NPA Management in Indian

Banking

AjitReddy N
2002C7A6775
Agenda

 Introduction
 Analysis of existing level of NPAs
 Objective of the study
 Literature Review
 Problems because of NPAs
 Model to analyze GNPA level
 Conclusions
Introduction

 NPA Meaning
An asset which ceases to generate income for the bank is
called non-performing asset.
RBI Definition
 A non-performing asset (NPA) is a loan or an advance
where:
 Interest and/ or installment 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.
 The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted.
 A loan granted for short duration crops will be treated as NPA, if
the installment of principal or interest thereon remains overdue for
two crop seasons.
 A loan granted for long duration crops will be treated as NPA, if the
installment of principal or interest thereon remains overdue for one
crop season.
Classification of Assets
 Sub-standard Assets
 current market value of the security charged is not enough
to ensure recovery of the dues
 Doubtful Assets
 collection or liquidation in full, – on the basis of currently
known facts, conditions and values – highly questionable
and improbable.
 Loss Assets
 asset is considered uncollectible
Provisioning Requirements
 Loss Assets
100%
 Doubtful assets
100% on unsecured portion
Unsecured portion
 Substandard assets
10% of outstanding
Analysis of Existing Level of NPAs

Sector wise GNPAs

20
18
16
14 PSB
12 Old Pvt
GNPA

10
8 New Pvt
6 Foreign
4
2
0
19 19 19 19 20 20 20 20 20
96- 97- 98- 99- 00- 01- 02- 03- 04-
97 98 99 00 01 02 03 04 05
Year
NPA levels in SCBs

 From 2001-2005
GNPA came down 70861-59516 Cr (16.01%)
NNPA came down 35554-22289 Cr (37.31%)
The reasons behind the sharp fall in
NPA
 Banks made huge profits in trading bonds which are used
for clearing and provisioning for bad debts.
 In the last 4 years (2002-05) PSU banks have made close
to Rs29,000 Cr worth of provisions for NPAs on around
Rs1,30,000 Cr operating profit .
 31.5 % of Operating profit was used to treat dab debts
 Year wise contribution for NPAs
2004 36.85%
2005 15.65%
2006 10.09%
 The increase in the Credit from Rs 231860 Cr in 1995-96 to
Rs1249606 Cr in 2005-06, an increase of 439%.
 With the phenomenal growth in the advances , the net NPA
as a proportion of total advances declined.
 Economic buoyancy, because of which corporations have
been in a better state of health.
 Significant improvement in recovering the loans
Establishment of ARCIL
SARFAESI Act
Objective of the study

 Analyze the existing level of NPAs in Indian banking sector

and study the effect of different RBI policies on NPA levels
 To find the factors that would effect the level of NPAs
 To analyze the significance of each variable that might
effect the NPA level
 To develop a model for effective management of Non
performing assets
Review of literature
 Studies by G.P Muniappan, A.Q Siddiqui revealed the
following causative factors for the NPAs

 Internal

 Diversion of funds for expansion/modernisation/setting up

new projects/ helping or promoting sister concerns.
 Time/cost over run while implementing the project.
 Deficiencies on the part of the banks viz. in credit appraisal,
monitoring and follow-up,
 Delay in release of limits, delay in settlement of
payments/subsidies by Govt. bodies
 Willful Default or Misappropriation of funds.
 Inefficient management, Strained labour relations,
 Inappropriate technology/technical problems

 External

 Recession in the economy

 External factors like raw material shortage, raw
material/input price escalation, power shortage, industrial
recession, excess capacity, natural calamities like floods,
accidents.
 Business failure like product failing to capture market,
inefficient management, Strike/strained labour relations,
wrong technology, technical problems, product
obsolescence, etc.
 Govt. policies like excise, import duty changes,
deregulation, pollution control orders.
 Failure, non-payment/overdues in other countries, recession
in other countries, externalisation problems, adverse
exchange rate, etc.
 Sergio (1996) in a study of non-performing loans in Italy
found evidence that, an increase in the riskiness of loan
assets is rooted in a bank’s lending policy adducing to
relatively unselective and inadequate assessment of
sectoral prospects.

 The study emphasised that increase in bad debts as a

consequence of recession alone is not empirically
demonstrated.
 The empirical analysis by Fuentes and Maquieira
(1998)on the Chilean market examined different factors
that may effect loan repayment

 Limitations on the access to credit

 Macroeconomic stability
 Collection technology
 Bankruptcy code
 Information sharing
 The judicial system
 Prescreening techniques
 Major changes in financial market regulation.
 They concluded that a satisfactory performance of the
Chilean credit market, in terms of loan epayments
hinges on a

 Good information sharing system, an

 Advanced collection technology
 Macroeconomic performance and
 Major changes in the financial market regulation.
 Lis (2000) used a simultaneous equation model in
which he explained bank loan losses in Spain using a
host of indicators
 GDP growth rate
 Debt-equity ratios of firms
 Regulation regime
 Loan growth
 Bank branch growth rates
 Bank size (assets over total size)
 Collateral loans
 Net interest margin
 Capital asset ratio (CAR) and market power of default
companies.
 They found that GDP growth (period’s GDP , as well as one
period lag term), bank size, and CAR, had negative effect
while

 Loan growth, collateral, net-interest margin, debt-equity,

market power, regulation regime and lagged dependent
variable had positive effect on problem loans.

 The effect of branch growth could vary with different lags

Impact of NPAs on Banks

 NPAs have a deleterious effect on the return

on assets because

 They erode current profits through provisioning

requirements
 They result in reduced interest income
 They require higher provisioning requirements
affecting the capacity to increase good quality
assets in future
 Pressure on net interest margin thereby reducing
competitiveness
 They limit recycling of funds, set in asset-liability
mismatches, etc
 Shift in concentration from core banking to credit
risk management
Model Specification
 The basic framework for empirical analysis involves a
multiple regression model of the following form

 GNPA= F (GDP, CDR, PA, BR)

 Gross domestic product (GDP)

Lagged GDP is taken to capture the borrower’s response to
expected macroeconomic environment and business
prospects
 The credit deposit ratio (CDR).
 The ratio of banks priority sector advances (PA)
 Bank Raterate (BR)
Data used

Year CDR Lag GDP GNPA PA/GA Bank Rate**

1994-95 54.68659 *** * * *

1995-96 58.55322 7.3 16.2 31.62641 12

1996-97 55.0636 7.3 15.7 32.77334 12

1997-98 54.1499 7.8 14.4 33.13774 11

1998-99 51.65603 4.8 14.7 33.51081 10.5

1999-00 53.60062 6.5 12.7 32.88949 8

2000-01 53.12949 6.1 11.4 32.91336 7

2001-02 53.44792 4.4 10.4 32.65329 7

2002-03 56.93198 5.8 8.8 31.60542 6.5

2003-04 55.8878 4 7.2 34.51594 6

2004-05 64.72352 8.2 5.2 41.39801 6

2005-06 71.45766 7.5 3.5 40.80566 6

Multiple Linear Regression

Regression Output
Conclusions
 Banks possibly need to maintain a relatively higher net
interest margin for the time being
 They should have proper credit Appraisal mechanism at
disposal
 Allowing FDI in ARCs
 Installing online early warning systems to monitor the
financial status of the borrowers
 Proper information sharing between the banks
Recommendations:
QUESTIONS?
THANK YOU!!