A REPORT ON

“A report on Public sector banks (SBI) vs private sector banks (HDFC) : A

comparative analysis of their NPA scenario”

Local Internship Project report

Submitted in Partial Fulfillment of the requirement

FOR THE AWARD OF BACHELORS DEGREE

BBM (e-BANKING & FINANCE)

BY: DERIC GONSALVES - 102601036

RANVIR JASWAL –

ROHAN THOMAS KURIEN-

UTKARSH SINGH -

Under the Guidance of: Mrs. E. Geetha (Assistant Professor)

______________________________________________________________________________

DEPARTMENT OF COMMERCE

MANIPAL UNIVERSITY

MANIPAL-576104

A REPORT ON

“A report on Public sector banks (SBI) vs private sector banks (HDFC) : A

comparative analysis of their NPA scenario”

BY: DERIC GONSALVES

RANVIR JASWAL

ROHAN THOMAS KURIEN

UTKARSH SINGH

DEPARTMENT OF COMMERCE

MANIPAL UNIVERSITY

MANIPAL-576104

DECLARATION

We hereby declare that the project work entitled ““Public sector banks vs private sector banks : A

comparative analysis of their NPA secnario.” submitted to Department of commerce Manipal is an

original work. The contents of this project report reflect the work done by us during the local project in

Manipal from January 4th, 2013 to March 31st, 2013.

Place: Manipal

Date: 31 /03 /2013

ACKNOWLEDGEMENTS

This report could not have been written without Mrs. Geetha. E. who not

only served as our guide but also encouraged and challenged us

throughout our local project program. She as well as other staff members

guided us throughout the process, never accepting less than our best

efforts. We thank them all.

We would like to thank all the customers of the banks and their

employees for their extended support and efforts in helping us collecting

data. Their support throughout is highly appreciated.

We would like to express our gratitude to the Department of Commerce,

Manipal University for providing us with an opportunity to carry out this

project and also providing us with all the required resources.

List of Figures :

Tables :

Table 1 - Categories of NPA

Table 2 – Gross NPA ratio

Table 3 – Net NPA ratio

Table 4 – Problem asset ratio

Figures of NPA ratios :

Fig : 1.1 - Bar diagram of gross NPA ratio

Fig : 1.2 - Bar diagram of net NPA ratio

Analysis of questionnaire :

Fig : 1.3 : Awareness

Fig : 1.4 : Source of Information

Fig ; 1.5 : Creating Awareness

Fig : 1.6 : Remedies

Fig : 1.7 : Type of accounts

Table Of Contents

1. Chapter 1 : Introduction

. The banking structure in India

. Nationalization process

. Reserve bank of India (RBI)

. Functions of the RBI

. Indian bank’s association

. banking Activities

. What is a Non performing asset?

. Types of NPA

. Classification of NPA

. Agricultural advance

. External factors

. Internal factors

. Problems due to NPA objectives

. Objectives

. Research methodology

. Scope for further research

. Limitation of the study

2. Chapter 2 : Literature Review

. Domestic papers

. International papers

3. Chapter 3 : Company Profile

. HDFC

. State bank of India ( SBI )

4. Analysis and interpretation of data and questionnaire

. Gross, Net and problem asset ratio

. Interpretation of the questionnaire

5. Suggestions and conclusion

Chapter 1 : Introduction

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

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

comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be

further grouped into nationalized banks, the State Bank of India and its associate banks, regional rural

banks and private sector banks (the old/new domestic and foreign). These banks have over 67,000

branches spread across the country. After nationalization, the initial mandate that banks were given was to

expand their branch network, saving rate and extend credit to the rural and SSI sectors. This mandate has

been achieved admirably. Since the early 90‟s the focus has shifted towards improving quality of assts

and better risk management. The Narasimham committee has recommended prudential norms on income

recognition, asset classification and provisioning. In India, banking sector acts as backbone of economy

system. Today, Banking Industry is undergoing a transitional phase. Foundation of Indian banking

industry is laid by Public Sector Banks and they hold 78% + of total asset of banking industry. But they

are held back with the excessive Non Performing assets (NPA), high employee cost and somehow lack in

intellectual capital. India cannot have a healthy economy without a sound and effective banking

system. The banking system should be hassle free and able to meet the new challenges posed by

technology and other factors, both internal and external.

In the past three decades, India's banking system has earned several outstanding achievements to

its credit. The most striking is its extensive reach. It is no longer confined to metropolises or

cities in India. In fact, Indian banking system has reached even to the remote corners of the

country. This is one of the main aspects of India's growth story. The government's regulation

policy for banks has paid rich dividends with the nationalization of 14 major private banks in

1969. Banking today has become convenient and instant, with the account holder not having to

wait for hours at the bank counter for getting a draft or for withdrawing money from his account.

The first bank in India, though conservative, was established in 1786. From 1786 till today, the

journey of Indian Banking System can be segregated into three distinct phases:

1. Early phase of Indian banks, from 1786 to 1969

2. Nationalization of banks and the banking sector reforms, from 1969 to 1991

3. New phase of Indian banking system, with the reforms after 1991

The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and

Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of

Bombay (1840), and Bank of Madras (1843) as independent units and called them Presidency

banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank of

private shareholders, mostly Europeans, was established. Allahabad Bank was established,

exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in

Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara

Bank, Indian Bank, and Bank of Mysore were set up. The Reserve Bank of India came in 1935.

During the first phase, the growth was very slow and banks also experienced periodic failures

between 1913 and 1948. There were approximately 1,100 banks, mostly small. To streamline the

functioning and activities of commercial banks, the Government of India came up with the

Banking Companies Act, 1949, which was later changed to the Banking Regulation Act, 1949 as

per amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI) was vested

with extensive powers for the supervision of banking in India as the Central banking authority.

During those days, the general public had lesser confidence in banks. As an aftermath, deposit

mobilization was slow. Moreover, the savings bank facility provided by the Postal department

was comparatively safer, and funds were largely given to traders.

The government took major initiatives in banking sector reforms after Independence. In 1955, it

nationalized the Imperial Bank of India and started offering extensive banking facilities,

especially in rural and semi-urban areas. The government constituted the State Bank of India to

act as the principal agent of the RBI and to handle banking transactions of the Union government

and state governments all over the country. Seven banks owned by the Princely states were

nationalized in 1959 and they became subsidiaries of the State Bank of India. In 1969, 14

commercial banks in the country were nationalized. In the second phase of banking sector

reforms, seven more banks were nationalized in 1980. With this, 80 percent of the banking sector

in India came under the government ownership.

This last phase has introduced many more products and facilities in the banking sector as part of

the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up,

which worked for the liberalization of banking practices. Now, the country is flooded with

foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to

customers. Phone banking and net banking are introduced. The entire system became more

convenient and swift. Time is given importance in all money transactions.

The financial system of India has shown a great deal of resilience. It is sheltered from crises

triggered by external macroeconomic shocks, which other East Asian countries often suffered.

This is all due to a flexible exchange rate regime, the high foreign exchange reserve, the not-yet

fully convertible capital account, and the limited foreign exchange exposure of banks and their

customers.

The Banking Structure in India

The commercial banking structure in India consists of scheduled commercial banks and

unscheduled banks. Scheduled banks constitute those banks that are included in the Second

Schedule of Reserve Bank of India (RBI) Act, 1934.

As on June 30, 1999, there were 300 scheduled banks in India having a total network of 64,918

branches. The scheduled commercial banks in India comprise State Bank of India and its

associates (8), nationalized banks (19), foreign banks (45), private sector banks (32), co-

operative banks, and regional rural banks. Before the nationalization of Indian banks, the State

Bank of India (SBI) was the only nationalized bank, which was nationalized on July 1, 1955,

under the SBI Act of 1955. The nationalization of seven State Bank subsidiaries took place in

1959.

After the nationalization of banks in India, the branches of the public sector banks rose to

approximately 800 percent in deposits and advances took a huge jump by 11,000 percent.

Nationalization Process

1955: Nationalization of State Bank of India

1959: Nationalization of SBI subsidiaries

1969: Nationalization of 14 major banks

1980: Nationalization of seven banks with deposits over Rs 200 crore

Banks in India

In India, banks are segregated in different groups. Each group has its own benefits and

limitations in operations. Each has its own dedicated target market. A few of them work in the

rural sector only while others in both rural as well as urban. Many banks are catering in cities

only. Some banks are of Indian origin and some are foreign players.

Banks in India can be classified into:

1. Public Sector Banks

2. Private Sector Banks

3. Cooperative Banks

4. Regional Rural Banks

5. Foreign Banks

One aspect to be noted is the increasing number of foreign banks in India. The RBI has shown

certain interest to involve more foreign banks. This step has paved the way for a few more

foreign banks to start business in India.

Banking industry is a major sector of the economy that has achieved renewed focus

after financial sector reforms and the entry of private sector banks. This sector is the foundation

of modern economic development and linchpin of development strategy .It forms the core of the

financial sector of an economy. Through mobilization of resources and their better allocation,

commercial banks play an important role in the development process of underdeveloped

countries. Commercial banks improve the allocation of resources by lending money to priority

sector of the economy. These banks provide a meeting ground for the savers and investors

among various indicators of financial stability; banks’ non-performing loan assumes critical

importance since it reflects on the asset quality, credit risk and efficiency in the allocation of

resources to productive sectors. Common perspective is that the problem of banks’ non-

performing loans is ascribed to political, economic, social, technological, legal and

environmental in present times, banking in India is fairly mature in terms of supply, product

range and reach. But reach in rural India still remains challenge for the public sector and private

sector banks. The Reserve Bank of India is mainly concerned with providing finance to weaker

section of society, development of priority sectors and providing credit under differential rate of

interest scheme. After reforms in 1991, the entry of many private players has been permitted.

Post liberalization demand PSB’s to compete with well diversified and resource rich private

banks and to provide fine funded services and unique products to suit customers need. PSB’s

have already sacrificed allot of their profits for achievement of social objectives. Due to cut

throat competition and technology, the PSB’s are thinking to improve productivity and

profitability which is essential to survive in a globalised economy. The future of PSB’s would be

based on their capability to continuously build good quality assets in an increasingly competitive

environment and maintaining capital adequacy and stringent prudential norms. Consolidation

and competition may be key factors impacting the nationalized banks in the future. Due to

reforms, it has been felt that there is a need not only to increase in profits but also reduction in

nonperforming assets (NPA’s) of banks. It is in this context the study has undertaken an

empirical analysis for evaluating the non- performing loans of public sector banks and private

sector banks with special reference to weaker sections.

Reserve Bank of India (RBI)

The central bank of the country is the Reserve Bank of India (RBI). It was established in April

1935 with a share capital of Rs 5 crore on the basis of the recommendations of the Hilton Young

Commission. The share capital was divided into fully paid shares of Rs 100 each, which was

entirely owned by private shareholders in the beginning. The government held shares of nominal

value of Rs 220,000. The RBI commenced operation on April 1, 1935, under the Reserve Bank

of India Act, 1934. The Act (II of 1934) provides the statutory basis of the functioning of the

Bank. The Bank was constituted to meet the following requirements:

1. Regulate the issue of currency notes

2. Maintain reserves with a view to securing monetary stability

3. Operate the credit and currency system of the country to its advantage

Functions of the RBI

The Reserve Bank of India Act of 1934 entrusts all the important functions of a central bank

with the Reserve Bank of India.

1. Bank of Issue: Under Section 22 of the Act, the Bank has the sole right to issue currency

notes of all denominations. The distribution of one-rupee notes and coins and small coins

all over the country is undertaken by the Reserve Bank as an agent of the government.

2. Banker to the Government: The second important function of the RBI is to act as the

government’s banker, agent, and adviser.

3. Bankers' Bank and Lender of the Last Resort: The RBI acts as the bankers' bank.

Since commercial banks can always expect the RBI to come to their help in times of

banking crisis, the RBI becomes not only the banker's bank but also the lender of the last

resort.

4. Controller of Credit: The RBI is the controller of credit, i.e., it has the power to

influence the volume of credit created by banks in India. It can do so through changing

the Bank rate or through open market operations.

5. Custodian of Foreign Reserves: The RBI has the responsibility to maintain the official

rate of exchange. Besides maintaining the rate of exchange of the rupee, the RBI has to

act as the custodian of India's reserve of international currencies.

6. Supervisory Functions: In addition to its traditional central banking functions, the RBI

has certain non-monetary functions of the nature of supervision of banks and promotion

of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act,

1949, have given the RBI wide powers of supervision and control over commercial and

co-operative banks, relating to licensing and establishments, branch expansion, liquidity

of their assets, management and methods of working, amalgamation, reconstruction, and

liquidation.

Indian Banks’ Association (IBA)

The Indian Banks’ Association (IBA) was formed on September 26, 1946, with 22 members.

Today, IBA has more than 156 members, such as public sector banks, private sector banks,

foreign banks having offices in India, urban co-operative banks, developmental financial

institutions, federations, merchant banks, mutual funds, housing finance corporations, etc.

The IBA has the following functions:

1. Promote sound and progressive banking principles and practices.

2. Render assistance and to provide common services to members.

3. Organize co-ordination and co-operation on procedural, legal, technical, administrative,

and professional matters.

4. Collect, classify, and circulate statistical and other information.

5. Pool expertise towards common purposes such as cost reduction, increased efficiency,

productivity, and improving systems, procedures, and banking practices.

6. Project good public image of banking through publicity and public relations.

7. Encourage sports and cultural activities among bank employees.

Banking Activities

1. Retail banking, dealing directly with individuals and small businesses

2. Business banking, providing services to mid-market businesses

3. Corporate banking, directed at large business entities

4. Private banking, providing wealth management services to high net worth individuals

5. Investment banking, activities in the financial markets, such as "underwrite" (guarantee

the sale of) stock and bond issues, trade for their own accounts, make markets, and advise

corporations on capital market activities like mergers and acquisitions

6. Merchant banking is the private equity activity of investment banks

7. Financial services, global financial institutions that engage in multiple activities such as

banking and insurance

What is a Non – Performing Asset?

A classification used by financial institutions that refer to loans that are in jeopardy of default.

Once the borrower has failed to make interest or principal payments for 90 days the loan is

considered to be a non-performing asset. Also known as non-performing loan.

Non-performing assets are problematic for financial institutions since they depend on interest

payments for income. Troublesome pressure from the economy can lead to a sharp increase in

non-performing loans and often results in massive write-downs.

Lease or loan where the lessee or borrower is not making timely payments, payments are no

longer anticipated or, maturity date has passed without fulfillment of the agreement. In

such cases, the lesser or lender may allow some time (typically not exceeding 90 days) before

asking for additional collateral, demanding the full payment of the balance, or

taking repossession or foreclosure action.

Types of 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 nonstandard 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 burden of 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

Classification of NPA’s :

1. Standard Assets

2. Sub standard Assets

3. Doubtful Assets

4. Loss Asset

An asset becomes non-performing when it ceases to generate income for the bank. Earlier an

asset was considered as non-performing asset (NPA) based on the concept of 'Past Due'. A 'non

performing asset' (NPA) was defined as credit in respect of which interest and / or installment of

principal has remained 'past due' for a specific period of time.

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

date. However, with effect from March 31, 2001 the 'past due' concept has been dispensed with

and the period is reckoned from the due date of payment.

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

of other accounts.

Agricultural Advance

1. With effect from September 30, 2004 the following revised norms are applicable to all

direct agricultural advances (Annex 1): A loan granted for short duration crops will be

treated as NPA, if the installment of principal or interest thereon remains overdue for two

crop seasons. A loan granted for long duration crops will be treated as NPA, if the

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

2. For the purpose of these guidelines, long duration crops would be crops with crop season

longer than one year and crops, which are not "long duration" crops would be treated as

short duration crops.

3. The crop season for each crop, which means the period up to harvesting of the crops

raised, would be as determined by the State Level Bankers' Committee in each state.

4. Depending upon the duration of crops raised by an agriculturist, the above NPA norms

would also be made applicable to agricultural term loans availed of by him. In respect of

agricultural loans, other than those specified in the Annex 1 and term loans given to non-

agriculturists, identification of NPAs would be done on the same basis as non-agricultural

advances, which, at present, is the 90 days delinquency norm.

5. Banks should ensure that while granting loans and advances, realistic repayment

schedules are fixed on the basis of cash flows / fluidity with the borrowers.

The system should ensure that identification of NPAs is done on an on-going basis and

doubts in asset classification due to any reason are settled through specified internal channels

within one month from the date on which the account would have been classified as NPA as

per prescribed norms. Banks should also make provisions for NPAs as 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

sheet for the year end reflects the provision made for NPAs.

The stability of banking hence is a pre-requisite for economic development and resilience

against financial crisis. Like any other business, success of banking is assessed based on

profit and quality of asset it possesses. Even though bank serves social objective through its

priority sector lending, mass branch networks and employment generation, maintaining asset

quality and profitability is critical for banks survival and growth. A major threat to banking

sector is prevalence of Non-Performing Assets (NPAs). NPA represent bad loans, the

borrowers of which failed to satisfy their repayment obligations. Michael et al (2006)

emphasized that NPA in loan portfolio affect operational efficiency which in turn affects

profitability, liquidity and solvency position of banks. Batra, S noted that in addition to the

influence on profitability, liquidity and competitive functioning, NPA also affect the

psychology of bankers in respect of their disposition of funds towards credit delivery and

credit expansion. NPA generate a vicious effect on banking survival and growth, and if not

managed properly leads to banking failures.

Batra, S (2003) mentioned that the most important business implication of the NPAs is that it

leads to the credit risk management assuming priority over other aspects of bank’s

functioning. The bank’s whole machinery would thus be pre-occupied with recovery

procedures rather than concentrating on expanding business. RBI, through various circulars,

stipulated guidelines to manage NPA. This view was supported by Yadav, MS and stated that

higher NPA engage banking staff on NPA recovery measures that includes filing suits to

recover loan amount instead of devoting time for planning to mobilization of funds. Thus

NPA impact the performance and profitability of banks. The most notable impact of NPA is

change in banker’s sentiments which may hinder credit expansion to productive purpose.

Banks may incline towards more risk-free investments to avoid and reduce riskiness, which

is not conducive for the growth of economy. Sethi, J and Bhatia, clarified on implications of

NPA accounts that Banks cannot credit income to their profit and loss account to the debit of

loan account unless recovery thereof takes place. Interest or other charges already debited but

not recovered have to be provided for and provision on the amount of gross NPAs also to be

made. All the loan accounts of the borrower would be treated as NPA, if one account is NPA.

Many authors emphasized the straddling impact of NPA and stressed its impact on loan

growth. A higher NPA force banks to invest in risk-free investments, thus directly affect the

flow of funds for productive purpose.

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

NPAs is more in public sector banks when compared to private sector banks and foreign banks.

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

EXTERNAL FACTORS

Ineffective recovery tribunal: The Govt. has set of numbers of recovery tribunals, which works

for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the

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

Willful Defaults : There are borrowers who are able to pay back loans but

but are intentionally withdrawing it. These groups of people should be identified and proper

measures should be taken in order to get back the money extended to them as advances and

loans.

Natural calamities : This is the measure factor, which is creating alarming rise in NPAs of the

PSBs. every now and then India is hit by major natural calamities thus making the borrowers

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

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

Mainly ours framers depends on rain fall for cropping. Due to irregularities of rain fall the

framers are not to achieve the production level thus they are not repaying the loans.

Industrial sickness : Improper project handling , ineffective management, lack of adequate

resources , lack of advance technology ,day to day changing govt. Policies give birth to industrial

sickness. Hence the banks that finance those

industriesultimately end up with a low recovery of their loansreducing their profit and liquidity.

Lack of demand Entrepreneurs in India could not foresee their product demand and starts

production which ultimately piles up their product thus making them unable to pay back the

money they borrow to operate these activit ies . The banks recover the amount by

selling of their assets, which covers minimum label. Thus the banks record the none recovered

part as NPAs and has to make provision for it.

Internal Factors

Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long

.i. Principles of safety ii. Principle of liquidity iii. Principles of profitability

NPA results in deleterious impact on the return on assets. It happens in the following ways;

1. The interest income of banks will fall and it is to be accounted only on receipt basis.

2. Banks profitability is affected adversely because of the provision of doubtful debts and

consequent write off as bad debts.

3. Return on Investment (ROI) is reduced.

4. The capital adequacy ratio is disturbed as NPAS are entering into the calculation.

5. The cost of capital will go up.

6. The assets and liability mismatch will widen.

7. The economic value additions (EVA) by banks gets upset because EVA is equal to the net

operating profit minus cost of capital, and

8. It limits recycling of the funds.

PROBLEMS DUE TO NPA 1. Owners do not receive a market return on their capital .in the worst case, if the banks fails, owners loose

their assets. In modern times this may affect abroad pool of shareholders.

2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors loose

their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and

higher lending rates repress saving and financial market, which hamper economic growth.

4.Non performing loans epitomize bad investment. They misallocate credit from good projects, which do not

receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by extension, labor

and natural resources.

Non performing asset may spill over the banking system and contract the money stock, which may lead to

economic contraction. This spillover effect can channelize through liquidity or bank insolvency.

Various reasons can be cited for an account becoming NPA. An asset leads to NPA when the

borrower fails to repay the interest and/or principal on agreed terms. The reasons for NPA are

classified differently; into systematic and situational causes into overhand component and

incremental component, into internal and external factors; into random and non-random factors

based on its effects and into bank-specific business and institutional environment factors. The

reasons classified into internal factors and external factors are more common in literatures.

With regard to the reasons for NPA, Reddy, PK (2002) opined that the problem of NPA is not

mainly because of lack of strict prudential norms, but due to legal impediments, postponement of

the problem by the banks to show higher returns and manipulation by the debtors using political

influence. Dash et al (2010) briefed that macro factors that includes real effective exchange rate

and growth in real GDP affect the level of NPAs. With regard to the bank specific variables, the

authors found that banks which charges relatively higher real interest rates and have a penchant

for taking on risk tends to experience greater non-performing loans. NPA s are classified into

political, economic, social and technological. The author opined that neglect of proper credit

appraisal, lack of follow-up and supervision, recessional pressures in economy, change in

government policies, infrastructural bottlenecks, and diversion of funds etc as the major cause

for NPA. Aggarwal and Mittal (2012) pointed out that the major reasons for NPA includes

improper selection of borrowers activities, weak credit appraisal system, industrial problems,

inefficient management, slackness in credit management and monitoring, lack of proper follow-

up, recessions and natural calamities and other uncertainties.

Some of the important reasons for NPA, mentioned in various literatures are summarized below:

1. Willful defaults, siphoning of funds, fraud, disputes, management disputes,

mismanagement, misappropriation of funds etc.

2. Lack of proper pre-appraisal and follow up.

3. Improper selection of borrowers/activities.

4. Inadequate working capital leading to operational issues. Under financing/untimely

financing.

5. Delay in completing the project.

6. Non-compliance of sanction terms and conditions.

7. Poor debt management by the borrower, leading to financial crisis.

8. Excess capacities created on non-economic costs.

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

instrument from capital markets.

10. Business failures.

11. Failures to identify problems in advance.

12. Diversion of funds for expansion\modernization\setting up new projects\ helping or

promoting sister concerns.

13. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,

delay in settlement of payments\ subsidiaries by government bodies etc.

14. Time involved in the legal process and realization of securities.

In a published report, the RBI attributes the rise in the NPA’s of both public and private sector.

Banks to diversion of funds away from the original purpose for they were granted as well as

willful default by borrowers. That apart, adverse economic and market factors, ranging from

recessionary conditions, regulatory changes and resource shortages to inefficient management

and strained labour relations have impacted the health of businesses and driven them to default

on their loan repayments. Sometimes the banks themselves are to blame, delay in loan

disbursement can throw a project off track, and have a cascading effect on its viability and

capacity to repay. Banks have also been known to take comfort in collateral and hen not follow

up diligently enough on loan dues. Where the market value of the collateral to drop, there is an

immediate impact on the quality of the related loan asset. There are also other, less transparent

reasons why NPA’s are on rise. For one, the process of asset disposal is riddled with legal

impediments and delay. Secondly highly connected corporate debtors have known to use

political pressure to get banks to waive their dues or restructure terms in their favor.

The health of a bank is reflected not only by the size of its balance sheet but also the return on its

assets. NPA’s generate no interest income for the bank, the bank is required by law to provide

for future loan losses arising from its bad assets out of current profits. Banks can no longer

account the interest on NPA loans as income unless and until it is actually paid by the borrower.

This not only affects profitability but also liquidity because now, the bank has fewer funds to

lend out or recycle. Higher NPAs degrade a bank’s credit rating lowering its creditability as well

as its ability to raise fresh capital. Today, the incidence of high NPAs in the Indian banking

industry points to a deteriorating credit market.

Objectives:

To understand how Non Performance Asset is managed in Public sector and private sector Bank.

To understand the various factors causing mounting NPA’s to bank.

To understand the impact of NPA’s in Indian economy.

Research Methodology :

Research methodology is basically described as the structured process adopted in one’s project to

conduct a research. This project’s research is primarily qualitative with emphasis on exploration

and investigation to come to a conclusion. This project is primarily qualitative supported by

quantitative data.

The objectives of this project are:

To understand how Non Performance Asset is managed in Public sector and private

sector Bank.

To understand the various factors causing mounting NPA’s to bank.

To understand the impact of NPA’s in Indian economy.

The above mentioned objectives are achieved by using secondary data as this is primarily a

research oriented project report. The data is there primarily secondary data which is obtained

through journals of the RBI, research papers, new paper and books.

This project also contains primary data which is used to support secondary data which is the

form of questionnaires filled by hundred bank account holders from various walks of life.

Scope for further Research

Further some other banks also can be evaluated and hoe they are managing and what are the

results yielded by adopting various measures by various banks .Other country banks models also

can be analyzed.

Limitation of the study

Due to time constraint and some less cooperation from bank employees the research cannot be

extended in detailed manner.

Chapter 2 : Review Literature

A literature view can be defined as a guide which is used to review the critical points of

knowledge which includes substantive findings as well as theoretical and methodological

contributions to a particular topic. ‘Literature’ covers everything relevant that is written on a

topic: books, journal articles, newspaper articles, historical records, government reports, theses

and dissertations, etc.

In the present topic the literature review revolves around how Indian banking sector has the

reacted to the increasing number of Non Performing Assets. The impact of poor asset quality on

the bank’s profitability is also mentioned here. This is mentioned in the domestic segment of the

paper.

The literature will also involve some international papers which study the impact of NPL’s on

the profitability of banks. The measure to reduce them will also be discussed here. Basically the

literature review is divided into two sections; which are the domestic papers and the international

papers.

Domestic Papers

“2013 Outlook: Indian Banks “Cyclical Uptrend, but Funding Constraints Limit Upside” by

India rating research (A Fitch group company)

This paper highlights the asset quality pressure which is going to be faced by the Indian banks.

This paper mentions that Indian banks will benefit from an expected cyclical uptrend in the

domestic economy during 2013-2014. Gross non-performing loans (NPLs) are likely to peak till

mid-2013. The paper also mentions the high degree of exposure of Indian banks to the

infrastructure sector. Infrastructure exposures however remain a key risk, given the elevated

execution challenges leading to project delays. Any delay here could lead to further restructuring

of loans, even as the reported gross NPL ratio starts to ease.

“Non performing assets: An Indian perspective” by Infosys

This paper points out that the increasing rate of NPA’s is due to improper diversion of the funds

by both public sector and private sector banks. This paper also highlights how rising NPA’s

reduced the credit rating of banks which in turn impact the market capitalization of banks. This

paper also highlights the overall effects of the rising number of NPAs on the economy.

“Banking Sector Reforms and NPA: a study of Indian Commercial Banks” by Meenakshi Rajeev and H P Mahesh

This analytical paper examines the trends of NPAs in India from various dimensions and

explains how mere recognition of the problem and self-monitoring has been able to reduce it to a

great extent. It also shows that public sector banks in India, which function to some extent with

welfare motives, have as good a record in reducing NPAs as their counterparts in the private

sector.

“Non Performing Asset and probability of commercial banks in India: Assessment and

emerging issues” by C.S.Balasubramaniam

This paper assumes significance with the recent proposal by RBI to introduce Basel III norms in

the banking sector from January 2013. Basel III framework of guidelines formulated by Bank for

International Settlements (BIS) in consultation with central banks operating in a number of

countries all over the world expect the participating banks in their respective economies to be

following healthy financial and operational management policies. The second part presents a

trend analysis of NPAs followed by a series of in depth analyses on the high level of borrowings

from banking sector indicating a buildup of sectoral credit booms in general and also raising

concerns about financial performance and operations of the borrowers. The third part dwells on

the impact of restructuring of advances by banks on the basis of asset classification.

International Papers

“ Restructuring Central Europe: Evolution of NPA’s” by Delloite

This paper correlates the relationship between economic prosperity and the rising number of

NPLs in the Central European Economies. Countries in the Central European region

demonstrated considerable growth in lending in the years prior to the crisis. During the growth

years the large number of development projects and the overall demand for lending on the basis

of growth on the relative low banking penetration of these countries resulted in an extraordinary

growth allowing banks to expand their presence in the region. Certain studies suggest that in

economic prosperity lenders are generally less rigorous in screening debtors as bank strategies

and personal incentive schemes are all aimed at growth. Thereby in the longer run NPLs tend to

increases which harms the economy.

“Determinants of Non Performing Loans: Case of US Banking Sector” by Romanian

Economic Journal

This paper analyses the Increase in NPLs rate and correlates it with the failure of credit policy to.

This paper also measures the impact of high NPLs rate in the banking sector. Financial crisis of

late 2000s, which started from US and spread into whole world having trading relationships with

US, is also labeled as cause of default in mortgages/loans..

Chapter 3 : Company Profile

HDFC :

The Housing Development Finance Corporation Limited (HDFC) was amongst the first to

receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the

private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The

bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered

office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank

in January 1995.

HDFC bank has three primary business segments which generate a majority of their revenue.

These are retail banking, wholesale and treasury. The retail banking segment serves retail

customers through a branch network and other delivery channels. This segment raises deposits

from customers and makes loans and provides other services with the help of specialist product

groups to such customers. The wholesale banking segment provides loans, non-fund facilities

and transaction services to corporate, public sector units, government bodies, financial

institutions and medium-scale enterprises. The treasury segment includes net interest earnings on

investments portfolio of the Bank.

HDFC Bank Ltd Was incorporated on August 30, 1994 by Housing Development Finance

Corporation Ltd. In the year 1994, Housing Development Finance Corporation Ltd was amongst

the first to receive an 'in principle' approval from the Reserve Bank of India to set up a bank in

the private sector, as part of the RBI's liberalization of the Indian Banking Industry. HDFC Bank

commenced operations as a Scheduled Commercial Bank in January 1995. In the year 1996, the

Bank was appointed as the clearing bank by the NSCCL. In the year 1997, the launched retail

investment advisory services. In the year 1998, they launched their first retail lending product,

Loans against Shares. In the year 1999, the Bank launched online, real-time NetBanking. In

February 2000, Times Bank Ltd, owned by Bennett, Coleman & Co. / Times Group

amalgamated with the Bank Ltd. This was the first merger of two private banks in India. The

Bank was the first Bank to launch an International Debit Card in association with VISA (Visa

Electron). In the year 2001, they started their Credit Card business. Also, they became the first

private sector bank to be authorized by the Central Board of Direct Taxes (CBDT) as well as the

RBI to accept direct taxes.

SBI :

State Bank of India is the largest state-owned banking and financial services company in India.

The Bank provides banking services to the customer. In addition to the banking services, the

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

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

management and primary dealership in the money market.

The Bank operates in four business segments, namely Treasury, Corporate/ Wholesale Banking,

Retail Banking and Other Banking Business. The Treasury segment includes the investment

portfolio and trading in foreign exchange contracts and derivative contracts. The Corporate/

Wholesale Banking segment comprises the lending activities of Corporate Accounts Group, Mid

Corporate Accounts Group and Stressed Assets Management Group. The Retail Banking

segment consists of branches in National Banking Group, which primarily includes personal

banking activities, including lending activities to corporate customers having banking relations

with branches in the National Banking Group. SBI provides a range of banking products through

their vast network of branches in India and overseas, including products aimed at NRIs. The

State Bank Group, with over 16,000 branches, has the largest banking branch network in India.

The State bank of India is the 10th most reputed company in the world according to Forbes. The

bank has 156 overseas offices spread over 32 countries. They have branches of the parent in

Colombo, Dhaka, Frankfurt, Hong Kong, Johannesburg, London and environs, Los Angeles,

Male in the Maldives, Muscat, New York, Osaka, Sydney, and Tokyo. They have offshore

banking units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and

Cape Town.

Chapter 4 : Data Analysis

Present Indian Banking Sector with reference to Non Performing Assets

Analysis :

Non-performing assets is unavoidable in the banking sector because of the basic nature of the

business of banking. According to RBI study, gross NPA level in the Indian Banking System

will reach an unprecedented level of 5.78% in March, 2013, a steep rise from 2.4% in

March,2010. Advances in the industry grew at 16.00% whereas non-performing assets grew at

44% and this was a dangerous trend starting to build up. Various numerous ways of tackling

problems have been provided to speed up the recovery process and bottlenecks being faced by

the banks in India. SARFESI Act, needed to be modified to recognize the priority of claims of

secured creditors over claims of revenue. The Act was enacted to recover the debt by enforcing

security without intervention of courts, however defaulters often misused the provisions by

taking stay on proceedings of recovery.

In a worsening trend of companies failing to meet their financial obligations, the country's

domestic banks have witnessed an increase of up to 85 per cent in their bad loans since the

beginning of the current fiscal. The sharp rise in bad loans for the banks comes at a time when

the number of corporate debt restructuring (CDR) cases has also grown to record-high levels. In

the first two quarters of the current fiscal 2012-13, the banks referred a record number of 74

CDR cases, involving a total debt amount of Rs 40,000 crore, for restructuring. At the same time,

at least 35 banks have already reported an increase in their gross NPAs (Non-Performing

Advances) from the levels recorded at the end of last fiscal, 2011-12, as per an analysis of the

latest quarterly results announced by them. The increase in gross NPAs has been as high as 60

per cent for lenders like PNB, Allahabad Bank and Lakshmi Vilas Bank, while the surge has

been even higher for South Indian Bank (86 per cent) in the first half of current fiscal.

A few others like Bank of India, Indian Overseas Bank and Corporation Bank have also seen

their bad loans grow by over 50 per cent in this period.

Collectively, these 35 banks have seen their gross NPAs grow by over 28 per cent or over Rs

32,000 crore in the first half of current fiscal, taking their total bad loans to Rs 1.47 lakh crore as

on September 30, 2012, as per an analysis of financial results announced by the listed banks for

the first two quarters of the current year. The analysis does not include the foreign banks and

unlisted domestic banks, as their figures were not available.

Incidentally, the collective gross NPA of these 35 banks at the end of first half of 2012-13 is

higher than the total gross NPA at the end of last fiscal for the entire banking system, including

foreign banks and unlisted domestic banks. As per RBI data, the gross NPA for all the banks

together in the country stood at Rs 1.42 lakh crore at March 31, 2012. The Reserve Bank recently

said the banks need to strengthen their due diligence and credit appraisal system along with

overall monitoring mechanism to contain the rising bad assets seen in the banking system. Banks

need to, not only utilize effectively, the various measures put in place by RBI and the

government for the resolution and recovery of bad loans, but also have to strengthen their due

diligence, credit appraisal and post-sanction loan monitoring systems to minimize and mitigate

the problem of increasing NPAs," the RBI said in its report on 'Trend and Progress of Banking in

2011-12'. So far, only four banks -- Bank of Maharashtra, Oriental Bank of Commerce,

Syndicate Bank and Development Credit Bank -- have seen their gross NPAs decline, albeit by

small margins from the levels recorded at the end of last fiscal. Together, these four banks have

seen their gross NPAs decline by 1.7 per cent (Rs 138 crore) to Rs 8,163 crore in the first half of

2012-13. Among the major banks, the banks that have seen lowest increase of about six per cent

in their NPA levels include ICICI Bank and HDFC Bank. On the other hand, public-sector

banking giant SBI has seen its gross NPA grow by about 24 per cent to over Rs 49,000 crore so

far in 2012-13, while that of PNB has grown by 60.8 per cent to Rs 14,000 crore. Interestingly,

SBI alone accounts for nearly one-third of the gross NPA of all listed banks put together. Among

major banks, SBI's gross NPA ratio (as a percentage of total advances) has risen to 5.15 per cent

from 4.44 per cent so far in the current fiscal. ICICI Bank's gross NPA ratio in the same period

has fallen from 3.62 per cent to 3.54 per cent, but still remains high. PNB's gross NPA ratio has

risen sharply from 2.93 per cent to 4.66 per cent, while that of HDFC Bank has come down from

1.02 per cent to 0.91 per cent. The banking system also witnessed a rise in restructured asset in

sync with the increasing NPA level in the system. A total of 101 cases have been referred for

Corporate Debt Restructuring (CDR) in calendar year 2012 as on September 30, involving a

collective debt amount of close to Rs 64,000 crore, as per the data available with the CDR cell of

bankers. RBI had helped set up CDR system in 2001 to help the corporate facing financial

difficulties due to factors beyond their control and due to certain internal reasons. Besides

helping the corporate manage their huge debts, it also seeks to safeguard the interest of banks

and financial institutions through restructuring of certain debt cases. High interest costs, along

with overall sluggishness in the domestic and global economies have made it difficult for the

companies to meet their debt obligations -- resulting in a spurt in CDR cases and also increased

NPA levels. As per the latest data available with CDR cell, a total of 466 cases, involving total

debt of Rs 2.46 lakh crore, have been referred to it since its inception.

Non-performing assets (NPAs) reflect performance of banks. A high level of NPAs loans is

indicative of a large number of loan defaults that affects the profitability and net worth of banks.

Growth in NPAs necessitates larger provisions, thus reducing the overall profits and shareholders

value. Rising NPAs is a big concern for the Indian banking sector. According to Associated

Chambers of Commerce and Industry (Assocham), the net non-performing loans have risen by

an average 26 percent in the second quarter of current fiscal as compared to corresponding

period previous year. The net NPAs of India's largest private lender, ICICI stood at Rs.4,553.94

crore as on March 31, 2009 as compared to Rs. 3490 crore on March 31, 2008, an increase of

nearly 30 percent. The situation in public sector banks is similar. Amidst rising NPAs, the

banking regulator, RBI has directed the public sector banks to increase the provisioning

requirements to 70% to provide a cushion against loan losses.

The Reserve Bank of India (RBI), for instance, obligates both public and private banks to

allocate about 40% of their total loan advances towards supporting the so-called priority sectors

such as agriculture, small-scale industries, housing and education, apart from specific branch

requirements. It is obvious that neither RBI nor the government can know if borrowers in priority

sectors are creditworthy, or if it is economically viable for banks to open branches in rural areas.

The huge pile of non-performing assets (NPAs) in the balance sheets of banks points to the

adverse effects of such institutional fiddling with banks.

In 2012, according to RBI, priority-sector lending contributed to almost half of the total NPAs of

scheduled commercial banks despite less than 40% of actual total advances made by banks going

into priority sectors. In fact, the cumulative figures hide the dire state of NPAs in nationalized

banks, which had close to 60% of their total NPAs related to priority-sector lending in 2011. The

scrutiny of populist priority-sector lending, however, should not deflect attention from lobbying

at top levels of business that allows affluent individuals to take banks for a ride. The Kingfisher

episode serves as a good example, with public sector banks writing off the company’s debt by

buying equity in the airline at a high premium—something that the company’s poor balance

sheet didn’t warrant. The final picture that emerges is one of rudderless public policy influenced

by both populist and crony interests, with the governing institutions of the country seemingly

concerned with the health of its lending institutions on the one hand, but also pushing the same

institutions towards adopting frivolous lending standards, paying no heed to the essential trade-

off.

Table : 1 Latest Provisioning Norms

Category Of Advances Revised Rate(%)

Standard Advances :

1. Direct advances to agriculture and SME

2. Advance to commercial real estate (CRE) sector

3. All other loans and advances not included above

0.25

1.00

0.40

Sub – Standard Advances :

1. Secured Exposures

2. Unsecured Exposures

3. Unsecured Exposures in respect of infrastructure loan

accounts where certain safeguards such as Escrow

accounts are available

15

25

20

Doubtful Advances – unsecured portion 100

Doubtful Advances – secured portion :

1. For doubtful upto 1 year

2. For doubtful >1 year and upto 3 years

3. For doubtful > 3 years

25

40

100

Loss Advances : 100

NPA is different and present in all public sector banks and private banks in India. There are

many banks but in this study some prominent banks are selected among their respective sector.

The data related to non performing assets of following banks i.e. SBI and HDFC is collected and

their comparison is done on the following basis :

Gross NPA ratio (position of gross NPA to gross advances) : from the table given below, it can

be observed that there has been a marginal decrease in NPA’s level over the period in the

selected banks. The ratio of SBI decreased from 11.95% at the end of March 2002 to 3.28% at

the end of March 2011. The ratio of HDFC decreased form 3.18% at the end of March 2002 to

1.06% at the end of March 2011.

Table : 2

YEARS STATE BANK OF

INDIA

HDFC

2001-02 11.95 3.18

2002-03 9.34 2.22

2003-04 7.75 1.86

2004-05 5.96 1.69

2005-06 3.61 1.44

2006-07 2.92 1.39

2007-08 3.04 1.42

2008-09 2.86 1.98

2009-10 3.05 1.44

2010-11 3.28 1.06

Fig : 1.1

Net NPA ratio ( percentage in age) : net NPAs to net advances ratio of SBI reduced from 5.64%

at the end of March 2002 to 1.63% at the end of March 2011. The ratio of HDFC also come

down from 0.50% at the end of March 2002 to 0.19% at the end of March 2011.

Table : 3

YEARS STATE BANK OF INDIA HDFC

2001-02 5.64 0.50

2002-03 4.49 0.37

2003-04 3.45 0.16

2004-05 2.65 0.24

2005-06 1.88 0.44

2006-07 1.56 0.43

2007-08 1.78 0.47

2008-09 1.79 0.63

2009-10 1.72 0.31

2010-11 1.63 0.19

0 2 4 6 8 10 12

SBI

HDFC

20010-11

2009-10

2008-09

2007-08

2006-07

Fig:1.2

Problem asset ratio : ( position of gross NPA to total assets) : There has been a marginal

reduction in problem assets ration over the considered period in the banks. The ratio of SBI

reduced from 4.45% at the end of March 2002 to 2.06% at the of March 2011. The ratio of

HDFC decreased from 0.94% at the end of March 2002 to 0.59% at the end of March 2011.

Table : 4

YEARS STATE BANK OF INDIA HDFC

2001-02 4.45 0.94

2002-03 3.59 0.87

2003-04 3.11 0.79

2004-05 2.71 0.85

2005-06 1.95 0.69

2006-07 1.76 0.72

2007-08 1.78 0.68

2008-09 1.62 0.89

2009-10 1.85 0.81

2010-11 2.06 0.59

0 1 2 3 4 5 6

SBI

HDFC

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

Fig :1.3

Analysis of the questionare :

A questionare was prepared to understand the customers perspective of Non Performing Assets

in the current context of the Indian banking sector and also to study how aware customers are to

its impact on the Indian economy. A survey was conducted among hundred investors and their

response was recorded. The recordings were then converted into pie charts and bar diagrams for

the purpose of analysis and interpretation.

Questionnaire

Awareness Of Non – performing assets among bank customers

Dear Respondents

This questionna ire is aimed to gain information on the awareness and knowledge

customers have regarding NPA;s and the banks current position with regard to Non

Performing Assets.. The data collected through this will be kept confidential as it is an

academic research. If you are interested in the findings of this study please provide your email id

and contact information below.

0 1 2 3 4 5

SBI

HDFC

2010-11

2009-10

2008-09

2007-08

2006-07

2005-06

2004-05

2003-04

2002-03

2001-02

A. Are you aware of Non Performing Assets in the context of banking?

1. Yes 70 %

2. No 30%

B. If Yes, how are you aware of the NPA’s impact on the Indian economy?

1. Through bank employees? 10%

2. Through the RBI website? 20%

3. Through articles, journals, magazines? 30%

4. All of the above 50%

C. What is your preferred method for creating awareness related to Non Performing Assets?

1. Campaigns 15%

2. Publishing reports regarding NPA in all branches 50%

3. Through websites publications. 35%

D. Given a list of methods chose one that you would prefer the bank doing with you :

1. Restructing your loan 60%

2. Debt recovery tribunal 15%

3. Legal methods ( Civil Court) 25%

E. Personal Profile :

1. Name :

2. Gender :

3. Type of account :

4. Contact info : ph. No :_______________ Email ID : _______________

Interpretation of the questionnaire in the form of pie charts :

1. Are you aware of Non Performing Assets in the context of banking?

Fig : 1.4

From the survey it was studied that customers of a bank are aware of the non performing

assets. 70% of the customers have the knowledge of Non Performing Assets.

70%

30%

Awareness

YES

NO

2. Source of Information :

Fig : 1.5

The source of information for the customers in the Udupi – Manipal region is through

Articles, journals, magazines.

10%

20%

30%

50%

Source of Information

Through bank employees

Through RBI website

Through Articles, journals &

magzines

All of the above

3. What is your preferred method for creating awareness related to Non Performing Assets?

Fig : 1.6

After analysis of the survey, the individuals preferred publishing reports of Non performing

assets with respect to the bank to be put up at all the branches of the bank. A quarterly analysis

of the NPA status of the banks could be carried out and brought to notice of the customers.

15%

50%

35%

Creating Awareness

Campaign

Publishing reports related to NPA

in all the branches of the bank

Through websites publications

4. Given a list of methods chose one that you would prefer the bank doing with you :

Fig : 1.7

When asked about the remedies offered by the bank, 60% of the customers opted for

restructuring of the loan and only 15 % opted for the debt recovery tribunal.

60%15%

25%

Remedies

Restructing your loan

Debt recovery tribunal

Legal methods (civil court)

5. Type of accounts :

Fig : 1.8

At the end of the survey, it was observed that 60% of the customers were current A/c

holders and only 40% were savings A/c holders. A major cause of the rising NPA

situation is due to the current A/c held by the banks.

0

10

20

30

40

50

60

Current A/c Savings A/c

60

40

Type

Type

Conclusions and Recommendations

It can be concluded from the above report that over last three to four years, the asset

quality has been at the lowest for Indian banks. Public sector banks have taken the

biggest hit. The high exposure of Public sector banks like SBI to corporate loans is one of

the reasons for the stress on the asset quality. The gross Non-performing assets rose

sharply from just over 2 per cent in 2007-08 to 4 per cent (estimated for March 2013),

this is a major worry for banks.

When private banks are compared to public publics there is a significant difference in the

percentage of NPAs; which only highlights a prominent difference in asset quality. There

are a majority of reasons for the above. . Most private sector banks and some public

sector banks have been seeking to meet this target indirectly by buying securitized

portfolios of non-banking finance companies (NBFCs) that qualify for priority sector

lending and investing in RIDF to meet the regulatory obligations. 40% of Adjusted Net

Bank credit (ANBC) is for priority sector lending and this sector contributes about 60%

of the NPA’s. State Bank of India is the worst hit. In the December quarter, over 8% of

SBI’s farm loan book turned bad, accounting for 18.5% of total NPAs. This highlights

the stringent lending done by private sector banks compared to public sector banks. The

public sector banks like SBI have a greater obligation to the society by being a prime

bank; thereby priority sector lending is a major chunk of its portfolio.

However despite the current slowdown in the Indian economy the outlook for the future

isn’t negative. The outlook for the Indian banking sector is projected to be stable

according to various rating agencies. The reasons are expectations of continued equity

injection in line with Basel III requirement, and cyclical improvement in asset quality.

Reserve Bank of India (RBI) Governor D Subbarao recently said the “the government

would need to infuse Rs 90,000 crore in public sector banks to maintain its current

shareholding after the Basel-III norms would come into force”. He also concluded “that

effective implementation of Basel-III norms would make Indian banks stronger and more

stable and sound so that they could deliver value to the real sectors of the economy”.

On the short term public sector banks will see a major challenge to their asset liability

management with slow growth in deposits and long term assets funded by short term

deposits. The growing short-term funding mismatches that increase refinancing pressures

may keep deposit cost elevated. 2013 is expected to a tough year for Indian banks but this

situation will improve by the end of 2014.

Asset-liability mismatches up to one year have been rising and for some banks are at all-

time highs. The refinancing risk is partly mitigated by government banks’ strong

domestic depositor base. The high pace of refinancing squeezes quarter-end liquidity and

may delay the transmission of any policy rate cut to borrowers.

The stress in banking is coming from sectors like power, infrastructure, with state

distribution companies and private generators reporting difficulties, road building,

textiles and aviation. A majority of these sectors will see an improvement over the years

as the economic climate improves.

Recommendations

As highlighted in this report the gross NPA’s of public sector banks is much more than

private sector banks. Therefore from an investor’s point of view private sector banks are

better bets with banks like HDFC bank, ICICI being the top picks in the private sector.

The capital adequacy ratio of Private Banks is a much more than 9% minimum

requirement of the RBI which only highlights these banks are in a better position to

absorb losses since they have more capital to cover their risk weighed assets.

The aggressive strategies of private sector banks have huge potential to further improve

their earning potentials; therefore giving their investors a potential 15-20% return on

investment on a year to year basis. For the short term for a period of one to two years

public sector banks earning will be affected but this will improve in the longer term due

to Basel 3 norms.

On the whole the Indian banking sector has tremendous potential to growth as long as it

can plug the leakages and reduce poor asset quality. With the implementation of Basel 3

norms the outlook for Indian banks in the future is strong; therefore this in turn will be

beneficial for the economy as banks would be able to deliver value the real sectors of the

economy.

Bibliography

ICRA: Indian Banking sector: Challenges unlikely to derail the progress made

2013 Outlook: Indian Banks “Cyclical Uptrend, but Funding Constraints Limit

Upside” by India rating research (A Fitch group company)

Banking Sector Reforms and NPA: a study of Indian Commercial Banks” by

Meenakshi Rajeev and H P Mahesh

Global Banking Outlook 2013-2014: Earnest and Young

Newspapers referred:

Economic Times

Moneycontrol

Business Standard

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http://www.livemint.com/Opinion/JRhBL2sjOJm3kTEgsjjOBO/Populism-in-Indian-banking.html

http://www.business-standard.com/article/finance/bank-npas-soar-by-86-in-first-half-of-fy13-112111800374_1.html

http://www.rupeetimes.com/article/personal_loan/do_rising_npas_reflect_an_ailing_banking_sector_3219.html

http://www.isec.ac.in/WP%20252%20-

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