Project on NPA 27032013.

CHAPTER I

INTRODUCTION

HISTORY OF BANKING

A banker or bank is a financial institution that acts as a payment agent for customers, and

borrows and lends money. In some countries such as Germany and Japan banks are the

primary owners of industrial corporations while in other countries such as the United States

Banks are prohibited from owning non financial companies.

Banks act as payment agents by conducting current accounts for customers paying

chequesdrawn by customers on the bank, and collection cheques deposited to customer’s

current accounts for customer payment via other payment methods such as telegraphic

transfer. Banks borrow money by accepting funds deposited on current account, accepting

term deposit and by issuing debt securities such as banknotes and bonds. Banks lend money

by making advances to customers on current account, by making installment loans, and by

investing in marketable debt securities and forms of lending.

Banks provide almost all payment services, and a bank account is considered indispensable

by most businesses, individuals and governments. Non-banks that provide payment services

such as remittance companies are not normally considered an adequate substitute for having a

bank account.

Banks borrow most funds borrowed from households and non-financial businesses,and lend

most funds lent to households and non-financial businesses,but non-bank lenders provide a

significant and in many cases adequate substitute for bank loans ,and money market funds,

cash management trusts and other non-bank financial institution in many cases provide an

adequate substitute to banks for lending saving to.

SESHADRIPURAM ACADEMY OF BUSINESS STUDIES

GROWTH OF BANKING IN INDIA:

Banking in India back to 1786 where the first bank that was established in India. Then the

nationalization of banks in 1969 liberalisation in 1991.In India, Banking sector is segregated

as public sector banks, private sector banks and co-operative banks.

Banks can be categorized into non-scheduled banks and scheduled banks. Scheduled banks

constitute of commercial banks and co-operative banks. There are about 67,000 branches of

scheduled banks spread across India. During the first phase of financial reforms, there was a

nationalization of 14 major banks in 1969. This crucial step led to a shift from Class banking

to Mass banking. Since then the growth of the banking industry in India has been a

continuous process.

As far as the present scenario is concerned the banking industry is in a transition phase. The

Public Sector Banks (PSBs), which are the foundation of the Indian Banking System account

for more than 78 percent of total banking industry assets. On the other hand the Private

Sector Banks in India is witnessing immense progress. They are leaders in Internet banking,

mobile banking, phone banking, ATMs. On the other hand the Public Sector Banks are still

facing the problem of unhappy employees. There has been a decrease of 20 percent in the

employee strength of the private sector in the wake of the Voluntary Retirement Schemes

(VRS). As far as foreign banks are concerned they are likely to succeed in India.

Indus land Bank was the first private bank to be set up in India. IDBI, ING Vysya Bank, SBI

Commercial and International Bank Ltd., Dhanalakshmi Bank Ltd., KarurVysya Bank Ltd.,

Bank of Rajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector

include Punjab National Bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank.

Banking industry has revolutionized the transactions and financial services system

worldwide. Through the development in technology, banking services has been availed to

customers at all times, even after the normal banking hours. Banking industry services is

nothing but the access of most of banking related services (Verification of account details,

going with transaction, etc.).


DEFINITION OF BANKING:

Sec(1)(b) defines banking as accepting for the purpose of lending or investments of deposits

of money from the public repayable on demand or otherwise and withdrawal by cheque ,

draft, order, or otherwise.

IMPORTANCE OF BANKING IN INDIA:

Banking plays a very important role in economic development of a country. They touch every

aspect of the modern banking. Some of the important roles played by banking for the

developments of Indian economy are as follows.

Banking mobilizes the small, scattered and ideal saving of the people and

make available for the productive purpose i.e. they help in the process of

capital formation.

By offering interest banks attracts depositors and promote the habit of thrift

and saving among people.

Bank is a convient and economic means payment and transfer of funds i.e.

cheques, DD, bankdrafts.

Bank helps the movement of funds from region where they are not very useful

to regions where they can be more usefully employed.

Though the supply of money (bank money and credit money)bank exert a

powerful influence on the interest rates in the money market.

Banks helps trade and commerce. Industry and agriculture by meeting their

financial needs.

Bank directs flow of funds into productive channels. While lending money

they discriminate in favor of essential activities and against non-essential

activities.

In the modern economy people who save people who undertakes investment

are different hence there is aneed for financial intermediaries like banks that

should help the flow of funds from savers to investors.


INDIAN BANKING SYSTEM

The Indian banking system can be broadly classified into nationalized, private banks and

specialized banking institution, the RESERVE BANK OF INDIA acts as a centralized body

monitoring any discrepancies and shortcoming in the system. Since the nationalization of

bank in 1969 the public sector banks like THE SBI BANK have acquired a place of

prominence and has since then seen tremendous progress.

The need to become highly CUSTOMER FOCUSSED has forced the slow moving

public sector banks to adopt a fast track approach, the varieties of products and services

through e-banking has increased the scope of our banking system.

The conservative banking practices allowed Indian. Banks to be insulted partially from the

Asian currency crisis. Indian banks are now quoting all higher valuation when compared to

banks in other Asian countries (Via, Hong Kong, Singapore, Philippines etc.) that have major

problems linked to huge Non-performing assets (NPA’s) and payments defaults. The SBI are

growing its revenue through the efficient branch networks mainly focused on the retail

segments like car finance, housing loans, track finance etc.

The Indian banking has finally worked up to face the competitive dynamics of the new Indian

market and is addressing the relevant issues to take on the multifarious challenges of

globalization. Banks that employ INFORMATION TECHNOLOGY SOLUTION are

perceived to be FUTURISTICS and PROACTIVE players capable of meeting the

multifarious requirement of the large customers ‘base.

Now the private banks have been fast on the uptake and are reorienting their strategies using

E-BANKING as a medium, the E-BANKING has emerged as the new a challenging frontier

of marketing with the conventional physical world being just as applicable like in any other

marketing medium.

The Indian banking has come from a long way from being a sleepy business institution to

a highly proactive and dynamics entity. This transformation has been largely brought about

by the large close of liberalization and economic reforms that allowed banks to expose new

business opportunities rather then generating revenues from conventional streams (i.e.


borrowing and lending). The banking in India is highly fragmented with 30 banking units

contributing to almost 50% of deposits and 60% of advance.

Indian nationalized banks (i.e. Governmentowned) continue to be the major lenders

in the economy due to their sheer size and penetrative networks which assures them high

deposit mobilization.

ESSENTIAL CHARACTERISTICS OF BANK:

The essential characteristics of a bank are:

Acceptance of deposits from the public on fixed, current or savings bank account

Allowing of withdrawal of such deposits by cheques, drafts, orders or otherwise.

Utilization of deposits in hand for the purpose of lending or investments.

FUNCTIONS OF BANKING

The most important functions of banking may be classified as follows:

To assemble capital and make it effective.

To receive deposits and make collections.

To check out and transfer funds.

To discount or lend.

To exercise fiduciary or trust powers.

To issue circulating notes.

Every bank which expects to succeed must first of all prove its value to the community. The

services which a bank performs are so generally taken for granted that the public is unaware

of the real extent of the facilities offered. Banks are equipped to utilize funds, for either a

short or long period of time, safely, and with some profit.

CLASSIFICATION OF BANKS

Banks are classified into several types based on the function they perform. Generally the

banks are classified:

Commercial banks


Investment or industrial banks

Exchange banks

Co-operative banks

Land Mortgage banks

Saving banks

Central banks

Commercial banks.

1. Commercial banks:

Commercial banks perform all types of business transactions and accept three

types of deposits fixed deposits, saving bank deposits and current deposits. They accept these

deposits which are repayable on demand or on short notice. They provide funds only for short

term needs.

2. Investment bank /industrial banks:

Investment bank is those banks, which provide funds on long term for

industries. The investment banks are specialized in providing long term loans to industries

with a view to buy plant and machinery. The investment banks obtain funds through share

capital, debentures and long term deposits from the public.

3. Exchange banks:

Exchange banks are known as foreign banks or foreign exchange banks, which provide

foreign exchange for import trade. Their main function is to make international payments

through the purchase and sale of exchange bills. They convert home currency into foreign

currency and foreign currency into home currency.

4. Co-operative banks:

Co-operative banks are promoted to meet the banking requirements of

consumer not only in urban areas and rural areas. They are formed on the co-operative banks

principle and as such they are more service oriented than profit oriented.


5. Central banks:

Central banks are an apex bank in the country, which brings the entire banking system

unified, controlled and regulated. In our country the central bank is the Reserve Bank of India

(RBI).

6. Land Mortgage banks:

Land Mortgage bank provides long term loans on the security of the land to initiate

permanent improvements on the land to buy agriculture machineries.

BANKER AND A CUSTOMER

BANKER

A banker is a person or company carrying on the business of receiving money and collecting

drafts, for customers subject to the obligation of honoring cheques drawn upon them time to

time by the extent of the available in their ‘current accounts’.

CUSTOMER

A person becomes a customer of a bank, when he makes a regular transaction with the bank

and has maintained his accounts regularly with the banker, the moment his cheques is

accepted for collection and there must be some recognizable course of habit of dealing

between the person and the bank.

FINANCE

A branch of economics concerned with resource allocation as well as resource management,

acquisition and investment. Simply finance deals with matters related to money and the

market. The term “Finance” may thus incorporate any of the following:

The study of money and other assets;

The management and control of those assets;

Profiling and managing project risks;

The science of managing money;


Finance is defined as the provision of money at the time when it is required. Every

Enterprise, whether big, medium or small, needs finance to carry on its operation achieve its

targets finances is some indispensable today that it is rightly said that it is the life blood of an

enterprise.

DEFINITION OF FINANCE:

According to OXFORD DICTIONARY finance may be defined as:

The management of money.

Monetary support for an organization.

As a verb, “to finance” is to provide funds for business or for an individual’s large purchase

(car, home, etc)

The activity of finance is the application of a set of technique that individual

and organizations (entities) use to manage their money, particularly the differences between

income and expenditure and the risks of their investments.

Finance is used by individuals (personal finance) by governments (public

finance), by business (corporate finance), as well as by a wide variety of organization

including schools and non –profit organization.

In general, the goals of each of the above activities are achieved through the

use of appropriate financial instruments, with consideration to their institutional setting.

Finance is one of the most important aspects of business management without proper

financial planning a new enterprise is unlikely to be successful. Managing money (a liquid

asset) is essential to ensure a secure future, both for the individual and an organization.

OBJECTIVES OF FINANCE

Profit maximization.

Wealth maximization.

Maintaining balanced asset structure.

Long-term Liquidity.


Judicious planning of funds.

Innovation and efficiently.

Financial discipline like capital budgeting, fund flow and cash flow analysis and

performance budgeting.

FEATURES OF FINANCE

Finance or Financing is an essential business activity.

Finance may be short-term finance, medium-term finance or long-term finance,

depending upon the nature of the activities to be financed.

Business Finance includes owned funds or owned capital and ploughed back

profits, and borrowed funds or borrowed capital like Debentures issued, public

deposits accepted, loans from financial institutions accepted and banks.

Finance estimates the financial requirements of the undertakings, profitable use of

the funds.

TPYES OF FINANCE

Depending upon the nature of nature of activities to be finance, the financial requirements

or needs of a business enterprise may be classified into three types of finance:

1. Short-term finance.

2. Medium-term finance.

3. Long-term finance.

Short-Term Finance:

Short-term finance refers to the financial required by a firm for a period of one year or less. It

is a finance required for the purchase of raw materials, payment of wages and salaries and for

meeting the other day-to-day expenditure like manufacturing, administrative, marketing and

other expenses of a firm.


Short- term finance is also known as working capital finance, as it is required for

investment in working capital or current assets like cash and bank balances, inventories and

accounts receivables and marketable securities.

Medium-Term Finance:

Medium-Term Finance refers to finance required for period of one year to five years. It is the

finance required for permanent or regular working capital, replacement of worn-out

machines, heavy repairs to buildings, heavy advertising campaign, small expansion and

modernization and also for meeting long-term needs for which long-term finance cannot be

quickly arranged.

Long- Term Finance :

Long-term finance refers to the finance required for a period exceeding five years, usually for

five to twenty years. It is required for financing the fixed capital, like, for procurement of

fixed assets required for the establishment of a new undertaking and for major expansion and

modernization of an existing undertaking.

FUNCTIONS OF FINANCE

The functions of finance includes:-

Benchmarking of Finance processes and practices to identify performance gaps and

issues;

Visioning of the overall Finance Function, considering organization, process, people

and technology;

Developing Finance policies and control frameworks, factoring in all relevant

business, regulatory, governance and internal control requirements;

Designing best of breed Finance organizations, including mapping of roles and

responsibilities of corporate, business unit and shared services Finance groups;

Identifying opportunities for shared services and outsourcing/co-sourcing delivery

models


Designing detailed Finance transaction processing and reporting processes including

business intelligence; and

Delivering programs for large-scale, multi-work stream transformational initiatives.

Meaning of Financial Management

The term “Financial Management” has a number of meanings including the

administration and maintenance of financial assets. The process of financial management

may also include identifying and trying to work around the various risks to which a particular

project may be exposed.

Definition of Financial Management

According to Prof. Bradley, "Financial management is the area of business management,

devoted to a judicious use of capital and a careful selection of sources of capital, in order to

enable a spending unit to move in the direction of reaching its goals."

According to Phillip hates: “FM is concerned with the managerial decisions that results in

acquisition and finance of long term and credit for the firm as such it deals with solution that

require selection of specific assets selection of liabilities as well as problems of size and

growth of enterprise. The analysis of these decisions is based on the expected inflow and

outflow of funds and their effect upon management function”.

Financial management is that part of management which is concerned mainly with raising

funds in the most economic and suitable manner, using these funds as profitable as

possible, planning future operations and controlling current performance and future

development through financial accountancy , cost accountancy , budgeting ,statistics and

other means.

Financial Management provides the best guide for the future resources allocation of firm.

It provides relatively uniform yardstick for judging most of the enterprises operations and

projects.

In short Financial Management is the operational activity of a business that is responsible for

obtaining and effectively utilizing of funds


OBJECTIVES OF FINANCIAL MANAGEMENT

Profit maximization:

Profit earningis the main aim of every economic activity. A business being an

economic institution must earn profit to cover its cost and provide funds for

growth. No business can survive without earning profit. Profit is a measure of

efficiency of a business enterprise .Profit also serves as a protection against risk

which cannot be ensured. Thus, profit maximization is considered as the main

objective of the business.

Wealth maximization:

Wealth maximization is the appropriate objective of an enterprise.

Financial theory asserts that wealth maximization is a single substitute for a stockholder’s

utility. When the firm maximizes the stockholder’s wealth, the individual stockholder’s can

use this wealth to maximize his individual utility. It means that by maximizing stockholder’s

wealth the firm is operating consistently towards maximizing stockholder’s utility.

1. Financial management is a distinct area of business management - i.e. financial

manager has a key role in overall business management.

2. To select the prudent or rational use of capital resources.

3. To make proper allocation and utilization of funds.

4. To have a careful selection of the source of capital.

5. To determining the debt equity ratio and designing a proper capital structure for the

corporate goal achievement.

6. To ensuring the achievement of business objectives viz. wealth or profit

Maximization.

7. To make fair returns to the investors.

8. Capital Budgeting.


IMPORTANCE OF FINANCIAL MANAGEMENT:

It is necessary for the smooth running of an Enterprise.

Financial management provides complete coordination between various functional

areas such as purchase, stores, production, marketing, etc.

Financial management helps the top management to evaluate the profitability of

operational activities of the organization.

Financial management is important to all level of management for decisions.

Financial management helps to determine the financial soundness of a firm.

DUE AND OVERDUE :

Any amount becomes due on the fixed time of payment. It becomes overdue if it is not paid

on that due date .In the same manner in customer banker relationship any amount due to the

bank under any credit facility, if not paid by the due date fixed by the bank becomes overdue.

HISTORY OF NON PERFORMING ASSET

The concept of NPA is introduced by RBI to reflect a bank’s actual financial health in its

balance sheet and as per the recommendations made by the committee on Financial System

(Chairman shriM.Narasimham). The provisioning should be made on the basis of the

classification of assets into different categories.

Before 31-03-2001, the concept of PAST DUE was in practice to consider any asset as Non

Performing Asset. An amount is considered as past due, when it

remains outstanding for 30 days beyond the due date. An asset becomes non-performing

when it ceases to generate income for the bank. A non performing asset was defined as credit

in respect of which interest and / or installment of principal has remained ‘past due’ for a

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


Year ended March,31 Specific period

1993 4 quarters

1994 3 quarters

1995 2 quarters

MEANING OF NON-PERFORMING ASSETS

An asset is classified as non-performing asset (NPAs) if dues in the form of principal and

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

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

any advance or credit facilities granted by bank to a borrower become non-performing, then

the bank will have to treat all the advances/credit facilities granted to that borrower as non-

performing without having any regard to the fact that there may still exist certain advances /

credit facilities having performing status.

NPA CLASSIFICATION

With effect from 31-03-2001, With a view to moving towards international best practices and

to ensure greater transparency, ’90 days’ overdue norms for identification of NPAs have been

made applicable from the year ended March 31, 2004. As such, with effect from March

31,2004, a non performing asset shall be a loan or an advance where:

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

days in respect of a term loan,

2. The account remains ‘out of order’ as indicated at paragraph 2.2 below , in respect

of an Overdraft/Cash Credit (OD/CC),

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

purchased and discounted,

4. The installment of principal or interest thereon remains overdue for two crop seasons

for short duration crops,


5. The installment of principal or interest thereon remains overdue for one crop season

for long duration crops,

6. The amount of liquidity facility remains outstanding for more than 90 days , in respect

of a securitisation transaction undertaken in terms of guidelines on securitisation

dated February 1,2006.

7. In respect of derivatives transactions , the overdue receivables representing positive

mark-to-market value of a derivative contract, if these remain unpaid for a period of

90 days from the specified due date for payment.

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

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

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

/ drawing power, but there are no credits continuously for 90 days or credits are not

enough to cover the interest debited during the same period , these accounts should be

treated as “.out of order”.

Regular and ad-hoc credit limits need to be reviewed / regularised not later than three

months from the due date / date of ad-hoc sanction. In case of constraints such as non

availability of financial statements and other data from the borrowers , the branch

should furnish evidence to show that renewal / review of credit limits is already on

and would be completed soon. In any case, delay beyond six months is not considered

desirable as a general discipline. Hence, an account where the regular / ad-hoc credit

limits have not been reviewed or have not been renewed within 180 days from the due

date/date of ad-hoc sanction will be treated as NPA, which period will be reduced to

90 days with effect from March 31,2004.

Banks should ensure that drawings in the working capital accounts are covered by the

adequacy of current assets, since current assets are first appropriated in times of

distress.

Considering the practical difficulties of large borrowers, stock statements relied upon

by the banks for determining drawing power should not be older than three months.

The outstanding in the account based on drawing power calculated from stock

statements older than three months would be deemed as irregular. A working capital


borrowal account will become NPA if such irregular drawings are permitted in the

account for a continous period of 90days (with effect from March 31,2004).

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

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

Advances against term deposits ,NSCs eligible for surrender , IVPs ,KVPs and Life

policies need not be treated as NPAs although interest thereon may not have been paid

for more than 90 days provided adequate margin is available in the accounts .

The investments are also subject to the prudential norms on income recognition.

Banks should not book income on accrual basis in respect of any security irrespective

of the category in which it is included , where the interest / principal is in arrears for

more than 90 days.

The system of identification of NPA should be ongoing basis. Banks should also

make provision for NPAs at the end of each calendar quarter i.e. as at the end of

March /June /September/December, so that the income and expenditure account for

the respective quarters as well as the P&L account and balance for the year end

reflects the provision made for NPAs.

Interest realised on NPAs may be taken to income account provided the credits in the

accounts towards interest are not out of fresh/additional credit facilities sanctioned to

the borrower concerned.

In the absence of a clear agreement between the bank and the borrower for the

purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest

due), banks should adopt an accounting principal and exercise the right of

appropriation of recoveries in a uniform and consistent manner.

On an account turning NPA, banks should reverse the interest already charged and

not collected by debiting Profit and Loss account , and stop further application of

interest .However, banks may continue to record such accrued interest in

memorandum account in their books. For the purpose of computing Gross Advances,

interest recorded in the Memorandum account should not be taken in account.


The treatment of an asset as NPA should be based on the record of recovery .Banks

should not treat an advance as NPA merely due to existence of some deficiency

which are of temporary in nature such as non availability of adequate drawing

power , balance outstanding exceeding the limit ,non-submission of stock statements

and the non renewal of the limits on the due date ,etc. where there is a threat of

loss ,or the recoverability of the advances is in doubt, the asset should be treated as

NPA .

In respect of a borrower having more than one facility with bank ,all the facilities

granted by the bank will have to be treated as NPA and not the particular facility or

part thereof which has become irregular . However , in respect of consortium

advances or financing under multiple banking arrangements ,each bank may classify

the borrowal accounts according to its own record of recovery and other aspects

having a bearing on the recoverability of the advances. Banks can’t classify all the

a/Cs of a group (i.e. common management by one or more directors /partners having

common in different firms) as NPA on ground of any one facility being NPA. The

classification of NPA is borrower wise and not group wise.

Asset classification of accounts under consortium should be based on the record of

recovery of the individual member banks and other aspects having a bearing on the

recoverability of the advances. Where the remittances by the borrower under

consortium lending arrangements are pooled with one bank and / or where the bank

receiving remittances is not parting with share of other member banks , the account

will be treated as not serviced in the books of other member banks , and therefore,be

treated as NPA. The banks participating in the consortium should ,therefore ,arrange

to get there share of recovery transferred from the lead bank or get an express consent

from the lead bank for the transfer of their share of recovery ,to ensure proper asset

classification in their respective books

ASSET CLASSIFICATION

Banks should classify their assets into Performing Assets.Performing assets are

standard assets where asNon Performing assets are broadly further classified into Sub


standard Assets, Doubtful Assets and loss assets. Further Doubtful assets are also

classified into three category namely D1, D2, D3 assets.

Standard assets are one which does not disclose any problems and which does not

carry more than normal risk attached to the business. Such an asset should not be an

NPA because here all the installments as well as interest are regularly paid.

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

remained NPA for a period less than or equal to 12months. In such cases, the current

net worth of the borrowers/guarantees or the current market value of the security

charged is not enough to ensure recovery of the dues to the banks in full. In other

words,such assets will have well defined credit weakness 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. An asset where the terms of

the loan agreement regarding interest and principal have been re-negotiated or

rescheduled after commencement of production, should be classified as sub-standard

and should remain in such category for at least 12months of satisfactory performance

under the re-negotiated or rescheduled terms. In other words, the classification of an

asset should not be upgraded merely as a result of rescheduling, unless there is

satisfactory compliance of this condition.

With effect from ms=arch 31,2005, an asset is required to be classified as doubtful, if

it has remained NPA for more than 12months.For Tier I banks, the 12months period

of classification of a substandard asset in doubtful category is effective from April

1,2009. As in the case of sub-standard assets, rescheduling does not entitle the bank to

upgrade the quality of an advance automatically. A loan classified as doubtful has all

the weaknesses inherent as that classified as sub-standard, with the added

characteristic that the weaknesses make collection or liquidation in full, on the basis

of currently known facts, conditionand a values, highly questionable and improbable.

An NPA need not go through the various stages of classification in case of serious

credit impairment and such assets should be straightway classified as a doubtful /loss

asset as appropriate. Erosion in the value of security can be reckoned as significant

when the realizable value of the security is less than 50percent of the value assessed

by the bank or accepted by RBI at the time of last inspection, as the case may be


straightway classified under doubtful category and provisioning should be made as

applicable to doubtful assets.

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

auditors or by the co-operation Department or by the Reserve Bank of India

inspection but the amount has not been written off, wholly or partly. In other words,

such an asset is considered un-collectible and of such little value that its continuance

as a bankable asset is not warranted although there may be some salvage or recovery

value. If the realizable value of the security, as assessed by the bank/approved

values/RBI is less than 10percent of the outstanding in the borrowal accounts, the

existence of security should be ignored and the assets should be straightway classified

as loss asset. It may be either written off after obtaining necessary permission from

the competent authority as per the co-operative Societies Act/Rules, or fully provided

for by the bank.

Broadly speaking, classification of assets into above categories should be done taking

into account the degree of well defined credit weaknesses and extent of dependence

on collateral security for realization of dues. In respect of accounts where there are

potential threats to recovery on account of erosion in the value of security and

existence of other factors such as, frauds committed by borrowers, it will not be

prudent for the banks to classify them first as sub-standard and then as doubtful after

expiry of 12manths from the date the account has become NPA.Such accounts should

be straight away classified as doubtful asset or loss asset, as appropriate, irrespective

of the period for which it has remained as NPA.

When the amounts due to a bank (present value of principal and interest receivable as

per restructured loans terms) are fully covered by the value of security, duly charged

in its favor in respect of those dues, the bank’s dues are considered to be fully

secured. While assessing the realizable value of security, primary as well as collateral

securities would be reckoned, provided such securities are tangible securities and are

not in intangible form like guarantee etc., of the promoter / others. However, for this

purpose the bank guarantees, State Government Guarantees will be treated on par

with tangible security.


PROVISIONS FOR STANDARD ASSETS

For urban coop banks the general provisioning requirement for all types of ‘Standard

advances’ shall be 0.40percent. However, direct advances to agricultural and SME

sectors which are standard assets, would attract a uniform provisioning requirement of

0.25per cent of the funded outstanding on a portfolio basis.

Further, with effect from Dec 8, 2009, all UCBs (Both Tier-I & Tier-II)are required

to make a provision of 1.00percent in respect of advances to commercial Real Estate

Sector classified as ‘Standard assets’.

For commercial banks direct advances to agriculture and small and micro

enterprises(SMEs) sectors at 0.25 percent; advances to Commercial Real Estates

(CRE) sector at 1.00 percent; all other loans and advances not included in (a) (b) and

(c) above at 0.40 percent

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 separately as ‘contingent Provisions against Standard assets’ under ‘other

Liabilities and Provision others in Schedule 5 of the balance sheet.

PROVISION FOR SUB STANDARD ASSETS

For urban coop banks a general provision of 10 percent on total outstanding should be

made without making any allowance for ECGC guarantee cover and securities

available. The ‘unsecured exposures’ which are identified as ‘substandard’ would

attract additional provision of 10percent, i.e., a total of 25 percent on the outstanding

balance. However, in view of certain safeguards such as escrow accounts available in

respect of infrastructure lending, infrastructure loan accounts which are classified as


sub-standard will attract a provisioning of 20percent instead of the aforesaid

prescription of 25 percent.

PROVISION FOR DOUBTFULL ASSETS

For coop banks Provision should be for 100 percent of the extent to which the

advance is not covered by the realizable value of the security to which the bank has a

valid recourse should be made and the realizable value is estimated on a realistic

basis. For secured portions 20%, 30% and 100% for D1, D2,D3 category respectively.

(D1 = doubtful up to 1 year, D2 = doubtful 1 to 3 years, and D3 = doubtful more than

3 years).

For commercial banks 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

realizable value is estimated on a realistic basis. For secured portions 25%,40% and

100% for D1,D2,D3 category respectively. (D1= doubtful up to 1 year, D2 = doubtful

1 to 3 years, and D3 = doubtfulmore than 3 years).

PROVISIONS FOR LOSS ASSETS

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

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

EXTRA PROVISION

The regulatory norms for provisioning represent the minimum requirement. A bank

may voluntarily make specific provisions for advances at rates which are higher than

the rates prescribed under existing regulations, to provide for estimated actual loss in

collectible amount, provided such higher rates are approved by the Board of Directors

and consistently adopted from year to year. Such additional provisions are not to be

considered as floating provisions. The additional provisions for NPAs, like the

minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive

at the net NPAs.


The bank’s board of directors should lay down approved policy regarding the level to

which the floating provisions can be created. The bank should hold floating

provisions for ‘advances’ and ‘investment’ separately and the guidelines prescribed

will be applicable to floating provisions held for both ‘advances’ & ‘investments’

portfolios. Floating provisions cannot be reversed by credit to the profit and loss

account. They can only be utilized for making specific provisions in extraordinary

circumstances. Until such utilization, these provisions can be netted off from gross

NPAs to arrive at disclosure of net NPAs. Alternatively, they can be treated as part of

Tier-II capital within the overall ceiling of 1.25% of total risk weighted assets.

RBI GUIDELINES ON PROVISIONING REQUIREMENT OF BANK

ADVANCES:

As and when an asset is classified as an NPA, the bank has to further sub-classify it

into sub-standard, loss and doubtful assets. Based on this classification, bank makes the

necessary provision against these assets.

Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of

bank advances where the recovery is doubtful. Banks are also required to comply with such

guidelines in making adequate provision to the satisfaction of its auditors before declaring

any dividends on its shares.

In case of loss assets, guidelines specifically require that full provision for the amount

outstanding should be made by the concerned bank. This is justified on the grounds that such

an asset is considered uncollectible and cannot be classified as bankable asset.

Also in case of doubtful assets, guidelines requires the bank concerned to provide

entirely the unsecured portion and in case of secured portion an additional provision of 20%-

50% of the secured portion should be made depending upon the period for which the advance

has been considered as doubtful.

For instance, for NPAs which are up to 1-year old, provision should be made of 20%

of secured portion, in case of 1-3 year old NPAs up to 30% of the secured portion and finally


in case of more than 3 year old NPAs up to 50% of secured portion should be made by the

concerned bank.

In case of a sub-standard asset, a general provision of 10% of total out standings

should be made.

Reserve Bank of India (RBI) has merely laid down the minimum provisioning

requirement that should be complied with by the concerned bank on a mandatory basis.

However, where there is a substantial uncertainty to recovery, higher provisioning should be

made by the bank concerned.

IMPACT OF NON PERFORMING ASSETS:

a) Non-Performing Assets are drag on profitability of banks because besides provisioning

banks are also required to meet the cost of funding these unproductive assets.

b) Non-Performing Assets reduce earning capacity of assets. Return on assets also gets

affected.

c) As Non-performing Assets not earn any income, they adversely affect capital adequacy

ratio.

d) No recycling of funds.

e) Non-Performing assets also attract cost of capital for maintaining capital adequacy

ratio.

f) Non-Performing assets demoralize the operating staff and the stake holders.

g) It will badly affect the image of the bank concerned.

h) Affect the moral of the employees and decisions making for fresh loans suffer.

i) Enhances administrative, legal and recovery costs.

CONSEQUENCES OF NON-PERFORMING ASSETS

DIRECT:


A. It affects profitability of the unit substantially.

B. Affects banks credibility and render rising of fresh capital from the market

difficult.

C. Recycling of funds gets blocked.

INDIRECT:

A. Reduction in lending rate is made difficult.

B. Affect risk taking ability which ultimately affects competitiveness of the branch

unit.

C. Lack of market competitiveness results in slump in credit expansion. The cost of

poor quality loans is shifted to bank customers through higher spread


CHAPTER II

RESEARCH DESIGN

Title of the study

“A Study on Analysis of NON PERFORMING ASSET at SBI Bank”.

Statement of Problem:-

This particular topic has been selected to analyze the NPA level of SBI Bank and their impact

on the performance of the Bank.

In India commercial Bank plays a major role in satisfying the short demand of the customer.

An in depth analysis of the study revealed that “due to of credit policy, classification of the

asset customer attitude circumstances, ever changing government, economic situation has

posed problem to the banking sector regarding NPA’s.

Hence the attempt to study and analyze causes for the NPA in the Bank and the role of the

management in handling N.P.A’s and the impact on the bank performance is important.

Purpose of the study:-

The Problem of NPA is not a matter of concern for the banks and financial institution alone.

It is a matter of grave concern for the entire public as credit is the catalyst in the economic

Growth of the country and any bottleneck in the smooth flow of credit is bound to create

adverse repercussions in the economy.

The purpose of this project is to analyze how NPA affect the performance of a bank and the

extent to which SBI bank has been successful in controlling its NPA level.


Objectives of Study:-

To study the role of NPA in Banking Sector.

To study the NPA expansion of SBI

To understand the extent to which SBI Bank has been successful in cutting down its

NPA

To know the performance of the NPA in the SBI, in the last 3 years in recovering of

NPA

To give suggestions which would help them in controlling their level of NPA

Scope of the study:-

The study covers management of Non Performing Asset with respect to SBI Bank,

Bangalore, and the study covers information given by the banks staff and vice president of

special loans management groups department and obtained from the other records of the

bank.

The scope of the study is restricted to SBI branch Rajarajeshwari nagar only. The study

covers the performance on NPA for last 5 years i.e. 2008 to 2012.

Research Methodology:-

It is a study, which is primarily directed to know about the SBI branch RR Nagar and

in this study I have used Trend Analysis to compare the Non Performing Asset from 2007-08

to 2011-12.

Sources of data collection :

Primary data:

Data was collected from Bank manager and loan section people and managing staff.


Secondary data:

Data was collected from bank balance sheet, Profit and loss account and income statements.

The data was also collected from internet, Bank annual report and magazines and

Publications.

Limitations of the study:

Despite all possible efforts to undertake to make the analysis more comprehensive and

scientific, a study of the present kind is bound to have certain limitations, Researcher humbly

submits at this stage the present day is an Empirical work, presented in a descriptive manner.

Since the objectives of the study may well be realized by this kind of analysis, no attempt has

been made to provide comprehensive conceptual analysis.

The Following are some of the limitations of the study:-

1. This study is limited to income recognition and asset classification statement provided

by, SBI Bank.

2. The study is conducted only on the basis of the data provided by the Bank.

Conclusions are drawn on the basis of limited data available.

3. The study was conducted for 2009 – 10, 2010 – 11, 2011 – 12 only.

4. Only few models are used in analyzing the data.

5. Ambiguity details were detected and put aside.

6. Time constrain

7. The Study is confined only to SBI.


CHAPTER III

COMPANY PROFILE

YEAR OF ESTABLISHMENT OF BRANCH:

( 30.7.1992 )

STATE BANK OF INDIA BRANCHES:

State bank of India branches span the country with a vast network to reach out to as many

customers as possible making full contribution to the status of India’s largest bank for SBI.

Each SBI branch is provided an identification code that is unique to each branch. The SBI

bank branches are categorized according to the banking services they provide.

These include SBI:

Core banking branch

Domestic Forex branch

Internet banking and

Personal banking (Real Time Gross Settlement) Branches.

State Bank of India being the largest bank provides specialized banking services in

accordance with the special requirement of a particular community or area. The SBI branch

type there by depends on the special banking services it aims to provide. These include:

Agricultural business and development branches

Commercial retail branches


Corporate accounts and mid corporate group branches

Main branches

Industrial finance branches

NRI banking branch

Overseas branches

Personal banking branch

Rehabilitation and recovery branch

SSI and SIB branch

Services branches

VISION STATEMENT:

Premier India financial services group with global perspective, world class standing

of the efficiency and profession and core institution values

Retain its position in the country as a pioneer in developing countries.

Maximize shareholder value through high sustained earnings per share.

An institution with a culture of mutual care and commitment a satisfying and exciting.

Work environment and continuous learning opportunity.

MISSION STATEMENT:

To retain the banks position as the premise India financial services

Group with world class standards and significant global business commitment to

excellence in customer, shareholder and employee satisfaction and to play a leading


role in the expanding and diversifying financial services sector while continuing

emphasis on its development banking role.


DEPUTY GENERAL MANAGER

ASSISTANT GENERAL MANAGER

MANAGER

ACCOUNTING MANAGER

HR MANAGER MARKETING MANAGER

SENIOR ACCOUNTANT

ACCOUNTANT

ATTENDER

SALES MANAGER

VALUES:

Excellence in customer service

Profit orientation.

Belonging and commitment to the bank.

Fairness in all dealing and relation.

Risk taking and innovation.

New business undertaking by SBI:

Due to completion from the private banks and in order to serve the customer’s needs as well

for the development of the economy state Banks of India has been entered into the new

market.

Recently SBI has started two new services providing area they are:

1. SBI LIFE INSURANCE

2. SBI MUTUAL FUNDS

3. SBI MEDICAL INSURANCE.

GOAL AND OBJECTIVES:

State Banks of India (SBI) is government-owned and is the largest banks in India it has its

own goal and objectives:

It traces its ancestry bank to the banks to Calcutta, which was established in 1806; this

makes SBI the oldest commercial banks in the Indian subcontinent.

SBI aims at providing regular services to its customer.

It aims at managing the nation’s largest ATM network.

SBI aims at providing various domestic, international and NRI products and services,

through its vast network in India and overseas for the sake of customer satisfaction.

In recent years the banks has focused on three priorities:


1. Reducing its huge staff through Golden handshake schemes know as the voluntary

Retirement scheme, which saw many of its best and brightest defect to the private

sector.

2. Computerizing its operations.

3. Trying to change the attitude of its largely rude staff through a program aptly named

‘parivartan’ or ‘change’.

SBI BRANCHES:

State Bank of India has 131 foreign offices in 32 countries across the globe.

SBI has about 21,000 ATMs; and SBI group (including associate banks) has about

45,000 ATMs.

SBI has 26,500 branches, including branches that belong to its associate banks.

SBI includes 99345 officers in our country.

SYMBOL AND SLOGAN:

The symbol of the State Bank of India is a circle and not key hole and a small man at

centre of the circle. A circle depicts perfection and the common man being the centre

of the bank’s business.

SLOGANS:

o With you all the way

o Pure banking nothing else

o The banker to every India.

Trustees

SBI Mutual Fund Trustee Company Private Limited (the “Trustee”), through its Board of


Directors discharge its obligations as Trustee of the SBI Mutual Fund. The Board of

Directors of SBI Mutual Fund Trustee Company Private Limited are as under:

o Shri T.L. Palani Kumar

Independent

o Shri C.M. Dixit

Independent

o Ms. Sandra Martyres

Associate

o Ms. BharatiRao

Associate

Current Board of Directors

After the end of O. P. Bhatt's reign as SBI Chairman on 31st March, 2011, the post was taken

over by PratipChaudhuri, who is the former Deputy Managing Director of the International

Division of SBI. As on 4th August, 2011, there are twelve members in the SBI Board of

Directors, including SubirGokarn, who is also one of the four Deputy Governors of the

Reserve Bank of India. The complete lists of the Board members are:

1. PratipChaudhuri (Chairman)

2. Hemant G. Contractor (Managing Director)

3. Diwakar Gupta (Managing Director)

4. A Krishna Kumar (Managing Director)

5. Dileep C Choksi (Director)

6. S. Venkatachalam (Director)

7. D. Sundaram (Director)

8. ParthasarathyIyengar (Director)

9. G. D. Nadaf (Officer Employee Director)

10. RashpalMalhotra (Director)


http://www.sbimf.com/AboutUs/Trustees.aspx




11. D. K. Mittal (Director)

12. Subir V. Gokarn (Director)

Associatebanks:

There are seven other associate banks that fall under SBI. They all use the and quot; State

Bank of India and quot; name followed by the regional headquarters name.

State Bank of Bikaner and Jaipur

State Bank of Hyderabad

State Bank of Indore

State banks of Mysore

State Bank of Patiala

State bank of Travancore


The Main branch of SBI at Mumbai

Foreign offices:

State Banks of India is present in 32 countries, where it has 84 offices serving the

international needs of the bank’s foreign customers, and in some cases conducts retail

operations. The focus of these offices is India-related business.

SBI has branches in these countries:

Australia

Bahrain

Bangladesh

Belgium

Canada

Dubai

France

Germany

Hong Kong

Japan

Israel


The Israeli branch of the State Bank of India located in Ramat Gan.

PRODUCTS:

Private Banking

Asset management

Pension

Mortgages

Credit Cards

State Bank of India- Financial and Strategic analysis review:

Summary:

State bank ofIndia (SBI) is a large financial services group operating in the banking industry.

The bank is engaged in providing trading services, international banking and traditional

banking and treasury operations. The Reserve bank of India holds more than half of SBI’s

equity capital. SBI has a network of over 10,000 branches. In addition, the seven associate

banks of SBI have more than 4900 branches. SBI along with its subsidiaries is engaged in

providing a wide range of financial services including Life Insurance, Merchant banking,

Mutual funds, credit card and factoring, security trading and primary dealership in the money

market.


http://en.wikipedia.org/wiki/Ramat_Gan

Global Markets Direct, the leading business information provider, presents an in-depth

business, strategic and financial analysis of State Bank of India. The report provides a

comprehensive insight into the company, including business structure and operations,

executive biographies and key competitors. The hallmark of the report is the detailed strategic

analysis and Global Markets Directs views on the company

Scope:

-The company’s strengths and weaknesses and areas of development or decline are analyzed.

Financial, strategic and operation factors are considered.

-The opportunities open to the company are considered and its growth potential assessed

competitive or technological threats are highlighted.

-The report contains critical company information-business structure and operations, the

company history, major products and services, key competitors, key employees and executive

biographies, different locations and important subsidiaries.

-It provides detailed financial ratios for the past five years as well as interim ratios for the last

four quarters.

-Financial ratios include profitability, margins and returns, liquidity and leverage, financial

position and efficiency ratios.

PRODUCTS AND SERVICES:

1. PERSONAL BANKING:

SBI Term deposits SBI loan for pensioners

SBI Recurring Deposits Loan Against Mortgage of Property

SBI Housing loan, Loan Against Share and Debentures

SBI Car Loan Rent Plus Scheme

SBI Educational loan Medi -Plus Scheme


2. NRI services

3. Agriculture/ Rural Banking

4. International Banking

5. Corporate Banking

6. Domestic Treasury

7. Services

8. Interest Rates

9. Safe Deposit Lockers

10. Other services:

ATM Services

De-mat services

Internet Banking

Mobile banking

SME

RBIEFT

E-Pay

E- Rail

SBI Vishwayatra foreign Travel Card

Broking Services

Gift Cheques


New products and services:

Apart from restructuring, SBI launched several innovation, value-added products and services

to project a customer friendly image. It launched a special service for corporate customers

called ‘telebanking and remote login’ to support transactional requests.

SCHEMES:

Now new schemes introduced by State Bank of India are:

Equity Scheme

Debt Scheme

Balanced Scheme

Exchange Traded Scheme.

WORK FORCE STRENGTH:

SBI Branch strength:

Main Branch strength:

SBI through the central Reserve Bank of India-also operates the world’s largest network, with

more than 13,500 branch offices throughout India, staffed by nearly 2,20,000 employees.

Principal Competitors:

ICICI Bank

Vijaya bank

Bank of Baroda

Canara Bank

Punjab National Bank

Bank of India


Union Bank of India

Central Bank of India

HDFC Bank

Oriental Bank of Commerce

SOCIAL RESPONSIBILITY:

SBI branch:

1. SBI provides loan to weaker sections.

2. It provides Home Loan, vehicle Loan, personal Loan, and Educational Loan.

State Bank of India: SBI has taken an initiative to encourage commercial workers to save

their earning. This project was implemented in sonagachi, one of Asia’s largest red light

areas, where residents were encouraged to open a saving bank (SBI) account. While this can

be called a social service, it also reflects a sharp business sense.

Awards

At SBI Funds Management, we devote considerable resources to gain, maintain and sustain

our profitable insights into market movements. The trust reposed on us by millions of

investors is a genuine tribute to our expertise in Fund Management and dedication to our

singular focus. And this has resulted in various awards and accolades for us from the fund

industry, motivating us to do better. Some of the awards won by us are listed below.


2011

Readers Digest Awards 2011 For Trusted Brand in Fund Management Category

ICRA Mutual Fund Awards 2011 for Magnum Income Fund - Floating Rate Plan - Long

Term Plan

2010

ICRA Mutual Fund Awards 2010 For Magnum Global Fund

2009

ICRA Mutual Funds Awards 2009 For Magnum Tax Gain Scheme 1993

The Lipper India Fund Awards 2009 For Various Schemes

2008

Outlook Money NDTV Profit Awards 2008

The Lipper India Fund Awards 2008 For Magnum Balanced Fund – Dividend

ICRA Mutual Fund Awards 2008 For Various Schemes

2007

Outlook Money NDTV Profit Awards 2007

CNBC Awaaz Consumer Awards 2007

The Lipper India Fund Awards 2007 For Various Schemes

ICRA Mutual Funds Awards 2007 For Various Schemes

CNBC TV18 - CRISIL Mutual Fund of the Year Award 2007 For Various Schemes


http://www.sbimf.com/AboutUs/Awards_Achievements.aspx














CHAPTER – 4

ANALYSIS AND INTERPRETATION

TABLE 4.1

TABLE SHOWING TOTAL ADVANCES

YEAR AMOUNT (in crores) % OF CHANGE

2007 – 08 61.8 -

2008 – 09 74.13 19.95

2009 – 10 76.8 24.27

2010 – 11 71.48 15.6

2011 – 12 67.31 8.91

ANALYSIS

The advances of the bank shows an upward trend through the period 2007 – 2008 to 2009 –

2010 but in the year 2010-2011 and 2011-2012 it has slightly decreased this can be seen from

the data regarding the advances of the bank. During this period net advances of the bank has

decreased by 5.83% to 67.31crores by March 2012 compare to71.48crores at the end of

previous year. From this it could be seen that such decrease in net advances is decreasing at a

increasing rate over the period under the study.


GRAPH 4.1

GRAPH SHOWING TOTAL ADVANCES

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

10

20

30

40

50

60

70

80

90

YEARAMOUNT (in crores)% OF CHANGE

INTERPRETATION

Non Performing Asset being a direct result of advances, it may have resulted from increase in

the Net Advances. While increase in Advances may be necessary for the survival and

progress of the bank itself, it should not mean increased justification for the higher incidence

of NPA. If recovery were good, perhaps, NPA could have been reduced. In other words,

increased NPA can be directly attributed to non-recovery advances made to borrowers in

time.


TABLE 4.2

TABLE SHOWING GROSS NPA

YEAR AMOUNT (in crores)

% OF CHANGES IN GROSS NPA

2007 - 08 1.02-

2008 - 09 1.6864.70

2009 - 10 3.44237.25

2010 - 11 2.29125.5

2011 - 12 0.96-5.88

ANALYSIS

The aggregate Gross NPA of the bank is on an downward trend but taking on yearly basis,

much trend could be identified out of 3 years of data considered for analysis, Gross NPA

decreased at an decreasing rate registrating decrease of 1.02(crores) and 0.96(crores)

respectively. This can be seen from the above table.


GRAPH 4.2

GRAPH SHOWING GROSS NPA

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

-50

0

50

100

150

200

250

300

AMOUNT (in crores) 1.02% OF CHANGE GROSS NPA Base year

INTERPRETATION

The movement of Gross NPA seems to have decreased at an decreasing rate which can be

observed in the rate of growth in some years so from data analysed above shows that bank as

followed the prudent lending policy and increased focus on recoveries.


TABLE 4.3

TABLE SHOWING GROSS NPA AND PROVISION

YEAR

GROSS NPA(in crores)

PROVISION(in crores)


% OF CHANGES IN PROVISION

2007 - 08 1.02 0.282008 - 09 1.68 0.31 64.7 10.712009 - 10 3.44 0.9 237.25 221.422010 - 11 2.29 0.63 125.5 1252011 - 12 0.96 0.33 -5.88 15.15

ANALYSIS

To understand the trend of Gross NPA and Provision, the charts are drawn taking the Gross NPA and Provision of the bank. From such chart what can be seen is that the Gross NPA and Provision were constantly decreasing.


GRAPH 4.3

GRAPH SHOWING GROSS NPA AND PROVISION

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

-50

0

50

100

150

200

250

300

GROSS NPA(in crores)PROVISION(in crores)% OF CHANGES IN GROSS NPA% OF CHANGES IN PROVISION

INTERPRETATION

There is a decrease in the Gross NPA and Provision given by the bank. This shows that bank has followed the prudent lending policy and increased focus on recoveries.


TABLE 4.4

TABLE SHOWING NET NPA

YEAR AMOUNT (in crores)

% OF CHANGE IN NET NPA

2007 - 08 0.74 -2008 - 09 1.37 85.132009 - 10 2.54 243.242010 - 11 1.66 124.322011 - 12 0.63 -14.86

ANALYSIS

The aggregate net NPA of the bank is on an downward trend but taking on a yearly basis much trend could be identified out of 5 years of the data considered for analysis , Net NPA decreased at an decreasing rate registering an decrease of 0.74(crores) and 0.63(crores) respectively. This can be seen from the chart above


GRAPH 4.4

GRAPH SHOWING NET NPA

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

-50

0

50

100

150

200

250

300

AMOUNT (in crores) 0.74% OF CHANGE IN NET NPA -

INTERPRETATION


The movement of the NPA seems to have decreased at a decreasing rate which can be observed in the rate of Growth in some years so from data analysed above shows that bank has followed prudent lending policy and increased focus on recoveries.

TABLE 4.5

TABLE SHOWING TOTAL ADVANCES AND GROSS NPA

YEARADVANCES (in crores)

GROSS NPA(in crores)

% OF CHANGES IN ADVANCES


2007 – 08 61.8 1.022008 – 09 74.13 1.68 19.95 64.7

2009 – 10 76.8 3.44 24.27 237.25

2010 – 11 71.48 2.29 15.66 125.5

2011 – 12 67.31 0.96 8.91 -5.88

ANALYSIS

To understand the trend of total advances and gross NPA the charts are drawn taking the total advances of bank and the gross NPA. From such chart , what can be seen is that the total advances was constantly increased from 2007-08 to 2009-10 and constantly decreasing for last 2 years but the Gross NPA was constantly decreasing.


GRAPH 4.5

GRAPH SHOWING TOTAL ADVANCES AND GROSS NPA

2007 – 08 2008 – 09 2009 – 10 2010 – 11 2011 – 12

-50

0

50

100

150

200

250

300

ADVANCES (in crores)GROSS NPA(in crores)% OF CHANGES IN ADVANCES% OF CHANGES IN GROSS NPA

INTERPRETATION

There is an sharp increase in total advances given by the bank in the year 2007-08 to 2009-10 and the advances decreased in the last 2 years but we can also be seen that Gross NPA decreased to a great extent. This shows that the bank has followed that prudent lending policy increased focus on recoveries.


TABLE 4.6

TABLE SHOWING TOTAL ADVANCES AND NET NPA

YEARADVANCES (in crores)

NET NPA(in crores)

% OF CHANGES IN ADVANCES

% OF CHANGES IN NET NPA

2007 - 08 61.8 0.74 - -

2008 - 09 74.13 1.37 19.95 85.13

2009 - 10 76.8 2.54 24.27 243.24

2010 - 11 71.48 1.66 15.60 124.32

2011 - 12 67.31 0.63 8.91 -14.86

ANALYSIS

To understand the trend of total advances and Net NPA the charts are drawn taking the total Advances of the bank and Net NPA. From such chart what can be seen is that the total Advances was constantly increased from 2007-08 to 2009-10 and decreasing for last 2 years but the Net NPA was decreasing.


GRAPH 4.6

GRAPH SHOWING TOTAL ADVANCES AND NET NPA

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

-50

0

50

100

150

200

250

300

ADVANCES (in crores)NET NPA(in crores)% OF CHANGES IN ADVANCES% OF CHANGES IN NET NPA

INTERPRETATION

There is a sharp increase in Total Advances given by the bank in the year 2007-08 to 2009-10 and decreased in last 2years but we can also be seen that Net NPA decreased to a extent. This


shows that the bank has followed the prudent lending policy and increased focus on recoveries.

TABLE 4.7

TABLE SHOWING THE PERCENTAGE OF GROSS NPA TO

TOTAL ADVANCES IN SBI FOR LAST 5 YEARS

YEARGROSS NPA (in crores)

ADVANCES (in crores)

% OF GROSS NPA TO TOTAL ADVANCES

2007 - 08 1.02 61.8 1.65

2008 - 09 1.68 74.13 2.26

2009 - 10 3.44 76.8 4.47

2010 - 11 2.29 71.48 3.2

2011 - 12 0.96 67.31 1.42

ANALYSIS

To understand the real impact of Gross NPA, the Graph is drawn taking the gross NPA of the bank as a percentage of the total Advances. From such Graph, what can be seen is that the Gross NPA as the percentage of total Advances has been decreasing


GRAPH 4.7

GRAPH SHOWING THE PERCENTAGE OF GROSS NPA TO TOTAL ADVANCES IN SBI FOR LAST 5 YEARS

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

10

20

30

40

50

60

70

80

90

GROSS NPA (in crores)ADVANCES (in crores)% OF GROSS NPA TO TOTAL ADVANCES

INTERPRETATION

Even though there was a increase in the Advances given by the bank. It can be seen that Gross NPA decrease to extent. From this we can assume that bank must have taken up


fruitful efforts to recover money from the wilful defaulters on the other hand, borrowers have become capable to pay back, possibly because their business has take off as expected. In this case project evaluation department may have evaluated the prospectors of the project properly alternatively the entrepreneur or the borrower may have enchased potential market opportunities. These aspects may have decreased the Gross NPA of the bank. However some stringent measures may have played a role in controlling the Gross NPA in said Period

TABLE 4.8

TABLE SHOWING THE PERCENTAGE OF NET NPA TO TOTAL ADVANCES

YEARNET NPA(in crores) ADVANCES (in crores)

% OF NET NPA TO TOTAL ADVANCES

2007 - 08 0.74 61.8 1.19

2008 - 09 1.37 74.13 1.84

2009 - 10 2.54 76.8 3.3

2010 - 11 1.66 71.48 2.32

2011 - 12 0.63 67.31 0.93

ANALYSIS

To understand the real impact of Net NPA, the Graph is drawn taking the Net NPA of the bank as a percentage of the total Advances. From such Graph, what can be seen is that the Net NPA as the percentage of total Advances has been decreasing


GRAPH 4.8

GRAPH SHOWING THE PERCENTAGE OF NET NPA TO TOTAL ADVANCES

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

10

20

30

40

50

60

70

80

90

NET NPA(in crores)ADVANCES (in crores)% OF NET NPA TO TOTAL ADVANCES

INTERPRETATION


Even though there was a increase in the Advances given by the bank. It can be seen that Net NPA decrease to extent. From this we can assume that bank must have taken up fruitful efforts to recover money from the willful defaulters on the other hand, borrowers have become capable to pay back, possibly because their business has take off as expected. In this case project evaluation department may have evaluated the prospectors of the project properly alternatively the entrepreneur or the borrower may have enchased potential market opportunities. These aspects may have decreased the Net NPA of the bank. However some stringent measures may have played a role in controlling the Net NPA in said Period.

TABLE 4.9

TABLE SHOWING GROSS AND NET NPA IN SBI

YEAR

GROSS NPA(IN CRORES)

NET NPA(in crores)


% OF CHANGES IN NET NPA

2007 - 08 1.02 0.742008 - 09 1.68 1.37 64.7 85.13

2009 - 10 3.44 2.54 237.25 243.24

2010 - 11 2.29 1.66 125.5 124.32

2011 - 12 0.96 0.63 -5.88 -14.86

ANALYSIS

To understand the trend of Gross NPA and Net NPA the charts are drawn taking a Gross NPA of the bank and Net NPA from such chart what can be seen is that Gross NPA and Net NPA were constantly decreasing.


GRAPH 4.9

GRAPH SHOWING GROSS AND NET NPA IN SBI

2007 - 08 2008 - 09 2009 - 10 2010 - 11 2011 - 12-50

0

50

100

150

200

250

300

GROSS NPA(IN CRORES)NET NPA(in crores)% OF CHANGES IN GROSS NPA% OF CHANGES IN NET NPA

INTERPRETATION

There is a decrease in the Gross NPA given by the bank but we can also see that Net NPA decreased to a extent. This shows that bank has followed the precedent lending policy and

increased focus on recoveries.


TABLE 4.10

TABLE SHOWING THE PERCENTAGE OF OF GROSS AND NET NPA

YEARGROSS NPA(IN CRORES) NET NPA(in crores)

2007 - 08 1.02 0.74

2008 - 09 1.68 1.37

2009 - 10 3.44 2.54

2010 - 11 2.29 1.66

2011 - 12 0.96 0.63

ANALYSIS


To understand the movement of Gross NPA and Net NPA, the charts are drawn taking the Gross NPA of the bank and the Net NPA. From such chart, what can be seen is that the Gross NPA and Net NPA was constantly decreasing.

GRAPH 4.10

GRAPH SHOWING THE PERCENTAGE OF GROSS AND NET NPA

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

1

2

3

4

5

6

7

1.02

1.68000000000001

3.44

2.29

0.960000000000001

0.740000000000004

1.37

2.54

1.66

0.630000000000006

NET NPA(in crores)GROSS NPA(IN CRORES)


INTERPRETATION

There is a decrease in the Gross NPA given by the bank but we can also see that Net NPA decreased to a extent. This shows the bank has followed precedent lending policy and increased focus on recoveries.

TABLE 4.11

TABLE SHOWING GROSS NPA, NET NPA AND PROVISION IN SBI FOR

THE LAST 5 YEARS

YEARGROSS NPA(in crores)

NET NPA(in crores)

PROVISION(in crores)

2007 - 08 1.02 0.74 0.28

2008 - 09 1.68 1.37 0.31

2009 - 10 3.44 2.54 0.9

2010 - 11 2.29 1.66 0.63

2011 - 12 0.96 0.63 0.33

ANALYSIS


To understand the trend of Gross NPA, Provision and Net NPA, the charts are drawn taking the Gross NPA, Provision and the Net NPA of the bank .From such chart what can be seen is that the Gross NPA, Provision and Net NPA were constantly decreasing.

GROSS NPA – PROVISION =NET NPA

GRAPH 4.11

GRAPH SHOWING GROSS NPA, NET NPA AND PROVISION IN SBI FOR

THE LAST 5 YEARS

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

0.5

1

1.5

2

2.5

3

3.5

4

GROSS NPA (in crores)NET NPA(in crores)PROVISION (in crores)


INTERPRETATION

There is a decrease in the Gross NPA, Provision and Net NPA given by the bank. This shows

that bank has followed the prudent lending policy and increased focus on recoveries.

TABLE 4.12

TABLE SHOWING SUB-STANDARD , DOUBTFULL ASSETS AND LOSS ASSETS

YEARSUB STANDARD ASSET DOUBTFUL ASSET LOSS ASSET

2007 - 08 0.68 0.19 0.15

2008 - 09 1.43 0.12 0.13

2009 - 10 2.67 0.21 0.56

2010 - 11 1.56 0.38 0.35

2011 - 12 0.64 0.09 0.23

ANALYSIS


To understand the trend of Sub Standard Assets, Loss Assets and Doubtfull Assets the chart are drawn taking the sub standard assets, loss assets and doubtful assets of the bank.From such chart what can be seen is that the Sub-Standard assets had decreased in the first year2007-08 and Loss Assets and Doubtful assets has been constantly decreasing.

SUB STANDARD ASSETS + DOUBTFUL ASSETS + LOSS ASSETS = GROSS NPA

GRAPH 4.12

GRAPH SHOWING SUB-STANDARD , DOUBTFULL ASSETS AND LOSS ASSETS


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

0.5

1

1.5

2

2.5

3

SUB STANDARD ASSETDOUBTFUL ASSETLOSS ASSET

INTERPRETATION

There is a increase in the substandard assets for the year 2009-10and 2010-11 and loss assets and doubtful assets has been constantly decreasing for last 5 years. This is the reason Gross NPA has been decreasing.

TABLE 4.13

TABLE SHOWING PERCENTAGE OF SUB-STANDARD , DOUBTFULL ASSETS AND LOSS ASSETS


YEARSUB-STANDARD ASSET DOUBTFUL ASSET LOSS ASSET

2007 - 08

2008 - 09 110.29 36.84 13.33

2009 - 10292.64 10.52 273.33

2010 - 11129.41 100 133.33

2011 - 125.88 52.63 53.33

ANALYSIS

To understand the classification of assets as percentage of substandard assets, doubtful assets and loss assets for the respective year. The charts are drawn taking the substandard assets, loss assets and doubtful assets of the bank as percentage to Gross NPA. From such chart what can be seen is that the percentage of doubtful assets is more comparing to the others

SUBSTANDARD ASSET + DOUBTFUL ASSET + LOSS ASSETS = GROSS NPA

GRAPH 4.13

GRAPH SHOWING PERCENTAGE OF SUB-STANDARD , DOUBTFULL ASSETS AND LOSS ASSETS


Classification of asset in the year 2008 - 09


2007 - 08

2009 - 10

2011 - 12

0

100

200

300SUB STANDARD ASSETDOUBTFUL ASSETLOSS ASSET

110.29

36.84

13.33

2008 - 09




292.64

10.52

273.33

2009 - 10




129.41

100

133.33

2010 - 11




5.88

52.63

53.33

2011 - 12


CHAPTER – V

SUMMARY OF FINDINGS AND CONCLUSION


FINDINGS:

Advances has been increased by 19.95% in 2008-09 compare to 2007-08 and

increased by 24.27% in 2009-10 and in the year 2010-11and 2001-2012 it is

Rs.71.48 and 67.31 respectively.

The Gross NPA of the bank is 64.70% in 2008-09 and it has been increased by

237.25% compare to 2008-09, in the year 2009-10 and it has slightly decreased

by 125.5% and 5.85% in 2010-11 and 2011-12 respectively.

The Provision has gone up by 221.42% in 2009-10 compare to 2008-09 which is

10.71%, but in the year 2010-11and 2011-12 provision has gone down by 125%

and 15.15% respectively.

The Net NPA has gone up by 85.13%, 243.24% in the year2008-09 and 2009-10

respectively and in the year 2010-11and 2011-12 the percentage of Net NPA has

come down by 124.32% and 14.86%respectively. This shows that the bank has

followed the prudent lending policy and increased focus on recoveries.

The percentage of Gross NPA to Total Advances is tremendously increased by

1.65%, 2.26% and 4.46% in the year 2007-08, 2008-09 and 2009-10 respectively

but it has slightly decreased to 3.2% and 1.42% in 2010-11 and 2011-12

respectively.

The percentage of Net NPA to Total Advances is tremendously increased by

1.19%, 1.84% and 3.3% in the year 2007-08, 2008-09 and 2009-10 respectively


but it has greatly decreased to 2.32% and 0.93% in 2010-11 and 2011-12

respectively.

According to RBI and Banking rules, provision act of the profit must be made.

The RBI has classified the Non Performing Asset into Sub-Standard assets,

Doubtful assets, and Loss assets.

The Doubtful assets for the year 2007-08,2008-09,2009-10,2010-11,2011-12 are

0.19, 0.12, 0.21, 0.38, 0.09crores respectively.

The Non Performing Asset of State Bank of India reduced to Rs.0.63crores in

the year 2011-12, is a significant development in the area of recovery and up

gradation. Intensive recovery measures, write offs and higher provisions have

helped bank to reduce Non Performing Asset.

CONCLUSION:


It is very important for any Bank and Financial Institution to maintain the asset quality for

strengthening its financial status. The Non Performing Asset figures of any financial

Institution and Banks gives the picture of the quality of asset of the Banks and Financial

Institution which depicts strength and weakness of their Balance sheet.

From the analysis and findings it can be concluded that –

Loans and Advances contribute more to the profits of the Bank.

In the time of recovery of loans and interest borrowed by the customer if they fails to

pay such debts results in Non Performing Asset.

According to RBI huge provisions should be provided to Non Performing Asset

results in decrease of Non Performing Asset.

When customer borrows loans, proper Investigation is not taken in case of surety and

business loans.

No constant communication and transactions with the business person who has taken

loan.

The experience in State Bank of India indeed was knowledgeable as well as

Educative. I have gained a lot of information about Non Performing Asset and the

role of the bank in controlling the Non Performing Asset level. I was also able to

know the Banks methodology in tracking a problem loan and strategies in preventing

an advances or loan from becoming an Non Performing Asset.

To conclude and would like to mention the experience in this bank has been an

immense help to me in understanding the importance of various concepts and thus

gave me a much needed practical exposure to the actual happenings in and out of the

bank.

CHAPTER VI

RECOMMANDATION AND SUGGESTIONS


SUGGESTIONS:

The lending bank should be given more powers to seize and dispose off the security and to attach any other additional security/asset available with the defaulting borrower and court intervention in such proceeding should be eliminated.

Bankers handling the recovery operations should be educated on the management and disposal process of the acquired assets and should also be provided with management expertise while taking over the operations of the companies.

3/4th of the powers currently available to the bankers under the Act should be explained to both the borrowers and the bankers for the effective implementation.

The branches should be given more power to take decisions about lending and

recovery. The Branch Manager, who knows better about his customers, should

be allowed to make the first appraisal report when the borrower approaches.

The bank needs an integral organization restructuring to face the internal

factors affecting the increase in NPA level, use of information technology for

better credit administration.

Publications of the names of the defaulters who have settled their dues through

compromise. This motivates other defaulters to make Reminder letters should be

sent to the borrowers. If there is no response, second and a third reminders

should be sent. This sort of reminders will continue until the recovery is made.

All the borrowers may not respond to the reminder and therefore it becomes

essential to visit them personally. During the visit, the branch staff should enquire


about their difficulties in loan payment and request them to cooperate with the

branch even by making a small payment.

One time settlement in another macro level concern. As the judicial process is time

consuming and ineffective, banks have advised defaulting borrowers. This

provides scope for willful defaulters becoming eligible candidates for such a

settlement. Compromises. In some cases, gifts must also be given Reminder letters

should be sent to the borrowers. If there is no response, second and a third

reminders should be sent. This sort of reminders will continue until the recovery is

made.

ANNEXURES AND BIBLIOGRAPHY


Balance Sheet of State Bank of India

PARTICULARS Mar '12 Mar '11 Mar '10 Mar '09 Mar '08

Capital and Liabilities: Total Share Capital 671 635 635 635 631 Equity Share Capital 671 635 635 635 631

Share Application Money - - - - -

Preference Share Capital - - - - - Init. Contribution Settler - - - - -

Preference Share Application Money - - - - -

Employee Stock Opiton - - - - - Reserves 105,559 82,836 82,501 71,756 60,605 Revaluation Reserves - - - - - Net Worth 106,230 83,471 83,136 72,390 61,236 Deposits 1,414,689 1,255,562 1,116,465 1,011,988 776,417 Borrowings 157,991 142,471 122,075 64,592 66,023 Total Debt 1,572,681 1,398,033 1,238,539 1,076,580 842,440 Minority Interest 3,726 2,977 2,631 2,228 2,028 Policy Holders Funds - - - - -

Group Share in Joint Venture - - - - -

Other Liabilities & Provisions 146,994 163,295 125,838 153,627 121,565 Total Liabilities 1,829,631 1,647,777 1,450,144 1,304,826 1,027,270

Assets

Cash & Balances with RBI 79,199 119,350 82,196 74,161 74,817

Balance with Banks, Money at Call 48,392 35,978 39,653 51,101 14,211 Advances 1,163,670 1,006,402 869,502 750,362 603,222


Investments 460,949 419,066 402,754 372,231 273,842 Gross Block 19,620 17,543 15,887 14,064 12,641

Accumulated Depreciation 12,593 11,402 10,359 9,127 8,225 Net Block 7,027 6,141 5,528 4,937 4,416

Capital Work In Progress 381 346 486 287 247 Other Assets 69,804 60,616 50,025 51,747 56,515 Minority Interest - - - - -

Group Share in Joint Venture - - - - - Total Assets 1,829,422 1,647,898 1,450,144 1,304,826 1,027,270 Contingent Liabilities 776,754 687,541 556,675 734,944 855,654 Bills for collection 240,812 234,065 197,108 175,678 115,339 Book Value (Rs) 1,583 1,315 1,309 1,140 970

Profit and loss a/c of State Bank of India

PARTICULARS Mar '12 Mar '11 Mar '10 Mar '09 Mar '08


Income Interest Earned 147,197 113,636 100,081 91,667 71,496 Other Income 31,205 34,343 30,748 22,055 19,580 Total Income 178,402 147,979 130,829 113,722 91,076 Expenditure Interest expended 89,320 68,086 66,638 62,626 47,944 Employee Cost 22,084 19,980 16,331 12,997 10,458

Selling and Admin Expenses 19,757 16,046 10,676 7,311 5,987 Depreciation 1,372 1,381 1,322 924 1,038

Miscellaneous Expenses 29,884 31,288 23,842 18,684 16,436

Preoperative ExpCapitalised - - - - - Operating Expenses 60,883 57,370 48,637 30,182 26,747

Provisions & Contingencies 12,214 11,325 3,534 9,735 7,171 Total Expenses 162,416 136,781 118,808 102,543 81,863

Net Profit for the Year 15,986 11,198 12,021 11,179 9,213 Minority Interest 630 495 280 218 252

Share Of P/L Of Associates - - - - -

Net P/L After Minority Interest & Share Of Associates 15,356 10,703 11,741 10,961 8,961 Extraordionary Items - - - - - Profit brought forward 523 59 216 88 119

Total Preference Dividend

16,509 -

11,257 12,237 -

11,267 -

9,332 - -

Equity Dividend 2,349 1,905 1,905 1,841 1,358

Corporate Dividend Tax 388 354 322 310 232

Per share data (annualised)

Earning Per Share (Rs) 238 176 189 176 146 Equity Dividend (%) - - - - - Book Value (Rs) 1,583 1,315 1,309 1,140 970 Appropriations


Transfer to Statutory Reserves 12,236 7,962 9,665 8,676 7,403

Transfer to Other Reserves - - - -

(0)

Proposed Dividend/Transfer to Govt 2,737 2,259 2,226 2,151 1,589

Balance c/f to Balance Sheet 893 523 59 216 88 Total 15,866 10,744 11,950 11,043 9,080

STATE BANK OF INDIA: RAJARAJESHWARI NAGAR BRANCH, BANGLORE-560098

PERFORMANCE HIGHLIGHTS


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

Deposits 80.57 101.55 121.83 140.86 197.93

Advance 61.8 74.13 76.8 71.48 67.31

Profit 3.02 2.98 3.45 4.95 3.9

Misc. Income 41.47 42.87 32.39 88.21 98.84

Over Head 33.91 32.99 33.63 31.59 34.51

NPA 0.96 1.26 3.44 2.27 0.94

CASA 35.61 46.36 52.28 62.91

BIBLIOGRAPHY

Reference:

Banking Theory and Practice


Published by Himalaya Publication

Author – P.N Reddy and H.R Appanaiah

Banking Theory law and Practice

Published by Himalaya Publication

Author – Dr.P.KSrivastava

Annual Reports of State Bank of India

Website:

1. www.google.com2. www.moneycontrol.com3. www.sbi.co.in


http://www.sbi.co.in/

http://www.moneycontrol.com/

http://www.google.com/

Project on NPA 27032013.

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Transcript of Project on NPA 27032013.