A REPORT ON

A COMPARATIVE STUDY OF THE CREDIT DISBURSAL AND NPAS OF PUBLIC SECTOR AND PRIVATE SECTOR BANK

BY VARUN KEDIA 6ND04657

A THESIS ON A COMPARATIVE STUDY OF THE CREDIT DISBURSAL AND NPAS OF PUBLIC SECTOR AND PRIVATE SECTOR BANK

BY VARUN KEDIA 6ND04657

A THESIS SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS OF THE MBA PROGRAM (CLASS OF 2008) ICFAI NATIONAL COLLEGE

BONOFIED CERTIFICATE

This is to certify that the project titled A comparative study of the credit disbursal and NPA (non performing assets) of public sector and private sector banks is the record of work done by Varun kedia in partial fulfillment of the requirements for the degree of Masters of business administration of ICFAI National College, ICFAI University, Hyderabad.

FACULTY GUIDE

TABLE OF CONTENTS.

S.NO
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12.

PARTICULARS
Acknowledgements Declaration Objective Introduction Abstract/Summary Company profile Explanation

PAGE NO 5 6 7 9 10 11 16 25 26 28 29 30

Methodology
Findings Suggestion Conclusion Bibliography

ACKNOWLEDGEMENT.
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The satisfaction and exhilaration that accompanies the successful completion of all my tasks would be incomplete without mentioning the people who made it possible, whose constant guidance and encouragement, crowned all my efforts with success.

I am grateful to my faculty guide, for their kind co-operation and valuable advice support all along for the successful completion of this report.

I am very thankful to Faculty Members, ICFAI National College for their valuable inputs, guidance, support and cooperation all along the internship program. This project would not have been possible without his help.

Last but by no means the least I would like to convey my special thanks to center head, and all the faculty members of ICFAI College for providing me all the needed inputs and facilities for the successful completion of Thesis.

Varun kedia 6ND04657

DECLARATION.
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I Varun Kedia hereby declare that this final report, which Im submitting is a part of my management thesis II .Under the guidance of my faculty guide. In partial fulfillment of the requirements for the degree of Masters of business administration of ICFAI National College, ICFAI University, Hyderabad.

Varun Kedia 6ND04657

OBJECTIVE
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The objective behind making this report is to do a detailed examination and comparative study of non performing assets and credit disbursal of public sector and private sector banks in India.

We can see that the concept of non performing assets came into existence when few borrowers dint repay the loan amounts to the bankers and NBFIS With in 30 days of due date therefore RBI took serious measures to overcome Therefore to better understand the working of the financial assets and loan giving criteria one has to first understand the concept of NPAS. By doing this project we can understand the regulations and criteria which banks follow to know the eligibility of the person for giving credits.

1. To study the Basel norms of these non performing assets

2.

The measures taken by the banks and RBI to reduce the problems of non performing assets

3.

To study the problems faced by the public and private sector banks.

4. To examine the causes for NPAs in public sector banks.

5.

By doing a comparative study between private and public sector banks we can know the various objects related to banking sector like the interest rtes offered by banks on deposits and credits.

ABBREVITATIONS

1. NPA-NON PERFORMING ASSERTS 2. NBFI-NON BANKING PERFORMING FINANCIAL INSTITUTIONS 3. RBI-RESERVE BANK OF INDIA 4. ICICI- Industrial Credit and Investment Corporation of India 5. ADRs- American Depositary Receipts 6. NYSE-New York Stock Exchange 7. BIS-Basel International codes and Standards 8. OECD-Organization for Economic Cooperation and Development 9. IRB-Internal rating based 10. SCBs-Scheduled Commercial Banks 11. SSI-Small-scale industry 12. CRAR-Credit risk adjusted ratios 13. ARCs-asset reconstruction companies

INTRODUCTION
Credit disbursal means paying out or giving of loans or money paid out. Whenever we see a balance sheet of a bank we can find 80%of its assets with the credits given therefore to know the working of the banks we need to know the credit disbursement methods followed by banks. Meaning of NPAs An asset is classified as Non-performing Asset (NPA) if due in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facility granted by banks to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exist certain advances / credit facilities having performing status. Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that asset is idling. Viewed with this perspective, the NPA is a result of an environment that prevents it from performing up to expected levels. The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004 onwards.

ABSTRACT
A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade.

Banking sector reforms in India has progressed promptly on aspects like interest rate deregulation, reduction in statutory reserve requirements, prudential norms for interest rates, asset classification, income recognition and provisioning. But it could not match the pace with which it was expected to do. The accomplishment of these norms at the execution stages without restructuring the banking sector as such is creating havoc. This research paper deals with the problem of having non-performing assets, the reasons for mounting of nonperforming assets and the practices present in other countries for dealing with non-performing assets.

COMPANY PROFILE ICICI BANK

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ICICI Bank is India's second-largest bank with total assets of Rs. 3,446.58 billion (US$ 79 billion) at March 31, 2007 and profit after tax of Rs. 31.10 billion for fiscal 2007. ICICI Bank is the most valuable bank in India in terms of market capitalization and is ranked third amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalization*. The Bank has a network of about 950 branches and 3,300 ATMs in India and presence in 17 countries. ICICI Bank offers a wide range of banking products and financial services to corporate and retail customers through a variety of delivery channels and through its specialized subsidiaries and affiliates in the areas of investment banking, life and non-life insurance, venture capital and asset management. The Bank currently has subsidiaries in the United Kingdom, Russia and Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai International Finance Centre and representative offices in the United States, United Arab Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. Our UK subsidiary has established a branch in Belgium. ICICI Bank's equity shares are listed in India on Bombay Stock Exchange and the National Stock Exchange of India Limited and its American Depositary Receipts (ADRs) are listed on the New York Stock Exchange (NYSE).

History
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
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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 nonJapan 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 Ahmadabad 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.
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ICICI Bank has formulated a Code of Business Conduct and Ethics for its directors and employees. *Free float holding excludes all promoter holdings, strategic investments and cross holdings among public sector entities.

ANDHRA BANK Andhra Bank was founded by Dr.Bhogaraju Pattabhi Sitaramayya. The Bank was registered on 20th November 1923 and commenced business on 28th November 1923 with a paid up capital of Rs 1.00 lakh and an authorised capital of Rs 10.00 lakhs. Andhra Bank total business as on 31.03.2005 stood at Rs.45,461 Crores and the Bank is rendering services through 1,672 Business Delivery Channels, consisting of 1,168 Branches, 136 Extension Counters, 330 ATMs and 38 Satellite Branches, spread over 21 States and 2 Union Territories as at the end of March, 2005. The Bank has entered into ATM sharing arrangements with IDBI, UTI Bank, SBI, Indian Bank, HDFC Bank, thus offering over 9,000 ATMs spread across the country for use by Customers. Instant Funds Transfer Facility is provided through 566 Branches. Andhra Bank Services Andhra Bank India provides a number of good services to both domestic customers as well as NRIs. In India it supports Small Scale Industries as well as big business with its attractive and easily available loan schemes. The following are few of the services at a glance: Personal Baning

Savings account Current account Term deposits Loans

Corporate Banking

Small Scale Industries Loans against Shares and Securities

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International Business Services

Assistance to Exporters in India Assistance to Importers in India Services to International Tourists Student Services Services to Businessmen Services for Medical Treatment Abroad

NRI Services

FCNR(B) NRE ONR Loans to NRIs Transfer of funds to and out of India Travelling NRIs Currency Exchange Baggage Rules

Andhra Bank Credit Card

The first international credit card was issued to a restricted number of customers by Andhra Bank in 1987 through the Visa program, after getting special permission from the Reserve Bank of India. Andhra Bank has also launched Co-Branded card with ICFAI University. This Andhra Bank Credit Card helps the student in the following ways:

Register Online for the examinations and download the admit card immediately there by avoiding the anxiety of waiting for up linking of admit card on the website from Hyderabad. Timely payment of Annual Service charges and have uninterrupted services. Avoid going to the Bank each time to get a demand draft for making any payment to ICFAI. Avoid the bank charges for making the demand draft. Get interest free credit period of a maximum of 45 days.

Andhra Bank Loans Like all other Indian and Foreign Banks, Andhra Bank also has a package of loans to
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suit every individual in the country with a competitive interest rates. The

following are the five loans which Andhra Bank provides:

Housing Loans Educational Loans Automobile Loans Consumer Loans Contingency Loans

EXPLANATION
During pre-nationalization period and after independence, the banking sector remained in private hands Large industries who had their control in the management of the banks were utilizing major portion of financial resources of the banking system and as a result low priority was accorded to priority sectors. Government of India nationalized the banks to make them as an instrument of economic and social change and the mandate given to the banks was to expand their networks in rural areas and to give loans to priority sectors such as small
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scale industries, self-employed groups, agriculture and schemes involving women. This is evident from the fact that population per office of commercial bank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of advances of public sector banks to priority sector increased form 14.6% in 1969 to 44% of the net bank credit. The number of deposit accounts of the banking system increased from over 3 crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68 crores. A bank with an efficient credit appraisal and loan recovery system will grow stronger over the years. Such banks have good management control and also inherent strengths in terms of a highly motivated staff, good checks and balances, which are further enhanced by a regulatory and supervisory system.

Asset Classification:

The RBI has issued guidelines to banks for classification of assets into four categories. 1. Standard assets:
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These are loans which do not have any problem are less risk. 2. Substandard assets: These are assets which come under the category of NPA for a period of less then 12 months. 3. Doubtful assets: These are NPA exceeding 12 months 4. Loss assets: These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI.

BASEL NORMS
The Basel norms for capital adequacy have been drawing a lot of attention in India. The history of the Basel International codes and Standards (BIS) relating to minimum capital adequacy for banks goes back to the developed countries' initiative in 1988 to protect the Organization for Economic Cooperation and Development (OECD) banks from the financial crises common during the 1980s. According to the norm, the BIS-reporting banks were to protect the depositors' money by raising capital from the market up to at least eight per cent of the riskweighted bank assets. The assets, consisting of advances and securities, were attributed a three-tiered credit-risk ranging from zero to 100 per cent. Generally, government-held debt (securities) carried a zero risk while bank borrowings and other loans were respectively at 20 per cent and 100 per cent. With securities overpowering the global market for bank credits by the 1990s, the notion of risk was no longer confined to credit alone. Risk today includes the possibilities of capital losses due to movements in prices or interest rates or even exchange rates in the market, in addition to operational risks. To counter these potential risks from market volatility, Basel II recommends a new model of risk-weighted capital adequacy for banks, to be initiated in stages.
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Risk-content of bank assets, as recommended, is judged either by an external agency in terms of the standardized approach or by banks themselves through an internal rating based (IRB) model. The market thus aims to bring in, via the regulators, financial discipline for banks, expecting a greater degree of financial stability. The Scheduled Commercial Banks (SCBs) in the country experienced, as a direct consequence, a noticeable drop in their non-performing assets (NPAs), from 8.1 per cent to 2.9 per cent of net bank credits (NBCs) between 1997-98 and 2003-04. On retrospection, the improvement in the NPA performance of banks can be related to several developments, including a demonstrated preference on the part of the SCBs to hold the risk-free government securities far in excess of the stipulated SLRs. Holding government securities also enabled banks to avoid the capital adequacy requirements while providing opportunities for reaping trading gains with declining yields and rising prices of government bonds in a softinterest rate regime. The improved NPA of banks was also made possible by the higher provisioning in respect of NPAs as warranted by Basel I. With the switchover from the earlier 180-day to the 90-day NPA norms by the RBI in accordance with international practice, the SCBs perforce raised provisions towards NPAs by as much as 40 per cent in 2003-04. By the end of 2003-04, the cumulative provisions of the SCBs accounted for 56.6 per cent of the gross NPA. It, however, needs to be pointed out that the restructuring of the banking sector with the Basel norms has implications that go far beyond the performance criteria of banks, such as the reduced NPAs. One needs to look at the changes in the composition of bank assets, which have a strong bearing on the distribution of bank credit. While the demonstrated preference on part of the banks for government securities pre-empts the sum available for other advances, the priority sector in India still enjoys the 40 per cent mandatory minimum of net bank credit. Social commitments in terms of priorities for credit, however, have of late been grossly violated with more than two-fifths of the priority sector credit offered to cover the "others segment." This segment typically comprises small business, retail trade, small transport operators, professional and self-employed persons, housing, education loans, micro credit, housing, etc. Small loans not exceeding Rs.10 lakh for housing have seen a steep jump over the last four years. Agriculture and small-scale industry (SSI), the remaining items on priority, have received the rest.
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Judged by the relative size of the net NPAs on net advances it is not correct to say that loans to SSIs have been less credit-worthy as compared with the other priority and non-priority sector loans. Nor have loans to SSIs been less profitable in terms of yield or interest rate spreads in recent years. No amount of "rationality" on the part of the banks can explain the shrinking size of bank credit to the small sector including the SSIs, which fell from 17.3 per cent of net bank credit from PSBs in 1999-2000 to seven per cent in 200304. No sub-target has been specified for the SSIs in the priority package, a fact which turns the flow as a residual after meeting the respective sub-targets of 19 per cent for agriculture and 10 per cent for the poor. Of the sum lent to the SSIs, 40 per cent is earmarked as advances to the `tiny' units (defined as those with investments less than Rs.50 lakh), at interest rates that cannot exceed the PLR. However, the interest rates on all other SSI units as well as those on "other loans" in the priority category have been liberalized since 1992. It is today openly admitted by bankers that banks lend short to small and medium enterprises at a higher interest rate and that they are also heavily collaterised. According to the Third Census of Small industries, held recently, shortage of working capital remains a major factor behind sickness in the SSI sector. Much of the so-called risk-aversion of banks with regard to loans to the small and medium industries have their origin in the quick adoption of the Baselapproved credit risk adjusted ratios (CRAR) for capital. Implementing Basel II will further accentuate the ongoing trend by moving credit away from the deserving industrial units in the small sector. Let us not forget the basic fact that employment generated by the organized sector of the manufacturing industry is only 14 per cent compared with 86 per cent by the unorganized sector of which small and medium enterprises remain the major component. Labour intensity of output for major undertakings in the organized big industries are alarmingly in the downtrend, both with technological upgrading and the adoption of labour market flexibility. Moreover, small and medium enterprises, which include the SSIs, currently contribute 40 per cent of the total industrial production and over 34 per cent of national exports for the country. One observes, with serious concern, the limitations of the guiding principle of the Basel norms for banking industry in a country like India where credit needs to be re-directed to units which deserve, not only in terms of productive contribution but also in terms of social priorities.
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With financial assets held in stock markets more lucrative compared to assets with productive capacity, policymakers today need to offer and administer wiser counsel to the profit-hungry corporate in the banking sector. Comparision and analysis The asset quality of banks has improved further last year and is reflected in the decline in their gross and net non-performing assets (NPA). An survey of 77 commercial banks finds that their aggregate gross NPA has declined by 1.2% in 2006-07 over 2005-06 . The gross NPA as percentage of loans and advances has declined from 3.35% in 2005-06 to 2.52% last year. Incidentally, the ratio of gross NPA to loans and advances was 4.91% two years ago. According to the Reserve Bank of India, although the chances as well as the extent of recovery of NPAs reduce overtime, the measures taken in recent years have helped the banks immensely to expedite recovery of NPAs. The strengthening of the various channels of NPA recovery such as debt recovery tribunals, Lok Adalats and corporate debt restructuring mechanism and the Securitization and Reconstruction of Financial Assets and Enforcement of Security Act have helped the commercial banks to bring down the amount of NPA substantially over the past years. Banks capital raising efforts too had kept pace with the asset growth and risk profile of new assets. The capital to risk-weighted asset ratio of commercial banks, a measure of the capacity of the banking system to absorb losses, as a result was estimated at 12.3% at the end of March 2007 same as at the end of March 2006. But although the commercial banks in general have succeeded in reducing NPAs, or loans defaulted by borrowers, the private sector banks, the new generation private sector banks, especially, have witnessed an increase in 200607. The gross NPAs of 26 private sector banks have increased 18.8% from Rs 7,791 crore in 2005-06 to Rs 9,255 crore last year. The gross NPA of ICICI Bank alone has increased by about Rs 1,900 crore in 2006-07. The gross NPA of Kotak Mahindra Bank has increased by Rs 240 crore and of HDFC Bank by Rs 148 crore during this period. There are, of course, good doers too. A number of private sector banks including, Development Credit Bank, Federal Bank, ING Vysya Bank and Catholic Syrian Bank have succeeded in reducing their NPAs in 2006-07 over the previous year.
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Despite the rise in actual NPAs, the private sector banks have, however, managed to bring down the ratio of gross NPAs to loans and advances from 2.45% in 2005-06 to 2.2% last year. This was largely because of higher rate of rise in loans and advances of the private sector banks. Surprisingly, despite an overall decline in gross NPAs of the banking sector, the foreign banks too have witnessed a rise in NPAs in 2006-07. The aggregate gross NPAs of 23 foreign banks in the list have increased 17.4% in 2006-07 over 2005-06. But then like the private sector banks they too have witnessed a reduction in the ratio of gross NPAs to loans and advances backed by a relatively higher rate of rise in loans and advances. The ratio has fallen from 2.08% in 2005-06 to 1.89% last year. The biggest beneficiaries of the NPA reduction, however, were the nationalized banks. The gross NPAs of 20 nationalized banks have declined by 8.8% in 2006-07 over 2005-06. The ratio of NPAs to loans and advances has declined from 3.81% to 2.69% during this period. At the individual level, 14 of them have witnessed a decline in NPAs last year. Of course, even after this fall the nationalized banks account for more than half of the gross NPAs of the banking sector. PUBLIC sector banks prefer to pursue recoveries of non-performing assets (NPAs) and retain transfer to asset reconstruction companies (ARCs) as the last option. Bankers said that the reluctance to transfer NPAs was on account of improved recoveries last year, buoyed by the amended Securitization Act. This year, each bank is expecting to recover at least Rs 500 crore. Some bankers said that during the first quarter of the current fiscal, they had made cash recoveries of over Rs 100 crore. The recoveries would allow them to push up bottom line and improve capital because the interest and penal recoveries are credited to the profit-loss account and treated as extraordinary income. Principal recoveries are credited to capital reserves. One of the major factors in the way of NPA transfers to ARCs such as Asset Reconstruction Company of India Ltd is the high level of discounting to face value.
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Bankers said that ARCIL's discounting rates are on the higher side. In some cases, bankers have had to part with NPAs at discounting rates of 50 per cent, which means that they would be recovering only 50 per cent of their principal. Another factor preventing bankers from passing NPAs to ARCs is the fact that they would have to make large provisioning in the balance sheets, if the assets are liquidated at very high discounts. Moreover, bankers said the ARCs preferred to cherry-pick the NPAs. "If the bad loans are to remain with us, it is better for us to pursue recoveries." According to them, only those loans that are written off are being offered to ARCs so as to realize a notional value. None of the banks is prepared to pass on substandard or doubtful assets. In both these categories, banks prefer to pursue rehabilitation measures, including rescheduling or restructuring efforts to convert them eventually to standard assets. But with some private sector and foreign banks coming into the market for buyout of the distressed assets, pricing would eventually improve. Kotak Bank is already in the market for distressed assets at highly competitive discounting rates. However, bankers said what could really change the situation and shrink the discounting rates even further is the entry of specialized foreign funds. (Currently, foreign funds are not allowed to enter the sector.) Some private sector banks are attempting to impress on the Government to relax the regulations and amend the Securitization Act to allow foreign funds to enter the sector. Permitting foreign funds into the sector would make the discounting more realistic and make it more attractive for bankers to pass on NPAs to ARCs, bankers said.

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O EN G G S N A P IN RO S P TO L RED CTIO TA U N RECO ERY V U G D TIO P RA A N W RITE-O FF S P G LIP A ES N RED CTIO ET U N CLO IN G S N A S G RO S P TO L N TA ETTA LE CRED B ITS N A P V IO P RO IS N O ER CRED TH IT N NA ET P G S N A RA RO S P TIO ( ) % N N A RA ET P TIO ( ) % P V IO CO ERA E RA RO IS N V G TIO ( ) %

F.Y A 05 .M R. 3734 1335 804 202 329 757 578 3156 1602 1415 187 1554 5.53 2.80 50.76

( m u in Rs cro ) A o nt . re F.Y A 06 .M R. F.Y.M R. 0 A 7 3156 2 479 1386 72 1 14 2 52 3 70 9 67 7 2479 1510 1332 17 8 97 0 3 2 .7 1 9 .4 60.89 1 326 752 132 441 947 379 2 100 1 468 1 354 114 632 2.42 0.74 69.9 1

(RS. C R.) 3156 2479 1554 970 632 2100

M AR. 05 G SS N RO PA

M AR. 06

M AR. 07 N TN E PA

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(% )
5 .5 3 3 .7 2 2 .8 0 1 .4 9 0 .7 4 2 .4 2

M AR. 05

M AR. 06

M AR. 07

N ET N P A %

GROSS NPA %

METHODOLOGY
There are two different methods of data collection. Primary sources Secondary sources The source of primary data was I had a conversation with the senior motivator of an insurance company who earlier worked in a bank. The secondary sources were through magazines, browsing internet and news papers

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FINDINGS
Causes for Non Performing Assets A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. The Indian banking system, which was operating in a closed economy, now faces the challenges of an open economy. 1. On one hand a protected environment ensured that banks never needed to develop sophisticated treasury operations and Asset Liability Management skills. 2. On the other hand a combination of directed lending and social banking relegated profitability and competitiveness to the background. The net result was unsustainable NPAs and consequently a higher effective cost of banking services. 3. One of the main causes of NPAs into banking sector is the directed loans system under which commercial banks are required a prescribed percentage of their credit (40%) to priority sectors. As of today nearly 7 percent of Gross
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NPAs are locked up in 'hard-core' doubtful and loss assets, accumulated over the years. The problem India Faces is not lack of strict prudential norms but i. The legal impediments and time consuming nature of asset disposal proposal. ii. Postponement of problem in order to show higher earnings. iii. Manipulation of debtors using political influence.

DIFFICULTIES WITH THE NON-PERFORMING ASSETS: 1. Owners do not receive a market return on their capital. In the worst case, if the bank fails, owners lose their assets. In modern times, this may affect a broad pool of shareholders. 2. Depositors do not receive a market return on savings. In the worst case if the bank fails, depositors lose their assets or uninsured balance. Banks also redistribute losses to other borrowers by charging higher interest rates. Lower deposit rates and higher lending rates repress savings and financial markets, which hampers economic growth. 3. Non performing loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital and, by extension, labour and natural resources. The economy performs below its production potential. 4. Non performing loans may spill over the banking system and contract the money stock, which may lead to economic contraction. This spillover effect can channelize through illiquidity or bank insolvency; (a) when many borrowers fail to pay interest, banks may experience liquidity shortages. These shortages can jam payments across the country, (b) illiquidity constraints bank in paying depositors e.g. cashing their paychecks. Banking panic follows. A run on banks by depositors as part of the national money stock become inoperative. The money stock contracts and economic contraction follows (c) undercapitalized banks exceeds the banks capital base.

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Lending by banks has been highly politicized. It is common knowledge that loans are given to various industrial houses not on commercial considerations and viability of project but on political considerations; some politician would ask the bank to extend the loan to a particular corporate and the bank would oblige. In normal circumstances banks, before extending any loan, would make a thorough study of the actual need of the party concerned, the prospects of the business in which it is engaged, its track record, the quality of management and so on. Since this is not looked into, many of the loans become NPAs. The loans for the weaker sections of the society and the waiving of the loans to farmers are another dimension of the politicization of bank lending. Most of the depositors money has been frittered away by the banks at the instance of politicians, while the same depositors are being made to pay through taxes to cover the losses of the bank. Comparative Study with Other Countries.

SUGGESTION
It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard.

A bank purchasing/selling NPA should ensure that the purchase or sale is conducted in accordance with the policy approved by the rules of the RBI.

Try to reduce fresh NPA generation.

Sanctioning of huge amount of loans to small units should be avoided

The Basel norms should always be followed.

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CONCLUSION
A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Over the years, much has been talked about NPAs and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them. There is also a general perception that the prescription of 40% of net bank credit to priority sectors have led to higher NPAs, due to credit to these sectors becoming sticky. Managers of rural and semi-urban branches generally sanction these loans. In the changed context of new prudential norms and emphasis on quality lending and profitability, managers should make it amply clear to potential borrowers that banks resources are scarce and these are meant to finance viable ventures so that these are repaid on time and relevant to other
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needy borrowers for improving the economic lot of maximum number of households. Hence, selection of right borrowers, viable economic activity, adequate finance and timely disbursement, correct end use of funds and timely recovery of loans Are absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs?

Non-Performing Assets may not turn banks into Non-Performing Banks; instead steps should be taken to covert Non-Performing Assets into Now-Performing Assets.

BIBLIOGRAPHY

Www.Knowledgestrom.Com

Www.Marketresearch.Com Www.Moneycontrol.Com

Mr. Narender kumar(Sr.motivator {sahara} ).

www.answers.com
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www.banknetindia.com www.icfaipress.org

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