Project Dissertation

on “ Problem of NPA and its impact on Banks ( with special reference to

State Bank of India )”

Submitted in partial fulfillment of the requirements for the award of the

degree of

“ Master of Business Administration ’’

(MBA) 2017-2019

Management Education and Research Institute (MERI)

Guru Govind Singh Indraprastha University

Submitted To:- Submitted By:-

Dr. Kompal Barara DIVYA

Faculty (Management) Enroll No- 02115103917

 TO WHOM SO EVER IT MAY CONCERN

This is to certify that DIVYA, a student of MBA 4th sem. at MANAGEMENT

EDUCATION & RESEARCH INSTITUTE, has completed her project work entitled
Problem of NPA and its impact on banks ( with special reference to SBI ). under my guidance
I found her work satisfactory and the same has not been submitted to any other university or
college for the award of any other degree.

Dr. Kompal Barara

Associate Professor

Management Education & Research Institute, Janak puri

 DECLARATION

I DIVYA student of the “MANAGEMENT EDUCATION & RESEARCH INSTITUTE” hereby

declare that the Project report on, “PROBLEM OF NPA AND ITS IMPACT ON BANKS ( WITH
SPECIAL REFERENCE TO SBI)” is an original work and the same has not been submitted to any
other institute for the award to any institute for the award of any other degree. The suggestions as given
by the faculty were duly incorporated.

I hereby certify that all the endeavors put in the fulfillment of the task are genuine and original to the
best of my knowledge and I have not submitted it earlier elsewhere.
 PREFACE

There is a vast difference between theory and practical applicability of management concepts,
principles and theories in any industry. This practical project report in the course is designed with
an objective of bridging the gap between the theory and practical applicability of management
concepts and theories studied during the MBA program and their applicability in an industry.

This Project report has been indeed a great learning experience which has provided a lot of exposure
regarding corporate functional environment in an industry. It has been a great pleasure for me to do my
project work .
 ACKNOWLEDGEMENT

My sincere thanks are due to all the contributors without whose efforts this project would not
have been completed. No task of this nature is a single person effort, so I am very thankful to
Dr. Kompal Barara

Under whose guidance I successfully completed my research project. Their unfailing interest
and support gave a new dimension to my work. They made it possible to collect abundance of
material, the relevant portion of which is quoted in this project.

I am also very grateful to all other Faculty of MERI whose teaching methodology helped me
in completion of my project without any difficulty.

I also express my gratitude to the all respondent for their proper responses and cooperation
during my dissertation project.

I would like to extend my thanks to my all friends for their valuable suggestion and cooperation
at various stages during my project.
S.No. Chapter Page
No
Chapter-1 INTRODUCTION TO THE TOPIC 1-15

1 C 15-16
Chapter-2 REVIEW LITERATURE

Chapter-3 Research Methodology 16-35

2 C
Chapter-4 Data Analysis And Interpretation 35-41

Chapter-5 Findings 41-42

3
Chapter-6 Recommendations 42-44

Chapter-7 Conclusion 44-45

Bibliography 45-46
 CHAPTER - 1
INTRODUCTION TO THE PROJECT

Since the introduction of economic liberalization and financial sector reforms, Banks are under
growing pressure to bring down their NPAs so as to improve their performance and viability.
What is bothering the bankers today is the management of Non-performing Assets. Over the
period this problem has aggravated alarmingly and therefore needs urgent remedial actions, so
in this context a good number of circular instruction/guidelines have been issued by
bank/Reserve Bank of India.

Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of Sh.
M.Narsimhan to examine and give recommendation for Income Recognition, Asset
Classification and Provisioning of loan assets of Banks and Financial Institutions. The
Committee examined the issues and recommended that a policy of Income Recognition should
be objective and based on record of recovery rather than on subjective considerations. On the
basis of the recommendations of the Narsimhan Committee, RBI had issued guidelines to all
Scheduled Commercial Banks on Income Recognition, Assets Classification and Provisioning
in April, 1992 which have been modified from time to time by the RBI on the basis of
experience gained and suggestions received from various quarters. The Prudential Norms for
Income Recognition, Asset Classification and Provisioning have come into effect from the
accounting year 31.03.1993.

Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India
Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were
also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June,
1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for the
purpose of Income Recognition and Assets Classification from the accounting year 1995-96.
However, guidelines relating to provisioning for RRBs have been made effective from the
financial' year ended 31.03.1997. The definition of NPAs is also gradually becoming tough for
RRBs to cover all advances like Commercial Banks. Although most of-the guidelines relating
to RRBs are similar to that of Commercial Banks, they have been made applicable in a phased
manner for RRBs.

1
INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played a
crucial role in the socio- economic progress of the country. Banks extend credit to different
types of borrowers for many different purposes. For most customers, bank credit is the primary
source of available debt financing.

For banks good loans are the most profitable assets. Return comes in the form of loan
interest, fee income and investment and the most prominent assumed risk is credit risk. Credit
risk involves inability or unwillingness of customer or counterpart to meet commitments in
relation to lending once a loan is overdue and ceases to yield income it would become a Non
Performing Asset.

Proper management and speedy disposal of NPAs is one of the most critical tasks of banks
today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has
been a matter of grave concern not only for the banks but also the real economy in general, as
NPAs can choke further expansion of credit which would impede the economic growth of the
country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions
in the economy. NPAs are not therefore the concern of only lenders but also the public at large.

Granting of credit for economic activities is the prime duty of banking. Apart from raising
resources through fresh deposits, borrowings and recycling of funds received back from
borrowers constitute a major part of funding credit dispensation activity. Lending is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which results into economic growth. However lending also carries a risk called credit
risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms
a major hurdle in the process of credit cycle. Thus, these loan losses affect the bank’s
profitability on a large scale. Though complete elimination of such losses is not possible, but
banks can always aim to keep the losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the
banking industry in our country sending distressing signals on the sustainability and
insurability of the affected banks. The positive results of the chain of measures affected under
banking reforms by the Government of India and RBI in terms of the two Narasimhan
Committee Reports in this contemporary period have been neutralized by the ill effects of this
surging threat. Despite various correctional steps administered to solve and end this problem,
concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on

2
banking and financial institutions. The severity of the problem is however acutely suffered by
Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

STATE BANK OF INDIA

SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31, 2015. It
dominates the Indian banking sector with a market share of around 20% in terms of total
banking sector deposits. The increasing focus on upgrading the technology back-bone of the
bank will enable it to leverage its reach better, improve service levels, provide new delivery
platforms, and improve operating efficiency to counter the threat of competition effectively.
Once the core banking solution (CBS) is fully implemented, it will cover over 10,000 branches
and ATMs of the State Bank group, and emerge as the strongest technology enabled
distribution network in India.

The increasing integration of SBI with its associate banks (associates) and subsidiaries will
further strengthen its dominant position in the banking sector and position it as the country’s
largest universal bank.

Resource-raising capabilities

SBI’s funding profile is strong, underpinned by its strong retail deposit base. The bank is facing
increasing competition in its metropolitan and urban franchise. SBI’s strong franchise gives it
access to a steady source of stable retail funds, which constitute around 59% of the total
resources as on March 31, 2015 (56% as at March 31, 2014).

Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in
the proportion of current account deposits, low-cost deposits have continued to constitute over
40% of total deposits as at March 31, 2015. The bank’s cost of deposits (excluding IMD) has
significantly reduced to 4.70% for the 2014-15 (refers to financial year from April 1 to March

3
31), compared with 5.48% in 2013-14. The bank’s liquidity position is very strong due to
healthy accretion to deposits, large limits in the call market, and significant surplus SLR
investments. SBI will maintain its strong funding profile and a low cost resource position in
view of its strong retail base and wide geographical reach.

Earnings profile to remain good

SBI will maintain a good earnings profile in the medium term despite high pressure on yields
due to the increasing competition in the banking sector. SBI’s earning profile is characterised
by consistency in the return on assets (PAT/Average Assets), at around 1% per annum for the
past three years, and diverse income streams. To maintain yields and pursue credit growth, the
bank is aggressively targeting retail finance and small and medium enterprises (SMEs). The
bank’s core fee income of 1% of average funds deployed bolsters its revenue profile. However,
with the opening of government business like tax collection to other banks and increased
competition, the growth in fee income is expected to slow down. The bank’s operating expense
at 2.44% of average funds deployed in 2014-15 is in line with other public sector banks. The
bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating
expenditure in 2014-15. Thus, despite good asset growth and technology efficiency gains, the
bank’s operating costs will remain high in the medium term. To be able to reap the full benefits
of technology implementation, the bank will have to reduce or redeploy work force; since this
is a sensitive issue, it is expected to happen gradually.

The bank’s fund based and fee income earnings are diversified across industries, regions, asset
classes, and customer segments.

Strong diversification in income streams will ensure that the bank’s earnings remain relatively
stable, despite the decline in profitability in some segments.

Comfortable capital position

SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a large capital
base of Rs 240.72 billion as at March 31, 2015. The bank has considerably improved its net
worth coverage for net NPAs to 4.4 times as at March 31, 2015 due to lower slippages reflecting
an improving asset quality, witnessed across the entire banking sector. The capitalization levels

4
of SBI are adequate to address the asset side risks and support the business growth in the
medium term.

Management strategies

In retail finance, the bank has leveraged its corporate relationships, pursued business growth
selectively, and has not competed based on interest rate. The bank has taken initiatives like on-
line tax returns filing and faster transfer of funds to protect its dominant position in the
government business. The bank also has a clear technology strategy that will enable it to
compete with the new generation private sector banks in customer service and operational
efficiency.

Asset quality to remain at average levels

The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at March
31, 2015, compared with 4.9% for all scheduled commercial banks (SCBs) taken together. The
bank is facing challenges to improve the quality of assets originated, as can be seen in the
consistently higher levels of slippages (additions to NPAs) at 2.71% in 2014-15.

To contain NPAs and ensure credit growth, the bank has decided to focus on financing the
retail (personal) segment as well as SMEs. The share of retail advances has increased to 24.73%
(Rs 522.08 billion) of total advances as at September 30 2015. In the retail loan segment, SBI
is targeting primarily the housing loans segment, which constitutes Rs. 283.41 billion (54.3%)
of total retail loans. The NPAs in retail finance are low currently; however they are steadily
increasing (especially in the housing finance portfolio) and have started showing signs of stress.
SBI’s retail portfolio has grown at over 37% CAGR in the last two years and hence a significant
portion of the portfolio is largely unseasoned. The housing finance portfolio has a 12-month,
lagged gross NPA of 4.34% as at March 31, 2015.The bank will face significant challenges in
the medium term to develop effective credit appraisal and collection systems in order to contain
NPAs in retail finance. SBI’s asset quality is expected to remain at average levels, as the bank’s
large and diverse asset portfolio reflects of the asset quality of the banking system.

Business description

SBI along with its associate banks offer a wide range of banking products and services across
its different client markets. The bank has entered the market of term lending to corporates and

5
infrastructure financing, traditionally the domain of the financial institutions. It has increased
its thrust in retail assets in the last two years, and has built a strong market position in housing
loans.

SBI, through its non-banking subsidiaries, offers a host of financial services, viz., merchant
banking, fund management, factoring, primary dealership, broking, investment banking and
credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI
Life Insurance Company Limited, which is a joint venture with Cardiff S.A., one of the largest
insurance companies in France. SBI currently holds 74% equity in the joint venture.

Industry prospects

To leverage benefits such as access to low cost resources and the facility to provide a larger
gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited
and HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that
of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such
entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements,
priority sector requirements, and corporate exposure limits.

New private sector banks capture market share

With technological edge and a strong marketing thrust, private sector banks have been stealing
market share in retail deposits and the corporate fee business from public sector banks.
Together with some foreign banks, these private banks have also aggressively entered the retail
asset financing space, hitherto the domain of non-banking finance companies.

Given their focus on cross selling and optimizing their customer base, they now offer the entire
range of products and services on the asset and liability side to retail and wholesale customers

Asset quality to improve

Banks have not yet fully resolved the stress in the asset quality of their legacy
corporate loan portfolios, however. Though slippages to NPAs and provisioning were high for

6
some banks in FY2014, as they moved to the 90-day norm for recognising and provisioning
for NPAs, the treasury gains enabled significant provisioning to be made with the result that
net NPAs for most public sector banks are now less than 3%.

Going forward, steady growth in gross domestic product should help improve the banks’ asset
quality and increase corporate lending. The securitization and reconstruction of financial assets
and enforcement of security interest (Sarfaesi) Act should also help banks in limiting slippages
and improving NPA recoveries.

Better Capitalization levels

Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through
public issues in recent years, thereby improving their capitalization levels. The steady accruals
to net worth and falling non-performing asset levels have resulted in an improvement in the
capitalization position of banks in recent years.

Challenges ahead

Competition from new private sector and foreign banks remains a key challenge for public
sector banks. They need to reorient their staff and effectively utilize technology platforms to
retain customers and reduce costs. They also need to fortify their credit risk management
systems to mitigate the risks arising from small-ticket lending to the retail, small and medium
enterprises, and services segments.

Consolidation and emergence of universal banking groups

The cap on foreign ownership of banks has already been raised from 49% to 74%. The
competition in the sector could get further intensified if the 10% cap on voting rights is also
relaxed. New private sector banks are expanding their geographical coverage and making

7
inroads into government business. The new private and foreign banks will continue to gain
market share from public sector banks because of their efficient cost structures, technological
edge, focused marketing approach and operational freedom. However, the emergence of newer
players would be restricted if the private ownership of banks is capped at low levels. Mergers
among PSBs would create banks with even larger balance sheets and customer base. However,
the integration process in such mergers is expected to be complex and time long drawn.

These would also be driven by GoI due to provisions of Banking Companies (Acquisition and
Transfer of Undertakings) Act 1969, and hence political scenario will impact the timing and
permutations possible. Strategic alliances between banks and other financial sector players
such as insurance companies and mutual funds are also likely as banks attempt to enhance their
product range, leverage on economies of scale and reduce costs.

Definition of NPAs (NON -PERFORMING ASSETS)

An asset, including a leased asset, becomes non-performing when it ceases to generate income
for the bank. A ‘non performing asset’ was defined as a credit facility in respect of which the
interest and / or installment of principal had remained ‘past due’ for a specified period of time.

The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period

1993 Four Quarters

8
 1994 Three Quarters

1995 Onwards Two quarters

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 improvements in the payment and settlement systems,
recovery climate, up gradation of technology in the banking sector, etc, it was decided to
dispense with the ‘past due’ concept, with effect from 31st March, 2001. Accordingly, as from
that date, a NPA shall 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 ‘our of order’ for a period of more than 180 days, in respect of an
overdraft/cash credit

iii. 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 agriculture
purposes

iv. Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.

With a view to move towards international best practices, it has been decided to adopt the ’90
days’ overdue norm for identification of NPAs, from 31st March, 2004.

‘Out of Order’ Status

An account should be treated as ‘out of order’ if the outstanding balance remains continuously
in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing power, but there are no
credits continuously for six months 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’.

9
‘Overdue’

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.

Classification of NPAs

Banks are required to classify NPAs further into the following three categories based on the
period for which the asset has remained non-performing and the reliability of the dues:

i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a
period less than or equal to 18 months. In such cases, the current net worth of the
borrower, or the current market value of the security charged is not enough to ensure
recovery of the dues to the banks in full. Such assets will have well defined credit
weakness that jeopardize the liquidation of the debt and are characterized by the distinct
possibility that the bank will sustain a loss.

ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding
18 months. It has all the weaknesses inherent to a sub-standard asset with the added
characteristic that the collection or liquidation in full – on the basis of currently known
facts – is highly questionable and improbable.

iii. Loss Assets: A loss asset is one where a loss has been identified by the bank or, internal
or external auditors but the amount has not been written off wholly.

Guidelines for Classification of NPAs

Broadly speaking, classification should be done taking into account the degree of well-defined
credit weaknesses and the extent of dependence on collateral security for realization of dues.

Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs, especially in respect of high value accounts.

 Accounts with temporary deficiencies: These should be classified based on the past
recovery records.

10
 Accounts regularize near about the balance sheet date: These accounts should be handled
with care and without scope for subjectivity. Where the account indicates inherent
weakness based on available data, it should be deemed as an NPA.

 Asset classification should be borrower-wise and not facility-wise: If a single facility to a

borrower is classified as NPA, others should also be classified the same way, as it is difficult
to envisage only a solitary facility becoming a problem credit and not others.

 Advances under consortium arrangements: Classification here should be based on the

recovery record of the individual member banks.

 Accounts where there is erosion in the value of the security: If there is a significant (i.e. the
realizable value of the security is less than 50% of that assessed by the bank during
acceptance) the account may be classified as NPA.

NPA SOME ASPECTS AND ISSUES

1. The NPAs of banks in India are considered to be at higher levels than those in other
countries. This issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and
disclosure measures initiated by RBI during recent years.
2. The NPA Management Policy document of SBI lays down to contain net NPAs to less
than 5% of bank's total loan assets in confirmity with the international standard. It is,
therefore necessary that as per guidelines provided in NPA Management Policy
document, every effort be made at all levels to cut down the NPAs. All this requires
greater efforts and teamwork.
3. It is essential to keep a constant watch over the non-performing assets not just to keep
it performing but also that once they become non-performing, effective measures are
initiated to get full recovery and where this is not possible, the various means are to be
initiated to get rid off the NPAs from the branch books.
4. NPAs adversely affect the wealth condition of the branch advances as also the
profitability of the branch. Some of the reasons for this are as under:
(a) Interest cannot be applied on the loan accounts classified as NPAs.

11
 (b) The Branch 'has to pay interest to central office on outstanding classified as
NPA.
(c) The Branch has to incur cost in supervision and follow up of such advances.
(d) Provision has to be made on NPAs at Bank level.
5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub
standard, Doubtful or loss assets.
6) Once the assets are classified as NPA, the Branch Manager has to take all the necessary
steps to get the dues recovered there-under to maintain the good health of advances and the
higher profitability at the-Branch. This requires management of NPAs in such a Planned
and scientific manner that the percentage of NPAs to the total advances will be minimum.

12
 RECOGNITION OF INCOME ON

NON-PERFORMING LOANS (NPLS)

Stricter regulations have been laid down by supervisory authorities in many countries with
regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest
payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful'
and 'loss'].

Any uncollected interest payments on NPLs are considered non-accrued interest. Previously
accrued, but uncollected interest is reversed out of income. Failure to do so would overstate
income. Uncollected interest is normally put in a memorandum account. NPLs are restored on
an accrual basis only after full settlement has been made on all delinquent principal and interest.
It would, therefore, be useful, if the accounts carry a footnote, explaining the accounting
policies followed with regard to recognition of income on NPLs.

NARSIMHAN COMMITTEE'S RECOMMENDATIONS

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.

a) To strength the foundation of financial system.

b) Related to this, streamlining procedures, upgrading technology and human

resource development.

c) Structural changes in the system.

1. It is recommended that an asset be classified as doubtful if it is in the sub-standard
category for 18 months in the first instance and eventually for 12 months as loss if it
has been so identified but not written off. These norms, which should be regarded as
the minimum, may be brought into force in a phased manner.

13
2. Corporations and FIs should avoid the practice of "ever greening" by making fresh
advances to their troubled constituents only with a view to settling interest dues and
avoiding classification of the loans in question as NPAs. The committee notes that the
regulatory and supervisory authorities are paying particular attention to such breaches
in the adherence to the spirit of the NPA definitions and are taking appropriate
corrective action.
3. The committee believes that objective should be to reduce the average level of net
NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. These targets cannot
be achieved in the absence of measure to tackle the problem of backlong NPAs on one
time basis and the implementation of strict prudential norms and management
efficiency.
4. There is no denying the fact that any effort at financial restructuring in the form of
having off NPAs portfolio from the books of the corporation or measures to initiate the
impact of high level of NPAs must go hand with operational restructuring. Cleaning up
the balance sheets of banks would thus make sense only if simultaneous steps are taken
to prevent of limit the reemergence of new NPAs.
5. Direct credit has a proportionately higher share in NPA portfolio of corporations and
has been one of the factors in erosion in the quality of asset portfolio. There is a
continuing need of Financial Corporations to extend Credit to SSI sector, which is
important segment of national economy but on commercial considerations and on basis
of credit worthiness. Government feels reluctant to accept the recommendation for
reducing the scope of directed credit under priority sector because timy sector of
industry and small businesses have problems with regard to obtaining credit and some
remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may
continue.
6. With regard to income recognition in India, income stops occurring when
interest/installment of principal is not paid within 180 days. However, we should move
towards international Practices in this regard and introduce the norm of 90 days in a
phased manner by the 2002.
7. As an incentive to Bank is to make specific provision, the consideration be given to
making such provisions tax deductible.
8. Banks should pay greater attention to asset liability management to avoid mismatch and
to cover, among others, liquidity and interest rate risks.

14
9. It should be encouraged to adopt statistical risk management techniques like value at
risk in respect of balance sheet term which are susceptible to market price fluctuation,
Forex rate volatility and interest rate changes. While the RBI and IDBI may initially,
prescribe certain normative models for market risk management, the ultimate objective
should be that of building up their models and RBI blacklisting them for their validity
on a periodical basis.
10. There is a need for a greater use of computerized system than at present.
Computerization has to be recognized as an indispensable tool for improvement in
customer service, the institution and operation of better control systems, greater
efficiency in information technology.
11. State Financial Corporations at present are over regulated and over administered.
Supervision should be based on evolving prudential norms and regulations which
should be adhered to rather than excessive control over administrative and other aspects
of organisation and functioning. Internal audit and internal inspection systems should
be strengthened.
12. The main issues with regard to operations of Bank’s are to ensure operational flexibility
and measure of competition and adequate internal autonomy in matters of loan
sanctioning and internal administration.
13. This calls for some re-examination and the present relevance of directed credit
programme ablest in respect of those who are able to stand on their own feet and to
whom the directed credit programmes with the element of interest concessionality that
has accompanied has become a source of economic rent. It is recommended that
directed credit sector be redefined to comprise the small and marginal farmers, the tiny
sector of industry, small business and transport operators, village and cottage industry,
rural artisans and other weaker sections. The credit target for this redefined priority
sector should hence forth be fixed at 10% of aggregate credit which would be broadly
in line with the credit flows to these sectors at present.
14. The committee believes that the balance sheets of banks and FIs should be made more
transparent and full disclosure made in Balance sheet. This is to be done in phased
manner.

15
 CHAPTER - 2

REVIEW OF LITERATURE

 Das (1990) has compared the various efficiency measures of public sector banks by
applying data envelopment analysis model and concluded that the level of NPAs
significant negative relationship with efficiency estimates.
 Verma (1999) has concluded that high level of NPAs leads to operational failure of the
bank.
 Berger and young (1997) has examined the relationship between problem loan and
bank efficiency by employing Granger-causality technique and found that high level of
problem loans cause banks of increase spending on monitoring, working out and / or
selling off these loans and possibly becomes more diligent in administering the portion
of their existing loan portfolio that is currently performing.
 Gupta (1997) has also concluded that NPAs on protifability of banks and leads to
liquidity crunch and slow down in the growth in GDP etc.
 Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit
making and six loss making banks and concluded that loss making banks maintained
higher NPAs in the loan portfolio which led them to show losses.
 Kwan and Eisenbeis (1994) also concluded that there is negative relationship between
efficiency and problem loans.
 Toor (1994) analysed that poor recovery management leads to reduction in yield on
advanced that poor recovery management leads to reduction in yield on advances,
reduced productivity loss in the credibility and put detrimental impact on the policies of
the banks.
 Murthy (1988) has examined that default bring down the return accruing and to them,
reduces effective rate of interest and reduces the funds’ recalculation and increase their
dependence on external sources thereby increasing the costs.
 ACCORDING TO S, RAJ KUMAR (2002) the SARFAESI act and the could
primarily used as powerful bargaining tool while negotiating with defaulter. This
puts bank on stronger ground in salvaging sticky loan

16
 CHAPTER - 3

RESEARCH METHODOLOGY

OBJECTIVE OF STUDY

 To study the position of non performing assets in SBI group

 To know the impact on NPAon strategic banking variable.

 To know the reason for an asset becoming NPA

Meaning of Research

Research is defined as “a scientific & systematic search for pertinent information on a

specific topic”. Research is an art of scientific investigation. Research is a systemized effort to
gain new knowledge. It is a careful inquiry especially through search for new facts in any
branch of knowledge. The search for knowledge through objective and systematic method of
finding solution to a problem is a research.

PROBLEM STATEMENT

The research problems, in general refers to sum difficulty with a researcher experience in the
contest of either a particular a theoretical situation and want to obtain a salutation for same.
The present Dissertation has been undertaken to do the Problem of NPA in
State Bank of India.

RESEARCH DESIGN

17
 TYPES OF
RESEARCH DESIGN

DESIGN

EXPLORATORY DESCRIPTIVE EXPERIMENTAL

RESEARCH
RESEARCH DESIGN
DESIGN
DIAGNOSTIC

RESEARCH DESIGN
The present study is descriptive in nature, as it seeks to discover ideas and insight
to bring out new relationship. Research design is flexible enough to provide opportunity for
considering different aspects of problem under study. It helps in bringing into focus some
inherent weakness in enterprise regarding which in depth study can be conducted by
management.

SAMPLING DESIGN:

A sample design is a definite plan for obtaining a sample from the sampling frame. It refers to
the technique or the procedure that is adopted in selecting the sampling units from which
inferences about the population is drawn. Sampling design is determined before the collection
of the data.

DATA COLLECTION

TYPES OF DATA

PRIMARY SECONDRY
DATA DATA

18
PRIMARY DATA: -

METHODS OF PRIMARY DATA

OBSERVATION INTERVIEW QUETIONAIRE SCHEDULE

METHOD METHIOD METHOD METHOD

SECONDARY DATA: -
The secondary data on the other hand, are those which have already been collected by someone
else and which have already been passed through the statistical processes. When the researcher
utilizes secondary data then he has to look into various sources from where he can obtain them.
For e.g. Books, magazine, newspaper, Internet, publications and reports. In the present

study use of secondary data collected from website.

.

19
REASONS FOR RISE IN NPAs

FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of
the rising NPAs. But the problem of NPAs is more in public sector banks when compared to
private sector banks and foreign banks. The NPAs in PSB are growing due to external as well
as internal factors.

EXTERNAL FACTORS

 Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, their by reducing their profitability and liquidity.

 Wilful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order to
get back the money extended to them as advances and loans.

 Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans

 Industrial sickness

Improper project handling , ineffective management , lack of adequate resources , lack of

advance technology , day to day changing govt. Policies give birth to industrial sickness.
Hence the banks that finance those industries ultimately end up with a low recovery of their
loans reducing their profit and liquidity.

20
  Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow
to operate these activities. The banks recover the amount by selling of their assets, which
covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to
make provision for it.

 Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to cope
with the changing principles and policies for the regulation of the rising of NPAs. eg. The
fallout of handloom sector is continuing as most of the weavers Co-operative societies have
become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked
out by the Central govt to revive the handloom sector has not yet been implemented. So the
over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS

 Defective Lending process

There are three cardinal principles of bank lending that have been followed by the
commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of
profitability

i. Principles of safety By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore
take utmost care in ensuring that the enterprise or business for which a loan is sought is a

21
sound one and the borrower is capable of carrying it out successfully .he should be a person
of integrity and good character.

 Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis can not be taken. Proper MIS and financial accounting system is
not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerised.

 Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,
and financial soundness and credit worthiness of the borrower. • Banks should consider the
borrowers own capital investment. • it should collect credit information of the borrowers
from a. From bankers b. Enquiry from market/segment of trade, industry, business. c. From
external credit rating agencies. • Analyse the balance sheet True picture of business will be
revealed on analysis of profit/loss a/c and balance sheet. • Purpose of the loan When bankers
give loan, he should analyse the purpose of the loan. To ensure safety and liquidity, banks
should grant loan for productive purpose only. Bank should analyse the profitability,
viability, long term acceptability of the project while financing.

 Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs.

 Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider the 1.
Marketability 2. Acceptability 3. Safety 4. Transferability.

22
The banker should follow the principle of diversification of risk based on the famous maxim
“do not keep all the eggs in one basket”; it means that the banker should not grant advances
to a few big farms only or to concentrate them in few industries or in a few cities. If a new
big customer meets misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack,
and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM
(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

 Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.

 Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters
and CCBs and PACs, the NPAs of OSCB is increasing day by day.

IMPACT OF NPAS ON BANKS: -

In portion of the interest income is absorbed in servicing NPA.NPA is not merely non-
remunerative. It is also cost absorbing and profit eroding.

In the context of severe competition in the banking industry, the weak banks are at disadvantage
for leveraging the rate of interest in the deregulated market and securing remunerative business
growth. The options for these banks are lost. "The spread is the bread for the banks". This is
the margin between the cost of resources employed and the return therefrom." This is the
margin between the cost of resources employed and the return thereform. In other words it is
gap between the return on funds deployed (Interest earned on credit and investments) and cost
of funds employed (Interest paid on deposits).

When the interest rates were directed by RBI, as heretofore, there was not option for banks.
But today in the deregulated market the banks decide their lending rates and borrowing rates.

23
In the competitive money and capital Markets, inability to offer competitive market rates adds
to the disadvantage of marketing and building new NPA has affected the profitability, liquidity
and competitive functioning of banks and finally the psychology of the bankers in respect of
their disposition towards credit delivery and credit expansion.

1. Impact on Profitability
"The efficiency of banks is not always reflected only by the size of its balance sheet but
by the level of return on its assets. 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.

NPAS have a deleterious effect on the return on assets in several ways:

 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.
There is at times a tendency among some of the banks to understate the level of NPAs in order
to reduce the provisioning and boost up bottom lines. It would only postpone the process.

In the context of crippling effect on a bank's operations in all spheres, asset quality has been
placed as one of the most important parameters in the measurement of a bank's performance
under the CAMELS supervisory rating system of RBI.

Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores
towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net
advances. To this extent the problem is contained but at what cost?

This costly remedy is made at the sacrifice of building healthy reserves for future capital
adequacy.

The enormous provisioning of NPA together with the holding cost of such non-productive
assets over the years has acted as a severe drain on the profitability of the SBI Group. In turn
SBI Group are seen as poor performers and unable to approach the market for raising additional
capital. Equity issues of nationalized banks that have already tapped the market are now quoted
24
at a discount in the secondary market. Other bans hesitate to approach the market to rise new
issues. This has alternatively forced SBI Group to borrow heavily from the debt market to build
Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins;
else they are to seek the bounty of the Central Government for repeated Recapitalization.

Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds
at 6% plus 1% service charge) the net NPA of Rs. 32632 Crores absorbs a recurring holding
cost of Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years
which works out to average of Rs. 3300 crores from annum, a sizeable business.

In the face of the deregulated banking industry, an ideal competitive working is reached, when
the banks are able to earn adequate amount of non-interest income to cover their entire
operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference
between the gross interest income and interest cost will constitute its operating profits.

Theoretically even if the banks keeps 0% spread, it will still break even in terms of operating
profit and not return an operating loss. The net profit is the amount of the operating profit minus
the amount of provisions to be made including for taxation. On account of the burden of heavy
NPA, many nationalized banks have little option and they are unable to lower lending rates
competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower
income from off balance sheet business yielding non-interest income.

The following working results of SBI Group an identified well managed nationalized banks for
the last two years and for the first nine months of the current financial year, will be revealing
to prove this statement.

Non-interest income fully absorbs the operating expenses of this banks in the current financial
year for the first 9 months. In the last two financial years, though such income has substantially
covered the operating expenses (between 80 to 90%) there is still a deficit left.

The strength of SBI Group is identified by the following positive feature:

25
 1. It's sizeable earnings under of non-interest income substantially/totally meets its
non-interest expenses.
2. Its obligation for provisioning requirements is within bounds. (Net NPA/Net
Advances is 1.92%)
It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year
ended March, 2001, as published by RBI in its Report on trends and progress of banking in
India.

Interest on Recapitalization Bonds is an income earned form the Government, who had
issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a
bailout package. The statistics above show the other weaknesses of the nationalized banks in
addition to the heavy burden they have to bear for servicing NPA by way of provisioning and
holding cost as under:

 Their operating expenses are higher due to surplus manpower employed. Wage costs
total assets is much higher to PSBs compared to new private banks or foreign banks.
 Their earnings from sources other than interest income are meagre. This is due to failure
to develop off balance sheet business through innovative banking products.

2. Impact on Liquidity of the SBI Group

Though SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines, the
facts that their net NPA in the average is as much as 7% is a potential threat for them. RBI
has indicated the ideal position as Zero percent Net NPA. Even

granting 3% net NPA within limits of tolerance the SBI Group are holding an
uncomfortable burden at 7.1% as at March 2001. They have not been able to build
additional capital needed for business expansion through internal generations or by tapping
the equity market, but have resorted to II-Tier capital in the debt market or looking to
recapitalization by Government of India.

3. Impact on Outlook of Bankers towards Credit Delivery.

The fear of NPA permeates the psychology of bank managers in the SBI Group in
entertaining new projects for credit expansion. In the world of banking the concepts of
business and risks are inseparable. Business is an exercise of balancing between risk and
reward. Accept justifiable risks and implements de-risking steps. Without accepting risk,
there can be no reward. The psychology of the banks today is to insulate themselves with
26
zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit
growth compared to growth of deposits, resulting in a low C/D Ratio around 50 to 54% for
the industry.

The fear psychosis also leads to excessive security-consciousness in the approach towards
lending to the small and medium sized credit customers. There is insistence on provision
of collateral security, sometimes up to 200% value of the advance, and consequently due
to a feeling of assumed protection on account of holding adequate security (albeit over-
confidence). a tendency towards laxity in the standards of credit appraisal comes to the
fore. It is well known that the existence of collateral security at best may convert the credit
extended to productive sectors into an investment against real estate, but will not prevent
the account turning into NPA. Further blocked assets and real estate represent the most
illiquid security and NPA in such advances has the tendency to persist for a long duration.

SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an
urgent solution for handling this hovering threat.

4. Impact on Productivity:
High level of NPAs effect the productivity of the banks by increasing the cost of funds and
by reducing the efficiency of banks employees. Cost of funds is increased because due to
non-availability of sufficient internal sources they have to rely on external sources to fulfill
their future financial requirements. Productivity of employees is also reduced because it
keeps staff busy with the task of recovery of overdue. Instead of devoting time for planning
for development through more credit and mobilization of resources the branch staff would
primarily be engaged in preparing a large value of returns and statements relating to sub-
standard, doubtful and loss assets, preparing proposal for filing of suits, pavement of legal
action, compromise, write off or in preparing DICGC claim papers etc.

5. Impact on other Variables:

High level of NPAs also leads to squeezing of interest spread, when asset becomes an NPA
for the first time it adversely affects the spread by not contributing to the interest income
and from the second year onwards it will have its impact on the bottom line of the balance
sheet because of provisioning to be made for it and not have incremental effect on the
spread.

27
Now a days Govt. does not encourage liberal capital support to be given to banks. Banks
are required to bring their own capital by issuing share to the public, whereas high level of
NPAs leads to lower profits hence less or no profits available for equity shareholders hence
lower EPS and fall in the value of share. During the year 2001-02 share of 12 public sector
banks were traded on the NSE out of which share value of three PSBs have decreased. Low
market value of shares has also forced the banks to borrow heavily debt market to build
Tier II capital to meet capital adequacy norms, putting severe pressure on their profit
margins.

6. Qualitative aspects of the Micro Level Impact of NPAs:

High incidence of loan defaults shakes the confidence of general public in the soundness
of banking setup and indirectly effects the capacity of the banking system to mop up the
deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust of
foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened by Indian
banks or confine their transaction to top Indian banks only. Moreover, it puts negative effect
on granting of autonomy to PSBs whereas it is must for banks in this competitive
environment. Banks having positive net profits for the last three years, Net NPA level
below 9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to be fulfilled
to get autonomous status, which becomes difficult in the situation of huge level of NPAs

Inadequate recovery also inhibits the banks to draw refinance from higher level agency.
The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery
to demand in respect of direct, medium and long term loans for agriculture and allied
activities. It implies that refinance facility would be progressively reduced depending on
the position of NPAs and also on the No. of years in which a banks branch remains in a
particular category of default. Due to fear of NPAa banks are being taken away from the
basic function for which these were established it is becoming more & more risky and less
remunerative. They are floating their subsidiaries to manage mutual funds, factoring,
insurance business, Good money is spent to recover bad money. Deterioration in the quality
of loan assets and inability to come with new products makes the Indian banks
uncompetitive globally. Due to high cost, they cannot reduce lending rate to meet the
economy's demand of low lending rate. It is also biggest threat for capital account
convertibility.

28
 7. Some areas of Macro-Economic Impact:
It is not only the banks which are affected higher level of NPAs but it is the economy as a
whole which pays for it. Banks are not putting enough resource in lending due to fear of
default. Once the credit to various sectors of the economy slow down, the economy is badly
hit. There is slowdown in growth in GDP, industrial output and fall in the profit margins of
the corporate and consequent depression in the market. Further high level of NPAs can
result in adding to the inflationary potential in the economy and eroding the viability of the
credit system as a whole.

Not only this, burden of NPAs is to be borne by the society as a whole. When capital
support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs, it
comes out of either Govt. budgetary resources or from the public as per

Liberalization policy, whether this money is from tax revenues or from the hard earned
saving of the investing public, in fact, the society is bearing the cost of these

NPAs. Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is
in its hand. Any dividend declared would have gone to the Govt. and which can be spent
on the welfare and development program.

GUIDELINES BY RBI

Guidelines of Government and RBI for Reduction of NPAs

1. Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to take steps for
arresting the incidence of fresh NPAs and have also been creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. More significant of them,
I would like to recapitulate at this stage.

* The broad framework for compromise or negotiated settlement of NPAs advised by RBI in
July 1995 continues to be in place. Banks are free to design and implement their own policies

29
 for recovery and write-off incorporating compromise and negotiated settlements with the
approval of their Boards, particularly for old and unresolved cases falling under the NPA
category. The policy framework suggested by RBI provides for setting up of an independent
Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinize
and recommend compromise proposals.

* Specific guidelines were issued in May 1999 to public sector banks for one time non
discretionary and non discriminatory settlement of NPAs of small sector. The scheme was
operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through
compromise settlement under this scheme].

* Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and
less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001 helped
the public sector banks to recover Rs. 2600 crore by September 2001].

* An OTS Scheme covering advances of Rs. 25000 and below continues to be in

operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance
Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal
farmers are being drawn up.

2. Lok Adaltas:

Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss"
category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok
Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats
to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had
recovered Rs. 40.38 crore as on September 30, 2001, through the forum of Lok Adalat.
The progress through this channel is expected to pick up in the coming years
particularly looking at the recent initiatives taken by some of the public sector banks
and DRTs in Mumbai.

3. Debt Recovery Tribunals:

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act,
passed in March 2000 has helped in strengthening the functioning of DRTs. Provisions
for placement of more than one Recovery Officer, power to attach defendant's

30
 property/assets before judgement, penal provisions for disobedience of Tribunal's order
or for breach of any terms of the order and appointment of receiver with powers of
realization, management, protection and preservation of property are expected to
provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to
come.

Though there are 22 DRTs set up at major centres in the country with Appellate
Tribunals located in five centres viz. Allahabad, Mumbai, Delhi,Calcutta and Chennai,
they could decide only 9814 cases for Rs. 6264.71 crore pertaining to public sector
banks since inception of DRT mechanism and till September 30, 2001. The amount
recovered in respect of these cases amounted to only Rs. 1864.30 crore.

Looking at the huge task on hand, with as many as 33049 cases involving Rs. 42988.84
crore pending before them as on September 30, 2001, I would like the banks to institute
appropriate documentation system and render all possible assistance to the DRTs for
speeding up decisions and recovery of some of the well collateralised NPAs involving
large amounts. I may add that familiarisation programmes have been offered in NIBM
at periodical intervals to the presiding officers of DRTs in understanding the
complexities of documentation and operational features and other legalities applicable
of Indian banking system. RBI on its part has suggested to the Government to consider
enactment of appropriate penal provisions against obstruction by borrowers in
possession of attached properties by DRT Receivers, and notify borrowers who default
to honour the decree passed against them.

4. Circulation of information on defaulters:

The RBI has put in place a system for periodical circulation of details of willful defaults
of borrowers of banks and financial institutions. This serves as a caution list while
considering requests for new or additional credit limits from defaulting borrowing units
and also from the directors/proprietors/partners of these entities. RBI also publishes a
list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom
suits have been filed by banks and FIs for recovery of

their funds, as on 31st March every year. It is our experience that these measures had
not contributed to any perceptible recoveries from the defaulting entities. However,
they serve as negative basket of steps shutting off fresh loans to these defaulters. I

31
 strongly believe that a real breakthrough can come only if there is a change in the
repayment psyche of the Indian borrowers

5. Recovery action against large NPAs:

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI
had advised the public sector banks to examine all cases of willful default of Rs 1 crore
and above and file suits in such cases, and file criminal cases in regard to willful
defaults. Board of Directors are required to review NPA accounts of Rs. 1 crore and
above with special reference to fixing of staff accountability.On their part RBI and the
Government are contemplating several supporting measures including legal reforms,
some of them I would like to highlight.

6. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide

a timely and transparent system for restructuring of the corporate debts of Rs. 20 crore
and above with the banks and financial institutions. The CDR process would also enable
viable corporate entities to restructure their dues outside the existing legal framework
and reduce the incidence of fresh NPAs. The CDR structure has been headquartered in
IDBI, Mumbai and a Standing Forum and Core Group for administering the mechanism
had already been put in place. The experiment however has not taken off at the desired
pace though more than six months have lapsed since introduction. As announced by the
Hon'ble Finance Minister in the Union Budget 2002-03, RBI has set up a high level
Group under the Chairmanship of Shri Vepa Kamesam, Deputy Governor, RBI to
review the implementation procedures of CDR mechanism and to make it more
effective. The Group will review the operation of the CDR Scheme, identify the
operational difficulties, if any, in the smooth implementation of the scheme and suggest
measures to make the operation of the scheme more efficient.

7. Credit Information Bureau:

Institutionalisation of information sharing arrangements through the newly formed

Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the
recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the
scheme of information dissemination on defaults to the financial system. The main
recommendations of the Group include dissemination of information relating to suit-

32
 filed accounts regardless of the amount claimed in the suit or amount of credit granted
by a credit institution as also such irregular accounts where the borrower has given
consent for disclosure. This, I hope, would prevent those who take advantage of lack of
system of information sharing amongst lending institutions to borrow large amounts
against same assets and property, which had in no small measures contributed to the
incremental NPAs of banks.

8. Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It is

working out a proper definition covering such classes of defaulters so that credit denials
to this group of borrowers can be made effective and criminal prosecution can be made
demonstrative against willful defaulters.

9. Corporate Governance:

A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the
Reserve Bank to review the supervisory role of Boards of Banks and financial
institutions and to obtain feedback on the functioning of the Boards vis-a-vis
compliance, transparency, disclosure, audit committees etc. and make
recommendations for making the role of Board of Directors more effective with a view
to minimising risks and overexposure. The group is finalising its recommendations
shortly and may come out with guidelines for effective control and supervision by bank
boards over credit management and NPA prevention measures.

10. Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002:

The Act provides, inter alia for enforcement of security interest for realisation of dues
without the intervention of courts or tribunals. The Security Interest (Enforcement)
Rules, 2002 has also been notified by Government to enable Secured Creditors to
authorise their officials to enforce the securities and recover the dues from the
borrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 notices
involving outstanding amount of Rs. 19,744 crore, and had recovered an amount of Rs.
1,748 crore from 24,092 cases.

33
PROBLEMS LOAN RECOVERY

1. Inadequate security and Erosion in value of security:

Generally, banks tend to find that there is a major gap in the valuation of the security,
as carried out at the time of providing the loan and at the time of loan recovery. The
value of the security has generally deteriorated over the period and according to experts,
it may further deteriorate by almost 10-50% if quick action is not taken for its
immediate sale.

2. Political interferences:

Political interference in the day -to-day functioning of public sector banks created a
number of problems for them. The populist policies of the national level politicians,
such as waiver in repayment only added to these problems.

3. Slow legal procedure:

Before the establishment of DRTs in 1993, the banks had to approach the normal courts
to recover their dues. There were provisions under various acts which hampered the
smooth takeover and sale of secured assets. The legal process could take years
to be completed, with the borrower having ample scope for delaying the takeover of
assets. A number of loopholes provided the borrower with opportunities to delay or
ignore repayment of loans. During this period, it was said by some unscrupulous
businessmen that - "there is no difference between equity and debt - you never have to
repay either of them ".

4. Swamping of DRTs with cases:

Once DRTs were established to quicken the pace of recovery procedures, the pace of
recovery improved quite a bit. However, the DRTs were soon drowned in the ever
increasing number of cases. The pending number of cases with the DRTs increased
manifold during the period 1993-2002.

34
5. Misuse of BIFR/SICA:

This was one of the favourite methods of willful defaulters to delay repayment. If the
defaulter's company is declared sick and taken for financial reconstruction under BIFR,
it is not possible to undertake any recovery proceeding against the company .The
procedure of financial reconstruction can take a number of years together, thereby
delaying recovery to a great extent.

6. Transfer of property Act, English mortgage:

Under provisions of Section 69 of Transfer of Property Act, mortgagee can take

possession of mortgaged property and sell the same without the intervention of the
Court only in the case of English Mortgage. In addition, mortgagee can take possession
of mortgaged property where there is specific provision in mortgage deed and it is
situated in the towns of Mumbai, Kolkata and Chennai only. In other cases, intervention
of the court is required.

However, this is very slow and time consuming process and by the time bank /FI is able
to get possession; the asset either does not exist or has become valueless.

35
 CHAPTER - 4

ANALYISIS AND

INTERPRETATION

STATE BANK OF INDIA

TOTAL ASSET

2013- 2014- 2015- 2016- 2017-

YEAR 14 15 16 17 18
TOTAL ASSET(RS.
CR) 407185 459883 494029 566565 721526

Total Assets(Rs.Cr)
800000

700000

600000

500000

400000

300000

200000

100000

0
2013-14 2014-15 2015-16 2016-17 2017-18

36
Interpretation: -Above graph show that total assets of SBI is increased in 2014-15 by 52658
crore, in 2017-18 increased by 154961rs. crore. So assets of the SBI bank increased from last
five year.

GROSS NPA

2013- 2014- 2015- 2016- 2017-

YEAR 14 15 16 17 18

_GROSS
NPA(RS.CR) 12667 12456 9628 9998 12837

Gross NPA
14000

12000

10000

8000

6000

4000

2000

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation: - above graph shows that Non-performing assets of SBI decreased from
2013-14 to2016-17 and increased in 2017-18. There are so many reasons of increases of npa

37
 NET NPA

2013- 2014- 2015- 2016- 2017-

YEAR 14 15 16 17 18
NET NPA(RS. CR.) 5442 5349 4906 5258 7424

Net NPA
8000

7000

6000

5000

4000

3000

2000

1000

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation: -above graph show that net NPA decreased from 2013-14 to 2015-16 and
increased in 2016-17 to 2017-18.

38
 GROSS NPA (RATIO%)

2013- 2014- 2015- 2016- 2017-

YEAR 14 15 16 17 18
GROSS
NPA(RATIO%) 7.75 5.96 3.61 2.92 3.04

Gross NPA
9
8
7
6
5
4
3
2
1
0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation: Above graph shows that the gross NPA (Ratio%) of SBI is decreased
from 2014-15 to 2016-17 and increased in 2017-18.

39
 NET NPA(RATIO%)

2013- 2014- 2015- 2016- 2017-

YEAR 14 15 16 17 18
NET NPA(RATIO%) 3.48 2.65 1.88 1.56 1.78

Net NPA Ratio(%)

4

3.5

2.5

1.5

0.5

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is decreased from
2014-15 to 2016-17 and increased in 2017-18

40
 PROVISION COVER

2013- 2014- 2015- 2016- 2017-

YEAR 14 15 16 17 18
PROVISION
COVER 57.04 59.45 49.04 47.41 45.04

Provision cover
70

60

50

40

30

20

10

0
2013-14 2014-15 2015-16 2016-17 2017-18

Interpretation: Above graph shows that in 2013-14 provision cover of NPA is 57.04%
and increased in 2014-15. It decreased from 2015-16 to 2017-18.

41
 CHAPTER - 5

FINDINGS

1. REASON OF NPA IN BANK:-

 Default by customer
 Non-inspection of borrower
 Lack of expertise
 Imbalance of inventories
 Poor credit collection
 Lack of trained staff
 Lack of commitment to recovery
 Change in consumer preference

2 IMPACT OF NPA ON BANK

 Govt. Policies
 Impact of profitability
 Liquidity
 Impact on outlook of Banker towards credit delivery
 Impact of productivity

42
 CHAPTER - 6
RECOMMENDATIONS

 Credit administration: A banks have to strengthen their credit administrative

machinery and put in place effective credit risk management systems to reduce the fresh
incidence of NPAs.

 Better Inspection: We shall keep a close watch on the manner in which NPA
reduction is taking place.

 Cash Recovery: We should also insist that cash recoveries should more than
offset the fresh write-offs in NPAs.

 Perception: The mindset of the borrowers needs to change so that a culture of proper
utilization of credit facilities and timely repayment is developed.

 Financial System: As you are aware, one of the main reasons for corporate default
is on account of diversion of funds and corporate entities should come forward of avoid
this practice in the interest of strong and sound financial system.

 Coordinator: Extending credit involves lenders and borrowers and both should realize
their role and responsibilities. They should appreciate the difficulties of each other and
should endeavor to work contributing to a healthy financial system.

43
 LIMITATION OF STUDY

 Shortage of time :-
.Time is very short for research ,so that is very difficult can get the knowledge about
everything.

 Information not sufficiently available

The source of data collection is secondary so the information available is not sufficient.

 No direct source of information available

The information is collected from indirect sources so in some information data is not
available.

 Secondary data:-

Information is not reliable because of secondary data

44
 CHAPTER - 7

CONCLUSION

A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors.

Over the years, much has been talked about NPA and the emphasis so far has been only on
identification and quantification of NPAs rather than on ways to reduce and upgrade them.

There is also a general perception that the prescriptions of 40% of net bank credit to priority
sectors have led to higher NPAs, due to credit to these sectors becoming stickly managers
of rural and semi-urban branches generally sanction these loans. In the changed context of
new prudential norms and emphasis on quality lending and profitability, mangers should
make it amply clear to potential borrowers that banks resources are scare and these are
meant to finance viable ventures so that these are repaid on time and relevant to other needy
borrowers for improving the economic lot of maximum number of households. Hence
selection of right borrowers, viable economic activity, adequate finance and timely
disbursement, correct and use of funds and timely recovery f loans is absolutely necessary
pre conditions for preventing of minimizing the incidence of new NPAs.

45
 BIBLIOGRAPHY

1. Finance India, September 2005 pp-957-961

2. Charted Financial Analysis, October 2005 pp-64

3. Charted Financial Analysis, October 2007 pp-31-31

4. Charted Financial Analysis, November 2007 pp-8-9

5. Charted Financial Analysis, August 2004 B.P. Dhaka pp-47-52

6. Business Today, May 2006 pp-34

7. Charted Financial Analysis, December 2005 pp-25-28

8. RBI Bulletin, July 1999 pp-34-36

9. RBI Bulletin, January 2004 pp-17-19

10. Alok Majumdar, NPAs: Recovery Blues, Treasury Management (Dec. 2000) pp 46-49

Books: KOTHARI C.R

Indian Financial System, VK publication ,pp-100-105

Website:

1. www.centurionbop.co.in/news/press_190505.html1

2. www.domainb.com/management/m_a/20060904_vijay_kalantri.html2

3. www.twincitiesbbs.com/php/subra/corporat.htm3

4. www.blonnet.com/2002/08/07/stories/2002080700050800.htm4

5. www.sbi.com

6. www.sbp.com

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