Arayabhatta Institute of Management & Technology

Seminar Submission for internal assessment requirement of Seminar on Project Presentation for Master of Business Administration Punjab Technical University Jalandhar

Topic: Non-Performing Assets

Submitted to: Mr. Pardeep Kumar (Class In-charge & Lect. Of FM) Submitted by: Name: Parneet Kaur Roll No.:95202239175

Introduction of SBOP
An Associate Bank of the State Bank of India, State Bank of Patiala (SBP) was established in 1917 by Late Bhupinder Singh, the Maharaja of Patiala state. SBP started its operations from one branch called 'Chowk Fort', in Patiala. During the time of the establishment, the state owned Bank was known as Patiala State Bank. Patiala State Bank was renamed State Bank of Patiala on 1 April 1960, when it became a wholly owned undertaking of the Government of Punjab. There are as many as 750 branches of SBP, spread across the major cities of India.
2

Introduction Of OBC
Established on 19th Feb' 1943 in Lahore, Oriental Bank of Commerce (OBC) is one of the public sector banks in India. Its modest beginning is creditable to its founder Late Rai Bahadur Lala Sohan Lal, the first Chairman of the OBC. Within four years of coming into existence, the country partitioned, the Bank shifted its Registered Office from Lahore to Amritsar. The Oriental Bank of Commerce was nationalized on 15th April 1980. The bank has 1,508 branches.

Classification of Assets

Performing Assets

Non-Performing Assets

DEFINITION OF NPAS
A NPA is a loan or an advance where;
Interest and/ or installment of principal remain overdue

for a period of more than 90 days in respect of a term loan, The account remains out of order in respect of an overdraft/ cash credit The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted The installment or interest remains overdue for two crop seasons in case of short duration crops and for one crop season in case of long duration crops

CATEGORIES OF NPA
Substandard Assets Which has remained NPA for a

period less than or equal to 12 months. Doubtful Assets Which has remained in the sub-standard category for a period of 12 months (mainly up to 3 years). Loss Assets where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

PROVISIONING NORMS
Standard Assets general provision of a minimum of

0.25% Substandard Assets 10% on total outstanding balance, 10 % on unsecured exposures identified as sub-standard. Doubtful Assets 100% to the extent advance not covered by realizable value of security. In case of secured portion, provision may be made in the range of 20% to 100% depending on the period of asset remaining sub-standard Loss Assets 100% of the outstanding

Impact of NPAs upon Banks

They erode current profits through provisioning requirements. They result in reduced interest income. They require higher provisioning requirements affecting profits

and accretion to capital. They limit recycling of funds, set in assets-liability mismatches, etc. Adverse impact on Capital Adequacy Ratio. ROE and ROA goes down because NPAs do not earn. Banks rating gets affected. Banks cost of raising funds goes up. RBIs approval required for declaration of dividend if Net NPA ratio is above 3%. Bad effect on Goodwill & equity value.
8

Underlying Reasons for NPAs in India

Internal Factors
Inefficiency in management
Slackness in credit management and monitoring Lack of co-ordination among lenders.

Problem of bad credit appraisal.

Inappropriate Technology/technical problems Funds borrowed for a particular purpose but not use for

the said purpose. Project not completed in time. Poor recovery of receivables.
9

Underlying Reasons for NPAs in India

Contd. Excess capacities created on non-economic costs. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. Business failures. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. Willful defaults, siphoning of funds, fraud, disputes, management disputes, Mis-appropriation etc., Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc.,

10

Underlying Reasons for NPAs in India

External Factors
Recession. Input / power shortage Price escalation. Exchange rate fluctuation Accidents and natural calamities, Liberalization of Economy/ removal of

restrictions/reduction of tariffs. Sluggish legal system. Long legal tangles. Changes that had taken place in labour laws
11

Underlying Reasons for NPAs in India

Contd. Lack of sincere effort & Industrial recession. Scarcity of raw material, labour and other resources. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents. Failures, nonpayment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc. Government policies like excise duty changes, Import duty changes etc.,
12

Preventive Measurements for NPA

Early Recognition of the Problem
Identifying Borrowers with Genuine Intent Timeliness and Adequacy of response Focus on Cash Flows Management Effectiveness

Multiple Financing

13

Early Symptoms
Four categories of early symptoms:
Financial. Operational and Physical.

Attitudinal Changes.
Others ( death of person , competition in the market etc.)

14

Sale of NPAs to other Banks

A NPA is eligible for sale to other banks only if it has remained a

NPA for at least two years in the books of the selling bank The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banks but not to bank, which originally sold the NPA. The NPA may be classified as standard in the books of the purchasing bank for a period of 90 days from date of purchase and thereafter it would depend on the record of recovery with reference to cash flows estimated while purchasing. The bank may purchase/ sell NPA only on without recourse basis. If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.
15

Measures Initiated by RBI & Govt.

Compromise Settlement Schemes Restructuring / Reschedulement Lok Adalat Corporate Debt Restructuring Cell Debt Recovery Tribunal (DRT) Proceedings under the Code of Civil Procedure Board for Industrial & Financial Reconstruction (BIFR)/

AAIFR National Company Law Tribunal (NCLT) Sale of NPA to other banks Sale of NPA to ARC/ SC under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SRFAESI) Liquidation
16

INTERNATIONAL PRACTICES
Credit Risk Mitigation
Early Warning Systems

Asset Management Companies

out of court restructuring

17

RESEARCH OPERATIONS
Significance of the study
The main aim behind making this report is to know how SBP is operating its business and how NPAs play its role to the operations of the SBP bank. My study is also focusing upon existing system in India to solve the problem of NPAs and comparative analysis to understand which bank is playing what role with concerned to NPAs. Thus, the study would help the decision maker to understand the financial performance and growth of the concerned banks as compared to the NPAs.

Objective of the study

To know which is better in terms of NPAs from both the banks

SBP and OBC banks. To understand what is Non Performing Assets and what are the underlying reasons for the emergence of the NPAs. To understand the impacts of NPAs on the operations of the Banks.
18

Objectives of the study

To know what steps are being taken by the Indian banking

sector to reduce the NPAs? To evaluate the comparative ratios of the SBP & OBC banks. To know why NPAs are the great challenge to Banks. To understand the meaning & nature of NPAs. To study the general reasons for assets become NPAs. What are the methods adopted by the bank to look after NPA management
19

Need For Study

Following Type of need arises for this study:
To study what kind of role NPAs are playing upon the operations of the Bank. To know the variables available to control NPAs. The need also has been felt to study the financial performance of SBP bank.

20

Scope of the Study

Banks can improve their financial position or can increase

their income from credits with the help of this project. This project can be used for comparing the performance of the bank with others. This can also be applicable to know the reasons of increase in NPAs. This project also gives light upon Impact of NPAs. Concept of NPAs can be made clear. To present a picture of movement of NPA in The SBOP Bank.
21

Limitations of the study

The data collected by me was not sufficient for report studying. I havent got enough time to study my report so that becomes the cause of limitation in the study. Since my study is based upon Secondary data, the practical operations as related to NPAs are adopted by the banks are not learned. The solutions are not applicable to every bank.

22

Research Methodology
Research Problem
As my training is at bank I have got the project upon Non Performing Assets the great challenge before the banks. This is my problem to be studied.

Research Design
The research design tells about the mode with which the entire project is prepared. My research design for this study is basically analytical. Because I have utilized the large number of data of the banking sector. In this project theoretical study is also attempted.

Determining the data source The data source can be primary or secondary. The primary data are those data which are used for the first time in the study. However such data take place much time and are also expensive.
Contd.
23

Contd.
Whereas the secondary data are those data which are already available in the market these data are easy to search and are not expensive too. For my study I have utilized almost totally the secondary data .But somehow I have also used primary data in shape of interviews.

Tools used for analysis of data

The data collected were analyzed with the help of statistical tools like Ratio analysis, and trend analysis. Tables are used to represent the consolidated data. Graphical representation is also used for better comprehension & presentation

Analyzing the Data

The Primary or secondary data both would never be useful until they are edited and studied or analyzed. When the person receives the data many unuseful data would also be there. So, I analyzed the data and edited it and turned it in the useful manner So, that it can become useful in my report study.

24

Contd. Interpretation of the data

With the use of analyzed data I managed to prepare my project report. But analyzing of the data would not help my study to reach towards its objectives. The interpretation of the data is required so that the others can understand the Crux of the study in more simple way without any problem so I have added the chapter of analysis that would explain others to understand my
study in simpler way.

Project Writing
This is the last step in preparing the project report. The objective of the report writing was to report the findings of the study to the concerned authorities. And to attach all the requirements with your report.

25

Analysis
Gross NPA Ratio:

Gross NPA

Gross NPA Ratio =

Gross Advances
Banks

*100

As on March 31, 2009 Gross Gross Gross NPA NPAs Advances Ratio (%) (1) (2) (3) 57390 105812 4396081 6906472

State Bank of Patiala Oriental Bank of Commerce

1.31
1.53

26

Gross NPA Ratio (Graphic presentation)

Gross NPA Ratio (%)
1.55 1.5 1.45 1.4

State Bank of Patiala

1.53
1.35 1.3 1.25 1.2

Oriental Bank of Commerce

1.31
State Bank of Patiala Oriental Bank of Commerce

27

Interpretation
Findings
The table above indicates the quality of credit portfolio of

the banks. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa. We can see from the above Chart that the Oriental Bank of Commerce has the higher gross NPA ratio of 1.53 % as compared to the State Bank of Patiala with 1.31%.

28

Net NPA Ratio

Net NPA Ratio :
Gross NPA-Provision

Net NPA Ratio = * 100 Gross Advances- Provisions

As on March 31, 2009 Net Net Net NPA NPAs Advances Ratio (%) (1) (2) (3) 26363 Oriental Bank of Commerce 435872070 0.6

Banks

State Bank of Patiala

44243

63204285

0.7

29

Net NPA Ratio (Graphic presentation)

Net NPA Ratio (%)
0.72
0.7 0.68 0.66 0.64 0.62 0.6 0.58 0.56 0.54

State Bank of Patiala

0.7 0.6

Oriental Bank of Commerce

State Bank of Patiala

Oriental Bank of Commerce

30

Interpretation
Findings
High NPA ratio indicates the high quantity of risky assets

in the Banks for which no provision are made. The OBC bank has the highest NPA ratio of 0.7 % as compared to the State Bank of Patiala with 0.6% However there is not too much difference.

31

Provisioning Ratio
Provision Ratio:

Total Provision

Provision Ratio =
Gross NPAs
Name of the Bank Provision Ratio (%)

* 100

State Bank of Patiala

Oriental Bank of Commerce

58.34

57.90
32

Provisioning Ratio(Graphic presentation)

Provision Ratio (%)
58.4 58.3 58.2

58.34

58.1
58 57.9 57.8 57.7 57.6 State Bank of Patiala Oriental Bank of Commerce

57.9

State Bank of Patiala Oriental Bank of Commerce

33

Interpretation
Findings This Ratio indicates the degree of safety measures adopted by the Banks. It has direct bearing on the profitability, Dividend and safety of shareholders fund. If the provision ratio is less, it indicates that the Banks has made under provision. The highest provision ratio is showed by State Bank of Patiala with58.34% as compared to OBC with 57.90%.
34

Problem Asset Ratio

Problem Asset Ratio:

Gross NPAs Problem Asset Ratio = Total Assets

As on March 31, 2009 Banks

* 100

Gross NPAs
(1)

Total Assets (2) 69665

Problem Asset Ratio

(3) 0.82

State Bank of Patiala 57390 Oriental Bank of Commerce 105812 112539 0.94
35

Problem Asset Ratio(Graphic presentation)

Problem Asset Ratio
100% 90% 80% 70% 60%

50%
40% 30%

0.82

0.94

State Bank of Patiala Oriental Bank of Commerce

20%
10% 0%

State Bank of Patiala

Oriental Bank of Commerce

36

Interpretation
Findings
We determine the percentage of assets out of total assets /

advances that are likely to become the Non- performing Assets as problematic assets. From the above table it becomes clear that Oriental Bank of Commerce have high problem Asset Ratio with 0.94% as compare to SBOP. That Ratio implies that the both above banks have the highest probability of creating NPAs in the near future. However OBC have more chances of increasing future NPAs.
37

Capital Adequacy Ratio

Capital Adequacy Ratio:

Capital Capital Adequacy Ratio = Risk Weighted Assets * 100

Name of the Bank

Capital Adequacy Ratio (%) 0.60

State Bank of Patiala Oriental Bank of Commerce

0.99
38

Capital Adequacy Ratio (Graphic presentation)

Capital Adequacy Ratio (%)
1 0.9 0.8 0.7

0.6
0.5 0.4 0.3 0.2 0.1 0

State Bank of Patiala Oriental Bank of Commerce

State Bank of Patiala

Oriental Bank of Commerce

39

Interpretation
Findings The capital adequacy ratio is important for them to maintain as per the banking regulations. Each bank needs to create the capital Reserve to compensate the Non Performing Assets. Each Asset has been given a risk weight age as per RBI guidelines Risk weighted Asset = Asset * Risk Weight age So, More the Risk weighted Assets are, Bank has to maintain more capital. As far as this ratio is concerned OBC is better than SBOP.
40

Solutions
Dont Eliminate Manage
Effectiveness of ARCs Well Developed Capital Markets

Contextual Decision Making

Securitization

41

Findings
OBC Bank shows high NPAs Ratio as compare to SBOP

Bank. High NPAs Ratio shows low credit portfolio of OBC Bank. In analysis SBOP low risk profile as compare to OBC in terms of NPAs. Study also indicates that major NPA increases because of govt. recommended priority sectors. SBOP has better provisioning as compare to OBC however OBC have better capital adequacy ratio than SBOP.
42

Recommendations
Both the Banks should give stress upon credit appraisal. The credit should be backed up by securitization. Banks should create effectiveness in Management.

Credit officer should focus upon cash flow.

Timely check out should be adopted. Both Banks should make good provisioning policy. Banks should try their best to recover NPAs.

The problem should be identified very early so that companies can try their best to stop an asset or A/C becoming NPA.
Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with the use of their strength and weakness, and what will be their possible future growth in concerned to

financial and operational performance. Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility. The credit rating agency should regularly evaluate the financial condition of the clients.
43

Conclusion
Both the bank shows very much high NPA ratios. NPAs represent high level of risk & low level of credit

appraisal. There are so many preventive measures available those can be adopted to stop an Asset or A/C becoming NPA. There are some certain guidelines made by RBI for NPAs which are adopted by banks. SBOP is better in all terms than OBC instead of capital Adequacy.
44

45

46