Non Performing Assets

COMMERCIAL BANKS HISTORY AND NPA PROBLEM

Submitted by:Anoop Kain Kapil Vidhani Nakul Jain Raveesh Goswami Sourabh Soni Surbhit Bansal Vijay Chakule Amit Kumar

Introduction 

Without a sound and effective banking system a country cannot develop same goes with the country like India.

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For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India.

Contd.. 

General Bank of India was set up in the year 1786

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Foreign Banks like Credit Lyonnais started their operations in the 1950’s

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The commercial banking structure in India consists of:  Scheduled Commercial Banks in India  Unscheduled Banks in India Scheduled Banks - Those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934

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Important Events 

Nationalisation -June 1969 - 14 largest commercial banks – 7 more banks in 1980- more government control of the credit delivery - banks grew at the same pace as economy

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Liberalisation -In 1990’s - licences to a small number of private banks UTI Bank, ICICI, HDFC - ushered in a modern outlook and tech-savvy methods of working - led to the retail boom in India

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Foreign Direct Investment -relaxation in the norms -Foreign Investors in banks may be given voting rights which could exceed the cap of 10%

History 

The first bank in India The General Bank of India, though conservative, was established in 1786.

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From 1786 till today, the journey of Indian Banking System can be divided into 3 distinct phases.

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Phase I, from 1786 to 1969 of Indian Banks

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Phase II, up to 1991 prior to Indian banking sector Reforms.

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Phase III, Indian Financial & Banking Sector Reforms after 1991.

Phase I 

To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949.

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It was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).

contd… 

Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority.

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During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948.

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During those days public had lesser confidence in the banks

contd… 

The General Bank of India 1786.

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Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) by The East India Company.

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These banks were called Presidency banks and later formed the Imperial bank in 1920.

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In 1865 Allahabad Bank, Punjab National Bank Ltd. in 1894 was established exclusively by Indians. Reserve Bank of India came in 1935.

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Phase II 

Government took major steps in this Indian Banking Sector Reform after independence.

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In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas.

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It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.

contd… 

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Second phase of nationalizations was carried out in 1980 with seven more banks. Banking in the sunshine of Government ownership gave the public implicit faith and confidence. 1949 : Enactment of Banking Regulation Act. 1955 : Nationalization of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1980 : Nationalisation of seven banks with deposits over 200 crore.

Nationalization of banks 

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalized 14 banks.

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These banks were mostly owned by businessmen and even managed by them.

Nationalized Banks       

Central Bank of India Punjab National Bank United Bank of India Indian Overseas Bank Bank of Maharashtra Syndicate Bank Bank of Baroda

Dena Bank UCO Bank Canara Bank Indian Bank Union Bank Bank of India Allahabad Bank

Phase III 

This phase has introduced many more products and facilities in the banking sector in its reforms measure.

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In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices.

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The exchange rate regime, the high foreign reserves , not fully convertible capital account and limited exposure to banks and their customers to foreign exchange makes Indian banking system safe.

contd… The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.

NON PERFORMING ASSETS 

The Indian banking industry has always been plagued with the problem of high levels of non performing assets, which can be attributed to factors like:-

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1.Archaic policies.

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2.Industrial inefficiency.

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3.Lack of adequate legal recourse to the lenders.

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4.Willful defaulters.

TYPES OF NPA 

Gross NPA and NET NPA

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Gross NPA-An improvement in the gross NPA generally indicates an improvement in the bank's systems and procedures.

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NET NPA- Improvement in the net NPA indicates that the bank's balance sheet has the strength to sustain higher provisions.

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The gross NPA has come down to 5.82 per cent as against as 8.84 per cent as of March 2006, while net NPA will drop to 2.54 per cent from 4.42 per cent during the same period.

PARAMETERS TO CONTROL NPA 

Credit administration -

Improved credit

management 

Risk management -On the improving risk management

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Improving corporate performance - Improve the risk profile of loans given to the industrial sector

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Legal remedies- Recourse to legal remedies such as DRT and SARFEASI

contd.. 

Higher provisions- Increase their provisioning / write off of bad loans

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Regulatory measures -One Time Settlement Scheme (OTS), Corporate Debt Restructuring (CDR)

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Legal reforms- Pressurize the defaulters to clear the over dues, and thus clean their balance sheet.

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Best practices- Building strong credit risk management.

THANK YOU..