NON- PERFORMING ASSETS AND THE SURVIVABILITY OF BANKS

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1 NON- PERFORMING ASSETS AND THE SURVIVABILITY OF BANKS Maneesh Kant Arya Associate Professor, Institute of Management Studies DAVV, Indore (M.P.) India ABSTRACT There are many mergers and acquisitions have been taken place in Indian banking industry in last couple of decade. Many reason behind it but one question is always associated that the survivability of weaker financial organization. Competition insists organizations to justify the earning and profitability. Reserve Bank of India (RBI) and other regulatory framework control the banking industry and individual bank. Banks cannot make big profit without giving good quality of services to their customers. Banks survive with high turnover of fund and low margin. If there is undue losses like Non Performing Assets (NPA) and other deliquesce cost come in the part of expenses banks reduce their profit. There may be negative profit in the income statement. India banks hold non-performing assets worth Rs. 1,93,5080 crores. Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive. An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the (RBI), a bank cannot book interest on an NPA on accrual basis. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby slowly eroding the net worth. Objective of the study: To analyze Non Performing Assets of different banks groups for sustainability of Indian Banks in present financial environment. MEANING The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of Non Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. Action for enforcement of security interest can be initiated only if the secured asset is classified as Non-performing asset. Non-performing asset means an asset or account of borrower,which has been classified by bank or financial institution as sub standard, doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI. An amount due under any credit facility is treated as past due when it is not been paid within 30 days from the due date. Due to the improvement in the payment and settlement system, 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 shell be an advance where Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan, BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER

2 The account remains outstanding (Out of Order) for a period of more than 180 days in respect of an overdraft/cash credit (OD/CC). Interest and/or principal remains overdue for two crop season but for a period not exceeding two half years in case of an advance granted for agricultural purpose, and 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 90 days overdue norms for identification of NPAs, from the year ending March 31, 2004, a non performing asset shell be a loan or an advance where; Out of order An account should be treated as out of order if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. in case where the outstanding balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period,these account should be treated as out of order. Overdue Any amount due to the bank under any credit facility is overdue if it is not paid on due date fixed by the bank. (Details taken from RBI guidelines) Impact of NPA: Profitability: NPA doesn t affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted. investment), which adversely affect current earning of bank. Liquidity: Neither principal amount nor interest amount is being received to the banks against the assets. The mobilisation of fund is stopped. It affects liquidity of fund. It is difficulty in operating the functions. Involvement of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now day s banks have special employees to deal and handle NPAs, which is additional cost to the bank. Credit loss Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks. Regulatory measures have been taken to strengthen the Indian Banking sectors The important measures taken to strengthen the banking sector are briefly, the following: Introduction of capital adequacy standards on the lines of the Basel norms, BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER

3 Prudential norms on asset classification, income recognition and provisioning, Introduction of valuation norms and capital for market risk for investments Enhancing transparency and disclosure requirements for published accounts, Aligning exposure norms single borrower and group-borrower ceiling with inter-national best practices Introduction of off-site monitoring system and strengthening of the supervisory framework for banks. LITERATURE REVIEW Bhattacharya (2001) in his paper Banking Strategy, Credit Appraisal & Lending decision rightly points to the fact that in an increasing rate regime, quality borrowers would switch over to other avenues such as capital markets, internal accruals for their requirement of funds. Under such circumstances, banks would have no option but to dilute the quality of borrowers thereby increasing the probability of generation of NPAs. Mohan (2003) conceptualized lazy banking while critically reflecting on banks investment portfolio and lending policy. The Indian viewpoint alluding to the concepts of credit culture owing to Reddy (2004) and lazy banking owing to Mohan (2003) has an international perspective since several studies in the banking literature agree that banks lending policy is a major driver of nonperforming loans (McGoven, 1993). Furthermore, in the context of NPAs on account of priority sector lending, it was pointed out that the statistics may or may not confirm this. There may be only a marginal difference in the NPAs of banks lending to priority sector and the bank s lending to private corporate sector. Against this background, the study suggests that given the deficiencies in these areas, it is imperative that banks need to be guided by fairness based on economic and financial decisions rather than system of conventions, if reform has to serve the meaningful purpose. Experience shows that policies of liberalisation, deregulation and enabling environment of comfortable liquidity at a reasonable price do not automatically translate themselves into enhanced credit flow. Although public sector banks have recorded improvements in profitability, efficiency (in terms of intermediation costs) and asset quality in the 1990s, they continue to have higher interest rate spreads but at the same time earn lower rates of return, reflecting higher operating costs (Mohan,2004). Prashanth K Reddy (2002) in his work A comparative study of Non Performing Assets in India in the Global context - similarities and dissimilarities, remedial measures by evaluated the position of India with respect to other countries in terms of NPA. This paper deals with the experiences of other Asian countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries. Santanu das (2007) in his work Management of Non-Performing Assets in Indian Public Sector Banks with special reference to Jharkhand had taken a state specific research in the banking sector. He rightly points to the fact that Expansion of credit is a must for a country like India. But as mentioned above, high credit growth may lead to high NPAs. Policymakers, therefore, face the dilemma as to how to minimize such risks that arise from dilution in credit quality, while still allowing bank lending to contribute to higher growth and efficiency. BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER

4 Jigar j. Soni (2007) in his study of comparative analysis of private and public sector s NPA pointed out that there is a huge difference in the awar Ashok and Arya Maneesh Kant (2009) discussed about the wage burden after a revision of salary of bank employees and profitability of banks. Arya Maneesh Kant and Sonwalkar J. (2009), discussed the effect on profitability and volatility of income with non interest income of banks. Sachin Nanda (2008) finds in his paper Challenges of NPA to PSBs in India is that the only problem that the Public Sector Banks are facing today is the problem of nonperforming assets. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. The NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of the funds. M. Karunakar, Mrs. K.Vasuki and Mr. S. Saravanan in their research paper Are non - Performing Assets Gloomy or Greedy from Indian Perspective touched the ascpect such as The problem of losses and lower profitability of public and private sector bank s NPA and their handling of the same. He also concluded that public sector bank s average NPA is lesser than the average NPA of private sector banks. Jh Non-Performing Assets (NPA) and liability mismatch in banks and financial sector depend on how various risks are managed in their business. RESEARCH METHODOLOGY The research is based on secondary data obtained from RBI, IBA and some researchers have already been done in the same fields. Data has been taken for the period The period is considered for the research because of RBI issued new guideline for management and administrates the NPA. Ratios, growth, graphs and charts have been used for analysis purpose. Key Words: NPA Non Performing Assets NNPA- Net Non Performing Assets NIM- Net Interest Margin Capital Adequacy RBI- Reserve Bank of India Data Analysis and Interpretation TABLE - 01 Gross Non-Performing Assets of All Three Bank Groups During Rs. In crores Bank Groups %change in Avg. growth of 5 years 5 years Public Sector Bank Private Sector Bank Foreign Bank TOTAL The measure of non-performing assets helps to assess the efficiency in allocation of resources made by banks to productive sectors. Absolute growth of gross NPA of banking industry has been recorded 16.39% with average BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER

5 of 3.28%. Public Sector banks managed their NPA efficiently in to Negative growth has been seen in the analysis period. Higher growth has been in Private Sector banks and foreign banks. TABLE - 02Net NPA of All Three Bank Groups During Rs. In crores Bank Groups Avg. %change in 5 growth of 5 years years Public Sector Bank Private Sector Bank Foreign Bank TOTAL Net NPA analysis has also been showing the same performance of different groups. Foreign banks group s Net NPA is 71.76% with highest average growth, 16.13% of Private Sector and with 4.89% Public Sector banks. The trend of improvement in the assets quality of banks continued during the period. The reasons are that the Indian banks could recover a higher amount of NPA during the period. Among the various channels of recovery available to banks for dealing with bad loans, the SAFAESI Act and Debt Recovery tribunals (DRTs) have been most effective in term of amount recovered (report on trend and progress of banks 08-09). Table 03.Net NPA as A Percentage of Net Advance Bank Groups Public Sector Bank Private Sector Bank Foreign Bank TOTAL The aggregate ratio of banking industry (Net NPA/Net Advances ratio) was1.98% in Of this the net NPAs to net advances ratio of the Private Sector Banks was 2.3% closely followed by Public Sector Bank sat 2.1% For Foreign Banks, the ratio was much lower at 0.9%. In the year situation was just reveres. Public Sector banks group with 0.94%, Foreign banks group 1.09% followed by Private Sector banks group 1.21%. There are many reasons to this change the most important reason was Public and Private Sector banks stepped up recovery efforts through numerous methods. In addition to their own internal recovery processes, banks recovered to the tune of Rs 608 crore through one time settlement BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER

6 and compromise schemes, Rs 223 crore though SARFAESI Act. Assets Reconstruction Company of India Ltd. (ARCIL) acquired 559 cases amounting to Rs crore from banks. Conclusion and recommendations: Banks are having Net Interest Margin ( NIM) between 3 to 5 percent any increase in NPA reduce the profitability of banks. The banks which are working in marginal difference may have loss. Small banks are required to control NPA. There are many small banks which have been merged in big banks i.e. Lord Krishna, Centurion Bank, Bank of Panjab etc. it is just because of question of survivability in competitive environment. Merger and acquisitions are good solutions for giving strength to an organization but in this process an organization/s lose their identity. There are many mergers have been taken place in banking industry in these changes one organization has to change /lose its identity. This may be due to continuous loss in the organization. 1. Strengthening provision norms and loan classification standards based on forward looking criteria (like future cash flows) were implemented. 2. Through securitization they can reduce NPA 3. Speed of action- the speedy containment of systematic risk and the domestic credit crunch problem with the injection of large public fund for bank recapitalization are critical steps towards normalizing the financial system. 4. Strengthening legal system by giving strict guideline for credit analysis in terms of continuity of income and earnings. 5. Maintain required capital adequacy ratio as per Basel II norms. That means now the provision for NPA will be more. This may look a conservative approach. But it should be implemented to reduce risk. ( Almost all banks achieved capital adequacy norms till date.) BIBLIOGRAPHY BOOKS REFERRED: Management of banking and financial servicesjustin paul and padamlata suresh Banking and law practices-gordan and natrajan WEBSITES VISITED: com, valuenotes.com. Birlaa.com, RBI.org, Indian Banks Association.Bloomberg.com RESEARCH REPORTS- found with the help of Google search engine. Bhattacharya, H (2001), Banking Strategy, Credit Appraisal & Lending Decisions, Oxford University Press, New Delhi. McGoven, J (1998) : Why Bad Loans happen to Good Banks, The Journal Of Commercial Lending, Philadelphia, February 1998, Vol.78. Mohan, R (2003): Transforming Indian Banking In search of a better tomorrow, Reserve Bank of India Bulletin, January Reddy, Y.V (2004): C redit Policy, Systems and Culture, RBI Bulletin, March Sachin Nanda (2008) A report On NPA an d Challenges to PSBs Jigar J soni (2007) Comparative analysis of NPAs of private and public sector banks Prastanth K reddy (2002) comparative study of Non Performing Assets in India in the Global BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER

7 context - similarities and dissimilarities, remedial measures, IIM Ahmadabad research journal Shantanu das (2007)study of NPA w.r.t Jharakand Bansal Arecent trends in risk management_1_8_jiom.pdf Sayuri Shirai; Assessment of Indian banking sector reforms from the perspective of the governance of the banking sector ; (2001).ESCAP- ADB Joint workshop on mobilizing domestic finance for development BANGKOK Nov Balasubramaniam C.S.,Non Performing Assets And Profitability Of Commercial Banks In India: Assessment And Emerging Issues, national monthly refereed journal of research in commerce & management. volume no.1, issue no.7 ISSN ArticleM Allirajan & Aparna Ramalingam, TNN Aug 24, 2013, 01.40AM IST. Bad debt and NPA: making sense of banking mess Alam Srinivas September BAUDDHIK VOLUME 4, NO.-3 SEPTEMBER- DECEMBER