SHIVAJI UNIVERSITY, KOLHAPUR. DOCTOR OF PHILOSOPHY IN COMMERCE

Transcription

1 A CRITICAL STUDY OF NON PERFORMING ASSETS OF COMMERCIAL BANKS IN MAHARASHTRA AN INTERSECTORAL COMPARISON A SYNOPSIS OF THESIS SUBMITTED TO SHIVAJI UNIVERSITY, KOLHAPUR. FOR THE DEGREE OF DOCTOR OF PHILOSOPHY IN COMMERCE UNDER THE FACULTY OF COMMERCE BY MR.. GAJANAN A. BHAKARE M.Com., M.Phil, B.Ed.,G. D. C.& A UNDER THE GUIDANCE DR.. V. M. CHAVAN M.Com., M.Phil, Ph.D., FDPM (IIMA) DIRECTOR, BHARATI VIDYAPEETH DEEMED UNIVERSITY INSTITUTE OF MANAGEMENT, KOLHAPUR MAY, 2010

2 1. INTRODUCTION After the Nationalization of banking sector, the Indian banking and financial system has made commendable progress in extending in geographical spread and financial reach. The banking industry in India is also undergoing rapid changes with the introduction of financial sector reforms and follow-up actions by Reserve Bank of India based on the Narasimham Committee recommendations. However before 1990 the Indian banking business was on the way to dismal performance. Most of the nationalized, private and co-operative sector banks outwardly were sharing profits, but in reality they were fictitious. As a result the basic elements of the banking system were getting shattered. M. Narasimham committee was to examine all aspects relating to the structure, organization, functions and procedures of the Indian financial system. Narasimham Committee gave preference to the prudential norms of income reconstruction, assets classification and provisioning for the advance portfolio of the banks and recognition of Non -Performing Assets and gradually strengthening the financial position of banks. 2. STATEMENT OF THE PROBLEM In a fast changing banking environment of today the very survival of a banking organization depends on level of the income generated through optimum use of assets after paying the cost of funds for acquiring them and other administrative costs involved therein. Once the assets cease to contribute the income, they are termed as Non Performing Assets, which not only have cost of funds involved but also require to be operated as per prudential norms. One of the major problems being faced by banks and financial institutions in India is that of bad debts termed as Non Performing Assets (NPA). There are many reasons for the sorry state of affairs and major among 2

3 them are 1) Political interference, 2) Poor enforcement, 3) Archaic laws and procedures,4) Corruptions at various levels and competition in various banking institutions. 5) Flow of Funds etc. After considering the importance of such a strategic affairs in Indian banking industry it is felt necessary to carry out a study entitled A Critical Study of Non Performing Assets of Commercial Banks in Maharashtra An Intersectoral Comparison. 3. OBJECTIVES OF THE STUDY The study basically aims at establishing a linkage between internal efforts of bank and financial institution and growth of NPAs. In other words, growth in NPAs can be checked considerably if bank and financial institutions have suitable internal arrangements. The profitability of the financial institution largely depends upon the level of income generated through optimum use of the assets after paying the cost of funds for acquiring them and other administrative cost involved therein. Once the assets cease contributing to the income, they are termed as Non Performing Assets. The study is related to internal systems, procedures and practices, for monitoring of NPAs and recovery from the same. The research work has undertaken intersectoral comparison of NPA of selected banks with the specific objectives, they are as follows: 1) To examine the nature and the problem of the NPA position in selected Banks. 2) To study recognized income of the selected banks. 3) To study the classification of assets into different categories of the selected banks. 4) To examine the advances secured against certain instruments. 3

4 5) To make an intersectoral comparison of NPA and other variables in the selected banks. 6) To examine the steps taken for recovery in respect of NPA accounts. 7) To make specific recommendations on the basis of research work carried out. 4. HYPOTHESES OF THE STUDY 1) The loan sanction procedure prevailing in the bank is prominent causing factor for increasing NPA in cooperative and private commercial banks. 2) Increasing NPA has affected on survival of the bank. 3) Asset classification can be modified for minimizing NPA provisions. 4) The management of NPA is done more effectively by private sector banks as compared to cooperative sector banks. 5. RESEARCH METHODOLOGY ADOPTED Present thesis is outcome of research conducted by researcher adopting survey method. A survey research is usually based on the sample survey or census survey. The present work uses the sample survey method, details of which are given below- Universe For the sample survey universe is 27 private sector scheduled commercial banks and 57 urban co-operative banks presently functioning in Maharashtra and three banks from each of the sectors situated in Pune, Satara and Kolhapur Districts have been selected on the basis of convenience for study in hand. 4

5 Sampling of banks The number of total scheduled commercial banks in India is 57, in which Public Sector Banks are 27 and Private Sector Banks are 30. On the other hand there are 73 co-operative scheduled banks in India out of which 30 banks are in Maharashtra. The study covers 3 banks from each of the sectors on convenience sampling basis aggregating 11.11% private sector banks and 10% cooperative sector banks functioning in Maharashtra. Sample Size Banks India % Maharashtra % Sample % Private Sector Co-operative Sector Total The private sector banks selected are: 1) The United Western Bank Ltd., Satara 2) The Ratnakar Bank Ltd., Kolhapur 3) The Ganesh Bank of Kurundwad Ltd., Kolhapur. The cooperative sector banks selected for the purpose of study are: 1) The Karad Urban Cooperative Bank Ltd., Karad 2) The Ichalkaranji Janata Sahakari Bank Ltd. Ichalkaranji 3) Janata Sahakari Bank Ltd., Pune. While deciding selection of banks, the researcher has also seen that those banks should be large in size and growth, and establishment. All the banks selected have more than 45 years of length of operations and all have received Audit Class A for their banking operations. As the head offices of the banks are situated in Western Maharashtra data collection was convenient for the researcher. 5

6 6) DATA COLLECTION For the study in hand primary and secondary data have been utilized: I) Primary Data: The primary data is collected through questionnaire administered to CEOs, AGMs, Branch Managers and NPA borrowers of the banks covered under the study. Break-up of Responses of Sampled Employees Name of banks Private Sector No of employees Interviewed CEO AGM Branch Manager Borrowers And others The Ratnakar Bank Ltd The United Western Bank Ltd The Ganesh Bank of Kurundwad Ltd Co-operative Sector The Ichalkaranji Janata Sahakari Bank ltd The Karad Urban co- op Bank Ltd Janata Shakari Bank Ltd Total In the same manner some opinions of the respondents mentioned earlier were collected through personal discussions and their comments on views of the researcher. Some amount of data was also collected from inspection of record. II) Secondary Data: Since the study is related to financial problem concerning banks it was obvious to rely on the secondary data in the published form which is extensively used for the purpose of the study in hand. Annual Reports from 1998 to 2007, bank publications, circulars, RBI notifications as to NPA Accounts, RBI Publications and guidelines on NPA, NPA Reports, classification of assets by RBI etc. This process is further supplemented by 6

7 extensive library research reviewing news papers, periodicals, magazines, articles on NPA etc. From the analysis of annual reports standard assets, sub standard assets, doubtful assets, loss assets, net advances and net NPA amounts of the sample banks covered under study for the period 1998 to 2007 have been calculated and analyzed and interpreted for the purpose of study. 7) STATISTICAL TOOLS UTILIZED: Entire data related to NPA is financial in nature which required careful scrutiny for which relevant statistical tools have been utilized as per the need of the study- 1) Percentages and 2) Comparative statements 8) SCOPE AND LIMITATIONS OF THE STUDY: The scope of the study is restricted to the selected banks and the area specified in methodology. The geographical limit of the study confined to three districts of Western Maharashtra i.e. Pune, Satara and Kolhapur. Unfortunately some banks were merged into some other banks which has caused a major hurdle in data collection and has hampered the research work. As researcher is a junior level bank employee; time remained a major constraint at all phases of the study. Time limit was confined to 31 st March 1998 to 31 st March ) CHAPTER SCHEME The entire research work is divided in Seven Chapter Chapter I Research Methodology: Introduction, Statement of the Problem, Objectives of the study, Hypotheses of the Study, Methodology, Data Collection, Statistical Tools Utilized, Scope and Limitations of the study and detailed Chapter Scheme. 7

8 Chapter II Conceptual Background and Review of Literature: Conceptual Background, Meaning and Definitions of NPA, RBI Guidelines for NPA Norms, Suggestion of various guidelines of RBI, Review of Literature, Conclusion. Chapter III Profile of the Sample Banks: Introduction, The United Western Bank Ltd., Satara, The Ratnakar Bank Ltd., Kolhapur, The Ganesh Bank of Kurundwad Ltd., Kolhapur, The Karad Urban Cooperative Bank Ltd., Karad, The Ichalkaranji Janata Sahakari Bank Ltd. Ichalkaranji, The Janata Sahakari Bank Ltd., Pune, Consolidated Performance of Private Sector banks, Consolidated Performance of Cooperative Sector banks, Conclusion. Chapter IV Analysis of Recovery of Non Performing Assets: Introduction, Analysis of Legal Mechanism, Analysis of Legal Expenses Incurred for Recovery, Factors responsible for NPAs of Selected Banks, Classification of Assets of selected Banks, NPA Write off In respect of selected banks, Financial Position of selected Banks, Conclusion. Chapter V Analysis of NPA in Selected Sample of Banks: Introduction Gross NPAs to Gross Advances Ratio, Net NPA to Net Advance, Gross NPAs and Net NPAs to Total Assets, Conclusion. Chapter VI Inter Sectoral Comparison of Selected Banks: Introduction, Sectoral Comparison of Classification of Assets, Sectoral Comparison of Recovery Mechanism, Sectoral comparison of NPA provision on profit, Conclusion. Chapter VII Observations, Recommendations and Conclusion of the Study: Observations of the study, Recommendations made by the researcher, Suggestions offered and Conclusion. 8

9 10) OBSERVATIONS OF THE STUDY Based on the data analysis of selected banks from both the sectors the researcher made the following observations- 1) According to the feedback from most senior Bank officers diverted use of funds and willful Defaults are the major factors contributing to NPA s in the banks from both the sectors. 2) The assets classification of NPAs showed that the net NPA in respect of WB ranges between 4.83% and % of net advances and on account of this position the bank was merged into IDBI bank. 3) Relatively private sector possesses more standard assets as compared to Co-operative sector. In Co-operative sector lowest standard assets are observed in Janata Sahakari Bank Ltd. Pune. 4) The provisioning for the standard assets has been practiced by both the sector banks. The Private sector banks implemented provisioning from1998 whereas Co-operative sector initiated the same from ) The two private sector banks i.e. GB and UWB merged in to Federal Bank and IDBI Bank respectively due to high degree of NPA and continuous losses incurred for successive three years besides failure to maintain a capital base of Rs. 300 Corers as prescribed by RBI. 6) It is observed that NPA s have affected on profitability of both the sector banks which is causal factor for vanishing them from the market. 7) As per RBI circular DBS- CO PPBC 9/11/ Dated 21 st Dec declared that action will be imposed upon the banks which will fail to reduce NPA s upto 10% but not above 15%. In C- 9

10 operative sector Janata Sahakari Bank Pune found to be weak bank and it was merged into Ratnagiri Co-operative Bank. In case of Private sector banks GB and UWB were loss incurring banks having less than Rs. 300 corers capital base and were merged into Federal Bank and IDBI respectively. 8) The performance of Co-operative banks in regards to gross NPA to gross advances is not satisfactory as compared to private sector banks covered under study. 9) High net NPA ratio is indicator of high risk. The ideal ratio of Net NPA to Net Advances should not cross 3%. The intersectoral comparison observed that both the sectors do not have ideal net NPA ratio. 10) The Private sector banks selected for the study performed better than Co-operative banks with a ratio of 9.04% Net NPA to Net Advances. It is % in Co-operative sector banks indicated weak performance. 11) The percentage of Gross NPA to total asset is 6% in Private Sector banks covered under study which is 26.13% in case of Co-operative sector banks. 12) According to RBI guidelines net NPA should not be in excess of 3% of net advances. In case of the banks from both the sectors it is observed that NPA s were higher than 3%. 13) The minimum recovery is observed on loans advanced to the friends and relatives of Directors and Officers of the banks which could have been recovered effectively through legal mechanism but unfortunately this could not happen. 14) The recovery management found to be effective in Private sector banks in comparison with Cooperative sector banks. 10

11 15) Both the sector banks have improved their recovery management from 2001 and credit of this change goes to the second reforms of Narshimham Committee Report. 16) In comparison with Private sector the cost of legal expenses of Cooperative sector is lower. Constantly without any exception; cost of legal expenses of Co-operative sector ranged between 0.1% to 0.32% indicating practice of not opting for legal mechanism. The cost incurred by private sector is much higher and results are much better. 11) RECOMMENDATIONS OF THE STUDY On the basis of the study conducted researcher has offered a set of recommendations as under- A) Recommendations for Head Offices of the Selected Banks 1) The loan application form is the basic document from which creditability and credit worth of the borrower could be judged, this document be developed with due care, get filled in properly; communicating all the rules and regulations, penalties in case of non payments to the borrowers. 2) An account does not become an NPA overnight. The account gives enough number of signals of the impending problems and banker should be alert to catch these signals for quick analysis, react on the same promptly and take corrective actions. 3) While making distinction between Standard and Sub-Standard categories of assets, potential NPAs be assessed and recovery attempts be made carefully. 11

12 4) If the fresh NPA is increasing it is indication of the failure of NPA management of the bank therefore fresh NPA level be kept at minimum level. 5) The loans advanced to the friends and relatives of Directors and officers can be effectively recovered through OTS, Compromise and write-off mechanism. This task can effectively be done involving the recommending authorities of the bank. 6) One Time Settlement, compromise and write off powers should be assigned to the branch manager up to a minimum limit of amount this will help to take immediate actions and resultantly NPA level will be minimum. 7) While sanctioning a loan Quality assets of the borrower be assessed carefully so that at the time of recovery if circumstances compel it can be liquidated and advanced loan can be recovered. If required the present loan sanctioning policy be modified to avoid losses affecting profitability of the bank. This procedure be followed strictly in cooperative sector as private sector is already strict as compared to cooperative. 8) To achieve better recovery in both the sectors separate legal departments be developed and constant follow-up of cases be made by filling suits, appointing of good advocates and time to time reporting to management. 9) It is recommended for both the sectors the rescheduling of NPA accounts should be arranged through installments of principal along with interest. This will result in increase in standard accounts and decrease in NPA accounts. 10) The banks under study should adopt new recovery policy and different schemes for example interest rebate, cut of interest with specific 12

13 period, loan mela, resettlement package etc. and they should also resort to strong- arm technique for loan recovery. This will minimize NPAs. 11) Recovery of NPAs is delicate matter. Hence need to have a team of duly trained employees with adequate experience and equipped with updated knowledge in the field of banking laws and practices, means SARFACI, Suit filing, DRT Compromise etc. Even clerical staff involved in this work needs proper orientation of the task. 12) It is recommended that banks in both the sectors should avoid to go for private recovery agents for collecting dues. 13) In order to bring down the level of overall NPA present capital adequacy norms should be reduced. 14) The bank should develop continuous relationship with the borrowers and prefer to give silent listening to the problems and guide them in their hard time to get proper cooperation in recovery. B) Recommendations to Branch Offices of Selected Banks: 1) In case of cash credit monthly stock statement of the borrower should be collected by the banks in all sectors and in case of term loans personal visit to the site be paid to verify physical presence of the assets. This should be done by the branch office of every bank. 2) In order to identify potential NPAs continuous scrutiny of the accounts be undertaken and weak accounts be attended in time to avoid further complications in the recovery. 3) The realistic picture of the NPA be communicated to the head office in time. It is a practice in both the sectors to hesitate to give realistic view of NPA in the branches. 13

14 4) In case of fresh NPA attempt should be made to convert the account in standard account by extending additional credit facility, and rescheduling. This will prevent the account to become NPA. 5) The borrowers be contacted by the branch offices in both the sectors continuously to maintain minimum level of new NPA account and old NPA account by applying their convincing skills. 6) The borrowers who are not ready for compromise as per the formula offered by bank be taken to the court of law for legal proceedings. 7) The cases already pending in the court be given necessary follow up under able legal guidance. 8) The staff members of the banks be offered suitable incentives for converting NPA into standard accounts and recovery made. 9) RBI recommends that even one account out of more accounts is under NPA in that case all accounts of same customers be treated as NPA even though they are standard accounts. This norm be applied strictly in all branches. This will dilute the lethargy in repayment of the loan. 10) The branch office should maintain the master list of NPA accounts with all relevant information. 11) The banks should go for branch wise periodical recovery camps and best performing banks be awarded with cash and non cash prizes. 12) The diverted use of funds is one of the major causes observed in the study can be avoided by transferring the amount advanced directly to the account of vendor-suppliers of the assets for which loans are granted. 14

15 13) In both the sectors the problem of big defaulters is serious therefore legal action against such borrower be taken immediately under able guidance without loosing time. C) Suggestive Model for RBI: 1) Banks have been taking legal and un legal steps for making the provisions as per the directives issued by the RBI time to time in this context the researcher has recommended that the banks should adopt the following policy to solve the NPA problem at bank level by making provisions on the principal outstanding - a) No provision requirement on standard assets. b) Banks have to make the additional provision over one year period under the head sub-standard additional provision with minimum of 20 percent each year. c) Assets classification and provision for non performing advances as under- Assets Classification Standard Assets Sub- standard Assets Outstanding / Irregular Installment Regular installment paid or due for not more than 90days. a) 3 months to 12 month b) 13 months to 36 month I ) 12 months Provision Requirement No provision 10% and.20% depend upon value of security ii) 12 months Loss Assets 36 months treated loss assets has been identified by the bank internal or by the external or by co-operative department or by the amount has not written- off wholly and partly Secured loan 75% unsecured loan 100% Secured loan 25% unsecured loan 100% Secured loan 100% unsecured loan 100% 15

16 It is clear that in the model NPAs total provision period is considered for 30 months instead of 60 months. Here only three step assets classification and provision on the principal outstanding have been suggested. In this way banks can make minimum provision of NPAs and higher level of profit without compromising with financial help of the bank. CONCLUSION Non Performing Assets are universal problem for all banks irrespective of the sector. It is a loss and is inevitable for every business including banking. It originates from lethargy in sanction of loans and failure in a recovery. In the study undertaken it is found the major loss on account of NPA is caused by cooperative sector as compared to private sector where lethargy is a common phenomenon. Though some of the cooperative banks have done better business in past suffered NPAs on account of mergers of few other banks which were financially weak and this affected on the financial position of the strong bank (taking over bank). There are common characteristics which are responsible for NPAs in selected banks due to diverted use of funds advanced, willful defaulters, lack of supervision, political interference, weak legal support, outside pressures, internal and external economic causes, faults in determining quality of bank assets and fraudulent attitude of top management/officers. It is also observed that two banks are merged in other banks due to such practices. Thus NPA is a threat to the existence of bank. Default on account of big borrowers is a problem in recovery for private sector but such borrowers are less in number in the sample cooperative banks. The quality of standard assets is important factor in determining NPA. In private sector this quality is purposefully maintained. This process starts from sanctioning of loans against proper securities, vigil on use of funds advanced, constant follow up on repayments delayed, visit of bank officers, efficient use of legal mechanism if required, which strengthen recovery process and ultimately resulted in lower level of NPA. In cooperative sector it is observed that a liberal view in the process of sanctioning loan, weak follow up and very limited use of legal mechanism registered very low results in the process of recovery and 16

17 NPAs found at higher level indicating low profitability as compared to private sector. This indicates that the cooperative sector should adopt professional banking management and sacrifice liberal banking resulting into problems like NPA. In cooperative sector controlling is exercised by NABARD, Cooperative Department of the State Government and RBI. To large extent this causes overlapping directives. In private sector only RBI exercises the control and issues uniform directives. As the directives are coming from only one source it is possible for private sector banks to act upon. This is reflected in their performances and in sector wise comparison of the banks under study. The NPA performances of private sector banks are better than cooperative sector banks. The recovery management, legal mechanism found to be efficient in private sector banks as compared to cooperative sector banks. Mr. Gajanan A. Bhakare Research Student Dr. V. M. Chavan Research Guide 17