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1. A REPORT ON
NONPERFORMING ASSETSCHALLENGE TO THE PUBLIC SECTOR BANKS
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2. INTRODUCTION
After liberalization the Indian banking sector developed very appreciate. The
RBI also nationalized good amount of commercial banks for proving socio economic
services to the people of the nation. The Public Sector Banks have shown very
good performance as far as the financial operations are concerned. If we look to
the glance of the financial operations, we may find that deposits of public to
the Public Sector Banks have increased from 859,461.95crore to 1,079,393.81crore
in 2003, the investments of the Public Sector Banks have increased from
349,107.81crore to 545,509.00crore, and however the advances have also been
increased to 549,351.16crore from 414,989.36crore in 2003. The total income of
the public sector banks have also shown good performance since the last few
years and currently it is 128,464.40crore. The Public Sector Banks have also
shown comparatively good result. The gross profits of the Public Sector Banks
currently 29,715.26crore which has been doubled to the last to last year, and
the net profit of the Public Sector Banks is 12,295,47crore. However, the only
problem of the Public Sector Banks these days are the increasing level of the
non performing assets. The non performing assets of the Public Sector Banks have
been increasing regularly year by year. If we glance on the numbers of non
performing assets we may come to know that in the year 1997 the NPAs were
47,300crore and reached to 80,246crore in 2002. The only problem that hampers
the possible financial performance of the Public Sector Banks is the increasing
results of the non performing assets. The non performing assets impacts
drastically to the working of the banks. 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.
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3. NPAs have a deleterious effect on the return on assets in several ways  
• • • •
They erode current profits through provisioning requirements They result in
reduced interest income They require higher provisioning requirements affecting
profits and accretion to capital funds and capacity to increase good quality
risk assets in future, and They limit recycling of funds, set in asset-liability
mismatches, etc.
The RBI has also tried to develop many schemes and tools to reduce the non
performing assets by introducing internal checks and control scheme,
relationship managers as stated by RBI who have complete knowledge of the
borrowers, credit rating system, and early warning system and so on. The RBI has
also tried to improve the securitization Act and SRFAESI Act and other acts
related to the pattern of the borrowings. Though RBI has taken number of
measures to reduce the level of the non performing assets the results is not up
to the expectations. To improve NPAs each bank should be motivated to introduce
their own precautionary steps. Before lending the banks must evaluate the
feasible financial and operational prospective results of the borrowing
companies. They must evaluate the business of borrowing companies by keeping in
considerations the overall impacts of all the factors that influence the
business.
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4. RESEARCH OPERATION
1. Significance of the study
The main aim of any person is the utilization money in the best manner since the
India is country were more than half of the population has problem of running
the family in the most efficient manner. However Indian people faced large
number of problem till the development of the full-fledged banking sector. The
Indian banking sector came into the developing nature mostly after the 1991
government policy. The banking sector has really helped the Indian people to
utilise the single money in the best manner as they want. People now have
started investing their money in the banks and banks also provide good returns
on the deposited amount. The people now have at the most understood that banks
provide them good security to their deposits and so excess amounts are invested
in the banks. Thus, banks have helped the people to achieve their socio economic
objectives. The banks not only accept the deposits of the people but also
provide them credit facility for their development. Indian banking sector has
the nation in developing the business and service sectors. But recently the
banks are facing the problem of credit risk. It is found that many general
people and business people borrow from the banks but due to some genuine or
other reasons are not able to repay back the amount drawn to the banks. The
amount which is not given back to the banks is known as the non performing
assets. Many banks are facing the problem of non performing assets which hampers
the business of the banks. Due to NPAs the income of the banks is reduced and
the banks have to make the large number of the provisions that would curtail the
profit of the banks and due to that the financial performance of the banks would
not show good results The main aim behind making this report is to know how
Public Sector Banks are operating their business and how NPAs play its role to
the operations of the Public Sector Banks. The report NPAs are classified
according to the sector, industry, and state wise. The present study also
focuses on the existing system in India to solve the problem of NPAs and
comparative analysis to understand which bank is playing what role with
concerned to NPAs.Thus, the study would help the decision makers to understand
the financial performance and growth of Public Sector Banks as compared to the
NPAs.
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5. 2. Objective of the study Primary objective:
The primary objective of the making report is: To know why NPAs are the great
challenge to the Public Sector Banks
Secondary objectives:
The secondary objectives of preparing this report are: To understand what is Non
Performing Assets and what are the underlying reasons for the emergence of the
NPAs. To understand the impacts of NPAs on the operations of the Public Sector
Banks. To know what steps are being taken by the Indian banking sector to reduce
the NPAs? To evaluate the comparative ratios of the Public Sector Banks with
concerned to the NPAs.
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6. 2. Research methodology
The research methodology means the way in which we would complete our prospected
task. Before undertaking any task it becomes very essential for any one to
determine the problem of study. I have adopted the following procedure in
completing my report study. 1. Formulating the problem 2. Research design 3.
Determining the data sources 4. Analysing the data 5. Interpretation 6.
Preparing research report (1) Formulating the problem
I am interested in the banking sector and I want to make my future in the
banking sector so decided to make my research study on the banking sector. I
analysed first the factors that are important for the banking sector and I came
to know that providing credit facility to the borrower is one of the important
factors as far as the banking sector is concerned. On the basis of the analysed
factor, I felt that the important issue right now as far as the credit
facilities are provided by bank is non performing assets. I started knowing
about the basics of the NPAs and decided to study on the NPAs. So, I chose the
topic  Non Performing Assts the great challenge before the Public Sector
Banks . (2) Research Design
The research design tells about the mode with which the entire project is
prepared. My research design for this study is basically analytical. Because I
have utilised the large number of data of the Public Sector Banks.
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7. (3)
Determining the data source
The data source can be primary or secondary. The primary data are those data
which are used for the first time in the study. However such data take place
much time and are also expensive. Whereas the secondary data are those data
which are already available in the market. These data are easy to search and are
not expensive too.for my study I have utilised totally the secondary data. (4)
Analysing the data
The primary data would not be useful until and unless they are well edited and
tabulated. When the person receives the primary data many unuseful data would
also be there. So, I analysed the data and edited them and turned them in the
useful tabulations. So, that can become useful in my report study. (5)
Interpretation of the data
With use of analysed data I managed to prepare my project report. But the
analyzing of data would not help the study to reach towards its objectives. The
interpretation of the data is required so that the others can understand the
crux of the study in more simple way without any problem so I have added the
chepter of analysis that would explain others to understand my study in simpler
way. (6) Project writing
This is the last step in preparing the project report. The objective of the
report writing was to report the findings of the study to the concerned
authorities.
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8. 4. Limitations of the study
The limitations that I felt in my study are: It was critical for me to gather
the financial data of the every bank of the Public Sector Banks so the better
evaluations of the performance of the banks are not possible. Since my study is
based on the secondary data, the practical operations as related to the NPAs are
adopted by the banks are not learned. Since the Indian banking sector is so wide
so it was not possible for me to cover all the banks of the Indian banking
sector.
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9. INDIAN BANKING SECTOR
Banking in India has its origin as early as the Vedic period. It is believed
that the transition from money lending to banking must have occurred even before
Manu, the great Hindu Jurist, who has devoted a section of his work to deposits
and advances and laid down rules relating to rates of interest. During the Mogul
period, the indigenous bankers played a very important role in lending money and
financing foreign trade and commerce. During the days of the East India Company,
it was the turn of the agency houses to carry on the banking business. The
General Bank of India was the first Joint Stock Bank to be established in the
year 1786. The others which followed were the Bank of Hindustan and the Bengal
Bank. The Bank of Hindustan is reported to have continued till 1906 while the
other two failed in the meantime. In the first half of the 19th century the East
India Company established three banks; the Bank of Bengal in 1809, the Bank of
Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as
Presidency Banks were independent units and functioned well. These three banks
were amalgamated in 1920 and a new bank, the Imperial Bank of India was
established on 27th January 1921. With the passing of the State Bank of India
Act in 1955 the undertaking of the Imperial Bank of India was taken over by the
newly constituted State Bank of India. The Reserve Bank which is the Central
Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake
of the Swadeshi Movement, a number of banks with Indian management were
established in the country namely, Punjab National Bank Ltd, Bank of India Ltd,
Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of
India Ltd. On July 19, 1969, 14 major banks of the country were nationalised and
in 15th April 1980 six more commercial private sector banks were also taken over
by the government.
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10. Indian Banking: A Paradigm shift-A regulatory point of view
The decade gone by witnessed a wide range of financial sector reforms, with many
of them still in the process of implementation. Some of the recently initiated
measures by the RBI for risk management systems, anti money laundering
safeguards and corporate governance in banks, and regulatory framework for non
bank financial companies, urban cooperative banks, government debt market and
forex clearing and payment systems are aimed at streamlining the functioning of
these instrumentalities besides cleansing the aberrations in these areas.
Further, one or two all India development financial institutions have already
commenced the process of migration towards universal banking set up. The banking
sector has to respond to these changes, consolidate and realign their business
strategies and reach out for technology support to survive emerging competition.
Perhaps taking note of these changes in domestic as well as international arena
All of we will agree that regulatory framework for banks was one area which has
seen a sea-change after the financial sector reforms and economic liberalisation
and globalisation measures were introduced in 1992-93. These reforms followed
broadly the approaches suggested by the two Expert Committees both set up under
the chairmanship of Shri M. Narasimham in 1991 and 1998, the recommendations of
which are by now well known. The underlying theme of both the Committees was to
enhance the competitive efficiency and operational flexibility of our banks
which would enable them to meet the global competition as well as respond in a
better way to the regulatory and supervisory demand arising out of such
liberalisation of the financial sector. Most of the recommendations made by the
two Expert Committees which continued to be subject matter of close monitoring
by the Government of India as well as RBI have been implemented. Government of
India and RBI have taken several steps to :- (a) Strengthen the banking sector,
(b) Provide more operational flexibility to banks, (c) Enhance the competitive
efficiency of banks, and (d) Strengthen the legal framework governing operations
of banks.
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11. Regulatory measures taken to strengthen the Indian Banking sectors The important
measures taken to strengthen the banking sector are briefly, the following:
• • • • • •
Introduction of capital adequacy standards on the lines of the Basel norms,
prudential norms on asset classification, income recognition and provisioning,
Introduction of valuation norms and capital for market risk for investments
Enhancing transparency and disclosure requirements for published accounts ,
Aligning exposure norms   single borrower and group-borrower ceiling   with
inter-national best practices Introduction of off-site monitoring system and
strengthening of the supervisory framework for banks.
(A) Some of the important measures introduced to provide more operational
flexibility to banks are:
•
• •
• • •
Besides deregulation of interest rate, the boards of banks have been given the
authority to fix their prime lending rates. Banks also have the freedom to offer
variable rates of interest on deposits, keeping in view their overall cost of
funds. Statutory reserve requirements have significantly been brought down. The
quantitative firm-specific and industry-specific credit controls were abolished
and banks were given the freedom to deploy credit, based on their commercial
judgment, as per the policy approved by their Boards. The banks were given the
freedom to recruit specialist staff as per their requirements, The degree of
autonomy to the Board of Directors of banks was substantially enhanced. Banks
were given autonomy in the areas of business strategy such as, opening of
branches / administrative offices, introduction of new products and certain
other operational areas.
(b) Some of the important measures taken to increase the competitive efficiency
of banks are the following:
•
Opening up the banking sector for the private sector participation.
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12. •
Scaling down the shareholding of the Government of India in nationalised banks
and of the Reserve Bank of India in State Bank of India.
(c) Measures taken by the Government of India to provide a more conducive legal
environment for recovery of dues of banks and financial institutions are:
• • •
Setting up of Debt Recovery Tribunals providing a mechanism for expeditious loan
recoveries. Constitution of a High Power Committee under former Justice Shri
Eradi to suggest appropriate foreclosure laws. An appropriate legal framework
for securitisation of assets is engaging the attention of the Government,
Due to this paradigm shift in the regulatory framework for banks had achieved
the desired results. The banking sector has shown considerable degree of
resilience. (a) The level of capital adequacy of the Indian banks has improved:
the CRAR of public sector banks increased from an average of 9.46% as on March
31, 1995 to 11.18% as on March 31, 2001. (b) The public sector banks have also
made significant progress in enhancing their asset quality, enhancing their
provisioning levels and improving their profits.
• •
• •
The gross and net NPAs of public sector banks declined sharply from 23.2% and
14.5% in 1992-93 to 12.40% and 6.7% respectively, in 2000-01. Similarly, in
regard to profitability, while 8 banks in the public sector recorded operating
and net losses in 1992-93, all the 27 banks in the public sector showed
operating profits and only two banks posted net losses for the year ended March
31, 2001. The operating profit of the public sector banks increased from Rs.5628
crore as on March 31, 1995 to Rs.13,793 crore as on March 31, 2001. The net
profit of public sector banks increased from Rs.1116 crore to Rs.4317 crore
during the same period, despite tightening of prudential norms on provisioning
against loan losses and investment valuation.
The accounting treatment for impaired assets is now closer to the international
best practices and the final accounts of banks are transparent and more amenable
to meaningful interpretation of their performance.
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13. WAY FORWARD RBI president recently recommended Indian banks to go for larger
provisioning when the profits are good without frittering them away by way of
dividends, however tempting it may be. As a method of compulsion, RBI has
recently advised banks to create an Investment Fluctuation Reserve upto 5 per
cent of the investment portfolio to protect the banks from varying interest rate
regime. He further added that one of the means for improving financial soundness
of a bank is by enhancing the provisioning standards of the bank. The cumulative
provisions against loan losses of public sector banks amounted to a mere 41.67%
of their gross NPAs for the year ended March 31, 2001. The amount of provisions
held by public sector banks is not only low by international standards but there
has been wide variation in maintaining the provision among banks. Some of the
banks in the public sector had as low provisioning against loan losses as 30% of
their gross NPAs and only 5 banks had provisions in excess of 50% of their gross
NPAs. This is inadequate considering that some of the countries maintain
provisioning against impaired assets at as high as 140%. Indian Banks should
improve the provisioning levels to at least 50% of their gross NPAs. There
should therefore be an attitudinal change in banks  policy as regards
appropriation of profits and full provisioning towards already impaired assets
should become a priority corporate goal. He also suggested that banks should
also develop a concept of building desirable capital over and above the minimum
CRAR which is insisted upon in developed regulatory regimes like UK. This can be
at, say around 12 percent as practised even today by some of the Indian banks,
so as to provide well needed cushion for growth in risk weighted assets as well
as provide for unexpected erosion in asset values. As banks would have observed,
the changes in the regulatory framework are now brought in by RBI only through
an extensive consultative process with banks as well as public wherever
warranted. While this serves the purpose of impact assessment on the proposed
measures it also puts the banks on notice to initiate appropriate internal
readjustment to meet the emerging regulatory prescriptions. Though adequate
transitional route has been provided for switchover to new regulatory measures
such as scaling down the exposure to capital market, tightening the prudential
requirements like switch over to 90 day NPA norm, reduction in exposure norms,
etc., I observe from the various quarters
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14. from which RBI gets its inputs that the banks are yet to take serious steps
towards implementation of these measures. The Boards of banks have been accorded
considerable autonomy in regard to their corporate strategy as also several
other operational matters. This does not; however, seem to have translated to
any substantial improvement in customer service. It needs to be recognised that
meeting the requirements of the customer   whether big or small  
efficiently and in a cost effective manner, alone will enable the banks to
withstand the global competition as also the competition from non-bank
institutions. The profitability of the public sector banks is coming under
strain. Despite the resilience shown by our banks in the recent times, the
income from recapitalisation bonds accounted for a significant portion of the
net profits for some of the nationalised banks. The Return on Assets (RoA) of
public sector banks has, on an average, declined from 0.54 for the year ended
March 31, 1999 to 0.43 for the year ended March 31, 2001. Therefore, the
Boards  attention needs to be focused on improving the profitability of the
bank. The interest income of public sector banks as a percentage of total assets
has shown a declining trend since 1996-97: it declined from 9.69 in 1996-97 to
8.84 in 2000-01. Similarly, the spread (net interest income) as a percentage of
total assets also declined from 3.16 in 1996-97 to 2.84 in 2000-01. A
disheartening feature is that a large number of public sector banks have
recorded far below the median RoA of 0.4% for 2000-01 in their peer group.
Incidentally the RoA recorded by new private banks and foreign banks ranged from
0.8% to 1% for the same period. An often quoted reason for the decline in
profitability of public sector banks is the stock of NPAs which has become a
drag on the bank s profitability. As you are aware, the stock of NPAs does not
add to the income of the bank while at the same time, additional cost is
incurred for keeping them on the books. To help the public sector banks in
clearing the old stock of chronic NPAs, RBI had announced  one-time non
discretionary and non discriminatory compromise settlement schemes  in 2000
and 2001. Though many banks tried to settle the old NPAs through this
transparent route, the response was not to the extent anticipated as the banks
had been bogged down by the usual fear psychosis of being averse to settling
dues where security was available. The moot point is if the underlying security
was not realised over decades in many cases due to extensive delay in litigation
process, should not the banks have taken advantage of the one time opportunity
provided under RBI scheme to cleanse their books of chronic
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15. NPAs? This would have helped in realizing the carrying costs on such non-income
earning NPAs and released the funds for recycling. If better steps are taken
placed in this connection then the performance of the Public Sector Banks can
show very good and healthy results in the shorter period. To make the better
future of the Public Sector Banks, the Boards need to be alive to the declining
profitability of the banks. One of the reasons for the low level of
profitability of public sector banks is the high operating cost. The cost income
ratio (which is also known as efficiency ratio of public sector banks) increased
from 65.3 percent for the year ended March 31, 2000 to 68.7 per cent for the
year ending March 31, 2001. The staff expenses as a proportion to total income
formed as high as 20.7% for public sector banks as against 3.3% for new banks
and 8.2% for foreign banks for the year ended March 31, 2001. There is thus an
imperative need for the banks to go for cost cutting exercise and rationalise
the expenses to achieve better efficiency levels in operation to withstand
declining interest rate regime. Boards of banks have much more freedom now than
they had a decade ago, and obviously they have to play the role of change
agents. They should have the expertise to identify, measure and monitor the
risks facing the bank and be capable to direct and supervise the bank s
operations and in particular, its exposures to various sectors of the economy,
and monitoring / review thereof, pricing strategies, mitigation of risks, etc.
The Board of the banks should also ensure compliance with the regulatory
framework, and ensure adoption of the best practices in regard to risk
management and corporate governance standards. The emphasis in the second
generation of reforms ought to be in the areas of risk management and enhancing
of the corporate governance standards in banks.
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16. THE INDIAN BANKING INDUSTRY
The origin of the Indian banking industry may be traced to the establishment of
the Bank of Bengal in Calcutta (now Kolkata) in 1786. Since then, the industry
has witnessed substantial growth and radical changes. As of March 2002, the
Indian banking industry consisted of 97 Commercial Banks, 196 Regional Rural
Banks, 52 Scheduled Urban Co-operative Banks, and 16 Scheduled State Co-
operative Banks. The growth of the banking industry in India may be studied in
terms of two broad phases: Pre Independence (1786-1947), and Post Independence
(1947 till date). The post independence phase may be further divided into three
sub-phases: • • • Pre-Nationalisation Period (1947-1969) Post-
Nationalisation Period (1969-1991) Post-Liberalisation Period (1991- till date)
The two watershed events in the postindependence phase are the nationalisation
of banks (1969) and the initiation of the economic reforms (1991). This section
focuses on the evolution of the banking industry in India post-liberalisation.
1. Banking Sector Reforms - Post-Liberalisation
In 1991, the Government of India (Gol) set up a committee under the chairmanship
of Mr. Narasimaham to make an assessment of the banking sector. The report of
this committee contained recommendations that formed the basis of the reforms
initiated in 1991. The banking sector reforms had the following objectives: 1.
Improving the macroeconomic policy framework within which banks operate; 2.
Introducing prudential norms; 3. Improving the financial health and competitive
position of banks; 4. Building the financial infrastructure relating to
supervision, audit technology and legal framework; and 5. Improving the level of
managerial competence and quality of human resources. 1.1 Impact of Reforms on
Indian Banking Industry
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17. With the initiation of the reforms in the financial sector during the 1990s, the
operating environment of banks and term-lending institutions has radically
transformed. One of the fall-outs of the liberalisation was the emergence of
nine new private sector banks in the mid1990s that spurred the incumbent
foreign, private and public sector banks to compete more fiercely than had been
the case historically. Another development of the economic liberalisation
process was the opening up of a vibrant capital market in India, with both
equity and debt segments providing new avenues for companies to raise funds.
Among others, these two factors have had the greatest influence on banks
operating in India to broaden the range of products and services on offer. The
reforms have touched all aspects of the banking business. With increasing
integration of the Indian financial markets with their global counterparts and
greater emphasis on risk management practices by the regulator, there have been
structural changes within the banking sector. The impact of structural reforms
on banks' balance sheets (both on the asset and liability sides) and the
environment they operate in is discussed in the following sections. 1.2 Reforms
on the Liabilities Side • Reforms of Deposit Interest Rate
Beginning 1992, a progressive approach was adopted towards deregulating the
interest rate structure on deposits. Since then, the rates have been freed
gradually. Currently, the interest rates on deposits stand completely
deregulated (with the exception of the savings bank deposit rate). The
deregulation of interest rates has helped Indian banks to gain more control on
the cost of their deposits, the main source of funding for Indian banks.
Besides, it has given more, flexibility to banks in managing their
AssetLiability positions.
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18. •
Increase in Capital Adequacy Requirement
During the 1990s, the Reserve Bank of India (RBI) adopted a strategy aimed at
all banks attaining a Capital Adequacy Ratio (CAR) of 8% in a phased manner. On
the recommendations of the Committee on Banking Sector Reforms, the minimum CAR
was further raised to 9%, effective March 31, 2000.While the stipulation of a
higher Capita! Adequacy' Ratio has increased the capital requirement of banks;
it has provided more stability to the Indian banking system. 1.3 Reforms on the
Asset Side Reforms on the Lending Interest Rate During 1975-76 to 1980-81, the
RBI prescribed both the minimum lending rate and the ceiling rate. During 1981-
82 to 1987-88. The RBI prescribed only the ceiling rate. During 198889 to 1994-
95, the RBI switched from prescribing a ceiling rate to fixing a minimum lending
rate. From 1991 onwards, interest rates have been increasingly freed. At
present, banks can offer loans at rates below the Prime Lending Rate (PLR) to
exporters or other creditworthy borrowers (including public enterprises), and
have only to announce the FLR and the maximum spread charged over it. The
deregulation of lending rates has given banks the flexibility to price loan
products on the basis of their own business strategies and the risk profile of
the borrower. It has also lent a competitive advantage to banks with lower cost
of funds. Lower Cash Reserve and Statutory Liquidity Requirements During the
early 1980s, statutory pre-emption in the form of Cash Reserve Ratio (CRR) and
Statutory Liquidity Ratio (SLR) accounted for 42% of the deposits. In the 1990s,
the figure rose to 53.5%, which during the post-liberalisation period has been
gradually reduced. At present, banks are required to maintain a CRR of 4% of the
Net Demand and Time Liabilities (NDTL) (excluding liabilities subject to zero
CRR prescriptions). The RBI has indicated that the CRR would eventually be
brought down to the statutory minimum level of 3% over a period of time. The
SLR, which was at a peak of 38.5% during September 1990 to December 1992, now
stands lower at the statutory minimum of 25%.A decrease in the CRR and SLR
requirements implies an increase in the share of deposits available to banks for
loans and advances. It also means that bank's now have more discretion in the
allocation of • •
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19. funds, which if deployed efficiently, can have a positive impact on their
profitability. By increasing the amount of invisible funds available to banks,
the reduction in the CRR and SLR requirements has also enhanced the need for
efficient risk management systems in banks. Asset Classification and
Provisioning Norms Prudential norms relating to asset classification have been
changed postliberalisation. The earlier practice of classifying assets of
different quality into eight `health codes" has now been replaced by the system
of classification into four categories (in accordance with the international
norms): standard, sub-standard, doubtful, and loss assets. On 1st April 2000,
provisioning requirements of a minimum of 0.25% were introduced for standard
assets. For the sub-standard, doubtful and loss asset categories, the
provisioning requirements remained at 10%, 20-50% (depending on the duration for
which the asset has remained doubtful), and 100%, respectively, the recognition
norms for NPAs have also been tightened gradually. Since March 1995, loans with
interest and/or installment of principal overdue for more than 180 days are
classified as nonperforming. This period will be shortened to 90 days from the
year ending 31st' March 2004. 1.4 Structural Reforms Increased Competition With
the initiation of banking-sector reforms, a more competitive environment has
been ushered in. Now banks are not only competing within themselves, but also
with non-banks, such as financial services companies and mutual funds. While
existing banks have been allowed greater flexibility in expanding their
operations, new private sector banks have also been allowed entry. Over the last
decade nine new private sector banks have established operations in the country.
Competition amongst Public Sector Banks (PSBs) has also intensified. PSBs are
now allowed to access the capital market to raise funds. This has diluted
Government's shareholding, although it remains the major shareholder in PSBs,
holding a minimum 51% of their total equity. Although competition in the banking
sector has reduced the share of assets and deposits of the PSBs, their dominant
positions, especially of the large ones, continues. Although the PSBs will
remain major players in the banking industry, they are likely to face tough
competition, from both private sector banks and foreign banks. Moreover, the
banking industry is likely to face stiff competition from other players like
non-bank • •
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20. finance companies, insurance companies, pension funds and mutual funds. The
increasing efficiency of both the equity and debt markets has also accelerated
the process of financial disintermediation, putting additional pressure on banks
to retain their customers. Increasing competition among banks and financial
intermediaries is likely to reduce the Net Interest Spread of banks. Banks entry
into New Business Lines Banks are increasingly venturing into new areas, such
as, Insurance and Mutual Funds, and offering a wider bouquet of products and
services to satisfy the diverse needs of their customers. With the enactment of
the Insurance Regulatory and Development Authority (IRBA) Act, 1999, banks and
NBFCs have been allowed to enter the insurance business. The RBI has also issued
guidelines for-banks' entry into insurance, according to which, banks need to
obtain prior approval of the RBI to enter the insurance business. So far, the
RBI has accorded its approval to three of the 39 commercial banks that had
sought entry into insurance. Insurance presents a new business opportunity for
banks. The opening up of the insurance business to banks is likely to help them
emerge as financial supermarkets like their counterparts in developed countries.
Increased thrust on Banking Supervision and Risk Management To strengthen
banking supervision, an independent Board for Financial Supervision (BFS) under
the RBI was constituted in November 1994. The Board is empowered to exercise
integrated supervision over all credit institutions in the financial system,
including select Development Financial Institutions (DFIs) and Non Banking
Financial Companies (NBFCs), relating to credit management, prudential norms and
treasury operations. A comprehensive rating system, based on the CAMELS
methodology, has also been instituted for domestic banks; for foreign banks, the
rating system is based on CACS. This rating system has been supplemented by a
technologyenabled quarterly off- site surveillance system. To strengthen the
Risk Management Process in banks, in line with proposed Basel 11 accord, the RBI
has issued guidelines for managing the various types of risks that banks are
exposed to. To make risk management an integral part of the Indian banking
system, the RBI has also issued guidelines for Risk based Supervision (RBS) and
Risk based Internal Audit (RBIA). • •
20

21. These reform initiatives are expected to encourage banks to allocate funds
across various lines of business on the basis of their Risk adjusted Return on
Capital (RAROC). The measures would also help banks be in line with the global
best practices of risk management and enhance their competitiveness. The Indian
banking industry has come a long way since the nationalisation of banks in 1969.
The industry has witnessed great progress, especially over the past 12 years,
and is today a dynamic sector. Reforms in the banking sector have enabled banks
explore new business opportunities rather than remaining confined to generating
revenues from conventional streams. A wider portfolio, besides the growing
emphasis on consumer satisfaction, has led to the Indian banking sector
reporting robust growth during past few years. It is clear that the deregulation
of the economy and of the Banking sector over the last decade has ushered in
competition and enabled Indian banks to better take on the challenges of
globalisation. 1.5 Operational and Efficiency Benchmarking Benchmarking of
Return on Equity Return on Equity (ROE) is an indicator of the profitability of
a bank from the shareholder's perspective. It is a measure of Accounting Profits
per unit of Book Equity Capital. The ROE of Indian banks for the year ended 31st
March 2003, was in the range of 14 - 40%; the median ROE. Being 23.72% for the
same period. On the other hand, the global benchmark banks had a median ROE of
12.72% for the year ended 31st December 2002. In recent years, Indian banks have
reported unusually high trading incomes, driven mainly by the scope to booking
profits that arise from a sharply declining interest rate environment. However,
such high trading income may not be sustainable in future. The adjusted median
ROE for Indian banks (adjusted for trading income) stands at 5.42% for Indian
banks for FY2003 as compared with 11.77% for the global benchmark banks.After
adjusting for trading income, the median ROE of Indian hanks stands lower than
the same for the global benchmark banks, thus implying that the contribution of
trading income to the RoE of Indian banks is significant. •
21

22. Further, the ROE benchmarking method favors banks that operate with low levels
of equity or high leverage. To assess the impact of the leverage factor on the
ROE of banks, "Equity Multiplier  is presented in the next section.
Benchmarking of Equity Multiplier Equity Multiplier (EM) is defined as "Total
Assets divided by Net Worth". This is the reciprocal of the Capital-to-Asset
ratio, which indicates the leverage of a bank (amount of Assets of a bank
pyramided on its equity capital). Banks with a higher leverage will be able to
post a higher ROE with a similar level of Return on Asset (ROA), because of the
multiplier effect. However, the banking industry is safer with a lower leverage
or a higher proportion of equity capital in the total liability. Capital is
important for banks for two main reasons: Firstly, capital is viewed as the
ultimate line of protection against any potential losscredit, market, or
operating risks. While loan and investment provisions are associated with
expected losses, capital is a cushion against unexpected losses. Secondly,
capital allows banks to pursue their growth objectives; a bank has to maintain a
minimum capital adequacy ratio in accordance with regulatory requirements. A
bank with insufficient capital may not be able to take advantage of growth
opportunities offered by the external operating environment the same way as
another bank with a higher capital base could. Benchmarking of Return on Assets
ROA is defined as Net Income divided by Average Total Assets. The ratio measures
a bank's Profits per currency unit of Assets. The median ROA for Indian banks
was 1.15% for FY2003. For the global benchmark banks, the ROA ranged from 0.05%
to 1.44% for the year ended December 2002, with the median at 0.79%. For the
year ended December 2002, Bank of America reported the highest ROA (1.44%) among
the global benchmark banks, followed by Citi group Inc. (1.42%). The median
value for Indian banks at 1.15% was higher than that of ABN AMRO Bank, Deutsche
Bank, Rabo Bank and Standard Chartered Bank. Two banks, namely Bank of America
and Citigroup Inc., posted higher ROAs as compared with the European and other
banks for both FY2003 and FY2002 primarily on the strength of higher Net
Interest Margins. The reasons for the Net Interest Margins being higher are
discussed in the sections that follow. • •
22

23. As with the ROE analysis, here too adjustments for non-recurring income/expenses
must be made while comparing figures on banks' ROA. Adjusting for trading
income, for both Indian banks and the global benchmark banks, the median works
out to be lower for Indian banks vis-a-vis the global benchmark banks for FY
2003. I have further analysed the effect of adjustment for trading income on the
ROAs of both Indian Banks and the Global Benchmark Banks. Here, it must be noted
that the global benchmark banks have a more diversified income portfolio as
compared with Indian banks, and a decline in interest rate could have increased
profitability of global benchmark banks indirectly in more ways than one.
However, from the disclosures available in the annual reports of the global
banks, it is not possible to quantify the impact of declining interest rates on
their profitability (`thus, the same has not been adjusted for in this
analysis). Nevertheless, to further analyse the profitability (per unit of
assets) of Indian banks vis-a-vis the global benchmark banks, ICRA has conducted
a ROA decomposition analysis. 1.6 Decomposition of Return on Assets Net Interest
Margin Net Interest Margin (NIM) measures the excess income of a bank's earnings
assets (primarily loans, fixed-income investments, and interbank exposures) over
its funding costs. To the past, for banks NIM was the main source of earnings,
which were therefore directly correlated with the margin levels. But with NIM
declining significantly in many countries, banks are now trying to compensate
the "lost" margins with non-fund based fee incomes and trading income. Despite
these changes, net interest income continues to account for a significant share
of the earnings of most banks. The median NIM for Indian banks was 3.16% for
FY2003 and 3.92% for FY2002. The figures compare favorably with those of the
global benchmark banks. Before drawing inferences on the NIM benchmarking
results, three aspects must be considered, namely: (a) The external operating
environment, (b) The quality and type of assets, and (c) Accounting policies
followed by banks. The three aspects are explored in detail in the subsequent
paragraphs. (a) External Operating Environment •
23

24. Intermediation cost is a significant factor explaining the differences in NIMs
across countries. Interest margins tend to be higher in countries where the
intermediation costs are high. Generally, the absence of a vibrant capital
market results in the intermediation costs being higher. In India, the debt
market is relatively less developed (as compared with the markets in USA and
Europe), and therefore, most corporate entities are dependent mainly on banks
for meeting their financing needs. As a result, Indian banks are able to command
higher NIMs as compared with the global benchmarks banks. To make a like-to-like
comparison and understand the impact of intermediation cost, ICRA has compared
the NIMs of the Indian operations of the global benchmark banks with those of
Indian banks. Of the six global benchmark banks, the local operations of four
banks earned higher NIMs vis-a-vis the median of Indian banks in FY2002 and
FY2003. Of these four banks, three earned NIMs above 4%. This analysis
strengthens ICRA's hypothesis that the external operating environment is an
important factor while benchmarking NIMs. (b) Type & Quality of Assets The
higher NIMs of US-based banks are attributable to their sharper focus on
consumer loans and credit cards as compared with European banks. Also, the high
NIMs of US banks are the cause for their comparatively high ROAs. To overcome
the potential for higher provisions arising from its strategy of lending to
riskier assets, a bank may charge a higher rate of interest to its borrowers
(with a consequently higher NIM) than another bank. So while comparing the NIMs
of two banks, the effect of asset quality must be normalised. One way of doing
this is to use Total Risk Weighted Adjusts (RWA) instead of Total Assets as the
denominator. However, many Indian banks do not disclose their RWA values in
their annual reports, and therefore, ICRA has not been able to use this method
in this study. The alternative method is to adjust the NIM for provisions &
contingencies. If the asset quality of a bank is relatively weak, it is likely
to generate higher Non-Performing Assets (NPAs). As a result, its provisions &
contingencies are also likely to be higher. Therefore, if the effect of asset
quality is normalised by removing provisions & contingencies from the NIM, a
better understanding of the efficiency of the fund based business of banks may
be obtained. ICRA defined adjusted NIM as Net Interest Spread (Net Interest
Income less Provisions & Contingencies)/Average Total Assets]. The Net Interest
Spread's for the global benchmark banks ranged from 0.14 to 2.10% for the
financial year ended December 2002, with the median at 1.54%. The corresponding
median figure for Indian banks was 1.68%. The difference between the NIMs of the
global benchmark banks and Indian bank; reduces substantially after
24

25. adjusting for provisions. This strengthens ICRA's hypothesis that the type and
quality of assets substantially affect NIM. (3)Accounting Policies The Net
Interest Spreads adjusted for Provisions can vary substantially, depending on
the income recognition and provisioning norms. According to International
Accounting Standard, (IAS) provisioning for NPAs is based on management
discretion, Whereas in India, the RBI defines the provisioning requirement for
impaired assets as a function of time and security. An illustration of
difference in accounting for NPA is that for Indian banks, an asset is reckoned
as NPA when principal or interest are past due for 180 days as compared with 90
days for the global benchmark banks (the norms will converge with effect from
financial year 2004). Keeping in view the levels of NIM for Indian and global
benchmark banks, and the three factors analysed above, ICRA believes that the
NIM for Indian banks is comparable with that of the global benchmark banks. •
Non-Interest Income Ratio
Increased competition in the Indian Banking industry has driven the interest
yields and consequently, the NIMs, southwards. Hence, banks are increasingly
concentrating on non-interest income to shore up profits. In FY2003, the range
of noninterest income for Indian banks (as percentage of average Total Assets)
was between 1.01 and 3.00%. The median for Indian banks showed a moderate
increase from 1.63% in 2002 to 1.77% in 2003. The non-interest income (as
percentage of Average Total assets) of the global benchmark banks varied from
0.72 to 3.13% (with a median value of 1.62%), or the year ended December 31,
2002. The decline in interest rates in India over the last few years has helped
Indian banks book substantial profits from the sale of investments, thus
boosting their Non-Interest Income. As the high profits accruing from the sale
of investments are not lively to be sustainable, ICRA has benchmarked the pure
fee based income (i.e. looking at Non-interest income without profits from sale
of investments) as a percentage of average total income. 16 of the 21 Indian
banks in the study had a fee based income ratio of between 0.4 and 0.8%.A
comparison after similar adjustment for the global benchmark banks reveals that
the fee-based income ratio of Indian banks is lower. • Operating Expense Ratio
25

26. The Operating Expense Ratio (operating expenses as a ratio of the average total
assets) reveals how expensive it is for a bank to maintain its fixed assets and
human capital that are used to generate that income streams, The median
Operating Expense ratio for Indian banks was 2.26% in 2003, which is comparable
with that for the global benchmark banks (2.09%). 1.7 Asset Quality Benchmarking
Gross NPAs The median Gross NIA ratio (Gross NPA as a proportion of total
advances) for Indian banks was 9.40% for FY2003 and 10.66% for FY2002. The
values of the Gross NPA ratio for FY 2003 range between 2.26 and 14.68%.Many
global banks do not disclose their Gross NPA percentages in their annual
reports. Net NPAs The median Net NPA ratio ("Net NPA as a proportion of Net
advances) of Indian banks was 4.33% for FY2003 and 5.39% for FY2002. The values
of Net NPA ratio for FY 2003 for the global benchmark banks ranged between 0.37
and 7.08%. Most of the global benchmark banks do not disclose their Net NPA
ratios in their annual reports. From the study it can be inferred that the
median Net NPA percentage for Indian banks is marginally higher than that for
the global benchmark banks. Efficiency Benchmarking ICRA studied the following
parameters to assess the efficiency of Indian banks vis-Ã -vis their foreign
counterparts: • Profitability per employee • Profitability per branch •
Business per employee • Business per branch • Expenses per employee •
Expenses per branch The business model of the global benchmark banks involves
outsourcing of noncore activities. In the case of Indian banks, particularly
those in the public sector, both non-core and core business functions are
carried out in-house. The global benchmark banks display higher efficiency
parameters, mainly because of the outsourcing model. • • •
26

27. Thus, the efficiency parameters are not strictly comparable, as they are
affected by the business plans of specific banks and also by economy-specific
considerations. ICRA has presented the analysis of the performance of Indian and
international banks in the following sections. We would like to highlight that
several factors influence the results here, and caution needs to be exercised in
arriving at inferences. E.g. comparing expenses per branch (or employee) for
banks across different economies involves conversion of amounts to a common
currency. The results depend on the conversion rates of foreign exchange used
(e.g. USD per rupee or Euro per rupee). In this report, ICRA has used nominal
rates of foreign currencies rather than rates based on PPP (Purchasing Power
Parity). On another dimension, Indian banks and international banks operate
under different business models and levels of technology. Increasingly,
sophisticated banks (particularly in advanced countries) use several channels to
transact business with customers, such as, the Internet, telephone, debit cards,
and ATMs. Therefore, results from benchmarking using parameters such as business
per branch or expenses per branch (which are appropriate parameters to compare
across banks that operate predominantly through branches) need to be
appropriately interpreted in an exercise when we compare heterogeneous banks
across different economies. Profitability per Employee The profit per employee
figure for 17 out of the 21 Indian banks was in the range of Rs. 0.02 crore for
the financial year ended March 2003. Most Indian banks posted higher profits per
employee in FY2003 as compared with FY2002. This overall trend of increasing
employee profitability may be attributed to the reduction in the number of
employees following the launch of Voluntary Retirement Schemes (VRS) by some
banks as well as higher profits by the banks. On an average, new private sector
banks enjoy a higher increase in profitability per employee, as compared with
their public sector counterparts. This may be attributed largely to the better
technology that the new private sector banks employ, besides the advantage of
carrying no historical baggage. As for the global benchmark banks, the
profitability per employee for HSBC was robust at USD 0.12 million (Rs. 0.552
crore) for FY 2002. For ABN AMRO Bank, the figure was EUR 0.02 million (Rs.l
crore). On an intertemporal basis, the profitability per employee for the global
benchmark bank also showed growth. Profitability per Branch For most Indian
banks, the profit, per branch was in the range of Rs. 0-0.2 crore. However, the
new private sector banks displayed the highest profits per branch, at Rs. • â€
¢
27

28. 1.73 and 1.22 crore for the years 2003 and 2002, respectively. On an inter-
temporal basis, profit per branch has been increasing gradually in the Indian
banking sector. The growth in profit per branch for Indian banks is attributable
to the overall increase in profitability in the banking industry. In the case of
the foreign peer group, profitability per branch shows a small increase over the
period covered by this study. As for the global benchmark banks, profitability
per branch for Bank of America is at a robust USD 1.62 million (Rs. 7.44 crore),
while the figure for ABN AMRO Bank is EUR 0.87 million (Rs. 4.36 crore) for the
FY 2002. Hence, profitability per branch for the global benchmark banks is
higher than that of Indian banks.
28

29. Business per Employee Since different employees in a bank contribute in
different ways to the revenues and profits of a bank, it is difficult to come up
with one universal metric that captures the business per employee accurately.
For' this analysis, ICRA has used the amount of deposits mobilised per employee
as a measure of the business per employee. The Indian banking industry on an
average mobilised Rs. 1-2 crore of deposits per employee for the year ended
March 2003. In this respect, private sector banks lead the group of Indian
banks. The top bank in this category showed a deposit per employee of Rs. 7.14
crore for the year ended March 2003. As for the global benchmark banks, business
per employee for HSBC was robust at USD9.71 million (Rs. 44.66 crore), while
that for ABN AMRO Bank was EUR 4 million (Rs. 20 crore) for the year ending
December 2002. Thus, deposit mobilisation per employee for the global benchmark
banks is higher than that of Indian banks. Business per Branch On an average,
the banks showed a deposit of around Rs. 10-30 crore per branch for the year
ended March 2003. In recent times, the deposit mobilisation for Indian Banks on
a branch basis has witnessed a steady increase. The new private sector banks in
India have led the way in this regard, because of the better use of technology.
The highest deposit per branch stood at Rs. 103.24 crore in 2003 for a new
private sector bank, as compared with Rs, 68.71 crore in 2002. The global
benchmark banks mobilised more business per branch as compared with their Indian
counterparts. Bank of America mobilised USD 88.9 million (Rs. 408.94 crores) for
the financial year ended 2002, while ABN AMRO Bank mobilised EUR 140 million
(Rs. 700 crores). The higher per-bank deposit mobilisation for the global
benchmark banks may be attributed to their superior technology orientation and
the higher gross domestic products (GDP) of their respective countries. 3.5.5
Expenses per Employee For this analysis, ICRA has used the employee expenses per
employee as a measure of the expenses per employee. Indian banks, on an average,
expensed Rs. 0.025 crore per employee in FY2002. For the new private sector
banks, this figure was higher. The highest expense per employee incurred by an
Indian bank for the year 2002 was Rs. 0.041 crore per employee. •
•
29

30. In the case of the global benchmark banks, the expenses per employee for Citi
Group Inc. was at USD 0.08 million (Rs. 0.36 crore), while for ABN AMRO Bank it
was EUR 0.07 million Rs. 0.36 crore). Expenses per Branch For this analysis,
ICRA has used operating expenses per branch as a measure of the expenses per
branch. The expense per branch for most Indian banks was Rs. 0.56 crore for
FY2002. Over the years, Indian banks have reported a gradual increase in such
expenses, with competition-prompted upgrade being the primary reason for the
same. In the case of the global benchmark banks, expense per branch for Bank of
America was USD 4.93 million (amount in Rs. 22.68 crore), while for ABN AMRO
Bank it was EUR 4.6 million (Rs. 22.99 crore). 1.8 Structural Benchmarking Since
its inception in 1980s) BIS has issued several guidance notes for banks and bank
supervisors. These notes have sought to improve the integrity of the global
banking system and propagate best practices in banking across the world. For
issues related to accounting, BIS has relied on the International Accounting
Standards (IAS) issued by the International Accounting Standards Committee
(IASC). Banks are supposed to follow these accounting standards as part of best
practices. For the structural benchmarking study of the Indian banking sector,
ICRA has used primarily the guidance notes issued by BIS and the relevant IAS as
the benchmarks of best practices. ICRA has also referred to standards as
mentioned under, US and UK. GAAP (Generally Accepted Accounting Practices) where
they provide a good understanding of international best practices. • Capital
Adequacy Norms for Banks BIS introduced capital adequacy norms for banks for the
first time in 1988. To improve on the existing norms, BIS issued a Consultative
Document in January 2001, proposing changes to the existing framework. The
objective of this document is to develop a consensus on the Basel II Accord (as
it is popularly known), which is expected to be implemented in 2007. Based on
feedback received from various quarters, BIS issued a new Consultative Document
in April 2003. In this document, BIS has proposed the following key changes over
the existing norms: • Introduction (of finer grades of risk weighting in
corporate credit: •
30

31. According to the original 1988 Accord, all credit risks have a 100% per cent
weighting. Under the new method, grades of weightings in the 20-150% range will
be assigned. Introduction of charges for operational risks: Under the proposed
Basel II Accord, banks have to allocate capital for operational risks. BIS has
suggested three methods for estimating operational risk capitals: 1. Basic
Approach, 2. Standardised Approach, and 3. Advanced Measurement Approach.
Capital requirement for mortgages reduced: The risk weights on residential
mortgages will be reduced to 35% from 50%. During the 1990s, the RBI adopted the
strategy of attaining a Capital Adequacy Ratio (CAR) of 8% in a phased manner.
Subsequently, in line with the recommendations of the Committee on Banking
Sector Reforms, the minimum CAR was further raised to 9%, effective 31st March
2000. As a step towards implementing the Basel II guidelines, the RBI in its
circular of 14th May, 2003 has proposed new methods for estimating regulatory
risk capital. To estimate the impact of the proposed changes on the capital
adequacy position of Indian banks, the RBI has asked select banks to estimate
their riskweighted assets on the basis of the new method. As per this, the RBI
has asked for the estimation of capital requirement on the basis of the external
credit rating of borrowers. For nonrated borrowers, the RBI has asked the select
banks to use the existing 100% risk weights. The RBI has also asked the banks to
calculate operational risk capital separately following the Basel approach.
Based on the result of the exercise, the RBI will issue new guidelines on
estimating economic capital. Additionally, the RBI has asked banks to introduce
internal risk scoring models. It is expected that once the Basel II Accord is
signed, the RBI will allow banks to move to the IRB approach. The Capital
Adequacy norms in India are in line with the best practices as suggested by BIS.
Once the Basel II Accord is implemented, the method of estimation of risk
capital will undergo a significant change. RBI has already taken appropriate
steps to prepare the Indian banking industry for such changes. • •
31

32. Recognition of Financial Assets & Liabilities IAS 39 requires that all financial
assets and all financial liabilities be recognised on the balance sheet. This
includes all derivatives. Historically, in many parts of the world, derivatives
have not been recognised as liabilities or assets on balance sheets. The
argument for this practice has been that at the time the derivative contract was
entered into, no cash or other asset was paid. The zero cost justified non-
recognition, notwithstanding the fact that as time pauses and the value of the
underlying variable (rate, price, or index) changes, the derivative has a
positive (asset) or negative (liability) value. In India, derivatives are still
off-balance sheet items and considered part of contingent liabilities. So in
Indian treatment of derivatives is different from International Accounting
Standards. Valuation of Financial Assets IAS 39 has classified financial assets
under four categories. The following table summarises the classification and
measurement scheme for financial assets under IAS 39, Under US GAAP, marketable
equity securities and debt securities are classified as under: • trading, •
Available for sale, or • held to maturity. Recognition of Non-Performing
Assets (NPAs)/Impaired Assets Under IAS 39, impairment recognition is left to
management discretion (its perception of the likelihood of recovery). Impairment
calculation compares the carrying amount of the financial asset with the present
value of the currently estimated amounts and timings of payments. If the present
value is lower than. The carrying amount, the loan is classified as NPL. Under
US GAAP, loans assume non-accrual statuses if any of the following conditions
are fulfilled: Full repayment of principal or interest is in doubt (in
management's judgment), or if scheduled principal or interest payment is past
due 90 days or more, and if the collateral is insufficient to cover the
principal and interest. In India, NPAs are classified under three categories-
Sub-standard, Doubtful and Loss on the basis of the number of months the amount
is overdue for. India proposed to • •
•
32

33. move from 180 days to a 90-day past due classification rule for NPA recognition
effective March 2004. The financial instrument's original effective interest
rate is the rate to be used for discounting. Any impairment loss is charged to
profit and loss account for the period. Impairment or "uncollectability" must be
evaluated individually for material financial assets. A portfolio approach may
be used for items that are individually small [IAS 39.109]. Therefore, under
IAS, provisioning is based on management discretion. Provision in excess of
expected loan losses may be booked directly to shareholders' equity. As with
IAS, under the UK, And US GAAP also, provisioning is based on management
discretion. Under US GAAP, when the Net Present Value of a loan is less than the
carrying value, the difference is booked as provision. In India; provisioning
norms are more explicit than they are under the IAS. RBI has specified norms for
various classes of NPL as follows: Standard Assets: 10% Doubtful Assets: 100% of
unsecured portion, 20-50% on secured portion Loss Assets: 100% Interest Accrual
on M on-performing Loans / impaired Assets Under both IAS and US GAAP, there is
no specific prescription for interest accrual on NPAs. Under UK. GAAP, interest
is suspended upon classification as NPL. However, suspension may be deferred up
to 12 months if sufficient collateral exists.
According to Sound Practices for Loan Accounting and Disclosure (1999) number
11, the BIS Committee on Banking Supervision recommends that when a loan is
identified as impaired, a bank should cease accruing interest in accordance with
the terms of the contract. Interest on impaired loans should not contribute to
net income if doubts exist over the collectability of loan interest or
principal. In India, accrual of interest is suspended upon classification of a
loan as non performing. • General Provisioning on Performing Loans
33

34. Under IAS, UK and US GAAP, there is no specific prescription for general
provisioning towards performing loans. However, Indian banks have a provisioning
require; f tent of 0.2 5% on all standard assets. Conclusion The RBI norms for
classification of assets, and provisioning against, bad/doubtful debts are more
detailed and precise vis-a-vis international rules. While the international
norms often leave bad debt provision levels to "management discretion", Indian
standards are precise and clearly state exactly when and by how much reported
earnings must be charged off for bad debts. In India, detailed accounting
standards for derivatives are yet to be introduced. As of now, derivatives
continue to be considered as off-balance sheet liabilities. 1.9 Likely Future
Trends and their Implications for Indian Banks Financial Disintermediation and
Bank Profitability The degree of banking disintermediation and financial
sophistication are important factors in the development of a country's economy.
Disintermediation affects the allocation process for both savings and credits in
the economy. With the introduction of sophisticated deposit products by mutual
funds, pension funds and insurance companies, individual and corporate
depositors now have more options for savings. A similar trend is also visible in
credit offerings. More and more corporate entities are now approaching the
capital market to raise funds either in the form of debt or equity. At the end
of the 1990s, the US banking industry was facing a high level of
disintermediation, as most outstanding savings were in mutual funds, pension
funds, and life insurance plans, but not in bank deposits or other liability
products. However, in continental Europe, most banking systems (as in Germany,
Spain, Italy, Austria, France, etc.) are still highly bank-intermediated,
although the trend is clearly towards faster disintermediation for both savings
and credits. In India, financial disintermediation is likely to catch up with
banks sooner than later. With the opening up of the financial sector, Indian
banks are facing competition from the mutual fund and insurance sectors for
savings. On the credit side, good quality borrowers have started raising debt
directly from the market at competitive rates. Changing Capital Adequacy Norms
Capital adequacy norms for banks are likely to undergo a change after the Basel
II Accord is implemented. In the current system, Indian banks need to allocate
9% capital, • • •
34

35. irrespective of the credit quality of a borrower. In the new system, a bank
offering credit to a better quality corporate entity is likely to require less
regulatory capital. The allocation of regulatory capital on the basis of credit
quality would encourage banks to estimate their Risk adjusted Return on Capital
(RAROC) rather than compute simple margins. Similarly, banks now need to
distinguish between the credit qualities of sovereign borrowings and inter-bank
borrowing, as they would need to allocate capital to sovereign credit and inter-
bank credit on the basis of external ratings, or using the IRB approach. To
emerge successful in the Basel II regulatory environment, banks would need to
introduce the practice of risk-based pricing of loans, which in turn would
require a bank to implement advance Risk Management Systems. To implement such
systems, banks would need to implement the following key steps: • • • •
• Develop Credit Risk Scoring Models Generate Probability of Default (PD)
associated with each risk grade Estimate Loss Given Default (LGD) for each
collateral type. Calculate expected and unexpected loss in a portfolio based on
correlation amongst loans. Compute the capital that would be required to be held
against economic loss potential of the portfolio.
Similarly, banks would have to introduce robust systems for measuring and
controlling Market Risk and Operations Risk. .3 Management of Non-Performing
Assets The size of the NPA portfolio in the Indian banking industry is close to
Rs. 1,00,000 crore, which is around 6% of India's GDP. NPAs affect banks
profitability on two counts: The introduction of scientific credit risk
management systems would lower slippage of assets from the performing to the
nonperforming category. Further, banks with better NPA recovery processes would
be able to reduce their provisioning requirements, thereby increasing their
profitability. To enable a fair borrower-lender relationship in credit, the
Government of India has recently enacted the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security interest Act 2002 (SRES Act).
Due to several cases still to be resolved in courts of law, it is. Not clear as
yet, how far this Act is set to alter the NPA recovery scenario in India.
35

36. Following the announcement of the RBI's Asset Classification norms, the process
of Asset Quality Management involves segregating the total portfolio into three
segments and having detailed strategies for each. The three segments are: • â€
¢ • Standard/Performing Assets Special Mention Accounts/Sub-Standard Assets
Chronic Non-Performing Assets
Banks need to vigilantly monitor Standard Assets to arrest any account slippage
into the non-performing grade. Besides, banks need to churn their credit
portfolio so as to maximise returns while keeping the risks pegged at acceptable
levels. Special Mention Accounts are assets with potential weaknesses which
deserve close attention and timely remedial action. The typical warning signs
exhibited by a borrower ranges from frequent excesses in the account to non-
submission of periodical statements. Account restructuring and rehabilitation
tools are best implemented during this stage. However, the challenges faced
while restructuring include, (a) selecting the genre of assets to be
restructured, (b) quantifying the benefits to be extended, (c) determining
repayment schedules, and (d) coordinating and balancing the needs of several
lenders. Chronic Non-Performing Assets can now be better managed following the
enactment of the SIZES Act. The Act provides the requisite regulatory framework
for the foreclosure of assets by lenders, incorporation of Asset Reconstruction
Companies (ARCS), and formation of a Central Registry. In the wake of this new
legislation, amicable solutions may be realised for Chronic NPAs. The strategies
include Enforcement of Security Interest, Securitisalion, One-Time Settlement
(OTS), and Writeoff. However, a scientific approach to deciding which of these
alternative routes must be taken hinges on: (a) assessment in terms of quality
of the underlying assets and their realisable value, (b) alternative use of the
assets, and (c) willingness of the borrower to settle outstanding dues.
conclusion The profitability of Indian banks in recent years compares well with
that of the global benchmark banks primarily because of the higher share of
profit on the sale of investments, higher leverage and higher net interest
margins of Indian banks. However, many of these drivers of higher profits of
Indian banks may not be sustainable. To ensure •
36

37. long-term profitability, Indian banks need to focus on the following parameters
and build systemic capability in management of the same: • • • • • •
• Ensure that loans are diversified across several customer segments Introduce
robust risk scoring techniques to ensure better quality of loans, as well as to
enable better risk-adjusted returns at the portfolio level Improve the quality
of credit monitoring systems so that slippage in asset quality is minimised
Raise the share of non-fund income by increasing product offerings wherever
necessary by better use of technology Reduce operating expenses by upgrading
banking technology, and Improve the management of market risks
Reduce the impact of operational risks by putting in place appropriate
frameworks to measure risks, mitigate them or insuring them. The RBI as the
regulator of the Indian banking industry has shown the way in strengthening the
system, and the individual banks have responded in good measure in orienting
them selves towards global best practices.
37

38. DISTRIBUTION OF THE INDIAN BANKS AS TO STATES AND POPULATION
How Indian banks are distributed as to states and population is explained from
the following table:
Table  Distribution of Banking Centers According to State and Population Group
(As at The End of March)
POPULATION GROUP
RURAL
SEMI-URBAN
URBAN
METROPOLITAN
ALL CENTRES
REGION/STATE/
2001
2002 2001
2002
2001
2002
2001
2002
2001
2002
UNION TERRITORY
1
2
3
4
5
6
7
8
9
10
NORTHERN REGION Haryana Himachal Pradesh Jammu & Kashmir Punjab Rajasthan
Chandigarh Delhi NORTH EASTERN REGION Arunachal Pradesh Assam Manipur
Meghalaya Mizoram Nagaland Tripura EASTERN REGION Bihar Jharkhand Orissa Sikkim

39. 4578 644 605 477 1022 1765 9 55 1166 53 749 40 122 60 34 108 6979 2346 906 1533
32
4576 644 605 477 1023 1762 9 56 1152 53 736 39 122 60 34 108 6972 2346 904 1532
32
458 94 14 22 102 212 2 12 123 6 73 11 7 5 8 13 773 313 88 93 1
458 94 14 22 102 212 2 12 123 6 73 11 7 5 8 13 773 313 88 93 1
36 11   2 9 13 1   8   4 1 1 1   1 67 12 4 6  
36 11   2 9 13 1   8   4 1 1 1   1 68 12 4 6  
3       1 1   1                 1        
3       1 1   1                 1        
5075 749 619 501 1134 1991 12 69 1297 59 826 52 130 66 42 122 7820 2671 998 1632
33
5073 749 619 501 1135 1988 12 69 1283 59 813 51 130 66 42 122 7814 2671 996 1631
33
38

40. West Bengal Andaman & Nicobar Islands CENTRAL REGION Chhattisgarh Madhya Pradesh
Uttar Pradesh Uttaranchal WESTERN REGION Goa Gujarat Maharashtra Dadra & Nagar
Haveli Daman & Diu SOUTHERN REGION Andhra Pradesh Karnataka Kerala Tamil Nadu
Lakshadweep Pondicherry ALL-INDIA
2147 15 7368 639 1698 4539 492 3777 140 1445 2186 5 1 6400 2283 2064 303 1719 9
22
2143 15 7331 629 1680 4530 492 3767 140 1438 2183 5 1
276 2 805 61 225 480 39 674 12 260 399 1 2
276 2 805 61 225 480 39 674 12 260 399 1 2 2213 466 278 1037 427   5 5046
45   60 6 15 36 3 42   14 28     83 35 15 7 25   1 296 296
45   60 6 15 36 3 42   14 28     83 35 15 7 25   1
1   4   2 2   7   3 4     3 1 1   1     18
1   4   2 2   7   3 4     3 1 1   1     18
2469 17 8237 706 1940 5057 534 4500 152 1722 2617 6 3 8704 2785 2358 1349 2175 9
28 35633
2465 17 8200 696 1922 5048 534 4490 152 1715 2614 6 3 8658 2781 2351 1348 2144 9
25 35517
6359 2218 2279 2057 1691 9 19 466 278 430   5
304 1039
30268 30157 5051
39

41. MAJOR DEVELOPMENTS IN BANKING AND FINANCE
• Banking Developments
The RBI allowed resident Indians to maintain foreign currency accounts. The
accounts to be known as resident foreign currency (domestic) accounts, can be
used to park forex received while visiting any place abroad by way of payment
for services, or money received from any person not resident in India, or who is
on a visit to India, in settlement of any lawful obligations. These accounts
will be maintained in the form of current accounts with a cheque facility and no
interest is paid on these accounts. With a view to liberalise gold trading, the
Reserve Bank has decided to permit authorised banks to enter into forward
contracts with their constituents like exporters of gold products, jewellery
manufacturers and trading houses, in respect of the sale, purchase and loan
transactions in gold with them. The tenor of such contracts should not exceed 6
months. The Reserve Bank of India has told foreign banks not to shut down
branches without informing the central bank well in advance. Foreign banks have
been further advised by the Reserve Bank of India to furnish a detailed plan of
closure to ensure that their customers  interests and conveniences are
addressed properly. The RBI has prohibited urban co-operative banks from acting
as agents or subagents of money transfer service schemes. The RBI has allowed
banks to invest undeployed foreign currency non-resident (FCNR-B) funds in the
overseas markets in the long-term fixed income securities with ratings a notch
lower than highest safety. Earlier, banks were allowed to invest only in long-
term securities with highest safety ratings by international agencies. The RBI
has defined the term  willful defaulter  paving the way for banks to acquire
assets of defaulting companies through the Securitisation Ordinance and reduce
their NPAs faster. According to the RBI a wilful defaulter is one who has not
used bank funds for the purpose for which it was taken and who has not repaid
loans despite having adequate liquidity. International credit rating agency
Standard & Poor has estimated that the level of gross problematic assets in
India can move into the 35-70 per cent range in the event of a recession. It has
also estimated that the level of non-performing assets (NPAs) in the system to
be at 25 per cent, of which only 30 per cent can be recovered.
40

42. The Reserve Bank of India has decided to extend operation of the guidelines for
the one time settlement scheme for loans upto Rs.50,000 to small and marginal
farmers by public sector banks for another 3 months, i.e, upto March 31, 2003.
The Reserve Bank of India, as part of its policy of deregulating interest rates
on rupee export credit, has freed interest rates on the second slab - 181 to 270
days for preshipment credit and 91 to 180 days for post-shipment credit with
effect from May 1, 2003. The Cabinet cleared a financial package for IDBI and
agreed to take over the contingent liabilities to the tune of Rs.2500 crore over
five years. The IDBI Act will be repealed during the winter session of the
Parliament, paving the way for IDBI s conversion into a banking company.The
IDBI would be given access to retail deposits, to enable it to bring down the
cost of funds, but will be spared from priority sector lending and SLR
requirements for existing liabilities. The RBI has issued guidelines for setting
up of offshore banking units (OBUs) within special economic zones (SEZs) in
various parts of the country. Minimum investment of $10 million is required for
setting up an OBU. All commercial banks are allowed to set up one OBU each. OBUs
have to undertake wholesale banking operations and should deal only in foreign
currency. Deposits of the OBUs will not be covered by deposit insurance. The
loans and advances of OBUs would not be reckoned as net bank credit for
computing priority sector lending obligations. The OBUs will be regulated and
supervised by the exchange control department of the RBI. With a view to develop
the derivatives market in India and making available hedged currency exposures
to residents an RBI Committee headed by Smt. Grace Koshie, recommended phased
introduction of foreign currency-rupee (FC/NR) options. _ The Reserve Bank of
India has notified the draft scheme for merging Nedungadi Bank with Punjab
National Bank. This is the first formal step towards bringing about a merger
between the two Banks. The Reserve Bank of India has agreed to allow capital
hedging for foreign banks in India. The guidelines pertaining to capital hedging
will be issued by RBI soon. The Reserve Bank of India has decided to allow
foreign institutional investors (FIIs) to enter into a forward contract with the
rupee as one of the currencies, with an
41

43. authorised dealer (AD) in India to hedge their entire exposure in equities at a
particular point of time without any reference to the cut-off date. Further, the
RBI has also increased Authorised Dealer s overseas market investment limit to
50 per cent of their unimpaired tier-I capital or $ 25 million, whichever is
higher. The Reserve Bank of India doubled the foreign exchange available under
the basic travel quota (BTQ) to resident individuals from US $5000 to US $10000,
or its equivalent.The Government has decided to dispose of UTI Bank as part of
restructuring Unit Trust of India.Though the details in this regard is yet to be
worked out, it has been decided that the bank will be disposed of during the
course of the restructuring. The RBI has allowed tour operators to sell tickets
issued by overseas travel operators such as Eurorail and other rail/road and
water transport operators in India, in rupees, without deducting the paymentfrom
the travellers  basic travel quota. The Reserve Bank of India (RBI) has banned
banks from offering swaps involving leveraged structures, which can cause huge
losses if the market moves the other way. The RBI constituted committee on
payment system has recommended that the central bank, as the regulator of
payment and settlement systems, should be empowered to regulate non-banking
systems. • Market Developments and New Products
The Hong Kong and Shanghai Banking Corporation will be bringing $150 million
additional capital to India in the current fiscal. The Reserve Bank of India has
ordered a moratorium on the Nedungadi Bank. The moratorium effective from the
close of business will be in force upto February 1, 2003. During this period,
the central bank is likely to finalise the plans for merging Nedungadi Bank with
Punjab National Bank. ABN Amro Bank launched its Business Process outsourcing
(BPO) operations, ABN Amro Central Enterprise Services (ACES) in Mumbai. It has
been set up with an initial investment of 4 million euros (Rs.19 crore) and has
been capacitised at 650 seats in a single shift.
42

44. The Canara Bank has returned 48 per cent (Rs. 277.87 crore) of its capital to
the Government before its Initial Public Offer. China has granted licence to
Bank of India to open a representative office in the south Chinese city of
Shenzhen. Shri A.K. Purwar is appointed as the Chairman of State Bank of India.
The State Bank of India has launched  SBI Cash Plus , its Maestro debit card
for which it has tied up with Master Card International. SBI Cash Plus will
allow customers to access their deposit accounts from ATMs and merchant
establishments. The Siam Commercial Bank, having Thailand government as the
major share holder, is planning to close down its banking operations in India
from November 30, 2002, as part of its global restructuring strategy. The Punjab
National Bank (PNB) has got license from the Reserve Bank of India for doing
internet banking. The bank is likely to do the formal launch of its internet
banking solution within a few weeks time. The ICICI Bank is planning to set up
kiosks to offer financial services in the rural areas. This outfit would also
extend agricultural loans.
43

45. CLASSIFICATION OF SCHEDULED BANKING STRUCTURE IN INDIA
The scheduled banks are divided into scheduled commercial banks and scheduled co
operative banks. Further scheduled commercial banks divided into the Public
Sector Banks, private sector banks, foreign banks, and regional rural banks.
Whereas scheduled co-operative banks are classified into scheduled urban co
operative and scheduled state co- operative.RBI has further classified public
sector banks into nationalized banks, state bank of India and its subsidiaries.
And private banks have been classified into old and new private sector banks. As
far as the number is concerned, total public sector banks are 27, private sector
banks are 30, foreign banks are 36, and regional rural banks are 196. Thus in
scheduled commercial bans, the regional rural banks are on the top number. In
the scheduled co-operative banks, there are 57 scheduled cooperatives and 16
scheduled co-operative banks. Today the overall commercial banking system in
India may be distinguished into:
44

46. 1. Public Sector Banks 2. private Sector Banks 3. Co-operative Sector Banks 4.
Development Banks PUBLIC SECTOR BANKS a. State Bank of India and its associate
banks called the State Bank group b. 20 nationalised banks c. Regional Rural
Banks mainly sponsored by Public Sector Banks
PRIVATE SECTOR BANKS a. b. c. d. e. Old generation private banks New generation
private banks Foreign banks in India Scheduled Co-operative Banks Non-scheduled
Banks
CO-OPERATIVE SECTOR The co-operative banking sector has been developed in the
country to the suppliment the village money lender. The co-operatiev banking
sector in India is divided into 4 components 1. 2. 3. 4. 5. 6. 7. 8. State Co-
operative Banks Central Co-operative Banks Primary Agriculture Credit Societies
Land Development Banks Urban Co-operative Banks Primary Agricultural Development
Banks Primary Land Development Banks State Land Development Banks
45

47. DEVELOPMENT BANKS 1. 2. 3. 4. 5. 6. 7. 8. 9. Industrial Finance Corporation of
India (IFCI) Industrial Development Bank of India (IDBI) Industrial Credit and
Investment Corporation of India (ICICI) Industrial Investment Bank of India
(IIBI) Small Industries Development Bank of India (SIDBI) SCICI Ltd. National
Bank for Agriculture and Rural Development (NABARD) Export Import Bank of India
National Housing Bank
46

48. PUBLIC SECTOR BANKS
Before the independence, the banking system in India was primarily associated
with urban sector. After independence, the banks had to spread out into rural
and unbanked areas and make credit available to the people of those areas. In
1969 the government nationalized 14 major commercial banks. Still the wide
disparities continued. To reduce the disparities the government nationalized 6
more commercial banks in 1980 government came to own 28 banks including SBI and
its 7 subsidiaries. Today, we are having a fairly well developed banking system
with different classes of banks-public sector banks, foreign banks, and private
sector banks-both old and new generation. In July 1993, New Bank of India was
merged with Punjab National Bank. Now, there are 27 banks in the public sector
viz. State Bank of India and its 7 associates, 19 commercial banks exclusive of
Regional Rural. In terms of sheer geographical spread, the public sector system
is the largest. The statistics are as follows: a network of 64000,branches-one
branch for every 14000 Indian with over 64 crores customers. This labour
intensive network has built-in cost, which makes the public sector banks
inherently uncompetitive. Reduction of branches to achieve cost saving has not
received a munch thrust as it should. Public sector banks are characterized by
mammoth branch network, huge work force, relatively lesser mechanization, and
huge volume but of less value business transactions, social objectives and their
own legacy system and procedures.  Improving profitability in general requires
efforts in several directions, i.e. cutting in cost, improving productivity,
better recovery of loan and to reduce high level of NPAs . The public sector
banks have to build up the cost-benefit culture in their operations. When there
is a thin margin in banking operation, the public sector banks in India have to
increase the turnover. Previously, Indian banks were relying on high credit
deposit ratio. Now, the Indian banks have to depend on the volume of high
business turnover. The returns on assets have to be improved. Further, the PSBs
in Indian have to compare them with the highly profitable bank with regards to
operating expenses. They have to ensure that each every account is profitable
and product should be such, while generates more profit.
47

49. CHALLENGES FOR THE PUBLIC SECTOR
Indian banks functionally diverse and geographically widespread have played a
crucial role in the socio-economic progress of the country after independence.
Growth of large number of medium and big industries and entrepreneurs in diverse
fields were the direct results of the expansion of activities of banks. The
rapid growth, forever lead to strains in the operational efficiency of the banks
and the accumulation of non-performing assets (NPAs) in their loans portfolio.
The uncomfortably high level of NPAs of banks however is a cause for worry and
it should be brought down to international acceptable levels for creating a
vibrant and competitive financial system. NPAs are serious strains on the
profitability of the banks as they cannot book income on such accounts and their
funding cost provision requirement is a charge on their profit. Although S & P
cited as a reasons for mounting of NPAs priority sector lending, outdated legal
system which not only encourages the incidence of NPAs but also prolongs their
existence by placing a premium on default and delay in finalization of
rehabilitation packages by the Board for Industrial and Financial Reconstruction
are some of the major causes for the rising of NPAs. The following deficiencies
were noticed in the managing Credit Risk: The absence of written policies. The
absence of portfolio concentration limits. Excessive centralization or
decentralization of lending authorities. Cursory financial analysis of borrower.
Infrequent customer contact. Inadequate checks and balances in credit process
The absence of loan supervision A failure to improve collateral position as a
credit deteriorate Excessive overdraft lending. Incomplete credit files The
absence of the assets classification and loan-loss provisioning standards
48

50. A failure to control and audit the credit process effectively.
In July 1993, New Bank of India was merged with Punjab National Bank. Now, there
are 27 banks in the public sector viz. State Bank of India and its 7 associates,
19 commercial banks exclusive of Regional Rural. Following are the 21 public
sector banks. 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. Allahabad Bank
Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central
Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas bank Punjab
National Bank Punjab and Sind Bank State Bank of India State Bank of India & its
associates. 1) State Bank of Hyderabad 2) State Bank of India 3) State Bank of
Indore 4) State Bank of Mysore 5) State Bank of Saurashtra 6) State Bank of
Travancore
18. Syndicate Bank 19. UCO Bank 20. Union Bank of India (UBI) 21.Vijaya Bank
49

51. 50

52. Deposits Total deposits mobilized by the Public Sector Banks as at the end March
2003 stood at Rs. 10,79,394crore showing a growth of 11.4% which is lower than
growth rate of 12.7% recorded at end March 2002. The State Bank of Patiala
showed the highest growth in the deposit mobilization with 28.1%, where Orietal
Bank of Commerce showed the lowest growth rate of 4.6% at the end March 2003.
During the year 2002-2003, 17 Public Sector Banks registered the higher growth
than the group average. Investment During 2002-2003, investment rose by Rs.
91,159crore (20%) to Rs. 5, 45,668 crore as compared to an increase of Rs.
60,402 crore (15.3%) during the previous year. The rate of growth was higher
than the average for 14 Public Sector Banks. State Bank of Patiala showed
highest rate with 42.3%. At the other extreme, Oriental Bank of commerce
registered growth rate of 7.9% during the year. Other banks which have
registered an impressive growth in investment during 2002-2003 are Canara Bank
(31.1%), Corporation Bank (32.4%), and State Bank of Saurashtra (33.0%). Credit
The rate of growth in the total loan disbursement by the banking sector was
lower during 2002-2003 due largely to lower economic activity. The total loans
and advances position as at end March 2003 stood at Rs. 5,49,351crore registered
the growth rate of 14.1% as compared to Rs. 4,80,118 crore at end March 2002
with growth rate of 15.7%. 14 Public Sector Banks showed the higher growth rate
than the group average. Vijya Bank tops the position with 27.3% in credit
disbursal. Other banks which have showed impressive growth in advances are
Canara Bank (22.1%), UCO Bank (24.4%), State Bank of Indore (21.0%),State Bank
of Patiala (23.8%)and State Bank of Travancore (23.3%)during 2002-2003. the Bank
which registered the lowest growth in credit disbursement was Bank of Baroda
with 5.0%.
51

53. Table 2: Public Sector Banks: Total Assets, Gross NPA, And Net NPA
Name of the Bank NATIONALI S-ED BANKS Allahabad Bank Andhra Bank Bank of Baroda
Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation
Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab
and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India
United Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of India
Associates of SBI State Bank of Bikaner & Jaipur State Bank of Heyderabad
Total Assets 2001 2002 2003 2001
Gross NPA 2002 2003 2001
Net NPA 2002 2003
22056.56 20389.41 63322.04 59566.57 19039.87 66520.64 47260.31 19703.20 17908.60
26640.54 30294.48
24764.46 20937.25 70910.07 69805.86 21470.45 72135.15 52613.67 23604.19 18842.07
30262.94 35441.12
28050.92 24678.36 76476.85 76626.77 24923.18 82054.93 57105.16 26271.98 20161.96
35375.22 41154.72
1821.31 470.10 4185.72 3434.00 876.63 2150.29 3253.00 484.74 1928.26 2359.07
1631.40
2001.85 524.14 4489.30 3722.00 906.42 2112.44 3376.00 527.05 1996.02 2175.35
1818.54
1841.50 580.70 4167.90 3804.00 957.54 2474.78 3244.00 657.34 1616.58 1629.82
1896.48
1074.64 219.02 1850.54 2138.00 497.67 1345.99 1830.00 171.19 1280.31 949.93
917.58
1160.1 237.23 1913.1 2304.0 479.71 1288.3 1699.0 253.43 1227.2 903.58 957.51
886.9 206.2 1700. 2382. 459.1 1453. 1562. 198.3 997.2 754.9 912.2
27072.43 13402.38 63519.22 28243.22 27331.18 38977.74 21482.82 14256.61 626987.8
315644.2
32236.93 13753.57 72914.66 31756.19 31381.37 44357.89 22776.38 16144.80 706109.0
348228.2
33987.63 14490.91 86221.80 34435.43 34914.08 51060.49 24270.68 19079.37 791281.4
375876.5
585.76 1026.15 3460.10 1074.60 1284.02 2056.33 1411.15 594.92 34087.55 15874.97
951.79 1091.84 4139.86 1299.13 1332.65 1215.50 602.69 36763.05 36763.05 15485.85
1146.25 1246.89 4980.06 1420.17 1366.49 2387.61 959.08 505.54 36882.7 13506.0
397.11 634.13 1871.11 530.64 655.92 1201.22 602.30 356.06 18523.36 6856.26
453.80 651.21 1810.0 689.59 723.59 1338.3 541.99 373.24 19005. 6810.2
225.2 639.4 1526. 700.0 697.1 1253. 406.0 205.8 17169 6183.
13887.58
15504.24

54. 18038.14
715.00
585.12
580.29
409.67
342.11
281.79
18426.03
22120.80
26131.54
1075.29
898.52
734.84
555.06
417.47
315.39
52

55. State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of
Saurashtra State Bank of Travancore Total of 7 Associates Total of State Bank
Group Total of Public Sector Bank S
8222.52 9413.49 14324.81 8583.06 14482.67 87340.17 402984.3 1029972.
9845.90 10353.67 17372.51 9369.85 16493.37 101060.4 449228.6 1155397.
11376.37 11335.75 21288.90 10873.91 91030.16 118077.7 493954.2 1285235.
325.19 581.01 688.99 568.54 757.93 4711.95 20586.92 54674.47
320.10 624.61 628.02 443.25 727.61 4227.23 19713.08 56476.13
295.25 562.01 531.29 354.34 635.26 3698.28 17204.35 54087.08
202.57 336.96 336.20 262.38 495.97 2598.81 9455.07 27978.43
153.46 361.51 254.78 203.57 425.05 2157.9 8968.2 27973.
137.84 272.90 160.85 163.96 280.00 1612.7 7795.7 24963.
Total Assets Total Assets of the Public Sector Banks increased to
Rs.1,28,5236crore as on March 2003 from Rs.11,55,398crore of the previous year,
showing the growth rate of 11.2% as against the growth rate of 12.2% recorded
during the 2001-2002. 17 Public Sector Banks registered higher than the average
rate of growth recorded by the Public Sector Banks as a group. During the
previous year (2001-2202), 16 Public Sector Banks registered growth rate higher
than the average growth recorded by this group. Non performing Assets Both gross
NPA and net NPA at the end March 2003 were lower than the previous year. The
gross NPA of Public Sector Banks decreased to Rs. 54,087crore at the end March
2003 from Rs. 56,476crore at end March 2002. Similarly the Net NPA declined from
R.s 27,973 crore at the end March 2002 to Rs. 24,963crore at the end March 2003.
so far as the growth is concerned, the gross NPA registered (-)4.2%at the end
March 2003 as compared to 3.3% of the previous year. In the case of net NPA, it
has shown a declining trend in all the tree years. The growth in net NPA
registered a (-) 0.02% in 2002 and (-) 10.7% at the end March 2003.
53

56. Table 3: Public Sectors Banks: Profits
Name of the Bank NATIONALIS ED BANKS Allahabad Bank Andhra Bank Bank of Baroda
Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation
Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab
and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India
United Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of India
Associates of SBI State Bank of Bikaner &
2001
Gross profit 2002 2003
Provisions &contingency 2001 2002 2003
2001
Net profit 2002
2003
266.01 248.72 1036.47 772.02 239.98 1131.23 470.48 532.06 76.83 61.59 306.60
534.10 102.74 145.21 297.79 213.70 511.25 136.72 178.48 8062.05 3466.78
407.98 425.38 1309.26 1408.45 415.05 1656.24 704.36 622.94 335.39 307.15 616.36
917.10 163.70 1473.80 355.24 475.98 869.24 237.16 252.51 12953.2 6044.83
515.8 754.83 1716.62 2030.00 520.58 1997.37 923.85 852.52 493.83 590.25 794.14
1163.06 280.84 2317.29 618.79 624.04 1303.92 556.02 432.36 18486.1 7775.40
226.0 127.5 761.8 520.1 194.7 846.1 424.0 270.2 342.9 335.5 190.6 331.2 89.48
481.5 62.86 180.7 355.7 117.5 107.7 5966. 2362.
327.7 223.1 763.3 903.2 269.6 914.8 541.0 314.8 324.0 273.9 386.1 596.5 140.6
911.4 104.6 311.4 555.1 118.1 121.6 8101. 3613.
949.84 351.84 943.84 1179.00 298.56 978.48 618.33 436.53 379.14 401.42 378.04
706.11 276.41 1475.09 274.66 416.55 751.23 250.83 235.80 10702.2 4670.40
39.91 121.19 274.66 251.88 45.19 285.10 46.46 261.84 -266.12 -274.00 115.93
202.89 13.26 263.64 234.94 33.00 155.47 19.14 70.73 2095.10 1604.25
80.21 202.27 545.93 505.22 145.41 741.40 163.30 308.10 11.36 33.22 230.21 320.55
23.04 562.39 250.55 164.52 314.13 119.04 130.90 4851.76 2431.62
165.9 402.9 772.7 851.0 222.0 1018. 305.5 415.9 114.1 188.8 419.1 456.9 4.43
842.2 344.1 207.4 552.6 305.1 196.5 7783. 3105.
268.30
390.62
440.85
162.9
226.1
237.5
105.37
164.50

57. 203.2
54

58. Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore State
Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7
Associates Total of State Bank Group Total of Public Sector Bank S
448.39 172.46 137.94 399.12 116.38 230.24 1772.83 5739.61 13801.6
600.05 342.24 234.79 564.63 221.26 321.26 2674.85 8719.68 21672.9
757.95 421.00 352.75 739.54 286.63 455.00 3453.72 11229.1 29715.2
298. 108.4 112.2 238.0 102.6 132.7 1155. 3577. 9484.
373. 217.1 168.8 331.6 139.2 200.3 1656. 5270. 13371
456.5 220.6 236.8 417.5 194.0 283.9 2047. 6717. 17419
150.22 63.99 25.72 161.10 13.11 97.49 417.59 2221.84 4316.94
226.49 125.10 65.90 232.94 82.09 120.93 1017.86 3449.48 8301.24
301.4 200.3 115.9 322.0 92.55 171.0 1406. 4511. 12295
Profit The total gross profit of the Public Sector Banks stood at Rs.29,715
crore during 2002-03 as compared to Rs. 21,673crore 2001-02. The net profit of
the banks also went up from Rs.8,301crore in 2001-02 to R.s12,295crore during
2002-03. highest growth rate in the net profit was recorded by the Dena Bank
(905.0%) followed by the Indian Bank (468.4%) apart from these two banks, other
banks which have recorded remarkable growth in net profit were United Bank of
India (156.3%) and Allahabad Bank (106.9%). 14 banks recorded higher growth in
the net Public Sector Banks than the group average during 2002-03.
55

59. 56

60. 57