Page 152 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 10: Financial Services

The past decade was also an eventful one for the Indian capital markets. Reforms, particularly Notes
the establishment and empowerment of Securities and Exchange Board of India (SEBI), market-
determined prices and allocation of resources, screen-based nationwide trading, dematerialisation
and electronic transfer of securities, rolling settlement and derivatives trading have greatly
improved both the regulatory framework and efficiency of trading and settlement. On account
of the subdued global economic conditions and the impact on the Indian economy of the drought
conditions prevailing in the country, 2002-03 was a subdued year for equity markets. Despite
this, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) ranked third and
sixth respectively among all exchanges in the world with respect to the number of transactions.
The year also witnessed the grant of approval for setting up of a multi-commodity exchange for
trading of various commodities.
In the midst of these positive developments, a key issue that continues to impact the Indian
financial sector adversely is that of asset quality and consequent pressure on capital. The
liberalisation and globalisation of the Indian economy led to a process of restructuring and
consolidation across several sectors of the economy. Several units that were set up in a
protectionist environment became unviable in the new paradigm of competition in the global
market place. Volatility in global commodity prices has a major impact on Indian companies.

This has led to non-performing loans and provisioning for credit losses becoming a key area of
concern for the Indian financial system. The NPA problem in India, viewed in the context of
comparison with other Asian economies, does not pose an insoluble systemic problem; at 8% of
GDP, the NPA levels are significantly lower than the levels of 30-40% seen in other Asian
economies. The key problems in India have been the inability of banks to quickly enforce
security and access their collateral, and the capital constraints in recognising large loan losses.
Recent measures taken by the Government have attempted to address both these problems. The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act creates a long-overdue framework for resolving the distressed credit problem
in India, by providing legal support to the resolution process and thereby encourages the flow
of capital into this specialised sector. The proposal for swapping high-yield Government securities
held by banks into lower-yield securities, thereby realising mark-to-market gains and utilising
the same to make additional provisions, would also strengthen the balance sheets of banks.

Notes Non-performing Asset means an asset or account of borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines relating to asset classification issued by The
Reserve Bank of India.

Ninety Days Overdue
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for identification of
NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004,
a non-performing asset (NPA) shall be a loan or an advance where:
1. interest and/or installment of principal remain overdue for a period of more than
90 days in respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/cash credit (OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
Contd....

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