Soumik Sen

12PGDM055
Section A
INTRODUCTION
Banks play a key role in the economic growth by means of the
money multiplier concept and any bottleneck in their credit policy will
definitely hamper the economy
Nonperforming assets (NPA) is a major obstacle in the efficient
functioning of the banks. Indian banks have a very high ratio of NPAs
to advances in comparison to the global benchmark.
laws framed in order to tackle the NPA crisis are SARFAESI Act, One
Time Settlement Scheme, setting up Corporate Debt Restructuring
mechanism and restructuring the sale of assets.
Moody Investors Service have changed the fundamental credit
outlook of India from Stable to Negative which reflects the poor
credit condition and a weakening asset quality of the banks
OBJECTIVES
The following objectives were prioritized:
1. To conceptualize NPA as a qualitative parameter and
study its impact on the liquidity of banks.
2. To analyze the factors responsible for high NPAs in public
sector banks (PSB).
3. To analyze the relationship with Net NPA as percentage
of Advances with some of these factors.
4. The compare the NPAs of PSBs with Private Banks and
Foreign Banks with Indian branches.
5. To provide some recommendations to reduce the NPAs
in PSBs.

CONCEPTS
NPA was introduced by RBI to reflect a bank's actual financial
health in its balance sheet and as per the recommendations
made by the Committee on Financial System (Chairman Shri
M. Narasimham)
Types of NPAs:
1. Standard Asset
2. Sub-standard asset
3. Doubtful asset
4. Loss asset
Reasons for NPAs:
1. From Investors side:
Poor management and strategies.
Improper forecasting of demands.
Prominent Bandwagon effect in sectors like Real Estate and Construction.
Poor capital structure of the company
Substantial losses for many years.
2. From the banks side:
Outdated credit and monitoring system.
Improper valuation of assets and securities before giving loans.

Delayed timely measures even after the asset gives warning
signals.
Delay in decision making and the inability to say No to loan
seekers.
Excess lending.
3. External Factors:
Demand going down suddenly.
Increase in Interest Rate
Devaluation of the currency applicable for export dependent
industries
Policy paralysis leading to more time for project clearance.
Political instability and coalition government.
Change in overall macroeconomic environment.

METHODOLOGY
1. Comparison between various PSBs.
We can clearly see that the average Gross NPAs to
Gross Advances Ratio for PSBs are 3.17% in 2012
Central Bank of India has the highest ratio
Corporation Bank has the lowest ratio of 1.26% only,
followed by Punjab & Sind Bank and Dena Bank
SBI and its associates also have a high ratio of 4.36
For SBI:

0
1
2
3
4
5
6
7
2005 2006 2007 2008 2009 2010 2011 2012 2013
Gross NPA Ratio
Net NPA Ratio
2. Return on Assets:
We can interpret that the relationship between NPA
and ROA is negative
In 2007, ROA was able to explain 63% of the change
in NPA while in 2009 it is able to explain only 29%.
Efficient management of assets can reduce the NPAs
of the banks.


0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
A
l
l
a
h
a
b
a
d

B
a
n
k
A
n
d
h
r
a

B
a
n
k
B
a
n
k

o
f

B
a
r
o
d
a
B
a
n
k

o
f

I
n
d
i
a
B
a
n
k

o
f

M
a
h
a
r
a
s
h
t
r
a
C
a
n
a
r
a

B
a
n
k
C
e
n
t
r
a
l

B
a
n
k

o
f

I
n
d
i
a
C
o
r
p
o
r
a
t
i
o
n

B
a
n
k
D
e
n
a

B
a
n
k
I
n
d
i
a
n

B
a
n
k
I
n
d
i
a
n

O
v
e
r
s
e
a
s

B
a
n
k
O
r
i
e
n
t
a
l

B
a
n
k

o
f

C
o
m
m
e
r
c
e
P
u
n
j
a
b

&

S
i
n
d


B
a
n
k
P
u
n
j
a
b

N
a
t
i
o
n
a
l

B
a
n
k
S
y
n
d
i
c
a
t
e

B
a
n
k
U
C
O

B
a
n
k
U
n
i
o
n

B
a
n
k

o
f

I
n
d
i
a
U
n
i
t
e
d

B
a
n
k

o
f

I
n
d
i
a
V
i
j
a
y
a

B
a
n
k
S
t
a
t
e

B
a
n
k

o
f

I
n
d
i
a

(
S
B
I
)
NPA 2009
ROA 2009
3. Capital Adequacy Ratio
although the relationship between NPA and CAR is
positive, but the relationship is very weak which is
evident from the very low value of R-square
Capital Adequacy Ratio does not influence NPA. Its
main objective is to hedge the banks against credit
risks.


0.00
2.00
4.00
6.00
8.00
10.00
12.00
14.00
16.00
A
l
l
a
h
a
b
a
d

B
a
n
k
A
n
d
h
r
a

B
a
n
k
B
a
n
k

o
f

B
a
r
o
d
a
B
a
n
k

o
f

I
n
d
i
a
B
a
n
k

o
f

M
a
h
a
r
a
s
h
t
r
a
C
a
n
a
r
a

B
a
n
k
C
e
n
t
r
a
l

B
a
n
k

o
f

I
n
d
i
a
C
o
r
p
o
r
a
t
i
o
n

B
a
n
k
D
e
n
a

B
a
n
k
I
n
d
i
a
n

B
a
n
k
I
n
d
i
a
n

O
v
e
r
s
e
a
s

B
a
n
k
O
r
i
e
n
t
a
l

B
a
n
k

o
f

P
u
n
j
a
b

&

S
i
n
d


B
a
n
k
P
u
n
j
a
b

N
a
t
i
o
n
a
l

B
a
n
k
S
y
n
d
i
c
a
t
e

B
a
n
k
U
C
O

B
a
n
k
U
n
i
o
n

B
a
n
k

o
f

I
n
d
i
a
U
n
i
t
e
d

B
a
n
k

o
f

I
n
d
i
a
V
i
j
a
y
a

B
a
n
k
S
t
a
t
e

B
a
n
k

o
f

I
n
d
i
a

NPA 2009
CAR 2009
4. Priority and non-priority sector NPAs
Priority sector refers to those sectors of the economy which may not get
timely and adequate credit in the absence of this special dispensation
Priority sector includes the following categories:
(i) Agriculture
(ii) Micro and Small Enterprises
(iii) Education
(iv)Housing
(v) Export Credit
lending in priority sector does not have a significant impact of high
NPAs as against non-priority sector lending

0.00
10.00
20.00
30.00
40.00
50.00
60.00
70.00
Priority NPAs
Non Priority NPA
Public Sector NPAs
4. Profit per employee
Since banking is a service sector, employee efficiency
will determine the banks efficiency.
profit per employee is not an appropriate measure to
evaluate NPAs. The value of adjusted R-square is
coming to be only 20%.
Nevertheless, we can see that the relationship is
negative from the second table. The value of coefficient
is -0.135. Hence, efficiency of the employees plays a role
in reducing NPAs, although the role is not so significant.

0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
5. Gross Domestic Product
People make more investments with high GDP growth rate. This
means that people have more money to spend and this will
improve the credit worthiness of the loan takers
The contrary logic is that with increase in investments, the chance
of default increases because many sub rated lenders will be given
loans
The GDP growth rate does not have any significance influence on
NPAs as evident from the F stat of table 2 in the report. Also, it is
able to explain only 11% of the change.
6. Interest Rate
With higher interest rates, the chance of default by the borrowers increase
leading to higher NPAs
For SBI there is not much relation between Lending rate and Gross
NPA ratio.
For some banks this relation was found to be significant
We can conclude that for managing Non Performing Assets,
the individual banks have to take a proactive role and not
depend on the economy to turnaround. The two main
macroeconomic indicators, i.e. the GDP growth rate and the
Lending Rate proved to be insignificant.
Comparison of different sectors:
A closer look at the graphs reveal that over the span of 15 years it is the
PSBs who are able to cut down their NPAs by the biggest margin.
New private sector banks like ICICI, HDFC and Axis have kept this ratio
less throughout except for the period of 2001-2003, which is still less than
PSBs and old private sector banks.
Foreign banks like Citi, JP Morgan and RBS have also kept this ratio low
throughout.
More banking reforms in the upcoming years and proper adherence to
Basel III norms will result in PSBs sufficiently reducing their NPA ratios
and performing at the similar operational level as private banks.

0
2
4
6
8
10
12
14
16
18
20
Public
Old Private
New Private
Foreign
CONCLUSION
1. Any asset does not become an NPA overnight. It gives distress
signals for some period and the banks should be quick to identify
the signals, analyze the problem and react to the situation quickly.
2. With the better management of asset quality, NPAs come down or
banks having high Return on Asset have low NPA ratio.
3. The type of lending, i.e. priority or non-priority, does not alter the
contribution of NPA. It is against many scholars who claim that
priority sector lending contributes more towards NPA.
4. Profit per employee has a negative relation with the NPA ratio, i.e.
NPA goes down with profit per employee. But then, the effect is
weak as seen from the regression.
5. PSBs have cut down their NPAs substantially over the last 15 years
and now they can compete against Private and Foreign Banks in
the coming years. This is against the populist belief that PSBs are
very poor at asset management.


RECOMMENDATIONS
1. Asset quality of banks is one of the most important indicators of their
financial health. Banks are advised that they should review their existing
IT and MIS framework and put in place a robust MIS mechanism for
early detection of signs of distress at individual account level as well as
at segment level (asset class, industry, geographic, size, etc)
2. To mandate banks to have proper system generated segmentwise data
on their NPA accounts, write-offs, compromise settlements, recovery
and restructured accounts
3. It is also recommended for the banks to carry out special investigation
audit of all the financial and business transactions and books of account
of their Retail and Corporate client
4. To continuously monitor and supervise stressful assets and to initiate
proper support to not to deteriorate further NPA trench
5. The PSBs have been able to bring down their NPAs by a decent margin
yet they are far off as regards the global standards. Adoption of
international banking norms and accounting standards are required for
these banks to compete at a global level