Professional Documents
Culture Documents
INTRODUCTION
1
Achieving such societal objectives resulted in imposing
Banking, whose environment till early 1990s was insulated from the
crept into the financial system over the years notably reduced
2
The asset quality is a prime concern and impacts various
measures in the banking sector during this period. Keeping in view the
The Cash Reserve Ratio (CRR) stood at its legal upper limit of
rate.
banks.
sector banks and foreign banks. One of the major objectives of banking
private equity
at the time.
Europeancountries.
functioning.
6
The existing capital adequacy regulations tried to protect the
NPA.
that the NPAs still pose a significant threat to the banking sector. This
7
2.0 INDIAN BANKING SECTOR: AN OVERVIEW
income, which are marked among its regions. The banking system in
India has had to serve the goals of economic policies enunciated in the
The history of modem Indian banking goes back to 1683 when the
the modern banking era in India. Two more Presidential Banks, namely,
Bank of Bombay and Bank of Madras were set up in 1840 and 1843
(1906), Indian Specie Bank (1906), Indian Bank (1906), Bankof Baroda
(1908) and Central Bank (1911) had their operation with a paid up
capital of Rupees Five lakhs and above. The Indian banking system had
system had neither a definite shape nor policy until the creation of RBI
Imperial Bank of India, which was renamed as State Bank of India (SBI).
In 1959, SBI took over control of eight private banks floated in the
mergers of weak banks with the strong ones. The move significantly
war development strategy was in many ways a socialist one, and the
government felt that the banks in private hands did not lend enough to
banking.
banks. Nonscheduled banks refer to those banks that are not included
cooperative banks.
Nationalized Banks and State Bank of India (SBI) & Associate banks);
Private Sector Banks and New Private Sector Banks that emerged
after 1991;
11
The figure no. 1 shows the structure of scheduled banks
inIndia.
12
In India, prior to nationalization, the banking was restricted
13
mainly to the urban areas and neglected the rural and semi-urban
areas. Large industries and big business houses enjoyed the major
exports did not receive deserved attention during the period. In the
than 80% of credit was allocated for trade and industry sector
banks was intended to enable the banks to play the role of catalytic
agents for economic growth. Since then the banking system in India
14
The regulatory frame work during the pre-liberalization period
approach, the banking network in the rural areas has made its
the rural masses. Though the volume of loans provided by banks has
2011-12.
15
Table 2.2 Statistical Tables on Number of Banks in
India(2001-2012)
012
16
increased to 70,314, i.e., an increase of 48% during the study period.
India(2001-2012)
PrivateSect
PrivateSect
SBI&
Nationalize
or Banks
or Banks
d Banks
PSBs
RRBs
Total
Year
ForeignBan
ks
Associates
ReserveBankofIndia,2012
The total number of offices of SCBs has increased from 7,812 in 2000-
study period.
17
Table 2.4 Total Loans and Advances of bank
groups(2011-12)
Amount in `Billion
PublicSect
AllSCBs
Nationalize
Private
SBI&
Foreign
Banks
or Banks
d Banks
Associates
p.55,RBI
* DataAnalysis
18
Total Loans and Advances - Bank Group
wise(2011-12)
2298,5%
groups(2011-12)
3.1 Introduction
NPA in Indian banking sector over the years. The comparative studies
principal has remained past due for a specified period of time. NPA
19
is used by financial institutions that refer to loans that are in jeopardy
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
affects the lending capacity since funds are blocked and repayment is
disturbed and has also resulted in additional cost for intermediation and
firm, concern, industry and nation where that asset is idling. Viewed
NPA to be treated as National Priority. The level of the NPA indicates the
21
measures and curative measures. Precautionary measures focus
assessment systems of the bank. This will reduce the instances of fresh NPA
that have been generated. The curative measures are reactionary in nature
Schemes, etc.
three categories based on the period for which the asset has
Sub-standard assets:
A sub standard asset is one which has been classified as NPA for a
Doubtful Assets:
Assets.
Loss assets:
22
Where loss has been identified by the bank, internal or external
auditor or central bank inspectors. But the amount has not been
affect the profitability and net-worth of banks and also erodes the
provisions, which reduces the over all profits and share holders value.
for financial system all over the world. The problem of NPAs is not
only affecting the banks but also the whole economy. In fact high
banking sector was felt in Indian Economy. The studies in this period
between NPA and macro economic indicators like GDP, Inflation, Index of
manage NPA. The findings of the study reiterated that NPA pose
Vibha (2007) explained that in the early stages, the NPA was mainly
of NPA during 1997-2003 and concluded that the root cause of NPA is
detailed the list of banks whose NPA is more than their net worth
riskmanagement.
the analysis that the narrow banking may expose weak banks to
immense market and interest rate risks and thus make it vulnerable to
idio syncratic and systemic risks arising from macro economic shocks.
SCBs in
25
India (2006-07 &2011-12)
is irrecoverable, for the bank has made provisions, and which is still in
over from the previous years. The overhang component can be best
26
Table 3.2 GNPA of all SCBs in India (2006-07 &2011-
12)
CommercialBanks 0 4
Source: Statistical Tables Relating to Banks in India (2006-07
and2011-12)
i.e., 48.51% in total GNPA of all SCBs in India. The share of SBI &
27
142,326
160,000 117,262
120,000
69,048
48,214
80,000
18,768
40,000 6,297
0
SBI andNationalized PSBsForeignPrivateAllSCBs
associatesBanksBanksSector Banks
BankGroup
Source: DataAnalysis
Figure 3.3 GNPA of all SCB in India - Bank GroupWise(2011-
12)
back or rising interest rate regime (The Economic Times, 2012), etc.
The lax credit appraisal system during boom period also contributed
from the analysis that the growth of additions to NPA was marginal
Rateof
4.1 Introduction
29
Contents
development process. Commercial banks are major constituents in the
sector since 1991. Levine et al (1999) pointed out that the legal and
30
always carries a risk, usually known as credit risk, arises out of the
th
NPA) existed right from the days of Goldsmith banking in 17 Century
England, where many Goldsmiths failed because they could not fulfill
the bank. In other words, NPA refers to a debt obligation where the
oftime.
days overdue norm for identification of NPA, from the year ending
March 31, 2004. Accordingly, with effect from March 31, 2004, a non-
termloan,
Credit(OD/CC),
agricultural purposes,and
32
become non-performing, then the bank will have to treat all the
without having any regard to the fact that there may still exist certain
(i) StandardAssets
(ii) Sub-standardAssets
(iii) DoubtfulAssets
(iv) LossAssets
33
account into various categories taking into account the degree of well
4.3.1.Standard Assets
Standard Asset is one which does not disclose any problems and
which does not carry more than normal risk attached to thebusiness.
4.3.2.Sub-standardAssets
possibility that the banks sustain some loss, if deficiencies are not
corrected.
34
classification of an asset should not be upgraded merely as a result of
mentioned conditions.
A loss asset is one where loss has been identified by the bank or
the Reserve Bank of India inspection but the amount has not been
salvage or recoveryvalue.
then as doubtful after the expiry of 12 months from the date the
account has become NPA. Such accounts are straight away classified
banks that failed in the U.S. in 2009 had a high level of NPA (over
banks exit to destiny (Ex: United Western Bank), while some other
banks merged (Ex. Lord Krishna Bank) with other banks, since affected
an asset becomes NPA when the borrower fails to repay the interest
36
i. into the system and situational causes,
factors, and
factors.
Funds are diverted for purposes other than for its original purpose. Even
funds for the purpose it is granted, the problem still persists and
The other major culprits for higher levels of NPA are willful
37
industries. In India, according to Reserve Bank of India (RBI)
when it has the capacity to honor the said obligations. Any entity that
has not utilized the money borrowed for the specific purpose for which
it was raised from the lender and diverted it to other use is also a
willful defaulter.
obligations to the lender even when it has the capacity to honor such
obligations.
38
b)The unit has defaulted in meeting its payment/repayment
obligations to the lender and has not utilized the finance from the
lender for the specific purposes for which finance was availed,
declared as such.
new ventures for five years. The Financial Express (2008) on Indian
39
banking system shared the bankers view that a significant rise in
default cases has led to a surge in the level of NPA in the banking
sector. It was mentioned that the legal system to manage NPA isnot
only archaic but also ambiguous and needs to reform to bring down
rise in the NPA. As well, factors like maturity of credit, better credit
40
available etc. If the repayment schedule is defective both with
practices,
and
and Gorter (2001) explained that the major cause for NPA is wrong
Under financing/untimelyfinancing.
economiccosts.
capitalmarkets.
h) Business Failures.
bodies etc.,
ofsecurities.
43
m) These are the major internal factors leading to poor
social systems existing in the country. The major external factors cited
in various researchesinclude;
4. Industrial recession.
etc.
44
7. Government policies like excise duty changes, Import duty
changes etc.,
below.
disposal process,
from the risk that the business confronts. These risks are translated
loan is not paid even when it is possible for the borrower to repay it
calamities.
capital, (c) poor credit allocation, (d) heavy borrowing, too ambitious
4.5 Conclusion
portfolio and resulted higher NPA. The increase in NPA since 2007-08
47
5.0 NPAs in PSUs
In India, the NPAs that are considered to be at higher levels than those in
of late, attracted the attention of public. The Indian banking system had acquired
NPAs, which can be termed as legacy NPAs. NPAs seem to be growing in public s
years. Non-performing Asset (NPA) has emerged since over a decade as an ala
affected banks. The positive results of the chain of measures affected under ban
Government of India and RBI in terms of the two Narasimhan Committee Reports
period have been neutralized by the ill effects of this surging threat. Despite vario
administered to solve and end this problem, concrete results are eluding. It is
is however acutely suffered by Nationalised Banks, followed by the SBI group, and
Institutions.
Gross NPAs of PSBs stood at Rs 112,489 crore in March 2012 rising to Rs 155,890
and all- time high of Rs 182,829 crore by June 2013. The Standing Committee on
examine the reasons for high NPAS in PSBs, including bigger banks like State Ban
AS per the Government of India,the major reasons for the NPAs are sluggishness
during the recent past, slowdown in recovery in the global economy and continuing
markets leading to lower exports of various products like textiles, engineering goods
factors, including the ban in mining projects, delay in environmental related perm
and steel sector, volatility in prices of raw material and the shortage in availability
on the operations in the textiles, infrastructure and iron & steel," the government sa
the Standing Committee, also shows that NPAs in the corporate sector are far h
priority or agriculture sector.The government further said, "The asset quality of PSBs
Within the priority sector, incremental NPAs were more in respect to micro small
followed by agriculture." On the whole, gross NPA ratio and net NPA ratio of PSBs
cent and 2.60 per cent as on June 30, 2013, to 4.85 per cent and 2.64 per cent at
"As regard to restructured standard advances relative to gross advances, the ratio
cent in September 2013 from 7.34 per cent a quarter ago. Despite the decline, ratio
tandem with rise in gross NPAs reflected visible asset quality strain embedded in the
As regards the SBI, its gross NPAs have risen from Rs 23,074 crore in March 2011 to
2013. Same is the case with the PNB, whose gross NPAs stood at Rs 4,371 crore in
"The recovery of NPAs by Public Sector Banks has increased from Rs 9,911 crore (M
crore (March 2011) and to Rs 17,272 crore by March 2012 to Rs 20,050 crore by Mar
Nonetheless, the difference between the Standing Committee and the
Committee.
The following are the figures of gross and net NPAs of public sec
As far as old NPAs are concerned, a bank can remove it on its own or sell the
assets to AMCs to clean up its balance sheet. For preventing fresh NPAs, the
bank itself should adopt proper policies. The failure of the banking sector may
The Indian banking system, which was operating in a closed economy, now
faces the challenges of an open economy. On one hand a protected
treasury operations and Asset Liability Management skills. On the other hand
One of the main causes of NPAs into banking sector is the directed
percent of Gross NPAs are locked up in 'hard-core' doubtful and loss assets,
The problem India Faces is not lack of strict prudential norms but
public sector banks. For Example, the government of India had given a
massive wavier of Rs. 15,000 Crs. under the Prime Minister ship of Mr. V.P.
Singh, for rural debt during 1989-90. This was not a unique incident in India
and left a negative impression on the payer of the loan. Poverty elevation
programs like IRDP, RREP, SUME, SEPUP, JRY, PMRY etc., failed on various
grounds in meeting their objectives. The huge amount of loan granted under
sections. Loans given by banks are their assets and as the repayment of
several of the loans were poor, the quality of these assets were steadily
(Table 2)
The study of about 900 top NPA accounts in 27 public sector banks , that the foll
Internal and
Management recovery
n) Lack of technical,
Collection
p) Lack of Quality
Control
35.2% or Rs 63,386 crore for the nine months ending December 2013
to cross the Rs 2.4 lakh croremark. This jump of 35.2% was much
higher than the 27% rise witnessed in the first six months of 2013-14
Ten out of the 40 listed banks accounted for nearly 70% of the total
The State Bank of India at 28% and Rs 67,799 crore has the largest
share in the total gross NPAs of the 40 listed banks as per the table
of March 31, 2013. The United Bank reported a 188% jump in gross
NPAs at Rs 8546 crore at end of Q3. Eleven banks posted a 50% plus
growth in their gross NPAs for the nine months ending December 31,
2013.
bad for banks on the NPAs front, but most banks will resort to higher
levels of provisioning so as to bring down their net NPA levels. The first
quarter of next financial year too will continue to be bad for banks with
regard to NPAs. The high concentration of banks' debt to the top 50-
the future of the Indian economy will emerge post the central elections
due in May."
The growth in net NPAs at 49% for the nine months ended December
31, 2013 as against a 38% rise in the first six months of 2013-14 is also
Concluding Remarks
bank credit to priority sectors have led to higher NPAs, due to credit to
borrowers that banks resources are scarce and these are meant to
finance viable ventures so that these are repaid on time and relevant
the time sanctioning of of the Loan and valuation done after the Loan
became BAD
Borrower
4 Type of Loan
5 Area of the property
6 Description of the Property
7 Location of the Property
8 Features of the property
9 Any Other details
10 Reasons given by the
Borrower
this study
12 Observation
REFERENCES
pp. 46-49.
pp. 60-62.
3. M.S.A. Rao, A Better Future for Banks, Indian Management (july 2001) pp.
1 4-16.
ahead.
5. M.Y. Khan, How to Tackle Credit Defaults, Business Line (Feb. 2000) pp 6.
Experiences, ICRA bulletin Money & Finance, (Jan-Mar. 2003), pp. 64 69.
2002, Mumbai.
12. Nacheket Mor & Bhavana Sharma, Rooting out NPAs, sept.2002, ICICI
researchcenter.org.
CHAPTER SCHEME
the research.
in Indian Context..
The major changes in Indian banking sector since the post - liberalization
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