PROJECT REPORT

ON

NON PERFORMING ASSETS

AND INDIAN BANKS
A Project Report submitted to Rama Devi Women’s University in partial fulfillment of
Bachelor’s Degree in Commerce

SUBMITED BY:

BABITA KUMARI BHALOTIA

ROLL No. – 71R0016020

UNDER THE GUIDANCE OF:

Dr. SABAT KUMAR DIGAL

ASSOCIATE PROFESSOR IN COMMERCE

Rama Devi Women’s University,Bhubaneswar

P.G DEPARTMENT OF COMMERCE,RAMA DEVI WOMEN’S

UNIVERSITY

BHOI NAGAR, BHUBANESWAR

2016-19
 PROJECT REPORT
ON

NON PERFORMING ASSETS AND

INDIAN BANKS
A Project Report submitted to Rama Devi Women’s University in partial fulfillment of
Bachelor’s Degree in Commerce

SUBMITED BY:

BABITA KUMARI BHALOTIA

ROLL No. – 71R0016020

UNDER THE GUIDANCE OF:

Dr. SABAT KUMAR DIGAL

ASSOCIATE PROFESSOR IN COMMERCE

Rama Devi Women’s University,Bhubaneswar

P.G DEPARTMENT OF COMMERCE,RAMA DEVI WOMEN’S

UNIVERSITY

BHOI NAGAR, BHUBANESWAR

2016-19
 DECLARATION

I Babita Kumari Bhalotia bearing the Roll. No- 71R0016020

student of B.Com +3 3rd Year Commerce undertake to say that thr project titled
“Non Performing Assets and Indian Banks”is a bonafied work done by me
under the guidance of Dr. Sabat Kumar Digal.No part of the project has been
copied by me.

Babita Kumari Bhalotia

Roll No.- 71R0016020

+3 3rd Year Commerce

P.G. Department Of Commerce
Rama Devi Women’s University

I
 CERTIFICATE

This is to certify that Miss Babita Kumari Bhalotia bearing Roll.

No.- 71R0016020 has prepared the project titled “Non Performing Assets and
Indian Banks” under my guidance.

To the best of my knowledge and belief, no part of the project has been
submitted to any other institutions or universities for award of any degree.

Dr. Sabat Kumar Digal

Assistant Proffessor

P.G. Department of Commerce

Rama Devi Women’s University

Bhubaneswar

II
 ACKNOWLEDGEMENT
I sincerely express my deep sense of gratitude to Dr. Sabat
Kumar Digal, Bhubaneswar for his extraordinary cooperation, invaluable
guidance and supervision. This dissertation paper work is the result of his
painstaking and generous attitude.

I owe and respectfully offer my thanks to my noble parents for

their constant moral support and affection which helped me to achieve success in
every sphere of life and without their kind devotion this dissertation paper work
would have been a sheer dream.

I am also thankful to my siblings and friends for their

constructive discussions, perseverance and encouragement during this research
work.

I sincerely acknowledge the efforts of all those who have

directly or indirectly helped me in completing my dissertation paper work
successfully. It is the kindness of these acknowledged persons that this dissertation
paper work sees the light of the day. I submit this dissertation paper of mine with
great humility and utmost regard bearing the sole responsibility for any errors.

Babita Kumari Bhalotia

UG 3rd Year Commerce

Roll No- 71R0016020

Rama Devi Women’s University

Bhubaneswar

III
 CONTENTS
Chapter Particulars Page
No.
Declaration I
Certificate II
Acknowledgement III
Abstracts IV
I Introduction 1-6
II Theoretical Framework 7-31

 Review of Literature 8
 Indian Banking System and 11
Structure
 Non Performing Assets in India 16

NPA and Its Classification 19

Asset Classification 21
 Factors contributing to Increase
22
in NPAs of Banks
 Impacts of NPAs 27
 Non Performing Asset Recovery
28
Mechanism
III Data analysis and 32-47
Interpretation
 NPAs of India Over Last Five
Years 33
 India’s position in global NPA
Ratio 40
 Relationship between NPA &
Net Profit 43
 Recovery of NPAs by Banks 46

IV Conclusion 48-52
 Conclusion 49
 Suggestions 50

Reference V
 ABSTRACTS

A banking system is a group or network of institutions that provide

financial services for us. These institutions are responsible for operating a
payment system, providing loans, taking deposits, and helping with investments.

Banking in India, in the modern sense, originated in the last decade of

the 18th century. Among the first banks were the Bank of Hindustan, which was
established in 1770 and liquidated in 1829–32; and the General Bank of India,
established in 1786 but failed in 1791.

Money provided by the bank to entities for fulfilling their short term
requirements is known as Advances. The loan is a kind of debt while Advances
are credit facility granted to customers by banks.

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.

According to the Reserve Bank of India (RBI), the gross non-performing

assets in Indian banks, specifically in public sector banks, are valued at around Rs
400,000 crore (~US$61.5 billion), which represents 90% of the total NPA in India,
with private sector banks accounting for the remainder.

IV
Chapter I : Introduction
 INTRODUCTION
 OBJECTIVES OF THE STUDY
 RESEARCH METHODOLOGY

[1]
 INTRODUCTION
The Indian banking sector has been facing serious problems of raising Non-
Performing Assets (NPAs). The NPAs growth has a direct impact on profitability of
banks. Non- performing assets are one of the major concerns for scheduled
commercial banks in India. As for the recommendations of Narasimham
committee and Verma committee, some steps have been taken to solve the
problem of old NPAs in the balance sheets of the banks. It continues to be
expressed from every corner that there has rarely been any systematic evaluation
of the best way of tackling the problem. There seems to be no unanimity in the
proper policies to be followed in resolving this problem. 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. NPAs affect the liquidity and profitability, in
addition to posing threat on quality of asset and survival of banks. 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. It is necessary to trim down NPAs to improve the financial
health in the banking system. An attempt is made in this paper to understand
NPA, the status and trend of NPAs in Indian Scheduled commercial banks, The
factors contributing to NPAs, reasons for high impact of NPAs on Scheduled
commercial banks in India and recovery of NPAS through various channels.

The banking system in India comprises commercial and cooperative banks, of

which the former accounts for more than 90 per cent of banking system’s assets.
Besides a few foreign and Indian private banks, the commercial banks comprise
nationalized banks (majority equity holding is with the Government), the State
Bank of India (SBI) (majority equity holding being with the Reserve Bank of India)
and the associate banks of SBI (majority holding being with State Bank of India).
These banks, along with regional rural banks, constitute the public sector (state
owned) banking system in India. The banking industry has undergone a sea
change after the first phase of economic liberalization in 1991 and hence credit
management.

[2]
Asset quality was not prime concern in Indian banking sector till 1991, but was
mainly focused on performance objectives such as opening wide
networks/branches, development of rural areas, priority sector lending, higher
employment generation, etc. While the primary function of banks is to lend funds
as loans to various sectors such as agriculture, industry, personal loans, housing
loans etc., but in recent times the banks have become very cautious in extending
loans. The reason being mounting nonperforming assets (NPAs) and nowadays
these are one of the major concerns for banks in India.

Bankers are the custodians and distributors of the liquid capital of the country.
Therefore most important function of the banking system is to mobilize the
savings of the people by accepting deposits from the public. The banker becomes
the trustee of the surplus balances of the public. Deposit mobilization promotes
the economic prosperity by controlling the money circulation and canalizing for
development and productive purposes. In order to mobilize deposits, the
commercial banks undertake deposit mobilization through various deposit
schemes suited to the different sections of the people. The deposits along with
other sources of funds namely capital, reserves and borrowings, form the sources
of funds for the banks. The lending and investment activities of the bank are
based on the sources of funds.

The banks, in their books, have different kind of assets, such as cash in hand,
balances with other banks, investment, loans and advances, fixed assets and
other assets. The Non-Performing Asset (NPA) concept is restricted to loans,
advances and investments. As long as an asset generates the income expected
from it and does not disclose any unusual risk other than normal commercial risk,
it is treated as performing asset, and when it fails to generate the expected
income it becomes a “Non-Performing Asset”.

In other words, a loan asset becomes a Non Performing Asset (NPA) when it
ceases to generate income, i.e. interest, fees, commission or any other dues for
the bank for more than 90 days. A NPA is an advance where payment of interest
or repayment of installment on principal or both remains unpaid for a period of
two quarters or more and if they have become ‘past due’. An amount under any

[3]
of the credit facilities is to be treated as past due when it remain unpaid for 30
days beyond due date.

Non-Performing Assets are also called as Non-Performing Loans. It is made by a

bank or finance company on which repayments or interest payments are not
being made on time. A loan is an asset for a bank as the interest payments and
the repayment of the principal create a stream of cash flows. It is from the
interest payments that a bank makes its profits. Banks usually treat assets as non-
performing if they are not serviced for some time. If payments are late for a short
time, a loan is classified as past due and once a payment becomes really late
(usually 90 days), the loan is classified as non-performing. A high level of
nonperforming assets, compared to similar lenders, may be a sign of problems.
Narasimham Committee that mandated identification and reduction of NPAs to
be treated as a national priority because NPA direct toward credit risk that bank
faces and its efficiency in allocating resources. Profitability and earnings of banks
are affected due to NPA numbers.. NPAs stood at Rs 10,03,404 Crores of India as
st
of 31 June 2018.

The main aim of any person is the utilisation of money in the best manner since
India is the country where more than half of the population has problem pf
running the family in the most efficient manner. However Indian people faced
large number of problem till the development of full fledged banking sector. The
Indian banking sector came into the developing nature mostly after the 1991
government policy.The banking sector has really helped the Indian people to
utilize the single in the best manner as they want.

The banks not only accept the deposits of the people but also provide them credit
facility for their development.Indian banking sector play an important role in
developing the business and service sectors.But recently the banks are facing the
problem of credit risk. It is found that many general people and business people
borrow from the banks but due to some genuine or other reasons are not able to

[4]
repay back is known as non-performing assets. Many banks are facing the
problem of NPA which hampers the business of banks. Due to NPAs the income of
the bank is reduced amd the banks have to make the large number of provisions
that would curtail the profit of the banks and due to that the financial
performance of banks would show good results.

The main aim behind making this report is to know how the rising in non-
performing assets affecting the Indian economy. My study is also focusing on
existing system in India to solve the problem of NPAs and comparative analysis to
understand which bank is playing what role with concerned to NPAs.Thus, the
study would help thr decision maker to understand the financial performance and
growth of the concerned banks as compared to the NPAs.

OBJECTIVES OF THE STUDY

i. To know the NPA position on quarterly basis from 2017-18

ii. To analyze the bank-wise NPAs and NPA ratio of 2018 and the increment in
NPAs in two years upto June 2018

iii. To find out the NPA figures of different private and public sector banks over
last five years.

iv. To explore India's position of acquiring NPA across the globe.

v. To understand the recovery mechanism of different banks.

[5]
RESEARCH METHODOLOGY
This research study is descrpitive in nature. This paper aims to explore the NPA
position,NPA ratio of different public and private sector banks. The study has
been focused on the quarterly results of banks from 2016-2018 to get idea about
the increments in NPA of banks in India. The bank wise NPA data has been studied
for the year 2018 to know the current situation of banking sector. The impact of
Gross NPA on net profits of different banks banks has been analysed for the year
2008-2018.The data for this study has been used from secondary sources such as
RBI's circulars and reports, newspapers ,journals, articles etc.

The statistical tools such as tables , bar diagrams and graphs, ratios and
percentages and Correlation have been used for this study.

The paper “Non-Performing Assets In Indian Banking Sector”

consists of seven chapters. The first chapter provides an introduction of the
study and explains about the objectives of the study and the research
methodology used in this project.

The second chapter includes the review of literature which explains different
studies conducted relating to the non-performing assets and their findings.

The third chapter provides a brief knowledge about the Indian banking
system and the banking structure existing in the country.

The fourth chapter gives information regarding the Non-performing assets in

India, the classification of NPA accounts and various types of assets.

The fifth chapter explains about the factors contributing to the rise in NPA of
banks and the impact of rise in NPA on banks and business. It also provides
information regarding the recovery mechanism of NPA existing in the country.

The sixth chapter provides the data regarding the Gross NPAs and NPA ratio
of different banks. The chapter explains about the trends taking place in the
banking sector regarding the profits and the NPA for different years.

The seventh chapter concludes the project and provides suggestions

regarding the measures to be taken to reduce NPAs.

[6]
Chapter II: Theoritical Framework

 REVIEW OF LITERATURE
 INDIAN BANKING SYSTEM AND STRUCTURE
 NON PERFOTMING ASSETS IN INDIA
 FACTORS CONTRIBUTING TO INCREASE IN
NPAs
 IMPACTS OF NPAs
 NON PERFORMING ASSET RECOVERY SYSTEM

[7]
REVIEW OF LITERATURE

Many published articles are available in the area of non-performing assets and a
large number of researchers have studied the issue of NPA in banking industry. A
review of the relevant literature has been described.

Kumar (2013) in his study on A Comparative study of NPA of Old Private Sector
Banks and Foreign Banks has said that Non-performing Assets (NPAs) have
become a nuisance and headache for the Indian banking sector for the past
several years. One of the major issues challenging the performance of commercial
banks in the late 90s adversely affecting was the accumulation of huge non-
performing assets (NPAs).

Selvarajan & Vadivalagan (2013) in A Study on Management of Non-Performing

Assets in Priority Sector reference to Indian Bank and Public Sector Banks (PSBs)
find that the growth of Indian Bank’s lending to Priority sector is more than that
of the Public Sector Banks as a whole. Indian Bank has slippages in controlling of
NPAs in the early years of the decade.

Singh (2013) in his paper entitled Recovery of NPAs in Indian commercial banks
says that the origin of the problem of burgeoning NPA’s lies in the system of
credit risk management by the banks. Banks are required to have adequate
preventive measures in fixing pre- sanctioning appraisal responsibility and an
effective post-disbursement supervision. Banks should continuously monitor
loans to identify accounts that have potential to become non- performing.

Gupta (2012) in her study A Comparative Study of Non-Performing Assets of SBI &
Associates & Other Public Sector Banks had concluded that each bank should
have its own independence credit rating agency which should evaluate the
financial capacity of the borrower before credit facility and credit rating agencies
should regularly evaluate the financial condition of the clients.

Rai (2012) in her study on Study on performance of NPAs of Indian commercial

banks find out that corporate borrowers even after defaulting continuously never

[8]
had the fear of bank taking action to recover their dues. This is because there was
no legal framework to safeguard the real interest of banks.

Chatterjee C., Mukherjee J. and Das (2012) in their study on Management of non-
performing assets - a current scenario has concluded that banks should find out
the original reasons/purposes of the loan required by the borrower. Proper
identification of the guarantor should be checked by the bank including scrutiny
of his/her wealth.

Kaur K. and Singh B. (2011) in their study on Non-performing assets of public and
private sector banks (a comparative study) studied that NPAs are considered as an
important parameter to judge the performance and financial health of banks. The
level of NPAs is one of the drivers of financial stability and growth of the banking
sector.

Prasad G.V.B. and Veena (2011) in their study on NPAs Reduction Strategies for
Commercial Banks in India stated that the NPAs do not generate interest income
for banks but at the same time banks are required to provide provisions for NPAs
from their current profits, thus NPAs have destructive impact on the return on
assets in the following ways.

Chaudhary K. and Sharma M. (2011) in their research stated that An efficient

management information system should be developed. The bank staff involved in
sanctioning the advances should be trained about the proper documentation and
charge of securities and motivated to take measures in preventing advances
turning into NPA.

Karunakar (2008), in his study Are non - Performing Assets Gloomy or Greedy
from Indian Perspective, has highlighted problem of losses and lower profitability
of Non- Performing Assets (NPA) and liability mismatch in Banks and financial
sector depend on how various risks are managed in their business. The lasting
solution to the problem of NPAs can be achieved only with proper credit
assessment and risk management mechanism.

Bhatia (2007) in his research paper explores that NPAs are considered as an
important parameter to judge the performance and financial health of banks. The

[9]
level of NPAs is one of the drivers of financial stability and growth of the banking
sector.

Kaur (2006) in her thesis titled Credit management and problem of NPAs in Public
Sector Banks, suggested that for effective handling of NPAs, there is an urgent
need for creating proper awareness about the adverse impact of NPAs on
profitability amongst bank staff, particularly the field functionaries. Bankers
should have frequent interactions and meeting with the borrowers for creating
better understanding and mutual trust.

Balasubramaniam C.S. (2001) highlighted the level of NPAs is high with all banks
currently and the banks would be expected to bring down their NPA. This can be
achieved by good credit appraisal procedures, effective internal control systems
along with their efforts to improve asset quality in their balance sheets.

High Non-Performing assets is one of the many problem created by lending to

priority sectors along with the problems like low profitability, high transaction
cost etc, Uppal (2009) .

Despite the significance of agriculture in contribution to economy, appropriate

credit system has not developed in this connection and the existing system is
plagued with increasing NPAs, Baijal (2015) .

Goyal, Agrawal and Agrawal (2015) concluded that priority sector lending is a
major contributor to NPAs in public and private sector banks.These studies
indicate that there is a significant contribution of priority sector lending towards
the NPAs in public sectors banks.

In relation to the non-priority sector, there is also a significant relation between

both priority and non-priority sector NPAs in contributing to the total NPAs in
public sector banks, Nagarajan, Sathyanarayan & Ali (2014).

[10]
INDIAN BANKING SYSTEM
A Bank is an institution which accepts deposits from the general public and
extends loans to the households, the firms and the government. Banks are those
institutions which operate in money. Thus, they are money traders, with the
process of development functions of banks are also increasing and diversifying
now, the banks are not nearly the traders of money, they also create credit. Their
activities are increasing and diversifying. Hence it is very difficult to give a
universally acceptable definition of bank. "Banking business" means the business
of receiving money on current or deposit account, paying and collecting cheques
drawn by or paid in by customers, the making of advances to customers, and
includes such other business as the Authority may prescribe for the purposes of
this Act.

Indian Banking Structure

The structure of Indian banking system that developed during the
preindependence period was without any purposive control and direction. There
were no comprehensive banking laws except the Bank Charter Act 1876 which
regulated the three presiding bank and the Indian Companies Act 1913 provided
some safe guards against bank failures.

[11]
 Fig 1: INDIAN BANKING STRUCTURE

RBI

COMMERCIAL CO-OPERATIVE DEVELOPMENT BANKS

BANKS BANKS

EXIM
SBI And Group State

Nationalised Banks CENTRAL

INDUSTRIAL

RRBs
Primary Agricultural

Private Banks
Housing

Foreign

Indian
[12]
Reserve Bank of India:
The apex or central bank of India is the RBI aka Reserve Bank of India. RBI was
established on 1st April, 1935 on the recommendation of Young Hilton
Committee. RBI is regulated as per the RBI Act, 1934. RBI was later nationalized
on 1st January, 1949. RBI acts as a banker to both State and Central Government.
It also acts as a lender of last resort to other Banks in India. RBI is also responsible
for making the monetary policy. Another important function of RBI is to issue
currency and maintain its circulation in India. Power of regulating foreign reserves
is also vested with RBI.

As seen in the above diagram, banks which are regulated by RBI can be broadly
classified into three categories:-

i.Commercial Banks

ii.Co-operative Banks

iii.Development Banks

Commercial Banks:

Commercial Banks are financial intermediaries that accept deposits from

customers for the purpose of lending. Commercial Banks are sometimes also
known as Business Banks. Commercial Banks include:-

I. Public Sector Banks:

Banks in which the government has the majority stakes are called Public Sector
Banks. These Include
 
SBI and its 5 Associate Banks

19 Nationalized Banks – Banks that were earlier private but were later brought under the
control of govt.
 
1 Other Public Sector Bank i.e. IDBI

[13]
II.Private Sector Banks:

Banks in which individuals have the majority stakes are called Private Sector
Banks. These include
 Indian Banks: Example ICICI, HDFC, Axis Bank, etc.
 Foreign Banks:


Foreign Banks mean multi-countries bank. In case of Indian foreign banks are such
banks which open its branch office in India and their head office are outside of
India. HSBC Bank, City Bank, Standard Chartered Bank , Bank of Tokyo, Bank of
America are the examples of Foreign Banks working in India. These banks are
mainly concerned with financing foreign trade.Following are the various functions
of foreign banks :-
⦁ Remitting money from one country to another country,
⦁ Discounting of foreign bills,
⦁ Buying and Selling Gold and Silver, and
⦁ Helping Import and Export Trade

iii.Regional Rural Banks:

Banks that are specially designed to cater to the credit needs of the rural and
weaker sections of the society are called Regional Rural Banks. They aim to bring a
large strata of unbanked population of India under the ambit of Banking Sector.

Co-operative Banks:

When a group of people belonging to same locality, or a professional community

enters into the business of banking, they form Co-operative Banks. Usually these
people share common interests and goals. The members of the co-operative
banks are the owners, as well as, the customers of the Bank. These include

1. Primary Agricultural Societies: These operate at the village level.

2. Central Co-operative Societies: These operate at district level and manage
various primary societies.
3. State Co-operative Societies: These operate at state level and manage
various central co-operative societies.

[14]
Development Banks:

These banks are special financial intermediaries that provide short and long term
loans for the sole purpose of promoting development in the country. They
provide finance to both public and private sector. These include

5 Agricultural Development Banks: These banks aims for the agricultural

development. So it provides finances to the rural people, agricultural labourers,
farmers, etc. Example : National Bank for Agriculture and Rural Development
(NABARD)
6 Industrial Development Banks: Industrial / Development banks collect cash by
issuing shares & debenturesand providing long-term loans to industries. The main
objective of these banks is to provide long-term loans for expansion and
modernisation of industries.
In India such banks are established on a large scale after independence.
Example SIDBI, IFCI, IDBI, etc.

7 Export -Import Development Banks: Example Export Import Bank of India

(EXIM)
8 Housing Development Banks: Example National Housing Bank (NHB)

[15]
NON-PERFORMING ASSETS IN INDIA
Assets mean valuable resources or properties owned by an organization. The
organization utilized this assets in an efficient manner to their full capacity to
attain the main goals of the organization i.e. income yield, improving productivity
and profitability.

Optimizing the performance of assets is the most important part of overall asset
management. In order to assess the performance of any organization, the
efficiency of its assets should be analysed. The focus has shifted from nearly an
asset management to asset-liability management (ALM) in order to achieve the
optimum efficiency of the organization.

For the banking sector, efficient management of its assets is of principal

importance because banks are the custodians of public funds and they lend other
people‟s money. To protect the interest of the public as well as the banks itself,
deliberate efforts are needed for efficient asset management. If the assets and
liabilities of the banks are not managed in well manner, it can cause a serious
problem for bank as well as for the society as a whole. In order to increase
profitability of the banks, serious efforts are required for managing the assets and
liabilities of the banks. If the assets are not managed in an appropriate manner,
they turned to non-performing state. Such assets are generally termed as 'Non-
Performing Assets'. In the field of bank, non-performing assets include non-
performing cash and bank balances, non-performing loans and advances,interest
on which is not realizable. If the amount of such non-performing assets increases,
it can cause serious problem for the bank. In the current age most of the banks
are facing the problem of non-performing assets. It has become a serious concern
for the bankers. The alarming situation of non-performing assets is an issue of
concern not only to the bank management but also to the authorities regulating
the working of the banks and to the policy makers at the national level

[16]
The term ‘Non-Performing Assets’ (NPA)

In human life, sickness, bankruptcy and death are not welcome, but they do
occur. So is the case with industrial or agricultural units, which fall sick, go into
liquidation and die much against the wishes of all concerned. Realities cannot be
escaped; it is necessary to face them. In the context of NPA's, the situation is no
different. In the current age the term 'non-performing assets' is the highly
discussed issue in the banking and financial sector. All the management thinkers,
policy makers and strategists are discussing this issue on a high scale. But actually
the non-performing asset is not a new concept. It was in existence in olden days
also without having a proper coinage of the term. A non-performing asset in the
banking sector was termed as an asset not contributing to the income of the
bank. In other words it is a 'zero-yielding asset'. The zero-yielding assets include
surplus cash and banker's balance held over the norms, amount lying in suspense
account, investments in shares or debentures of companies not yielding any
dividend or interest, advances where interest is not realized and even the
principal amount is difficult to recover.

In Indian banking sector also the concept of NPA is not new. In olden days the
assets were classified into eight categories as follows:

a) Satisfactory

b) Irregular

c) Sick-viable under nursing

d) Sick-non-viable/sticky

e) Advances recalled

f) Suit filed accounts

g) Decreed debts

h) Debts classified by the banks as bad/doubtful

[17]
 Out of these eight categories last four categories were deemed to be
nonperforming loans. It is interesting to note that this classification was left to the
discretion of each bank and there was no objective attempt to segregate bad-
loans from good loans.

In the year 1991, The Narasimham Committee on Financial Sector Reforms (CFSR)
and in the year 1998, The Narasimham Committee on Banking Sector Reforms
(CBSR) focused on this zero- yielding assets. The committee created various
norms for the zero-yielding assets and the new term “Non-Performing Assets”
was coined by the committee. The term “Non-Performing Assets” is now widely
used in the banking sector. It has become a burning issue of the modern age of
the banking industry.

The term non-performing assets can be defined both in the wider and the narrow
sense. While in the narrower sense, it includes only non-earning credit portfolio,
in the wider sense it may include also the volume of unutilized cash balances and
unutilized or underutilized physical assets like building and premises. In the wider
sense it may also include non-performing human resources-a large volume of
work force not effectively utilized. This is the generalized definition of the non-
performing assets but the present research is focused on the norms developed by
RBI on the basis of recommendations given by The Narasimham Committee.

In order to quantify NPA problem, The Narasimham Committee, 1991 made it

mandatory on the part of the banks to publish annually the magnitude of NPAs.
According to The Narasimham Committee, 1991 NPAs are those categories of
assets (advances, bills discounted, overdraft, cash credits etc…….) for which any
amount remains due for a period of 180 days

[18]
NPA and Its Classification
A non-performing asset, in a narrow sense, may be defined as an asset which
does not directly contribute to the corporate profits or yield any positive returns.
This may be appropriate when applied to loans and advances. However, there are
other assets such as cash balances held which are certainly require for business
operations but do not yield any direct return. Although banks cannot completely
do away with such nonperforming assets from their books, they have to manage
to keep them at a minimum possible level to maximize profits. The term non-
performing asset has been defined by several experts, SARFAESI Act and RBI on
the basis of recommendation of Narasimham Committee.
⦁ SARFEASI Act, 2002 defined NPA as “an asset or account of borrower, which has been classified by a bank or financial institutions as sub-standard, doubtful or loss assets in accordance with the direction issued the Reserve Bank of India”.

⦁As per RBI guidelines advances are classified into performing and nonperforming advances (NPAs). NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI.

An asset, including a leased asset, becomes nonperforming when it ceases to generate

income for the Bank. An NPA is a loan or an advance where:

I.Interest and/or installment of principal remains overdue for a period of more than 90
days in respect of a term loan.

II.The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC).

III. The bill remains overdue for a period of more than 90 days in case of bills purchased
and discounted.

IV.A loan granted for short duration crops will be treated as an NPA if the installments
of principal or interest thereon remain overdue for two crop seasons.

V.A loan granted for long duration crops will be treated as an NPA if the installments
of principal or interest thereon remain overdue for one crop season.

The Bank classifies an account as an NPA only if the interest imposed during any quarter is
not fully repaid within 90 days from the end of the relevant quarter. This is a key to

[19]
the stability of the banking sector. There should be no hesitation in stating that Indian
banks have done a remarkable job in containment of non-performing loans (NPL)
considering the overhang issues and overall difficult environment.

In fact, recovery management is also linked to the banks‟ interest margins. The cost
and recovery management supported by enabling legal framework hold the key to
future health and competitiveness of the banks. No doubt, improving recovery
management in India is an area requiring expeditious and effective actions in legal,
institutional and judicial processes. In 2001 the norms of recognizing the NPA were
somewhat liberal but in 2004 the RBI revised the norms and made them stricter. Below
given is the comparative presentation of RBI guidelines for NPAs recognition.

TABLE:- RBI Guidelines for NPAs Recognition

Loans & Advances Guidelines applicable Guidelines applicable from 31-

from 31-3-2001 3-2004

Term loan interest and/or

installment remain over due for
180 days 90 days
more than

Overdraft/credit account Remains out of order Remains out of order

Bill purchased and discounted

remains over due for more than
180 days 90 days

Agricultural loan interest and/or Two harvest seasons but Two harvest seasons but not
installments remains over due for not exceeding two and exceeding two and half years
half years

Other accounts-any amount to be

received remains over due for more
180 days 90 days
than
[20]
ASSET CLASSIFICATION
For the evaluation of bank performance, it is important to identify the quality of assets of the
bank. In the light of Narasimham Committee recommendations, the Reserve Bank of India has
redefined the non-performing assets and advised all commercial banks in public sector, old and
new private sector banks, development banks and the cooperative banks, to classify their
advances into four broad categories i.e. Standard, Substandard, Doubtful and Loss assets. The
standard assets are treated as performing assets and the remaining three
categories are treated as non-performing assets.

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

 Sub-standard Assets

 Doubtful Assets

 Loss Assets

Sub-standard Assets

With effect from 31 March 2005, a sub-standard asset would be one, which has remained NPA for
a period less than or equal to 12 months. In such cases, the current net worth of the borrower/
guarantor or the current market value of the security charged is not enough to ensure recovery of
the dues to the banks in full. In other words, 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.

Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in
the sub-standard category for a period of 12 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as sub-standard, with the added
characteristic that the weaknesses make collection or liquidation in full, – on the basis of
currently known facts, conditions and values – highly questionable and improbable.

Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors
or the RBI inspection but the amount has not been written off wholly. In other words, such an
asset is considered uncollectible and of such little value that its continuance as a bankable
asset is not warranted although there may be some salvage or recovery value.
[21]
Factors Contributing to Increase in Non-
Performing Assets of Banks
The banking sector has been facing the severe problems of the rising NPAs. But
the problem of NPAs is more in public sector banks when compared to private
sector banks and foreign banks, the NPAs in PSB are increasing due to external as
well as internal factors.

External Factors

a. Ineffective recovery tribunal

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

b. Willful Defaults

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

c. Natural calamities

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

[22]
d. Industrial sickness

Inappropriate project handling , ineffective management , lack of adequate

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

e. Lack of demand

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

f. Change on Govt. policies

With every new govt. banking sector gets new policies for its operation, so it has
to cope with the changing principles and policies for the regulation of the rising of
NPAs. For example, the fallout of handloom sector is continuing as most of the
weavers Co-operative societies have become defunct largely due to withdrawal of
state patronage. The rehabilitation plan worked out by the Central government to
renew the handloom sector has not yet been implemented, so the over dues due
to the handloom sectors are becoming NPAs.

Internal Factors
a. Defective Lending process

There are three cardinal principles of bank lending that have been followed by the
commercial banks, that is, Principles of safety, Principle of liquidity, Principles of
profitability. Principles of safety mean that the borrower is in a position to pay
back the loan, including both principal and interest. The refund of loan depends
upon the borrowers, Capacity to pay and Willingness to pay.

[23]
Capacity to pay depends upon, Tangible assets, Success in business. Willingness to
pay depends on, Character, Honest, Reputation of borrower. The banker should,
therefore take utmost care in ensuring that the enterprise or business for which a
loan is sought is a sound one and the borrower is competent of carrying it out
successfully, he should be a person of integrity and good character.

b. Inappropriate technology

Due to improper technology and management information system, market driven

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

c. Improper SWOT analysis

The inappropriate strength, weakness, opportunity and threat analysis is another

reason for increase in NPAs. While providing unsecured advances the banks
depend more on the honesty, integrity, and financial soundness and credit
worthiness of the borrower, so, banks should consider the borrowers own capital
investment and bank should collect credit information of the borrowers from, a.
Bankers b. Enquiry from market/segment of trade, industry, business. c. From
external credit rating agencies.

Banker should examine the balance sheet which shows the true picture of
business will be revealed on analysis of profit/loss a/c and balance sheet. When
bankers give loan, he should examine the purpose of the loan. To make sure
safety and liquidity, banks should grant loan for productive purpose only. Bank
should examine the profitability, viability, long term acceptability of the project
while financing.

d. Poor credit appraisal system

Deprived credit appraisal is an additional factor for the increase in NPAs, due to
poor credit appraisal the bank gives advances to those who are not able to repay
it back. They should use better credit appraisal to reduce the NPAs.

[24]
e. Managerial deficiencies

The banker should always select the borrower very cautiously and should take
tangible assets as security to safe guard its interests. When accepting securities,
banks should consider, the Marketability, Acceptability, Safety, Transferability etc.
The banker should follow the principle of diversification of risk based on the
famous maxim “do not keep all the eggs in one basket”, which means that the
banker should not grant advances to a few big farms only or to concentrate them
in few industries or in a few cities. If a latest big customer meets misfortune or
certain traders or industries affected adversely, the overall position of the bank
will not be affected.

f. Absence of regular industrial visit

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

The growth and proliferation in the activities of the bank has led to ever-
increasing non-performing assets that have mounted to a huge amount during
the last decade or so. The quantum of NPAs has been calculated and put at
different figures mainly due to absence of correct statistics and the method on
the basis adopted for calculating the percentage of NPAs in relation to either the
total assets of the bank or the quantity of loan portfolio or on the basis of the
number of the accounts or the size of the outstanding advances.

For a large number of years, the banks have been taking credit in its books, on
basis of accrued interest income, even for the sum of periodic interest that was
not really paid by the borrower. This was done by raising debit in suspense
account and crediting amount equivalent to the periodic interest in the loan
account of the borrower.

After objections from the auditors and income tax authority the banks altered
strategy and started giving extra loans to the defaulting borrowers for the

[25]
purpose of making payments to the bank for adjustment of the over dues, in
many cases the due dates of payments were postponed and even the entire
period of the loan was extended further again and again. As if to attach fire to the
fuel, ambitious programme for branch progress and extension of banking services
led to new recruitments, transfers, relocation and unhealthy competition
amongst offices of the same bank, but at the same time adequate facilities
available for training of the staff were not expanded.

In the anxiety to attain business targets the rules and procedures for prudent
banking were conveniently forgotten. Even the senior management setup
conveniently relaxed the rules for proper appraisal of the loan proposals, the
provisions of standard bank sanction letter, errors in execution of the loan
agreements, deeds of hypothecation and mortgages were more often overlooked
for compliance in the hurry for disbursement and attainment of targets for
purposes of building up record of achievements and reporting.

The study of about 900 top NPA accounts in 27 public sector banks that has been
tabulated from the available information revealed by RBI, that the following are
the important factors for units becoming sick/weak and constantly accounts
turning NPA in the order of prominence:

* Diversification of funds mostly for expansion \diversification \ modernization,

taking up of new projects, is the single most prominent reason. Besides being so,
this factor also has significant proportion of cases, when compared to other
factors.

* Internal factor failure of business (product), inefficient management,

inappropriate technology, product obsolescence.

* External factor comprising industrial recession, price escalation, power

shortage, accidents etc.,

* Other factors in order or prominence are Government Policies like changes in

Import \ Excise duties etc., willful default, fraud \ misappropriation, disputes etc.,
(No. 8 above – Internal factor) and lastly, deficiencies on the part of banks delays
in release of limits and delay in settlement of payments by government bodies.

[26]
IMPACT OF NPAs
Following are the impact of NPAs:-

 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.

How are businesses getting affected?

When an entrepreneur gets an order, he uses working capital from banks
which finances the raw material inventory and work-in-progress.

After production, delivery and collection of final payments, he pays interest on

that working capital and draws it down with the bank until the next order.

[27]
If the working capital cycle remains intact and accommodative, businesses are not
hit by a squeeze on financing. But with severe constraints on such finance, all
businesses are hit, irrespective of how good demand may be.

Public sector banks (PSBs), comprising 21 “nationalised banks” and six of the
State Bank of India group, account for almost 70 per cent of the assets and
liabilities of the system.

Non-Performing Assets Recovery Mechanism

Reduction in NPAs is the most important task for the banks. It is the burning issue
for the RBI as well as the Government of India to control the NPAs. The
government of India has taken certain steps for reducing NPAs of the Indian
banking sector. For this, the government has established a recovery mechanism
that involves the following steps.

I.Sending reminders and visiting the borrower’s business premises/residence:

The banks should take continuous follow – up for collecting the advances. The
bank should adopt the policy of “the older the advances, the tighter the follow –
up. The bank should send reminders to the borrowers on a periodical basis or the
bank should visit the premises of the business or the residence of the borrowers.
The bank should make it a point that the reminders are sent on time and without
fail. Frequent visits should be taken in the case of hardcore borrowers. The visit
should not be only the formality but it should bring some quality results.

II. Recovery camps:

In case of agricultural advances and advances given to seasonal businesses,

recovery camps should be organize during the peak season of the business or
during the harvest season in agriculture. In the recovery camp the banks can
recover maximum advances by offering some discount or certain other
relaxations. Such recovery camp should be properly planned to ensure maximum
advantage. It is advisable to take the help of outsiders such as local panchayat

[28]
officials, regional bank managers and similar other person. Such camps should be
widely publicized to ensure maximum recovery of loans.

III. Redesigning unpaid loan installments:

The bank should make an effort to redesign the loan repayment schedule for
those borrowers who are unable to repay the loans. The banks can reduce the
amount of installment and can extend the time for repayment of the loan. This
will convince the borrowers that they can repay the loan. The banks need to be
sympathetic to the sincere borrowers.

IV. One-time settlement/Compromise scheme:

The bank can start compromise schemes or one-time settlement schemes for the
recovery of loans. The RBI in consultation with the government of India has issued
the guidelines for such one-time settlement/compromise scheme for the dues of
commercial banks up to Rs. 10,00,000.

V. Rehabilitation of sick units:

The banks should identify sick units in SSI as well as in medium and large scale
industry. The banks should introduce rehabilitation package for such sick units
according to RBI guidelines. While introducing such rehabilitation package, the
bank should keep in mind that the causes of sickness should be genuine and the
project should be viable in terms of debt-service coverage ratio.

VI. Filing of civil suits or legal actions for recovery:

Where the compromise proposals given by the banks are not accepted by the
borrowers, it is better for the banks to file the civil suits instead of waiting for the
long time. The bank should start immediate actions against such borrowers
because there are chances of their willful default.

[29]
VII. Asset Reconstruction Companies (ARC):
The Committee on Banking Sector Reforms (CBSR) Report suggest remedies to
recover the NPAs as well their subsequent transfer as asset through Asset
Reconstruction Companies. The most effective way of removing NPAs from the
books of the weak banks would be to move these out to a separate agency which
will buy the loans and make it own efforts for their recovery. The ARC’s efforts are
profit oriented and its aim is to recover from the acquired assets more than the
price paid for it. These companies are to be registered with the RBI with a
minimum capital base of Rs.2,00,00,000.

VIII. Lok adalats:

Lok adalats are voluntary agencies created by state governments to assist in

matters of loan compromise. Lok adalats work out an acceptable compromise and
issue a recovery certificate which shortens the period of obtaining a court decree.
The government should make an effort to give wide publicity to the scheme,
besides educating the bankers and borrowers about Lok adalats. Lok adalats have
been set up for the recovery of dues in accounts falling in the doubtful and loss
categories with outstanding balance up to Rs.5,00,000 by way of compromise
settlements. Government has recently revised the monetary ceiling of cases to be
referred to Lok adalats organized by civil courts from Rs.5,00,000 to Rs.20,00,000.
RBI has issued guidelines to commercial banks advising them to make use of Lok
adalats.

IX. SARFAESI Act:

SARFAESI is the preferred route for finding solution to NPA. There was no legal
provision for facilitating securitization of financial asset of the bank and financial
institutions or power to take possession of securities and sell them. This resulted
in slow recovery of defaulting loan and mounting levels of NPA of bank and
financial institutions and a need was felt for keeping pace with changing
commercial practice and financial sector reforms. Keeping with this, an enabling
legislative and regulatory framework was put in place with the enactment of the
Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002. The primary objective of the act is reduction of NPA levels of

[30]
banks or financial institutions and unlocking value from distressed asset in the
banking and financial system.

X. Debt Recovery Tribunal (DRT):

The government of India passed the recovery of Debts due to Banks and Financial
Institutions (amendment) Act, 2000. This act has helped in strengthening the
functioning of DRTs. Provisions for placement of more than one recovery officer,
power to attach defendant’s property or asset before judgment, penal provision
for disobedience of tribunal’s order or for breach of any terms has provided
necessary strength to DRTs.

XI. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been introduced in the year 2001.
The aim is to provide a timely and transparent system for restructuring of the
corporate debt of Rs.20,00,00,000 and above with the banks and financial
institutions. The CDR process enables the companies to restructure their dues and
reduce the incidence of fresh NPAs. It reforms the loan servicing obligation of the
borrower and gives some concession in the interest rate.

XII. Revenue Recovery Act:

On the basis of recommendations of Talwar Committee, a simplified procedure

for recovery of commercial banks’ dues has been introduced. The
recommendations of the committee have been accepted by most of the states
but the results in terms of recovery are not encouraging.

XIII. Settlement of claim with Deposit Insurance and Credit Guarantee

Corporation of India (DICGC):

Bank should submit their proposals for outstanding loans with DICGC for
settlement of their claims and reduce their NPAs. DICGC will recover the
outstanding loans on behalf of the banks.

[31]
CHAPTER III: DATA ANALYSIS
AND INTERPRETATION

 NPA OF INDIAN BANKS OVER FIVE YEARS TILL

JUNE 2018
 INDIA’S POSITION IN GLOBAL NPA RATIO
 RELATIONSHIP BETWEEN NPA AND NET PROFIT
 RECOVERY OF NPA

[32]
NPA OF INDIAN BANKS OVER LAST
FIVE YEARS TILL JUNE 2018

Indian banks' gross non-performing assets (NPAs), or bad loans, stood at

Rs 10.25 lakh crore as on 31 March 2018. On quarter, the pile has grown by Rs 1.39
lakh crore or 16 percent from Rs 8.86 lakh crore as on 31 December 2017. This
chunk now accounts for 11.8 percent of the total loans given by the banking
industry. For financial year 2018, the total bad loans of these banks rose by a
whopping Rs 3.13 lakh crore.

Taking note of the alarming bad loans situation, the Narendra Modi-led
government, last year, announced a Rs 2.11 lakh crore bank recapitalisation plan
to pull out state-run banks from the mess. As much as 90 percent of the above-
mentioned sticky assets are on the books of government-owned banks. A break-up
of the NPAs shows that 21 public sector banks (PSBs) saw their bad loans pile grow
by Rs 1.19 lakh crore (or 15.4 percent) to Rs 8.97 lakh crore in the March 2018
quarter, compared to December 2017's figures, while that of 18 private banks
surged by Rs 19,446 crore or 17.9 percent to Rs 1.28 lakh crore in the March 2018
quarter from Rs 1.09 lakh crore in the December 2017 quarter. After making
provisions, the net bad loans of these banks stood at Rs 5.18 lakh crore in the
March 2018 quarter as against Rs 4.69 lakh crore in the December 2017 quarter.

Industry leader, the State Bank of India (SBI), which tops the NPA chart, has
logged an increase of Rs 24,286 crore in bad loans in the March quarter to Rs 2.23
lakh crore. The Nirav Modi scam-hit Punjab National Bank (PNB) has reported the
maximum rise of Rs 29,100 crore in gross NPAs to Rs 86,620 crore in the March
quarter. Barring the Bank of India (BoI) and Oriental Bank of Commerce (OBC),

[33]
most other PSBs' also recorded a rise in bad loans during the quarter. While Bank
of India's gross bad loans declined by Rs 1,920 crore in the March quarter, that of
OBC was down by Rs 1,417 crore.

Among private banks, the gross NPAs of ICICI Bank and Axis Bank have risen
significantly. ICICI Bank's bad loans pile grew by Rs 8,024 crore or 17.4 percent in
the March 2018 quarter to Rs 54,063 crore; Axis Bank's widened by Rs 9,248 crore
or 37 percent to Rs 34,249 crore in the March 2018 quarter from Rs 25,001 crore
during the December 2017 quarter.

These seven charts throw more light on the bad loans crisis that has engulfed
the nation's banking sector:

( https://infogram.com/bank-gross-npas-1h8j4x73gkxp6mv )

(fig 2)

[34]
 The Modi government has time and again blamed the previous UPA-regime
for the bad loan mess, saying NPAs are a legacy issue. It isn't clear whether the
government has grasped the gravity of the situation. Indeed, the government has
taken steps to address the bad loans mess like the NPA ordinance, giving the
central bank more power to direct banks to take action against loan defaulters, and
the passage of the Insolvency and Bankruptcy Code (IBC).

While these steps are welcome, they are unlikely to help solve the bad loans
problem in the immediate future. It will take years before banks can get rid of
NPAs, accumulated over the years on account of multiple factors.Over last five
years from December 2013 to June 2018 gross NPAs of Indian Banks increased from
Rs. 2,52,275 to 10,03,404 . Which is a drastic change in gross NPAs in our banking
structure,which is affecting our GDP. In 2013 the growth rate of Indian GDP is 6.6%
and in 2018 it is 7.3%, which is not that satisfactory when compared to the global
market. The lower rate of growth in GDP is clearly affected by incresing NPA % over
these years.

[35]
(I) PUBLIC SECTOR BANKS GROSS NPAs(Quarterly till
June 2018 )

( https://infogram.com/psbs-gross-npas-1hxj48nmeprd4vg )(fig 3)
From this above data we can see that from December 2013 the Gross NPAs
increased from Rs 2,28,244 to 8,74,071 in June 2018.
This is also showing from Dec 2013 to Sep 2015 the rate of increment is slower
than the rate of increment for the period Sep 2015 to June 2016. Because of
demonitisation the NPA is increased in a slower rate and reached its lower in
March 2017 among last 10 quarters. In recent data the NPA stands at Rs 8,74,071
in June 2018, decreasing from Rs 8,96,601 in March 2018.

[36]
(II) PRIVATE BANKS’ GROSS NPA (Quarterly data)

( https://infogram.com/private-banks-gross-npas-1hmr6gl8z8m94nl )
(fig 4)

Like previous diagram in this histogram we can see NPAs of private banks
stands at Rs 1,29,333 by increased from Rs 1,23,627 in March 2018 in a increasing
order from December 2013 from Rs 24,031

[37]
(III)PUBLIC SECTOR BANKS’ WITH
HIGHER GROSS NPA

(fig 5)

From this above chart we can see that SBI stands at number one in the higher
gross NPAs among other Public sector Banks with Rs. 2,12,840 followed By PNB
Rs.82,889,BOI Rs.60,604,IDBI Rs.57,807 and at bottom UCO Bank with Rs.29,786.

[38]
(IV)PRIVATE BANKS WITH HIGHER GROSS
NPS (in Rs. Crore)

(fig 6)

As on 2018 ICICI Banks is standing at the Top with Rs.53,465 followed by Axis
Bank Rs.32,662
HDFC RS.9,539
J &K Bank Rs. 6242
Kotak Mahindra Bank at Rs. 3,899 and ending with South Indian Bank at Rs.
2,552.

[39]
INDIA’S POSITION IN GLOBAL NPA
RATIO

The non-performing asset (NPA) issue facing banks has dominated headlines for
several months now and the fact that we are still unsure of whether or not all have
been recognised does cause some discomfort. In this context it is compelling to
see how the Indian banking system stands on a global yardstick.

This is important because NPAs have resulted due to several judgment calls made
in the past, which in hindsight were incorrect. Lending operations in the banking
system are linked with expectations of how the economy will behave. If the
economy is growing at a fast pace, it is assumed that the same will prevail in
future. The problem hence, is that there always seem to be progressive
expectations when the economy does well. This is where judgement gets blurred
and errors get into the system as credit evaluation goes awry.

(fig 7)

[40]
 This picture is showing the Position of India at Global level among other
th
country.Where we stand at 6 position with 9.98% of NPAs in our banks.
Business cycles

When business cycles are buoyant and interest rates low, companies go in for
big investments and banks are gung-ho as everything looks plausible. Growth in
bank credit averaged 19 per cent per annum between FY08 and FY12 when the
repo rate was first lowered from 7.75 per cent to 5 per cent before being increased
to 8.5 per cent by FY12.

During these phases, the interest cost also ceases to matter as it is assumed
that it is a small component of the cost and can be absorbed with the topline
growing rapidly. Corporate sales growth in those years averaged 15-20 per cent on
a recurring basis.

It is not surprising that bank credit during this period grew rapidly, by an
average annual rate of 19 per cent. It was then the economy was impacted by
various controversies in the natural resources sectors which, in particular, thwarted
investments and led to an increase in stalled projects as bureaucrats were not
willing to take decisions. Bank credit growth subsequently slowed and the average
growth rate came down to 11 per cent between FY13 and FY17.

This surrealism was hence shattered as the economy moved from a canter to a
trot (GDP growth also slid by around 1 per cent per annum for these two periods
with different base years), leaving banks holding the rotten eggs. This does provoke
a debate on whether or not we have brought about high growth by inflating
investment through erroneous lending.

In several countries that saw rapid growth — starting with the East Asian Tiger
economies in the 1980s and 1990s as well as China when it posted growth of over
10 per cent on a sustained basis on the back of an investment-driven model —
there was reason to believe that financial decisions were fogged by a misleading
futuristic windshield.

At 10 per cent, India is in the more ‘unsatisfactory’ league of nations with high
NPAs.

The ones which are more problematic are Greece, Italy, Portugal, Ireland and
Russia. Quite interestingly, the top four were part of the PIIGS group which
epitomised the euro crisis of 2010. Spain has moved away with a ratio of 4.5 per

[41]
cent, while the rest still struggle to rein them. One thing that stands out is that
some of the Latin American nations like Brazil and Argentina are doing much better
on this front while even Turkey, which has other challenges in terms of currency
and growth, has a low ratio of less than 3 per cent. India’s NPAs were also around 3
per cent when there were various camouflages available under corporate debt
restructuring.

However, ever since the RBI brought about the concept of asset quality
recognition in 2016, banks progressively revealed the same which has, in turn,
stressed the system. The very developed nations with large economies like the US,
the UK, Japan and Germany have sound banking systems with NPA ratios of less
than 2 per cent, while China scores well at 1.7 per cent.

The NPA issue does not just end with an adverse portfolio. As provisions have
been made on an accelerated recognition of the same, the profitability of banks
has been affected.

The return on assets at 0.33 per cent for Indian banks is comparable to those
of the very developed countries. However, this could lead to a misleading
conclusion that Indian banking system is on par with them.

Western banks operate on smaller interest rate spreads on much larger

balance sheets which lowers their return on assets. Similarly, a larger volume of
capital lowers the return on net worth. This means that if the interest rate spreads
were lowered by Indian banks then profitability at the present levels would not be
maintained. Therefore, in a way both deposit-holders as well as borrowers are
confronting unfavourable interest rate schedules.
The positive side

The good part of the story is that hopefully all the NPAs have been placed on
the table. And, the IBC (Insolvency and Bankruptcy Code) has seen the first big
resolution and there would be more to follow. This is critical because the recovery
rates in India have been very low at 15-20 per cent while the system needs to move
towards 50-75 per cent over a period of time.

Given the time-bound manner of resolution of the NPAs, there is hope that
there would the proverbial light at the end of a tunnel which has a fixed length. The
system may have to struggle for another year or so, but the 2019-20 fiscal could be
brighter.

[42]
RELATIONSHIP BETWEEN NPA AND NET PROFIT
Normally the profitability of the banking sector depends on recovery of loans on
time which are disbursed to the different sectors. The performance of banking sector
depends on how effectively you manage the non-performing assets. Except SBI and
Punjab National Bank all the banks are facing problems with respect to NPAs. It does
not indicate that the more NPAs the more profits for SBI but the largest bank of India is
able to receive more profits only because of its wide variety of financial services and
effective management of NPAs. But if NPAs continue in the same manner then even
large banks will also stumble like Lehman Brothers in USA which resulted in
International economic crisis.

The net profits of SBI in 2007 was Rs 4541.31 crores and it increased upto
Rs.9166.05 crores in 2010.It again reduced to Rs.7370.35 crores in 2011 and further
increased upto Rs 14104.98 crores in 2013 and decreased to Rs 10891.17 crores in
2014. It gained Rs.13101.57 crores in 2015 and again the profits reduced to Rs
9950.65 crores in 2016.

The net profits of Bank of India has risen from Rs.1125.95 crores in 2007 to
Rs.3009.41 crores in 2009 and then it reduced to rs.1738.56 crores in 2010.
Further it increased to Rs.2488.71 crores in 2011 and the profits increased upto
Rs.2732.65 crores in 2014. Again it declined to Rs. 1748.32 crores and there was
sharp decline in profits and was found to be negative i.e., Rs.-6334.98 crores in
2016.

The United Bank of India had profits of Rs.267.28 crores in 2007 which rose
to Rs.318.95 crores in 2008 and declined to Rs.184.71 crores in 2009.Then the
profits of the bank had a positive growth for three years 2010-2012.Further the
profits declined to almost half to Rs.391.90 crores in the year 2013 and the
profits were found to be negative in 2014 i.e., Rs. -1213.44 crores. The profits
were positive in 2015 i.e., Rs.255.99 crores and negative in 2016 i.e., Rs. -281.96
crores.

The profits of Indian Overseas Bank has been positive for the years 2007-
2014.It found to be negative for the years 2015 and 2016.

[43]
 The Punjab National Bank had experienced positive growth from the year
2007-2012.Then the profits of the bank reduced from Rs.4747.67 crores in the
year 2013 to Rs.3944.40 crores in 2016.

The Central Bank of India has positive growth in net profits from 2007-
2013 whereas it was found to be negative in 2014 i.e., R-1262.84 crores. The
profits rose in 2015 to Rs. 606.45 crores and again it was negative in 2016 i.e.,
rs. - 1117.67 crores.

Non-performing assets of seven banks

The gross NPA have been continuously increasing for all he banks for he
specified period. As the business operations of the bank increasing the amount
of NPAs have also increased. The Gross NPA of SBI has risen from Rs.9998 crores
in 2007 to Rs.98172.80 crores in 2016. It is observed that SBI has highest Gross
NPA as compared to other banks.

(fig 8)
Bank of India had zero Gross NPA from 2007 to 2010. The bank had NPA of
Rs.4811.55 crores in 2011 and it increased upto Rs. 49879.12 crores in 2016.

[44]
 United Bank of India, Bank of Baroda, Indian Overseas Bank, Punjab
National Bank and Central Bank India also have faced growth in the Gross NPA
in all the subsequent years from 2007-2016.
The Punjab National Bank also had higher NPAs followed by State Bank of
India

NPA of the banks went on increasing in all the years but a drastic raise was
observed in the year 2016. The percentage raise of NPA of the banks in the year
2016 as compared to 2015 were SBI – 73.07, BOI- 124.75, UBI- 44.53, BOB-149.18,
IOB-101.37, PNB- 117 and CBI- 91.36

[45]
RECOVERY OF NPA
In an indication of deteriorating management of non-performing assets
(NPAs), the rate of recovery of banks’ gross NPAs has been steadily declining for
the past 12 years and hit the lowest level of 20.8 per cent in 2016-17, according to
the latest data from the Reserve Bank of India (RBI). Recovery of written-off loans
through various channels, such as debt recovery tribunals (DRTs), has also been
falling year-on-year. While the loan recovery rate has been falling, the number of
cases being referred to the National Company Law Tribunal (NCLT) benches for
insolvency resolution has been correspondingly rising since the enactment of the
Insolvency and Bankruptcy Code (IBC) last year.

Recovery of banks’ NPAs remained poor, having declined to 20.8 per cent by
end-March 2017 from 61.8 per cent in 2009.. After peaking in 2009 and remaining
well above 40 per cent in the earlier years, the recovery rate has declined over the
years. Banks were able to recover higher amount through secured loans, term
loans and exposure to real estate.

During the 2015-17 period, the average recovery ratio of Indian banks was
26.4 per cent, with recovery by private sector banks at 41 per cent being much
higher than by public sector banks (PSBs) at 25.1 per cent. Banks continue to
pursue various recovery measures for NPAs as well as written-off loans. A higher
recovery rate indicates the ability of banks to prune their NPAs. During this two-
year period, banks and financial institutions recovered an average of around 10 per
cent through the existing legal recovery channels, including DRTs, the Securitisation
and Reconstruction of Financial Assets and Enforcement of Security Interest
(SARFAESI) Act, and Lok Adalats.

The recovery percentage through these three channels fell to 9.8 per cent in
2016-17, down from 10.3 per cent in 2015-16. Out of Rs 2.86 lakh crore worth of
bad loans being chased through DRTs, SARFAESI and Lok Adalats, banks were able
to recover Rs 28,000 crore worth of loans in 2016-17. In the previous financial year,
the banks and financial institutions could recover Rs 22,800 crore worth of bad
loans out of total Rs 2.21 lakh crore being chased through these legal channels.

[46]
 “The proceedings of the annual review of state-run banks by finance minister
Arun Jaitley on Tuesday highlighted the possible recovery of Rs 1.8 lakh crore in
bad loans through resolution mechanisms as well as from the insolvency and
bankruptcy code cases of some large borrowers with huge accumulated bad
loans.”

“We find NPAs are coming down… debtors are paying up because they
may have to face IBC proceedings otherwise,” Jaitley said.” From The
Telegraph

( https://www.telegraphindia.com/business/npa-recovery-on-track/cid/1670109 )
[47]
Chapter IV: CONCLUSION
 Conclusion
 Suggestions

[48]
CONCLUSION
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 but
still a lot needs to be done to curb this problem. The NPAs level of our banks is
still high as compared to the foreign banks. 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.

[49]
Suggestions for Reducing Non-Performing Assets
The non-performing asset is like termite which eats the whole financial system. If
this termite is not controlled, it will be dangerous for the financial system. The
government has taken several policy decisions and has prepared several
strategies to control the high rate of NPAs in the banking sector. But these steps
have not created desired effect on the rate of NPAs. Here are some suggestions
for reducing nonperforming assets. If these suggestions are implemented
effectively, they will be helpful for reducing NPAs with immediate effect.

I. Proper selection of borrower/activity:

When the borrower/activity is wrongly selected, it definitely results into NPAs. To

reduce this danger, the banks should take enough care in selection of the
borrower/activity. For this the bank should perform an in-depth investigation
about the creditworthiness of the borrower. The bank must collect as much
information as possible. After making thorough analysis of this information, the
bank should take the decision whether to sanction the loan or not.

II. Regular post-sanction follow up:

Generally it happens that after sanctioning the loan, banks do not take any follow
up of the borrower. Lack of regular follow up makes the borrower careless in the
repayment of loans. And it results into default. To remove this danger, the bank
must take regular follow up of the borrower after sanctioning the loan. Follow up
taken at a regular interval will keep the borrower alert and the chances of default
will be reduced. Reporting to the top level management of the bank about the
repayment schedule of the borrower should be done regularly.

III. Establishment of a recovery cell:

The efforts made by the banks to recover the amount of loan are not enough. In
this situation the amounts of NPAs are continuously rising. The bank should form
a special recovery cell to recover the outstanding amount of loan. This recovery
cell is responsible to recover the outstanding loans. For this, the recovery cell is
empowered to take necessary steps to recover the outstanding loans.

[50]
IV. Publishing the name of defaulters in local news papers:

This can be an effective step for recovering the outstanding loans from the
defaulters. The banks should publish the names of such defaulters in the local
news papers with outstanding amounts. This will affect the dignity of such
defaulter and there are chances that they may repay the amount of loan. This will
be a helpful step for other banks also. By considering the names of defaulters,
other banks would not sanction loans to such defaulter.

V. Set up a group of auctioneers:

Generally the assets that are kept as security are auctioned to recover the
amount of default. But there are no bidders to purchase such moveable or
immovable property due to the fear of the defaulters. Because of this the bank
can not realize the full amount of default. In such case the bank should assign
such case to a special group of auctioneer that will find out an appropriate bidder
so that the full amount of default can be realized by selling the securitized
property held with the bank.

VI. Constant touch with persons trading with the borrower:

To know about the creditworthiness of the borrower and to obtain market report
in regard to his trade dealings and solvency, the bank should keep a touch with
the persons trading with the borrower. By this the bank can take immediate steps
as and when some negative information about the borrower is received from the
market.

VII. Setting up of credit investigation and information agency:

The banks should establish an agency which is assigned the duty to investigate
about the creditworthiness of the borrowers. The information obtained by such
agency should be easily accessible by all the bankers. This will be helpful in the
selection of borrowers. Before sanctioning the loan, such agency should be
contacted to obtain the information about the creditworthiness of the borrowers.
This will reduce the chances of wrong selection of borrower.

[51]
VIII. Legislative changes:
The government should pass some legislation in the direction of effective
recovery of outstanding loans. By passing the legislation, recovery tribunals,
recovery cell, lok-adalatas etc. should be given more authority and they should be
made autonomous institutions. If they have more power to recover the
outstanding loans, they can take immediate and effective steps for the recovery.
This kind of institutions will be helpful for the banks to make the legal recovery of
outstanding loans.

IX. Interest discounts for prompt repayments:

To reduce the NPAs, the bank should start some schemes under which the
defaulters are given a special interest discount if they make the prompt
repayment of the outstanding amount. This step may be helpful to recover the
outstanding amount from those defaulters who have sense of market credit.

X. Asset Reconstruction Fund:

The NPAs of weak banks may be transferred to state owned asset reconstruction
fund (ARF), managed by an independent private sector firms. The ARF will buy the
NPAs from the weak banks at a price it decides. Its objective will be to make
profits out of deals. It is just like business buying impaired loans, recovering them
and in the process, making profits.

[52]
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 http://www.thehansindia.com/posts/index/Civil-Services/2017-10-
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V
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VI