REVIEW OF LITERATURE

Das (1990) has compared the various efficiency measures of public sector banks by
applying data envelopment analysis model and concluded that the level of NPAs
significant negative relationship with efficiency estimates.
Verma (1999) has concluded that high level of NPAs leads to operational failure of
the bank.
Berger and young (1997) has examined the relationship between problem loan and
bank efficiency by employing Granger-causality technique and found that high level of
problem loans cause banks of increase spending on monitoring, working out and / or
selling off these loans and possibly becomes more diligent in administering the portion
of their existing loan portfolio that is currently performing.
Gupta (1997) has also concluded that NPAs on protifability of banks and leads to
liquidity crunch and slow down in the growth in GDP etc.
Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit
making and six loss making banks and concluded that loss making banks maintained
higher NPAs in the loan portfolio which led them to show losses.
Kwan and Eisenbeis (1994) also concluded that there is negative relationship
between efficiency and problem loans.
Toor (1994) analysed that poor recovery management leads to reduction in yield on
advanced that poor recovery management leads to reduction in yield on advances,
reduced productivity loss in the credibility and put detrimental impact on the policies
of the banks.
Murthy (1988) has examined that default bring down the return accruing and to them,
reduces effective rate of interest and reduces the funds recalculation and increase their
dependence on external sources thereby increasing the costs.
ACCORDING TO S, RAJ KUMAR (2002) the SARFAESI act and the could
primarily used as powerful bargaining tool while negotiating with defaulter. This puts
bank on stronger ground in salvaging sticky loan
Khedekar Pooja S. (2012) A strong Banking Sector is essential for a flourishing
economy. Indian banking sector emerged stronger during 2010-11 in the aftermath of
global financial meltdown of 2008-10 under the watchful eye of its regulator. The
level of NPA's act as an indicator showing the credit risks & efficiency of allocation of
resource. NPA involves the necessity of provisions, any increase in which bring down
 the overall profitability of banks. An excessive rise in interest rates over the past 18
months has led to a sharp increase in nonperforming assets. This not only affects the
banks but also the economy as a whole. This Abhinav International Monthly Refereed
Journal of Research In Management & Technology 63 ISSN 2320-0073 Volume II,
December13 www.abhinavjournal.com paper deals with understanding the concept of
NPA, the causes and overview of different sectors in India.
Selvarajan B. and Vadivalagan, G.(2012) Over the few years Indian banking,
attempts to integrate with the global banking has been facing lots of hurdles in its way
due to certain inherent weakness, despite its high sounding claims and lofty
achievements. In a developing country, banking is seen as an important instrument of
development, while with the demanding Non-Performing Assets (NPAs), banks have
become burden on the economy. Non-Performing Assets are not merely non
remunerative, but they add cost to the credit Management. The fear of Non-Performing
Assets permeates the psychology of bank managers in entertaining new projects for
credit expansion. Non-Performing Assets is not a dilemma facing exclusively the
bankers; it is in fact an all pervasive national scourge swaying the entire Indian
economy. Non Performing Asset is a sore throat of the Indian economy as a whole.
Non Performing Assets have affected the profitability, liquidity and competitive
functioning of banks and developmental of financial institutions and finally the
psychology of the bankers in respect of their disposition towards credit delivery and
credit expansion. NPAs do not generate any income for the banks, but at the same time
banks are required to make provisions for such NPAs from their current profits. Apart
from internal and external complexities, increases in NPAs directly affects banks'
profitability sometimes even their existence.
Meeker Larry G. and Gray Laura (1987) in 1983, the public was given its first
opportunity to review bank asset quality in the form of non-performing asset
information. The purpose of this study is to evaluate that information. A regression
analysis comparing the non-performing asset statistics with examiner classifications of
assets suggests that the non-performing asset information can be a useful aid in
analyzing the asset quality of banks, particularly when the information is timely.
PaulPurnendu , Bose,Swapan and Dhalla, Rizwan S.(2011) In this paper we
attempt to measure the relative efficiency of Indian PSU banks on overall financial
performances. Since, the financial industry in a developing country like India is
undergoing through a very dynamic pace of restructuring, it is imperative for a bank to
 continuously monitor their efficiency on Non-Performing Assets, Capital Risk-
Weighted Asset Ratio, Business per Employee, Return on Assets and Profit per
Employee. Here, Non-Performing Assets is a negative financial indicator. To prove
empirically, we propose a framework to measure efficiency of Indian public sector
banks.
Veerakumar, K.(2012) The Indian banking sector has been facing serious problems
of raising Non-Performing Assets (NPAs). Like a canker worm, NPAs have been
eating the banking industries from within, since nationalization of banks in 1969.
NPAs have choked off quantum of credit, restriction the recycling of funds and leads
to asset-liability mismatches. It also affected profitability, liquidity and solvency
position of the Indian banking sector. One of the major reasons for NPAs in the
banking sector is the 'Direct Lending System' by the RBI under social banking motto
of the Government, under which scheduled commercial banks are required to lend
40% of their total credit to priority sector. The banks who have advanced to the
priority sector and reached the target suffocated on account of raising NPAs, since
long. The priority sector NPAs have registered higher growth both in percentage and
in absolute terms year after year. The present paper is an attempt to study the priority
sector advances by the public, private and foreign bank group-wise, target achieved by
them and a comparative study on priority and non-priority sector NPAs over the
Abhinav International Monthly Refereed Journal of Research In Management &
Technology 64 ISSN 2320-0073 Volume II, December13 www.abhinavjournal.com
period of 10 years between 2001-02 and 2010-11. This paper also aims to find out the
categories of priority sector advances which contribute to the growth of total priority
sector NPAs during the period under study.
Murthy, K. V. Bhanu Gupta, Lovleen.(2012) One of the major reasons cited for this
state of health of banking industry has been the persistence of 'Non-performing Assets'
(NPAs). In this study the focus is on the impact of liberalization on the non-
performing assets of the four banking segments, namely, public sector, old private
sector, new private sector and foreign banks by studying the overall trends in NPAs.
We have used the Structure- Conduct Performance (S-C-P) approach that shows the
relationship between competition and conduct, concentration and growth in NPAS.
Our results show that on an average across the banking industry segments, average
non-performing assets in the past 11 years have been declining at the rate of 13% p.a.
compounded growth rate. The old private sector banks' nonperforming assets have
 reduced at the rate of 11.98% and that of public sector banks have declined at the rate
of 18% and foreign banks at 11.4%. Though new private sector banks and the foreign
banks seem to be more efficient but their conduct does not show consistency and
stability
Joseph, Mabvure Tendai Edson, Gwangwava(2012) The purpose of the study was
to find out the causes of non-performing loans in Zimbabwe. Loans form a greater
portion of the total assets in banks. These assets generate huge interest income for
banks which to a large extent determines the financial performance of banks.
However, some of these loans usually fall into non-performing status and adversely
affect the performance of banks. In view of the critical role banks play in an economy,
it is essential to identify problems that affect the performance of these institutions.
This is because non-performing loans can affect the ability of banks to play their role
in the development of the economy. A case study research design of CBZ Bank
Limited was employed. Interviews and questionnaires were used to collect data for the
study. The paper revealed that external factors are more prevalent in causing non-
performing loans in CBZ Bank Limited. The major factors causing nonperforming
loans were natural disasters, government policy and the integrity of the borrower.
Toor N.S. (1994) stated that recovery of non-performing as-sets through the process of
compromise by direct talks rather than by the lengthy and costly procedure of
litigation. He suggested that by constant monitoring, it is possible to detect, the sticky
accounts, the incipient sickness of the early stages itself and an attempt could be made
to review the unit and put it back on the road to recovery S.N. Bidani (2002) Non-
performing Assets are the smoking gun threatening the very stability of Indian banks.
NPAs wreck a banks profitability both through a loss of interest income and write-off
of the principal loan amount itself. This is definitive book which tackles the subject of
managing bank NPAs in its entirely, starling right from the stage of their
identification till the recovery of dues in such ac-counts.
Debarsh and Sukanya Goyal (2012) emphasized on management of non-performing
assets in the perspective of the public sector banks in India under strict asset
classification norms, use of latest technological platform based on Core Banking
Solution, recovery procedures and other bank specific indicators in the context of
stringent regulatory framework of the RBI. 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. The reduction of non-
 per-forming asset is necessary to Abhinav International Monthly Refereed Journal of
Research In Management & Technology 65 ISSN 2320-0073 Volume II,
December13 www.abhinavjournal.com improve profitability of banks and comply
with the capital adequacy norms as per the Basel Accord.
Kavitha. N (2012), emphasized on the assessment of non-performing assets on
profitability its magnitude and impact. Credit of total advances was in the form of
doubtful assets in the past and has an adverse impact on profitability of all Public
Sector Banks affected at very large extent when non-performing assets work with
other banking and also affect productivity and efficiency of the banking groups. The
study observed that there is increase in advances over the period of the study.
STATE BANK OF INDIA

SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31, 2005. It
dominates the Indian banking sector with a market share of around 20% in terms of total
banking sector deposits. 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.
Once the core banking solution (CBS) is fully implemented, it will cover over 10,000
branches and ATMs of the State Bank group, and emerge as the strongest technology enabled
distribution network in India.

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.

Resource-raising capabilities

SBIs funding profile is strong, underpinned by its strong retail deposit base. The bank is
facing increasing competition in its metropolitan and urban franchise. SBIs strong franchise
gives it access to a steady source of stable retail funds, which constitute around 59% of the
total resources as on March 31, 2005 (56% as at March 31, 2004).
Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in
the proportion of current account deposits, low-cost deposits have continued to constitute
over 40% of total deposits as at March 31, 2005. The banks cost of deposits (excluding
IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year from April
1 to March 31), compared with 5.48% in 2003-04. The banks liquidity position is very
strong due to healthy accretion to deposits, large limits in the call market, and significant
surplus SLR investments. SBI will maintain its strong funding profile and a low cost resource
position in view of its strong retail base and wide geographical reach.

Earnings profile to remain good

SBI will maintain a good earnings profile in the medium term despite high pressure on yields
due to the increasing competition in the banking sector. SBIs earning profile is characterised
by consistency in the return on assets (PAT/Average Assets), at around 1% per annum for the
past three years, and diverse income streams. To maintain yields and pursue credit growth,
the bank is aggressively targeting retail finance and small and medium enterprises (SMEs).
The banks core fee income of 1% of average funds deployed bolsters its revenue profile.
However, with the opening of government business like tax collection to other banks and
increased competition, the growth in fee income is expected to slow down. The banks
operating expense at 2.44% of average funds deployed in 2004-05 is in line with other public
sector banks. The banks cost structure is rigid as fixed employee cost accounted for 74% of
the operating expenditure in 2004-05. Thus, despite good asset growth and technology
efficiency gains, the banks operating costs will remain high in the medium term. To be able
to reap the full benefits of technology implementation, the bank will have to reduce or
redeploy work force; since this is a sensitive issue, it is expected to happen gradually.

The banks fund based and fee income earnings are diversified across industries, regions,
asset classes, and customer segments.

Strong diversification in income streams will ensure that the banks earnings remain
relatively stable, despite the decline in profitability in some segments.
Comfortable capital position

SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a large capital
base of Rs 240.72 billion as at March 31, 2005. The bank has considerably improved its net
worth coverage for net NPAs to 4.4 times as at March 31, 2005 due to lower slippages
reflecting an improving asset quality, witnessed across the entire banking sector. The
capitalization levels of SBI are adequate to address the asset side risks and support the
business growth in the medium term.

Management strategies

In retail finance, the bank has leveraged its corporate relationships, pursued business growth
selectively, and has not competed based on interest rate. The bank has taken initiatives like
on-line tax returns filing and faster transfer of funds to protect its dominant position in the
government business. The bank also has a clear technology strategy that will enable it to
compete with the new generation private sector banks in customer service and operational
efficiency.

Asset quality to remain at average levels

The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at
March 31, 2005, compared with 4.9% for all scheduled commercial banks (SCBs) taken
together. The bank is facing challenges to improve the quality of assets originated, as can be
seen in the consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05.

To contain NPAs and ensure credit growth, the bank has decided to focus on financing the
retail (personal) segment as well as SMEs. The share of retail advances has increased to
24.73% (Rs 522.08 billion) of total advances as at September 30 2005. In the retail loan
segment, SBI is targeting primarily the housing loans segment, which constitutes Rs. 283.41
billion (54.3%) of total retail loans. The NPAs in retail finance are low currently; however
they are steadily increasing (especially in the housing finance portfolio) and have started
showing signs of stress. SBIs retail portfolio has grown at over 37% CAGR in the last two
years and hence a significant portion of the portfolio is largely unseasoned. The housing
finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March 31, 2005.The bank
will face significant challenges in the medium term to develop effective credit appraisal and
collection systems in order to contain NPAs in retail finance. SBIs asset quality is expected
to remain at average levels, as the banks large and diverse asset portfolio reflects of the asset
quality of the banking system.

Business description

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 corporates 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 joint venture.

Industry prospects

To leverage benefits such as access to low cost resources and the facility to provide a larger
gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited
and HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that
of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such
entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements,
priority sector requirements, and corporate exposure limits.

New private sector banks capture market share

With technological edge and a strong marketing thrust, private sector banks have been
stealing market share in retail deposits and the corporate fee business from public sector
banks. Together with some foreign banks, these private banks have also aggressively entered
the retail asset financing space, hitherto the domain of non-banking finance companies.

Given their focus on cross selling and optimizing their customer base, they now offer the
entire range of products and services on the asset and liability side to retail and wholesale
customers .
Asset quality to improve

Banks have not yet fully resolved the stress in the asset quality of their legacy
corporate loan portfolios, however. Though slippages to NPAs and provisioning were high
for some banks in FY2004, as they moved to the 90-day norm for recognising and
provisioning for NPAs, the treasury gains enabled significant provisioning to be made with
the result that net NPAs for most public sector banks are now less than 3%.

Going forward, steady growth in gross domestic product should help improve the banks
asset quality and increase corporate lending. The securitization and reconstruction of
financial assets and enforcement of security interest (Sarfaesi) Act should also help banks in
limiting slippages and improving NPA recoveries.

Better Capitalization levels

Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through
public issues in recent years, thereby improving their capitalization levels. The steady
accruals to net worth and falling non-performing asset levels have resulted in an
improvement in the capitalization position of banks in recent years.

Challenges ahead

Competition from new private sector and foreign banks remains a key challenge for public
sector banks. They need to reorient their staff and effectively utilize technology platforms to
retain customers and reduce costs. They also need to fortify their credit risk management
systems to mitigate the risks arising from small-ticket lending to the retail, small and medium
enterprises, and services segments.

Consolidation and emergence of universal banking groups

The cap on foreign ownership of banks has already been raised from 49% to 74%. The
competition in the sector could get further intensified if the 10% cap on voting rights is also
relaxed. New private sector banks are expanding their geographical coverage and making
inroads into government business. The new private and foreign banks will continue to gain
market share from public sector banks because of their efficient cost structures, technological
edge, focused marketing approach and operational freedom. However, the emergence of
 newer players would be restricted if the private ownership of banks is capped at low levels.
Mergers among PSBs would create banks with even larger balance sheets and customer base.
However, the integration process in such mergers is expected to be complex and time long
drawn.

These would also be driven by GoI due to provisions of Banking Companies (Acquisition and
Transfer of Undertakings) Act 1969, and hence political scenario will impact the timing and
permutations possible. Strategic alliances between banks and other financial sector players
such as insurance companies and mutual funds are also likely as banks attempt to enhance
their product range, leverage on economies of scale and reduce costs.

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,

i. Interest and/or installment of principal remain overdue for a period of more than 180 days
 in respect of a term loan

ii. The account remains our of order for a period of more than 180 days, in respect of an
overdraft/cash credit

iii. 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 agriculture
purposes

iv. Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.

With a view to move towards international best practices, it has been decided to adopt the 90
days overdue norm for identification of NPAs, from 31st March, 2004.

Out of Order Status

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.

Guidelines for Classification of NPAs

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.
RECOGNITION OF INCOME ON NON-PERFORMING LOANS (NPLS)

Stricter regulations have been laid down by supervisory authorities in many countries with
regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest
payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful'
and 'loss'].

Any uncollected interest payments on NPLs are considered non-accrued interest. Previously
accrued, but uncollected interest is reversed out of income. Failure to do so would overstate
income. Uncollected interest is normally put in a memorandum account. NPLs are restored
on an accrual basis only after full settlement has been made on all delinquent principal and
interest. It would, therefore, be useful, if the accounts carry a footnote, explaining the
accounting policies followed with regard to recognition of income on NPLs.

NARSIMHAN COMMITTEE'S RECOMMENDATIONS

Committee on Financial System (CFS) Narsimhan committee which reported in 1991,

meanwhile major changes have taken place in the domestic, economic and institutional
science, indicating the movement towards global integration of financial services. Committee
has presented second generation reforms.

a) To strength the foundation of financial system.

b) Related to this, streamlining procedures, upgrading technology and human

resource development.

c) Structural changes in the system.

1. It is recommended that an asset be classified as doubtful if it is in the sub standard
category for 18 months in the first instance and eventually for 12 months as loss if it
has been so identified but not written off. These norms, which should be regarded as
the minimum, may be brought into force in a phased manner.
2. Corporations and FIs should avoid the practice of "ever greening" by making fresh
advances to their troubled constituents only with a view to settling interest dues and
avoiding classification of the loans in question as NPAs. The committee notes that the
 regulatory and supervisory authorities are paying particular attention to such breaches
in the adherence to the spirit of the NPA definitions and are taking appropriate
corrective action.
3. The committee believes that objective should be to reduce the average level of net
NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. These targets
cannot be achieved in the absence of measure to tackle the problem of backlong NPAs
on one time basis and the implementation of strict prudential norms and management
efficiency.
4. There is no denying the fact that any effort at financial restructuring in the form of
having off NPAs portfolio from the books of the corporation or measures to initiate
the impact of high level of NPAs must go hand with operational restructuring.
Cleaning up the balance sheets of banks would thus make sense only if simultaneous
steps are taken to prevent of limit the reemergence of new NPAs.
5. Direct credit has a proportionately higher share in NPA portfolio of corporations and
has been one of the factors in erosion in the quality of asset portfolio. There is a
continuing need of Financial Corporations to extend Credit to SSI sector, which is
important segment of national economy but on commercial considerations and on
basis of credit worthiness. Government feels reluctant to accept the recommendation
for reducing the scope of directed credit under priority sector because timy sector of
industry and small businesses have problems with regard to obtaining credit and some
remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may
continue.
6. With regard to income recognition in India, income stops occurring when
interest/installment of principal is not paid within 180 days. However, we should
move towards international Practices in this regard and introduce the norm of 90 days
in a phased manner by the 2002.
7. As an incentive to Bank is to make specific provision, the consideration be given to
making such provisions tax deductible.
8. Banks should pay greater attention to asset liability management to avoid mismatch
and to cover, among others, liquidity and interest rate risks.
9. It should be encouraged to adopt statistical risk management techniques like value at
risk in respect of balance sheet term which are susceptible to market price fluctuation,
Forex rate volatility and interest rate changes. While the RBI and IDBI may initially,
 prescribe certain normative models for market risk management, the ultimate
objective should be that of building up their models and RBI blacklisting them for
their validity on a periodical basis.
10. There is a need for a greater use of computerized system than at present.
Computerization has to be recognized as an indispensable tool for improvement in
customer service, the institution and operation of better control systems, greater
efficiency in information technology.
11. State Financial Corporations at present are over regulated and over administered.
Supervision should be based on evolving prudential norms and regulations which
should be adhered to rather than excessive control over administrative and other
aspects of organisation and functioning. Internal audit and internal inspection systems
should be strengthened.
12. The main issues with regard to operations of Banks are to ensure operational
flexibility and measure of competition and adequate internal autonomy in matters of
loan sanctioning and internal administration.
13. This calls for some re-examination and the present relevance of directed credit
programme ablest in respect of those who are able to stand on their own feet and to
whom the directed credit programmes with the element of interest concessionality that
has accompanied has become a source of economic rent. It is recommended that
directed credit sector be redefined to comprise the small and marginal farmers, the
tiny sector of industry, small business and transport operators, village and cottage
industry, rural artisans and other weaker sections. The credit target for this redefined
priority sector should hence forth be fixed at 10% of aggregate credit which would be
broadly in line with the credit flows to these sectors at present.
14. The committee believes that the balance sheets of banks and FIs should be made more
transparent and full disclosure made in Balance sheet. This is to be done in phased
manner.