Npa (Non Performing Assets)

An Industry Oriented Dissertation Project On
NPA (NON-PERFORMING ASSETS) IN

BANKS
Submitted for the partial fulfilment of the requirement of the degree of
MASTER OF MANAGEMENT STUDIES

OF
UNIVERSITY OF MUMBAI
Submitted by
MR.SAURABH DIVEKAR
Roll No. 19
Specialization:-FINANCE
SASMIRA’S INSTITUTE OF MANAGEMENT STUDIES

AND RESEARCH, SASMIRA MARG, WORLI, MUMBAI
APRIL 2021
1
DECLARATION BY THE CANDIDATE
I hereby certify that the work which is being presented in this Industry Oriented Dissertation
Project entitled- N P A ” ( N O N - P E R F O RM I N G A S S E T S ) I N B A NK S ” in partial
fulfilment of the requirement for the award of the Degree of Master of Management
Studies, University of Mumbai and submitted to the Sasmira’s Institute of Management
Studies and Research, Worli, Mumbai, is an authentic record of my own work carried
out during a period from January 2021 till March 2021 under the guidance of PROF.
Rupali More, ( Head Academics ).
The matter presented in this project report has not been submitted by me for the award of any
other degree of this or any other Institute.
Wherever references have been made to intellectual properties of any individual / Institution /
Government / Private / Public Bodies / Universities, research paper, text books, reference books,
research monographs, archives of newspapers, corporate, individuals, business / Government
and any other source of intellectual properties viz., speeches, quotations, conference
proceedings, extracts from the website, working paper, seminal work et al, they have been
clearly indicated, duly acknowledged and included in the Bibliography.
Name of the Student: SAURABH DIVEKAR
Signature of the Student:
This is to certify that the above statement made by the candidates is correct to the best of our knowledge.
Signature of Guide: ___________
Name of Guide: Dr. Rupali More (Head Academics)
Signature of Co-Guide: _________
Name of Co-Guide: Dr. Satish Athawale
2
CERTIFICATE BY THE GUIDE
This is to certify that Mr. SAURABH SUNIL DIVEKAR of the two-year full- time.
Master's Degree Programme in Management Studies (MMS),Finance ,Roll No-19.
has carried out the work on the Industry Oriented Dissertation Project titled NPA (NON-
PERFORMING ASSETS) IN BANKS under my guidance in partial fulfilment of requirement
for the completion of MMS as prescribed by the University of Mumbai.
This Industry Oriented Dissertation Project Report is the record of authentic work carried out by
her during the period from January 2021 to March 2021.
Place: MUMBAI
Date:
Signature of Guide: : ____________________
Name of Guide: Dr. Rupali More (Head Academics)
Signature of Co-Guide: __________________
Name of Co-Guide: Dr. Satish Athawale
3
ACKNOWLEDGEMENT
“It is not possible to prepare a project report without the assistance &encouragement of
other people. This one is certainly no exception.”
On the very outset of this report, I would like to extend my sincere & heart felt obligation
towards all the personages who have helped me in this endeavor. Without their active guidance,
help, cooperation & encouragement, I would not have made headway in the project. I am
extremely thankful and pay my gratitude to my faculty Dr. Rupali More (Head Academics) for
her valuable guidance and support on completion of this project in its presently. I extend
my gratitude to SASMIRA’S INSTITUTE OF MANAGEMENT STUDIES AND
RESEARCH
for giving me this opportunity.
I also acknowledge with a deep sense of reverence, my gratitude towards my parents and
member of my family, who has always supported me morally as well as economically. At
last, but not least gratitude goes to all of my friends who directly or indirectly helped me to
complete this project report.
Any omission in this brief acknowledgement does not mean lack of gratitude.
Thanking You
SAURABH SUNIL DIVEKAR.
4
CONTENTS
Chapter Details Page No.
No.
Candidate’s Declaration ii
Certificate by the Guide ii
Acknowledgement Iv
Abstract / Executive Summary v
List of Abbreviations xii
List of Figures/ Illustrations xv
List of Tables xvi
List of Charts xviii
1 INTRODUCTION 9
1.1 OBJECTIVE OF THE STUDY 10
1.2 NEED OF THE STUDY. 11
1.3 LIMITATIONS OF THE STUDY 11
2 REVIEW OF LITRATURE 12
3 RESEARCH METHODOLOGY 15
3.1 RESEARCH DESIGN

3.2 SOURCE OF THE STUDY
4 INTRODUCTION TO BANKING IN INDIA 15
4.1 BANKING HISTORY IN INDIA 16
4.2 INDIAN BANKING INDUSTRY –GENERAL 18

STRUCTURE
5
4.3 INDIAN BANKING INDUSTRY – 19
CURRENT SCENARIO
4.4 RESERVE BANK OF INDIA (RBI) 20
5 NPA ASSETS OVERVIEW 21
5.1 CLASSIFICATION OF ASSETS 23-30
6 CAUSES OF NPA 30
7 IMPACT OF NON-PERFORMING ASSETS ON 35
THE OPERATIONS BANKS

7.1 EFFECTS OF HIGH NPA OF BANKS 37-38
8 COMPARATIVE ANALYSIS OF PVB AND PSB OF 39

NPA
9 DATA ANALYSIS AND INTERPRETATION 62 43-54
10 FINDINGS & SUGGESTIONS 54-55
11 COVID IMPACT ON NPA 57
12 CONLUSION 58
BIBILIOGRAPHY 60
6
EXECUTIVE SUMMARY
The banking sector plays an imperative role in the economic growth of a country. By way of
providing services, the banking sector becomes an integral part of the creation, processes of
allocation, trade and use in the economic system. Promote the flow of funds in an economy and
fuels economic growth. Therefore, efficiency and effectiveness of the banking system determines
the speed of progress of economy. Like any other commercial company, the competence of a bank
is evaluated based on the profitability and quality of the assets it possesses. In an evaluation of the
Indian banking industry during the pre-liberalization era, it has been observed that the banking
sector suffers several deficiencies that in turn lead to productivity reduction, deterioration of asset
quality and efficiency and increase cost structure due to technological backwardness, maintenance
of asset quality is a main concern for a bank, since it affects several performance indicators, that
is profitability, intermediation costs, liquidity, credibility, income generating capacity and general
operation of the banks. This reduction in asset quality results in accumulation of unprofitable assets
(NPA) that were mounted so high causing threat to the existence of the banking industry. NPAs
have far-reaching implications on the financial health of banks. This reduces the profitability of
banks to considerable period. In addition to that, it also involves the assignment of important
working group on the management, monitoring and recovery of funds linked to NPAs. The
Banking sector reforms in India during the post-liberalization period primarily aimed to improve
the efficiency of the banking sector by incorporating prudential rules for revenue recognition, asset
classification and reduction in the NPA level. The alarming level of the NPA has been recognized
as one of the main problems that requires structural changes and reform measures in the banking
sector during this period. For this purpose, from time to time many committees were established
to make proper suggestions to avoid this type of problem in the banking sector. The prominent
among them, the Narsimha Committee needs special mention. The committee was established, and
many prudent suggestions were made. Among the main suggestions and the recommendations that
banks follow today are gradual reduction of the statutory liquidity ratio (SLR) and the cash reserve
ratio, directed credit program, issuance of more banking licenses, autonomy to banks, withdrawal
of banks from the concept of nationalizations, facilitating the operations of foreign banks in India,
liberalization of the interest rate regime and structural issues of banks, etc. The reduction in SLR
and CRR requirements allow banks to lend more, as they must be less effective to meet the
mandatory requirement specified by the Reserve Bank of India.
7
The banking sector plays an imperative role in the economic growth of a country. By way of
providing services, the banking sector becomes an integral part of the creation, processes of
allocation, trade and use in the economic system. Promote the flow of funds in an economy and
fuels economic growth. Therefore, efficiency and effectiveness of the banking system determines
the speed of progress of economy. Like any other commercial company, the competence of a bank
is evaluated based on the profitability and quality of the assets it possesses. In an evaluation of the
Indian banking industry during the pre-liberalization era, it has been observed that the banking
sector suffers several deficiencies that in turn lead to productivity reduction, deterioration of asset
quality and efficiency and increase cost structure due to technological backwardness, maintenance
of asset quality is a main concern for a bank, since it affects several performance indicators, that
is profitability, intermediation costs, liquidity, credibility, income generating capacity and general
operation of the banks. This reduction in asset quality results in accumulation of unprofitable assets
(NPA) that were mounted so high causing threat to the existence of the banking industry. NPAs
have far-reaching implications on the financial health of banks. Banks are required to do provisions
in your financial statements to account for losses expected to arise of non-productive assets. This
reduces the profitability of banks to considerable period. In addition to that, it also involves the
assignment of important working group on the management, monitoring and recovery of funds
linked to NPAs. The Banking sector reforms in India during the post-liberalization period
primarily aimed to improve the efficiency of the banking sector by incorporating prudential rules
for revenue recognition, asset classification and reduction in the NPA level. The alarming level of
the NPA has been recognized as one of the main problems that requires structural changes and
reform measures in the banking sector during this period. The prominent among them, the
Narsimha Committee needs special mention. The committee was established, and many prudent
suggestions were made. Among the main suggestions and the recommendations that banks follow
today are gradual reduction of the statutory liquidity ratio (SLR) and the cash reserve ratio, directed
credit program, issuance of more banking licenses, autonomy to banks, withdrawal of banks from
the concept of nationalizations, facilitating the operations of foreign banks in India, liberalization
of the interest rate regime and structural issues of banks, etc.
CHAPTER 1 : INTRODUCTION
8
GENERAL INTRODUCTION:
Banks are commercial organizations, and the main business of banking consists of collecting
deposits from the public and lending them to people, business concerns, institution, etc. The loan
business is associated with risk. One of the risks in loans is the possibility that the account will
become non-performing assets. Non-performing assets (NPA) do not generate interest income and
the loan repayment to the bank is not made according to the repayment schedule that affects the
bank's income and its profitability.
Non-performing assets do not generate interest but at the same time require banks to make
provisions for such non-productive assets outside their Current Benefit. The term non- performing
assets was recognized in the Indian banking sector after the introduction of financial sector reforms
in 1992. The prudential rules on revenue recognition, asset classification and provision in this
regard are implemented since fiscal year 1992-93, as recommended by the Financial System
Committee (Narsimha Committee). These rules have contributed quantification and objectivity to
the evaluation and provisioning for NPA.
Reserve Bank of India constantly strives to ensure that recipes in this regard are close to
international standards. The efficiency of a bank is not always reflected only in the size of its bank
balance but for the level of return on your assets. NPAs do not generate interest income for banks,
but at the same time banks must make provision for such NPAs from their current production.
9
NPAs have an adverse effect on asset performance in several ways:
 Erode current earnings through provisioning requirements.
 They result in reduced income.
 Require higher provisioning requirements that affect earnings and increased capital funds and
capacity to increase the risk of good quality future assets.
 Limit the recycling of funds, established in mismatch of asset liability.
DEFINITION OF NON-PERFORMING ASSET
“According to Reserve Bank of India (RBI) NPAs “An asset, including a

leased asset, becomes non-performing when it ceases to generate income
for the bank”.
“when interest or other dues to a bank remain unpaid for more than 90
days of the entire bank loan automatically turns a
“NON-PERFORMING ASSETS”
1.1 OBJECTIEV OF THE STUDY :

 To understand the concept of non-performing assets.
 To understand the guidelines regarding assets classification and provisioning norms in respect
of both public and private sector banks.
 To compare the gross NPA’s of public sector and private sector banks.
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 To know the impact of the NPA‟s in banks
 To analyzed different kinds of NPA‟s in selected banks.
 To identify the causes of NPAs in Indian banking system.
 To study the preventive mechanism for NPA and Compromise settlement scheme.
 To analyse the relationship between Gross NPA and profitability of banks.
 To know the performance of selected Public and Private sector banks with respect to Gross
NPA. 3.
 To find out the model for best fit to Profitability with Gross NPA of the banks.
1.2 NEED OF THE STUDY :
The scope of the study is very wide. There are 186 scheduled commercial banks, 28public sector
banks, 27 private sector banks, 29 foreign banks and 102 rural banks.
Therefore, I have selected five banks from the public sector and five from the private sector banks.
So, a total of ten banks, including five banks from the public sector and five from the private sector
Bank have been covered for the study. And non-performing assets and their impact on the
profitability, solvency and liquidity of banks is also a wide area but, in this research, the researcher
only considers the impact of the NPA on the profitability of the selected public and private sector
banks in India.
Private banks selected for the study-Kotak Mahindra bank, ICICI bank, HDFC bank, IndusInd
bank and Yes bank from 2015 to 2019 whereas Public banks selected for the study- State Bank of
India, Bank of India, Indian Overseas Bank, United Bank of India, Indian Bank.
1.3 LIMITATIONS OF THE STUDY
 The study is limited to five public sector banks and five private sector banks.
 The study period is fixed for five years only since 2016 to 2020.
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 The basis for identifying non-performing assets is taken from the annual reports of various
banks and related websites as this research is entirely based on secondary data.
 The data which is used for his study is based on annual report of the bank and secondary data
collected from published reports from time to time. Therefore, the quality of this research
depends on the quality and reliability of data published in annual reports.
CHAPTER 2 : REVIEW OF LITRATURE
The post-liberalization period of India has witnessed stiff competition in financial markets the
liberalization of the financial sector in India is exposing India commercial banks in a new
economic environment characterized by increased competition and new regulatory requirements.
The amount of delinquent loans is considered an indicator to evaluate Bank credit risk, asset quality
and efficiency in the allocation of productive resources sectors. The financial system committee
has expressed concern about erosion in the quality of the assets of which non-productive advances
accounted for the most.
This study is an attempt to diagnose the quality of assets and the level of unprofitable assets of
commercial banks with reference to the backward region. In the context of the banking sector, the
issue of non-compliance has been studied and observed by many researchers, a review of their
relevant literature on the topic of PAN has been described under:
Mukhopadhyay (2018), in his paper, has discussed about finding solutions to India’s NPA woes.
He has suggested that to resolve the problems of NPAs the RBI should not abide by a single model,
instead, an innovative and flexible approach is needed for each affected bank, which should differ
on case-by-case basis.
Kumar (2018), in her study has found that NPAs have a serious negative impact on the
profitability and liquidity of the banking sector. According to her if the issue of NPAs is managed
efficiently, then many microeconomic issues such as poverty, unemployment, imbalances of
balance of payments can be reduced, the money market can be strengthened, and thus, the image
of Indian banking system can be improved in the international market.
12
Sharma (2018) emphasises the role of the banking sector as an instrument of economic growth
and development. The paper discusses how banks are burdened due to growing NPAs especially
in case of public sector banks. The author states several preventive measures that would curtail the
level of NPAs. Viable regulatory standards and timely implementation of them could pave the way
for a strong financial sector in India.
Dey (2018) in a very recent research paper looks at the recovery aspect of recovery of poor loans
of the Indian commercial banks. The author finds the role of DRTs to be much better compared to
the recovery through Lok Adalat’s and SARFASEI Act.
Kumar (2018) make an interesting study to find out the main reasons behind accumulating NPAs.
They find the main reasons to be industrial sickness, change in government policies, poor credit
appraisal system, wilful defaults, and defect in the lending process.
Banerjee 2018) have examined the status of gross NPAs and net NPAs in private sector banks
and public sector banks to study their effect on the asset quality of the banks. Deliberate loan
defaults, poor credit management policies, sanctioning of loans without analysing the risk-bearing
capacity of the borrowers are the main reasons for piling up of NPAs. The banks should stress on
better strategy formulation and its proper execution as well. Stringent provisions by the
government could help in reducing the level of NPAs.
Sengupta, R. and Vardhan, H. (2017) In‟ Non-Performing assets in Indian Banks‟ indicated
continuous growth in NPA‟s. Author indicated that in the last two decades, there have been two
incidents when the banking sector was severely affected by balance problems.
Agarwal, N., Dimri, R. and Choubey, D.S. (2015) about Active assets and their composition: a
comparative study of the SBI groups with others Nationalized banks of India OSE and GNP in
relation to the management of NPA. The study indicates the downward trend of NPA in the priority
sector and the growing trend in the non-priority sector after 2008.
13
Samir & Kamra, D. (2013) in his article analyses the position of the NPA in selected banks such
as the State Bank of India (SBI), the Punjab National Bank (GNP) and Central Bank of India (CBI).
He also analyzed the policies applied by banks to address the NPAs and suggested a multiple
strategy for rapid recovery of the NPAs in banking sector the study covers the period that begins
from 1996-1997 until 2009-2010. The authors analyzed the trends of the NPA in terms of values,
gross and net NPA as a percentage of gross advances and net advances, gross and net NPAs as a
percentage of total assets, respectively. The document details the sector classification of NPA,
reasons for its occurrence, the effects of NPAs in banks and the frequency distribution of public
sector banks by reason of net NPA to net advances.
Srivastava, V., Bansal, D. (2012) made a study of the trends of default positive trend and control
five years since 2007-2012 from several secondary sources and analyzed by average and
comparative percentage analysis. That level of NPA was found to be alarming with public sector
banks in India, but there is a minor improvement in asset quality reflected by the decrease in NPA
percentage. Banks must take appropriate measures against the degradation of the good Active
assets).
Swami (2001) The competitive performance of different banking groups was carried out by
Swami, researcher to identify factors that could have led to changes in the position of individual
banks in terms of their participation in the banking industry in general. Research has analyzed the
proportion of rural branches, the average branch size, expenses, provisions and contingencies,
nonperforming net assets with net advances, Propagation has been calculated. It was concluded
that nationalized public sector banks are much better than private banks, they are even better than
foreign banks in many ways.
14
CHAPTER 3 : RESEARCH METHODOLOGY
For our study, we have considered unprofitable assets in scheduled commercial banks, which
include public sector and private sector banks. The study is based on secondary data. The study
discusses the conceptual framework of NPA and highlights the trends, status, and impact of NPA
on the scheduled commercial bank.
3.1 RESEARCH DESIGN
The research design used to carry out this study is descriptive research because it deals with
statistical data and the main aim of the report is to describe the factors affecting the problem
mentioned. For this study secondary data are collected thus study is also an explanatory research.
The secondary data is collected from the annual reports of selected bank and Reserve Bank of
India website.
3.2 SOURCE OF THE STUDY
The data collected is mainly secondary in nature. The sources of data for this thesis include the
literature published by selected banks and the Reserve Bank of India, various magazines, Journals,
Books dealing with the current banking scenario and research papers.
CHAPTER 4 : INTODUCTION TO BANKING INDIA
The banking system in India is far from being a sleepy business institution to a highly proactive
and vibrant entity. This transformation has been mainly caused by liberalization and economic
reforms. It has allowed banks explore new business opportunities instead of generating revenue
from the conventional currents (i.e., loans and loans). Currently, Indian banking was developed to
serve to the growing financial needs of its commerce and industry. The constituents and the main
players of the current banking system in India have been of different backgrounds and sizes.
15
At the top, the Reserve Bank of India (RBI) is the country's Central Bank, followed by the State
Bank of India (SBI), created in July 1955 by Nationalization of the Imperial Bank of India. In
addition, the subsidiaries of SBI: 20 main nationalized banks scheduled.
Strategically, Indian banks are divided into unscheduled banks and scheduled banks. Scheduled
banks include commercial banks and cooperatives banks, which had their first existence in 1904
in the outfit of cooperative credit societies; Nidhi’s and Chit Funds, which exist since the previous
quarter 18th century; other joint banks that were formed in the second half of the 19th century.
Programmed banks can also be classified into two groups: Indian programmed foreign banks and
banks scheduled. Post-independence, the banking system in India has went through various phases
(evolutionary phase, before 1948, foundation phase: 1948-1967: Expansion phase: 1968 1984,
Consolidation phase: 1985-1990, Reform phase: 1991-2000, mergers and acquisitions phase: 2001
onwards).
Public sector banks (PSB) are the basis of Indian banking system and represent more than 72
percent of the total assets of the banking industry. According to the report, public sector banks
(PSB) had a market of 73.2 percent and 73.9 percent participation in credits and deposits
respectively at the end of March 2014. According to 'Basic two Statistical report of the report of
commercial banks (BSR), as of March 2014, gross outstanding credit of the system increased 13.7
percent to Rs62,82,082.43 rupees in 2013-14.There are about 1.29,151 branches of scheduled
commercial banks spread across India and will increase according to the Government's pro
industrial development policies.
Unfortunately, due to weak governance and corrupt and political practices interferences, are loaded
with excessive non-productive assets (NPA), lack of Modern technology massive workforce and
deviated visions. On the contrary, the Private sector banks are witnessing remarkable progress in
India. They are leading in Internet banking, mobile banking, telephone banking, ATMs.
1.1 BANKING HISTORY IN INDIA
The Indian banking system originated in the last decades of the 18th century. The first banks were
the General Bank of India and the Bank of Hindustan that began in 1786and 1790 respectively;
both are no longer operational. The oldest bank that exists in India is the State Bank of India, which
16
originated from the Bank of Calcutta in June 1806, which immediately became the Bengal Bank.
This was one of the three presidential banks, the other two are the Bank of Bombay and the Bank
of Madras. All three went established under the letters of the British East India Company. For
many years, the Presidential banks acted as quasi-central banks, just like their successors.
These three banks merged in 1921 to form the Imperial Bank of India, which became the State
Bank of India after the independence of India. Indian merchants in Calcutta established Union
Bank in 1839, however, it failed in 1848 due to the economic crisis of 1848-49. Allahabad Bank,
established in 1865 and still currently operating, it is the oldest joint stock bank in India. However,
he was not the first honour belongs to the Bank of Upper India, which was established in 1863,
and he survived until 1913. When he failed with some of his assets and liabilities transferred to the
Shimla Alliance Bank.
When the American Civil War of the Confederate States to Lancashire stopped the supply of
cotton, the promoters opened banks to finance trade in India cotton. With a large exposure to
tentative companies, most banks opened in India during that phase it failed. Depositors lost money
and interest in holding deposits with banks consequently, banking in India remained the exclusive
domain of Europeans for the next decades until the beginning of the 20th century.
In the 1860s, foreign banks also began to arrive, particularly in Calcutta. In 1860, the Comptoired
Escompte de Paris opened a branch in Calcutta and another in Bombay in 1862; Branches followed
in Madras and Pondicherry, then a French colony. HSBC was established in Bengal in 1869.
Calcutta was the liveliest commercial port of India, largely due to the trade of the British Empire,
and therefore became a banking centre.
The first fully Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faridabad. However, it failed in 1958. The next was the Punjab National Bank, established in
Lahore in 1895, which has survived to the present and is now one of the largest banks in India.
At the beginning of the 20th century, the Indian economy was going through a relative period of
stability. Since the Indian mutiny, about five decades had passed the social, industrial, and other
infrastructure had improved. The Indians had established small banks, most of which served ethnic
and religious communities. The presidential banks dominated banking in India, but there were also
some exchange banks and a series of Indian joint banks that operate in different segments of the
economy.
Foreign exchange banks, mostly owned by Europeans, focused on financing foreign trade. Indian
joint stock banks were generally undercapitalized and lacked experience and maturity to compete
17
with the presidency and exchange banks. Segmentation led Lord Curzon to observe: "Regarding
banking, it seems that we are behind the hour. We are like an old sailboat, divided by solid wood
bulkheads in separate and cumbersome compartments. "
1.2 INDIAN BANKING INDUSTRY –GENERAL STRUCTURE
Commercial Banks can be further classified into public sector banks, private sector banks,
foreign banks, and Regional Rural Banks (RRB).
cooperative banks are classified into urban and rural. Apart from these, a new addition to the
structure is payments bank.10 Public Sector Banks (PSB) were merged with 4 big PSB on 30
August 2019. So now the number of Public Sector Banks in India reduced to 12.
The number of Private sector banks is reduced to 22.
 Public Sector Banks (PSBs) are a major type of bank in India, where a majority stake (i.e.,
more than 50%) is held by the government. The shares of these banks are listed on stock
exchanges. There are a total of 12 Public Sector Banks and 1 Public Sector Payment Bank.
18
Public Sector Banks are the banks whose more than 50% shareholding lies with the central or
state government. Private Sector Banks are the banks whose majority of stake is held
by private corporations or individuals.
 Private sector banks These include banks in which private shareholders have a significant stake
or capital. All banking rules and regulations established by the RBI will also apply to private
sector banks.
Classification Number of banks Total assets (US $

trillions)
of banks(2020)
Public sector 12 107.83
Private sector 21 688
1.3 INDIAN BANKING INDUSTRY- CURRENT SCENERIO
The Indian banking system consists of 12 public sector banks, 21 private sector banks, 46 foreign
banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural cooperative banks
in addition to cooperative credit institutions. As of September 2020, the total number of ATMs in
India increased to 210,049 and is further expected to increase to 407,000 by 2021.
Asset of public sector banks stood at Rs. lakh crore (US$ 1.52 trillion) in FY20.
During FY16-FY20, bank credit grew at a CAGR of 3.57%. As of FY20, total credit extended
surged to US$ 1,698.97 billion.
During FY16-FY20, deposits grew at a CAGR of 13.93% and reached US$ 1.93 trillion by FY20.
Credit to non-food industries stood at Rs. 103.46 trillion (US$ 1.40 trillion) as of November 20,
2020
19
1.4 RESERVE BANK OF INDIA (RBI)
The Reserve Bank of India (RBI) is the leading institution in the financial system and act as the
main credit regulator. The country's central bank is the Reserve Bank of India (RBI), which was
established in April 1935 with a share capital of Rs. 5 million dollars based on the
recommendations of the Hilton Young Commission. The fee capital was divided into shares of Rs.
100 each fully paid and was the exclusive property of private shareholders in the beginning. The
Government had shares of nominal value of Rs. 2, 20,000.
Other key financial institutions are commercial banks (in public and private sector), regional rural
banks, cooperative banks, and development banks. Non-bank financial institutions include
financial and leasing companies and other institutions such as LIC, GIC, UTI, mutual funds,
pension funds, post banks, etc.
The Reserve Bank of India was nationalized in 1949. The general superintendence and the
management of the Bank was entrusted to the Central Board of Directors of 20 members, the
governor and four vice governors, a government official of the ministry of Finance, ten Directors
nominated by the Government to represent important elements in the economic life of the country
and four nominated directors by the central government to represent the four local boards with
headquarters in Mumbai, Kolkata, Chennai, and New Delhi.
The Local Boards consist of five members each Central Government designated for a term of four
years by the central government to represent the territorial economy interests and interests of
cooperative and indigenous banks. The Reserve Bank of India Act of 1934 began on April 1, 1935.
The Law of 1934 (II of 1934) provides the legal basis for the operation of the Bank.
20
The Bank was established for the need of the following objectives:
 Regulating the issuance of banknotes

 Maintain reserves with a view to ensuring monetary stability.
 Operate the country's credit and currency system in your favour.
In the last twenty consistent liberalization processes. Having witnessed acceleration in annual
GDP growth around 4-5% percent annually during the eighties and nineties, the Indian economy.
It has continued to grow over the past decade at a rate of 8.5% since 2005. With the implementation
of several reforms aimed at increasing access and competition, the Indian financial sector has been
expanding and playing a key role in ensuring stability and maintenance of this growth momentum.
CHAPTER 5: NPA ASSETS OVERVIEW
India is one of the fastest growing economies in the world. An important support system for the
economy, banks provide much-needed credit to industries and developers. Good health of these
support systems, in general, and banks is essential to move on a high growth trajectory. However,
the Indian banking system faces a crisis of non-performing assets (NPAs), which has been
diminishing banks’ ability to infuse capital into the system further.
According to RBI, any loan or advance on which the payment of interest or principal installments
has remained overdue for more than 90 days, is termed as an NPA. The size of NPAs has reached
alarming levels at Rs. 6.7 lakh crores, of which public sector banks (PSBs) account for over Rs. 6
lakh crores. The rising NPA is the result of the Twin Balance Sheet (TBS) syndrome, which
includes impaired financial status of banks as well as large corporate houses. To confront the TBS
challenge, the Government has come up with a 4-R Strategy:
1. Recognition: Value assets close to real value,
2. Recapitalization: Infuse equity into sick banks to safeguard capital position,
3. Resolution: Sell off stressed assets, and
4. Reform: Avoid repetition of the problem
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To ease Recognition, RBI has also initiated an Asset Quality Review (AQR) which mandates the
banks to report actual NPAs in their balance sheets. Although transparent recognition norms have
surfaced more stressed assets, there isn’t much progress in the resolution of NPAs.
In the last three years, RBI has come out with various schemes to tackle NPAs. Scheme for
Sustainable Structuring of Stressed Assets (S4A), Corporate Debt Restructuring (CDR), Strategic
Debt Restructuring (SDR) mechanisms, and Joint Lenders Forum (JLF) are some of the major
ones. The government has cleared Insolvency and Bankruptcy Code (IBC) to reduce delays in
insolvency resolution, announced Rs. 70,000 crores for recapitalization and set up Asset
Reconstruction Companies (ARCs) for NPA resolution. However, these initiatives have not had
their desired impact yet. Reasons include banks’ reluctance in resolving NPAs through these
schemes as selling bad loans to ARCs can potentially invite a host of investigation agencies
questioning the deals or labelling them biased. JLF, intended for quick decision-making, has also
become a bottleneck. Any decision by the forum needs approval of at least 60% of the consortium
lenders by number and at least 75% by value. This one-size-fits-all approach is not a good solution
to deal with a problem of this magnitude.
The Government has recently proposed a new NPA resolution policy that comes with measures to
alleviate the stressed assets: Banking Regulation Act is amended, and it empowers RBI to direct
the banks for recovery of NPAs by initiating insolvency resolution under IBC. RBI can now set
up oversight panels to shield bankers from investigation agencies. This will provide indemnity to
bankers from any legal responsibility. These control boards also aim to reduce banks’ problems
by adopting sector-specific strategies. Moreover, banks can opt for haircuts in settling loans under
the guidance of RBI. JLF can now make decisions agreed upon by 50% of lenders by number and
60% by value. The Government has empowered itself by directing RBI to initiate the NPA
resolution process once a default is established. This provision has come under criticism as it tends
to undermine RBI’s authority as an independent regulator.
Although the amount of NPAs is huge, the problem mainly confines 40–50 companies, mostly in
power, steel, heavy metal, and textile sectors. Adopting specific strategies for these organizations
is feasible. RBI has already identified 12 such accounts that constitute around 25% of the NPAs.
This targeted approach to resolving the problem seems effective and promising. This also becomes
important as we try to retain investor confidence in the Indian market. Lately, our economy has
undergone some large-scale reforms including demonetization of the high currency bank notes,
and Goods and Services Tax (GST) which has brought in a revamped arrangement for indirect
taxes. These big-ticket reforms seem to have side-lined the NPA problem, but it needs more
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attention than ever before. A well planned, government-guided, and RBI-led action is the need of
the hour.
5.1 CLASSIFICATION OF ASSETS
Banks classify non-performing assets in the following three classifications based on the period
during which the asset has remained without return and the reliability of dues:
 Standard Assets
A Standard asset is one in which the borrower fails to make repayment regularly and
on time.
 Substandard Assets
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A Sub-Standard asset is one which has been NPA for a period not exceeding 12 months. It
is an asset in which bank must maintain 15% of its reserves.
Effective as of March 31, 2005, an asset is called a deficient asset, if it has been maintained as an
NPA for a period of less than or equal to 12 months. Such asset will have well-defined credit
weaknesses that will jeopardize debt settlement and is classified by the distinctive possibility that
banks will suffer losses if the deficiencies are not rectified.
 Doubtful assets
A Doubtful asset is one which has been NPA for more than 12 months.
Effective as of March 31, 2005, an asset is called a doubtful asset if it has remained in the inferior
quality category for 12 months. A classified loan doubtful it has all the weakness, with the
additional features that the weaknesses make the collection or liquidation in its entirety, based on
the data currently known, conditions and values that are highly questionable and unlikely.
 Loss of assets
A Loss asset is one where the loss has been identified by the bank, through the internal or
external auditor or by the central bank inspectors. The amount has not been written off,
wholly or partly.
In other words, said asset is considered as unrecoverable and of such little value that in continuity
as a banking asset is not guaranteed, although there may be some recovery or recovery value.
Guidelines for asset classification
 Assets are classified considering the degree of well-defined credit weaknesses and the
magnitude of collateral security units for the realization of quotas.
 Banks establish appropriate internal mechanisms to eliminate NPAs, particularly about the
high value of the accounts.
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 The NPA must be based on the recovery record with respect to accounts with short term
deficiencies. Banks cannot classify an advance account as NPA simply due to short-term
deficiencies, which are temporary in nature as such, such as the unavailability of adequate
extraction power based on the latest stock.
 Facilities approved for a borrower by a bank should be treated as an NPA and not the
installation or a portion thereof, which has become irregular.
.
 The erosion in the security value can be estimated as notable when the realization the security
value is less than 50 percent of the value assessed by the bank or accepted by RBI at the time
of the last inspection. These NPAs must be classified as Doubtful category and provisioning
should be done as appropriate for doubtful assets.
 Agricultural advances: with respect to advances granted for agricultural purposes where
interest and / or fee remain unpaid after it has expired by two seasons of continuous harvest
but for a period not exceeding two and a half years, such an advance must be treated as an
NPA. In a situation where natural calamities impair the ability to pay agricultural borrowers,
banks can take relief measurement conversion of the short-term production loan in a term or
reprogramming of the repayment term. In such situations, loans should be treated as current
instalments and does not need to be classified as an NPA.
Exceptions:
Since trade includes only the purchase and sale of products and difficulties associated with
manufacturing units such as bottlenecks in commercial production, time and cost escalation, etc.
are not applicable, these guidelines mentioned by RBI will not be pragmatic for the
restructuring/reprogramming of extended credit lines to merchants.
 RBI GUIDELINES
Definition:
According to RBI, an asset becomes a non-productive asset when it stops generate income for a
bank It is also defined as a line of credit for which interest and / or principal instalments have
remained "overdue" for a defined period. This defined period is "two quarters."
 Past due:
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An amount due under any credit line is treated as "past due" when not paid within 30 days from
the due date. With the advancement in technology and improvement in the payment and settlement
system, the expired concept has been issued effective as of March 31, 2002, consequently non-
productive assets it will be treated as an advance when:
 The principal's interests and / or fees remain overdue for a period of more than 180days with
respect to a term loan, that is, two quarters.
 The account remains "out of service" for a period of more than 180 days, with respect to
overdraft / cash credit.
 The invoice remains overdrawn for a period of more than 180 days, with respect to a cash
overdraft / credit.
 The invoice remains uncovered for a period of more than 180 days in the case of invoices
purchased and discounted.
 The principal's interests and / or fees remain overdue for two harvest seasons but for a period
not exceeding two and a half years in the case of an advance granted by agricultural purposes.
 Any amount received overdue for a period of more than 180 days with respect to other
accounts.
As a step towards international best practices and to ensure greater transparency, it has been
decided to adopt the 90-day delay for identification of the NPA for the year ending March 31,
2004, consequently, an NPA will be a loan or an advance where:
 The principal's interests and / or fees remain overdue for a period of more than 90days
regarding a term loan.
 The account remains "out of service" for a period of more than 90 days with respect to an
overdraft / cash credit.
 The invoice is still overdue for a period of more than 90 days in the case of invoices
purchased or discounted.
 The share of capital or interest in this regard remains behind by two growing seasons for
short-lived crops.
 The share of capital or interest in this regard is still due for a growing season for long-
lasting crops.
 The amount of the liquidity line remains outstanding for more than 90 days, with respect
to a securitization transaction carried out in terms of securitization guidelines from
February 1, 2006.
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 In case of interest payment, banks should classify an account as NPA only if the interest
owed and collected during any quarter is not fully paid within 90 days at the end of the
quarter.
 NPA report
It is mandatory that all banks submit a report on NAPs beginning March 31, every year
after the completion of the audit. The NPA would relate to the bank's global, portfolio,
including advances in foreign branches. While reporting NPA figures for RBI, the amount
withheld in the interest suspense account, should be shown as deduction of gross advances
upon reaching the net NPA.
 "Out of order" status

An account should be treated as "out of order" if the outstanding balance remains
constantly more than the sanctioned limit / extraction power. In situations where the
outstanding balance in the main operating account is less than the sanctioned limit /
extraction power, but there are no credits continuously for the period 90 days as on the
balance sheet date or credits are not adequate to cover the interest due during the same
period, these accounts should be treated as ,out of order '.
 Overdue
Any amount owed to the bank under any credit line is treated as "overdue" when it is not
paid on the due date set by the corresponding bank.
 Revenue recognition policy

The revenue recognition procedure must be objective and based in the recovery log.
Globally, the income of non-productive assets is not recovered on an accrual basis but is
recorded as income only when it really is received. Therefore, banks should not charge
and carry interest income account on any basis with respect to NPA. This will apply to all
guaranteed governments accounts too.
However, interest on bank advances against time deposits, national savings Certificates
(NSC), Indira Vikas Patras (IVP), Kisan Vikaspatras (KVP) and others. Life policies can
be treated as an income account on the due date, if it is sufficient margin is available in
account books. Fees and other commissions earned by banks as a result of rescheduling
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outstanding debts must be recognized in a accrued basis during the period of time covered
by the rescheduled extension of the credit.
 Reversal of income
When advances, including purchased and discounted invoices, become NPA, all interest
accrued and credited in the income account in the past must be reversed if not done This will also
apply to all accounts guaranteed by the government. Rate the commission and related revenues
that have accumulated should stop accumulating in the current period and should be reversed with
respect to past periods, if it remains without collected.
 Leased assets
The financial charge component of the income of the leased asset that was accumulated and
credited to the income account before the assets cease to function, must be reversed in the current
accounting period.
 Appropriation of recovery in NPA
The interest realized on the NPA must be taken to the income account whenever Loans in interest
accounts are not outside additional credit lines sanctioned the borrower in question. In the absence
of a perfect agreement between the bank and the borrower for the appropriation of recoveries in
NPA, banks must adopt an accounting principle and exercise the right of appropriation of
recoveries in a constant and constant way.
 Interest Application With respect to any NPA account, banks must reverse the interest they
have has already been charged and has not been charged when loading the profit and loss
account. Nevertheless, banks could continue to record such accrued interest in a memorandum
account in your account books. To calculate gross advances, interest documented in the
memorandum account should not be considered.
 SARFAESI Act, 2002:
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Securitization and reconstruction of financial assets and execution of the Security Interest Law
entered into force in 2002. This law is used as an Effective tool to deal with the recovery of bad
loans (NPA). It provides the power of "size and desist "all Indian commercial banks. Under this
law, banks can provide a notice to the delinquent borrower required to discharge their obligations
within 60 days’ time frame. Once the borrower does not comply with the notice, banks can take
resort to one or more of the following measures under this law.
Banks can take possession of the loan guarantee. Assets can be sold or assigned the security
right.
Banks can administer the same or designate any person to administer the same.
The SARFAESI Act also establishes the establishment of asset reconstruction. Company (ARC)
regulated by RBI to acquire assets of banks and other financial entities.
BASEL RULES:
Basel is a city located in north-western Switzerland. It is the headquarters of Bureau of

International Settlement (BIS), which promotes cooperation between central banks with a common
objective of financial stability and banking standards regulation. Every two months, the BPI
organizes a meeting with the governor and senior officials. Central bank executives from member
countries. For 2015, there are 27 members nations on the committee. Basel guidelines refer to
extensive management standards formulated by this group of central banks called the Basel
Banking Committee Supervision (BCBS). The BSBS set of agreements mainly focuses on risks
parameters of the banking and financial system that are called Basel agreements.
The purpose of the Basel agreements is to ensure that all financial institutions must have adequate
capital on account to meet obligations and hire unexpected losses. India has accepted the Basel
agreements for the banking system. In fact, in some parameters that the RBI has prescribed strict
measures compared to standard suggested by the Basel Committee.
 Basel - I in 1988 BCBS introduced Basel-I. He focused almost entirely on credit risk. That
defined capital and risk weighting structure for banks.
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 Basel - II on June 4, BCBS published the Basel II guidelines. The guidelines were based
on 3 parameters, which the committee mentions as pillars of the bank system.
1. Capital adequacy requirements.

2. Supervision review
3. Market discipline
 Basel - III In 2010, the Basel III guidelines were announced. Basel - III Standards aims to
making most banking activities more capital intensive. The objectives of the guideline to
promote a stronger banking system focusing on four dynamic banks parameters to know
capital, leverage, financing, and liquidity.
CHAPTER 6: CAUSES OF NPA
The NPAs are the result of "bad loans" or defaults. By default, in the financial language, is
the breach of financial obligations, for example, the default of a loan delivery. The main
reason for the increase in the NPA of banks, among other things, is the slowness internal
growth during the recent past, the slowdown in recovery in the world economy and
continuing uncertainty in the conditions of the universal market that lead to lower exports
of various products such as textiles, engineering products, leather, gems, etc. External
factors include the prohibition of mining projects, the delay in authorizations that affect
Electricity, iron and steel industry, volatility in raw material prices and shortages in the
availability of energy, the delay in the collection of accounts receivable creates tension on
several infrastructure projects and, most importantly, aggressive loans from banks in past.
In general, these loans may occur due to the following reasons:
 Regular banking operations / bad credit practices

 A banking crisis (as happened in South Asia, Japan in the recent past)
 Overhang component (due to environmental reasons, natural calamities, business factors,
occurrence of diseases, etc)
 Incremental component (due to internal banking management, such as credit policy, credit
conditions, etc.)
Talk about the issue of the causes that lead to an increase in the level of NPA and as to why
is there more NPA in public sector banks, Dr. Raghuram Rajan, ex
30
governor, RBI, deposed before the committee, on 10/30/2014, as follows:
“The NPAs are more focused on public sector banking. That is not necessarily because
only the public sector banking system has made mistakes that private sector system. The
private sector system did not finance some of the major projects as infrastructure to the
same extent as the public sector system. Further the private sector banking system also
knows how to move to the public sectoral system Many people believe that the level of
NPA reproduces a level of embezzlement in the public sector banking system. There is
embezzlement, I will not deny that, But I will not point it out as the main reason. If you
remember, many of the projects, which are in trouble today, started in 2007-2008 after four
or five years of very, very strong growth. The Belief then was that growth would be
continuing to grow and some of these were financing exports. The world was also growing
very fast at that time. But then, we had the financial crisis. We had slowdown in the Indian
economy. All the optimistic projections on growth, etc. arrived down widely after that,
both globally and nationally. So that was a reason we have problems ”(RBI Bulletin, 2015)
 EXTERNAL FACTORS
a) Ineffective recovery court
The government has established a few recovery courts, which works for the recovery of
loans and advances, due to their carelessness and inefficiency in their work, the bank suffers the
consequence of not recovering, thus reducing its profitability and liquidity.
b) Intentional Defaults
There are borrowers who are competent to pay the loans but are intentionally withdrawing it.
These groups of people must be recognized and take appropriate measures. It must be taken to
recover the money that is extended to them as advances and loans.
c) Natural disasters
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This is the measured factor, which is creating an alarming increase in the NPA of PSBs from
time-to-time India is affected by large natural calamities, which makes the Borrowers who cannot
pay their loans. Therefore, the bank must make a large amount of provisions in order to pay
damages to those loans, therefore the prosecutor ends with a reduced profit. Basically, our farmers
depend on rain for cultivation. Because irregularities in rain fall farmers do not reach the level of
production therefore, they are not paying the loans.
d) Industrial sickness
Inappropriate project management, inefficient management, lack of adequate resources, lack of

advanced technology, daily government change, Production of Policies results into Industrial
sickness. Therefore, the banks that finance these industries finally end up with a low recovery of
your loans reducing your profits and liquidity.
e) Lack of demand
Entrepreneurs in India could not predict the demand for their products and start production and
finally accumulate product, thus they cannot pay the money borrowed to operate these activities.
Banks recover the amount by sale of its assets, which covers the smallest label. Therefore, banks
record the part not recovered as NPA and must provide for it.
f) Change in government.
Policies With each new government, the banking sector obtains new policies for its operation,
so it must address changing principles and policies for the regulation of the emergence of NPAs.
For example, the consequences of the handloom sector continue as most of the weavers’
Cooperative societies have become largely extinct due to the withdrawal of state sponsorship. The
rehabilitation plan developed by the central government to renovating the handloom sector has not
yet been implemented, so the over dues due to the handloom sectors are becoming NPA.
 INTERNAL FACTORS
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There are three fundamental principles of bank loans that have been followed by
commercial banks, that is, Security Principles, Liquidity Principle, Principles of
profitability mean that the borrower is able to pay the loan, which includes both capital and
interest. The loan repayment depends on borrowers, ability to pay and willingness to pay.
The ability to pay depends on tangible assets, success in business. Want to make Payment
depends on, Character, Honest, Reputation of the borrower. The banker should, therefore,
take the utmost care to ensure that the company or business for which you lend wanted is
a good one and the borrower is competent to carry it out successfully, you must be person
of integrity and good character.
Due to inadequate technology and management information system, market oriented You
cannot make decisions in real time. Adequate GIS and financial accounting the system is
not implemented in banks, which leads to bad credit collection, so NPA, therefore, all bank
branches must be computerized.
The inappropriate analysis of strength, weakness, opportunity and threat is another reason
for the increase in NPA. By providing unsecured advances, banks depend more about the
honesty, integrity and financial strength and creditworthiness of Borrower, therefore, banks
should consider the borrower's own capital investment and the bank must collect credit
information from borrowers from, a. Bankers b. Consultation of market / segment of
commerce, industry, business. C. From external credit rating agencies. The banker must
examine the balance that shows the true image of the business. It will be disclosed in the
profit / loss analysis a / c and balance sheet. When bankers give loan, you must examine
the purpose of the loan. To ensure security and liquidity, Banks must grant loans for
productive purposes only. The bank must examine the profitability, viability, long-term
acceptability of the project while financing.
Private credit valuation is an additional factor for the increase in NPA, due to the deficient
Credit valuation the bank gives advances to those who cannot return it. They should use a
better credit assessment to reduce the NPA.
The banker should always select the borrower very cautiously and must take tangible
assets as collateral to safeguard your interests. By accepting securities, banks must consider
merchantability, acceptability, security, transferability, etc. banker must follow the
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principle of risk diversification based on the famous maximum "do not store all eggs in a
basket", which means that the banker must not grant advances to a few large farms or to
concentrate them in a few industries or in some cities If a last big customer encounters a
misfortune or certain merchants or negatively affected industries, the general position of
the bank will not be affected.
The irregularities in the punctual visit also increase the NPA, absence of periodic visits of
Bank officials to the point of the client decreases the collection of interest and principal on
loan Therefore, NPAs can be collected through periodic visits.
 Growth and proliferation in bank activities has led to an increase in non-productive assets that
have accumulated in a large amount during the last decade or so. The amount of NPA has been
calculated and set to different figures mainly due to the absence of correct statistics and the
method of the basis adopted to calculate the percentage of NPA in relation to the total assets
of the bank or the loan portfolio amount or based on number of accounts or the size of
outstanding advances.
For many years, banks have been taking credit in their books, in base of accrued interest
income, even for the sum of periodic interest that was really not paid by the borrower. This was
done by increasing the suspended debt account and amount of credit equivalent to the periodic
interest in the loan Borrower’s account.
After the objections of the auditors and the income tax authority, the banks altered strategy and
began to give additional loans to delinquent borrowers for the purpose of making payments to the
bank for the adjustment of overdue installments, in many cases the payment due dates and even
the totality were postponed. The loan period was extended again and again. As if setting fire to the
fuel, ambitious program for the progress of the branch and the extension of the bank services led
to new hires, transfers, relocations and unhealthy competition between offices of the same bank,
but at the same time adequate facilities available for staff training were not expanded.
In the anxiety to achieve commercial objectives, the rules and procedures for prudence bank was
conveniently forgotten. Even senior management settings conveniently relaxed the rules for the
34
proper evaluation of loan proposals, the provisions of the standard bank sanction letter, errors in
the execution of the loan agreements, mortgage deeds and mortgages were more frequent
overlooked for compliance in the rush for disbursement and the achievement of objectives with
the purpose of building a record of achievements and reports.
CHAPTER 7: IMPACT OF NON-PERFORMING ASSETS ON THE

OPERATIONS OF BANKS
The impacts of unprofitable assets on bank operations are:
I. Profitability
Unprofitable asset means the reserve of money in terms of defective assets that happened due to
an incorrect customer choice. Because money cannot be navigated, the prodigality of the bank
decreases not only by the amount of non-performing assets, but it also leads to opportunity cost.
Therefore, non-performing assets do not affect the flow earnings, but also affects the future stream
of earnings, which can lead to the loss of long-term beneficial opportunities (Sushma Yadav,
2014). Another impact of the decline in profitability is low ROI (return on investment), which
seriously affects the current bank gain.
II. Liquidity
Money is being blocked and, the reduced return leads to lack of available cash which leads to
borrowing money for short periods of time and that in turn creates additional cost for the company.
The difficulty in operating the bank's functions is another reason for NPA due to lack of liquid
cash.
III. Management Participation
35
Time and management efforts is another indirect cost that the bank has to bear due to NPA. The
efforts made to manage and administer the NPA would have diverted to some productive activities,
which would have given good returns. Today, banks have different employees to manage NPAs,
which is additional cost for the bank.
IV. Loss of credit
If a bank faces problem of non-productive assets, then it affects little value of the bank in terms
of market for credit. Banks could lose their goodwill, brand image and solvency that have a
negative impact on people who are Invest your money in banks as deposits.
 CURRENT STATUS OF NPA’S IN BANKING SECTOR
Gross Non-Performing assets of all banks may jump to 12.5 per cent by the end of this fiscal under
the baseline scenario, from 8.5 per cent in March 2020, according to the financially stability report
(FSR) released by the Reserve Bank.
Under the ‘vey severely stressed scenario’, gross NPA of banks may increase to 14.7 per cent by
March 2021,the report said.
The stress tests indicate that the GNPA ratio of all schedules Commercial banks (SCBs) may
increase from 8.5 per cent in March 2020 to 12.5 per cent by March 2021 under the baseline
scenario.
“If the macroeconomic environment worsens further, the ratio may escalate to 14.7 per cent under
the very severely stressed scenario,” the report showed.
The resilience of Indian banking in the face of macroeconomic shock was tested though macros
tress tests which attempt to assess the impact of cumulative shocks on the banks balance sheet and
generate projection of GNPA ratios and capital to risk weighted assets ratio (CRAR’s) over a one-
year horizon under a baseline and tree adverse - medium, severe, and very severe scenarios, it
said.
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The baseline scenario is derived from the forecasted values of macroeconomic variables such as
GDP growth, combined growth, combined gross fiscal deficit-to-GDP ratio and CPI
inflation among others, the report said.
7.1 Effects of high NPA for banks
Higher NPA ratio trembles the confidence of investors, depositors, lenders etc. It also causes poor
recycling of funds, which in turn will have deleterious effect on the deployment of credit. The non-
recovery of loans effects not only further availability of credit but also financial soundness of
the banks.
Greater NPA impacts the strength of bank revenues and also loses confidence level of consumers
and depositors, banks are back of the financial economy of each country. Here are some effects in
details:
 Changes in interest rates Higher NPA reflects the reduction of the interest rate on bank
deposits, only the poor public directly impacts the consequences of the bank's superior NPAs.
 Collection of charges for each operation Looking at the previous scenario, the bank is
recovering its losses through liens in those operations that were free as
 ATM withdrawal limit
 Number of withdrawals of times
 Cash deposits at other branches
 Internet transaction charges
 Increase in the current account deficit NPA plays an important role in all economic conditions
and the main cause of the increase in the current account deficit. Interest rates, loans, home
loans, CRR, and SLR, all are directly affected by the system. Companies also affect the impact
of a higher NPA.
 Trust in the Shareholders Higher NPAs in the banking system lose shareholder confidence,
and the depositors are changing segments and losing confidence in the system.
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 Effect on the serious borrower the increase in the NPA not only affects the public but also
affects the serious honest borrower with good credentials and credit rating. They have to suffer
and follow, on the other hand, the economy is losing hope of improving.
Steps to withdraw banks from unprofitable assets (NPA)
The Government of India makes many changes and makes things transparent for keep the NPA
level under control and try to reduce it, some of the important steps that need to be implemented
to improve the banking situation.
 The bank must think conservative Your time bank has to think conservative if banks only think
about distributing loans and increase the numbers just to get some benefits in the form of
subsidy from the government of India, the number of NPAs are also increasing.
 Loan Restructuring Process The bank must adjust its borrower selection scanner not only
through credit rating, but you also must investigate the company's past performance and the
members of the company, whether someone is delinquent in the past performance. That will
not only save the bank but also the trust of the shareholders.
 Relying on loan restructuring Why banks expect the Loan to become NPA and allow the
borrower to restructure the loan, this act causes loss to the bank and has a higher probability
of obtain the Non-Yield Loan (NPA), instead of relying on the restructuring bank must take
the appropriate exam before releasing the loan.
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CHAPTER 8: COMPARATIVE ANALYSIS OF PVB AND PSB OF NPA
The banking system is going through an interesting phase in problem management, such as capital,
asset quality, deposits, and credit allocation. The recognition process of NPAs won with
precedence when the asset quality review system was invoked.
NPAs have subsequently increased as banks progressively recognized your stressed assets. It is
believed that this process has been completed for most banks and that NPA levels have stabilized
in recent quarters. Previous analysis analyses some of these trends in banks, both PSB and private
banks.
As per RBI data on global operations, public and private sector banks wrote off Rs 80,893
crore during the current financial year 2019-20.Gross NPAs have since declined by Rs
80,790 crore to Rs 9,40,674 crore as of September 2019.
The 12 PSBs together saw a 5% sequential decline in their gross NPAs, while the private
pack’s NPA pile fell 6% from the end of the December quarter. The March quarter was good
for some public sector banks (PSBs), as many turned profitable after posting losses for several
quarters in a row. Non-performing assets (NPAs), too, declined for most of them. Even so, the
twelve public-sector banks (PSBs) recorded gross NPAs worth Rs 5.47 lakh crore, more than
twice the size of the bad-loan pile of 19 private banks, which stood at Rs 2.04 lakh crore, showed
data from Capitalize. The actual value of bad assets in PSBs is likely to be much higher as Q4
results for six PSBs, which were merged with other banks during the quarter, have not been
made public. Almost all PSBs saw a decline in absolute GNPA numbers, except for Indian Bank
and Canara Bank.
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 PRIVATE BANKS WITH HIGHER NPA
40
Private sector banks witnessed a rise in non-performing assets (NPA) in respect of
large borrowed accounts with exposure of Rs five crore or above.
A recent report by the Reserve Bank of India (RBI), cited that the gross NPA ratio, as well
as the ratio of restructured standard assets to total funded amounts emanating from
larger borrowed accounts in the public sector banks, have gone down.
At the end of September 2020, large borrowed accounts constituted 79.8 per cent of
NPAs and 53.7 per cent of total loans, it said.
"During 2019-20, PSBs' GNPA ratio, as well as the ratio of restructured standard assets to total
funded amounts emanating from larger borrowable accounts, trended downwards. On the
contrary, PVBs experienced an increasing share of NPAs in respect of such accounts," it said.
Further, the share of special mention accounts (SMA-0) witnessed a sharp rise in September
2020, which, according to the report, may be an initial sign of stress after lifting of moratorium
on August 31, 2020.
The RBI report also showed that the decline in NPAs in the last financial year was achieved
largely on the back of write-offs.
As per the data, that both public and private sector banks wrote off NPAs worth over Rs 2.37
lakh crore.
In terms of lenders, out of the total write-off of Rs 2.37 lakh crore loans, NPAs worth over Rs
1.78 lakh crore were written off by public sector banks, while private sector banks wrote off
loans worth Rs 53,949 crore.
The banks' net NPA stood over Rs 2.89 lakh crore in 2019-20 as against Rs 3.55 lakh crore in
2018-19.
 Looking at the above scenario, there should be some action plan ready for the government
and Department of Finance, the amount of money involved in this Nonperforming Asset
(NPA) should be used for other segments of the economy such as employment, food, health,
41
farmers, etc. In addition to releasing Business Loans, the Government has to work on the
platform to reduce NPA.
 LIQUIDITY POSITION
If the bank evaluates less capital, the future commercial concern, which affects the bank
position and creating a mismatch between assets and liabilities and then force the bank to raise
resources at a high rate. Then, there will be an impact on the profitability of the banks, if they
could not recover the borrower's amount. The profit level will go down.
 IMAGE OF THE LOW BANK
Increase in non-productive assets that shades domestic and global market level, in that
situation the bank's profitability decreases, which leads to bad Image to the banks.
 EFFECT ON FINANCING
The increase in non-productive assets creates a shortage of funds for other borrowers. How
just as the Indian capital market is also affected? And then there will only be a few banking
institutions lend money.
 GREATER CAPITAL COST
It will result in an increase in the cost of capital since banks will now have to keep aside more
funds for trouble-free operations.
 HIGH RISK
High in non-productive assets, low profitability, high risk in business and work against the
bank and can take the two circumstances of survival of the bank. It affects the bank's risk
capacity.
 BANK PROFITABILITY
42
What makes low profits have a lower capital adequacy ratio and a low capital index which
limits the subsequent creation of assets? These types of banks face difficulties in their growth,
expansion and plans, and there they don't need to leave boldly on these fronts. In these growth
failures in expansion, the only consequences are stagnation and negative growth.
Reduce net interest income since they do not charge interest on these accounts.
Maintenance of non-performing assets must be provided with caution. This again will lead to
reduced profitability.
CHAPTER 9 : DATA ANALYSIS AND INTERPRETATION
 Profitability ratio of five private sector banks
KOTAK MAHINDRA BANK
PROFITABILITY MAR 20 MAR 19 MAR 18 MAR 17 MAR 16

RATIOS
Operating Margin 10.41 13.15 17.23 15.77 4.87

(%)
Adjusted Cash
Margin (%)
Adjusted Return on 19.56 18.32 18.43 17.48 12.51

Net Worth (%)
Reported Return on 11.86 11.47 10.89 12.35 8.72

Net Worth (%)
Return On long 43.32 46.78 43.84 53.30 52.62

Term Funds (%)
HDFC BANK
43
RATIOS
Operating Margin 12.66 15.87 22.33 20.49 14.26

(%)
Adjusted Cash
Margin (%)

Net Worth (%)
Reported Return 15.35 14.12 16.45 16.26 16.91

on Net Worth (%)
Return On long 55.69 55.57 62.88 65.17 70.54

Term Funds (%)
YES BANK

RATIOS
Operating Margin -107.18 -6.51 13.36 11.30 8.60

(%)
Adjusted Cash
Margin (%)
Adjusted Return on -42.40 5.90 17.47 17.01 16.31

Net Worth (%)
Reported Return on -75.56 6.39 16.40 15.09 18.41

Net Worth (%)
44
Return On long Term 13.08 82.41 72.69 71.05 92.35
Funds (%)
ICICI BANK

RATIOS
Operating Margin -1.94 -15.70 12.58 14.45 -4.60

(%)
Adjusted Cash 9.73 5.31 10.44 14.33 15.31

Margin (%)

Net Worth (%)

Net Worth (%)

Funds (%)
INDUSIND BANK

RATIOS
45
Operating Margin -1.92 -1.96 11.36 7.74 2.83
(%)
Adjusted Cash 13.14 12.64 17.32 16.46 16.42

Margin (%)

Net Worth (%)

Net Worth (%)

Funds (%)
PERCENTAGE OF GROSS NPA AND NET NPA OF ALL FIVE PRIVATE

BANKS
KOTAK MAHINDRA BANK
YEAR PROFITABILITY GROSS NPA(%) NET NPA (%)
2020 14.12 14.78 3.88
2019 16.45 15.84 4.77
46
2018 16.26 16.58 4.89
2017 16.91 13.22 2.67
2016 16.47 13.7 13.22
HDFC BANK
2020 14.12 6.70 2.06
2019 16.45 8.84 4.77
2018 16.26 7.89 4.89
2017 16.91 5.21 2.67
2016 16.47 3.78 1.61
YES BANK
2020 14.12 6.70 2.06
2019 16.45 8.84 4.77
2018 16.26 7.89 4.89
2017 16.91 5.21 2.67
ICICI BANK
47
2020 14.12 6.70 2.06
2019 16.45 8.84 4.77
2018 16.26 7.89 4.89
2017 16.91 5.21 2.67
INDUSIND BANK
2020 14.12 6.70 2.06
2019 16.45 8.84 4.77
2018 16.26 7.89 4.89
2017 16.91 5.21 2.67
2016 16.47 3.78 1.61
Profitability Ratio of Five Public Sector Banks
STATE BANK OF INDIA

RATIOS
48
(%)
Adjusted Cash 9.73 5.31 10.44 14.33 15.31

Margin (%)

Net Worth (%)

Net Worth (%)

Funds (%)
BANK OF INDIA

RATIOS

(%)
Adjusted Cash 9.73 5.31 10.44 14.33 15.31

Margin (%)

Net Worth (%)
49
Net Worth (%)

Funds (%)
INDIA OVERSEAS BANK

RATIOS

(%)
Adjusted Cash 9.73 5.31 10.44 14.33 15.31

Margin (%)

Net Worth (%)

Net Worth (%)

Funds (%)
UNITED BANK OF INDIA

RATIOS
50
(%)
Adjusted Cash 9.73 5.31 10.44 14.33 15.31

Margin (%)

Net Worth (%)

Net Worth (%)

Funds (%)
INDIAN BANK

RATIOS

(%)
Adjusted Cash 9.73 5.31 10.44 14.33 15.31

Margin (%)

Net Worth (%)
51
Net Worth (%)

Funds (%)
PERCENTAGE OF GROSS NPA AND NET NPA OF ALL FIVE PRIVATE

BANKS
STATE BANK OF INDIA
YEAR PROFITABILITY GROSS NPA (%) NET NPA (%)
2020 0.43 7.53 3.01
2019 -3.37 10.91 5.73
2018 6.69 6.90 3.71
2017 6.89 6.50 3.81
2016 10.20 4.25 2.12
BANK OF INDIA
2020 -13.30 15.84 5.61
2019 -20.15 16.58 8.26
52
2018 -5.06 13.22 6.90
2017 -19.63 13.07 7.79
2016 5.43 5.39 3.36
INDIAN OVERSEAS BANK
2020 -22.84 21.97 10.81
2019 -47.45 25.28 15.33
2018 -29.50 22.39 13.99
2017 -21.85 17.40 11.89
2016 -3.26 8.33 5.68
UNITED BANK OF INDIA
2020 -21.89 16.48 8.67
2019 -18.85 24.10 16.49
53
2018 3.41 15.53 10.02
2017 -5.73 13.26 9.04
2016 4.89 9.49 6.22
INDIAN BANK
2020 -21.89 16.48 8.67
2019 -18.85 24.10 16.49
2018 3.41 15.53 10.02
2017 -5.73 13.26 9.04
2016 4.89 9.49 6.22
CHAPTER 10:FINDINGS& SUGGESTIONS


Findings
The overall NPA trend for all scheduled commercial banks in India is showing an uptrend since
2015. For the period prior to 2015 the trend was falling both for Gross Non-Performing Assets %
(GNPA) and Net Non-Performing Assets % (NNPA).
The study showed the average performance of all the scheduled commercial banks in India for the
period of 5 years i.e., from 2015 to 2019. Net NPA (%) for all the banks was increasing for the
period of 2015to 2018. However, a slight improvement has seen for the next year i.e., 2019.
54
In contrast to the finding of Swami (2001) this study finds and concludes, that private sector banks
are managing their NPAs in better way as well as show less NPAs than public sector banks. Study
supports the findings of Isaac K. Other (2005) that private banks in middle and
lower income countries have experienced significant improvement in operating income.
Study also supports to the findings of Satya (2005) and concludes that privatized banks have
performed better as compared to public sector banks in respect to financial performance and
efficiency. It also supports the findings of the Jain and Vibha (2007) that there is a serious
problem in public sector bank in respect of GNPA and NNPA.
Overall performance of the bank is measured by its profitability. Profitability here consists of
Interest spread, Adjusted cash margin, Net profit margin, return on long term fund, return on net
worth, and Return on assets. Private and Public sector banks profitability have been compared in
connection with GNPAs and NNPAs. Based on the findings this study concludes that NPAs have
less effect on the profitability of private sector banks rather than public sector banks.
 Suggestions
Based on observations and findings, this study suggests that.
The study indicates that the NPAs are negatively affecting the capital of the banks and
weakening its financial strength. It is also seen that this has become a political and financial
issue. It is suggested that banks and financial Institutions should be more proactive in adopting a
structured and realistic non-performing asset management policy to obtain default assets on
priority.
A study indicates that, compared to private sector banks, the public sector bank is more at the
level of NPA. Therefore, it is suggested that the public sector bank should take more care to
prevent any account from becoming an NPA by taking appropriate preventive measures
efficiently.
55
It is suggested that the NPA be managed with the application of prudence rules. At the same
time, it is important that the bank follows transparency in their transactions and statements.
It is suggested that banks should initiate appropriate preventive measures in establishing

responsibility for the pre-sanctioned evaluation and subsequent effective post disbursement
supervision.
It is suggested that personal visit and face-to-face discussion and inspection of the borrower's
business will help the banker to know the commercial problems and the financial statement and
the opportunity to identify if it is a case of voluntary default.
Public and private sector banks that operate in India with a higher level of capital have the
tendency to increase the size of the loan and expand the portfolio and sometimes increase
possibility of customer failure. Therefore, these banks must exercise proper precautions in the
time to advance personal loan applicants, industrial credit applicants and even to Small business.
It is suggested that both the Public Sector Banks and the Private Sector Banks adopt rigor in the
recovery of the NPA of high-profile metropolitan customers and the legality actions must be
taken against the offender. Retail borrowers should also have unlimited liability towards your
loans and mortgaged assets.
56
CHAPTER 11: COVID IMPACT ON NPA
India Banks may be looking at a prolonged period of uncertainty on asset

quality front for about two years on account of significant restructuring
exercise for COVID-linked loans.
Six-month loan moratorium and one-time loan restructuring may have come as a boon for
COVID-hit borrowers and lending institutions to delay the pain. But analysts have raised
warning signals on the likely build-up of hidden stress in the banking system on account of these
measures.
Indian banks may be looking at a prolonged period of uncertainty on asset quality front for about
two years on account of significant restructuring exercise for COVID-linked loans. Under the
restructuring, banks relax repayment terms for stressed borrowers without classifying these loans
as bad loans. In fact, banks have already begun the process of rolling out the COVID resolution
schemes by putting up FAQs and online tools on websites. The idea is to help borrowers
understand their eligibility and the processes that need to be followed.
At least two banks, State Bank of India (SBI) and HDFC Bank, have published the details of
one-time loan restructuring schemes on their websites. Others are expected to follow. Under this,
banks can offer up to two years of loan moratorium extension to those borrowers whose cash
flows have been impacted by COVID. While retail borrowers can apply on the websites,
corporate customers will have to discuss their eligibility for the scheme with banks on a case-to-
case basis.
“The restructuring will mean actual NPAs will remain suppressed till the extended moratorium
period gets over,” said Jaikishan Parmar, an analyst at Angel Broking Ltd. “There will be a
systemic impact on account of the restructuring process,” said Parmar.
57
To fight COVID, the Reserve Bank of India (RBI) permitted financial institutions to offer a
moratorium on all term loans. This period expired on August 31. While the regular repayments
should have started by September 1, the Supreme Court has directed banks not to tag accounts as
fresh NPAs that are standard as on March 31.
CHAPTER 12: CONCLUSION
For any financial system, NPAs are an inevitable burden, and this needs monitor regularly to
prevent any account from becoming an NPA. Based on the review of the literature and other
studies, it is concluded that the success of the bank depends on the proper management of the
Non-performing assets and keeping them within tolerance level. The reforms in the Indian banking
sector since 1991 have been deliberate mainly in terms of the significant measures that were
implemented to develop a proper healthy, stable, and efficient banking sector in India.
The effect of a highly regulated banking environment on asset quality, the productivity and
performance of the banks demanded the reform process and resulted in incorporation of prudential
rules for revenue recognition, asset classification and provisioning and capital adequacy standards,
in line with international best practices.
Since the policies to deal with NPAs are different in nationalized and private banks, it has normally
been observed that the problem of NPAs is not significant in some of the private banks; However,
some of the nationalized banks have huge NPAs.
In today's competitive global environment, NPA management is becoming critical and has become
the need for all. The banking sector to become effective, the management of NPA should be an
58
exercise for the entire Bank lowering the last level. In the last three decades, especially after the
period of liberalization, the RBI has initiated several regulatory measures in association with banks
that includes the SARFAESI Law, BASEL etc. to administer the NPA and bring it to the optimal
level.
Although these measures are significant and largely helped banks reduce its level of NPA, the
generation of fresh NPA, its increasing trend during the financial crisis emphasizes the need for
an effective credit risk management mechanism. The NPAs are depleting the capital of the banks
and weakening their financial strength. It is also both a political and financial issue.
Banks and financial institutions should be more proactive to adopt practical and structured non-
productive assets management policy where the prevention of non-productive assets receives
priority. However, compared to private sector banks, the public sector bank is more at the NPA
level. Public sector bank should be more careful to prevent any account from becoming an NPA
by taking adequate preventive measures efficiently.
59
BIBILIOGRAPHY
Prasad, G.B. and Veena, D., 2011. NPAs reduction strategies for commercial banks in India.
International Journal of Management and Business Studies.
Reddy, G.S., 2004. Management of Non-Performing Assets (NPA‟s) in Public Banks sector.
Journal of Banking and Finance.
Reddy, P.K., 2002. A comparative study of Non-Performing Assets in India in the Global
context-similarities and dissimilarities, remedial measures.
Rajeshwari Parmar, Non-Performing Assets (NPAs): A Comparative Analysis of SBI and

ICICI Bank, International Journal for Research in Management and Pharmacy.
http://www.careratings.com/upload/NewsFiles/Economics/NPAs%20Q1%20FY20https://www.b
usiness-standard.com/article/finance/rbi-finally-discloses-details-of-major-wilful-defaulters-
under-rti-119112100441_1.html
https://pib.gov.in/newsite/PrintRelease.aspx?relid=191437
https://www.moneycontrol.com/financials/ratios/KM
https://www.rbi.org.in/
https://m.economictimes.com/
https://www.rbi.org.in/scripts/SearchResults.aspx?search=npa
https://www.financialexpress.com/industry/banking/
https://www.screener.in/
60

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An Industry Oriented Dissertation Project On

NPA (NON-PERFORMING ASSETS) IN

Submitted for the partial fulfilment of the requirement of the degree of

MASTER OF MANAGEMENT STUDIES

SASMIRA’S INSTITUTE OF MANAGEMENT STUDIES

Name of the Student: SAURABH DIVEKAR

Signature of the Student:

Signature of Guide: ___________

Name of Guide: Dr. Rupali More (Head Academics)

Signature of Co-Guide: _________

Name of Co-Guide: Dr. Satish Athawale

Master's Degree Programme in Management Studies (MMS),Finance ,Roll No-19.

Signature of Guide: : ____________________

Name of Guide: Dr. Rupali More (Head Academics)

Signature of Co-Guide: __________________

Name of Co-Guide: Dr. Satish Athawale

SAURABH SUNIL DIVEKAR.

Chapter Details Page No.

Certificate by the Guide ii

Abstract / Executive Summary v

List of Abbreviations xii

List of Figures/ Illustrations xv

List of Tables xvi

List of Charts xviii

1.1 OBJECTIVE OF THE STUDY 10

1.2 NEED OF THE STUDY. 11

1.3 LIMITATIONS OF THE STUDY 11

3.1 RESEARCH DESIGN

4.1 BANKING HISTORY IN INDIA 16

4.2 INDIAN BANKING INDUSTRY –GENERAL 18

5 NPA ASSETS OVERVIEW 21

5.1 CLASSIFICATION OF ASSETS 23-30

7 IMPACT OF NON-PERFORMING ASSETS ON 35

THE OPERATIONS BANKS

8 COMPARATIVE ANALYSIS OF PVB AND PSB OF 39

10 FINDINGS & SUGGESTIONS 54-55

11 COVID IMPACT ON NPA 57

 Erode current earnings through provisioning requirements.

 They result in reduced income.

 Limit the recycling of funds, established in mismatch of asset liability.

DEFINITION OF NON-PERFORMING ASSET

“According to Reserve Bank of India (RBI) NPAs “An asset, including a

1.1 OBJECTIEV OF THE STUDY :

 To analyzed different kinds of NPA‟s in selected banks.

 To identify the causes of NPAs in Indian banking system.

 To analyse the relationship between Gross NPA and profitability of banks.

1.2 NEED OF THE STUDY :

1.3 LIMITATIONS OF THE STUDY

CHAPTER 2 : REVIEW OF LITRATURE

3.1 RESEARCH DESIGN

3.2 SOURCE OF THE STUDY

CHAPTER 4 : INTODUCTION TO BANKING INDIA

1.1 BANKING HISTORY IN INDIA

1.2 INDIAN BANKING INDUSTRY –GENERAL STRUCTURE

The number of Private sector banks is reduced to 22.

Classification Number of banks Total assets (US $

Public sector 12 107.83

Private sector 21 688

1.3 INDIAN BANKING INDUSTRY- CURRENT SCENERIO

 Regulating the issuance of banknotes

CHAPTER 5: NPA ASSETS OVERVIEW

1. Recognition: Value assets close to real value,

2. Recapitalization: Infuse equity into sick banks to safeguard capital position,