Banks areunder growing pressure to bring down their NPAs so as to improve their
performance andviability. What is bothering the bankers today is the management
of Non-performing Assets.Over the period this problem has aggravated alarmingly
and therefore needs urgent remedialactions, so in this context a good number of
circular instruction/guidelines have been issuedby bank/Reserve Bank of
India.Reserve Bank of India, in the year 1991, appointed a committee under the
Chairmanship ofSh. M.Narsimham to examine and give recommendation for
Income Recognition, AssetClassification and Provisioning of loan assets of Banks
and Financial Institutions. TheCommittee examined the issues and recommended
that a policy of Income Recognitionshould be objective and based on record of
recovery rather than on subjective considerations.On the basis of the
recommendations of the Narsimhan Committee, RBI had issuedguidelines to all
Scheduled Commercial Banks on Income Recognition, Assets Classificationand
Provisioning in April, 1992 which have been modified from time to time by the
RBI onthe basis of experience gained and suggestions received from various
quarters. ThePrudential Norms for Income Recognition, Asset Classification and
Provisioning have comeinto effect from the accounting year 31.03.1993.Similarly,
guidelines were issued by the Reserve Bank of India in March, 1994 to All
IndiaFinancial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate
guidelines werealso issued by the RBI on Prudential Norms to Non-Banking
Financial Companies in June,1994 and to Regional Rural banks in March, 1996.
They have adopted these guidelines forthe purpose of Income Recognition and
Assets Classification from the accounting year 1995-96. However, guidelines
relating to provisioning for RRBs have been made effective fromthe financial year
ended 31.03.1997. The definition of NPAs is also gradually becomingtough for
RRBs to cover all advances like Commercial Banks. Although most oftheguidelines relating to RRBs are similar to that of Commercial Banks, they have
been madeapplicable in a phased manner for RRBs.INDIAN BANKS
FUNCTIONALLY diverse and geographically widespread, have playeda crucial
role in the socio- economic progress of the country. Banks extend credit to
different
7. types of borrowers for many different purposes. For most customers, bank
credit is theprimary source of available debt financing. For banks good loans are
the most profitable assets. Return comes in the form of loaninterest, fee income
and investment and the most prominent assumed risk is credit risk.Credit risk
involves inability or unwillingness of customer or counterpart to meetcommitments
in relation to lending once a loan is overdue and ceases to yield income itwould
become a Non Performing Asset.Proper management and speedy disposal of NPAs
is one of the most critical tasks of bankstoday. The problem of Non Performing
strong retail deposit base. The bank is facing increasing competition in its
metropolitan and urban franchise. SBIs strong franchise gives it access to a steady
source of stable retail funds, which constitute around 59% of the total resources as
on March 31, 2005 (56% as at March 31, 2004).Savings deposits have shown a
strong three-year growth of 19%. Thus, despite a reduction in the proportion of
current account deposits, low-cost deposits have continued to constitute over 40%
of total deposits as at March 31, 2005. The banks cost of deposits (excluding
IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year
from April1 to March 31), compared with 5.48% in 2003-04. The banks liquidity
position is very strong due to healthy accretion to deposits, large limits in the call
market, and significant surplus SLR investments. SBI will maintain its strong
funding profile and a low cost resource position in view of its strong retail base and
wide geographical reach.
Earnings profile to remain good
SBI will maintain a good earnings profile in the medium term despite high
pressure on yields due to the increasing competition in the banking sector. SBIs
earning profile is characterized by consistency in the return on assets (PAT/Average
Assets), at around 1% per annum for the past three years, and diverse income
streams. To maintain yields and pursue credit growth, the bank is aggressively
targeting retail finance and small and medium enterprises (SMEs).The banks core
fee income of 1% of average funds deployed bolsters its revenue profile. However,
with the opening of government business like tax collection to other banks and
increased competition, the growth in fee income is expected to slow down. The
banks operating expense at 2.44% of average funds deployed in 2004-05 is in line
with other public sector banks. The banks cost structure is rigid as fixed employee
cost accounted for 74% of the operating expenditure in 2004-05. Thus, despite
good asset growth and technology efficiency gains, the banks operating costs will
remain high in the medium term. To be able to reap the full benefits of technology
implementation, the bank will have to reduce or redeploy work force; since this is a
sensitive issue, it is expected to happen gradually.
Comfortable capital position
SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a
large capital base of Rs 240.72 billion as at March 31, 2005. The bank has
considerably improved its net worth coverage for net NPAs to 4.4 times as at
March 31, 2005 due to lower slip pages reflecting an improving asset quality,
witnessed across the entire banking sector. The capitalization levels of SBI are
adequate to address the asset side risks and support the business growth in the
medium term.
Management strategies
In retail finance, the bank has leveraged its corporate relationships, pursued
business growth selectively, and has not competed based on interest rate. The bank
has taken initiatives like on-line tax returns filing and faster transfer of funds to
protect its dominant position in the government business. The bank also has a clear
technology strategy that will enable it to compete with the new generation private
sector banks in customer service and operational efficiency.
Asset quality to remain at average levels
The bank continues to have a high level of gross NPAs at 5.95% of gross advances
as at March 31, 2005, compared with 4.9% for all scheduled commercial banks
(SCBs) taken together. The bank is facing challenges to improve the quality of
assets originated, as can be seen in the consistently higher levels of slippages
(additions to NPAs) at 2.71% in 2004-05.
To contain NPAs and ensure credit growth, the bank has decided to focus on
financing the retail (personal) segment as well as SMEs. The share of retail
advances has increased to24.73% (Rs 522.08 billion) of total advances as at
September 30 2005. In the retail loan segment, SBI is targeting primarily the
housing loans segment, which constitutes Rs. 283.41billion (54.3%) of total retail
loans. The NPAs in retail finance are low currently; however they are steadily
increasing (especially in the housing finance portfolio) and have started showing
signs of stress. SBIs retail portfolio has grown at over 37% CAGR in the last two
years and hence a significant portion of the portfolio is largely unseasoned. The
housing finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March
31, 2005.The bank will face significant challenges in the medium term to develop
effective credit appraisal and collection systems in order to contain NPAs in retail
finance. SBIs asset quality is expected to remain at average levels, as the banks
large and diverse asset portfolio reflects of the asset quality of the banking system.
Business description
SBI along with its associate banks offer a wide range of banking products and
services across its different client markets. The bank has entered the market of term
lending to corporate and infrastructure financing, traditionally the domain of the
financial institutions. It has increased its thrust in retail assets in the last two years,
and has built a strong market position in housing loans.
SBI, through its non-banking subsidiaries, offers a host of financial services, viz.,
merchant banking, fund management, factoring, primary dealership, broking,
investment banking and0020credit cards. SBI has commenced its life insurance
business by setting up a subsidiary, SBI Life Insurance Company Limited, which is
a joint venture with Cardiff S.A., one of the largest insurance companies in France.
SBI currently holds 74% equity in the joint venture.
Industry prospects
To leverage benefits such as access to low cost resources and the facility to provide
a larger gamut of services, a number of finance companies such as Kotak Mahindra
Finance Limited and HDFC Limited have promoted banks. Simultaneously, yet
another emerging trend is that of foreign banks promoting NBFCs to benefit from
regulatory flexibility available to such entities in areas like absence of statutory
liquidity ratio and cash reserve ratio requirements, priority sector requirements,
and corporate exposure limits.
New private sector banks capture market share
With technological edge and a strong marketing thrust, private sector banks have
been stealing market share in retail deposits and the corporate fee business from
public sector banks. Together with some foreign banks, these private banks have
also aggressively entered the retail asset financing space, hitherto the domain of
non-banking finance companies.
Given their focus on cross selling and optimizing their customer base, they now
offer the entire range of products and services on the asset and liability side to
retail and whole sale customers
Asset quality to improve
Banks have not yet fully resolved the stress in the asset quality of their legacy
corporate loan portfolios, however. Though slippages to NPAs and provisioning
were high for some banks in FY2004, as they moved to the 90-day norm for
recognizing and provisioning for NPAs, the treasury gains enabled significant
provisioning to be made with the result that net NPAs for most public sector banks
are now less than 3%.
Going forward, steady growth in gross domestic product should help improve the
banks asset quality and increase corporate lending. The securitization and
reconstruction of financial assets and enforcement of security interest (Sarfaesi)
Act should also help banks in limiting slippages and improving NPA recoveries.
ultimate objective should be that of building up their models and RBI blacklisting
them for their validity on a periodical basis.10. There is a need for a greater use of
computerized system than at present. Computerization has to be recognized as an
indispensable tool for improvement in customer service, the institution and
operation of better control systems, greater efficiency in information
technology.11. State Financial Corporations at present are over regulated and over
administered. Supervision should be based on evolving prudential norms and
regulations which should be adhered to rather than excessive control over
administrative and other aspects of organisation and functioning. Internal audit and
internal inspection systems should be strengthened.12. The main issues with regard
to operations of Banks are to ensure operational flexibility and measure of
competition and adequate internal autonomy in matters of loan sanctioning and
internal administration.13. This calls for some re-examination and the present
relevance of directed credit programme ablest in respect of those who are able to
stand on their own feet and to whom the directed credit programmes with the
element of interest concessionality that has accompanied has become a source of
economic rent. It is recommended that directed credit sector be redefined to
comprise the small and marginal farmers, the tiny sector of industry, small business
and transport operators, village and cottage industry, rural artisans and other
weaker sections. The credit target for this redefined
23. priority sector should hence forth be fixed at 10% of aggregate credit which
would be broadly in line with the credit flows to these sectors at present.14. The
committee believes that the balance sheets of banks and FIs should be made more
transparent and full disclosure made in Balance sheet. This is to be done in phased
manner.
24. Das (1990) has compared the various efficiencyREVIEW OF
LITERATURE measures of public sector banks by applying data envelopment
analysis model and concluded that the level of NPAs significant negative Verma
(1999) has concluded thatrelationship with efficiency estimates. Bergerhigh
level of NPAs leads to operational failure of the bank. and young (1997) has
examined the relationship between problem loan and bank efficiency by employing
Granger-causality technique and found that high level of problem loans cause
banks of increase spending on monitoring, working out and / or selling off these
loans and possibly becomes more diligent in administering the portion of their
existing Gupta (1997) has alsoloan portfolio that is currently performing.
concluded that NPAs on protifability of banks and leads to liquidity Kaveri(1995)
has alsocrunch and slow down in the growth in GDP etc. examined the impact of
NPAs on profitability by taking profit making and six loss making banks and
concluded that loss making banks maintained Kwanhigher NPAs in the loan
portfolio which led them to show losses. and Eisenbeis (1994) also concluded that
there is negative relationship Toor (1994) analysed that poorbetween efficiency
and problem loans. recovery management leads to reduction in yield on advanced
that poor recovery management leads to reduction in yield on advances, reduced
productivity loss in the credibility and put detrimental impact on the Murthy
(1988) has examined that default bringpolicies of the banks. down the return
accruing and to them, reduces effective rate of interest and reduces the funds
recalculation and increase their dependence on
ACCORDING TO S,
RAJexternal sources thereby increasing the costs. KUMAR (2002) the
SARFAESI act and the could primarily used as powerful bargaining tool while
negotiating with defaulter. This puts bank on stronger ground in salvaging sticky
loan
25. To study the position of non performing assets inOBJECTIVE OF
STUDY To To know the impact on NPAon strategic banking variable.SBI
group know the reason for an asset becoming NPA
26. RESEARCH METHODOLOGYMeaning of Research Research is defined
as a scientific & systematic search for pertinent information on aspecific topic.
Research is an art of scientific investigation. Research is a systemized effortto gain
new knowledge. It is a careful inquiry especially through search for new facts in
anybranch of knowledge. The search for knowledge through objective and
systematic method offinding solution to a problem is a research.PROBLEM
STATEMENTThe research problems, in general refers to sum difficulty with a
researcher experience in thecontest of either a particular a theoretical situation and
want to obtain a salutation for same.The present Dissertation has been undertaken
to do the Problem of NPA inState Bank of India.RESEARCH DESIGN TYPES OF
RESEARCH DESIGN DESI EXPLORATORY DESCRIPTIVE EXPERIMENTAL
RESEARCH RESEARCH DESIGN DESIGN
27. The present study is descriptive in nature, as it seeks to discover ideas and
insightto bring out new relationship. Research design is flexible enough to provide
opportunity forconsidering different aspects of problem under study. It helps in
bringing into focus someinherent weakness in enterprise regarding which in depth
study can be conducted bymanagement.SAMPLING DESIGN:A sample design is
a definite plan for obtaining a sample from the sampling frame. It refersto the
technique or the procedure that is adopted in selecting the sampling units from
whichinferences about the population is drawn. Sampling design is determined
before thecollection of the data.DATA COLLECTION TYPES OF DATA
PRIMARY SECONDRY DATA DATAPRIMARY DATA: - METHODS OF
PRIMARY
DATAOBSERVATION
INTERVIEW
QUETIONAIRE
SCHEDULEMETHOD METHIOD METHOD METHOD
28. SECONDARY DATA: -The secondary data on the other hand, are those
which have already been collected bysomeone else and which have already been
passed through the statistical processes. When theresearcher utilizes secondary data
then he has to look into various sources from where he canobtain them. For e.g.
Books, magazine, newspaper, Internet, publications and reports. In thepresent
study use of secondary data collected from website..
29. REASONS FOR RISE IN NPAsFACTORS FOR RISE IN NPAs The
banking sector has been facing the serious problems ofthe rising NPAs. But the
problem of NPAs is more in public sector banks when compared toprivate sector
banks and foreign banks. The NPAs in PSB are growing due to external as wellas
internal factors.EXTERNAL FACTORS Ineffective recovery tribunalThe Govt.
has set of numbers of recovery tribunals, which works for recovery of loans
andadvances. Due to their negligence and ineffectiveness in their work the bank
suffers theconsequence of non-recover, their by reducing their profitability and
liquidity. Wilful DefaultsThere are borrowers who are able to payback loans but
are intentionally withdrawing it.These groups of people should be identified and
proper measures should be taken in order toget back the money extended to them
as advances and loans. Natural calamitiesThis is the measure factor, which is
creating alarming rise in NPAs of the PSBs. every nowand then India is hit by
major natural calamities thus making the borrowers unable to payback there loans.
Thus the bank has to make large amount of provisions in order tocompensate those
loans, hence end up the fiscal with a reduced profit. Mainly ours farmersdepends
on rain fall for cropping. Due to irregularities of rain fall the farmers are not
toachieve the production level thus they are not repaying the loans Industrial
sicknessImproper project handling , ineffective management , lack of adequate
resources , lack ofadvance technology , day to day changing govt. Policies give
birth to industrial sickness.Hence the banks that finance those industries ultimately
end up with a low recovery of theirloans reducing their profit and liquidity.
30. Lack of demandEntrepreneurs in India could not foresee their product
demand and starts production whichultimately piles up their product thus making
them unable to pay back the money theyborrow to operate these activities. The
banks recover the amount by selling of their assets,which covers a minimum label.
Thus the banks record the nonrecovered part as NPAs andhas to make provision for
it. Change on Govt. policiesWith every new govt. banking sector gets new
policies for its operation. Thus it has to copewith the changing principles and
policies for the regulation of the rising of NPAs. eg. Thefallout of handloom sector
is continuing as most of the weavers Co-operative societies havebecome defunct
largely due to withdrawal of state patronage. The rehabilitation plan workedout by
the Central govt to revive the handloom sector has not yet been implemented. So
theover dues due to the handloom sectors are becoming NPAs.INTERNAL
handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular
industrial visitThe irregularities in spot visit also increases the NPAs. Absence of
regularly visit of bankofficials to the customer point decreases the collection of
interest and principals on the loan.The NPAs due to wilful defaulters can be
collected by regular visits. Re loaning processNon remittance of recoveries to
higher financing agencies and re loaning of the same havealready affected the
smooth operation of the credit cycle. Due to re loaning to the defaultersand CCBs
and PACs, the NPAs of OSCB is increasing day by day.
33. IMPACT OF NPAS ON BANKS:-In portion of the interest income is
absorbed in servicing NPA.NPA is not merely non-remunerative. It is also cost
absorbing and profit eroding.In the context of severe competition in the banking
industry, the weak banks are atdisadvantage for leveraging the rate of interest in the
deregulated market and securingremunerative business growth. The options for
these banks are lost. "The spread is the breadfor the banks". This is the margin
between the cost of resources employed and the returntherefrom." This is the
margin between the cost of resources employed and the returnthereform. In other
words it is gap between the return on funds deployed (Interest earned oncredit and
investments) and cost of funds employed (Interest paid on deposits). When the
interest rates were directed by RBI, as heretofore, there was not option forbanks.
But today in the deregulated market the banks decide their lending rates
andborrowing rates. In the competitive money and capital Markets, inability to
offer competitivemarket rates adds to the disadvantage of marketing and building
new NPA has affected theprofitability, liquidity and competitive functioning of
banks and finally the psychology of thebankers in respect of their disposition
towards credit delivery and credit expansion. 1. Impact on Profitability "The
efficiency of banks is not always reflected only by the size of its balance sheet but
by the level of return on its assets. NPAS do not generate interest income for the
banks, but at the same time banks are required to make provisions for such NPAS
from their current profits. NPAS have a deleterious effect on the return on assets in
several ways: They erode current profits through provisioning requirements.
They result in reduced interest income. They require higher provisioning
requirements affecting profits and accretion to capital funds and capacity to
increase good quality risk assets in future, and
34. They limit recycling of funds, set in asset-liability mismatches, etc.There
is at times a tendency among some of the banks to understate the level of NPAs
inorder to reduce the provisioning and boost up bottom lines. It would only
postpone theprocess.In the context of crippling effect on a banks operations in all
spheres, asset quality has beenplaced as one of the most important parameters in
the measurement of a banks performanceunder the CAMELS supervisory rating
system of RBI.Between 01.04.93 to 31.03.2001, SBI Group incurred a total
amount of Rs. 31251 Crorestowards provisioning NPA. This has brought Net NPA
to Rs. 32632 Crores or 6.2% of netadvances. To this extent the problem is
contained but a what cost?This costly remedy is made at the sacrifice of building
healthy reserves for future capitaladequacy.The enormous provisioning of NPA
together with the holding cost of such non-productiveassets over the years has
acted as a severe drain on the profitability of the SBI Group. In turnSBI Group are
seen as poor performers and unable to approach the market for raisingadditional
capital. Equity issues of nationalized banks that have already tapped the market
arenow quoted at a discount in the secondary market. Other bans hesitate to
approach the marketto rise new issues. This has alternatively forced SBI Group to
borrow heavily from the debtmarket to build Tier II Capital to meet capital
adequacy norms putting severe pressure ontheir profit margins; else they are to
seek
the
bounty
of
the
Central
Government
for
repeatedRecapitalization.Considering the minimum cost of holding NPAs at 7%
p.a. (reckoning average cost of fundsat 6% plus 1% service charge) the net NPA of
Rs. 32632 Croces absorbs a recurring holdingost of Rs. 2300 Crores annually.
Considering the average provisions made for the last 8 yearswhich works out to
average of Rs. 3300 crores from annum, a sizeab business.
35. In the face of the deregulated banking industry, an ideal competitive
working is reached,when the banks are able to earn adequate amount of noninterest income to cover their entireoperating expenses i.e. a positive burden. In
that event the spread factor i.e. the differencebetween the gross interest income and
interest cost will constitute its operating profits.Theoretically even if the banks
keeps 0% spread, it will still break even in terms of operatingprofit and not return
an operating loss. The net profit is the amount of the operating profitminus the
amount of provisions to be made including for taxation. On account of the
burdenof heavy NPA, many nationalised banks have little option and they are
unable to lowerlending rates competitively, as a wider spread is necessitated to
cover cost of NPA in the faceof lower income from off balance sheet business
yielding non-interest income.The following working results of SBI Group an
identified well manged nationalised banksfor the last two years and for the first
nine months of the current financial year, will berevealing to prove this
statement.Non-interest income fully absorbs the operating expenses of this banks
in the currentfinancial year for the first 9 months. In the last two financial years,
though such income hassubstantially covered the operating expenses (between 80
to 90%) there is still a deficit left.The strength of SBI Group is indentified by the
following positive feature: 1. Its sizeable earnings under of non-interest income
substantially/totally meets its non-interest expenses. 2. Its obligation for
provisioning requirements is within bounds. (Net NPA/Net Advances is 1.92%)It is
worthwhile to compare the aggregate figures of the 19 Nationalised banks for the
yearended March, 2001, as published by RBI in its Report on trends and progress
of banking inIndia. Interest on Recapitalization Bonds is a income earned form the
Government, who hadissued the Recapitalization Bonds to the weak banks to
sustain their capital adequacy under abailout package. The statistics above show
the other weaknesses of the nationalised banks in
36. addition to the heavy burden they have to bear for servicing NPA by way of
provisioning andholding cost as under: Their operating expenses are higher due
to surplus manpower employed. Wage costs total assets is much higher to PSBs
compared to new private banks or foreign banks. Their earnings from sources
other than interest income are meagre. This is due to failure to develop off balance
sheet business through innovative banking products. 2. Impact on Liquidity of the
SBI Group Though SBI Group are able to meet norms of Capital Adequacy, as per
RBI guidelines, the facts that their net NPA in the average is as much as 7% is a
potential threat for them. RBI has indicated the ideal position as Zero percent Net
NPA. Even granting 3% net NPA within limits of tolerance the SBI Group are
holding an uncomfortable burden at 7.1% as at March 2001. They have not been
able to build additional capital needed for business expansion through internal
generations or by tapping the equity market, but have resorted to II-Tier capital in
the debt market or looking to recapitalistion by Government of India. 3. Impact on
Outlook of Bankers towards Credit Delivery. The fear of NPA permeates the
psychology of bank managers in the SBI Group in entertaining new projects for
credit expansion. In the world of banking the concepts of business and risks are
inseparable. Business is an exercise of balancing between risk and reward. Accept
justifiable risks and implements de-risking steps. Without accepting risk, there can
be no reward. The psychology of the banks today is to insulate themselves with
zero percent risk and turn lukewarm to fresh credit. This has affected adversely
credit growth compared to growth of deposits, resulting in a low C/D Ratio around
50 to 54% for the industry. The fear psychosis also leads to excessive securityconsiousness in the approach towards lending to the small and medium sized credit
customers. There is insistence on provision of collateral security, sometimes up to
200% value of the advance, and consequently due to a feeling of assumed
protection on account of holding adequate security (albeit over 37. confidence). a tendency towards laxity in the standards of credit appraisal
comes to thefore. It is well know that the existence of collateral security at best
may convert the creditextended to productive sectors into an investment against
real estate, but will not preventthe account turning into NPA. Further blocked
assets and real estate represent the mostilliquid security and NPA in such advances
has the tendency to persist for a longduration.SBI Group have reached a dead-end
of the tunnel and their future prosperity depends onan urgent solution for handling
this hovering threat.4. Impact on Productivity:High level of NPAs effect the
for which these were established it is becoming more &more risky and less
remunerative. They are floating their subsidiaries to manage mutualfunds,
factoring, insurance business, Good money is spent to recover bad
money.Deterioration in the quality of loan assets and inability to come with new
products makesthe Indian banks uncompetitive globally. Due to high cost, they
cannot reduce lendingrate to meet the economys demand of low lending rate. It is
also biggest threat for capitalaccount convertibility.
39. 7. Some areas of Macro-Economic Impact:It is not only the banks which
are affected higher level of NPAs but it is the economy as awhole which pays for it.
Banks are not putting enough resource in lending due to fear ofdefault. Once the
credit to various sectors of the economy slow down, the economy isbadly hit.
There is slowdown in growth in GDP, industrial output and fall in the profitmargins
of the corporate and consequent depression in the market. Further high level
ofNPAs can result in adding to the inflationary potential in the economy and
eroding theviability of the credit system as a whole. Not only this, burden of NPAs
is to be borne by the society as a whole. When capitalsupport is given to PSB on
A/c of losses booked and/ or erosion of capital due to NPAs, itcomes out of either
Govt. budgetary resources or from the public as perLiberalization policy, whether
this money is from tax revenues or from the hard earnedsaving of the investing
public, in fact, the society is bearing the cost of theseNPAs. Moreover, Govt. holds
majority of shares in PSBs in some banks 100% capital isin its hand. Any dividend
declared would have gone to the Govt. and which can be spenton the welfare and
development program.
40. GUIDELINES BY RBIGuidelines of Government and RBI for Reduction
of NPAs1. Compromise settlement schemes: The RBI/Government of India have
been constantly goading the banks to take steps for arresting the incidence of fresh
NPAs and have also been creating legal and regulatory environment to facilitate the
recovery of existing NPAs of banks. More significant of them, I would like to
recapitulate at this stage.* The broad framework for compromise or negotiated
settlement of NPAs advised by RBI in July 1995 continues to be in place. Banks
are free to design and implement their own policies for recovery and write-off
incorporating compromise and negotiated settlements with the approval of their
Boards, particularly for old and unresolved cases falling under the NPA category.
The policy framework suggested by RBI provides for setting up of an independent
Settlement Advisory Committees headed by a retired Judge of the High Court to
scrutinise and recommend compromise proposals.* Specific guidelines were issued
in May 1999 to public sector banks for one time nondiscretionary and non
discriminatory settlement of NPAs of small sector. The scheme wasoperative up to
September 3, 2000. [Public sector banks recovered Rs. 668 crore
throughcompromise settlement under this scheme].* Guidelines were modified in
July 2000 for recovery of the stock of NPAs of Rs. 5 croreand less as on 31 March
1997. [The above guidelines which were valid up to June 30, 2001helped the
public sector banks to recover Rs. 2600 crore by September 2001].* An OTS
Scheme covering advances of Rs. 25000 and below continues to be inoperation and
guidelines in pursuance to the budget announcement of the Honble
FinanceMinister providing for OTS for advances up to Rs. 50,000 in respect of
NPAs ofsmall/marginal farmers are being drawn up.
41. 2. Lok Adaltas: Lok Adalats help banks to settle disputes involving
accounts in doubtful" and "loss" category, with outstanding balance of Rs. 5 lakh
for compromise settlement under Lok Adalats. Debt Recovery Tribunals have now
been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. 10
lakhs and above. The public sector banks had recovered Rs. 40.38 crore as on
September 30, 2001, through the forum of Lok Adalat. The progress through this
channel is expected to pick up in the coming years particularly looking at the
recent initiatives taken by some of the public sector banks and DRTs in Mumbai.3.
Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial
Institutions (amendment) Act, passed in March 2000 has helped in strengthening
the functioning of DRTs. Provisions for placement of more than one Recovery
Officer, power to attach defendants property/assets before judgement, penal
provisions for disobedience of Tribunals order or for breach of any terms of the
order and appointment of receiver with powers of realization, management,
protection and preservation of property are expected to provide necessary teeth to
the DRTs and speed up the recovery of NPAs in the times to come. Though there
are 22 DRTs set up at major centres in the country with Appellate Tribunals located
in five centres viz. Allahabad, Mumbai, Delhi,Calcutta and Chennai, they could
decide only 9814 cases for Rs. 6264.71 crore pertaining to public sector banks
since inception of DRT mechanism and till September 30, 2001. The amount
recovered in respect of these cases amounted to only Rs. 1864.30 crore.
42. Looking at the huge task on hand, with as many as 33049 cases involving
Rs. 42988.84 crore pending before them as on September 30, 2001, I would like
the banks to institute appropriate documentation system and render all possible
assistance to the DRTs for speeding up decisions and recovery of some of the well
collateralised NPAs involving large amounts. I may add that familiarisation
programmes have been offered in NIBM at periodical intervals to the presiding
officers of DRTs in understanding the complexities of documentation and
operational features and other legalities applicable of Indian banking system. RBI
on its part has suggested to the Government to consider enactment of appropriate
penal provisions against obstruction by borrowers in possession of attached
properties by DRT Receivers, and notify borrowers who default to honour the
decree passed against them.4. Circulation of information on defaulters: The RBI
has put in place a system for periodical circulation of details of willful defaults of
borrowers of banks and financial institutions. This serves as a caution list while
considering requests for new or additional credit limits from defaulting borrowing
units and also from the directors/proprietors/partners of these entities. RBI also
publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above)
against whom suits have been filed by banks and FIs for recovery of their funds, as
on 31st March every year. It is our experience that these measures had not
contributed to any perceptible recoveries from the defaulting entities. However,
they serve as negative basket of steps shutting off fresh loans to these defaulters. I
strongly believe that a real breakthrough can come only if there is a change in the
repayment psyche of the Indian borrowers5. Recovery action against large NPAs:
After a review of pendency in regard to NPAs by the Honble Finance Minister,
RBI had advised the public sector banks to examine all cases of willful default of
Rs 1 crore and above and file suits in such cases, and file criminal cases in regard
to willful defaults. Board of Directors are required to review NPA accounts of Rs. 1
crore and above with special reference to fixing of staff accountability.On their part
RBI and
43. the Government are contemplating several supporting measures including
legal reforms, some of them I would like to highlight.6. Corporate Debt
Restructuring (CDR): Corporate Debt Restructuring mechanism has been
institutionalised in 2001 to provide a timely and transparent system for
restructuring of the corporate debts of Rs. 20 crore and above with the banks and
financial institutions. The CDR process would also enable viable corporate entities
to restructure their dues outside the existing legal framework and reduce the
incidence of fresh NPAs. The CDR structure has been headquartered in IDBI,
Mumbai and a Standing Forum and Core Group for administering the mechanism
had already been put in place. The experiment however has not taken off at the
desired pace though more than six months have lapsed since introduction. As
announced by the Honble Finance Minister in the Union Budget 2002-03, RBI has
set up a high level Group under the Chairmanship of Shri Vepa Kamesam, Deputy
Governor, RBI to review the implementation procedures of CDR mechanism and
to make it more effective. The Group will review the operation of the CDR
Scheme, identify the operational difficulties, if any, in the smooth implementation
of the scheme and suggest measures to make the operation of the scheme more
efficient.7. Credit Information Bureau: Institutionalisation of information sharing
arrangements through the newly formed Credit Information Bureau of India Ltd.
(CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer
Group (Chairman of CIBIL) to operationalise the scheme of information
dissemination on defaults to the financial system. The main recommendations of
the Group include dissemination of information relating to suit- filed accounts
regardless of the amount claimed in the suit or amount of credit granted by a credit
institution as also such irregular accounts where the borrower has given consent for
disclosure. This, I hope, would prevent those who take advantage of lack of system
of information sharing amongst lending institutions to borrow large
44. amounts against same assets and property, which had in no small measures
contributed to the incremental NPAs of banks.8. Proposed guidelines on willful
defaults/diversion of funds: RBI is examining the recommendation of Kohli Group
on willful defaulters. It is working out a proper definition covering such classes of
defaulters so that credit denials to this group of borrowers can be made effective
and criminal prosecution can be made demonstrative against willful defaulters.9.
Corporate Governance: A Consultative Group under the chairmanship of Dr. A.
Ganguly was set up by the Reserve Bank to review the supervisory role of Boards
of Banks and financial institutions and to obtain feedback on the functioning of the
Boards vis-a-vis compliance, transparency, disclosure, audit committees etc. and
make recommendations for making the role of Board of Directors more effective
with a view to minimising risks and overexposure. The group is finalising its
recommendations shortly and may come out with guidelines for effective control
and supervision by bank boards over credit management and NPA prevention
measures. 10. Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002: The Act provides, inter alia for
enforcement of security interest for realisation of dues without the intervention of
courts or tribunals. The Security Interest (Enforcement) Rules, 2002 has also been
notified by Government to enable Secured Creditors to authorise their officials to
enforce the securities and recover the dues from the borrowers. As on June 30,
2004, 27 public sector banks had issued 61, 263 notices involving outstanding
amount of Rs. 19,744 crore, and had recovered an amount of Rs. 1,748 crore from
24,092 cases.
45. PROBLEMS LOAN RECOVERY1. Inadequate security and Erosion in
value of security: Generally, banks tend to find that there is a major gap in the
valuation of the security, as carried out at the time of providing the loan and at the
time of loan recovery. The value of the security has generally deteriorated over the
period and according to experts, it may further deteriorate by almost 10-50% if
quick action is not taken for its immediate sale.2. Political interferences: Political
interference in the day -to-day functioning of public sector banks created a number
of problems for them. The populist policies of the national level politicians, such as
waiver in repayment only added to these problems.3. Slow legal procedure: Before
the establishment of DRTs in 1993, the banks had to approach the normal courts to
recover their dues. There were provisions under various acts which hampered the
smooth takeover and sale of secured assets. The legal process could take years to
be completed, with the borrower having ample scope for delaying the takeover of
08Interpretation :-above graph show that net NPA decreasd from 2003-04 to 200506 andincreased in 2006-07 to 2007-08.
51. GROSS NPA (RATIO%) YEAR 2003-04 2004-05 2005-06 2006-07 200708 GROSS NPA(RATIO%) 7.75 5.96 3.61 2.92 3.04 8Interpretation : Above graph
shows that the gross NPA (Ratio%)of SBI is decreasedfrom 2004-05 to 2006-07
and increased in 2007-08. 7 6
52. NET NPA(RATIO%) YEAR 2003-04 2004-05 2005-06 2006-07 2007-08
NET NPA(RATIO%) 3.48 2.65 1.88 1.56 1.78 4 3.5 3 2.5 YEAR 2 NET 1.5
NPA(RATIO%) 1 0.5 0 1 2 3 4 5 6Interpretation: Above graph shows that the net
NPA(Ratio%) of SBI is decreased from2004-05 to 2006-07 and increased in 200708 PROVISION COVER
53. YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 PROVISION COVER
57.04 59.45 49.04 47.41 45.04 PROVISION COVER 70 60 POVISION COVER
% 50 40 PROVISION COVER 30 20 10 0 2003-04 2004-05 2005-06 2006-07
2007-08 yEARInterpretation: Above graph shows that in 2003-04 provision cover
of NPA is 57.04%and increased in 2004-05. It decreased from 2005-06 to 2007-08.
State Bank of Patiala
54. YEAR 2003-04 2004-05 2005-06 2006-07 2007-08 GROSS NPA(%) 1.82
1.65 1.38 2.14 1.42 NET NPA(%) 1.35 1.23 0.99 0.83 0.6 2.5 2 1.5 GROSS
NPA(%) 1 NET NPA(%) 0.5 0 2003- 2004- 2005- 2006- 2007- 04 05 06 07
08Interpretation: Above graph shows that the gross NPA of SBP is decreased
from2003-04 to 2005-06,increased in 2006-07 and again decreased in 2007-08.
The net NPAdecreased from 2003-04 to 2007-08. FINDINGS 1. REASON OF
NPA IN BANK: 55. Lack of expertise Non-inspection of borrower Default by customer
Lack of trained Poor credit collection Imbalance of inventories Change in
consumer preference 2 Lack of commitment to recovery staff Impact of
profitability Govt. Policies IMPACT OF NPA ON BANK Impact on
outlook of Banker to wards credit delivery Liquidity Impact of productivity
RECOMMANDATIONS
56. Credit administration: A banks have to strengthen their credit
administrative machinery and put in place effective credit risk
Bettermanagement systems to reduce the fresh incidence of NPAs. Inspection:
We shall keep a close watch on the manner in which NPA Cash Recovery: We
should also insist thatreduction is taking place. cash recoveries should more
than offset the fresh write-offs in NPAs. Perception: The mindset of the borrowers
needs to change so that a culture of proper utilization of credit facilities and timely
repayment Financial System: As you are aware, one of the mainis developed.
reason for corporate default is on account of diversion of funds and corporate