Professional Documents
Culture Documents
PREFACE
Granting of credit facilities for economic activities is the primary task of banking.
Apart from raising resources through fresh deposits, borrowings, etc. recycling of
funds received back from borrowers constitutes a major part of funding credit
dispensation activities. Non-recovery of installments as also interest on the loan
portfolio negates the effectiveness of this process of the credit cycle. Non-recovery
also affects the profitability of banks besides being required to maintain more
owned funds by way of capital and creation of reserves and provisions to act as
cushion for the loan losses. Avoidance of loan losses is one of the pre-occupations
of management of banks. While complete elimination of such losses is not possible,
bank managements aim to keep the losses at a low level. In fact, it is the level of
non-performing advances, which, to a great extent, differentiates between a good
and a bad bank. Mounting NPAs may also have more widespread repercussions. To
avoid shock waves affecting the system, the salvaging exercise is done by the
Government or by the industry on t he behest of Government/ central bank of the
country putting pressure on the exchequer.
In India, the NPAs, which are considered to be at higher levels than those in other
countries, have, of late, attracted the attention of public as also of international
financial institutions. This has gained further prominence in the wake of
transparency and disclosure measures initiated by the RBI during recent years.
This project aims at providing an o ov erall view on t he existence of NPAs, their
treatment, the ways at resolving this issue and also a f ew reports on the recent
developments in this field.
ACKNOWLEDGEMENT
First of all I would like to take this opportunity to thank my College for having
projects as a part of the B.Com Curriculum.
I wish to express my heartfelt gratitude to the following individuals who have played
a crucial role in the research for this project. Without their active cooperation the
preparation of this project could not have been completed within the specified time
limit.
The first person I would like to acknowledge is my guide Dr. P. P. Ghosh, of
St. Xaviers College Kolkata, who supported me throughout this project with
utmost co-operation and patience. I am very much thankful to you sir, for sparing
your precious and valuable time for me and for helping me in doing this project. I am
also thankful to the Vice Principal and Dean of Commerce, who gave us an
opportunity to make this project in our final year.
Finally, to all my friends who helped me in making this project. I want to thank
them for all their help, support, interest and valuable hints.
TABLE OF CONTENTS
TOPICS
Sr.
No.
1.
Pg.
No.
Introduction to NPAs
1-27
Meaning of NPA
Asset Classification
Types of NPA
Impact of NPA
10
Early Symptoms
11
13
Procedure
of
NPA
Resolutions in India
Identification
&
16
2.
28
3.
Research Methodology
29
4.
Analysis
31-58
5.
Hypothesis Testing
59-64
6.
Overall Findings
65
7.
Conclusion
66
8.
Suggestion
67
9.
Bibliography
68
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
i.
Interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan,
ii.
The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit(OD/CC),
iii.
The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iv.
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
v.
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;
i.
Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,
ii.
1
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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iii.
The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv.
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
v.
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 fo llowing four catego ries:
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.
Provisio ning Norms:
From the year ending 31.03.2000, the banks should make a general provision of a
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.
Provisio ning 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.
Provisio ning 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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Provision
considered as doubtful
requirement (%)
Up to one year
20
30
31, 2005.
75% effect from March 31,
2006.
April 1, 2004.
31, 2007.
assets effective from March 31, 2003 has to be made in phases as under:
i.
ii.
As on 31.03.2002, balance of the provisions not made during the previous 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 t he
bank or internal or external auditors or the RBI inspection but the amount would not have
been written-off wholly.
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
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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.
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 =
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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
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.
6) Government policies like excise duty changes, Import duty changes etc.,
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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.
Time/ cost overrun during project implementation stage.
Governmental policies such as changes in excise duties, pollution control orders etc.
Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation,
promoters/ directors disputes etc.
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.
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 nonperforming asset
Four categories of early symptoms:1) Financial:
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.
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3) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.
4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
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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:
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.
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
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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 t o
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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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
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
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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.
3. Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default and diversion
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
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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
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.
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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,
Securitization and Securitization Companies
Enforcement of Security Interest
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
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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:
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 t he 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
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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
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OBJECTIVES
I.
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RESEARCH METHODOLOGY
I.
Research Design
The research design that will be use is Descriptive Research.
Involves gathering data that describe events and then organizes, tabulates, depicts,
and describes the data.
Uses description as a tool to organize data into patterns that emerge during analysis.
Often uses visual aids such as graphs and charts to aid the reader.
Using of hypothesis testing.
Test of Correlation:
a) 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
b) 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
c) 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
II.
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III.
IV.
V.
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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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 2010
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 2009-10, 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 , 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
2009 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 2002 to reach a level of 6.3 per cent by
March 2010.
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.
Graph: 1
Source: http://www.rbi.org.in
Interpretation:
From the above it is observed that net NPA of public sector banks has a declining
trend up to year 2006-07 and after that it has a rising trend till 2009-10. The same
trend has been observed in both Private and Foreign Sector Banks. The declining
trend from 2004 to 2007 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 2007.
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 2010 from 13.0 per cent at end-March
2009. 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 2010 from 1.0 per cent as at end March 2009. 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
Page 34
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 2009
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 2009
17726
8245
8398
740
4640
1247
As at end-March 2010
21033
9339
10745
1165
6253
2973
End-March 2009
2.2
2.1
2.6
2.3
2.4
1.8
End-March 2010
1.8
2.5
2.3
2.8
End-March 2009
0.8
0.7
1.4
0.7
1.1
0.9
End-March 2010
0.7
0.7
1.5
0.9
1.3
1.7
Gross NPAs/Gross
Advances Ratio
Net NPAs/Net
Advances Ratio
Source: http://www.rbi.org.in
Page 35
Interpretation:
The trend of improvement in the asset quality of banks continued during the year.
Indian banks recovered a higher amount of NPAs during 2009-10 than that during the
previous year. Though the total amount recovered and written-off at Rs.38,828 in
2009-10 was higher than Rs.28,283 crore in 2008-09, 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.
Page 36
> 10%
40%
5% to 10%
30%
2% to 5%
20%
< 2%
10%
2005-06
2006-07
2007-08
Graph: 3
2008-09
FB
Pvt.SB
PSB
FB
Pvt.SB
PSB
FB
Pvt.SB
PSB
FB
Pvt.SB
PSB
FB
Pvt.SB
PSB
0%
2009-10
Source: http://www.rbi.org.in
Interpretation:
In the year 2005-06, the Public sector banks (PSBs) had around 60% of their NPA profile
in the < 2% category which increased 75% in 2006-07, 90% in 2007-08 - 2008-09 &
100% in 2009-10. PSBs 30% NPA profile in the year 2005-06 belongs to 2% to 5%
category which reduced over the years and has been totally eliminated in 2009-10. PSBs
did not have any of its banks in > 10% category.
Private sector banks (Pvt.SBs) was having the worst situation in 2005-06 where 50% of
its bank was in 2% to 5% category. While this ratio is declining over the years 2008-09
this is compensated by the rise in number of banks in < 2%. 5 Pvt. SBs banks were in
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
Page 37
5% to10% category in 2005-06 which was totally eliminated in 2008-09. But due to poor
financial condition in 2009-10, there is increase in number of banks in higher NPA
category.
Foreign banks (FB) were comparatively in good position compare to privat e 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.
Page 38
30000
25000
20000
15000
10000
5000
0
2002
24156
2003
25150
2004
24939
2005
23841
2006
21926
2007
22374
2008
22954
2009
25287
2010
24318
28405
26781
25698
23249
18664
15158
14163
19251
903
1087
610
444
341
490
299
474
Priority Sector
Public Sector
1711
Graph: 4.1
Source: http://www.indiastat.com/
Interpretation:
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 2002 to 2006, Nonpriority sector contributes more towards NPA than priority sector. But in later years
from 2007 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.
Page 39
In case of priority sector, it started falling from 2004 up to 2006 over previous year.
But in the later years i.e. from 2007 there is rise NPA because of defaults on the loan
given to the farmers. It was highest in 2009. In order to reduce that, waiver package
was announced in union budget of 2009. 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 2003 to 2009 i.e. by
50%.Though the advance given to non-priority sector was higher than priority sector, NPAs
of non-priority sector is comparatively.
Page 40
14000
12000
10000
8000
6000
4000
2000
0
Priority Sector
2002
1835
2003
2546
2004
2445
2005
2482
2006
2188
2007
2284
2008
2884
2009
3419
2010
3640
Non-Priority Sector
4452
9090
9327
7796
6569
5541
6353
9558
13172
Public Sector
123
31
95
75
42
75
Graph: 4.2
Source: http://www.indiastat.com/
Interpretation:
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 2008 to 2010 there is increase in NPA of
priority sector. In these years more advances was given to agriculture & housing
sector.
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.
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
Page 41
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 2004 to 2007. This as a result of securitization Act,
2002.
Page 42
COMPOSITION OF NPAs OF
FORIEGN BANKS - 2008 TO 2010
7000
6000
5000
4000
3000
2000
1000
0
Priority Sector
2008
331
2009
402
2010
649
Non-Priority Sector
2,120
2712.0
6506
Public Sector
Graph: 4.3
Source: http://www.indiastat.com//
Interpretation:
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.
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
Page 43
Graph: 5
Interpretation:
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.
Page 44
NPA as % of Advance
2
1.5
1
0.5
0
2005-06
2006-07
2007-08
2008-09
2009-10
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: http://www.indiastat.com/
Interpretation:
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 2006-07
then it got stable and started rising from 2008-09 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 2006 to 2010. Public sector banks as a result
of stringent checks & control able to manage low ratio compare to other banks. Also
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 2010 due to financial crises & also for public sector bank the
reduction in 2010 was the lowest i.e. 12.5%
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
Page 45
0.9
4.3
0.7
3.4
Sub-Standard Asset
0.5
2.3
Doubtful Asset
Loss Asset
0.2
1.1
1.0
0.2
1.0
0.9
97.7
97.9
0.3
1.5
1.0
1.1
1.2
2.6
94.6
96.1
97.2
92.2
2005
2006
2007
Graph: 7.1
2008
2009
2010
Interpretation:
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 SubStandard, 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.
Page 46
0.4
2.5
Sub-Standard Asset
0.3
1.5
0.8
Doubtful Asset
0.2
1.0
0.3
0.9
1.1
1.5
97.6
97.3
2008
2009
Loss Asset
0.3
1.0
2.0
1.0
1.8
96.1
97.4
96.8
94.2
2005
Graph: 7.2
2006
2007
2010
Interpretation:
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 2010, the
percentage of Sub-Standard asset is highest among all the year. In 2010 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.
Page 47
1.5
1.8
Sub-Standard Asset
0.8
0.5
0.7
1.3
1.0
Doubtful Asset
0.4
0.5
0.2
0.5
1.1
1.2
0.9
Loss Asset
0.2
0.6
3.5
1.6
97.0
97.9
98.1
98.1
95.7
95.2
2005
Graph: 7.3
2006
2007
2008
2009
2010
Interpretation:
The proportion of Standard Asset is increasing from 2005 and started getting stable in
2008 & 2009. But it has fallen in 2010. The proportion of other three types of assets
is falling over the years, but in 2010 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 2009. The interest & principle
amount remained unpaid for period of more than 180 days but less than 1 year.
Page 48
35000
30000
25000
20000
15000
10000
5000
0
Net NPA
27977
27958
24877
19335
16904
14566
15145
17726
21033
Net Profit
4317
8301
12295
16546
15784
16539
20152
26592
34394
Graph: 8.1
Source: http://www.indiastat.com/
Interpretation:
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
2001-02 to 2004-05 & from 2006-07 to 2009-10. 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
2002-03 to 2006-07. 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%
Page 49
10000
8000
6000
4000
2000
0
Net NPA
3700
6676
3963
4128
4212
3171
4028
5380
7418
Net Profit
1142
1779
2958
3481
3533
4975
6465
9522
10868
Graph: 8.2
Source: http://www.indiastat.com/
Interpretation:
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 2001-02 to 2009-10. The average of percentage rise in net NPA comes
to almost 15%.
Page 50
8000
7000
6000
5000
4000
3000
2000
1000
0
2001-02
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: http://www.indiastat.com/
Interpretation:
The above line graph shows net profit of foreign banks is increasing throughout the
period from 2001-02 to 2009-10. 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.
Page 51
Gross NPAs/Gross
Advances
3.6
3
2.7
2.2
2.1
1.3
1.1
0.8
Net NPAs/Net
Advances
0.7
0
2005-06
2006-07
2007-08
2008-09
Graph: 9.1
2009-10
Interpretation:
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 2005-06 to 2006-07. Similarly it has
reduced by 25%, 18.5% & 9% respectively from 2006-07 to 2007-08, from
2007-08 to 2008-09 & 2008-09 to 2009-10.
While in case of net NPA to net advances ratio, the percentage change is varying. It
has reduced by 38% from 2005-06 to 2006-07. Similarly it has reduced by 15.38%,
27.27% & 12.5% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09
& 2008-09 to 2009-10.
Page 52
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
2006-07 [67%] & lowest in 2007-08 [59%]. In other years it near to 63%. This gap
is highest in 2007 because in 2007 advances have increased tremendously over 2006.
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.
Page 53
3.8
3.5
3
2.9
2.5
2.5
2.5
2.2
1.9
1.5
1.5
2006-07
2007-08
1.2
Gross NPAs/Gross
Advances
Net NPAs/Net
Advances
0.5
0
2005-06
Graph: 9.2
2008-09
2009-10
Interpretation:
The percentage change in of gross NPA to gross advances ratio is decreasing initially
& thereafter started rising from 2007-08. It has reduced by 34.2% from 2005-06 to
2006-07. Similarly it has reduced by 12% from 2006-07 to 2007-08 & thereafter
increased by 18.5% & 9% respectively from 2007-08 to 2008-09 & 2008-09 to 200910.
While in case of net NPA to net advances ratio, the percentage change is var ying
drastically. It has reduced by 47% from 2005-06 to 2006-07. It is unchanged from
2006-07 to 2007-08. It has increased by 20% & 25% respectively from 2007-08 to
2008-09 & 2008-09 to 2009-10.
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.
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
Page 54
The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2006-07 [60%] & lowest in 2009-10 [48%]. In other years it near to 54%. In 2007
there is highest increase in advances over previous year amongst all the year.
This resulted increase in NPA which in turn increased the provisions and
unrecognized interest income.
Private sector banks have not succeeded to reduce NPA as against the advances made
over the years as both the ratios are increasing in later years.
Page 55
3.5
3
2.8
2.5
2
1.5
1
0.9
0.5
0.8
1.8
1.8
0.9
1.7
Gross NPAs/Gross
Advances
Net NPAs/Net
Advances
0
2005-06
2006-07
2007-08
Graph: 9.3
2008-09
2009-10
Interpretation:
The gross NPA to gross advances ratio is decreasing till 2007-08.It is unchanged in
2008-09 & then increased in 2009-10. It has reduced by 28.5% & 10% respectively
from 2005-06 to 2006-07 & from 2006-07 to 2007-08. It has increased tremendously
by 122% from 2008-09 to 2009-10.
While in case of net NPA to net advances ratio, there is great volatility. It has reduced
by 11% from 2005-06 to 2006-07. Thereafter it increased by 25% in 2007-08. Again
it reduced by 10% in 2009 and finally increased by 89% in 2009-10.
The steep rise in gross NPA & net NPA 2009-10 is due to poor global conditions.
Page 56
The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2005-06 & lowest in 2007-08. In 2005-06 provisions & unrecognized interest income
was highest compare to other years while it was lowest in 2007-08.
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.
Page 57
Graph: 9.4
Source: http://www.rbi.org.in
Interpretation:
From the above chart it is clearly observed that old private sector banks are constantly
improving in terms of net NPA to net advances ratio which is represented by
declining trend from 2001-02 to 2009-10. While on the other hand for new private
sector banks net NPA to net advances ratio is fluctuating over the years.
Page 58
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.
Net
Profit
Year
X
Y
4317
2001-02 27977
8301
2002-03 27958
2003-04 24877 12295
2004-05 19335 16546
2005-06 16904 15784
2006-07 14566 16539
2007-08 15145 20152
2008-09 17726 26592
2009-10 21033 34394
Total 185521 154921
Mean 20,613 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
(X-X)2
(Y-Y)2
(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
Page 59
r=
(X-X) *(Y-Y)
[(X-X)2*(Y-Y)2] 1/2
r=
-207100923.9
379534704
r = - 0.54567
Page 60
Year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
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
4742
4742
4742
4742
4742
4742
4742
4742
4742
r=
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
(X-X)2
1085326
3741170
606513
376738
280677
2467380
509496
407606
7161443
16636349
(Y-Y)2
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)
[(X-X)2*(Y-Y)2] 1/2
r=
18673820.57
38889840.77
r=
0.480172
Page 61
Year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
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
1126
1126
1126
1126
1126
1126
1126
1126
1126
r=
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
(X-X)2
116350
42478
49774
37288
237268
101189
39642
14522
3412162
4050674
(Y-Y)2
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)
[(X-X)2*(Y-Y)2] 1/2
r=
10334943.88
13373740.04
r=
0.772778883
Page 62
Interpretation:
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.
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Non-interest
Income
20%
Interest Income
2005
Graph: 10
2006
2007
2008
2009
FBs
Pvt.SBs
PSBs
FBs
Pvt.SBs
PSBs
FBs
Pvt.SBs
PSBs
FBs
Pvt.SBs
PSBs
FBs
Pvt.SBs
PSBs
FBs
Pvt.SBs
PSBs
0%
2010
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.
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OVERALL FINDINGS
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 2009-10 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 2009-10
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 2009 and 2010 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 2010
which was 1.2% of loan assets in 2009.
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.
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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 t he
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
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SUGGESTIONS
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 2009 & 2010.
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.
Public sector banks should increase their non-interest income, as rise in NPA due to
default in interest income may affect the profits drastically.
.
ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA
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BIBLIOGRAPHY
I.
Books
Management Of Non-Performing Assets In Banks by Sugan C Jain
Managing Non-performing Assets in Banks S. N. Bidani
II.
Magazines
Investor
Business India
III.
e-Newspapers
The Economic Times
The Business Standard
I V.
Published Material
RBI Guidelines Circulars on Income Recognition and Asset Classification
Report on Trend and Progress of Banking in India 2009-10
Statistical Tables Relating to Banks of India
Master Circular
V.
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