INDEX

CHAPTER 1: INTRODUCTION

28
CHAPTER 4: DATA 31
46
.53

.61
APPEN 66
69

LIST OF TABLES

TABLE 1: CROSS- ..17

TABLE 2: RECOVERY OF NPA 22
TABLE 3: PRIMARY DATA ..
TABLE 4: AWARENESS OF NPAS AMONG INDIAN BANKING CUSTOMERS

TABLE 5: PERCEPTION & SELECTION OF BANKS FOR BANKING SERVICES

........37
TABLE 6: CROSS TABULATION OF CHI SQUARE TEST (SOURCE: PRIMARY
...............................................37
TABLE 7: CHI-SQUARE TEST (SOURCE: PRIMARY DATA) 38
TABLE 8: PRIVATE SECTOR BANKS 39
TABLE 9: YEAR ON YEAR GROWTH RATE IN GROSS NPAS IN PRIVATE SECTOR
BANK ...............................40
TABLE 10: SBI AND ITS ASSOCIATES 41
TABLE 11: YEAR ON YEAR GROWTH RATE IN GROSS NPAS IN STATE BANK OF
INDIA AND ITS ASSOCIATES.............................................................................................42
TABLE 12: NATIONALISED BANKS
TABLE 13: YEAR ON YEAR GROWTH RATE IN GROSS NPAS IN NATIONALISED
BANKS .44
.. 48
49

LIST OF CHARTS

CHART 1: GROSS NPA AS A PERCENTAGE OF GROSS ADVANCES

CHART 2: NET N
CHART 3
CHART 4: WRITE-
CHART 5: AGE OF RESPONDENTS (SOURCE: PRIMARY DATA)
CHART 6: TIME FRAME SINCE RESPONDENTS HAVE BEEN AVAILING
COMMERCIAL BANKING FACILITIES (SOURCE: PRIMARY DATA)
CHART 7: COMMERCIAL BANKING FACILITIES AVAILED BY RESPONDENTS
(SOURCE: PRIMARY DATA)...............................................................................................32
CHART 8: NO. OF BANKS IN WHICH RESPONDENTS HAVE THEIR ACCOUNTS
33
CHART 9: PREFERENCE OF TYPE OF BANK BY RESPONDENTS (SOURCE:
33
CHART 10: RISK PERCEPTION BY RESPONDENTS (SOURCE: PRIMARY
34
CHART 11: AWARENESS ABOUT NPAS BY RESPONDENTS (SOURCE: PRIMARY
35
CHART 12: KNOWLEDGE ABOUT NPAS BY RESPONDENTS (SOURCE: PRIMARY
35
CHART 13: KNOWLEDGE ABOUT LEVELS OF NPAS BY RESPONDENTS (SOURCE:
36
CHART 14: OPINION ON RELIABILITY OF BANKS & NPAS BY RESPONDENTS
36
 LIST OF FIGURES

FIGURE 1 ...10
FIGURE 2: FACTORS RESPONSIBLE FOR GROWTH OF NPAS

LIST OF ABBREVIATIONS

-PERFORMING ASSETS
-PERFORMING ASSETS
-PERFORMING ASSET
-PERFORMING LOAN

SARFAESI..............THE SECURITIZATION AND RECONSTRUCTION OF FINANCIAL

ASSETS AND ENFORCEMENT OF SECURITY INTEREST ACT, 2002
 CHAPTER 1: INTRODUCTION

1.0 Overview

Banks are the engines that drive the operations in the financial sector, money markets and
growth of an economy. In modern era, banking industry plays an important role in the
functioning of organized money markets, and also acts as a conduit for mobilizing funds and
channelizing them for productive purposes. A well-organized and efficient banking system is
an essential pre-requisite for the economic growth of every country due to their role in credit
intermediation process, payment and settlement systems, and monetary policy transmission,
says Bhasin (2016). Therefore, stability of the banking system and viability of banking industry
is considered to be of paramount importance for the financial stability, as well as, the speedy
growth of the economy as a whole. Across the globe, in fact, the banking sector acts as the
s economy. In emerging economies (like India), banks are more than
mere agents of financial intermediation and carry out the additional responsibility of achieving
s social agenda. Because of this close relationship between banking and
economic development, the growth of the overall economy is intrinsically correlated to the
health of the banking industry.

The stalwarts of Indian financial community nodded their heads sagaciously when Prime
Minister Mr. which we can
confidently assert that India is ahead in the world, it is the robustness and soundness of banking
banks by the international rating

Economic development is a continuous process. The success of economic development

depends essentially on the extent of mobilization of resources and investment and on the
operational efficiency and economic discipline displayed by the various segments of the
economy. Banks play a positive role in the economic development of a country as they not only
accept and deploy large funds in a fiduciary capacity but also leverage such funds through
credit creation. A commercial bank is a financial intermediary which accepts deposits of money
from the public and lends them with a view to make profits. A post office may accept deposits
but it cannot be called a bank because it does not perform the other essential function of a bank,
i.e. lending money. The banking system forms the core of the financial sector of an economy.
The role of commercial banks is particularly important in underdeveloped countries. Through

9
mobilization of resources and their better allocation, commercial banks play an important role
in the development process of underdeveloped countries. A commercial bank accepts deposits
which are of various types like current, savings, recurring and fixed deposits. It grants credit in
various forms such as loans and advances, discounting of bills and investment in open market
securities. It renders investment services such as underwriters and bankers for its issue of
securities to the public. Further, by offering attractive saving schemes and ensuring safety of
deposits, commercial banks encourages willingness to save among the people. By reaching out
to people in rural areas, they help convert idle savings into effective ones. Commercial banks
improve the allocation of resources by lending money to priority sectors of the economy. These
banks provide a meeting ground for the savers and the investors. Savers may not invest either
because of inadequate savings and lack of risk-taking spirit.

1.1 Classification of Banks in India

The banking system in India comprises commercial and cooperative banks, of which the former
and Indian
private banks, the commercial banks comprise nationalized banks (majority equity holding is
with the Government), the State Bank of India (SBI) (majority equity holding being with the
Reserve Bank of India) and the associate banks of SBI (majority holding being with State Bank
of India). These banks, along with regional rural banks, constitute the public sector (state
owned) banking system in India. They can be classified as follows:

Public Sector
Banks

Private Sector
Scheduled Banks
Commercial
Banks
Foreign Banks

Scheduled Regional Rural

Banks in India Banks

Scheduled
Urban Co-
Scheduled Co- operative Banks
Operative
Banks Scheduled State
Co-operative
Banks

Figure 1: Classification of Banks in India (Source: Prepared By Researcher)

10
 a) Scheduled and Non-scheduled Banks: Scheduled bank is one which is included in the
second schedule of the Reserve Bank of India Act, 1934. Certain conditions are to be
satisfied to be eligible for this as, for example, a bank must be a corporation and not a
partnership or a single-owner firm. Scheduled banks enjoy certain facilities like
borrowings from the RBI. In return, they have to meet certain obligations of RBI like
maintaining a part of their cash reserves with the RBI. Non-scheduled banks are
disappearing from the banking scene and hence they are not important.
b) Indian and Foreign Banks: Indian banks are those which are incorporated in India
and have their head offices in India. Some big Indian banks have their branches in
foreign countries. Foreign banks are incorporated in foreign countries with their head
offices outside India. They are scheduled banks and generally specialize in the field of
foreign exchange.
c) Public Sector and Private Sector Banks: The Central Government entered the
banking business with the nationalization of the Imperial Bank of India (now the State
Bank of India) in 1955. In 1969, fourteen large banks were nationalized and again in
1980, six more banks were taken over by the Government. These nationalized banks
are called public sector banks. The others are private sector banks.
d) Regional Rural Banks: These were started in 1975 to cater to the needs of rural
economy of India. They pay particular attention to the credit requirements of small
farmers, artisans and agricultural workers. They operate mainly at the district level.

1.2 Understanding Non-Performing Assets

Both in developed and developing countries, banking system has shown tremendous dynamism
and flexibility for adaptation towards adjusting itself to the sweeping changes in the economy
(Sharma, 1985). Banking system in India is no exception to the above phenomena and has
undergone major transformation twice, over the last five decades. Firstly, nationalization of
State Bank of India in 1955 followed by nationalization of 20 leading commercial banks in 2
phases in 1969 and 1984, resulted in paradigm shift in the philosophy and functioning of
banking from traditional class banking to mass banking. The policy thrust in those days was to
spread banking service far and wide into the countryside. As a result, banking in India
witnessed unprecedented expansion in branch network, particularly in rural and semi urban
areas, tremendous increase in disbursement of credit, particularly in priority and preferred
sector of the economy and also in mobilization of deposit.

11
Secondly, the reform initiative started in 1992-93 in the banking industry with the primary
motive of making Indian banking system stable, competitive, transparent and vibrant which
brought a total shift in the mindset of bankers in India from mass banking to prudent banking.
In this direction, series of policy initiatives were introduced as per recommendations of
Narasimhan committee in two phases. Firstly during 1992-93 to 1997-98 (first phase of
reforms), the primary objective was to stop erosion in the health of banking, bring uniformity
in banking practices and transparency in the balance sheet of banking companies in India. Until
1992-93, the Indian financial system was characterized by limited competition. Both the
products and players were circumscribed by heavy regulation in interest rates in credits,
government securities and capital markets. During these days commercial banks in India were
also subjected to administered structure with a highly segmented market with limited
competition and few distinct alternative products. The banking industry moved gradually from
a regulated environment to a deregulated market economy. The market developments kindled
by liberalization and globalization resulted in changes in the intermediation role of banks. The
pace of transformation was more significant with suitable support of technological up-
gradation. While the banking system had done fairly well in adjusting to the new market
dynamics, greater challenges were still there to face. Finally with the second phase of reform,
from 1998-99 onwards, the main focus was shifted towards raising Indian banking to
international standard. Accordingly, the financial sector was opened up for greater international
competition under WTO. Banks had to gear up to meet stringent prudential capital adequacy
norms under BASEL II and also had to cope with challenges posed by technological
innovations in banking. Commercial banks in India accepted the challenges in a befitting
manner to suitably adapt to such changes.

One of the major challenges that the banking industry is facing today is credit risks. Various
dimensions of credit risks expose this fast growing industry to mounting Non-Performing
Assets (NPAs). Though macro environmental factors including global recession, economic
slowdown, rising inflation and inadequate legal frame work have contributed heavily towards
growth of distress asset in the banking sector in India, micro banking factors, including poor
appraisal and follow-up, inappropriate mindset of the borrower and lender are no less
important. Pressure from regulators towards strict adherence to international norms on asset
quality has also contributed to rising bad loan figures in absolute terms in the Public Sector
Banks (PSBs) in India in the last two decades.

12
In the traditional banking business of lending financed by deposits from customers,
Commercial Banks (CBs) are faced with the risk of default by the borrower in the payment of
either principal or interest. This risk in and accounts
where payment of interest and/or repayment of principal are not forthcoming are treated as
Non- assets of the Indian banking
sector is a cause for concern for the economy. Indeed, existence of NPAs is an integral part of
banking and every bank has some Non-Performing Assets in its advance portfolio. However,
the high level of NPA is a cause of worry to any financial institution. A non-performing asset
is a loan or advance for which the principal or interest payment remained overdue for a period
of 90 days. Banks are required to classify NPAs further into three groups:

a) Substandard assets: Assets which has remained NPA for a period less than or equal
to 12 months.
b) Doubtful assets: An asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months
c) Loss assets: As per RBI, Loss asset is considered uncollectible and of such little value
that its continuance as a bankable asset is not warranted, although there may be some
salvage or recovery value.

Further, the following factors confronting the borrowers are responsible for incidence of NPAs
in the banks:

Diversion of funds for expansion/modernization/setting up new projects/helping

promoting sister concerns.
Time/cost overrun while implementing projects.
External factors like raw-material shortage, raw-material/Input price escalation, power
shortage, industrial recession, excess capacity, natural calamities like floods, accident
etc.
Business failures like product failing to capture market, inefficient management,
strike/strained labor relations, wrong technology, technical problem, product
obsolescence, etc.
Failure, non-payment/over dues in other countries, recession in other countries,
externalization problems, adverse exchange rate, etc.
Government policies like excise, import duty changes, deregulation, pollution control
orders, etc.

13
 Willful default, siphoning of funds, fraud, misappropriation, promoters / management
disputes etc.

Besides above, factors such as deficiencies on the part of the banks viz., deficiencies in credit
appraisal, monitoring and follow-up; delay in release of limits; delay in settlement of
payments/subsidies by Government bodies, etc. are also attributed for the incidence of NPAs.

Indeed, the NPA problem is one of the most severe plaguing the Indian Banking sector posing
questions over the stability of Indian banking system. Raghuram Rajan, the ex-Governor of
RBI has identified the NPA problem as a major challenge facing the Indian banking sector.
The problem, which was largely hidden earlier as banks used to do window-dressing of their
account statement, has now come to the forefront
their asset books by March 2017.Resultantly, this led to 29 PSBs writing-off Rs. 1.14 lakh
crore of bad-debts between 2013-2015, much more than what they had done in the preceding
nine years.

1.3 Status of Non-Performing Assets

Banking is a financial intermediary which mobilizes savings of the surplus units in the form of
deposits and channelizes them in deficit units including agriculture, industry and services, as
loans and advances. Commercial banks in India particularly the PSBs are exposed to numerous
problems viz a dramatic hike in the bank total expenses, stiff competition with highly
technology driven new generation Private Sector Banks and Foreign Banks, enormous task of
changing the mindset of existing workforces, mobilizing low cost resources, improving asset
quality and improving on operating efficiency etc. However, the most difficult problem is to
address the issue of distress asset in the balance sheet and ensure disbursement of funds in
quality assets (loans and advances). As a lending institution, bad debt in banking business is an
eventuality and cannot be avoided. Bad loans or NPAs are loan assets, which cease to generate
income to the bank. NPAs have dampening effect on banking system since long, though they
were not in the public domain till early 90s (Khasnobis, 2006). By this time huge amount of
advances involving uncertainty regarding repayment had piled up, resulting in question about
the health of Indian banking system and their ability to honour their deposit commitments
(Banerjee, Cole, & Duflo, 2004).

Norms on NPA was implemented for the first time by RBI in 1992-93, when Gross Non
Performing Asset (GNPA) of all public sector banks (PSBs) were Rs. 39,253 crores,

14
representing 23.18% of Gross Advances (GAs) and subsequently rose to Rs. 6,78,317 crores,
representing 10.25% of the GAs as on March 2020. For all Schedule Commercial Banks
(SCBs), GNPA were Rs. 47,300 crores representing 15.7% of GAs as on March 1997, which
rose to Rs. 8,96,082 crores for SCBs representing 1.87% of GAs as on March 2020. This
indicates low quality of credit portfolio in absolute terms in the PSBs and SCBs in aggregate
in India. Such a high figure of loan defaults is directly eating away vitality of the banks in India
and compels to relook into their credit appraisal and follow up system. The above estimates of
NPAs in PSBs, is believed to significantly understate the actual gravity of the situation. Such
a mammoth NPA figure in PSBs is also a constant worry for the regulators and the Ministry,
as banking plays a significant role in a developing country like India. Moreover, on account of
the intricacies involved in handling the NPAs, the task of managing asset quality in a bank has
become quite challenging for the managers, because a little indiscretion on any front may put
a bank into serious trouble. A graphical representation of GNPA/GA ratio of all SCBs from
March 1997 to March 2020 is given in the following chart.

Chart 1: Gross NPAs as a percentage of Gross Advances (Source: RBI Data Warehouse)
A look at the GNPA curves for PSBs and SCBs exhibit upward trends in the last ten years since
2009 (though prior to that period over a period of five years there was a declining trend in
GNPA due to number of factors including global recession, for which the GNPA figures
increased very sharply. The GA figures with respect SCBs reveal existence of continuous
upward trends, which indicate increasing credit appetite in the various segments of the society
(thereby justifying the commonly held impression regardi the Indian

15
economy). The GNPA ratio [(GNPA/GA) X 100] figures have registered decline over a period
of more than a decade till 2008-09 for PSB and 2009-10 for SCB indicating apparent
improvement over years, primarily because of the many-fold increase in the gross advances
and not due to the activities, like, better management of distress asset through proper appraisal,
follow up and recovery actions.

Chart 2: Net NPAs as a percentage of Advances (Source: RBI Data Warehouse)

1.4 Global Comparison of Non-Performing Assets

The performance parameters of the Indian banks had steadily improved till 2009 approaching
international standards and were among the better performers in the emerging market group.
However, it started deteriorating after 2011, as shown in Table 3. According to Kumar, Krishna
and Bhardwaj (2016), gross non-performing asset (GNPA) ratio, which
is the value of non-performing loans divided by the total value of the loan portfolio, stood at
4.2 per cent as of the end of 2015. In India, the ratio bottomed out only in 2009 (versus 2007
for the world). Moreover, until 2011, the worsening of bank asset quality in India was modest
by global standards. In contrast, since 2012, the ratio in India has been rising sharply and had
nearly touched the global average. World Bank data on country-wise bank asset quality is
available up to 2013. Till that year, the ratio in India was lower than the world average, albeit
marginally. In contrast, the emerging markets of Brazil and Indonesia only recorded an NPA
of 3.1 per cent and 2.3 per cent, respectively during the same period. The disturbing fact is that
the NPA in India has inflated to almost twice its size since 2010, while the same metric for its
peers (Brazil, Indonesia and South Africa) remained steady or moved in the opposite direction.

16
 Country 05 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20
Brazil 3.5 3.5 3.0 3.1 4.2 3.1 3.5 3.4 2.9 2.9 3.3 3.9 3.6 3.1 3.1 2.2
Indonesia 7.3 5.9 4.0 3.2 3.3 2.5 2.1 1.8 1.7 2.1 2.4 2.9 2.6 2.3 2.4 2.8
India 5.2 3.5 2.7 2.4 2.2 2.4 2.7 3.4 4.0 4.3 5.9 9.2 10. 9.5 9.2 7.9
Russia 2.6 2.4 2.5 3.8 9.5 8.2 6.6 6.0 6.0 6.7 8.3 9.4 10. 10.1 9.3 8.8
United 0.7 0.8 1.4 3.0 5.0 4.4 2.8 3.3 2.5 1.9 1.5 1.3 1.1 0.9 0.9 1.1
States
South Africa 1.8 1.1 1.4 3.9 5.9 5.8 4.7 4.0 3.6 3.2 3.1 2.9 2.8 3.7 3.9 5.2
China 8.6 7.1 6.2 2.4 1.6 1.1 1.0 1.0 1.0 1.2 1.7 1.7 1.7 1.8 1.9 1.8
Table 1:Cross-Country Comparison of NPA to Total Loans (%) (Source: World Bank Report)

1.5 Impact of Non-Performing Assets on Indian Economy

NPA impact the performance and profitability of banks. If NPAs are increasing, this will have
serious effects on future credit growth, as banks would develop cold feet in extending credit to
sectors exhibiting higher NPAs. This is particularly true for some sectors, such as agriculture
and SMEs. Further, if higher NPAs lead to higher write-offs, this will have negative effects on
those who repay their loans promptly, and create a moral hazard problem. Thirdly, under Basel
III, higher NPAs would require higher provisioning, and therefore, higher economic capital.
For the public sector banks, this is going to pose additional challenges, given the fiscal
situation. Hence, meaningful reduction and containment of NPAs within a reasonable limit is
very important at the current juncture. Among the banking groups, the deterioration is
pronounced for public sector banks, followed by foreign banks. Today, 70 per cent of the
banking system is paralyzed. The state-controlled banks have no ability to take on additional
risk they are not capitalized to do so, and that is a very serious issue for the economy.

Chart 3: Annual Slippage Ratio (Source: RBI Financial Stability Report)

17
Slippage ratio, calculated as the addition of Gross NPAs during the year as a percentage of
outstanding standard assets of the previous year, is an important indicator of asset quality. This
has decreased from 2.0 at end March 2011 to 1.6 at end March 2020 and further to 0.15 at end
of September 2020.

Chart 4: Write-off to Gross NPA (Source: RBI Financial Stability Report)

The written-off ratio, defined as NPAs written-off during the year as a percentage of gross
NPAs outstanding at the beginning of the year, reached 22.5 percent approximately during the
year ended March 2020. The written-off amount is quite significant for private sector banks,
compared with public sector banks, keeping the total gross advances lent by them (Kanan
2013).

1. Banks have to adhere to the provisioning norms set by RBI for the bad loans, which
eats into their profitability. This leads to banks having lesser capital to deploy,
shareholders losing money and banks finding it tough to survive in the market.
2. If banks do not classify an asset as NPA, they naturally have more money to advance
to earn interest income on. If large NPAs go unreported, the bank could reach a
situation, where it has advanced more money than it has available leading to a situation
of technical bankruptcy.
3. In light of attaining the Bessel norms, the burden on maintaining Capital Adequacy
Ratio increases.
4. It also affects the competitive position of banks.
5. For economy, it is disadvantageous as banks become more circumspect in giving loans
which affect the credit off-take in economy. India is still an economy which is largely

18
 dependent on banks to raise capital as the bond market is not that well developed. This
leads to declining Gross Capital Formation affecting economic growth.
6. Rising of NPAs will lead to a crisis of confidence in the market. The price of loans, i.e.
the interest rates will shoot up. Shooting of interest rates will directly impact the
investors who wish to take loans for setting up infrastructural, industrial projects etc.
7. It will also impact the retail consumers like us, who will have to shell out a higher
interest rate for a loan.
8. This will hurt the overall demand in the Indian economy which will lead to lower
growth rates and of course higher inflation because of the higher cost of capital.
9. The trend may continue in a vicious circle and deepen the crisis.

1.6 Microeconomic & Macroeconomic Impact of Non-Performing Assets

Microeconomic / Bank Specific Impact of NPA:

1. edged
cannot be charged on such accounts), but also erodes current profit generated by other
performing assets due to stringent provisioning norms on impaired loans (Selvarajan &
Vadivalagan, 2012).
2.
to funding costs and also puts deterrent effect on the solvency of the bank. Moreover,
unexpected increases in Non-Performing Loans (NPLs) reduce the coverage provided

3. Asset quality of a bank is measured inter-alia, in terms of the percentage of NPA to

total advances and therefore a higher level of NPA leads to adverse comments and
criticism by all stake-holders which in-
4. It tends to de-
loyalty. Public confidence depends on the intrinsic strength of banks, their sound
balance sheet and strong fundamentals, which is diluted with the existence of NPA level
of beyond tolerance.
5. Additional time and efforts required in handling NPA portfolio involve indirect cost
which a bank has to bear for no incremental gain (Srivastava, Bansal, & Sharma, 2013).
6. NPA creates a serious problem of asset- liability mismatch as the money lent for a
particular period, if not recovered in time, meeting the matching liability will be
extremely difficult and often becomes costly.

19
 7. The cost of financial intermediation by banks is high because of the cross subsidization
of their NPAs.
8. Existence of large amount of NPAs in the balance sheet of a bank essentially leads to
bank failure (Hou, 2007).
9. There are evidences that even among the banks that do not fail, there is a negative
relationship between NPA and performance efficiency (Kwan & Elsenbeis, 1997).

Macroeconomic/ Industry impact of NPA:

1. s of the bank
get blocked, restricting the recycling to the productive sectors of the economy. Once
the credit to various sectors of the economy slows down, the economy is badly hit.
There is a slowdown in growth in GDP. NPA is one of the major causes of economic
stagnation problem (Hou, 2007).
2. Indirectly the burden of NPA is to be borne by the society as a whole. When government
comes to rescue by way of infusion of capital to a sick bank due to erosion of capital
on account of NPAs, the same comes out o resources which
is contributed by the public in general, either in the form of tax revenues or from the
hard earned savings of the investing public. In any case, the society is bearing the cost
of these NPAs (Sharma, 2005).
3. NPA in bank is a serious problem and is plaguing the banking industry which is
reflected in decline in productivity and efficiency due to deterioration in the quality of
loan portfolio, restricting income generation and enhancement of capital funds,
accompanied by inadequate loan loss provisions (RBI, 1991).

It is a fact that at present, Indian banks are well-capitalized, with satisfactory capital adequacy
ratio. However, growing distress asset in stressed power and airline sectors is a matter of great
concern for all concerned. (RBI, 2012). Management of NPAs is as such sacrosanct to ensure
effective re-cycling of funds, and improvement of bottom lines. Therefore, reduction in NPA
should be treated as a national priority (GOI, 1998) and it is necessary that NPAs in banks
should be kept at the minimum possible level.

1.7 L

SARFAESI: The Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act empowers Banks/ Financial Institutions to recover their NPAs without

20
the intervention of the court, through acquiring and disposing secured assets without the
intervention of the court in case of outstanding amounts greater than 1 lakh. SARFAESI, it is
accused, has been used only against the small borrowers primarily from MSME sector.

Recovery of Debts Due to Banks and Financial Institutions (DRT) Act: The Act provides
setting up of Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals
(DRATs) for expeditious and exclusive disposal of suits filed by banks / FIs for recovery of
their dues in NPA accounts with outstanding amount of Rs. 10 lakh and above. DRTs are
overburdened leading to slow disposal of cases.

Lok Adalats: Section 89 of the Civil Procedure Code provides resolution of disputes through
ADR methods such as Arbitration, Conciliation, Lok Adalats and Mediation. Lok Adalat
mechanism offers expeditious, inexpensive and mutually acceptable way of settlement of
dispute.

Banking Regulation Act: Under the Banking Regulation Act 1949, the RBI is empowered to
monitor the asset quality of banks by inspecting record books.

1.8 Recovery Mechanisms for NPAs

Specific measures have been taken for sectors where the incidence of NPA is high, the
government said in response to the parliament question. To improve the resolution or recovery
of bank loans, Insolvency and Bankruptcy Code (IBC) has been enacted and SARFAESI Act
and Recovery of Debts due to Banks and Financial Institutions (RDDBFI) have been amended,
the response said. Further, six new Debt Recovery Tribunals (DRTs) have been established for
improving recovery. The SARFAESI Act allows banks and other financial institutions to
auction residential and commercial properties when borrowers default on their payments. This
helps the banks to reduce their NPA by recovery and reconstruction. Under this Act, 64,519
properties were seized or taken possession off by the banks in 2015-16. At a time when bad
loans are witnessing a surge, the rate of recovery of bad assets by banks has taken a knock. The
rate of recovery of NPAs was 10 per cent, or Rs. 22,957 crore, out of the total NPAs of Rs.
285,976 crore during fiscal ended March 2017, against Rs. 23,300 crore (22 per cent) of the
total amount of Rs. 105700 crore reported in March 2013, data from the RBI has said.
According to the RBI, the rate of recovery was 18.4 per cent, or Rs. 32,000 crore out of the
total NPAs of Rs. 173,800 crore reported in March 2014. The recovery rate was even higher at

21
 22 per cent (Rs. 23,300 crore) in March 2013 out of the total reported NPAs of Rs. 105,700
crore, the RBI said in its database on the Indian economy.

Sr Lok SARFAESI
Year Recovery Channel DRTs Total
No. Adalats Act
1 No. of cases referred
840,691 13,408 190,537 1,044,636
2 Amount involved
6,600 31,000 68,100 105,700
2012-13
3 Amount recovered
400 4,400 18,500 23,300
4 3 as per cent of 2
6 14 27 22
1 No. of cases referred 194,707#
1,636,957 28,258 1,859,922
2 Amount involved
23,200 55,300 95,300 173,800
2013-14
3 Amount recovered
1,400 5,300 25,300 32,000
4 3 as per cent of 2
6 10 27 18
1 No. of cases referred
2,958,313 22,004 175,355 3,155,672
2 Amount involved
31,000 60,400 156,800 248,200
2014-15
3 Amount recovered
1,000 4,200 25,600 30,800
4 3 as per cent of 2
3 7 16 12
1 No. of cases referred
4,456,634 24,537 173,582 4,654,753
2 Amount involved
72,000 69,300 80,100 221,400
2015-16
3 Amount recovered
3,200 6,400 13,200 22,800
4 3 as per cent of 2
4 9 17 10
1 No. of cases referred
2,152,895 28,902 80,076 2,261,873
2 Amount involved
105,787 67,089 113,100 285,976
2016-17
3 Amount recovered
3,803 16,393 7,758 27,954
4 3 as per cent of 2
4 24 7 10
Table 2: Recovery of NPA By SCBs Through Various Channels

22
The RBI said a total of 42.61 lakh cases to recover NPAs were filed in Lok Adalats, Debt
Recovery Tribunals and under the SARFAESI Act. Of this, 21.52 lakh cases were taken up by
Lok Adalats during fiscal March 2016. Public sector banks, which are burdened with a high
recover only Rs. 27,954 crore, the RBI said.
The deceleration in recovery was mainly due to a reduction in recovery through the SARFAESI
channel by 52 per cent from Rs. 25,600 crore in 2014-15 to Rs. 13,179 crore in 2015-16. On
the other hand, recovery through Lok Adalats and DRTs increased, the RBI said in its Report
on Trends and Progress in Banking (2014). To help banks recover loans or a part thereof, there
are legal measures available too. These include:

1) Debt Recovery Tribunals, which help banks resolve cases of seizure of property and
assets for defaulters above Rs. 10 lakhs expeditiously
2) The Securitization and Reconstruction of Financial Assets and Enforcement of Security

through Courts.
3) For milder cases, there are Lok Adalats, which help with arbitration and settlement

The chart shows that even though Lok Adalats and Debt Recovery Tribunals were able to
realize as much as 30 per cent of the amount on cases filed by banks in 2011, the ratio came
down to a mere 18 per cent in just four years. A time-series analysis shows that it was largely
the efficiency of DRTs that came down from 21.5 per cent in 2011 to 9.83 per cent in 2014.
While the ministry claims that in absolute numbers, DRTs are disposing off many more cases
than before and it is only because the number of cases has fallen that the ratio of realization is
dipping, it is evident that some ways are proving to be more effective than others in recovering
lost money for the banks. While the government tries to force banks into disclosing and
recovering their bad loans, what Raghuram Rajan told the committee on the possibility of
corruption and lax norms in lending seems to sum up the situation where funds are not only
being diverted but stolen in public eye. We have to go after corrupt bank managements as well
as corrupt promoters, Rajan said. There is no doubt that we need to do it. We do not have
enough teeth. There are these promoters, who have diverted funds. Diverted fund is a
euphemism. I would say plainly that they have stolen the funds, and we cannot go after them.
It takes too long.

23
 CHAPTER 2: LITERATURE REVIEW

2.0 Overview

The topic of NPAs in banks has been extensively debated, researched by scholars and hotly
highlighted by the media. Accordingly, many published studies and reports are available and
several academic researchers have studied the issue of NPAs, from time to time, in the Indian
banking industry. A brief of the different literatures available on the issue and related areas are
given below.

2.1 Literature Reviewed

In fact, Kaur and Singh (2011) felt that NPAs are considered as an important parameter to judge
the performance and financial health of banks. The level of NPAs is one of the drivers of
financial stability and
efforts to understanding the concept of NPAs, its magnitude and major causes for increasing
NPA & to evaluate the operational performance of SBI & Associates and other Public Sector
Banks during 2007-2011. He used various statistical tools like ratio, standard deviations,
coefficient of variation and ANOVA test to analyze and interpret the data. Author concluded
that each bank should have its own independence credit rating agency which should evaluate
the financial capacity of the borrower before credit facility and credit rating agencies should
regularly evaluate the financial condition of the clients.

Thiagarajan, Ayyappan, Ramachandran and Sakthivadivel (2011) in their paper empirically

evaluate the determinants of profitability in the public and private sector commercial banks in
India. Correlation analysis, multiple regression analysis and factor analysis have been used to
estimate the contribution of select bank specific variables towards profitability. The correlation
coefficient of the selected independent variables with the bank been worked
out in order to identify the most significant variable that has strong relationship with the
dependent variable. The study also examines the impact of several independent variables on
profitability for which multiple regression analysis has been undertaken. The study also uses
factor analysis to examine the value for the coefficient for regression when the variables are
regressed upon the factors. In factor analysis the varimax rotation has been used. The study
reveals that credit risk represented by NPA has a significant negative influence on the
profitability on both private and public sector banks. It also establishes that NPA is positively
influenced by GDP and negatively influenced by inflation. The study concludes that with the

24
recent trend of lower GDP and higher inflation, NPA is likely to rise and as a consequence
profitability is likely to decline. The multiple regression analysis highlight that the return on
investments and return on advances has a significant influence on the profitability of private
sector banks.

Further, Chaudhury and Singh (2012) point to the impact of economic reforms in the country
on the asset quality of the banks. To test the statistical significance, ANOVA technique is used.
The analysis clearly shows that there is a significant difference in the group-wise asset quality
of Indian banks. Nevertheless, reforms have indeed transformed Indian banks into strong,
stable and prosperous entities. In terms of group wise results, the authors find a significant
difference in their quality of loans.

Siraj and Pillai (2012) investigate the performance of Indian SCBs before and after global
financial crisis (2007-09). They examine various aspects of performance and asset quality of
those banks, group wise. For the purpose of analyzing the trends average annual growth rate
(AAGR) has been computed for selected variables and the output is presented graphically for
meaningful inference. They also examine movement of various NPA indicators, gross NPA,
net NPA, additions to NPA, reductions to NPA and provisions towards NPA and compare it
with total advances and total deposits of banks. The study examines bank-group wise
performance data for post-millennium period from 31st March 2001 to 31st March 2011. The
study also examines the impact of gross advance and total deposit on incremental NPA with
the help of simple regression analysis. A multiple regression model has also been developed
with NPA as a dependent variable with total deposits and total advances as independent
variable to examine the total effects of these variables in addition to NPAs of the bank. The
study observes that increased level of addition to NPA still remain a major concern for banks
in India. Though NPA shows improved recovery during first half of last decade, it remained
challenging during second half of the period. A notable result is the financial stability of PSBs
and increased susceptibility of PrSBs and FBs during financial crisis.

Samir and Kamra (2013), however, analyzed the comparative position of NPAs in selected
banks namely State Bank of India, Punjab National Bank and Central Bank of India. They also
highlighted the policies pursued by the banks to tackle the NPAs and suggested a multi-pronged
strategy for speedy recovery of NPAs in banking sector. The researchers throw light on the
significance of asset quality since it affects interest income, profitability, capital base,
capitalrisk weighted assets ratio.

25
Moreover, DTA (2014) report points to the fact that almost 86% of the bad loans in the sector
were generated from the nationalized banks (56%) and SBI group (30%) as at the end of
September, 2013. With respect to rising bad loans, the report points to measures like
independent appraisal of all credit application cases, sensitivity analysis for infrastructure
projects, increasing importance of the ARCs etc.

Similarly, the reports prepared by CARE (2014, 2015) looked into the NPA trend in the Indian
banking sector apart from the causes that have been responsible for the rising trend in the poor
loans that we are seeing recently. Also, a brief discussion is made about the different measures
that have been adopted to bring the nonperforming loans (NPLs) under control.

Also, Mahajan (2014) examined the NPAs of all public, old and new private and foreign sector
banks in India for 15 years period from year ended 1998-99 to 2012-13 with the help of ratios.

Chakrabarti (2015) discussed the vital role of asset reconstruction companies (ARC) in
managing NPAs in the banking sector in the light of the sudden rise in NPAs in the industry.
The author mentions that RBI points to the fact that NPAs plus stressed assets equal almost
10% of the bank loans. The discussion focuses on the performance and the problems of the
ARCs.

However, Jana and Thakur (2015) looked into the trend of NPAs by studying variables like the
gross and net NPA ratios on the data of the nationalized banks for the period 2008 to 2012. The
study revealed that though the overall trend is negative and is, therefore, upward rising, it is
heterogeneous in nature.

Similarly, Tripathy and Singh (2015) conducted a study of 4 banks. The data collected for
NPA, CRAR, regulatory capital and capital ratio from website of RBI and banks and further
analyzed to check whether banks have sufficient capital adequacy or not. The time span is
2008-2014 for NPA and CRAR and 2013-2014 for regulatory capital and capital ratios. Finally
it is concluded that public sector banks have made enough cushion against their risk weighted

Vallabh et al. (2016) in their joint study, however, devised a unique way to forecast the NPAs
in Indian banking system in 2020. The focus was to devise a model which would play a pivotal
role in forecasting future NPAs in the Indian banking sector. This was achieved by looking into
various methodologies and zeroing in on a model, which could be implemented to help
understand how NPAs could be predicted.

26
Another study performed by Borse (2016) attempts to correlate the NPA and ROA of Indian
commercial banks, 6 Public sector banks and 5 Private sector banks, where chosen for the
study. 2010-11 to 2014-15 is the study period for this study. The study concluded that NPA
increase rate is higher in public sector banks than the private sector banks. NPA of private
sector banks are well under control. This study shows that there is moderate negative
correlation of NPA and ROA of Public sector banks. This means as the NPA increases it
negatively affects the ROA of banks.

The main objectives of Sasikala and Mohanapriya (2017) study is to identify various factors
are responsible for increasing the size of NPA in cooperatives. The current data is analyzed
with the help of secondary data from RBI website, NPA with reference to PCUBs covering the
five financial years from 2008-2009, 2009-10, 2010- 11, 2011-12 and 2012 2013) & primary
questionnaire.

However, M Even though the aspect of NPA has been studied

by researchers from time to time, the present research aims to seen whether there has been any
significant effect or trend following the financial crisis that commenced in 2007 and has still
not lost its grip on some major economies of the world.

Similarly, Roy and Samanta (2017) study tries to depict both the Gross Non Performing Asset
and Net Non-Performing Asset position of Public Sector Banks in India and attempts to find
whether there is any significant difference among them. This paper also tries to show the impact
of GNPA on Net Profit of the selected banks for the last 5 years. The analysis carried on in this
paper about GNPA shows
the years. Since there is a negative high correlation between GNPA and NP, the profit gradually
decreases as the GNPA grows which has become a serious concern right now.

27
 CHAPTER 3: RESEARCH METHODOLOGY

3.0 Introduction

An attempt is made in this paper to analyze the factors contributing to NPAs, the magnitude of
NPAs, reasons for high NPAs and their impact on Indian banking operations, relationship
between NPAs and business cycles, GDP, Interest rates, etc. and finally, to provide suitable
suggestions to reduce NPAs in commercial banks. This paper also makes an attempt to establish

banks for banking services and if there has been any significant improvement in the trend of
NPAs.

3.1 Research Objectives

To study the concept of Non-Performing Assets and its impact on Indian Banking Sector.
To study the general reasons for assets to become Non-Performing Assets.
To study the overall trend of NPA over the past decade in Indian Banking Sector.
To suggest various measures for the bank to reduce the level of NPA.
To offer suggestions and future action plan based on findings emanated from the study.

3.2 Stated Hypotheses

The researcher while collecting data came across a wide array of facts and details. For
maintaining the scientific study of the research, two hypotheses were stated by the researcher.
Following hypotheses were stated:

H01: There is no significant relation

perception and selection of banks for banking services.

H10
perception and selection of banks for banking services.

H12: There has been no significant increase in the level of NPAs in the past decade among
Indian banks.

H21: There has been a significant increase in the level of NPAs in the past decade among Indian
banks.

28
3.4 Research Design

The design used for research is mixed method. Both primary and secondary data have been
used for the purpose of research. While significant information was extracted from published
journals, magazines, internet search engines and other government websites, a structured
questionnaire were drafted by the researcher to gather factual information pertaining to the
awareness and perception of NPAs among Indian customers. Responses were collected and
assessed with reference to secondary data collected during the research in order to reach valid
conclusions and inferences. Thus, a proper balance was maintained between both the data
sources.

Owing to the time constraints and the geographical variations, responses situated only in
Mumbai were considered for research. It is pertinent to note here that is the generally accepted
Financial Capital of India. Therefore the study is limited due to the geographical and time
constraint.

3.5 Primary Data Sources

Structured questionnaires were used to obtain responses from the individual banking
customers. The questionnaire for individual customers was prepared and digital means were
relied upon for obtaining responses. Several sources were tapped including generally available
sources of information, the Alumni Association of the college, and other exhaustive sources.

No. of
Questionnaire Technique Description
Respondents

Random
Responses from
Individual Sampling
Indian Individuals
Banking Using 52
Who Are Banking
Customers Online
Customers
Format
Table 3: Primary Data

3.6 Secondary Data Sources

This is a very important area of research as it lays the foundation for the proposed work. The
correctness and robustness of the findings depend on the design that is laid. For the present
study, the components of the design are as follows:

29
Sample: The individual private sector banks, the nationalized banks and SBI and its associates
have been considered.

Data Period: The analysis is based on data for the period 2010-2017. Data for period post
2017 was unavailable for access on RBI Data Warehouse.

Nature of the Data and Source: The investigation is based on secondary data, which is
collected from the RBI website.

Variable of Interest: Gross NPAs.

Research Method: The statistical tool that the researcher has used is the geometric mean for
arriving at the mean growth rate and then the growth of individual banks has been compared
with the average growth rate.

Moreover, several reputed research journals, including research paper and articles, have been
extensively used by the researcher. Also, the relevant data have been collected from RBI
publications like Annual Report on Trends and Progress of Banking in India, Annual Report
of RBI, and various publications of RBI like RBI Bulletin, IBA Bulletin, websites and
magazines.
3.7 Data Cleaning / Refining for Analysis

Once these responses were collected, they were checked for completeness of response and only
those responses were utilized for the analysis. This raw data was then compiled and refined to
be used appropriately in the analysis. The statistical tools used were Chi-Square Test and
Geometric Mean.

30
 CHAPTER 4: DATA ANALYSIS AND FINDINGS

4.0 Introduction

The objective of the research is to assess the level of knowledge, attitude & perception of Indian
customers towards NPAs and the extent to which it affects their selection of banks for banking
services. In order to obtain proper statistical validation, the following statistical tool is used to
analyze the hypothesis.

4.1 Assessment of Primary Data

The data collected was analyzed to meet the objectives and were presented in graphical manner
to bring about comparison to meet the above objectives. Tables of all the responses were drawn
for the data. Simple statistical and graphical method is used to present the facts observed by
the study. Some of the questions asked in the questionnaire are drawn below in detail:

Q3. What is your age?

Chart 5: Age of Respondents (Source: Primary Data)

The responses collected reveal that the age group of 18-30 were the majority of the respondents
in the study. The age group of 31-45 constituted 15.4% of the total responses while the age
group of 60+ constituted 9.6%.

31
Q4. Since how long have you been keeping your money in the bank?

Chart 6: Time Frame Since Respondents Have Been Availing Commercial Banking Facilities
(Source: Primary Data)
Most of the respondents have been availing commercial banking facilities since more than 10
years. The data here also reveals that 23.1% of respondents have been availing banking
facilities between 5-10 years. This suggests that there is a significant overlap between
respondents who are in the working age group and the time frame since they have been availing
banking services.

Q5. Do you have any of these with a bank? Choose the ones you have.

Chart 7: Commercial Banking Facilities Availed By Respondents (Source: Primary Data)

32
The analysis reveals that most respondents avail multiple services such as Savings Account as
well as Current Account or Fixed Deposit. All the respondents have been availing banking
services and a staggering 94.2% have access to a Savings Bank Account followed by Fixed
Deposit at 44.2%.

Q6. Are all of these with one bank or with different banks?

Chart 8: No. of Banks In Which Respondents Have Their Accounts (Source: Primary Data)

The analysis shows that approximately half of the respondents have accounts in 2 banks. A
substantial 30% reveal that their accounts have been with a single bank.

Q8. Which amongst the following will be your first preference for bank?

Chart 9: Preference of Type of Bank By Respondents (Source: Primary Data)

33
A huge 75% of the respondents reveal that nationalized banks will be their first preference. A
significant portion of those respondents find that nationalized banks have a stronger safety
through the backing of the government.

Q12. How risky on a scale of 1-5 is keeping your money in the bank according to you? 1
being no risk 5 being very risky.

Chart 10: Risk Perception By Respondents (Source: Primary Data)

38.5% respondents believe that the risk of keeping your money in bank is low though it is not
minimal. A portion of respondents believe that it is moderately risk to put your money in bank
(30.8%).

Q14. Do you know What NPAs are?

As can be seen below, 76.9% of respondents believe that they know what Non-Performing
Assets are -Performing Assets.

34
 Chart 11: Awareness About NPAs By Respondents (Source: Primary Data)

Q15. What according you would be an NPA?

Chart 12: Knowledge About NPAs By Respondents (Source: Primary Data)

The analysis reveals that 55.8% of the respondents have a certain knowledge about Non-
Performing Assets while 30.8% of respondents have a very basic knowledge level about NPAs.

Q16. Are you aware of how much NPA your Bank has?

A staggering 80.8% of respondents concluded that they do not know what the level of NPAs
with their banks are. A meagre 19.2% believed that they know the levels of NPAs with their
banks.

35
 Chart 13: Knowledge About Levels of NPAs By Respondents (Source: Primary Data)

Q19. In your opinion, does the NPA of a bank affect its reliability?

Chart 14: Opinion on Reliability of Banks & NPAs By Respondents (Source: Primary Data)

76.9% of respondents believe that NPAs affect the reliability of banks. They suggest correctly
that the levels of NPA have a direct impact on the performance and profitability of banks.

4.2 Chi-Square Test

Chi Square Analysis is carried out in order to find the significant association between the
variables of level of knowledge of Indian customers regarding NPAs and their perception &
selection of banks for banking services. Chi Square is a statistical tool to examine variation. It
compares the variation between two different populations and makes a determination whether
the variation is same.

36
Chi Square helps to determine the statistical significance of an association between an attribute
X and an attribute Y in Y = f (X1, X Xn). Chi Square is a statistical test commonly used to
compare observed data with data we would expect to obtain according to a specific hypothesis.

That is, Chi Square is the sum of the squared difference between observed (O) and expected
(E) data in all possible categories.

Valid Cumulative
Frequency Percent
Percent Percent
Poor 9 17.3 17.3 17.3
Fair 15 28.8 28.8 46.2
Valid
Good 28 53.8 53.8 100.0
Total 52 100.0 100.0

Table 4: Awareness of NPAs Among Indian Banking Customers (Primary Data)

Valid Cumulative
Frequency Percent
Percent Percent
Positive 12 23.1 23.1 23.1
Fair 20 38.5 38.5 61.5
Valid
Negative 20 38.5 38.5 100.0
Total 52 100.0 100.0

Table 5: Perception & Selection of Banks for Banking Services (Primary Data)

The Chi-Square Test was conducted first to determine whether there is any association between
the two variables in order to test H01 and H11.

Table 6: Cross Tabulation

Perception & Selection of Banks
for Banking Services
Total
Awareness of NPAs Among
Positive Fair Negative
Indian Banking Customers

Count 2 13 13 28
Good
Expected Count 6.5 10.8 10.8 28.0
Count 3 6 6 15
Fair
Expected Count 3.5 5.8 5.8 15.0
Count 7 1 1 9
Poor
Expected Count 2.1 3.5 3.5 9.0
Count 12 20 20 52
Total
Expected Count 12.0 20.0 20.0 52.0

37
The counts obtained from raw data were refined for the purpose of the test and the expected
count was calculated to find dependence of the two variables as can be seen in the table above.

Table 7: Chi-Square Test

Value df Sig-value
a
Pearson Chi-Square 19.255 4 .001

The table indicates that significance value is 0.001, which is less than standard value of 0.05%.
Therefore, the Chi-square test is rejected (using p-value method). The alternate hypothesis is

NPAs and the perception and selection of banks for banking services.

4.3 Geometric Mean

Assessment of Private Sector Banks

The position of the private sector banks with regard to the movement of gross NPAs during the
study period is discussed below

Assessment at the Individual Level: An examination of the gross NPA position of the banks
in the private sector shows that the growth rate (calculated using Geometric Mean) is quite low
in the initial years of the study period (the lowest being 3 per cent in the year 2011- 2012), but
it goes on increasing thereafter. The overall position of NPAs of the private sector goes up to
a maximum of 72 per cent in the year 2016-2017. Majority of the private sector banks show a
sharp rise in the NPA growth rates after the year 2015-2016. This sudden rise may have been

The inspection carried out by the RBI highlighted the under-reporting of NPAs in the private
sector banks. Big lenders like Axis Bank, Yes Bank and ICICI Bank reveal high growth rate
of NPAs during the latter years of the study period. Axis Bank experienced a significant rise in
the gross NPAs of close to 250 per cent in 2016-2017 followed by Karur Vysya Bank (190 per
cent) and Yes Bank (170 per cent).

38
 Growth more than average (27%) (%) Growth less than average (27%) (%)
Axis Bank 49 Catholic Syrian Bank Limited 22
City Union Bank Limited 33 DCB Limited -3
Jammu and Kashmir Bank Ltd 44 Dhanlaxmi Bank 22
Karur Vysya Bank 30 Federal Bank 11
Nainital Bank 32 HDFC Bank 18
RBL 44 ICICI Bank 24
Tamilnadu Mercantile Bank Ltd 28 Indusind Bank 22
Yes Bank Ltd 65 Karnataka Bank Ltd 16
Kotak Mahindra Bank Ltd 25
Lakshmi Vilas Bank 10
South Indian Bank 27
Table 8: Private Sector Banks (Computed By Researcher)
Comparing Performance Against the Mean: If we consider the growth rates of NPAs of
each private sector bank with respect to the average growth rate of the banks in the private
sector as a whole, we find that most of the banks have a growth rate less than the average
growth rate (27 per cent). The performance of DCB is a commendable one as it shows an
overall decline in the level of poor loans, which is an exception in the banking landscape. It
points to a sound NPA management process in the bank. On the other hand, Yes Bank, which
is among the big brands in the industry recorded the highest growth rate of 65 per cent followed
by Axis Bank (49 per cent) (Table 9)

39
 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 GM
Year (%) (%) (%) (%) (%) (%) (%) (%)
Axis Bank 21 13 33 31 -31 48 250 49
Catholic Syrian Bank Ltd 29 -5 15 58 42 -6 34 22
City Union Bank Limited 20 10 40 69 15 52 33 33
DCB Limited -17 -8 -11 -36 34 6 29 -3
Dhanlaxmi Bank -13 55 265 28 15 -18 -31 22
Federal Bank 40 13 19 -30 -3 58 4 11
HDFC Bank -7 18 17 28 15 28 34 18
ICICI Bank 6 -6 1 9 44 74 61 24
Indusind Bank 4 31 32 36 -9 38 36 22
Jammu and Kashmir Bank Ltd 12 0 25 22 253 58 37 44
Karnataka Bank Ltd 28 -2 -7 31 13 25 34 16
Karur Vysya Bank -3 41 -11 -2 143 -25 190 30
Kotak Mahindra Bank Ltd -21 2 23 40 17 129 -26 25
Lakshmi Vilas Bank -51 95 49 19 -17 -14 64 10
Nainital Bank -8 45 117 -9 27 54 38 32
RBL -22 54 -22 200 43 87 72 44
South Indian Bank 9 16 62 0 49 143 26 27
Tamilnadu Mercantile Bank Ltd 23 26 21 100 -26 31 55 28
Yes Bank Ltd 34 4 12 85 79 139 170 65
Private Sector Banks 6 3 13 16 37 59 72 27
Table 9: Year on year growth rate in gross NPAs in private sector banks (Source: Computed By Researcher)

40
Performance assessment of SBI and its Associates
Assessment at the Individual Level: Next, we analyse the position of SBI and the SBI Group
as a whole (note that the SBI Associates do not separately exist now as they have been merged
with SBI in 2017). An analysis of the gross NPA position shows that the initial spurt in NPA
growth took place in 2011-2012 followed by 2015-2016. This observation is the same as what
is seen in the case of the nationalised banks. Of the entire SBI Group the State Bank shows the
minimum average growth of 28 per cent. The associate banks show a poor performance in
terms of the overall rise in NPAs during the period. Calculations show that State Bank of
Hyderabad shows a growth of 61 per cent, which is closely followed by State Bank of Patiala
(51 per cent), State Bank of Bikaner and Jaipur (50 per cent), State Bank of Mysore (49 per
cent) and State Bank of Travancore (45 per cent). It is evident from the computations that with
the SBI giving more focus towards NPA management rather than business expansion, fruitful
results are reflected in 2016-2017 with respect to the previous year, a rise of only 14 per cent.
For the remaining associate banks, it seems that the top management has not taken the issue of
NPAs very seriously, due to which in 2016-2017 the year on year growth rate exceeds 160 per
cent for all the banks. This might be the possible reason apart from generating economies of
scale behind mergers of the associate banks with the parent bank (Table 11).

Comparing Performance Against the Mean: The table below gives an idea about the growth
position in NPAs of the individual banks against the average performance of the group (Table
10).

Growth more than average (34%) (%) Growth less than average (34%) (%)
State Bank of Bikaner And Jaipur 50 State Bank of India 28
State Bank of Hyderabad 61
State Bank of Mysore 49
State Bank of Patiala 5
State Bank of Travancore 45
Table 10: SBI and its Associates (Computed By Researcher)

41
 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 GM
Year (%) (%) (%) (%) (%) (%) (%) (%)
State Bank of Bikaner And Jaipur 37 98 28 29 8 22 196 50
State Bank of Hyderabad 77 74 59 83 -14 32 176 61
State Bank of India 30 57 29 20 -8 73 14 28
State Bank of Mysore 45 74 38 35 -24 70 173 49
State Bank of Patiala 37 37 30 53 16 55 164 5
State Bank of Travancore 30 78 18 76 -23 36 176 45
State Bank of India and its
associates 32 59 30 27 -8 66 46 34
Table 11:Year on year growth rate in gross NPAs in state bank of India and its associates (Computed By Researcher)

Growth more than average (46%) (%) Growth less than average (46%) (%)
Allahabad Bank 50 Bank of India 40
Bank of Baroda 51 Bank of Maharashtra 46
Andhra Bank 67 Canara Bank 45
Corporation Bank 59 Central Bank of India 41
Dena Bank 53 Indian Overseas Bank 38
IDBI Bank Ltd 55 Syndicate Bank 36
Indian Bank 53 UCO Bank 45
Oriental Bank of Commerce 48 Union Bank of India 44
Punjab and Sind Bank 63 United Bank of India 35
Punjab National Bank 50 Vijaya Bank 30
Table 12: Nationalised banks (Computed By Researcher)

42
Performance Assessment of Nationalised Banks
Assessment at the Individual Level: As per the computation, the position of Gross NPAs with
respect to the growth rate during the period 2010-2011 and 2016-2017 is extremely bad, which
is the reason behind the growing worry of the apex bank. If we look into specific banks and
look at the growth rate during the study period we find the banks, which show the maximum
rate are Andhra Bank, Punjab and Sindh Bank and IDBI Bank, which show the mean growth
rate (in terms of geometric mean) to be 67, 63 and 55 per cent, respectively. In fact, the overall
position of the nationalised banks taken together shows that the growth rate has risen at a high
pace after the financial crisis started showing its effect in 2010. Of the 20 nationalised banks,
40 per cent show a mean growth rate of atleast 50 per cent. If we compare the growth rate of
banks with respect to the average growth rate of the nationalised banking group taken together,
it is evident that 50 per cent of the banks grow at a rate, which is more than the mean rate of
46 per cent. Some of the prominent names include Punjab National Bank, Andhra Bank, IDBI
Bank (in which LIC has recently taken a stake of 51 per cent). For those banks in which the
NPA rose by less than the average, the geometric mean lies in the range of 30 per cent (for
Vijaya Bank) and 46 per cent (for Bank of Maharashtra). If we analyse the pattern of growth
(year-on-year), we find that there has been a spurt in the NPA growth of nationalised banks
during 2011-2012 and 2013-2014. The second shock in terms of poor quality norms took place
in 2015-2016 when the overall nationalised banks grew 104 per cent over the previous year.
After the RBI came up with the concept of prompt corrective action, and looked at the problem
with more diligence, some positive results (though not satisfactory) is seen in 2016-2017. It is
evident from the calculations that the growth of NPAs in 2016-2017 is 21 per cent, which is
the least during the study period (Table 13).

Performance of Banks against Average: The table above shows the categorisation of the

43
 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015 2015-2016 2016-2017 GM
Year (%) (%) (%) (%) (%) (%) (%) (%)
Allahabad Bank 35 25 149 57 4 84 34 50
Bank of Baroda 31 42 79 49 37 149 5 51
Andhra Bank 104 81 107 58 17 66 54 67
Bank of India -1 34 44 38 72 125 4 40
Bank of Maharashtra -3 11 -12 151 124 62 66 46
Canara Bank 21 29 55 21 72 143 8 45
Central Bank of India -3 204 16 36 3 91 20 41
Corporation Bank 21 61 61 131 50 105 17 59
Dena Bank 31 14 52 80 68 95 47 53
IDBI Bank Ltd 31 63 42 54 27 96 80 55
Indian Bank 45 150 93 28 24 56 12 53
Indian Overseas Bank -14 27 69 37 65 101 17 38
Oriental Bank of Commerce 31 86 17 34 36 92 55 48
Punjab and Sind Bank 106 80 101 66 21 37 49 63
Punjab National Bank 36 99 54 40 36 117 -1 50
Syndicate Bank 30 22 -6 55 40 115 27 36
UCO Bank 89 30 74 -7 55 104 8 45
Union Bank of India 36 50 16 51 36 85 39 44
United Bank of India -1 61 36 140 -8 45 16 35
Vijaya Bank 27 36 -11 30 23 147 6 30
Nationalised banks 22 57 47 45 38 104 21 46
Table 13: Year on year growth rate in gross NPAs in nationalised banks (Computed By Researcher)

44
NPAs in the banking system have started increasing sharply since the end of 2011. This was
also the period
8 per cent (based on old methodology) to 6.2 per cent in FY 2012 and further to 4.5 per cent
and 4.7 per cent, respectively in the subsequent years. Based on the new methodology, growth
rates are higher at 5.6 per cent and 6.6 per cent, respectively in FY 2013 and FY 2014. These
years were also the ones where there was low industrial growth, as well as, build-up of stalled
projects as there were challenges in areas, such as mining, power, land, environment to name
some. Industrial growth came down to 1.1 per cent in FY 2013, -0.1 per cent in FY 2014 and
2.8 per cent in FY15. Growth in bank credit has also averaged a lower number of 13.5 per cent
for the period FY 2012-2015 compared with 19.5 per cent in the preceding four years.
Therefore, the macro conditions have not been favorable and hence, contributed to the higher
growth in NPAs. It has been observed historically that banks also tend to lend more money
when economic conditions are good. However, once the downturn sets in the business cycle,
the assets come under pressure and move towards becoming NPAs especially those in the
infrastructure sector as well as loans given to the SME segment which get impacted
significantly during a downturn. Also a sub-optimal monsoon leads to an increase in NPAs on
farm loans. A combination of these factors has contributed to this build-up of NPAs over the
years.

As is visible, the growth rate of NPAs point towards an increasing level of NPAs throughout
the Commercial Banks. Therefore, the null hypothesis is rejected and the alternate
hypothesis is accepted. There has been a significant increase in the level of NPAs in the
past decade among Indian banks.

45
 CHAPTER 5: INTERPRETATION OF DATA
There is no doubt that a strong banking sector is important for a flourishing economy. Recently,
Bhasin (2016b)
and Cooperatives Banks of which the Commercial Banks (CBs) account for more than 90 per
s assets. Based on the ownership pattern, the CBs can be grouped
into three types, i.e., (a) State owned or Public Sector Banks (PSBs) that is the State Bank of
India (SBI) and its subsidiaries, and the nationalized banks (there are 27 PSBs functioning in
the country as on 31.3.2014), (b) Private Banks (PVBs) under Indian ownership, and (c)
Foreign Banks (FBs) operating in India. The PSBs dominated the banking business in the
country. Balance sheets of the Indian banks have been weighing down with high-levels of
impaired loans, which are expected to impact their ability to extend credit to the productive
sectors of the economy thereby hurting the pickup in private capex (Kumar et al., 2016).
sharply
and if not tackled promptly poses a systemic risk to the banking system and by extension the
Indian economy. A high proportion of NPAs steadily erodes the capital base of a bank,
impinging on the ability of banks to raise fresh capital and continue lending for investment
activities. Indeed, the spillover impact from banking crises to the real-economy are all too
familiar, evinced by the subprime mortgage crisis in the United States. The PSBs, which
account for over 70 per cent of the banking system in India, faces concerns regarding their
profitability, asset quality, capital position and governance despite several measures taken to
distress the sector.

Now, stressed assets (SAs) are getting increased attention as the trend of deteriorating asset
quality has emerged as a big economic risk for the Indian banking sector. In fact, SA is a
powerful indicator of the health of the banking system. Hence, a new classification is made in
the form of SAs that comprises restructured loans and written-off assets besides NPAs. Indeed,
SAs in India have almost doubled from 5.7 per cent in FY 2008 to 10.2 per cent in FY 2013,
which has impacted the banking industry adversely. However, the ratio of stressed assets to
gross advances of the Indian banking system is increasing from 2013 onwards. It has risen from
around 6 per cent at the end of March 2011 to 11.1 per cent by March 2015. Shockingly, the
PSBs have the highest stressed asset ratio 13.5 per cent of total advances as of March 2015,
compared to 4.6 per cent in the case of PV banks. (Table 15)

46
The adva (via interests and
installments). If an installment is not paid until the due date, it is called a bad loan. If it extends
beyond 90 days, it is termed NPA. The ratio of NPAs to total advances given by a bank is a
commonly used indicator reflecting the health of the banking system. Gross/Net NPA per cent
is percentage of Gross/Net NPA towards the gross advances. NPAs indicate the quality of loan
book. The higher NPA is a double whammy for the bank, as they do not get income on loans
classified under NPA (lesser revenue) and they need to set aside provisions (lower profits) for
the NPA identified. As of June 2016, the total amount of Gross NPAs for public and private
sector banks is around Rs. 6 lakh crore. In absolute terms, State Bank of India (SBI) has the
highest value of Gross NPA around Rs. 93,000 crores. Punjab National Bank (PNB) (Rs.
55,000 crores) and Bank of India (BoI) (Rs. 44,000 crores) come next. But how severe is the
Indian bad loan problem? A look at the ratio of bad loans or non-performing assets (NPA)
-performing major
economies of the world, said Shreesh (2016).

Banks which have very minimal exposure to corporate loans (high retail loans), have the least
NPAs. IndusInd, HDFC, Kotak, Axis, Federal, Lakshmi Vilas, DCB and CUB all have gross

NPAs in sustainable limits. It might be because of the high volume of credit lending they
undertake every quarter which offsets the NPA growth. The IOB, UCO Bank, United Bank of
India, PNB, Central Bank of India and Bank of India have alarmingly high level (>13 per cent)
of Gross NPA per cent. IOB (gross NPA at 20.48 per cent) will not be able to sustain if it goes
above its current level, unless it brings in more cash infusion.

The difference between the state-owned banks and private sector banks is starker when we
compare their asset quality. Gross non-performing assets (NPA) as percentage of total loans
and advances is higher in public sector banks than private banks. The share of PSBs in total
NPAs has been increasing continuously over the last 5 years from 70.83 per cent in FY 2010
to 85.19 per cent in FY 2015. Therefore, there has been concentration of NPAs in this segment.
Also, in value terms the incremental increase has been more perceptible after FY 2012 with an
increase of between Rs. 44,670 to 59,972 crore each year. Quite clearly the level of stress has
gone up. It is important to note that the numbers mentioned here are the classified NPAs and
do not include the restructured assets, which is another portfolio of stressed assets that had
built-up largely due to the infra-sector, which was buffeted by extraneous forces that made debt

47
servicing difficult. Also, these NPAs are after the sale of assets to ARCs, 5/25 assets and SDR
(strategic debt restructuring). Asset Reconstruction Companies (like ARCIL in India) purchase
stressed assets from Commercial Banks at a discount. They are holder of assets and liabilities
of borrowers whose NPA accounts are sold by the financing Banks. When the ARCs realize
the dues from borrowers they make a profit as they have purchased the assets at a discount.
Banks also benefit as their NPA level goes down and their blocked assets become liquid, which
they can further lend or invest (Crisil-Assocham Study, 2016).

Due to the combination of increase in the growth of Gross NPAs, as well as, lower
provisioning, net NPAs also registered higher growth. It was higher for public sector banks,
followed by private sector banks. In the last few years, banks restructured their advances to
contain the deterioration in asset quality due to increasing NPAs.

Gross NPA growth and Net NPA growth are indicative of further slippages. Higher slippages
need to be offset with higher provisioning, which again is going to take a toll on bank profits.
From the perspective of the Indian banking industry, the Q1 FY 2017 NPA growth has been
below 15 per cent (QoQ basis) for most of the banks.

March Public Private Foreign Total

2010 59,434 17,341 7,134 83,909

2011 74,926 18,239 5,068 98,233

2012 117,838 18,768 6,297 142,903

2013 164,461 21,071 7,964 193,342

2014 227,264 24,542 11,565 263,371

2015 278,465 34,106 10,771 323,342

2016 417,988 55,853 15,798 489,639

2017 506,922 91,915 13,621 612,457

2018 895,601 125,863 13,830 1,035,294

2019 739,541 180,872 12,183 932,596

2020 678,317 205,848 10,208 894,373

Table 14: Gross NPAs of SCBs (Source: RBI Data Warehouse)

48
But there have been some exceptional cases too. The Gross NPA of the above 37 banks together
stands at Rs. 6.24 Trillion, it grew over 9.65 per cent from the previous quarter. The Net NPA
of the above 37 banks together stands at Rs. 3.66 Trillion, it grew over 10.15 per cent from
previous quarter (Shreesh, 2016).

Table 15 shows that the NPA ratio has been the highest (4.13 per cent) for Public sector banks
(PSBs), followed by the Foreign banks (FBs) (3.96 per cent) and Private sector banks (PVBs)
(2.64 per cent). Surprisingly, in case of PSBs, it has been increasing continuously over the 5
years, while for the foreign banks it declined to 2.76 per cent in FY 2012 and then rose from
3.04 to 3.86 per cent till FY 2014 before slightly declining to 3.20 per cent in FY 2015.
Fortunately, the private sector banks have witnessed a declining trend (2.99 to 1.78 per cent)
till FY 2014 before increasing to 2.10 per cent in FY 2015. Gross NPA growth and Net NPA
growth are indicative of further slippages. Higher slippages need to be offset with higher
provisioning, which again is going to take a toll on bank profits.

March Public Private Foreign Total

2010 2.27 2.99 4.36 2.51

2011 2.31 2.48 2.61 2.35

2012 3.17 2.09 2.76 2.95

2013 3.61 1.77 3.04 3.23

2014 4.36 1.78 3.86 3.83

2015 4.96 2.10 3.20 4.27

2016 10.69 2.83 4.20 7.48

2017 12.95 4.05 3.96 9.32

2018 14.58 4.62 3.81 11.18

2019 11.59 5.25 2.99 9.08

2020 10.25 5.45 2.34 8.21

Table 15: Bank Group Wise NPA Ratios (Source: RBI Data Warehouse)
Rating agencies have voiced c capital needs and inadequacy
of funding options.

49
 capital infusions into banks, Fitch cautioned that more
injections credit needs, while the latter also manages pressures
of asset quality, resolution of problem loans and elevated credit costs (Shukla, 2015). Banks
are now pinning their hopes on the Insolvency and Bankruptcy Code (2016) for effective loan
recovery. Effective implementation of the Insolvency and Bankruptcy Code can potentially
release about Rs 25,000 crore capital currently locked up in non-performing assets over next
4-5 years, said a Crisil-Assocham joint study. If implemented successfully, the code will help
with or even exceed the recovery rates of 32 per cent and
average time taken of 2.8 years in other emerging markets. The code will also contain slippages
into NPAs by spawning better credit discipline. The RBI has already tightened norms for
willful defaulters, which, together with implementation of the code, will enhance recoveries
from such borrowers and improve overall credit discipline, Crisil said. However, considering
that institutionalizing the code will be a long-drawn affair, it may not provide any material
capital relief to banks over short term.

RBI as regulator and the Government as the owner of the largest number of banks in the country
must crack the whip to the large defaulters. RBI has defined willful defaulter as a borrower
who intentionally defaults on its repayment obligation, despite adequate cash flows, or has
diverted/siphoned off funds, or not utilized the funds for the purpose for which it was taken.
Recently, RBI widened the scope of willful defaulters by covering guarantors under its
purview. While these changes are a welcome step, there are many reasons which curb bankers
from declaring NPA borrowers as willful defaulters. As per the guidelines, higher provision is
required to be made for fraud accounts compared to NPA accounts (EY 2016).

At a time when bad loans are witnessing a surge, the rate of recovery of bad assets by banks
has taken a knock, as highlighted in Figure 6. The rate of recovery of NPAs was 10.3 per cent
(or Rs. 22,800 crore) out of the total NPAs of Rs. 221,400 crore during fiscal ended March
2016, against Rs. 30,800 crore (12.4 per cent) of the total amount of Rs. 248,200 crore reported
in March 2015, data from the RBI has said. According to the RBI, the rate of recovery was
18.4 per cent (or Rs. 32,000 crore) out of the total NPAs of Rs. 173,800 crore reported in March
2014. The recovery rate was even higher at 22 per cent (Rs. 23,300 crore) in March 2013 out
of the total reported NPAs of Rs. 105,700 crore, the RBI said in its database on the Indian
economy. The RBI said a total of 46.54 lakh cases to recover NPAs were filed in Lok Adalats,
debt recovery tribunals and under the SARFAESI Act. Of this, 44.56 lakh cases were taken up

50
by Lok Adalats during fiscal March 2016. Public sector banks, which are burdened with a high
as against Rs.
27,849 crore
due to a reduction in recovery through the SARFAESI channel by 52 per cent from Rs. 25,600
crore in 2014-15 to Rs. 13,179 crore in 2015-16. On the other hand, recovery through Lok
Adalats and DRTs increased, the RBI said in its Report on Trends and Progress in Banking,
(2014).

Reiterating that casually treating a structural problem of lending by the banks would not be a
long-term solution, Raghuram Rajan also said last month that the banks need to stop brushing
the NPA issue under the
the loan, it can only apply Band-Aids for any more drastic action would require NPA
classification, he said. In August 2016, Finance Minister Arun Jaitley called the levels of NPAs
compensation
plan for these banks, spread over four years. In February 2017, Jaitley announced a package
and stressed that the banks will have clean balance sheets by 2017, which seems to be a case
of wishful thinking.

The unabated rise in stressed assets of the Indian banking sector is a cause for concern for the
economy. Empirically, high level of NPAs has been found to be associated with contraction of
credit, slow-down of GDP growth, depreciation of exchange rates, inflation and unemployment
(Bock and Demyanets 2012, Klein 2013). The quantum and growth in gross NPA of banks has
been inhibiting not just banks profitability, growth, health and solvency but also the overall
investments and economic progress of the country (FICCI 2016). The impact starts with the
pressure NPAs create on the income statement and balance sheet of banks.

1) Profitability: NPAs affect the profitability of the banks adversely by way of affecting
both income and expenses. A high NPA means the asset is not performing or bringing
in the interest income it was expected to bring. Income from NPAs can be booked only
on actual realization of the same and not on accrual basis. So this will have an adverse

income and hence, lower net profits. From expenses point of view, a high NPA means
higher provisioning requirements as well as higher expenses involved in NPA recovery
process (like litigation and administrative costs), both of which would reduce the net
profits.

51
2) Capital Adequacy: Reduction in profits due to high NPA is likely to result in lower
retained earnings, which in turn is likely to create adverse effect on Tier 1 component
of CRAR. Moreover, Total Risk Weighted Assets (TRWA) increase because of the
risks attached to NPA portion of the total asset composition. Increase in TRWA with
absolute amount of capital funds remaining intact is likely to bring down CRAR.
3) Liquidity and Credit growth: Lower profits or earnings arising from NPAs also boils

with pressure on profits and capital adequacy adversely affects the willingness and
ability of the banks to expand its loan portfolio. Reluctance on the part of banks to grant
loans can spill over to the economy in the form of credit rationing and credit crunch.
4) Stock prices and Solvency: High NPA signals weakness in asset quality of banks and
is likely to bring down the stock prices of banks because the investors would perceive
assets of such banks to be of high risk.

52
 CHAPTER 6: CONCLUSION

One cannot comprehend an economic and industrial growth without a healthy banking industry.
Banks are faced with the challenging task of maintaining/increasing credit off-take to fuel GDP
growth, while also ensuring quality is not compromised. An obvious outcome of low asset
quality is the growth in Non-Performing Assets (NPAs). NPA growth needs to be supported
with a higher level of provisioning, which in turn has a direct impact on bottom-line. Banks
see a definite drop in retained earnings and are forced to raise more tier-1 capital to sustain the
same level of credit disbursements. Intuitively, this points to an inefficient utilization of
resources with ratios like profit margin and return on equity (RoE) being directly impacted. In
fact, it might be impossible to eliminate NPAs from the books of the banks, which are into the
business of taking credit risks when granting loans. But high levels of NPAs can pose a big
threat to the viability of the banks and can lead to bank failures. Bank failures in turn, through
its interconnectedness can threaten the stability of the financial system of an economy as a
whole. A quick review of the past NPA handling by the banks and the regulators would also
help them in deciding on the most effective corrective mechanism towards resolving the current
NPA over-hang. A better knowledge of the NPA drivers can also help improve upon the

put lipstick on a pig but it does not become a princess. So dressing up a loan and showing it as

need to solve the current NPAs and put a roadmap to reduce the reasons which lead to creation
of such high NPAs.

Is the Narendra Modi govt ignoring the warning signals? Unnikrishnan (2017) media report
-performing
assets (GNPAs) above 10 per cent of their total advances, six of them above 15 per cent and
one bank has reported GNPA at 22.42 per cent (Indian Overseas Bank). According to
Capitaline data, total gross NPAs reported by 42 banks aggregated to Rs 7.32 lakh crore as of
December end, as compared with Rs. 4.51 lakh crore in the year-ago period and Rs. 7.05 lakh
crore in the September quarter. Of this chunk, close to 88 per cent is in the books of state-run
banks. The bad loan story of state-run banks continues and there are hardly any signs of things
improving in the near future. At issue is what to do with $133 billion in stressed assets
accumulated by banks after years of reckless lending, a problem that has bedeviled regulators
and stalled loans that India needs to revive private investment. The bad loan scenario of Indian

53
 on account of three factors. One, the
revival in the investment cycle has not taken strong hold yet. And the second, the process of
rebooting of the delayed projects has not yet translated into improved cash flows for companies.

Bad loans of public sector banks have reached an unacceptable level and an all-out effort has
been launched to correct their health. NPAs, which have reached to the present level, are
unacceptable. They reached this level partly because of indiscretion, partly because of inaction
and partly because of challenges in some sectors of the economy, which were evident through
the high NPA levels in these sectors, Finance Minister Arun Jaitley (2015) said. The FM wants
banks to clean-up the bad loan pile on their balance sheets as quickly as possible. But, there is
no magic wand to make NPAs disappear. It is not easy, said a senior banker, who was present

assets revive and companies start paying back. Till then, the only option for banks is to avoid
further lending, said the official. That does not augur well for an economy, which desperately
needs funds to kick off the growth-phase. The slowdown in credit growth is already visible.
How did the NPAs pile up? It did not happen overnight. Besides the overall economic
slowdown, one major reason why the NPAs shot up is the reckless lending resorted by state-
run banks without adequately assessing the risks. The focus was on volume growth and not
quality. Secondly, interested party lending and the role of middlemen played a key role. The
banker-middleman corporate nexus operated in full swing. Most often than not, these interested
parties are those linked to influential politicians and business groups. Third, a new set of
promoters, who would not pay back loans to banks despite having the ability to do so, emerged

as willful defaulter, no other financial institution will lend to such parties, nor can these
promoters be part of any other organizations. There are 7,035 cases of willful defaults with a
bad loan pile to the tune of Rs. 58,792 crores as on 31 March, 2015, Lee (2016). Fourth, bad
loan picture turned grim after banks started pushing loans to the restructured category to
prevent them becoming NPAs. This only postponed the problem and started to backfire. Many
of these loans were close to NPAs when they were admitted to recasts.

As part of the solution, a slew of corrective measures initiated by the Modi government, such
as cleaning up the power-discom mess with state-supported revival package, increasing the
tenure of bank chiefs and creation of a bankruptcy code can aid the reduction in bad loans over
a period of time. But, the actual implementation of these promises is critical. Budget 2017 may

54
prove to be path-breaking on several fronts. However, an important concern is the peripheral
attention given to reviving the banking sector. For the economy, the banking sector represents
its heart. If the heart is clogged, the economy cannot return to vitality, says media report by
Subramanian (2017).

cleared and banking sector starts functioning without stress. Point to note is that cost of fund
for the economy, therefore, the future rate of growth, is dependent on a transparent and stress
free financial sector. Banks would need to adopt and implement the measures in true spirit and
s
just be compliant, but over the long-term, also help adjust their credit policy, product portfolio
and lending processes in a bid to reduce bad loans. The key to proactive identification of red
flags would be to integrate and analyze transactional data (bank statements) with documents
available (audit report, sanction documents etc.) and information from the public domain
including market information to find anomalies. Specific roles for designated persons, who will
ensure compliance with the formal guidelines, would be necessary to ensure accountability of
decisions taken. The road to recovery is long and winding. But bankers are cautiously
optimistic that the NPA situation will improve albeit at a slow pace.

55
 CHAPTER 7: SUGGESTIONS & RECOMMENDATIONS

7.0 Overview

NPAs normally have tended to move along with the economic cycle. Often, the loans given
during the good times stop performing when conditions turn adverse. The recent fall in
commodity prices has affected several industries and those which are leveraged have had issues
with debt servicing. The interest cover ratio has also been declining over the last few quarters
(Care Ratings, 2016). fe Cycle in Banks can prove to be a valuable tool to
reduce NPAs in Banks. There are three stages of the life cycle of NPAs in banks (Shukla,
2015). The first stage consists of identification of stressed assets and NPAs. The second stage
consists of investigation by measurement and the last and third stage consists of resolution
through crisis management and revitalization of stressed assets. RBI has laid an emphasis on
banks to be proactive in recognizing stress level and to take remedial measures in order to
preserve the economic value of assets. Under the guidelines of RBI Special Mention Accounts
(SMAs) classification has been introduced recently, coupled with defining a time bound
procedure for deciding the course and nature of remedial actions. In addition, RBI has also
taken various steps in strengthening the NPA resolution eco-system in India, which includes
an increase in foreign participation rules in ARCs in India and bringing a sunset clause to
regulatory forbearance accorded to restructured accounts up to March 2016.

The study reveals a nonlinear upward trend in classified debt over the decade which is an
alarming situation for the growing economy in general with banking industry in particular.
Moreover, it has been found that NPA has statistically significant negative impact on
profitability. In short, it may be concluded that arresting the steep growth in NPA is the prime
challenge with the policy makers in SCBs.

7.1 Factors Responsible for Growth in NPAs

Before discussing the strategic action points to combat NPA and its growth, we may briefly
have a look at the factors responsible for such an unwarranted situation. Based on interaction
with the bankers and survey of research papers on the subject, I have identified following major
factors, which contribute heavily towards accumulation of NPA in SCBs.

56
 External factors such as global recession, downturn in industry, natural calamities, etc

Cumbersome legal system.

Delays in settlement proposals and implementation of rehabilitation package in respect of

Factors Responsible for

BIFR cases
Growth of NPAs

Non co-operative and dishonest attitude of the borrower.

Lack of adequate follow-up in recovery of dues.

Absence/ Inadequate market or resale value of assets charged

Advances not backed by enforceable security

Genuine business failure

Figure 2: Factors Responsible for Growth of NPAs

7.2 Strategic Action Plan

Though arresting the growth of NPA is really a challenging task but it is certainly possible to
contain its growth. In this direction, a few comprehensive action plans have been suggested to
contain the growth of distress asset as under.

7.3(a) General Action Plan

Top priority has to be accorded towards management of NPA with a view to improve overall
quality of asset. A two pronged approach comprising (i) preventive measures and (ii) curative
measures are advocated to contain the rising NPAs. It is observed that even a good appraised
account tends to become nonperforming for lack of proper monitoring. Ensuring compliance
of sanction terms, periodical verification of primary are collateral securities, proper valuation
of securities charged in favour of the bank, identification of early warning signals for initiating
timely preventive measures, monitoring and follow-up are treated as nucleus of effective Credit
Management System as it arrests degradation in the quality of assets. Signals can be picked up
at the incipient stage of sickness. The bank should identify these stress symptoms and take
corrective steps to avoid slippage into NPA category. It is pertinent to emphasize that every
loan should be under regular surveillance when it is under performing category. Therefore,
proactive steps should be initiated at the right time to prevent fresh addition to NPAs. The
branches/ offices should put more impetus on credit appraisal/ sanctioning/ documentation/

57
monitoring/ review/ renewal etc to restore quality of the asset. In cases where the accounts
show symptoms of irregularity/ sickness for reasons beyond the control of the borrower, the
same should be restructured/ rescheduled/ rehabilitated in early stage itself when it is detected
in order to prevent its slippage to NPA.

An illustrative list of such signals is as under:

a) Poor credit turnover in the account.

b) Credit turnover is not commensurate with the sales estimate.
c) Routing of transactions through other bank /Non-member banks.
d) Frequent request for allowing over drawing in the account.
e) Delay in submission of stock statement/ other control statements/ financial statements.
f) Return of cheques issued by borrowers.
g) Frequent devolvement of Letter of Credit and non-payment within a reasonable period.
h) Frequent invocation of Bank Guarantee and non-payment within a reasonable period.
i) Return of bills/cheques discounted.
j) Poor financial performance in terms of declining sales and profits, cash losses, net
losses, erosion of net worth etc.
k) Incomplete documentation in terms of creation/registration of charge/ mortgage etc.
l) Non-compliance of terms and conditions of sanction.

7.3(b) Autonomy in Credit Decisions

PSBs in general are subjected to strict compliance of government directives in all matters
including credit policy and credit decision. Under the present liberalized scenario where an
individual PSB is also responsible for its bottom lines, it should be given full autonomy in the
matter of credit decisions. Referrals by the ministry to sanction large corporate loans should be
dispensed with.

7.3(c) Risk Based Pricing of Loan Products

In an increasingly competitive environment, banks need to indulge in risk based modelling and
pricing instead of following purely conservative cost plus methods. For instance, not only
historical parameters and repayment track records should be considered in decisions but also
quantified behavioural parameters should be considered. Profile calls can also be taken while
on-boarding new loan relationships with clients. Pricing policy should be dynamic and while
it history

58
should also be taken into consideration. This will encourage better credit culture and improve
credit worthiness of the customers.

7.3(d) Streamlining Credit and Systematic Risk Processes

Credit and Systematic Risk processes have to be streamlined. Exhaustive Credit Risk
Assessment System for Commercial and Institutional customers segment have to be launched.
Necessary methodology has to be evolved for determining and managing target portfolio mix,
classified by industry, borrower type, credit rating, product, maturity and large exposure
aggregates. Industry risk concentration exercises have to be undertaken as a part of ongoing
review of loan portfolio.

7.3(e) Greater Due Diligence for Priority Sector Lending (PSL)

With RBI increasingly keeping pressure on sanction and disbursement of PSL like agriculture,
SSI etc. the quality checks in place needs to be geared up. Debt burden ratio, and
collateralization in PSL is necessary to ensure that the customers do not default in repayment
of loan instalment and accrued interest.

7.3(f) Management of Time Barred Documents

The Law of Limitation prescribes the period within which the existing rights can be enforced
in a court of law. The Limitation Act lays down that every suit instituted, appeal preferred, and
application made after the prescribed period shall be dismissed although limitation has not been

signed and stamped by the borrower, has to obtained before the expiry of the limitation period.

7.3(g) Special Care for Compromise/ OTS/ legal/ BIFR cases

Compromise and one time settlement as measure of managing NPA relating to borrowers who
have failed to meet their obligation to the banks on account of genuine reasons are to be
encouraged. Loan compromise proposal have to be handled with care and on fast truck.

Besides, to speed up legal process, suit filed cases of Rs. 10 lacs and above still pending in
various courts, within the jurisdictional area of the DRT functioning at a number of centers to
be transferred to the later. To expedite disposal of cases transferred to DRT, special legal cell
may be created at District Level. Mechanism of follow up of suit filed cases, especially those
filed with DRT, has to be streamlined. For close monitory DRT cases specially designated

59
nodal officer with appropriate knowledge and skill be appointed in legal/DRT Cell. As regards
BIFR referred cases bank has to work in close association with BIFR for rehabilitating the sick
units with basic viability.

7.3(h) Motivational Package and Training for Employees

Employees have to be motivated towards participation in recovery drive and management of

NPA by formulating scheme for award of cash prizes/ certificate of merit and trophies to
branches showing outstanding performance in this respect. In order to further improve the

gradation of credit skills at various levels through appropriate training interventions.

7.3(i) Introduction of Credit Audit Cell

A separate Credit Audit in addition for existing Inspection & Audit Dept. has to be set up to
improve efficiency and effectiveness of the appraisal, assessment, sanctions and disbursement

mechanism will generate warning signals for taking appropriate action to prevent performing
asset turning into NPA.

7.3(j) Special Attention on High Value NPA

Special type of branches like Rehabilitation and Recovery branch may be set up where big
existing NPA be transferred for systematic follow up and appropriate remedial measures. Task
Force, at the corporate level, comprising top executives to monitor all big NPA accounts (say
Rs.5 crores and above), local controlling offices like Regional Office / Zonal Office for
monitoring all medium size NPA account ( say Rs.1 crore and above to less than Rs. 5 crores
) should be set up.

7.3(k) Restructuring and Up-gradation of Potential as well as existing NPA Accounts

Restructuring of impaired standard accounts as well as of viable NPA has to be an ongoing

process and to be religiously persuaded towards up-gradation of such assets in time.

7.3(l) Transparency in Communication Between Bankers and FIs

Regular and transparent communication and prompt feed- back among bankers and FIs in
locality to be encouraged for mutual benefit of all the lenders.

60
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65
 APPENDIX: QUESTIONNAIRE

1 Name

2 E-mail

3 Age

4 Do you have any of these with a bank? Choose the ones you have.
o Savings Account
o Current Account
o Fixed Deposit
o Recurring Deposit

5 Are all of these with one bank or with different banks?

o All are with 1 bank
o 2 Banks
o 3 banks or more

6 Since how long have you being keeping your money in the bank?
o 1 year or less
o 1-5 Years
o 5-10 Years
o More than 10 years

7
Why do you prefer to keep the money in the bank? Select all the options applicable
□ Opportunity to Earn interest
□ Requirement at workplace or by law
□ Core Banking
□ Digitization
□ Benefits by Government and under Income Tax
□ Other

8 Which amongst the following will be your first preference for bank?
o Government Backed Bank
o Private Bank

9 On a scale of 1 to 5, how significant is the total amount deposited in the bank accounts
to you? 1 being least significant and 5 being most significant
o1
o2
o3
o4
o5

10 What is the name of your bank (Primary Bank)?

66
11 What are the factors that contribute towards your decision in selection of a Primary
Bank? Please select any 5 reasons that are of utmost importance to you.

Banking, Dematerialization Account, etc.)

availing services at the bank

12 How risky on a scale of 1-5 is keeping your money in the bank according to you? 1
being No Risk 5 being Very Risky
o1
o2
o3
o4
o5

13 Which education background are you from primarily?

o Commerce
o Science
o Arts

14 Do you know what NPAs are?

o Yes
o No
15 What according you would be an NPA?
o When an asset ceases to generate income from the bank
o If the customers of the bank do not pay principal and interest for a certain period of time (90
days), it can be called as NPA
o If periodical income is not generated for lender of money, it is called as NPA

16 Are you aware of how much NPA your Bank has?

o Yes
o No

17 What is the percentage of NPA in your Bank?

67
 o 1%-4%
o 4%-7%
o 7%-10%
o 10% above

What is the trend of NPA in your Bank? In case you are not aware, please answer on
18 the basis of your knowledge of the bank
o Highly Decreasing
o Slowly Decreasing
o Constant
o Slowly increasing
o Highly increasing

19 In your opinion, does the NPA of a bank affect its reliability?

o Yes
o No

68
URKUND

Urkund Analysis Result

Analysed Document: Non-Performing Assets - Accentuating Stress on the Indian Banking
Sector.pdf (D44532738)
Submitted: 10/22/2021 7:18:00 PM
Significance: 3%

Sources included in the report:

https://www.researchgate.net/publication/334290239_A_Analysis_of_the_Non-
Performing_Assets_of_Some_Selected_Public_Sector_Banks_in_India_In_parti
al_fulfillment_of_the_Degree_of_DOCTORATE_OF_PHILOSOPHY_2016
http://hdl.handle.net/10603/70262
http://hdl.handle.net/10603/195120
https://dyuthi.cusat.ac.in/xmlui/bitstream/handle/purl/4685/Dyuthi-
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0010/full/html
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https://businessperspectives.org/images/pdf/applications/publishing/templates/a
rticle/assets/4383/BBS_en_2011_04_Rajput.pdf

Instances where selected sources appear:

32