CHAPTER - 6 PA NPA ANALYSIS AND INTERPRETATION OF DATA OF SELECTED UCBS TEKAN TOGETHER 6.1 Introduction 131 6.2 Concept Of NPA And Its Importance In Banking Sector 131 6.3 Common - Size Analysis Of The Selected UCBs 132 6.4 Common Size Analysis Of PA And NPAs Of The Selected UCBs Taken Together 6.5 Ratio Analysis Of The Selected UCBs Taken Together 132 134 6.5.1 Gross NPA ratio 6.5.2 Net NPA ratio 6.5.3 Problem Assets ratio 6.5.4 Depositors Safety ratio 6.5.5 Share Holders Risk ratio 6.5.6 Provisions ratio 6.5.7 Sub standard Assets ratio 6.5.8 Doubtful Assets ratio 6.5.9 Loss Assets ratio 6.6 General Causes Of Non Performing Assets 153 130
CHAPTER - 6 PA NPA ANALYSIS AND INTERPRETATION OF DATA OF SELECTED UCBS TEKAN TOGETHER 6.1 INTRODUCTION: In today s world of healthy competition where all business units and industries are trying to survive in the market, the banking sector too can not be aloof from competition in market. As liberalization and globalization has opened door for free entry in any business, the co-operative sector of banking has to face competition from not only nationalized or commercial banks but also from private financial instructions and foreign banks. Two or three decades back, profit had a back seat and came as an end product. They never consciously planned their business of banking from the profit point of view. But today profit is a sign of vitality and success in a competitive scenario. It ensures survival and growth and can eventually become the only parameter for performance evaluation. Profit depends upon NPA provisions. Hence, for a banker, NPA has become very significant. In this chapter an attempt has been made to find out the importance of PA and NPA in banking sector and to measure the level of NPA of banking sector using accounting techniques of NPA analysis and statistical tools along with graphs and charts. 6.2 CONCEPT OF NPA AND ITS IMPORTANCE IN BANKING SECTOR: Guidelines issued by Reserve Bank of India regarding recognition, asset classification and provisioning norms have compelled banks in India not to show true financial picture in the balance sheet but also to take corrective steps for improving their loan portfolio. With the adoption of these guidelines, banks are now fully vigilant about quality of their loan assets and various steps are being taken by them to reduce the NPAs. It is always better to follow the proper policy for appraisal, supervision and follow up of advances to avoid NPAs. However, risks attached to lending cannot be completely eliminated. If certain advances are converted into NPAs, it is necessary to take corrective steps to reduce them. Reduction in NPAs is necessary to improve profitability. 131
6.3 COMMON - SIZE ANALYSIS OF THE SELECTED UCBs: The entire picture of the PA and NPA of the selected UCBs under study has been presented in the form of common size statement for the period spreading from 2001-02 to 2008-09. An attempt to analyze PA and NPA of the selected UCBs with the help of their common - size PA and NPA statement is made at this stage. Here the figures of total advances have been taken as equal to 100 and the percentage of individual items of PA and NPAs has been calculated. Common - size PA and NPA statement has been presented in appendices 7.2 to 7.11 6.4 COMMON SIZE ANALYSIS OF PA AND NPAs OF THE SELECTED UCBs TAKEN TOGETHER: Consolidated PA and NPAs of all the selected UCBs under study has been presented in appendix 7.1. The appendix clearly indicates the ratio of PA and NPAs of all the selected UCBs during the period of study. The proportion of each component of the PA and NPAs statement has also been found out considering the total Advances as 100. Figure 6.1 PIE CHAT SHOWING THE AVERAGE PROPORTION OF PERFORMING AND NON - PERFORMING ASSETS OF ALL SELECTED UCBs TAKEN TOGETHER. The above pie chart (figure 6.1) shows the proportion of performing and Non performing assets of all the selected UCBs put together. It indicates a very low percentage of NPA (14.77%) as against a high percentage (85.23%) of Performing assets during the period of study i.e. 2001-02 to 2008-09. The position of PA and NPA for these UCBs seems to be quite satisfactory. 132
Figure 6.2 PIE CHART SHOWING THE AVERAGE PROPORTION OF VARIOUS COMPONENTS OF NON - PERFORMING ASSETS OF ALL SELECTED UCBs TAKEN TOGETHER The average proportion of various components of Non-performing assets of all the selected UCBS taken together is shown in the above pie chart (figure 6.2) it depicts 70.07% doubtful assets, 23.12% sub standard assets and 6.81% of loss assets. As far as sub standard assets and doubtful assets are concerned it can be said that a high sub standard assets over doubtful assets may signify a satisfactory and safe position as the prospect of recovery of advances is bright. Banks should make such efforts to recover advances from the default, even by making some compromise, that the proportion of gross NPA gets reduced. Considering the position of the ten banks under study, it can be concluded that the situation is not pessimistic. The increasing doubtful assets suggest that there is a very good scope of recovery, as more scope is there for compromising and reducing NPAs. 133
6.5 RATIO ANALYSIS OF THE SELECTED UCBs: An attempt has also been made to judge the position of NPAs of the UCBs through ratio analysis using important ratios as follows: 6.5.10 Gross NPA ratio. 6.5.11 Net NPA ratio. 6.5.12 Problem Assets ratio. 6.5.13 Depositors Safety ratio. 6.5.14 Share Holders Risk ratio. 6.5.15 Provisions ratio. 6.5.16 Sub standard Assets ratio. 6.5.17 Doubtful Assets ratio. 6.5.18 Loss Assets ratio. 134
6.5.1 GROSS NPA RATIO Gross NPA Ratio = Gross NPA Gross Advances X 100 TABLE 6.1 GROSS NPA RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Gross NPA Gross Advances Gross NPA Ratio (In Percentage) 2001-02 15366.03 65640.56 23.41 2002-03 15481.22 67183.80 23.04 2003-04 14812.59 63799.04 23.22 2004-05 12685.02 64732.36 19.60 2005-06 10211.45 65741.05 15.53 2006-07 8773.16 83760.08 10.47 2007-08 8071.25 102475.37 7.88 2008-09 7132.11 113174.28 6.30 Average 11566.60 78313.32 14.77 Source Appendix 7.1 Figure 6.3 135
The above table and graph makes it very clear that the average gross NPA of all the UCBs under study is very satisfactory. It is seen that the gross NPA which was 23.41% in 2001-02 reduced marginally every year and finally reached 6.30% in 2008-09 which is much lower than the average gross NPA (14.77%). It goes without saying that the UCBs are taking good care and following ideal norms of granting advances, so that the recovery is satisfactory leading to lower gross NPA. It is very encouraging that the gross NPA ratio in the last three years is very much lower than the average 14.77%. 136
6.5.2 NET NPA RATIO Net NPA Ratio = Gross NPA Provisions Gross Advances - Provisions X 100 TABLE 6.2 NET NPA RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Net NPA (Rs. In Lakhs) Gross Advances (Rs. In Lakhs) Provisions by banks (Rs. In Lakhs) Net Advances (Rs. In Lakhs) NET NPA Ratio (In Percentage) 2001-02 4982.88 65640.56 10660.25 54980.31 9.06 2002-03 4942.84 67183.80 12389.64 54794.16 9.02 2003-04 3378.26 63799.04 15292.62 48506.42 6.96 2004-05 1733.94 64732.36 16915.86 47816.50 3.63 2005-06 411.64 65741.05 18282.75 47458.30 0.87 2006-07 0.00 83760.08 18611.99 65148.09 0.00 2007-08 0.00 102475.37 19009.99 83465.38 0.00 2008-09 0.00 113174.28 17969.65 95204.63 0.00 Average 1931.20 78313.32 16141.59 62171.20 3.11 Source: Appendices 7.1 & 8.1 Figure 6.4 137
The above graph presents the Net NPA Ratio of all the selected UCBs taken together. It can be noticed that Net NPA ratio has resulted in the first five years of study i.e. from 2001-02 to 2005-06, though reducing in effect. The Net NPA ratio during these years can be ascribed to the high Net NPA position of The Sardar Bhiladwala Pardi People s Co.Op. Bank Ltd. The bank had failed to make sufficient provisions against NPA in these years. However, they succeeded in making provisions and thus they could bring the Net NPA down to zero. The Net NPA Ratio of the bank in the year 2006-07,2007-08 and 2008-09 is zero after the improvement of the above bank. It is to be seen that the position of all other banks has been very good and they had zero net NPA ratio. It is therefore, evident that nine of the above ten banks have been able to make enough provisions against their gross NPA which is a very satisfactory position. The management of all these banks have taken enough care in granting advances and they have been very meticulous in recovering from defaulters. Another observation is that the above banks have strictly followed the RBI guidelines by making provisions against NPAs. 138
6.5.3 PROBLEM ASSET RATIO: Problem Asset Ratio = Gross NPA Total Assets X 100 TABLE 6.3 PROBLEM ASSETS RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Gross NPA Total Assets Problem Assets Ratio (In Percentage) 2001-02 15366.03 171926.14 8.94 2002-03 15481.22 165121.63 9.38 2003-04 14812.59 177740.54 8.33 2004-05 12685.02 165829.01 7.65 2005-06 10211.45 182752.42 5.59 2006-07 8773.16 202593.79 4.33 2007-08 8071.25 224868.22 3.59 2008-09 7132.11 127038.97 5.61 Average 11566.60 177233.84 6.53 Source: Appendices 7.1 & 1.1 Figure 6.5 139
The Problem assets ratio shows the proportion of Gross NPA to total assets and the table & graph given above shows that the percentage of all selected UCBs is 6.53% on an average for the last 8 years. The percentage shown is, however not stable. It was reducing from 2002-03 to 2007-08 but it went slightly up in the year 2008-09. It seems that much attention has been given by the management to the proportion of Gross NPA and total assets of the bank. The gross NPA is on the rise due to the increase in advances. 140
6.5.4 DEPOSITORS SAFETY RATIO: Depositors Safety Ratio = Total Standard Assets Total outside liabilities X 100 Depositors Safety Ratio = Total standard Loan Assets + Investments Total liabilities Capital & Reserves X 100 TABLE 6.4 DEPOSITORS SAFETY RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Total Standard Loan Assets Investments (Rs. In Lakhs) Total Standard Assets (Rs. In Lakhs) Total Liabilities (Rs. In Lakhs) Capital & Reserves (Rs. In Lakhs) Total Outside Liabilities Depositors Safety Ratio (In Percentage) 2001-02 50274.53 83363.59 133638.12 171926.14 27841.79 144084.35 92.75 2002-03 51702.58 77618.16 129320.74 165121.63 31041.32 134080.31 96.45 2003-04 48986.45 91803.00 140789.45 177740.54 35842.20 141898.34 99.22 2004-05 52047.34 78162.07 130209.41 165829.01 37832.74 127996.27 101.73 2005-06 55529.60 95152.29 150681.89 182752.42 41013.30 141739.12 106.31 2006-07 74986.92 94658.02 169644.94 202593.79 42861.07 159732.72 106.21 2007-08 94404.12 97003.97 191408.09 224868.22 46391.61 178476.61 107.25 2008-09 106042.17 106139.99 212182.16 127038.97 50635.53 76403.44 277.71 Average 66746.71 90487.64 157234.35 177233.84 39182.45 138051.39 113.90 Source: Appendices 1.1, 6.1 & 7.1 Figure 6.6 141
Due to awareness of depositors towards safety of their money deposited in a bank they are forced to study the proportion of standard assets of the bank to the outside liabilities, mostly consisting of their deposits. The above table and graph proves that the ratio of all the UCBs under study is very satisfactory in the last eight years, especially in the year 2008-09. The percentage shot up from 107.25% in 2007-08 to 277.71% in 2008-09. The eight year average of more than 100% is highly comfortable. To the credit of all the UCBs it must be stated that the ratio during 2008-09 is very high i.e. 277.71% and it can be safely stated that the depositors money is safe in these UCBs. 142
6.5.5 SHAREHOLDERS RISK RATIO: Shareholders risk ratio = Net NPAs Total Capital & Free Reserves X 100 TABLE 6.5 SHAREHOLDERS RISK RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Net NPAs Total Capital & Free Reserves Share Holders Risk Ratio (In Percentage) 2001-02 4982.88 27841.79 17.90 2002-03 4942.84 31041.32 15.92 2003-04 3378.26 35842.20 9.43 2004-05 1733.94 37832.74 4.58 2005-06 411.64 41013.30 1.00 2006-07 0.00 42861.07 0.00 2007-08 0.00 46391.61 0.00 2008-09 0.00 50635.53 0.00 Average 1931.20 39182.45 4.93 Source Appendices 1.1 & 8.1 Figure 6.7 143
Like depositors, the shareholders are also exposed to great risk if the Net NPA is positive or more than zero. Hence it is necessary to see that the shareholders funds are safe in view of the NPA. So, this ratio becomes important from the view point of the shareholders. From the table and graph given above, we can see the position of the selected UCBs. A risk ratio is resulted in the first five year and it is only due to The Sardar Bhiladwala Pardi People s Co.Op. Bank Ltd. Which had failed in making provisions against NPAs. However, it is a happy sign that the risk ratio in the last three years is zero. As the Net NPA of all the banks taken together is zero in the last three years, it is natural that the shareholders risk ratio is also zero. This signifies that the shareholders funds in these banks are clearly safe. 144
6.5.6 TOTAL PROVISIONS RATIO: Total Provisions Ratio = Total Provision Gross NPAs X 100 TABLE 6.6 TOTAL PROVISIONS RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Total Provisions Gross NPA Provision Ratio (In Percentage) 2001-02 10660.25 15366.03 69.37 2002-03 12389.64 15481.22 80.03 2003-04 15292.62 14812.59 103.24 2004-05 16915.86 12685.02 133.35 2005-06 18282.75 10211.45 179.04 2006-07 18611.99 8773.16 212.15 2007-08 19009.99 8071.25 235.51 2008-09 17969.65 7132.11 251.95 Average 16141.59 11566.60 139.55 Source: Appendix 8.1 Figure 6.8 145
Since the publication of the Narsimham Committee Report, the RBI published guidelines for making provisions against NPAs for all banks, including Co. Op. banks. The total provisions against gross NPAs must be such that its Net NPA comes to zero. It means that three must be 100% provision, so that the above table, it is seen that all the selected UCBs have made more than enough provisions for their gross NPA. During the last eight years the provisions Ratio has been above 100% expect in 2001-02 and 2002-03 due to The sardar Bhiladwala Pardi People s Co.Op. Bank Ltd. This marks a very satisfactory position and it signifies the satisfactory policy of the managements. It has even exceeded the limits laid down by the RBI. As per appendix 8.8 the gross NPA of The sardar Bhiladwala Pardi People s Co.Op. Bank during 2001-02 to 2005-06 were more than 40 to 50 percent of the total advances. But in the last three years i.e. 2006-07 to 2008-09 the Net NPA is zero as enough provisions were made against Gross NPA. It should be noticed that in the last three years the provision ratio has exceeded 200 percent which is a very positive sign. 146
6.5.7 SUBSTANDARD ASSETS RATIO: Substandard Assets Ratio = Total sub standard assets Gross NPAs TABLE 6.7 X 100 SUBSTANDARD ASSETS RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Total Substandard Assets Gross NPA Sub-standard Assets Ratio (In Percentage) 2001-02 7073.82 15366.03 46.04 2002-03 4261.08 15481.22 27.52 2003-04 3646.49 14812.59 24.62 2004-05 1470.44 12685.02 11.59 2005-06 877.05 10211.45 8.59 2006-07 1197.03 8773.16 13.64 2007-08 1574.59 8071.25 19.51 2008-09 1306.66 7132.11 18.32 Average 2675.90 11566.60 23.12 Source Appendix 7.1 Figure 6.9 147
The substandard assets ratio indicates the scope for improvement in NPA. The higher the ratio, the better is position of recovering the advances. From the above table and graph it is found that ratio has been decreasing in the first five years of study and increased a little in the last three years. The variations in the substandard assets ratio are caused by the higher percentage of doubtful assets over sub standard assets in some of the banks. The management should take necessary measures to reduce doubtful assets and loss assets and to increase the percentage of substandard assets. 148
6.5.8 DOUBTFUL ASSETS RATIO: Doubtful Assets Ratio = Total doubtful assets Gross NPAs X 100 TABLE 6.8 DOUBTFUL ASSETS RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Total Doubtful Assets Gross NPA Doubtful Assets Ratio (In Percentage) 2001-02 7625.34 15366.03 49.62 2002-03 10712.43 15481.22 69.20 2003-04 10434.42 14812.59 70.44 2004-05 10794.74 12685.02 85.10 2005-06 8402.32 10211.45 82.28 2006-07 6739.79 8773.16 76.82 2007-08 5358.69 8071.25 66.39 2008-09 4778.97 7132.11 67.01 Average 8105.84 11566.60 70.07 Source Appendix 7.1 Figure 6.10 149
The doubtful assets ratios of the selected UCBs taken together are presented in the above table and graph. Banks can recover more of the advances through compromise and that is the stage of compromise. The doubtful assets ratio indicates the proportion of total doubtful assets to gross NPAs. If the ratio is higher, there is more scope for compromising and reducing NPAs. From the table we understand that the ratio had been satisfactory except for three years i.e. 2004-05 (85.10%), 2005-06 (82.28%) and 2006-07 (76.82%). Nevertheless, the doubtful assets ratio is less than sub standard assets ratio which is a positive sign. The managements must try to recover as much doubtful advances as possible so that the Gross NPAs are reduced. 150
6.5.9 LOSS ASSETS RATIO: Loss Assets Ratio = Total Loss Assets Gross NPAs X 100 TABLE 6.9 LOSS ASSETS RATIO OF ALL THE SELECTED UCBs TAKEN TOGETHER Year Total Loss Assets Gross NPA Loss Assets Ratio (In Percentage) 2001-02 666.87 15366.03 4.34 2002-03 507.71 15481.22 3.28 2003-04 731.68 14812.59 4.94 2004-05 419.84 12685.02 3.31 2005-06 932.08 10211.45 9.13 2006-07 836.34 8773.16 9.53 2007-08 1137.97 8071.25 14.10 2008-09 1076.48 7132.11 15.09 Average 788.62 11566.60 6.81 Source Appendix 7.1 Figure 6.11 151
Loss assets ratio shows the proportion of loss that the banks are likely to suffer as compared to Gross NPAs. The ratio must be minimum, as it will indicate that the assets to be lost would be lower as compared to Gross NPAs. The loss assets are not likely to be recovered at all and so a higher ratio would suggest higher losses. From the above table it is understood that the loss assets ratio had been very low in the first four years of study i.e. 2001-02 to 2004-05 (3.31%) but it increased in the next four years i.e. 2005-06 to 2008-09 (15.09%). The increase is due to the higher loss assets in The Sutex Co. Op. Bank Ltd. (Appendix 7.3). The loss assets ratio in the remaining nine banks is very satisfactory. The Sutex bank in question should take its condition seriously and work out action plans to reduce the loss assets ratio. 152
6.6 GENERAL CAUSES OF NON PERFORMING ASSETS A bank with 100% performing assets is quite impossible as NPAs are sure to occur at one stage or another. The causes of such NPAs are many which may be broadly classified into three, viz. internal factors, external factors and internal and external factors together. INTERNAL FACTORS The internal factors leading to NPAs may work at either institutional level or borrower s level or both. A. Institutional level: The Institution s philosophy, its policy, procedure and people should be well coordinated. Very often aggressive lending policy and absence of well designed procedures for sanctioning advances result in high NPA levels. Before sanctioning loans gathering, processing and analyzing information are at the heart of decision making, failing which the bank s loan portfolio gets ruined. Appraisal deficiencies have put many banks in difficult conditions. In addition, delays in sanctioning loans and inappropriate repayment schedules worsen the situation. At post sanction stage inappropriate disbursement and Lack of adequate supervision / monitoring develop problems and losses. For example, sound loans at the initial stage are not good for any bank. Other Causes : Credit concentration deficiency causes NPAs as lack of information regarding repaid or growing areas for financing hinder accuracy. Secondly, credit process issues like sanctioning advances under unsatisfactory terms, violating credit principles lead to destruction of the bank. Over extension of credit to directors, large share holders and lending under pressure from interested parties also cause trouble. Technical in competence and lack of complacency also cause NPAs. Inadequate supervision unfamiliar borrowers and dependence on oral information instead of reliable complete financial data, optimistic interpretation of credit weakness are dangerous. 153
Poor selection of risks involving highly leveraged loans to establish business situation were bank financed share of required capitals is large related to the equity investment of owners, may also cause unpleasant situation. Lack of assessment of the credit worthiness of borrowers is get another reason for high NPAs. Loans based on expectations of successful completions of business rather than borrowers creditworthiness are always at risk. Loans made because of benefits such as large balance in deposits in a bank rather than on sound security or collateral are also not advisable. Loans against problematic collaterals might also cause NPAs. Liquidation of such collaterals and loans against collaterals without adequate margin create hurdles for a bank. B. Borrowers Level; Project related problems, managerial aspects like failure in marketing, inefficient management, labour problems and product obsolesces cause NPAs. Also, financial indiscipline like diversion of funs for different purposes is another cause of this situation. EXTERNAL FACTORS The external factors are those factors that lead advances into NPA beyond the control of borrowers or institution i.e. banks. Such factors are natural calamities, state of economy, recession or competition, trade policy, technological, advances, regulatory advances, environmental pollution control requirements, lack of adequate support from the legal system, loan waivers etc. These factors are not exhaustive but inclusive. The factors that affect the NPAs would reflect in the policies of the bank especially for lending, recovery management, monitoring and effective supervision. If proper attention is not given to recovery Management of NPAs, banks will lose their profitability and will not be able to satisfy its creditors and share holders. The internal and external factors lending accounts to NPAs are enlisted below: 154
INTERNAL FACTORS: 1. Improper appraisal of the credit proposal / credit requirements. 2. Lack of Supervision and follow up. 3. Vested interest 4. Improper treatment to borrowers (attitude as well as system constraints) EXTERNAL FACTORS 1. Recession in economy / industry not visualized earlier. 2. Failure of the product or service to take off. 3. Internal conflict among the promoters. 4. Mismanagement of the unit. 5. Willful default. 155