Non-performing assets in Indian banks

B S :KP Shashidharan:11 Feb 2013

RBI has been insisting on banks to utilise various measures on recovery of bad loans and strengthen due diligence

The global rating agency, Moody’s, in its latest report of 2013, has downgraded Indian banking system’s rating outlook from ‘stable’ to ‘negative’.

 The Reserve Bank of India (RBI) has also observed in its second quarter review of monetary policy 2012-13 that the Non Performing Assets (NPA) and restructured loans of banks have been increasing significantly and a major reason for deterioration in the asset quality of banks is the lack of effective timely information exchange among banks on credit, derivatives and un-hedged foreign currency exposures.

As per the available statistics, NPAs for all banks rose to 3.6 per cent in September 2012 and are expected to reach 4% by March 2013 and 4.4 per cent by the March 2014.

In the first two quarters of the current fiscal 2012-13, the banks referred a record number of 74 CDR cases; total debt requiring restructuring increased to Rs 40,000 crore. Latest quarterly results of banks show that NPAs of at least in 35 banks rose from the last fiscal 2011-12 by 28 per cent reaching over Rs 32,000 crore in the first half of current financial year, amounting bad loans to Rs 1.47 lakh crore as on September 30, 2012.

NPAs in SBI have grown 24 per cent marking over Rs 49,000 crore in 2012-13, constituting one third of gross NPAs of all listed banks put together. SBI’s gross NPA as percentage of total advances has risen to 5.15% from 4.4 per cent. 

As per the latest data available with CDR cell, 466 cases involving debt of Rs 2.46 lakh crore have been referred to it since its inception. High interest costs, along with overall sluggishness in the domestic and global economies are reported to be the reasons for the companies to meet their debt obligations.

In order to reflect true financial health of the banks in their financial reports, RBI had issued a master circular in June 2008 detailing prudential norms on NPA, asset classification, income recognition and provisioning. An asset becomes non-performing when it ceases to generate income for the bank.

 Keeping in line with the international best practices, NPA has been defined from March 31, 2004 as credit in respect of which interest and/or installment of principal has remained ‘overdue’ for more than 90 days. Identification of NPA should be done on an ongoing basis and doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the amount would have been classified as NPA.

RBI norms stipulate that where there is threat of loss or the recoverability of the advances is in doubt, the asset should be treated as NPA. Banks are prohibited to book income on accrual basis in respect of any security where the interest/principal is in arrears for more than 90 days.

Consequent to changes made in asset classification norms in 2005, banks are permitted to phase the consequent additional provisioning over a five-year period from March 2005 with a minimum of 10% of the required provision in each of the first two years and the balance in equal installments over the subsequent three years.

In conformity with prudential norms, provisions should be made on NPAs on the basis of classification of assets into prescribed categories, standard assets, sub-standard assets, doubtful assets and loss assets.

 Based on the period for which the advance has remained in ‘doubtful category’, the provisioning percentage has been prescribed. Banks are required to make provisions for NPA as at the end of each calendar quarter.

 The income expenditure account for the respective quarters, profit & loss account and balance sheet for the year end should reflect the requisite provisioning made for NPAs.

RBI has been insisting on banks to utilise various measures put in place by it and the government for recovery of bad loans and strengthen the due diligence, credit appraisal and post-sanction loan monitoring systems to reduce NPAs.

The central bank has advised all banks to put in place an effective mechanism for information sharing by December 2012 and instructed that fresh sanction of loans should be done only after obtaining requisite information from January 2013.

The role of the statutory auditors of the banks cannot be under estimated in identifying NPAs and ensuring adequate provisioning as per the prudential norms.

As banks are allowed to choose its auditors from the empanelled audit firms, the regulatory body of audit firms, the Institute of Chartered Accountants of India has expressed its concern about possible conflict of interest and dilution of independence of auditors, which is of course a sad refection of the professionalism of auditors.

The change in the policy of choosing auditors by public sector banks from the empanelled list of audit firms, deviating from the erstwhile practice of appointing bank auditors by a committee consisting of members of the banking division of the Ministry of Finance, RBI and CAG is intended for ensuring level playing field among all Indian banks in respect of appointment of the auditors.

In the present scenario, it has become all the more important for RBI’s mandatory inspection to act as an effective deterrent for banks not to resort to non-adherence to applicable prudential norms and less provisioning for NPAs.