A study on Non-Performing Assets of Public and Private Sector Banks

A study on Non-
Performing Assets of
Public and Private sector
Banks

Submitted To: Submitted By:

Prof. (Dr.) Mr. Haldhar Sharma Sumit Sharma
Vinisha Maheshwari
Vivek Rathore
Vaishnavi Patel
Vajid Mansuri
Vikas Manjhi

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 A study on Non-Performing Assets of Public and Private Sector Banks

Acknowledgement
A Report is a thorough study of any subject matter where we reach to a
conclusion after testing all the corners. A business report has to be
precise and to the points covering all the aspects required.
We had this wonderful opportunity under the guidance of Prof. (Dr.)
Mr. Haldhar Sharma. He provided as all the knowledge and pre-
requisites for the thorough study of Business Research Methods by
conducting both offline and online classes to cope with this ongoing
pandemic situation.
I would also like to extend my gratitude to the Vice-Chancellor Prof.
(Dr.) SK Somani, Dean Management Prof. (Dr.) Harish Bapat for
providing us all the facilities that were required.

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 A study on Non-Performing Assets of Public and Private Sector Banks

Index
Content Page No.
Abstract 3
Introduction 4
Non Performing Assets 5
Types of NPA 6
Targets on Priority Sector Advances 7
Review of Literature 8
Objectives of Study 9
Research Methodology 10
Public Sector Banks 11
Private Sector Banks 11
Public and Private Sector Banks 12
Suggestion 13
Conclusion 14

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 A study on Non-Performing Assets of Public and Private Sector Banks

Abstract
The Indian banking sector has been facing serious problems of raising
Non-Performing Assets (NPAs). Like a canker worm, NPAs have been
eating the banking industries from within, since nationalisation of banks
in 1969. NPAs have choked off quantum of credit, restriction the
recycling of funds and leads to asset-liability mismatches. It also
affected profitability, liquidity and solvency position of the Indian
banking sector.
One of the major reasons for NPAs in the banking sector is the ‘Direct
Lending System’ by the RBI under social banking motto of the
Government, under which scheduled commercial banks are required to
lend 40% of their total credit to priority sector. The banks who have
advanced to the priority sector and reached the target suffocated on
account of raising NPAs, since long. The priority sector NPAs have
registered higher growth both in percentage and in absolute terms year
after year. The present paper is an attempt to study the priority sector
advances by the public, private and foreign bank group-wise, target
achieved by them and a comparative study on priority and non-priority
sector NPAs over the period of 10 years between 2001-02 and 2010-11.
This paper also aims to find out the categories of priority sector
advances which contribute to the growth of total priority sector NPAs
during the period under study.

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 A study on Non-Performing Assets of Public and Private Sector Banks

Introduction
The economic reforms initiated by the then finance minister Dr.
Manmohan Singh would have been remained incomplete without the
overhaul of Indian banking sector. A strong banking sector is important
for flourishing economy. The banking industry has undergone a drastic
change after the first phase of economic liberalization in 1991 and
hence credit management. The primary function of banks is to lend
funds as loans to various sectors such as agriculture, industry, personal
and housing etc. and to receive deposits. Receiving deposits does not
involve any risk but extending loans does involve a significant degree of
risk. Thus progress on the structural-institutional aspects of the banks in
India has been much slower and is a cause for concern. The major
problem faced by banks is Non-Performing Assets. In the recent years
this problem as risen at a significant level. The banking giants in India
such as State Bank of India, Punjab National Bank, Canara Bank, Bank
of Baroda and many other are greatly affected due to this problem as the
number of loan defaulters are increasing day by day. These loan non-
repayments result into huge money loss to banks and to their investors’
of course. This report is based on the problems of NPA, consequences
and its possible remedies.

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 A study on Non-Performing Assets of Public and Private Sector Banks

Non Performing Assets

When a bank extends a loan to its customer then they look forward for
its repayment at a specified period of time with pre-determined rate of
interest. But when the borrower fails to repay the loan or reluctant to it
then it can be called as NPA or doomed to be. It is a type of asset to the
bank where bank does not get any return from it. According to the RBI
norms he bank also has to maintain the provision for the NPA’s or soon
to be NPA’s. This hampers the earning of the banking sector.
For the purpose of determining the NPA’s the apex bank of India i.e.,
The Reserve Bank of India has laid some norms and those are:
a) Interest and/or instalment of principal remains overdue for a period of
more than 90 days
In respect of a term loan,
b) The account remains ‘out of order’ for a period of more than 90 days,
in respect of an
Over Draft / Cash Credit.
c) The bill remains overdue for a period of more than 90 days in case of
bills purchased and discounted,
d) Interest and/or instalment of principal remains overdue for two
harvest seasons but for a period not exceeding two half years in the case
of an advance granted for agricultural purpose.
e) Any amount to be received remains overdue for a period of more than
90 days in respect of other accounts.

Advances against bank’s term deposits, NSCs, IVPs, KVPs, and Life
Policies will not be classified as NPAs if the outstanding balance is fully
covered by such securities. These advances come under the exempted
category for the purpose of income recognition and asset classification.

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 A study on Non-Performing Assets of Public and Private Sector Banks

The non performing Asset is classified in following manner:

Sub Standard Assets – If an asset has been non-performing for less
than 12 months.
Doubtful Assets – If an asset has been non-performing for more than
12 months.
Loss Assets – Assets where losses have been identified by the bank,
auditor or inspector and have not been fully written off.

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

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 A study on Non-Performing Assets of Public and Private Sector Banks

Targets on Priority Sector Advances

Before the nationalisation of banks, there was no target on the priority
sector. After nationalisation it was just emphasized that commercial
banks should increase their involvement in financing of priority sector.
By March 1979, banks were advised to raise the share of the priority
sectors in their aggregate advances to the level of 33.33 percent. Later,
it was increased to 40 percent at the end of 1985 and also sub-targets
were fixed.
Categories of Priority Sector
The scope and extent of priority sector advances has undergone a
significant change in the post-reform period with several new areas and
sector being brought under its preview. On the basis of the
recommendations made in September 2005 by the Internal Working
Group, set up in Reserve Bank to examine, review and recommend
changes, if any, in the existing policy on priority sector lending
including the segments constituting the priority sector, targets and sub-
targets, etc. and the comments/suggestions received thereon from banks,
financial institutions, public and the Indian
Banks’ Association (IBA), RBI has decided to include only those
sectors as part of the priority sector, which impact large segments of
population & the weaker sections, and which are employment intensive.
Accordingly the broad categories of priority sector for all scheduled
commercial banks as per Draft Guidelines of RBI (January 2007) on
lending to Priority Sector are as under:
1. Agriculture and Allied Activities - Finance to agriculture shall
include short, medium and long term loans given for agriculture and
allied activities.
2. Micro & Small Enterprises - The micro and small enterprises shall
include small road and water transport operators, small business,
professional & self-employed persons.
3. Micro Credit - Credit and other financial services and products of
amounts not exceeding Rs.50,000 per borrower.
4. Education Loans - Loans and advances granted to only individuals
up to Rs.10 lakh for studies in India and Rs.20 lakh for studies abroad.

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 A study on Non-Performing Assets of Public and Private Sector Banks

5. Housing Loans - Loans up to Rs.25 lakh to individuals for purchase/

construction of dwelling unit and loans given for repairs to the damaged
dwelling units of families up to Rs.1 lakh in rural and semi-urban areas
and up to Rs.2 lakh in urban and metropolitan areas.
6. Loans to Self Help Groups (SHG) / Joint Liability Groups
(JLGs) - Loans to SHGs / JLGs up to Rs. 50,000 would be considered
as Micro Credit and hence treated as priority Sector Advances.

Review of Literature
Kaveri (2001) studied the non-performing assets of various banks and
suggested various strategies to reduce the extent of NPAs. Prashanth k
Reddy (2002) in his study focuses on comparative study on Non-
Performing Assets in India in the Global context. Similarities and
dissimilarities, remedial measures and conclude the importance of a
sound understanding of the macroeconomic variables and systemic
issues pertaining to banks and the economy for solving the NPAs.

Dong He (2002) reviews the nature of Non-Performing Assets in the

Indian banking system and discusses the key design features that would
be important for the Assets Reconstruction Companies to play an
effective role in resolving such NPAs.

Kavitha. N (2012), emphasized on the assessment of nonperforming

assets on profitability its magnitude and impact. Credit of total advances
was in the form of doubtful assets in the past and has an adverse impact
on profitability of all Public Sector Banks affected at very large extent
when non-performing assets work with other banking and also affect
productivity and efficiency of the banking groups. The study observed
that there is increase in advances over the period of the study. However,
the decline in ratio of Non-performing Assets indicates improvement in
the assets quality of SBI groups, Nationalized Banks and Private Sector
Banks.

Debarsh and Sukanya Goyal (2012) emphasized on management of

non-performing assets in the perspective of the public sector banks in

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 A study on Non-Performing Assets of Public and Private Sector Banks

India under strict asset classification norms, use of latest technological

platform based on Core Banking Solution, recovery procedures and
other bank specific indicators in the context of stringent regulatory
framework of the RBI. Non-performing Asset is an important parameter
in the analysis of financial performance of a bank as it results in
decreasing margin and higher provisioning requirements for doubtful
debts. The reduction of non-performing asset is necessary to improve
profitability of banks.

Prashanth K. Reddy (2002) in his research paper on the topic, “A

comparative study of Nonperforming Assets in India in the Global
context” examined the similarities and dissimilarities, remedial
measures. Financial sector reform in India has progressed rapidly on
aspects like interest rate deregulation, reduction in reserve requirements,
barriers to entry, prudential norms and risk-based supervision. The
study reveals that the sheltering of weak institutions while liberalizing
operational rules of the game is making implementation of operational
changes difficult and ineffective. Changes required to tackle the NPA
problem would have to span the entire gamut of judiciary, polity and the
bureaucracy to be truly effective.

Amitabh Joshi (2003) conducted a survey on “Analysis of Non-

Performing Assets of IFCI Ltd”. The study found that Profitability and
Viability of Development Financial Institutions are directly affected by
quality and performance of advances. The basic element of Sound NPA
Management System is quick identification of Non-performing
advances their containment at minimum levels and ensuring that their
impingement on the financials is at low level. Excessive reliance on
Collaterals has led Institutions to long drawn litigations and hence it
should not be sole criteria for sanction.

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 A study on Non-Performing Assets of Public and Private Sector Banks

Objectives of study
The main objectives of this study are as follows:
1. To study the trends in Gross Advances and Gross NPAs by various
bank groups during the study period.
2. To analyse the trends of NPAs in Priority and Non priority sector.
3. To study the impact of NPAs in profitability, liquidity, and solvency
position of the banks.
4. To offer suitable strategies to avoid the Non Performing Assets in
priority sector.

Research Methodology
Data Collection
For the purpose of present study, NPAs of Scheduled Commercial
Banks (SCBs) i.e., public sector banks, old and new private sector banks
are listed in the Second Schedule of the Reserve Bank of India Act,
1934 have been considered. The data collected is secondary in nature.
The RBI publications like, “Report on Trend and Progress of Banking in
India”, “Annual Report of RBI”, and “Reports on Currency and
Finance” are the major sources for this study.

Data Analysis
The collected data has been processed through MS Excel and we used
here percentage method to calculate the percentage of Gross NPA over
the total advances given by the bank on that year. For better clearance
we have taken the data pf 10 years from the official site of RBI of all the
Public and Private Banks.

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 A study on Non-Performing Assets of Public and Private Sector Banks

Public Sector Banks

(as on 31 march 2019)

Bank Name Gross Advances Gross NPA Ratio%

ALLAHABAD BANK 163552.33 28704.78 17.55
ANDHRA BANK 178689.57 28973.97 16.21
BANK OF BARODA 501706.39 48232.77 9.61
BANK OF INDIA 382860.38 60661.12 15.84
BANK OF 93466.70 15324.49 16.40
MAHARASHTRA
INDIAN BANK 187896.06 13353.45 7.11

CANARA BANK 444215.55 39224.11 8.83

CENTRAL BANK OF 167728.91 32356.04 19.29
INDIA
CORPORATION BANK 135048.25 20723.68 15.35
DENA BANK 60598.25 12767.94 21.07
Table 1.0
amt. In crores
Ratio = Gross NPA/Gross Advance

As we can see above in the table the NPA’s have affected the gross
npa/gross advances ratio in the case of Dena Bank, Central Bank of
India, Allahabad Bank, Andhra Bank and Bank of Maharashtra
drastically. The banks such as Bank of Baroda, Indian Bank, and Canara
Bank are having very low ratio in comparison to their companions.

Private Sector Banks

(as on 31 Mach 2019)

Bank Name Gross Advances Gross NPA Ratio%

AXIS BANK LIMITED 511096.44 27146.45 5.31
BANDHAN BANK 40234.63 819.56 2.04
LIMITED
DCB BANK LIMITED 23858.69 439.48 1.84
FEDERAL BANK LTD 111829.27 3260.68 2.92
HDFC BANK LTD. 827334.92 11135.91 1.35
CATHOLIC SYRIAN 10905.48 530.62 4.87
BANK LTD
CITY UNION BANK 33065.25 977.05 2.95
LIMITED
Table 1.1
amt. In crores
Ratio = Gross NPA/Gross Advance

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 A study on Non-Performing Assets of Public and Private Sector Banks

As we can see on the above table we have lowest ratio of HDFC Bank
which is a good indicator that the bank is handling it’s NPA with
effective set of policies and instructions. The case is same with the DCB
Bank. Axis Bank has a highest ratio among its compani9ons which is
serious alarm and the bank has to act upon it.

Public and Private Sector Banks

(From 2009 till 2019)
Year Gross Advances Gross NPA Ratio%
Public Private Public Private Public Private
2009 1535601.92 575166.76 26803.79 16787.44 1.75 2.92
2010 1746400.25 579534.91 35470.31 17306.71 2.03 2.99
2011 2176966.71 723205.44 42907.39 17904.93 1.97 2.48
2012 2503374.10 871641.30 66795.10 18210.20 2.67 2.09
2013 3141285.89 1151246.34 101683.11 20381.67 3.24 1.77
2014 3607182.10 1360252.77 147447.43 24183.50 4.09 1.78
2015 3897549.00 1607339.36 204959.54 33690.35 5.26 2.10
2016 3911175.56 1972658.82 417987.78 55853.12 10.69 2.83
2017 3914442.25 2266720.69 506921.68 91914.65 12.95 4.05
2018 6141698.16 2725890.72 895601.30 125862.89 14.58 4.62
2019 6382460.85 3442346.66 739541.00 180872.43 11.59 5.25
amt. In crores Table 1.2

Ratio = Gross NPA/Gross Advance

As we can see on the above table, we have taken the data of 10 years
i.e., from 2009-2019. The Public banks here include all the nationalised
banks including the State Bank of India and It’s Associates. The Gross
advances of public banks are increasing per year at a variable rate and
that is probably because of increase in infrastructure facilities and
increase in disposable income of Indians and Indian companies.
The case is same with private sector banks and the difference is that
their Gross NPA is increasing at a slow pace except in the year 2017-
2018.
But going through the Gross NPA/Gross Advances Ratio wwe can
observe that the private banks are performing more competent than
public banks in controlling Non Performing Assets.

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 A study on Non-Performing Assets of Public and Private Sector Banks

Suggestions
1.The bank management may impart training to the officials in the art of
lending to the different categories of priority sector and they may
continue to encourage upgrading their skills in recovering the priority
sector advances.
2. Every bank may consider setting up specialized branches in all
potential centres equipped with adequately trained manpower and
infrastructure facilities.
3. Bank management may possess specialized credit rating agency to
finalize the borrowing capacity of the potential borrowers before
offering credit facility. The credit rating agency shall evaluate the
financial condition of the clients or appraising credit proposals
professionally and insisting on timely delivery of credit.
4. Continuous review of the end use of the funds sanctioned is required
to ascertain any embezzlement or diversion of funds. This process may
be done at least once in three months so that any account converting to
NPA can be properly identified and accounted for.
5. Steps need to be taken to recover the loans in time by adopting new
recovery mechanism. Creation of a separate NPAs recovery department
for each category of priority sector to recover the loans in time. The
officers responsible for lending to the priority sector and those officers
who are actively recovering the NPAs shall be recognized with
appropriate incentives.
6. Banks may enter into compromise proposals with the chronic
defaulters especially when adequate security is not available and
accounts have been bad due to extend factors.
7. Banks may have to identify and prepare a list of wilful defaulters at
regular intervals. The list of wilful defaulters is required to be presented
to SEBI and RBI, to prevent them to access to money market and capital
markets. RBI may permit the bankers to initiate legal measures
including legal actions, wherever required, and undertake a proactive
approach in change in management, where appropriate.

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 A study on Non-Performing Assets of Public and Private Sector Banks

Conclusion
The problem of NPAs is a live danger to the Indian Scheduled
Commercial Banks, because it destroys the healthy financial conditions
of them. The people would not keep trust on the banks any more if the
banks have higher NPAs. So, the problem of NPAs must be handled in
such a manner that would not ruin the financial conditions and affect the
image of the SCBs. The RBI and the Government of
India has taken number steps to reduce NPAs of the SCBs. The
remedial measures taken by Government of India, Reserve Bank of
India and Bank management in recent years, helped to reduce NPAs
below 3% of total advances (average 2.5%) as recommended by Shri M.
Narasimham. To improve the efficiency and profitability, the NPA has
to be reduced further. The bank management may speed up recovery of
good loans and bad loans through various modes to decelerate growth of
NPAs from the present level and also to prevent re-emergence of NPAs
over the minimum level.

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