Managing asset quality
The asset quality of UCBs has shown improvement in recent years
For more than 150 years, credit unions and financial cooperatives have provided affordable financial services to millions of people around the globe. The cooperative banking has attracted policy-related and academic attention since the onset of Great Financial crisis in 2007 all over the world. There are two reasons for the same: 1) they are managing the initial financial and economic storms relatively well and 2) their tendency to adopt less risky strategies. Each year, their overall performance differed in terms of efficiency, profitability and risk compared to the complete banking sector. The strengthening of prudential norms has resulted in increased level of Non-Performing Assets (NPAs) for the cooperative banking sector. As per CAMELS rating model, the highest weight is given to asset quality components. Today, cooperative banks are compelled to maintain superior asset quality in the wake of large scale defaults of cooperative banks in India.
Cooperative banking in India
India’s cooperative banking sector comprised of 1579 Urban Cooperative Banks (UCBs) and 94,178 Rural Cooperative Credit Institutions as on 31st march 2015. The Short-term cooperative consists of State Cooperative Banks (StCBs, 32 in number), District Central Cooperative Banks (DCCBs, 370 in number) and Primary Agricultural Credit Societies (PACs, 93,042 in number). Long-term consists of State Cooperative Agricultural and Rural Development Banks (SCARDBs, 20 in number) and Primary Cooperative Agriculture and Rural Development Banks (PCARCBs, 714 in number) at the grass root level catering to the credit requirements of the members.
Indian banking and NPA regulations
In 1985, the first ever system of classification of assets for the Indian banking system was introduced on the recommendations of A. Ghosh Committee on Final Accounts. This system, called the ‘Health Code System’ involved classification of bank advances into eight categories ranging from 1 (satisfactory) to 8 (bad and doubtful debt). In 1991, the Narasimhan Committee suggested that for the purpose of provision, banks should classify their advances into: (i) standard assets; (ii) substandard assets; (iii) doubtful assets; and (iv) loss assets. Following this, prudential norms were introduced in 1992 in a phased manner. In 1998, the Narasimhan Committee on Banking Sector Reforms recommended a further tightening of prudential standards and brings them on par with evolving international best practices. With the introduction of 90-days norms for classification of NPAs in 2001, the guidelines were brought at par with international standards. RBI also introduced prudential norms for the UCBs in a phased manner in 1998; insisting on a 90-day norm for all jewel loans and beyond that period, the loans are classified as NPA. This came into force on March 31, 2006
Asset quality of cooperative banks in India
The analysis of a bank’s assets quality can be divided into two parts. The first is a qualitative review of the bank’s policies and an assessment of the composition of its loan portfolio. The second is a ratio analysis of key indicators. The ratio used to judge the extent of the Non Performing Asset (NPA) problem of the bank is gross NPA/gross advance as shown in Table.
It is clearly visible that the gross NPA of UCBs, StCBs and DCCBs have recorded a decreasing trend over the period, and ranges from 18.9 to 6.00 per cent, 16.8 to 5.5 per cent and 19.7 to 9.3 per cent respectively. On an average, the gross NPA of PACs, SCARDBs and PCARDBs are 33.34 per cent, 34.41 per cent and 40.81 per cent respectively over a period. The performance of RCBs except StCBs and DCCBs towards management of asset quality is not up to mark. They have to face recovery problems. As per the RBI circular, the financially sound banks have the gross NPA of less than 7 per cent. It indicates that the UCBs and StCBs are maintaining decent asset quality only in the year 2012-13 to 2014-15 and 2012-13 to 2013-14 respectively.
Non-performing assets of commercial banks
Commercial banks continue to report higher bad loans and their gross NPAs as on March 31, 2015, stood at 5.17 per cent. The stressed assets ratio (includes NPAs and restructured loans) was 13.2 per cent. Going by the details of annual financial results of public and private sector banks for 2014-15, the gross NPA of 26 public sector banks have risen by 22.5 per cent to Rs 2.78 lakh crore against Rs 2.27 lakh crore in the previous financial year. From 2013 to 2015, 29 public sector banks wrote off as much as Rs 1.14 lakh crore of bad debts. The Government announced Rs 70,000 crore compensation plans for these banks. As PSBs dominate the Indian banking sector and increase in the NPAs of PSBs is matter of concerns, steps are being taken to improve the situation.
Credit portfolio of cooperative banks vs commercial banks
The foregoing analysis clearly states that both the cooperative banks and commercial banks have to face the problems of NPAs. Percentage- wise comparison show that commercial banks are far better placed than the cooperative banks. But it is not the real state of affairs. The commercial banks have made write-off process to show decreasing trend of NPA in their balance sheet. Further, cooperative banks are providing more than 60 per cent of their advances to priority sectors. The major clients of cooperative banks are small traders, artisans, farmers, middle income group, growers, producers and women. The major defaulters of commercial banks are big corporate entities.
The RBI has indentified five sectors – Infrastructure, Iron and Steel, Textiles, Aviation and Mining – as the stressed sectors. PSBs have high exposures to the ‘industry’ sector (42 per cent of total credit) in general and to such ‘stressed’ sectors in particular as on 31st march 2015. On the other hand, cooperatives contribution to rural credit is only 27.3 per cent whereas non-institutional rural credit accounts for 42.9 per cent. It raises an important question; are cooperatives, which are to be fundamentally socio-economic entities, being operated as socio-political entities?
The government had to provide huge amounts to some commercial banks to bail them out in successive years from their problem on NPAs. If it is justified that policy of both the government and the regulator i.e., RBI is to protect the interest of the depositors and the credibility of the banking system, then the same policy should be applicable to those cooperative banks which are suffering from NPAs. Contradictory to this, the RBI and Government had imposed restrictions on their activities through tightening of prudential norms and fixing some eligibility criteria for getting financial package for rural cooperatives (short-term) only. UCBs were not selected for this benefit. Also, the government released huge funds (Rs 70,000 crore) to write-off NPAs of PSBs without any restrictions. In what way will this attitude help the balanced growth of financial system as a whole?
Contrary to popular perception, the non-priority sector has contributed significantly to acceleration in total NPAs in the recent period. There is an urgency to promote appropriate behavior and attitude for the bankers to overcome the credit management problems. Reduction of NPAs, accepted globally as an explicit strategy for fostering economic growth, is today a compulsion rather than just a need, not only for cooperative banks, but entire banking system.
Gross Non-Performing Assets of Cooperative Banks (%)
|Rural co-operative Banks(RCBs)|
|Short-term Structure||Long Term Structure|
StCBs: State Co-operative Banks
DCCBs: District Central Co-operative Banks
PACs: Primary Agricultural Credit Societies
SCARDBs: State Co-operative Agriculture and Rural Development Banks
PCARDBs: Primary Co-operative Agriculture and Rural Development Banks
- Data for 2013-14 is provisional.
- Data on Short Term Structure NPAs of PACs represent percentage of over dues to demand.
- Prudential norms were made applicable to the UCBs since 1991-93 the StCBs and DCCBs since 1996-97 and SCARDBs and PCARDBs since 1997-98.
Source: Reserve bank for UCBs and NABARD for Rural Cooperative Banks (excluding PACs for which the source is NASCOB)
N RAMU | The writer is an Associate Professor of Commerce at Annamalai University, Tamil Nadu and a UGC Research Awardee