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Five things to know about bank NPAs
The Reserve Bank of India governor and deputy governors often make speeches at various forums. In a recent speech, K C Chakrabarty, deputy governor of RBI, spoke at length on non-performing assets in banks. These speeches offer a great insight into the functioning of banks.
Profitability of banks is dependent on the successful repayment of loans. When a borrower is unable to pay interest for a period of 90 days, the bank classifies that loan as a ‘Non-Performing Asset’ if it does not expect further payments. The quantum of these NPAs as a percentage of its interest income is used to measure a bank’s health.
Here are five things we pulled out from the speech he made recently that could help you to know about NPAs in India:
NPAs in India before 2008:
In India, NPA regulations were introduced only in the 1990s. Back then, NPA levels were very high. As of March 1994, gross NPAs as a percentage of gross advances – the total amount that banks have lent – stood at 19.1%, according to RBI data. Thereafter, the regulations were tightened and gross NPAs declined to 2.3% in March 2008. Banks’ asset qualities improved. This was due to a number of reasons like better risk management by banks, good performance of the overall economy, rise in demand for loans, and so on.
Rise in NPAs after 2008:
“In 2008, the financial crisis in the US had a ripple effect world over. The asset quality of India’s banking system deteriorated. After 2008, gross NPAs in India rose from 3.1% to 4.2% in September 2013. NPAs increase by Rs 1,93,200 crore between 2008 and 2013. This is much higher than the Rs 50,000-crore increase in NPAs in the 2001-2007 period. A key reason for the rise is the slowdown in the overall economy. However, it is also because of other factors like poor credit management on part of the banks.
Public-sector bank NPAs:
Since 2009, deterioration of asset quality of public-sector banks is greater than private sector banks. This is because of poor management and structural problems. “The private sector and foreign banks…were quick to identify the early threats posed by the slowdown and effectively managed them,” Dr K. C. Chakrabarty, deputy governor of the RBI said in a speech in November 2013. PSBs, however, failed to respond quickly, and as a result, have seen a continued rise in NPAs.
A RBI analysis found that NPAs have been higher in those banks with high credit growth in the 2004-09 period. This shows that during the pre-crisis years, banks failed to efficiently appraise the credit-worthiness of corporates, which witnessed a sharp rise in debt levels. Banks also failed to continuously monitor the likely risks in the system. This led to a rise in NPAs after the crisis, when a slowdown hit the economy.
Despite the fact that NPAs have been on the rise, the overall financial system remains stable. This is because, NPAs are still lower than the 1994-levels. Gross NPAs for the banking system stood at 3.4%, as of March 2013, significantly lower than the 19% levels in March 1994. Moreover, Indian banks today have stronger capitals than in the 1990s. Tier I Capital of banks is at 9% as of June 2013, according to an RBI study. It may go down to 6% only if NPAs rise to 150%, the study added.
Asset quality of public-sector banks is worse than that of private banks. They account for 85% of total NPAs in the banking system. This is up from 75% in 2003, according to RBI data. In contrast, their share in total loans barely rose from 74% in 2003 to 76% now. This shows that loan demand has grown at the same rate as NPAs. This has affect profitability even more as there is not much increase in the income from interest payments.