Job Kurian

CHAPTER 1
BACKGROUND OF STUDY

INTRODUCTION
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Presently, in India almost all the sectors such as IT sector, automobile industry and share
market are not in a very good condition. But, quite interestingly, the banking sector of India
is booming day-by-day and that too even in the period of global crisis .Banks acts as the
backbone of modern business. Development of a country mainly depends on banks. Banks
play an important role in the economic development of a country. The Indian banking has
come from a long way from being a sleepy business institution to a highly proactive and
dynamic entity. The Indian banking sector has emerged as one of the strongest drivers of
Indias economic growth. The Indian banking industry (US$ 1.22 trillion) has made
outstanding advancement in last few years, even during the times when the rest of the world
was struggling with financial meltdown. India's economic development and financial sector
liberalization have led to a transformation of the Indian banking sector over the past two
decades.Today Indian Banking is at the crossroads of an invisible revolution. The sector has
undergone significant developments and investments in the recent past. Most of banks
provide various services such as Mobile banking, SMS Banking, Net banking and ATMs to
their clients Indian banks, the dominant financial intermediaries in India, have made high
quality progress over the last five years, as is evident from several factors, including annual
credit growth, profitabilityIn this growing economic and financial sector reforms banks are
faced with many challenges .what is bothering the bank today is the management of non
performing asset. Over the years the banks are facing this problem and therefore needs
urgent remedial actions.Non-performing assets are problematic for banks . pressure from
the economy can lead to a sharp increase in non-performing loans and often results in
massive write-downs.one of the important function of the bank is lending money to its
customers by way of loans and advances. for banks loans are the most profitable assets.
return comes in the form of loan interest, fee income and investment. The most assumed risk
is the credit risk and it involves inability or unwillingness of customer to meet the
commitments in relation to the loan. once a loan is overdue and cease to yield income it
would be an non performing asset. It is a serious concern for banks since they depend on
interest payments for income. Non-performing Asset (NPA) has emerged since over a
decade as an alarming threat to the banking industry in our country sending distressing
signals on the sustainability and insurability of the affected banks. The positive results of the
chain of measures affected under banking reforms by the Government of India and RBI in
terms of the two Narasimhan Committee Reports in this contemporary period have been
neutralized by the ill effects of this surging threat. Despite various correctional steps
administered to solve and end this problem, concrete results are eluding. It is a sweeping and
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all pervasive virus confronted universally on banking and financial institutions. The severity
of the problem is however acutely suffered by Nationalised Banks, followed by the SBI
group, and the all India Financial Institutions. The Non-Performing Assets (NPAs) of the
Indian banking sector have been incessantly rising in the past six months. Historically, in
1997, NPAs were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008.
This figure stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from
2009 to 2012 and assets under reconstruction had trebled during the same period. Indias
biggest lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans.
According to a recently published Credit Suisse Group AG report, 10 large industrial houses
account for 13% of total assets financed by the Banking system, which means that bank
lending is getting increasingly skewed. Further, of the total reconstructed assets, 8.24%
belong to the large manufacturing sector, 3.99% are from the services sector while 1.45%
are from the agricultural sector.

Definition of NPAs (NON -PERFORMING ASSETS)

An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank. A non performing asset was defined as a credit facility in respect of
which the interest and / or installment of principal had remained past due for a specified
period of time. The specified period was reduced in a phased manner as under:
Year ending March 31 Specified period
1993 Four Quarters
1994 Three Quarters
1995 Onwards Two quarters
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 improvements in the payment and settlement
systems, recovery climate, up gradation of technology in the banking sector, etc, it was
decided to dispense with the past due concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall be an advance where

Interest and/or installment of principal remain overdue for a period of more than 90
days in respect of a term loan,
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The account remains out of order for a period of more than 90 days, in respect of
an Overdraft/Cash Credit (OD/CC),

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

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,
NPA is a classification used by financial institutions that refer to loans that are in jeopardy of
default. Once the borrower has failed to make interest or principal payments for 90 days the
loan is considered to be a non-performing asset. Non-performing assets are problematic for
financial institutions especially banks since they depend on interest payments for income.
Troublesome pressure from the economy can lead to a sharp increase in non-performing
loans and often results in massive write-downs. 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 march 31st 2004 . The Non-Performing
Assets (NPAs) of the Indian banking sector have been incessantly rising in the past six
months. Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which
nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute figures,
NPAs have doubled from 2009 to 2012 and assets under reconstruction had trebled during
the same period. Indias biggest lender, State Bank of India, is experiencing an NPA level of
4.99% of total loans. According to a recently published Credit Suisse Group AG report, 10
large industrial houses account for 13% of total assets financed by the Banking system,
which means that bank lending is getting increasingly skewed. Further, of the total
reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are from the
services sector while 1.45% are from the agricultural sector.

Out of Order Status

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An account should be treated as out of order if the outstanding balance remains

continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the date of
Balance Sheet or credits are not enough to cover the interest debited during the same period,
these accounts should be treated as out of order.
Overdue
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.

Classification of NPAs
Banks are required to classify NPAs further into the following three categories based on the
period for which the asset has remained non-performing and the reliability of the dues:
i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a period
less than or equal to 18 months. In such cases, the current net worth of the borrower, or the
current market value of the security charged is not enough to ensure recovery of the dues to
the banks in full. Such assets will have well defined credit weakness that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the bank will
sustain a loss.
ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18
months. It has all the weaknesses inherent to a sub-standard asset with the added
characteristic that the collection or liquidation in full on the basis of currently known facts
is highly questionable and improbable.
iii. Loss Assets: A loss asset is one where a loss has been identified by the bank or, internal
or external auditors but the amount has not been written off wholly. Sub-standard asset is the
asset in which bank have to maintain 10% of its reserves. All those assets which are
considered as non-performing for period of more than 12 months are called as Doubtful
Assets. All those assets which cannot be recovered are called as Loss Assets.

Guidelines for Classification of NPAs

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Broadly speaking, classification should be done taking into account the degree of well
defined credit weaknesses and the extent of dependence on collateral security for 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
accounts. .Accounts with temporary deficiencies: These should be classified based on the
past recovery records.
.Accounts regularize near about the balance sheet date: These accounts should be handled
with care and without scope for subjectivity. Where the account indicates inherent weakness
based on available data, it should be deemed as an NPA.
Asset classification should be borrower-wise and not facility-wise: If a single facility to a
borrower is classified as NPA, others should also be classified the same way, as it is difficult
to envisage only a solitary facility becoming a problem credit and not others.
Advances under consortium arrangements: Classification here should be based on the
recovery record of the individual member banks.
Accounts where there is erosion in the value of the security: If there is a significant (i.e. the
realizable value of the security is less than 50% of that assessed by the bank during
acceptance) the account may be classified as NPA.

NPA SOME ASPECTS AND ISSUES

1.The NPAs of banks in India are considered to be at higher levels than those in other
countries. This issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and disclosure
measures initiated by RBI during recent years.
2. The NPA Management Policy document of SBI lays down to contain net NPAs to less
than 5% of bank's total loan assets in confirmity with the international standard. It is,
therefore necessary that as per guidelines provided in NPA Management Policy document,
every effort be made at all levels to cut down the NPAs. All this requires greater efforts and
teamwork.
3. It is essential to keep a constant watch over the non-performing assets not just to keep it
performing but also that once they become non-performing, effective measures are initiated

to get full recovery and where this is not possible, the various means are to be initiated to get
rid off the NPAs from the branch books.
4. NPAs adversely affect the wealth condition of the branch advances as also the profitability
of the branch. Some of the reasons for this are as under:
(a) Interest cannot be applied on the loan accounts classified as NPAs.
(b) The Branch 'has to pay interest to central office on outstanding classified as NPA.
(c) The Branch has to incur cost in supervision and follow up of such advances.
(d) Provision has to be made on NPAs at Bank level.
5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub
standard, Doubtful or loss assets.
6. Once the assets are classified as NPA, the Branch Manager has to take all the necessary
steps to get the dues recovered there-under to maintain the good health of advances and the
higher profitability at the-Branch. This requires management of NPAs in such a Planned and
scientific manner that the percentage of NPAs to the total advances will be minimum.

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of,the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector banks and
foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS
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 Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, their by reducing their profitability and liquidity.
Wilful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing
it.These groups of people should be identified and proper measures should be taken in order
to get back the money extended to them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans
Industrial sickness
Improper project handling , ineffective management , lack of adequate resources , lack of
advance technology , day to day changing govt. Policies give birth to industrial sickness.
Hence the banks that finance those industries ultimately end up with a low recovery of their
loans reducing their profit and liquidity
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they
borrow to operate these activities. The banks recover the amount by selling of their assets,
which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and
has to make provision for it.

Change on Govt. policies

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With every new govt. banking sector gets new policies for its operation. Thus it has to cope
with the changing principles and policies for the regulation of the rising of NPAs. eg. The
fallout of handloom sector is continuing as most of the weavers Co-operative societies have
become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked
out by the Central govt to revive the handloom sector has not yet been implemented. So the
over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS
. Defective Lending process
There are three cardinal principles of bank lending that have been followed by the
commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of
profitability
i. Principles of safety By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore
take utmost care in ensuring that the enterprise or business for which a loan is sought is.
sound one and the borrower is capable of carrying it out successfully .he should be a person
of integrity and good character.

Inappropriate technology
Due to inappropriate technology and management information system, market driven
decisions on real time basis can not be taken. Proper MIS and financial accounting system is
not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerised.

Improper swot analysis

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The improper strength, weakness, opportunity and threat analysis is another reason for rise
in NPAs. While providing unsecured advances the banks depend more on the honesty,
integrity,and financial soundness and credit worthiness of the borrower. Banks should
consider theborrowers own capital investment. it should collect credit information of the
borrowers from a. From bankers b. Enquiry from market/segment of trade, industry,
business. c. From external credit rating agencies. Analyse the balance sheet True picture of
business will be revealed on analysis of profit/loss a/c and balance sheet. Purpose of the
loan When bankers give loan, he should analyse the purpose of the loan. To ensure safety
and liquidity, banks should grant loan for productive purpose only. Bank should analyse the
profitability,viability, long term acceptability of the project while financing.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider
1.Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the
principle of diversification of risk based on the famous maxim do not keep all the eggs in
one basket; it means that the banker should not grant advances to a few big farms only or to
concentrate them in few industries or in a few cities. If a new big customer meets misfortune
or certain traders or industries affected adversely, the overall position of the bank will not be
affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM(117.77lakhs), and the handloom
sector Orissa hand loom WCS ltd (2439.60lakhs).
.Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.
Re loaning process
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Non remittance of recoveries to higher financing agencies and re loaning of the same
havealready affected the smooth operation of the credit cycle. Due to re loaning to the
defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

IM PACT OF NPAS ON BANKS:In portion of the interest income is absorbed in servicing NPA.NPA is not merely
nonremunerative.It is also cost absorbing and profit eroding.In the context of severe
competition in the banking industry, the weak banks are at disadvantage for leveraging the
rate of interest in the deregulated market and securing remunerative business growth. The
options for these banks are lost. "The spread is the bread for the banks". This is the margin
between the cost of resources employed and the return therefrom." This is the margin
between the cost of resources employed and the return thereform. In other words it is gap
between the return on funds deployed (Interest earned on credit and investments) and cost of
funds employed (Interest paid on deposits).When the interest rates were directed by RBI, as
heretofore, there was not option for banks. But today in the deregulated market the banks
decide their lending rates and borrowing rates. In the competitive money and capital
Markets, inability to offer competitive market rates adds to the disadvantage of marketing
and building new NPA has affected the profitability, liquidity and competitive functioning of
banks and finally the psychology of the bankers in respect of their disposition towards credit
delivery and credit expansion.

1. Impact on Profitability
"The efficiency of banks is not always reflected only by the size of its balance sheet but by
the level of return on its assets. NPAS do not generate interest income for the banks, but at
the same time banks are required to make provisions for such NPAS from their current
profits. NPAS have a deleterious effect on the return on assets in several ways:

.They erode current profits through provisioning requirements.

.They result in reduced interest income.
.They require higher provisioning requirements affecting profits and accretion to

capital funds and capacity to increase good quality risk assets in future, and
.They limit recycling of funds, set in asset-liability mismatches, etc.

There is at times a tendency among some of the banks to understate the level of NPAs in
order to reduce the provisioning and boost up bottom lines. It would only postpone the
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process. In the context of crippling effect on a bank's operations in all spheres, asset quality
has been placed as one of the most important parameters in the measurement of a bank's
performance under the CAMELS supervisory rating system of RBI. Between 01.04.07 to
31.03.212, SBI Group incurred a total amount of Rs. 29932 Crores towards provisioning
NPA. This has brought Net NPA to 6.8% of netadvances. To this extent the problem is
contained but at what cost? This costly remedy is made at the sacrifice of building healthy
reserves for future capital adequacy. The enormous provisioning of NPA together with the
holding cost of such non-productive assets over the years has acted as a severe drain on the
profitability of the SBI Group. In turn SBI Group are seen as poor performers and unable to
approach the market for raising additional capital. Equity issues of nationalized banks that
have already tapped the market are now quoted at a discount in the secondary market. Other
bans hesitate to approach the market to rise new issues. This has alternatively forced SBI
Group to borrow heavily from the debt market to build Tier II Capital to meet capital
adequacy norms putting severe pressure on their profit margins; else they are to seek the
bounty of the Central Government for repeated Recapitalization.In the face of the
deregulated banking industry, an ideal competitive working is reached,when the banks are
able to earn adequate amount of non-interest income to cover their entire operating expenses
i.e. a positive burden. In that event the spread factor i.e. the difference between the gross
interest income and interest cost will constitute its operating profits. Theoretically even if the
banks keeps 0% spread, it will still break even in terms of operating profit and not return an
operating loss. The net profit is the amount of the operating profit minus the amount of
provisions to be made including for taxation. On account of the burden of heavy NPA, many
nationalised banks have little option and they are unable to lower lending rates
competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower
income from off balance sheet business yielding non-interest income.The following working
results of SBI Group an identified well manged nationalised banksfor the last two years and
for the first nine months of the current financial year, will be revealing to prove this
statement. Non-interest income fully absorbs the operating expenses of this banks in the
current financial year for the first 9 months. In the last two financial years, though such
income has substantially covered the operating expenses (between 80 to 90%) there is still a
deficit left.The strength of SBI Group is identified by the following positive feature:

It's sizeable earnings under of non-interest income substantially/totally meets it noninterest expenses.
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Its obligation for provisioning requirements is within bounds. (Net NPA/Net

Advances is 1.82%)

It is worthwhile to compare the aggregate figures of the 19 Nationalised banks as published

by RBI in its Report on trends and progress of banking inIndia. Interest on Recapitalization
Bonds is a income earned form the Government, who had issued the Recapitalization Bonds
to the weak banks to sustain their capital adequacy under a bailout package. The statistics
above show the other weaknesses of the nationalised banks in addition to the heavy burden
they have to bear for servicing NPA by way of provisioning and holding cost as under:
*Their operating expenses are higher due to surplus manpower employed. Wage costs total
assets is much higher to PSBs compared to new private banks or foreign banks.
*Their earnings from sources other than interest income are meagre. This is due to failure to
develop off balance sheet business through innovative banking products.
2. Impact on Liquidity of the SBI Group
Though SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines, the
facts that their net NPA in the average is as much as 7% is a potential threat for them. RBI
has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA within
limits of tolerance the SBI Group are holding an uncomfortable burden at 6.8% as at March
2012. They have not been able to build additional capital needed for business expansion
through internal generations or by tapping the equity market, but have resorted to II-Tier
capital in the debt market or looking to recapitalistion by Government of India.
3. Impact on Outlook of Bankers towards Credit Delivery .
The fear of NPA permeates the psychology of bank managers in the SBI Group in
entertaining new projects for credit expansion. In the world of banking the concepts of
business and risks are inseparable. Business is an exercise of balancing between risk and
reward. Accept justifiable risks and implements de-risking steps. Without accepting
risk,there can be no reward. The psychology of the banks today is to insulate themselves
with zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit
growth compared to growth of deposits, resulting in a low C/D Ratio around 50 to 54% for
the industry fear psychosis also leads to excessive security-consiousness in the approach
towardslending to the small and medium sized credit customers. There is insistence on
provision of collateral security, sometimes up to 200% value of the advance, and
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consequently due to a feeling of assumed protection on account of holding adequate security

(albeit overconfidence)a tendency towards laxity in the standards of credit appraisal comes
to the fore. It is well know that the existence of collateral security at best may convert the
credit extended to productive sectors into an investment against real estate, but will not
prevent the account turning into NPA. Further blocked assets and real estate represent the
most illiquid security and NPA in such advances has the tendency to persist for a long
duration. SBI Group have reached a dead-end of the tunnel and their future prosperity
depends on an urgent solution for handling this hovering threat.
4. Impact on Productivity:
High level of NPAs effect the productivity of the banks by increasing the cost of funds and
by reducing the efficiency of banks employees. Cost of funds is increased because due to
non-availability of sufficient internal sources they have to rely on external sources to fulfill
their future financial requirements. Productivity of employees is also reduced because it
keeps staff busy with the task of recovery of overdue. Instead of devoting time for planning
for development through more credit and mobilization of resources the branch staff would
primarily be engaged in preparing a large value of returns and statements relating to substandard, doubtful and loss assets, preparing proposal for filing of suits, waivement of legal
action, compromise, write off or in preparing DICGC claim papers etc.
5. Impact on other Variables:
High level of NPAs also leads to squeezing of interest spread, when asset becomes an NPA
for the first time it adversely affects the spread by not contributing to the interest income and
from the second year onwards it will have its impact on the bottom line of the balance sheet
because of provisioning to be made for it and not have incremental effect on the spread.
Now a days Govt. does not encourage liberal capital support to be given to banks. Banks are
required to bring their own capital by issuing share to the public, whereas high level of
NPAs leads to lower profits hence less or no profits available for equity shareholders hence
lower EPS and fall in the value of share. Low market value of shares has also forced the
banks to borrow heavily debt market to build Tier II capital to meet capital adequacy norms,
putting severe pressure on their profit margins.
6. Qualitative aspects of the Micro Level Impact of NPAs:

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High incidence of loan defaults shakes the confidence of general public in the soundness of
banking setup and indirectly effects the capacity of the banking system to mop up the
deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust of
foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened by Indian
banks or confine their transaction to top Indian banks only. Moreover, it puts negative effect
on granting of autonomy to PSBs whreas it is must for banks in this competitive
environment. Banks having positive net profits for the last three years, Net NPA level below
9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to be fulfilled to get
autonomous status, which becomes difficult in the situation of huge level of
NPAs.Inadequate recovery also inhibits the banks to draw refinance from higher level
agency. The eligibility of a bank to draw refinance from NABARD is linked to the %age of
recovery to demand in respect of direct, medium and long term loans for agriculture and
allied activities. It implies that refinance facility would be progressively reduced depending
on the position of NPAs and also on the No. of years in which a banks branch remains in a
particular category of default. Due to fear of NPAa banks are being taken away from the
basic function for which these were established it is becoming more & more risky and less
remunerative. They are floating their subsidiaries to manage mutual funds, factoring,
insurance business, Good money is spent to recover bad money. Deterioration in the quality
of loan assets and inability to come with new products makes the Indian banks
uncompetitive globally. Due to high cost, they cannot reduce lending rate to meet the
economy's demand of low lending rate. It is also biggest threat for capital account
convertibility.

7. Some areas of Macro-Economic Impact:

It is not only the banks which are affected higher level of NPAs but it is the economy as a
whole which pays for it. Banks are not putting enough resource in lending due to fear of
default. Once the credit to various sectors of the economy slow down, the economy is badly
hit. There is slowdown in growth in GDP, industrial output and fall in the profit margins of
the corporate and consequent depression in the market. Further high level of NPAs can result
in adding to the inflationary potential in the economy and eroding the viability of the credit
system as a whole.Not only this, burden of NPAs is to be borne by the society as a whole.
When capital support is given to PSB on A/c of losses booked and/ or erosion of capital due
to NPAs, it comes out of either Govt. budgetary resources or from the public as per
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Liberalization policy, whether this money is from tax revenues or from the hard earned
saving of the investing public, in fact, the society is bearing the cost of these NPAs.
Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is in its hand.
Any dividend declared would have gone to the Govt. and which can be spent on the welfare
and development program.

MANAGEMENT OF NPA
Various steps have been taken by the government and RBI to recover and reduce NPAs.
These strategies are necessary to control NPAs .
1. Preventive management and
2. Curative management
A. Preventive Management:
Preventive measures are to prevent the asset from becoming a non performing asset. Banks
has to concentrate on thefollowing to minimize the level of NPAs.
1.

Early Warning Signals

The origin of the flourishing NPAs lies in the quality of managing credit assessment, risk
management by the banks concerned. Banks should have adequate preventive measures,
fixing pre sanctioning appraisal responsibility and having an effective post-disbursement
supervision. Banks should continuously monitor loans to identify accounts that have
potential to become non-performing [13]. It is important in any early warning system, to be
sensitive to signals of credit deterioration. A host of early warning signals are used by
different banks for identification of potential NPAs. Most banks in India have laid down a
series of operational, financial, transactional indicators that could serve to identify emerging
problems in credit exposures at an early stage. Further, it is revealed that the indicators
which may trigger early warning system depend not only on default in payment of
installment and interest but also other factors such as deterioration in operating and financial
performance of the borrower, weakening industry characteristics, regulatory changes, and
general economic conditions. Early warning signals can be classified into five broad
categories viz.
(a) Financial
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(b) Operational
(c) Banking
(d) Management and
(e) External factors.
Financial related warning signals generally emanate from the borrowers balance sheet,
income expenditure statement, statement of cash flows, statement of receivables etc.
Following common warning signals are captured by some of the banks having relatively
developed EWS.

2. Financial warning signals

Persistent irregularity in the account
Default in repayment obligation
Devolvement of LC/invocation of guarantees
Deterioration in liquidity/working capital position
Substantial increase in long term debts in relation to equity
Declining sales
Operating losses/net losses
Rising sales and falling profits
Disproportionate increase in overheads relative to sales
Rising level of bad debt losses Operational warning signals
Low activity level in plant
Disorderly diversification/frequent changes in plan
Nonpayment of wages/power bills
Loss of critical customer/s
Frequent labor problems
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 Evidence of aged inventory/large level of inventory

3. Management related warning signals

Lack of co-operation from key personnel
Change in management, ownership, or key personnel
Desire to take undue risks
Family disputes
Poor financial controls
Fudging of financial statements
Diversion of funds

4. Banking related signals

Declining bank balances/declining operations in the account
Opening of account with other bank
Return of outward bills/dishonored cheques
Sales transactions not routed through the account
Frequent requests for loan
Frequent delays in submitting stock statements, financial
data, etc. Signals relating to external factors
Economic recession
Emergence of new competition
Emergence of new technology
Changes in government / regulatory policies
Natural calamities

18

Know your client profile (KYC): Most banks in India have a system of preparing `know
your client (KYC) profile/credit report. As a part of `KYC system, visits are made on
clients and their places of business/units. The frequency of such visits depends on the nature
and needs of relationship.Credit Assessment and Risk Management Mechanism: Credit
assessment and Risk management mechanism are ever lasting solution to the problem of
NPAs. Managing credit risk is a much more forward-looking approach and is mainly
concerned with managing the quality of credit portfolio before default takes place. The
documentation of credit policy and credit audit immediately after the sanction is necessary
to upgrade the quality of credit appraisal in banks. In a situation of liquidity overhang the
enthusiasm of the banking system is to increase lending with compromise on asset quality,
raising concern about adverse selection and potential danger of addition to the NPAs stock.
It is necessary that the banking system is equipped with prudential norms to minimize if not
completely avoid the problem of credit risk and develop an effective internal credit risk
models for the purpose of credit risk management. Organizational restructuring: With regard
to internal factors leading to NPAs the onus for containing the same rest with the bank
themselves. These will necessities organizational restructuring improvement in the
managerial efficiency, skill up gradation for proper assessment of credit worthiness and a
change in the attitude of the banks towards legal action, which is traditionally viewed as a
measure of the last resort. Reduce Dependence on Interest: The Indian banks are largely
depending upon lending and investments. The banks in the developed countries do not
depend upon this income whereas 86 percent of income of Indian banks is accounted from
interest and the rest of the income is fee based. The banker can earn sufficient net margin by
investing in safer securities though not at high rate of interest. It facilitates for limiting of
high level of NPAs gradually. It is possible that average yield on loans and advances net
default provisions and services costs do not exceed the average yield on safety securities
because of the absence of risk and service cost.

5. Watch-list/Special Mention Category

The grading of the banks risk assets is an important internal control tool. It serves the need
of the Management to identify and monitor potential risks of a loan asset. The purpose of
identification of potential NPAs is to ensure that appropriate preventive / corrective steps
could be initiated by the bank to protect against the loan asset becoming non-performing.
Most of the banks have a system to put certain borrowable accounts under watch list or
19

special mention category if performing advances operating under adverse business or

economic conditions are exhibiting certain distress signals. These accounts generally exhibit
weaknesses which are correctable but warrant banks closer attention. The categorization of
such accounts in watch list or special mention category provides early warning signals
enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take
necessary preventive steps to avoid their slippage into non performing advances

6. Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default and diversion and
siphoning of funds. As per these guidelines a willful default occurs when a borrower defaults
in meeting its obligations to the lender when it has capacity to honor the obligations or when
funds have been utilized for purposes other than those for which finance was granted. The
list of willful defaulters is required to be submitted to SEBI and RBI to prevent their access
to capital markets. Sharing of information of this nature helps banks in their due diligence
exercise and helps in avoiding financing unscrupulous elements. RBI has advised lenders to
initiate legal measures including criminal actions, wherever required, and undertake a
proactive approach in change in management, where appropriate

B.CURATIVE MEASURES
The curative measures are designed to maximize recoveries so that banks funds locked up in
NPAs are released for recycling. The Central government and RBI have taken steps for
controll ingincidence of fresh NPAs and creating legal and regulatory environment to
facilitate the recovery of existing NPAs of banks. They are:

1. Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to
take steps for arresting the incidence of fresh NPAs and have also been
creating legal and regulatory environment to facilitate the recovery of
existing NPAs of banks. More significant of them, I would like to
recapitulate at this stage.
* The broad framework for compromise or negotiated settlement of NPAs
advised by RBI in July 1995 continues to be in place. Banks are free to
design and implement their own policies for recovery and write-of
20

incorporating compromise and negotiated settlements with the approval

of their Boards, particularly for old and unresolved cases falling under the
NPA category. The policy framework suggested by RBI provides for setting
up of an independent Settlement Advisory Committees headed by a
retired Judge of the High Court to scrutinise and recommend compromise
proposals.
* Specific guidelines were issued in May 1999 to public sector banks for
one time non discretionary and non discriminatory settlement of NPAs of
small sector. The scheme was operative up to September 3, 2000. [Public
sector banks recovered Rs. 668 crore through compromise settlement
under this scheme].
* Guidelines were modified in July 2000 for recovery of the stock of NPAs
of Rs. 5 crore and less as on 31 March 1997. [The above guidelines which
were valid up to June 30, 2001 helped the public sector banks to recover
Rs. 2600 crore by September 2001].
* An OTS Scheme covering advances of Rs. 25000 and below continues to
be in operation and guidelines in pursuance to the budget announcement
of the Hon'ble Finance Minister providing for OTS for advances up to Rs.
50,000 in respect of NPAs of small/marginal farmers are being drawn up.

2. Lok Adaltas:
Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and
"loss"category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok
Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to
decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had recovered
Rs. 40.38 crore through the forum of Lok Adalat. The progress through this channel is
expected to pick up in the coming years particularly looking at the recent initiatives taken by
some of the public sector banks and DRTs in Mumbai.

3. Debt Recovery Tribunals:

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in
March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement
21

of more than one Recovery Officer, power to attach defendant's property/assets before
judgement, penal provisions for disobedience of Tribunal's order or for breach of any terms
of the order and appointment of receiver with powers of realization, management, protection
and preservation of property are expected to provide necessary teeth to the DRTs and speed
up the recovery of NPAs in the times to come. Though there are 22 DRTs set up at major
centres in the country with Appellate Tribunals located in five centres viz. Allahabad,
Mumbai, Delhi,Calcutta and Chennai, they could decide only 9814 cases . The amount
recovered in respect of these cases amounted to only Rs. 1864.30 crore. Looking at the huge
task on hand, with as many as 33049 cases involving Rs. 42988.84 crore pending before
them I would like the banks to institute appropriate documentation system and render all
possible assistance to the DRTs for speeding up decisions and recovery of some of the well
collateralised NPAs involving large amounts. I may add that familiarisation programmes
have been offered in NIBM at periodical intervals to the presiding officers of DRTs in
understanding the complexities of documentation and operational features and other
legalities applicable of Indian banking system. RBI on its part has suggested to the
Government to consider enactment of appropriate penal provisions against obstruction by
borrowers in possession of attached properties by DRT Receivers, and notify borrowers who
default to honour the decree passed against them.
4. Circulation of information on defaulters:
The RBI has put in place a system for periodical circulation of details of willful defaults of
borrowers of banks and financial institutions. This serves as a caution list while considering
requests for new or additional credit limits from defaulting borrowing units and also from
the directors/proprietors/partners of these entities. RBI also publishes a list of borrowers
(with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by
banks and FIs for recovery of their funds, as on 31st March every year. It is our experience
that these measures had not contributed to any perceptible recoveries from the defaulting
entities. However, they serve as negative basket of steps shutting off fresh loans to these
defaulters. I strongly believe that a real breakthrough can come only if there is a change in
the repayment psyche of the Indian borrowers
5. Recovery action against large NPAs:

22

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI had
advised the public sector banks to examine all cases of willful default of Rs 1 crore and
above and file suits in such cases, and file criminal cases in regard to willful defaults. Board
of Directors are required to review NPA accounts of Rs. 1 crore and above with special
reference to fixing of staff accountability.On their part RBI and the Government are
contemplating several supporting measures including legal reforms, some of them I would
like to highlight.

6. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a
timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and
above with the banks and financial institutions. The CDR process would also enable viable
corporate entities to restructure their dues outside the existing legal framework and reduce
the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai
and a Standing Forum and Core Group for administering the mechanism had already been
put in place. The experiment however has not taken off at the desired pace though more than
six months have lapsed since introduction. As announced by the Hon'ble Finance Minister in
the Union Budget 2002-03, RBI has set up a high level Group under the Chairmanship of
Shri Vepa Kamesam, Deputy Governor, RBI to review the implementation procedures of
CDR mechanism and to make it more effective. The Group will review the operation of the
CDR Scheme, identify the operational difficulties, if any, in the smooth implementation of
the scheme and suggest measures to make the operation of the scheme more efficient. CDR
system in the country will have a three-tier structure:
A. CDR Standing Forum
B. CDR Empowered Group
C. CDR Cell
A. CDR Standing Forum :
The CDR Standing Forum would be the representative general body of all financial
institutions and banks participating in CDR system. All financial institutions and banks
should participate in the system in their own interest. CDR Standing Forum will be a self-

23

empowered body, which will lay down policies and guidelines, guide and monitor the
progress of corporate debt restructuring.
B. CDR Empowered Group:
The CDR Empowered Group would be mandated to look into each case of debt
restructuring, examine the viability and rehabilitation potential of the Company and pprove
the restructuring package within a specified time frame of 90 days, or at best 180 days of
reference to the Empowered Group.
C. CDR Cell
The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell
in all their functions. The CDR Cell will make the initial scrutiny of the proposals received
from borrowers / lenders, by calling for proposed rehabilitation plan and other information
and put up the matter before the CDR Empowered Group, within one month to decide
whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to prepare
detailed Rehabilitation Plan with the help of lenders and if necessary, experts to be engaged
from outside. If not found prima facie feasible, the lenders may start action for recovery of
their dues.
IX. The Mechanism of the CDR
CDR will be a Non-statutory mechanism. CDR mechanism will be a voluntary system based
on debtor-creditor agreement and inter-creditor agreement. The scheme will not apply to
accounts involving only one financial institution or one bank. The CDR mechanism will
cover only multiple banking accounts / syndication / consortium accounts with outstanding
exposure of Rs.20 crore and above by banks and institutions. The CDR system will be
applicable only to standard and sub-standard accounts. However, as an interim measure,
permission for corporate debt restructuring will be made available by RBI on the basis of
specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by value) of
the lenders constituting banks and FIs consent for CDR, irrespective of differences in asset
classification status in banks/ financial institutions. There would be no requirement of the
account / company being sick NPA or being in default for a specified period before reference
to the CDR Group. This approach would provide the necessary flexibility and facilitate
timely intervention for debt restructuring. Prescribing any milestone(s) may not be
necessary, since the debt restructuring exercise is being triggered by banks and financial
24

institutions or with their consent. In no case, the requests of any corporate indulging in
willful default or misfeasance will be considered for restructuring under CDR.

7. Credit Information Bureau:

Institutionalisation of information sharing arrangements through the newly formed Credit
Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the
recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme
of information dissemination on defaults to the financial system. The main recommendations
of the Group include dissemination of information relating to suitfiled accounts regardless of
the amount claimed in the suit or amount of credit granted by a credit institution as also such
irregular accounts where the borrower has given consent for disclosure. This, I hope, would
prevent those who take advantage of lack of system of information sharing amongst lending
institutions to borrow large amounts against same assets and property, which had in no small
measures contributed to the incremental NPAs of banks.

8. Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working
out a proper definition covering such classes of defaulters so that credit denials to this group
of borrowers can be made effective and criminal prosecution can be made demonstrative
against willful defaulters.

9. Corporate Governance:
A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the Reserve
Bank to review the supervisory role of Boards of Banks and financial institutions and to
obtain feedback on the functioning of the Boards vis--vis compliance, transparency,
disclosure, audit committees etc. and make recommendations for making the role of Board
of Directors more effective with a view to minimising risks and overexposure. The group is
finalising its recommendations shortly and may come out with guidelines for effective
control and supervision by bank boards over credit management and NPA prevention
measures.
25

10.

Securitization

and

Reconstruction

of

Financial

Assets

and

Enforcement of Security Interest Act, 2002:

The Act provides, inter alia for enforcement of security interest for
realisation of dueswithout the intervention of courts or tribunals. The
Security Interest (Enforcement)Rules, 2002 has also been notified by
Government to enable Secured Creditors toauthorise their officials to
enforce the securities and recover the dues from theborrowers. As on
June

30,

2004,

27

public

sector

banks

had

issued

61,

263

noticesinvolving outstanding amount of Rs. 19,744 crore, and had

recovered an amount ofRs. 1,748 crore from 24,092 cases.

11. Asset Reconstruction Company (ARC)

This empowerment encouraged the three major players in Indian banking system, namely,
State Bank of India (SBI), ICICI Bank Limited (ICICI) and IDBI Bank Limited (IDBI) to
come together to set-up the first ARC. Arcil was incorporated as a public limited company
on February 11, 2002 and obtained its certificate of commencement of business on May 7,
2003. In pursuance of Section 3 of the Securitization Act 2002, it holds a certificate of
registration dated August 29, 2003, issued by the Reserve Bank of India (RBI) and operates
under powers conferred under the Securitization Act, 2002. Arcil is also a "financial
institution" within the meaning of Section 2 (h) (ia) of the Recovery of Debts due to Banks
and Financial Institutions Act, 1993 (the "DRT Act"). Arcil is the first ARC in the country to
commence business of resolution of non-performing assets (NPAs) upon acquisition from
Indian banks and financial institutions. As the first ARC, Arcil has played a pioneering role
in setting standards for the industry in India.
A. Unlocking capital for the banking system and the economy
The primary objective of Arcil is to expedite recovery of the amounts locked in NPAs of
lenders and thereby recycling capital. Arcil thus, provides relief to the banking system by
managing NPAs and help them concentrate on core banking activities thereby enhancing
shareholders value.
B. Creating a vibrant market for distressed debt assets securities in India offering a trading
platform for Lenders Arcil has made successful efforts in funneling investment from both
26

from domestic and international players for funding these acquisitions of distressed assets,
followed by showcasing them to prospective buyers. This has initiated creation of a
secondary market of distressed assets in the country besides hastening their resolution. The
efforts of Arcil would lead the countrys distressed debt market to international standards.
C. To evolve and create significant capacity in the system for quicker resolution of NPAs by
deploying the assets optimally
With a view to achieving high delivery capabilities for resolution, Arcil has put in place a
structure aimed at outsourcing the various sub-functions of resolution to specialized
agencies, wherever applicable under the provision of the Securitization Act, 2002. Arcil has
also encourage, groomed and developed many such agencies to enhance its capacity in line
with the growth of its activity.

Role Of Technology In The Mangement Of NPA

The RBI has made it clear to all banks that theymust automate data management and record
keeping as far as possible and complete periodic regulatory reporting of NPAS without
intervening manually.the regulator is also exploring the creationof a contract server to store
the date of different banks.the use of technology will bring about a fundamental shift in the
way indian banks manage their npas implementing automated solutions ,not just helps in
finer analysis of data but more importantly enables early warning indicators before the
situations worsens thus giving banks more time to take appropriate measures.a core banking
application is a pre-requisite for this.but most of all it can put a stop to the manipulation of
NPAs a common practice in the manual system.besides improving compliance a core
banking solution can add value by aggregating data across the organization and its touch
points making it easily accessible to the bank as a single unified view of each customers.that
being said not all technology solutions are alike ,and banks must choose carefully to pick
one with strong credentials as well as comprehensive functionalitty

27

28

CHAPTER 2
INDUSTRY AND
COMPANY PROFILE

29

2.1 INDUSTRY DETAILS

The Indian banking sector has emerged as one of the strongest drivers of Indias economic
growth. The Indian banking industry (US$ 1.22 trillion) has made outstanding advancement
in last few years, even during the times when the rest of the world was struggling with
financial meltdown. India's economic development and financial sector liberalization
haveled to a transformation of the Indian banking sector over the past two decades. Today
Indian Banking is at the crossroads of an invisible revolution. The sector has undergone
significant developments and investments in the recent past. Most of banks provide various
services such as Mobile banking, SMS Banking, Net banking and ATMs to their clients.
Indian banks, the dominant financial intermediaries in India, have made high-quality
progress over the last five years, as is evident from several factors, including annual credit
growth, profitability, and trend in gross non-performing assets (NPAs). While annual rate of
credit growth clocked 23% during the last five years, profitability (average Return on Net
Worth) was maintained at around 15% during the same period, while gross NPAs fell from
3.3% as on March 31, 2006 to 2.3% as on March 31, 2011. The Indian banking sector is a
mixture of public, private and foreign ownerships. The State bank of India has recorded
highest market share. The Net Interest Margin of HDFC Banks is 4.2% which is highest
among others.
BANKING SYSTEM IN INDIA
A HISTORICAL PERSPECTIVE:
We can identify there distinct phases in the history of Indian banking:
1.Early phase from 1786-1969.
2.Nationalization of banks and up to 1991 prior to banking sector reforms.
3.New phase of Indian banking with the advent of financial banking. Banking in India has
its origin as early or Vedic period. It is believed that the transitions from many lending to
banking must have occurred even before Manu, the great Hindu furriest, who has devoted a
section of his work to deposit and advances and laid down rules relating to the rate of
30

interest. During the mogul period, the indigenious banker played a very important role in
lending money and financing foreign trade and commerce.
During the days of the East India Company it was the turn of agency house to carry on the
banking business. The General Bank of India was the first joint stock bank to be established
in the year 1786. The other which followed was the Bank of Hindustan and Bengal Bank.
The Bank of Hindustan is reported to have continued till 1906. While other two failed in the
meantime. In the first half of the 19th century the East India Company established there
banks, The bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Bombay
in1843. These three banks also known as the Presidency banks were the independent units
and functioned well. These three banks were amalgamated in 1920 and new bank, the
Imperial Bank of India was established on 27th January, 1921.
With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank
of India was taken over by the newly constituted SBI. The Reserve Bank of India (RBI)
which is the Central bank was established in April, 1935 by passing Reserve bank of India
act 1935.
The Central office of RBI is in Mumbai and it controls all the other banks in the country. In
the wake of Swadeshi Movement, number of banks with the Indian management were
established in the country namely, Punjab National Bank Ltd., Bank of India Ltd., Bank of
Baroda Ltd., Canara Bank. Ltd. on 19th July 1969, 14 major banks of the country were
nationalized and on 15th April 1980, 6 more commercial private sector banks were taken
over by the government.

2.COMPANY PROFILE
State Bank of India (SBI) is a multinational banking and financial services company based
in India. It is a government-owned corporation with its headquarters in Mumbai,
Maharashtra.It is founded in july1995. State Bank of India is the largest banking and
financial services company in India. In addition to the banking services, the Bank through
their subsidiaries, provides a range of financial services, which include life insurance,
merchant banking ,mutual funds, credit card, factoring, security trading, pension fund
management and primary dealership in the money market. The State Bank Group, with over
16,000 branches, has the largest banking branch network in India. The bank has 173
overseas offices spread over 34countries. The bank offers convenience of over 21000 ATMs
31

in India. SBI provides a range of banking products through its network of branches in India
and overseas, including products aimed at non-resident Indians(NRIs). SBI has 14 regional
hubs and 57 Zonal Offices that are located at important cities throughout the country SBI is
the largest bank in India with deposits of Rs 10,43,647

crores as on March12. The

increasing focus on upgrading the technology back-bone of the bank will enable it to
leverage its reach better, improve service levels, provide new delivery platforms, and
improve operating efficiency to counter the threat of competition effectively. The net profit
of the bank crossed 10,000 crores and increased by 41.66% to Rs11,707 crores compared to
FY 11 and it is one of the highest net profits earned by any corporate in the country .the SBI
have also recorded a robust increase in the net interest income by 33.10% to Rs 43,291
crores in FY 12.The SBI is the No 1 home loan provider with a 26% market share. SBI is
a regional banking behemoth and has 20% market share in deposits and loans among Indian
commercial banks. The assosciate and subsidiaries are also showing a robust growth. The
bank scaled new heights in csr activities by winning the prestigious golden peacock award
for corporate social responsibility 2012. The increasing integration of SBI with its associate
banks (associates) and subsidiaries will further strengthen its dominant position in the
banking sector and position it as the countrys largest universal bank. The operating profit of
the bank for 2011-12 stood at Rs 31,573.54 crores as compared to Rs 25,333.57 crores in
2010-11. SBI along with its associate banks offer a wide range of banking products and
services across its different client markets. The bank has entered the market of term lending
to corporate and infrastructure financing, traditionally the domain of the financial
institutions. It has increased its thrust in retail assets in the last two years, and has built a
strong market position in housing loans.SBI, through its non-banking subsidiaries, offers a
host of financial services, viz., merchant banking, fund management, factoring, primary
dealership, broking, investment banking and credit cards. SBI has commenced its life
insurance business by setting up a subsidiary, SBI Life Insurance Company Limited, which
is a joint venture with Cardiff S.A., one of the largest insurance companies in France. SBI
currently holds 74% equity in the join

32

CHAPTER 3
RESEARCH
METHODOLOGY

33

TITLE OF THE STUDY

The impact and management of NPA

OBJECTIVE OF STUDY

To study the position of non performing assets in SBI group

To know the impact on NPAon strategic banking variable.
To know the reason for an asset becoming NPA

PROBLEM STATEMENT
The research problems, in general refers to some difficulty which a researcher experience in
the contest of either a particular a theoretical situation and want to obtain a salutation for
same. The present Dissertation has been undertaken to do the impact and management of
NPA in State Bank of India
The present study is descriptive in nature, as it seeks to discover ideas and insight to bring
out new relationship. Research design is flexible enough to provide opportunity for
considering different aspects of problem under study. It helps in bringing into focus some
inherent weakness in enterprise regarding which in depth study can be conducted by
management.

Research sources :
There is only secondary source of data and is based on the insight and experience of the
professionals working in State Bank Of India..

Research instrument:
The data has been collected by personally interacting with the professionals and there
insight. Also the internet has been used.

34

LIMITATION OF STUDY
Shortage of time
Time was very short for study ,so it was very difficult to get information
About everything .
Information not sufficiently available
The source of data collection is secondary so the information available is not
sufficient.
No direct source of information available
The information is collected from indirect sources so in some information data is not
available.
Secondary data
Information is not reliable because of secondary data

35

CHAPTER 4
ANALYSIS AND
INTERPRETATION

36

STATE BANK OF INDIA

TOTAL ASSET

Table 1.1
YEAR

2007-08

200809

TOTAL
ASSET

7,21,52
6

9,64,4
32

200910
10,53,
413

201011
12,23,
736

201112
13,35,
519

Graph 1.1

Total Asset
1600000
1400000
1200000
1000000

Total Asset

800000
600000
400000
200000
0
2007-08

2008-09

2009-10

2010-11

2011-12

Interpretation
37

Above graph show that total assets of SBI in 2008-09 were 9,64,432 in 2010-11 was
12,23,736 and in 2011-12 was 13,35,519 . As a result we find an increase in the total assets
of SBI.

Gross NPA
Gross NPA is a advance which is considered irrecoverable, for bank has made provisions,
and which is still held in banks' books of account
Table 2.1
YEAR

2007-08

200809

Gross NPA

12837

15588.
60

200910

19534

201011

25326

201112

39676

Graph 2.1

Gross NPA
40000
35000
30000
25000

Gross NPA

20000
15000
10000
5000
0
2007-08

2008-09

2009-10

2010-11

2011-12

Interpretation
38

Gross NPA has been found to be increasing for each year. When the NPA in 2007-08
was 12837, in 2009-10 it was found to be 19534 and in 2011-12 it was 39676.

NET NPA
Net NPA is obtained by deducting items like interest due but not recovered, part payment
received and kept in suspense account from Gross NPA.

Table 3.1
YEAR

2007-08

Net NPA

7424

200809
9552

200910

201011

10870

12346

201112
15818

Graph 3.1

Net NPA
16000
14000
12000
10000
Net NPA

8000
6000
4000
2000
0
2007-08

2008-09

2009-10

2010-11

2011-12

39

Interpretation
In 2007-08, Net NPA was 7424, following which in 2009-10 it was found to be
10870 and in 2011-12, it was 15818, as a result we find an increase in Net NPA.

GROSS NPA (RATIO%)

Gross NPA Ratio (%) = (Gross NPA/Gross Advances )*100

Table 4.1
YEAR

2007-08

Gross NPA %

200809

200910

201011

2.84

3.05

3.28

3.04

201112
4.44

Graph4.1

Ratio%
4.5
4
3.5
3

Ratio

2.5
2
1.5
1
0.5
0
2007-08

2008-09

2009-10

2010-11

2011-12

40

Interpretation
Gross NPA Ratio was found to have decreased in the year 2008-09 to 3.04 after
which for the following years it have been increasing steeply and in the year 2011-12
it was found to be 4.44

Net NPA (RATIO%)

Net NPA Ratio = Net NPA to Net Advance as per Annual Report

Table 5.1
YEAR
Net NPA %

2007-08
1.78

200809

200910

201011

1.76

1.72

1.63

201112
1.82

Graph 5.1

41

Ratio%
1.85
1.8
1.75
1.7

Ratio

1.65
1.6
1.55
1.5
2007-08

2008-09

2009-10

2010-11

2011-12

Interpretaion
Unlike Gross NPA, Net NPA has been found to be decreasing from 2007-08 to 201011 from 1.78 to 1.63 and in the year 2011-12, a surge in the Net NPA to 1.82 was
found.

PROVISION FOR NPA

Provisioning Norms
(i) Sub-standard assets
A general provision of 15% on total outstanding should be made without making any
allowance for ECGC guarantee cover and securities available. The unsecured exposures
which are identified as substandard would attract additional provision of 10%, i.e., a total
of 25% on the 'outstanding balance. However, in view of certain safeguards such as
escrow accounts available in respect of infrastructure lending, infrastructure loan accounts
42

which are classified as sub-standard, will attract a provisioning of 20% instead of the
aforesaid prescription of 25%.
(ii) Doubtful assets
a) 100% 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(unsecured portion).
b) In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20% to 100% of the secured portion, depending upon the period for
which the asset has remained doubtful:

Period for which the advance has remained in

the doubtfulcategory

Provision requirement
(%)

Up to one year
One to three years
More than three years

25
40
100

(iii) Loss assets

Loss assets should be written off. If loss assets are permitted to remain in the books for any
reason, 100% of the outstanding should be provided for.

(iv) Standard assets

a. Direct advances to agricultural and SME sectors at 0.25%;
b. Advances to Commercial Real Estate (CRE) Sector at 1%;
c. Housing loan at teaser rates of 2% and .40% after one year from the date on which the
rates are reset at higher rates;
d. Restructured account classified as Standard 2.00%;
e. All other loans and advances not included in (a) , (b) , (c) and (d) above at 0.40%.
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Table 6.1
YEAR

2007-08

Provision

2001

200809
2475

200910
5148

201011

201112

8792

11546

Graph 6.1

Provision For NPA

12000
10000
8000
6000
4000
2000
0
2007-08

2008-09

2009-10

2010-11

2011-12

Interpretation
Provision has found to be increasing from 2007-08 to 2011-12 with 2001 Crores in
the first year followed by 2475 in the next and with a steep rise in 2011-12 to 11546
Crores.

44

CHAPTER5
45

SUMMARY OF
FINDINGS AND
CONCLUSION

FINDINGS

It has found that the Gross NPA and NET NPA of SBI are showing an increasing trend. The
main reasons for this are:

Default by customer

Non-inspection of borrower

Lack of expertise

Imbalance of inventories

Poor credit collection

46

Lack of trained staff

Lack of commitment to recovery

Change in consumer preference

It has also found that the provisions towards NPA are also increasing which effect

the

profit of the bank

Increase in NPA have also effected the productivity of bank by increasing cost of funds and
by reducing the efficiency of bank employees.

CONCLUSION
A strong banking sector is important for a flourishing economy. The failure of the banking
sector may have an adverse impact on other sectors. Over the years, much has been talked
about NPA and the emphasis so far has been only on identification and quantification of
NPAs rather than on ways to reduce and upgrade them.There is also a general perception
that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs,
due to credit to these sectors becoming stickly managers of rural and semi-urban branches
generally sanction these loans. NPAs reflect the overall performance of the banks. A high
level of NPAs suggests high probability of a large number of credit defaults that affect the
47

profitability and net-worth of banks and also erodes the value of the asset. The NPA growth
involves the necessity of provisions, which reduces the overall profits and shareholders
value. Due diligence and utmost care must be taken by the branch managers before
sanctioning the loans to the clients and specially in case of lending to priority sector. So,
careful steps like selection of right borrowers, viable economic activity, adequate finance
and timely disbursement, correct end use of funds and timely recovery of loans are
absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs
which will enhance the creditability of the banks and in turn make the foundation of our
country strong. The problem of NPAs can be achieved only with proper credit assessment
and risk management mechanism. In a situation of liquidity overhang, the enthusiasm of the
banking system to increase lending may compromise on asset quality, raising concern about
their adverse selection and potential danger of addition to the stock of NPAs. It is necessary
that the banking system is to be equipped with prudential norms to minimize if not
completely to avoid the problem of NPAs. The onus for containing the factors leading to
NPAs rests with banks themselves. This will necessitates organizational restructuring,
improvement in the managerial efficiency and skill up gradation for proper assessment of
credit worthiness. It is better to avoid NPAs at the nascent stage of credit consideration by
putting in place of rigorous and appropriate credit appraisal mechanisms. In the changed
context of new prudential norms and emphasis on quality lending and profitability, mangers
should make it amply clear to potential borrowers that banks resources are scare and these
are meant to finance viable ventures so that these are repaid on time and relevant to other
needy borrowers for improving the economic lot of maximum number of households. Hence
selection of right borrowers, viable economic activity, adequate finance and timely
disbursement, correct and use of funds and timely recovery of loans is absolutely necessary
pre conditions for preventing of minimizing the incidence of new NPAs.

48

49

CHAPTER6
SUGGESTIONS

The Gross NPA of SBI is higher so it requires reducing the gross NPA by efficient recovery

management.
Credit administration: A banks have to strengthen their credit administrative machinery
and put in place effective credit risk management systems to reduce the fresh incidence of

NPAs.
Better Inspection: We shall keep a close watch on the manner in which NPA reduction is

taking place.
Cash Recovery: We should also insist that cash recoveries should more than offset the fresh
write-offs in NPAs.

50

Perception: The mindset of the borrowers needs to change so that a culture of proper

utilization of credit facilities and timely repayment is developed.

Financial System: As you are aware, one of the main reason for corporate default is on
account of diversion of funds and corporate entities should come forward of avoid this

practice in the interest of strong and sound financial system.

Coordinator: Extending credit involves lenders and borrowers and both should realize their
role and responsibilities. They should appreciate the difficulties of each other and should
endeavor to work contributing to a healthy financial system.

Bibliography
o INDIAN FINANCIAL SYSTEM , KOTHARI C.R, VK publication.
o NON-PERFORMING ASSETS-AN INDIAN PERSPECTIVE,INFOSYS FINACLE
o MANAGING NON-PERFORMING ASSETS IN BANKS,SN BIDANI,
VISION BOOKS
www.rbi.org
www.icai.com
www.sbi.com
www.moneycontrol.com
State bank of india annual report

51

NPAs Reduction Strategies for Commercial Banks in India ,G.V.Bhavani Prasad and
D.Veena

52