NPA has affected the profitability, liquidity and competitive functioning of PSBs

and finally the psychology of the bankers in respect of their disposition towards
credit delivery and credit expansion.

Impact on Profitability

Between 01.04.93 to 31.03.2001Commercial banks incurred a total amount of

Rs.31251 Crores towards provisioning NPA. This has brought Net NPA to Rs.32632
Crores or 6.2% of net advances. To this extent the problem is contained, but at what
cost? This costly remedy is made at the sacrifice of building healthy reserves for
future capital adequacy. The enormous provisioning of NPA together with the
holding cost of such non-productive assets over the years has acted as a severe drain
on the profitability of the PSBs. In turn PSBs are seen as poor performers and unable
to approach the market for raising additional capital. Equity issues of nationalised
banks that have already tapped the market are now quoted at a discount in the
secondary market. Other banks hesitate to approach the market to raise new issues.
This has alternatively forced PSBs to borrow heavily from the debt market to build
Tier II Capital to meet capital adequacy norms putting severe pressure on their profit
margins; else they are to seek the bounty of the Central Government for repeated
Recapitalisation.

Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost
of funds at 6% plus 1% service charge) the net NPA of Rs.32632 Crores absorbs a
recurring holding cost of Rs.2300 Crores annually. Considering the average
provisions made for the last 8 years, which works out to average of Rs.3300 crores
from annum, a sizeable portion of the interest income is absorbed in servicing NPA.
NPA is not merely non-remunerative. It is also cost absorbing and profit eroding.

In the context of severe competition in the banking industry, the weak banks are at
disadvantage for leveraging the rate of interest in the deregulated market and
securing remunerative business growth. The options for these banks are lost. "The
spread is the bread for the banks". This is the margin between the cost of resources
employed and the return there from. In other words it is gap between the return on
funds deployed (Interest earned on credit and investments) and cost of funds
employed (Interest paid on deposits). When the interest rates were directed by RBI,
as heretofore, there was no option for banks. But today in the deregulated market the
banks decide their lending rates and borrowing rates. In the competitive money and
capital Markets, inability to offer competitive market rates adds to the disadvantage
of marketing and building new business.
In the face of the deregulated banking industry, an ideal competitive working is
reached, when the banks are able to earn adequate amount of non-interest income to
cover their entire operating expenses i.e. a positive burden. In that event the spread
factor i.e. the difference between the gross interest income and interest cost will
constitute its operating profits. Theoretically even if the bank keeps 0% spread, it
will still break even in terms of operating profit and not return an operating loss. The
net profit is the amount of the operating profit minus the amount of provisions to be
made including for taxation. On account of the burden of heavy NPA, many
nationalised banks have little option and they are unable to lower lending rates
competitively, as a wider spread is necessitated to cover cost of NPA in the face of
lower income from off balance sheet business yielding non-interest income.

The following working results of Corporation bank an identified well managed

nationalised banks for the last two years and for the first nine months of the current
financial year, will be revealing to prove this statement-

Table -6 (part-1) …………Year Year

Performance of Corporation Bank .......ended ended 9 months
(Amount in Crores).. PerformanceMar. Mar. Apr.Decr.2001
indicator 2000 2001
Earnings - Non-interest 270.81 292.09 285.85
Operating expenses 303.99 341.36 280.52
Difference - 33.18 - 49.27 5.33

Non-interest income fully absorbs the operating expenses of this bank in the current
financial year for the first 9 months. In the last two financial years, though such
income has substantially covered the operating expenses (between 80 to 90%) there
is still a deficit left. Now what are the interest earnings and expenses of Corporation
Bank during this period?

Table -6 (part-1) Corporation BankYear Year

9 months
-Interest Earnings andended ended
Apr.Decr.2001
Expense……………….. (Amount inMar. 2000Mar. 2001
Crores) Performance indicator
Earnings - Iinterest Income 1604.39 1804.54 1458.33
Exp.-Interest expenses 1146.09 1223.21 981.45
Interest spread 458.30 581.33 476.88
Operating Profit 425.12 482.21 532.06
 Provisions 192.68 270.22 219.48
Net Profit 232.44 261.84 262.73

The strength of Corporation Bank is identified by the following positive features:

1. It's sizeable earnings under of non-interest income substantially/totally meets

its non-interest expenses.
2. Its obligation for provisioning requirements is within bounds. (Net NPA/Net
Advances is 1.92%)

It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for

the year ended March 2001, as published by RBI in its Report on trends and progress
of banking in India.

Table 7- Nationalised banks operational

Year endedYear ended
statistics……….. (Amount in Crores)
Mar. 2000 Mar. 2001
Performance indicator
Earnings - Non-interest 6662.42 7159.41
Operating expenses 14251.87 17283.55
Difference - 7589.45 - 10124.14
Earnings - interest income 50234.01 56967.11
Exp.-Interest expenses 35477.41 38789.64
Interest spread 14756.60 18177.47
Intt. On Recap bonds 1797.88 1795.48
Operating Profit 5405.27 6257.85
Provisions 4766.15 5958.24
Net Profit 639.12 299.61

Interest on Recapitalisation Bonds is a income earned from the Government, who

had issued the Recapitalisation Bonds to the weak banks to sustain their capital
adequacy under a bail out package. The statistics above show the other weaknesses
of the nationalised banks in addition to the heavy burden they have to bear for
servicing NPA by way of provisioning and holding cost as under:

1. Their operating expenses are higher due to surplus manpower employed.

Wage costs to total assets is much higher to PSBs compared to new private
banks or foreign banks.
 2. Their earnings from sources other than interest income are meagre. This is due
to failure to develop off balance sheet business through innovative banking
products.

How NPA Affects the Liquidity of the Nationalised Banks?

Though nationalised banks (except Indian Bank) are able to meet norms of Capital
Adequacy, as per RBI guidelines, the fact that their net NPA in the average is as
much as 7% is a potential threat for them. RBI has indicated the ideal position as
Zero percent Net NPA. Even granting 3% net NPA within limits of tolerance the
nationalised banks are holding an uncomfortable burden at 7.1% as at March 2001.
They have not been able to build additional capital needed for business expansion
through internal generations or by tapping the equity market, but have resorted to II-
Tier capital in the debt market or looking to recapitalistion by Government of India.

How NPA Affects the Outlook of Bankers towards Credit Delivery

The fear of NPA permeates the psychology of bank managers in the PSBs in
entertaining new projects for credit expansion. In the world of banking the concepts
of business and risks are inseparable. Business is an exercise of balancing between
risk and reward. Accept justifiable risks and implement de-risking steps. Without
accepting risk, there can be no reward. The psychology of the banks today is to
insulate themselves with zero percent risk and turn lukewarm to fresh credit. This
has affected adversely credit growth compared to growth of deposits, resulting a low
C/D Ratio around 50 to 54% for the industry.

The fear psychosis also leads to excessive security-consciousness in the approach

towards lending to the small and medium sized credit customers. There is insistence
on provision of collateral security, sometimes up to 200% value of the advance, and
consequently due to a feeling of assumed protection on account of holding adequate
security (albeit over-confidence), a tendency towards laxity in the standards of credit
appraisal comes to the fore. It is well known that the existence of collateral security
at best may convert the credit extended to productive sectors into an investment
against real estate, but will not prevent the account turning into NPA. Further
blocked assets and real estate represent the most illiquid security and NPA in such
advances has the tendency to persist for a long duration.

Nationalised banks have reached a dead-end of the tunnel and their future prosperity
depends on an urgent solution of this hovering threat.
NPA the Unbridled Virus and an Emerging Challenge to
Indian Banking System

The Emergence of NPA in Indian Banking & Financial Institutions and its
Dimensions

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat
to the banking industry in our country sending distressing signals on the
sustainability and endurability of the affected banks. The positive results of the chain
of measures effected under banking reforms by the Government of India and RBI in
terms of the two Narasimhan Committee Reports in this contemporary period have
been neutralised by the ill effects of this surging threat. Despite various correctional
steps administered to solve and end this problem, concrete results are eluding. It is a
sweeping and all pervasive virus confronted universally on banking and financial
institutions. The severity of the problem is however acutely suffered by Nationalised
Banks, followed by the SBI group, and the all India Financial Institutions.

As at 31.03.2001 the aggregate gross NPA of all scheduled commercial banks

amounted to Rs.63,883 Crore. Table No.I gives the figures of gross and net NPA for
the last four years. It shows an increase of Rs.13,068 Crore or more than 25% in the
last financial year, indicating that fresh accretion to NPA is more than the recoveries
that were effected, thus signifying a losing battle in containing this menace.

Table No. I
NPA Statistics -All %-age of %-age of
Scheduled Gross Net
Total Gross Net Net
Commercial NPA to NPA to
Advances NPA Advances NPA
Banks ......................... total net
......... (Amount in advances advances
Crores) Year
1997-98 352697 50815 325522 25734 14.4 7.3
1998-99 399496 58722 367012 27892 14.7 7.6
1999-2000 475113 60408 444292 30211 12.7 6.8
2000-2001 558766 63883 526329 32632 11.4 6.2

The apparent reduction of gross NPA from 14.4% to 11.4% between 1998 and 2001
provides little comfort, since this accomplishment is on account of credit growth,
which was higher than the growth of Gross NPA and not through appreciable
recovery of NPA. There is neither reduction nor even containment of the threat.
 The gross NPA and net NPA for PSBs as at 31.03.2001 are 12.39% and 6.74% are
higher than the figures for SCBs at 11.4%and 6.2%. Comparative figures for PSBs,
SBI Group and Nationalised Banks are as under.

%-age of %-age
Table -2 : NPA of Gross Net
Total Gross Net
PSBs…………………………………………………………… NPA to NPA
Advances NPA NPA
(Amount in Crores) Year total net
advances advanc
1996-97 244214 43577 20285 17.8 % 9.2 %
1997-98 284971 45563 21232 16.0 % 8.2 %
1998-99 325328 51710 24211 15.9 % 8.1 %
1999-2000 380077 53033 26188 14.00 % 7.9%
2000-2001 442134 54773 27967 12.39 % 6.74%

%-age of %-age of
Table -3: NPA of State Bank Gross Net
Total Gross Net
Group……………………………………….. NPA to NPA to
Advances NPA NPA
(Amount in Crores) Year total net
advances advances
1997-98 113360 15522 6829 14.57% 6.98 %
15.67
118959 18641 7764 7.74 %
%
1999-2000 129253 19773 7411 14.08 % 6.77 %
2000-2001 150390 20586 8125 12.73 % 6.26 %

%-age of %-age of
Table -4: NPA of Nationalised Gross Net
Total Gross Net
Banks…………………………………………. NPA to NPA to
Advances NPA NPA
(Amount in Crores) Year total net
advances advances
1997-98 166222 30130 14441 16.88 8.91
1998-99 188926 33069 15759 16.02 8.35
1999-2000 224818 33521 17399 13.99 7.80
2000-2001 264237 34609 16096 12.19 7.01

Further it is revealed that commercial banks in general suffer a tendency to

understate their NPA figures. There is the practice of 'ever-greening' of advances,
through subtle techniques. As per report appearing in a national daily the banking
industry has under-estimated its non-performing assets (NPAs) by whopping Rs.
3,862.10 Crore as on March 1997. The industry is also estimated to have under-
provided to the extent of Rs 1,412.29 Crore. The worst "offender" is the public
sector banking industry. Nineteen nationalised banks along with the State Bank of
India and its seven associate banks have underestimated their NPAs by Rs 3,029.29
Crore. Such deception of NPA statistics is executed through the following ways.

• Failure to identify an NPA as per stipulated guidelines: There were instances

of `sub-standard' assets being classified as `standard';
• Wrong classification of an NPA: classifying a `loss' asset as a `doubtful' or
`sub-standard' asset; classifying a `doubtful' asset as a `sub-standard' asset.
• Classifying an account of a credit customer as `substandard' and other
accounts of the same credit customer as `standard', throwing prudential norms
to the winds.

Essentially arising from the wrong classification of NPAs, there was a variation in
the level of loan loss provisioning actually held by the bank and the level required to
be made. This practice can be logically explained as a desperate attempt on the part
of the bankers, whenever adequate current earnings were not available to meet
provisioning obligations. Driven to desperation and impelled by the desire not to
accept defeat, they have chosen to mislead and claim compliance with the
provisioning norms, without actually providing. This only shows that the problem
has swelled to graver dimensions.

The international rating agency Standard & Poor (S & P) conveys the gloomiest
picture, while estimating NPAs of the Indian banking sector between 35% to 70% of
its total outstanding credit. Much of this, up to 35% of the total banking assets, as
per the rating agency would be accounted as NPA if rescheduling and restructuring
of loans to make them good assets in the book are not taken into account. However
RBI has contested this dismal assessment. But the fact remains that the infection if
left unchecked will eventually lead to what has been forecast by the rating agency.
This invests an urgency to tackle this virus as a fire fighting exercise.

Financial institutions have not far lagged behind. NPAs of ten leading institutions
have reported a rise of 11.89 per cent, or Rs 1,929 Crore, to Rs 18,146 Crore during
the year ended March 2000 from Rs 16,217 Crore last year. The NPA statistics of
the three leading Financial Institutions for the last two years are given in Table-5
IDBI tops the list by notching up bad loans worth Rs 7665 Crore by March 2000. In
fact, its NPAs have gone up by Rs 1,185 Crore from Rs 6,490 Crore in the previous
year. IFCI followed with NPAs of Rs 4,103 Crore, but it reported fall of Rs 134
Crore from the previous year's level of Rs 4,237 Crore. ICICI's NPAs went up to Rs
3,959 Crore from Rs 3,623 Crore in the previous year.

Table 5
NPA
Statistics of
the three
Major Term
Total Total NPA-% NPA-%
Lending NPA NPA
Loans Loans age age
Institutions 31.3.2000 31.3.2001
31.3.2000 31.3.2001 31.3.2000 31.3.2001
as at
31.03.2001.
(Amount in
Crores)
Name of FI
IDBI 57099 56477 7665 13.4 8363 13.9
ICICI 52341 57507 3959 07.6 2782 05.2
IFCI 19841 18715 4103 20.7 3897 20.8

Emergence of NPA as an Alarming Threat to Nationalised Banks

NPA is a brought forward legacy accumulated over the past three decades, when
prudent norms of banking were forsaken basking by the halo of security provided by
government ownership. It is not wrong to have pursued social goals, but this does
not justify relegating banking goals and fiscal discipline to the background. But
despite this extravagance the malaise remained invisible to the public eyes due to the
practice of not following transparent accounting standards, but keeping the balance
sheets opaque. This artificially conveyed picture of 'all is well' with PSBs suddenly
came to an end when the lid was open with the introduction of the prudential norms
of banking in the year 1992-93, bringing total transparency in disclosure norms and
'cleansing' the balance sheets of commercial banks for the first time in the country.

How RBI Describes this New Development in its Web Site

In the peak crisis period in early Nineties, when the first Series of Banking Reforms
were introduced, the working position of the State-owned banks exhibited the
severest strain. Commenting on this situation the Reserve Bank of India in its web-
site has pointed out as under:

"Till the adoption of prudential norms relating to income recognition, asset

classification, provisioning and capital adequacy, twenty-six out of twenty-seven
public sector banks were reporting profits (UCO Bank was incurring losses from
1989-90). In the first post-reform year, i.e., 1992-93, the profitability of the PSBs as
a group turned negative with as many as twelve nationalised banks reporting net
losses. By March 1996, the outer time limit prescribed for attaining capital adequacy
of 8 per cent, eight public sector banks were still short of the prescribed."

Consequently PSBs in the post reform period came to be classified under three
categories as -

• healthy banks (those that are currently showing profits and hold no
accumulated losses in their balance sheet)
• banks showing currently profits, but still continuing to have accumulated
losses of prior years carried forward in their balance sheets
• Banks which are still in the red, i.e. showing losses in the past and in the
present.

The Unseen and Unperceived Edge of NPA

NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the
midst of turbulent structural changes overtaking the international banking
institutions, and when the global financial markets were undergoing sweeping
changes. We have already discussed these changes in detail in an earlier Chapter. In
fact after it had emerged the problem of NPA kept hidden and gradually swelling
unnoticed and unperceived, in the maze of defective accounting standards that still
continued with Indian Banks up to the Nineties and opaque Balance sheets.

In a dynamic world, it is true that new ideas and new concepts that emerge through
such changes caused by social evolution bring beneficial effects, but only after
levying a heavy initial toll. The process of quickly integrating new innovations in the
existing set-up leads to an immediate disorder and unsettled conditions. People are
not accustomed to the new models. These new formations take time to configure,
and work smoothly. The old is cast away and the new is found difficult to adjust.
Marginal and sub-marginal operators are swept away by these convulsions. Banks
being sensitive institutions entrenched deeply in traditional beliefs and conventions
were unable to adjust themselves to the changes. They suffered easy victims to this
upheaval in the initial phase.

Consequently banks underwent this transition-syndrome and languished under

distress and banking crises surfaced in quick succession one following the other in
many countries. Elaborating a cross-country description of this phenomenon a study
by FICCI depicts as under:

"Since the mid-eighties, banking crises have come to the forefront of economic
analysis. Situations of banking distress have quickly intensified and in the process,
have become one of the main obstacles to stability to the financial system.
According to Lindgren et.al. (1996), 73 per cent of the member countries of the
International Monetary Fund's (IMF) experienced at least one bout of significant
banking sector problems from 1980 to 1996. More importantly, such crises have
resulted in severe bank losses or public sector resolution costs. As Caprio and
Klingebiel (1996) observe, such costs amounted to 10 per cent or more of GDP in at
least a dozen developing country episodes during the past 15 years. Recent studies
by Honohan (1996) provide the estimated resolution costs of banking crises in
developing and transition economies since 1980 are pegged at US $ 250 billion
reinforce this view."

But when the banking industry in the global sphere came out of this metamorphosis
to re-adjust to the new order, they emerged revitalized and as more vibrant and
robust units. Deregulation in developed capitalist countries particularly in Europe,
witnessed a remarkable innovative growth in the banking industry, whether
measured in terms of deposit growth, credit growth, growth intermediation
instruments as well as in network.

During all these years the Indian Banking, whose environment was insulated from
the global context and was denominated by State controls of directed credit delivery,
regulated interest rates, and investment structure did not participate in this vibrant
banking revolution. Suffering the dearth of innovative spirit and choking under
undue regimentation, Indian banking was lacking objective and prudential systems
of business leading from early stagnation to eventual degeneration and reduced or
negative profitability. Continued political interference, the absence of competition
and total lack of scientific decision-making, led to consequences just the opposite of
what was happening in the western countries. Imperfect accounting standards and
opaque balance sheets served as tools for hiding the shortcomings and failing to
reveal the progressive deterioration and structural weakness of the country's banking
institutions to public view. This enabled the nationalised banks to continue to
flourish in a deceptive manifestation and false glitter, though stray symptoms of the
brewing ailment were discernable here and there.

The government hastily introduced the first phase of reforms in the financial and
banking sectors after the economic crisis of 1991. This was an effort to quickly
resurrect the health of the banking system and bridge the gap between Indian and
global banking development. Indian Banking, in particular PSBs suddenly woke up
to the realities of the situation and to face the burden of the surfeit of their woes.
Simultaneously major revolutionary transitions were taking place in other sectors of
the economy on account the ongoing economic reforms intended towards freeing the
Indian economy from government controls and linking it to market driven forces for
a quick integration with the global economy. Import restrictions were gradually
freed. Tariffs were brought down and quantitative controls were removed. The
Indian market was opened for free competition to the global players. The new
economic policy in turn revolutionalised the environment of the Indian industry and
business and put them to similar problems of new mixture of opportunities and
challenges. As a result we witness today a scenario of banking, trade and industry in
India, all undergoing the convulsions of total reformation battling to kick off the
decadence of the past and to gain a new strength and vigour for effective links with
the global economy. Many are still languishing unable to get released from the old
set-up, while a few progressive corporates are making a niche for themselves in the
global context.

During this decade the reforms have covered almost every segment of the financial
sector. In particular, it is the banking sector, which experienced major reforms. The
reforms have taken the Indian banking sector far away from the days of
nationalization. Increase in the number of banks due to the entry of new private and
foreign banks; increase in the transparency of the banks' balance sheets through the
introduction of prudential norms and norms of disclosure; increase in the role of the
market forces due to the deregulated interest rates, together with rapid
computerisation and application of the benefits of information technology to banking
operations have all significantly affected the operational environment of the Indian
banking sector.

As banking in the country was deregulated and international standards came to be

accepted and applied, banks had to unlearn their traditional operational methods of
directed credit, directed investments and fixed interest rates, all of which had led to
deterioration in the quality of loan portfolios, inadequacy of capital and the erosion
of profitability. Banks have now an entirely different environment under which to
operate, to innovate and thrive in a highly competitive market and their success
depended on their ability to act and adopt to market changes. These called for new
strategies, different from those that related to regulated banking in a captive
environment

In the background of these complex changes when the problem of NPA was
belatedly recognised for the first time at its peak velocity during 1992-93, there was
resultant chaos and confusion. As the problem in large magnitude erupted suddenly
banks were unable to analyze and make a realistic or complete assessment of the
surmounting situation. It was not realised that the root of the problem of NPA was
centered elsewhere in multiple layers, as much outside the banking system, more
particularly in the transient economy of the country, as within. Banking is not a
compartmentalized and isolated sector delinked from the rest of the economy. As
has happened elsewhere in the world, a distressed national economy shifts a part of
its negative results to the banking industry. In short, banks are made ultimately to
finance the losses incurred by constituent industries and businesses. The
unpreparedness and structural weakness of our banking system to act to the
emerging scenario and de-risk itself to the challenges thrown by the new order,
trying to switch over to globalisation were only aggravating the crisis. Partial
perceptions and hasty judgements led to a policy of ad-hoc-ism, which characterised
the approach of the authorities during the last two-decades towards finding solutions
to banking ailments and dismantling recovery impediments. Continuous concern was
expressed. Repeated correctional efforts were executed, but positive results were
evading. The problem was defying a solution.

But why? The threat of NPA was being surveyed and summarised by RBI and
Government of India from a remote perception looking at a bird's-eye-view on the
banking industry as a whole delinked from the rest of the economy. A bird's eye
view is distinct, extensive and even sharp, but it is limited to the view appearing at
the surface or top-layer. It is a not an exhaustive or in-depth view. Restricted merely
as a top-layer view it is partial and is not even a top-to-bottom view, where a
bottom-to-top-view alone can enlighten the correct contributing factors. Flying at a
great height the bird can of-course survey a wide area, but it perceives only a
telescopic view of the roof- top and not the contents that exist inside the several
structures. A simple look at the whole provides summarised perception. But it is not
a homogeneous whole that is being perceived. RBI looks at the banking industry's
average on a macro basis, consolidating and tabulating the data submitted by
different institutions. It has collected extensive statistics about NPA in different
financial sectors like commercial banks, financial institutions, RRBs, urban
cooperatives, NBFC etc. But still it is a distant view of one outside the system and
not the felt view of a suffering participant. Individual banks inherit different cultures
and they finance diverse sectors of the economy that do not possess identical
attributes. There are distinct diversities as among the 29 public sector banks
themselves, between different geographical regions and between different types of
customers using bank credit. There are three weak nationalised banks that have been
identified. But there are also correspondingly two better performing banks like
Corporation and OBC. There are also banks that have successfully contained NPA
and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross
NPA 6.13%). The scenario is not so simple to be generalised for the industry as a
whole to prescribe a readymade package of a common solution for all banks and for
all times.

Similarly NPA concerns of individual Banks summarised as a whole and expressed

as an average for the entire bank cannot convey a dependable picture. It is being
statistically stated that bank X or Y has 12% gross NPA. But if we look down
further within that Bank there are a few pockets possessing bulk segments of NPA
ranging 50% to 70% gross , which should consequently convey that there should
also be several other segments with 3 to 5% or even NIL % NPA, averaging the
bank's whole performance to 12%. Much criticism is made about the obligation of
Nationalised Banks to extend priority sector advances. But banks have neither fared
better in non-priority sector. The comparative performance under priority and non-
priority is only a difference of degree and not that of kind.

The assessment of the mix-of contributing factors should have included

1. human factors (those pertaining to the bankers and the credit customers),
2. environmental imbalances in the economy on account of wholesale changes
and also
3. inherited problems of Indian banking and industry.

While banks functioned for several decades under ethnic culture, Indian business
and industry were owned, controlled or managed by single families, all having been
nurtured and developed through innovative zeal of pioneers, represented by one
dominant individual towering at each set-up. This inherently convey the sole-
proprietorship culture and unable to quickly transform to modern professionally
managed corporations of the global standard, where operations should be conducted
on a decentralized knowledge-based work-group- an integrated teams of specialists
each contributing to a core area of management. The Indian management set up
everywhere turns mostly as one-man show even today.

Variable skill, efficiency and level integrity prevailing in different branches and in
different banks accounts for the sweeping disparities between inter-bank and intra-
bank performance. We may add that while the core or base-level NPA in the
industry is due to common contributory causes, the inter-se variations are on account
of the structural and operational disparities. The heavy concentrated prevalence of
NPA is definitely due to human factors contributing to the same.

No bank appears to have conducted studies involving a cross-section of its operating

field staff, including the audit and inspection functionaries for a candid and
comprehensive introspection based on a survey of the variables of NPA burden
under different categories of sectoral credit, different regions and in individual
Branches categorized as with high, medium and low incidence of NPA. We do not
hear the voice of the operating personnel in these banks candidly expressed and
explaining their failures. Ex-bankers, i.e. the professional bankers who have retired
from service, but possess a depth of inside knowledge do not out-pour candidly their
views. After three decades of nationalised banking, we must have some hundreds of
retired Bank executives in the country, who can boldly and independently, but
objectively voice their views. Everyone is satisfied in blaming the others. Bank
executives hold 'willful defaulters' responsible for all the plague. Industry and
business blames the government policies.

An important fact-revealing information for each NPA account is the gap period
between the date, when the advance was originally made and the date of its
becoming NPA. If the gap is long, it is the case of a sunset industry. Things were all
right earlier, but economic variance in trade cycles or market sentiments have
created the NPA. Credit customers who are in NPA today, but for years were earlier
rated as good performers and creditworthy clients ranging within the top 50 or 100.
But what is the proportion of this content? Significant part of the NPA is on account
of clout banking or willfully given bad loans. Infant mortality in credit is solely on
account of human factors and absence of human integrity.

Credit to different sectors given by the PSBs in fact represents different products.
Advance to weaker sections below Rs.25000/- represents the actual social banking.
NPA in this sector forms 8 TO 10% of the gross amount. Advance to agriculture,
SSI and big industries each calls for different strategies in terms of credit
assessment, credit delivery, project implementation, and post advance supervision.
NPA in different sector is not caused by the same resultant factors. Containing
quantum of NPA is therefore to be programmed by a sector-wise strategy involving
a role of the actively engaged participants who can tell where the boot pinches in
each case. Business and industry has equal responsibility to accept accountability for
containment of NPA. Many of the present defaulters were once trusted and valued
customers of the banks. Why have they become unreliable now, or have they?

The credit portfolio of a nationalised bank also includes a number of low-risk and
risk-free segments, which cannot create NPA. Small personal loans against banks'
own deposits and other tangible and easily marketable securities pledged to the bank
and held in its custody are of this category. Such small loans are universally given in
almost all the branches and hence the aggregate constitutes a significant figure. Then
there is food credit given to FCI for food procurement and similar credits given to
major public Utilities and Public Sector Undertakings of the Central Government. It
is only the residual fragments of Bank credit that are exposed to credit failures and
reasons for NPA can be ascertained by scrutinising this segment.

Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all
pervasive national scourge swaying the entire Indian economy. NPA is a sore throat
of the Indian economy as a whole. The banks are only the ultimate victims, where
life cycle of the virus is terminated.

Now, is not the Government an equal sufferer? What about the recurring loss of
revenue by way of taxes, excise to the government on account of closure of several
lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial
infrastructure erected with considerable investment by the nation? As per statistics
collected three years back there are over two and half million small industrial units
representing over 90 percent of the total number of industrial units. A majority of the
industrial work force finds employment here and the sector's contribution to
industrial output is substantial and is estimated at over 35 percent while its share of
exports is also valued to be around 40 percent. Out of the 2.5 million, about 10% of
the small industries are reported to be sick involving a bank credit outstanding
around Rs.5000 to 6000 Crore, at that period. It may be even more now. These
closed units represent some thousands of displaced workers previously enjoying
gainful employment. Each closed unit whether large, medium or small occupies
costly developed industrial land. Several items of machinery form security for the
NPA accounts should either be lying idle or junking out. In other words, large value
of land, machinery and money are locked up in industrial sickness. These are the
assets created that have turned unproductive and these represent the real physical
NPA, which indirectly are reflected in the financial statements of nationalised banks,
as the ultimate financiers of these assets. In the final analysis it represents instability
in industry. NPA represents the owes of the credit recipients, in turn transferred and
parked with the banks. What is the effect of the dismal situation on the psychology
of entrepreneurs intending fresh entry to business and industry?

Recognizing NPA as a sore throat of the Indian economy, the field level participants
should first address themselves to find the solution. Why not representatives of
industries and commerce and that of the Indian Banks' Association come together
and candidly analyze and find an everlasting solution heralding the real spirit of
deregulation and decentalisation of management in banking sector, and accepting
self-discipline and self-reliance? What are the deficiencies in credit delivery that
leads to its misuse, abuse or loss? How to check misuse and abuse at source? How to
deal with erring Corporates? In short, the functional staff of the Bank along with the
representatives of business and industry have to accept a candid introspection and
arrive at a code of discipline in any final solution. And preventive action to be
successful should start from the credit-recipient level and then extend to the bankers.
RBI and Government of India can positively facilitate the process by providing
enabling measures. Do not try to set right industry and banks, but help industry and
banks to set right themselves. The new tool of deregulated approach has to be
accepted in solving NPA.

Focus at Anomalies at the Credit Delivery Centre -- A Detached

Survey of NPA from within the Credit Agency

[The writer is a retired bank officer in senior management with four decades of past
service in one of the leading nationalised banks. He has overseen working of
branches of the bank as Chief Inspector for three years and as Development
Managers for two terms. He had had occasion to study in-depth working of a
number of branches big and small, as well as regional and zonal offices of the bank
at the closest range with analytical precision. He has also served as Manager/Sr.
Manager/Chief Manager in six large/very large branches in his tenure. He was
extensively engaged in multi-agency sponsored projects of social banking in two
States in the South. His propositions in this article are based on his field experience.
Please also refer to pages titled "My Encounters with Corporate Corruption in my
service" in this context]

The Disorder & Confusion at the Credit Delivery Centres

NPA can be defined as failed credit. The service product has turned into scrap.
Credit delivered is not put to productive application, but sunk into dead assets. But
where has the process gone wrong? Has the credit delivered correctly, properly and
sincerely? Search objectively for an answer examining credit delivery processes
sequentially from within the branch. Select a few branches with high-density NPA
for your study and start methodically from the scratch. Has NPA surfaced due to
defective product engineering by the designer (Banker) or due to misapplication of
the product by the user (credit-customer), or due to effects of the violently changing
economic/ industrial /commercial environment?

The exact stage at which the failure has occurred, which causes NPA in the life cycle
of a project-finance can be identified in a post-mortem review. How a credit given to
an eligible and deserving customer for a viable project can ever become NPA, if it
was efficiently assessed and disbursed resulting in its successful completion and
realisation of project objectives? Can it be only due to 'willful default' by a credit
customer at the last stage? Obviously if the credit is not allowed to a deserving, or
eligible customer and it turns sticky, the financing bank is as much to be blamed as
the customer. Similarly if the project financed is deficient and not viable or credit-
worthy, it is a mistake of judicious assessment by the bank. The disbursement of
project finance is not done efficiently, it may result in time/cost over runs and lead to
trouble to the financing institution. In all these cases it is deficiency of job talents on
the part of the banker, which creates NPAs. NPA can be arrested only through
internal remedies, i.e. improving efficiency of credit assessment and credit delivery
operations at the point of the financing bank in the first instance. Followed by
efficient utilisation credit disbursement by industry and trade.

Looking next at the customer what is the benefit or motive of the corporate customer
to willfully default repayment? And why this tendency has surfaced amongst Indian
corporates in the last two decades? A project is deemed implemented successfully
when it not only attains profitable turnover but also discharges the project-debt as
per schedule. Debt default and successful entrepreneurship in business promotion do
not go together. The assets created in the project are encumbered to the lender and
discharging the debt releases the assets from the banker's charge. The corporate
customer proves his capacity and financial integrity and he commands better
recognition by the banker for his future credit needs only when the project is shown
as self repaying its debts. Still why default takes place and that too willfully? This is
apparently against the laws of economics and law of human nature.

Credit a is product of financial service, which provides redeemable capital to

industry and business. Commencing with borrowed capital a viable project generates
the source for its repayment and reaches the stand-alone or self-sustaining status.
Primarily there are three stages in credit extension, its productive use and its
repatriation. These are, credit delivery, credit utilization and loan liquidation. Unless
you are successful in the earlier stage, you do not reach the next stage. Thus if the
project report and the terms of loan sanction are not handled realistically, the credit
cycle will not pass on to the next stage of successful project implementation. If the
project is not effectively implemented it is futile to aspire for repayment in the
normal course, without the loan becoming an NPA.

The credit customer need not have to search for a source to repay the loan. The
source for repayment is self-generated from within and made available in time
schedules coinciding with the repayment terms. The provision is in-built in the
project structure. The bank-credit should be for productive and self-redeemable
projects and should thus be self-liquidating. This then is the test for a viable project
and the grounds on which the banker accepts to finance the same. The banker has to
possess different knowledge resources and talents to efficiently handle credit-
management at each stage. In particular the banker needs to have two primary
attributes for successful credit extension. These are talent (appropriate knowledge
and foresight) and integrity. The customer must possess entrepreneur ability and
integrity. We may call it as two 'C's (character and capacity) to be present commonly
with the financier and promoter. These are the human factors. Additionally the
project financed needs to possess two characteristics, technical feasibility and
financial viability.

If the basic ingredients are lacking in the banker, the loan released by him will not
be productively employed and it may result in potential NPA. Decades back credit
risk was not so extensive, when banking was operated purely on a security-oriented
approach. Accept and hold in your custody a marketable security and release the
advance. Allow the activity to be carried out by the customer. Release the security
when repayment is made, and in case of non-repayment dispose of the security and
reimburse your exposure. It is almost zero risk oriented.

Subsequently when the country was industrialised in the 60s industry was protected
by the government policies. Imports were discouraged. Units enjoyed a captive
demand without competition and hence there was no problem for the banker. But it
is not so today, when banks are called upon to extend multiple types finance for
diverse needs of capital for industry, business and other economic activities open to
global competition. Character and capacity are still the basic ingredient, but essence
of these terms has acquired substantial additional content and meaning.

The action or initiative is with the customer at the stage of the preparation of the
project. It is with the banker in project appraisal and loan sanction including the
setting up of terms and conditions. If both act prudently the first stage is passed. In
the second stage the implementation responsibility is with the customer and
controlling responsibility with the banker. In the final stage it is mainly the
responsibility of the customer. A healthy joint approach promotes the cause of both,
the absence of which can ruin either or both.

Your analysis of NPA study should indicate whether the roots of NPA lie in the first,
second or third stages of the life span of the service product. Wrong handling at any
stage can obviously create NPA. Credit, which undergoes infant-mortality at the
outset itself or after a short span of time after trial production, is on account of
deficiency in credit assessment and credit delivery. The loan is released, but not
utilised for the purpose it was allowed and no assets are held or only negligible
assets are seen. The seeds are sown but the plants never sprout and there is no
question of the crops to harvest. This can be attributed to gross negligence,
inefficiency or lack of training and knowledge and finally lack of integrity in respect
of the person(s) involved. These are the within factors responsible for accretion to
the pool of Bank's NPA burden- lack of talent and lack of integrity.

Failure in the second stage is generally on account of default on the part of the
banker in carrying out his functions with foresight and wisdom. This goose will lay
the golden eggs, but without waiting, if you cut the goose out of eagerness for a
quick meal, it results in a sordid plight for the person of hasty action. There are two
manifestos for the branch manager, i.e. the Project Report and the Memorandum
Of Loan Sanction by a higher authority stipulating terms and conditions. In other
words this is the outer limit of the delegated authority for the Bank Manager in the
exercise of credit management with reference to this customer. It is also a contract
between the financing bank and the borrowing customer. The project report is the
source document and the loan sanction record is a derived instrument. The sanction
should be based on the project report, and if this is not so and if the sanction is at
variance, the project report must be revised and approved/accepted by all. Once a
letter of sanction is received, the existence of the project report is forgotten and the
assumptions contained therein are totally ignored. No doubt the sanctioned terms
represent the legal contract between the credit customer and the banker, but the
project report alone contains nucleus for the successful culmination of the activity
and creating the source for repayment. During implementation of the project in the
second stage involving disbursement of funds progress may not take place as
scheduled in the project. The situation needs a flexible attitude on the part of the
Bank manager, but if rigid adherence is resorted to the terms of sanction, it brings
adverse effects to the detriment of the interests of both the banker and the credit
customer. These problems were not felt so much earlier, when in the inflationary
economy, when the security financed was regularly appreciating in value, and
marketing the products produced, even of inferior quality was never felt a problem
in a captive and protected market.

A concrete example can explain this. The project outlay is Rs.5 Lacs. Credit
customer equity is Rs.2.0 Lacs and Bank loan Rs.3.0 Lacs. Credit customer's equity
includes margin for working capital Rs.50,000/-.The Loan was to be released in
January 1998 and the project to be completed in the same year. The interest and first
installment to be repaid before March 1999. Now there is delay initially in the bank
completing the documents and other legal formalities and the loan was released only
in March 1998. On the credit customers part there is delay of three months in the
completion of the project. However the credit customer on his part did bring
Rs.25000 additionally. Now events as they have unfolded are at variance with the
assumptions in the project report. Thus the implementation report is different from
the project in certain details. As at 31st March 1999, when the project is still
incomplete, the bank manager arbitrarily recovers the first installment and interest,
as per the terms of sanction. If this happens, it is then woe to the project, which is
still incomplete. The unit financed faces liquidity crunch due to contraction in
working capital caused by term loan repayment therefrom and is unable to either
complete the project or provide the margin and avail the working capital. Here the
bankers switche to the 3rd stage in the life cycle, while the second stage is still
incomplete. Recovery can come only from generated funds and not from the source
of finance for the project.

Two decades of regimented banking and directed approach to credit delivery has
deprived bank managers of the instinct skill and knowledge. Lack of structured
career path and restricted experience through vertical movement in the hierarchical
ladder without a horizontal exposure and without imparting training in organisation
and business management needed for a understanding and for the interpretation of
the current business environment, are the sins of a blind promotion policy more
oriented on subjectivity than objective merit assessment. Nationalised banking did
not produce a spring of talent resources from within. Directive Inputs and course-
direction came externally from RBI and Finance Ministry. Execution responsibility
was delegated to the nationalised banks. The system did not promote initiative and
talent, but bred corruption and nepotism.

Before nationalisation banks were in the private sector. Indian banking developed on
ethnic and regional set-up. Every community and every section wanted to start a
bank. The entire social set up was based on the joint Hindu family culture and the
business looked to class banking for a select segment of society. Banking was not
professionalised, as was major business and industry, which utilized bank finance.
The trader in the Mandi, the rice and cotton and oil miller did not believe that
professional education is necessary for doing business. So too did bankers. The
average bank employee, including a part of the top executives did have no
professional education or education in modern management techniques.

Bureaucratic approach and lack of talent in the service provider can also generate
NPA. That happens when a project is grossly under-financed. It will also happen
when the project initially is scrutinised at the lower level and found viable based on
well-defined assumptions, but when finally sanctioned at a higher level, several
stipulations like higher rate of interest or higher margin requirement on the credit
customer stipulated like condition to raise additional internal finance by way of
unsecured loans were included without looking into the feasibility and sensitivity of
the variations on the overall viability of the project.
Loyalty to the top man (CEO) and understandings his mind and acting as per his
dictates and desires is considered as a main service-ethics. Corporate management in
India is generally a one-man dominated show. This is the legacy of the spirit of the
patriarch in the decade-old joint-family culture, which however has vastly
dismantled. This management philosophy is against modern management concepts
of defining a goal and mission for the organization. An individual is fragile and
fickle minded. In the modern world, where consumerist motives predominates in the
minds of all, his value systems are not dependable. Instead of loyalty to the mission
and goals of the organization, it turns to be loalty to the top boss, and to every top
boss changing in intervals of 3 to 5 years.

This is the scene of Indian Banking struggling hard to transition from old primitive
systems and values to modern professional Business Ethics and Corporate
Governance.

Diagnosis of the Root Cause and Tracing the Solution -- Self-Introspection

by Industry, Business and Banks

"The health of banks is determined by many factors, the most significant

being a strong capital base, adequate provisioning, the nature of investments
made, the quality of asset management, the skill and commitment of
officials, quantity and quality of informational data, the internal incentive
mechanisms and above all the nature of governmental interference, in
particular by the monetary authorities of the country in question."

Anyone could with conviction and candour say that both the management of the
nationalised banks, and business & industry are equally responsible for the
emergence of NPA at alarming levels. The root causes are inefficiency and
corruption. It is due to lack of capacity and character at both places. This
inefficiency and corruption can be traced from the history of the decadence that the
social, political and economic institutions of our country underwent during the last
six decades commencing from the Second World War.

The Indian social system signifying the inherent values of business and industry
underwent progressive erosion in the last five or six decades, since the second World
War. The era of pioneering philanthropic industrial barons like GD Birla or JRD
Tata, were succeeded by annals of short-sighted industrialists, who desire more to
get riches through any means of manipulation and speculative maneuvers instead
through bonafide efforts and honest means. Today we hear stories of Harshad
Mehta-s and Ketan Parekh-s frequently. And it will also be seen that in every scam
in the country the banks are inextricably involved with a sordid role.

The fall in the standards of public life is vividly brought out in the very first chapter
titled "Discipline and its Qualities" in my Project Literature on "Integrity in Public
Life & Services" as under:

"… but in recent times old traditions are breaking very fastly. This tendency
in our social values is aptly noticed and pointed out by Mr.K.Santhanam in his
very informative Report, four decades ago. "In the pre-war and pre-
independence era, a man was known in society by what he was. Today, he is
known by what he has."

This is what Mr. Santhanam has to say:

"Thus, there has come about a certain amount of weakening of the old system of
values without its being replaced by an effective system of new values. The relative
fixity of ways and aspirations of former times and the operation of a moral code
tending towards austerity, frugality and simplicity of life profoundly influenced by
the mechanism of social control and social responses. In the emerging Indian society
with its emphasis on purposively initiated process of urbanisation, along side of the
weakening of the social norms of the simpler society signs are visible of
materialism, growing impersonalism, importance of status resulting from possession
of money and economic power, group loyalties, intensification of parochial affinity,
unwillingness or inability to deal with deviations from the highest standards of
political, economic and social ethics, profession of faith in the rule of law and
disregard of where adherence thereto is not convenient"

Diagnosis of Corruption Scene in India by Central Vigilance Commission

</SPAN< FONT>

Dealing with the topic "Zero tolerance to corruption", the Commissioner of Central
Vigilance has diagnosed the corruption scenario prevailing in India as under:

"As we look at the corruption scene today, we find that we have reached this
stage because the corrupting of the institutions in turn has finally led to the
institutionalisation of corruption. As the Prime Minister pointed out, the
failure to deal with corruption has bred contempt for the law. When there is
contempt for the law and this is combined with the criminalisation of
 politics, corruption flourishes. It is the honest public servant who tries to
implement the law who becomes a misfit under such a situation.

As of today, entire sections of our public life have become corrupt, as people
like SS Gill in his book THE PATHOLOGY OF CORRUPTION have
pointed out. As I see it, there are five key players in our Indian corruption
scene. These are the corrupt politician (neta), the corrupt bureaucrat (babu),
the corrupt business (lala), the corrupt NGO (jhola) and finally the criminal
(dada). There are five reasons why our system encourages corruption. These
are (i) scarcity of goods and services, (ii) lack of transparency, (iii) red tape
and delay due to obsolete rules and procedures which are time consuming
and encourage speed money, (iv) cushions of legal safety which have been
laid down by various pronouncements of the courts and CATs on the
principle that everybody is innocent till proved guilty. The net result is that
the corrupt are able to engage the best lawyers and quibble their way through
the system. (v) Finally, biradri or tribalism, where the corrupt public servants
protect each other. We talk about people being thick as thieves not thick as
honest men!

But why should this happen at all? The outlook of the individual, business men and
public servants got depraved in the aftermath of the 2nd World and subsequently on
account of Government assuming more and more powers to totally control the
economic life of citizens in the country, inflating the powers of bureaucrats in the
name of economic planning. The resultant situation that developed is narrated in the
same chapter referred earlier, as under:

The Second World War provided a fillip to the growth of corruption. It got an
impetus in the post war flush of money and consequent inflation. The subsequent
period from the Seventies witnessed the start of the era of political corruption and
criminalization of politics, of conducting or allowing corruption in the electoral
process using money power and with links between criminals and politicians
resulted in the total demoralisation of our public lives. Despite all this, what little
progress we make to produce eminence intellectuals in our society is solely on
account of our ancient culture and traditional family way of life. Today the good
majority is dumb in public life. Many educated citizens do not even cast their
franchise.

Growing indiscipline prevailing at the business and industry adversely affect the
entire society and set pace to all our present social problems. Engaged in commercial
or industrial activities and dealing with vast resources, business enterprises as part of
their activities build wide interactions with the government and public authorities.
Prompted by greed and the desire for making quick or easy money, and possessed
with vast resources garnered through black money hoarding, there is adequate scope
for businessmen and industrialist in this environment to use corrupt ways of getting
their things achieved. Corruption is fueled by greed. It is an attempt to look for short
cut means for getting quick money. Business and industry promote corruption and
public service thrives as the beneficiary of this evil source of earnings. This
phenomenon is well documented in Santhanam Committee Report, as described
below.

Origin of Corruption in our Society - Analysis by

Santhanam Committee Report (1964)

"Corruption can exist only if there is some one willing to corrupt and capable
of corrupting. We regret to say that both this willingness and capacity to
corrupt is found in a large measure in the industrial and commercial classes.
The ranks of these classes have been swelled by the speculators and
adventurers of the war period. To these corruption is not only an easy
method to secure large unearned profits, but also the necessary means to
enable them to be in a position to pursue their vocations or retain their
position among their own competitors. It is these persons who indulge in
evasion and avoidance of taxes, accumulate large amounts of unaccounted
money by various methods such as obtaining licences in the names of bogus
firms and individual's, trafficking in licences, suppressing profits by
manipulation of accounts to avoid taxes and other legitimate claims on
profits, accepting money for transactions put through without accounting for
it in bills and accounts (on-money) and under-valuation of transactions in
immovable property. It is they who have control over large funds and are in a
position to spend considerable sums of money in entertainment. It is they
who maintain an army of liaison men and contract men, some of whom live,
spend and entertain ostentatiously"

To cite a concrete example of the demoralisation has set in in the country can be
seen from the way the functioning of The Board for Industrial and Financial
Reconstruction of sick industrial companies (special provisions) Act of 1985 is
abused.
"The Board was set up 'with a view to securing the timely detection of sick and
potentially sick companies owning undertakings and to identify and implement
speedy ameliorative remedial measures. Sadly, as with everything above, the
provisions of SICA were misused. Clever corporates to ward off winding up
petitions and other legal cases pending against them, registered themselves with
BIFR, so as to take shelter under section 22 of SICA, which provided a protective
umbrella against those cases during period of such registration." (Source "Banking
through the decades" by PSV Chari & PS Narasimhan published in "The Hindu
Survey of Indian Industry 1999")

It was intended to be brake to curb sickness, but it served as an powerful engine to

generate more NPAs. Rightly bankers now demand the abolition of BIFR as one of
the remedial measures for arresting further growth of NPAs.

The Vicious Atmosphere prevailing in Nationalised Banks

I have created this web site to fight corporate corruption prevailing in public sector
banks. I have given material data about such corruption in the chapters describing
"My Encounters with Corporate Corruption in my Service". After retirement I have
submitted the incidents in seven complaints with complete facts and material
evidence to the Bank Chairman though the ED, the highest executives of the Bank.
The response - it is obvious - there is not even an acknowledgement. Majority of the
officers are not dishonest. By and large the employees are not dishonest. But these
employees and officers know, who in their Banks are corrupt and how much
corruption is there. If anywhere there is more than 30% NPA, there is high
probability of widespread corruption, with the corrupt holding a shield from being
detected or punished. But there are NPA points with incidence as much as 70%. I
submitted a complaint on Pune Branch of MYBANK in 1994. The complaint was
not considered and acted. But the fact is that this particular branch happens to be the
leader in terms of largest of quantum of NPA in the Western Zone of MYBANK.
The then Zonal Manage of Bombay wanted to act on my complaint, but more
powerful executives at the head office thought differently. They chose to harass me
for making the complaint.

My recent complaints submitted relate to the Delhi Zone of the Bank. Incidentally
this Zone has the credit to possess the maximum NPA within the Bank.

The Turning Point - Impact of the Economic Reforms from 1991 onwards

Today government has divested much of the controls, quotas and permits.
Quantitative import restrictions have been withdrawn and industrial-licensing
systems has been liberalised to a very large extent. Inefficient public enterprises
boarding corrupt public servants are being dismantled progressively through the
process of corporatisation of public enterprises. The era of maintaining contact men,
liaison agents and frequent visits to Delhi for political leverage are things of the past.

Internet has changed our life style. Information about every Government
Department, Public Sector Corporation or Public Utility Services are on the world
wide web at a click's distance at your desktop. Every citizen has an equal access to
information. This has provided remarkable transparency in our administration.

On the other hand industry no longer is pampered and favoured through protective
economy. There is free competition not merely at national level, but at the global
level. Business and industry have to change their mindset. The environment that was
breeding corruption is given a go bye. Tax laws are being simplified and
rationalised. Enormous opportunities are invested to the new generation of our
young men and women and made within reach through bonafide efforts. Be honest
and find your way to excellence. It is within our reach. Or act otherwise and get
struck. The choice lies with us, and with each one of us. Reforms will have meaning,
only when all of us reform our mindset.

Industry has to compete at the global level and capital has to be sourced from large
number of investors at the national or international level. Corporate governance and
corporate ethics have become essential for business success and to infuse confidence
with the stakeholders. The era of easy profits through questionable ways are now
gone bye.

At the Corporate level power and authority have to be decentralised. This is one of
the objectives of corporate governance. Everyone must have sufficient power to play
his effective role for the fulfillment of the corporate mission, and achievement of the
accepted corporate goals.

The Reforms in Banking Sector

We have analysed the reforms in more detail. Banks have been freed from all kinds
of regulations. They have to compete with each other, public sector banks, new
private sector banks and old private sector banks and foreign banks. Government
banks have to turn to the market for fresh capital. There can be no more burkha to
hide their weaknesses and failure through shady balancing sheeting. BSRB is
abolished. Dynamic management of Corporation Bank and Oriental Bank of
Commerce have shown the new path of progress through quality in banking.
Dull heads and false pretenders cannot use influence peddling and secure the
position as Bank Chairman or Executive Director in the future. The writing in the
wall is clear. Either turn a new leaf or get lost. This credit to goes CII (Confederation
of Indian industry) to make the bold statement. If unfit to manage efficiently, close
them- the three weak banks. There were powerful protests. But the message did have
its positive effect. The three banks have understood, that none, not even God will
salvage them, if they do not mend their ways and show a turn-about in their
performance. They have now declared "We are no longer weak banks and we have
turned about".

My web site is addressed to the community of bank officers and bank employees.
Do not be tolerant to corruption in your institutions, if you want to salvage
nationalised banking and more than that Indian Banking in the coming decades.
When you get rid of corporate corruption in your Institutions, you will be able to
bring down NPA level, and not until then.

"Any amount of regulation would be futile if an ethical culture of compliance is not

fostered among lenders and borrowers, Mr P.S. Shenoy, Chairman, Bank of Baroda,
said on the sidelines of a seminar on financial markets. "Pressure should be put on
borrowers from peers, society, spiritual leaders and such influential quarters to
reduce default and control non-performing assets - an effective tool that was
prevalent in traditional money-lending such as hundis," Mr Shenoy said.
[BUSINESS LINE - Tuesday, Jan 22, 2002 Non-Performing Assets - Compliance
key for cutting.]

In Retrospect - Efforts, Results & Review

[Excerpts from address by Deputy Governor (Shri G.P.Muniappan) at CII Banking
Summit 2002 at Mumbai on April 1, 2002 ]
"It is not Anymore Lenders' Problem alone but Equally
that of Borrowers too !"

"The high level of NPAs in banks and financial institutions has been a matter of
grave concern to the public as bank credit is the catalyst to the economic growth of
the country and any bottleneck in the smooth flow of credit, one cause for which is
the mounting NPAs, is bound to create adverse repercussions in the economy. NPAs
are not therefore the concern of only lenders. I consider that forum like this,
comprising of representatives of a major section of the beneficiaries of the financial
system, should equally get concerned in a serious way on what they can do to
address the gravity of the NPA problem of banks. I would rather urge them to lend a
helping hand in the ongoing efforts of banks, and financial institutions to recover
bad debts and arrest fresh accretions of NPAs.
Present Prudential Regulations

"The prudential norms on income recognition, asset classification and provisioning

thereon, are implemented from the financial year 1992-93, as per the
recommendation of the Committee on the Financial System (Narasimham
Committee I). These norms have brought in quantification and objectivity into the
assessment and provisioning for NPAs. We at the central bank constantly endeavour
to ensure that our prescriptions in this regard are close to international norms. We
are neither strict nor lax but just correct in tune with our needs and capabilities.

"Under the prudential norms laid down by RBI

• Income should not be recognised on NPAs on accrual basis but should be

booked only when it is actually received in respect of such accounts.
• An asset is considered as "non-performing" if interest or installments of
principal due remain unpaid for more than 180 days (the lag would get
reduced to 90 days from March 31, 2004 to conform to international norms).
Any NPA would migrate from sub-standard to doubtful category after 18
months (as against 12 months under international norms). It would get
classified as loss asset if it is irrecoverable or only marginally collectible.
• The banks should make full provision for loss assets, 100 per cent of the
unsecured portion of the doubtful asset plus 20 to 50 per cent of the secured
portion (depending on the period for which the account is doubtful), and a
general 10% (it is 20 per cent under international norms) of the outstanding
balance in respect of sub-standard assets."

"Detailed guidelines have been issued by RBI in October 2000 on valuation and
provisioning for investment portfolio including credit substitutes"

Impact of NPAs on banks' profits and lending prowess

"The efficiency of a bank is not always reflected only by the size of its balance sheet
but by the level of return on its assets. NPAs do not generate interest income for the
banks, but at the same time banks are required to make provisions for such NPAs
from their current profits.

NPAs have a deleterious effect on the return on assets in several ways -

• They erode current profits through provisioning requirements

• They result in reduced interest income
 • They require higher provisioning requirements affecting profits and accretion
to capital funds and capacity to increase good quality risk assets in future, and
• They limit recycling of funds, set in asset-liability mismatches, etc

There is at times a tendency among some of the banks to understate the level of
NPAs in order to reduce the provisioning and boost up bottom lines. It would only
postpone the < CBI and vigilance to management senior the subjecting besides
internationally, credibility losing weak as branded getting like consequences,
disastrous with banks of some in happened effect>

In the context of crippling effect on a bank's operations in all spheres, asset quality
has been placed as one of the most important parameters in the measurement of a
bank's performance under the CAMELS supervisory rating system of RBI.

Movement of NPAs over the years

"A glance through the statistics on the movement of NPAs of public sector banks
since introduction of prudential norms in 1992-1993 will help us to understand the
extent to which the public sector banks have made progress in reducing their NPA
levels

"The level of gross and net NPAs has been sliding down over the years. Gross NPA
had come down from 23.18% in 1992-93 to 12.40% in 2000-01. Net NPA also
moved down from 14.46% in 1993-94 to 6.74% in 2000-01. Still the NPA level can
be considered of staggering magnitude in absolute terms costing the public sector
banks more than Rs.5000 crores annually by way of loss of interest income, besides
servicing and litigation costs. To be fair, I have to state that a major portion of the
NPAs was a legacy of the pre-prudential days, when banks were accounting for
interest as income on accrual basis even when the underlying advances were not
performing.

"It will be interesting to have a look at the movement of NPAs (gross and net), as a
percentage of advances, group-wise over the last four years. This will give an idea of
where banks, as different groups, stand in regard to their NPAs

"It may be observed that the malady of high level of NPAs eroding the profitability
of banks is not confined to public sector banks alone, but it is equally present in the
private sector banks too. While some of the foreign banks loan portfolio had been
affected by a few large accounts turning NPA, it is a matter of concern that some of
the new private sector banks which started off on a clean slate had acquired so
quickly such a large level of NPAs
Implications of NPAs - Supervisory action that may arise
on account of high level of NPAs

"One of the trigger points in the proposed Prompt Corrective Action (PCA)
mechanism [which was widely circulated by RBI through the public domain] is the
level of net NPAs. When the trigger point under the mechanism is activated by the
performance of a bank, the mandatory actions would follow by way of restriction on
expansion of risk-weighted assets, submission and implementation of capital
restoration plan, prior approval of RBI for opening of new branches and new lines of
business, paying off costly deposits and special drive to reduce the stock of NPAs,
review of loan policy, etc.

Other implications

"The most important business implication of the NPAs is that it leads to the credit
risk management assuming priority over other aspects of bank's functioning. The
bank's whole machinery would thus be pre-occupied with recovery procedures rather
than concentrating on expanding business.

"As already mentioned earlier, a bank with high level of NPAs would be forced to
incur carrying costs on a non-income yielding assets. Other consequences would be
reduction in interest income, high level of provisioning, stress on profitability and
capital adequacy, gradual decline in ability to meet steady increase in cost, increased
pressure on net interest margin (NIM) thereby reducing competitiveness, steady
erosion of capital resources and increased difficulty in augmenting capital resources.

"The lesser appreciated implications are reputational risks arising out of greater
disclosures on quantum and movement of NPAs, provisions etc. The non-
quantifiable implications can be psychological like 'play safe' attitude and risk
aversion, lower morale and disinclination to take decisions at all levels of staff in the
bank.

Management of NPAs

"The quality and performance of advances have a direct bearing on the profitability
and viability of banks. Despite an efficient credit appraisal and disbursement
mechanism, problems can still arise due to various factors. The essential component
of a sound NPA management system is quick identification of non-performing
advances, their containment at minimum levels and ensuring that their impingement
on the financials is minimum.
"The approach to NPA management has to be multi-pronged, calling for different
strategies at different stages a credit facility passes through. RBI's guidelines to
banks (issued in 1999) on Risk Management Systems outline the strategies to be
followed for efficient management of credit portfolio. I would like to touch upon a
few essential aspects of NPA management in this paper.

Excessive reliance on collateral has led Indian banks nowhere except to long drawn
out litigation and hence it should not be sole criterion for sanction. Sanctions above
certain limits should be through Committee which can assume the status of an
'Approval Grid'.

"It is common to find banks running after the same borrower/borrower groups as we
see from the spate of requests for considering proposals to lend beyond the
prescribed exposure limits. I would like to caution that running after niche segment
may be fine in the short run but is equally fraught with risk. Banks should rather
manage within the appropriate exposure limits. A linkage to net owned funds also
needs to be developed to control high leverages at borrower level.

"Exchange of credit information among banks would be of immense help to them to

avoid possible NPAs. There is no substitute for critical management information
system and market intelligence.

We have come across cases of excellent appraisal and compliance with sanction
procedures but no control at disbursement stage over compliance with the terms of
sanction. To overcome this problem a mechanism for independent review of
compliance with terms of sanction has to be put in place.

"Close monitoring of the account particularly the larger ones is the primary solution.
Emerging weakness in profitability and liquidity, recessionary trends, recovery of
installments / interest with time lag, etc., should put the banks on caution. The
objective should be to assess the liquidity of the borrower, both present and future
prospects. Loan review mechanism is a tool to bring about qualitative improvement
in credit administration. Banks should follow risk rating system to reveal the risk of
lending. The risk-rating process should be different from regular loan renewal
exercise and the exercise should be carried out at regular intervals. It is not enough
for banks to aspire to become big players without being backed by development of
internal rating models. This is going to be a pre-requisite under the New Capital
Adequacy framework and if a bank wants to be an international player, it shall have
to go for such a system.
"Banks should ensure that sanctioning of further credit facilities is done only at
higher levels. A quick review of all documents originally obtained and their validity
should be made. A phased programme of exit from the account should also be
considered.

Measures Initiated by RBI and Government of India for Reduction of NPAs

"As regards internal factors leading to NPAs, the onus rests with the
banks themselves. This calls for organisational restructuring,
improvement in managerial efficiency, skill upgradation for proper
assessment of creditworthiness and a change in the attitude of the
banks towards legal action which is traditionally viewed as a
measure of the last resort. These are the elements on the agenda of
the second phase of reforms.
[ Dr.Bimal Jalan, Governor, RBI, in a speech titled "Banking and
Finance in the New Millennium." delivered at 22nd Bank
Economists Conference, New Delhi,15th February, 2001]

Compromise settlement schemes

The RBI / Government of India have been constantly goading the banks to take steps
for arresting the incidence of fresh NPAs and have also been creating legal and
regulatory environment to facilitate the recovery of existing NPAs of banks. More
significant of them, I would like to recapitulate at this stage.

• The broad framework for compromise or negotiated settlement of NPAs

advised by RBI in July 1995 continues to be in place. Banks are free to design
and implement their own policies for recovery and write-off incorporating
compromise and negotiated settlements with the approval of their Boards,
particularly for old and unresolved cases falling under the NPA category. The
policy framework suggested by RBI provides for setting up of an independent
Settlement Advisory Committees headed by a retired Judge of the High Court
to scrutinise and recommend compromise proposals
• Specific guidelines were issued in May 1999 to public sector banks for one
time non discretionary and non discriminatory settlement of NPAs of small
sector. The scheme was operative up to September 30, 2000. [Public sector
banks recovered Rs. 668 crore through compromise settlement under this
scheme.]
 • Guidelines were modified in July 2000 for recovery of the stock of NPAs of
Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were
valid up to June 30, 2001 helped the public sector banks to recover Rs. 2600
crore by September 2001]
• An OTS Scheme covering advances of Rs.25000 and below continues to be in
operation and guidelines in pursuance to the budget announcement of the
Hon'ble Finance Minister providing for OTS for advances up to Rs.50,000 in
respect of NPAs of small/marginal farmers are being drawn up.

Measures for faster legal process

Lok Adalats

Lok Adalat institutions help banks to settle disputes involving accounts in "doubtful"
and "loss" category, with outstanding balance of Rs.5 lakh for compromise
settlement under Lok Adalats. Debt Recovery Tribunals have now been empowered
to organize Lok Adalats to decide on cases of NPAs of Rs.10 lakhs and above. The
public sector banks had recovered Rs.40.38 crore as on September 30, 2001, through
the forum of Lok Adalat. The progress through this channel is expected to pick up in
the coming years particularly looking at the recent initiatives taken by some of the
public sector banks and DRTs in Mumbai.For more details about Lok Adalats please
refer to page Lok Adalat

Debt Recovery Tribunals

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act,
passed in March 2000 has helped in strengthening the functioning of DRTs.
Provisions for placement of more than one Recovery Officer, power to attach
defendant's property/assets before judgement, penal provisions for disobedience of
Tribunal's order or for breach of any terms of the order and appointment of receiver
with powers of realization, management, protection and preservation of property are
expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs
in the times to come.

Though there are 22 DRTs set up at major centres in the country with Appellate
Tribunals located in five centres viz. Allahabad, Mumbai, Delhi, Calcutta and
Chennai, they could decide only 9814 cases for Rs.6264.71 crore pertaining to
public sector banks since inception of DRT mechanism and till September 30,
2001.The amount recovered in respect of these cases amounted to only Rs.1864.30
crore.
Looking at the huge task on hand with as many as 33049 cases involving
Rs.42988.84 crore pending before them as on September 30, 2001, I would like the
banks to institute appropriate documentation system and render all possible
assistance to the DRTs for speeding up decisions and recovery of some of the well
collateralised NPAs involving large amounts. I may add that familiarisation
programmes have been offered in NIBM at periodical intervals to the presiding
officers of DRTs in understanding the complexities of documentation and
operational features and other legalities applicable of Indian banking system. RBI on
its part has suggested to the Government to consider enactment of appropriate penal
provisions against obstruction by borrowers in possession of attached properties by
DRT receivers, and notify borrowers who default to honour the decrees passed
against them.

Circulation of information on defaulters

The RBI has put in place a system for periodical circulation of details of willful
defaults of borrowers of banks and financial institutions. This serves as a caution list
while considering requests for new or additional credit limits from defaulting
borrowing units and also from the directors /proprietors / partners of these entities.
RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and
above) against whom suits have been filed by banks and FIs for recovery of their
funds, as on 31st March every year. It is our experience that these measures had not
contributed to any perceptible recoveries from the defaulting entities. However, they
serve as negative basket of steps shutting off fresh loans to these defaulters. I
strongly believe that a real breakthrough can come only if there is a change in the
repayment psyche of the Indian borrowers.

Recovery action against large NPAs

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI
had advised the public sector banks to examine all cases of willful default of Rs 1
crore and above and file suits in such cases, and file criminal cases in regard to
willful defaults. Board of Directors are required to review NPA accounts of Rs.1
crore and above with special reference to fixing of staff accountability.

On their part RBI and the Government are contemplating several supporting
measures including legal reforms, some of them I would like to highlight.

Asset Reconstruction Company:

An Asset Reconstruction Company with an authorised capital of Rs.2000 crore and
initial paid up capital Rs.1400 crore is to be set up as a trust for undertaking
activities relating to asset reconstruction. It would negotiate with banks and financial
institutions for acquiring distressed assets and develop markets for such assets..
Government of India proposes to go in for legal reforms to facilitate the functioning
of ARC mechanism

[For latest information on ARC formation please refer to pages dealing with the
subject ARC/SC Ordinance 2002

Legal Reforms

The Honourable Finance Minister in his recent budget speech has already announced
the proposal for a comprehensive legislation on asset foreclosure and securitisation.
Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act
in December 2002.

Corporate Debt Restructuring (CDR)

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to

provide a timely and transparent system for restructuring of the corporate debts of
Rs.20 crore and above with the banks and financial institutions. The CDR process
would also enable viable corporate entities to restructure their dues outside the
existing legal framework and reduce the incidence of fresh NPAs. The CDR
structure has been headquartered in IDBI, Mumbai and a Standing Forum and Core
Group for administering the mechanism had already been put in place. The
experiment however has not taken off at the desired pace though more than six
months have lapsed since introduction. As announced by the Hon'ble Finance
Minister in the Union Budget 2002-03, RBI has set up a high level Group under the
Chairmanship of Shri. Vepa Kamesam, Deputy Governor, RBI to review the
implementation procedures of CDR mechanism and to make it more effective. The
Group will review the operation of the CDR Scheme, identify the operational
difficulties, if any, in the smooth implementation of the scheme and suggest
measures to make the operation of the scheme more efficient. For more information
please refer the details of CDR Scheme given in another page.

Credit Information Bureau

Institutionalisation of information sharing arrangements through the newly formed

Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering
the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise
the scheme of information dissemination on defaults to the financial system. The
main recommendations of the Group include dissemination of information relating
to suit-filed accounts regardless of the amount claimed in the suit or amount of credit
granted by a credit institution as also such irregular accounts where the borrower has
given consent for disclosure. This, I hope, would prevent those who take advantage
of lack of system of information sharing amongst lending institutions to borrow
large amounts against same assets and property, which had in no small measure
contributed to the incremental NPAs of banks. More information on CIBIL schme
given in a separate page.

Proposed guidelines on willful defaults/diversion of funds

RBI is examining the recommendation of Kohli Group on willful defaulters. It is

working out a proper definition covering such classes of defaulters so that credit
denials to this group of borrowers can be made effective and criminal prosecution
can be made demonstrative against willful defaulters.

Corporate Governance

A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up by the
Reserve Bank to review the supervisory role of Boards of banks and financial
institutions and to obtain feedback on the functioning of the Boards vis-à-vis
compliance, transparency, disclosures, audit committees etc. and make
recommendations for making the role of Board of Directors more effective with a
view to minimising risks and over-exposure. The Group is finalising its
recommendations shortly and may come out with guidelines for effective control
and supervision by bank boards over credit management and NPA prevention
measures. The report of the group is now published and discussed in another page.

Special Mention Accounts - Additional Precaution at the Operating Level

In a recent circular, RBI has suggested to the banks to have a new asset category -
`special mention accounts' - for early identification of bad debts. This would be
strictly for internal monitoring. Loans and advances overdue for less than one
quarter and two quarters would come under this category. Data regarding such
accounts will have to be submitted by banks to RBI.

However, special mention assets would not require provisioning, as they are not
classified as NPAs. Nor are these proposed to be brought under regulatory oversight
and prudential reporting immediately. The step is mainly with a view to alerting
management to the prospects of such an account turning bad, and thus taking
preventive action well in time. An asset may be transferred to this category once the
earliest signs of sickness/irregularities are identified. This will help banks look at
accounts with potential problems in a focused manner right from the onset of the
problem, so that monitoring and remedial actions can be more effective. Once these
accounts are categorised and reported as such, proper top management attention
would also be ensured.

Borrowers having genuine problems due to temporary mismatch in funds flow or

sudden requirements of additional funds may be entertained at the branch level, and
for this purpose a special limit to tide over such contingencies may be built into the
sanction process itself. This will prevent the need to route the additional funding
request through the controlling offices in deserving cases, and help avert many
accounts slipping into NPA category.

Introducing a `special mention' category as part of RBI's `Income Recognition and

Asset Classification norms' (IRAC norms) would be considered in due course.