EXECUTIVE SUMMARY

The future of Indian Banking represents a unique mixture of unlimited opportunities amidst insurmountable challenges. On the one hand we see the scenario represented by the rapid process of globalization presently taking shape bringing the community of nations in the world together, transcending geographical boundaries, in the sphere of trade and commerce, and even employment opportunities of individuals. All these indicate newly emerging opportunities for Indian Banking. But on the darker side we see the accumulated morass, brought out by three decades of controlled and regimented management of the banks in the past. It has siphoned profitability of the Government owned banks, accumulated bloated NPA and threatens Capital Adequacy of the Banks and their continued stability. Nationalized banks are heavily overstaffed. The recruitment, training, placement and promotion policies of the banks leave much to be desired. In the nutshell the problem is how to shed the legacies of the past and adapt to the demands of the new age. PSB’s in India can solve their problems only if they assert a spirit of selfinitiative and self-reliance through developing their in-house expertise. They have to imbibe the banking philosophy inherent in de-regulation NPA is a problem created by the Banks and they have to find the cause and the solution - how it was created and how the Banks are to overcome it. An attempt is made in this study the present situation and to arrive at a solution to solve this problem.

RESEARCH DESIGN
Statement of the problem: The Indian commercial banks have come a long way. The development over the years with regards to branch expansion, deposit mobilization of credit facilities and other services has shown tremendous growth and developments. The difficulties and the problems have also increased and one such major problem is NPA. This project is “A STUDY ON Non Performing Assets and its effect on Liquidity”.

Objectives of the study
1. 2. 3. 4. 5. 6. To know what are the steps taken by Indian Banks to reduce NPA To know the reasons of NPA. To evaluate Gross NPA & Net NPA. To analyse financial performance of banks at different level of NPA. To know the impact of NPA. To know the preventive measures.

That is how the company has got the success. The study means that the analysis of the products of the company on which he/she has to focus. Or if it is going in the loss. why.SCOPE OF THE STUDY The scope of the study refers to the job that to know about the activities of the organization. Scope of the Study  Concept of Non Performing Asset  Guidelines  Impact of NPAs  Reasons for NPAs  Preventive Measures  Tools to manage NPAs It is necessary for the student that he /she involve with the experience guys to get the knowledge about the company. .

The respondents were met. The major sources of secondary data are as follows      Annual Reports of the Bank Profit and Loss Account Balance Sheet Internet Books II. The respondents were met directly and asked questions the collected information was recorded in the questionnaire. One was for customers and another was for retailers and productive information was collected. III. RESEARCH APPROACH Survey method was used for carrying out the research. RESEARCH INSTRUMENT The research instrument adopted was questionnaire. it is called as secondary source. In this study primary source of data collection was carried out using structured questionnaire.RESEARCH METHODOLOGY I. Two sets of questionnaire were prepared.If the researcher uses already compiled data. the data was collected by personal interview. 1) 2) Secondary Data: .It is the original source of data collected by the researcher. SAMPLING PLAN  Sampling unit: . The other sources of primary data was collected by referring some bank statements and collected through interaction with the Senior Manager and Bank Staff. The survey was conducted for 2 weeks. IV. DATA SOURCE Primary Data: . Primary data was collected from 100 customers in Belgaum city.

In study the sample size for respondents was decided to be 100.The sample unit is a basic unit containing the elements of the population to be sampled. . The sample unit in research is working class people. An important decision that has to be taken while adopting a sample technique in the sample size.  Sampling size: Sample size refers to the number of elements including the study.  Sampling extent : The survey was conducted in limited areas within the BELGAUM city.

INTRODUCTION It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPA’s) and the issue is becoming more and more unmanageable. some steps have been taken recently. An amount due under any credit facility is treated as “past due” when it is not been paid within 30 days from the due date. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan. . Nonperforming asset means an asset or account of borrower which has been classified by bank or financial institution as sub –standard. In order to bring the situation under control. 2001. with effect from March 31. it was decided to dispense with “past due “concept. which is an important step towards elimination or reduction of NPA’s. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. recovery climate. a Non performing asset shell be an advance where i. Accordingly as from that date. up gradation of technology in the banking system etc. in accordance with the direction or guidelines relating to assets classification issued by RBI. doubtful or loss asset. Due to the improvement in the payment and settlement system. 2002 was passed by Parliament. WHAT IS A NPA (NON PERFORMING ASSETS)? Action for enforcement of security interest can be initiated only if the secured asset is classified as Nonperforming asset.

Out of order An account should be treated as out of order if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. Accordingly with the effects from March 31.in respect of an overdraft/cash credit (OD/CC) The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted.and Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts v. The account remains ‘out of order ‘ for a period of more than 90 days . it has been decided to adopt the ’90 days’ overdue norm for identification of NPAs. 2004.in respect of an overdraft/cash credit (OD/CC) The bill remains overdue for a period of more than 90 days in case of bill purchased or discounted. v. An advance will be classified as an NPA where in the case of: i.ii. in case where the outstanding balance in the principal operating account is less than the sanctioned amount /drawing power. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose . from the year ending March 31. With a view to moving towards international best practices and to ensure greater transparency. iii. 2004. The account remains ‘out of order ‘ for a period of more than 180 days . iv. ii. Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. iv. iii. but .

But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks.there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period these account should be treated as out of order. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans. their by reducing their profitability and liquidity. Overdue Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on due date fixed by the bank FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. A.  Natural calamities . EXTERNAL FACTORS: Ineffective recovery tribunal The Govt.  Willful Defaults There are borrowers who are able to pay back loans but are intentionally withdrawing it. The NPAs in PSB are growing due to external as well as internal factors. has set of numbers of recovery tribunals. which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of nonrecover.

every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. which covers a minimum label.  Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. day to day changing govt. Thus the banks record the non recovered part as NPAs and has to make provision for it. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. hence end up the fiscal with a reduced profit. policies . Mainly ours farmers depends on rain fall for cropping.This is the measure factor.  Change on Govt. The banks recover the amount by selling of their assets.  Industrial sickness Improper project handling . ineffective management . Thus the bank has to make large amount of provisions in order to compensate those loans. Policies give birth to industrial sickness. which is creating alarming rise in NPAs of the PSBs. lack of adequate resources . Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. lack of advance technology .

So the over dues due to the handloom sectors are becoming NPAs. B.With every new govt. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented.  Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. banking sector gets new policies for its operation. Principles of safety Principle of liquidity Principles of profitability Principles of safety:By safety it means that the borrower is in a position to repay the loan both principal and interest. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The repayment of loan depends upon the borrowers Capacity to pay Willingness to pay Capacity to pay depends upon Tangible assets . INTERNAL FACTORS. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs.

he should be a person of integrity and good character.Success in business Willingness to pay depends upon Character Honest Reputation of borrower The banker should. . market driven decisions on real time basis can not be taken. opportunity and threat analysis is another reason for rise in NPAs. Proper MIS and financial accounting system is not implemented in the banks. weakness. While providing unsecured advances the banks depend more on the honesty. which leads to poor credit collection. • Banks should consider the borrowers own capital investment. Principle of liquidity:- Principle of profitability:-  Inappropriate technology Due to inappropriate technology and management information system. All the branches of the bank should be computerized  Improper SWOT analysis The improper strength. there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully . and financial soundness and credit worthiness of the borrower. thus NPA. integrity.

• It should collect credit information of the borrowers from a) From bankers.  Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. Analyze the balance sheet. viability. They should use good credit appraisal to decrease the NPAs. industry. banks should grant loan for productive purpose only. c) • From external credit rating agencies. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. Bank should analyze the profitability. he should analyze the purpose of the loan. business. • Purpose of the loan When bankers give loan. b) Enquiry from market/segment of trade. long term acceptability of the project while financing  Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. 2. Marketability Acceptability . When accepting securities banks should consider the 1. To ensure safety and liquidity.

PROBLEMS DUE TO NPA 1. it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. and the handloom sector Orissa hand loom WCS ltd (2439. if the banks fails. If a new big customer meets misfortune or certain traders or industries affected adversely. The NPAs due to willful defaulters can be collected by regular visits. the NPAs of OSCB is increasing day by day. and Orissa hand loom industries.  Absence of regular industrial visit The irregularities in spot visit also increases the NPAs.60lakhs). owners lose their assets. Due to re loaning to the defaulters and CCBs and PACs. In modern times this may affect a broad pool of shareholders. 4. Owners do not receive a market return on their capital .in the worst case. the overall position of the bank will not be affected. The biggest defaulters of OSCB are the OTM (117. .3.77lakhs). Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. Safety Transferability The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”. Like OSCB suffered loss due to the OTM Cuttack.  Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle.

This spillover effect can channelize through liquidity or bank insolvency: a) When many borrowers fail to pay interest. lower deposit rates and higher lending rates repress saving and financial market. and  Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. which hamper economic growth. Nonperforming loans epitomize bad investment.c) Undercapitalized banks exceeds the banks capital base. 2002. In the worst case if the bank fails.  Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purposes. banks have been advised to move over to charging of interest at monthly rests. labour and natural resources. Depositors do not receive a market return on saving.2. To come out of these first we need to think is it possible to avoid NPA. The recovery of loan has always been problem for banks and financial institution. They misallocate credit from good projects. depositors lose their assets or uninsured balance. 4. continue to classify an account as NPA only if the interest charged during any quarter is not . NPA is short form of “Non Performing Asset”. which do not receive funding. no cannot be then left is to look after the factor responsible for it and managing those factors. which may lead to economic contraction. the entire bank loan automatically turns a non performing asset. b) Illiquidity constraints bank in paying depositors . Banks should. to failed projects. As a facilitating measure for smooth transition to 90 days norm. This can jam payment across the country. by April 1. 3. banks may experience shortage. Banks redistribute losses to other borrowers by charging higher interest rates. Nonperforming asset may spill over the banking system and contract the money stock. the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. liquidity The three letters Strike terror in banking sector and business circle today. However. therefore. Bad investment ends up in misallocation of capital. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days. and by extension.

2002 and 90 days from the end of the quarter with effect from March 31. which may lead to loss of some long-term beneficial opportunity. which would have given good returns. Routine payments and dues. Internal Factors. . Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities. External Factors. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Internal Factors. 2. Now day’s banks have special employees to deal and handle NPAs.  Liquidity:Money is getting blocked. So NPA doesn’t affect current profit but also future stream of profit. 2004 Impact of NPA  Profitability:NPA means booking of money in terms of bad asset.  Involvement of management:Time and efforts of management is another indirect cost which bank has to bear due to NPA. which occurred due to wrong choice of client. 1. decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes period of time which lead to additional cost to the company. which adversely affect current earning of bank. which is additional cost to the bank.  Credit loss:Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. Another impact of reduction in profitability is low ROI (return on investment). Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset.serviced fully within 180 days from the end of the quarter with effect from April 1. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks REASONS FOR AN ACCOUNT BECOMING NPA: 1.

f) Government policies like excise duty changes.a) Funds borrowed for a particular purpose but not use for the said purpose. accidents. industrial recession. in credit appraisal. e) Failures. i) Deficiencies on the part of the banks viz. raw material\input price escalation. b) Project not completed in time. c) Industrial recession. g) Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. management disputes. power shortage. External Factors. non payment\ over dues in other countries. f) Business failures. recession in other countries. monitoring and follow-ups. fraud. c) Poor recovery of receivables. adverse exchange rates etc. Import duty changes etc. misappropriation etc. d) Excess capacities created on non-economic costs. e) In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. d) Shortage of raw material. power and other resources. disputes. excess capacity. 2. TECHNIQUES USED IN REDUCTION OF NPA’s . • Lack of sincere effort. siphoning of funds. natural calamities like floods. b) Scarcity of raw material. h) Willful defaults. a) Sluggish legal system • Long legal tangles • Changes that had taken place in labour laws. delay in settlement of payments\ subsidiaries by government bodies etc.

It is an effective technique. The various forms of sending these notices are ordinary.  Suit filing in the court .  Lok Adalats.  Field visits. interest reduction. The bank adopts a legal action against the borrowers. waiver. Then it sells it through auction. This is similar as the suit filing by the courts. The notices contain the due dates.  Seizure and disposal of assets through auctions. It is a facility for asset recovery and reconstruction.  Application of SARFAESI Act. defaulters and judges. They have a discussion and arrive at a solution. I. The bank takes possession of the assets.e. By this way the bank recovers the NPA. The bank uses this act to recover the money. The bank talks with the defaulter and does some compromises like interest reduction. SARFAESI stands for secutarisation and reconstruction of financial assets and enforcement of security interest. by this way the amount is recovered. etc. This tribunal helps the bank to recover the advance. They persuade them to pay the amount  Civil procedures and winding up notices. By this way the bank recovers the amount  Debt Recovery Tribunal In case the NPAs are more than 10 lakhs the bank approaches the debt recovery tribunal. personal persuasion The bank does field visits.  Compromises It includes waiver. Here a meeting is arranged between the banker. The borrowers have to reply to such notices. It helps in managing the NPAs and keeping pace with the international pace of financial institutions. registered and legal. through ordinary. The bank sends notices to the defaulters. registered and legal. The bank sends notices to borrowers. It helps the bank to realize the long term assets. And further they have started making the repayments. It allows the banks to take possession of the assets and sale them. The banks meet the defaulters. Sending notices on due dates.

The bank files a suit in the court. Standard & Poor have lowered India's credit rating to sub-investment grade. Gross NPA B. poor infrastructure facilities. 10. recession is at its peak. He states that is the defaulter fails to make the payments then his property will be sold.000 crores. they will find it difficult to survive. globally stock markets have tumbled and business itself is getting hard to do. Net NPA . One would be surprised to know that the banks and financial institutions in India hold non-performing assets worth Rs. it goes without saying that banks are no exception and are bound to face the heat of a global downturn. Under such a situation. It is an effective technique. sticky legal system. Instead of paying the installments the borrower makes one time settlement. Types of NPA A. Bankers have realized that unless the level of NPA’s is reduced drastically. 1. INDIAN ECONOMY AND NPA’S: Undoubtedly the world economy has slowed down.  One time settlement In this technique the bank talks with the borrower and he makes the payment at one time. Here the bank adopts legal action. cutting of exposures to emerging markets by FIs. Further. The Indian economy has been much affected due to high fiscal deficit. etc. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate. international rating agencies like.

Since in India. bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming. It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs Gross Advances B.both in terms of rehabilitation of the project and recovery of bank’s dues. and loss assets. Identification of weakness in the very beginning that is : When the account starts showing first . doubtful. are quite significant. That is why the difference between gross and net NPA is quite high.A. by the time banks start their efforts to get involved in a revival process. Net NPA Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. the provisions the banks have to make against the NPAs according to the central bank guidelines.Provisions PREVENTIVE MEASUREMENT FOR NPA  Early Recognition of the Problem:Invariably. It can be calculated by following Net NPAs = Gross NPAs – Provisions Gross Advances . it’s too late to retrieve the situation. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard. Gross NPA Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date.

In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction. has to be adequate in terms of extend of additional funding and relaxations etc. Restructuring should be attempted where. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. The package of assistance may be flexible and bank may look at the exit option. banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. Time is a crucial element in any restructuring or rehabilitation activity. after an objective assessment of the promoter’s intention. books of account in order to ascertain real factors that contributed to sickness of the borrower. is imperative. under the restructuring exercise. so as to recover whatever is possible through legal means before the security position becomes worse. banks are convinced of a turnaround within a scheduled timeframe. The response decided on the basis of techno-economic study and promoter’s commitment. In respect of totally unviable units as decided by the bank. and help avert many accounts slipping into NPA category  Timeliness and Adequacy of response:Longer the delay in response. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters’ sincerity. Base don this objective assessment. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level.  Identifying Borrowers with Genuine Intent:Identifying borrowers with genuine intent from those who are nonserious with no commitment or stake in revival is a challenge confronting bankers.  Focus on Cash Flows:- . Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers. grater the injury to the account and the asset. it is better to facilitate winding up/ selling of the unit earlier. and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases.signs of weakness regardless of the fact that it may not have become NPA. and capability to achieve turnaround.

The Credit Information Bureau of India Ltd. which is not part of the consortium. Where the default is due to deeper malady. But this may not be the case all the time.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit’s fortunes.  Multiple Financing:• During the exercise for assessment of viability and restructuring. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow  Management Effectiveness:The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. Toward this end. given the probability of success/failure In some default cases. A proper techno. which could yield a potentially misleading picture. the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default. a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. and ensure that such cash flows are used for working capital purposes. at the time of restructuring the banks may not be guided by the conventional fund flow analysis only. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. While one set of lenders may be willing to wait for a longer time to recover its dues. viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. A bank. may not be allowed to offer credit facilities to such defaulting clients. the priority of each lender will be different. for fear of getting their cash flows forfeited).economic viability study must thus become the basis on which any future action can be considered. there should be regular flow of information among consortium members.While financing. So it is possible • • . In a forum of lenders. another lender may have a much shorter timeframe in mind. where the unit is still working.

any plan for restructuring/rehabilitation may take this aspect into account.that the letter categories of lenders may be willing to exit. . • Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements. even a t a cost – by a discounted settlement of the exposure. Under this system. Therefore. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework.