Present scenario in the Banking system
Maintenance of Asset quality has become the important aspect for survival of Banks. Increasing competition results in a situation where banks compete with each other for better customers. It is becoming tougher and tougher for banks to generate consistent profits. Though banks have developed alternative methods for generation of non interest income, the income from Loans and advances is the basic revenue generator for the bank. Among the banks in India, those in Public Sector particularly face challenges in this aspect. After withdrawal of regulatory forbearance on restructuring of assets, banks are now in the process of adjusting to a realistic process of recognizing stress. However, RBI has recently voiced concern at the proportion of stressed assets (those accounts with irregularities, and likely to slip to NPA category) already comprising a major portion of standard advances in Public sector Banks.
Importance of maintaining Asset Quality
Increase in business is an imperative need for Banks. But the whole success of such growth is measured by asset quality. Paradoxically, the asset quality position of banks is looking better than the real situation since most of the times the irregular advances are measured in percentage terms. As the advances portfolio of banks is growing continuously, the percentage increase in NPAs and stressed assets remains low as a percentage. But the absolute figures reflect a really alarming situation (Refer to Table – 1 below). Maintaining perfect asset quality is the only option for the banks to do well and improve the bottom-line. This is the survival mantra.
The percentage NPAs also reflects an equally grim picture: Table -1
|GNPAs of SCBs: June 2015|
|Amount in Rs. Crore|
|Gross Advances||Gross NPAs
To Gross Advances %
|Bank of Baroda||14937||284315||5.25|
|Bank of India||24402||280987||8.68|
|Bank of Maharashtra||7575||96365||7.86|
|Bharatiya Mahila Bank Ltd.||0||395||0.00|
|Central Bank of India||12931||193132||6.70|
|IDBI Bank Limited||13942||188277||7.41|
|Indian Overseas Bank||14638||158961||9.21|
|Oriental Bank of Commerce||8577||146549||5.85|
|Punjab & Sind Bank||3300||63799||5.17|
|Punjab National Bank||25032||336814||7.43|
|Union Bank of India||13765||232072||5.93|
|United Bank of India||6533||68299||9.57|
|State Bank of Bikaner & Jaipur||3133||70436||4.45|
|State Bank of Hyderabad||5482||106704||5.14|
|State Bank of India||53788||1062785||5.06|
|State Bank of Mysore||2214||52612||4.21|
|State Bank of Patiala||5091||79705||6.39|
|State Bank of Travancore||2759||68411||4.03|
|TOTAL PUBLIC SECTOR||357842||6234660||5.69|
(Source: RBI statistics, key indicators)
Based on the above figures, the Gross NPA of all public sectors has risen to overall 5.69% of the total advances. Many of the public sector banks have their Gross NPA percentage above 5%, which is indeed a very alarming picture.
Reasons for existence of huge number of stressed assets
A study of present scenario gives us an idea about some factors causing this trend.
- Impracticable and unrealistic repayment schedules: For Banks, while sanctioning loans, in many cases, it may not be possible to make a very accurate and realistic assessment of the project. This is true especially on study of the fact as to when the borrowal units it will actually take off, break even and start generating profits. The project report submitted by the prospective borrower to the bank should be subject to analysis, before deciding when it will actually generate income for the borrower unit. Moreover, there is no system of midterm assessment of the project during take off stage, to know whether the business is going well with the projections and expectations. As a result, most of the problems faced by the borrowal units during the take off stage are not properly handled. As a result, the repayment becomes due, before the unit actually generates surplus. This will result in stress in the account, as the due amounts are not realized in time.
- Economic cycles turning worse: The winds of economy are not always favorable, they keep on fluctuating. The general trend or recession in the economy affects the entire economy. All the economic entities, whether big or small will be under the influence. The units financed by Banks are no exception.
- Compulsion in financing certain activities mandated by Government: Public sector Banks have taken up the cause of upliftment of the downtrodden, and people who are lying below the poverty line. Government looks up to banks for this cause, as banks are well equipped and most suitable tools to bring about economic development from the grass root level. For identification of beneficiaries, various government agencies are involved. The activities of these agencies are overlapping. These agencies often identify activities which may not go well in the area. And also some times, financing to such activity will result in stiff competition. For example, many a beneficiaries are selected and recommended to banks for Auto Rickshaw finance in the same area, despite the fact that the area is flooded with such auto rickshaws. Many a time it happens that the same activity is forced through more than one bank in a particular area, resulting in competition in the market. Ultimately it affects the income generation of the borrower.
- Presence of the borrowers in remote and inaccessible area: Bank finance reaches to all corners and remote areas. The intention is to bring about development in these areas. However, recovery of loans given in such areas becomes difficult as the borrowers are not easily accessible. Some of the areas are inaccessible. Borrowing units financed in such areas demand a lot of effort and time from the Bank Staff.
- Difficulty in understanding the accuracy and veracity of the data submitted by borrowing units at a given point of time. Banks are facing difficulty to a great extent, in verifying the accuracy of the data submitted by the borrowing units. The data submitted by the borrowers on day to day basis and the final data for the financial year (Audited) is likely to have a wide variation. Till such audited data is received, banks have to rely on provisional data and many decisions are taken based on this data. As there is no proper basis for these decisions, it may land them in trouble. Particularly in big ticket loans, this will prove disastrous.
- Compromising on vital parameters while appraising loans due to severe competition to acquire big borrowers: In present day banking, stiff competition among bankers exists to acquire good customers. Sometimes banks are compelled to take risks to acquire and retain customers ignoring some vital parameters of lending. The deviations that crop up are not matching with the compliance guidelines. During this process, banks are exposed to great risks.
Comparison of banks
If we take a comparison of Banks’ NPA position, the present situation makes it amply evident that banks are losing much because of one parameter, i.e., slippages to NPA. Even if banks gain profit on many other aspects, slippages to NPA category nullify all the positive gain factors of banks, putting great strain on the balance sheet at the end.
If we analyze the Gross NPAs of Public Sector banks for the last 10 years, as per RBI statistics, from a level of 476.22 billion, the Gross NPAs have reached to a level of 2784.68 billion. An increase of 585% or more than 5 times the bad loans position as on 31.3.2005.
If we take a look at the picture of slippages in banks, it reflects further worsening scenario. (Pl. refer to Table II)
|MOVEMENT OF NPA OF ALL PUBLIC SECTOR BANKS AS ON 31.3.2015
|As on March 31, 2015 ( in millions)|
|Bank||Gross NPAs||Net NPAs|
|As on March 31 ( previous year )||Addition during the Year||Reduction during the Year||Write-off during the Year||As on March 31 ( current year )||As on March 31 ( previous year )||As on March 31 ( Current year )|
|1||STATE BANK OF BIKANER & JAIPUR||27328||16875||11120||3631||29451||17709||17692|
|2||STATE BANK OF HYDERABAD||58242||30493||35334||3553||49848||29849||23485|
|3||STATE BANK OF INDIA||616054||294350||130116||213035||567253||310961||275906|
|4||STATE BANK OF MYSORE||28189||18955||18377||7403||21364||16303||11216|
|5||STATE BANK OF PATIALA||37584||47085||33520||7551||43597||24045||30492|
|6||STATE BANK OF TRAVANCORE||30769||44749||41404||10544||23571||19285||13987|
|STATE BANK OF INDIA & ITS ASSOCIATES||798165||452507||269871||245716||735085||418151||372777|
|3||BANK OF BARODA||118759||85153||25512||15786||162614||60348||80695|
|4||BANK OF INDIA||118686||166515||50690||12578||221932||76795||137747|
|5||BANK OF MAHARASHTRA||28599||46336||8278||2637||64021||18073||41266|
|6||BHARATIYA MAHILA BANK LTD.||0||–||–||–||–||–||–|
|8||CENTRAL BANK OF INDIA||115000||65790||48200||13860||118730||66490||68070|
|11||IDBI BANK LIMITED||99602||61008||17671||16089||126850||49023||59925|
|13||INDIAN OVERSEAS BANK||90205||120160||40271||20869||149225||56581||98133|
|14||ORIENTAL BANK OF COMMERCE||56179||45143||15410||9249||76662||39044||48162|
|15||PUNJAB AND SIND BANK||25535||12424||4505||2633||30822||19186||22660|
|16||PUNJAB NATIONAL BANK||188801||166596||39251||59197||256949||99170||153965|
|19||UNION BANK OF INDIA||95637||56663||12684||9307||130309||53403||69190|
|20||UNITED BANK OF INDIA||71180||40872||38916||7607||65529||46641||40814|
Total for Public Sector
(Source: RBI statistics, key indicators)
The fresh gross slippages during the financial year 2014-15 for all Public sector banks stands at 1,77,861 crores (without netting). However, at the end of the financial year, after affecting recoveries, the NPAs stood at 2, 78,467 crores.
These figures indicate the really alarming situation in asset quality of banks.
The Way out of the situation:
The strategy for tackling irregular/stressed assets revolves around mitigating the risk factors or reasons as cited earlier in the article.
- Multi layer due diligence is to be conducted to accept any borrower. Proper operational guidelines should be put in place for multi layer screening well before accepting the (borrower) customer. Presently, most of the banks rely on one or two officials mostly the branch officials of the concerned branch. However, it will be prudent for banks to conduct a second layer due diligence independent of the one which is already done by the branch officials concerned. For this, officials from nearest branches/administrative offices can be engaged. The second layer should once again verify the credentials of the borrower from independent sources of its own. A summarization of the facts can be done at a later stage before accepting the proposal for sanction. For implementing this, Banks must devise specialized mechanism to deal with appraisal and pre sanction due diligence which involves the physical aspects of the unit, the borrower, and the papers (financials).
- Restructuring, wherever possible and necessary, based on viability: Needless to mention, restructuring should be driven by genuine need, and the viability aspect. Realistic appraisal of the situation is a must. In the same manner, a borrower who needs to be assisted must be given the helping hand through restructuring, wherever the situation warrants.
- Do not withdraw support once the account turns NPA: An account may become NPA due to numerous reasons. Field functionaries should well be trained to identify the actual cause of the account slipping to NPA, and extend support if needed, so that the unit can be tapped back to health. In fact, a culture is to be developed to identify the real causes wherever the accounts are stressed, when the first signals of irregularities crop up. This will give a realistic view of the unit. Banks in this situation have to recognize the borrowers whether they are willful defaulters/non cooperative, and then decide whether to extend help or to adopt other preventive measures.
- Economic viability of the unit is to be preserved for the overall good of the economy: As stated in the earlier point, the real objective of banks should be preserving the economic viability, and thereby the economic value of the units. NPA classification is meant only for giving a true picture of the balance sheet of Banks. The ultimate objective of all financial institutions, including banks, is to preserve the value of the units, in which huge amount of investments are made. Any action taken by banks looking from this angle will ultimately have a win – win situation for both Banks and borrowers.
- Ensuring the progress of the units both on financial and physical terms: Once finance is extended, banks become the partners of the borrower with a considerable stake in the activity. Sufficient support and handholding is to be extended to the units/borrowers on both financial and physical matters. A sort of ownership is to be assumed and felt. A monitoring culture developed through a sense of ownership, will really work for the benefit of both the bank and borrower.
- A proper internal Loan review mechanism supported by a timely Risk Rating evaluation: The internal review mechanism of banks needs to be more realistic. For review/ renewal and rating of accounts, banks will generally rely on unaudited/provisional figures to complete the process within the stipulated time. The audited financials, which are actual reflection of the financial strength of the unit, will be provided at a later date on completion of all formalities by borrowers and they are generally received during the month of September/October every year. As per the present practice, Banks are merely conducting a fresh rating of the account when the audited financials are received as the account is already reviewed with provisional financials without looking at the audited financials in entirety. Great risk is involved in this aspect.
Alternatively, banks can standardize the renewal system to synchronize uniformly for all accounts during a particular period, say spread over three months, when the audited financials are generally received. A suitable period like September/October/November can be chosen for this. Instead of relying on provisional data each year at the time of renewal of the account, banks can time the first renewal of each account falling due at the time of the receipt of audited financials. Thereafter they can enjoy the benefit of actual renewal with audited financials every year thereafter. Besides giving banks a good control on the units/borrowers, this system may enable the banks to follow up, plan and regulate the review/renewal system more effectively.
Similarly, the risk rating conducted at the time of actual renewal will also be more tenable with audited financials each time.
- Separate and more intensified review mechanism for accounts under stress: This can be planned with more focus on the causes leading to stress. Review or renewal of stressed accounts should not be a routine renewal. Wherever there is stress, the review mechanism should be focusing on some more aspects, for example the causes for the irregularities, whether they can be rectified and the unit can work normally as per expectations of original sanction. A separate proposal/renewal note should be devised for such accounts. Banks can also prepare check list borrower/industry-wise to list the problems and find out the solution to specific problems, instead of conducting a routine renewal of the accounts.
- Constant up-gradation of credit appraisal skills: Banks also need to prune up the appraisal skills of its employees on a continuous basis. The present appraisal skills of an average advances officer does not commensurate with the challenges faced by the industry. Repeated trainings on appraisal skills for updating the skills is required.
- More and more penetration in to all aspects of the loan proposals during appraisal stage: This will help the banks to have control or information of a major portion of the activity. Minute details regarding each aspect of the project, at the time of initial sanction may be incorporated in the proposal. These aspects may include details of getting power connection, approvals from government authorities, etc. Borrowers’ ability to get these things cleared becomes more important.
- Sufficiency of Loan documentation: The field functionaries attending the documentation aspect need to be thoroughly trained. Banks may think of special cells for documentation (Some banks have already implemented this aspect) for big accounts, where few experts on documentation will be sitting and they attend the documentation aspects more systematically. This will ensure ultimate recovery of Banks’ money. A thorough documentation process before disbursement of loans can be a litmus test for the borrower, and sometimes banks can get important signals about the borrower, during this stage.
- Standby credit facility to take care of cost over run: While financing any new unit, banks have to sufficiently take care to assess whether any cost overrun is likely to occur, if so, what is the remedy available with the borrower. Follow up of implementation schedule in large project loans assumes great importance. Correlating disbursements with the sanction schedule and checking the progress as per the projected schedule is a very important aspect that is to be monitored during the currency of entire disbursement schedule.
- Maintaining quality advances is to be one of the important parameters in appraisal system: Wherever officers involved in processing and sanction of loan proposals, special care can be taken to incorporate positive aspects of asset quality in performance appraisal systems. This will generate a motivation for maintaining quality advances.
- Temporary measures for up gradation of accounts should be avoided: For example, erosion of liquid collaterals to reduce over dues and keep accounts standard: Whenever banks find accounts under stress, the first reaction of field functionaries will be to liquidate the liquid assets. Such temporary measures have to be avoided to postpone slippages.
- Role of middlemen is to be discouraged in the process of loan sanctions: This aspect is to be taken care at appraisal level. Instead of relying on middlemen, banks have to select their own borrowers based on merits of the case.
Regulatory support by Reserve Bank of India
As banks are severely under stress, RBI also has come up with few new guidelines to help the banking system and thereby preserving the economic value of the assets created out of bank finance
- RBIs framework on revitalizing distressed assets in the economy, giving detailed guidelines for identifying stress in the accounts particularly large borrowal accounts. This gives banks proper direction for monitoring of large borrowal accounts and action plan to be followed
- Strategic Debt Restructuring Scheme giving leverage to banks for acquiring or transferring the ownership of the ailing companies, where the management is not competent. This enables banks to change the management or having a better say in the affairs of the defaulting companies. Ultimately banks have the liberty to change the management of the unit to preserve the economic value of the unit and also preserve the investment value, for the overall good of the economy.
- Flexible restructuring with periodical refinancing option for every 5 years: This gives banks leverage in case of big projects having long moratorium period. This helps banks to re-assess and regulate the further funding for projects with a large gestation. This will also protect the banks against asset liability mismatches.
- Reporting borrowers as Willful Defaulters: This initiative by Reserve Bank maintains pool of information about willful defaulters where banks can verify the particular internet site before accepting any borrower
- The system of identifying Red flagged accounts where any signal is emitted where fraud may be suspected.
Supportive measures by Government:
Government is bringing about many measures to strengthen the hands of the Banks. However, a few more initiates in the following lines are the need of the hour
- Wherever government officials are involved in the process of bank loans, strict accountability on government officials should be brought about. For example, any property coming for registration with the Revenue authorities, bank clearance on such property should be made compulsory. The transfer should be allowed only on producing enough proof that no bank loan is existing on the property.
- Bank loan clearance certificate/NIL certificate from Banks should be made compulsory for any person applying for a pass port.
- There should be regulation for immediate action against fraudsters without delay. Willful default of bank loan without proper reason should be treated as a crime against the nation.
To safeguard against the perils of slippages, banks need to further strengthen the mechanism for monitoring of advances at all levels. There should be a focused approach giving due importance on this aspect. Particularly, banks need to intensify the focus more on the big ticket loans, which account for a large portion of the stressed assets. For such loans, more specialization and more involvement at appraisal stage is desired. Monitoring during maintenance of the accounts also needs more focused and specialized approach. Further, as it is understood that income from Loans is the life saver for banks, training and specialization of staff in this aspect is a must. Such overall improvement only can safeguard banks from the perils of slippages. It is high time that some changes in Banks’ operational guidelines are initiated in this direction.