Banks must provide more information on NPAs, write-offs and their effects on stakeholders concerned.

The recent steep increase of non-performing assets (NPAs) of Indian banks in general, and public sector banks in particular, is a serious issue, which has implications for India’s financial stability. While assessing the soundness of the banking sector, NPAs are the second most important criterion, next to capital-to-risk-weighted-asset ratio.

Although there has been a steady improvement in NPAs since 1999, Gross NPAs have revealed a significant deterioration since 2008-09. Gross NPAs as a ratio to gross advances declined from 14.6 per cent in end March 1999 to 2.25 per cent at end March 2008. Even though this ratio remained at the same level in 2008-09, during 2009-10, this increased to 2.39 per cent. Even after netting out provisions, net NPAs as ratio of net advances were 1.12 per cent in end March 2010.

During 2011-12, the asset quality deteriorated further for Scheduled commercial banks (SCBs). The Gross NPA ratio touched 3.1 per cent, against 2.5 per cent in end March 2011. During 2012-13, this ratio was 3.25 at end June 2012 and slipped further to 3.59 at end September 2012 (table 1). A similar increasing trend is also seen in the net NPA ratio, which indicates lack of full provisioning towards NPAs.


If NPAs are increasing, this will have serious effects on future credit growth, as banks would develop cold feet in extending credit to sectors exhibiting higher NPAs. This is particularly true for sectors such as agriculture and SMEs.

Further, if higher NPAs lead to higher write-offs, this will have negative effects on those who repay their loans promptly, and create a moral hazard problem.

Thirdly, under Basel III, higher NPAs would require higher provisioning, and therefore higher economic capital. For the public sector banks, this is going to pose additional challenges, given the fiscal situation. Hence, meaningful reduction and containment of NPAs within a reasonable limit is very important at the current juncture.

Among the banking groups, the deterioration is pronounced for public sector banks, followed by foreign banks.

Slippage ratio, calculated as the addition of Gross NPAs during the year as a percentage of outstanding standard assets of the previous year, is an important indicator of asset quality. This has increased from 2.0 at end March 2011 to 2.5 at end March 2012 and further to 3.04 at end June 2012. NPAs recovered remained stagnant at about 57 per cent in 2012 as against 59.8 per cent during 2011-12 (table 2).

The written-off ratio, defined as NPAs written-off during the year as a percentage of gross NPAs outstanding at the beginning of the year, reached a peak of 14.9 per cent in 2009-10 and since then this started declining and stood at 4.4 per cent during 2011-12. The written-off amount is quite significant for private sector banks, compared with public sector banks, keeping the total gross advances lent by them.


Due to the combination of increase in the growth of Gross NPAs as well as lower provisioning, net NPAs also registered higher growth. It was higher for public sector banks, followed by private sector banks.

In the last few years, banks restructured their advances to contain the deterioration in asset quality due to increasing NPAs.

The RBI issued a circular in 2008 providing a special dispensation mechanism to address this issue. In spite of this, the deterioration in asset quality was clearly evident in the form of rising sub-standard/doubtful assets as a percentage of gross advances.

While the priority sector accounts for 52 per cent of NPAs in end March 2011, this has declined to 47 per cent in March 2012. The balance is accounted by the non-priority sector. Of the priority sector, agriculture accounts for a sizeable portion of NPAs.

Although ratios of NPAs to advances to weaker sections have declined consistently from 5 per cent in 2008 to about 2.5 per cent in 2011, this has increased significantly in 2012, with strong implications for the financial inclusion exercise.

It is important that those who availed loans from banks do not misuse the write-off route. During 2010-11, the Government of India injected Rs 20,117 crore as capital in public sector banks; this infusion amounted to Rs 12,000 crore and Rs 12,517 crore, respectively, during 2011-12 and 2012-13. During 2013-14, the GOI announced an infusion of Rs 14,000 crore in the latest Budget. On an average, the write-off amount accounts for about 15-25 per cent of the capital injected in these years. Hence, it is important that this write-off route is used judiciously so that taxpayers’ money is not misused.


In order to put the banking system on a sound footing, containing the NPAs in general and administering write-offs activity carefully assumes more importance. Hence, the following suggestions are made from the viewpoint of transparency and effective administration.

Banks must publish the names of those who are becoming NPAs, and in particular those cases where write-off is done.

“Focused auditing” should be done separately for NPAs. Along with the audited statements, the external auditor must submit a special report regarding NPAs and write-off cases.

The written-off account holders should not be eligible for any bank loan for another three or five years and a data pool must be maintained by the Indian Banks’ Association. This data pool must be made available to other banks when needed.

When the RBI grants new banking licence, there should be a condition that for the first 10 years there cannot be any loan write-offs. Later, write-off amounts must be borne by the shareholders, which is to be certified by external auditors. A separate statement should be made so that all stakeholders are aware to what extent their profits were affected due to the write-off.

The RBI must ask those strategically important banks, which carry higher NPA ratios, higher than the industrial median, to publish their plan to reduce NPAs along with their annual accounts and also position a periodical monitoring mechanism of high frequency.

The RBI must be discreet in providing the restructuring loan classification mechanism, as was done in 2008, and conduct an evaluation exercise regarding the efficacy of this measure. This would enable it to critically evaluate the implication of this measure.

(The author is former Principal Advisor, RBI. Views are personal.)

(This article was published on April 5, 2013)
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