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Non Performing Assets in Sbi Group 130312102006 Phpapp01
Non Performing Assets in Sbi Group 130312102006 Phpapp01
Research Project
ON
PROBLEM OF NPA AND ITS IMPACT ON
BANKS (WITH SPECIAL REFRENCE TO
STATE BANK OF INDIA)
Submitted to
Submitted By:-
NAVJINDER GREWAL
MBA(II)YR
ROLL NO. (27)
DECLARATION
I hereby certify that the work embodied in the project Problem of NPA and its impact on
banks (with special reference to state bank of India" was done by me under the
supervision of Dr. R.S GUPTA (H.O.D MGT DEPTT,BCET)
The project is done for the partial fulfillment of Degree of Master of Business Administration
program of Punjab Technical University, Jalandhar from, Bhutta College Of Engineering
And Technology, Ludhiana. I have not submitted this report to any institute or University.
NAVJINDER GREWAL
ACKNOWLEDGEMENT
My sincere thanks are due to all the contributors without whose efforts this project would not
have been completed. No task of this nature is a single person effort, so I am very thankful to
Dr. R.S GUPTA (H.O.D MGT DEPTT)
Under whose guidance I successfully completed my research project. Their unfailing interest
and support gave a new dimension to my work. They made it possible to collect abundance
of material, the relevant portion of which is quoted in this project.
I am also very grateful to all other Faculty of B.C.ET whose teaching methodology helped
me in completion of my project without any difficulty.
I also express my gratitude to the all respondent for their proper responses and cooperation
during my dissertation project.
I would like to extend my thanks to my all friends for their valuable suggestion and
cooperation at various stages during my project.
NAVJINDER GREWAL
CHAPTER PLAN
Chapters
S.No.
1.
Introduction
Non performing asset
Classification of NPA
Some issue of NPA
2.
Review of literature
3.
Objective of study
4.
Research Methodology
Research Design
Sources of Data
5.
Reason of NPA
6.
7.
Guidelines of RBI
8.
9.
Findings
Page No.
10.
Limitation
11.
Recommendation
12.
Conclusion
13.
Bibliography
Since the introduction of economic liberalization and financial sector reforms, Banks are
under growing pressure to bring down their NPAs so as to improve their performance and
viability. What is bothering the bankers today is the management of Non-performing Assets.
Over the period this problem has aggravated alarmingly and therefore needs urgent remedial
actions, so in this context a good number of circular instruction/guidelines have been issued
by bank/Reserve Bank of India.
Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of
Sh. M.Narsimham to examine and give recommendation for Income Recognition, Asset
Classification and Provisioning of loan assets of Banks and Financial Institutions. The
Committee examined the issues and recommended that a policy of Income Recognition
should be objective and based on record of recovery rather than on subjective considerations.
On the basis of the recommendations of the Narsimhan Committee, RBI had issued
guidelines to all Scheduled Commercial Banks on Income Recognition, Assets Classification
and Provisioning in April, 1992 which have been modified from time to time by the RBI on
the basis of experience gained and suggestions received from various quarters. The
Prudential Norms for Income Recognition, Asset Classification and Provisioning have come
into effect from the accounting year 31.03.1993.
Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India
Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were
also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June,
1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for
the purpose of Income Recognition and Assets Classification from the accounting year 199596. However, guidelines relating to provisioning for RRBs have been made effective from
the financial' year ended 31.03.1997. The definition of NPAs is also gradually becoming
tough for RRBs to cover all advances like Commercial Banks. Although most of-the
guidelines relating to RRBs are similar to that of Commercial Banks, they have been made
applicable in a phased manner for RRBs.
INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played
a crucial role in the socio- economic progress of the country. Banks extend credit to different
types of borrowers for many different purposes. For most customers, bank credit is the
primary source of available debt financing.
For banks good loans are the most profitable assets. Return comes in the form of loan
interest, fee income and investment and the most prominent assumed risk is credit risk.
Credit risk involves inability or unwillingness of customer or counterpart to meet
commitments in relation to lending once a loan is overdue and ceases to yield income it
would become a Non Performing Asset.
Proper management and speedy disposal of NPAs is one of the most critical tasks of banks
today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has
been a matter of grave concern not only for the banks but also the real economy in general, as
NPAs can choke further expansion of credit which would impede the economic growth of the
country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions
in the economy. NPAs are not therefore the concern of only lenders but also the public at
large.
Granting of credit for economic activities is the prime duty of banking. Apart from raising
resources through fresh deposits, borrowings and recycling of funds received back from
borrowers constitute a major part of funding credit dispensation activity. Lending is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which results into economic growth. However lending also carries a risk called
credit risk, which arises from the failure of borrower. Non-recovery of loans along with
interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the
banks profitability on a large scale. Though complete elimination of such losses is not
possible, but banks can always aim to keep the losses at a low level.
Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the
banking industry in our country sending distressing signals on the sustainability and
insurability of the affected banks. The positive results of the chain of measures affected
under banking reforms by the Government of India and RBI in terms of the two Narasimhan
Committee Reports in this contemporary period have been neutralized by the ill effects of
this surging threat. Despite various correctional steps administered to solve and end this
problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted
universally on banking and financial institutions. The severity of the problem is however
acutely suffered by Nationalised Banks, followed by the SBI group, and the all India
Financial Institutions.
SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31, 2005. It
dominates the Indian banking sector with a market share of around 20% in terms of total
banking sector deposits. The increasing focus on upgrading the technology back-bone of the
bank will enable it to leverage its reach better, improve service levels, provide new delivery
platforms, and improve operating efficiency to counter the threat of competition effectively.
Once the core banking solution (CBS) is fully implemented, it will cover over 10,000
branches and ATMs of the State Bank group, and emerge as the strongest technology enabled
distribution network in India.
The increasing integration of SBI with its associate banks (associates) and subsidiaries will
further strengthen its dominant position in the banking sector and position it as the countrys
largest universal bank.
Resource-raising capabilities
SBIs funding profile is strong, underpinned by its strong retail deposit base. The bank is
facing increasing competition in its metropolitan and urban franchise. SBIs strong franchise
gives it access to a steady source of stable retail funds, which constitute around 59% of the
total resources as on March 31, 2005 (56% as at March 31, 2004).
Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in
the proportion of current account deposits, low-cost deposits have continued to constitute
over 40% of total deposits as at March 31, 2005. The banks cost of deposits (excluding
IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year from April
1 to March 31), compared with 5.48% in 2003-04. The banks liquidity position is very
strong due to healthy accretion to deposits, large limits in the call market, and significant
surplus SLR investments. SBI will maintain its strong funding profile and a low cost resource
position in view of its strong retail base and wide geographical reach.
Management strategies
In retail finance, the bank has leveraged its corporate relationships, pursued business growth
selectively, and has not competed based on interest rate. The bank has taken initiatives like
on-line tax returns filing and faster transfer of funds to protect its dominant position in the
government business. The bank also has a clear technology strategy that will enable it to
compete with the new generation private sector banks in customer service and operational
efficiency.
Asset quality to remain at average levels
The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at
March 31, 2005, compared with 4.9% for all scheduled commercial banks (SCBs) taken
together. The bank is facing challenges to improve the quality of assets originated, as can be
seen in the consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05.
To contain NPAs and ensure credit growth, the bank has decided to focus on financing the
retail (personal) segment as well as SMEs. The share of retail advances has increased to
24.73% (Rs 522.08 billion) of total advances as at September 30 2005. In the retail loan
segment, SBI is targeting primarily the housing loans segment, which constitutes Rs. 283.41
billion (54.3%) of total retail loans. The NPAs in retail finance are low currently; however
they are steadily increasing (especially in the housing finance portfolio) and have started
showing signs of stress. SBIs retail portfolio has grown at over 37% CAGR in the last two
years and hence a significant portion of the portfolio is largely unseasoned. The housing
finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March 31, 2005.The bank
will face significant challenges in the medium term to develop effective credit appraisal and
collection systems in order to contain NPAs in retail finance. SBIs asset quality is expected
to remain at average levels, as the banks large and diverse asset portfolio reflects of the asset
quality of the banking system.
Business description
SBI along with its associate banks offer a wide range of banking products and services across
its different client markets. The bank has entered the market of term lending to corporates
and infrastructure financing, traditionally the domain of the financial institutions. It has
increased its thrust in retail assets in the last two years, and has built a strong market position
in housing loans.
SBI, through its non-banking subsidiaries, offers a host of financial services, viz., merchant
banking, fund management, factoring, primary dealership, broking, investment banking and
credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI
Life Insurance Company Limited, which is a joint venture with Cardiff S.A., one of the
largest insurance companies in France. SBI currently holds 74% equity in the joint venture.
Industry prospects
To leverage benefits such as access to low cost resources and the facility to provide a larger
gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited
and HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that
of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such
entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements,
priority sector requirements, and corporate exposure limits.
New private sector banks capture market share
With technological edge and a strong marketing thrust, private sector banks have been
stealing market share in retail deposits and the corporate fee business from public sector
banks. Together with some foreign banks, these private banks have also aggressively entered
the retail asset financing space, hitherto the domain of non-banking finance companies.
Given their focus on cross selling and optimizing their customer base, they now offer the
entire range of products and services on the asset and liability side to retail and wholesale
customers
Specified period
1993
Four Quarters
1994
Three Quarters
1995 Onwards
Two quarters
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 improvements in the payment and settlement
systems, recovery climate, up gradation of technology in the banking sector, etc, it was
decided to dispense with the past due concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall be an advance where,
i.
Interest and/or installment of principal remain overdue for a period of more than 180 days
in respect of a term loan
ii.
The account remains our of order for a period of more than 180 days, in respect of an
overdraft/cash credit
iii.
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 agriculture
purposes
iv.
Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.
With a view to move towards international best practices, it has been decided to adopt the 90
days overdue norm for identification of NPAs, from 31st March, 2004.
Out of Order Status
Overdue
Any amount due to the bank under any credit facility is overdue if it is not paid on the due
date fixed by the bank.
Classification of NPAs
Banks are required to classify NPAs further into the following three categories based on the
period for which the asset has remained non-performing and the reliability of the dues:
i.
Sub-standard Assets: A sub-standard asset is one which has remained NPA for a
period less than or equal to 18 months. In such cases, the current net worth of the
borrower, or the current market value of the security charged is not enough to ensure
recovery of the dues to the banks in full. Such assets will have well defined credit
weakness that jeopardize the liquidation of the debt and are characterized by the
distinct possibility that the bank will sustain a loss.
ii.
Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding
18 months. It has all the weaknesses inherent to a sub-standard asset with the added
characteristic that the collection or liquidation in full on the basis of currently
known facts is highly questionable and improbable.
iii.
Loss Assets: A loss asset is one where a loss has been identified by the bank or,
internal or external auditors but the amount has not been written off wholly.
Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs, especially in respect of high value accounts.
Accounts with temporary deficiencies: These should be classified based on the past
recovery records.
Accounts regularize near about the balance sheet date: These accounts should be handled
with care and without scope for subjectivity. Where the account indicates inherent
weakness based on available data, it should be deemed as an NPA.
Accounts where there is erosion in the value of the security: If there is a significant (i.e.
the realizable value of the security is less than 50% of that assessed by the bank during
acceptance) the account may be classified as NPA.
The NPAs of banks in India are considered to be at higher levels than those in other
countries. This issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and
disclosure measures initiated by RBI during recent years.
2.
The NPA Management Policy document of SBI lays down to contain net NPAs to
less than 5% of bank's total loan assets in confirmity with the international standard.
It is, therefore necessary that as per guidelines provided in NPA Management Policy
document, every effort be made at all levels to cut down the NPAs. All this requires
greater efforts and teamwork.
3.
It is essential to keep a constant watch over the non-performing assets not just to keep
it performing but also that once they become non-performing, effective measures are
initiated to get full recovery and where this is not possible, the various means are to
be initiated to get rid off the NPAs from the branch books.
4.
NPAs adversely affect the wealth condition of the branch advances as also the
profitability of the branch. Some of the reasons for this are as under:
(a)
(b)
5.
(c)
The Branch has to incur cost in supervision and follow up of such advances.
(d)
Under Income Recognition, Assets Classification and provisioning, NPA may be Sub
standard, Doubtful or loss assets.
6) Once the assets are classified as NPA, the Branch Manager has to take all the
necessary steps to get the dues recovered there-under to maintain the good health of
advances and the higher profitability at the-Branch. This requires management of NPAs
in such a Planned and scientific manner that the percentage of NPAs to the total advances
will be minimum.
RECOGNITION OF INCOME ON
NON-PERFORMING LOANS (NPLS)
Stricter regulations have been laid down by supervisory authorities in many countries with
regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest
payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful'
and 'loss'].
Any uncollected interest payments on NPLs are considered non-accrued interest. Previously
accrued, but uncollected interest is reversed out of income. Failure to do so would overstate
income. Uncollected interest is normally put in a memorandum account. NPLs are restored
on an accrual basis only after full settlement has been made on all delinquent principal and
interest. It would, therefore, be useful, if the accounts carry a footnote, explaining the
accounting policies followed with regard to recognition of income on NPLs.
b)
c)
1.
has been so identified but not written off. These norms, which should be regarded as
the minimum, may be brought into force in a phased manner.
2.
Corporations and FIs should avoid the practice of "ever greening" by making fresh
advances to their troubled constituents only with a view to settling interest dues and
avoiding classification of the loans in question as NPAs. The committee notes that the
regulatory and supervisory authorities are paying particular attention to such breaches
in the adherence to the spirit of the NPA definitions and are taking appropriate
corrective action.
3.
The committee believes that objective should be to reduce the average level of net
NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. These targets
cannot be achieved in the absence of measure to tackle the problem of backlong
NPAs on one time basis and the implementation of strict prudential norms and
management efficiency.
4.
There is no denying the fact that any effort at financial restructuring in the form of
having off NPAs portfolio from the books of the corporation or measures to initiate
the impact of high level of NPAs must go hand with operational restructuring.
Cleaning up the balance sheets of banks would thus make sense only if simultaneous
steps are taken to prevent of limit the reemergence of new NPAs.
5.
Direct credit has a proportionately higher share in NPA portfolio of corporations and
has been one of the factors in erosion in the quality of asset portfolio. There is a
continuing need of Financial Corporations to extend Credit to SSI sector, which is
important segment of national economy but on commercial considerations and on
basis of credit worthiness. Government feels reluctant to accept the recommendation
for reducing the scope of directed credit under priority sector because timy sector of
industry and small businesses have problems with regard to obtaining credit and some
remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may
continue.
6.
move towards international Practices in this regard and introduce the norm of 90 days
in a phased manner by the 2002.
7.
8.
Banks should pay greater attention to asset liability management to avoid mismatch
and to cover, among others, liquidity and interest rate risks.
9.
10.
11.
State Financial Corporations at present are over regulated and over administered.
Supervision should be based on evolving prudential norms and regulations which
should be adhered to rather than excessive control over administrative and other
aspects of organisation and functioning. Internal audit and internal inspection systems
should be strengthened.
12.
The main issues with regard to operations of Banks are to ensure operational
flexibility and measure of competition and adequate internal autonomy in matters of
loan sanctioning and internal administration.
13.
This calls for some re-examination and the present relevance of directed credit
programme ablest in respect of those who are able to stand on their own feet and to
whom the directed credit programmes with the element of interest concessionality
that has accompanied has become a source of economic rent. It is recommended that
directed credit sector be redefined to comprise the small and marginal farmers, the
tiny sector of industry, small business and transport operators, village and cottage
industry, rural artisans and other weaker sections. The credit target for this redefined
priority sector should hence forth be fixed at 10% of aggregate credit which would be
broadly in line with the credit flows to these sectors at present.
14.
The committee believes that the balance sheets of banks and FIs should be made more
transparent and full disclosure made in Balance sheet. This is to be done in phased
manner.
REVIEW OF LITERATURE
Das (1990) has compared the various efficiency measures of public sector banks by
applying data envelopment analysis model and concluded that the level of NPAs
significant negative relationship with efficiency estimates.
Verma (1999) has concluded that high level of NPAs leads to operational failure of
the bank.
Berger and young (1997) has examined the relationship between problem loan and
bank efficiency by employing Granger-causality technique and found that high level
of problem loans cause banks of increase spending on monitoring, working out and /
or selling off these loans and possibly becomes more diligent in administering the
portion of their existing loan portfolio that is currently performing.
Gupta (1997) has also concluded that NPAs on protifability of banks and leads to
liquidity crunch and slow down in the growth in GDP etc.
Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit
making and six loss making banks and concluded that loss making banks maintained
higher NPAs in the loan portfolio which led them to show losses.
Kwan and Eisenbeis (1994) also concluded that there is negative relationship
between efficiency and problem loans.
Toor (1994) analysed that poor recovery management leads to reduction in yield on
advanced that poor recovery management leads to reduction in yield on advances,
reduced productivity loss in the credibility and put detrimental impact on the policies
of the banks.
Murthy (1988) has examined that default bring down the return accruing and to them,
reduces effective rate of interest and reduces the funds recalculation and increase
their dependence on external sources thereby increasing the costs.
ACCORDING TO S, RAJ KUMAR (2002) the SARFAESI act and the could
primarily used as powerful bargaining tool while negotiating with defaulter. This
puts bank on stronger ground in salvaging sticky loan
OBJECTIVE OF STUDY
RESEARCH METHODOLOGY
Meaning of Research
Research is defined as a scientific & systematic search for pertinent information on a
specific topic. Research is an art of scientific investigation. Research is a systemized effort
to gain new knowledge. It is a careful inquiry especially through search for new facts in any
branch of knowledge. The search for knowledge through objective and systematic method of
finding solution to a problem is a research.
PROBLEM STATEMENT
The research problems, in general refers to sum difficulty with a researcher experience in the
contest of either a particular a theoretical situation and want to obtain a salutation for same.
TYPES OF
RESEARCH DESIGN
DESI
EXPLORATORY
RESEARCH
DESIGN
DESCRIPTIVE
EXPERIMENTAL
RESEARCH
DESIGN
The present study is descriptive in nature, as it seeks to discover ideas and insight
to bring out new relationship. Research design is flexible enough to provide opportunity for
considering different aspects of problem under study. It helps in bringing into focus some
inherent weakness in enterprise regarding which in depth study can be conducted by
management.
SAMPLING DESIGN:
A sample design is a definite plan for obtaining a sample from the sampling frame. It refers
to the technique or the procedure that is adopted in selecting the sampling units from which
inferences about the population is drawn. Sampling design is determined before the
collection of the data.
DATA COLLECTION
TYPES OF DATA
PRIMARY
DATA
SECONDRY
DATA
OBSERVATION
METHOD
INTERVIEW
METHIOD
QUETIONAIRE
METHOD
SCHEDULE
METHOD
SECONDARY DATA: The secondary data on the other hand, are those which have already been collected by
someone else and which have already been passed through the statistical processes. When the
researcher utilizes secondary data then he has to look into various sources from where he can
obtain them. For e.g. Books, magazine, newspaper, Internet, publications and reports. In the
EXTERNAL FACTORS
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, their by reducing their profitability and liquidity.
Wilful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order to
get back the money extended to them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans
Industrial sickness
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they
borrow to operate these activities. The banks recover the amount by selling of their assets,
which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and
has to make provision for it.
With every new govt. banking sector gets new policies for its operation. Thus it has to cope
with the changing principles and policies for the regulation of the rising of NPAs. eg. The
fallout of handloom sector is continuing as most of the weavers Co-operative societies have
become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked
out by the Central govt to revive the handloom sector has not yet been implemented. So the
over dues due to the handloom sectors are becoming NPAs.
INTERNAL FACTORS
There are three cardinal principles of bank lending that have been followed by the
commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of
profitability
i. Principles of safety By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore
take utmost care in ensuring that the enterprise or business for which a loan is sought is a
sound one and the borrower is capable of carrying it out successfully .he should be a person
of integrity and good character.
Inappropriate technology
The improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,
and financial soundness and credit worthiness of the borrower. Banks should consider the
borrowers own capital investment. it should collect credit information of the borrowers
from a. From bankers b. Enquiry from market/segment of trade, industry, business. c. From
external credit rating agencies. Analyse the balance sheet True picture of business will be
revealed on analysis of profit/loss a/c and balance sheet. Purpose of the loan When bankers
give loan, he should analyse the purpose of the loan. To ensure safety and liquidity, banks
should grant loan for productive purpose only. Bank should analyse the profitability,
viability, long term acceptability of the project while financing.
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider the 1.
Marketability 2. Acceptability 3. Safety 4. Transferability.
The banker should follow the principle of diversification of risk based on the famous maxim
do not keep all the eggs in one basket; it means that the banker should not grant advances
to a few big farms only or to concentrate them in few industries or in a few cities. If a new
big customer meets misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack,
and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM
(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.
Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters
and CCBs and PACs, the NPAs of OSCB is increasing day by day.
IMPACT OF NPAS ON BANKS:In portion of the interest income is absorbed in servicing NPA.NPA is not merely nonremunerative. It is also cost absorbing and profit eroding.
In the context of severe competition in the banking industry, the weak banks are at
disadvantage for leveraging the rate of interest in the deregulated market and securing
remunerative business growth. The options for these banks are lost. "The spread is the bread
for the banks". This is the margin between the cost of resources employed and the return
therefrom." This is the margin between the cost of resources employed and the return
thereform. In other words it is gap between the return on funds deployed (Interest earned on
credit and investments) and cost of funds employed (Interest paid on deposits).
When the interest rates were directed by RBI, as heretofore, there was not option for
banks. But today in the deregulated market the banks decide their lending rates and
borrowing rates. In the competitive money and capital Markets, inability to offer competitive
market rates adds to the disadvantage of marketing and building new NPA has affected the
profitability, liquidity and competitive functioning of banks and finally the psychology of the
bankers in respect of their disposition towards credit delivery and credit expansion.
1. Impact on Profitability
"The efficiency of banks is not always reflected only by the size of its balance sheet
but by the level of return on its assets. NPAS do not generate interest income for the
banks, but at the same time banks are required to make provisions for such NPAS from
their current profits.
NPAS have a deleterious effect on the return on assets in several ways:
There is at times a tendency among some of the banks to understate the level of NPAs in
order to reduce the provisioning and boost up bottom lines. It would only postpone the
process.
In the context of crippling effect on a bank's operations in all spheres, asset quality has been
placed as one of the most important parameters in the measurement of a bank's performance
under the CAMELS supervisory rating system of RBI.
Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores
towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net
advances. To this extent the problem is contained but a what cost?
This costly remedy is made at the sacrifice of building healthy reserves for future capital
adequacy.
The enormous provisioning of NPA together with the holding cost of such non-productive
assets over the years has acted as a severe drain on the profitability of the SBI Group. In turn
SBI Group are seen as poor performers and unable to approach the market for raising
additional capital. Equity issues of nationalized banks that have already tapped the market are
now quoted at a discount in the secondary market. Other bans hesitate to approach the market
to rise new issues. This has alternatively forced SBI Group to borrow heavily from the debt
market to build Tier II Capital to meet capital adequacy norms putting severe pressure on
their profit margins; else they are to seek the bounty of the Central Government for repeated
Recapitalization.
Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds
at 6% plus 1% service charge) the net NPA of Rs. 32632 Croces absorbs a recurring holding
ost of Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years
which works out to average of Rs. 3300 crores from annum, a sizeab business.
In the face of the deregulated banking industry, an ideal competitive working is reached,
when the banks are able to earn adequate amount of non-interest income to cover their entire
operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference
between the gross interest income and interest cost will constitute its operating profits.
Theoretically even if the banks keeps 0% spread, it will still break even in terms of operating
profit and not return an operating loss. The net profit is the amount of the operating profit
minus the amount of provisions to be made including for taxation. On account of the burden
of heavy NPA, many nationalised banks have little option and they are unable to lower
lending rates competitively, as a wider spread is necessitated to cover cost of NPA in the face
of lower income from off balance sheet business yielding non-interest income.
The following working results of SBI Group an identified well manged nationalised banks
for the last two years and for the first nine months of the current financial year, will be
revealing to prove this statement.
Non-interest income fully absorbs the operating expenses of this banks in the current
financial year for the first 9 months. In the last two financial years, though such income has
substantially covered the operating expenses (between 80 to 90%) there is still a deficit left.
The strength of SBI Group is indentified by the following positive feature:
1.
2.
It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year
ended March, 2001, as published by RBI in its Report on trends and progress of banking in
India.
Interest on Recapitalization Bonds is a income earned form the Government, who had
issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a
bailout package. The statistics above show the other weaknesses of the nationalised banks in
addition to the heavy burden they have to bear for servicing NPA by way of provisioning and
holding cost as under:
Their operating expenses are higher due to surplus manpower employed. Wage costs
total assets is much higher to PSBs compared to new private banks or foreign banks.
Their earnings from sources other than interest income are meagre. This is due to
failure to develop off balance sheet business through innovative banking products.
confidence). a tendency towards laxity in the standards of credit appraisal comes to the
fore. It is well know that the existence of collateral security at best may convert the credit
extended to productive sectors into an investment against real estate, but will not prevent
the account turning into NPA. Further blocked assets and real estate represent the most
illiquid security and NPA in such advances has the tendency to persist for a long
duration.
SBI Group have reached a dead-end of the tunnel and their future prosperity depends on
an urgent solution for handling this hovering threat.
4. Impact on Productivity:
High level of NPAs effect the productivity of the banks by increasing the cost of funds
and by reducing the efficiency of banks employees. Cost of funds is increased because
due to non-availability of sufficient internal sources they have to rely on external sources
to fulfill their future financial requirements. Productivity of employees is also reduced
because it keeps staff busy with the task of recovery of overdue. Instead of devoting time
for planning for development through more credit and mobilization of resources the
branch staff would primarily be engaged in preparing a large value of returns and
statements relating to sub-standard, doubtful and loss assets, preparing proposal for filing
of suits, waivement of legal action, compromise, write off or in preparing DICGC claim
papers etc.
5. Impact on other Variables:
High level of NPAs also leads to squeezing of interest spread, when asset becomes an
NPA for the first time it adversely affects the spread by not contributing to the interest
income and from the second year onwards it will have its impact on the bottom line of the
balance sheet because of provisioning to be made for it and not have incremental effect
on the spread.
Now a days Govt. does not encourage liberal capital support to be given to banks. Banks
are required to bring their own capital by issuing share to the public, whereas high level
of NPAs leads to lower profits hence less or no profits available for equity shareholders
hence lower EPS and fall in the value of share. During the year 2001-02 share of 12
public sector banks were traded on the NSE out of which share value of three PSBs have
decreased. Low market value of shares has also forced the banks to borrow heavily debt
market to build Tier II capital to meet capital adequacy norms, putting severe pressure on
their profit margins.
6.
High incidence of loan defaults shakes the confidence of general public in the soundness
of banking setup and indirectly effects the capacity of the banking system to mop up the
deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust
of foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened bi
Indian banks or confine their transaction to top Indian banks only. Moreover, it puts
negative effect on granting of autonomy to PSBs whreas it is must for banks in this
competitive environment. Banks having positive net profits for the last three years, Net
NPA level below 9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to
be fulfilled to get autonomous status, which becomes difficult in the situation of huge
level of NPAs
.
Inadequate recovery also inhibits the banks to draw refinance from higher level
agency. The eligibility of a bank to draw refinance from NABARD is linked to the %age
of recovery to demand in respect of direct, medium and long term loans for agriculture
and allied activities. It implies that refinance facility would be progressively reduced
depending on the position of NPAs and also on the No. of years in which a banks branch
remains in a particular category of default. Due to fear of NPAa banks are being taken
away from the basic function for which these were established it is becoming more &
more risky and less remunerative. They are floating their subsidiaries to manage mutual
funds, factoring, insurance business, Good money is spent to recover bad money.
Deterioration in the quality of loan assets and inability to come with new products makes
the Indian banks uncompetitive globally. Due to high cost, they cannot reduce lending
rate to meet the economy's demand of low lending rate. It is also biggest threat for capital
account convertibility.
7.
It is not only the banks which are affected higher level of NPAs but it is the economy as a
whole which pays for it. Banks are not putting enough resource in lending due to fear of
default. Once the credit to various sectors of the economy slow down, the economy is
badly hit. There is slowdown in growth in GDP, industrial output and fall in the profit
margins of the corporate and consequent depression in the market. Further high level of
NPAs can result in adding to the inflationary potential in the economy and eroding the
viability of the credit system as a whole.
Not only this, burden of NPAs is to be borne by the society as a whole. When capital
support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs, it
comes out of either Govt. budgetary resources or from the public as per
Liberalization policy, whether this money is from tax revenues or from the hard earned
saving of the investing public, in fact, the society is bearing the cost of these
NPAs. Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is
in its hand. Any dividend declared would have gone to the Govt. and which can be spent
on the welfare and development program.
GUIDELINES BY RBI
The broad framework for compromise or negotiated settlement of NPAs advised by RBI
in July 1995 continues to be in place. Banks are free to design and implement their own
policies for recovery and write-off incorporating compromise and negotiated settlements
with the approval of their Boards, particularly for old and unresolved cases falling under
the NPA category. The policy framework suggested by RBI provides for setting up of an
independent Settlement Advisory Committees headed by a retired Judge of the High Court
to scrutinise and recommend compromise proposals.
* Specific guidelines were issued in May 1999 to public sector banks for one time non
discretionary and non discriminatory settlement of NPAs of small sector. The scheme was
operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through
compromise settlement under this scheme].
* Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore
and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001
helped the public sector banks to recover Rs. 2600 crore by September 2001].
*
operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance
Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs of
small/marginal farmers are being drawn up.
2.
Lok Adaltas:
Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss"
category, with outstanding balance of Rs. 5 lakh for compromise settlement under
Lok Adalats. Debt Recovery Tribunals have now been empowered to organize Lok
Adalats to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector
banks had recovered Rs. 40.38 crore as on September 30, 2001, through the forum of
Lok Adalat. The progress through this channel is expected to pick up in the coming
years particularly looking at the recent initiatives taken by some of the public sector
banks and DRTs in Mumbai.
3.
DRTs.
Provisions for placement of more than one Recovery Officer, power to attach
defendant's property/assets before judgement, penal provisions for disobedience of
Tribunal's order or for breach of any terms of the order and appointment of receiver
with powers of realization, management, protection and preservation of property are
expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs
in the times to come.
Though there are 22 DRTs set up at major centres in the country with Appellate
Tribunals located in five centres viz. Allahabad, Mumbai, Delhi,Calcutta and
Chennai, they could decide only 9814 cases for Rs. 6264.71 crore pertaining to public
sector banks since inception of DRT mechanism and till September 30, 2001. The
amount recovered in respect of these cases amounted to only Rs. 1864.30 crore.
Looking at the huge task on hand, with as many as 33049 cases involving Rs.
42988.84 crore pending before them as on September 30, 2001, I would like the
banks to institute appropriate documentation system and render all possible assistance
to the DRTs for speeding up decisions and recovery of some of the well collateralised
NPAs involving large amounts. I may add that familiarisation programmes have been
offered in NIBM at periodical intervals to the presiding officers of DRTs in
understanding the complexities of documentation and operational features and other
legalities applicable of Indian banking system. RBI on its part has suggested to the
Government to consider enactment of appropriate penal provisions against
obstruction by borrowers in possession of attached properties by DRT Receivers, and
notify borrowers who default to honour the decree passed against them.
4.
5.
7.
amounts against same assets and property, which had in no small measures
contributed to the incremental NPAs of banks.
8.
9.
Corporate Governance:
A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the
Reserve Bank to review the supervisory role of Boards of Banks and financial
institutions and to obtain feedback on the functioning of the Boards vis-a-vis
compliance,
transparency,
disclosure,
audit
committees
etc.
and
make
recommendations for making the role of Board of Directors more effective with a
view to minimising risks and overexposure. The group is finalising its
recommendations shortly and may come out with guidelines for effective control and
supervision by bank boards over credit management and NPA prevention measures.
10. Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002:
The Act provides, inter alia for enforcement of security interest for realisation of dues
without the intervention of courts or tribunals. The Security Interest (Enforcement)
Rules, 2002 has also been notified by Government to enable Secured Creditors to
authorise their officials to enforce the securities and recover the dues from the
borrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 notices
involving outstanding amount of Rs. 19,744 crore, and had recovered an amount of
Rs. 1,748 crore from 24,092 cases.
1.
2.
Political interferences:
Political interference in the day -to-day functioning of public sector banks created a
number of problems for them. The populist policies of the national level politicians,
such as waiver in repayment only added to these problems.
3.
4.
5.
Misuse of BIFR/SICA:
This was one of the favourite methods of willful defaulters to delay repayment. If the
defaulter's company is declared sick and taken for financial reconstruction under
BIFR, it is not possible to undertake any recovery proceeding against the company
.The procedure of financial reconstruction can take a number of years together,
thereby delaying recovery to a great extent.
6.
ANALYISIS AND
INTERPRETATION
TOTAL ASSET
YEAR
TOTAL ASSET(RS.
2003-
2004-
2005-
2006-
2007-
04
05
06
07
08
CR)
407185
459883
494029
566565
721526
800000
700000
600000
500000
400000
YEAR
300000
200000
100000
0
YEAR
GROSS NPA
YEAR
_GROSS NPA(RS.CR)
2003-04
2004-05
2005-06
2006-07
2007-08
12667
12456
9628
9998
12837
_GROSS NPA(RS.CR)
14000
12000
10000
8000
_GROSS
NPA(RS.CR)
6000
4000
2000
0
200304
200405
200506
200607
200708
NET NPA
YEAR
NET NPA(RS. CR.)
2003-04
2004-05
2005-06
2006-07
2007-08
5442
5349
4906
5258
7424
NET NPA(RS.
CR.)
3000
2000
1000
0
Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and
increased in 2006-07 to 2007-08.
YEAR
GROSS NPA(RATIO%)
2003-04
2004-05
2005-06
2006-07
2007-08
7.75
5.96
3.61
2.92
3.04
Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased
from 2004-05 to 2006-07 and increased in 2007-08.
7
6
NET NPA(RATIO%)
YEAR
NET NPA(RATIO%)
2003-04
3.48
2004-05
2.65
2005-06
1.88
2006-07
1.56
2007-08
1.78
4
3.5
3
2.5
YEAR
NET
NPA(RATIO%)
1.5
1
0.5
0
1
Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is decreased from
2004-05 to 2006-07 and increased in 2007-08
PROVISION COVER
YEAR
2003-04
2004-05
2005-06
2006-07
2007-08
57.04
59.45
49.04
47.41
45.04
PROVISION COVER
PROVISION COVER
POVISION COVER %
70
60
50
40
PROVISION COVER
30
20
10
0
2003-04 2004-05 2005-06 2006-07 2007-08
yEAR
Interpretation: Above graph shows that in 2003-04 provision cover of NPA is 57.04%
and increased in 2004-05. It decreased from 2005-06 to 2007-08.
YEAR
GROSS NPA(%)
NET NPA(%)
2003-04
1.82
1.35
2004-05
1.65
1.23
2005-06
1.38
0.99
2006-07
2.14
0.83
2007-08
1.42
0.6
2.5
2
1.5
GROSS NPA(%)
NET NPA(%)
0.5
0
2003- 2004- 2005- 2006- 200704
05
06
07
08
Interpretation: Above graph shows that the gross NPA of SBP is decreased from
2003-04 to 2005-06,increased in 2006-07 and again decreased in 2007-08. The net NPA
decreased from 2003-04 to 2007-08.
FINDINGS
1.
Default by customer
Non-inspection of borrower
Lack of expertise
Imbalance of inventories
Govt. Policies
Impact of profitability
Liquidity
Impact of productivity
RECOMMANDATIONS
Credit administration:
machinery and put in place effective credit risk management systems to reduce the fresh
incidence of NPAs.
Better Inspection:
Cash Recovery:
As you are aware, one of the main reason for corporate default
realize their role and responsibilities. They should appreciate the difficulties of each
other and should endeavor to work contributing to a healthy financial system.
LIMITATION OF STUDY
Shortage of time :-
.Time is very short for research ,so that is very difficult can get the knowledge about
everything .
CONCLUSION
A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors.
Over the years, much has been talked about NPA and the emphasis so far has been only
on identification and quantification of NPAs rather than on ways to reduce and upgrade
them.
There is also a general perception that the prescriptions of 40% of net bank credit to
priority sectors have led to higher NPAs, due to credit to these sectors becoming stickly
managers of rural and semi-urban branches generally sanction these loans. In the changed
context of new prudential norms and emphasis on quality lending and profitability,
mangers should make it amply clear to potential borrowers that banks resources are scare
and these are meant to finance viable ventures so that these are repaid on time and
relevant to other needy borrowers for improving the economic lot of maximum number
of households. Hence selectionof right borrowers, viable economic activity, adequate
finance and timely disbursement, correct and use of funds and timely recovery f loans is
absolutely necessary pre conditions for preventing of minimizing the incidence of new
NPAs.
BIBLIOGRAPHY
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Alok Majumdar, NPAs: Recovery Blues, Treasury Management (Dec. 2000) pp 46-49
www.centurionbop.co.in/news/press_190505.html1
2.
www.domainb.com/management/m_a/20060904_vijay_kalantri.html2
3.
www.twincitiesbbs.com/php/subra/corporat.htm3
4.
www.blonnet.com/2002/08/07/stories/2002080700050800.htm4
5.
www.sbi.com
6.
www.sbp.com