A Comparative Study of NPA Management in Public and Private Sector Banks

Transcription

1 International Conference on Contemporary Management (INCOCOM 12), 19 October A Comparative Study of NPA Management in Public and Private A. Rajangam and K.M.S. Syed Abuthahir Abstract--- Today the Indian banking system has undergone significant transformation following financial sector reforms, adopting international best practices. Several prudential, payment, integrating and provisioning norms have been introduced, and these are pressurizing banks to improve efficiency and trim down NPAs to improve the financial health in the banking system. It is among the best in the world because Indian banks are favorable on growth, asset quality and profitability; RBI and Government have made some notable changes in policies and regulation to strengthen the 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. In this paper, an effort has been made to evaluate the operational performance of the selected PSBs & Private bank in India since 1997, NPAs Trends and issues through secondary data. This paper analyzes how efficiently Public and Private sector banks have been managing NPA. T I. INTRODUCTION HE Indian banking sector has played a commendable role in fuelling and sustaining growth in the economy. The Public have shown very good performance over the private sector banks as far as the financial operations are concerned. The Public have also shown comparatively good result. However, the only problem of the Public these days are the increasing level of the non performing assets. The non performing assets of the Public have been increasing regularly year by year. If we glance on the numbers of non-performing assets we may come to know that in the year 1997 the NPAs were Rs. 43,577 crore and reached to Rs. 74,614crore in 2011in Public sector banks and comparatively in the year 1997 the NPAs were Rs. 2,542 crore and reached to Rs. 18,240crore in 2011 in Private sector banks. The only problem that hampers the possible financial performance of the Public and private are the increasing results of the non performing assets. The non performing assets impact drastically to the working of the banks. The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time banks are required to make provisions for such NPAs from their current profits. NPAs A. Rajangam, Assistant Professor, Department of Commerce, NPR Arts & Science College, Natham. K.M.S. Syed Abuthahir, Head of the Department of Management, NPR Arts & Science College, Natham. have a deleterious effect on the return on assets in several ways 1. They erode current profits through provisioning requirements 2. They result in reduced interest income 3. They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and 4. They limit recycling of funds, set in asset-liability mismatches, etc. The RBI has also tried to develop many schemes and tools to reduce the non performing assets by introducing internal checks and control scheme, relationship managers as stated by RBI who have complete knowledge of the borrowers, credit rating system, and early warning system and so on. The RBI has also tried to improve the securitization Act and SRFAESI Act and other acts related to the pattern of the borrowings. Though RBI has taken number of measures to reduce the level of the non performing assets the results is not up to the expectations. To improve NPAs each bank should be motivated to introduce their own precautionary steps. Before lending the banks must evaluate the feasible financial and operational prospective results of the borrowing companies. They must evaluate the business of borrowing companies by keeping in considerations the overall impacts of all the factors that influence the business. While gross NPAs reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of banks, weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements. A. Reasons for an Asset Turning NPA Various Studies have been conducted to analyze the reasons for NPA, whatever may be complete elimination of

2 International Conference on Contemporary Management (INCOCOM 12), 19 October NPA is impossible. The reason were generally classified into two 1. Overhand Component due to environmental reasons, business cycle etc 2. Incremental Component due to internal bank management, credit policy, term of credit etc. There are various reasons either jointly or singly responsible for an asset becoming NPA can be classified as follows:- B. Reasons from the Economic Side 1. Political: Mindset regarding paradigm, proactive, fiscal responsible, major portion of NPA arise out of lending to priority sector at the dictates of politicians and bureaucrats. 2. Economic: Growth, distribution, efficient allocation of resource. 3. Social: Acceptability, mobility, education. 4. Technological: Lack of adoption of IT makes data processing difficult. 5. Legal: loan contracts are not enforceable naturally be a tendency to default. 6. Environmental: Liberalization and globalization. C. Reasons from the Industry Side 1. Global competition. 2. Cyclical downswing. 3. Sunset industry industry growing slowly or declining. 4. Frequent changes in regulatory norms. D. Reasons from the Borrower Side 1. Misconceived project. 2. Poor governance. 3. Product failure. 4. Bungling management. 5. Diversion of fund. 6. Dormant capital structure. 7. Regulator changes. E. Reasons from the Banking Side 1. Parameter set for functioning was deficient. 2. Lack of freedom to choose product and pricing. 3. Unexposed to international marketing methods and products. 4. Wrong lending decision. 5. Lack of Resource and poor training. 6. Lack of system and procedure. 7. Lack of ability to handle assets and liability. 8. Lack of mechanism of credit information dissemination. 9. Lack of an effective judicial system for recovery from defaulters. 10. Collateral based lending to idle assets. 11. Fixing of price and quantum of loans. 12. Lack of effective IT system and MIS. F. Reasons from the Loan Structuring Side 1. High debt equity ratio. 2. Timing of raising equity. 3. Discrepancy between rate of interest charged and realistic rate of return. 4. Inconsistency between revenue generation and the loan repayment schedule. 5. Lack of binding penal clause and performance guarantees. 6. Rising interest rate. G. Reason from the Security Side There is a tendency among bank and institution to depend excessively on collateral for advancing loans. It is important to presume that if the borrower default in repaying then the security given will be helpful for recovery of loan. Clearly this logic is unacceptable. Emphasis should be on cash generation and a charge on this should be built into the loan contract through some escrow mechanism. H. Reason from the Regulatory Side Frequently regulator changes can turn assets non performing. Accounting reason like reduction in income recognition norms from 180 days to 90 days could be one reason and political related issues could be the other reason. II. STATEMENT OF THE PROBLEM Credit is like putting paste out of a tooth paste, it is easy to get it but recovery is somewhat difficult, like putting that paste back in to the tube. That is the reason why good money lent, sometimes becomes bad and doubtful, in the banking parlance it is called as Non-Performing Asset. NPA are like flab, which causes in convenience to the Banking sector, it is a brought forward legacy accumulated over the past decades, when prudent norms of Banking were unoccupied relaxing by the radiance of security provided by government ownership. It is not wrong to have pursued social goals, but this does not justify relegating banking goals and fiscal discipline to the background. Ever increasing NPAs have a direct impact on profitability, liquidity and solvency. Since Indian banking industry is largely dominated by Public sector banks with almost two third share of total advances in the economy it is facing an acute problem with regard to NPAs. There is a need to manage the ever increasing level of NPAs. Keeping this issue in view the present study has undertaken. A. Objectives of the Study 1. To study the NPAs in Private and Public sector banks 2. To study the mechanism of legal Regulatory regime of Non-Performing assets 3. To Analyses the performance of different recovery channels and challenges to recover bad loan and provide the some suggestion to improvise the strategies. Methodology B. Data Collection and Sample For the purpose of present study, NPAs of Scheduled Commercial (SCBs) i.e., public sector banks, old and new private sector banks and foreign banks which are listed in the Second Schedule of the Reserve Bank of India Act, 1934 have been considered. The study is based on secondary data. The RBI publications like, Report on Trend and Progress of

3 International Conference on Contemporary Management (INCOCOM 12), 19 October Banking in India, Annual Report of RBI, and Reports on Currency and Finance are the major sources for this study. To supplement the data, the researcher elicits other relevant data available from the annual reports of the various public, private and foreign commercial banks, journals, websites and text books. III. ANALYSIS AND RESULTS The increase in the profitability of a bank is always preceded by the composition of assets and liability. Hence, the following ratios are calculated to identify the optimal mix of banks in relation to profitability. 1. Ratio of Gross NPA to Gross Advances 2. Ratio of Net NPA to Net Advances A. Review of Literature In the banking literature, the problem of non-performing assets has been revisited in several theoretical and empirical studies. A synoptic review of the relevant literature on the NPAs issues examined by different researchers is presented as follows: 1. Saluja and lal, (2010) has emphasized the improvement of legal strategies on grass root level. Professional people should be recruited and associated at all levels of credit appraisal. They can be CAs, lawyers, MBAs, banking experts etc. and compromise should be considered better remedy than recovery through legal suits. and financial Institutions together with Central Government should establish more courts for quicker remedies. 2. K.Rajender (2009) stated that the issue of mounting NPAs is a challenge to public sector banks. The study found that the asset wise classification of PSBs is in right direction, and there is significant variation in the recovery of NPAs in the different sectors. The research observed that PSBs should not be loaded with the twin objectives of profitability and social welfare. 3. R.Jayachandran and T. Nagananthi (2008) conducted a study with the objective to evaluate trends in the Non- Performing Assets of State Bank of India and its Associates. The study observed that NPAs for State Bank of India and its Associate banks has significantly declined over the period of study. 4. Singla(2008) studied the financial performance of banks in India in view of increasing globalization and increased competition in the banking industry. He concluded that the financial positions of banks is reasonable, debt-equity ratio is maintained at an adequate level and NPAs also witnessed a decline during the study period. 5. Jain Vibha (2007) examined the status of NPAs in commercial banks. The study found that the problem of gross and net NPAs is more acute in Public. The new private sector banks and foreign banks have also registered an increase in the amount of gross and net NPAs during the period It concluded that new private sector banks and foreign banks failed to prevent the fresh generation of NPAs in the period whereas, PSBs and old private sector banks were able to reduce it. B. Results and Discussion Table 1: Bank Group Wise Gross NPA (Rupees in Crores) Pvt. New Pvt Table 1 shows the Scheduled Commercial Gross NPAs during the study period. It clearly indicates that Gross NPAs were higher in the public sector banks while the least in foreign banks during the beginning of the study period. But the trend has changed at the end of the study period that Gross NPAs were higher in the foreign banks while the least in the public sector banks. It shows that SCBs have taken effective steps to curb the NPAs. Among the SCBs, the public sector banks have taken much effort to curtail the NPAs more than 5 times during the study period of 15years than private and foreign banks. Table 2: Bank Group Wise Net NPA (Rupees in Crores) New Pvt Pvt The data clearly indicates that the NPAs in absolute terms are on rise which may be due to the normal growth in advances of banks. Even then attempts are to be made to contain the NPAs. Despite the rise in business levels, banks have to ensure that the pace of increase in NPAs is not more

4 International Conference on Contemporary Management (INCOCOM 12), 19 October than the tolerable level of risk appetite set against the incremental rise in the portfolio. A tab on the acquisition of new business and slippage in advances has to be relatively monitored to ensure a consistent improvement in the quality of advances. It is clear from table2 that there has been a steady increase in Net NPA level prevails in Public (20,285 to 36,071), New private banks(154 to 3,448) and banks(516 to 1,312) but at the same time Old private sector banks trend has been marginal Reduction in Net NPA levels (1,385 to 982) Table 3: Bank Group Wise Gross NPA Ratio Pvt. New Pvt Table-3 provides a trend of gross NPAs which are going down except in foreign banks and new private banks, may be due to their different risk appetite. In order to keep the gross NPAs under control, different banks adopt different strategies and set their risk appetite levels accordingly. If the loan policy and recovery policy in banks are broadly aligned with the philosophy of keeping the up-trend in the quality of assets and if effective internal surveillance systems are kept in place, the gross NPAs can be more effectively monitored. Table 4: Bank Group Wise Net NPA Ratio Pvt. New Pvt As far as the levels of net NPAs are concerned, it depends on provision levels. It has two aspects. Mandatory provisions are maintained as per the RBI guidelines and additional provisions are made as per individual bank's own prudential policy and its ability to maintain them beyond the minimum prescribed levels. This enables banks to bring down their net NPAs, a healthy competitive indicator. The data in Table-4 provides information on net NPAs as percentage to total advances. A marginal drop could be seen in SCBs and PSBs whereas new private banks and old private banks could record steep fall their NPA levels. The banks could thus ensure that the rise in business levels do not lead to rise in delinquency levels. Depending on the bank's ability to make provisions beyond the minimum standards, the levels of net NPAs can be brought down. In order to make provisions beyond the suggested prudential standards, better management of profitability is needed. C. Recovery Trends in NPAs If all attempts of up-gradation and restoration of NPA accounts fail, banks use different methods for recovery of loans. Depending on the type of loans and underlying security, banks take suitable recovery measures. The pattern of outcome of recovery efforts provides a clue as to the effectiveness of each mode of recovery. Table 5: Lok Adalats (Rupees in Crores) Pvt. New pvt DNA DNA ,78, ,16, to Table 6: DRTS (Rupees in Crores) New pvt Pvt ,544 12, , DNA ,463 DNA ,130 3, , ,89

5 International Conference on Contemporary Management (INCOCOM 12), 19 October Table 7: Recovery of NPA through SARFAESI Act by SCB (Rupees in Crores) Year No of Amount Amount Percentage Notices Involved Recovered of Recovery issued Rs in Rs in crores crores Table 8: Recovery of NPA s Through OTS / Compromise Scheme (Rupees in Crores) Pvt. New pvt , It can be observed from the data in Table-5,6,7&8 that invocation of SARFAESI Act and use of DRTs could help expedite loan recovery, but a lot needs to be achieved. As soon as an account is classified as sub-standard, all out efforts are made to get it upgraded. If such attempts do not fructify, recovery measures are initiated. Depending on the underlying security and assets charged to the bank, a suitable recovery mode is selected and pursued. The legal mode of recovery is the last resort as it is still very tardy and time consuming. Keeping in view the net present value of money, banks increasingly attempt compromise and out of court settlements which is relatively less time consuming. But looking to the percentage of recovery made through DRT invoking the SARFAESI Act , they are definitely more effective. Timeliness and steadfast follow up of recovery actions can improve the performance. IV. CONCLUSION Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively higher in public sectors banks. To improve the efficiency and profitability, the NPA has to be scheduled. Various steps have been taken by government to reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard. The study observed that there is increase in advances over the period of the study. However, the decline in ratio of NPAs indicates improvement in the asset quality of SBI Groups, Nationalised banks group and private sector banks. It is found on the basis of analysis that there is considerable development in the management of nonperforming assets in India. The study finally viewed that the prudential norms and other schemes has rushed banks to improve their performance and accordingly resulted into orderly down of NPA as well as enhancement in the financial strength of the Indian banking structure. REFERENCES [1] poongavanam.s(2011).non Performing assets:issues, Causes and remedial Solution.Asian Journal Of Management ResearchVolume 2 Issue 1. [2] Mahipal Singh Yaadav, Swami Vivkananda. Impact of Non Performing Assets on Profitability and Productivity of Public in India. AFBE Journal,Academic paper (pp ). [3] Malyadri.P, Sirisha.S(2011,October). A Comparative Study of Non Performing Assets in Indian Banking Industry. 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