Impact & management of npas in Indian public sector banks

Kurian

CHAPTER 1

BACKGROUND OF STUDY

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INTRODUCTION

Presently, in India almost all the sectors such as IT sector, automobile industry and share

market are not in a very good condition. But, quite interestingly, the banking sector of India

is booming day-by-day and that too even in the period of global crisis .Banks acts as the

backbone of modern business. Development of a country mainly depends on banks. Banks

play an important role in the economic development of a country. The Indian banking has

come from a long way from being a sleepy business institution to a highly proactive and

dynamic entity. The Indian banking sector has emerged as one of the strongest drivers of

India’s economic growth. The Indian banking industry (US$ 1.22 trillion) has made

outstanding advancement in last few years, even during the times when the rest of the world

was struggling with financial meltdown. India's economic development and financial sector

liberalization have led to a transformation of the Indian banking sector over the past two

decades.Today Indian Banking is at the crossroads of an invisible revolution. The sector has

undergone significant developments and investments in the recent past. Most of banks

provide various services such as Mobile banking, SMS Banking, Net banking and ATMs to

their clients Indian banks, the dominant financial intermediaries in India, have made high

quality progress over the last five years, as is evident from several factors, including annual

credit growth, profitabilityIn this growing economic and financial sector reforms banks are

faced with many challenges .what is bothering the bank today is the management of non

performing asset. Over the years the banks are facing this problem and therefore needs

urgent remedial actions.Non-performing assets are problematic for banks . pressure from

the economy can lead to a sharp increase in non-performing loans and often results in

massive write-downs.one of the important function of the bank is lending money to its

customers by way of loans and advances. for banks loans are the most profitable assets.

return comes in the form of loan interest, fee income and investment. The most assumed risk

is the credit risk and it involves inability or unwillingness of customer to meet the

commitments in relation to the loan. once a loan is overdue and cease to yield income it

would be an non performing asset. It is a serious concern for banks since they depend on

interest payments for income. Non-performing Asset (NPA) has emerged since over a

decade as an alarming threat to the banking industry in our country sending distressing

signals on the sustainability and insurability of the affected banks. The positive results of the

chain of measures affected under banking reforms by the Government of India and RBI in

terms of the two Narasimhan Committee Reports in this contemporary period have been

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neutralized by the ill effects of this surging threat. Despite various correctional steps

administered to solve and end this problem, concrete results are eluding. It is a sweeping and

all pervasive virus confronted universally on banking and financial institutions. The severity

of the problem is however acutely suffered by Nationalised Banks, followed by the SBI

group, and the all India Financial Institutions. The Non-Performing Assets (NPAs) of the

Indian banking sector have been incessantly rising in the past six months. Historically, in

1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008.

This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from

2009 to 2012 and assets under reconstruction had trebled during the same period. India’s

biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans.

According to a recently published Credit Suisse Group AG report, 10 large industrial houses

account for 13% of total assets financed by the Banking system, which means that bank

lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24%

belong to the large manufacturing sector, 3.99% are from the services sector while 1.45%

are from the agricultural sector.

Definition of NPAs (NON -PERFORMING ASSETS)

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank. A ‘non performing asset’ was defined as a credit facility in respect of

which the interest and / or installment of principal had remained ‘past due’ for a specified

period of time. The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period

1993 Four Quarters

1994 Three Quarters

1995 Onwards Two quarters

An amount due under any credit facility is treated as ‘past due’ when it has not been paid

within 30 days from the due date. Due to the improvements in the payment and settlement

systems, recovery climate, up gradation of technology in the banking sector, etc, it was

decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.

Accordingly, as from that date, a NPA shall be an advance where

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

respect of a term loan,

The account remains ‘out of order’ for a period of more than 90 days, in respect of

an Overdraft/Cash Credit (OD/CC),

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

discounted,

Interest and/or installment of principal remains overdue for two harvest seasons but for a

period not exceeding two half years in the case of an advance granted for agricultural

purposes,

NPA is a classification used by financial institutions that refer to loans that are in jeopardy

of default. Once the borrower has failed to make interest or principal payments for 90 days

the loan is considered to be a non-performing asset. Non-performing assets are problematic

for financial institutions especially banks since they depend on interest payments for

income. Troublesome pressure from the economy can lead to a sharp increase in non-

performing loans and often results in massive write-downs. With a view to moving towards

international best practices and to ensure greater transparency, it has been decided to adopt

the ‘90 days’ overdue’ norm for identification of NPAS, from march 31 st 2004 . The Non-

Performing Assets (NPAs) of the Indian banking sector have been incessantly rising in the

past six months. Historically, in 1997, NPAs were 15.8% of loans for the banking sector,

which nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute

figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled

during the same period. India’s biggest lender, State Bank of India, is experiencing an NPA

level of 4.99% of total loans. According to a recently published Credit Suisse Group AG

report, 10 large industrial houses account for 13% of total assets financed by the Banking

system, which means that bank lending is getting increasingly skewed. Further, of the total

reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the

services sector while 1.45% are from the agricultural sector.

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‘Out of Order’ Status

An account should be treated as ‘out of order’ if the outstanding balance remains

continuously in excess of the sanctioned limit/drawing power. In cases where the

outstanding balance in the principal operating account is less than the sanctioned

limit/drawing power, but there are no credits continuously for six months as on the date of

Balance Sheet or credits are not enough to cover the interest debited during the same period,

these accounts should be treated as ‘out of order’.

Overdue’

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due

date fixed by the bank.

Classification of NPAs

Banks are required to classify NPAs further into the following three categories based on the

period for which the asset has remained non-performing and the reliability of the dues:

i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a period

less than or equal to 18 months. In such cases, the current net worth of the borrower, or the

current market value of the security charged is not enough to ensure recovery of the dues to

the banks in full. Such assets will have well defined credit weakness that jeopardize the

liquidation of the debt and are characterized by the distinct possibility that the bank will

sustain a loss.

ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18

months. It has all the weaknesses inherent to a sub-standard asset with the added

characteristic that the collection or liquidation in full – on the basis of currently known facts

– is highly questionable and improbable.

iii. Loss Assets: A loss asset is one where a loss has been identified by the bank or, internal

or external auditors but the amount has not been written off wholly. Sub-standard asset is the

asset in which bank have to maintain 10% of its reserves. All those assets which are

considered as non-performing for period of more than 12 months are called as Doubtful

Assets. All those assets which cannot be recovered are called as Loss Assets.

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Guidelines for Classification of NPAs

Broadly speaking, classification should be done taking into account the degree of well

defined credit weaknesses and the extent of dependence on collateral security for realization

of dues. Banks should establish appropriate internal systems to eliminate the tendency to

delay or postpone the identification of NPAs, especially in respect of high value

accounts.· .Accounts with temporary deficiencies: These should be classified based on the

past recovery records.

.Accounts regularize near about the balance sheet date: These accounts should be handled

with care and without scope for subjectivity. Where the account indicates inherent weakness

based on available data, it should be deemed as an NPA.

· Asset classification should be borrower-wise and not facility-wise: If a single facility to a

borrower is classified as NPA, others should also be classified the same way, as it is difficult

to envisage only a solitary facility becoming a problem credit and not others.

· Advances under consortium arrangements: Classification here should be based on the

recovery record of the individual member banks.

· Accounts where there is erosion in the value of the security: If there is a significant (i.e. the

realizable value of the security is less than 50% of that assessed by the bank during

acceptance) the account may be classified as NPA.

NPA SOME ASPECTS AND ISSUES

1.The NPAs of banks in India are considered to be at higher levels than those in other

countries. This issue has attracted attention of public as also of international financial

institutions and has gained further prominence in the wake of transparency and disclosure

measures initiated by RBI during recent years.

2. The NPA Management Policy document of SBI lays down to contain net NPAs to less

than 5% of bank's total loan assets in confirmity with the international standard. It is,

therefore necessary that as per guidelines provided in NPA Management Policy document,

every effort be made at all levels to cut down the NPAs. All this requires greater efforts and

teamwork.

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3. It is essential to keep a constant watch over the non-performing assets not just to keep it

performing but also that once they become non-performing, effective measures are initiated

to get full recovery and where this is not possible, the various means are to be initiated to get

rid off the NPAs from the branch books.

4. NPAs adversely affect the wealth condition of the branch advances as also the

profitability of the branch. Some of the reasons for this are as under:

(a) Interest cannot be applied on the loan accounts classified as NPAs.

(b) The Branch 'has to pay interest to central office on outstanding classified as NPA.

(c) The Branch has to incur cost in supervision and follow up of such advances.

(d) Provision has to be made on NPAs at Bank level.

5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub

standard, Doubtful or loss assets.

6. Once the assets are classified as NPA, the Branch Manager has to take all the necessary

steps to get the dues recovered there-under to maintain the good health of advances and the

higher profitability at the-Branch. This requires management of NPAs in such a Planned and

scientific manner that the percentage of NPAs to the total advances will be minimum.

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of,the rising NPAs. But the

problem of NPAs is more in public sector banks when compared to private sector banks and

foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

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EXTERNAL FACTORS

· Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and

advances. Due to their negligence and ineffectiveness in their work the bank suffers the

consequence of non-recover, their by reducing their profitability and liquidity.

· Wilful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing

it.These groups of people should be identified and proper measures should be taken in order

to get back the money extended to them as advances and loans.

· Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now

and then India is hit by major natural calamities thus making the borrowers unable to pay

back there loans. Thus the bank has to make large amount of provisions in order to

compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers

depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to

achieve the production level thus they are not repaying the loans

· Industrial sickness

Improper project handling , ineffective management , lack of adequate resources , lack of

advance technology , day to day changing govt. Policies give birth to industrial sickness.

Hence the banks that finance those industries ultimately end up with a low recovery of their

loans reducing their profit and liquidity

· Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which

ultimately piles up their product thus making them unable to pay back the money they

borrow to operate these activities. The banks recover the amount by selling of their assets,

which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and

has to make provision for it.

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· Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to cope

with the changing principles and policies for the regulation of the rising of NPAs. eg. The

fallout of handloom sector is continuing as most of the weavers Co-operative societies have

become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked

out by the Central govt to revive the handloom sector has not yet been implemented. So the

over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS

. Defective Lending process

There are three cardinal principles of bank lending that have been followed by the

commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of

profitability

i. Principles of safety By safety it means that the borrower is in a position to repay the loan

both principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay

depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore

take utmost care in ensuring that the enterprise or business for which a loan is sought is.

sound one and the borrower is capable of carrying it out successfully .he should be a person

of integrity and good character.

· Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis can not be taken. Proper MIS and financial accounting system is

not implemented in the banks, which leads to poor credit collection, thus NPA. All the

branches of the bank should be computerised.

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· Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise

in NPAs. While providing unsecured advances the banks depend more on the honesty,

integrity,and financial soundness and credit worthiness of the borrower. • Banks should

consider theborrowers own capital investment. • it should collect credit information of the

borrowers from a. From bankers b. Enquiry from market/segment of trade, industry,

business. c. From external credit rating agencies. • Analyse the balance sheet True picture of

business will be revealed on analysis of profit/loss a/c and balance sheet. • Purpose of the

loan When bankers give loan, he should analyse the purpose of the loan. To ensure safety

and liquidity, banks should grant loan for productive purpose only. Bank should analyse the

profitability,viability, long term acceptability of the project while financing.

· Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the

bank gives advances to those who are not able to repay it back. They should use good credit

appraisal to decrease the NPAs.

· Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets

as security to safe guard its interests. When accepting securities banks should consider

1.Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the

principle of diversification of risk based on the famous maxim “do not keep all the eggs in

one basket”; it means that the banker should not grant advances to a few big farms only or to

concentrate them in few industries or in a few cities. If a new big customer meets misfortune

or certain traders or industries affected adversely, the overall position of the bank will not be

affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom

industries. The biggest defaulters of OSCB are the OTM(117.77lakhs), and the handloom

sector Orissa hand loom WCS ltd (2439.60lakhs).

.Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank

officials to the customer point decreases the collection of interest and principals on the loan.

The NPAs due to wilful defaulters can be collected by regular visits.

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· Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same

havealready affected the smooth operation of the credit cycle. Due to re loaning to the

defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

IM PACT OF NPAS ON BANKS:-

In portion of the interest income is absorbed in servicing NPA.NPA is not merely

nonremunerative.It is also cost absorbing and profit eroding.In the context of severe

competition in the banking industry, the weak banks are at disadvantage for leveraging the

rate of interest in the deregulated market and securing remunerative business growth. The

options for these banks are lost. "The spread is the bread for the banks". This is the margin

between the cost of resources employed and the return therefrom." This is the margin

between the cost of resources employed and the return thereform. In other words it is gap

between the return on funds deployed (Interest earned on credit and investments) and cost of

funds employed (Interest paid on deposits).When the interest rates were directed by RBI, as

heretofore, there was not option for banks. But today in the deregulated market the banks

decide their lending rates and borrowing rates. In the competitive money and capital

Markets, inability to offer competitive market rates adds to the disadvantage of marketing

and building new NPA has affected the profitability, liquidity and competitive functioning

of banks and finally the psychology of the bankers in respect of their disposition towards

credit delivery and credit expansion.

1. Impact on Profitability

"The efficiency of banks is not always reflected only by the size of its balance sheet but by

the level of return on its assets. NPAS do not generate interest income for the banks, but at

the same time banks are required to make provisions for such NPAS from their current

profits. NPAS have a deleterious effect on the return on assets in several ways:

.They erode current profits through provisioning requirements.

.They result in reduced interest income.

.They require higher provisioning requirements affecting profits and accretion to

capital funds and capacity to increase good quality risk assets in future, and

.They limit recycling of funds, set in asset-liability mismatches, etc.

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There is at times a tendency among some of the banks to understate the level of NPAs in

order to reduce the provisioning and boost up bottom lines. It would only postpone the

process. In the context of crippling effect on a bank's operations in all spheres, asset quality

has been placed as one of the most important parameters in the measurement of a bank's

performance under the CAMELS supervisory rating system of RBI. Between 01.04.07 to

31.03.212, SBI Group incurred a total amount of Rs. 29932 Crores towards provisioning

NPA. This has brought Net NPA to 6.8% of netadvances. To this extent the problem is

contained but at what cost? This costly remedy is made at the sacrifice of building healthy

reserves for future capital adequacy. The enormous provisioning of NPA together with the

holding cost of such non-productive assets over the years has acted as a severe drain on the

profitability of the SBI Group. In turn SBI Group are seen as poor performers and unable to

approach the market for raising additional capital. Equity issues of nationalized banks that

have already tapped the market are now quoted at a discount in the secondary market. Other

bans hesitate to approach the market to rise new issues. This has alternatively forced SBI

Group to borrow heavily from the debt market to build Tier II Capital to meet capital

adequacy norms putting severe pressure on their profit margins; else they are to seek the

bounty of the Central Government for repeated Recapitalization.In the face of the

deregulated banking industry, an ideal competitive working is reached,when the banks are

able to earn adequate amount of non-interest income to cover their entire operating expenses

i.e. a positive burden. In that event the spread factor i.e. the difference between the gross

interest income and interest cost will constitute its operating profits. Theoretically even if

the banks keeps 0% spread, it will still break even in terms of operating profit and not return

an operating loss. The net profit is the amount of the operating profit minus the amount of

provisions to be made including for taxation. On account of the burden of heavy NPA, many

nationalised banks have little option and they are unable to lower lending rates

competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower

income from off balance sheet business yielding non-interest income.The following working

results of SBI Group an identified well manged nationalised banksfor the last two years and

for the first nine months of the current financial year, will be revealing to prove this

statement. Non-interest income fully absorbs the operating expenses of this banks in the

current financial year for the first 9 months. In the last two financial years, though such

income has substantially covered the operating expenses (between 80 to 90%) there is still a

deficit left.The strength of SBI Group is identified by the following positive feature:

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It's sizeable earnings under of non-interest income substantially/totally meets it non-

interest expenses.

Its obligation for provisioning requirements is within bounds. (Net NPA/Net

Advances is 1.82%)

It is worthwhile to compare the aggregate figures of the 19 Nationalised banks as published

by RBI in its Report on trends and progress of banking inIndia. Interest on Recapitalization

Bonds is a income earned form the Government, who had issued the Recapitalization Bonds

to the weak banks to sustain their capital adequacy under a bailout package. The statistics

above show the other weaknesses of the nationalised banks in addition to the heavy burden

they have to bear for servicing NPA by way of provisioning and holding cost as under:

*Their operating expenses are higher due to surplus manpower employed. Wage costs total

assets is much higher to PSBs compared to new private banks or foreign banks.

*Their earnings from sources other than interest income are meagre. This is due to failure to

develop off balance sheet business through innovative banking products.

2. Impact on Liquidity of the SBI Group

Though SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines, the

facts that their net NPA in the average is as much as 7% is a potential threat for them. RBI

has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA within

limits of tolerance the SBI Group are holding an uncomfortable burden at 6.8% as at March

2012. They have not been able to build additional capital needed for business expansion

through internal generations or by tapping the equity market, but have resorted to II-Tier

capital in the debt market or looking to recapitalistion by Government of India.

3. Impact on Outlook of Bankers towards Credit Delivery .

The fear of NPA permeates the psychology of bank managers in the SBI Group in

entertaining new projects for credit expansion. In the world of banking the concepts of

business and risks are inseparable. Business is an exercise of balancing between risk and

reward. Accept justifiable risks and implements de-risking steps. Without accepting

risk,there can be no reward. The psychology of the banks today is to insulate themselves

with zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit

growth compared to growth of deposits, resulting in a low C/D Ratio around 50 to 54% for

the industry fear psychosis also leads to excessive security-consiousness in the approach

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towardslending to the small and medium sized credit customers. There is insistence on

provision of collateral security, sometimes up to 200% value of the advance, and

consequently due to a feeling of assumed protection on account of holding adequate security

(albeit overconfidence)a tendency towards laxity in the standards of credit appraisal comes

to the fore. It is well know that the existence of collateral security at best may convert the

credit extended to productive sectors into an investment against real estate, but will not

prevent the account turning into NPA. Further blocked assets and real estate represent the

most illiquid security and NPA in such advances has the tendency to persist for a long

duration. SBI Group have reached a dead-end of the tunnel and their future prosperity

depends on an urgent solution for handling this hovering threat.

4. Impact on Productivity:

High level of NPAs effect the productivity of the banks by increasing the cost of funds and

by reducing the efficiency of banks employees. Cost of funds is increased because due to

non-availability of sufficient internal sources they have to rely on external sources to fulfill

their future financial requirements. Productivity of employees is also reduced because it

keeps staff busy with the task of recovery of overdue. Instead of devoting time for planning

for development through more credit and mobilization of resources the branch staff would

primarily be engaged in preparing a large value of returns and statements relating to sub-

standard, doubtful and loss assets, preparing proposal for filing of suits, waivement of legal

action, compromise, write off or in preparing DICGC claim papers etc.

5. Impact on other Variables:

High level of NPAs also leads to squeezing of interest spread, when asset becomes an NPA

for the first time it adversely affects the spread by not contributing to the interest income and

from the second year onwards it will have its impact on the bottom line of the balance sheet

because of provisioning to be made for it and not have incremental effect on the spread.

Now a days Govt. does not encourage liberal capital support to be given to banks. Banks are

required to bring their own capital by issuing share to the public, whereas high level of

NPAs leads to lower profits hence less or no profits available for equity shareholders hence

lower EPS and fall in the value of share. Low market value of shares has also forced the

banks to borrow heavily debt market to build Tier II capital to meet capital adequacy norms,

putting severe pressure on their profit margins.

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6. Qualitative aspects of the Micro Level Impact of NPAs:

High incidence of loan defaults shakes the confidence of general public in the soundness of

banking setup and indirectly effects the capacity of the banking system to mop up the

deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust of

foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened by Indian

banks or confine their transaction to top Indian banks only. Moreover, it puts negative effect

on granting of autonomy to PSBs whreas it is must for banks in this competitive

environment. Banks having positive net profits for the last three years, Net NPA level below

9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to be fulfilled to get

autonomous status, which becomes difficult in the situation of huge level of

NPAs.Inadequate recovery also inhibits the banks to draw refinance from higher level

agency. The eligibility of a bank to draw refinance from NABARD is linked to the %age of

recovery to demand in respect of direct, medium and long term loans for agriculture and

allied activities. It implies that refinance facility would be progressively reduced depending

on the position of NPAs and also on the No. of years in which a banks branch remains in a

particular category of default. Due to fear of NPAa banks are being taken away from the

basic function for which these were established it is becoming more & more risky and less

remunerative. They are floating their subsidiaries to manage mutual funds, factoring,

insurance business, Good money is spent to recover bad money. Deterioration in the quality

of loan assets and inability to come with new products makes the Indian banks

uncompetitive globally. Due to high cost, they cannot reduce lending rate to meet the

economy's demand of low lending rate. It is also biggest threat for capital account

convertibility.

7. Some areas of Macro-Economic Impact:

It is not only the banks which are affected higher level of NPAs but it is the economy as a

whole which pays for it. Banks are not putting enough resource in lending due to fear of

default. Once the credit to various sectors of the economy slow down, the economy is badly

hit. There is slowdown in growth in GDP, industrial output and fall in the profit margins of

the corporate and consequent depression in the market. Further high level of NPAs can

result in adding to the inflationary potential in the economy and eroding the viability of the

credit system as a whole.Not only this, burden of NPAs is to be borne by the society as a

whole. When capital support is given to PSB on A/c of losses booked and/ or erosion of

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capital due to NPAs, it comes out of either Govt. budgetary resources or from the public as

per Liberalization policy, whether this money is from tax revenues or from the hard earned

saving of the investing public, in fact, the society is bearing the cost of these NPAs.

Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is in its hand.

Any dividend declared would have gone to the Govt. and which can be spent on the welfare

and development program.

MANAGEMENT OF NPA

Various steps have been taken by the government and RBI to recover and reduce NPAs.

These strategies are necessary to control NPAs .

1. Preventive management and

2. Curative management

A. Preventive Management:

Preventive measures are to prevent the asset from becoming a non performing asset. Banks

has to concentrate on thefollowing to minimize the level of NPAs.

1. Early Warning Signals

The origin of the flourishing NPAs lies in the quality of managing credit assessment, risk

management by the banks concerned. Banks should have adequate preventive measures,

fixing pre sanctioning appraisal responsibility and having an effective post-disbursement

supervision. Banks should continuously monitor loans to identify accounts that have

potential to become non-performing [13]. It is important in any early warning system, to be

sensitive to signals of credit deterioration. A host of early warning signals are used by

different banks for identification of potential NPAs. Most banks in India have laid down a

series of operational, financial, transactional indicators that could serve to identify emerging

problems in credit exposures at an early stage. Further, it is revealed that the indicators

which may trigger early warning system depend not only on default in payment of

installment and interest but also other factors such as deterioration in operating and financial

performance of the borrower, weakening industry characteristics, regulatory changes, and

general economic conditions. Early warning signals can be classified into five broad

categories viz.

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(a) Financial

(b) Operational

(c) Banking

(d) Management and

(e) External factors.

Financial related warning signals generally emanate from the borrowers’ balance sheet,

income expenditure statement, statement of cash flows, statement of receivables etc.

Following common warning signals are captured by some of the banks having relatively

developed EWS.

2. Financial warning signals

• Persistent irregularity in the account

• Default in repayment obligation

• Devolvement of LC/invocation of guarantees

• Deterioration in liquidity/working capital position

• Substantial increase in long term debts in relation to equity

• Declining sales

• Operating losses/net losses

• Rising sales and falling profits

• Disproportionate increase in overheads relative to sales

• Rising level of bad debt losses Operational warning signals

• Low activity level in plant

• Disorderly diversification/frequent changes in plan

• Nonpayment of wages/power bills

• Loss of critical customer/s

17

• Frequent labor problems

• Evidence of aged inventory/large level of inventory

3. Management related warning signals

• Lack of co-operation from key personnel

• Change in management, ownership, or key personnel

• Desire to take undue risks

• Family disputes

• Poor financial controls

• Fudging of financial statements

• Diversion of funds

4. Banking related signals

• Declining bank balances/declining operations in the account

• Opening of account with other bank

• Return of outward bills/dishonored cheques

• Sales transactions not routed through the account

• Frequent requests for loan

• Frequent delays in submitting stock statements, financial

data, etc. Signals relating to external factors

• Economic recession

• Emergence of new competition

• Emergence of new technology

• Changes in government / regulatory policies

• Natural calamities

18

Know your client’ profile (KYC): Most banks in India have a system of preparing `know

your client’ (KYC) profile/credit report. As a part of `KYC’ system, visits are made on

clients and their places of business/units. The frequency of such visits depends on the nature

and needs of relationship.Credit Assessment and Risk Management Mechanism: Credit

assessment and Risk management mechanism are ever lasting solution to the problem of

NPAs. Managing credit risk is a much more forward-looking approach and is mainly

concerned with managing the quality of credit portfolio before default takes place. The

documentation of credit policy and credit audit immediately after the sanction is necessary

to upgrade the quality of credit appraisal in banks. In a situation of liquidity overhang the

enthusiasm of the banking system is to increase lending with compromise on asset quality,

raising concern about adverse selection and potential danger of addition to the NPAs stock.

It is necessary that the banking system is equipped with prudential norms to minimize if not

completely avoid the problem of credit risk and develop an effective internal credit risk

models for the purpose of credit risk management. Organizational restructuring: With regard

to internal factors leading to NPAs the onus for containing the same rest with the bank

themselves. These will necessities organizational restructuring improvement in the

managerial efficiency, skill up gradation for proper assessment of credit worthiness and a

change in the attitude of the banks towards legal action, which is traditionally viewed as a

measure of the last resort. Reduce Dependence on Interest: The Indian banks are largely

depending upon lending and investments. The banks in the developed countries do not

depend upon this income whereas 86 percent of income of Indian banks is accounted from

interest and the rest of the income is fee based. The banker can earn sufficient net margin by

investing in safer securities though not at high rate of interest. It facilitates for limiting of

high level of NPAs gradually. It is possible that average yield on loans and advances net

default provisions and services costs do not exceed the average yield on safety securities

because of the absence of risk and service cost.

5. Watch-list/Special Mention Category

The grading of the bank’s risk assets is an important internal control tool. It serves the need

of the Management to identify and monitor potential risks of a loan asset. The purpose of

identification of potential NPAs is to ensure that appropriate preventive / corrective steps

could be initiated by the bank to protect against the loan asset becoming non-performing.

Most of the banks have a system to put certain borrowable accounts under watch list or

19

special mention category if performing advances operating under adverse business or

economic conditions are exhibiting certain distress signals. These accounts generally exhibit

weaknesses which are correctable but warrant banks’ closer attention. The categorization of

such accounts in watch list or special mention category provides early warning signals

enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take

necessary preventive steps to avoid their slippage into non performing advances

6. Willful Defaulters

RBI has issued revised guidelines in respect of detection of willful default and diversion and

siphoning of funds. As per these guidelines a willful default occurs when a borrower

defaults in meeting its obligations to the lender when it has capacity to honor the obligations

or when funds have been utilized for purposes other than those for which finance was

granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent

their access to capital markets. Sharing of information of this nature helps banks in their due

diligence exercise and helps in avoiding financing unscrupulous elements. RBI has advised

lenders to initiate legal measures including criminal actions, wherever required, and

undertake a proactive approach in change in management, where appropriate

B.CURATIVE MEASURES

The curative measures are designed to maximize recoveries so that banks funds locked up in

NPAs are released for recycling. The Central government and RBI have taken steps for

controll ingincidence of fresh NPAs and creating legal and regulatory environment to

facilitate the recovery of existing NPAs of banks. They are:

1. Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to

take steps for arresting the incidence of fresh NPAs and have also been

creating legal and regulatory environment to facilitate the recovery of

existing NPAs of banks. More significant of them, I would like to

recapitulate at this stage.

* The broad framework for compromise or negotiated settlement of NPAs

advised by RBI in July 1995 continues to be in place. Banks are free to

design and implement their own policies for recovery and write-off

20

incorporating compromise and negotiated settlements with the approval

of their Boards, particularly for old and unresolved cases falling under the

NPA category. The policy framework suggested by RBI provides for

setting up of an independent Settlement Advisory Committees headed by

a retired Judge of the High Court to scrutinise and recommend

compromise proposals.

* Specific guidelines were issued in May 1999 to public sector banks for

one time non discretionary and non discriminatory settlement of NPAs of

small sector. The scheme was operative up to September 3, 2000. [Public

sector banks recovered Rs. 668 crore through compromise settlement

under this scheme].

* Guidelines were modified in July 2000 for recovery of the stock of NPAs

of Rs. 5 crore and less as on 31 March 1997. [The above guidelines which

were valid up to June 30, 2001 helped the public sector banks to recover

Rs. 2600 crore by September 2001].

* An OTS Scheme covering advances of Rs. 25000 and below continues to

be in operation and guidelines in pursuance to the budget announcement

of the Hon'ble Finance Minister providing for OTS for advances up to Rs.

50,000 in respect of NPAs of small/marginal farmers are being drawn up.

2. Lok Adaltas:

Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and

"loss"category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok

Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to

decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had recovered

Rs. 40.38 crore through the forum of Lok Adalat. The progress through this channel is

expected to pick up in the coming years particularly looking at the recent initiatives taken by

some of the public sector banks and DRTs in Mumbai.

3. Debt Recovery Tribunals:

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in

March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement

21

of more than one Recovery Officer, power to attach defendant's property/assets before

judgement, penal provisions for disobedience of Tribunal's order or for breach of any terms

of the order and appointment of receiver with powers of realization, management, protection

and preservation of property are expected to provide necessary teeth to the DRTs and speed

up the recovery of NPAs in the times to come. Though there are 22 DRTs set up at major

centres in the country with Appellate Tribunals located in five centres viz. Allahabad,

Mumbai, Delhi,Calcutta and Chennai, they could decide only 9814 cases . The amount

recovered in respect of these cases amounted to only Rs. 1864.30 crore. Looking at the huge

task on hand, with as many as 33049 cases involving Rs. 42988.84 crore pending before

them I would like the banks to institute appropriate documentation system and render all

possible assistance to the DRTs for speeding up decisions and recovery of some of the well

collateralised NPAs involving large amounts. I may add that familiarisation programmes

have been offered in NIBM at periodical intervals to the presiding officers of DRTs in

understanding the complexities of documentation and operational features and other

legalities applicable of Indian banking system. RBI on its part has suggested to the

Government to consider enactment of appropriate penal provisions against obstruction by

borrowers in possession of attached properties by DRT Receivers, and notify borrowers who

default to honour the decree passed against them.

4. Circulation of information on defaulters:

The RBI has put in place a system for periodical circulation of details of willful defaults of

borrowers of banks and financial institutions. This serves as a caution list while considering

requests for new or additional credit limits from defaulting borrowing units and also from

the directors/proprietors/partners of these entities. RBI also publishes a list of borrowers

(with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by

banks and FIs for recovery of their funds, as on 31st March every year. It is our experience

that these measures had not contributed to any perceptible recoveries from the defaulting

entities. However, they serve as negative basket of steps shutting off fresh loans to these

defaulters. I strongly believe that a real breakthrough can come only if there is a change in

the repayment psyche of the Indian borrowers

5. Recovery action against large NPAs:

22

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI had

advised the public sector banks to examine all cases of willful default of Rs 1 crore and

above and file suits in such cases, and file criminal cases in regard to willful defaults. Board

of Directors are required to review NPA accounts of Rs. 1 crore and above with special

reference to fixing of staff accountability.On their part RBI and the Government are

contemplating several supporting measures including legal reforms, some of them I would

like to highlight.

6. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a

timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and

above with the banks and financial institutions. The CDR process would also enable viable

corporate entities to restructure their dues outside the existing legal framework and reduce

the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai

and a Standing Forum and Core Group for administering the mechanism had already been

put in place. The experiment however has not taken off at the desired pace though more than

six months have lapsed since introduction. As announced by the Hon'ble Finance Minister in

the Union Budget 2002-03, RBI has set up a high level Group under the Chairmanship of

Shri Vepa Kamesam, Deputy Governor, RBI to review the implementation procedures of

CDR mechanism and to make it more effective. The Group will review the operation of the

CDR Scheme, identify the operational difficulties, if any, in the smooth implementation of

the scheme and suggest measures to make the operation of the scheme more efficient. CDR

system in the country will have a three-tier structure:

A. CDR Standing Forum

B. CDR Empowered Group

C. CDR Cell

A. CDR Standing Forum :

The CDR Standing Forum would be the representative general body of all financial

institutions and banks participating in CDR system. All financial institutions and banks

should participate in the system in their own interest. CDR Standing Forum will be a self-

23

empowered body, which will lay down policies and guidelines, guide and monitor the

progress of corporate debt restructuring.

B. CDR Empowered Group:

The CDR Empowered Group would be mandated to look into each case of debt

restructuring, examine the viability and rehabilitation potential of the Company and pprove

the restructuring package within a specified time frame of 90 days, or at best 180 days of

reference to the Empowered Group.

C. CDR Cell

The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell

in all their functions. The CDR Cell will make the initial scrutiny of the proposals received

from borrowers / lenders, by calling for proposed rehabilitation plan and other information

and put up the matter before the CDR Empowered Group, within one month to decide

whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to prepare

detailed Rehabilitation Plan with the help of lenders and if necessary, experts to be engaged

from outside. If not found prima facie feasible, the lenders may start action for recovery of

their dues.

IX. The Mechanism of the CDR

CDR will be a Non-statutory mechanism. CDR mechanism will be a voluntary system based

on debtor-creditor agreement and inter-creditor agreement. The scheme will not apply to

accounts involving only one financial institution or one bank. The CDR mechanism will

cover only multiple banking accounts / syndication / consortium accounts with outstanding

exposure of Rs.20 crore and above by banks and institutions. The CDR system will be

applicable only to standard and sub-standard accounts. However, as an interim measure,

permission for corporate debt restructuring will be made available by RBI on the basis of

specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by value) of

the lenders constituting banks and FIs consent for CDR, irrespective of differences in asset

classification status in banks/ financial institutions. There would be no requirement of the

account / company being sick NPA or being in default for a specified period before

reference to the CDR Group. This approach would provide the necessary flexibility and

facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be

necessary, since the debt restructuring exercise is being triggered by banks and financial

24

institutions or with their consent. In no case, the requests of any corporate indulging in

willful default or misfeasance will be considered for restructuring under CDR.

7. Credit Information Bureau:

Institutionalisation of information sharing arrangements through the newly formed Credit

Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the

recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme

of information dissemination on defaults to the financial system. The main

recommendations of the Group include dissemination of information relating to suitfiled

accounts regardless of the amount claimed in the suit or amount of credit granted by a credit

institution as also such irregular accounts where the borrower has given consent for

disclosure. This, I hope, would prevent those who take advantage of lack of system of

information sharing amongst lending institutions to borrow large amounts against same

assets and property, which had in no small measures contributed to the incremental NPAs of

banks.

8. Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working

out a proper definition covering such classes of defaulters so that credit denials to this group

of borrowers can be made effective and criminal prosecution can be made demonstrative

against willful defaulters.

9. Corporate Governance:

A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the Reserve

Bank to review the supervisory role of Boards of Banks and financial institutions and to

obtain feedback on the functioning of the Boards vis-à-vis compliance, transparency,

disclosure, audit committees etc. and make recommendations for making the role of Board

of Directors more effective with a view to minimising risks and overexposure. The group is

finalising its recommendations shortly and may come out with guidelines for effective

25

control and supervision by bank boards over credit management and NPA prevention

measures.

10. Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002:

The Act provides, inter alia for enforcement of security interest for

realisation of dueswithout the intervention of courts or tribunals. The

Security Interest (Enforcement)Rules, 2002 has also been notified by

Government to enable Secured Creditors toauthorise their officials to

enforce the securities and recover the dues from theborrowers. As on

June 30, 2004, 27 public sector banks had issued 61, 263

noticesinvolving outstanding amount of Rs. 19,744 crore, and had

recovered an amount ofRs. 1,748 crore from 24,092 cases.

11. Asset Reconstruction Company (ARC)

This empowerment encouraged the three major players in Indian banking system, namely,

State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to

come together to set-up the first ARC. Arcil was incorporated as a public limited company

on February 11, 2002 and obtained its certificate of commencement of business on May 7,

2003. In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of

registration dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates

under powers conferred under the Securitization Act, 2002. Arcil is also a "financial

institution" within the meaning of Section 2 (h) (ia) of the Recovery of Debts due to Banks

and Financial Institutions Act, 1993 (the "DRT Act"). Arcil is the first ARC in the country to

commence business of resolution of non-performing assets (NPAs) upon acquisition from

Indian banks and financial institutions. As the first ARC, Arcil has played a pioneering role

in setting standards for the industry in India.

A. Unlocking capital for the banking system and the economy

The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of

lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by

managing NPAs and help them concentrate on core banking activities thereby enhancing

shareholders value.

26

B. Creating a vibrant market for distressed debt assets securities in India offering a trading

platform for Lenders Arcil has made successful efforts in funneling investment from both

from domestic and international players for funding these acquisitions of distressed assets,

followed by showcasing them to prospective buyers. This has initiated creation of a

secondary market of distressed assets in the country besides hastening their resolution. The

efforts of Arcil would lead the country’s distressed debt market to international standards.

C. To evolve and create significant capacity in the system for quicker resolution of NPAs by

deploying the assets optimally

With a view to achieving high delivery capabilities for resolution, Arcil has put in place a

structure aimed at outsourcing the various sub-functions of resolution to specialized

agencies, wherever applicable under the provision of the Securitization Act, 2002. Arcil has

also encourage, groomed and developed many such agencies to enhance its capacity in line

with the growth of its activity.

Role Of Technology In The Mangement Of NPA

The RBI has made it clear to all banks that theymust automate data management and record

keeping as far as possible and complete periodic regulatory reporting of NPAS without

intervening manually.the regulator is also exploring the creationof a contract server to store

the date of different banks.the use of technology will bring about a fundamental shift in the

way indian banks manage their npas implementing automated solutions ,not just helps in

finer analysis of data but more importantly enables early warning indicators before the

situations worsens thus giving banks more time to take appropriate measures.a core banking

application is a pre-requisite for this.but most of all it can put a stop to the manipulation of

NPAs a common practice in the manual system.besides improving compliance a core

banking solution can add value by aggregating data across the organization and its touch

points making it easily accessible to the bank as a single unified view of each customers.that

being said not all technology solutions are alike ,and banks must choose carefully to pick

one with strong credentials as well as comprehensive functionalitty

27

28

CHAPTER 2

INDUSTRY AND

COMPANY PROFILE

29

2.1 INDUSTRY DETAILS

The Indian banking sector has emerged as one of the strongest drivers of India’s economic

growth. The Indian banking industry (US$ 1.22 trillion) has made outstanding advancement

in last few years, even during the times when the rest of the world was struggling with

financial meltdown. India's economic development and financial sector liberalization

haveled to a transformation of the Indian banking sector over the past two decades. Today

Indian Banking is at the crossroads of an invisible revolution. The sector has undergone

significant developments and investments in the recent past. Most of banks provide various

services such as Mobile banking, SMS Banking, Net banking and ATMs to their clients.

Indian banks, the dominant financial intermediaries in India, have made high-quality

progress over the last five years, as is evident from several factors, including annual credit

growth, profitability, and trend in gross non-performing assets (NPAs). While annual rate of

credit growth clocked 23% during the last five years, profitability (average Return on Net

Worth) was maintained at around 15% during the same period, while gross NPAs fell from

3.3% as on March 31, 2006 to 2.3% as on March 31, 2011. The Indian banking sector is a

mixture of public, private and foreign ownerships. The State bank of India has recorded

highest market share. The Net Interest Margin of HDFC Banks is 4.2% which is highest

among others.

BANKING SYSTEM IN INDIA

A HISTORICAL PERSPECTIVE:

We can identify there distinct phases in the history of Indian banking:

1.Early phase from 1786-1969.

2.Nationalization of banks and up to 1991 prior to banking sector reforms.

3.New phase of Indian banking with the advent of financial banking. Banking in India has

its origin as early or Vedic period. It is believed that the transitions from many lending to

banking must have occurred even before Manu, the great Hindu furriest, who has devoted a

section of his work to deposit and advances and laid down rules relating to the rate of

30

interest. During the mogul period, the indigenious banker played a very important role in

lending money and financing foreign trade and commerce.

During the days of the East India Company it was the turn of agency house to carry on the

banking business. The General Bank of India was the first joint stock bank to be established

in the year 1786. The other which followed was the Bank of Hindustan and Bengal Bank.

The Bank of Hindustan is reported to have continued till 1906. While other two failed in the

meantime. In the first half of the 19th century the East India Company established there

banks, The bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Bombay

in1843. These three banks also known as the Presidency banks were the independent units

and functioned well. These three banks were amalgamated in 1920 and new bank, the

Imperial Bank of India was established on 27th January, 1921.

With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial

Bank of India was taken over by the newly constituted SBI. The Reserve Bank of India

(RBI) which is the Central bank was established in April, 1935 by passing Reserve bank of

India act 1935.

The Central office of RBI is in Mumbai and it controls all the other banks in the country. In

the wake of Swadeshi Movement, number of banks with the Indian management were

established in the country namely, Punjab National Bank Ltd., Bank of India Ltd., Bank of

Baroda Ltd., Canara Bank. Ltd. on 19th July 1969, 14 major banks of the country were

nationalized and on 15th April 1980, 6 more commercial private sector banks were taken

over by the government.

2. COMPANY PROFILE

State Bank of India (SBI) is a multinational banking and financial services company based

in India. It is a government-owned corporation with its headquarters in Mumbai,

Maharashtra.It is founded in july1995. State Bank of India is the largest banking and

financial services company in India. In addition to the banking services, the Bank through

their subsidiaries, provides a range of financial services, which include life insurance,

merchant banking ,mutual funds, credit card, factoring, security trading, pension fund

management and primary dealership in the money market. The State Bank Group, with over

16,000 branches, has the largest banking branch network in India. The bank has 173

overseas offices spread over 34countries. The bank offers convenience of over 21000 ATMs

31

in India. SBI provides a range of banking products through its network of branches in India

and overseas, including products aimed at non-resident Indians(NRIs). SBI has 14 regional

hubs and 57 Zonal Offices that are located at important cities throughout the country SBI is

the largest bank in India with deposits of Rs 10,43,647 crores as on March’12. The

increasing focus on upgrading the technology back-bone of the bank will enable it to

leverage its reach better, improve service levels, provide new delivery platforms, and

improve operating efficiency to counter the threat of competition effectively. The net profit

of the bank crossed 10,000 crores and increased by 41.66% to Rs11,707 crores compared to

FY ’11 and it is one of the highest net profits earned by any corporate in the country .the

SBI have also recorded a robust increase in the net interest income by 33.10% to Rs 43,291

crores in FY ’12.The SBI is the “No 1 home loan provider with a 26% market share. SBI is

a regional banking behemoth and has 20% market share in deposits and loans among Indian

commercial banks. The assosciate and subsidiaries are also showing a robust growth. The

bank scaled new heights in csr activities by winning the prestigious golden peacock award

for corporate social responsibility 2012. The increasing integration of SBI with its associate

banks (associates) and subsidiaries will further strengthen its dominant position in the

banking sector and position it as the country’s largest universal bank. The operating profit of

the bank for 2011-12 stood at Rs 31,573.54 crores as compared to Rs 25,333.57 crores in

2010-11. SBI along with its associate banks offer a wide range of banking products and

services across its different client markets. The bank has entered the market of term lending

to corporate and infrastructure financing, traditionally the domain of the financial

institutions. It has increased its thrust in retail assets in the last two years, and has built a

strong market position in housing loans.SBI, through its non-banking subsidiaries, offers a

host of financial services, viz., merchant banking, fund management, factoring, primary

dealership, broking, investment banking and credit cards. SBI has commenced its life

insurance business by setting up a subsidiary, SBI Life Insurance Company Limited, which

is a joint venture with Cardiff S.A., one of the largest insurance companies in France. SBI

currently holds 74% equity in the join

32

CHAPTER 3

RESEARCH

METHODOLOGY

33

TITLE OF THE STUDY

“The impact and management of NPA”

OBJECTIVE OF STUDY

To study the position of non performing assets in SBI group

To know the impact on NPAon strategic banking variable.

To know the reason for an asset becoming NPA

PROBLEM STATEMENT

The research problems, in general refers to some difficulty which a researcher experience in

the contest of either a particular a theoretical situation and want to obtain a salutation for

same. The present Dissertation has been undertaken to do the impact and management of

NPA in State Bank of India

The present study is descriptive in nature, as it seeks to discover ideas and insight to

bring out new relationship. Research design is flexible enough to provide opportunity for

considering different aspects of problem under study. It helps in bringing into focus some

inherent weakness in enterprise regarding which in depth study can be conducted by

management.

Research sources :

There is only secondary source of data and is based on the insight and experience of the

professionals working in State Bank Of India..

Research instrument:

The data has been collected by personally interacting with the professionals and there

insight. Also the internet has been used.

34

LIMITATION OF STUDY

Shortage of time

Time was very short for study ,so it was very difficult to get information

About everything .

Information not sufficiently available

The source of data collection is secondary so the information available is not

sufficient.

No direct source of information available

The information is collected from indirect sources so in some information data is not

available.

Secondary data

Information is not reliable because of secondary data

35

CHAPTER 4

ANALYSIS AND

INTERPRETATION

36

STATE BANK OF INDIA

TOTAL ASSET

Table 1.1

YEAR 2007-082008-09 2009-10 2010-11

2011-12

TOTAL ASSET 7,21,526

9,64,432

10,53,413

12,23,736

13,35,519

Graph 1.1

2007-08 2008-09 2009-10 2010-11 2011-120

200000

400000

600000

800000

1000000

1200000

1400000

1600000

Total Asset

Total Asset

Interpretation

37

Above graph show that total assets of SBI in 2008-09 were 9,64,432 in 2010-11 was

12,23,736 and in 2011-12 was 13,35,519 . As a result we find an increase in the total assets

of SBI.

Gross NPAGross NPA is a advance which is considered irrecoverable, for bank has made provisions, and which is still held in banks' books of account

Table 2.1

YEAR 2007-08 2008-09 2009-10 2010-11 2011-12

Gross NPA 1283715588.6

0 19534 25326 39676

Graph 2.1

2007-08 2008-09 2009-10 2010-11 2011-120

5000

10000

15000

20000

25000

30000

35000

40000

Gross NPA

Gross NPA

Interpretation

38

Gross NPA has been found to be increasing for each year. When the NPA in 2007-08

was 12837, in 2009-10 it was found to be 19534 and in 2011-12 it was 39676.

NET NPA

Net NPA is obtained by deducting items like interest due but not recovered, part payment

received and kept in suspense account from Gross NPA.

Table 3.1

YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 Net NPA 7424 9552 10870 12346 15818

Graph 3.1

2007-082008-09

2009-102010-11

2011-12

0

2000

4000

6000

8000

10000

12000

14000

16000

Net NPA

Net NPA

39

Interpretation

In 2007-08, Net NPA was 7424, following which in 2009-10 it was found to be

10870 and in 2011-12, it was 15818, as a result we find an increase in Net NPA.

GROSS NPA (RATIO%)

Gross NPA Ratio (%) = (Gross NPA/Gross Advances )*100

Table 4.1

YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 Gross NPA % 3.04 2.84 3.05 3.28 4.44

Graph4.1

2007-08 2008-09 2009-10 2010-11 2011-120

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Ratio%

Ratio

Interpretation

40

Gross NPA Ratio was found to have decreased in the year 2008-09 to 3.04 after

which for the following years it have been increasing steeply and in the year 2011-12

it was found to be 4.44

Net NPA (RATIO%)

Net NPA Ratio = Net NPA to Net Advance as per Annual Report

Table 5.1

YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 Net NPA % 1.78 1.76 1.72 1.63 1.82

Graph 5.1

2007-082008-09

2009-102010-11

2011-12

1.5

1.55

1.6

1.65

1.7

1.75

1.8

1.85

Ratio%

Ratio

41

Interpretaion

Unlike Gross NPA, Net NPA has been found to be decreasing from 2007-08 to 2010-

11 from 1.78 to 1.63 and in the year 2011-12, a surge in the Net NPA to 1.82 was

found.

PROVISION FOR NPA

Provisioning Norms

(i) Sub-standard assets

A general provision of 15% on total outstanding should be made without making any

allowance for ECGC guarantee cover and securities available. The ‘unsecured exposures’

which are identified as ‘substandard’ would attract additional provision of 10%, i.e., a total

of 25% on the 'outstanding balance’. However, in view of certain safeguards such as

escrow accounts available in respect of infrastructure lending, infrastructure loan accounts

which are classified as sub-standard, will attract a provisioning of 20% instead of the

aforesaid prescription of 25%.

(ii) Doubtful assets

a) 100% of the extent to which the advance is not covered by the realisable value of the

security to which the bank has a valid recourse and the realisable value is estimated on a

realistic basis(unsecured portion).

b) In regard to the secured portion, provision may be made on the following basis, at the

rates ranging from 20% to 100% of the secured portion, depending upon the period for

which the asset has remained doubtful:

Period for which the advance has remained in the ‘doubtful’category

Provision requirement (%)

42

Up to one year 25One to three years 40More than three years 100

(iii) Loss assets

Loss assets should be written off. If loss assets are permitted to remain in the books for any

reason, 100% of the outstanding should be provided for.

(iv) Standard assets

a. Direct advances to agricultural and SME sectors at 0.25%;

b. Advances to Commercial Real Estate (CRE) Sector at 1%;

c. Housing loan at teaser rates of 2% and .40% after one year from the date on which the

rates are reset at higher rates;

d. Restructured account classified as Standard 2.00%;

e. All other loans and advances not included in (a) , (b) , (c) and (d) above at 0.40%.

Table 6.1

YEAR 2007-08 2008-09 2009-10 2010-11 2011-12 Provision 2001 2475 5148 8792 11546

Graph 6.1

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2007-082008-09

2009-102010-11

2011-12

0

2000

4000

6000

8000

10000

12000

Provision For NPA

Interpretation

Provision has found to be increasing from 2007-08 to 2011-12 with 2001 Crores in

the first year followed by 2475 in the next and with a steep rise in 2011-12 to 11546

Crores.

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CHAPTER5

45

SUMMARY OF

FINDINGS AND

CONCLUSION

FINDINGS

It has found that the Gross NPA and NET NPA of SBI are showing an increasing

trend. The main reasons for this are:

Default by customer

Non-inspection of borrower

Lack of expertise

Imbalance of inventories

Poor credit collection

Lack of trained staff

46

Lack of commitment to recovery

Change in consumer preference

It has also found that the provisions towards NPA are also increasing which effect

the profit of the bank

Increase in NPA have also effected the productivity of bank by increasing cost of

funds and by reducing the efficiency of bank employees.

CONCLUSION

A strong banking sector is important for a flourishing economy. The failure of the banking

sector may have an adverse impact on other sectors. Over the years, much has been talked

about NPA and the emphasis so far has been only on identification and quantification of

NPAs rather than on ways to reduce and upgrade them.There is also a general perception

that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs,

due to credit to these sectors becoming stickly managers of rural and semi-urban branches

generally sanction these loans. NPAs reflect the overall performance of the banks. A high

level of NPAs suggests high probability of a large number of credit defaults that affect the

profitability and net-worth of banks and also erodes the value of the asset. The NPA growth

involves the necessity of provisions, which reduces the overall profits and shareholders’

47

value. Due diligence and utmost care must be taken by the branch managers before

sanctioning the loans to the clients and specially in case of lending to priority sector. So,

careful steps like selection of right borrowers, viable economic activity, adequate finance

and timely disbursement, correct end use of funds and timely recovery of loans are

absolutely necessary pre conditions for preventing or minimizing the incidence of new

NPAs which will enhance the creditability of the banks and in turn make the foundation of

our country strong. The problem of NPAs can be achieved only with proper credit

assessment and risk management mechanism. In a situation of liquidity overhang, the

enthusiasm of the banking system to increase lending may compromise on asset quality,

raising concern about their adverse selection and potential danger of addition to the stock of

NPAs. It is necessary that the banking system is to be equipped with prudential norms to

minimize if not completely to avoid the problem of NPAs. The onus for containing the

factors leading to NPAs rests with banks themselves. This will necessitates organizational

restructuring, improvement in the managerial efficiency and skill up gradation for proper

assessment of credit worthiness. It is better to avoid NPAs at the nascent stage of credit

consideration by putting in place of rigorous and appropriate credit appraisal mechanisms. In

the changed context of new prudential norms and emphasis on quality lending and

profitability, mangers should make it amply clear to potential borrowers that banks resources

are scare and these are meant to finance viable ventures so that these are repaid on time and

relevant to other needy borrowers for improving the economic lot of maximum number of

households. Hence selection of right borrowers, viable economic activity, adequate finance

and timely disbursement, correct and use of funds and timely recovery of loans is absolutely

necessary pre conditions for preventing of minimizing the incidence of new NPAs.

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49

CHAPTER6

SUGGESTIONS

The Gross NPA of SBI is higher so it requires reducing the gross NPA by efficient

recovery management.

Credit administration: A banks have to strengthen their credit administrative

machinery and put in place effective credit risk management systems to reduce the fresh

incidence of NPAs.

Better Inspection: We shall keep a close watch on the manner in which NPA

reduction is taking place.

Cash Recovery: We should also insist that cash recoveries should more than offset

the fresh write-offs in NPAs.

Perception: The mindset of the borrowers needs to change so that a culture of

proper utilization of credit facilities and timely repayment is developed.

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Financial System: As you are aware, one of the main reason for corporate default is

on account of diversion of funds and corporate entities should come forward of avoid this

practice in the interest of strong and sound financial system.

Coordinator: Extending credit involves lenders and borrowers and both should

realize their role and responsibilities. They should appreciate the difficulties of each other

and should endeavor to work contributing to a healthy financial system.

Bibliography

o INDIAN FINANCIAL SYSTEM , KOTHARI C.R, VK publication.

o NON-PERFORMING ASSETS-AN INDIAN PERSPECTIVE,INFOSYS FINACLE

o MANAGING NON-PERFORMING ASSETS IN BANKS,SN BIDANI,

VISION BOOKS

www.rbi.org

www.icai.com

www.sbi.com

www.moneycontrol.com

State bank of india annual report

51

NPAs Reduction Strategies for Commercial Banks in India ,G.V.Bhavani Prasad and

D.Veena

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