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Impending NPA Crisis in Indian Banks & Remedies

Posted in Finance Articles, Total Reads: 8917 , Published on September 15, 2014

Zoom Developers, Winsome Diamond, Sterling Biotech, Kingfisher Airlines and the recently Bhushan Steel; the story never ends when it comes to wilful defaulters. Indian Banking Industry has been in the focus when it comes to NPA or ‘loans gone bad’. In this article we will try to explore if it is a systemic problem or monster created by the banks themselves. We will discuss the current magnitude of the problem and steps which can be adopted by the RBI & Government to resolve this messy affair. Our focus in this article will be large corporations such as ones mentioned above simply because it is difficult to come up with a framework for NPAs arising out of priority sector lending.

Image Courtesy: freedigitalphotos.net, cooldesign

As of December 2013, gross NPAs had reached 4.4% of total loans in the banking system, with PSUs such as SBI reporting much higher levels. PSUs in total account for Rs. 216,739 Cr. Of bad loans while private sector only Rs. 22,744 Cr.

NPAs effect the banks in multiple ways:

• A negative impact on Return of Assets

• Interest income of banks reduced it is to be accounted only on receipt basis

• Erosion of profits

• Capital adequacy ratio is disturbed

• Cost of capital goes up

• Economic Value Addition decreases

Major Bank-Wise & Bank Group-Wise Data– 2013 (Source: www.rbi.org.in)

Bank/ Bank Group

Gross NPAs

(Rs. millions)

Gross NPAs to Gross
Advances Ratio

State Bank of India & its Associates



Axis Bank Ltd.



HDFC Bank Ltd.



ICICI Bank Ltd.



Bank of Baroda



Bank of India



Canara Bank



Indian Overseas Bank



Punjab National Bank



UCO Bank



Allahabad Bank



Andhra Bank



Indian Overseas Bank



Union Bank of India



IDBI Bank Limited



Private Sector Banks



Public Sector Banks



Taking over the business and appointing an external agency to oversee day-to-day operations has been one of the most used remedial measures by the banks. But it is like treating the patient after he has been diagnosed with interminable illness. The steps adopted by the banks must be proactive with added teeth given by the RBI and governments to deal with the issue of rising NPAs.

These strategies necessary to control NPAs can be of two types:

1. Preventive management and

2. Curative management

Some Steps for Preventive Management:

• Root cause of NPAs is indiscriminate lending by the banks. Banks need come up with tight lending norms. For example, limit on the debt to equity ratio. In the case of Bhushan Steel it went to 3.5, making them most indebted steelmaker in India. Still they managed to secure additional debt of Rs 5,000 crore. Banks’ lending may be influenced by political pressure and the confidence of a government bailout in the event of a crisis.

• Banks need detect Early Warning Signals, mainly financial and management related. Banks can come up with watch-list/Special Mention Category.

• Banks needs to make their credit-appraisal process, before disbursement and during renewal or extension, more robust. The parameters for appraisal can include parameters pertaining to market practice, principles or code of conduct of borrower, business expertise, availability of raw materials, possible M&As and analysis of the risk involved in the borrower’s project. Banks can make use of external assessors for coming up with rating for a corporation. For example, 60% of NPAs are accounted by infrastructure, power, iron and steel, textiles and aviation industries. Thus even a layman can guess that Banks need to careful while lending to these sectors.

• Continuously tracking the asset performance and not engaging in it ones the load slips into NPA. This will help in early detection of stress and help lenders take prompt corrective actions to avoid non-performing asset creation. The same was stressed by RBI.

• Establishing a specialised AMC prior to a financial crisis as observed in Malaysia and Taiwan. AMCs to have one core objective: the rehabilitation and restructuring of viable assets.

• Recently RBI came up with policy directive that even before a loan turns into an NPA, banks are required to identify stress by creating three sub-categories under the Special Mention Account, for overdue ranging between 30 and 90 days. But reluctance of various financial institutions to act on such and many other proposed solutions, which, if implemented properly, can indeed go a long way in curbing the NPA menace, is proving to be one of the main hurdle in the war against NPAs.

Some Steps for Curative Management:

• Empowering banks to seize property of defaulters has resulted in reducing bad loans. RBI needs to provide framework under which banks need to work. One step that RBI took earlier this year was to launch a framework for revitalising distressed assets in the economy.

• Lenders to agree collectively and quickly to a restructuring plan. RBI can offer incentives for the same. Sector-specific companies / private equity firms can be encouraged to play an active role in stressed assets market.

• Accept limited success of asset reconstruction companies (ARCs) in India and take steps to improve their effectiveness. ARCs need to be more realistic when it comes to asset valuation as it will help in investments by foreign investors so that ARCs stop being sponsored by the banks solely.

• Banks to focus on fairness & efficiency of the loan recovery process and try to preserve the value of underlying assets and if possible safeguard jobs. Credit data must be shared and large exposures across banks monitored closely. An urgent need for accelerating working of debt recovery tribunals and ARCs exists currently.

Some Contentious Changes:

• FICCI recommended establishment of ‘Namco’ to effectively tackle large NPAs in India. But it can again be remedial measure with no guarantee that it will succeed. It may become garbage can for all the NPAs helping banks writing off the NPAs off their balance sheet.

• Adoption of detailed guidelines on formation of Joint Lenders’ Forum (JLF) and adoption of Corrective Action Plan for operationalizing the above Framework are given below. JLF can also refer the matter to CDR cell. A study needs to be conducted in the effectiveness of this mechanism. The parameters for the study can be viability milestones achieved using either of the mechanism, time duration for achieving the same, and effectiveness in transfer of equity or infusion of more equity, lastly overall restructuring efforts.

• Banks raise capital through dispersed ownership of banks' equity capital or creation of bad bank. Though it will change the status of banks to ‘buy’, it fails to address the root cause.

Bottom line remains the banks should prevent assets from slipping into NPAs and not run behind the large defaulter after the crisis. In short, a pro-active, preventive approach is desirable for speedy revival of the economy.

This article has been authored by Deepak K. and Margesh Wavhal from XLRI


• Dey, B. K. (2013). Impact of non-performing assets (NPAS) on banks’ profitability: A comparative study on private and public sector banks of India. Asian Journal of Research in Banking and Finance, 3(6), 86-97.

• Chatterjee, C., Mukherjee, J., & Das, D. R. (2012). Management of Non-Performing Assets–A current scenario. International Journal of Social Science and Interdisciplinary Research, 1(11).

• Srivastava, V., & Gupta, S. K. (2013). A Study on Non-Performing Assets of Indian Banks. In Proceedings of National Seminar (p. 96).

• Anon, (2014). [online] Available at: http://Empowering banks to seize property helpful to recover NPA Finance Minister Latest News & Updates at Daily News & Analysis [Accessed 22 Aug. 2014].

• Anon, (2014). [online] Available at: http://www.thehindubusinessline.com/economy/macro-economy/rbi-must-permit-second-restructuring-of-debt/article6210257.ece [Accessed 22 Aug. 2014].

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