ABSTRACT

The case discusses the issue of high NPAs in the Indian banking system in the first two decades of the twenty-first century. It covers in detail the various steps taken by the central bank of India and the Government of India to bring down the NPAs and how gross NPAs went down by rupees one trillion in the financial year 2019 when compared with the previous financial year. Although the GNPAs had gone down by close to rupees one trillion in FY19, bad loans were still very high. Some experts opined that the high number of bad loans would continue as long as the Public Sector Banks remained under the shadow of the government. They commented that the RBI and the GoI should take more stringent steps to clean up the balance sheet of the banks. ororPayPal (11 USD)
 

Issues

The case is structured to achieve the following teaching objectives:

• Analyze the Indian banking system and understand how it developed over a period of time.

• Understand the NPA problem in the Indian banking system.

• Critically analyze the initiatives taken by the RBI, the GoI, and SEBI, to address the issue of high NPAs.

• Understand what steps stakeholders should take to solve the issue of high NPAs in the Indian Banking Industry.

ContentsINTRODUCTIONINDIAN BANKING INDUSTRYNPAS IN INDIAN BANKING INDUSTRYREASONS FOR HIGH GROWTH IN NPASRBI’S POLICIES ON NPASSEBI’S CIRCULAR ON DISCLOSURE OF DIVERGENCEEFFORTS OF GOI TO REDUCE NPASLOOKING AHEADEXHIBITS

Keywords

NPA, RBI, Asset Quality Review, Non-Performing Assets, Willful defaulters, Strategic Debt Restructuring, Divergence Disclosure Rules, Prudential Framework for Resolution of Stressed Assets, Insolvency and Bankruptcy Code, Project Sashakt, 4Rs strategy

INTRODUCTION

 In July 2019, Nirmala Sitharaman (Sitharaman), Union Finance Minister of India, stated that the bad loans in the Indian banking industry had gone down in FY19 compared to FY18. The Gross Non-Performing Assets (GNPAs) had decreased from Rs. 10.5 trillion in FY18 to Rs. 9.24 trillion in FY19. Similarly, Non-Performing Assets (NPAs) had also come down from Rs. 5.27 trillion in FY18 to Rs. 3.52 trillion in FY19. Experts stated that various factors such as bad loan write-offs by banks, change in the credit culture, prohibiting willful defaulters from raising funds from the market, and enactment of the Insolvency and Bankruptcy Code (IBC) in 2016 by the Reserve Bank of India (RBI) and the Government of India (GoI) had resulted in the reduction in GNPAs and NPAs...

INDIAN BANKING INDUSTRY

An indigenous banking industry had prevailed in India since ancient times, with some communities being traditionally involved. These communities mostly ran huge businesses apart from their small banking business. They dealt mainly in money lending, did not accept deposits from customers, and discouraged savings.

The Western type of banks came into the picture in the late 18th century in India when the Bank of Hindustan was established in 1770 in Calcutta (now Kolkata) in eastern India...

EXCERPTS

NPAS IN INDIAN BANKING INDUSTRY

In 1996-97, the GNPA in the Indian banking industry was 15.7%. This fell to 2.36% at the end of financial year 2010-11 due to various reforms introduced by the RBI and GoI, such as implementation of the reforms suggested by the second M. Narasimham Committee on the banking sector in 1998, enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and the Credit Information Companies (Regulation) Act, 2005 , etc. , ...

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REASONS FOR HIGH GROWTH IN NPAS

There were many environmental factors that were responsible for the high growth of NPAs in India. One of the main reasons was the US financial crisis in 2008 which had a global impact. In addition to this, a fall in commodity prices and dumping from China had decreased the competitiveness of Indian manufacturers, leading to a reduction in the cash flow of the manufacturers. This had made it tough for them to repay their loans and this in turn resulted in the growth in NPAs...

RBI’S POLICIES ON NPAS

In September 2013, Raghuram Rajan (Rajan) became governor of the RBI. In his very first speech as governor, he said, “We have to improve the efficiency of the recovery system, especially at a time of economic uncertainty like the present [2013]…. I have asked Deputy Governor Dr. Chakrabarty to take a close look at rising NPAs and the restructuring/recovery process, and we too will be taking the next steps shortly. RBI proposes to collect credit data and examine large common exposures across banks...

SEBI’S CIRCULAR ON DISCLOSURE OF DIVERGENCE

In November 2019, the Securities and Exchange Board of India (SEBI), the regulator of the Indian securities market, issued a circular asking listed banks to disclose any material divergence in their NPAs as soon as possible but not later than 24 hours after the receipt of the ‘Risk Assessment Report’ (RAR) from the RBI. SEBI’s circular stated, “These disclosures in respect of divergence and provisioning are in the nature of material events/ information and hence necessitate immediate disclosure.” Before the November circular, banks used to disclose such divergences in quarterly results.....

EFFORTS OF GOI TO REDUCE NPAS

In May 2016, the Indian parliament passed the long-awaited ‘Insolvency and Bankruptcy Code, 2016’ (IBC) which gave more powers to the creditors and ensured timely winding up of unviable projects and faster recovery of money. IBC replaced the old bankruptcy law. The provisions of this law would be applicable to companies incorporated, limited partnership firms, partnership firms, and individuals. This law made it easier to do business in India as it resolved the problem of having to deal with multiple laws that a person who wanted to start a business in India faced...

LOOKING AHEAD

Sitharaman, who became the new Union Finance Minister of India on May 31, 2019, asked banks to follow the circular of the RBI in which the central bank had directed banks to not declare the stressed loans of Micro, Small & Medium Enterprises (MSMEs) as NPAs till March 31, 2020. Sitharaman said, “We have told the banks that till March 31, 2020, no stressed-asset MSME will be declared an NPA. We have also requested that the banks should make an effort to sit with such stressed-asset MSMEs and work it out with them to get them out of that situation.” ...

EXHIBITS

Exhibit I: Indian Banking Structure
Exhibit II: Aggregate NPA of Banking Services Industry (in Rs. million)
Exhibit III: Return on Assets and Return on Equity of SCBs: Bank Group-Wise
Exhibit IV: Top 10 Banks Writing Off Bad Debts in 2015
Exhibit V: Format to Report Divergence in Asset Classification and Provisioning for NPAs
Exhibit VI: Bandhan Bank Stock Price (Adj. close**) Movement since Inception (Currency in INR)
Exhibit VII: Profitability and Liquidity Ratio of Bandhan Bank vs. Its Peers (FY 2016-2018)
Exhibit VIII: Bandhan Bank’s Growth Parameter Assumptions for FY2019-2023