NPA has affected the profitability, liquidity and competitive functioning of PSBs and finally the psychology of the

bankers in respect of their disposition towards credit delivery and credit expansion. Impact on Profitability Between 01.04.93 to 31.03.2001Commercial banks incurred a total amount of Rs.31251 Crores towards provisioning NPA. This has brought Net NPA to Rs.32632 Crores or 6.2% of net advances. To this extent the problem is contained, but at what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy. The enormous provisioning of NPA together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the PSBs. In turn PSBs are seen as poor performers and unable to approach the market for raising additional capital. Equity issues of nationalised banks that have already tapped the market are now quoted at a discount in the secondary market. Other banks hesitate to approach the market to raise new issues. This has alternatively forced PSBs to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins; else they are to seek the bounty of the Central Government for repeated Recapitalisation. Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs.32632 Crores absorbs a recurring holding cost of Rs.2300 Crores annually. Considering the average provisions made for the last 8 years, which works out to average of Rs.3300 crores from annum, a sizeable portion of the interest income is absorbed in servicing NPA. NPA is not merely non-remunerative. It is also cost absorbing and profit eroding. In the context of severe competition in the banking industry, the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. The options for these banks are lost. "The spread is the bread for the banks". This is the margin between the cost of resources employed and the return there from. In other words it is gap between the return on funds deployed (Interest earned on credit and investments) and cost of funds employed (Interest paid on deposits). When the interest rates were directed by RBI, as heretofore, there was no option for banks. But today in the deregulated market the banks decide their lending rates and borrowing rates. In the competitive money and capital Markets, inability to offer competitive market rates adds to the disadvantage of marketing and building new business.

In the face of the deregulated banking industry, an ideal competitive working is reached, when the banks are able to earn adequate amount of non-interest income to cover their entire operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference between the gross interest income and interest cost will constitute its operating profits. Theoretically even if the bank keeps 0% spread, it will still break even in terms of operating profit and not return an operating loss. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. On account of the burden of heavy NPA, many nationalised banks have little option and they are unable to lower lending rates competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income from off balance sheet business yielding non-interest income. The following working results of Corporation bank an identified well managed nationalised banks for the last two years and for the first nine months of the current financial year, will be revealing to prove this statementTable -6 (part-1) …………Year Performance of Corporation Bank .......ended (Amount in Crores).. PerformanceMar. indicator 2000 Earnings - Non-interest 270.81 Operating expenses 303.99 Difference - 33.18 Year ended Mar. 2001 292.09 341.36 - 49.27 9 months Apr.Decr.2001 285.85 280.52 5.33

Non-interest income fully absorbs the operating expenses of this bank in the current financial year for the first 9 months. In the last two financial years, though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left. Now what are the interest earnings and expenses of Corporation Bank during this period? Table -6 (part-1) Corporation BankYear Year 9 months -Interest Earnings andended ended Apr.Decr.2001 Expense……………….. (Amount inMar. 2000Mar. 2001 Crores) Performance indicator Earnings - Iinterest Income 1604.39 1804.54 1458.33 Exp.-Interest expenses 1146.09 1223.21 981.45 Interest spread 458.30 581.33 476.88 Operating Profit 425.12 482.21 532.06

Provisions Net Profit

192.68 232.44

270.22 261.84

219.48 262.73

The strength of Corporation Bank is identified by the following positive features: 1. It's sizeable earnings under of non-interest income substantially/totally meets its non-interest expenses. 2. Its obligation for provisioning requirements is within bounds. (Net NPA/Net Advances is 1.92%) It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March 2001, as published by RBI in its Report on trends and progress of banking in India. Table 7- Nationalised banks operational Year endedYear ended statistics……….. (Amount in Crores) Mar. 2000 Mar. 2001 Performance indicator Earnings - Non-interest 6662.42 7159.41 Operating expenses 14251.87 17283.55 Difference - 7589.45 - 10124.14 Earnings - interest income 50234.01 56967.11 Exp.-Interest expenses 35477.41 38789.64 Interest spread 14756.60 18177.47 Intt. On Recap bonds 1797.88 1795.48 Operating Profit 5405.27 6257.85 Provisions 4766.15 5958.24 Net Profit 639.12 299.61 Interest on Recapitalisation Bonds is a income earned from the Government, who had issued the Recapitalisation Bonds to the weak banks to sustain their capital adequacy under a bail out package. The statistics above show the other weaknesses of the nationalised banks in addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under: 1. Their operating expenses are higher due to surplus manpower employed. Wage costs to total assets is much higher to PSBs compared to new private banks or foreign banks.

The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. Business is an exercise of balancing between risk and reward. a tendency towards laxity in the standards of credit appraisal comes to the fore. and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over-confidence). It is well known that the existence of collateral security at best may convert the credit extended to productive sectors into an investment against real estate. . but have resorted to IITier capital in the debt market or looking to recapitalistion by Government of India. Without accepting risk. How NPA Affects the Outlook of Bankers towards Credit Delivery The fear of NPA permeates the psychology of bank managers in the PSBs in entertaining new projects for credit expansion. Nationalised banks have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution of this hovering threat. This has affected adversely credit growth compared to growth of deposits. Their earnings from sources other than interest income are meagre. In the world of banking the concepts of business and risks are inseparable. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market.2. RBI has indicated the ideal position as Zero percent Net NPA. Further blocked assets and real estate represent the most illiquid security and NPA in such advances has the tendency to persist for a long duration.1% as at March 2001. There is insistence on provision of collateral security. as per RBI guidelines. sometimes up to 200% value of the advance. How NPA Affects the Liquidity of the Nationalised Banks? Though nationalised banks (except Indian Bank) are able to meet norms of Capital Adequacy. Accept justifiable risks and implement de-risking steps. The fear psychosis also leads to excessive security-consciousness in the approach towards lending to the small and medium sized credit customers. but will not prevent the account turning into NPA. Even granting 3% net NPA within limits of tolerance the nationalised banks are holding an uncomfortable burden at 7. resulting a low C/D Ratio around 50 to 54% for the industry. the fact that their net NPA in the average is as much as 7% is a potential threat for them. there can be no reward. This is due to failure to develop off balance sheet business through innovative banking products.

.. Despite various correctional steps administered to solve and end this problem. .6 1999-2000 475113 60408 444292 30211 12.8 2000-2001 558766 63883 526329 32632 11.7 6. As at 31... I NPA Statistics -All %-age of %-age of Scheduled Gross Net Total Gross Net Net Commercial NPA to NPA to Advances NPA Advances NPA Banks . followed by the SBI group.... indicating that fresh accretion to NPA is more than the recoveries that were effected...4 6.2001 the aggregate gross NPA of all scheduled commercial banks amounted to Rs. There is neither reduction nor even containment of the threat...... 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.03.13..883 Crore.. (Amount in advances advances Crores) Year 1997-98 352697 50815 325522 25734 14. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions.7 7.63.4% to 11. and the all India Financial Institutions.4 7.. since this accomplishment is on account of credit growth... thus signifying a losing battle in containing this menace.2 The apparent reduction of gross NPA from 14.. It shows an increase of Rs.I gives the figures of gross and net NPA for the last four years.. Table No. The severity of the problem is however acutely suffered by Nationalised Banks....4% between 1998 and 2001 provides little comfort...068 Crore or more than 25% in the last financial year. which was higher than the growth of Gross NPA and not through appreciable recovery of NPA.3 1998-99 399496 58722 367012 27892 14...NPA the Unbridled Virus and an Emerging Challenge to Indian Banking System The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions 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. total net .. concrete results are eluding.... Table No.

57% 6.9% 2000-2001 442134 54773 27967 12.26 % %-age of %-age of Table -4: NPA of Nationalised Gross Net Total Gross Net Banks………………………………………….2 % 1998-99 325328 51710 24211 15. NPA to NPA to Advances NPA NPA (Amount in Crores) Year total net advances advances 1997-98 166222 30130 14441 16. SBI Group and Nationalised Banks are as under.1 % 1999-2000 380077 53033 26188 14.39% and 6.00 % 7.91 1998-99 188926 33069 15759 16.2%.08 % 6.80 .35 1999-2000 224818 33521 17399 13.8 % 9. Comparative figures for PSBs.03.74 % % 1999-2000 129253 19773 7411 14.77 % 2000-2001 150390 20586 8125 12.67 118959 18641 7764 7.9 % 8.4%and 6.The gross NPA and net NPA for PSBs as at 31.73 % 6.2001 are 12.98 % 15. NPA to NPA to Advances NPA NPA (Amount in Crores) Year total net advances advances 1997-98 113360 15522 6829 14.0 % 8.74% are higher than the figures for SCBs at 11.99 7.39 % 6.02 8. %-age of %-age Table -2 : NPA of Gross Net Total Gross Net PSBs…………………………………………………………… NPA to NPA Advances NPA NPA (Amount in Crores) Year total net advances advanc 1996-97 244214 43577 20285 17.74% %-age of %-age of Table -3: NPA of State Bank Gross Net Total Gross Net Group……………………………………….88 8.2 % 1997-98 284971 45563 21232 16..

29 Crore. Driven to desperation and impelled by the desire not to accept defeat. But the fact remains that the infection if left unchecked will eventually lead to what has been forecast by the rating agency.146 Crore during .01 Further it is revealed that commercial banks in general suffer a tendency to understate their NPA figures. or Rs 1. there was a variation in the level of loan loss provisioning actually held by the bank and the level required to be made. throwing prudential norms to the winds. classifying a `doubtful' asset as a `sub-standard' asset. 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. Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or `sub-standard' asset.89 per cent. to Rs 18. As per report appearing in a national daily the banking industry has under-estimated its non-performing assets (NPAs) by whopping Rs. This only shows that the problem has swelled to graver dimensions. This practice can be logically explained as a desperate attempt on the part of the bankers.29 Crore. NPAs of ten leading institutions have reported a rise of 11. The industry is also estimated to have underprovided to the extent of Rs 1. through subtle techniques.10 Crore as on March 1997. they have chosen to mislead and claim compliance with the provisioning norms.412. Financial institutions have not far lagged behind. Much of this. whenever adequate current earnings were not available to meet provisioning obligations. The worst "offender" is the public sector banking industry. 3.2000-2001 264237 34609 16096 12. However RBI has contested this dismal assessment. Classifying an account of a credit customer as `substandard' and other accounts of the same credit customer as `standard'. up to 35% of the total banking assets. Nineteen nationalised banks along with the State Bank of India and its seven associate banks have underestimated their NPAs by Rs 3.029. There is the practice of 'ever-greening' of advances. while estimating NPAs of the Indian banking sector between 35% to 70% of its total outstanding credit. The international rating agency Standard & Poor (S & P) conveys the gloomiest picture.19 7.862.929 Crore. Such deception of NPA statistics is executed through the following ways. without actually providing. This invests an urgency to tackle this virus as a fire fighting exercise. • • • Failure to identify an NPA as per stipulated guidelines: There were instances of `sub-standard' assets being classified as `standard'. Essentially arising from the wrong classification of NPAs.

959 Crore from Rs 3.3.2000 31.490 Crore in the previous year.217 Crore last year. when prudent norms of banking were forsaken basking by the halo of security provided by government ownership.2001 31.7 3897 20.3.8 Emergence of NPA as an Alarming Threat to Nationalised Banks NPA is a brought forward legacy accumulated over the past three decades.2000 31.2 IFCI 19841 18715 4103 20. but it reported fall of Rs 134 Crore from the previous year's level of Rs 4. its NPAs have gone up by Rs 1. but keeping the balance sheets opaque. Table 5 NPA Statistics of the three Major Term Total Total NPA-% NPA-% Lending NPA NPA Loans Loans age age Institutions 31.103 Crore. 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.3.237 Crore.9 ICICI 52341 57507 3959 07.3.4 8363 13.3.03.185 Crore from Rs 6. but this does not justify relegating banking goals and fiscal discipline to the background.2001 31. 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 2000.3. IFCI followed with NPAs of Rs 4.2001.the year ended March 2000 from Rs 16.2000 31. ICICI's NPAs went up to Rs 3. But despite this extravagance the malaise remained invisible to the public eyes due to the practice of not following transparent accounting standards.2001 as at 31.6 2782 05. It is not wrong to have pursued social goals.623 Crore in the previous year. In fact. (Amount in Crores) Name of FI IDBI 57099 56477 7665 13. How RBI Describes this New Development in its Web Site .

and when the global financial markets were undergoing sweeping changes. 1992-93. the profitability of the PSBs as a group turned negative with as many as twelve nationalised banks reporting net losses. provisioning and capital adequacy.. These new formations take time to configure. when the first Series of Banking Reforms were introduced. asset classification. i. People are not accustomed to the new models. By March 1996." 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. i. but only after levying a heavy initial toll. The old is cast away and the new is found difficult to adjust. Commenting on this situation the Reserve Bank of India in its website has pointed out as under: "Till the adoption of prudential norms relating to income recognition. in the maze of defective accounting standards that still continued with Indian Banks up to the Nineties and opaque Balance sheets. We have already discussed these changes in detail in an earlier Chapter. the outer time limit prescribed for attaining capital adequacy of 8 per cent. Banks being sensitive institutions entrenched deeply in traditional beliefs and conventions . but still continuing to have accumulated losses of prior years carried forward in their balance sheets Banks which are still in the red. In a dynamic world. The Unseen and Unperceived Edge of NPA NPA surfaced suddenly in the Indian banking scenario. the working position of the State-owned banks exhibited the severest strain. In fact after it had emerged the problem of NPA kept hidden and gradually swelling unnoticed and unperceived.e. showing losses in the past and in the present. in the midst of turbulent structural changes overtaking the international banking institutions. twenty-six out of twenty-seven public sector banks were reporting profits (UCO Bank was incurring losses from 1989-90). eight public sector banks were still short of the prescribed. The process of quickly integrating new innovations in the existing set-up leads to an immediate disorder and unsettled conditions.In the peak crisis period in early Nineties.e. around the Eighties. In the first post-reform year. and work smoothly. it is true that new ideas and new concepts that emerge through such changes caused by social evolution bring beneficial effects. Marginal and sub-marginal operators are swept away by these convulsions.

were unable to adjust themselves to the changes. Deregulation in developed capitalist countries particularly in Europe.al. whose environment was insulated from the global context and was denominated by State controls of directed credit delivery. (1996). they emerged revitalized and as more vibrant and robust units. According to Lindgren et. Recent studies by Honohan (1996) provide the estimated resolution costs of banking crises in developing and transition economies since 1980 are pegged at US $ 250 billion reinforce this view. led to consequences just the opposite of what was happening in the western countries. As Caprio and Klingebiel (1996) observe." But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new order. Imperfect accounting standards and opaque balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive deterioration and structural weakness of the country's banking institutions to public view. During all these years the Indian Banking. the absence of competition and total lack of scientific decision-making. This enabled the nationalised banks to continue to . whether measured in terms of deposit growth. regulated interest rates. banking crises have come to the forefront of economic analysis. They suffered easy victims to this upheaval in the initial phase. 73 per cent of the member countries of the International Monetary Fund's (IMF) experienced at least one bout of significant banking sector problems from 1980 to 1996. Elaborating a cross-country description of this phenomenon a study by FICCI depicts as under: "Since the mid-eighties. have become one of the main obstacles to stability to the financial system. such costs amounted to 10 per cent or more of GDP in at least a dozen developing country episodes during the past 15 years. Continued political interference. growth intermediation instruments as well as in network. Consequently banks underwent this transition-syndrome and languished under distress and banking crises surfaced in quick succession one following the other in many countries. and investment structure did not participate in this vibrant banking revolution. More importantly. Suffering the dearth of innovative spirit and choking under undue regimentation. credit growth. Situations of banking distress have quickly intensified and in the process. such crises have resulted in severe bank losses or public sector resolution costs. Indian banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. witnessed a remarkable innovative growth in the banking industry.

Banks have now an entirely different environment under which to operate. inadequacy of capital and the erosion of profitability. it is the banking sector. all of which had led to deterioration in the quality of loan portfolios. to innovate and thrive in a highly competitive market and their success depended on their ability to act and adopt to market changes. Tariffs were brought down and quantitative controls were removed. In particular. trade and industry in India. The reforms have taken the Indian banking sector far away from the days of nationalization. while a few progressive corporates are making a niche for themselves in the global context. The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis of 1991. directed investments and fixed interest rates. These called for new . increase in the role of the market forces due to the deregulated interest rates. together with rapid computerisation and application of the benefits of information technology to banking operations have all significantly affected the operational environment of the Indian banking sector. The Indian market was opened for free competition to the global players. though stray symptoms of the brewing ailment were discernable here and there. Indian Banking. increase in the transparency of the banks' balance sheets through the introduction of prudential norms and norms of disclosure. As a result we witness today a scenario of banking. banks had to unlearn their traditional operational methods of directed credit. which experienced major reforms. As banking in the country was deregulated and international standards came to be accepted and applied. During this decade the reforms have covered almost every segment of the financial sector. Import restrictions were gradually freed. The new economic policy in turn revolutionalised the environment of the Indian industry and business and put them to similar problems of new mixture of opportunities and challenges. in particular PSBs suddenly woke up to the realities of the situation and to face the burden of the surfeit of their woes. This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. Simultaneously major revolutionary transitions were taking place in other sectors of the economy on account the ongoing economic reforms intended towards freeing the Indian economy from government controls and linking it to market driven forces for a quick integration with the global economy. Increase in the number of banks due to the entry of new private and foreign banks. all undergoing the convulsions of total reformation battling to kick off the decadence of the past and to gain a new strength and vigour for effective links with the global economy.flourish in a deceptive manifestation and false glitter. Many are still languishing unable to get released from the old set-up.

financial institutions. A bird's eye view is distinct. but it perceives only a telescopic view of the roof.strategies.top and not the contents that exist inside the several structures. It was not realised that the root of the problem of NPA was centered elsewhere in multiple layers. different from those that related to regulated banking in a captive environment In the background of these complex changes when the problem of NPA was belatedly recognised for the first time at its peak velocity during 1992-93. where a bottom-to-top-view alone can enlighten the correct contributing factors. The problem was defying a solution. A simple look at the whole provides summarised perception. more particularly in the transient economy of the country. but positive results were evading. banks are made ultimately to finance the losses incurred by constituent industries and businesses. which characterised the approach of the authorities during the last two-decades towards finding solutions to banking ailments and dismantling recovery impediments. there was resultant chaos and confusion. There are distinct diversities as among the 29 public sector banks . RRBs. But why? The threat of NPA was being surveyed and summarised by RBI and Government of India from a remote perception looking at a bird's-eye-view on the banking industry as a whole delinked from the rest of the economy. consolidating and tabulating the data submitted by different institutions. Repeated correctional efforts were executed. RBI looks at the banking industry's average on a macro basis. As the problem in large magnitude erupted suddenly banks were unable to analyze and make a realistic or complete assessment of the surmounting situation. as much outside the banking system. It is a not an exhaustive or in-depth view. It has collected extensive statistics about NPA in different financial sectors like commercial banks. Individual banks inherit different cultures and they finance diverse sectors of the economy that do not possess identical attributes. Banking is not a compartmentalized and isolated sector delinked from the rest of the economy. urban cooperatives. a distressed national economy shifts a part of its negative results to the banking industry. But it is not a homogeneous whole that is being perceived. but it is limited to the view appearing at the surface or top-layer. as within. extensive and even sharp. As has happened elsewhere in the world. But still it is a distant view of one outside the system and not the felt view of a suffering participant. Flying at a great height the bird can of-course survey a wide area. Restricted merely as a top-layer view it is partial and is not even a top-to-bottom view. trying to switch over to globalisation were only aggravating the crisis. Partial perceptions and hasty judgements led to a policy of ad-hoc-ism. Continuous concern was expressed. NBFC etc. The unpreparedness and structural weakness of our banking system to act to the emerging scenario and de-risk itself to the challenges thrown by the new order. In short.

13%). It is being statistically stated that bank X or Y has 12% gross NPA. human factors (those pertaining to the bankers and the credit customers). all having been nurtured and developed through innovative zeal of pioneers. environmental imbalances in the economy on account of wholesale changes and also 3. There are also banks that have successfully contained NPA and brought it to single digit like Syndicate (Gross NPA 7. The comparative performance under priority and nonpriority is only a difference of degree and not that of kind. 2. controlled or managed by single families. Much criticism is made about the obligation of Nationalised Banks to extend priority sector advances. The assessment of the mix-of contributing factors should have included 1. There are three weak nationalised banks that have been identified. Variable skill. inherited problems of Indian banking and industry. where operations should be conducted on a decentralized knowledge-based work-group.87%) and Andhra (Gross NPA 6. averaging the bank's whole performance to 12%. The Indian management set up everywhere turns mostly as one-man show even today. But there are also correspondingly two better performing banks like Corporation and OBC. represented by one dominant individual towering at each set-up. But banks have neither fared better in non-priority sector. which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA. This inherently convey the soleproprietorship culture and unable to quickly transform to modern professionally managed corporations of the global standard. We may add that while the core or base-level NPA in the industry is due to common contributory causes.themselves. efficiency and level integrity prevailing in different branches and in different banks accounts for the sweeping disparities between inter-bank and intrabank performance.an integrated teams of specialists each contributing to a core area of management. Indian business and industry were owned. the inter-se variations are on account . The scenario is not so simple to be generalised for the industry as a whole to prescribe a readymade package of a common solution for all banks and for all times. But if we look down further within that Bank there are a few pockets possessing bulk segments of NPA ranging 50% to 70% gross . While banks functioned for several decades under ethnic culture. between different geographical regions and between different types of customers using bank credit. Similarly NPA concerns of individual Banks summarised as a whole and expressed as an average for the entire bank cannot convey a dependable picture.

the professional bankers who have retired from service. Business and industry has equal responsibility to accept accountability for containment of NPA.e. it is the case of a sunset industry. NPA in different sector is not caused by the same resultant factors. but economic variance in trade cycles or market sentiments have created the NPA. SSI and big industries each calls for different strategies in terms of credit assessment. Infant mortality in credit is solely on account of human factors and absence of human integrity. we must have some hundreds of retired Bank executives in the country. If the gap is long. and post advance supervision. But what is the proportion of this content? Significant part of the NPA is on account of clout banking or willfully given bad loans. including the audit and inspection functionaries for a candid and comprehensive introspection based on a survey of the variables of NPA burden under different categories of sectoral credit. Containing quantum of NPA is therefore to be programmed by a sector-wise strategy involving a role of the actively engaged participants who can tell where the boot pinches in each case. but for years were earlier rated as good performers and creditworthy clients ranging within the top 50 or 100. Many of the present defaulters were once trusted and valued customers of the banks. Everyone is satisfied in blaming the others. Credit customers who are in NPA today. NPA in this sector forms 8 TO 10% of the gross amount. Things were all right earlier. different regions and in individual Branches categorized as with high. project implementation. Advance to agriculture. Advance to weaker sections below Rs. i. Bank executives hold 'willful defaulters' responsible for all the plague. credit delivery. Ex-bankers. Why have they become unreliable now. An important fact-revealing information for each NPA account is the gap period between the date. Credit to different sectors given by the PSBs in fact represents different products.25000/.of the structural and operational disparities. The heavy concentrated prevalence of NPA is definitely due to human factors contributing to the same. who can boldly and independently.represents the actual social banking. when the advance was originally made and the date of its becoming NPA. but possess a depth of inside knowledge do not out-pour candidly their views. which cannot create NPA. No bank appears to have conducted studies involving a cross-section of its operating field staff. or have they? The credit portfolio of a nationalised bank also includes a number of low-risk and risk-free segments. Small personal loans against banks' . We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. After three decades of nationalised banking. Industry and business blames the government policies. medium and low incidence of NPA. but objectively voice their views.

Secondly NPA is not a dilemma facing exclusively the Bankers. is not the Government an equal sufferer? What about the recurring loss of revenue by way of taxes. and accepting . where life cycle of the virus is terminated. which indirectly are reflected in the financial statements of nationalised banks. Then there is food credit given to FCI for food procurement and similar credits given to major public Utilities and Public Sector Undertakings of the Central Government. A majority of the industrial work force finds employment here and the sector's contribution to industrial output is substantial and is estimated at over 35 percent while its share of exports is also valued to be around 40 percent. in turn transferred and parked with the banks. NPA represents the owes of the credit recipients. medium or small occupies costly developed industrial land. about 10% of the small industries are reported to be sick involving a bank credit outstanding around Rs. Now. Why not representatives of industries and commerce and that of the Indian Banks' Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentalisation of management in banking sector. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. In the final analysis it represents instability in industry. The banks are only the ultimate victims. These closed units represent some thousands of displaced workers previously enjoying gainful employment. large value of land. It is only the residual fragments of Bank credit that are exposed to credit failures and reasons for NPA can be ascertained by scrutinising this segment. Several items of machinery form security for the NPA accounts should either be lying idle or junking out. NPA is a sore throat of the Indian economy as a whole. excise to the government on account of closure of several lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure erected with considerable investment by the nation? As per statistics collected three years back there are over two and half million small industrial units representing over 90 percent of the total number of industrial units. It is in fact an all pervasive national scourge swaying the entire Indian economy.5 million. at that period. machinery and money are locked up in industrial sickness. the field level participants should first address themselves to find the solution. Each closed unit whether large. In other words.5000 to 6000 Crore. What is the effect of the dismal situation on the psychology of entrepreneurs intending fresh entry to business and industry? Recognizing NPA as a sore throat of the Indian economy. These are the assets created that have turned unproductive and these represent the real physical NPA. as the ultimate financiers of these assets.own deposits and other tangible and easily marketable securities pledged to the bank and held in its custody are of this category. It may be even more now. Out of the 2.

Credit delivered is not put to productive application. RBI and Government of India can positively facilitate the process by providing enabling measures. He has overseen working of branches of the bank as Chief Inspector for three years and as Development Managers for two terms. And preventive action to be successful should start from the credit-recipient level and then extend to the bankers. abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporates? In short. The new tool of deregulated approach has to be accepted in solving NPA. Has NPA surfaced due to defective product engineering by the designer (Banker) or due to misapplication of the product by the user (credit-customer). or due to effects of the violently changing economic/ industrial /commercial environment? The exact stage at which the failure has occurred. but help industry and banks to set right themselves. Do not try to set right industry and banks. He has also served as Manager/Sr.self-discipline and self-reliance? What are the deficiencies in credit delivery that leads to its misuse. The service product has turned into scrap. Select a few branches with high-density NPA for your study and start methodically from the scratch. but sunk into dead assets. Focus at Anomalies at the Credit Delivery Survey of NPA from within the Credit Agency Centre -A Detached [The writer is a retired bank officer in senior management with four decades of past service in one of the leading nationalised banks. which causes NPA in the life cycle of a project-finance can be identified in a post-mortem review. He had had occasion to study in-depth working of a number of branches big and small. He was extensively engaged in multi-agency sponsored projects of social banking in two States in the South. properly and sincerely? Search objectively for an answer examining credit delivery processes sequentially from within the branch. the functional staff of the Bank along with the representatives of business and industry have to accept a candid introspection and arrive at a code of discipline in any final solution. Manager/Chief Manager in six large/very large branches in his tenure. if it . But where has the process gone wrong? Has the credit delivered correctly. Please also refer to pages titled "My Encounters with Corporate Corruption in my service" in this context] The Disorder & Confusion at the Credit Delivery Centres NPA can be defined as failed credit. His propositions in this article are based on his field experience. as well as regional and zonal offices of the bank at the closest range with analytical precision. How a credit given to an eligible and deserving customer for a viable project can ever become NPA.

improving efficiency of credit assessment and credit delivery operations at the point of the financing bank in the first instance.was efficiently assessed and disbursed resulting in its successful completion and realisation of project objectives? Can it be only due to 'willful default' by a credit customer at the last stage? Obviously if the credit is not allowed to a deserving. The source for repayment is self-generated from within and made available in time schedules coinciding with the repayment terms. The assets created in the project are encumbered to the lender and discharging the debt releases the assets from the banker's charge. The bank-credit should be for productive and self-redeemable projects and should thus be self-liquidating. Similarly if the project financed is deficient and not viable or creditworthy. Followed by efficient utilisation credit disbursement by industry and trade. or eligible customer and it turns sticky. Commencing with borrowed capital a viable project generates the source for its repayment and reaches the stand-alone or self-sustaining status. Credit a is product of financial service. Primarily there are three stages in credit extension. Thus if the project report and the terms of loan sanction are not handled realistically. which provides redeemable capital to industry and business. The corporate customer proves his capacity and financial integrity and he commands better recognition by the banker for his future credit needs only when the project is shown as self repaying its debts. i. it may result in time/cost over runs and lead to trouble to the financing institution. it is a mistake of judicious assessment by the bank. the credit cycle will not pass on to the next stage of successful project implementation. credit delivery. the financing bank is as much to be blamed as the customer. its productive use and its repatriation. Looking next at the customer what is the benefit or motive of the corporate customer to willfully default repayment? And why this tendency has surfaced amongst Indian corporates in the last two decades? A project is deemed implemented successfully when it not only attains profitable turnover but also discharges the project-debt as per schedule. you do not reach the next stage. without the loan becoming an NPA. Debt default and successful entrepreneurship in business promotion do not go together. The provision is in-built in the project structure. Unless you are successful in the earlier stage.e. The credit customer need not have to search for a source to repay the loan. The disbursement of project finance is not done efficiently. which creates NPAs. This then is the test for a viable project . These are. credit utilization and loan liquidation. If the project is not effectively implemented it is futile to aspire for repayment in the normal course. NPA can be arrested only through internal remedies. Still why default takes place and that too willfully? This is apparently against the laws of economics and law of human nature. In all these cases it is deficiency of job talents on the part of the banker.

In the second stage the implementation responsibility is with the customer and controlling responsibility with the banker. is on account of deficiency in credit assessment and credit delivery. but not utilised for the purpose it was allowed and no assets are held or only negligible assets are seen. If the basic ingredients are lacking in the banker. Wrong handling at any stage can obviously create NPA. Release the security when repayment is made. We may call it as two 'C's (character and capacity) to be present commonly with the financier and promoter. the absence of which can ruin either or both. but essence of these terms has acquired substantial additional content and meaning. Additionally the project financed needs to possess two characteristics. Imports were discouraged.and the grounds on which the banker accepts to finance the same. Subsequently when the country was industrialised in the 60s industry was protected by the government policies. The banker has to possess different knowledge resources and talents to efficiently handle creditmanagement at each stage. In the final stage it is mainly the responsibility of the customer. Accept and hold in your custody a marketable security and release the advance. Allow the activity to be carried out by the customer. Credit. These are the human factors. But it is not so today. If both act prudently the first stage is passed. when banks are called upon to extend multiple types finance for diverse needs of capital for industry. It is with the banker in project appraisal and loan sanction including the setting up of terms and conditions. The customer must possess entrepreneur ability and integrity. It is almost zero risk oriented. Character and capacity are still the basic ingredient. A healthy joint approach promotes the cause of both. Your analysis of NPA study should indicate whether the roots of NPA lie in the first. These are talent (appropriate knowledge and foresight) and integrity. technical feasibility and financial viability. business and other economic activities open to global competition. The action or initiative is with the customer at the stage of the preparation of the project. second or third stages of the life span of the service product. the loan released by him will not be productively employed and it may result in potential NPA. Decades back credit risk was not so extensive. and in case of non-repayment dispose of the security and reimburse your exposure. The seeds are sown but the plants never sprout and there is no . when banking was operated purely on a security-oriented approach. which undergoes infant-mortality at the outset itself or after a short span of time after trial production. Units enjoyed a captive demand without competition and hence there was no problem for the banker. The loan is released. In particular the banker needs to have two primary attributes for successful credit extension.

These are the within factors responsible for accretion to the pool of Bank's NPA burden. inefficiency or lack of training and knowledge and finally lack of integrity in respect of the person(s) involved. it results in a sordid plight for the person of hasty action. the Project Report and the Memorandum Of Loan Sanction by a higher authority stipulating terms and conditions. Credit customer equity is Rs. The project outlay is Rs. Failure in the second stage is generally on account of default on the part of the banker in carrying out his functions with foresight and wisdom. The project report is the source document and the loan sanction record is a derived instrument. the existence of the project report is forgotten and the assumptions contained therein are totally ignored. During implementation of the project in the second stage involving disbursement of funds progress may not take place as scheduled in the project.The Loan was to be released in January 1998 and the project to be completed in the same year. and if this is not so and if the sanction is at variance.25000 additionally.3.0 Lacs and Bank loan Rs. if you cut the goose out of eagerness for a quick meal. There are two manifestos for the branch manager. and marketing the products produced. In other words this is the outer limit of the delegated authority for the Bank Manager in the exercise of credit management with reference to this customer.50. This goose will lay the golden eggs. Now events as they have unfolded are at variance with the assumptions in the project report.lack of talent and lack of integrity.e. Once a letter of sanction is received. On the credit customers part there is delay of three months in the completion of the project. No doubt the sanctioned terms represent the legal contract between the credit customer and the banker.0 Lacs. but if rigid adherence is resorted to the terms of sanction. These problems were not felt so much earlier. The situation needs a flexible attitude on the part of the Bank manager. even of inferior quality was never felt a problem in a captive and protected market. Thus the implementation report is different from . but without waiting. The sanction should be based on the project report. i. This can be attributed to gross negligence.question of the crops to harvest. A concrete example can explain this.000/-.2. Credit customer's equity includes margin for working capital Rs. However the credit customer on his part did bring Rs. The interest and first installment to be repaid before March 1999. but the project report alone contains nucleus for the successful culmination of the activity and creating the source for repayment.5 Lacs. It is also a contract between the financing bank and the borrowing customer. it brings adverse effects to the detriment of the interests of both the banker and the credit customer. the project report must be revised and approved/accepted by all. when the security financed was regularly appreciating in value. when in the inflationary economy. Now there is delay initially in the bank completing the documents and other legal formalities and the loan was released only in March 1998.

Bureaucratic approach and lack of talent in the service provider can also generate NPA. which is still incomplete. Execution responsibility was delegated to the nationalised banks. The system did not promote initiative and talent. as per the terms of sanction. Lack of structured career path and restricted experience through vertical movement in the hierarchical ladder without a horizontal exposure and without imparting training in organisation and business management needed for a understanding and for the interpretation of the current business environment. while the second stage is still incomplete. but bred corruption and nepotism. Directive Inputs and coursedirection came externally from RBI and Finance Ministry. The average bank employee. So too did bankers. The trader in the Mandi. the rice and cotton and oil miller did not believe that professional education is necessary for doing business. Before nationalisation banks were in the private sector. as was major business and industry. Recovery can come only from generated funds and not from the source of finance for the project. The unit financed faces liquidity crunch due to contraction in working capital caused by term loan repayment therefrom and is unable to either complete the project or provide the margin and avail the working capital. Every community and every section wanted to start a bank. As at 31st March 1999. That happens when a project is grossly under-financed. but when finally sanctioned at a higher level. it is then woe to the project. Banking was not professionalised. Indian banking developed on ethnic and regional set-up. Nationalised banking did not produce a spring of talent resources from within. Two decades of regimented banking and directed approach to credit delivery has deprived bank managers of the instinct skill and knowledge. . when the project is still incomplete. the bank manager arbitrarily recovers the first installment and interest. Here the bankers switche to the 3rd stage in the life cycle. several stipulations like higher rate of interest or higher margin requirement on the credit customer stipulated like condition to raise additional internal finance by way of unsecured loans were included without looking into the feasibility and sensitivity of the variations on the overall viability of the project. are the sins of a blind promotion policy more oriented on subjectivity than objective merit assessment. including a part of the top executives did have no professional education or education in modern management techniques. It will also happen when the project initially is scrutinised at the lower level and found viable based on well-defined assumptions.the project in certain details. If this happens. which utilized bank finance. The entire social set up was based on the joint Hindu family culture and the business looked to class banking for a select segment of society.

and to every top boss changing in intervals of 3 to 5 years. The era of pioneering philanthropic industrial barons like GD Birla or JRD Tata. This is the scene of Indian Banking struggling hard to transition from old primitive systems and values to modern professional Business Ethics and Corporate Governance. who desire more to get riches through any means of manipulation and speculative maneuvers instead through bonafide efforts and honest means. his value systems are not dependable. The root causes are inefficiency and corruption. This management philosophy is against modern management concepts of defining a goal and mission for the organization." Anyone could with conviction and candour say that both the management of the nationalised banks. This inefficiency and corruption can be traced from the history of the decadence that the social. In the modern world. the most significant being a strong capital base. adequate provisioning. The Indian social system signifying the inherent values of business and industry underwent progressive erosion in the last five or six decades. and business & industry are equally responsible for the emergence of NPA at alarming levels.Loyalty to the top man (CEO) and understandings his mind and acting as per his dictates and desires is considered as a main service-ethics. quantity and quality of informational data. Corporate management in India is generally a one-man dominated show. Diagnosis of the Root Cause and Tracing the Solution -.Self-Introspection by Industry. which however has vastly dismantled. the internal incentive mechanisms and above all the nature of governmental interference. the nature of investments made. political and economic institutions of our country underwent during the last six decades commencing from the Second World War. it turns to be loalty to the top boss. the quality of asset management. where consumerist motives predominates in the minds of all. Today we hear stories of Harshad . It is due to lack of capacity and character at both places. the skill and commitment of officials. This is the legacy of the spirit of the patriarch in the decade-old joint-family culture. An individual is fragile and fickle minded. Business and Banks "The health of banks is determined by many factors. Instead of loyalty to the mission and goals of the organization. in particular by the monetary authorities of the country in question. were succeeded by annals of short-sighted industrialists. since the second World War.

four decades ago. growing impersonalism. When there is contempt for the law and this is combined with the criminalisation of . there has come about a certain amount of weakening of the old system of values without its being replaced by an effective system of new values. importance of status resulting from possession of money and economic power. And it will also be seen that in every scam in the country the banks are inextricably involved with a sordid role. the failure to deal with corruption has bred contempt for the law. we find that we have reached this stage because the corrupting of the institutions in turn has finally led to the institutionalisation of corruption.Mehta-s and Ketan Parekh-s frequently. The relative fixity of ways and aspirations of former times and the operation of a moral code tending towards austerity. group loyalties. The fall in the standards of public life is vividly brought out in the very first chapter titled "Discipline and its Qualities" in my Project Literature on "Integrity in Public Life & Services" as under: "… but in recent times old traditions are breaking very fastly. intensification of parochial affinity. Santhanam has to say: "Thus. "In the pre-war and preindependence era. economic and social ethics. Today. This tendency in our social values is aptly noticed and pointed out by Mr." This is what Mr. a man was known in society by what he was. frugality and simplicity of life profoundly influenced by the mechanism of social control and social responses. unwillingness or inability to deal with deviations from the highest standards of political. the Commissioner of Central Vigilance has diagnosed the corruption scenario prevailing in India as under: "As we look at the corruption scene today.Santhanam in his very informative Report.K. he is known by what he has. In the emerging Indian society with its emphasis on purposively initiated process of urbanisation. As the Prime Minister pointed out. profession of faith in the rule of law and disregard of where adherence thereto is not convenient" Diagnosis of Corruption Scene in India by Central Vigilance Commission </SPAN< FONT> Dealing with the topic "Zero tolerance to corruption". along side of the weakening of the social norms of the simpler society signs are visible of materialism.

We talk about people being thick as thieves not thick as honest men! But why should this happen at all? The outlook of the individual. Engaged in commercial or industrial activities and dealing with vast resources. These are the corrupt politician (neta). Today the good majority is dumb in public life. (ii) lack of transparency. It is the honest public servant who tries to implement the law who becomes a misfit under such a situation. as under: The Second World War provided a fillip to the growth of corruption. The net result is that the corrupt are able to engage the best lawyers and quibble their way through the system. what little progress we make to produce eminence intellectuals in our society is solely on account of our ancient culture and traditional family way of life. These are (i) scarcity of goods and services. the corrupt business (lala). the corrupt bureaucrat (babu). As I see it. corruption flourishes. It got an impetus in the post war flush of money and consequent inflation. (iii) red tape and delay due to obsolete rules and procedures which are time consuming and encourage speed money. Despite all this. (v) Finally. (iv) cushions of legal safety which have been laid down by various pronouncements of the courts and CATs on the principle that everybody is innocent till proved guilty. there are five key players in our Indian corruption scene. as people like SS Gill in his book THE PATHOLOGY OF CORRUPTION have pointed out. The subsequent period from the Seventies witnessed the start of the era of political corruption and criminalization of politics. The resultant situation that developed is narrated in the same chapter referred earlier. business men and public servants got depraved in the aftermath of the 2nd World and subsequently on account of Government assuming more and more powers to totally control the economic life of citizens in the country. Growing indiscipline prevailing at the business and industry adversely affect the entire society and set pace to all our present social problems. biradri or tribalism. There are five reasons why our system encourages corruption. where the corrupt public servants protect each other. of conducting or allowing corruption in the electoral process using money power and with links between criminals and politicians resulted in the total demoralisation of our public lives. business enterprises as part of . inflating the powers of bureaucrats in the name of economic planning. the corrupt NGO (jhola) and finally the criminal (dada). As of today.politics. entire sections of our public life have become corrupt. Many educated citizens do not even cast their franchise.

as described below. trafficking in licences. accumulate large amounts of unaccounted money by various methods such as obtaining licences in the names of bogus firms and individual's. It is they who have control over large funds and are in a position to spend considerable sums of money in entertainment. accepting money for transactions put through without accounting for it in bills and accounts (on-money) and under-valuation of transactions in immovable property. Business and industry promote corruption and public service thrives as the beneficiary of this evil source of earnings. It is they who maintain an army of liaison men and contract men. Corruption is fueled by greed. spend and entertain ostentatiously" To cite a concrete example of the demoralisation has set in in the country can be seen from the way the functioning of The Board for Industrial and Financial Reconstruction of sick industrial companies (special provisions) Act of 1985 is abused. Origin of Corruption in Santhanam Committee Report (1964) our Society Analysis by "Corruption can exist only if there is some one willing to corrupt and capable of corrupting. and possessed with vast resources garnered through black money hoarding. It is an attempt to look for short cut means for getting quick money. . suppressing profits by manipulation of accounts to avoid taxes and other legitimate claims on profits. This phenomenon is well documented in Santhanam Committee Report. some of whom live. Prompted by greed and the desire for making quick or easy money. It is these persons who indulge in evasion and avoidance of taxes. The ranks of these classes have been swelled by the speculators and adventurers of the war period. We regret to say that both this willingness and capacity to corrupt is found in a large measure in the industrial and commercial classes. but also the necessary means to enable them to be in a position to pursue their vocations or retain their position among their own competitors.their activities build wide interactions with the government and public authorities. there is adequate scope for businessmen and industrialist in this environment to use corrupt ways of getting their things achieved. To these corruption is not only an easy method to secure large unearned profits.

The Vicious Atmosphere prevailing in Nationalised Banks I have created this web site to fight corporate corruption prevailing in public sector banks. Incidentally this Zone has the credit to possess the maximum NPA within the Bank. They chose to harass me for making the complaint. But there are NPA points with incidence as much as 70%. I submitted a complaint on Pune Branch of MYBANK in 1994. so as to take shelter under section 22 of SICA. The complaint was not considered and acted. But the fact is that this particular branch happens to be the leader in terms of largest of quantum of NPA in the Western Zone of MYBANK. registered themselves with BIFR. but more powerful executives at the head office thought differently. but it served as an powerful engine to generate more NPAs. there is high probability of widespread corruption. After retirement I have submitted the incidents in seven complaints with complete facts and material evidence to the Bank Chairman though the ED. By and large the employees are not dishonest. the highest executives of the Bank.there is not even an acknowledgement. as with everything above. Sadly. The response . who in their Banks are corrupt and how much corruption is there. Rightly bankers now demand the abolition of BIFR as one of the remedial measures for arresting further growth of NPAs. My recent complaints submitted relate to the Delhi Zone of the Bank. quotas and permits. The then Zonal Manage of Bombay wanted to act on my complaint. Clever corporates to ward off winding up petitions and other legal cases pending against them. the provisions of SICA were misused."The Board was set up 'with a view to securing the timely detection of sick and potentially sick companies owning undertakings and to identify and implement speedy ameliorative remedial measures. Quantitative import restrictions have been withdrawn and industrial-licensing . Majority of the officers are not dishonest. But these employees and officers know.it is obvious . with the corrupt holding a shield from being detected or punished. which provided a protective umbrella against those cases during period of such registration. The Turning Point .Impact of the Economic Reforms from 1991 onwards Today government has divested much of the controls. If anywhere there is more than 30% NPA." (Source "Banking through the decades" by PSV Chari & PS Narasimhan published in "The Hindu Survey of Indian Industry 1999") It was intended to be brake to curb sickness. I have given material data about such corruption in the chapters describing "My Encounters with Corporate Corruption in my Service".

There is free competition not merely at national level. and with each one of us. Every citizen has an equal access to information. The era of easy profits through questionable ways are now gone bye. Government banks have to turn to the market for fresh capital. The era of maintaining contact men. Inefficient public enterprises boarding corrupt public servants are being dismantled progressively through the process of corporatisation of public enterprises. They have to compete with each other. This is one of the objectives of corporate governance. . and achievement of the accepted corporate goals. Public Sector Corporation or Public Utility Services are on the world wide web at a click's distance at your desktop. Reforms will have meaning. only when all of us reform our mindset. Internet has changed our life style. public sector banks. Be honest and find your way to excellence. There can be no more burkha to hide their weaknesses and failure through shady balancing sheeting. Tax laws are being simplified and rationalised. Dynamic management of Corporation Bank and Oriental Bank of Commerce have shown the new path of progress through quality in banking. This has provided remarkable transparency in our administration. Banks have been freed from all kinds of regulations. It is within our reach. The environment that was breeding corruption is given a go bye. Enormous opportunities are invested to the new generation of our young men and women and made within reach through bonafide efforts. On the other hand industry no longer is pampered and favoured through protective economy. Everyone must have sufficient power to play his effective role for the fulfillment of the corporate mission. The Reforms in Banking Sector We have analysed the reforms in more detail. Business and industry have to change their mindset. Corporate governance and corporate ethics have become essential for business success and to infuse confidence with the stakeholders. but at the global level. At the Corporate level power and authority have to be decentralised. Industry has to compete at the global level and capital has to be sourced from large number of investors at the national or international level. The choice lies with us. Or act otherwise and get struck. Information about every Government Department. BSRB is abolished. liaison agents and frequent visits to Delhi for political leverage are things of the past.systems has been liberalised to a very large extent. new private sector banks and old private sector banks and foreign banks.

[BUSINESS LINE . I would rather urge them to lend a helping hand in the ongoing efforts of banks. Jan 22. I consider that forum like this. if they do not mend their ways and show a turn-about in their performance. . you will be able to bring down NPA level. comprising of representatives of a major section of the beneficiaries of the financial system. They have now declared "We are no longer weak banks and we have turned about". "Any amount of regulation would be futile if an ethical culture of compliance is not fostered among lenders and borrowers. Results & Review [Excerpts from address by Deputy Governor (Shri G.S. not even God will salvage them. Chairman." Mr Shenoy said.the three weak banks.Muniappan) at CII Banking Summit 2002 at Mumbai on April 1. Bank of Baroda. and not until then. My web site is addressed to the community of bank officers and bank employees. The three banks have understood. that none. society. and financial institutions to recover bad debts and arrest fresh accretions of NPAs. When you get rid of corporate corruption in your Institutions. Shenoy. Mr P. should equally get concerned in a serious way on what they can do to address the gravity of the NPA problem of banks. Do not be tolerant to corruption in your institutions. is bound to create adverse repercussions in the economy. spiritual leaders and such influential quarters to reduce default and control non-performing assets . But the message did have its positive effect. There were powerful protests.P. The writing in the wall is clear. "Pressure should be put on borrowers from peers. one cause for which is the mounting NPAs.Tuesday.an effective tool that was prevalent in traditional money-lending such as hundis. This credit to goes CII (Confederation of Indian industry) to make the bold statement. 2002 ] "It is not Anymore Lenders' Problem alone but Equally that of Borrowers too !" "The high level of NPAs in banks and financial institutions has been a matter of grave concern to the public as bank credit is the catalyst to the economic growth of the country and any bottleneck in the smooth flow of credit. if you want to salvage nationalised banking and more than that Indian Banking in the coming decades.] In Retrospect Efforts. 2002 Non-Performing Assets .Compliance key for cutting.Dull heads and false pretenders cannot use influence peddling and secure the position as Bank Chairman or Executive Director in the future. Either turn a new leaf or get lost. said on the sidelines of a seminar on financial markets. NPAs are not therefore the concern of only lenders. close them. If unfit to manage efficiently.

are implemented from the financial year 1992-93. but at the same time banks are required to make provisions for such NPAs from their current profits. asset classification and provisioning thereon. It would get classified as loss asset if it is irrecoverable or only marginally collectible. An asset is considered as "non-performing" if interest or installments of principal due remain unpaid for more than 180 days (the lag would get reduced to 90 days from March 31. and a general 10% (it is 20 per cent under international norms) of the outstanding balance in respect of sub-standard assets. The banks should make full provision for loss assets. 2004 to conform to international norms). These norms have brought in quantification and objectivity into the assessment and provisioning for NPAs. Any NPA would migrate from sub-standard to doubtful category after 18 months (as against 12 months under international norms).Present Prudential Regulations "The prudential norms on income recognition. We are neither strict nor lax but just correct in tune with our needs and capabilities." "Detailed guidelines have been issued by RBI in October 2000 on valuation and provisioning for investment portfolio including credit substitutes" Impact of NPAs on banks' profits and lending prowess "The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. as per the recommendation of the Committee on the Financial System (Narasimham Committee I). NPAs have a deleterious effect on the return on assets in several ways • • They erode current profits through provisioning requirements They result in reduced interest income . "Under the prudential norms laid down by RBI • • • Income should not be recognised on NPAs on accrual basis but should be booked only when it is actually received in respect of such accounts. 100 per cent of the unsecured portion of the doubtful asset plus 20 to 50 per cent of the secured portion (depending on the period for which the account is doubtful). NPAs do not generate interest income for the banks. We at the central bank constantly endeavour to ensure that our prescriptions in this regard are close to international norms.

40% in 2000-01. and They limit recycling of funds. besides servicing and litigation costs. "It will be interesting to have a look at the movement of NPAs (gross and net). credibility losing weak as branded getting like consequences. as a percentage of advances. asset quality has been placed as one of the most important parameters in the measurement of a bank's performance under the CAMELS supervisory rating system of RBI. To be fair. stand in regard to their NPAs "It may be observed that the malady of high level of NPAs eroding the profitability of banks is not confined to public sector banks alone. I have to state that a major portion of the NPAs was a legacy of the pre-prudential days.46% in 1993-94 to 6. This will give an idea of where banks. Still the NPA level can be considered of staggering magnitude in absolute terms costing the public sector banks more than Rs.• • They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future. Net NPA also moved down from 14.5000 crores annually by way of loss of interest income. but it is equally present in the private sector banks too. as different groups. It would only postpone the < CBI and vigilance to management senior the subjecting besides internationally.74% in 2000-01. disastrous with banks of some in happened effect> In the context of crippling effect on a bank's operations in all spheres. group-wise over the last four years. set in asset-liability mismatches. etc There is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning and boost up bottom lines. Movement of NPAs over the years "A glance through the statistics on the movement of NPAs of public sector banks since introduction of prudential norms in 1992-1993 will help us to understand the extent to which the public sector banks have made progress in reducing their NPA levels "The level of gross and net NPAs has been sliding down over the years.18% in 1992-93 to 12. it is a matter of concern that some of the new private sector banks which started off on a clean slate had acquired so quickly such a large level of NPAs . Gross NPA had come down from 23. when banks were accounting for interest as income on accrual basis even when the underlying advances were not performing. While some of the foreign banks loan portfolio had been affected by a few large accounts turning NPA.

high level of provisioning. "The lesser appreciated implications are reputational risks arising out of greater disclosures on quantum and movement of NPAs. prior approval of RBI for opening of new branches and new lines of business. problems can still arise due to various factors. lower morale and disinclination to take decisions at all levels of staff in the bank. . increased pressure on net interest margin (NIM) thereby reducing competitiveness. gradual decline in ability to meet steady increase in cost. When the trigger point under the mechanism is activated by the performance of a bank. a bank with high level of NPAs would be forced to incur carrying costs on a non-income yielding assets. review of loan policy. "As already mentioned earlier. paying off costly deposits and special drive to reduce the stock of NPAs. Other consequences would be reduction in interest income. their containment at minimum levels and ensuring that their impingement on the financials is minimum. submission and implementation of capital restoration plan. etc.Implications of NPAs on account of high level of NPAs Supervisory action that may arise "One of the trigger points in the proposed Prompt Corrective Action (PCA) mechanism [which was widely circulated by RBI through the public domain] is the level of net NPAs. The nonquantifiable implications can be psychological like 'play safe' attitude and risk aversion. provisions etc. Despite an efficient credit appraisal and disbursement mechanism. stress on profitability and capital adequacy. The essential component of a sound NPA management system is quick identification of non-performing advances. steady erosion of capital resources and increased difficulty in augmenting capital resources. The bank's whole machinery would thus be pre-occupied with recovery procedures rather than concentrating on expanding business. Management of NPAs "The quality and performance of advances have a direct bearing on the profitability and viability of banks. the mandatory actions would follow by way of restriction on expansion of risk-weighted assets. Other implications "The most important business implication of the NPAs is that it leads to the credit risk management assuming priority over other aspects of bank's functioning.

To overcome this problem a mechanism for independent review of compliance with terms of sanction has to be put in place. The risk-rating process should be different from regular loan renewal exercise and the exercise should be carried out at regular intervals. I would like to caution that running after niche segment may be fine in the short run but is equally fraught with risk. "Exchange of credit information among banks would be of immense help to them to avoid possible NPAs. "Close monitoring of the account particularly the larger ones is the primary solution. calling for different strategies at different stages a credit facility passes through. recessionary trends. etc. "It is common to find banks running after the same borrower/borrower groups as we see from the spate of requests for considering proposals to lend beyond the prescribed exposure limits. Banks should follow risk rating system to reveal the risk of lending. Emerging weakness in profitability and liquidity. Excessive reliance on collateral has led Indian banks nowhere except to long drawn out litigation and hence it should not be sole criterion for sanction. The objective should be to assess the liquidity of the borrower. A linkage to net owned funds also needs to be developed to control high leverages at borrower level."The approach to NPA management has to be multi-pronged. This is going to be a pre-requisite under the New Capital Adequacy framework and if a bank wants to be an international player. RBI's guidelines to banks (issued in 1999) on Risk Management Systems outline the strategies to be followed for efficient management of credit portfolio.. Banks should rather manage within the appropriate exposure limits. I would like to touch upon a few essential aspects of NPA management in this paper. . recovery of installments / interest with time lag. it shall have to go for such a system. Sanctions above certain limits should be through Committee which can assume the status of an 'Approval Grid'. There is no substitute for critical management information system and market intelligence. We have come across cases of excellent appraisal and compliance with sanction procedures but no control at disbursement stage over compliance with the terms of sanction. should put the banks on caution. It is not enough for banks to aspire to become big players without being backed by development of internal rating models. both present and future prospects. Loan review mechanism is a tool to bring about qualitative improvement in credit administration.

This calls for organisational restructuring. [Public sector banks recovered Rs."Banks should ensure that sanctioning of further credit facilities is done only at higher levels. • • The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. The scheme was operative up to September 30." delivered at 22nd Bank Economists Conference. [ Dr. A phased programme of exit from the account should also be considered. The policy framework suggested by RBI provides for setting up of an independent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinise and recommend compromise proposals Specific guidelines were issued in May 1999 to public sector banks for one time non discretionary and non discriminatory settlement of NPAs of small sector. I would like to recapitulate at this stage. Measures Initiated by RBI and Government of India for Reduction of NPAs "As regards internal factors leading to NPAs. These are the elements on the agenda of the second phase of reforms. More significant of them. improvement in managerial efficiency. A quick review of all documents originally obtained and their validity should be made. New Delhi. Governor. RBI. 668 crore through compromise settlement under this scheme.] . particularly for old and unresolved cases falling under the NPA category.15th February. in a speech titled "Banking and Finance in the New Millennium. skill upgradation for proper assessment of creditworthiness and a change in the attitude of the banks towards legal action which is traditionally viewed as a measure of the last resort. 2001] Compromise settlement schemes The RBI / Government of India have been constantly goading the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. 2000.Bimal Jalan. the onus rests with the banks themselves. Banks are free to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements with the approval of their Boards.

Allahabad.30 crore. The progress through this channel is expected to pick up in the coming years particularly looking at the recent initiatives taken by some of the public sector banks and DRTs in Mumbai. Provisions for placement of more than one Recovery Officer.• • Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. Calcutta and Chennai.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30.5 lakh for compromise settlement under Lok Adalats. power to attach defendant's property/assets before judgement. 5 crore and less as on 31 March 1997.25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister providing for OTS for advances up to Rs.10 lakhs and above.50. passed in March 2000 has helped in strengthening the functioning of DRTs. they could decide only 9814 cases for Rs.The amount recovered in respect of these cases amounted to only Rs. 2001 helped the public sector banks to recover Rs. .1864.38 crore as on September 30. Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals located in five centres viz. protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come.000 in respect of NPAs of small/marginal farmers are being drawn up. 2600 crore by September 2001] An OTS Scheme covering advances of Rs. The public sector banks had recovered Rs. Mumbai. through the forum of Lok Adalat. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. 2001. penal provisions for disobedience of Tribunal's order or for breach of any terms of the order and appointment of receiver with powers of realization.6264. 2001. Delhi. [The above guidelines which were valid up to June 30.40. management.For more details about Lok Adalats please refer to page Lok Adalat Debt Recovery Tribunals The Recovery of Debts due to Banks and Financial Institutions (amendment) Act. Measures for faster legal process Lok Adalats Lok Adalat institutions help banks to settle disputes involving accounts in "doubtful" and "loss" category. with outstanding balance of Rs.

I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers. RBI had advised the public sector banks to examine all cases of willful default of Rs 1 crore and above and file suits in such cases. Circulation of information on defaulters The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions.84 crore pending before them as on September 30. 2001. as on 31st March every year. RBI on its part has suggested to the Government to consider enactment of appropriate penal provisions against obstruction by borrowers in possession of attached properties by DRT receivers. Recovery action against large NPAs After a review of pendency in regard to NPAs by the Hon'ble Finance Minister.Looking at the huge task on hand with as many as 33049 cases involving Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds. I would like the banks to institute appropriate documentation system and render all possible assistance to the DRTs for speeding up decisions and recovery of some of the well collateralised NPAs involving large amounts.42988.1 crore and above with special reference to fixing of staff accountability. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors /proprietors / partners of these entities. and notify borrowers who default to honour the decrees passed against them. However. I may add that familiarisation programmes have been offered in NIBM at periodical intervals to the presiding officers of DRTs in understanding the complexities of documentation and operational features and other legalities applicable of Indian banking system. they serve as negative basket of steps shutting off fresh loans to these defaulters. and file criminal cases in regard to willful defaults. Board of Directors are required to review NPA accounts of Rs. On their part RBI and the Government are contemplating several supporting measures including legal reforms. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. some of them I would like to highlight. Asset Reconstruction Company: .

The CDR structure has been headquartered in IDBI.20 crore and above with the banks and financial institutions.. The Group will review the operation of the CDR Scheme. RBI to review the implementation procedures of CDR mechanism and to make it more effective. Deputy Governor.R. For more information please refer the details of CDR Scheme given in another page. in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient.2000 crore and initial paid up capital Rs. identify the operational difficulties. Credit Information Bureau Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd.An Asset Reconstruction Company with an authorised capital of Rs. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. Government of India proposes to go in for legal reforms to facilitate the functioning of ARC mechanism [For latest information on ARC formation please refer to pages dealing with the subject ARC/SC Ordinance 2002 Legal Reforms The Honourable Finance Minister in his recent budget speech has already announced the proposal for a comprehensive legislation on asset foreclosure and securitisation. It would negotiate with banks and financial institutions for acquiring distressed assets and develop markets for such assets. if any.Iyer Group (Chairman of CIBIL) to operationalise . Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in December 2002. Vepa Kamesam. (CIBIL) is under way. As announced by the Hon'ble Finance Minister in the Union Budget 2002-03. RBI has set up a high level Group under the Chairmanship of Shri. RBI is considering the recommendations of the S. Corporate Debt Restructuring (CDR) Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs. Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place.1400 crore is to be set up as a trust for undertaking activities relating to asset reconstruction.

Nor are these proposed to be brought under regulatory oversight and prudential reporting immediately. Loans and advances overdue for less than one quarter and two quarters would come under this category. RBI has suggested to the banks to have a new asset category `special mention accounts' . The Group is finalising its recommendations shortly and may come out with guidelines for effective control and supervision by bank boards over credit management and NPA prevention measures. disclosures. More information on CIBIL schme given in a separate page. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and over-exposure. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of banks and financial institutions and to obtain feedback on the functioning of the Boards vis-à-vis compliance.for early identification of bad debts. A. The report of the group is now published and discussed in another page. which had in no small measure contributed to the incremental NPAs of banks. Special Mention Accounts . This would be strictly for internal monitoring. as they are not classified as NPAs. would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large amounts against same assets and property. However. This.Additional Precaution at the Operating Level In a recent circular. The step is mainly with a view to alerting management to the prospects of such an account turning bad. Proposed guidelines on willful defaults/diversion of funds RBI is examining the recommendation of Kohli Group on willful defaulters. and thus taking . It is working out a proper definition covering such classes of defaulters so that credit denials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against willful defaulters. audit committees etc. The main recommendations of the Group include dissemination of information relating to suit-filed accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. I hope. Data regarding such accounts will have to be submitted by banks to RBI.S. transparency. special mention assets would not require provisioning.the scheme of information dissemination on defaults to the financial system. Corporate Governance A Consultative Group under the chairmanship of Dr.

Once these accounts are categorised and reported as such. .preventive action well in time. Borrowers having genuine problems due to temporary mismatch in funds flow or sudden requirements of additional funds may be entertained at the branch level. This will prevent the need to route the additional funding request through the controlling offices in deserving cases. This will help banks look at accounts with potential problems in a focused manner right from the onset of the problem. An asset may be transferred to this category once the earliest signs of sickness/irregularities are identified. Introducing a `special mention' category as part of RBI's `Income Recognition and Asset Classification norms' (IRAC norms) would be considered in due course. proper top management attention would also be ensured. so that monitoring and remedial actions can be more effective. and for this purpose a special limit to tide over such contingencies may be built into the sanction process itself. and help avert many accounts slipping into NPA category.

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