Bad loans: Are economic conditions alone responsible for rising NPAs?
Ordinary borrowers often complain about difficulty in getting loans, while some large borrowers just get it on a platter. This also highlights high operational risks associated with people and process that may be responsible for increase in bad loans or NPAs
Non-performing assets (NPAs) of the banks, especially public sector banks (PSBs), have been going up sharply recently.  According to one of the estimates, the gross non-performing assets (NPAs) of listed banks rose 35.2% to Rs2.43 lakh crore during the first three quarters of the current financial year. In absolute terms, the 40 listed banks added Rs63,386 crore to their gross NPAs during the nine months till December 2013, with State Bank of India (SBI), the largest lender in the country, leading with an accretion of Rs16,610 crore. The rising NPAs have set the alarm bells ringing all across. The finance ministry has asked banks to work on ways and means of recovering NPAs at the earliest. Banks are busying chalking out strategies to recover money blocked in NPAs. While managing NPAs has become a cause of concern for banks, the reasons for rising NPAs are also being debated all across.
The rising incidence of NPAs has been generally attributed to the economic slowdown. It is believed that with economic growth slowing down and rate of interest going up sharply, corporates have been finding it difficult to repay loans, and it has added up to rising NPAs. Even finance minister P Chidambaram stated that bad loans are a function of the economy and hence, having bad loans during distressed times is very natural. But do bad loans rise only because of economic distress? If this was the case, almost all banks would have experienced similar kinds of bad loans in their portfolios. Public sector banks have performed badly on the NPAs front compared to the private sector banks. While the loan portfolio of these two types of banks may be different, the contribution of public sector or state-run banks in total NPAs does not justify this difference in the composition of loans.
So what is it that is causing burgeoning of NPAs? Is it the approach of banks towards loans, which is wait and watch approach or the credit sanctioning processes of the banks itself? Are there other factors as well contributing to the rise in NPAs? The wait and watch approach of banks have been often blamed as the reason for rising NPAs as banks allow deteriorating asset class to go from bad to worse in the hope of revival and often offer restructuring option to  corporates.
Let us look at the wait and watch approach supplemented by restructuring offers of banks, which cause NPAs to rise. A Parliamentary panel, examining increasing incidents of NPAs, has observed that state-owned banks should stop “ever-greening” or repeated restructuring of corporate debt to check the constant bulging of their non-performing assets. Members of the panel were of the view that NPAs are the result of bad economic situation, but there were also management issue of every-greening of loans, which could be avoided by “not renewing loans, particularly of corporate”. This analysis clearly points out that banks’ approach towards NPAs has been a reason for aggravation of bad loans. Extending those extra helping hand can go against the financial health of banks.
Coming to the contribution of credit assessment process, banks need to be more conservative in granting loans to sectors that have been traditionally found to be contributors of NPAs. Infrastructure sector is one such villain causing NPAs to rise predominantly because of long gestation period of the projects. But more than all, this credit sanctioning process of banks need to go much more beyond the traditional analysis of financial statements and analyzing the history of promoters. There is a need to incorporate significance of economic factors in the credit assessment process. Also, banks need to evolve strategy through which defaulters are kept out of system unless they honour the previous payment. It is obvious that credit bureaus have failed to obtain this objective as their reports giving credit history of corporate have been inadequate in capturing repeated defaults by same borrower. The old defaulter often resurfaces by using a new name with a clean slate and banks find it difficult to track this ‘habitual’ defaulter.
Banks also need to look at operational factors causing increasing incidents of bad loans. Are the bank officers going beyond the traditional principles of lending? Are unfair practices also adding to the increasing incidents of lending?  SBI has recently taken some steps in this regard. To ensure that the dealings of its officers are more transparent, SBI has asked its officials not to meet the borrowers, existing as well as prospective, at any location other than the bank branch. Whether this will be effective or not is debatable, however the fact remains that high operational risks associated with people and process is key contributing factor in increasing incidents of loans turning bad or into NPAs. Ordinary borrowers often complain about difficulty in getting loans, while some large borrowers just get loans on a platter. It is time for banks to have a complete framework in place to tame NPAs getting added because of operational risks.
(Vivek Sharma has worked for 17 years in the stock market, debt market and banking. He is a post graduate in Economics and MBA in Finance. He writes on personal finance and economics and is invited as an expert on personal finance shows.)
  • Like this story? Get our top stories by email.




    6 years ago

    United Bank of India, State Bank of India & GOD knows how many more ??? The media has not playing the news of banks NPA levels falling as an important news, all the news currently are pretty much around the National politics & elections. Hoping the investors are careful, can't say when these news might hogg the limelight.


    6 years ago

    United Bank of India CMD Archana Bhargava resigns; reports of rifts on NPA classification
    By Atmadip Ray, ET Bureau | 22 Feb, 2014, 04.00AM IST

    Read more at:

    Foreign banks earning more income from services other than banking

    According to RBI survey, foreign banks operating in India generated more income from fee-based business like derivatives, stock, securities, foreign exchange trading services and financial consultancy or advisory services


    Foreign banks operating in India are generating more fee-based income from derivatives, stock, securities, and foreign exchange trading services and financial consultancy or advisory services, says a study conducted by the Reserve Bank of India (RBI)

    The survey on ‘International Trade in Banking Services’ (2012-2013) shows a study on Indian banks’ branches and subsidiaries operating outside the country as well as the foreign banks operating in India.

    The survey reveals that, the Indian banks’ branches, which originated outside India, generated their major share of fee income by rendering credit-related services and trade finance-related services. However,

    Findings of the Survey on International Trade in Banking Services:

    Employment Distribution and Growth

    1. Indian banks’ branches operating abroad employed 64.5% of employees from local sources, 32.5 %from India and remaining 3.0% from other countries;
    2. The total share of local employees in foreign banks working in India was 99.6 % in 2012-13. However the number of employees of foreign banks operating in India decreased 8.1%;
    3. Total number of employees of Indian banks operating abroad increased by 7.8 % during 2012-13.

    Credit and Deposit Growth

    1. Growth of credit extended by Indian banks’ branches operating abroad increased 31.7 % to Rs5,855.7 billion (US$ 107.7 billion);
    2. Credit extended by foreign banks operating in India increased by 27.5% to Rs 3,077.0 billion (US$ 56.6 billion) during 2012-13;
    3. Deposit mobilised by Indian banks’ branches operating abroad increased by 45.5 %during 2012-13;
    4. In case of foreign banks operating in India, deposit growth moderated to 3.2 %from 14.3 %in the previous year.

    Income and Expenditure

    1. The total income of Indian banks’ overseas branches increased 28.1% to Rs365.6 billion (US$ 6.7billion) in 2012-13;
    2. The total income of Foreign banks operating in India, increased 13.1% to Rs528.4 billion (US$ 9.7 billion);
    3. Total expenditure accounted for about 75% and 71% of the total income of Indian overseas branches and foreign banks operating in India respectively.

    Fee Income Generated

    1. Total fee income generated by 170 overseas branches of Indian banks increased to Rs93.5 billion (US$ 1.7 billion) in 2012-13 from Rs68.0 billion (US$1.4 billion) in 2011-12;
    2. Total fee income generated during 2012-13, by foreign banks operating in India declined to Rs74.5 billion (US$ 1.4 billion) from Rs 94.3 billion (US$ 2.0 billion) in 2011-12.

    Country-wise Banking Services

    Bahrain, Belgium, Hong Kong, Japan, Singapore, Sri Lanka, UAE, UK and USA were the major countries which together accounted for nearly 92.2% of the total banking services of the branches of Indian banks operating abroad.

    The survey covered 170 overseas branches, 184 overseas subsidiaries of Indian Banks and 316 branches of foreign banks operating in India.

    RBI said that it has done the survey with the intention of providing information on International trade in banking services (ITBS) of India. RBI has released the survey results including statistical data in tabular format to provide consistent and comparable data which are captured on financial auxiliaries’ services rendered by the banks based on explicit, implicit fees and commission charged to customers.

  • User 

    NPAs of 40 listed banks rise 35% to over Rs2.4 lakh crore in Q3

    According to, almost 11 banks out of 40 posted a 50% plus growth in their gross NPAs during the nine months that ended on 31 December 2013

    Gross non-performing assets (NPAs) or bad loans of 40 listed banks increased 35.2% or by Rs63,386 crore to over Rs2.4 lakh crore during the December 2013 quarter. This jump of 35.2% was much higher than the 27% witnessed during the first six months of financial year 2013-14, says


    According to a study conducted by the portal, 10 out of the 40 listed banks accounted for nearly 70% of the total gross NPAs of Rs2.43 lakh crore. State Bank of India (SBI) at 28% or Rs67,799 crore has the largest share in the total gross NPAs of the 40 listed banks, followed by Punjab National Bank (PNB) with 7% share at Rs16,596 crore. Bank of Baroda and Central Bank of India, both have 5% share each in the NPAs.


    As of 31 December 2013, Bank of Maharashtra posted the largest increase in gross NPAs of 209% to Rs3,516 crore from Rs1,138 crore as on March 2013.  United Bank of India also reported a 188% jump in its gross NPAs at Rs8,546 crore at end of December quarter. Almost 11 banks posted a 50% plus growth in their gross NPAs for the nine months ending 31 December 2013, said.

    "The fourth quarter of 2013-14 will continue to be bad for banks on the NPAs front, but most banks will resort to higher levels of provisioning so as to bring down their net NPA levels. The first quarter of next financial year too will continue to be bad for banks with regard to NPAs. The high concentration of banks’ debt to the top 50-100 corporates is also a major concern area. A clearer picture about the future of the Indian economy will emerge post the central elections due in May," said Devendra K Jain, chairman and managing director of Atishya Group that owns


    The growth in net NPAs at 49% for the nine months ended 31 December 2013 as against a 38% rise in the first six months of 2013-14 is also alarming. Net NPAs have gone up to Rs1.38 lakh crore as of December end from Rs93,116 crore at end of March 2013.


    "There is no respite for banks in India from the onslaught of higher interest rates and slowdown in the Indian economy leading to further increase in loans turning bad from corporate as well as retail segments,” Jain added.

  said gross NPAs of listed banks have doubled since September 2011; while net NPAs have risen by 2.4 times or 140% during the same period.


  • User 

    We are listening!

    Solve the equation and enter in the Captcha field.

    To continue

    Sign Up or Sign In


    To continue

    Sign Up or Sign In



    online financial advisory
    Pathbreakers 1 & Pathbreakers 2 contain deep insights, unknown facts and captivating events in the life of 51 top achievers, in their own words.
    online financia advisory
    The Scam
    24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
    Moneylife Online Magazine
    Fiercely independent and pro-consumer information on personal finance
    financial magazines online
    Stockletters in 3 Flavours
    Outstanding research that beats mutual funds year after year
    financial magazines in india
    MAS: Complete Online Financial Advisory
    (Includes Moneylife Online Magazine)
    FREE: Your Complete Family Record Book
    Keep all the Personal and Financial Details of You & Your Family. In One Place So That`s Its Easy for Anyone to Find Anytime
    We promise not to share your email id with anyone