A Study of Non-Performing Asset Management with Special Reference to Bank of Baroda: Ruchir Joshi

A robust banking sector is significant for prospering economy. It has been understood that the failure of the banking sector results in an adverse impact on the economy. In the ongoing years Non-Performing Assets “NPA” have been the single biggest reason for stress for banking sector in India. The 1991 Narasimham Committee Report highlighted that the priority sector lending prompting the development of NPA by banks and prescribed a legitimate framework to recognize, characterize and afterward eliminate the NPA.[1]

 

A significant level of NPAs recommends high likelihood of countless credit defaults that influence the benefit and total assets of banks and furthermore erodes the value of the asset. This article discusses in brief the meaning of NPA, its impact and its rise in India. The main purpose of this article is to analyse the increasing NPA ratios of Bank of Baroda and analyse the reforms in the NPA management by the bank in light of the same.

 

What is NPA?

 

An asset including a leased asset becomes non-performing when it ceases to generate income for the bank. In simple words, aNPA, is a loan or advance for which the principal or interest payment remains overdue for more than 90 days.[2]

 

Classification of NPA's

 

Banks are required to classify NPA's into 4 broad categories:

 

-        Substandard Asset: Assets that have remained NPA for less than or 12 months.

 

-        Doubtful Assets: Assets that have remained substandard for 12 months.

 

-        Loss Asset: As per RBI, “loss asset is considered as uncollectible and of such little value that its continuous as a bankable asset is not warranted although there may be some salvage or recovery value.[3]”

 

-        Standard Asset: As opposed to NPA, standard assets are those that have remained non-performing for 12 months and the risk of the asset is normal.[4]

 

Impact of NPA

NPA's place the financial burden on the lender. A noteworthy number of NPA's over some undefined time frame may demonstrate to regulators that the financial wellbeing of the bank is in risk. This also impacts the depositors and borrowers as; depositors get lower returns on their investments and may likewise lose any uninsured deposits and borrowers also have to pay a higher rate of interest on loans to compensate bad loans.[5]

 

Rise in NPA in India

India holds the dubious distinction of having the noticeably terrible non-performing loan ratio among the world’s major economies. Indian lenders have the highest percentage of bad loans as compared to the 10 emerging economies.[6]

 

In 2011, the countries bad loans were only 2.36% which kept surging until march 2015 when it rose dramatically. The reason behind this surge can be attributed to the RBI, which tightened norms for NPA recognition in 2015, after which the banks had to recognise some assets as NPA's which otherwise were considered as standard assets.[7]

 

A great deal of loans classified as NPA's originated in the mid 2000's at a time when the economy was booming and business viewpoint was exceptionally positive. After which, large corporations were granted loans for projects based on the recent growth and performance. But as the economic growth stagnated following the global financial crisis of 2008, the repayment capability of these corporations decreased.[8]

 

Data Analysis: Bank of Baroda

Bank of Baroda, an Indian state-owned International Banking and financial services company is the second largest bank in India, after the State Bank of India.[9]

As regards the NPA of the Bank of Baroda “BoB” it has been noted that the NPA took off more than six-fold to ₹73,140 crore while those of Indian Bank surged four-times to ₹32,561.26 crore in six years. The number of NPA accounts have also risen to 6,17,306 in December 2019, compared to 2,08,035 on March 2014.[10]

This table provides the trend NPA Ratios of the Bank of Baroda.[11]

NPA RATIOS:	Mar’20	MAR’ 19	MAR’18	MAR’17	MAR’16
i) Gross NPA	69,381.43	48,232.77	56,480.39	42,718.70	40,521.04
ii) Net NPA	21,576.59	15,609.50	23,482.65	18,080.18	19,406.46
i) % of Gross NPA	9.40	9.61	12.26	10.46	9.99
ii) % of Net NPA	3.13	3.33	5.49	4.72	5.06
Return on Assets %	0.06	0.06	-0.34	0.20	-0.78

 

As per the data, BoB has seen elevated gross NPA’s over the last one year.NPA’s have remained at elevated levels, and there are signs of continuing stress all over. In the light of this, it is important that the Bank strengthens its risk management techniques so as to overcome this challenge.

BOB’s response to tackle bad loans

As a result of the spike in bad loans and to guard against the potential slippages, the BoB has redesigned its NPA management strategies. As per the recent annual report, the bank has strengthened its NPA management by introducing various new measures.[12]

New Measures

·       To increase recoveries and reduce slippages, the bank has created a ‘stressed assets management vertical’.  Under this all major and medium sized NPA accounts will be handled by specialised units called Stressed Assets Recovery Branches (SARB) set up at zonal and regional level which will be under the direct control of the corporate office.[13]

·       To address the problem of large number of small NPA accounts, sector-wise special OTS (one-time settlement) schemes were launched. For micro, small and medium enterprises, the bank launched MSME OTS Scheme to provide an opportunity for repayment of dues. For the MSME sector, the bank launched MSME OTS Scheme to provide an opportunity for repayment of dues.

·       Also, a special OTS scheme was launched for distressed farmers.

·       The bank has also launched an application named ‘One Time Settlement Tracking System’, wherein the customers can initiate online proceedings to settle dues. The new framework of a ‘legal war room’ has also been introduced for “real-time tracking of recovery proceedings and to aid accelerated decision making wherein high value suit-filed accounts are monitored.

·       To augment recoveries, the bank has also set up a solution provider cell to ensure minimal slippages and to provide resolution strategies for large NPA accounts i.e exposure above Rs 30 crores.

·       The NPA management was strengthened with daily dashboards like Days Past Due (DPD) Report, NPA movement chart and mock runs for forecasting degradations to ensure a reduction in slippages and improvement in collections, the bank said.

·       The report also stated that the bank is in the process of developing a mobile application to enable collection agents to collect the amount based on data fed in the system and also update recovery details.

·       In addition, the bank has put a slew of measures on an ongoing basis to facilitate the recoveries. These include assigning nodal officers at each DRT for follow-up of legal cases on a daily basis to minimise the delay in obtaining decrees and execution and to maximise the recoveries.[14]

 

Conclusion

The measures introduced by the BoB to tackle the NPA, were very much needed in a time when the country is already facing an economic crisis as a result of the coronavirus pandemic. Most banks have seen an increase in the rise of stressed assets and even the RBI has anticipated a spike in the NPA’s.[15]

In the light of this, it can be concluded that the reforms in the NPA management techniques were very much needed, and will help in reducing the NPA ratios of the bank.

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[1]Committee on Banking Sector Reforms (Narasimham Committee II) - Action taken on the recommendations, RBI (Oct. 31, 2001), https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?ID=251.

[2]Definition of ‘Non Performing Assets’, THE ECONOMIC TIMES, https://economictimes.indiatimes.com/definition/non-performing-assets#:~:text=Definition%20of%20'Non%20Performing%20Assets,Substandard%2C%20Doubtful%20and%20Loss%20assets. (last visited Aug 2020).

[3]Prudential Norms on Income Recognition, Asset Classification and Provisioning - Pertaining to Advances, RBI (Aug. 30, 2001), https://www.rbi.org.in/scripts/NotificationUser.aspx?Id=449&Mode=0.

[4]supra note 2.

[5]Ahita Paul, Examining the rise of Non-Performing Assets in India (Sept. 13, 2018), PRS INDIA https://www.prsindia.org/content/examining-rise-non-performing-assets-india.

[6]India’s bad loans worst in world, surpass Italy in dubious record, FINANCIAL EXPRESS (Mar. 19, 2019), https://www.financialexpress.com/economy/indias-bad-loans-worst-in-world-surpasses-italy-in-dubius-index/1520872/.

[7] Pragya Srivastava, Dramatic rise in NPAs in India after 2015 in one chart, and it’s not Modi’s fault, FINANCIAL EXPRESS  (Apr. 23, 2018), https://www.financialexpress.com/economy/dramatic-rise-in-npas-in-india-after-2015-in-one-chart-and-its-not-modis-fault/1142194/.

[8] Supra note 5.

[9]History, BANK OF BARODA, https://www.bankofbaroda.in/history.htm#:~:text=Bank%20of%20Baroda%20is%20an,corporate%20office%20in%20the%20Mumbai.(last visited Aug 2020).

[10]Bank of Baroda, Indian Bank's NPAs surge multi-fold in 6 years: RTI data, LIVEMINT (May 3, 2020), https://www.livemint.com/industry/banking/bank-of-baroda-indian-bank-s-npas-surge-multi-fold-in-6-years-rti-data-11588491146659.html.

[11] Yearly Results of Bank of Baroda, MONEY CONTROL, https://www.moneycontrol.com/financials/bankofbaroda/results/yearly/bob (last visited Aug. 2020).

[12] Annual Report 2019-20, BANK OF BARODA (Jul. 15, 2020), https://www.bankofbaroda.in/writereaddata/Images/pdf/AR2019-20-15-07-2020.pdf.

[13] Id., at 50.

[14]supra note 12, at 50.

[15] COVID 19: RBI report says bank NPAs may touch 22-year high in severe-stress scenario, CNBC TV18 (Jul.24, 2020), https://www.cnbctv18.com/economy/rbi-financial-stability-report-covid-npa-6435361.htm.