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Suresh Krishnamurthy

THE Oriental Bank of Commerce and Bank of India cases highlight the ability of NPA management to boost profitability. In 2002-03, Oriental Bank of Commerce recovered Rs 492 crore of advances previously classified as NPAs. This, along with hefty provisions, led to a 50 per cent reduction in its net non-performing assets (NPAs). About Rs 56 crore of the recovered amount was credited to the profit and loss account to boost profits.

Bank of India is a study in contrast. It can boast of one of the lowest cost of funds. Still, its spreads are one of the lowest. Reason: Large NPAs. Net NPAs to advances of the bank is one of the highest in the industry. Clearly, better NPA management holds the key to better profitability for banks.

Several developments have taken place lately, which suggest that NPA management by PSBs is only likely to improve. The introduction of an Act to enforce the security of banks, the imminent setting up of asset reconstruction companies and greater activity in corporate debt restructuring augur well. Individually, these factors may have only a small impact. Cumulatively, though, their impact on recovery of bad loans could be sizeable.

On the other hand, fresh accretion to bad loans is likely to continue. According to recent estimate by CRISIL, weak assets of PSBs are likely to be as high as their gross NPAs. Industry insiders do not paint such a bleak picture. Their estimates range between 50 per cent and 60 per cent of gross NPAs. In this context, efforts at recovery of past NPAs hold the key to reducing the overall proportion of NPAs.

It is also important to write-off loans utilising the bonanza in the form of profits on government securities. In 2002-03, only a handful of banks adopted such a prudent approach . Only Punjab National Bank, SBI and Indian Overseas Bank completely utilised their profits to enhance provisions. The record of Oriental Bank of Commerce, Union Bank of India and Vijaya Bank is also good. Banks such as Allahabad Bank, Canara Bank, Bank of India and Bank of Baroda, which carry sizeable sums of bad loans, utilised only a portion of the profits to enhance provisions.

Overall, only such banks as Oriental Bank of Commerce, Allahabad Bank, Corporation Bank and Vijaya Bank have recorded substantial reductions in their net NPAs. In the case of other banks, the reduction has been only cosmetic although the ratio of net NPAs to net advances has declined for all the PSBs.

Banks, however, still have some time before intense competition sets it. They also have sizeable unrealised profits on government securities on hand. The improvement in the economy could also provide a helping hand. Thus, almost all of them have the chance to rein in NPAs and increase their profitability.

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