NPA CHARACTERISTICS IN INDIA

1. Size of NPA Portfolios Reviewed On an overall basis, in comparison to the Gross NPA portfolio of the financial sector in India for the year ended March 31, 2011, approximately Rs. 573 billion from the total gross NPAs of Indian banking sectors Public Sector Banks cover 55% of gross NPAs Private sector banks cover 11% of gross NPAs Foreign sector banks cover 3.02%, and Financial institutions cover 29% 2. Sectoral Segmentation Banks in India are required to reserve a part of their lending for the priority sector. Broadly this comprises the sub-sectors such as Agriculture, Small Scale Industries, and other activities such as small business, retail trade, small transport operators, professional and self employed persons, housing, education loans, micro-credit etc. In addition, certain investments in bonds issued by State Financial Corporations (SFCs), State Industrial Development Corporations (SIDCs), etc. are also recognized as priority sector lending provided such bonds have been issued exclusively to finance priority sector activities.

As seen from the Chart below, around 23% of the NPA portfolio is in the priority sector including agriculture, small scale and others. The balance 77% belongs to NPAs in the nonpriority sector which includes NPAs pertaining to public sector undertakings, corporate and retail borrowers. Within the non-priority sector, a large proportion of NPAs (more than 96%) by gross value are in the corporate segment. The largest proportion among the corporate borrowers is private sector corporate borrowers.

Since the sectoral segmentation norms are applicable to banks only the above graph is somewhat skewed (participant lenders included financial institutions). Given below is the sectoral segmentation in public sector banks only. Priority sector NPAs constitutes 46% of the NPA portfolio of participant public sector banks by value. In the non-priority sector corporate borrowers form the largest proportion of NPAs.

3. Industry Classification Most of the participant lenders have provided us with detailed NPA profile for large NPAs. The remainder of our analysis for NPA profiling, therefore, focuses on the large NPA portfolio. The total large NPA (individual gross value above Rs 10 million) portfolio of the participating banks amounts to Rs 357 billion approximately. The top 5 industries with maximum Large NPAs (by gross value) for the participant lenders included in this study are Textiles, Iron & Steel, Chemicals, Engineering and (non ferrous) Metals. The Large NPAs of these 5 industries alone comprise approximately half of the total Large NPA portfolio (by gross value) of the participating lenders. At 15%, the Textiles industry is the single largest contributor to the gross Large NPAs of the participating lenders. It is followed by Iron & Steel with 14%, Chemicals with 9%, Engineering with 8% and Metals with 5%. The participant lenders provided loan grading segmentation of the Large NPAs in the top 5 industries viz. textiles, iron & steel, chemicals, engineering and metals. Only about 20% of the Large NPA portfolio by gross value is in sub-standard assets. This indicates that the rehabilitation potential of, about 80% of the Large NPA portfolio in each of the top 5 industries is somewhat limited. Nearly 68% of the gross NPAs by gross value are in the doubtful category. Within this, 28% by gross value are in the C3 subcategory. It might be worth noting that C3 category comprises assets that have been non-performing for at least 5 years and that there is no upper time limit on holding assets in the C3 category if the lender is able to provide evidence that collateral exists. Also nearly 15% to 18% of the Large NPAs in each of the top industries (other than Chemicals) are loss assets.

Industry Classification 15% 14% 9% 8%5% 49% Textiles Iron & Steel Chemicals Engineering Metals Other

4.State-wise Distribution Data was collected from participant lenders on state wise distribution of their Large NPAs. The top 5 states with maximum Large NPAs (by gross value) for the lenders included in this study are Maharashtra (including Goa), Gujarat, Delhi (including Rajasthan), Andhra Pradesh and Tamil Nadu. The Large NPAs in these 5 states alone comprise approximately 65% of the total Large NPA portfolio (by gross value) of the lenders in the sample. Maharashtra (including Goa) with nearly 24% is the single largest contributor to the gross Large NPAs of the participant lenders. It is followed by Gujarat with 11%, Delhi (including Rajasthan) with slightly more than 10%, Andhra Pradesh with 10% and Tamil Nadu with just under 10%. State Wise Distribution 24% 11% 35% 10% 10% 10%

Maharashtra Gujarat Delhi, Rajesthan Andhra Pradesh Tamil Nadu Other 5. Region-wise Distribution The NPA portfolios of lenders covered in the study have been segmented into the following regions: Northern - J&K, Himachal Pradesh, Punjab, Haryana, Delhi, Rajasthan, Uttaranchal and UP Eastern - North eastern states, West Bengal, Orissa, Bihar and Jharkhand Southern - Tamil Nadu, Kerala, Pondicherry, Andhra Pradesh, Karnataka Western - Maharashtra, Goa, Gujarat

 Central - Madhya Pradesh, Chattisgarh Based on the above segmentation, the region-wise distribution of Large NPAs of the participant Lenders taken together is provided in the Chart below: The Western region (with 35%) has the maximum Large NPAs (by gross value) of the participating lenders. This is followed by the Southern and Northern Regions with 24% each. Eastern and Central regions have a lower proportion of NPAs by gross value at 10% and 6% respectively. On an overall basis, the geographical distribution of NPAs is clearly linked to the level of industrialization in various parts of India. The Western region in general and Maharashtra and Gujarat, in particular, are amongst the more industrialized areas of India. As a result, these areas have also attracted the maximum amount of bank credit. The slowdown in industrial activity during the past few years has also been more pronounced in these areas, which has resulted in a higher proportion of NPAs. Regional Distribution 24% 10% 24% 36% 6% Northern Estern Southern Western Central Regional Distribution 24% 10% 24% 36% 6% Northern Estern Southern Western Central

6. Operating Status of Assets In order to assess the rehabilitation potential of the Large NPAs, we had requested banks to provide break-down of their Large NPA portfolio between operating/nonoperating and implementation status. The table below provides a break-up of the NPA portfolio of all participating banks on the basis of operating status. As can be seen, only a very small proportion of the Large NPA portfolio (by gross value) is under implementation. The remaining is more or less equally split between assets which are operating and those which are not.

7. Security Profile The data on break-up of the number and gross value of the Large NPAs based on the type of security (Fixed assets/current assets) was also received from the participant lenders. It can be seen from the Chart below that 89% of the secured large NPAs are secured against Fixed Assets, which suggests that some value might be preserved even if assets are not operating.

8. Possible Increase in Near Future Several measures are being taken both by the Government, Reserve Bank of India and by the banks and institutions themselves to reduce the level of NPAs in the system. While the absolute value of NPAs has been increasing marginally, the NPA ratios (both gross and net) have been declining over the last few years. In fact in the year ended March 31, 2003, the levels of NPAs have also declined in absolute terms also as compared to the previous year. The Indian system is moving towards international practices which utilize significant qualitative measures in addition to quantitative measures. Such a change may contribute to standard loans being graded as NPAs in the future. Also, according to some estimates, the application of the 90 days past due criteria from March 31, 2004 (as proposed by RBI) will increase gross NPAs by 3-5% of gross advances.