62
“NPA’s- IMPRESSION OF PANDEMIC ON INDIAN BANKING”
Dr. Namrata Kapoor Kohli Daly College of Business Management
Abstract- Banks in India, biggest challenge in 2021 will be tackling with the 'hidden' non- performing assets (NPA). Covid had sharply spiked loan defaults as many small and medium-scale companies are still struggling to repay dues owed to banks.This pandemic had a distressing impact on banks and financial institutions due to a rise in defaults and bad loans around the world as the global economic crisis but the situation is particularly serious for Indian banks as they are already struggling to cope with rising bad loans.
The progress of the economy hingeupon the proficiency and steadiness of the banking sector and the factor which measures the strength of the banking industry is the size of NPAs. Profitability of the banks is directly linked with the non-performing assets as it denotes the efficiency with which a bank is optimizing its total resources and therefore, serving an index to the degree of asset utilization and managerial effectiveness. Liquidity position of banks is also affected as NPAs affects the profitability of the banks in terms of rising cost of capital, increasing risk perception.
This paper attempts to first examine the level of NPAs in the State Bank of India and ICICI Bank in India and then analyse the causes for increasing NPAs. The secondary data collected from different sources has been used in the study. The study shows that the magnitude of NPAs increasing in State Bank of India as compared to ICICI bank. Therefore, banks need to effectually control their NPA’s in order to surge their cost-effectiveness and efficacy.
Keywords: Bank Performance, Efficiency, Non-Performing Assets (NPA’s), Profitability.
1. INTRODUCTION
Banking sector is a backbone of a successful economy. If banking system for a developing country is strong and reliable then it can be assumed that it is on the track of a successful trajectory. Recently Indian banking system with the rise in NPA crisis, flouting the very aspect of safe keeping of public asset.Indian government’s awkwardly reluctant attitude to handle the crises only digs the grave of the mighty Indian banking system.Vijay Mallya’s felony to 17 banks owing them 90 billion sent a wave of shock throughout the market.Similarly, CBI received two complaints from PNB against billionaire diamantine Nirav Modi and a jewellery company alleging fraudulent transactions worth about 11,400 crores.
In India, the RBI monitors the entire banking system and, as defined by the country’s central bank. Money or assets provided by banks to companies as loans sometimes remain unpaid by borrowers or ifthe interestinstalment amount is overduefor a period of more than 90 days then that loan account can be termed a Non-Performing Asset.This late or non-payment of loans is defined as Non-Performing Assets (NPA). In other words,a dead/ bad assetswhich no longer will generate any revenue. Indian Public Sector banks collectively owed approximately 6.8 trillion Indian rupees as non-performing assets at the end of the fiscal year 2020.
1.1 Classification of Assets: Non-performing assets are further classified into three categories based on the span for which the asset has remained non-performing and the recovery of the dues:
i. Substandard Assets-Substandard asset would be the one, which has remained as a non-performing asset for a period of less than or equal to 12 months.
ii. Doubtful Assets- An asset is classified as doubtful if it has remained as a sub- standard asset for a period of 12 months.
iii. Loss Assets -A loss asset is one where loss has been identified by the bank’s internal auditors and RBI‟s external auditors, but the amount has not been written off fully.
63 Table: 1.1Categories and Parameters of NPA
No. Category Parameters Provision Requirement
1. Substandard
Asset *Remained NPA for a period not less than or equal to one year.
*In such cases, the current net worth of the borrower or guarantor or market value of the security charged is not enough to ensure recovery of the bank’s dues;
*Likely to sustain some loss if deficiencies are not corrected.
*15% of the sum of the net investment in the lease and the unrealized portion of finance income net of finance charge component.
*Additional 10% for unsecured lease exposure i.e., total 25%
2. Doubtful
Asset *Remained in substandard category beyond 1 year;
*Recovery-highly questionable and improbable.
*100% of the finance not secured by the realizable value of the leased asset.
*Additional provision on the unrealised portion of finance income net of finance charge component of the secured portion as under Period for which the advance remained in doubtful category and the provision (%) Up to one year is 25% provision, One to three years 40% provision, more than three years 100%
3. Loss Asset *Asset considered uncollectible and of little value but not written off wholly by the bank.
*Continuance as bankable assets although it may have some salvage or recovery value.
To be written off or 100% of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge
Source: http://www.iibf.org.in/documents/IRAC.pdf 1.2 Reasons for the rise in NPA
Indian economy was in a boom phase during 2000-2008 due to which banks, especially public sector starts advancing loans to the companies. However, with the financial crisis in 2008-09, corporate profits dwindled due to slowdown in the global economyand the Government expelledthe mining projects. This resulted delay in environmental related permits affecting power, iron and steel sector, volatility in prices of raw material and the shortage in availability,which affected their ability to pay back loans and is the most important reason behind increase of NPA in banks.
One of the main reasons of rising NPA is also the relaxed lending norms i.e., not properly analysing the credit rating and financial status of the corporates while advancing loans especially for the corporate chiefs and by huge selling of unsecured loans to face the competition among the banks. Other reasons could be (i) Restructuring of loan facility extended to companies that were facing larger problems of over-leverage&
inadequate profitability, (ii) lack of contingency planning, especially for mitigating project risk and (iii)lastly,unforeseen economic shocks like Demonetization and Covid 19.
1.3 Impact of NPA’s
Low profit margins to the lenders
Less supply of funds in comparison to demand, therefore, negative impact on the larger national economy.
Higher interest rates are imposed by the banks to maintain the profit margin.
Redirecting funds from the good projects to the bad ones.
As investments got stuck, investors would not get rightful returns and it may also result in unemployment.
Cause faltering of the investment and development process both
NPA’s related cases add more pressure to already pending cases with the judiciary.
64 1.4 NPA’s May Explode by 2022
A large number of individuals are struggling to repay their loans after losing income or employment due to the historic economic crisis triggered by the coronavirus pandemic and the initial lockdown.
The rating agency fears that financial institutions in India will find it difficult in maintaining the momentum after the amount of new non-performing loans declined in the first half to September 30 2020. Rating agencies also expects the Indian banking sector’s bad loans to shoot up to 10-11 per cent of the total loans as on March 31, 22 from eight per cent on June 30, 2020.
The Financial Stability Report (FSR) released by RBI recently has once again underlined the vulnerability of the Indian banks . They have been under a severe balance sheet crisis even before the pandemic, and the crisis created by the pandemic, and the moratorium offered, will explode when the chickens come to roost.
1.5 According to the FSR
The gross non-performing assets would go up from 11.3% in March 2020 to 15.2%
in March 2021, and to 16.3% under a very severe stress scenario.
The CRAR is estimated to deteriorate from 14.6% in March to 13.3% in the baseline scenario, and to 11.8% under a very severe stress scenario.
The volume of recapitalisation required is humongous.
2. REVIEW OF LITERATURE:
The issue of NPA’s has been a major area of concern for the lenders and the policymakers.
Various research studies have been made to understand the causes contributing to the rise in NPAs, measures that should be taken to resolve the issue in its nascent stage and reforms that have come into effect to reduce the piling up of NPAs. Some of the relevant studies are arranged in a chronological sequence
Das, S. (2010): In this paper the author has tried to analyse the parameters which are actually the reasons of NPAs, and those are, market failure, wilful defaults, poor follow- up and supervision, non-cooperation from banks, poor Legal framework, lack of entrepreneurial skills, and diversion of funds
Ahmad, Z., Jegadeeshwaran, M. (2013):In this research paper author has analysed the concept and causes for NPA. Secondary data was collected for a period of five years and analysed by mean, CAGR, ANOVA and ranking banks. The banks were ranked as per their performance in managing the NPA’s. The efficiency in managing the NPA by the nationalised banks was tested.
Dutta. A (2014): This paper studied the growth of NPA in the public and private sector banks in India, and analysed sector wise non-performing assets of the commercial banks. For the purpose of the study data has been collected from secondary sources such as report on Trend and Progress of Banking in India, RBI, Report on Currency and Finance, RBI Economic Surveys of India.
Dr. Biswanath Sukul (Jan. 2017) had studied on “Non-Performing Assets: A comparative analysis of selected private sector banks”. The objectives are to find the comparative analysis on NPA in HDFC Bank, Axis Bank, ICICI Bank. The methodology based on analytical nature and finding the trend ratio in NPAs. The Pearson Correlation Co- Efficient is used to explore the relationship between Net Profit and NPAs.
3. OBJECTIVES:
To Study on comparative analysis of Non – Performing Assets in State Bank of India
& ICICI Bank in India.
To study the trend of Gross NPA and Net NPA of State Bank of India & ICICI Bank in India.
Toanalyse the impact of NPAs on banks’ performance.
To analyse the reasons for mounting NPAs in banks in India.
65
To suggest ways to reduce the level of NPAs in banks in India.
4. RESEARCH METHODOLOGY:
Analytical Research Design is used for the study. The research is based on secondary data source available and collected from various external sources like annual reports, articles, journals and internet. The Secondary Data are analysed by using variousfacts, figures and variables which can be interpreted and results can be shown in graphs and diagrams.
Trend Analysis Tool is used for analysis as it is an aspect of technical analysis that tries to predict the future movement of a stock based on past data. Trend analysis is based on the idea that what has happened in the past gives traders an idea of what will happen in the future.
5. ANALYSIS & DISCUSSION:
Table1.2: NET PROFIT (As on 31st March) (Amt in Crore) State Bank of India ICICI Bank
2020 14488.11 7930.81
2019 862.23 3363.30
2018 -6547.45 6777.42
2017 10484.10 9801.09
2016 9950.65 9726.29
Source: RBI
Graph1.1: Net Profit (For the year ended 31st march)
The base year trend analysis percentage is always 100.00%. If the percentage is decreased below 100.00% it shows that the company is indeed in higher net profit of that particular year. If it is above 100.00%, then the company is positively growing in generating net profit.
Table1.3: STATE BANK OF INDIA
(Amount in ` Crore) STATE BANK OF INDIA
Year Gross NPAs Net NPAs
As on March 31( previous
year )
Addition during the
Year
Reduction during the
Year
Write-off during the
Year
As on March 31(current
year )
As on March 31(previous
year )
As on March 31
(current year )
(1) (2) (3) (4) (5) (6) (7)
2020 172750.36 49826.28 21122.42 52362.37 149091.85 65894.74 51871.30 2019 223427.46 32738.05 24509.97 58905.18 172750.36 110854.70 65894.74 2018 112342.99 160303.65 9023.76 40195.42 223427.46 58277.38 110854.70 2017 98172.80 39071.38 4331.39 20569.80 112342.99 55807.02 58277.38 2016 56725.34 64198.49 6987.77 15763.26 98172.80 27590.58 55807.02 Source: RBI
9950.65 10484.1
-6547.45 862.23 14488.11
9726.29 9801.09 6777.42 3363.3 7930.81
2016 2017 2018 2019 2020
Net Profit
State Bank of India ICICI Bank
66 Table1.4: ICICI BANK LIMITED
(Amount in ` Crore) ICICI BANK LIMITED
Year Gross NPAs Net NPAs
As on March 31(previous
year )
Addition during the
Year
Reduction during the
Year
Write-off during the
Year
As on March 31(current
year )
As on March 31 (previous
year )
As on March 31(current
year )
(1) (2) (3) (4) (5) (6) (7)
2020 45676.04 13802.00 7697.09 10951.86 40829.09 13449.72 9923.24 2019 53240.18 10595.96 6602.97 11557.13 45676.04 27823.56 13449.72 2018 42159.39 28634.95 9185.50 8368.66 53240.18 25216.81 27823.56 2017 26221.25 33546.61 5416.56 12191.91 42159.39 12963.08 25216.81 2016 15094.69 16710.85 2628.95 2955.34 26221.25 6255.53 12963.08 Source: RBI
Table1.5: Bank wise Gross NPA
Bank 2016 2017 2018 2019 2020
State Bank of India 98172.80 112342.99 223427.46 172750.36 149091.85 ICICI Bank 26221.25 42159.39 53240.18 45676.04 40829.09
Graph1.2: Bank wise Gross NPA
GNPA is used to predict the Net Profit in future values.The value of GNPA is increasing continuously in each financial year till 2018 for both the banks.
Table1.6: Trend Gross NPA%
Bank 2016 2017 2018 2019 2020
State Bank of India 100 114 228 176 152
ICICI Bank 100 161 203 174 156
The base year trend analysis percentage is always 100.00%.
Interpretation of Trend Analysis of GNPA
We can observe here that the net non- performing assets of both State Bank of India and ICICI bank are increasing over the years till 2018 and shows decreasing trend thereafter, butthere is a huge difference between the quantum of NPAs between them.
State Bank of India and ICICI Bank are facing trouble in FY2018 as the proportion of GNPA’s increased with more than 100% as compared to the base FY 2016.Trend analysis shows that theproportion in which NPA’s are increasing for ICICI bank is more in the FY2017 where as in case of decrease in FY 2019 & FY2020 share is less as compared to State Bank of India.
The Gross NPA of banks has declined at the end ofFY20 as compared to FY2018, primarily due to gradual reduction of incremental slippages, recoveries in some large NPAs and writing-off of NPA loans. “The banks had witnessed a rise in their GNPA levels in March
98172.8 112342.99
223427.46
172750.36
149091.85
26221.25 42159.39 53240.18 45676.04 40829.09
2016 2017 2018 2019 2020
Bank wise Gross NPA
State Bank of India ICICI Bank
67 2018, after the February 12, 2018 circular of the RBI which redefined the norms for recognition and restructuring of the stressed assets,”.
During Covid-19 macro stress tests for credit risk indicate that the GNPA ratio of all banks may escalate from March 2020 to March 2021.
The central bank revealed that the GNPA and the decline in NPA levels covers the impacts of the loan freeze that came into effect from March 1, announced by the RBI under its COVID-19 relief measures. According to the central bank, nearly half of the customers accounting for around half of outstanding bank loans opted to avail the benefit of the moratorium, whereas financial stability report pointed out that the NPA formations are rising more among small category borrowers as compared to large amount borrower.
Table1.7: Bank wise Net NPA
Bank 2016 2017 2018 2019 2020
State Bank of India 55807.02 58277.38 110854.70 65894.74 51871.30 ICICI Bank 12963.08 25216.81 27823.56 13449.72 9923.24
Graph1.3: Bank wise Net NPA
FY2019-FY2020 is showing that Net NPA reduced for both the banks State Bank of India and ICICI Bank from the previous year FY2018-FY2019 It shows that the company is relaxed at the financial year and decreased their risk of returns to promotes more profitability.
Table1.8: Trend Net NPA%
Bank 2016 2017 2018 2019 2020
State Bank of India 100 104 199 118 93
ICICI Bank 100 195 215 104 77
Interpretation of Trend Analysis of Net NPA
In the FY 2017 although there was a huge increase in Net NPA % for ICICI bank but still Net Profit increased in comparison to the previous year 2016. In FY 2018 when there was not much increase in Net NPA % but still drastic fall in amount of Net Profit was evident.
Data of FY 2019 shows more amazing results as amount of Net Profits falls with more than 50% (3363.3) as compared to the previous year 2018 profits (6777.42) with a massive decrease in NNPA% where as in FY 2020 the performance of ICICI bank improved in terms of increase in amount of Net Profits with a decrease in Net NPA% but this increase in Net profits was still less as compared to the profits for the FY2016 i.e., although according to the data ICICI bank is in profits but when compared with the base year 2016 the performance of the bank shows decreasing trend in terms of revenue and profits in the last five years.
In case of State Bank of India data shows that in FY2018 there was vast increase in Net NPA% due to which bank not only had reduction in their number of profits rather they went into huge losses. In FY 2019 & 2020 shows that decrease in Net NPA%
resultedpositive impact on the performance of the bank. Although number of Net profits in FY 2019 was less nevertheless better than the losses and with the same paceState Bank of
55807.02 58277.38
110854.7
65894.74
51871.3
12963.08 25216.81 27823.56
13449.72 9923.24
2016 2017 2018 2019 2020
Bank wise Net NPA
State Bank of India ICICI Bank
68 Indiahave posted fairly good revenue growth and in number of Net Profit during the FY 2020.
6. SUGGESTIONS TO REDUCE NPAS IN BANKS
(i) Revision of existing credit appraisal and monitoring systems by RBI
(ii) Regular follow-up of customers by the banks to ensure that there is no diversion of funds.
(iii) Review of all loan accounts at fixed interval.
(iv) Proper training to bank employees and staff to overcome the weakness of credit appraisal and credit monitoring.
(v) Banks may resort to one-time settlement scheme or compromise settlement scheme.
Recovery through Debt Recovery Tribunals and LokAdalat’s are other ways. Banks these days are resorting to SARFAESIAct for the management of NPAs.
(vi) Establishing a rigorous screening process before granting credit.
(vii) The bank should rephrase or reschedule the account for reasons that are beyond the borrower’ control.
(viii) Sectors performing well are pharmaceuticals, FMCG, ecommerce, utilities and IT sector, therefore loans to these sectors are not likely to turn bad.
7. CONCLUSIONS
Due to its direct bearing on profitability, non-performing assets have always been a major concern for the banks, asfailure of the banking sector may have an adverse impact on other sectors of the economy too. Thus, there is a need to ensure that the banks take proper steps to resolve it, thereby ensuring fair and efficient recovery of loans so that banking sector continue to function without stress. Banks have been reporting a decline in NPA’s in the last few months, there is a high possibility that forbearance on asset classification is masking bad loans that are constantly on the rise, according to S&P Global Ratings.
Banking sector performance had improved in FY20 as banks have reported growth in earning along with having high NPAs. The study reveals that the extent of NPAs is comparatively more in public sector banks as compared to private sector banks due to large number of banks and their branches in public sector. The government is taking many steps to reduce the problem of NPA’s but banks should also have to be more proactive to adopt a structured NPAs policy to prevent the non-performing assets and should follow stringent measures for its recovery. Bankers should also consider the ROI on a proposed project and provide loans to customers who have better credit worthiness as prevention is always better than cure. RBI is also proposing certain measures to curb the impact of NPA’s like loan moratorium on banks to salvage borrowers due to Coronavirus. Owing to loan moratorium borrowers will not be required to pay interest and principal components of the loan to the bank during the moratorium period which will encourage borrowers to increase their spending,thwart low business confidenceand continue their businesses optimistically so that economic growth can be sustained.
Although the repo rate has been lowered substantially by the RBI but banks have not much lowered their lending rates because of financial sustainability. So, with the growth of loans in H1FY21 will translate into good earnings for banks despite the pandemic.
Once moratorium is lifted and repayments start coming banks will become profitable.
NPA’s would rise and in this aspect, RBI has asked banks to do provisioning, buffers and raise capital and thus be buoyant organisations.
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