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ISSN: 2277-4637 (Online) | ISSN: 2231-5470 (Print)

Opinion Vol. 3, No. 1, June 2013

A Comparative Analysis of Non- Performing Assets


(NPAs) of Selected Commercial Banks in India
Samir *
Deepa Kamra**

ABSTRACT
With the introduction of international norms for
income recognition, asset classification and
provisioning in the banking sector, managing NPAs
has emerged as one of the major challenges facing
Indian banks. Banks today are judged not only on
the basis of number of branches and volume of
deposits but also on the basis of quality of assets.
Non-performing assets constitute a major portfolio
of the Banks portfolio and hence are an inevitable
burden on the banking industry. NPAs adversely
affect the profitability, liquidity and solvency of the
banks. This paper analyses the position of NPAs in
selected banks namely State Bank of India (SBI),
Punjab National Bank (PNB) and Central Bank of
India (CBI).It also highlights the policies pursued
by the banks to tackle the NPAs and suggests a
multi-pronged strategy for speedy recovery of NPAs
in banking sector.
Keywords: Non-Performing Assets, Priority sector,
Sector-wise Classifications

I. INTRODUCTION
The incidence of non-performing assets (NPAs) is
affecting the performance of the credit institutions both

financially and psychologically. Non-performing asset


(NPA) is not only non-performing but also makes the
banker and the bank non-performing as it:
Prevents or delays recycling of funds.
denies income from the asset by way of interest
Erodes profit by way of provisions.
NPA is a disorder resulting in non-performance of
a portion of loan portfolio leading to no recovery or
less recovery / income to the lender. NPAs represent
the quantified Credit Risk. It also plays havoc on the
mental make-up of the banker where in the banker tries
to go slow on lending, fearing future NPAs, it may lead
to delay and denial of credit resulting in low off- take of
lendable funds.
NPAs are an inevitable burden on the banking
industry. Hence, the success of a bank depends upon
the methods of managing NPAs and keeping them within
tolerance level.

II. AIM AND METHODOLOGY


Aim of the present research paper is to analyze the trends
in NPAs in terms of values, gross and net NPAs as a
percentage of gross advances and net advances, gross
and net NPAs as a percentage of Total Assets
respectively. The paper details about the sector-wise
classification of NPAs, reasons for their occurrence,

*Asst. Professor, Dept. of Commerce, Swami Shraddhanand College, University of Delhi, New Delhi.
** Asst. Professor, Dept. of Business Studies, Deen Dayal Upadhyaya College, University of Delhi, New Delhi.

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the effects of NPAs on banks, and frequency distribution


of public sector banks by ratio of net NPAs to net
advances. The study spans the period starting from
1996-1997 to 2009-2010.The data for the study has
been sourced from Reserve Bank of India(RBI)
bulletins, statistical tables relating to banks in India,
Report on trend and progress of banking in India, issued
by the RBI. The study also suggests multi-pronged and
diversified strategy for speedy recovery of NPAs in
commercial banks in India.

III. CONCEPTUAL FRAMEWORK


OF NPAS
The concept of NPAs originated when Reserve Bank
of India introduced prudential norms, on the
recommendations of the Narashimam Committee in the
year 1992-93. As per the prudential norms laid down
by RBI, An asset is considered as non-performing if
interest on installments of principal due remain unpaid
for more than180 days(from March31,2004, it has been
decided to adopt the ,90 days, overdue norm for
identification of NPAs).
In simple words, as long as the expected income is
realized from the asset, it is treated as performing asset
but when it fails to generate income or deliver value on
due date it is treated as non-performing asset. Growth
of non-performing assets on the balance sheet of banks
erodes the solvency, profitability and financial health of
banks.
With a view to moving towards international best
practices and to ensure greater transparency, 90 days
overdue norm for identification of NPAs instead of 180
days has been adopted from the year ending March
31st 2004. Accordingly, a non-performing asset would
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 remain out of order, in respect of
overdraft/cash credit;
III. the bill remain overdue for a period of more than
90 days in case of bill purchased and discounted;
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Opinion Vol. 3, No. 1, June 2013

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 purposes; and
V. Any amount to be received remains overdue for a
period of more than 90 days in respect of other
accounts.
(Any amount due to the bank under any credit facility
is Overdue if it is not paid on the due date fixed by the
bank).
Banks have been advised by the RBI that they
should identify the non-performing assets and ensure
that interest on such assets is not recognized as income
and taken to the profit and loss account. Banks are to
recognize their income on accrual basis in respect of
income on performing assets and on cash basis in respect
of income on non-performing assets. Any interest
accrued and credited to income account must be
cancelled by a reserve entry once the credit facility
comes under the category of non-performing assets.

3.1 Assets Classification and Provisions


Banks are required to classify the loan assets (advances)
into four categories viz.
I. Standard assets
II. Sub-standard assets
III. Doubtful assets; and
IV. Loss assets
Standard Advances/Assets: are those, which do
not disclose any problem and do not carry more than
normal risk attached to the business. Such assets are
considered to be performing asset. A general provision
of 0.25% has to be provided on global loan portfolio
basis.
Sub-Standard Advances: 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 months. Such an asset will have well defined
credit weaknesses that jeopardize liquidation of the debt
and are characterized by distinct possibility that bank
will sustain some loss. Accordingly a general provision
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of 10% on outstanding has to be provided on substandard assets.


Doubtful assets- These are the assets which have
remained NPAs for a period exceeding 12 months and
which are not considered as a loss advance. Banks have
to provide 100 percent of the unsecured portion of the
outstanding advance after netting realized amount in
respect of DICGC scheme (Deposit Insurance and
Credit Guarantee Corporation) and realized/realizable
amount of guarantee cover under ECGC (Export Credit
Guarantee Corporation) schemes.
Period for which the
advance has remained
in Doubtful category

Provision requirements (%)

Up to one year

20

One to three years

30

More than three years


I. Outstanding stock of NPAs - 60 percent with effect from
as on March31,2004
March31,2005
-75 percent with effect from
March 31, 2006.
-100 percent with effect from
March31,2007
II. Advances classified as
doubtful for more than
three years on or after
April1,2004

100 percent with effect from


March 31,2005

Loss Assets Loss assets are those where loss


has been identified by the bank or internal /external
auditors or RBI inspectors but the amount has not been
written off, wholly or partially. Any NPAs would get
classified as loss assets if they were irrecoverable or
marginally collectible and cannot be classified as
bankable asset. Companies have to provide 100% of
these outstanding advances.
Note: provision towards standard assets should not
be deducted from advances but shown separately as
contingent provisions against standard assets under
Other liabilities and provisions others in schedule V
of the balance sheet.

3.2 Reasons for NPAs in Banks


An account does not become an NPA overnight. It gives
signals sufficiently in advance that steps can be taken to
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Opinion Vol. 3, No. 1, June 2013

prevent the slippage of the account into NPA category.


An account becomes an NPA due to causes attributable
to the borrower, the lender and for reasons beyond the
control of both. An internal study conducted by the RBI
shows that in the order of prominence, the following
factors contribute to NPAs.

Internal Factors
Diversion of funds for
-Expansion/diversification/modernization.
-Taking up new projects.
-Helping/promoting associate concerns.
Time/cost overrun during the project
implementation.
Inefficient management.
Strained labour relations.
Inappropriate technology/technical problems.
Product obsolescence, etc.
Poor credit Appraisals, monitoring and follow up,
improper SWOT analysis on the part of banks.
External Factors

Recession.
Input or power shortage.
Price escalation.
Exchange rate fluctuation.
Accidents and natural calamities.
Changes in government policy such as excise,
import and export duties, pollution control order
etc.
Willful defaulters have been there because they
knew that legal recourse available to the lenders
is time consuming and slow.
Sickness of the industry also leads to gradual
erosion of the liquidity and units start failing to
honour its obligations for the loan payments.
Heavy funds are locked up in these units.
Political tool-Directed credit to SSI and Rural
sectors has been there
Manipulation by the debtors using political
influence has been a cause for high industrial bad
debts.
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In the current perspective, the Economic Survey,


2012-13(paragraph 5.32) identifies the following as the
main reasons for the growing NPAs:
a) Switchover to a system- based identification of
NPAs by PSBs
b) prevailing macro-economic situation in the country;
c) Increased interest rates in the recent past;
d) Lower economic growth; and
e) Aggressive lending by banks in the past, especially
during good times.

3.3 NPAs: Effect on the Performance of


banks
The large percentages of NPAs have a deleterious impact
on a banks profit in a number of ways:
they result in reduced interest income
They erode (eat into) current profits through
provisioning requirements.
it leads into erosion of capital base and reduction
in their competitiveness
Through creation of reserves and provisions that
come from profits, to act as cushions for loan
losses.
Decline in profit has its bearing on variables like
Capital to Risk Weighted Assets Ratio (CRAR
and cost).
To quote the committee on banking sector reforms
(Narasimham Committee II, 1998) NPAs constitute a
real economic cost to the nation is that they reflect the
application of scarce capital & credit funds to
unproductive uses. The money locked up in NPAs is
not available for productive uses to the extent that bank
seek to make provisions for NPAs or write them off. It
is a charge on their profits, NPAs, in short, is not just a
problem for banks; they are bad for the economy.

IV. ANALYSIS OF PERFORMANCE


WITH REFERENCE TO NPAS
Non-performing assets are one of the important
parameters of analyzing financial performance of banks.
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Opinion Vol. 3, No. 1, June 2013

This part of the paper focuses on trend analysis of NPAs


and evaluates the financial health of commercial banks.

4.1 Gross NPAs and Net NPAs (as a


percentage of advances and Total Assets)
Gross NPAs is an advance which is considered
irrecoverable, for bank has made provisions, and which
is still held in banks books of account.Net NPAs are
obtained from gross NPAs after deduction of the
following:
Interest due but not received: i.e. balances in
interest suspense account.
Claims received from credit guarantors and kept
in suspense accounts pending final settlement.
Part payment received and kept in suspensions
;and
Total provisions held.
Similarly gross advances consists of bills
purchased and discounted, cash credits, overdrafts
and loans and term loans, whereas net advance is
calculated by netting out bills discounted, DICGC
claims etc., from gross advances. Gross NPA is a
better indicator than net NPAs since the former
does not incorporate the endogenous provisioning
process; this is because banks make provisioning
for NPAs according to their capacities.Net NPAs
does not present a true picture of NPAs so they
will have to be supplemented by gross NPAs
figures.
Table-1
Gross and Net NPAs of SBI, PNB and
CBI as a percentage of advances and assets
during 1996-97 to 2009-2010
GROSS NPAs/ GROSS ADVANCES RATIO and
GROSS NPAs TO TOTAL ASSETS RATIO
GNPA/GADV
Year

GNPA/T.ASSETS

SBI

PNB

CBI

SBI

PNB

CBI

1996-1997

16.02

16.31

25

7.01

6.92

9.55

1997-1998

14.14

14.5

20.47

6.38

6.15

7.91

1998-1999

15.56

14.12

17.41

6.32

6.11

6.9

1999-2000

14.25

13.19

16.63

5.88

5.78

6.87

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Opinion Vol. 3, No. 1, June 2013

2000-2001

12.93

11.71

16.06

5.11

5.45

6.88

2001-2002

11.95

11.38

14.7

4.39

5.68

6.42

2002-2003

9.34

11.58

13.06

3.59

5.78

5.68

2003-2004

7.75

9.35

12.55

3.11

4.56

4.88

2004-2005

5.96

5.96

9.5

2.71

3.8

2005-2006

3.9

4.1

6.8

1.95

2.2

2006-2007

2.9

3.5

4.8

1.76

2.1

2.76

2007-2008

2.7

3.2

1.78

1.66

1.89

2008-2009

2.98

1.77

2.67

1.63

1.1

1.6

2009-2010

3.28

1.71

2.32

1.85

1.08

1.34

Source: Compiled from Statistical Tables Relating to Banks in India,


Various issues

It is observed from the Table 1. The gross NPAs


to gross advance ratio has shown a declining trend
in selected commercial banks over the period of
study. Gross NPAs to Gross advance ratio of SBI
decreased from 16.02 percent in 1996-97 to 3.28
percent in 2009-2010. In case of PNB, this ratio
shows a significant decline from 16.31 percent to
1.71 percent in 2009-2010.CBI has shown
commendable progress in restricting this ratio with
a decline from 25 percent in 1996-97 to 2.32
percent in 2009-10. A significant improvement in
recovery of NPAs, along with a rise in gross loans
and advances led to sharp decline in the gross
NPAs to gross advances ratio. The settings of the
Asset Reconstruction Company Limited (ARCIL),
Debt Recovery Tribunal and the SARFASEI Act
have been effective in recovering of NPAs in the
banking sector.
The gross NPAs as percentage of total assets have
significantly reduced across all the banks from
1996-97 to 2009-10.This decline can be
attributed to the significant improvement in the asset
quality with a rapid increase in quantum of credit
to the commercial sector.
High level of NPAs in PSBs can be attributed to
the following possible factors:
1. Various credits related welfare programs are
carried out through public sector banks as they
have a widespread network in the rural areas.
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2. The problem of high gross NPAs is also one of


inheritance. Historically, Indian public sector banks
have been poor on credit recovery due to a weak
legal provision governing foreclosure and
bankruptcy, lengthy legal battles, sticky loans
made to PSUs, loan waivers and priority sector
lending.
3. PSBs also suffer due to lax system of granting
advances, poor post-loan follow up and politically
motivated policy framework.
All banks have been making efforts to contain the
NPAs level and reduce the drag on their
profitability. Even as individual banks devised
various policies for containment of NPAs, the
magnitude of the problem of slippage of
performing assets to NPAs category has become
a cause of permanent concern in the banks.

4.2 Analysis of NPAs in SBI, PNB and CBI


on basis of Net NPAs/Net Advances and
Total Assets
Table-2
NET NPAs/ NET ADVANCES RATIO and
NET NPAs TO TOTAL ASSETS RATIO
NNPA/NADV
Year

NNPA/T.ASSETS

SBI

PNB

CBI

SBI

PNB

CBI

1996-1997

7.3

1997-1998

6.07

10.38

14.4

2.89

4.11

4.8

9.57

12.21

2.5

3.84

4.28

1998-1999

7.18

8.96

9.79

2.65

3.66

3.55

1999-2000

6.41

8.52

2000-2001

6.03

6.74

9.84

2.4

3.54

3.76

9.72

2.35

2.95

3.87

2001-2002

5.63

5.32

7.98

2002-2003

4.5

3.86

6.74

1.96

2.48

3.23

1.58

1.77

2.74

2003-2004

3.48

0.98

5.57

1.33

0.44

2.01

2004-2005

2.65

0.2

2.98

1.16

0.1

1.2

2005-2006

1.9

0.3

2.59

0.99

0.1

1.3

2006-2007

1.56

0.76

1.7

0.93

0.4

0.9

2007-2008

1.78

0.64

1.45

0.4

0.9

2008-2009

1.79

0.17

1.24

0.1

0.7

2009-2010

1.72

0.53

0.69

1.03

0.33

0.4

Source: Compiled from Statistical Tables Relating to Banks in India,


Various issues

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It is observed from the table that Net NPAs to Net


Advance ratio has shown a declining trend in selected
commercial banks over the period of study. Net NPAs
to Net Advance ratio of SBI decreased from 7.3
percent in 1996-97 to 1.72 percent in 2009-2010 .In
case of PNB, this ratio has improved from 10.38
percent to 0.53 percent in 2009-2010.CBI exhibits
commendable progress with a decline from 14.40
percent in 1996-97 to 0.69 percent in 2009-10.
The asset quality of banks in India has been
improving over the past few years as reflected in the
declining NPA to Advances ratio. It is noteworthy that
notwithstanding the pressures of a slowdown in the
economy and an uncertain macroeconomic scenario,
the net NPA to net Advances ratio remained stable in
case of SBI, while for the other two banks exhibited a
decline in this ratio.

4.3 SECTOR WISE NPAS OF SBI, PNB


AND CBI
The total NPAs of banks are classified into three
categories viz. Priority Sector, Public Sector and Non
priority Sector. The Sectoral distribution of NPAs
showed a growing proportion of priority sector NPAs

Opinion Vol. 3, No. 1, June 2013

between 2009 and 2010. Priority sector NPAs, which


constituted approximately half of the total NPAs of
domestic banks up to 2008, exhibited a steep decline
in 2009 attributable primarily to the Agricultural Debt
Waiver and Debt Relief Scheme of 2008. Between
2009 and 2010, the share of priority sector NPAs
increased for domestic banks, partly a reflection of the
impact of the financial crisis and the economic slowdown
that had set in thereafter.

4.3.1 STATE BANK OF INDIA


The proportion of NPAs in Priority Sector to the total
NPAs of the SBI has significantly increased from 44.44
percent to 50.87 percent and the total amount of NPAs
in Public sector decreased from Rs. 1090.40 crores in
2000-01 to Rs.235 crores in 2009-10.
At the end of March 2010, the percentage of
Priority sector NPAs in Total NPAs was 50.87 per cent
for State Bank of India The sharp rise in NPAs of nonpriority sector was reflective of the slowdown in the
economy and stressed financial conditions of corporates.
The NPAs in the priority sector increased during 200708, mainly due to increase in NPAs of the agriculture
sector.

Table 3
Sector-Wise Classification of NPAs of SBI
Year

Priority
Sector (i)

Public Sector
NPAs (ii)

Non Priority
Sector NPAs (ii)

Total NPAs
(i+ii+iii)

2000-01

6876.32

44.44

1090.4

7.05

7506.26

48.51

15472.98

100.00

2001-02

6942.42

44.83

506.4

3.27

8037.05

51.90

15485.87

100.00

2002-03

6171.23

46.55

381.2

2.88

6704.84

50.57

13257.27

100.00

2003-04

5764.83

48.70

109.06

0.92

5963.02

50.38

11836.91

100.00

2004-05

5604.68

48.12

90.32

0.78

5952.43

51.11

11647.43

100.00

2005-06

5906.49

57.51

33.2

0.32

4329.83

42.16

10269.52

100.00

2006-07

5810.19

58.86

149.32

1.51

3911.5

39.63

9871.01

100.00

2007-08

7561.28

60.12

91.16

0.72

4923.64

39.15

12576.08

100.00

2008-09

7010

46.41

163

1.08

7932

52.51

15105

100.00

2009-10

9073

50.87

235

1.32

8529

47.82

17837

100.00

r*

0.82

r**

0.51
-0.54

0.94
0.39

0.52

r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.
r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.

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Opinion Vol. 3, No. 1, June 2013

The calculated value of coefficient of correlation ,r,


of the different sectors to the total amounts of sector
wise NPAs observed a positive correlation ,but the
proportionate NPA recovery in the Priority Sector has
recorded a negative correlation ,r = - 0.54 which shows
increase in NPAs in the priority Sector.

4.3.2 Punjab National Bank


The proportion of NPAs in Priority Sector to the Total
NPAs of the PNB has significantly increased from 41.04
percent to 76.88 percent whereas the Non-Priority
Sector amounts decreased from Rs. 1993.52 crores in
2000-01 to Rs.739 crores in 2009-10.The value of
Public sector NPAs shows a fluctuating trend over the
period of study and is minimum in the year 2008-09.

Table 4
Sector-Wise Classification of NPAs of PNB
Year

Priority
Sector (i)

Public Sector
NPAs (ii)

Non Priority
Sector NPAs (ii)

Total NPAs
(i+ii+iii)

2000-01

1419.98

41.04

46.6

1.35

1993.52

57.61

3460.1

100.00

2001-02

1728.31

41.75

59.43

1.44

2352.12

56.82

4139.86

100.00

2002-03

2039.91

40.96

35.72

0.72

2904.43

58.32

4980.06

100.00

2003-04

1979.17

42.38

65.12

1.39

2625.84

56.23

4670.13

100.00

2004-05

1740.76

46.53

39.52

1.06

1961.06

52.42

3741.34

100.00

2005-06

1809.55

57.66

34.16

1.09

1294.57

41.25

3138.28

100.00

2006-07

2511.6

74.08

90.16

2.66

788.51

23.26

3390.27

100.00

2007-08

2761.59

83.20

52.84

1.59

504.87

15.21

3319.3

100.00

2008-09

2436

88.01

0.04

331

11.96

2768

100.00

2009-10

2471

76.88

0.12

739

22.99

3214

100.00

r*

-0.33

r**

0.37
-0.84

0.90
0.16

0.83

r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.
r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.

The calculated value of coefficient of correlation, r,


of the different sectors to the total amounts of sector
wise NPAs observed a positive correlation in case of
public sector NPAs and non-priority sector NPAs but
negative correlation of -0.33 has been observed in case
of priority sector to the total NPAs amount, also the
proportionate NPA recovery in the Priority Sector has
recorded a high degree of negative correlation, r = 0.84 which shows increase in NPAs in the priority
Sector.

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4.3.3 Central Bank of India


The proportion of NPAs in Priority Sector to the Total
NPAs of CBI has increased from 48.68 percent to
67.45 percent whereas the Non-Priority Sector amounts
decreased from Rs. 26.96 crores in 2000-01 to Rs.8
crores in 2009-10. The value of Public sector NPAs
shows a fluctuating trend over the period of study and
is minimum in the year 2008-09.
Non-Priority Sector amounts decreased from
Rs. 1642.77 crores in 2000-01 to Rs.792 crores in
2009-10.Public sector NPAs shows a fluctuating
trend over the period of study and is minimum in the
year 2009-10.
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Opinion Vol. 3, No. 1, June 2013

Table 5
Sector-Wise Classification of NPAs of CBI
Year

Priority
Sector (i)

Public Sector
NPAs (ii)

Non Priority
Sector NPAs (ii)

Total NPAs
(i+ii+iii)

2000-01

1583.6

48.68

26.96

0.83

1642.77

50.50

3253.33

100.00

2001-02

1708.99

50.63

25.01

0.74

1641.69

48.63

3375.69

100.00

2002-03

1721.04

53.06

123

3.79

1399.41

43.15

3243.45

100.00

2003-04

1724.59

55.78

21.14

0.68

1346.19

43.54

3091.92

100.00

2004-05

1585.44

60.48

12.71

0.48

1023.26

39.03

2621.41

100.00

2005-06

1597.68

59.52

6.47

0.24

1080.03

40.24

2684.18

100.00

2006-07

1598.86

62.16

10.15

0.39

962.97

37.44

2571.98

100.00

2007-08

1651.44

70.28

0.81

0.03

697.59

29.69

2349.84

100.00

2008-09

1587

68.38

59

2.54

675

29.08

2321

100.00

2009-10

1658

67.45

0.33

792

32.22

2458

100.00

r*

0.53

r**

0.39
-0.97

0.98
0.31

0.94

r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.
r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.

The calculated value of coefficient of correlation, r, of the different sectors to the total amounts of sector wise
NPAs observed a positive correlation in case of public sector NPAs, Priority sector and non-priority sector
NPAs, also the proportionate NPA recovery in the Priority Sector has recorded a high degree of negative correlation,
r = - 0.97 which shows increase in NPAs in the priority Sector.

4.4 PRIORITY SECTOR NPAS IN SBI, PNB and CBI


The Priority Sector includes Agriculture, Small-scale Industries (SSIs) and Other Sectors, with a view to ensure
flow of credit to these underdeveloped sectors, commercial banks in India were advised to grant at least 40
percent of their total advances to the borrowers in the Priority Sectors. Following tables depict the priority sector
composition of NPAs in selected banks i.e. SBI, PNB and CBI.
Table 6
Priority Sector NPAs of SBI
Year

Agriculture (i)

SSI(ii)

Others(iii)

Total Priority
Sector (i+ii+iii)

2000-01

2351.18

34.19

2898.42

42.15

1626.72

23.66

6876.32

100.00

2001-02

2520.49

36.31

2794.22

40.25

1627.71

23.45

6942.42

100.00

2002-03

2369.39

38.39

2302.57

37.31

1499.27

24.29

6171.23

100.00

2003-04

2124.26

36.85

1741.07

30.20

1899.5

32.95

5764.83

100.00

2004-05

1912.68

34.13

1371.97

24.48

2320.03

41.39

5604.68

100.00

2005-06

1929.21

32.66

1238.89

20.98

2738.39

46.36

5906.49

100.00

2006-07

1977.18

34.03

1074.78

18.50

2758.23

47.47

5810.19

100.00

2007-08

2915.12

38.55

1260.11

16.67

3386.05

44.78

7561.28

100.00

2008-09

1789

25.52

1712

24.42

3509

50.06

7010

100.00

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25.59

Opinion Vol. 3, No. 1, June 2013

2009-10

2322

2168

23.90

4583

0.48

0.34

0.68

0.23

0.12

0.46

50.51

9073

100.00

r = Coefficient of Correlation,R2 =Coefficient of Determination

Table 7
Priority Sector NPAs of PNB
Year

Agriculture (i)

SSI(ii)

2000-01

384.81

27.10

568.88

40.06

2001-02

443.9

25.68

687.09

2002-03

512.23

25.11

2003-04

474.05

23.95

Others(iii)

Total Priority
Sector (i+ii+iii)

466.29

32.84

1419.98

100.00

39.76

597.32

34.56

1728.31

100.00

929.91

45.59

597.77

29.30

2039.91

100.00

928.17

46.90

576.95

29.15

1979.17

100.00

2004-05

354.46

20.36

908.3

52.16

478.6

27.48

1741.36

100.00

2005-06

432.17

23.88

796.94

44.04

580.5

32.08

1809.61

100.00

2006-07

647.39

25.78

991.32

39.47

872.89

34.75

2511.6

100.00

2007-08

1011.61

36.63

910.51

32.97

839.47

30.40

2761.59

100.00

2008-09

537

22.04

1000

41.05

899

36.90

2436

100.00

2009-10

977

39.55

1165

47.17

328

13.28

2470

100.00

0.84

0.73

0.76

0.56

0.41

0.26

r = Coefficient of Correlation,R =Coefficient of Determination


2

Table 8
Priority Sector NPAs of CBI
Year

Agriculture (i)

SSI(ii)

2000-01

346.78

21.90

737.71

46.58

2001-02

396.34

23.19

789.37

2002-03

441.1

25.63

2003-04

459.78

2004-05

Others(iii)

Total Priority
Sector (i+ii+iii)

499.11

31.52

1583.6

100.00

46.19

523.28

30.62

1708.99

100.00

746.75

43.39

533.19

30.98

1721.04

100.00

26.66

683.39

39.63

581.42

33.71

1724.59

100.00

356.34

22.48

627.55

39.58

601.55

37.94

1585.44

100.00

2005-06

413.39

25.87

607.46

38.02

576.83

36.10

1597.68

100.00

2006-07

450.67

28.19

519.47

32.49

628.72

39.32

1598.86

100.00

2007-08

535.83

32.45

636.3

38.53

479.31

29.02

1651.44

100.00

2008-09

417

26.26

659

41.50

512

32.24

1588

100.00

2009-10

421

25.39

922

55.61

315

19.00

1658

100.00

0.40

0.08

0.46

-0.16

0.30

0.04

r = Coefficient of Correlation,R =Coefficient of Determination


2

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Opinion Vol. 3, No. 1, June 2013

The decline in Priority Sector NPAs during 200809 was contributed by the agricultural sector, partly
reflecting the effect of the debt waiver scheme for farmers
announced by the Central Government in 2007.NPAs
of SBI decreased from 34.19 Percent at the end of
March 2001 to 25.59 percent at the end of March 2010.
The NPAs in case of SSIs declined from 42.15 percent
in 2000-01 to 23.90 in 2009-10.The other sectors
amount of NPAs increased from Rs. 1626.72 crores
with 23.66 percent at the end of March 2001 to Rs.
4583 crores with 50.51 percent at the end of March
2010.The calculated value of coefficient of correlation
,r, of Priority Sector shows that there is a positive
Correlation as regards the recovery of mounting NPAs
in Agriculture, SSI and other sectors to the total Priority
Sector of PSBs, coefficient of correlation being
0.48,0.34 and .68 over the period of study in case of
SBI.

4.5 Distribution of PSBs by Ratio of Net NPAs


to Net Advances
The distribution of PSBs using the ratio of net NPAs to
net Advances is used to examine the performance of
banks in improving the recovery of mounting NPAs;
this ratio has been divided into 4 categories i.e. up to
2%,2-5%, 5-10% and above 10%.The table reveals
that all the PSBs were under the category of below 2%
of net NPAs at the end March 2009.This shows that
there is an effective recovery of mounting NPAs in all
the PSBs and improvement in the financial health of
Indian banks in recent years.
Table 9
Distribution of PSBs by Ratio of net
NPAs to net advances
Year

No. of PSBs lie under the rate of NPA


Below 2% 2%-5% 5%-10% Above 10%

Total
PSBs

1999-00

22

27

2000-01

16

27

2001-02

11

13

27

2002-03

14

27

2003-04

11

13

27

2004-05

19

28

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2005-06

23

28

2006-07

27

28

2007-08

28

28

2008-09

27

27

V. CONCLUSION
The incidence of non-performing assets (NPAs) is
affecting the performance of credit institutions both
financially and psychologically. The non-performing
assets have become a major cause of concern. Imbibing
the credit management skills has become all the more
important for improving the bottom-line of the banking
sector. It becomes essential to master the expertise for
monitoring exposure levels, industry scenarios and timely
action in respect of troubled industries. Skills of NPA
management, include working out negotiated
settlements, compromises constituting active settlement,
advisory committees, restructuring and rehabilitation,
effective recourse to suitable legal remedies are to be
supplemented with most suitable legal reforms by banks
to recover dues well in time so that the financial
soundness of the banking sector will not be undermined.
On the international front, the various global risks
associated with the banking industry will expose the
credit assets to greater risks while serious efforts need
to be taken for recovery measures, banks need to be
equipped with necessary risk appraisal system to minimize
credit defaults.
The position of NPAs continues to haunt Indian
banking Sector. Several experiments have been tried to
curb NPAs (viz., BIFR/SICA, lok adalats, DRTs, OTS,
SARFAESI etc) but nothing has hit the mark in tackling
NPAs. The validity of both DRT/ Securitization act was
challenged and still hangs in dilemma, which has
dampened the spirits of bankers.
A clear discrimination is warranted while formulating
any strategy in addressing the problem of genuine and
willful defaulters. There should be a real crackdown on
willful defaulters and their assets whether or not charged
to banks should be declared as national assets and be
disposed in a transparent manner, without major legal
hurdles.
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Nevertheless, the process of NPA management does


not start after filing a suit but starts with the identification
of a right borrower. The problem of NPA is greater in
the public sector banks as compared to private and
foreign banks in India. Similarly, the problem of NPAs
is more in non-priority sector than priority and public
sector. Further, SSI sector has largest share in the total
NPA of priority sector. As a result of this, financial health
of banks has been affected adversely. Hence, banks in
India must apply the basic principles of financial
management to solve the problems of mounting NPA.
From the above analysis, following suggestions
emerge which may contribute towards reduction in the
mounting non-performing assets in banks;
Improving the recovery management-Sound
functioning of banks depends on timely recovery
of credit, hence, banks should develop suitable
recovery programs for assessing and classifying
the over dues, monitoring accounts ,keeping regular
contact with borrowers ,fixing recovery targets,
arranging recovery camps, training the personnel
and linking marketing of produce and recovery.
Improving the corporate governance practicesGovernment of India had initiated many economic
reforms in the financial sectors but minimal
attention has been devoted to the issues of
corporate governance in banks .BOD are the key
players in the management of banks but they are
granted little autonomy. The nominees of
Government /RBI dominate the banks boards due
to their vast powers. Hence, there is an urgent
need to remove the dominance in order to take
appropriate decision to improve their financial
health.
Upgrading Technology- Computer based banking
system has helped the bank management to solve
some of the inherent problems. Computerization
can further help the management in getting required
information in order to take proper decisions while
granting loans/advances.
Inculcating ethics in borrowers- Ethics in
borrowers is necessary to make the banking
sector more efficient. However, many borrowers
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Opinion Vol. 3, No. 1, June 2013

are defaulters not because of low income but due


to lack of ethics .Hence, banks should use NGOs
and other voluntary organizations to educate the
borrowers regarding the importance of timely
repayment of credit.
Improving the credit Management- Management
of credit is essential for proper functioning of
banks. Preparation of credit planning, appraisal
of credit proposals, timely sanction and
disbursements, post sanction follow-up and need
based credit are the some areas of credit
management that needs improvement in order to
reduce the NPAs.
Effective legal system - Government of India/RBI
had initiated many legal measures to bring down
NPA in banks. However, there are some flaws in
each legal measure which need improvement in
order to bring down NPA in banks.
When the RBI grants new banking license, there
should be a condition that for the first 10 years
there cannot be any loan write-offs. Later, writeoff amounts must be borne by the shareholders,
which is to be certified by external auditors. A
separate statement should be made so that all
stakeholders are aware to what extent their profits
were affected due to the write-off.
Banks should reduce dependence on interest
income- Indian banks are largely dependent on
the lending and investment as in comparison to
developed countries. Indian banks should look for
sources (income) from fee based services and
products.
Credit Information Bureau- The institutionalization
of information sharing arrangement is now possible
through the newly formed Credit information
Bureau of India Limited (CIBIL) it was set up in
the year 2001, by SBI, HDFC, and two foreign
technology partners. This will prevent those who
take advantage of lack of system of information
sharing amongst leading institutions to borrow large
amount against same assets and property, which
has in no measures contributed to the incremental
of NPAs of banks.
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Opinion Vol. 3, No. 1, June 2013

Circulation of Information of Defaulters- RBI has


put in place a system for periodical circulation of
details of willful defaulters of banks and financial
institutions. RBI also publishes a list of borrowers
(with outstanding aggregate rupees one crore and
above) against whom banks and financial
institutions in recovery of funds have filed suits as
on 31 st March every year. This serves as a caution
list while considering a request for new or
additional credit limits from defaulting borrowing
units and also from the directors, proprietors and
partners of these entities.
Debt Recovery Tribunals (DRTs) - In the context
of recovery from NPAs, banks and FIs depend
heavily on DRTs. These tribunals were set up for
suits of the value of recovery over Rs. 10 lakhs,
while High Courts and District Courts would take
up cases of lesser values. The government has
amended the Debt Recovery Tribunal
(procedures) rules, 2003 to facilitate better
administration of the act including plural remedies
for banks like power to attach defendants
property before judgement etc. They have the huge
task on their hands.
(DRTs were set up under the recovery of debts
due to banks and financial institution act, 1993).
The following table depicts the NPAs recovered
through various channels by SCBs.
Table 10
NPAs recovered by SCBs through Various
Channels(Amount in Rs. Crores)
One-time
Lok DRTs SARFAESI
Settlement/ Adalats
Act
compromise
Scheme
No. of Cases
referred
2003-04
Amount
Involved
Amount
Recovered
No. of Cases
referred
2004-05
Amount
Involved

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139562

186100 7544

2661#

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

2011-12

Amount
Recovered

880

113

2688

No. of Cases
referred

10262

Amount
Involved

772

2144

6273

8517

Amount
Recovered

608

265

4735

3363

No. of Cases
referred

__

Amount
Involved

__

758

9156

8517

Amount
Recovered

__

106

3463

3363

No. of Cases
referred

__

Amount
Involved

__

2142

5819

7263

Amount
Recovered

__

176

3020

4429

No. of Cases
referred

__

Amount
Involved

__

2142

5819

7263

Amount
Recovered**

__

176

3020

4429

No. of Cases
referred

__

Amount
Involved

__

7235

9797

14249

Amount
Recovered**

__

112

3133

4269

No. of Cases
referred

__

Amount
Involved

__

5300

14100

30600

Amount
Recovered**

__

200

3900

11600

No. of Cases
referred

__

Amount
Involved

__

1700

24100

35300

Amount
Recovered**

__

200

4100

10100

268090 3534

160368 4028

186535 3728

548308 2004

778833 6019

616018 12872

476073 13365

2391
41180#

60178#

83942#

61760#

78366#

118642#

140991#

1510

1063

12305

7847

# Number of notices issued under section 13(2) of the SARFAESI


Act.

617

149

2117

1156

Source: Report on Trend and Progress of Banking in India, Various


issues, RBI.

39288#

**Refers to amount recovered during the given year which could be


with reference to cases referred during the given year as well as
during the earlier years.

132781
1332

185395 4744
801

14317

13244

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Using the new institutions and legal options, banks


and financial institutions accelerated their recovery of
NPAs. In 2002, SARFAESI Act (Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest) was passed and it empowered the
creditors to foreclose non-performing loans and the
underlying collateral without going through a lengthy
judicial or tribunal process. This act was passed with
the aim of enabling banks and financial institutions to
realize long-term assets, manage the problem of liquidity,
reduce asset liability mismatches and improve recovery
by taking possession of securities, selling them and
reducing NPAs. The ordinance also allows banks and
financial institutions to utilize the services of ARCs/SCs
for speedy recovery of dues from defaulters and to
reduce their NPAs. The ordinance contains provisions
that would make it possible for ARCs/SCs to take
possession directly of the secured assets and/or the
management of the defaulting borrower companies
without resorting to the time-consuming process of
litigation and without allowing borrowers to take shelter
under the provisions of SICA/BIFR. All these efforts
improved the recovery of NPAs by commercial banks.
The NPAs recovered by scheduled commercial banks
through various channels is presented in the above
Table. During 2011-12, total amount of NPAs recovered
through the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest
Act (SARFAESI Act), Debt Recovery Tribunals (DRTs)
and Lok Adalats registered a decline compared with
the previous year. Of the total amount recovered through
these channels, recoveries under the SARFAESI Act
constituted almost 70 per cent. At present, there are 33
DRTs and five Debt Recovery Appellate Tribunals
across the country.
SARFAESI Act and the debt recovery tribunals (DRTs)
have proved to be most effective in terms of amount
recovered among the various channels of recovery for
dealing with bad loans. .In terms of cases, the highest
number (3405720) were referred to the lok adalats and
the lowest (57838) to the DRTs over the period 20032012. In terms of the amount involved, the DRTs
recovered the highest amount of around Rs. 30504
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Opinion Vol. 3, No. 1, June 2013

crores out of Rs 99997 crores and Lok Adalats the


least, Rs. 1497 crores out of Rs.25166 crores for the
period 2003-12. In terms of the recovery, 58 percent
of the amount involved was recovered through one
time settlement/Compromise schemes. DRTs recovered
around 30.5 percent and lok Adalats recovered around
5.63 percent, while 35.71 percent of the amount was
recovered under the SARFAESI Act for the period
2003-2012.

VI. REFERENCES
1. Pricewaterhouse Coopers, Management of nonperforming assets by Indian banks, IBA Bulletin,
Jan 2004.
2. Samir and Anubha (2005), Management of nonperforming assets (NPAs) in public sector,
private-sector and foreign banks, pp.71-76,
vol.VII, No-1&2 in Musings, journal of
management, Centre For Management
Development.
3. Shri A.S. Shiralashetu and Dr.Akash,
S.B.(2006), Management of non-performing
assets in commercial banks-some issues,
Banking and finance
4. Dr. G.Sudarsana Reddy, (2004) Management of
non-performing assets (NPAs) in Public sector
banks, Banking and finance.
5. Samir, Deepa Kamra and N.S
Rana.(2010)Non-Performing Assets(NPAs)
impede performance of Public Sector Banks,
pp.6-13,Vol. 7,No.3 in Masterstroke, The
Journal of Master School of Management, ISSN
0972-9895
6. Report on Trend and Progress of banking in India,
Various Issues.
7. Statistical Tables relating to Banks in India,
Various Issues.
8. http://rbi.org.in.
9. http://iba.org.in
Opinion: International Journal of Management 80