INCREASING NPA IN PSU BANKS AND ITS MANAGENENT

Presented by : - Amit

sharma

9017511110

NPA Non Performing Asset means a loan or an

account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

Categories of NPA Standard Assets : Arrears of interest and the principal amount

of loan does not exceed 90 days at the end of financial year ( 0.25 % of all type standard assets )

Substandard Assets : Which has remained NPA for a period less than or equal to 12 months. ( 10 % of all types standard assets )

Doubtful Assets : Which has remained in the sub-standard category for a period of more than 12 months D1 i.e. up to 1 year : 20% provision is made by the bank D2 i.e. up to 2 year : 30% provision is made by the bank D3 i.e. up to 3 year : 100% provision is made by the bank

Loss Assets : where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. ( 100% of secured and unsecured advances )

The strong credit growth is the synonymous with improvement in asset quality and at the same time the declining credit growth in the system is an indication for asset deterioration and likely to add impaired assets further.  Asset Quality concerns persist as the growth in NPAs accelerated and continued to outpace credit growth .

The Gross NPA ratio of the banks has witnessed sharp increase from 5.1 % as on september 2015 to 7.6 % as at end of March 2016. Similarly, the Net NPA ratio has gone up from 11.3% to 11.5% during the same period.

Among the selected seven sectors, Agriculture, Construction, Iron & Steel and Engineering sectors registered highest NPA compared to other sectors. 

The combined net loss of 20 public sector banks (PSB) stood at Rs 16,272.34 crore for the fourth quarter ended March 2016 as bad loans situation worsened.

Effect of NPA’s on Banks Restriction on flow of cash done by bank

due to the provisions of fund made against NPA.

Drain of profit. Bad effect on goodwill. Bad effect on equity value.

NPA - Impact on Balance Sheet The problem of NPAs in the Indian banking

system is one of the foremost and the most formidable problems that had impact the entire banking system. Higher NPA ratio trembles the confidence of investors, depositors, lenders etc. It also causes poor recycling of funds, which in turn will have deleterious effect on the deployment of credit. The non-recovery of loans effects not only further availability of credit but also financial soundness of the banks.

Profitability: NPAs put detrimental impact on the

profitability as banks stop to earn income on one hand and attract higher provisioning compared to standard assets on the other hand. On an average, banks are providing around 25% to 30% additional provision on incremental NPAs which has direct bearing on the profitability of the banks.

Asset (Credit) contraction:  The increased NPAs put pressure on

recycling of funds and reduces the ability of banks for lending more and thus results in lesser interest income. It contracts the money stock which may lead to economic slowdown.

Liability Management:  In the light of high NPAs, Banks tend to

lower the interest rates on deposits on one hand and likely to levy higher interest rates on advances to sustain Net Interest Margin . This may become hurdle in smooth financial intermediation process and hampers banks’ business as well as economic growth.

Capital Adequacy: As per Basel norms, banks are required to

maintain adequate capital on risk-weighted assets on an ongoing basis. Every increase in NPA level adds to risk weighted assets which warrant the banks to shore up their capital base further. Capital has a price tag ranging from 12% to 18% since it is a scarce resource.

Shareholders’ confidence:   Normally, shareholders are interested to enhance

value of their investments through higher dividends and market capitalization which is possible only when the bank posts significant profits through improved business. The increased NPA level is likely to have adverse impact on the bank business as well as profitability thereby the shareholders do not receive a market return on their capital and sometimes it may erode their value of investments. As per extant guidelines, banks whose Net NPA level is 5% & above are required to take prior permission from RBI to declare dividend and also stipulate cap on dividend payout.

Public confidence:

 Credibility of banking system is also affected greatly due to higher level NPAs because it shakes the confidence of general public in the soundness of the banking system. The increased NPAs may pose liquidity issues which is likely to lead run on bank by depositors. Thus, the increased incidence of NPAs not only affects the performance of the banks but also affect the economy as a whole

In a nutshell, the high incidence of NPA has cascading impact on all important financial ratios of the banks viz., Net Interest Margin, Return on Assets, Profitability, Dividend Payout, Provision coverage ratio, Credit contraction etc., which may likely to erode the value of all stakeholders including Shareholders, Depositors, Borrowers, Employees and public at large

Management of NPA Prevention is better than cure

Proper evaluation of credit proposals  Centralized model for sanction and recovery

corporate loans Timely follow up is the key to keep the quality of

assets intact  Selection of right borrowers, viable economic

activity, adequate finance and timely disbursement, end use of funds and timely recovery of loans should be the focus areas for preventing or minimizing the incidence of fresh NPAs.ko

. 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

GOVERNMENT ROLE IN MANGEMENT OF NPA

27 public sector banks (PSBs), which constitute 70 percent of India’s banking sector, have written off Rs 59,547 crore in fiscal year ended March 2016.

In the last three years (FY13, 14 and 15) banks had together written off Rs 1.14 lakh crore.

Around 70,000 cases involving more than Rs 5 lakh crore are pending in Debt Recovery Tribunals (DRT).

The government is  coming up with the ammendments in the debt recovery law in lok sabha.

 To strengthen the debt recovery laws with an objective to improve the ease of doing business in the country .

The government had last year announced it will infuse Rs 70,000 crore

In line with the blueprint, PSU banks are to get Rs 25,000 crore each in 2015-16 and 2016-17 fiscal. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19.

Banks have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirement.

Resolution to the problem Resolution to the problem – as currently

happening – recognize all such bad loans to get the extent of the problem. Get Bankruptcy Act, amendments to Sarfaesi & DRT Acts in place (which will happen soon), then since de-nationalization of PSU Banks is not possible (lack of BJP majority in Rajya Sabha), first merge Banks to reduce their number from 27 to a decent 6. Then offload stakes in these 6 big Banks by keeping Government stake at 51%. Simultaneously, force Promoters to offload their assets and pay back the Banks.