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- 1. NPA Management bythe Indian Banking Sector in the Turbulent Economic Environment By Dr. Vijay Kr Khurana
- 2. NPA Management bythe Indian Banking Sector in the Turbulent Economic Environment 1. Introduction 2. Factors Impacting Rise in NPAs 3. Indian Scenario 4. NPA Management Strategies 5. Effectiveness of NPA Management in Indian Banks 6. Impact of Current Economic Turbulence on NPAs 7. Challenges Ahead 8. Improvement Measures 9. Conclusion 10.References
- 3. Introduction Fig 1: AssetClassification Assets Performing Assets Standard Assets Non Performing Assets (NPA) Sub -Standard Assets Doubtful Assets Loss Assets
- 4. Introduction • Assets whichdo not generate periodical income are called as Non-Performing Assets (NPA). • A Non-Performing Asset (NPA) is defined as a credit facility in respect of which the interest and/or instalment of principal has remained ‘past due’ for a specified period of time.(Usually 90 Days or more) • Mere mention of the word NPA causes alarm bells ringing in banking sector and financial markets.
- 5. Introduction • During theU.S. subprime mortgage crisis of the late-2000s, NPAs attained shocking proportions. Many banks failed in USA during the years 2008 & 2009 • If the recent eurozone debt crisis had become much worse, then it could have become like the 2007 and 2008 financial crash all over again, with the global banking system again under threat due to NPAs in the form of likely default in government debt.
- 6. Introduction • In Indiaalso, NPAs have always been cause of concern in the banking sector & financial markets. PSBs are reported to have higher NPAs. • In Jan 2012, SBI etc said that Loan to Kingfisher has become NPA.
- 7. Introduction • In Feb2012, Banks are said to be reviewing loan to Air India to be classified as NPA
- 8. Introduction Generation / Increasein NPAs can create following problems: • Owners do not receive a market return on their capital. • Depositors do not receive a market return on saving. • Banks tend to redistribute losses to others • Nonperforming loans epitomize bad investments • Nonperforming asset may spill over from the banking system and contract the money stock, which may lead to economic contraction.
- 9. Factors Impacting RiseIn NPAs
- 10. Factors Impacting RiseIn NPAs External factors • Ineffective legal framework & weak recovery tribunals • Lack of demand / economic recession or slowdown • Change in Govt. policies • Wilful defaults by customers • Alleged political interferences
- 11. Factors Impacting RiseIn NPAs Internal factors • Defective Lending process • Inappropriate / non –use of technology like MIS , Computerization • Improper SWOT analysis • Inadequate credit appraisal system • Managerial deficiencies • Absence of regular industrial visits & monitoring • Deficiencies in re-loaning process • Alleged corruption • Inadequate networking & linkages b/w banks
- 12. Factors Impacting RiseIn NPAs • In the context of USA subprime mortgage crisis, following factors were responsible for surge in NPAs & collapse of many banks during 2007- 09: ...... • Boom and bust in the housing market, Excessive homeowner speculation, High-risk mortgage loans and deficiencies in lending/borrowing practices, Mortgage fraud, Poor securitization practices, Inaccurate credit ratings, Inappropriate govt policies, Problems with monetary policies of central bank etc.
- 13. Indian Scenario Table 3.1:Trend in Asset Quality Indicators of SCBs S No SCBs FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.5 2.3 2.3 2.4 2.3 2 Net NPAs (%) 1.0 1.0 1.1 1.1 0.9 3 Fresh NPA Generation Rate (%) 1.7 1.8 2.1 2.2 2.0 4 Net NPAs/Net Worth (%) 9.2 7.8 8.6 9.1 10.0
- 14. Indian Scenario Table 3.2:Trend in Asset Quality Indicators of SCBs S No PSBs FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.7 2.2 2.0 2.2 2.3 2 Net NPAs (%) 1.1 1.0 0.9 1.1 1.1 3 Net NPAs/Net Worth (%) 12.1 11.2 11.4 13.5 13.4
- 15. Indian Scenario Table 3.3:Trend in Asset Quality Indicators of SCBs S No Private Banks FY 2006-07 2007-08 2008-09 2009-10 2010-11 1 Gross NPAs (%) 2.1 2.4 2.9 2.7 2.3 2 Net NPAs (%) 0.9 1.1 1.3 1.0 0.6 3 Net NPAs/Net Worth (%) 7.8 6.1 7.5 5.3 3.2
- 16. Indian Scenario • GrossNPA percentage of SCBs did not increase by the extent that the stress in the Indian market during 2008-09 would warrant because of large loan restructuring over last 2-3 years (4-5% of total advances); • Gross NPAs declined marginally from 2.4% as in March 2010 to 2.3% as in March 2011. • However, higher provisioning led to a reduction in Net NPAs from 1.1% as in March 2010 to 0.9% as in March 2011.
- 17. Indian Scenario • Overthe last two years, PSBs Gross NPAs rose from 2% to 2.3%, while private banks’ NPAs declined from 2.9% to 2.3%. • Gross NPA percentage of the PSBs got impacted by slippages from restructured accounts, “Agri Debt Relief”, and slippages because of automation of asset classification. • Better provisioning coverage and a stronger capitalisation profile allowed private banks report better solvency (Net NPA/Net Worth) than PSBs during last few years.
- 18. NPA Management Strategies •Indian Banks are pursuing variety of strategies to control NPAs, which can be studied under two broad categories as under: – a. Preventive Management – b. Curative Management
- 19. NPA Management Strategies a.Preventive Management - It is rightly said that prevention is better than cure. • Developing ‘Know Your Client’ profile (KYC • Monitoring Early Warning Signals • Installing Proper Credit Assessment and Risk Management Mechanism • Reduced Dependence on Interest • Generating Watch-list/Special Mention Category
- 20. NPA Management Strategies b.Curative Management • Re-phasement of loans • Pursuing Corporate Debt Restructuring (CDR • Encouraging rehabilitation of potentially viable units • Encouraging acquisition of sick units by healthy units • Entering compromise schemes with borrowers / Entering one time settlement
- 21. NPA Management Strategies b.Curative Management … contd …. • Using Lok Adalats for compromise settlement for smaller loans in “doubtful” and “loss” category. • Using Securitization & SARFAESI Act • Using Asset Reconstruction Company (ARC) • Approaching Debt Recovery Tribunals (DRTs). • Recovery Action against Large NPAs • Circulation of Information of Defaulters- Strengthening Database of Defaulters
- 22. Effectiveness of NPA Managementin Indian Banks • While on the whole NPAs have shown declining trend during last decade, many analysts suspect that some banks might have fraudulently and in nexus with auditors have concealed some bad assets and NPAs in the name of reformation. • NPAs position remains worrisome in government banks mainly due to alleged widespread corruption, ill-motivated decisions on lending taken by some corrupt officials , due to inaction of such corrupt officials and alleged political interferences.
- 23. Effectiveness of NPA Managementin Indian BANKS • A recent study by Boston Consulting Group (BCG) found that NPAs fell from a peak of 11.4 per cent in 2001 to just 2.4 per cent in 2010.
- 24. Effectiveness of NPA Managementin Indian Banks • Implementation of SARFAESI Act 2002, setting up of credit information bureaus, internal improvements such as upgrade of technology infrastructure, tightening of the appraisal and monitoring processes, and strengthening of the risk management platform have contributed to the improvement.
- 25. Effectiveness of NPA Managementin Indian Banks • Even with an assumption of a 20% delinquency in restructured loans, along with the current forecasts for a rise in gross NPAs, the overall asset quality of public sector banks would stabilize within two years. It would also stay superior to the current status of European banks. • BCG expects that by 2025 the Indian banking sector will be the third largest in the world in terms of assets, behind China and the US.
- 26. Impact Of CurrentEconomic Turbulence On NPAs • During the U.S. subprime mortgage crisis of the late- 2000s NPAs attained shocking proportions. • The financial crisis was characterized by a rise in subprime mortgage delinquencies and foreclosures, and the resulting decline of securities backed by said mortgages. • Around 25 USA banks failed in 2008 (including Washington Mutual Bank which was acquired by J P Morgan) and another 140 USA banks failed in 2009.
- 27. Impact Of CurrentEconomic Turbulence On NPAs • By Oct 2008, when Lehman Brothers had collapsed under the weight of sub-prime exposures, the crisis had become truly global, both in spread and impact. • The NPAs in the UK and US rose from 0.9 per cent and 1.4 per cent in 2007 to 4.0 per cent and 4.9 per cent in 2009 respectively. • Just when the global economy was reverting to the normalcy, another crisis in the nature of sovereign debt crisis surfaced in late 2009.
- 28. Impact Of CurrentEconomic Turbulence On NPAs • If the current eurozone crisis had become much worse, then it could be like the 2007 and 2008 financial crash all over again, with the global banking system under threat again due to NPAs in the form of likely default in government debt. • Recession in global economy has impacted India as well. GDP growth rate is expected to slow down from 8.5% in the financial year 2010–11 to around 6.9 - 7.0% for the financial year 2011-12.
- 29. Impact Of CurrentEconomic Turbulence On NPAs • High inflation rate is adversely impacting the corporate profitability including that of lending banks. • Credit to recession-hit sectors like textile and steel accounts for significant proportion of total lending by Indian banks. • Credit to power and infrastructure sectors has also grown rapidly in the past four years • In addition State-owned banks have a higher allocation to small industries, which could get hurt early if the industrial slowdown continues.
- 30. Impact Of CurrentEconomic Turbulence On NPAs • Global ratings firm Moody's recently downgraded its rating of State Bank of India's (SBI) financial strength by one notch to ‘D+' on account of the lender's low Tier-I capital ratio and deteriorating asset quality. • In March 2012, Moody's lowered its credit opinion on Syndicate Bank, Union Bank of India and Bank of India, due to rising bad loans.
- 31. Impact Of CurrentEconomic Turbulence On NPAs • Thereafter, rating agency ICRA downgraded rating of Central Bank of India, Oriental Bank of Commerce and Union Bank of India etc, due to rising bad loans and the high value of restructured loans. • Thus NPAs are likely to continue rising in the near term — due to higher operating costs including interest costs and a slower economy. RBI expects non-performing assets (NPA) to inch up to 2.9 per cent by end-year 2011-12.
- 32. Challenges Ahead Overall, thecredit profiles of borrowers could weaken in 2012-13 because of the following factors: • Moderation/slowdown in demand conditions; • Compression of operating profitability and inability of companies to pass on the higher costs • Higher interest rates; • Lacklustre capital markets, which would constrain access to equity;
- 33. Challenges Ahead Contd …credit profiles of borrowers …. • Project implementation related delays; • Reduced profitability of new projects (because of competitive pressures, higher input costs and higher interest costs) funded with relatively higher leveraging; and • Increase in counterparty risks and increasing concerns over fuel linkages in the power sector.
- 34. Challenges Ahead In currenteconomic scenario, Indian banks are going to face following Asset quality related challenges ahead. • Spill-over from restructuring window are not over yet • Exposure to State utilities remains an area of concern • Credit loss from exposure to micro lending institutions in Andhra Pradesh is likely to hit banks
- 35. Challenges Ahead • GrossNPA percentage could rise to 2.9% by end-year 2011-12 • Higher interest rates may ensure better deposits growth in 2012-13 • High proportion of certificates of deposits could impact NIM (Net Interest Margin) and liquidity negatively • Profitability profile may be somewhat stable; higher operating expenses, credit provisions could offset increase in NIMs
- 36. Challenges Ahead • Increasein interest rate on savings deposits could reduce NIM • Interest rate sensitivity may rise; ability to pass on increase in cost of funds may get reduced • Operating expenses may remain at an elevated level in the short term
- 37. Improvement Measures • Thereis need to strengthen sharing of credit information. • Sharing of credit information must occur in both ways between lending institutions & CICs. • There is need to strengthen Unique Customer Identification (UCI) across the banking system. • The Reserve Bank of India is planning to introduce a comprehensive dynamic provisioning NPA framework for banks in India with dynamic and countercyclical elements.
- 38. Conclusion • Currently, Indianbanks face several challenges, such as increase in interest rates on saving deposits, a tighter monetary policy, a large government deficit, increased stress in some sectors (such as, State utilities, airlines, and microfinance), restructured loan accounts, unamortised pension/gratuity liabilities, increasing infrastructure loans, and implementation of Basel III.
- 39. Conclusion • NPAs arelikely to continue rising in the near term — due to higher operating costs including interest costs and a slower economy. RBI expects non-performing assets (NPA) to inch up to 2.9 per cent by end-year 2011-12. • Thus RBI & banks need to exercise high degree of caution in NPA & credit management.
- 40. NPA Management bythe Indian Banking Sector in the Turbulent Economic Environment By Dr. Vijay Kr Khurana