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Table of Contents - The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions - List of Articles

i. ii. iii. iv. v. vi. vii. NPA the Unbridled Virus and an Emerging Challenge to Indian Banking System - The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions Adverse Effects of NPA on the Working of Commercial Banks The Unseen and Unperceived Edge of NPA Focus at Anomalies at the Credit Delivery Centre - A Detached Survey of NPA from within the Credit Agency Diagnosis of the Root Cause and Tracing the Solution -- Self-Introspection by Industry, Business and Banks In Retrospect - Efforts, Results & Review Measures Initiated by RBI and Government of India for Reduction of NPAs

NPA the Unbridled Virus and an Emerging Challenge to Indian Banking System - The Emergence of NPA in Indian Banking & Financial Institutions and its Dimensions
[The article gives the position of Indian Banking as seen in the year 2001]

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressin g 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 pe riod 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 an d 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 amounte d 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 we re effected, thus signifying a losing battle in containing this menace.
Table No. I NPA Statistics -All Scheduled Commercial Banks .................................. (Amount in Crores) Year 1997-98 1998-99 1999-2000 2000-2001 %-age of %-age of Gross Net NPA to NPA to total net advances advances 14.4 7.3 14.7 7.6 12.7 6.8 11.4 6.2

Total Gross Net Net Advances NPA Advances NPA 352697 399496 475113 558766 50815 58722 60408 63883 325522 367012 444292 526329 25734 27892 30211 32632

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. Ther e 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 of Gross Net Net NPA to NPA to NPA total net advance advance s s> 2028 17.8 % 9.2 % 5 2123 16.0% 8.2% 2 2421 15.9% 8.1% 1 2618 14.00% 7.9%> 8 2796 12.39% 6.74% 7

Table -2 : NPA of Total Gross PSBs Advance NPA (Amount in Crores) Year s 4357 7 4556 3 5171 0 5303 3 5477 3

1996-97 1997-98 1998-99 1999-2000 2000-2001

244214 284971 325328 380077 442134

Table -3: NPA of State Bank Group.. (Amount in Crores) Year 1997-98 1998-99 1999-2000 2000-2001

Total Gross Net Advances NPA NPA 113360 118959 129253 150390 15522 18641 19773 20586 6829 7764 7411 8125

%-age of %-age of Gross Net NPA to NPA to total net advances advances 14.57% 6.98 % 15.67% 7.74% 14.08% 6.77% 12.73 % 6.26 %

Table -4: NPA of Nationalised Total Gross Net Banks. Advances NPA NPA (Amount in Crores) Year 1997-98 1998-99 1999-2000 2000-2001 166222 188926 224818 264237 30130 33069 33521 34609 14441 15759 17399 16096

%-age of %-age of Gross Net NPA to NPA to total net advances advances 16.88 8.91 16.02 8.35 13.99 7.80 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 nonperforming 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. Ninetee n 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.
y y y

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 oblig ations. 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 e ventually 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 c ent, 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 Cror e. 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 Total Total NPA-% NPA-% Major Term Lending NPA NPA Loans Loans age age Institutions as at 31.3.2000 31.3.2001 31.3.2000 31.3.2001 31.3.2000 31.3.2001 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 r elegating 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. T his 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 bal ance 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 Sta te-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 cap ital 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 tw elve 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 y y y

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.

Adverse Effects of NPA on the Working of Commercial Banks

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 raisi ng 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 borr ow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margin, 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 indu stry, 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 R BI, 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 disadvanta ge 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 posi tive 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 profi t 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 man aged 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) Performance of Corporation Bank .......(Amount in Crores).. Performance indicator Earnings - Non-interest Operating expenses Difference Year ended Year ended 9 months Mar. 2000 Mar. 2001 Apr.Decr.2001 270.81 303.99 -33.18 292.09 341.36 -49.27 285.85 280.52 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 Co rporation Bank during this period?

Table -6 (part-1) Corporation Bank -Interest Year ended Year ended 9 months Earnings and Expense.. (Amount in Mar. 2000 Mar. 2001 Apr.Decr.2001 Crores) Performance indicator Earnings - Interest 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




The strength of Corporation Bank is identified by the following positive features: i. ii. It's sizeable earnings under of non -interest income substantially/totally meets its non interest expenses. 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 statistics.. (Amount in Crores) Performance indicator Earnings - Non-interest Operating expenses Difference Earnings - interest income Exp.-Interest expenses Interest spread Intt. On Recap bonds Operating Profit Provisions Net Profit Year ended Mar. 2000 6662.42 14251.87 -7589.45 50234.01 35477.41 14756.60 1797.88 5405.27 4766.15 639.12 Year ended Mar. 2001 7159.41 17283.55 -10124.14 56967.11 38789.64 18177.47 1795.48 6257.85 5958.24 299.61

Interest on Recapitalisation Bonds is an income earned from the Government, who had issued the Recapitalisation Bonds to the weak banks to sustain their capital adequacy under a bailout 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: i. ii. 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. 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 recapitalisation 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 enter taining 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 5 0 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.

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 dis cussed 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 t he 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 fou nd 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 ob stacles to stability to the financial system. According to Lindgren (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 yea rs. 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, wh ether 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 p rudential 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 reform s 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 wer e 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 ch allenges. 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 fina ncial 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 pro fitability. 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 adapt to market changes. These called for new strategies, diff erent 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 centred elsewhere in multiple la yers, 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 distress ed 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 eco nomy. 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 t he 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 di fferent 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 fel t 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, av eraging 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 no n-priority is only a difference of degree and not that of kind. The assessment of the mix -of contributing factors should have included i. ii. iii. human factors (those pertaining to the bankers and the credit customers), environmental imbalances in the economy on acc ount of wholesale changes and also 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 nurt ured 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 boldl y and independently, but objectively voice their views. Everyone is satisfied in blaming the others. Bank executives hold 'wilful 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? Significa nt part of the NPA is on account of clout banking or wilfully 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 produ cts. 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 e ngaged 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 ha ve 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 mark etable 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 scrutin ising 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 vict ims, 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 percen t. 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, la rge 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 ba nks, as the ultimate financiers of these assets. In the final analysis it represents instability in industry. NPA represents the woes 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 an d 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 decentralisation 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 busine ss 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 te rms. 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 sc rap. 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 se quentially 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 'wilful 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 cas es 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 fi rst 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 wilfully 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 g o 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 b anker for his future credit needs only when the project is shown as self repaying its debts. Still why default takes place and that too wilfully? This is apparently against the laws of economics and law of human nature.

Credit is a product of financial ser vice, 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 struc ture. 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 cap tive 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 glo bal 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 responsibil ity 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 o n 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 aut hority 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 b orrowing 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 revi sed 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 cred it 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 p roblem 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 instalment 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 wi th 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 instalment 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 there from and is unable to either comple te the project or provide the margin and avail the working capital. Here the bankers switch 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 t he 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 an 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 tra der 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 ed ucation 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 low er 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 ma nagement 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 ar e not dependable. Instead of loyalty to the mission and goals of the organization, it turns to be loyalty 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 o ld 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 equa lly 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, wer e succeeded by annals of short-sighted industrialists, who desire more to get riches through any means of manipulation and speculative manoeuvres 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 tow ards 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 o f 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 inabilit y 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 Co mmission

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, inf lating 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 an d 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 fu elled 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 Co mmittee Report, as described below.

Origin of Corruption in our Society - Analysis by Santhanam Committee Report (1964)

"Corruption can exist only if there is someone 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 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 B IFR, 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 I ndustry 1999") It was intended to be brake to curb sickness, but it served as a 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 S ervice". 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 acknowledgeme nt. 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 acte d. 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 thou ght 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 Econ omic 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 ent erprises 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 informa tion. 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 sta keholders. 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 fulfilment 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 t urn 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 progr ess 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 non e, 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 market s. "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 count ry 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 repres entatives 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
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Income should not be recognise d 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 instalments of principal due remain unpaid for more than 180 days (the lag would get r educed 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 irrecove rable 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 doubtfu l), 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 includin g 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 -

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They erode current profits through provisioning requirements They result in red uced 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, cr edibility 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 i n 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, bes ides 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 perform ing. "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, pa ying 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 move ment 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 perf ormance 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 runnin g 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 wit h 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 instalments / 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 pr e-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 set tlement 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 compro mise 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 cou ntry 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 larg e 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 b anking 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 decr ees passed against them.

Circulation of information on defaulters

The RBI has put in place a system for periodical circulation of details of wilful 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 suit s 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 w ith 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 pleas e 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 instituti onalised 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 o utside 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 h as 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, Deput y 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 sug gest 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 scheme given in a separate page.

Proposed guidelines on wilful defaul ts/diversion of funds

. Pursuant to the instructions of the Central Vigilance Commission for collection of information on wilful defaults of Rs.25 lakhs and above by RBI and dissemination to the reporting banks and FIs, a scheme was framed by RBI with effe ct from 1st April 1999 under which the banks and notified All India Financial Institutions were required to submit to RBI the details of the wilful defaulters. Accordingly, banks and FIs started reporting all cases of wilful defaults, which occurred or were detected after 31st March 1999 on a quarterly basis. It covered all non -performing borrowal accounts with outstandings (funded facilities and such non -funded facilities which are converted into funded facilities) aggregating Rs.25 lakhs and above identi fied as wilful default by a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs. Banks/FIs were advised that they should examine all cases of wilful defaults of Rs 1.00 crore and above for filing of suits and a lso consider criminal action wherever instances of cheating/fraud by the defaulting borrowers were detected. In case of consortium/multiple lending, banks and FIs were advised that they report wilful defaults to other participating/financing banks also. Ca ses of wilful defaults at overseas branches were required be reported if such disclosure is permitted under the laws of the host country. Further, considering the concerns expressed over the persistence of wilful default in the financial system in the 8th Report of the Parliament's Standing Committee on Finance on Financial Institutions, the Reserve Bank of India, in consultation with the Government of India, constituted in May 2001 a Working Group on Wilful Defaulters (WGWD) under the Chairmanship of Shri S. S. Kohli, the then Chairman of the Indian Banks' Association, for examining some of the recommendations of the Committee. The Group submitted its report in November 2001. The recommendations of the WGWD were further examined by an In House Working Group constituted by the Reserve Bank. Accordingly, the Scheme was further revised by RBI on May 30, 2002. The Group submitted its report in November 2001. The recommendations of the WGWD were further examined by an In House Working Group constituted by the Res erve Bank. Accordingly, the Scheme was further revised by RBI on May 30, 2002. The details of the scheme is provided on this website in another folder.

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 --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 fo r effective control and supervision by bank boards over credit management and NPA prevention measures. The report of the group is given and discussed in another page.

Special Mention Accounts - Additional Precaution at the Operating Level

A study at the behest of Board for Financial Supervision (BFS) was conducted by the Reserve Bank by scanning relevant information/data obtained from a select group of banks, as also by holding discus sions with bank officials, who manage NPAs at the policy level as well as those who look after actual recovery, rehabilitation / revival, restructuring of accounts at the implementing level. On the basis of the study, we had suggested a framework of recommendations for preventing slippage of NPAs accounts from sub -standard to doubtful/loss category which had been circulated among banks for feedback and comments. Response from most banks to these recommendations has been positive and in addition, some useful suggestions too have been received, which have been taken into account at the time of finalisation of the recommendations. In view of suggestions from some of the banks, our guidelines for categorising assets under special mention category may be taken as an indicative framework for internal control purpose, for assets with potential weaknesses which deserves close attention and which can be resolved through timely remedial action. Accordingly in a circular issued during September 2002, 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 cat egory. Data regarding such accounts will have to be submitted by banks to RBI.The details of the scheme are given in another folder 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, a nd 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 `Inc ome Recognition and Asset Classification norms' (IRAC norms) would be considered in due course.