“Research Project” ON
“PROBLEM OF NPA AND ITS IMPACT ON BANKS (WITH SPECIAL REFRENCE TO STATE BANK OF INDIA)”
Punjab Technical University, Jalandhar in partial fulfilment for the degree of Master of Business Administration (Session 2008-2010)
Under the supervision of: Dr. R.S GUPTA HOD MGT DEPTT.
Submitted By:NAVJINDER GREWAL MBA(II)YR ROLL NO. (27)
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.
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.
1. Introduction Non –performing asset • Classification of NPA • Some issue of NPA 2. 3. 4. Review of literature Objective of study Research Methodology • Research Design • Sources of Data 5. Reason of NPA
6. 7. 8. 9.
Impact of NPA on Banks Guidelines of RBI Analysis and interpretation of data Findings
10. 11. 12. 13.
Limitation Recommendation Conclusion
INTRODUCTION TO THE PROJECT
Assets Classification and Provisioning in April. They have adopted these guidelines for the purpose of Income Recognition and Assets Classification from the accounting year 199596.03. On the basis of the recommendations of the Narsimhan Committee. The definition of NPAs is also gradually becoming tough for RRBs to cover all advances like Commercial Banks.ICICI. so in this context a good number of circular instruction/guidelines have been issued by bank/Reserve Bank of India.03. they have been made applicable in a phased manner for RRBs. 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. Banks extend credit to different
. Reserve Bank of India. guidelines were issued by the Reserve Bank of India in March. 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. 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. IDBI. Banks are under growing pressure to bring down their NPAs so as to improve their performance and viability. Similarly. guidelines relating to provisioning for RRBs have been made effective from the financial' year ended 31. 1996. Although most of-the guidelines relating to RRBs are similar to that of Commercial Banks. have played a crucial role in the socio. Asset Classification and Provisioning of loan assets of Banks and Financial Institutions.economic progress of the country.Narsimham to examine and give recommendation for Income Recognition. 1994 to All India Financial Institutions viz. Asset Classification and Provisioning have come into effect from the accounting year 31. in the year 1991. However.Since the introduction of economic liberalization and financial sector reforms. IFCI.1997. 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.1993. INDIAN BANKS FUNCTIONALLY diverse and geographically widespread. AXIS Bank and IIBI. M. appointed a committee under the Chairmanship of Sh. RBI had issued guidelines to all Scheduled Commercial Banks on Income Recognition.
these loan losses affect the bank’s profitability on a large scale. Apart from raising resources through fresh deposits. Return comes in the form of loan interest. as NPAs can choke further expansion of credit which would impede the economic growth of the country. which results into economic growth. For most customers. Though complete elimination of such losses is not possible. Despite various correctional steps administered to solve and end this
. Granting of credit for economic activities is the prime duty of banking. fee income and investment and the most prominent assumed risk is credit risk. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. but banks can always aim to keep the losses at a low level. Thus.types of borrowers for many different purposes. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. However lending also carries a risk called credit risk. NPAs are not therefore the concern of only lenders but also the public at large. For banks good loans are the most profitable assets. 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. 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. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. Proper management and speedy disposal of NPAs is one of the most critical tasks of banks today. 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. borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. which arises from the failure of borrower. 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. bank credit is the primary source of available debt financing.
and the all India Financial Institutions. concrete results are eluding.problem. followed by the SBI group. 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.
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 country’s largest universal bank. SBI’s strong franchise gives it access to a steady source of stable retail funds. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. 2005 (56% as at March 31.70% for the 2004-05 (refers to financial year from April 1 to March 31). which constitute around 59% of the total resources as on March 31. large limits in the call market. compared with 5. 67. underpinned by its strong retail deposit base. and significant surplus SLR investments.
. 2005. low-cost deposits have continued to constitute over 40% of total deposits as at March 31. Once the core banking solution (CBS) is fully implemented.000 branches and ATMs of the State Bank group. improve service levels. Thus. 2005. The bank’s cost of deposits (excluding IMD) has significantly reduced to 4. provide new delivery platforms. and emerge as the strongest technology enabled distribution network in India. 2004).STATE BANK OF INDIA
SBI is the largest bank in India with deposits of Rs 3. The bank’s liquidity position is very strong due to healthy accretion to deposits. it will cover over 10. Resource-raising capabilities SBI’s funding profile is strong. and improve operating efficiency to counter the threat of competition effectively.000 crore as on March 31. The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better. Savings deposits have shown a strong three-year growth of 19%. The bank is facing increasing competition in its metropolitan and urban franchise. SBI will maintain its strong funding profile and a low cost resource position in view of its strong retail base and wide geographical reach. despite a reduction in the proportion of current account deposits.48% in 2003-04.
4 times as at March 31. To maintain yields and pursue credit growth. The capitalization levels of SBI are adequate to address the asset side risks and support the business growth in the medium term. and customer segments. However. the growth in fee income is expected to slow down. regions. asset classes. The bank’s operating expense at 2. Comfortable capital position SBI is adequately capitalized with a tier I capital adequacy ratio of 8. despite the decline in profitability in some segments. witnessed across the entire banking sector. with the opening of government business like tax collection to other banks and increased competition.
. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets).04% and a large capital base of Rs 240. it is expected to happen gradually. the bank’s operating costs will remain high in the medium term. The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile.72 billion as at March 31. The bank has considerably improved its net worth coverage for net NPAs to 4. Strong diversification in income streams will ensure that the bank’s earnings remain relatively stable. the bank will have to reduce or redeploy work force. the bank is aggressively targeting retail finance and small and medium enterprises (SMEs). at around 1% per annum for the past three years.Earnings profile to remain good SBI will maintain a good earnings profile in the medium term despite high pressure on yields due to the increasing competition in the banking sector. To be able to reap the full benefits of technology implementation. since this is a sensitive issue. The bank’s fund based and fee income earnings are diversified across industries. 2005. and diverse income streams. 2005 due to lower slippages reflecting an improving asset quality. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating expenditure in 2004-05. despite good asset growth and technology efficiency gains. Thus.44% of average funds deployed in 2004-05 is in line with other public sector banks.
The housing finance portfolio has a 12-month. 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. and has not competed based on interest rate. SBI’s 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 bank is facing challenges to improve the quality of assets originated.08 billion) of total advances as at September 30 2005. lagged gross NPA of 4.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. which constitutes Rs. SBI is targeting primarily the housing loans segment. The bank has entered the market of term lending to corporates
.3%) of total retail loans. 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. the bank has leveraged its corporate relationships. as can be seen in the consistently higher levels of slippages (additions to NPAs) at 2. pursued business growth selectively. In the retail loan segment. the bank has decided to focus on financing the retail (personal) segment as well as SMEs.34% as at March 31.9% for all scheduled commercial banks (SCBs) taken together. 283.95% of gross advances as at March 31.71% in 2004-05. 2005. however they are steadily increasing (especially in the housing finance portfolio) and have started showing signs of stress.73% (Rs 522. The NPAs in retail finance are low currently. The share of retail advances has increased to 24. To contain NPAs and ensure credit growth. as the bank’s large and diverse asset portfolio reflects of the asset quality of the banking system.Management strategies In retail finance. Asset quality to remain at average levels The bank continues to have a high level of gross NPAs at 5. Business description SBI along with its associate banks offer a wide range of banking products and services across its different client markets. 2005. compared with 4.41 billion (54. SBI’s asset quality is expected to remain at average levels.
It has increased its thrust in retail assets in the last two years. viz. Simultaneously. fund management. Industry prospects To leverage benefits such as access to low cost resources and the facility to provide a larger gamut of services. and corporate exposure limits. through its non-banking subsidiaries. investment banking and credit cards. primary dealership. private sector banks have been stealing market share in retail deposits and the corporate fee business from public sector banks. a number of finance companies such as Kotak Mahindra Finance Limited and HDFC Limited have promoted banks. hitherto the domain of non-banking finance companies. Given their focus on cross selling and optimizing their customer base. factoring. Together with some foreign banks. SBI Life Insurance Company Limited.. which is a joint venture with Cardiff S. broking. SBI has commenced its life insurance business by setting up a subsidiary. SBI currently holds 74% equity in the joint venture.A. priority sector requirements. New private sector banks capture market share With technological edge and a strong marketing thrust. merchant banking. and has built a strong market position in housing loans. offers a host of financial services. 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. SBI. these private banks have also aggressively entered the retail asset financing space.and infrastructure financing. one of the largest insurance companies in France. traditionally the domain of the financial institutions.. they now offer the entire range of products and services on the asset and liability side to retail and wholesale customers
The steady accruals to net worth and falling non-performing asset levels have resulted in an improvement in the capitalization position of banks in recent years. Challenges ahead Competition from new private sector and foreign banks remains a key challenge for public sector banks. however. Better Capitalization levels Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through public issues in recent years. steady growth in gross domestic product should help improve the banks’ asset quality and increase corporate lending.Asset quality to improve Banks have not yet fully resolved the stress in the asset quality of their legacy corporate loan portfolios.
. Going forward. as they moved to the 90-day norm for recognising and provisioning for NPAs. The securitization and reconstruction of financial assets and enforcement of security interest (Sarfaesi) Act should also help banks in limiting slippages and improving NPA recoveries. small and medium enterprises. the treasury gains enabled significant provisioning to be made with the result that net NPAs for most public sector banks are now less than 3%. thereby improving their capitalization levels. They need to reorient their staff and effectively utilize technology platforms to retain customers and reduce costs. Though slippages to NPAs and provisioning were high for some banks in FY2004. They also need to fortify their credit risk management systems to mitigate the risks arising from small-ticket lending to the retail. and services segments.
These would also be driven by GoI due to provisions of Banking Companies (Acquisition and Transfer of Undertakings) Act 1969.Consolidation and emergence of universal banking groups The cap on foreign ownership of banks has already been raised from 49% to 74%. Strategic alliances between banks and other financial sector players such as insurance companies and mutual funds are also likely as banks attempt to enhance their product range. the integration process in such mergers is expected to be complex and time long drawn. the emergence of newer players would be restricted if the private ownership of banks is capped at low levels. technological edge. leverage on economies of scale and reduce costs. The competition in the sector could get further intensified if the 10% cap on voting rights is also relaxed. and hence political scenario will impact the timing and permutations possible. focused marketing approach and operational freedom. New private sector banks are expanding their geographical coverage and making inroads into government business. Mergers among PSBs would create banks with even larger balance sheets and customer base. The new private and foreign banks will continue to gain market share from public sector banks because of their efficient cost structures. However.
it was decided to dispense with the ‘past due’ concept. in respect of an overdraft/cash credit iii. a NPA shall be an advance where. The account remains ‘our of order’ for a period of more than 180 days. up gradation of technology in the banking sector. A ‘non performing asset’ was defined as a credit facility in respect of which the interest and / or installment of principal had remained ‘past due’ for a specified period of time. as from that date. Accordingly. 2001. Due to the improvements in the payment and settlement systems. recovery climate. etc.Definition of NPAs (NON -PERFORMING ASSETS)
An asset. including a leased asset. with effect from 31st March. i. 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
. becomes non-performing when it ceases to generate income for the bank. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan ii.
The specified period was reduced in a phased manner as under: Year ending March 31 1993 1994 1995 Onwards Specified period Four Quarters Three Quarters 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.
it has been decided to adopt the ’90 days’ overdue norm for identification of NPAs. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power. With a view to move towards international best practices.
Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period. 2004.
. these accounts should be treated as ‘out of order’. ‘Out of Order’ Status
An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. from 31st March.iv.
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.
iii. In such cases. especially in respect of high value accounts. or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full.
. classification should be done taking into account the degree of well defined credit weaknesses and the extent of dependence on collateral security for realization of dues. internal or external auditors but the amount has not been written off wholly. the current net worth of the borrower.
Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs. 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.
Guidelines for Classification of NPAs
Broadly speaking.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:
Loss Assets: A loss asset is one where a loss has been identified by the bank or.
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.
Sub-standard Assets: A sub-standard asset is one which has remained NPA for a period less than or equal to 18 months.
Accounts where there is erosion in the value of the security: If there is a significant (i.•
Accounts with temporary deficiencies: These should be classified based on the past recovery records. as it is difficult to envisage only a solitary facility becoming a problem credit and not others. others should also be classified the same way. 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.
Asset classification should be borrower-wise and not facility-wise: If a single facility to a borrower is classified as NPA.
Accounts regularize near about the balance sheet date: These accounts should be handled with care and without scope for subjectivity.
Advances under consortium arrangements: Classification here should be based on the recovery record of the individual member banks. it should be deemed as an NPA.
. Where the account indicates inherent weakness based on available data.e.
It is. This requires management of NPAs in such a Planned and scientific manner that the percentage of NPAs to the total advances will be minimum. The Branch 'has to pay interest to central office on outstanding classified as NPA. All this requires greater efforts and teamwork. the various means are to be initiated to get rid off the NPAs from the branch books. The NPAs of banks in India are considered to be at higher levels than those in other countries. The Branch has to incur cost in supervision and follow up of such advances. NPAs adversely affect the wealth condition of the branch advances as also the profitability of the branch.
Under Income Recognition. therefore necessary that as per guidelines provided in NPA Management Policy document. 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. 3. 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. Provision has to be made on NPAs at Bank level. 4. Doubtful or loss assets. 2.
. NPA may be Sub standard. Assets Classification and provisioning. 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 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. every effort be made at all levels to cut down the NPAs.NPA SOME ASPECTS AND ISSUES
1. effective measures are initiated to get full recovery and where this is not possible. 6) Once the assets are classified as NPA. Interest cannot be applied on the loan accounts classified as NPAs. Some of the reasons for this are as under: (a) (b) (c) (d) 5.
NPLs are restored on an accrual basis only after full settlement has been made on all delinquent principal and interest. be useful. meanwhile major changes have taken place in the domestic. Structural changes in the system. a) b) To strength the foundation of financial system. Related to this.
NARSIMHAN COMMITTEE'S RECOMMENDATIONS Committee on Financial System (CFS) Narsimhan committee which reported in 1991. economic and institutional science.
It is recommended that an asset be classified as doubtful if it is in the sub standard category for 18 months in the first instance and eventually for 12 months as loss if it
. c) 1. streamlining procedures. upgrading technology and human resource development. Uncollected interest is normally put in a memorandum account. It would. but uncollected interest is reversed out of income. 'doubtful' and 'loss']. The suspension of interest payments is required on loans that are classified as 'non-performing' ['substandard'. Any uncollected interest payments on NPLs are considered non-accrued interest. if the accounts carry a footnote. Previously accrued. Committee has presented second generation reforms.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). Failure to do so would overstate income. therefore. explaining the accounting policies followed with regard to recognition of income on NPLs. indicating the movement towards global integration of financial services.
which should be regarded as the minimum.
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. Given the special needs of these sectors.
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. 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. may be brought into force in a phased manner.
3. 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. 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.
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. However. A poverty alleviation and employment generation schemes. we should
. There is a continuing need of Financial Corporations to extend Credit to SSI sector. 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. These norms.
With regard to income recognition in India.
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. the current practice may continue. which is important segment of national economy but on commercial considerations and on basis of credit worthiness.
5.has been so identified but not written off.
2. income stops occurring when interest/installment of principal is not paid within 180 days.
As an incentive to Bank is to make specific provision. Banks should pay greater attention to asset liability management to avoid mismatch and to cover. Internal audit and internal inspection systems should be strengthened.
The main issues with regard to operations of Bank’s are to ensure operational flexibility and measure of competition and adequate internal autonomy in matters of loan sanctioning and internal administration. prescribe certain normative models for market risk management.
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. 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.
State Financial Corporations at present are over regulated and over administered.move towards international Practices in this regard and introduce the norm of 90 days in a phased manner by the 2002. rural artisans and other weaker sections. greater efficiency in information technology.
12. 8. the institution and operation of better control systems. the consideration be given to making such provisions tax deductible. among others. While the RBI and IDBI may initially.
There is a need for a greater use of computerized system than at present. the ultimate objective should be that of building up their models and RBI blacklisting them for their validity on a periodical basis. the tiny sector of industry. liquidity and interest rate risks. 7. Computerization has to be recognized as an indispensable tool for improvement in customer service. small business and transport operators. Forex rate volatility and interest rate changes. village and cottage industry.
13. It should be encouraged to adopt statistical risk management techniques like value at risk in respect of balance sheet term which are susceptible to market price fluctuation.
10. It is recommended that directed credit sector be redefined to comprise the small and marginal farmers. The credit target for this redefined
This is to be done in phased manner.
.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.
The committee believes that the balance sheets of banks and FIs should be made more transparent and full disclosure made in Balance sheet.
Verma (1999) has concluded that high level of NPAs leads to operational failure of the bank. reduces effective rate of interest and reduces the funds’ recalculation and increase their dependence on external sources thereby increasing the costs. ACCORDING TO S. 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. Murthy (1988) has examined that default bring down the return accruing and to them. reduced productivity loss in the credibility and put detrimental impact on the policies of the banks. 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. Kwan and Eisenbeis (1994) also concluded that there is negative relationship between efficiency and problem loans.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. 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
. 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. 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.
To know the reason for an asset becoming NPA
.OBJECTIVE OF STUDY
To study the position of non performing assets in SBI group To know the impact on NPAon strategic banking variable.
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. The search for knowledge through objective and systematic method of finding solution to a problem is a research. Research is an art of scientific investigation.
The present Dissertation has been undertaken to do the Problem of NPA in State Bank of India. Research is a systemized effort to gain new knowledge.RESEARCH METHODOLOGY
Meaning of Research Research is defined as “a scientific & systematic search for pertinent information on a specific topic”.
PROBLEM STATEMENT The research problems.
TYPES OF RESEARCH DESIGN
EXPLORATORY RESEARCH DESIGN
EXPERIMENTAL RESEARCH DESIGN
. It is a careful inquiry especially through search for new facts in any branch of knowledge.
Sampling design is determined before the collection of the data. It helps in bringing into focus some inherent weakness in enterprise regarding which in depth study can be conducted by management.The present study is descriptive in nature. 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. as it seeks to discover ideas and insight
to bring out new relationship. DATA COLLECTION
TYPES OF DATA
PRIMARY DATA: METHODS OF PRIMARY DATA
. Research design is flexible enough to provide opportunity for considering different aspects of problem under study.
are those which have already been collected by someone else and which have already been passed through the statistical processes.SECONDARY DATA: The secondary data on the other hand. Books. For e. magazine.
. publications and reports. newspaper.
.g. Internet. In the
present study use of secondary data collected from website. When the researcher utilizes secondary data then he has to look into various sources from where he can obtain them.
Mainly ours farmers depends on rain fall for cropping.
There are borrowers who are able to payback loans but are intentionally withdrawing it.REASONS FOR RISE IN NPAs
FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. Thus the bank has to make large amount of provisions in order to compensate those loans. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans
Improper project handling . 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. hence end up the fiscal with a reduced profit. has set of numbers of recovery tribunals.
Ineffective recovery tribunal
. their by reducing their profitability and liquidity. ineffective management . which works for recovery of loans and advances. day to day changing govt. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.
This is the measure factor. lack of advance technology . The NPAs in PSB are growing due to external as well as internal factors. Policies give birth to industrial sickness. which is creating alarming rise in NPAs of the PSBs. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover. lack of adequate resources .
Defective Lending process
There are three cardinal principles of bank lending that have been followed by the commercial banks since long. policies
With every new govt. Reputation of borrower The banker should. which covers a minimum label. So the over dues due to the handloom sectors are becoming NPAs. Principle of liquidity iii. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. Tangible assets 2. banking sector gets new policies for its operation. Capacity to pay b. The rehabilitation plan worked out by the Central govt to revive the handloom sector has not yet been implemented. Thus the banks record the nonrecovered part as NPAs and has to make provision for it. eg. Success in business Willingness to pay depends on: 1. Principles of safety ii. 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. Willingness to pay Capacity to pay depends upon: 1. The repayment of loan depends upon the borrowers: a. Honest 3. Principles of safety By safety it means that the borrower is in a position to repay the loan both principal and interest. there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a
. Character 2.•
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. i. The banks recover the amount by selling of their assets.
Change on Govt. Principles of profitability i.
Improper swot analysis
The improper strength. • Purpose of the loan When bankers give loan. viability. he should analyse the purpose of the loan. business. which leads to poor credit collection. • it should collect credit information of the borrowers from a. • Banks should consider the borrowers own capital investment. When accepting securities banks should consider the 1. From external credit rating agencies. They should use good credit appraisal to decrease the NPAs. banks should grant loan for productive purpose only. All the branches of the bank should be computerised. and financial soundness and credit worthiness of the borrower. While providing unsecured advances the banks depend more on the honesty. market driven decisions on real time basis can not be taken.
The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. integrity. Marketability 2. • Analyse the balance sheet True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. long term acceptability of the project while financing. thus NPA.sound one and the borrower is capable of carrying it out successfully . Transferability. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. Enquiry from market/segment of trade. weakness. Bank should analyse the profitability. industry. From bankers b.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs.he should be a person of integrity and good character. To ensure safety and liquidity. Acceptability 3. opportunity and threat analysis is another reason for rise in NPAs.
Due to inappropriate technology and management information system.
. Safety 4. c. Proper MIS and financial accounting system is not implemented in the banks.
Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. If a new big customer meets misfortune or certain traders or industries affected adversely. the overall position of the bank will not be affected. The NPAs due to wilful defaulters can be collected by regular visits.77lakhs).
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.The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”. and the handloom sector Orissa hand loom WCS ltd (2439. and Orissa hand loom industries. Like OSCB suffered loss due to the OTM Cuttack. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. 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. the NPAs of OSCB is increasing day by day.
. Due to re loaning to the defaulters and CCBs and PACs.60lakhs). The biggest defaulters of OSCB are the OTM (117.
liquidity and competitive functioning of banks and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. It is also cost absorbing and profit eroding. NPAS have a deleterious effect on the return on assets in several ways: • • • They erode current profits through provisioning requirements. They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future.IMPACT OF NPAS ON BANKS:In portion of the interest income is absorbed in servicing NPA. NPAS do not generate interest income for the banks. The options for these banks are lost. They result in reduced interest income. "The spread is the bread for the banks". inability to offer competitive market rates adds to the disadvantage of marketing and building new NPA has affected the profitability." This is the margin between the cost of resources employed and the return thereform. and
. But today in the deregulated market the banks decide their lending rates and borrowing rates.
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. In the competitive money and capital Markets. When the interest rates were directed by RBI. as heretofore. 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). the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. but at the same time banks are required to make provisions for such NPAS from their current profits. there was not option for banks. This is the margin between the cost of resources employed and the return therefrom. In the context of severe competition in the banking industry.NPA is not merely nonremunerative.
It would only postpone the process. SBI Group incurred a total amount of Rs.2% of net advances.2001. else they are to seek the bounty of the Central Government for repeated Recapitalization. a sizeab business. Between 01. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs. 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.•
They limit recycling of funds. Considering the minimum cost of holding NPAs at 7% p.a. In turn SBI Group are seen as poor performers and unable to approach the market for raising additional capital.03.93 to 31. Other bans hesitate to approach the market to rise new issues. Considering the average provisions made for the last 8 years which works out to average of Rs. 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. 2300 Crores annually. etc. 3300 crores from annum. 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.
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. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market. This has brought Net NPA to Rs. 31251 Crores towards provisioning NPA. 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. set in asset-liability mismatches. 32632 Crores or 6.04.
. 32632 Croces absorbs a recurring holding ost of Rs.
(Net NPA/Net Advances is 1. It's sizeable earnings under of non-interest income substantially/totally meets its non-interest expenses. a positive burden. Non-interest income fully absorbs the operating expenses of this banks in the current financial year for the first 9 months. 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. many nationalised banks have little option and they are unable to lower lending rates competitively. the difference between the gross interest income and interest cost will constitute its operating profits. when the banks are able to earn adequate amount of non-interest income to cover their entire operating expenses i.e.
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.92%) It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March. Interest on Recapitalization Bonds is a income earned form the Government. Theoretically even if the banks keeps 0% spread. 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. as published by RBI in its Report on trends and progress of banking in India. 2. an ideal competitive working is reached. The statistics above show the other weaknesses of the nationalised banks in
. Its obligation for provisioning requirements is within bounds. though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left. 2001.e. In the last two financial years. In that event the spread factor i. On account of the burden of heavy NPA. will be revealing to prove this statement.In the face of the deregulated banking industry. who had issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout package. The strength of SBI Group is indentified by the following positive feature: 1.
Even granting 3% net NPA within limits of tolerance the SBI Group are holding an uncomfortable burden at 7.1% as at March 2001. Impact on Outlook of Bankers towards Credit Delivery. Business is an exercise of balancing between risk and reward. sometimes up to 200% value of the advance. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market. The fear psychosis also leads to excessive security-consiousness in the approach towards lending to the small and medium sized credit customers. Wage costs total assets is much higher to PSBs compared to new private banks or foreign banks. This is due to failure to develop off balance sheet business through innovative banking products. the facts that their net NPA in the average is as much as 7% is a potential threat for them. as per RBI guidelines.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. but have resorted to II-Tier capital in the debt market or looking to recapitalistion by Government of India. In the world of banking the concepts of business and risks are inseparable. RBI has indicated the ideal position as Zero percent Net NPA. there can be no reward. 3. 2. The fear of NPA permeates the psychology of bank managers in the SBI Group in entertaining new projects for credit expansion. There is insistence on provision of collateral security. and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over-
. Without accepting risk. Their earnings from sources other than interest income are meagre. Impact on Liquidity of the SBI Group Though SBI Group are able to meet norms of Capital Adequacy. This has affected adversely credit growth compared to growth of deposits. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. resulting in a low C/D Ratio around 50 to 54% for the industry. Accept justifiable risks and implements de-risking steps.
but will not prevent the account turning into NPA. 4. Now a days Govt. Productivity of employees is also reduced because it keeps staff busy with the task of recovery of overdue. 5. 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. Banks are required to bring their own capital by issuing share to the public. 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. 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. preparing proposal for filing of suits. waivement of legal action. compromise. Impact on other Variables: High level of NPAs also leads to squeezing of interest spread. a tendency towards laxity in the standards of credit appraisal comes to the fore. During the year 2001-02 share of 12
. doubtful and loss assets. SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution for handling this hovering threat. 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. does not encourage liberal capital support to be given to banks. 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. 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. 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. write off or in preparing DICGC claim papers etc.confidence).
6. Inadequate recovery also inhibits the banks to draw refinance from higher level agency. of years in which a banks branch remains in a particular category of default. they cannot reduce lending rate to meet the economy's demand of low lending rate. Deterioration in the quality of loan assets and inability to come with new products makes the Indian banks uncompetitive globally. 100 Crore. It is also biggest threat for capital account convertibility. 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. CAR of > 8% are the 4 condition to be fulfilled to get autonomous status. Net NPA level below 9%. Reputed foreign suppliers do not accept letter of credit opened bi Indian banks or confine their transaction to top Indian banks only. insurance business. Qualitative aspects of the Micro Level Impact of NPAs:
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. The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to demand in respect of direct. It also leads to loss of trust of foreign suppliers. which becomes difficult in the situation of huge level of NPAs . Moreover. Good money is spent to recover bad money. It is a blot on the credibility of the banking system. putting severe pressure on their profit margins. Banks having positive net profits for the last three years.public sector banks were traded on the NSE out of which share value of three PSBs have decreased. it puts negative effect on granting of autonomy to PSBs whreas it is must for banks in this competitive environment. Due to high cost. factoring. 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. owned funds of Rs.
. It implies that refinance facility would be progressively reduced depending on the position of NPAs and also on the No. medium and long term loans for agriculture and allied activities. They are floating their subsidiaries to manage mutual funds.
7. and which can be spent on the welfare and development program. When capital support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs. in fact. 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. whether this money is from tax revenues or from the hard earned saving of the investing public. industrial output and fall in the profit margins of the corporate and consequent depression in the market. the society is bearing the cost of these NPAs. budgetary resources or from the public as per Liberalization policy.
Some areas of Macro-Economic Impact:
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. Once the credit to various sectors of the economy slow down. holds majority of shares in PSBs in some banks 100% capital is in its hand. Banks are not putting enough resource in lending due to fear of default. Not only this. burden of NPAs is to be borne by the society as a whole. There is slowdown in growth in GDP. Moreover. Govt. it comes out of either Govt. the economy is badly hit.
. Any dividend declared would have gone to the Govt.
25000 and below continues to be in
operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister providing for OTS for advances up to Rs. Compromise settlement schemes: The RBI/Government of India have been constantly goading the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. particularly for old and unresolved cases falling under the NPA category. 2001 helped the public sector banks to recover Rs. More significant of them. [The above guidelines which were valid up to June 30. * The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place.000 in respect of NPAs of small/marginal farmers are being drawn up. 50. 2600 crore by September 2001].GUIDELINES BY RBI
Guidelines of Government and RBI for Reduction of NPAs
1. 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. 668 crore through compromise settlement under this scheme]. 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. 5 crore and less as on 31 March 1997.
. * An OTS Scheme covering advances of Rs. 2000. I would like to recapitulate at this stage. The scheme was operative up to September 3. * Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. [Public sector banks recovered Rs. * 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.
71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30. Allahabad. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. Mumbai. 10 lakhs and above.30 crore. management.
Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act. power to attach defendant's property/assets before judgement.
Lok Adaltas: Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category.2. Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals located in five centres viz. 40. 6264.38 crore as on September 30. they could decide only 9814 cases for Rs.
3. 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. Provisions for placement of more than one Recovery Officer.Calcutta and Chennai. 5 lakh for compromise settlement under Lok Adalats. through the forum of Lok Adalat. 1864. The public sector banks had recovered Rs. 2001. passed in March 2000 has helped in strengthening the functioning of DRTs. with outstanding balance of Rs. 2001. The amount recovered in respect of these cases amounted to only Rs. 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. 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.
1 crore and above with special reference to fixing of staff accountability. 2001. and notify borrowers who default to honour the decree passed against them. they serve as negative basket of steps shutting off fresh loans to these defaulters.84 crore pending before them as on September 30. Board of Directors are required to review NPA accounts of Rs.Looking at the huge task on hand. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors/proprietors/partners of these entities. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers 5. as on 31st March every year. 42988. Circulation of information on defaulters: The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions. 4. However. RBI had advised the public sector banks to examine all cases of willful default of Rs 1 crore and above and file suits in such cases. 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. 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. and file criminal cases in regard to willful defaults. with as many as 33049 cases involving Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds. 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. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs.On their part RBI and
. Recovery action against large NPAs: After a review of pendency in regard to NPAs by the Hon'ble Finance Minister.
in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. This.R. (CIBIL) is under way. 20 crore and above with the banks and financial institutions. The CDR structure has been headquartered in IDBI. if any. Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. The main recommendations of the Group include dissemination of information relating to suitfiled accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. The Group will review the operation of the CDR Scheme. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. identify the operational difficulties. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. RBI is considering the recommendations of the S. Deputy Governor. Credit Information Bureau: Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. 7. Corporate Debt Restructuring (CDR): Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs. RBI has set up a high level Group under the Chairmanship of Shri Vepa Kamesam.the Government are contemplating several supporting measures including legal reforms. would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large
.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system. I hope. RBI to review the implementation procedures of CDR mechanism and to make it more effective. some of them I would like to highlight. As announced by the Hon'ble Finance Minister in the Union Budget 2002-03. 6.
8. 9. The Security Interest (Enforcement) Rules.
. 263 notices involving outstanding amount of Rs. 10.748 crore from 24. As on June 30. Proposed guidelines on willful defaults/diversion of funds: RBI is examining the recommendation of Kohli Group on willful defaulters. 19. disclosure. 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. which had in no small measures contributed to the incremental NPAs of banks. 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. It is working out a proper definition covering such classes of defaulters so that credit denials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against willful defaulters. 1.092 cases. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and overexposure. Corporate Governance: A Consultative Group under the chairmanship of Dr. audit committees etc. and had recovered an amount of Rs. inter alia for enforcement of security interest for realisation of dues without the intervention of courts or tribunals.amounts against same assets and property. 2002: The Act provides. 2004. A. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. 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.744 crore. transparency. 27 public sector banks had issued 61.
A number of loopholes provided the borrower with opportunities to delay or ignore repayment of loans.
4. The legal process could take years to be completed. the DRTs were soon drowned in the ever increasing number of cases."there is no difference between equity and debt . the pace of recovery improved quite a bit.
3. with the borrower having ample scope for delaying the takeover of assets. the banks had to approach the normal courts to recover their dues. as carried out at the time of providing the loan and at the time of loan recovery. During this period.
.PROBLEMS LOAN RECOVERY
1. There were provisions under various acts which hampered the smooth takeover and sale of secured assets. The populist policies of the national level politicians. The value of the security has generally deteriorated over the period and according to experts. However. banks tend to find that there is a major gap in the valuation of the security. The pending number of cases with the DRTs increased manifold during the period 1993-2002. it may further deteriorate by almost 10-50% if quick action is not taken for its immediate sale.
Political interferences: Political interference in the day -to-day functioning of public sector banks created a number of problems for them.
2. such as waiver in repayment only added to these problems.you never have to repay either of them ".
Inadequate security and Erosion in value of security: Generally.
Swamping of DRTs with cases: Once DRTs were established to quicken the pace of recovery procedures. it was said by some unscrupulous businessmen that .
Slow legal procedure: Before the establishment of DRTs in 1993.
it is not possible to undertake any recovery proceeding against the company .
6. Kolkata and Chennai only. this is very slow and time consuming process and by the time bank /FI is able to get possession. English mortgage: Under provisions of Section 69 of Transfer of Property Act. intervention of the court is required.
. mortgagee can take possession of mortgaged property where there is specific provision in mortgage deed and it is situated in the towns of Mumbai.The procedure of financial reconstruction can take a number of years together. However.5.
Misuse of BIFR/SICA: This was one of the favourite methods of willful defaulters to delay repayment. In other cases.
Transfer of property Act. If the defaulter's company is declared sick and taken for financial reconstruction under BIFR. In addition. mortgagee can take possession of mortgaged property and sell the same without the intervention of the Court only in the case of English Mortgage. the asset either does not exist or has become valueless. thereby delaying recovery to a great extent.
ANALYISIS AND INTERPRETATION
in 2007-08 increased by 154961rs.
. So assets of the SBI bank increased from last five year.STATE BANK OF INDIA
TOTAL ASSET 2003YEAR TOTAL ASSET(RS. CR)
Interpretation:-Above graph show that total assets of SBI is increased in 2004-05 by
52658 crore. crore. CR)
800000 700000 600000 500000 400000 300000 200000 100000 0 1 2 3 YEAR 4 5 6 YEAR TOTAL ASSET(RS.
YEAR _GROSS NPA(RS.CR) 14000 12000 10000 8000 6000 4000 2000 0 200304 200405 200506 200607 200708 _GROSS NPA(RS.above graph shows that Non-performing assets of SBI decreased
from 2003-04 to2006-07 and increased in 2007-08.CR)
_GROSS NPA(RS. There are so many reason of increases of npa
CR.2005.200704 05 06 07 08 NET NPA(RS.
NET NPA(RS.YEAR NET NPA(RS.) 8000 7000 6000 5000 4000 3000 2000 1000 0 2003.2004.2006. CR.)
Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and
increased in 2006-07 to 2007-08.
8 7 6
Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased
from 2004-05 to 2006-07 and increased in 2007-08.GROSS NPA (RATIO%)
YEAR GROSS NPA(RATIO%)
5 3 2.48
2004-05 2.5 1 0.65
2005-06 1.NET NPA(RATIO%)
YEAR NET NPA(RATIO%)
2006-07 1.5 0 1 2 3 4 5 6 YEAR NET NPA(RATIO%)
Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is decreased from
2004-05 to 2006-07 and increased in 2007-08
4 3.5 2 1.
and increased in 2004-05.
State Bank of Patiala
PROVISION COVER 70 POVISION COVER % 60 50 40 30 20 10 0 2003-04 2004-05 2005-06 2006-07 2007-08 yEAR PROVISION COVER
Interpretation: Above graph shows that in 2003-04 provision cover of NPA is 57.YEAR PROVISION COVER
2004-05 59. It decreased from 2005-06 to 2007-08.41
38 0.65 1.
2006-07 2.increased in 2006-07 and again decreased in 2007-08.2005.200704 05 06 07 08 GROSS NPA(%) NET NPA(%)
Interpretation: Above graph shows that the gross NPA of SBP is decreased from
2003-04 to 2005-06.35
REASON OF NPA IN BANK:-
.82 1.2006.2004.14 0.42 0.5 0 2003.6
2. The net NPA decreased from 2003-04 to 2007-08.5 1 0.23
2005-06 1.5 2 1.YEAR GROSS NPA(%) NET NPA(%)
Default by customer
Non-inspection of borrower Lack of expertise Imbalance of inventories Poor credit collection Lack of trained staff Lack of commitment to recovery Change in consumer preference
IMPACT OF NPA ON BANK
Govt. Policies Impact of profitability Liquidity Impact on outlook of Banker to wards credit delivery Impact of productivity
Credit administration: incidence of NPAs. one of the main reason for corporate default
is on account of diversion of funds and corporate entities should come forward of avoid this practice in the interest of strong and sound financial system. They should appreciate the difficulties of each other and should endeavor to work contributing to a healthy financial system.
Coordinator: Extending credit involves lenders and borrowers and both should
realize their role and responsibilities.
The mindset of the borrowers needs to change so that a culture of
proper utilization of credit facilities and timely repayment is developed.
LIMITATION OF STUDY
Shortage of time :-
A banks have to strengthen their credit administrative
machinery and put in place effective credit risk management systems to reduce the fresh
We shall keep a close watch on the manner in which NPA
reduction is taking place.
As you are aware.
We should also insist that cash recoveries should more than
offset the fresh write-offs in NPAs.
Information not sufficiently available The source of data collection is secondary so the information available is not sufficient.so that is very difficult can get the knowledge about everything . Secondary data:Information is not reliable because of secondary data
.Time is very short for research .. No direct source of information available The information is collected from indirect sources so in some information data is not available.
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. due to credit to these sectors becoming stickly managers of rural and semi-urban branches generally sanction these loans. viable economic activity. Over the years. There is also a general perception that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs.A strong banking sector is important for a flourishing economy. 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. In the changed context of new prudential norms and emphasis on quality lending and profitability. Hence selectionof right borrowers. The failure of the banking sector may have an adverse impact on other sectors. 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.
Finance India.R Indian Financial System .blonnet. NPAs: Recovery Blues. May 2006 pp-34 Charted Financial Analysis. 6.htm3 www. 5.twincitiesbbs.com/management/m_a/20060904_vijay_kalantri.htm4 www.com/php/subra/corporat.html2 www.BIBLIOGRAPHY
1.in/news/press_190505. July 1999 pp-34-36 RBI Bulletin. 10. October 2007 pp-31-31 Charted Financial Analysis. October 2005 pp-64 Charted Financial Analysis. December 2005 pp-25-28 RBI Bulletin.P.com
.com www. November 2007 pp-8-9 Charted Financial Analysis. 6. 7. 4. August 2004 B. www. 9.co.html1 www. Dhaka pp-47-52 Business Today. September 2005 pp-957-961 Charted Financial Analysis.com/2002/08/07/stories/2002080700050800. January 2004 pp-17-19 Alok Majumdar.domainb. 2. 3.centurionbop. 2. 3. 2000) pp 46-49
Books : KOTHARI C. 5. Treasury Management (Dec. VK publication .pp-100-105 Website: 1. 8.sbp.sbi.