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

It is necessary that the banking system is equipped with prudential norms to minimize if not completely avoid the problem of credit risk. Trading in debts is a speculative form of transaction that is not permissible activity and thus. 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. No doubt this Act was challenged in various courts on ground that it was loaded heavily in favour of lenders. 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 . In the interim. giving little chance to the borrowers to explain their views once recovery process is initiated under the legislation. Effective management of NPA rather than elimination is prudent. A loan item or the borrower is an asset of a bank and not a debt. the legality of loan purchases is under cloud till now. Securitization in India is still in a nascent stage but has potential in areas like mortgage Backed securitization.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.that “Interest transfer of NPAs by banks is illegal and not a part of banking activity under the BR Act. It is a unique piece of legislation which has far reaching consequences. I feel the recent pronouncement of the Gujarat High Court has misinterpreted the term „debt‟ from legal as well as accounting point of view. The banks in the developed countries do not depend upon this income whereas N.R. The major problem with the Indian banking system is that they depend largely upon lending and investments. This act has a overriding power over the other legislation. 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. 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. Thus. 2002. All these issues gave the passage of evolution of the Securitization and Reconstruction of Financial Assets and enforcement of Security Interest Act (SARFAESI). 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. de-facto the assignment of loan (good or bad) amounts to transfer of asset and not debt. SARFAESI ACT was promulgated to regulate the financial assets and enforcement of security interest and for matters connected therewith or incidental thereto. INSTITUTE OF BUSINESS MANAGEMENT 4 .

INSTITUTE OF BUSINESS MANAGEMENT 5 . 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. 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. all the mechanisms suggested above may prove to be ineffective. 4) There have been instances of banks extending credit to doubtful debtors (who deliberately default on debt) and getting kickbacks for the same. 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. that a lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk management mechanism. 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. Conclusion The contaminated portfolio is definitely a bane for any bank. 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. The banker can earn sufficient net margin by investing in safer securities though not at high rate of interest.R. The corporate debt restructuring is also one of the methods suggested for the reduction of NPAs. It facilitates for limiting of high level of NPAs gradually. This will necessitates organizational restructuring. Without this. N.86 percent of income of Indian banks is accounted from interest and the rest of the income is fee based. 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 is needless to mention. The problem of non -performing loans created due to systematic banking crisis world over has become acute. 3) The receiver of properties of any bank or financial institution. 2) A manager of the borrowers‟ asset taken over by banks or financial institution. The onus for containing the factors leading to NPAs rests with banks themselves. It puts severe dent on the liquidity and profitability of the bank where it is out of proportion.

and describes the data. depicts. IV. Private & Foreign banks) using NPA ratios & comparing NPA with profits. Research Design The research design that will be use is Descriptive Research.  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.III.  Involves gathering data that describe events and then organizes.  Using of hypothesis testing. 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. tabulates.R.  Often uses visual aids such as graphs and charts to aid the reader. INSTITUTE OF BUSINESS MANAGEMENT 6 .  Uses description as a tool to organize data into patterns that emerge during analysis.  To check the proportion of NPA of different types of banks in different categories. Problem statement/Objective of the research  To study of the concept of Non Performing Asset in Indian perspective.

Priority sector.  To understand the causes & effects of NPA  To analyze the past trends of NPA of Public. 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. profits (net & gross) & advances of different banks is taken from Reserve Bank of India website. non-priority sector. N. H1: There is significant difference in NPAs of different types of banks among various sectors. Various banks from different categories together may make efforts to overcome limitations for lending money to different sectors like agricultural. classification of loan assets. Data Collection Sources Secondary Data Secondary data refers to the data which has already been generated and is available for use. The data about NPAs & its composition.2) ANNOVA Test : H0: There is no significant difference in NPAs of different types of banks among various sectors. VI. Scope of the study  To understand the concept of NPA in Indian Banking industry. 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. VIII. Private & Foreign banks in different sector. INSTITUTE OF BUSINESS MANAGEMENT 7 . V. SSI. VII.R. public sector & others.

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

5% respectively EARLY HISTORY: Banking in India originated in the last decades of the 18th century. became the State Bank of India. upon India's independence. Currently. they may be publicly listed and traded on stock exchanges) and 38 foreign banks. The first banks were The General Bank of India which started in 1786. India has 96 scheduled commercial banks (SCBs) .000 branches and 17. as did their successors. N. The oldest bank in existence in India is the State Bank of India. After India's independence in 1947. which originated in the Bank of Calcutta in June 1806.27 public sector banks (that is with the Government of India holding a stake). the government nationalized the six next largest in 1980. both of which are now defunct.R.000 ATMs. the public sector banks hold over 75 percent of total assets of the banking industry. a rating agency. This was one of the three presidency banks. INSTITUTE OF BUSINESS MANAGEMENT 9 . and the Bank of Hindustan. a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. The oldest bank in existence in India is the State Bank of India. In 1969 the government nationalized the 14 largest commercial banks. all three of which were established under charters from the British East India Company. Central banking is the responsibility of the Reserve Bank of India. relegating it to commercial banking functions. 31 private banks (these do not have government stake. The three banks merged in 1921 to form the Imperial Bank of India. For many years the Presidency banks acted as quasi-central banks. the other two being the Bank of Bombay and the Bank of Madras. which. which almost immediately became the Bank of Bengal. They have a combined network of over 53.2% and 6. the Reserve Bank was nationalized and given broader powers.INDIAN BANKING INDUSTRY INTRODUCTION: Banking in India originated in the last decades of the 18th century. with the private and foreign banks holding 18. According to a report by ICRA Limited. which in 1935 formally took over these responsibilities from the then Imperial Bank of India.

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

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

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. This resulted into greater involvement of the state in different segments of the economy including banking and finance. and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. and it became an institution owned by the Government of India. the Reserve Bank of India. paralyzing banking activities for months. 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.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). The major steps to regulate banking included:  In 1948. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The years of the First World War were turbulent. and two years thereafter until the independence of India were challenging for Indian banking. INSTITUTE OF BUSINESS MANAGEMENT 12 . N. Lakhs) 274 710 56 231 76 209 (Rs. India's central banking authority. and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. The Government of India initiated measures to play an active role in the economic life of the nation. was nationalized.R.

"  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. a national leader of India. Nationalization By the 1960s. However. and inspect the banks in India. banks in India except the State Bank of India. the GOI controlled around 91% of the banking business of India." The paper was received with positive enthusiasm. 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.R. in the year 1993. Thereafter. the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate. Indira Gandhi. despite these provisions. The stated reason for the nationalization was to give the government more control of credit delivery." Within two weeks of the issue of the ordinance. control and regulations. Later on. until the 1990s. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. the government merged New Bank of India with Punjab National Bank. This changed with the nationalization of major banks in India on 19 July 1969. 1969. Jayaprakash Narayan. INSTITUTE OF BUSINESS MANAGEMENT 13 . and a debate had ensued about the possibility to nationalise the banking industry. the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill. closer to the N. continued to be owned and operated by private persons. the Indian banking industry had become an important tool to facilitate the development of the Indian economy. and no two banks could have common directors. At the same time. it had emerged as a large employer. In 1949. and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19. the nationalised banks grew at a pace of around 4%. and it received the presidential approval on 9 August 1969. control. With the second dose of nationalization. After this. A second dose of nationalization of 6 more commercial banks followed in 1980. described the step as a "masterstroke of political sagacity. her move was swift and sudden.

The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. In terms of quality of assets and capital adequacy. Chidambaram. government banks. along with the rapid growth in the economy of India. The nationalised banks were credited by some. banking in India is generally fairly mature in terms of supply. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment. where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. Currently (2007). The stated policy of the Bank on the N. revitalized the banking sector in India. the then NarsimhaRao government embarked on a policy of liberalization. These came to be known as New Generation tech-savvy banks. Axis Bank(earlier as UTI Bank). which has seen rapid growth with strong contribution from all the three sectors of banks. People not just demanded more from their banks but also received more. and included Global Trust Bank (the first of such new generation banks to be set up). private banks and foreign banks. Liberalisation In the early present it has gone up to 74% with some restrictions. namely.average growth rate of the Indian economy. product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. till this time. including Home minister P. which later amalgamated with Oriental Bank of Commerce. were used to the 4-6-4 method (Borrow at 4%. This move. The Reserve Bank of India is an autonomous body. strong and transparent balance sheets relative to other banks in comparable economies in its region. to have helped the Indian economy withstand the global financial crisis of 2007-2009. Indian banks are considered to have clean.R.Lend at 6%. Bankers. licensing a small number of private banks.All this led to the retail boom in India. The new policy shook the Banking sector in India completely. INSTITUTE OF BUSINESS MANAGEMENT 14 . ICICI Bank and HDFC Bank.Go home at 4) of functioning. with minimal pressure from the government.

In March 2006. INSTITUTE OF BUSINESS MANAGEMENT 15 . vehicle and personal loans. 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. One may also expect M&As. N. the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. 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. and asset sales. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide. especially retail banking.Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.R. takeovers. mortgages and investment services are expected to be strong. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing.

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

During 1976. there was substantial increase in the no. deposits of Rs.R.Rs. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organization and consolidation of the banking system. INSTITUTE OF BUSINESS MANAGEMENT 17 . The Service Area Approach was introduced during 1989. of branches opened in rural/semi-urban centre‟s bringing down the population per bank branch to 12000 appx.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980. 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee. 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. loans of Rs. 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. 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. RRBs were established (on the recommendations of M. In these five decades since independence. Meanwhile. the consolidation phase started in late 80s and more particularly during early 90s. The focus during this period was to lay the foundation for a sound banking system in the country.50 cr. N. with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. While the 1970s and 1980s saw the high growth rate of branch banking net-work. During December 1969. for meeting the requirement of Indian economy.28. In the post-nationalization period.2629 cr. during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors.

Most importantly. credit management. 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.R. 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 flows were guided towards the priority sectors. autonomy packages etc. staff productivity and profitability of banks. 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. which had no access to banking hitherto. INSTITUTE OF BUSINESS MANAGEMENT 18 . A determined effort was made to make banking facilities available to the masses. customer service. Attention was paid to improving house-keeping. N. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population. technological changes. prudential guidelines on asset classification and income recognition.Expansion phase had begun in mid-60s but gained momentum after nationalization of banks and continued till 1984. more competition. capital adequacy.

batch processing in Cobol for MIS. business & transaction volumes and directed lending to agriculture. 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. Mainframes in corporate office 1991-1995 Expansion slows down Banking sector reforms resulting in progressive de-regulation of banking.R. INSTITUTE OF BUSINESS MANAGEMENT 19 .1980 Unprecedented expansion in geographical coverage.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.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. staff. introduction of prudential banking norms entry of new private sector banks Total Branch Automation (TBA) in Govt. owned and old private banks begins New private banks are set up with CBS/TBA from the start N.

“INDIAN FINANCIAL SYSYEM”. owned banks feel the heat and attempt to respond using intermediary technology. 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.Y. TBA implementation surges ahead under fiat from Central Vigilance Commission (CVC). IDRBT sets up VSAT network for Banks Govt. owned banks and old private banks start implementing CBSs.R. but initial attempts face problems Banks enter insurance business launch debit cards (Source: M.KHAN.3rd edition Publication by TATA McGraw hill) N. 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. proliferation of credit cards Communication infrastructure improves and becomes cheap.1996-2000 New delivery channels like ATM. INSTITUTE OF BUSINESS MANAGEMENT 20 .

according to a stress test done by the Reserve Bank of India (RBI). accounted for 50. The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. 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. as a group.5 per cent and 2.5 per cent in the total bank credit. Significantly. as per the RBI's February bulletin. Foreign banks and regional rural banks had a share of 5. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-resident External Rupee Accounts. while State Bank of India (SBI) and its associates accounted for 23. the RBI has the tenth largest gold reserves in the world after spending US$ 6. 28. 2010.8 per cent. with SBI and its associates at 23.R. Of these centres. new deposits have gravitated towards public sector banks.5 billion on July 2009. The report also found that scheduled commercial banks served 34. respectively.8 per cent. INSTITUTE OF BUSINESS MANAGEMENT 21 .8 per cent. Following the financial crisis.0 per cent. With respect to gross bank credit also.709 banked centres.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. The share of other scheduled commercial banks. N. nationalized banks hold the highest share of 50. according to the RBI's February bulletin.7 per cent and other scheduled commercial banks at 17.095 were single office centres and 64 centres had 100 or more bank offices. NRI fund inflows increased since April 2009 and touched US$ 45. 5. India's foreign exchange reserves rose to US$ 284. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009'. foreign banks and regional rural banks in aggregate deposits were 17.5 per cent respectively in the total bank credit.6 per cent and 3.26 billion as on January 8. nationalized banks.7 billion towards the purchase of 200 metric tons of gold from the International Monetary Fund (IMF) in November 2009.5 per cent of the aggregate deposits.

2009. in a notification issued on June 25. up 14. said that banks should link more branches to the National Electronic Clearing Service (NECS). 2009 over the figure of US$ 128. Currently. In its Third Quarter Review of Monetary Policy for 2009-10. the RBI observed that the Indian economy showed a degree of resilience as it recorded a better-than-expected growth of 7.Major Developments The State Bank of India (SBI) has posted a net profit of US$ 1.16 million in the second quarter of 2009-10. all core-banking-enabled branches should be part of NECS. the RBI hiked the Cash Reserve Ratio (CRR) by 75 basis points (bps) to 5.000 branches of 114 banks are enabled to participate in NECS. while keeping repo and reverse repo rates unchanged.43 per cent from US$ 175. This will cement its leading position as the bank with the largest global presence among local peers. the central bank of the country. Amongst the private banks. NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions.75 per cent. Ideally. Axis Bank's net profit surged by 32 per cent to US$ 115. N.4 million for the quarter ended December 31. the RBI.4 million posted in the nine months ended December 2008.9 per cent during the second quarter of 2009-10.56 billion for the nine months ended December 2009. INSTITUTE OF BUSINESS MANAGEMENT 22 .05 million for the same quarter in the previous year. Government Initiatives In its platinum jubilee year. HDFC Bank has posted a 32 per cent rise in its net profit at US$ 175. over the corresponding period last year.4 million on 21. In the Third Quarter Review of Monetary Policy for 2009-10.2 per cent rise in total income to US$ 852. a little over 26.R. The SBI is adding 23 new branches abroad bringing its foreign-branch network number to 160 by March 2010.

This is the highest year-on-year growth recorded since August 14.9 per cent as on October 9.According to the RBI. INSTITUTE OF BUSINESS MANAGEMENT 23 . outstanding bank credit in the 15 days up to January 29 2010 rose by US$ 4. 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. pointing to a revival in credit growth. reflecting large market borrowings of the Government. Meanwhile. 2009. 2009.R. The main source of M3 expansion was bank credit to the government.32 billion. remained above the indicative projection of 18. N.0 per cent set out in the First Quarter Review of July 2009.

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

INSTITUTE OF BUSINESS MANAGEMENT 25 .5% respectively. the public sector banks hold over 75 percent of total assets of the banking industry.They have a combined network of over 53. with the private and foreign banks holding 18. According to a report by ICRA Limited.000 ATMs. a rating agency.  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.R.000 branches and 17.2% and 6. N.

unless industry utilities and service bureaus. service operations. restrictive labour laws.R.  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. risk management and the overall organizational performance ethic & strengthen human capital.  Old private sector banks also have the need to fundamentally strengthen skill levels.  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. N.  Structural weaknesses such as a fragmented industry structure. weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs).WEAKNESS  PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing. restrictions on capital availability and deployment. INSTITUTE OF BUSINESS MANAGEMENT 26 .  The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. lack of institutional support infrastructure.

These require new skills in sales & marketing.  Reach in rural India for the private sector and foreign banks. and in fee-based income and investment banking on the wholesale banking side.OPPORTUNITY  The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards. consumer finance and wealth management on the retail side.  With increased interest in India.  Given the demographic shifts resulting from changes in age profile and household income.  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.R. 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. credit and operations. consumers will increasingly demand enhanced institutional capabilities and service levels from banks. At the same time. competition from foreign banks will only intensify. This will expose the weaker banks. actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. N. 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. Attracting. they should stay in the game for potential acquisition opportunities as and when they appear in the near term. INSTITUTE OF BUSINESS MANAGEMENT 27 .

explore this route for raising cheaper funds in the overseas markets. left with little headroom for raising equity. If the new instruments find takers. 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. compared to 20% foreign equity holding allowed in PSU banks. Significantly. it would help PSU banks. mortgages and investment services are expected to be strong.  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.  In an attempt to relieve banks of their capital crunch. especially retail banking.  Liberalization of ECB norms: The government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs.R. which were earlier not permitted to raise such funds. INSTITUTE OF BUSINESS MANAGEMENT 28 . N. the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. FII and NRI investment limits in these securities have been fixed at 49%.

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

INSTITUTE OF BUSINESS MANAGEMENT 30 . Social and Technological analysis.R. N. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry. Economic. PEST stands for Political.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.

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. Various policies are framed by the RBI looking at the present situation of the country for better control over the banks. Sometimes the government appoints various chairmen of the banks.5% to 3.  MONETARY POLICY Monetary Policy 2009-2010 Bank Rate: The Bank Rate has been retained unchanged at 6. Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5. They exploit these banks for their benefits. This gives India an advantage in terms of credibility over other countries.25% with immediate effect.R. stricter prudential regulations with respect to capital and liquidity. INSTITUTE OF BUSINESS MANAGEMENT 31 . Sometimes looking into the political advantage of a particular party.  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.POLITICAL FACTORS Government and RBI policies affect the banking sector.0% of NDTL. Cash Reserve Ratio: CRR has been retained unchanged at 5.75% with immediate effect. Various banks in the cooperative sector are open and run by the politicians. By doing so the profits of the bank get affected. Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3. N. to attract the farmer‟s votes.0% to 4. 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. the Government declares some measures to their benefits like waiver of short-term agricultural loans.0%.

 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. as incentive to those farmers who repay short-term crop loans on schedule. Also additional allocation of Rs 411 crore over Interim Budget 2009-10 was made for the same.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.  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. 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. 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. 2009 to 31st December. Currently this facility has been extended from 30th June. Also additional subvention of 1% to be paid from this year. INSTITUTE OF BUSINESS MANAGEMENT 32 . N. Ceiling for FII investment in companies was also increased from 24.R. 2009.

 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. The agriculture sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. expanding network with ATM's. With Government bearing this burden.  To allow scheduled commercial banks setting up off-site ATMs without prior approval subject to reporting.R. Moreover the emphasize on hiking promoter shareholding in Public sector banks. banks would not be affected much. This Union Budget has provided further six months extension of 25% rebate on loan for farmers owing more than 2 hectare of land. INSTITUTE OF BUSINESS MANAGEMENT 33 . It will only help banks to clear their most stubborn NPA accounts on banks book. opening of banking centre in un-banked blocks are some of the positive moves for the sector. N.  To provide banking facilities in under-banked/un-banked areas in the next three years. A sub-committee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same.  BUDGET IMPACT The Union Budget 2008-09 has focused on farm credit.  OTHER PROVISIONS  The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner.  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. 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.

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

therefore. and thus. 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. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities.ECONOMIC FACTORS Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector. SEZs and NRI investment have been framed to give a push to the economy and hence the GDP. 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. N. others followed. 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. In India. It takes India one step closer to the developed economies of the world. 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. Banking Industry is directly related to the growth of the economy.R. INSTITUTE OF BUSINESS MANAGEMENT 35 . Earlier it was agriculture which mainly contributed to the Indian GDP. banking has existed in one form or the other from time to time. booming the economy. If in the Budget savings are encouraged. 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. Policies of FDI. If the FDI limits are relaxed.

00 per cent on the corresponding date of last year.92 per cent.63 per cent to 3. LOW INTEREST RATES Reserve Bank of India controls the Interest rate. It leads to an erosion in the purchasing power of money. N. Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry. we expect that Indian Economy could again register a robust growth rate in the year 2009-10. the same as on the corresponding date of last year.47 per cent as compared with 5.50/3. each unit of currency buys fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate from the high of 12.92 per cent on 7th February 2009 against a high of 12. decreasing crude prices and lowering interest rate. Call money rates (borrowing & lending) were in the range of 1. Resultantly. which is based on several monetary policies.R. 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. To fight against the slowdown of the Economy. Inflation stands at 3. decreasing commodity prices. Government of India & Reserve Bank of India took many fiscal as well as monetary actions. Clubbed with fiscal & monetary actions.00 per cent.63 per cent on 9th August 2008. As on September 11.25/11. 2009 Bank Rate was 6.

Agriculture credit flow was Rs 2. the government shall pay an additional subvention of 1% as an incentive to those farmers who repay their short term crop loans on schedule. I propose to extend this period by six months upto 31st December. farmers having more than two hectares of land were given time upto 30th June.R. In the recent past. The target for agriculture credit flow for the year 2009-10 is being set at Rs. To achieve this.3 lakh per farmer at the interest rate of 7% per annum.000 crore to cover an estimated 40 million farmers was one of the major highlights of the last Budget. 2009.000 crore in 2008-09. I propose to continue the interest subvention scheme for short term crop loans to farmers for loans upto Rs.  DEBT RELIEF FOR FARMERS The one-time bank loan waiver of nearly Rs 71. Due to the late arrival of monsoon. 2009 to pay 75% of their overdues. the sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. the interest rate for these farmers will come down to 6% per annum. Thus.87. Under the Agricultural Debt Waiver and Debt Relief Scheme (2008).25.000 crore. AGRICULTURE CREDIT Agriculture has been the mainstay of our economy with 60% of our population deriving their sustenance from it. For this. I am making an additional Budget provision of Rs 411 crore over Interim BE. N. For this year. INSTITUTE OF BUSINESS MANAGEMENT 37 .3.

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

 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.advancement has changed the face of traditional banking systems. INSTITUTE OF BUSINESS MANAGEMENT 41 . N. Technology advancement has offer 24X7 banking even giving faster and secured service.R.

Accordingly. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan. up gradation of technology in the banking system. The account remains 'out of order' for a period of more than 90 days. iv. from the year ending March 31. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted. it has been decided to adopt the '90 days overdue' norm for identification of NPAs. and v. iii. doubtful or loss asset. as from that date. in accordance with the directions or guidelines relating to asset classification issued by RBI.. ii. in respect of an overdraft/ cash Credit(OD/CC). with effect from March 31. 2001. 2004. which has been classified by a bank or financial institution as sub-standard. The account remains 'out of order' for a period of more than 180 days. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan. i.R. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. ii.INTRODUCTION TO NPA MEANING OF NPA: Non Performing Asset means an asset or account of borrower. N. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems. recovery climate. INSTITUTE OF BUSINESS MANAGEMENT 42 . a non-performing asset (NPA) shell be a loan or an advance where. Accordingly. it was decided to dispense with 'past due' concept. etc. 2004. With a view to moving towards international best practices and to ensure greater transparency. a Non performing asset (NPA) shell be an advance where i. in respect of an overdraft/ cash Credit(OD/CC). 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. with effect from March 31.

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

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.Others' in Schedule 5 of the balance sheet. 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.  The provisions on standard assets should not be reckoned for arriving at net NPAs.  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 .03. the banks should make a general provision of a minimum of 0. 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.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. INSTITUTE OF BUSINESS MANAGEMENT 44 .2000.40 percent on standard assets on global loan portfolio basis.

 In regard to the secured portion. INSTITUTE OF BUSINESS MANAGEMENT 45 .Sub-standard Assets: With effect from 31 March 2005. 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. 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. 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. Doubtful Assets: A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard. provision may be made on the following basis. which has remained NPA for a period less than or equal to 12 month. a substandard asset would be one. 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. With effect from March 31.R. 2005. an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. with the added characteristic that the weaknesses make collection or liquidation in full. on the basis of currently known facts. conditions and values – highly questionable and improbable. if deficiencies are not corrected. 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.

2003 has to be made in phases as under: i. Also.2002.2003.03. INSTITUTE OF BUSINESS MANAGEMENT 46 . 2005. (2) Advances classified as „doubtful‟ more than three years on or after April 1. these assets would have been identified as „loss assets‟ by the bank N. ii. 2004.03. balance of the provisions not made during the previous year.R. 100% with effect from March 31.  Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31.2002. As on 31. 2005.although there may be some salvage or recovery value. 2006. Provision requirement (%) 20 30 60% with effect from March 31. 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.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. 2004. 2007. as on 31. As on31.03. with a minimum of 20 % each year. 75% effect from March 31. 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.  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. in addition to the provisions needed.

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

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

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

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

which occurred due to wrong choice of client. Involve ment of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Routine payments and dues. Another impact of reduction in profitability is low ROI (return on investment). Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Liquidity: Money is getting blocked. 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.R. which may lead to loss of some long-term beneficial opportunity. N. INSTITUTE OF BUSINESS MANAGEMENT 51 .IMPACT OF NPA: Profitability: NPA means booking of money in terms of bad asset. which would have given good returns. Now day‟s banks have special employees to deal and handle NPAs. 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. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities. which adversely affect current earning of bank. 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. So NPA doesn‟t affect current profit but also future stream of profit. which is additional cost to the bank. Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit.

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

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

Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers. books of account in order to ascertain real factors that contributed to sickness of the borrower. INSTITUTE OF BUSINESS MANAGEMENT 54 . 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. so as to recover whatever is possible through legal means before the security position becomes worse. by the time banks start their efforts to get involved in a revival process. This will obviate the need to route the additional funding through the controlling offices in deserving cases. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. N.R. In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction. Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are non.both in terms of rehabilitation of the project and recovery of bank‟s dues. Based on this objective assessment. and for this purpose a special limit to such type of cases should be decided. and help avert many accounts slipping into NPA category.serious with no commitment or stake in revival is a challenge confronting bankers. it‟s too late to retrieve the situation. after an objective assessment of the promoter‟s intention. 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. is imperative. it is better to facilitate winding up/ selling of the unit earlier. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level. Restructuring should be attempted where. banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank. and capability to achieve turnaround.PREVENTIVE MEASUREMENT FOR NPA: Early Recognition of the Problem: Invariably. banks should decide as quickly as possible whether it would be worthwhile to commit additional finance.

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

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

differ from bank to bank. The Relationship Manager has to keep in constant touch with the borrower and report all developments impacting the N. frequent devolvement of L/Cs. units' financial problems. viz. In addition. persistent irregularity in accounts. The EWS enable a bank to identify the borrower accounts which show signs of credit deterioration and initiate remedial action.PROCEDURES FOR NPA IDENTIFICATION AND RESOLUTION IN INDIA: 1. accordingly. 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. delays in servicing of interest. indicative of potential problems in the accounts.R. market related problems. These early warning signals used by banks are generally independent of risk rating systems and asset classification norms prescribed by RBI. etc. 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. are captured by the system. 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. however. The early warning signals. INSTITUTE OF BUSINESS MANAGEMENT 57 . Many banks have evolved and adopted an elaborate EWS. the actual processes followed. his business. his future plans. which allows them to identify potential distress signals and plan their options beforehand. etc. Though most banks have Early Warning Systems (EWS) for identification of potential NPAs.

visits are made on clients and their places of business/units. Watch-list/Special Mention Category The grading of the bank's risk assets is an important internal control tool. 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. As a part of `KYC' system. 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.borrowable account. In the credit monitoring process. the responsibility of monitoring a corporate account is vested with Relationship Manager/Credit Officer. INSTITUTE OF BUSINESS MANAGEMENT 58 . Most banks in India have put in place the system of internal credit rating. The frequency of such visits depends on the nature and needs of relationship. industry and management. a few banks have adopted credit rating models designed by rating agencies. 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. credit rating system enables tracking the health of banks entire credit portfolio.R. While most of the banks have developed their own models. At the whole bank level. 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. etc. financial. The categorization of such accounts in watch list or special mention category N. 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. associated with a borrowable unit. Know your client' profile (KYC) Most banks in India have a system of preparing `know your client' (KYC) profile/credit report. It serves the need of the Management to identify and monitor potential risks of a loan asset.

transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. INSTITUTE OF BUSINESS MANAGEMENT 59 . statement of cash flows. income expenditure statement. to be sensitive to signals of credit deterioration. A host of early warning signals are used by different banks for identification of potential NPAs. weakening industry characteristics.R. regulatory changes. general economic conditions. Early warning signals can be classified into five broad categories viz. Most banks in India have laid down a series of operational. Early Warning Signals It is important in any early warning system. 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. Following common warning signals are captured by some of the banks having relatively developed EWS. a) Financial b) Operational c) Banking d) Management and e) External factors. Further. 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. financial. etc. statement of receivables etc. Financial related warning signals generally emanate from the borrowers' balance sheet.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.

Signals relating to external factors  Economic recession  Emergence of new competition  Emergence of new technology N. INSTITUTE OF BUSINESS MANAGEMENT 60 . ownership. etc. financial data. 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.R.

R. Dun and Bradstreet Information Services (India) Pvt. one time settlement schemes. This is also on account of various resolution mechanisms introduced in the recent past which include the SRFAESI Act. HDFC Limited. State Bank of India. As can be seen. there were 1. As per the recommendations of the working group. The total number of resolution approaches (including cases where action is to be initiated) is greater than the number of NPAs. Changes in government / regulatory policies  Natural calamities 2. the RBI constituted a working group to examine the role of CIBs. The total gross value of these NPAs amounted to Rs. 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. Settlement has been considered only in 9% of the cases. Pending the enactment of CIB Regulation Bill. 215 billion. CIBIL will share this information with commercial banks and FIs so as to help them minimize adverse selection at appraisal stage. 50 million in all the public sector banks in India. and M/s. 2003 which had gross value greater than Rs. 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. INSTITUTE OF BUSINESS MANAGEMENT 61 . Many banks have come out with their own restructuring schemes for settlement of NPA accounts. 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. 2003. 2. It is likely to have been adopted in even fewer cases. Banks and FIs are now required to submit the list of suit-filed cases of Rs.522 numbers of NPAs as on March 31. Rehabilitation has been considered/ adopted in only about 13% of the cases. N. setting up of the CDR mechanism. From the data available of Public Sector Banks as on March 31.5 million and above to RBI as well as CIBIL. M/s. indicating some double counting. strengthening of DRTs. The CIBIL is in the process of getting operationalised. 10 million and above and suit filed cases of willful defaulters of Rs. Ltd. suit filed and BIFR are the two most common approaches to resolution of NPAs in public sector banks.

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

the Act deals with the following largely aspects. 1987 helps in resolving disputes between the parties by conciliation. In any case. In addition to asset reconstruction and ARCs. They take up cases which are suitable for settlement of debt for certain consideration. if such settlement contains a clause that if the compromise is not adhered to by the parties. 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. It is known for effecting mediation and counseling between the parties and to reduce burden on the court. 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. 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. 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. we should continue our efforts to seek the help of the Lokadalat. Cases involving suit claims up to Rs. If the compromise is arrived at. mediation. Lastly. Parties are heard and they explain their legal position. 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. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets. compromise or amicable settlement. many needs to be done for making the DRTs stronger in terms of infrastructure. Normally. especially for small loans. In general. INSTITUTE OF BUSINESS MANAGEMENT 63 . defense personnel and judicial officers.R. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. it is observed that banks do not get the full advantage of the Lokadalats. Lokadalats The institution of Lokadalat constituted under the Legal Services Authorities Act.of the DRTs. N.

Additionally. the designated regulatory authority for ARCS has issued Directions.  By obtaining quotations from persons dealing in such assets or otherwise interested in buying the assets. N. 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. 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. assignment or sale. operations and funding of ARCS and resolution of NPAs by ARCS.R. Guidance Notes. and  Recover receivables of the borrower in respect of any secured asset which has been transferred. The Reserve Bank of India (RBI). 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"). assignment or sale. which lays down the procedure to be followed by a secured creditor while enforcing its security interest pursuant to the Act.  By inviting tenders from the public. 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.  Take over the management of the secured assets including the right to transfer by way of lease. consideration for the same and valuation of instruments issued by the ARCS. INSTITUTE OF BUSINESS MANAGEMENT 64 . These secured assets may be sold by using any of the following routes to obtain maximum value. After taking over possession of the secured assets. the secured creditors are required to obtain valuation of the assets.  Appoint any person as a manager of the secured asset (such person could be the ARC if they do not accept any pecuniary liability). 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.

 The sale or lease of the business of the borrower. 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 SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than Rs. 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. either through security enforcement or through settlements. or  By private treaty. 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.R. Further. When the legal hurdles are removed. 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. N.  Settlement of the borrowers' dues. INSTITUTE OF BUSINESS MANAGEMENT 65 . 20.000. Under the SRFAESI Act ARCS can be set up under the Companies Act. They can also be appointed to act as a receiver. 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.000. These include:  Enforcement of security interest.  Taking over or changing the management of the business of the borrower. on an ongoing basis. The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction. 1956. if appointed by any Court or DRT. being the holding company of or being in control of the ARC. By holding public auctions. the Directions require that an ARC should maintain. a minimum capital adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a maximum realization time frame of five years from the date of acquisition of the assets. and  Restructuring or rescheduling of debt.

DRTs or other legal proceedings. 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).R. INSTITUTE OF BUSINESS MANAGEMENT 66 . N. sub-standard or doubtful categories can be considered for restructuring. 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.rbi. CDR is a nonstatutory mechanism based on debtor-creditor agreement and inter-creditor agreement. Corporate borrowers with borrowings from the banking system of Rs. Restructuring helps in aligning repayment obligations for bankers with the cash flow projections as reassessed at the time of restructuring. Korea and Malaysia. The CDR mechanism instituted in India is broadly along the lines of similar systems in the UK. Accounts falling under standard. RBI has issued revised guidelines in February 2003 with respect to the CDR Institution of CDR Mechanism The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable entities facing financial difficulties. Therefore it is critical to prepare a restructuring plan on the lines of the expected business plan along with projected cash flows.Source: http://www.

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

often there is a scramble to file a reference in BIFR so as to obtain protection from debt recovery proceedings. proceedings initiated by any creditor seeking to recover monies from a sick company would not be suspended by a reference to the NCLT and. 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. Promoters systematically take refuge in SICA . with modifications to address weaknesses experienced under the SICA provisions. therefore. there is a possibility of conflict between the activities that may be undertaken by the ARC. change in management. the above provision of the Act may not have much relevance any longer and probably does not extend to the tribunal for this reason.Increased Powers to NCLTs and the Proposed Repeal of BIFR In India.R. Therefore. However. 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. The recent amendments to the Companies Act vest powers for revival and rehabilitation of companies with the National Company Law Tribunal (NCLT). in place of BIFR. Once a company is referred to the BIFR (and even if an enquiry is pending as to whether it should be admitted to BIFR). e.g. and the role of the NCLT in restructuring sick companies. it is afforded protection against recovery proceedings from its creditors. The Bill to repeal SICA is currently pending in Parliament and the process of staffing of NCLTs has been initiated N. INSTITUTE OF BUSINESS MANAGEMENT 68 . BIFR is widely regarded as a stumbling block in recovering value for NPAs.

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

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



8 1.7 2.3 2.4 1.7 0.R.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. INSTITUTE OF BUSINESS MANAGEMENT 73 .9 1.5 2.7 0.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 1.9 1.5 N.1 1.4 2.1 1.8 2.3 2.7 0.3 0.rbi.2 2 2.8 0.6 2.

INSTITUTE OF BUSINESS MANAGEMENT 74 . The gross NPAs to gross advances of foreign banks increased significantly during the year. The hardening of interest rates might have made the repayment of loans difficult for some borrowers. it may be noted that in the present context of financial turmoil. it was lower than fresh addition of NPAs (Rs. the gross NPAs of SCBs increased across all the bank groups. which have been more active in the real estate and housing loans segments.382 crore) during the year. it may be noted that this slippage was moderate as compared to the problems faced by banks all over the world.828 in 2008-09 was higher than Rs.Interpretation:  The trend of improvement in the asset quality of banks continued during the year.283 crore in 2007-08.  Nevertheless.28. Though the total amount recovered and written-off at Rs. resulting in some increase in NPAs in this sector. While net NPAs to net advances ratio of all the banks increased over the previous year except that of nationalized banks. The NPAs ratio of all other bank groups declined. N. some slippage in NPAs could be expected.38. while that of private sector banks increased marginally.52. As a result. In this context.  Gross NPAs (in absolute terms) increased for all the banks. It may be noted that the increase in gross NPAs was more noticeable in respect of new private sector and foreign banks.R. Indian banks recovered a higher amount of NPAs during 2008-09 than that during the previous year.

2007-08 & 100% in 2008-09. 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.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. PSBs did not have any of its banks in > 10% category. INSTITUTE OF BUSINESS MANAGEMENT 75 FB . the Public sector banks (PSBs) had around 60% of their NPA profile in the < 2% category which increased 75% in 2005-06. 90% in 2006-07 . 5 Pvt. While this ratio is declining over the years 2007-08 this is compensated by the rise in number of banks in < 2%.SB Pvt.R.SB Pvt.SB Pvt.  Private sector banks (Pvt.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.SBs) was having the worst situation in 2004-05 where 50% of its bank was in 2% to 5% category. SB‟s banks were in N.SB Pvt.

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

R. But in later years from 2006 it‟s other way round. SSI.2001 TO 2009 30000 Amount in Rs. Nonpriority sector contributes more towards NPA than priority sector. In the initial years from 2001 to 2005. & other priority sector advances. N.COMPOSITION OF NPAs OF BANK SECTOR WISE: COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS . INSTITUTE OF BUSINESS MANAGEMENT 77 . where priority sector contributes more than Nonpriority sector.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. Non priority sector consist of large industries.  Priority sector consist of advance given to agriculture. 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.

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

5% of total advance is made towards public sector category. which encouraged people to take more loans. N. the real estate market was on boom. In these years more advances was given to agriculture & housing sector. The major reason for this is that on an average only 3.  Priority sector category on an average constitutes almost 34% of the total advances made by the private sector banks.COMPOSITION OF NPAs OF 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. While average NPA of priority sector constitutes of 25% of total NPA. In later years from 2007 to 2009 there is increase in NPA of priority sector.R. 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 the year 2007-08.2001 TO 2009 14000 12000 Amount in Rs. But after the subprime crisis there was sudden fall in real estate market & people became default to pay the loan. INSTITUTE OF BUSINESS MANAGEMENT 79 .

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

120 0 2712.COMPOSITION OF NPAs OF FORIEGN BANKS . Crore 7000 6000 5000 4000 3000 2000 1000 0 Priority Sector Non-Priority Sector Public Sector 2007 331 2008 402 2009 649 2.2007 TO 2009 Amount in Rs. N.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.R.  The advances are made to medium & large scale industries in non-priority sector. So NPA will also be more in non-priority sector.  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.0 0 6506 0 Graph: 4. As foreign banks are having global presence they are more affected by the global meltdown & financial crisis of 2008. INSTITUTE OF BUSINESS MANAGEMENT 81 . So its effect is seen by sudden rise in NPA in 2009.  NPA is low in priority sector because very few advances are made in priority sector & that too are made to SSI.

000 3.R. starts performing better than their new counterparts.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. N.000 6.000 5.COMPARISON OF NET NPA OF OLD AND NEW PRIVATE SECTOR BANKS: 2000-01 to 2008-09 NET NPA 7.000 1. Old private sector banks are more efficient than that of new private sector banks in managing NPA. INSTITUTE OF BUSINESS MANAGEMENT 82 .  Old private sector banks which is passing from lower growth rate in recent past.000 4.000 2.

7% from 2005 to 2009.  In case of foreign banks it is fluctuating over the years.9 2005-06 1.7 1.8 1.R.5 2 1. INSTITUTE OF BUSINESS MANAGEMENT 83 .9 0.5 1 0.5% N. In the year 2008-09 the ratio increased by 89% for foreign banks where the foreign banks were badly affected by the global meltdown.5 0 Public Sector Private Sector Foriegn Sector NPA as % of Advance 2004-05 2.8 2006-07 1. 12.1 1 1 2007-08 0. Public sector banks have been able to reduce this ratio by 66.5 1.9 2008-09 0.e. 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.1 1.7 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.NET NPAs AS PERCENTAGE OF ADVANCES OF BANKS: Net NPAs/Net Advances 2.3 1 0. Public sector banks as a result of stringent checks & control able to manage low ratio compare to other banks.2 0. It is constantly reducing each year. whereas in case of private sector bank it has reduced in 2005-06 then it got stable and started rising from 2007-08 onwards.

INSTITUTE OF BUSINESS MANAGEMENT 84 .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.9 2004 2005 2006 2007 2008 2009 Graph: 7.9 4.0 3. Doubtful & Loss Asset are decreasing every asset.6 92.3 1.9 1.5 1. Sub-standard.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.CLASSIFICATION OF LOAN ASSET OF BANKS: Classification of Loan Asset of Public Sector Banks Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset 0.7 97.R.  Public sector banks have taken various measures to reduce NPA also convert SubStandard. Sub-Standard & Doubtful asset.6 94.7 0.3 0. This proves that public sector banks have succeeded in reducing NPA over the years. Doubtful & loss asset into the above category Standard.1 1.e.2 96.1 2. N.2 1.3 0.2 0.0 0.1 97.4 1.5 2.2 1.2 97.

5 3.5% which is compensated by increase in SubStandard & doubtful assets.4 96.5 96.0 0.2 1. So the private sector banks have managed to reduce the doubtful asset.6 97.3 1.Classification of Loan Asset of Private Sector Banks Standard Asset 0.1 94. The percentage of doubtful asset has reduced to a great extent amongst all.3 1.5 0.0 1.9 1.R.1 Doubtful Asset 0. INSTITUTE OF BUSINESS MANAGEMENT 85 . This increase is due to interest & principle amount unpaid due to financial crisis in 2009.0 2.8 97.3 0.2 97.0 1. N.6 1. the percentage of Sub-Standard asset is highest among all the year.5 Loss Asset 0.4 2.8 0. In 2009 percentage of standard asset has reduced by 0. But in the year 2009.8 2004 2005 2006 2007 2008 2009 Graph: 7.3 Sub-Standard Asset 0.2 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.

N. The proportion of other three types of assets is falling over the years.2 0.3 0.0 0.1 95. 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. INSTITUTE OF BUSINESS MANAGEMENT 86 .7 1.Classification of Loan Asset of Foriegn Banks Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset 1. This increase in Sub-Standard asset is because of interest & principle amount unpaid.6 1. The interest & principle amount remained unpaid for period of more than 180 days but less than 1 year.4 0. But it has fallen in 2009. due to poor global conditions.3 Source: Annexure – Table 10 Interpretation:  The proportion of Standard Asset is increasing from 2004 and started getting stable in 2007 & 2008.5 0.5 0.5 1.2 0.2 97.1 98.8 0.2 0.1 3.5 1.0 95.9 98.9 0.7 2004 2005 2006 2007 2008 2009 Graph: 7.5 1.8 1.R. for the loan provided in a 2008.6 97.

R. INSTITUTE OF BUSINESS MANAGEMENT 87 . There is constant increase in net profit from 2000-01 to 2003-04 & from 2005-06 to 2008-09. The average of percentage decrease in net NPA YOY basis comes to 2. Although the percentage of reduction over the previous year is low compared to percentage of rise in profit over previous year. The average of percentage increase in net profit YOY basis comes to 32.1 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. 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.COMPARISON OF NET PROFIT AND NET NPA OF BANKS: Comparison of Net Profit And Net NPA Public Sector Banks 40000 35000 Amount in Rs.5% N.

INSTITUTE OF BUSINESS MANAGEMENT 88 . N.R. The average of percentage increase in net profits of private sector banks comes to approximately 34%. The average of percentage rise in net NPA comes to almost 15%. 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: 8.2 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.Comparison of Net Profit And Net NPA Private Sector Banks 12000 10000 Amount in Rs.  On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from 2000-01 to 2008-09.

R. 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.Comparison of Net Profit And Net NPA Foreign Banks 9000 8000 Amount in Rs.  But overall there is rise in net NPA of foreign banks. INSTITUTE OF BUSINESS MANAGEMENT 89 . 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%.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. So this shows there is positive relationship between net NPA & net profit of foreign banks. N. Whereas in case of net profit there is no continuous upward or downward movement.

N.7 2 1 0 2004-05 2005-06 2006-07 2007-08 2008-09 2.5 5 4 3.2 2 Net NPAs/Net Advances Gross NPAs/Gross Advances 0.27% & 12. 18. it has reduced by 34. from 2006-07 to 2007-08 & 2007-08 to 2008-09.  While in case of net NPA to net advances ratio. the percentage change is varying.6 3 2.38%. It has reduced by 38% from 2004-05 to 2005-06.3 1.e. from 2006-07 to 2007-08 & 2007-08 to 2008-09.7 Graph: 9.1 2. Similarly it has reduced by 15.5% from 2004-05 to 2005-06.5% respectively from 2005-06 to 2006-07.R. Similarly it has reduced by 25%.8 0.5% & 9% respectively from 2005-06 to 2006-07.1 Source: Annexure – Table 14 Interpretation:  The percentage in reduction of gross NPA to gross advances ratio is decreasing year on year i.1 1. 27. INSTITUTE OF BUSINESS MANAGEMENT 90 .NPA TO ADVANCE RATIO OF BANK: Comparison of NPA with AdvancesPublic Sector Banks 6 5.

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

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 2.5 2 1.2 1.5 1 0. the percentage change is varying drastically.5 2.2% from 2004-05 to 2005-06. It has reduced by 34.9 1.Comparison of NPA with AdvancesPrivate Sector Banks 4 3. INSTITUTE OF BUSINESS MANAGEMENT 92 . It has increased by 20% & 25% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-09.R.  While in case of net NPA to net advances ratio. It has reduced by 47% from 2004-05 to 2005-06. N.9 3.8 Graph: 9.2 Gross NPAs/Gross Advances Net NPAs/Net Advances 2. It is unchanged from 2005-06 to 2006-07.5 0 2004-05 2005-06 2006-07 2007-08 2008-09 1 1 1. Similarly it has reduced by 12% from 2005-06 to 2006-07 & thereafter increased by 18.  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.5% & 9% respectively from 2006-07 to 2007-08 & 2007-08 to 200809.5 2.5 3 2.

In other years it near to 54%. In 2006 there is highest increase in advances over previous year amongst all the year.R. This resulted increase in NPA which in turn increased the provisions and unrecognized interest income. INSTITUTE OF BUSINESS MANAGEMENT 93 .  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. N. The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2005-06 [60%] & lowest in 2008-09 [48%].

Thereafter it increased by 25% in 2006-07.9 0.5 4 3. there is great volatility.8 4 Graph: 9. It has reduced by 28.8 1 0. Again it reduced by 10% in 2008 and finally increased by 89% in 2008-09.5 1 0. INSTITUTE OF BUSINESS MANAGEMENT 94 .3 Source: Annexure – Table 16 Interpretation:  The gross NPA to gross advances ratio is decreasing till 2006-07.  While in case of net NPA to net advances ratio.5 2 1.5 0 2004-05 2005-06 2006-07 2007-08 2008-09 0.7 Net NPAs/Net Advances 2.5 3 2.8 1.It is unchanged in 2007-08 & then increased in 2008-09. N. It has increased tremendously by 122% from 2007-08 to 2008-09.9 2 1.Comparison of NPA with AdvancesForeign Banks 4.8 Gross NPAs/Gross Advances 1. It has reduced by 11% from 2004-05 to 2005-06.  The steep rise in gross NPA & net NPA 2008-09 is due to poor global conditions.5% & 10% respectively from 2004-05 to 2005-06 & from 2005-06 to 2006-07.R.

In all the public sector bank has succeeded to reduce the non performing assets against the advances made over the years. The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2004-05 & lowest in 2006-07.  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. The change in net NPA to net advances is quite higher than gross NPA to gross advances. In 2004-05 provisions & unrecognized interest income was highest compare to other years while it was lowest in 2006-07. INSTITUTE OF BUSINESS MANAGEMENT 95 .  The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to net advances is decreasing over the years. N.

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.R. While on the other hand for new private sector banks net NPA to net advances ratio is fluctuating over the years. N.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. INSTITUTE OF BUSINESS MANAGEMENT 96 .

213 17.613 20.213 17.613 20. Net NPA and Net profit of Public.613 20.613 20. 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 20.278 -3.345 4.e.709 -6.HYPOTHESIS TESTING TEST OF CO-RELATION The test of co-relation is used to identify the co-relation between two variables.213 17.X 7.R.213 17.047 -5.613 Net Profit Y 4317 8301 12295 16546 15784 16539 20152 26592 34394 154921 17.213 17. This test researcher has applied to identify the co-relation between two variables i.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.613 20.613 Y 17.213 17.364 7.264 -1.613 20.213 17.468 -2. The variable in our study is Net NPA and Net profit.213 X.613 20.613 20. Private and Foreign Sector Banks. INSTITUTE OF BUSINESS MANAGEMENT 97 .213 17.213 X 20.

0.R. INSTITUTE OF BUSINESS MANAGEMENT 98 .54567 H0 (Null Hypothesis) is rejected N.r= ∑ (X-X)*(Y-Y) ∑[(X-X)2*(Y-Y)2] 1/2 r= -207100923.9 379534704 r = .

57 38889840. INSTITUTE OF BUSINESS MANAGEMENT 99 .480172 H0 (Null Hypothesis) is rejected N.77 r= 0.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.

04 r = 0.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.R.88 13373740.772778883 H0 (Null Hypothesis) is rejected N. INSTITUTE OF BUSINESS MANAGEMENT 100 .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.

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

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

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 3577.5 2 95103422 1.5 X = 7962.R.5 5 84889526 N.12032 424447628. 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.

14681 Total X2 .5)2 (3-1) = 190206843.R.14681 19251 .Between Column Variance = ∑nj (Xj – X) 2 K-1 = 3(14681-7962.k (X1 .5629 X3 .5629 75 .5-7962.3578 0 17152225 S= ∑(X .X2)2 3956121 56896849 30846916 91699886 (X3 .X3)2 8576112 8576112 X1 .X1)2 92871769 20884900 201838849 315595518 (X2 .5 2 = 95103421.75 Within Column Variance = ∑ nj – 1 sj2 nT .5)2 + 2(3577.X3 649 -3578 6506 .14681 474 .5)2 + 3(5629-7962.5 N.X1 24318 .X2 3640 -5629 13172. INSTITUTE OF BUSINESS MANAGEMENT 104 .X)2 k-1 S1 = 315595518 (3-1) S2 = 91699886 (3-1) S3 = 17152224.5 (2-1) S1 = 157797759 S2 = 45849943 S3 = 17152224.

R. which means that there is no significant difference in NPAs of different types of banks among various sectors. private sector & foreign banks seems to be same in different sectors i.7 Fcal = Between Column Variance Within Column Variance = 95103421.e. non-priority sector & public sector for the year 2009.12 Ftab = k-1 NT-k = 2/5 Ftab = 5. public sector.5)*1/5 = 84889525.  So this states that the mean behavior of NPAs of all the types of bank i. INSTITUTE OF BUSINESS MANAGEMENT 105 . null hypothesis is accepted.e. N.7 Fcal = 1.05 error Interpretation:  As Fcal is less than Ftab.Within Column Variance = (157797759)*2/5 + (45849943)*2/5 + (17152224.75 84889525.79 @ 0. priority sector.

which have been more active in the real estate and housing loans segments. which had been registering a significantly lower growth rate than their newer counterparts in the recent past. 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.2% of loan assets in 2008. public sector banks have managed to reduce NPAs over the years.  Among all three sectors.  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. It shows a upward trends over the years as compared to others  The old private sector banks. Whereas it is just 55% & 43% for private sector banks & foreign banks.5% of loan assets in 2009 which was 1. managed a better performance this year. 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.  Public sector banks almost 75% of income comes from Interest/Discount on advances/bill. INSTITUTE OF BUSINESS MANAGEMENT 106 . N.OVERALL FINDINGS  NPAs were more noticeable in respect of new private sector and foreign banks.R. In Foreign sectors banks the proportion of sub-standard asset has increased tremendously by 3.

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

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

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

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

Frequency Distribution of Banks according to level of NPAs Year Banks PSB Pvt. INSTITUTE OF BUSINESS MANAGEMENT 111 .ANNEXURE Table: 1:.rbi.SB 2005-06 FB PSB Pvt.SB 2007-08 FB PSB N.SB 2006-07 FB PSB Pvt.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.SB 2004-05 FB PSB Pvt.R.

in Table: 3:.977 27.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 27.904 14.700 6.Composition of NPAs of Public Sector Banks .335 4028 5.Table: 2:.R.566 15.212 3.963 4.128 4.418 Foreign Banks 785 920 903 933 639 808 927 1247 2973 Compiled from: http://www.877 19.rbi.958 N.380 7.145 17.rbi. INSTITUTE OF BUSINESS MANAGEMENT 112 .676 3.033 Private Sector Banks 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.726 21.

R.Table: Table: N.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.Composition 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. INSTITUTE OF BUSINESS MANAGEMENT 113 .org.rbi.

663 1.013 2.9 1 1 1.2 1. INSTITUTE OF BUSINESS MANAGEMENT 114 N. Private & Foreign Sector Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 Public Sector Bank 2.137 4640 6253 Compiled from: http://www.5 Foreign Bank 0.771 3.796 3.8 1 0.Net NPA to Net Advance of Public.1 0.986 2.3 1.365 1.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.9 0.353 1.R.9 1.7 Private Sector Bank 1.375 891 740 1165 New Private Sector Banks 929 3.859 1.8 0.Table: 6:.7 Compiled from: http://www.1 1.598 Table: 7:.

8 Table: 9:.5 2.R.9 Doubtful Asset 4.8 Sub-Standard Asset 1.Table: 8:.1 0.4 2.5 1.2 97.Classification of Loan Asset of Public Sector Banks in percentage Standard Year 2004 2005 2006 2007 2008 2009 Asset 92.3 0.9 0.0 0.rbi.2 0.1 97.6 96.6 1.5 1.2 96.0 1.3 0.5 0.0 0.3 3.6 97.0 Doubtful Asset 3.3 96.5 1.1 1.9 Sub-Standard Asset 2.2 0.7 0.1 1.4 97.9 1.2 N.2 Compiled from: http://www.1 97.0 Loss Asset 0.3 1.2 1.3 Compiled from: http://www.4 0.7 97.6 2.8 1.Classification of Loan Asset of Private Sector Banks in percentage Standard Year 2004 2005 2006 2007 2008 2009 Asset 94.0 0.3 0.rbi.0 Loss Asset 0. INSTITUTE OF BUSINESS MANAGEMENT 115 .org.

0 1.4 0.9 1.1 1.5 0.1 98.6 0.6 Loss Asset 1.rbi.5 0.Net 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.8 0.2 3.3 0.R.5 0.5 0.Table: 10:.Classification of Loan Asset of Foreign Sector Banks in percentage Standard Year 2004 2005 2006 2007 2008 2009 Asset 95.0 97.5 Doubtful Asset 1.1 97.9 98.2 Compiled from: http://www.rbi.7 Sub-Standard Asset Table: N.8 1.2 0. INSTITUTE OF BUSINESS MANAGEMENT 116 .7 0. Table: 13:.rbi.rbi. INSTITUTE OF BUSINESS MANAGEMENT 117 .Table: N.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: 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.

8 4 Net NPAs/Net Advances 0.7 2.rbi.8 2 1.1 Table: 16:.2 1. INSTITUTE OF BUSINESS MANAGEMENT 118 .6 2.9 1 1 N.2 2.9 1.8 1.rbi.rbi.5 2.8 0.9 0.5 2.Table: 14:.2 2 Net NPAs/Net Advances 2.3 1.5 Compiled from: http://www.NPA 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.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 3.8 1 0.7 Compiled from: http://www.1 0.7 Compiled from: 3.9 Net NPAs/Net Advances 1.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:.8 2.

9 0.76 0.55 0.8 2.56 0.2 3.SBs FBs PSBs Pvt.5 1.54 0.27 0.44 0.Table: 17:.7 1.SBs FBs PSBs Pvt.23 0.SBs FBs PSBs 0.Frequency Distribution of Banks Income Year Banks PSBs Pvt.1 1.42 0.61 0.3 7.55 0.77 0.7 0.1 4.54 Compiled from: http://www.43 0.8 1 1.51 0.72 0.58 0.27 0.rbi.44 0.24 0.SBs FBs PSBs Pvt.28 119 2004 2005 2006 2007 2008 2009 N.9 New Private Sector Banks 3.9 Table: 18:.rbi.SBs FBs Interest Income Non-interest Income 0.7 1 0.61 0.49 0.45 0.1 5.7 1.45 0.56 0.73 0.73 0.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 7.76 0.58 0.46 0.39 0.R.SBs FBs PSBs Pvt.57 0.3 Compiled from: http://www. INSTITUTE OF BUSINESS MANAGEMENT .39 0.24 0.

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