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RESEARCH METHODOLOGY

9.

Introduction
The banking industry has undergone a sea change after the first phase of economic
liberalization in 1991 and hence credit management. While the primary function of banks is
to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing
loans etc., in recent times the banks have become very cautious in extending loans. The
reason being mounting non-performing assets (NPAs). An NPA is defined as a loan asset,
which has ceased to generate any income for a bank whether in the form of interest or
principal repayment. As per the prudential norms suggested by the Reserve Bank of India
(RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests
can be booked only when it has been actually received.
Therefore, an NPA account not only reduces profitability of banks by provisioning in the
profit and loss account, but their carrying cost is also increased which results in excess &
avoidable management attention. Apart from this, a high level of NPA also puts strain on a
banks net worth because banks are under pressure to maintain a desired level of Capital
Adequacy and in the absence of comfortable profit level, banks eventually look towards their
internal financial strength to fulfill the norms thereby slowly eroding the net worth.

35.

Literature Review
When a borrower, who is under a liability to pay to secured creditors, makes any default in
repayment of secured debt or any installment thereof, the account of borrower is classified as
nonperforming assets (NPA) .NPAs cannot be used for any productive purposes because they
reflect the application of scarce capital and credit funds. Continued growth in NPA threatens
the repayment capacity of the banks and erodes the confidence reposed by them in the banks.
In fact high level of NPAs has an adverse impact on the financial strength of the banks who
in the present era of globalization, are required to conform to stringent International
Standards. Non Performing Asset means an asset or account of a borrower, which has been
classified by bank or financial institution as substandard, doubtful or loan asset. After
nationalization and globalization the initial directive that banks were given was to expand
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their branch network, increase the saving rate and extent credits to rural, urban and the most
important SSI sectors. No doubt this mandate has been achieved admirably under the
regulation of economic reforms initiated in 1991 by the then Finance Minister and present
Prime minister Dr. Manmohan Singh. No doubt it would have been incomplete without the
overhaul of Indian Banking System. Then all of a sudden focus shifted towards improving
quality of assets and better risk management. The Narasimhan committee reports (First
report) recommendations are the basis for initiation of the process, which is still continuing.
The committee has recommended the enactment of a new legislation for securitization and
empowering banks and financial institution to take possession of the securities and do sell
them without the intervention of the court. The Narasimham Committee Report is without
doubt a major path- breaking piece of work and deserves the support of all who yearn for a
more rational and effective banking system in this country. In order to have the proper
understanding of NPA menace, it is important to have a brief idea of growth and structural
changes that have taken place in the banking sector. The growth of the banking system can be
assessed in five phases:- 1) Preliminary Phase(series of birth and death of banks) 2) Business
Phase(period between 1949- 19 69) 3) Branching Out Phase(period when commercial banks
got nationalized) 4) Consolidated phase(weaknesses and defects were identified) 5) Reforms
and Strengthening Phase(1991 to till date) Indian Banking Industry Saddled with High NPAs:
Reasons The liberalization policies launched in 1991 opened the doors to the entrepreneurs to
setup industries and business, which are largely financed by loans from the Indian banking
systems. Business firms and companies fail to pay the principal amount as well as the interest
amount (Bad Loan) . In the global economy prevailing today, the vulnerability of Indian
businesses has increased. A culture change is crept in where repayment of bank loans is no
longer assured. A constant follow up action and vigil are to be exercised by the operating
staff. Diversion of funds and willful default has become more common. As per a study
published in the RBI bulletin in July 1999, diversion of funds and willful default are found to
be the major contributing factors for NPAs in public and private sector banks. Today, the
situation looks optimistic with the industry succeeding in overcoming the hurdles faced
earlier. The timely restructuring and rehabilitation measures have helped to overcome
setbacks and hiccups without seriously jeopardizing their future. The greater transparency
and stricter corporate governance methods have significantly raise
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the credibility of the corporate sector. The attrition rate in corporate sector has come down.
The challenges before the banks in India today are the raising NPAs in the retail sector,
propelled by high consumerism and lowering of moral standards. Other Factors: The problem
that India faces is not lack of prudential norms but the legal impediments and time
consuming nature of asset disposal process , postponement of the problem in order to
report high earnings and to some extent manipulation of by the debtor using political
influence. Most of the banks in India are into this malpractices and fraudulent acts. In the
process of earning high returns on their investment by the above stated method, the banks
become bankrupt or penniless. A vicious effect of the slow legal process is that banks are
shying away from risks by investing a greater than required proportion of their assets in the
form of sovereign debt paper. The worst part is that the NPA of a private enterprise is both
financially and politically undesirable. Earlier bankruptcy Law favored borrowers and law
courts were not reliable vehicles. But the circumstances have changed. Laws were passed
allowing the creation of asset management companies, foreign equity participation in
securitisation and asset backed securitization. Impact of NPAs on Banking Operations: The
efficiency of a bank is not reflected only by the size of its balance sheet but also the level of
return on its assets. The NPAs do not generate interest income for banks but at the same time
banks are required to provide provisions for NPAs from their current profits. The NPAs have
deliterious impact in the interest income on the bank, bank profitability because of the
providing of the doubtful debts, return on investment of course. NPAs also disturb the Capital
Adequacy Ratio (CAV) and economic value addition (EVR) of the banks. It is due to above
factors, the public sector banks are faced with bulging NPAs which results in lower income
and higher provisioning for doubtful debts and it will make a dent in their profit margin. In
this context of crippling effect on banks operation the slew asset quality is placed as one of
the most important parameters in the measurement of banks performance under the
Camels supervisory rating system of RBI. Whether trading of NPA between Banks illegal or
not: The word trading here means purchasing or selling of NPAs between banks. So
assignment or trading falls under the guidelines of Banking Regulation Act (BRA) which
makes it legal . But the Gujarat High court has recently held that the buying and selling of
non performing assets is illegal. The court has ruled that such an activity is not a part of
banking activity as contemplated under the Banking Regulation Act, 1949. The court held
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that Interest transfer of NPAs by banks is illegal and not a part of banking activity under the
BR Act. Trading in debts is a speculative form of transaction that is not permissible activity
and thus, cannot be a part of the business of a banking system The ruling had an impact of
sending shockwaves through the backbone of Indian economy and came under the greater
scrutiny in academic circles too. But the judgment is yet to stand the Supreme test of
judiciary scrutiny as the aggrieved Banks and concerned regulatory bodies (RBI and Indian
Bank Association) have challenged the decision before the Supreme Court. In the interim, the
legality of loan purchases is under cloud till now. I feel the recent pronouncement of the
Gujarat High Court has misinterpreted the term debt from legal as well as accounting point
of view. A loan item or the borrower is an asset of a bank and not a debt. Thus, de-facto the
assignment of loan (good or bad) amounts to transfer of asset and not debt. Even RBI
considers interest NPA assignment between banks to be a significant tool for resolving the
issue of Non Performing Assets and in the interest of banking policy .The decision given by
the Honorable Courts in the cases that have been cited below (footnote16) was in favor of
assignment of NPAs between banks. Measures to control NPAs menace a lasting solution to
the problem of NPAs can be achieved only with proper credit assessment and risk
management mechanism. It is necessary that the banking system is equipped with prudential
norms to minimize if not completely avoid the problem of credit risk. Effective management
of NPA rather than elimination is prudent. All these issues gave the passage of evolution of
the Securitization and Reconstruction of Financial Assets and enforcement of Security
Interest Act (SARFAESI), 2002. It is a unique piece of legislation which has far reaching
consequences. Securitization in India is still in a nascent stage but has potential in areas like
mortgage Backed securitization. This act has a overriding power over the other legislation.
SARFAESI ACT was promulgated to regulate the financial assets and enforcement of
security interest and for matters connected therewith or incidental thereto. The main purpose
of this act is to enable the creditors take possession of the secured assets and to deal with
them without the intervention of the court. No doubt this Act was challenged in various
courts on ground that it was loaded heavily in favour of lenders, giving little chance to the
borrowers to explain their views once recovery process is initiated under the legislation. The
major problem with the Indian banking system is that they depend largely upon lending and
investments. The banks in the developed countries do not depend upon this income whereas
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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. The corporate debt restructuring is also 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 DRT and other legal proceedings for the benefit of concerned. The problem of
non -performing loans created due to systematic banking crisis world over has become acute.
Focused measures to help the banking system to realize its NPAs has resulted into the
creation of specialized bodies called Asset Management Companies which in India have been
named Asset Reconstruction Companies (ARCs) The main objective of ARCs is to act as 1)
A agent for any bank or financial institution for the purpose of recovering their dues from the
borrowers. 2) A manager of the borrowers asset taken over by banks or financial institution.
3) The receiver of properties of any bank or financial institution. 4) There have been
instances of banks extending credit to doubtful debtors (who deliberately default on debt) and
getting kickbacks for the same. Ineffective Legal mechanisms and inadequate internal control
mechanisms have made this problem grow quick action has to be taken on both counts so
that both the defaulters and the authorizing officer are punished heavily. Without this, all the
mechanisms suggested above may prove to be ineffective. Conclusion 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. It is needless to mention, that a lasting
solution to the problem of NPAs can be achieved only with proper credit assessment and risk
management mechanism. It is necessary that the banking system is to be equipped with
prudential norms to minimize if not completely to avoid the problem of NPAs. The onus for
containing the factors leading to NPAs rests with banks themselves. This will necessitates
organizational restructuring, improvement in the managerial efficiency and skill up gradation
for proper assessment of credit worthiness It is better to avoid NPAs at the nascent stage of
credit consideration by putting in place of rigorous and appropriate credit appraisal
mechanisms.
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61. 1
Problem statement/Objective of the research
To study of the concept of Non Performing Asset in Indian perspective.
2
3

To study NPA standard of RBI


To study the Reasons for & Impact of NPAs

banks (Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.
5

IV.

To check the proportion of NPA of different types of banks in different categories.

Research Design
The research design that will be use is Descriptive Research.
1
Involves gathering data that describe events and then organizes, tabulates, depicts,
2and describes
the data.as a tool to organize data into patterns that emerge during analysis.
Uses description
3
4

Often uses visual aids such as graphs and charts to aid the reader.
Using of hypothesis testing.

1) Test of Correlation:
1) H0: There is no significant correlation between profits & NPAs of Public Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Public Sector Banks for last 9
years
2) H0: There is no significant correlation between profits & NPAs of Private Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Private Sector Banks for last
9 years
3) H0: There is no significant correlation between profits & NPAs of Foreign Banks
for last 9 years
H1: There is correlation between profits & NPAs of Foreign Banks for last 9 years
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2) ANNOVA Test :
H0: There is no significant difference in NPAs of different types of banks among
various sectors.
H1: There is significant difference in NPAs of different types of banks among
various sectors.

22.

Data Collection Sources


Secondary Data
Secondary data refers to the data which has already been generated and is available for use.
The data about NPAs & its composition, classification of loan assets, profits (net & gross)
& advances of different banks is taken from Reserve Bank of India website.

VI. Scope of the study


1

To understand the concept of NPA in Indian Banking industry.

To understand the causes & effects of NPA

3 To analyze the past trends of NPA of Public, Private & Foreign banks in different
sector.

VII. Expected contribution of the study


The analysis made as a part of this study may contribute in a way analysis of strength and
weakness of the banking sector as whole with regard to Non Performing Asset of banks.
Various banks from different categories together may make efforts to overcome limitations
for lending money to different sectors like agricultural, SSI, Priority sector, non-priority
sector, public sector & others.

VIII. Beneficiaries of the study


The outcomes analyzed from this study would be beneficial to various sections such as:
1 Banks: This study would definitely benefit the banks in a way that directs them as to
which sector should be given priority for lending money.
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Further Researchers: The major beneficiaries from the project would be the
researchers themselves as this study would enhance their knowledge about the topic.
They get an
insight of the present scenario of this industry as this is the emerging industry in the
financial sector of the economy.

IX.

Student: To get the understanding of NPA concept as a whole.

Limitation
There are some data which are available for just 3 years while the same data for its
counterparts were available for 9 years. So exact comparison was not possible.

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INDIAN BANKING INDUSTRY


INTRODUCTION:
Banking in India originated in the last decades of the 18th century. The oldest bank in
existence in India is the State Bank of India, a government-owned bank that traces its origins
back to June 1806 and that is the largest commercial bank in the country. Central banking is
the responsibility of the Reserve Bank of India, which in 1935 formally took over these
responsibilities from the then Imperial Bank of India, relegating it to commercial banking
functions. After India's independence in 1947, the Reserve Bank was nationalized and given
broader powers. In 1969 the government nationalized the 14 largest commercial banks; the
government nationalized the six next largest in 1980.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake), 31 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of
total assets of the banking industry, with the private and foreign banks holding 18.2% and
6.5% respectively

EARLY HISTORY:
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan, both of which are
now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.
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Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That
honor belongs to the Bank of Upper India, which was established in 1863, and which
survived until 1913, when it failed, with some of its assets and liabilities being transferred to
the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian cotton. With large
exposure to speculative ventures, most of the banks opened in India during that period failed.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The
Comptoired'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay
in 1862; branches in Madras and Pondichery, then a French colony, followed. HSBC
established itself in Bengal in 1869. Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, and so became a banking center.

The Bank of Bengal, which later became the State Bank of India.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in

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Lahore in 1895, which has survived to the present and is now one of the largest banks in
India.
Around the turn of the 20th Century, the Indian economy was passing through a relative
period of stability. Around five decades had elapsed since the Indian Mutiny, and the social,
industrial and other infrastructure had improved. Indians had established small banks, most
of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks
and a number of Indian joint stock banks. All these banks operated in different segments of
the economy. The exchange banks, mostly owned by Europeans, concentrated on financing
foreign trade. Indian joint stock banks were generally undercapitalized and lacked the
experience and maturity to compete with the presidency and exchange banks. This
segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the
times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swedish
movement. The Swedish movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to
the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara
Bank and Central Bank of India.

The fervor of Swedish movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara
( South Kanara ) district. Four nationalised banks started in this district and also a leading
private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of
Indian Banking".

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FROM WORLD WAR I TO INDEPENDENCE:


The period during the First World War (1914-1918) through the end of the Second World War
(1939-1945), and two years thereafter until the independence of India were challenging for
Indian banking. The years of the First World War were turbulent, and it took its toll with
banks simply collapsing despite the Indian economy gaining indirect boost due to war-related
economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in
the following table:

Years

Number of banks Authorised capital Paid-up Capital


that failed

(Rs. Lakhs)

(Rs. Lakhs)

1913 12

274

35

1914 42

710

109

1915 11

56

1916 13

231

1917 9

76

25

1918 7

209

Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West
Bengal, paralyzing banking activities for months. India's independence marked the end of
a regime of the Laissez-faire for the Indian banking. The Government of India initiated
measures to play an active role in the economic life of the nation, and the Industrial
Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This
resulted into greater involvement of the state in different segments of the economy
including banking and finance.
The major steps to regulate banking included:

In 1948, the Reserve Bank of India, India's central banking


authority, was
nationalized, and it became an institution owned by the Government of India.

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1 In 1949, the Banking Regulation Act was enacted which empowered the
Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
2 The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two banks
could have common directors.
However, despite these provisions, control and regulations, banks in India except the
State Bank of India, continued to be owned and operated by private persons. This
changed with the nationalization of major banks in India on 19 July 1969.

Nationalization
By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had ensued about the possibility to nationalise the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalisation." The paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and
nationalised the 14 largest commercial banks with effect from the midnight of July 19,
1969. Jayaprakash Narayan, a national leader of India, described the step as a
"masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the
Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking)
Bill, and it received the presidential approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The


stated reason for the nationalization was to give the government more control of credit
delivery. With the second dose of nationalization, the GOI controlled around 91% of the
banking business of India. Later on, in the year 1993, the government merged New Bank
of India with Punjab National Bank. It was the only merger between nationalized banks
and resulted in the reduction of the number of nationalised banks from 20 to 19. After
this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the
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average growth rate of the Indian economy. The nationalised banks were credited by
some, including Home minister P. Chidambaram, to have helped the Indian economy
withstand the global financial crisis of 2007-2009.

Liberalisation
In the early 1990s, the then NarsimhaRao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be known as
New Generation tech-savvy banks, and included Global Trust Bank (the first of such new
generation banks to be set up), which later amalgamated with Oriental Bank of
Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,
along with the rapid growth in the economy of India, revitalized the banking sector in
India, which has seen rapid growth with strong contribution from all the three sectors of
banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%,at present it has gone up to 74%
with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks.All this led to the retail boom in India. People not just demanded more
from their banks but also received more.

Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous
body, with minimal pressure from the government. The stated policy of the Bank on the

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Indian Rupee is to manage volatility but without any fixed exchange rate-and this has
mostly been true. With the growth in the Indian economy expected to be strong for quite
some time-especially in its services sector-the demand for banking services, especially
retail banking, mortgages and investment services are expected to be strong. One may
also expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in
Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor
has been allowed to hold more than 5% in a private sector bank since the RBI announced
norms in 2005 that any stake exceeding 5% in the private sector banks would need to be
vetted by them.

In recent years critics have charged that the non-government owned banks are too
aggressive in their loan recovery efforts in connection with housing, vehicle and personal
loans. There are press reports that the banks' loan recovery efforts have driven defaulting
borrowers to suicide.

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RECENT HISTORY OF INDIAN BANKING


Indian banking system, over the years has gone through various phases after establishment of
Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the
country. Earlier to creation of RBI, the central bank functions were being looked after by the
Imperial Bank of India. With the 5-year plan having acquired an important place after the
independence, the Govt. felt that the private banks may not extend the kind of cooperation in
providing credit support, the economy may need. In 1954 the All India Rural Credit Survey
Committee submitted its report recommending creation of a strong, integrated, Statesponsored, State-partnered commercial banking institution with an effective machinery of
branches spread all over the country. The recommendations of this committee led to
establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955
by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India.
Similarly during 1956-59, as a result of re-organisation of princely States, the associate banks
came into fold of public sector banking.

Another evaluation of the banking in India was undertaken during 1966 as the private banks
were still not extending the required support in the form of credit disbursal, more particularly
to the unorganised sector. Each leading industrial house in the country at that time was
closely associated with the promotion and control of one or more banking companies. The
bulk of the deposits collected, were being deployed in organised sectors of industry and
trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed
had to depend on money lenders who used to exploit them by charging higher interest rates.
In February 1966, a Scheme of Social Control was set-up whose main function was to
periodically assess the demand for bank credit from various sectors of the economy to
determine the priorities for grant of loans and advances so as to ensure optimum and efficient
utilisation of resources. The scheme however, did not provide any remedy. Though a no. of
branches were opened in rural area but the lending activities of the private banks were not
oriented towards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of
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Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting
for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought
91% of the deposits and 84% of the advances in Public Sector Banking. During December
1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman
Committee.

Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance
cover to the depositors.

In the post-nationalization period, there was substantial increase in the no. of branches
opened in rural/semi-urban centres bringing down the population per bank branch to 12000
appx. During 1976, RRBs were established (on the recommendations of M. Narasimham
Committee report) under the sponsorship and support of public sector banks as the 3rd
component of multi-agency credit system for agriculture and rural development. The Service
Area Approach was introduced during 1989.

While the 1970s and 1980s saw the high growth rate of branch banking net-work, the
consolidation phase started in late 80s and more particularly during early 90s, with the
submission of report by the Narasimham Committee on Reforms in Financial Services Sector
during 1991.
In these five decades since independence, banking in India has evolved through four distinct
phases:

Foundation phase can be considered to cover 1950s and 1960s till the nationalization of
banks in 1969. The focus during this period was to lay the foundation for a sound banking
system in the country. As a result the phase witnessed the development of necessary
legislative framework for facilitating re-organization and consolidation of the banking
system, for meeting the requirement of Indian economy. A major development was
transformation of Imperial Bank of India into State Bank of India in 1955 and nationalization
of 14 major private banks during 1969.
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Expansion phase had begun in mid-60s but gained momentum after nationalization of banks
and continued till 1984. A determined effort was made to make banking facilities available to
the masses. Branch network of the banks was widened at a very fast pace covering the rural
and semi-urban population, which had no access to banking hitherto. Most importantly, credit
flows were guided towards the priority sectors. However this weakened the lines of
supervision and affected the quality of assets of banks and pressurized their profitability and
brought competitive efficiency of the system at a low ebb.

Consolidation phase: The phase started in 1985 when a series of policy initiatives were
taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to
improving house-keeping, customer service, credit management, staff productivity and
profitability of banks. Measures were also taken to reduce the structural constraints that
obstructed the growth of money market.

Reforms phase: The macro-economic crisis faced by the country in 1991 paved the way for
extensive financial sector reforms which brought deregulation of interest rates, more
competition, technological changes, prudential guidelines on asset classification and income
recognition, capital adequacy, autonomy packages etc.

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Indian Banking: Key Developments


1969

Government acquires ownership in major banks


Almost all banking operations in manual mode
Some banks had Unit record Machines of IBM for IBR & Pay roll

1970- 1980

Unprecedented expansion in geographical coverage, staff, business &


transaction volumes and directed lending to agriculture, SSI & SB sector
Manual systems struggle to handle exponential rise in transaction
volumes -Outsourcing of data processing to service bureau begins
Back office systems only in Multinational (MNC) banks' offices

1981- 1990

Regulator (read RBI) led IT introduction in Banks


Product level automation on standalone PCs at branches (ALPMs)
In-house EDP infrastructure with Unix boxes, batch processing in Cobol
for MIS.
Mainframes in corporate office

1991-1995

Expansion slows down


Banking sector reforms resulting in progressive de-regulation of banking,
introduction of prudential banking norms entry of new private sector
banks
Total Branch Automation (TBA) in Govt. owned and old private banks
begins
New private banks are set up with CBS/TBA from the start

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1996-2000

New delivery channels like ATM, Phone banking and Internet banking
and convenience of any branch banking and auto sweep products
introduced by new private and MNC banks
Retail banking in focus, proliferation of credit cards
Communication infrastructure improves and becomes cheap. IDRBT sets
up VSAT network for Banks
Govt. owned banks feel the heat and attempt to respond using
intermediary technology, TBA implementation surges ahead under fiat
from Central Vigilance
Commission (CVC), Y2K threat consumes last two years

2000-2003

Alternate delivery channels find wide consumer acceptance


IT Bill passed lending legal validity to electronic transactions
Govt. owned banks and old private banks start implementing CBSs, but
initial attempts face problems
Banks enter insurance business launch debit cards

(Source: M.Y.KHAN, INDIAN FINANCIAL SYSYEM,3rd edition Publication by TATA


McGraw hill)

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BANKING IN INDIA: 2009-10


The Indian banking system is financially stable and resilient to the shocks that may arise due
to higher non-performing assets (NPAs) and the global economic crisis, according to a stress
test done by the Reserve Bank of India (RBI).

Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7
billion towards the purchase of 200 metric tons of gold from the International Monetary Fund
(IMF) in November 2009. The purchase has increased the country's share of gold holdings in
its foreign exchange reserves from approximately 4 per cent to about 6 per cent.
Following the financial crisis, new deposits have gravitated towards public sector banks.
According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial
Banks: September 2009', nationalized banks, as a group, accounted for 50.5 per cent of the
aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per
cent. The share of other scheduled commercial banks, foreign banks and regional rural banks
in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively.

With respect to gross bank credit also, nationalized banks hold the highest share of 50.5 per
cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled
commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5
per cent and 2.5 per cent respectively in the total bank credit.

The report also found that scheduled commercial banks served 34,709 banked centres. Of
these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices.
The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI
fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per
the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident
(FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange
reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February
bulletin.

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Major Developments
The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months
ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine months
ended December 2008.

The SBI is adding 23 new branches abroad bringing its foreign-branch network number to
160 by March 2010. This will cement its leading position as the bank with the largest global
presence among local peers.

Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4 million
on 21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-10,
over the corresponding period last year. HDFC Bank has posted a 32 per cent rise in its net
profit at US$ 175.4 million for the quarter ended December 31, 2009 over the figure of US$
128.05 million for the same quarter in the previous year.

Government Initiatives
In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued
on June 25, 2009, said that banks should link more branches to the National Electronic
Clearing Service (NECS). Ideally, all core-banking-enabled branches should be part of
NECS. NECS was introduced in September 2008 for centralized processing of repetitive and
bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled
to participate in NECS.

In the Third Quarter Review of Monetary Policy for 2009-10, the RBI observed that the
Indian economy showed a degree of resilience as it recorded a better-than-expected growth of
7.9 per cent during the second quarter of 2009-10.

In its Third Quarter Review of Monetary Policy for 2009-10, the RBI hiked the Cash Reserve
Ratio (CRR) by 75 basis points (bps) to 5.75 per cent, while keeping repo and reverse repo
rates unchanged.

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According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will
be to:

Anchor inflation expectations and keep a vigil on inflation trends and respond
swiftly through policy adjustments

2
Actively manage liquidity to ensure credit demands of productive sectors are
3met adequately
Maintain an interest rate environment consistent with financial stability and price
stability
The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9,
2009, remained above the indicative projection of 18.0 per cent set out in the First Quarter
Review of July 2009. The main source of M3 expansion was bank credit to the government,
reflecting large market borrowings of the Government.
Meanwhile, outstanding bank credit in the 15 days up to January 29 2010 rose by US$ 4.32
billion, pointing to a revival in credit growth. This is the highest year-on-year growth
recorded since August 14, 2009.

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INDUSTRY ANALYSIS
S.W.O.T. ANALYSIS OF INDIAN BANKING INDUSTRY
STRENGTH
1

Indian banks have compared favourably on growth, asset quality and


profitability with other regional banks over the last few years. The banking index has
grown at a
compounded annual rate of over 51 per cent since April 2001 as compared to a 27
percent growth in the market index for the same period.

Policy makers have made some notable changes in policy and regulation to
help strengthen the sector. These changes include strengthening prudential norms,
enhancing the payments system and integrating regulations between commercial and
co-operative banks.

Bank lending has been a significant driver of GDP growth and employment.

The vast networking & growing number of branches & ATMs. Indian banking
system has reached even to the remote corners of the country.

The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India.

In terms of quality of assets and capital adequacy, Indian banks are considered
to have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region.

India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that
is with the Government of India holding a stake)after merger of New Bank of India in
Punjab National Bank in 1993, 29 private banks (these do not have government stake;
they may be publicly listed and traded on stock exchanges) and 31 foreign banks.

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They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold
over 75 percent of total assets of the banking industry, with the private and foreign
banks holding 18.2% and 6.5% respectively.

1
Foreign banks will have the opportunity to own up to 74 per cent of Indian
private sector banks and 20 per cent of government owned banks.

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WEAKNESS
1

PSBs need to fundamentally strengthen institutional skill levels especially in


sales and marketing, service operations, risk management and the overall
organizational
performance ethic & strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skill
levels.

The cost of intermediation remains high and bank penetration is limited to only
a few customer segments and geographies.

Structural weaknesses such as a fragmented industry structure, restrictions on


capital availability and deployment, lack of institutional support infrastructure,
restrictive
labour laws, weak corporate governance and ineffective regulations beyond
Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus.

Refusal to dilute stake in PSU banks: The government has refused to dilute its
stake in PSU banks below 51% thus choking the headroom available to these banks
for
raining equity capital.

Impediments in sectoral reforms: Opposition from Left and resultant cautious


approach from the North Block in terms of approving merger of PSU banks may
hamper their growth prospects in the medium term.

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OPPORTUNITY

The market is seeing discontinuous growth driven by new products and


services that include opportunities in credit cards, consumer finance and wealth
management on
the retail side, and in fee-based income and investment banking on the wholesale
banking side. These require new skills in sales & marketing, credit and operations.

Banks will no longer enjoy windfall treasury gains that the decade-long secular
decline in interest rates provided. This will expose the weaker banks.

With increased interest in India, competition from foreign banks will only
intensify.

Given the demographic shifts resulting from changes in age profile and
household income, consumers will increasingly demand enhanced institutional
capabilities and
service levels from banks.

New private banks could reach the next level of their growth in the Indian
banking sector by continuing to innovate and develop differentiated business models
to
profitably serve segments like the rural/low income and affluent/HNI segments;
actively adopting acquisitions as a means to grow and reaching the next level of
performance in their service platforms. Attracting, developing and retaining more
leadership capacity

Foreign banks committed to making a play in India will need to adopt


alternative approaches to win the race for the customer and build a value-creating
customer
franchise in advance of regulations potentially opening up post 2009. At the same
time, they should stay in the game for potential acquisition opportunities as and when
they appear in the near term. Maintaining a fundamentally long-term value-creation
mindset.

Reach in rural India for the private sector and foreign banks.

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With the growth in the Indian economy expected to be strong for quite some
time especially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong.

The Reserve Bank of India (RBI) has approved a proposal from the government
to amend the Banking Regulation Act to permit banks to trade in commodities and
commodity derivatives.

Liberalization of ECB norms: The government also liberalized the ECB norms
to permit financial sector entities engaged in infrastructure funding to raise ECBs.
This
enabled banks and financial institutions, which were earlier not permitted to raise
such funds, explore this route for raising cheaper funds in the overseas markets.

In an attempt to relieve banks of their capital crunch, the RBI has allowed them
to raise perpetual bonds and other hybrid capital securities to shore up their capital. If
the new instruments find takers, it would help PSU banks, left with little headroom
for raising equity. Significantly, FII and NRI investment limits in these securities have
been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.

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THREATS

Threat of stability of the system: failure of some weak banks has often
threatened the stability of the system.

Rise in inflation figures which would lead to increase in interest rates.

3
Increase in the number of foreign players would pose a threat to the PSB as
well as the private players.

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PEST ANALYSIS OF INDIAN BANKING INDUSTRY:

PEST analysis of any industry investigates the important factors that affect the industry and
influence the companies operating in the sector. PEST stands for Political, Economic, Social
and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the
industry and how those factors can influence the industry.

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POLITICAL FACTORS
Government and RBI policies affect the banking sector. Sometimes looking into the
political advantage of a particular party, the Government declares some measures to their
benefits like waiver of short-term agricultural loans, to attract the farmers votes. By
doing so the profits of the bank get affected. Various banks in the cooperative sector are
open and run by the politicians. They exploit these banks for their benefits. Sometimes
the government appoints various chairmen of the banks.
Various policies are framed by the RBI looking at the present situation of the country for
better control over the banks.

FOCUS ON REGULATIONS OF GOVERNMENT


Banking is least affected as compare to other developed economy which is attributed to
Reserve Bank of India for its robust policy framework, stricter prudential regulations
with respect to capital and liquidity. This gives India an advantage in terms of credibility
over other countries.
Government affects the performance of banking sector most by legislature and framing
policy government through its budget affects the banking activities securitization act has
given more power to banking sector against defaulting borrowers.

MONETARY POLICY
Monetary Policy 2009-2010
Bank Rate: The Bank Rate has been retained unchanged at 6.0%.

Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis
points from 5.0% to 4.75% with immediate effect.
Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3.5% to
3.25% with immediate effect. RBI has retained the option to conduct overnight or longer
term repo/reverse repo under the LAF depending on market conditions and other relevant
factors.
Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.

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FDI LIMIT
The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent
during the first quarter of this fiscal came as a welcome announcement to foreign players
wanting to get a foot hold in the Indian Markets by investing in willing Indian partners
who are starved of net worth to meet CAR norms. Ceiling for FII investment in
companies was also increased from 24.0 percent to 49.0 percent and have been included
within the ambit of FDI investment

BUDGET
MEASURES
Provisions:-

Budget

Increase Farm Credit: The FM has further increase the farm credit target for
2009-10 at Rs 325000 crore compared to Rs 287000 crore targeted in 2008-09.

Subvention of 1% to be paid as incentive to farmers: The Budget continued


the Interest subvention scheme for short-term crop loans up to Rs 300000 per farmer
at
the interest rate of 7% per annum. Also additional subvention of 1% to be paid from
this year, as incentive to those farmers who repay short-term crop loans on schedule.
Also additional allocation of Rs 411 crore over Interim Budget 2009-10 was made for
the same.

Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt
waiver scheme by six more months for farmers owing more than 2 hectare of land.
The
Union Budget 2008-09 allowed these farmers 25% rebate on loan if they repay 75%
of their overdue within stipulated period of 30th June 2009. Currently this facility has
been extended from 30th June, 2009 to 31st December, 2009.

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Setting up of separate task force for those not covered under the debt
waiver scheme: The government also announced that it will set up a task force to
examine
the issue of debt taken by a large number of farmers in some regions of Maharashtra
from private money lenders who were not covered by the loan waiver scheme
announced last year.

OTHER PROVISIONS

The threshold for non-promoter public shareholding for all listed companies to
be raised in a phased manner.

To allow scheduled commercial banks setting up off-site ATMs without prior


approval subject to reporting.

To provide banking facilities in under-banked/un-banked areas in the next three


years. A sub-committee of State level Bankers Committee (SLBC) would identify and
formulate an action plan for the same.

The Ministry has also granted Rs 100 crore of grants in aid to ensure provision
of at least one Centre/Point of Sales (POS) for banking services in each of the unbanked
blocks.

BUDGET IMPACT
The Union Budget 2008-09 has focused on farm credit. The agriculture sector has
recorded a growth of about 4% per annum with substantial increase in plan allocations
and capital formation in the sector. The one-time bank loan waiver of nearly Rs 71000
crore (Rs 710 billion) to cover an estimated 40 million farmers was one of the major
highlights of the last Budget. This Union Budget has provided further six months
extension of 25% rebate on loan for farmers owing more than 2 hectare of land. With
Government bearing this burden, banks would not be affected much. It will only help
banks to clear their most stubborn NPA accounts on banks book.
Moreover the emphasize on hiking promoter shareholding in Public sector banks,
expanding network with ATM's, opening of banking centre in un-banked blocks are some
of the positive moves for the sector.

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On the flipside, the spike in government borrowings is set to adversely affect the treasury
income of banks in general and public sector banks in particular, through rise in yields on
government securities.

OUTLOOK
The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking
sector as a whole. However it has increased the Government borrowing to Rs 451093
crore (Rs 4510.93 billion) compared to Rs 361782 crore (Rs 3617.82 billion) targeted in
the Interim Budget 2009-10.
This is likely to push the Bond yields high moving forward. Despite ample liquidity in
the system, the 10 year benchmark yield has zoomed above 7% levels owing to rise in
borrowing target. Hardening of yields is likely to affect treasury profits of banks in
general and Public sector banks in particular.

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ECONOMIC FACTORS
Banking is as old as authentic history and the modern commercial banking are traceable
to ancient times. In India, banking has existed in one form or the other from time to time.
The present era in banking may be taken to have commenced with establishment of bank
of Bengal in 1809 under the government charter and with government participation in
share capital. Allahabad bank was started in the year 1865 and Punjab national bank in
1895, and thus, others followed.

Every year RBI declares its 6 monthly policy and accordingly the various measures and
rates are implemented which has an impact on the banking sector. Also the Union budget
affects the banking sector to boost the economy by giving certain concessions or
facilities. If in the Budget savings are encouraged, then more deposits will be attracted
towards the banks and in turn they can lend more money to the agricultural sector and
industrial sector, therefore, booming the economy. If the FDI limits are relaxed, then
more FDI are brought in India through banking channels

GROWING ECONOMY / GDP


Indian economy has registered a growth of more that 9 per cent for last three year and is
expected to maintain robust growth rate as compare to other developed and developing
countries. Banking Industry is directly related to the growth of the economy.
The contributions of various sectors in the Indian GDP for 2007-2008 are as follows:
Agriculture: 17%
Industry: 29%
ServiceSector: 54%
It is great news that today the service sector is contributing more than half of the Indian
GDP. It takes India one step closer to the developed economies of the world. Earlier it
was agriculture which mainly contributed to the Indian GDP.
The Indian government is still looking up to improve the GDP of the country and so
several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI
investment have been framed to give a push to the economy and hence the GDP.

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LOW INTEREST RATES


Reserve Bank of India controls the Interest rate, which is based on several monetary
policies. Recently RBI has reduced the interest rate which stimulates the growth rate of
banking industry. As on September 11, 2009 Bank Rate was 6.00 per cent, the same as on
the corresponding date of last year. Call money rates (borrowing & lending) were in the
range of 1.50/3.47 per cent as compared with 5.25/11.00 per cent on the corresponding
date of last year.

INFLATION RATES
Inflation represents a rise in general level of prices of goods and services over a period of
time. It leads to an erosion in the purchasing power of money. Resultantly, each unit of
currency buys fewer goods and services Different fiscal and monetary policies have
curbed the Inflation rate from the high of 12.63 per cent to 3.92 per cent.
To fight against the slowdown of the Economy, Government of India & Reserve Bank of
India took many fiscal as well as monetary actions. Clubbed with fiscal & monetary
actions, decreasing commodity prices, decreasing crude prices and lowering interest rate,
we expect that Indian Economy could again register a robust growth rate in the year
2009-10. Inflation stands at 3.92 per cent on 7th February 2009 against a high of 12.63
per cent on 9th August 2008.

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AGRICULTURE CREDIT
Agriculture has been the mainstay of our economy with 60% of our population deriving
their sustenance from it. In the recent past, the sector has recorded a growth of about 4%
per annum with substantial increase in plan allocations and capital formation in the
sector. Agriculture credit flow was Rs 2,87,000 crore in 2008-09. The target for
agriculture credit flow for the year 2009-10 is being set at Rs.3,25,000 crore. To achieve
this, I propose to continue the interest subvention scheme for short term crop loans to
farmers for loans upto Rs.3 lakh per farmer at the interest rate of 7% per annum. For this
year, the government shall pay an additional subvention of 1% as an incentive to those
farmers who repay their short term crop loans on schedule. Thus, the interest rate for
these farmers will come down to 6% per annum. For this, I am making an additional
Budget provision of Rs 411 crore over Interim BE.

DEBT RELIEF FOR FARMERS


The one-time bank loan waiver of nearly Rs 71,000 crore to cover an estimated 40
million farmers was one of the major highlights of the last Budget. Under the Agricultural
Debt Waiver and Debt Relief Scheme (2008), farmers having more than two hectares of
land were given time upto 30th June, 2009 to pay 75% of their overdues. Due to the late
arrival of monsoon, I propose to extend this period by six months upto 31st December,
2009.

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SOCIO CULTUREAL FACTORS


Socio culture factors also affect the business. They show in which people behave in
country. Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying
and consumption habit of people, their language, beliefs and values affect the business.
Banking industry is also operates under this social environment and it is also affect by
this factor.
These factor are changing continuously peoples life style, their behavior, consumption
pattern etc. is changing and also creating opportunities and threat for banking industry.
There are some socio-culture factors that affect banking inIndia have been analyzed
below.

TRADITIONAL MAHAJAN PRATHA


Before the birth of the banks, people of India were used to borrow money local
moneylenders, shahukars, shroffs. They were used to charge higher interest and also
mortgage land and house. Farmers were exploited by these shahukars. But farmers need
money. So, they did not have any choice other than going to shahukar and borrowing
money from them in spite of exploitation by these people. But after emergence of banks
attitude of people was changed. Traditional mahajan pratha still exist in India specially in
rural areas. This affects the banking sector. Rural people afraid to go to bank to borrow
money instead they prefer to borrow from shahukar whith whom they have relationships
from the time of their fore fathers. Banking infrastructure is also week in some interior
areas of India. So, this is reason it still exist.

SHIFT TOWARDS NUCLEAR FAMILY


Attitude of people of India is changing. Now, younger generation wants to remain
separate from their parents after they get married. Joint families are breaking up. There
are many reasons behind that. But banking sector is positively affected by this trend. A
family need home consumer durables likefreeze, washing machine, television, bike, car,
etc.. so, they demand for these products and borrow from banks. Recently there is boost

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in housing finance and vehicle loans. As they do not have money they go for
installments. So, banks satisfy nuclear families wants.

CHANGE IN LIFE STYLE


Life style of India is changing rapidly. They are demanding high class products. They
have become more advanced. People want everything car, mobile, etc.. what their fore
father had dreamed for. Now teenagers also have mobile and vehicle. Even middle class
people also want to have well furnished home, television, mobile, vehicle and this has
opened opportunities for banking secter to tap this change. Every thing is available so it
has become easy to purchase anything if you do not have lump sum.

POPULATION
Increase in population is one of he important factor, which affect the private sector banks.
Banks would open their branches after looking into thepopulation demographics of the
area. Percentage of deposit in any branches of banks depends upon the population
demographic of that area. The population of India is about 102.90 is expected to reach
about 119.70 cores in 2011. About 70% of population is below 35years of age. They are
in the prime earning stage and this increase the earning of the banks. Total Deposits
mobilized by the Private Sector Banks increased from Rs, 2,52,335 crore as on 31st
March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Deposits showed a subdued
growth during 2004-05.Income distributions also affects the operations and overall
business of private sector banks.

LITERACY RATE
Literacy rate in India is very low compared to developed countries. Illiterate people
hesitate to transact with banks. So, this impacts negatively on banks. But there is positive
side of this as well i.e. illiterate people trust more on banks to deposit their money, they
do not have market information. Opportunities in stocks or mutual funds. So, they look
bank as their sole and safe alternative.

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TECHNOLOGICAL FACTORS
1

TECHNOLOGY IN BANKS
Technology plays a very important role in banks internal controlmechanisms as well as
services offered by them. It has in fact given new dimensions to the banks as well as
services that they cater to and the banks are enthusiastically adopting new technological
innovations for devising new products and services.

ATM
The latest developments in terms of technology in computer and telecommunication have
encouraged the bankers to change the concept of branch banking to anywhere banking.
The use of ATM and Internet banking has allowed anytime, anywhere banking
facilities.
Automatic voice recorders now answer simple queries, currency accounting machines
makes the job easier and self-service counters are now encouraged.
Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa
card are the two most popular cards used world over. The banks have now started issuing
smartcards or debit cards to be used for making payments. These are also called as
electronic purse. Some of the banks have also started home banking through
telecommunication facilities and computer technology by using terminals installed at
customers home and they can make the balance inquiry, get the statement of accounts,
give instructions for fund transfers, etc. Through ECS we can receive the dividends and
interest directly to our account avoiding the delay or chance of loosing the post.

IT SERVICES & MOBILE BANKING


Today banks are also using SMS and Internet as major tool of promotions and giving
great utility to its customers. For example SMS functions through simple text messages
sent from your mobile. The messages are then recognized by the bank to provide you
with the required information. All these technological changes have forced the bankers to
adopt customer-based approach instead of product-based approach Technology

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advancement has changed the face of traditional banking systems. Technology


advancement has offer 24X7 banking even giving faster and secured service.

CORE BANKING SOLUTIONS


It is the buzzword today and every bank is trying to adopt it is the centralize banking
platform through which a bank can control its entire operation the adoption of core
banking solution will help bank to roll out new product and services.

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INTRODUCTION TO NPA
MEANING OF NPA:
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
1.

Interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan,

2.

The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit(OD/CC),

3.

The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,

4.

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

5.

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, from 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;
1.

Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,

2.

The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC),

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3.

The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,

4.

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

5.

Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

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ASSET CLASSIFICATION:
Assets are classified into following four categories:

1
2

Standard Assets:

Sub-standard Assets

Doubtful Assets
Loss Assets

Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here it is also very important
that in this case the arrears of interest and the principal amount of loan do not exceed 90
days at the end of financial year. If asset fails to be in category of standard asset that is
amount due more than 90 days then it is NPA and NPAs are further need to classify in sub
categories.
Provisioning Norms:
1
From the year ending 31.03.2000, the banks should make a general provision of
2a minimum
of 0.40 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net
NPAs.

The provisions towards Standard Assets need not be netted from gross
advances but shown separately as 'Contingent Provisions against Standard Assets'
under 'Other
Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.

Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
reasonability of the dues:
1) Sub-standard Assets
2) Doubtful Assets
3) Loss Assets

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Sub-standard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained
NPA for a period less than or equal to 12 month. The following features are exhibited by
substandard assets: the current net worth of the borrowers / guarantor or the current
market value of the security charged is not enough to ensure recovery of the dues to the
banks in full; and the asset has well-defined credit weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.
Provisioning Norms:
A general provision of 10 percent on total outstanding should be made without making
any allowance for DICGC/ECGC guarantee cover and securities available.

Doubtful Assets:
A loan classified as doubtful has all the weaknesses inherent in assets that were classified
as sub-standard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently known facts, conditions and values highly
questionable and improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if it remained
in the sub-standard category for 12 months.
Provisioning Norms:

100 percent of the extent to which the advance is not covered by the realisable
value of the security to which the bank has a valid recourse and the realisable value is
estimated on a realistic basis.

In regard to the secured portion, provision may be made on the following basis,
at the rates ranging from 20 percent to 50 percent of the secured portion depending
upon the
period for which the asset has remained doubtful:

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Period for which the advance has been

Provision

considered as doubtful

requirement (%)

Up to one year

20

One to three years

30

More than three years:

60% with effect from March

(1) Outstanding stock of NPAs as on


March 31, 2004.
(2) Advances classified as doubtful

31, 2005.
75% effect from March 31,
2006.

more than three years on or after

100% with effect from March

April 1, 2004.

31, 2007.

Additional provisioning consequent upon the change in the definition of


doubtful assets effective from March 31, 2003 has to be made in phases as under:
1. As on31.03.2003, 50 percent of the additional provisioning requirement on the
assets which became doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.
As on 31.03.2002, balance of the provisions not made during the previous

2.

year, in addition to the provisions needed, as on 31.03.2002.

Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12
months over a four year period commencing from the year ending March 31, 2005,
with a minimum of 20 % each year.

Loss Assets:
A loss asset is one which considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted- although there may be some salvage or
recovery value. Also, these assets would have been identified as loss assets by the bank
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or internal or external auditors or the RBI inspection but the amount would not have been
written-off wholly.
Provisioning Norms:
The entire asset should be written off. If the assets are permitted to remain in the books
for any reason, 100 percent of the outstanding should be provided for.

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TYPES OF NPA:
1. Gross NPA
2. Net NPA

Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made
by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss
assets. It can be calculated with the help of following ratio:
Gross NPAs Ratio =

Gross NPAs

Gross Advances

Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burdenof banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross
and net NPA is quite high.
It can be calculated by following:
Net NPAs = Gross NPAs Provisions
Gross Advances - Provisions

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REASONS FOR AN ACCOUNT BECOMING NPA:


1. Internal factors
2. External factors

Internal factors:
1) Funds borrowed for a particular purpose but not use for the said purpose.
2) Project not completed in time.
3) Poor recovery of receivables.
4) Excess capacities created on non-economic costs.
5) In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6) Business failures.
7) Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc.
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and followups, delaying settlement of payments\ subsidiaries by government bodies etc.,

External factors:
1) Sluggish legal system

1
2
3

Long legal tangles

Changes that had taken place in labour laws


Lack of sincere effort.

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.
5) Failures, nonpayment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
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6) Government policies like excise duty changes, Import duty changes etc.,

The RBI has summarized the finer factors contributing to higher level of NPAs in the
Indian banking sector as:

Diversion of funds, which is for expansion, diversification, modernization,


undertaking new projects and for helping associate concerns. This is also coupled
with recessionary trends and failures to tap funds in capital and debt markets.

Business failures (such as product, marketing etc.), which are due to inefficient
management system, strained labour relations, inappropriate technology/ technical
problems, product obsolescence etc.

Recession, which is due to input/ power shortage, price variation, accidents,


natural calamities etc. The externalization problems in other countries also lead to
growth of
NPAs in Indian banking sector.

4
5
etc.

Time/ cost overrun during project implementation stage.


Governmental policies such as changes in excise duties, pollution control orders

Willful defaults, which are because of siphoning-off funds, fraud/


misappropriation, promoters/ directors disputes etc.

7
Deficiency on the part of banks, viz, delays in release of limits and payments/
subsidies by the Government of India.

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IMPACT OF NPA:
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. Routine payments and dues.

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.

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EARLY SYMPTOMS:
By which one can recognize a performing asset turning in to non-performing
asset
Four categories of early symptoms:1) Financial:

1
2
3
4
5
6
7

Non-payment of the very first installment in case of term loan.


Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.

While monitoring the accounts it is found that partial amount is diverted to sister
concern or parent company.

2) Operational and Physical:


1
information is received that the borrower has either initiated the process of
2If
winding
or are not doing the business.
Overdue up
receivables.
3

Stock statement not submitted on time.

4
non-controllable factor like natural calamities in the city where borrower
5External
conduct
business.
Frequenthis
changes
in plan.
6

Nonpayment of wages.

3) Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.

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1
2

Avoidance of contact with bank.

Problem between partners.

4) Others:

1
2

Changes in Government policies.

Death of borrower.

Competition in the market.

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PREVENTIVE MEASUREMENT FOR NPA:


Early Recognition of the Problem:
Invariably, by the time banks start their efforts to get involved in a revival process, it s
too late to retrieve the situation- both in terms of rehabilitation of the project and
recovery of banks dues. Identification of weakness in the very beginning that is : When
the account starts showing first signs of weakness regardless of the fact that it may not
have become NPA, is imperative. Assessment of the potential of revival may be done on
the basis of a techno-economic viability study. Restructuring should be attempted where,
after an objective assessment of the promoters intention, banks are convinced of a
turnaround within a scheduled timeframe. In respect of totally unviable units as decided
by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover
whatever is possible through legal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent:


Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones who have
intelligent inputs with regard to promoters sincerity, and capability to achieve
turnaround. Based on this objective assessment, banks should decide as quickly as
possible whether it would be worthwhile to commit additional finance.
In this regard banks may consider having Special Investigation of all financial
transaction or business transaction, books of account in order to ascertain real factors that
contributed to sickness of the borrower. Banks may have penal of technical experts with
proven expertise and track record of preparing techno-economic study of the project of
the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route
the additional funding through the controlling offices in deserving cases, and help avert
many accounts slipping into NPA category.

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Timeliness and Adequacy of response:


Longer the delay in response, grater the injury to the account and the asset. Time is a
crucial element in any restructuring or rehabilitation activity. The response decided on the
basis of techno-economic study and promoters commitment, has to be adequate in terms
of extend of additional funding and relaxations etc. under the restructuring exercise. The
package of assistance may be flexible and bank may look at the exit option.

Focus on Cash Flows:


While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading picture.
Appraisal for fresh credit requirements may be done by analyzing funds flow in
conjunction with the Cash Flow rather than only on the basis of Funds Flow.

Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in
tackling adverse business conditions is a very important aspect that affects a borrowing
units fortunes. A bank may commit additional finance to an aling unit only after basic
viability of the enterprise also in the context of quality of management is examined and
confirmed. Where the default is due to deeper malady, viability study or investigative
audit should be done it will be useful to have consultant appointed as early as possible
to examine this aspect. A proper techno- economic viability study must thus become the
basis on which any future action can be considered.

Multiple Financing:
1

During the exercise for assessment of viability and restructuring, a Pragmatic


and unified approach by all the lending banks/ FIs as also sharing of all relevant
information on the borrower would go a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.

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In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part of the borrowers to
switch
bankers once they default, for fear of getting their cash flows forfeited), and ensure
that such cash flows are used for working capital purposes. Toward this end, there
should be regular flow of information among consortium members. A bank, which is
not part of the consortium, may not be allowed to offer credit facilities to such
defaulting clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit Information
Bureau of India Ltd.(CIBIL) may be very useful for meaningful information
exchange on defaulting borrowers once the setup becomes fully operational.

In a forum of lenders, the priority of each lender will be different. While one set
of lenders may be willing to wait for a longer time to recover its dues, another lender
may have a much shorter timeframe in mind. So it is possible that the letter categories
of lenders may be willing to exit, even a t a cost by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into
account.

Corporate Debt Restructuring mechanism has been institutionalized in 2001


to provide a timely and transparent system for restructuring of the corporate debt of
Rs.
20 crore and above with the banks and FIs on a voluntary basis and outside the legal
framework. Under this system, banks may greatly benefit in terms of restructuring of
large standard accounts (potential NPAs) and viable sub-standard accounts with
consortium/multiple banking arrangements.

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PROCEDURES FOR NPA IDENTIFICATION AND


RESOLUTION IN INDIA:
1. Internal Checks and Control
Since high level of NPAs dampens the performance of the banks identification of
potential problem accounts and their close monitoring assumes importance. Though most
banks have Early Warning Systems (EWS) for identification of potential NPAs, the actual
processes followed, however, differ from bank to bank. The EWS enable a bank to
identify the borrower accounts which show signs of credit deterioration and initiate
remedial action. Many banks have evolved and adopted an elaborate EWS, which allows
them to identify potential distress signals and plan their options beforehand, accordingly.
The early warning signals, indicative of potential problems in the accounts, viz. persistent
irregularity in accounts, delays in servicing of interest, frequent devolvement of L/Cs,
units' financial problems, market related problems, etc. are captured by the system. In
addition, some of these banks are reviewing their exposure to borrower accounts every
quarter based on published data which also serves as an important additional warning
system. These early warning signals used by banks are generally independent of risk
rating systems and asset classification norms prescribed by RBI.
The major components/processes of a EWS followed by banks in India as brought out by
a study conducted by Reserve Bank of India at the instance of the Board of Financial
Supervision are as follows:
1
2
3
4

Designating Relationship Manager/ Credit Officer for monitoring account/s


Preparation of `know your client' profile
Credit rating system
Identification of watch-list/special mention category accounts

Monitoring of early warning signals

Relationship Manager/Credit Officer


The Relationship Manager/Credit Officer is an official who is expected to have complete
knowledge of borrower, his business, his future plans, etc. The Relationship Manager has
to keep in constant touch with the borrower and report all developments impacting the

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borrowable account. As a part of this contact he is also expected to conduct scrutiny and
activity inspections. In the credit monitoring process, the responsibility of monitoring a
corporate account is vested with Relationship Manager/Credit Officer.

Know your client' profile (KYC)


Most banks in India have a system of preparing `know your client' (KYC) profile/credit
report. As a part of `KYC' system, visits are made on clients and their places of
business/units. The frequency of such visits depends on the nature and needs of
relationship.

Credit Rating System


The credit rating system is essentially one point indicator of an individual credit exposure
and is used to identify measure and monitor the credit risk of individual proposal. At the
whole bank level, credit rating system enables tracking the health of banks entire credit
portfolio. Most banks in India have put in place the system of internal credit rating. While
most of the banks have developed their own models, a few banks have adopted credit
rating models designed by rating agencies. Credit rating models take into account various
types of risks viz. financial, industry and management, etc. associated with a borrowable
unit. The exercise is generally done at the time of sanction of new borrowable account
and at the time of review renewal of existing credit facilities.

Watch-list/Special Mention Category


The grading of the bank's risk assets is an important internal control tool. It serves the
need of the Management to identify and monitor potential risks of a loan asset. The
purpose of identification of potential NPAs is to ensure that appropriate preventive /
corrective steps could be initiated by the bank to protect against the loan asset becoming
non-performing. Most of the banks have a system to put certain borrowable accounts
under watch list or special mention category if performing advances operating under
adverse business or economic conditions are exhibiting certain distress signals. These
accounts generally exhibit weaknesses which are correctable but warrant banks' closer

attention. The categorization of such accounts in watch list or special mention category
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provides early warning signals enabling Relationship Manager or Credit Officer to


anticipate credit deterioration and take necessary preventive steps to avoid their slippage
into non performing advances. Early Warning Signals It is important in any early warning
system, to be sensitive to signals of credit deterioration. A host of early warning signals
are used by different banks for identification of potential NPAs. Most banks in India have
laid down a series of operational, financial, transactional indicators that could serve to
identify emerging problems in credit exposures at an early stage. Further, it is revealed
that the indicators which may trigger early warning system depend not only on default in
payment of installment and interest but also other factors such as deterioration in
operating and financial performance of the borrower, weakening industry characteristics,
regulatory changes, general economic conditions, etc. Early warning signals can be
classified into five broad categories viz.
1) Financial
2) Operational
3) Banking
4) Management and
5) External factors.

Financial related warning signals generally emanate from the borrowers' balance sheet,
income expenditure statement, statement of cash flows, statement of receivables etc.
Following common warning signals are captured by some of the banks having relatively
developed EWS.

1 warning signals
Financial
Persistent irregularity in the account
2
3
4
5
6

Default in repayment obligation


Devolvement of LC/invocation of guarantees
Deterioration in liquidity/working capital position
Substantial increase in long term debts in relation to equity
Declining sales

Operating losses/net losses

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1
2
3
4
5
6
7
8

Rising sales and falling profits

Disproportionate increase in overheads relative to sales


Rising level of bad debt losses Operational warning signals
Low activity level in plant
Disorderly diversification/frequent changes in plan
Nonpayment of wages/power bills
Loss of critical customer/s
Frequent labor problems

Evidence of aged inventory/large level of inventory

1
Management
related warning signals
Lack of co-operation from key personnel
2
3
4
5
6

Change in management, ownership, or key personnel


Desire to take undue risks
Family disputes
Poor financial controls
Fudging of financial statements

Diversion of funds

1 related signals
Banking
Declining bank balances/declining operations in the account
2
3
4
5

Opening of account with other bank


Return of outward bills/dishonored cheques
Sales transactions not routed through the account
Frequent requests for loan

Frequent delays in submitting stock statements, financial data, etc.

1relating to external factors


Signals
Economic recession
2

Emergence of new competition

Emergence of new technology

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1
2

Changes in government / regulatory policies

Natural calamities

2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various
resolution mechanisms introduced in the recent past which include the SRFAESI Act, one
time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs.
From the data available of Public Sector Banks as on March 31, 2003, there were 1,522
numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50
million in all the public sector banks in India. The total gross value of these NPAs
amounted to Rs. 215 billion. The total number of resolution approaches (including cases
where action is to be initiated) is greater than the number of NPAs, indicating some
double counting. As can be seen, suit filed and BIFR are the two most common
approaches to resolution of NPAs in public sector banks. Rehabilitation has been
considered/ adopted in only about 13% of the cases. Settlement has been considered only
in 9% of the cases. It is likely to have been adopted in even fewer cases. Data available
on resolution strategies adopted by public sector banks suggest that Compromise
settlement schemes with borrowers are found to be more effective than legal measures.
Many banks have come out with their own restructuring schemes for settlement of NPA
accounts. State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information
Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
information between banks and FIs for curbing the growth of NPAs incorporated credit
Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of
CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs.
As per the recommendations of the working group, Banks and FIs are now required to
submit the list of suit-filed cases of Rs. 10 million and above and suit filed cases of
willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share
this information with commercial banks and FIs so as to help them minimize adverse
selection at appraisal stage. The CIBIL is in the process of getting operationalised.

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3. Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default and diversion
and siphoning of funds. As per these guidelines a willful default occurs when a borrower
defaults in meeting its obligations to the lender when it has capacity to honor the
obligations or whenfunds have been utilized for purposes other than those for which
finance was granted. The list of willful defaulters is required to be submitted to SEBI and
RBI to prevent their access to capital markets. Sharing of information of this nature helps
banks in their due diligence exercise and helps in avoiding financing unscrupulous
elements. RBI has advised lenders to initiate legal measures including criminal actions,
wherever required, and undertake a proactive approach in change in management, where
appropriate.

4. Legal and Regulatory Regime


Debt Recovery Tribunals
DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions
Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal
(DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with
competence to entertain cases referred to them, by the banks and FIs for recovery of debts
due to the same. The order passed by a DRT is appealable to the Appellate Tribunal but
no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the
amount due from him as determined by it. However, the Affiliate Tribunal may, for
reasons to be received in writing, waive or reduce the amount of such deposit. Advances
of Rs. 1 million and above can be settled through DRT process. An important power
conferred on the Tribunal is that of making an interim order (whether by way of
injunction or stay) against the defendant to debar him from transferring, alienating or
otherwise dealing with or disposing of any property and the assets belonging to him
within prior permission of the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticized in respect of recovery made considering the size of NPAs in
the Country. In general, it is observed that the defendants approach the High Country
challenging the verdict of the Appellate Tribunal which leads to further delays in
recovery. Validity of the Act is often challenged in the court which hinders the progress
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of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of
infrastructure.

Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987
helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counseling between the
parties and to reduce burden on the court, especially for small loans. Cases involving suit
claims up to Rs. l million can be brought before the Lokadalat and every award of the
Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any
court against the award made by the Lokadalat. Several people of particular localities
various social organizations are approaching Lokadalats which are generally presided
over by two or three senior persons including retired senior civil servants, defense
personnel and judicial officers. They take up cases which are suitable for settlement of
debt for certain consideration. Parties are heard and they explain their legal position.
They are advised to reach to some settlement due to social pressure of senior bureaucrats
or judicial officers or social workers. If the compromise is arrived at, the parties to the
litigation sign a statement in presence of Lokadalats which is expected to be filed in court
to obtain a consent decree. Normally, if such settlement contains a clause that if the
compromise is not adhered to by the parties, the suits pending in the court will proceed in
accordance with the law and parties will have a right to get the decree from the court. In
general, it is observed that banks do not get the full advantage of the Lokadalats. It is
difficult to collect the concerned borrowers willing to go in for compromise on the day
when the Lokadalat meets. In any case, we should continue our efforts to seek the help of
the Lokadalat.

Enactment of SRFAESI Act


The "The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory
framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition
to asset reconstruction and ARCs, the Act deals with the following largely aspects,

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1
2

Securitization and Securitization Companies

Enforcement of Security Interest

Creation of a central registry in which all securitization and asset reconstruction

transactions as well as any creation of security interests has to be filed.


The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has
issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April
2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance
Notes cover various aspects relating to registration, operations and funding of ARCS and
resolution of NPAs by ARCS. The RBI has also issued guidelines to banks and financial
institutions on issues relating to transfer of assets to ARCS, consideration for the same
and valuation of instruments issued by the ARCS. Additionally, the Central Government
has issued the security enforcement rules ("Enforcement Rules"), which lays down the
procedure to be followed by a secured creditor while enforcing its security interest
pursuant to the Act. The Act permits the secured creditors (if 75% of the secured creditors
agree) to enforce their security interest in relation to the underlying security without
reference to the Court after giving a 60 day notice to the defaulting borrower upon
classification of the corresponding financial assistance as a non-performing asset. The
Act permits the secured creditors to take any of the following measures:

Take over possession of the secured assets of the borrower including right to
transfer by way of lease, assignment or sale;

Take over the management of the secured assets including the right to transfer
by way of lease, assignment or sale;

Appoint any person as a manager of the secured asset (such person could be the
ARC if they do not accept any pecuniary liability); and

Recover receivables of the borrower in respect of any secured asset which has
been transferred. After taking over possession of the secured assets, the secured
creditors are required to obtain valuation of the assets. These secured assets may
be sold by using any of the following routes to obtain maximum value.

5 By obtaining quotations from persons dealing in such assets or otherwise


in buying
assets;
6interested
By inviting
tendersthefrom
the public;
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1
2

By holding public auctions; or


By private treaty.

Lenders have seized collateral in some cases and while it has not yet been possible to
recover value from most such seizures due to certain legal hurdles, lenders are now
clearly in a much better bargaining position vis-a-vis defaulting borrowers than they were
before the enactment of SRFAESI Act. When the legal hurdles are removed, the
bargaining power of lenders is likely to improve further and one would expect to see a
large number of NPAs being resolved in quick time, either through security enforcement
or through settlements. Under the SRFAESI Act ARCS can be set up under the
Companies Act, 1956. The Act designates any person holding not less than 10% of the
paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a
controlling interest in, being the holding company of or being in control of the ARC. The
SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned
fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC should
maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk
weighted assets. ARCS have been granted a maximum realization time frame of five
years from the date of acquisition of the assets. The Act stipulates several measures that
can be undertaken by ARCs for asset reconstruction. These include:
1
2
3
4

Enforcement of security interest;


Taking over or changing the management of the business of the borrower;
The sale or lease of the business of the borrower;
Settlement of the borrowers' dues; and

Restructuring or rescheduling of debt.

ARCS are also permitted to act as a manager of collateral assets taken over by the lenders
under security enforcement rights available to them or as a recovery agent for any bank
or financial institution and to receive a fee for the discharge of these functions. They can
also be appointed to act as a receiver, if appointed by any Court or DRT.

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Source: http://www.rbi.org.in

Institution of CDR Mechanism


The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for
resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism
instituted in India is broadly along the lines of similar systems in the UK, Thailand,
Korea and Malaysia. The objective of the CDR mechanism has been to ensure timely and
transparent restructuring of corporate debt outside the purview of the Board for Industrial
and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is
intended to preserve viable corporate affected by certain internal/external factors and
minimize losses to creditors/other stakeholders through an orderly and coordinated
restructuring programme. RBI has issued revised guidelines in February 2003 with
respect to the CDR mechanism. Corporate borrowers with borrowings from the banking
system of Rs. 20crores and above under multiple banking arrangement are eligible under
the CDR mechanism. Accounts falling under standard, sub-standard or doubtful
categories can be considered for restructuring. CDR is a nonstatutory mechanism based
on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in
aligning repayment obligations for bankers with the cash flow projections as reassessed at
the time of restructuring. Therefore it is critical to prepare a restructuring plan on the
lines of the expected business plan along with projected cash flows.

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The CDR process is being stabilized. Certain revisions are envisaged with respect to the
eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign
banks are not members of the CDR forum, and it is expected that they would be signing
the agreements shortly. However they attend meetings. The first ARC to be operational in
India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum.
Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in
multiple lender arrangements and to increase transparency in the process. While in the
RBI guidelines it has been recommended to involve independent consultants, banks are
so far resorting to their internal teams for recommending restructuring programs.

Compromise Settlement Schemes


1) One Time Settlement Schemes
NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The
scheme also covers NPAs classified as sub-standard as on 31st March 2000, which
have subsequently become doubtful or loss. All cases on which the banks have
initiated action under the SRFAESI Act and also cases pending before
Courts/DRTs/BIFR,

subject

to

consent

decree

being

obtained

from

the

Courts/DRTs/BIFR are covered. However cases of willful default, fraud and


malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores,
the minimum amount that should be recovered should be 100% of the outstanding
balance in the account.
2) Negotiated Settlement Schemes
The RBI/Government has been encouraging banks to design and implement policies
for negotiated settlements, particularly for old and unresolved NPAs. The broad
framework for such settlements was put in place in July 1995. Specific guidelines
were issued in May 1999to public sector banks for one-time settlements of NPAs of
small scale sector. This scheme was valid until September 2000 and enabled banks to
recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July
2000 for recovery of NPAs of Rs. 50 millionand less. These guidelines were effective
until June 2001 and helped banks recover Rs. 26 billion.

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Increased Powers to NCLTs and the Proposed Repeal of BIFR


In India, companies whose net worth has been wiped out on account of accumulated
losses come under the purview of the Sick Industrial Companies Act (SICA) and need to
be referred to BIFR. Once a company is referred to the BIFR (and even if an enquiry is
pending as to whether it should be admitted to BIFR), it is afforded protection against
recovery proceedings from its creditors. BIFR is widely regarded as a stumbling block in
recovering value for NPAs. Promoters systematically take refuge in SICA - often there is
a scramble to file a reference in BIFR so as to obtain protection from debt recovery
proceedings. The recent amendments to the Companies Act vest powers for revival and
rehabilitation of companies with the National Company Law Tribunal (NCLT), in place
of BIFR, with modifications to address weaknesses experienced under the SICA
provisions. The NCLT would prepare a scheme for reconstruction of any sick company
and there is no bar on the lending institution of legal proceedings against such company
whilst the scheme is being prepared by the NCLT. Therefore, proceedings initiated by any
creditor seeking to recover monies from a sick company would not be suspended by a
reference to the NCLT and, therefore, the above provision of the Act may not have much
relevance any longer and probably does not extend to the tribunal for this reason.
However, there is a possibility of conflict between the activities that may be undertaken
by the ARC, e.g. change in management, and the role of the NCLT in restructuring sick
companies. The Bill to repeal SICA is currently pending in Parliament and the process of
staffing of NCLTs has been initiated

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ANALYSIS
OVERALL ANALYSIS:
Scheduled Commercial banks (SCBs) in India remained robust against the backdrop of
global financial crisis. It is noteworthy that contrary to the trend in some advanced countries,
the leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting the
strength of the Indian banking system. However, the Indian banking sector was not
completely insulated from the effects of the slowdown of the India economy.

The consolidated balance sheets of SCBs, expanded by 21.2 per cent as at end-March 2009
as compared with 25.0 per cent in the previous year. While the balance sheet of public sector
banks maintained their growth momentum, the private sector banks and foreign banks
registered a deceleration in growth rate.

During 2008-09, the growth rate of banks lending to industries, personal loans and services
sector witnessed a deceleration, while growth rate of banks lending to agriculture and allied
activities increased substantially. Overall, the incremental CreditDeposit (C-D) ratio
declined sharply reflecting the slowdown in credit growth, as corporates deferred their
investments against the backdrop of widespread uncertainty.

It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in
India has remained high reflecting the strength of the Indian banking system. For instance, as
observed by the World Bank (2009)5, the leverage ratio of banks in the UK witnessed a
decline throughout 1990s, which was accentuated after 2000 to reach a level of about 3 per
cent by 2008 from around 5 per cent in the 1990s. On the other hand, the leverage ratio for
Indian banks has risen from about 4.1 per cent in March 2001 to reach a level of 6.3 per cent
by March 2009.

The balance sheets of public sector banks maintained their growth momentum, the private
sector banks and foreign banks registered a deceleration in growth rate. Furthermore, the old
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private sector banks, which had been registering a significantly lower growth rate than their
newer counterparts in the recent past, managed a better performance this year.

NET NPAs OF BANKS: 2000-01 to 2008-09

Net NPA
30,000
25,000
20,000
15,000

10,000

Public Sector
Banks
Private Sector
Banks
Foreign Sector
Banks

5,000
0

Graph: 1 Source: Annexure Table 2

Interpretation:
1

From the above it is observed that net NPA of public sector banks has a declining
trend up to year 2005-06 and after that it has a rising trend till 2008-09. The same
trend has been observed in both Private and Foreign Sector Banks. The declining
trend from 2003 to 2006 of NPA was due to the implementation of Securitization Act
(2002).

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But the increase in NPA was increasing in absolute term, as NPA as per percent
of advance shows a declining trend in Public Sector Banks while that of in Private
and
Foreign Sector Banks shows an upward trend that is increase in NPA as per percent of
advance after 2006.

The increase in NPA as per percent of advance of Private and Foreign Sector
Banks is because of they have a major proportion of lending in non- priority sectors
includes
Medium and large scale industries which was highly affected by global financial
crisis.

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SOUNDNESS INDICATORS:
1. Capital Quality
2. Asset Quality

Capital Quality:
A sound and efficient banking system is end product for maintaining financial stability.
Therefore, considerable emphasis has been placed on strengthening the capital
requirements in recent years. The Capital to Risk-weighted Assets Ratio (CRAR) of
SCBs, a measure of the capacity of the banking system to absorb unexpected losses,
improved further to 13.2 per cent at end-March 2009 from 13.0 per cent at end-March
2008. The asset quality of banks in India has been improving over the past few years as
reflected in the declining NPA to advances ratio. It is especially noteworthy that
notwithstanding the pressures of a slowdown in the economy and an atmosphere of
uncertainty, the net NPA to net advances ratio increased only marginally to 1.1 per cent as
at end March 2009 from 1.0 per cent as at end March 2008. Significantly, gross NPA to
gross advances ratio remained constant at 2.3 per cent. Thus, in terms of the two crucial
soundness indicators, viz., capital and asset quality, the Indian banking sector has
exhibited resilience amidst testing times.

Graph: 2

Source: http://www.rbi.org.in

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Asset Quality:
Movements in Non-performing Assets Bank Group-wise

Public

Old

New

State

Private

Private

Sector

Nationalized

Bank

Sector

Sector

Foreign

Banks

Banks

Group

Banks

Banks

Banks

Gross NPAs
As at end-March 2008

40089

23410

15303

2557

9901

2872

31338

17822

12879

2094

10520

8430

26271

15863

9829

1579

6510

2954

1514

45156

25368

18352

3072

13911

6833

As at end-March 2008

17726

8245

8398

740

4640

1247

As at end-March 2009

21033

9339

10745

1165

6253

2973

End-March 2008

2.2

2.1

2.6

2.3

2.4

1.8

End-March 2009

1.8

2.5

2.3

2.8

End-March 2008

0.8

0.7

1.4

0.7

1.1

0.9

End-March 2009

0.7

0.7

1.5

0.9

1.3

1.7

Addition during the


year
Recovered during the
year
Written off during the
year
As at end-March 2009
Net NPAs

Gross NPAs/Gross
Advances Ratio

Net NPAs/Net
Advances Ratio

Source: http://www.rbi.org.in
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Interpretation:
1

The trend of improvement in the asset quality of banks continued during the
year. Indian banks recovered a higher amount of NPAs during 2008-09 than that
during the
previous year. Though the total amount recovered and written-off at Rs.38,828 in
2008-09 was higher than Rs.28,283 crore in 2007-08, it was lower than fresh addition
of NPAs (Rs.52,382 crore) during the year. As a result, the gross NPAs of SCBs
increased across all the bank groups. In this context, it may be noted that in the
present context of financial turmoil, some slippage in NPAs could be expected.

Nevertheless, it may be noted that this slippage was moderate as compared to


the problems faced by banks all over the world. The hardening of interest rates might
have made the repayment of loans difficult for some borrowers, resulting in some
increase in NPAs in this sector. It may be noted that the increase in gross NPAs was
more noticeable in respect of new private sector and foreign banks, which have been
more active in the real estate and housing loans segments.

Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to
gross advances of foreign banks increased significantly during the year, while that of
private sector banks increased marginally. The NPAs ratio of all other bank groups
declined. While net NPAs to net advances ratio of all the banks increased over the
previous year except that of nationalized banks.

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FREQUENCY DISTRIBUTION OF BANKS ACCORDING TO


LEVEL OF NPAs:
Frequency Distribution of Banks according to level of NPAs
100%
90%
80%
70%
60%
50%

> 10%

40%

5% to 10%

30%

2% to 5%

20%

< 2%

200607

Graph: 3

200708

FB

FB

PSB
Pvt.SB

FB

PSB
Pvt.SB

FB

PSB
Pvt.SB
200506

PSB
Pvt.SB

200405

FB

0%

PSB
Pvt.SB

10%

200809

Source: Annexure Table 1

Interpretation:
1

In the year 2004-05, the Public sector banks (PSBs) had around 60% of their NPA
profile in the < 2% category which increased 75% in 2005-06, 90% in 2006-07 - 200708 &
100% in 2008-09. PSBs 30% NPA profile in the year 2004-05 belongs to 2% to 5%
category which reduced over the years and has been totally eliminated in 2008-09. PSBs
did not have any of its banks in > 10% category.

Private sector banks (Pvt.SBs) was having the worst situation in 2004-05 where 50%
of its bank was in 2% to 5% category. While this ratio is declining over the years 2007-08
this is compensated by the rise in number of banks in < 2%. 5 Pvt. SBs banks were in

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5% to10% category in 2004-05 which was totally eliminated in 2007-08. But due to poor
financial condition in 2008-09, there is increase in number of banks in higher NPA
category.

Foreign banks (FB) were comparatively in good position compare to private sector
banks in the initial years. 70% of its NPA profile belongs to < 2% category. The number
of
banks increased in < 2% category. So among all three sectors, public sector banks
managed to reduce NPAs over the years.

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COMPOSITION OF NPAs OF BANK SECTOR WISE:

COMPOSITION OF NPAs OF PUBLIC


SECTOR
BANKS - 2001 TO 2009
Amount
Rs. in Crore

30000
25000
20000
15000
10000
5000
0
Priority Sector
Non-priority
Sector
Public Sector

Graph: 4.1

2001 2002 2003 2004 2005 2006 2007 2008 2009


24156 25150 24939 23841 21926 22374 22954 25287 24318
27307 28405 26781 25698 23249 18664 15158 14163 19251
1711

903

1087

610

444

341

490

299

474

Source: Annexure Table 3

Interpretation:
1

From the above chart it is observed that public sector category is the least
contributor towards the NPA of public sector bank. In the initial years from 2001 to
2005, Nonpriority sector contributes more towards NPA than priority sector. But in later years
from 2006 its other way round, where priority sector contributes more than Nonpriority sector.

Priority sector consist of advance given to agriculture, SSI, & other priority
sector advances. Non priority sector consist of large industries, medium industries &
other
non priority sectors.

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In case of priority sector, it started falling from 2003 up to 2005 over previous
year. But in the later years i.e. from 2006 there is rise NPA because of defaults on the
loan
given to the farmers. It was highest in 2008. In order to reduce that, waiver package
of Rs. 60,000 crore was announced in union budget of 2008. It may also be noted that
the increase in NPAs was more noticeable in priority sector, which have been more active in
the real estate and housing loans segments.

NPA in non priority sector is reducing constantly from 2002 to 2008 i.e.
by
50%.Though the advance given to non-priority sector was higher than priority sector, NPAs
of non-priority sector is comparatively.

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COMPOSITION OF NPAs OF PRIVATE


SECTOR
BANKS - 2001 TO 2009

Amountn i Rs. Crore

14000
12000
10000
8000
6000
4000
2000
0
Priority Sector
Non-Priority
Sector
Public Sector

Graph: 4.2

2001
1835

2002
2546

2003
2445

2004
2482

2005
2188

2006
2284

2007
2884

2008
3419

4452

9090

9327

7796

6569

5541

6353

9558 13172

123

31

95

75

42

2009
3640

75

Source: Annexure Table 4

Interpretation:
1

From the above graph it is observed that public sector contributes very
negligible towards the overall NPA of foreign banks. The major reason for this is that
on an
average only 3.5% of total advance is made towards public sector category.

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.

3
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.
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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.

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Amount in Rs.e Cror

COMPOSITION OF NPAs OF
FORIEGN BANKS - 2007 TO 2009
7000
6000
5000
4000
3000
2000
1000
0
Priority Sector
Non-Priority
Sector
Public Sector

Graph: 4.3

2007
331

2008
402

2009
649

2,120

2712.0

6506

Source: Annexure Table 5

Interpretation:
1

It is observed from the chart there is no NPA in public sector category in all the
three years because there was no advance made to public sector category.

Non-priority sector contributes highest towards the NPA of foreign banks


because non-priority sector constitute approximately 65% of the total advances made
by
foreign banks. So NPA will also be more in non-priority sector.

NPA is low in priority sector because very few advances are made in priority
sector & that too are made to SSI.

The advances are made to medium & large scale industries in non-priority
sector. As foreign banks are having global presence they are more affected by the
global
meltdown & financial crisis of 2008. So its effect is seen by sudden rise in NPA in
2009.

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COMPARISON OF NET NPA OF OLD AND NEW PRIVATE


SECTOR BANKS: 2000-01 to 2008-09

NET NPA
7,000
6,000
5,000
4,000

3,000

Old
private
sector
banks
New
private
sector
banks

2,000
1,000
0

Graph: 5 Source: Annexure Table 6

Interpretation:
1

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.

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NET NPAs AS PERCENTAGE OF ADVANCES OF BANKS:

Net NPAs/Net Advances


NPA % of Advance
as

2.5
2
1.5
1
0.5
0

2004-05

2005-06

2006-07

2007-08

2008-09

Public
Sector

2.1

1.3

1.1

0.8

0.7

Private
Sector

1.9

1.2

1.5

Foriegn
Sector

0.9

0.8

0.9

1.7

Graph: 6

Source: Annexure Table 7

Interpretation:
1

From the above it is clearly observed that only public sector banks have
succeeded in reducing net NPA against net advances made over the period of time. It
is constantly
reducing each year, whereas in case of private sector bank it has reduced in 2005-06
then it got stable and started rising from 2007-08 onwards.

In case of foreign banks it is fluctuating over the years. Public sector banks
have been able to reduce this ratio by 66.7% from 2005 to 2009. Public sector banks
as a result
of stringent checks & control able to manage low ratio compare to other banks. In the
year 2008-09 the ratio increased by 89% for foreign banks where the foreign banks
were badly affected by the global meltdown. Even for private sector bank the ratio
increased by 25% in 2009 due to financial crises & also for public sector bank the
reduction in 2009 was the lowest i.e. 12.5%

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CLASSIFICATION OF LOAN ASSET OF BANKS:

Classification of Loan Asset of Public


Sector
Banks
Standard
Asset

0.9
4.3

0.7
3.4

Sub-Standard
Asset

0.5
2.3

0.3
1.5

Doubtful
Asset

Loss Asset

0.2

0.2

1.0

0.9

97.2

97.7

97.9

2007

2008

1.0

1.1

1.0

1.1
1.2

2.6
94.6

96.1

92.2

2004

Graph: 7.1

2005

2006

2009

Source: Annexure Table 8

Interpretation:
1

The above frequency distribution chart states that standard asset is increasing
every year & on the contrary all the other types of asset i.e. Sub-standard, Doubtful &
Loss
Asset are decreasing every asset. This proves that public sector banks have succeeded
in reducing NPA over the years.

Public sector banks have taken various measures to reduce NPA also convert
Sub-Standard, Doubtful & loss asset into the above category Standard, Sub-Standard
&
Doubtful asset. The rise in sub standard ratio has major proportion indicates that there
is a high scope of up gradation or improvement in NPA recovery in initial stage
because it will be very easy to recover the loan as minimum duration of default.

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Classification of Loan Asset of Private


Sector
Banks
Standard
Asset
0.5

3.6

0.4
2.5

Sub-Standard
Asset
0.3

Doubtful
Asset

0.2
1.0

0.3
0.9

1.1

1.5

97.4

97.6

97.3

2006

2007

2008

1.5
0.8

Loss Asset
0.3
1.0
2.0

1.0
1.8
96.1

96.8

94.2

2004

Graph: 7.2

2005

2009

Source: Annexure Table 9

Interpretation:
1

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-Standard asset is highest among all the year. In 2009 percentage of
standard asset has reduced by 0.5% which is compensated by increase in SubStandard & doubtful assets. This increase is due to interest & 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.

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Classification of Loan Asset of Foriegn


Banks
Standard
Asset

1.5

Sub-Standard
Asset

0.8
1.3

1.8

0.5
0.7
1.0

Doubtful
Asset

Loss Asset

0.4
0.5

0.2
0.5

1.1

1.2

0.9

0.2
0.6

3.5

1.6
97.0

97.9

98.
1

98.1
95.7

95.2

2004

Graph: 7.3

2005

2006

2007

2008

2009

Source: Annexure Table 10

Interpretation:
1

The proportion of Standard Asset is increasing from 2004 and started getting
stable in 2007 & 2008. But it has fallen in 2009. The proportion of other three types
of assets
is falling over the years, but in 2009 there is great increase in the proportion of SubStandard asset which is as a result of decrease in proportion of Standard asset. This
increase in Sub-Standard asset is because of interest & principle amount unpaid, due
to poor global conditions, for the loan provided in a 2008. The interest & principle
amount remained unpaid for period of more than 180 days but less than 1 year.

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COMPARISON OF NET PROFIT AND NET NPA OF BANKS:

Comparison of Net Profit And Net


NPA Public Sector Banks
40000

Amou i R Crore
nt
n s.

35000
30000
25000
20000
15000
10000
5000
0
2000-01

200102

200203

200304

200405

200506

20062008072007-08
09

Net NPA 27977 27958 24877 19335 16904 14566 15145 17726 21033
Net
Profit

Graph: 8.1

4317

8301

12295 16546 15784 16539 20152 26592 34394

Source: Annexure Table 11

Interpretation:
1

It is observed from the above graph there exist no particular relationship


between net profit & net NPA of public sector banks. There is constant increase in net
profit from
2000-01 to 2003-04 & from 2005-06 to 2008-09. The average of percentage increase
in net profit YOY basis comes to 32.3%

On the contrary public sector banks have managed to reduce net NPA
constantly from 2001-02 to 2005-06. Although the percentage of reduction over the
previous year is
low compared to percentage of rise in profit over previous year. The average of
percentage decrease in net NPA YOY basis comes to 2.5%

N.R. INSTITUTE OF BUSINESS MANAGEMENT

87

Comparison of Net Profit And Net


NPA Private Sector Banks
12000

Amou in Crore
nt Rs.

10000
8000
6000
4000
2000
0
2000-01
Net NPA

2001022002-03

2003042004-05

2005062006-072007-08

200809

3700

6676

3963

4128

4212

3171

4028

5380

7418

Net Profit 1142

1779

2958

3481

3533

4975

6465

9522

10868

Graph: 8.2

Source: Annexure Table 12

Interpretation:
1

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%.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

88

Comparison of Net Profit And Net


NPA Foreign Banks
9000

Amou i R Crore
nt n s.

8000
7000
6000
5000
4000
3000
2000
1000
0
2000-01

2001022002-03

2003042004-05

2005062006-072007-08

200809

Net NPA

785

920

903

933

639

808

927

1247

2973

Net Profit

945

1492

1824

2243

3098

4109

5343

7544

8459

Graph: 8.3

Source: Annexure Table 13

Interpretation:
1

The above line graph shows net profit of foreign banks is increasing throughout
the period from 2000-01 to 2008-09. The average of percentage increase in net profit
YOY basis comes to 32%. Whereas in case of net profit there is no continuous
upward or downward movement.

But overall there is rise in net NPA of foreign banks. The average of percentage
increase in net NPA YOY basis comes to approximately 25%. So this shows there is
positive relationship between net NPA & net profit of foreign banks.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

89

NPA TO ADVANCE RATIO OF BANK:

Comparison of NPA with AdvancesPublic Sector Banks


6
5.5
5
Gross
NPAs/Gross
Advances

4
3.6
3

2.7
2.1

1.3

1.1

2.2

0.8

0.7

Net NPAs/Net
Advances

0
2004-05

2005-06

2006-07

2007-08

2008-09

Graph: 9.1 Source: Annexure Table 14

Interpretation:
1

The percentage in reduction of gross NPA to gross advances ratio is decreasing


year on year i.e. it has reduced by 34.5% from 2004-05 to 2005-06. Similarly it has
reduced by 25%, 18.5% & 9% respectively from 2005-06 to 2006-07, from 2006-07
to 2007-08 & 2007-08 to 2008-09.

While in case of net NPA to net advances ratio, the percentage change is
varying. It has reduced by 38% from 2004-05 to 2005-06. Similarly it has reduced by
15.38%,
27.27% & 12.5% respectively from 2005-06 to 2006-07, from 2006-07 to 2007-08 &
2007-08 to 2008-09.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

90

The above calculated figure states that the provisions made for NPA & other
items like interest due but not recovered, part payment received and kept in suspense
account, etc which is deducted from Gross NPA is changing over the years. It is not
decreasing in same proportion as gross NPA.

The difference in gross NPA/ gross advances & net NPA/net advances is
highest in 2005-06 [67%] & lowest in 2006-07 [59%]. In other years it near to 63%.
This gap
is highest in 2006 because in 2006 advances have increased tremendously over 2005.
Due to which NPA also increased & so provisions also increased.

The line graph clearly states that the ratio of gross NPA to gross advances & net
NPA to net advances is decreasing over the years. In all the public sector bank has
succeeded to reduce the non performing assets against the advances made over the
years.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

91

Comparison of NPA with


AdvancesPrivate Sector
Banks
4

3.8

3.5
3

2.9
2.
5

2.5

2.5
2.2

2
1.9
1.5

1.5

1.2

Gross
NPAs/Gross
Advances
Net NPAs/Net
Advances

0.5
0
2004-05

2005-06

2006-07

2007-08

2008-09

Graph: 9.2 Source: Annexure Table 15

Interpretation:
1

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 200809.

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.
N.R. INSTITUTE OF BUSINESS MANAGEMENT

92

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.

2
Private sector banks have not succeeded to reduce NPA as against the advances
made over the years as both the ratios are increasing in later years.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

93

Comparison of NPA with


AdvancesForeign
Banks
4.5
4

3.5
3

2.8

2.5
2

1.8

1.8

1.5
1

0.9

0.8

1.7

Gross
NPAs/Gross
Advances
Net NPAs/Net
Advances

0.9

0.5
0
2004-05

2005-06

2006-07

2007-08

2008-09

Graph: 9.3 Source: Annexure Table 16

Interpretation:
1

The gross NPA to gross advances ratio is decreasing till 2006-07.It is


unchanged in 2007-08 & then increased in 2008-09. It has reduced by 28.5% & 10%
respectively
from 2004-05 to 2005-06 & from 2005-06 to 2006-07. It has increased tremendously
by 122% from 2007-08 to 2008-09.

While in case of net NPA to net advances ratio, there is great volatility. It has
reduced by 11% from 2004-05 to 2005-06. Thereafter it increased by 25% in 200607. Again
it reduced by 10% in 2008 and finally increased by 89% in 2008-09.

The steep rise in gross NPA & net NPA 2008-09 is due to poor global conditions.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

94

The difference in gross NPA/ gross advances & net NPA/net advances is
highest in 2004-05 & lowest in 2006-07. In 2004-05 provisions & unrecognized
interest income
was highest compare to other years while it was lowest in 2006-07.

The line graph clearly states that the ratio of gross NPA to gross advances & net
NPA to net advances is decreasing over the years. In all the public sector bank has
succeeded to reduce the non performing assets against the advances made over the
years.

Thus in foreign banks gross NPA to gross advances ratio & net NPA to net
advances ratio are not having parallel movement throughout the period. The change in
net NPA
to net advances is quite higher than gross NPA to gross advances.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

95

Net NPA to Net Advance


Ratio of Private
Sector Banks
8
7

Advance Net NPA/Net

6
5O
4
3
2
1
0

P
r

Sector
Banks

Fro
s
ed

B
a

e
Nw

years.

Grap
h: 9.4
Sourc
e:
Anne
xure

Table
17

N.R. INSTITUTE OF BUSINESS MANAGEM

Inte
rpre
tatio
n:
1

HYPOTHESIS TESTING

TEST OF CO-RELATION
The test of co-relation is used to identify the co-relation between two
variables. The variable in our study is Net NPA and Net profit. This test
researcher has applied to identify the co-relation between two variables i.e.
Net NPA and Net profit of Public, Private and Foreign Sector Banks.
Public Sector Banks:
H0: There is no significant correlation between NPA and Profit of Public
Sector Banks for last 9 years
H1: There is correlation between NPA and Profit of Public Sector Banks for
last 9 years

Year
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Total
Mean

Net
NPA

Net
Profit

X
27977
27958
24877
19335
16904
14566
15145
17726
21033
185521
20,613

Y
4317
8301
12295
16546
15784
16539
20152
26592
34394
154921
17,213

X
20,613
20,613
20,613
20,613
20,613
20,613
20,613
20,613
20,613

Y
17,213
17,213
17,213
17,213
17,213
17,213
17,213
17,213
17,213

X- X
7,364
7,345
4,264
-1,278
-3,709
-6,047
-5,468
-2,887
420

Y-Y
-12896
-8912
-4918
-667
-1429
-674
2939
9379
17181

N.R. INSTITUTE OF BUSINESS MANAGEMENT

(X-X)
(Y-Y)
(X-X)*(Y-Y)
54228496 166308364 -94966586
53949025 79419466
-65456877
18181696 24182200
-20968391
1633284
444396
851953
13756681
2040898
5298677
36566209
454734
4077734
29899024
8638779
-16071436
8337541
87965641
-27081675
176383
295186761
7215676
216728339 664641238 -207100924

97

r=

(X-X)*(Y-Y)
2

[(X-X) *(Y -Y) ] 1/2

r=

-207100923.9
379534704

r = - 0.54567
H0 (Null Hypothesis) is rejected

N.R. INSTITUTE OF BUSINESS MANAGEMENT

98

Private Sector Banks:

H0: There is no significant correlation between NPA and Profit of Private


Sector Banks for last 9 years
H1: There is correlation between NPA and Profit of Private Sector Banks for
last 9 years

Year
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Total
Average

X
3700
6676
3963
4128
4212
3171
4028
5380
7418
42676
4742

Y
1142
1779
2958
3481
3533
4975
6465
9522
10868
44723
4969

X-X
4742
4742
4742
4742
4742
4742
4742
4742
4742

Y-Y
4969
4969
4969
4969
4969
4969
4969
4969
4969

X-X
-1042
1934
-779
-614
-530
-1571
-714
638
2676

Y-Y
-3828
-3190
-2012
-1488
-1436
5
1496
4553
5899

r=

(X-X)
1085326
3741170
606513
376738
280677
2467380
509496
407606
7161443
16636349

(Y-Y)
14651015
10176830
4046150
2213384
2061678
28
2238152
20727765
34795553
90910555

(X-X)*(Y-Y)
3987621
-6170352
1566539
913162
760701
-8302
-1067862
2906676
15785639
18673821

(X-X)*(Y-Y)
2

[(X-X) *(Y-Y) ] 1/2


r=

18673820.57
38889840.77

r=

0.480172

H0 (Null Hypothesis) is rejected


N.R. INSTITUTE OF BUSINESS MANAGEMENT

99

Foreign Sector Banks:


H0: There is no significant correlation between NPA and Profit of Foreign
Sector Banks for last 9 years
H1: There is correlation between NPA and Profit of private Sector Banks for
last 9 years

Year
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
Total
Average

X
785
920
903
933
639
808
927
1247
2973
10135
1126

Y
945
1492
1824
2243
2002
3069
4585
6612
7510
30282
3365

X- X
1126
1126
1126
1126
1126
1126
1126
1126
1126

Y-Y
3365
3365
3365
3365
3365
3365
3365
3365
3365

X-X
-341
-206
-223
-193
-487
-318
-199
121
1847

Y-Y
-2420
-1873
-1541
-1122
-1362
-296
1220
3247
4145

r=

(X-X)
116350
42478
49774
37288
237268
101189
39642
14522
3412162
4050674

(Y-Y)
5855077
3506618
2373654
1258046
1855907
87679
1489506
10544914
17183457
44154859

(X-X)*(Y-Y)
825373
385945
343725
216588
663587
94192
-242994
391326
7657202
10334944

(X-X)*(Y-Y)
2

[(X-X) *(Y -Y) ] 1/2

r=

10334943.88
13373740.04

r = 0.772778883
H0 (Null Hypothesis) is rejected
N.R. INSTITUTE OF BUSINESS MANAGEMENT

100

Interpretation:
1

There is negative correlation between net profit & net NPA of public sector
banks while it is positive for private sector & foreign banks.

Net profit consists of income earned by the banks. Income is divided into two
parts interest income & other income. Interest income includes Interest/Discount on
advances/bill, Income on investments, Interest on balances with RBI and other interbank funds, others. While non-interest income includes fee income components such
as commission, brokerage and exchange transactions, sale of investments, corporate
finance transactions, M&A deals; and any other income other than the interest income
generated by the bank. But in interest income, income from Interest/Discount on
advances/bill is the major contributor towards NPA.

Average 75% of total earning of public sector bank comes from


Interest/Discount on advances/bill which is 55% & 43% for private sector banks &
foreign banks. If we
consider the last six years average of percentage increase in income from
Interest/Discount on advances/bill YOY basis then public sector bank records only
18% increase while its 33% for both private sector & foreign banks. But for private
sector & foreign banks rise in income from Interest/Discount on advances/bill
contributes minimal to the rise in overall income.

The income other than Interest/Discount on advances/bill income for all the
banks together i.e. public sector, private sector and foreign banks on an average stood
at
32.8% of the total income, but it is highest in foreign banks i.e. 57% & 45% for
private sector banks.

The last six years average of percentage increase in income other than
Interest/Discount on advances/bill income YOY basis was highest for foreign banks
i.e. 26% which is 15% & 19% for public sector bank & private sector banks
respectively.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

101

Frequency Distribution of Banks


Income
100%
80%
60%
40%

Non-interest
Income

20%

200
4

Graph: 10

200
5

200
6

200
7

200
8

FBs

FBs
PSBs
Pvt.SBs

FBs
PSBs
Pvt.SBs

FBs
PSBs
Pvt.SBs

FBs
PSBs
Pvt.SBs

FBs
PSBs
Pvt.SBs

0%

PSBs
Pvt.SBs

Interest
Income

200
9

Source: Annexure - Table 18

Public sector banks depend excessively on their interest income as compared to


their peers in the private sector and their fee-based earnings coming from services
remain
quite low.

The higher proportion of non-interest income in private sector & foreign banks
is due to the value added services offered by these banks. There are some services
which are
offered by private sector banks but not by public sector banks. These include Forex
Desk, Derivatives Desk, Technology Finance, Syndication Services, Real Time Gross
Settlement, Channel Financing, Corporate Salary Account, Bankers to Right/Public
Issue. Foreign banks offers some more services other than the above mentioned
services like Global Trade Solutions, Factoring Solutions, Derivatives Clearing, asset
management, private equity placement. So the private sector & foreign banks earn
higher non-interest income because of such value added services.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

102

ANNOVA TEST (ANALYSIS OF VARIANCE)


H0: There is no significant difference in NPAs of Public Sector Banks among
various sectors
H1: There is significant difference in NPAs of Public Sector Banks among
various sectors
Public Sector
Bank

Private Sector
Bank

X1

X2

X3

Priority sector

24318

3640

649

Non-priority sector

19251

13172

6506

474

75

Public Sector
Bank

Private Sector
Bank

X1

X2

X3

Priority sector

24318

3640

649

Non-priority sector

19251

13172

6506

474

75

Total

44043

16887

7155

Mean

14681

5629

3577.5

Public sector

Public sector

=
X 7962.5

N=8

Foreign
Bank

Foreign
Bank

k=
3
Degrees of

Source of
Variation

Sum of Squares

Freedom

Mean Square F-Ratio

190206843.5

95103422

424447628.5

84889526

Between Column
Variance
Within Column
Variance

1.12032

N.R. INSTITUTE OF BUSINESS MANAGEMENT

103

Between Column Variance = nj (Xj X)


2

K-1
2

1= 3(14681-7962.5) + 3(5629-7962.5) + 2(3577.5-7962.5)

(3-1)
1=

190206843.5
2

1=

95103421.75

Within Column Variance = nj 1 sj

nT - k
(X1
-

X1 - X1

X2 - X2

(X2
X2)2

X3 - X3

(X3
X3)2

3640 -5629

3956121

649 -3578

8576112

56896849

6506 - 3578

8576112

30846916

X1)2

24318 - 14681

92871769

19251 - 14681

20884900 13172- 5629

474 - 14681

201838849

Total

315595518

S=

75 - 5629

1715222
5

91699886

(X - X)2
k-1

S1 =

315595518

S2
=

(3-1)
S1 =

157797759

91699886

S3
=

(3-1)
S2
=

45849943

17152224.5
(2-1)

S3
=

17152224.
5

N.R. INSTITUTE OF BUSINESS MANAGEMENT

104

Within Column Variance = (157797759)*2/5 + (45849943)*2/5 + (17152224.5)*1/5


= 84889525.7
Fcal = Between Column Variance
Within Column Variance
1= 95103421.75
84889525.7
Fcal = 1.12

Ftab =

k-1
NT-k

= 2/5

Ftab = 5.79 @ 0.05 error


Interpretation:
1

As Fcal is less than Ftab, null hypothesis is accepted, which means that there is no
significant difference in NPAs of different types of banks among various sectors.

So this states that the mean behavior of NPAs of all the types of bank i.e. public sector,
private sector & foreign banks seems to be same in different sectors i.e. priority sector,
non-priority sector & public sector for the year 2009.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

105

OVERALL FINDINGS
1

NPAs were more noticeable in respect of new private sector and foreign banks, which
have been more active in the real estate and housing loans segments. It shows a upward
trends
over the years as compared to others

The old private sector banks, which had been registering a significantly lower growth rate
than their newer counterparts in the recent past, managed a better performance this year.

Among all three sectors, public sector banks have managed to reduce NPAs over the
years. NPA profile in the < 2% category of public sector banks was reached to 100% in 200809 as
compared to Private and Foreign sector banks which was around 80%

Net NPA against net advances increased more in Foreign and Private sector banks in
2008-09 while Public sector banks have succeeded in reducing net NPA against net advances
made
over the period of time

Public sector banks have managed to increase the standard assets over the years. The
proportion of standard assets in Private sector banks reduced in 2008 and 2009 which was
compensated by increase in sub-standard and doubtful assets. In Foreign sectors banks the
proportion of sub-standard asset has increased tremendously by 3.5% of loan assets in 2009
which was 1.2% of loan assets in 2008.

The percentage change in gross NPA to gross advances ratio & net NPA to net advances
ratio over the years states that public sector banks makes more provisions in gross NPA &
gross
advances as compared to private and foreign banks.

Public sector banks almost 75% of income comes from Interest/Discount on


advances/bill. Whereas it is just 55% & 43% for private sector banks & foreign banks.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

106

SUGGESTIONS
1

New body like Debt Recovery Tribunal should be established & capacity of DRTs should
be enhanced.

All banks should keep stringent check on advance being made to real estate & housing
segment as these segment contributed highly towards the NPA in 2008 & 2009.

Based on the asset classification viz. Standard Assets (STD), Sub-standard Assets (SUB),
Doubtful Assets (DOUB) and Loss Assets (LOSS), a matrix can be formed with a given
probability.

Since the probability of a loss asset being converted to any higher asset category is
zero, p41 = p42 = p43 = 0 and thus p44 = 1.
This transition matrix can be used to assess the loan quality of a firm level borrower by
evaluating the financial position. However, this matrix will be difficult to apply to assess
individual borrowers because unlike a firm level borrower, financial data of an individual is
not available. Therefore, this matrix can be better applied for a firm level or corporate level
borrower.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

107

Uneven scale of repayment schedule with higher repayment in the initial years normally
should be preferred.

Private sector & Foreign banks should focus more on recovery of sub-standard &
doubtful assets.

3default
Public
sector income
banks should
increase
their non-interest
in interest
may affect
the profits
drastically. income, as rise in NPA due to

N.R. INSTITUTE OF BUSINESS MANAGEMENT

108

CONCLUSION
The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper
management of the NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.
The NPAs would destroy the current profit, interest income due to large provisions of the
NPAs, and would affect the smooth functioning of the recycling of the funds

Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which hampers
economic growth.

Public sector banks are more efficient than private sector & foreign banks with regard to the
management of nonperforming assets. Even among private sector bank, old private sector
banks are more efficient than new private sector banks. But efficient management of NPA is
not the sole factor that determines the overall efficiency of banks.

N.R. INSTITUTE OF BUSINESS MANAGEMENT

109

BIBLIOGRAPHY

Books:
1) Marketing Research- An Applied Orientation by Naresh K. Malhotra;
Edition-Fourth; Publication-New Delhi
Websites:
th

1) Tables in Annexure: Retrieved on 19 February, 2010 from


http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of
Banking in India
th

2) Tables in Annexure: Retrieved on 25 February, 2010 from


http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to
Banks of India
rd

3) Master Circular: Retrieved on 3 March, 2010


from http://rbi.org.in/scripts/NotificationUser.aspx
4) Introduction to Banking Industry: Retrieved on 25
from http://en.wikipedia.org/wiki/Banking_in_India

th

January, 2010

th

5) Banking in India-2009-10:Retrieved on 30 January, 2010 from


http://www.ibef.org/industry/Banking.aspx
th

6) Recent History Of Indian Banking: Retrieved on 7 February, 2010


from http://www.bankingindiaupdate.com/general.html

N.R. INSTITUTE OF BUSINESS MANAGEMENT

110

ANNEXURE
Table: 1:- Frequency Distribution of Banks according to level of NPAs
Year

Banks

< 2%

2% to 5%

5% to 10%

> 10%

PSB

17

Pvt.SB

10

15

22

PSB

22

Pvt.SB

17

26

PSB

26

Pvt.SB

21

27

PSB

26

Pvt.SB

22

25

PSB

27

Pvt.SB

18

24

2004-05 FB

2005-06 FB

2006-07 FB

2007-08 FB

2008-09 FB

Compiled from: http://www.rbi.org.in

N.R. INSTITUTE OF BUSINESS MANAGEMENT

111

Table: 2:- Net NPAs of Banks: 2000-01 to 2008-09


Public Sector

Private Sector

Foreign

Year

Banks

Banks

Banks

2000-01

27,977

3,700

785

2001-02

27,958

6,676

920

2002-03

24,877

3,963

903

2003-04

19,335

4,128

933

2004-05

16,904

4,212

639

2005-06

14,566

3,171

808

2006-07

15,145

4028

927

2007-08

17,726

5,380

1247

2008-09

21,033

7,418

2973

Compiled from: http://www.rbi.org.in

Table: 3:- Composition of NPAs of Public Sector Banks - 2001 To 2009


Year

Priority Sector

Non-priority Sector

Public Sector

2001

24156

27307

1711

2002

25150

28405

903

2003

24939

26781

1087

2004

23841

25698

610

2005

21926

23249

444

2006

22374

18664

341

2007

22954

15158

490

2008

25287

14163

299

2009

24318

19251

474

Compiled from: http://www.rbi.org.in

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Table: 4:- Composition of NPAs of Private Sector Banks - 2001 To 2009


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

2007

2884

6353

2008

3419

9558

2009

3640

13172

75

Compiled from: http://www.rbi.org.in

Table: 5:- Composition of NPAs of Foreign Sector Banks 2007 To 2009


Year

Priority Sector

Non-Priority Sector

Public Sector

2007

331

2120

2008

402

2712

2009

649

6506

Compiled from: http://www.rbi.org.in

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Table: 6:- Net NPAs of Old and New Private Sector Banks: 2000-01 to 2008-09
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
Compiled from: http://www.rbi.org.in

Table: 7:- Net NPA to Net Advance of Public, Private & Foreign Sector Banks: 2004-05
to 2008-09
Year

Public Sector Bank

Private Sector Bank

Foreign Bank

2004-05

2.1

1.9

0.9

2005-06

1.3

0.8

2006-07

1.1

2007-08

0.8

1.2

0.9

2008-09

0.7

1.5

1.7

Compiled from: http://www.rbi.org.in

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Table: 8:- Classification of Loan Asset of Public Sector Banks in percentage


Standard

Sub-Standard

Doubtful

Year

Asset

Asset

Asset

Loss Asset

2004

92.2

2.6

4.3

0.9

2005

94.6

1.2

3.4

0.7

2006

96.1

1.1

2.3

0.5

2007

97.2

1.0

1.5

0.3

2008

97.7

1.0

1.1

0.2

2009

97.9

0.9

1.0

0.2

Compiled from: http://www.rbi.org.in

Table: 9:- Classification of Loan Asset of Private Sector Banks in percentage


Standard

Sub-Standard

Doubtful

Year

Asset

Asset

Asset

Loss Asset

2004

94.2

1.8

3.6

0.5

2005

96.1

1.0

2.5

0.4

2006

97.4

0.8

1.5

0.3

2007

97.6

1.1

1.0

0.2

2008

97.3

1.5

0.9

0.3

2009

96.8

2.0

1.0

0.3

Compiled from: http://www.rbi.org.in

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Table: 10:- Classification of Loan Asset of Foreign Sector Banks in percentage


Standard

Sub-Standard

Doubtful

Year

Asset

Asset

Asset

Loss Asset

2004

95.2

1.6

1.8

1.5

2005

97.0

0.9

1.3

0.8

2006

97.9

1.0

0.7

0.5

2007

98.1

1.1

0.5

0.4

2008

98.1

1.2

0.5

0.2

2009

95.7

3.5

0.6

0.2

Compiled from: http://www.rbi.org.in

Table: 11:- Net NPAs & Net Profit of Public Sector Banks: 2000-01 to 2008-09
Year

Net NPA

Net Profit

2000-01

27977

4317

2001-02

27958

8301

2002-03

24877

12295

2003-04

19335

16546

2004-05

16904

15784

2005-06

14566

16539

2006-07

15145

20152

2007-08

17726

26592

2008-09

21033

34394

Compiled from: http://www.rbi.org.in

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Table: 12:- Net NPAs & Net Profit of Private Sector Banks: 2000-01 to 2008-09
Year

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

Compiled from: http://www.rbi.org.in

Table: 13:- Net NPA & Net Profit of Foreign Banks: 2000-01 to 2008-09
Year

Net NPA

Net Profit

2000-01

785

945

2001-02

920

1492

2002-03

903

1824

2003-04

933

2243

2004-05

639

3098

2005-06

808

4109

2006-07

927

5343

2007-08

1247

7544

2008-09

2973

8459

Compiled from: http://www.rbi.org.in

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Table: 14:- NPA ratios of Public Sector Banks: 2004-05 to 2008-09


Year

Gross NPAs/Gross Advances

Net NPAs/Net Advances

2004-05

5.5

2.1

2005-06

3.6

1.3

2006-07

2.7

1.1

2007-08

2.2

0.8

2008-09

0.7
Compiled from: http://www.rbi.org.in

Table: 15:- NPA ratios of Private Sector Banks: 2004-05 to 2008-09


Year

Gross NPAs/Gross Advances

Net NPAs/Net Advances

2004-05

3.8

1.9

2005-06

2.5

2006-07

2.2

2007-08

2.5

1.2

2008-09

2.9

1.5

Compiled from: http://www.rbi.org.in

Table: 16:- NPA ratios of Foreign Banks: 2004-05 to 2008-09


Year

Gross NPAs/Gross Advances

Net NPAs/Net Advances

2004-05

2.8

0.9

2005-06

0.8

2006-07

1.8

2007-08

1.8

0.9

2008-09

1.7
Compiled from: http://www.rbi.org.in

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Table: 17:- Net NPA to Net Advance Ratio of Private Sector Banks
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

2007-08

0.7

1.1

2008-09

0.9

1.3

Compiled from: http://www.rbi.org.in

Table: 18:- Frequency Distribution of Banks Income


Year

2004

2005

2006

2007

2008

2009

Banks
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs

Interest Income Non-interest Income


0.73
0.27
0.45
0.55
0.39
0.61
0.72
0.28
0.51
0.49
0.43
0.57
0.73
0.27
0.54
0.46
0.42
0.58
0.76
0.24
0.56
0.44
0.44
0.56
0.77
0.23
0.58
0.42
0.45
0.55
0.76
0.24
0.61
0.39
0.46
0.54
Compiled from: http://www.rbi.org.in

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