Rising NPA: India's bad loan problem

Submission to: Dr. Hitesh Thakkar

(Assistant Professor of Economics)

Submission by:

Rushil Shah: 18MB07

Semester- I
Managerial Economics

E-Mail - rushilshah1995@gmail.com
Mobile No. – 9998012729
 TABLE OF CONTENTS

S.NO TOPICS PAGE NO.

1 Abstract 3

2 Identified Variables 3

3 Discussion 3

4 Limitation 3

5 Questionnaire 4 – 19

6 Conclusion 20
 Rising NPA: India's bad loan problem
Abstract

Growing non-performing assets is a recurrent problem in the Indian banking sector. No business
is without any risk and banks cannot be any exception. NPAs negatively affect on the
profitability, liquidity and solvency of the banks. But the high quantum of NPA is surely a cause
for worry, especially when the economy is fast recovery and Indian banks have an important role
to play for growth to be sustained. NPA’s is more in public sector banks when compared to
private sector banks and foreign banks. Among the bank groups, the gross NPA ratio for public
sector banks (PSBs) may increase from 15.6% in March 2018 to 17.3% by March 2019 in a
scenario where the stress was severe. For private banks, the ratio could to 5.3%, the central bank
observed while for foreign banks’ it could increase to 4.8% by March 2019. In this situation the
provision coverage ratio increased across all bank groups in March 2018 from its level in
September 2017. Among the bank groups, foreign banks had the highest provision coverage ratio
(88.7%) followed by private banks (51%) and public sector banks (47.1%). In fact high level of
NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade.
Many times borrowers divert the borrowed funds to purposes other than mentioned in loan
documents. It is very hard to recover from this kind of borrowers that is direction of funds. The
government should also make more provisions for faster settlement of pending cases and also it
should reduce the mandatory lending to priority sector as this is the major problem creating area.
The Banking Regulation Act may be amended to give RBI more powers to monitor bank
accounts of big defaulters. The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act or (SARFAESI) Act of 2002 was amended in 2016 as it
took banks years to recover the assets. So the problem of NPA needs lots of serious efforts
otherwise NPAs will keep killing the profitability of banks which is not good for the growing
Indian economy at all.

KEY WORDS:
Profitability, Liquidity, Solvency, Reflection, Non Performing Assets, (PSB) Public sector bank
Introduction

The Indian banking industry, it is governed by the banking regulation act of India, 1949 can be
broadly classified in to two major categories, schedule banks and non-schedule bank. Schedule
bank comprises commercial banks and co-operative banks. In the commercial bank they can be
group in to the nationalized banks. The assets of the banks which don't perform (that is - don't
bring any return) are called Non-Performing Assets (NPA) or bad loans. Bank's assets are the
loans and advances given to customers. If customers don't pay either interest or part of principal
or both, the loan turns into bad loan. NPA is any asset of a bank which is not producing any
income. The Non- Performing Asset (NPA) concept is restricted to loans, advances and
investments. Non-Performing Assets are also called as Non-Performing Loans. A non-
performing asset (NPA) is a loan or advance for which the principal or interest payment
remained overdue for a period of 90 days. In the commercial loans which are more than 90 days
overdue and any consumer loans which are more than 180 days overdue. NPAs reflect the
performance of banks. A high level of NPAs suggests high probability of a large number of
credit defaults that affect the profitability and net-worth of banks and also erodes the value of the
asset. A high level of nonperforming assets, compared to similar lenders, may be a sign of
problems. NPAs affect the liquidity and profitability, in addition to posing threat on quality of
asset and survival of banks. The problem of NPAs is not only affecting the banks but also the
whole economy. In fact, high level of NPAs in Indian banks is nothing but a reflection of the
state of health of the industry and trade. NPAs to improve the financial health in the banking
system. Profitability and earnings of banks are affected due to NPA numbers. If we glance on the
numbers of non-performing assets we may come to know that in the year 2015 to March 2018 it
is increased by about Rs 6.2 lakh crore. Gross NPAs stood at Rs 8.71 lakh crore as of June 2018
of which Rs 1.29 lakh crore resided in private banks and Rs 7.42 lakh crore in PSBs. India
cannot have a healthy economy a sound and effective banking system. The banking system
should be hassle free and able to meet the new challenges posted by technology and other
factors, both internal and external.
Review of Literature

In the past several years NPA of old private sector bank and foreign banks has said that Non-
Performing asset have become a burden and headache for the Indian banking sector and it is the
virus affecting banking sector. More than Rs 7 lakh crore worth loans are classified as Non-
Performing loans in India. This is a huge amount. The figure roughly translates to near 10% of
all loans given. This 10% loans are never paid back, resulting in substantial loss of money to the
banks. NPA crisis in India is set to worst thing. Restructuring norms are being misused. A
number of papers have been written and gone through, and this part of this paper is attempting to
present a review of all those are available in the same area of non-performing assets of the public
sector banks, private sector banks and other banks. This survey has conducted a study on the
existing papers, articles, journals, and reports provided by different authors, groups and
committees from time to time. This bad performance is not a good sign and can result in crashing
of banks as happened in the sub-crime of 2008 in the United States of America. Also, the NPA
problem in India is worst when comparing other emerging economics in BRICS.

Types of NPA

Gross NPA

Gross NPA is the total sum of all loan assets that are classified as NPA as per RBI guidelines
as on Balance Sheet date. When the NPA occurs, it is not just an interest income loss to the
bank but that is a principal loss as well. Gross NPA reflects the quality of the loans made by
banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs / Gross Advances

Net NPA

Net NPA is that type of NPAs in which the bank has deducted the provision regarding NPAs.
Net NPA shows the actual burden of banks. In simple words the total bad assets minus the
provision left aside. In India recovery process and loan write off process is very time
consuming. Bank cannot make the provision for the NPAs according to the central bank
guidelines that are quite significant. That is why the difference between gross and net NPA is
quite high. It can be calculated by following:

Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions

Asset Classification

Standard Assets: In the business point of view that standard asset which does not create any
problem and which does not carry more than normal risk. But in the banking point of view
they give loan to the customer can be taken as an asset since they expect the benefits to be in
the form of interest payments from the borrower. Hence for bank that asset that assures of
future economic benefits is a standard asset.

Sub Standard Assets: An asset which remains as NPAs for less than or equal to 12 months.
The loan is given by the bank to its customer which does not guarantee prompt payment of
interest or which defaults in its schedule to payment. Customers have failed to adhere to the
repayment schedule. That is called Sub Standard asset.

Doubtful Assets: Doubtful assets are those kinds of assets which have remained NPA for
duration of time exceeding 12 months.

Loss Assets: A loss asset is considered as uncollectible and it has been identified but the amount
has not been written off wholly or partly.

Objectives of the Study

• The status of Non-Performing Assets of Indian Banks.

• Impact of NPA.
• Reason behind the NPA.
• Recovery of NPA.
• Appropriate suggestions to avoid future NPAs.
• Recent trend level of NPAs in Indian banking industry.
• Comparison between all Public, Private and Foreign Banks NPAs.
Limitation of the Study
• The basis for identifying non-performing assets is taken from the Reserve Bank of India
Publications.
• NPAs are changing with the time. The study is done in the present environment without
foreseeing future developments.
• The study is based on the primary data it carries own limitations.

Scope of the Study

The study has the following scope:
• To avoid future NPAs & to reduce existing NPAs.
• The study might be help to the government in creating & implementing new strategies to
control NPAs.
• The study will help to select appropriate techniques suited to manage the NPAs and
develop a time bound action plan to check the growth of NPAs.

Sources of Data
The data collected is mainly secondary in nature. The sources of data for this paper include the
literature published by Indian Bank and the Reserve Bank of India, various magazines, Journals,
Books dealing with the current banking scenario and research papers.

Methodology of Study
Non-Performing Assets in Scheduled Commercial Banks which includes public sector banks,
private sector banks and foreign banks which are listed in the Second Schedule of the Reserve
Bank of India Act, 1934. The study is based on secondary data. The paper discusses the
conceptual framework of NPA and it also highlights the trends, status and impact of NPA on
scheduled commercial banks during the period of 14 years i.e. from 2000 to 2014. Several
reputed research journals including research paper and articles have been used by the
researchers. Moreover, RBI Report on Trend and Progress of Banking in India for various years,
websites and a book on banking has been referred during the study.
 Population
Banking industry is taken for the study, where aggregate data related to NPA for Public sector
Banks, Private Sector Banks and Foreign Banks is used.
ANALYSIS AND INTERPRETATION
Table 1: Gross and Net NPA (Amount in corers)
YEAR SBI PNB
GNPA %GNPA NNPA %NNP GNPA %GNPA NNPA %NNPA
A
2010 19535 3.09 10870 1.72 3356.2 1.68 1678.52 1.12

2011 25326 3.28 12346 1.63 4379 1.79 2038.63 1.23

2012 39676 4.44 15818 1.82 8719.6 2.93 4454.23 1.52

2013 51189 4.75 21956 2.1 13465.7 4.27 7236.50 2.35

2014 61605 4.95 27590 2.57 1880.06 5.25 9916.99 2.85

2015 56725 4.25 27591 2.12 25695 6.55 15396 4.06

2016 98173 6.5 55807 3.81 55818 12.9 35423 8.61

2017 112342 6.90 58277 3.71 55370 12.58 32702 7.81
2018 223427 10.91 110854 5.73 86620 18.38 46684 11.24

Source: www.moneycontrol.com, www.sbi.co.in , www.pnb.co.in

18000

16000

14000

12000

10000
SBI
8000 PNB
6000

4000

2000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fig 1: TREND OF GNPA OF SBI & PNB

In the above figure 1, it is observed that there is an increasing trend of the GNPA for
both SBI & PNB over the years from 2009 to 2017.There has been a sharp fall in the
GNPA levels of PNB in 2014 and for SBI in 2016.The reason is due to better credit
management and pay-off of outstanding loans. But there has been again a rise in the
GNPA levels for both the banks after the said years. The GNPA level for PNB was
stagnated during the year 2016-17 as seen from the graph.

120000

100000

80000

60000 SBI
PNB
40000

20000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fig 2: NNPA OF SBI & PNB
YE HDFC AXIS
 AR GNPA %GNPA NNPA %NNPA GNPA %GNPA NNPA %NN
PA
20 1816 1.09 392 0.31 1318 0.98 419 0.4
10
20 1694 1.05 296 0.2 159 1.01 41 0.26
11
20 1999 1.02 352 0.2 1806 0.94 472 0.25
12
20 2334 0.97 468 0.2 2393 1.06 704 0.32
13
20 2989 1.00 820 0.30 3146 1.22 1025 0.40
14
20 3438 0.9 896 0.20 4110 1.34 1317 0.44
15
20 4393 0.94 1320 0.28 6083 1.67 2522 0.70
16
20 5886 1.05 1844 0.33 21280 5.04 8626 2.11
17
20 8606 1.30 2601 0.40 34248 6.77 16591 3.40
18
Table 2: Gross and Net NPA (Amount in crores)
Source: www.moneycontrol.com, www.hdfc.com,www.axisbank.com
40000

35000

30000

25000

20000 HDFC
AXIS
15000

10000

5000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fig 3: GNPA OF HDFC & AXIS BANK

In the above figure 3, the GNPA level of HDFC bank has shown a stable trend over
the years with a slight increase during 2010-17. Axis bank shows a mixed trend of
GNPA level with some fall in the year 2011 and 2013 and with gradual rise during
2013-16 but a sharp rise in 2016 is seen. This is due to some poor credit
administration policies of the bank.

In figure 4, the NNPA of Axis bank shows an upward trend with a steep rise in 2016-
17. However, the NNPA levels of HDFC bank have been moderate throughout.

18000

16000

14000

12000

10000
HDFC
8000 AXIS
6000

4000

2000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fig 4: NNPA OF HDFC & AXIS BANK
250000

200000

150000
HDFC
AXIS
SBI
100000
PNB

50000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018
Fig 5: GNPA OF SBI, PNB, HDFC & AXIS BANK

120000

100000

80000
HDFC
60000 AXIS
SBI
40000 PNB

20000

0
2010 2011 2012 2013 2014 2015 2016 2017 2018

Fig 6: NNPA OF SBI, PNB, HDFC & AXIS BANK

In the context of the figures 5& 6 above, the GNPA & NNPA levels of SBI, PNB,
and HDFC & AXIS bank has shown a growing trend. The GNPA & NNPA is
highest of SBI (Leader) in the year 2016-17, followed by PNB, then AXIS bank and
HDFC respectively. The GNPA & NNPA levels have been the least for HDFC bank.
It can be seen that the GNPA & NNPA for the private sector banks has been
comparatively lower for private sector banks than public sector banks. The private
sector banks have actually shown up NPAs after 2013.This implies credit
management policies of private banks have been better than public banks.
YEAR SBI PNB HDFC AXIS

2012 0.88 1.19 1.80 1.68

2013 0.91 1.00 1.90 1.70

2014 0.65 0.64 2.00 1.78

2015 0.76 0.53 2.00 1.83

2016 0.46 -0.61 1.92 1.72

2017 0.41 0.19 1.88 0.65

2018 -0.19 -1.60 0.46 0.43

Table 3: Return on Assets (ROA) of public sector and private sector banks

2.5

1.5

1
SBI
0.5 PNB
0 HDFC
2012 2013 2014 2015 2016 2017 2018 AXIS
-0.5

-1

-1.5

-2

Fig 7: ROA OF SBI, PNB, HDFC, AXIS BANK

In this given figure 7, the ROA of the public sector banks has shown a downward
trend with PNB showing a negative ROA in the year 2016 whereas the private sector
banks have shown an increasing trend over the years with AXIS bank showing a fall
in the ROA in the year 2017.
Table 4: Asset-quality of Public sector and Private sector Banks
PARAMETERS OVERALL PUBLIC SECTOR PRIVATE SECTOR
BANK
S BANKS
As on March 31 2015 2016 2017 2015 2016 2017 2015 2016 2017
Gross NPA /Net 4.63 7.71 9.20 4.97 9.29 11.03 2.11 2.79 4.19
NPA
Net NPA /Net 2.50 4.65 5.3 2.92 5.73 6.47 0.94 1.35 2.19
Advances
Net NPA / Net 23.95 44.52 49.72 84.69 66.70 77.52 5.60 8.39 13.03
Worth
St. structured 6.27 4.65 2.49 7.35 4.13 3.02 2.30 1.63 1.08
Advances/ Net
Advances
Stressed Assets/ 10.54 11.11 11.58 12.16 13.26 13.90 4.58 4.39 5.24
Gross Advances
Source: CARE Ratings & Banks, June-August 2017

Impact of NPA
NPA impact the performance and profitability of banks. The most notable impact of NPA is
change in banker’s sentiments which may break credit expansion to productive purpose. Banks
may incline towards more risk-free investments to avoid and reduce riskiness, which is not
conducive for the growth of economy. If the level of NPAs is not controlled timely they will:
• Reduce the earning capacity of assets and badly affect the ROI.
• The cost of capital will go up.
• Lenders suffer lowering of profit margins.
• NPAs causes to decrease the value of share sometimes even below their book value in the
capital market.
• NPAs affect the risk facing ability of banks.
• Highest Interest rates by the banks to maintain the profit margin.
• Redirecting funds from the good projects to the bad ones.
 • Bad health of banks means a bad return for a shareholder that means the government gets
less money as a dividend.
• Investors do not get rightful returns.

Findings
• Gross NPAs of scheduled commercial banks have increased from Rs. 708 Billion in
200001 to Rs 2642 Billion in 2012-13.
• Net NPAs of scheduled commercial banks have increased from Rs. 355 Billion in 2000-
01 to Rs. 986 Billion in 2012-13.
• NPAs as a Percentage of Net Advances which was lowest 1.0 % in 2007-08 & 2008-09
and highest 5.5 % in 2001-02. It was 2.2 % in 2013-14.
• The average Percentage of Net NPAs during 2001-02 to 2013-14 was around 2.0%
• Number of Cases Referred to Lok Adalat was 1,86,535 in 2008 and reached to 16,36,957
in 2014
• Rs. 2535 crores of NPAs of SCBs recovered through Lok Adalat during 2008 to 2014
• Rs. 27231 crores of NPAs of SCBs recovered through DRTs during 2008 to 2014
• Rs. 77241 crores of NPAs of SCBs recovered through SARFAESI Act during 2008 to
2014
• NPAs reduce the earning capacity banks and badly affect the ROI.

Recommendations for management of NPAs

• RBI should revise existing credit appraisals and monitoring systems.
• Banks should improve upon and strengthen the loan recovery methods
• Credit appraisal and post –loan monitoring are crucial steps which need to concentrate by
all the public sector banks.
• There must be regular follow-up with the customers and it is the duty of banker to ensure
that there is no diversion of funds. This process can be taken up at regular intervals.
• Personal visits should be made after sanction and disbursal of credit and further close
monitoring of the operations of the accounts of borrowed units should be done
periodically.
 • Frequent discussions with the staff in the branch and taking their suggestions for recovery
of dues.
• RBI may initiate actions against defaulters like, publishing names of defaulters in
Newspapers, broadcasting media, which is helpful to other banks and financial
institutions.

Government Recovery Policy

The Debt Recovery Tribunals (DRTs) – 1993
• To decrease the time required for settling cases. They are governed by the provisions
of the Recovery of Debt Due to Banks and Financial Institutions Act, 1993.However,
their number is not sufficient therefore they also suffer from time lag and cases are
pending for more than 2-3 years in many areas.

Credit Information Bureau – 2000

• A good information system is required to prevent loan falling into bad hands and
therefore prevention of NPAs. It helps banks by maintaining and sharing data of
individual defaulters and willful defaulters.

Lok Adalat– 2001

• They are helpful in tackling and recovery of small loans however they are limited up
to 5 lakh rupees loans only by the RBI guidelines issued in 2001. They are positive in
the sense that they avoid more cases into the legal system.

Compromise Settlement – 2001

• It provides a simple mechanism for recovery of NPA for the advances below Rs. 10
Cores. It covers lawsuits with courts and DRTs (Debt Recovery Tribunals) however
willful default and fraud cases are excluded.

SARFAESI Act – 2002

• The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act, 2002 – The Act permits Banks / Financial
Institutions to recover their NPAs without the involvement of the Court, through
acquiring and disposing of the secured assets in NPA accounts with an outstanding
 amount of Rs. 1 lakh and above. The banks have to first issue a notice. Then, on the
borrower’s failure to repay, they can:
• Take ownership of security
• Control over the management of the borrowing concern.
• Appoint a person to manage the concern.
• Further, this act has been amended last year to make its enforcement faster.

ARC (Asset Reconstruction Companies)

• The RBI gave license to 14 new ARCs recently after the amendment of the
SARFAESI Act of 2002. These companies are created to unlock value from stressed
loans. Before this law came, lenders could enforce their security interests only
through courts, which was a time-consuming process.

Corporate Debt Restructuring – 2005

• It is for reducing the burden of the debts on the company by decreasing the rates paid
and increasing the time the company has to pay the obligation back.

Joint Lenders Forum – 2014

• It was created by the inclusion of all PSBs whose loans have become stressed. It is
present so as to avoid loan to same individual or company from different banks. It is
formulated to prevent the instances where one person takes a loan from one bank to
give a loan of the other bank.

Strategic debt restructuring (SDR) – 2015

• Under this scheme banks who have given loans to a corporate borrower gets the right
to convert the complete or part of their loans into equity shares in the loan taken
company. Its basic purpose is to ensure that more stake of promoters in reviving
stressed accounts and providing banks with enhanced capabilities for initiating a
change of ownership in appropriate cases.
 Asset Quality Review – 2015
• Classify stressed assets and provisioning for them so as the secure the future of the
banks and further early identification of the assets and prevent them from becoming
stressed by appropriate action.

Sustainable structuring of stressed assets (S4A) – 2016

• It has been formulated as an optional framework for the resolution of largely stressed
accounts. It involves the determination of sustainable debt level for a stressed
borrower and bifurcation of the outstanding debt into sustainable debt and
equity/quasi-equity instruments which are expected to provide upside to the lenders
when the borrower turns around.

Insolvency and Bankruptcy code Act-2016

• It has been formulated to tackle the Chakravyuaha Challenge (Economic Survey) of
the exit problem in India. The aim of this law is to promote entrepreneurship,
availability of credit, and balance the interests of all stakeholders by consolidating
and amending the laws relating to reorganization and insolvency resolution of
corporate persons, partnership firms and individuals in a time bound manner and for
maximization of value of assets of such persons and matters connected therewith or
incidental thereto.

Conclusion
The government should make more provisions for faster settlement of pending cases and also it
should reduce the mandatory lending to priority sector as this is the major problem creating area.
The Banking Regulation Act may be amended to give RBI more powers to monitor bank
accounts of big defaulters. The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act or (SARFAESI) Act of 2002 was amended in 2016 as it
took banks years to recover the assets. So, the problem of NPA needs lots of serious efforts
otherwise NPAs will keep killing the profitability of banks which is not good for the growing
Indian economy at all.
References

• https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!4
• http://www.insightsonindia.com/2014/07/05/banking-system-india-non-performing-
assets/
• http://www.iasscore.in/special-details-34.html
• https://www.epw.in/tags/non-performing assets?0=ip_login_no_cache
%3D35fb2f6d56fb37b9471aa816ce2d5c77
• https://www.thehindu.com/data/Details-of-NPA-figures-of-public-private-sector-
banks/article16670548.ece
• https://rbi.org.in/Scripts/AnnualPublications.aspx?head=Statistical%20Tables
%20Relating%20to%20Banks%20in%20India
• https://www.isb.edu/faculty-research/research/published-papers
• https://www.researchgate.net/publication/319136150_IMPACT_OF_NON-
PERFORMING_ASSETS_ON_THE_PROFITABILITY_OF_BANKS_-_A_SELECTIVE_STUDY
• https://en.wikipedia.org/wiki/Non-performing_asset
• http://www.journal4research.org/articles/J4RV3I1007.pdf
• https://pdfs.semanticscholar.org/ca19/06a74efe249db1b6d55300cc66cde52679d2.pdf
• Websites: Money Control, HDFC Bank, Axis Bank, SBI, PNB
• IJournals: International Journal of Social Relevance & Concern ISSN-2347-9698
Volume 6 Issue 2
 ANNEXURE
BANK-WISE GROSS NPAs as of Sep, 2018(in crores)
BANKS AMOUNT
SBI 205864
BANK OF INDIA 61560
PNB 81250
HDFC 10097
BANK OF BARODA 55121
VIJAYA BANK 7557
IDBI 57806
UNION 50157
UCO BANK 29581
ICICI 54488
KOTAK MAHINDRA 4033
CANARA BANK 45233
IDFC 895
OBC BANK 25673
DENA BANK 16140
YES BANK 3866
FEDERAL BANK 3184
RBL 644
BANDHAN BANK 413
INDUSIND BANK 1781
DCB 409
BANK OF MAHARASHTRA 16872
ALLAHABAD BANK 27236
ANDHRA BANK 27623
TOTAL 787433