The extent of NPAs in India
A nonperforming asset (NPA) refers to a classification for loans on the books of financial institutions that are in default or are in arrears on scheduled payments of principal or interest. In most cases, debt is classified as nonperforming when loan payments have not been made for a period of 90 days. Traditionally, two metrics are used to assess the scale of the problem—the ratio of NPAs (gross or net) to gross domestic product (GDP) and the ratio of NPAs to total loans. The ratio of NPAs to GDP measures the potential losses in relation to the size of the economy. This is especially useful in cross-country comparisons, given that countries are at different levels of GDP. The following description tells us about the extent of NPAs in the India Banking Sector:
- The combined gross bad loans for 38 out of 39 listed banks nearly doubled to about ₹5.8 trillion at the end of the March quarter (2016) compared to the same period last year. The quarters ending March, and December 2016 added over ₹1 trillion each in bad loans. Public sector banks account for about 90 per cent of all bad loans.
- For the latest quarter ending March, 15 out of 25 public sector banks swung to combined net losses of about ₹23,493 crores, compared to combined net profit of ₹8,500 crores in the same quarter last year. The biggest losses were posted by Punjab National Bank (at ₹5,367 crores), Canara Bank (₹₹ ₹3,905 crores), Bank of India ( ₹3,587 crores), and Bank of Baroda ( ₹3,230 crores). The reported net losses excluded any tax-related benefits.
- There is a silver lining, however, as the private sector banks didn’t report net losses in the latest quarter. But even private sector banks saw net profits slip 14 percent from a combined ₹10,254 crores last year. The private sector banks have fared better in part because of the higher interest income they earn compared to the public sector banks.
- The combined net losses and red ink can be attributed to the ‘provisions’ that the banks have had to do to account for their bad loans and non performing assets. Such provisions rose 87 per cent in 2016—from ₹93,698 crore to ₹1.75 trillion.
Banks have had to clean up their balance sheets and report non-performing assets (NPAs) or bad loans as part of a massive clean-up drive, also known as ‘asset quality review,’ which was prompted RBI last year. RBI Governor Raghuram Rajan has often referred to the clean-up as “deep surgery” necessary to stabilise the Indian financial system.
NPAs in different Banks of India in 2017
Indian Overseas Bank– The gross NPA of Indian Overseas Bank (IOB) has risen to Rs 35,098.25 crore, which is 22.39 per cent of its total lending. IOB registered a loss of Rs 646.66 crore in the March quarter compared with a net loss of Rs 936.19 crore in the corresponding quarter last year.
IDBI Bank– The gross NPA of IDBI Bank has risen to 21.25 per cent or Rs 44,752.59 crore of its total lending.
The Bank reported a loss of Rs 3,199.76 crore for the quarter ended March 31, 2017, almost twice the net loss of Rs 1,735.81 crore it posted in the corresponding quarter last year.
Central Bank– The gross NPA of Central Bank has risen to 17.81 per cent or Rs 27251.33 crore of its total lending.
The Bank reported a loss of Rs 591.77 crore for the quarter ended March 31, 2017 compared with a net loss of Rs 898.04 of the corresponding quarter a year ago.
Bank of India-The gross NPA of Bank of India has risen up to 13.22 per cent or Rs 52044.52 crore of its total lending.
The bank reported a net loss of 10.46 billion rupees for March quarter. Net loss for the quarter ended March 31 narrowed from a loss of 35.87 billion rupees a year earlier.
Punjab National Bank– The gross NPA of PNB is 12.53 per cent, Rs 55,370.45 crore of its total lending.
At the end of March quarter, the bank’s fresh slippages stood at Rs 22,415 crore as against Rs 42,252 crore in the same period last year.
Oriental Bank– The gross NPA of Oriental Bank is 13.73 per cent, Rs 22,859.27 crore of its total lending. The bank reported a net loss of Rs 1,218.01 crore for March quarter, whereas it had made a net profit of Rs 21.62 crore during the similar quarter of preceding fiscal year.
Dena Bank– The gross NPA of Dena Bank is 16.27 per cent, Rs 12618.73 crore of its total lending. The bank’s loss widened to Rs 575 crore in March 2017 from Rs 326 crore in March 2016.
Canara Bank– The gross NPA of Canara Bank is 9.63 per cent, Rs 34202.04 crore of its total lending. The bank posted a profit of Rs 2.14 billion in the quarter ended March 31 compared with a loss of 39.05 billion rupees a year earlier.
State Bank of India– 12 large accounts had become NPAs by end-March 2016 and Crisil estimates show the banks had already provisioned 40 per cent for these NPAs worth Rs 2 trillion or about Rs 80,000 crore. The total NPA provisioning of banks stood at Rs 2.2 trillion as of FY17, up from Rs 2 trillion in FY16. The largest 12 accounts named by RBI are Bhushan Steel (Rs 44,478 cr), Lanco Infra (Rs 44,365 cr), Essar Steel (Rs 37,284 cr), Bhushan Power (Rs 37248 cr), Alok Industries (Rs 22,075 cr), Amtek Auto (Rs 14,075 cr), Monnet Ispat (Rs 12,115 cr) Electrosteel Steels (Rs 10,274 cr), Era Infra (Rs 10,065 cr) Jypaee Infratech(Rs 9,635 cr), ABG Shipyard (Rs 6,953 cr), and Jyoti Structures (Rs 5,165 cr). Of these six accounts have already been sent to NCLT by banks — Bhushan Steel, Essar Steel and Electrosteel Steels by SBI; Bhushan Power by PNB; Lanco Infratech by IDBI; and Amtek Auto by Corporation Bank- for possible liquidation.
Steps Taken by the government to solve the NPA problem
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (also known as the SARFAESI Act) is an Indian law. It allows banks and other financial institution to auction residential or commercial properties to recover loans. The first asset reconstruction company (ARC) of India, ARCIL, was set up under this act. Under this act secured creditors (banks or financial institutions) have many rights for enforcement of security interest under section 13 of SARFAESI Act, 2002. If borrower of financial assistance makes any default in repayment of loan or any installment and his account is classified as Nonperforming Asset by secured creditor, then secured creditor may require before expiry of period of limitation by written notice to the borrower for repayment of due in full within 60 days by clearly stating amount due and intention for enforcement. Where he does not discharge dues in full within 60 days, then without intervention of any court or tribunal Secured creditor may take possession (including sale, lease, assignment) of secured asset, or take over management of business of borrower or appoint manager for secured asset or without taking any of these action may also proceed against guarantor or sell the pledged asset, if any.
The law does not apply to unsecured loans, loans below Rs. 100,000 or where remaining debt is below 20% of the original principal. This law allowed the creation of asset reconstruction companies (ARC) and allowed banks to sell their non-performing assets to ARCs. Banks are allowed to take possession of the collateral property and sell it without the permission of a court. The act was amended by “Enforcement of Security Interest and Recovery of Debts Laws and Miscellaneous Provisions (Amendment) Bill, 2016”, passed by Lok Sabha on 2 August 2016. Act passed by Rajya Sabha by voice vote on August 10, 2016.
Debt Recovery Tribunal
Keeping in line with the international trends on helping financial institutions recover their bad debts quickly and efficiently, the Government of India has constituted thirty three Debts Recovery Tribunals and five Debts Recovery Appellate Tribunals across the country. The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 and also Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002. Under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 banks approach the Debts Recovery Tribunal (DRT) whereas, under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 borrowers, guarantors, and other any other person aggrieved by any action of the bank can approach the Debts Recovery Tribunal (DRT). Debts Recovery Tribunal are located across the country. Some cities have more than one Debts Recovery Tribunals. New Delhi, Chennai, Kolkata and Mumbai have three Debts Recovery Tribunals. Ahmedabad and Chandigarh have two Debts Recovery Tribunal (DRT) each. One Debts Recovery Tribunal has been constituted at Allahabad, Aurangabad, Bangalore, Coimbatore, Cuttack, Earnakulam, Guwahati, Hyderabad, Jabalpur, Jaipur, Lucknow, Madurai,Nagpur, Patna, Pune, Vishakapatnam and Ranchi. Appeals against orders passed by Debts Recovery Tribunal (DRT) lie before Debts Recovery Appellate Tribunal (DRAT). There five Debts Recovery Appellate Tribunal (DRATs) located in the country. One Debts Recovery Appellate Tribunal (DRAT) is located each at Delhi, Allahabad, Mumbai, Chennai and Kolkatta. A Debts Recovery Appellate Tribunal (DRAT) conducts circuit sittings in different cities where Debts Recovery Tribunal (DRTs) are located over which it has appellate jurisdiction. There are a number of States that do not have a Debts Recovery Tribunal. The Banks & Financial Institutions and other parties in these States have to go to Debts Recovery Tribunal located in other states having jurisdiction over there area. Thus the territorial jurisdiction of some Debts Recovery Tribunal is very vast.
Indradhanush is a scheme for capital infusion in the stressed public sector banks. Under Indradhanush roadmap announced in 2015, the government had announced to infuse Rs 70,000 crore in state-run banks over four years while they will have to raise a further Rs 1.1 lakh crore from the markets to meet their capital requirement in line with global risk norms, known as Basel-III. In line with the plan, public sector banks were given Rs 25,000 crore in 2015-16, and similar amount has been earmarked for the current fiscal. Besides, Rs 10,000 crore each would be infused in 2017-18 and 2018-19. Government plans to come out with ‘Indradhanush 2.0’, a comprehensive plan for recapitalisation of public sector lenders, with a view to make sure they remain solvent and fully comply with the global capital adequacy norms, Basel-III. ‘Indradhanush 2.0′ will be finalised after completion of the Asset Quality Review (AQR) by the Reserve Bank, which is likely to be completed by March-end. The RBI had embarked on the AQR exercise from December 2015 and asked banks to recognise some top defaulting accounts as non-performing assets (NPAs) and make adequate provisions for them. It has had a debilitating impact on banks’ numbers and their stocks. The central bank has set a deadline of March 2017 to complete the AQR exercise.
Apart from the above measures the government has made Banking Board Bureau to reduce political interference in recruitment to the top position in the PSU banks and appointing board members. The banks are also being suggested to follow standard accounting norms and asset classification. There is also a suggestion to create PARA to solve the most complex and big defaults on bank loans by big corporate sector units.