management of non performing assets - a current scenario

IRJC
International Journal of Social Science & Interdisciplinary Research
Vol.1 Issue 11, November 2012, ISSN 2277 3630
MANAGEMENT OF NON PERFORMING ASSETS
- A CURRENT SCENARIO
CHANDAN CHATTERJEE*; JEET MUKHERJEE**; DR.RATAN DAS***
* Research scholar Department of Economics,
University of Burdwan, Burdwan,
West Bengal, India
** Faculty Member Department of Commerce
Durgapur Government College
Burdwan, West Bengal, India
***Assistant professor
Department of Commerce
Durgapur Government College,
Burdwan, West Bengal, India
ABSTRACT
Today the Indian banking system has gone through significant transformation following financial
sector reforms. Several prudential, payment, integrating and provisioning norms have been
introduced to improve efficiency and trimming down the NPAs‟ to improve the financial health of
the banking sector. NPA involves the necessity of provisions, any increase in which bring down
the overall profitability of banks; is the indicator of banking health in a country. The issue of
mounting non-performing assets is giving jitters to banking sector particularly in many a
developing economy. This article attempts to focus mainly on the causes and consequences of
NPAs, policy directives of RBI, initiatives of Indian Government, scenario of NPAs sector wise
and bank group wise and finally the curative measures for NPAs in India.
KEYWORDS: Non performing assets, financial sector, banking sector, customer, loss asset.
______________________________________________________________________________
INTRODUCTION
Non Performing Asset means a loan or an account of borrower, which has been classified as a
sub-standard, doubtful or loss asset, in accordance with the directions or guidelines of asset
classification issued by RBI.
‣ Earlier assets were declared as NPA after completion of the period for the payment of
total amount of loan and 30 days grace.
‣ At present scenario assets are declared as NPA if none of the installment is paid till six
months i.e. 180 days in respect of a term loan.
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International Journal of Social Science & Interdisciplinary Research
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‣ Interest and/ or installment of principal remains overdue for two harvest seasons but for
a period not exceeding two half years in the case of an advance granted for agricultural
purpose, and
‣ Any amount to be received remains unpaid for a period of more than 90 days in respect
of other accounts
With effect from March 31, 2004, a non-performing asset (NPA) shall be a declared as a loan
or an advance where;
• Installment of principal or interest remain overdue for a period exceeding 90 days in
respect of a Term Loan,
• The account remains 'out of order' for a period of more than 90 days, relating to Cash
Credit or Bank Overdraft
• The bill remains unsettled for a period of more than 90 days in respect of a purchased or
discounted bill.
Types of NPA:
There are three major types of NPA:
• Sub-standard : The account holder belonging to this category don‟t pay three installment
continuously after 90 days and up to 1year. Bank has made 10% provision of funds for
this category to meet the losses generated from NPA from their profit.
• Doubtful NPA : Doubtful NPA are classified into three sub categories :
• 20% provision is made by the banks for D1 i.e. up to 1 year
• 30% provision is made by the bank for D2 i.e. up to 2 year
• 100% provision is made by the bank for D3 i.e. up to 3 year.
• Loss Assets : When account holder belongs to this category 100% provision is made by
the banks to write off their accounts. After this the assets are delivered to recovery agents
for the purpose of sale.
Reasons behind NPA:
Default of a loan intentionally
Frequent shuffle of govt. policies leads to NPA.
Customer has taken the loan for non performance of business
Most of the loan sanctioned for agricultural purposes
Negligent pre-enquiry by the bank for sanctioning the loan to a customer.
Effects of NPA on banks & FI:
Continuous draining of profit.
Negative impact on goodwill.
Adverse growth of equity value.
Restricted cash flow by bank due to provision of fund created against NPA.
Gross NPA and Net NPA:
Gross NPA is advance which is considered irrecoverable, for whom the bank has made
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International Journal of Social Science & Interdisciplinary Research
Vol.1 Issue 11, November 2012, ISSN 2277 3630
provisions, and which is still held in banks' books of account. Net NPA is obtained by deducting
items like interest due but not recovered, part payment received and other income kept in
suspense account from Gross NPA.
In India, when the loan is sanctioned against any security, provision has to be created. Further,
Indian Banks have to make a100 per cent provision which is treated as a „doubtful‟advance,
while in some countries; it is 50 per cent or just 75 per cent. According to the RBI, "Reduction of
NPAs in the Indian banking sector should be treated as a national priority item to make the
system stronger, resilient and geared to meet the challenges of globalization. It is necessary that a
public debate is started soon on the problem of NPAs and their resolution. "
OBJECTIVES
1) To understand the NPAs sector wise.
2) To make a comparative study of NPA‟s of public sector banks, private sector banks and
foreign sector banks.
3) To understand the relationship between NPA‟s net profit and advances
4) To understand the recovery of NPAs through various channels.
METHODOLOGY
The present study is aims to analyze the NPA‟s of Indian Banks. For the purpose of the study
data has been collected from secondary sources. The main source of information has been
through RBI reports and bulletins.
CASE STUDY :AN ANALYTICAL DISCUSSION
Here the Scheduled Commercial Bank is taken as a sample to analyze the management of Non
Performing Assets. At first we will study the lending composition of SCBs by analyzing the
three core sectors of economy i.e. priority sector, public sector and non-priority sector.
Non Performing Assets Sector-wise:
Bank mainly lends to three sectors i.e. priority sector, public sector and non-priority sector. The
lending composition of the Indian Banks is studied from the Table No - 1
Secondly the graphical analysis of the lending composition of scheduled commercial bank is
shown in Figure - 1 and Figure - 2. The only reason behind these is to study the trend of
nonperforming assets in scheduled commercial bank of India.
Thirdly the tabular analysis of the Gross and Net NPAs of SCBs- Bank Group Wise is displayed
in Table no-2 to study the percentage of Gross NPA and Net NPA to Gross and Net Advances
respectively.
Then the Graphical Analysis of respective Gross and Net NPAs of SCBs Bank Group wise is
shown in Figure - 3 and Figure - 4 in order to assess the NPA management of SCB.
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Vol.1 Issue 11, November 2012, ISSN 2277 3630
Finally the tabular analysis and graphical analysis of the data pertaining to the recovery of NPAs
by SCBs through various channels is presented in order to restructure the banking system by
reducing the level of NPA
Table-1: Lending composition of Indian banks
Sector
Public sector
2009-10 2010-11
Old Private Sector
2009-10 2010-11
New Private Sector
2009-10 2010-2011
All SCB’s
2009-10 2010-11
A. Priority Sector 30848
(53.8)
i)Agriculture 8,330
(14.5)
Ii)Small scale industries 11,537
(20.1)
iii)Others 10,981
(19.2)
B. Public Sector 524
(0.9)
C .Non-Priority Sector 26,453
(46.2)
Total (A+B+C) 57,301
(100)
41245
(58.1)
14487
(20.4)
14.340
(20.2)
12,417
(17.5)
278
(0.4)
29,802
(41.9)
71,047
(100)
1613
(44.7)
269
(7.4)
475
(13.2)
869
(24.1)
-
-
1,999
(55.3)
3,612
(100)
1599
(43.3)
417
(11.3)
551
(14.9)
631
(17.1)
-
-
2,095
(56.7)
3,694
(100)
3179
(23.1)
1,754
(12.7)
664
(4.8)
760
(5.5)
-
-
10,594
(76.9)
13,773
(100)
3224
(22.6)
1,755
(12.3)
746
(5.2)
722
(5.1)
-
-
11,053
(77.4)
14.277
(100)
Amount in crores
35640
(47.7)
46068
(51.8)
10,353 16,660
(13.9) (18.7)
12,676 15,638
(17.0) (17.6)
12,611 13,370
(16.9) (15.5)
524 431
(0.7) (0.5)
39,045 42,950
(52.3) (48.2)
74,685 89,017
(100) (100)
Fig-1: Graphical Composition of Scheduled Commercial Bank in 2010
SCB's(2010)
priority sector(2010)
public sector(2010)
Non Priority sector(2010)
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International Journal of Social Science & Interdisciplinary Research
Vol.1 Issue 11, November 2012, ISSN 2277 3630
Fig-2: Graphical Composition of Scheduled Commercial Bank
SCB's(2011)
Priority sector(2011)
Public Sector(2011)
Non Priority Sector(2011)
Table-2: Gross and Net NPAs of SCBs- Bank Group Wise
Bank Group Year Gross NPAs Net NPAs
All SCBs
2005
2006
2007
2008
2009
2010
2011
% to Gross Advances % to Net Advances
5.2
1.9
3.3
1.2
2.5
1.0
2.3
1.0
2.25
1.05
2.39
1.12
2.25
0.97
PSB
2005
2006
2007
2008
2009
2010
2011
5.5
3.6
2.7
2.2
1.97
2.19
2.23
2.0
1.3
1.1
1.0
0.94
1.09
1.09
Old Private Sector Banks
2005
2006
2007
2008
2009
2010
2011
6.0
4.4
3.1
2.3
2.36
2.32
1.97
2.7
1.7
1.0
0.7
0.90
0.78
0.53
New Private Sector Banks
2005
2006
2007
2008
2009
2010
2011
3.6
1.7
1.9
2.5
3.05
2.87
2.33
1.9
0.8
1.0
1.2
1.40
1.08
0.56
Foreign Banks in India
2005
2006
2007
2008
2009
2010
2011
2.8
1.9
1.8
1.8
3.80
4.26
2.54
0.8
0.8
0.7
0.8
1.81
1.82
0.67
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Fig-3: Gross NPA as a % to Gross Advances
Fig-4: Net NPA as a % to Net Advances
3
2.5
2
1.5
2005
2006
2007
1
2008
0.5
0
All S C B s P S B O ld P rivate
S ector B anks
New P rivate
S ector B anks
F oreign
B anks in
India
2009
2010
2011
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% of previous years G ros s
NP A
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International Journal of Social Science & Interdisciplinary Research
Vol.1 Issue 11, November 2012, ISSN 2277 3630
Table-3: Amount recovered by SCBs through various channels
(Amount in Rs crores)
Recovery
Channel
2009-10 2010-11
No of
cases
referred
Amount
involved
Amount
recovered
Col(4)
as a %
of
Col(3)
No of
cases
referred
Amount
involved
Amount
recovered
(1) (2) (3) (4) (5) (6) (7) (8) (9)
Col(8)
as a %
of
Col(7)
i) Lok Adalats
ii) DRTs
iii)SARFAESI
778833
6019
78366
7235
9797
14249
112
3133
4269
1.55
32.00
30.00
616018
12872
118642
5254
14092
30604
151
3930
11561
2.87
27.89
37.78
Total recovery
channel
863218
31281
7514
24.02%
747532
49950
15642
31.31%
Fig-5: Recovery rate of NPA
NP A rec overed as a % of previous
years G ros s NP A
70
65
60
55
50
NP A recovered as a %
of previous years G ross
NP A
2008 2009 2010 2011
55.6 66.1 56.5 56.8
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International Journal of Social Science & Interdisciplinary Research
Vol.1 Issue 11, November 2012, ISSN 2277 3630
ANALYSIS AND FINDINGS
Table - 1 indicates that the share of NPAs in the priority sector to total NPAs of Public sector
banks increased marginally to 58.1 percent in 2011 from 53.8 percent compared to that of 2010.
However the share of NPAs of other sector and non-priority sector in respect of PSBs declined in
2011 i.e. share of NPA of other sectors and non-priority sector in 2011 is declined to 17.5% and
41.9% respectively. In case of NPAs of old and new private sector banks the rise and fall
pertaining to the priority sector, public sector and non-priority sector is not a continuous
phenomenon. As for NPAs of public sector undertakings are concerned, on an aggregate it is
found to be decreased from 0.7 percent in 2010 to 0.5 % in 2011. Similarly NPAs of the priority
sector is found to be decreased from 52.3% to 48.2%.
Graphically it is found from fig -1 and fig - 2, i.e. by studying two pie charts in 2010 and 2011, it
is clearly evident that the NPA in 2010 has considerably decreased in 2011 mainly for the public
sector and non-priority sector while the priority sector‟s NPA level has considerably increased.
Table - 2 reveals that there is a significant improvement in NPAs recovery by studying all bank
groups. It is observed that there is a sharp fall in Gross NPAs percent to Gross Advances is 5.2%
in 2005 and it got decreased to 2.25 % in 2011 in case of SCBs. Similarly Net NPAs percent to
Net Advances was 1.9 in 2005 and reduced to 0.97%.
Graphically by studying fig 3 and fig 4, a sharp decrease in NPA level is observed not only in
case of SCBs but also in case of PSBs, old private sector banks and foreign banks in India.
However, still the decline rate in Gross NPAs is found to be sharper in the old private sector,
public sector bank and in all the scheduled commercial bank. While in case of Net NPA, the
decline rate is much more intense in the old private sector banks, new private sector, public
sector banks and in all the scheduled commercial bank.
Table No - 3 presents the data pertaining to the recovery of NPAs by SCBs through various
channels like Lok Adalats, DRTs and SARFAESI act. All total recovery in 2011 is 31.31%
which is higher than recovery rate i.e. 24.02% in 2010. Most of the NPA recovered in 2010
through Debt-Recovery Tribunal (DRT), while that of 2011 is recovered through “The
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) ordinance 2002”
Figure-5 represents that most of the NPA recovered as a percentage of Gross NPA is in the year
2009. Relative to the year 2008 and 2010 significant NPA is recovered in the year 2011 as a
percentage of previous years Gross NPA which is 56.8%.
CONCLUSIONS
From the study it is quite evident that the NPAs have a negative influence on the achievement of
capital adequacy level, funds mobilization and deployment policy, banking system credibility,
productivity and overall economy. On one hand, the Public Sector Banks which are the said to be
a focal point of the Indian Banking system are in trouble with excessive governmental equity,
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Vol.1 Issue 11, November 2012, ISSN 2277 3630
excessive NPAs and excessive manpower, while on the other hand the private sector banks are
merging themselves through adoption of most up-to-date expertise and technological systems.
Therefore considerable efforts are required at RBI, Ministry of Finance and all the banks level to
control the menace of NPAs. The public sector banks should not be loaded with the
doppelganger objectives of social welfare and profitability which seems to be mutually
incongruent. While gross NPA reflects the quality of the loans made by banks, net NPA shows
the actual burden of banks. The banks have to take a pivotal role to reduce NPAs in a time bound
strategic approach. There has been an incessant decrease in the time period to declare a loan as
non-performing. The continuous decrease in the time period is actually done to reduce gap
between the International banking norms and Indian banking norms. This move will undoubtedly
help to reduce the NPA level which in turn improves the asset quality of the banks. This scenario
will crave for a strong political will. When backed by the strong political and financial
consciousness, Indian Banks will certainly able to find a satisfactory solution to the increasing
problem of mounted NPAs.
RECOMMENDATIONS
Banks should find out the original reasons/purposes of the loan required by the borrower.
Proper identification of the guarantor should be checked by the bank including scrutiny of
his/her wealth.
Framing reasonably well documented loan policy and rules.
Sound credit appraisal on well-settled banking norms with emphasis on reduction in Gross
NPAs rather than Net NPAs
Position of overdue accounts is reviewed on a weekly basis to arrest slippage of fresh account
to NPA.
Half yearly balance confirmation certificates should be obtained from the borrowers.
A committee is constituted at Head Office, to review irregular accounts.
Based on the recent trends, banks should emphasize more on priority sector for reducing the
quantum of NPAs.
Banks should ensure credibility of the borrower.
Appropriate SWOT analysis should be done before disbursement of the advance.
Banks should ensure that there is no diversion of funds disbursed to the borrower.
Bank officials should frequently visit the unit and should assess the physical conditions of the
assets, receivables and stocks therein.
While advancing loans, the three principles of bank lending viz., Principle of Safety, Principle
of Liquidity and principle of Profitability must be adhered to.
Banks should get the Non Encumbrance and Valuation of the primary and collateral securities
done.
Banks should critically examine and analyze the reasons behind time overrun.
The banks should ensure that latest technology is being used by the borrower, to avoid
obsolescence.
The banks should ensure that the assets are fully insured.
Recovery competition system should be extended among the staff members. The recovering
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Vol.1 Issue 11, November 2012, ISSN 2277 3630
highest amount should be felicitated.
Adopting market intelligence for deciding the credibility of the borrowers
Creation of a separate “Recovery Department” with Special Recovery Officer
There surely is a need to distinguish between willful and non willful defaulters. In case of the
latter category of defaulters, the law should not be as harsh as in case of former category.
The recovery process is very slow; as such the Government needs to update the process which
is fast and effective.
Bank officers shouldn‟t forget the ethics of doing job.
Last but not the least, the act(s) should be judiciously and selectively applied so that NPAs
should be converted into performing assets.
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[5] Ms. Kanika Goyal, 2010. Empirical Study of Non Performing Assets Management of Indian
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[6] Narayanan V. (2000) NPA Reduction- The New „Mantra of Slippage Management, IBA
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Vol.1 Issue 11, November 2012, ISSN 2277 3630
[11] Shalu rani(2011), “ a study on NPAs with Special reference to SCBs of India,RMS journal
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