An Introduction to the Study

CHAPTER 1

AN INTRODUCTION TO THE STUDY

1.1 introduction

Banking in its crude form is an old age phenomenon. It was in existence even in ancient times.

The origin of banking lies in the business of money changing in ancient days.

On account of the multifarious activities of the modern bank, it plays an important role in the

economy of a country financial requirements of modern economy are of a diverse nature,

distinctive variety and large magnitude. Thus various types of banks have been instituted to cater to

the varying needs of community.

Since banks constitute the very life blood of modern trade commerce and industry their

management and success become unavoidable .Here comes the importance of management of

nonperforming assets or shortly known as NPA.NPAs are the assets which cease to generate

income. If their is any past due amounts remaining uncovered for the two quarters, consequently

the amount would be classified as NPAs for the whole year .it includes borrowers default or delays

in the Interest or principal repayments.

Mountaining of NPAS were considered to be a sure omen of non profitability and

mismanagement of funds and resources .Here a study was made on the non performing assets of

STATE BANK OF INDIA, IRINJALAKUDA for the following categories such as Commercial

And Institutional Loans, Small Industries And Business Loans, Agricultural Loan And Personal

Loans.

1.2 ORGANISATIONAL PROFILE

A)Industrial Profile

Centuries ago, there was a time where animals and jewels are exchanged to purchase something

of value. With advancement and evolution, barter system, gold system and now currency system

took their place. All the developments led to a need for a place where money and valuables

should be kept safe. Thus began the era of banking.

BANKING IN ANCIENT TIMES

The evolution of banking can be traced back to the early times of human history. It was in

existence in one form or other in ancient times. In olden times, people deposited their money and

valuables at temples because these places of worship were considered as the safest place to keep

theses valuables. Probably it was the earliest form of banking

In ancient Greece, the famous temples such as Ephesus, Delphi and Olympia were used as the

depositories of surplus funds of people in 2000 BC. A prehistoric Hindu scripture provides

enough evidence of the existence of money lending business in India. It was in existence in

Vedic period. The practice of storing precious metals and coins at safe places and loaning of

money to the people was also prevalent in ancient Rome.

BANKING IN MEDIEVAL TIMES

According to Crowther, modern banking has three ancestors namely

a) Merchant bankers

b) Goldsmith

c) Money lenders

The goldsmiths were gradually replaced by private bankers.

Bank of Venice was started in Italy. It is said to be the oldest banking institution in the world, but

the famous was Medici bank established by Giovanni Medici in 1397. The Bank of Barcelona

was on track on 1401 and the bank of Genoa in 1407. The Bank of Amsterdam was launched in

1609. The Lombard’s who migrated to Europe and England from Italy was responsible for the

modern banking in the world. Banking innovations took place in Amsterdam in 16th and London

in 17th century. The growth of joint stock commercial banking was started after the enactment of

Banking Act which was passed in England in 1833.

EVOLUTION OF BANKING IN INDIA

There was sufficient evidence to believe that the money lending business was prevalent in India.

The writings of Manu and Kautilya contained the reference of banking.

In India, however the modern banking started hence the English agency houses in Calcutta and

Mumbai began to serve as bankers to the East India Company and the Hindustan Bank was the

first banking institution of its kind to be established in 1779.

From the time till today, the evolution of banking system can be divided into three distinct

phases.

They are:-

Phase 1 – Early phase of Indian banks from 1786 to 1969.

Phase 2 – Nationalization of Indian banks till 1991.

Phase 3 – Post 1991, after the introduction of the Indian financial and banking sector

reforms.

Phase 1

In 1796, the General Bank of India was established followed by the bank of Hindustan and

Bengal bank. The Bank of Bengal (1809), the Bank of Bombay (1840), and the Bank of Madras

(1843) was set up by East India Company as independent units and named as Presidency Banks.

These three banks were merged to form the Imperial Bank of India in 1920 which started as a

private bank with foreign share holders.

The Allahabad Bank was set up in 1865 and then in 1894, for the first time, the Punjab National

Bank, was exclusively set up with Indian shareholders with its headquarters based at Lahore.

Thereafter between 1906 and 1913, banks like the Bank of India, Bank of Baroda, Central Bank

of India, Canara bank and Indian bank came into existence. In 1935 RBI was established.

Growth during the initial phase was quite slow and many banks witnessed failures between the

period of 1913 and 1948. Altogether there were about 1100 banks, but mostly small in size. The

government of India introduces Banking Companies Act, 1949, to streamline the activities and

functions of commercial banking. This act was later changed to the Banking Regulation Act 1949

as per the amendment of the act of 1965(Act no. 23 of 1965).

During the initial year public confidence in the banks was low, and thus the deposits.

Professionalism was absent.

PHASE 2

After Independence, the government of India undertook several important steps to reform the

Indian Banking sector. Among that is the setting up of SBI by the nationalization of Imperial

Bank of India in 1955.

Following are the milestones during phase 2

1949: Enactment of Banking Regulation Act

1955: Nationalization of SBI

1959: Nationalization of the subsidiaries of SBI

1961: Extension of insurance cover to deposit

1969: Nationalization of 14 important banks

1971: Creation of credit guarantee corporation

1975: Creation of rural banks in various regions

1980: Nationalization of 7 banks with deposit of more than 200 crores

After nationalization of banks, the deposits in various branches of the public sector banks,

increased by almost 800 percent and advances jumped by approximately 11000 percent.

PHASE 3

With LPG (Liberalization, privatization and globalization) all Indian economy got a new falls. As

per Rangarajan Committee in 1988, the computerization began from 1993 with the settlement

between IBA and Bank Employees Association.

In 1994, Committee on Technology issues relating to payments system, cheque clearing and

security settlement in the Banking Industry (1994) was setup. It emphasized on Electrical Fund

Transfer (EFT) system, with the BANK NET communications network as it carrier.

The Banks have been selling the third party products like Mutual Funds, insurance to its clients.

Total number of ATMs installed in India by various banks as on end March 2005 is 17642. New

and new private sector banks emerged and they were also allowed by RBI to enter into insurance

(ICICI Prudential)

b) Organizational profile

State bank of India is India’s largest commercial bank with its presence covering all time zones

in the world. The bank has a history of almost two centuaries.SBI was established on 1 st July,

1955 by acquiring the total assets and liabilities of the imperial bank of India by an act of

parliament. Nearly a quarter of banking business in the country is with SBI. It include a network

of eight banking subsidiaries and several non banking subsidiaries offering merchant banking

services ,primary dealer ship in government securities credit card and insurance .originally the

SBI was established with an authorized share capital of Rs20 cr. and an issued share capital of

Rs. 5625 cr. which was allotted to RBI. In order to enhance the capital adequacy ratio the

authorized capital of the SBI was raised from Rs. 20 crores to Rs. 299 crores in 1985. It’s

subscribed and paid up capital was Rs. 50 crores while those of the associate banks were raised to

Rs. 10 crores each. Again an ordinance was issued in 1993 leading to an amendment of the SBI

Act 1995 to enable the bank entered into capital market successfully.

MERITS

SBI is THE 29TH MOST REPUTED COMPANY in the world according to the Forbes.

BEST DOMESTIC PROVIDER OF FOREIGN SERVICES as Per Asia Money Polls in 2012.

SBI is the only bank featured in the “TOP 10 BRANDS OF INDIA” list in an annual survey

conducted by Brand Finance and The Economic Times in 2010.

SBI had won BEST BANK award by Business India magazine 3 times.

BANK OF THE YEAR ’08 of India by banker magazine London

The State Bank of India is the largest of the big four banks in India, along with ICICI Bank,

Punjab National Bank and HDFC Bank- its main competitors.

BRANCHES OF SBI

State Bank of India has 172 foreign offices in 37 countries across the globe.

SBI has about 25000 ATMs (25000th ATM was inaugurated by the then chairman of State

Bank Shri. O.P.Bhatt on 31 March 2011, the day of his retirement): and SBI group (including

associate banks) has about 450000 ATMs.

SBI has 21500 branches, including branches that belong to its associate banks.

SBI includes 99345 offices in India.

India’s number one ADB is in Bellary i.e. State Bank of India, Bellary.

SYMBOL AND SLOGAN

The symbol of the State Bank of India is a circle and a small man at the centre of the circle (and

not a key hole). A circle depicts perfection and the common man being the centre of the bank’s

business. Slogans “Pure banking nothing else” and includes “with you- all this way” and “a bank

of common man”.

1.3. STATEMENT OF THE PROBLEM

NPAs are an inevitable burden on the banking industry. The success of a bank depends upon the

methods of managing NPAs and keeping them within the tolerance level. Several studies have

been conducted to examine the issues relating to NPAs which include a study by RBI IN 1999,

PANIR SELVAM COMMITTEE in 1998 and many more. Even in early 90s, in

NARASIMHAM COMMITTEE AND in CHAKRABORTHY COMMITTEE NPAs were

mentioned.

Thus a study has been carried out regarding the management of NPAs in STATE BANK OF

INDIA, IRINJALAKUDA to check out the impact of NPA on profitability of bank 22years after

RBI mentioning it and various measures taken by all banks to curb the same.

Disbursement of funds, their returns and management has been identified and analyzed in the

research and possible solutions have been suggested for solving the problem.

1.4. OBJECTIVE OF THE STUDY

The general objectives of the analysis of NPAs in State Bank of India, Irinjalakuda were

To analyze the relationship between NPA and profitability of the bank

To understand the amount of NPAs in State Bank of India and study the main reason for

asset becoming NPAs.

To make suggestions to overcome the problem of Non- performing assets.

1.5. RESEARCH METHADOLOGY

The data which was collected include primary and secondary data. Primary data were collected

through direct interviews with manager and employees. Secondary data were collected from

reports, broachers’, circulars and notices.

Data analysis: data were collected from various sources have been analyzed and studied using

tools such as

Percentages

Correlation

Data presentation: Data were presented using tables and charts for easy comparison and

analysis.

1.6. LIMITATION OF THE STUDY

1. The study has its own limitation. A detailed study could not be undertaken due to

Time constraints.

2. The authenticity of the study depends on the accuracy and proper disclosure by bank

employees.

3. Only limited tools were used for analysis.

1.7. CHAPTERIZATION.

Chapter 1 deals with introduction, objectives, procedures, limitation of the study.

Chapter 2 includes the literature review consisting of empirical and conceptual theories.

Chapter 3 explains analyzing of data through simple charts and diagrams.

Chapter 4 accounts for establishing a relationship between Non-performing assets and bank

profitability through tools like correlation.

Chapter 5 checks out suggestions, conclusions and remedies of project.

CHAPTER-2

REVIEW OF LITERATURE

The previous part dealt with the introductory parts of the project. It has been covered with

the necessary background information of the report, its aims, scope, limitations, methodology and

profiles that are relevant to the topic of study. The review of literature of the study is a structure

that can hold or support a theory of research work. Studies relevant to the topic of research are

reviewed and the concept of each work is summarized by it.

Review of literature can be classified into 2 parts,

Empirical literature deals with the careful analysis of the past studies available. Conceptual

literature tries to demonstrate an understanding of theories, concepts and that will relate to the

border fields of knowledge in the selected category.

2.1 EMPIRICAL LITERATURE

M.n.Shindae and G.S.Zulzule 1 in their study ‘Profitability and NPAs of Urban

Cooperative Banks in Western Maharashtra’ has taken two hypotheses where a second

hypothesis is “the NPAs of urban cooperative banks is higher in Parbhani, Hingoli district than

Sangli, Satara district”. They had taken data for 11 years and comparative analysis of NPAs

were done, found out proportion of gross NPA to net NPA and totaled and averaged the same.

The hypotheses proved to be null and void, so not accepted. And they concluded that all the

banks show declining trend of Gross NPA as well as Net NPOAs which is a good sign for banks

P.S Vohra and Jai Prakash Dharmu 2 (2012) in their study “NPA

management- Always a critical issue for banking industry” stresses that whatever measures have

been taken as per various committee reports, importance of NPA management is increasing day

by day.

M. Razamullah Khan and Haisai Khairul Makeen 3 (2012) concluded in

his article titled “Non- performing assets: Co-operative Bank in Jalna” that non performing assets

were decreased due to various measures taken by the bank in national and local level.

Anupam Jain and Vinita Swati 4 (2012) in their article reported that,

sector wise scenario of NPAs pointed towards NPAs arising from SSI sector is comparatively

higher than other sectors that fall even within the priority sector. NPAs statistics in 2008 for

agriculture sector was 13.8% and for SSI was 18.7%.during 2010 NPAs for agriculture and SSI

sector was 14.4% and 17.6% respectively.

In her article about ‘Impact of NPAs on Profitability of banks,’ Renu

Jatana 5(2009) pointed out that “Factors responsible for NPAs include poor credit appraisal, lack

of proper monitoring reckless advances, lack of corporate culture, changes in economic policy or

economic environment.” her methodology was particularly useful, in that it focuses attention on

vivid problems which would lead to increase of NPAs in banks. She noted “no transparent

accounting policy and poor auditing practices were also causes for NPAs’’. Thus no one can

stress only in one or two problems as causes for NPAs since numerous were there.

Sunita Mehta and hanuman Prasad 6 (2008) in their study ‘banking

reforms: progress and emerging issues’ viewed NPA as an emerging issue and they quoted NPA

under prudential regulations to ensure financial safety, soundness and solvency of the bank and

banks of India, after reforms were aimed to reduce gross NPA to 3% and Net NPA to 0 percent,

same as per international standards.

A. Prasad and ch.Panduranga Reddy7 in their study namely ‘Challenges in

Indian Banking Sector’ concludes that in future NPAs will become the major cause of banks

concern. Imbibing the credit management skills will become all the important for improving the

bottom line of banking sector .skills of NPA management which include working out negotiated

settlements, compromises constituting active settlement advisory committees, restructuring and

rehabilitation effective resources to suitable legal remedies etc. are to be supplemented by the

banks to recover due well in time so that the financial soundness of the banking sector will be

undermined.

A Study by Basu U.K8 (2005) on’ Banking in India: Interest rate, NPA

and Financial Fragility’, discuss how interest rate changes affect NPA’s and in turn contribute to

Financial Fragility. The study defines NPA’s as Assets on which payment of the principal or

interest or both is overdue for a period of 90 days or more. Thus NPA’s are impaired assets and

their accumulation may spell doom for banking. The study concludes by saying changes in

interest rate will increase the chance for an asset becoming NPA and the relation between NPA

and interest rate is directly proportional.

Rajiv Ranjan and Sarath Chandra Dal 9(2003) in their study ‘Non

performing Loans and Terms of credit of PSB in India’ evaluate how banks non performing loans

are influenced by three major sets of economic and financial factors – terms of credit, bank size

induced risk preferences and macro economic shocks. Their panel regression model suggest that

the terms of credit variable have significant effect on banks non performing loans in the presence

of bank size included risk preferences and macro economic shocks. Alternative measures of bank

size could give rise to differential impact on banks non performing loans. They suggest that “in

regard to terms of credit variables, changes in cost of credit in terms of expectations of higher

interest rate induce rise in NPAs –on the other hand, horizon of maturity of credit, better credit

culture, favorable macro economic and business condition lead to lowering of NPAs”.

K.M. Bhattacharya10(2002) in his article ‘management of non performing advances

in banks’ has written; “NPAs are serious strain on the profitability of the banks on one hand on

the other hand they are required to charge the funding cost and provision requirements to their

profits. The problem of NPA is multi dimensional and must bring to the international standards

of 2 to 3% of total loan assets”. He suggested employment of sound credit granting system,

monitoring assets continuously, reliable MIS, proper control mechanism and feed back analysis

to reduce NPAs.

2.2 CONCEPTUAL LITERATURE

NON-PERFORMING ASSETS

MEANING

An asset is classified as Non-performing Asset (NPA) if due in the form of principle and

interest are not paid by the borrower for a period of 180 days. However, with effect from March

2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance

or credit facilities granted by banks to a performer become non-performing, then the bank will

have to treat all the advances/credit facilities granted to that borrower as non-performing without

having regard to the fact that there may still exist certain advances / credit facilities having

performing status.

Though the term NPA connotes a financial asset of a co-operative bank, which has stopped

earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm,

concern, industry and nation where that asset is idling. Viewed with this perspective, the NPA is a

result of an environment that prevents it from performing up to expected levels.

The definition of NPAs in Indian context is certainly more liberal with two quarters norm

being applied for classification of such assets. The RBI is moving over to one-quarter norm from

2004 onwards.

DEFINITION

A NPA was defined as credit in respect of which interest and/or installment of principal has

remained “past due” for a specific period of time. The specific period was reduced in a phased

manner as under:

Year ended March,31 Specific period

1993 4 Quarters

1994 3 Quarters

1995 2 quarters

2004 1 quarters

An amount is considered as past due, when it remains outstanding for 30 days beyond the due date.

However, with effect from March 31, 2001 the “past due” concept has been dispensed with and the

period is reckoned from the due date of payment.

NORMS FOR IDENTIFICATION OF NPA

With an intense to use the international best practice and to ensure greater transparency, “90

days” overdue norms are accepted for the identification of NPA from the year ended March 31,

2004.

With effect from March 31, 2004, a NPA shall be counted on loan and advances where:

A. Interest and/or installment of principal remain overdue for a period of more than 90 days in

respect of a term loan.

B. The amount remains out of order for a period of 90 days, in respect of an Overdraft/Cash

Credit (OD/CC).

C. The bill remains overdue for a period of more than 90 days in the case of bills purchased

and discounted.

Any amount to be received remains overdue for a period of more than 90 days in respect of any

other accounts. Gold loans and small loans up to Rs. 1 lakh are exempted from the 90 days norms

for the recognition of impairment. These loans would continue to be governed by the 180 days

norm for classification as NPA as per prescribed norms.

CONCEPTS OF NON-PERFORMING ASSETS

Non-performing assets is a part of banking throughout the world. It is not peculiar to public

sector banks in and financial institutions in India. Incidence of NPA is higher in public sector

banks in comparison to private sector banks and foreign banks in India.

Tae concept of classification of bank advances in several categories started in the later 1980s but

at that time, the terminology of NPAS does not exist. It was introduced in the early 190s when

Anglo American model had served block of categorization of bank assets. Prior to the introduction

of asset classification, banks in India had their own system of accounting, but this way wasn’t in

conformity with international standards. Banks are now required recognize such loans periodically

and then classify the assets. There are certain advantages and disadvantages of NPAs. they are

ADVANTAGES

a. A loan which is non-performing can be directly written off against any profits to claim tax

reliefs.

b. It can be good on a later date but will be coming under the category of windfall recoveries do

not attract any taxes as they are classified as burden rather than actually an asset.

DISADVANTAGES

a. Once an investment is non- performing it directly affects the profit of the organization.

b. It can encourage willful defaulters to exploit the conditions for their personnel gains.

CAUSES FOR NON PERFORMING ASSETS

A strong banking sector is important for a flourishing economy. Indian banking system, which

was operating in a closed economy, now faces the challenges of open economy. On one hand a

protected environment ensured that banks never needed to develop sophisticated treasury

operations and Asset Management Skills

On the other hand, a combination of directed lending and social banking related profitability and

competitiveness to the background. The net result was a unsustainable NPAs and consequently

higher effective cost of banking services.

One of the main causes of NPAs into banking sector is the directed loan system under which

commercial banks are required to lend a prescribed percentage of their credit (40) to priority

sectors. As of today nearly 7 percent of Gross NPAs are locked up in hard core doubtful and loss

assets, accumulated over the years.

The problem India faces is not lack of strict prudential norms but

I. The legal impediments and time consuming nature of asset disposal system

II. Postponement of problem in order to show higher earnings

III. Manipulation of debtors using political influences.

Macro perspective behind NPAs

A lot of practical problem has been found in Indian banks, especially in public sector. For example

the government of India had given a massive wavier of Rs 15000 Crs under Prime Minister Ship of

V.P.Singh, for rural debt during 1989-90.this was not a unique incident in India and left a negative

impression on the payer of the loan. Huge amount of loans were granted under various schemes

which became non recoverable due to political manipulation, misuse of funds and non reliability of

target audience of these section. Loans given by banks are their assets and as the repayments of

several of loans were poor, the quality of these assets was steadily deteriorating.

Causes of NPA could be classified into two categories

Internal factors

External factors

Internal factors

Internal factors are related to organizational deficiencies and administrative ineffectiveness. It

includes;

1. Funds borrowed for particular purposes but not used for said purposes.

2. Project not completed in time.

3. Poor recovery for receivables.

4. Excess capacities created on non economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or other debt

instruments from capital markets.

6. Business failures.

7. Diversion of funds for expansion/modernization/setting up new projects/helping or

promoting sister concerns.

8. Willful defaults, siphoning of funds, frauds, disputes, management of disputes, mis

appropriation etc.

9. Deficiencies on the part of banks viz. In credit appraisal, monitoring and follow ups, delay

in settlement of payments/subsidiaries n government bodies etc.

External factors

External factors are those on which banks have no operational control or administrative control.eg;

1. Natural calamities

2. Political and government interferences

3. Cropping pattern-micro level planning and macro level

4. Costs of inputs and prices of farm products

Causes for an Account Becoming NPA

Causes Attributable TO

Borrowers

Causes Attributable To

Banks

Other Causes

a) Failure to bring in

required capital

b) Too ambitious

project

c) Longer gestation

period attitude

d) Unwanted expenses

a) Wrong selection of

borrower

b)Poor credit appraisal

c) Unhelpful in supervision

d)Tough stand on issues

e) Too flexible attitudes

f) System overload

a) Lack of infrastructure

b) Fast changing technology

c) Unhelpful government

d) Change in consumers

e) Increase in material cost

f) Government

g) Credit policy

e) Over trading

f) Imbalances of

inventory policies

g) Lack of proper

planning

h) Dependence on

single customers

i) Lack of expertise

j) Improper working

capital management

k) Mismanagement

l) Diversion of funds

m) Poor quality

management

n) Heavy borrowings

o) poor credit

collection

p) Lack of quality

control

g)Non inspection of units

h)Lack of motivation

i) Delay in sanction

j) Lack of trained staff

h) Taxation policy

i) Civil commotion

j) Sluggish legal system

ASSET CLASSIFICATION

While all performing assets are classified as standard assets, non performing assets are classified

as sub standard, doubtful or loss assets. Assets are classified as sub standard asset depending on

the period for which they have remained as NPA.As asset may be treated as loss asset even if it

has not been considered as sub standard or doubtful earlier we have the following assets

Standard assets

Sub-standard assets

Doubtful assets

Loss assets

Standard assets

A standard asset is one in which there is no problem in respect to its repayment of principal or

interest or there may not default in payment of such. It odes not disclose any problem and it does

not carry more than the normal risk attached to the business. These are not a non performing asset

Sub standard asset

Sub standard assets are those which are classified as non performing asset for a period not

exceeding two year, the current net worth of the borrower /guarantor, the current market value of

the security charged to the bank is not enough to ensure recovery of the debt due to the bank is full.

With effect from March 31 2005 an asset would be classified as sub-standard if it remained NPA

for a period less than or equal to 12 months. In such cases, the current net worth of the

borrowers/guarantors or the current market value of the security changed is not enough to ensure

recovery of the dues to the banks in full. In other words, such assets will have well defined credit

weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct

possibility that the banks will some loss, if deficiencies are not corrected. An asset where the terms

of the loan agreement regarding interest and principal have been regonotiated or rescheduled after

commencement of production should be classified as sub standard and should remain in such

category for at least 12 months of satisfactory performance under renegotiated or rescheduled

terms. In other words, the classification of an asset should not e upgraded merely as a result of

rescheduling unless there is sati factory compliance of this condition.

Doubtful asset

A doubtful asset is a non performing asset which has continued to be so far a period exceeding two

years ,in case of term loan if the installments of principal have remained over due for a period

exceeding two years it should be treated as doubtful. The rescheduling does not entitled the bank to

upgrade the quality of advances .A loan classified as doubtful has the weakness of a substandard

asset plus the weakness which made.

With effect from March 31 2005, an asset required to be classified as doubtful, if it has remained

NPA for more than 12 months. As n case of sub standard asset, rescheduling does not entitle the

bank to upgrade the quality of an advance automatically.

Loss asset

A loss asset is one where loss has been identified by the bank or internal or external auditors or by

the co-operation department or by the reserve bank of India inspection but the amount has not been

written off, wholly or partially. In other words such an asset is considered uncollectable and of

such title value that its continuance as a bankable asset is not warranted although there may be

some salvage or recovery value.

MANAGEMENT OF NPA

A non performing asset is defined as a credit facility in respect of which interest has remained past

due for more than 180 days credit facility in respect of NPA is term loan interest, overdraft and

cash credit account, bills purchased and discounted and other account receivables.

Management of NPA involves three stages

Regular monitoring of the performance of each loan asset and its periodic review.

Easily identification of problem asset for the success of remedial action.

Effective follow up for recovery

The quantum of NPA s a percentage of total resources (Gross NPA) is one of the critical indicators

of the bank loan portfolio and hence its performance is assigned the highest weight age in the

rating system. For a proper assessment if it is necessary to distinguish between Gross NPA and Net

NPA, Net NPA is derived from gross NPA after excluding balance in interest suspense account i.e.

interest due but not received DIGC/ECGC claim received and kept in suspense account and

provisions held.

With the introduction of prudential norms and better governance cleaning up of bank a balance

sheet has begun and an assessment of their financial health very close to reality could be

undertaken on site inspections on the model of CAMELS (Capital adequacy, Asset quality,

Management, Earnings, Liquidity and System) enables verification of the returns and assessment

of the integrity of those responsible for it and detection of mistake in the working of the bank.

GENERAL METHODS OF MANAGEMENT OF NPAS

The management of NPA is the difficult task in practice. Management of NPA means, how to

settle the NPA account in the books .in simple it focus on the methods of settlement of NPA

account. The methods were different from banks to banks. That information on settlement is given

below.

1. Compromise

The dictionary meaning of compromise is “settlement of dispute reached by mutual

concessions. The following are the detailed guidelines for compromise/ negotiated settlement

of NPAs

The compromise should be negotiated settlement under which the bank should ensure

recovery of its dues to the maximum extent possible of minimum expenses.

Proper distinction should be made between willful defaulters and borrowers

defaulting in repayments due to circumstances beyond their control.

Where security is available for assessing the realizable value, the proper weight age

should be given to the location, condition and marketable title and possession of sub

security.

An advantage in settlement cases is that banks can promptly recycle the funds instead

of resorting to expensive recovery proceedings spread over a long period.

All compromise reports approved by any functionary should be promptly reported to

the next higher authority for post facto scrutiny

Proposal for write off/compromise should be first looked by a committee of senior

executives of the bank.

Special recovery cells should be set up at all regional levels.

2. Legal remedies

The legal remedies are one of the methods of management of NPAs .the banks observed that

the borrower is making willful default; no more time should be lost instituting appropriate

recovery proceedings. The legal remedies involve filing of civil suits.

3. Regular training program

The all levels of executives are compelling to undergrowth the regular training program on

credit management and NPA it is very useful and helpful to the executives for dealing the

NPA properly.

4. Recovery camps

The bank should conduct regular or periodical recovery camps in the bank premises or

some other common places; such type of recovery camps reduces the level of NPA in the

banks.

REFERENCES

1. M.N. SHINDAE and G.S.ZULZULE, Southern Economist, VOL 51, NO; 19,

FEBRUARY 1 2013, Pg 29-32.

2. P.S. VOHRA AND JAI PRAKASH DHARMU, Journal of Banking, Information

and Technology and Management, vol-9, July-December 2012.

3. M.RAZAULLAH KHAN and HASAI KHAIRUL MAKEEN, Southern Economist, vol

51, august 15 2012, pg no 8.

4. ANUPAM JAIN and VIVITA SWATI, Indian Journal of Accounting, VOL-XLII (2),

JUNE 2012, Pg no 11-18.

5. RENU JATANA, Indian Journal of Accounting, VOL XXXIX (2), June 2009, Pp21-27.

6. SUNITA MEHTA and HANUMAN PRASAD, Southern Economist, February 15 2008,

pg no 16 &17.

7. A.PRASAD and ch.PANDURANGA REDDY, Southern Economist, VOL 47,number

1,MAY 1 2008,Pp 53,54.

8. BASU.U.K.Foreign Trade Review, VOL, XL, no 2, July-September 2005, Pp 3-7.

9. RAJIV RANJAN and SARATH CHANDRA DAL, RBI-Occasional papers, VOL 24, no

3, winter 2003.

10. K.M.BATTACHARYA, Journal of Accounting and Finance, VOL 16, NO 1,

OCTOBER 2001-MARCH 2002, Pp 58-69.

Chapter-3

Data Analysis and Interpretation-1

In the previous chapter, review of literature, both empirical and conceptual literature was

explained. This chapter deals with data analysis and interpretation of data.

Analysis of NPA in various segments is done in this chapter to understand deeply, the amount of

NPA in each segment by using percentage analysis. Segments include,

Commercial and institutional loans

Agricultural loans

Small industries and business loans

Personal loans.

Then total loan for each year and NPAs in respective years was found and ratios of NPA to

advances were found. The formula used was

Gross NPA ratio = gross NPA for the year

Total advances for the year

Percentage method

It shows what the percentage of NPA in the loan amount is in each year and in each segment

1 .Commercial And Institutional Loans

It includes loans provided for various institutions by bank.

Table 3.1 showing the loan amount and NPA of Commercial and Institutional Loans

( In 000;s)

year Loan amount NPA percentage

2008-09 190.47 6.17 3.24

2009-10 358.24 10.63 2.97

2010-11 779.06 23.37 2.99

2011-12 1011.19 21.63 2.41

2012-13 1295.78 21.50 1.66

(Source: primary data)

The above table shows the loan amount provided by the bank is steadily increasing. The NPA

shows flexibility in its behavior. During the year 08-09, about 3.24%of total loan consist of NPA,

which declines in the next year to 2.97%.but year 10-11 shows a slight increase in the percentage

of NPA of about .02%.and then the NPA shows a decline in the coming years and ends at 1.66%.

Figure 3.1 showing year wise detail of commercial and institutional loans and respective NPA

s

2008-09 2009-10 2010-11 2011-12 2012-130

200

400

600

800

1000

1200

1400

190.47358.24

779.06

1011.19

1295.78

6.17

10.63

23.378

21.63

21.5

Column1NPALoan amount

YEARS

LOAN

AM

OUN

T

Figure 3.1 shows the amount of loans provided under commercial and institutional loans and NPA

in each year. The amount for NPA is increasing each year but directly proportional to loan in first

three years, then the amount of NPA reduces to 21.63 and finally touches 21.5 in 2013.

2. Agricultural loan

It includes loans provided for agricultural purposes including to by machines, seeds,

fertilizers etc.

Table 3.2 showing the amount of loan and NPA for Agricultural Loans

(In 000’s)

year Loan amount NPA Percentage

2008-09 272.29 57.86 21.25%

2009-10 317.33 54.32 17.12%

2010-11 453.81 51.41 11.33%

2011-12 517.64 36.28 7.01%

2012-13 601.43 18.16 3.02%

(Source; primary data)

Table 3.2 shows that the percentage of NPA for 5 years in the agricultural sector. The NPA

percentage is steadily decreasing for the past 5 years. During the year 08-09, NPA was 21.25

%which gradually declined to 17.12%in next year, then to 11.33% in 2010-11, 7.01% in 2011-12

and ends at 3.02% during last financial year.

Figure 3.2 showing the loan amount and NPA in Agricultural Sector

2008-09 2009-10 2010-11 2011-12 2012-130

100

200

300

400

500

600

700

272.29317.33

453.81

517.64

601.429999999999

57.86 54.32 51.41 36.28 18.16

LOAN AMOUNT NPA

YEARS

Figure 3.2 shows the amount of loan in agricultural sector and amount of NPA among them in five

years. The loan amount was increasing for the last five years and NPA amount was decreasing, the

NPA which accounts for 57.56 in 2008-09crores decreases to 54.32in the next year. Then again the

NPA amount shows decreasing tend 51.41 crores, 36.28 crores and 18.16 crores.

3. Small Industries and Business Loans

It includes loans provided for small scale industries engaged in production and also loans to

business units in the area.

Table 3.3 showing the loan amount and NPA of Small Industries and Business Sector

with NPA percentage

Loan amount NPA Percentage

2008-09 760.93 24.65 3.24%

2009-10 1135.40 33.72 2.97%

2010-11 1568.21 37.79 2.41%

011-12 1998.87 32.56 1.63%

2012-13 2214.00 33.87 1.53%

(Sources; primary data)

It is clear from the table that about 3.24% of total loan in small industries and business loans

were NPA .even though NPA amount increased in next year, percentage of NPA decreases to

2.97%.next year also amount of NPA is increasing to 37.79 crores but compared to last year

the loan amount provided is more thus the percentage of NPA reduces to 2.41%.during 2011-

12 both the NPA amount and percentage of NPA decreases. Last year that is 2012-13 NPA

touches 1.53%, far below the international standard of 3% NPA.

Figure 3.3 showing the loan amount and NPA in Small Industries and Business Loan

Sector.

2008-09 2009-10 2010-11 2011-12 2012-130

500

1000

1500

2000

2500

760.93

1135.4

1568.21

1998.87

2214

24.65 33.72 37.79 32.56 33.87

LOAN AMOUNT NPA

The above figure shows an increasing trend in the amount of loan in case of small

industries and business loan, where as amount of NPA increases in the first three years that is 24.65

crores, 33.72 crores, 37.79 crores respectively. On the contrary, 2011-12 accounts for a reduction

in NPA amount to32.56 crores but again NPA amount increases to 33.87 crores but its percentage

is lower as the loan amount provided is the largest among five years.

4. Personal Loans

These are the loans provided to persons to meet their individual persons. This is the largest

loan segment in SBI .it includes varieties of loans such as educational loans, housing loans,

two wheeler loans, three wheeler loans and many more.

Table 3.4 showing the details of loan lend in Personal segment and amount of NPA and

its percentage.

(In000’s)

year Loan amount NPA percentage

2008-09 3060.10 204.41 6.68%

2009-10 3672.15 203.80 5.55&

2010-11 4413.06 208.73 4.73%

2011-12 5394.28 221.70 4.11%

2012-13 6619.84 209.55 3.16%

(Source; primary data)

Table 3.4 reveals the percentage of NPA in personal loans for the five years from 08 to 12.it

figures that percentage of NPA is decreasing continuously whatever may be the increase in loan

amount and NPA amount.NPA which shows a percentage of 6.6 reduces to 5.55 % in the very next

year. During 2010-11 NPA amounts only 4.73% of 4413.06 crores, which shows a downward

movement in the next two years also. And it reaches 3.16 % in 2012-13, very near to international

standard of NPA.

Figure 3.4 showing the loan amount and NPA in personal loan segment

2008-09 2009-10 2010-11 2011-12 2012-130

1000

2000

3000

4000

5000

6000

7000

3060.13672.15

4413.06

5394.28

6619.84

204.41 203.8 208.73 221.7 209.55

loan amount NPA

YEARS

LAON AMOUNT

Figure.3.4 points out that loan amount under personal loan segment are steadily increasing.

And NPA amount in the first two years decline but next two year visualizes an increase of

NPA amount to 208.73 crores and 221.70 crores. Then the next year amount of NPA comes

down to 209 .55.

Gross NPA to advances ratio

A method used to analyze NPA includes studying the NPA with its advances in that year.

Ratio of NPA amount and advances is taken for each year and interpretation is made by

comparing it to international standard of 3%.

1.In the year 2008

Table 3.5 showing loan amount and NPA amount for 2008

segment Loan amount NPA

Commercial loan 190.47 6.17

Agricultural loan 272.29 10.63

Small industries and business 760.93 24.65

Personal loan 3060.10 204.41

total 4283.79 245.86

Gross NPA = 4283.79 245.86 = 5.80

Interpretation: Standard ratio of NPA IS 3% .since in the year 2008 the gross NPA ratio is

5.80 %the management of NPA need to be improved.

Figure 3.5 showing the NPA in 2008

An Introduction to the Study

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