alexa

Search in Indianmoney's WealthPedia

Home Articles Major Problems Faced by India’s Nationalized Banks

Major Problems Faced by India’s Nationalized Banks

IndianMoney.com Research Team | Posted On Tuesday, February 26,2019, 02:58 PM

5.0 / 5 based on 3 User Reviews

Major Problems Faced by India’s Nationalized Banks

 

 

The Indian Banking sector was in deep trouble. The Gross NPA (Non Performing Asset) rate was 9.4% of loans outstanding in September 2016. The share of gross NPAs in total advances of banks (This is both for private banks and public banks) had peaked in March 2018. It is since on the decline and the RBI note says, the worst of NPA and the credit growth problem is over.

RBI Governor Shaktikanta Das is satisfied with the performance of the banking sector especially public sector banks. He says bad loans have declined, especially in the public sector banks. The Gross NPAs (This includes restructured standard advances) was 12.1% of gross advances (This is the total amount of issued credit) in March 2018. The Gross NPA could come down to 10.2% of loans outstanding in September 2019.

What are NPAs? Non Performing Assets (NPAs) are those loans which cease to generate income for the bank. NPAs are a classification for loans and advances which are in default or arrears on scheduled payments of principal or interest. Loans are considered to be NPAs if loan payments (repayments) have not been made for a period of 90 days.

Why NPAs are Bad?

  • NPAs do not generate income for the banks.
  • Provisions have to be made for these loans. (Provision is an expense set aside for uncollected loans and loan payments).
  • Bank profits go down.
  • The prestige and image of the banks are affected.
  • Banks do not give fresh loans to borrowers.
  • Bank staff morale and confidence goes down.
  • Depositors will not deposit money in banks which have high percentage of NPAs.
  • Share price of the bank falls.
  • Customers believe the management to be weak.

Want to know more on Investment Planning? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

Major Problems Faced by India’s Nationalized Banks

What are the problems of Nationalized Banks in India?

Opening branches in rural India is a loss making venture for banks. RBI has asked banks to open more branches in rural areas. This brings banking to villagers doorsteps.

Nationalized banks in India restrict transactions at rural bank branches. Bad loans are a headache for rural branches of nationalized banks in India. Many Nationalized Banks like Canara Bank, Andhra Bank, ICICI Bank and Syndicate Bank have completed the target of opening brick and mortar branches in rural areas of India. Many villagers open bank accounts to avail subsidies, which are directly credited to savings bank accounts.

SEE ALSO:  Problems Faced by India’s Nationalized Banks

Farm Loan Waivers Affect Banks

During election season farmers in India expect farm loan waivers. This is a nightmare for banks as farmers in anticipation of write-offs, stop repayments.  With Lok Sabha elections round the corner and several State Elections to boot, farmers are going slow on repayments. This results in large overdue for banks. Farm loan waivers in States during election season, puts squeeze on lending. Banks are reluctant to sanction loans (credit squeeze) especially in rural credit institutions.

Why Banks Fear Farm Loan Waivers?

RBI Governor says farm loan waiver affects credit culture (The behavior of borrowers). Farm loan waivers amounted to more than Rs 85,000 Crores in the 2 consecutive financial years of FY 2017-18 and FY 2018-19. In a farm loan waiver, State Governments repay banks. Banks provide a temporary write-off, with the eventual liability being the State Government. Farm loan write-offs could go up to Rs 2 Lakh Crores by the time of the Lok Sabha elections 2019.

In a farm loan waiver scheme, the Center or the State repays loans on behalf of the farmers. Banks get the money, but they are reluctant to lend with the default culture. This squeezes credit growth.

Priority Sector Lending:

RBI imposes a limit on the banks to set aside a percentage of total loans granted during a fixed period of time, for selected purposes. RBI has given Nationalized Banks in India an important role to set aside a specified portion of banking for specific sectors like agriculture, MSMEs, poor people for housing, renewable energy, students for education and low income people.

Each bank when it crosses a certain size has to set aside/deploy 40% of total credit/loans towards priority sector lending. If banks miss the priority sector lending targets, they are penalized.

Raising priority sector lending target for Regional Rural Banks (RRBs) affects profits. While commercial banks have a PSL (Priority Sector Lending) target of 40%, RRBs have a higher target.

Banks have a problem with priority sector lending even though it doesn’t have much credit risk (loan default). The main reason is lack of understanding of agriculture, MSME and the weaker sections. The uncertainty of monsoons increases risk in priority sector lending, especially in rural areas.

Education loans up to Rs 4 Lakhs marked as priority sector lending, have high NPAs. Bankers cannot chase students who complete education and default on loans.

Iframe Content

Keep your Financial Cognizance up to date with IndianMoney App. Download NOW for simple tips & solutions for your financial wellbeing.

Nationalized Banks in India vs Foreign Banks

India has been very profitable for foreign banks. Foreign banks lend heavily to Corporate Clients and MSMEs. Foreign Banks are very aggressive in product offerings vis-à-vis nationalized banks as they grow strong in India. Foreign Banks make a lot of money from Mergers and Acquisitions (M&A).

Nationalized Banks have seen NPAs steadily grow in the past few years. Provisioning for NPAs is on the rise, restricting banks ability to lend. The problem lies with Government practices in public sector banks mainly political interference, bureaucratization and crony capitalism (This is the nexus between businessmen and the politicians).

The Government has infused Rs 48,239 Crores in 12 PSBs which will help Allahabad Bank and Corporation Bank come out of PCA (Prompt Corrective Bank). PCA is triggered when banks breach certain regulatory requirements like minimum capital, return on asset and quantum of non-performing assets. This is a step in the right direction to reduce NPAs in the banking sector.

Have a complaint against any company? IndianMoney.com's complaint portal Iamcheated.com can help you resolve the issue. Just visit IamCheated.com and lodge your complaint. If you want to post a review on any company you can post it on Indianmoney.com review and complaint portal IamCheated.com.

Be Wise, Get Rich.

What is your Credit Score? Get FREE Credit Score in 1 Minute!

Get Start Now!
CIBIL Meter
Get It now!
Attention!

This is to inform that Suvision Holdings Pvt Ltd ("IndianMoney.com") do not charge any fees/security deposit/advances towards outsourcing any of its activities. All stake holders are cautioned against any such fraud.