“NON-PERFORMING ASSESTS (NPA) IN BANKS”

A PROJECT STUDY SUBMITTED IN PARTIAL

FULFILLMENT FOR THE REQUIREMENT OF THE
THREE YEAR POST GRADUATE DIPLOMA IN
MANAGEMENT (PART TIME) 2008-2011

BY

NARAYAN CHULI
ROLL NO. 54/08
BATCH 2008-2011

UNDER THE GUIDANCE

OF
(Dr. DEEPAK TANDON)

LAL BAHADUR SHASTRI INSTITUTE OF MANGEMENT

DELHI

MARCH 2011

1
 LAL BAHADUR SHASTRI INSTITUTE OF MANAGEMENT,
Sector-3, R. K. Puram, Delhi

Dated……………

CERTIFICATE

Certified that Narayan Chuli has successfully completed Project Study entitled
“Non Performing Assets (NPA) in Banks” under my guidance. It is his / her
original work, and is fit for evaluation in partial fulfillment for the requirement
of the Three Year Post Graduate Diploma in Management (Evening).

(Name of the Student (Name of the Guide

with Signature) with Signature)

2
 ACKNOWLEDGEMENT

Carrying out a project like this can never be the outcome of the efforts of a single person; rather
it bears the imprint of a number of persons who directly or indirectly helped me in completing
this project. It gives me immense pleasure, to take the opportunity of expressing my sincere
gratitude towards colleagues, mentors and seniors whose sincere advice made my project period
educative & pleasant one.

I would like to express my heart-felt gratitude to my Mentor Dr. Deepak Tandon for giving me
the opportunity to work on this challenging project and supporting me throughout my project
life.

I would like to thank the faculty members and batch-mates of my institute who have been a
guiding light right from day one and whose encouragement and support; have helped me
complete my project.

I wish to place on record my gratitude to LBSIM, New Delhi, for providing me an opportunity
to work on this project of such importance. My stay in the organization has been a great learning
experience. This exposure has enriched me with knowledge and has also introduced me to the
attributes of a successful professional.

NARAYAN CHULI
54/08

3
 EXECUTIVE SUMMARY

The clouds of economic gloom and the ensuing liquidity crunch have dealt a double blow to
corporate bottom lines. Worries are growing on asset quality of banks as borrowers are on a shaky
ground, and lenders (banks) cannot be but vulnerable to the risk of rising defaults. But a remarkably
long stint of economic prosperity has led to tenable balance sheets (60% lower leverage than in the
NPA cycle of late-1990s) and much higher personal income levels while banks have lower exposure
to troubled sectors

A cyclical turn in the economy, accentuated by the global credit freeze and subsequent domestic
liquidity squeeze, has dented the confidence of an effervescent India Inc. The demand slump and
steep fall in commodity prices pose a threat to corporate bottom-line. As a result, a host of smaller
and leveraged companies are facing acute liquidity shortage – threatening to translate into a solvency
crisis. Uncertainty on personal incomes also builds a case for rise in retail NPAs.

Our analysis suggests that net slippage & NPAs will be well below that in the previous cycle due to

 Lower leverage of corporate

 Banks’ limited exposure to vulnerable sectors
 Better debt restructuring and recovery practices.
 better risk management practices

EVALUATIVE MODEL FOR BANKS: We have designed a model taking into consideration:

 Asset quality
 Balance sheet
 Some key ratios
 Efficiency

We have superimposed our understanding to give weight to different factors.

We find that in the current down turn scenario, AXIS Bank & HDFC Bank is the best option to
invest because they are

 Less vulnerable to the stress.

 Sound balance sheet position
 Better placed to endure the rise in NPAs
 Performance is quite remarkable

4
 TABLE OF CONTENTS

ACKNOWLEDGEMENT 3

EXECUTIVE SUMMARY 4

TABLE OF CONTENTS 5

1. AN INTRODUCTION 7

1.1 HEDGE FUND: 8

1.2 MUTUAL FUND VS HEDGE FUNDS 10

2. OBJECTIVES OF THE STUDY 10

3. RESEARCH METHODOLOGY 11

4. THEORETICAL OVERVIEW 12

4.1 NPA REGULATION 12

4.2 ASSET QUALITY: HICCUP OR A CRISIS? 14

4.3 ASSESSING THE DAMAGE 17

4.4 ASSET QUALITY CYCLES IN THE PAST: 19

4.5 IT’S DIFFERENT THIS TIME: 22

4.6 CORPORATE DEBT: 30

4.7 RETAIL ASSET BAG: 35

4.8 PRIORITY SECTOR LENDING 37

5. MODEL FORMULATION 42

5.1 MODEL METHODLOGY: 43

5.2 MODEL CALCULATION: 52

5
6. FINDINGS & ANALYSIS 55

7. RESEARCH STUDY BY OTHERS: 56

8. CONCLUSION & RECOMENDATIONS: 58

9. ANNEXURE: 60

ANNEXTURE-I 61

ANNEXURE-II 74

ANNEXURE -III 83

ANNEXTURE-IV 87

ANNEXURE V 94

10. REFERENCES 97

6
 1. AN INTRODUCTION

The Banking Industry is currently dependent upon the financial growth and stability of the economy.
The primary functions of lending funds to various sectors have ceased to generate Income / Principal
repayment. The R.B.I. has already suggested various Income recognition and prudential norms
thereby telling the banks “critical performance areas”. Non – recovery of the loan assets has
increased the strain on the banks’ network and eroding the net worth considerably.

Thus the banks’ credit is considered to be a catalyst to the economic growth of the country and any
bottlenecks in the smooth flow of the credit / mounting of the N.P.A.s is bound to create adverse
repercussions on the economy. Since the N.P.A.s have galloped in the Indian Banking System, with
the introduction of the new, stronger foreclosure laws [SARFAESI (The Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interests)] the gross N.P.A. levels
have fallen in the Public Sector Banks. Management / Resolution of the N.P.A.s include the
SARFAESI Act; One time settlement scheme, setting up of the C.D.R. (Corporate Debt
Restructuring) mechanism, Restructuring / Stripping the sale of assets are the plausible remedial
regulations for timely comparison of the recovery of ‘Asset based lending’ versus ‘Income based
Lending’

7
1.1 HEDGE FUND:

A hedge fund is an investment fund open to a limited range of investors that is permitted by
regulators to undertake a wider range of investment and trading activities than other investment
funds, and that, in general, pays a performance fee to its investment manager. Every hedge fund has
its own investment strategy that determines the type of investments and the methods of investment it
undertakes. Hedge funds, as a class, invest in a broad range of investments including shares, debt and
commodities.

As the name implies, hedge funds often seek to hedge some of the risks inherent in their investments
using a variety of methods, most notably short selling and derivatives. However, the term "hedge
fund" has also come to be applied to certain funds that do not hedge their investments, and in
particular to funds using short selling and other "hedging" methods to increase rather than reduce
risk, with the expectation of increasing the return on their investment.

Hedge funds are typically open only to a limited range of professional or wealthy investors. This
provides them with an exemption in many jurisdictions from regulations governing short selling,
derivatives, leverage, fee structures and the liquidity of interests in the fund. This, along with the
performance fee and the fund's open-ended structure, differentiates a hedge fund from an ordinary
investment fund.

The net asset value of a hedge fund can run into many billions of dollars, and the gross assets of the
fund will usually be higher still due to leverage. Hedge funds dominate certain specialty markets
such as trading within derivatives with high-yield ratings and distressed debt

ORIGIN

Sociologist, author, and financial journalist Alfred W. Jones is credited with the creation of the first
hedge fund in 1949.

FEES

A hedge fund manager will typically receive both a management fee and a performance fee (also
known as an incentive fee) from the fund. A typical manager may charge fees of "2 and 20", which
refers to a management fee of 2% of the fund's net asset value each year and a performance fee of
20% of the fund's profit.

HEDGE FUND RISK:

Leverage - In addition to money invested into the fund by investors, a hedge fund will typically
borrow money, with certain funds borrowing sums many times greater than the initial investment

Short selling - Due to the nature of short selling, the losses that can be incurred on a losing bet are,
in theory, limitless, unless the short position directly hedges a corresponding long position.
Therefore, where a hedge fund uses short selling as an investment strategy rather than as a hedging
strategy, it can suffer very high losses if the market turns against it.

8
Appetite for risk - Hedge funds are more likely than other types of funds to take on underlying
investments that carry high degrees of risk, such as high yield bonds, distressed securities, and
collateralized debt obligations based on sub-prime mortgages.

Lack of transparency - Hedge funds are secretive entities with few public disclosure requirements.
It can, therefore, be difficult for an investor to assess trading strategies, diversification of the
portfolio, and other factors relevant to an investment decision.

Lack of regulation - Hedge fund managers are, in some jurisdictions, not subject to as much
oversight from financial regulators as regulated funds, and therefore some may carry undisclosed
structural risks

Comparison to private equity funds

Hedge funds are similar to private equity funds in many respects. Both are lightly regulated, private
pools of capital that invest in securities and compensate their managers with a share of the fund's
profits. Most hedge funds invest in relatively liquid assets, and permit investors to enter or leave the
fund, perhaps requiring some months notice. Private equity funds invest primarily in very illiquid
assets such as early-stage companies and so investors are "locked in" for the entire term of the fund.
Hedge funds often invest in private equity companies' acquisition funds.

Between 2004 and February 2006, some hedge funds adopted 25-month lock-up rules expressly to
exempt themselves from the SEC's new registration requirements and cause them to fall under the
registration exemption that had been intended to exempt private equity funds

9
1.2 MUTUAL FUND VS HEDGE FUNDS

Similarities:

Both mutual funds and hedge funds are managed portfolios. This means that a manager (or a
group of managers) picks securities that he or she feels will perform well and groups them into a
single portfolio. Portions of the fund are then sold to investors who can participate in the
gains/losses of the holdings. The main advantage to investors is that they get instant
diversification and professional management of their money.

Differences:

Hedge funds are managed much more aggressively than their mutual fund counterparts. They are
able to take speculative positions in derivative securities such as options and have the ability
to short sell stocks. This will typically increase the leverage - and thus the risk - of the fund. This
also means that it's possible for hedge funds to make money when the market is falling. Mutual
funds, on the other hand, are not permitted to take these highly leveraged positions and are
typically safer as a result.

Another key difference between these two types of funds is their availability. Hedge funds are
only available to a specific group of sophisticated investors with high net worth. The U.S.
government deems them as "accredited investors", and the criteria for becoming one are lengthy
and restrictive. This isn't the case for mutual funds, which are very easy to purchase with minimal
amounts of money.

Size of the Mutual Fund industry is much larger than Hedge fund industry.

There is difference between fees of manager of Mutual Fund and Hedge fund. Generally, Hedge
fund manager receive performance-based fees, where the compensation to the manager is based
on the performance of the fund which Mutual fund manager don’t receive.

A hedge fund investor must be an accredited investor with certain exceptions (employees, etc.)

Mutual funds must price and be liquid on a daily basis. Hedge funds also ordinarily do not have
daily liquidity, but rather "lock up" periods of time where the total returns are generated (net of
fees) for their investors and then returned when the term ends.

2. OBJECTIVES OF THE STUDY

This study focuses on the following major objectives:

 Gradation of Banks on the basis of various selective Parameters.

 To Create a Model for Assessment of banks for Investment Advice

10
3. RESEARCH METHODOLOGY

 Study of the RBI’s guidelines for Non Performing Assets.

 Study annual report of selected bank for last five years.

 Go through Basel-II disclosures by selected bank.

 We have superimposed our understanding to design as well as assign weight to different

factors

11
 4. THEORETICAL OVERVIEW

4.1 NPA Regulation

NON PERFORMING ASSETS

Non Performing Asset means an asset or account of borrower, which has been classified by a bank
or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or
guidelines relating to asset classification issued by The Reserve Bank of India.

Thirty days past due

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) shall be an advance where:

1. interest and /or installment of principal remain overdue for a period of more than 180 days in
respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit(OD/CC),
3. the bill remains overdue for a period of more than 180 days in the case of bills purchased and
discounted,
4. 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
5. any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts.

The non-performing assets often include mortgage loans, car loans, credit card debt and installment
loans.

Ninety days overdue

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 identification of NPAs, form the year ending
March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell
be a loan or an advance where:

1. interest and /or installment of principal remain overdue for a period of more than 90 days in
respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 90 days, inrespect of an overdraft/
cash Credit(OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,

12
 4. 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
5. any amount to be received remains overdue for a period of more than 90 days in respect of
other

In other words NPA is defined as an advance for which interest or repayment of principal or both
remain outstanding for a period of more than three quarters. The level of NPA act as an indicator
showing the bankers credit risks and efficiency of allocation of resource.

Reasons:

Various studies have been conducted to analysis the reasons for NPA. Whatever may be complete
elimination of NPA is impossible. The reasons may be widely classified in two:

(1) Over hang component

(2) Incremental component

Over hang component is due to the environment reasons, business cycle etc.

Incremental component may be due to internal bank management, credit policy, terms of credit etc.

Asset Classification :

The RBI has issued guidelines to banks for classification of assets into four categories.

1. Standard assets:
These are loans which do not have any problem are less risk and otherwise known as performing
assets.

2. Substandard assets:
These are assets which come under the category of NPA for a period of less than or equal to 12
months.

3. Doubtful assets:
A doubtful asset would be one which has remained in the sub-standard category of NPA for a period
of exceeding 12 months.

4. Loss assets:
These NPA where loss has been identified as unreliable by the bank or internal or external auditors
or by the RBI inspection.

Reasons for NPAs in Banks:

An account does not become an NPA overnight. It gives signals sufficiently in advance that steps can
be taken to prevent the slippage of the account into NPA category. An account becomes an NPA due
to causes attributable to the borrower, the lender and for reasons beyond the control of both.

13
4.2 ASSET QUALITY: HICCUP OR A CRISIS?
A cyclical turn in the economy, aggravated by the global credit freeze and subsequent domestic
liquidity crisis, has dented confidence of the once fast-growing India Inc. The slump in demand and
steep correction in commodity prices pose a threat to corporate bottom lines in the coming years
(compression in margins already evident). As a result, a number of smaller and leveraged
companies, particularly in the troubled sectors, are still finding it hard to secure funds even at
elevated interest rates. While this threatens to translate into a solvency crisis in the banks’ corporate
loan books, uncertainty on personal incomes also builds a case for higher delinquencies in retail
loans. Most quarters expect the NPA situation to worsen in coming years, but the view varies on the
extent of the damage.

1. Concerns loom large as GDP growth moderates

The economic up cycle lasted for five years for India with GDP exhibiting a CAGR of 9% over the
period, driven by easy capital availability, buoyant exports and strong global growth. However, with
liquidity streams running dry and credit becoming tougher (a function of risk aversion of banks), we
expect GDP growth to be under stress for the next 2-3 quarters as the impact of monetary easing and
softer interest rates plays out with a lag. In this backdrop, we expect GDP growth to moderate to
6.5% in FY09 and 6.2% in FY10.

2. Acute liquidity crunch

By 1HFY09, policymakers were already in a monetary tightening mode to tame the belligerent
inflation, as a result of which banks’ reserve requirements had increased to 9% from 7.5%. The
sudden onset of global liquidity crunch led to an acute shortage of funds and credit became hard to
come by even for large corporate. The situation assumed worrisome proportions as stretched
liquidity in the system threatened to translate into a solvency crisis. However, liquidity management

14
thereafter assumed priority for policymakers (aggregate CRR cut by 400bp, repo rate by 350bp and
reverse repo rate by 200bp),easing the flow of funds into the system.

3. Despite elevated interest rates, corporate clamored for funds

The monetary tightening engineered by the RBI over the past few years (pre FY09) was targeted at
achieving moderation in credit growth. While credit growth was expected to taper down to ~20% in
FY09, it remained strong at 29% yoy in 1HFY09 even at higher borrowing costs owing to drying up
of alternate sources of funding (a function of the global credit squeeze). The surge in credit growth
was led by:
 Higher borrowings by OMCs due to soaring crude oil prices
 Higher working capital loans availed of by corporate due to runaway inflation
 Extension of credit lines to fertilizer companies due to delay in sanction of Subsidies
 Replacement demand for trade credit as LCs and guarantees from foreign banks became
hard to secure.

Driven by loss of trust in the global credit markets and extreme volatility in domestic capital
markets, corporate had no recourse to funding avenues except for banks. Meanwhile, redemption
pressure on mutual funds and the liquidity crunch faced by NBFCs forced corporate to seek funds
from banks to replace their existing debt.Also, rising overseas credit spreads for Indian borrowers put
a lid on ECBs/ FCCBs.

15
4. Corporate caught in a vicious cycle of stress

Reeling under the stress of reduced credit availability and slowing demand, top lines as well as
earnings of Corporate India are witnessing a sharp slowdown – expected to continue over the next 2-
3 quarters. With deterioration in earnings outlook weighing down upon the repayment capacity of
borrowers (given the risk aversion of banks), the flow of funds was further restricted, contributing to
the mounting stress. While lower interest costs would offset the decline in earnings to a certain
extent, such stress is likely to manifest into asset quality pressure.

As observed in the past cycles, the cyclical slowdown is set to exert strain on all quarters of the
economy. Thus, weaker domestic as well as international demand, the sharp decline in commodity
prices, weak capital markets and a dithering personal income scenario have raised the default.

16
4.3 ASSESSING THE DAMAGE

Contrary to widespread fears, we expect incremental slippages in the current NPA cycle to be
significantly lower than in the previous one. This can be attributed to lower leverage of corporate,
limited exposure of banks to stressed sectors, and better risk management and restructuring practices.

IDFC - SSKI INDIA a study of macroeconomic factors, detailed analysis of corporate credit (
evaluated balance sheets of ~3,000 companies) and bank-level exposure to various segments.
Evaluating all the segments of debt, it conclude that ~14% of banks’ outstanding debt may face
stress. Maximum stress is perceived in industry credit (~22% of sectoral debt under stress) followed
by retail (11%).

1. Granular analysis of credit to arrive at stress levels

% of Total
Credit Stress Loan as
Type of given by Total loan Stress Loan as % of Total Stress Loan in
industry bank in bn % of Credit credit bn
Corporate 43 9417 21.8 9.374 2052.906
Retail 23 5054 11 2.53 555.94
Service 19 4014 6.4 1.216 256.896
Agriculture 12 2737 5 0.6 136.85
NBFC 3 753 10 0.3 75.3
Total 100 21975 14.02 3077.892

Source: RBI, Capitaline, IDFC-SSKI Research

17
2. Lower growth to drive moderation in credit

The sluggishness in economic activity to lead to lower demand for credit in the period and growth to
come in at ~22% in FY09 (partly buoyed by mandatory priority sector lending in Q4FY09). Further,
fresh projects are likely to be delayed owing to slackening demand and higher cost of funds (owing
to banks’ risk aversion). Coupled with lower GDP growth and softer commodity prices (thereby
lower working capital requirements), this is expected to result in
significantly subdued credit growth of ~15% in FY10.

3. NPA cycle – expected to peak in FY12

The estimated delinquencies are expected to appear on banks’ books in a staggered manner over the
next 2-3 years. We estimate that 15% of these incremental slippages are likely to accrue in the
current fiscal as the impact of slowdown becomes evident. A substantial proportion of these (~60%)
are expected to manifest in FY10 as the impact on the economy peaks out with the remaining 25%
spilling over to FY12. The impact of this on Indian banks envisaging three different scenarios:

Moreover, with the RBI allowing a second round of restructuring of loans and banks keen to avert an
outsized rise in NPAs, we believe that a significant proportion of these stressed loans would be
restructured and not figure as NPAs in banks’ books. As such, NPAs in our analysis indicate a sum
of NPA and restructured loans in the banking system.

ACTUA
L Base Case Best Case Worst Case
RS In bn FY 09 FY 10 FY 11 FY 10 FY 11 FY 10 FY 11
Opening of GNPA 564 795 1,719 680 1142 911 2297
Incre. NPAs oyrs (%) 15 60 25 60 25 60 25
Additions 231 924 385 462 192 1386 577
Closing Gross NPAs 795 1714 2104 1142 1334 2297 2874
Bank Credit 27,419 31,532 37207 31,532 37,207 31,532 37,207
yoy growth (%) 22 15 18 15 18 15 18
Gross NPA (%) 2.9 5.5 5.7 3.6 3.6 7.3 7.7

Source: Actual Fig from RBI & Others from IDFC-SSKI Research

4.Impact on banks’ net-worth on mark to market basis

Conforming to reserve requirements banks have ~28-29% of their deposits in government bonds with
average duration of 4-5 years (25-26% of balance sheet). From the peak in mid-July, bond yields
have come-off by 250-300bp across maturities. This decline has led to 12-15% MTM appreciation of
the portfolio (around 3-3.5% of the loan book), thus offsetting the estimated credit loss. As a result,
in the current scenario, on a mark to market basis estimated credit loss is likely to be offset by
notional bond gains, thus protecting the networth of banks.

18
4.4 ASSET QUALITY CYCLES IN THE PAST:

1. The period of mid 1990s: Liberalization brought competitive pressures

With liberalization firmly in place, the economy witnessed high degree of competition. Though the
overall macro environment appeared to be robust with strong GDP and IIP numbers, few weak
sectors wilted under competition from cheap goods and their sub-optimal capacities (especially steel
and textiles).

NPA rose due to weak sectors and tightening of NPA recognition norms

The banking sector, specifically PSU banks, continued to be plagued with higher gross NPAs.
Gross NPA increased by 9% Y-o-Y (1.5% of advances, one year lag) to INR 41 bn with both the
priority and non priority sector segments showing almost similar increase. Additionally, tightening of
NPA recognition norms from 360 days to 270 days by FY94 and 180 days by FY95 and higher
exposure to weak sectors like textiles and iron and steel (at ~25% of corporate credit) coming under
stress due to opening up of the market led to higher slippages. Weak SSI performance further
aggravated NPA.

Gross NPA at 18% of advances; poor recovery mechanism

19
  Gross NPA increased to 18% of gross advances with over 12% in doubtful assets (assets
where no payment was received for over 30 months).
 Public sector banks had to be recapitalized with the government infusing over INR 200
bn over the next few years.
 Options available with banks for recovery of assets were fairly low with recovery under
Board for Industrial & Financial Reconstruction (BIFR) and Debt Recovery Tribunal (DRT)
being not only slow but also painful.

2. 1999 crisis: Asian crisis; rapid expansion of green field projects

Macro environment turned unfavorable with Asian crisis and lowering of tariffs

With the Asian crisis slowly impacting every country in Asia, India despite being insulated, saw its
industrial economy steadily declining to the low single digits. Also, as India was slowly moving
towards WTO regulations, it steadily lowered its import tariffs and encouraged local
Competition.

Rapid expansion of green-field projects but poor execution

Most corporate houses went on a huge capex programme across all sectors. Financial closures for
projects were done with assumptions of equity capital raising programmes. However, with equity
markets losing flavor during the Asian crisis, most companies could not fund their equity
contribution resulting in delay in project execution. This resulted in projects funded through higher
debt, leveraging the company’s balance sheets even further. Also loans had to be restructured due to
low repayment capabilities while a few projects saw equity infusion by lenders to replace promoter’s
contribution. Also, there were projects with tardy progress resulting in time overruns. Time and cost
overruns resulted in higher NPAs.

Gross slippages of SBI at ~15% in FY99-01; commodity sector heavily affected

 Gross slippage (of SBI) went up sharply to 6.7% in FY99, 4.5% in FY00 and ~4% in FY01,
while cumulative slippage during FY99-01 was ~15% while net slippages went by 7.9% in
FY99-01.
 Key sectors impacted were iron and steel, textiles, chemicals, and paper. Priority sector
NPAs for few banks reached ~20% while non priority sector NPAs were at 14%.
 Legal mechanisms continued to be weak with the option of DRT and some degree of
restructuring being the sole source of recovery/improving the asset quality. With DRT
available in very few cities, recovery was extremely slow and painful.
 In this period, PSU banks were capitalised but were saddled with legacy NPA.

20
3. 2002: Global slowdown affected industrial output

Overall GDP growth in 2002 was healthy at ~5%, with agriculture and the services sector being the
growth drivers. However, industrial sector grew by merely ~3% (compared to ~6% in FY01) as
global slowdown adversely affected industrial output. Iron and steel passed through its worst and
final year of its downturn which started in FY96-98 while sectors like textiles improved marginally.

Gross NPAs low for public sector banks

Gross NPA increased by 11% Y-o-Y (1.3% of advances, one year lag) for scheduled commercial
banks but only 3% for (net of w/off) public sector banks. Key sectors like textiles, leather, iron and
steel, engineering and chemicals were the most affected. Capex continued to be fairly slow but
existing projects were running under huge cost and time overruns. Gross NPA continued to be high
at ~10% of advances with 3.1% net slippages of credit outstanding; priority sector NPA was as high
as 16% while non priority sector NPA was at 9%.Legal recovery mechanisms continued to be weak,
but DRT improved with opening of more centers; however, it continued to be slow.

However, there were major developments after 2002 to fasten recovery process:

 New NPA recovery mechanisms were introduced through CDR/SARFAESI to bypass DRT
and BIFR;
 Introduction of CIBIL to track defaulters (especially willful defaulters);
 (3) one time settlement (OTS) was introduced for chronic NPAs

21
4.5 It’s Different This Time:

Magnitude and velocity of slippage to be lower this time:

Analysis of the past decade indicates two prime contributors to high gross NPA:
 Overhang component in the form of old and stickier assets sitting in doubtful assets for a long
time (due to longer recovery cycles)
 Change in business cycles.
Whether it was the mid 1990s post liberalization crisis, which exposed operational inefficiencies, or
the late 1990s crisis due to a slowdown instigated by Asian crisis, Indian banks continued to
accumulate NPAs from each downturn, resulting in gross NPA ratio of >10%.

We would use the cliché ‘it’s different this time’ to best describe our view on the current asset
quality. In our view, net slippage in the current cycle will be significantly lower compared with both
mid-1990s and early 2000 due to decline in proportion of stressed sectors, lower leverage, better risk
management, and improved debt restructuring, though retail NPL are likely to continue. Strong
corporate balance sheets, regulatory relaxations and deep interest rate cuts, combined with an
extended strong economic cycle over the past few years, will slow down the pace of delinquency, in
our view. Compared with previous business cycles, corporate dependence on external funds has
reduced considerably to 44% in 2002-06 from 69% in the mid-1990s. Moreover, LGD will also be
lower due to better internal/external risk mechanisms and better legal recovery channels
(SARFAESI, DRT, CDR) available for banks now. Though the severity seen earlier is unlikely to be
repeated in the current cycle, a few sectors in the corporate and SME (textiles, real estate, auto
components and metals) and the priority sector of SSI can re-emerge as a sore point going forward.
In other sectors, we expect movement in gross NPA to emerge as a function of business cycles and
banks to proactively take steps ensuring no sharp slippages occur through using various options.

1. Capex funding – largely driven by equity

1990s – credit deployed in unviable projects

The base of NPA crisis of the late 1990s lay in capital misallocation. Books of banks and financial
institutions were saddled with project-financing debt. A number of these projects were initiated with
an extremely high degree of leverage with viability dependent on duty protection. Also, a number of
these were small capacities in globally competitive industries (such as steel). Moreover, execution
delays were rampant which exerted further pressure on financial feasibility of the projects.

Recent years – capital distribution towards viable projects

Over the past few years, capacity expansions have been limited as corporate which got scathed in the
previous cycle refrained from setting up new capacities. Moreover, as equity flows into the country
surged over the past few years, growth was largely fuelled by equity. This meant that system
leverage remained at low levels.

22
Source: CMIE

2. Bad loans are not concentrated in any single sector

The exhibit below shows the distribution of gross NPAs of Indian banks as of end-FY09. A wide
distribution of stressed loans is likely to reduce the overall impact of the economic slowdown, as
segments like agriculture would not be hit with the same intensity.

Source : RBI

23
3. A stronger banking system

Since FY99, asset quality of Indian banks has improved consistently as gross NPAs as well as net
NPAs declined in both absolute and percentage terms. Gross NPAs have declined from ~15% in
FY99 to 2.3% in FY08. The cleanup of the banking system was facilitated by the decline in yields of
government bonds, which gave banks sufficient gains to clear their books.

Source: RBI

4. Lessons from past led to regulatory and structural improvements :

Bank specific measures

In the past decade, banks have seen significant improvements which attempt to identify early
signals of deterioration in asset quality.

1. Setting up ALCO and research committees

 Banks and financial institutions have set up research committees to identify early warning
signals and assess subsequent impact on their portfolios.
 Internal guidelines have been issued for board approval for large disbursements and
continuous monitoring on performance of NPA portfolio. Financial closure for projects
is carefully scrutinized with equity contribution monitored with every disbursement.
Covenants established before disbursements ensures effective monitoring.
 Ceiling of company exposure (ex-infrastructure) to capital funds was brought down from
25% in FY00 to 20% in FY01 and to 15% by FY02. Group exposure (exinfrastructure) has
been brought down from 50% of capital funds to 40% by FY02.

2. Improved IT infrastructure has helped monitor delinquencies and recoveries.

24
3. Banks were heavily discouraged from ever-greening their assets (process of providing finance to
service existing debt) to prevent NPA.

4. Bank specific restructuring: The RBI has issued various guidelines for bank specific
restructuring of an asset and subsequent reclassification of the asset.

Company level measures

With most banks and financial institutions paying a heavy price in the 1990s for their project finance
exposure, past few years have seen drastic changes. Risks in project finance is de-risked across the
value chain to ensure that cost and time overruns are identified to specific parties and risk is
relatively lower for stakeholders. Working capital cycles steadily declined while sustained growth in
profits has led to lower reliance on external debt.

Legal recourse

With slow progress in recovery, banks were allowed more flexibility with other options:

25
 Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest, 2002 (SARFAESI):

The most significant difference between the current and all the previous down cycles is SARFAESI.
The act authorises banks, financial institutions, and housing finance companies to take possession of
the security without any court intervention by giving 60 days notice. The act aims to provide more
powers to banks and bypass the legal channel. However, only post FY07 bankers have gained a fair
degree of success in implementing the act. In the past couple of years, recoveries through
SARFAESI have been steadily increasing—61% in FY08 compared to FY05 levels of 18%.

Corporate debt restructuring (CDR):

CDR was introduced in FY02 with the objective of ensuring timely and transparent mechanism for
restructuring of corporate debts lent under consortium of viable corporate entities affected by internal
or external factors, outside the purview of BIFR, DRT, and other legal proceedings. Despite draft
guidelines issued in FY03, it was only in FY06 that final guidelines were approved. This covers
mainly exposures of over INR 100 mn across banks with at least 60% of creditors and 75% by value
approving for a restructure. It allows banks to restructure debt within a
period of 90 days (can be extended to 180 days with sufficient reasons).

Asset reconstruction firms (ARC) which can buy distressed assets:

Established in FY02, this allowed establishment of ARCs to help banks and financial institutions sell
their non-performing assets. Guidelines have been subsequently enhanced to facilitate faster transfer
of assets. There are ~11 players in the asset reconstruction space with ARCIL (Asset Reconstruction
Company of India) being the largest player with over ~75- 90% market share. However, the value
recovered from sale of assets is fairly low, which makes sale to ARC unattractive and the last option.

Credit Information Bureau (India) (CIBIL):

Established in FY02, the institution has been an effective agency only in the past three years. It has
slowly started becoming an effective source to understand defaulters and default patterns across
banks; it has a scoring mechanism to identify defaulters.

Debt recovery tribunals:

Introduced in 1992 through the Recovery of Debts Due to Banks and Financial Institutions Act,
1993, this is a time consuming process and incurs high legal costs for recoveries. In terms of success
ratio, FY06 was one of the better years for DRT with a success ratio of ~77% compared to a low of
19% in FY05.

26
Regulatory measures

Guidelines for early recognition of NPA:

One of the most significant guideline which emerged from the Narasimhan Committee was the early
recognition of NPA.
 Recognition norms for doubtful assets was tightened from 24 months since ‘past due’
(includes 30 days of grace period since due) to 18 months post overdue by March 31, 2001,
and further lowered to 12 months by March 31, 2005.
 NPA recognition norms were also tightened from two quarters past due to one quarter
overdue by March 31, 2004.

One time settlement:

From FY01, various measures have been initiated by the government aimed at removing legacy NPA
from PSU banks’ portfolios. In FY00-01, public sector banks were asked to relook their
corporate/SME NPA (up to March 1998) where lending was up to INR 50 mn (subsequently revised
upwards to INR 100 mn) and NPA (up to March 1998) from lending to small and marginal farmers
up to INR 25,000 (subsequently revised upwards to INR 50,000) and work out a one-time settlement
scheme. While the move was successful in bringing down NPA levels, progress was extremely slow
with frequent change of definitions and extension of deadlines. In comparison, the recently issued
one-time settlement in FY08 for agriculture debt
was implemented much faster.

27
Legal channels and loss metrics for NPA performance

A proactive and conservative regulator R.B.I

RBI has been arguably the most conservative and proactive regulator in the region. With its multiple,
and timely, regulatory and monetary policies, it has limited banks’ exposure to high-risk sectors and
ensured low concentration risk and normalized accounting profits.

Increased risk weights and capital-adequacy requirements have also restricted the leverage ratio for
Indian banks. Restrictions on capital-account convertibility of the rupee prevented banks from
having sizable exposure to overseas funding needs and subprime mortgage-backed securities, credit
default swap or credit linked note.

28
The not so good part

Law protects banks, but only when backed with stringent documentation

While banks are better equipped to handle NPAs through legal channels, they are expected to
diligently complete the documentation process. Failure to do so will only result in slower recovery
process and higher NPAs. The process flaw and system ineffectiveness is higher in case of PSU
banks.

Expertise in long term project financing will be tested for the first time

Commercial banks, which have been traditionally active in working capital financing and not so
active in project-based loans, have lent to long-term projects in the past three four years. Long-term
lending (to housing and infrastructure) has been rising steadily and is more than 60% of banks’
portfolios currently compared to 33% in the late 1990s. With banks becoming sole players in the
project finance space with the gradual decline in the importance of development financial institutions
(DFI), it will be testing times for them. Also, banks have largely lent under a consortium where the
documentation process should be complete to initiate any CDR process, if required.

Relaxation of underlying classification can lead to procrastination of NPA

One of the biggest risks emerging in the next few quarters would be deferring the early recognition
of the underlying stressed asset as RBI relaxes asset classification norms (RBI’s recent approval of
relaxing the classification of delayed infrastructure project execution as a standard asset would be an
example). As stringent asset classification norms help banks, especially during a weak environment
by forcefully making higher provisions, relaxation of this basic tenet defeats the underlying purpose.

29
4.6 CORPORATE DEBT:
1. Nature of industrial credit has also changed to limited working capital

Since FY02, the nature of credit has changed steadily. There are three primary reasons for
this change:
 With sharp pick up in revenue growth, companies were flush with internal funds and required
limited working capital. Improved working capital management has resulted in net working
capital days reducing from over 100 days in the 1990s to ~20 by FY07;
 Credit off-take in the infrastructure sector tends to be for longer duration;
 Working capital, despite being short term, actually worked as long term funding for
companies. Hence, banks could have converted some of the working capital lending in to
long term funding.

Sectors like cement, metals, and auto have witnessed the sharpest decline in utilization of
their working capitals.

2. Leverage still low and coverage ratios high

Despite steady rise in industry credit/GDP, overall financials of companies, barring a few, are still
well above dangerous levels of FY98-02. Strong corporate profitability along with favorable capital
markets in the past three years helped equity issuances and ensured steady decline in debt/equity and
improve their debt service coverage levels. The interest coverage ratio (ICR) is healthy now
compared to FY99. Segments that are heavy on debt consumption, which is indicated through rising
corporate debt/GDP, will contribute to GDP from FY11-12 onwards. Sectors like power, roads,
ports, and telecommunications are still in the investment mode and revenue contribution is still a few
years away.

30
3. Rated companies being downgraded despite not defaulting in past three years

Having had the worst history during FY98-01 with over 94 companies defaulting, Indian corporate
debt has had no defaults in the past three years. Of the total 120 debt defaults in Crisil Default Study
2007, ~17% were from non banking financial companies, followed by iron and steel (~13%), textiles
(~9%), chemicals and consumer durables (~8%), and construction (~7%). Significantly, in 1998,
which was the worst year with over 44 defaults, 30% of defaults representing 13 companies, were in
the NBFC category. Since then, stringent regulatory requirements for NBFCs have helped lower
default rates, improved business cycle for commodities has helped iron and steel, while benefits from
the government in the form of TUFS (Technology Upgradation Fund Scheme) and improved
business environment have helped textiles.

4. Private sector banks better equipped

In a deteriorating environment, no banks can be in isolation on asset quality. At best, one can
probably perform better. We believe there are a few factors which favor private banks over public
sector banks.

Establishment of early warning signals that detect possible NPA

Discussions with banks indicate that private banks have risk teams that monitor factors like
commodity prices, cross currency fluctuations, economic data, etc., to understand the implication of
and customer behavior to these changes. This helps in early detection of sectors under stress. While
most banks in the previous cycle responded only after NPA occurrence, such proactiveness can help
reduce costs of NPAs for private banks.

Better documentation leading to faster recovery

One of the key factors helping faster recovery, especially through legal channels, is a sound
operating model with a strong documentation process. Any slippage will lead to longer delay when
recovery is done via legal channels. Our discussions with a few banks indicate that processes are
better handled in private banks.

31
Glance at different sector in corporate debt:

Construction & Realty

 While stress in construction-oriented companies is negligible, commercial real estate

companies are in dire straits
 With slowdown in demand and ALM mismatch, developers are currently finding it extremely
difficult to meet working capital needs and hence are forced to raise funds at substantially
high interest rates
 Given the significant credit crunch, developers have been forced to lower their price points in
select pockets
 In order to overcome the prevalent slowdown and reduce gearing, real estate developers are
implementing various strategies like downsizing development plans, part monetization of
assets and reducing pace of construction for capital-intensive projects
 Further, many real estate developers are developing mid/ low income housing projects in a
bid to improve their cash flows. However, given the weak consumer sentiment on account of
an extremely challenging macro environment, real estate demand is unlikely to recover in the
near term.

Steel
Sensitive Sector

 Benchmark steel prices have come off by ~45% over the last 12 months
 Slowdown in end-user industries (viz auto, white goods manufacturing, etc) has led to sharp
drop in sales volumes
 Anticipating strong demand growth, most steel companies had chalked out aggressive growth
plans.
 With spiraling raw material costs last year, working capital requirements of most companies
were significantly stretched.
 But till the time actual end-user demand recovers materially, uncertainty on the sector is
likely to persist. While demand is not likely to bounce back in the near term, we believe the
renegotiated raw material contract prices (due in Q1CY09) will provide stability to steel
prices.
 ferrous space, demand is expected to remain weak in the coming quarters

Textiles
Sensitive Sector

 A sharp drop in demand from developed countries - key markets for Indian textile companies
– have significantly impacted order flows
 Most companies have also reported large losses on currency hedging
 Massive expansion plans were underway, and hence balance sheets of most textile companies
are significantly leveraged
 Arbitrary government policies on cotton pricing (read minimum support prices) have led to
substantial margin compression for yarn manufacturers.
 We do not see the any material improvement in sector outlook in the near term.
 Primarily due to high cost of raw material i.e cotton.
 Profits will be severely impacted on account of cost push problems

32
Fertilizers

 The regulated nature of the industry (and thereby under-recoveries), and the inability of the
government to pay out subsidies (in cash) on time, has led to significantly high working
capital requirements.
 Additionally, the government has tried to compensate for the under-recoveries by way of
issuance of special government bonds. However, these bonds trade much below par value and
fertilizer companies have not been able to fully recover the loss of revenues by selling these
bonds.
 All these factors, coupled with increasing input costs (Phosphate, Urea, etc until H1FY09),
have led to increased debt levels for fertilizer companies.
 However, an imminent change in the government’s fertilizer policy (which could eventually
lead to deregulation) as also the cash payment of subsidy dues would likely lead to better
prospects.

Auto Ancillaries

 India's auto component players are facing one of the biggest crises ever. With the domestic
automobile market witnessing a slowdown and a severe drop in export volumes on account of
a recession-hit global export market, many small ancillary units are on the verge of shutting
down.
 The entire supply chain of auto companies, from Tier-1 companies to small-scale units, is
facing sharp decline demand, delayed payments and a stiff liquidity crunch. In order to
remain profitable in a declining volume scenario, auto component manufacturers are
indulging in production cuts/ plant shutdowns, laying off temporary employees, postponing/
curtailing expansion plans and reducing their fixed cost (plant and shift rationalization).
 Further, most of the component players are facing a significantly higher interest burden on
account of loans taken at higher rates to manage their working capital cycle.
 Given the recessionary trends in USA and Europe, export volumes are unlikely to recover in
FY10. Further, domestic automobile volume growth would remain muted in FY10 in light of
the prevalent uncertain macroeconomic conditions. Sustained margin pressure due to lower
capacity utilization levels and high interest burden would impact profitability and debt
servicing capability going forward.

33
Gems & Jewellery

Sensitive Sector

 With jewellery being a discretionary spend, gems and jewellery is among the first sectors to
be hit by an economic downturn
 Exporters have lost significantly in currency hedging while export volumes too have been hit
due to global slowdown
 On the domestic front also, steep correction in diamond prices (more than 20% correction in
last three months); rising unemployment is the domestic diamond industry indicates the high
level of stress.
 key concerns is the revenue visibility given its higher dependence on exports
 Gold prices are scaling new peaks everyday. Coupled with a sluggish economy, volumes
have taken a big hit . Prospects likely to remain subdued till stability returns to the global
financial world.

Sugar
Sensitive Sector

 Companies have taken significant leverage for the aggressive capex plans during the previous
sugar cycle (Sugar Season 2004- 2006). However, due to slump in prices of sugar globally on
the back of a supply glut, realizations have declined significantly.
 Profitability has taken a beating due to lower realizations as also higher costs (due to
increased SAPs to be paid to sugarcane farmers).
 During SS2009, sugar production is expected to be significantly lower. Consequently, sugar
prices have started inching up. Sugar producers are now looking at relatively better
realization in SS2009-10
 Margins are fairly weak

Power

 High government ownership makes it low risk.

 Looking at power shortage in India, the risk to asset quality is very low.
 According to CLSA Asia-Pacific markets, the troubled asset is more likely to get restructured
rather than being a loss asset.
 Since tariffs are regulated and enable full-cost coverage, the risk of profitability deterioration
is fairly low

Telecoms

 Low gearing, healthy margins

 Due to India’s high growth potential and as most global players are facing saturation in their
local markets; the sector continues to attract strong investor interest.
 With high profitability and strong balance sheets, we believe the risk to earnings and asset
quality is fairly low

34
4.7 RETAIL ASSET BAG:

Bank retail credit increased at an aggressive pace over FY04-07 on a very low base (now forming
~23% of the overall credit according to IDFC - SSKI INDIA). With rise in exposure to higher risk
customers, elevated interest rates, reliance on DSAs coupled with unfavorable recovery regulation,
such loans have seen some deterioration over the past 18 months. However, the Indian retail
portfolio is dominated by mortgage loans (51% share) – a comparatively safer asset class and the
most resilient to macroeconomic headwinds. Though we see mortgages supporting the overall
quality of retail portfolios, higher interest rates and lower economic growth would indeed exert
pressure on other categories of retail loans, which
would lead to higher defaults in the portfolio. However, asset quality would be supported by lower
pace of growth in mortgages over FY08 and FY09, when interest rates peaked.

Accelerated credit growth over FY04-07 & has now come off

Retail finance witnessed an accelerated 35% CAGR between FY04-07. During the period,
competition intensified due to entry of new players as also efforts by existing players to extend
portfolios into newer segments. In the absence of due checks on creditworthiness of borrowers in the
rush to garner higher share of incremental credit expansion, credit disbursed during the last few years
is more prone to defaults. Moreover, banks relied extensively on third-party direct sales agents
(DSAs) to source new business and process loan applications, which meant less control on quality of
borrowers, leading to dilution in underwriting standards.

Growth in retail loans declined sharply to 11% in FY08. We expect growth to remain in single digits
through FY09-10. This is despite the marked improvement in demographics that point to a fairly
swift rise in income levels over the past 5-7 years, though the pace has moderated of late. We may
assume retail loans to grow in low single digits in FY10 as we believe that pick-up in demand is
likely to be rear ended following the interest rate cuts on such loans as also a correction in property
prices.

35
Portfolio dominated by mortgages – a safer asset class

Retail portfolio of Indian banks is dominated by mortgage loans, constituting ~51% of the overall
retail loans.

RETAIL SECTOR BREAK UP

Sub Category Loans % of Total Retail Loan % of Stress Stressed Loan
Direct Housing 2557 50.59 6 153.42
Advance FD 450 8.90 0 0
Credit Card 192 3.80 25 48
Education 207 4.10 10 20.7

Consumer Durables 86 1.70 25 21.5

Others( Including
unsecured PL) 1562 30.91 20 312.4
Total 5054 100.00 11 556.02

Source : IDFC - SSKI INDIA

According to industry estimates, 65-70% of these advances are expended to salaried employees,
while 90%+ of mortgages is expected to borrow for self occupancy. Consequently, home loans
assume priority over other loans for such borrowers. Moreover, growth volumes have been low in
FY08 (when real estate prices were at peak) and LTV ratios are still estimated to be comfortable at
~71%. As a result, mortgage loans remain a relatively secured asset class, wherein credit losses are
the lowest. Current delinquency levels are ~3% and adopting a conservative stance, we have
assumed stress levels to double to 6%.

36
Unsecured loans remain vulnerable delinquencies to rise

In pursuit of rapid growth, banks ventured into high-risk unsecured personal loans and aggressively
expanded their credit card portfolios. Moreover, in order to tap the otherwise unbanked markets,
banks lent aggressively in tier-2 and tier-3 cities –typically to low-income and self employed
borrowers. Over the past 18 months, there has been deterioration in quality of these unsecured
personal and credit card loans. Owing to elevated interest rates and entry of players into newer and
high risk geographies, we expect a further worsening of asset quality in these loans. CRISIL
estimates peg net credit costs in the range of 8-13% for unsecured loans.

4.8 Priority Sector Lending

Priority sector lending (PSL), which is ~33% of total portfolio, was a highly delinquent portfolio for
all banks till FY01. It has improved remarkably in the past six years. Despite 25% CAGR in credit

37
growth to the sector in FY01-08, gross NPAs fell sharply from 17% in FY01 to 4% in FY08. On an
absolute level, this has remained flat at ~INR 250-270 bn till FY07 but increased to INR 291 bn
mainly after the implementation of the loan waiver scheme.

The decline in gross NPA was assisted by a change in the agricultural loan portfolio focusing more
on indirect finance, improvement in the SSI portfolio and strong credit growth in the lesser
delinquent housing segment (less than INR 2 mn qualifies for PSL).

Agriculture loan portfolio showed sharp jump in NPA in March 2008, post the implementation
of the loan waiver when gross NPA rose 35bps to 3.6%. SSI book has shown continuous
improvement with 42% decline in NPA from FY01-08, to 4.2%.

 The announcement of loan waiver is a clear dampener for the agriculture portfolio of PSU
banks. SBI and PNB have witnessed higher delinquencies of over 100bps Y-o-Y, while some
banks have not witnessed sharp deterioration.
 We believe delinquencies will rise in the SSI sector, but may not reach alarming levels of
FY01. Our analysis of the SME portfolio of companies with turnover of less than INR 2 bn
indicates that this segment sees a rapid deterioration in financials in an economic downturn.
 Delinquency in securitization pools for some portfolios, which are classified as PSL like
commercial vehicles and commercial equipment, are showing strains of higher delinquency
in the 3-5% range.
 Private banks building a portfolio and relying more on bond-based exposure through
NABARD and RIDF will witness delinquency, but will be restricted mainly by their housing
loan portfolio, SME segment and indirect finance.

I. Agriculture: Structural improvement

Sector’s asset quality has improved sharply post 2001

Despite consistent low output being a good lead indicator of weakness in the portfolio, the actual
behavior shows the opposite. key reasons for a better portfolio

 Banks have actively tied farmers with procurement agencies, thereby, improving repayment
capacities. Unlike other lending products, end use of funds is restricted to the livelihood of
the farmer; hence, defaults are restricted to crop failures.
 Aggressive write off of delinquent portfolios with strong growth in overall income.
 The government has been active in supporting farmers through many means to ensure lower
delinquency such as agricultural loan waiver and lending at a flat interest rate of 7% for
short-term loans, with interest subsidy of 2% from the government.
 Banks facing limited competition in select geographies are lending near the PLR. They have
technical field staff to monitor end use of funds and ensure timely repayment.

38
39
II. Small Scale Enterprises:

Absolute gross NPA declined for FY01-07

 Sustained improvement in the macro environment leading to better growth in business

performance.
 PSU banks provided relief to sick but viable units and implemented OTS in the past.
 Banks have initiated rating systems with SIDBI, small industries services, state government
industries, etc., to understand the portfolio.
 Focusing on SME clusters where revenue visibility is dependent on the overall sector.

Contribution to overall credit book declined to 8% in FY07 from 16% in FY99

 Nature of funding is mainly in working capital: A recent report from RBI on banking shows
~55% of the total credit in the form of cash credit and packing credit and the balance in term
loans. This is a distinct comparison to agriculture where the lending is mainly in the form of
medium and long term crop loans.
 Given the short term nature of lending, any adverse impact on margins would directly affect
this portfolio. There are no significant off balance sheet exposures to this segment.

III. Other priority sector lending

Other segments left in the priority sector portfolio largely comprise housing, retail trade, education
and lending to weaker sections.
 Housing under priority sector lending contributes ~18-20% to this book. Gross NPA has been
steadily increasing in the sector mainly because of relaxed underwriting standards. We
estimate the increase in delinquency is mainly because of the gradual shift of most banks
towards the housing portfolio where delinquency was fairly low but is now steadily
increasing.
 Education, another sector where the gross NPA is fairly low, contributes ~10% for select
banks and has grown at over 50% CAGR in FY05-08. However, given the current
environment we expect delinquency in this portfolio to rise steadily.

40
41
5. Model Formulation

42
5.1 MODEL METHODLOGY:

WEIGHT

Weight
15

Assest Quality
40
15 Balance Sheet
Helping Key Ratio
Efficiency

30

1. ASSEST QUALITY:

Asset Quality
Proportion
of
40%
exposure
60% under
stress

Taking into consideration current downturn, we decided assets quality is most important for bank
prospective because:

 It creates burden on balance sheet of the bank.

 Bank has to keep excess amount for provision purpose which reduce liquidity of bank.
 It creates hurdle in cash inflow (estimated) of the bank.

That is the reason why we have given 40% weightage to this attribute (Asset Quality)

Stress sector:

43
Sector which have highest-

 Doubtful assets (NPA exceeding 12 months)

 Loss assets: NPA which are identified as unreliable by internal inspector of bank or auditors
or by RBI

We have given 60 % weightage to proportion of exposure under stress sector & 40 % weightage to
exposure to sensitive sector because prior have greater probability of default as compared to the later
one.

Sensitive Sector:

Textile sector:

 Primarily due to high cost of raw material i.e cotton.

 Profits will be severely impacted on account of cost push problems

44
Gems and Jewellery:

 Key concerns is the revenue visibility given its higher dependence on exports

Steel Sector

 Ferrous space, demand is expected to remain weak in the coming quarters

 Slight reduction in price of raw material unable to compensate y-o-y price reduction of
steel

Sugar:-

 Margins are fairly weak

 During SS2009, sugar production is expected to be significantly lower. Consequently,
sugar prices have started inching up. Sugar producers are now looking at relatively better
realization in SS2009-10

Commercial Real Estate

 Weaker Household Income

 Economic Uncertainty
 Developers Highly Leveraged

Credit Card and Unsecured Personal loans

 No collateral or mortgaged attached

 Job losses

(Details given in page no-32 to 34)

Addition to this we take help of Altman Z Score to determine sensitive sectors

 One of the most commonly used statistical ratio models for predicting stress in business
developed for bankruptcy prediction

 The original Altman Z Score formula is given by:

Z= 1.2 T1 + 1.4 T2 + 3.3 T3 + 0.6 T4 + 0.999 T5

 T1 :-(Current Assets – Current Liabilities)/Total assets

 T2:- (Retained Earnings)/Total Assets
 T3:-(Earnings before Interest and Tax)/Total Assets
 T4:-(Market Value of Equity)/Book Value of Total Liability
 T5:- (Sales)/Total Assets

45
 z- Score
3 2.2 2.4 2.8 2.9
1.8 1.7
2
1
0 z- Score

Source: CLSA Asia-Pacific Markets

There are three zones:

 Red Zone :( Z < 1.8): Completely in danger. Very high probability of default.
 Grey Zone :( 1.8 < Z < 3): There is chance of default.
 Green Zone :( Z > 3): Out of danger. No chance of default

BALANCE SHEET STRENGTH

Balance Sheet Strength

Credit Growth
20% 15%
NNPA Ratio

Provision
30% 35% Coverage Ratio
Capital Adequacy
Ratio

46
NNPA Ratio:

As GNPA & NNPA are directly related to quality of assets we have given highest weight (35 %) to
these attributes in balance sheet strength. It is very important because it shows how much amount of
assets quality deteriorates to the total advance given by the bank. Lower the NNPA ratio better the
bank is.

GNPA Ratio = Gross NPA to Gross Advance.

NNPA Ratio = Net NPA to Net Advance.

Net NPA = Gross NPA – (Balance in Interest Suspense account + DICGC/ECGC claims received
and held pending adjustment + Part payment received and kept in suspense account +Total
provisions held).

Note: We have not taken GNPA because NNPA itself include GNPA.

Average Provision Coverage Ratio:

It is the ratio between Provisions for NPA to Gross NPA.

It ratio indicates risk taking ability of the bank. We have given higher score to the bank that has
higher ratio because it shows higher ability to absorb shock during crunch or stress situation.

Capital Adequacy Ratio:

Capital adequacy ratio is the ratio which determines the capacity of the bank in terms of meeting the
time liabilities and other risk such as credit risk, operational risk, etc. A bank's capital is the
"cushion" for potential losses, which protect the bank's depositors or other lenders. Hence we have
given 20 % weight to this attribute.

T1 capital / Core capital:

 Common stock
 Disclosed reserves (or retained earnings)
 Non-redeemable non-cumulative preferred stock.

In other words Tier 1 capital is that which includes equity capital and disclosed reserves, where
equity capital includes instruments that can't be redeemed at the option of the holder (meaning that

47
the owner of the shares cannot decide on his own that he wants to withdraw the money he invested
and so cannot leave the bank without the risk coverage). Reserves are held by the bank, and are thus
money that no one but the bank can have an influence on.

T2 capital / Supplementary capital:

It includes

 Undisclosed reserves
 Revaluation reserves
 General provisions
 Hybrid instruments
 Subordinated term debt.

Risk Weighted Assets (a):

Defined as per Basel norm II.

Hence higher the CAR ratio better the bank can sustained to risk arising due to fast changing
environment.

Credit Growth:

It indicates the amount of total advance bank has given to different sectors. It shows liquidity in the
market i.e. robust environment for economy. But at the same time it doesn’t indicate how many
percentage of the advance utilized properly i.e. not transferring to non performing assests.

Hence we have given 15 % of total balance sheet. We have given higher rank to bank having higher
YoY credit growth.

48
HELPING KEY RATIOS

Helping Key Ratios

30% ROA
40%
EPS
NIM
30%

Net Interest margin:

NIM is a measurement of the difference between the interest income generated by banks or other
financial institutions and the amount of interest paid out to their lenders (for example, deposits). It is
considered similar to the gross margin of non-financial companies.

It is expressed as a percentage of what the financial institutions are earning (it's interest often from
borrowing from other financial institutions like the Federal Reserve) minus the interest that it pays
on borrowed funds to its investors.

Net interest margin is similar in concept to the net interest spread; where the net interest spread
expresses the nominal average difference between the borrowing and the lending rates, without
compensating for the fact that the earning assets and the borrowed funds may be different
instruments and differ in volume. The net interest margin can therefore be higher or lower than the
net interest spread.

It shows interest earned per money invested by the bank. Hence we have given highest weight (40
%) among helping key ratios. Higher the NIM ratio better the bank is.

49
Earning Per Share:

Earning per share serves as an indicator of a company's profitability.

While calculating, it is more accurate to use a weighted average number of shares outstanding over
the reporting term, because the number of shares outstanding can change over time. However, data
sources sometimes simplify the calculation by using the number of shares outstanding at the end of
the period.

Diluted EPS expands on basic EPS by including the shares of convertibles or warrants outstanding in
the outstanding shares number.

Hence higher the EPS the better the profitability of bank. Thus higher rank has given been given to
the bank who has the better EPS.

Return on Assets:

Where asset turnover tells an investor the total sales for each $1 of assets, return on assets, or ROA
for short, tells an investor how much profit a company generated for each $1 in assets. The return on
assets figure is also a sure-fire way to gauge the asset intensity of a business.

In other words , an indicator of how profitable a company is relative to its total assets. ROA gives an
idea as to how efficient management is at using its assets to generate earnings. Calculated by
dividing a company's annual earnings by its total assets, ROA is displayed as a percentage.
Sometimes this is referred to as "return on investment".

High the ratio, better is the position of the bank.

We have given equal weights (30 % each) to both EPS & ROA because both are the profitable
indicator of the bank. In other words we can summarize that both the indicator says about financial
soundness of the bank.

50
EFFICIENCY

Efficiency

30% 35% CD ratio

CI ratio
RL as % of TA
35%

Credit to Deposit Ratio

It is the proportion of loan-assets created by banks to the deposits received. The higher the ratio, the
higher the loan-assets created from deposits.

Implication:

Some experts contend that a high credit-deposit ratio could lead to a rise in interest rates.

E.g.: Consider Bank X which has deposits worth Rs. 100 crores and a credit-deposit ratio of 60 per
cent. That means Bank X has used deposits worth Rs. 60 crores to create loan-ssets. Only Rs. 40
crores is available for other investments. Now, the Indian government is the largest borrower in the
domestic credit market. The government borrows by issuing securities (G-secs) through auctions
held by the RBI. Banks, thus, lend to the government by investing in these G-secs. And Bank X has
only Rs. 40 crores to invest in G-secs. If more banks like X have lesser money to invest in G-secs,
the government will need to raise money to meet its expenditure.

The government has two options.

 It can raise yields to make investment by banks in G-secs attractive.

 Force the RBI to take the securities into its books.

Both the options have a tendency to push up interest rates in the economy. How?

51
Yields on G-secs serve as a benchmark for interest rates on other debt instruments. A rise in the
former, thus, pushes up interest rates on the latter. But why should interest rates rise if RBI takes G-
secs into its books? Because, by doing so, the RBI releases fresh money into the system.

If the money so released is large, ``too much money will chase too few goods'' in the economy
resulting in higher inflation levels. This would prompt investors to demand higher returns on debt
instruments. In other words, higher interest rates.

Higher ratio indicates better utilization of the fund.

Cost to Income Ratio:

The cost/income ratio is an efficiency measure similar to operating margin. Unlike the operating
margin, lower is better. The cost income ratio is most commonly used in the financial sector.

To get the ratio, divide the operating costs (administrative and fixed costs, such as salaries and
property expenses, but not bad debts that have been written off) by operating income. The ratio gives
investors a clear view of how efficiently the firm is being run - the lower it is, the more profitable the
bank will be. Changes in the ratio can also highlight potential problems: if the ratio rises from one
period to the next, it means that costs are rising at a higher rate than income, which could suggest
that the company has taken its eye off the ball in the drive to attract more business.

Restructured Loan as a % of Total Advance:

- Higher the better as it ensures better picture of the balance sheet.

This shows how much percentage of total advances given by bank is sound condition. In other
words, it shows the performance of the bank in brief.

5.2 MODEL CALCULATION:

ASSEST QUALITY SUMMARY:

Assest
EXPOSURE UNDER EXPOSURE TO
Qty
STRESS SENSITIVE SECTOR
Score
% Of Score % Of Score
Bank Points(a) Points(b)
Exposure (60%) Exposure (40 %)
HDFC 11.1 7 4.2 20.5 3 1.2 5.4
ICICI 11.14 6 3.6 28.17 1 0.4 4
BANK OF
12.47 5 3 17.6 4 1.6 4.6
BORODA
PNB 15.52 3 1.8 24.5 2 0.8 2.6
AXIS 15.17 4 2.4 15.5 7 2.8 5.2
SBI 16.43 2 1.2 16.16 6 2.4 3.6
BANK OF
16.66 1 0.6 16.4 5 2 2.6
INDIA

52
 Detail calculation has shown in Annexure-I

Assets quality Score=0.6*a+0.4*b

BALANCE SHEET STEET STRENGTH SUMMARY

Credit Provision
Bank Growth NNPA CRAR Coverage Ratio
(15%) (35%) (30%) (20%) Bal Sheet Score
HDFC 6 3 6 1 3.95
ICICI 5 1 7 3 3.8
BANK OF
BORODA 4 5 4 6 4.75
PNB 1 7 3 5 4.5
AXIS 7 6 2 7 5.15
SBI 3 2 5 4 3.45
BANK OF
INDIA 2 4 1 2 2.4
Detail calculation has shown in Annexure-II

Bal Sheet Score=0.15*credit growth+0.35*NNPA+0.3*CRAR+0.2*Provision Coverage ratio

KEY RATIO SUMMARY

NIM
Bank
ROA (30%) EPS (30%) (40%) Key Ratio Score
HDFC 5 3 7 5.2
ICICI 1 1 1 1
BANK OF BORODA 3 5 2 3.2
PNB 4 6 6 5.4
AXIS 6 2 5 4.4
SBI 2 7 3 3.9
BANK OF INDIA 7 4 4 4.9

Detail calculation has shown in Annexure-III

Key Ratio Score=0.3*ROA+0.3*EPS+0.4*CRAR

53
EFFICIENCY SUMMARY:

Credit To Cost To Restructured Loan

Bank Deposit Ratio Income Ratio To Total Advance Efficiency
(35%) (35%) (30 %) Score
HDFC 4 1 7 3.85
ICICI 7 4 1 4.15
BANK OF
BORODA 6 3 4 4.35
PNB 5 6 3 4.75
AXIS 4 5 6 4.95
SBI 5 2 5 3.95
BANK OF INDIA 3 7 2 4.1

Detail calculation has shown in Annexure-IV

Efficiency Score =0.35*CD Ratio+0.35*CI Ratio+0.3*RLTA Ratio.

54
 6. FINDINGS & ANALYSIS

FINAL SCORE CARD OF SELECTED BANKS

Bal Sheet
Bank Assets Qty (40%) Strength(30) Key Ratios (15%) Performance (15%)
Over All
Points Rank Points Rank Points Rank Points Rank Score Rank
HDFC 5.40 1 3.95 4 5.20 2 3.82 4 4.70 2
ICICI 4.00 4 3.80 5 1.00 7 4.2 5 3.52 6
BANK OF
BORODA 4.60 3 4.75 2 3.20 6 3.62 3 4.29 3
PNB 2.60 6 4.50 3 5.40 1 3.24 2 3.69 4
AXIS 5.20 2 5.15 1 4.40 4 3.09 1 4.75 1
SBI 3.60 7 3.45 6 3.90 5 4.965 6 3.80 5
BANK OF
INDIA 2.60 6 2.40 7 4.90 3 5.065 7 3.25 7

Overall Score=0.4*Assets Quality Rank+0.3*Balance Sheet Strength Rank+ 0.15*Key Ratios Rank+ 0.15*Performance Rank

 In Terms of Asset Quality HDFC Bank is ranked 1 among the selected bank in this down turn scenario.
 According to Balance Sheet AXIS Bank is on top among the selected bank in current scenario.
 By virtue of some key ratio analysis, we find PNB is on top Bank among the selected bank in FY-09.
 By analyzing some performance indicators, we found Axis bank is better among the selected banks.
 Thus in the current down turn scenario, according to our study AXIS Bank is the best bank.

55
 7. RESEARCH STUDY BY OTHERS:

Before giving recommendation to the company, we cross checked our result with some
research papers to examine robustness of our model design.

Edelweiss research

AXIS Bank despite a fairly high corporate loan book, higher-than-industry growth in
balance sheet and recently originated retail book, we believe the bank has one of the better
risk management systems that can weather asset quality issues better than most peers. In our
view, especially in the current volatile times. We maintain ‘BUY’ recommendation

Post the Centurion Bank of Punjab (CBoP) acquisition, HDFC Bank’s asset quality has not
deteriorated sharply and the bank has indicated that slippages are well within expected
limits. The bank has tightened credit requirements to keep slippages under control. We expect
HDFC Bank to be better placed than peers, though on absolute basis. We maintain ‘BUY’
recommendation on the stock.

CLSA Research

With aggressive loan growth and 20% exposure to high-risk sectors, Axis is susceptible to
rising NPLs. Yet, we expect gross NPLs to remain below 3% even after a 7x rise in absolute
terms. Loan growth will slow due to high risk-averseness - a positive in the current market.
Hence BUY.

At a time when investors are keenly aware of impairment risks, HDFC’s healthy asset quality
and established track record across cycles makes it a relatively safe bet. Loan growth is
likely to moderate from 20% levels to around 17% in FY10 even as HDFC gains market-
share. Spreads will remain stable as decline in funding costs offsets pressure on yields.
HDFC’s high FY10-11 core ROAE of 24%, amid falling equity costs, warrants a premium
valuation for the stock. We maintain ‘BUY‘recommendation on the stock.

Exposure to high-risk sectors, coupled with a lower coverage ratio leave SBI’s earnings
vulnerable to rising nonperforming loans (NPLs). Even as loan growth remains strong due to
a focus on market share, profitability is likely to decline as net interest margins (NIMs)
contract and loan-loss provisions rise. . We maintain ‘SELL’ recommendation on the stock.

FIIT Research, Deutsche Bank

Actionable ideas: Our top picks are HDFC Bank, HDFC and PNB. We also suggest pair
trades:
56
  Buy HDFC-Sell SBI
 Buy PNB-sell Canara
 Buy basket of HDFC Bank & AXIS-sell ICICI

Kotak institutional equity research

Axis Bank has been immensely successful in building strong liability which should result in
continued growth in next few years.

BOB is steady performer in all account.

BOI strong performanance so far but Risk is increasing.

HDFC Bank: On the back of superior business model resulting sustainable core earning we
expect premium valuation for HDFC bank to sustain.

ICICI bank likely to face challenging times in the near term on the back of slower growth &
declining fees.

57
 8. CONCLUSION & RECOMENDATIONS:

It can be concluded that an account does not become an NPA overnight. The account emits
enough amber signals of the impending problems which the banker should be alert to catch
these signals to quickly analyze, react and take corrective action.

As the present environment is fraught with risks of various kinds and dimensions, a tested
and sound credit-risk model has to be put in place to have proper perception of the risk in a
proposal and decide on the acceptability or otherwise and to take mid-course correction in
respect of existing accounts. Though total elimination of NPAs is not possible in banking
business as elements of risk is an inseparable ingredient, especially in the present context of
the externalities fraught with risk. But, by effective management, its incidence can only be
minimized.

The adage’ prevention is better than cure’ or ‘a stitch in time saves nine’, hold good in the
monitoring of credit portfolio and arresting fresh generation of NPAs is equally important as
recovery of NPA. In a banking system, NPA is inevitable and cannot be totally eliminated.
What needs to be done is to arrest fresh accretion and contain it to the barest minimum by
preventing slippage through effective proactive steps and that too at the right time.

A cyclical turn in the economy, accentuated by the global credit freeze and subsequent
domestic liquidity squeeze, has dented the confidence of an effervescent India Inc. The
demand slump and steep fall in commodity prices pose a threat to corporate bottom-line.
It has been analyzed that after carefully study the following parameters of the selected bank

 Asset quality
 Balance sheet
 Some key ratios
 Efficiency

We found that in the current down turn scenario, AXIS Bank & HDFC Banks are the best
options to invest because they are

 Less vulnerable to the stress.

 Sound balance sheet position
 Better placed to endure the rise in NPAs
 Performance is quite remarkable.

58
Hence, We maintain ‘BUY’ recommendation for share of HDFC Bank & AXIS Bank
In the current scenario, ICICI & BOI are not the best option to buy because

 Risk is increasing
 Likely to face challenging times in the near term on the back of slower growth &
declining fees.
 More exposure to stress loan & sensitive sectors
Arresting slippage of accounts through relentless monitoring and focus on the continuous
viability of the borrowing concern with improved asset classification is must. At the same
time all accounts in the Standard category should not be taken for granted and should be
subjected to periodical and in-depth review in a systematic manner through a sound adequate
loan review mechanism in place.

Categorization of standard accounts into A, B, C based on actual recovery of interest and

installments due, will help a focused and strengthened monitoring.

Banks should ensure that they should move with speed and charged with momentum in
disposing off the loss assets. This is because as uncertainty increases with the passage of
time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch
good price. If faced with such a situation than the very purpose of getting protection under
the Securitization Act, 2002 would be defeated and the hope of seeing a must have growing
banking sector can easily vanish.

Bank should adhere to “Know Your Customer” norms for identification of borrower,
guarantor and verification of their addresses to minimize the risk of default in case of housing
sector lending. In respect of agricultural advances, recovery camp should be organized during
the harvest season.

Ongoing monitoring of bank’s borrowers is important to understand the primary cause of

corporate decline and to be able to identify the symptoms of a potential distress situation.
Loan Officers and staff should be alert and diligent for signs of borrower distress. It is
essential to identify signs of distress which diminish the Borrowers capacity to repay debt.
Early recognition followed by appropriate action is essential if the bank is to minimize NPAs.

Loan Workout Unit should be created which should be exclusively responsible for managing
non-performing and under performing loans to maximize the recovery value from a portfolio
of distressed loans, through the employment of an equitable and professional workout
process.

59
 9. Annexure:

ASSEST QUALITY (ANNEXURE-I)

60
 ANNEXTURE-I

PROPOTION OF EXPOSURE UNDER STRESS IN HDFC ANK

% of Funded % Stressed in the

INDUSTRIES/SECTORS Amount Stressed Debt
Exposure Sector
Retail 59.10 584.39 7.80 45.58
Auto Loan 15.00 148.32 3.00 4.45
Personal Loans 8.80 87.02 15.00 13.05
CVs 8.20 81.08 4.00 3.24
Loan against Securities 0.70 6.92 5.00 0.35
Two Wheelers 2.10 20.77 15.00 3.11
Business Banking 13.40 132.50 5.00 6.63
Credit Cards 4.10 40.54 20.00 8.11
Others 6.80 67.24 10.00 6.72
Automobile & Auto Ancillaries 5.20 51.42 23.90 12.29
Transportation 5.10 50.43 48.00 24.21
Trade 4.10 40.54 5.00 2.03
Banks & FIIs 3.10 30.65 3.00 0.92
Other Finance Intermediataries 2.60 25.71 5.00 1.29
Food Processing 1.70 16.81 20.00 3.36
Metal & Matel Products 1.50 14.83 26.90 3.99
Engineering 1.50 14.83 0.60 0.09
Others 16.10 159.20 10.00 15.92
Total 100.00 988.82 109.75

Hence % of Fund under Stress Sector 11.10

EXPOSURE TO SENSITIVE SECTOR

INDUSTRIES AMOUNT % OF TOTAL ADVANCES

Iron & Steel 7.91 0.80
Textile 9.89 1.00
Sugar 0.00 0.00
Gems & Jewelery 0.00 0.00
Commercial real state 58.34 5.90
Credit Cards 40.54 4.10
Unsecured Personal loans 87.02 8.80
Total 202.71 20.50

Source: Basel II Disclosures by HDFC Bank

61
 PROPOTION OF EXPOSURE UNDER STRESS IN BOB BANK

% of Funded % Stressed in Stressed

SL NO INDUSTRIES/SECTORS Amount
Exposure the Sector Debt
1 Mining 0.30 4.26 2.90 0.12
2 Iron & Steel 4.40 62.44 30.10 18.79
Other Metal & Metal
3 1.20 17.03 9.20 1.57
Products
4 All Engineering 2.10 29.80 0.60 0.18
5 Electicity 0.30 4.26 0.10 0.00
6 Textile 0.00 0.00
a Cotton Textile 0.90 12.77 49.80 6.36
b Jute Textile 0.10 1.42 49.80 0.71
c Other Textile 2.90 41.15 49.80 20.49
7 Sugar 0.40 5.68 77.70 4.41
8 Tea 0.05 0.71 27.10 0.19
9 Food Processing 0.80 11.35 20.00 2.27
10 Vegetable Oil & Vanaspati 0.20 2.84 21.80 0.62
11 Tobaco & Tobaco Products 0.00 0.00
12 Paper & Paper Products 0.45 6.39 37.40 2.39
13 Rubber & Rubber Products 0.25 3.55 28.50 1.01
14 Chemical dyes,Paint etc 0.00 0.00
a Of which Fertilizer 0.60 8.51 17.20 1.46
b Of which Petrochemicals 4.00 56.76 2.80 1.59
c Of which drugs 0.90 12.77 20.70 2.64
d others 1.50 21.29 0.00
15 Cement 0.20 2.84 4.80 0.14
16 Leather & Leather Product 0.20 2.84 26.90 0.76
17 Gems & Jewellery 0.50 7.10 51.30 3.64
18 Construction 1.13 16.04 62.10 9.96
19 Petroleum 1.70 24.13 2.80 0.68
20 Automobile including Trucks 0.90 12.77 4.40 0.56
21 Computer Software 0.10 1.42 8.60 0.12
22 Infrstructure
a Of which power 5.60 79.47 0.10 0.08
b Telecommunication 1.30 18.45 6.80 1.25
c Roads 0.70 9.93 0.00 0.00
d Ports 0.30 4.26 5.00 0.21
e Other Infrastructure 0.20 2.84 5.00 0.14
23 NBFC 3.60 51.09 5.00 2.55
24 Trading 4.10 58.18 10.00 5.82
25 Other Industries 2.20 31.22 15.00 4.68

62
 % of Funded % Stressed in Stressed
SL NO INDUSTRIES/SECTORS Amount
Exposure the Sector Debt
26 Retail 0.00 0.00
a Mortages 7.10 100.76 6.00 6.05
b Other Retails 9.50 134.82 15.00 20.22
28 Agriculture 13.71 194.49 6.00 11.67
29 International Book 25.60 363.29 12.00 43.60
30 coal 0.02 0.21 2.90 0.01
Total 100.00 1419.12 176.96

Total % of Fund Under Stress 12.47

EXPOSURE TO SENSITIVE SECTOR

% OF TOTAL
INDUSTRIES AMOUNT
ADVANCES
Iron & Steel 43.51 4.40
Textile 49.44 5.00
Sugar 3.96 0.40
Gems & Jewelery 4.94 0.50
Commercial real state 34.61 3.50
Credit Cards 0.00 0.00
Unsecured Personal loans 37.58 3.80
Total 249.77 17.60

Source: Basel II Disclosures by BOB Bank

63
PROPOTION OF EXPOSURE UNDER STRESS IN BOI BANK

Exposure
% of funded % of exposure
Sectors Amount under
exposure under stress
stress

1 Coal 0.10 1.17 2.90 0.03

2 Mining 0.40 4.67 2.90 0.14
3 Iron & Steel 4.60 53.70 30.10 16.16
Other Metal & Metal
4 1.10 12.84 9.20 1.18
Products
5-a All Engineering 2.10 24.51 0.60 0.15
b Electronics 0.70 8.17 0.00 0.00
6 Textile 0.00 0.00
a Cotton Textile 1.40 16.34 49.80 8.14
b Jute Textile 0.04 0.41 49.80 0.20
c Other Textile 2.70 31.52 49.80 15.70
7 Sugar 0.30 3.50 77.70 2.72
8 Tea 0.46 5.31 27.10 1.44
9 Food Processing 0.30 3.50 20.00 0.70
Vegetable Oil &
10 0.04 0.47 21.80 0.10
Vanaspati
11 Paper & Paper Products 0.50 5.84 37.40 2.18
Rubber & Rubber
12 0.90 10.51 28.50 2.99
Products
13 Chemical dyes,Paint etc 0.00 0.00
a Of which Fertilizer 0.20 2.33 17.20 0.40
b Of which Petrochemicals 0.30 3.50 2.80 0.10
c Of which drugs 1.10 12.84 20.70 2.66
d others 0.90 10.51
14 Cement 0.30 3.50 4.80 0.17
Leather & Leather
15 0.27 3.15 26.90 0.85
Product
16 Gems & Jewellery 2.40 28.02 51.30 14.37
17 Construction 0.90 10.51 62.10 6.52
18 Petroleum 0.60 7.00 2.80 0.20
Automobile including
19 0.60 7.00 4.40 0.31
Trucks
20 Computer Software 0.03 0.35 8.60 0.03
21 Infrstructure 0.00 0.00
a Of which power 2.70 31.52 0.10 0.03
b Telecommunication 1.40 16.34 6.80 1.11
c Roads and Ports 1.10 12.84 0.00 0.00
22 Other Industries 5.90 68.87 15.00 10.33

64
 Exposure
% of funded % of exposure
Sectors Amount under
exposure under stress
stress
23 Retail 0.00
a Residential Mortages 5.70 66.54 6.00 3.99
b Business Mortgage 2.40 28.02 8.00 2.24
c Auto finance 0.70 8.17 8.00 0.65
d Educational loan 1.10 12.84 4.00 0.51
e Credit card 0.00 0.00 25.00 0.00
f Personal loan 0.40 4.67 20.00 0.93
h Others 6.40 74.71 20.00 14.94
g Agriculture 13.24 154.55 5.00 7.73
25 International Advances 20.62 240.70 20.00 48.14
Residuary Other
26 15.11 176.38 15.00 26.46
Advances
100.00 1167.31 194.52

Total % of Fund Under Stress 16.66

EXPOSURE TO SENSITIVE SECTOR

% OF TOTAL
INDUSTRIES AMOUNT
ADVANCES
Iron & Steel 45.49 4.60
Textile 40.54 4.10
Sugar 2.97 0.30
Gems & Jewelery 23.73 2.40
Commercial real state 45.49 4.60
Credit Cards 0.00 0.00
Unsecured Personal loans 3.96 0.40
Total 191.44 16.40

Source: Basel II Disclosures by BOI Bank

65
 PROPOTION OF EXPOSURE UNDER STRESS IN AXIS BANK

% of funded % of exposure Exposure

Sectors Amount
exposure under stress under stress

1 Mining 0.10 0.82 2.90 0.02

2 Iron & Steel 1.50 12.23 30.10 3.68
Other Metal & Metal
3 0.40 3.26 9.20 0.30
Products
4 All Engineering 1.10 8.97 0.60 0.05
5 Electicity 1.00 8.16 0.10 0.01
6 Textile 0.00 0.00
7(a) Cotton Textile 2.30 18.76 49.80 9.34
(b) Other Textile 0.70 5.71 49.80 2.84
© Sugar 0.80 6.52 77.70 5.07
8 Tea 0.20 1.63 27.60 0.45
9 Food Processing 0.90 7.34 20.00 1.47
Vegetable Oil &
10 0.50 4.08 21.80 0.89
Vanaspati
Tobaco & Tobaco
11 0.40 3.26 0.00
Products
12 Paper & Paper Products 0.40 3.26 37.40 1.22
Rubber & Rubber
13 0.10 0.82 28.50 0.23
Products
14 Chemical dyes, Paint etc 1.40 11.42 17.60 2.01
15 Cement 0.90 7.34 4.80 0.35
Leather & Leather
16 0.10 0.82 26.90 0.22
Product
17 Gems & Jewellery 0.90 7.34 51.30 3.77
18 Construction 3.80 30.99 52.10 16.15
19 Petroleum 0.70 5.71 2.80 0.16
Automobile including
20 1.30 10.60 4.40 0.47
Trucks
21 Computer Software 0.80 6.52 8.60 0.56
22 Infrastructure 4.50 36.70 0.60 0.22
23 NBFC and Trading 13.60 110.92 5.00 5.55
24 Other Industries 14.30 116.63 15.00 17.49
25 Retail 0.00
a Housing and Advance 10.60 86.45 5.00 4.32
b CV Loans 0.70 5.71 6.00 0.34
c Four Wheelers 1.70 13.86 5.00 0.69
d Two Wheelers 0.30 2.45 4.00 0.10
e Personal loan 2.20 17.94 25.00 4.49

66
 % of funded % of exposure Exposure
Sectors Amount
exposure under stress under stress
f Non- Schematic 0.80 6.52 5.00 0.33
g Credit Card 0.70 5.71 20.00 1.14
26 International Advances 6.60 53.83 20.00 10.77
27 Others 23.70 193.29 15.00 28.99
100.00 815.57 123.69

Total % of Fund Under Stress 15.17

Exposure to Sensitive Sector

% OF TOTAL
INDUSTRIES AMOUNT
ADVANCES
Iron & Steel 14.83 1.50
Textile 29.66 3.00
Sugar 7.91 0.80
Gems & Jewelery 8.90 0.90
Commercial real state 63.28 6.40
Credit Cards 6.92 0.70
Unsecured Personal loans 21.75 2.20
Total 153.27 15.50

Source: Basel II Disclosures by AXIS Bank

67
 PROPOTION OF EXPOSURE UNDER STRESS IN SBI BANK

% of funded % of exposure Exposure under

Sectors Amount
exposure under stress stress

1 Petroleum & Coal 4.24 230.02 2.90 6.67

2 Mining 0.90 48.83 2.90 1.42
3 Iron & Steel 6.20 336.35 30.10 101.24
Other Metal & Metal
4 1.22 66.19 9.20 6.09
Products
5-a All Engineering 4.71 255.52 0.60 1.53
6 Textile 5.36 290.78 49.80 144.81
7 Sugar 1.10 59.68 77.70 46.37
8 Tea 0.10 5.43 27.10 1.47
9 Food Processing 3.71 201.27 20.00 40.25
10 Vegetable Oil & Vanaspati 0.50 27.13 21.80 5.91
11 Paper & Paper Products 0.70 37.98 37.40 14.20
Rubber & Rubber
12 0.50 27.13 28.50 7.73
Products
13 Chemical dyes,Paint etc 0.00 0.00
a Of which Fertilizer 0.50 27.13 17.20 4.67
b Of which Petrochemicals 0.50 27.13 2.80 0.76
c Of which drugs 1.10 59.68 20.70 12.35
d others 1.51 81.92 0.00 0.00
14 Cement 0.60 32.55 4.80 1.56
Leather & Leather
15 0.30 16.28 26.90 4.38
Product
16 Gems & Jewellery 2.00 108.50 51.30 55.66
17 Construction 1.50 81.38 62.10 50.53
Automobile including
19 1.30 70.53 4.40 3.10
Trucks
20 Computer Software 0.30 16.28 8.60 1.40
21 Infrstructure 0.00 0.00
a Of which power 3.10 168.18 15.00 25.23
b Telecommunication 2.30 124.78 6.80 8.48
c Roads and Ports 1.80 97.65 0.00 0.00
d others 3.00 162.75 0.00 0.00
22 Other bank/NBFC 2.00 108.50 5.00 5.43
22 Other Industries 3.95 214.29 15.00 32.14
23 Retail 0.00 0.00
a Home loan 9.60 520.80 5.00 26.04
b Education Loan 1.22 66.19 4.00 2.65
c Auto finance 1.60 86.80 8.00 6.94

68
 % of funded % of exposure Exposure under
Sectors Amount
exposure under stress stress
d Personal loan 6.58 356.97 20.00 71.39
24 Agriculture 10.00 542.50 5.00 27.13
25 International Advances 16.00 868.00 20.00 173.60
100.00 5425.03 891.14

Total % of Fund Under Stress 16.43

Exposure to Sensitive Sector

% OF TOTAL
INDUSTRIES AMOUNT
ADVANCES
Iron & Steel 330.93 6.10
Textile 290.78 5.36
Sugar 59.68 1.10
Gems & Jewelery 108.50 2.00
Commercial real state 113.93 2.10
Credit Cards 0.00 0.00
Unsecured Personal loans 0.00 0.00
Total 903.81 16.66

Source: Basel II Disclosures by SBI Bank

69
 PROPOTION OF EXPOSURE UNDER STRESS IN PNB BANK

% of funded % of exposure Exposure

Sectors exposure Amount under stress under stress

1 Coal 0.20 3.80 2.90 0.11

2 Mining 0.50 9.50 2.90 0.28
3 Iron & Steel 6.50 123.44 30.10 37.15
Other Metal & Metal
4 Products 0.80 15.19 9.20 1.40
5 All Engineering 2.80 53.17 0.60 0.32
6 Electicity 4.00 75.96 0.10 0.08
7 Textile 0.00 0.00
Cotton Textile 1.90 36.08 49.80 17.97
Jute Textile 0.10 1.90 49.80 0.95
Other Textile 2.70 51.27 49.80 25.53
8 Sugar 2.00 37.98 77.70 29.51
9 Tea 0.50 9.50 27.10 2.57
10 Food Processing 1.30 24.69 20.00 4.94
11 Vegetable Oil & Vanaspati 0.60 11.39 21.80 2.48
12 Paper & Paper Products 0.90 17.09 37.40 6.39

13 Rubber & Rubber Products 0.10 1.90 28.50 0.54

14 Chemical dyes,Paint etc 0.00 0.00

Fertilizer 0.50 9.50 17.20 1.63
Petrochemicals 0.30 5.70 2.80 0.16
drugs 0.90 17.09 20.70 3.54
15 Cement 1.00 18.99 4.80 0.91

16 Leather & Leather Product 0.40 7.60 26.90 2.04

17 Gems & Jewellery 0.50 9.50 51.30 4.87
18 Construction 2.10 39.88 62.10 24.77
19 Petroleum 1.70 32.28 2.80 0.90
20 Automobile including Trucks 0.30 5.70 4.40 0.25
21 Computer Software 0.65 12.34 8.60 1.06
22 Infrstructure 0.00 0.00
23 Of which power 0.20 3.80 0.10 0.00
24 Telecommunication 1.00 18.99 6.80 1.29
25 Roads and Ports 1.70 32.28 0.00 0.00
26 NBFC 4.90 93.05 5.00 4.65
27 Trading 1.00 18.99 5.00 0.95
28 Other Industries 6.25 118.69 15.00 17.80

70
 % of funded % of exposure Exposure
Sectors exposure Amount under stress under stress
29 Retail 0.00 11.90 0.00
Mortgages 6.20 117.74 6.00 7.06
Educational 1.30 24.69 4.00 0.99
Others 16.80 319.04 15.00 47.86
30 Agriculture 18.10 343.73 5.00 17.19
Residuary Other Advances 15.00
31 9.30 176.61 26.49
Total 100.00 1899.04 294.65

Total % of Fund Under Stress 15.52

Exposure To Sensitive Sector

% OF TOTAL
INDUSTRIES AMOUNT
ADVANCES
Iron & Steel 64.27 6.50
Textile 45.49 4.60
Sugar 19.78 2.00
Gems & Jewelry 4.94 0.50
Commercial real state 49.44 5.00
Credit Cards 0.00 0.00
Unsecured Personal loans 58.34 5.90
Total 242.26 24.50

Source: Basel II Disclosures by PNB Bank

71
 PROPOTION OF EXPOSURE UNDER STRESS IN ICICI BANK

% of Funded % Stressed in
INDUSTRIES/SECTORS Amount Stressed Debt
Exposure the Sector
RETAIL PORTFOLIO 49.30 1102.20
Home Loan 52.20 575.88 5.00 28.79
Automobile Loan 12.10 133.05 6.00 7.98
Retail Commercial Business 14.90 164.40 6.00 9.86
Finance Two Wheeler Loans 1.50 16.91 15.00 2.54
Portfolio Personal Loans 9.90 108.66 25.00 27.17
Credit Cards 8.20 90.02 25.00 22.51
Loans Against
1.20 13.28 15.00 1.99
Securities& others
Services-Non Finance 7.50 168.05 6.30 10.59
Crude Petroleum/Refining & petro
6.40 142.04 0.00 0.00
chemicals
Iron/Steels & Products 4.40 99.14 30.10 29.84
Road,Port,Telecom,Urban
4.20 94.62 9.20 8.71
Deveopment & other infrastrure
Services-finance 3.50 77.68 5.00 3.88
Power 4.00 54.19 15.00 8.13
Food & Beverages 2.40 53.57 27.60 14.79
Chemical & Fertilizers 2.30 51.83 17.60 9.12
Eloctronics & Engineering 1.60 36.17 3.00 1.09
Wholesale/Retail Trade 1.20 26.29 5.00 1.31
Construction 1.10 23.86 62.10 14.82
Other Industires 13.70 306.57 15.00 45.99
TOTAL ADVANCES 100.00 2236.21 249.09

Hence Fund Under Stress = 11.14 %

EXPOSURE TO SENSITIVE SECTOR

INDUSTRIES AMOUNT % OF TOTAL ADVANCES

Capital Market 61.83 2.77

Real State 568.02 25.40
Total 28.17

Source: Basel II Disclosures by ICICI

Bank

72
BALANCE SHEET STRENGTH (ANNEXURE-II)

73
 ANNEXURE-II
CREDIT GROWTH YOY

FY 07 FY 08 FY 09 FY 10 CAGR POINTS
HDFC 37.14 33.89 35.11 55.90 40.24 6
ICICI 43.40 58.66 55.73 -2.72 36.25 5
BANK OF BORODA 38.04 39.57 27.60 33.00 34.47 4
PNB 24.00 29.00 24.00 22.75 24.92 1
AXIS 43.02 65.25 61.80 36.70 51.21 7
SBI 29.37 28.85 23.55 30.17 27.96 3
BANK OF INDIA 22.08 19.01 30.20 34.50 26.29 2
(Figures are in % term)

LOANS/ADVANCES (Figure are in Bn)

2005-06 2006-07 2007-08 2008-09 2009-10
HDFC 255.66 350.61 469.45 634.27 988.82
ICICI 648.87 930.45 1476.25 2298.92 2236.31
BANK OF
BORODA 434.00 599.11 836.20 1067.01 1419.12
PNB 779.95 967.14 1247.60 1547.03 1899.04
AXIS 156.02 223.14 368.74 596.61 815.57
SBI 2023.74 2618.08 3373.36 4167.68 5425.03
BANK OF INDIA 458.82 560.12 666.62 867.91 1167.31

Source: Annual Reports

74
NNPA Ratio:

NNPA RATIO (In %) RANK

FY 06 FY 07 FY 08 FY 09 FY 10
HDFC 0.3 0.4 0.4 0.5 0.6 3
ICICI 2.03 0.71 1.02 1.55 2.09 1
BANK OF BORODA 1.45 0.87 0.61 0.47 0.31 5
PNB NA NA NA 0.64 0.17 7
AXIS 1.07 0.75 0.61 0.36 0.35 6
SBI 2.65 1.88 1.56 1.78 1.76 2
BANK OF INDIA 2.80 1.49 0.74 0.52 0.44 4

Note: We have taken only FY 09 value to allocate Scores

BOB
FY 06 FY 07 FY 08 FY 09 FY 10
GNPA(in Bn) 33.22 23.9 20.92 19.81 18.43
NNPA(in Bn) 6.2 5.18 5.06 4.94 4.51
GNPA % 7.3 3.9 2.47 1.84 1.27
NNPA % 1.45 0.87 0.61 0.47 0.31

BOI
FY 06 FY 07 FY 08 FY 09 FY 10
GNPA(in Bn) 31.56 24.79 21 19.31 24.71
NNPA(in Bn) 15.54 9.7 6.32 5.92 6.28
GNPA % 5.53 3.72 2.42 1.68 1.71
NNPA % 2.8 1.49 0.74 0.52 0.44

AXIS
FY 06 FY 07 FY 08 FY 09 FY 10
GNPA(in Bn) 3.1 3.74 4.19 4.95 8.98
NNPA(in Bn) NA NA 2.66 2.48 3.27
GNPA % 1.7 1.1 0.95 0.72 0.96
NNPA % 1.07 0.75 0.61 0.36 0.35

75
 PNB
FY 06 FY 07 FY 08 FY 09 FY 10
GNPA(in Bn) NA NA NA 33.19 27.67
NNPA(in Bn) NA NA NA 7.54 2.63
GNPA % NA NA NA NA NA
NNPA % NA NA NA 0.64 0.17

ICICI
FY 06 FY 07 FY 08 FY 09 FY 10
GNPA(in Bn) 34.37 22.73 41.26 75.88 98.03
NNPA(in Bn) 19.83 10.75 19.92 34.9 45.53
GNPA % NA NA 2.08 3.3 4.32
NNPA % 2.03 0.71 1.02 1.55 2.09

SBI
FY 06 FY 07 FY 08 FY 09 FY 10
GNPA(in Bn) 124.56 103.75 99.8 128.37 155.89
NNPA(in Bn) 53.48 49.06 44.6 74.24 95.52
GNPA % 5.96 3.88 3.42 3.04 2.84
NNPA % 2.65 1.88 1.56 1.78 1.76

HDFC
FY 06 FY 07 FY 08 FY 09 FY 10
GNPA(in Bn) 4.4 5.1 6.57 9.07 19.88
NNPA(in Bn) NA NA NA 2.03 6.28
GNPA % 1.5 1.2 1.3 1.34 1.98
NNPA % 0.3 0.4 0.4 0.5 0.6

Source: Annual Reports

76
AVERAGE PROVISION COVERAGE RATIO

AVERAGE PROVISION COVERAGE RATIO Score

FY 06 FY 07 FY 08 FY 09 FY 10
HDFC 0.86 0.69 0.69 0.67 0.36 1
ICICI 0.36 0.50 0.51 0.52 0.38 3
BANK OF BORODA 0.52 0.56 0.47 0.45 0.42 6
PNB 0.36 0.40 5
AXIS 0.01 0.34 0.32 0.32 0.45 7
SBI 0.00 0.00 0.48 0.42 0.39 4
BANK OF INDIA 0.11 0.22 0.26 0.36 0.37 2

Note: We have taken only FY 09 value to allocate Scores.

SBI
FY 06 FY 07 FY 08 FY 09 FY 10
Provision for NPA(In Bn) 47.41 54.13 60.36
Gross NPA(In Bn) 124.56 103.75 99.8 128.37 155.89
Av Provision coverage ratio 0.00 0.00 0.48 0.42 0.39

BOB
FY 06 FY 07 FY 08 FY 09 FY 10
Provision for NPA(In Bn) 17.32 13.28 9.91 8.94 7.75
Gross NPA(In Bn) 33.22 23.9 20.92 19.81 18.43
Av Provision coverage ratio 0.52 0.56 0.47 0.45 0.42

HDFC
FY 06 FY 07 FY 08 FY 09 FY 10
Provision for NPA(In Bn) 3.79 3.54 4.55 6.10 7.10
Gross NPA(In Bn) 4.4 5.1 6.57 9.07 19.88
Av Provision coverage ratio 0.86 0.69 0.69 0.67 0.36

77
 ICICI
FY 06 FY 07 FY 08 FY 09 FY 10
Provision for NPA(In Bn) 12.36 11.42 20.84 39.43 37.25
Gross NPA(In Bn) 34.37 22.73 41.26 75.88 98.03
Av Provision coverage ratio 0.36 0.50 0.51 0.52 0.38

BOI
FY 06 FY 07 FY 08 FY 09 FY 10
Provision for NPA(In Bn) 3.51 5.36 5.56 6.97 9.14
Gross NPA(In Bn) 31.56 24.79 21 19.31 24.71
Av Provision coverage ratio 0.11 0.22 0.26 0.36 0.37

AXIS
FY 06 FY 07 FY 08 FY 09 FY 10
Provision for NPA(In Bn) 0.03 1.27 1.34 1.60 4.02
Gross NPA(In Bn) 3.1 3.74 4.19 4.95 8.98
Av Provision coverage ratio 0.01 0.34 0.32 0.32 0.45

PNB
FY 06 FY 07 FY 08 FY 09 FY 10
Provision for NPA NA NA NA 11.94 11.07
Gross NPA NA NA NA 33.19 27.67
Av Provision coverage ratio NA NA NA 0.36 0.40

Source: Annual Reports

78
CAPIAL ADEQUESY RATIO:

CRAR RATIO BASEL II RANK

FY 06 FY 07 FY 08 FY 09 FY 10 FY 09 FY 10
HDFC 12.16 11.41 13.08 NA NA 13.60 15.10 6
ICICI 11.78 13.35 13.35 14.92 15.92 13.96 15.53 7
BANK OF BORODA 12.61 13.65 11.80 12.91 12.88 12.94 14.05 4
PNB 12.96 12.59 13.46 14.03 3
AXIS 12.66 11.08 11.60 NA NA 13.99 13.65 2
SBI 12.45 11.88 12.34 13.54 12.97 NA 14.25 5
BANK OF INDIA 11.52 10.75 11.58 12.95 13.21 12.09 13.01 1

Note: We have taken only BASEL-II result of FY 09 value to allocate Scores

ICICI BASEL II
2005-06 2006-07 2007-08 2008-09 2009-10 2008-09 2009-10
TIER 1(IN BN) 102.46 191.82 191.82 381.34 420.09 421.72 421.96
T1/RWA 7.59 9.20 9.20 11.32 12.16 11.76 11.84
TIER 2(IN BN) 56.57 86.61 86.61 121.21 129.72 78.86 131.59
T2/RWA 4.19 4.15 4.15 3.60 3.76 2.20 3.69
RWA(IN BN) 1350.17 2085.94 2085.94 3367.55 3453.38 3584.57 3564.63
CAR 11.78 13.35 13.35 14.92 15.92 13.96 15.53

HDFC BASEL II
2005-06 2006-07 2007-08 2008-09 2009-10 2008-09 2009-10
TIER 1(IN BN) NA NA NA NA NA NA NA
T1/RWA 9.60 8.55 8.58 NA NA 10.36 NA
TIER 2(IN BN) NA NA NA NA NA NA NA
T2/RWA 2.56 2.86 4.50 NA NA 3.24 NA
RWA(IN BN) NA NA NA NA NA NA NA
CAR 12.16 11.41 13.08 NA NA 13.60 15.10

79
 SBI BASEL II
2005-06 2006-07 2007-08 2008-09 2009-10 2008-09 2009-10
TIER 1(IN BN)
T1/RWA 8.04 9.36 8.01 9.14 8.53 NA NA
TIER 2(IN BN)
T2/RWA 4.41 2.52 4.33 4.40 4.44 NA NA
RWA(IN BN)
CAR 12.45 11.88 12.34 13.54 12.97 NA 14.25

AXIS BASEL II
2005-06 2006-07 2007-08 2008-09 2009-10 2008-09 2009-10
TIER 1(IN BN) 21.11 28.02 36.24 NA NA 88.27 108.13
T1/RWA 8.87 7.26 6.40 NA NA 10.39 9.41
TIER 2(IN BN) 9.02 14.76 29.44 NA NA 30.64 48.65
T2/RWA 3.79 3.82 5.20 NA NA 3.60 4.24
RWA(IN BN) 237.99 385.98 566.27 NA NA 849.96 1148.58
CAR 12.66 11.08 11.60 NA NA 13.99 13.65

BOB BASEL II
2005-06 2006-07 2007-08 2008-09 2009-10 2008-09 2009-10
TIER 1(IN BN) NA NA NA NA NA NA NA
T1/RWA 8.21 10.98 8.74 7.63 7.79 NA NA
TIER 2(IN BN) NA NA NA NA NA NA NA
T2/RWA 4.40 2.67 3.06 5.28 5.09 NA NA
RWA(IN BN) NA NA NA NA NA NA NA
CAR 12.61 13.65 11.80 12.91 12.88 12.94 14.05

80
 BOI BASEL II
2005-06 2006-07 2007-08 2008-09 2009-10 2008-09 2009-10
TIER 1(IN BN) 36.84 45.52 58.25 94.39 124.96 94.69 124.66
T1/RWA 7.05 6.75 6.54 8.19 8.73 7.75 8.91
TIER 2(IN BN) 23.33 26.96 44.87 54.87 64.16 53.03 57.45
T2/RWA 4.47 4.00 5.04 4.76 4.48 4.34 4.11
RWA(IN BN) 522.30 674.22 890.81 1152.80 1431.36 1222.21 1399.31
CAR 11.52 10.75 11.58 12.95 13.21 12.09 13.01

PNB BASEL II
2005-06 2006-07 2007-08 2008-09 2009-10 2008-09 2009-10
TIER 1(IN BN) NA NA NA NA NA NA NA
T1/RWA NA NA NA NA NA NA NA
TIER 2(IN BN) NA NA NA NA NA NA NA
T2/RWA NA NA NA NA NA NA NA
RWA(IN BN) NA NA NA NA NA NA NA
CAR NA NA NA 12.96 12.59 13.46 14.03

Source: Annual Reports

81
KEY RATIOS (ANNEXURE-III)

82
 Annexure -III
NET INTEREST MARGIN

NET INTEREST MARGIN POINTS

FY 06 FY 07 FY 08 FY 09 FY 10
HDFC 3.21 3.80 4.00 4.09 4.30 7
ICICI 2.46 2.45 2.19 2.22 2.43 1
BANK OF BORODA 3.32 2.97 2.06 2.26 2.50 2
PNB NA NA NA 3.58 3.62 6
AXIS 2.90 2.85 2.75 3.47 3.33 5
SBI 3.39 3.40 3.18 3.07 2.93 3
BANK OF INDIA 85.55 83.82 86.48 113.03 2.97 4

Note: We have taken only FY 09 value to allocate Scores

HDFC BANK(IN LACS)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 290543.00 423018.00 664793.00 1011500.00 16332270.00
Interest Expense 131556.00 192950.00 317945.00 488712.00 8911100.00
Net Interest Income 158987.00 230068.00 346848.00 522788.00 7421170.00
Interest earning Asset 4939011.00 6054421.00 8666352.00 12759880.00 172585349.00
NIM 3.22 3.80 4.00 4.10 4.30

ICICI BANK(IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 94.10 137.84 219.95 307.88 310.93
Interest Expense 65.71 95.97 163.58 234.84 227.26
Net Interest Income 28.39 41.87 56.37 73.04 83.67
Interest earning Asset 1153.24 1706.81 2577.27 3288.34 3436.20
NIM 2.46 2.45 2.19 2.22 2.43

AXIS BANK(IN MN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 19242.00 28888.00 45604.00 70053.00 108291.10
Interest Expense 11930.00 18106.00 29933.00 44200.00 71849.20
Net Interest Income 7312.00 10782.00 15671.00 25853.00 36441.90
Interest earning Assest 252137.90 378315.70 570934.30 745043.20 1104200.90
NIM 2.90 2.85 2.74 3.47 3.30

83
 SBI(IN BN)
2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 324.28 357.90 394.91 489.50 637.90
Interest Expense 184.83 201.60 234.37 319.30 429.20
Net Interest Income 139.45 156.30 160.54 170.20 208.70
Interest earning Assest 4113.56 4587.00 5034.60 5534.00 7118.00
NIM 3.39 3.41 3.19 3.08 2.93

BANK OF INDIA(IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 60.31 70.29 89.36 123.55 163.47
Interest Expense 37.95 43.97 54.96 81.25 108.48
Net Interest Income 22.36 26.32 34.40 42.30 54.99
Interest earning Assest 917.43 1084.02 1280.27 1439.97 1851.52
NIM 2.44 2.43 2.69 2.94 2.97

BANK OF BORODA(IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 64.31 71.00 90.04 118.13 150.91
Interest Expense 34.52 38.75 54.27 79.02 99.68
Net Interest Income 29.79 32.25 35.77 39.11 51.23
Interest earning Assest 897.30 1084.81 1728.72 1728.72 2057.20
NIM 3.32 2.97 2.07 2.26 2.49

PNB(IN MN)
2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income NA NA NA 142.65 193.26
Interest Expense NA NA NA 87.31 122.95
Net Interest Income NA NA NA 55.34 70.31
Interest earning Assest NA NA NA 1545.80 1942.27
NIM NA NA NA 3.58 3.62

84
RETURN ON ASSEST

RETURN ON ASSEST RANK

FY 06 FY 07 FY 08 FY 09 FY 10
HDFC 1.20 1.30 1.30 1.40 1.40 5
ICICI 0.98 1.00 1.09 1.10 0.98 1
BANK OF BORODA 0.75 0.79 0.80 0.89 1.09 3
PNB 1.15 1.39 4
AXIS 1.21 1.18 1.10 1.24 1.44 6
SBI 0.99 0.89 0.84 1.01 1.04 2
BANK OF INDIA 0.38 0.68 0.88 1.25 1.49 7

Note: We have taken only FY 09 value to allocate Scores

Source: Annual Report

EARING PER SHARES

EARING PER SHARES (In Rs) RANK

FY 06 FY 07 FY 08 FY 09 FY 10
HDFC 22.92 27.92 36.29 46.22 52.90 3
ICICI 27.33 32.15 34.64 39.15 33.70 1
BANK OF BORODA 23.08 27.10 28.18 39.41 61.14 5
PNB 64.98 98.03 6
AXIS 11.92 14.32 17.45 31.31 50.27 2
SBI 81.79 83.73 86.29 126.26 143.77 7
BANK OF INDIA 20.69 14.39 23.04 40.83 57.27 4

Note: We have taken only FY 09 value to allocate Scores

Source: Annual Report

85
EFFCIENCY (ANNEXURE-IV)

86
 ANNEXTURE-IV
COST TO INCOME RATIO

COST TO INCOME RATIO RANK

FY 06 FY 07 FY 08 FY 09 FY 10
HDFC 48.40 49.38 48.33 49.86 51.66 1
ICICI 52.74 59.77 57.84 50.60 44.11 4
BANK OF BORODA 48.22 52.53 51.31 49.21 45.93 3
PNB 46.80 42.27 6
AXIS 50.65 45.02 49.48 51.80 43.81 5
SBI 47.83 50.94 51.81 49.03 46.63 2
BANK OF INDIA 56.97 55.42 52.14 41.66 36.18 7
Note: We have taken only FY 09 value to allocate Scores

HDFC BANK (IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 29.05 42.30 66.48 101.15 163.32
Interest Expense 13.16 19.30 31.79 48.87 89.11
Net Interest Income 15.90 23.01 34.68 52.28 74.21
Other Income 6.52 11.24 15.16 22.83 32.90
Total Income 22.42 34.25 49.84 75.11 107.11
operating Expense 10.85 16.91 24.09 37.45 55.33
CI Ratio 48.40 49.38 48.33 49.86 51.66

ICICI BANK (IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 94.10 137.84 219.95 307.88 310.93
Interest Expense 65.71 95.97 163.58 234.84 227.26
Net Interest Income 28.39 41.87 56.37 73.04 83.67
Other Income 34.16 41.80 59.29 88.10 76.04
Total Income 62.55 83.67 115.66 161.14 159.71
operating Expense 32.99 50.01 66.90 81.54 70.45
CI Ratio 52.74 59.77 57.84 50.60 44.11

87
 AXIS BANK (IN BN)
2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 19.24 28.89 45.60 70.05 108.29
Interest Expense 11.93 18.11 29.93 44.20 71.85
Net Interest Income 7.31 10.78 15.67 25.85 36.44
Other Income 4.16 7.30 9.43 15.75 29.16
Total Income 11.47 18.08 25.10 41.60 65.60
operating Expense 5.81 8.14 12.42 21.55 28.74
CI Ratio 50.65 45.02 49.48 51.80 43.81

SBI (IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 324.28 357.90 394.91 489.50 637.90
Interest Expense 184.83 201.60 234.37 319.30 429.20
Net Interest Income 139.45 156.30 160.54 170.20 208.70
Other Income 71.19 73.88 67.65 86.94 126.90
Total Income 210.64 230.18 228.19 257.14 335.60
operating Expense 100.74 117.25 118.23 126.08 156.48
CI Ratio 47.83 50.94 51.81 49.03 46.63

BANK OF INDIA (IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 60.31 70.29 89.36 123.55 163.47
Interest Expense 37.95 43.97 54.96 81.25 108.48
Net Interest Income 22.36 26.32 34.40 42.30 54.99
Other Income 11.55 11.84 15.62 21.17 30.52
Total Income 33.91 38.16 50.02 63.47 85.51
operating Expense 19.32 21.15 26.08 26.44 30.94
CI Ratio 56.97 55.42 52.14 41.66 36.18

88
 BANK OF BORODA (IN BN)
2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income 64.31 71.00 90.04 118.13 150.91
Interest Expense 34.52 38.75 54.27 79.02 99.68
Net Interest Income 29.79 32.25 35.77 39.11 51.23
Other Income 11.27 13.13 13.81 20.51 26.62
Total Income 41.06 45.38 49.58 59.62 77.85
operating Expense 19.80 23.84 25.44 29.34 35.76
CI Ratio 48.22 52.53 51.31 49.21 45.93

PNB (IN BN)

2005-06 2006-07 2007-08 2008-09 2009-10
Interest Income NA NA NA 142.65 193.26
Interest Expense NA NA NA 87.31 122.95
Net Interest Income NA NA NA 55.34 70.31
Other Income NA NA NA 19.98 29.20
Total Income NA NA NA 75.32 99.51
operating Expense NA NA NA 35.25 42.06
CI Ratio NA NA NA 46.80 42.27

Source: Annual Report

89
 Restructured Loan as % of Total Advances

AXIS HDFC BOI BOB ICICI SBI PNB

FY 09 FY 10 FY 09 FY 10 FY 09 FY 10 FY 09 FY 10 FY 09 FY 10 FY 09 FY 10 FY 09 FY 10
Restructured
Loan 6.29 9.90 0.03 0.51 6.29 52.42 3.57 26.59 16.76 610.00 14.21 83.10 10.02 40.74
Gross
Advances 596.61 821.27 634.27 1002.44 1148.00 1447.32 1067.01 1453.78 2256.16 2234.06 4167.68 5425.00 1190.00 1547.00
Restructured
Loan as % of
Total
Advances 1.05 1.21 0.00 0.05 0.55 3.62 0.33 1.83 0.74 27.30 0.34 1.53 0.84 2.63
RANK 6 7 2 4 1 5 3

Note: We have taken only FY 09 value to allocate Scores

90
CERDIT 2 DEPOSIT RATIO

CERDIT 2 DEPOSIT RATIO Point

FY 06 FY 07 FY 08 FY 09 FY 10
HDFC 0.70 0.63 0.69 0.63 0.69 4
ICICI 0.65 0.56 0.63 0.94 1.02 6
BANK OF BORODA 0.71 0.73 0.72 0.89 1.09 7
PNB 0.71 0.73 5
AXIS 0.49 0.56 0.63 0.68 0.69 4
SBI 0.55 0.69 0.77 0.78 0.73 5
BANK OF INDIA 0.58 0.60 0.56 0.58 0.62 3

Note: We have taken only FY 09 value to allocate Scores

SBI
FY 06 FY 07 FY 08 FY 09 FY 10
Credit/Advance 2023.74 2618.08 3373.36 4167.68 5425.03
Deposit 3678.50 3800.96 4355.21 5374.04 7420.73
C-D ratio 0.55 0.69 0.77 0.78 0.73

HDFC
FY 06 FY 07 FY 08 FY 09 FY 10
Credit/Advance 255.66 350.61 469.45 634.27 988.82
Deposit 363.54 557.96 682.97 1007.68 1428.11
C-D ratio 0.70 0.63 0.69 0.63 0.69

PNB
FY 06 FY 07 FY 08 FY 09 FY 10
Credit/Advance NA NA NA 1195.02 1547.03
Deposit NA NA NA 1664.76 2097.60
C-D ratio NA NA NA 71.78 73.75

91
 BOI
FY 06 FY 07 FY 08 FY 09 FY 10
Credit/Advance 458.82 560.12 666.62 867.91 1167.31
Deposit 788.21 939.32 1198.81 1500.12 1897.08
C-D ratio 0.58 0.60 0.56 0.58 0.62

AXIS
FY 06 FY 07 FY 08 FY 09 FY 10
Credit/Advance 156.02 223.14 368.74 596.61 815.57
Deposit 317.12 401.13 587.85 876.26 1173.74
C-D ratio 0.49 0.56 0.63 0.68 0.69

BOB
FY 06 FY 07 FY 08 FY 09 FY 10
Credit/Advance 434.00 599.11 836.20 1067.01 1419.12
Deposit 611.26 820.69 1161.39 1198.88 1301.95
C-D ratio 0.71 0.73 0.72 0.89 1.09

ICICI
FY 06 FY 07 FY 08 FY 09 FY 10
Credit/Advance 648.87 930.45 1476.25 2298.92 2236.31
Deposit 998.19 1650.83 2350.10 2444.31 2183.48
C-D ratio 0.65 0.56 0.63 0.94 1.02

Source: Annual Report

92
RESTRUCTURING OF LOANS (ANNEXURE-V)

93
 Annexure V
MODALITIES OF RESTRUCTURING OF LOANS

Restructured asset:

If a bank anticipates that a customer may default on interest and/ or principal payment of a
loan due to financial or any other reason, it may go in for restructuring of the loan to avoid
turning the account into an NPA or a bad loan.

Restructuring would normally involve modification of terms of the repayment of advances,

generally including alteration of repayment period/ repayable amount/ the amount of
installments/ rate of interest (due to reasons other than competitive reasons). Prior to
restructuring, the bank has to ascertain financial viability of the loan and be reasonably sure
of the borrowers’ repayment capacity.

Impact of restructuring on banks’ P&L:

Income recognition:

Interest income in respect of restructured accounts, classified as 'standard assets', is

recognized on accrual basis while income in respect of the accounts classified as NPAs is
recognized on cash basis only. So, while accrued interest income is reversed on becoming
an NPA, the income on a standard restructured asset continues to accrue as normal.

Provisioning

I. Normal provisions –

Banks are required to continue to hold pre-restructuring provisions against the

restructured advances, i.e. if a loan is classified prior to restructuring as:

 Standard - 0.4% of the outstanding loan amount (varies from 0.25% to 2% on the
various classes of assets as prescribed by the RBI)
 Sub-standard - 10% of the outstanding amount

II. Provision for loss in PV terms of restructured advances –

Reduction in interest and/or re-schedulement of repayment of the principal amount,

in the course of the restructuring, is bound to result in a decline in the fair value of such
advance. Such decline in value is an economic loss for the bank. Thus, banks have to
provide for such losses and make provisions by debiting to P&L account in addition to
normal provisions.

PV Loss = PV of future cash flows less PV of future cash flows as per the restructuring
package

94
Cash flows (interest as well as principal) are discounted on the sum of current PLR,
appropriate term premium and credit risk premium.

Incremental advances:

Any additional finance may be treated as ‘standard asset’ up to a period of one year after the
first interest/principal payment, whichever is earlier, falls due under the approved
restructuring package.

In case a restructured loan is classified as NPA, banks are reluctant to lend to the same
borrower as the incremental loans also have to be classified as NPAs (though regulations do
not restrain banks from lending incrementally).

Classification of restructured loans:

Post restructuring, the advance can either be classified as standard or substandard (i.e.
NPA), depending upon its prerestructuring classification. If the advance is classified as NPA
prior to restructuring, it remains an NPA.

However, in case of a standard asset, the loan can continue to be classified as a standard
asset, subject to the following conditions:

 The dues to the bank are ‘fully secured’

 In case of SSI borrowers, where the outstanding is up to Rs2.5m,
 In case of infrastructure projects, provided the cash flows generated from these
projects are adequate for repayment of the advance
 The unit becomes viable in 10 years in case of infrastructure, and in seven years in
the case of other units
 The repayment period of the restructured advance does not exceed 15 years in the
case of infrastructure and 10 years in the case of other advances. In case of housing
loans, the ceiling of 10 years on repayment period would not be applicable

Even if all the above conditions are satisfied, exposure to sensitive sectors continues to be
related as NPAs, i.e.:

 Consumer and personal advances, and

 Advances classified as capital market exposures

Prior to special treatment allowed in stimulus package (November 2008), commercial real
estate (CRE) loans fell under this category. However, now exposure to CRE will get
concessional regulatory treatment for restructuring till June 2009.

Second round of restructuring allowed for other sectors:

Corporate other than in commercial real estate, capital market and personal/ consumer
loans can now go in for a second round of restructuring and these exposures will get
exceptional regulatory treatment till June 2009.

Incentives for a bank to restructure –

95
Arrest the rise in NPAs –

As a result, a loan upon restructuring will not be downgraded to NPA. This enables a bank
to arrest the increase and reduce the existing level of NPAs.

Impact on profitability –

If an account is classified as NPA then the bank has to make higher provisions for it (at 10%
of the outstanding loan as against PV provision in case of restructuring), which impacts the
bottom-line adversely. So, restructuring has a positive impact on banks’ bottom-line as they
can not only make lower provisioning, but also book interest.

Flip-side of restructuring:

Rise in exposure to ‘stressed companies’:

In the process of restructuring, banks often extend incremental credit to ‘stressed

companies’. As a result, the exposure of banks to such companies increases, leading to a
higher risk in
the quality of the loan book.

Higher probability of a restructured loan lapsing into NPL:

Globally, restructured loans are seen to have a higher tendency to slip into NPAs. As a
result, restructuring may often serve as just a tool to delay the slippage of a loan account
into NPA.

Lower visibility:

Unlike NPAs, banks disclose restructured loans on an annual basis rather a quarterly basis.
This makes the financial position more opaque.

96
10. References
 Gaurav Vallabh, Annop Bhatia and Saurabh Mishra, “Non Performing
Assets of India Public, Private and Foreign Sector Banks: An Empirical
Assessment”, The ICFAI Journal of Bank Management August 2007, Vol.
VI, No.3.
 Basabi Bhattacharya and Tanima Niyogi Sinha Roy, “Macroeconomic
Determinants of Asset Quality of Indian Public Sector Banks: A
Recursive VAR Approach”, The ICFAI Journal of Bank Management
February 2008, Vol. VI, No.1.
 Kalyan Mukherjee, “Asset Management: A success Story”, The Indian
Banker November 2006, Vol. I- No. 11.
 Price water house Coopers, Report on “Management of Non Performing
Assets by Indian Banks”, IBA Bulletin January 2004, Vol. XXXVI, No.1.
 www.wikipedia.com
 www.investopedia.com
 www.rbi.gov.in
 www.rediff.com
 Annual report of seven banks for last five years
 Basel to disclosure by banks
 Edelweiss Research
 CLSA Research
 FITT Research by Deutsche bank
 Kotak Institutional Equity Research

97