A COMPARATIVE STUDY OF NON-PERFORMING ASSETS WITH SPECIAL

REFERENCE TO PUBLIC PRIVATE AND FOREIGN BANKS

INTRODUCTION:
Banking is the backbone of a modern economy. Health of banking industry is one of the most
important pre-conditions for sustained economic progress of any country. The world of banking
has assumed a new dimension at the dawn of the 21st century with the advent of tech banking,
thereby lending the industry a stamp of universality. In general, banking may be classified as
retail and corporate banking. Retail banking, which is designed to meet the requirements of
individual customers and encourage their savings, includes payment of utility bills, consumer
loans, credit cards, checking account balances, ATMs, transferring funds between accounts and
the like. Corporate banking, on the other hand, caters to the needs of corporate customers like
bills discounting, opening letters of credit and managing cash.

The Indian banking scene has changed drastically with the private sector making inroads in an
area hitherto dominated by large public sector banks. Growing disinvestment is likely to impact
the banking industry as well. There is every possibility of privatization of public sector banks,
leading to greater operational autonomy.

The development of the Indian banking sector has been accompanied by the introduction of new
norms such as Income Recognition and Capital Adequacy, by the government. The latter implies
that banks can lend on the basis of their respective capital base. These norms have caused banks
to construct equity on their own, before going in for debt. Disintermediation is a real threat for
banks. Of late, banks are adopting the EVA (Economic Value Added) concept wherein revenues
are viewed in the context of the risk associated with them.

The New World order has ensured "Survival of the Fittest". New services are the order of the
day, in order to stay ahead in the rat race. Banks are now foraying into net banking, securities,
consumer finance, housing finance, treasury market, merchant banking and insurance

LITERATURE REVIEW

A number of studies related to performance and over dues of banking sector have been
conducted by many researchers and institutions in India. An analytical attempt is being made to
review some related works done to organize them in a presentable form.
I. Studies Prior to Financial Sector Reforms (1991):
The Maclegan Committee (1914), which is the historical document in the annals of cooperative
movement, has examined the performance of credit cooperatives. It stated that when the funds
are kept rotating, any loaning function of the bank can gear up successfully and serve very useful
purpose. Unless the loans are repaid punctually, cooperation is both financially and educationally
an illusion.
Kalyani (1970) emphasized on a longer period for the repayment of long term loans in India. He
added that the total burden of interest would be relatively higher in the long period than in the
shorter period, but then this burden would be spread over quite a long period, making it easier for
the borrower to repay his loan in easy installments, thereby resulting in lesser over dues.
The All India Rural Credit Review Committee (1972) strongly stated that there is an utter lack of
administrative supervision, staff of right type and the requisite scale of and, therefore, a full
check on the utilization of loans is rather difficult. Further it pointed out that the cooperative
system had remained stagnant both in respect of coverage of credit as well as borrowing
members as proportion to the total number of members.

Cooperative credit was short of

standards of timeliness, adequacy and dependability. Generally the over dues were heavy and
were rising from year to year.
Datey, the Chairman of the Report of the study team on over dues in cooperative credit
institutions (1974) studied the problem of over dues in cooperative banks and remarked. About
three fourths of over dues arose due to willful default besides internal reasons. And he suggested
that stern action on recalcitrant borrowers should be taken up.
Economic Survey (2005-2006), Monetary and Banking Developments: According to this survey,
the target for institutional credit for agriculture by all the agencies was fixed at Rs.105,000 crores
for the year 2004-05,ensuring 30% growth over previous years achievement. The overall
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achievement by all agencies during 2004-05 was 1,15,243 crores, equivalent to 32% growth over
the previous years achievement. It further highlighted that while the Commercial Banks and
Regional Rural Banks over performed vis--vis their target of Rs 57000 crores and 8500 crores,
there was a shortfall of over Rs.8000 crores by Cooperative Banks vis--vis their target of 39,000
crores, attributing the same to low resource base and inefficient recovery system, thereby leading
to excessive Over dues. The position of NPAs has significantly improved in Scheduled
Commercial Banks due to wider options available to these for recovery of their dues on one hand
and sale of their NPAs to Asset Reconstruction Co(India) limited (ARCIL) on the other hand.
This resulted in NPAs declining by 6487 crores between March 2004 and end March 2005.

Bagchi, (2006). made an attempt to analyze the performance of Cooperative Credit Institutions
especially Primary Agriculture Credit Societies, and observed that PACS could not match up to
the increasing requirements of growth dimensions in the Agri /Rural developments in the Post
Independence Period, although till the late 50s, they were the only available source of
institutional rural finance. According to the RBI Report on Trend and Progress of Banking in
India 2004-05, released on 24-11-05, the Cooperative Credit Institutions had extended an amount
of Rs.39, 638 crores to Agri-Allied sectors i.e., about half of credit advanced by Commercial
Banks (72,886 crores) and double the amount advanced by RRBs (11,718 crores). The dismal
performance of Cooperative Banks was due to unnecessary State Government intervention and
above all the inefficient loan recovery system leading to NPAs.

CONCEPTUAL FRAME WORK

Meaning: Non Performing Asset means an asset or account of borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance
with the directions or guidelines relating to asset classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it has not been paid within
30 days from the due date. Due to the improvement in the payment and settlement systems,
recovery climate, up gradation of technology in the banking system, etc., it was decided to
dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that
date, a Non performing asset (NPA) shell be an advance where
1. Interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan.
2. The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit(OD/CC),
3. The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
4. Interest and/ or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
5. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
With a view to moving towards international best practices and to ensure greater transparency,
it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year
ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset
(NPA) shell be a loan or an advance where;
i.

Interest and /or installment of principal remain overdue for a period of more than 90 days
in respect of a Term Loan,

ii.

The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC)
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iii.

The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,

iv.

Interest and/ or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural
purpose, and

v.

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

ASSET CLASSIFICATION:
Assets are classified into following four categories:
Standard Assets:
Sub-standard Assets
Doubtful Assets
Loss Assets
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this case
the arrears of interest and the principal amount of loan do not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount due more than 90
days then it is NPA and NPAs are further need to classify in sub categories.
Provisioning Norms:
From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Contingent Provisions against Standard Assets' under 'Other
Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.
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Banks are required to classify non-performing assets further into the following three categories
based on the period for which the asset has remained non-performing and the reasonability of the
dues:
1) Sub-standard Assets
2) Doubtful Assets
3) Loss Assets
Sub-standard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained NPA
for a period less than or equal to 12 month. The following features are exhibited by substandard
assets: the current net worth of the borrowers / guarantor or the current market value of the
security charged is not enough to ensure recovery of the dues to the banks in full; and the asset
has well-defined credit weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are
not corrected.
Provisioning Norms:
A general provision of 10 percent on total outstanding should be made without making any
allowance for DICGC/ECGC guarantee cover and securities available.
Doubtful Assets:
A loan classified as doubtful has all the weaknesses inherent in assets that were classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full,
on the basis of currently known facts, conditions and values - highly questionable and
improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the
sub-standard category for 12 months.
Provisioning Norms:
100 percent of the extent to which the advance is not covered by the realisable value of
the security to which the bank has a valid recourse and the realisable value is estimated
on a realistic basis.
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 In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the
period for which the asset has remained doubtful:

Period for which the advance has been Provision requirement (%)
considered as doubtful

Up to one year

20

One to three years

30

More than three years:

(1) Outstanding stock of NPAs as on March 31,
2004.

60% with effect from March 31, 2005.

(2) Advances classified as doubtful more than

75% effect from March 31, 2006.

three years on or after April 1, 2004.

100% with effect from March 31, 2007

Additional provisioning consequent upon the change in the definition of doubtful assets effective
from March 31, 2003 has to be made in phases as under:

i.

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

which became doubtful on account of new norm of 18 months for transition from substandard asset to doubtful category.

ii.

As on 31.03.2002, balance of the provisions not made during the previous year, in
addition to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning consequent upon the reduction in the
transition period from substandard to doubtful asset from 18 to 12 months over a four year period
commencing from the year ending March 31, 2005, with a minimum of 20 % each year.
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Loss Assets:
A loss asset is one which considered uncollectible and of such little value that its continuance as
a bankable asset is not warranted- although there may be some salvage or recovery value. Also,
these assets would have been identified as loss assets by the bank or internal or external
auditors or the RBI inspection but the amount would not have been written-off wholly.
Provisioning Norms:
The entire asset should be written off. If the assets are permitted to remain in the books for any
reason, 100 percent of the outstanding should be provided for.
Guidelines for the classification of assets
Classification of assets into above categories should be done taking into account the
degree of well defined credit weaknesses and the extent of dependencies on collateral
security for the realization of dues.
Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs especially in respect of high value of accounts.
Account with temporary Deficiencies:
The classification of an asset as NPA should be based on the record of recovery. Bank
should not classify an advance account as NPA merely due to the existence of some
deficiencies, which are temporary in nature as such as non availability of adequate
drawing power based on latest stock.
Asset classification to be borrower wise and not facility-wise:
It is difficult to envisage a situation when only one facility to a borrower becomes a
problem credit and not others. Therefore, all the facilities granted by a bank to a borrower
will have to be treated as NPA and not the particular facility or a part thereof, which has
become irregular.
Advances under consortium arrangements:
Asset classified of accounts under consortium should be based on the record of recovery
of the individual member banks and other aspects having bearing on the recoverability of
the advances. Accounts where there is erosion in the value of security can be reckoned as
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significant when the realizable value of the security is less than 50 percent of the value
assessed by the bank or accepted by RBI at the time of last inspection, as the case may be.
Such NPAs may be straightway classified under doubtful category and provisioning
should be made as applicable to doubtful assets.
Agricultural Advances
In respect of advances granted for agricultural purpose where interest and / or installment
of principal remains unpaid after it has become past due for two harvest seasons but for a
period not exceeding two half years , such an advance should be treated as NPA.
Where the natural calamities impair the repaying capacity of agricultural borrowers,
banks may decide on their own as a relief measure-conversion of the short term
production loan into a term or re-schedulement of the repayment period.
In such cases of conversation or re-schedulement, the term loan as well as fresh shortterm loan may be treated as current dues and need not be classified as NPA.
Restructuring /rescheduling of loans:
A standard asset where the terms of the loan arrangement regarding interest and principal
have been renegotiated or rescheduled after the commencement of production should be
as sub-standard and should remain in such category for at least one year of satisfactory
performance under the renegotiated or restructured terms. In case of substandard and
doubtful assets also, rescheduling does not entitle a bank to upgrade the quality of
advances automatically unless there is satisfactory performance under the rescheduled
renegotiated terms.
Exceptions:
As trading involves only buying and selling of commodities and the problems associated
with manufacturing units such as bottleneck in commercial production, time and cost
escalation etc. are not applicable to them.
NPA NORMS
Provisional Norms:

Banks will be required to make provisions for bad and doubtful debts on a uniform and
consistent basis so that the balance sheets reflect a true picture of the financial status of the bank.
The Narsimham Committee has recommended the following provisioning norms (i) 100 per cent
of loss assets or 100 per cent of out- standings for loss assets; (ii) 100 per cent of security
shortfall for doubtful assets and 20 percent to 50 per cent of the secured portion; and (iii) 10 per
cent of the total out standings for substandard assets. A provision of 1% on standard assets is
required as suggested by Narsimham Committee II, 1998. Banks need to have better credit
appraisal systems so as to prevent NPA from occurring. The most important relaxation is that the
banks have been allowed to make provisions for only 30 per cent of the "provisioning
requirements" as calculated using the Narsimham Committee recommendations on provisioning.
The encouraging profits recently declared by several banks have to be seen in the light of
provisions made by them. To the extent that provisions have not been made, the profits would be
fictitious.
Disclosure Norms:
Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and
borrowings. Apart from this, banks are also required to give details of their exposure to foreign
currency assets and liabilities and movement of bad loans. These disclosures were to be made for
the year ending March 2000. In fact, the banks must be forced to make public the nature of NPA
being written off. This should be done to ensure that the taxpayers money given to the banks, as
capital is not used to write off private loans without adequate efforts and punishment of
defaulters.
TYPES OF NPA:
Gross NPA
Net NPA
Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets.
It can be calculated with the help of following ratio:
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Gross NPAs Ratio =

Gross NPAs /Gross Advances

Net NP A:
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
Reasons for an account becoming NPA:
1. Internal factors
2. External factors
Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,
misappropriation etc.
9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow11

ups, delaying settlement of payments\ subsidiaries by government bodies etc.,

External factors:
1. Sluggish legal system Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5. Failures, nonpayment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes etc
The RBI has summarized the finer factors contributing to higher level of NPAs in the
Indian banking sector as: Diversion of funds, which is for expansion, diversification, modernization, undertaking
new projects and for helping associate concerns. This is also coupled with recessionary
trends and failures to tap funds in capital and debt markets.
Business failures (such as product, marketing etc.), which are due to inefficient
management system, strained labour relations, inappropriate technology/ technical
problems, product obsolescence etc.
Recession, which is due to input/ power shortage, price variation, accidents, natural
calamities etc. The externalization problems in other countries also lead to growth of
NPAs in Indian banking sector.
Time/ cost overrun during project implementation stage.
Governmental policies such as changes in excise duties, pollution control orders etc.
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 Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation,

promoters/ directors disputes etc.
Deficiency on the part of banks, viz, delays in release of limits and payments/ subsidies
by the Government of India.
Impact of NPA:
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 doesnt 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.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest 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.
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 days banks have special
employees to deal and handle NPAs, which is additional cost to the bank.
Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting their money in the banks.

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EARLY SYMPTOMS:
By which one can recognize a performing asset turning in to non-performing asset Four
categories of early symptoms:1. Financial:
Non-payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that partial amount is diverted to sister concern
or parent company.
1. Operational and Physical:
If information is received that the borrower has either initiated the process of winding up
or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower
conduct his business.
Frequent changes in plan.
Nonpayment of wages.
2. Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower
Avoidance of contact with bank.
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 Problem between partners.

3. Others:
Changes in Government policies.
Death of borrower.
Competition in the market
MANAGING NPA:
The primary aim of any business is to make profits. Therefore, any asset created in
the course of the conduct of business should generate income for the business.
This applies equally to the business of banking. The banks the worlds over deal in
money, by accepting deposits (liabilities) and out of such deposits (liabilities)
lend/create loans (assets). If for any reason such assets created do not generate
income or become sticky and difficult of recovery, then the very position of the banks
in repaying the deposits (liabilities) on the due dates would be at stake and in
jeopardy. Banks with such assets portfolio would become weak and naturally such
weak banks will lose the faith and confidence of the investors.
With the introduction of prudential norms for income recognition, assets
classification and provisioning, banks have become quite sensitive and are taking all
possible steps to strengthen their assets acquisition and monitoring systems.
There is also a growing awareness to bring down non-performing assets as these are
having adverse impact on their profitability due to de-recognition of interests as well
as requirement of heavy loan loss provisions on such assets. Therefore it would be
prudent for banks to manage their assets in such a manner that they always remain
healthy, generate sufficient income and capable of repayment/recovery on the due
dates.
Management of performing/non-performing assets in banks has become an `art and
science' and virtually `a battle of wits' between the banker and the borrower with the
latter demanding write off or at least a major sacrifice from the bankers side
irrespective of whether he is in a position to pay or not.
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 Management of non-performing assets of the financial sector was put on fast track
recently with the Union Cabinet approving the promulgation of an ordinance to
facilitate securitization and reconstruction of financial assets.
Besides enabling banks and financial institutions to create a market for the securitized
assets and improve their asset liability management, the Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Ordinance
would also assist in setting up Asset Reconstruction Companies. Though this is a
welcome development, the bankers have to do their basic homework and to utilize
this opportunity to clean up and recover their dues at an early date.
MEASURES TO RECOVER NPAS
Over the last few years Indian banking in its attempt to integrate itself with the global banking
has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high
sounding claims and lofty achievements. One of the major hurdles, the Indian banking is facing
today, is its ever-growing size of non-performing assets over which the top management of
almost each bank is baffled. On account of the intricacies involved in handling the NPA the
ticklish task of assets management of the bank has become a tight rope walk affair for the
controlling heads, because a little wavering this or that side may land the concern bank in
trouble. The growing NPA is a potent source of worry for the finance minister as well, because
in a developing country like ours, banking is seen as an important instrument of development,
while with the backbreaking NPA banks have become helpless burden on the economy.
NPA with outstanding up to 5 crore:
In case of doubtful and loss assets, through the modified schemes, the banks have been directed
to follow up a settlement formula under which the minimum amount to be recovered, amounts to
be entire outstanding running ledger balances as on the date the account was identified as NPA
i.e. the date from which the interest was not charged to the running ledger, an analysis of the
given formula shows that RBI has been very much generous in granting huge relaxation to the
borrowers who were not coming forward for setting their overdue loans due to one or other
reason. The scheme is of high practical value as it protects the borrowers who were having
genuine problems in clearing their dues because the interest component constituted a multiplied
amount of principal outstanding. On the other hand, the concerned banks were also finding in
16

difficult to sacrifice the entire interest component, but outstanding in the dummy ledger. Now as
per the provision to the scheme, they will be ready to grant such relaxation in favour of the
borrowers. These guidelines have come as a windfall for borrowers who after a lot of
negotiations were almost ready to repay back their principal as well as part of the interest
component to settle their accounts, as under the modified scheme, they would be able to save the
interest component. To that extent the concerned bank stands to lose.
In the case of sub standard assets, the settlement formula as given in the modified scheme states
that the minimum sum to be recovered must contain the entire running ledge outstanding balance
as on the date of the account was identified as NPA i.e. the date from the which interest was not
charged to the running ledger plus interest at the existing prime lending rate of the bank. As per
the modified scheme, the terms suggested for the payment of settlement amount NPA are simple
and pragmatic. As per the terms of the scheme, the settlement amount should be paid in lump
sum by the borrower. However in case of the borrower is unable to repay back in a lump sum,
the scheme allows sufficient breathing period to enable him to arrange the funds and clear at
least 25 percent of the settlement amount to be paid upfront and the remaining amount to be
recovered in installments spread over a period of one year along with interest at the existing PLR
from the date of settlement up to the date of final payment.
NPA with outstanding over Rs. 5 crores:
For recovery of NPA over Rs. 5 crore, RBI has left the matter to the concerned banks and
advised that the concerned banks may formulate policy guidelines regarding their settlement and
recovery. The freedom, in such cases, is given to the banks, because the attending circumstances
in each case may vary from the other. Therefore it was in the right direction that adopting a
generalized approach was not thought appropriate. In cases, where the amount involved is above
Rs. 5 crore, RBI expects CMD of each bank to supervise the NPA personally. The CMDs of the
concerned banks are advised to review all such cases within a given timeframe and decide the
course of action in terms of rehabilitation/restructuring. RBI also desires the submission of a
quarterly report of all NPA above Rs. 5 crore from PSU banks. Thus by putting up the cut-off
dates for the implementing of the scheme, RBI desires the banks to realize the seriousness of the
issue and gear up to sweep away the NPA in one go.

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For commercial banks, it is a golden opportunity to clear the mess, consolidate and come out on
a track leading the path of global banking. The time given for weeding out the disastrous NPA is
neither too long nor too short and the banks, with proper planning and follow up can drastically
reduce their NPAs, if they firmly resolve to do so. RBI expects the commercial banks to follow
the guidelines in letter and spirit without any discrimination or discretion as a slight dilution may
jeopardize their interest. A proper monitoring system is also desired to be evolved for monitoring
the progress of the scheme. As this is a rare opportunity given to the defaulting borrowers so that
they can avail the chance given for the settlement of their loans. Without adequate publicity of
the scheme the response from the defaulting borrowers may not be there to the expected level.
PREVENTIVE MEASUREMENT FOR NPA:
EARLY RECOGNITION OF THE PROBLEM
Invariably, by the time banks start their efforts to get involved in a revival process, it too late
to retrieve the situation- both in terms of rehabilitation of the project and recovery of banks
dues. Identification of weakness in the very beginning that is: When the account starts
showing first signs of weakness regardless of the fact that it may not have become NPA, is
imperative. Assessment of the potential of revival may be done on the basis of a technoeconomic viability study. Restructuring should be attempted where, after an objective
assessment of the promoters intention, banks are convinced of a turnaround within a
scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to
facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through
legal means before the security position becomes worse.
IDENTIFYING BORROWERS WITH GENUINE INTENT
Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of frontline
officials at the branch level is paramount as they are the ones who have intelligent inputs
with regard to promoters sincerity, and capability to achieve turnaround. Based on this
objective assessment, banks should decide as quickly as possible whether it would be
worthwhile to commit additional finance. In this regard banks may consider having Special
Investigation of all financial transaction or business transaction, books of account in order
to ascertain real factors that contributed to sickness of the borrower. Banks may have penal
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of technical experts with proven expertise and track record of preparing techno-economic
study of the project of the borrowers. Borrowers having genuine problems due to temporary
mismatch in fund flow or sudden requirement of additional fund may be entertained at
branch level, and for this purpose a special limit to such type of cases should be decided.
This will obviate the need to route the additional funding through the controlling offices in
deserving cases, and help avert many accounts slipping into NPA category.
TIMELINESS AND ADEQUACY OF RESPONSE
Longer the delay in response, grater the injury to the account and the asset. Time is a crucial
element in any restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and promoters commitment, has to be adequate in terms of extend of
additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.
FOCUS ON CASH FLOWS
While financing, at the time of restructuring the banks may not be guided by the conventional
fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh
credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow
rather than only on the basis of Funds Flow.
MANAGEMENT EFFECTIVENESS
The general perception among borrower is that it is lack of finance that leads to sickness and
NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse
business conditions is a very important aspect that affects a borrowing units fortunes. A bank
may commit additional finance to an aling unit only after basic viability of the enterprise also in
the context of quality of management is examined and confirmed. Where the default is due to
deeper malady, viability study or investigative audit should be done it will be useful to have
consultant appointed as early as possible to examine this aspect. A proper techno- economic
viability study must thus become the basis on which any future action can be considered.
MULTIPLE FINANCING
During the exercise for assessment of viability and restructuring, a Pragmatic and unified
approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower
19

would go a long way toward overall success of rehabilitation exercise, given the probability of
success/failure.
In some default cases, where the unit is still working, the bank should make sure that it captures
the cash flows (there is a tendency on part of the borrowers to switch bankers once they default,
for fear of getting their cash flows forfeited), and ensure that such cash flows are used for
working capital purposes. Toward this end, there should be regular flow of information among
consortium members. A bank, which is not part of the consortium, may not be allowed to offer
credit facilities to such defaulting clients. Current account facilities may also be denied at nonconsortium banks to such clients and violation may attract penal action. The Credit Information
Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on
defaulting borrowers once the setup becomes fully operational.
In a forum of lenders, the priority of each lender will be different. While one set of lenders may
be willing to wait for a longer time to recover its dues, another lender may have a much shorter
timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit,
even a t a cost by a discounted settlement of the exposure. Therefore, any plan for
restructuring/rehabilitation may take this aspect into account.
Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely
and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the
banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks
may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and
viable sub-standard accounts with consortium/multiple banking arrangements.

20

BANKING INDUSTRY PROFILE

Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790;
both are now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of
Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay
and the Bank of Madras, all three of which were established under charters from the British East
India Company. For many years the Presidency banks acted as quasi-central banks, as did their
successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon
India's independence, became the State Bank of India.
The Rs 64 trillion (US$ 1.22 trillion) Indian banking industry has made exceptional progress in
last few years, even during the times when the rest of the world was struggling with financial
meltdown. Even today, financial institutions across the world are facing the repercussions of the
turmoil but the Indian ones are standing stiff under the regulator's watchful eye and hence, have
emerged stronger.
Ratings agency Moody's believe that strong deposit base of Indian lenders and Government's
persistent support to public sector and private banks would act as positive factors for the entire
system amidst the negative global scenario.
The sector has undergone significant developments and investments in the recent past. Some of
them are discussed hereafter along with the key statistics and Government initiatives pertaining
to the same.
Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India's independence marked the end of a regime of the
Laissez-faire for the Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted into greater involvement of the
21

state in different segments of the economy including banking and finance. The major steps to
regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on
January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948 (RBI, 2005b).

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could have
common directors.

Key Statistics

According to the Reserve Bank of India (RBI)'s Quarterly Statistics on Deposits and
Credit of Scheduled Commercial Banks', March 2011, Nationalized Banks, as a group,
accounted for 53.0 per cent of the aggregate deposits, while State Bank of India (SBI)
and its associates accounted for 21.6 per cent. The share of new private sector banks, Old
private sector banks, Foreign banks and Regional Rural banks in aggregate deposits was
13.4 per cent, 4.6 per cent, 4.4 per cent and 3 per cent respectively.

With respect to gross bank credit also, nationalized banks hold the highest share of 52.8
per cent in the total bank credit, with SBI and its associates at 22.1 per cent and New
Private sector banks at 13.2 per cent. Foreign banks, Old private sector banks and
Regional Rural banks held relatively lower shares in the total bank credit with 4.9 per
cent, 4.6 per cent and 2.4 per cent respectively.

Another statement from RBI has revealed that bank advances grew 17.08 per cent annually as on
December 16 while bank deposits rose 18.03 per cent.
RBI data shows that India raised US$ 1.6 billion through external commercial borrowings
(ECBs) in November 2011 for new projects, capital outlay et al. 78 companies raised US$ 1.3
billion under automatic route and US$ 253 million was raised under the approval route (it
requires case-by-case approval by the regulator).

India's foreign exchange reserves stood at US$ 297 billion as on December 30, 2011.
22

In recent years, deposits under non-resident Indians (NRI) schemes have witnessed an
upsurge. There was an inflow Rs 14,763 crore (US$ 2.83 billion) under NRI deposits in
2010-11, which was 6.5 per cent higher from 2009-10. In 2011, the total of NRI deposits
was Rs. 2,30,812 crore (US$ 44.2 billion), compared to Rs 2,27,078 crore (US$ 43.5
billion) in 2010.

Recent Developments

The US Export-Import Bank, with a commitment of US$ 7 billion, is on a way to

diversify its portfolio in India by financing projects in education, healthcare and
agriculture. After Mexico, India is the second biggest investment destination for the bank
as the entity anticipates the country to become the largest market in next 12-18 months.

India Infrastructure Finance Company Ltd (IIFCL) and IDBI Bank have inked a five-year
memorandum of understanding (MoU) to launch infrastructure debt fund (IDF) schemes.
The IDF, for which IDBI Bank and IIFCL would play strategic investors, is expected to
get launched by the end of February 2012.

With 'green power' projects getting highly popular in India, especially in the states of
Gujarat and Rajasthan, banks are increasingly opening up to projects from nonconventional (solar and wind) energy space. After receiving project proposals that were
meant for a particular industry/consumer or group of industries/consumers for their own
use, banks are now getting projects that entail commercial viability (25-100 mega watt).

With an intension to strengthen its hold in Southern India, the Uco Bank is planning to
add 11 more branches in Andhra Pradesh to its 66-branch-strong network in the state.
The bank has made exemplary progress in recent past with 2,004 branches in the country
and four abroad.

Government Initiatives
Agreeing to Khandelwal Committee's recommendation, the Government has said that state-run
banks will get two Chief Executives and the large banks would get three Executive Directors
(EDs) in their management panel. Banks with a business of more than Rs 300,000 crore (US$

23

57.44 billion) are considered to be large entities. The third ED, however, would be responsible
for human resource development (HRD) and technology in the bank.
"Non-resident Indians (NRIs) are crucial investors for banks as they form 10 per cent of total
personal segment deposits," said Samir Kumar Bhattacharya, General anager (NRI), State Bank
of India (SBI). In order to encourage them, the RBI had deregulated interest rates on NonResident (External) Rupee Deposits and Ordinary Non-Resident Accounts (on December 16,
2011) due to which banks are able to offer competitive rates to NRIs. This move has further
made India an attractive investment destination for them.
Further, the Government of India has decided to infuse Rs 6,000 crore (US$ 1.15 billion) in
public sector banks during the remaining 2011-12 to ensure that the entities meet regulatory
requirements. In 2010-11, the Government had provided Rs 20,157 crore (US$ 3.86 billion) as
its capital support to public sector banks.
In order to prepare public sector banks for neck-to-neck competition ahead and improve their
performance in future, the Ministry of Finance has set new benchmarks for them to achieve. The
new benchmarks, that would calculate their functional and financial capability to qualify for
capital infusion, entail three performance indicators - savings and current deposit ratio,
employee-branch ratio and profit per employee.
Road Ahead
According to Chanda Kochhar, Managing Director and Chief Executive Officer, ICICI Bank
India's banking sector has the potential to become a Rs 200 trillion (US$ 3.83 trillion) industry
by 2020 if the country's economy grows at 8 per cent per annum over a long term as the growth
of any country's banking sector depends on the growth of that country's gross domestic product
(GDP).
Another report by The Boston Consulting Group (BCG) India, in association with a leading
industry organisation and Indian Banks Associations (IBA) predicts that Indian banking sector
would become the world's third largest in asset size by 2025. The report also analyses that
mobile banking would become the second largest channel of banking after ATMs. Given the
positive eco-system of the industry, regulatory and Government initiatives, mobile banking is
anticipated to enhance from 0.1 per cent of transactions in a 45 per cent financial inclusion base
in 2010 to 34 per cent of the transactions with 80 per cent rural inclusion base by 2020, as per the
report.
24

Nationalization
Despite the provisions, control and regulations of Reserve Bank of India, banks in India except
the State Bank of India or SBI, continued to be owned and operated by private persons. By the
1960s, the Indian banking industry had become an important tool to facilitate the development of
the Indian economy. At the same time, it had emerged as a large employer, and a debate had
ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of
India, expressed the intention of the Government of India in the annual conference of the All
India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization". The
meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance and
nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969.
Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political
sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second dose of nationalization, the Government of India controlled around 91% of the
banking business of India. Later on, in the year 1993, the government merged New Bank of India
with Punjab National Bank. It was the only merger between nationalized banks and resulted in
the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the
nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian
economy.
Liberalization
In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New Generation techsavvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of
India, revitalized the banking sector in India, which has seen rapid growth with strong

25

contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms
for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights
which could exceed the present cap of 10%, at present it has gone up to 74% with some
restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this
led to the retail boom in India. People not just demanded more from their banks but also received
more.
Currently (2007), banking in India is generally fairly mature in terms of supply, product range
and reach-even though reach in rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to
have clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage
volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As, takeovers, and asset
sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak
Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed
to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any
stake exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in
their loan recovery efforts in connection with housing, vehicle and personal loans. There are
press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

26

Banks also may offer investment and insurance products, which they were once prohibited from
selling. Banks also may offer investment and insurance products, which they were once
prohibited from selling. As a variety of models for cooperation and integration among finance
industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms have diminished. In spite of these changes, banks continue to
maintain and perform their primary roleaccepting deposits and lending funds from these
deposits.
Banking is comprised of two parts: Monetary AuthoritiesCentral Bank, and Credit
Intermediation and Related Activities. The former includes the bank establishments of the U.S.
Federal Reserve System that manage the Nations money supply and international reserves, hold
reserve deposits of other domestic banks and the central banks of other countries, and issue the
currency we use. The establishments in the credit intermediation and related services industry
provide banking services to the general public. They securely save the money of depositors,
provide checking services, and lend the funds raised from depositors to consumers and
businesses for mortgages, investment loans, and lines of credit.
There are several types of banks, which differ in the number of services they provide and the
clientele they serve. Although some of the differences between these types of banks have
lessened as they have begun to expand the range of products and services they offer, there are
still key distinguishing traits. Commercial banks, which dominate this industry, offer a full range
of services for individuals, businesses, and governments. These banks come in a wide range of
sizes, from large global banks to regional and community banks. Global banks are involved in
international lending and foreign currency trading, in addition to the more typical banking
services. Regional banks have numerous branches and automated teller machine (ATM)
locations throughout a multi-state area that provide banking services to individuals. Banks have
become more oriented toward marketing and sales. As a result, employees need to know about
all types of products and services offered by banks. Community banks are based locally and offer
more personal attention, which many individuals and small businesses prefer. In recent years,
online bankswhich provide all services entirely over the Internethave entered the market,
with some success. However, many traditional banks have also expanded to offer online banking,
and some formerly Internet-only banks are opting to open branches.
27

Savings banks and savings and loan associations, sometimes called thrift institutions, are the
second largest group of depository institutions. They were first established as community-based
institutions to finance mortgages for people to buy homes and still cater mostly to the savings
and lending needs of individuals.
Credit unions are another kind of depository institution. Most credit unions are formed by people
with a common bond, such as those who work for the same company or belong to the same labor
union or church. Members pool their savings and, when they need money, they may borrow from
the credit union, often at a lower interest rate than that demanded by other financial institutions.
History
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that
issues stock and requires shareholders to be held liable for the company's debt) It was not the
first though. That honor belongs to the Bank of Upper India, which was established in 1863, and
which survived until 1913, when it failed, with some of its assets and liabilities being transferred
to the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the Confederate
States, promoters opened banks to finance trading in Indian cotton. With large exposure to
speculative ventures, most of the banks opened in India during that period failed. The depositors
lost money and lost interest in keeping deposits with banks. Subsequently, banking in India
remained the exclusive domain of Europeans for next several decades until the beginning of the
20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in
Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the
British Empire, and so became a banking center.

28

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in
1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period
of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial
and other infrastructure had improved. Indians had established small banks, most of which
served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and
a number of Indian joint stock banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign
trade. Indian joint stock banks were generally undercapitalized and lacked the experience and
maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon
to observe, "In respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome
compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to the
present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank
and Central Bank of India.
The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara (
South Kanara ) district. Four nationalized banks started in this district and also a leading private
sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian
Banking".

29

PUBLIC, PRIVATE AND FOREIGN BANKS PROFILE:

Banks in India
The system of banking in India dates back to the later half of the 18th century. The first bank that
was established in India was known as The General Bank of India. It was founded in the year
1786, today it is defunct. State Bank of India is the oldest bank in the country that still exists. It
was previously known as Bank of Calcutta and started operations on June 1806.
Banks in India have come a long way since liberalization. The banks in India are broadly
categorized into Public, Private and Foreign banks.
Striking Facts about Banks in India
Canara Bank was the first bank in India that was given an ISO
Punjab National Bank was the first bank in India that began operations entirely with
Indian capital.
South Indian Bank was the first bank in India in the private sector that became a
scheduled bank in the year 1946 by the RBI Act
State Bank of India is the largest, oldest and most successful commercial bank in the
country.
State Bank of India offers a wide range of domestic, NRI and international products
and services
Bank of India was the first Indian bank that opened a branch outside the country in
1946 in London.
Allahabad Bank is the oldest Public Sector Bank in the country that has branches
spread across all over India.
Allahabad Bank has been serving the nation for the past 132 years
The Central Bank of India was the first commercial bank in India which was entirely
owned and managed by the citizens of the country.

30

Public sector Banks in India

The term public sector banks are used commonly in India. This refers to banks that have their
shares listed in the stock exchanges NSE and BSE and also the government of India holds
majority stake in these banks. They can also be termed as government owned banks.
Example: State bank of India
India is home to a host of Public sector Banks. Public sector banks refer to those banks in which
the government holds more than 50 percent of the shares.
List of Public sector Banks in India

Bank of Baroda

Bank of India

Union Bank of India

Punjab & Sind Bank

UCO Bank

Bank of Maharashtra

Allahabad Bank

Andhra Bank

Punjab National Bank

Syndicate Bank

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

Indian Bank

Indian Overseas Bank

Oriental Bank of Commerce

Punjab & Sind Bank

UCO Bank

United Bank of India

Vijaya Bank
31

Services of Public sector Banks in India

The Public sector Banks in India provide the following services under the different sections:
Personal Banking

Home Loan

Loans

deposit scheme

Life Insurance

General Insurance

credit Cards

Overdrafts

Personal Loan

Loan against Property

current account

gold schemes

salary account scheme

Mutual Fund Products

Corporate Banking

Merchant Banking Services

Accounts & Deposits

IPO Monitoring Activity

Loans & Advances

Cash Management Services

TUF Schemes

Electronic Tax

NRI Banking

Remit money schemes

32

Rupee drawing arrangement

Bank-western union remittances scheme

Priority & SME Credit

Priority Credit

SME Marketing Desk

Regional Rural Banks

SME Business

Rural Development

Consultancy Services related to agriculture

Agri-Business Marketing Desk

Social Banking

Entrepreneurship Development for women

Loans & Advances:

Home Loan

Loan for Personal needs of Teaching/Non- Teaching Staff

Loan for Personal Needs

Loan against Security of Mortgage of Property

Loan for Pensioners

Loan against approved Shares/Debentures/Mutual Funds

Private Banks in India

Private sector banks are those banks in which majority of stake are hold by private individuals
and not by the govt.
Example: The total economy is composed of two sectors, the private sector and the public sector.
India also houses numerous private banks. Private Banks are the banks that have no government
stakes. The shares in these banks are held entirely by financial institutions/general public.

33

List of Private Banks in India

Bank of Rajasthan

Centurion Bank

Bank of Punjab

Catholic Syrian Bank

IndusInd Bank

IDBI Bank

ICICI Bank

Jammu & Kashmir Bank

ING Vysya Bank

Karur Vysya Bank

Laxmi Vilas Bank

United Western Bank

UTI Bank

City Union Bank

Dhanalakshmi Bank

Development Credit Bank

Federal Bank

HDFC Bank

Karnataka Bank

South Indian Bank

Services of Private sector Banks in India

The Private sector Banks in India provide the following services under the different sections:
Personal banking

Loans

Forex and trade services

Credit Card

Online Payment services

34

Investments and insurance

Private Banking

NRI banking

Accounts and deposits savings accounts, foreign currency deposits, current accounts,
accounts for returning Indians and fixed deposits

Preferred banking

Loans home loan and loan against securities

Ways to bank banking online, banking in person and banking with your phone

Payment services

Fixed deposits

Portfolio investment services

Mutual funds

Private banking

Corporate Banking

Funded Services

Non Funded Services

Value Added Services

Internet Banking

Corporate Salary Accounts

Foreign Banks in India

Foreign Banks are international banks that have opened their branches in India. These banks
have brought along with them the latest technologies and banking practices.
The foreign banks in India are slowly but steadily creating a niche for themselves. With the
globalization hitting the world, the concept of banking has changed substantially over the last
couple of years. Some of the foreign banks have successfully introduced latest technologies in

35

the banking practices in India. This has made the banking business in the country more smooth
and interesting for the customers.
The concept of foreign banks in India has changed the prevailing banking scenario in the
country. The banking industry is now more competitive and customer-friendly than before. The
foreign banks have brought forth some innovations and changes in the banking industry of the
country.

The Reserve Bank of India (RBI) is the supreme monetary authority of the country and tops the
entire banking hierarchy. The scheduled banks under the authority of Reserve Bank of India are
further categorized into two segments - commercial banks and co-operative banks. The
commercial banks are then again subdivided into two classes - private sector banks and public
sector banks. In the year 1994, the Government of India allowed the new private banks to operate
in the country and this changed the face of banking in the country.
According to the new rules set by Reserve Bank of India in the new budget, some decisions
regarding foreign banks in India have been taken. The steps taken by the central monetary
authority provide some extent of liberty to the foreign banks and they are hopeful to grow
unshackled. The foreign banks in India are now allowed to set up local subsidiaries in the
country. The policy also states that the foreign banks are not allowed to acquire any Indian bank
unless the Indian bank is listed as a weak bank by the RBI. The Indian subsidiaries of the foreign
banks are not allowed to open branches freely in the country.
Here is a complete list of the foreign banks in India as of September, 2007:

ABN AMRO Bank N.V.

American Express Bank

Abu Dhabi Commercial Bank Ltd

Antwerp Diamond Bank

Bank International Indonesia

Arab Bangladesh Bank

Bank of America
36

Bank of Ceylon

Bank of Bahrain & Kuwait

Bank of Nova Scotia

Barclays Bank

Bank of Tokyo Mitsubishi UFJ

BNP Paribas

ChinaTrust Commercial Bank

Calyon Bank

Cho Hung Bank

DBS Bank

Citibank

Deutsche Bank

JPMorgan Chase Bank

HSBC (Hongkong & Shanghai Banking Corporation)

Krung Thai Bank

Mizuho Corporate Bank

Mashreq Bank

Oman International Bank

Standard Chartered Bank

Societe Generale

Taib Bank

State Bank of Mauritius

India offers a promising market for the foreign bankers beckoning some more respected names
of the world. By the year 2009, some more banks are planning to establish themselves in India.
With the RBI showing sudden interest in the establishment of foreign banking in India, the
banking scenario of India is going to change even more in the near future.
Services of Foreign Banks in India
The Foreign Banks in India provide the following services under the different sections:

Credit cards
37

Debit cum ATM cards

Touch Screen Banking

Mobile Banking

Online Payment of Bills

Bank statements through Email

Loans which include home loans, business loans, personal loans, overdrafts

Internet Banking

Prepaid Mobile Recharge

Insurance services which include Health insurance, Life Insurance, insurance on home
loans and travel insurance

Investment Services which include Demat, Mutual Funds, and Deposits

Corporate banking services

Current Accounts

Citi Business cards

Personal Wealth Management

Business Loans

The NRI banking services

E-Statements

Forex services

Foreign Exchange Services

Dollar Checking Account

38

RESEARCH METHODOLOGY
Need for the study:
The present study explains that Non-performing assets (NPAs) reflect the health of the banking
system. So it is a matter of some significance when the Reserve Bank discloses, as it does in its
latest report on Trend and Progress of Banking in India that between end-March 2010 and 2011.
NPAs of public sector banks were increase. Closely connected with the magnitude of NPAs is
the proportion of NPAs attributable to the priority sector. Here, according to the RBI, almost
one-half of all NPAs of public sector banks are accounted for by the priority sector. This study
attempts to take a closer look at the available information on some of these issues.

Objectives of the study:

To study Comparison between Nationalized banks and State bank Group NPAs
pertaining to weaker section.
To determine the Non Performing Assets in private sector banks and public sector and
foreign banks.
To examine the standard assets, Sub-standard assets, Doubtful assets and Loss assets in
total NPAs pertaining to private sector banks and public sector and foreign banks.
To Evaluate the Share of Old Private Sector NPAs and New Private Sector NPAs in the
total private sector Advances and NPAs.
To analyze the financial performance of Public, private and foreign banks at different
levels of NPA.

Scope of the study:

The present study is based upon the macro approach to analyze Nonperforming Assets in public
sector banks and private sector and foreign banks. The study is related to Public sector, private
sector and foreign banks which include nationalized banks and State Bank of India (SBI) and its
associates in case of public sector banks and in case of private sector banks it includes both old
private sector banks and new private sector banks.
39

Method of data collection

Secondary data have been collected from the respective unit though manuals and annual reports
of the company.
Nature of Data
The study is based on secondary data.
Source of data
The study is analytical in nature, and the present study uses the latest available published
secondary data. The data has been analyzed using percentage method.

Limitations of the study:

The study covers only a period of five years.
The study is based on secondary data only.
Time was insufficient to carry out the research.
The study covered a wide concept hence wide collection and coverage of information
was not easily possible.

40

DATA ANALYSIS AND INTERPRETATIONS

Net NPAs of Banks
(Amount in Rs. crore)
Year

Public Sector Banks

Private Sector Banks

Foreign Banks

2006-07

14,566

3,171

808

2007-08

15,145

4028

927

2008-09

17,726

5,380

1247

2009-10

21,033

7,418

2973

2010-11

26,598

11,635

4,523

30000
26598
25000
21033
20000

15000

17726
Public Sector Banks

15145

14566

11635

Private Sector Banks

Foreign Banks

10000

5000

7418
3171
808

4028

5380

4523
2973

1247

927

0
2006-07

2007-08

2008-09

2009-10

2010-11

Interpretation:
From the above fig; it is understood that the Net NPA values of Public sector banks is increasing
year on year compared to private and foreign banks. Whereas compared to foreign banks private
banks are showing high net NPA values.

41

Composition of NPAS of public sector banks-2007 to 2011

Year

Priority sector

(Amount in Rs. crore)

Non-priority sector

Public sector

2006 - 07

22954

15158

490

2007 - 08

25287

14163

299

2008 - 09

24318

19251

474

2009 - 10

30848

25929

524

2010 - 11

41245

29524

278

45000

41245

40000
35000

30848

30000
25000
20000

25287

22954

29524

25929

24318

Priority sector

19251
15158

15000

Non-priority sector

14163

Public sector

10000
5000

490

299

474

524

278

0
2006-07

2007-08

2008-09

2009-10

2010-11

Interpretation:
From the above chart it is observed that public sector category is the least contributor towards the
NPA of public sector bank. From 2006-07 to 2010-11, priority sector contributes more towards
NPA than non priority sector.

42

Classification of Loan Asset of Public Sector Banks in percentage

Year

Standard assets

Sub-Standard

Doubtful assets

Loss assets

assets
2006 - 07

97.2

1.0

1.5

0.3

2007 - 08

97.7

1.0

1.1

0.2

2008 - 09

97.9

0.9

1.0

0.2

2009 - 10

97.7

1.1

1.0

0.2

2010 - 11

97.7

1.1

1.0

0.2

100

0.3

99.5
99

1.5

98.5
98

0.2

0.2

0.2

0.2

1.1

0.9

1.1

1.1

Doubtful assets

Sub-Standard assets

97.5
97
96.5

Loss assets

97.2

97.7

97.9

97.7

97.7

Standard assets

96
95.5
2006 - 07

2007 - 08

2008 - 09

2009 - 10

2010 - 11

Interpretation:
From the above fig; it is understood that the standard assets of public sector banks is increasing
year on year till 2008-09, thereafter the standard assets values decreased and maintain a constant
value. The value of sub-standard assets is decreased in the year 2008-09 thereafter it is increased.
In case of doubtful assets the public sectors show decrement from the year 2006-07 to 2010-11.
Finally in case of loss of assets the value is decreased from the initial time period and get stable
thereafter.

43

Classification of Loan Asset of Private Sector Banks in percentage

Year

Standard assets

Sub-Standard

Doubtful assets

Loss assets

assets
2006 07

97.6

1.1

1.0

0.2

2007 08

97.3

1.5

0.9

0.3

2008 09

96.8

2.0

1.0

0.3

2009 10

97.0

1.5

1.1

0.4

2010 11

97.5

0.6

1.5

0.4

100.5
100
99.5

0.2
1

0.3

0.3

0.9

99
98.5
98

0.4
1.1

0.4
1.5
Loss assets

1.1

1.5

1.5

0.6

Sub-Standard assets

97.5
97
96.5

Doubtful assets

Standard assets
97.6

96

97.3

96.8

97

97.5

95.5
95
2006 - 07

2007 - 08

2008 - 09

2009 - 10

2010 - 11

Interpretation:
From the above fig; it is understood that the value of standard assets is decreased from 2006-07
till 2008-09, thereafter the value is increased. In the year 2008-09 the sub-standard assets is
highest among all the years. The value of doubtful assets is increased from 2007 to 2011 which
clearly give a sign to the private banks to reduce the doubtful asset. The values of Loss assets are
negligible as compared to other assets values of private sector banks.

44

Classification of Loan Asset of Foreign Banks in percentage

Year

Standard assets

Sub-Standard

Doubtful assets

Loss assets

assets
2006 - 07

98.1

1.1

0.5

0.4

2007 - 08

98.1

1.2

0.5

0.2

2008 - 09

95.7

3.5

0.6

0.2

2009 - 10

95.7

2.9

0.9

0.5

2010 - 11

97.5

0.9

1.1

0.5

101
100

0.4
0.5

0.2
0.5

99

1.1

1.2

98

0.2
0.6

3.5

97
96

0.5
0.9

0.5
1.1
0.9

Loss assets
Doubtful assets

2.9

Sub-Standard assets
98.1

98.1

95

97.5
95.7

Standard assets

95.7

94
93
2006 - 07

2007 - 08

2008 - 09

2009 - 10

2010 - 11

Interpretation:
In the years 2008-09, 2009-10 there is great increase in the proportion of sub standard asset
which is a result of decrease in proportion of standard asset. The remaining assets like doubtful
assets and Loss assets are negligible in nature. So foreign banks need to concentrate on
decreasing sub standard assets.

45

Net NPAs & Net Profit of Public Sector Banks

(Amount in Rs. Crore)
Net NPA

Net Profit

2006 07

14566

16539

2007 08

15145

20152

2008 09

17726

26592

2009 10

21033

34394

2010 11

26,598

36513

Year

40000
34394

35000
30000

21033

20152
20000
15000

26,598

26592

25000
16539
14566

36513

Net NPA

17726
15145

Net Profit

10000
5000
0
2006-07

2007-08

2008-09

2009-10

2010-11

Interpretation:
It is observed from the above graph there exist no particular relationship between net profit & net
NPA of public sector banks. There is constant increase in net profit from 2006-07 to 2010-11. On
the contrary public sector banks have managed to reduce net NPA constantly from 2006-07 to
2010-11.

46

Net NPAs & Net Profit of Private Sector Banks

(Amount in Rs. Crore)
Net NPA

Net Profit

2006 07

3171

4975

2007 08

4028

6465

2008 09

5380

9522

2009 10

7418

10868

2010 11

10532

12534

Year

14000
12534
12000

10868

10532

9522

10000

7418

8000

Net NPA

6465
6000

5380

4975

Net Profit

4028
4000

3171

2000
0
2006-07

2007-08

2008-09

2009-10

2010-11

Interpretation:
The graph between net NPA & Net profit of private sector banks shows that the value of Net
profit is greater than Net NPA in every year and it is continuously increasing form 2006-07 to
2010-11.

47

Net NPA & Net Profit of Foreign Banks

(Amount in Rs. crore)
Net NPA

Year

Net Profit

2006 - 07

808

4109

2007 - 08

927

5343

2008 - 09

1247

7544

2009 - 10

2973

8459

2010 - 11

4235

9568

12000
9568

10000
8459
7544

8000

6000

Net NPA

5343
4235

4109
4000

Net Profit

2973

2000
808

927

2006-07

2007-08

1247

0
2008-09

2009-10

2010-11

Interpretation:
From the above fig; it is understood that the value of Net NPA is very low compared to Net
profit. The value of Net profit is increased year on year from 2006-07.

48

NPA ratios of Public Sector Banks

Gross NPAs/Gross
Advances

Year

Net NPAs/Net
Advances

2006 - 07

3.6

1.1

2007 - 08

2.7

1.1

2008 - 09

2.2

0.8

2009 - 10

0.7

2010 - 11

2.3

0.9

3.6

3.5
3

2.7

2.5

2.3

2.2

Gross NPAs/Gross Advances

2
1.5

Net NPAs/Net Advances

1.1

1.1
0.8

0.7

0.9

0.5
0
2006-07

2007-08

2008-09

2009-10

2010-11

Interpretation:
The Graph between Gross NPAs and Net NPAs of public sector banks shows that the value of
Gross NPAs is higher than the Net NPAs starting from 2006-07. The individual values of Gross
NPAs are decreasing throughout the period from 2006-07 to 2009-10. In the year 2010-11 the
values of both Gross NPAs and Net NPAs increased slightly.

49

NPA ratios of Private Sector Banks

Gross NPAs/Gross Advances

Year

Net NPAs/Net Advances

00.2006 07

2.5

2007 08

2.2

2008 09

2.5

1.2

2009 10

2.9

1.5

2010 11

2.4

1.1

3.5
2.9

3
2.5

2.5

2.5

2.4

2.2

Gross NPAs/Gross Advances

1.5
1.5
1

1.2

1.1

Net NPAs/Net Advances

1
0.5
0
2006-07

2007-08

2008-09

2009-10

2010-11

Interpretation:
The value of Gross NPAs and Net NPAs of private sector banks clearly reveals that the value of
Gross NPA is higher than Net NPAs throughout period from 2006-07 to 2010-11. When
concentrating on individual values of Gross and Net NPA values the following changes is
observed.
The Gross NPA values of private sector banks is decreased in the year 2007 thereafter increased
till 2009-10 and again it is decreased. Whereas the value of Net NPA is increased till 2009-10
and in the year 2010-11 it is slightly decreased.

50

NPA ratios of Foreign Banks

Gross NPAs/Gross Advances

Year

Net NPAs/Net Advances

2006 07

0.8

2007 08

1.8

2008 09

1.8

0.9

2009 10

1.7

2010 11

2.3

1.1

4.5
4
4
3.5
3
2.3

2.5

Gross NPAs/Gross Advances

1.8

1.8

1.5
1

0.8

Net NPAs/Net Advances

1.7
1.1

0.9

0.5
0
2006-07

2007-08

2008-09

2009-10

2010-11

Interpretation:
The Gross and Net NPA values of foreign banks shows distinct results compared to public and
private sector banks. Even though the Gross NPA values are high compared to Net NPA over the
years starting from 2006-07 to 2010-11, the Gross & Net NPA values are very high in one year
and it is drastically decreased in the following year (In 2009-10 it is very high and in the next
year it is very low).
51

Findings:

1. Public sector banks have more Net NPA values compared to both private and foreign
banks.
2. Public sector banks have lent their money towards priority sectors like agriculture and
rural industries to enhance the growth in these sectors.
3. Public sector banks have more standard assets compared to sub standard assets, doubtful
assets and Loss assets. The value of sub standard assets is increasing year on year.
Doubtful assets are at constant value from 2008-09 which a positive sign for the bank
performance. The loss assets of public sector banks are very negligible.
4. Private sector banks have less standard assets and more loss assets as compared to public
sector banks.
5. Foreign banks have nearly equal percentage of standard assets and more loss assets as
compared to private sector banks. The other types of assets doubtful assets and substandard assets remain constant in case of private and foreign banks.
6. Even though the Net NPA is increasing year on year the Net Profit of the public sector
banks remains unchanged. That means the impact of Net NPA on Net Profit is less. Same
is in the case of Private sector banks and foreign banks.
7. The net NPA ratio is used to describe the overall quality of the banks loan book. The
private sector banks have more Gross NPA ratio compared to public sector banks and
foreign banks.

52

Suggestions:

1. Public sector banks have to decrease their Net NPA which is high compared to Private
Banks as well as foreign banks. Because it will indicates top leaderships dexterity in
managing credit risk in operation activities.
2. Public sector banks have to take suitable measures to reduce the percentage of loss assets
and doubtful assets.
3. Private sector banks have to increase the standard assets so that income will generate
continuously and contains normal risk.
4. Foreign banks have to concentrate on recovery of bad debts which called as loss assets.
Because these assets will reduce the Net profit of the company.
5. All the types of banks have to concentrate on the factors like fraudulent practices,
diversion of funds, internal reasons like inefficient management, inappropriate
technology, labour problems, marketing failure etc, and external reasons like price rise,
delay in release of sanctioned limit by banks, delays in settlements of payments by
government etc., resulting in poor performance of the companies.

53

Conclusion:
The comparative study on non-performing assets of commercial banks was undertaken with an
objective of getting an insight into the concept of non-performing assets. The study aims to
compare the Public, Private and Foreign banks NPA pertaining to weaker section. Further, it
aims to determine the non performing assets in private, public and foreign sector banks and
examine the share of nationalized banks & state bank group in the total public sector banks
advances and NPA pertaining to weaker sections.
The study is done using the NPA values of public, private and foreign banks that are taken from
the data base of RBI. The entire study is based on the secondary data only. The analytical tools
used for the study are Graphs, charts and NPA and net profit values of public, private and foreign
banks. The study is done at Hyderabad for a period of 60days. The study had few limitations
which were taken care of.
The financial information obtained was analyzed using the appropriate techniques and it was
found that NPA were more noticeable in respect of Public sector banks. Further it is found that
the public sector banks are gaining 75% of incomes from interest on advances.
It is suggested to public sector banks to increase their non- interest income and make provisions
in NPA & Gross advances. Also, the private and foreign banks should improve their income
from interest on advances.

54

BIBLIOGRAPHY
1. I.M. Pandey, Financial Management Ninth Edition, Vikas Publishing House Pvt Ltd, 10th
edition, 2009
2. Prasanna chandhra, Financial Management, Tata McGraw-Hill Education, 7th edition,
2008.
3. Khan and jain, Financial Management, Tata McGraw-Hill Education, 5th edition, 2007.

Webiliography:

1. Www. wikipedia.com
2. moneyterms.co.uk/npa/
3. www.rbi.org
4. www.scribd.com
5. www.investiopedia.com
6. www.zainbooks.com

55