My Print Report

PDIMTR 2009-10
OVERVIEW OF THE BANKING INDUSTRY
Banking in India originated in the last decades of the 18th century. The
oldest bank in existence in India is the State Bank of India, a government-
owned bank that traces its origins back to June 1806 and that is the largest
commercial bank in the country. Central banking is the responsibility of
the Reserve Bank of India, which in 1935 formally took over these
responsibilities from the then Imperial Bank of India, relegating it to
commercial banking functions. After India's independence in 1947, the
Reserve Bank was nationalized and given broader powers. In 1969 the
government nationalized the 14 largest commercial banks; the government
nationalized the six next largest in 1980.
Currently, India has 88 scheduled commercial banks (SCBs) - 27 public

sector banks (that is with the Government of India holding a stake), 29
private banks (these do not have government stake; they may be publicly
listed and traded on stock exchanges) and 31 foreign banks. They have a
combined network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public sector banks hold
over 75 percent of total assets of the banking industry, with the private
and foreign banks holding 18.2% and 6.5% respectively.
STRUCTURE OF INDIAN BANKING
A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

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Reserve Bank of India is the regulating body for the Indian Banking
Industry. It is a mixture of Public sector, Private sector, Co-
operative banks and foreign banks. The private sector banks are
further spilt into old banks and new banks.
Non Performing Assets & its impact on Operating profit of

Bank.

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The world is going faster in terms of services and physical products.

However it has been researched that physical products are available
because of the service industries. In the nation economy also, service
industry plays vital role in the boosting up of the economy. The nations
like U.S, U.K, and Japan have service industries more than 55%. Banking
sector reforms in India has progressed promptly on aspects like interest
rate deregulation, reduction in statutory reserve requirements, prudential
norms for interest rates, asset classification, income recognition and
provisioning. But it could not match the pace with which it was expected
to do. The accomplishment of these norms at the execution stages without
restructuring the banking sector as such is creating havoc.
The efficiency of a bank is not always reflected only by the size of its
balance sheet but by the level of return on its assets. NPAs do not generate
interest income for the banks, but at the same time banks are required to
make provisions for such NPAs from their current profits. The main aim
of any person is the utilization money in the best manner since the India is
country where more than half of the population has problem of running
the family in the most efficient manner. However Indian people faced
large number of problem till the development of the full-fledged banking
sector. The Indian banking sector came into the developing nature mostly
after the 1991 government policy. The banking sector has really helped the
Indian people to utilize the single money in the best manner as they want.
People now have started investing their money in the banks and banks
also provide good returns on the deposited amount. The people now have
at the most understood that banks provide them good security to their
deposits and so excess amounts are invested in the banks. Thus, banks
have helped the people to achieve their socio economic objectives.
The banks not only accept the deposits of the people but also provide
them credit facility for their development. Indian banking sector has the
nation in developing the business and service sectors. But recently the

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banks are facing the problem of credit risk. It is found that many general
people and business people borrow from the banks but due to some
genuine or other reasons are not able to repay back the amount drawn to
the banks. The amount which is not given back to the banks is known as
the non performing assets. Many banks are facing the problem of non-
performing assets which hampers the business of the banks. Due to NPAs
the income of the banks is reduced. The world is going faster in terms of
services and physical products. However it has been researched that
physical products are available because of the service industries. In the
nation economy also service industry plays vital role in the boosting up of
the economy. The nations like U.S, U.K, and Japan have service industries
more than 55%. The banking sector is one of appreciated service
industries.
The banking sector plays larger role in channelizing money from one end
to other end. It helps almost every person in utilizing the money at their
best. The banking sector accepts the deposits of the people and provides
fruitful return to people on the invested money. But for providing the
better returns plus principal amounts to the clients; it becomes important
for the banks to earn. The main source of income for banks is the interest
that they earn on the loans that have been disbursed to general person,
businessman, or any industry for its development. Thus, we may find the
input-output system in the banking sector. Banks first, accepts the deposits
from the people and secondly they lend this money to people who are in
the need of it. By the way of channelizing money from one end to another
end, Banks earn their profits.
However, Indian banking sector has recently faced the serious problem of
Non Performing Assets. This problem has been emerged largely in Indian
banking sector since three decade. Due to this problem many Public Sector
Banks have been adversely affected to their performance and operations.
In simple words Non Performing Assets problem is one where banks are
not able to recollect their landed money from the clients or clients have
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been in such a condition that they are not in the position to provide the
borrowed money to the banks. The problem of NPAs is danger to the
banks because it destroys the healthy financial conditions of them. The
trust of the people would not be any more if the banks have higher NPAs.
So the problem of NPAs must be tackled out in such a way that would not
destroy the operational, financial conditions and would not affect the
image of the banks. Recently, RBI has taken number steps to reduce NPAs
of the Indian banks. And it is also found that the many banks have shown
positive figures in reducing NPAs as compared to the past years.
That’s why the study of NPA’s become necessary due to the above
mentioned reasons :
 They erode current profits through provisioning requirements.
 They result in reduced interest income.
 They require higher provisioning requirements affecting profits

and accretion to capital funds and capacity to increase good
quality risk assets in future, and
 They limit recycling of funds, set in asset-liability mismatches,
etc.
NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
To start with, performance in terms of profitability is a benchmark for any

business enterprise including the banking industry. However, increasing
NPAs have a direct impact on banks profitability as legally banks are not
allowed to book income on such accounts and at the sometime are forced
to make provision on such assets as per the Reserve Bank of India (RBI)
guidelines. Also, with increasing deposits made by the public in the
banking system, the banking industry cannot afford defaults by borrower
s since NPAs affects the repayment capacity of banks.
Further, Reserve Bank of India (RBI) successfully creates excess

liquidity in the system through various rate cuts and banks fail to
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utilize this benefit to its advantage due to the tear of burgeoning non-
performing assets.
About the NPA

An asset is classified as Non-performing Asset (NPA) if due in the form
of principal and interest are not paid by the borrower for a period of 90
days. If any advance or credit facilities granted by banks to a borrower
become non-performing, then the bank will have to treat all the
advances/credit facilities granted to that borrower as non-performing
without having any regard to the fact that there may still exist certain
advances/credit facilities having performing status.
Though the term NPA connotes a financial asset of a commercial bank,
which has stopped earning an expected reasonable return, it is also a
reflection of the productivity of the unit, firm, concern, industry and
nation where that asset is idling. Viewed with this perspective, the NPA is
a result of an environment that prevents it from performing up to
expected levels.
The definition of NPAs in Indian context is certainly more liberal with two
quarters norm being applied for classification of such assets. The RBI is
moving over to one-quarter norm from 2004 onwards.
NPAs –MEANING:
 A NPA is a loan or an advance where Interest and/ or
installment of principal remain overdue for a period of more
than 90 days in respect of a term loan,
 The debt remains outstanding for 90 consecutive days or more

beyond the scheduled payment date or maturity.
 The debt exceeds the borrower’s approved limit for 90
consecutive days or more.
 Interest is due and uncollected for 90 days or more or

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 For overdrafts, the account has been inactive for 90 consecutive

days and / or deposits are insufficient to cover the interest
capitalized during the period.
NPAs reflect the performance of banks. A high level of NPAs suggests

high probability of a large number of credit defaults that affect the
profitability and net-worth of banks and also erodes the value of the
asset. The NPA growth involves the necessity of provisions, which
reduces the overall profits and shareholders’ value.
It's a known fact that the banks and financial institutions in India face
the problem of swelling non-performing assets (NPAs) and the issue is
becoming more and more unmanageable. In order to bring the
situation under control, some steps have been taken recently. The
Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002 was passed by Parliament, which is an
important step towards elimination or reduction of NPAs.
DEFINITION GIVEN BY THE NARASIMHAN

COMMITTEE:
Committee on financial system (CFS) Narsimhan committee which

reported in 1991, meanwhile major changes have taken place in the
domestic, economic and institutional science, indicating the movement
towards global integration of financial services. Committee has presented
second-generation reforms.
1. To strengthen the foundation of financial system
2. Related to this, streamlining procedures, upgrading

technology and human resource development.
3. Structural changes in the system

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The committee has defined non-performing assets as advances here, as on

the date of balance sheet,
1. In respect of term loans, interest remains past due for a period of
more than 90 days.
2. Overdrafts and cash credits accounts remain out of order for more
than 90 days.
3. Bills purchased and discounted remain over due and unpaid for a
period of more than 90 days.
An amount is considered past due when it remains outstanding for 30
days beyond the due date.
RBI REGULATION REGARDING INCOME

RECOGNITION, ASSETS CLASSIFICATION AND
PROVISIONING:
INCOME RECOGNITION:
RBI has notified regulations concerning the income recognition of banks

while accepting the recommendations of the Narasimham committee
report. The following is the regulations regarding income recognition of
banks:
 Interest income should not be recognized until it is realized.
A non-performing asset is one when it is overdue for two
quarters or more.
 In respect of non-performing assets, interest is not to be
recognized on accrual basis but it is to be treated as income
only when it is actually received. NPA’s banks should not
charge or take into account the interest.
 In overdue bill, interest should not be charged or taken as
income unless realized. Interest accrued and credited to prior
accounting period in respect of non-performing assets

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should be reversed or provided for in the current account if

such interest still remains uncollected.
CLASSIFICATION OF ASSETS FOR MAKING

PROVISION:
For the purpose of making provisions for bad and doubtful loans and
advances, banks need to classify them into the following broad categories:
 Performing assets
 Non-performing asset
I) PERFORMING ASSETS:
Performing assets is also known as standard assets/loans, where the
interest or principal are not overdue beyond 180 days at the end of the
financial year. Such loans don’t carry more than the normal business risk.
II) NON-PERFORMING ASSETS:
Any loan the repayment of which is overdue beyond 180 days or two
quarters is considered as NPA. It is further classified into:
a. Sub-standard assets
b. Doubtful assets
c. Loss assets
(a) SUB-STANDARD ASSETS:
Sub-standard asset is one which has been classified as NPA for a period
not exceeding two years. With effect from 31 March 2001, a sub-standard
asset is one, which has remained NPA for a period less than or equal to 18
months. In such cases, the current net worth of the borrower/guarantor or
the current market value of the security charged is not enough to ensure
weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the bank will sustain some
loss, if deficiencies are not corrected.

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(b) DOUBTFUL ASSETS:

A doubtful asset is one, which has remained NPA for a period exceeding
two years. With effect from 31st March 2001, an asset is to be classified as
doubtful, if it has remained NPA for a period exceeding 18 months. A loan
classified as doubtful has all the weaknesses inherent in that 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.
(c) LOSS ASSETS:

A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has been written
off, wholly or partly. In other words, such an asset is 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. The assets, which have been wholly written off should not be
reported in BSR-1. however, in case of partly written off assets, the amount
of technical write off, if any, should be reduced from the outstanding gross
advances.
It should be noted that the above classification is only for the purpose of
computing the amount of provision that should be made with respect to
bank advances and certainly not for the purpose of presentation of
advances in the bank’s balance sheet.
The Third Schedule to the Banking Regulation Act, 1949, solely governs
presentation of advances in the balance sheet. Banks have started issuing
notices under the Securitization Act, 2002 directing the defaulter to either
pay back the dues to the bank or else give the possession of the secured
assets mentioned in the notice. However, there is a potential threat to
recovery if there is substantial erosion in the value of security given by the
borrower or if borrower has committed fraud. Under such a situation it

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will be prudent to directly classify the advance as a doubtful or loss asset,

as appropriate.
ADVERSE EFFECTS OF NPAs
An NPA on the balance sheet of an institution deteriorates its health in

several ways:
1. PROBLEM OF MORAL HAZARD

Interest income cannot be
booked on the loan declared as an NPA, and so profits get affected.
In addition, provisioning against assets creates further losses. Thus,
financial institutions have a tendency to rollover non- performing
loans. The borrower is given more loans to pay interest on past
loans and repay whatever amount is possible.
2. ADVERSE INCENTIVE:
A bank with say 25% NPA,
will have to earn on 75% of its assets to meet its expenses and make
a profit. It will have a tendency to go for more risky ventures
promising higher rates of return, since 750/(; of the loan portfolio
will have to pay for 100% of the liabilities and risky venture always
have a greater probability of becoming 'non- performing', thus
completing the self- fulfilling cycle.
3. HUGE OPPURTUNITY COST:

Assuming Rs. 1,
00,000 crore locked up due to NPAs started earning interest, say at
10%, it would immediately boost the interest yield of the
nationalized banks by anything between 1.6 and 1.8%. This
increased yield could then translate into reduced interest rates for
the banks' clients.

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CREDIT RISK AND NPAs
Quite often credit risk management (CRM) is confused with managing

non-performing assets (NPAs). However there is an appreciable difference
between the two. NPAs are a result of past action whose effects are
realized in the present i.e. they represent credit risk that has already
materialized and default has already taken place. On the other hand
managing credit risk is a much more forward-looking approach and is
mainly concerned with managing the quality of credit portfolio before
default takes place. In other words, an attempt is made to avoid possible
default by properly managing credit risk.
Considering the current global recession and unreliable inforn1ation in

finaI1cial statements, there is high credit risk in the banking and lending
business. To create a defense against such uncertainty, bankers are
expected to develop an effective internal credit risk models for the
purpose of credit risk management.
IMPORTANCE OF CREDIT RATING
Fundamentally Credit Rating implies evaluating the creditworthiness of a

borrower by an independent rating agency. Here objective is to evaluate
the probability of default. As such, credit rating does not predict loss but it
predicts the likelihood of payment problems. Credit rating has been
explained by Moody's a credit rating agency as forming an opinion of the
future ability, legal obligation and willingness of a bond -issuer or obligor
to make full and timely payments on principal and interest due to the
investors. Banks do rely on credit rating agencies to measure credit risk as
a sign of probability of default. A credit rating agency generally slot
companies into risk buckets that indicate company's credit risk and is also

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reviewed periodically. Associated with each risk bucket is the probability

of default that is derived from historical observations of default behavior
in each risk bucket.
However, credit rating is not foolproof. In fact, Enron was rated

investment grade till as late as a month prior to its filing for Chapter 11
bankruptcy when it was assigned an in default status by the rating
agencies. It depends on the information available to the credit rating
agency. Besides, there may be conflict of interest, which a credit rating
agency may not be able to resolve in the interest of investors and lenders.
Stock prices are an important (but not the sole) indicator of the
credit risk involved. Stock prices are much more forward looking in
assessing the creditworthiness of a business enterprise. Historical
data proves that stock prices of companies such as Enron and
WorldCom had started showing a falling trend many months prior
to it being downgraded by credit rating agencies.
NORMS FOR TREATING VARIOUS ADVANCES AS NPAs
An asset which ceases to generate income for the bank is called a non-
performing asset (NPA). The basic factor to determine whether an account
is NPA or not is the record of recovery and not the availability of security.
RBI has advised following norms for identifying the kind of advances as
non -performing.
LOANS (loans repayable in installments):

A loan shall be treated as NPA if interest and/or installment of principal
remain overdue/or a period of more than 90 days. Any amount due to the
bank under any credit facility is 'overdue' if it is not paid on the due date
fixed by the bank. Hence a loan account shall be treated as NPA as on
31.03.2004, if interest and/or installment of principal remain overdue for a
period of more than 90 days.

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Illustrations:
 If interest due for the month-ended 31.12.2004 is not paid, it

becomes NPA on 30.03.2005 (i.e. overdue for more than 90
days). Hence the amount shall be classified as NP A as on
31.03.2005
 If installment towards principal due on 01.01.2005 is not

paid, it becomes NPA as on 31.03.2005 (i.e. overdue for more
than 90 days).
SPECIAL CASE:
Equated monthly installments: In case of loans repayable in equated

monthly installments where a part of the interest is including in the
installment, NPA status shall be determined on the basis of non-payment
of equated monthly installments and not with reference to the date of
debit of monthly interest.
Loans with moratorium for payment of interest: In the case of bank

finance given for industrial projects or for agricultural plantations etc.
where moratorium is available for payment of interest, payment of interest
becomes due only after the moratorium or gestation period is over.
Therefore such amounts of interest becomes overdue and hence NPA,
with reference to date of debit of interest. They become overdue after due
date for payment of interest, if uncollected.
Staff housing loans: In case of housing loan or similar advances granted to

staff members where interest is payable after recovery of principal, interest
need not be considered as overdue from the first month onwards Such
loans/advances should be classified as NP A only when there is a default

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in repayment of installment of principal or payment of interest on the

respective due dates.
Advance payments: Where the borrower has made advance payment of

installments fixed towards the loan as on 31.03.2004 the loan account is
regular, such loan account need not be treated as NPA even if technically
interest is due for more than 90 days.
CASH CREDIT/OVERDRAFT:
A cash credit/overdraft account shall be treated as NPA if it remains 'out
of order' for 90 days. An account shall be treated as out of order if the
outstanding balance remains continuously in excess of the sanctioned
limit/drawing power, whichever is less but there are no credits
simultaneously for 90 days as on the date of balance sheet or credits are
not enough to cover the interest debited during the same period, these
accounts should be treated as' out of' order’.
Illustration: If a cash credit/overdraft if within limit but there are no

credits continuously during the period from 02.01.2005 to 31.03.2005, the
account becomes NPA on 31.03.2005(i.e. no credits continuously for 90
days).
BILLS PURCHASED/DISCOUNTED:
A Bill purchased/discounted shall be treated as NPA if it remains overdue

for a period of more than 90 days. Hence a cheque/draft/bill
purchased/discounted shall be treated as NPA as on 31.03.2005 if it
remains overdue for more than 90 days as on 31.03.2005.
AGRICULTURAL LOANS:
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An agricultural advance shall be treated as NPA if interest and/or

installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years. Hence in respect of advances granted
for agricultural purpose where interest and/or installment of principal
remains unpaid for two harvest seasons but for a period not exceeding
two half years after it has become due, such advance should be treated as
NPA. In respect of agricultural advances such as dairy, poultry,
sericulture, animal husbandry, fishery etc, income recognition, Asset
classification and provisioning should be done on the same basis as non-
agricultural advances as per 90 days noun.
OTHER ACCOUNTS:
Any other credit facility shall be treated as NPA if any amount to be
received remains overdue for a period of more than 90 days. Hence any
other credit facility shall be classified as NPA as on 31.0 3.2005 if
interest/principal remains overdue for more than 90 days.
ACCOUNTS, WHICH NEED NOT BE CLASSIFIED AS NPA:

Loans on deposits and loans against Govt. securities: Advances fully
secured against term deposit (inclusive of accrued interest, if any), NSC,
Indira Vikas Patra (IVP), Kisan Vikas Patra (KVP) and LIC Policies should
not be treated as NP A. Such securities are exempt from provision
requirement and hence, they shall be classified as Perforn1ing assets only.
Advances guaranteed by State/Central Government: Govt. guaranteed

advances mean the advances repayment of which is guaranteed by State
or Central Government, by executing guarantee bond/guarantee letter by
the concerned Government department. Borrower accounts of Public
Sector Undertakings should not be treated as Government Guaranteed
Accounts unless specific Guarantee bond/guarantee letter is executed by
the concerned Govt. Department.

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The credit facilities backed by guarantee of the Central Govt. though

overdue may be treated as NP A only when the Government repudiates its
guarantee when invoked. This exemption from classification of Govt.
guaranteed advances, as NP A is not for the purpose of recognition of
income.
Advances sanctioned against State Government guarantees should be

classified as NPA in the normal course, if the guarantee is invoked and
remains in default for more than 90 days. If State /Central Govt. guarantee
is not adequate to cover the full liability, asset classification and
provisioning norms shall be applied on uncovered portion. Further, in
case of Government guaranteed accounts. When suit is filed against the
borrower as well as against the concerned Government, it should be
classified as sub-standard, doubtful or loss asset applying the norms as
applicable to other advances.

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PROCEDURES FOR NPA IDENTIFICATION AND

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

brought out by a study conducted by Reserve Bank of India at the instance of
the Board of Financial Supervision are as follows:
 Designating Relationship Manager/ Credit Officer for monitoring

account/s
 Preparation of `know your client' profile
 Credit rating system
 Identification of watch-list/special mention category accounts
 Monitoring of early warning signals

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Relationship Manager/Credit Officer
The Relationship Manager/Credit Officer is an official who is expected to

have complete knowledge of borrower, his business, his future plans, etc.
The Relationship Manager has to keep in constant touch with the
borrower and report all developments impacting the 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
borrow-able unit. The exercise is generally done at the time of sanction of new
borrow-able account and at the time of review / renewal of existing credit
facilities.

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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 provides early warning signals enabling Relationship Manager or
Credit Officer to anticipate credit deterioration and take necessary preventive
steps to avoid their slippage into non performing advances.
Early Warning Signals
It is important in any early warning system, to be sensitive to signals of credit

deterioration. A host of early warning signals are used by different banks for
identification of potential NPAs. Most banks in India have laid down a series
of operational, financial, transactional indicators that could serve to identify
emerging problems in credit exposures at an early stage. Further, it is revealed
that the indicators which may trigger early warning system depend not only
on default in payment of instalment and interest but also other factors such as
deterioration in operating and financial performance of the borrower,
weakening industry characteristics, regulatory changes, general economic
conditions, etc. Early warning signals can be classified into five broad
categories viz.
(a) Financial
(b) Operational
(c) Banking
(d) Management and

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(e) External factors.
Financial related warning signals generally emanate from the borrowers'

balance sheet, income expenditure statement, statement of cash flows,
statement of receivables etc. Following common warning signals are captured
by some of the banks having relatively developed EWS.
Financial warning signals
 Persistent irregularity in the account

 Default in repayment obligation
 Devolvement of LC/invocation of guarantees
 Deterioration in liquidity/working capital position
 Substantial increase in long term debts in relation to equity
 Declining sales
 Operating losses/net losses
 Rising sales and falling profits
 Disproportionate increase in overheads relative to sales
 Rising level of bad debt losses Operational warning signals
 Low activity level in plant
 Disorderly diversification/frequent changes in plan
 Non-payment of wages/power bills
 Loss of critical customer/s
 Frequent labour problems
 Evidence of aged inventory/large level of inventory
Management related warning signals
 Lack of co-operation from key personnel

 Change in management, ownership, or key personnel
 Desire to take undue risks
 Family disputes
 Poor financial controls
 Fudging of financial statements
 Diversion of funds
Banking related signals

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 Declining bank balances/declining operations in the account

 Opening of account with other bank
 Return of outward bills/dishonored cheques
 Sales transactions not routed through the account
 Frequent requests for loan
 Frequent delays in submitting stock statements, financial data,
etc. Signals relating to external factors
 Economic recession
 Emergence of new competition
 Emergence of new technology
 Changes in government / regulatory policies
 Natural calamities
COMPANY PROFILE
Introduction of SBI:
State Bank of India (SBI) is India's largest commercial bank. SBI has a vast
domestic network of over 16000 branches (approximately 14% of all bank
branches) and commands one-fifth of deposits and loans of all scheduled
commercial banks in India. The State Bank Group includes a network of
eight banking subsidiaries and several non-banking subsidiaries offering

Page 22
PDIMTR 2009-10
merchant banking services, fund management, factoring services,

primary dealership in government securities, credit cards and insurance.
The eight banking subsidiaries are:

1-State Bank of Bikaner and Jaipur (SBBJ)
2-State Bank of Hyderabad (SBH)
3-State Bank of India (SBI)
4-State Bank of Indore (SBIR)
5-State Bank of Mysore (SBM)
6-State Bank of Patiala (SBP)
7-State Bank of Saurashtra (SBS)
8-State Bank of Travancore (SBT)
The origins of State Bank of India date back to 1806 when the Bank of
Calcutta (later called the Bank of Bengal) was established. In 1921, the
Bank of Bengal and two other Presidency banks (Bank of Madras and
Bank of Bombay) were amalgamated to form the Imperial Bank of India.
In 1955, the controlling interest in the Imperial Bank of India was acquired
by the Reserve Bank of India and the State Bank of India (SBI) came into
existence by an act of Parliament as successor to the Imperial Bank of
India. Today, State Bank of India (SBI) has spread its arms around the
world and has a network of branches spanning all time zones. SBI's
International Banking Group delivers the full range of cross-border
finance solutions through its four wings - the Domestic division, the
Foreign Offices division, the Foreign Department and the International
Services division.
SBI provides a range of banking products through its vast network in

India and overseas, including products aimed at NRIs. The State Bank
Group, with over 16000 branches, has the largest branch network in India.
With an asset base of $250 billion and $195 billion in deposits, it is a
regional banking behemoth. It has a market share among Indian

Page 23
PDIMTR 2009-10
commercial banks of about 20% in deposits and advances, and SBI

accounts for almost one-fifth of the nation’s loans.
State Bank of India (SBI) (LSE: SBID) is the largest bank in India. If one
measures by the number of branch offices and employees, SBI is the
largest bank in the world. Established in 1806 as Bank of Calcutta, it is the
oldest commercial bank in the Indian subcontinent. SBI provides various
domestic, international and NRI products and services, through its vast
network in India and overseas.
The government nationalized the bank in 1955, with the Reserve Bank of
India taking a 60% ownership stake. In recent years the bank has focused
on three priorities,
 1), reducing its huge staff through Golden handshake schemes
known as the Voluntary Retirement Scheme, which saw many of its
best and brightest defect to the private sector,
 2), computerizing its operations and
 3), changing the attitude of its employees (through an ambitious
programme aptly named 'Parivartan' which means change) as a
large number of employees are very rude to customers.
Timeline:
o June 2 , 1806: The Bank of Calcutta established
o January 2, 1809: This became the Bank of Bengal.
o April 15, 1840: Bank of Bombay established.
o July 1, 1843: Bank of Madras established.
o 1861: Paper Currency Act passed.
o January 27, 1921: all three banks amalgamated to form
Imperial Bank of India.
o July 1, 1955: State Bank of India formed; becomes the first
Indian bank to be nationalized.
o 1959: State Bank of India (Subsidiary Banks) Act passed,
enabling the State Bank of India to take over eight former
State-associated banks as its subsidiaries.

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PDIMTR 2009-10
o 1980s When Bank of Cochin in Kerala faced a financial

crisis, the government merged it with State Bank of India.
o June 29, 2007: The Government of India today acquired the
entire Reserve Bank of India (RBI) shareholding in State
Bank of India (SBI), consisting of over 314 million equity
shares at a total amount of over 355 billion rupees.
Associate banks:
There are seven other associate banks that fall under SBI. They all use the
"State Bank of" name followed by the regional headquarters' name. These
were originally banks belonging to princely states before the government
nationalized them in 1959. In tune with the first Five Year Plan,
emphasizing the development of rural India, the government integrated
these banks with the State Bank of India to expand its rural outreach. The
State Bank group refers to the seven associates and the parent bank. All
the banks use the same logo of a blue keyhole. Currently, the group is
merging all the associate banks into SBI, which will create a "mega bank",
and one hopes, streamline operations and unlock value.
MANAGEMENT:
The bank has 14 directors on the Board and is responsible for the
management of the Bank’s business. The board in addition to monitoring
corporate performance also carries out functions such as approving the
business plan, reviewing and approving the annual budgets and
borrowing limits and fixing exposure limits. Mr. O. P. Bhatt is the
Chairman of the bank. The five-year term of Mr. Bhatt will expire in
March 2011.Mr. Bhatt has more than 30 years of experience in the Indian
banking industry and is seen as futuristic leader in his approach towards
technology and customer service. Mr. T S Bhattacharya is the Managing
Director of the bank and known for his vast experience in the banking
industry. Recently, the senior management of the bank has been

Page 25
PDIMTR 2009-10
broadened considerably. The positions of CFO and the head of treasury

have been segregated and new heads for rural banking and for corporate
development and new business banking have been appointed.
Shareholding & Liquidity (Till 30th Sept. 2008)

Reserve Bank of India is the largest shareholder in the bank with 59.7%
stake followed by overseas investors including GDRs with 19.78% stake as
on September 06. Indian financial institutions held 12.3% while Indian
public held just 8.2% of the stock. RBI is the monetary authority and
having majority shareholding reflects conflict of interest. Now the
government is rectifying the above error by transferring RBI’s holding to
itself. Post this, SBI will have a further headroom to dilute the GOI’s stake
from 59.7% to 51.0%, which will further improve its CAR and Tier I ratio.
Reserve Bank of India
Mutual Funds/UTI
Financial
Institutions/Banks
Overseas investors
including FIIs/OCBs/NRIs
GDR Issues
Others
Growth
With 11,448 branches and a further 6500+ associate bank branches, the SBI
has extensive coverage. Following its arch-rival ICICI Bank, State Bank of
India has electronically networked most of its metropolitan, urban and
semi-urban branches under its Core Banking System (CBS), with over 4500
branches being incorporated so far. The bank has one of the largest ATM
networks in the region, with more than 9000 ATMs across India.

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PDIMTR 2009-10
The State Bank of India has had steady growth over its history, though the
Harshad Mehta scam in 1992 marred its image. In recent years, the bank
has sought to expand its overseas operations by buying foreign banks.
According to the Forbes 2000 listing it tops all Indian companies.
In recent past, SBI has acquired banks in Mauritius, Kenya and Indonesia.
The bank had total staff strength of 198,774 as on 31st March, 2006. Of this,
29.51% are officers, 45.19% clerical staff and the remaining 25.30% were
sub-staff. The bank is listed on the Bombay Stock Exchange, National
Stock Exchange, Kolkata Stock Exchange, Chennai Stock Exchange and
Ahmadabad Stock Exchange while its GDRs are listed on the London
Stock Exchange.
SBI group accounts for around 25% of the total business of the banking
industry while it accounts for 35% of the total foreign exchange in India.
With this type of strong base, SBI has displayed a continued performance
in the last few years in scaling up its efficiency levels. Net Interest Income
of the bank has witnessed a CAGR of 13.3% during the last five years.
During the same period, net interest margin (NIM) of the bank has gone
up from as low as 2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%.
It is the only Indian bank to feature in the top 100 world banks in the
Fortune Global 500 rating and various other rankings.
Activities: State Bank of India administrative structure is well equipped

to oversee the large network of branches in India and abroad. The State
Bank of India 14 Local Head Offices and 57 Zonal Offices are located at
important cities spread throughout the country. State Bank of India has 52
foreign offices in 34 countries across the globe. The Corporate Accounts
Group is a Strategic Business Unit of the Bank set up exclusively to fulfill
the specialized banking needs of top corporate in the country. The main
activities of are into –
 Personal Banking.
 NRI Services
 Agriculture
 SME
 Corporate
 Domestic Treasury
 International

Page 27
PDIMTR 2009-10
Foreign Offices:
State Bank of India is present in 32 countries, where it has 84 offices
serving the international needs of the bank's foreign customers, and in
some cases conducts retail operations. The focus of these offices is India-
related business.
SBI & NPA

Being the largest bank SBI is the largest lender to the various sector of the
society and hence faces the huge problem of the non performing assets.
The Reserve Bank of India has asked the country’s largest lender State
Bank of India to increase its provision coverage ratio for bad loans,
considering the low provisions made by it when compared to the industry
average.

Page 28
PDIMTR 2009-10

Presently, the bank has made provisions at 38.72 percent for the current
fiscal which is very low when compared with the industry average of 52
percent. The regulator feels that the bank must maintain an average PCR
(Provision Coverage Ratio) of 50 percent, considering the increase in
number of home loans defaults in recent past.

The regulator (RBI) feels that the SBI must maintain an average PCR of
50 percent, considering the increase in number of home loans defaults in
recent past. The PCR of its peer banks, Punjab National Bank and Bank
of Baroda stood at 90 percent and 75 percent respectively. The regulator
has also indicated a drop in SBI PCR on y-o-y basis. In 2005-06, the PCR
of the bank was 49 percent. The PCR was lowered to 38 percent in 2008-
09.
However, the bank reasoned that the loan loss provisions made by it are in
accordance with the regulator’ guidelines.
REASONS BEHIND HUGE LEVEL OF NPAs IN THE INDIAN

BANKING SYSTEM
The origin of the problem of burgeoning NPAs lies in the quality of

managing credit risk by the banks concerned. Any lending activity
involves the following three stages where discretion needs to be exercised:
evaluation and assessment of the proposal; continuing support during the
loan period by additional loan or by non-fund based activities; and exit
decision and modality. Studies have shown that Indian financial
institutions have shown extremes of behavior at each of the above stages.
In many instances, loans have been sanctioned because of vested interests.
Promoter banker nexus or promoter-politician linkage have been exploited
to siphon off-funds from the banking system, Post loan disbursal, bankers
are supposed to keep track of the key signals that indicate the health of the
loan recipient and monitor project progress. Banks concerned should
continuously monitor loans to identify accounts that have potential to
become non-performing.
1. Willful Default:

Page 29
PDIMTR 2009-10
If the borrower doesn't pay though he has the capacity to pay. He is

termed as willful defaulter. The features of willful default are wrong use
of funds and siphoning of funds.
2. Improper functioning of Debt Recovery Tribunals
Although the setting up of Debt Recovery Tribunals had raised

much hope about speeding up of the recovery proceedings
initiated by banks these hopes have largely remained unfulfilled.
At quite a few places, the DRTs are still to be set up and, even
where these have been set up, they are not yet fully equipped to
handle very large number of cases already before them or those
that can be placed before them. In some of the DRTs, the number
of pending cases is quite large. While the government has been
reviewing the operations of DRTs, as yet a Stage has not come
when it can be said that these are helping recoveries of banks' dues
substantially. In fact it has failed to achieve the declared objective
of disposal of' cases within six months in speedy recovery of
advances.
3. Project appraisal Deficiencies: -
It includes deficiencies regarding technical feasibility" economic

viability and project management deficiencies in regard to
implementation, production, and labor “marketing" financial and
administrative.
4. Ineffective Credit Monitoring: -

Page 30
PDIMTR 2009-10
Ineffective credit monitoring and follow-up mechanism of' the

banks have also contributed to slippage of' standard loans into bad loans.
5. Diversion of Funds: -
Diversion of' funds mostly for

expansion/diversification/modernization and taking up new projects and
for promoting associated concerns is a prominent reason for high level of
NPAs.
6. External factors: -
The RBI study noted that non-availability of raw materials, power

shortage, transport bottlenecks, financial bottlenecks, change in Govt.
policy, natural calamities, industrial sickness, increase in import cost,
increase in overhead cost, market saturation, product obsolescence, fill in
demand and others were responsible for weak performance in 48% of
units assisted by the banks resulting into advances given to them turning
bad.
7. Ineffective legal system: -
It is one of the most important factors contributing to enormously

high level of NPAs in Banks. Antiquated legal system, extremely slow
judicial system and dismal record of enforcement machineries have
contributed significantly to high level of NPAs.
8. International development: -

Page 31
PDIMTR 2009-10
Sudden international development adversely affects viability of

production units e.g. OIL Crisis, fertilizer plants based on petro chemical
feedstock became suddenly enviable.
9. Promoter-banker nexus: -
In many instances, loans have been sanctioned because of vested

interests. Promoter-banker nexus have been exploited to siphon off funds
from the banking system.
10. Operational factors: -
It is regarding the current and prospective risk to earnings arising

from fraud, error and the inability to deliver products or services and
maintain a competitive position.
11. Strategic Factors: -
It includes adverse business decisions, improper implementation of

decisions or lack of responsiveness to industry changes.
RESEARCH METHODOLOGY

Page 32
PDIMTR 2009-10
The project titled “A STUDY OF NON PERFORMING ASSETS IN

LEADING NATIONALISED BANKS” shall be the result of
Descriptive research.
The conception of the research design plan is a critical step in the research
process. The design of the study constitutes the blue print for the
collection, measurement and analysis of the data. In other words, the
research design is a conceptual structure with in which research is
conducted. Research methodology is designed in order to solve a research
problem. I have conducted a descriptive research to understand and
develop knowledge on the existing problem of Non-performing Assets.
Objectives of the Study

The broad objectives of the present study are:
 To understand the meaning & nature of NPAs.
 To examine the causes for NPAs in public sector
banks.
 To analyze the NPA and its relation with operating
profit of the bank
 To study the general reasons for assets become NPAs.
 What is the criterion to recover the advances from the
bank.
 What are the methods adopted by the bank to look
after NPA management
Statement of problem:
The bank will always face the problem of NPA because of poor recovery of
advances granted by the bank and several other reasons like adopting a
poor recovery strategies so when the loan is not recovered from the bank

Page 33
PDIMTR 2009-10
effectively and efficiently that balance amount will become the NPA to the
bank it may create some huge problem to the bank’s net profit.
Scope of this study:
 To present a picture of movement of NPA in Nationalized
bank.
 To know how NPA level will affect the profit of the bank.
SIGNIFICANCE OF STUDY:
The main aim behind making this report is to know how Nationalized
Banks are operating their business and how NPAs play its role to the
operations of the Public Sector Banks. The present study also focuses on
the existing system in India to solve the problem of NPAs and
comparative analysis to understand which bank is playing what role with
concerned to NPAs. Thus, the study would help the decision makers to
understand the financial performance and growth of Public Sector Banks
as compared to the NPAs.
That’s why the study of NPA’s become necessary due to the above
mentioned reasons :
 They erode current profits through provisioning requirements.
 They result in reduced interest income.

 They require higher provisioning requirements affecting profits and
accretion to capital funds and capacity to increase good quality risk
assets in future, and
 They limit recycling of funds, set in asset-liability mismatches, etc.
3.4 HYPOTHESIS
H0: There is no significant relationship between gross NPA o
f a bank to it operating profit.
H1: There is a significant relationship between gross NPA of
a bank to its operating profit.
Sources of data: The study is based on the secondary data.

Page 34
PDIMTR 2009-10
Secondary Data: Secondary data are those which have

already been passed through the statistical process”. The
data which was pre-essential for this study relating to
management of NPA was based on secondary source of data.
This data was collected from materials provided by bank,
annual reports, management reports, magazines, journals,
RBI circulars and some essential books on banking was
referred.
Annual reports of nationalized banks.
 Magazines
 Journals
 Newspapers
 RBI’s Annual reports.
 Quarterly bulletins of nationalized banks.
 Nationalized bank’s websites.
Websites of the sample banks:

www.statebankofindia .com
www.iba.org.in
www.rbi.org
Brochures from the bank branch in Nagpur

Magazines & Journals
News Papers: 1) Business Standard 2) Economic Times

Page 35
PDIMTR 2009-10
DATA ANALYSIS & INTERPRETATION
1) Presentation of data through various charts. 2) Interpretation of data.
Comparative study of NPA among
1. Nationalized banks 2.Private Banks 3.Foreign

Bank
Table: 1 FLUCTUATION IN LAST 3 yrs NPA IN SBI:
Items 2006-07 2007-08 2008-09

No. of offices 9632 10253 11447
No. of employees 185388 179205 205896
Business per employee (in Rs.
lakh) 357.00 456.00 556.00
Profit per employee (in Rs. lakh) 2.37 3.73 4.74
Capital and Reserves & surplus 31299 49033 57948
Deposits 435521 537404 742073
Investments 149149 189501 275954
Advances 337336 416768 542503
Interest income 37242 48950 63788
Other income 6765 8695 12691

Page 36
PDIMTR 2009-10
Interest expended 22184 31929 42915

Operating expenses 11824 12609 15649
Cost of Funds (CoF) 4.55 5.64 5.85
Ret on advances adjusted to CoF 3.74 3.70 3.83
Wages as % to total expenses 23.33 17.48 16.64
Return on Assets 0.84 1.01 1.04
CRAR 12.34 13.54 14.25
Net NPA ratio 1.56 1.78 1.76
1.2
1
Figure 1.1 shows the increase in
0.8
return on assets in the last three
0.6 Return on Assets years
0.4
0.2
0
Fig 1.1
Non-Performing Assets as percentage of Total Assets –

Scheduled Commercial Banks
Table 2:- Gross NPA of different sector of bank
BANK 2006-07 2007-08 2008-09

Scheduled 1.5 1.3 1.3
Commercial
Banks
Foreign Banks 1.8 1.8 4.0
in India
Private Sector 2.2 2.5 2.9
Banks
Public Sector
Banks 1.6 1.3 1.2
Nationalized
Banks 1.6 1.3 1.1
State Bank
Associates 1.6 1.5 1.4
State Bank of
India 1.8 1.8 1.6

Page 37
PDIMTR 2009-10
Gross NPA 2006-07

2.5
2
1.5
Private Sector
1 Scheduled
Foreign Banks in ; 2.2Public Sector
Banks State Bank State Bank of
Nationalized
Commercial
India ; 1.8 Banks; 1.6 Banks; Associates ;India;
1.6 1.6 1.8
0.5 Banks; 1.5
0
ia
ks
ks
s
a
ks
es
nk
di
nd
an
an
iat
an
Ba
In
fI
rB
lB
oc
rB
n
ko
ed
cia
ss
si
cto
cto
liz
an
kA
nk
er
Se
Se
na
m
eB
Ba
an
ic
tio
m
te
at
bl
eB
ign
Co
iva
Na
St
Pu
re
at
Pr
led
St
Fo
du
he
Sc
Gross NPA 2007-08

3
2.5
2
Nationalized Banks;
1.5 Private Sector Banks 1.3
1 ; 2.5 in
Foreign Banks State Bank of India;
Scheduled Public Sector Banks; State Bank
Commercial India ;
Banks; 1.8 1.8; 1.5
0.5 1.3 Associates
1.3
0

Page 38
PDIMTR 2009-10
Gross NPA 2008-09

4.5
4
3.5
3
2.5
2 Foreign Banks in India ;
4 Public Sector Banks;
1.5 Private Sector1.2Banks ;Nationalized Banks; 1.1
2.9
1
Scheduled Commercial State Bank State
Associates ; India; 1.6
Bank of
0.5 1.3
Banks; 1.4
0
Table 3:- Net NPA of different sectors of bank
BANK 2006-07 2007-08 2008-09

Scheduled 0.6 0.6 0.6
Commercial
Banks
Foreign Banks 1.0 0.9 1.7
in India
Private Sector 1.0 1.2 1.5
Banks
Public Sector
Banks 0.6 0.6 0.6
Nationalized
Banks 0.5 0.4 0.4
State Bank
Associates 0.8 0.8 0.8
State Bank of 0.9 1.0 1.0

Page 39
PDIMTR 2009-10
India
NET NPA 2006-07

1.2
1
0.8
0.6 Foreign Banks inPrivate Sector Banks State Bank of India;
State Bank
ScheduledIndia ; 1
0.4 ;1
Public Sector Banks; 0.9
Commercial Banks; Nationalized Banks; ; 0.8
Associates
0.2
0.6 0.6 0.5
0 0
0
NET NPA 2007-08

1.4
1.2
1
0.8
0.6 Private Sector Nationalized Banks;
Foreign Banks in Banks ; 1.2 0.4 State Bank of India;
Scheduled
0.4 State Bank
1
India ; 0.9 Public Sector Banks; Associates ; 0.8
Commercial Banks; 0.6
0.2
0.6 0 0
0

Page 40
PDIMTR 2009-10
NET NPA 2008-09

1.8
1.6
1.4
1.2
1 Foreign Banks in
0.8 India ; 1.7 Private Sector Banks
; 1.5 Nationalized Banks;
0.6 0.4 State Bank of India;
Scheduled
0.4 State Bank
1
Commercial Banks; Public Sector Banks; Associates ; 0.8
0.2
0.6 0 0.6
0
0
The table shows that the percentage of gross NPA/ gross advance and net NPA/ net
advance are in a static trend. This shows the sign of efficiency in public and private
sector banks. But still if compared to foreign banks Indian private sector and public
sector banks have a lesser NPA.
Table 4:- GROSS NPA V/S OPERATING PROFIT
ITEMS 2006-07 2007-08 2008-09 PROJECTED

2009-10
GROSS NPA 490 472 413 392
LEVEL
OPERATING 517 589 627 693
PROFIT

Page 41
PDIMTR 2009-10
 Inference: From the chart, it is understood that as the gross NPA

level started decreasing in recent year, operating profit started
increasing drastically.
Table 5:- Recent year NPA Performance Chart
STATE 2006-07 2007-08 2008-09 Group All Banks

BANK average average
OF 2008-09
INDIA
NET 1.56 1.78 1.76 1.45 1.0
NPA
RATIO

Page 42
PDIMTR 2009-10
 Inference: In recent years Net NPA ratio has come increased, which
is very much above the standard level of 1, which is not
favorable for the bank.
Table 6:- COMPARASION WITH OTHER GROUP BANKS
Banks SBI SBI & NATIONALIS FOREIG ALLBAN

ASSOCIAT ED BANKS N KS
ES BANKS
NET 1.5 0.633 0.7 0.7155 1
NPA 6
RATI
O

Page 43
PDIMTR 2009-10
 Inference: Compared to all other group banks SBM is in good

position with 1.56 NPA ratio.
Table 7:- Non-Performing Assets of Public Sector Banks – Sector-wise (As at end-
march 20009.
(Amount in Rs. crore)

Bank AGRI SSI Others Priority Public Non- Tot.
Sector Sector Priority
Sector
amt % amt % amt % amt % am % amt % amt

t

Page 44
PDIMTR 2009-10
PSB 5708 13.0 6984 15.9 11626 26.4 24318 55.2 474 1.1 19251 43.7 44042
NB 3707 14.2 4958 18.9 7206 27.5 15871 60.6 297 1.1 10001 38.2 26169
SBG 2001 11.2 2026 11.3 4420 24.7 8447 47.3 177 1.0 9250 51.8 17874
SBI 1789 11.8 1712 11.3 3509 23.2 7010 46.4 163 1.1 7932 52.5 15105
FINDINGS
 The bank has achieved its target because the net profit is also
increased and there is a decrease in NPAs. So it is in better position
From the table, we can conclude that the non priority sector & priority
compared to last year.
sector are the major contributors to the NPA in public sector banks &
 The total NPA is 413 crore, last year it was 472. Crore.
nationalized banks. While public sector has the minimum NPA rate in all
 The loans and advances have been increased from 2007-08 to 2008-
the banks.
09
 There is decrease in doubtful assets compared to last year.

Page 45
PDIMTR 2009-10
 Priority sector & Non priority sector is the major contributor to the
NPA in nationalized banks while public sector is the least
contributor to the NPA.
 There is a slight decrease in ROA but there is a slight increase in
ROE.
CONCLUSION
The Indian banking sector is facing a serious problem of NPA. The extent
of NPA is comparatively higher in public sectors banks. To improve the
efficiency and profitability, the NPA has to be scheduled. Various steps
have been taken by government to reduce the NPA. It is highly impossible
to have zero percentage NPA. But at least Indian banks can try competing
with foreign banks to maintain international standard. The NPA is one of
the biggest problems that the Public Sector Banks are facing today .If the
proper management of the NPAs is not undertaken it would hamper the
Page 46
PDIMTR 2009-10
business of the banks. In absolute terms, the last three years have seen an
increase in the net NPAs of 25 public sector banks by 24 per cent.
According to the numbers, the last year it saw a 17 percent rise in the
sticky assets.
The largest public sector lender, SBI, has seen an increase in the net NPAs
by a whopping 41 percent in 2007-08.As the global slowdown has crept
into the economy, bankers feel that in more loans are going to turn bad in
the coming quarters and therefore they want RBI to relax the deadline for
loan reconstruction. Due to Recession & slowdown in the Indian economy
would result in emerging NPA‘s for the public sector banks from textiles,
real estate, retail, exports and auto sectors. The RBI has also been trying to
take number of measures but the ratio of NPAs is not decreasing of the
banks. The banks must find out the measures to reduce the evolving
problem of the NPAs. The reduction of the NPAs would help the banks to
boost up their profits, smooth recycling of funds in the nation. This would
help the nation to develop more banking branches and developing the
economy by providing the better financial services to the nation.
If the concept of NPAs is taken very lightly it would be dangerous for the
Indian banking sector. The NPAs would destroy the current profit, interest
income due to large provisions of the NPAs, and would affect the smooth
functioning of the recycling of the funds. As a result of the NPA’s owners
do not receive a market return on their capital. In the worst case, if the
bank fails, owners lose their assets & this may affect a broad pool of
shareholders & act as a rain on Profitability.
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 .When many
borrowers fail to pay interest, banks may experience liquidity shortages
.These shortages can jam payments across the country and as a result Non
performing loans may spill over the banking system and contract the
money stock, which may lead to economic contraction.

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PDIMTR 2009-10
Banks need to create capital reserve to write-off the mounting NPA’s

burden. “A Man without money is like a bird without wings”, the
Rumanian proverb insists the importance of the money. A bank is an
establishment, which deals with money. The basic functions of
Commercial banks are the accepting of all kinds of deposits and lending of
money. In general there are several challenges confronting the commercial
banks in its day- today operations. The main challenge facing the
commercial banks is the disbursement of funds in quality assets (Loans
and Advances) or otherwise it leads to Non-performing assets.”
RECOMMENDATIONS:
It is recommended that the proper documentation and verification to be
made before sanctioning the loan. Empowering staff to make decisions
related to sanctioning of loans. Constant interactions have to be
maintained with the customers to keep track of their loan payment. Strict
measures have to be taken while issuing or sanctioning the loan. The
measures can include verification of job and salary slips, verification of
securities and the like.
1) Effective and regular follow-up of the end use of the funds sanctioned is
required to ascertain any embezzlement or diversion of funds. This
process can be undertaken every quarter so that any account converting to
NPA can be properly accounted for.
2) A healthy Banker-Borrower relationship should be developed. Many
instances have been reported about forceful recovery by the banks, which
is against corporate ethics. Debt recovery will be much easier in a
congenial environment.

Page 48
PDIMTR 2009-10
3) Assisting the borrowers in developing his entrepreneurial skills will not

only establish a good relation between the borrowers but also help the
bankers to keep a track of their funds.
4) Countries such as Korea, China, Japan, Taiwan have a well functioning
Asset Reconstruction/ Recovery mechanism wherein the bad assets are
sold to an Asset Reconstruction Company (ARC) at an agreed upon price.
In India, there is an absence of such mechanism and whatever exists, it is
still in nascent stage. One problem that can be accorded is the pricing of
such loans. Therefore, there is a need to develop a common prescription
for pricing of distressed assets so that they can be easily and quickly
disposed. The ARCs should have clear ‘financial acquisition policy’ and
guidelines relating to proper diligence and valuation of NPA portfolio.
5) Some tax incentives like capital gain tax exemption, carry forward the
losses to set off the same with other income of the Qualified Institutional
Borrowers (QIBs) should be granted so as to ensure their active
participation by way of investing sizeable amount in distressed assets of
banks and financial institutions.
6) So far the Public Sector Banks have done well as far as lending to the
priority sector is concerned. However, it is not enough to make lending to
this sector mandatory; it must be made profitable by sharply reducing the
transaction costs. This entails faster embracing of technology and
minimizing documentation.
7) Commercial Banks should be allowed to come up with their own
measures to address the problem of NPAs. This may include waiving and
reducing the principal and interest on such loans, or extending the loans,
or settling the loan accounts. They should be fully authorized and they
should be able to apply all the preferential policies granted to the asset
management companies.
8) Another way to manage the NPAs by the banks is Compromise
Settlement Schemes or One Time Settlement Schemes. However, under
such schemes the banks keep the actual amount recovered secret. Under

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PDIMTR 2009-10
these circumstances, it is necessary to bring more transparency in such

deals so that any flaw could be removed.
Bibliography
 Books
1) Non – Performing Assets in Indian banks
( B. Satish Kumar)
2) Non – Performing assets in Commercial Banks
( Vibha Jain)
3) Management of Non – Performing Assets in Banks And

Financial Institutions
(B Ramachandra Reddy)
 Magazines
1) The Indian Banker
2) The Banker
3) Business world
 Newspaper
1) Economic times
2) Business Standard
 Websites

Page 50
PDIMTR 2009-10
1) www.statebankofindia .com
2) www.iba.org.in
3) www.rbi.org
 Bank manuals

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PDIMTR 2009-10

OVERVIEW OF THE BANKING INDUSTRY

Currently, India has 88 scheduled commercial banks (SCBs) - 27 public

STRUCTURE OF INDIAN BANKING

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

Non Performing Assets & its impact on Operating profit of

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

The world is going faster in terms of services and physical products.

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

 They require higher provisioning requirements affecting profits

NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in terms of profitability is a benchmark for any

Further, Reserve Bank of India (RBI) successfully creates excess

About the NPA

 The debt remains outstanding for 90 consecutive days or more

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

 For overdrafts, the account has been inactive for 90 consecutive

NPAs reflect the performance of banks. A high level of NPAs suggests

DEFINITION GIVEN BY THE NARASIMHAN

Committee on financial system (CFS) Narsimhan committee which

1. To strengthen the foundation of financial system

2. Related to this, streamlining procedures, upgrading

3. Structural changes in the system

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

The committee has defined non-performing assets as advances here, as on

RBI REGULATION REGARDING INCOME

RBI has notified regulations concerning the income recognition of banks

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

should be reversed or provided for in the current account if

CLASSIFICATION OF ASSETS FOR MAKING

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

(b) DOUBTFUL ASSETS:

(c) LOSS ASSETS:

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

will be prudent to directly classify the advance as a doubtful or loss asset,

ADVERSE EFFECTS OF NPAs

An NPA on the balance sheet of an institution deteriorates its health in

1. PROBLEM OF MORAL HAZARD

3. HUGE OPPURTUNITY COST:

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

CREDIT RISK AND NPAs

Quite often credit risk management (CRM) is confused with managing

Considering the current global recession and unreliable inforn1ation in

IMPORTANCE OF CREDIT RATING

Fundamentally Credit Rating implies evaluating the creditworthiness of a

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

reviewed periodically. Associated with each risk bucket is the probability

However, credit rating is not foolproof. In fact, Enron was rated

NORMS FOR TREATING VARIOUS ADVANCES AS NPAs

LOANS (loans repayable in installments):

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

 If interest due for the month-ended 31.12.2004 is not paid, it

 If installment towards principal due on 01.01.2005 is not

Equated monthly installments: In case of loans repayable in equated

Loans with moratorium for payment of interest: In the case of bank

Staff housing loans: In case of housing loan or similar advances granted to

A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED BANKS

in repayment of installment of principal or payment of interest on the

Advance payments: Where the borrower has made advance payment of

Illustration: If a cash credit/overdraft if within limit but there are no

A Bill purchased/discounted shall be treated as NPA if it remains overdue

An agricultural advance shall be treated as NPA if interest and/or

ACCOUNTS, WHICH NEED NOT BE CLASSIFIED AS NPA:

Advances guaranteed by State/Central Government: Govt. guaranteed