23-05-2012, 02:53 PM
ROLE OF NPA AS A PERFORMANCE INDEX OF PUBLIC SECTOR BANKS
ROLE OF NPA AS A PERFORMANCE INDEX OF PUBLIC SECTOR BANKS.docx (Size: 269.05 KB / Downloads: 79)
INTRODUCTION TO INDIAN BANKING SECTOR
History
Banking in India has its origin as early as the Vedic period. It is believed that the Transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce.
During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India.
The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalized and in 15th April 1980 six more commercial private sector banks were also taken over by the government.
INTRODUCTION TO PUBLIC SECTOR IN INDIA
Institutional credit support plays a catalytic role in accelerating the pace of economic development of a country. In the context of developing economy of India, bank finance plays a crucial role in pushing the agricultural economy on to the progressive pathway and helping develop rural India. Indian banking, appreciably, over the years, has emerged from being a supplier of credit to be an engine of economic development.
A historic review of the State Bank of India, a giant among the public sector commercial banks, and the subsequently in nationalized commercial banks, reveals the emerging promising trends in the deposit mobilization, deployment of credit with developmental dimension added to it, prioritization of sectoral financing and social responsibility assumed by the banks. Along with promising trends in the progressive march of the public sector banks, certain disturbing trends are notice.
Hence, the vital importance of making an in-depth study of the changing trends in the Indian public sector commercial banks so that policy sector commercial banks so that policy corrections can be made for enabling them play a more effective developmental role in the context of resurgent national economy of India.
Nationalized banks (Public Sector)
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
IDBI Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce, Etc.
INTRODUCTION TO NPA
It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPAs) and the issue is becoming more and more unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed by Parliament, which is an important step towards elimination or reduction of NPAs.
After liberalization the Indian banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks for proving socio economic services to the people of the nation.
The Public Sector Banks have shown very good performance as far as the financial operations are concerned. If we look to the glance of the financial operations, we may find that deposits of public to the Public Sector Banks have increased from 859,461.95crore to 1,079,393.81crore in 2003, the investments of the Public Sector Banks have increased from 349,107.81crore to 545,509.00crore, and however the advances have also been increased to 549,351.16crore from 414,989.36crore in 2003.
The total income of the public sector banks have also shown good performance since the last few years and currently it is 128,464.40crore. The Public Sector Banks have also shown comparatively good result. The gross profits of the Public Sector Banks currently 29,715.26crore which has been doubled to the last to last year, and the net profit of the Public Sector Banks is 12,295,47crore.
However, the only problem of the Public Sector Banks these days are the increasing level of the non performing assets. The non performing assets of the Public Sector Banks have been increasing regularly year by year. If we glance on the numbers of nonperforming assets we may come to know that in the year 1997 the NPAs were 47,300crore and reached to 80,246crore in 2002.
The only problem that hampers the possible financial performance of the Public Sector Banks is the increasing results of the non performing assets. The non performing assets impacts drastically to the working of the banks. The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time banks are required to make provisions for such NPAs from their current profits.
NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the sometime are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines.
Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the tear of burgeoning non-performing assets.
NPAs have a deleterious effect on the return on assets in several ways :
They erode current profits through provisioning requirement.
They result in reduced interest income.
They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future.
They limit recycling of funds, set in asset-liability mismatches, etc.
The RBI has also tried to develop many schemes and tools to reduce the non performing assets by introducing internal checks and control scheme, relationship managers as stated by RBI who have complete knowledge of the borrowers, credit rating system, and early warning system and so on. The RBI has also tried to improve the securitization Act and SARFAESI Act and other acts related to the pattern of the borrowings.