NPA Current Affairs - 2020

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RBI Financial Stability Report: NPAs will increase

On December 27, 2019, RBI released Financial Stability Report. The report is biennial and reflects the collective assessment of the Sub-committee of Financial Stability and Development Council. The report said that the non-performing asset ratio of banks is increasing. It was 9.9% in September 2019 and may rise to 9.9% in September 2020.

Highlights of the report

The Provision Coverage Ratio of banks increased to 61.5% in September 2019 from 60.5% in March 2019. It is the ratio that gives an indication about the provisions made against bad loans. When the PCR is higher, the unexposed part of bad loans is lower. Therefore, higher PCR is good for an economy.

The report also stated that capital to risk weighted assets ratio (CRAR) improved to 15.1% in September 2019 from 14.3% in March 2019.

The credit losses have jumped by 7.33% as compared to June 2019.

Highlights: Sector wise

The report stated that only 4 banks had Gross Non-Performing Asset ratio (GNPA) higher than 20%. On the other hand, around 24 banks had GNPA ratio under 5%. The GNPA measure was used to measure asset quality of agricultural and industrial sectors

The report said that asset quality of agriculture deteriorated to 10.1% in September 2019 as compared to 8% in March 2019. In case of industrial sector, GNPA declined to 3.79%.

Frauds

The frauds reported by the banks touched an all time high of around Rs 1.13 lakhs in the FY19. The number of cases that accounted to the fraud was 4,412. The frauds reported between 2001-18 accounted to 90% of the frauds registered in 2019 alone!

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Key Facts: Why RBI has abruptly placed restrictions on PMC Bank?

The Reserve Bank of India has imposed caps on withdrawals made by customers of Punjab and Maharashtra Cooperative Banks for 6 months. The imposition was invoked by the central bank under Section 35 A of India’s Banking Regulation act, 1949.

PMC is spread across 6 states and has a network of 137 branches.

What are the restrictions imposed?

During the period of restriction, the customers of PMC bank are not allowed to withdraw more than Rs 1,000. RBI has also imposed restrictions on lending by cooperative bank. The notification issued by RBI said that the PMC banks cannot grant or renew loans, make investment, borrow funds, accept fresh deposits, agree or disburse payments without prior permission from the central bank. The bank said that the restrictions will be eased according to the performance of PMC banks. However, the bank license had not been withdrawn.

Why were the restrictions imposed?

The restrictions were a precautionary measure to prevent a run on the bank. The gross bad loans of the bank account to 3.76% of its advances and PMC discloses it is much higher than this. Also, these restrictions are precautionary measures while the central bank completes its audit on PMC. Though auditing of cooperative banks are done by state government, RBI has power to audit cooperative banks once a year.

The bank reported profit of 99 crores in 2019 as compared to 100 crores in 2018. Similarly the NPAs of the bank increased largely. It was 1.05% in 2018 and increased to 2.19% in 2019. The capital adequacy ratio was 12.29% in 2018 and increased to 12.62% in 2019. Capital Adequacy ratio is the measurement of bank’s available capital in terms of percentage of bank’s risk – weighted credit exposures. It is calculated by dividing the bank’s capital by its risk weighted assets.

What is Section 35 A of India’s Banking Regulation act, 1949?

Section 35A of the Banking Regulation act provides powers to RBI to give directions to banks. It enables RBI with the power to take action in order to prevent a banking company acting detrimental to the interests of the depositors.

Is PMC a scheduled bank?

Yes, PMC is a scheduled bank. It was provided the status of scheduled bank in 2000. The banks that are accounted in the second schedule of RBI act, 1934 are called scheduled banks. The banks with reserve capital more than 5 lakhs rupees are qualified to become scheduled banks. The banks should also satisfy RBI that its affairs are carried out in a way with no harm to the interest of the depositors.

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