Languages
Pages
Legal
A
PROJECT REPORT
ON
NPA MANAGEMENT
Submitted in the partial fulfillment of the requirement for the award of
Degree of Masters of Management Studies
Under the University of Mumbai
Submitted By:
Mr. MOHD ARIF
9320804505
Under the guidance of:
Dr. N. MAHESH
A C PATIL COLLEGE OF ENGINEERING MANAGEMENT
STUDIES & RESEARCH SECTOR-4, KHARGHAR
NAVI MUMBAI-410210
1
Acknowledgement
I express my sincere thanks to Dr. N.MAHESH (HOD) of MMS Department of A C Patil
college of Engineering management studies & research, for his valuable suggestion and
help to prepare this project.
I wish to take opportunity to express my deep sense of gratitude to Dr. D. G. BORSE
Director of A C Patil college of Engineering management studies & research. He has been a
constant source of inspiration.
I express my deep sense o gratitude to Prof. NILIMA ASTHANKAR and to other faculty
members of the MMS department, for offering me suggestion and help me in successfully
completing my project.
Finally it is my foremost duty to thank my parents who has also been the source of
inspiration.
Reg No.08126
Place: MUMBAI
Date: 12/02/2010 MOHD ARIF
2
Declaration
I hereby declare that this project report ”NPA MANAGEMENT” is a record of work
carried out by me under the guidance of Dr .N .MAHESH in the partial fulfillment of the
requirement for the award to degree of Masters of Management Studies.
I also hereby declare that this project report is the result of my own effort and has not
been submitted at any time to any other University or institute for the award of any degree or
diploma.
Reg No.08126
Place: MUMBAI
Date: 12/02/2010 MOHD ARIF
3
COLLEGE CERTIFICATE
This is to certify that Mr. MOHD ARIF a student of A C PATIL COLLEGE OF
ENGINEERING MANAGEMENT STUDIES & RESEARCH, KHARGHAR has
completed his specialization project on “NPA MANAGEMENT” in the field of finance
under the guidance of Dr. N. MAHESH.
Dr. N. MAHESH Dr. D. G. BORSE
(HEAD OF DEPARTMENT) (DIRECTOR)
4
5
GUIDE CERTIFICATE
This is to certify that Mr. MOHD ARIF student of final year of Masters of
Management Studies of A.C PATIL COLLEGE OF ENGINEERING MANAGEMENT
STUDIES & RESEARCH specializing in FINANCE has prepared his specialization project
report titled “NPA MANAGEMENT” under my guidance for the partial fulfillment of
Masters of Management Studies from University of Mumbai in the Academic year (2008-10)
Place: MUMBAI
Date: 12/02/2010 Dr. N. MAHESH
6
Chapter 1
1.1 INTRODUCTION
The accumulation of huge non-performing assets in banks has assumed great
importance. The depth of the problem of bad debts was first realized only in early 1990s.
The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000 crores.
While gross NPA reflects the quality of the loans made by banks, net NPA shows
the actual burden of banks. Now it is increasingly evident that the major defaulters are the
big borrowers coming from the non-priority sector. The banks and financial institutions have
to take the initiative to reduce NPAs in a time bound strategic approach.
Public sector banks figure prominently in the debate not only because they
dominate the banking industries, but also since they have much larger NPAs compared with
the private sector banks. This raises a concern in the industry and academia because it is
generally felt that NPAs reduce the profitability of a banks, weaken its financial health and
erode its solvency.
7
1.2 INRODUCTION TO BANKING:
Banking is nothing but a service. Banks are business organizations selling banking
services. Banks continuously reassess how a customer views bank services, what are new and
emerging customer aspirations and how these can be satisfied.
ORIGIN:
Since the banking activities were started in different periods in different countries,
there is no unanimous view regarding the origin of the word bank. The word bank is derived
from the French word ‘banco’ or ‘Bancus’, which means a bench. Infact the early Jews in
Lombardy transacted their banking business sitting on benches. When the business ailed, the
benches were broken and hence the word bankrupt came in to vogue.
DEFINITION:
The Indian Banking Companies Act, 1949 section 5(b), defines banking as
“accepting for purpose of lending or investing of deposits from the public, repayable on
demand or otherwise and withdrawals by cheque, drafts, and orders or otherwise”.
Banks are backbone of our society. A bank must meet the financial needs of a customer, by
acting as a custodian of his assets, providing credit facilities and assisting him to speedily put
through financial transaction of one type or another. Banking when you comer to think of it is
people. It is not figures, files and ledgers. Bank services needs considerable improvement on
an emergent basis. The time has come for banks to look inward to find out what is the nature
and quality of the products they sell, what is the product demanded by the customer.
It would be unrealistic today to believe that banks are mere financial institutions, working for
profit. Banks essentially are now social organizations, regarding financial services to sub
serving the socio-economic objectives of the society.
8
IN INDIA:
India has a system of indigenous banking from very early times, though it was not
similar to banking of modern times. There is evidence to show that money lending existed
even during the Vedic period. With the advent of the English traders in the seventeenth
century and the establishment of trading centers by the East India Company encouraged the
establishment of what were known as the agency houses? The trading firms which undertook
banking operations for the benefit of their constituents. Some of the houses established during
the period were Alexander and Co. and Ferguson & Co. There were also Presidency Banks,
Joint stock banks and Exchange banks which took up gradually one after the other.
IMPERIAL BANK:
The Presidency Banks referred to above were amalgamated into the Imperial Bank of
India, which was brought into existence on 27th January 1921 by the Imperial Bank of India
Act 1920. This Act, however, gave the bank no power to issue notes and this left out without
control over the currency of the country. But it was allowed to hold Government balances and
to manage public debt and clearing houses till the establishment of Reserve Bank Of India in
1935 which apart from taking over all these functions from the Imperial Bank of India, was
given the privilege of acting as an agent of the latter in places where it had no branches.
COMMERCIAL BANKS:
Amongst the banking institutions in the organized sector, the commercial banks initially were
established as corporate bodies with share holdings by private individuals, but subsequently
there has been a drift towards central ownership and control. Today 27 banks constitute the
strong public sectors in Indian Commercial Banking. Up to late 60’s Commercial Banks are
mainly engaged in financing organized trade, commerce & industry , since then they are
actively participating in financing agriculture, small-scale business ands small borrowers
also.
9
FUNCTIONS OF COMMERCIAL BANKS:
Commercial banks perform several crucial functions, which may be classified into two
categories:
(a) Primary functions and
(b) Secondary functions
PRIMARY FUNCTIONS:
Primary banking functions of the commercial banks include:
I) acceptance of deposits from public
II) lending funds
III) use of cheque system and
IV) remittance of funds
SECONDARY FUNCTIONS:
Commercial banks perform a multitude of other non banking functions, which may be
classified as
(a) Agency service
(b) General utility services
NATIONALIZATION OF COMMERCIAL BANKS:
The major historical event in the history of banking in India after independence is
undoubtedly the nationalization of the 14 major banks on 19th July 1969. In 1980, six more
private sector banks are nationalized extending the public domain further over the banking
sector. Nationalization was deemed as a major step in achieving the socialistic pattern of
society. The nationalized banks were to increase lending to areas of importance to the
10
government and to use their resources for sub-serving the common good. A detailed scheme
of objectives, regulations, management, etc was drawn up for these banks.
Nationalization was recognition of the potential of the banking system to promote broader
economic objectives. The banks had to reach out and expand their networks so that the
concept of mass banking was given importance over class banking.
THE RESERVE BANK OF INDIA [RBI]:
The Central Bank of India called the Reserve Bank of India was constituted under the
Reserve Bank of India Act, 1934 to regulate the issue of bank notes and keeping of reserves
with a view to securing monetary stability in India and generally to operate the currency and
credit system of India to its advantage. Amongst its multifarious functions affecting the
Indian Financial System, the RBI regulates and prohibits the issue of prospectus or
advertisement soliciting deposits of money, regulates the functioning of non-banking
institutions and transacts Government business. Its regulatory involvement in the Indian
Capital Markets is primarily of debt management through primary dealers, foreign exchange
control and liquidity support to market participants. The RBI regulates participants in the
securities markets when a foreign transaction is involved. Transactions that include Indian
issuers issuing of security outside India, such as GDRs and ADRs, and Financial Institutional
Investors (FIIs) or Foreign Brokers selling, buying or dealing in Indian Securities need the
permission of RBI.
As the central banking authority of India, the Reserve Bank of India performs the following
traditional functions of the central bank:
I. It provides currency and operates as the clearing system for the banks.
II. It formulates and implements monetary and credit policies.
III. It functions as the banker’s bank.
IV. It supervises the operations of credit institutions.
V. It regulates foreign exchange transactions.
VI. It moderates the fluctuations in the exchange value of the rupee.
11
In addition to the traditional function of the central banking authority, the
Reserve Bank of India performs several functions aimed at developing the
Indian financial system:
It seeks to integrate the unorganized financial sector with the organized
financial sector.
It encourages the extension of the commercial banking system in the
rural areas.
It influences the allocation of credit.
It promotes the development of new institutions.
12
13
Chapter. 2
LITERATURE REVIEW
1. Economic an political weekly, October 16, 2004, CARLTON PEREIRA,pg 4602-4604
“INVESTING IN NPAs”.
2. THE TREASURY MANAGEMENT, DECEMBER 2004, vinay kumar,PG62-
66”securitisation:issues and perspectives”
At The Global Level, SECURITISATION is becoming more popular among Fis. It is
meant to avoid disparity between assets and liabilities of banks/Fis. In order to promote
securitization in India RBI has constituted a working group on assets securitization. Though
securitization is in a nascent stage, it holds great promise in areas like infrastructure, power
and housing.
3. Chartered Secretary, February 2003, V. S. Datey, Pg. 128-135 “THE SARFAESI ACT”
The securities and reconstruction of financial assets and enforcement of security
interest act, 2002 made effective on 21.6.2002 is a step to reduce NPAs of Banks. The act
also makes provision for asset reconstruction and securitization.
14
Chapter 3
RESEARCH METHODOLOGY
3.1 Type of Research
The research methodology adopted for carrying out the study were
In this project Descriptive research methodologies were use.
At the first stage theoretical study is attempted.
At the second stage Historical study is attempted.
At the Third stage Comparative study of NPA is undertaken.
3.2 OBJECTIVES OF THE STUDY
The basic idea behind undertaking the Grand Project on NPA was to:
To evaluate NPAs (Gross and Net) in different banks.
To evaluate NPA level in different economic situation.
To Know the Concept of Non Performing Asset
To Know the Impact of NPAs
To Know the Reasons for NPAs
To learn Preventive Measures
3.3 Scope of the Study
Concept of Non Performing Asset
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs
15
3.4 Limitations of the project:
Due to time constraint depth analysis could not be made.
Some of the information is considered confidential and not available for the study.
The data taken for interpretation is for a limited period.
3.5 Sampling plan
To prepare this Project we took five banks from public sector as well as five banks from
private sector.
3.6 Data collection
The data collected for the study was secondary data in Nature.
16
Chapter 4
About the topic
4.1 INTRODUCTION:
It’s a known fact that the banks and financial institutions in India face the problem of
swelling non-performing assets (NPA’s) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, some steps have been taken
recently. The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002 was passed by parliament, which is an important step towards
elimination or reduction of NPA’s.
EMERGENCE OF THE WORD NON-PERFORMING ASSET:
The issues relating to definition, management or the mismanagement and
recommendations calling for spectacular solutions to the problem of non-performing
advances of banks are being deliberated at frequent intervals during last decade or so.
In late 80s the concept of classification of bank advances in several health code categories
took place though the terminology non-performing advances did not exist at that time. This is
followed by early 90s Anglo-American model of categorization of bank lending portfolio in
several blocks of nomenclature in that included the non-performing advances.
The rapid popularity of the phenomenon can be ascribed to the opening up of the Indian
economy and consequent pressure from western powers to influence our banking system in
the name of international standards of accounting, congruence of banking supervision by
Basle committee, and so on.
The sudden shock of guidelines relating to non-performing advances and simultaneous of
income recognition made the Indian banking system totter and a number of public sector
17
banks started incurring losses from the mid-nineties. Then came the recommendations of the
Narasimham committee with the proposition of creating asset-reconstruction fund for
cleaning the balance sheets of the banks of non-performi8ng advances as a one-time measure.
MEANING OF NPA’s:
An asset is classified as non-performing asset (NPA’s) if the borrower does not pay
dues in the form of principal and interest 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. In simple words, an asset which ceases to yield is a
non-performing asset.
DEFINITION GIVEN BY THE NARASIMHAM COMMITTEE:
The committee has defined non-performing assets as advances here, as on the date of
balance sheet,
1. In respect of term loans, interest remains past due for a period of more than 90 days.
2. Overdrafts and cash credits accounts remain out of order for more than 90 days.
3. date Bills purchased and discounted remain over due and unpaid for a period of more
than 90 days.
An amount is considered past due when it remains outstanding for 30 days beyond the
due
.
18
4.2 Types of NPA
A] Gross NPAA] Gross NPA
B] Net NPAB] Net NPA
A] Gross NPA:A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss
assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio Gross NPAs
Gross Advances
B] Net NPA:B] 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
19
4.3 FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector banks and
foreign banks. The NPAs in PSB are growing due to external as well as internal factors.
4.3.1 EXTERNAL FACTORS :-
-
1. Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans
and advances. Due to their negligence and ineffectiveness in their work the bank
suffers the consequence of non-recover, their by reducing their profitability and
liquidity.
2. Willful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing
it. These groups of people should be identified and proper measures should be taken
in order to get back the money extended to them as advances and loans.
3. Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every
now and then India is hit by major natural calamities thus making the borrowers
unable to pay back there loans. Thus the bank has to make large amount of provisions
in order to compensate those loans, hence end up the fiscal with a reduced profit.
Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall
the farmers are not to achieve the production level thus they are not repaying the
loans.
20
4. Industrial sickness
Improper project handling , ineffective management , lack of adequate resources ,
lack of advance technology , day to day changing govt. Policies give birth to
industrial sickness. Hence the banks that finance those industries ultimately end up
with a low recovery of their loans reducing their profit and liquidity.
5. Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production
which ultimately piles up their product thus making them unable to pay back the
money they borrow to operate these activities. The banks recover the amount by
selling of their assets, which covers a minimum label. Thus the banks record the non
recovered part as NPAs and has to make provision for it.
6. Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus it has to
cope with the changing principles and policies for the regulation of the rising of
NPAs.
The fallout of handloom sector is continuing as most of the weavers Co-operative
societies have become defunct largely due to withdrawal of state patronage. The
rehabilitation plan worked out by the Central government to revive the handloom
sector has not yet been implemented. So the over dues due to the handloom sectors
are becoming NPAs.
4.3.2 INTERNAL FACTORS :-
1 Defective Lending process
21
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
2 Principles of safety :-
By safety it means that the borrower is in a position to repay the loan both principal and
interest. The repayment of loan depends upon the borrowers:
I Capacity to pay
II Willingness to pay
3 Reputation of borrower
The banker should, therefore take utmost care in ensuring that the enterprise or
business for which a loan is sought is a sound one and the borrower is capable of
carrying it out successfully .he should be a person of integrity and good character.
4 Inappropriate technology
Due to inappropriate technology and management information system, market driven
decisions on real time basis can not be taken. Proper MIS and financial accounting
22
system is not implemented in the banks, which leads to poor credit collection, thus
NPA. All the branches of the bank should be computerized.
5 Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis is another
reason for rise in NPAs. While providing unsecured advances the banks
depend more on the honesty, integrity, and financial soundness and credit
worthiness of the borrower.
6 Purpose of the loan
When bankers give loan, he should analyze the purpose of the loan. To ensure safety and
liquidity, banks should grant loan for productive purpose only. Bank should analyze the
profitability, viability, long term acceptability of the project while financing.
7 Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good
credit appraisal to decrease the NPAs.
8 Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible
assets as security to safe guard its interests. When accepting securities banks should
consider the_
1. Marketability
2. Acceptability
3. Safety
23
4. Transferability.
The banker should follow the principle of diversification of risk based on the famous
maxim “do not keep all the eggs in one basket”; it means that the banker should not grant
advances to a few big farms only or to concentrate them in few industries or in a few cities.
If a new big customer meets misfortune or certain traders or industries affected adversely,
the overall position of the bank will not be affected.
9 Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the
loan. The NPAs due to willful defaulters can be collected by regular visits.
10 Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle.
Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing
day by day.
24
4.4 PROBLEMS DUE TO NPA
1. Owners do not receive a market return on there capital .in the worst case, if the banks
fails, owners loose their assets. In modern times this may affect a broad 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, labour and natural resources.
Non performing asset may spill over the banking system and contract the money
stock, which may lead to economic contraction. This spill over effect can channelize
through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the banks capital base.
The three letters Strike terror in banking sector and business circle today. NPA is
short form of “Non Performing Asset”. The dreaded NPA rule says simply this: when
interest or other due to a bank remains unpaid for more than 90 days, the entire bank
loan automatically turns a non performing asset. The recovery of loan has always
been problem for banks and financial institution. To come out of these first we need to
think is it possible to avoid NPA, no can not be then left is to look after the factor
responsible for it and managing those factors.
Interest and/or instalment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted
for agricultural purposes, and
25
Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should, therefore, continue to
classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter with effect from April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.
26
4.54.5 Impact of NPAImpact of NPA
4.5.1 Profitability:-4.5.1 Profitability:-
NPA means booking of money in terms of bad asset, which occurred due to wrong
choice of client. Because of the money getting blocked the prodigality of bank decreases
not only by the amount of NPA but NPA lead to opportunity cost also as that much of
profit invested in some return earning project/asset. So NPA doesn’t affect current profit
but also future stream of profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.
4.5.2. Liquidity:-4.5.2. Liquidity:-
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead
to borrowing money for shot\rtes period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to
lack of money. Routine payments and dues.
4.5.34.5.3 Involvement of management:-Involvement of management:-
Time and efforts of management is another indirect cost which bank has to bear due
to NPA. Time and efforts of management in handling and managing NPA would have
diverted to some fruitful activities, which would have given good returns. Now day’s
banks have special employees to deal and handle NPAs, which is additional cost to
the bank.
27
4.5.44.5.4 Credit loss:-Credit loss:-
Bank is facing problem of NPA then it adversely affect the value of bank in terms of
market credit. It will lose it’s goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks .
28
Chapter 5
Preventive measures of NPA
5.1 Early identification:
I) Identification of accounts showing early warning signals.
II) High values NPA’s should be given focused attention.
III) A systematic review of problems loans should be done. The time norms for the
problem loan review should be adhered to. Action plan to be drawn up for each
account and follow up.
5.2 Recovery:
Actual recovery occurs in the accounting in which the total recovery of the dues is
warranted. Through regular pre and post sanction monitoring, follow-ups, the NPA’s can
be eliminated.
5.3 Up gradation:
The NPA accounts in which part recovery of the total, dues will upgrade the account
from NPA to performing asset. Generally the NPA accounts with less than 2 years of the
age under NPA are covered. The main characteristic of these accounts is after
elimination from NPA, also these accounts continued to be part of advances. Since
lending is a main business of the banks up gradation of accounts is preferred.
Substandard accounts to be specially targeted for up gradation.
Up gradation strategies would include adjustment of irregularity, repayment of over
due interest/installment and up gradation following restructuring/ rehabilitation.
29
Replacement/re-schedulement of loans should be done in deserving cases promptly.
After 1 year of successful implementation, account to be reviewed for up gradation.
5.4 Rehabilitation:
Rehabilitation of units should be taken up in deserving cases.
5.5 Repayment:
Fixing repayment programme for accounts while continued viability is in doubt.
Fixing installments for irregular amount were limits to be continued with reduced
exposure.
5.6 Compromise:
Through compromise the accounts are closed by negotiated settlement with the
borrowers as per the compromise policy of the bank. Generally compromises are encouraged
in cases of chronic NPA accounts.
Compromise proposals need to be considered where necessary, and in time.
Option of OTS through Lok Adalat should be examined.
30
Chapter 6
RECOVERY TOOLS AND THEIR EFFECTIVENESS:
6.1. DEBT RECOVERY TRIBUNALS:
Lack of expeditious court remedies has been one of the major impediments
experienced by banks and financial institutions in the recovery of NPA. On the basis
of the recommendation of Tiwari Committee(1981) and Narsimham Committee on
financial systems(1991), which emphasized the need for the establishment of special
tribunals for banks and financial institutions, the recovery of debts due to banks and
financial institutions act was enacted in1993.
The act applies only to cases where the amount of debt due to banks/financial
institution is Rs 10 lakhs or above. Filing of cases at the DRT has been a cause of
concern for almost every bank in the country today. One reason for the slow pace is
the requisite infrastructure at the respective DRT was inadequate to handle the huge
number of cases pending with it. There has been a decision to add about 7 more DRT
to the existing 22 DRT and 5 appellate authorities. This enables the banks to settle
some of the pending NPAs.
6.2. LOK ADALATS:
For recovery of smaller loans, the Lok Adalat has proved a very good agency for quick
justice and settlement of dues. The Gujarat State Legal Service Authority and the DRT,
Ahmadabad have nominated and appointed conciliators to deal with the cases before the
Lok Adalat comprising of retired High Court Judge and two members from senior
advocates/industrialists/executives of the banks. These Adalats in the state of Gujarat
31
have been found to be useful as supplement to the efforts of the efforts of the recovery by
the DRTs. Such agencies should be established in all the states.
6.3. ASSET RECONSTRUCTION COMPANY:
The setting of Asset Reconstruction Company may be another channel to discount the
NPAs of the bank to such an agency and to developing the process of securitization of
banks loan assets for providing liquidity. Perhaps secondary market of derivatives based
on securitized assets could also be developed as in individual countries.
6.4. REVENUE RECOVERY ACT:
In some states, revenue recovery act has been made applicable to banks. Since this is also
expeditious process of adjudicating claims, banks may be notified to cover the Act by
state.
32
THE SECURITISATION AND RECONSTRUCTION OF FINANCIAL
ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
(SARFAESI ACT):
There was an acute need being felt for assistance to the banks and other financial
institutions in the recovery of loans, for there were heavy losses being incurred on
account of unpaid debts. To regulate securitization and reconstruction of financial assets
and enforcement of security interest the president, on 21st day of June 2002 promulgated
the securitization and reconstruction of financial assets and enforcement of Security
Interest Act.
Definition of securitization:
Securitization means acquisition of financial assets by any securitization company or
reconstruction company from any originator, whether by raising of funds by such
Securitization Company or Reconstruction Company from qualified institutional buyers
by issue of security receipts representing undivided interest in such financial assets.
Measures for assets reconstruction:
When the borrower fails to repay the loan amount, then according to RBI guidelines the
construction company can take following measures:
The proper management of business of the borrower, by change in, or take over
of, the management of the business of the borrower.
The sale or lease of a part or whole of the business of the borrower.
Rescheduling of payments of debts payable by the borrower.
Enforcement of security interest in accordance with the provisions of this Act.
Settlement of dues payable by the borrower.
Taking possession of secured assets in accordance with the provisions of the act.
33
34
STEPS OR INTIATVES TAKEN BY RBI TO CURTAIL NPA :
Recognizing the fact that the origin of Non-performance could be at the initial stage of loan
decision-making, RBI had impressed upon banks from time to time, to strengthen credit
appraisal and credit supervision. After sanction and dispersal of credit, banks are required to
closely monitor the operation of the borrower units and accounts by way of ostentation of
periodic stock/operation statements brought down, end use, etc. in the cases of incipient cases
sickness, nursing back the sick units, etc. problem accounts above a certain outstanding
balance are required to be monitored individually by designated senior officials of the bank.
In respect of accounts where the classification of assets of the banks are required to take
prompt steps to recover the dues and staff accountability is required to be examined.
Banks have also been advised to take decisions regarding finding of source expeditiously and
to effectively follow up the cases of suit filed and decreed accounts. During periodic
discussions with bank management, special emphasis is given on monitoring of large NPA
accounts at the highest level in the banks and also on reductions of NPA through up
gradation, recovery and compromise settlements. RBI has advised and accordingly bank
boards have laid down policies in regard to credit dispensation, recovery of credit etc. Banks
have constituted recovery cells, recovery branches and NPA management departments and
fixed recovery targets.
Policies evolved and steps taken in this regard are critically examined during the annual on
sight inspection of banks. The off sights returns also provide RBI and insight into the quality
of credit portfolio at quarterly intervals.
Introduction of prudential norms on income recognition, asset classification , provisioning
during 1992-93 and other steps initiated apart from beginning in transparency in the loan
portfolio of banking industry have significantly contributed towards improvement of the pre-
sanction appraisal and post sanction supervision which is reflected in lowering of the levels
of fresh accretion of non-performing advances of banks after 1992.
RBI impressed upon the banks to strengthen the credit appraisal and credit
supervision.
Adoption of 90 days norm for recognition of loan impairment as against the
current norm of 180 days effective March 2004.
35
Reduction in transition period of sub-standard asset to doubtful category to
12 months as against the current norm of 18 months effective from March
2005.
Revision in the CRAR norms in terms of new Basel Capital Accord after
2005.
In cases of incipient sickness, detailed guidelines have been issued to banks
to take steps for avoiding sickness, nursing back the sick units etc.
During periodic description with bank management special emphasis is
given on monitoring of large NPA accounts at the highest level in the banks
and also on reduction of NPAs through up gradation, recovery and
compromise settlements.
RBI has advised and accordingly bank’s boards laid down policies in regard
to credit dispensation, recovery of credit, etc.
Policies evolved and steps taken are critically examined during the annual
on sight inspection of banks.
36
ANALYSIS
For the purpose of analysis and comparison between private sector and public
sector banks, I have taken five-five banks in both sector to compare the non performing assets
of banks and Deposits-Investment-Advances
Deposit – Investment – Advances is the first in the analysis because due to these we
can understand the where the bank stands in the competitive market.
DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and comparison
among them,for the year 2008-09.
PRIVATE SECTOR BANKS
BANK DEPOSIT INVESTMENT ADVANCES
AXIS 117374 46330 81557
HDFC 142812 58818 98883
ICICI 230510 103058 195865
KOTAK 15645 9110 16625
INDUSIND 21037 6930 15795
TOTAL 527378 224246 408725
37
At the end of march 2009, in private sector ICICI Bank is the highest deposit-investment-
advances figures in rupees crore, second is HDFC Bank and KOTAK Bank has least figures.
PUBLIC SECTOR BANK
BANK DEPOSIT INVESTMENT ADVANCES
CORP BANK 73984 24938 48512
BOI 189708 52607 144732
DENA 43050 12473 28878
PNB 209760 78605 154703
UBI 138416 67645 96960
TOTAL 654918 236268 473785
.In public sector banks Punjab National Bank has highest deposit-investment-
advances ,Union bank of india and Bank of India are almost the similar in numbers and Dena
38
Bank is stands for last in public sector bank. When we compare the private sector banks with
public sector banks among these banks, we can understand the more number of people prefer
to choose public sector banks for deposit-investment.
ICICI BANK AND PUNJAB NATIONAL BANK :-
\
BANK DEPOSIT INVESTMENT ADVANCES
ICICI BANK 230,510 103058 195,865
PNB 209760 78605 154703
But when we compare the private sector bank ICICI Bank with the public sector banks ICICI
Bank is more deposit-investment figures and first in the all banks.
39
Analysis and comparisons of NPA
There are two concepts related to non-performing assets_ gross and net. Gross refers to all
NPAs on a bank’s balance sheet irrespective of the provisions made. It consists of all the non
standard assets, viz. sub standard, doubtful, and loss assets. A loan asset is classified as ‘ sub
standard” if it remains NPA up to a period of 18 months; “ doubtful” if it remains NPA for
more than 18 months; and loss, without any waiting period, where the dues are considered
not collectible or marginally collectible.
Net NPA is gross NPA less provisions. Since in India, bank balance sheets contains 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 NPA according to the central bank
guidelines, are quite significant.
Here, we can see that there is huge difference between gross and net NPA. While gross
NPA reflects the quality of the loans made by banks, net NPA shows the actual burden
of banks. The requirements for provisions are :
100% for loss assets
100% of the unsecured portion plus 20-50% of the secured portion, depending on the
period for which the account has remained in the doubtful category
10% general provision on the outstanding balance under the sub standard category.
Here, there are gross and net NPA data for 2008-09 we taken for comparison among banks.
These data are NPA AS PERCENTAGE OF TOTAL ASSETS. As we discuss earlier that
gross NPA reflects the quality of the loans made by banks.
40
PUBLIC SECTOR BANKS (2008-09)
BANK GROSS NPA NET NPA
CORP BANK 1.14 0.29
BOI 1.71 0.44
DENA 2.13 1.09
PNB 1.77 0.17
UBI 1.96 0.34
Among the public sector banks, Dena Bank has highest gross NPA as a percentage of total
assets in the year 2008-09 and also net NPA. Punjab National Bank shows vast difference
between gross and net NPA. BOI and UBI have almost similar figures.
41
PRIVATE SECTOR BANKS (2008-09)
BANK GROSS NPA NET NPA
AXIS 0.86 0.35
HDFC 1.98 0.63
ICICI 4.32 2.09
KOTAK 3.64 2.02
INDUSIND 1.61 1.14
Among the private sector banks AXIS bank has the lowest Gross NPA as well as Net NPA,
while ICICI bank has the highest Gross NPA
COMPARISON OF GROSS NPA WITH ALL BANKS FOR THE YEAR 2008-
09. The growing NPAs affects the health of banks, profitability and efficiency. In the
long run, it eats up the net worth of the banks. We can say that NPA is not a healthy
sign for financial institutions. Here we take all the ten banks gross NPA together for
42
better understanding. Average of these ten banks gross NPAs is 1.29 as percentage of
total assets. So if we compare in private sector banks AXIS and HDFC Bank are
below average of all banks and in public sector BOB and BOI. Average of these five
private sector banks gross NPA is 1.25 and average of public sector banks is 1.33.
Which is higher in compare of private sector banks.
GROSS NPA :-
COMPARISON OF NET NPA WITH ALL BANKS FOR THE YEAR 2008-09.
Average of these ten bank’s net NPA is 0.56. And in the public sector banks all these
five banks are below this. But in private sector banks there are three banks are above
average. The difference between private and public banks average is also vast.
Private sector banks net NPA average is 0.71 and in public sector banks it is 0.41 as
percentage of total assets. As we know that net NPA shows actual burden of banks.
IndusInd bank has highest net NPA figure and HDFC Bank has lowest in comparison.
NET NPA of banks:-
banks ICICI Bank has the highest NPA in both sector in compare to other private sector
banks
43
SUMMARY OF FINDINGS :
The main causes for NPA is willful default, followed by improper selection of
borrowers and then lack of supervision and follow up.
We can observe that majority of respondents say that staff involvement in the
processing helps to reduce the NPAs and other respondent’s feel that proper
documentation helps in reducing NPA.
The Bank has converted NPA to good assets in few branches.
44
CONCLUSION:
The problem of non-performing assets has been a major issue for the banking industry. The
RBI which is the apex body for controlling the level of non-performing assets has been
giving guidelines and getting norms for the banks in order to control the incidents of defaults.
This study on management of non-performing assets with specific reference to J&K bank was
conducted, to find out the reasons for the incidence of non-performing assets and how public
sector banks managed it and its effect on performance of the bank.
The NPA of Jammu & Kashmir Bank Limited was studied and it was observed that
all branches of bank had NPA.
The study revealed that the J&K bank has been successful in controlling its level of
Non-performing assets as compared to the recent banking industry trends.
The causes for NPA in Jammu & Kashmir Bank Limited were analyzed, the extent to
which profitability has been reduced, was also analyzed.
45
46
BIBLOGRAPHY:
(A) TEXT BOOKS
1.) Financial Management by P.N. Reddy, H.R. Appannaiah and B.G.Satyaprasad.
2.) Financial Management by Prassana Chandra (Tata Mc Graw Hill Publications).
3.) Business Research Methods by O.R. Krishnaswami and B.G.
Satyaprasad.
4.) Law and Practice of Banking by H.R. Appannaiah, P.N. Reddy and S.Vijayendra.
5.) Greater Kashmir.
6.) Hand book of banking information by N S Tour.
(B) WEBSITES
1.) www.banking .com
2.) www.rbi.org
47