The Study of A Degree of An Impact of Non - Performing Assets On Balance Sheet With Special Reference To State Bank of India

Indus Business Academy
The Study of a Degree of an Impact of Non- Performing

Assets on Balance Sheet with Special Reference to State
Bank of India
A market research report submitted for the partial fulfilment of the requirement of
Post-Graduate Diploma in Management
Submitted by
Boina Naga Sai
FPB1517/040
Boinanagasai321@gmail.com
Under the supervision of

Professor Nagendra Hegde
Mentor, Indus Business Academy,
Bengaluru.
INDUS BUSINESS ACADEMY, LAKSHMIPURA, THATAGUNI POST

KANAKAPURA MAIN ROAD,
BENGALURU.
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Table of Contents
I.
Abstract.............................................................................................................1
II.
Introduction- Overview...................................................................................2
III.
Review of Literature........................................................................................5
IV.
Methodology...................................................................................................10
V.
Data analysis and Interpretation..................................................................12
VI.
Key findings....................................................................................................26
VII.
Conclusion.......................................................................................................28
VIII.
Bibliography...................................................................................................29
IX.
Annexure.........................................................................................................31
I.
Abstract
Non- performing assets have emerged as an alarming threat to the banking industry over the past few
years and also sent distressing signals regarding the sustainability and durability of the affected
institutions and despite various measures administered to solve amend the above problem. The
severity of the problem is acutely suffered by nationalized banks. In India, the definition of NPAs has
changed over time. According to the Narasimham
Committee
Report
(1991), those assets
(advances, bills discounted, overdrafts, cash credit etc.) for which the interest remains due for a
period of four quarters (180 days) should be considered as NPAs. It affects liquidity and profitability,
in addition posing threat on quality of asset and survival of banks. The motive of present study is to
assess the non performing assets of State Bank of India and its impact on profitability & to
determine which factors will have a high impact on the rise in the level of NPAs. The study uses the
balance sheet of State Bank of India for the period of 4 years from 20011-12 to 2014-15. The data
has been analysed by taking the Information from The Bank Managers of SBI of various branches
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and as well the data from the secondary sources. The important point to be noted is that the decline
of NPA is essential to improve profitability of banks. And the External Factors have the more impact
on rise in the level of NPAs. When level of SBI Gross & NET NPA compared with impact of external
factors and internal factors we get the result that there is impact of external factors is high on the
level of NPAs than internal factors. While analysing the impact on level of NPAs of SBI it is
concluded that External Factors plays a key role in raising the level NPAs of State Bank of India. It
simply means that the SBI management should adopt an appropriate measures to reduce the impact
of external factors on the level of NPAs. RBI guidelines plays major role in the level of NPAs
Keywords: Non- Performing Assets, External factors, internal factors, profitability, Level
Of NPAs
II. Introduction- Overview
A non-performing asset is an outcome of overdue in the form of credit is being given in respect of
which the interest and/or instalments of principal has remained over-due for a specified length of
time. It is a loan or advance for which the principal or interest payment remained overdue for a
period of 90 days. With an aim of moving towards the international best practices and ensuring
greater transparency, a standard criterion of 90 days overdue norm was fixed for identification of
NPA from the FY ending March, 2004 in the Indian financial system. Thus, as per present
convention, a non-performing asset refers to a loan or an advance where:
Interest and/or instalment of principal remain overdue for a period of more than 90
days in respect of a term loan,
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,
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Interest and/or instalment of principal remains overdue for two harvest seasons but for
a period not exceeding two half years in the case of an advance granted for agricultural
purposes, and
Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
Banks are required to classify their NPAs further into the following three categories based on the
period for which a specific asset has remained non-performing as well as the reliability of the dues:
Sub-standard Assets
Doubtful Assets `
Loss Assets
Substandard Assets
With effect from March 31, 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
jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks
will sustain some loss, if deficiencies are not corrected.
Doubtful Assets
With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as substandard, with the added characteristic that the
weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions
and values highly questionable and improbable.
Loss Assets
A loss asset is one where loss has been identified by the bank or internal or external auditors or the
RBI inspection but the amount has not been written off wholly. In other words, such an asset is
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considered uncollectible and of such little value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery value.
Impact of NPAs:
The impact of NPA crisis is visible with 29 state-owned banks who wrote off a total of 1.14 lakh
crore of bad debts between FY13 and 15, much more than they had done in the preceding nine years.
And bad loans written off by banks between 2004 and 2015 amounted to more than 2.11 lakh crore
with more than half of such loans having been waived off between 2013 and 2015. Recovery efforts
continue to be made in respective branches with respect to bad loans. A write off does not mean that
recovery comes to stop however, it does indicate the stoppage of cash inflows in the form of
recovery/repayment for the banking system
At state owned banks the un-provided NPAs are now 30-75 percent of their capital and un-provided
problem loans. (Loans which are in trouble and could turn into NPAs) are even higher at 65-200
percent. In India once a borrower has failed to make interest or principal payments for 90 days, the
loan is considered to be a NPA.
Companys profile:
State
Bank
of
India is
an
Indian
multinational, public
sector banking and financial
services company. It is a government-owned corporation with its headquarters in Mumbai

Maharashtra. As of 2014-15, it has assets of INR 20, 48,080 corers and more than 17000 branches,
including 191 foreign offices spread across 36 countries, making it the largest banking and financial
services company in India by assets
State Bank of India is one of the Big Four banks of India, along with ICICI Bank, Bank of
Baroda and Punjab National Bank
Background
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The authors interest on the banking sector led him to conduct the research on the concept of Nonperforming assets. And the author is willing to know the operations and performance of a State Bank
of India because of his interest on this particular company where he wants to work with future. This
research is being done to help the author in favour of providing knowledge to him in this particular
concept.
III. Review of Literature
1. EMPERICAL STUDY ON NON PERFORMING OF ASSETS:

Non-performing Asset is an important parameter in the analysis of financial performance of a bank
as it results in decreasing margin and higher provisioning requirements for doubtful debts. NPA is a
virus affecting banking sector. It affects liquidity and profitability, in addition posing threat on
quality of asset and survival of banks. The motive of present study is to assess the non performing
assets of Punjab National Bank and its impact on profitability. (DR. SONIA NARULA, 2014)
2. A COMPARATIVE STUDY OF NON-PERFORMING ASSETS OF PUBLIC AND

PRIVATE SECTOR BANKS:
NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large
number of credit defaults that affect the profitability and net-worth of banks and also erodes the
value of the asset. The NPAs growth involves the necessity of provisions, which reduces the overall
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profits and shareholders value. The issue of Non-Performing Assets has been discussed at length for
financial system all over the India. The problem of NPAs is not only affecting the banks but also the
whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of
health of the industry and trade. The Indian banking sector is facing a serious problem of NPAs. To
improve the efficiency and profitability, the NPAs have to be scheduled. Various steps have been
taken by government to reduce the NPAs. It is highly impossible to have zero percentage NPAs. But
at least Indian banks can try competing with foreign banks to maintain international standard.
(DR.HARPREET KAUR, 2011)
3.
A Study on Analysing the Trend of NPA Level in PUBLIC SECTOR BANKS:
The best indicator for the health of the banking industry in a country is its level of Non-performing
assets (NPAs). It reflects the performance of banks. NPAs in the Indian banking sector have become
a major concern for the Indian economy. NPA has a direct impact on the profitability, liquidity and
solvency position of the bank. Higher NPA indicates inefficiency of the bank and lower NPA indicate
better performance and management of funds. To improve the efficiency and profitability of banks
the NPA need to be reduced and controlled. This paper basically deals with the trends of NPA in
banking industry, the factors that mainly contribute to NPA raising in the banking industry and also
provides some suggestions how to overcome this burden of NPA on banking industry. (Ashly Lynn
Joseph&, Dr. M. Prakash)
4.
PROFITABILITY AND CREDIT CULTURE OF +NPAS: AN EMPIRICAL ANALYSIS

OF PSBs:
This paper provides an empirical approach to the analysis of profitability indicators with a focal
point on non-performing assets (NPAs) of commercial banks in the Indian context. The paper
discusses NPA, Factors contributing to NPA, Magnitude and Consequences. By using analytical
perspective, the paper observed that NPAs affected significantly to the performance of the banks in
the present scenario. On the other hand, factors like better credit culture, managing the risk and
business conditions which lead to lowering of NPAs. The empirical findings using observation
method and statistical tools like DEA, correlation, regression and data representation techniques,
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identified that there is a negative relationship between profitability measure and NPAs. (NAMITA
RAJPUT& MONIKA GUPTA 2012)
5.
NPAs Reduction Strategies for Commercial Banks in India:
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. (G.V.Bhavani Prasad& Veena
2012)
6. COMPARATIVE STUDY ON NPA MANAGEMENT OF NATIONALISED BANKS:

The management of nonperforming assets is a daunting task for every bank in the banking industry.
The very important reason and necessity for management of NPA is due to their multi-dimensional
effect on the operations, performance and position of bank. Results of study through light on the
level of nonperforming assets of different nationalized banks and relation between different banks in
the level of nonperforming assets. It is found that level of nonperforming asset both gross and net is
on an average in upward trend all the nationalized banks but the growth rate is different. Banks got
different ranks on the basis of mean and final ranking was done on the basis of average gross NPA
rank and net NPA rank. (ZAHOOR AHMAD 2013)
7. A STUDY ON NON-PERFORMING ASSTES OF PSBs IN INDIA:

On one hand, it reduces the income earning capacity of banks, at the same time, banks need to
provision from their income towards probable credit losses. The effect of NPA is not limited to bank
alone, it affect the economy, borrowers, creditors, industries, etc. At macro level, NPA blocks the
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flow of funds to prospective borrowers and hence results in reduced capital formation and economic
activity. Also, higher levels of NPA force banks to invest in risk free government securities and other
investments. This also results in reduced capital formation and economic activity. (Michael et al,
2006)
8. AG Reddy-manager Andhra bank

Profitability: NPAs put detrimental impact on the profitability as banks stop to earn income on one
hand and attract higher provisioning compared to standard assets on the other hand. On an average,
banks are providing around 25% to 30% additional provision on incremental NPAs which has direct
bearing on the profitability of the banks.
Asset (Credit) contraction: The increased NPAs put pressure on recycling of funds and reduces the
ability of banks for lending more and thus results in lesser interest income. It contracts the money
stock which may lead to economic slowdown.
Liability Management: In the light of high NPAs, Banks tend to lower the interest rates on deposits
on one hand and likely to levy higher interest rates on advances to sustain NIM. This may become
hurdle in smooth financial intermediation process and hampers banks business as well as economic
growth.
Capital Adequacy: As per Basel norms, banks are required to maintain adequate capital on riskweighted assets on an ongoing basis. Every increase in NPA level adds to risk weighted assets which
warrant the banks to shore up their capital base further.
9. A STUDY ON NON- PERFORMING ASSETS OF COMMERCIAL BANKS IN INDIA:

The banks can avoid sanctioning loans to the non-credit worthy borrowers by adopting certain
measures. Banker can constantly monitor the borrower in order to ensure that the amount sanctioned
is utilized properly for the purpose to which it has been sanctioned. The banker should get both the
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formal and informal reports about the goodwill of the customer. If he had already proven as a
defaulter then there is no question of sanctioning loan to him. The banker also has to educate the
borrowers regarding the effects and consequences of defaulting. By considering all the above factors
the banker can reduce the non-performing assets in a bank. The use of technology like Core Banking
Solutions in Apex bank should make more reachable to all borrowers. (Srinivas K T 2013)
The Research Gap

By studying the literatures reviews, it is found out that their research is done about the factors which
are impacting the profitability of the banks, these factors are internal factors, external factors.
Internal factors like managerial deficiencies, re-loaning process, will defaults etc. And external
factors like natural calamities, crisis, RBI guidelines etc. and the measures and taken by the SBI to
reduce the level of NPAs. But no research was done on which factors have a more impact on level of
NPAs of SBI either internal factors or external factors. And no research is done on the SBIs
Preventive measure Stressed Asset Management Group (SAMG).
It is created specially to efficiently resolve high value NPAs. With five regional offices each headed
by a general manager and two chief general managers overseeing the entire effort, SAMG has turned
in to a centre of excellence in the NPA resolution effort of the bank.
My aim is to fill that gap by finding out which factors have more impact on level of NPAs which
impacts the profitability of State Bank of India. And to what extent that SAMG helped SBI to reduce
the level of NPAs over the past 4 years tries to fill the gap.
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IV. Methodology
1. Title: The study of a degree of an impact of non- performing assets on the balance sheet with
special reference to State Bank of India
2. Objectives
To study the impact of non-performing assets on profitability of State Bank of India
To understand the level of net and gross NPAs in State Bank of India and measures taken to
reduce NPAs in last 4 years.
3. The Research Problem and Hypothesis

The research problem is to find out which factors has the more impact on the profitability of State
Bank of India either internal factors or external factors. The research problem is decided to be solved
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by using the hypothesis testing. To also understand the level of NPAs in State Bank of India and
measures taken to reduce NPAs in last 4 years.
Ho: Internal factors have more impact on level of NPAs than external factors
H1: external factors have more impact on level of NPAs than internal factors
4. Data collection:
Primary data:
Primary research consists of a collection of original primary data collected by the researcher. It is
often undertaken after the researcher has gained some insight into the issue by reviewing secondary
research or by analysing previously collected primary data. It can be accomplished through various
methods, including questionnaires and telephone interviews in market research, or experiments and
direct observations in the physical sciences, amongst others. The distinction between primary
research and secondary research is crucial among market research
Sampling size: 5 bank managers
Data collected through direct interview
South Indian SBI branches as follows:
Branches
Choutuppal
Bangalore
Hyderabad
Prattipadu
Bangalore
Secondary data:
Primary research consists of a collection of original primary data collected by the researcher. It is
often undertaken after the researcher has gained some insight into the issue by reviewing secondary
research or by analysing previously collected primary data. It can be accomplished through various
methods, including questionnaires and telephone interviews in market research, or experiments and
direct observations in the physical sciences, amongst others. The distinction between primary
research and secondary research is crucial among market research
Balance sheets of SBI for the past 4 years
Various research papers
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Journals like corporate India, international journal of advance research in management
studies,
articles, documents, annual reports, printed literature etc.
5. Limitations and Assumptions:
Collected data only from the known people of 5 different manager level candidates of various
SBI branches
Research is done only on the NPAS of State Bank Of India
Research is done by analysing only the last 4 years annual reports and balance sheets of State
Bank Of India
Data collected only from the South Indian SBI Branch managers
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V. Data analysis and Interpretation
Reasons for Rise in NPAs:

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
Ineffective recovery tribunal
Wilful defaults
Natural calamities
Industrial sickness
Lack of demand
RBI guidelines
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 nonrecover, thereby reducing their profitability and liquidity.
Wilful defaults
There are borrowers who are able to pay back 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.
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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 non-recovered part as NPAs and has to make provision for it.
RBI guidelines
The RBI guidelines plays a major role in the level of NPAs in a bank a change in a guidelines may
leads to a massive change in the rise or fall of the NPAs in the bank. These are controlled by the
government to control the money supply in the economy
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Change on government policies
With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the
changing principles and policies for the regulation of the rising of NPAs. 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 Government 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
Inappropriate technology
Improper swot analysis
Poor credit appraisal system
Absence of regular industrial visit

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Reloaning process
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. 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
Inappropriate technology
Due to inappropriate technology and management information system, market driven decisions on
real time basis cannot 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
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
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Poor credit appraisal system means the management let the customers not to know the information
about their lending process. 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 the
a. Marketability
b. Acceptability
c. Safety
d. Transferability
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.
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Reloaning process
Non-remittance of recoveries to higher financing agencies and re loaning of the same have already
affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and
PACs, the NPAs of OSCB is increasing day by day.
When compared to both, as per the data collected, the external factors will have the high impact on
rise in the level of NPAs. When compared to both the factors, as per the data collected from the
primary as well as secondary it is concluded that external factors will have the impact on the rise in
the level of NPAs than internal factors. Mainly NPAs was affected by the RBI policies and the
industrial crisis. These factors leads to drastic changes in the level of NPAs.
RBI policies
According to RBI, there is still under recognition of NPAs. In addition, theres been an increase in
divergences in classifying stressed corporate loans as non-performing loans. The loan growth to
stressed sectors like power and steel continues to be high at this stage the capital needs at banks will
be large. Most PSU banks have been unable to grow their loan books over the past nine months and
with net interest margins under pressure, pre-provision profitability has weak end further. Also with
the needs to increase provisioning for loans even as P&L weak end, 11 banks reported losses and
recap needs for the state-owned banks have gone up and they are likely to need $34- $53 billion of
capital. A strong banking sector is important for a flourishing economy and the weakening of our
banking sector may have no adverse impact on other sectors.
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Fig 1: The balance sheet of State Bank of India from 2012-2015

In
crores
Shareholder's funds
Equities and Liabilities
Mar Mar 14
Mar 13
Mar 12
15
Equity Share Capital
Total Share
746.57
746.57
684.03
671.04
746.57
746.57
684.03
671.04
127,691.65 117,535.68
98,199.65
83,280.16
127,691.65 117,535.68
98,199.65
83,280.16
98,883.69
83,951.21
Capital
Reserves and
Surplus
Total Reserves and
Surplus
Total
Shareholders
Funds
Deposits
128,438.2 118,282.2
2
1,576,793.2 1,394,408.5 1,202,739.57 1,043,647.36

4
Borrowings
205,150.29 183,130.88
Other Liabilities and 137,698.05
96,412.96
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169,182.71
127,005.57
95,455.07
80,915.09

Provisions
Total Capital and
2,048,079. 1,792,234. 1,566,261.0 1,335,519.2
Liabilities
80
60
115,883.84
84,955.66
65,830.41
54,075.94
58,977.46
47,593.97
48,989.75
43,087.23
495,027.40 398,308.19
350,927.27
312,197.61
1,300,026.3 1,209,828.7 1,045,616.55
867,578.89
ASSETS
Cash and Balances
with Reserve Bank
of India
Balances with Banks
Money at Call and
Short Notice
Investments
Advances
Fixed Assets
9,329.16
8,002.16
7,005.02
5,466.55
Other Assets
68,835.55
43,545.90
47,892.03
53,113.02
Total Assets
2,048,079. 1,792,234. 1,566,261.0 1,335,519.2

80
60
16,333.00
15,869.00
14,816.00
14,097.00
213,238.00 222,033.00
228,296.00
215,481.00
OTHER ADDITIONAL
INF ORMATION
Number of Branches
Number of
Employees
Capital Adequacy
12
13
13
14
Tier 1 (%)
10
10
10
Tier 2 (%)
56,725.34
61,605.35
51,189.39
39,676.46
Ratios ( % )
KEY PERFORMANCE
IND ICATORS
ASSETS QUALITY
Gross NPA
Gross NPA (%)
4.25
4.95
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4.75
4.44

Net NPA
27,590.58
31,096.07
21,956.48
12,346.89
2.12
2.57
2.10
1.82
Bills for Collection
190,560.35
74,028.42
66,639.54
66,959.85
Contingent
902,862.16 1,017,329.9
926,378.91
832,605.33
14,104.98
11,707.29
Net NPA (%)

Net
NPA
To
Advances (%)
CONTINGENT LIABILITIE S,
COMMITMENTS
Liabilities
Net profit
13,101.57
10,891.17
Source: Annual report of SBI

Fig 2: the ratio of net NPAs on the net profit of State bank of India
NET
YEAR
NET NPA(x)
PROFIT(y)
Ratio(X/Y)
2011-12
15,818.85
11,707.29
1.35
2012-13
21,956.48
14,104.98
1.55
2013-14
31,096.07
10,891.17
2.85
2014-15
27,590.58
13,101.57
2.10
Source: annual report of SBI
Interpretation of result
This table is representing the ratio of net NPAs on the net profit of SBI from 2012-2015. With the
help of table we can see that the impact of net NPAs on the net profit of SBI is increasing
continuously since 2014. Which shows that bank performance on NPAs is declining. In 2015 it
decreased from 2.85 to 2.10 which shows that the banks approach towards NPAs is slightly
improved. We can conclude that there is a negative impact of NPAs on the balance sheet of the State
Bank of India.
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The impact of NPAs on the profitability of the SBI is summarized in the following points
Reducing earning capacity of banks
NPAs reduced the earning capacity of the assets and as a result of this return on assets get affected.
Blocks capital
NPAs carry risk weight of 100% (to the extent it is uncovered). Therefore they block capital for
maintaining Capital adequacy. As NPAs do not earn any income, they are adversely affecting
Capital Adequacy Ratio of the bank.
Incurrence of additional cost
Carrying of NPAs require incurrence of Cost of Capital Adequacy, Cost of funds in NPAs and
Operating cost for monitoring and recovering NPAs.
Reduces EVA
While calculating Economic Value Added (EVA =Net operating profit after tax minus cost of capital)
for measuring performance towards shareholders value creation, cumulative loan loss provisions on
NPAs s considered as capital. Hence, it increases cost of capital and reduces EVA.
Low yield on advances
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Due to NPAs, yield on advances shows a lower figure than actual yield on standard Advances. The
reasons that yield are calculated on weekly average total advances including NPAs.
Effect on Return On Assets
It means what we get as a return on assets of the company. NPAs reduce earning capacity of the
assets and as a result of this, ROA gets affected.
Impact of NPAs on banking operations

The efficiency of a bank is not reflected only by the size of its balance sheet but also by the level of
return on its assets. The NPAs do not generate interest income for banks. At the same time, banks are
required to provide provisions for NPAs from their current profits. The NPAs have deleterious impact
on the return on assets in the following ways:
a. The interest income of banks will fall and it is to be accounted only on receipt basis.
b. Banks profitability is affected adversely because of the providing of doubtful debts and consequent
to writing it off as bad debts.
c. Return on investments (ROI) is reduced.
d. The capital adequacy ratio is disturbed as NPAs enter into its calculation.
e. The cost of capital will go up.
f. Asset and liability mismatch will widen.
g. It limits recycling of the funds
Cost of Nonperforming assets
Non-Performing Assets affect the profitability, liquidity and competitive functioning of banks and
developmental financial institutions and finally the psychology of the bankers in respect of their
disposition towards credit delivery and credit expansion. Non-Performing assets cause high cost for
the bank, as these assets do not improve any of the following:
Profits
Reduction of other costs
Page 24 of 37
Management of NPAs in the State Bank of India

To give thrust to recovery efforts and to prevent slippages, various measures were undertaken, which
included timely identification of Special Mention Accounts (SMAs) and dissemination of
information to operating units, etc. Following are brief details of such measures:
a. Tightening of appraisal norms/loan eligibility criteria.
b. Risk Scoring Models have been developed for all P-Segment loans on the basis of statistical
models for objective assessment.
c. Account Tracking & Monitoring online (AT&M) launched for updating of account wise follow
up in P-Segment
d. NPA dashboard is being utilized as a data tool for real time monitoring of NPAs.
e. To provide relief to stressed MSME sector, SBI has launched non-discretionary and
non- discriminatory scheme named SBIOTS-MSME2012. For one time
settlement of loan outstanding with liberal terms.
f. Account tracking centres (ATCs) have been operationalized in all circles to contract
borrowers with outstanding up to 25 lakhs in SMAs and soft NPA accounts in
SME.
Preventive Measures for Non-Performing Assets
Identifying borrowers with genuine intent from those who are non-serious with no commitment or
stake in revival is a challenge confronting bankers.
Longer the delay in response, greater the injury to the account and the asset.
While financing/appraisal of credit requirements, funds flow analysis in conjunction with the
cash flow analysis should be done, rather than only concentrating on funds flow analysis.
The general perception among borrowers is that it is lack of finance that leads to sickness and
NPAs. However, management effectiveness in tackling adverse business conditions is a very
important aspect that affects a borrowing units fortunes.
During the exercise for assessment of viability and restructuring, a practical and integrated
approach by all the lending banks as also sharing of all relevant information on the borrower
would go a long way towards overall success of rehabilitation exercise, given the probability of
success/failure.
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As a part of asset portfolio decision by commercial banks, exposure to predefined sensitive sectors
viz., capital market sector and the real estate sector should be kept within reasonable limits and their
trends should be subjected to stringent internal monitoring. Being vigilant towards such advances
helps avoiding their slippages into the NPA and bad debt categories significantly. Table 10 portrays
the trend of advances to sensitive sectors by the major Indian public sector banks. From the table, it
is evident that the PSBs have been successful in terms of keeping their sensitive advances in check.
Methods for Reducing Non-Performing Assets
All accounts where interest has not been collected should be reviewed at periodical intervals by
appropriate authorities. In order to recover the amount, one can adopt any way like persuasion,
pressurization, frequent interaction, showing sympathy etc. Repayment of a term loan depends on
income generating capacity of the borrowing unit. Therefore, it is necessary to fix repayment
program for a term loan according to the income generating capacity of the unit.
After classification of unit as sick, bank can make decision to offer a rehabilitation package. In
that case, bank has to have a sympathetic and positive approach and provide the relief package in
time.
Merger is the process under which a sick unit is merged with a healthy unit, or sometimes, a
healthy unit acquires a sick unit. A part of the consideration paid to the sick unit by the healthy
unit is used to liquidate the NPA wholly or partly.
Recovery of advances through compromise settlement is accepted as an effective non-legal

remedy. Under this borrower agrees to pay certain amount of the bank after getting concessions.
If all attempts of converting an NPA into a performing asset fail, the bank is left with no other
option but to recall the advance and resort to legal action by filing of recovery suits in the civil
court or Debt Recovery Tribunals. To do away with this specific requirement of filing a suit with
court towards recovery of NPAs, Government of India enacted the Securitization and
Page 26 of 37

Reconstruction of Financial Assets & Enforcement of Securities Interest (SARFAESI) Act or
popularly referred to as Securitization Act in the year 2002.
Stressed Assets Management Group (SAMG)
As a part of focus on NPAs, Stressed Asset Management Group (SAMG) continues to work as a
dedicated and specialised vertical, headed by a deputy managing director, created specially to
efficiently resolve high value NPAs. With five regional offices each headed by a general manager
and two chief general managers overseeing the entire effort, SAMG has turned in to a centre of
excellence in the NPA resolution effort of the bank.
Towards giving focused attention to high value NPAs in SME and Corporates, Stressed Assets
Management Group (SAMG) was created in April 2011 headed by a Deputy Managing Director.
Effective 1st April 2014 SAMG as a logical extension took over 42 stressed assets resolution
branches from across.
SAMG has 14 Stressed Assets Management Branches (SAMBs) and 1 Resident Office under its
aegis. The SBI group further opened two new branches in March 2012 (one in Ludhiana and
Ernakulum). These branches handle NPAs and Advances under Collection Account (AUCAs) with
out-standings in excess of
1 crore. Each branch has dedicated, trained staff including a legal
expert for expeditious resolution and is able to affect significant recoveries by resorting to action
under SARFAESI Act, DRT Act, sale to ARCs and negotiated settlements.
In addition, 115 Stressed Assets Resolution Branches/Centres (SARBs/SARCs) have been

functioning under the NBG across the country in Metro/Urban centres for quicker resolution of
NPAs with out-standings up to
1 crore in MSME and Personal segments.
Today SAMG has 16 SAMG branches and 43 SARBs across the country. Currently, SAMG covers
23.79% and 54.33% of the Banks Non-Performing Assets (NPAs) and Advances under Collection
Account (AUCA) respectively. The recovery efforts of SAMG are supplemented by efforts put in by
frontline operating staff at our 15,869 branches across the country. Besides, Account Tracking &
Monitoring (AT & M) Centres have been operationalized in all Circles to contact retail Special
Mention Accounts (SMAs) and NPAs. Business Correspondents, Business Facilitators and Self Help
Groups are also involved in recovery of Agricultural NPAs. The sale of final assets to ARCs has
Page 27 of 37

resulted in reduction of NPAs by 3, 590 crores and AUCA revers l of Rs.1, 092 crores. Different
strategies were adopted for achieving optimum sales level and price.
SAMG resorts to various strategies to resolve stressed assets. Some of these are enumerated below:
Restructuring of both Standard assets and NPAs, either though the corporate debt restructuring
mechanism or through a bilateral arrangement.

Recovery through auction of assets using the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest (SARFAESI) route.

Filing suits in Debt Recovery Tribunals and other Courts for recovery of dues.
Identifying and engaging with strategic investors for takeover of stressed assets.
Sale of NPAs to Asset Reconstruction Companies.
Entering into Onetime Settlements with borrowers.
Using Resolution Agents to take possession of properties mortgaged to the Bank and arranging
for their auction.

Persuading large corporate borrowers under stress to sell noncore assets, dilute their
shareholding and bring in strategic investors thus reducing debt and improving viability.
The Non-Performing Assets (NPAs) of MCG have increased from Rs.18, 443 crores in March 2013
to Rs.32, 715 crores in March 2014. To tackle this issue, the Group has strengthened the processes
of appraisal/sanction, follow-up and supervision. Every effort is made to improve the asset quality
through regular engagement with promoters of weak/ stressed accounts. The Bank has made various
committees headed by Chairman/ Managing Directors/ Deputy Managing Directors/ Chief General
Managers/ General Managers/ Deputy General Managers to periodically review stressed assets and
suggest resolution strategies.
SAMG has brought in substantial recoveries in high value NPAs and some decades old dues during
FY 201314 due to its specialised attention and concerted efforts. Despite a harsh environment last
year, we achieved a deceleration in NPA accretion due to SAMG''s relentless efforts along with the
support of SAMBs/ SARBs/ SARCs.
It is concluded that H1 is accepted (external factors have more impact on level of NPAs than
internal factors)
VI. Key findings
Page 28 of 37
Lack of proper verification of the genuine purpose of the loans and advances is the main reason
for asset becoming a Non-performance assets. And Lack of timely action is also a one of the
reason for NPAs.
SBI branches have similar recovery strategy in all sectors and in all geographical regions towards
reducing the level of NPAs in order to improve the performance of the banks. But the impact of
recovery strategies will be different from sector to sector. Because the provisions related to one
sector is different from other.
Lending at low rate of interest to farmers so that repayments is made easy for the loans in
agricultural sectors. As it leads to the decreases in the chances of asset turning in to Nonperforming assets.
The increase in the total advances leads to the increase in the profits but it also leads to increase
in the NPAs, as there is an increase in the advances is due to the increase in the amounts of loans
issued to customers.
Securitization of assets, legal recovery strategies may be helpful for reducing the NPAs. And also
Proper appraisal before lending is the best alternative ways to reduce the NPAs.
External factors has the more impact on the rise in level of NPAs. Mainly RBI policies and
industrial crisis may drastically impacts the rise in the level of NPAs. The mismanagement of the
banks leads to decrease in the performance.
Stressed Asset Management Group (SAMG) helped to reduce the NPAs. The impact of SAMG
on the level of NPAs is increasing year by year. It means the SBI is concentrating more on this
measure to improve the performance of the company.
previously an asset be called NPA after 180 days, but now it is being changed to 90 days in
Indian context, in most of the opinions possibly it will have a negative impact on the banks.
Page 29 of 37
The impact of NPAs on profitability of SBI due to Effect on Return On Assets, Blocks capital,
Incurrence of additional cost, Reduces EVA, Low yield on advances, Effect on Return On Assets.
VII. Conclusion
After segregating the data collected from the bank managers and from the various secondary sources,
it is verified that impact of external factors is more than the impact of internal factors on the rise in
the level of NPAs. And the data which is collected from the secondary sources like balance sheet,
Page 30 of 37

annual reports, journals shown that the measures which is taken by the SBI on management of NPAs
for the past 4 years like Stressed Asset management Group has a positive impact on reducing the
level of NPAs year by year by taking an effective measures. The impact of NPAs on profitability of
SBI could be lessened by reducing the ROA, low yield on advances, blockage of capital etc. The
banks have to take initiative to reduce NPAs in a time bound strategic approach. There has been a
continuous decrease in the time period considered to declare a loan as non-performing. The
continuous decrease in the time period is to bring the Indian banking norms at par with international
norms. Such policy revisions will certainly reduce the NPAs and in turn improve the asset quality of
the banks. When compared to the 2014 and 2015, the impact of net NPAs on net profit is slightly
decreased. It is positive sign for bank saying that by taking preventive measures can help to decrease
the level of NPAs in the bank
VIII.
Bibliography
(dr. sonia narula, 2014) empirical study on non-performing of assets
Page 31 of 37
(dr.harpreet kaur,2011) a comparative study of non-performing assets of public and private
sector banks
(ashly lynn joseph&, dr. m. prakash) a study on analysing the trend of NPA level in public
sector banks
(namita rajput& monika gupta 2012) profitability and credit culture of NPAs: an empirical
analysis of psbs
(g.v.bhavani prasad& veena 2012)NPAs reduction strategies for commercial banks in india
zahoor ahmad 2013, comparative study on NPA management of nationalised banks
(srinivas k t 2013) a study on non- performing assets of commercial banks in India
AG Reddy-manager Andhra bank
Corporate India magazine dated 31st march 2016
Books: Kothari C.R

Indian financial system, VK publications
Websites:
http://www.studymode.com/essays/a-Study-On-Non-Performing-Assets-1591801.html
http://www.studymode.com/essays/a-Study-On-Non-Performing-Assets-1591801.html
http://www.scienpress.com/Upload/JAFB/Vol%203_2_8.pdf
http://www.allbankingsolutions.com/Articles/NPA-impact-on-Balance-Sheet.htm
http://www.blog.sanasecurities.com/non-performing-asset-npa-in-public-sector-banks/
http://kalyan-city.blogspot.in/2011/07/measures-to-solve-problems-of-non.html
http://www.gktoday.in/non-performing-assets-npa/
Page 32 of 37
http://economictimes.indiatimes.com/state-bank-of-india/directorsreport/companyid11984.cms
http://www.livemint.com/Industry/F1e6vhHAQdgXfxPzBWe4cO/SBI-selling-assets-beforethey-are-ready-to-be-classified-as.html
http://www.businesstoday.in/cover-story/distressed-assets-market-in-india-witnessingunprecedented-boom/story/221604.html
http://timesofindia.indiatimes.com/business/india-business/SBI-declares-war-on-NPAs-asbad-loans-spurt/articleshow/30409527.cms
http://tenders.gov.in/department.asp?id=1577
http://www.helplinelaw.com/business-law/DRTBS/drt-role-in-banking-sector.html
www.wiikipedia.com
www.academia.edu
www.sbi.com
www.googlescholar.com
Page 33 of 37
IX. Annexure
1. According to you what is NPA?
A. when an asset ceases to generate income for the bank

B. if the customers do not pay principal and interest for a certain period of time (90 days) ,it can
be called as NPA
C. if periodical income is not generated for lender of money ,it is called as NPA
2. Others previously an asset be called NPA after 180 days, but now it is being changed to 90 days
in Indian context .in your opinion it would have negative impact or positive impact on banks?
A. Negative impact
B. Positive impact
C. Either negative or positive
3. What is the level of NPA in your particular branch?

A. high
B. low
C. moderate
D. very low
4. What is trend of NPA in your bank from 2012-2015

A. Highly decreasing
Page 34 of 37

B. Slowly decreasing
C. Constant
D. Slowly increasing
E. Highly increasing
5. What is the reason for above choice which you opted?
A)
6. Does NPA classified as
Standard asset
Substandard asset
Doubtful asset
Loss asset
A) Yes
B) No
7. What are the main reason for assets becoming non-performing asset?
A. Managerial Deficiencies During the work
B. Lack of knowledge of the area of handling
C. Lack of ad
D. equate efforts for recovery
E. Lack of proper verification of the genuine purpose of loans and advances
F. All of the above
8. Do you have similar recovery strategy in all sectors and in all geographical regions?
A. Yes
B. No
Page 35 of 37

9. What are the alternative ways to reduce the NPA?
A. Proper appraisal before lending
B. Lending at low rate of interest to customers so that repayment is made easy
C. To reduce unsecured loans by taking effective measures
D. Others
10. Among all these internal factors which has more impact on level of NPA?
A. Defective lending process
B. Poor credit appraisal system
C. Managerial deficiencies
D. Re loaning process
E. Absence of regular industrial visits
F. All of the above
11. Among all these external factors which has more impact on level of NPA?
A. Wilful defaults
B. Natural Calamities
C. Industrial Sickness
D. Lack of Demand
E. Change on Govt. Policies
F. RBI guidelines
G. All of the above
12. On which type of loans the NPAs are more in your Bank?
A. Agriculture loans
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B. Manufacturing loans
C. Housing loans
D. Education loans
13. Which factors has more impact on level of NPAs in your bank?
A. External Factors
B. Internal factors
14. To what extent an impact of NPAs on the profitability of your bank?

A. High
B. Low
C. Moderate
D. Very low
Page 37 of 37

The Study of A Degree of An Impact of Non - Performing Assets On Balance Sheet With Special Reference To State Bank of India

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