Bankers’ Nightmare

Ever since the euphemistically correct term “Non Performing Asset” (NPA) was coined to replace the terms such as bad loans, sick loans etc. which were turning the balance sheets of the banks in India red, it has been the nightmare of bankers in the country. Being the son of branch manager of a Regional Rural Bank and being born and bought up in that very banking environment, I am quite familiar with the phase through which the bankers in India usually go through. Numerous nights are spent thinking about the assets which will soon be classified as Non Performing and numerous days, trying to recover every penny that can be following a rigorous legal approach against the people with heavy political backing. Specially, the Public Sector banks where the major business is through priority sector lending and the lending in the rural areas, the condition of NPAs is even worse.

Although much has already been said about the NPAs in the banks, but still nothing seems to work for the banks in Asian countries. The last decade of the Indian Banking Industry has viewed extremely high NPAs and many banks reported negative profit. This is not the case with the performance in this decade due to the changes brought by policy of The Reserve Bank of India (India’s central bank).  With the RBI’s new definition for the NPA released in 2004, the condition has improved, and the problem of understating the NPA is no more prevalent.

The Foreign sector banks in the country have been able to keep their NPAs as low as zero, except a few. The Standard Charted bank has the highest NPA amongst the foreign sector banks. In Private sector banks, ICICI is leading from the front in terms of high NPA. Where as, amongst Public sector banks the honor for the whopping high NPA goes to the State Bank of India. The condition is reverse when viewed from the other side. These banks are the highest profit makers in their respective sectors and the Net NPA to Net Advances ratio of theirs is quite low and most of them have been constantly reducing it. All credit to the excellent and aggressive policies of these banks.

Source: Indian Banks Association (Figures in Crores of INR, 1 Crore = 10 Million)

The stats may be hurting, but it is true that the NPA of the Indian Banking sector hanged around 1% of the GDP at factor cost of the nation in the year 2004, and if we consider the other Financial Institutions then it will be 4% of the GDP at factor cost. The situation is comparatively better than those of the other Asian countries such as China and Japan, where the NPA is more than 30% of the GDP. The condition of NPA has improved over the years with Asset Reconstruction Companies (ARCs) coming into picture in the Indian Banking Industry. But NPA is NPA, whether small or large, it is always like a body part of bank being paralyzed.

As per the current scenario in India from the coming fiscal year, there will be even more players in the Indian Banking Industry, and this fierce competition will certainly drive the Indian economy by a large magnitude, despite it will also magnify the NPA problem. This clearly means more work for the BIU of these banks, the ARCs and the consultants to reduce the NPAs by every possible bit. We at Marketelligent with expertise in Risk Management and efficient modeling techniques for NPA reduction through Profile Monitoring and Fraud detection are all set to let the Asset managers enjoy their nights.

Zishan Ansari

Consultant, Marketelligent