Non Profitable Assets

s

t se

As

A Study on NON PERFORMING

ASSETS

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Regd. No.26363D

A Report by UHRF

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A STUDY ON NON PERFORMING ASSETS

NPA (Non Performing Asset) - Background In the wake of the nancial reforms undertaken by the Government of India based on the Narasimhan Committee report I and II, prudential norms were introduced by Reserve Bank of India to address the credit monitoring process being adopted and pursued by the banks and nancial institutions. To strengthen further the recovery of dues by banks and nancial institutions, Government of India promulgated The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 and The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002.

An Overview Banking sector reform in India has progressed promptly on aspects like interest rate deregulation, reduction in statutory reserve requirements, prudential norms for interest rates, asset classication, income recognition and provisioning. But it could not match the pace with which it was expected to.

The accomplishment of these norms at the execution stages without restructuring the banking sector as such is creating havoc, this research paper deals with the problem of having non-performing assets, the reasons for mounting of non-performing assets and the practices present in other countries for dealing with non-performing assets.

During pre-nationalization period and after independence, the banking sector remained in private hands large industries who had their control in the management of the banks were utilizing major portion of nancial resources of the banking system and as a result low priority was accorded to priority sectors. Government of India nationalized the banks to make them as an instrument of economic and social change and the mandate given to the banks was to expand their networks in rural areas and to give loans to priority sectors such as small scale industries, self-employed groups, agriculture and schemes involving women.

To a certain extent, the banking sector has achieved this mandate. Lead Bank Scheme enabled the banking system to expand its network in a planned way and make available banking services to the large number of population and touch every strata of society by extending credit to their productive Endeavour's. This is evident from the fact that population per ofce of the commercial bank has

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A STUDY ON NON PERFORMING ASSETS

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come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, the share of advances of public sector banks to priority sector increased from 14.6% in 1969 to 44% of the net bank credit.

The number of deposit accounts of the banking system increased from over 3 crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68 crores.

The accumulation of huge non-performing assets in banks has assumed great importance. The depth of the problem of bad debts was rst realized only in early 1990s. The magnitude of NPAs in banks and nancial institutions is over Rs.1, 50,000 crores. While gross NPA reects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector.

The banks and nancial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks gure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the protability of banks, weaken its nancial health and erode its solvency. For the recovery of NPAs, a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements.

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What is NPA (Non Performing Asset)?

Non Performing Asset means an asset or account of borrower, which has been classied by a bank or nancial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classication issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001.

Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, the account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identication of NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be 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' for a period of more than 90 days, 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, interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

Non-Performing Asset or NPA, It is called such as while it is an "Asset", it does not bring substantial income to its Owner or is just dormant. Call it a white elephant if you wish. Basically, it is having something that should work but does not. It is supposed to make Non- Performing Assets work. The

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A STUDY ON NON PERFORMING ASSETS

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RBI has issued guidelines to banks for classication of assets into four categories. Ÿ Standard (Assets): These are loans which do not have any problem or are less risky. Ÿ Substandard (Assets): These are assets which come under the category of NPA for a period of

less than 12 months. Ÿ Doubtful (Assets): These are NPA exceeding 12 months. Ÿ Loss (Assets): Where loss has been identied by the bank or internal or external auditors or the

RBI inspection but the amount has not been written off wholly.

Total NPA Assets of Banks Ÿ The Non Performing Assets (NPAs) of the banks in the country stood at Rs 3, 00,611 crore as on

December 2014. Ÿ Of the total NPAs, Rs 2, 62,402 crore belonged to nationalised banks, Rs 38,209 belonged to

private sector banks. Ÿ The total gross advances of nationalised banks as on December 2014 stood at Rs 46,49,843

crore while the total advances of private sector banks stood at Rs 16,77,875 crore

Reasons behind NPA Rise External Factors: Ÿ Ineffective legal framework & weak recovery tribunals Ÿ Lack of demand / economic recession or slowdown Ÿ Change in Govt. policies Ÿ Wilful defaults by customers Ÿ Alleged political interferences Internal Factors: Ÿ Defective Lending process Ÿ Inappropriate / non –use of technology like MIS , Computerization Ÿ Improper SWOT analysis Ÿ Inadequate credit appraisal system Ÿ Managerial deciencies Ÿ Absence of regular industrial visits & monitoring Ÿ Deciencies in re-loaning process Ÿ Alleged corruption Ÿ Inadequate networking & linkages b/w banks

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Impacts of NPAs on Bank Performance The efciency of a bank is not reected only by the size of its balance sheet but also the level of return on its assets. The NPAs do not generate interest income for banks but at the same time banks are required to provide provisions for NPAs from their current prots.

The NPAs have deleterious impact on the return on assets in the following ways. Ÿ The interest income of banks will fall and it is to be accounted only on receipt basis. Ÿ Banks protability is affected adversely because of the doubtful debts and consequent to writing it

off as bad debts. Ÿ Return on investments (ROI) is reduced. Ÿ The capital adequacy ratio is disturbed as NPAs are entering into its calculation. The cost of

capital will go up. Ÿ The assets and liability mismatch will widen. Ÿ The economic value addition (EVA) by banks gets upset because EVA is equal to the net operating

prot minus cost of capital and it limits recycling of the funds.

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NPA Management Strategies Indian Banks are pursuing variety of strategies to control NPAs, which can be studied under two broad categories as under: Ÿ Preventive Management Ÿ Curative Management

Preventive Management - It is rightly said that prevention is better than cure. Ÿ Developing 'Know Your Client' prole Ÿ Monitoring Early Warning Signals Ÿ Installing Proper Credit Assessment and Risk

Management Mechanism Ÿ Reduced Dependence on Interest Ÿ Generating Watch-list/Special Mention Category

Curative Management Ÿ Re-phasement of loans Ÿ Pursuing Corporate Debt Restructuring (CDR Ÿ Encouraging rehabilitation of potentially viable units Ÿ Encouraging acquisition of sick units by healthy units Ÿ Entering compromise schemes with borrowers / Entering one time settlement Ÿ Using Lok Adalats for compromise settlement for smaller loans in “doubtful” and “loss” category. Ÿ Using Securitization & SARFAESI Act Ÿ Using Asset Reconstruction Company (ARC) Ÿ Approaching Debt Recovery Tribunals (DRTs). Ÿ Recovery Action against Large NPAs Ÿ Circulation of Information of Defaulters- Strengthening Database of Defaulters

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Highest NPAs of Public Sector Banks BANK WISE AND BANK GROUP-WISE GROSSN ON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS N PA RATIO OF SCHEDULED COMMERCIAL BANKS - 2013 (Amount in ` Million) As on March 31, 2013 Gross NPAs

Gross Advances

Gross NPAs to Gross Advances Ratio (%)

(1)

(2)

(3)

511894

10785571

4.75

State Bank of Bikaner and Jaipur

21195

584737

3.62

State Bank of Hyderabad

31860

920231

3.46

State Bank of Mysore

20806

459805

4.52

State Bank of Patiala

24530

754598

3.25

State Bank of Travancore

17499

683885

2.56

627784

14188827

4.42

Allahabad Bank

51370

1309363

3.92

Andhra Bank

37145

1001378

3.71

Bank of Baroda

79826

3328113

2.40

Bank of India

87653

2929679

2.99

Bank of Maharashtra

11376

763972

1.49

Canara Bank

62602

2439358

2.57

Central Bank o f India

84562

1762337

4.80

Corporation Bank

20482

1193540

1.72

Dena Bank

14525

664569

2.19

IDBI Bank Limited

64500

2001347

3.22

Indian Bank

35655

1071559

3.33

Indian Overseas Bank

66080

1643665

4.02

Oriental Bank of Commerce

41840

1301862

3.21

Punjab and Sind Bank

15369

518434

2.96

Punjab National Bank

134658

3152440

4.27

Syndicate Bank

29785

1494227

1.99

UCO Bank

71301

1315691

5.42

Union Bank of India

63138

2119111

2.98

United Bank of India

29638

697081

4.25

Vijaya Bank

15329

705135

2.17

Nationalised Banks $

1016834

31412861

3.24

Public Sector Banks

1644618

45601688

3.61

Banks

Public Sector Banks State Bank of India

SBI and its Associates

Source :Department of Banking Supervision, RBI. Source

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Highest NPAs of Private Sector Banks BANK WISE AND BANK GROUP-WISE GROSS NON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS NPA RATIO OF SCHEDULED COMMERCIALBANKS - 2013 (Amount in `Million) As on March 31, 2013 Gross NPAs

Gross Advances

Gross NPAs to Gross Advances Ratio (%)

(1)

(2)

(3)

2109

8976 0

1731

15342 9

3803

7896 3

1554 0

45194 6

1214

31891 6

6438

39853 7

6389

25416 5

2859

29705 9

4599

11892 3

673

2174 6

259

6395 2

4339

32014 0

2145

16366 1

5209 8

273119 7

2371 4

198900 7

2150

6753 0

2048 1

241306 1

9607 8

298416 4

4578

44641 6

7581

48918 6

943

47086 9

New Private S ector Banks

15552 5

886023 3

1.76

Private S ector Banks

20762 3

1159143 0

1.79

Banks

Private S ector Banks Catholic Syrian Bank City Union Bank Dhana lakshmi Bank Federal B ank ING Vysya B ank Jammu & Kashmir B ank Karnataka B ank Karur Vysya B ank Lakshmi Vilas Bank Nainital B ank Ratnakar Bank South Indian Bank Tamilnad Mercantile Bank Old Private S ector Banks Axis B ank Development Credit Bank HDFC Bank ICICI Bank Indusind Bank Kotak Mahindra Bank Yes B ank

2.35 1.13 4.82 3.44 0.38 1.62 2.51 0.96 3.87 3.09 0.40 1.36 1.31 1.91 1.19 3.18 0.85 3.22 1.03 1.55 0.20

Source :Department of Banking Supervision, RBI. Source

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Highest NPAs of Foreign Banks BANK WISE AND BANK GROUP-WISE GROSSNON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS NPA RATIO OF SCHEDULED COMMERCIAL BANKS - 2013 (Amount in ` Million) As on March 31, 2013 Gross NPAs

Gross Advances

Gross NPAs to Gross Advances Ratio (%)

(1)

(2)

(3)

57

638

8.93

-

5199

-

American Express Banking Corp.

446

17230

2.59

Antwerp Diamond Bank Nv

503

8106

6.21

Banks

Foreign Banks Ab Bank Limited Abu Dhabi Commercial Bank Ltd

Australia and New Zealand Banking Group Limited

281

24048

1.17

BNP Paribas

163

77536

0.21

-

76230

-

Bank of America N.t. and S.a.

Bank of Bahrain & Kuwait B.s.c.

Bank of Ceylon Bank of Nova Scotia Barclays Bank Chinatrust Commercial Bank Citibank N.a

7215

7.25

15

1014

1.48 0.74

579

77890

5543

88793

6.24

522

3019

17.29

13587

526288

2.58

Commonwealth Bank of Australia

-

1652

-

Credit Agricole

6

24048

0.02

Credit Suisse Ag

-

4550

-

DBS Bank Ltd.

5820

14111 1

4.12

Deutsche Bank

1544

224999

0.69

Firstrand Bank Ltd Hongkong and Shanghai Banking Corpn.ltd.

237

2831

8.37

6408

362305

1.77 -

HSBC Bank Oman S.A.O.G.

-

51

Industrial and Commercial Bank of China

-

3372

-

JP Morgan Chase Bank

53689

0.45

JSC VTB Bank

-

885

-

Krung Thai Bank Public Company Limited

-

160

-

Mashreq Bank Psc

-

547

-

1253

55565

2.26

National Australia Bank

-

1636

-

Rabobank International

-

5899

-

Sberbank

-

370

-

Shinhan Bank

-

12062

-

Societe Generale

7

17576

0.04

15

199

7.54

38801

648317

5.98

350

8380

4.18

-

68395

-

2796

127770

-

9741

2.19 -

-

358

-

79700

2689674

2.96

1931941

59882792

3.23

Mizuho Corporate Bank Ltd

Sonali Bank Standard Chartered Bank State Bank of Mauritius Ltd The Bank of Tokyo-mitsubishi Ufj Ltd The Royal Bank of Scotland N.v.

UBS AG United Overseas Bank Ltd Foreign Banks All Scheduled Commercial Banks

Source : Department of Banking Supervision, RBI. Source

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Steps for Recovery of NPAs RBI has taken a number of steps for recovery of NPAs that include having a Board approved loan recovery policy, putting in place an effective mechanism for information sharing for sanction of loans and taking recourse to legal mechanism.

The RBI has released guidelines on January 30, 2014 for 'Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distress Assets in the Economy' suggesting various steps for quicker recognition and resolution of stressed assets.

SUGGESTIONS TO CONTROL NPAs The Bank should adopt the following general strategies to control NPAs. The suggestions are as follows: Ÿ Projects with old technology should not be considered for nance Large exposure on big corporate or single project should be avoided. Operating staffs' credit skills should be up graduation. Ÿ There is need to shift banks approach from collateral security to viability of the project and intrinsic strength of promoters. Ÿ Timely sanction and or release of loans by the bank is to avoid time and cost overruns. Bank should prevent diversion of funds by the promoters. Ÿ Operating staff should scrutinize the level of inventories/receivables at the time of assessment of working capital. Ÿ The Credit section should carefully watch the warning signals viz. non-payment of quarterly interest, dishonor of check etc. Ÿ Effective inspection system should be implemented. Ÿ Identifying reasons for turning of each account of a branch into NPA is the most important factor for upgrading the asset quality, as that would help initiate suitable steps to upgrade the accounts. Ÿ The bank must focus on recovery from those borrows who have the capacity to repay but are not repaying initiation of coercive action a few such borrows may help. Ÿ The recovery machinery of the bank has to be stream lined; targets should be xed for eld ofcers / supervisors not only for recovery in general but also in terms of upgrading number of existing NPAs. Ÿ In the bank there should be a proper manpower planning. Ÿ Bank should try to establish the branches in competitive market, so it will increase their prot. Ÿ Bank has required increasing the cash and bank balances byreducing the unnecessary expenses for future plan

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