non performing assests

8/11/2019 Non Performing Assests

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Trend and Causes of NPA and its

Impact on BanksWith a Case Study on SBI and its

Associates

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Asset quality, specifically in terms of the Gross NPA, is the

most important indicator of a banks overall condition and

thus, at the aggregate level, asset quality explains the

performance of banking system as a whole. It is a sweeping and all pervasive virus confronted universally

on banking and financial institutions, acutely suffered by

Nationalised banks, Private banks, and the all India Financial

Institutions. While the primary driver of the deteriorating asset quality was

the domestic economic slowdown, the contribution of other

factors was also significant.

Analyse trends and causes of NPA as also the severity of itsimpact on banking sector and the economy as a whole.

Ensure early detection of sign of distress .

PREVENTION IS BETTER THAN CURE2


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OBJECTIVES

Prudential norms of the RBI on Asset classification, andprovisioning with respect to advances.

Trend Analysis of Non-Performing Assets

The factors leading to the increase in the NPAs in the

banking sector The impact of deterioration in asset quality on the

performance and operations of the Bank as also the macro-economy

Relationship between the growth in Bank credit and macro-

economic variables Relationship between the growth NPA and macro-economic

variables

Case Analysis on State Bank of India and its Associate banks

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What is Non-Performing Assets ?A Non-Performing asset (NPA) shall be a loan or an advance, where:

Interest and/ or instalment of principal remain overdue for a period of more than 90 days in

respect of a term loan,

The account remains outof orderin respect of an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills purchased anddiscounted

The instalment of principal or interest thereon remains overdue for two crop seasons forshort duration crops,

The instalment of principal or interest thereon remains overdue for one crop season forlong duration crops.

The amount of liquidity facility remains outstanding for more than 90 days, in respect of asecuritisation transaction undertaken in terms of guidelines on securitisation dated February1, 2006.

In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the

specified due date for payment. 4


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ASSET CLASSIFICATION AND PROVISIONING

NORMS

PERFORMING ASSETS

Standard Assets

NON-PEFORMING ASSETS

Sub-Standard Assets

Doubtful Assets Loss Assets

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A TREND ANALYSIS OF NPAs OF

SCHEDULED COMMERCIAL BANKS

(SCBS)

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7

In retrospect, the Indian Banks have overall

demonstrated a trend of continued good

performance and profitability despite risinginterest rates, increase in operating costs and the

spill over effects of recent global financial crisis .

Higher credit growth and deposit record Better return on assets

Better return on equities.

The capital position improved significantly.

HOWEVER..


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In the recent past

It has been impacted by the global and domestic economic slowdown over

the last two years.

Moderation in balance sheet growth for the second consecutive year, led

by a slowing down of credit growth.

The level of NPAs is high with all banks currently.

There has been a rise in asset impairment coupled with a dip inprofitability.

Maintaining profitability is a challenge in the wake of increasing

competition due to opening up of banking business to NBFCs and foreign

banks.

The Capital requirements would be large considering the varied structureof banks and financial institutions operating in the economy and their NPA

levels in order to comply with provisioning norms and capital adequacy

requirements while meeting Basel III standards which will be brought in by

RBI shortly.

High likelihood of no change in macro-economic environment anytimesoon.8


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Gross NPA ratio at system-level increased, mainly on

account of the deterioration in asset quality of public

sector banks

11.19%

-3.31%

-5.47%-8.51%

-12.62%

-2.57%

11.78%

22.22% 22.87%

15.55%

45.34%

36.34%

21.87%

14.26%15.94%

27.79%

34.59%

29.72%

24.61%

21.15%

16.68%13.18%

16.29%

28.35%

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013

GROWTH RATE OF GROSS NPAs vis-a-vis GROSS ADVANCES FOR ALL SCBs

YOY GROWTH IN GROSS NPA YOY GROWTH IN GROSS ADVANCES

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TRENDS IN NON-PERFORMING ASSETS BANK GROUP WISE

(Amount in Rs Billion)

PUBLIC SECTOR

BANK

NATIONALISED

BANK SBI GROUP

PRIVATE SECTOR

BANK

FOREIGN

BANK

SCHEDULED COMMERCIAL

BANKS

GROSS NPA

OPENING BALANCE FOR 2011-

2012 1178 696 482 187 62 1429

ADDITION DURING 2012-2013 1198 772 425 128 41 1368

RECOVERED DURING 2012-2013 648 429 219 63 24 736

WRITTEN OFF DURING 2012-

2013 78 17 60 42 0 120

CLOSING BANLANCE FOR2012-

2013 1650 1022 627 210 79 1940

GROSS NPA AS % OF GROSS ADVANCES

2011-2012 3.3 2.8 4.6 2.1 2.6 3.1

2012-2013 4.1 3.6 5 2 2.9 3.6

NET NPA

CLOSING BANLANCE FOR 2011-

2012 593 391 202 44 14 652

CLOSING BANLANCE FOR 2012-

2013 900 619 281 59 26 986

NET NPA AS % OF GROSS ADVANCES

2011-2012 1.5 1.4 1.8 0.5 0.6 1.3

2012-2013 2 2 2 0.5 1 1.710


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0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

GROSS NPA TO TOTAL ASSETS

PUBLIC SECTOR BANKS

PRIVATE SECTOR BANKS

FOREIGN SECTOR BANKS

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NPAs became stickier, with proportion of sub-standard as well

as doubtful assets in gross advances registering an increase:

1.0

1.1

1.3 1.3

1.0

1.4

1.6

1.3

1.0

1.01.0

1.1

1.3

1.6

0.3

0.2 0.20.2 0.2 0.2 0.2

2007 2008 2009 2010 2011 2012 2013

Asset Classification of All Scheduled Commercial Banks ( % Share of

Gross Advances)

Sub-Standard Assets Doubtful Assets Loss Assets

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Slippage ratio and recovery ratios

deteriorated during the year.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

WRITE OFF RATIO

SLIPPAGE RATIO

PROVISION RATIO

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Increase in NPA Acceleration ratio and Decrease in

NPA Reduction ratio-Overall deterioration in Asset

quality

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

160.00%

180.00%

200.00%

NPA ACCELARATION RATIO

NPA REDUCTION RATIO

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Slippage Ratio was the highest for the public sector

banks and the lowest for the private sector banks

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

SLIPPAGE RATIO

PUBLIC SECTOR BANKS



ALL BANKS

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Private sector banks, however took a lead in cleaning

up their balance sheets.

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

WRITE OFF RATIO

PUBLIC SECTOR BANKS



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There was a marginal decline in the provisioning coverage ratio

at the aggregate level

10.46%

13.71%

15.21%

21.34%

10.19%

10.33%

16.01%

19.29%

27.74%

35.99%

32.31%

26.80%

25.61%

2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013

PROVISIONING COVER

ALL SCHEDULED COMMERCIAL BANKS

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Private banks have made the highest

provisioning against NPAs

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

PROVISIONING COVER

PUBLIC SECTOR BANKS



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0.00%

0.50%

1.00%

1.50%

2.00%

2.50%

PROVISION RATIO

PUBLIC SECTOR BANKS



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Deterioration in asset quality of public sector banks was spread

across priority and non-priority sectors as it increased for both

the priority and non-priority sectors:

47.23% 47.54% 49.05%

54.07%

59.92%63.86%

54.88% 53.84%58.09%

49.96%

42.93%

50.71% 51.24% 50.00% 43.68% 38.80% 35.39% 44.04% 45.25% 41.52% 49.11% 57.00%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS

Priority Sector Non-Priority Sector

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Non-priority sector the major

contributor to rise in NPAs

51.8%

46.9%

41.0%

48.2%

53.1%

59.0%

2011 2012 2013

SHARE OF PRIORITY AND NON-PRIORITY SECTOR IN TOTAL NPAs

PRIORITY SECTOR NON-PRIORITY SECTOR

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Restructured standard advances

increased significantly

2.29%

2.02%

0.40% 0.43%

0.63%

2.31%

2.67%

1.36%

2.58%

4.02%

FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

RESTRUCTURED ASSETS RATIO

RESTRUCTURED ASSETS RATIO

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Steep increase in restructured

advances by public sector banks

3.21%

0.96%

0.07%

1.84%

3.50%3.62%

1.82%

2.96%

4.42%

3.24%

PSB PVT FOREIGN SBI ALL

PROPORTION OF RESTRUCTURED STANDARD ADVANCES AND NPA TO GROSS ADVANCES

LOAN RESTRUCTURED RATIO GROSS NPA RATIO (2012-2013)

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The Y-o-Y growth rate of the impaired loan outpaced that of

the advances by a huge margin in the last two years

27.79%

34.59%29.72% 24.61%

21.15%16.68% 13.18%

16.29%

28.35%

-3.24%

-30.66%

3.29%

21.72%

92.23%

29.30%

-15.00%

72.59%

65.35%

FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

ALL SCHEDULED COMMERCIAL BANKS

Y-O-Y GROWTH IN ADVANCES Y-O-Y GROWTH IN IMPAIRED LOAN

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Impaired loan Ratio has shown a rising trend in

two consecutive years after a year of decline

9.47%

7.17%

3.70%

2.94% 2.87%

4.56%

5.05%

3.80%

5.63%

7.26%

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013

IMPAIRED LOAN RATIO

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SOME OTHER SIGNIFICANT TRENDS

Banking sector predominantly public in nature.

Credit to sensitive sectors picked up even in a period ofslowdown in overall credit growth.

Deceleration in growth of credit to all productivesectors viz., agriculture, industry and services.

There was a rise in the growth of priority sector creditagainst a drop in overall credit growth during the year.

SARFAESI Act remained the most important channel forNPA recovery as NPAs recovered through this Actaccounted for about 80 per cent of the total amount ofNPAs.

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FACTORS LEADING TO RISING LEVEL OF NPA

While the primary driver of the deteriorating

loan quality was the domestic economic

slowdown, that's not the only story.

BANK SPECIFIC FACTORS

EXTERNAL FACTORS

BORROWER SPECIFIC FACTORS

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IMPACT OF RISING LEVEL OF NPA ON

THE BANKS

High cost of funds due to NPAs

Impact on Profitability

Impact on Liquidity

Impact on Productivity

Involvement of Management

Credit Loss

Qualitative aspects of the Micro Level Impact ofNPAs

Macro-Economic Impact

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AN ANALYSIS OF RELATIONSHIP BETWEEN BANK

CREDIT, NPA AND MACRO-ECONOMIC VARIABLES

Given the association between macroeconomic factors and banking, there is aneed for the central banks and policy makers to understand and quantify theinterrelationship between health of banking system and macro-economy.

The understanding would help in finding early warning signals about the failure ofbanks and to take timely and appropriate corrective actions and also enable the

regulators to take right measures for strengthening the financial system whilepromoting economic development.

If banks make adequate provisioning when the economy is doing good the impactof the economic downturns on bank balance sheets can be managed quitecomfortably. In this back drop, Bank for International Settlements (BIS) in its BaselIII accord has suggested a need for creation of capital conservation buffer and

countercyclical buffer by banks.

very strong linkages between macro-economic indicators and asset quality as wellas the volume of credit flow in the economy.

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Relationship between Bank Credit

and Macroeconomic Factors Bank credit has positive association with GDP, NNI, per capita

income, exports and imports.

On the other hand, it has a negative relationship with inflation andWPI.

Studies also show that bank credit has a very high correlation withthe IIP and tend to increase with an increase in the industrialproduction.

There exists a lead and lag relationship between bank credit andmacro-economic developments as can be measured by GDP andNNI.

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Association between Macroeconomic

Factors and NPA

Level of NPA in general is negatively correlated

with credit and GDP.

It can be expected to have a positive

relationship with inflation.

The lead-lag relationship between inflation

and NPA of banks.

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A CASE STUDY ON SBIAND ITs ASSOCIATES

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SBIsfunding profile is strong, underpinned by its strong retail deposit base.

Low-cost deposits have continued to constitute over 45% of total deposits

The banks liquidity position is very strong due to healthy accretion to deposits,large limits in the call market, and significant surplus SLR investments.

Wide geographical reach.

SBI has maintained a good earnings profile in the medium term despite highpressure on yields due to the increasing competition in the banking sector.

Strong diversification in income streams will ensure that the banks earnings

remain relatively stable, despite the decline in profitability in some segments.

The Capital Adequacy Ratio of the Bank stands at 12.92%, against RBI stipulation of9%, with Tier l capital at 9.49% and Tier II at 3.43%.

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Looking to the severe competition and NPA position,

the NIM was under pressure.

The level of impaired assets for FY 2013 has shown

an upward bias, indicative of the state of theeconomy, and SBI experienced an unparalleled level

of delinquencies.

The deterioration has occurred in the mid-corporate

and SME space in sectors under stress in the

economy.

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MOVEMENT OF NPAs:AMOUNT IN Rs crores

NPA FY03-04 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13

GROSS NPA 15988.3

1

15616.4

7

13288.3

6

12676.9

4

12837.3

4

15589 19535 25326 39676 51189

GROSS NPA % 7.75% 5.96% 3.88% 2.92% 3.04% 2.84 3.05 3.28 4.44 4.75

NET NPA 5442 5349 4906 5258 7424.34 9552 10870 12347 15819 21956.48

NET NPA % 3.48% 2.65% 1.87% 1.56% 1.78% 1.76 1.72 1.63 1.82 2.1

CASH RECOVERY IN NPA 1617 1836 3461 1940 1732.15 2966 2059 3848 4159 4766

UPGRADATION TO STANDARD ASSETS 958 1323.00 1192 1257 1516.84 3402 3972 4499 5459 10119

WRITE OFFS 3974 1337 1809 1397 1242.52 1896 1991 4007 744 5594

GROSS REDUCTION IN NPA ( UPGRADATION+CASH

RECOVERIES+WRITEOFF)

6549 4496.00 6462 4594 4491.51 8264 8022 12354 10362 20479

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4.44

4.995.15

5.3

4.75

5.56

Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

GROSS NPAs %GROSS NPAs %

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An upward trend in the growth of

NPAs over the last two years

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

7.00%

8.00%

9.00%

FY03-04 FY04-05 FY05-06 FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13

TREND IN NPA

GROSS NPA % NET NPA %

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Movement of stressed assets clearly shows that there has been


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Movement of stressed assets clearly shows that there has been

a continuously increasing trend in stressed assets over the last

two years including the Q1FY14.

5.29%

6.19% 6.24% 6.27%

6.72%

7.44%7.66% 7.73%

8.57%

3.34%

3.99%3.79%

3.60%3.88%

4.66%4.88%

5.02%

5.75%

Jun-11 Sep-11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13

MOVEMENT OF STRESSED ASSETS

GROSS NPA + RESTR. STD TO GROSS ADVANCES NET NPA + RESTR. STND TO GROSS ADVANCES

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The share of mid corporate SME and agriculture sector has increased


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The share of mid-corporate, SME and agriculture sector has increased

substantially in the gross NPA for SBI group specially in the Q1FY14.

However, mid corporate has been biggest contributor throughout the

period.

7.3% 6.4% 7.0% 5.2% 5.5% 5.3%

12.4% 10.6% 10.2% 9.1% 8.3% 8.0%

19.0%19.6% 18.6%

18.5% 19.8% 20.9%

28.7% 30.1% 28.5%

28.7%28.4% 27.7%

29.1% 32.1% 35.2% 37.0% 36.0% 33.4%

3.4% 1.3% 0.6% 1.5% 2.0% 4.7%

Dec-11 Mar-12 Jun-12 Dec-12 Mar-13 Jun-13

SECTOR WISE GROSS NPAs TO TOTAL GROSS NPAs %

INTERNATIONAL RETAIL AGRI SME MID CORPORATE LARGE CORPORATE

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In the FY 2013, major portion of NPA came from the Non-

Priority sector, contrary to the trend of the previous years.

47.49% 47.07% 47.39%54.95%

57.14% 58.49%

47.26% 50.11%55.32% 52.33%

44.09%

49.41% 51.47% 51.49%

44.11% 41.36%40.88%

51.75% 48.77%

44.66%

47.62% 55.85%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

COMPOSITION OF NPAs OF SBI & IT's ASSOCIATES

Priority Sector Non-Priority Sector

41

SBI l di t th iti t h b i i ti l


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SBIs lending to the sensitive sector has been increasing continuously over

the last five years and the increase had been very significant in the FY 13

which again pose a threat to increasing NPA levels.

71079.3

95020.49

144958.79 148238.62

190810.81

2008-09 2009-10 2010-11 2011-12 2012-13

LENDING TO SENSITIVE SECTOR

STATE BANK OF INDIA

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Y-o-Y Growth rate of fresh slippage into NPA category has remained substantial over

last three years. Major industries contributing to the fresh slippages in FY 13 are iron

& steel, textiles, trade and services and automobiles/transport industries.

7.52%

53.21%

36.19%

29.46%

FY09-10 FY10-11 FY11-12 FY12-13

FRESH SLIPPAGES OF STANDARD ASSETS TO NPA CATEGORY

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The total loans written off during the year as a percentage of the total loan

portfolio for SBI group has increased drastically in the current year after a

sharp decline in the previous year

0.00%

0.10%

0.20%

0.30%

0.40%

0.50%

0.60%

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013

WRITE-OFF RATIO

ALL SCHEDULED COMMERCIAL BANKS SBI AND ITS ASSOCIATES

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The recoveries in written off account has been the highest in FY13 over the

last eight years in absolute terms as also the recoveries has grown

substantially in the FY13.

-3.28%

-13.72%

5.89%

11.49%

-2.42%

-0.41%

10.81%

FY06-07 FY07-08 FY08-09 FY09-10 FY10-11 FY11-12 FY12-13

Y-O-Y GROWTH IN RECOVERIES IN WRITEN OFF ACCOUNT

Y-O-Y GROWTH IN RECOVERIES IN WRITEN OFF ACCOUNT

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The provisioning coverage ratio (PCR), defined as provisions for credit loss as

per cent of gross NPAs, showed a marginal decline during the year at the

aggregate level as well for SBI group.

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

35.00%

40.00%

2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013

PROVISIONING COVER

ALL SCHEDULED COMMERCIAL BANKS SBI AND ITS ASSOCIATES

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The CDR ratio of SBI Group was more in tune

with the CDR ratio of All SCBs.

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

1.80%

2.00%

CDR RATIO

All scheduled Commercial Banks

SBI & its Assosicate Bank

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The corporate debt restructured under doubtful assets class


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The corporate debt restructured under doubtful assets class

increased manifold in FY13 while CDR under standard and

sub-standard asset classes also showed an upward trend.

-500.00%

0.00%

500.00%

1000.00%

1500.00%

2000.00%

2500.00%

3000.00%

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 2012-2013

CORPORATE DEBT RESTRUCTURED

Y-O-Y GROWTH STANDARD ASSET YOY GROWTH SUB-STANDARD ASSETS YOY GROWTH DOUBTFUL ASSETS

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RECOMMENDATIONS

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Banks should shift to an information-based project appraisal system to ensure that the

precious funds are not stuck in unproductive projects.

There is a need for concerted policy action such that credit availability to the productive

sectors of the economy is maintained/enhanced.

Strengthen their risk management systems, credit appraisal and sanction process, post-

sanction monitoring and follow-up system.

They should have a robust MIS mechanism for early detection of incipient

weaknesses/distress and for taking steps for remedial measures and recovery of banksdues.

The rigor and robustness of project appraisal, credit monitoring and continuous assessment

of the health of the large accounts in terms of early warning signals should be in tune with

the exposure banks take.

There is a need to improve the effectiveness of the recovery system. There is an urgent need

to accelerate the working of DRTs and ARCs.

Banks should set up separate dedicated verticals to recover as much as possible from

accounts that were technically written off .

The banks should closely watch the top 30 NPA accounts and large accounts as also confront

the wilful defaulters.

Central Government, State Governments and the project developers should ensure that the

minor impediments that ail the operationalization of the assets in the infrastructure sector

are immediately removed so that they can be put to productive use and start generating

revenues.

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THANK YOU

non performing assests

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