borrowing of banks may be on account of the more flexibility given to banks to source foreign borrowings. In January 2003, the Reserve Bank provided further flexibility to banks to source foreign currency funds for granting pre-shipment credit in foreign currency/export bills rediscounting (PCFC/EBR) to exporters. Banks are allowed to use funds generated through buy-sell swaps in domestic forex markets for granting such loans subject to Aggregate Gap Limit approved by the Reserve Bank. There was also a significant expansion in ADRs/GDRs and equities of banks held by non-residents. The expansion in flows under ADRs/GDRs may be attributed to the improvement in the investment climate and lower cost of funds overseas. In terms of currency composition, international liabilities were predominantly in US dollars followed by Indian Rupees, given the large size of Rupee non-resident deposits.

3.37 Banks’ international assets, on the other hand, marginally increased by 3.2 per cent during 2002-03 to reach the level of Rs.1,04,574 crore at end-March 2003 which further increased by 10.7 per cent (about Rs.11,000 crore) during 2003-04 (Table III.11). Loans and deposits continued to be the major component accounting for about 93 per cent of total international assets. As regards the components of loans and deposits the foreign currency loans to residents increased by 20 per cent during the year 2003-04 over the top of increase of 88 per cent during the year 2002-03. The nostro balances of the reporting banks, which reflect the domestic residents’ preference of foreign currency, increased slightly during the year 2003-04 compared with a decline of 34 per cent in 2002-03.

3.38 The consolidated claims of banks, based on immediate country risk, as at end-March 2004 were mainly concentrated on the US, Hong Kong and the UK together accounting for about 54 per cent of total international claims (Table III.12). The distribution of consolidated international claims of banks on various countries, other than India, according to residual maturity revealed that banks continued to prefer to invest/lend for short-term purposes particularly in the ‘up to 6 months’ period whose share in total claims has increased by 4.5 percentage points to 70.2 per cent during 2003-04 (Table III.13). As regards the sectoral distribution of these claims, the reporting banks preferred to invest/lend in/to ‘bank’ sector and ‘non-bank private’ sector.

3.39 A quarterly profile of the commercial bank survey is able to capture the shifts in funds flows. Liquidity in the banking system surged in the first quarter of 2003-04, essentially because of the seasonal down turn in credit demand and continued capital flows. Banks drew down their nostro balances and borrowed overseas to fund foreign currency loans to residents. Net outflows were recorded under the FCNR(B) scheme as the alignment of interest rates with international rates took effect. With subdued credit demand from the commercial sector and greater access to relatively cheaper overseas funds, surplus liquidity led to an expansion of bank reserves in the first quarter

of 2003-04, despite the cut in CRR in mid-June 2003. Banks’ gilt portfolios rose sharply as the borrowing programme gathered momentum and the Reserve Bank engaged in sizeable open market sales. Repayments of food credit and relatively weak demand from industry kept credit to the commercial sector at moderate levels. Subdued credit off-take led to banks’ expanding their exposure to the commercial sector through non-SLR investments. Nostro balances were built up by some banks in the second quarter in anticipation of RIB redemption on October 1, 2003. Banks’ overseas borrowings picked up strongly in consonance with the growth of foreign currency loans to residents. The FCNR(B) scheme continued to record outflows. Net bank reserves declined as the surplus liquidity was absorbed by LAF auctions.

3.40 During the third quarter of 2003-04, deposit mobilisation revived in consonance with the recovery in real activity. This was also reflected in a strong non-food credit demand evident since August. Banks unwound nostro positions as most of the redemption proceeds of the RIBs were switched into domestic currency/non-resident deposit schemes. Overseas borrowings by banks rose in response to liberalisation in borrowing limits relating to Tier-I capital. Bank reserves rose significantly, driven by the surplus liquidity resulting from the slack in demand for funds by the Government. The slowdown in call/term borrowing from financial institutions reflected a further scaling down of non-bank lendings in the call/notice money market. Non-food credit off-take continued to strengthen in the final quarter. This, along with other factors such as inflows on account of ONGC disinvestment, FIIs inflows and inflows under Exchange Earners Foreign currency (EEFC) accounts continued to swell demand deposits. Time deposits also witnessed a spurt reflecting a switch back from mutual funds to bank deposits as well as temporary parking of mutual funds in bank deposits because of a downturn in the stock markets. The rise in banks’ investments in Government securities in the last quarter reflected repo operations conducted under the LAF. The growth of foreign currency loans to residents remained steady in all quarters. The large accretions in the capital account of banks reflected their building up of investment fluctuation reserves as well as adherence to prudential guidelines relating to the capital adequacy ratio.

3.41 In the first two quarters of 2004-05, deposit accretion moderated due to reduced capital inflows. Food credit picked up in the first quarter of 2004-05 reflecting higher procurement although there was a seasonal down turn in the second quarter. There was also a sustained increase in the non-food credit off-take reflecting in part the strengthening of industrial activity. Investment in Government paper declined in view of the upturn in interest rates and the revival of credit demand (Table III.14 and Appendix Table III.10).

3.42 The maturity structure of assets and liabilities of commercial banks showed a combination of various concerns of banks pertaining to business expansion, liquidity management, cost of funds, return on assets, asset quality, and also risk appetite in an industrial upturn. In general, the major components of balance sheet, including deposits, borrowings, advances and investments for all bank groups encompassed a non-linear portfolio structure across the spectrum of maturity. Furthermore, for all bank groups, the maturity structure of loans, and advances depicted synchronicity with that of deposits. However, there is some difference between the maturity structure of deposits and that of investments across banks. PSBs hold a greater part of their investment in higher maturity bucket, in particular, in the more than five-year maturity bucket as compared with private sector and foreign banks, which hold a major portion of investment in the upto one-year maturity bucket (Table III.15).

3.43 The stock markets, which had remained subdued since February 2000, witnessed a broad-based rally during 2003-04. The rally, which began since end-May 2003, continued almost uninterrupted till February 2004. This rally was caused by various factors like a good monsoon, encouraging corporate results, strong macroeconomic fundamentals, heavy investments by institutional investors especially by Foreign Institutional Investors (FIIs), positive trends in international markets and sector specific factors. The stock markets witnessed a sharp decline during March 2004-July 2004 on account of several domestic and international factors including profit booking by market players on year-end considerations, diversion of funds to primary market due to certain attractive IPOs, uncertainty regarding the outcome of the general elections and its effects on the reform process, slowdown in institutional investments, a rise in domestic inflation and rising international crude oil prices. However, a revival was witnessed subsequently.

3.44 In line with the uptrend in the market during 2003-04 the banking sector stocks too displayed buoyancy. The Bankex closely mirrored the BSE Sensex during 2003-04 [Chart III.4(A) and Chart III.4(B)]. In April 2004, Bankex outstripped the BSE Sensex. In May 2004, in the

3.45 In 2003-04, there was a strong market preference for bank scrips as evident from the sharp increases in turnover in respect of public sector and private sector banks (Table III.16). The share of public sector banks’ turnover in total market turnover increased to 10.7 per cent in 2003-04 from 2.7 per cent in 2002-03. All public sector banks, which are listed in the NSE, recorded substantial increase in their stock prices. The major gainers in terms of average daily prices included Bank of Baroda, Canara Bank, Corporation Bank, Indian Overseas Bank, Oriental Bank of Commerce and Punjab National Bank. The private sector banks, which are listed in the NSE, also recorded significant gains in their stock prices (Table III.17). The most active scrips, in terms of daily turnover, were State Bank of India, Syndicate Bank, ICICI Bank, Bank of Baroda and Bank of India.

3. Financial Performance of Scheduled Commercial Banks

3.46 In 2003-04, the performance of the banking sector exhibited several improvements. The momentum of high growth in the profitability of SCBs was maintained. Profits of SCBs increased substantially over and above the strong performance of 2002-03 (Table III.18). But the sources of increase in income and profits during 2003-04 were different from those of 2002-03. The high growth of operating profit was achieved mainly due to a substantial increase in non-interest income (or other income) and a significant containment of expenditure in general coupled with a decline in interest expenses on deposits in particular. Although interest income recorded a low growth, it still made a positive contribution to banks’ overall earnings. Bank group-wise important financial indicators are given in Appendix Table III.11 and Appendix Table III.12 (A) to (G).

3.47 Due to the softer interest rate regime, the total income of SCBs witnessed a slowdown with a growth rate of 6.6 per cent in 2003-04 compared with a record growth rate of 14 per cent in 2002-03. The sluggish growth of income was evident for all bank groups. Among bank groups, the rate of increase in income was highest for the foreign banks group followed by PSBs, new private sector banks and old private sector banks. The bottomline of certain PSBs also improved owing to the fact that the Reserve Bank allowed banks to recognise income on accrual basis in respect of some categories of projects under implementation which had time overruns.

3.48 The interest income from core activities including loans and advances and investments in outstanding terms remained the dominant component, accounting for 78.4 per cent of total income of SCBs. On an incremental basis, however, the contribution of interest income to total income during 2003-04 was 29 per cent compared with 64.5 per cent in 2002-03 (Chart III.5). The growth rate of interest income at 2.4 per cent in 2003-04 was substantially lower when compared with the growth rate of 10.8 per cent in 2002-03. Among the components of interest income, both income on advances and investments posted a lower growth in 2003-04 when compared with 2002-03.

Other Income

3.49 With the diversification of banks’ portfolio non-interest income or ‘other income’ has evolved as an increasingly important source of income for banks. The share of non-interest income in banks’ total income has increased continuously

from nine per cent in 1992-93 to 21.6 per cent in 2003-04 (Chart III.6). During 2003-04, on an incremental basis, the non-interest income accounted for about 71 per cent of total income as compared with 35.5 per cent in 2002-03.

3.50 The composition of non-interest income of SCBs showed that fee income, trading income on investments, income from foreign exchange operations and miscellaneous income accounted for about 30 per cent, 49 per cent, 9 per cent and 12 per cent, respectively. Within non-interest income category, the share of fee-income has come down while the share of trading income including profit (loss) from investment has increased over the years (Chart III.7). It is worth mentioning here that international evidence indicates that non-interest income tends to be more volatile than traditional interest income (Box III.6).

3.51 The expenditure of SCBs showed substantial containment during 2003-04. The growth rate of expenditure at 4 per cent in 2003-04 was much lower than 11.3 per cent recorded in 2002-03. Expenditure containment driven largely by the decline in interest expenses was evident for all bank groups. The decline in interest expenses was sharper for foreign banks when compared with other bank groups.

3.52 For SCBs, interest expenditure on deposits accounted for about 54.2 per cent of total expenditure in 2003-04, lower by 6 percentage points when compared with 2003-04. The ratio of interest expenditure to total assets of SCBs declined to 4.4 per cent in 2003-04 from 5.5 per cent in 2002-03. For PSBs, the ratio of interest expenses to total assets declined to 4.5 per cent in 2003-04 from 5.4 per cent in 2002-03. The ratio of interest expenditure to assets of new private sector banks declined to 4.7 per cent in 2003-04 from 6.4 per cent in 2002-03 while for old private sector banks, it has declined to 5 per cent in 2003-04 from 6 per cent in 2002-03.

3.53 Operating expenses comprise broadly wage expenses and non-wage expenses such as rent, taxes, establishment expenses, advertisement, directors’ fees and allowances and legal charges. During 2003-04, the operating expenses of scheduled commercial banks grew at 14.3 per cent, which was higher by 1.2 percentage points over the growth rate recorded in 2002-03. The stability in growth of operating expenses relative to assets was evident in 2003-04 since the ratio of operating expenses to assets remained more or less at the same level, albeit with a marginal decline compared with 2002-03. Across bank groups, the ratio of

operating expenses to assets declined for public sector banks, old private sector banks and foreign banks but increased marginally for new private sector banks during 2003-04 when compared with 2002-03. From a cross-country perspective, the comparative efficiency of Indian banks is evident since the ratio of operating expenses to total expenses of Indian banks is in the range of 24-35 per cent much lower than the international benchmark of 60 per cent.

3.54 The wage bill of scheduled commercial banks increased by 10.8 per cent in 2003-04 as against an increase of 8.4 per cent in 2002-03. However, the share of wage bills in operating expenses of SCBs declined to 60 per cent in 2003-04 from 62 per cent in 2002-03. Among bank groups, the more technology-intensive new private sector and foreign banks have a lower proportion of the wage bill in operating expenses as compared with old private sector and public sector bank groups. In 2003-04, the share of wage expenses in operating expenses was highest at 69 per cent for public sector banks and 59 per cent for old private sector banks. The share of wage expenses in operating expenses was 23.4 per cent and 32.1 per cent for new private sector banks and foreign banks, respectively, in 2003-04.

During the last decade, banks have steadily shifted away from traditional sources of revenue such as interest earning loans and advances and investment activities toward various non-traditional non-interest income sources, which include fee income, commission and service charges, net profit from sale (or purchase) of investments, gains from foreign exchange transactions and various other types of miscellaneous receipts. Information technology, and an increasingly liberalised financial sector have facilitated the growth of banks’ non-interest income. Increasing recourse to non-traditional sources of income enable banks to derive diversification gains in terms of lower portfolio risk. Non-interest income is also likely to be less dependent on overall business conditions than traditional interest income, so that an increased reliance on non-interest income reduces the cyclical variation in banks’ revenues and profits. Non-interest income activities enable banks to reap the benefits of economies of scale and scope through expanded business opportunities and reduce operating cost as also to spread out such costs across various activities. The potential gains from non-interest income notwithstanding, several studies have debated whether there has been significant improvement in stability of banks’ income and profitability due to the changing composition of banks’ earnings. Empirical studies for Europe and US banks suggest that non-interest income has been more volatile than traditional interest income. Using applied portfolio analysis, these studies have shown that due to positive correlation between interest and non-interest income, the volatility of aggregate income and profitability of banks has accentuated over the years.

In the Indian context, the share of non-interest income in banks’ total income has increased from nine per cent in the 1991-92 to 22 per cent in 2003-04. Across bank groups, public sector and domestic private sector banks have recorded accelerated growth of non-interest income. In terms of components of non-interest income, the income from fees and commissions, which accounted for about 70 per cent to 97 per cent of total non-interest income across various bank groups in 1991-92, has declined to about 25 per cent to 30 per cent in 2003-04. Thus, other components of non-interest income including investment banking and treasury operations have witnessed rapid growth over the years.

An analysis of volatility of the income of various bank groups suggests that during the period 1994-2004, the standard deviation of the ratio of interest income to assets was highest for private sector banks followed by foreign banks, SBI group and the nationalised banks. The standard deviation of the ratio of interest income to assets was greater than that of the ratio of non-interest income to assets of all bank groups. However, the standard deviation of the ratio of net interest income to assets was lower than that of the ratio of non-interest income to assets for all bank groups with the exception of nationalised banks. The correlation between interest income and non-interest income was negative for all bank groups; it was substantially high for nationalised banks and lower for Indian private sector banks. The correlation between net interest income and non-interest income was, however, positive for all bank groups with the exception of nationalised banks.

3.55 The major items on provisions and contingencies consist of provisions for loan losses, provisions for depreciation in value of investments and provisions for taxes. The growth of provisions in recent years has been influenced by various policy incentives. The Union Budget 2002-03 raised the allowance for deduction by banks against provisions made for bad and doubtful debts from five per cent of their total income to 7.5 per cent. Due to the impact of 90-day delinquency norm the provisions and contingencies expenditure maintained a high growth at 28.8 per cent in 2003-04 when compared with a growth of 29.3 per cent recorded in 2002-03.

3.56 During 2003-04 the SCBs continued to maintain a robust momentum in profits. Operating profit, the structural measure of profitability, increased by 29.5 per cent in 2003-04 as against an increase of 36.3 per cent recorded in 2002-03. Among bank groups, the operating profits of PSBs and foreign banks increased by 32.8 per cent and 33.8 per cent, respectively, in 2003-04. The rate of increase in operating profits of private sector banks was relatively lower at 13.4 per cent in 2003-04 as compared with 55.7 per cent recorded in 2002-03.

3.57 In recent times, treasury operations have emerged as a major profit centre for Indian banks. Forex incomes, although not as large as treasury income, have also been contributing significantly to bank’s operating profits in recent years, despite the pressure on margins and the thinning of inter-bank spreads (Table III.19, Appendix Table III.13). A bank group wise analysis indicates that a major share of the profits of PSBs and private sector banks was on account of trading income while in the case of foreign banks foreign exchange transactions accounted for a major share in profits.

3.58 Net profits of SCBs increased by 30.4 per cent in 2003-04, as against a rise of 47.5 per cent in 2002-03. In 2003-04, among the bank groups, the increase in net profits was the highest for PSBs with a growth rate of 34.6 per cent, followed by foreign banks and Indian private sector banks, which recorded a growth rate of 23 per cent and 18 per cent, respectively (Chart III.8). This was due to the large gains on

non-interest incomes, in particular, the profits booked on sale/purchase of investments.

3.59 Within PSBs group, all banks except one reported profitability (the net profit as percentage of total assets) above half per cent. In fact, 26 PSBs recorded net profitability of 0.75 per cent, of which 21 banks reported net-profitability of a percentage point in 2003-04.

3.60 International experience suggests that bank profitability was high in 2003 in major countries except Germany and Japan. There were, however, diverse developments across countries pertaining to profitability, cost conditions and provisioning (Table III.20). From a cross country perspective, the profitability of India’s banking sector remained in the high profitability of 1 per cent and above category.

3.61 The return on equity (RoE) indicator of banks provides information about the conduct of business by banks in the interest of shareholders. The RoE of the banking system was high at 19.8 per cent as at end-March 2004 as against 16.9 per cent as at end-March 2003 (Chart III.9). The high RoE in the banking industry may be conducive to attracting capital. However, actual success of banks in tapping capital market would be contingent on the individual bank’s stability and vibrancy.

3.62 Off-balance sheet activities of SCBs, comprising fees, commissions and brokerage, profit (loss) on sale/purchase of investments and forward exchange contracts, guarantees, acceptances and endorsements, rose sharply by 51.3 per cent in 2003-04. Accordingly, the share of off-balance sheet operations in terms of total liabilities increased to 89.3 per cent in 2003-04, recording a jump of about 20 percentage points over 2002-03. Out of this, forward exchange contracts accounted for 65.5 per cent. Among bank groups, foreign banks were particularly active in off-balance sheet activities with the result that the ratio of their off-balance sheet activity to total liabilities rose from 483 per cent in 2002-03 to 653 per cent in 2003-04 (Appendix Table III.14).

3.63 In the recent period, a notable feature of the banking sector has been the low cost of funds in the enabling macroeconomic environment. The cost of funds across bank groups declined in the range of 70-150 basis points in 2003-04. The decline in cost of funds in 2003-04 was

accompanied by a more or less a similar decline in return on advances, implying that the benefits of low interest rates have percolated to banks’ borrowers (Table III.21).

3.64 The spread or the net interest income, defined as the difference between interest income and interest expenses, constitutes an important indicator of efficiency of banks since it drives a wedge between interest received by depositors and the interest charged to borrowers on their loans. The spread of SCBs recorded a sustained growth; it increased by 19.8 per cent in 2003-04 as against an increase of 19.5 per cent in 2002-03. Most bank groups had recorded a double-digit increase in the spread. The increase in spreads of private sector and foreign banks was sharper than that of PSBs.

3.65 Financial parameters of various banks across bank groups of public sector, private sector and foreign banks are given in Appendix Tables III.15(A) to III.15(I), Appendix Tables III.16(A) to III.16(H) and Appendix Tables III.17(A) to III.17(H), respectively.

3.66 In line with the policy approach, banks have accelerated their efforts toward building up of the Investment Fluctuation Reserve (IFR). As at end-March 2004, the IFR ratio (IFR defined as a percent of investments under available for sale (AFS) and held for trade (HFT) categories, taken together) for SCBs increased sharply to reach three per cent from the level of 1.8 per cent in 2002-03. The progress on building up of IFR is evident for all bank groups. However, the record of progress has been highest for PSBs, followed by foreign banks and old private sector banks. The new private sector banks lagged behind other bank groups. While banks are required to build up an IFR portfolio of a minimum of five per cent of their investments by 2007, it is observed that three banks within PSBs have already achieved the target and 20 banks have built up IFR ratio of 3.0 per cent or more, perhaps reflecting their concerns of cushioning their investment portfolios against adverse interest rate movements (Table III.22 and Appendix Table III.18).

4. Non-performing Assets

3.67 The level of non-performing loans is recognised as a critical indicator for assessing banks’ credit risk, asset quality and efficiency in allocation of resources to productive sectors. Reflecting the success of financial sector reforms, regulatory and supervisory process, in particular, banks have made substantial progress in cleaning up the NPAs from their balance sheets (Box III.7).

A common perspective is that banks’ non-performing loans are influenced by structural nature of the economy. The structural nature of India’s financial market has undergone significant changes due to financial sector reforms. Government intervention in the credit market has eased significantly. There has been shift in emphasis from direct instruments to indirect instruments of monetary management. Statutory pre-emption of banks’ funds has been reduced through lowering of CRR and SLR. Interest rates have been deregulated in order to facilitate price discovery and foster market mechanism. Banks have been given freedom to charge lending rates. Rapid advances in information technology has contributed to significant reduction in transaction costs, facilitated greater diversification of portfolio, and improvements in credit delivery of banks. Prudential norms in line with international standards have been put in place for promoting and enhancing efficiency of banks. The process of institution building has been strengthened with several measures in the areas of debt recovery, asset reconstruction and securitisation, besides specific initiatives through recapitalisation to enhance the capital base of banks, and one-time settlement for resolution of NPAs. The implementation of SARFAESI Act, and Corporate Debt-Restructuring (CDR) has facilitated resolution of NPAs.

Various studies have shown that NPAs have two components; the overhang component and the incremental component (Jalan, 2002, Munniappan, 2002). The overhang component arises due to infirmities in structural and institutional environment while the increment component arises from factors internal to banks’ management and credit culture. At the international level, several studies have identified a range of factors influencing NPAs of banks. Some have argued that the problem of NPAs could be due to plain bad luck attributing to business cycle, and unanticipated shocks such as business failures of producing firms, and disruption of activities due to various calamities. Another viewpoint is that the problem of NPAs may be due to bad management by banks (Caprio, and Klingebiel, 2000). According to the latter view, in an increasingly competitive financial market, economic factors have evolved as the key influences on banks’ non-performing loans. In this context, various studies have underscored the role of banks’ lending policy in general and the ‘terms of credit’ defined over, inter alia, cost, maturity, and collateral in influencing the movement of banks non-performing loans (Reddy, 2004, Mohan, 2003,2004, Sergio, 1996, McGoven,1993, Christine, 1995, Bloem and Gorterl 2001). In the Indian context, during the period 1993-2004, the ratio of banks’ gross non-performing loans to advances has declined from about 24-25 per cent to 7-8 per cent amidst significant improvement in the lending terms. A comparative position of gross NPAs to advances ratio and the terms of credit variables including maturity (share of term loans in total advances), interest cost of deposits, operating expenses to asset ratio, total expenses to assets ratio, lending rates and credit-deposit ratio of public sector banks during the last ten years provide useful insights. There is evidence that, for the public sector banks, the gross NPA ratio has declined from 23 per cent in 1992-93 to 7.8 per cent in 2003-04. The prime-lending rate of interest of banks has declined by 500-750 basis points during period 1992-93 to 2003-04. The maturity terms of loans, defined as the ratio of term loans to advances, has improved from about 30 per cent to about 45 per cent. The credit orientation of banks, measured by credit-deposit ratio, which declined during the period 1993-99, has improved in the recent years. The proportion of secured loans has remained at high level, reflecting the stability in banks’ approach to risk management. Besides, bank size induced risk element has moderated with stronger balance sheets. Rajaraman and Vasishtha (2002) in an empirical study provided evidence of significant bivariate relationship between operating inefficiency indicator and problem loans of India’s public sector banks. Das and Ghosh (2003) made an empirical analysis of non-performing loans of India’s public sector banks relating to various indicators such as asset size, credit growth and macroeconomic condition, and operating efficiency indicators. An empirical analysis suggests that besides supporting policy environment, banks have to devise appropriate lending terms taking account the cost of credit, cost of funds, maturity of loans, credit orientation among other factors so as to induce lower defaults on borrowers.

Bhide, M.G., Prasad, A., and Ghosh, S., (2002), ‘Banking Sector Reforms: A Critical Overview’, Economic and Political Weekly, February 2.

Caprio, G., Jr. and Klingebiel , D., (1996) ‘Bank Insolvency: Bad Luck, Bad Policy, or Bad Banking?’ Annual World Bank Conference on Development Economics 1996, Policy Research Working Paper, 1620, World Bank.

Das, A., and S. Ghosh, (2003), ‘Determinants of Credit Risk’, paper presented at the Conference on Money, Risk and Investment held at Nottingham Trent University in November 2003 Fuentes, R., and Carlos M., (2003), ‘Institutional Arrangements, Credit Market Development and Loan Repayment in Chile’, School of Business and Economics, Universidad de Chile.

Mohan, R., (2003), ‘Transforming Indian Banking: In Search of a Better Tomorrow’, RBI Bulletin, January.

Mohan, R., (2004), ‘Finance for Industrial Growth’, RBI Bulletin, March.

Muniappan, G., (2002), ‘The NPA Overhang, Magnitude, Solutions and Legal Reforms’, RBI Bulletin, May.

Reddy, Y.V., (2004), ‘Credit Policy, Systems, and Culture’,

RBI Bulletin, March.

Sergio, M., (1996), ‘Non-performing bank loans: Cyclical Patterns and Sectoral Risk’, Review of Economic Conditions in Italy. Rome, June, Issue 1.

3.68 In 2003-04, there was a remarkable improvement in the asset quality of SCBs. Despite the switchover to 90-day delinquency norm with effect from March 2004, the gross NPAs of SCBs declined in absolute terms for a second year in succession. The gross NPAs of SCBs declined by 5.6 per cent in 2003-04 as against a decline of 3.0 per cent in 2002-03. Due to significant provisioning, the net NPAs declined substantially by 24.7 per cent during 2003-04 as against a decline of 8 per cent in 2002-03 (Table III.23 to III.26). The decline in NPAs is evident across bank groups. The bank-wise gross/net NPAs as percentage to advances/assets are provided in Appendix III.19(A) to 19(F). During 2003-04, reductions outpaced additions in the NPAs account. For SCBs, the decline in gross NPAs was accompanied by the decline in doubtful and loss assets by 8.8 per cent and 15.0 per cent, respectively.

3.69 The ratio of net-NPAs to net advances of SCBs declined from 4.4 per cent in 2002-03 to 2.9 per cent in 2003-04. All bank groups witnessed a decline in the ratio of net NPAs to net advances in 2003-04. Among bank groups, the old private sector banks had the highest net NPAs ratio at 3.8 per cent followed by public sector banks, new private banks and foreign banks.

3.70 Sector-wise NPAs of individual public and private sector banks are presented in Appendix Table III.20(A) and III.20(B). During 2003-04, the share of NPAs in the priority sector to total NPAs of public sector banks increased marginally. However, there was decline in the share of NPAs of agriculture sector and small-scale industries but an increase in the share of other priority