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CHAPTER 1

INTRODUCTION

INTRODUCTION
Since the introduction of economic liberalization and financial sector reforms, Banks are under
growing pressure to bring down their NPAs so as to improve their performance and viability.
What is bothering the bankers today is the management of Non-performing Assets. Over the
period this problem has aggravated alarmingly and therefore needs urgent remedial actions, so in
this context a good number of circular instruction/guidelines have been issued by bank/Reserve
Bank of India.
Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of Sh.
M.Narsimham to examine and give recommendation for Income Recognition, Asset
Classification and Provisioning of loan assets of Banks and Financial Institutions. The
Committee examined the issues and recommended that a policy of Income Recognition should
be objective and based on record of recovery rather than on subjective considerations. On the
basis of the recommendations of the Narsimhan Committee, RBI had issued guidelines to all
Scheduled Commercial Banks on Income Recognition, Assets Classification and Provisioning in
April, 1992 which have been modified from time to time by the RBI on the basis of experience
gained and suggestions received from various quarters. The Prudential Norms for Income
Recognition, Asset Classification and Provisioning have come into effect from the accounting
year 31.03.1993.
Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India
Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were also
issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June, 1994 and
to Regional Rural banks in March, 1996. They have adopted these guidelines for the purpose of
Income Recognition and Assets Classification from the accounting year 1995-96. However,
guidelines relating to provisioning for RRBs have been made effective from the financial' year
ended 31.03.1997. The definition of NPAs is also gradually becoming tough for RRBs to cover
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all advances like Commercial Banks. Although most of-the guidelines relating to RRBs are
similar to that of Commercial Banks, they have been made applicable in a phased manner for
RRBs.
INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played a
crucial role in the socio- economic progress of the country. Banks extend credit to different types
of borrowers for many different purposes. For most customers, bank credit is the primary source
of available debt financing.
For banks good loans are the most profitable assets. Return comes in the form of loan interest,
fee income and investment and the most prominent assumed risk is credit risk. Credit risk
involves inability or unwillingness of customer or counterpart to meet commitments in relation
to lending once a loan is overdue and ceases to yield income it would become a Non Performing
Asset.
Proper management and speedy disposal of NPAs is one of the most critical tasks of banks
today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has
been a matter of grave concern not only for the banks but also the real economy in general, as
NPAs can choke further expansion of credit which would impede the economic growth of the
country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in
the economy. NPAs are not therefore the concern of only lenders but also the public at large.
Granting of credit for economic activities is the prime duty of banking. Apart from raising
resources through fresh deposits, borrowings and recycling of funds received back from
borrowers constitute a major part of funding credit dispensation activity. Lending is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which results into economic growth. However lending also carries a risk called credit
risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a
major hurdle in the process of credit cycle. Thus, these loan losses affect the bank’s profitability
on a large scale. Though complete elimination of such losses is not possible, but banks can
always aim to keep the losses at a low level.
Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the
banking industry in our country sending distressing signals on the sustainability and insurability
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of the affected banks. The positive results of the chain of measures affected under banking
reforms by the Government of India and RBI in terms of the two Narasimhan Committee
Reports in this contemporary period have been neutralized by the ill effects of this surging threat.
Despite various correctional steps administered to solve and end this problem, concrete results
are eluding. It is a sweeping and all pervasive virus confronted universally on banking and
financial institutions. The severity of the problem is however acutely suffered by Nationalised
Banks, followed by the SBI group, and the all India Financial Institutions.

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Accordingly. Troublesome pressure from the economy can lead to a sharp increase in non-performing loans and often results in massive write-downs. NPA is used by financial institutions that refer to loans that are in jeopardy of default.  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 purposes.MEANING OF NPA A Non-performing asset (NPA) is defined as a credit facility in respect of which the interest and/or installment of Bond finance principal has remained ‘past due’ for a specified period of time. from the year ending March 31.  Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility. a non-performing asset (NPA)is a loan or an advance where. with effect from March 31.  The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted. 2004. Once the borrower has failed to make interest or principle payments for 90 days the loan is considered to be a non-performing asset. Non-performing assets are problematic for financial institutions since they depend on interest payments for income.  The account remains ‘out of order’ for a period of more than 90 days. With a view to moving towards international best practices and to ensure greater transparency. 4 . 2004. it has been decided to adopt the ‘90 days’ overdue’ norm for identification of NPA. and  Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.  Interest and/or installment of principal remain overdue for a period of more than 91 days in respect of a term loan. in respect of an Overdraft/Cash Credit (OD/CC).

But the amount has not been written off. 3. All those assets which cannot be recovered are called as Loss Assets. 5 . wholly or partly. No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days sify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues: 1. All those assets which are considered as non-performing for period of more than 12 months are called as Doubtful Assets. Sub-standard assets: a sub standard asset is one which has been classified as NPA for a period not exceeding 12 months. internal or external auditor or central bank inspectors. Doubtful Assets: a doubtful asset is one which has remained NPA for a period exceeding 12 months. Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. 2. Loss assets: where loss has been identified by the bank.

 To know the reason for an asset becoming NPA.ABOUT THE REPORT  Title of the study: .  To know the impact on NPA on strategic banking variable.The present study is titled as “A PROJECT REPORT ON NPA MANAGEMENT IN BANK(SBI)”.The following are the objective of the study  To study the position of non performing assets in SBI.  Period of the study:-The period of the present study is FEB 2016. 6 .  Objective of the study:.  Limitations of the Study:-The present study has got all the limitations of explanatory study method.

books. The increasing integration of SBI with its associate banks (associates) and subsidiaries will further strengthen its dominant position in the banking sector and position it as the country’s largest universal bank. Data and Methodology:-For the purpose of the present study I had referred internet. CHAPTER 2 PROFILE STATE BANK OF INDIA SBI is the largest bank in India with deposits of Rs 3. 2005 (56% as at March 31. which constitute around 59% of the total resources as on March 31. underpinned by its strong retail deposit base. 2005. The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better. 7 . Resource-raising capabilities SBI’s funding profile is strong. Once the core banking solution (CBS) is fully implemented. SBI’s strong franchise gives it access to a steady source of stable retail funds.000 branches and ATMs of the State Bank group. 2004). provide new delivery platforms. and emerge as the strongest technology enabled distribution network in India. improve service levels. 67. The bank is facing increasing competition in its metropolitan and urban franchise.000 crore as on March 31. and improve operating efficiency to counter the threat of competition effectively. it will cover over 10. newspaper to collect information. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits.

and significant surplus SLR investments. Thus. SBI will maintain its strong funding profile and a low cost resource position in view of its strong retail base and wide geographical reach. the bank will have to reduce or redeploy work force.Savings deposits have shown a strong three-year growth of 19%. despite good asset growth and technology efficiency gains. since this is a sensitive issue. Thus. and customer segments.44% of average funds deployed in 2004-05 is in line with other public sector banks. 2005. the growth in fee income is expected to slow down.70% for the 2004-05 (refers to financial year from April 1 to March 31). The bank’s liquidity position is very strong due to healthy accretion to deposits. at around 1% per annum for the past three years. The bank’s fund based and fee income earnings are diversified across industries. despite the decline in profitability in some segments. To maintain yields and pursue credit growth. and diverse income streams. The bank’s operating expense at 2. low-cost deposits have continued to constitute over 40% of total deposits as at March 31. large limits in the call market. The bank’s cost of deposits (excluding IMD) has significantly reduced to 4. 8 . regions. despite a reduction in the proportion of current account deposits. the bank’s operating costs will remain high in the medium term. To be able to reap the full benefits of technology implementation. Strong diversification in income streams will ensure that the bank’s earnings remain relatively stable. it is expected to happen gradually.48% in 2003-04. However. Earnings profile to remain good SBI will maintain a good earnings profile in the medium term despite high pressure on yields due to the increasing competition in the banking sector. the bank is aggressively targeting retail finance and small and medium enterprises (SMEs). The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile. asset classes. with the opening of government business like tax collection to other banks and increased competition. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating expenditure in 200405. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets). compared with 5.

34% as at March 31. The bank has considerably improved its net worth coverage for net NPAs to 4. The share of retail advances has increased to 24. compared with 4.71% in 2004-05. 2005.Comfortable capital position SBI is adequately capitalized with a tier I capital adequacy ratio of 8. as can be seen in the consistently higher levels of slippages (additions to NPAs) at 2. the bank has leveraged its corporate relationships. The housing finance portfolio has a 12-month. To contain NPAs and ensure credit growth. The bank is facing challenges to improve the quality of assets originated.95% of gross advances as at March 31.The bank will face significant challenges in the 9 . SBI is targeting primarily the housing loans segment.08 billion) of total advances as at September 30 2005. 2005. The bank has taken initiatives like online tax returns filing and faster transfer of funds to protect its dominant position in the government business.9% for all scheduled commercial banks (SCBs) taken together. The capitalization levels of SBI are adequate to address the asset side risks and support the business growth in the medium term. pursued business growth selectively. lagged gross NPA of 4. 283.04% and a large capital base of Rs 240. The bank also has a clear technology strategy that will enable it to compete with the new generation private sector banks in customer service and operational efficiency. SBI’s retail portfolio has grown at over 37% CAGR in the last two years and hence a significant portion of the portfolio is largely unseasoned. In the retail loan segment.3%) of total retail loans. and has not competed based on interest rate. the bank has decided to focus on financing the retail (personal) segment as well as SMEs. which constitutes Rs. however they are steadily increasing (especially in the housing finance portfolio) and have started showing signs of stress. The NPAs in retail finance are low currently. 2005.41 billion (54. Asset quality to remain at average levels The bank continues to have a high level of gross NPAs at 5. 2005 due to lower slippages reflecting an improving asset quality.72 billion as at March 31. witnessed across the entire banking sector.73% (Rs 522.4 times as at March 31. Management strategies In retail finance.

priority sector requirements. and has built a strong market position in housing loans. Industry prospects To leverage benefits such as access to low cost resources and the facility to provide a larger gamut of services.medium term to develop effective credit appraisal and collection systems in order to contain NPAs in retail finance. yet another emerging trend is that of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements. offers a host of financial services. one of the largest insurance companies in France. broking. SBI. a number of finance companies such as Kotak Mahindra Finance Limited and HDFC Limited have promoted banks. viz.A. and corporate exposure limits.. through its non-banking subsidiaries. SBI has commenced its life insurance business by setting up a subsidiary. private sector banks have been stealing market share in retail deposits and the corporate fee business from public sector banks.. as the bank’s large and diverse asset portfolio reflects of the asset quality of the banking system. New private sector banks capture market share With technological edge and a strong marketing thrust. SBI currently holds 74% equity in the joint venture. merchant banking. Simultaneously. traditionally the domain of the financial institutions. SBI Life Insurance Company Limited. primary dealership. The bank has entered the market of term lending to corporates and infrastructure financing. factoring. SBI’s asset quality is expected to remain at average levels. investment banking and credit cards. Business description SBI along with its associate banks offer a wide range of banking products and services across its different client markets. It has increased its thrust in retail assets in the last two years. which is a joint venture with Cardiff S. Together 10 . fund management.

however. The securitization and reconstruction of financial assets and enforcement of security interest (Sarfaesi) Act should also help banks in limiting slippages and improving NPA recoveries. The steady accruals to net worth and falling non-performing asset levels have resulted in an improvement in the capitalization position of banks in recent years. small and medium enterprises. as they moved to the 90-day norm for recognising and provisioning for NPAs. these private banks have also aggressively entered the retail asset financing space. thereby improving their capitalization levels. they now offer the entire range of products and services on the asset and liability side to retail and wholesale customers Asset quality to improve Banks have not yet fully resolved the stress in the asset quality of their legacy corporate loan portfolios. They also need to fortify their credit risk management systems to mitigate the risks arising from small-ticket lending to the retail. 11 . and services segments. steady growth in gross domestic product should help improve the banks’ asset quality and increase corporate lending. Given their focus on cross selling and optimizing their customer base. Better Capitalization levels Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through public issues in recent years.with some foreign banks. Going forward. They need to reorient their staff and effectively utilize technology platforms to retain customers and reduce costs. Challenges ahead Competition from new private sector and foreign banks remains a key challenge for public sector banks. hitherto the domain of non-banking finance companies. the treasury gains enabled significant provisioning to be made with the result that net NPAs for most public sector banks are now less than 3%. Though slippages to NPAs and provisioning were high for some banks in FY2004.

Consolidation and emergence of universal banking groups The cap on foreign ownership of banks has already been raised from 49% to 74%. The new private and foreign banks will continue to gain market share from public sector banks because of their efficient cost structures. the emergence of newer players would be restricted if the private ownership of banks is capped at low levels. However. 12 . New private sector banks are expanding their geographical coverage and making inroads into government business. technological edge. These would also be driven by GoI due to provisions of Banking Companies (Acquisition and Transfer of Undertakings) Act 1969. focused marketing approach and operational freedom. and hence political scenario will impact the timing and permutations possible. the integration process in such mergers is expected to be complex and time long drawn. leverage on economies of scale and reduce costs. Mergers among PSBs would create banks with even larger balance sheets and customer base. The competition in the sector could get further intensified if the 10% cap on voting rights is also relaxed. However. Strategic alliances between banks and other financial sector players such as insurance companies and mutual funds are also likely as banks attempt to enhance their product range.

the current net worth of the borrower. Such assets will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain a loss. ii. 13 .CHAPTER 3 THEORETICAL VIEW CLASSIFICATION OF NPA Banks are required to classify NPAs further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues: i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a period less than or equal to 18 months. In such cases. It has all the weaknesses inherent to a sub-standard asset with the added characteristic that the collection or liquidation in full – on the basis of currently known facts – is highly questionable and improbable. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18 months. Loss Assets: A loss asset is one where a loss has been identified by the bank or. iii. internal or external auditors but the amount has not been written off wholly. or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full.

Where the account indicates inherent weakness based on available data. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs.  Accounts with temporary deficiencies: These should be classified based on the past recovery records.  Accounts where there is erosion in the value of the security: If there is a significant (i.GUIDELINES FOR CLASSIFICATION OF NPAS Broadly speaking. others should also be classified the same way. 14 .e. as it is difficult to envisage only a solitary facility becoming a problem credit and not others.  Asset classification should be borrower-wise and not facility-wise: If a single facility to a borrower is classified as NPA. the realizable value of the security is less than 50% of that assessed by the bank during acceptance) the account may be classified as NPA. especially in respect of high value accounts.  Advances under consortium arrangements: Classification here should be based on the recovery record of the individual member banks.  Accounts regularize near about the balance sheet date: These accounts should be handled with care and without scope for subjectivity. it should be deemed as an NPA. classification should be done taking into account the degree of well defined credit weaknesses and the extent of dependence on collateral security for realization of dues.

All this requires greater efforts and teamwork. It is essential to keep a constant watch over the non-performing assets not just to keep it performing but also that once they become non-performing. Once the assets are classified as NPA. 4. This requires management of NPAs in such a 15 . (b) The Branch 'has to pay interest to central office on outstanding classified as NPA. The NPAs of banks in India are considered to be at higher levels than those in other countries. The NPA Management Policy document of SBI lays down to contain net NPAs to less than 5% of bank's total loan assets in confirmity with the international standard. 3. It is. the Branch Manager has to take all the necessary steps to get the dues recovered there-under to maintain the good health of advances and the higher profitability at the-Branch. 6. (c) The Branch has to incur cost in supervision and follow up of such advances. 2. (d) Provision has to be made on NPAs at Bank level. This issue has attracted attention of public as also of international financial institutions and has gained further prominence in the wake of transparency and disclosure measures initiated by RBI during recent years. Under Income Recognition. Assets Classification and provisioning. Doubtful or loss assets. the various means are to be initiated to get rid off the NPAs from the branch books. effective measures are initiated to get full recovery and where this is not possible. NPAs adversely affect the wealth condition of the branch advances as also the profitability of the branch. (a) Interest cannot be applied on the loan accounts classified as NPAs.NPA SOME ASPECTS AND ISSUES 1. NPA may be Sub standard. therefore necessary that as per guidelines provided in NPA Management Policy document. every effort be made at all levels to cut down the NPAs. Some of the reasons for this are as under: 5.

Planned and scientific manner that the percentage of NPAs to the total advances will be minimum. 16 .

Uncollected interest is normally put in a memorandum account. 'doubtful' and 'loss']. Previously accrued. be useful. therefore. but uncollected interest is reversed out of income. The suspension of interest payments is required on loans that are classified as 'non-performing' ['substandard'. explaining the accounting policies followed with regard to recognition of income on NPLs. if the accounts carry a footnote. Failure to do so would overstate income. It would. NPLs are restored on an accrual basis only after full settlement has been made on all delinquent principal and interest. 17 .RECOGNITION OF INCOME ON NON-PERFORMING LOANS (NPLS) Stricter regulations have been laid down by supervisory authorities in many countries with regard to income recognition on Non-Performing Loans (NPLs). Any uncollected interest payments on NPLs are considered non-accrued interest.

Thus the bank has to make large amount of provisions in order to compensate those loans. EXTERNAL FACTORS    Ineffective recovery tribunal The Govt. their by reducing their profitability and liquidity. ineffective management . Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans    Industrial sickness Improper project handling . These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans. has set of numbers of recovery tribunals. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. hence end up the fiscal with a reduced profit. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.    Wilful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. The NPAs in PSB are growing due to external as well as internal factors. lack of advance technology . Policies give birth to industrial sickness. which works for recovery of loans and advances. Mainly ours farmers depends on rain fall for cropping.REASONS FOR RISE IN NPAs FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. 18 . Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover. day to day changing govt. which is creating alarming rise in NPAs of the PSBs. lack of adequate resources .    Natural calamities This is the measure factor. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans.

So the over dues due to the handloom sectors are becoming NPAs. Principles of safety ii. The rehabilitation plan worked out by the Central govt to revive the handloom sector has not yet been implemented. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. Reputation of borrower The banker should. which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to make provision for it. i.   Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. Character 2. Principle of liquidity iii. INTERNAL FACTORS    Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. The banks recover the amount by selling of their assets. Principles of safety By safety it means that the borrower is in a position to repay the loan both principal and interest. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one 19 . The repayment of loan depends upon the borrowers: a. Honest 3. Capacity to pay b. banking sector gets new policies for its operation. Success in business Willingness to pay depends on: 1. eg.    Change on Govt. Willingness to pay Capacity to pay depends upon: 1. Tangible assets 2. policies With every new govt. Principles of profitability i.

They should use good credit appraisal to decrease the NPAs. and financial soundness and credit worthiness of the borrower.    Improper swot analysis The improper strength. c. industry. which leads to poor credit collection. weakness. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. he should analyse the purpose of the loan.    Inappropriate technology Due to inappropriate technology and management information system. business. Enquiry from market/segment of trade. market driven decisions on real time basis can not be taken. When accepting securities banks should consider the 1.    Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. While providing unsecured advances the banks depend more on the honesty.and the borrower is capable of carrying it out successfully . • Analyse the balance sheet True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. viability. From external credit rating agencies. Acceptability 3. • Banks should consider the borrowers own capital investment. Safety 4. thus NPA. To ensure safety and liquidity. All the branches of the bank should be computerised. Proper MIS and financial accounting system is not implemented in the banks. long term acceptability of the project while financing.he should be a person of integrity and good character. • Purpose of the loan When bankers give loan. • it should collect credit information of the borrowers from a. opportunity and threat analysis is another reason for rise in NPAs. banks should grant loan for productive purpose only. Transferability. integrity.    Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Marketability 2. Bank should analyse the profitability. From bankers b. 20 .

the overall position of the bank will not be affected. If a new big customer meets misfortune or certain traders or industries affected adversely. Like OSCB suffered loss due to the OTM Cuttack. it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. and Orissa hand loom industries. The NPAs due to wilful defaulters can be collected by regular visits.    Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. and the handloom sector Orissa hand loom WCS ltd (2439. Due to re loaning to the defaulters and CCBs and PACs. the NPAs of OSCB is increasing day by day.    Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle.60lakhs). 21 .The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The biggest defaulters of OSCB are the OTM (117.77lakhs).

The options for these banks are lost.NPA is not merely nonremunerative. Impact on Profitability "The efficiency of banks is not always reflected only by the size of its balance sheet but by the level of return on its assets. 1. NPAS have a deleterious effect on the return on assets in several ways:  They erode current profits through provisioning requirements. as heretofore.  They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future.  They result in reduced interest income. In the competitive money and capital Markets. NPAS do not generate interest income for the banks. the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. This is the margin between the cost of resources employed and the return therefrom." This is the margin between the cost of resources employed and the return thereform. In other words it is gap between the return on funds deployed (Interest earned on credit and investments) and cost of funds employed (Interest paid on deposits). but at the same time banks are required to make provisions for such NPAS from their current profits. When the interest rates were directed by RBI. But today in the deregulated market the banks decide their lending rates and borrowing rates. inability to offer competitive market rates adds to the disadvantage of marketing and building new NPA has affected the profitability. liquidity and competitive functioning of banks and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion.IMPACT OF NPAS ON BANKS:In portion of the interest income is absorbed in servicing NPA. In the context of severe competition in the banking industry. "The spread is the bread for the banks". It is also cost absorbing and profit eroding. and 22 . there was not option for banks.

(reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs. This has alternatively forced SBI Group to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins. 2300 Crores annually. To this extent the problem is contained but a what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy.2001. Considering the average provisions made for the last 8 years which works out to average of Rs. a sizeab business. an ideal competitive working is reached. Other bans hesitate to approach the market to rise new issues. etc. else they are to seek the bounty of the Central Government for repeated Recapitalization. It would only postpone the process.04. 31251 Crores towards provisioning NPA. set in asset-liability mismatches. when the banks are able to earn adequate amount of non-interest income to cover their entire operating 23 . Between 01. SBI Group incurred a total amount of Rs. In turn SBI Group are seen as poor performers and unable to approach the market for raising additional capital. In the context of crippling effect on a bank's operations in all spheres.03.a. The enormous provisioning of NPA together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the SBI Group. Considering the minimum cost of holding NPAs at 7% p.93 to 31. In the face of the deregulated banking industry. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market. 32632 Croces absorbs a recurring holding ost of Rs. 3300 crores from annum. This has brought Net NPA to Rs. They limit recycling of funds. asset quality has been placed as one of the most important parameters in the measurement of a bank's performance under the CAMELS supervisory rating system of RBI. There is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning and boost up bottom lines. 32632 Crores or 6.2% of net advances.

(Net NPA/Net Advances is 1. who had issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout package. Non-interest income fully absorbs the operating expenses of this banks in the current financial year for the first 9 months. will be revealing to prove this statement. 2001. The following working results of SBI Group an identified well manged nationalised banks for the last two years and for the first nine months of the current financial year. In the last two financial years. It's sizeable earnings under of non-interest income substantially/totally meets its noninterest expenses. though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. the difference between the gross interest income and interest cost will constitute its operating profits. Theoretically even if the banks keeps 0% spread.e.expenses i. a positive burden. 2. it will still break even in terms of operating profit and not return an operating loss. as published by RBI in its Report on trends and progress of banking in India. Interest on Recapitalization Bonds is a income earned form the Government. On account of the burden of heavy NPA. The statistics above show the other weaknesses of the nationalised banks in addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under: 24 .92%) It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March. as a wider spread is necessitated to cover cost of NPA in the face of lower income from off balance sheet business yielding non-interest income. Its obligation for provisioning requirements is within bounds. The strength of SBI Group is indentified by the following positive feature: 1. In that event the spread factor i. many nationalised banks have little option and they are unable to lower lending rates competitively.e.

resulting in a low C/D Ratio around 50 to 54% for the industry. Business is an exercise of balancing between risk and reward. This is due to failure to develop off balance sheet business through innovative banking products. This has affected adversely credit growth compared to growth of deposits. RBI has indicated the ideal position as Zero percent Net NPA. there can be no reward. but have resorted to II-Tier capital in the debt market or looking to recapitalistion by Government of India. Even granting 3% net NPA within limits of tolerance the SBI Group are holding an uncomfortable burden at 7. Wage costs total assets is much higher to PSBs compared to new private banks or foreign banks. Impact on Outlook of Bankers towards Credit Delivery.1% as at March 2001.  Their earnings from sources other than interest income are meagre. as per RBI guidelines. Impact on Liquidity of the SBI Group Though SBI Group are able to meet norms of Capital Adequacy. There is insistence on provision of collateral security. In the world of banking the concepts of business and risks are inseparable. The fear psychosis also leads to excessive security-consiousness in the approach towards lending to the small and medium sized credit customers. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market. a tendency towards laxity in the standards of credit appraisal comes to the fore. sometimes up to 200% value of the advance. and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over-confidence). It is well know that the 25 . Their operating expenses are higher due to surplus manpower employed. The fear of NPA permeates the psychology of bank managers in the SBI Group in entertaining new projects for credit expansion. Accept justifiable risks and implements de-risking steps. Without accepting risk. 2. 3. the facts that their net NPA in the average is as much as 7% is a potential threat for them.

doubtful and loss assets. Productivity of employees is also reduced because it keeps staff busy with the task of recovery of overdue. Further blocked assets and real estate represent the most illiquid security and NPA in such advances has the tendency to persist for a long duration. compromise. does not encourage liberal capital support to be given to banks. 5. when asset becomes an NPA for the first time it adversely affects the spread by not contributing to the interest income and from the second year onwards it will have its impact on the bottom line of the balance sheet because of provisioning to be made for it and not have incremental effect on the spread. During the year 2001-02 share of 12 public sector banks were traded on the NSE out of which share value of three PSBs have decreased. 4. Low market value of shares has also forced the banks to borrow heavily debt market to build Tier II capital to meet capital adequacy norms. 26 . but will not prevent the account turning into NPA. preparing proposal for filing of suits. Impact on Productivity: High level of NPAs effect the productivity of the banks by increasing the cost of funds and by reducing the efficiency of banks employees. Cost of funds is increased because due to nonavailability of sufficient internal sources they have to rely on external sources to fulfill their future financial requirements. Now a days Govt. write off or in preparing DICGC claim papers etc. whereas high level of NPAs leads to lower profits hence less or no profits available for equity shareholders hence lower EPS and fall in the value of share. SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution for handling this hovering threat. Instead of devoting time for planning for development through more credit and mobilization of resources the branch staff would primarily be engaged in preparing a large value of returns and statements relating to sub-standard.existence of collateral security at best may convert the credit extended to productive sectors into an investment against real estate. putting severe pressure on their profit margins. waivement of legal action. Impact on other Variables: High level of NPAs also leads to squeezing of interest spread. Banks are required to bring their own capital by issuing share to the public.

Banks having positive net profits for the last three years. factoring. Net NPA level below 9%. 7. Qualitative aspects of the Micro Level Impact of NPAs: High incidence of loan defaults shakes the confidence of general public in the soundness of banking setup and indirectly effects the capacity of the banking system to mop up the deposits. which becomes difficult in the situation of huge level of NPAs . It also leads to loss of trust of foreign suppliers. Due to fear of NPAa banks are being taken away from the basic function for which these were established it is becoming more & more risky and less remunerative.6. insurance business. Inadequate recovery also inhibits the banks to draw refinance from higher level agency. 100 Crore. of years in which a banks branch remains in a particular category of default. It is a blot on the credibility of the banking system. It is also biggest threat for capital account convertibility. industrial output and fall in the profit margins of the corporate and 27 . they cannot reduce lending rate to meet the economy's demand of low lending rate. There is slowdown in growth in GDP. it puts negative effect on granting of autonomy to PSBs whreas it is must for banks in this competitive environment. Some areas of Macro-Economic Impact: It is not only the banks which are affected higher level of NPAs but it is the economy as a whole which pays for it. It implies that refinance facility would be progressively reduced depending on the position of NPAs and also on the No. Moreover. owned funds of Rs. medium and long term loans for agriculture and allied activities. Good money is spent to recover bad money. Once the credit to various sectors of the economy slow down. They are floating their subsidiaries to manage mutual funds. Reputed foreign suppliers do not accept letter of credit opened bi Indian banks or confine their transaction to top Indian banks only. Banks are not putting enough resource in lending due to fear of default. CAR of > 8% are the 4 condition to be fulfilled to get autonomous status. Due to high cost. The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to demand in respect of direct. the economy is badly hit. Deterioration in the quality of loan assets and inability to come with new products makes the Indian banks uncompetitive globally.

holds majority of shares in PSBs in some banks 100% capital is in its hand. Not only this. Any dividend declared would have gone to the Govt. 28 . Moreover. whether this money is from tax revenues or from the hard earned saving of the investing public. Further high level of NPAs can result in adding to the inflationary potential in the economy and eroding the viability of the credit system as a whole.consequent depression in the market. burden of NPAs is to be borne by the society as a whole. it comes out of either Govt. budgetary resources or from the public as per Liberalization policy. and which can be spent on the welfare and development program. When capital support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs. Govt. the society is bearing the cost of these NPAs. in fact.

 Better Inspection: We shall keep a close watch on the manner in which NPA reduction is taking place.  Financial System: As you are aware.  Cash Recovery: We should also insist that cash recoveries should more than offset the fresh write-offs in NPAs.  Perception: The mindset of the borrowers needs to change so that a culture of proper utilization of credit facilities and timely repayment is developed. 29 . They should appreciate the difficulties of each other and should endeavor to work contributing to a healthy financial system.RECOMMENDATION  Credit administration: A banks have to strengthen their credit administrative machinery and put in place effective credit risk management systems to reduce the fresh incidence of NPAs. one of the main reason for corporate default is on account of diversion of funds and corporate entities should come forward of avoid this practice in the interest of strong and sound financial system.  Coordinator: Extending credit involves lenders and borrowers and both should realize their role and responsibilities.

viable economic activity. much has been talked about NPA and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them.CHAPTER 4 CONCLUSION CONCLUSION A strong banking sector is important for a flourishing economy. There is also a general perception that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs. correct and use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing of minimizing the incidence of new NPAs. due to credit to these sectors becoming stickly managers of rural and semi-urban branches generally sanction these loans. mangers should make it amply clear to potential borrowers that banks resources are scare and these are meant to finance viable ventures so that these are repaid on time and relevant to other needy borrowers for improving the economic lot of maximum number of households. The failure of the banking sector may have an adverse impact on other sectors. adequate finance and timely disbursement. 30 . Hence selection of right borrowers. In the changed context of new prudential norms and emphasis on quality lending and profitability. Over the years.

com 31 . PUBLISHER : TATA MCGRAW HILL.sbi. www.com www.wikipedia.com www.BIBILOGRAPHY BOOKS : INDIAN FINANCIAL SYSTEM AUTHOR : KHAN.scribd.