A Project report

On
“COMPARATIVE ANALYSIS OF NON PERFORMING ASSETS OF
PUBLIC AND PRIVATE SECTOR BANKS”

SUBMITTED FOR THE COMPLETION OF THE REQUIREMENT FOR THE

DEGREE OF

MASTER OF BUSINESS ADMINISTRATION

(Session 2015-2017)

Submitted By
NAMITA

University Roll No. 1375

MBA 2015-17

BABA FARID GROUP OF MANAGEMENT & TECHNOLOGY

BATHINDA
PUNJAB

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 CERTIFICATE
This is to certify that Namita has preceded under my supervision her project report on
“Comparative Analysis of Non Performing Assets of Public and Private Sector Banks”
in specialization area “Finance”.
The work embodied in this report is original and is of the standard expected of an MBA
student and has not been submitted in part or full to this or any other University for the award
of any degree. She has completed all requirements of guidelines for research project report
and the work is fit for evaluation.

Project Mentor

Signature of Supervisor/Guide

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 DECLARATION

This is certified that I Namita the student of Department of Management Studies, studying in
MBA (4th Sem.), has undergone research project on title “Comparative Analysis of Non
Performing Assets of Public and Private Sector Banks” for the completion of degree of
Master of Business Administration to BABA FARID COLEEGE OF MANAGEMENT AND
TECHNOLOGY, BATHINDA , PUNJAB.

I solemnly declare that the work done by me is original and no copy of it has been
submitted to any other university for award of any other degree/fellowship or a similar title
and topic.

Namita
Specialization: Finance

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 ACKNOWLEDGEMENT

I am very thankful to everyone who all supported me, for I have completed my project
effectively and moreover, on time.
I am equally grateful to my project mentor. She gave me moral support and guided me in
different matters regarding the topic. She has been very kind and patient, whilst suggesting to
me the outlines of this project, and correcting my doubts. I thank her for her overall support.
Last but not the least, I would like to thank my parents who helped me a lot in gathering
different information, collecting data and guiding me from time to time in completing this
project. Despite their busy schedules, they gave me different ideas to help make this project
unique.

Thanking you

Namita
MBA 4th Sem.

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 TABLE OF CONTENT

CERTIFICATE I
DECLARATION II
ACKNOWLEDGEMENT III
EXECUTIVE SUMMERY 5
CHAPTER-1
INTRODUCTION ......................................................................................... 11
1.1 INDIAN BANKING SECTOR .................................................................................. 13
1.1.1 History of Banking In India ................................................................................. 14
1.1.2 Banking Activities ............................................................................................... 15
1.1.3 Public Sector Banks............................................................................................. 16
1.1.4 Private Sector Banks ........................................................................................... 18
1.2 NON-PERFORMING ASSETS (NPA) ...................................................................... 20
1.2.1Definitions ........................................................................................................... 20
1.2.2 NPA as Defined by RBI ...................................................................................... 21
1.2.3 Classification of Assets ....................................................................................... 22
1.2.4 Types of NPA...................................................................................................... 24
1.2.5 Why Assets Become NPA ................................................................................... 24
1.2.6 Reason for NPA .................................................................................................. 25
1.2.7 Impact of NPA .................................................................................................... 27
1.2.8 NPA Rules for Bank ............................................................................................ 28
1.2.9 Norms for Treating Loans / Advances as NPA..................................................... 28
1.2.10 Early Symptoms ................................................................................................ 30
1.2.11 Preventive Measurement for NPA ..................................................................... 31
1.2.12 NPA Management Practices In India ................................................................. 33
1.2.13 Measures Initiated By RBI and Government of India For Reduction of NPA’s .. 34
CHAPTER-2
LITERATURE REVIEW .............................................................................. 40
CHAPTER-3
RESEARCH METHODOLOGY .................................................................. 43
3.1 INTRODUCTION ..................................................................................................... 44
3.2 OBJECTIVE OF THE STUDY.................................................................................. 44
3.3 SCOPE OF THE STUDY .......................................................................................... 44
3.4 RESEARCH DESIGN ............................................................................................... 45

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 3.5 SOURCE OF DATA ................................................................................................. 45
3.6 PERIOD OF STUDY................................................................................................. 45
3.7 DATA ANALYSIS ................................................................................................... 45
3.8 LIMITATION OF STUDY ........................................................................................ 46
CHAPTER-4
DATA ANALYSIS & INTERPRETATION ................................................ 47
4.1COMPARATIVE RATIOS ........................................................................................ 48
4.1.1 Gross NPA’s Ratio (%) ....................................................................................... 48
4.1.2 Net NPA Ratio (%).............................................................................................. 50
4.1.3 Provisions Ratio (%) ........................................................................................... 51
4.1.4 Comparison of Gross NPA Ratio and Net NPA of Public Sector Bank ................ 52
4.1.5 Comparison of Gross NPA Ratio and Net NPA of Private Sector Bank ............... 53
4.2 COMPOSITION OF LOAN ASSET OF BANKS ...................................................... 54
4.2.1 Standard Assets Ratio (%) ................................................................................... 54
4.2.2 Sub-standard Assets Ratio (%) ............................................................................ 55
4.2.3 Doubtful Assets Ratio (%) ................................................................................... 56
4.2.4 Loss Assets Ratio (%) ......................................................................................... 57
4.3 IMPACT OF NON-PERFORMING ASSETS ON PROFITABILITY ....................... 58
4.3.1 Correlation between Net Profit & Net NPA of Public Sector Bank ...................... 58
4.3.1 Correlation between Net Profit & Net NPA of Private Sector Bank ..................... 58
4.4 NPA RECOVERY ANALYSIS ................................................................................. 60
4.4.1 Percentage of Net Amount Recovered ............................................................ 60
CHAPTER-5
FINDINGS, SUGGESTIONS & CONCLUSION ........................................ 61
5.1 FINDINGS ................................................................................................................ 62
5.2 SUGGESTION .......................................................................................................... 63
5.3 CONCLUSION ......................................................................................................... 64
BIBLIOGRAPHY
APPENDICES

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 LIST OF TABLES

Table 1: List of Nationalized Banks .................................................................................... 17

Table 2: List of State Bank of India & its Associates ........................................................... 17
Table 3: List of Private Sector Banks .................................................................................. 19
Table 4: Gross NPA Ratio ................................................................................................... 48
Table 5: Net NPA Ratio ...................................................................................................... 50
Table 6: Provisions Ratio ................................................................................................... 51
Table 7: Comparison of Gross & Net NPA Ratios of Public Sector Banks ........................... 52
Table 8: Comparison of Gross & Net NPA Ratios of Private Sector Banks .......................... 53
Table 9: Standard Assets Ratio ............................................................................................ 54
Table 10: Sub-Standard Assets Ratio ................................................................................... 55
Table 11: Doubtful Assets Ratio .......................................................................................... 56
Table 12: Loss Assets Ratio ................................................................................................ 57
Table 13: Correlation between Net Profit & Net NPA of Public Sector Bank ...................... 58
Table 14: Correlation between Net Profit & Net NPA of Private Sector Bank ..................... 58
Table 15: Recovery Rate ..................................................................................................... 60

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 LIST OF FIGURES

Figure 1: Gross NPA Ratio .................................................................................................. 49

Figure 2: Net NPA Ratio ..................................................................................................... 50
Figure 3: Provisions Ratio .................................................................................................. 51
Figure 4: Comparison of Gross & Net NPA Ratios of Public Sector Banks ......................... 52
Figure 5: Comparison of Gross & Net NPA Ratios of Private Sector Banks ........................ 53
Figure 6: Standard Assets Ratio........................................................................................... 54
Figure 7: Sub-Standard Assets Ratio ................................................................................... 55
Figure 8: Doubtful Assets Ratio .......................................................................................... 56
Figure 9: Loss Assets Ratio ................................................................................................. 57
Figure 10: Recovery Rate .................................................................................................... 60

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 EXECUTIVE SUMMERY
The Major Project Report undertaken by me has given us an exposure into the Non-
Performing Assets of Banks in India. The project that was undertaken involves Public &
Private Sector Banks in the country. In this project their Non- Performing Assets have been
analyzed on the basis of various ratios & correlation Analysis.

Title of the study is “COMPARATIVE ANALYSIS OF NON PERFORMING ASSETS

OF PUBLIC AND PRIVATE SECTOR BANKS”

As in this report study of NPAs is done, so Non Performing assets means the debt which is
given by the Bank is unable to recover it is called NPA .Non- Performing Asset [NPA] is a
result of asset Liability mismatch, A NPA account in the books of accounts is an asset as it
indicates the amount receivable from the Defaulters. It means if any bank gives loan to the
customer if the interest for that loan is not paid by the customer till 90 days then that account
is called as NPA account.

As the analysis done is of banking sector so we must know about banking. Banking Means
"Accepting Deposits for the purpose of lending or Investment of deposits of money from the
public, repayable on demand or otherwise and withdraw by cheque, draft or otherwise."

As the analysis is on 2 types of banks Public Sector & Private Sector.

The Objectives undertaken in the study were, to understand the concept of Non-Performing
Assets of Public Sector and Private Sector Banks, to evaluate the efficiency in managing
Non-Performing Assets of Public Sector and Private Sector Banks via comparative ratios, to
analyze the various compositions of the Non-Performing Assets of Public Sector and Private
Sector Banks, to study the impact of Non-Performing Assets on profitability of Public Sector
and Private Sector Banks and to study the various recovery channels for Non-Performing
Assets.

The Research Methodology includes the secondary data which consists of the data of NPA
of both the sectors which has been taken from the official website of The Reserve Bank of
India and ratios have been calculated in excel worksheet and correlation analysis have been
done in SPSS.

Everything has some limitations & also this report is not free from limitations & the main
Limitations of the Study are Since my study is based upon Secondary data, the practical

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operations as related to NPAs are adopted by the banks are not learned. The solutions are not
applicable to every bank. NPAs are changing with the time. The study is done in the present
environment without foreseeing future developments. The study, as limitations, is confined
only to the selected and restricted indicators and the study is confined only for the period of
five years.

The Observations & Findings of the study are based on the results interpreted through the
analysis of the ratios & correlation used in this study. From the study it has been observed
that private sector bank, is having a better management of NPA’s in all aspects in
comparison of Public Sector Banks. All the tools whether it is Gross NPA Ratios, Net NPA
Ratios, Provisions Ratios for NPA, Standard, Sub-Standard, Doubtful, Loss Asset Ratios etc.
Private Sector Banks have an upper edge over Public Sector Bank in all of them.

Based on the Findings of the study from the interpretation, there are some Suggestions in
light to them which include trying uplifting business of banking by reducing NPA’s with the
help of various recovery channels like Lok Adaalat’s, DTR’s, SARFAESI Act and many
more other channels.

In light of all the above Findings & Suggestions, the Conclusion is that, 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.

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 CHAPTER-1

INTRODUCTION

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 CHAPTER-1
INTRODUCTION
A strong banking sector is important for flourishing economy. One of the most important and
major roles played by banking sector is that of lending business. It is generally encouraged
because it has the effect of funds being transferred from the system to productive purposes,
which also results into economic growth. As there are pros and cons of everything, the same
is with lending business that carries credit risk, which arises from the failure of borrower to
fulfil its contractual obligations either during the course of a transaction or on a future
obligation. The failure of the banking sector may have an adverse impact on other sectors.
Non- performing assets are one of the major concerns for banks in India. 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. The issue of Non Performing Assets has been discussed at
length for financial system all over the world. The problem of NPAs is not only affecting the
banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but
a reflection of the state of health of the industry and trade. This project deals with
understanding the concept of NPAs, its magnitude and major causes for an account becoming
non-performing, projection of NPAs over next years in banks and concluding remarks.
The magnitude of NPAs have a direct impact on Banks profitability legally they are not
allowed to book income on such accounts and at the same time banks are forced to make
provisions on such assets as per RBI guidelines The RBI has advised all State Co-operative
Banks as well as the Central Co-operative Banks in the country to adopt prudential norms
from the year ending 31-03-1997. These have been amended a number of times since 1997.
As per their guidelines the meaning of NPAs, the norms regarding assets classification and
provisioning Its now very known that the banks and financial institutions in India face the
problem of amplification of non-performing assets (NPAs) and the issue is becoming more
and more unmanageable. In order to bring the situation under control, various steps have been
taken. Among all other steps most important one was the introduction of Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by
Parliament, which was an important step towards elimination or reduction of NPAs.
An asset is classified as non-performing asset (NPAs) if dues in the form of principal and
interest are not paid by the borrower for a period of 180 days, however with effect from

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March 2004, default status would be given to a borrower if dues are not paid for 90 days. If
any advance or credit facility granted by bank to a borrower becomes 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 exists certain advances /
credit facilities having performing status. The NPA level of our banks is way high than
international standards. One cannot ignore the fact that a part of the reduction in NPA’s is
due to the writing off bad loans by banks. Indian banks should take care to ensure that they
give loans to credit worthy customers. In this context the dictum “prevention is always better
than cure” acts as the golden rule to reduce NPA’s.

1.1 INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the
transition from money lending to banking must have occurred even before Manu, the great
Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down
rules relating to rates of interest. During the Mogul period, the indigenous bankers played a
very important role in lending money and financing foreign trade and commerce. During the
days of the East India Company, it was the turn of the agency houses to carry on the banking
business. The General Bank of India was the first Joint Stock Bank to be established in the
year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The
Bank of Hindustan is reported to have continued till 1906 while the other two failed in the
meantime. In the first half of the 19th century the East India Company established three
banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in
1843. These three banks also known as Presidency Banks were independent units and
functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial
Bank of India was established on 27thJanuary 1921. With the passing of the State Bank of
India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly
constituted State Bank of India. The Reserve Bank which is the Central Bank was created in
1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a
number of banks with Indian management were established in the country namely, Punjab
National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of
Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country
were nationalized and in 15th April 1980 six more commercial private sector banks were also
taken over by the government

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1.1.1 History of Banking in India
The first bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinct phases:
 Early phase of Indian banks, from 1786 to 1969
 Nationalization of banks and the banking sector reforms, from 1969 to 1991
 New phase of Indian banking system, with the reforms after 1991
Phase 1
The first bank in India, the General Bank of India, was set up in 1786. Bank of
Hindustan and Bengal Bank followed. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as independent
units and called them Presidency banks. These three banks were amalgamated in 1920
and the Imperial Bank of India, a bank of private shareholders, mostly Europeans, was
established. Allahabad Bank was established, exclusively by Indians, in 1865.
Punjab National Bank was set up in 1894 with headquarters in Lahore. Between 1906
and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian
Bank, and Bank of Mysore were set up. The Reserve Bank of India came in 1935.
During the first phase, the growth was very slow and banks also experienced periodic
failures between 1913 and 1948. There were approximately 1,100 banks, mostly small.
To streamline the functioning and activities of commercial banks, the Government of
India came up with the Banking Companies Act, 1949, which was later changed to the
Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965).
The Reserve Bank of India (RBI) was vested with extensive powers for the supervision
of banking in India as the Central banking authority. During those days, the general
public had lesser confidence in banks. As an aftermath, deposit mobilization was slow.
Moreover, the savings bank facility provided by the Postal department was
comparatively safer, and funds were largely given to traders.

Phase 2
The government took major initiatives in banking sector reforms after Independence. In
1955, it nationalized the Imperial Bank of India and started offering extensive banking
facilities, especially in rural and semi-urban areas. The government constituted the State
Bank of India to act as the principal agent of the RBI and to handle banking transactions
of the Union government and state governments all over the country. Seven banks owned
by the Princely states were nationalized in 1959 and they became subsidiaries of the
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 State Bank of India. In 1969, 14 commercial banks in the country were nationalized. In
the second phase of banking sector reforms, seven more banks were nationalized in
1980. With this, 80 percent of the banking sector in India came under the government
ownership.
Phase 3
This phase has introduced many more products and facilities in the banking sector as part
of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee
was set up, which worked for the liberalization of banking practices. Now, the country is
flooded with foreign banks and their ATM stations. Efforts are being put to give a
satisfactory service to customers. Phone banking and net banking are introduced. The
entire system became more convenient and swift. Time is given importance in all money
transactions.
The financial system of India has shown a great deal of resilience. It is sheltered from
crises triggered by external macroeconomic shocks, which other East Asian countries
often suffered. This is all due to a flexible exchange rate regime, the high foreign
exchange reserve, the not-yet fully convertible capital account, and the limited foreign
exchange exposure of banks and their customers.

1.1.2 Banking Activities

 Retail banking, dealing directly with individuals and small businesses.

 Business banking, providing services to mid-market businesses.

 Corporate banking, directed at large business entities.

 Private banking, providing wealth management services to high net worth individuals.

 Investment banking, activities in the financial markets, such as "underwrite"

(guarantee the sale of) stock and bond issues, trade for their own accounts, make
markets, and advise corporations on capital market activities like mergers and
acquisitions.
 Merchant banking is the private equity activity of investment banks.

 Financial services, global financial institutions that engage in multiple activities such

as banking and insurance.

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1.1.3 Public Sector Banks
PSBs are banks where a majority stake (i.e. more than 50%) is held by a government. The
shares of these banks are listed on stock exchanges. There are a total of 27 PSBs in India
[21 nationalized banks + 6 State bank group (SBI + 5 associates)].

In 2011 IDBI bank and in 2014 Bharatiya Mahila Bank were nationalized with a
minimum capital of Rs 500 cr.

Emergence of public sector banks

The Central Government entered the banking business with the nationalization of the
Imperial Bank of India in 1955. A 60% stake was taken by the Reserve Bank of India and
the new bank was named as the State Bank of India. The seven other state banks became
the subsidiaries of the new bank when nationalised on 19 July 1960. The next major
nationalisation of banks took place in 1969 when the government of India, under Prime
Minister Indira Gandhi, nationalised an additional 14 major banks. The total deposits in
the banks nationalised in 1969 amounted to 50 crores. This move increased the presence
of nationalised banks in India, with 84% of the total branches coming under government
control.

The next round of nationalisation took place in April 1980. The government nationalised
six banks. The total deposits of these banks amounted to around 200 crores. This move
led to a further increase in the number of branches in the market, increasing to 91% of the
total branch network of the country. The objectives behind nationalisation were:

 To break the ownership and control of banks by a few business families,

 To prevent the concentration of wealth and economic power,
 To mobilize savings from masses from all parts of the country,
 To cater to the needs of the priority sectors.

Total public sector banks are 27 including IDBI and BMB

Some Public Sector Banks are which comprises nationalized banks and SBI and its associates
are shown in the table.

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  Nationalized Banks
Sr. No. Names
1 Allahabad Bank
2 Andhra Bank
3 Bank of Baroda
4 Bank of India
5 Bank of Maharashtra
6 Canara Bank
7 Central Bank of India
8 Corporation Bank
9 Dena Bank
10 Indian Bank
11 Indian Overseas Bank
12 Oriental Bank of Commerce
13 Punjab National Bank
14 Punjab & Sind Bank
15 Syndicate Bank
16 Union Bank of India
17 United Bank of India
18 UCO Bank
19 Vijaya Bank
20 IDBI Bank Ltd
21 Bharatiya Mahila Bank
Table 1: List of Nationalized Banks Source: http://www.rbi.org.in
 State Bank of India and its Associates

Sr. No. Names

1 State Bank of Bikaner & Jaipur
2 State Bank of Patiala
3 State Bank of Hyderabad
4 State Bank of Mysore
5 State Bank of Travancore
Table 2: List of State Bank of India & its Associates Source: http://www.rbi.org.in
Note: - Now all these SBI Associates are merged in SBI. So now there are only 22
Public Sector Banks.

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1.1.4 Private Sector Banks
The private-sector banks in India represent part of the Indian banking sector that is
made up of both private and public sector banks. The "private-sector banks" are banks
where greater parts of state or equity are held by the private shareholders and not by
government.

Banking in India has been dominated by public sector banks since the 1969 when all
major banks were nationalised by the Indian government. However, since liberalisation in
government banking policy in the 1990s, old and new private sector banks have re-
emerged. They have grown faster & bigger over the two decades since liberalisation using
the latest technology, providing contemporary innovations and monetary tools and
techniques.

The private sector banks are split into two groups by financial regulators in India, old and
new. The old private sector banks existed prior to the nationalisation in 1969 and kept
their independence because they were either too small or specialist to be included in
nationalisation. The new private sector banks are those that have gained their banking
license since the liberalisation in the 1990s.
Old Private Sector Bank
The banks, which were not nationalized at the time of bank nationalization that took place
during 1969 and 1980, are known to be the old private-sector banks. These were not
nationalized, because of their small size and regional focus. Most of the old private-sector
banks are closely held by certain communities their operations are mostly restricted to the
areas in and around their place of origin. Their Board of directors mainly consist of
locally prominent personalities from trade and business circles. One of the positive points
of these banks is that, they lean heavily on service and technology and as such, they are
likely to attract more business in days to come with the restructuring of the industry round
the corner.
New Private Sector Bank

The banks, which came in operation after 1991, with the introduction of economic
reforms and financial sector reforms are called "new private-sector banks". Banking
regulation act was then amended in 1993, which permitted the entry of new private-
sector banks in the Indian banking sector. However, there were certain criteria set for the

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 establishment of the new private-sector banks, some of those criteria being: The bank
should have a minimum net worth of Rs. 200 crores.

1. The promoters holding should be a minimum of 25% of the paid-up capital.

2. Reliance Capital, India Post, Larsen & Toubro, Shriram Transport Finance are
companies pending a banking license with the RBI under the new policy, while IDFC
& Bandhan were given a go ahead to start banking services for 2015.
3. Within 3 years of the starting of the operations, the bank should offer shares to public
and their net worth must increased to 300 crores.

List of the private-sector banks in India

Sr. No. Name

1 Axis Bank
2 Bandhan Bank
3 Catholic Syrian Bank ltd
4 City Union Bank limited
5 DCB Bank Limited
6 Dhanlaxmi Bank
7 Federal Bank
8 HDFC Bank
9 ICICI Bank
10 IDFC Bank
11 IndusInd Bank
12 Jammu & Kashmir Bank ltd
13 Karnataka Bank ltd
14 Karur Vysya Bank
15 Kotak Mahindra Bank ltd
16 Lakshmi Vilas Bank
17 Nainital Bank
18 RBL
19 South Indian Bank
20 Tamilnad Mercantile Bank ltd
21 Yes Bank ltd.
Table 3: List of Private Sector Banks Source: http://www.rbi.org.in

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1.2 NON-PERFORMING ASSETS (NPA)
The three letters “NPA” strike terror in banking sector and business circle
today.NPA is a short form of “Non-Performing Assets”.
In banking, NPA are loans given to doubtful customers who may or may not repay
the loan on time. There are two types of assets viz. performing and non-performing.
Performing loans are standard loans on which both the principle and interest are secured and
their return is guaranteed.
Non Performing assets means the debt which is given by the Bank is unable to
recover it is called NPA .Non- Performing Asset [NPA] is a result of asset Liability
mismatch, A NPA account in the books of accounts is an asset as it indicates the amount
receivable from the Defaulters. It means if any bank gives loan to the customer if the interest
for that loan is not paid by the customer till 90 days then that account is called as NPA
account.
A loans or leases that are not meeting its stated principal and interest payments are
considered to be bad. Banks usually classify as nonperforming assets any commercial loans
which are more than 90 days overdue and any consumer loans which are more than 180 days
overdue. More generally, an asset which is not producing income becomes non-performing.

1.2.1Definitions
An asset, including a leased asset, becomes Non-Performing when it ceases to generate
income for the bank.
A non-performing asset’ (NPA) was defined as a credit facility in respect of which the
interest and/or instalment of principal has remained ‘past due’ for a specified period of
time. The specified period was reduced in a phased manner as under:

w.e.f. 31.03.1993 : four quarters

w.e.f. 31.03.1994 : three quarters
w.e.f. 31.03.1995 : two quarters
w.e.f. 31.03.2001 : 180 days
w.e.f. 31.03.2004 : 90 days

90 days’ delinquency norms are not applicable to Agriculture segment

With the effect from March 31, 2004, NPA shall be a loan or an advance where:

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  Term loan: Interest and /or instalment of principal remain over due for a period of
more than 90 days.
 Cash credit/overdraft: The account remains ‘out of order’ for a period of more
than 90days.
 Bills: The bill remains overdue for a period of more than 90days from due
date of payment.
 Other Loans: Any amount to be received remains overdue for a period of more
than 90days.
 Agricultural Accounts: In the case of agriculture advances, where repayment is
based on income from crop. An account will be classified as NPA as under:
 If loan has been granted for short duration crop: interest and/or instalment of
Principal remains overdue for two crop seasons beyond the due date.
 If loan has been granted for long duration crop: Interest and/or instalment of
principal remains overdue for one crop seasons beyond due date.
Non-Performing Asset is defined as the loans which are in jeopardy of being default. If a
borrower has failed to pay interest on principal payment for 90 days or more in case of a
loan, than that loan is considered to be non-performing asset (NPA).This kind of thing
can be termed as Non-Performing Loan. NPAs affect the smooth flow of credit and
profitability as higher NPAs mean higher provisioning which reduces s the profit. These
are loans and advances whose time period for payment of interest and principle has
exceeded 90 days. In this case the account of person is marked as out of order. If the loan
is granted to a person for agricultural purpose the instalment period for interest might
remain due for two harvest seasons. Non-performing assets tells us about the banks as the
institutions of finance and companies judge their non-performing assets through NPA and
higher the NPA means bad performance of the institute of finance.

1.2.2 NPA as Defined by RBI

Any asset and it also includes leased asset can become Non Performing Asset when
income stops to be generated from it for the bank. It is an advance or loan where;
1) For 90 days’ time interest or instalment of principle amount may remain overdue.
2) The account an overdraft or cash credit with respect of it may remain out of order as it
is indicated below.

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 3) In case the bills are purchased or discounted then they remain overdue for more than
90days period.
4) The instalment for two of the crop seasons for short duration of crops remains
overdue whether it is principal or interest. The instalment for long duration crops
therefore remains overdue whether its interest or principal amount.
5) The instalment therefore remains overdue for one crop season for long duration crops
of principal or interest.
6) In respect of a securitization transaction that has been undertaken like in terms of
guidelines on securitization on dated February 1, 2006. For more than 90 days the
amount of which like of liquidity facility will remain outstanding.
A debt obligation where the borrower has not paid any previously agreed upon interest and
principal repayments to the designated lender for an extended period of time. The
nonperforming asset is therefore not yielding any income to the lender in the form of
principal and interest payments.
For example, a mortgage in default would be considered non-performing. After a prolonged
period of non-payment, the lender will force the borrower to liquidate any assets that were
pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off
the asset as a bad debt and then sell it at a discount to a collections agency.
An asset becomes non-performing when it ceases to generate income for the bank. A non-
performing asset (NPA) is defined generally as a credit facility in respect of which interest
and / or instalment of principal has remained “past due” for two quarters or more. 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. It was, however, decided to dispense with “past due”.
Banks should, classify an account as NPA only if the interest charged during any quarter is
not serviced fully within 90 days from the end of the quarter.

1.2.3 Classification of Assets

1. Standard Assets
Standard asset is one which does not disclose any problem and which does not carry
more than normal risk attached to business. Thus, in general, all the current loans,
agricultural and non-agricultural loans which have not become NPA may be treated
as standard asset.

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2. Sub-Standard Assets
A Non-performing asset may be classified as sub-standard on the basis of the
following criteria. (a) An asset which has remained overdue for a period not
exceeding 3 years in respect of both agricultural and non-agricultural loans should be
treated as substandard. (b) In case of all types of term loans, where instalments are
overdue for a period not exceeding 3 years, the entire outstanding in term loan should
be treated as sub-standard. (c) An asset, where the terms and conditions of the loans
regarding payment of interest and repayment of principal have been renegotiated or
rescheduled, after commencement of production, should be classified as sub-standard
and should remain so in such category for at least one year of satisfactory
performance under the renegotiated or rescheduled terms. In other words, the
classification of an asset should not be upgraded merely as a result of rescheduling
unless there is satisfactory compliance of the above condition.
3. Doubtful Asset
A Non-Performing Asset may be classified as doubtful on the basis of following
criteria: As asset which has remained overdue for a period exceeding 3 years in
respect of both agricultural and non-agricultural loans should be treated as doubtful.
In case of all types of term loans, where instalments are overdue for more than 3
years, the entire outstanding in term loan should be treated as doubtful. As in the case
of sub-standard assets, rescheduling does not entitle a bank to upgrade the quality of
advance automatically.
4. Loss Asset
Loss assets are those where loss is identified by the bank/ auditor/ RBI/ NABARD
inspectors but the amount has not been written off wholly or partly. In other words,
an asset which is considered unrealizable and/ or of such little value that its
continuance as a doubtful asset is not worthwhile, should be treated as a loss asset.
Such loss assets will include overdue loans in cases (a) where decrease or execution
petitions have been time barred or documents are lost or no other legal proof is
available to claim the debt, (b) where the members and their sureties are declared
insolvent or have died leaving no tangible assets, (c) where the members have left the
area of operation of the society (refers to the borrower in whose name the respective
Loan Account with SCB/ CCB) leaving no property and their sureties have also no
means to pay the dues (d) where the loan is fictitious or when gross misutilisation is
noticed, and (e) amounts which cannot be recovered in case of liquidated societies.

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1.2.4 Types of NPA
1 Gross NPA
2 Net NPA
1. Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made
by banks. It consists of all the non standard assets like as sub-standard, doubtful, and
loss assets.
It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs

Gross Advances
2. Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank
balance sheets contain a huge amount of NPAs and the process of recovery and write off
of loans is very time consuming, the provisions the banks have to make against the NPAs
according to the central bank guidelines, are quite significant. That is why the difference
between gross and net NPA is quite high.
It can be calculated by following

Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

1.2.5 Why Assets Become NPA

A several factors are responsible forever increasing size of NPAs in PSBs. The Indian
banking industry has one of the highest percents of NPAs compared to international
levels. A few prominent reasons for assets becoming NPAs are as under:
 Lack of proper monitoring and follow-up measures.
 Lack of sincere corporate culture.
 Inadequate legal provisions on foreclosure and bankruptcy.
 Change in economic policies/environment.
 Non transparent accounting policy and poor auditing practices.

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  Lack of coordination between banks/FIs.
 Directed landing to certain sectors.
 Failure on part of the promoters to bring in their portion of equity from their own
sources or public issue due to market turning unfavourable.
 Criteria for classification of assets
 Classification of agricultural and non-agricultural loans is required to be done into

1.2.6 Reason for NPA

An internal study conducted by RBI shows that in the order of prominence, the following
factor contribute to NPAs.
 Internal Factor
 Diversion of funds for
 Expansion/diversification /modernization
 Taking up new project
 Helping /promoting associate concerns time/cost overrun during
the project implementation stage
 Business Failure
 Inefficiency in management
 Slackness in credit management and monitoring
 Inappropriate Technology/technical problem
 Lack of coordination among lenders
 External Factor
 Recession
 Input/power storage
 Price escalation
 Exchange rate fluctuation
 Accidents and natural calamities, etc.
 Changes in government policies in excise/ import duties, pollution control orders,
etc.
 Other Factors
 Liberalization of economy/removal of restriction/reduction of tariffs:-A large
number of NPA borrowers were unable to compete in a competitive market in
which lower prices and greater choices were available to consumers. Further,

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 borrowers operating in specific industries have suffered due to political, fiscal and
social compulsions, compounding pressures from liberalization.
 Lax monitoring of credit and failure to recognize Early Warnings Signals:-It
has been stated that approval of loan proposal is generally thorough and each
proposal passes through many levels before approval is granted. However, the
monitoring of sometimes complex credit files has not received the attention it
needed which meant that early warning signals were not recognized and standard
assets slipped to NPA category without banks being able to take proactive
measures to prevent this. Partly due to this reason, adverse trends in borrower’s
performance were not noted and the position further deteriorated before action
was taken.
 Over optimistic promoters:-Promoters were often optimistic in setting up large
projects and in some cases were not fully above board in their intentions.
Screening procedures did not always highlight these issues. Often projects were
set up with the expectation that part of the funding would be arranged from the
capital markets which were booming at the time of the project appraisal. When the
capital markets subsequently crashed, the requisite funds could never be raised,
promoter often lost interest and lenders were left stranded with
incomplete/unviable projects.
 Directed lending:-Loans to some segment were dictated by Governments policies
than commercial imperatives.
 Highly Leveraged borrowers:-Some borrowers were undercapitalized and over
burdened with debt to absorb the changing economic situation in the country.
Operating within a protected marked resulted economic situation in the country.
Operating within a protected market resulted in low appreciation of
commercial/market risk.
 Funding mismatch:-There are said to be many cases where loans granted for
short terms were used to fund long term transactions.
 High Cost of Funds:-Interest rates as high as 20% were not uncommon. Coupled
with high leveraging and falling Denmark, borrowers could not continue to
service high cost debt.

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  Wilful Defaulters:-There are a number of borrowers who have strategically
defaulted on their debt service obligation realizing that the legal resource available
to creditors is slow in achieving results.

1.2.7 Impact of NPA

1. Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong
choice of client. Because of the money getting blocked the prodigality of bank
decreases not only by the amount of NPA but NPA lead to opportunity cost also as
that much of profit invested in some return earning project/asset. So NPA doesn’t
affect current profit but also future stream of profit, which may lead to loss of
some long-term beneficial opportunity. Another impact of reduction in
profitability is low ROI (return on investment), which adversely affect current
earning of bank.
2. Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand
which lead to borrowing money for shortest period of time which lead to
additional cost to the company. Difficulty in operating the functions of bank is
another cause of NPA due to lack of money. Routine payments and dues.
3. Involvement of management:
Time and efforts of management is another indirect cost which bank has to bear
due to NPA. Time and efforts of management in handling and managing NPA
would have diverted to some fruitful activities, which would have given good
returns. Now day’s banks have special employees to deal and handle NPAs, which
is additional cost to the bank.
4. Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms
of market credit. It will lose its goodwill and brand image and credit which have
negative impact to the people who are putting their money in the banks.

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1.2.8 NPA Rules for Bank
General Rules
 In line with the international practices and as per the recommendations made by the
committee on Financial system (Chairman Shri M. Narasimham), the Reserve Bank
of India has introduced, in a phased manner, prudential norms for income
recognition, asset classification and provisioning for the advances portfolio of the
banks so as to move towards greater consistency and transparency in the published
accounts.
 The policy of income recognition should be objective and based on record of
recovery rather than on any subjective considerations. Likewise, the classification of
assets of banks has to be done on the basis of objective criteria which would ensure
a uniform and consistent application of norms. Also, the provisioning should be
made on the basis of classification of assets based on the period for which the asset
has remained non – performing / overdue as also availability of security and its
realizable value.

1.2.9 Norms for Treating Loans / Advances as NPA

 Treatment of agricultural advances
In respect of advances granted for agricultural purposes where interest payment is on
half-yearly basis synchronizing with harvest, banks should adopt the agricultural
season as the basis. In other words, if interest has not been paid during the last two
seasons of harvest (covering two half-years) after the principal has become overdue
then such an advance should be treated as NPA. This norm is applicable to all direct
agricultural advances listed in the Annexure. In respect of agricultural advances other
than those specified in the Annexure, identification of NPA would be done on the
same basis as non-agricultural advances which at present are the 180 days delinquency
norm. Crop loans for each season, viz., Rabi and Kharif has to be treated as separate
account and IRAC norms have to be applied accordingly.
 Treatment of advances for allied agricultural activities as well as non farm sector
Credit facilities granted for other allied agricultural activities as well as for non-farm
sector activities should be treated as NPA if amounts of instalments of principal and /
or interest remain outstanding for a period of two quarters from the due date.

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 Project / Housing Loans, etc
In case of projects (industry, plantation, etc.) where moratorium is given for payment,
[loan becomes due only after moratorium or gestation period is over] such a loan
becomes overdue if instalment is not paid on due date. Similarly, in the case of
housing loans or similar advances granted to staff members where interest is payable
after recovery of principal, such loans should be classified as NPA when there is a
default in repayment of principal on due date of payment and overdue criteria will be
the basis for classification of assets.
 Consortium advances
In respect of consortium advances each bank is required to classify the borrowable
accounts according to its own recovery i.e., on the record of recovery of the individual
member banks. The banks participating in the consortium should therefore, arrange to
get their share of recovery transferred from the lead bank of the consortium.
 Treatment of different facilities to borrower as overdue (NPA)
Short-term agricultural advances are granted by SCBs / CCBs to CCBs PACS
respectively for the purpose of on-lending. In respect of such advances as well as
advances for other purposes, if any, granted under on-lending system, only that
particular facility which became irregular should be treated as NPA and not all the
other facilities granted to them. Crop loans for each season, viz., Rabi and Kharif have
to be treated as separate account and accordingly IRAC norms have to be applied. In
respect of all other direct loans and advances granted to a borrower, all such loans will
become NPA even if one loan A/c becomes NPA.
 ‘Out of order status’
In respect of cash credit / over draft facility 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”.
 ‘Overdue’
Any amount due to the bank under any credit facility is “overdue”, if it is not paid
on due date fixed by the bank.

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  Performance of the account as on the date of Balance Sheet
The performance of the account as on the date of Balance Sheet only has to be
taken into account for the purpose of NPA. Subsequent developments should not
be considered for determining NPAs. 2.10. If interest and / or instalment of
principle have remained unpaid for any two quarters out of the four quarters
ending 31 March of the year concerned, the credit facility should be treated as
NPA although the default may not be continuously for two quarters during the
year.

1.2.10 Early Symptoms

By which one can recognize a performing asset turning in to non-performing asset
Four categories of early symptoms:-
Financial:
 Non-payment of the very first instalment in case of term loan.
 Bouncing of cheque due to insufficient balance in the accounts.
 Irregularity in instalment.
 Irregularity of operations in the accounts.
 Unpaid overdue bills.
 Declining Current Ratio.
 Payment which does not cover the interest and principal amount of that instalment.
 While monitoring the accounts it is found that partial amount is diverted to
sister concern or parent company.
Operational and Physical:
 If information is received that the borrower has either initiated the process of
winding up or are not doing the business.
 Overdue receivables.
 Stock statement not submitted on time.
 External non-controllable factor like natural calamities in the city where
borrower conduct his business.
 Frequent changes in plan.
 Non payment of wages.

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Attitudinal Changes:
 Use for personal comfort, stocks and shares by borrower.
 Avoidance of contact with bank.
 Problem between partners.
Others:
 Changes in Government policies.
 Death of borrower.
 Competition in the market.

1.2.11 Preventive Measurement for NPA

 Early Recognition of the Problem:

Invariably, by the time banks start their efforts to get involved in a revival process,
it’s too late to retrieve the situation- both in terms of rehabilitation of the project and
recovery of bank’s dues. Identification of weakness in the very beginning that is:
When the account starts showing first signs of weakness regardless of the fact that it
may not have become NPA, is imperative. Assessment of the potential of revival may
be done on the basis of a techno-economic viability study. Restructuring should be
attempted where, after an objective assessment of the promoter’s intention, banks are
convinced of a turnaround within a scheduled timeframe. In respect of totally
unviable units as decided by the bank, it is better to facilitate winding up/ selling of
the unit earlier, so as to recover whatever is possible through legal means before the
security position becomes worse.
 Identifying Borrowers with Genuine Intent:
Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones who have
intelligent inputs with regard to promoters’ sincerity, and capability to achieve
turnaround. Based on this objective assessment, banks should decide as quickly as
possible whether it would be worthwhile to commit additional finance.
In this regard banks may consider having “Special Investigation” of all financial
transaction or business transaction, books of account in order to ascertain real factors
that contributed to sickness of the borrower. Banks may have penal of technical
experts with proven expertise and track record of preparing techno-economic study
of the project of the borrowers.

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 Borrowers having genuine problems due to temporary mismatch in fund flow or
sudden requirement of additional fund may be entertained at branch level, and for this
purpose a special limit to such type of cases should be decided. This will obviate the
need to route the additional funding through the controlling offices in deserving
cases, and help avert many accounts slipping into NPA category.
 Timeliness and Adequacy of response:
Time is a crucial element in any restructuring or rehabilitation activity. The response
decided on the basis of techno-economic study and promoter’s commitment, has to be
adequate in terms of extend of additional funding and relaxations etc. under the
restructuring exercise. The package of assistance may be flexible and bank may look
at the exit option.
 Focus on Cash Flows:
While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading
picture. Appraisal for fresh credit requirements may be done by analyzing funds
flow in conjunction with the Cash Flow rather than only on the basis of Funds
Flow.
 Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to
sickness and NPAs. But this may not be the case all the time. Management
effectiveness in tackling adverse business conditions is a very important aspect that
affects a borrowing unit’s fortunes. A bank may commit additional finance to an
align unit only after basic viability of the enterprise also in the context of quality of
management is examined and confirmed. Where the default is due to deeper
malady, viability study or investigative audit should be done – it will be useful to
have consultant appointed as early as possible to examine this aspect. A proper
techno- economic viability study must thus become the basis on which any future
action can be considered.
 Multiple Financing:
A. During the exercise for assessment of viability and restructuring, a Pragmatic
and unified approach by all the lending banks/ FIs as also sharing of all relevant
information on the borrower would go a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.

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 B. In some default cases, where the unit is still working, the bank should make sure
that it captures the cash flows (there is a tendency on part of the borrowers to
switch bankers once they default, for fear of getting their cash flows forfeited),
and ensure that such cash flows are used for working capital purposes. Toward
this end, there should be regular flow of information among consortium members.
A bank, which is not part of the consortium, may not be allowed to offer credit
facilities to such defaulting clients. Current account facilities may also be denied
at non-consortium banks to such clients and violation may attract penal action.
The Credit Information Bureau of India Ltd. (CIBIL) may be very useful for
meaningful information exchange on defaulting borrowers once the setup becomes
fully operational.
C. In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender
may have a much shorter timeframe in mind. So it is possible that the letter
categories of lenders may be willing to exit, even a t a cost – by a discounted
settlement of the exposure. Therefore, any plan for restructuring/rehabilitation
may take this aspect into account.
D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to
provide a timely and transparent system for restructuring of the corporate debt of
Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the
legal framework. Under this system, banks may greatly benefit in terms of
restructuring of large standard accounts (potential NPAs) and viable sub-standard
accounts with consortium/multiple banking arrangements.

1.2.12 NPA Management Practices In India

 Formation of the Credit Information Bureau (India) Limited (CIBIL)

 Release of Wilful Defaulter’s List. RBI also releases a list of borrowers with
aggregate outstanding of Rs.1 crore and above against whom banks have filed
suits for recovery of their funds
 Reporting of Frauds to RBI
 Norms of Lender’s Liability – framing of Fair Practices Code with regard to
lender’s liability to be followed by banks, which indirectly prevents accounts
turning into NPAs on account of bank’s own failure
 Risk assessment and Risk management

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  RBI has advised banks to examine all cases of wilful default of Rs.1 crore and above
and file suits in such cases. Board of Directors are required to review NPA accounts
of Rs.1 crore and above with special reference to fixing of staff accountability.
 Reporting quick mortality cases
 Special mention accounts for early identification of bad debts. Loans and
advances overdue for less than one and two quarters would come under this
category. However, these accounts do not need provisioning

1.2.13 Measures Initiated By RBI and Government of India For Reduction

of NPA’s
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 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 onetime non-
discretionary and non-discriminatory settlement of NPAs of small sector. The scheme
was operative up to September 30, 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 Honourable
Finance Minister providing for OTS for advances up to Rs.50, 000 in respect of NPAs
of small/marginal farmers are being drawn up.

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 Negotiating for compromise settlements;
The first crucial step towards meaningful NPA management is to accept that recoveries
are one's own responsibility. To keep the Bank's operating cycle going smoothly, it is
essential that this realization of one's duties be transformed into deeds by resorting to
various methods of recovery.
Of the various methods available for NPA Management, Compromise Settlements are
the most attractive, if handled in a professional manner.
Advantages
i) Saves money, time and manpower
Banks are mainly concerned with recovery of dues, to the maximum possible
extent, at minimum expense. By entering into compromise settlements, the
objective is achieved. Also, a lot of executive time is saved because most of the
usual problems / delays associated with court action are avoided.
ii) Projects a helpful image of the Bank
A well-concluded compromise settlement, which results in a ‘WIN-WIN’ for the
Bank as well as the borrower, is a strong positive propaganda for the Bank. The
impression generated is that the Bank is capable not only of sympathy, but also
empathy.
iii) Expedites recycling of funds
Compromise settlements aim at quick recovery. Recovery means funds becoming
available for recycling and, additional interest generation.
iv) Cleanses Balance Sheet
With the NPA level going down, and the additional funds becoming available for
recycling as fresh advances, the asset quality of the Bank is bound to go up.
Improved asset quality signifies higher profits by reduced provisions and
increased interest income. With additions to the reserves, the capital position also
improves, improving the Capital Adequacy position.

Disadvantages

i. Compromise involves loss, since full recovery is not possible. In fact, full recovery
is not even envisaged, but sacrifice is.
ii. It may be viewed as a reward for default, especially if chronic default cases are
settled by negotiations.
iii. It may have a demonstrative effect, and so may vitiate the culture of repayment

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 iv. There is also the possibility of misuse or, even, mala fides, since assessment of
situation is highly subjective.
Practical aspects of compromise settlements
Every compromise proposal needs to be looked at individually, evaluated strictly on
merits, and negotiated properly for maximization of benefit to the Bank. Hence, a
straight jacket approach is not possible, neither is it desirable, to give strict guidelines
for compromise settlements.
2. Restructuring and Rehabilitation
Banks are free to design and implement their own policies for restructuring/
rehabilitation of the NPA accounts Reschedulement of payment of interest and
principal after considering the Debt service coverage ratio, contribution of the promoter
and availability of security
3. LokAdalats
LokAdalat institutions help banks to settle disputes involving accounts in “doubtful”
and “loss” category, with outstanding balance of Rs.5 lakh for compromise settlement
under LokAdalats. Debt Recovery Tribunals have now been empowered to organize
LokAdalats 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
LokAdalat. 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. Some of features are
 Small NPAs up to Rs.20 Lakhs
 Speedy Recovery
 Veil of Authority
 Soft Defaulters
 Less expensive
 Easier way to resolve
4. 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
property/assets before judgment, penal provisions for disobedience of Tribunal’s order or
for breach of any terms of the order and appointment of receiver with powers of

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 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.
I may add that familiarization 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
decrees passed against them.
5. Circulation of information on defaulters
The RBI has put in place a system for periodical circulation of details of wilful 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 strongly believe that a real
breakthrough can come only if there is a change in the repayment psyche of the Indian
borrowers.
6. Recovery action against large NPAs
After a review of pendency in regard to NPAs by the Honourable Finance Minister, RBI
had advised the public sector banks to examine all cases of wilful default of Rs 1 crore
and above and file suits in such cases, and file criminal cases in regard to wilful
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

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7. Asset Reconstruction Company:
An Asset Reconstruction Company with an authorized capital of Rs.2000 crore and
initial paid up capital Rs.1400 crore is to be set up as a trust for undertaking activities
relating to asset reconstruction. It would negotiate with banks and financial institutions
for acquiring distressed assets and develop markets for such assets. Government of
India proposes to go in for legal reforms to facilitate the functioning of ARC
mechanism.
8. Legal Reforms
The Honourable Finance Minister in his recent budget speech has already announced
the proposal for a comprehensive legislation on asset foreclosure and Securitization.
Since enacted by way of Ordinance in June 2002 and passed by Parliament as an Act in
December 2002.
9. Corporate Debt Restructuring (CDR)
Corporate Debt Restructuring mechanism has been institutionalized 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 Honourable Finance Minister in the Union Budget
2002-03, RBI has set up a high level Group under the Chairmanship of Shri.
VepaKamesam, 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.
10. Credit Information Bureau
Institutionalization 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-

38 | P a g e
 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 measure contributed to the
incremental NPAs of banks.
11. Proposed guidelines on wilful defaults/diversion of funds
RBI is examining the recommendation of Kohli Group on wilful 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 wilful defaulters.
12. Corporate Governance
A Consultative Group under the chairmanship of Dr. A.S. 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-à-vis
compliance, transparency, disclosures, audit committees etc. and make
recommendations for making the role of Board of Directors more effective with a view
to minimizing risks and over-exposure. The Group is finalizing its recommendations
shortly and may come out with guidelines for effective control and supervision by bank
board’s over credit management and NPA prevention measures.

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 CHAPTER-2

LITERATURE REVIEW

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 CHAPTER-2
LITERATURE REVIEW
NPA is a burning topic for the banking sector and many authors tried to study the
reasons of NPA, the problems created by NPA and the impact of NPA on the banking sector,
and moreover came to a solution or remedies of the growing problem of NPA. A number of
papers have been written and gone through, and this part of this paper is attempting to present
a review of all those are available in the same area of non-performing assets of the public
sector banks, private sector banks and other banks. This survey has conducted a study on the
existing papers, articles, journals, and reports provided by different authors, groups and
committees from time to time.
Rajaraman, I.,Vasishtha, G. (2001): The paper performs a panel regression on the
definitional uniform secondary data, on NPA available for a five-year period ending in 1999-
2000. The paper studies 27 public sector banks, and investigates variations within a class that
is homogenous on the ownership dimension and operational efficiency.
Reddy, P.K. (2002): This paper deals with the experiences of other Asian countries
in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and
suggests mechanisms to handle the problem by drawing on experiences from other countries.
Satpathy, I, Patnaik, B.C.M. (2010): The present paper attempted to examine the
causes of NPAs in home loans of commercial banks. For this borrowers of the loans were
surveyed through questionnaires made for the purpose, and ultimately suggestions given to
overcome the problem.
Patnaik, B.C.M., Satpathy, I. (2011): The present paper tries to analyze the
quantitative trend and pattern in growth of NPA with reference to the education loan scheme,
in Odisha. An effort was made to find the cause, by questionnaire survey of the defaulters,
who are students of different colleges, suggestions to overcome this problem was also given
by the author.
Kumar, M.,Singh, G. (2012): The paper focuses on the most significant factors,
which contribute towards the non-performing assets problem from the view point of the top
bankers of public sector banks and, some foreign banks in India and the measures required
for managing the NPAs
Pradhan, T.K. (2012): The present study is on Odisha, and depends on the
mismanagement or diversion of fund, which are one of the main causes of NPA. The study is

41 | P a g e
based on primary data which has been analyzed by percentage method. The data was
collected from 50 bank officials through a structured questionnaire.
Gupta, B. (2012): In this paper, study has been made on SBI and Associates, and
public sector banks, an effort has been made to understand the concept of NPAs, its
magnitude and major causes for increasing NPA and also evaluate the operational
performance in managing NPA.
Kamra, S. D. (2013): This paper analyses the position of NPAs in the selected
nationalised banks namely State Bank of India (SBI), Punjab National Bank (PNB) and
Central Bank of India (CBI). It also focuses on the policies pursued by the banks to manage
the NPAs and suggests a strategy for the speedy recovery of NPAs.
Srinivas, K.T. (2013): The present paper undertakes to study the reasons for loans
and advances becoming NPA in the Indian Commercial banking Sector and give a suitable
solution to overcome the mentioned problem.
Dutta.A(2014): This paper studied the growth of NPA in the public and private sector
banks in India, and analysed sector wise non-performing assets of the commercial banks. For
the purpose of the study data has been collected from secondary sources such as report on
Trend and Progress of Banking in India, RBI, Report on Currency and Finance, RBI
Economic Surveys of India.
Tripathi, L. K., Parashar, A., Mishra, S. (2014): The present study, with the help of
multiple regression model attempts to investigate the impact of priority sector advances,
unsecured advances and advances made to sensitive sectors by banks like SBI group and
other nationalised banks on Gross NPAs of banks.
Arora, N., Ostwal, N. (2014): The present paper analyses the classification and
comparison of loan assets of public and private sector banks. The study concluded that NPAs
are still a threat for the banks and financial institutions and public sector banks have higher
level of NPAs in comparison to Private sector banks.

Research and Time gap in Literature

The different aspects of literature related to Non-Performing Assets of researchers over the
years have been collected and used for this study, but there is a huge time gap existing for
the comprehensive research on quality aspects of Non-Performing Assets. Most of the
research and studies are being done on causes, impact and management aspects of NPAs.
My study is related to the impact of NPA’s in public and private sector banks.

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 CHAPTER-3

RESEARCH METHODOLOGY

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 CHAPTER-3
RESEARCH METHODOLOGY

3.1 INTRODUCTION
The design of any research project requires considerable attention to the research
methods and the proposed data analysis. Within this section, we have attempted to provide
some information about how to produce a research design for a study. We offer a basic
overview of the research methods portion of a research proposal and then some data analysis
templates for different types of designs. Our goal is not to answer every question, but provide
a head start.

3.2 OBJECTIVE OF THE STUDY

 To understand the concept of Non-Performing Assets of Public Sector and
Private Sector Banks.
 To evaluate the efficiency in managing Non-Performing Assets of Public Sector
and Private Sector Banks via comparative ratios.
 To analyze the various compositions of the Non-Performing Assets of Public
Sector and Private Sector Banks.
 To study the impact of Non-Performing Assets on profitability of Public Sector
and Private Sector Banks.
 To study the various recovery channels for Non-Performing Assets.

3.3 SCOPE OF THE STUDY

The present study of the non performing assets is confined restricted to the boundary of
public sector and private sector bank of India.
 To understand the causes & effects of NPA.
 To analyze the past trends of NPA of public & private in different sector.
 Banks can improve their financial position or can increase their income from
credits with the help of this project.
 This can also be applicable to know the reasons of increase in NPAs.

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3.4 RESEARCH DESIGN
A research design is a frame work or blue print for conducting research procedure is
necessary for obtaining information to solve the problem. Research designed to assist the
decision maker in determining, evaluating and selecting the best course of action to take in a
given situation. Descriptive studies are usually the best methods for collecting information
that will demonstrate relationships and describe the world as it exists. Descriptive studies are
designed primarily to describe what is going or what exist.
The research design that will be use is Descriptive Research.
 Involves gathering data that describe events and then organizes, tabulates, depicts,
and describes the data.
 Uses description as a tool to organize data into patterns that emerge during analysis.
 Often uses visual aids such as graphs and charts to aid the reader.

3.5 SOURCE OF DATA

Secondary data refers to the data which has already been generated and is available
for use. The data about NPAs & its composition, classification of loan assets, profits &
advances of different banks is taken from the official website of Then Reserve Bank of India
and some other banking sites. In this research study the researcher have to take all Public
Sector Banks and all Private Sector Banks from the authorized published data of RBI for
the study.

3.6 PERIOD OF STUDY

This study covers the period of five years from 2012 to 2016

3.7 DATA ANALYSIS

The collected information has been tabulated, analyzed and interpretation has been
arrived on the basis of statistical analysis. Data processing and analysis have been done both
manually and by using computer. Tabular method, ratio analysis and correlation analysis
tools have been used. In this research various ratios are calculated in excel worksheet and
correlation analysis have been done through SPSS statistical analysis tool.

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3.8 LIMITATION OF STUDY
 Since my study is based upon Secondary data, the practical operations as related to
NPAs are adopted by the banks are not learned.
 NPAs are changing with the time. The study is done in the present environment
without foreseeing future developments.
 The study is based on secondary data as published in various publications of RBI and
other reports. These data are based on historical accounting concept, which ignores
the impact of inflation.
 The study, as limitations, is confined only to the selected and restricted indicators
and the study is confined only for the period of five years.

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 CHAPTER-4

DATA ANALYSIS &

INTERPRETATION

47 | P a g e
 CHAPTER-4
DATA ANALYSIS & INTERPRETATION
To analyse the data, first of all we need to study about what data analysis and interpretation
is. It is the process by which sense and meaning are made of the data gathered in qualitative
research, and by which the emergent knowledge is applied to clients' problems. This data
often takes the form of records of group discussions and interviews, but is not limited to this.
Through processes of revisiting and immersion in the data, and through complex activities of
structuring, re-framing or otherwise exploring it, the researcher looks for patterns and insights
relevant to the key research issues and uses these to address the client's brief.

In this chapter some comparative analysis have been done to achieve the objectives of the
study. This is accomplished through various ratios analysis and correlation between net
profits and net NPA’s.

4.1COMPARATIVE RATIOS

4.1.1 Gross NPA’s Ratio (%)

Gross NPA’s
Gross NPA Ratio = X 100
Gross Advances

Gross NPA's to Gross Advances Ratio (%)

Year Public Sector Bank Private Sector Bank

2012 3.17 2.09

2013 3.61 1.77
2014 4.36 1.78
2015 4.96 2.10
2016 9.28 2.83
Table 4: Gross NPA Ratio Source: http://www.rbi.org.in

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10
9 9.28

8
7
6
5 4.96
4.36
4
3.61
3 3.17
2.83
2 2.09 2.10
1.77 1.78
1
0
2012 2013 2014 2015 2016

Public Sector Bank Private Sector Bank

Figure 1: Gross NPA Ratio

Interpretation:
 This analysis indicates the Gross NPA Ratio of Public Sector Banks and Private
Sector Banks from 2012 till 2016. As we know very well that higher this ratio, more
dangerous position it is for the banks.
 From the above chart we can clearly understand that rate of growth of Gross NPA of
Public Sector Banks is increasing since 2012 to 2016 which is 3.17% to 9.28% but in
Private Sector Banks initially it decreases in 2013 from 2.09% to 1.77% and after that
it also start increasing which raise up to 2.83% in 2016.
 But we can say that increase in Gross NPA ratio of Public Sector Banks is very
alarming which has increased from 3.17% to 9.28% whereas in Private Sector Banks
it rises from 2.09% to 2.83% only from year 2012 to 2016.

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4.1.2 Net NPA Ratio (%)

Net NPA’s
Net NPA Ratio = X 100
Net Advances

Net NPAs to Net Advances Ratio (%)

Year Public Sector Bank Private Sector Bank

2012 1.69 0.51

2013 2.01 0.53
2014 2.55 0.66
2015 2.91 0.89
2016 5.72 1.37
Table 5: Net NPA Ratio Source: http://www.rbi.org.in

7
5.72
6
5
4 2.91
2.55
3 2.01
1.69
2 1.37
0.66 0.89
0.51 0.53
1
0
2012 2013 2014 2015 2016

Public Sector Bank Private Sector Bank

Figure 2: Net NPA Ratio

Interpretation:
 This analysis indicates the Net NPA Ratio of Public Sector Banks and Private Sector
Banks from 2012 till 2016. As we know very well that higher this ratio, more
dangerous position it is for the banks.
 From the above chart we can clearly understand that rate of growth of Net NPA of
Public and Private Sector Banks is increasing since 2012 to 2016 which is 1.69% to
5.72% and 0.51% to 1.37% respectively.
 But we can say that increase in Net NPA Ratio of Public Sector Banks is very
alarming which has increased by 4.03% whereas in Private Sector Banks it rises by
0.86% only from year 2012 to 2016.

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4.1.3 Provisions Ratio (%)
Provisions
Provision Ratio = X 100
Gross NPA’s

Provisions to Gross NPAs Ratio (%)

Year Public Sector Bank Private Sector Bank
2012 47.37 75.83
2013 45.31 70.59
2014 42.64 63.36
2015 42.56 58.06
2016 40.67 52.24
Table 6: Provisions Ratio Source: http://www.rbi.org.in

80 75.83 70.59
63.36
58.06
60 52.24
47.37 45.31 42.64 42.56 40.67
40

20

0
2012 2013 2014 2015 2016

Public Sector Bank Private Sector Bank

Figure 3: Provisions Ratio

Interpretation:
 This analysis indicates the Provision Ratio of Public Sector Banks and Private Sector
Banks from 2012 till 2016. As we know very well that higher this ratio, more safe
position for banks.
 From the above chart we can clearly understand that due to increasing rate of Gross
NPA’s of Public and Private Sector Banks, provisions made by these banks are
decreasing since 2012 to 2016 which is 47.37% to 40.67% and 75.83% to 52.24%
respectively.
 We can say that if provisions are decreasing and private sector banks are having less
NPA’s as compared to Public Sector Banks even then they are making more
provisions to be on the safer side.

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4.1.4 Comparison of Gross NPA Ratio and Net NPA of Public Sector Bank

Public Sector Banks

Year Gross NPA Ratio (%) Net NPA Ratio (%)

2012 3.17 1.69

2013 3.61 2.01
2014 4.36 2.55
2015 4.96 2.91
2016 9.28 5.72
Table 7: Comparison of Gross & Net NPA Ratios of Public Sector Banks Source: http://www.rbi.org.in

10 9.28
9
8
7
5.72
6 4.96
5 4.36
3.61
4 3.17 2.91
2.55
3 2.01
1.69
2
1
0
2012 2013 2014 2015 2016

Gross NPA Net NPA

Figure 4: Comparison of Gross & Net NPA Ratios of Public Sector Banks

Interpretation:
 This analysis indicates the relationship between gross NPA ratio and net NPA ratio.
These both are showing increasing trend from 2012 to 2016 in Public Sector Banks.
 Above chart shows that gross NPA’s are more as compared to net NPA, which means
more provisions are made by public sector banks so as to reduce the risk of non
recovery.

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4.1.5 Comparison of Gross NPA Ratio and Net NPA of Private Sector Bank

Private Sector Banks

Year Gross NPA Ratio (%) Net NPA Ratio (%)

2012 2.09 0.51

2013 1.77 0.53
2014 1.78 0.66
2015 2.10 0.89
2016 2.83 1.37
Table 8: Comparison of Gross & Net NPA Ratios of Private Sector Banks

3 2.83

2.5
2.09 2.1
2 1.77 1.78

1.37
1.5

0.89
1
0.66
0.51 0.53
0.5

0
2012 2013 2014 2015 2016

Gross NPA Net NPA

Figure 5: Comparison of Gross & Net NPA Ratios of Private Sector Banks

Interpretation:
 This analysis indicates the relationship between gross NPA ratio and net NPA ratio.
These both are showing increasing trend from 2012 to 2016 in Private Sector Banks.
 Above chart shows that gross NPA’s are more as compared to net NPA, which means
more provisions are made by private sector banks so as to reduce the risk of non
recovery.

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4.2 COMPOSITION OF LOAN ASSET OF BANKS
4.2.1 Standard Assets Ratio (%)

Total Standard assets

Standard Assets Ratio = X 100
Gross NPAs

Standard Assets Ratio (%)

Year Public Sector Bank Private Sector Bank

2012 3.40 5.29

2013 2.67 5.59
2014 2.20 5.53
2015 1.92 4.67
2016 0.98 3.43
Table 9: Standard Assets Ratio Source: http://www.rbi.org.in

6 5.29 5.59 5.53

4.67
5
4 3.4 3.43
2.67
3 2.2 1.92
2 0.98
1
0
2012 2013 2014 2015 2016

Public Sector Bank Private Sector Bank

Figure 6 Standard Assets Ratio

Interpretation:
 This analysis indicates the Standard Asset Ratio of Public Sector Banks and Private
Sector Banks from 2012 till 2016. As we know very well that higher this ratio, more
advantageous it is for the banks.
 From the above chart we can clearly understand that the Standard Asset Ratio of
Public and Private Sector Banks is decreasing constantly from 2012 to 2016 & has
fallen down to 3.43% from 5.29% for Private Sector Bank & to 0.98% from 3.40%
for Public Sector Bank. So, we can determine that Private Sector bank is in beneficial
position than Public Sector Bank.

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4.2.2 Sub-standard Assets Ratio (%)
Total sub–standard assets
Substandard Assets Ratio = X 100
Gross NPAs

Sub-standard Assets Ratio (%)

Year Public Sector Bank Private Sector Bank

2012 0.06 0.26

2013 0.05 0.28
2014 0.04 0.27
2015 0.04 0.23
2016 0.04 0.17
Table 10: Sub-Standard Assets Ratio Source: http://www.rbi.org.in

0.3 0.26 0.28 0.27

0.23
0.25
0.2 0.17

0.15
0.1 0.06 0.05 0.04 0.04 0.04
0.05
0
2012 2013 2014 2015 2016

Public Sector Bank Private Sector Bank

Figure 7: Sub-Standard Assets Ratio

Interpretation:
 This analysis indicates the Sub-Standard Asset Ratio of Public Sector Banks and
Private Sector Banks from 2012 till 2016. As we know very well that lower this ratio,
more advantageous it is for the banks.
 From the above chart we can clearly understand that the Sub-Standard Asset Ratio of
Public and Private Sector Banks is decreasing constantly from 2012 to 2016 & has
fallen down to 0.17% from 0.26% for Private Sector Bank & to 0.04% from 0.06%
for Public Sector Bank. So, we can determine that Public Sector bank is in beneficial
position than Private Sector Bank.

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4.2.3 Doubtful Assets Ratio (%)
Total doubtful assets
Doubtful Assets Ratio = X 100
Gross NPAs

Doubtful Assets Ratio (%)

Year Public Sector Bank Private Sector Bank

2012 0.04 0.06

2013 0.05 0.05
2014 0.05 0.05
2015 0.06 0.05
2016 0.06 0.06
Table 11: Doubtful Assets Ratio Source: http://www.rbi.org.in

0.07 0.06 0.06 0.06

0.06 0.05 0.05 0.05
0.05 0.04
0.04
0.03
0.02
0.01
0
2012 2013 2014 2015 2016

Public Sector Bank Private Sector Bank

Figure 8: Doubtful Assets Ratio

Interpretation:
 This analysis indicates the Doubtful Asset Ratio of Public Sector Banks and Private
Sector Banks from 2012 till 2016. As we know very well that lesser this ratio, more
advantageous it is for the banks.
 From the above chart we can clearly understand that the Doubtful Asset Ratio of
Public Sector Banks is increasing slightly and Private Sector Banks is showing
constant trend from 2012 to 2016. Since the ratio for both the banks have a marginal
difference, therefore the only thing which differentiates the banks is that this ratio for
public is increasing and for Private it is constant. So, Private Sector Banks gain
advantage from this ratio.

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4.2.4 Loss Assets Ratio (%)

Total loss assets

Loss Assets Ratio = X 100
Gross NPAs

Loss Assets Ratio (%)

Year Public Sector Bank Private Sector Bank

2012 0.005 0.02

2013 0.004 0.02
2014 0.004 0.02
2015 0.004 0.02
2016 0.003 0.01
Table 12: Loss Assets Ratio Source: http://www.rbi.org.in

0.025
0.02 0.02 0.02 0.02
0.02

0.015
0.01
0.01
0.005 0.004 0.004 0.004
0.005 0.003

0
2012 2013 2014 2015 2016

Public Sector Bank Private Sector Bank

Figure 9: Loss Assets Ratio

Interpretation:
 This analysis indicates the Loss Asset Ratio of Public Sector Banks and Private Sector
Banks from 2012 till 2016. As we know very well that lower this ratio, more
advantageous it is for the banks.
 From the above chart we can clearly understand that the Loss Asset Ratio of Public
and Private Sector Banks is decreasing constantly from 2012 to 2016 & has fallen
down to 0.01% from 0.02% for Private Sector Bank & to 0.003% from 0.005% for
Public Sector Bank. So, we can determine that Private Sector bank is in beneficial
position than Private Sector Bank.

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4.3 IMPACT OF NON-PERFORMING ASSETS ON PROFITABILITY
4.3.1 Correlation between Net Profit & Net NPA of Public Sector Bank

Net Profit of Net NPA of

Public Sector Public Sector
Banks Banks

Pearson Correlation 1 -.978**

Net Profit of Public Sector
Sig. (2-tailed) .004
Banks
N 5 5

Pearson Correlation -.978 1

Net NPA of Public Sector
Sig. (2-tailed) .004
Banks
N 5 5
Table 13: Correlation between Net Profit & Net NPA of Public Sector Bank

4.3.1 Correlation between Net Profit & Net NPA of Private Sector Bank

Net Profit of Net NPA of

Private Sector Private Sector
Banks Banks

Pearson Correlation 1 .869

Net Profit of Private Sector
Sig. (2-tailed) .056
Banks
N 5 5

Pearson Correlation .869 1

Net NPA of Private Sector
Sig. (2-tailed) .056
Banks
N 5 5
Table 14: Correlation between Net Profit & Net NPA of Private Sector Bank

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Relationship between Net Profit and Net NPA
To establish relationship between Net Profit and Net NPA Pearson’s Correlation has been
used. Pearson’s Correlation for Public Sector Banks is -.978 and for Private Sector Banks is
.869.

Interpretation:

As we can see that correlation for Private Sector Banks is equal to 0.869. It means that there
is a positive relation between Net Profits and NPA of Private Sector Banks. It simply means
that as profits increase, NPA also increase. It is because of the mismanagement on the side of
bank. NPA is directly related to Total Advances given by bank and banks main source of
income is interest earned by bank. Since we have seen earlier that total advances are
increasing so interest income is increasing and profits are also increasing. But as we know
there are two types of Customers (good and bad). Good customers’ leads to increase in profits
by paying interest and installments on total advances timely and Bad customers leads to
increase in NPA by not paying interest and installment on total advances timely. This is
because of mismanagement and wrong choice of client. That is the only reason of positive
relation between NPA and Profit. If there is good management by bank like in case of Public
Sector Banks bank where correlation between Net Profit and Net NPA is found to be -0.978,
which indicates that amount of NPA decreases and Profits will increase more by the amount
not becoming NPA. So there is negative correlation between profits and NPA.

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4.4 NPA RECOVERY ANALYSIS
4.4.1 Percentage of Net Amount Recovered

Percentage of NPA Amount Recovered

Lok Adalats DRTs SARFAESI Act

2012-13 6.1% 14.2% 27.2%

2013-14 6% 9.6% 26.6%
2014-15 3.2% 7% 16.3%
2015-16 4.4% 9.2% 16.5%
Table 15: Recovery Rate Source: http://www.rbi.org.in

30 27.2 26.6
25
20 16.3 16.5
14.2
15
9.6 9.2
10 6.1 6 7
5 3.2 4.4

0
2012-13 2013-14 2014-15 2015-16

Lok Adalats DRTs SARFAESI Act

Figure 10: Recovery Rate

Interpretation:
 Above Chart clearly showing NPAs of scheduled commercial banks recovered
through various channels during the study period of 2012 to 2016.
 SARFAESI Act is the most effective channel of NPA recovery. Rs. 13,200 Crores
were recovered through this channel in 2015-16. But it is in fewer amounts as
compared to in year 2012-13.

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 CHAPTER-5

FINDINGS, SUGGESTIONS &

CONCLUSION

61 | P a g e
 CHAPTER-5
FINDINGS, SUGGESTIONS & CONCLUSION
5.1 FINDINGS
 The percentage change in gross NPA to gross advances ratio & net NPA to net
advances ratio over the years is increasing day in and out.
 It states that Private sector banks makes more provisions in gross NPA & gross
advances as compared to Public Sector Banks.
 Public sector banks have managed to decrease the standard assets over the years but
the Private Sector Banks have an increase in their Standard Assets.
 The sub-standard assets of both the banks are decreasing
 Doubtful assets of Public Banks are increasing but they are constant with Private
Sector Banks
 Loss assets of both banks are showing decreasing trend.
 There is a positive relation between NPA & profits of private sector banks which is
due to wrong choice of clients by Banks.
 There is an adverse effect on the Liquidity of Banks.
 Banks are backing out to give loans to the new customers due to lack of funds which
arises due to NPA.
 Ineffective recovery, wilful defaults and Defective lending process are the
important factors which are responsible for the rise of NPAs in banks.
 NPAs reduce the earning capacity banks and badly affect the profitability of banks.
 The National Company Law Tribunal (NCLT) has adjudicated insolvency
resolution for companies. The Debt Recovery Tribunal (DRT) has adjudicated
insolvency resolution for individuals.

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5.2 SUGGESTION

 New body like Debt Recovery Tribunal should be established & capacity of DRTs
should be enhanced.
 All banks should keep stringent check on advances being made during the time.
 Public sector should focus more on recovery of doubtful assets.
 Private sector banks should increase their income from sources other than interest, as
rise in NPA due to default in interest income may affect the profits drastically.
 RBI should revise existing credit appraisals and monitoring systems.
 Banks should improve upon and strengthen their loan recovery methods.
 Credit appraisal and post–loan monitoring are crucial steps which need to be
concentrated by all the banks.
 There must be regular follow-up with the customers and it is the duty of banker to
ensure that there is no diversion of funds. This process can be taken up at regular
intervals.
 Personal visits should be made after sanction and disbursal of credit and further close
monitoring of the operations of the accounts of borrowed units should be done
periodically.
 Advances provided by banks need pre-sanctioning evaluation and post-disbursement
control so that NPA can decrease.
 Good management needed on the side of banks to decrease the level of NPA.
 Proper selection of borrowers & follow ups required to get timely payment.

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5.3 CONCLUSION

The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper
management of the NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.
The NPAs would destroy the current profit; interest income due to large provisions of the
NPAs, and would affect the smooth functioning of the recycling of the funds.
Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which hampers
economic growth.
Although Public Sector Banks have good substandard assets when compared with Private
Sector banks but Private Sector Banks are more efficient than public sector banks with
regard to all the other factors which give them a good upper hand.
The Non-Performing Assets have always created a big problem for the banks in India. It is
just not only problem for the banks but for the economy too. The money locked up in NPAs
has a direct impact on profitability of the bank as Indian banks are highly dependent on
income from interest on funds lent. This study shows that extent of NPA is comparatively
very high in public sectors banks. Although various steps have been taken by government to
reduce the NPAs like S4A (Scheme for Sustainable Structuring of Stressed Assets) and
Indradhanush Scheme but still a lot needs to be done to curb this problem. The NPAs level
of our banks is still high. It is not at all possible to have zero NPAs. The bank management
should speed up the recovery process. The problem of recovery is not with small borrowers
but with large borrowers and a strict policy should be followed for solving this problem. The
government should also make more provisions for faster settlement of pending cases and
also it should reduce the mandatory lending to priority sector as this is the major problem
creating area. So the problem of NPA needs lots of serious efforts otherwise NPAs will keep
killing the profitability of banks which is not good for the growing Indian economy at all.

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 BIBLIOGRAPHY
JOURNALS
 Kanika Goyal, “Empirical Study of Non-Performing Assets Management of Indian
Public Sector Banks”, APJRBM Volume 1, Issue 1, October 2010.
 Prasad and Veena, “NPAs Reduction Strategies for Commercial Banks in India”.
International Journal of Management and Business Studies. Vol.1 Issue 3, pp. 49-53,
2011
 Price water house Coopers, “Management of nonperforming assets by Indian banks”,
IBA Bulletin, Jan. 2004.
 Chaudhary, K. & Sharma, M., “Performance of Indian Public Sector Banks and
Private Sector Banks: A Comparative Study”, International Journal of Innovation,
Management and Technology, Vol. 2, No. 3, 2011.

WEBSITES
 http://www.rbi.org.in/
 https://www.rbi.org.in/Scripts/Publications.aspx?publication=Annual
 https://www.rbi.org.in/Scripts/AnnualPublications.aspx?head=Statistical%20Tables
%20Relating%20to%20Banks%20in%20India
 https://dbie.rbi.org.in/DBIE/dbie.rbi?site=publications#!4
 https://dbie.rbi.org.in/BOE/OpenDocument/1608101727/OpenDocument/opendoc/op
enDocument.faces?logonSuccessful=true&shareId=0
 https://dbie.rbi.org.in/BOE/OpenDocument/1608101727/OpenDocument/opendoc/op
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enDocument.faces?logonSuccessful=true&shareId=4
 https://www.slideshare.net/guddugodwani1/comparative-analysis-of-non-
performing-assets-of-public-sector-private-sector-foreign-banks
 https://www.aqr.org.uk/glossary/analysis-and-interpretation
 http://www.prsindia.org/billtrack/the-insolvency-and-bankruptcy-bill-2015-4100/
 http://www.bankingschool.co.in/loans-and-advances/all-about-s4a-the-scheme-for-
sustainable-structuring-of-stressed-assets/
 https://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=37210

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 APPENDICES
PUBLIC SECTOR BANKS

Gross NPAs Gross Advances Gross NPAs to Gross

Year
(Amount in ` Millions) (Amount in ` Millions) Advances Ratio (%)

2011 710474 30798042 2.31

2012 1124892 35503892 3.17
2013 1644616 45601686 3.61
2014 2272639 52159197 4.36
2015 2784680 56167175 4.96
2016 5399563 58183484 9.28
Source: http://www.rbi.org.in

Net NPA's Net Advances Net NPAs to Net

Year
(Amount in ` Millions) (Amount in ` Millions) Advances Ratio (%)

2011 360546 30448113 1.18

2012 592052 34971052 1.69
2013 899516 44856586 2.01
2014 1303615 51190172 2.55
2015 1599511 54982006 2.91
2016 3203758 55987678 5.72
Source: http://www.rbi.org.in

Provisions Gross NPAs Provisions to Gross

Year
(Amount in ` Millions) (Amount in ` Millions) NPAs Ratio (%)

2011 349929 710474 49.25

2012 532840 1124892 47.37
2013 745100 1644616 45.31
2014 969025 2272639 42.64
2015 1185169 2784680 42.56
2016 2195806 5399563 40.67
Source: http://www.rbi.org.in

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 Net NPA Net Profit
Year
(Amount in ` Millions) (Amount in ` Millions)

2012 592052 495138

2013 899516 505827
2014 1303615 370189
2015 1599511 375400
2016 3203758 -179930
Source: http://www.rbi.org.in

Classification of Assets (Amount in Billions)

Standard Sub-standard Doubtful

Year Loss Assets
Assets Assets Assets

2012 38255 623 490 60

2013 43957 815 761 68
2014 49887 958 1216 99
2015 53382 1054 1630 100
2016 52875 2005 3232 163
Source: http://www.rbi.org.in
PRIVATE SECTOR BANKS

Gross NPAs Gross Advances Gross NPAs to Gross

Year
(Amount in `Millions) (Amount in ` Millions) Advances Ratio (%)

2011 179049 7232054 2.48

2012 182102 8716413 2.09

2013 203817 11512463 1.77

2014 241835 13602528 1.78

2015 336904 16073394 2.10

2016 558531 19726588 2.83

Source: http://www.rbi.org.in

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 Net NPA's Net Advances Net NPAs to Net
Year
(Amount in ` Millions) (Amount in ` Millions) Advances Ratio (%)

2011 44322 7097327 0.62

2012 44012 8578323 0.51

2013 59944 11368590 0.53

2014 88615 13449308 0.66

2015 141283 15877773 0.89

2016 266774 19434831 1.37

Source: http://www.rbi.org.in

Provisions Gross NPAs Provisions to Gross

Year
(Amount in ` Millions) (Amount in ` Millions) NPAs Ratio(%)

2011 134728 179049 75.25

2012 138090 182102 75.83
2013 143873 203817 70.59
2014 153220 241835 63.36
2015 195620 336904 58.06
2016 291757 558531 52.24
Source: http://www.rbi.org.in

Net NPA Net Profit

Year
(Amount in ` Millions) (Amount in ` Millions)

2012 44012 227180

2013 59944 289954

2014 88615 337541

2015 141283 387347

2016 266774 413137

Source: http://www.rbi.org.in

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 Classification of Assets (Amount in Billions)
Standard Sub-standard
Year Doubtful Assets Loss Assets
Assets Assets
2012 9629 52 104 29
2013 11384 64 112 32
2014 13371 86 114 42
2015 15750 108 176 52
2016 19184 186 311 62
Source: http://www.rbi.org.in
RECOVERY THROUGH SOURCES

NPAs recovered by SCBs through Lok Adalats (Amount in Billions)

No. of cases Amount Amount % of Amount
Years
referred involved recovered Recovered
2012-13 840691 66 4 6.1

2013-14 1636957 232 14 6

2014-15 2958313 310 10 3.2

2015-16 4456634 720 32 4.4

Source: http://www.rbi.org.in

NPAs recovered by SCBs through DRTs (Amount in Billion)

No. of cases Amount Amount % of Amount
Years
referred involved recovered Recovered
2012-13 13408 310 44 14.2

2013-14 28258 553 53 9.6

2014-15 22004 604 42 7

2015-16 24537 693 64 9.2

Source: http://www.rbi.org.in

NPAs recovered by SCBs through SARFAESI Act (Amount in Billion)

No. of cases Amount Amount % of Amount
Years
referred involved recovered Recovered
2012-13 190537 681 185 27.2

2013-14 194707 953 253 26.6

2014-15 175355 1568 256 16.3

2015-16 173582 801 132 16.5

Source: http://www.rbi.org.in

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