Financial Performance of Indian Bank: With Special Reference to Non−Performing Assets
WITH SPECIAL REFERENCE TO NON PERFORMING ASSETS
The Indian Banking sector has played a commendable role in fuelling and sustaining growth in the economy. In the recent past a large part of the banking sector’s growth has been on the back of financing consumption, as reflected in the growth of retail banking. Profitability and viability of development financial institutions are directly affected by quality and performance of advances. Indian banks are weighted down by enormous amounts of bad loans that threaten the very health of the banking system. In fact banks extended large number of loans to all sectors at the behest of politicians, but their experience with these borrowers has not been satisfactory. RBI has been specifically commenting on Non Performing Assets. The implementation of prudential norms of Narasimham committee was the step towards introduction of transparency in accounting practices as per the norms of international accounting standards. Banking is the key sector of any economy. It can influence economic growth by enhancing resources in the direction of national objectives. Its energy and vitality indicate the health and prosperity of any nation. The new economic reforms have given a new thrust to the banking sector as a whole and private sector in particular. In spite of commanding role of the Indian banking sector in last five decades under the competitive global environmental conditions, the banking sector currently suffers from a number of weaknesses such as low recovery rate of credit, high costs, poor management practices, trade union pressures, political interferences, unprofitable branches and mounting Non Performing Assets (NPAs). The banking system in the country has undergone a sea−change with the introduction of prudential norms on income recognition, asset classification and their provisioning. In a developing country, banking is seen as an important instrument of development, while with the increasing Non Performing Assets (NPAs), banks have become burden on the economy. Looking to the changing scenario at the world level, the problem becomes more ironical, because Indian banking cannot afford to remain unresponsive to the global requirements. The banks are aware of the grim situation and are trying their level best to reduce the Non Performing Assets (NPAs) ever since the regulatory authorities ie, Reserve Bank of India and Government of India are seriously chasing up the issue. The study focuses on the cost of Non Performing Assets in Banks with special reference to Indian Bank and it deals with steps to reduce the Non Performing Assets (NPAs).
STATEMENT OF PROBLEM
Credit risk is associated with lending highly whenever a party enters into an obligation to make payment or deliver value to the bank. The nature and extent of credit risk depend on quality of loan assets and soundness of investments. Based on the income, expenditure, net interest income, NPAs and capital adequacy one can comment on the profitability and the long run sustenance of the bank. When the money is blocked, inadequate cash at hand leads to
borrowing of money for short period of time which adds additional cost to the bank. Now −a −days, banks have special employees to deal with and handle Non Performing Assets, which is also an additional cost to the bank. Bank is facing problem of Non Performing Assets as it adversely affects the value of bank in terms of market credit. It will lose its goodwill, brand image and credit which have negative impact on the people who are putting their money in the banks. Non Performing Assets are not merely non remunerative but they add cost to the credit management. The fear of Non Performing Assets permeates the psychology of bank managers in entertaining new projects for credit expansion. Non Performing Assets is not only a dilemma facing exclusively the bankers, it is in fact an all pervasive national scourge swaying the entire Indian economy. Non Performing Assets can be arrested only through internal remedies, ie improving efficiency of credit assessment and credit delivery operations at the point of the financing bank in the first instance. The bank will face the problem of NPAs because of poor recovery of advances granted by the bank and several other reasons.
NON PERFORMING ASSETS −CONCEPT AND TYPES
Non Performing assets are those assets that cease to generate income for banks. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002 defines Non Performing Assets as "an asset or account of a borrower, which has been classified by a bank or financial institution as sub − standard, doubtful or loss assets in accordance with the direction and guidelines relating to asset classification issued by the RBI". From 31st March 2004 an asset is considered to have gone bad when the borrower has defaulted on principal and interest repayment for more than one quarter or 90 days. REVIEW OF LITERATURE: 1. Dr. C.H. Rajesham and Dr. K. Rajendar ( June 2007) studied the management of nonperforming assets in Indian scheduled commercial banks. Both the authors found that stringent measures are required at levels of the RBI, the banks & the judiciary to control the NPA problem. It found that NPAs had negative impact on banks. 2. T. N. Anantharam Iyer (June 1999) in his paper "Bank supervision and the management of Non Performing Advances" he studied how much risk each bank undertakes for recovering and managing the Non Performing Assets. It is revealed that early identification of problem assets helps the success of remedial action and effective recovery of the Non Performing Assets. 3. Shri T C G Namboodiri (March 2002) in his study entitled "NPA − Prevention is better than cure", pointed out that the problem of Non Performing Assets was very prominent in Indian Banks. He observed certain simple but important basic points that a banker has to apply while appraising a credit proposal. He suggested several points such as 5Cs (Character, Capital, Capacity, Conditions, Collateral), 6Ms (Man, Money, Machine, Material, Market, Men), and 7Ps (Product, Project, Purpose, Place, People, Policies, Profit). These 18 points mentioned play considerable role in credit risk management and can be used for a SWOT analysis of the venture before financing. 4. Dr. B. Samal (April 2002) in his paper on "The NPA overhang: Magnitude, Solution and Legal Reforms" reviewed the overall recovery machinery and legal reforms of banks for the period of 1994 − 2001. The study found that NPAs derivative of financial reforms cannot be avoided by the banks; rather they should be dealt with more critically and consciously. It is pointed out that it is not possible to eliminate totally NPAs in the banking business but can only be minimized. 5. K.J. Taori (June 2000) in the study entitled, "Problems and issued relating to management of NPAs of banks in India" studied the growth of NPAs of banks in India. The analysis revealed about priority sector and Non
priority sector NPAs and set of the guidelines for bankers and borrowers. It was concluded that an effective legal framework will be needed to bring recovery suits to their logical conclusion and effect recoveries, within a reasonable time frame.
OBJECTIVES OF THE STUDY
To analyze the Non Performing Assets in Indian Bank To find out the reasons for Non Performing Assets in Banks To offer suitable suggestion based on findings of this study
The study is based on secondary data. The period of the study covers Eleven years from 2001−02 to 2011 −12. The relevant data required for the study has been collected from RBI’s Annual reports and Indian Bank’s annual reports Reports on trend and progress of banking in India Government publications, books, websites and various banking journals The data collected has been tabulated and analysed with the help of percentage, statistical tools etc.
COST OF NON PERFORMING ASSETS
Non Performing Assets affect the profitability, liquidity and competitive functioning of banks and developmental financial institutions and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. Non Performing assets cause high cost for the bank, as these assets do not improve any of the following: Profits Capital adequacy Reduction of other costs Capital market perception
ANALYSIS AND INTERPRETATION
Credit Management of a bank includes lending and recovery. Gross NPA is the result of non recovery of advances on their respective due dates. Prevention of creation of NPAs and recovery of existing NPAs are part of credit management. To evaluate the effectiveness of credit management the ratio of gross NPA to total advances will be useful. Higher the ratio indicates the ineffective credit management. On the contrary, low ratio proves the effective credit management. Table−1 gives the data regarding gross NPAs and Total advances of Indian Bank for the period of study. Also, the ratio of gross NPAs to Total advances is calculated annually & provided below to facilitate an effective analysis. For Indian Bank, 2001−02 is the year in which the turn−around exercise has started to correct the past lapses in the overall financial management. It has clearly come to light from this table that the ratio of gross NPAs to Total advances has been 23.07 in 2001−02 and 14.90 in 2002−03. The decreasing trend of this ratio from 23.07 in 2001−02 to 1.03 in 2010−11 indicates clearly that Indian Bank has taken effective steps to reduce the gross NPAs and at the same time improve the advances. But, the increase in the quantum of gross NPAs in the last two years of the decade causes concern. Indian Bank must have arrested the increase in gross NPAs in the year 2009−10, 2010−11 & 2011−12 taking appropriate steps. For any Bank, the aim should be to nullify the Net NPAs, i.e. the Net NPAs must be zero. However, the reduction in Net NPAs shows the steps taken to allocate provision for NPAs as per norms. Making advances is a prime function of any bank. Indian Bank has done this function very effectively. This is being evidenced by the figures given in the above table. An advance made by Indian Bank has set a continuous increasing trend. As the quantum of Net NPA is reducing year after year from 2001−02, the ratio also has been reducing. But the reduction trend reversed from 2009−10, the year in which the Net NPAs started to increase. This table informs the Bank about the alarming repeat of the increase in Net NPA.
NPAs form part of loans and advances of the assets side of the balance sheet of a bank. However, the existence of NPA in a bank has a
negative chain reaction affecting the financial performance in various stages. NPAs start affecting the future income as per income recognition norms, affect the existing income as per provisioning norms, these two affect the profit, decrease in profit affects capital formation, low capital affects capital adequacy ratio, inadequate capital damages the image of the bank, morale is affected among the employees, trust and confidence level is affected among the customers and thus NPAs pose a constant threat to the financial performance of a Bank. The ratio of gross NPAs to assets will help to understand the initial damages to the assets as a whole and this will help the Bank to take appropriate corrective steps to arrest NPAs. Table No.2 gives the data regarding gross NPAs and total assets of Indian Bank. This table also gives the ratio of gross NPA to total assets.
The table provides the information that gross NPAs are decreasing and total assets are increasing and consequently the ratio is decreasing. The continuous growth with annual positive increase in total assets and the regular annual decrease in gross NPAs from 2001−02 to 2008−09 indicate that Indian Bank is able to improve its business throughout the decade of study on one side and on the other side it is able to contain the NPAs during the period. The increase in the quantum of gross NPAs in 2009− 10 and 2010−11 causes concern. But the ratio indicates that the effect of increase in gross NPAs has been nullified to some extent by the increase in the total assets. Therefore, the ratio has not shown any marked increase in 2010−11 but increased in the year of 2011−12. However, Indian Bank must take serious steps to reverse the increasing trend in gross NPAs from 2009− 10 to prevent future damages to it financial performance. Table−3 gives the data on gross
profit and gross NPAs and the ratio of gross profit to gross NPAs. Gross profit is affected by creation and prevalence of NPAs. This ratio helps to analyze how NPA affects gross profit. NPA affects the interest income in two ways, namely, 1. As per income recognition norms, interest cannot be charged to NPA unless there is an actual recovery. Thus income is reduced. 2. As per provisioning norms, provision has to be made for NPA at prescribed rates. This provision is done from the available income. Thus income is reduced. When income is reduced, the profit is affected directly. Therefore, the ratio of gross profit to gross NPA is analyzed in this table. This table indicates that the gross profit of Indian Bank has set a continuous growth trend throughout the decade. Gross NPA has been declining in quantum from 2001−02 to 2008−09 and in the last two years it has gone up. The average ratio is arrived at as 2.43. The ratio of gross profit to gross NPA has increased above the mean from 2006−07. It indicates that the profit is growing at a higher rate while NPAs are decreasing. Inference derived is that Indian Bank is managing the NPA very well and it makes good profit. However, the increase in NPA during the last two years of the decade must be viewed seriously and adequate steps be taken by Indian Bank to reverse the trend.
Net profit is arrived after making statutory and other provisions and after deducting the tax, etc. The Net NPA is derived after the provisions and after calculating the secured portion, etc as per the norms. Net profit shows the actual net earnings of the bank and Net NPA shows the actual quantum of NPA which pose the real burden to the bank. The Banks objective should be to wipeout Net NPA. Table−4 provides the data regarding the Net profit and Net NPA of Indian Bank and also the ratio of Net profit to Net NPA to evaluate the performance of Indian Bank in making profit.
The above table spells out that the Net profit of Indian Bank has been increasing continuously with annual positive increases throughout the decade of study. In case of Net NPAs, the quantum has been decreasing from 2001−02 to 2008−09 and thereafter it increases at a faster rate. The ratio indicates very clearly that Indian
Bank has performed well in controlling Net NPA upto 2008−09 and simultaneously has made good Net Profit. In 2009−10 also, the bank has made progress in Net Profit while the Net NPA shows an increase over the previous year figure. The ratio thus declined from 13.27 to 10.73. But the ratio 4.32 in 2010−11, indicates the dismal performance of Indian Bank. Though it made a good Net profit, the abnormal increase in Net NPA has shadowed the proper in Net Profit. Indian Bank has to arrest the increase in the Net NPA taking appropriate steps at the earlier.
REASONS FOR NON PERFORMING ASSETS
The points that are derived by the Reserve Bank of India recently on 800 top non repayment of credit and NPAs accounts in 25 banks, revealed interesting insights into the problem of non repayment of credit and NPAs. The study identified factors such as:
Diversion of funds mostly for expansion or for promoting associate concerns. Marketing failure in related field, inefficient Management of funds. Inappropriate technology adopted by the business.. Labour unrest and poor financial disclosure Excessive exposure in high risk sources. Unfavorable macroeconomic environment recession, infrastructural bottlenecks time,cost over runs. Changes in the government economic policies and Delays in the sanction of loans.
Indian bank has realized that a higher level of Non Performing Assets in their credit portfolio is dangerous and will affect on their profitability which is already under strain. Quality of loan assets is the most important factor for the basic viability of the banking system. Lower level of NPAs helps the Indian Bank in consolidating
their position and gives credence to efficiency of the management. Indian Bank can control this problem of reducing the NPAs taking measures namely;
1. Preventive Measures
It is required to arrest the fresh inflow of Non Performing Assets. Indian Bank needs to ensure that only genuine proposals are accepted and projects having inherited weaknesses are to be rejected at the first instance. It needs to upgrade the credit appraisal skills which are highly inadequate. Economic viability, technical feasibility, quality of management and financial position of the borrower should be evaluated properly. Pre−credit and post−credit appraisals are to be done by Indian bank more objectively. Close monitoring of borrower accounts, site visits, factory visits, etc are to be done regularly. Rehabilitation of viable sick units is essential.
2. Corrective Measures
Corrective measures are required to recover the money out of assets, which have already fallen into NPA category. Normally, after sanctioning and disbursement of loans the bank should have an effective follow−up, monitoring and supervision over the credit. For Indian Bank it is necessary to adopt proper credit monitoring mechanism, with periodical inspection of the units along with regular flow of information from them pertaining to their financial liquidity, annual accounts, stock reports, etc., comparative risk analysis and compliance of terms and
conditions of sanction. Indian Bank needs to make sincere efforts to recover the amount from assets which have already slipped into NPAs category.
Non Performing Assets have been a big worry for the banks in India. It is just not a problem for the banks; they are bad for the economy too. The money locked up in Non Performing Assets is not available for productive use and hence these have an adverse effect on banks’ profitability. If the bank could reduce the cost of Non Performing Assets, cost will reduce and the profit and return on equity and assets will increase. It is not possible to eliminate totally the Non Performing Assets in the banking business but can only be minimized. It is always wise to follow the proper policy appraisal, supervision and follow up of advances to avoid creation of Non Performing Assets. The banks should take steps for reducing present nonperforming assets, but necessary precaution should also be taken to avoid future increases in Non Performing Assets.
1. Narasimham, Money and Banking Sector Reforms, The rationale and contents
2. Chakrabothy, K.C, " Managing Non Performing Assets" the chartered financial analyst
3. Reddy Ramakrishna. G & Sreebharagavi, An appraisal of Indian Banking form NPA perspective,
4. Banking Sector Reforms, NPA managing Assets −ARCIL, Dr. Pradeep Singh, Article from Banking and Finance, 2007
5. Banerjee A.V, Cole, S. & Dufflo, E. (2004), "Banking Reform in India, Bureau for research in Economic Analysis of Development, Policy paper, No. 006, September, Harvard