Imprint of Insolvencies on Commercial Bank's Priority Sector Lending Practices

 

T. Vara Lakshmi¹, M. Srinivasa Reddy²

¹Research Scholar, Department of Management, Sri Venkateswara University, Tirupathi.

²Professor, Department of Management, Sri Venkateswara University, Tirupathi.

 

ABSTRACT:

Every business activity including bank's is all about results, the best results interns of profit and development depends on the organization's internal (for example: Employees) and external (for example: customers) better relationships. Following ethics and transparency measures only builds better relations especially for Financial Institutions like Banks. Few decades back Indian government taken a decision to nationalise more banks with an objectivity to spread the banking services to the nook and corner of the country. In addition to this as per the recommendations of M. Narasimham committee Reserve bank of India (RBI) introduced the concept of Priority Sector Lending practices for the banks and fixed a target of at least 40%of the bank's credit must be given to selected group under Priority sector. Behind this two revolutionary decisions is to boost up the bank's profits as well as to achieve balanced economic growth, but due to the increasing percentage of bad debts became a hurdle for the banks in delivering their planned services to the target groups. In this paper the ratio of bad loans on Priority sector Lending by the scheduled banks highlighted and reasons for   happening of NPAs evaluated with some suggestible methods to avoid them.

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1. INTRODUCTION:

Recently in an annual Index of Economic freedom by a top American think-tank India ranked a dismal 143 with a sustaining an average annual growth of about 7% over the past 5 years. This shows the countries poor performance in achieving the sustainable economic growth and development. If any country wish to liberalise their economic activities and boost up the GDP, that countries' financial system plays a vital role, especially the performance of Banks is very important for well organized financial system. 

 

 

Banks are the financial Institutions that accept the both demand and time deposits with an offered Return factor to the depositors by carefully mobilizing those funds to satisfy the multiple needs of barrowers. In this process banks functioning is designed to subscribe for risk in the case of bankruptcies and insolvencies. For the FY16, the amount of all Indian banks bad loans approximately 65,00,000 crore rupees. Where India's largest commercial bank State Bank of India announced high amount of provision for Nonperforming Assets in spite of maintaining additional bucket reserves. As per the conditions of RBI, every bank must maintain provision against NPAs to equalise the annual Balance Sheet of the banks. Every individual or an institution arranges or mobilises the funds to required people with an expectation of return factor along with principle amount within the time period. If any mobilized fund does not repaid by the barrower within the time, then there will be an adverse impact on profits of the banks. Though the banks, RBI, government of India approaching different techniques to avoid those profit seizing assets, still the banks growth is pulling back by this bad loans.

 

Commercial Banks primarily concentrates on profit maximization and secondarily on development orientation. even though the development is the next priority after earnings, most of the banks entirely concentrated on profit and totally neglected the helping hand to EWS (Economically weaker Sections ) and BPL ( below Poverty line). to put an end to this type of greedy activity, RBI introduced the concept of Priority Sector Lending (PSL) and made mandatory for the banks in allocating  the target loans to such people completely with an growth perspective. even if any bad loans happen in PSL at least the end result may help for retaining the economy growth. In this paper this key factors were analysed with some possible suggestions.

 

2. OBJECTIVE OF THE STUDY:

The research study mainly focused on reasons for occurring bad loans in bank's assets and to analyse the impact of insolvencies on Priority Sectors. Few suggestions were also provided with in the purvey to maintain the sustainable faith on banks in every society. 

 

3. SCOPE OF THE STUDY:

The research study limited to consider the commercial banks quantitative data i.e. financial performance only into consideration and qualitative factors were not taken into consideration.

 

3.1. Limitation of the study:

Some Informal data also taken to the  consideration while evaluating the reasons for NPAs, from close circle of employees and involvers in bad loans who denied to give formal response.

 

3.2. Non Performing Asset:

In general, anything that creates benefits for an organization will be treated asset. even in the banking services all types of loans treats assets, because they creates the credit with an expectation of returns in the form of Interest rate, Commission rate or sometimes discount rate. Each and every fund arranging by the banks facilitates different types of repayment modes to the barrower. For example EMI (Equated Monthly Instalments) which includes some portion of principle and interest rate as per the specifications of the customer.

 

At the time of repayment, if no problem contains then such assets (loans) are called as Performing assets, and any problem contains any can be solvable within 90 days then those assets are called as Standard Assets. If the loan due continues for more than 90 days then those assets will be called as Non Performing Asset (NPA), later if an NPA continue for one more year then those assets will be called as Sub standard assets and a sub standard assets continues for one more year called as Doubtful Assets, if the details of the customer is lost by the bank then those assets will be called as Loss Assets. To put an end for this profit seizing assets government introduced many acts like SARFAESI  Act  2002 and Bankruptcy and Insolvency code bill 2016, even RBI also introduced many schemes like S4A ( Structuring scheme for stressed assets), even banks are also implementing stringent policies like approaching ARCs (Asset Reconstructing Companies). all this acts policies and schemes are showing their impact only for short run period but fails in solving the problem permanently. 

 

3.3. Priority Sector Lending:

The term Priority sector Lending emphasised by National credit Council in the year 1972, later that has properly defined by Dr K.S Krishnaswamy committee with an objectivity to spread the credit flows into some of the vulnerable sectors of the economy, which may not be attractive for the banks from the point of view of profitability. At present  sectors under priority sector are Agriculture, MSMEs, Export credit, Education, housing Social Infrastructure, renewable energy and others like weaker sections personal loans, distressed persons loans up to Rs 1,00,00 and loans to State sponsored Organizations for the development of SC/ST.

 

3.4. Reasons for happening of NPAs:

As per the nature of the customer, the barrower's insolvency that leads to NPAs are divided as two types

1      Intentional Insolvency (Wilful Defaulters):  voluntarily few customers are availing the credit facility from the banks by manipulating some bank employees   without providing proper genuine documents. In most of the cases such loans will be termed as bad loans. Reasons for this type of loans are

·         Favorability of some bank employees on their relatives or friends and close circle group.

·         Political parties influence on bank employees.

·         To achieve the targets of loans without following proper credit creating procedures by dissatisfied employees.

 

2      Non Intentional insolvency (Unwilful defaulters): In this case of bankruptcy, the barrower may exposes to market and country risk. In such cases though the customers wish to repay the loan, unexpected losses may leads to Insolvency. Reasons for such loans are

·         Changes in supply demand factors of customer generating products that may leads to market risk.

·         Unexpected economy policy changes by the government like demonetization that leads to country and currency risk.

 

3.5. Reasons for NPAs especially in PSL:

·         Unpredictable monsoons may cause bankruptcy in the field of agriculture.

·         Unemployment leads to default in education loans

·         Uncontrollable inflation and operational risk is the reason for bad loans in MSMEs

 

3.6.  Suggestions to reduce NPAs: 

All ready so many methods and policies were implemented and some key decisions like introducing of Bad banks are also in progress.

·         It is better to estimate the entire risk associated with the barrower while assigning the funds as per his requirement.

·         ESOP (Employee Stock option Plan) imple mentation in the banking sector may develop more responsibility among the dissatisfied employees

·         If the banks arrange timely programs on corporate ethics and values, there is a possibility of behavioral changes of unethical employees.

 

 

4. RESULTS AND ANALYSIS:

Table: NPA's in Priority Sector of Scheduled Commercial Banks

YEAR	Gross Advances	Trend%	Gross NPAs	Trend%	Gross NPAs as Per Cent of Total	Trend%
2009	9103	100	280	100	45.9	100
2010	10802	118	356	127	47.7	103
2011	12774	140	461	164	51.8	112
2012	14141	155	613	218	46.9	102
2013	15947	175	721	257	41.0	89
2014	19024	208	852	304	35.6	77
2015	21007	230	1,031	368	34.5	75
Average	14685.43	161	616.29	220	43.34	94
	r=0.99		r=0.99		r=0.98

Source: Hand book of statistics on the Indian economy , various issues

 

 

5. CONCLUSION:

Though many remedial actions are taking by the Government of India and RBI, still many stringent policies are required to put an end for NPAs, even our Finance Minister Mr. Arun Jailty also expressed the same in his FY17 budget speech. Recent surveys revealed that Private sector banks are having less amount of bad loans when compared to Public Sector Banks. even in achieving the PSL targets Private banks are performing well than Public sector banks. So it is clearly shows that if the banks arranges more loans to priority sectors they may reduce the bad debts and if any bad loans happen from Priority sectors, on the other side that money may contributes to the economy development of the country instead of bad loans in Larger industries that may transfer to black economy.

 

6. REFERENCES:

1.     RBI various issues for different years.

2.     Smt. Ranjana Kumar, Chairperson and Managing Director, Indian Bank, Chennai – Restructuring of Debts: The best bet for bankers and the borrowers –IBA Bulleting Special Issue – March 2003 – p.no:40– 47.

3.     Rajendra Kakker (2004) “NPA Management – Role of Asset Reconstruction Companies” – IBA Bulletin – Volume 4 – p.no: 11- 14.

4.     Akshay Kumar Mishra – "An Analysis of NPAs in Priority and Non-Priority Sectors with respect to Public Sector Banks in India"- IOSR Journal of Business and Management e-ISSN: 2278-487X, p-ISSN: 2319–7668,page no:87-92.

5.     Dr. (Mrs.) Paramjit Nanda, Priyanka Mahajan – "Analysis of Non-Performing Assets (Npas) In Priority Sector: A Comparative Study of Public and Private Sector Banks" - Volume 1 Issue 2, 2009.

6.     Najmi Shabbir – "SECTORWISE PRIORITY SECTOR ADVANCES IN INDIA" - International Journal of Research In Social Sciences - Oct 2013. Vol. 3, No.2 ISSN 2307-227X, page no:57-71.

7.     Najmi Shabbir and Dr. Rachna Mujoo – " Problem of Non Performing Assets in Priority Sector Advances in India" - Journal of Economics and Development Studies March 2014, Vol. 2, No. 1, pp. 241-275.

8.     B. Selvarajan and Dr. G. Vadivalagan – "A Study on Management of Non Performing Assets in Priority Sector reference to Indian Bank and Public Sector Banks (PSBs)" - Global Journal of Management and Business Research Volume 13 Issue 1 Version 1.0 Year 2013.

9.     Utpal Kumar Mishra and Dr. Lav Kush Sharma - “Priority Sector Lending and Emergence of Non-Performing Assets in Public Sector Banks: A case study of State Bank of India, Madhubani district: Post Liberalization” – International Journal of Arts, Humanities and management Studies – ISSN NO: 2395 – 0692, Volume 02, No.05, May 2016, page no:98-108.

 

 

 

Accepted on 09.07.2017          © A&V Publications all right reserved