Fi­nan­cial Per­for­mance of In­dian Bank: With Spe­cial Ref­er­ence to Non−Per­form­ing As­sets

WITH SPE­CIAL REF­ER­ENCE TO NON PER­FORM­ING AS­SETS

Economic Challenger - - CONTENTS - − Dr. M. Chan­drasekaran

IN­TRO­DUC­TION

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

METHOD­OL­OGY

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.

SUG­GES­TIONS

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.

CONCULSION

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.

REF­ER­ENCES

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

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