Professional Documents
Culture Documents
GAURAV S. GODWANI
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.
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.
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
Sr.
TOPICS Pg.
No. No.
1. Introduction to NPAs 1-27
Meaning of NPA 1
Asset Classification 3
Types of NPA 7
Reasons for an Account becoming an NPA 8
Impact of NPA 10
Early Symptoms 11
Preventive Measurement of NPA 13
Procedure of NPA Identification &
Resolutions in India 16
2. Objectives & Beneficiaries 28
3. Research Methodology 29
4. Analysis 31-58
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. The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC),
1
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.
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
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.
Up to one year 20
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.
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:
Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burdenof banks. Since in India, bank
balance sheets contain a huge amount of NPAs and the process of recovery and write off
of loans is very time consuming, the provisions the banks have to make against the NPAs
according to the central bank guidelines, are quite significant. That is why the difference
between gross and net NPA is quite high.
It can be calculated by following:
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, mis-
appropriation etc.
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, 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.,
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.
Governmental policies such as changes in excise duties, pollution control orders etc.
Deficiency on the part of banks, viz, delays in release of limits and payments/
subsidies by the Government of India.
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.
1) Financial:
Non-payment of the very first installment in case of term loan.
Irregularity in installment.
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.
If information is received that the borrower has either initiated the process
of winding up or are not doing the business.
Overdue receivables.
Nonpayment of wages.
4) Others:
Death of borrower.
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.
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.
Financial related warning signals generally emanate from the borrowers' balance sheet,
income expenditure statement, statement of cash flows, statement of receivables etc.
Following common warning signals are captured by some of the banks having relatively
developed EWS.
3. Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default and diversion
of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of
infrastructure.
Banks: This study would definitely benefit the banks in a way that directs them as
to which sector should be given priority for lending money.
Further Researchers: The major beneficiaries from the project would be the
researchers themselves as this study would enhance their knowledge about the
topic. They get an insight of the present scenario of this industry as this is the
emerging industry in the financial sector of the economy.
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
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.
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
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).
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.
Old New
Public 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
Addition during the
year 31338 17822 12879 2094 10520 8430
Recovered during the
year 26271 15863 9829 1579 6510 2954
Written off during the
year 0 0 0 0 0 1514
As at end-March 2010 45156 25368 18352 3072 13911 6833
Net NPAs
As at end-March 2009 17726 8245 8398 740 4640 1247
As at end-March 2010 21033 9339 10745 1165 6253 2973
Gross NPAs/Gross
Advances Ratio
End-March 2009 2.2 2.1 2.6 2.3 2.4 1.8
End-March 2010 2 1.8 2.5 2.3 2.8 4
Net NPAs/Net
Advances Ratio
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
Source: http://www.rbi.org.in
100%
90%
80%
70%
60%
50% > 10%
40% 5% to 10%
30% 2% to 5%
20% < 2%
10%
0%
Pvt.SB
FB
FB
Pvt.SB
FB
Pvt.SB
FB
Pvt.SB
FB
Pvt.SB
PSB
PSB
PSB
PSB
PSB
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
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.
25000
Amount in Rs. Crore
20000
15000
10000
5000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Priority Sector 24156 25150 24939 23841 21926 22374 22954 25287 24318
Non-priority Sector 27307 28405 26781 25698 23249 18664 15158 14163 19251
Public Sector 1711 903 1087 610 444 341 490 299 474
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, Non-
priority sector contributes more towards NPA than priority sector. But in later years
from 2007 its other way round, where priority sector contributes more than Non-
priority 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.
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.
14000
12000
Amount in Rs. Crore
10000
8000
6000
4000
2000
0
2002 2003 2004 2005 2006 2007 2008 2009 2010
Priority Sector 1835 2546 2445 2482 2188 2284 2884 3419 3640
Non-Priority Sector 4452 9090 9327 7796 6569 5541 6353 9558 13172
Public Sector 123 31 95 75 42 4 3 0 75
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.
7000
6000
5000
4000
3000
2000
1000
0
2008 2009 2010
Priority Sector 331 402 649
Non-Priority Sector 2,120 2712.0 6506
Public Sector 0 0 0
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.
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.
2
NPA as % of Advance
1.5
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 1 1.2 1.5
Foriegn Sector 0.9 0.8 1 0.9 1.7
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%
2.6
97.2 97.7 97.9
96.1
94.6
92.2
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 Sub-
Standard, Doubtful & loss asset into the above category Standard, Sub-Standard &
Doubtful asset. The rise in sub standard ratio has major proportion indicates that there
is a high scope of up gradation or improvement in NPA recovery in initial stage
because it will be very easy to recover the loan as minimum duration of default.
1.8
97.4 97.6 97.3
96.8
96.1
94.2
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 Sub-
Standard & doubtful assets. This increase is due to interest & principle amount unpaid
due to financial crisis in 2009. The percentage of doubtful asset has reduced to a
great extent amongst all. So the private sector banks have managed to reduce the
doubtful asset.
1.6
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 Sub-
Standard 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.
35000
30000
Amount in Rs. Crore
25000
20000
15000
10000
5000
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net NPA 27977 27958 24877 19335 16904 14566 15145 17726 21033
Net Profit 4317 8301 12295 16546 15784 16539 20152 26592 34394
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%
10000
Amount in Rs. Crore
8000
6000
4000
2000
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net NPA 3700 6676 3963 4128 4212 3171 4028 5380 7418
Net Profit 1142 1779 2958 3481 3533 4975 6465 9522 10868
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%.
6000
5000
4000
3000
2000
1000
0
2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Net NPA 785 920 903 933 639 808 927 1247 2973
Net Profit 945 1492 1824 2243 3098 4109 5343 7544 8459
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.
4
Gross NPAs/Gross
3.6
Advances
3
2.7 Net NPAs/Net
2.1 2.2 Advances
2 2
1.3
1 1.1
0.8 0.7
0
2005-06 2006-07 2007-08 2008-09 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.
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.
3
2.9
2.5 2.5 2.5
2.2
2
1.9 Gross NPAs/Gross
Advances
1.5 1.5
1.2
1 1 1 Net NPAs/Net
Advances
0.5
0
2005-06 2006-07 2007-08 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 2009-
10.
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.
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.
4 4
3.5
3
2.8
2.5
Gross NPAs/Gross
2 2 Advances
1.8 1.8 1.7
1.5 Net NPAs/Net
Advances
1 0.9 1 0.9
0.8
0.5
0
2005-06 2006-07 2007-08 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.
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.
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.
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 Net
NPA Profit
[(X-X)2*(Y-Y)2] 1/2
r= -207100923.9
379534704
r = - 0.54567
r= (X-X) *(Y-Y)
[(X-X)2*(Y-Y)2] 1/2
r= 18673820.57
38889840.77
r= 0.480172
r= (X-X) *(Y-Y)
[(X-X)2*(Y-Y)2] 1/2
r= 10334943.88
13373740.04
r= 0.772778883
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 inter-
bank 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.
101
80%
60%
40%
Non-interest
Income
20%
Interest Income
0%
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
Pvt.SBs
FBs
PSBs
PSBs
Pvt.SBs
FBs
2005 2006 2007 2008 2009 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.
102
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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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
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.
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
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