After liberalization the Indian banking sector has developed appreciably. The RBI has also nationalized good number of commercial banks for providing socio economic services to the people of the nation .The Public Sector Banks have shown very good performance as far as the financial operations are concerned. If we look at the financial operations, we may find that deposits of public to the Public Sector Banks have increased; the investments of the Public Sector Banks have increased, and however the advances have also been increased .The total income of the public sector banks have also shown good performance since the last few years. The Public Sector Banks have also shown comparatively good result. However, the only problem of the Public Sector Banks these days is the increasing level of the non performing assets and the rising amount of capital provisioning which has badly affected the profitability of Banks. The non performing assets of the Public Sector Banks have been increasing regularly year after year.
If we look at the numbers of non performing assets we may come to know that in the year 1997 the NPAs were Rs.47,300 crore and it has now reached to Rs 4,04,667 crore as on 31st December 2015.
Asset Classification and Provisioning Norms
Prudential norms relating to asset classification have been changed post-liberalisation. The earlier practice of classifying assets of different quality into eight `health codes have been replaced by the system of classification into four categories (in accordance with the international norms): Standard, Sub-standard, Doubtful, and Loss assets. On 1st April 2000, provisioning requirements of a minimum of 0.25% were introduced for standard assets. For the sub-standard, doubtful and loss asset categories, the provisioning requirements remained at 10%, 20-50% (depending on the duration for which the asset has remained doubtful), and 100%, respectively, the recognition norms for NPAs have also been tightened gradually. Since March 1995, loans with interest and/or installment of principal overdue for more than 180 days are classified as non- performing. This period shortened to 90 days from the year ending 31st’ March 2004. Provisioning norms further strengthened with 15% general provision for sub-standard secured assets and additional 10 % for unsecured portion. Doubtful unsecured portion 100 % and secured portion 25%\40%\100% as per tenure of doubtful up to 1 year or 1-3 years or more than 3 years respectively and Loss assets 100% provision.
NPAs COST TO BANKS AND NATIONAL ECONOMY:
One of the major problems that hamper the possible financial performance of the Public Sector Banks is the increasing non performing assets.
The non performing assets impact drastically 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 have a deleterious effect on the return on assets in several ways –
- They erode current profits through provisioning requirements
- They result in reduced interest income
- They require higher provisioning requirements affecting profits and accretion to capital funds. They affect the capacity to increase good quality risk assets in future
NPAs do not just reflect badly on a bank’s books of account, they adversely impact the national economy. Following are some of the repercussions of NPAs:
- Depositors do not get rightful returns and many times may lose uninsured deposits. Banks may begin charging higher interest rates on some products to compensate Non-performing loan losses
- Bank shareholders are adversely affected
- Bad loans imply redirecting of funds from good projects to bad ones. Hence, the economy suffers due to loss of good projects and failure of investments.
- When bank do not get loan repayment or interest payments, liquidity problems will erupt.
- They limit recycling of funds and set in asset-liability mismatches.
CONCERNS OF NPA AT THE QUARTER END DECEMBER 2015
Mounting bad loans on the books of Indian banks, especially state-run lenders, is a major concern of the Reserve Bank of India (RBI) and the policymakers at government. At last count (as on 31 December 2015), the total gross non-performing assets (GNPAs) of 26 public sector banks have totaled Rs 4,04,667 crore .Banks also have significant portion of restructured loans on their balance sheets (somewhat equal to the NPA amount), which also faces the risk of slipping to bad loan category if the economy doesn’t pick up as expected. The total stressed assets in the Indian banking industry would be around Rs 8 lakh crore or 11.30 per cent of the total loans given by Indian banks. The RBI has set March, 2017 deadline for banks to clean up their books. From Rs 53,917 crore, GNPAs in September 2008 (just before the 2008 global financial crisis broke out following the collapse of Lehman Brothers), the bad loans of Indian Banks have now grown to Rs 4,04,667 crore in December, 2015.
The dirt has begun to come out in large chunks. It is grim — the stressed assets of banks are at 11.3%, which means that the capital they have is not enough to cover the loss of value of their assets. State-run bank’s reluctance to lend is reflected in the credit numbers. Government bank’s credit growth slowed to 6.7% in December last, from 19.1% in the same month in the year 2013.
In the December quarter, of the 40 listed banks, 10 banks had gross bad loans of more than 8%, while 22 banks had in excess of 5%. In a matter of 40 days, they lost more than `1.8lakh crore in market capitalisation. Yes, there may be a few more quarters of bad numbers. There may be a lot more companies that should be declared NPAs but have not yet been declared NPAs, Companies may have operating profits which are much lower than what are needed to cover their interest.
A JOURNEY AHEAD TOWARDS REFORMS
The RBI has tried to develop many schemes and tools to reduce the non performing assets by introducing Framework for Revitalising Distressed Assets in the Economy, a detailed Guidelines on Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP), 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. RBI has given guidelines relating to infrastructure and core industries ( 5:25 refinance scheme) and Strategic Debt Restructuring (SDR) to tackle stressed assets more effectively. 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 mind the overall impact of all the factors that influence the business.
But, how big is the NPA problem at this stage and what is the cost to economy on account of this? Under current norms, banks need to set aside money against bad loans in the form of provisions. Banks take a hit as they need to provide for this chunk, in turn, spiking up their capital requirements. In the case of state-run banks, the burden to feed these banks is on the taxpayer; since government is the owner of these banks .The government has promised to infuse the needed capital in state-run banks (it has provided Rs 25,000 crore in this year’s budget). But, the burden can grow multi-fold if the economic activities do not pick up on the ground. But this may well be a journey that could end up happily. Let us hope what is happening now is good in the long term for the banking sector and for the economy, if the problem is being addressed in a focused manner and within a defined time-period. Once it’s done, the outcomes will be very positive for the PSU BANKS and our economy.
About the Author
B B LENKA
UNION BANK OF INDIA