Thursday, February 11, 2016

[Editorial # 63] Doubly damaging : The Indian Express

[Following editorial has been published in The Indian Express on 11th February 2016. Read through it and try to answer the questions that follow. Please do not copy and paste answers. The objective of this exercise is to get you in the groove of answer-writing. Try to write in your own words. Don't hesitate to write in a bulleted-format, if you are uncomfortable in writing in paragraph form.]

On the face of it, no major bank, state-owned or private, has escaped the non-performing assets crisis unfolding in the country. The latest addition to the list is the public-sector giant, Punjab National Bank. On Tuesday, the bank announced that its gross NPAs in the third quarter of the current fiscal increased to Rs 34,338 crore, a sharp rise from Rs 22,211 crore last year. As a result, the PNB had to increase provisioning towards NPAs to Rs 3,775 crore for Q3, up from Rs 1,467 crore in the same quarter a year ago. Eventually, the slippage due to NPAs resulted in the PNB’s net profits falling 93.4 per cent to Rs 51 crore in the October-December quarter. But the PNB was not alone. Two more public-sector banks — Allahabad Bank and Dena Bank — reported a combined loss of Rs 1,100 crore just for the December quarter. Even private-sector banks are getting hit due to increasing NPAs but there is a difference between how the NPA-induced pain in the banking sector affects public-sector and private-sector banks.

According to an analysis by the P.J. Nayak Committee report on the governance of bank boards in 2014, the market share of PSBs in India has fallen from 80.2 per cent in 2000 to 73 per cent in 2013. It calculated that, given this trend, PSBs will further relinquish market share and be reduced to just 63.2 per cent by 2025. This, the committee found, is due to several reasons. Irrespective of which variable one looks at — return on assets, average net interest margin, net profit per employee or the ratio of staff costs to operating expenses — PSBs massively lag behind private-sector banks. This is evident in the scale of the NPA crisis, too.

In its bid to give primacy to the goal of financial inclusion, the Modi government unveiled a flurry of schemes such as the Jan Dhan Yojana, the Atal Pension Yojana and the Suraksha Bima Yojana — PSBs were expected to be the main vehicles to drive this change. At first, the hurried pace at which many of these schemes were pushed was a cause for concern. But now, as PSBs declare the true extent of stressed assets on their balance-sheets, it is becoming clear that they will find it difficult to push financial inclusion, which requires banks to put up with significant costs upfront. This underlines the urgency to reform PSBs and ensure they follow prudential norms. Failure to do so will adversely affect the goal of financial inclusion.


1. What is Non Performing Asset?

2. What are Public Sector Banks? How are they different from Private Sector Banks?

3. Why was P J Nayak Committee constituted? What were its major recommendations?

4. What factors are attributed to high NPAs on the balance sheets of PSBs? How are Private Sector Banks performing vis-a-vis PSBs?

5. What is meant by Financial Inclusion? What are various steps taken by the Govt. of India to achieve Financial Inclusion in India?

6. How are higher NPAs affecting various programs of Financial Inclusion?

7. What steps should be taken by the Government to address theNPA crisis?

8. What is Jan Dhan Yojna? Evaluate its performance since inception.

9. What are Atal Pension Yojana and Suraksha Bima Yojana? Highlight their features.


  1. 1. A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days.

  2. Non Performing Asset?
    It is a credit facility in which the interest or installment of principal has been overdue for a period of time. It is said to be non-performing because it ceases to generate income for the lender.

  3. 1. Non Performing Asset is an economic term which refers that all the loans or advance payment by the lender is no more generating any income or revenue for the lender. Under this, principle payment and interest payment remains overdue for more than 90 days.

  4. Public Sector Banks? How are they different from Private Sector Banks?
    Public sector banks are those banks in which the majority stake is held by the government. Shares of these banks are listed in stock exchanges. There are 27 Private sector bank in India.
    In contrast Private sector banks are those banks in which the majority stake is held by private share holders and not by the government.

  5. 8. Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to ensure access to financial services, namely, Banking/ Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension in an affordable manner.

    * It is one of India’s ambitious financial inclusion schemes that aims to provide basic banking and micro insurance services to India’s poor.
    * Under the scheme an account holder is entitled to one lakh rupees accidental death cover and 30,000 rupees life insurance cover.
    * It provides universal access to banking services.
    * Under PMJDY whole country is to be covered by extending banking facilities in each Sub-Service area consisting of 1000 – 1500 households such that facility is available to all within a reasonable distance, say about 5 Km.

  6. 9. ATAL PENSION YOJANA: - Towards promulgation of new schemes that make financial security for the common man. The scheme intends to bring pension benefits to allow people of the unorganised sector to enjoy social security with minimum contribution per month. People who work in the private sector or employed in occupations that do not give them the benefit of pension can apply for the scheme. They can opt for a fixed pension of INR 1,000 to 5,000 on attaining the age of 60. The amount of contribution and the individual’s age will determine the pension. Upon the contributor’s death, the spouse of the contributor can claim the pension and after the spouse’s death the nominee will be returned the corpus accrued.
    The Atal Pension Scheme will bring security to ageing Indians while at the same time promote a culture of savings and investment among the lower and lower middle class sections of society. One of the greatest benefits of the scheme may be enjoyed by the poorer sections of society. The Atal Pension Yojana (APY) is open to all Indians between the age of 18 and 40. This allows an individual to contribute for at least 20 years before reaping the benefits of the scheme. Any bank account holder who is not a member of any statutory social security scheme can avail of the scheme. It will now replace the Swavalamban scheme, which did not gain much popularity across the country.
    SURAKSHA BIMA YOJANA: - It is an insurance policy which covers death or disablement of the policyholder caused due to accident or accidental injuries. The Pradhan Mantri Suraksha Bima Yojana will offer an accidental death and full disability cover of Rs. 2 Lakh and for partial disability cover of Rs. 1 Lakh. This cover is available to people in age group 18 to 70 years. Premium is fixed at Rs.12 per annum. The premium will be directly auto-debited by the bank from the subscribers' account
    It is a good option for those without an insurance cover but for the middle class the cover is inadequate. Subscribers have to renew this accidental cover every year. If they don't want to have the hassle of renewing the cover every year, they can give an instruction for auto-debit of bank account every year. The scheme will be offered by all public sector general insurance companies such as New India Assurance Company, National Insurance Company, The Oriental Insurance Co, and United India Insurance Co - through tie-ups with banks. The government also plans to rope in other insurers as well. Any person having an Aadhaar-linked bank account can join the scheme by submitting a form to the bank.

  7. P J Nayak Committee
    The committee was set up by Reserve Bank of India to review the governance of board of banks in India. PJ Nayak was the chairman of the committee. he was the ex-chairman of Axis Bank.
    Banks in which the government owns more than 50% share. They have the majority voting rights and can appoint board directors according to its own whims and fancies. This has resulted in various scams.
    1.Repeal Bank Nationalization Act, SBI Act, SBI subsidiaries Act.
    2.Set up Bank Investment Company under Companies Act. Then transfer the shares of banks in which it holds more than 50% shares to BIC. Then proceed with the registration of Goverment banks as Subsidiary companies of BIC.
    3. BIC will have voting powers to appoint Board of Directors.
    4.Till the time BIC is constituted set up Bank Boards Bureau in Mumbai. This will advise on all board appointments till the time BIC is set up. Once BIC is set up the Bank Boards Bureau will dissolve.

  8. 3. The P. J. Nayak Committee report was constituted by the RBI for making recommendations regarding corporate governance in PSU banks. In August 2015, Finance Minister Arun Jaitley unveiled a seven point agenda for public sector banks. The government has borrowed freely from that Committee’s report and that is a good development. However, even while accepting and in a few cases even implementing the Nayak Committee’s report, the government appears to be playing safe. For instance, on the crucial question of finding new means to raise resources for the banks, the government’s action plan has very few new ideas on raising the massive resources that these banks will require both to clean up their balance sheets as well as to meet the new capital adequacy norms. The Nayak Committee had recommended a holding company or an investment trust, to which will be vested government’s holding in public sector banks. This could facilitate fund raising but it is debatable whether such a move would nullify the deleterious consequences of government ownership.
    Autonomy for public sector banks has remained a perpetual goal for banks as well as policymakers.
    Reform agenda has attracted its fair share of supporters and critics, autonomy in the current context is in terms of freedom for PSBs independent of their government ownership. A crucial issue has been the dependence of PSBs on government owners for more capital. Top management of PSBs has not been able to resist political will, according to many estimates.
    Scrapping and removal of Bank Nationalisation Acts, SBI Act and SBI(Subsidiary Banks) Act
    Conversion of PSBs into Companies as per the Companies Act
    Formation of a Bank Investment Company (BIC) under the Companies Act, transfer of shares by the central government in PSBs to the BIC
    BIC in turn would have over the controlling power to boards of PSBs
    Government will only control earning return on investment
    Fair return on investment to the Central government would be the responsibility of BIC
    Appointments of CEOs, Inside Directors and top Executives of PSBs would be the responsibility of the Bank Boards Bureau constituting three serving or retired bank chairmans and the government would not be involved in this decision in any way. Nayak committee also recommends proportionate voting rights to all shareholders and reduction of governmental shareholding to 40%.

  9. 7. Various options through which the Indian banking system can reduce NPLs. It can be said that the Indian banking system is facing a ‘mild’ crisis in terms of the current NPL scenario but the potential economic recovery and lower interest rates over the next two-three years could improve banks’ and borrowers’ financial condition. Creation of a NPA's and transfer of impaired assets to the bad bank is a possible solution to this. Asset reconstruction companies can play a similar role in the Indian context. Lower interest rates can result in lower interest expenses for borrowers and investment gains for banks that can offset NPLs.
    Some specific measures are need of the hour such as improved pricing and realisation for companies (power and telecom), availability of raw materials at reasonable costs (power, steel and telecom) and mergers and acquisitions (power and telecom). Banks to play a much more active role in finding appropriate solutions to the issue of their stressed assets rather being passive participants.
    There is further scope for re-rating of banking stocks in case loan-loss provisions turn out to be lower than our and the Street’s expectations. The net profits and RoEs of banks, especially private corporate-oriented and public-sector banks, may be higher than expectations, resulting in the market being more comfortable about ascribing higher P/B multiples to the stocks. The stocks are partly discount a decline in banks’ credit costs and stressed loans, which makes it imperative that events play out per expectations. Credit costs should stay elevated over the next two years due to high levels of restructured loans in the banking system and continued high slippages over the past few quarters.
    The above mentioned suggestions are given by the Kotak Institutional Equities Research. These suggested recommendations could be used as a tool by the current government in order to arrest the augmenting pace of Non Performing Assets or Bad Loans.

  10. 9. The Government of India has announced a new scheme called Atal Pension Yojana (APY). APY is a guaranteed pension scheme and is administered by the Pension Fund Regulatory and Development Authority (PFRDA).
    1. Guaranteed monthly pension for subscribers, ranging from Rs. 1,000 to Rs. 5,000 per month.
    2. Government of India (GoI) will also co-contribute 50% of the subscriber’s contribution or Rs. 1,000 per annum, whichever is lower.
    3. The Government co-contribution is available for those who are not covered by any Statutory Social Security Schemes and is not an Income Tax payer.
    4. GoI will co-contribute to each eligible subscriber, for a period of 5 years who joins the scheme in the period June 1 to December 31, 2015.
    5. The benefit of five years of Government co-contribution under APY would not exceed 5 years for all subscribers including migrated Swavalamban beneficiaries.

    Pradhan Mantri Suraksha Bima Yojana:-

    Highlights of the Pradhan Mantri Suraksha Bima Yojana (PMSBY – Scheme 1 – for Accidental Death Insurance) are:
    1) Eligibility: Savings Bank Account holders between 18 years and 70 years who give their consent to join / enable auto-debit, as per the modality, will be enrolled into the scheme.
    2) Policy period: The cover shall be for one year period.
    3) Premium: Rs. 12 per annum.
    4) Payment Mode: The premium will be directly auto-debited by the bank from the subscribers account. This is the only mode available.
    5) Risk Coverage: Total coverage (sum-insured) under the scheme is Rs. 2 Lakh.

  11. 5. The term Financial Inclusion deals with the strategies of the government which are solely focus to include or fecilitate the socially and economically deprived sections in the nation by rendering them finanacial aids and financial support at affordable costs. a large section of Indian population still remain unbanked. This malaise has led generation of financial instability and pauperism among the lower income group who do not have access to financial products and services. However, in the recent years the government and Reserve Bank of India has been pushing the concept and idea of financial inclusion.
    The lower income category has been living under the constant shadow of financial duress mainly because of the absence of savings. The absence of savings makes them a vulnerable lot. Presence of banking services and products aims to provide a critical tool to inculcate the habit to save.
    So far the unbanked population has been vulnerably dependent of informal channels of credit like family, friends and moneylenders. Availability of adequate and transparent credit from formal banking channels shall allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the countryside. A classic example of what easy and affordable availability of credit can do for the poor is the MICROFINANCE SECTOR.
    A considerable sum of money that is meant for the poorest of poor does not actually reach them. While this money meanders through large system of government bureaucracy much of it is widely believed to leak and is unable to reach the intended parties. Government is therefore, pushing for direct cash transfers to beneficiaries through their bank accounts rather than subsidizing products and making cash payments. This laudable effort is expected to reduce government’s subsidy bill and provide relief only to the real beneficiaries. All these efforts require an efficient and affordable banking system that can reach out to all. Therefore, there has been a push for FINANCIAL INCLUSION.
    RBI set up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy and urged banks to review their existing practices to align them with the objective of financial inclusion. RBI also exhorted the banks and stressed the need to make available a basic banking 'no frills' account either with very minimum balances as well as charges that would make such accounts accessible to vast sections of the population.
    Pradhan Mantri Jan Dhan Yojana (PMJDY) is the current government's tool to involve every poor individual to raise the nation's fund and for themselves by impulsating their personal income savings. Under this, Banks were asked to organize mega account opening camps on the day of the launch and thereafter at each rural and urban branch in the district in coordination with District Authorities for opening of bank accounts. National Payment Corporation of India (NPCI) that connects all the banks and all the telephone network operators in the country. The platform helps a customer or any bank to access his/ her account with any type of mobile handset.
    SWABHIMAAN was one of the initiatives taken by the UPA Government but it couldn’t gain the momentum needed. The focus was on the coverage of villages with population of 2,000 or more with banking services.

  12. What is meant by Financial Inclusion? What are various steps taken by the Govt. of India to achieve Financial Inclusion in India?
    Financial inclusion means delivery of financial services to the dis-advantaged or low-income groups at an affordable cost.
    Pradhan Mantri Jan Dhan Yojana
    gold monetization scheme
    Micro Units Development and Refinance Agency Bank
    Direct Benefit Transfer
    Atal Pension Yojana
    Suraksha Bima Yojana

    1. Thank You for mentioning crucial points. I missed out them.

  13. 6. The higher is the amount of non-performing assets (NPAs), the weaker will be the bank’s revenue stream. In the short-term, many banks have the ability to handle an increase in nonperforming assets they might have strong reserves or other capital that can be used to offset the losses. But after a while, if that capital is used up, nonperforming loans will imperil a bank’s health. The nonperforming assets acts as the dead weight on the balance sheet.
    As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security markets. Few banks will be willing to lend if they are not sure of the recovery of their money. The shareholders of the banks will lose a lot of money as banks themselves will find it tough to survive in the market. This will lead to a crisis of confidence in the market. The price of loans or the interest rates will shoot up badly. Shooting of interest rates will directly impact the investors who wish to take loans for setting up infrastructural, industrial projects etc. It will also impact the retail consumers who will have to shell out a higher interest rate for a loan.
    All of this will lead to a situation of low off take of funds from the security market. This will hurt the overall demand in the Indian economy. And, finally it will lead to lower growth rates and of course higher inflation because of the higher cost of capital.
    Banking sectors are bound to increase the interest rates to people including retail consumers, thus it pushes away investers and middle class or poor people from the Banks. Hence, it would finally result in the failure of any sort of Financial Incusion.

  14. What is Jan Dhan Yojna? Evaluate its performance since inception.
    It is a national mission for financial inclusion to ensure that financial services(Banking/ Savings, Remittance, Credit, Insurance, Pension ) are available to people(Dis-advantaged and low income) at an affordable price.
    Benefits under the scheme
    Interest on deposit.
    Accidental insurance cover of Rs.1.00 lac
    No minimum balance required.
    Life insurance cover of Rs.30,000/-
    Easy Transfer of money across India
    Beneficiaries of Government Schemes will get Direct Benefit Transfer in these accounts.
    After satisfactory operation of the account for 6 months, an overdraft facility will be permitted
    Access to Pension, insurance products.
    Accidental Insurance Cover, RuPay Debit Card must be used at least once in 45 days.
    Overdraft facility upto Rs.5000/- is available in only one account per household, preferably lady of the household.
    20.63cr accounts have been opened till now.
    9.34cr Suraksha bima policies
    2.94cr jeevan jyoti bima policies
    1.26lac bank mitras
    31,399.67cr deposits.

  15. What are Atal Pension Yojana and Suraksha Bima Yojana?
    Pradhan Mantri Suraksha Bima Yojana
    It is an accident insurance scheme which is provided by the government. It was launched in Kolkata. It is for people between 18 and 70 having bank accounts. Annual premium is 12rs. Incase of death or permanent disability the payment to the nominee would be 2lacs and for temporary disability it wold be 1 lac. This will be linked to Pradhan mantri jan dhan yojna.
    Atal Pension Yojna
    It is a pension scheme which is launched by the government and it basically targets unorganised sector. It was launched in Kolkata. The minimum age reuired to join the scheme is 18yrs and maximum 40yrs. The age of exit and pension schemes start at the age of 60.
    For each contribution made to the pension fund the government will contribute 1000rs or 50% of the contribution whichever is low for a period of 5 yrs. this scheme would be linked to Pradhan mantri jan dhan yojna.