MANAGEMENT OF NON- PERFORMING ASSETS

Presented By:
GURWINDER SINGH MBA-2nd YEAR ROLL NO.6391

Introduction of SBOP
An Associate Bank of the State Bank of India, State Bank of Patiala (SBP) was established in 1917 by Late Bhupinder Singh, the Maharaja of Patiala. SBP started its operations from one branch called Chowk Fort ,in Patiala. During the time of the establishment, the state owned Bank was known as Patiala State Bank. Patiala State Bank was renamed State Bank of Patiala on 1 April 1960, when it became a wholly owned undertaking of the Government of Punjab. There are as many as 1010 branches of SBP, spread across the major cities of India.

VISION AND MISSION

Vision To be a progressive Bank with customer centric philosophy blending modernity with tradition. Mission To continue our tradition of customers-focused approach for high growth and profitability , and be the most preferred bank in our core area of operation meeting the expectations of all stakeholders as a responsible corporate citizens.

SWOT ANALYSIS
Lets analyze SWOT in order to know as to where the company stands

STRENGTH
Wide network Large number of customers Fast adaptability to technology Brand image

WEAKNESS
Casual behavior Corruption and red tapism Slow decision making due to large hierarchy

OPPORTUNITIES

Home to home banking services Diversification towards other fields Globalization

THREATS
Stiff competition from other private players.

MEANING OF NON PERFORMING ASSETS (NPA)

Non-performing assets, also called nonperforming loans, are loans, made by a bank or finance company, on which repayments or interest payments are not being made on time. An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the bank. Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

DEFINITION OF NPAS
A NPA is a loan or an advance where;
Interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, The account remains out of order in respect of an overdraft/ cash credit The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted The installment or interest remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops

CLASSIFICATION OF ASSETS
ASSETS

PERFORMING ASSETS OR STANDARD ASSETS

NON-PERFORMING ASSETS

SUB-STANDARD ASSETS

DOUBTFUL ASSETS

LOSS ASSETS

Performing Asset
An account (loan or investment) is classified as Performing Asset if it does not disclose any problems and carry normal risk attached to the business .

All loan facilities which are regular !

CLASSIFICATION OF NON- PERFORMING ASSETS

Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the reasonability of the dues: Sub-standard Assets Doubtful Assets Loss Assets.

CATEGORIES OF NPA
Substandard Assets Which has remained NPA for a period less than or equal to 12 months. Doubtful Assets Which has remained in the substandard category for a period of 12 months (mainly up to 3 years). Loss Assets where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.
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PROVISIONING NORMS
Standard Assets general provision of a minimum of 0.25% Substandard Assets 10% on total outstanding balance, 10 % on unsecured exposures identified as sub-standard. Doubtful Assets 100% to the extent advance not covered by realizable value of security. In case of secured portion, provision may be made in the range of 20% to 100% depending on the period of asset remaining sub-standard Loss Assets 100% of the outstanding

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TYPES OF NPA
1.Gross NPA. 2.Net NPA

Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the nonstandard assets like as substandard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs / Gross Advances

 Net NPA:Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following:

Net NPAs = Gross NPAs - Provisions / Gross Advances - Provisions

REASONS FOR NPA IN INDIA

The banking sector has been facing serious problem of rising NPAs. But the problem of NPAs is more in public sector bank when compare to private banks and foreign banks. The NPAs is growing in public sector bank due to external as well as internal factors:

External Factors:
Ineffective recovery tribunal Willful defaults Natural Calamities Industrial Sickness Lack of demand Change on government policies

Internal Factors:
Defective leading process a. Capacity to pay b. Willingness to pay Inappropriate technology: Improper swot analysis Poor credit appraisal system Managerial deficiencies Absence of regular industrial visit: Re loaning Process

EFFECTS OF NPA ON BANKS

Effects on profitability: Effects on Return on Assets (ROA) : Effect on Net worth: Effect on Capital Adequacy Ratio: Effects on Autonomy: Effects on Rating: Effects on productivity: Effects on business mobilization: Effect on Recycling of funds: Effects on the image of the bank: Effect on interest Rate:

EARLIER SYMPTOMS
By which one can recognize a performing asset turning in to non-performing asset Four categories of early symptoms:-

1)Financial:
Non-payment of the very first installment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts. Irregularity in installment. Irregularity of operations in the accounts. Unpaid overdue bills. Declining Current Ratio. Payment which does not cover the interest and principal amount of that installment. While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.

2)Operational and Physical:

If information is received that the borrower has either initiated the process of winding up or are not doing the business. Overdue receivables. Stock statement not submitted on time. External non-controllable factor like natural calamities in the city where borrower conduct his business. Frequent changes in plan. Nonpayment of wages.

3) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank. Problem between partners.

4) Others:
Changes in Government policies. Death of borrower. Competition in the market.

OBJECTIVES OF STUDY
To understand what is NPA. To understand what are the underlying reasons for the emergence of the NPAs. To understand the dimensions of nonperforming assets of bank. To study the position of Non-performing Assets in State Bank of Patiala. To study the procedure and tools used for management of NPSs. To evaluate the ratio of the Bank with concerned to the NPSs.

TOOLS FOR RECOVERING NPA

1. Compromise settlement schemes:
The RBI/Government of India have been constantly guarding the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. The scheme was operative up to September 3, 2000. Public sector banks recovered Rs. 668 crore through compromise settlement under this scheme. Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and less as on 31 March 1997. The above guidelines which were valid up to June 30, 2001helped the public sector banks to recover Rs. 2600 crore by September 2001.

2. Lok Adalats:
The institution of Lok adalat constituted under the Legal Services Authorities Act, 1987 helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counseling between the parties and to reduce burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million can be brought before the Lok adalat and every award of the Lok adalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any court against the award made by the Lok adalat. Several people of particular localities various social organizations are approaching Lokadalats which are generally presided over by two or three senior persons including retired senior civil servants, defense personnel and judicial officers.

3. Debt Recovery Tribunals:

DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain cases referred to them, by the banks and FIs for recovery of debts due to the same. The order passed by a DRT is appealable to the Appellate Tribunal but no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the amount due from him as determined by it. However, the Affiliate Tribunal may, for reasons to be received in writing, waive or reduce the amount of such deposit. Advances of Rs. 1 million and above can be settled through DRT process. An important power conferred on the Tribunal is that of making an interim order (whether by way of injunction or stay) against the defendant to debar him from transferring, alienating or otherwise dealing with or disposing of any property and the assets belonging to him within prior permission of the Tribunal. This order can be passed even while the claim is pending. DRTs are criticized in respect of recovery made considering the size of NPAs in the Country. In general, it is observed that the defendants approach the High Country challenging the verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the Act is often challenged in the court which hinders the progress of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of infrastructure.
Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the banks and financial institutions. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs.

4. Corporate Debt Restructuring (CDR):

5. Credit Information Bureau:

Institutionalization of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system. The main recommendations of the Group include dissemination of information relating to suit-filed accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure.

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

7. Sale of assets to reconstruction companies:

With a view to develop a healthy secondary market for NPAs and to further increase the options available to banks, RBI has issued guidelines for purchase/sale of NPAs (including Non-performing investments) on cash basis, to SCs/ARCs/Banks/Fls/NBFCs. A financial asset, including assets under multiple/consortium banking arrangements, would be eligible for sale, if it has remained an NPA/Nonperforming investment in the books of the bank for at least 2 years. . The option of restructuring by the bank has been ruled out. There is no prohibition against assignment of the loan, in the loan documents. The loan should be fully disbursed without any outstanding commitment on part of the Bank. In case of working capital, the loan should be due and payable. In case of contingent liability, the same may also be sold on crystallization. Homogenous pool within Retail Non Performing Financial Assets on a portfolio basis provided each of Non Performing Financial Assets of the pool has remained as Non Performing for at least 2 years in the books of the bank.

ANALYSIS AND INTERPRETATION OF DATA: Year wise NPA at State Bank of Patiala. Year 2008 2009
Details Amount (Rs. In Crores) % of Total

Standard Assets

43401.1

98.69

Substandard Assets

264.62

0.60

Doubtful Assets

272.58

0.62

Loss Assets

36.70

0.08

Total

43975

100

Year wise NPA at State Bank of Patiala. Year 2008 2009

Year wise NPA at State Bank of Patiala. Year 2009 2010

Details Standard Assets Amount (Rs. in Crores) 46056.39 % of Total 97.86

Sub-Standard Assets

603.06

1.28

Doubtul Assets

331.76

0.70

Loss Assets

71.79

0.15

Total

47063

100

Year wise NPA at State Bank of Patiala. Year 2009 2010

Year wise NPA at State Bank of Patiala. Year 2010 2011

Details Amount ( Rs. in Crores) % of Total

Standard Assets

50971.32

97.36

Sub-Standard Assets

602.02

1.14

Doubtful Assets

546.2

1.043

Loss Assets

233.46

0.44

Total

52353

100

Year wise NPA at State Bank of Patiala. Year 2010 2011

Gross NPA in State Bank Of Patiala

Years Gross NPA (Rs. In Crores) 2007-2008 520.94 2008-2009 573.90 2009-2010 1006.61 2010-2011 1381.68 2011-2012 1888

2000

1800
1600 1400 Rs. in crores 1200 1000

800
600 400 200 0 2007-2008 2008-2009 2009-2010 Year 2010-2011 2011-2012

Series1

Interpretation: The above graph shows that gross NPA of State Bank of Patiala was Rs.520.94 Crores in year 2007-2008. Then it again increased to Rs. 573.9 Crores. In 2009-2010 gross NPA increased by Rs. 432.71 Crores and reached at Rs. 1006.61 Crores. In 2010-2011 Gross NPA again increased to 1381.68 Crores . In 2011-2012 gross NPA increased by 506.32 and reached at Rs.1888 Crores.

Net NPA in State Bank Of Patiala

Year Net NPA (Rs. in Crores) 2007-2008 216.99 2008-2009 263.63 2009-2010 482.72 2010-2011 620.77 2011-2012 848

900 800 700 600 Rs. in crores 500 400 300 200 100 0 2007-2008 2008-2009 2009-2010 Year 2010-2011 2011-2012 Series1

Interpretation: The above graph shows that Net NPA of State Bank of Patiala decreased by Rs. 21.42 Crores in year 20072008. It again increased in 2008-2009 to 2010-2011. In year 2010-2011 Net NPA of bank is Rs. 620.77 Crores. In 2011-2012 Net NPA Rs. 848 Crores .

GROSS NPA RATIO IN SBOP

Year Gross NPA 2007-2008 1.42 2008-2009 1.31 2009-2010 2.14 2010-2011 2.64 2011-2012 2.94

ratio (%)

NET NPA
1.6 1.4 1.2 1 in % 0.8

0.6
0.4 0.2 0 2007-2008 2008-2009 2009-2010 Years 2010-2011 2011-2012

Series1

Interpretation: Gross NPA Ratio shows the banks credit appraisal policy. High Gross NPA ratio means bank have liberal appraisal policy and vice-versa. In State Bank of Patiala this ratio is 1.31 % in year 2007-2008 and it has been increased from year 2007-2008 to 2010-2011 from 1.42 % to 2.64 %.But it again increased in year 2009-2010 & 2011-2012 and reached at 2.94 %.

NET NPA RATIO IN SBOP

Year Net NPA ratio (%) 2007-2008 0.60 2008-2009 0.60 2009-2010 2010-2011 1.04 1.21 2011-2012 1.35

NET NPA
1.6 1.4 1.2 1 in % 0.8 0.6 0.4 0.2 0 2007-2008 2008-2009 2009-2010 Years 2010-2011 2011-2012 Series1

Interpretation: The Net NPA Ratio shows the degree of risk in portfolio of bank. High Net NPA ratio means banks dont have enough funds to do provision against the Gross NPA. In State Bank of Patiala this Ratio is 0.60% in year 20072008 and it increased from year 2007-2008 to 20102011 from 0.60% to1.21 % and again increased from year 2010-2011 to 2011-2012 from 1.21% to 1.35 % .

CONCLUSION
Many banks are facing the problem of non performing assets which hamper the business of the banks. Due to NPAs the income of the banks is reduced and the banks have to make the large number of provisions that would curtail their profit. And due to this the financial performance of the banks would not show good results. So, the problem of NPAs must be tackled in such a manner that does not destroy the operational, financial conditions and also not affect the image of the banks. Recently, RBI has taken a number steps to reduce NPAs of the Indian banks. And it has also found out that many banks have shown positive figures in reducing NPAs as compared to the past years. SBOP has also followed the above said recovery policies effectively and has reduced its NPA to minimum.

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