Trend and Causes of NPA and its

Impact on Banks
With a Case Study on SBI and its
Associates
1
Asset quality, specifically in terms of the Gross NPA, is the
most important indicator of a banks overall condition and
thus, at the aggregate level, asset quality explains the
performance of banking system as a whole.
It is a sweeping and all pervasive virus confronted universally
on banking and financial institutions, acutely suffered by
Nationalised banks, Private banks, and the all India Financial
Institutions.
While the primary driver of the deteriorating asset quality was
the domestic economic slowdown, the contribution of other
factors was also significant.
Analyse trends and causes of NPA as also the severity of its
impact on banking sector and the economy as a whole.
Ensure early detection of sign of distress .
PREVENTION IS BETTER THAN CURE
2
OBJECTIVES
Prudential norms of the RBI on Asset classification, and
provisioning with respect to advances.
Trend Analysis of Non-Performing Assets
The factors leading to the increase in the NPAs in the
banking sector
The impact of deterioration in asset quality on the
performance and operations of the Bank as also the macro-
economy
Relationship between the growth in Bank credit and macro-
economic variables
Relationship between the growth NPA and macro-economic
variables
Case Analysis on State Bank of India and its Associate banks

3
What is Non-Performing Assets ?
A Non-Performing asset (NPA) shall be a loan or an advance, where:

Interest and/ or instalment of principal remain overdue for a period of more than 90 days in
respect of a term loan,

The account remains out of order in respect of an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted

The instalment of principal or interest thereon remains overdue for two crop seasons for
short duration crops,

The instalment of principal or interest thereon remains overdue for one crop season for
long duration crops.

The amount of liquidity facility remains outstanding for more than 90 days, in respect of a
securitisation transaction undertaken in terms of guidelines on securitisation dated February
1, 2006.

In respect of derivative transactions, the overdue receivables representing positive mark-to-
market value of a derivative contract, if these remain unpaid for a period of 90 days from the
specified due date for payment.



4
ASSET CLASSIFICATION AND PROVISIONING
NORMS
PERFORMING ASSETS
Standard Assets

NON-PEFORMING ASSETS
Sub-Standard Assets
Doubtful Assets
Loss Assets

5
A TREND ANALYSIS OF NPAs OF
SCHEDULED COMMERCIAL BANKS
(SCBS)
6
7
In retrospect, the Indian Banks have overall
demonstrated a trend of continued good
performance and profitability despite rising
interest rates, increase in operating costs and the
spill over effects of recent global financial crisis .
Higher credit growth and deposit record
Better return on assets
Better return on equities.
The capital position improved significantly.
HOWEVER..

In the recent past

It has been impacted by the global and domestic economic slowdown over
the last two years.
Moderation in balance sheet growth for the second consecutive year, led
by a slowing down of credit growth.
The level of NPAs is high with all banks currently.
There has been a rise in asset impairment coupled with a dip in
profitability.
Maintaining profitability is a challenge in the wake of increasing
competition due to opening up of banking business to NBFCs and foreign
banks.
The Capital requirements would be large considering the varied structure
of banks and financial institutions operating in the economy and their NPA
levels in order to comply with provisioning norms and capital adequacy
requirements while meeting Basel III standards which will be brought in by
RBI shortly.
High likelihood of no change in macro-economic environment anytime
soon.
8
Gross NPA ratio at system-level increased, mainly on
account of the deterioration in asset quality of public
sector banks

11.19%
-3.31%
-5.47%
-8.51%
-12.62%
-2.57%
11.78%
22.22% 22.87%
15.55%
45.34%
36.34%
21.87%
14.26%
15.94%
27.79%
34.59%
29.72%
24.61%
21.15%
16.68%
13.18%
16.29%
28.35%
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013
GROWTH RATE OF GROSS NPAs vis-a-vis GROSS ADVANCES FOR ALL SCBs
YOY GROWTH IN GROSS NPA YOY GROWTH IN GROSS ADVANCES
9
TRENDS IN NON-PERFORMING ASSETS BANK GROUP WISE
(Amount in Rs Billion)
PUBLIC SECTOR
BANK
NATIONALISED
BANK SBI GROUP
PRIVATE SECTOR
BANK
FOREIGN
BANK
SCHEDULED COMMERCIAL
BANKS
GROSS NPA
OPENING BALANCE FOR 2011-
2012 1178 696 482 187 62 1429
ADDITION DURING 2012-2013 1198 772 425 128 41 1368
RECOVERED DURING 2012-2013 648 429 219 63 24 736
WRITTEN OFF DURING 2012-
2013 78 17 60 42 0 120
CLOSING BANLANCE FOR2012-
2013 1650 1022 627 210 79 1940
GROSS NPA AS % OF GROSS ADVANCES
2011-2012 3.3 2.8 4.6 2.1 2.6 3.1
2012-2013 4.1 3.6 5 2 2.9 3.6
NET NPA
CLOSING BANLANCE FOR 2011-
2012 593 391 202 44 14 652
CLOSING BANLANCE FOR 2012-
2013 900 619 281 59 26 986
NET NPA AS % OF GROSS ADVANCES
2011-2012 1.5 1.4 1.8 0.5 0.6 1.3
2012-2013 2 2 2 0.5 1 1.7
10

0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
GROSS NPA TO TOTAL ASSETS
PUBLIC SECTOR BANKS
PRIVATE SECTOR BANKS
FOREIGN SECTOR BANKS
11
NPAs became stickier, with proportion of sub-standard as well
as doubtful assets in gross advances registering an increase:
1.0
1.1
1.3
1.3
1.0
1.4
1.6
1.3
1.0
1.0
1.0
1.1
1.3
1.6
0.3
0.2
0.2
0.2 0.2
0.2 0.2
2007 2008 2009 2010 2011 2012 2013
Asset Classification of All Scheduled Commercial Banks ( % Share of
Gross Advances)
Sub-Standard Assets Doubtful Assets Loss Assets
12
Slippage ratio and recovery ratios
deteriorated during the year.

0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
WRITE OFF RATIO
SLIPPAGE RATIO
PROVISION RATIO
13
Increase in NPA Acceleration ratio and Decrease in
NPA Reduction ratio-Overall deterioration in Asset
quality
0.00%
20.00%
40.00%
60.00%
80.00%
100.00%
120.00%
140.00%
160.00%
180.00%
200.00%
NPA ACCELARATION RATIO
NPA REDUCTION RATIO
14
Slippage Ratio was the highest for the public sector
banks and the lowest for the private sector banks
0.00%
2.00%
4.00%
6.00%
8.00%
10.00%
12.00%
14.00%
SLIPPAGE RATIO
PUBLIC SECTOR BANKS
PRIVATE SECTOR BANKS
FOREIGN SECTOR BANKS
ALL BANKS
15
Private sector banks, however took a lead in cleaning
up their balance sheets.
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
WRITE OFF RATIO
PUBLIC SECTOR BANKS
PRIVATE SECTOR BANKS
FOREIGN SECTOR BANKS
16
There was a marginal decline in the provisioning coverage ratio
at the aggregate level

10.46%
13.71%
15.21%
21.34%
10.19%
10.33%
16.01%
19.29%
27.74%
35.99%
32.31%
26.80%
25.61%
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013
PROVISIONING COVER
ALL SCHEDULED COMMERCIAL BANKS
17
Private banks have made the highest
provisioning against NPAs
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
PROVISIONING COVER
PUBLIC SECTOR BANKS
PRIVATE SECTOR BANKS
FOREIGN SECTOR BANKS
18
0.00%
0.50%
1.00%
1.50%
2.00%
2.50%
PROVISION RATIO
PUBLIC SECTOR BANKS
PRIVATE SECTOR BANKS
FOREIGN SECTOR BANKS
19
Deterioration in asset quality of public sector banks was spread
across priority and non-priority sectors as it increased for both
the priority and non-priority sectors:

47.23% 47.54%
49.05%
54.07%
59.92%
63.86%
54.88%
53.84%
58.09%
49.96%
42.93%
50.71% 51.24% 50.00% 43.68% 38.80% 35.39% 44.04% 45.25% 41.52% 49.11% 57.00%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS
Priority Sector Non-Priority Sector
20
Non-priority sector the major
contributor to rise in NPAs

51.8%
46.9%
41.0%
48.2%
53.1%
59.0%
2011 2012 2013
SHARE OF PRIORITY AND NON-PRIORITY SECTOR IN TOTAL NPAs
PRIORITY SECTOR NON-PRIORITY SECTOR
21
Restructured standard advances
increased significantly
2.29%
2.02%
0.40%
0.43%
0.63%
2.31%
2.67%
1.36%
2.58%
4.02%
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
RESTRUCTURED ASSETS RATIO
RESTRUCTURED ASSETS RATIO
22
Steep increase in restructured
advances by public sector banks
3.21%
0.96%
0.07%
1.84%
3.50%
3.62%
1.82%
2.96%
4.42%
3.24%
PSB PVT FOREIGN SBI ALL
PROPORTION OF RESTRUCTURED STANDARD ADVANCES AND NPA TO GROSS ADVANCES
LOAN RESTRUCTURED RATIO GROSS NPA RATIO (2012-2013)
23
The Y-o-Y growth rate of the impaired loan outpaced that of
the advances by a huge margin in the last two years
27.79%
34.59%
29.72%
24.61%
21.15%
16.68%
13.18%
16.29%
28.35%
-3.24%
-30.66%
3.29%
21.72%
92.23%
29.30%
-15.00%
72.59%
65.35%
FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13
ALL SCHEDULED COMMERCIAL BANKS
Y-O-Y GROWTH IN ADVANCES Y-O-Y GROWTH IN IMPAIRED LOAN
24
Impaired loan Ratio has shown a rising trend in
two consecutive years after a year of decline
9.47%
7.17%
3.70%
2.94%
2.87%
4.56%
5.05%
3.80%
5.63%
7.26%
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013
IMPAIRED LOAN RATIO
25

SOME OTHER SIGNIFICANT TRENDS
Banking sector predominantly public in nature.
Credit to sensitive sectors picked up even in a period of
slowdown in overall credit growth.
Deceleration in growth of credit to all productive
sectors viz., agriculture, industry and services.
There was a rise in the growth of priority sector credit
against a drop in overall credit growth during the year.
SARFAESI Act remained the most important channel for
NPA recovery as NPAs recovered through this Act
accounted for about 80 per cent of the total amount of
NPAs.


26
FACTORS LEADING TO RISING LEVEL OF NPA
While the primary driver of the deteriorating
loan quality was the domestic economic
slowdown, that's not the only story.

BANK SPECIFIC FACTORS
EXTERNAL FACTORS
BORROWER SPECIFIC FACTORS

27
IMPACT OF RISING LEVEL OF NPA ON
THE BANKS
High cost of funds due to NPAs
Impact on Profitability
Impact on Liquidity
Impact on Productivity
Involvement of Management
Credit Loss
Qualitative aspects of the Micro Level Impact of
NPAs
Macro-Economic Impact
28
AN ANALYSIS OF RELATIONSHIP BETWEEN BANK
CREDIT, NPA AND MACRO-ECONOMIC VARIABLES

Given the association between macroeconomic factors and banking, there is a
need for the central banks and policy makers to understand and quantify the
interrelationship between health of banking system and macro-economy.

The understanding would help in finding early warning signals about the failure of
banks and to take timely and appropriate corrective actions and also enable the
regulators to take right measures for strengthening the financial system while
promoting economic development.

If banks make adequate provisioning when the economy is doing good the impact
of the economic downturns on bank balance sheets can be managed quite
comfortably. In this back drop, Bank for International Settlements (BIS) in its Basel
III accord has suggested a need for creation of capital conservation buffer and
countercyclical buffer by banks.

very strong linkages between macro-economic indicators and asset quality as well
as the volume of credit flow in the economy.
29
Relationship between Bank Credit
and Macroeconomic Factors
Bank credit has positive association with GDP, NNI, per capita
income, exports and imports.

On the other hand, it has a negative relationship with inflation and
WPI.

Studies also show that bank credit has a very high correlation with
the IIP and tend to increase with an increase in the industrial
production.

There exists a lead and lag relationship between bank credit and
macro-economic developments as can be measured by GDP and
NNI.

30
Association between Macroeconomic
Factors and NPA

Level of NPA in general is negatively correlated
with credit and GDP.

It can be expected to have a positive
relationship with inflation.

The lead-lag relationship between inflation
and NPA of banks.

31
32
A CASE STUDY ON SBI
AND ITs ASSOCIATES
33
SBIs funding profile is strong, underpinned by its strong retail deposit base.

Low-cost deposits have continued to constitute over 45% of total deposits

The banks liquidity position is very strong due to healthy accretion to deposits,
large limits in the call market, and significant surplus SLR investments.

Wide geographical reach.

SBI has maintained a good earnings profile in the medium term despite high
pressure on yields due to the increasing competition in the banking sector.

Strong diversification in income streams will ensure that the banks earnings
remain relatively stable, despite the decline in profitability in some segments.

The Capital Adequacy Ratio of the Bank stands at 12.92%, against RBI stipulation of
9%, with Tier l capital at 9.49% and Tier II at 3.43%.



34
Looking to the severe competition and NPA position,
the NIM was under pressure.

The level of impaired assets for FY 2013 has shown
an upward bias, indicative of the state of the
economy, and SBI experienced an unparalleled level
of delinquencies.

The deterioration has occurred in the mid-corporate
and SME space in sectors under stress in the
economy.

35
MOVEMENT OF NPAs:
AMOUNT IN Rs crores
NPA FY03-04 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13
GROSS NPA 15988.3
1
15616.4
7
13288.3
6
12676.9
4
12837.3
4
15589 19535 25326 39676 51189
GROSS NPA % 7.75% 5.96% 3.88% 2.92% 3.04% 2.84 3.05 3.28 4.44 4.75
NET NPA 5442 5349 4906 5258 7424.34 9552 10870 12347 15819 21956.4
8
NET NPA % 3.48% 2.65% 1.87% 1.56% 1.78% 1.76 1.72 1.63 1.82 2.1
CASH RECOVERY IN NPA 1617 1836 3461 1940 1732.15 2966 2059 3848 4159 4766
UPGRADATION TO STANDARD ASSETS 958 1323.00 1192 1257 1516.84 3402 3972 4499 5459 10119
WRITE OFFS 3974 1337 1809 1397 1242.52 1896 1991 4007 744 5594
GROSS REDUCTION IN NPA ( UPGRADATION+CASH
RECOVERIES+WRITEOFF)
6549 4496.00 6462 4594 4491.51 8264 8022 12354 10362 20479
36
4.44
4.99
5.15
5.3
4.75
5.56
Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
GROSS NPAs %
GROSS NPAs %
37
An upward trend in the growth of
NPAs over the last two years
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
7.00%
8.00%
9.00%
FY03-04 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13
TREND IN NPA
GROSS NPA % NET NPA %
38
Movement of stressed assets clearly shows that there has been
a continuously increasing trend in stressed assets over the last
two years including the Q1FY14.

5.29%
6.19%
6.24% 6.27%
6.72%
7.44%
7.66%
7.73%
8.57%
3.34%
3.99%
3.79%
3.60%
3.88%
4.66%
4.88%
5.02%
5.75%
Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13
MOVEMENT OF STRESSED ASSETS
GROSS NPA + RESTR. STD TO GROSS ADVANCES NET NPA + RESTR. STND TO GROSS ADVANCES
39
The share of mid-corporate, SME and agriculture sector has increased
substantially in the gross NPA for SBI group specially in the Q1FY14.
However, mid corporate has been biggest contributor throughout the
period.

7.3% 6.4% 7.0%
5.2% 5.5% 5.3%
12.4%
10.6% 10.2%
9.1% 8.3% 8.0%
19.0%
19.6% 18.6%
18.5% 19.8% 20.9%
28.7%
30.1%
28.5%
28.7%
28.4% 27.7%
29.1%
32.1%
35.2%
37.0% 36.0%
33.4%
3.4%
1.3%
0.6%
1.5% 2.0%
4.7%
Dec-11 Mar-12 Jun-12 Dec-12 Mar-13 Jun-13
SECTOR WISE GROSS NPAs TO TOTAL GROSS NPAs %
INTERNATIONAL RETAIL AGRI SME MID CORPORATE LARGE CORPORATE
40
In the FY 2013, major portion of NPA came from the Non-
Priority sector, contrary to the trend of the previous years.

47.49%
47.07% 47.39%
54.95%
57.14% 58.49%
47.26%
50.11%
55.32%
52.33%
44.09%
49.41%
51.47% 51.49%
44.11%
41.36% 40.88%
51.75%
48.77%
44.66%
47.62%
55.85%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
COMPOSITION OF NPAs OF SBI & IT's ASSOCIATES
Priority Sector Non-Priority Sector
41
SBIs lending to the sensitive sector has been increasing continuously over
the last five years and the increase had been very significant in the FY 13
which again pose a threat to increasing NPA levels.

71079.3
95020.49
144958.79
148238.62
190810.81
2008-09 2009-10 2010-11 2011-12 2012-13
LENDING TO SENSITIVE SECTOR
STATE BANK OF INDIA
42
Y-o-Y Growth rate of fresh slippage into NPA category has remained substantial over
last three years. Major industries contributing to the fresh slippages in FY 13 are iron
& steel, textiles, trade and services and automobiles/transport industries.

7.52%
53.21%
36.19%
29.46%
FY09-10 FY10-11 FY11-12 FY12-13
FRESH SLIPPAGES OF STANDARD ASSETS TO NPA CATEGORY
43
The total loans written off during the year as a percentage of the total loan
portfolio for SBI group has increased drastically in the current year after a
sharp decline in the previous year
0.00%
0.10%
0.20%
0.30%
0.40%
0.50%
0.60%
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013
WRITE-OFF RATIO
ALL SCHEDULED COMMERCIAL BANKS SBI AND ITS ASSOCIATES
44
The recoveries in written off account has been the highest in FY13 over the
last eight years in absolute terms as also the recoveries has grown
substantially in the FY13.
-3.28%
-13.72%
5.89%
11.49%
-2.42%
-0.41%
10.81%
FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13
Y-O-Y GROWTH IN RECOVERIES IN WRITEN OFF ACCOUNT
Y-O-Y GROWTH IN RECOVERIES IN WRITEN OFF ACCOUNT
45
The provisioning coverage ratio (PCR), defined as provisions for credit loss as
per cent of gross NPAs, showed a marginal decline during the year at the
aggregate level as well for SBI group.
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013
PROVISIONING COVER
ALL SCHEDULED COMMERCIAL BANKS SBI AND ITS ASSOCIATES
46
The CDR ratio of SBI Group was more in tune
with the CDR ratio of All SCBs.
0.00%
0.20%
0.40%
0.60%
0.80%
1.00%
1.20%
1.40%
1.60%
1.80%
2.00%
CDR RATIO
All scheduled Commercial Banks
SBI & its Assosicate Bank
47
The corporate debt restructured under doubtful assets class
increased manifold in FY13 while CDR under standard and
sub-standard asset classes also showed an upward trend.

-500.00%
0.00%
500.00%
1000.00%
1500.00%
2000.00%
2500.00%
3000.00%
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013
CORPORATE DEBT RESTRUCTURED
Y-O-Y GROWTH STANDARD ASSET YOY GROWTH SUB-STANDARD ASSETS YOY GROWTH DOUBTFUL ASSETS
48
RECOMMENDATIONS
49
Banks should shift to an information-based project appraisal system to ensure that the
precious funds are not stuck in unproductive projects.
There is a need for concerted policy action such that credit availability to the productive
sectors of the economy is maintained/enhanced.
Strengthen their risk management systems, credit appraisal and sanction process, post-
sanction monitoring and follow-up system.
They should have a robust MIS mechanism for early detection of incipient
weaknesses/distress and for taking steps for remedial measures and recovery of banks dues.
The rigor and robustness of project appraisal, credit monitoring and continuous assessment
of the health of the large accounts in terms of early warning signals should be in tune with
the exposure banks take.
There is a need to improve the effectiveness of the recovery system. There is an urgent need
to accelerate the working of DRTs and ARCs.
Banks should set up separate dedicated verticals to recover as much as possible from
accounts that were technically written off .
The banks should closely watch the top 30 NPA accounts and large accounts as also confront
the wilful defaulters.
Central Government, State Governments and the project developers should ensure that the
minor impediments that ail the operationalization of the assets in the infrastructure sector
are immediately removed so that they can be put to productive use and start generating
revenues.
50
THANK YOU
51