A COMPARATIVE STUDY OF FOREIGN BANKS AND PUBLIC SECTOR BANKS WITH REFERENCE TO NON-PERFORMING ASSETS

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1 A COMPARATIVE STUDY OF FOREIGN BANKS AND PUBLIC SECTOR BANKS WITH REFERENCE TO NON-PERFORMING ASSETS Smita Ramakrishna 1 and Reeba Kurian 2 1 Assistant Professor, K. J. Somaiya Institute of Management Studies and Research, Mumbai, India smitaramakrishna@somaiya.edu 2 Research Associate, K. J. Somaiya Institute of Management Studies and Research, Mumbai, India reeba.kurian@somaiya.edu ABSTRACT The stability and viability of commercial banking is critical for economic growth and development. Non-performing asset management is a vital function to ensure that profitability is not compromised. This paper studies the core parameters in this context which are Gross Advances, Gross Non-performing assets, Net Advances and Net Nonperforming asserts. The study has been done in respect of Foreign Banks and Public Sector Banks. The analysis is focused on comparing the performance of these two categories of banks with respect to Non-performing assets. Financial data for the years has been used for this purpose. Keywords: Gross Advances; Gross Non-performing Assets; Net Advances; Net Nonperforming Assets; Foreign Banks; Public Sector Banks INTRODUCTION A bank is said to be efficient when it is able to overcome both its external and internal challenges and also keeps itself updated with the technological advancements. Every country s economy requires a sound banking system to function smoothly. The genesis of the Indian banking system can be found from 1786 (source: The journey of our banking system has been an impressive one, wherein, today one can boast of its several outstanding achievements and its strong fundamental backbone which shields us from international shocks/perils. Post 1991, India witnessed a whirlwind change in its economy. The banking system reflected this change, too. The Narasimham committee initiated the liberalization of the banking practices. This led to the entry of foreign and new private sector banks which not only brought about an enriching competency in the nationalized banks, but also has been a favorable boon for the customers. The latest entry of mobile and net banking combined with the core banking system has not only been beneficial for the banks to earn higher revenue, but also, for the customers who enjoy a wide variety of easy services available a click away in this fast paced life. 1

2 Banking Structure in India The commercial banking structure consists of scheduled commercial banks and unscheduled commercial banks.(rbi report) (a) Scheduled Commercial Banks are grouped under following categories: 1. State Bank of India and its Associates 2. Nationalized Banks 3. Foreign Banks 4. Regional Rural Banks 5. Other Scheduled Commercial Banks. (Private Banks) (b) Non-Scheduled Commercial Banks As per the data, there are 40 foreign banks, 20 nationalized banks and 6 of SBI group. Total number of private banks is 20 with 13 old private sector banks and 7 new private sector banks. As on March 2012, there are branches of public sector bank, which consists of nationalized banks and belonging to the SBI group. There are branches of private sector bank and 322 of foreign banks. The total number of scheduled commercial branches is The spread of ATMs in the country has been showing an increasing trend, with a total of machines and still counting, consisting of public sector, of private sector and 1414 of foreign banks. (Source : Master office file (latest updated version) on commercial Banks. Note: 1) Nationalised Banks include IDBI Bank Ltd. 2) Branches data exclude administrative offices). Functions of Commercial banks 2

3 The functions of commercial bank can be classified into primary and secondary functions. The primary functions consist of accepting deposits and lending advances. The banks accept money in the form of deposits from customers and are kept in savings, fixed or recurring as per the choice and interest of the customer. Advances are granted to these customers from the deposits that the bank keep. However they are charged a higher percentage for the same, which is the primary source of income for the banks. The bank has a set of rules and regulation that the customer needs to observe while taking a loan from the bank; Primarily being, payment of the loans EMIs in the stipulated time frame, with a previously agreed upon rate of interest. LITERATURE REVIEW In their paper on Evaluation of Private Sector Banks in India, Dharmendra Singh and Garima Kohli (2006) provided a survey of private sector banks. In this study, they identify the cause of better performance as the use of technology and predicted greater scope of mergers. K.K.Siraj and P.Sudarsanan Pillai provided a survey of the efficiency of NPA management by Indian commercial banks. They highlighted that Nationalized Banks rank better than Foreign Banks and Private Sector Banks. A decrease in NPA indicates that banks have improved their credit appraisal processes over the years while an increase indicates a lowering of profitability(prasad and Veena, 2011). The efficiency of NPA management by way of recovery measures such as SARFAESI, Debt Recovery Tribunals, etc is studied by Siraj and Pillai (2012).Since post liberalization period, various studies have utilized NPA statistics while assessing the relative efficiency of banks in India (Prabhakar, et al, 2012).Rawlin and Saran (2012) observed that that there is a strong correlation between Gross Advances and NPA of banks and that NPA can be predicted based on its relationship with Gross advances. Pradhan Tanmay Kumar,2013, in a comparative study between Old Private Sector Banks and Foreign Banks, concludes that Gross Advances as well as Gross NPA of both generally continued to rise from 2007 to OBJECTIVE OF STUDY To determine Gross Advances and Gross NPAs of Public sector Banks and Foreign Banks. To determine Net Advances and Net NPAs of Public sector Banks and Foreign Banks. To assess the performance of Public Sector Banks vis a vis Foreign Banks. DATA AND VARIABLES Data The data used for this study is taken from Reserve Bank of India s annual statistical publication titled Handbook of Statistics of the Indian Economy. The report contains statistical data pertaining to Scheduled Commercial Banks, Public Sector Banks, Old and New Private sector banks and Foreign Banks in India. In this paper, we have concentrated on Public sector banks and Foreign Banks in India. 3

4 Variables The various variables taken into consideration while preparing this paper are the Gross Advances, Net Advances, Gross Non Performing Assets, Net Non Performing Assets, Gross NPAs as percentage of Gross Advances, Net NPAs as percentage of Net Advances. The percent of increase/decrease in Gross and Net NPAs and Gross and Net Advances. Non-Performing Asset The loan is an asset for the bank and as per the definition given by RBI, an asset becomes a Non-performing asset when it ceases to generate income for the bank. A non performing asset (NPA) is a loan or an advance where; (RBI report) 1. interest and/ or installment 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 as indicated at paragraph 2.2 below, 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. the installment of principal or interest there on remains overdue for two crop seasons for short duration crops, 5. the installment of principal or interest there on remains overdue for one crop season for long duration crops, 6. The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. 8. Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. Asset Classification Classification Banks categorize their assets as follows (i) Standard Assets (ii) Sub-standard Assets (iii) Doubtful Assets (iv) Loss Assets Definitions Standard Assets: In simple words, an asset which does not classify as a Non-performing asset is known as a standard asset. It does not exhibit any problem in the normal course other than the risk it faces in business. 4

5 Sub-standard Assets: Sub-standard asset is an asset class drawn within the broader and much-known non-performance asset category of banks on the basis of term for which the asset class has not performed and extent of dues realization from collateral security with banks. More specifically, according to RBI circular, with effect from March 31,2005 those assets which remain an NPA for a period less than or equal to 1 year, would be known as substandard asset. The liquidation of the debt would be difficult and the banks would have to sustain some losses if the dearth of interest and principal amount payment are not corrected. When the terms and conditions of the loan account are altered, there are chances that a loan account is classified as a sub-standard asset. Moreover, depending on the And depending on the satisfactory performance basis the revised terms, the account has to be classified within the sub-standard asset category for a minimum of 12 months. Thus, mere revision of terms of the account with no proper compliance does not result in the upgradation of the asset category. Doubtful Assets: Earlier 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 had remained NPA for a period exceeding 18 months. With effect from March 31, 2005(RBI Report); the norms have been further tightened, and an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. A loan classified as doubtful has all the weakness 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. 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. However, only those advances are classifies as loss assets where no security is available. In accounts where some security/ ECGC/ DICGC cover is available, these accounts are not reported under loss assets. Provision Norms of NPA Table 1 TYPES OF ASSETS PROVISIONS Standard asset 0.25% for all type of standard advances Sub-standard asset 10% for all types of standard advances Doubtful asset -up to 1 year 100% of unsecured advances and 20% of secured advances. 1 to 3 years 100% of secured advances and 30% of secured advances More than 3 years 100% of unsecured advances and 100% of secured advances Loss asset 100% of unsecured advances and 100% of secured advances Source: RBI Handbook* 5

6 Reasons for Growing NPAs Banks revise their interest rates time and again in order to curb inflation. When the interest rates are increased the cost of the funds for the borrowers also increase, which affects their repayment capacities. The borrower finds it difficult to manage his finances according to the changing rates of interest by the banks, and thus ends up as a defaulter of the said loan. This is one of the major causes that augment the NPAs in the banks. The domestic economic activity in India has witnessed a decline both in manufacturing and the services sectors. A sluggish economy will have a direct impact on the balance sheets and profitability of many firms who have availed of loans from the banking sector. Krishna Chaitanya V. in his paper Causes for non-performing assets in public sector Banks has mentioned that there are several internal and external factors leading to an account becoming an NPA. Some of the internal factors are failure of business, projects not being completed on time, funds borrowed for a particular purpose and not being used for the same, poor recovery of receivables among others. External factors include scarcity of raw materials, change in government policies, non-payment of dues from other countries, industrial recession etc. One of the primary reasons for a bank to face a NPA is a wrong lending decision(source: A major portion of the advances given by banks are for industries and for trade, which majority of the time is not analyzed rightly by the bankers and therefore result in bad loans. It is through these experiences that a banker learns new ways of appraisals and assessments of a credit borrower. NPA ANALYSIS AND FINDINGS Gross Advances and Gross Non-Performing Assets (Amount in Rs. Billion) PSB FOREIGN GROSS ADVANCES GNPA% GROSS ADVANCES GNPA% Source: Calculated from RBI website Table 64: Gross and Net NPAs of Scheduled Commercial Banks 6

7 FINDINGS Year of Public Sector Banks (Amount in Rs. Billion) Year Gross Advances GNPA Gross % Of Ga correlation Year of Foreign Banks (Amount in Rs. Billion) Year Gross Advances GNPA Gross % Of Ga correlation As per the data given by the RBI, the Gross Advances given by the banks have increased over the years. However, they have shown a percent of decrease from 25.52% to 13.65% from to Public sector banks show a steady GNPA percentage over the years from , it does increase from onwards with a high jump in the year at 3.3%. The percent of increase/decrease of the GNPA to Advances has been highly variable ranging from to 0.9 to 0.37 over the past five years. This goes on to show that, though the percentage of GNPA in regard to advances has been steady over the years, its rate in comparison to the swelling loans given by the banks is highly fluctuating. The correlation of Gross advances of Public sector Banks at the rate of 0.92 shows it to be very strong, it depicts that the rate at which the advances provided by the banks have increased, the GNPA of those banks have also increased at the same rate. The foreign banks give a steady picture of Gross advances from 2007 to 2010; however their GNPA percentage does increase from 1.8 % to 2.5%. The percent of increase/decrease has been highly uneven for this bank with a 4.14% in the year 08-09, it falls down to -1.34% in 09-10, nevertheless; it does grow back to 17.75% by the year The percent of increase/decrease of the GNPA to Advance is like a roller coaster ride, which is seen dipping from 1.11% to -0.65% and seen again gaining to 0.04% by the year The correlation of the Foreign banks are weak at the rate of 0.20 as compared to the Public sector banks. This proves to show that the Gross NPAs do not move at the same rate as their Advances do, which is a good point, considering the fact that though their advances have increased, NPA seems to be under control. 7

8 Net Advances and Net Non-Performing Assets PSB Foreign Net Advances NNPA% Net Advances NNPA% Source: Calculated from RBI website Table 64: Gross and Net NPAs of Scheduled Commercial Banks FINDINGS Year of Public Sector Banks (Amount in Rs. Billion) Year Net Advances NNPA NET % OF NA correlation Year of Foreign Banks (Amount in Rs. Billion) year NET ADVANCES NNPA NET % OF NA correlation The Net Advances provided by the Public Sector banks have increased over the years from Rs to Rs.38783; nonetheless it shows a decrease in percent from 8

9 25.69% to 22.37% from the year 2007 to 2011 with a further fall to 17.32% in the year In similar lines with the PSB, the foreign sector banks show a decrease in percent in the advances provided. In the case of foreign banks the net advances provided by them show an increase in percent from 2.63% to 17.52% from the year 2007 to 2012, where the Net advances have increased from Rs to Rs.2298 billion. The Net NPA percentage of PSBs in regard to the Net advances has seen an increase from 1% to 1.7% with an increase in percent average of 0.15%. In the case of foreign banks records show the Net NPA percentage consistent for a period of at least two years. Hence, there has been no percent in increase or decrease for the years and It witnessed a decrease in percent in the year at the rate of -0.66%. This demonstrates the fact that it has a good control over their transactions especially during the recession years. The correlation of the Net advances of the public sector banks show a very strong picture at the rate of 0.95, which show that their Net NPAs have increased at the same rate as that of the Net Advances over the years. This proves the fact that the public sector banks have not been vigilant enough to keep a watch over their increasing NPAs in regard to their escalating advances. In the case of foreign sector banks it shows a negative correlation of This shows that as the advances of the banks were increasing, their NPAs were decreasing. This is a good picture that the foreign banks have showcased, presenting a fact that they have been able to control their NPAs and even managed to reduce them over the years. CONCLUSION RBI governor D Subbarao in his 5 th R Venkataraman Endownment lecture, stated that RBI is concerned about the increasing bad loans and that they will be taking more measures to control the NPA levels across the asset quality of banks. It was observed that the public sector banks have a higher NPA level than that of private sector banks, as the public banks have different decision variables. The gross NPA of the public sector banks stood at 3.8% of the system at March 2013 quarter, followed by the foreign banks. Their recovery rate is at 9.1 %.( Source: / _ 1_psbs-public-sector-banks-more-measures) Public sector banks have to play out their role in the Indian economy, ensuring that credit is available for the right purposes. Foreign banks too, are trying to bridge the gap of credit requirement and disbursement. The problem, however, arises from the rising NPAs in tandem with the increase in advances. Banks have to therefore focus on risk assessment and credit appraisal processes more stringently. Controls at all levels should be adequate and there should be continual monitoring of the advances. Developments in the recent past such as the introduction of the Basel II norms and SARFESI Act (for recovery from secured assets) should aid the banks in their quest for lowering the levels of NPAs. REFERENCES 1. Pradhan Tanmaya Kumar, A comparative study of NPA of Old Private sector banks and Foreign Banks, Research Journal of Management Science, Vol.2(7), 38-40, July(2013). 2. Santosh Kumar Das & Imed Drine, Financial Liberalization and Banking Sector Efficiency in India: A Fourier Flexible functional form and Stochastic Frontier Approach, International Research and Management, Vol.2, No ,pp

10 3. K. Rama Prasad, B. Ramchandra Reddy, Management of Non-Performing Assets in Andhra Bank, Indian Journal of Applied Research, Vol.2, Issue.2, November C. S. Balasubramaniam, Non Performing Assets and Profitability of Commercial Banks in India: Assessment and Emerging Issues, Vol.1, Issue.7, ABHINAV National Monthly referred journal of research in Commerce and Management. 5. K.K. Siraj & P. Sudarsanan Pillai, Effeciency of NPA Management in Indian SCBs A Bank Group Wise exploratory Study, Journal of Applied Finance and Banking, Vol.3, No.2, 2013, Committee on Banking sector reforms (Narasimham Committee- II) - Action taken on the recommendations. 7. Jayanth R. Varma, V. Raghunathan, A.Korwar and M.C. Bhatt, Narasimham Committee Report Some further Ramifications and Suggestions, Working Paper No. 1009, February Various reports and statistical tables from RBI Database Publications. 9. Chandan Chatterjee, Jeet Mukherjee & Dr. Ratan Das, Management of Non-Performing Assets A current scenario, International Journal of Social Science and Interdisciplinary Research, Vol.1, Issue 11, November Non-performing Assets An Indian perspective, Infosys Finacle. 11. Dr. T.R. Gurumoorthy and B. Sudha, Non-performing Assets (A study with reference to Public Sector Banks), Indian Journal of Applied Research, Vol.2, Issue.2, November Todd. A. Gormley, the Impact of Foreign Bank entry in emerging markets: Evidence from India, Social Science Research Network, December 10, Dr. Tanmaya Kumar Pradhan, A study of Non-performing Assets in Public Sector Banks During Post Reform Period, The International Journal s Research Journal of Economics and Business Studies, Vol.1, Number.11, September Khalid Ashraf Chisti, The Impact Of Asset Quality On Profitability Of Private Banks In India A Study of JK, ICICI, HDFC and YES Bank, Journal of African Microeconomic Review, Vol.2, No.1, (2012). 15. Kajal Choudhary and Monica Sharma, Performance of Indian Public Sector Banks and Private Sector Banks: A Comparative Study, International Journal of Innovation, Management and Technology, Vol.2, No.3, June Zahoor Ahmad & Dr. M. Jegadeeshwaran, Comparative study on NPA Management of Nationalized Banks, International Journal of Marketing, Financial Services and Management Research, Vol.2, No.8. August (2013) 17. Dr. Tanmaya Kumar Pradhan, A Comparative study of NPA of State Bank of India Group and Nationalized Banks, The International Journal s Research Journal of Economics and Business Studies, Vol.2, No. 6, April Seema Mahlawat & Pooja Vyas, Securitization and its Implications for the Management of NPAs in the Indian public Sector Banks, Global Conference on Business and Finance Proceedings, Vol.7, No.2, June

11 19. Dr. Mohan Kumar & Govind Singh, Mounting NPAs in Indian Commercial Banks, International Journal of Transformations in Business Management, Vol.1 Issue No.6, April-June RBI report on Operations and Performance of Commercial Banks. 21. RBI report on Evolution of Banking in India 22. Ritika Gauba, The Indian Banking Industry: Evolution, Transformation & the Road Ahead, Pacific Business Review International, Vol.5, Issue 1, July ANNEXURE Table 1. Gross and Net NPAs of Scheduled Commercial Banks - Bank Group-Wise Public Sector Banks (Amount in Rupees Billion) Year (End- March) Advances Non-Performing Assets Gross Net Gross Net Amount As % As % of of Gross Total Advances Assets Amount As % of Net Advances As % of Total Assets 11

12 Table 2. Gross and Net NPAs of Scheduled Commercial Banks - Bank Group-Wise Foreign Banks in India (Amount in Rupees Billion) Year (End- March) Advances Non-Performing Assets Gross Net Gross Net Amount As % of Gross Advances As % of Total Assets Amount As % of Net Advances As % of Total Assets Note: 1. Data for are provisional. 2. Data on Scheduled Commercial Banks & Public Sector Banks for include the impact of conversion of a non-banking entity into a banking entity. Table 3. Percentage Change (Increase Or Decrease) Of Public Sector Banks And Foreign Banks Gross Advances PSBs FOREIGN BANKS Percentage Change Percentage Change GROSS GROSS GNPA ADVANCES ADVANCES GNPA

13 Table 4. Percentage Change (Increase or Decrease) of Public Sector Banks and Foreign Banks Net Advances PSBs FOREIGN BANKS Percentage Change Percentage Change NET NET ADVANCES NNPA ADVANCES NNPA

SHIV SHAKTI International Journal of in Multidisciplinary and Academic Research (SSIJMAR) Vol. 4, No. 4, August 2015 (ISSN )

SHIV SHAKTI International Journal of in Multidisciplinary Academic Research (SSIJMAR) Vol. 4, No. 4, August 2015 (ISSN 2278 5973) A Comparative Study Of Public Sector Banks And Private C Sector Banks With