Page 222 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Unit 15: Management of NPAs by Banks

Notes
You talked about HR initiatives. What is the impact?
Thanks to fast track promotions, the average employee age has come down to 45 years
from 50 in just five years. It may come down to 40 by 2012. We have appointed consultancy
firm Hewitt to look at performance management system. We are looking at key result
areas for 200 important positions. Based on their recommendations, we will form
performance incentive scheme and career progression and succession planning scheme.

Do you expect a slowdown in housing loans after the latest RBI prescriptions?
I don’t think so. There is a genuine need for housing in India and demand is quite obvious.
The trend of growth in individual housing loans is also good. However, the regulator has
to be forward looking. The RBI’s concern is on need for banks to be transparent with the
customers about interest rates and to understand the repaying capacity of the borrower at
normal lending rate.
Similarly, low margin-based housing loans are being offered by some entities. This has
led to stipulation for maximum loan-to-value ratio (LTV) at 80 per cent. In fact, majority of
housing loans by Indian banks is around this LTV. But as I said, the RBI has to have a
forward looking approach. Even if these prescriptions lead to some firming up in interest
rates on housing loans, its demand may not be impacted. Nonetheless, housing prices are
a concern, particularly in Tier-I cities where rising trend is observed.
The RBI has allowed additional LAF window for a month. Will it help ease the liquidity
situation?

The RBI had announced temporary liquidity easing measures which were effective up to
November 7. After this, net LAF outstanding amount again increased to a level beyond
the RBI’s comfort zone. In the recent policy, the RBI has indicated comfort zone of liquidity
as (+/-) one per cent of net demand and time liabilities of banks, which comes close to
52,000 crores. Current borrowing through LAF window is almost twice the comfort zone
on the deficit side. Therefore, re-introduction of liquidity easing measures is a welcome
move. Particularly, extension up to December 16 is positive for the market sentiment as it
also covers the period of third quarter advance tax outflows. As an immediate market
reaction, we have seen call rates coming down. There is huge government balances with
the RBI ( 77,736 crores as of October 30) and the system may see the positive impact as the
government starts drawing down its balances
Question
Discuss the key reasons behind the improvement of bank’s NPAs position.

Source: http://www.thehindubusinessline.in

15.3 Factors Contributing to NPAs

These are the major factors which are responsible for the higher non-performing assets in the
banks:
1. Banks have poor credit discipline
2. Inadequate credit and risk management
3. Diversion of funds by promoters

4. Funding of non-viable projects

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