24-08-2012, 10:58 AM
PROBLEM OF NPA AND ITS IMPACT ON BANKS (WITH SPECIAL REFRENCE TO STATE BANK OF INDIA)
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INTRODUCTION TO THE PROJECT
Since the introduction of economic liberalization and financial sector reforms, Banks are under growing pressure to bring down their NPAs so as to improve their performance and viability. What is bothering the bankers today is the management of Non-performing Assets. Over the period this problem has aggravated alarmingly and therefore needs urgent remedial actions, so in this context a good number of circular instruction/guidelines have been issued by bank/Reserve Bank of India.
Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of Sh. M.Narsimham to examine and give recommendation for Income Recognition, Asset Classification and Provisioning of loan assets of Banks and Financial Institutions. The Committee examined the issues and recommended that a policy of Income Recognition should be objective and based on record of recovery rather than on subjective considerations. On the basis of the recommendations of the Narsimhan Committee, RBI had issued guidelines to all Scheduled Commercial Banks on Income Recognition, Assets Classification and Provisioning in April, 1992 which have been modified from time to time by the RBI on the basis of experience gained and suggestions received from various quarters. The Prudential Norms for Income Recognition, Asset Classification and Provisioning have come into effect from the accounting year 31.03.1993.
Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June, 1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for the purpose of Income Recognition and Assets Classification from the accounting year 1995-96. However, guidelines relating to provisioning for RRBs have been made effective from the financial' year ended 31.03.1997. The definition of NPAs is also gradually becoming tough for RRBs to cover all advances like Commercial Banks. Although most of-the guidelines relating to RRBs are similar to that of Commercial Banks, they have been made applicable in a phased manner for RRBs.
STATE BANK OF INDIA
SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31, 2005. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better, improve service levels, provide new delivery platforms, and improve operating efficiency to counter the threat of competition effectively. Once the core banking solution (CBS) is fully implemented, it will cover over 10,000 branches and ATMs of the State Bank group, and emerge as the strongest technology enabled distribution network in India.
The increasing integration of SBI with its associate banks (associates) and subsidiaries will further strengthen its dominant position in the banking sector and position it as the country’s largest universal bank.
Resource-raising capabilities
SBI’s funding profile is strong, underpinned by its strong retail deposit base. The bank is facing increasing competition in its metropolitan and urban franchise. SBI’s strong franchise gives it access to a steady source of stable retail funds, which constitute around 59% of the total resources as on March 31, 2005 (56% as at March 31, 2004).
Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in the proportion of current account deposits, low-cost deposits have continued to constitute over 40% of total deposits as at March 31, 2005. The bank’s cost of deposits (excluding IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year from April 1 to March 31), compared with 5.48% in 2003-04. The bank’s liquidity position is very strong due to healthy accretion to deposits, large limits in the call market, and significant surplus SLR investments. SBI will maintain its strong funding profile and a low cost resource position in view of its strong retail base and wide geographical reach.
Earnings profile to remain good
SBI will maintain a good earnings profile in the medium term despite high pressure on yields due to the increasing competition in the banking sector. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets), at around 1% per annum for the past three years, and diverse income streams. To maintain yields and pursue credit growth, the bank is aggressively targeting retail finance and small and medium enterprises (SMEs). The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile. However, with the opening of government business like tax collection to other banks and increased competition, the growth in fee income is expected to slow down. The bank’s operating expense at 2.44% of average funds deployed in 2004-05 is in line with other public sector banks. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating expenditure in 2004-05. Thus, despite good asset growth and technology efficiency gains, the bank’s operating costs will remain high in the medium term. To be able to reap the full benefits of technology implementation, the bank will have to reduce or redeploy work force; since this is a sensitive issue, it is expected to happen gradually.
Management strategies
In retail finance, the bank has leveraged its corporate relationships, pursued business growth selectively, and has not competed based on interest rate. The bank has taken initiatives like on-line tax returns filing and faster transfer of funds to protect its dominant position in the government business. The bank also has a clear technology strategy that will enable it to compete with the new generation private sector banks in customer service and operational efficiency.
Asset quality to remain at average levels
The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at March 31, 2005, compared with 4.9% for all scheduled commercial banks (SCBs) taken together. The bank is facing challenges to improve the quality of assets originated, as can be seen in the consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05.
To contain NPAs and ensure credit growth, the bank has decided to focus on financing the retail (personal) segment as well as SMEs. The share of retail advances has increased to 24.73% (Rs 522.08 billion) of total advances as at September 30 2005. In the retail loan segment, SBI is targeting primarily the housing loans segment, which constitutes Rs. 283.41 billion (54.3%) of total retail loans. The NPAs in retail finance are low currently; however they are steadily increasing (especially in the housing finance portfolio) and have started showing signs of stress. SBI’s retail portfolio has grown at over 37% CAGR in the last two years and hence a significant portion of the portfolio is largely unseasoned. The housing finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March 31, 2005.The bank will face significant challenges in the medium term to develop effective credit appraisal and collection systems in order to contain NPAs in retail finance. SBI’s asset quality is expected to remain at average levels, as the bank’s large and diverse asset portfolio reflects of the asset quality of the banking system.
Business description
SBI along with its associate banks offer a wide range of banking products and services across its different client markets. The bank has entered the market of term lending to corporates and infrastructure financing, traditionally the domain of the financial institutions. It has increased its thrust in retail assets in the last two years, and has built a strong market position in housing loans.
SBI, through its non-banking subsidiaries, offers a host of financial services, viz., merchant banking, fund management, factoring, primary dealership, broking, investment banking and credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI Life Insurance Company Limited, which is a joint venture with Cardiff S.A., one of the largest insurance companies in France. SBI currently holds 74% equity in the joint venture.
Industry prospects
To leverage benefits such as access to low cost resources and the facility to provide a larger gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited and HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements, priority sector requirements, and corporate exposure limits.
New private sector banks capture market share
With technological edge and a strong marketing thrust, private sector banks have been stealing market share in retail deposits and the corporate fee business from public sector banks. Together with some foreign banks, these private banks have also aggressively entered the retail asset financing space, hitherto the domain of non-banking finance companies.
Given their focus on cross selling and optimizing their customer base, they now offer the entire range of products and services on the asset and liability side to retail and wholesale customers
RECOGNITION OF INCOME ON
NON-PERFORMING LOANS (NPLS)
Stricter regulations have been laid down by supervisory authorities in many countries with regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful' and 'loss'].
Any uncollected interest payments on NPLs are considered non-accrued interest. Previously accrued, but uncollected interest is reversed out of income. Failure to do so would overstate income. Uncollected interest is normally put in a memorandum account. NPLs are restored on an accrual basis only after full settlement has been made on all delinquent principal and interest. It would, therefore, be useful, if the accounts carry a footnote, explaining the accounting policies followed with regard to recognition of income on NPLs.