Magazine 2013
International Peer-Reviewed Journal
RH, VOL. 3 JULY 2013
COMMERCE
Global Economic Financial Crisis:
Impact On Banks In India
Sunita Sharma
ABSTRACT
This paper attempts to portray the impact of global financial crisis with reference to banks in
India. With help of graphs and tables, it shows the increasing borrowings by the industry from banks.
The study concludes that an important impact of global recession is increase in Non Performing
Assets (NPAs) of the banks, which are like an ice-cream cone, if you don’t get rid of them, they melt all
over your hands, and you don’t have anything left to sell. The trend towards Corporate Debt Restructuring
(
CDR) is unmistakable – the double whammy of global and domestic economic slump, and it may
st
become a permanent feature of the Indian economy it the first quarter of the 21 Century.
Keywords - Global Financial Crisis, Debts, Reserve Bank of India, NPA, CDR.
Introduction
The global economic financial crisis which started in the mid of 2007 with the US housing crisis has
shocked many financial institutes and people. The crisis that had shaken the world in the past years, and
brought down the United States and Europe, is the most severe, since the stock market crash of 1929. Many
financial institutions bankrupted and many others received government bailout or were completely bankrupt. It
has destabilized the financial markets of the developed world causing the fall down of prominent names in the
banking business. Primary cause of the crisis can be banks and other financial institutions in the United States
of America, who had gone through a long period of inappropriate lending. The effect of the global financial
crisis was, the drop in global consumption demand, which led to a fall in global industrial production. According
to World Bank (2010) estimates (Global Economic Prospects, 2010), world industrial production was falling at
2
7 percent annualized pace.
For the banks all over the world, non-performing loans have been a matter of concern for depositors,
bank employees, management, governments and public at large. They have led to tying up scarce capital and
resources which can be used for social goals. In India they have become a matter of serious concern, following
the East Asian Economic crisis beginning in 1997.
This paper focuses on the impact of global financial crisis on banks in India. It examines the increasing
borrowings from banks, by the industry and the process of deleveraging by the corporate sector. This has lead
to increased reliance of Corporates on bank borrowings. An important indicator of the impact of global crisis
is the increasing Non Performing Assets (NPAs) of the banks, which has become a growing global challenge.
This is followed by a review of recent international experiences in corporate restructuring and progress of
Corporate Debt Restructuring (CDR) mechanism in India.
Borrowings
Individuals & firms borrow from external sources to satisfy their ambitions for acquiring goods, services
and social status. Their own savings are not sufficient to satisfy their ambitions. Hence they rely on external
sources of finance. According to RBI Annual Report (2006-07), bank borrowing to total borrowings on average
constituted 27.5 – 35.0% in the period 1990-91 to 1999-2000, but went up to 34.4-51.7% during the period
2
000-01to 2006-07 for about approximately 2000 companies due to sustained high profitability there is lesser
reliance on borrowings. Table 1 shows that the gross bank credit to industry by banks has shown an increase:
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RH, VOL. 3 JULY 2013
Table 1
Bank Credit to Industry
Year (outstanding as on March)
009
010
011
Amount (Rupees in Crore)
2
10,54,390
13,11,451
16,20,849
2
2
Source: Table 11, pg. 180 of English version of RBI-Annual Report, 2010 -11.
Leverage of Corporates: Leverage results from the use of fixed cost assets or funds to magnify the returns of
the firm’s owners. Generally, increases in leverage result in increased return and risk and vice versa.
According to RBI Annual Report (2010-2011) high leverage levels of corporate sector are causes of concern,
especially in developed countries. Leverage in corporate sector, is not directly regulated, even though macro
prudential guidelines exist for bank lending to corporate sector. In India, the level of leverage for corporate
sector is much lower as compared to the high levels prevailing in developed countries.
The high level of debt and steady and sharp rise in leverage in the developed economies, especially after
2000, has been identified as one of the major casual factors that sparked off the global financial crisis. Corporate
debt ratios increased sharply in countries like Ireland, Spain, Portugal and UK, (Refer Chart 1) the corporate
sector were highly leveraged, aggregate financial sector leverage in most countries grew modestly during the
year preceding the crisis. This was mainly because of rise in securitization which allowed banks to shift non-
performing loans off their balance sheets.
It is well documented in economic literature that financial crises often take place after a credit boom as
reflected in a sharp rise in the ratio of credit to GDP. The leverage is high during credit boom periods, suggesting
risk taking behavior of both lenders as well as borrowers, thereby leading to build-up of systematic risk. This
subsequently results in a bust when risk materializes. The spillover effects may have adverse implications for
growth. This is followed by a long, painful process of deleveraging as corporate sector reduce their debt
exposures. Following the recent crisis, the process of deleveraging has begun in developed economies as
corporates reduce their debt exposures.
In India, the debt levels have remained low. Infact, the leverage of corporate sector has been falling in
recent years implying that there is increased reliance on bank borrowings.
Chart 1
Debt GDP Ratio: Cross Country Experience
Source: Chart 1, p. 99 of English Version of RBI-Annual Report 2010-11
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RH, VOL. 3 JULY 2013
Chart 2
Leverage Ratios in India
Source: Chart 2, p. 100 of English Version of RBI Annual Report 2010 -11.
The strong credit growth during 2010-11 outpaced the growth in NPAs resulting in better asset quality
of the banking sector. The NPA write offs by banks to cleanse their balance sheets also helped in achieving a
lower gross NPA ratio.
Status of NPAs in Banks
Once an assets ceases to generate any income for a bank, whether in the form of interest or principal
repayment, it is termed as non-performing asset. This has become a ‘critical performance area” of the banking
sector as the level of NPA affects the profitability of the bank.
An important indicator of the impact of crisis is the net NPA levels
Chart 3
Source: Bank Quest, 2010, Vol. 81, NoI, p. 59.
Chart 4
Incremental NPA
Source: Bank Quest, 2010, Vol. 81, No 1, p. 59.
It is seen that in the recent years new NPA as a percentage of incremental advances is on the rise. The
trend (Chart 3,4) has started in the year 2005-06. The overall Gross NPA of all Scheduled Commercial Banks
(
SCBs) stood at Rs. 81813 crore (2.5 percent of Gross Advances) as on March 31,2010. The absolute level of
gross NPAs of select banks as on June 30,2010 rose by 28.7% to Rs. 80879 crore. CARE, the Rating Agency,
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has pegged the sector’s gross NPAs at 3.5% of gross advances by as on March 2011, compared to 2.5% during
010. The Table 2 shows the Net NPAs of Banking Industry. The Net NPAs of State Bank group, Nationalized
Banks and Foreign Banks have shown as increase.
RH, VOL. 3 JULY 2013
2
Table 2
Net NPAs of Banking Industry
Banks Groups
Net NPAs 31.3.2009 (%)
Net NPAs 31.3.2010 (%)
SBI & Associates
Nationalized Banks
Old Private Sector Banks
Net Private Sector Banks
Foreign Banks
1.47
.68
1.50
.91
.90
.83
1.40
1.81
1.05
1.09
1.82
1.12
All SCBs
Source: Reserve Bank of India – A profile of Banks, 2009 -10.
It is thus evident that it is only the extent of provisioning that is containing the NPA ratio. It is a matter of
conjecture that possibly, but for the concessions offered under the Corporate Debt Restructuring (CDRs), Sale
of assets to ARC, the NPA would have been higher. If not for the provisioning and concessions under CDR, the
NPA position would be grave.
Recent International Experiences in Corporate Restructuring
The World Bank has published as Chapter 3 an article by Ira Lieberman, Mario Gobbo, William P. Mako
and Ruth L. Neyens titled ‘Recent International Experience in the use of Voluntary Workouts under Distressed
Conditions”. (pg. 59-98).
According to these authors, non performing loans are a growing and global challenge. Troubled loans
alone amount to 16 percent of the total loans. These stock of non performing loans exact a heavy price. They
weaken the repayment ethic, as borrowers see others default without penalty. They lock up scarce financial
capital in nonproductive projects and impede the resumption of efficient intermediation, which is vital for
sustainable economic growth. Misallocation of capital-stagnant growth, lack of capital formation and lost
opportunities falls hardest on the poor, as large amount of the government resources are redirected from badly
needed social programs to recapitalization of the banking sector.
The condition of the portfolio of the banking sector is the minor image of the health of the corporate
sector, and successful bank restructuring is contingent on the effective corporate restructuring.
Indeed, the ability to curtain the fiscal cost of financial crisis appears to be linked directly to the success of
implementing a program that recognizes this leverage.
During financial crises or periods of liquidity tightening, it may be necessary for banks and large
corporations to come together and resolve the inability of debtors to meet their obligations. This is often
difficult when multiple creditors are involved in each case and when a large number of such cases must be
resolved, weak bankruptcy systems cannot handle a large number of cases at one time.
Informal workout proceedings or out-of-court settlements between banks and corporates are a widely
applied method of asset resolution. They have been used to resolve non performing loans in many countries
since the London approach was first conceived by the Bank of England in the mid-1970s. As other countries,
particularly those with weak legal and institutional environments, have experienced financial-economic crises,
they have adopted variations of the London approach to aid in the resolution process.
These authors review the recent experience with voluntary corporate workouts (similar to our corporate
debt restructuring scheme). During period of voluntary distress or crises they begin with the United Kingdom
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RH, VOL. 3 JULY 2013
and London Approach, where the Bank of England used its power of persuasion to bring debtors and creditors
to the negotiating table. During the East Asian Crisis (1997-2002), Indonesia, Republic of Korea and Thailand
each adopted variants of the London approach. They focus on the most effective example-Korea- where the
Financial Supervisory Commission undertook both bank and corporate restructuring. During the tequila crisis,
Turkish crisis. The government, the banks, the representatives of industry came together, assisted by the world
bank, to design a voluntary workout program, that soon became known as Istanbul approach to workout with
a view to restructuring the banks before their eventual privatization. In each of these cases the institutional
structure for informal workouts may vary, but the rules have common features. Very large firms must be dealt
with on a case by case basis, but bailing out such firms can be expensive, simply postpone the problems, and
may undermine credit discipline. Thus government should aim to achieve a deep corporate restructuring,
preserving as much of the firm as a going concern.
Reserve Bank of India Scheme on Corporate Debt Restructuring
The Reserve Bank of India (RBI) felt the need for revolving an appropriate mechanism for Corporate Debt
Restructuring (CDR) in the country on the lines of similar mechanism prevalent in countries like U.K., Thailand,
Korea, Malayasia etc. In response to the need, RBI issued a circular no. B.P.B.C. 15/21.04.114/2000-01 on
August 23,2001. This circular outlined the CDR scheme which was later on modified to have a wider coverage.
Banks are also asked to publish in their annual accounts under ‘notes on account’ the following information in
respect of CDR under taken during the year.
•
•
•
Total amount of loan assets subjected to restructuring under CDR.
The amount of standard assets subject to CDR.
The amount of sub-standard assets subject ot CDR.
Objectives of the Scheme
•
To ensure timely and transparent mechanism for restructuring of corporate debts of viable entities facing
problems, for the benefit of all concerned.
•
To aim at preserving viable corporate that are affected by certain internal and external factors.
•
To minimize the losses to the creditors and other stakeholders through an orderly and co-ordinated
restructuring programme.
Triggering CDR Mechanism
The CDR mechanism is a voluntary non-statutory system based on Debtor-Credit Agreement (DCA) and
Inter-Creditor Agreement (ICA) and the approvals by super majority of 75% creditors (by value) which makes it
binding on the remaining 25% to fall in line with the majority decision. The CDR mechanism covers multiple
banking accounts, syndication / consortium accounts, where all banks and institutions together have an
outstanding aggregate exposure of Rs. 200 million and above. It consists of categories of assets in the books
of member –creditors classified in terms of RBI’s asset classification standards. Even cases filed in Debt Recovery
Tribunals / Bureau of Industrial and Financial Reconstruction / and other suit-filed cases are eligible for restructuring
under CDR. The cases of restructuring of standard and substandard class of assets are Category-I, while cases
of doubtful assets are covered under category-II.
Reference of CDR mechanism may be triggered by: (i) any or more of credit institutions having a minimum
2
0% share in either working capital or term finance or (ii) by the concerned borrower if supported by a bank /
financial institution having minimum 20% share as above. Borrower’s consent to be covered by CDR as they
have to deal with only one agency and they are free to pursue their operations as going concerns.
Generally medium and large public limited companies with a paid up capital of Rs. 10 crores and above and
having a high debt-equity ratio, may be the candidates for inclusion under CDR.
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International Peer-Reviewed Journal
RH, VOL. 3 JULY 2013
Table 3
Progress Report of CDR Cases
(Rs. Crore)
Total
References
Received
Total Cases Approved
Cases under finalization
Cases Rejected /
Closed
(
including case
of Restructuring
Packages
withdrawn / exited /
Year
merged after approval)
No. of
cases
Aggregate
Debt
No. of
cases
Aggregate
No. of
cases
Aggregate
No. of
cases
Aggregate
Debt
Debt
Debt
2
008*
199
276
305
88819
120864
138604
32
34
42
6256
7220
9667
2
36
165
220
242
82527
105152
110914
2010**
22
21
8492
18023
2011***
*
*
*
As on April, 30, 2008
* As on September, 30, 2010
** As on March, 2011
Source : http://www.cdrinda.org/addreading.htm
Table 4
Aggregate
Debt
Aggregate
Debt
Aggregate
Debt
% of
%
Share
of
% of
Share
Sr.
No.
No.
No.
No.
Industry
(
Rs. Crore) Share
(Rs. Crore)
(Rs. Crore)
1
2
3
4
5
6
7
8
9
Iron & Steel
Fertilizer
Refineries
Cement
20 29956 36.30 25
36673 34.88 25 36673 33.06
9
1
13156 15.94
4874 5.91
4663 5.65
4285 5.19
3486 4.22
2897 3.51
2923 3.54
2615 3.17
3943 4.78
2171 2.63
1844 2.23
905 1.10
903 1.09
655 0.79
576 0.70
463 0.56
406 0.49
223 0.27
1011 1.23
176 0.21
8
1
8454
4874
4663
5250
3836
9038
2717
454
8.04
4.64
4.43
4.99
3.65
8.60
2.58
0.43
5.07
2.06
4.91
1.60
5.22
2.03
0.54
0.44
0.73
0.32
2.03
0.17
8
1
8
8
7
8454 7.62
4874 4.39
5928 5.34
5427 4.89
3836 3.46
7
6
Telecom
Power
6
7
5
7
Textiles
23
15
9
49
13
6
54 10227 9.22
Chemicals
Engineering
Sugar
14
8
2823 2.55
758 0.68
6131 5.53
2171 1.96
5166 4.66
1866 1.70
5493 4.95
2132 1.92
563 0.51
463 0.42
1201 1.0
374 8.34
2130 1.9
10
18
5
20
5
5328
2171
5166
1680
5493
2132
563
23
5
11
Metals (Non-ferrous Metals)
Infrastructure
12
8
9
9
13
Paper / Packaging
Petrochemicals
Electronics
8
12
3
13
3
14
2
15
1
2
2
16
Auto Components
Wood Products
Cables
7
7
7
17
1
1
463
1
18
5
7
765
8
19
Ceramic Tiles
4
5
333
6
20
Pharmaceuticals
Ship Breaking
3
6
2130
176
6
21
1
1
2
869
2.7
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International Peer-Reviewed Journal
RH, VOL. 3 JULY 2013
2
2
Rubber
3
2
2
-
167 0.20
147 0.18
3
2
2
1
2
1
1
1
2
5
167
147
82
0.16
0.14
0.08
0.11
0.20
0.45
0.03
0.11
0.52
0.86
3
3
2
1
3
1
2
2
2
5
167
373
82
8.1
5.3
4.0
23
Hotels
24
Glass
82
-
0.10
25
Forgings
Plastic
-
-
-
-
-
-
-
112
214
470
35
112 7.10
399 0.36
470 0.42
26
-
-
27
Retail
-
-
28
Battery
-
-
67
0.06
29
NBFC
-
-
115
551
900
214 0.19
551 0.50
900 0.81
30
Automobiles
Other (Dairy, Jewellery)
Total
-
-
31
-
-
165 82527 100 220 105152 100
242 110914 100
Source : http://www.cdrinda.org/addreading.html
Table 5
Corporate Debt Restructuring (CDR) in2006 – 2007, 2009 – 10 & 2011-12
(Rs. In crores)
No.of Amount Amount No.of
Amount No.of Amount Amount
Amount
under
CDR
sacrifi
ced
under CDR sacrifi
under
CDR
sacrifi
ced
Sr.
A/cs
A/cs
A/cs
ced
Name of the Bank
No.
2009 - 2010
2011-2012
8 9
2
006-2007
SBI AND ITS ASSOCIATES
1
2
3
4
5
6
7
1
2
3
4
5
6
7
8
State Bank of India
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Patiala
State Bank of Saurashtra
State Bank of Travancore
NATIONALISED BANKS
Allahabad Bank
32 322.54 5.02 3870 18999.23 675.25 33 3239.92 400.96
-
-
33.21
-
08
167 1692.04 86.39 22 361.71 50.09
(merged with SBI)
215.65
20.60 16 468.75 26.37
53.16 1.95
2
-
32.22
21.75
-
-
-
-
-
-
-
-
12
22
362.14
677.73
37.83 34 602.49 55.37
85.74 33 1322.08 150.15
-
254.28
87.09
-
(merged with SBI)
-
-
-
4
125.65
1
18.78
4.03
5
90.03 13.27
9
-
371.39
24.87
208.93
98.59
19.96
0.00
-
-
-
-
-
-
11
4
417.22
81.02
40.73 21 940.10 81.16
4.57 21 1748.64 342.00
20.83 16 1534.03 262.81
71.61 22 1564.59 236.49
10
Andhra Bank
-
11
Bank of Baroda
-
7
355.76
819.79
133.68
12
Bank of India
-
12
3
13
Bank of Maharashtra
Canara Bank
-
-
8.96
1
45.55
1.51
14
67 1571.72
50.3 13 1484.90 174.62
16.15 10 1650.53 300.63
15
Central Bank of India
Corporation Bank
-
11.55 0.75
NIL NIL
33.61 4.36
8
393.41
105.31
630.92
163.87
335.6
16
NIL
2
5
27.29
14.82 16 715.24 44.11
14.92 04 86.10 5.63
9
813.03 50.04
17
Dena Bank
14
04
12
11
02
18
Indian Bank
NIL
-
NIL
39.65
11.22
NIL
NIL
-
19
Indian Overseas Bank
Oriental Bank of Commerce
Punjab & Sind Bank
11.77 32 2491.81 233.34
13.7 14 1211.39 157.16
3.42 21 174.10 8.13
20
-
-
354.30
28.44
21
NIL
NIL
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International Peer-Reviewed Journal
RH, VOL. 3 JULY 2013
2
2
Punjab National Bank
Syndicate Bank
-
-
242.23
84.50
158.01
11.25
83.44
-
-
-
-
-
14 1706.37 187.22 19 2008.93 289.64
23
11
06
6
260.19
176.19
167.02
206.57
10.83
5
343.70 36.70
24
Union Bank of India
United Bank of India
United Commercial Bank
2
-
19.43 18 1984.90 461.41
10.07 15 672.51 56.07\
25
26
-
7
36.02
2
140.95 00.00
(UCO Bank)
2
7
Vijaya Bank
NIL
7
NIL
NIL
9
58.80
5.01 17 366.87 41.88
28
IDBI Bank
364.09 0.19
29 3509.69 101.67 49 3611.65 271.68
Important Private Banks
AXIS Bank (UTI Bank)
HDFC Bank
2
9
4
-
253.92
2.74
-
-
-
4
-
162.58
34.78
12.01
-
2
96.55 14.18
30
10 277.97 11.00
31
ICICI Bank
2
1013.70
33
8130.94
50938 14 24908.90 3319.10
TOTAL
56 3963.55 12.27
4359 69187.21 2100.52 494 54957.92 7095.50
Source : Annual Reports of the above mentioned Banks.
Progress report of CDR as on April 30, 2008, September 30,2010 & March, 2011 is given in Table 3, while
industry-wise classification of approved cases is given in Table 4. In the year 2008, there were 199 reported
cases for CDR which increased to 276 in 2010 and to 305 in 2011. The total amount tied up in these delinquent
cases is Rs. 88,819 crores in 2008, it increase to Rs.120,864 crores in 2010 and to Rs.138,604 crores in 2011 .
What a staggering amount!” As seen in Table 4 maximum number of approved cases are from textiles sector.
Companies from sectors such as steel, sugar and auto components too have come up for restructuring.
Table 5 shows the amount under CDR for different nationalized banks and private banks. From Rs.
963.55 crores in 2006-07, it has increased to Rs. 69187.21 crores in 2009-10 and is Rs. 54957.90 2011-12.
3
ICICI Bank and SBI Group account for large amounts under CDR. It appears from the above table the higher the
rank of the bank in the public image, the larger the amount under CDR.
Conclusion:
An important impact of global recession is increase in NPAs of the banks. The trend towards CDR is
unmistakable – the double whammy of global and domestic economic slump. This has led to a number of
corporate entities getting referred for CDR. We cannot but conclude that CDR may have to become a permanent
st
feature of the Indian economy in the first quarter of the 21 Century.
References
•
•
Annual Report of 31 Banks, 2007-08, 2009-10, 2011-12. Print.
Bhaskaran, R. ‘Impact of Financal Crisis on Banks in India and the new ‘NORM’al Bank Quest’, The
Journal of Indian Institute of Banking & Finance, Vol.81, No 1, 53-60.2010, January-March.Print.
Chowdhury, Sahana Roy. ‘Impact of Global Crisis on Small and Medium Enterprises’ Global Business
Review, Vol. 12, No.3, 377-396. 2011, October. Print.
Padhya, L.P. ‘Innovations in Recovery Management of NPAs: A Practioner’s Perspective Bank Quest’,
The Journal of Indian Institute of Banking & Finance, Vol. 81, No.4, 36-42. 2010, October – December.
Print.
•
•
•
Pomerleano, Micheal and William Shaw. Corporate Restructuring – Lessons From Experience.
Washington, USA: The World Bank. 2005. Print.
•
•
•
•
•
Reserve Bank of India. Annual Report, 2006-07. Print.
__________ Annual Report, 2010-11. Print.
__________ Annual Report, 2009-10. Print.
__________ Report on Currency and Finance , 2008-09. Print.
_________ DBOD Circular No. BP.BC 15/21.04.114/2000-01 dated August 23, 2001 regarding CDR.
Print.
•
•
World Bank. Global Economic Prospects. 2010.Print.
http://www.cdrindia.org/addreading.html.Web.
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