50,65,81,83,84,87,100/160 28,90,91,95,112,11, 110, 93-94 /154
Introduction to Banks
The bulk of all money transactions today involve the transfer of bank deposits. Depository institutions, which we normally call banks, are at the very center of our monetary system. Thus a basic knowledge of the banking system is essential to an understanding of how money works. Bank Deposits and Reserves The monetary base is created by the Fed when it buys securities for its own portfolio. Bank deposits themselves are not base money, rather they are claims on base money. A bank must hold reserves of base money in order to meet its depositors' cash withdrawals and to cover the checks written against their accounts. Reserves comprise a bank's vault cash and what it holds on deposit at the Fed, known as Fed funds. The Fed requires banks to maintain reserves of at least 10% of their demand deposits, averaged over successive 14-day periods. The Movement of Bank Reserves When a depositor writes a check against his account, his bank must surrender that amount in reserves to the payee’s bank for the check to clear. Reserves are constantly moving from one bank to another as checks are written and cleared. At the end of the day, some banks will be short of reserves and others long. Banks redistribute reserves among themselves by trading in the Fed funds market. Those long on reserves will normally lend to those short. The annualized interest rate on interbank loans is known as the Fed funds rate, and varies with supply and demand. The reserve requirement applies only to the bank's demand deposits, not its term or savings deposits. Thus when a bank depositor converts funds in a demand deposit into a term or savings deposit, he frees up the reserves that were held against the demand deposit. The bank can then use those reserves in several ways. For example, it can hold them to back further lending, buy interest-earning Treasury securities, or lend them to other banks in the Fed funds market. Controlling the Fed Funds Rate The supply of reserves changes whenever base money enters or leaves the banking system. This occurs when the Fed buys or sells securities or when the public deposits or withdraws cash from banks. The demand for reserves changes whenever total demand deposits change, which occurs when banks increase or decrease aggregate lending. The Fed controls the Fed funds rate by adjusting the supply of reserves to meet the demand at its target interest rate. It does so by adding or draining reserves through its open market operations. The Fed funds rate effectively sets the upper limit on the cost of reserves to banks, and thus determines the interest rates that banks must charge the public for loans. Bank interest rates influence the demand for loans, and thereby the net amount of bank lending. That in turn determines the
balances in excess of its nearterm payment obligations. in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India. On average. All government spending is paid out of the Treasury's account at the Fed.
. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. In order to minimize variations in aggregate banking system reserves. and does not accumulate. the Treasury maintains a nearly constant balance in its Fed account.liquidity of the private sector. an asset which is not producing income.
Definition A loan or lease that is not meeting its stated principal and interest payments. which is important in terms of aggregate demand and inflationary pressures. the Fed debits the Treasury's account and credits the Fed account of the payee’s bank. The Treasury replenishes its Fed account with transfers from its commercial bank accounts where it deposits the receipts from taxes. The Effects of Government Spending The Fed acts as a depository for the Treasury as well as member banks. Funds move in the reverse direction when the public pays taxes or buys securities from the Treasury. The Treasury sells or redeems securities as required to balance its inflows against outflows. which has been classified by a bank or financial institution as sub-standard. Non performing asset Non Performing Asset means an asset or account of borrower. However it has no need for. More generally. and the sale of its securities. Whenever the government spends. However short-term variations occur because receipts cannot be synchronized with spending. Banking system reserves remain essentially unaffected by government spending because the Treasury transfers funds from its commercial bank accounts to replace the funds spent out of its Fed account. The Treasury must maintain a positive balance in its commercial bank accounts to avoid having to borrow directly from the Fed. government spending does not affect the aggregate bank deposits of the private sector. In effect. Treasury payments are simply transfers from its commercial bank accounts to the bank accounts of the public. The selection and control of the Fed funds rate is the key monetary policy instrument of the Fed. doubtful or loss asset.
terms of credit etc. 1. Indian banking sector of having a serious problem due non performing. Asset Classification : The RBI has issued guidelines to banks for classification of assets into four categories. The financial reforms have helped largely to clean NPA was around Rs. credit policy. business cycle etc. 2. The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of resource. 52. The reasons may be widely classified in two:
(1) Over hang component (2) Incremental component Over hang component is due to the environment reasons. The earning capacity and profitability of the bank are highly affected due to this NPA is defined as an advance for which interest or repayment of principal or both remain out standing for a period of more than two quarters. Substandard assets: These are assets which come under the category of NPA for a period of less then 12 months. Incremental component may be due to internal bank management.000 crores in the year 2004. 3. Reasons: Various studies have been conducted to analysis the reasons for NPA. Doubtful assets:
. Standard assets: These are loans which do not have any problem are less risk. What ever may be complete elimination of NPA is impossible.what are non performing assets in banks Non-Performing Assets in Indian Banks In liberalizing economy banking and financial sector get high priority.
3) 37756 (6.6) 21382 (3.25% to 100% from standard asset to loss asset respectively. crores) 2003 709260 (91.4) 63963 (11.8) 2004 837130 (92.36) 7625 (0.6) 39731 (5.4) 2002 609972 (89.2) 20078 (2.These are NPA exceeding 12 months 4. It ranges from 0. 2001 494716 (88.2) 68780 (8. The classification of assets of scheduled commercial bank. RBI has also tightened red the provisions norms against asset classification.6) 18206 (3. Loss assets: These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI. it is actually received.3) 36247 (4.4) (Amount Rs.8) 21026 (2. Table 1 Assets Standard assets Sub standard assets Doubtful assets Loss assets Total NPA Income recognition and provisioning Income from NPA is not recognized on accrued basic but is booked as income only when.8) 902027 (100)
Gross and net NPA of different sector of bank
.1) 41201 (6.1) 8971 (1.1) 8370 (1.2) 70953 (10.8) 8001 (1.
The table II and III shows that the percentage of gross NPA/ gross advance and net NPA/ net advance are in a decreasing trend.38 (end of March 31) (in %) Net NPA / Net Advance 2002 5.09 9.Table 2 Category 2001 Public sector bank Private sector Foreign bank Table 3 category 2001 Public sector bank Private sector Foreign bank 6.76 2004 2.84 4.32 1.79 5. This was due to show ineffective recovery of bank credit.82 2. lacuna in credit recovery system.98 1.37 6.53 2.74 2.49 2003 9.84
(end of March 31) (in %) Gross NPA/ Gross Advance 2002 11.07 5.37 8.36 8.82 12.32 1.but still if compared to foreign banks Indian private sector and public sector banks have a higher NPA.25 2004 7. This shows the sign of efficiency in public and private sector bamks. Management of NPA The table II&III shows that during initial sage the percentage of NPA was higher.64 5. inadequate legal provision etc. Various steps have been taken by the government to recover and reduce NPAs.89 2003 4.49 1. Some of them are.
2004 on Prudential Norms on Income Recognition.BSD. Lok adalats 3.PCB.BSD.140.05.PCB.17/13.1.No.I. But at least Indian banks can try competing with foreign banks to maintain international standard.MC. the NPA has to be scheduled. Debt Recovery Tribunals 4.05/2001-02 dated October 5.05/2004-05 dated December 2.IP. One time settlement / compromise scheme 2.No.Cir.00/05-06 July 4. UBD. Provisioning and Other Related Mattes as also the following circulars on the above subject: i.No. Corporate Reconstruction Companies 6. Taking into consideration requests received from the UCB Sector. Asset Classification.1/09.15/12.05. To improve the efficiency and profitability. Income Recognition and Asset Classification Norms-UCBs Please refer to Master Circular dated UBD.Cir. 2005 The Chief Executives of all Primary( Urban) Cooperative Banks Dear Sir/Madam.05. Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002. 2001 ii. UBD. 2004 2. UBD. Various steps have been taken by government to reduce the NPA.BSD. It is highly impossible to have zero percentage NPA.05/2002-03 dated September 9. 5.15/12.04. credit information on defaulters and role of credit information bureaus
CONCLUSION The Indian banking sector is facing a serious problem of NPA. (Table II&III).I. 2002 iii.00/2004-05 dated September 4. Income Recognition and Asset Classification Norms-UCBs RBI/2005-06/41 UBD (PCB). The extent of NPA is comparatively higher in public sectors banks. it has been decided to permit the following categories of UCBs to classify
2007 and should not result in reclassification of accounts already classified as NPA in the year March 31. iii. 100 crore will be determined on the basis of average of the fortnightly Net Demand and Time Liabilities in the financial year concerned.Loan Accounts as NPAs based on 180 days delinquency norm instead of the extant 90 days norm. Interest and/or installment of principal remain overdue** for a period of more than 180 days in respect of a Term Loan. The bill remains overdue** for a period of more than 180 days. The above modifications are subject to condition that the changes will take effect for classification of NPAs in the year ended March 31. disbursement and post disbursement procedures. Ananda) Chief General Manager-in-charge Annexure
. The relaxation in classification of NPA accounts for the banks referred to at para 2 above will be in force for three financial years i. The exemption given for classification of gold loans and small loans upto Rs. Yours faithfully (K. 5. 100 crore* ii. in the case of bills purchased and discounted. 2004 or earlier except through the normal process of up-gradation. 4. The details of the changes and the consequent impact on the existing instructions with regard to asset classification and income recognition in respect of these banks are given in the Annexure. i.e. 3. Banks having multiple branches within a single district with deposits upto Rs.e. if not paid by the due date fixed by the bank becomes overdue. 2005. The relaxations are given for the explicit purpose of enabling the UCBs concerned to transit to the 90 day NPA norm in the year 2007-2008 by building up adequate provisions and strengthening their appraisal. in respect of an Overdraft/Cash Credit (OD/CC). an account would be classified as Non Performing Asset if the i. All UCBs other than those referred to at para 2 above shall classify their loan accounts as NPA as per 90 day norm as hitherto. 2006 and 2007. The account remains 'Out of order' for a period of more than 180 days. 2005 and onwards upto March 31.Unit banks i.R. 2006. **Any amount due to the bank under any credit facility. financial years ended/ending March 31. iv. ii. 100 crore* * The deposit base of Rs. banks having a single branch / HO with deposits upto Rs. For the above category of banks. Any amount to be received remains overdue** for a period of more than 180 days in respect of other accounts.1 lakh based on 180 days norm will however continue till March 31.
Annexure to Circular UBD. Sl.05.05.PCB.03. gold loans and (iii) W. (iii) UBD. (ii) In view of (i) above.PCB. will be governed by the accounts classified as NPA as on March 31.e.03.00/2004-05 dated 04.15 / 12.e. 2004 or earlier should not be 90 days norm reclassified as standard merely on the with effect basis of 180 days norm.12/ 12.2002.f. but should be from the year upgraded through the normal process of ending upgradation.e.03. 2007 classified as doubtful if it remained in the (iii) A Sub standard account will continue to be classified as doubtful after 18
.10. (ii) Gold loans and small loans March 31 2004.2001 (ii) UBD. these banks should build up adequate provisions in the BDDR over the next three years such that they would be able to transit to 90 day NPA norm by March 31 2008.2004 the norm for classification of an asset as non performing has been reduced to 90 days from 180 days.05/2001-2002 dated 05. 31. 2007.BSD.04.09. 2005 Relaxed Prudential Norms on income recognition.2005 an asset would be governed by 180 days norm upto March 31. However. upto March31.BSD. revised asset up to Rs 1 lakh classification norm should not result in any write back of provisions.1. New Norms
Asset Classification norm: (i) UBD.f small loan upto Rs 1 lakh will also be 31.Cir.No.
(i) These banks will be required to identify NPAs on the basis of 180 day delinquency norm for three more years commencing March 31 2005. Since the 90 day norm for asset classification came into force w.I.No. Moreover.140.05/2002-03 dated 11.(PCB). Circulars referred to: Existing Norms (i) W.2007. No.Cir 17/13.00/2005-06 dated July 4.09. asset classification and provisioning for UCBs referred to in paragraph 2 of the Circular.e.1 /09.2004.f 31.No. i.
The provisioning norms will be as under from year ended31.sub-standard category for 12 months. As such the banks should build up adequate provisions over this period to facilitate smooth transition. 2007.05.PCB.2004 (i) Sub standard.2005 upto year ending 31.10% (ii) Doubtful (up to one year):100% of unsecured portion plus 20% of secured portion (iii) Doubtful (one to three years) : 100% of unsecured portion plus 30% of secured portion (iv) Doubtful for more than 3 years: 100% of unsecured portion plus 50% of secured portion (v) Loss: 100%.2004 (ii) UBD.BSD.09.03.12.05.05/2004-05 dated 27. 2 Provisioning Norms: (i) UBD.MC. Note: Implementation of the instructions requiring classification of substandard account into doubtful category after 12 months and 100 % provisioning for secured portion of doubtful assets of over 3 years would be deferred by three years.2007: (i) Sub standard.IP.10% (ii) Doubtful (up to one year):100% of unsecured portion plus 20% of secured portion (iii) Doubtful (one to three years) : 100% of unsecured portion plus 30% of secured portion (iv) Doubtful for more than 3 years: 100% of unsecured portion.15/ 12. For secured portion the provision are as under: Outstanding stock of NPAs
months instead of 12 months upto March 31.
.03.05/2004-05 dated 02.No.Cir21/ 12.
2007 75 per cent as on March 31. 2006 • 50 percent upto March 2006. 2009
Advances classified as 'doubtful more than three years' on or
.as on March 31. 60 per cent as on March 31. 2008 100 per cent as on March 31.
Draft%20Letter%20of%20Offer.moneycontrol. http://www.htm 5.after April 1. 2006-100 %.in/State%20bank%20of%20Mysore. www.com/financials/statebankmysore/balance-sheet/SBM 4.com/companies/state-bank-of-mysore/14030005/profit-and-loss
1.in/dp/sbmlof.trustgroup. http://www.gov.sebi.pdf 3. www.co. (v) Loss: 100%.