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The NPA market
The NPA market
Indian Banking Industry has low provisioning coverage on account of time based provisioning as against cash flow based provisioning in developed countries. From FY 07 banks have to provide 100% provision in respect of doubtful assets over 3 years old, which will increase fresh flow of NPAs into the system. Tough provisioning requirement will enable banks to sell their NPAs without taking any hit in their P&L A/c. Stricter provisioning norms / write offs after 3 years will compel banks to shift towards “Write-Off and Sell” approach from the present “Provide and Hold” approach.
With the implementation of BASEL II norms, the capital adequacy ratio of banks needs to be improved. As per the BASEL II accord, the minimum capital to be maintained by a bank for operational risk is 15% of the average gross total assets of previous 3 years. Additional capital will also be required to cover for credit risk and market risk. In order to raise this additional capital, a number of banks approached the capital markets in FY 2006 and FY 2007. Unlocking the capital locked in NPAs will help the banks to mobilise the required additional resources and also reduce capital requirements.
Banking statistics all over the world indicate that NPAs are a natural bi-product in any economy. In the developed economy of USA around 1% of the loan book is written off every year. Therefore, in the Indian context, given the growth rate of the economy, it is unlikely that the accretion rate will go down significantly in the near future.