A

“Research Project”

ON

“PROBLEM OF NPA AND ITS IMPACT ON BANKS (WITH SPECIAL REFRENCE TO

STATE BANK OF INDIA)”

Submitted to

Punjab Technical University, Jalandhar in partial fulfilment for the degree of Master of Business

Administration (Session 2008-2010)

Under the supervision of: - Submitted By:-

Dr. R.S GUPTA NAVJINDER GREWAL

HOD MGT DEPTT. MBA(II)YR

ROLL NO. (27)

DECLARATION

I hereby certify that the work embodied in the project “Problem of NPA and its impact on

banks (with special reference to state bank of India" was done by me under the

supervision of Dr. R.S GUPTA (H.O.D MGT DEPTT,BCET)

The project is done for the partial fulfillment of Degree of Master of Business Administration

program of Punjab Technical University, Jalandhar from, Bhutta College Of Engineering

And Technology, Ludhiana. I have not submitted this report to any institute or University.

NAVJINDER GREWAL

ACKNOWLEDGEMENT

My sincere thanks are due to all the contributors without whose efforts this project would not

have been completed. No task of this nature is a single person effort, so I am very thankful to

Dr. R.S GUPTA (H.O.D MGT DEPTT)

Under whose guidance I successfully completed my research project. Their unfailing interest

and support gave a new dimension to my work. They made it possible to collect abundance

of material, the relevant portion of which is quoted in this project.

I am also very grateful to all other Faculty of B.C.ET whose teaching methodology helped

me in completion of my project without any difficulty.

I also express my gratitude to the all respondent for their proper responses and cooperation

during my dissertation project.

I would like to extend my thanks to my all friends for their valuable suggestion and

cooperation at various stages during my project.

NAVJINDER GREWAL

CHAPTER PLAN

S.No. Chapters Page No.

1. Introduction

Non –performing asset

Classification of NPA

Some issue of NPA

2. Review of literature

3. Objective of study

4. Research Methodology

Research Design

Sources of Data

5. Reason of NPA

6. Impact of NPA on Banks

7. Guidelines of RBI

8. Analysis and interpretation of data

9. Findings

10. Limitation

11. Recommendation

12.

13.

Conclusion

Bibliography

INTRODUCTION TO THE PROJECT

Since the introduction of economic liberalization and financial sector reforms, Banks are

under growing pressure to bring down their NPAs so as to improve their performance and

viability. What is bothering the bankers today is the management of Non-performing Assets.

Over the period this problem has aggravated alarmingly and therefore needs urgent remedial

actions, so in this context a good number of circular instruction/guidelines have been issued

by bank/Reserve Bank of India.

Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of

Sh. M.Narsimham to examine and give recommendation for Income Recognition, Asset

Classification and Provisioning of loan assets of Banks and Financial Institutions. The

Committee examined the issues and recommended that a policy of Income Recognition

should be objective and based on record of recovery rather than on subjective considerations.

On the basis of the recommendations of the Narsimhan Committee, RBI had issued

guidelines to all Scheduled Commercial Banks on Income Recognition, Assets Classification

and Provisioning in April, 1992 which have been modified from time to time by the RBI on

the basis of experience gained and suggestions received from various quarters. The

Prudential Norms for Income Recognition, Asset Classification and Provisioning have come

into effect from the accounting year 31.03.1993.

Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India

Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were

also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June,

1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for

the purpose of Income Recognition and Assets Classification from the accounting year 1995-

96. However, guidelines relating to provisioning for RRBs have been made effective from

the financial' year ended 31.03.1997. The definition of NPAs is also gradually becoming

tough for RRBs to cover all advances like Commercial Banks. Although most of-the

guidelines relating to RRBs are similar to that of Commercial Banks, they have been made

applicable in a phased manner for RRBs.

INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played

a crucial role in the socio- economic progress of the country. Banks extend credit to different

types of borrowers for many different purposes. For most customers, bank credit is the

primary source of available debt financing.

For banks good loans are the most profitable assets. Return comes in the form of loan

interest, fee income and investment and the most prominent assumed risk is credit risk.

Credit risk involves inability or unwillingness of customer or counterpart to meet

commitments in relation to lending once a loan is overdue and ceases to yield income it

would become a Non Performing Asset.

Proper management and speedy disposal of NPAs is one of the most critical tasks of banks

today.  The problem of Non Performing Assets [NPAs] in banks and financial institutions has

been a matter of grave concern not only for the banks but also the real economy in general, as

NPAs can choke further expansion of credit which would impede the economic growth of the

country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions

in the economy. NPAs are not therefore the concern of only lenders but also the public at

large.

Granting of credit for economic activities is the prime duty of banking. Apart from raising

resources through fresh deposits, borrowings and recycling of funds received back from

borrowers constitute a major part of funding credit dispensation activity. Lending is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, which results into economic growth. However lending also carries a risk called

credit risk, which arises from the failure of borrower. Non-recovery of loans along with

interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the

bank’s profitability on a large scale. Though complete elimination of such losses is not

possible, but banks can always aim to keep the losses at a low level.

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 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.

STATE BANK OF INDIA

SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31, 2005. It

dominates the Indian banking sector with a market share of around 20% in terms of total

banking sector deposits. 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.

Once the core banking solution (CBS) is fully implemented, it will cover over 10,000

branches and ATMs of the State Bank group, and emerge as the strongest technology enabled

distribution network in India.

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.

Resource-raising capabilities

SBI’s funding profile is strong, underpinned by its strong retail deposit base. The bank is

facing increasing competition in its metropolitan and urban franchise. SBI’s strong franchise

gives it access to a steady source of stable retail funds, which constitute around 59% of the

total resources as on March 31, 2005 (56% as at March 31, 2004).

Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in

the proportion of current account deposits, low-cost deposits have continued to constitute

over 40% of total deposits as at March 31, 2005. The bank’s cost of deposits (excluding

IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year from April

1 to March 31), compared with 5.48% in 2003-04. The bank’s liquidity position is very

strong due to healthy accretion to deposits, large limits in the call market, and significant

surplus SLR investments. SBI will maintain its strong funding profile and a low cost resource

position in view of its strong retail base and wide geographical reach.

Earnings profile to remain good

SBI will maintain a good earnings profile in the medium term despite high pressure on yields

due to the increasing competition in the banking sector. SBI’s earning profile is characterised

by consistency in the return on assets (PAT/Average Assets), at around 1% per annum for the

past three years, and diverse income streams. To maintain yields and pursue credit growth,

the bank is aggressively targeting retail finance and small and medium enterprises (SMEs).

The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile.

However, with the opening of government business like tax collection to other banks and

increased competition, the growth in fee income is expected to slow down. The bank’s

operating expense at 2.44% of average funds deployed in 2004-05 is in line with other public

sector banks. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of

the operating expenditure in 2004-05. Thus, despite good asset growth and technology

efficiency gains, the bank’s operating costs will remain high in the medium term. To be able

to reap the full benefits of technology implementation, the bank will have to reduce or

redeploy work force; since this is a sensitive issue, it is expected to happen gradually.

The bank’s fund based and fee income earnings are diversified across industries, regions,

asset classes, and customer segments.

Strong diversification in income streams will ensure that the bank’s earnings remain

relatively stable, despite the decline in profitability in some segments.

Comfortable capital position

SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a large capital

base of Rs 240.72 billion as at March 31, 2005. The bank has considerably improved its net

worth coverage for net NPAs to 4.4 times as at March 31, 2005 due to lower slippages

reflecting an improving asset quality, witnessed across the entire banking sector. The

capitalization levels of SBI are adequate to address the asset side risks and support the

business growth in the medium term.

Management strategies

In retail finance, the bank has leveraged its corporate relationships, pursued business growth

selectively, and has not competed based on interest rate. The bank has taken initiatives like

on-line tax returns filing and faster transfer of funds to protect its dominant position in the

government business. The bank also has a clear technology strategy that will enable it to

compete with the new generation private sector banks in customer service and operational

efficiency.

Asset quality to remain at average levels

The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at

March 31, 2005, compared with 4.9% for all scheduled commercial banks (SCBs) taken

together. The bank is facing challenges to improve the quality of assets originated, as can be

seen in the consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05.

To contain NPAs and ensure credit growth, the bank has decided to focus on financing the

retail (personal) segment as well as SMEs. The share of retail advances has increased to

24.73% (Rs 522.08 billion) of total advances as at September 30 2005. In the retail loan

segment, SBI is targeting primarily the housing loans segment, which constitutes Rs. 283.41

billion (54.3%) of total retail loans. The NPAs in retail finance are low currently; however

they are steadily increasing (especially in the housing finance portfolio) and have started

showing signs of stress. SBI’s retail portfolio has grown at over 37% CAGR in the last two

years and hence a significant portion of the portfolio is largely unseasoned. The housing

finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March 31, 2005.The bank

will face significant challenges in the medium term to develop effective credit appraisal and

collection systems in order to contain NPAs in retail finance. SBI’s asset quality is expected

to remain at average levels, as the bank’s large and diverse asset portfolio reflects of the asset

quality of the banking system.

Business description

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 corporates

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 joint venture.

Industry prospects

To leverage benefits such as access to low cost resources and the facility to provide a larger

gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited

and HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that

of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such

entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements,

priority sector requirements, and corporate exposure limits.

New private sector banks capture market share

With technological edge and a strong marketing thrust, private sector banks have been

stealing market share in retail deposits and the corporate fee business from public sector

banks. Together with some foreign banks, these private banks have also aggressively entered

the retail asset financing space, hitherto the domain of non-banking finance companies.

Given their focus on cross selling and optimizing their customer base, they now offer the

entire range of products and services on the asset and liability side to retail and wholesale

customers

Asset quality to improve

Banks have not yet fully resolved the stress in the asset quality of their legacy

corporate loan portfolios, however. Though slippages to NPAs and provisioning were high

for some banks in FY2004, as they moved to the 90-day norm for recognising and

provisioning for NPAs, the treasury gains enabled significant provisioning to be made with

the result that net NPAs for most public sector banks are now less than 3%.

Going forward, steady growth in gross domestic product should help improve the banks’

asset quality and increase corporate lending. The securitization and reconstruction of

financial assets and enforcement of security interest (Sarfaesi) Act should also help banks in

limiting slippages and improving NPA recoveries.

Better Capitalization levels

Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through

public issues in recent years, thereby improving their capitalization levels. The steady

accruals to net worth and falling non-performing asset levels have resulted in an

improvement in the capitalization position of banks in recent years.

Challenges ahead

Competition from new private sector and foreign banks remains a key challenge for public

sector banks. They need to reorient their staff and effectively utilize technology platforms to

retain customers and reduce costs. They also need to fortify their credit risk management

systems to mitigate the risks arising from small-ticket lending to the retail, small and medium

enterprises, and services segments.

Consolidation and emergence of universal banking groups

The cap on foreign ownership of banks has already been raised from 49% to 74%. The

competition in the sector could get further intensified if the 10% cap on voting rights is also

relaxed. New private sector banks are expanding their geographical coverage and making

inroads into government business. The new private and foreign banks will continue to gain

market share from public sector banks because of their efficient cost structures, technological

edge, focused marketing approach and operational freedom. However, the emergence of

newer players would be restricted if the private ownership of banks is capped at low levels.

Mergers among PSBs would create banks with even larger balance sheets and customer base.

However, the integration process in such mergers is expected to be complex and time long

drawn.

These would also be driven by GoI due to provisions of Banking Companies (Acquisition

and Transfer of Undertakings) Act 1969, and hence political scenario will impact the timing

and permutations possible. Strategic alliances between banks and other financial sector

players such as insurance companies and mutual funds are also likely as banks attempt to

enhance their product range, leverage on economies of scale and reduce costs.

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,

i. Interest and/or installment of principal remain overdue for a period of more than 180 days

in respect of a term loan

ii. The account remains ‘our of order’ for a period of more than 180 days, in respect of an

overdraft/cash credit

iii. 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 agriculture

purposes

iv. Any amount to be received remains overdue for a period of more than 180 days in respect

of other accounts.

With a view to move towards international best practices, it has been decided to adopt the ’90

days’ overdue norm for identification of NPAs, from 31st March, 2004.

‘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.

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.

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.

RECOGNITION OF INCOME ON

NON-PERFORMING LOANS (NPLS)

Stricter regulations have been laid down by supervisory authorities in many countries with

regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest

payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful'

and 'loss'].

Any uncollected interest payments on NPLs are considered non-accrued interest. Previously

accrued, but uncollected interest is reversed out of income. Failure to do so would overstate

income. Uncollected interest is normally put in a memorandum account. NPLs are restored

on an accrual basis only after full settlement has been made on all delinquent principal and

interest. It would, therefore, be useful, if the accounts carry a footnote, explaining the

accounting policies followed with regard to recognition of income on NPLs.

NARSIMHAN COMMITTEE'S RECOMMENDATIONS

Committee on Financial System (CFS) Narsimhan committee which reported in 1991,

meanwhile major changes have taken place in the domestic, economic and institutional

science, indicating the movement towards global integration of financial services. Committee

has presented second generation reforms.

a) To strength the foundation of financial system.

b) Related to this, streamlining procedures, upgrading technology and human

resource development.

c) Structural changes in the system.

1. It is recommended that an asset be classified as doubtful if it is in the sub standard

category for 18 months in the first instance and eventually for 12 months as loss if it

has been so identified but not written off. These norms, which should be regarded as

the minimum, may be brought into force in a phased manner.

2. Corporations and FIs should avoid the practice of "ever greening" by making fresh

advances to their troubled constituents only with a view to settling interest dues and

avoiding classification of the loans in question as NPAs. The committee notes that the

regulatory and supervisory authorities are paying particular attention to such breaches

in the adherence to the spirit of the NPA definitions and are taking appropriate

corrective action.

3. The committee believes that objective should be to reduce the average level of net

NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. These targets

cannot be achieved in the absence of measure to tackle the problem of backlong

NPAs on one time basis and the implementation of strict prudential norms and

management efficiency.

4. There is no denying the fact that any effort at financial restructuring in the form of

having off NPAs portfolio from the books of the corporation or measures to initiate

the impact of high level of NPAs must go hand with operational restructuring.

Cleaning up the balance sheets of banks would thus make sense only if simultaneous

steps are taken to prevent of limit the reemergence of new NPAs.

5. Direct credit has a proportionately higher share in NPA portfolio of corporations and

has been one of the factors in erosion in the quality of asset portfolio. There is a

continuing need of Financial Corporations to extend Credit to SSI sector, which is

important segment of national economy but on commercial considerations and on

basis of credit worthiness. Government feels reluctant to accept the recommendation

for reducing the scope of directed credit under priority sector because timy sector of

industry and small businesses have problems with regard to obtaining credit and some

remaining may be necessary for this sector. A poverty alleviation and employment

generation schemes. Given the special needs of these sectors, the current practice may

continue.

6. With regard to income recognition in India, income stops occurring when

interest/installment of principal is not paid within 180 days. However, we should

move towards international Practices in this regard and introduce the norm of 90 days

in a phased manner by the 2002.

7. As an incentive to Bank is to make specific provision, the consideration be given to

making such provisions tax deductible.

8. Banks should pay greater attention to asset liability management to avoid mismatch

and to cover, among others, liquidity and interest rate risks.

9. It should be encouraged to adopt statistical risk management techniques like value at

risk in respect of balance sheet term which are susceptible to market price fluctuation,

Forex rate volatility and interest rate changes. While the RBI and IDBI may initially,

prescribe certain normative models for market risk management, the ultimate

objective should be that of building up their models and RBI blacklisting them for

their validity on a periodical basis.

10. There is a need for a greater use of computerized system than at present.

Computerization has to be recognized as an indispensable tool for improvement in

customer service, the institution and operation of better control systems, greater

efficiency in information technology.

11. State Financial Corporations at present are over regulated and over administered.

Supervision should be based on evolving prudential norms and regulations which

should be adhered to rather than excessive control over administrative and other

aspects of organisation and functioning. Internal audit and internal inspection systems

should be strengthened.

12. The main issues with regard to operations of Bank’s are to ensure operational

flexibility and measure of competition and adequate internal autonomy in matters of

loan sanctioning and internal administration.

13. This calls for some re-examination and the present relevance of directed credit

programme ablest in respect of those who are able to stand on their own feet and to

whom the directed credit programmes with the element of interest concessionality

that has accompanied has become a source of economic rent. It is recommended that

directed credit sector be redefined to comprise the small and marginal farmers, the

tiny sector of industry, small business and transport operators, village and cottage

industry, rural artisans and other weaker sections. The credit target for this redefined

priority sector should hence forth be fixed at 10% of aggregate credit which would be

broadly in line with the credit flows to these sectors at present.

14. The committee believes that the balance sheets of banks and FIs should be made more

transparent and full disclosure made in Balance sheet. This is to be done in phased

manner.

REVIEW OF LITERATURE

Das (1990) has compared the various efficiency measures of public sector banks by

applying data envelopment analysis model and concluded that the level of NPAs

significant negative relationship with efficiency estimates.

Verma (1999) has concluded that high level of NPAs leads to operational failure of

the bank.

Berger and young (1997) has examined the relationship between problem loan and

bank efficiency by employing Granger-causality technique and found that high level

of problem loans cause banks of increase spending on monitoring, working out and /

or selling off these loans and possibly becomes more diligent in administering the

portion of their existing loan portfolio that is currently performing.

Gupta (1997) has also concluded that NPAs on protifability of banks and leads to

liquidity crunch and slow down in the growth in GDP etc.

Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit

making and six loss making banks and concluded that loss making banks maintained

higher NPAs in the loan portfolio which led them to show losses.

Kwan and Eisenbeis (1994) also concluded that there is negative relationship

between efficiency and problem loans.

Toor (1994) analysed that poor recovery management leads to reduction in yield on

advanced that poor recovery management leads to reduction in yield on advances,

reduced productivity loss in the credibility and put detrimental impact on the policies

of the banks.

Murthy (1988) has examined that default bring down the return accruing and to them,

reduces effective rate of interest and reduces the funds’ recalculation and increase

their dependence on external sources thereby increasing the costs.

ACCORDING TO S, RAJ KUMAR (2002) the SARFAESI act and the could

primarily used as powerful bargaining tool while negotiating with defaulter. This

puts bank on stronger ground in salvaging sticky loan

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

RESEARCH METHODOLOGY

Meaning of Research

Research is defined as “a scientific & systematic search for pertinent information on a

specific topic”. Research is an art of scientific investigation. Research is a systemized effort

to gain new knowledge. It is a careful inquiry especially through search for new facts in any

branch of knowledge. The search for knowledge through objective and systematic method of

finding solution to a problem is a research.

PROBLEM STATEMENT

The research problems, in general refers to sum difficulty with 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 Problem of NPA in

State Bank of India.

RESEARCH DESIGN

TYPES OF RESEARCH DESIGN

DESIGN

EXPLORATORY

RESEARCH DESIGN

DESCRIPTIVE

EXPERIMENTAL RESEARCH DESIGN

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.

SAMPLING DESIGN:

A sample design is a definite plan for obtaining a sample from the sampling frame. It refers

to the technique or the procedure that is adopted in selecting the sampling units from which

inferences about the population is drawn. Sampling design is determined before the

collection of the data.

DATA COLLECTION

PRIMARY DATA: -

TYPES OF DATA

PRIMARY DATA

SECONDRY DATA

METHODS OF PRIMARY DATA

OBSERVATION METHOD

QUETIONAIRE METHOD

INTERVIEW METHIOD

SCHEDULE METHOD

SECONDARY DATA: -

The secondary data on the other hand, are those which have already been collected by

someone else and which have already been passed through the statistical processes. When the

researcher utilizes secondary data then he has to look into various sources from where he can

obtain them. For e.g. Books, magazine, newspaper, Internet, publications and reports. In the

present study use of secondary data collected from website.

.

REASONS FOR RISE IN NPAs

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.

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.

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 a

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.

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 the

borrowers 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 the 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.

Re loaning process

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

already 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 non-

remunerative. 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.

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 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores

towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net

advances. To this extent the problem is contained but a 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.

Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds

at 6% plus 1% service charge) the net NPA of Rs. 32632 Croces absorbs a recurring holding

ost of Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years

which works out to average of Rs. 3300 crores from annum, a sizeab business.

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 banks

for 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 indentified by the following positive feature:

1. It's sizeable earnings under of non-interest income substantially/totally meets its

non-interest expenses.

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

Advances is 1.92%)

It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year

ended March, 2001, as published by RBI in its Report on trends and progress of banking in

India.

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 7.1% as at March 2001. 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.

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

lending 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 over-

confidence). 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. During the year 2001-02 share of 12

public sector banks were traded on the NSE out of which share value of three PSBs have

decreased. 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.

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 bi

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 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.

GUIDELINES BY RBI

Guidelines of Government and RBI for Reduction of NPAs

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 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 as on September 30, 2001, 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 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 for Rs. 6264.71 crore pertaining to public

sector banks since inception of DRT mechanism and till September 30, 2001. 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 as on September 30, 2001, 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:

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.

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 suit-

filed 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-a-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 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 dues

without the intervention of courts or tribunals. The Security Interest (Enforcement)

Rules, 2002 has also been notified by Government to enable Secured Creditors to

authorise their officials to enforce the securities and recover the dues from the

borrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 notices

involving outstanding amount of Rs. 19,744 crore, and had recovered an amount of

Rs. 1,748 crore from 24,092 cases.

PROBLEMS LOAN RECOVERY

1. Inadequate security and Erosion in value of security:

Generally, banks tend to find that there is a major gap in the valuation of the security,

as carried out at the time of providing the loan and at the time of loan recovery. The

value of the security has generally deteriorated over the period and according to

experts, it may further deteriorate by almost 10-50% if quick action is not taken for its

immediate sale.

2. Political interferences:

Political interference in the day -to-day functioning of public sector banks created a

number of problems for them. The populist policies of the national level politicians,

such as waiver in repayment only added to these problems.

3. Slow legal procedure:

Before the establishment of DRTs in 1993, the banks had to approach the normal

courts to recover their dues. There were provisions under various acts which

hampered the smooth takeover and sale of secured assets. The legal process could

take years to be completed, with the borrower having ample scope for delaying the

takeover of assets. A number of loopholes provided the borrower with opportunities

to delay or ignore repayment of loans. During this period, it was said by some

unscrupulous businessmen that - "there is no difference between equity and debt - you

never have to repay either of them ".

4. Swamping of DRTs with cases:

Once DRTs were established to quicken the pace of recovery procedures, the pace of

recovery improved quite a bit. However, the DRTs were soon drowned in the ever

increasing number of cases. The pending number of cases with the DRTs increased

manifold during the period 1993-2002.

5. Misuse of BIFR/SICA:

This was one of the favourite methods of willful defaulters to delay repayment. If the

defaulter's company is declared sick and taken for financial reconstruction under

BIFR, it is not possible to undertake any recovery proceeding against the

company .The procedure of financial reconstruction can take a number of years

together, thereby delaying recovery to a great extent.

6. Transfer of property Act, English mortgage:

Under provisions of Section 69 of Transfer of Property Act, mortgagee can take

possession of mortgaged property and sell the same without the intervention of the

Court only in the case of English Mortgage. In addition, mortgagee can take

possession of mortgaged property where there is specific provision in mortgage deed

and it is situated in the towns of Mumbai, Kolkata and Chennai only. In other cases,

intervention of the court is required.

However, this is very slow and time consuming process and by the time bank /FI is

able to get possession; the asset either does not exist or has become valueless.

ANALYISIS AND

INTERPRETATION

STATE BANK OF INDIA

TOTAL ASSET

YEAR

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

TOTAL ASSET(RS.

CR) 407185 459883 494029 566565 721526

0

100000

200000

300000

400000

500000

600000

700000

800000

1 2 3 4 5 6

YEAR

YEAR

TOTAL ASSET(RS. CR)

Interpretation:-Above graph show that total assets of SBI is increased in 2004-05 by

52658 crore, in 2007-08 increased by 154961rs. crore. So assets of the SBI bank

increased from last five year.

GROSS NPA

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

_GROSS NPA(RS.CR) 12667 12456 9628 9998 12837

_GROSS NPA(RS.CR)

0

2000

4000

6000

8000

10000

12000

14000

2003-04

2004-05

2005-06

2006-07

2007-08

_GROSSNPA(RS.CR)

Interpretation:- above graph shows that Non-performing assets of SBI decreased

from 2003-04 to2006-07 and increased in 2007-08. There are so many reason of

increases of npa

NET NPA

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

NET NPA(RS. CR.) 5442 5349 4906 5258 7424

0

1000

2000

3000

4000

5000

6000

7000

8000

2003-04

2004-05

2005-06

2006-07

2007-08

NET NPA(RS. CR.)

NET NPA(RS.CR.)

Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and

increased in 2006-07 to 2007-08.

GROSS NPA (RATIO%)

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

GROSS NPA(RATIO%) 7.75 5.96 3.61 2.92 3.04

Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased

from 2004-05 to 2006-07 and increased in 2007-08.

0

1

2

3

4

5

6

7

8

2003-04

2004-05

2005-06

2006-07

2007-08

GROSS NPA(RATIO%)

GROSSNPA(RATIO%)

NET NPA(RATIO%)

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

NET NPA(RATIO%) 3.48 2.65 1.88 1.56 1.78

0

0.5

1

1.5

2

2.5

3

3.5

4

1 2 3 4 5 6

YEAR

NETNPA(RATIO%)

Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is decreased from

2004-05 to 2006-07 and increased in 2007-08

PROVISION COVER

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

PROVISION COVER 57.04 59.45 49.04 47.41 45.04

PROVISION COVER

0

10

20

30

40

50

60

70

2003-04 2004-05 2005-06 2006-07 2007-08

yEAR

PO

VIS

ION

CO

VE

R %

PROVISION COVER

Interpretation: Above graph shows that in 2003-04 provision cover of NPA is 57.04%

and increased in 2004-05. It decreased from 2005-06 to 2007-08.

State Bank of Patiala

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

GROSS NPA(%) 1.82 1.65 1.38 2.14 1.42

NET NPA(%) 1.35 1.23 0.99 0.83 0.6

0

0.5

1

1.5

2

2.5

2003-04

2004-05

2005-06

2006-07

2007-08

GROSS NPA(%)

NET NPA(%)

Interpretation: Above graph shows that the gross NPA of SBP is decreased from

2003-04 to 2005-06,increased in 2006-07 and again decreased in 2007-08. The net NPA

decreased from 2003-04 to 2007-08.

FINDINGS

1. REASON OF NPA IN BANK :-

Default by customer

Non-inspection of borrower

Lack of expertise

Imbalance of inventories

Poor credit collection

Lack of trained staff

Lack of commitment to recovery

Change in consumer preference

2 IMPACT OF NPA ON BANK

Govt. Policies

Impact of profitability

Liquidity

Impact on outlook of Banker to wards credit delivery

Impact of productivity

RECOMMANDATIONS

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.

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.

LIMITATION OF STUDY

Shortage of time :-

.Time is very short for research ,so that is very difficult can get the knowledge 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

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. 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 selectionof right borrowers, viable economic activity, adequate

finance and timely disbursement, correct and use of funds and timely recovery f loans is

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

NPAs.

BIBLIOGRAPHY

1. Finance India, September 2005 pp-957-961

2. Charted Financial Analysis, October 2005 pp-64

3. Charted Financial Analysis, October 2007 pp-31-31

4. Charted Financial Analysis, November 2007 pp-8-9

5. Charted Financial Analysis, August 2004 B.P. Dhaka pp-47-52

6. Business Today, May 2006 pp-34

7. Charted Financial Analysis, December 2005 pp-25-28

8. RBI Bulletin, July 1999 pp-34-36

9. RBI Bulletin, January 2004 pp-17-19

10. Alok Majumdar, NPAs: Recovery Blues, Treasury Management (Dec. 2000) pp 46-49

Books : KOTHARI C.R

Indian Financial System , VK publication ,pp-100-105

Website:

1. www.centurionbop.co.in/news/press_190505.html1

2. www.domainb.com/management/m_a/20060904_vijay_kalantri.html2

3. www.twincitiesbbs.com/php/subra/corporat.htm3

4. www.blonnet.com/2002/08/07/stories/2002080700050800.htm4

5. www.sbi.com

6. www.sbp.com