banking system in india – non performing assets - insights
DESCRIPTION
Banking System in IndiaTRANSCRIPT
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 1/12
insightsonindia.com http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/
ByINSIGHTS
INSIGHTSSimplifyingUPSCIASExamPreparation
BankingSysteminIndiaNonPerformingAssets
NonperformingAssets(NPAs)
INTRODUCTION
InthelastarticleonUnderstandingthebankingsystem,wehaddiscussedtheBaselnorms.
WelearntwhatBaselnormsareandwhytheyholdsuchimportancefortheIndianbankingsystem.Thenweunderstoodthechallengesthebankswillhavetofaceinimplementingthem.Further,wesuggestedapossiblewayout.
Previousdiscussionhighlightedwhystabilityinthebankingsystemisimportant.Followingthatdiscussion,inthisarticlewewillbediscussingoneofthebiggestchallengesthreateningthestabilityoftheIndianbankingsystemtheNonPerformingassets(NPAs).
ThebankingbusinesshasboomedsinceIndependence,particularlyaftertheLPGreforms.ThesectoriscurrentlyvaluedatRs115lakhcroreandexpectedtomorethandoubleatRs288lakhcroreby2020.Outofthis70percentofbusinessisbeingdonebyPSUbanks.AninterestingfactisthatSBIsmarketshareoutoftotalbankingbusinessis22percent!
Lookingattheenormoussizeofthebankingindustry,theNPAsareabigcauseofconcern.
WewillfirstlookatsomeofthebasicsofNPAsthenmoveontounderstandtheircausesandimplicationsthenexaminethechallengesthatthebankswillfacebecauseofthemandfinallyputforwardpossiblesolutions.
ThediscussionwillalsocoverthesocialagendabehindthebankingandwhetheritisunviablefortheIndianbanks.
WHATARENPAS?
Generallyspeaking,NPAisanyassetofabankwhichisnotproducinganyincome.
Inotherwords,aloanorleasethatisnotmeetingitsstatedprincipalandinterestpayments.
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 2/12
Onabanksbalancesheet,loansmadetocustomersarelistedasassets.Thebiggestrisktoabankiswhencustomerswhotakeoutloansstopmakingtheirpayments,causingthevalueoftheloanassetstodecline.
Criteria
Loansdontgobadrightaway.Mostloansallowcustomersacertaingraceperiod.Thentheyaremarkedoverdue.Afteracertainnumberofdays,theloanisclassifiedasanonperformingloan.
Banksusuallyclassifyasnonperformingassetsanycommercialloanswhicharemorethan90daysoverdueandanyconsumerloanswhicharemorethan180daysoverdue.
Foragriculturalloans,iftheinterestand/ortheinstallmentorprincipalremainsoverduefortwoharvestseasonsitisdeclaredasNPAs.But,thisperiodshouldnotexceedtwoyears.Aftertwoyearsanyunpaidloan/installmentwillbeclassifiedasNPA.
Categories
1.Substandard:WhentheNPAshaveaged12months.
3.Lossassets:Whenthebankoritsauditorshaveidentifiedtheloss,butithasnotbeenwrittenoff.
Afteracertainamountoftime,abankwilltrytorecoupitsmoneybyforeclosingonthepropertythatsecurestheloan.ThewaymoneyisrecoupedisahighlycontentiousissuenotjustwithbanksbutalsowithMicroFinanceInstitutions(MFIs).Wewilldiscussitlaterinthearticle.
Allofthiscanbeexplainedinamuchmoretechnicalmanner,butthatisnotrequiredhere.Forexample,wedonotneedtolistalltheconditionsthatmakethebanksdeclareanassetasNPAslikeInrespectofderivativetransactions,theoverduereceivablesrepresentingpositivemarktomarketvalueofaderivativecontract,iftheseremainunpaidforaperiodof90daysfromthespecifiedduedateforpayment.
Onlyunderstandingthebasicconceptswillsuffice.UPSCisnotgoingtoaskyouthesedetails,butabouttheimpactandsolutionsofNPAs.Eveninprelims,thesedetailswillnotbeasked.Soweavoidtechnicalitiesandjargonshere.ItisnotusefulforaGSpaper,evenifsomeofitmaybeusefulforEconomicsoptionalpaper.
EXTENTOFNPAs
GrossNPAsofdomesticbanksjumpedto4.2%oftotallendingbytheendofSeptember2013from3.6%sixmonthsbefore,accordingtotheReserveBankofIndia(RBI).
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 3/12
AsperarecentwarningbytheRBI,badloans(NPAs)couldclimbto7%oftotaladvancesby2015.
Inabsoluteterms,grossNPAsareestimatedtotouchRs2.50lakhcroresbytheendofMarchthisyear.ThisisequaltothesizeofthebudgetofUttarPradesh.Thebiggestchunkofthesoureddebtsiswithstaterunbanks(PublicsectorbanksorPSBs),whichaccountfortwothirdsofloansbut80%ofthebadassets.
ThisishowtheNPAcurvehasbeenmovingintherecentyears,asperanewsreportintheBusinessStandard:
Privatesectorandforeignlendersarebetterplaced.TheirNPAsinproportionoftheirlendingislesserthanthatofthePSBs.
WHYITMATTERS?
Thehigheristheamountofnonperformingassets(NPAs),theweakerwillbethebanksrevenuestream.
Intheshortterm,manybankshavetheabilitytohandleanincreaseinnonperformingassetstheymighthavestrongreservesorothercapitalthatcanbeusedtooffsetthelosses.Butafterawhile,ifthatcapitalisusedup,nonperformingloanswillimperilabankshealth.Thinkofnonperformingassetsasdeadweightonthebalancesheet.
HereistheimpactoftheNPAs:
AstheNPAofthebankswillrise,itwillbringascarcityoffundsintheIndiansecuritymarkets.Fewbankswillbewillingtolendiftheyarenotsureoftherecoveryoftheirmoney.
Theshareholdersofthebankswilllosealotofmoneyasbanksthemselveswillfindittoughtosurvivein
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 4/12
themarket.
Thiswillleadtoacrisisofconfidenceinthemarket.Thepriceofloans,i.e.theinterestrateswillshootupbadly.Shootingofinterestrateswilldirectlyimpacttheinvestorswhowishtotakeloansforsettingupinfrastructural,industrialprojectsetc.
Itwillalsoimpacttheretailconsumerslikeus,whowillhavetoshelloutahigherinterestrateforaloan.
Allofthiswillleadtoasituationoflowofftakeoffundsfromthesecuritymarket.ThiswillhurttheoveralldemandintheIndianeconomy.And,finallyitwillleadtolowergrowthratesandofcoursehigherinflationbecauseofthehighercostofcapital.
Thistrendmaycontinueinaviciouscircleanddeepenthecrisis.
TotalNPAshavetouchedfiguresclosetothesizeofUPbudget.ImagineifalltheNPAwasrecovered,howwellitcanaugurfortheIndianeconomy.
RBIgovernorRaghuramRajanhasrecentlysaidthatNPAsmustbecurbedbeforetheproblembecomesalarming.
WHYSUCHASITUATION?
TherisingincidenceofNPAshasbeengenerallyattributedtothedomesticeconomicslowdown.Itisbelievedthatwitheconomicgrowthslowingdownandrateofinterestgoingupsharply,corporateshavebeenfindingitdifficulttorepayloans,andithasaddeduptorisingNPAs.EvenfinanceministerPChidambaramstatedthatbadloansareafunctionoftheeconomyandhence,havingbadloansduringdistressedtimesisverynatural.
However,TheNPAmessisnotentirelybecauseofthereversalofeconomiccycles.
Herewelookattheotherreasonsbehindthismess.BasicallythewholeproblemcanbedividedintotwopartsExternalproblemsandinternalproblemsasfacedbythebanks.
ExternalFactors
Reasonsrelatedtothecorporatesector
1. ApartfromtheslowdowninIndia,theglobaleconomyhasalsosloweddown.
ThishasadverselyimpactedthecorporatesectorinIndia.Continuinguncertaintyintheglobalmarketshasleadtolowerexportsofvariousproductsliketextiles,engineeringgoods,leather,gemsetc.Itcanbenotedthatimportsandexportscombinedequaltoaround40%ofIndiasGDP!
Ahurtcorporatesectorisfindingitdifficulttopayloans
2. Thebaninminingprojects,delayinenvironmentalrelatedpermitsaffectingpower,ironandsteelsector,volatilityinpricesofrawmaterialandtheshortageinavailabilityofpowerhaveallimpactedtheperformanceofthecorporatesector.Thishasaffectedtheirabilitytopaybackloans.
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 5/12
Othersectors
BanksinIndiaarehighlyregulated.Prioritysectorlending(PSL)isoneoftheseregulationswhichrequirethebankstogiveacertain%oftheirloanstocertainsectionsofsociety.Thesearefarmers,SCs,STs,ITparks,MSMEsetc.
NaturallyonewouldassumethattheweakersectionscoveredunderPSLaretheonestobeblamedforthesituation.However,itisnotthecase.
Asperrecentnewsreports,theStandingCommitteeonFinancewillbenowexaminingthereasonsforhighNPASinPSBs.
Thedata,sharedwiththeStandingCommittee,showsthatNPAsinthecorporatesectorarefarhigherthanthoseinthepriorityoragriculturesector.
Withintheprioritysector,incrementalNPAsweremoreinrespecttomicrosmallandmediumenterprisesfollowedbyagriculture.
However,eventhePSLsectorhascontributedsubstantiallytotheNPAs.
AsperthelatestestimatesbytheSBI,educationloansconstitute20%ofitsNPAs!
Thesluggishlegalsystem(JudiciaryinIndia)andlackofsystematicandconstanteffortsbythebanksmakeitdifficulttorecovertheseloansfrombothcorporateandnoncorporate.
InternalFactors
1.Indiscriminatelendingbysomestateownedbanksduringthehighgrowthperiod(200408)isoneofthemainreasonsforthedeteriorationinassetquality.
2.Bankerssaythereisalackofrigourinloanappraisalsystemsandmonitoringofwarningsignalsatstaterunbanks.Thisisparticularlytrueincaseofinfrastructureprojects,manyofwhicharestrugglingtorepayloans.Besides,theseprojectsgoonfor20to30years.
3.Poorrecoveryanduseofcoercivetechniquesbybanksinrecoveringloans
4.ThewaitandwatchapproachofbankshavebeenoftenblamedasthereasonforrisingNPAsasbanksallowdeterioratingassetclasstogofrombadtoworseinthehopeofrevivalandoftenofferrestructuringoptionto
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 6/12
corporates.
AParliamentarypanel,examiningincreasingincidentsofNPAs,hasobservedthatstateownedbanksshouldstopevergreeningorrepeatedrestructuringofcorporatedebttochecktheconstantbulgingoftheirnonperformingassets.MembersofthepanelwereoftheviewthatNPAsaretheresultofbadeconomicsituation,buttherewerealsomanagementissueofeverygreeningofloans,whichcouldbeavoidedbynotrenewingloans,particularlyofcorporate.
Therefore,itcanbeclearlyseenthatitisonlytheeconomicslowdownthatisbehindtheNPAs.Thereareawholerangeoffactors.
WAYOUT
ThesimplestapproachtocutdownNPAsistorecoverthebadloans.
ApartfromtheregularguidelinesreleasedbytheRBI,tostrengthenfurthertherecoveryofduesbybanksandfinancialinstitutions,GovernmentofIndiapromulgated:
1.TheRecoveryofDebtsDuetoBanksandFinancialInstitutionsAct,1993
2.TheSecuritizationReconstructionofFinancialAssetsandEnforcementofSecurityInterest(SARFAESI)Act,2002.
So,howcanthebankslegallyrecovertheirloans?
(i)TheSecuritizationandReconstructionofFinancialAssetsandEnforcementofSecurityInterest(SARFAESI)Act,2002TheActempowersBanks/FinancialInstitutionstorecovertheirnonperformingassetswithouttheinterventionoftheCourt,throughacquiringanddisposingofthesecuredassetsinNPAaccountswithoutstandingamountofRs.1lakhandabove.Thebankshavetofirstissueanotice.Then,ontheborrowersfailuretorepay,theycan:
Takepossessionofsecurityand/or
Takeoverthemanagementoftheborrowingconcern.
Appointapersontomanagetheconcern.
(ii)RecoveryofDebtsDuetoBanksandFinancialInstitutions(DRT)Act:TheActprovidessettingupofDebtRecoveryTribunals(DRTs)andDebtRecoveryAppellateTribunals(DRATs)forexpeditiousandexclusivedisposalofsuitsfiledbybanks/FIsforrecoveryoftheirduesinNPAaccountswithoutstandingamountofRs.10lacandabove.Governmenthas,sofar,setup33DRTsand5DRATsalloverthecountry.
(iii)LokAdalats:Section89oftheCivilProcedureCodeprovidesresolutionofdisputesthroughADRmethods
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 7/12
suchasArbitration,Conciliation,LokAdalatsandMediation.LokAdalatmechanismoffersexpeditious,inexpensiveandmutuallyacceptablewayofsettlementofdisputes.
GovernmenthasadvisedthepublicsectorbankstoutilizethismechanismtoitsfullestpotentialforrecoveryinNonperformingAssets(NPAs)cases.
Amongthevariouschannelsofrecoveryavailabletobanksfordealingwithbadloans,theSARFAESIActandtheDebtRecoveryTribunals(DRTs)havebeenthemosteffectiveintermsofamountrecovered.
TherecentcontroversysurroundingloanrecoveryinIndiaViewsoftheSC
Bankshavebeenallegedtoengageincoercivepracticestorecovertheloans.Recently,therehavebeensomejudicialpronouncementsbytheapexcourtdeterminingthescopeofpowersofenforcementofsecuritieswithouttheinterventionofthecourts,bythebanksandFIsundertheSARFAESIAct.Theapexcourthasreiteratedtheneedtoprotecttheinterestofborrowers,andemphasizedthattheexerciseofextraordinarypowersofrecovery,bybanksandFIsmustbeincompliancewiththeprovisionsoftheSARFAESIAct.
AspertheSupremeCourt(SC)Liquidityoffinancesandflowofmoneyisessentialforanyhealthyandgrowthorientedeconomy.Butcertainly,whatmustbekeptinmindisthatthelawshouldnotbeinderogationoftherightswhichareguaranteedtothepeopleundertheConstitution.Theprocedureshouldalsobefair,reasonableandvalid,thoughitmayvarylookingtothedifferentsituationsneededtobetackledandobjectsoughttobeachieved.
But,thesearestepswhichcurethediseaseofNPAs.TheissueofNPAsneedstobetackledatthelevelofpreventionratherthancure.
Therefore,thestepsthatcanpreventthepilingupofNPAsareasfollows:
1.Conservatism:
BanksneedtobemoreconservativeingrantingloanstosectorsthathavetraditionallyfoundtobecontributorsinNPAs.Infrastructuresectorisonesuchexample.NPAsrisepredominantlybecauseoflonggestationperiodoftheprojects.Therefore,theinfrastructuresector,insteadofgettingloansfromthebankscanbefundedfromInfrastructureDebtFunds(IDFs)orotherspecializedfundsforinfrastructuraldevelopmentinthecountry.
2.Improvingprocesses:
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 8/12
Thecreditsanctioningprocessofbanksneedstogomuchmorebeyondthetraditionalanalysisoffinancialstatementsandanalyzingthehistoryofpromoters.Forexample,banksrelymoreontheinformationgivenbycreditbureaus.However,itisoftennoticedthatseveraldefaultsbysomecorporatearenotregisteredintheircredithistory.
3.Relyinglessonrestructuringtheloans:
Insteadofsittingandwaitingforaloantoturntoabadloan,andthenrestructureit,thebanksmayofficiallystarttoworktorecoversuchaloan.Thiswillobviatetheneedtorestructurealoanandseveralissuesassociatedwithit.Oneestimatesaysthatby2013therewillbeRs2trillionworthofrestructuredloans.
4.ExpandinganddiversifyingconsumerbasebyInnovativebusinessmodels:
Contrarytopopularperceptions,theNPAinnoncorporatesectorislessthanthatinthecorporatesector.Hence,thereisaneedtoreachouttopeopleinremoteareaslackingconnectivityandaccessibility.Moreandmorepoorpeopleinruralpocketsshouldbebroughtunderthebankingsystembyadoptingnewtechnologiesandelectronicmeans.Innovativebusinessmodelswillplayacrucialrolehere.Otherwise,theNPAsmayincreaseinsteadofdecreasing.
AssaidbythenewM.D.ofSBI,Mr.Viswanathanproposedideassuchasasingledemataccountforallinvestmentsandcreditcardsforschoolstudents(aboveclass8th)tomakethemawarewiththebankingsystem.
CONCLUSION
Lookingatthegiantsizeofthebankingindustry,therecanbehardlyanydoubtthatthemenaceofNPAsneedstobecurbed.ItposesabigthreattothemacroeconomicstabilityoftheIndianeconomy.AnanalysisofthepresentsituationbringsustothepointthattheproblemismultifacetedandhasrootsineconomicslowdowndeterioratingbusinessclimateinIndiashortagesinthelegalsystemandtheoperationalshortcomingofthebanks.Therefore,ithastobedealtatmultiplelevels.Thegovernmentcantbeexpectedtorescuethestaterunbankswithtaxpayersmoneyeverytimetheyfallintoacrisis.But,thekindofattentionwithwhichthisproblemhasbeenreceivedbypolicymakersandbankersalikeisabigrayofhope.Rightsteps,timelyandconcertedactionsandarevivaloftheIndianeconomywillputalidonNPAs.Prevention,however,hastobecomeaprioritythanmerecure.
MODELQUESTIONS
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 9/12
PrelimsQuiz
(Incaseifyouareviewingthisarticleinyouremail,youdontseequizbuttonthere.Youhavetovisitthesitetotakethisquiz)
EconomyQuizNPAs
Timelimit:0
Quizsummary
0of5questionscompleted
Questions:
1. 1
2. 2
3. 3
4. 4
5. 5
Information
NonPerformingAssetsQuiz
Youhavealreadycompletedthequizbefore.Henceyoucannotstartitagain.
Quizisloading...
Youmustsigninorsignuptostartthequiz.
Youhavetofinishfollowingquiz,tostartthisquiz:
Results
0of5questionsansweredcorrectly
Yourtime:
Timehaselapsed
Youhavereached0of0points,(0)
Averagescore
Yourscore
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 10/12
Categories
1. Notcategorized0%
1. 1
2. 2
3. 3
4. 4
5. 5
1. Answered
2. Review
1. Question1of5
1.Question
Considerthefollowingstatements:
1. InIndia,theprivatesectorbankshavealargermarketsharethanthepublicsectorbanks.
2. TheNPAsoftheprivatesectorbanksarefargreaterthanthatofthepublicsectorbanks.
Choosethecorrectanswerusingthecodesbelow:
Correct
Solution:d)
Incorrect
Solution:d)
2. Question2of5
2.Question
WhichofthefollowingfactorsMAYadverselyaffectthelevelofNPAsoftheIndianbanks?
1. Sloweconomicgrowth.
2. Substantialdelayinbankfundedinfrastructuralprojects.
3. PrivatizationofthePSBs.
Choosethecorrectanswerusingthecodesbelow:
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 11/12
Correct
Solution:a)
Incorrect
Solution:a)
3. Question3of5
3.Question
Considerthefollowingstatements:
Assertion(A):TheNPAsunderthecorporatesectoraremuchlesserthantheonesgivenunderPrioritySectorlendingnorms.
Reason(R):ThePSLnorms,interalia,covertheweakersectionsofthesocietywhomaybeunabletopayloansontime.
Inthecontextofthestatementsabove,whichoftheseistrue?
Correct
Solution:c)
Incorrect
Solution:c)
4. Question4of5
4.Question
DisputesconcerningNPAsinIndia,canbesortedoutbywhichofthesemechanisms:
1. Arbitration
2. MovingtheLokAdalat
3. Movingtheconcernedquasijudicialandregulatoryauthoritiesincaseofinfrastructureprojects.
Choosethecorrectanswerusingthecodesbelow:
Correct
Solution:a)
Incorrect
Solution:a)
-
1/17/2015 BankingSysteminIndiaNonPerformingAssetsINSIGHTS
http://www.insightsonindia.com/2014/07/05/bankingsystemindianonperformingassets/ 12/12
5. Question5of5
5.Question
WhichofthefollowingcanbepossibleconsequencesofveryhighunmanageableNPAs?
1. Economicslowdownandpossiblerecession.
2. Riseininterestratesofloans.
3. Scarcityoffundsinthesecuritymarket.
Choosethecorrectanswerusingthecodesbelow:
Correct
Solution:d)
Incorrect
Solution:d)
Mains
1.Inyourview,whatcanbethepossiblereasonsbehindtheincreasinglyhighNPAsoftheIndianbanks?HowfarcanthisbeattributedtotheconditionsprevailingintheIndianandglobaleconomy?(300words)
2.ExplainhowhighNPAscanbedamagingtotheIndianeconomy.(200words)
3.HowfarcanfinancialinclusionhelpincontainingthehighlevelofNPAsofbanksinIndia?Substantiateyourviewswithtwoexamples.(200words)
4.WhatarethelegalmechanismsthatcanbeusedtocontaintheNPAs?BringoutclearlytheroleofeachactortheRBI,theGovernmentofIndia,andthebanksinachievinglowerNPAsthroughlegalmechanisms.(300words)
5.TheInfrastructuralprojectsarefacedwithseveralproblemsespeciallyrelatedtofinancingoftheprojectsbycommercialbanks.Examinethebottlenecksinthepresentsystemoffinancing.Whatcanbedonetoaddresstheseissues?(200words)
6.DespitehavingamuchlargershareintheBankingmarket,thestateownedbankshavenotperformedwellfinancially.Criticallyexamine.Cantheproblemberesolvedbydenationalizingthepoorlyperformingbanks?(300words)
INSIGHTS2015.AllRightsReserved.