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Banking Theory and Practice

Notes

Caselet Non-performing Assets in Indian Banks

BI has been insisting on banks to utilise various measures on recovery of bad loans
and strengthen due diligence. The global rating agency, Moody’s, in its latest
Rreport of 2013, has downgraded Indian banking system’s rating outlook from
‘stable’ to ‘negative’. The Reserve Bank of India (RBI) has also observed in its second
quarter review of monetary policy 2012-13 that the Non-performing Assets (NPA) and
restructured loans of banks have been increasing significantly and a major reason for
deterioration in the asset quality of banks is the lack of effective timely information
exchange among banks on credit, derivatives and unhedged foreign currency exposures.
As per the available statistics, NPAs for all banks rose to 3.6 per cent in September 2012
and are expected to reach 4% by March 2013 and 4.4 per cent by the March 2014. In the first
two quarters of the current fiscal 2012-13, the banks referred a record number of 74 CDR
cases; total debt requiring restructuring increased to ` 40,000 crore. Latest quarterly results
of banks show that NPAs of at least in 35 banks rose from the last fiscal 2011-12 by 28 per
cent reaching over ` 32,000 crore in the first half of current financial year, amounting bad
loans to ` 1.47 lakh crore as on September 30, 2012.
NPAs in SBI have grown 24 per cent marking over ` 49,000 crore in 2012-13, constituting
one third of gross NPAs of all listed banks put together. SBI’s gross NPA as percentage of
total advances has risen to 5.15% from 4.4 per cent. As per the latest data available with
CDR cell, 466 cases involving debt of ` 2.46 lakh crore have been referred to it since its
inception. High interest costs, along with overall sluggishness in the domestic and global
economies are reported to be the reasons for the companies to meet their debt obligations.
In order to reflect true financial health of the banks in their financial reports, RBI had
issued a master circular in June 2008 detailing prudential norms on NPA, asset classification,
income recognition and provisioning. An asset becomes non-performing when it ceases
to generate income for the bank. Keeping in line with the international best practices,
NPA has been defined from March 31, 2004 as credit in respect of which interest and/or
instalment of principal has remained ‘overdue’ for more than 90 days. Identification of
NPA should be done on an ongoing basis and doubts in asset classification due to any
reason are settled through specified internal channels within one month from the date on
which the amount would have been classified as NPA.
The central bank has advised all banks to put in place an effective mechanism for
information sharing by December 2012 and instructed that fresh sanction of loans should
be done only after obtaining requisite information from January 2013. In the present
scenario, it has become all the more important for RBI’s mandatory inspection to act as an
effective deterrent for banks not to resort to non-adherence to applicable prudential norms
and less provisioning for NPAs.
Source: http://www.business-standard.com/article/opinion/kp-shashidharan-non-performing-assets-in-indian-banks-
113021000913_1.html

In order to ensure greater transparency in the borrower accounts and to reflect actual health of
banks in their balance sheets, the RBI introduced prudential regulations pertaining to income
recognition, asset classification and provisioning recommended by Narasimham Committee
with certain modifications in a phased manner over a three-year period beginning 1992-93.
These regulations have put in place objective criteria for asset classification, provisioning and
recognition of income which was lacking hitherto. This change has brought in necessary
quantification and objectivity into the determination of NPAs. Thus, as per the asset classification,

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