COMPARATIVE STUDY OF NON-PERFORMING ASSETS WITH RESPECT TO PUBLIC AND PRIVATE SECTOR INDIAN BANKS

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1 COMPARATIVE STUDY OF NON-PERFORMING ASSETS WITH RESPECT TO PUBLIC AND PRIVATE SECTOR INDIAN BANKS Dr Resham Chopra 1, Sudeshna Chatterjee 2 Assistant Professor, Deptt of Economics, DEI, Agra (India) M Phil, Deptt of Economics, DEI, Agra (India) I. INTRODUCTION The banking industry in India has been witnessing a series of revolutionary changes and noteworthy transformation since 1991 after introduction of LPG policy and new economic and financial sector reforms. On the eve of economic reforms in 1991, it was recognized that the banks were burdened with huge amount of Non- Performing assets (NPA's), which were not revealed in the balance sheets. The banks had gone very weak. Balance sheets were hiding more than what they revealed. After the first nationalization of Banks in 1969, certain tendencies emerged in the banks that lead to the emergence of NPAs. Asset quality was not prime concern in Indian banking sector till 1991, but was mainly focused on performance objectives such as opening wide networks/branches, development of rural areas, priority sector lending, higher employment generation, etc. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., but in recent times the banks have become very cautious in extending loans. The reason being mounting nonperforming assets (NPAs) and nowadays these are one of the major concerns for banks in India. Ever mounting Non- Performing Assets, Risk management and Basel II norms, Consolidation, mergers and acquisitions, overseas expansion, technology changes, government reforms, skilled manpower and consumer protection etc. are the major challenges and problems being faced by the Indian banking Industry during last decades due to competitive environment and adoption to the international best practices The private and public sector banks are now facing acute competition from the foreign banks who are trying to tap the Indian domestic market after adoption of economic reforms. The concept of NPAs emerged as a contemporary issue when Reserve Bank of India (RBI) introduced the prudential norms on the recommendations of the Narsimha Committee in the year The prudential norms as laid down by RBI states that An asset is considered as Non Performing if interest or instalment of principal due remains unpaid for more than 90 days. In simple words as long as the expected income is realized from the assets, it is treated as performing asset but when it fails to generate income or deliver value on due date, it is treated as non-performing asset. With a view to moving towards International best practices and to 451 P a g e

2 ensure greater transparency, the 90 Days overdue norm for identification NPAs had been adopted from the Year ending 31 March, The NPAs are considered as an important parameter to judge the performance and financial health of banks. The growing NPAs have been a cause of concern for the entire banking industry. As a result of the inappropriate credit appraisal and inefficient recovery mechanism, several banks have been reeling under high level of bad debts. The ever increasing NPAs of Indian Banking industry arises due to faulty lending policy and making compulsion lending to priority sector by banks. Faulty credit management like defective credit in recovery mechanism, lack of professionalism in workforce, improper selection of Borrowers/activities, unscientific repayment schedule and misutilisation of loans by the users cause the emergence of the NPAs. Untimely communication to the borrowers regarding their due date and lack of sponge legal mechanism, weak credit appraisal system, industrial problems and recession in market etc. also causes NPAs to rise in the banking industry. In spite of the overall growth in business of public and private sector banks, particularly in advancing loan in much liberal manner, the number of defaulters is also increasing from time to time. So it seems highly important to have a study on the management of NPAs in banking sector. Thus, a need arise to study the concept of NPA and its trend over a period of years for Public, private sector Banks in India. II. REVIEW OF LITERATURE The review of literature is utmost important in any research as it offers an explanation for the necessity of the current research initiatives. The asset quality and NPAs is debated in many academic literatures across the world. This review of literature offers an in depth view on the treatment of NPA in Indian banking sector over the years. So the studies available on NPA will help the researcher to evaluate the incidence of NPA and its management in various economies. Shalini (2013) suggest that Credit management includes planning, organizing, controlling, directing and coordinating the credit sanctioning policies in order to decrease the NPAs. While Mohnail and Deshmukh (2013) have suggested that past reform era changed the whole structure of banking industry in India. The emerging competition has resulted in new challenges for the Indian banks. Hence, parameters for evaluating the performance of banks have also changed. This paper provides an empirical approach to the analysis of profitability indicators with a focal point on NPAs of public and private sector banks. On the other hand Kaur, A. (2012) studied the income and expenditure pattern, profitability performance and NPAs position of public sector commercial banks in India for a period of to respectively. Growth rate, compound growth rate, coefficient correlation, ratio analysis and median test have been used for the analysis. The author concluded that the PSCBs have shown downward trends of NPAs for the period under study. They succeed in recovery of loans. Rajamohan (2012) described that Indian banking industry plays a pivotal role in the socio economic development of a country. During the past few years the banks gain sufficient strength to pose good performance which is reflected in the high growth of low cost deposits, a well-diversified credit portfolio. The corporate, retail and small and medium enterprises improved margins and spread good other income and better quantity of asset through a consistent reduction in NPAs. Hosmani, P., and Hudagi J. (2011) found that a slight improvement in asset quality reflected by downsize in NPA%. NPA is an improvement scale for assessing financial performance of Indian Banks. The mounting value of Non-Performing Assets will adversely affect to financial position in terms of liquidity, profitability and economies of scale in operation. Bank has to take timely necessary steps against degradation of good performing assets. 452 P a g e

3 Usha Arora, Bhavna Vashisht and Monica Bansal (2009) analyzed and compared the performance (in terms of loan disbursement and NPAs) of credit schemes of selected banks for the five years period. They found a positive relationship between total loan disbursement and total NPA outstanding of the selected banks. III. RESEARCH METHODOLOGY This study is exploratory in nature where the facts are already established in the market and is reaffirmed to the current scenario. 3.1 Need of The Study It is known that the problem of NPA has been a major issue for the Indian banking industry and the economy as a whole. So while observing several studies regarding NPA, relevant questions which strike the mind were what is the level of NPA in Public and Private sector banks? What are the reasons for the assets becoming Non-Performing Assets and what is its impact on the performance of the bank, govt. and society. Hence there arises a need to address the aforesaid questions. 3.2 Objectives of The Study To understand NPA regulation devised by RBI To study about the causes of increasing NPA in public and private sector banks. To analyse the trend and impact of NPA on public and private sector Indian banks 3.3 Data Collection To fulfil the above desired objectives the study is conducted with the help of Primary as well as Secondary data. For primary data the information is collected with the help of structured interviews where the order of questions is decided before hand. The information for secondary data is collected from various sources such as websites, annual reports, research papers, journals and magazines etc. 3.4 Research Design The geographical area covered is Agra city. The total sample size of the study includes 30 experts working in the managerial cadre of selected public and private sector banks; who gave their opinions regarding NPAs. The respondents with experience in credit division are considered for the purpose of data collection. 3.5 Expected Outcome of the Study The analysis made as a part of this study may contribute in a way analysing the strength and weaknesses of the banking sector as a whole with regard to non performing assets of banks. Various banks from different categories together may make efforts to overcome limitations for lending money to different sectors like agriculture, SSI, Priority sector, non- priority sector, public sector and others. 453 P a g e

4 IV. MEANING OF NON-PERFORMING ASSETS An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time. The specified period was reduced in a phased manner as under: Year ending March 31 Specified period 1993 four quarters 1994 three quarters 1995 onwards two quarters 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 improvements 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, Accordingly, as from that date, a Non-performing Asset (NPA) shall be an advance where [1] interest and/or instalment 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 instalment 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 purposes, and [5] Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. 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, from the year ending March 31, Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where; [1] interest and/ or instalment 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, in respect 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, [4] interest and/or instalment 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 purposes, and [5] Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. 454 P a g e

5 4.1.REPORTING OF NON-PERFORMING ASSETS Banks are required to furnish a Report on NPAs as on 31 st March each year after completion of audit. The NPAs would relate to the banks global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the annexure. While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report. 4.2 ASSET CLASSIFICATION A. Categories of Non Performing Assets Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues: a. Sub-standard Assets b. Doubtful Assets c. Loss Assets B. Sub-standard Assets A sub-standard asset was one, which was classified as NPA for a period not exceeding two years. With effect from 31 March 2001, a sub-standard asset is one, which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. C. Doubtful Assets A doubtful asset was one, which remained NPA for a period exceeding two years. With effect from 31 March 2001, an asset is to be classified as doubtful, if it has remained NPA for a period exceeding 18 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable. D. Loss Assets A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. E. Guidelines for classification of assets Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-defined credit weaknesses and the extent of dependence on collateral security for realisation of dues. 455 P a g e

6 Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cutoff point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. 4.3 TYPES OF NON-PERFORMING ASSETS Gross NPA Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA is advance which is considered irrecoverable, for bank has made provisions, and which is still held in banks' books of account Gross NPA reflects the quality of the loans made by Banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs / Gross Advances Net NPA Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the Central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following: Net NPAs = Gross NPAs Provisions / Gross Advances Provisions V.ANALYSIS AND INTERPRETATION The information regarding recent trend of NPA in the Indian Banking sector has been summarised below. The analysis is based on the structured interviews conducted from the bank officials dealing in the loan segment and also formulating policies and dealing with NPAs. Most of the officials believe that the situation of NPA is controllable in case of private sector banks, whereas in case of public sector banks the situation is at alarming rate and need to be controlled and steps should be taken to improve the condition. Important inferences drawn from the study are summarized below: It was observed that the NPA of public sector banks has a declining trend till and post it raised while private sector had fluctuating trend of NPA. The overall declining trend from of NPA was due to the implementation of securitisation Act. 456 P a g e

7 It was found that during 2007, the strong credit growth continued to be underpinned by significant improvement in asset quality. The standard advances of the public sector banks are increasing every year on the contrary of other advances. In case of private sector banks the rise in standard assets over the years compensates the fall in other three types of assets. From 2012 to 2015, non priority sector contributes more towards NPA than priority sector. During 2010 and 2011 priority sector contributed more towards NPA of public sector banks because it had been active in the real estate and housing loans segment but after 2012 the contribution of non priority sector was experienced more. Single window clearance to reduce delays and government spending to address lack of capital might improve the state of priority sector as they are essentially the backbone of the Indian economy. Net NPA as a percentage of Net Advances of private sector banks is fluctuating over the years. The relationship between net profit and net NPA (R) is , which indicates the positive correlation, Here year by year profits of the bank are increasing, In a same manner net NPA also tremendously increasing.. ICICI Bank took some extreme steps to bring down NPA. Most of the respondents believe that the situation of NPA is controllable in case of private sector banks, whereas in case of public sector banks the situation is at alarming rate and needs to be controlled and steps should be taken to improve the condition. The situation of public sector bank is worse as compared to private sector bank, as they adhere to the ruling of governmental policies which make it difficult to cut on NPAs Bank officials are of the view that high level of NPA indicates high risk of profitability. Most of the respondents observed that dissemination of credit information among banks is present and it was found very important to manage credit portfolio efficiently. 35% of the respondent remarked that dissemination of credit information among banks is not effective. Public and private sector banks asset quality and performance of commercial banks were affected moderately by the recessionary pressure of global financial crisis. Majority of the respondents remarked that NPA of banks can be controlled if effective measures are initiated by both the banks. Internal efficiency of credit management need to be improved More staffs in the loan department VI.CAUSES OF NON-PERFORMING ASSETS The major cause for the NPA can be attributed to: Improper selection of borrower s activities Lack of proper follow up by bank Recession in the market Changes in economic conditions 457 P a g e

8 Due to natural calamities and other uncertainties Weak credit appraisal system Industrial problem Inefficiency in management of borrower. VII. FINDINGS OF THE STUDY All the banks are having NON PERFORMING ASSET in their balance sheet. The NPAs are going on increasing of public and private sector banks. The gross NPAs have been continuously increasing for all banks for the specified period. As the business operations of banks are increasing the amount of NPAs have also increased. Public sector banks are facing more issues related to NPAs as compared to private sector banks so this means that Public sector banks are not effective in controlling NPAs as compared to private sector banks. Over the years non priority sector contributes more towards NPA than priority sector. The ratio of gross NPA to gross advances in case of public sector is more as compared to private sector which need to be reduced by adopting necessary measures. The gross bad loans of public sector banks increased to 9.6 per cent as of march The net NPA of banks have also increased to 4.6 % in March 2016, from 2.8% in September Public sector banks net NPA was 6.1 per cent while the ratio of private sector banks was less that is 4.6 per cent. Most of the public sector banks have shown high level of NPA which indicates high risk of profitability as compared to private sector banks Public sector banks, which have close to 70 per cent market share of loans, are more affected than the private sector banks. Economic downturn is seen since 2008 which has been a reason for increasing bad loans. VII. SUGGESTIONS Banks must publish the names of those who are having high NPAs, and in particular those cases where write-off done. Focus on auditing should be done separately for NPAs. It was observed that lending policies of various banks were not proper due to improper financing. Bank should provide detailed information to the customer about their lending policy. RBI must take the restructuring loan classification mechanism. This would enable banks to critically evaluate the implication of the measure. Whatever the banks carry higher NPA, to publish their plan to reduce NPAs along with their annul accounts and periodical monitoring mechanism should play a key role for reducing NPA. Two legal measures can also be adopted to recover NPAs. 458 P a g e

9 Debt Recovery Tribunals (DRTs): Narasimha Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. This is insufficient to solve the problem all over the country (India). Securitisation Act 2002: This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the borrower cannot sell or dispose the assets without the consent of the lender. According to the provisions of the Act, Asset Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10 crores has been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank, SBI, ICICI, Federal Bank and South Indian Bank. VIII. CONCLUSION NPAs are draining the capital of the banks and weakening their financial strength. It is also as much a political and a financial issue. The banks and financial institutions should be more proactive to adopt a pragmatic and structured non- performing assets management policy where prevention of non- performance assets receives priority. Compared to private sector banks, public sector bank is more in the NPA level. Public sector bank must take more care in avoiding any account becoming NPA by taking proper preventive measures in an efficient manner. REFERENCES [1] Gandhi, R., (2016),AssetReconstruction and NPA Management in India. Speech at ReModel in India Assets Reconstruction and NPA Management Summit,organized by Economic Times, Mumbai. [2] Gandhi, R. (2015), Financial Frauds-Prevention: A Question of Knowing Somebody, 2nd National Conference on Financial Frauds Risks and Preventions organized by ASSOCHAM, New Delhi,June 26, 2015 [3] Gandhi, R., 2016), Financial Stability Issues and Concerns: Are We Barking up All Right Trees? Speech at Great Lakes Institute of Management, Chennai. [4] Patel, D. (2014,April). Impact of non- performing assets on profitability of public and private sector banks. Retrieved from [5] Reserve Bank of India, Report on Trend and Progress of banking in India, Various issues, Bombay, India. Reserve Bank of India (2014), Trend and Progress of Banking in India. [6] Mohnial, P., Deshmukh, M.( 2013).A study of NPA on selected Public and Private Sector Banks. International Journal of Science and Research, 2(4). [7] Prasanth.K, Kiran and Mary.J. (2013 ).Effect of NPA on the profitability of the bank,5( 2). [8] Srinivas,K.T. (2013,December). Study of Non-performing Assets of commercial bank in India. International Monthly Refereed Journal of Research In Management & Technology,2 [9] Zahoor Ahmed.( 2013 ). Comparative study of NPA management of nationalised banks, 2(8). [10] Kaur, A. (2012). An empirical study on the performance evaluation of Public Sector Banks in India. International Journal of Marketing, Financial services and Management Research, 1(11), pp P a g e

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