Foreign Banks

2.40 Total assets of foreign banks⁴ as at end-March 1999 constituted 8.1 per cent of the total assets of all SCBs. The operating profits of foreign bank group declined by 23.8 per cent from Rs.2,544.5 crore in 1997-98 to Rs.1,939.6 crore in 1998-99. The ratio of operating profits to total assets declined by 1.38 percentage points from 3.91 per cent in 1997-98 to 2.53 per cent in 1998-99. The decline in operating profits of foreign banks during the year could be attributed to the substantial increase in operational costs, i.e., interest expended (23.2 per cent) and operating expenses (33.6 per cent). During 1998-99, the operating profit ratio of these banks was higher than the SCBs' ratio of 1.47 per cent. The provisions and contingencies showed a decline of 1.31 percentage points from 2.94 per cent in 1997-98 to 1.63 per cent in 1998-99 (Chart II.8). The ratio of net profits to total assets of these banks declined from 0.97 per cent in 1997-98 to 0.90 per cent in 1998-99 (Table II.15).

2.41 On the cost side, the ratio of intermediation cost to total assets increased from 2.97 per cent in 1997-98 to 3.37 per cent in 1998-99. An analysis of cost structure of the SCBs indicates that the intermediation cost ratio of foreign banks at 3.37 per cent is higher than that of all SCBs (2.65 per cent). The wages and automation expenses accounting for a major share in operating expenses led to its increase during the year. The spread of foreign bank group at 3.47 per cent in 1998-99 is higher than the spread of all as well as the sub-groups of SCBs (Chart II.9). However, it is important to note that out of forty four banks, four banks viz., Citibank, ANZ Grindlays Bank Ltd., Standard Chartered Bank, and Bank of America NT&SA, accounted for 52.4 per cent, 71.8 per cent, and 87.5 per cent in total assets, operating profits, and net profits of this group respectively. Appendix Tables II.6 (A), II.6 (B), II.6 (C), II.6 (D), II.6 (E), II.6 (F), II.6 (G), II.6 (H) provide bank-wise details of certain financial indicators of foreign banks in India.

Table II.14: Financial Performance of New Private Sector Banks for the years 1997-98 and 1998-99

(Rs. crore)

Item

1997-98

1998-99

Variation of

Column (3) over (2)

Absolute

Percentage

1

2

3

4

5

A.

Income (i+ii)

3,015.07

4,130.49

1,115.42

36.99

(100.00)

(100.00)

i)

Interest Income

2,395.21

3,540.88

1,145.67

47.83

(79.44)

(85.73)

ii)

Other Income

619.86

589.61

-30.25

-4.88

(20.56)

(14.27)

B.

Expenditure (i+ii+iii)

2,615.55

3,733.44

1,117.89

42.74

(100.00)

(100.00)

i)

Interest Expended

1,819.79

2,776.94

957.15

52.60

(69.58)

(74.38)

ii)

Provisions and Contingencies

340.04

287.23

-52.81

-15.53

(13.00)

(7.69)

iii)

Operating Expenses

455.72

669.27

213.55

46.86

(17.42)

(17.93)

of which : Wage Bill

79.57

119.72

40.15

50.46

(3.04)

(3.21)

C.

Profit

i)

Operating Profit

739.56

684.28

-55.28

-7.47

ii)

Net Profit

399.52

397.05

-2.47

-0.62

D.

Total Assets

25,844.94

38,530.87

12,685.93

49.08

E.

Financial Ratios (per cent) $

i)

Operating Profit

2.86

1.78

-1.08

-

ii)

Net Profit

1.55

1.03

-1.52

-

iii)

Income

11.67

10.72

-0.95

-

iv)

Interest Income

9.27

9.19

-0.08

-

v)

Other Income

2.40

1.53

-0.87

-

vi)

Expenditure

10.12

9.69

-0.43

-

vii)

Interest Expended

7.04

7.21

0.17

-

viii)

Operating Expenses

1.76

1.74

-0.02

-

ix)

Wage Bill

0.31

0.31

0.00

-

x)

Provisions and Contingencies

1.32

0.75

-0.57

-

xi)

Spread (Net Interest Income)

2.23

1.98

-0.24

-

Notes :

1.

$ Ratios to Total Assets.

2.

Figures in brackets are percentage shares to the respective total.

Table II.15: Financial Performance of Foreign Banks in India for the years 1997-98 and 1998-99

(Rs. crore)

Item

1997-98

1998-99

Variation of

Column (3) over (2)

Absolute

Percentage

1

2

3

4

5

A.

Income (i+ii)

8,697.53

9,719.02

1,021.49

11.74

(100.0)

(100.0)

i)

Interest Income

6,783.09

7,857.13

1,074.04

15.83

(77.99)

(80.84)

ii)

Other Income

1,914.44

1,861.89

-52.55

-2.74

(22.01)

(19.16)

B.

Expenditure (i+ii+iii)

8,067.56

9,025.65

958.09

11.88

(100.00)

(100.00)

i)

Interest Expended

4,222.29

5,200.57

978.28

23.17

(52.34)

(57.62)

ii)

Provisions and Contingencies

1,914.57

1,246.24

-668.33

-34.91

(23.73)

(13.81)

iii)

Operating Expenses

1,930.70

2,578.84

648.14

33.57

(23.93)

(28.57)

of which : Wage Bill

618.72

769.86

151.14

24.43

(7.67)

(8.53)

C.

Profit

i)

Operating Profit

2,544.54

1,939.61

-604.93

-23.77

ii)

Net Profit

629.97

693.37

63.40

10.06

D.

Total Assets

65,097.71

76,623.13

11,525.42

17.70

E.

Financial Ratios (per cent) $

i)

Operating Profit

3.91

2.53

-1.38

-

ii)

Net Profit

0.97

0.90

-0.07

-

iii)

Income

13.36

12.68

-0.68

-

iv)

Interest Income

10.42

10.25

-0.17

-

v)

Other Income

2.94

2.43

-0.51

-

vi)

Expenditure

12.39

11.78

-0.61

-

vii)

Interest Expended

6.49

6.79

0.30

-

viii)

Operating Expenses

2.97

3.37

0.40

-

ix)

Wage Bill

0.95

1.00

0.05

-

x)

Provisions and Contingencies

2.94

1.63

-1.31

-

xi)

Spread (Net Interest Income)

3.93

3.47

-0.46

-

Notes :

1.

$ Ratios to Total Assets.

2.

Number of banks for 1997-98 and 1998-99 are 42 and 44 respectively.

3.

Figures in brackets are percentage shares to the respective total.

Off-Balance Sheet Activities of Scheduled Commercial Banks

2.42 The off-balance sheet activities of SCBs include the activities relating to the forward exchange contracts, guarantees and acceptances, endorsement, etc. The off-balance sheet exposures of SCBs have shown a decline of 3.4 per cent from Rs.4,74,094 crore in 1997-98 to Rs.4,57,855 crore in 1998-99. The off-balance sheet exposure (contingent liabilities) as a proportion to the total liabilities of all SCBs has also declined by 11.4 percentage points from 59.6 per cent in 1997-98 to 48.2 per cent in 1998-99. Such decline in off-balance sheet exposures can be attributed to the discernible decline in the proportion of forward exchange contracts by 10.0 percentage points from 45.2 per cent in 1997-98 to 35.2 per cent in 1998-99.

2.43 An intra-sectoral analysis indicates that as a proportion to total liabilities, the highest decline in the off-balance sheet exposures (contingent liabilities) was found in the case of foreign banks (79.6 percentage points from 367.6 per cent in 1997-98 to 288.0 per cent in 1998-99), followed by new private sector banks (30.4 percentage points from 113.5 per cent in 1997-98 to 83.1 per cent in 1998-99), old private sector banks (7.6 percentage points from 31.8 per cent in 1997-98 to 24.2 per cent in 1998-99), and public sector banks (4.3 percentage points from 28.9 per cent in 1997-98 to 24.6 per cent in 1998-99). The decline in such off-balance sheet exposure of all bank groups is mainly attributed to the decline in the proportion of forward exchange contracts in their respective total liabilities. The proportion of forward exchange contracts in total liabilities, declined by 76.9 percentage points (from 328.3 per cent in 1997-98 to 251.4 per cent in 1998-99) in the case of foreign banks, 28.0 percentage points (from 89.4 per cent in 1997-98 to 61.4 per cent in 1998-99) in case of new private sector banks, 8.1 percentage points (from 25.3 per cent in 1997-98 to 17.2 per cent in 1998-99) in case of old private sector banks and 2.9 percentage points (from 16.8 per cent in 1997-98 to 13.9 per cent in 1998-99) in case of public sector banks (Table II.16) (Chart II.10).

2.

Autonomy granted by the Government of India to PSBs is subject to fulfilling the following criteria: 1. Positive net profits for the last three years. 2. Capital Adequacy Ratio of more than 8 per cent. 3. Net NPA level below 9 per cent of the net advances. 4. Minimum owned funds of Rs.100 crore.

3.

Bareilly Corporation Bank Ltd. was placed under moratorium on March 8, 1999 and was subsequently amalgamated with the Bank of Baroda w.e.f. June 3, 1999. The figures for this bank are as on March 8, 1999.

4.

During the year, the following changes took place relating to the number of foreign banks in India. The Commercial Bank of Korea stopped doing banking business in India w.e.f. January 1, 1998. Its licence was cancelled on May 18, 1999 and went outside the purview of Banking Regulation Act, 1949 on May 22, 1999. Accordingly, the figures of this bank for the year 1998-99 are not included in this Report. Hanil Bank has been excluded from the Second Schedule to the Reserve Bank of India Act, 1934, vide Reserve Bank of India notification dated August 28, 1999. The British Bank of Middle East has been excluded from the Second Schedule to the Reserve Bank of India Act, 1934, vide Reserve Bank of India notification dated September 25, 1999. Three new foreign banks came into existence and these include (a) Bank Muscat International (w.e.f. 9.9.1998), (b) Morgan Guaranty Trust Company of New York (w.e.f. 24.12.98), and (c) K.B.C. Bank N.V. (w.e.f. 15.02.1999).

4.

Non-Performing Assets

2.44 While the non-performing assets (NPAs) of PSBs showed a marginal decline, an increase was witnessed in all other bank groups. During the year 1998-99, number of PSBs with net NPAs upto 10 per cent increased by one to 18 and the number of banks with net NPAs in the range of 10 per cent to 20 per cent declined by one to 8 with one bank continuing to show NPAs above 20 per cent (Table II.17). The number of old private sector banks with the net NPAs below 10 per cent was 17 as against 21 in 1997-98; those above 20 per cent were 3 as against nil in the last three years. In the case of foreign banks, those with net NPAs upto 10 per cent declined from 34 to 27 over the year and those above 20 per cent stood at 3 as against 2 in the last year. The number of foreign banks with net NPAs ranging between 10 to 20 per cent increased to 11 from 6 in the preceding year (Table II.18).

Table II.16: Off-Balance Sheet Exposure of Scheduled Commercial Banks in India: 1997-98 and 1998-99

(Rs. crore)

Item

State Bank Group

Nationalised Banks

Public Sector Banks

1997-98

1998-99

Variations

1997-98

1998-99

Variations

1997-98

1998-99

Variations

1

2

3

4

5

6

7

8

9

10

1.

Forward exchange contract

37,614.53

42,572.15

13.18

71,455.44

64,608.26

-9.58

1,09,069.97

1,07,180.41

-1.73

(16.15)

(14.89)

-1.26

(17.15)

(13.34)

-3.81

(16.79)

(13.91)

-2.88

2.

Guarantees given

16,757.13

17,670.05

5.45

23,259.33

24,321.51

4.57

40,016.46

41,991.56

4.94

(7.20)

(6.18)

-1.02

(5.58)

(5.02)

-0.56

(6.16)

(5.45)

-0.71

3.

Acceptances,

16,848.35

16,564.52

-1.68

22,044.29

23,570.69

6.92

38,892.64

40,135.21

3.19

endorsements, etc.

(7.24)

(5.79)

-1.44

(5.29)

(4.87)

-0.42

(5.99)

(5.21)

-0.78

Total Contingent Liabilities

71,220.01

76,806.72

7.84

1,16,759.06

1,12,500.46

-3.65

1,87,979.07

1,89,307.18

0.71

(30.59)

(26.86)

-3.72

(28.02)

(23.22)

-4.80

(28.94)

(24.58)

-4.37

New Private Sector Banks

Old Private Sector Banks

Foreign Banks

All SCBs

1997-98

1998-99

Variations

1997-98

1998-99

Variations

1997-98

1998-99

Variations

1997-98

1998-99

Variations

11

12

13

14

15

16

17

18

19

20

21

22

1.

Forward exchange

23,099.92

23,663.40

2.44

13,890.47

11,233.17

-19.13

2,13,699.30

1,92,645.03

-9.85

3,59,759.66

3,34,722.01

-6.96

contract

(89.38)

(61.41)

-27.96

(25.27)

(17.17)

-8.10

(328.27)

(251.42)

-76.86

(45.23)

(35.20)

-10.03

2.

Guarantees given

3,148.90

4,116.01

30.71

2,044.18

2,540.44

24.28

13,062.20

14,154.24

8.36

58,271.74

62,802.25

7.77

(12.18)

(10.68)

-1.50

(3.72)

(3.88)

0.16

(20.07)

(18.47)

-1.59

(7.33)

(6.60)

-0.72

3.

Acceptances,

3,081.48

4,223.39

37.06

1,559.49

2,062.93

32.28

12,529.12

13,909.63

11.02

56,062.73

60,331.16

7.61

endorsements, etc.

(11.92)

(10.96)

-0.96

(2.84)

(3.15)

0.32

(19.25)

(18.15)

-1.09

(7.05)

(6.34)

-0.70

Total Contingent

29,330.30

32,002.80

9.11

17,494.14

15,836.54

-9.48

2,39,290.62

2,20,708.90

-7.77

4,74,094.13

4,57,855.42

-3.43

Liabilities

(113.49)

(83.06)

-30.43

(31.83)

(24.21)

-7.62

(367.59)

(288.04)

-79.54

(59.60)

(48.15)

-11.45

Notes :

1.

Figures in brackets are percentages to Total Assets.

2.

The variations relating to the 'amounts' indicate the percentage variation in 1998-99 over 1997-98.

3.

The variations relating to the 'percentage to Total Assets given in brackets' indicate the simple change in such figures during 1998-99 as compared to 1997-98.

Table II.17: Distribution of Net NPAs by Number of Public Sector Banks: 1995 to 1999

(Number of banks)

Net NPAs/ Net Advances

End-March

1995

1996

1997

1998

1999

1.

Upto 10 per cent

2

19

17

17

18

2.

Above 10 and upto 20 per cent

15

6

9

9

8

3.

Above 20 per cent

10

2

1

1

1

Table II.18: Distribution of Net NPAs by Number of Indian Private Sector Banks and Foreign Banks in India: 1996 to 1999

(Number of banks)

Net NPAs/ Net Advances

End-March

1996

1997

1998

1999

Old Indian Private Sector Banks

1.

Upto 10 per cent

22

22

21

17

2.

Above 10 and upto 20 per cent

3

3

4

5

3.

Above 20 per cent

Nil

Nil

Nil

3

New Indian Private Sector Banks

1.

Upto 10 per cent

9

9

9

9

2.

Above 10 and upto 20 per cent

Nil

Nil

Nil

Nil

3.

Above 20 per cent

Nil

Nil

Nil

Nil

Foreign Banks in India @

1.

Upto 10 per cent

30

36

34

27

2.

Above 10 and upto 20 per cent

1

1

6

11

3.

Above 20 per cent

Nil

2

2

3

Notes:

@

Number of banks having nil NPAs for 1996, 1997, 1998 and 1999 were 12, 16, 14 & 9 respectively. For 1999, 3 banks' NPAs are not available.

2.45 An analysis of NPAs of different bank groups showed that with the exception of public sector banks (PSBs), the other bank groups (i.e. private sector and foreign banks) witnessed increases during 1998-99 (Table II.19). In the case of PSBs, marginal decline in NPAs ratio was mainly aided by an increase in the share of standard assets and commensurate declines in the shares of doubtful and sub-standard assets (Table II.20). However, the declining trend of NPAs of SCBs witnessed till the year 1997-98 could not be sustained in 1998-99. The gross NPAs to total assets of SCBs, however, declined from 6.4 per cent in 1997-98 to 6.2 per cent in 1998-99 and net NPAs to net total assets also declined from 3.0 per cent in 1997-98 to 2.9 per cent in 1998-99.

Public Sector Banks

2.46 An analysis of NPAs of different bank groups indicate that PSBs hold larger share of NPAs. During the year 1998-99, the level of gross NPAs to gross advances declined from 16.0 per cent in 1997-98 to 15.9 per cent in 1998-99 facilitated by a marginal reduction in sub-standard and doubtful assets and concomitant increase in standard assets. The share of standard assets to gross advances increased from 84.0 per cent in 1997-98 to 84.1 per cent in 1998-99. Similarly, net NPAs to net advances declined from 8.2 per cent in 1997-98 to 8.1 per cent in 1998-99. However, in absolute terms, both gross and net NPAs registered substantial increases. While gross NPAs increased from Rs.45,653 crore in 1997-98 to Rs.51,710 crore in 1998-99 (Table II.19), net NPAs moved up from Rs.21,232 crore in 1997-98 to Rs.24,211 crore in 1998-99. The gross NPAs as a fraction of total assets declined from 7.0 per cent in 1997-98 to 6.7 per cent in 1998-99 and net NPAs, as a percentage to total assets declined from 3.3 per cent in 1997-98 to 3.1 per cent in 1998-99. Further details are given in Appendix Tables II.7A and II.7B.

Table II.19: Bank Group-wise Gross and Net NPAs of Scheduled Commercial Banks: 1997 to 1999 (as at end-March)

(Amount in Rs. crore)

Bank Groups/Years

Gross NPAs

Net NPAs

Gross

Gross

Per cent

Per cent

Net

Net

Per cent

Per cent

Advances

NPAs

to Gross

to Total

Advances

NPAs

to Net

to Total

Advances

Assets

Advances

Assets

1

2

3

4

5

6

7

8

9

Scheduled Commercial Banks

1997

3,01,698

47,300

15.7

7.0

2,76,421

22,340

8.1

3.3

1998

3,52,697

50,815

14.4

6.4

3,25,522

23,761

7.3

3.0

1999

4,01,253

58,554

14.6

6.2

3,70,397

27,774

7.5

2.9

Public Sector Banks

1997

2,44,214

43,577

17.8

7.8

2,20,922

20,285

9.2

3.6

1998

2,84,971

45,653

16.0

7.0

2,60,459

21,232

8.2

3.3

1999

3,25,328

51,710

15.9

6.7

2,97,789

24,211

8.1

3.1

All Private Sector Banks

1997

29,959

2,542

8.5

4.2

28,646

1,539

5.4

2.5

1998

36,753

3,186

8.7

3.9

35,411

1,863

5.3

2.3

1999

44,492

4,643

10.4

4.5

42,717

2,956

6.9

2.8

Old Private Sector Banks

1997

21,702

2,325

10.7

5.2

20,832

1,385

6.6

3.1

1998

25,580

2,794

10.9

5.1

24,353

1,572

6.5

2.9

1999

29,105

3,773

13.0

5.8

27,692

2,332

8.4

3.6

New Private Sector Banks

1997

8,257

217

2.6

1.3

7,814

154

2.0

1.0

1998

11,173

392

3.5

1.5

11,058

291

2.6

1.1

1999

15,387

871

5.7

2.3

15,025

623

4.1

1.6

Foreign Banks in India

1997

27,525

1,181

4.3

2.1

26,853

516

1.9

0.9

1998

30,972

1,976

6.4

3.0

29,652

666

2.2

1.0

1999

31,433

2,201

7.0

2.9

29,890

607

2.0

0.8

Notes:

1.

Figures are provisional.

2.

Constituent items may not add up to the totals due to rounding off.

Source:

1.

Returns submitted by respective banks.

2.

Balance sheet of respective banks.

Table II.20: Bank Group-wise Classification of Loan Assets of Scheduled Commercial Banks: 1997 to 1999 (as at end-March)

(Amount in Rs. crore)

Bank Groups/

Standard

Sub-standard

Doubtful

Loss

Total

Total

Years

Assets

Assets

Assets

Assets

NPAs

Advances

Amount

Per cent

Amount

Per cent

Amount

Per cent

Amount

Per cent

Amount

Per cent

Amount

1

2

3

4

5

6

7

8

9

10

11

12

Scheduled Commercial Banks

1997

2,54,446

84.3

14,500

4.8

27,165

9.0

5,634

1.9

47,300

15.7

3,01,698

1998

3,01,877

85.6

17,428

4.9

27,146

7.7

6,242

1.8

50,815

14.4

3,52,696

1999

3,42,428

85.3

19,813

4.9

31,301

7.8

7,441

1.9

58,555

14.6

4,01,253

Public Sector Banks

1997

2,00,637

82.2

12,472

5.1

26,015

10.7

5,090

2.1

43,577

17.8

2,44,214

1998

2,39,318

84.0

14,463

5.1

25,819

9.1

5,371

1.9

45,653

16.0

2,84,971

1999

2,73,618

84.1

16,033

4.9

29,252

9.0

6,425

2.0

51,710

15.9

3,25,328

All Private Sector Banks

1997

27,417

91.5

1,370

4.6

889

3.0

283

0.9

2,542

8.5

29,959

1998

33,567

91.3

1,766

4.8

1,077

2.9

343

0.9

3,186

8.7

36,753

1999

39,848

89.6

2,655

6.0

1,584

3.6

404

0.9

4,643

10.4

44,492

Old Private Sector Banks

1997

19,377

89.3

1,199

5.5

885

4.1

241

1.1

2,325

10.7

21,702

1998

22,786

89.1

1,402

5.5

1,068

4.2

324

1.3

2,794

10.9

25,580

1999

25,332

87.0

1,918

6.6

1,456

5.0

398

1.4

3,773

13.0

29,105

New Private Sector Banks

1997

8,040

97.4

171

2.1

4

0.0

42

0.5

217

2.6

8,257

1998

10,781

96.5

365

3.3

9

0.1

19

0.2

392

3.5

11,173

1999

14,516

94.3

737

4.8

128

0.8

6

0.0

871

5.7

15,387

Foreign Banks in India

1997

26,392

95.9

658

2.4

261

0.9

261

0.9

1,181

4.3

27,525

1998

28,992

93.6

1,198

3.9

250

0.8

528

1.7

1,976

6.4

30,972

1999

28,962

92.1

1,124

3.6

465

1.5

612

1.9

2,201

7.0

31,433

Notes :

1.

Figures are provisional.

2.

NPAs consist of assets including (i) Sub-standard, (ii) Doubtful, and (iii) Loss Assets. An asset becomes (i) Substandard when it is classified as NPA for a period not exceeding two years, (ii) Doubtful when it remains NPA for a period exceeding two years, and (iii) Loss when it is identified asset either by a bank or an internal or external auditors or under RBI instructions, but not written off.

3.

Constituent items may not add up to the totals due to rounding off.

Source :

1.

Returns submitted by respective banks.

2.

Balance sheet of respective banks.

2.47 Sector-wise analysis of NPAs of PSBs indicates that the share of NPAs of priority sector has declined from 50.0 per cent at end-March 1995 to 43.7 per cent at end-March 1999. This indicates marked improvements in the loan portfolio of PSBs in the category of 'priority sector' (Table II.21).

Private Sector Banks

2.48 During 1998-99, NPAs of private sector bank (both old and new private sector banks) witnessed significant increases affected by the substantial decline in standard assets. A similar trend was seen in the case of the foreign bank group. While gross NPAs of all private banks increased from 8.7 per cent during 1997-98 to 10.4 per cent during 1998-99, the net NPAs to net advances indicated an increase from 5.3 per cent during 1997-98 to 6.9 per cent during 1998-99. Also another concern is the increase in the share of NPAs to total assets. The gross NPAs to total assets increased from 3.9 per cent in 1997-98 to 4.5 per cent in 1998-99 and that of net NPAs to total assets rose from 2.3 per cent during 1997-98 to 2.8 per cent during 1998-99. Further details are given in Appendix Tables II.7C and II.7D.

Old Private Sector Banks

2.49 Among the private sector bank group, the NPAs of old private sector bank group showed higher increases during 1998-99 mainly due to significant declines in standard assets. The 'standards assets' to total advances declined from 89.3 per cent in 1996-97 to 89.1 per cent in 1997-98 and further to 87.0 per cent in 1998-99.

2.50 The gross NPAs to total advances of old private sector bank group increased from 10.9 per cent in 1997-98 to 13.0 per cent in 1998-99. Similarly, net NPAs to net advances also increased from 6.5 per cent in 1997-98 to 8.4 per cent in 1998-99. Another concern is the increasing share of NPAs to total assets during the year. The gross NPAs to total assets of old private sector bank group moved up from 5.1 per cent during 1997-98 to 5.8 per cent during 1998-99. Likewise, net NPAs to total assets increased from 2.9 per cent in 1997-98 to 3.6 per cent in 1998-99.

New Private Sector Banks

2.51 During 1998-99, the new private sector bank group had the smallest share of NPAs but showed substantial increases in NPAs. Besides, new private sector banks maintained the highest share of 'standard assets' to total advances than all other banking groups even though it has indicated a decline during the year. The gross NPAs to total advances of new private sector bank group increased from 3.5 per cent in 1997-98 to 5.7 per cent in 1998-99 mainly effected by the marginal declines in standard assets. In regard to the share of net NPAs to net advances of new private sector banks, it increased from 2.6 per cent in 1997-98 to 4.1 per cent in 1998-99. The gross NPAs to total assets also increased from 1.5 per cent in 1997-98 to 2.3 per cent in 1998-99. Like wise, the net NPAs to total assets also increased from 1.1 per cent in 1997-98 to 1.6 per cent in 1998-99.

Foreign Banks

2.52 During 1998-99, the NPAs of foreign bank group were on the rise as a result of steady decline in standard assets. The share of standard assets to total advances has come down from 95.9 per cent in 1996-97 to 93.6 per cent in 1997-98 and further to 92.1 per cent in 1998-99. The gross NPAs to total advances increased from 6.4 per cent during 1997-98 to 7.0 per cent during 1998-99. In respect of the share of net NPAs to net advances during 1998-99, it is the lowest among various bank groups. The share of net NPAs declined from 2.2 per cent in 1997-98 to 2.0 per cent in 1998-99. The gross NPAs as a percentage of total assets witnessed decline from 3.0 per cent during 1997-98 to 2.9 per cent during 1998-99 and net NPAs to total assets also declined from 1.0 per cent during 1997-98 to 0.8 per cent during 1998-99. Further details are given in Appendix Tables II.7E and II.7F.

Table II.21: Sector-wise NPAs of Public Sector Banks: 1995 to 1999

(Rs. crore)

Bank Group

Priority

Non-priority

Public

Total

Sector

Sector

Sector

1

2

3

4

5

March 1995

1.

SBI

6,966

5,495

809

13,271

(52.5)

(41.4)

(6.1)

(100.0)

2.

Nationalised Banks

12,242

12,366

507

25,114

(48.7)

(49.2)

(2.0)

(100.0)

3.

PSBs (1+2)

19,208

17,861

1,316

38,385

(50.0)

(46.5)

(3.4)

(100.0)

March 1996

1.

SBI

7,041

5,263

816

13,120

(53.7)

(40.1)

(6.2)

(100.0)

2.

Nationalised Banks

12,065

13,804

595

26,464

(45.6)

(52.2)

(2.3)

(100.0)

3.

PSBs (1+2)

19,106

19,067

1,411

39,584*

(48.3)

(48.2)

(3.6)

(100.0)

March 1997

1.

SBI

7,247

6,291

829

14,368

(50.4)

(43.8)

(5.8)

(100.0)

2.

Nationalised Banks

13,527

15,050

632

29,209

(46.3)

(51.5)

(2.2)

(100.0)

3.

PSBs (1+2)

20,774

21,341

1,461

43,577

(47.7)

(49.0)

(3.3)

(100.0)

March 1998

1.

SBI

7,470

7,390

662

15,522

(48.1)

(47.6)

(4.3)

(100.0)

2.

Nationalised Banks

13,714

15,717

700

30,130

(45.5)

(52.2)

(2.3)

(100.0)

3.

PSBs (1+2)

21,184

23,107

1,362

45,653

(46.4)

(50.6)

(3.0)

(100.0)

March 1999(P)

1.

SBI

8,318

9,668

655

18,641

(44.6)

(51.9)

(3.5)

(100.0)

2.

Nationalised Banks

14,289

17,940

841

33,069

(43.2)

(54.3)

(2.5)

(100.0)

3.

PSBs (1+2)

22,607

27,608

1,496

51,710

(43.7)

(53.4)

(2.9)

(100.0)

Notes :

1.

P Provisional.

2.

Figures in brackets are percentages to the total.

3.

Constituent items may not add up to the totals due to rounding off.

NPAs: A Cross-Country Comparison

2.53 Containment of NPAs within a tolerable level is very important for enhancing confidence in the banking sector and for ensuring the contribution of the sector to macroeconomic stability. This is evident from the cross-country analysis of NPAs and on this attention has been focussed since about the middle of 1980s (Box II.3).

Box II.3: NPAs: A Cross-Country Comparison

Since the mid-eighties, banking crises have come to the forefront of economic analysis. Situations of banking distress have quickly intensified and in the process, have become one of the main obstacles to stability to the financial system. According to Lindgren et.al.(1996), 73 per cent of the member countries of the International Monetary Fund's (IMF) experienced at least one bout of significant banking sector problems from 1980 to 1996. More importantly, such crises have resulted in severe bank losses or public sector resolution costs. As Caprio and Klingebiel (1996) observe, such costs amounted to 10 per cent or more of GDP in at least a dozen developing country episodes during the past 15 years. Recent studies by Honohan (1996) provide the estimated resolution costs of banking crises in developing and transition economies since 1980 are pegged at US $ 250 billion and reinforce this view.

Such intensity of banking crises has raised the question as to the reasons why such crises occur? Several arguments have been raised in the literature, including, among others, volatility in market environment, the increased leverage of banks, connected lending practices and regulatory forbearance in the face of political economy considerations. However, all these arguments seriously compromise on the objectivity in credit assessment, which has often been instrumental in building-up of the non-performing assets (NPAs) of banks. The accumulation of NPAs is exacerbated by the weaknesses in the accounting, disclosure, and legal framework. In many developing countries, accounting conventions are not rigorous enough to prevent banks and their borrowers from concealing the true size of their NPA portfolio. Often bad loans are made to look good by additional lending to troubled borrowers ("ever-greening"). If loan classification is dependent only on the loan payment status-without regard to the borrower's credit worthiness or to the market value of collateral-then the potential delay in recognizing bad loans can be considerable. And if non-performing loans are systemically understated, loan-loss provisions are apt to be too low, and bank net income and capital will be systemically overstated. Without accurate information on the true financial condition of banks, it is difficult for private investors or supervisors to monitor and discipline errant banks.

Studies have reported that the publicly reported figures on non-performing loans gave little hint of banking crises in Chile and Colombia in the early 1980s. Hausman and Rojas-Suarez (1996) observe that, on the eve of banking difficulties, reported ratios of non-performing to total loans in several Latin American economies were much lower in relation to the size of the subsequent banking problems. In some of the developing countries of the Asia Pacific Economic Co-operation (APEC) forum, a loan is classified as non-performing only after it has been in arrears for at least six months. One-third of total loans in Argentina's public sector banks were non-performing at the end of 1994. Of US $ 20 billion in non-performing loans in the December 1994 portfolio of Banespa-owned by Sao Paolo state of Brazil-more than half was owed by the State. Sheng (1996) cites one South-East Asian country that, until recently, allowed loans that had not been serviced for more than three years to be treated as performing. Mexican banks' planned transition to international accounting standards is expected to double the amount of past-due loans reported (Goldstein, 1996). However, recent loan classification guidelines for the Asian economies reveal that they are gradually moving towards compliance with international best practice (Table 1).

Once problem loans are identified, adequate loan-loss provisions must be established. But studies suggest that guidelines in many developing countries are unclear, weak or altogether absent. For example, as of August 1995, a group of transition economies (Armenia, Azerbaijan, Georgia, Tajikistan and Ukraine) did not have regulations obliging banks to make provisions for problem loans. Where there are such guidelines, there appears to be wide variation in coverage across countries. Figures of provisioning-coverage ratios (i.e., the ratio of loan-loss reserves to non-performing loans) for a sample of developing countries in the early 1990s reveal that, on average, the developing countries with the highest share of non-performing loans tend to be the ones with the lowest provisioning coverage ratios, although there are a few exceptions (e.g., Argentina and Malaysia) where coverage in the face of a high non-performing loan share is quite conservative (Table 2).