MANAGEMENT OF NPAS AND THEIR IMPACT ON PROFITABILITY OF BANKS

AND FINANCIAL INSTITUTIONS

Name : Sneha Rambabu Singh

Roll No: 17-I-121
Faculty: Prof. B.D.Dhongade
Subject: Managerial Economics
Batch & Year: MIM (2017-20)
 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Management of NPAs and their Impact on profitability of Banks and Financial

Institutions

ABSTRACT

Management of non-performing assets is the most important factor for the basic
viability of the banking system. The Indian banking system has been facing the
serious problems of the rising NPAs. In fact, PSBs are facing more problems than the
private sector banks. The NPAs in PSBs are growing due to external as well as internal
factors. Managing the NPAs has emerged as one of the major challenges facing banks
today as high level of NPAs affects core performance area of the banking system as
well as raises corporate governance issues.

The asset quality of banks is an important indicator of their financial health which also
reflects the efficacy of their credit risk management and recovery environment. Rising
NPAs are not just hurting banks' profitability but are also reducing the amount of funds
available for fresh lending as banks need to make higher provisioning for bad debts.
It was observed that containing NPAs has been in focus since the Indian banking
sector reforms were initiated in 1992. The banks have been making efforts to contain
the NPA level. Even, RBI has also tried to develop many schemes and tools to reduce
the NPAs.

INTRODUCTION

The three letters “NPA” Strike terror in banking sector and business circle today. NPA
is short form of “Non Performing Asset”.

An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit
facility in respect of which the interest and/ or instalment of principal has remained
‘past due’ for a specified period of time. With a view to moving towards international
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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

best practices and to ensure greater transparency, it has been decided to adopt the
‘90days’ overdue’ norm for identification of NPAs, from the year ending March 31,
2004.

Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be
a loan or an advance where;

 Interest and/ or instalment of principal remain overdue for a period of more than
90 days in respect of a term loan,

 The account remains ‘out of order’ for a period of more than 90 days, in respect
of an Overdraft/Cash Credit (OD/CC),

 The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,

 Interest and/or instalment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted
for agricultural purposes, and

 Any amount to be received remains overdue for a period of more than 90 days
in respect of other accounts.

Non Performing Assets can be classified in the following categories:

Sub-Standard Assets

With effect from 31st March 2005, a sub-standard asset is one which has remained
NPA for a period less than or equal to 12 months. The sub-standard assets can be
classified into two categories depending upon their NPA period. Sub-standard asset
I is less than or equal to 12 months and Sub-standard II is more than 12 months, but
less than 18 months.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Doubtful Assets

A doubtful asset is a credit facility, which remained NPA for a period of exceeding 18
months for the purpose of provisioning a doubtful asset is again classified into the
following sub- categories

Status as Doubtful
Category Status as NPA
Asset
a)a ) Doubtful 1 ( DF-1) Up to 1year Up to 2 ½ years only
b) Doubtful 1 ( DF-2) More than 1 to 3 year More than 2 ½ to 4 ½ year
c) Doubtful 1 ( DF-3) More than 3 year More than 4 ½ year

Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection, but the amount has not been written off.

TYPES OF NPA

Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per
RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans
made by banks. It consists of all the non standard 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

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Net NPA

Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs.Net NPA shows the actual burden of banks. Since in India, bank
balance sheets contain a huge amount of NPAs and the process of recovery and write
off of loans is very time consuming, the provisions the banks have to make against
the NPAs according to the central bank guidelines, 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

The below table depict the % of Net, Gross NPA and Stress assets during the period
2013 to 2016 the % increase continuously. It forecast that in 2017 it will reach at
8.5and 9.3 and it will be critical for banking system.

NPA Net NPA% Gross NPA% Stressed assets%

Mar-13 3.4 9.2
Sep-13 2.3 4.2 10.2
Mar-14 2.2 4.1 10
Sep-14 2.5 4.5 10.7
Mar-15 2.5 4.6 11.1
Sep-15 2.8 5.6 11.3
Mar-16 4.6 7.6 11.5
Mar-17 8.5 9.3

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Management of NPA and their Impact on profitability of Banks and Financial Institutions

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Some Indian banks and their NPA

Bank NPA
PNB 5300 CR
UCO 1497 CR
INDIAN OVERSEAS BANK 1425 CR
CENTRAL BANK OF INDIA 837 CR
DENA BANK 663 CR
14 OTHER BANKS 8883 CR

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

IDBI 1609 CR

Top 10 Defaulters:

Bank Borrower Directors Name Outstanding

Name Amount (
Rs. In Lacs)
State Bank Kingfisher Vijay Mallya (Dr), United Breweries 120139.99
Of India Airlines Ltd (Holdings) Limited

Kotak Beta Deepak K Baweja, Satish D Deshpande, 95197

Mahindra Naphthol Kewak K Baweja, Premnath Pandit,
Bank Satyapal Pahwa, Surendra Sanmukhani

Punjab Winsome Jatin Mehta, R Ravichandran, Ramesh 90037.06

National Diamonds & Parikh, Jai Kumar Kapoor (Ind), Madan
Bank Jewellery Ltd. Khurjekar, Dilip Tikale, Mrs. Urvashi
Saxena
Punjab Forever Jatin Mehta, Pranav Ramesh Dalal, Hari 74798.36
National Precious Mohan Namdev, Vinod Kumar Jain,
Bank Jewellery & Bhailal Kantilal Patel, Harish Mehta (Ind),
Diamonds Jaikumar Madanlal Kapoor (Ind), Nimesh
Ltd. Patel, Madan Khurjekar

Kotak Raza Textiles V K Shrivastav 69459.51

Mahindra Limited
Bank
Kotak Rank D V Ramesh, K Srinivasa Rao, S 55131.13
Mahindra Industries Jayadev
Bank Limited.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Central Bank Winsome Ramesh I Parikh, R Ravichandran, Jatin 54926

Of India Diamonds & Rajnikant Mehta Guarantor, Formerly Co
Jewellery Ltd Know As Suraj Diamonds & Jwell,
Bombay Diamonds Company Pvt Ltd,
Kohinoor Diamonds Company Pvt Ltd
Gtee, Forever Diamonds Pvt Ltd
Guarantor
State Bank Xl Energy Ltd Perumthotathil Ravindranathan Vishnu, 41314.28
Of India Vkas Nayyar, Aneesh Mittal, Ritu Lal
Kumar, Dinesh Kumar (Managing
Director)

Punjab Zoom Vijay Choudhary, B L Kejriwal, Michael 41018.46

National Developers Startling
Bank Pvt Ltd
Axis Bank Ltd Deccan T Venkattram Reddy, T Vinayak Ravi
Chronicle Reddy, P K Iyer
Holdings Ltd

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Management of NPA and their Impact on profitability of Banks and Financial Institutions

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Management of NPA and their Impact on profitability of Banks and Financial Institutions

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

CAUSES AND SYMPTOMS OF NPA IN INDIA

An internal study conducted by RBI shows that in the order of prominence, the
following factor contribute to NPAs.

Internal Factor

1. Diversion of funds for

 Expansion/diversification /modernization
 Taking up new project
 Helping /promoting associate concerns time/cost overrun during the
project implementation stage

2. Business Failure
3. Inefficiency in management
4. Slackness in credit management and monitoring
5. Inappropriate Technology/technical problem
6. Lack of coordination among lenders

External Factor

1. Recession
2. Input/power storage
3. Price escalation
4. Exchange rate fluctuation
5. Accidents and natural calamities, etc.
6. Changes in government policies in excise/ import duties, pollution control
orders, etc.
7. To over management tardiness in recovering loan extended to big corporate
house as many as 7000 willful defaulters, also legal recourse available to the
lenders is time consuming and slow.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

8. Absence of regular industrial visits also leads to gradual erosion of liquidity and
units start failing up honour its obligations for the loan payments.
9. Political tool – Directed credit to SSI and Rural sector.
10. Manipulation by the debtors using political influence has been a cause for high
industrial bad debts.

Some other factors also affected to NPA which are

1. Liberalization of economy/removal of restriction/reduction of tariffs

2. Lax monitoring of credit and failure to recognize Early Warnings Signals
3. Over optimistic promoters
4. Highly Leveraged borrowers
5. Directed Lending
6. Funding mismatch
7. High Cost of Funds
8. Willful Defaulters

Symptoms of NPA

Four categories of early symptoms:-

Financial:

 Non-payment of the very first installment in case of term loan.

 Bouncing of cheque due to insufficient balance in the accounts.
 Irregularity in installment.
 Irregularity of operations in the accounts.
 Unpaid overdue bills.
 Declining Current Ratio.
 Payment which does not cover the interest and principal amount of that
installment.
 While monitoring the accounts it is found that partial amount is diverted
to sister concern or parent company.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Operational and Physical:

 If information is received that the borrower has either initiated the process of
winding up or are not doing the business.
 Overdue receivables.
 Stock statement not submitted on time.
 External non-controllable factor like natural calamities in the city where
borrower conduct his business.
 Frequent changes in plan.
 Non payment of wages.

Attitudinal Changes:

 Use for personal comfort, stocks and shares by borrower.

 Avoidance of contact with bank.
 Problem between partners.

Others:

 Changes in Government policies.

 Death of borrower.
 Competition in the market.

As of June 2016, the total amount of Gross Non-Performing Assets (NPAs) for public
and private sector banks is around Rs. 6 lakh crore. The NPA figures along with total
debt for each of the 49 public and private sector banks were shared by the Ministry of
Finance. The amount of top twenty Non Performing Assets (NPA) accounts of Public
Sector Banks stands at Rs. 1.54 lakh crores. The advances given by banks are called
assets, which generate income via interests and instalments. If the instalment is not
paid until the due date, it is called a bad loan. If it extends beyond 90 days, it is
termed NPA. The ratio of NPAs to total advances given by a bank is a commonly
used indicator reflecting the health of the banking system.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

MANAGEMENT OF NPA

Because of mismanagement in bank there is a positive relation between Total

Advances, Net Profits and NPA of bank which is not good. Positive relation between
NPA & profits are due to wrong choice of clients by Banks. There is an adverse effect
on the Liquidity of Bank. Bank is unable to give loans to the new customers due to
lack of funds which arises due to NPA As per the government, the main reasons for
rise in NPAs are sluggishness in the domestic growth in the recent past, slow recovery
in the global economy and continuing uncertainty in global markets leading to lower
exports of various products such as textiles and leather.

Advances provided by banks need to be done pre-sanctioning evaluation and post

disbursement control so that NPA can decrease. Good management needed on the
side of banks to decrease the level of NPA. Proper selection of borrowers & follow ups
required to get timely payment. Non performing assets are a drain to the banks. The
banks in India are adopting various strategies to reduce the non performing assets in
their banks and they are also adopting various methodologies by which further
addition to NPA portfolio is minimized In the real sense, in case there is a recovery in
principal and installments due in respect of the loans granted to the banks are received
100%, the question of non performing assets do not arise. However, there is no such
ideal bank where the NPA is nil. Except banks which were originated recently, all
banks are prone to have some portion of their loans and advances as non performing
advances.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

The following are some strategies by which banks are trying to curtail non performing
assets to a great extent:

Recovery camps

Bank personnel jointly approach the defaulting borrowers for repayment at a place
and time convenient to both the parties. These are more suited to small loans.
Normally the borrowers who had availed small loans will be more in number in rural
and semi urban areas rather than urban and metro centers. As such, the banks instead
search areas rather than urban and metro centers. As such, the banks instead of
conducting the recovery camps at their branches, they usually conduct such recovery
camps in centres like panchayat board offices, court buildings, government
department buildings etc such recovery camps so that the borrowers find it convenient
to attend the recovery camps. Under certain circumstances, the manager in charge of
the bank branches along with some branch officials go to each visit each house of the
borrowers and recover the installments due in respect of loans availed by them. This
type of recovery camp will be successful in case an advance notice is served on the
borrowers mentioning the date of recovery camps

Preference of claims

Banks should expeditiously and properly claim indemnity from organizations like
Deposit Insurance and Credit Guarantee Corporation called DICGC, Export Credit
Guarantee Corporation called ECGC, Credit Guarantee Fund Trust for small scale
industries, Insurance Companies etc and invoke Government/other personal
guarantees to recover loan dues and reduce non performing assets.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Compromise proposals

Compromise routes are adopted by banks, where borrowers experience certain

genuine difficulties and where normal recovery is not possible. It involves certain
sacrifices on the part of the banks on the principle of “one bird at hand is worth two in
the bush”. Such proposals can be taken up considering the history of the borrowed
account, security available, net worth of the borrower/guarantor, time value of offer
made etc.

Technical write off

Normally banks decide writing off small loans which have become bad and the
recovery is not at all possible in those accounts under any circumstances on account
of the facts that the borrower might have been expired; he has no means to repay the
loan at any cost and there may be huge losses in respect of the properties etc. This
is for the sole purpose of servicing such non performing accounts.

One time settlement scheme

To reduce the absolute amount of non performing assets, Government of India along
with Reserve Bank of India are announcing one time settlement schemes periodically
for the past few years. When the borrowers are alive and when the borrowers are
farmers, small entrepreneurs etc and they find it very difficult to pay their dues for
various reasons like bad health and fall in their business ventures,however, they have
the inclination to repay their debts to the banks, this type of practice is very much
helpful to the borrowers and the lending institutions. Surely the banks are in a position
to lose certain portion of their loan amount when they are conducting one time portion
of their loan amount when they are conducting one time settlement schemes.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Suit filing

Filing of suit is taken up as a last resort when all other remedies to recover non
performing assets fail. Banks can initiate recovery proceedings with or without
intervention of the courts of law. To Expedite the process; banks should be alert and
proactive in all stages of the proceedings. i.e. preparation of plaint, service of
summons, written statements, trial of the suit, obtaining decree copy, praying for
interim relief, execution of decrees, attachment of the property, arrest of the
defendants, if needed etc.

Recovery of Debts Due to Banks and Financial Institutions (DRT) Act

The Recovery of Debts Due to Banks and Financial Institutions Bill having been
passed by both the Houses of Parliament received the assent of the President on 27th
August 1993. It came on the Statute Book as THE RECOVERY OF DEBTS DUE TO
BANKS AND FINANCIAL INSTITUTIONS ACT, 1993 (51 of 1993).

LIST OF AMENDING ACTS

1. The Recovery of Debts Due to Banks and Financial Institutions (Amendment)

Act, 1995 (28 of 1995).
2. The Recovery of Debts Due to Banks and Financial Institutions (Amendment)
Act, 2000 (1 of 2000).
3. 3. The Enforcement of Security Interest and Recovery of Debts Laws
(Amendment) Act, 2004 (30 of 2004) (w.e.f. 11-11-2004).
4. 4. The Enforcement of Security Interest and Recovery of Debts Laws
(Amendment) Act, 2012 (1of 2013) (w.e.f. 15-1-2013).

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

The Act provides setting up of Debt Recovery Tribunals (DRTs) and Debt
Recovery Appellate Tribunals (DRATs) for expeditious and exclusive disposal
of suits filed by banks / FIs for recovery of their dues in NPA accounts with
outstanding amount of Rs. 10 lac and above. Government has, so far, set up 33
DRTs and 5 DRATs all over the country. The debt recovery tribunal act was passed
by Indian Parliament in 1993 with the objective of facilitating the banks and
financial institutions for speedy recovery of dues in cases where the loan amount
is Rs. 10 lakhs and above. The time limit envisaged under the act is not being
adhered to in disposing off the suits because of inadequate infrastructure and
shortage of recovery personnel with the DRTs. Nonetheless, the DRT act and
subsequent amendment in 2000 have provided a great improvement over the
normal legal forum

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Lok Adalats

It is a legal forum for expeditious settlement of loan dues on consensus arrived

between the bank and the borrowers mediated by the Lok Adalat. Section 89 of the
Civil Procedure Code provides resolution of disputes through ADR methods such as
Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalat mechanism offers
expeditious, in-expensive and mutually acceptable way of settlement of disputes.
Government has advised the public sector banks to utilize this mechanism to its fullest
potential for recovery in Non-performing Assets (NPAs) cases.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Securitization Act

For the past few years, the Indian Banking system has been struggling to manage the
vast portfolio of bad loans, popularly known as Non-Performing Assets (NPAs). The
problem is more acute in the case of PSU banks. As of March 2003, the total NPAs of
the private and public sector banks put together stood at a whopping Rs 65,000
crore(Source: Trend and Progress of Banking in India, RBI).NPAs, simply defined, are
those loans and advances in respect of which interest and/or principal instalment have
not been paid for 180 days from the due date. From April 1, 2004, however, any loan
on which interest or principal installment is not paid for more than 90 days would be
reckoned as NPA. The banking system is, therefore, sure to see a swelling NPA
portfolio in the coming years. This poses a serious liquidity and credit risk on the
banking system, which unless manage defectively would jeopardize the same. Thus,
to prevent the collapse of the whole system due to non-payment of loans by the
borrowers, there ought to be some mechanism in place. Two major steps were taken
in this regard –

 The RBI directed the banks to maintain compulsory provisions for different
types of NPAs

 The Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 was enacted.

The SARFAESI Act allowed the banks and financial institutions to take possession of
the collateral security given by the defaulting borrowers and sell these assets without
having to go through protracted legal procedures.

The Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest (SARFAESI) Act, 2002. The Act empowers Banks / Financial
Institutions to recover their non-performing assets without the intervention of the
Court, through acquiring and disposing of the secured assets in NPA accounts with

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

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 possession of security and/or

 Take over the management of the borrowing concern.
 Appoint a person to manage the concern.

It aims to empower banks as secured creditors to take possession, manage and sell
the securities without the intervention of court/tribunal. It also aims at Asset
Reconstruction by securitization or reconstruction company. However, loan with
balance below Rs. 1 lakh, unsecured loans and loans against collateral of agricultural
land are exempted from the purview of this act.

Securitization is the process of conversion of existing assets or future cash flows into
marketable securities. For the purpose of distinction, the conversion of existing assets
into marketable securities is known as asset-backed securitization and the conversion
of future cash flow into marketable securities is known as future-flows
securitization. The purpose of the Securitization Act is to promote the setting up
of asset reconstruction / securitization companies to take over the Non Performing
Assets (NPA) accumulated with the banks and public financial institutions. The Act
provides special powers to lenders and securitization / asset reconstruction
companies, to enable them to takeover of assets of borrowers without first resorting
to courts. The Act was welcomed by the banking community, but resisted by the
borrower community. The validity was challenged in various courts on the ground that
it was predominantly in favor of lenders. Hence, lenders were unable to enforce the
provisions in full. But the crux of the issue was whether the Act would be an effective
tool to make a drastic difference to the NPA menace.

Securitization - Relevance to the Banking Sector

The growth in credit off take of banks has been the second highest in the last 55
years. But at the same time the incremental credit deposit ratio for the past one-year
has been greater than one. Thus, for every Rs 100 worth of deposit coming into the

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system more than Rs 100 is being disbursed as credit. So, the mismatch between the
credit given and the funds received creates an issue of proper management
of increased credit off-take. One of the measures adopted by the banks to cater to this
credit boom is by selling their investments in government securities and giving the
amount raised as loans. But there is a limit to such credit funding due to minimum SLR
requirements of 25% in government and semi government securities. Once the banks
reach this level of 25 per cent, they cannot sell anymore government securities to
generate liquidity. And given the pace of credit off take, some banks could reach this
level very fast. So banks, in order to keep giving credit, need to ensure that more
deposits keep coming in.

Securitization also helps banks to sell off their NPAs to Asset Reconstruction
companies (ARCs). ARCs, which are typically publicly / government owned, act as
debt aggregators and are engaged in acquiring bad loans from the banks at a
discounted price, thereby helping banks to focus on core activities. On acquiring bad
loans ARCs restructure them and sell them to other investors as 'Pass Through
Certificates' (PTCs), thereby freeing the banking system to focus on normal banking
activities.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

Securitization is expected to become more popular in the near future in the banking
sector. Banks are expected to sell off a greater amount of NPAs to ARCIL by 2007,
when they have to shift to Basel-II norms. Blocking too much capital in NPAs can
reduce the capital adequacy of banks and can be a hindrance for banks to meet the
Basel-II norms. Thus, banks will have two options - either to raise more capital or to
free capital tied up in NPAs and other loans through securitization.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

The SARFAESI Act allows banks and other financial institutions to auction residential
and commercial properties when borrowers default on their payments. This helps the
banks to reduce their NPA by recovery and reconstruction. Under this Act, 64,519
properties were seized or taken possession off by the banks in 2015-16. In the current
financial year, as of June, the number stands at 33,928.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

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.
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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

 Managers under credit monitoring and recovery department should have

dynamism in their work. Many managers say that “we do not fear to negotiate
but we do not negotiate out of fear. Such fear leads to arbitrary negotiation,
which fails.
 Frequent discussions with the staff in the branch and taking their suggestions
for recovery of dues.
 Assisting the borrowers in developing his/her entrepreneurial skill will not only
establish a good relation between the borrowers but also help the bankers to
keep a track of their funds.
 RBI may initiate actions against defaulters like, publishing names of defaulters
in Newspapers, broadcasting media, which is helpful to other banks and
financial institutions.
 As a part of curative measures, bankers may resort to Compromise Settlement
or One Time Settlement. Lok Adalats and Debt Recovery Tribunals are other
ways for the recovery of dues. It has been observed that Banks these days are
highly resorting to SARFAESI Act for the management of NPA.
 If the delinquencies are due to reasons beyond the control of borrower which
are namely draughts, floods, or other natural calamities, the banker should
suitably restructure the loans taking into account the genuine difficulty of the
borrowers.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

IMPACT ON PROFITABILITY

One of the major challenges for the Indian banking system is to address the NPA issue
which has also affected the profitability of banks besides coming in the way of future
bank lending as banks have been cautious while lending especially for long term
purposes. Various measures have been attempted to address this issue with the IBC
being the latest one where some of the larger NPAs have been identified for speedy
resolution. The outcome would be known in course of time.

Meanwhile, the performance of banks with respect to NPAs has not been too positive
of late. While it was largely expected that the NPA ratios would have settled by March
2017 as there were indications of stabilization relative to December 2017, the picture
emerging for Q1FY18 is that the NPAs have deteriorated further for the system as
whole.

In Q1 FY18, non-performing assets (NPAs) of a sample of 38 banks increased by a

sharp 34.2% on a y-o-y basis. Also the NPA ratio increased to 10.21% in June 2017
from 8.42% in June 2016, which is the highest in the last six quarters.

On a q-o-q basis, the increase in NPAs have been the highest in Q1 FY18 witnessing
an increase of about 16.6% to reach Rs 829,338 crore as of June 2017.

Narasimham committee that mandated identification and reduction of NPAs to be

treated as a national priority because NPA direct toward credit risk that bank faces
and its efficiency in allocating resources. Profitability and earnings of banks are
affected due to NPA number of accounts. Impact of NPA the performance and
profitability of banks.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

The most impact of NPA is change in credit expansion to banks performance

1. Higher provisioning requirement on mounting NPAs adversely affect capital

adequacy ratio and banks profitability.

2. The economic value additions ( EVA) by banks get upset because EVA is equal
to the net operating profit minus cost of capital.

3. NPAs causes to decrease the value of share sometimes even below their book
value in the capital market

4. NPAs affect the risk facing ability of banks.

NPA impact the performance and profitability of banks. The most notable impact of
NPA is change in banker’s sentiments which may hinder 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.
 The assets and liability mismatch will widen.
 Higher provisioning requirement on mounting NPAs adversely affect capital
adequacy ratio and banks profitability.
 The economic value additions (EVA) by banks get upset because EVA is equal
to the net operating profit minus cost of capital.
 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.
 Reduce the earning capacity of assets and badly affect the ROI.
 The cost of capital will go up.
 The assets and liability mismatch will widen.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

 Higher provisioning requirement on mounting NPAs adversely affect capital

adequacy ratio and banks profitability.
 The economic value additions (EVA) by banks get upset because EVA is equal
to the net operating profit minus cost of capital.
 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.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

 State Bank of India accounted for the largest share of about 22.7% in the total
NPAs during the quarter. The NPAs stood at Rs 188,068 crore as of June 2017
 Top 5 banks together – SBI, PNB, BOI, IDBI, BOB account for a share of 47.4%
totaling to Rs 393,154 crore
 11 of the top 12 banks in terms of NPAs are public sector banks (PSBs) with
the exception being ICICI Bank.
 ICICI Bank accounts for about 5.2% share in the total NPAs during the quarter.
 Top 12 banks together account for 75.7% share
 Public sector banks appear to be definitely more stressed than private banks
 ICICI Bank and Axis Bank are the only private sector banks in the top 15 with
a combined share of 7.9% in the total NPAs

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

 The top 20 banks with highest NPA ratios are public sector banks (PSBs)
 The top 2 banks, namely IDBI Bank (24.11%) and Indian Overseas Bank
(23.6%) have NPA ratios of over 20%
 Indian Bank is the PSB with lowest ratio of 7.21%.
 Top 8 banks have an NPA ratio of over 15% as of June 2017.
 YES Bank is the only bank with a ratio of just less than 1.

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 Management of NPA and their Impact on profitability of Banks and Financial Institutions

CONCLUSION

The Non-Performing Assets have always created a big problem for the banks in India.
It is just not only problem for the banks but for the economy too. The money locked
up in NPAs has a direct impact on profitability of the bank as Indian banks are highly
dependent on income from interest on funds lent. This study shows that extent of NPA
is comparatively very high in public sectors banks. Although various steps have been
taken by government to reduce the NPAs but still a lot needs to be done to curb this
problem. The NPAs level of our banks is still high as compared to the foreign banks.
It is not at all possible to have zero NPAs. The bank management should speed up
the recovery process. The problem of recovery is not with small borrowers but with
large borrowers and a strict policy should be followed for solving this problem. 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. 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.

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