I. Introduction
The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans. The reason being mounting non-performing assets (NPAs). An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests can be booked only when it has been actually received. Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and loss account, but their carrying cost is also increased which results in excess & avoidable management attention. Apart from this, a high level of NPA also puts strain on a banks net worth because banks are under pressure to maintain a desired level of Capital Adequacy and in the absence of comfortable profit level, banks eventually look towards their internal financial strength to fulfill the norms thereby slowly eroding the net worth.


Literature Review
When a borrower, who is under a liability to pay to secured creditors, makes any default in repayment of secured debt or any installment thereof, the account of borrower is classified as nonperforming assets (NPA) .NPAs cannot be used for any productive purposes because they reflect the application of scarce capital and credit funds. Continued growth in NPA threatens the repayment capacity of the banks and erodes the confidence reposed by them in the banks. In fact high level of NPAs has an adverse impact on the financial strength of the banks who in the present era of globalization, are required to conform to stringent International Standards. “Non Performing Asset” means an asset or account of a borrower, which has been classified by bank or financial institution as substandard, doubtful or loan asset. After nationalization and globalization the initial directive that banks were given was to expand N.R. INSTITUTE OF BUSINESS MANAGEMENT

their branch network, increase the saving rate and extent credits to rural, urban and the most important SSI sectors. No doubt this mandate has been achieved admirably under the regulation of economic reforms initiated in 1991 by the then Finance Minister and present Prime minister Dr. Manmohan Singh. No doubt it would have been incomplete without the overhaul of Indian Banking System. Then all of a sudden focus shifted towards improving quality of assets and better risk management. The Narasimhan committee reports (First report) recommendations are the basis for initiation of the process, which is still continuing. The committee has recommended the enactment of a new legislation for securitization and empowering banks and financial institution to take possession of the securities and do sell them without the intervention of the court. The Narasimham Committee Report is without doubt a major path- breaking piece of work and deserves the support of all who yearn for a more rational and effective banking system in this country. In order to have the proper understanding of NPA menace, it is important to have a brief idea of growth and structural changes that have taken place in the banking sector. The growth of the banking system can be assessed in five phases:- 1) Preliminary Phase(series of birth and death of banks) 2) Business Phase(period between 1949- 19 69) 3) Branching Out Phase(period when commercial banks got nationalized) 4) Consolidated phase(weaknesses and defects were identified) 5) Reforms and Strengthening Phase(1991 to till date) Indian Banking Industry Saddled with High NPAs: Reasons The liberalization policies launched in 1991 opened the doors to the entrepreneurs to setup industries and business, which are largely financed by loans from the Indian banking systems. Business firms and companies fail to pay the principal amount as well as the interest amount (Bad Loan) . In the global economy prevailing today, the vulnerability of Indian businesses has increased. A culture change is crept in where repayment of bank loans is no longer assured. A constant follow up action and vigil are to be exercised by the operating staff. Diversion of funds and willful default has become more common. As per a study published in the RBI bulletin in July 1999, diversion of funds and willful default are found to be the major contributing factors for NPAs in public and private sector banks. Today, the situation looks optimistic with the industry succeeding in overcoming the hurdles faced earlier. The timely restructuring and rehabilitation measures have helped to overcome setbacks and hiccups without seriously jeopardizing their future. The greater transparency and stricter corporate governance methods have significantly raise N.R. INSTITUTE OF BUSINESS MANAGEMENT

the credibility of the corporate sector. The attrition rate in corporate sector has come down. The challenges before the banks in India today are the raising NPAs in the retail sector, propelled by high consumerism and lowering of moral standards. Other Factors: The problem that India faces is not lack of prudential norms but the legal impediments and time consuming nature of asset disposal process , „postponement‟ of the problem in order to report high earnings and to some extent manipulation of by the debtor using political influence. Most of the banks in India are into this malpractices and fraudulent acts. In the process of earning high returns on their investment by the above stated method, the banks become bankrupt or penniless. A vicious effect of the slow legal process is that banks are shying away from risks by investing a greater than required proportion of their assets in the form of sovereign debt paper. The worst part is that the NPA of a private enterprise is both financially and politically undesirable. Earlier bankruptcy Law favored borrowers and law courts were not reliable vehicles. But the circumstances have changed. Laws were passed allowing the creation of asset management companies, foreign equity participation in securitisation and asset backed securitization. Impact of NPAs on Banking Operations: The efficiency of a bank is not reflected only by the size of its balance sheet but also the level of return on its assets. The NPAs do not generate interest income for banks but at the same time banks are required to provide provisions for NPAs from their current profits. The NPAs have deliterious impact in the interest income on the bank, bank profitability because of the providing of the doubtful debts, return on investment of course. NPAs also disturb the Capital Adequacy Ratio (CAV) and economic value addition (EVR) of the banks. It is due to above factors, the public sector banks are faced with bulging NPAs which results in lower income and higher provisioning for doubtful debts and it will make a dent in their profit margin. In this context of crippling effect on banks operation the slew asset quality is placed as one of the most important parameters in the measurement of banks performance under the Camel‟s supervisory rating system of RBI. Whether trading of NPA between Banks illegal or not: The word „trading‟ here means purchasing or selling of NPAs between banks. So assignment or trading falls under the guidelines of Banking Regulation Act (BRA) which makes it legal . But the Gujarat High court has recently held that the buying and selling of non performing assets is illegal. The court has ruled that such an activity is not a part of “banking activity” as contemplated under the Banking Regulation Act, 1949. The court held N.R. INSTITUTE OF BUSINESS MANAGEMENT

This act has a overriding power over the other legislation. No doubt this Act was challenged in various courts on ground that it was loaded heavily in favour of lenders. Thus. INSTITUTE OF BUSINESS MANAGEMENT 4 . It is necessary that the banking system is equipped with prudential norms to minimize if not completely avoid the problem of credit risk. The banks in the developed countries do not depend upon this income whereas N. But the judgment is yet to stand the Supreme test of judiciary scrutiny as the aggrieved Banks and concerned regulatory bodies (RBI and Indian Bank Association) have challenged the decision before the Supreme Court.that “Interest transfer of NPAs by banks is illegal and not a part of banking activity under the BR Act. The main purpose of this act is to enable the creditors take possession of the secured assets and to deal with them without the intervention of the court. SARFAESI ACT was promulgated to regulate the financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. It is a unique piece of legislation which has far reaching consequences. cannot be a part of the business of a banking system” The ruling had an impact of sending shockwaves through the backbone of Indian economy and came under the greater scrutiny in academic circles too. Effective management of NPA rather than elimination is prudent.The decision given by the Honorable Courts in the cases that have been cited below (footnote16) was in favor of “assignment of NPAs between banks. 2002. the legality of loan purchases is under cloud till now. Trading in debts is a speculative form of transaction that is not permissible activity and thus. A loan item or the borrower is an asset of a bank and not a debt.R. All these issues gave the passage of evolution of the Securitization and Reconstruction of Financial Assets and enforcement of Security Interest Act (SARFAESI). Measures to control NPAs menace a lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk management mechanism. Even RBI considers interest NPA assignment between banks to be a significant tool for resolving the issue of Non Performing Assets and in the interest of banking policy . de-facto the assignment of loan (good or bad) amounts to transfer of asset and not debt. giving little chance to the borrowers to explain their views once recovery process is initiated under the legislation. I feel the recent pronouncement of the Gujarat High Court has misinterpreted the term „debt‟ from legal as well as accounting point of view. In the interim. The major problem with the Indian banking system is that they depend largely upon lending and investments. Securitization in India is still in a nascent stage but has potential in areas like mortgage Backed securitization.

This will necessitates organizational restructuring. The problem of non -performing loans created due to systematic banking crisis world over has become acute.86 percent of income of Indian banks is accounted from interest and the rest of the income is fee based. Without this. Focused measures to help the banking system to realize its NPAs has resulted into the creation of specialized bodies called Asset Management Companies which in India have been named Asset Reconstruction Companies (ARC‟s) The main objective of ARCs is to act as 1) A agent for any bank or financial institution for the purpose of recovering their dues from the borrowers. 2) A manager of the borrowers‟ asset taken over by banks or financial institution. It is needless to mention. It puts severe dent on the liquidity and profitability of the bank where it is out of proportion. Its objective is to ensure a timely and transparent mechanism for restructure of corporate debts of viable corporate entities affected by the contributing factors outside the purview of DRT and other legal proceedings for the benefit of concerned. improvement in the managerial efficiency and skill up gradation for proper assessment of credit worthiness It is better to avoid NPAs at the nascent stage of credit consideration by putting in place of rigorous and appropriate credit appraisal mechanisms.R. It is necessary that the banking system is to be equipped with prudential norms to minimize if not completely to avoid the problem of NPAs. The banker can earn sufficient net margin by investing in safer securities though not at high rate of interest. INSTITUTE OF BUSINESS MANAGEMENT 5 . 3) The receiver of properties of any bank or financial institution. N. It is possible that average yield on loans and advances net default provisions and services costs do not exceed the average yield on safety securities because of the absence of risk and service cost. It facilitates for limiting of high level of NPAs gradually. Ineffective Legal mechanisms and inadequate internal control mechanisms have made this problem grow – quick action has to be taken on both counts so that both the defaulters and the authorizing officer are punished heavily. all the mechanisms suggested above may prove to be ineffective. Conclusion The contaminated portfolio is definitely a bane for any bank. The corporate debt restructuring is also one of the methods suggested for the reduction of NPAs. The onus for containing the factors leading to NPAs rests with banks themselves. 4) There have been instances of banks extending credit to doubtful debtors (who deliberately default on debt) and getting kickbacks for the same. that a lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk management mechanism.

Research Design The research design that will be use is Descriptive Research.III.  To check the proportion of NPA of different types of banks in different categories. depicts. Problem statement/Objective of the research  To study of the concept of Non Performing Asset in Indian perspective.  To study NPA standard of RBI  To study the Reasons for & Impact of NPAs  To evaluate the efficiency in managing Non Performing Asset of different types of banks (Public. INSTITUTE OF BUSINESS MANAGEMENT 6 . IV.R. tabulates. Private & Foreign banks) using NPA ratios & comparing NPA with profits. and describes the data.  Uses description as a tool to organize data into patterns that emerge during analysis.  Often uses visual aids such as graphs and charts to aid the reader. 1) Test of Correlation: a) H0: There is no significant correlation between profits & NPAs of Public Sector Banks for last 9 years H1: There is correlation between profits & NPAs of Public Sector Banks for last 9 years b) H0: There is no significant correlation between profits & NPAs of Private Sector Banks for last 9 years H1: There is correlation between profits & NPAs of Private Sector Banks for last 9 years c) H0: There is no significant correlation between profits & NPAs of Foreign Banks for last 9 years H1: There is correlation between profits & NPAs of Foreign Banks for last 9 years N.  Using of hypothesis testing.  Involves gathering data that describe events and then organizes.

V. Expected contribution of the study The analysis made as a part of this study may contribute in a way analysis of strength and weakness of the banking sector as whole with regard to Non Performing Asset of banks. The data about NPAs & its composition. INSTITUTE OF BUSINESS MANAGEMENT 7 . public sector & others. Data Collection Sources Secondary Data Secondary data refers to the data which has already been generated and is available for use.  To understand the causes & effects of NPA  To analyze the past trends of NPA of Public. VII. non-priority sector. VIII. Beneficiaries of the study The outcomes analyzed from this study would be beneficial to various sections such as:  Banks: This study would definitely benefit the banks in a way that directs them as to which sector should be given priority for lending money. H1: There is significant difference in NPAs of different types of banks among various sectors. Private & Foreign banks in different sector. classification of loan assets. Various banks from different categories together may make efforts to overcome limitations for lending money to different sectors like agricultural. Scope of the study  To understand the concept of NPA in Indian Banking industry.R. Priority sector.2) ANNOVA Test : H0: There is no significant difference in NPAs of different types of banks among various sectors. N. VI. SSI. profits (net & gross) & advances of different banks is taken from Reserve Bank of India website.

R. Further Researchers: The major beneficiaries from the project would be the researchers themselves as this study would enhance their knowledge about the topic. IX. N. Limitation There are some data which are available for just 3 years while the same data for its counterparts were available for 9 years.  Student: To get the understanding of NPA concept as a whole. They get an insight of the present scenario of this industry as this is the emerging industry in the financial sector of the economy. So exact comparison was not possible. INSTITUTE OF BUSINESS MANAGEMENT 8 .

The oldest bank in existence in India is the State Bank of India.2% and 6. The three banks merged in 1921 to form the Imperial Bank of India. The oldest bank in existence in India is the State Bank of India. which in 1935 formally took over these responsibilities from the then Imperial Bank of India.000 branches and 17. which originated in the Bank of Calcutta in June 1806. Currently. the public sector banks hold over 75 percent of total assets of the banking industry.5% respectively EARLY HISTORY: Banking in India originated in the last decades of the 18th century.000 ATMs. with the private and foreign banks holding 18. a rating agency. This was one of the three presidency banks. N.R. INSTITUTE OF BUSINESS MANAGEMENT 9 . upon India's independence. all three of which were established under charters from the British East India Company. the other two being the Bank of Bombay and the Bank of Madras. After India's independence in 1947. and the Bank of Hindustan. the Reserve Bank was nationalized and given broader powers. they may be publicly listed and traded on stock exchanges) and 38 foreign banks. both of which are now defunct. 31 private banks (these do not have government stake. India has 96 scheduled commercial banks (SCBs) . a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. According to a report by ICRA Limited.INDIAN BANKING INDUSTRY INTRODUCTION: Banking in India originated in the last decades of the 18th century. became the State Bank of India. the government nationalized the six next largest in 1980. Central banking is the responsibility of the Reserve Bank of India. as did their successors. For many years the Presidency banks acted as quasi-central banks. The first banks were The General Bank of India which started in 1786. They have a combined network of over 53.27 public sector banks (that is with the Government of India holding a stake). which almost immediately became the Bank of Bengal. In 1969 the government nationalized the 14 largest commercial banks. relegating it to commercial banking functions. which.

and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank. banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States. particularly in Calcutta. most of the banks opened in India during that period failed. in the 1860s. The Allahabad Bank. The Comptoired'Escompte de Paris opened a branch in Calcutta in 1860. then a French colony. HSBC established itself in Bengal in 1869. mainly due to the trade of the British Empire. established in 1865 and still functioning today. Subsequently. The Bank of Bengal. followed. INSTITUTE OF BUSINESS MANAGEMENT 10 . Foreign banks too started to arrive.R. That honor belongs to the Bank of Upper India.Indian merchants in Calcutta established the Union Bank in 1839. when it failed. branches in Madras and Pondichery. which later became the State Bank of India. With large exposure to speculative ventures. and another in Bombay in 1862. It failed in 1958. promoters opened banks to finance trading in Indian cotton. Calcutta was the most active trading port in India. The next was the Punjab National Bank. which was established in 1863. established in N. is the oldest Joint Stock bank in India. established in 1881 in Faizabad. but it failed in 1848 as a consequence of the economic crisis of 1848-49. and which survived until 1913. The depositors lost money and lost interest in keeping deposits with banks. with some of its assets and liabilities being transferred to the Alliance Bank of Simla. It was not the first though.

Indians had established small banks. Around five decades had elapsed since the Indian Mutiny. Canara Bank and Central Bank of India. which has survived to the present and is now one of the largest banks in India. All these banks operated in different segments of the economy. The fervor of Swedish movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. mostly owned by Europeans.R. and the social. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks.Lahore in 1895. "In respect of banking it seems we are behind the times." The period between 1906 and 1911. Corporation Bank. divided by solid wooden bulkheads into separate and cumbersome compartments. Bank of Baroda. industrial and other infrastructure had improved. The Swedish movement inspired local businessmen and political figures to found banks of and for the Indian community. concentrated on financing foreign trade. INSTITUTE OF BUSINESS MANAGEMENT 11 . Around the turn of the 20th Century. most of which served particular ethnic and religious communities. This segmentation let Lord Curzon to observe. We are like some old fashioned sailing ship. saw the establishment of banks inspired by the Swedish movement. Indian Bank. A number of banks established then have survived to the present such as Bank of India. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". the Indian economy was passing through a relative period of stability. N. Four nationalised banks started in this district and also a leading private sector bank. The exchange banks. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks.

INSTITUTE OF BUSINESS MANAGEMENT 12 . and it became an institution owned by the Government of India. the Reserve Bank of India. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Years Number of banks Authorised capital Paid-up Capital that failed (Rs. and two years thereafter until the independence of India were challenging for Indian banking. The major steps to regulate banking included:  In 1948. India's central banking authority. and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. This resulted into greater involvement of the state in different segments of the economy including banking and finance.R. The years of the First World War were turbulent. N. Lakhs) 35 109 5 4 25 1 1913 12 1914 42 1915 11 1916 13 1917 9 1918 7 Post-independence The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal. Lakhs) 274 710 56 231 76 209 (Rs.FROM WORLD WAR I TO INDEPENDENCE: The period during the First World War (1914-1918) through the end of the Second World War (1939-1945). and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. was nationalized. paralyzing banking activities for months. The Government of India initiated measures to play an active role in the economic life of the nation.

Nationalization By the 1960s. However. her move was swift and sudden. until the 1990s." Within two weeks of the issue of the ordinance. described the step as a "masterstroke of political sagacity. in the year 1993. With the second dose of nationalization. Jayaprakash Narayan. the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate. Thereafter. control. and inspect the banks in India. Indira Gandhi. continued to be owned and operated by private persons. it had emerged as a large employer. Later on. control and regulations. the GOI controlled around 91% of the banking business of India. and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19. After this. At the same time."  The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI. the Indian banking industry had become an important tool to facilitate the development of the Indian economy. The stated reason for the nationalization was to give the government more control of credit delivery. This changed with the nationalization of major banks in India on 19 July 1969. the government merged New Bank of India with Punjab National Bank. banks in India except the State Bank of India. In 1949.R. the nationalised banks grew at a pace of around 4%. despite these provisions. the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill. and no two banks could have common directors. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. a national leader of India. 1969. and a debate had ensued about the possibility to nationalise the banking industry." The paper was received with positive enthusiasm. and it received the presidential approval on 9 August 1969. the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation. closer to the N. A second dose of nationalization of 6 more commercial banks followed in 1980. INSTITUTE OF BUSINESS MANAGEMENT 13 .

The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment. These came to be known as New Generation tech-savvy banks. Chidambaram. Liberalisation In the early 1990s.Lend at 6%. The stated policy of the Bank on the N. In terms of quality of assets and capital adequacy. till this time. private banks and foreign banks.All this led to the retail boom in India. Axis Bank(earlier as UTI Bank). Currently (2007).Go home at 4) of functioning. This move. with minimal pressure from the government. The new policy shook the Banking sector in India completely. along with the rapid growth in the economy of India. product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. The Reserve Bank of India is an autonomous body. ICICI Bank and HDFC Bank. INSTITUTE OF BUSINESS MANAGEMENT 14 . Bankers. where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. which has seen rapid growth with strong contribution from all the three sectors of banks. strong and transparent balance sheets relative to other banks in comparable economies in its region. licensing a small number of private banks. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. including Home minister P. the then NarsimhaRao government embarked on a policy of liberalization. namely.average growth rate of the Indian economy.R. People not just demanded more from their banks but also received more. banking in India is generally fairly mature in terms of supply. which later amalgamated with Oriental Bank of Commerce. government banks. Indian banks are considered to have clean. to have helped the Indian economy withstand the global financial crisis of present it has gone up to 74% with some restrictions. The nationalised banks were credited by some. were used to the 4-6-4 method (Borrow at 4%. and included Global Trust Bank (the first of such new generation banks to be set up). revitalized the banking sector in India.

With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services. and asset sales. In March 2006. the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%.R. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing. mortgages and investment services are expected to be strong. vehicle and personal loans. especially retail banking.Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide. One may also expect M&As. takeovers. INSTITUTE OF BUSINESS MANAGEMENT 15 . N. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

of the then Imperial Bank of India. The bulk of the deposits collected. transporters . over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule. With the 5-year plan having acquired an important place after the independence. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01. On July 19. did not provide any remedy. State-partnered commercial banking institution with an effective machinery of branches spread all over the country. the central bank functions were being looked after by the Imperial Bank of India. the Govt. to function as Central Bank of the country. as a result of re-organisation of princely States. while the farmers. were being deployed in organised sectors of industry and trade. 1955 by acquiring the substantial part of share capital by RBI. INSTITUTE OF BUSINESS MANAGEMENT 16 . Earlier to creation of RBI. the economy may need. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal. Statesponsored.RECENT HISTORY OF INDIAN BANKING Indian banking system. Similarly during 1956-59. a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. 1969. professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. integrated.R. small entrepreneurs. felt that the private banks may not extend the kind of cooperation in providing credit support. In February 1966. The scheme however. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors. the Govt. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong. more particularly to the unorganised sector. the associate banks came into fold of public sector banking. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of N. Though a no.

N. Subsequently in 1980.R. The Service Area Approach was introduced during 1989. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalization of 14 major private banks during 1969. banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalization of banks in 1969. Meanwhile. In the post-nationalization period. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organization and consolidation of the banking system. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. loans of Rs. of branches opened in rural/semi-urban centre‟s bringing down the population per bank branch to 12000 appx. In these five decades since independence.Rs. the consolidation phase started in late 80s and more particularly during early 90s.28.50 cr. during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. for meeting the requirement of Indian economy. with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. deposits of Rs. INSTITUTE OF BUSINESS MANAGEMENT 17 . The focus during this period was to lay the foundation for a sound banking system in the country. 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. While the 1970s and 1980s saw the high growth rate of branch banking net-work. During 1976. During December 1969. RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee. RRBs were established (on the recommendations of M. there was substantial increase in the no.1813 cr and with 4134 branches accounting for 80% of advances.2629 cr.

Reforms phase: The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates. N.R. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. capital adequacy.Expansion phase had begun in mid-60s but gained momentum after nationalization of banks and continued till 1984. staff productivity and profitability of banks. more competition. autonomy packages etc. Most importantly. technological changes. customer service. Attention was paid to improving house-keeping. A determined effort was made to make banking facilities available to the masses. credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at a low ebb. INSTITUTE OF BUSINESS MANAGEMENT 18 . Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. credit management. which had no access to banking hitherto. prudential guidelines on asset classification and income recognition.

staff. business & transaction volumes and directed lending to agriculture.1980 Unprecedented expansion in geographical coverage. batch processing in Cobol for MIS. SSI & SB sector Manual systems struggle to handle exponential rise in transaction volumes -Outsourcing of data processing to service bureau begins Back office systems only in Multinational (MNC) banks' offices 1981.1990 Regulator (read RBI) led IT introduction in Banks Product level automation on standalone PCs at branches (ALPMs) In-house EDP infrastructure with Unix boxes. INSTITUTE OF BUSINESS MANAGEMENT 19 . owned and old private banks begins New private banks are set up with CBS/TBA from the start N. introduction of prudential banking norms entry of new private sector banks Total Branch Automation (TBA) in Govt.Indian Banking: Key Developments 1969 Government acquires ownership in major banks Almost all banking operations in manual mode Some banks had Unit record Machines of IBM for IBR & Pay roll 1970. Mainframes in corporate office 1991-1995 Expansion slows down Banking sector reforms resulting in progressive de-regulation of banking.R.

3rd edition Publication by TATA McGraw hill) N. Phone banking and Internet banking and convenience of any branch banking and auto sweep products introduced by new private and MNC banks Retail banking in focus. “INDIAN FINANCIAL SYSYEM”.1996-2000 New delivery channels like ATM. owned banks and old private banks start implementing CBSs.R.Y. owned banks feel the heat and attempt to respond using intermediary technology. Y2K threat consumes last two years 2000-2003 Alternate delivery channels find wide consumer acceptance IT Bill passed lending legal validity to electronic transactions Govt. but initial attempts face problems Banks enter insurance business launch debit cards (Source: M. INSTITUTE OF BUSINESS MANAGEMENT 20 .KHAN. IDRBT sets up VSAT network for Banks Govt. TBA implementation surges ahead under fiat from Central Vigilance Commission (CVC). proliferation of credit cards Communication infrastructure improves and becomes cheap.

foreign banks and regional rural banks in aggregate deposits were 17. accounted for 50. N. as per the RBI's February bulletin.5 per cent of the aggregate deposits. Significantly.5 billion on July 2009. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009'. India's foreign exchange reserves rose to US$ 284. new deposits have gravitated towards public sector banks. 5. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts.0 per cent. as a group.709 banked centres.8 per cent. according to a stress test done by the Reserve Bank of India (RBI). The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again.BANKING IN INDIA: 2009-10 The Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis. respectively. according to the RBI's February bulletin. The purchase has increased the country's share of gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6 per cent. The share of other scheduled commercial banks.26 billion as on January 8. nationalized banks. The report also found that scheduled commercial banks served 34.8 per cent. nationalized banks hold the highest share of 50. with SBI and its associates at 23.095 were single office centres and 64 centres had 100 or more bank offices.R.7 per cent and other scheduled commercial banks at 17. while State Bank of India (SBI) and its associates accounted for 23.8 per cent. 28. Foreign banks and regional rural banks had a share of 5.5 per cent in the total bank credit. INSTITUTE OF BUSINESS MANAGEMENT 21 .6 per cent and 3. With respect to gross bank credit also. the RBI has the tenth largest gold reserves in the world after spending US$ 6. NRI fund inflows increased since April 2009 and touched US$ 45. Of these centres.5 per cent and 2. 2010.7 billion towards the purchase of 200 metric tons of gold from the International Monetary Fund (IMF) in November 2009. Following the financial crisis.5 per cent respectively in the total bank credit.

HDFC Bank has posted a 32 per cent rise in its net profit at US$ 175. INSTITUTE OF BUSINESS MANAGEMENT 22 .R.4 million for the quarter ended December 31.05 million for the same quarter in the previous year. Government Initiatives In its platinum jubilee year. the RBI hiked the Cash Reserve Ratio (CRR) by 75 basis points (bps) to 5. said that banks should link more branches to the National Electronic Clearing Service (NECS). in a notification issued on June 25. the RBI. the central bank of the country. Amongst the private banks.56 billion for the nine months ended December 2009.000 branches of 114 banks are enabled to participate in NECS.Major Developments The State Bank of India (SBI) has posted a net profit of US$ 1. while keeping repo and reverse repo rates unchanged. In the Third Quarter Review of Monetary Policy for 2009-10.16 million in the second quarter of 2009-10. up 14. The SBI is adding 23 new branches abroad bringing its foreign-branch network number to 160 by March 2010. over the corresponding period last year. the RBI observed that the Indian economy showed a degree of resilience as it recorded a better-than-expected growth of 7. NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions. This will cement its leading position as the bank with the largest global presence among local peers. Ideally. 2009.2 per cent rise in total income to US$ 852. Currently. all core-banking-enabled branches should be part of NECS.4 million posted in the nine months ended December 2008. a little over 26.9 per cent during the second quarter of 2009-10. Axis Bank's net profit surged by 32 per cent to US$ 115.43 per cent from US$ 175. In its Third Quarter Review of Monetary Policy for 2009-10. N. 2009 over the figure of US$ 128.4 million on 21.75 per cent.

9 per cent as on October 9.R. 2009.32 billion. Meanwhile. pointing to a revival in credit growth.According to the RBI. remained above the indicative projection of 18.0 per cent set out in the First Quarter Review of July 2009. 2009. The main source of M3 expansion was bank credit to the government. N. outstanding bank credit in the 15 days up to January 29 2010 rose by US$ 4. INSTITUTE OF BUSINESS MANAGEMENT 23 . reflecting large market borrowings of the Government. This is the highest year-on-year growth recorded since August 14. the stance of monetary policy for the remaining period of 2009-10 will be to:  Anchor inflation expectations and keep a vigil on inflation trends and respond swiftly through policy adjustments  Actively manage liquidity to ensure credit demands of productive sectors are met adequately  Maintain an interest rate environment consistent with financial stability and price stability The money supply (M3) growth on a year-on-year basis at 18.

 Policy makers have made some notable changes in policy and regulation to help strengthen the sector.27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993.  The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. they may be publicly listed and traded on stock exchanges) and 31 foreign banks.  Bank lending has been a significant driver of GDP growth and employment.INDUSTRY ANALYSIS S. enhancing the payments system and integrating regulations between commercial and co-operative banks. Indian banking system has reached even to the remote corners of the country.  India has 88 scheduled commercial banks (SCBs) .T. strong and transparent balance sheets relative to other banks in comparable economies in its region.O.  The vast networking & growing number of branches & ATMs.R. These changes include strengthening prudential norms. asset quality and profitability with other regional banks over the last few years. ANALYSIS OF INDIAN BANKING INDUSTRY STRENGTH  Indian banks have compared favourably on growth.W. INSTITUTE OF BUSINESS MANAGEMENT 24 . Indian banks are considered to have clean. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 percent growth in the market index for the same period. N.  In terms of quality of assets and capital adequacy. 29 private banks (these do not have government stake.

 Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.000 branches and 17.5% respectively. the public sector banks hold over 75 percent of total assets of the banking industry.R.2% and 6. INSTITUTE OF BUSINESS MANAGEMENT 25 . N.They have a combined network of over 53. with the private and foreign banks holding 18. a rating agency. According to a report by ICRA Limited.000 ATMs.

lack of institutional support infrastructure.WEAKNESS  PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing.  The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. N. weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs). risk management and the overall organizational performance ethic & strengthen human capital. restrictions on capital availability and deployment.  Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.  Old private sector banks also have the need to fundamentally strengthen skill levels. unless industry utilities and service bureaus.  Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.  Structural weaknesses such as a fragmented industry structure. restrictive labour laws. service operations.R. INSTITUTE OF BUSINESS MANAGEMENT 26 .

 Reach in rural India for the private sector and foreign banks. Attracting. At the same time. developing and retaining more leadership capacity  Foreign banks committed to making a play in India will need to adopt alternative approaches to win the “race for the customer” and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. INSTITUTE OF BUSINESS MANAGEMENT 27 . actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. consumer finance and wealth management on the retail side. credit and operations. consumers will increasingly demand enhanced institutional capabilities and service levels from banks.  New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments.  With increased interest in India. This will expose the weaker banks.  Given the demographic shifts resulting from changes in age profile and household income. These require new skills in sales & marketing. Maintaining a fundamentally long-term value-creation mindset.  Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. N.OPPORTUNITY  The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards.R. they should stay in the game for potential acquisition opportunities as and when they appear in the near term. competition from foreign banks will only intensify. and in fee-based income and investment banking on the wholesale banking side.

compared to 20% foreign equity holding allowed in PSU banks. mortgages and investment services are expected to be strong. it would help PSU banks. Significantly.  In an attempt to relieve banks of their capital crunch. left with little headroom for raising equity. FII and NRI investment limits in these securities have been fixed at 49%.  Liberalization of ECB norms: The government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. especially retail banking. INSTITUTE OF BUSINESS MANAGEMENT 28 . N. This enabled banks and financial institutions. With the growth in the Indian economy expected to be strong for quite some time especially in its services sector-the demand for banking services. which were earlier not permitted to raise such funds.R. explore this route for raising cheaper funds in the overseas markets. If the new instruments find takers. the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital.  The Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives.

R.  Increase in the number of foreign players would pose a threat to the PSB as well as the private players. N. INSTITUTE OF BUSINESS MANAGEMENT 29 .THREATS  Threat of stability of the system: failure of some weak banks has often threatened the stability of the system.  Rise in inflation figures which would lead to increase in interest rates.

N. PEST stands for Political. Economic.R. Social and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry.PEST ANALYSIS OF INDIAN BANKING INDUSTRY: PEST analysis of any industry investigates the important factors that affect the industry and influence the companies operating in the sector. INSTITUTE OF BUSINESS MANAGEMENT 30 .

Government affects the performance of banking sector most by legislature and framing policy government through its budget affects the banking activities securitization act has given more power to banking sector against defaulting borrowers. They exploit these banks for their benefits. RBI has retained the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. INSTITUTE OF BUSINESS MANAGEMENT 31 . By doing so the profits of the bank get affected. Sometimes looking into the political advantage of a particular party. Various policies are framed by the RBI looking at the present situation of the country for better control over the banks.  FOCUS ON REGULATIONS OF GOVERNMENT Banking is least affected as compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework. stricter prudential regulations with respect to capital and liquidity.0%.  MONETARY POLICY Monetary Policy 2009-2010 Bank Rate: The Bank Rate has been retained unchanged at 6.0% of NDTL.5% to 3. This gives India an advantage in terms of credibility over other countries. the Government declares some measures to their benefits like waiver of short-term agricultural loans.POLITICAL FACTORS Government and RBI policies affect the banking sector. N. Various banks in the cooperative sector are open and run by the politicians. Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3.75% with immediate effect. Sometimes the government appoints various chairmen of the banks.0% to 4. Cash Reserve Ratio: CRR has been retained unchanged at 5.R. Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.25% with immediate effect. to attract the farmer‟s votes.

Ceiling for FII investment in companies was also increased from 24. Also additional allocation of Rs 411 crore over Interim Budget 2009-10 was made for the same. Currently this facility has been extended from 30th June.  Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by six more months for farmers owing more than 2 hectare of land. Also additional subvention of 1% to be paid from this year. 2009. INSTITUTE OF BUSINESS MANAGEMENT 32 . The Union Budget 2008-09 allowed these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of 30th June 2009.  Subvention of 1% to be paid as incentive to farmers: The Budget continued the Interest subvention scheme for short-term crop loans up to Rs 300000 per farmer at the interest rate of 7% per annum. as incentive to those farmers who repay short-term crop loans on schedule.R. FDI LIMIT The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net worth to meet CAR norms.0 percent and have been included within the ambit of FDI investment  BUDGET MEASURES Budget Provisions: Increase Farm Credit: The FM has further increase the farm credit target for 200910 at Rs 325000 crore compared to Rs 287000 crore targeted in 2008-09.0 percent to 49. 2009 to 31st December. N.

A sub-committee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same. INSTITUTE OF BUSINESS MANAGEMENT 33 . With Government bearing this burden.  To provide banking facilities in under-banked/un-banked areas in the next three years.  OTHER PROVISIONS  The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner. The agriculture sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector.R. This Union Budget has provided further six months extension of 25% rebate on loan for farmers owing more than 2 hectare of land.  BUDGET IMPACT The Union Budget 2008-09 has focused on farm credit. Moreover the emphasize on hiking promoter shareholding in Public sector banks. The one-time bank loan waiver of nearly Rs 71000 crore (Rs 710 billion) to cover an estimated 40 million farmers was one of the major highlights of the last Budget. opening of banking centre in un-banked blocks are some of the positive moves for the sector.  To allow scheduled commercial banks setting up off-site ATMs without prior approval subject to reporting. N. expanding network with ATM's. Setting up of separate task force for those not covered under the debt waiver scheme: The government also announced that it will set up a task force to examine the issue of debt taken by a large number of farmers in some regions of Maharashtra from private money lenders who were not covered by the loan waiver scheme announced last year. It will only help banks to clear their most stubborn NPA accounts on banks book. banks would not be affected much.  The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least one Centre/Point of Sales (POS) for banking services in each of the un-banked blocks.

Despite ample liquidity in the system.  OUTLOOK The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking sector as a whole. INSTITUTE OF BUSINESS MANAGEMENT 34 . Hardening of yields is likely to affect treasury profits of banks in general and Public sector banks in particular.On the flipside. the 10 year benchmark yield has zoomed above 7% levels owing to rise in borrowing target. N.R. through rise in yields on government securities. the spike in government borrowings is set to adversely affect the treasury income of banks in general and public sector banks in particular.82 billion) targeted in the Interim Budget 2009-10. This is likely to push the Bond yields high moving forward. However it has increased the Government borrowing to Rs 451093 crore (Rs 4510.93 billion) compared to Rs 361782 crore (Rs 3617.

then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector. Policies of FDI. In India. Banking Industry is directly related to the growth of the economy. N. Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. then more FDI are brought in India through banking channels  GROWING ECONOMY / GDP Indian economy has registered a growth of more that 9 per cent for last three year and is expected to maintain robust growth rate as compare to other developed and developing countries. It takes India one step closer to the developed economies of the world. The contributions of various sectors in the Indian GDP for 2007-2008 are as follows: Agriculture: 17% Industry: 29% ServiceSector: 54% It is great news that today the service sector is contributing more than half of the Indian GDP. SEZs and NRI investment have been framed to give a push to the economy and hence the GDP. If in the Budget savings are encouraged. others followed. and thus. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities. therefore. banking has existed in one form or the other from time to time. The present era in banking may be taken to have commenced with establishment of bank of Bengal in 1809 under the government charter and with government participation in share capital. Allahabad bank was started in the year 1865 and Punjab national bank in 1895. If the FDI limits are relaxed. The Indian government is still looking up to improve the GDP of the country and so several steps have been taken to boost the economy.R. booming the economy. INSTITUTE OF BUSINESS MANAGEMENT 35 .ECONOMIC FACTORS Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. Earlier it was agriculture which mainly contributed to the Indian GDP.

50/3.92 per cent on 7th February 2009 against a high of 12. INSTITUTE OF BUSINESS MANAGEMENT 36 .  INFLATION RATES Inflation represents a rise in general level of prices of goods and services over a period of time.92 per cent. which is based on several monetary policies. Inflation stands at 3.47 per cent as compared with 5. each unit of currency buys fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate from the high of 12. Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry.R. Resultantly. decreasing crude prices and lowering interest rate. Government of India & Reserve Bank of India took many fiscal as well as monetary actions. 2009 Bank Rate was 6. N. Call money rates (borrowing & lending) were in the range of 1.00 per cent. the same as on the corresponding date of last year. To fight against the slowdown of the Economy. As on September 11. Clubbed with fiscal & monetary actions.00 per cent on the corresponding date of last year. LOW INTEREST RATES Reserve Bank of India controls the Interest rate. decreasing commodity prices.63 per cent to 3. we expect that Indian Economy could again register a robust growth rate in the year 2009-10.25/11.63 per cent on 9th August 2008. It leads to an erosion in the purchasing power of money.

3. N. To achieve this.87. the government shall pay an additional subvention of 1% as an incentive to those farmers who repay their short term crop loans on schedule.  DEBT RELIEF FOR FARMERS The one-time bank loan waiver of nearly Rs 71. 2009 to pay 75% of their overdues. INSTITUTE OF BUSINESS MANAGEMENT 37 . Agriculture credit flow was Rs 2. farmers having more than two hectares of land were given time upto 30th June. For this year. Thus. I am making an additional Budget provision of Rs 411 crore over Interim BE. AGRICULTURE CREDIT Agriculture has been the mainstay of our economy with 60% of our population deriving their sustenance from it. In the recent past. Due to the late arrival of monsoon. the sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. For this. I propose to extend this period by six months upto 31st December.3 lakh per farmer at the interest rate of 7% per annum. the interest rate for these farmers will come down to 6% per annum.000 crore in 2008-09.25. The target for agriculture credit flow for the year 2009-10 is being set at Rs. Under the Agricultural Debt Waiver and Debt Relief Scheme (2008). I propose to continue the interest subvention scheme for short term crop loans to farmers for loans upto Rs.000 crore.000 crore to cover an estimated 40 million farmers was one of the major highlights of the last Budget.R. 2009.

Socio culture factors also affect the business. They show in which people behave in country. Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and consumption habit of people, their language, beliefs and values affect the business. Banking industry is also operates under this social environment and it is also affect by this factor. These factor are changing continuously people‟s life style, their behavior, consumption pattern etc. is changing and also creating opportunities and threat for banking industry. There are some socio-culture factors that affect banking inIndia have been analyzed below.  TRADITIONAL MAHAJAN PRATHA Before the birth of the banks, people of India were used to borrow money local moneylenders, shahukars, shroffs. They were used to charge higher interest and also mortgage land and house. Farmers were exploited by these shahukars. But farmers need money. So, they did not have any choice other than going to shahukar and borrowing money from them in spite of exploitation by these people. But after emergence of banks attitude of people was changed. Traditional mahajan pratha still exist in India specially in rural areas. This affects the banking sector. Rural people afraid to go to bank to borrow money instead they prefer to borrow from shahukar whith whom they have relationships from the time of their fore fathers. Banking infrastructure is also week in some interior areas of India. So, this is reason it still exist.  SHIFT TOWARDS NUCLEAR FAMILY Attitude of people of India is changing. Now, younger generation wants to remain separate from their parents after they get married. Joint families are breaking up. There are many reasons behind that. But banking sector is positively affected by this trend. A family need home consumer durables likefreeze, washing machine, television, bike, car, etc.. so, they demand for these products and borrow from banks. Recently there is boost



in housing finance and vehicle loans. As they do not have money they go for installments. So, banks satisfy nuclear families wants.  CHANGE IN LIFE STYLE Life style of India is changing rapidly. They are demanding high class products. They have become more advanced. People want everything car, mobile, etc.. what their fore father had dreamed for. Now teenagers also have mobile and vehicle. Even middle class people also want to have well furnished home, television, mobile, vehicle and this has opened opportunities for banking secter to tap this change. Every thing is available so it has become easy to purchase anything if you do not have lump sum.  POPULATION Increase in population is one of he important factor, which affect the private sector banks. Banks would open their branches after looking into thepopulation demographics of the area. Percentage of deposit in any branches of banks depends upon the population demographic of that area. The population of India is about 102.90 is expected to reach about 119.70 cores in 2011. About 70% of population is below 35years of age. They are in the prime earning stage and this increase the earning of the banks. Total Deposits mobilized by the Private Sector Banks increased from Rs, 2,52,335 crore as on 31st March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Deposits showed a subdued growth during 2004-05.Income distributions also affects the operations and overall business of private sector banks.  LITERACY RATE Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to transact with banks. So, this impacts negatively on banks. But there is positive side of this as well i.e. illiterate people trust more on banks to deposit their money, they do not have market information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe alternative.



 TECHNOLOGY IN BANKS Technology plays a very important role in bank‟s internal controlmechanisms as well as services offered by them. It has in fact given new dimensions to the banks as well as services that they cater to and the banks are enthusiastically adopting new technological innovations for devising new products and services.  ATM The latest developments in terms of technology in computer and telecommunication have encouraged the bankers to change the concept of branch banking to anywhere banking. The use of ATM and Internet banking has allowed „anytime, anywhere banking‟ facilities. Automatic voice recorders now answer simple queries, currency accounting machines makes the job easier and self-service counters are now encouraged. Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa card are the two most popular cards used world over. The banks have now started issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking through telecommunication facilities and computer technology by using terminals installed at customers home and they can make the balance inquiry, get the statement of accounts, give instructions for fund transfers, etc. Through ECS we can receive the dividends and interest directly to our account avoiding the delay or chance of loosing the post.

 IT SERVICES & MOBILE BANKING Today banks are also using SMS and Internet as major tool of promotions and giving great utility to its customers. For example SMS functions through simple text messages sent from your mobile. The messages are then recognized by the bank to provide you with the required information. All these technological changes have forced the bankers to adopt customer-based approach instead of product-based approach Technology N.R. INSTITUTE OF BUSINESS MANAGEMENT

Technology advancement has offer 24X7 banking even giving faster and secured service.  CORE BANKING SOLUTIONS It is the buzzword today and every bank is trying to adopt it is the centralize banking platform through which a bank can control its entire operation the adoption of core banking solution will help bank to roll out new product and services. INSTITUTE OF BUSINESS MANAGEMENT 41 .R. N.advancement has changed the face of traditional banking systems.

R. doubtful or loss asset. ii. 2001. a non-performing asset (NPA) shell be a loan or an advance where. iii. Accordingly. as from that date. 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. in respect of an overdraft/ cash Credit(OD/CC). from the year ending March 31. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose.INTRODUCTION TO NPA MEANING OF NPA: Non Performing Asset means an asset or account of borrower. Due to the improvement in the payment and settlement systems. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted. in accordance with the directions or guidelines relating to asset classification issued by RBI. The account remains 'out of order' for a period of more than 180 days. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan. and v. which has been classified by a bank or financial institution as sub-standard. Accordingly. i. with effect from March 31. a Non performing asset (NPA) shell be an advance where i. ii. etc. recovery climate. up gradation of technology in the banking system. INSTITUTE OF BUSINESS MANAGEMENT 42 . 2004. With a view to moving towards international best practices and to ensure greater transparency. with effect from March 31. it has been decided to adopt the '90 days overdue' norm for identification of NPAs. N. 2004. 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' for a period of more than 90 days. it was decided to dispense with 'past due' concept. iv. in respect of an overdraft/ cash Credit(OD/CC)..

Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. INSTITUTE OF BUSINESS MANAGEMENT 43 . iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. N.R. and v.iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted.

the banks should make a general provision of a minimum of 0.Others' in Schedule 5 of the balance sheet.2000. 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: 1) Sub-standard Assets 2) Doubtful Assets 3) Loss Assets N. Provisio ning Norms:  From the year ending 31.ASSET CLASSIFICATION: Assets are classified into fo llowing four categories:  Standard Assets:  Sub-standard Assets  Doubtful Assets  Loss Assets Standard Assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer.  The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions .40 percent on standard assets on global loan portfolio basis. INSTITUTE OF BUSINESS MANAGEMENT 44 . If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories.  The provisions on standard assets should not be reckoned for arriving at net NPAs.03.R. Here it is also very important that in this case the arrears of interest and the principal amount of loan do not exceed 90 days at the end of financial year.

2005. with the added characteristic that the weaknesses make collection or liquidation in full. conditions and values – highly questionable and improbable. at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful: N. an asset would be classified as doubtful if it remained in the sub-standard category for 12 months.Sub-standard Assets: With effect from 31 March 2005. The following features are exhibited by substandard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. With effect from March 31. Provisio ning Norms:  100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.  In regard to the secured portion. if deficiencies are not corrected.R. which has remained NPA for a period less than or equal to 12 month. Doubtful Assets: A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard. Provisio ning Norms: A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available. INSTITUTE OF BUSINESS MANAGEMENT 45 . provision may be made on the following basis. and the asset has well-defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss. on the basis of currently known facts. a substandard asset would be one.

ii.03.2002.03. INSTITUTE OF BUSINESS MANAGEMENT 46 .R. (2) Advances classified as „doubtful‟ more than three years on or after April 1. 2006. these assets would have been identified as „loss assets‟ by the bank N. 2004. Loss Assets: A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. Provision requirement (%) 20 30 60% with effect from March 31.  Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31. Also. 2003 has to be made in phases as under: i. 2004.Period for which the advance has been considered as doubtful Up to one year One to three years More than three years: (1) Outstanding stock of NPAs as on March 31. balance of the provisions not made during the previous year. 2005.2002. As on 31.although there may be some salvage or recovery value. 2007. 75% effect from March 31. as on 31.2003.  Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31. 2005. with a minimum of 20 % each year. 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category.03. 100% with effect from March 31. in addition to the provisions needed. As on31.

INSTITUTE OF BUSINESS MANAGEMENT 47 . If the assets are permitted to remain in the books for any reason.R. Provisio ning Norms: The entire asset should be written off. N.or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly. 100 percent of the outstanding should be provided for.

It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs Gross Advances Ne t NP A: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. INSTITUTE OF BUSINESS MANAGEMENT 48 . It consists of all the nonstandard assets like as sub-standard. and loss assets. bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming. 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.TYPES OF NPA: 1. Gross NPA 2.R.Provisions Net NPAs = N. That is why the difference between gross and net NPA is quite high. Since in India. the provisions the banks have to make against the NPAs according to the central bank guidelines. doubtful. are quite significant. It can be calculated by following: Gross NPAs – Provisions Gross Advances . Net NPA shows the actual burdenof banks. Gross NPA reflects the quality of the loans made by banks.

industrial recession. externalization problems. 3) Industrial recession. fraud. disputes. 4) Excess capacities created on non-economic costs. adverse exchange rates etc. natural calamities like floods. power shortage. External factors Internal factors: 1) Funds borrowed for a particular purpose but not use for the said purpose. 5) In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. excess capacity. in credit appraisal. misappropriation etc. nonpayment\ over dues in other countries. accidents. raw material\input price escalation. 3) Poor recovery of receivables. 9) Deficiencies on the part of the banks viz. 4) Shortage of raw material.R. 7) Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. Internal factors 2. recession in other countries. N. INSTITUTE OF BUSINESS MANAGEMENT 49 . delaying settlement of payments\ subsidiaries by government bodies etc. management disputes. 2) Project not completed in time. siphoning of funds. 8) Willful defaults.REASONS FOR AN ACCOUNT BECOMING NPA: 1. 5) Failures.. monitoring and followups. 6) Business failures. External factors: 1) Sluggish legal system –  Long legal tangles  Changes that had taken place in labour laws  Lack of sincere effort. power and other resources. 2) Scarcity of raw material.

promoters/ directors disputes etc.  Recession. product obsolescence etc.  Time/ cost overrun during project implementation stage. undertaking new projects and for helping associate concerns. INSTITUTE OF BUSINESS MANAGEMENT 50 . which are because of siphoning-off funds. which is due to input/ power shortage. marketing etc. The externalization problems in other countries also lead to growth of NPAs in Indian banking sector..R. price variation.). viz.  Willful defaults.  Governmental policies such as changes in excise duties. This is also coupled with recessionary trends and failures to tap funds in capital and debt markets. diversification. Import duty changes etc. inappropriate technology/ technical problems. delays in release of limits and payments/ subsidies by the Government of India. which is for expansion.  Business failures (such as product.  Deficiency on the part of banks.6) Government policies like excise duty changes. fraud/ misappropriation. The RBI has summarized the finer factors contributing to higher level of NPAs in the Indian banking sector as:  Diversion of funds. natural calamities etc. strained labour relations. modernization. which are due to inefficient management system. accidents. N. pollution control orders etc.

Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities. which occurred due to wrong choice of client. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks. Involve ment of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. which is additional cost to the bank. Routine payments and dues. So NPA doesn‟t affect current profit but also future stream of profit. Another impact of reduction in profitability is low ROI (return on investment). INSTITUTE OF BUSINESS MANAGEMENT 51 . Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. Now day‟s banks have special employees to deal and handle NPAs. N. Liquidity: Money is getting blocked. which would have given good returns. which may lead to loss of some long-term beneficial opportunity. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset.R.IMPACT OF NPA: Profitability: NPA means booking of money in terms of bad asset. which adversely affect current earning of bank.

While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company. N. 3) Attitudinal Changes:  Use for personal comfort. Irregularity in installment. Stock statement not submitted on time. stocks and shares by borrower.EARLY 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. Irregularity of operations in the accounts. Nonpayment of wages. Unpaid overdue bills. Payment which does not cover the interest and principal amount of that installment. External non-controllable factor like natural calamities in the city where borrower conduct his business.R. 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. Declining Current Ratio. Frequent changes in plan. INSTITUTE OF BUSINESS MANAGEMENT 52 . Overdue receivables. Bouncing of cheque due to insufficient balance in the accounts.

4) Others:  Changes in Government policies.R. Avoidance of contact with bank. INSTITUTE OF BUSINESS MANAGEMENT 53 .  Death of borrower.  Competition in the market.  Problem between partners. N.

banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction. and capability to achieve turnaround. Here the role of frontline officials at the branch level is paramount as they are the ones who have intelligent inputs with regard to promoters‟ sincerity. after an objective assessment of the promoter‟s intention. INSTITUTE OF BUSINESS MANAGEMENT 54 . it is better to facilitate winding up/ selling of the unit earlier. Assessment of the potential of revival may be done on the basis of a techno-economic viability study.R. This will obviate the need to route the additional funding through the controlling offices in deserving cases. In respect of totally unviable units as decided by the bank. Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are non. and help avert many accounts slipping into NPA category. books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers.both in terms of rehabilitation of the project and recovery of bank‟s dues.serious with no commitment or stake in revival is a challenge confronting bankers. Identification of weakness in the very beginning that is : When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA. it‟s too late to retrieve the situation. N. by the time banks start their efforts to get involved in a revival process. so as to recover whatever is possible through legal means before the security position becomes worse. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level.PREVENTIVE MEASUREMENT FOR NPA: Early Recognition of the Problem: Invariably. Restructuring should be attempted where. and for this purpose a special limit to such type of cases should be decided. banks are convinced of a turnaround within a scheduled timeframe. is imperative. Based on this objective assessment.

Multiple Financing:  During the exercise for assessment of viability and restructuring. has to be adequate in terms of extend of additional funding and relaxations etc.Timeliness and Adequacy of response: Longer the delay in response. at the time of restructuring the banks may not be guided by the conventional fund flow analysis only. which could yield a potentially misleading picture. Time is a crucial element in any restructuring or rehabilitation activity. viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit‟s fortunes. grater the injury to the account and the asset. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow. INSTITUTE OF BUSINESS MANAGEMENT 55 . The package of assistance may be flexible and bank may look at the exit option. A proper techno. N.R. Focus on Cash Flows: While financing. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. But this may not be the case all the time. a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise.economic viability study must thus become the basis on which any future action can be considered. under the restructuring exercise. given the probability of success/failure. Where the default is due to deeper malady. The response decided on the basis of techno-economic study and promoter‟s commitment. Management Effectiveness: The general perception among borrower is that it is lack of finance that leads to sickness and NPAs.

which is not part of the consortium.  In a forum of lenders. and ensure that such cash flows are used for working capital purposes. there should be regular flow of information among consortium members. The Credit Information Bureau of India Ltd. So it is possible that the letter categories of lenders may be willing to exit. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Therefore. N. INSTITUTE OF BUSINESS MANAGEMENT 56 .R. Toward this end. Under this system. even a t a cost – by a discounted settlement of the exposure.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational. While one set of lenders may be willing to wait for a longer time to recover its dues. In some default cases.  Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. any plan for restructuring/rehabilitation may take this aspect into account. the priority of each lender will be different. banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements. where the unit is still working. for fear of getting their cash flows forfeited). Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. another lender may have a much shorter timeframe in mind. A bank. the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default. may not be allowed to offer credit facilities to such defaulting clients.

The major components/processes of a EWS followed by banks in India as brought out by a study conducted by Reserve Bank of India at the instance of the Board of Financial Supervision are as follows:  Designating Relationship Manager/ Credit Officer for monitoring account/s  Preparation of `know your client' profile  Credit rating system  Identification of watch-list/special mention category accounts  Monitoring of early warning signals Relationship Manager/Credit Officer The Relationship Manager/Credit Officer is an official who is expected to have complete knowledge of borrower. delays in servicing of interest. In addition.PROCEDURES FOR NPA IDENTIFICATION AND RESOLUTION IN INDIA: 1. indicative of potential problems in the accounts. however. differ from bank to bank. etc. Many banks have evolved and adopted an elaborate EWS. INSTITUTE OF BUSINESS MANAGEMENT 57 . some of these banks are reviewing their exposure to borrower accounts every quarter based on published data which also serves as an important additional warning system. The early warning signals. Though most banks have Early Warning Systems (EWS) for identification of potential NPAs. his future plans. the actual processes followed. persistent irregularity in accounts. The Relationship Manager has to keep in constant touch with the borrower and report all developments impacting the N.R. units' financial problems. accordingly. etc. which allows them to identify potential distress signals and plan their options beforehand. viz. These early warning signals used by banks are generally independent of risk rating systems and asset classification norms prescribed by RBI. Internal Checks and Control Since high level of NPAs dampens the performance of the banks identification of potential problem accounts and their close monitoring assumes importance. his business. are captured by the system. frequent devolvement of L/Cs. The EWS enable a bank to identify the borrower accounts which show signs of credit deterioration and initiate remedial action. market related problems.

Watch-list/Special Mention Category The grading of the bank's risk assets is an important internal control tool. As a part of `KYC' system. While most of the banks have developed their own models. Most banks in India have put in place the system of internal credit rating. the responsibility of monitoring a corporate account is vested with Relationship Manager/Credit Officer.R. credit rating system enables tracking the health of banks entire credit portfolio. In the credit monitoring process. industry and management. a few banks have adopted credit rating models designed by rating agencies. associated with a borrowable unit. etc. visits are made on clients and their places of business/units. Know your client' profile (KYC) Most banks in India have a system of preparing `know your client' (KYC) profile/credit report. INSTITUTE OF BUSINESS MANAGEMENT 58 . Credit rating models take into account various types of risks viz. These accounts generally exhibit weaknesses which are correctable but warrant banks' closer attention. As a part of this contact he is also expected to conduct scrutiny and activity inspections. Most of the banks have a system to put certain borrowable accounts under watch list or special mention category if performing advances operating under adverse business or economic conditions are exhibiting certain distress signals. The exercise is generally done at the time of sanction of new borrowable account and at the time of review renewal of existing credit facilities. The frequency of such visits depends on the nature and needs of relationship. At the whole bank level. financial. The purpose of identification of potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the bank to protect against the loan asset becoming non-performing. Credit Rating System The credit rating system is essentially one point indicator of an individual credit exposure and is used to identify measure and monitor the credit risk of individual proposal. The categorization of such accounts in watch list or special mention category N. It serves the need of the Management to identify and monitor potential risks of a loan asset.borrowable account.

statement of receivables etc. INSTITUTE OF BUSINESS MANAGEMENT 59 . Financial related warning signals generally emanate from the borrowers' balance sheet. income expenditure statement. weakening industry characteristics. Following common warning signals are captured by some of the banks having relatively developed EWS. A host of early warning signals are used by different banks for identification of potential NPAs. statement of cash flows. to be sensitive to signals of credit deterioration. it is revealed that the indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower. general economic conditions. Financial warning signals  Persistent irregularity in the account  Default in repayment obligation  Devolvement of LC/invocation of guarantees  Deterioration in liquidity/working capital position  Substantial increase in long term debts in relation to equity  Declining sales  Operating losses/net losses N.R. Early Warning Signals It is important in any early warning system. Further. etc.provides early warning signals enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take necessary preventive steps to avoid their slippage into non performing advances. Most banks in India have laid down a series of operational. financial. a) Financial b) Operational c) Banking d) Management and e) External factors. regulatory changes. Early warning signals can be classified into five broad categories viz. transactional indicators that could serve to identify emerging problems in credit exposures at an early stage.

or key personnel  Desire to take undue risks  Family disputes  Poor financial controls  Fudging of financial statements  Diversion of funds Banking related signals  Declining bank balances/declining operations in the account  Opening of account with other bank  Return of outward bills/dishonored cheques  Sales transactions not routed through the account  Frequent requests for loan  Frequent delays in submitting stock statements. Rising sales and falling profits  Disproportionate increase in overheads relative to sales  Rising level of bad debt losses Operational warning signals  Low activity level in plant  Disorderly diversification/frequent changes in plan  Nonpayment of wages/power bills  Loss of critical customer/s  Frequent labor problems  Evidence of aged inventory/large level of inventory Management related warning signals  Lack of co-operation from key personnel  Change in management. ownership. INSTITUTE OF BUSINESS MANAGEMENT 60 . financial data.R. etc. Signals relating to external factors  Economic recession  Emergence of new competition  Emergence of new technology N.

one time settlement schemes. indicating some double counting. HDFC Limited. 2. Management/Resolution of NPAs A reduction in the total gross and net NPAs in the Indian financial system indicates a significant improvement in management of NPAs. 10 million and above and suit filed cases of willful defaulters of Rs. Ltd. Dun and Bradstreet Information Services (India) Pvt. setting up of the CDR mechanism. Many banks have come out with their own restructuring schemes for settlement of NPA accounts. Settlement has been considered only in 9% of the cases. From the data available of Public Sector Banks as on March 31.R. strengthening of DRTs. The CIBIL is in the process of getting operationalised.522 numbers of NPAs as on March 31. suit filed and BIFR are the two most common approaches to resolution of NPAs in public sector banks. Trans Union to serve as a mechanism for exchange of information between banks and FIs for curbing the growth of NPAs incorporated credit Information Bureau (India) Limited (CIBIL) in January 2001. As per the recommendations of the working group. INSTITUTE OF BUSINESS MANAGEMENT 61 . Rehabilitation has been considered/ adopted in only about 13% of the cases. Data available on resolution strategies adopted by public sector banks suggest that Compromise settlement schemes with borrowers are found to be more effective than legal measures. This is also on account of various resolution mechanisms introduced in the recent past which include the SRFAESI Act. Pending the enactment of CIB Regulation Bill.5 million and above to RBI as well as CIBIL. As can be seen. It is likely to have been adopted in even fewer cases. CIBIL will share this information with commercial banks and FIs so as to help them minimize adverse selection at appraisal stage. State Bank of India. 215 billion. 2003 which had gross value greater than Rs. the RBI constituted a working group to examine the role of CIBs. The total gross value of these NPAs amounted to Rs. 50 million in all the public sector banks in India. N. Changes in government / regulatory policies  Natural calamities 2. there were 1. The total number of resolution approaches (including cases where action is to be initiated) is greater than the number of NPAs. Banks and FIs are now required to submit the list of suit-filed cases of Rs. 2003. M/s. and M/s.

e. Willful Defaulters RBI has issued revised guidelines in respect of detection of willful default and diversion and siphoning of funds. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent their access to capital markets. 1 million and above can be settled through DRT process. where appropriate. waive or reduce the amount of such deposit. This order can be passed even while the claim is pending. 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. and undertake a proactive approach in change in management. 1993. As per these guidelines a willful default occurs when a borrower defaults in meeting its obligations to the lender when it has capacity to honor the obligations or whenfunds have been utilized for purposes other than those for which finance was granted.3. for reasons to be received in writing. Advances of Rs. alienating or otherwise dealing with or disposing of any property and the assets belonging to him within prior permission of the Tribunal. Legal and Regulatory Regime Debt Recovery Tribunals DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act. Under the Act. the Affiliate Tribunal may. 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.R. by the banks and FIs for recovery of debts due to the same. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). Sharing of information of this nature helps banks in their due diligence exercise and helps in avoiding financing unscrupulous elements. Validity of the Act is often challenged in the court which hinders the progress N. 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. The DRTs are vested with competence to entertain cases referred to them. DRTs are criticized in respect of recovery made considering the size of NPAs in the Country. However. two types of Tribunals were set up i. 4. RBI has advised lenders to initiate legal measures including criminal actions. wherever required. INSTITUTE OF BUSINESS MANAGEMENT 62 .

It is known for effecting mediation and counseling between the parties and to reduce burden on the court. In addition to asset reconstruction and ARCs. If the compromise is arrived at. l million can be brought before the Lokadalat and every award of the Lokadalat 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 Lokadalat. many needs to be done for making the DRTs stronger in terms of infrastructure. mediation. especially for small loans. compromise or amicable settlement. Cases involving suit claims up to Rs. Enactment of SRFAESI Act The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework for setting up Asset Reconstruction Companies (ARCs) in India. INSTITUTE OF BUSINESS MANAGEMENT 63 . In any case. They take up cases which are suitable for settlement of debt for certain consideration. 1987 helps in resolving disputes between the parties by conciliation. we should continue our efforts to seek the help of the Lokadalat. defense personnel and judicial officers. 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. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. Lastly. the Act deals with the following largely aspects. In general. Lokadalats The institution of Lokadalat constituted under the Legal Services Authorities Act. N. Normally.R. Parties are heard and they explain their legal position. the suits pending in the court will proceed in accordance with the law and parties will have a right to get the decree from the court.of the DRTs. it is observed that banks do not get the full advantage of the Lokadalats. the parties to the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to obtain a consent decree. if such settlement contains a clause that if the compromise is not adhered to by the parties. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets.

The Reserve Bank of India (RBI). After taking over possession of the secured assets. The Act permits the secured creditors to take any of the following measures:  Take over possession of the secured assets of the borrower including right to transfer by way of lease.  By obtaining quotations from persons dealing in such assets or otherwise interested in buying the assets. the designated regulatory authority for ARCS has issued Directions.R. and  Recover receivables of the borrower in respect of any secured asset which has been transferred.  By inviting tenders from the public. the secured creditors are required to obtain valuation of the assets. operations and funding of ARCS and resolution of NPAs by ARCS. These secured assets may be sold by using any of the following routes to obtain maximum value. Application Form and Guidelines to Banks in April 2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover various aspects relating to registration. Additionally. Guidance Notes. The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the underlying security without reference to the Court after giving a 60 day notice to the defaulting borrower upon classification of the corresponding financial assistance as a non-performing asset. INSTITUTE OF BUSINESS MANAGEMENT 64 . which lays down the procedure to be followed by a secured creditor while enforcing its security interest pursuant to the Act. assignment or sale. Securitization and Securitization Companies  Enforcement of Security Interest  Creation of a central registry in which all securitization and asset reconstruction transactions as well as any creation of security interests has to be filed. N. consideration for the same and valuation of instruments issued by the ARCS.  Take over the management of the secured assets including the right to transfer by way of lease.  Appoint any person as a manager of the secured asset (such person could be the ARC if they do not accept any pecuniary liability). assignment or sale. The RBI has also issued guidelines to banks and financial institutions on issues relating to transfer of assets to ARCS. the Central Government has issued the security enforcement rules ("Enforcement Rules").

They can also be appointed to act as a receiver.000. either through security enforcement or through settlements.  The sale or lease of the business of the borrower. on an ongoing basis. N. lenders are now clearly in a much better bargaining position vis-a-vis defaulting borrowers than they were before the enactment of SRFAESI Act. the Directions require that an ARC should maintain. 20. Further. ARCS have been granted a maximum realization time frame of five years from the date of acquisition of the assets.  Taking over or changing the management of the business of the borrower. 1956. being the holding company of or being in control of the ARC. the bargaining power of lenders is likely to improve further and one would expect to see a large number of NPAs being resolved in quick time. ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under security enforcement rights available to them or as a recovery agent for any bank or financial institution and to receive a fee for the discharge of these functions. The SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than Rs. if appointed by any Court or DRT. The Act designates any person holding not less than 10% of the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in. The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction.  Settlement of the borrowers' dues. a minimum capital adequacy ratio of 15% of its risk weighted assets. or  By private treaty. When the legal hurdles are removed.R. By holding public auctions. Under the SRFAESI Act ARCS can be set up under the Companies Act. These include:  Enforcement of security interest. and  Restructuring or rescheduling of debt.000. INSTITUTE OF BUSINESS MANAGEMENT 65 . Lenders have seized collateral in some cases and while it has not yet been possible to recover value from most such seizures due to certain legal hurdles.

Therefore it is critical to prepare a restructuring plan on the lines of the expected business plan along with projected cash flows. The CDR mechanism instituted in India is broadly along the lines of similar systems in the UK. sub-standard or doubtful categories can be considered for Corporate borrowers with borrowings from the banking system of Rs. N.R. Thailand. The framework is intended to preserve viable corporate affected by certain internal/external factors and minimize losses to creditors/other stakeholders through an orderly and coordinated restructuring programme.Source: http://www. Restructuring helps in aligning repayment obligations for bankers with the cash flow projections as reassessed at the time of restructuring. DRTs or other legal proceedings. INSTITUTE OF BUSINESS MANAGEMENT 66 . CDR is a nonstatutory mechanism based on debtor-creditor agreement and inter-creditor agreement. 20crores and above under multiple banking arrangement are eligible under the CDR mechanism. The objective of the CDR mechanism has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial and Financial Reconstruction (BIFR).rbi. Accounts falling under Institution of CDR Mechanism The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable entities facing financial difficulties. RBI has issued revised guidelines in February 2003 with respect to the CDR mechanism. Korea and Malaysia.

subject to consent decree being obtained from the Courts/DRTs/BIFR are covered.R. Specific guidelines were issued in May 1999to public sector banks for one-time settlements of NPAs of small scale sector. Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings) and time frame for restructuring.7 billion from various accounts.The CDR process is being stabilized. 2) Negotiated Settlement Schemes The RBI/Government has been encouraging banks to design and implement policies for negotiated settlements. However cases of willful default. This scheme was valid until September 2000 and enabled banks to recover Rs 6. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase transparency in the process. N. particularly for old and unresolved NPAs. While in the RBI guidelines it has been recommended to involve independent consultants. 10crores. banks are so far resorting to their internal teams for recommending restructuring programs. However they attend meetings. and it is expected that they would be signing the agreements shortly. The first ARC to be operational in India. which have subsequently become doubtful or loss. which have become doubtful or loss as on 31st March 2000. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR. The scheme also covers NPAs classified as sub-standard as on 31st March 2000. The broad framework for such settlements was put in place in July 1995. Compromise Settlement Schemes 1) One Time Settlement Schemes NPAs in all sectors. for NPAs up to Rs. As per the OTS scheme. 26 billion. These guidelines were effective until June 2001 and helped banks recover Rs. 50 millionand less. Foreign banks are not members of the CDR forum. the minimum amount that should be recovered should be 100% of the outstanding balance in the account. fraud and malfeasance are not covered.Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum. INSTITUTE OF BUSINESS MANAGEMENT 67 .

there is a possibility of conflict between the activities that may be undertaken by the ARC. proceedings initiated by any creditor seeking to recover monies from a sick company would not be suspended by a reference to the NCLT and. INSTITUTE OF BUSINESS MANAGEMENT 68 .often there is a scramble to file a reference in BIFR so as to obtain protection from debt recovery proceedings. The Bill to repeal SICA is currently pending in Parliament and the process of staffing of NCLTs has been initiated N. Therefore. Once a company is referred to the BIFR (and even if an enquiry is pending as to whether it should be admitted to BIFR). Promoters systematically take refuge in SICA . the above provision of the Act may not have much relevance any longer and probably does not extend to the tribunal for this reason. The recent amendments to the Companies Act vest powers for revival and rehabilitation of companies with the National Company Law Tribunal (NCLT).g.Increased Powers to NCLTs and the Proposed Repeal of BIFR In India. However. The NCLT would prepare a scheme for reconstruction of any sick company and there is no bar on the lending institution of legal proceedings against such company whilst the scheme is being prepared by the NCLT. companies whose net worth has been wiped out on account of accumulated losses come under the purview of the Sick Industrial Companies Act (SICA) and need to be referred to BIFR. BIFR is widely regarded as a stumbling block in recovering value for NPAs. with modifications to address weaknesses experienced under the SICA provisions. therefore. e. in place of BIFR. it is afforded protection against recovery proceedings from its creditors.R. change in management. and the role of the NCLT in restructuring sick companies.

Overall. expanded by 21. During 2008-09. It is noteworthy that contrary to the trend in some advanced countries. which was accentuated after 2000 to reach a level of about 3 per cent by 2008 from around 5 per cent in the 1990s. the leverage ratio of banks in the UK witnessed a decline throughout 1990s.1 per cent in March 2001 to reach a level of 6. For instance. while growth rate of banks‟ lending to agriculture and allied activities increased substantially. the leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting the strength of the Indian banking system.0 per cent in the previous year. While the balance sheet of public sector banks maintained their growth momentum. The consolidated balance sheets of SCBs. the growth rate of banks‟ lending to industries. the Indian banking sector was not completely insulated from the effects of the slowdown of the India economy.R. the incremental Credit–Deposit (C-D) ratio declined sharply reflecting the slowdown in credit growth.3 per cent by March 2009. Furthermore.ANALYSIS OVERALL ANALYSIS: Scheduled Commercial banks (SCBs) in India remained robust against the backdrop of global financial crisis. personal loans and services sector witnessed a deceleration. the private sector banks and foreign banks registered a deceleration in growth rate. On the other hand. the private sector banks and foreign banks registered a deceleration in growth rate. the old N. the leverage ratio in India has remained high reflecting the strength of the Indian banking system. INSTITUTE OF BUSINESS MANAGEMENT 69 . The balance sheets of public sector banks maintained their growth momentum. as corporates deferred their investments against the backdrop of widespread uncertainty. It is noteworthy that contrary to the trend in some advanced countries.2 per cent as at end-March 2009 as compared with 25. as observed by the World Bank (2009)5. the leverage ratio for Indian banks has risen from about 4. However.

private sector banks, which had been registering a significantly lower growth rate than their newer counterparts in the recent past, managed a better performance this year.

 NET NPAs OF BANKS: 2000-01 to 2008-09

30,000 25,000 20,000 15,000 10,000 5,000 0

Public Sector Banks Private Sector Banks Foreign Sector Banks

Graph: 1

Source: Annexure – Table 2

 From the above it is observed that net NPA of public sector banks has a declining trend up to year 2005-06 and after that it has a rising trend till 2008-09. The same trend has been observed in both Private and Foreign Sector Banks. The declining trend from 2003 to 2006 of NPA was due to the implementation of Securitization Act (2002).



 But the increase in NPA was increasing in absolute term, as NPA as per percent of advance shows a declining trend in Public Sector Banks while that of in Private and Foreign Sector Banks shows an upward trend that is increase in NPA as per percent of advance after 2006.  The increase in NPA as per percent of advance of Private and Foreign Sector Banks is because of they have a major proportion of lending in non- priority sectors includes Medium and large scale industries which was highly affected by global financial crisis.



1. Capital Quality 2. Asset Quality

Capital Quality:
A sound and efficient banking system is end product for maintaining financial stability. Therefore, considerable emphasis has been placed on strengthening the capital requirements in recent years. The Capital to Risk-weighted Assets Ratio (CRAR) of SCBs, a measure of the capacity of the banking system to absorb unexpected losses, improved further to 13.2 per cent at end-March 2009 from 13.0 per cent at end-March 2008. The asset quality of banks in India has been improving over the past few years as reflected in the declining NPA to advances ratio. It is especially noteworthy that notwithstanding the pressures of a slowdown in the economy and an atmosphere of uncertainty, the net NPA to net advances ratio increased only marginally to 1.1 per cent as at end March 2009 from 1.0 per cent as at end March 2008. Significantly, gross NPA to gross advances ratio remained constant at 2.3 per cent. Thus, in terms of the two crucial soundness indicators, viz., capital and asset quality, the Indian banking sector has exhibited resilience amidst testing times.

Graph: 2



INSTITUTE OF BUSINESS MANAGEMENT 73 .1 1.4 2.7 2.2 2 2.8 1.3 2.9 1.4 1.Asset Quality: Movements in Non-performing Assets – Bank Group-wise Old Public Sector Banks Nationalized Banks State Bank Group Private Sector Banks New Private Sector Banks Foreign Banks Gross NPAs As at end-March 2008 Addition during the year Recovered during the year Written off during the year As at end-March 2009 Net NPAs As at end-March 2008 As at end-March 2009 Gross NPAs/Gross Advances Ratio End-March 2008 End-March 2009 Net NPAs/Net Advances Ratio End-March 2008 End-March 2009 0.5 0.1 1.3 0.6 2.7 1.8 4 17726 21033 8245 9339 8398 10745 740 1165 4640 6253 1247 2973 0 45156 0 25368 0 18352 0 3072 0 13911 1514 6833 26271 15863 9829 1579 6510 2954 31338 17822 12879 2094 10520 8430 40089 23410 15303 2557 9901 2872 Source: http://www.7 0.3 2.8 2.R.7 0.9 N.5 2.7 0.

Indian banks recovered a higher amount of NPAs during 2008-09 than that during the previous year. As a result.382 crore) during the year. The NPAs ratio of all other bank groups declined. It may be noted that the increase in gross NPAs was more noticeable in respect of new private sector and foreign banks. The hardening of interest rates might have made the repayment of loans difficult for some borrowers. some slippage in NPAs could be expected. which have been more active in the real estate and housing loans segments.52. the gross NPAs of SCBs increased across all the bank groups.283 crore in 2007-08.R. The gross NPAs to gross advances of foreign banks increased significantly during the year. it may be noted that this slippage was moderate as compared to the problems faced by banks all over the world.Interpretation:  The trend of improvement in the asset quality of banks continued during the year. N. resulting in some increase in NPAs in this sector.  Gross NPAs (in absolute terms) increased for all the banks. INSTITUTE OF BUSINESS MANAGEMENT 74 .  Nevertheless. In this context.28.38. while that of private sector banks increased marginally. Though the total amount recovered and written-off at Rs. it may be noted that in the present context of financial turmoil.828 in 2008-09 was higher than Rs. While net NPAs to net advances ratio of all the banks increased over the previous year except that of nationalized banks. it was lower than fresh addition of NPAs (Rs.

SB Pvt. 5 Pvt. PSBs did not have any of its banks in > 10% category. While this ratio is declining over the years 2007-08 this is compensated by the rise in number of banks in < 2%.2007-08 & 100% in 2008-09. INSTITUTE OF BUSINESS MANAGEMENT 75 FB .FREQUENCY DISTRIBUTION OF BANKS ACCORDING TO LEVEL OF NPAs: Frequency Distribution of Banks according to level of NPAs 100% 90% 80% 70% 60% 50% 40% > 10% 5% to 10% 2% to 5% < 2% 30% 20% 10% 0% Pvt. the Public sector banks (PSBs) had around 60% of their NPA profile in the < 2% category which increased 75% in 2005-06.SB Pvt.SB Pvt. SB‟s banks were in N. PSBs 30% NPA profile in the year 2004-05 belongs to 2% to 5% category which reduced over the years and has been totally eliminated in 2008-09.  Private sector banks (Pvt.SB Pvt.SBs) was having the worst situation in 2004-05 where 50% of its bank was in 2% to 5% category.SB PSB PSB PSB PSB PSB FB FB FB FB 2004-05 2005-06 2006-07 2007-08 2008-09 Graph: 3 Source: Annexure – Table 1 Interpretation:  In the year 2004-05.R. 90% in 2006-07 .

there is increase in number of banks in higher NPA category. The number of banks increased in < 2% category.  Foreign banks (FB) were comparatively in good position compare to private sector banks in the initial years. 70% of its NPA profile belongs to < 2% category. But due to poor financial condition in 2008-09. public sector banks managed to reduce NPAs over the years.R.5% to10% category in 2004-05 which was totally eliminated in 2007-08. INSTITUTE OF BUSINESS MANAGEMENT 76 . N. So among all three sectors.

Non priority sector consist of large industries. Nonpriority sector contributes more towards NPA than priority sector.  Priority sector consist of advance given to agriculture.COMPOSITION OF NPAs OF BANK SECTOR WISE: COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS .R.2001 TO 2009 30000 Amount in Rs. N. & other priority sector advances.1 Source: Annexure – Table 3 Interpretation:  From the above chart it is observed that public sector category is the least contributor towards the NPA of public sector bank. INSTITUTE OF BUSINESS MANAGEMENT 77 . In the initial years from 2001 to 2005. medium industries & other non priority sectors. Crore 25000 20000 15000 10000 5000 0 Priority Sector Public Sector 2001 24156 1711 2002 25150 28405 903 2003 24939 26781 1087 2004 23841 25698 610 2005 21926 23249 444 2006 22374 18664 341 2007 22954 15158 490 2008 25287 14163 299 2009 24318 19251 474 Non-priority Sector 27307 Graph: 4. where priority sector contributes more than Nonpriority sector. But in later years from 2006 it‟s other way round. SSI.

 NPA in non priority sector is reducing constantly from 2002 to 2008 i.000 crore was announced in union budget of 2008.Though the advance given to non-priority sector was higher than priority sector. N. waiver package of Rs. INSTITUTE OF BUSINESS MANAGEMENT 78 . from 2006 there is rise NPA because of defaults on the loan given to the farmers. which have been more active in the real estate and housing loans segments. by 50%. In order to reduce that.e. It was highest in 2008. 60. But in the later years i. In case of priority sector. It may also be noted that the increase in NPAs was more noticeable in priority sector.e. it started falling from 2003 up to 2005 over previous year. NPAs of non-priority sector is comparatively.R.

5% of total advance is made towards public sector category.  Priority sector category on an average constitutes almost 34% of the total advances made by the private sector banks.2 Source: Annexure – Table 4 Interpretation:  From the above graph it is observed that public sector contributes very negligible towards the overall NPA of foreign banks. The major reason for this is that on an average only 3. the real estate market was on boom. which encouraged people to take more loans. In later years from 2007 to 2009 there is increase in NPA of priority sector.  In the year 2007-08. But after the subprime crisis there was sudden fall in real estate market & people became default to pay the loan. While average NPA of priority sector constitutes of 25% of total NPA.2001 TO 2009 14000 12000 Amount in Rs.COMPOSITION OF NPAs OF PRIVATE SECTOR BANKS . Crore 10000 8000 6000 4000 2000 0 2001 1835 4452 123 2002 2546 9090 31 2003 2445 9327 95 2004 2482 7796 75 2005 2188 6569 42 2006 2284 5541 4 2007 2884 6353 3 2008 3419 9558 0 2009 3640 13172 75 Priority Sector Non-Priority Sector Public Sector Graph: 4. In these years more advances was given to agriculture & housing sector. INSTITUTE OF BUSINESS MANAGEMENT 79 .R. N.

the average advances made are 60. We can see the declining trend in NPA of non-priority sector from 2003 to 2006. In case of non-priority sector. 2002. INSTITUTE OF BUSINESS MANAGEMENT 80 . But the average NPA of non-priority sector is almost 74% which is highest amongst the entire category.5% of total advance made by private sector banks. N.R. This as a result of securitization Act.

COMPOSITION OF NPAs OF FORIEGN BANKS .2007 TO 2009 Amount in Rs. So NPA will also be more in non-priority sector. As foreign banks are having global presence they are more affected by the global meltdown & financial crisis of 2008.0 0 6506 0 Graph: 4.R.  Non-priority sector contributes highest towards the NPA of foreign banks because non-priority sector constitute approximately 65% of the total advances made by foreign banks.3 Source: Annexure – Table 5 Interpretation:  It is observed from the chart there is no NPA in public sector category in all the three years because there was no advance made to public sector category. N. INSTITUTE OF BUSINESS MANAGEMENT 81 .  The advances are made to medium & large scale industries in non-priority sector. Crore 7000 6000 5000 4000 3000 2000 1000 0 Priority Sector Non-Priority Sector Public Sector 2007 331 2008 402 2009 649 2.  NPA is low in priority sector because very few advances are made in priority sector & that too are made to SSI. So its effect is seen by sudden rise in NPA in 2009.120 0 2712.

R.COMPARISON OF NET NPA OF OLD AND NEW PRIVATE SECTOR BANKS: 2000-01 to 2008-09 NET NPA 7.000 1. N. INSTITUTE OF BUSINESS MANAGEMENT 82 .000 2.000 6. Old private sector banks are more efficient than that of new private sector banks in managing NPA.000 3.000 5. starts performing better than their new counterparts.000 4.000 0 Old private sector banks New private sector banks Graph: 5 Source: Annexure – Table 6 Interpretation:  From the above chart it is clearly observed that net NPA of old private sector banks has a declining trend over the years on the contrary new private sector banks has an upward trend.  Old private sector banks which is passing from lower growth rate in recent past.

12.5 2 1.8 1.8 2006-07 1. whereas in case of private sector bank it has reduced in 2005-06 then it got stable and started rising from 2007-08 onwards.1 1.NET NPAs AS PERCENTAGE OF ADVANCES OF BANKS: Net NPAs/Net Advances 2.e.9 2008-09 0.3 1 0. Even for private sector bank the ratio increased by 25% in 2009 due to financial crises & also for public sector bank the reduction in 2009 was the lowest i.  In case of foreign banks it is fluctuating over the years. Public sector banks have been able to reduce this ratio by 66. In the year 2008-09 the ratio increased by 89% for foreign banks where the foreign banks were badly affected by the global meltdown.2 0. INSTITUTE OF BUSINESS MANAGEMENT 83 .9 0.5 1 0.5 1.7 1. It is constantly reducing each year.R.7 Graph: 6 Source: Annexure – Table 7 Interpretation:  From the above it is clearly observed that only public sector banks have succeeded in reducing net NPA against net advances made over the period of time.5% N. Public sector banks as a result of stringent checks & control able to manage low ratio compare to other banks.5 0 Public Sector Private Sector Foriegn Sector NPA as % of Advance 2004-05 2.9 2005-06 1.1 1 1 2007-08 0.7% from 2005 to 2009.

1 1.9 1. INSTITUTE OF BUSINESS MANAGEMENT 84 .R. This proves that public sector banks have succeeded in reducing NPA over the years.2 0. Sub-Standard & Doubtful asset.2 96.5 2.3 0.2 1.0 3.9 4.7 97.2 1.2 97.0 0. Sub-standard.1 2.6 92.e.CLASSIFICATION OF LOAN ASSET OF BANKS: Classification of Loan Asset of Public Sector Banks Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset 0.0 0. The rise in sub standard ratio has major proportion indicates that there is a high scope of up gradation or improvement in NPA recovery in initial stage because it will be very easy to recover the loan as minimum duration of default.3 0.3 1.  Public sector banks have taken various measures to reduce NPA also convert SubStandard. N.7 0. Doubtful & Loss Asset are decreasing every asset.4 1.9 2004 2005 2006 2007 2008 2009 Graph: 7.1 97. Doubtful & loss asset into the above category Standard.6 94.5 1.1 Source: Annexure – Table 8 Interpretation:  The above frequency distribution chart states that standard asset is increasing every year & on the contrary all the other types of asset i.

2 1.0 0. In 2009 percentage of standard asset has reduced by 0.0 2.5 96. But in the year 2009.2 Source: Annexure – Table 9 Interpretation:  The above chart clearly states that the rise in the standard assets over the years compensates the fall in the other three types of assets.9 1. N.5 0.5 3.0 1.1 Doubtful Asset 0.3 1.5 Loss Asset 0.Classification of Loan Asset of Private Sector Banks Standard Asset 0.2 97.3 1.0 1.3 Sub-Standard Asset 0.4 2.3 0. So the private sector banks have managed to reduce the doubtful asset.5% which is compensated by increase in SubStandard & doubtful assets.6 97.R. INSTITUTE OF BUSINESS MANAGEMENT 85 . the percentage of Sub-Standard asset is highest among all the year.8 97. The percentage of doubtful asset has reduced to a great extent amongst all.1 94.8 0.4 96.8 2004 2005 2006 2007 2008 2009 Graph: 7.6 1. This increase is due to interest & principle amount unpaid due to financial crisis in 2009.

4 0. This increase in Sub-Standard asset is because of interest & principle amount unpaid.2 0.3 Source: Annexure – Table 10 Interpretation:  The proportion of Standard Asset is increasing from 2004 and started getting stable in 2007 & 2008.2 0. The proportion of other three types of assets is falling over the years.1 95.3 0.5 1.1 3. but in 2009 there is great increase in the proportion of SubStandard asset which is as a result of decrease in proportion of Standard asset.2 0.0 95.8 1.5 0. due to poor global conditions.5 1.5 1.7 2004 2005 2006 2007 2008 2009 Graph: 7.0 0.9 0.7 1.6 97. But it has fallen in 2009.6 1. INSTITUTE OF BUSINESS MANAGEMENT 86 .5 0. for the loan provided in a 2008.R.9 98.1 98.8 0.2 97. N.Classification of Loan Asset of Foriegn Banks Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset 1. The interest & principle amount remained unpaid for period of more than 180 days but less than 1 year.

There is constant increase in net profit from 2000-01 to 2003-04 & from 2005-06 to 2008-09.5% N.1 Source: Annexure – Table 11 Interpretation:  It is observed from the above graph there exist no particular relationship between net profit & net NPA of public sector banks. The average of percentage decrease in net NPA YOY basis comes to 2. INSTITUTE OF BUSINESS MANAGEMENT 87 .R. Crore 30000 25000 20000 15000 10000 5000 0 Net NPA Net Profit 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 27977 4317 27958 8301 24877 12295 19335 16546 16904 15784 14566 16539 15145 20152 17726 26592 2008-09 21033 34394 Graph: 8.3%  On the contrary public sector banks have managed to reduce net NPA constantly from 2001-02 to 2005-06. Although the percentage of reduction over the previous year is low compared to percentage of rise in profit over previous year.COMPARISON OF NET PROFIT AND NET NPA OF BANKS: Comparison of Net Profit And Net NPA Public Sector Banks 40000 35000 Amount in Rs. The average of percentage increase in net profit YOY basis comes to 32.

 On the contrary there is no continuous rise/fall in net NPA.2 Source: Annexure – Table 12 Interpretation:  It is clearly observed from the line graph that there is continuous rise in net profit of private sector banks over the years. The average of percentage increase in net profits of private sector banks comes to approximately 34%.Comparison of Net Profit And Net NPA Private Sector Banks 12000 10000 Amount in Rs. The average of percentage rise in net NPA comes to almost 15%. INSTITUTE OF BUSINESS MANAGEMENT 88 .R. But overall there is rise in net NPA from 2000-01 to 2008-09. N. Crore 8000 6000 4000 2000 0 Net NPA Net Profit 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 3700 1142 6676 1779 3963 2958 4128 3481 4212 3533 3171 4975 4028 6465 5380 9522 2008-09 7418 10868 Graph: 8.

Comparison of Net Profit And Net NPA Foreign Banks 9000 8000 Amount in Rs. Whereas in case of net profit there is no continuous upward or downward movement. N.  But overall there is rise in net NPA of foreign banks. Crore 7000 6000 5000 4000 3000 2000 1000 0 Net NPA Net Profit 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 785 945 920 1492 903 1824 933 2243 639 3098 808 4109 927 5343 1247 7544 2973 8459 Graph: 8. So this shows there is positive relationship between net NPA & net profit of foreign banks. The average of percentage increase in net profit YOY basis comes to 32%. The average of percentage increase in net NPA YOY basis comes to approximately 25%. INSTITUTE OF BUSINESS MANAGEMENT 89 .R.3 Source: Annexure – Table 13 Interpretation:  The above line graph shows net profit of foreign banks is increasing throughout the period from 2000-01 to 2008-09.

27% & 12.2 2 Net NPAs/Net Advances Gross NPAs/Gross Advances 0. N. the percentage change is varying.7 2 1 0 2004-05 2005-06 2006-07 2007-08 2008-09 2.R.6 3 2.e. from 2006-07 to 2007-08 & 2007-08 to 2008-09. It has reduced by 38% from 2004-05 to 2005-06.5% from 2004-05 to 2005-06.1 2. 18. 27.1 Source: Annexure – Table 14 Interpretation:  The percentage in reduction of gross NPA to gross advances ratio is decreasing year on year i. Similarly it has reduced by 15.1 1. it has reduced by 34.3 1.5 5 4 3.5% respectively from 2005-06 to 2006-07. Similarly it has reduced by 25%.5% & 9% respectively from 2005-06 to 2006-07.NPA TO ADVANCE RATIO OF BANK: Comparison of NPA with AdvancesPublic Sector Banks 6 5.7 Graph: 9. INSTITUTE OF BUSINESS MANAGEMENT 90 .38%. from 2006-07 to 2007-08 & 2007-08 to 2008-09.  While in case of net NPA to net advances ratio.8 0.

This gap is highest in 2006 because in 2006 advances have increased tremendously over 2005. Due to which NPA also increased & so provisions also increased.  The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to net advances is decreasing over the years. It is not decreasing in same proportion as gross NPA. The above calculated figure states that the provisions made for NPA & other items like interest due but not recovered.  The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2005-06 [67%] & lowest in 2006-07 [59%]. In all the public sector bank has succeeded to reduce the non performing assets against the advances made over the years. part payment received and kept in suspense account. In other years it near to 63%. etc which is deducted from Gross NPA is changing over the years. N. INSTITUTE OF BUSINESS MANAGEMENT 91 .R.

Comparison of NPA with AdvancesPrivate Sector Banks 4 3.2 Source: Annexure – Table 15 Interpretation:  The percentage change in of gross NPA to gross advances ratio is decreasing initially & thereafter started rising from 2006-07.5 0 2004-05 2005-06 2006-07 2007-08 2008-09 1 1 1. INSTITUTE OF BUSINESS MANAGEMENT 92 .  The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the years states that private sector banks makes more provisions in gross NPA & gross advances.R. It is unchanged from 2005-06 to 2006-07.5 2 1. It has increased by 20% & 25% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-09.9 1.5 3 2.2 Gross NPAs/Gross Advances Net NPAs/Net Advances 2.5% & 9% respectively from 2006-07 to 2007-08 & 2007-08 to 200809.  While in case of net NPA to net advances ratio. N.2 1.9 3. It has reduced by 47% from 2004-05 to 2005-06.5 2. Similarly it has reduced by 12% from 2005-06 to 2006-07 & thereafter increased by 18. It has reduced by 34.5 2.2% from 2004-05 to 2005-06.8 Graph: 9.5 1 0.5 2. the percentage change is varying drastically.

 Private sector banks have not succeeded to reduce NPA as against the advances made over the years as both the ratios are increasing in later years.R. This resulted increase in NPA which in turn increased the provisions and unrecognized interest income. INSTITUTE OF BUSINESS MANAGEMENT 93 . In other years it near to 54%. N. The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2005-06 [60%] & lowest in 2008-09 [48%]. In 2006 there is highest increase in advances over previous year amongst all the year.

 While in case of net NPA to net advances ratio.9 0.8 4 Graph: 9.9 2 1.5% & 10% respectively from 2004-05 to 2005-06 & from 2005-06 to 2006-07.7 Net NPAs/Net Advances 2.It is unchanged in 2007-08 & then increased in 2008-09.  The steep rise in gross NPA & net NPA 2008-09 is due to poor global conditions. INSTITUTE OF BUSINESS MANAGEMENT 94 .5 4 3.5 3 2. It has reduced by 11% from 2004-05 to 2005-06. It has reduced by 28.R.5 1 0.8 Gross NPAs/Gross Advances 1.8 1 0. Again it reduced by 10% in 2008 and finally increased by 89% in 2008-09. there is great volatility. N.5 0 2004-05 2005-06 2006-07 2007-08 2008-09 0.Comparison of NPA with AdvancesForeign Banks 4.5 2 1. It has increased tremendously by 122% from 2007-08 to 2008-09. Thereafter it increased by 25% in 2006-07.3 Source: Annexure – Table 16 Interpretation:  The gross NPA to gross advances ratio is decreasing till 2006-07.8 1.

R. N. In 2004-05 provisions & unrecognized interest income was highest compare to other years while it was lowest in 2006-07. The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2004-05 & lowest in 2006-07. The change in net NPA to net advances is quite higher than gross NPA to gross advances.  The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to net advances is decreasing over the years. INSTITUTE OF BUSINESS MANAGEMENT 95 . In all the public sector bank has succeeded to reduce the non performing assets against the advances made over the years.  Thus in foreign banks gross NPA to gross advances ratio & net NPA to net advances ratio are not having parallel movement throughout the period.

R. While on the other hand for new private sector banks net NPA to net advances ratio is fluctuating over the years. INSTITUTE OF BUSINESS MANAGEMENT 96 .4 Source: Annexure – Table 17 Interpretation:  From the above chart it is clearly observed that old private sector banks are constantly improving in terms of net NPA to net advances ratio which is represented by declining trend from 2000-01 to 2008-09.Net NPA to Net Advance Ratio of Private Sector Banks 8 7 Net NPA/Net Advance 6 5 4 3 2 1 Old Private Sector Banks New Private Sector Banks 0 Graph: 9. N.

613 20.345 4.213 X 20. Private and Foreign Sector Banks.047 -5.278 -3.613 20. Net NPA and Net profit of Public.X 7.613 20.613 20.468 -2.213 17. This test researcher has applied to identify the co-relation between two variables i.709 -6.e.613 Net Profit Y 4317 8301 12295 16546 15784 16539 20152 26592 34394 154921 17.613 20.R.213 17.213 17.213 17.613 Y 17. Public Sector Banks: H0: There is no significant correlation between NPA and Profit of Public Sector Banks for last 9 years H1: There is correlation between NPA and Profit of Public Sector Banks for last 9 years Net NPA Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Total Mean X 27977 27958 24877 19335 16904 14566 15145 17726 21033 185521 20.264 -1.213 17.213 17. The variable in our study is Net NPA and Net profit.HYPOTHESIS TESTING TEST OF CO-RELATION The test of co-relation is used to identify the co-relation between two variables.213 17.613 20.613 20.213 X. INSTITUTE OF BUSINESS MANAGEMENT 97 .613 20.887 420 Y-Y -12896 -8912 -4918 -667 -1429 -674 2939 9379 17181 (X-X)2 (Y-Y)2 (X-X)*(Y-Y) 54228496 166308364 -94966586 53949025 79419466 -65456877 18181696 24182200 -20968391 1633284 444396 851953 13756681 2040898 5298677 36566209 454734 4077734 29899024 8638779 -16071436 8337541 87965641 -27081675 176383 295186761 7215676 216728339 664641238 -207100924 N.364 7.213 17.

r= ∑ (X-X)*(Y-Y) ∑[(X-X)2*(Y-Y)2] 1/2 r= -207100923.R.0.54567 H0 (Null Hypothesis) is rejected N.9 379534704 r = . INSTITUTE OF BUSINESS MANAGEMENT 98 .

R.Private Sector Banks: H0: There is no significant correlation between NPA and Profit of Private Sector Banks for last 9 years H1: There is correlation between NPA and Profit of Private Sector Banks for last 9 years Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Total Average X 3700 6676 3963 4128 4212 3171 4028 5380 7418 42676 4742 Y 1142 1779 2958 3481 3533 4975 6465 9522 10868 44723 4969 X-X 4742 4742 4742 4742 4742 4742 4742 4742 4742 Y-Y 4969 4969 4969 4969 4969 4969 4969 4969 4969 X-X -1042 1934 -779 -614 -530 -1571 -714 638 2676 Y-Y -3828 -3190 -2012 -1488 -1436 5 1496 4553 5899 (X-X)2 1085326 3741170 606513 376738 280677 2467380 509496 407606 7161443 16636349 (Y-Y)2 14651015 10176830 4046150 2213384 2061678 28 2238152 20727765 34795553 90910555 (X-X)*(Y-Y) 3987621 -6170352 1566539 913162 760701 -8302 -1067862 2906676 15785639 18673821 r= ∑ (X-X)*(Y-Y) ∑ [(X-X)2*(Y-Y)2] 1/2 r= 18673820.57 38889840. INSTITUTE OF BUSINESS MANAGEMENT 99 .77 r= 0.480172 H0 (Null Hypothesis) is rejected N.

Foreign Sector Banks: H0: There is no significant correlation between NPA and Profit of Foreign Sector Banks for last 9 years H1: There is correlation between NPA and Profit of private Sector Banks for last 9 years Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Total Average X 785 920 903 933 639 808 927 1247 2973 10135 1126 Y 945 1492 1824 2243 2002 3069 4585 6612 7510 30282 3365 X.X 1126 1126 1126 1126 1126 1126 1126 1126 1126 Y-Y 3365 3365 3365 3365 3365 3365 3365 3365 3365 X-X -341 -206 -223 -193 -487 -318 -199 121 1847 Y-Y -2420 -1873 -1541 -1122 -1362 -296 1220 3247 4145 (X-X)2 116350 42478 49774 37288 237268 101189 39642 14522 3412162 4050674 (Y-Y)2 5855077 3506618 2373654 1258046 1855907 87679 1489506 10544914 17183457 44154859 (X-X)*(Y-Y) 825373 385945 343725 216588 663587 94192 -242994 391326 7657202 10334944 r= ∑ (X-X)*(Y-Y) ∑[(X-X)2*(Y-Y)2] 1/2 r= 10334943.R.88 13373740. INSTITUTE OF BUSINESS MANAGEMENT 100 .772778883 H0 (Null Hypothesis) is rejected N.04 r = 0.

 The income other than Interest/Discount on advances/bill income for all the banks together i. If we consider the last six years average of percentage increase in income from Interest/Discount on advances/bill YOY basis then public sector bank records only 18% increase while its 33% for both private sector & foreign banks. brokerage and exchange transactions. 57% & 45% for private sector banks. Interest income includes Interest/Discount on advances/bill. income from Interest/Discount on advances/bill is the major contributor towards NPA.8% of the total income. corporate finance transactions. public sector.e.  The last six years average of percentage increase in income other than Interest/Discount on advances/bill income YOY basis was highest for foreign banks i.e. Income is divided into two parts interest income & other income.Interpretation:  There is negative correlation between net profit & net NPA of public sector banks while it is positive for private sector & foreign banks. While non-interest income includes fee income components such as commission. but it is highest in foreign banks i. M&A deals. INSTITUTE OF BUSINESS MANAGEMENT 101 . N. private sector and foreign banks on an average stood at 32.e. and any other income other than the interest income generated by the bank. Income on investments. But in interest income.  Net profit consists of income earned by the banks. But for private sector & foreign banks rise in income from Interest/Discount on advances/bill contributes minimal to the rise in overall income. Interest on balances with RBI and other interbank funds.R. sale of investments. others.  Average 75% of total earning of public sector bank comes from Interest/Discount on advances/bill which is 55% & 43% for private sector banks & foreign banks. 26% which is 15% & 19% for public sector bank & private sector banks respectively.

SBs Pvt. So the private sector & foreign banks earn higher non-interest income because of such value added services. asset management.R. Derivatives Desk.  The higher proportion of non-interest income in private sector & foreign banks is due to the value added services offered by these banks. Corporate Salary Account.SBs FBs FBs FBs FBs FBs PSBs PSBs PSBs 2004 2005 2006 2007 2008 Graph: 10  Public sector banks depend excessively on their interest income as compared to their peers in the private sector and their fee-based earnings coming from services remain quite low. Foreign banks offers some more services other than the above mentioned services like Global Trade Solutions. Bankers to Right/Public Issue.SBs 2009 Pvt. Channel Financing. Real Time Gross Settlement.Table 18 FBs N. There are some services which are offered by private sector banks but not by public sector banks.SBs Pvt. Technology Finance. PSBs PSBs PSBs Source: Annexure . Syndication Services.SBs Pvt. private equity placement.SBs Pvt.Frequency Distribution of Banks Income 100% 80% 60% 40% 20% Non-interest Income Interest Income 0% Pvt. Derivatives Clearing. These include Forex Desk. Factoring Solutions. INSTITUTE OF BUSINESS MANAGEMENT 102 .

5 X = 7962.12032 424447628.5 2 95103422 1.ANNOVA TEST (ANALYSIS OF VARIANCE) H0: There is no significant difference in NPAs of Public Sector Banks among various sectors H1: There is significant difference in NPAs of Public Sector Banks among various sectors Public Sector Bank X1 Priority sector Non-priority sector Public sector 24318 19251 474 Private Sector Bank X2 3640 13172 75 Foreign Bank X3 649 6506 0 Public Sector Bank X1 Priority sector Non-priority sector Public sector Total Mean 24318 19251 474 44043 14681 Private Sector Bank X2 3640 13172 75 16887 5629 Foreign Bank X3 649 6506 0 7155 3577.R. INSTITUTE OF BUSINESS MANAGEMENT 103 .5 Source of Variation Between Column Variance Within Column Variance N=8 k=3 Degrees of Sum of Squares Freedom Mean Square F-Ratio 190206843.5 5 84889526 N.

14681 Total X2 .R.3578 0 17152225 S= ∑(X .5)2 + 2(3577.X1)2 92871769 20884900 201838849 315595518 (X2 . INSTITUTE OF BUSINESS MANAGEMENT 104 .X1 24318 .75 Within Column Variance = ∑ nj – 1 sj2 nT .5629 X3 .X2 3640 -5629 13172.5629 75 .14681 474 .X3)2 8576112 8576112 X1 .5-7962.14681 19251 .5)2 (3-1) = 190206843.Between Column Variance = ∑nj (Xj – X) 2 K-1 = 3(14681-7962.5)2 + 3(5629-7962.X2)2 3956121 56896849 30846916 91699886 (X3 .X3 649 -3578 6506 .X)2 k-1 S1 = 315595518 (3-1) S2 = 91699886 (3-1) S3 = 17152224.5 N.5 2 = 95103421.k (X1 .5 (2-1) S1 = 157797759 S2 = 45849943 S3 = 17152224.

null hypothesis is accepted. private sector & foreign banks seems to be same in different sectors i.5)*1/5 = 84889525.Within Column Variance = (157797759)*2/5 + (45849943)*2/5 + (17152224. which means that there is no significant difference in NPAs of different types of banks among various sectors. priority sector.7 Fcal = Between Column Variance Within Column Variance = 95103421. public sector. non-priority sector & public sector for the year 2009.  So this states that the mean behavior of NPAs of all the types of bank i.05 error Interpretation:  As Fcal is less than Ftab.e. N.79 @ 0. INSTITUTE OF BUSINESS MANAGEMENT 105 .12 Ftab = k-1 NT-k = 2/5 Ftab = 5.e.75 84889525.R.7 Fcal = 1.

OVERALL FINDINGS  NPAs were more noticeable in respect of new private sector and foreign banks. Whereas it is just 55% & 43% for private sector banks & foreign banks. N. The proportion of standard assets in Private sector banks reduced in 2008 and 2009 which was compensated by increase in sub-standard and doubtful assets.2% of loan assets in 2008.R. NPA profile in the < 2% category of public sector banks was reached to 100% in 2008-09 as compared to Private and Foreign sector banks which was around 80%  Net NPA against net advances increased more in Foreign and Private sector banks in 2008-09 while Public sector banks have succeeded in reducing net NPA against net advances made over the period of time  Public sector banks have managed to increase the standard assets over the years.5% of loan assets in 2009 which was 1. INSTITUTE OF BUSINESS MANAGEMENT 106 .  Among all three sectors. which had been registering a significantly lower growth rate than their newer counterparts in the recent past.  Public sector banks almost 75% of income comes from Interest/Discount on advances/bill. which have been more active in the real estate and housing loans segments.  The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the years states that public sector banks makes more provisions in gross NPA & gross advances as compared to private and foreign banks. public sector banks have managed to reduce NPAs over the years. managed a better performance this year. It shows a upward trends over the years as compared to others  The old private sector banks. In Foreign sectors banks the proportion of sub-standard asset has increased tremendously by 3.

Sub-standard Assets (SUB).  Based on the asset classification viz. Since the probability of a loss asset being converted to any higher asset category is zero. p41 = p42 = p43 = 0 and thus p44 = 1.SUGGESTIONS  New body like Debt Recovery Tribunal should be established & capacity of DRTs should be enhanced. INSTITUTE OF BUSINESS MANAGEMENT 107 . Standard Assets (STD). a matrix can be formed with a given probability. However.R. Therefore. financial data of an individual is not available.  All banks should keep stringent check on advance being made to real estate & housing segment as these segment contributed highly towards the NPA in 2008 & 2009. this matrix can be better applied for a firm level or corporate level borrower. This transition matrix can be used to assess the loan quality of a firm level borrower by evaluating the financial position. Doubtful Assets (DOUB) and Loss Assets (LOSS). N. this matrix will be difficult to apply to assess individual borrowers because unlike a firm level borrower.

R. INSTITUTE OF BUSINESS MANAGEMENT 108 . Uneven scale of repayment schedule with higher repayment in the initial years normally should be preferred. as rise in NPA due to default in interest income may affect the profits drastically.  Public sector banks should increase their non-interest income.  Private sector & Foreign banks should focus more on recovery of sub-standard & doubtful assets. N.

R. interest income due to large provisions of the NPAs.CONCLUSION The NPA is one of the biggest problems that the Indian Banks are facing today. and would affect the smooth functioning of the recycling of the funds Banks also redistribute losses to other borrowers by charging higher interest rates. The NPAs would destroy the current profit. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. INSTITUTE OF BUSINESS MANAGEMENT 109 . Even among private sector bank. N. old private sector banks are more efficient than new private sector banks. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. which hampers economic growth. Lower deposit rates and higher lending rates repress savings and financial markets. But efficient management of NPA is not the sole factor that determines the overall efficiency of banks. Public sector banks are more efficient than private sector & foreign banks with regard to the management of nonperforming assets.

Edition-Fourth. 2010 from and Progress of N. Publication-New Delhi Websites: 1) Tables in Annexure: Retrieved on 19th February.An Applied Orientation by Naresh K.aspx?head=Trend Banking in India 2) Tables in Annexure: Retrieved on 25th February. 2010 from http://www. 2010 from http://rbi.aspx 6) Recent History Of Indian Banking: Retrieved on 7th February. 2010 from 5) Banking in India-2009-10:Retrieved on 30th January.aspx?head=Statistical Tables Relating to Banks of India 3) Master Circular: Retrieved on 3rd March.aspx 4) Introduction to Banking Industry: Retrieved on 25th January.BIBLIOGRAPHY Books: 1) Marketing 2010 from INSTITUTE OF BUSINESS MANAGEMENT 110 2010 from http://en.

SB 2008-09 FB < 2% 17 10 22 22 17 26 26 21 27 26 22 25 27 18 24 2% to 5% 9 15 2 6 9 0 2 3 1 2 1 2 0 4 5 5% to 10% 2 5 2 0 2 0 0 1 0 0 0 0 0 0 1 > 10% 0 0 4 0 0 3 0 0 1 0 0 1 0 0 0 Compiled from: http://www.rbi.SB 2006-07 FB PSB Pvt.Frequency Distribution of Banks according to level of NPAs Year Banks PSB Pvt. INSTITUTE OF BUSINESS MANAGEMENT 111 .SB 2007-08 FB PSB 2004-05 FB PSB N.ANNEXURE Table: 1:.SB 2005-06 FB PSB Pvt.R.

in Table: N.904 14.566 15.145 17.212 3.380 7.Net NPAs of Banks: 2000-01 to 2008-09 Public Sector Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Banks 27.rbi.726 21.rbi.977 6. INSTITUTE OF BUSINESS MANAGEMENT 112 .org.963 4.171 4028 5.R.958 24.418 Foreign Banks 785 920 903 933 639 808 927 1247 2973 Compiled from: http://www.335 16.877 19.Composition of NPAs of Public Sector Banks .Table: 2:.676 3.2001 To 2009 Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 Priority Sector 24156 25150 24939 23841 21926 22374 22954 25287 24318 Non-priority Sector 27307 28405 26781 25698 23249 18664 15158 14163 19251 Public Sector 1711 903 1087 610 444 341 490 299 474 Compiled from: http://www.128 4.033 Private Sector Banks 3.

in Table: of NPAs of Private Sector Banks .2001 To 2009 Year 2001 2002 2003 2004 2005 2006 2007 2008 2009 Priority Sector 1835 2546 2445 2482 2188 2284 2884 3419 3640 Non-Priority Sector 4452 9090 9327 7796 6569 5541 6353 9558 13172 Public Sector 123 31 95 75 42 4 3 0 75 Compiled from: http://www.Composition of NPAs of Foreign Sector Banks – 2007 To 2009 Year 2007 2008 2009 Priority Sector 331 402 649 Non-Priority Sector 2120 2712 6506 Public Sector 0 0 0 Compiled from: http://www.rbi. INSTITUTE OF BUSINESS MANAGEMENT 113 .Table:

142 1.2 1.R.3 1.796 3.7 Private Sector Bank 1.8 0.137 4640 6253 Compiled from: http://www.598 2.353 1.1 1.9 1. Private & Foreign Sector Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Public Sector Bank 2.8 1 6:.375 891 740 1165 New Private Sector Banks 929 3.013 2.9 Table: 7:.rbi.663 1.9 1 1 N.5 Foreign Bank 0.Net NPAs of Old and New Private Sector Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Old Private Sector Banks 2.rbi. INSTITUTE OF BUSINESS MANAGEMENT 114 .Net NPA to Net Advance of Public.771 3.7 Compiled from: http://www.365 1.986 2.1 1.

1 1.4 0.5 0.3 1.2 Compiled from: http://www.9 Doubtful Asset 4.Table: 8:.1 1.rbi.6 2.1 1.4 2.3 0.4 97.3 3.Classification of Loan Asset of Public Sector Banks in percentage Standard Year 2004 2005 2006 2007 2008 2009 Asset 92.2 1.0 0.R.5 1.1 97.3 0.1 97.9 1.0 Loss Asset 0.7 0.0 0.8 1.5 1.6 97.3 0.3 Compiled from: Table: 9:.6 96.0 Loss Asset 0.0 Doubtful Asset N.2 0.Classification of Loan Asset of Private Sector Banks in percentage Standard Year 2004 2005 2006 2007 2008 2009 Asset 94.rbi.2 0.0 1. INSTITUTE OF BUSINESS MANAGEMENT 115 .6 1.0 0.9 0.7 96.9 Sub-Standard Asset 2.5 2.2 94.8 Sub-Standard Asset 1.5 0.3 96.8 1.2 97.

6 Loss Asset 1.1 1.7 0.2 3.0 1.8 1.5 0.Table: 10:.9 1.Classification of Loan Asset of Foreign Sector Banks in percentage Standard Year 2004 2005 2006 2007 2008 2009 Asset N.0 97.2 97.2 Compiled from: 98.8 0.6 0.rbi.5 Table: NPAs & Net Profit of Public Sector Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Net NPA 27977 27958 24877 19335 16904 14566 15145 17726 21033 Net Profit 4317 8301 12295 16546 15784 16539 20152 26592 34394 Compiled from: http://www.7 Sub-Standard Asset 1.3 0.2 0.5 0.5 0.9 98. INSTITUTE OF BUSINESS MANAGEMENT 116 .4 0.rbi.R.5 Doubtful Asset 1.1 95.

Net NPAs & Net Profit of Private Sector Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Net NPA 3700 6676 3963 4128 4212 3171 4028 5380 7418 Net Profit 1142 1779 2958 3481 3533 4975 6465 9522 10868 Compiled from: http://www.rbi. INSTITUTE OF BUSINESS MANAGEMENT 117 Table: 13:.rbi.Net NPA & Net Profit of Foreign Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Net NPA 785 920 903 933 639 808 927 1247 2973 Net Profit 945 1492 1824 2243 3098 4109 5343 7544 8459 Compiled from: 12:.R.

3 1.2 2.5 ratios of Foreign Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Gross NPAs/Gross Advances 2.8 2 1.8 1 0.rbi.7 Compiled from: http://www.9 Net NPAs/Net Advances N.R.1 0.9 1.1 1.rbi.8 4 Net NPAs/Net Advances 0.2 1.9 1 1 1.8 2.8 0.rbi.5 Compiled from: http://www. INSTITUTE OF BUSINESS MANAGEMENT 118 .5 2.6 2.7 Compiled from: http://www.2 2 Net NPAs/Net Advances 2.Table: Table: 16:.9 0.NPA ratios of Private Sector Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Gross NPAs/Gross Advances 3.NPA ratios of Public Sector Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Gross NPAs/Gross Advances Table: 15:.5 2.8 1.7 2.

46 0.23 0.72 0.8 1 1.7 1.1 5.7 0.57 0.45 0.73 0.9 0.55 0.SBs FBs PSBs Pvt.76 0.7 1 0.76 0.61 0.39 0.9 New Private Sector Banks 3.49 0.73 0. INSTITUTE OF BUSINESS MANAGEMENT .SBs FBs PSBs Pvt.7 1.Table: 17:.56 0.R.2 3.55 0.54 0.54 Compiled from: http://www.5 1.3 Compiled from: http://www.77 0.58 0.45 0.43 0.SBs FBs Interest Income Non-interest Income 0.24 0.Frequency Distribution of Banks Income Year Banks PSBs Pvt.3 7.44 0.9 1.Net NPA to Net Advance Ratio of Private Sector Banks Years 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Old Private Sector Banks 7.42 0.58 2.27 0.44 0.46 Table: 18:.SBs FBs PSBs 119 2004 2005 2006 2007 2008 2009 N.rbi.1 1.24 0.SBs FBs PSBs Pvt.61 0.56 0.28 0.1 4.51 0.42 0.39 0.SBs FBs PSBs Pvt.

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