Executive summary of the project

After liberalization the Indian banking sector developed very appreciate. The RBI also
nationalized good amount of commercial banks proving socio economic services to the
people of the nation. The public Sector banks have shown very good performance as far
as the financial operations are concerned. If we look to the glance of the financial
operation, We may find that deposit of public to the public sector Banks have increased
from 859, 461, 95 crore to 1, 079, 393, 81 crore in 2003, the investments of the public
sector Banks have increased from 349,107.81 crore to 545,509.00 crore , and however
the advances have also been increased to 549,351.16crore from 414,989.36crore in
2003. The total income of the public sector banks has also shown good performance
since the last few years and currently it is 128,464.40crore.The public sector Banks have
also shown comparately good result. The gross profits of the public sector Banks
Currently29, 715,26crore which has been doubled to the last to last year, and the net
profit Of the public sector Banks is 12,295,47crore.However, the only problem of the
public sector Banks these days are the Increasing level of the non performing assets. The
non performing assets. The non performing assets of the public Sector banks have been
increasing regularly year by year. If we glance on the numbers of performing assets we
may come to know that in the year 1997 the NPAs were 437,300crore and reached to
80.24crore in 2002. The only problem that hampers the possible financial performance of
the public Sector Banks is the increasing results of the non performing assets. The non
performing assets impacts drastically to the working of the banks .The efficiency of a bank
is not always reflected only by the size of its Balance sheet but buy the level of return on
its assets. NPAs do not generate interest income for its Bank, but at the same time banks
are required to make provisions for such NPAs from their current profits.

NPAs have deleterious effect on the return on assets in several ways: ---

(1) They erode current profits through provisioning requirements

(2) They result in reduced interest income

(3) They require higher providing requirements affecting profits and accretion to Capital
funds recycling of funds, set in asset-liability mismatches, etc.

The RBI has also tried to develop many schemes and tools to reduce the non Performing
assets the results are not up to the expectations. To improve NPAs each bank should be
motivated to introduce their own precautionary steps. Before lending the banks must
evaluate the feasible financial and operational prospective results of the borrowing
companies by keeping in Considerations the overall impacts all the factors that influence
the business.

Introduction

Banks play a crucial role in the Indian _nancial system. More than two-thirds of household
savings
are channeled through the banking system, which also provides more than 90% of the
commercial
credit in the country. In a bank-dominated economy, sustained impairment of the banking
sector
due to balance sheet problems creates a drag on real economic activity and can take the
shape of
an economic crisis. It is imperative to expeditiously resolve a banking sector crisis so that
banks
as the primary source of credit can start functioning normally again. In India, banking
crisis is a
recurrent phenomenon.1 Since the liberalization reforms of 1991, there have been two
major banking
crisis episodes-the _rst one took place during the 1997-2002 period and the second one
started in the
aftermath of the 2008 Global Financial Crisis and is yet to be resolved.2
In this paper, we compare and contrast the causes and magnitude of the banking crisis
in both these
periods, discuss how the previous crisis got resolved and draw policy lessons for the
ongoing crisis.
Speci_cally, we compare the two crises on three dimensions: (i) the antecedents
preceding the crisis-
both macroeconomic and banking sector related, (ii) the degree and the nature of the
crises, and (iii)
the policy responses to the crises.
While some empirical work has been done to analyse the non-performing asset (NPA)
problem of the
Indian banking sector (Rajaraman et al., 1999; Rajaraman and Vasishtha, 2000; Mohan,
2003; Ranjan
and Dhal, 2003; Reddy, 2004; Das and Ghosh, 2007 among others), to the best of our
knowledge there
is no comprehensive study that explores the two major NPA episodes in post liberalization
India and
analyses them in a comparative framework. Such a comparative analysis is important
because it
helps to understand common patterns leading to recurrent bank balance sheet problems
as well as
the di_erences across the two episodes. It is possible that the solution that may have
worked last
time may not be successful in reviving the health of the banking sector during the ongoing
crisis.
The Indian economy has changed rapidly and signi_cantly since the implementation of
the liberaliza-
tion, deregulation and privatization reforms of the early 1990s. The banking sector has
also undergone
remarkable changes over the last 25 years. When comparing crises across time, the main
antecedents
that need to be considered are the changes in the overall economy as well as in the
banking sector
at the time of the crises. The economic factors that are relevant here include the growth
rate of
GDP and the evolution over time of the bank credit to GDP ratio. Also important is the
structure of banking as captured through factors such as the depth of banking penetration,
share of bank credit in
the overall capital formation, ownership structure of banks, level of capitalization, and key
aspects of
banking regulation. These antecedents help to understand the causes of the crises and
also facilitate
a comparison of crises occurring at di_erent points in time.
There are several ways to describe a banking crisis. The most common manifestations
of stress in the
banking sector are in the form of insolvency and illiquidity. In India, crises have mostly
manifested
in the form of high levels of NPAs and their impact on the capital adequacy levels of
banks. Hence,
the levels of NPAs, in absolute and in relation to the capital in the banking system,
constitute a
convenient metric to compare the degree of banking crises.3
Finally, for a comprehensive analysis of the two crisis episodes, it is important to compare
the con-
sequences of the crises, especially in terms of the policy responses undertaken. Given
that banking
is a regulated activity, it is important to assess how the regulator (in this case the Reserve
Bank
of India or RBI) responds to the crises. Resolution of a banking crisis is a collective e_ort
where
the regulator works closely with the stakeholders the shareholders, management,
customers, and
employees of the banks. Regulatory response at the onset and during the course of a
banking crisis
is a critical determinant of how e_ectively and e_ciently the crisis is resolved. In India,
given the
dominance of government owned banks (public sector banks or PSU banks), the
government as an
owner and manager of these banks becomes a key stakeholder.
In the next section we give a brief description of the banking sector and highlight some of
the problems
associated with the way banking is organized in India. In Section 3, we discuss the
macroeconomic
and banking environment preceding the two crisis episodes with the objective of throwing
light on
possible causes of the crises as well as to provide a context to the subsequent policy
responses. In
Section 4 we present some statistics to highlight the extent of the NPA problem in both
periods.
In Section 5 we analyse the policy actions adopted in response to both the crises. In
Section 6 we
summarise the lessons learnt from this discussion and also outline a few policy
recommendations to
better deal with an NPA related crisis in future. Finally in Section 7 we provide our
concluding
remarks.

NPA OF BANKS

A Non-performing asset (NPA) is defined as a credit facility in respect of which the

interest and/or installment of Bond finance principal has remained ‘past due’ for a
specified period of time. NPA is used by financial institutions that refer to loans that are
in jeopardy of default the so called [[Non-performing loanailed 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 since they depend on interest
payments for income. Troublesome pressure from the economy can lead to a sharp
increase in NPLs and often results in massive write-downs.

WHAT IS A NPA (NON PERFORMING ASSETS) ?

Action for enforcement of security interest can be initiated only if the secured asset is
classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which has been classified
by bank or financial institution as sub –standard , doubtful or loss asset, in accordance
with the direction or guidelines relating to assets classification issued by RBI .

An amount due under any credit facility is treated as “past due” when it is not been paid
within 30 days from the due date. Due to the improvement in the payment and settlement
system, recovery climate, up gradation of technology in the banking system etc, it was
decided to dispense with “past due “concept, with effect from March 31, 2001. Accordingly
as from that date, a Non performing asset shell 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 ‘out of order ‘ for a period of more than 180 days ,in respect
of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 180 days in case of bill
purchased or discounted.

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

v. Any amount to be received remains overdue for a period of more than 180 days
in respect of other accounts
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt ’90 days overdue ‘norms for identification of
NPAs ,from the year ending March 31,2004,a non performing asset shell be a loan or an
advance where;

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

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

iii. The bill remains overdue for a period of more than 90 days in case of bill purchased
or discounted.

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

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

Out of order

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

continuously in excess of sanctioned limit /drawing power. in case where the out standing
balance in the principal operating account is less than the sanctioned amount /drawing
power, but there are no credits continuously for six months as on the date of balance
sheet or credit are not enough to cover the interest debited during the same period
,these account 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 due
date fixed by the bank.

Growth of banking sector

A bank is a financial institution that provides banking and other financial services. By the
term bank is generally understood an institution that holds a Banking Licenses. Banking
licenses are granted by financial supervision authorities and provide rights to conduct the
most fundamental banking services such as accepting deposits and making loans. There
are also financial institutions that provide certain banking services without meeting the
legal definition of a bank, a so-called Non-bank. Banks are a subset of the financial
services industry.

The word bank is derived from the Italian banca, which is derived from German and
means bench. The terms bankrupt and "broke" are similarly derived from banca rotta,
which refers to an out of business bank, having its bench physically broken.
Moneylenders in Northern Italy originally did business in open areas, or big open rooms,
with each lender working from his own bench or table.
Typically, a bank generates profits from transaction fees on financial services or the
interest spread on resources it holds in trust for clients while paying them interest on the
asset. Development of banking industry in India followed below stated steps.

 Banking in India has its origin as early as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu, the
great Hindu Jurist, who has devoted a section of his work to deposits and advances and
laid down rules relating to rates of interest.
 Banking in India has an early origin where the indigenous bankers played a very
important role in lending money and financing foreign trade and commerce. During the
days of the East India Company, was the turn of the agency houses to carry on the
banking business. The General Bank of India was first Joint Stock Bank to be established
in the year 1786. The others which followed were the Bank Hindustan and the Bengal
Bank.

1. Comprises balance of expired loans, compensation and other bonds such as National
Rural Development Bonds and Capital Investment Bonds. Annuity certificates are
excluded.

2. These represent mainly non- negotiable non- interest bearing securities issued to
International Financial Institutions like International Monetary Fund, International Bank for
Reconstruction and Development and Asian Development Bank.

3. At book value.

4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits
of Non- Government

 In the post-nationalization era, no new private sector banks were allowed to be

set up. However, in 1993, in recognition of the need to introduce greater competition
which could lead to higher productivity and efficiency of the banking system,
 new private sector banks were allowed to be set up in the Indian banking system.
These new banks had to satisfy among others, the following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located in a centre
which does not have the headquarters of any other bank; and
(v) The bank will be subject to prudential norms in respect of banking
operations, accounting and other policies as laid down by the RBI. It will have to achieve
capital adequacy of eight per cent from the very beginning

The growth of the Bank over the years is given in the table below:

Structure of Indian Banking Industry

 RESERVE BANK OF INDIA

COMMERCIALBANK REGIONAL RURAL

CORPORATIVE BANK BANK
SCHEDUL
ED
URBAN/PRIMA
RURAL NON-
RY
SCHEDULED
SHORT
SHORTTERM LONG TERM
STRUCTURE SCHEDULE SBI AND
STRUCTURE ASSOCIATES

SCARDBs
NON-
SCHEDULE NATIONALIZED
STCBs BANKS

PCARDBs
PRIVATE SECTOR
CCBs BANKS

FOREIGN BANKS
PACs

The formal banking system in India comprises the Reserve Bank of India, commercial
banks, regional rural banks and the cooperative banks. In the recent past, private non-
banking finance companies also have been active in the financial system, and are being
regulated by the RBI. Today the overall Commercial banking system in india may be
distinguished into:

(1) Public Sector Banks

(2) Private Sector Banks

(3) Co-operative Sector Banks

(4) Development Banks

PUBLIC SECTOR BANKS

a. State Bank of India and its associate banks called the state Bank group.
b. 20 nationalized banks
c. Regional Rural Banks mainly sponsored by Public Banks

PRIVATE SECTOR BANKS

a. Old generation private banks

b. New generation private banks
c. Foreign banks in India
d. Scheduled Co-operative Banks
e. Non-scheduled Banks

CO-OPERATIVE SECTOR

The Co-operative banking sector has been developed in the country to the
supplement the village money lender. The co-operative banking sector in india is divided
into 4 components.

1. State Co-operative Banks

2. Central Co-operative Banks
3. Primary Agriculture Credit societies
4. Land Development Banks
5. Urban Co-operative Banks
6. Primary Agricultural Development Banks
7. Primary Land Development Banks
8. State Land Development Banks

DEVELOPMENT BANKS

1. Industrial Finance Corporation India (IFCI)

2. Industrial Development Bank of India (IDBI)
3. Industrial Credit and Investment Corporation of India (ICICI)
4. Industrial Investment Bank of India (IIBI)
5. Small Industries Development Bank of India(SIDBI)
6. SCICI Ltd.
7. National Bank for Agriculture and Rural Development(NABARD)
8. Export Import Bank of India
9. National Housing Bank
PUBLIC SECTOR BANKS

1. Allahabad Bank
2. Andhra Bank
3. Bank of Baroda
4. Bank of India
5. Bank of Maharashtra
6. Canara Bank
7. Central Bank of India
8. Corporation Bank
9. Dena Bank
10. Indian Bank
11. Indian Overseas Bank
12. Punjab National Bank
13. Punjab and Sind Bank
14. Vijaya Bank
15. United Bank of India
16. Union Bank of India
17. Syndicate Bank
18. Oriental Bank of commerce
19. Uco Bank
20. State Bank of India

Vision
To be the leading provider of financial services in India and enhance our
positioning among global banks through sustainable value creation.

Mission

To create value for our stakeholders by: being the financial services provider of first choice
for our customers by delivering high quality, world-class products and services playing a
proactive role in the full realisation of India’s potential and contributing positively in all
markets where we operate maintaining high standards of governance and ethics; and
balancing growth, profitability and risk to deliver and sustain healthy returns on capital

NON-PERFORMING ASSETS

The world is going faster in terms of services and physical products. However it has been
researched that physical products are available because of service industries. In the
nation economy also service industry plays vital role in the boosting up of the economy.
The nations like US, UK, and Japan have service industries more than 55%.The banking
sector is one of appreciated service industry. The banking sector plays large role in
channelizing money from one end to other end. It helps almost every person in utilizing
the money at their best. The banking sector accepts the deposits of the people and
provides fruitful return to people on the invested money. But for providing the better
returns plus principle amounts to the clients; it becomes important for the bank to earn
the main source of income for banks are the interest that they earn on the loans that have
been disbursed general person, businessman, or any industry for development. Thus,
we may find the input-output system in the banking sector. Banks first, accepts the
deposits from the people and secondly they lend this money to people who are in the
need of it. By the way of channelizing money from one end to another end, Banks earn
their profits.
However, Indian banking sector has recently faced the serious problem of Non performing
Assets. This problem has been emerged largely in Indian banking sector since three
decade. Due to this problem many public sector Banks have been adversely affected to
their performance and operations. In simple words Non Performing Assets problem is one
where banks are not able to recollect their landed money from the clients or clients have
been in such a condition that they are not in the position to provide the borrowed money
to the banks.
The problem of NPAs is danger to the banks because it destroys the
healthy financial conditions of the them. The trust of the people would not be any more if
the banks have the higher NPAs. So, the problem of NPAs must be tackled out in such a
way that would not destroy the operational, financial conditions and would not affect the
image of the banks, recently,RBI has taken number steps to reduce NPAS of the Indian
banks. And it is also found that the many banks have shown positive figures in reducing
NPAs as compared to the past years.

MEANING OF NPAS

An asset is classified as non –performing assets (NPAs) if the borrower does not pay
dues in the form of principle and interest for a period of 180 days. However with effect
from March 2004, default status would be given to a borrower if dues were not paid for
90 days. If any advance or credit facilities granted by bank to a borrower become non-
performing, then the bank will have to treat all the advances/credit facilities granted to
that borrower as non-performing without having any regard to the fact that there may still
exist certain advances/credit facilities having performing status.

WHAT IS NPAs (NON PERFORMING ASSETS)

Action for enforcement of security interest can be initiated only if the secured asset is
classified as Nonperforming Assets means an assets or account of borrower, which has
been classified by a bank or financial institutions as substandard doubtful or loss asset,
in accordance with the directions or guidelines relating to asset classification issued by
RBI.

 An amount due under any credit facility is treated as “past due” when it has not
been paid within 30 days from the due date. Due to the improvement in the payment and
settlement systems, recovery climate, up gradation of technology in the banking system
etc, it was decided to dispense with ‘past due’ concept, with effect from March 31, 2001.
Accordingly, as from that date, a Non performing assets(NPA) shell be an advance where
interest and/ or installment of principal remain overdue for a period of more than 180 days
in respect of a Term loan,

 The account remains ‘out of order’ for a period of more than 180 days, in respect
of an overdraft/cash credit(OD/OC) .

 The bill remains overdue for a period of more than 180 days in case of bills
purchased and discounted.

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

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

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the ’90 days overdue’ norm for identification
of NPAs, form the year ending March 31, 2004 .Accordingly, with effect form March 31,
2004, a non- performing assets(NPA) shell be a loan or advance where;

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

 The account be remains ‘out of order’ for a period of more than 90 days, in respect
of an overdraft /cash credit (OD/OC),
 The bill remains overdue for a period of more than 90 days in 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 case of an advance granted for
agricultural purpose, and
  Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

CLASSIFICATION OF LOANS

In India the bank loans are classified on the following basis.

Performing Assets:

Loans where interest and /or principle are repayable regularly as term
and conditions sanction letter.

Non- Performing Assets:

Any loan the interest and/or installment of the principle are overdue more than 90 days,
the account becomes NPA. According to the securitization and reconstruction of financial
assets and enforcement of security interest ordinance, 2002 “non- performing assets”
(NPA) means “an assets or account of a borrower, which has been classified by a bank
or financial institutions as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classifications issued by the Reserve Bank”

Internationally, income from non-performing assets is not recognized on accrual basis,

but is taken into account as income only when it is actually received. It has been
Decided to adopt similar practice in our country also. Banks have been advised that they
should not charge and take to income account the interest on all Non- performing assets.
An asset becomes non- performing for a bank when it ceases to generate income.

INCOME RECOGNITION:

S.N Nature of Basis for treating as NPA

credit facility
1 Term Loans A term loan is to be treated as NPA if interest remains past due for a
period of 4 quarters for the year ended 31-3-1993,3 quarters for the year
ended 31-3-1995 and onwards.

2 Cash Credit & A cash credit or overdraft account should be treated as NPA if the
overdrafts account remains out or order for a period of four quarters during the
years ended 31-3-1993, three quarters during the year ended 31-3-1994
and two quarters during the year ended 31-3-1995 and onwards.
 OR
There are some credits but the credits are not enough to cover the interest debited to th
period.

3 Bill purchased An account should be treated as NPA if the bill remains overdue and
and unpaid for a period of four quarters during the year ended31st March,
Discounted 1995 and onwards.

4 Other Any other credit facility should be treated as NPA if any amount to be
Accounts received in respect of that facility remains past due for a period of four
quarters during the year ended 31st March 1993. Three quarters during
the year ended 31st March 1994 and two quarters during the year ended
31st March 1995 and onwards.
 CLASSIFICATION:

S.N Category of assets Basis for Deciding the category

1 Standard Assets An asset, which does not disclose any problem and also
does not carry more than normal risk attached to the
business, it should not fail under the category o NPA.

2 Sub- standard Assets
An asset, which has been identified as NPA for a period
not exceeding two years.
In the case of term loan, if the installments of principal
are overdue for more than one year but not exceeding
two years, it is to be treated as sub-standard asset.

3 Doubtful Assets An asset, which remains NPA for more than two years.

4 Loss Assets An asset where loss has been identified by the bank or
internal/external auditors or by RBI inspection but the
amount has not been written-off, wholly or parity.

Potential NPA:- Standard assets which disclose problem/irregularities beyond 45 days

but less than 90 days.

Provisioning Requirement as per Asset classification

Banks are required to make provision against each of the NPA account. The minimum
extent of provision to be made against Sub-standard, doubtful and loss is different and
the same is indicated below:
 Classification Provision of o/s balance

Standard
Agriculture&SME accounts 0.25%
Residential housing Loan beyond RS 20 lakh 1.00%
Loan and advances to capital market, personal loan, 2.00%
credit cards, commercial rate state &NBFCS
Other
0.40%

Sub-Standard (Secured) 10%

Sub-Standard (Sanctioned originally as secured) 20%

Doubtful(Unsecured portion) 100%

Doubtful-1(Secured) 20%
Doubtful-2(Secured) 30%
Doubtful-3(Secured) 100%

Loss asset 100%

Notes on provisioning

(1) No provision should be made against non-founded exposures in case of NPA

accounts.
(2) Treatment of back –ended subsidy/ recoveries etc against NPAs held in separate
account- provision requirement would be calculated on the “outstanding ledger balance
less credit balance held in separate account.”
Implication of NPA account

(1) NO interest income on NPA accounts.

(2) Provision on gross NPA accounts
(3) If one account of the borrower is NPA, his all account would be NPA.
(4) Reputation loss to bank.

REASONS FOR NPAs IN INDIA

The following factors contribute to NPAs ---

Internal Factors

 Diversion of funds for

o Expansion/ diversification/ modernization

o Taking up new projects
o Helping /promoting associate concerns time / cost overrun during the project
implementation stage
 Business (Product, marketing, etc) failure
 Inefficiency in management
 Slackness in credit management and monitoring
 Inappropriate technology/ technical problems
 Lack of co-ordination among lenders

External factors

 Recession
 Input/ power shortage
 Price escalation
 Exchange rate fluctuations
 Accidents and natural calamities, etc\
 Changes in government policies in excise /import duties ,pollution control orders,
etc.
 Liberalization of economy /removal of restrictions/ reduction of tariffs
A large number of NPA borrowers were unable to compete in a competitive market in
which lower prices and greater choices were available to consumers. Further, borrowers
operating in specific industries have suffered due to political , fiscal and social
compulsions, compounding pressure from liberalization (e.g., sugar and fertilizer
industries) .
 Over optimistic promoters
Promoters were often optimistic in setting up large projects and in some cases were not
fully above board in their intentions. Screnning procedures did not always highlight these
issues. Often projects were set up with the expectations that part of the funding would be
arranged from the capital markets, which were booming at the time of project appraisal.
When the capital markets subsequently crashed, the requisite funds could never be
raised, promoters often lost interest and lenders were left standard with incomplete
/unavailable projects.

 Funding mismatch
There are said to be many cases where loans granted for short terms were used fund
long term transactions.

 High cost of funds

Interest rates as high as 20% were not uncommon. Coupled with falling demand,
borrowers could not continue to service high cost debt.

 Highly leveraged borrowers

Some borrowers were under capitalized and over burdened with debt to absorb the
changing economic situation in the country.

NPA MANAGEMENT

(A) Non-legal Measures:-

(1) Reminder system

(2) Seasonal/ Area based recovery drive
(3) Follow up of Potential NPA
(4) Review of NPA account
(5) Preparation of village wise /Area wise list
(6) Visit to Borrower’s business premise/Residence
(7) Allotment of NPA account to staff
(8) Recovery camps/Settlement camp
(9) Road shows
(10) Appointment of professional Recovery Agents.
(11) Rehabilitation of sick units
(12) Corporate debt Restructuring
(13) Lok adalat /lok nayalaya
(14) Circulation of list of defaulters
(15) Recalling of advances
(16) Recovery through Recovery Branches
(17) Up gradation of NPA
(18) Cash Recovery
(19) Recovery through compromise cases
(20) Revival of failed compromise cases
(21) Recovery of written-off cases
(22) Restructuring / Rescheduling
(23) Sale of financial Assets (Asset Reconstruction companies)
(24) Write-off

Legal Measures

(1) Recovery certificate (Tehsil office)

(2) Recovery through Judicial process (Filing of suit)
(3) Execution of decreed cases
(4) Debt Recovery Tribunals (DRT)
(5) Securitization and Reconstruction of Financial assets and Enforceability of security
interest Act 2002 (SARFAESI)
(6) Other legal measures
Research operation

Significance of the study

The main aim of any person is utilization money in the best manner since the India is
country were more than half of the population has problem of running the family in the
most efficient manner. However Indian people faced large number of problem till the
development of the full-fledged banking sector. The Indian banking sector came into the
developing nature mostly after the 1991 government policy. The banking sector has really
helped the Indian people to utilize the single money in the best manner as they want.
People now have started investing their money in the banks and banks also provide good
returns on the deposited amount. The people now have at the most understood that banks
provide them good security to their deposits and so excess amount are invested in the
banks. Thus, banks have helped the people you achieve their socio economic objectives.

The banks not only accept the deposits of the people but also provide them credit
Facility for their development. Indian banking sector has the nation in developing the
business and service sectors. But recently the banks are facing the problem of credit
risk.It is found that many general people and business people borrow from the banks but
due to some genuine or other reasons are not able to repay back the amount drawn to
the banks. The amount which is not given back to the banks is known as non- performing
assets which hamper the business of the banks. Due to NPAs the income of the bank is
reduced and the banks have to make large number of the provisions that would curtail
the profit of the bank and debtor that the financial performance of the banks not shows
good results.

The main aim behind making this report is to know how

public sector Banks are operating their business and how NPAs play its role to the
operations of the public sector Banks. The report NPAs are classified according to the
sector, industry, and state wise. The present study also focuses on the existing system in
India to solve the problem of NPAs and comparative analysis to understand which bank
is playing what role with concerned to NPAs.Thus, the study would help the decision
makers to understand the financial performance and growth of public sectors banks are
compared to the NPAs.
Objective of the study

Primary objective:

The primary objective of the making report is:

 To know why NPAs are great challenge to the private sector banks.
 Technical and fundamental analyses of the ICICI Bank in the parameters of NPA.

Secondary objectives:

The secondary objectives of preparing this report are:

 To understand what is Non performing Assets and what are the underlying
reasons for the emergence of the NPAs.
 To understand the impacts of NPAs on the operations of the public sector Banks.
 To know what steps are being taken by the Indian banking sector to reduce the
NPAs?
 To evaluate the comparative ratios of the public sector banks with concerned to
the NPAs.

Research methodology

The research methodology means the way in which we would complete our prospected
task. Before undertaking any task. Before undertaking any task it becomes very essential
for anyone to determine the problem of study. I have adopted the following procedure in
completing my report study.

(1) Formulating the problem

(2) Research design
(3) Determine the data sources
(4) Analyzing the data
(5) Interpretation
(6) Preparing research report

(1) Formulating the problem

I am interested in the banking sector and I want to my future in banking sector so decided
to make my research study on banking sector. I analyzed first the factors that are
important for the banking sector and I came to know that providing credit facility to the
borrower is one of the important factors as far as the banking sector is concerned. On the
basis of the analyzed factor, I felt that the important issue right now as far as the credit
facilities are provided by the bank is non performing assets. I started knowing about the
basics of the NPAs and decide to the study on the NPAs. So, I chose the topic “NON
performing Assets the great challenge before the public sector banks”.

(2) Research Design

The research design tells about the mode with which the entire project is prepared.
My research design for the study is basically analytical. Because I have utilized the large
number of data of the public sector banks.

(3) Determining the data source

The data source can be primary or secondary. The primary data are those data which are
used for the first time in the study. However such data take place much time and are also
expensive. Whereas the secondary data are those data which are already available in the
market. These data are easy to search and are not expensive too for my study I have
utilized totally the secondary data.

(4) Analyzing the data

The primary data would not be useful until and unless they are well edited and tabulated.
When the person receives the primary data many unuseful data would also be there. So,
I analyzed the data and edited them and turned them in the unuseful data would also be
there. So, I analyzed the data and edited them and turned them in the useful tabulations.
So, that can become useful in my report study.

(5) Interpretation of the data

With use of analyzed data I managed to prepare my project report. But the analyzing of
data would not help the study to reach towards its objectives.
The interpretation of the data is required so that the others can understand the crux of the
study in more simple way without any problem so I have added the chapter of analysis
That would explain others to understand my study in simple way.

(6) Project writing

This is the last step in preparing the project report. The objective of the report writing was
to report the findings of the study to the concerned authorities.

Tools and Techniques

As no study could be successfully completed without proper tools and techniques, same
with my project. For the better presentation and right explanation I used tools of statistics
and computer very frequently. And I am very thankful to all those tools for helping me a
lot. Basic tools which I used for project from statistics are-

 Bar Charts
 Pie charts
 Tables

Bar charts and pie charts are really useful tools for every research to show the result in a
well clear, ease and simple way. Because I used bar charts and pie charts in project for
showing data in a systematic way, so it need not necessary for any observer to read all
the theoretical detail, simple on seeing the charts anybody could know that what is being
said.

Applied Principles and concepts

While I started to do the project the main thing which was the matter of concern was that
around what principles I have to revolve my project. Because without having any
hypothesis and objective we cannot determine that what output or result we are expecting
from the project. And second thing is that having only tools and techniques for the purpose
of project is not relevant until unless we have the principals for which we have to use
those tools and techniques.

Mathematical Averages
Standard Deviation
Correlation

Sources of primary and Secondary data:

For the purpose of project data is very much required which works as a food for process
which will ultimately give output in the form of information. So before mentioning the
source of data for the project I would like to mention the source of data for the project I
would like to mention that what type of data I have collected for the purpose of project
and what is exactly.

1. Primary Data:

Primary data is basically the live data which I collected on field while doing
cold calls with the customers and I shown them list of question for which I had required
their responses. In some cases I got no response from their side and then on the basis
of my previous experiences I filled those fields.
Source: Main source of primary data for the project was Questionnaires which I got filled
by the customers or sometimes filled myself on the basis of discussion with the
customers.

2. Secondary Data:

Secondary data for the base of the project I collected from intranet of the Bank
and from internet, RBI Bulletin, Journal by ICFAI University.

Limitation of the study

The limitations that left in my side are:

 It was critical for me to gather the financial data of the every bank of the public
sector Banks so the better evaluations of the performance of the banks are not possible.

 Since my study is based on the secondary data, the practical operations as related
to the NPAs are adopted by the banks are not learned.

 Since the Indian banking sector is so wide so it was not possible for me to cover
all the banks of the Indian banking sector.
REVIEW OF LITERATURE

The Report of the Rural Banking Enquiry Committee (Thakurdas Committee) (1949)
Concluded that proper
investigate action was very essential. Banks have to maintain close contacts with the
borrowers, keep track of the end-use
of funds lent to the borrowers’ effective recovery of advances as per the repayment
schedule.

RBI's Study Team on Overdues (1974) Estimated that more than three-fourths of the over
dues were due to
willful default. Faulty lending policies, failure to link credit with marketing, lack of will on
the part of management to take
strong action against recalcitrant and willful defaulters, lack of financial discipline and
apathetic of some of the State
Governments towards creating an environment conducive and congenial to repayment of
dues were the causes for over
dues. According to the Report of the Agriculture Credit Review Committee (1989), over
dues prevented recycling of
funds, impaired refinance eligibility and productivity of co-operative banks. Nearly 26 per
cent of the resources deployed
by the credit agencies for the agriculture sector were locked up in over dues and were not
available for recycling. At the
institutional level, the clogging of over dues had severely impaired the eligibility of the
credit agencies, for refinance from
NABARD. As a defaulter, the borrower is cut off from any access to credit from institutions.
This affects his productive
enterprise.

Gopalakrishnan (1996), Suggested that the bad effect of Debt Relief Schemes should be
erased from the minds
of borrowers.

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A Literature Review on Non-Performing Assets of Co-Operative Banks in India

47
The Working Committee (1999) on NPAs considered write-off, compromise, one time
settlement for recovery of
NPAs. It recommended compromise model forthe rrecovery of NPAs as the most effective
mechanism. However both
write-off and compromise are steps to be taken with caution and due monitoring.

RBI study (1999) Stated that banks were required to closely monitor the operations of the
borrowal units. In
respect of accounts where the classification of asset worsens, banks were required to
take prompt steps to recover the dues
and staff accountability was required to be examined. Special emphasis was given on
monitoring of large NPA accounts,
also on reduction of NPAs, through up-gradation, recovery, and compromise settlements.

Namasivayam and Ranachandriaiah (2000), Concluded that the productive loan as a

proportion of total loan
was higher for marginal farmers among non-defaulter and control groups who were
utilizing loans predominantly for
digging and deepening wells. The crop loan tended to be more often misused than term
loans. This may be partly due to
untimely issue of loans.

S.Sambasiva Rao (2002), Suggested declaring default of bank loans as criminal offence
and punishment be
awarded along with financial recovery, authorizing seizure agencies and giving them a
legal status to recover loans.

According to Samal (2002), NPA overhang was due to defects in legal processes like
prolonged / delayed legal
system, absence of proper legal framework for non-payment of bank's dues.

Reddy, B. Rama Chandra and Reddy, S Vijayulu (2003), View that the new challenges
faced by the banks are
forcing to attempt all new things with the same old rigid structure and system. What
required is more managerial and
administrative freedom to the management with commensurate and result oriented
accountabilities. They stressed that the
banks should move towards professional banking with requisite freedom to operate freely
in the market within the
regulatory and prudential framework prescribed by the Reserve Bank of India.

Sachin Agrawal and Kavita Agrawal,(2006) Held that the proper policies adopted by the
banks regarding
disbursement of the loan, good chain of recovery, continuous and systematic way of
working has also made the NPAs to
diminishing rates”

Fulbag Singh and Balwinder Singh (2006) examined the funds management in the
Central Co-operative Banks
in Punjab. They observed that higher proportion of own funds in the working funds of the
bank and the concerned shown
by the bank in the timely recovery of loans resulted in an increased monetary boundary
of the central co-operative banks in
Punjab. They concluded that less dependence on the new outside resources helped
these banks in increasing their financial
margin.

Avinash V.Raikar (2006), Analyzed the issues, problems and prospects of co-operative
credit institutions (CCIs)
in India. He has found that the major problems of the CCIs are dual control, high overdues
and low resource base. He
concludes that the future survival of these institutions would be determined by its ability
to technologically modernize
themselves, innovation of new products and its reach among the agrarian society.

Mayilsamy,R (2007), Non-Performing Assets (NPAs) in short term co-operative credit

structure. He observed that
the banks have to evolve recovery strategies and plan for recovery management. He
concluded that if they fail to improve
the recovery, the huge burden of NPAs is really breaking the backbone of the short term
co-operative credit structure in
India.

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48

S. Pramila

Lakshmanan, C and Dharmendran, A(2007) Studied the impact of Non Performing Assets
(NPAs) on
performance variables in Chennai Central Co-operative Bank. They examined
performance variables namely, net profit,
investment, legal expenses and spread. They observed that the results of NPAs on all
the above performance variables were
negative and insignificant at 5 percent level in all the equation. They concluded that the
effective management of NPAs is
essential to strengthen the financial position of the bank.

Mandira Sarma and Rajiv Kumar (2008), Carried out primary studies on the rural short-
term co-operative
credit structure. They observed that the Non-Performing Assets (NPAs) level in the Rural
Short-term Co-operative Credit
Structure (RSTCCS) was very high compared to that in the commercial banking system
in India. They concluded that in
spite of significant development in India’s financial sector over the last decade, a large
number of poor, particularly large
and marginal communities remained “financially excluded” even today.

Kulwant Pathania and Sabina Batra (2009), the NPA management in co-operative banks.
It was observed that
the main factor responsible for NPAs was willful default i.e. able, but not willing to pay
followed by inadequacy of loans,
ineffective management and supervision, utilization of loans for unproductive purposes,
political support, redemption of
post debts, inadequate infrastructure facilities and field staff for recoveries and poor socio
economic conditions. They have
concluded that the poor recovery position of the banks concerned has adversely affected
the image of the bank among other
banks and also in the public.

Jayalakshmi.G and Sumathy.M (2009), In their study on NPAs Management in Co-

operative Banks in India
opined that a good management of NPAs requires pro-active actions to be taken by banks
at the time of taking decisions for
granting advances by making proper assessment of risk involved and strict adherence to
the prudential norms. They
concluded that following prudential norms for NPAs management is compulsory for
survival of co-operative banks along
with the confidence of the customer.

Mayilsamy,R and Revathi Bala,M (2009) in their work entitled “Management of Non
Performing Assets (NPAs)
in District Central Co-operative Banks (DCCBs) in India”, felt that the Narasimhamn
Committee Report-1998, rightly
pointed out that ‘NPAs constitute a real economic cause to the nation in that they reflected
the application of lacking capital
and credit finance to inefficient uses. They have concluded that high NPAs in the banks
have devastating efforts not only
on the banks but also on the economy as a whole.

They have suggested that the formation of the good policy will be no use unless it is
implemented in true spirit.

Pacha Malyadri, S. Sirisha (2011), observed that the banking sector in India has
responded very positively in the
field of enhancing the role of market forces regarding measures of prudential regulations
of accounting, income
recognition, provisioning and exposure, introduction of CAMELS supervisory rating
system and reduction of NPA’s and up
gradation of technology. It is suggested that government should formulate bank specific
policies and should implement
these policies through Reserve Bank of India for upliftment of Public Sector Banks. Public
sector banks should try to
upgrade technology and should formulate customer friendly policies to face competition
at national and international level.

Dr. A Ramachandran, D.Siva Shanmugam (2012), Analyzed that the urban cooperative
banks exhibited a
greater emphasis on product diversification, customer orientation thrust towards retail
banking, adoption of IT for
improved service, better MIS and management and strategic mergers and acquisition
across bank groups. The researcher

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A Literature Review on Non-Performing Assets of Co-Operative Banks in India

49

concluded that the future of urban cooperative banks is challenging because of the
competition from public sector banks
and private sector banks. Public sector banks and private sector banks are concentrating
on their major expansion activities
both vertically and horizontally. The growth of urban cooperative banks depends on
transparency in control and operation,
governance, customer-centric policies, technology-up gradation and efficiency.

Vighneswara Swamy (2013), Study has established that private banks and foreign banks
have advantages in
terms of their efficiencies in better credit management in containing the NPAs, which
indicates that bank privatization can
lead to better management of default risk. These findings infer that better credit risk
management practices need to be taken
up for bank lending. Adequate attention should be paid to those banks with low operating
efficiency and low capitalisation
as also to macroeconomic cycles that appear to be playing some role in NPA
management. The state owned banks need to
be toned up with adequate measures to sharpen their NPA management practices. These
findings assume crucial
importance in view of the significance. It is summarised that Private Banks (both Old and
New) and Foreign Banks appear
to manage their NPAs efficiently.

V. SCOPE OF THE STUDY

The present study will pave the way to the academic as well as general public about
the overall efficiency at which the PSU and private banks are serving.

This analysis will also help to understand the financial performance through NPA of
both PSU and private sector Banks.

This study will throw light on the different aspects where the State Bank of India,
Punjab National Bank and HDFC, ICICI Bank excel and how the banks will provide an
opportunity in balancing its NPA to achieve the best performance.
 STUDY ON ICICI BANK

ICICI BANK INTRODUCTION

ICICI Bank is India's largest private sector bank with total consolidated assets of Rs.
9,860.43 billion (US$ 152.0 billion) at March 31, 2017 and profit after tax of Rs. 98.01
billion (US$ 1.5 billion) for the year ended March 31, 2017. ICICI Bank currently has a
network of 4,850 Branches and 14,164 ATM's across India.

HISTORY & BACKGROUND OF ICICI BANK

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity
offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of
Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary
market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was
formed in 1955 at the initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was to create a development
financial institution for providing medium-term and long-term project financing to Indian
businesses.

In the 1990s, ICICI transformed its business from a development financial institution
offering only project finance to a diversified financial services group offering a wide variety
of products and services, both directly and through a number of subsidiaries and affiliates
like ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or
financial institution from non-Japan Asia to be listed on the NYSE.

After consideration of various corporate structuring alternatives in the context of the

emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both entities,
and would create the optimal legal structure for the ICICI group's universal banking
strategy. The merger would enhance value for ICICI shareholders through the merged
entity's access to low-cost deposits, greater opportunities for earning fee-based income
and the ability to participate in the payments system and provide transaction-banking
services. The merger would enhance value for ICICI Bank shareholders through a large
capital base and scale of operations, seamless access to ICICI's strong corporate
relationships built up over five decades, entry into new business segments, higher market
share in various business segments, particularly fee-based services, and access to the
vast talent pool of ICICI and its subsidiaries.

In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of
ICICI and two of its wholly-owned retail finance subsidiaries, ICICI Personal Financial
Services Limited and ICICI Capital Services Limited, with ICICI Bank. The merger was
approved by shareholders of ICICI and ICICI Bank in January 2002, by the High Court of
Gujarat at Ahmedabad in March 2002, and by the High Court of Judicature at Mumbai
and the Reserve Bank of India in April 2002. Consequent to the merger, the ICICI group's
financing and banking operations, both wholesale and retail, have been integrated in a
single entity.

ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and
employees.

KEY FINANCIAL INDICATORS

ICICI Group Companies
ICICI Group
http://www.icicigroupcompanies.com

ICICI Prudential Life Insurance Company

http://www.iciciprulife.com/public/default.htm

ICICI Securities
http://www.icicisecurities.com

ICICI Lombard General Insurance Company

http://www.icicilombard.com

ICICI Prudential AMC & Trust

http://www.icicipruamc.com

ICICI Venture
http://www.iciciventure.com

ICICI Direct
http://www.icicidirect.com

ICICI Foundation
http://www.icicifoundation.org

Disha Financial Counselling

http://www.icicifoundation.org

ICICI Bank also has banking subsidiaries in UK and Canada

 COMPARATIVE STUDY OF ICICI BANK

PROFILE OF BANKS

ICICI Bank: ICICI Bank is an Indian multinational banking and financial services
company established by the Industrial Credit and Investment Corporation of India
(ICICI), an Indian financial institution as a wholly owned subsidiary in 1994. The parent
company was merged with the bank in 2001. In 2000, ICICI Bank became the first
Indian bank to list on New York Stock Exchange with its 5 million American Depository
Receipts shares issue generating a demand book 13 times the offer size. In 2014, it
was the second largest bank in India in terms of assets and third in term of market
capitalization. ICICI Bank is the only Indian brand to figure in the BrandZ Top 100 Most
Valuable Global Brands Report, second year in a row in 2011.

HDFC Bank: HDFC Bank is an Indian banking and financial services company
incorporated in 1994 by Housing Development Finance Corporation (HDFC), India’s
largest housing finance company. The bank started its operations as a schedule
commercial bank in January 1995. HDFC Bank is the second largest private bank in
India as measured by assets. It is the largest bank in India by market capitalization as of
February 2016. It was ranked 69th in 2016 BrandZTM Top 100 Most Valuable Global
Brands. It has a presence in Bahrain, Hong Kong and Dubai.

Axis Bank: Axis Bank (the erstwhile UTI bank) is the third largest of the private sector
bank in India offering a comprehensive suite of financial products. The name has been
officially changed to the Axis Bank Ltd with effect from 30th July 2007. The Bank was
promoted in 1993 jointly by the Administrator of the Unit Trust of India (UTI-I), Life
Insurance Corporation of India, General Insurance Corporation, National Insurance
Company, The New India Assurance Company, The Oriental Insurance Corporation
and United India Insurance Company. Axis bank has been awarded the title of
Superbrand 2014-2015, by Superbrands. Axis Bank's equity shares are listed on the
Bombay Stock Exchange and National Stock Exchange of India. The company's global
depository receipts (GDRs) are listed on the London Stock Exchange.
 ANALYSIS OF DATA

Data has been collected from the annual reports of the respective private sector banks.
The basis studying trend of NPAs is ratio of Gross Non- Performing Assets (GNPAs) and
ratio of Net Non-Performing Assets (NNPAs).
Both are shown in terms of percentage.

Ratio of GNPAs = Gross NPAs / Gross Advance. The following table shows the year wise
Gross NPAs and ratio of Gross NPAs of the three selected banks.

Year HDFC Bank ICICI Bank AXIS Bank

GNPA GNPA% GNPA GNPA% GNPA GNPA%
2011-12 1999.39 1.02 9475.33 3.62 1806.30 0.94
2012-13 2334.64 0.97 9607.75 3.22 2393.42 1.06
2013-14 2989.28 1.00 10505.84 3.03 3146.41 1.22
2014-15 3438.38 0.90 15094.69 3.78 4110.19 1.34
2015-16 4392.83 0.94 26221.25 5.82 60.88 1.67
Average 3030.90 .97 14180.97 3.89 2303.44 1.25

From the Table 1 it is evident that the NPA problem is more acute in case of ICICI bank.
The time series data shows an increase of NPAs in respect of all the banks expect Axis
Bank in 2015-16. The GNPA of HDFC Bank is increased from Rs. 1999.39 crores to Rs.
4392.83 crores in 2015-16. On the other hand in case of ICICI Bank the GNPA is
increased from Rs. 9475.33 crores in 2011-12 to Rs. 26221.25 crores in the reference
period.. The GNPA situation in Axis Bank is Rs. 1806.30 crores in 2011-12 and increased
to Rs. 4110.19 crores in 2014-15 but in 2015-16 it reduced to Rs. 60.88 crores. The top
management of HDFC Bank has kept the ratio of NPAs under control and the average
NPAs ratio is 0.97%. The increasing trend of GNPAs ratio is somehow reduced in 2012-
13 and 2013-14 in case of ICICI Bank but from 2014-15 it is again uprising. The ratio of
NPAs of Axis Bank is ever increasing. Although the NPAs ratio is not alarming one
(average 1.25%) but management should note that it is increased year after year. The
following Figure 1 shows vividly the ratio of NPAs of HDFC Bank, ICICI Bank and Axis
Bank.
We now try to examine whether the NPAs have any significant impact on the net profit of the respective banks. The
following Table III shows the Pearson’s correlation coefficient between net profit and gross NPAs.

Table III: Correlation coefficient between Gross NPA and Net Profit (Rs. in Crores)

Year HDFC Bank ICICI Bank AXIS Bank

GNPA Net Profit GNPA Net GNPA Net Profit

Profit
2011-12 1999.39 5167.07 9475.33 6465.26 1806.30 4242.21

2012-13 2334.64 6726.28 9607.75 8325.47 2393.42 5179.43

2013-14 2989.28 8478.40 10505.84 9810.48 3146.41 6217.67

2014-15 3438.38 10215.92 15094.69 11175.35 4110.19 7357.82

2015-16 4392.83 12296.23 26221.25 9726.29 60.88 8223.66

Correlation Coefficient 0.992747 0.448265 -0.158704

From the Table III it has been seen that the Pearson’s Correlation Coefficients are
0.992747, 0.448265 and (-) 0.158704 in case of HDFC Bank, ICICI Bank and Axis Bank
respectively. The negative correlation coefficient between net profit and gross NPAs
means an increase in GNPAs will decrease net profit of the bank. It is a logical conclusion
because profitability of a bank depends upon the recovery of loans and existence of bad
loan will jeopardize it. But in case of HDFC Bank and ICICI Bank, the correlation
coefficients are positive. Does it indicate more NPAs lead to more profit? The answer is
certainly not. The magnitude of gross advance is increased year after year and so the
interest income and consequently profit of the bank also. Most of the borrower pays their
installments timely. Only a small portion failed to discharge their liability. If the NPAs were
big enough the profit will decrease. So it is seen that net profit as well as NPAs both are
increased simultaneously and a positive correlation exist between them. But it is the fact
that absence of the NPAs will boost up the profit of the banks. Besides, income from a
variety of financial services like stock broking services, investment banking, mutual funds,
life and general insurance, custodian services, issue of credit cards etc. have a positive
effect on net profit. The following Figure 3 shows the correlation coefficient between net
profit and gross NPAs. It has been seen that correlation coefficient is positive in case of
HDFC Bank and ICICI Bank whereas in case of Axis Bank it is negative.

We have an insight into the NPAs of the three leading private sector banks in India from
the above study. Complete elimination of NPAs is perhaps impossible in banking
business. The situation of HDFC Bank and Axis Bank regarding NPAs is praiseworthy but
the situation of ICICI Bank is fearful as the ratio of net NPAs is increasing by leaps and
bounds. The top management should look forward to check it. The management of NPAs
is a very challenging task. It requires Preventive measures as well as Curative measures
i.e. banks should not only take steps to reduce the present NPAs but also take precaution
to avoid future NPAs. Preventive measures include
 inculcating ethics in borrowers regarding the importance of timely repayment of credit,
adherence of proper credit appraisal techniques,
proper evaluation of projects,
timely sanction and disbursement of credit,
proper credit monitoring to restrict any misuse and diversion of fund,
assisting borrowers in developing entrepreneurial skill,
follow up of SLP (security, liquidity and profitability) principle etc..
On the other hand curative measures may be as follows:
post sanction follow up,
banning political loan waiver scheme (sometimes an impression works that credit is a
gift for political loyalty) and giving incentives for timely repayment
restructure of loan in case of reasons beyond control like natural calamities, global
recession etc.,
effective implementation of existing acts like DTR Act / SARFAESI Act etc.
(International rating agency FITCHIBCA observed that Indian legal system is sympathetic
towards the borrowers and works against the banks interest),
visit to the borrowing units with regular interval,
circulation of information of defaulters among banks,
treating willful default as criminal offence and time bound strong penal measures
against them and
above all, relationship (banker-customer) banking are some of them.
Key highlights of ICICI BANK

HIGHLIGHTS OF PERFORMANCE OF SUBSIDARIES, ASSOCIATES AND JOINT

VENTURE COMPANIES AND THEIR CONTRIBUTION TO THE OVERALL
PERFORMANCE OF THE COMPANY
The performance of subsidiaries and associates and their contribution to the overall
performance of the Bank as on March 31, 2017 has been annexed to this report as
Annexure A. A summary of key financials of the Bank’s subsidiaries is also included in
this Annual report.
The highlights of the performance of key subsidiaries are given as a part of Management’s
Discussion & Analysis under section “Consolidated financials as per Indian GAAP”.
The Bank will make available separate audited financial statements of the subsidiaries to
any Member upon request. These documents/details are available on the Bank’s website
(www.icicibank.com) and will also be available for inspection by any Member or trustee
of the holder of any debentures of the Bank at its Registered Office and Corporate Office.
As required by Accounting Standard 21 (AS 21) issued by the Institute of Chartered
Accountants of India, the Bank’s consolidated financial statements included in this Annual
Report incorporate the accounts of its subsidiaries and other consolidating entities.
SIGNIFICANT AND MATERIAL ORDERS PASSED BY THE REGULATORS OR
COURTS OR TRIBUNALS IMPACTING THE GOING CONCERN STATUS OF THE
COMPANY AND ITS FUTURE OPERATIONS
There are no significant and/or material orders passed by the Regulators or Courts or
Tribunals impacting the going concern status or future operations of the Bank.
DIRECTORS AND OTHER KEY MANAGERIAL PERSONNEL
The Board of the Bank at March 31, 2017 consisted of 13 Directors, out of which seven
are independent Directors, one is a Government Nominee Director and five are wholetime
Directors.
Changes in the composition of the Board of Directors and other Key Managerial
Personnel
The Board of Directors at their Meeting held on April 29, 2016 approved the appointment
of Vijay Chandok as a wholetime Director (designated as executive Director) for a period
of five years effective from the date of receipt of RBI approval. The Members at their
Meeting held on July 11, 2016 approved the appointment of Vijay Chandok for a period
of five years effective the date of receipt of RBI approval. RBI approved the appointment
of Vijay Chandok for a period of three years effective from July 28, 2016 upto July 27,
2019.
The Board of Directors at their Meeting held on October 14, 2016 approved the
appointment of Anup Bagchi as a wholetime Director (designated as executive Director)
for a period of five years effective from February 1, 2017 or the date of receipt of approval
from RBI, whichever is later. RBI approved the appointment of Anup Bagchi for a period
of three years effective February 1, 2017 upto January 31, 2020. The said appointment
is subject to the approval of Members. Approval of the Members is being sought for Anup
Bagchi’s appointment for five years in the Notice of the forthcoming Annual General
Meeting vide item no. 7 and 8.
Amit Agrawal, Joint Secretary, Department of Financial Services, Ministry of Finance has
been nominated by Government of India as a Director on the Board of the Bank effective
January 16, 2017 in place of Alok Tandon.
M. S. Ramachandran, independent Director ceased to be a Director on the Board of the
Bank effective close of business hours on April 24, 2017 pursuant to completion of his
maximum permissible tenure of eight years as per the provisions of the Banking
Regulation Act, 1949. The Board placed on record its appreciation of the valuable
contribution and guidance provided by Alok Tandon and M. S. Ramachandran to the
Bank.
Rajiv Sabharwal, executive Director stepped down from his position as an executive
Director effective close of business hours on January 31, 2017 consequent to his decision
to pursue other opportunities. The Board placed on record its appreciation for Rajiv
Sabharwal’s contribution to the growth of the Bank.

RISK MANAGEMENT FRAMEWORK

The Bank’s risk management framework is based on a clear understanding of various

risks, disciplined risk assessment and measurement procedures and continuous
monitoring. The policies and procedures established for this purpose are continuously
benchmarked with international best practices. The Board of Directors has oversight on
all the risks assumed by the Bank. Specific Committees have been constituted to facilitate
focused oversight of various risks, as follows:
The Risk Committee of the Board reviews risk management policies of the Bank
pertaining to credit, market, liquidity, operational, outsourcing risks and business
continuity management. The Committee also reviews the Risk Appetite & Enterprise Risk
Management frameworks, Internal Capital Adequacy Assessment Process (ICAAP) and
stress testing. The stress testing framework includes a range of Bank-specific, market
(systemic) and combined scenarios. The ICAAP exercise covers the domestic and
overseas operations of the Bank, banking subsidiaries and material non-banking
subsidiaries. The Committee reviews migration to the advanced approaches under Basel
II and implementation of Basel III, risk return profile of the Bank, and the activities of the
Asset Liability Management Committee. The Committee reviews the level and direction
of major risks pertaining to credit, market, liquidity, operational, technology, compliance,
group, management and capital at risk as part of risk dashboard. In addition, the
Committee has oversight on risks of subsidiaries covered under the Group Risk
Management Framework. The Risk Committee also reviews the Liquidity Contingency
Plan for the Bank and the various thresholds set out in the Plan.
The Credit Committee of the Board, apart from sanctioning credit proposals based on the
Bank’s credit authorisation framework, reviews developments in key industrial sectors
and the Bank’s exposure to these sectors as well as to large borrower accounts and
borrower groups. The Credit Committee also reviews the major credit portfolios, non-
performing loans, accounts under watch, overdues and incremental sanctions.
The Audit Committee of the Board provides direction to and monitors the quality of the
internal audit function and also monitors compliance with inspection and audit reports of
Reserve Bank of India, other regulators and statutory auditors.
The Asset Liability Management Committee provides guidance for management of
liquidity of the overall Bank and management of interest rate risk in the banking book
within the broad parameters laid down by the Board of Directors/ Risk Committee.

INR in Million except EPS. Figures are non consolidated.

Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17

Revenu 185,90 167,59 227,59 175,56 165,85 168,47 187,63 168,32

e 9 5 1 4 8 0 3 2

Cost of 44,774 33,731 37,369 37,777 38,674 37,944 39,088 38,144

Revenu
e

Interest 80,774 81,717 83,861 82,548 76,064 78,693 78,680 79,601

Expens
e

Net 7,019 22,324 31,023 24,418 20,246 20,490 20,582 16,502

income

EPS 1.21 3.84 5.33 4.20 3.48 3.20 3.21 2.57

NPA woes continue at ICICI bank, GNPA at 8%

Growing gross NPAs continue to hurt ICICI bank. According to the latest figures for the
Apr-Jun 2017 released yesterday, the total gross NPA stood at Rs 43,148 crore, up by
1.4% on a quarter on quarter basis.

The total Gross NPA stood at Rs 43,148 crore, up by 1.4% on a quarter on quarter basis.
Growing gross NPAs continue to hurt ICICI bank. According to the latest figures for the
Apr-Jun 2017 released yesterday, the total gross NPA stood at Rs 43,148 crore, up by
1.4% on a quarter on quarter basis. But, in terms of gross additions to the NPAs the bank
saw a major improvement, as the figure of Rs 4,976 crore is the best when compared to
the last seven quarters. An account worth Rs 2,775 crores which had previously been
categorised as NPA was upgraded to AAA category after successful sale of the
borrower’s cement business. The bank has a gross NPA ratio of nearly 8%, 3% higher
than Axis bank, revealing that the bank’s struggle against mounting NPAs is far from
over. “Net loans to companies whose facilities have been restructured were Rs 2,370
crore at June 2017, down 44.4 percent compared with Rs 4,265 crore at March 2017,”
the private sector lender said, adding there was no sale of NPAs to asset reconstruction
companies during the quarter.
In relation to the IBC (Insolvency and Bankruptcy Code), wherein the RBI had advised
banks to initiate insolvency resolution process in respect of 12 accounts and also required
banks to make higher provisions for these accounts during the year, the private sector
lender said that the bank had exposure to nine borrowers amounting to Rs 6,889 crores.
Out of the total outstanding, 97% was secured as at June 2017 as per the bank.
The bank had unreported under-reported gross non-performing assets (NPAs) in FY16
to the tune of Rs 5,104.61 crore. According to its FY17 annual report, while the bank
reported gross NPAs of Rs26,221.25 crore in FY16, the Reserve Bank of India’s (RBI)
supervision had found the gross NPAs to be at Rs 31,325.86 crore in the same period.
“The impact of changes in classification and provisioning arising out of the RBI’s
supervisory process for the year ended March 31, 2016, has been fully given effect to in
the audited financial statements for the year ended March 31, 2017,” the bank had said
in the annual report earlier.
CONCLUSIONS

Banking is the life blood of Indian economy. Banking has three types of sectors, which
provide finance to
different sectors i.e. private sector, public sector and co- operative sector. The co-
operative banking sector in India plays an
important role in expanding rural economy as well as banking structure and its services
to the last man of the society. The
co-operative banking structure has developed very fast in India but still it lags in so many
things like ideal liquidity
position due to NPA of customer as well as staff, modernization of banking structure etc.