Non-Performing Assets

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CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks

Capstone Project Report On the topic
A STUDY OF NON PERFORMING ASSETS IN INDIAN PRIVATE BANKING SECTOR
LOVELY PROFESIONAL UNIVERSITY
In Partial Fulfillment of the Requirements for the Award of Degree Of MASTER OF BUSINESS
ADMINISTRATION
Group Code: - Submitted by:-
QDO5 Navjot Singh (11012664) Rahul Kundliya (11001882)
Pankaj Bisht (11005154) Sumit kumar (11001711)
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ACKNOWLEDGEMENT
It is often said that journey of a thousand miles begins with the first, uncertain if we may add, step.
My journey was not too different. It involved the help, support and contribution of several people.
It is difficult to ascertain the starting point for such thanks giving, and yet one usually starts with the
most significant contributor. In my case let us begin with the people who strictly confined
themselves to behind the scenes before I move on to the persons who directly affected the course
and scope of events.
I would like to extend our sincerest gratitude to Ms. Sakshi Sharma for her unrelenting support and
an uncanny habit of pointing out the flaws in the scheme of things at the most crucial juncture,
hence causing several opportunities for learning. I do not think it would be just to end such thanks
giving without thanking our respondents for co-operating with us.
Finally I also extend my heartiest thanks to all my friends and well wishers for being with me and
extending encouragement throughout the project.

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CERTIFICATION/THESIS APPROVAL BY FACULTY ADVISOR
TO WHOMSOEVER IT MAY CONCERN
This is to certify that the project report titled ________________________________________
carried out by Mr. ------------------------------------------------------------ (student name), S/o or D/O -----------
-------------------------------------------- (Fathers Name) has been accomplished under my guidance &
supervision as a duly registered MBA student of the Lovely Professional University, Phagwara. This
project is being submitted by him/her in the partial fulfillment of the requirements for the award of
the Master of Business Administration from Lovely Professional University.
His dissertation represents his original work and is worthy of consideration for the award of the
degree of Master of Business Administration.
___________________________________ (Name & Signature of the Faculty Advisor) Date:
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DECLARATION
I, "________________________________ (student's name), hereby declare that the work
presented herein is genuine work done originally by me and has not been published or submitted
elsewhere for the requirement of a degree programme. Any literature, data or works done by others
and cited within this dissertation has been given due acknowledgement and listed in the reference
section.
_______________________ (Student's name & Signature)
_______________________ (Registration No.)
Date:__________________
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DECLARATION
section.
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DECLARATION
I, "________________________________(student's name), hereby declare that the work
section.
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_______________________ (Registration No.)
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DECLARATION
section.
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TABLE OF CONTENTS
S.NO PARTICULARS PAGE.NO 1. CHAPTER 1 INTRODUTION
1.1 Introduction To Non Performing Assets
1.2 Types of Banks
1.3 Non Performing Assets
1.4 Beneficiaries of the study

11-15
2. Chapter 2 Review of Literature
16-19
3. Chapter 3 Research Design & Methodology
20-23
4. Chapter 4 Data Analysis and Interpretation 24-41
Reasons for an account becoming NPAs Impact of NPAs on bank performance Consequences of NPAs
Measures to Control NPAs
42-49
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5. Chapter 6 Suggestions & Conclusion 50-52
6. Chapter 7 Bibliography 53-54
7. Appendix 55-60
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A STUDY OF NON PERFORMING ASSETS IN INDIAN PRIVATE BANKING SECTOR
Introduction
Banking sector reforms in India has progressed promptly on aspects like interest rate deregulation,
reduction in statutory reserve requirements, prudential norms for interest rates, asset classification,
income recognition and provisioning. But it could not match the pace with which it was expected to.
The accomplishment of these norms at the execution stages without restructuring the banking
sector as such is creating havoc, this research paper deals with the problem of having non-
performing assets, the reasons for mounting of non-performing assets and the practices present in
other countries for dealing with non-performing assets.
During pre-nationalization period and after independence, the banking sector remained in private
hands Large industries who had their control in the management of the banks were utilizing major
portion of financial resources of the banking system and as a result low priority was accorded to
priority sectors. Government of India nationalized the banks to make them as an instrument of
economic and social change and the mandate given to the banks was to expand their networks in
rural areas and to give loans to priority sectors such as small scale industries, self-employed groups,
agriculture and schemes involving women.
To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the
banking system to expand its network in a planned way and make available banking series to the
large number of population and touch every strata of society by extending credit to their productive
Endeavours. This is evident from the fact that population per office of commercial bank has come
down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of advances of public sector
banks to priority sector increased from 14.6% in 1969 to 44% of the net bank credit. The number of
deposit accounts of the banking system increased from over 3 crores in 1969 to over 30 crores.
Borrowed accounts increased from 2.50 lakhs to over 2.68 crores.
The accumulation of huge non-performing assets in banks has assumed great importance. The depth
of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks
and financial institutions is over Rs.1, 50,000 crores. While gross NPA reflects the quality of the loans
made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the
major defaulters are the big borrowers coming from the non-priority sector. The banks and financial
institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public
sector banks figure prominently in the debate not only because they dominate the banking
industries, but also since they have much larger NPAs compared with
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the private sector banks. This raises a concern in the industry and academia because it is generally
felt that NPAs reduce the profitability of banks, weaken its financial health and erode its solvency.
For the recovery of NPAs a broad framework has evolved for the management of NPAs under which
several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to
design and implement their own policies for recovery and write-off incorporating compromise and
negotiated settlements.
TYPES OF BANKS:
PUBLIC SECTOR BANKS:
Public sector banks are the ones in which the government has a major holding. Public Sector Banks
dominate 75% of deposits and 71% of advances in the banking industry. Public Sector Banks control
commercial banking India, these can be further classified into:
1) Nationalized banks 2) State Bank of India and its associates 3) Regional Rural Banks
PRIVATE SECTOR BANKS:
Private sector banks came into existence to supplement the performance of public sector banks and
serve the needs of the economy better. As the public sector banks were merely in the hands of the
government, banks had no incentive to make profits and improve their financial capability. The main
difference between public and private sector banks is only that public sector banks follow the RBI
interest rules strictly but private banks can make some changes in them but only after the approval
from the RBI. Private sector banks are the banks which are controlled by the private lenders with the
approval from the RBI. Their interest rates are slightly costly as compared to public sector banks.
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NPA (NON PERFORMING ASSET)
Action for enforcement of security interest can be initiated only if the secured asset is classified as
Non Performing Asset. Non Performing Asset means an asset or account of borrower, which has
been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines relating to asset classification issued by RBI. An amount
due under any credit facility is treated as "past due" when it has not been paid within 30 days from
the due date. Due to the improvement in the payment and settlement systems, recovery climate, up
gradation of technology in the banking system, etc., it was decided to dispense with 'past due'
concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset
(NPA) shell be an advance where interest and /or installment of principal remain overdue for a
period of more than 180 days in respect of a Term Loan, the account remains 'out of order' for a
period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains
overdue for a period of more than 180 days in the case of bills purchased and discounted, interest
and/ or installment of principal remains overdue for two harvest seasons but for a period not
exceeding two half years in the case of an advance granted for agricultural purpose, and any amount
to be received remains overdue for a period of more than 180 days in respect of other accounts.
With a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year
ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA)
shell be a loan or an advance where; interest and /or installment of principal remain overdue for a
period of more than 90 days in respect of a Term Loan, the account remains 'out of order' for a
period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains
overdue for a period of more than 90 days in the case of bills purchased and discounted, interest
and/ or installment of principal remains overdue for two harvest seasons but for a period not
exceeding two half years in the case of an advance granted for agricultural purpose, and any amount
to be received remains overdue for a period of more than 90 days in respect of other accounts.
Non-Performing Asset or NPA, It is called such as while it is an "Asset", it does not bring substantial
income to its Owner or is just dormant. Call it a white elephant if you wish. Basically, it is having
something that should work but does not. It is supposed to make Non- Performing Assets work. The
RBI has issued guidelines to banks for classification of assets into four categories.
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A. Standard (Assets):
These are loans which do not have any problem are less risk.
B .Substandard (Assets):
These are assets which come under the category of NPA for a period of less than 12 months.
C. Doubtful (Assets):
These are NPA exceeding 12 months.
D. Loss (Assets):
Where loss has been identified by the bank or internal or external auditors or the RBI inspection but
the amount has not been written off wholly.
BENEFICIARIES OF THE STUDY:
The outcomes analyzed from this study would be beneficial to various sections such as:
Banks: This study would primarily benefit the banks in identifying the sectors to be given priority for
lending money.
Future Researchers: The results of the study would also benefit the future researchers as this study
would enhance their knowledge about the topic. They would get an insight of the present scenario
of this industry as this is the emerging industry in the financial sector of the economy.
Students: This research would help students in understanding of NPA concept as a whole.
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NON PERFORMING ASSETS AS A MAJOR ISSUE AND CHALLENGE FOR BANKING INDUSTRY:
Non-performing Assets are threatening the stability and demolishing banks profitability through a
loss of interest income, write-off of the principal loan amount itself. RBI issued guidelines in 1993
based on recommendations of the Narashimam Committee that mandated identification and
reduction of NPAs be treated as a national priority because the level of NPA act as an indicator
showing the bankers credit risks and efficiency of allocation of resource. The financial reforms in
Indian bank industry have helped largely to clean NPA which was around Rs 52,000 crores in the year
2004. The earning capacity and profitability of the bank are highly affected due to this NPA.
GROSS NPA AND NET NPA
Gross NPA is an advance which is considered irrecoverable, for bank has made provisions, and which
is still held in banks' books of account. Net NPA is obtained by deducting items like interest due but
not recovered, part payment received and kept in suspense account from Gross NPA. The Reserve
Bank of India states that, compared to other Asian countries and the US, the gross non-performing
asset figures in India seem more alarming than the net NPA figure. The problem of high gross NPAs is
simply one of inheritance. Historically, Indian public sector banks have been poor on credit recovery,
mainly because of very little legal provision governing foreclosure and bankruptcy, lengthy legal
battles, sticky loans made to government public sector undertakings, loan waivers and priority sector
lending.
Net NPAs are comparatively better on a global basis because of the stringent provisioning norms
prescribed for banks in 1991 by Narashimam Committee. In India, even on security taken against
loans, provision has to be created. Further, Indian banks have to make a 100 per cent provision on
the amount not covered by the realizable value of securities in case of ''doubtful'' advance, while in
some countries; it is 75 per cent or just 50 per cent. The ASSOCHAM Study titled - Solvency Analysis
of the Indian Banking Sectors, reveals that on an average 24 per cent rise in net non performing
assets have been registered by 25 public sector and commercial banks during the second quarter of
the 2009 as against 2008. According to the RBI, "Reduction of NPAs in the Indian banking sector
should be treated as a national priority item to make the system stronger, resilient and geared to
meet the challenges of globalization. It is necessary that a public debate is started soon on the
problem of NPAs and their resolution."
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Review of Literature:
According to a study by Brownbridge (1998), most of the bank failures were caused by non-
performing loans. Arrears affecting more than half the loan portfolios were typical of the failed
banks. Many of the bad debts were attributable to moral hazard: the adverse incentives on bank
owners to adopt imprudent lending strategies, in particular insider lending and lending at high
interest rates to borrowers in the most risky segments of the credit markets.
Bloem and Gorter (2001) suggested that a more or less predictable level of non-performing loans,
though it may vary slightly from year to year, is caused by an inevitable number of wrong economic
decisions by individuals and plain bad luck (inclement weather, unexpected price changes for certain
products, etc.). Under such circumstances, the holders of loans can make an allowance for a normal
share of non-performance in the form of bad loan provisions, or they may spread the risk by taking
out insurance. Enterprises may well be able to pass a large portion of these costs to customers in the
form of higher prices. For instance, the interest margin applied by financial institutions will include a
premium for the risk of nonperformance on granted loans. At this time, banks non-performing loans
increase, profits decline and substantial losses to capital may become apparent. Eventually, the
economy reaches a trough and turns towards a new expansionary phase, as a result the risk of
future losses reaches a low point, even though banks may still appear relatively unhealthy at this
stage in the cycle.
According to Gorter and Bloem (2002) non-performing loans are mainly caused by an inevitable
number of wrong economic decisions by individuals and plain bad luck (inclement weather,
unexpected price changes for certain products, etc.). Under such circumstances, the holders of loans
can make an allowance for a normal share of nonperformance in the form of bad loan provisions, or
they may spread the risk by taking out insurance.
Petya Koeva (2003), his study on the Performance of Indian Banks. During Financial Liberalization
states that new empirical evidence on the impact of financial liberalization on the performance of
Indian commercial banks. The analysis focuses on examining the behavior and determinants of bank
intermediation costs and profitability during the liberalization period. The empirical results suggest
that ownership type has a significant effect on some performance indicators and that the observed
increase in competition during financial liberalization has been associated with lower intermediation
costs and profitability of the Indian banks.
Das and Ghosh (2003) empirically examined non-performing loans of Indias public sector banks in
terms of various indicators such as asset size, credit growth and macroeconomic condition, and
operating efficiency indicators. Sergio (1996) in a study of non-performing loans in Italy found
evidence that, an increase in the riskiness of loan assets is rooted in a banks lending policy adducing
to relatively unselective and inadequate assessment of sectoral prospects.
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Vradi et.al (2006), his study on Measurement of efficiency of bank in India concluded that in
modern world performance of banking is more important to stable the economy .in order to see the
efficiency of Indian banks we have see the fore indicators i.e. profitability, productivity, assets,
quality and financial management for all banks includes public sector, private sector banks in India
for the period 2000 and 1999 to 2002-2003. For measuring efficiency of banks we have adopted
development envelopment analysis and found that public sectors banks are more efficient then
other banks in India
Brijesh K. Saho et.al (2007), this paper attempts to examine, the performance trends of the Indian
commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings are indicative in
many ways. First, the increasing average annual trends in technical efficiency for all ownership
groups indicate an affirmative gesture about the effect of the reform process on the performance of
the Indian banking sector. Second, the higher cost efficiency accrual of private banks over
nationalized banks indicate that nationalized banks, though old, do not reflect their learning
experience in their cost minimizing behavior due to X-inefficiency factors arising from government
ownership. This finding also highlights the possible stronger disciplining role played by the capital
market indicating a strong link between market for corporate control and efficiency of private
enterprise assumed by property right hypothesis. And, finally, concerning the scale elasticity
behavior, the technology and market-based results differ significantly supporting the empirical
distinction between returns to scale and economies of scale, often used interchangeably in the
literature.
Roma Mitra et.al (2008), A stable and efficient banking sector is an essential precondition to increase
the economic level of a country. This paper tries to model and evaluate the efficiency of 50 Indian
banks. The Inefficiency can be analyzed and quantified for every evaluated unit. The aim of this
paper is to estimate and compare efficiency of the banking sector in India. The analysis is supposed
to verify or reject the hypothesis whether the banking sector fulfils its intermediation function
sufficiently to compete with the global players. The results are insightful to the financial policy
planner as it identifies priority areas for different banks, which can improve the performance. This
paper evaluates the performance of Banking Sectors in India.
B.Satish Kumar (2008), in his article on an evaluation of the financial performance of Indian private
sector banks wrote Private sector banks play an important role in development of Indian economy.
After liberalization the banking industry underwent major changes. The economic reforms totally
have changed the banking sector. RBI permitted new banks to be started in the private sector as per
the recommendation of Narashiman committee. The Indian banking industry was dominated by
public sector banks. But now the situations have changed new generation banks with used of
technology and professional management has gained a reasonable position in the banking industry.
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M. Karunakar et.al (2008), Study the important aspect of norms and guidelines for making the whole
sector vibrant and competitive. The problem of losses and lower profitability of Non- Performing
Assets (NPA) and liability mismatch in Banks and financial sector depend on how various risks are
managed in their business. Besides capital to risk Weightage assets ratio of public sector banks,
management of credit risk and measures to control the menace of NPAs are also discussed. The
lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk
management mechanism. It is better to avoid NPAs at the market stage of credit consolidation by
putting in place of rigorous and appropriate credit appraisal mechanisms.
Nelson M. Waweru et.al (2009), Study that many financial institutions that collapsed in Kenya since
1986 failed due to non performing loans, this study investigated the causes of non- performing
loans, the actions that bank managers have taken to mitigate that problem and the level of success
of such actions. Using a sample of 30 managers selected from the ten largest banks the study found
that national economic downturn was perceived as the most important external factor. Customer
failure to disclose vital information during the loan application process was considered to be the
main customer specific factor. The study further found that Lack of an aggressive debt collection
policy was perceived as the main bank specific factor, contributing to the non performing debt
problem in Kenya.
Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of great importance
given its association with bank failure and financial crises, and it should therefore be of interest to
developing countries. The purpose of this paper is to build a multivariate model, incorporating
macroeconomic and bank-specific variables, to forecast non-performing loans in the banking sector
of Barbados. On an aggregate level, our model outperforms a simple random walk model on all
forecast horizons, while for individual banks; these forecasts tend to be more accurate for longer
prediction periods only.
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RESEARCH PROBLEM:
Indian banking industry, which was in glory phase once upon a time, has been facing a lots of
challenges on non performing assets at present scenario. Many banks have kept their NPAs under
the control but some banks are not able to control their NPA levels. They are facing lots of problems.
There can be various reasons behind this NPA. Non-performing assets has been hitting the
profitability of the banks or it can be said that due to NPA, the profitability of the banks are going
down day by day. The subsidiary for this is the functioning of Debt Recovery Tribunal (DRT) which is
a judiciary for the bank for recovery amount from the default customers. These can be considered as
a research problem based on which the information is collected, the object is measured and the data
is analyzed and interpreted.
OBJECTIVES OF THE STUDY:
The objective of the project was to find how this Non-Performing Assets generate and what its
impact on the profitability of the bank and how it can be reduced. The study is addressed to the
following objectives:
relationship betwee
in private sector.
NEED OF THE STUDY:
The non-performing assets that are not able to generate income for the bank are the great threat for
the banking institution. Rather than generating profit for the bank, NPA drains off the income earned
by the other performing asset by the way of paying interest to the real owner of the resources. It
affects the overall profitability of the bank adversely by affecting the return on equity and return on
asset. There are certain ways through which it affects the financial institutions are as follows:
Thus, the need of the study of the NPA is must necessary due to these reasons. These reasons are
the crucial for any bank at present. One has to realize these matters and has to take corrective
action against NPA reasons, as for as possible one has to convert all the NPA accounts into PA
accounts. As far as the importance of the study is concern, without the study, one cant identify the
whole gamut of the NPA. To know, how the account is becoming NPA is must necessary. After
identifying the reason behind the particular NPA account, one can go for a step ahead. That means
for the step of how to convert into PA and how to prevent other account from becoming
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NPA. As for as possible, one has to eradicate the reasons of NPAs. Thus, it is highly importance to
study NPA in detail.
SCOPE OF THE STUDY:
Being a project scope will be based on the day-to-day teamwork operations. The data will be
collected from various aspects of loans and advances in various private banks of Jalandhar and
Phagwara (Punjab).
derstand the causes

HYPOTHESES FORMULATION:
H1: There exists a relationship between NPAs and profitability of private banks.
H2: The recovery mechanisms adopted by private banks are effective.
COLLECTION OF DATA:
The relevant data was collected from both primary and secondary sources. Census method of data
collection was applied to collect primary information. Research population for the study comprised
of private banks operating in Jalandhar and Phagwara (Punjab). The response rate for the present
study came to be 86.66 % since 13 banks responded out of 15 private banks in the concerned area.
The 13 banks surveyed are 1) Axis Bank, 2) Citi Bank, 3) Federal Bank; 4) HDFC Bank, 5) ICICI Bank, 6)
IndusInd Bank, 7) ING Vysya Bank, 8) Karnataka Bank, 9) Karur Vysya Bank, 10) Kotak Mahindra Bank,
11) South Indian Bank, 12) Jammu and Kashmir Bank, 13) IDBI Bank.
The secondary sources comprised of various audited reports and publications of the Reserve Bank of
India. Detailed information were collected mainly from the various volumes of the Statistical Tables
Relating to Banks in India covering the period from 2000 - 2009 which were published by the
Statistical Department of Reserve Bank of India, Mumbai from the website www.rbi.org.in.
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DATA COLLECTION FORM:
A structured questionnaire assessing work system, recovery system, processing loan applications
and other impeding factors associated with loan portfolio was used to collect primary information
from the private banks. Items based on 5-point Likert scale and multiple chioce questions were
included in the questionnaire.
STATISTICAL TOOLS:
The analyses of primary data were conducted through descriptive statistics, factor analysis, Pearson
correlation and one-sample t-test. The secondary data was analyzed through column charts, line
charts, bar charts and percentages.
LIMITATIONS:
1. The secondary data was available for 9 years only.
2. The present study is confined to Jalandhar and Phagwara areas only.
3. The conclusions of the study are based on the responses of the banks and secondary information.
Thus, some amount of subjectivity might remain.
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ANALYSES OF PRIMARY DATA:
I) MULTIPLE CHOICE QUESTIONS:
Table: 1 Since how long the branch is functioning?
Frequency
Percentage (%) Valid Percent
Cumulative Percent
Valid 0-2 years 1 7.7 7.7 7.7
2-3 years 2 15.4 15.4 23.1
3-5 years 5 38.5 38.5 61.5
5- years above 5 38.5 38.5 100.0
Total 13 100.0 100.0
Interpretation:
39% of banks surveyed showed 3-5 years of functioning experience. Also, the same percentage
(39%) was found to have an experience above 5 years.
Table : 2 Since how long the presence of NPA is observed in your
Frequency
Cumulative Percent
Valid 0-1yrs 3 23.1 23.1 23.1
1-2yrs 7 53.8 53.8 76.9
above -5yrs 3 23.1 23.1 100.0
Total 13 100.0 100.0
Interpretation:
54% of banks observed NPA in their branch from 1-2 years.
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Table: 3 What is the appropriate value of NPA is your branch? (Rs in lakhs)
Frequency
Cumulative Percent
Valid 1-10 5 38.5 38.5 38.5
10-20 6 46.2 46.2 84.6
20-30 1 7.7 7.7 92.3
above - 40 1 7.7 7.7 100.0
Total 13 100.0 100.0
Interpretation:
46% of banks have 20 lakhs (approximate) of NPAs and 39% of banks have 1-10 lakhs (approximate)
NPA.
Table : 4 For which category the NPA is being observed
Frequency
Cumulative Percent
Valid Personal loan 6 46.2 46.2 46.2
Housing loan 6 46.2 46.2 92.3
Agri-term loan 1 7.7 7.7 100.0
Total 13 100.0 100.0
Interpretation:
46.2% banks observed NPAs are in the category of personal loans, also, same percentage (46.2%)
observed NPAs in housing loans category.
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Table : 5 Measures for recovery of NPA adopted by the bank
Frequency
Cumulative Percent
Valid Legal measures 6 46.2 46.2 46.2
Both legal and non-legal 7 53.8 53.8 100.0
Total 13 100.0 100.0
Interpretation:
53.8% banks adopted both legal and non-legal measures of recovery whereas 46.2% banks adopted
legal measures only.
Table: 6 To what extent NPA has been converting into good asset.
Frequency
Cumulative Percent
Valid 1% 1 7.7 7.7 7.7
2% 1 7.7 7.7 15.4
4% 1 7.7 7.7 23.1
5% 1 7.7 7.7 30.8
>5% 9 69.2 69.2 100.0
Total 13 100.0 100.0
Interpretation:
After survey 69.2% banks showed that they could convert more than 5% NPA into good assets.
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Table: 7 Has the profitability improved after adopting reduction technique?
Frequency
Cumulative Percent
Valid Definitely improved 5 38.5 38.5 38.5
improved 7 53.8 53.8 92.3
Cant say 1 7.7 7.7 100.0
Total 13 100.0 100.0
Interpretation:
53.8% banks showed that their profitability improved and 38.5% banks confirmed that their
profitability definitely improved after adopting NPA reduction techniques.
II) FACTOR ANALYSIS:
Factorial profile of recovery mechanism adopted for NPA by banks
Table: 8 No. of rounds
No. of factors
Communalities (Above)
Iterations KMO (Above)
Items Deleted
Items Remained
V.E %
Factor Loading (Above) 1 3 .60 4 .45 1 8 80.36 .55
2 3 .65 5 .34 - 7 80.81 .70
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Descriptive Statistics of Factors affecting NPAs:
Table: 9
Factors
Mean Standard Deviation
Factor Loading
Communality Variance Explained (%)
Cronbach s Alpha
F1 Recession and management failure
28.79 .721
Recession in economy
3.15 .987 .940 .891
Management Failure
3.00 1.780 .837 .710
F2 Execution Problems
28.39 .709
Improper Credit Appraisal
2.92 1.115 .850 .762
Difficulty in executing Repayment procedure
3.46 .967 .827 .713
Cost of effective legal measures
2.46 1.391 .730 .694
F3 Default by customers
23.62 .753
Willful Default
2.77 1.235 .914 .927
Absence of Security
2.15 1.281 .854 .960
Interpretation:
Factors affecting NPAs were subjected to data purification, which resulted into three factors, with
KMO value = 0.34, variance explained = 80.81%, communalities above .65 and Cronbachs Alpha
above .70. The factors extracted were Recession and management failure, Execution Problems
and Default by customers.
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Factorial profile of recovery mechanism adopted for reducing NPA
Table: 10 No. of rounds
No. of factors
Items Deleted
Items Remained
V.E %
2 2 .85 3 .50 - 4 89 .85
Descriptive Statistics of Recovery Mechanisms adopted to reduce NPAs:
Table: 11
Factors
Factor Loading
Cronbach s Alpha
F1 Banking Measures 48.25 .912
Self involvement 2.08 1.256 .960 .923
Recovery campus 2.00 1.414 .951 .910
F2 Legal Measures 41.71 .793
Lok adalats 2.31 1.494 .932 .892
SARFASI Act 1.85 1.214 .891 .874
Interpretation:
Factor analysis was run on the recovery mechanism adopted by private banks for reducing NPAs
which completed in two rounds after deleting two items, one with communality below 0.50 and
other with missing factor loading. Finally, two factors emerged Banking Measures
and Legal Measures, with KMO value of .50, variance explained = 89%, communalities above .85
and Cronbachs Alpha .80.
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III) TESTING OF HYPOTHESES:
H1: There exists a relationship between NPAs and profitability of private banks.
Table: 12
Pearson Correlation
Net NPA Net Profit
Net NPA Pearson Correlation 1 .480
Sig. .191
Net Profit Pearson Correlation .480 1
Sig. .191
Interpretation:
Pearson correlation was applied to test this hypothesis. The value of coefficient of correlation r
obtained was .480. Since the significance value was above 0.05 (p =.191), it shows that NPA and
profitability of private banks surveyed is uncorrelated. Thus this hypothesis is rejected.
H2: The recovery mechanisms adopted by private banks are effective.
Table: 13
One- sample t-test (Test value = 2) Factors t df Sig. level
F1 .108 12 .916
F2 .224 12 .827
Interpretation:
This hypothesis was tested through one sample t-test. Overall mean calculated was 2.06 and both
the factors were compared with the test value = 2. Both the factors were found to be insignificant,
thus hypothesis stands rejected. This implies that the recovery mechanism adopted by private banks
to reduce NPAs is not effective.
32
ANALYSIS & INTERPRETATION OF SECONDARY DATA:
I. ANALYSIS OF TREND AND ASSET QUALITY OF GROSS ADVANCES AND GROSS NON PERFORMING
ASSETS:
Table 1.1: GROSS ADVANCES AND GROSS NPAs OF PRIVATE SECTOR BANKS
Years
Gross Advances(cr.)
Gross NPAs
Amount(cr.)
Percent to Gross Advances
Percent to Total Assets
2000-01 71237 5963 8.4 3.4 2001-02 120958 11662 9.6 4.4 2002-03 146047 11782 8.1 4 2003-04
177419 10381 5.9 2.8 2004-05 197832 8782 4.4 2.1 2005-06 317690 7811 2.5 1.4 2006-07 420745
9256 2.2 1.2 2007-08 525845 12983 2.5 1.4 2008-09 585065 16983 2.9 1.7
Interpretation:
The following table helps in examining trends of gross advances, gross NPAs, ratio of gross NPAs to
gross advances and ratio of gross NPAs to total assets. We can also visualize the trend of private
sector banks by using gross advances, gross NPAs and ratios of gross NPA to gross advances and total
assets. We can clearly see from the above table that the gross advances are increasing continuously
and there is an increase of over 721 percent as compared to 2000-01 and 2008-09. This clearly
shows that apart from the presence of private sector banks also get a great opportunity to prove
them. The amount of gross NPAs shows a mix kind of trend over a period- as till 2002-03 and from
2005-06 to 2008-09 there is a continuous increase in gross NPA amount while there is a decrease in
it from a period ranging from 2003-04 to 2005-06. NPA ratios related to gross NPA also shows a mix
trend over a period. But if we see the last three years data, we can clearly see that there is an
increase in gross NPA to total assets and gross NPA to gross advances which means that the asset
quality is diminishing instead of improving.
Thus, if we compare both public and private sector banks we can say that public sector banks are
better than private sector banks as the efficiency and asset quality of public sector banks had shown
a continuous improvement if compare relatively to private sector banks.
33
II. ANALYSIS OF TREND AND ASSET QUALITY OF NET ADVANCES ON NET NON PERFORMING ASSETS:
Table 1.2: NET ADVANCES AND NET NPAS OF PRIVATE SECTOR BANKS
Years Net Advances(cr.)
Net NPAs
Amount(cr.)
Percent to Net Advances
Percent to Total Assets 2000-01 68059 3700 5.4 2.3 2001-02 116473 6676 5.7 2.5 2002-03 138951
3963 2.8 2.3 2003-04 170754 4128 2.4 1.3 2004-05 191397 4212 2.2 1 2005-06 312962 3171 1 0.6
2006-07 414752 4028 1 0.5 2007-08 518403 5607 1.1 0.6 2008-09 575336 7418 1.3 0.7
Interpretation:
After the analysis of gross advances and gross NPA, the study investigates the net advances; net
NPAs, ratio of net NPAs to net advances and net NPAs to total assets.
If we use the same criteria for private sector banks, we can see despite of continuous increase in net
advances in all years the net NPA ratio to net advances and total assets increases in last 2-3 years
that is in 2007-08 and 2008-09 while all other years shows a decreasing trend. That means only in
last 2-3 years the efficiency and asset quality of private sector banks is questionable otherwise in all
other previous years the banks had shown a continuous improvement. As, if we see overall
performance of the private sector banks we can say that there is a wide improvement as the net
NPA ratios changes from 5.4 to 1.3 and from 2.3 to 0.7. Thus, after comparing both the gross and net
NPA ratio, if we compare Private sector banks are much more efficient than other sector banks.
34
OBJECTIVE 1:
The trend of NPA in last nine years was analyzed through secondary data. The percentages of both
gross and net NPA to gross and net advances were found to increase during first two years but
continuously decrease after 2001 2002.
CLASSIFICATION OF LOAN ASSETS OF NPAS OF PRIVATE SECTOR BANKS
Table: 1.3
Years
Classification of Loan Assets (Amount in Rs. Crore)
Standard Assets
Sub-standard Assets Doubtful Assets Loss Assets
Amount %age Amount %age Amount %age
Amoun t %age 2001 65071 91.5 2585 3.6 3069 4.3 424 0.6 2002 109216 90.3 4738 3.9 6539 5.4 390
0.3 2003 131620 90.8 3703 2.6 8512 5.9 1118 0.8 2004 167076 94.2 3127 1.8 6391 3.6 825 0.5 2005
216448 96.1 2213 1.0 5578 2.5 900 0.4 2006 309051 97.6 2424 0.8 4348 1.4 939 0.3 2007 382628
97.6 4378 1.1 3923 1 941 0.2 2008 459369 97.3 7280 1.5 4452 0.9 1244 0.3 2009 561546 97.1 10553
1.8 4975 0.9 1324 0.2
Interpretation:
If we analyze the loan assets of private sector banks, we can say that if we compare the first year
and last year for sub standard assets we can say that there is a decrease in it of health is improving
but overall analysis for sub-standard assets shows that after year 2006 there is a continuous increase
in the amount of sub-standard assets i.e. from 1percent to 1.8 percent. But, the doubtful assets have
declined from 5.9percent in 2003 to 0.9 percent in 2009. The loss assets also have shown a
decreasing trend from year 2003. Thus, we can say that except the sub- standard assets category the
other two categories of non-performing assets have improved over the period of study.
35
Net NPAs & Net Profit of Private Sector Banks: 2000-01 to 2008-09
Table: 1.4
Net NPA Net Profit 2000-01 3700 1142 2001-02 6676 1779 2002-03 3963 2958 2003-04 4128 3481
2004-05 4212 3533 2005-06 3171 4975 2006-07 4028 6465 2007-08 5380 9522 2008-09 7418 10868

It is clearly observed from the line graph that there is continuous rise in net profit of private sector
banks over the years. The average of percentage increase in net profits of private sector banks
comes to approximately 34%.
On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from
2000-01 to 2008-09. The average of percentage rise in net NPA comes to almost 15%.
0
2000
4000
6000
8000
10000
12000
Net NPA Net Profit
Classification of Loan Asset of Private Sector Banks in percentage:
Table: 1.5

The above chart clearly states that the rise in the standard assets over the years compensates the
fall in the other three types of assets. But in the year 2009, the percentage of Sub highest among all
the year. In 2009 percentage of sta compensated by increase in Sub principle amount unpaid due to
financial crisis in 2009. The percentage of doubtful asset has reduced to a great extent amongst all.
So the private sector banks have managed to reduce the doubtful asset.
2004 2005 2006
94.2
96.1
97.4
1.8
1
3.6
2.5
0.5 0.4
Year Standard Asset (%)
2004 94.2 2005 96.1 2006 97.4 2007 97.6 2008 97.3 2009 96.8
A study of Non Performing Assets on Indian Private Banks
Classification of Loan Asset of Private Sector Banks in percentage:
fall in the other three types of assets. But in the year 2009, the percentage of Sub- highest among all
the year. In 2009 percentage of standard asset has reduced by 0.5% which is compensated by
increase in Sub-Standard & doubtful assets. This increase is due to interest & principle amount
unpaid due to financial crisis in 2009. The percentage of doubtful asset has reduced mongst all. So
the private sector banks have managed to reduce the doubtful asset.
2006 2007 2008 2009
97.4 97.6 97.3
96.8
0.8
1.1 1.5
2
1.5
1 0.9 1 0.3 0.2 0.3 0.3
Standard (%)
Sub- Standard Asset (%)
Doubtful Asset (%)
Loss Asset (%)
1.8 3.6 0.5 1.0 2.5 0.4 0.8 1.5 0.3 1.1 1.0 0.2 1.5 0.9 0.3 2.0 1.0 0.3
36
A study of Non Performing Assets on Indian Private Banks
fall -Standard asset is ndard asset has reduced by 0.5% which is Standard & doubtful assets. This
increase is due to interest & principle amount unpaid due to financial crisis in 2009. The percentage
of doubtful asset has reduced mongst all. So the private sector banks have managed to reduce the
doubtful asset.
Loss Asset Doubtful Asset Sub-Standard Asset Standard Asset
37
Net NPA to Net Advance Ratio of Private Sector Banks:
Table: 1.6
Years Old Private Sector Banks
New Private Sector Banks 2000-01 7.3 3.1 2001-02 7.1 4.9 2002-03 5.2 1.5 2003-04 3.8 1.7 2004-05
2.7 1.9 2005-06 1.7 0.8 2006-07 1 1 2007-08 0.7 1.1 2008-09 0.9 1.3
Interpretation:
From the above chart it is clearly observed that old private sector banks are constantly improving in
terms of net NPA to net advances ratio which is represented by declining trend from 2000-01 to
2008-09. While on the other hand for new private sector banks net NPA to net advances ratio is
fluctuating over the years.
0 1 2 3 4 5 6 7 8
Old Private Sector Banks New Private Sector Banks
38
Net NPAs of Old and New Private Sector Banks: 2000-01 to 2008-09
Table: 1.7 Year Old Private Sector Banks
New Private Sector Banks 2000-01 2,771 929 2001-02 3,013 3,663 2002-03 2,598 1,365 2003-04
2,142 1,986 2004-05 1,859 2,353 2005-06 1,375 1,796 2006-07 891 3,137 2007-08 740 4640 2008-09
1165 6253

From the above chart it is clearly observed that net NPA of old private sector banks has a declining
trend over the years on the contrary new private sector banks has an upward trend.
Old private sector banks which is passing from lower growth rate in recent past, starts performing
better than their new counterparts. Old private sector banks are more efficient than that of new
private sector banks in managing NPA.
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
Old Private Sector Banks New Private Sector Banks
39
Composition of NPAs of Private Sector Banks - 2001 To 2009:
Table: 1.8 Year Priority Sector
Non-Priority Sector
Public Sector
2001 1835 4452 123 2002 2546 9090 31 2003 2445 9327 95 2004 2482 7796 75 2005 2188 6569 42
2006 2284 5541 4 2007 2884 6353 3 2008 3419 9558 0 2009 3640 13172 75
Interpretation:
From the above graph it is observed that Priority sector category on an average constitutes almost
34% of the total advances made by the private sector banks. While average NPA of priority sector
constitutes of 25% of total NPA. In later years from 2007 to 2009 there is increase in NPA of priority
sector. In these years more advances was given to agriculture & housing sector.
0
2000
4000
6000
8000
10000
12000
14000
1 2 3 4 5 6 7 8 9
Priority Sector Non-Priority Sector Public Sector
40
In the year 2007-08, the real estate market was on boom, which encouraged people to take more
loans. But after the subprime crisis there was sudden fall in real estate market & people became
default to pay the loan.
In case of non-priority sector, the average advances made are 60.5% of total advance made by
private sector banks. But the average NPA of non-priority sector is almost 74% which is highest
amongst the entire category. We can see the declining trend in NPA of non-priority sector from 2003
to 2006, this as a result of securitization Act, 2002.
NPA ratios of Private Sector Banks: 2004-05 to 2008-09
Table: 1.9 Year Gross NPAs/Gross Advances
Net NPAs/Net Advances
2004-05 3.8 1.9 2005-06 2.5 1 2006-07 2.2 1 2007-08 2.5 1.2 2008-09 2.9 1.5
3.8
2.5
2.2
2.5
2.9
1.9
1 1
1.2
1.5
0
0.5
1
1.5
2
2.5
3
3.5
4
2004-05 2005-06 2006-07 2007-08 2008-09
Gross NPAs/Gross Advances Net NPAs/Net Advances
41

The percentage change in of gross NPA to gross advances ratio is decreasing initially & thereafter
started rising from 2006-07. It has reduced by 34.2% from 2004-05 to 2005-06. Similarly it has
reduced by 12% from 2005-06 to 2006-07 & thereafter increased by 18.5% & 9% respectively from
2006-07 to 2007-08 & 2007-08 to 2008-
While in case of net NPA to net advances ratio, the percentage change is varying drastically. It has
reduced by 47% from 2004-05 to 2005-06. It is unchanged from 2005-06 to 2006-07. It has increased
by 20% & 25% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-09.
The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over
the years states that private sector banks makes more provisions in gross NPA & gross advances.
The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2005-06 [60%] &
lowest in 2008-09 [48%]. In other years it near to 54%, in 2006 there is highest increase in advances
over previous year amongst all the year. This resulted increase in NPA which in turn increased the
provisions and unrecognized interest income.
Private sector banks have not succeeded to reduce NPA as against the advances made over the years
as both the ratios are increasing in later years.
42
REASONS FOR AN ACCOUNT BECOMING NPA:
1. Internal factors
2. External factors
Internal factors:

-economic costs.
-ability of the corporate to raise capital through the issue of equity or other debt instrument
from capital markets.

\modernization\setting up new projects\ helping or promoting
sister concerns.
- appropriation etc.
-ups, delaying
settlement of payments\ subsidiaries by government bodies etc.,
External factors:
1) Sluggish legal system:

2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material\input price escalation, power shortage, industrial
recession, excess capacity, natural calamities like floods, accidents.
43
5) Failures, nonpayment\ over dues in other countries, recession in other countries, externalization
problems, adverse exchange rates etc.
IMPACT OF NPAS ON BANK PERFORMANCE:
The efficiency of a bank is not reflected only by the size of its balance sheet but also the level of
return on its assets. The NPAs do not generate interest income for banks but at the same time banks
are required to provide provisions for NPAs from their current profits.
The NPAs have deleterious impact on the return on assets in the following ways.
profitability is affected adversely because of the providing of doubtful debts and consequent to
writing it off as
by banks gets upset because EVA

It is due to above factors the public sector banks are faced with bulging NPAs which results in lower
income and higher provisioning for doubtful debts and it will make a dent in their profit margin. In
this context of crippling effect on banks operation the slew asset quality is placed as one of the most
important parameters in the measurement of banks performance under the Camels supervisory
rating system of RBI:
Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client.
Because of the money getting blocked the prodigality of bank decreases not only by the amount of
NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning
project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead
to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low
ROI (return on investment), which adversely affect current earning of bank.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest period of time which lead to additional cost to the company. Difficulty
in operating the functions of bank is another cause of NPA due to lack of money.
44
Involvement of Management:
Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time
and efforts of management in handling and managing NPA would have diverted to some fruitful
activities, which would have given good returns. Now days banks have special employees to deal and
handle NPAs, which is additional cost to the bank.
Credit Loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It
will lose its goodwill and brand image and credit which have negative impact to the people who are
putting their money in the banks.
Early Symptoms: By which one can recognize a performing asset turning in to non-performing asset
Four categories of early symptoms:-
1) Financial:
-payment of the very first instal

partial amount is diverted to sister concern or parent company.
2) Operational and Physical:
If information is received that the borrower has either initiated the process of winding up or are not
doing the business.

45
-controllable factor like natural calamities in the city where borrower conduct his
business.

3) Attitudinal Changes:
Problem between partners.
4) Others:

CREDIT DEFAULT SWAP:
It is a bilateral financial contract in which buyer pays a periodic fee expressed in fixed basis points on
the notional amount in return for a floating payment contingent on the default of a third party
reference credit. The floating payment is designated to mirror the loss incurred by creditors of the
reference credit in the event of its default. The credit event various from bank to bank and from
transaction to transaction, the credit events are pre defined in the agreement, which includes (i)
Bankruptcy, (ii) Insolvency (iii) Rating, and downgrading below agreed threshold (iv)Failure to adjust
for new payment obligation and (v) Debt Rescheduling. The credit event triggers the obligation of
the seller of default protection to the purchaser of the same. The investors who need to protect
themselves against default but do not want to sell them at risk security for accounting, tax and
regulatory reasons can buy a credit default swap.
CREDIT LIMITED NOTES (CLN):
These are known as credit swaps in which buyer makes periodic payments of a fixed percentage of
the reference asset to the seller over the life of the swap. Then the seller promises a payment in the
case of credit default for the reasons viz., bankruptcy, delinquency and credit rating down grade. The
payments may be either a pre - determined amount and also decrease in the market value of the
reference obligation that may cause the credit event. The seller calls the structure away from the
investor and delivers the defaulting notes against them on the happening of credit
46
event. The CLN are like bonds in character and are acceptable to certain banks. They are not allowed
to involve in credit default swap.
CONSEQUENCES OF NPAS:
The contaminated portfolio is definitely a bane for any bank. It puts severe dent on the liquidity and
profitability of the bank where it is out of proportion. The NPAs in the public sector banks are well
above the normal level. The consequences envisaged during the past several years are many. It has
become a difficult task for the banks to reduce the lending rate due to the presence of large NPAs.
Ultimately this is affecting the competitiveness of the Indian banks. When the bank does not enjoy
the market competitiveness naturally the credit expansion would be slumped and when it happens,
the profitability gets a setback. In this way the vicious circle will go on and on.
Another important one is the reduction in the availability of funds for further expansion due to the
unproductiveness of the existing portfolio. Sometimes it is found that the presence of large NPAs
discourages banks to accept profitable but risky proposal loan from the customers. The NPAs also
affect the risk taking ability of the banks. On the whole it affects the credibility of the bank and faces
difficulty in raising fresh capital from the market for future requirements.
MEASURES TO CONTROL NPAs:
It is proved beyond doubt that NPAs in bank ought to be kept at the lowest level. Two pronged
approaches viz., (i) Preventive management and (ii) Curative management would be necessary for
controlling NPAs.
1. Preventive Management:
a) Credit Assessment and Risk Management Mechanism:
A lasting solution to the problem of NPAs can be achieved only with proper credit assessment and
risk management mechanism. The documentation of credit policy and credit audit immediately after
the sanction is necessary to upgrade the quality of credit appraisal in banks. In a situation of liquidity
overhang the enthusiasm of the banking system is to increase lending with compromise on asset
quality, raising concern about adverse selection and potential danger of addition to the NPAs stock.
It is necessary that the banking system is equipped with prudential norms to minimize if not
completely avoid the problem of credit risk.
47
b) Organizational Restructuring:
With regard to internal factors leading to NPAs the onus for containing the same rest with the bank
themselves. These will necessities organizational restructuring improvement in the managerial
efficiency, skill up gradation for proper assessment of credit worthiness and a change in the attitude
of the banks towards legal action, which is traditionally viewed as a measure of the last resort.
c) Reduce Dependence on Interest:
The Indian banks are largely depending upon lending and investments. The banks in the developed
countries do not depend upon this income whereas 86 percent of income of Indian banks is
accounted from interest and the rest of the income is fee based. The banker can earn sufficient net
margin by investing in safer securities though not at high rate of interest. It facilitates for limiting of
high level of NPAs gradually. It is possible that average yield on loans and advances net default
provisions and services costs do not exceed the average yield on safety securities because of the
absence of risk and service cost.
d) Potential and Borderline NPAs under Check:
The potential and borderline accounts require quick diagnosis and remedial measures so that they
do not step into NPAs categories. The auditors of the banking companies must monitor all
outstanding accounts in respect of accounts enjoying credit limits beyond cut off points, so that
new sub-standard assets can be kept under check.
2. Curative Management:
The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs
are released for recycling. The Central government and RBI have taken steps for arresting incidence
of fresh NPAs and creating legal and regulatory environment to facilitate the recovery of existing
NPAs of banks. They are: Debt Recovery Tribunals (DRT): In order to expedite speedy disposal of high
value claims of banks Debt Recovery Tribunals were setup. The Central Government has amended
the recovery of debts due to banks and financial institutions Act in January 2000 for enhancing the
effectiveness of DRTs. The provisions for placement of more than one recovery officer, power to
attach dependents property before judgment, penal provision for disobedience of Tribunals 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 times to come.
a) Lok Adalats:
The Lok adalats institutions help banks to settle disputes involving accounts in doubtful and loss
categories. These are proved to be an effective institution for settlement of dues in respect of
smaller loans. The Lok adalats and Debt Recovery Tribunals have been empowered to organize Lok
adalats to decide for NPAs of Rs. 10 lakhs and above.
48
b) Asset Reconstruction Company (ARC):
The Narasimham Committee on financial system (1991) has recommended for setting up of Asset
that centralized all India fund will severely handicap in its recovery efforts by lack of widespread
geographical reach which indi
problem of financing the ARF.
Subsequently, the Narasimham committee on banking sector reforms has recommended for transfer
of sticky assets of banks to the ARC. Thereafter the Varma committee on restructuring weak public
sector banks has also viewed the separation of NPAs and its transfer thereafter to the ARF is an
important element in a comprehensive restructuring strategy for weak banks. In recognition of the
same ARC Bill was passed to regulate Securitization and Reconstruction of financial assets and
enforcement of security interest.
The ICICI BANK has promoted the countrys first Asset Reconstruction Company. The company is
specialized in recovery and liquidation of assets. The NPAs can be assigned to ARC by banks at a
discounted price. The objective of ARC is floating of bonds and making necessary steps for recovery
of NPAs from the borrowers directly. This enables a onetime clearing of balance sheet of banks by
sticky loans.
c) Corporate Debt Restructuring (CDR):
The corporate debt restructuring is one of the methods suggested for the reduction of NPAs. Its
objective is to ensure a timely and transparent mechanism for restructure of corporate debts of
viable corporate entities affected by the contributing factors outside the purview of BIFR, DRT and
other legal proceedings for the benefit of concerned. The CDR has three tier structure viz., a. CDR
standing forum b. CDR empowered group and c. CDR cell. The Mechanism of the CDR: It is a
voluntary system based on debtors and creditors agreement. It will not apply to accounts involving
one financial institution or one bank instead it covers multiple banking accounts, syndication,
consortium accounts with outstanding exposure of Rs. 20 crores and above by banks and
institutions.
The CDR system is applicable to standard and sub standard accounts with potential cases of NPAs
getting a priority. In addition to the steps taken by the RBI and Government of India for arresting the
incidence of new NPAs and creating legal and regulatory environment to facilitate for the recovery
of existing NPAs of banks, the following measures were initiated for reduction of NPAs. Circulation of
Information of Defaulters: The RBI has put in place a system for periodical circulation of details of
willful defaulters of banks and financial institutions. The RBI also publishes a list of borrowers (with
outstanding aggregate rupees one crore and above) against whom banks and financial institutions in
recovery of funds have filed suits as on 31st March every year. It will serve as a caution list while
considering a request for new or additional credit limits from defaulting borrowing units and also
from the directors, proprietors and partners of these entities.
49
d) Recovery Action against Large NPAs:
The RBI has directed the PSBs to examine all cases of willful default of Rs. One crore and above and
file criminal cases against willful defaulters. The board of directors are requested to review NPAs
accounts of one crore and above with special reference to fix staff accountability in individually.
e) Credit Information Bureau:
The institutionalization of information sharing arrangement is now possible through the newly
formed Credit Information Bureau of India Limited (CIBIL) It was set up in January 2001, by SBI,
HDFC, and two foreign technology partners. This will prevent those who take advantage of lack of
system of information sharing amongst leading institutions to borrow large amount against same
assets and property, which has in no measures contributed to the incremental of NPAs of banks.
50
51
SUGGESTIONS TO CONTROL NPAs:
The Bank should adopt the following general strategies to control NPAs. The suggestions are as
follows:
project and intrinsic strength o
Operating staff should scrutinize the level of inventories/receivables at the time of assessment of
-payment of
Identifying reasons for turning of each account of a branch into NPA is the most important factor for
bank must focus on recovery from those borrows who have the capacity to repay but are not
repaying i
bank has to be stream lined; targets should be fixed for field officers / supervisors not only for
recovery in general but also in terms of upgrading number of existi
byreducing the unnecessary expenses for future plan
52
CONCLUSION:
Growing NPAs is one of the biggest problems that the private Indian banks are facing today. If proper
management of the NPAs is not undertaken it would hamper the efficiency of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the banking sector. The NPAs destroy
the current profit and interest income and affect the smooth functioning of the recycling of the
funds. Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which in turn hampers
the economic growth of the country. Thus, it is highly essential for the banks to focus their attention
on growth of NPAs and take appropriate measures to regulate their growth.
53
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Prudential Policy
M. Karunakar et.al (2008), Are non - Performing Assets Gloomy or Greedy from Indian Perspective,
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loans, Discussion Paper, Statistics Department of the IMF, Decembere1, 2001
Das, A., & Ghosh, S (2003), Determinants of Credit Risk, Paper presented at the Conference on
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54
BOOKS:
1) Marketing Research- An Applied Orientation by Naresh K. Malhotra; Edition-Fourth; Publication-
New Delhi
WEBSITES:
1) http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India
2) http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to Banks of
India
3) http://rbi.org.in/scripts/NotificationUser.aspx
4) http://en.wikipedia.org/wiki/Banking_in_India
5) http://www.ibef.org/industry/Banking.aspx
6) http://www.bankingindiaupdate.com/general.html
55
ANNEXURE
Descriptive Statistics of Factors affecting NPAs:
Factors
Factor Loading
Cronbach s Alpha
F1 Recession and management failure
28.79 .721
Recession in economy
3.15 .987 .940 .891
Management Failure
3.00 1.780 .837 .710
F2 Execution Problems
28.39 .709
Improper Credit Appraisal
2.92 1.115 .850 .762
Difficulty in executing Repayment procedure
3.46 .967 .827 .713
Cost of effective legal measures
2.46 1.391 .730 .694
F3 Default by customers
23.62 .753
Willful Default
2.77 1.235 .914 .927
Absence of Security
2.15 1.281 .854 .960
56
Descriptive Statistics of Recovery Mechanisms adopted to reduce NPAs:
Factors
Factor Loading
Cronbach s Alpha
F1 Banking Measures 48.25 .912
Self involvement 2.08 1.256 .960 .923
Recovery campus 2.00 1.414 .951 .910
F2 Legal Measures 41.71 .793
Lok adalats 2.31 1.494 .932 .892
SARFASI Act 1.85 1.214 .891 .874
Factorial profile of recovery mechanism for NPA by banks
No. of rounds
No. of factors
Items Deleted
Items Remained
V.E %
2 3 .65 5 .34 - 7 80.81 .70
One-Sample Test
Test Value = 2
t df Sig. (2-tailed) Mean Difference
95% Confidence Interval of the Difference
Lower Upper
VAR00002 .222 12 .828 .05769 -.5081 .6235
57
One-Sample Statistics
N Mean Std. Deviation Std. Error Mean
BART factor score 4 for analysis 2
13 2.0385 1.28228 .35564
BART factor score 1 for analysis 3
13 2.0769 1.23905 .34365
KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy. .505
Bartlett's Test of Sphericity Approx. Chi-Square 20.921
df 6
Sig. .002
Total Variance Explained
Compon ent
Initial Eigenvalues Extraction Sums of Squared Loadings
Rotation Sums of Squared Loadings
Total % of Variance
Cumulativ e % Total
% of Variance
Cumulative % Total
% of Varian ce
Cumula tive %
1 2.044 51.097 51.097 2.044 51.097 51.097 1.930 48.251 48.251
2 1.555 38.873 89.970 1.555 38.873 89.970 1.669 41.719 89.970
3 .253 6.327 96.297
4 .148 3.703 100.000
Extraction Method: Principal Component Analysis.

58
A study of non-performing assets in Indian private banking sector
We are pursuing MBA and we are conducting a study on non performing assets in private banks.
Please answer the questions below. Your response in this regards is very valuable for the success of
our project. Also note that the information so revealed will be utilized without directly disclosing the
identity of the concern Bank/Officials.

Since how long the branch is functioning 0-2yrs 2-3yrs 3-5yrs
5yrs above
Since how long the presence of NPA is observed in your branch 0-1yrs 1-2yrs
2-3yrs 5yrs
What is the approximate value of NPA in your branch? (Rs in lakhs) 1-10 10-20 20-30 above-
40
For which category the NPA is being observed
Personal loan vehicle loan
Housing loan Agri-term loan
59
The main reasons for NPAs in the bank
(Rating factors 1-5 according to the importance of factor. 1- Most effective, 2- effective, 3-
moderate, 4- non effective, 5- least effective.)
Factors 1 2 3 4 5 Improper credit appraisal Lack of effective follow up Diversion of funds willful
default difficulty in execution of discredit cost of effective legal measures Absence of security
Management failure demand recession
Measures for recovery of NPA adopted by the bank
Legal measures non legal measures
Both legal and non-legal other then specify
Which of the following recovery mechanism are adopted by the bank for NPA?
(Rating factors 1-5 according to the importance of factor. 1- Most effective, 2- effective, 3-
moderate, 4- non effective, 5- least effective.)
Factors 1 2 3 4 5 Lok adalats Civil courts Corporate and restructuring Self involvement debt recovery
tribunal one time settlement scheme recovery campus SARFAESI Act.
60
To what extent your bank has been succeeded in converting NPA into good assets?
1% 4%
2% 5%
3% >5%
Has the profitability improved after adopting reduction technique?
Definitely improved improved
Cant say definitely not improved
Thanks for your co-operation.

Non-Performing Assets

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CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks

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