Nonperforming Asset

What Does Nonperforming Asset Mean? A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments.

Investopedia explains Nonperforming Asset For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency.

Non-performing assets (NPA)

Non-performing assets, also called non-performing loans, are loans,made by a bank or finance company, on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments than a bank makes its profits. Banks usually treat assets as non-performing if they are not serviced for some time. If payments are late for a short time a loan is classified as past due. Once a payment becomes really late (usually 90 days) the loan classified as non-performing. A high level of non-performing assets compared to similar lenders may be a sign of problems, as may an sudden increase. However this needs to be looked at in the context of the type of lending being done. Some banks lend to higher risk customers than others and therefore tend to have a higher proportion of non-performing debt, but will make up for this by charging borrowers higher interest rates, increasing spreads. A mortgage

lender will almost certainly have lower non-performing assets than a credit card specialist, but the latter will have higher spreads and may well make a bigger profit on the same assets, even if it eventually has to write off the non-performing loans.

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India.

[edit] Ninety days overdue

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004. 1. Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a term Loan. 2. The account remains out of order for a period of more than 90 days, in respect of an Overdraft / Cash Credit. 3. The bill remains overdue for a period of more than 90 days in case of the bill purchase and discounted. 4. Interest and / or installment of principal remain overdue for two harvest season but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. 5. Any amount to be received remains over-due for a period of more than 90 days in respect of the other accounts. ow, to study non performing assets in banks has become important because RBI's Financial Stability Report which has been published today, has told that main reason of decreasing the profitability will be non performing assets in banks. RBI explained in the report that the gross NPA ratio in the agriculture sector rose to 3.3 per cent in March from 2.4 per cent a year earlier. What is non performing assets in banks? Non performing assets is the investment of banks in doubtful loan. In simple words, it means to give loan to those parties who will not repay on the time. RBI has made a simple rules of asset classification for showing non performing assets in the balance sheet. If bank does not get his given loan with in 90 days after date of its collection, it will become non performing asset in bank. In bank term, it is called NPA. It is also called non performing debt or loan.

Guidelines on purchase/sale of Non Performing Assets

RBI/2005-06/54 DBOD.NO.BP. BC. 16 / 21.04.048/ 2005-06 13 July 2005 All Commercial Banks (excluding RRBs) All India Term Lending and Refinancing Institutions All Non Banking Financial Companies (including RNBCs) Dear Sir, Guidelines on purchase/sale of Non Performing Assets In order to increase the options available to banks for resolving their non performing assets and to develop a healthy secondary market for non-performing assets, where securitisation companies and reconstruction companies are not involved, it has been decided to issue guidelines to banks on purchase / sale of Non-Performing Assets. Since the sale/purchase of non-performing financial assets under this option would be conducted within the financial system the whole process of resolving the non performing assets and matters related thereto has to be initiated with due diligence and care warranting the existence of a set of clear guidelines which shall be complied with by all entities so that the process of resolving non-performing assets by sale and purchase of NPAs proceeds on smooth and sound lines. Accordingly guidelines on sale/purchase of non-performing assets have been formulated and furnished in the Annexure.

The guidelines may be placed before the bank's/FI's /NBFC's Board at the next meeting and appropriate steps may be taken for their implementation. 2. Please acknowledge receipt. Yours faithfully, (Prashant Saran) Chief General Manager

Annexure Guidelines on purchase/ sale of Non Performing Financial Assets Scope 1. These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling non performing financial assets, from/ to other banks/FIs/NBFCs (excluding securitisation companies/ reconstruction companies). 2. A financial asset, including assets under multiple/consortium banking arrangements, would be eligible for purchase/sale in terms of these guidelines if it is a non-performing asset/non performing investment in the books of the selling bank. 3. The reference to bank in the guidelines would include financial institutions and NBFCs. Structure 4. The guidelines to be followed by banks purchasing/ selling non-performing financial assets from / to other banks are given below. The guidelines have been grouped under the following headings: i. Procedure for purchase/ sale of non performing financial assets by banks, including valuation and pricing aspects. ii. Prudential norms, in the following areas, for banks for purchase/ sale of non performing financial assets: a. Asset classification norms b. Provisioning norms c. Accounting of recoveries d. Capital adequacy norms e. Exposure norms iii. Disclosure requirements 5. Procedure for purchase/ sale of non performing financial assets, including valuation and pricing aspects i. A bank which is purchasing/ selling non-performing financial assets should ensure that the purchase/ sale is conducted in accordance with a policy approved by the Board. The Board shall lay down policies and guidelines covering, inter alia,

a. Non performing financial assets that may be purchased/ sold; b. Norms and procedure for purchase/ sale of such financial assets; c. Valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated based on the estimated cash flows arising out of repayments and recovery prospects; d. Delegation of powers of various functionaries for taking decision on the purchase/ sale of the financial assets; etc. e. Accounting policy ii. While laying down the policy, the Board shall satisfy itself that the bank has adequate skills to purchase non performing financial assets and deal with them in an efficient manner which will result in value addition to the bank. The Board should also ensure that appropriate systems and procedures are in place to effectively address the risks that a purchasing bank would assume while engaging in this activity. iii) The estimated cash flows are normally expected to be realised within a period of three years and not less than 5% of the estimated cash flows should be realized in each half year. iv) A bank may purchase/sell non-performing financial assets from/to other banks only on without recourse basis, i.e., the entire credit risk associated with the non-performing financial assets should be transferred to the purchasing bank. Selling bank shall ensure that the effect of the sale of the financial assets should be such that the asset is taken off the books of the bank and after the sale there should not be any known liability devolving on the selling bank. v) Banks should ensure that subsequent to sale of the non performing financial assets to other banks, they do not have any involvement with reference to assets sold and do not assume operational, legal or any other type of risks relating to the financial assets sold. Consequently, the specific financial asset should not enjoy the support of credit enhancements / liquidity facilities in any form or manner. vi) Each bank will make its own assessment of the value offered by the purchasing bank for the financial asset and decide whether to accept or reject the offer. vii) Under no circumstances can a sale to other banks be made at a contingent price whereby in the event of shortfall in the realization by the purchasing banks, the selling banks would have to bear a part of the shortfall. viii) A non-performing asset in the books of a bank shall be eligible for sale to other banks only if it has remained a non-performing asset for at least two years in the books of the selling bank. ix) Banks shall sell non-performing financial assets to other banks only on cash basis. The entire sale consideration should be received upfront and the asset can be taken out of the books of the selling bank only on receipt of the entire sale consideration. x) A non-performing financial asset should be held by the purchasing bank in its books at least for a period of 15 months before it is sold to other banks. Banks should not sell such assets back to the bank, which had sold the NPFA. (xi) Banks are also permitted to sell/buy homogeneous pool within retail non-performing financial assets, on a portfolio basis provided each of the non-performing financial assets of the pool has remained as non-performing financial asset for at least 2 years in the books of the selling bank. The pool of assets would be treated as a single asset in the books of the purchasing bank.

xii) The selling bank shall pursue the staff accountability aspects as per the existing instructions in respect of the non-performing assets sold to other banks. 6. Prudential norms for banks for the purchase/ sale transactions (A) Asset classification norms (i). The non-performing financial asset purchased, may be classified as standard in the books of the purchasing bank for a period of 90 days from the date of purchase. Thereafter, the asset classification status of the financial asset purchased, shall be determined by the record of recovery in the books of the purchasing bank with reference to cash flows estimated while purchasing the asset which should be in compliance with requirements in Para 5 (iii). (ii). The asset classification status of an existing exposure (other than purchased financial asset) to the same obligor in the books of the purchasing bank will continue to be governed by the record of recovery of that exposure and hence may be different. (iii) Where the purchase/sale does not satisfy any of the prudential requirements prescribed in these guidelines the asset classification status of the financial asset in the books of the purchasing bank at the time of purchase shall be the same as in the books of the selling bank. Thereafter, the asset classification status will continue to be determined with reference to the date of NPA in the selling bank. (iv) Any restructure/reschedule/rephrase of the repayment schedule or the estimated cash flow of the non-performing financial asset by the purchasing bank shall render the account as a nonperforming asset. (B) Provisioning norms Books of selling bank i. When a bank sells its non-performing financial assets to other banks, the same will be removed from its books on transfer. ii. If the sale is at a price below the net book value (NBV) (i.e., book value less provisions held), the shortfall should be debited to the profit and loss account of that year. iii. If the sale is for a value higher than the NBV, the excess provision shall not be reversed but will be utilised to meet the shortfall/ loss on account of sale of other non performing financial assets. Books of purchasing bank The asset shall attract provisioning requirement appropriate to its asset classification status in the books of the purchasing bank. (C) Accounting of recoveries Any recovery in respect of a non-performing asset purchased from other banks should first be adjusted against its acquisition cost. Recoveries in excess of the acquisition cost can be recognised as profit.

(D) Capital Adequacy For the purpose of capital adequacy, banks should assign 100% risk weights to the nonperforming financial assets purchased from other banks. In case the non-performing asset purchased is an investment, then it would attract capital charge for market risks also. For NBFCs the relevant instructions on capital adequacy would be applicable. (E) Exposure Norms The purchasing bank will reckon exposure on the obligor of the specific financial asset. Hence these banks should ensure compliance with the prudential credit exposure ceilings (both single and group) after reckoning the exposures to the obligors arising on account of the purchase. For NBFCs the relevant instructions on exposure norms would be applicable. 7. Disclosure Requirements Banks which purchase non-performing financial assets from other banks shall be required to make the following disclosures in the Notes on Accounts to their Balance sheets: A. Details of non-performing financial assets purchased: (Amounts in Rupees crore) 1. (a) No. of accounts purchased during the year (b) Aggregate outstanding 2. (a) Of these, number of accounts restructured during the year (b) Aggregate outstanding B. Details of non-performing financial assets sold: (Amounts in Rupees crore) 1. No. of accounts sold 2. Aggregate outstanding 3. Aggregate consideration received C. The purchasing bank shall furnish all relevant reports to RBI, CIBIL etc. in respect of the nonperforming financial assets purchased by it

Reserve Bank Guidelines on purchase/ sale of Non Performing Financial Assets

Scope 1. These guidelines would be applicable to banks, FIs and NBFCs purchasing/ selling non performing financial assets, from/ to other banks/FIs/NBFCs (excluding securitisation companies/ reconstruction companies).

2. A financial asset, including assets under multiple/consortium banking arrangements, would be eligible for purchase/sale in terms of these guidelines if it is a non-performing asset/non performing investment in the books of the selling bank. 3. The reference to 'bank' in the guidelines would include financial institutions and NBFCs. Structure 4. The guidelines to be followed by banks purchasing/ selling non-performing financial assets from / to other banks are given below. The guidelines have been grouped under the following headings: i. Procedure for purchase/ sale of non performing financial assets by banks, including valuation and pricing aspects. ii. Prudential norms, in the following areas, for banks for purchase/ sale of non performing financial assets: a. Asset classification norms b. Provisioning norms c. Accounting of recoveries d. Capital adequacy norms e. Exposure norms iii. Disclosure requirements 5. Procedure for purchase/ sale of non performing financial assets, including valuation and pricing aspects i. A bank which is purchasing/ selling non-performing financial assets should ensure that the purchase/ sale is conducted in accordance with a policy approved by the Board. The Board shall lay down policies and guidelines covering, inter alia, a. Non performing financial assets that may be purchased/ sold; b. Norms and procedure for purchase/ sale of such financial assets; c. Valuation procedure to be followed to ensure that the economic value of financial assets is reasonably estimated based on the estimated cash flows arising out of repayments and recovery prospects; d. Delegation of powers of various functionaries for taking decision on the purchase/ sale of the financial assets; etc. e. Accounting policy ii. While laying down the policy, the Board shall satisfy itself that the bank has adequate skills to purchase non performing financial assets and deal with them in an efficient manner which will result in value addition to the bank. The Board should also ensure that appropriate systems and procedures are in place to effectively address the risks that a purchasing bank would assume while engaging in this activity. iii) The estimated cash flows are normally expected to be realised within a period of three years and not less than 5% of the estimated cash flows should be realized in each half year. iv) A bank may purchase/sell non-performing financial assets from/to other banks only on 'without recourse' basis, i.e., the entire credit risk associated with the non-performing financial assets should be transferred to the purchasing bank. Selling bank shall ensure that the effect of the sale of the financial assets should be such that the asset is taken off the books of the bank and after the sale there should not be any known liability devolving on the selling bank.

Banks' non-performing assets may rise: Assocham

IANS Aug 14, 2011, 11.57am IST Tags:

non-performing assets| Banks' NPAs

NEW DELHI: Non-performing assets (NPAs) of banks are likely to go up as lending to certain sectors like telecom, airlines and agriculture might turn into bad loans, a study by an industry chamber shows. "Though banks have shown improvement in asset quality over the years, fast-changing macro-economic scenario has thrown up renewed risks of accounts going bad in certain vulnerable sectors like telecom, airlines, small and medium enterprises, and agriculture," the Associated Chambers of Commerce and Industry of India (Assocham) said in a study report. There still remains a considerable scope for improvement in asset quality of Indian banking institutions and regulatory norms associated with them, it said.
Managing Non-performing Assets in Banks
S. N. Bidani
Pages: 192 Price: Rs. 325 Format: Paperback ISBN13/10: / 8170944910 Availability: Yes Published in 2002 Buy Now write comments refer to friend

Definitive NPA training handbook and operations manual for bankers Non-performing Assets (NPAs) are the smoking gun threatening the very stability of Indian banks. NPAs wreck a banks profitability both through a loss of interest income and write-off of the principal loan amount itself. In a bid to stem the lurking rot, RBI issued in 1993 guidelines based on recommendations of the Narasimham Committee that mandated identification and reduction of NPAs. Their implementation immediately pushed many banks into the red. So serious is the problem that an RBI report suggested that reducing NPAs be treated as a national priority. This is a definitive book which tackles the subject of managing bank NPAs in its entirety, starting right from the stage of their identification till the recovery of dues in such accounts. Highlights:

How to identify non-performing assets Asset classification and assessment of provisions Pre-sanction appraisal and post-sanction supervision and follow-up Monitoring system for existing and potential NPAs Rehabilitation of sick non-performing units How to reduce risk-weighted assets NPA recovery through compromise and negotiated settlement Strategies and actionable operational guidelines for reducing NPAs Suggestions for improving bank profitability.

Here is an in-depth treatment for managing NPAs in banks by a veteran banker intimately familiar with the subject. The book will thus serve both as a training handbook and an operations manual for practising bankers.

STORY OF AN NPA (NON-PERFORMING ASSET)

Author - Anil Chawla

Once upon a time, he was a bright young engineer full of patriotic zeal. He had graduated from the country's most prestigious institute and while his classmates were preparing for migrating to USA, he had decided to serve his country. Twenty years later, he has been converted to an NPA (Non-Performing Asset) and he spends his time reading law books to save his skin in the court case that will haunt him for the rest of his life. He had started as an employee in a blue-chip company but gave up job to be an entrepreneur. After spending five years to gather some initial capital, he started a small industry with a loan from the largest Bank of India. This was 1987 and the beginning of the tragedy. He had planned the unit based on commitment from a large scale industry who it turned out had given written commitments without being serious about what it committed. The baby was born sick and it was clear to the engineer-entrepreneur that there was no hope. There was just no exit route and he was forced to keep the new-born alive. As soon as the production started in 1988, he thought of various ways of saving the baby and discussed the same with the Bank with who asked him to write it all out in hundred different ways. He did that and also followed it up with personal visits to officers of the Bank. Every day he would spend half the day shunting from one office of the Bank to the other where more often than not he was treated as a dignified beggar. On the rarest of rare occasions when he displayed some sense of self-respect, he was insulted beyond imagination. Reports of such bad behaviour to higher officers were answered with sermons on learning to behave like a businessman. Bank refused to help him out by giving additional finance. Bank also refused to take over his unit or to help him find a buyer for the unit. In fact they pleaded that they had no such provision. Bank can only take over a unit after a Court orders it to and that may take a few years if not decades. Bank froze his account and insisted that he keep running the unit with a frozen account. He committed his first illegal act by opening an account in

another bank. This started a witch-hunt with the Bank using all means at its disposal to pressurize the other bank to close his account. All this while he kept pleading with the Bank to settle the matter amicably, but they were not interested. In 1993, the Bank filed a court case. Seven years later he is still pleading with the Bank to take over his unit on asis-where-is basis and recover the best value possible. But the Bank believes that a dead horse is more valuable than a live one and they would take over the assets (or what remains of the assets) a few years down the line after being ordered so by Debt Recovery Tribunal. He has offered to pay some money based on his paying capacity and settle the matter out-of-court. Bank is not even interested in talking. The case drags on and he keeps cursing the day he decided to serve the country. A long story that is boring because everyone likes to read about success and forget about failures. Yet, there is no denying that failure is an essential part of entrepreneurship. Accepting failures gracefully is the key to success and a society that cannot accept failures is doomed. For a long time, India tried to follow socialism treating all businessmen as crooks and looking at entrepreneurs with suspicion. All talk of liberalization and economic reforms has not changed the mindset of Indian bankers and powers that control the bankers. The legacy of the British raj has survived and flourished in the form of India's gigantic cancerous bureaucracy. The tentacles of this cancer have spread to almost all fields in India including banking. Indian banks and financial institutions (FI's) are crying hoarse about their large Non-Performing Assets portfolio and are blaming the entrepreneurs, businessmen, Government, judicial system, courts - practically everybody except themselves for the mess that has been created primarily by them. Any lending involves the following three stages where discretion needs to be exercised (a) Evaluation and assessment of the proposal (b) Continuing Support during the currency of the loan by additional loan or by non-fund based activities (c) Exit decision and modality. Indian Banks and FI's exhibit extremes of behaviour at each of the above stages. A rule-based approach precludes reasonable application of mind. Evaluation of project idea and the management is something that most Indian banks and FI's are least equipped for. This leads to the banker acting too liberal on all projects that are related to the flavor-of-the-month as well as to insisting on collaterals from everyone without taking into consideration any other competencies of the entrepreneur. For example if wind is blowing in favour of software, all projects involving software will be supported. On the other hand if foods is not being favored, a genuinely good proposal in foods will be rejected by all banks. This naturally encourages crooks to keep smelling for the flavorof-the-month. As soon as they smell it out, the next step is to get a readymix 'bankable' project report from a con-man (also called consultant). Banks and FI's are too willing to finance against such reports to shady businessmen who may also sometimes grease their palms instead of looking for genuine project ideas backed by competent men of integrity. Herd mentality of the bankers and FI's creates excess capacity in any industry that they choose to finance thereby laying the seeds of sickness of that industry. Coupled with the incompetency of the entrepreneurs and the shady intentions with which the projects were set up, the sickness spreads like wild fire.

After a loan has been disbursed, it is an accepted norm that the Bank and FI's have a duty to keep smelling for and to act promptly on key signals that indicate the health of the recipient of the loan. Rule-bound bankers in India do collect all the necessary information and pile it up in neat reports and files. It is not unusual for bankers to even advise their clients to cook up their accounts to either satisfy the Banker's Health Code requirements or to get their unit classified as sick under the relevant laws. This having been done, the banker can sleep peacefully. Acting on the signals that emanate from these reports is none of his business. It is the entrepreneur who has to exercise to convince a long chain of stubborn bank and FI officers to rise from their slumber. This long chain operates on a veto system. Each and every member of the chain has a right to delay and veto and no one, howsoever senior, has a right to over-ride a veto or to ask someone to expedite. So the entrepreneur is now caught in a game where almost every petty Bank and FI officer satisfies his ego by kicking him where it hurts most before obliging him by moving the file to the next officer. Bank's and FI's key decisions about nursing versus exit get influenced by this merry-go-round ego trip of the officers. The attitude that the Bank will lose more than the entrepreneur by a delay in such key decisions is completely missing in Indian bankers and FI's who see themselves as demi-gods waiting for the right 'puja' (rites of worship) to be performed by the faithful before granting the boons. Honourable exit is something that is an alien concept to the Indian bankers and FI's. The only exit route known to banks and FI's in India is to issue a Recall of Loan letter. The letter is just a stepping stone to filing a suit and has no other practical utility. As soon as a Recall letter is issued, the banker is relaxed because his headaches are now over. He will pass the necessary entries in his books classifying the loan as Non-Performing Asset (NPA). He can now blame everybody else for all his omissions and commissions with the entrepreneur being the key accused. In any other part of the world, the first option that a banker is supposed to exercise with the support and consent of the entrepreneur is a change in ownership. It always makes more sense to sell a business as a going concern rather than sell it as a dead horse. In any business there are intangibles like goodwill, key customers, key employees who may be lost as soon as a court case is filed. Sometimes such intangible assets may be more valuable than tangibles like land, building, plant & machinery etc. Indian banks and financial institutions live in a fool's paradise thinking that a court or tribunal can get them all that they need. What they do not realize is that no judicial body can help them get possession of a running unit without sacrificing its vitality. The bureaucratic attitude of Indian banks and FI's has had two negative effects. On one hand it has fed and strengthened a generation of shady businessmen and con-men who know how to fool the banks for a multitude of projects - some of which even turn profitable. On the other hand it has killed a new generation of capable entrepreneurs. Indian Banks and FI's have looked at balance sheets and financial statements for too often. It is time that they learn to look at human capabilities. It is time that they learn to evaluate ideas rather than run in herd-like manner. Tribunals and Courts are like surgeons who can cut and operate but cannot give life and good health. Unless Indian banks and FI's learn to build their health as well as the health of their clients, they will keep converting useful assets of the country into NPA's.

The business of banking over the past three years

Tweet 1Share
The Reserve Bank of India (RBI) recently came out with draft guidelines for the entry of new private sector banks into the sector. Most major corporate houses in India including the Tatas, Ambanis, Mahindras, Birlas, Bajaj Group etc are all ready to jump on the bandwagon. They are all seeking to apply for new banking licenses. Even various non-banking finance companies including Religare, Shriram Group etc are also in the fray. The beleaguered SKS Microfinance is also said to looking for a license, in order to improve its ailing fortunes. Why is everyone so eager to be a part of this industry? We thought it would be interesting to see how the banking sector has progressed over the past three years. We wanted to find out what exactly is the current scenario. To see this we concentrated on the bank's profitability, capital requirements as well as their asset quality. To understand the same; we analyzed a few ratios from the perspective of the various banking groups in India. In this article, we focused mainly on private sector banks, foreign banks, public sector banks and SBI and its associates. Capital adequacy ratio: A bank's capital adequacy ratio (CAR) is the ratio of qualifying capital to risk adjusted (or weighted) assets. The RBI has set the minimum capital adequacy ratio at 9% for all banks. A ratio below the minimum indicates that the bank is not adequately capitalized to expand its operations. The ratio ensures that the bank do not expand their business without having adequate capital against their assets. It can be seen that most banks are well above the minimum capital adequacy ratio set by the RBI. However the same saw a decline across the board in FY11. Private sector banks and foreign banks however maintain higher capital ratios, giving them a significant capital cushion. Public Click Here to view the entire WebSummit
ADVERTISEMENT

sector banks, especially State Bank of India needs to soon bolster its capital position. Its Tier-1 capital ratio has currently sunk below 8%, the minimum desired level by the government.

Source: RBI - A Profile of Banks, 2011

Non-performing asset (NPA) ratio: The net NPA to loans (advances) ratio is used as a measure of the overall quality of the bank's loan book. NPA or non performing assets are those loans for which interest is overdue for more than 3 months. Net NPAs are calculated by reducing cumulative balance of provisions outstanding at a period end from gross NPAs. A higher ratio reflects rising bad quality of loans. On an overall basis net NPAs declined in FY11. While private banks and foreign banks were able to contain their NPAs, public sector banks and SBI could not improve their asset quality. Going forward, we believe that asset quality will continue to be under some pressure. This is on account of the central bank's monetary tightening and the slowdown in the economy. Plus, public sector banks may also face the heat on account of shifting all their smaller accounts to the core banking system. This will help in more accurate recognition of NPAs on a timely basis. However, NPAs are expected to see a spike on this account.

Source: RBI - A Profile of Banks, 2011

Profit per employee: Profit per employee measures the productivity of a bank's employees. This ratio is calculated by dividing the total profits of the group by the number of employees. A higher ratio indicates that the bank is able to generate more profits through its employees. This partly has to do with the business mix, as can be seen with the foreign banks, which rank much higher in profits per employees on account of their focus on higher margin products. These foreign banks also don't have much branch presence in the country. Cumulatively the 33 foreign banks, have just 316 offices in India. Public sector banks on the other hand have over 60,000 offices, and over 750,000 employees across 26 banks. Among the private sector banks, Yes Bank and Axis Bank rank quite highly in this ratio. Profit per employee across the bank groups increased during FY11, except for State Bank of India and its associates. SBI's FY11 profits were severely dampened on account of increased provisioning as well as pension related expenses.

Source: RBI - A Profile of Banks, 2011

Return on assets (ROA) ratio: ROA is a commonly used figure used to comparing performance of financial institutions and banks. The ROA ratio is the net income (profits) generated by the bank on its total assets (including fixed assets). The higher the proportion of average earnings assets, the better would be the resulting returns on total assets. At bank group level, most bank groups witnessed an increase in return on assets in FY11, with the exception of SBI and its associates, which witnessed decline in return on assets.

Source: RBI - A Profile of Banks, 2011

In conclusion

Most banks have seen a steady progression over the past few years. This is either in terms of improvement in asset quality or higher profitability. With the exception of SBI and its associates, most banks were able to better their FY10 performance in FY11. However, things may not look so rosy in FY12, as the full impact of the central bank's monetary tightening, and the economic slowdown takes its toll. Either way, with a large portion of this country still unbanked, there is still a lot of scope for the development of the industry in this country, which we hope the new private sector banks' will be able to cater to.