of NAPAs - Key to Banking Reforms by Chander Shekhar *
Reforms initiated in 1991 by the then Finance Minister, Dr. Manmohan
Singh would have remained incomplete without the overhaul of the Indian
Banking Sector. The process, which began on the basis of recommendations
of the Narasimhamam Committee Report (first report) is still continuing,
though many of the sick banks have been able to come out of the red
after repeat doses of fund infusion. A few of the them, however, are
still in the red but the efforts are on to resuscitate them. However,
the bigger challenge at the moment is to deal with the worsening financial
health of the financial institutions. The other important financial
institution IDBI is also not in the pink of health and needs government
support for revitalising itself.
The other aspect of the banking sector reforms relates to liberalisation
of norms and guidelines for making the whole sector vibrant and competitive.
This was a gradual process undertaken with utmost care least it should
disrupt the banking sector. Slowly, the Reserve Bank of India (RBI)
freed interest rates, both on the deposit and the lending sides. At
the same time it relaxed the cash reserve ratio (CRR) and statutory
liquidity ratio (SLR) unlocking more and more funds. On the deposit
side, a bank is free to offer any rate depending upon its asset-liability
position. Only savings rate are mandated by the RBI. Similarly, banks
can charge any rate on lending operations depending on risk perception.
It would be wrong to say that there are no controls, but they are
much less as compared to the controls that existed before the initiation
of the banking sector reforms.
Reduction of NPAs
The third and the most important dimension of the banking sector reforms
was reduction of the non-performing assets (NPAs). In fact the whole
effort to reform the banking sector would collapse if the banks are
not able to contain and reduce their NPAs. It would be impossible
for a bank with high NPAs to be either vibrant or competitive. What
are these NPAs? These are the assets that do not yield any return.
It is like owning a vast field where nothing grows, though the field
was purchased at high rates.
Technically, NPAs consist of three categories of assets - sub-standard,
doubtful and loss. As per the new norms for recognition, identification
and classification of assets (changed with effect from March 31, 2001),
assets classified as NPAs for a period upto two years belong to sub-standard
category, while doubtful assets are those that remain NPAs for a period
beyond two years. Loss assets are those which are identified as such
either by banks themselves or internal/ external auditors or RBI but
not written off.
According to the Economic Survey (2002-2003) gross NPAs of the public
sector banks were of the order of Rs.56,507 crore at the end of 2001-2002.
Private sector banks had gross NPAs of Rs.11,672 crore and foreign
banks Rs.2,726 crore. Total gross NPAs of the banking sector amounted
to Rs.70,905 crore.
This was 10.4 percent of gross advances of the banking sector. This
means that banking sector does not earn any return on an investment
of Rs.70,905 crore. The strategy of the successive finance ministers
have been to fight this menace of growing NPAs. These efforts are
yielding fruits. Gross NPAs as a percentage of gross advances were
12.7 percent in 1999-2000. It came down to 11.4 percent in 2000-2001
and 10.4 percent in 2001-2002. Similarly, net NPAs as percentage of
net advances for the banking sector came down from 6.8 percent in
1999-2000 to 6.2 percent in 2000-2001 and 5.5 percent in 2001-2002.
The banking sector reforms are on the right track, though not many
are happy with the pace of reduction of NPAs.
Weak and Strong Banks
The Narasimhamam Committee suggested recapitalisation of a host of
public sector banks. These banks were expected to follow prudential
norms with regard to asset classification. The Narasimhamam Committee-II
revisited the banking sector reforms to carry forward the unfinished
agenda. It defined a weak bank as one whose accumulated losses and
net NPAs exceed its net worth or whose operating profits less income
on recapitalisation bonds was negative for three consecutive years.
Then came the working group on restructuring weak public sector banks
headed by former State Bank of India, Chairma, Shri M.S. Verma. The
group identified seven parameters for identification of weak banks
- CAR and Coverage Ratio under solvency; return on assets and net
interest margin under earning capacity; and three ratios under profitability
which include operating profit to average working funds, costs to
income and staff cost to net interest income plus all other income.
By and large the exercise, spread over a decade, achieved its objective
to a large extent with many public sector banks being able to show
results. At the end of March, 2002, according to the Economic Survey
2002-2003, 25 out of 27 public sector banks had CAR above the prescribed
minimum level of 9 percent. Of these, as many as 23 banks had CRAR
exceeding 10 percent. The two banks which failed to fulfill the minimum
capital adequacy norms were Indian Bank and Dena Bank. Of the 30 private
sector banks, Centurian Bank and Nedungadi Bank could not attain the
minimum CRAR level. Out of the 40 foreign banks operating in the country,
only Siam Commercial Bank had a negative CRAR of 13.3 percent. The
CRAR of the commercial banks as a whole increased from 11.2 percent
at the end of March, 2001 to 11.8 percent at the end of March, 2002.
The future of the Indian banking rests on the ability of the bankers
to recover its money, especially from those who are wilful defaulters.
This will ease pressure on interest rates and genuine borrowers would
find it easier to obtain funds from banking channels at competitive
rates. In a bid to help the banks and also financial institutions
to recover funds, the government enacted the Securitisation, Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002.
The Act allowed creditors to take possession of secured assets; take
over the management of secured assets; and to appoint a person to
manage them, in case of the failure of the borrower to discharge the
liabilities in the stipulated time.
Though the borrower have been allowed to appeal with the Debts Recovery
Tribunals, they can do so only after depositing 75 percent of the
amount claimed by the secured creditor. Borrowers aggrieved by the
order to of the Debts Recovery Tribunal have been permitted to appeal
to an Appellate Authority within 30 days from the date of receipt
of the order of the tribunal.
The Act, which has become operational, is currently being scrutinised
by the Supreme Court. The industry feels that many of the provisions
are draconian and the whole act needs to be redrafted. The bankers,
on the other hand, are opposed to redrafting of the Act but agreeable
to certain procedural changes. The apex court, however, will take
a view after listening to the arguments of both sides. Hopefully,
the problem would be resolved amicably for the benefit of the both
- banks as well as industry - paving the way for easy availability
of cheaper credit.
Mr. Chander Shekhar is Chief of Bureau, Financial Express.
Courtesy : Yojana