A Study on

NPA Management in SBI (State Bank of India)

A Project Report Submitted for the

Partial Fulfillment of the Requirement for the Award of the Degree

of

Master of Business Administration (MBA)

Supervised By Submitted By

DR. B.D. Mishra Meenakshi Dhirwani

(Associate Professor) Roll No. -13605023

2015

Department of Management studies

Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)

I

Certificate by the student

This is to certify that I, Meenakshi Dhirwani, a student of MBA Fourth Semester of the

batch 2013-15 (Roll No. 13605023) have carried out a project entitled “NPA Management

in SBI” under the supervision of Dr. B.D. Mishra (Associate Professor) in the Department

of Management Studies, Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G). This is an original

work carried out by me and the report has not been submitted to any other University for the

award of any degree of diploma.

Date: 13/ 5 /2015 Meenakshi Dhirwani

Place: Bilaspur MBA IVth Semester

Batch:- 2013-15

Roll No.:- 13605023

II

Certificate by the supervisor

This is to certify that Ms. Meenakshi Dhirwani, a student of MBA fourth semester of the

2013- 15 batch (Roll No. 13605023) has carried out a project “NPA Management in SBI”

under my supervision and guidance. It is also certified that the student has compiled with all

the guidelines designed for the project of report. To the best of my knowledge this report is

an authentic record of the work carried out by the student and it is considered fit for being

referred to evaluation.

Date: 13/ 5 /2015 Dr. B.D. Mishra

Place: Bilaspur (Associate professor)

Department of Management Studies

Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)

III

COPY OF SYNOPSIS AS APPROVED BY THE

SUPERVISOR

TITLE:-A STUDY OF NPA MANAGEMENT IN SBI

OBJECTIVES:-

1. To understand what is non performing Assets and what are the underlying reasons for the

emergence of the NPA's

2. To study the position of NPA in SBI group

3. To understand the impact of NPA on strategic banking whole

4. To know the reason for an Asset becoming NPA

5. To suggest measures to reduce NPA

6. To study the methods adopted by the RBI to look after NPA management

7. To study why banks and financial institutions are facing problems of swelling NPAs even

after the passing of the act.

SIGNIFICANCE OF THE STUDY

The main aim of any person is the utilization of money in the best manner since the India is

country where more than half of population has problem of running the family in the most

efficient manner. However Indian people faced large number of problems till the

development of full- fledged banking sector. The Indian banking sector came into the

developing nature mostly after 1991 government policy. The banking sector has really helped

the Indian people to utilize the single money in the best manner as they want. The banks not

only accept the deposits of the people but also provide them credit facility for their

development. Indian banking sector has the nation in developing the business and services

sectors. But recently the banks are facing the problem of credit risk. It is found that many

general people and business people borrow from the banks but due to some genuine of other

reasons are not able to repay back is known as the non- performing assets. Many banks are

facing the problem of NPA which hampers the business of banks. Due to NPAs the income of

the banks is reduced and the banks have to make large number of the provision that would

IV

curtail the profit of the banks and due to that the financial performance of the bank would not

show good results.

The main aim behind making this report is to know how SBI is operating its business and

how NPAs play its role to the operations of the SBI bank. My study is also focusing upon

existing system in India to solve the problem of NPAs.

REASERCH METHODOLOGY

The key element of our methodology are as follow:-

1.Sample size:- the total sample size was 25. The respondent was bank members, especially

the bank manager, loan manager, the credit managers and the officers in charge of recovery

department.

2. Selection of the sample:-convenience sampling is used.

3. Sources of Data collection:- the source of data is important consideration for any project.

The data used it:

Secondary data:-

Secondary data refers to the data which has already been generated and is available for use.

The data is taken from Reserve Bank of India website, SBI website and journals.

Primary data:-

The primary data is collected through questionnaire,

4. Period of the study:- the period of the study is done on the basis of availability of data.

The data are collected i.e. from 2003-04 to 2007-08.

5. Research design:- the research conducted is to analyze the NPA management in SBI

bank. The nature of research is exploratory as well as diagnostic. This study is based on the

discussions conducted with officials of the bank. The various data provided by them, the RBI

V

circulars, journal, magazines, data from internet will be studied and interpretation made

thereof.

6. secondary information is obtained by the medium of internet, books and the journals of

various Management schools and the government web portals.

CHAPTER PLAN

1. Introduction

2. Company profile

3. NPA management

4. Data analysis and interpretation

5. Findings, conclusion and suggestion.

VI

ACKNOWLEDGEMENT

On the very outset of this report, I would like to extend my sincere & heartfelt obligation

towards all the personages who have helped me in this endeavor. Without their active

guidance, help, cooperation & encouragement, I would not have made headway in the

project.

I am extremely thankful and pay my gratitude to my faculty guide Dr. B.D. Mishra for his

valuable guidance and support on this project in its presently.

I am extremely indebted to Dr. L.P. Pateriya sir for conscientious guidance and

encouragement to accomplish this assignment.

I extend my gratitude to Department of Management Studies, GGV, Bilaspur (C.G.) for

giving me this opportunity.

I also acknowledge with a deep sense of reverence, my gratitude towards my parents and

member of my family, who has always supported me morally as well as economically. At last

but not the least gratitude goes to all my friends who directly or indirectly helped me to

complete this project report

Any omission in this brief acknowledgement does not mean lack of gratitude.

Meenakshi Dhirwani

MBA IVthSemester

VII

PREFACE

Master of business administration of finance is course which combines with theory and its

application as its contents of study in the field of management as a part of this course every

aspirant has to submit a major project report.

Granting of credit facilities for economic activities is the primary task of banking. Apart from

raising resources through fresh deposits, borrowings, etc. recycling of fund received bank

from borrowers constitutes a major part of funding credit dispensation activities. Non-

recovery of installment as also interest on the loan portfolio negates the effectiveness of this

process of the credit cycle. Non- recovery also affects the profitability of banks besides being

required to maintain more owned funds by way of capital and creation of reserves and

provision to act as cushion for the loan losses. Avoidance of loan losses is one of the pre-

occupation of management of banks. While complete elimination of such losses is not

possible, bank management aim to keep the losses at a low level. In fact, it is the level of non-

performing advances, which, to a great extent, widespread repercussions. To avoid shock

waves affecting the system, the salvaging exercise is done by the Government or by the

industry on the behest of Government/ central bank of the country putting pressure on the

exchequer.

This project aims at providing overall view on the existence of NPAs, their treatment, the

ways at resolving this issue and also a few reports on the recent developments in this field. If

this report will be fruitful to any organization by any means, we will consider our work

worthwhile.

Date: 13/5/2015 Meenakshi Dhirwani

Place- Bilaspur M.B.A IVth Semester

VIII

LIST O TABLES AND CHARTS

TABLE

NO.

CONTENTS PAGE

NO.

4.1

TOTAL ASSET

60

4.2

GROSS NPA RATIO

61

4.3

NET NPA RATIO

63

4.4

TABLE OF ADVANCES AND GROSS NPA

64

4.5

CAPITAL ADEQUACY RATIO

65

4.6

PROVISION RATIO

66

4.7

WHAT ISNPA?

68

4.8

PERCENTGE OF NPA

69

4.9

TREND OF NPA

70

4.10

CAUSES OF NPA

71

4.11

STEPS TO BE TAKEN

72

4.12

METHOD OF MEASUREMENT OF NPA

74

4.13

MEASURE FOR RECOVERY OF NPA

75

4.14

RESPONSIBLE FOR NON-RECOVERY OF OUT STNDING

CREDIT

76

4.15

APPOINMENT MADE FOR REALIZING MONEY

77

4.16

LAW ACTS AS A STUMBLING BLOCK

78

4.17

TIME TAKEN TO RECOVER MONEY

79

4. 18

GOVERNMENT POLICIES RESPONSIBLE FOR NPA

80

4.19

CATETGORY FOR WHICH NPA IS LARGELY OBSERVED

81

4.20

POLITICAL INTERFERANCE AFFECTS NPA

82

IX

4.21 OUT OF COURT SETTLEMENT 83

4.22

DEVELOPING A TENDENCY OF DELIBERATE ATTEMPT

OF

DEFAULT AMONG BORROWERS

84

4.22

ADEQUACY OF CREDIT MONITORING SYSTEM

85

4.23

NECESSITY OF IMPROVEMENT

86

4.24

APPOINTMENT OF EXTERNAL RECOVERY AGENT

87

4.25

DELAY IN LEGAL PROCEDURES CREATE DIFFICULTY IN

RECOVERY

88

4.26

CASH INCENTIVE SCHEME

89

4.27

SATISFACTION FROM PRESENT INCENTIVE SCHEME

90

4.28

PROGRESS OF NPA

91

4.29

SIMILAR RECOVERY STRATEGY

92

4.30

STRATEGIE, HELPFUL IN REDUCING NPA

93

X

CONTENTS

S. NO PARTICULARS PAGE NO.

1. CERTIFICATE BY THE STUDENT I

2. CERTIFICATE BY THE SUPERVISOR II

3. COPY OF SYNOPSIS AS APPROVED BY THE SUPERVISOR III-V

4. PREFACE VI

5. ACKNOWLEDGEMENT VII

6. LIST OF TABLES AND CHARTS VIII- IX

7. EXECUTIVE SUMMARY 1

8. CHAPTER-1 INTRODUCTION 2- 7

1.1 NPA IN INDIAN BANK- CURRENT SCENERIO

1.2 OBJECTIVES OF THE PROJECT

1.3 SIGNIFICANCE OF THE STUDY

1.4 RESEARCH PROBLEM

1.5 RESEARCH METHODOLOGY

1.6 LIMITATIONS OF THE STUDY

1.7 CHAPTER PLAN

9. CHAPTER-2 BANKING INDUSTRY IN INDIA AND SBI 8- 30

2.1 INTRODUCTION OF BANKING SYSTEM IN INDIA

2.2 HISTORY OF INDIAN BANKING

2.3 THE INDIAN BANKING SYSTEM

2.4 THE STRUCTURE OF INDIAN BANKING

XI

2.5 BANKING DIVISIONS

2.6 SWOT ANALYSIS

2.7 IMPORTANCE OF BANKING SECTOR IN GROWING ECONOMY

2.8 EMERGING SCENERIO IN THE BANKING SECTOR

2.9 CONCERN

2.10 INTRODUCTION OF SBI

2.11 ABOUT LOGO

2.12 MISSION, VISSION AND VALUES

2.13 BOARD OF DIRECTORS

2.14 PRODUCTS AND SERVICES

10. CHAPTER-3 NPA MANAGEMENT 31- 59

3.1 MEANING OF NPA

3.2 INCOME RECOGNITION- POLICY

3.3 ASSET CLASSIFICATION

3.4 SALE OF NPA TO OTHER BANK

3.5 TYPES OF NPA

3.6 REASONSOF AN ACCOUNT BECOMING NPA

3.7 IMPACT OF NPA ON BANKS

3.8 EARLY SYMPTOMS

3.9 PREVENTIVE MEASURES OF NPA

3.10 GUIDELINES BY RBI

11. CHAPTER-4 DATA ANALYSIS AND INTERPRETATION 60- 100

4.1 RATIO ANALYSIS

XII

4.2 ANALYSIS BASED ON QUESTIONNAIRE

12. CHAPTER-5 FINDINGS, CONCLUSION AND SUGGESTION 101- 105

13. ANNEXURE 106- 111

14. BIBLIOGRAPHY 112

1

EXECUTIVE SUMMARY

The most important problem that the Indian banks are facing is the problem of their NPAs. It

is only since a couple of years that this particular aspect has been given so much importance.

The banks has to overcome these difficulty properly in order to effectively counter the

competition faced by the foreign banks. With the framing of law as per international

standards and setting up of Debt recovery tribunal we can say that steps have been taken in

this direction.

SARFAESI ACT 2002 (Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act) gave the banks the much needed teeth to curb the

menace of NPA’s. the non- performing assets (NPAs) of banks have at last begun shrinking.

As reported from surveys, it is understood that there has been substantial improvement in

non- performing assets and this has been because of several measures such as formation of

asset reconstruction companies, debt restructuring norms, securitization, provisioning norms

and prudential norms for income recognition. The problem is no doubt about recovery

management where the objective is to find out about the reasons behind NPAs and to create

networks for recovery.

An explorative study was adopted to achieve the objectives of the study. The major limitation

of the study was the lack of time. Even then, maximum care has been taken to arrive at

appropriate conclusion. The method adopted for collection of data was personal interview

with the bank officials and observation. It was also sourced from secondary data. After

collecting data from the respective sources, analysis and interpretation of data has been made.

Based on the findings, logical conclusion are drawn, and further, suitable suggestions and

recommendation are brought out. The entire project report is presented in the form of a report

using chapter scheme, developed logically and sequentially from ‘introduction’ to

‘bibliography’.

2

CHAPTER - 1

3

1.1 NPA IN INDIAN BANK- CURRENT SCENERIO

Non- performing assets (NPAs) are the smoking gun threatening the very stability of Indian

banks. NPAs wreck a bank’s profitability both through a loss of interest income and write-

off of the principal loan amount itself.

According to economic survey:- During 2012-13, the deteriorating asset quality of the

banking sector emerged as a major concern, with gross NPAs ( non-performing assets ) of

banks registering a sharp increase...Growth of NPA is a cause for concern," the Survey tabled

in Parliament by Finance Minister ArunJaitley said. The bad loans of public sector banks

were at 4.4 per cent in March 2014 compared with 2.09 per cent in 2008-09, it said, adding,

the gross NPA increased by almost four times from March 2010 (Rs 59,972 crore) to March

2014 (Rs 2,04,249 crore).

Increase in NPAs of banks is mainly accounted forby switchover to system-based

identification of NPAs by PSBs (public sector banks), slowdown of economic growth, and

aggressive lending bybanks in the past, especially during good times, it said.Overall NPAs or

bad loans of the banks, includingprivate sector lenders, increased from 2.36 percent to 3.90

per cent in March 2014. Increase was sharp in case of infrastructure with NPAs rising from

3.23 per cent to 8.22 per cent, it said. Infrastructure, iron and steel, textiles, aviation and

mining are five main sector that are stressed.

"The next wave of infrastructure financing will require a capable bond market." Despite, asset

quality deteriorating, the survey said the capital positions of Indian banks, including that of

public sector, remained strong and above the stipulated minimum.Highlighting challenges

and outlook, the Surveysaid financial markets continue to suffer from illiquidity and a major

objective should be to develop bond-currency derivative (BCD) nexus to equity market

quality levels.

4

1.2 OBJECTIVES OF THE STUDY

1. To understand what is non performing Assets and what are the underlying reasons for

the emergence of the NPA's

2. To study the position of NPA in SBI group

3. To understand the impact of NPA on strategic banking whole

4. To know the reason for an Asset becoming NPA

5. To suggest measures to reduce NPA

6. To study the methods adopted by the RBI to look after NPA management

7. To study why banks and financial institutions are facing problems of swelling NPAs

even after the passing of the act.

1.3 SIGNIFICANCE OF THE STUDY

The main aim of any person is the utilization of money in the best manner since the India is

country where more than half of population has problem of running the family in the most

efficient manner. However Indian people faced large number of problems till the

development of full- fledged banking sector. The Indian banking sector came into the

developing nature mostly after 1991 government policy. The banking sector has really helped

the Indian people to utilize the single money in the best manner as they want. The banks not

only accept the deposits of the people but also provide them credit facility for their

development. Indian banking sector has the nation in developing the business and services

sectors. But recently the banks are facing the problem of credit risk. It is found that many

general people and business people borrow from the banks but due to some genuine of other

reasons are not able to repay back is known as the non- performing assets. Many banks are

facing the problem of NPA which hampers the business of banks. Due to NPAs the income of

the banks is reduced and the banks have to make large number of the provision that would

curtail the profit of the banks and due to that the financial performance of the bank would not

show good results.

5

The main aim behind making this report is to know how SBI is operating its business and

how NPAs play its role to the operations of the SBI bank. My study is also focusing upon

existing system in India to solve the problem of NPAs.

1.4 REASEARCH PROBLEM

Indian banking industry, which was in glory phase once upon a time, has been facing a lots of

challenges on non- performing assets at present scenario. Many banks have kept their NPAs

under the control but some banks are not able to control their NPA levels. They are facing

lots of problems there can be various reasons behind this NPA. Non- performing assets has

been hitting the profitability of the banks or it can be said that due to NPA, the profitability of

the banks are going down day by day. The subsidiary for this is the functioning of Debt

Recovery Tribunal (DRT) which is a judiciary for the bank for recovery amount from the

default customers. These can be considered as a research problem based on which the

information is collected, the object is measured and the data is analyzed and interpreted.

1.5 RESEARCH PROBLEM

The key element of our methodology are as follow:-

1. Sample size:- the total sample size was 25. The respondent was bank members, especially

the bank manager, loan manager, the credit managers and the

officers in charge of recovery department.

2. Selection of the sample:-convenience sampling is used.

3. Sources of Data collection:- the source of data is important consideration for any project.

The data used it:

6

Secondary data:-

Secondary data refers to the data which has already been generated and is available for use.

The data is taken from Reserve Bank of India website, SBI website and journals.

Primary data:-

The primary data is collected through questionnaire,

4. Period of the study:- the period of the study is done on the basis of availability of data.

The data are collected i.e. from 2003-04 to 2007-08.

5. Research design:- the research conducted is to analyze the NPA management in SBI

bank. The nature of research is exploratory as well as diagnostic. This study is based on the

discussions conducted with officials of the bank. The various data provided by them, the RBI

circulars, journal, magazines, data from internet will be studied and interpretation made

thereof.

6. Secondary information is obtained by the medium of internet, books and the journals.

1.6 LIMITATIONS

The project was a very good learning experience but on the other side it was full of

challenging and difficulties. The most difficult part of the project was the interpretation with

the members of the banks with the purpose to collect feedback. The major constraints faced

can be listed as follow-

It was not possible to collect the data from all the branches and members of the bank

due to the shortage of time data.

Convincing respondent for filling up of the questionnaire was challenging.

The secondary data was available for 5 years only.

The conclusion of the study are based on the responces of the banks and secondary

information. Thus, some amount of subjectivity might remain.

7

1.7 CHAPTER PLAN

1. Introduction

2. Company profile

3. NPA management

4. Data analysis and interpretation

5. Findings, conclusion and suggestion.

8

CHAPTER- 2

9

BANKING INDUSTRY IN INDIA

2.1 INTRODUCTION

A bank is a financial institution that provides banking and other financial services to their

customers. A bank is generally understood as an institution which provides fundamental

banking services such as accepting deposits and providing loans. There are also non banking

institutions that provide certain banking services without meeting the legal definition of a

bank. Banks are a subset of the financial services industry.

A banking system also referred as a system provides by the bank which offers cash

management services for customers, reporting the transactions of their accounts and

portfolios, throughout the day. The banking system in India should not only be hassle free but

it should be able to meet the new challenges posed by the technology and any other external

and internal factors. For the past three decades, India’s banking system has several

outstanding achievements to its credit. The banks are the main participants of the financial

system in India. The banking sector offers several facilities and opportunities to their

customers. All the banks safeguard the money and valuables and provide loans, credit, and

payment services, such as checking accounts, money orders, and cashier’s cheques. The

banks also offer investment and insurance products. As a variety of models for cooperation

and integration among finance industries have emerged, some of the traditional distinctions

between banks, insurance companies and securities firms have diminished. In spite of these

changes, banks continue to maintain and perform their primary role- accepting deposits and

lending funds from these deposits.

2.2 History:Banking in India has its origin as carry as the Vedic period. It is believed that

the transition from money lending to banking must have occurred even before Manu, the

great Hindu jurist, who has devoted a section of his work to deposits and advances and laid

down rules relating to the interest. During the mogal period, the indigenous bankers played a

very important role in lending money and financing foreign trade and commerce. During the

days of East India Company, it was to turn of the agency houses top carry on the banking

business. The general bank of India was the first joint stock bank to be established in the year

10

1786.The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank

of Hindustan is reported to have continued till 1906, while the other two failed in the

meantime. In the first half of the 19th Century the East India Company established three

banks; The Bank of Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras

in 1843.These three banks also known as presidency banks and were independent units and

functioned well. These three banks were amalgamated in 1920 and The Imperial Bank of

India was established on the 27th Jan 1921, with the passing of the SBI Act in 1955, the

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

Reserve Bank which is the Central Bank was created in 1935 by passing of RBI Act 1934, in

the wake of swadeshi movement, a number of banks with Indian Management were

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

Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The Central Bank of India Ltd .On July 19th

1969, 14 Major Banks of the country were nationalized and in 15th April 1980 six more

commercial private sector banks were also taken over by the government. The Indian

Banking industry, which is governed by the Banking Regulation Act of India 1949, can be

broadly classified into two major categories, non-scheduled banks and scheduled banks.

Scheduled Banks comprise commercial banks and the co-operative banks.

The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969

and resulted in a shift from class banking to mass banking. This in turn resulted in the

significant growth in the geographical coverage of banks. Every bank had to earmark a min

percentage of their loan portfolio to sectors identified as “priority sectors” the manufacturing

sector also grew during the 1970’s in protected environments and the banking sector was a

critical source. The next wave of reforms saw the nationalization of 6 more commercial

banks in 1980 since then the number of scheduled commercial banks increased four- fold and

the number of bank branches increased to eight fold.

After the second phase of financial sector reforms and liberalization of the sector in the early

nineties. The PSB’s found it extremely difficult to complete with the new private sector

banksand the foreign banks. The new private sector first made their appearance after the

guidelines permitting them were issued in January 1993.

11

2.3 The Indian Banking System:

Banking in our country is already witnessing the sea changes as the banking sector seeks new

technology and its applications. The best port is that the benefits are beginning to reach the

masses. Earlier this domain was the preserve of very few organizations. Foreign banks with

heavy investments in technology started giving some “Out of the world” customer services.

But, such services were available only to selected few- the very large account holders. Then

came the liberalization and with it a multitude of private banks, a large segment of the urban

population now requires minimal time and space for its banking needs.

Automated teller machines or popularly known as ATM are the three alphabets that have

changed the concept of banking like nothing before. Instead of tellers handling your own

cash, today there are efficient machines that don’t talk but just dispense cash. Under the

Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled

banks. The scheduled banks are those, which are entered in the Second Schedule of RBI Act,

1934. Such banks are those, which have paid- up capital and reserves of an aggregate value of

not less then Rs.5 lacs and which satisfy RBI that their affairs are carried out in the interest of

their depositors. All commercial banks Indian and Foreign, regional rural banks and state co-

operative banks are Scheduled banks. Non Scheduled banks are those, which have not been

included in the Second Schedule of the RBI Act, 1934.

The organized banking system in India can be broadly classified into three categories: (i)

Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative banks. The Reserve

Bank of India is the supreme monetary and banking authority in the country and has the

responsibility to control the banking system in the country. It keeps the reserves of all

commercial banks and hence is known as the “Reserve Bank”.

12

2.4 The Structure of Indian Banking:

The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of

the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are

again split into old banks and new banks.

2.5 BANKING DIVISIONS

Retail banking – loans to individuals ( auto loan, housing loan, educational loan and

other personal loan) or small business.

Wholesale banking – loans to mid and large corporate ( working capital loans, project

finance, team loans, lease finance)

RBI

unscheduled scheduled

cooperative commercial

RRB foriegn private public Rural Urban

13

Treasury operations – investment in equity, derivatives, commodities, mutual funds,

bonds, trading and forex operations.

Other banking businesses – merchant banking, leasing business, hire purchase,

syndication services, etc.

2.6 SWOT ANALYSIS

STRENGHTS

Valuable contribution to

GDP

Regulatory environment

Government support

WEAKNESSES

Increasing NPA

Low penetration

Lack of product

differentiation

OPURTUNITIES

Modern technology

Untapped rural market

Globalization

THREATS

Unorganized money

lending market

Customer

dissatisfaction

Rise of monopolistic

structures

14

2.7 IMPORTANCE OF BANKING SECTOR IN A GROWING

ECONOMY

In the recent times when the service industry is attaining greater importance compared to

manufacturing industry, banking has evolved as a prime sector providing financial services to

growing needs of the economy.

Banking industry has undergone a paradigm shift from providing ordinary banking services

in the past to providing such complicated and crucial services like, merchant banking,

housing finance, bill discounting etc. This sector has become more active with the entry of

new players like private and foreign banks. It has also evolved as a prime builder of the

economy by understanding the needs of the same and encouraging the development by way

of giving loans, providing infrastructure facilities and financing activities for the promotion

of entrepreneurs and other business establishments.

For a fast developing economy like ours, presence of a sound financial system to mobilize

and allocate savings of the public towards productive activities is necessary. Commercial

banks play a crucial role in this regard.

The Banking sector in recent years has incorporated new products in their businesses, which

are helpful for growth. The banks have started to provide fee-based services like, treasury

operations, managing derivatives, options and futures, acting as bankers to the industry

during the public offering, providing consultancy services, acting as an intermediary between

two-business entities etc.At the same time, the banks are reaching

out to other end of customer requirements like, insurance premium payment, tax payment etc.

It has changed itself from transaction type of banking into relationship banking, where you

find friendly and quick service suited to your needs. This is possible with understanding the

customer needs their value to the bank, etc. This is possible with the help of well-organized

staff, computer based network for speedy transactions, products like credit card, debit card,

health card, ATM etc. These are the present trend of services. The customers at present ask

for convenience of banking transactions, like 24 hours banking, where they want to utilize the

services wheneverthere is a need. The relationship banking plays a major and important role

15

in growth, because the customers now have enough number of opportunities, and they choose

according to their satisfaction of responses and recognition they get. So the banks have to

play cautiously, else they may lose out the place in the market due to competition, where

slightest of opportunities are captured fast.

Another major role played by banks is in transnational business, transactions and networking.

Many leading Indian banks have spread out their network to other countries, which help in

currency transfer and earn exchange over it.

These banks play a major role in commercial import and export business, between parties of

two countries. This foreign presence also helps in bringing in the international standards of

operations and ideas. The liberalization policy of 1991 has allowed many foreign banks to

enter the Indian market and establish their business. This has helped large amount of foreign

capital inflow & increase our Foreign exchange reserve.

Another emerging change happening all over the banking industry is consolidation through

mergers and acquisitions. This helps the banks in strengthening their empire and expanding

their network of business in terms of volume and effectiveness.

2.8 EMERGING SCENARIO IN THE BANKING SECTOR

The Indian banking system has passed through three distinct phases from the time of

inception. The first was being the era of character banking, where you were recognized as a

credible depositor or borrower of the system. This era come to an end in the sixties. The

second phase was the social banking. Nowhere in the democratic developed world, was

banking or the service industry nationalized. But this was practiced in India. Those were the

days when bankers has no clue whatsoever as to how to determine the scale of finance to

industry. The third era of banking which is in existence today is called the era of Prudential

Banking. The main focus of this phase is on prudential norms accepted internationally

16

SBI Group-

The Bank of Bengal, which later became the State Bank of India. State Bank of India with its

seven associate banks commands the largest banking resources in India.

Nationalization-

The next significant milestone in Indian Banking happened in late 1960s when the then Indira

Gandhi government nationalized on 19th July 1949, 14 major commercial Indian banks

followed by nationalization of 6 more commercial Indian banks in 1980.

The stated reason for the nationalization was more control of credit delivery. After this, until

1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu

growth of the Indian economy .After the amalgamation of New Bank of India with Punjab

National Bank, currently there are 19 nationalized banks in India.

Liberalization-

In the early 1990’s the then Narasimharao government embarked a policy of liberalization

and gave licences to a small number of private banks, which came to be known as New

generation tech-savvy banks, which included banks like ICICI and HDFC. This move along

with the rapid growth of the economy of India, kick started the banking sector in India, which

has seen rapid growth with strong contribution from all the sectors of banks, namely

Government banks, Private Banks and Foreign banks. However there had been a few hiccups

for these new banks with many either being taken over like Global Trust Bank while others

like Centurion Bank have found the going tough.

The next stage for the Indian Banking has been set up with the proposed relaxation in the

norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given

voting rights which could exceed the present cap of 10%, at pesent it has gone up to 49%

with some restrictions.

17

The new policy shook the Banking sector in India completely. Bankers, till this time, were

used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new

wave ushered in a modern outlook and tech-savvy methods of working for traditional

banks.All this led to the retail boom in India. People not just demanded more from their

banks but also received more.

2.9 CONCERN

Indian economy is one of the fastest growing economies of the world. The economy with its

vital geography and demography has specific requirements in order to traverse to the next

orbit and attain its full potential. Banks enable to cope with finance requirement for few

industries such as infrastructure, housing and real estate etc. India’s infrastructural financing

needs are not only huge but also vital. Traditionally banks have been the major source of

infrastructure financing and their exposure to infrastructure is already high at 17 per cent.

There are several major concerns which as noted below:

Intensifying competition

Indian banking industry has undergone qualitative changes due to banking sector reforms.

Indian banking sector, which is dominated by state- controlled, has facing formidable

challenges. Due to this new emerging competition, Indian banks, especially PSBs are trying

their best to improve their performance and preparing to compete in the emerging global

market. New private sector banks and foreign banks have more customer- centric policies,

high quality services, new attractive schemes and computerized branches. All these services

attracted more and more customers to their banks. In this context, there is a need to examine

the efficiency of public sector banks operating in India. Mainly, competition can intensify

and banks which is efficient. The transaction cost of customers could come down and a bank

which is efficient, nimble and customer focused would always be able to do better than

others. As a result of globalization, many new banks have the Indian banking industry,

further intensifying the competition.

18

Increasing NPA

The asset quality of banks is one of the most important indicator of their financial health. It

also reflects the efficiency of banks’ credit risk management and the recovery environment.

The Indian banks have shown very good performance as far as the financial operations are

concerned. But non- performing assets (NPA) has caused some concerns. Despite write- offs

gross NPAs have continued to rise significantly. The new accretion to NPAs has been much

faster than the reduction in existing NPAs due to lower levels of up gradation and recoveries.

To improve the banks’ ability their non –performing assets (NPAs) and restructured accounts

in an effective manner and considering that almost all branches of banks have been fully

computrized, the Reserve bank of India in its monetary policy statement 2012- 13 proposed

the following measures:

• To mandate banks to put in place a robust mechanism for early detection of signs of

distress, and measures, including prompt restructuring in the case of all viable accounts

wherever required, with view to presenting the economic value such accounts: and

• To mandate banks to have proper system generated- wise data on their NPA accounts,

write offs, compromise settlement, recovery and restructured accounts.

Despite these concerns, it is projected that the Indian banking industry will grow through

leaps and bounds looking at the huge growth potential of Indian economy. High population

base of India, rising disposable income, etc. will drive the growth og Indian banking industry

in the long- term.

COMPANY PROFILE

2.10 INTRODUCTIONSTATE BANK OF INDIA

Not only many financial institution in the world today can claim the antiquity and majesty of

the State Bank Of India founded nearly two centuries ago with primarily intent of imparting

stability to the money market, the bank from its inception mobilized funds for supporting

both the public credit of the companies governments in the three presidencies of British India

and the private credit of the European and India merchants from about 1860s when the Indian

19

economy book a significant leap forward under the impulse of quickened world

communications and ingenious method of industrial and agricultural production the Bank

became intimately in valued in the financing of practically and mining activity of the Sub-

Continent Although large European and Indian merchants and manufacturers were

undoubtedly thee principal beneficiaries, the small man never ignored loans as low as Rs.100

were disbursed in agricultural districts against glad ornaments. Added to these the bank till

the creation of the Reserve Bank in 1935 carried out numerous Central – Banking functions.

Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the

post depression exe. For instance – when business opportunities become extremely restricted,

rules laid down in the book of instructions were relined to ensure that good business did not

go post. Yet seldom did the bank contravenes its value as depart from sound banking

principles to retain as expand its business. An innovative array of office, unknown to the

world then, was devised in the form of branches, sub branches, treasury pay office, pay

office, sub pay office and out students to exploit the opportunities of an expanding economy.

New business strategy was also evaded way back in 1937 to render the best banking service

through prompt and courteous attention to customers.A highly efficient and experienced

management functioning in a well defined organizational structure did not take long to place

the bank an executed pedestal in the areas of business, profitability, internal discipline and

above all credibility A impeccable

financial status consistent maintenance of the lofty traditions if banking an observation of a

high standard of integrity in its operations helped the bank gain a pre- eminent status. No

wonders the administration for the bank was universal as key functionaries of India

successive finance minister of independent India Resource Bank of governors and

representatives of chamber of commercial showered economics on it.

Modern day management techniques were also very much evident in the good old days years

before corporate governance had become a puzzled the banks bound functioned with a high

degree of responsibility and concerns for the shareholders. An unbroken records of profits

and a fairly high rate of profit and fairly high rate of dividend all through ensured

20

satisfaction, prudential management and asset liability management not only protected the

interests of the Bank but also ensured that the obligations to customers were not met. The

traditions of the past continued to be upheld even to this day as the State Bank years itself to

meet the emerging challenges of the millennium.

2.11 ABOUT LOGO

THE PLACE TO

SHARE THE NEWS

...……

SHARE THE

VIEWS ……

Togetherness is the theme of this corporate loge of SBI where the world of banking services

meet the ever changing customers needs and establishes a link that is like a circle, it indicates

complete services towards customers. The logo also denotes a bank that it has prepared to do

anything to go to any lengths, for customers.

The blue pointer represent the philosophy of the bank that is always looking for the growth

and newer, more challenging, more promising direction. The key hole indicates safety and

security.

21

2.12 MISSION, VISION AND VALUES

MISSION STATEMENT:

To retain the Bank’s position as premiere Indian Financial Service Group, with world class

standards and significant global committed to excellence in customer, shareholder and

employee satisfaction and to play a leading role in expanding and diversifying financial

service sectors while containing emphasis on its development banking rule.

VISION STATEMENT:

Premier Indian Financial Service Group with prospective world-class

Standards of efficiency and professionalism and institutional values.

Retain its position in the country as pioneers in Development banking.

Maximize the shareholders value through high-sustained earnings per

Share.

An institution with cultural mutual care and commitment, satisfying and

Good work environment and continues learning opportunities.

VALUES:

Excellence in customer service

Profit orientation

Belonging commitment to Bank

Fairness in all dealings and relations

Risk taking and innovative

22

Team playing

Learning and renewal

Integrity

Transparency and Discipline in policies and systems.

2.13 BOARD OF DIRECTORS

List of directors on the central board of state bank of India (As on 1st December, 2014)

S. No Name Designation Under section

of

SBI Act 1955

1 Smt. Arundhati Bhattacharya Chairman 19(a)

2 Shri. P. Pradeep Kumar Managing director 19(b)

3 Shri. B. Sriram Managing director 19(b)

4 Shri. V.G Kannan Managing director 19(b)

5 Shri. SanjivMalhotra Director 19(c)

6 Shri. Sunil Mehta Director 19(c)

7 Shri. M. D. mallya Director 19(c)

8 Shri. Deepak I. Amin Director 19(c)

9 Shri. S. K Mukherjee Officer employee

director

19(cb)

10 Dr. Rajiv Kumar Director 19(d)

11 Shri. HarichandraBahadursingh Director 19(d)

12 Shri. TribhuwanNathchaturvedi Director 19(d)

13 Dr. HasmukhAdhia Director 19(e)

14 Dr. Urjit R. Patel Director 19(f)

23

2.14 PRODUCTS AND SERVICES

PRODUCTS:

State Bank Of India renders varieties of services to customers through the following

products:

Personal Loan Product:

SBI Term Deposits

SBI Recurring Deposits

SBI Housing Loan

SBI Car Loan

SBI Educational Loan

SBI Personal Loan

SBI Loan For Pensioners

Loan Against Mortgage Of Property

Loan Against Shares & Debentures

Rent Plus Scheme

Medi-Plus Scheme

Rates Of Interest

SBI Housing loan

SBI Housing loan or Mortgage Loan schemes are designed to make it simple for you to make

a choice at least as far as financing goes!

'SBI-Home Loans'

24

features:

No cap on maximum loan amount for purchase/ construction of house/ flat

Option to club income of your spouse and children to compute eligible loan amount

Provision to club expected rent accruals from property proposed to compute eligible

loan amount

Provision to finance cost of furnishing and consumer durables as part of project cost

Repayment permitted upto 70 years of age

Free personal accident insurance cover

Optional Group Insurance from SBI Life at concessional premium (Upfront premium

financed as part of project cost)

Interest applied on daily diminishing balance basis

'Plus' schemes which offer attractive packages with concessional interest rates to

Govt. Employees, Teachers, Employees in Public Sector Oil Companies.

Special scheme to grant loans to finance Earnest Money Deposits to be paid to Urban

Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/

flat

No Administrative Charges or application fee

Prepayment penalty is recovered only if the loan is pre-closed before half of the

original tenure (not recovered for bulk payments provided the loan is not closed)

Provision for downward refixation of EMI in respect of floating rate borrowers who

avail Housing Loans of Rs.5 lacs and above, to avail the benefit of downward revision

of interest rate by 1% or more

In-principle approval issued to give you flexibility while negotiating purchase of a

property

·Option to avail loan at the place of employment or at the place of construction

Attractive packages in respect of loans granted under tie-up with Central/ State

Governments/ PSUs/ reputed corporates and tie-up with reputed builders (Please

contact your nearest branch for details)

25

SERVICES:

DOMESTIC TREASURY

SBI VISHWA YATRA FOREIGN TRAVEL CARD

BROKING SERVICES

REVISED SERVICE CHARGES

ATM SERVICES

INTERNET BANKING

E-PAY

E-RAIL

RBIEFT

SAFE DEPOSIT LOCKER

GIFT CHEQUES

ATM SERVICES

STATE BANK NETWORKED ATM SERVICES

State Bank offers you the convenience of over 8000 ATMs in India, the largest network in

the country and continuing to expand fast! This means that you can transact free of cost at the

ATMs of State Bank Group (This includes the ATMs of State Bank of India as well as the

Associate Banks – namely, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State

Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra, and

State Bank of Travancore) and wholly owned subsidiary viz. SBI Commercial and

International Bank Ltd., using the State Bank ATM-cum-Debit (Cash Plus) card.

KINDS OF CARDS ACCEPTED AT STATE BANK ATMs

Besides State Bank ATM-Cum-Debit Card and State Bank International ATM-Cum-Debit

Cards following cards are also accepted at State Bank ATMs: -

1) State Bank Credit Card

26

2) ATM Cards issued by Banks under bilateral sharing viz. Andhra Bank,Axis Bank, Bank

of India, The Bank of Rajasthan Ltd., Canara Bank, Corporation Bank, Dena Bank, HDFC

Bank, Indian Bank, Indus Ind Bank, Punjab National Bank, UCO Bank and Union Bank of

India.

3) Cards issued by banks (other than banks under bilateral sharing) displaying Maestro,

Master Card, Cirrus, VISA and VISA Electron logos

4) All Debit/ Credit Cards issued by any bank outside India displaying Maestro, Master Card,

Cirrus, VISA and VISA Electron logos

Note: If you are a cardholder of bank other than State Bank Group, kindly contact your Bank

for the charges recoverable for usage of State Bank ATMs.

STATE BANK INTERNATIONAL ATM-CUM-DEBIT CARD

Eligibility:

All Saving Bank and Current Account holders having accounts with networked branches and

are:

18 years of age & above

Account type: Sole or Joint with “Either or Survivor” / “Anyone or Survivor”

NRE account holders are also eligible but NRO account holders are not.

27

Benefits:

Convenience to the customers traveling overseas

Can be used as Domestic ATM-cum-Debit Card

Available at a nominal joining fee of Rs. 200/-

Daily limit of US $ 1000 or equivalent at the ATM and US $ 1000 or equivalent at

Point of Sale (POS) terminal for debit transaction

Purchase Protection*up to Rs. 5000/- and Personal Accident cover*up to Rs.

2,00,000/-

Charges for usage abroad: Rs. 150+ Service Tax per cash withdrawal Rs. 15 + Service

Tax per enquiry.

State Bank ATM-cum-Debit (State Bank Cash plus) Card:

India’s largest bank is proud to offer you unparalleled convenience viz. State Bank ATM-

cum-Debit(Cash Plus) card. With this card, there is no need to carry cash in your wallet. You

can now withdraw cash and make purchases anytime you wish to with your ATM-cum-Debit

Card.

Get an ATM-cum-Debit card with which you can transact for FREE at any of over 8000

ATMs of State Bank Group within our country.

28

SBI GOLD INTERNATIONAL DEBIT CARD

E-PAY

Bill Payment at Online SBI (e-Pay) will let you to pay your Telephone, Mobile, Electricity,

Insurance and Credit Card bills electronically over our Online SBI website

E-RAIL

Book your Railways Ticket Online.

The facility has been launched wefIst September 2003 in association with IRCTC. The

scheme facilitates Booking of Railways Ticket Online.

The salient features of the scheme are as under:

All Internet banking customers can use the facility.

On giving payment option as SBI, the user will be redirected to onlinesbi.com. After

logging on to the site you will be displayed payment amount, TID No. and Railway

reference no.

. The ticket can be delivered or collected by the customer.

The user can collect the ticket personally at New Delhi reservation counter .

The Payment amount will include ticket fare including reservation charges,

courier charges and Bank Service fee of Rs 10/. The Bank service fee has

been waived unto 31st July 2006.

29

SAFE DEPOSIT LOCKER

For the safety of your valuables we offer our customers safe deposit vault or locker facilities

at a large number of our branches. There is a nominal annual charge, which depends on the

size of the locker and the centre in which the branch is located.

NRI HOME LOAN

SALIENTFEATURES

PURPOSE

Loans to NRIs & PIOs can be extended for the following purposes.

To purchase/construct a new house / flat

To repair, renovate or extend an existing house/flat

To purchase an existing house/flat

To purchase a plot for construction of a dwelling unit.

To purchase furnishings and consumer durables, as a part of the project cost

AGRICULTURE / RURAL

State Bank of India Caters to the needs of agriculturists and landless agricultural labourers

through a network of 6600 rural and semi-urban branches. here are 972 specialized branches

which have been set up in different parts of the country exclusively for the development of

agriculture through credit deployment. These branches include 427 Agricultural Development

Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which

cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad

catering to the needs of hitech commercial agricultural projects.

30

CHAPTER- 3

31

3.1 MEANING OF NPA

Non- performing asset means an asset or account of borrower, which has been classified by a

bank or financial institution as sub- standard, doubtful or loss asset, in accordance with the

directions or guidelines relating to asset classification issued by RBI.

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 agriculturepurposes

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. Accordingly with

effect from march 31, 2004, a non-perfoming asset (NPA) shell be a loan or an advance

where;

I. Interest and/or installment of principal remain overdue for a period of more than

90 days in respect of a term loan,

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

of an overdraft/ cash credit (OD/CC)

32

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

purchased and discounted,

IV. Interest and / or installement 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 purpose, and

V. Any amount to be recived remains overdue for a period of more than 90 days in

respect of other accounts.

3.2 INCOME RECOGNITION- POLICY

The policy of income recognition has to be objective and based on the record of

recovery. Internationally income from non-performing assets (NPA) is not recognised

on accrual basis but is booked as income only when it is actually received. Therefore,

the banks should not charge and take to income account interest on any NPA.

However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life

policies may be taken to income account on the due date, provided adequate margin is

available in the accounts.

If Government guaranteed advances become NPA, the interest on such advances

should not be taken to income account unless the interest has been realised.

If any advance, including bills purchased and discounted, become NPA as at the close

of any year, the entire interest accured and credited to income account in the past

periods, should be reversed or provided for if the same is not realized.

33

3.3 ASSET CLASSIFICATION

Assets are classified into following four categories:

Standard assets

Sub- standard assets

Doubtful assets

Loss assets

Standard Assets:- Standard assets are the ones in which the bank is receiving interest as

well as the principal amount of the loan regularly from the customer. Here it is also very

important that in this case the arrears of interest and the principal amount of loan does not

exceed 90 days at the end of financial year. If asset fails to be in category of standard asset

that is amount due more than 90 days then it is NPA and NPAs are further need to classify in

sub categories.

Provisioning norms:

From the year ending 31. 03. 2000, the banks should make a general provision of a

minimum of 0.40 percent on standard assets on global loan portfolio basis.

The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards standard assets need not be netted from gross advances but

shown seperately as ‘contingent provisions aginst standard assets’ under ‘other

liabilities and provisions- others’ in schedule 5 of the balance sheet.

Banks are required to classify non- performing assets further into the following three

categories based on the period for which the asset has remained non- performing and the

reasonability of the dues:

1) Sub- standard assets

2) Doubtful assets

3) Loss assets

34

Sub-standard Assets:-- With effect from 31 March 2005, a sub standard asset would be

one, which has remained NPA for a period less than or equal to 12 month. The following

features are exhibited by sub standard assets: the current net worth of the borrowers /

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

of the dues to the banks in full; and the asset has well-defined credit weaknesses that

jeopardise the liquidation of the debt and are characterised by the distinct possibility that the

banks will sustain some loss, if deficiencies are not corrected.

Provisioning norms: a general provision of 10% on total outstanding should be made

without making any allowance for DICGC/ECGC guarantee cover securities available.

Doubtful Assets:--A loan classified as doubtful has all the weaknesses inherent in assets

that were classified as sub-standard, with the added characteristic that the weaknesses make

collection or liquidation in full, – on the basis of currently known facts, conditions and values

– highly questionable and improbable.With effect from March 31, 2005, an asset would be

classified as doubtful if it remained in the sub-standard category for 12 months.

Provisioning norms:

100 percent 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.

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

rates ranging from 20 percent to 50 percent of the secured portion depending upon the

period for which the asset has remained doubtful:

Additional provisioning consequent upon the change in the definition of doubtful

assets effective from March 31, 2003 has to be made in phases as under:

1. As on31.03.2003, 50 percent of the additional provisioning requirement on the

assets which became doubtful on account of new norm of 18 months for transition

from sub-standard asset to doubtful category.

35

2. As on 31.03.2002, balance of the provisions not made during the previous year, in

addition to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning consequent upon the

reduction in the transition period from substandard to doubtful asset from 18 to 12

months over a four year period commencing from the year ending March 31, 2005,

with a minimum of 20 % each year.

LLoossss AAsssseettss::----A loss asset is one which considered uncollectible and of such little value that

its continuance as a bankable asset is not warranted- although there may be some salvage or

recovery value. Also, these assets would have been identified as ‘loss assets’ by the bank or

internal or external auditors or the RBI inspection but the amount would not have been

written-off wholly.

PPrroovviissiioonniinngg nnoorrmmss:: The entire asset should be written off. If the assets are permitted to

remain in the books for any reason, 100 percent of the outstanding should be provided for.

3.4 SALE OF NPA TO OTHER BANKS

A NPA is eligible for sale to other banks only if it has remained a NPA for at least

two years in the books of the selling bank.

The NPA must be held by the purchasing bank at least for a period of 15 months

before it is sold to other banbks but not to bank, which originally sold the NPA.

The NPA may be classified as standard in the books of the purchasing banbk for a

period of 90 days from date of purchase and therefore it would depend on the record

of recovery with refrence of cash flows estimated while purchasing.

The bank may purchase/ sell NPA only on without recourse basis.

If the sale is conducted below the net book value, the short fall should be debited to

P&L account and if it is higher, the excess provision will be utilized to meet the loss

on account of sale of other NPA.

36

3.5 TYPES OF NPA

A] Gross NPA

B] Net NPA

Gross NPA:Gross NPAs are the sum total of all loan assets that are classified as NPAs as

per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans

made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and

loss assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs

Gross Advances

Net NPA:Net NPAs are those type of NPAs in which the bank has deducted the provision

regarding NPAs. Net NPA shows the actual burdenof banks. Since in India, bank balance

sheets contain a huge amount of NPAs and the process of recovery and write off of loans is

very time consuming, the provisions the banks have to make against the NPAs according to

the central bank guidelines, are quite significant. That is why the difference between gross

and net NPA is quite high.

It can be calculated by following_

Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

37

3.6 REASONS FOR AN ACCOUNT BECOMING NPA:

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

1· 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.

2. 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.

3·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

38

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

4·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.

5·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.

6·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

1· Defective Lending process

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

39

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.

2· 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 computerized.

3· 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

40

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

external credit rating agencies. • Analyze 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 analyze the purpose of the loan. To ensure safety and liquidity, banks

should grant loan for productive purpose only. Bank should analyze the profitability,

viability, long term acceptability of the project while financing.

4· 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.

5· 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).

41

6· 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.

7· 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.

3.7 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

therefore. 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

forbanks. 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.

42

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

capitaladequacy.

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

43

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 Crores 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 size 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 nationalized 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 managed nationalized 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 currentfinancial

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.

44

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 itsnon-

interest expenses.

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

45

expansion through internal generations or by tapping the equity market, but have resorted to

II-Tier capital in the debt market orlooking 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 inentertaining

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

overconfidence). a tendencytowards 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 fundsand by

reducing the efficiency of banks employees. Cost of funds is increased becausedue to non-

availability of sufficient internal sources they have to rely on external sourcesto fulfill their

future financial requirements. Productivity of employees is also reducedbecause 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 thebranch staff would

46

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 anNPA

for the first time it adversely affects the spread by not contributing to the interestincome 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 margin

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 whereas 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 levelagency. 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.

47

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 NPAs 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 profitmargins 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.

48

3.8 EARLY SYMPTOMS

By which one can recognize a performing asset turning ti to non- performing asset four

categories of early symptoms

1. Financial

Non- payment of the very first installment in case of term loan.

Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in installment.

Irregularity of operations in the accounts.

Unpaid overdue bills.

Declining current ratio.

Payment which does not cover the interest and principal amount of that

installment.

While monitoring the accounts it is found that principal amount is diverted to

sister concern or parent company.

2. Operational and physical:

If information is received that the borrower has either initiated the process of

winding up or are not doing the business.

Overdue receivables.

Stock statement not submitted on time.

External non- controllable factor like natural calamities in the city where

borrower conduct his business.

Frequent changes in plan.

Nonpayment of wages.

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3. Attitudinal changes:

Use for personal comfort, stocks and shares by borrowers.

Avoidance of contact with bank.

Problem between partners.

4. Others:

Changes in government policies.

Death of borrowers.

Competition in the market.

3.9 PREVENTIVE MEASURES FOR NPA:

EEaarrllyy RReeccooggnniittiioonn ooff tthhee PPrroobblleemm::--

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too

late to retrieve the situation- both in terms of rehabilitation of the project and recovery of

bank’s dues. Identification of weakness in the very beginning that is : When the account starts

showing first signs of weakness regardless of the fact that it may not have become NPA, is

imperative. Assessment of the potential of revival may be done on the basis of a techno-

economic viability study. Restructuring should be attempted where, after an objective

assessment of the promoter’s intention, banks are convinced of a turnaround within a

scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to

facilitate winding up/ selling of the unit earlier, so asto recover whatever is possible through

legal means before the security position becomes worse.

IIddeennttiiffyyiinngg BBoorrrroowweerrss wwiitthh GGeennuuiinnee IInntteenntt::

Identifying borrowers with genuine intent from those who are non- serious with no

commitment or stake in revival is a challenge confronting bankers. Here the role of frontline

officials at the branch level is paramount as they are the ones who has intelligent inputs with

regard to promoters’ sincerity, and capability to achieve turnaround. Basedon this objective

50

assessment, banks should decide as quickly as possible whether it would be worthwhile to

commit additional finance.

In this regard banks may consider having “Special Investigation” of all financial transaction

or business transaction, books of account in order to ascertain real factors that contributed to

sickness of the borrower. Banks may have penal of technical experts with proven expertise

and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden

requirement of additional fund may be entertained at branch level, and for this purpose a

special limit to such type of cases should be decided. This will obviate the need to route the

additional funding through the controlling offices in deserving cases, and help avert many

accounts slipping into NPA category.

TTiimmeelliinneessss aanndd AAddeeqquuaaccyy ooff rreessppoonnssee::--

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial

element in any restructuring or rehabilitation activity. The response decided on the basis of

techno-economic study and promoter’s commitment, has to be adequate in terms of extend of

additional funding and relaxations etc. under the restructuring exercise. The package of

assistance may be flexible and bank may look at the exit option.

FFooccuuss oonn CCaasshh FFlloowwss::

While financing, at the time of restructuring the banks may not be guided by the conventional

fund flow analysis only, which could yield a potentially misleading picture. Appraisal for

fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash

Flow rather than only on the basis of Funds Flow.

MMaannaaggeemmeenntt EEffffeeccttiivveenneessss::--

The general perception among borrower is that it is lack of finance that leads to sickness and

NPAs. But this may not be the case all the time. Management effectiveness in tackling

adverse business conditions is a very important aspect that affects a borrowing unit’s

fortunes. A bank may commit additional finance to an aling unit only after basic viability of

the enterprise also in the context of quality of management is examined and confirmed.

Where the default is due to deeper malady, viability study or investigative audit should be

51

done – it will be useful to have consultant appointed as early as possible to examine this

aspect. A proper techno- economic viability study must thus become the basis on which any

future action can be considered.

MMuullttiippllee FFiinnaanncciinngg::--

I. During the exercise for assessment of viability and restructuring, a

Pragmatic and unified approach by all the lending banks/ FIs as also

sharing of all relevant information on the borrower would go a long way

toward overall success of rehabilitation exercise, given the probability of

success/failure.

II. In some default cases, where the unit is still working, the bank should

make sure that it captures the cash flows (there is a tendency on part of

the borrowers to switch bankers once they default, for fear of getting their

cash flows forfeited), and ensure that such cash flows are used for working

capital purposes. Toward this end, there should be regular flow of

information among consortium members. A bank, which is not part of the

consortium, may not be allowed to offer credit facilities to such defaulting

clients. Current account facilities may also be denied at non-consortium

banks to such clients and violation may attract penal action. The Credit

Information Bureau of India Ltd.(CIBIL) may be very useful for

meaningful information exchange on defaulting borrowers once the setup

becomes fully operational.

III. In a forum of lenders, the priority of each lender will be different. While

one set of lenders may be willing to wait for a longer time to recover its

dues, another lender may have a much shorter timeframe in mind. So it is

possible that the letter categories of lenders may be willing to exit, even a t

a cost – by a discounted settlement of the exposure. Therefore, any plan

for restructuring/rehabilitation may take this aspect into account.

52

IV. Corporate Debt Restructuring mechanism has been institutionalized in

2001 to provide a timely and transparent system for restructuring of the

corporate debt of Rs. 20 crore and above with the banks and FIs on a

voluntary basis and outside the legal framework. Under this system, banks

may greatly benefit in terms of restructuring of large standard accounts

(potential NPAs) and viable sub-standard accounts with

consortium/multiple banking arrangements.

3.10 GUIDELINES BY RBI

Guidelines of Government and RBI for Reduction of NPAs

Compromise settlement schemes:

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

forarresting the incidence of fresh NPAs and have also been creating legal and

regulatoryenvironment 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 RBIin

July 1995 continues to be in place. Banks are free to design and implement their ownpolicies

for recovery and write-off incorporating compromise and negotiated settlementswith the

approval of their Boards, particularly for old and unresolved cases falling underthe NPA

category. The policy framework suggested by RBI provides for setting up of anindependent

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

nondiscretionary 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].

53

Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 croreand

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 inoperation 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.

LokAdaltas:

LokAdalats help banks to settle disputes involving accounts in 'doubtful" and "loss"category,

with outstanding balance of Rs. 5 lakh for compromise settlement underLokAdalats. Debt

Recovery Tribunals have now been empowered to organize LokAdalats to decide on cases of

NPAs of Rs. 10 lakhs and above. The public sectorbanks had recovered Rs. 40.38 crore as on

September 30, 2001, through the forum ofLokAdalat. The progress through this channel is

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

some of the public sectorbanks and DRTs in Mumbai.

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 attachdefendant's property/assets before

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

the order and appointment of receiverwith powers of realization, management, protection and

preservation of property areexpected to provide necessary teeth to the DRTs and speed up the

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

the country with AppellateTribunals located in five centres viz. Allahabad, Mumbai,

Delhi,CalcuttaandChennai, they could decide only 9814 cases for Rs. 6264.71 crore

pertaining to publicsector banks since inception of DRT mechanism and till September 30,

54

2001. Theamount 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 thebanks to institute

appropriate documentation system and render all possible assistanceto the DRTs for speeding

up decisions and recovery of some of the well collateralized NPAs involving large amounts. I

may add that familiarisationprogrammes have beenoffered in NIBM at periodical intervals to

the presiding officers of DRTs inunderstanding the complexities of documentation and

operational features and otherlegalities applicable of Indian bankingsystem. RBI on its part

has suggested to theGovernment to consider enactment of appropriate penal provisions

againstobstruction by borrowers in possession of attached properties by DRT Receivers,

andnotify borrowers who default to honour the decree passed against them.

Circulation of information on defaulters:The RBI has put in place a system for periodical

circulation of details of willfuldefaults of borrowers of banks and financial institutions. This

serves as a caution listwhile considering requests for new or additional credit limits from

defaulting borrowing units and also from the directors/proprietors/partners of these entities.

RBIalso publishes a list of borrowers (with outstanding aggregating Rs. 1 croreandabove)

against whom suits have been filed by banks and FIs for recovery oftheir funds, as on 31st

March every year. It is our experience that these measures hadnot contributed to any

perceptible recoveries from the defaulting entities. However,they serve as negative basket of

steps shutting off fresh loans to these defaulters. Istrongly believe that a real breakthrough

can come only if there is a change in therepayment psyche of the Indian borrowers

Recovery action against large NPAs:

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

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.

55

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 beenheadquartered in IDBI, Mumbai and a

Standing Forum and Core Group foradministering the mechanism had already been put in

place. The experiment howeverhas not taken off at the desired pace though more than six

months have lapsed sinceintroduction. As announced by the Hon'ble Finance Minister in the

Union Budget2002-03, RBI has set up a high level Group under the Chairmanship of

ShriVepaKamesam, Deputy Governor, RBI to review the implementation procedures of

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

theCDR Scheme, identify the operational difficulties, if any, in the smoothimplementation of

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

Credit Information Bureau:

Institutionalisation of information sharing arrangements through the newly formedCredit

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

therecommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise thescheme

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

of the Group include dissemination of information relating to suitfiledaccounts regardless of

the amount claimed in the suit or amount of credit grantedby a credit institution as also such

irregular accounts where the borrower has givenconsent for disclosure. This, I hope, would

prevent those who take advantage of lackof system of information sharing amongst lending

institutions to borrow largeamounts against same assets and property, which had in no small

measurescontributed to the incremental NPAs of banks.

Proposed guidelines on willful defaults/diversion of funds:

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

a proper definition covering such classes of defaulters so that creditdenials to this group of

56

borrowers can be made effective and criminal prosecution canbe made demonstrative against

willful defaulters.

Corporate Governance:

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

Bank to review the supervisory role of Boards of Banks and financialinstitutions and to

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

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

Directors more effective with aview to minimising risks and overexposure. The group is

finalising itsrecommendations shortly and may come out with guidelines for effective control

andsupervision by bank boards over credit management and NPA prevention measures.

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.

3.11 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. Thevalue of the

security has generally deteriorated over the period and according toexperts, it may further

deteriorate by almost 10-50% if quick action is not taken for itsimmediate sale.

57

2. Political interferences:

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

recover their dues. There were provisions under various acts whichhampered the smooth

takeover and sale of secured assets. The legal process couldtake years to be completed, with

the borrower having ample scope for delaying thetakeover of assets. A number of loopholes

provided the borrower with opportunitiesto delay or ignore repayment of loans. During this

period, it was said by someunscrupulous businessmen that - "there is no difference between

equity and debt – younever 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 ofrecovery

improved quite a bit. However, the DRTs were soon drowned in the everincreasing number

of cases. The pending number of cases with the DRTs increasedmanifold during the period

1993-2002.

5. Misuse of BIFR/SICA:

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

thedefaulter's company is declared sick and taken for financial reconstruction underBIFR, 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.

58

6. Transfer of property Act, English mortgage:

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

mortgaged property and sell the same without the intervention of theCourt only in the case of

English Mortgage. In addition, mortgagee can takepossession of mortgaged property where

there is specific provision in mortgage deedand 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 isable to get possession; the asset

either does not exist or has become valueless.

59

CHAPTER- 4

60

4.1 DATA ANALYSIS AND INTERPRETATION

STATE BANK OF INDIA

The objective of this analysis is to know the position of SBI in terms of total Assets. From the

time period from 2010 to 2014. A firm’s total assets include all current and fixed assets.

TOTAL ASSET

TABLE 1

YEARS

2010 2011 2012 2013 2014

TOTAL

ASSET(RS.

In billons)

10534.13 12237.36 13355.19 15662.61 17922.35

CHART 1

INTERPRETATION

Above graph show that total assets of SBI is increased in 2011 by 1703.23 billion, in 2014

increased by 2259.74 billion. So assets of the SBI bank increased from last five year.

0

5000

10000

15000

20000

2010 2011 2012 2013 2014

TOTAL ASSETS

Rs. In billions

61

RATIO ANALYSIS:The relationship between two related items of financial is known as

ratio. A ratio is just one number expressed in terms on another. The ratio is customarily

expressed in there different ways. It may be expressed as a proportion between the two

figures. Second, it may be expressed in terms of percentage. Third, it may expressed in terms

of rate.

The use of ratio become increasingly popular during the last few years only. Originally, the

bankers used the current ratio to judge the capacity of borrowings business enterprises to

repay the loan and make regular interest payments. Today it has assumed to be important

tools that anybody connected with the business turns to ratio for measuring the financial

strength and earning capacity of business.

Gross NPA Ratio:

Gross NPA Ratio is the ratio of gross advances of the Bank. Gross is the sum of all loan

assets that are classified as NPA as per RBI guidelines, the ratio is to be counted in terms of

percentage and the formula for GNPA is as follows:

Gross NPAs Ratio = Gross NPAs *100

Gross Advances

TABLE 2

YEAR GROSS NPA

(IN CRORE)

GROSS

ADVANCES (IN

CR.)

GROSS NPA

RATIO

2010 61605.35

2019847.54

3.05

2011 51189.39 1560652.134 3.28

2012 39676.46 893613.96 4.44

2013 25326.29 533185.052 4.75

2014 19534.89 394644.24 4.95

62

CHART 2

INTEPRETATION

The above table and graph makes it very clear that the average gross NPA of SBI is not very

satisfactory. It has seem that the gross NPA which was 3.05% in 2010 increased every year

and finally reached 4.95% in 2014. It seems that SBI need to take more care and follow ideal

norms of granting advances, so that the recovery is satisfactory leading to lower gross NPA.

0

1

2

3

4

5

6

2010 2011 2012 2013 2014

GROSS NPA RATIO

Rs. In crores

63

NET NPA RATIO

The net NPA percentage is the ratio of NPA to net advances in which is to be deducted from

the gross advances. The provision is to be made for NPA account. The formula for that is.

Net NPA Ratio = Net NPAs *100

Net Advances

TABLE 3

YEAR NET NPA NET ADVANCES NET NPA RATIO

2010 10870.17 631986.63 1.72

2011 12346.89 757477.91 1.63

2012 15818.85 869167.58 1.82

2013 21956.48 1045546.67 2.10

2014 31096.07 1209963.81 2.57

CHART 3

0

0.5

1

1.5

2

2.5

3

2010 2011 2012 2013 2014

NET NPA RATIO

Series 1

64

INTERPRETATION

The above graph presents the NPA ratio of SBI bank. It can be noticed that the NPA ratio

was decreased in 2011 by 0.9 crore. After that it is continuously increased. The bank had

failed to make sufficient provisions against NPA.

TABLE 4

YEAR ADVANCES

( Rs. In billion)

INCREASE/

DECREASE

PERCENTAGE

GROSS NPA

Rs. In crore)

INCREASE/

DECREASE

PERCENTAGE

2010 6319.14 --- 19534.89 ---

2011 7567.19 19.75 25326.29 26.65

2012 8675.79 14.65 39676.46 56.66

2013 10456.17 20.52 51189.39 29.017

2014 12098.29 15.70 61605.35 20.35

(source- annual report)

INTERPRETATION

In this table we can see that increase in gross NPA is not because of increase in advances.

There is another possibility of increasing in NPA may be this is because of poor credit system

in bank.

CAPITAL ADEQUACY RATIO

The bank manages and maintains capital as a cushion against risk of problem losses and to

protect its depositors and creditors. The future capital requirement of the bank is projected as

a part of its annual business plan, in accordance with its business strategy. In calculating the

capital requirements of the banks, broad parameters viz. balance sheet composition, portfolio

mix, growth rate and relevant discounting are considered. In addition, views regarding market

65

behavior of interest rate and liquidity positions are also taken into account. Further, the loan

composition and rating matrix is factored in to reflect precision in projections. The New

Capital Adequacy Framework (NCAF) of RBI stipulates the methodology for computation of

CRAR which is a ratio of the total capital of the bank to its risk adjusted assets. The CRAR

for the bank is calculated on a quarterly basis and credit, market and operational risks are

considered to arrive at the ratio. The bank has adopted the standardized approach for credit

risk, the Standardized Measurement Method (SMM) for market risk and the Basic Indicator

Approach (BIA) for operational risk. The position of the CRAR of the bank is as follow.

TABLE 5

CHART 5

(source- annual report)

11

12

13

14

15

2010 2011 2012 2013 2014

CAPITAL ADEQUACY RATIO

CAPITAL ADEQUACY RATIO

YEAR CAPITAL ADEQUACY

RATIO

2010 13.39

2011 11.98

2012 13.86

2013 12.92

2014 12.96

66

INTERPRETATION

Each bank needs to create the capital reserve to compensate the non- performing assets. Here,

SBI has shown better capital adequacy ratio with 13.86% in 2012as compared to 11.98% in

2011, 12.92% in 2013, 12.96% in 2014 and 13.39 in 2010. The capital adequacy ratio is

important for them to maintain as per the regulation. Each bank needs to create the capital

reserve to compensate the non- performing assets.

PROVISION RATIO

Provision are to be made for to keep safety the NPA, and it directly effect on the gross profit

of the banks. The provision ratio is nothing but total provision held for NPA to gross NPA of

the banks. The formula for that is:

Provision Ratio = Total Provision *100

Gross NPAs

(Additional Formula: Net NPA = Gross NPA- Provision

Therefore, provision = Gross NPA – Net NPA)

TABLE 6

YEAR TOTAL

PROVISIONS

(IN CR.)

GROSS NPA

(IN CR.)

PROVISION

RATIO

2010 9155 61605.35 14.86

2011 17071 51189.39 33.35

2012 19866 39676.46 50.07

2013 16977 25326.29 108.61

2014 21218 19534.89 67.03

67

CHART 6

(source- annual report)

INTERPRETATION

This ratio indicates the degree of safety measures adopted by the banks. It has direct bearing

on the profitability, dividend and safety of shareholders’ fund, if the provision ratio is less, it

indicates that the banks has made under provision. The highest provisions ratio is showed by

SBI is 108.61% in 2013 as compared to 14.86% in 2010, 33.35% in 2011, 50.07% in 2012

and 67.03% in 2014.

0

20

40

60

80

100

120

2010 2011 2012 2013 2014

PROVISION RATIO

PROVISION RATIO

68

ANALYSIS BASED ON QUESTIONNAIRE

Q.1 according to you what is NPA?

TABLE 7

What is NPA? RESPONDENT PERCENTAGE

A. When an assets ceases to

generate income from bank

5 20%

B. if the customers do not pay

principal and interest for a

certain period of time (90

days) ,it can be called as

NPA

18 72%

C. if periodical income is not

generated for lender of

money ,it is called as NPA

2 8%

CHART 7

0%

10%

20%

30%

40%

50%

60%

70%

80%

a. When an assetceases to generate

income for thebank.

b. If the customerdo not pay principal

and interest for acertain period of

time (90 days) it canbe called as NPA

c   If periodicalincome is not

generated from theborrower of moneyit is called as NPA.

WHAT IS NPA

PERCENTAGE

69

INTERPRETATION

According to above chart 72 percentage respondent said that,If the customers do not pay

principal and interest for a certain period of time (90 days) ,it can be called as NPA . 20

percentage said that when an asset ceases to generate income from the bank and only 8

percentage said that if periodical income is not generated from the borrower of money it is

called as NPA.

Q. 2 what is the percentage of NPA in your particular branch?

TABLE 8

Percentage of NPA RESPONDENT PERCENTAGE

A.1-4% 20 80%

B.4-7% 5 20%

C. 7-10% 0 0

D. 10% and above 0 0

CHART 8

0%

50%

100%

1-4% 4-7% 7-10% 10% andabove

percentage of NPA

PERCENTAGE

70

INTERPRETATION

80 % respondent said that percentage of NPA in their bank is 1-4%, and other 20 %

respondent said that percentage of NPA in their bank is 4-7 %.

Q.3 what is trend of NPA in your bank ?

TABLE 9

TREND OF NPA RESPONDENT PERCENTAGE

A. highly decreasing 1 4%

B. slowly decreasing 15 60%

C. constant 3 12%

D. slowly increasing 5 20%

E. highly increasing 1 4%

CHART 9

0%

10%

20%

30%

40%

50%

60%

70%

highlydecreasing

slowlydecreasing

constant slowlyincreasing

highlyincreasing

TREND OF NPA

PERCENTAGE

71

INTERPRETATION

60% of the respondent have said that the NPA in their branch is slowly decreasing, 20% have

said that NPA is slowly increasing, 12% of respondent have said that NPA is constant, 4%

have said that NPA is highly increasing and highly decreasing.

Q.4 According to your opinion, What are the main causes of NPA?

TABLE 10

CAUSES OF NPA RESPONDENT PERCENTAGE

A. Willful effect 6 24%

B. Lack of monitoring 0 0

C. Lack of persuasion 0 0

D. No risk assessment 0 0

E. Mismanagement of

fund borrowers

3 12%

F. Delay in legal

proceeding

1 4%

G. All the above 15 60%

CHART 10

0%

10%

20%

30%

40%

50%

60%

70%

CAUSES OF NPA

PERCENTAGE

72

INTERPRETATION

60% of respondent have said all the above mentioned points are causes of NPA, 24%

respondent have said that willful effect is the cause of NPA. 12% have said that

mismanagement of funds by borrowers and 4% have said that delay in legal proceedings is

the cause of NPA.

Q. 5 What are the steps to be taken by bank to control NPA?

TABLE 11

STEPS TO BE TAKEN RESPONDENT PERCENTAGE

A. Caution and care

during loan processing

2 8%

B. Strengthening of

recovery cell

0 0%

C. Vigorous follow up at

branch level

0 0%

D. Out of court

settlement

0 0%

E. All the above 23 92%

73

CHART 11

INTERPRETATION

92% respondent have said that all the above mentioned steps can be taken to reduced NPA,

and only 4% respondent have said to reduce NPA caution and care should be done during

loan processing.

0%10%20%30%40%50%60%70%80%90%

100%

Series1

74

Q. 6 What methods you have planned for measurement of NPA?

TABLE 12

METHOD OF

MEASUREMENT OF NPA

RESPONDENT PERCENTAGE

A. Early stage 21 84%

B. Alert stage 4 16%

C. Advance stage 0 0%

CHART 12

INTERPRETATION

84% respondent follow the early stage method while, 16% prefer alert stage method.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

early stage alert stage advance stage

methods for measurement of NPA

percentage

75

Q. 7 what measures for recovery of NPA are adopted by your bank?

TABLE 13

MEASURE FOR

RECOVERY OF NPA

RESPONDENT PERCENTAGE

Persuasion 4 16%

Out of court settlement 5 20%

Legal actions 4 16%

All the above 12 48%

CHART 13

INTERPRETATION

20% and 16% respondent have voted out of court settlement and legal actions, while 16%

feel NPA can be recovered by persuasion. 48% of the respondent feel that all the methods are

equally important for the recovery of NPA.

0%

10%

20%

30%

40%

50%

60%

persuasionj out of courtsettlement

legal actions all the above

MEASURES FOR RECOVERY OF NPA

percentage

76

Q. 8 normally, who is held responsible for non- recovery of outstanding credit?

TABLE 14

RESPONSIBLE RESPONDENT PERCENTAGE

Loan sanctioning officer 14 56%

Dealing clerk 0 0%

Branch manager 0 0%

None of the above 6 24%

Any other 5 20%

CHART 14

INTERPRETATION

56% of respondent feels that loan sanctioning manager is responsible for non- recovery of

outstanding credit, while 24% respondent have said none of these are responsible for non-

recovery of outstanding loan and 20% have said any other are responsible- like loan

maintenance officer and loan dealing or recovery manger .

0%

10%

20%

30%

40%

50%

60%

loansanctioning

officer

dealing clerk branchmanager

none of theabove

any other

RESPONSIBLE FOR NON-RECOVERY OF OUTSTANDING CREDIT

percentage

77

Q. 9 How does your bank realize money from a NPA(In realizing the amount whom does

your bank appoint)

TABLE 15

APPOINMENT MADE FOR

REALIZING MONEY

RESPONDENT PERCENTAGES

Recovery agent 9 36%

Files suit 5 20%

Meeting with borrowers 9 36%

Appointment of arbitrator 2 8%

CHART 15

INTERPRETATION

36% of respondent have voted for recovery agent and meeting and persuading the borrower

to pay the amount. While 20 % of respondent are in the favor of filing a suit and 8% have

said for appointing of arbitrator.

0%

5%

10%

15%

20%

25%

30%

35%

40%

recovery agent files suit meeting withborrowers

appoinment ofarbitrator

APPOINMENT MADE FOR REALIZING AMOUNT

percentage

78

Q. 10 Do you think that the law acts as a stumbling block to recover NPA?

TABLE 16

LAW ACTS AS A

STUMBLING BLOCK

RESPONDENT PERCENTAGE

Yes 16 64%

no 9 36%

CHART 16

INTERPRETATION

64% of respondent agree that law acts as a stumbling block for recovering NPA. On the other

hand 36% of the respondent does not feel that law acts as a stumbling block for recovering

NPA.

0%

10%

20%

30%

40%

50%

60%

70%

yes no

LAW ACTS AS A STUMBLING BLOCK

percentage

79

Q. 11 How much time does it take to recover the money from customer?

TABLE 17

TIME TAKEN TO

RECOVER MONEY

RESPONDENT PERCENTAGE

Within the time limit 13 52%

Beyond the time limit 12 48%

CHART 17

INTERPRETATION

52% of the respondent have said that the money recovered from the borrowers within the

time limit by making continues calls, sending notices, and personnel visit. While 48% feel

that the money is not received within the time limit.

46%

47%

48%

49%

50%

51%

52%

53%

within the timelimit

beyond the timelimit

TIME TAKEN TO RECOVER MONEY

percentage

80

Q. 12 Do you think that government policies are responsible for NPA?

TABLE 18

GOVERNMENT POLICIES

RESPONSIBLE FOR NPA

RESPONDENT PERCENTAGE

yes 19 76%

no 6 24%

CHART 18

INTERPRETATION

76% of the respondent feels that the government policies are responsible for NPA. While

24% of respondent feels government policies are not responsible for NPA.

0%

10%

20%

30%

40%

50%

60%

70%

80%

yes no

GOVERNMENT POLICIES RESPONSIBLE FOR NPA

percentage

81

Q. 13 Which category of loan NPA is largely observed?

TABLE 19

CATETGORY FOR

WHICH NPA IS

LARGELY OBSERVED

RESPONDENT PERCENTAGE

Agriculture and SME loan 17 68%

Non agriculture loan 3 12%

Cash credit 1 4%

Over draft 2 8%

Term loan 1 4%

Housing loan 1 4%

CHART 19

INTERPRETATON

NPA is largely observed in agriculture and SME loan(68%), 12% is observed in non-

agriculture loan, 4% in cash credit, 8% in over draft and 4% in term loan.

0%

10%

20%

30%

40%

50%

60%

70%

80%

Agricultureand SME

loan

Nonagriculture

loan

Cash credit Over draft Term loan

CATEGORY FOR WHICH NPA IS LARGELY OBSERVED

PERCENTAGE

82

Q. 14 Do you think political interference also affects NPA?

TABLE 20

POLITICAL

INTERFERANCE

AFFECTS NPA

RESPONDENT PERCENTAGE

YES 19 76%

NO 6 24%

CHART 20

INTERPRETATION

76% respondent feel that political interference is an important factor affecting the NPA of the

bank, while 24% disagree to the same.

0%

10%

20%

30%

40%

50%

60%

70%

80%

yes no

POLITICAL INTERFERANCE AFFECTS NPA

percentage

83

Q. 15 Are you in favor of out of court settlement?

TABLE 21

OUT OF COURT

SETTLEMENT

RESPONDENT PERCENTAGE

Yes 22 88%

no 3 12%

CHART 21

INTERPRETATION

88% of the respondent are in favor of out of court settlement. According to them small

amount can be recovered by this method instead of going for the legal procedures as they are

time taking. While 12% disagree with the same.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

yes no

OUT OF COURT SETTLEMENT

percentage

84

Q. 16 Don’t you think that out of court settlement may develop a tendency among bank

borrowers to make deliberate attempt of default and then ask for concession?

TABLE 22

OPTIONS RESPONDENT PERCENTAGE

Yes 5 20%

no 20 80%

CHART 22

INTERPRETATION

80% of the respondent feel that out of court settlement may not develop a tendency

amongborrowers to make deliberate attempt of default and then ask for concession. While

20% agree to the same.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

yes no

DEVELOPING A TENDENCY OF DIFFERENT ATTEMPT OF DEFAULT AMONG BORROWERS

percentages

85

Q. 17 Credit monitoring system in Indian banking industry. Is it adequate?

Table 23

ADEQUACY OF CREDIT

MONITORING SYSTEM

RESPONDENT PERCENTAGE

Yes 15 60%

no 10 40%

CHART 23

INTERPRETATION

60% of the respondent agree to the fact that the present monitoring system in India is

adequate while 40% disagree, accounting to them it can be further improved.

0%

10%

20%

30%

40%

50%

60%

70%

yes no

ADEQUACY OF CREDIT MONITORING SYSTEM

percentages

86

Q. 18 Do you feel that improvement in this system is necessary?

TABLE 24

NECESSITY OF

IMPROVEMENT

RESPONDENT PERCENTAGES

Yes 15 60%

no 10 40%

CHART 24

INTERPRETATION

60% of that respondent said that it is necessary to bring improvement in this system of

monitoring while 40% are satisfied with the present system.

0%

10%

20%

30%

40%

50%

60%

70%

yes no

NECESSITY OF IMPROVEMENT

percentages

87

Q. 19 Do you favor appointment of external recovery agents to recover NPA?

TABLE 25

APPOINTMENT OF

EXTERNAL RECOVERY

AGENT

RESPOMDENT PERCENTAGE

Yes 20 80%

no 5 20%

CHART 25

INTERPRETATION

80% of the respondent feel that there is need for the appointment of the external recovery

agents. While 20% agree for the appointment of external agents.

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

yes no

APPOINTMENT OF EXTERNAL RECOVERY AGENT

percentage

88

Q. 20 Do you feel delay in legal procedure make the recovery procedure difficult?

TABLE 26

DELAY IN LEGAL

PROCEDURES CREATE

DIFFICULTY IN

RECOVERY

RESPONDENT PERCENTAGE

YES 15 60%

NO 10 40%

CHART 26

INTERPRETATION:

40% feel that legal procedure take time, but does not create difficulty in recovery of NPA.

While 60% agree to the fact that delays in legal procedure create difficulty.

0%

10%

20%

30%

40%

50%

60%

70%

Yes No

DELAY IN LEGAL PROCDURES CREATE DIFFICULTY IN RECOVERY

percentage

89

21. Do you favour cash incentive schemes for bank staff for recovery of dues?

TABLE 27

CASH INCENTIVE

SCHEME

RESPONDENT PERCENTAGE

YES 24 96%

NO 1 4%

CHART 27

INTERPRETATION:

96% respondent agree to the fact that there should be a cash incentive scheme for the bank

staff for recovery of dues, while 4% of respondent not agree.

0%

20%

40%

60%

80%

100%

120%

yes no

CASH INCENTIVE SCHEME

percentage

90

Q. 22 Are you satisfied with the present cash incentive system?

TABLE 28

SATISFACTION FROM

PRESENT INCENTIVE

SCHEME

RESPONDENT PER CENTAGE

Yes 20 80

No 5 20

CHART 28

INTERPRETATION:

80% of the respondent are satisfied from the present incentive scheme. While 20% are not

satisfied. Currently, SBI bank provides a cash incentive of

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

yes no

SATISFACTION FROM PRESENT INCENTIVE SCHEME

percentage

91

Q. How would you assess the progress of NPA management in your bank?

TABLE 29

PROGRESS OF NPA RESPONDENT PERCENTAGE

Poor O 0%

Slow 2 8%

Moderate 12 48%

Good 11 44%

CHART 29

INTERPRETATION:

48% of the respondent believe that the progress of NPA in SBI bank is moderate. 44% feel

that it is good. 8% have voted for slow.

0%

10%

20%

30%

40%

50%

60%

poor slow moderate good

PROGRESS OF NPA

percentage

92

Q. 24 Do you have similar recovery strategy in all sectors and in all geographical regions?

TABLE 30

SIMILAR RECOVERY

STRATEGY

RESPONDENT PERCENTAGE

Yes 10 40%

No 15 60%

CHART 30

INTERPRETATION:

60% of the respondent said that they do not have similar strategy for all sector and

geographical regions, while 40% said that they have similar strategy for all sector and

geographical regions.

0%

10%

20%

30%

40%

50%

60%

70%

yes no

SIMILAR RECOVERY STRATEGY IN ALL SECTOR ND GEOGRAPHICAL REGIONS

percentage

93

Q. 25 From the following strategies, choose which are helpful in reducing NPA.

TABLE 31

STRATEGIES, HELPFUL

IN REDUCING NPA

RESPONDENT PERCENTAGE

Securitization of asset 1 4%

Legal recovery 3 12%

Lokadalats 2 8%

Compromise settlement 3 12%

Credit information bureau 4 16%

By adopting proper credit

evaluation process

12 48%

CHART 31

INTERPRETATION:48% of respondent said by adopting proper credit evaluation system

NPA can be reduced, 16% said NPA can be reduced by credit information bureau, 12% said

by compromise settlement and legal recovery can be helpful in reducing NPA, 8% said

lokadalat and 4% said by securitization of asset NPA can be reduced.

0%

10%

20%

30%

40%

50%

60%

Securitizationof asset

Legalrecovery

Lok adalats Compromisesettlement

Creditinformation

bureau

By adoptingproper credit

evaluationprocess

percentage

94

CHAPTER- 5

95

FINDINGS

The asset quality of banks is one of the most important indicators of their financial health. It

also reflects the efficiency of banks credit risk management and the recovery environment.

The SBI bank has shown very good performanve as far as the financial operations are

concerned. But non- performing assets (NPA) has caused some concerns. The NPA has been

continuously increasing this was due to ineffective recovery of bank credit, credit recovery

system, inadequate legal provision etc.

Various steps have been taken by the government to recover and reduce NPAs. Some of them

are:

Formation of the credit information bureau (India) limited (CIBIL)

Release of willful Defaulter’s list. RBI also releases a list of borrowers with

aggregate outstanding of Rs. 1 crore and above against whom banks have filed suits

for recovery of their funds.

Reporting of funds to RBI.

Norms of lender’s liability- framing of fair practices code with regard to lender’s

liability to be followed by banks, which indirectly prevents accounts turning into

NPAs on account of bank’s own failure.

Risk assessment and risk management.

RBI has advised banks to examine all cases of willful default of Rs. 1 crore and above

and file suits in such cases. Board of directors are required to review NPA accounts of

Rs. 1 crore and above with special references to fixing of staff accountability.

Reporting quick mortality cases

Special mention accounts for early identification of bad debts. Loans and advances

overdue for less than one and two quarters would come under this category. However,

these accounts do not need provisioning.

96

Other 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 towards credit delivery

Impact of productivity

97

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 selection of 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.

To conclude this study we can say about this report, that

The NPA is slowly decreasing in SBI

NPAs represent high level of risk and low level of credit appraisal.

There are so many preventive measures available those can be adopted to stop an

Asset or A/C becoming NPA.

There are some certain guidelines made by RBI for NPAs which are adopted by

banks.

BOP is better in all terms than OBC instead of capital adequacy.

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SUGGESTION

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.

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QUESTIONAIRE

I am pursuing MBA and I am conducting a study on non- performing assets in SBI bank.

Please answer the questions below. Your response in this regard is very valuable for the

success of my project. Also note that the information so revealed will be utilized without

directly disclosing the identity of the concern bank/ officials. Further, the information

provided will be used strictly for academic purposes only.

Name of respondent-

Designation-

Bank name and branch-

1. According to you what is NPA?

a. When an asset ceases to generate income for the bank.

b. If the customer do not pay principal and interest for a certain period of time (90

days) it can be called as NPA

c. If periodical income is not generated from the borrower of money it is called as

NPA.

2. What is the percentage (%) of NPA in your particular branch??

a. 1-4 %

b. 4-7%

c. 7-10%

d. 10% and above

3. What is trend of NPA in your bank?

a. Highly decreasing

b. Slowly decreasing

c. Constant

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d. Slowly increasing

e. Highly increasing

4. According to your opinion, What are the main causes of NPA?

a. Wilful effect

b. Lack of monitoring

c. Lack of persuasion

d. No risk assessment

e. Mismanagement of funds by borrowers

f. Delay in legal proceedings

g. All the above

5. What are the steps to be taken by bank to control NPA?

a. Caution and care during loan processing

b. Strengthening of recovery cell

c. Vigorous follow up at branch level

d. Out of court settlement

e. All the above

6. What methods you have planned for measurement of NPA?

a. Early stage

b. Alert stage

c. Advance stage

7. What measures for recovery of NPAare adopted by your bank?

a. Persuasion

b. Out of court settlement

c. Legal actions

d. All the above

e. Any other- please specify-

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8. Normally, who is held responsible for non-recovery of outstanding credit?

a. Loan sanctioning officer

b. Dealing clerk

c. Branch manager

d. All of the above

e. None of the above

f. Any other- please specify-

9. How does your bank realise money from a NPA(In realizing the amount whom does

your bank appoint)?

a. Recovery agent

b. Files suit

c. Meeting with borrower

d. Appointment of arbitrator

10. Do you think that the law acts as a stumbling block to recover NPA?

a. Yes

b. No

11. How much time does it take to recover the money from customer?

a. Within the time limit

b. Beyond the time limit.

12 Do you think that government policies are responsible for NPA?

a. Yes

b. No

13For which category of loan NPA is largely observed?

a. Agriculture loans

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b. Non agriculture loans

c. Cash credit

d. Over draft

e. Term loan

f. Housing loan

14Do you think political interference also affects NPA?

a. Yes

b. No

15Are you in favour of out of court settlement?

a. Yes

b. No

16Don’t you think that out of court settlement may develop a tendency among bank

borrowers to make deliberate attempt of default and then ask for concession?

a. Yes

b. No

17Credit monitoring system in Indian banking industry. Is it adequate?

a. Yes

b. No

18Do you feel that improvement in this system is necessary?

a. Yes

b. No

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19. Do you favour appointment of external recovery agents to recover NPA?

a. Yes

b. No

20 Do you feel delay in the legal procedure make the recovery procedure difficult?

a. Yes

b. No

21 Do you favour cash incentive schemes for bank staff for recovery of dues?

a. Yes

b. No

22 Are you satisfied with the present cash incentives system?

a. Yes

b. No

23 How would you assess the progress of NPA management in your bank?

a. Poor

b. Slow

c. Moderate

d. Good

24 Do you have similar recovery strategy in all sectors and in all geographical regions?

a. Yes

b. No

25 From the following strategies, choose which are helpful in reducing NPA.

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a. Securitization of asset

b. Legal recovery

c. Lokadalats

d. Compromise settlement

e. Credit information bureau

f. By adopting proper credit evaluation process

g. Any other (Please Specify)

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BIBLIOGRAPHY

BOOKS

Management of Non- performing Assets in Banks by Sugan C Jain

Managing Non- performing Assets in Banks S.N.Bindani

MAGAZINES

Investors

Business India

E- NEWSPAPER

The Economic Times

The Business Standard

PUBLISHED MATERIAL

RBI Guidelines Circulars on Income Recognition and Asset Classification

Report on Trend and progress of Banking in India 2012- 13

WEBSITES

WWW.rbi.org.in

www.google.co.in

www.wiki.answers.com

www.wikipedia.com

www.moneycontrol.com

www.sbi.com