PROJECT REPORT

(Submitted for the Degree of B.Com. (Hons) in Accounting & Finance under the
University of Calcutta)

NPA MANAGEMENT

Submitted by:

Name of Candidate: SANJANA GUHA NEOGI

Registration No.: 017-1221-6091-15
Name of College: THE BHAWANIPUR EDUCATION SOCIETY
COLLEGE
UID No: 0101150696

Supervised by:

Name of Supervisor: Priti Modi

Name of College: THE BHAWANIPUR EDUCATION SOCIETY
COLLEGE

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 ACKNOWLEDGEMENT

At the successful completion of this project, I would like to express my sincere gratitude
to all the people without whose support this project would not be completed.

At the onset, I would like to thank University of Calcutta, my institute “ The

Bhawanipur Education Society College, Kolkata, and my supervisor Ms Priti Modi for
giving us the opportunity to undergo the research project at the very under graduate
level.

I would also like to acknowledge the constant help and encouragement of my parents,
who have given their valuable suggestions and expert guidance and support.

I would also like to thank who have directly or indirectly helped us in the preparation of
this report.

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 Annexure – IA
Supervisor’s Certificate

This is to certify that SANJANA GUHA NEOGI a student of B.Com. Honours in

Accounting & Finance of THE BHAWANIPUR EDUCATION SOCIETY COLLEGE
under the University of Calcutta has worked under my supervision and guidance for his
Project Work and prepared a Project Report with the title NPA MANAGEMENT.

The project report, which she is submitting, is her genuine and original work to the best
of my knowledge.

SIGNATURE:

PLACE: NAME: PRITI MODI

DATE: DESIGNATION: TEACHER

NAME OF COLLEGE: THE

BHAWANIPUR

EDUCATION SOCIETY COLLEGE

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 Annexure – IB
Student’s Declaration

I hereby declare that the Project work with the title NPA MANAGEMENT submitted
by me for the partial fulfillment of the degree of B.Com. Honours in Accounting &
Finance under the University of Calcutta is my original work and has not been
submitted earlier to any other University/Institution for the fulfillment of the
requirement for any case of study.

I also declare that no chapter of this manuscript in whole or in part has been
incorporated in this report from earlier work done by others or by me. However, extracts
of any literature which has been used for this report has been duly acknowledged
providing details of such literature in the references.

SIGNATURE:

PLACE: NAME: SANJANA GUHA NEOGI

DATE: DESIGNATION: STUDENT

NAME OF COLLEGE: THE

BHAWANIPUR

EDUCATION SOCIETY
COLLEGE

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 CHAPTERISATION

S.NO TOPICS PAGE NO.

1. INTRODUCTION: 6-14
1.1 BACKGROUND 7-8
1.2 OBJECTIVES OF STUDY 9
1.3 NEED FOR STUDY 10
1.4 LIMITATIONS OF STUDY 11
1.5 LITERATURE REVIEW 12-13
1.6 RESEARCH METHODOLOGY 14
2. CONCEPTUAL FRAMEWORK: 15-23
2.1 MEANING OF NPA 16-17
2.2 CLASSIFICATION OF NPA 18
2.3 PROVISIONING OF NPA 19-21
2.4 CURRENT SCENARIO IN INDIAN ECONOMY 22-23
3. DATA ANALYSIS AND FINDINGS: 24-38
3.1 COMPARETIVE STUDY OF NPA IN PRIVATE & 25-29
PUBLIC SECTORS
3.2 CASE STUDY: NPA MANAGEMENT IN STATE BANK 30-35
OF INDIA
3.3 CORRECTIVE STEPS BY RBI TOWARDS RECOVERY 36-38
OF NPA
4. CONCLUSION, RECOMMENDATION & 39-44
BIBLIOGRAPHY:
4.1 CONCLUSIONS 40
4.2 RECOMMENDATIONS 41-42
4.3 BIBLIOGRAPHY 43-44

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1. INTRODUCTION

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 1.1 - BACKGROUND

The Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest (SARFAESI) Act 2002 defines Non-Performing Assets as “An Asset
or account of borrower, which has been classified by a bank or financial institution
as sub-standard, doubtful or loss assets in accordance with the direction issued by
the Reserve Bank of India”. In simple words, Non-Performing Assets are those assets
of the banks that do not generate income.

A major chunk of assets of banks and lending institutions comprises of loans and
advances given by them to individuals, business entities and other such persons. These
assets generate income for the banks in the form of interest, pre-payment charges, non-
payment charges etc. A non-performing asset is one which fails to generate income to
the bank. As per the regulations of the Reserve Bank of India, an asset is considered
to have gone due, the past due amount remaining uncovered, where the borrower has
defaulted as principal and interest repayment for more than one quarter or 90 days and
such asset is classified as Non-Performing Assets.

NPAs block income for the banks and bring down the profitability. This not only
reflects badly on the bank’s books of accounts, but also impacts the national economy in
its entirety. Since banks play a major role in funding various industries and
infrastructural projects, non recovery of NPA causes cash shortages in banks, thereby
affecting its lending capacity. Consequently, such banks may also face serious liquidity
problems. Moreover, for listed banks, huge accumulation of NPA results in declining
share prices, thus affecting the shareholders’ wealth.

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The Indian Government, in congruence with the Reserve Bank of India, has at time and
again brought out various schemes and framed policies to ensure recovery of NPA and
debt collection. Several reform measures have been implemented, the details of which
have been analysed. However, the plague continues to exist and is gradually
surmounting in extraordinarily high levels.

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 1.2 - OBJECTIVES OF THE STUDY
The primary objective of the present research study is to examine the performance of
loan portfolios and procedures of decision making in the area of management of NPAs
in banking sector, with specialized focus of Public Sector Banks and to analyse recent
developments in the Indian economy regarding management and recovery of NPAs
and the results of the steps taken in this regard.

The objectives may be enlisted as follows:-

 To highlight the current trend of Loans advanced by banks and financial

institutions.
 To determine and analyse the figures of sectoral non-performing assets using
graphs and other statistical tools.
 To analyse the profitability status of banks and the effects of NPA on tye
same
 To attempt to provide a resolution to the issues created by NPAS ad debt
collection

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 1.3 - NEED OF THE STUDY

The need of undertaking this research study is to draw up the state of NPA in the current
scenario of the Indian economy and its cause and effect relationship with profitability of
companies.

The benefits derived from undertaking this study may be enumerated as follows:

 The study could suggest measures for the banks to avoid future NPAs & to reduce
existing NPAs.
 The study may help the government in creating & implementing new strategies to
control NPAs.
 The study will help to select appropriate techniques suited to manage the NPAs
and develop a time bound action plan to check the growth of NPAs.

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 1.4 - LIMITATIONS OF THE STUDY

Every research study conducted is accompanied by certain inherent limitations. Due to

time constraint, paucity of sources and dependence on secondary data, it has not been
possible to carry out in depth research on all facets of the topic. Hence, the attempt has
been to be as concise and specific as possible while displaying a clear picture of the
study.

Although maximum coverage has been attempted to study as many scenarios as possible
the following limitations upheld my project:

 The project focuses on Public Sector Banks and with only limited details on
other sectors.
 The project is solely based on the secondary data available to me from the
books, periodicals, websites and published financial statements and results of the
respective banks. No personal interaction with any of the bank or bank officials
in what so ever sense has been done.
 One of the factors of the study was lack of availability of ample internal
information of the banks considered in the case study. The study could not delve
into the internal workings adopting by the bank and policies so framed, due to
paucity of time and sources.

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 1.5 LITERATURE REVIEW

Over the last few years the literature that examines non-performing loans has expanded
in line with the interest afforded to understanding the factors responsible for financial
vulnerability. This situation may be attributed to the fact that impaired assets plays a
critical role in financial vulnerability as evidenced by the strong association between
Non Performing Loans (NPLs) and banking/financial crises during the 1990s.

Keeton and Morris (1987) present one of the earliest studies to examine the causes of
loan losses. In the latter paper the authors examined the losses by 2,470 insured
commercial banks in the United States (US) over the 1979-85. Using NPLs net of
charge-offs as the primary measure of loan losses Keeton and Morris (1987) shows that
local economic conditions along with the poor performance of certain sectors explain
the variation in loan losses recorded by the banks. The study also reports that
commercial banks with greater risk appetite tend to record higher losses. Several studies
which followed the publication of Keeton and Morris (1987) have since proposed
similar and other explanations for problem loans in the US. Sinkey and Greenwalt
(1991), for instance, investigate the loan loss-experience of large commercial banks in
the US; they argue that both internal and external factors explain the loan-loss rate
(defined as net loan charge offs plus NPLs divided by total loans plus net charge-offs)
of these banks.

These authors find a significant positive relationship between the loan-loss rate and
internal factors such as high interest rates, excessive lending, and volatile funds. Similar
to the previous study, Sinkey and Greenwalt (1991) report that depressed regional
economic conditions also explain the loss-rate of the commercial banks. The study
employs a simple log-linear regression model and data of large commercial banks in the
United States from 1984 to 1987.

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Keeton (1999) uses data from 1982 to 1996 and a vector auto regression model to
analize the impact of credit growth and loan delinquencies in the US. It reports evidence
of a strong relationship between credit growth and impaired assets. Specifically, Keeton
(1999) shows that rapid credit growth, which was associated with lower credit
standards, contributed to higher loan losses in certain states in the US. In this study loan
delinquency was defined as loans which are overdue for more than 90 days or does not
accrue interest. Studies that examined other financial systems also provide similar
results to those in the US. For instance, Bercoff et al (2002) examine the fragility of the
Argentinean Banking system over the 1993-1996 period; they argue that NPLs are
affected by both bank specific factors and macroeconomic factors. To separate the
impact of bank specific and macroeconomic factors, the authors employ survival
analysis. Using a dynamic model and a panel dataset covering the period 1985-1997 to
investigate the determinants of problem loans of Spanish commercial and saving banks,
Salas and Saurina (2002) reveal that real growth in GDP, rapid credit expansion, bank
size, capital ratio and market power explain variation in NPLs. Furthermore, Jimenez
and Saurina (2005) examine the Spanish banking sector from 1984 to 2003; they
provide evidence that NPLs are determined by GDP growth, high real interest rates and
lenient credit terms. This study attributes the latter to disaster myopia, herd behavior and
agency problems that may entice bank managers to lend excessively during boom
periods.

Meanwhile, Rajan and Dhal (2003) utilise panel regression analysis to report that
favourable macroeconomic conditions (measured by GDP growth) and financial factors
such as maturity, cost and terms of credit, banks size, and credit orientation impact
significantly on the NPLs of commercial banks in India. Using a pseudo panel-based
model for several Sub-Saharan African countries, Fofack (2005) finds evidence that
economic growth, real exchange rate appreciation, the real interest rate, net interest
margins, and inter-bank loans are significant determinants of NPLs in these countries.

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Page | 14
 1.6 - RESEARCH
METHODOLOGY
The project is completely based on the secondary data available, the authenticity of
which is based on secondary sources. No primary data has been used. Great care has
been taken to assure maximum coverage of topics related with the study. Following
methodologies have been applied:

 Secondary data has been extracted from various periodicals, books, reports and
well known websites.
 A detailed analysis of the facts and figures has been done in order to provide a
clear and conceptual view of the topic.
 Various graphs, diagrams and other statistical tools have been added which
provides a pictoral representation of the facts and figures so as to enable the
reader to have a lucid understanding of the topic.
 A comparative analysis of NPA creation and management of two well known
Public sector banks has been added as a case study in order to have an
understanding of the current status of NPAs in the Indian economy.

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2. CONCEPTUAL
FRAMEWORK

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 2.1 – MEANING

A Non-Performing Asset (NPA) is defined as a credit facility in respect of which

the interest and/or installment of Bond finance principal has remained ‘past due’
for a specified period of time. Once the borrower has failed to make interest or
principle payments for 90 days the loan is considered to be a non-performing asset.
Non-performing assets are problematic for financial institutions since they depend on
interest payments for income.
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification
of NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31,
2004, a non-performing asset (NPA) is a loan or an advance where;

 Interest and/or installment of principal remain overdue for a period of more than
91 days in respect of a term loan,
 The account remains ‘out of order’ for a period of more than 90 days, in respect
of an Overdraft/Cash Credit (OD/CC),
 The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
 Interest and/or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted for
agricultural purposes, and
 Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
 Non submission of Stock Statements for 3 Continuous Quarters in case of Cash
Credit Facility.
 No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for
more than 91days

GROSS & NET NPA: NPAs are primarily expressed in two ratios in order to
conduct analytical understanding viz., Gross NPA and Net NPA which are described
as below:

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 GROSS NPA NET NPA
Net NPAs are those type of
NPAs in which the bank has
deducted the provision
regarding NPAs.
Gross NPA is an advance which is considered
Net NPA shows the actual
irrecoverable, for bank has made provisions, and
burden of banks. Since in India,
which is still held in banks' books of account.
bank balance sheets contain a
Gross NPAs are the sum total of all loan assets that
huge
are classified as NPAs as per RBI Guidelines as on
amount of NPAs and the process
Balance Sheet date. Gross NPA reflects the quality
of recovery and write off of
of the loans made by banks. It consists of all the
loans is very time consuming,
nonstandard assets like as sub-standard, doubtful,
the
and loss asset.
banks have to make certain
provisions against the NPAs
according to the central bank
guidelines.
Net NPAs = Gross NPAs –
Gross NPAs Ratio = Gross NPAs / Gross
Provisions / Gross Advances –
Advances.
Provisions

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 2.2 - Classification of Non Performing
Assets (NPAs)

Non-performing assets are classified further into the following three categories based on
the period for which the asset has remained non-performing and the realisability of the
dues:

1. Sub-standard assets: a sub standard asset is one which has been classified as
NPA for a period not exceeding 12 months.

2. Doubtful Assets: a doubtful asset is one which has remained NPA for a period
exceeding 12 months. The said doubtful assets are further classified age-wise in
order to segregate provisioning rates, as follows:

DOUBTFUL ASSETS UPTO CLASSIFICATION OF NPA

1 year Of twenty four months
1 year to 3 years Over twenty four months & upto forty
eight months
3 years & above Above eight months

3. Loss assets: where loss has been identified by the bank, internal or external
auditor with little salvage value.

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 2.3 - Provisioning of Non Performing
Assets (NPAs)
In the light of the Narasimhan Committee recommendations, the Reserve Bank of
India has, from time to time, developed norms relating to classification and
provisioning of assets, whether performing or non-performing. As per Master Circular
No. DBOD.No.BP.BC.1/21.04.048/2013-14 dated July 1, 2013, RBI has updated the
provisioning rates, which has been enlisted underneath.

l
C
i
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aa
fiti
c
n
o
f
t
e
s
A

 Standard Assets:

Standard asset is one which does not disclose any problem and which does not carry
more than normal risk attached to the business. Such an asset is not an NPA. The
insurer should make a general provision on Standard Assets of a minimum of 0.40
per cent of the value of the asset.

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The regional rural banks have been advised to make a general provision for standard
assets at the following rates:
a) Direct advances to agricultural and SME sectors at 0.25 per cent;
b) All other advances at 0.40 per cent.

 Sub-Standard Assets:
With effect from March 31, 2005, a substandard asset would be one, which has
remained
NPA for a period less than or equal to 12 months. Such an asset will have well defined
credit weaknesses that jeopardise the liquidation of the debt and are characterised by the
distinct possibility that the banks will sustain some loss, if deficiencies are not
corrected.
Following would be the provisioning rates for sub-standard assets:
 A general provision of 15 percent on total outstanding should be made without
making any allowance for ECGC guarantee cover and securities available.

 The ‘unsecured exposures’ which are identified as ‘substandard’ would attract

additional provision of 10 per cent, i.e., a total of 25 per cent on the outstanding
balance. However, in view of certain safeguards such as escrow accounts
available in respect of infrastructure lending, infrastructure loan accounts which
are classified as sub-standard will attract a provisioning of 20 per cent instead of
the aforesaid prescription of 25 per cent.

 Doubtful assets:

 100 percent of the extent to which the advance is not covered by the
realisable value of the security to which the bank has a valid recourse and
the realisable value is estimated on a realistic basis.
 In regard to the secured portion, provision may be made on the following
basis, at the rates ranging from 25 percent to 100 percent of the secured
portion depending upon the period for which the asset has remained
doubtful:

Period for which the advance has

Provision requirement (%)
remained in ‘doubtful’ category
Up to one year 25

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 One to three years 40
More than three years 100

 Loss Assets:

It is advised by Reserve Bank of India to the banks that in cases where loss assets are
more than two years old in the books of a bank without legal action being initiated, the
banks should submit a review note to their management committee/board of directors
giving specific reasons as to why steps have not been taken for recovery. These assets
should be written off. If they are permitted to remain in the books for any reason
100 per cent should be provided for.

Technically the standard assets are performing assets. The remaining categories of sub-
standard, doubtful and less assets are NPAs. According to Reserve Bank of India
direction, all the banks are required to maintain NPAs both on gross and net basis.

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 2.4 – CURRENT SCENARIO IN
INDIAN ECONOMY
Presently, NPA continues to be one of the major drawbacks in the Indian economy. The
banks, especially the ones in public sector continues to be burdened by enourmous non-
performing assets which have adversely affected the performance of the banking sector
and has decelerated the economy as a whole. The gravity of the problem can be
expressed in the terms of the aforementioned facts and figures:

 More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans
in India. This is a huge amount.
 The figure roughly translates to near 10% of all loans given.
 This means that about 10% of loans are never paid back, resulting in substantial
loss of money to the banks.
 When restructured and unrecognised assets are added the total stress would be
15-20% of total loans.
 NPA crisis in India is set to worsen.
 Restructuring norms are being misused.
 This bad performance is not a good sign and may result in crashing of banks as
happened in the sub-prime crisis of 2008 in the United States of America.

Reasons for rise in NPA in the recent years:

 GDP slowdown -Between early 2000's and 2008 Indian economy were in the
boom phase. During this period Banks especially Public sector banks lent
extensively to corporate. However, the profits of most of the corporate dwindled
due to slowdown in the global economy, the ban in mining projects, and delay in
environmental related permits affecting power, iron and steel sector, volatility in
prices of raw material and the shortage in availability of. This has affected their
ability to pay back loans and is the most important reason behind increase in
NPA of public sector banks.
 One of the main reasons of rising NPA is the relaxed lending norms especially
for corporate honchos when their financial status and credit rating is not
analyzed properly. Also, to face competition banks are hugely selling unsecured
loans which attributes to the level of NPAs.
 5 sectors Textile, aviation, mining, Infrastructure contributes to most of the
NPA, since most of the loan given in these sector are by PSB, They account for
most of the NPA.

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  Public Sector banks provide around 80% of the credit to industries and it is this
part of the credit distribution that forms a great chunk of NPA. Last year, when
kingfisher was marred in financial crisis, SBI provided it huge amount of loan
which it is not able to recover from it.
 The Lack of Bankruptcy code in India and sluggish legal system make it difficult
for banks to recover these loans from both corporate and non-corporate.
 Diversification of funds to unrelated business/fraud.
 Lapses due to diligence.
 Busines losses due to changes in business/regulatory environment.
 Global, regional or national financial crisis which results in erosion of margins
and profits of companies, therefore, stressing their balance sheet which finally
results into non-servicing of interest and loan payments. (For example, the 2008
global financial crisis).
 The general slowdown of entire economy for example after 2011 there was a
slowdown in the Indian economy which resulted in the faster growth of NPAs.
 The slowdown in a specific industrial segment, therefore, companies in that area
bear the heat and some may become NPAs.
 Unplanned expansion of corporate houses during boom period and loan taken at
low rates later being serviced at high rates, therefore, resulting into NPAs.
 Due to mal-administration by the corporates, for example, willful defaulters.
 Due to misgovernance and policy paralysis which hampers the timeline and
speed of projects, therefore, loans become NPAs. For example Infrastructure
Sector.
 Severe competition in any particular market segment. For example Telecom
sector in India.

Impact of NPAs on the economy:

 Lenders suffer lowering of profit margins.

 Stress in banking sector causes less money available to fund other projects,
therefore, negative impact on the larger national economy.
 Higher interest rates by the banks to maintain the profit margin.
 Redirecting funds from the good projects to the bad ones.
 As investments got stuck, it may result in it may result in unemployment.
 In the case of public sector banks, the bad health of banks means a bad return for
a shareholder which means that government of India gets less money as a
dividend. Therefore it may impact easy deployment of money for social and
infrastructure development and results in social and political cost.
 Investors do not get rightful returns.
 Balance sheet syndrome of Indian characteristics that is both the banks and the
corporate sector have stressed balance sheet and causes halting of the
investment-led development process.
 NPAs related cases add more pressure to already pending cases with the
judiciary.

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3. DATA ANALYSIS &
FINDINGS

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 3.1 – COMPARETIVE STUDY OF
NPAs IN PUBLIC & PRIVATE
SECTOR BANKS
As of June 2017, the total amount of Gross Non-Performing Assets (NPAs) for
public and private sector banks is around Rs. 6 lakh crore. The amount of top twenty
Non Performing Assets (NPA) accounts of Public Sector Banks stands at Rs. 1.54
lakh crores.

GROSS NPAs OF TOP TEN PUBLIC & PRIVATE SECTOR BANKS AS ON 30 TH

JUNE, 2017:

S Total Advances (Rs. in Gross NPA (Rs. in NPA Ratio

Bank
No. crore) crore) (%)

Indian Overseas
1 Bank 1,49,217.00 30,239.00 20.26

UCO Bank 1,15,166.00 21,495.00 18.66

2
Bank of India 2,74,391.00 43,935.00 16.01
3
Punjab National
4 Bank 3,56,958.00 55,003.00 15.41

United Bank of
5 India 70,781.00 10,104.00 14.28

Central Bank of
6 India 1,85,719.00 25,107.00 13.52

State Bank of Patiala 85,239.00 11,365.00 13.33

7
Bank of Baroda 2,69,115.00 35,604.00 13.23
8
Allahabad Bank 1,45,328.00 18,769.00 12.92
9
Bank of Maharashtra 1,03,148.00 13,040.00 12.64
10

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Indian Overseas Bank fares worst, having the highest ratio of NPA to total advances-
20.26%. UCO Bank (18.66%) and Bank of India (16.01%) follow.

In absolute terms, State Bank of India has the highest value of Gross NPA around Rs.
93,000 crores. Punjab National Bank (Rs. 55,000 crores) and Bank of India (Rs. 44,000
crores) come next

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SECTORAL CONTRIBUTION: Basic Metal and Metal Products sector is the worst
performing in terms of NPA ratio. As of June 2017, govt data show that a third of all
outstanding advances (Rs. 4.33 lakh crore) given to the sector turned to NPA (Rs. 1.49
lakh crore). Textiles sector, and Beverages (excluding Tea and Coffee) and Tobacco
sector follow, both having NPA ratio at around 17 per cent.

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PRIVATE SECTOR BANKS:
Gross NPAs of 17 private banks soared by 161 percent to Rs 96,201 crore in June 2017
quarter from Rs 36,878 crore in September 2015. The bad loan scenario of private banks
as compared to their counterparts in public sector is much better. But, even there, there
isn't immunity to the problem.

Year Assets HDFC AXIS ICICI YES Bank Kotak Mahindra

Year
2017 Advances 4,64,593.96 3,38,773.72 4,35,263.94 98,209.93 1,18,665.30
Gross 26,221.2 2,838.1
  NPA 4,392.83 6,087.51 5 748.96 1
Year 66,160.7
2016 Advances 3,65,495.03 2,81,083.03 3,87,522.07 75,549.82 1
Gross 15,094.6 1,237.2
  NPA 3,438.38 4,110.19 9 313.40 3
Year 53,027.6
2015 Advances 3,03,000.03 2,30,066.76 3,38,702.65 55,632.96 3
Gross 10,505.8 1,059.4
  NPA 2,989.28 3,146.41 4 174.93 4
Year 48,468.9
2014 Advances 2,39,720.00 1,96,965.96 2,90,249.44 46,999.57 8
Gross 9,607.7 94.3 758.1
  NPA 2,334.64 2,393.42 5 2 1
Year 39,079.2
2013 Advances 1,95,420.00 1,69,759.54 2,53,727.66 37,988.64 3
Gross 9,475.3 83.8 614.1
  NPA 1,999.39 1,806.30 3 6 9

To improve
the resolution
or recovery
of bank
Object 2
loans, IBC

Page | 29
(Insolvency and Bankruptcy Code) has been enacted and SARFAESI
(Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest) Act and RDDBFI (Recovery of Debts due to Banks and Financial
Institutions) have been amended, the response said. Further, six new Debt Recovery
Tribunals (DRTs) have been established for improving recovery.

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 3.2 – CASE STUDY: NPA
MANAGEMENT IN STATE BANK OF
INDIA

BRIEF INTRODUCTION: State Bank of India (SBI), a

government owned Indian multinational, public sector banking
and financial services company is currently India’s largest
public sector bank with its five associate banks- State Bank
of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of
Mysore, State Bank of Patiala and State Bank of Travancore. It
has 198 offices in 37 countries; 301 correspondents in 72 countries. The company is
ranked 232nd on the Fortune Global 500 list of the world's biggest corporations as of
2016. State Bank of India has 20% market share in deposits and loans among Indian
commercial banks.

DATA ANALYSIS:

 NPA RATIO: Following is the tabulation of annual NPA records of State Bank
of India, as per the published annual financial statements:

Yearly Results of
------------------- in Rs. Cr. -------------------
State Bank of India

NPA RATIO Mar '17 Mar '16 Mar '15 Mar '14 Mar '13
i) Gross NPA 1,12,342.99 98,172.80 56,725.34 61,605.35 51,189.39
ii) Net NPA 58,277.38 55,807.02 27,590.58 31,096.07 21,956.48
i) % of Gross NPA 6.9 6.5 4.25 4.95 4.75
ii) % of Net NPA 3.71 3.81 2.12 2.57 2.1
Return on Assets % 0.41 0.46 0.76 0.65 0.91

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 Object 5

The above graph is a diagrammatical representation of the status of NPA in SBI over
last five financial years. It can be seen that Gross NPA has seen a gradual increase
throughout the period, while the figure of Net NPA has fluctuated, showing a downward
trend in financial year 2014-15 while increasing in all other years. Recent figures show
that Gross NPA in financial year 2016-17 has experienced an increase of 14.43%
from the previous year, while Net NPA has increase 4.42%.

 MAJOR DEFAULTERS:

 As per data revealed by SBI documents, with an outstanding debt of

Rs.1201.40 crore, Vijay Mallya’s defunct Kingfisher Airlines heads the list of
100 ‘wilful defaulters’ who owe SBI more than Rs.8,000 crore. Kingfisher’s
debt comprises more than half of the Rs.2,207.07 crore that the top five in the
list owe SBI with Chennai-based online education promoter Agnite Education
Ltd following far behind with Rs.315.45 crore.
 Others in the top five list of wilful defaulters – defined as those who are
deliberately refusing to pay back bank loans – are Mumbai-based Shreem
Corporation Ltd, the erstwhile Rajput Retail (Rs 283.08 crore), Chennai-based
Non-Banking Finance Company, First Leasing Company of India Ltd (Rs
235.29 crore) and Teledata Marine Solutions Pvt Ltd (Rs 166.85 crore).
Chandigarh’s Harman Milkfood follows in sixth position with Rs 148.16
crore.

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 An analysis of the data shows that most of the top defaulters used forgery,
fudged accounts and false statements to avail huge loans from the bank. Some
companies removed stocks as the primary security without the bank’s
knowledge. An estimated 15 per cent of the defaulters are from the steel
sector, followed by manufacturing, food, textile and jewellery.
 With 27 companies owing Rs 2,033 crore, Maharashtra has more wilful
defaulters than any other state. Karnataka is at number two with Rs 1,440
crore by virtue of Kingfisher.

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Page | 34
  IMPACT ON PROFITABILITY: Increase in NPA affects overall profitability
of banks. Following table represents the profit figures of State Bank of India
over five financial years:

Profit & Loss account of ------------------- in Rs. Cr. -------------------

State Bank of India
  Mar '17 Mar '16 Mar '15 Mar '14 Mar '13
Net Profit for the Year 10,484.10 9,950.65 13,101.57 10,891.17 14,104.98
Profit brought forward 0.32 0.32 0.32 0.34 0.34
Total 10,484.42 9,950.97 13,101.89 10,891.51 14,105.32
Equity Dividend 2,108.56 2,018.32 2,557.28 2,239.71 2,838.74
Corporate Dividend Tax 306.38 334.51 520.65 298.45 375.95

Per share data (annualised)        

Earning Per Share (Rs) 13.15 12.82 17.55 145.88 206.2
Equity Dividend (%) 260 260 350 300 415
Book Value (Rs) 196.53 185.85 172.04 1,584.34 1,445.60

STRATEGIES ADOPTED TO COMBAT NPA ISSUES BY SBI:

The country's largest lender had more than Rs 65,000 crore (Rs 650 billion) of non-
performing assets (NPAs) in October, 2013. The number, which was 5.64 per cent of its
total advances, was bigger than the loan book of some private sector banks. Arundhuti
Bhattacharya, the then-chairman of the bank, laid out a six-pronged strategy,
called the Super Six to tackle the crisis. The strategy consisted of six manifolds:

 Improving asset quality: Reactive to proactive

 Cost rationalisation
 Risk management
 Go digital
 Customer delivery
 Repositioning human resources

SBI decided to sell stressed assets to Asset Reconstruction Companies on a regular

Basis. The second key focus area was cost rationalisation. The lender conducted "space
audit" to optimise on rent, improved efficiency in cash management, among others
which helped it to contain growth in operating expenses to 10.3 per cent. The third
strategy, which was to focus more on digital banking, has also helped the bank in
containing cost. The share of alternative channels to total transactions has increased to

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71.6 per cent as on June end from 61.6 per cent a year ago. On the digital front, SBI
entered into partnership with several e-commerce players like Amazon, Snapdeal and
Ola cabs, which has increased the revenue. SBI will also launch its mobile wallet - SBI
Buddy, to strengthen its digital presence.

On risk management, the bank initiated risk-based budgeting and made risk assessing
process an ongoing one to facilitate early corrective action. As a result, the risk
mitigated portfolio of the small and medium enterprises sector grown from 25.3 per cent
to 30.9 per cent in one year. 

The mid-corporate segment, which contributed maximum stress on SBI book's during
the last two years, is showing improvement. In the mid-corporate space, NPAs declined
to Rs 21,468 crore (Rs 214.68 billion) from Rs 24,632 crore (Rs 246.32 billion),
recorded a year ago. 

Mr Rajnish Kumar, the new chairman has created a special division under the level
of Stressed Assets Resolution Group headed by an MD to tackle the issue of NPA.
The key reshuffle includes re-designation of B Sriram, who was earlier heading the
corporate banking group, as MD (corporate and global banking). Till the time new MD
for SARG is appointed, Sriram will be looking after the stressed assets resolution group
department as well.

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 3.3 CORRECTIVE STEPS BY RBI
TOWARDS RECOVERY OF NPA

The government has promulgated an Ordinance to help banks tackle the menace of
mounting bad loans, which is denting profits of lenders, slowing credit flow to industry
and hurting the economy.

The promulgation of an ordinance to amend the Banking Regulation Act is being carried
out to speed up recovery of bad loans.

The move comes after clarion calls from lenders who have been jostling with stressed
assets mounting to about Rs 10 lakh crore, or close to 7% of India’s GDP, as of
December-end.

Here are five ways the government and Reserve Bank of India can speed up recovery of
non-performing assets (NPAs).

1. Amendment in banking law to give RBI more powers

The Banking Regulation Act may be amended to give RBI more powers to monitor
bank accounts of big defaulters.

The amendment in the banking law will enable setting up of a committee to oversee
companies that have been the biggest defaulters of loans.

RBI wants stricter rules for joint lenders’ forum (JLF) and oversight committee (OC) to
curb NPAs.

While the present law allows the government to direct RBI to carry out inspection of a
lender, there is no provision for setting up oversight committees.

Also, there could be changes in the laws, which will bar a bank to extend loans to a
defaulting company that has failed to repay to other banks.

2. Stringent NPA recovery rules

The government has over the years enacted and tweaked stringent rules to recover assets
of defaulters.

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The Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act or Sarfaesi Act of 2002 was amended in 2016 as it took banks years to
recover the assets.

Experts have pointed out that the NPA problem has to be tackled before the time a
company starts defaulting. This needs a risk assessment by the lenders and red-flagging
the early signs of a possible default.

3. RBI’s loan restructuring schemes

RBI has over the past few decades come up with a number of schemes such as corporate
debt restructuring (CDR), formation of joint lenders’ forum (JLF), flexible structuring
for long-term project loans to infrastructure (or 5/25 Scheme), strategic debt
restructuring (SDR) scheme and sustainable structuring of stressed assets (S4A) to
check the menace of NPAs.

In many cases, the companies have failed to make profits and defaulted even after their
loans were restructured.

4. Present NPA scenario

According to the latest information collated by the government, stressed assets which
includes both non-performing assets as well as restructured loans of banks stood at Rs
9.64 lakh crore as on December 31, 2016.

In December, RBI’s financial stability report said the gross non-performing advances
(GNPAs) ratio of all banks increased to 9.1% by September 2016 from 7.8% in March
2016. The amount of stressed loans was up at 12.3% of total loan given out by banks by
September, up from 11.5% in March 2016.

RBI’s stress test of the banking sector indicated that GNPA ratio may increase from
9.1% in September 2016 to 9.8% by March 2017, and further to 10.1% by March 2018.

PSU banks are worst hit as their GNPA may increase to 12.5% by March 2017 and then
to 12.9% in March 2018, from 11.8% in September 2016.

5. Banks may need to take a “hair cut”

In the past few quarters, most of the banks especially PSU lenders, have reported a
sharp fall in profits as they set aside hefty amounts for losses on account of NPAs,
which eroded their profits.

Given the gravity of the problem, the government may ask banks to go for more “hair
cut” or write offs for NPAs.

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The government and RBI may also come up with a one-time settlement scheme for top
defaulters before initiating stringent steps against them.

The finance ministry and RBI are also considering setting up of a “bad bank” to deal
with the problem of non-performing loans, as it has been suggested by chief economic
adviser Arvind Subramanian in the Economic Survey.

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 4. CONCLUSIONS,
RECOMMENDATIONS &
BIBLIOGRAPHY

Page | 40
 4.1 - CONCLUSION
In light of the study conducted and the analogy derived from the project report, it can
be concluded that NPAs are a major issue of the banking sector in the current Indian
economy.

Following are the ways in which the issue can be combated:

 Proper recycling of funds necessary for the efficient functioning of

commercial banks
 Proper selection of the borrower accounts

 Financing in the viable scheme

 Extending need based financing

 Suitable amendments to the existing laws must be made to enable the

bankers to initial legal proceedings against the willful defaulters.

 The bank defaulters should not be permitted to enter the politics at

various levels which include panchayat, assembly, parliament other local
bodies and the like.

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 4.2 - RECOMMENDATIONS

After going through the summary of findings and the results of hypothesis
testing, the following are the suggestions offered to improve the effective
management of mounting NPAs:

 The bank may follow different strategies of NPA management, timely

construction of loan portfolio. Keeping in view the present condition of the
sensitive sector where volatility is increasing day by day the bank may diversify
its services into capital market, consultancy, lease financing, housing finance
and insurance services with prior permission of Central Government.

 The priority sector lending target, which includes farm sector, has been revised
to 60 per cent of total advances, with sub-target of 15 per cent to weaker
sections. Even though the Chi-square test rejects the null hypothesis, which
shows the bank’s management is performing in a very well manner, additional
steps may be taken to manage balanced loan portfolio.

 The bank may take steps to improve the existing risk management systems,
implementation of new accounting standards to bring up them equal to
international standard, transparency and disclosures, supervision of financial
conglomerates and corporate governance to face the competitive global
environmental conditions.

 The bank may take steps to constitute more legal cells and tribunals, recovery
branches, NPA management departments, lok adalats etc., for speedy recovery
of NPAs in addition to the existing methods.

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 The banks may be permitted to design and implement their own policies; which
comes under the RBI guidelines, for recovery especially in case of old and
unresolved cases falling under the NPA category.

 The bank may send circulation of informant and defaulters, which will serve as a
caution list which considering request for new additional credit limits from
defaulting borrowings units and also file criminal cases in regard to willful
defaulters.

 The bank may consider that the NPAs should be avoided in initial stages of
credit consideration by putting in place appropriate credit appraisal mechanism.

 One of the bank’s prime responsibilities is that the borrower should also realize
their role and responsibilities. They should understand the difficulties of each
other and should try to work towards contributing a healthy mechanism.

 The bank should adopt the technological changes by converting their banks as
fully computerized banks which may lead to a fast and easy service to their
customers.

4.3 - BIBLIOGRAPHY
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 BOOKS
 Gupta S.P., Statistical Methods, Sultan Chand & Sons, New Delhi, 2005.

 Kothari, C.R., Research Methodology, Methods and Techniques, Viswa

Prakasam, New Delhi, 2000.

 JOURNALS

 Jayanth R. Varma, Indian Financial Sector Reforms: A Corporate

Perspective, Journal of the Indian Institute of Management, Ahamedabad,
January-March 1998, 23(1), p.27-38 – Copyright: Vikalpa-
http://www.iimahd.ernet.in/vikalpa.

 Rajaram, Dr. Ch. & Dr. K. Rajendar, article “ Management of NPAs in

Indian Scheduled Commercial Banks”, The Management Accountant, Aug
2008, Vol.43, No8 P. 107.

 Banking finance – ISSN – 0971 – 4498

 REPORTS

 Ananthan, B.R “Regional Development Banks – a Performance Evaluation of

Karnataka SFC”, Unpublished Ph.D Thesis, 1981

Page | 44
 Mayil Murugan .A. “A Study of Prudential Norms and their impact on financial
performance of Madurai District Central Cooperative Bank, Limited”,
Unpublished Ph.D., Thesis, MKU, 2007

 Shri. M.Narashimam Working Group Recommendations (1975)

 WEBSITES

 http://www.irdaindia.org/Finance_And_Analysis/Prudential%20Norms
%20for%20Income%20Recognition,%20Asset%20Classification%20and
%20Provisioning%20and%20other%20related%20matters%20No.32-2-
F&A-Circulars-169-Jan-07%20Dt.24-01-07.pdf

 https://www.rbi.org.in/scripts/BS_ViewMasCirculardetails.aspx?
Id=449&Mode=0

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