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Npa Management In Public Sector Banks

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By Prav in Palande /Forbes India

Indian banks have brought bad loans down to 2.4% over 1 0 y ears, but now

they need to be careful

The past three months hav e been to ugh for Indian banking. High interest

rates and threats of a global recession hav e taken their toll on bank stocks.

The NSE banking index fell 1 5% compared with the Niftys 11 % slide in thepast three months. Indian banks, ironically , have nev er been in a better

state of health in the past 10 y ears.

A rec ent s tudy by Bosto n Consulting Group (BCG) found that bad lo ans fel l from a pe ak of 1 1. 4% in

2001 to just 2.4% in 2010, showing the efficiency o f management of capital. In fact, Indian banks

have bee n performing better in controlling defaults with only 0 .6% of loans handed out last ye ar

turning sticky, co mpared to 1 % in the US and China. Indian banks also hav e a c ost-to-income

ratio of 47 %, which is lower than Germany, France and the US.

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The main reason for the ro bustness was the banks focus on re turn on investment, co st-to-income

ratios and the efficient use of technolo gy. BCG expec ts that by 2025 the Indian banking sector

will b e the third la rgest in the wor ld on asse ts, b ehind China and the US.

But now stress signals are showing up. The Reserv e Bank of India expec ts non-performing assets(NPA) to inch up to 2.9% during 201 1. IDFC Securities, a broking firm, rece ntly said at least 17 %

of loans are stressed and some could go bad. Total bank credit to the industrial sector stands at

about Rs 17 ,60,600 crore.

Credit to power and infrastructure se ctors has gro wn 40% in the past four year s and the

proportion of the same has gone up to 14% in terms of total credit offtake, which has created

additional risks to the banking segment, say s Ajay Parmar, head of institutional research at

Emkay Global.

State-owned banks have a higher alloc ation to small industries, which co uld get hurt early if there

is an industrial slowdown. Additionally, the c entral banks battle with persistent inflation is

raising the cost of money , pressuring net interest margins that are expec ted to co ntinue to

narrow for at least another two years.

But no one is pressing the panic button y et because t here is no dearth of liquidity in the system.

Says Rajeev Thakkar, CEO, Parag Parikh Financial Adv isory Services, I f margins are high then

NPAs are not a cause for co ncern... There is a difficulty in the sy stem but we are c ertainly not into

recessionary territory.

My V iew on this article published on website of money control.com

I fully disagree with the con clusion arrived at by Forbes India. It is not true th at

due to tight management banks h as been able to control NPA during last one decade

and absolutely false to say that banks have got suc cess in bringing it down from 11%

in 200 1 to 2.8% in 2011.

Bitter truth is that banks have fraudulently and in nexus with RBI and auditors

have c oncealed all bad assets and conc ealed NPA during last ten years in the nam e

of reformation. Secondly they have reduced th eir exposure in sm all segment and

increased their focus and their exposure on bulk lending. This is why 70 to 80 to

their total disbursem ent during last ten y ears are for big corporate and gov ernmen t

companies which help in reducing Gross NPA percentage.

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I peeped into loan portfolio of one of governm ent banks and found th at loan

outstanding in the nam e of top 500 borrowers is 50000 c rores out of total loan

portfolio of Rs.1500 00/ crores of the bank. It m eans loan shown to be disbursed to

priority sector is inflated by including bulk loan and obv iously th e bank is falsely

claim ing that th e bank is fulfilling RBI target fixed for various segmen ts in priority

sector.RBI is willfully silent spec tator of all frauds com mit ted by c hief of variou s

ban ks.

Obviously banks have controlled NPA ratio firstly by concealing bad assets and

secondly by increasing bulk lending and neglecting small farmers, small traders

and small m anufactu rers for which ban ks were nationalized in 1969.

If list of newly generated NPA of any bank is properly analy sed it will precipitate

that account was in fact NPA long ago but banks willfully concealed the same and

boo ked interest as in co m e again st RBI 's pruden tial no rm s for in co m e recogn ition .

In th is way banks not only inflated income bu t also saved provision to a great

exten t. Now when RBI has forced to declare NPA as per system s top bankers are

weepin g and searchi ng lam e ex cu ses of glob al rec essi on o r bad we ath er or in flation

or high interest rate.

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