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Indian Banking Today and Tomorrow
NPA the Unbridled Virus and an Emerging Challenge to
Indian Banking System - The Emergence of NPA in Indian Banking &
Financial Institutions and its Dimensions

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NPA the Unbridled Virus and an Emerging Challenge to
Indian Banking System - The Emergence of NPA in Indian Banking &
Financial Institutions and its Dimensions

[The article gives the position of Indian Banking as seen in the year 2001]

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures effected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralised by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

As at 31.03.2001 the aggregate gross NPA of all scheduled commercial banks amounted to Rs.63,883 Crore. Table No.I gives the figures of gross and net NPA for the last four years. It shows an increase of Rs.13,068 Crore or more than 25% in the last financial year, indicating that fresh accretion to NPA is more than the recoveries that were effected, thus signifying a losing battle in containing this menace.

Table No. I
NPA Statistics -All Scheduled Commercial Banks .................................. (Amount in Crores)
Year Total Advances Gross NPA Net Advances Net NPA %-age of Gross
NPA to total
advances
%-age of Net
NPA to net
advances
1997-98 352697 50815 325522 25734 14.4 7.3
1998-99 399496 58722 367012 27892 14.7 7.6
1999-2000 475113 60408 444292 30211 12.7 6.8
2000-2001 558766 63883 526329 32632 11.4 6.2

The apparent reduction of gross NPA from 14.4% to 11.4% between 1998 and 2001 provides little comfort, since this accomplishment is on account of credit growth, which was higher than the growth of Gross NPA and not through appreciable recovery of NPA. There is neither reduction nor even containment of the threat.

The gross NPA and net NPA for PSBs as at 31.03.2001 are 12.39% and 6.74% are higher than the figures for SCBs at 11.4%and 6.2%. Comparative figures for PSBs, SBI Group and Nationalised Banks are as under.

Table -2 : NPA of PSBs…………………………………………………………… (Amount in Crores)
Year Total Advances Gross NPA Net NPA %-age of Gross
NPA to total
advances
%-age of Net
NPA to net
advances >
1996-97 244214 43577 20285 17.8 % 9.2 %
1997-98 284971 45563 21232 16.0% 8.2%
1998-99 325328 51710 24211 15.9% 8.1%
1999-2000 380077 53033 26188 14.00% 7.9%>
2000-2001 442134 54773 27967 12.39% 6.74%


Table -3: NPA of State Bank Group……………………………………….. (Amount in Crores)
Year Total Advances Gross NPA Net NPA %-age of Gross
NPA to total
advances
%-age of Net
NPA to net
advances
1997-98 113360 15522 6829 14.57% 6.98 %
1998-99 118959 18641 7764 15.67% 7.74%
1999-2000 129253 19773 7411 14.08% 6.77%
2000-2001 150390 20586 8125 12.73 % 6.26 %


Table -4: NPA of Nationalised Banks…………………………………………. (Amount in Crores)
Year Total Advances Gross NPA Net NPA %-age of Gross
NPA to total
advances
%-age of Net
NPA to net
advances
1997-98 166222 30130 14441 16.88 8.91
1998-99 188926 33069 15759 16.02 8.35
1999-2000 224818 33521 17399 13.99 7.80
2000-2001 264237 34609 16096 12.19 7.01


Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. There is the practice of 'ever-greening' of advances, through subtle techniques. As per report appearing in a national daily the banking industry has under-estimated its non-performing assets (NPAs) by whopping Rs. 3,862.10 Crore as on March 1997. The industry is also estimated to have under-provided to the extent of Rs 1,412.29 Crore. The worst "offender" is the public sector banking industry. Nineteen nationalised banks along with the State Bank of India and its seven associate banks have underestimated their NPAs by Rs 3,029.29 Crore. Such deception of NPA statistics is executed through the following ways.

  • Failure to identify an NPA as per stipulated guidelines: There were instances of `sub-standard' assets being classified as `standard';

  • Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or `sub-standard' asset; classifying a `doubtful' asset as a `sub-standard' asset.
  • Classifying an account of a credit customer as `substandard' and other accounts of the same credit customer as `standard', throwing prudential norms to the winds.

Essentially arising from the wrong classification of NPAs, there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made. This practice can be logically explained as a desperate attempt on the part of the bankers, whenever adequate current earnings were not available to meet provisioning obligations. Driven to desperation and impelled by the desire not to accept defeat, they have chosen to mislead and claim compliance with the provisioning norms, without actually providing. This only shows that the problem has swelled to graver dimensions.

The international rating agency Standard & Poor (S & P) conveys the gloomiest picture, while estimating NPAs of the Indian banking sector between 35% to 70% of its total outstanding credit. Much of this, up to 35% of the total banking assets, as per the rating agency would be accounted as NPA if rescheduling and restructuring of loans to make them good assets in the book are not taken into account. However RBI has contested this dismal assessment. But the fact remains that the infection if left unchecked will eventually lead to what has been forecast by the rating agency. This invests an urgency to tackle this virus as a fire fighting exercise.

Financial institutions have not far lagged behind. NPAs of ten leading institutions have reported a rise of 11.89 per cent, or Rs 1,929 Crore, to Rs 18,146 Crore during the year ended March 2000 from Rs 16,217 Crore last year. The NPA statistics of the three leading Financial Institutions for the last two years are given in Table-5 IDBI tops the list by notching up bad loans worth Rs 7665 Crore by March 2000. In fact, its NPAs have gone up by Rs 1,185 Crore from Rs 6,490 Crore in the previous year. IFCI followed with NPAs of Rs 4,103 Crore, but it reported fall of Rs 134 Crore from the previous year's level of Rs 4,237 Crore. ICICI's NPAs went up to Rs 3,959 Crore from Rs 3,623 Crore in the previous year.

Table 5
NPA Statistics of the three Major Term Lending Institutions as at 31.03.2001. (Amount in Crores)
Name of FI Total Loans 31.3.2000 Total Loans 31.3.2001 NPA 31.3.2000 NPA-% age 31.3.2000 NPA 31.3.2001 NPA-% age 31.3.2001
IDBI 57099 56477 7665 13.4 8363 13.9
ICICI 52341 57507 3959 07.6 2782 05.2
IFCI 19841 18715 4103 20.7 3897 20.8

Emergence of NPA as an Alarming Threat to Nationalised Banks

NPA is a brought forward legacy accumulated over the past three decades, when prudent norms of banking were forsaken basking by the halo of security provided by government ownership. It is not wrong to have pursued social goals, but this does not justify relegating banking goals and fiscal discipline to the background. But despite this extravagance the malaise remained invisible to the public eyes due to the practice of not following transparent accounting standards, but keeping the balance sheets opaque. This artificially conveyed picture of 'all is well' with PSBs suddenly came to an end when the lid was open with the introduction of the prudential norms of banking in the year 1992-93, bringing total transparency in disclosure norms and 'cleansing' the balance sheets of commercial banks for the first time in the country.

How RBI Describes this New Development in its Web Site

In the peak crisis period in early Nineties, when the first Series of Banking Reforms were introduced, the working position of the State-owned banks exhibited the severest strain. Commenting on this situation the Reserve Bank of India in its web-site has pointed out as under:

"Till the adoption of prudential norms relating to income recognition, asset classification, provisioning and capital adequacy, twenty-six out of twenty-seven public sector banks were reporting profits (UCO Bank was incurring losses from 1989-90). In the first post-reform year, i.e., 1992-93, the profitability of the PSBs as a group turned negative with as many as twelve nationalised banks reporting net losses. By March 1996, the outer time limit prescribed for attaining capital adequacy of 8 per cent, eight public sector banks were still short of the prescribed."

Consequently PSBs in the post reform period came to be classified under three categories as -

  • healthy banks (those that are currently showing profits and hold no accumulated losses in their balance sheet)

  • banks showing currently profits, but still continuing to have accumulated losses of prior years carried forward in their balance sheets
  • Banks which are still in the red, i.e. showing losses in the past and in the present.


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