CHAPTER I

INTRODUCTION AND RESEARCH

DESIGN

1.1 Introduction
1.2 Objectives of the study
1.3 Hypothesis of the study
1.4 Significance of the Study
1.5 Statement of the Problem
1.6 Scope of the study
1.7 Methods of Data collection
1.8. Methods of Data Analysis
1.9 Limitations of study
1.10 Conclusion

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 CHAPTER I
INTRODUCTION AND RESEARCH

DESIGN

1.1 INTRODUCTION

It's a known fact that the banks and financial institutions in India face the problem of
swelling non-performing assets (NPA’s) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, some steps have been
taken recently. The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 was passed by Parliament, which is an
important step towards elimination or reduction of NPA’s.

MEANING OF NPA’s:

An asset is classified as non-performing asset (NPA’s) if dues in the form of principal

and interest are not paid by the borrower for a period of 180 days. However with
effect from March 2004, default status would be given to a borrower if dues are not
paid for 90 days. If any advance or credit facilities granted by bank to a borrower
become non-performing, then the bank will have to treat all the advances/credit
facilities granted to that borrower as non-performing without having any regard to the
fact that there may still exist certain advances / credit facility.

NPA IN INDIAN BANKING SYSTEM:

NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the
midst of turbulent structural changes overtaking the international banking institutions,
and when the global financial markets were undergoing sweeping changes. In fact
after it had emerged the problem of NPA kept hidden and gradually swelling
unnoticed and unperceived, in the maze of defective accounting standards that still
continued with Indian Banks up to the Nineties and opaque Balance sheets.

In a dynamic world, it is true that new ideas and new concepts that emerge through
such changes caused by social evolution bring beneficial effects, but only after

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levying a heavy initial toll. The process of quickly integrating new innovations in the
existing set-up leads to an immediate disorder and unsettled conditions. People are not
accustomed to the new models. These new formations take time to configure, and
work smoothly. The old is cast away and the new is found difficult to adjust. Marginal
and sub-marginal operators are swept away by these convulsions. Banks being
sensitive institutions entrenched deeply in traditional beliefs and conventions were
unable to adjust themselves to the changes. They suffered easy victims to this
upheaval in the initial phase.

Consequently banks underwent this transition-syndrome and languished under distress

and banking crises surfaced in quick succession one following the other in many
countries. But when the banking industry in the global sphere came out of this
metamorphosis to re-adjust to the new order, they emerged revitalized and as more
vibrant and robust units. Deregulation in developed capitalist countries particularly in
Europe, witnessed a remarkable innovative growth in the banking industry, whether
measured in terms of deposit growth, credit growth, growth intermediation
instruments as well as in network.

During all these years the Indian Banking, whose environment was insulated from the
global context and was denominated by State controls of directed credit delivery,
regulated interest rates, and investment structure did not participate in this vibrant
banking revolution. Suffering the dearth of innovative spirit and choking under undue
regimentation, Indian banking was lacking objective and prudential systems of
business leading from early stagnation to eventual degeneration and reduced or
negative profitability. Continued political interference, the absence of competition and
total lack of scientific decision-making, led to consequences just the opposite of what
was happening in the western countries. Imperfect accounting standards and opaque
balance sheets served as tools for hiding the shortcomings and failing to reveal the
progressive deterioration and structural weakness of the country's banking institutions
to public view. This enabled the nationalized banks to continue to flourish in a
deceptive manifestation and false glitter, though stray symptoms of the brewing
ailment were discernable here and there.

The government hastily introduced the first phase of reforms in the financial and
banking sectors after the economic crisis of 1991. This was an effort to quickly
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resurrect the health of the banking system and bridge the gap between Indian and
global banking development. Indian Banking, in particular PSB’s suddenly woke up
to the realities of the situation and to face the burden of the surfeit of their woes.
Simultaneously major revolutionary transitions were taking place in other sectors of
the economy on account the ongoing economic reforms intended towards freeing the
Indian economy from government controls and linking it to market driven forces for a
quick integration with the global economy. Import restrictions were gradually freed.
Tariffs were brought down and quantitative controls were removed. The Indian
market was opened for free competition to the global players. The new economic
policy in turn revolutionaries the environment of the Indian industry and business and
put them to similar problems of new mixture of opportunities and challenges. As a
result we witness today a scenario of banking, trade and industry in India, all
undergoing the convulsions of total reformation battling to kick off the decadence of
the past and to gain a new strength and vigor for effective links with the global
economy. Many are still languishing unable to get released from the old set-up, while
a few progressive corporate are making a niche for themselves in the global context.

During this decade the reforms have covered almost every segment of the financial
sector. In particular, it is the banking sector, which experienced major reforms. The
reforms have taken the Indian banking sector far away from the days of
nationalization. Increase in the number of banks due to the entry of new private and
foreign banks; increase in the transparency of the banks' balance sheets through the
introduction of prudential norms and norms of disclosure; increase in the role of the
market forces due to the deregulated interest rates, together with rapid
computerization and application of the benefits of information technology to banking
operations have all significantly affected the operational environment of the Indian
banking sector.

In the background of these complex changes when the problem of NPA was belatedly
recognized for the first time at its peak velocity during 1992-93, there was resultant
chaos and confusion. As the problem in large magnitude erupted suddenly banks were
unable to analyze and make a realistic or complete assessment of the surmounting
situation. It was not realized that the root of the problem of NPA was centered
elsewhere in multiple layers, as much outside the banking system, more particularly in

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the transient economy of the country, as within. Banking is not a compartmentalized
and isolated sector delinked from the rest of the economy. As has happened elsewhere
in the world, a distressed national economy shifts a part of its negative results to the
banking industry. In short, banks are made ultimately to finance the losses incurred by
constituent industries and businesses. The unprepared ness and structural weakness of
our banking system to act to the emerging scenario and de-risk itself to the challenges
thrown by the new order, trying to switch over to globalization were only aggravating
the crisis. Partial perceptions and hasty judgments led to a policy of ad-hoc-ism,
which characterized the approach of the authorities during the last two-decades
towards finding solutions to banking ailments and dismantling recovery impediments.
Continuous concern was expressed. Repeated correctional efforts were executed, but
positive results were evading. The problem was defying a solution.

The threat of NPA was being surveyed and summarized by RBI and Government of
India from a remote perception looking at a bird's-eye-view on the banking industry
as a whole delinked from the rest of the economy. RBI looks at the banking industry's
average on a macro basis, consolidating and tabulating the data submitted by different
institutions. It has collected extensive statistics about NPA in different financial
sectors like commercial banks, financial institutions, urban cooperatives, NBFC etc.
But still it is a distant view of one outside the system and not the felt view of a
suffering participant. Individual banks inherit different cultures and they finance
diverse sectors of the economy that do not possess identical attributes. There are
distinct diversities as among the 29 public sector banks themselves, between different
geographical regions and between different types of customers using bank credit.
There are three weak nationalized banks that have been identified. But there are also
correspondingly two better performing banks like Corporation and OBC. There are
also banks that have successfully contained NPA and brought it to single digit like
Syndicate (Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not
so simple to be generalized for the industry as a whole to prescribe a readymade
package of a common solution for all banks and for all times.

Similarly NPA concerns of individual Banks summarized as a whole and expressed as

an average for the entire bank cannot convey a dependable picture. It is being
statistically stated that bank X or Y has 12% gross NPA. But if we look down further

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within that Bank there are a few pockets possessing bulk segments of NPA ranging
50% to 70% gross , which should consequently convey that there should also be
several other segments with 3 to 5% or even NIL % NPA, averaging the bank's whole
performance to 12%. Much criticism is made about the obligation of Nationalized
Banks to extend priority sector advances. But banks have neither fared better in non-
priority sector. The comparative performance under priority and non-priority is only a
difference of degree and not that of kind.

The assessment of the mix-of contributing factors includes:

1. human factors (those pertaining to the bankers and the credit customers),
2. environmental imbalances in the economy on account of wholesale changes
and also
3. Inherited problems of Indian banking and industry.

Variable skill, efficiency and level integrity prevailing in different branches and in
different banks accounts for the sweeping disparities between inter-bank and intra-
bank performance. We may add that while the core or base-level NPA in the industry
is due to common contributory causes, the inter-se variations are on account of the
structural and operational disparities. The heavy concentrated prevalence of NPA is
definitely due to human factors contributing to the same.

No bank appears to have conducted studies involving a cross-section of its operating

field staff, including the audit and inspection functionaries for a candid and
comprehensive introspection based on a survey of the variables of NPA burden under
different categories of sectorial credit, different regions and in individual Branches
categorized as with high, medium and low incidence of NPA. We do not hear the
voice of the operating personnel in these banks candidly expressed and explaining
their failures. Ex-bankers, i.e. the professional bankers who have retired from service,
but possess a depth of inside knowledge do not out-pour candidly their views. After
three decades of nationalized banking, we must have some hundreds of retired Bank
executives in the country, who can boldly and independently, but objectively voice
their views. Everyone is satisfied in blaming the others. Bank executives hold 'willful

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defaulters' responsible for all the plague. Industry and business blames the
government policies.

Important fact-revealing information for each NPA account is the gap period between
the date, when the advance was originally made and the date of its becoming NPA. If
the gap is long, it is the case of a sunset industry. Things were all right earlier, but
economic variance in trade cycles or market sentiments have created the NPA. Credit
customers who are in NPA today, but for years were earlier rated as good performers
and creditworthy clients ranging within the top 50 or 100. Significant part of the NPA
is on account of clout banking or willfully given bad loans. Infant mortality in credit
is solely on account of human factors and absence of human integrity.

Credit to different sectors given by the PSB’s in fact represents different products.
Advance to weaker sections below Rs.25000/- represents the actual social banking.
NPA in this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI
and big industries each calls for different strategies in terms of credit assessment,
credit delivery, project implementation, and post advance supervision. NPA in
different sector is not caused by the same resultant factors. Containing quantum of
NPA is therefore to be programmed by a sector-wise strategy involving a role of the
actively engaged participants who can tell where the boot pinches in each case.
Business and industry has equal responsibility to accept accountability for
containment of NPA. Many of the present defaulters were once trusted and valued
customers of the banks. Why have they become unreliable now, or have they?

The credit portfolio of a nationalized bank also includes a number of low-risk and
risk-free segments, which cannot create NPA. Small personal loans against banks'
own deposits and other tangible and easily marketable securities pledged to the bank
and held in its custody are of this category. Such small loans are universally given in
almost all the branches and hence the aggregate constitutes a significant figure. Then
there is food credit given to FCI for food procurement and similar credits given to
major public Utilities and Public Sector Undertakings of the Central Government. It is
only the residual fragments of Bank credit that are exposed to credit failures and
reasons for NPA can be ascertained by scrutinizing this segment.

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Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all
pervasive national scourge swaying the entire Indian economy. NPA is a sore throat
of the Indian economy as a whole. The banks are only the ultimate victims, where life
cycle of the virus is terminated.

Now, how does the Government suffer? What about the recurring loss of revenue by
way of taxes, excise to the government on account of closure of several lakhs of
erstwhile vibrant industrial units and inefficient usage of costly industrial
infrastructure erected with considerable investment by the nation? As per statistics
collected three years back there are over two and half million small industrial units
representing over 90 percent of the total number of industrial units. A majority of the
industrial work force finds employment here and the sector's contribution to industrial
output is substantial and is estimated at over 35 percent while its share of exports is
also valued to be around 40 percent. Out of the 2.5 million, about 10% of the small
industries are reported to be sick involving a bank credit outstanding around Rs.5000
to 6000 Cores, at that period. It may be even more now. These closed units represent
some thousands of displaced workers previously enjoying gainful employment. Each
closed unit whether large, medium or small occupies costly developed industrial land.
Several items of machinery form security for the NPA accounts should either be lying
idle or junking out. In other words, large value of land, machinery and money are
locked up in industrial sickness. These are the assets created that have turned
unproductive and these represent the real physical NPA, which indirectly are reflected
in the financial statements of nationalized banks, as the ultimate financiers of these
assets. In the final analysis it represents instability in industry. NPA represents the
owes of the credit recipients, in turn transferred and parked with the banks.

Recognizing NPA as a sore throat of the Indian economy, the field level participants
should first address themselves to find the solution. Why not representatives of
industries and commerce and that of the Indian Banks' Association come together and
candidly analyze and find an everlasting solution heralding the real spirit of
deregulation and decentralization of management in banking sector, and accepting
self-discipline and self-reliance? What are the deficiencies in credit delivery that leads
to its misuse, abuse or loss? How to check misuse and abuse at source? How to deal
with erring Corporate? In short, the functional staff of the Bank along with the

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representatives of business and industry has to accept a candid introspection and
arrive at a code of discipline in any final solution. And preventive action to be
successful should start from the credit-recipient level and then extend to the bankers.
RBI and Government of India can positively facilitate the process by providing
enabling measures. Do not try to set right industry and banks, but help industry and
banks to set right themselves. The new tool of deregulated approach has to be
accepted in solving NPA.

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1.2 Objectives of the study

 To study the meaning of NPAs.

 To examine the causes of NPAs and understand the factors that contributes to
the problem.
 To evaluate the impact of NPAs on the financial performance and stability of
banks.
 To identify the factors that influences the recovery of NPAs, such as loan
restructuring and the implementation of the Insolvency and Bankruptcy Code.
 To evaluate the effectiveness of various strategies and policies those have
been implemented to reduce the level of NPAs.
 To make recommendations for improving the management of NPAs and
enhancing the resilience of the banking sector to the risk of NPAs.
 To provide insights into best practices in the management of NPAs, and to
share lessons learned with policymakers and other stakeholders.

1.3 Hypothesis of the study

The following hypotheses have been set by the researcher for the study.

1. H1): NPA has no significant impact on banks financial performance.

2. (H0): NPA has no significant impact on banks financial performance.

1.4 Significance of the study

1. Understanding NPA trends: The study will help understand the trends in NPAs
of Union Bank of India and the factors that are contributing to them.

2. Improving financial performance: By analyzing the trends and causes of

NPAs, the study can help Union Bank of India identify areas for improvement
and take proactive steps to reduce its NPA levels, thereby improving its
financial performance.

3. Risk management: The study will provide insights into the quality of risk
management processes of Union Bank of India and the effectiveness of its
efforts to mitigate the risks associated with NPAs.

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 4. Best practices: The study may provide best practices for managing NPAs that
can be adopted by Union Bank of India and other banks to improve their
financial performance.

5. Industry knowledge: The study will contribute to the overall understanding of

NPAs in the banking sector and the efforts taken by banks to reduce their NPA
levels.

Overall, the project can help Union Bank of India make data-driven decisions to
improve its financial performance and reduce the impact of NPAs on its bottom line.

1.5 Statement of the Problem

"Non-performing assets (NPAs) are a major challenge for the banking

industry, including Union Bank of India. Despite efforts to mitigate NPAs, their levels
remain high, impacting the bank's financial performance and putting pressure on its
profitability. The reasons for the high levels of NPAs and the impact of various
internal and external factors on Union Bank of India's NPA situation are not fully
understood. The purpose of this study is to analyze the trends in NPAs and identify
the key factors contributing to them, with the aim of improving Union Bank of India's
financial performance and reducing the impact of NPAs on its bottom line."

1.6 Scope of the study

1. NPA Trends: The study will analyze the trends in NPAs of Union Bank of
India over a specified period of time to understand the evolution of NPA
levels.
2. Factors contributing to NPAs: The study will identify and analyze the key
internal and external factors that are contributing to the high levels of NPAs in
Union Bank of India.
3. Risk management processes: The study will examine the quality of risk
management processes at Union Bank of India and evaluate their effectiveness
in mitigating NPA risk.
4. Data analysis: The study will use statistical analysis techniques to draw
conclusions about the relationships between NPAs and various internal and
external factors.

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 5. Recommendations: Based on the findings, the study will provide
recommendations for Union Bank of India to reduce its NPA levels and
improve its financial performance.

The scope of the study may be limited to a specific geographic region, product line, or
time period. The scope should be defined clearly to ensure that the objectives of the
study can be achieved within the available resources.

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