brm

BRM Research Report

Business Research Methodology

Conceptual Paper

On

Causes of NPAs in Indian PSU Banks

Presented to P. Premlatha on 29th March 2012

Contents

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Chapter 1 – Introduction......................................................................................................................4

Topic of research................................................................................................................................4

Background to the study, organization and the industry...............................................................4

Indian Banking Industries............................................................................................................4

Concept of NPA`s...........................................................................................................................5

Types of NPAs................................................................................................................................7

Banking in India 2010-11..............................................................................................................8

Literature review...............................................................................................................................8

Conceptual Frame Work.................................................................................................................14

Research Gap and Rationale for the Study...................................................................................19

Beneficiaries for the study...............................................................................................................38

Scope of the study............................................................................................................................38

Limitations of the study...................................................................................................................38

Values of the study...........................................................................................................................38

Chapter 2 - Research Methodology....................................................................................................39

Research Questions..........................................................................................................................39

Research Objectives:.......................................................................................................................41

Research Design...............................................................................................................................41

Data Collection Methods.................................................................................................................42

Chapter 3 - Results and Discussion....................................................................................................45

ANALYSIS...........................................................................................................................................45

COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS -2007 TO 2011............................49

Debt recovery process......................................................................................................................53

Chapter 4 – Conclusion.......................................................................................................................54

Annexure...............................................................................................................................................56

Table 1 NPAs of Public Banks........................................................................................................56

Table 2 NPAs Old Private Sector Banks......................................................................................57

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Table 3New Private Sector Banks..................................................................................................59

Table 4 Loan Composition..............................................................................................................60

Table 5a Advances v/s NPAs Public Sector...................................................................................61

Table 5b Advances v/s NPAs Private Sector.................................................................................62

Table 6a Net Profit of Public Bank................................................................................................63

Table 6b Net Profit of Private Bank...............................................................................................64

Chapter 1 – Introduction

Topic of research

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Comparative analysis of causes of NPA’s in public sector and private sector banks.

Background to the study, organization and the industry

Indian Banking Industries

Banking in India originated in the last decade of the 18th century. The oldest bank in

existence in India is State Bank of India, a government-owned bank that have its origin from

1806 and is one of the largest commercial banks in the country. In 1935 the responsibility of

the central banking & commercial banking function was taken over by Reserve Bank of India

from Imperial Bank of India. After India's Independence in 1947, RBI was given more

powers and it was nationalized. In 1969 the government nationalized the 14 largest

commercial banks and thereafter another 6 banks were nationalized in 1980s.

There are currently 27 public sector banks in India. They include the SBI and its 6 associate

banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalized

banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd.

Source: RBI

The banking industry has undergone a dramatic change after the liberalization of the

first phase in 1991. The main function of the bank is to provide funds to various sectors like

agriculture, manufacturing industries, personal loans, housing loans, car loans, etc. The bank

has become very cautious in providing loans to the entire sector mentioned above. The

primary reason been the rising number of non-performing assets (NPA`s)The NPA account

hampers the profitability of the banks as the provisions have to be made for such NPA

account in Profit & Loss account. Also the banks need to maintain Capital adequacy along

with Cash Reserve Ratio and Statutory Reserve Ratio with RBI, which makes it difficult for

the banks to control the erosion of their Net worth. NPAs reflect the performance of banks. A

high level of NPAs suggests high probability of a large number of credit defaults that affect

the profitability and net-worth of banks and also erodes the value of the asset. The NPA

growth involves the necessity of provisions, which reduces the overall profits and

shareholders’ value.

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The issue of Non Performing Assets has been discussed at length for financial system

all over the world. The problem of NPAs is not only affecting the banks but also the whole

economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of

health of the industry and trade.

The paper deals with understanding the concept of NPAs, its magnitude and major

causes for an account becoming non-performing, to understand the meaning & nature of

NPAs.

Concept of NPA`s

Classification of advances: - The guidelines require bank to classify their advances into four

broad categories are as follows:-

a- Standard Asset - A standard asset is one which does not disclose any problems and

which does not carry more than normal risk attached to the business. Such an asset is

not a non-performing asset.

Provisioning Norms

From the year ending 31.03.2000, the banks should make a general provision

of a minimum of 0.40 percent on standard assets on global loan portfolio basis.

The provisions on standard assets should not be reckoned for arriving at net NPAs.

The provisions towards Standard Assets need not be netted from gross

advances but shown separately as 'Contingent Provisions against Standard Assets'

under 'Other Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.

b- Sub Standard Asset - A sub standard asset is one which has been classified as NPA

for a period not exceeding 12 months.

Provisioning Norms

A general provision of 10 percent on total outstanding should be made without

making any allowance for DICGC/ECGC guarantee cover and securities available.

c- Doubtful Asset - A doubtful asset is one which has remained NPA for a period

exceeding 12 months.

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Provisioning Norms

100 percent of the extent to which the advance is not covered by the realizable

value of the security to which the bank has a valid recourse and the realizable value is

estimated on a realistic basis.

For secured portion following are the rates:

Period for which the advance has been

considered as doubtful

Provision requirement (%)

Up to one year 20

One to three years 30

More than three years (D-III)

(i) outstanding stock of NPAs as on March

31, 2007

(ii) advances classified as ‘doubtful for

more than three years’ on or after April 1,

2007

60 per cent with effect from March 31, 2008

- 75 per cent with effect from March 31, 2009

- 100 per cent with effect from March 31, 2010

- 100 percent

d- Loss of Asset - A loss of asset is one where loss has been identified by the bank or

internal or external auditor or the RBI inspection but the amount would not have

written off wholly.

Provisioning norms

The entire assets should be written off after obtaining necessary approval from

the competent authority and as per the provisions of the Co-operative Societies

Act/Rules. If the assets are permitted to remain in the books for any reason, 100 per

cent of the outstanding should be provided for.

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In respect of an asset identified as a loss asset, full provision at 100 per cent

should be made if the expected salvage value of the security is negligible.

Source: RBI Master Circular

If any of the credit facilities granted to a borrower become non-performing all the facilities

granted to the borrower will have to be treated as NPA without having any regard to the

performing status of other facilities.

Operational Definition

According to RBI guidelines from 31st march 2004 NPA is a loan or an advance where,

1- Interest and/ or Installment of principal remain over due for a period of more than 90

days in respect of term loan.

2- The account remain out of order for a period of more than 90 days in respect of an over

draft/ cash credit.

3- The bill remains over due for a period of more than 90 days in the case of bills

purchased and discounted.

4- Interest and/ or Installment of principal remain over due for two harvest seasons but for

a period not exceeding 2 years, in case of an advance granted for agricultural purpose and in

respect of advances granted for agricultural purpose w.e.f. 30th September 2004, a loan

granted for short duration crops will be treated as NPA, if the installment of principal or

interest thereon remains over due for two crops season and loan granted for long duration

crops will be treated as NPA, if the installment of principal and interest thereon remain

overdue for one crop seasons, and

5- Any amount to be received remains overdue for a period of more than 90 days in

respect of other account.

Types of NPAs

1) Gross NPAs

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per

RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans

made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful,

and loss assets. It can be calculated with the help of following ratio:

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Gross NPAs Ratio = Gross NPAs

Gross Advances

2) Net NPAs

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. 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, the provisions the banks have to make against the NPAs

according to the central bank guidelines, are quite significant. That is why the difference

between gross and net NPA is quite high. It can be calculated by following:

Net NPAs = Gross NPAs – Provisions

Gross Advances – Provisions

Banking in India 2010-11

According to the stress test done by RBI the Indian banking system is financially

stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs)

and the global economic crisis.

The RBI has 22,972 M US $ reserve in gold and a total of 304818 M US $ reserves in

foreign exchange. The gold reserve in 2009-10 were 17986 M US $ and total reserve were at

279057 M US $. There is a healthy increase in the reserves as well as gold.

Literature review

When a borrower, who is under a liability to pay to secured creditors, makes any

default in repayment of secured debt or any installment thereof, the account of borrower is

classified as nonperforming assets (NPA) .NPAs cannot be used for any productive purposes

because they reflect the application of scarce capital and credit funds. Continued growth in

NPA threatens the repayment capacity of the banks and erodes the confidence reposed by

them in the banks. In fact high level of NPAs has an adverse impact on the financial strength

of the banks who in the present era of globalization, are required to conform to stringent

International Standards. “Non Performing Asset” means an asset or account of a borrower,

which has been classified by bank or financial institution as substandard, doubtful or loan

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asset. After nationalization and globalization the initial directive that banks were given was to

expand their branch network, increase the saving rate and extent credits to rural, urban and

the most important SSI sectors. No doubt this mandate has been achieved admirably under

the regulation of economic reforms initiated in 1991 by the then Finance Minister and present

Prime minister Dr. Manmohan Singh. No doubt it would have been incomplete without the

overhaul of Indian Banking System. Then all of a sudden focus shifted towards improving

quality of assets and better risk management. The Narasimhan committee reports (First

report) recommendations are the basis for initiation of the process, which is still continuing.

The committee has recommended the enactment of a new legislation for securitization and

empowering banks and financial institution to take possession of the securities and do sell

them without the intervention of the court. The Narasimham Committee Report is without

doubt a major path- breaking piece of work and deserves the support of all who yearn for a

more rational and effective banking system in this country. In order to have the proper

understanding of NPA menace, it is important to have a brief idea of growth and structural

changes that have taken place in the banking sector. The growth of the banking system can be

assessed in five phases:- 1) Preliminary Phase(series of birth and death of banks) 2) Business

Phase(period between 1949- 19 69) 3) Branching Out Phase(period when commercial banks

got nationalized) 4) Consolidated phase(weaknesses and defects were identified) 5) Reforms

and Strengthening Phase(1991 to till date) Indian Banking Industry Saddled with High NPAs:

Reasons The liberalization policies launched in 1991 opened the doors to the entrepreneurs to

setup industries and business, which are largely financed by loans from the Indian banking

systems. Business firms and companies fail to pay the principal amount as well as the interest

amount (Bad Loan) .In the global economy prevailing today, the vulnerability of Indian

businesses has increased. A culture change is crept in where repayment of bank loans is no

longer assured. A constant follow up action and vigil are to be exercised by the operating

staff. Diversion of funds and willful default has become more common. As per a study

published in the RBI bulletin in July 1999, diversion of funds and willful default are found to

be the major contributing factors for NPAs in public and private sector banks. Today, the

situation looks optimistic with the industry succeeding in overcoming the hurdles faced

earlier. The timely restructuring and rehabilitation measures have helped to overcome

setbacks and hiccups without seriously jeopardizing their future. The greater transparency

and stricter corporate governance methods have significantly raise the credibility of the

corporate sector. The attrition rate in corporate sector has come down. The challenges before

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the banks in India today are the raising NPAs in the retail sector, propelled by high

consumerism and lowering of moral standards. Other Factors: The problem that India faces is

not lack of prudential norms but the legal impediments and time consuming nature of asset

disposal process, “postponement” of the problem in order to report high earnings and to some

extent manipulation of by the debtor using political influence. Most of the banks in India are

into this malpractices and fraudulent acts. In the process of earning high returns on their

investment by the above stated method, the banks become bankrupt or penniless. A vicious

effect of the slow legal process is that banks are shying away from risks by investing a

greater than required proportion of their assets in the form of sovereign debt paper. The worst

part is that the NPA of a private enterprise is both financially and politically undesirable.

Earlier bankruptcy Law favored borrowers and law courts were not reliable vehicles. But the

circumstances have changed. Laws were passed allowing the creation of asset management

companies, foreign equity participation in securitization and asset backed securitization.

Impact of NPAs on Banking Operations: The efficiency of a bank is not reflected only

by the size of its balance sheet but also the level of return on its assets. The NPAs do not

generate interest income for banks but at the same time banks are required to provide

provisions for NPAs from their current profits. The NPAs have deleterious impact in the

interest income on the bank, bank profitability because of the providing of the doubtful debts,

return on investment of course. NPAs also disturb the Capital Adequacy Ratio (CAV) and

economic value addition (EVR) of the banks. It is due to above factors, the public sector

banks are faced with bulging NPAs which results in lower income and higher provisioning

for doubtful debts and it will make a dent in their profit margin. In this context of crippling

effect on banks operation the slew asset quality is placed as one of the most important

parameters in the measurement of banks performance under the Camel’s supervisory rating

system of RBI. Whether trading of NPA between Banks illegal or not: The word ‘trading’

here means purchasing or selling of NPAs between banks. So assignment or trading falls

under the guidelines of Banking Regulation Act (BRA) which makes it legal. But the Gujarat

High court has held that the buying and selling of non-performing assets is illegal. The court

has ruled that such an activity is not a part of “banking activity” as contemplated under the

Banking Regulation Act, 1949. The court held that “Interest transfer of NPAs by banks is

illegal and not a part of banking activity under the BR Act. Trading in debts is a speculative

form of transaction that is not permissible activity and thus, cannot be a part of the business

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of a banking system” The ruling had an impact of sending shockwaves through the backbone

of Indian economy and came under the greater scrutiny in academic circles too. But the

judgment is yet to stand the Supreme test of judiciary scrutiny as the aggrieved Banks and

concerned regulatory bodies (RBI and Indian Bank Association) have challenged the decision

before the Supreme Court. In the interim, the legality of loan purchases is under cloud till

now. We feel the recent pronouncement of the Gujarat High Court has misinterpreted the

term ‘debt’ from legal as well as accounting point of view. A loan item or the borrower is an

asset of a bank and not a debt. Thus, de-facto the assignment of loan (good or bad) amounts

to transfer of asset and not debt. Even RBI considers interest NPA assignment between banks

to be a significant tool for resolving the issue of Non Performing Assets and in the interest of

banking policy. Measures to control NPAs menace a lasting solution to the problem of NPAs

can be achieved only with proper credit assessment and risk management mechanism. It is

necessary that the banking system is equipped with prudential norms to minimize if not

completely avoid the problem of credit risk. Effective management of NPA rather than

elimination is prudent. All these issues gave the passage of evolution of the Securitization

and Reconstruction of Financial Assets and enforcement of Security Interest Act

(SARFAESI), 2002. It is a unique piece of legislation which has far reaching consequences.

Securitization in India is still in a nascent stage but has potential in areas like mortgage

Backed securitization. This act has an overriding power over the other legislation.

SARFAESI ACT was promulgated to regulate the financial assets and enforcement of

security interest and for matters connected therewith or incidental thereto. The main purpose

of this act is to enable the creditors take possession of the secured assets and to deal with

them without the intervention of the court. No doubt this Act was challenged in various

courts on ground that it was loaded heavily in favor of lenders, giving little chance to the

borrowers to explain their views once recovery process is initiated under the legislation. The

major problem with the Indian banking system is that they depend largely upon lending and

investments. The banks in the developed countries do not depend upon this income whereas

86 percent of income of Indian banks is accounted from interest and the rest of the income is

fee based. The banker can earn sufficient net margin by investing in safer securities though

not at high rate of interest. It facilitates for limiting of high level of NPAs gradually. It is

possible that average yield on loans and advances net default provisions and services costs do

not exceed the average yield on safety securities because of the absence of risk and service

cost. The corporate debt restructuring is also one of the methods suggested for the reduction

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of NPAs. Its objective is to ensure a timely and transparent mechanism for restructure of

corporate debts of viable corporate entities affected by the contributing factors outside the

purview of DRT and other legal proceedings for the benefit of concerned. The problem of

non -performing loans created due to systematic banking crisis world over has become acute.

Focused measures to help the banking system to realize its NPAs has resulted into the

creation of specialized bodies called Asset Management Companies which in India have been

named Asset Reconstruction Companies (ARC’s) The main objective of ARCs is to act as 1)

A agent for any bank or financial institution for the purpose of recovering their dues from the

borrowers. 2) A manager of the borrowers’ asset taken over by banks or financial institution.

3) The receiver of properties of any bank or financial institution. 4) There have been

instances of banks extending credit to doubtful debtors (who deliberately default on debt) and

getting kickbacks for the same. Ineffective Legal mechanisms and inadequate internal control

mechanisms have made this problem grow – quick action has to be taken on both counts so

that both the defaulters and the authorizing officer are punished heavily. Without this, all the

mechanisms suggested above may prove to be ineffective. Hence, the contaminated portfolio

is definitely a bane for any bank. It puts severe dent on the liquidity and profitability of the

bank where it is out of proportion. It is needless to mention, that a lasting solution to the

problem of NPAs can be achieved only with proper credit assessment and risk management

mechanism. It is necessary that the banking system is to be equipped with prudential norms to

minimize if not completely to avoid the problem of NPAs. The onus for containing the

factors leading to NPAs rests with banks themselves. This will necessitates organizational

restructuring, improvement in the managerial efficiency and skill up gradation for proper

assessment of credit worthiness it is better to avoid NPAs at the nascent stage of credit

consideration by putting in place of rigorous and appropriate credit appraisal mechanisms.

The size of the Balance sheet is not the only factor which reflects the efficiency of the

bank but the level of the return on asset is also considered for the measurement of the

efficiency of the banks NPAs is non generating income class of the bank but banks are

required to provide the provisions from their current profits. These provisions have impacted

the profitability of the banks. The main challenges to be faced for the increasing number of

NPAs are the Public sector banks.

Mediating VariablesPoliticalGovt. Policy & BudgetBudget measuresMonetary PolicyFDI Limit

Moderating VariableEconomicalGDPInflationInterest RatesDisposable incomeRecession

Individual FactorsSalaryCredit historyCareer/Industry

Company FactorsFailure of Business ModelManagement IntegrityHigh gearing or leverage ratio

External FactorsRecession/Industrial GrowthStrikesTerrorist attacks / Natural disasters

Demographic VariableAgeIncome

Dependent VariableNPA

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Conceptual Frame Work

H

Independent Variable

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Individual Factors

Salary:

Primarily salary is an important factor while evaluating the customer's profile and

eligibility of the loan amount. Some banks with aggressive business strategy keep the limits

more than the customer's loan repayment appetite. Customer's accounts are also checked for

monthly salary and interest which is getting credited into their account.

The second thing that need to be considered while eligibility of the loan amount is the

qualification of the borrower. They are assessed in order to determine the average salary that

the person would get in the near future based upon his qualifications. The principal amount of

the loan is approved or negotiated, on the basis of the probable average salary that the person

can get. (International journal in commerce and management. Volume II issue X Oct 2011.)

Credit history:

Banks also check the credit history of the customer. Credit history is the repayment

history of borrowers, including defaults and the period for which the repayment was not

made by the customer. Usually bank should refer to credit history of a customer in CIBIL

(Credit Information Bureau India). CIBIL is a database of all loans given out by its member

bank. Banks use this database to check the creditworthiness before lending.

The CIBIL maintains the following information of the borrowers:

• The complete record of the credit facilities availed by the borrower

• Loan payment history

• Overdue amount

• How many members have inquired about borrower’s credit history

• Suit-filed status

Banks also need to understand unsecured loans taken by customer. Unsecured loans

are mainly personal loans given on the basis of loan against credit card, loan against LIC

premiums. Generally banks give loan without cross checking the actual income.

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Also to retain the market share, most of the banks and NBFCs offer loans to same

customer on the basis of proxy records which results in over leveraging. The procedure is

very simple, a customer in need of money contact more than one bank at a time and most of

the banks power-driven with their proxy records give loan. And the net result is a customer

who should get one loan in fact gets ten which in turn lead to defaulting in most of the cases.

Last six months banks statements are also very important in determining their

creditworthiness. Generally following points are checked in bank's statements.

• Average bank balance maintained by the customer in his/her account on certain dates of all

months

• Number of dishonored cheques both inward and outward

• If ever paid any minimum balance charges

• Examine other obligations

Source: CIBIL

Career/Industry:

The Individuals career or industries also play a major role in the Banks NPA`s. The

career of the individual is related to the banks NPA’s. If an individual who is not set in his

career will face a cash crunch. If this individual has availed the loan from the bank and due to

his improper path in his career it will be difficult for him to repay back the loan of the bank.

Thus the Banks will have to ensure these factors of the individual career before

granting any loan to such individual.

Also the individuals industry in which he is working plays a significant role in the

NPA’s. As for example an Employees of Satyam were layed off due to the scam and the new

management of Tech Mahindra. According to article in F.E 3rd Jun 2009 the new owner of

Satyam said that “The first phase of layoffs has started. In the second phase, employees who

have been on bench for less than three months would go away.” They also told that some

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senior executives on the bench are being offered almost 50% of their salary or an option to go

on a sabbatical.

These layoffs could very well affect the banks NPA’s. As the one who might have

taken a loan from the bank would definitely find it difficult to pay back the loan. Also the

bank even at the time of disbursing the loan may have not realized that such an unfortunate

instance may happen.

As is the case with the employees of Jet Airways. In the article in F.E 16th Oct 2008

Jet had retrenched 800 flight attendants because of the slowdown in demand. The Jet Airways

said in a statement it would reduce probationary and temporary workers in other areas,

including management and pilots.

This will seriously affect the livings of the individuals. The banks may have not got

the idea credit worthiness of the individual.

External Factors

RECESSION/ INDUSTRIAL DEGROWTH:

Business cycles are periodic re-occurrences of highs and lows of economic activity. It

has been observed that release of bank credit increases during a boom period and decreases

during recession. There are many reasons attributable to this phenomenon. The primary

reason is that Banks become vary of the creditworthiness of the Borrower during Recession

and they become risk averse. This is due to the fact that Recession is causes growth to

decelerate or even negate thus affecting output. A lower output causes lower income levels

and this is said to directly impact the debt servicing ability of the Borrower. Similarly in the

economic boom, Banks are generally more relaxed in releasing credit and assign higher credit

scores to potential borrowers, sometimes are the risk of doing an inadequate assessment of

the long term sustainability of the Borrower in adverse business conditions. This laxity more

often than not comes to back to haunt the lender during times of recession. Of course in times

of boom the observation is that credit default is lower. There exists numerical data to suggest

a negative relationship between the growth in real GDP and NPA according to the research

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by Salas and Suarina, 2002; Rajan & Dhal, 2003; Fofack, 2005; and Jimenez and Saurina,

2005. The explanation provided by the literature for this relationship is that strong positive

growth in real GDP usually translates into more income which improves the debt servicing

capacity of borrower which in turn contributes to lower non-performing loans. Conversely,

when there is a slowdown in the economy (low or negative GDP growth) the level of NPAs

should increase.

Source : http://www.eurojournals.com/mefe_7_06.pdf

The Determinants of Non-Performing Assets in Indian Commercial Bank: An Econometric

Study

INFLATION

The findings indicate an inconsistent relationship between inflation and non-

performing loans.

STRIKES

Industrial strikes is said to have an abnormal impact on capital intensive business with

long horizons and also service industries. A classic example is an Airline which has very high

fixed costs and also high variable costs. A strike will lead to negative cash flows which

ultimately will lead to loan default. The case study of Air India- inherently a service industry

with long capital gestation of the strike in 2011 re-enforces this view. Strikes have an even

bigger impact on service industries as it will bring operations to a complete stand still and

cash flows will be severely affected and will lead to the loans taken from Banks turning into

NPA.

Source : http://www.siliconindia.com/

http://www.siliconindia.com/

http://www.eurojournals.com/mefe_7_06.pdf

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Terrorist attack/ Natural disaster

This is the external factors on which the Npas of the banks depends. Any terrorist

attack on the country may cause to severe damage to the property as well as the individuals.

In this case any damage leads to the downturn of the country's economy. Any loss of life due

to the attack will prove to be a fatal situation. The person who may have taken a loan from

the bank or collateral his property if affected by such terrorist attack will completely turn to

npas for the bank. As in this case the man himself is not defaulting but the default is due to

the external factors i.e the terrorist attack.

Also due to the natural disaster any loss to the life or the property will affect the asset

quality of the banks if the same has been taken by as collateral or bank may have given the

loan to somebody.

In both the cases there is a risk to the bank’s asset which is not controllable by the

banks. The individual who has been affected by such incident either in terms of life or

property does not have the intention of default but due to the external factors the same is not

controllable and the asset turns to NPA.

Other factors such as strikes will lead to NPAs but for a short while. As at the time of

strike the worker may not get the salary or wages due to which he may not able to meet the

cash requirement. But immediately after the strike gets over the worker start getting his

wages regularly and his cash requirement is met properly.

Research Gap and Rationale for the Study

Industry Analysis

PEST Analysis of Indian Banking Industry

Political, Economic, Social & Technological analysis is a toll to analyze the different

forces which drives the industry and how these forces can influence the industry.

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Political Factors namely Government Policy and budget, Budget measures, Monetary

policies, FDI`s as well as FII`s.

Government & RBI policies mainly affect the banking sector. Many a times the Government

declares some measures looking into consideration some of the political party to benefit them

like waiver of short term agricultural loans, in order to attract the farmers vote. In this process

the profits of the banks get affected as they need to provide for this waiver from their current

profits. Various policies are framed by the RBI in order to have a better control.

Monetary Policy 2011-12

Cash Reserve Ratio: - 4.75%

Repo Rate: - 8.5%

Reverse Repo Rate: - 7.5%

Bank Rate: - 6%

Source: RBI

Budget 2012-13

In the Union Budget announced on 16th March 2012, the PSU banks will be granted US 1.2bn

$ to maintain capital to risk asset ratio norms. This will help the PSU banks to improve in

their performance for maintaining the above ratio. RBI has asked banks to improve their

ability to manage stressed assets, but said there was nothing alarming about an unexpected

rise in the Non-Performing Assets (NPA) levels this fiscal. The total NPAs in the system are

set to top 3% of the total assets this fiscal, against a 2.3% last fiscal at Rs.98,000 crore. RBI

has also decided to infuse Rs.10,000 crore via open market operations today to ease the

liquidity conditions.

Source: ET 17th Mar 2012

Economic factors

RBI declares its 6 monthly policy and various measures and rates are implemented

which will have an impact on the banking sector. Also the Union budget affects the banking

sector to boost the economy by giving certain concessions or grants. If in the budget savings

are promoted then more money will be collected by the banks in the form of savings through

which the banks can allocate these money to agricultural sectors or manufacturing sectors or

any other sectors which in turn help the economy to grow.

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Growing Economy/GDP

Indian economy has registered a growth rate of 8% approx for last 5 yrs and is

expected to growth at a robust growth rate as compared to other developed and developing

countries. Banking industry is directly related to the growth of the economy.

The contribution of various sector in Indian GDP for 2010-11 are as follows:

Agriculture: - 14.4%

Industry: - 20%

Services: - 65.6%

The service sector is contributing more than half of the Indian GDP. The government

is taking various steps to improve the GDP of the country. They are framing various policies

like FDI limits, SEZs, Investment by NRI and so on to improve the economy of the country

and in turn will improve the GDP.

Interest Rates

The interest rates are controlled by RBI through various monetary policies. The

interest rates were stable at 7 % from 2006 to 2008. In 2010 the interest rates was 4.5% and

RBI have started to increase the same and is not around 8% in 2011.

It can be seen from the chart that the Call Money Rate (borrowing & lending) is going high as

Compared to 2010 i.e. from 3.56% to 7.11% almost double.

Inflation Rate

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Inflation represents the rise in the general level of the prices of goods and services

over a period of time. The inflation was high in March 2010 at 10.4 % where as in March

2011 it was around 9.7%. To combat the inflation rate the RBI have taken monetary measures

which includes increase in the interest rates.

Agriculture credit

Agriculture is the main focus of the Indian economy. Nearly 60% of our population

deriving their sustenance from the same. In the recent past the sector have recorded a growth

of around 4% per annum with substantial increase in plan allocations and capital formation

for this sector. Agriculture credit flow was 416133 CR in 2010 where as it was 460333 CR in

2011. This shows that the credit flow is increasing to make this sector grow in a positive

direction.

Debt relief for farmers

Since 2006-07, the Government of India has been subsidized short term crop loans to

farmers in order to ensure the availability of crop loans to farmers up to Rs.3.00 lakh, at 7%

p.a. This interest Subvention Scheme has been proposed to be continued in 2011-12 for

Public Service Banks, Regional Rural Banks and Cooperative Banks. This year an additional

subvention of 3% will be provided to the farmers, who repay on time. Thus, the effective rate

of interest for such farmers will be 4% per annum in the year 2011-12. This scheme is

equally available to the small/marginal farmers who take loan through these new banking

channels. The Government of India has implemented Agricultural Debt Waiver and Debt

Relief Scheme (ADWDRS), 2008. Under the Scheme, the entire ‘eligible amount’ in case of

small or marginal farmers (cultivating up to 2 hectares or 5 acres of land) was waived. The

debt waiver portion of the Scheme was closed on 30.6.2008. In the case of ‘other farmers’

(cultivating more than 2 hectares or 5 acres of land), there was a One Time Settlement (OTS)

Scheme under which these farmers were to be given a debt relief by way of rebate of 25 per

cent of the ‘eligible amount’ subject to the condition that the farmer pays the balance of 75

per cent of the eligible amount’. The Government had extended the last date for the OTS for

‘other farmers’ up to 30.6.2010.

Socio cultural factor

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Factors like taboos, traditions, customs, tastes, buying habits, preferences, and

consumption of people, their language, beliefs and values affect the business. Banking

industry also operates under this social environment and also affected by these factors.

These factors are changing continuously people’s life style, their behavior, consumption

pattern which is also creating opportunities and threat for the banking industries.

Technological factor

Technology has played a vital role in the banking system for the internal control

mechanism as well as the service which they offer to the customers. New technological

developments in the banking industry are ATMs, IT Services and Mobile banking, Core

Banking are some of the important factors contributing to the change in the banking system

as far as the service offered to the customers.

Reasons for an account becoming NPA

1. Internal factors

2. External factors

Internal factors

1. Business failures.

2. Poor recovery of receivables.

3. Project not completed on time.

4. Funds borrowed for specific purpose but not used for the said purpose.

5. Poor recovery of receivables.

6. Diversion of funds for expansion/modernization/ setting up of new projects/promoting

sister concerns.

7. Strikes by labor union.

8. Inappropriate technology/technical problems.

9. Product obsolescence.

10. Willful default, fraud, disputes, management disputes, misappropriation of funds.

11. Deficiencies on part of banks credit appraisal, monitoring and follow up of the

receivables, delaying settlement of payments, subsidies by government.

External factors

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1. Legal system which includes long legal procedures and time taken to settle the claims,

changes taking place in the labor laws and lack of sincere efforts.

2. Scarcity of raw materials, power and other useful resources.

3. Industrial recession.

4. Price of the raw material escalation, power shortages, excess capacity, natural

calamities like floods, accidents, earth quakes.

5. Terrorist attacks.

6. Government policies like excise duty change, import duty changes, pollution control

orders.

Main Sectors of NPAs

1- Housing Loan includes matter not only relating to providing money for approval of

loan but also relating to modification of loan and then declared the account as NPA.

In this game those banks are also participating whose financial position are not good. These

banks transferred Rs. 500 crore in NPA account. It means banks cannot recover this money.

It is estimating that from the above NPA 40% relating to real estate sector.

Note: - source of data dainik jagaran 22nd November 2010

As an auditor you cannot comment upon corruption involve but you can comment upon the

non performing account.

2- Education Loan is the other sector of NPA. In this case banks facing problem to

find those people who had taken professional loan but not repaid after getting employment

these account holder declares as defaulter.

As per annual report of Government of India for the year 2009-10 in education

account total 1715016 account having amount of Rs. 32366.61 crore declares as outstanding

as on 30th September 2009.

The total outstanding loans of Public Sector Banks (PSBs) for education as on 31st

March, 2009 stood at Rs.27646 crore, in 1603385 accounts. The increase in total loans

outstanding over previous year in absolute and percentage terms was Rs.7829 crore and 39%

respectively. Year-wise break-up of education loans outstanding as on March 31, 2004 to as

on March 31, 2009 is given below:

As on No. of Amt. Year on Year

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March

31st

Accounts

outstanding

(Rs.Crore)

Growth (%)

No. of

Accounts

Amount

2004 319337 4550

2005

468207 6713 46.62 47.54

2006 679945 10012 45.22 49.14

2007 944397 14283 38.89 42.65

2008 1246870 19817 32.03 38.75

2009 1603385 27646 28.59 39.51

As on 30th Sept.

2009#

1715016 32367 6.96* 17.08*

Source: IBA. # Figures are provisional. * Growth over

March 2009

Reserve Bank of India has laid down norms for classification of assets and provisioning

norms for NPA, however certain exceptions to these norms are discussed below:-

I. Temporary deficiencies e.g. non availability of current drawing power due to non-

receipt of latest stock statement, temporary delay in renewal of limit on due date etc.

II. Natural calamities, where in the wake of natural calamities short term agricultural

loans are converted into long term or there is rescheduling of repayment period or

fresh short term loans are sanctioned, the term loans as well as fresh short term loan

may be treated as current dues and need not to be classified as NPA.

III. Facilities Backed by Central Government Guarantee: - credit facilities backed by

guarantee of the Central Government though overdue should be treated as NPA only

when government repudiates its guarantee when invoked (this exception is only for

the purpose of asset classification and provisioning and not for the purpose of

recognition of income.)

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a) Professional

As on 31st Mar 2011 the Nap’s SBI & Union Bank Sector wise is as follows:

SBI (In CRORES)

PRIORITY SECTOR: Rs.13275 (57.5%)

NON PRIORITY SECTOR: Rs.9799 (42.5%)

UBI (In CRORES)

PRIORITY SECTOR: Rs.2262 (62.4%)

NON PRIORITY SECTOR: Rs.1361 (37.6%)

(Priority sector was regarded as a People Sector by policymakers, regulators and banks till

1990. As one of the prime objectives of nationalization of banks was radical development of

the society in general and certain sectors in particular credit flow to these sectors was

ensured. With lower interest rates and the overdue from the priority sector grew

tremendously)

According to the RBI as on 31st March 2011 the asset quality of the banking sector

has improved in 2010-11 as compared to the previous year. The Gross NPAs to gross

advances ratio declined to 2.25% in 2010-11 from 2.39% in 2009-10. The improvement in

asset quality was visible in both the public as well as private banks.

According to the banking analyst in Motilal Oswal Sec (31st Jan 2012) Ltd the recent

string of loan restructuring, PSU banks are likely to bear the brunt. According to him most

of the restructuring that are happening are at zero net present value loss.

SBI is facing a series of restructuring failures like in the case of GTL Infra. In June 2010

SBI has syndicated Rs. 5000 CR loan for GTL Infra to pay for Aircel Cellular’s tower

business. However a year after the loan syndication SBI was back in the picture to help

GTL Infra in a financial crisis. In Sept 2011 GTL Infra had to go for corporate debt

restructuring.

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According to the report by Fitch (1st Feb 2012) the NPAs of the Indian PSUs are

expected to touch 4% of the total assets from 3% in 2011.

The RBI takes the asset quality as one of the most important parameters in

measurement of banks performance under the Camels (1) supervisory rating system. This

supervisory system helps in the increasing numbers of NPAs in the public sectors banks to

keep under control.

Focused measures to help the banking system to realize its NPAs has resulted in the

formation of specialized bodies called Asset Management Companies which in India is called

Asset Reconstruction Companies. The objectives of the ARC are to act as an agent for any

banks or financial institution for recovering of their dues from the borrowers.

The solution to the problems of the NPAs can be achieved only with proper credit

assessment and risk management mechanism. It is in the hands of the banks itself to avoid the

NPAs at the earlier stage by putting in place a strict and appropriate credit appraisal

mechanisms.

1. CAMEL: Capital Adequacy, Asset quality, Management, Earnings, Liquidity,

System and control.

Impact of NPA

Impact on Indian Economy: - After NPA issue came into picture the share price of those

concerns or companies fall on 25th November 2010 which highlights in this issue. The data

given below is as per data published in dainik jagaran on 26th November 2010.

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Bank/Company

% Decrease in price

Punjab National Bank 6.38

Canara Bank 5.85

Axis Bank 3.35

LIC housing finance 0.98

DB reality 9.99

JP 5.19

DLF 4.13

India Bulls 5.22

Unitech 6.04

Following data is relating to NPA declared by banks during the financial year 2009-10

Source Bank Name Amount (Rs. In Crore)

Dainik Jagaran dated

29th November 2010

Punjab National Bank 853

Dena Bank 185

Bank of Baroda 515

Canara Bank 884

Indian Bank 388

Syndicate Bank 419

UCO Bank 371

State Bank of India 1990

Vijaya Bank 479

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Allahabad Bank 750

Union Bank of India 513

TOTAL 7347

Profitability

The profitability of the bank is generally affected by NPAs as because of the

provisions which they need to provide for the same. It is because of this provisioning for

NPAs the bank banks write off the bad debt or NPA account from the current profit earned.

This will have an adverse impact on return on investments along with the opportunity cost

that is if the same money invested in other asset would give the banks some attractive returns.

Liquidity

Due to the provisioning of NPAs the money is getting blocked and this leads to

liquidity crunch and in turn lead to problem in routine payments and dues.

Involvement of management

The time and efforts by the management is another indirect cost which the bank has to

bear due to NPA. The management has to manage the NPA account on a daily basis in order

to reduce the bank’s profitability, this efforts and time if diverted to the other activities may

bring more profits to the banks.

Loss of goodwill

The people generally tend to avoid putting their money in the banks with high number

of NPAs as they feel it that the banks are generating loss. This indirectly hampers the

goodwill of the banks.

Early symptoms of NPA

By which one can recognize a performing asset turning into non-performing asset:

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1) Financial

Non- payment of first installment.

Cheque bounce due to insufficient funds in the bank account.

Irregular payments in installments.

Unpaid bills which are overdue.

Current ratio is decreasing.

Diversion of funds to sister concern.

2) Operations

Overdue receivables.

Stock statement not submitted on time.

External non controllable factors like natural calamities where borrower is

operating his business.

Nonpayment of wages.

3) Others

Death of borrower.

Change in government policies.

Competition in the market.

Preventive measurement of NPA

Early recognition of the problem:

Identification of the weakness in the beginning stage that is when the account starts

showing first sign of weakness it is the time for the bank to be more cautious on such

account. Assessment of the revival of the account should be based on the economic viable

study. Restructuring activity should be carried only after the assessment shows favorable

results that the account will turn to normal after specific time period. In case if the bank feels

that the account is unviable then it needs to be closed down and sell the unit at the price

prevailing in the market so as to minimize the risk before the unit become intensive.

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Identifying the borrower’s creditworthiness:

It is very much important for the banks to identify the borrower with their true

creditworthiness and also the borrowers whose intent is genuine or not. It is the most

important process as this process will determine the true credibility of the borrowers at the

initial stage, so that the bank can decide to finance or not. For this purpose banks need to

inspect the financial transaction, books of accounts, financial background in order to gauge

the financial requirements of the borrower and also to know whether it is possible for him to

repay back the loan. There should be limit set for the borrowers who are genuinely in need of

finance and this may help in many account which might go into NPAs.

Management effectiveness:

It is a general perception among the borrowers that due to lack of finance their unit

has turned to sickness. There are many other reasons for instance the management decision in

tackling complex problems is also the reason for the unit to become sick. As any wrong

decision may lead the unit to become sick and unviable. The bank must also look into the

effectiveness of the management before passing the dues.

Corporate Debt Restructuring:

CDR mechanism has been institutionalized in 2001 to provide a timely and

transparent system of restructuring of corporate debt of Rs. 20 CR and above with banks and

financial institution on a voluntary basis. Under this system banks are benefited in terms of

restructuring the NPAs which are large in size.

Source: www.cdr.org

Procedure for NPA identification and resolution in India

1) Internal Checks and Control

High level of NPAs affects the profitability and the performance of the banks, the

identification of the potential problem account and their close monitoring becomes very

important. Most banks have Early Warning System (EWS) for identification of NPAs, but

the actual process followed may differ from bank to bank. The EWS enable a bank to

identify the borrower accounts which show signs of credit deterioration and initiate

remedial action. Many banks have evolved and adopted an elaborate EWS, which allows

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them to identify potential distress signals and plan their options beforehand, accordingly.

The early warning signals, indicative of potential problems in the accounts, viz. persistent

irregularity in accounts, delays in servicing of interest, frequent devolvement of L/Cs,

units' financial problems, market related problems, etc. are captured by the system. In

addition, some of these banks are reviewing their exposure to borrower accounts every

quarter based on published data which also serves as an important additional warning

system. These early warning signals used by banks are generally independent of risk

rating systems and asset classification norms prescribed by RBI. The major

components/processes of a EWS followed by banks in India as brought out by a study by

RBI at the instance of Board of Financial Supervision are as follows:

Designating Relationship manager or credit officer for monitoring accounts.

Preparation of KYC i.e. Know your client profile.

Credit rating system.

Identification of special mention category account.

Monitoring of early warning signals.

Relationship manager/Credit officer

The RM/ CO are an official who is expected to have a complete knowledge of

borrower, his business, his future plans, etc. The Relationship Manager has to keep in

constant touch with the borrower and report all developments impacting the borrowable

account. As a part of this contact he is also expected to conduct scrutiny and activity

inspections. In the credit monitoring process, the responsibility of monitoring a corporate

account is vested with Relationship Manager/Credit Officer.

Know Your Client Profile

Banks are required to follow Know Your Customer (KYC) guidelines. These

guidelines are meant to weed out and to protect the good ones and the banks. With the

growth in organized crime, KYC has assumed great significance for banks. The RBI

guidelines on KYC aim at preventing banks from being used, intentionally or

unintentionally, by criminal elements for money laundering or terrorist financing

activities. They also enable banks to have better knowledge and understanding of their

customers and their financial dealings. This in turn helps banks to manage their risks

better. The RBI expects all banks to have comprehensive KYC policies, which need to be

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approved by their respective boards. Banks should frame their KYC policies

incorporating the following four key elements:

a) Customer Acceptance Policy;

b) Customer Identification Procedures;

c) Monitoring of Transactions; and

d) Risk Management.

Most banks in India have a system of preparing `know your client' (KYC)

profile/credit report. As a part of `KYC' system, visits are made on clients and their places

of business/units. The frequency of such visits depends on the nature and needs of

relationship. Source: www.cvlindia.com CDSL Venture Ltd

Credit Rating System

The credit rating system is essentially one point indicator of an individual credit

exposure and is used to identify measure and monitor the credit risk of individual proposal.

At the whole bank level, credit rating system enables tracking the health of banks entire credit

portfolio. Most banks in India have put in place the system of internal credit rating. While

most of the banks have developed their own models, a few banks have adopted credit rating

models designed by rating agencies. Credit rating models take into account various types of

risks viz. financial, industry and management, etc. associated with a borrowable unit. The

exercise is generally done at the time of sanction of new borrowable account and at the time

of review renewal of existing credit facilities.

Special Mention category

The grading of the bank's risk assets is an important internal control tool. It serves the

need of the Management to identify and monitor potential risks of a loan asset. The purpose

of identification of potential NPAs is to ensure that appropriate preventive / corrective steps

could be initiated by the bank to protect against the loan asset becoming non-performing.

Most of the banks have a system to put certain borrowable accounts under watch list or

special mention category if performing advances operating under adverse business or

economic conditions are exhibiting certain distress signals. These accounts generally exhibit

weaknesses which are correctable but warrant banks' closer attention. The categorization of

such accounts in watch list or special mention category provides early warning signals

enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take

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necessary preventive steps to avoid their slippage into non performing advances. Early

Warning Signals It is important in any early warning system, to be sensitive to signals of

credit deterioration. A host of early warning signals are used by different banks for

identification of potential NPAs. Most banks in India have laid down a series of operational,

financial, transactional indicators that could serve to identify emerging problems in credit

exposures at an early stage. Further, it is revealed that the indicators which may trigger early

warning system depend not only on default in payment of installment and interest but also

other factors such as deterioration in operating and financial performance of the borrower,

weakening industry characteristics, regulatory changes, general economic conditions, etc.

Warning signals may include:

Financial

Operational

Banking

Management

External factors

Financial warnings include the financial position of the borrowers like Profit & Loss, Balance

Sheet, Cash Flows etc.

Signals like :

Persistent irregularity in the account

Default in repayment obligation

Devolvement of LC/invocation of guarantees

Deterioration in liquidity/working capital position

Substantial increase in long term debts in relation to equity

Declining sales

Operating losses/net losses

Low activity level in plant

Disorderly diversification/frequent changes in plan

Nonpayment of wages/power bills

Loss of critical customer/s

Frequent labor problems

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Evidence of aged inventory/large level of inventory

Management related warning signals

Lack of co-operation from key personnel

Change in management, ownership, or key personnel

Desire to take undue risks

Family disputes

Poor financial controls

Fudging of financial statements

Diversion of funds

Banking related signals

Declining bank balances/declining operations in the account

Opening of account with other bank

Return of outward bills/dishonored cheques

Sales transactions not routed through the account

Frequent requests for loan

Frequent delays in submitting stock statements, financial data, etc.

Signals relating to external factors

Economic recession

Emergence of new competition

Emergence of new technology

Changes in government / regulatory policies

Natural calamities

2) Management/ Resolution of NPAs

A reduction in the total gross and net NPAs in the Indian financial system

indicates a significant improvement in management of NPAs. This is also on account of

various resolution mechanisms introduced in the recent past which include the SRFAESI

Act, one time settlement schemes, setting up of the CDR mechanism, strengthening of

DRTs. From the data available of Public Sector Banks as on March 31, 2003, there were

1,522 numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50

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million in all the public sector banks in India. The total gross value of these NPAs

amounted to Rs. 215 billion. The total number of resolution approaches (including cases

where action is to be initiated) is greater than the number of NPAs, indicating some

double counting. As can be seen, suit filed and BIFR are the two most common

approaches to resolution of NPAs in public sector banks. Rehabilitation has been

considered/ adopted in only about 13% of the cases. Settlement has been considered only

in 9% of the cases. It is likely to have been adopted in even fewer cases. Data available on

resolution strategies adopted by public sector banks suggest that Compromise settlement

schemes with borrowers are found to be more effective than legal measures. Many banks

have come out with their own restructuring schemes for settlement of NPA accounts.

3) Willful Defaulters

RBI has issued revised guidelines in respect of detection of willful default and

diversion and siphoning of funds. As per these guidelines a willful default occurs when a

borrower defaults in meeting its obligations to the lender when it has capacity to honor

the obligations or when funds have been utilized for purposes other than those for which

finance was granted. The list of willful defaulters is required to be submitted to SEBI and

RBI to prevent their access to capital markets. Sharing of information of this nature helps

banks in their due diligence exercise and helps in avoiding financing unscrupulous

elements. RBI has advised lenders to initiate legal measures including criminal actions,

wherever required, and undertake a proactive approach in change in management, where

appropriate.

4) Legal & Regulatory Regime

Debt Recovery Tribunals

DRTs were set up under the Recovery of Debts due to Banks and Financial

Institutions Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt

Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs

are vested with competence to entertain cases referred to them, by the banks and FIs

for recovery of debts due to the same. The order passed by a DRT is appealable to the

Appellate Tribunal but no appeal shall be entertained by the DRAT unless the

applicant deposits 75% of the amount due from him as determined by it. However, the

Affiliate Tribunal may, for reasons to be received in writing, waive or reduce the

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amount of such deposit. Advances of Rs. 1 million and above can be settled through

DRT process.

Lokadalats

The institution of Lokadalat constituted under the Legal Services Authorities

Act, 1987 helps in resolving disputes between the parties by conciliation, mediation,

compromise or amicable settlement. It is known for effecting mediation and

counseling between the parties and to reduce burden on the court, especially for small

loans. Cases involving suit claims up to Rs. l million can be brought before the

Lokadalat and every award of the Lokadalat shall be deemed to be a decree of a Civil

Court and no appeal can lie to any court against the award made by the Lokadalat.

Several people of particular localities various social organizations are approaching

Lokadalats which are generally presided over by two or three senior persons including

retired senior civil servants, defense personnel and judicial officers.

Enactment of SRFAESI Act

The "The Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act" (SRFAESI) provides the formal legal basis and

regulatory framework for setting up Asset Reconstruction Companies (ARCs) in

India. In addition to asset reconstruction and ARCs, the Act deals with the following

largely aspects,

Securitization and Securitization Companies

Enforcement of Security Interest

Creation of a central registry in which all securitization and asset reconstruction

transactions as well as any creation of security interests has to be filed.

The Reserve Bank of India (RBI), the designated regulatory authority for

ARCS has issued Directions, Guidance Notes, Application Form and Guidelines to

Banks in April 2003 for regulating functioning of the proposed ARCS and these

Directions/ Guidance Notes cover various aspects relating to registration, operations

and funding of ARCS and resolution of NPAs by ARCS. The RBI has also issued

guidelines to banks and financial institutions on issues relating to transfer of assets to

ARCS, consideration for the same and valuation of instruments issued by the ARCS.

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Beneficiaries for the study

The outcomes analyzed from this study would be beneficial to various sections such as:

Banks: This study would definitely benefit the banks in a way that directs them as to

which sector should be given priority for lending money.

Further Researchers: The major beneficiaries from the project would be the

researchers themselves as this study would enhance their knowledge about the topic.

They get an insight of the present scenario of this industry as this is the emerging

industry in the financial sector of the economy.

Student: To get the understanding of NPA concept as a whole.

Scope of the study

To understand the concept of NPA in Indian Banking industry.

To understand the causes & effects of NPA

To analyze the past trends of NPA of Public, Private & Foreign banks in different

sector.

Limitations of the study

There are some data which are available for just 2 years while the same data for its

counterparts were available for 5 years. So exact comparison was not possible.

Values of the study

The analysis made as a part of this study may contribute in a way analysis of strength

and weakness of the banking sector as whole with regard to Non Performing Asset of banks.

Various banks from different categories together may make efforts to overcome limitations

for lending money to different sectors like agricultural, SSI, Priority sector, non-priority

sector, public sector & others.

Chapter 2 - Research Methodology

Research Questions

Following are the questionnaire asked to the CFO and Assistant CFO along with the credit

grant team of SBI Main Branch Mumbai

Target audience : Credit Managers at Pub-

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lic / Private Sector Banks

Part 1

Socio Demographic Profiling

Name

Age

Gender

Number of years in Credit appraisal

Designation

Professional Qualification

Part 2

SR

No

. Questionnaire

STRON

GLY

AGREE

AG

RE

E

DIS-

AGR

EE

STRONG

LY DIS-

AGREE

1

Largest contributor to Non performing Asset

(NPA) category is the large scale industry

borrower segment.

2

Largest contributor to NPA category is the

medium scale industry borrower segment.

3

Largest contributor to NPA category is the

small scale industry borrower segment.

4

Largest contributor to NPA category is the in-

dividual borrower segment.

5

Inadequate credit appraisal checks are the

main reason for loans turning into NPA.

6

Poor quality of credit appraisal checks is the

main reason for loans turning into NPA.

7

The state of the economy is the reason for rise

and fall in NPA's

8

Nature of the industry to which the borrower

belongs to has a strong relation to loans turn-

ing into NPA's

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9

Higher CIBIL rating translates to lower NPA

for individual borrowers.

10

CIBIL data is reliable for credit appraisal of

individual borrowers.

11

Forged documents are a big reason for causes

of NPA.

12

Political pressure on lending to PSU has a ma-

jor impact on NPA.

13

Weak legal system is not an adequate deter-

rent for willful default.

14

Willful default is the major reason for loans

turning to non performing assets

15

Loans to non priority sector, such as agricul-

ture, infrastructure have higher chances of be-

coming NPA.

16

Consortium lending among banks leads to

lower NPA.

17

Mismanagement and fraud are a major reason

for loans becoming NPA.

18

Lack of understanding or misinterpretation of

financial data is the main cause of NPA.

19 Rise in interest rates leads to increase in NPA.

20

Longer the duration of loan, the higher the

chances of loans becoming NPA.

21

If you have any Comments to add

or something that you feel we should know

and have missed out to ask?

Interpretation

Majority of them were of the opinion that one of the major causes of NPA is the large scale

industry borrower segment. Most of them were of the opinion that the credit appraisal checks

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do not lead to loans turning into NPA. The economic performance is considered to be the

major cause of the NPA by all the respondents. Majority were of the opinion that Nature of

the industry to which the borrower belongs to has a strong relation to loans turning into NPA.

Willful default is also considered to the major reason for loans turning to non-performing.

Also they were of the strong opinion that loans to non priority sector such as agriculture,

infrastructure have higher chances of becoming NPA. The consortium lending was taken

negatively as the causes of NPA. Also they were of the agreement that increase in the interest

rate was considered to be the reasons of NPA.

Research Objectives:

To understand the meaning & nature of NPAs.

To examine the causes for NPAs in public sector banks.

To know which is better in terms of NPA’s from SBI and UBI.

To understand what are the underlying reasons for emergence on NPA’s

To understand the impacts of NPA’s operation of the Banks

Research Design

The research design that will be use is Descriptive Research.

Involves gathering data that describe events and then organizes, tabulates, depicts, and

describes the data.

Uses description as a tool to organize data into patterns that emerge during analysis.

Often uses visual aids such as graphs and charts to aid the reader.

Using of hypothesis testing.

1) Test of Correlation:

a) H0: There is no significant correlation between profits & NPAs of Public Sector

Banks for last 5 years

H1: There is correlation between profits & NPAs of Public Sector Banks for last 5

years

b) H0: There is no significant correlation between profits & NPAs of Private Sector

Banks for last 5 years

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H1: There is correlation between profits & NPAs of Private Sector Banks for last 5

years

Data Collection Methods

Secondary Data: Secondary data refers to the data which has already been generated and is

available for use. The data about NPAs & its composition, classification of loan assets,

profits (net & gross) & advances of different banks is taken from Reserve Bank of India

website.

HYPOTHESIS TESTING

TEST OF CO-RELATION

The test of co-relation is used to identify the co-relation between two variables. The

variable in our study is Net NPA and Net profit. This test researcher has applied to identify

the co-relation between two variables i.e. Net NPA and Net profit of Public, Private sector

banks.

Public Sector Banks:

H0: There is no significant correlation between NPA and Profit of Public Sector Banks for

last 5 years

H1: There is correlation between NPA and Profit of Public Sector Banks for last 5 years

NPA Profits

Year X Y X Y X−X Y−Y ¿¿ ¿¿ ¿¿

2007 15145 2015223970.

2 33058.8 -8825.2 -12906.877884155.0

4 166585486.2 113905091

2008 17836 2659223970.

2 33058.8 -6134.2 -6466.837628409.6

4 41819502.24 39668645

2009 21155 3439223970.

2 33058.8 -2815.2 1333.2 7925351.04 1777422.24 -3753225

2010 29644 3925723970.

2 33058.8 5673.8 6198.232192006.4

4 38417683.24 351673472011 36071 44901 23970. 33058.8 12100. 11842.2 146429360. 140237700.8 143300094

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2 8 6

Total 119851 165294 302059282.

8 388837794.8 328287952

Mean23970.

2 33058.8

r = ∑ {( X−X )∗(Y −Y ) }

√∑ ( X−X )2∗∑ (Y−Y )

2

r = 328287952

342712803 . 1

r = 0.957909799

H0 (Null Hypothesis) is rejected.

Private Sector Banks:

H0: There is no significant correlation between NPA and Profit of Private Sector Banks for

last 5 years

H1: There is correlation between NPA and Profit of Private Sector Banks for last 5 years

NPA Profits Year X Y X Y X−X Y−Y ¿¿ ¿¿ ¿¿

2007 4028 6468 5604.4 11535.4 -1576.4

-5067.

4 2485036.9625678542.7

6 7988249

2008 5647 9521 5604.4 11535.4 42.6

-2014.

4 1814.76 4057807.36 -858132009 7411 10865 5604.4 11535.4 1806.6 -670.4 3263803.56 449436.16 -1211145

2010 6505 13111 5604.4 11535.4 900.61575.

6 811080.36 2482515.36 1418985

2011 4431 17712 5604.4 11535.4 -1173.46176.

6 1376867.5638150387.5

6 -7247622Total 28022 57677 7938603.2 70818689.2 862654Mean 5604.4 11535.4

r = ∑ {( X−X )∗(Y −Y ) }

√∑ ( X−X )2∗∑ (Y−Y )

2

r = 862654

23710788 . 11

BRM Research Report

r = 0.03638235

H0 (Null Hypothesis) is rejected

Interpretation:

There is positive correlation between net profit & net NPA of public sector banks and

private sector banks.

Net profit consists of income earned by the banks. Income is divided into two parts

interest income & other income. Interest income includes Interest/Discount on

advances/bill, Income on investments, Interest on balances with RBI and other inter-

bank funds, others. While non-interest income includes fee income components such

as commission, brokerage and exchange transactions, sale of investments, corporate

finance transactions, M&A deals; and any other income other than the interest income

generated by the bank. But in interest income, income from Interest/Discount on

advances/bill is the major contributor towards NPA.

Public sector banks depend excessively on their interest income as compared to their

peers in the private sector and their fee-based earnings coming from services remain

quite low.

Chapter 3 - Results and Discussion

ANALYSIS

Private Sector Banks in India remained robust against the backdrop of global financial crisis. It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting the strength of the Indian

BRM Research Report

banking system. However, the Indian banking sector was not completely insulated from the effects of the slowdown of the India economy. Lets Analyze a few Statistics of NPAs in Public and Private Sector Banks.

NET NPAs OF PUBLIC and Private Sector BANKS: 2007 - 2011

Year 2007 2008 2009 2010 20110

10000

20000

30000

40000

50000

60000

70000

80000

Net NPA Public Sector Net NPA Private Sector

Data Retrieved from RBI under Publication Yearly 2011.

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Interpretation:

From the above it is observed that net NPA of public sector banks has an increasing trend all the way from 2007 to 2011. The same trend has been observed in Private Sector Banks. There was a declining trend from 2003 to 2006 of NPAs which was due to the im-plementation of Securitization Act (2002).

But the increase in NPA was increasing in absolute term, as NPA as per percent of ad-vance shows a declining trend in Public Sector Banks while that of in Private Sector Banks shows an upward trend that is increase in NPA as per percent of advance after 2006.

The increase in NPA as per percent of advance of Private Sector Banks is because of they have a major proportion of lending in non- priority sectors includes Medium and large scale industries which was highly affected by global financial crisis.

SOUNDNESS INDICATORS:

1. Capital Quality

2. Asset Quality

Capital Quality:

A sound and efficient banking system is end product for maintaining financial stability. Therefore, considerable emphasis has been placed on strengthening the capital requirements in recent years. The Capital to Risk-weighted Assets Ratio (CRAR) of SCBs, a measure of the capacity of the banking system to absorb unexpected losses, improved further to 13.2 per cent at end-March 2009 from 13.0 per cent at end-March 2008. The asset quality of banks in India has been improving over the past few years as reflected in the declining NPA to advances ratio. It is especially noteworthy that notwithstanding the pressures of a slowdown in the economy and an atmosphere of uncertainty, the net NPA to net advances ratio increased only marginally to 1.1 per cent as at end March 2009 from 1.0 per cent as at end March 2008. Significantly, gross NPA to gross advances ratio remained constant at 2.3 per cent. Thus, in terms of the two crucial soundness indicators, viz., capital and asset quality, the Indian banking sector has exhibited resilience amidst testing times.

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GROSS To NET NPAs Public Sector Banks

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

0

10000

20000

30000

40000

50000

60000

Gross NPAsNet NPAs


GROSS To NET NPAs Private Sector Banks

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

0

2000

4000

6000

8000

10000

12000

14000

16000

Gross NPAsNet NPAs


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Interpretation:

The trend of improvement in the asset quality of banks continued during the year. Indian banks recovered a higher amount of NPAs during 2008-09 than that during the previous year. Though the total amount recovered and written-off at Rs.38,828 in 2008-09 was higher than Rs.28,283 crore in 2007-08, it was lower than fresh addition of NPAs (Rs.52,382 crore) during the year. As a result, the gross NPAs of SCBs increased across all the bank groups. In this context, it may be noted that in the present context of financial turmoil, some slippage in NPAs could be expected.

Nevertheless, it may be noted that this slippage was moderate as compared to the problems faced by banks all over the world. The hardening of interest rates might have made the repayment of loans difficult for some borrowers, resulting in some increase in NPAs in this sector. It may be noted that the increase in gross NPAs was more noticeable in respect of new private sector and foreign banks, which have been more active in the real estate and housing loans segments.

Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to gross advances of foreign banks increased significantly during the year, while that of private sector banks increased marginally. The NPAs ratio of all other bank groups declined. While net NPAs to net advances ratio of all the banks increased over the previous year except that of nationalized banks.

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COMPOSITION OF NPAs OF BANK SECTOR WISE:

COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS -2007 TO 2011

Year 2007 2008 2009 2010 20110

5000

10000

15000

20000

25000

30000

35000

40000

45000

Priority Sector Non Priority Sector Public Sector

Data retrieved from Annexure Table 4

Interpretation:

From the above chart it is observed that public sector category is the least contributor towards the NPA of public sector bank. In the initial years from 2001 to 2005, Non-priority sector contributes more towards NPA than priority sector. But in later years from 2006 its other way round, where priority sector contributes more than Non-priority sector.

Priority sector consist of advance given to agriculture, SSI, & other priority sector advances. Non priority sector consist of large industries, medium industries & other non priority sectors.

In case of priority sector, it started falling from 2003 up to 2005 over previous year. But in the later years i.e. from 2006 there is rise NPA because of defaults on the loan given to the farmers. It was highest in 2008. In order to reduce that, waiver package of Rs. 60,000 crore was announced in union budget of 2008.It may also be noted that the increase in NPAs was more noticeable in priority sector, which have been more active in the real estate and housing loans segments.

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NPA in non priority sector is reducing constantly from 2002 to 2008 i.e. by 50%.Though the advance given to non-priority sector was higher than priority sector, NPAs of non-priority sector is comparatively.

COMPOSITION OF NPAs OF PRIVATE SECTOR BANKS -2007 TO 2011

Year 2007 2008 2009 2010 20110

2000

4000

6000

8000

10000

12000

14000

Priority Sector Non Priority Sector Public Sector

Data retrieved from RBI In Statistical Table Relating to Banks Publication

Interpretation:

From the above graph it is observed that public sector contributes very negligible towards the overall NPA of foreign banks. The major reason for this is that on an average only 3.5% of total advance is made towards public sector category.

Priority sector category on an average constitutes almost 34% of the total advances made by the private sector banks. While average NPA of priority sector constitutes of 25% of total NPA. In later years from 2007 to 2009 there is increase in NPA of priority sector. In these years more advances was given to agriculture & housing sector.

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In the year 2007-08, the real estate market was on boom, which encouraged people to take more loans. But after the subprime crisis there was sudden fall in real estate market & people became default to pay the loan.

In case of non-priority sector, the average advances made are 60.5% of total advance made by private sector banks. But the average NPA of non-priority sector is almost 74% which is highest amongst the entire category. We can see the declining trend in NPA of non-priority sector from 2003 to 2006. This as a result of securitization Act, 2002.

NET NPAs AS PERCENTAGE OF ADVANCES OF BANKS:

COMPARISON OF NPA WITH ADVANCES – FOR PUBLIC / PRIVATE SECTOR BANKS

Year 2007 2008 2009 2010 20110

1

2

3

4

5

6

7

Public Sector Private Sector

Data retrieved from Annexure Table 5a & 5b.

Interpretation:

From the above it is clearly observed that only public sector banks have succeeded in reducing net NPA against net advances made over the period of time. It is constantly reducing each year,

BRM Research Report

whereas in case of private sector bank it has reduced in 2005-06 then it got stable and started rising from 2007-08 onwards.

Public sector banks have been able to reduce this ratio by 66.7% from 2005 to 2009. Public sector banks as a result of stringent checks & control able to manage low ratio compare to other banks. Even for private sector bank the ratio increased by 25% in 2009 due to financial crises & also for public sector bank the reduction in 2009 was the lowest i.e. 12.5%

COMPARISON OF NET PROFIT AND NET NPA OF BANKS:

Public Sector Banks

2007 2008 2009 2010 20110

5000

10000

15000

20000

25000

30000

35000

40000

45000

50000

NPA in Public Sector Banks Profits in Public Sector Banks

Data retrieved from Annexure Table 6a Data of 2007 to 2009 taken from RBI

Interpretation:

It is observed from the above graph there exist no particular relationship between net profit & net NPA of public sector banks. There is constant increase in net profit from 2000-01 to 2003-04 & from 2005-06 to 2008-09. The average of percentage increase in net profit YOY basis comes to 32.3%

On the contrary public sector banks have managed to reduce net NPA constantly from 2001-02 to 2005-06. Although the percentage of reduction over the previous year is low compared to percentage of rise in profit over previous year. The average of percentage decrease in net NPA YOY basis comes to 2.5%

BRM Research Report

Private Sector Banks

2007 2008 2009 2010 20110

5000

10000

15000

20000

25000

Profits in Public Sector BanksNPA in Public Sector Banks

Data retrieved from Annexure Table 6b Data of 2007 to 2009 taken from RBI

Interpretation:

It is clearly observed from the line graph that there is continuous rise in net profit of private sector banks over the years. The average of percentage increase in net profits of private sector banks comes to approximately 34%.

On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from 2000-01 to 2008-09. The average of percentage rise in net NPA comes to almost 15%.

Suggestion

Debt recovery tribunal should be established and the power should be given to them

for better management of recovery process.

Public sector banks should increase their non-interest income, as rise in NPA due to

default in interest income may affect the profits drastically.

All banks should keep stringent check on advance being made to real estate &

housing segment as these segment contributed highly towards the NPA in 2008 &

2009.

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Chapter 4 – Conclusion

The NPA is one of the biggest problems that the Indian Banks are facing today. Banks today

are forced to improve their understanding on the causes of NPA. Further Banks are looking to

make their internal systems and processes more robust to keep this problem in check.

If the proper management of the NPAs is not undertaken it would hamper the business of the

banks. If the concept of NPAs is taken very lightly it would be dangerous for the Indian

banking sector. The NPAs would destroy the current profit, interest income due to large

provisions of the NPAs, and would affect the smooth functioning of the recycling of the

funds. Banks also redistribute losses to other borrowers by charging higher interest rates.

Lower deposit rates and higher lending rates repress savings and financial markets, which

hampers economic growth.

Private sector banks are more efficient than public sector with regard to the management of

nonperforming assets. This is primarily due to more efficient and effective internal policies

and checks. Also Public sector banks have a higher exposure to priority lending sectors which

tend to have higher share of NPA.

Even among private sector bank, old private sector banks are more efficient than new private

sector banks. But efficient management of NPA is not the sole factor that determines the

overall efficiency of banks.

Also by correlation method we found that there is relation between net profit and net NPA. In

case net NPA of a bank is increasing then Net Profits will also get more affected in public

sector banks with respect to private sector banks.

BRM Research Report

REFERENCES

RBI Master Circular on Income Recognition, Asset classification, Provisioning &

Other Related matters, dated June 30, 2008.

Net NPAs www.rbi.org.in master circular no. RBI/2010-11/45 dated July 1, 2010.

Banking in India data retrieved from RBI Statistical Hand book Yearly.

Introduction to Banking Industry:

http://en.wikipedia.org/wiki/Banking_in_India

Banking in India-2009-10: http://www.ibef.org/industry/Banking.aspx

Recent History Of Indian Banking:

http://www.bankingindiaupdate.com/general.html

Monetary Policy 2010-11 retrieved from RBI Weekly Statistical Circular.

Budget 2011-12 Economics Time dated 17th March 2012.

Growing GDP RBI Annual report 2010-11 Macroeconomic Indicators

Interest rate table from RBI Cash Reserve & Interest Rates Weekly Statistical

supplement.

Debt relief for farmer www.pib.nic.in Press Information Bureau Government of

India.

Corporate debt restructuring website www.cdr.org

CDSL Venture Ltd www.cvilindia.com

Dainik Jagran publication dated 26th November 2010.

Fitch Report on 1st Feb 2012.

Motilal Oswal Sec Ltd Monthly Report dated 31st Jan 2012.

BRM Research Report

Annexure

Table 1 NPAs of Public Banks

Year

(End-

March

)

Advances Non-Performing Assets

Gross Net Gross Net

Amou

nt

As

Per-

cent-

age of

Gross

Ad-

vance

s

As Per-

centage

of

Total

Assets

Amou

nt

As Per-

centage

of Net

Ad-

vances

As Per-

centage

of Total

Assets

1996-

97 244214 220922 43577 17.8 7.8 20285 9.2 3.6

1997-

98 284971 260459 45653 16.0 7.0 21232 8.2 3.3

1998-

99 325328 297789 51710 15.9 6.7 24211 8.1 3.1

1999-

00 379461 352714 53033 14.0 6.0 26187 7.4 2.9

2000-

01 442134 415207 54672 12.4 5.3 27977 6.7 2.7

2001-

02 509368 480681 56473 11.1 4.9 27958 5.8 2.4

2002-

03 577813 549351 54090 9.4 4.2 24877 4.5 1.9

2003-

04 661975 631383 51537 7.8 3.5 19335 3.1 1.3

2004-

05 877825 848912 48399 5.5 2.7 16904 2.1 1.0

2005-

06

113472

4

110628

8 41358 3.6 2.1 14566 1.3 0.7

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2006-

07

146449

3

144014

6 38968 2.7 1.6 15145 1.1 0.6

2007-

08

181907

4

179740

1 40452 2.2 1.3 17836 1.0 0.6

2008-

09

228347

3

225921

2 44957 2.0 1.2 21155 0.9 0.6

2009-

10

273345

8

270130

0 59926 2.2 1.4 29644 1.1 0.7

Table 2 NPAs Old Private Sector Banks

Year

(End-

Marc

h)


Gross Net Gross Net

Amou

nt

As Per-

centage

of Gross

Ad-

vances

As Per-

centage

of

Total As-

sets

Amou

nt

As Per-

centage

of Net

Ad-

vances

As Per-

centage

of Total

Assets

1996-

97 21702 20832 2325 10.7 5.2 1385 6.6 3.1

1997-

98 25580 24353 2794 10.9 5.1 1572 6.5 2.9

1998-

99 28979 26017 3784 13.1 5.8 2332 9.0 3.6

1999-

00 35404 33879 3815 10.8 5.2 2393 7.1 3.3

2000-

01 39738 37973 4346 10.9 5.1 2771 7.3 3.3

2001-

02 44057 42286 4851 11.0 5.2 3013 7.1 3.2

2002- 51329 49436 4550 8.9 4.3 2598 5.2 2.5

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03

2003-

04 57908 55648 4398 7.6 3.6 2142 3.8 1.8

2004-

05 70412 67742 4200 6.0 3.1 1859 2.7 1.4

2005-

06 85154 82957 3759 4.4 2.5 1375 1.7 0.9

2006-

07 94872 92887 2969 3.1 1.8 891 1.0 0.6

2007-

08

11340

4

11167

0 2557 2.3 1.3 740 0.7 0.4

2008-

09

13035

2

12850

4 3072 2.4 1.3 1159 0.9 0.5

2009-

10

15635

7

15413

6 3622 2.3 1.4 1271 0.8 0.5

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Table 3New Private Sector Banks

Year

(End-

Marc

h)


Gross Net Gross Net

Amou

nt

As Per-

centage

of Gross

Ad-

vances

As Per-

centage

of

Total As-

sets

Amou

nt

As Per-

centage

of Net

Ad-

vances

As Per-

centage

of Total

Assets

1996-

97 8257 7814 217 2.6 1.3 154 2.0 1.0

1997-

98 11173 11058 392 3.5 1.5 291 2.6 1.1

1998-

99 14070 13714 871 6.2 2.3 611 4.5 1.6

1999-

00 22816 22156 946 4.1 1.6 638 2.9 1.1

2000-

01 31499 30086 1617 5.1 2.1 929 3.1 1.2

2001-

02 76901 74187 6811 8.9 3.9 3663 4.9 2.1

2002-

03 94718 89515 7232 7.6 3.8 1365 1.5 0.7

2003-

04

11951

1

11510

6 5983 5.0 2.4 1986 1.7 0.8

2004-

05

12742

0

12365

5 4582 3.6 1.6 2353 1.9 0.8

2005-

06

23253

6

23000

5 4052 1.7 1.0 1796 0.8 0.4

2006-

07

32527

3

32186

5 6287 1.9 1.1 3137 1.0 0.5

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2007-

08

41244

1

40673

3 10440 2.5 1.4 4907 1.2 0.7

2008-

09

45471

3

44682

4 13854 3.1 1.7 6252 1.4 0.8

2009-

10

48771

3

47835

8 14017 2.9 1.6 5234 1.1 0.6

Table 4 Loan Composition

TABLE 7.2 : COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS - 2002 TO 2011(Amount in Rs. crore)

Bank Groups / Years

As on March 31

Priority SectorNon-Priority

SectorPublic Sector Total

Amount

Per cent

Amount

Per cent

Amount

Per cent

Amount

share share share (1) (2) (3) (4) (5) (6) (7)

A. Nationalized Banks 2002 16173 45.78 18742 53.05 413 1.17 353282003 16886 47.10 18402 51.33 561 1.57 358492004 16705 47.74 17895 51.14 390 1.12 349902005 16381 49.81 16225 49.33 283 0.86 328882006 15124 53.66 12845 45.58 216 0.76 281852007 15779 60.58 9965 38.26 302 1.16 260462008 16385 66.80 7941 32.38 202 0.82 245282009 15871 60.65 10001 38.22 297 1.13 261692010 19908 56.13 15283 43.09 280 0.79 354702011 25678 59.84 16957 39.52 273 0.64 42907B. State Bank of India & its As-sociates

2002 8977 47.01 9628 50.42 490 2.56 190952003 8053 47.49 8379 49.41 526 3.10 169582004 7136 47.07 7803 51.48 220 1.45 151592005 7017 47.39 7624 51.48 168 1.13 148082006 7250 54.95 5819 44.10 125 0.95 131932007 7175 57.15 5193 41.36 188 1.50 125562008 8902 58.49 6222 40.88 97 0.63 152202009 8447 47.26 9250 51.75 177 0.99 178742010 10940 50.11 10646 48.77 244 1.12 218312011 15567 55.32 12567 44.66 6 0.02 28140Public Sector Banks ( A+B ) 2002 25150 46.21 28371 52.13 902 1.66 544232003 24938 47.23 26781 50.72 1087 2.06 528072004 23840 47.54 25698 51.24 610 1.22 501482005 23397 49.05 23849 50.00 450 0.94 476962006 22374 54.07 18664 45.11 341 0.82 413782007 22954 59.46 15158 39.27 490 1.27 38602

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2008 25287 63.62 14163 35.63 299 0.75 397492009 24318 55.21 19251 43.71 474 1.08 440422010 30848 53.83 25929 45.25 524 0.91 573012011 41245 58.05 29524 41.56 278 0.39 71047Source : Off-site returns (domestic) - Latest updated database, Division of banking Supervision, RBI.

Table 5a Advances v/s NPAs Public Sector

TABLE B7: BANK-WISE GROSS NON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS NPA RATIO OF SCHEDULED COMMERCIAL BANKS - 2009

(Amount in Rs. lakh)

BanksAs on March 31, 2009

Gross NPAs

Gross Ad-vances

Gross NPA Ratio (%)

(1) (2) (3)State Bank of India & its AssociatesState Bank of Bikaner & Jaipur 49034 3008810 1.63State Bank of Hyderabad 48604 4393772 1.11State Bank of India 1634564 54929681 2.98State Bank of Indore 30128 2174658 1.39State Bank of Mysore 36761 2586988 1.42State Bank of Patiala 57390 4396081 1.31State Bank of Travancore 54902 3297158 1.67Nationalized BanksAllahabad Bank 107825 5944340 1.81Andhra Bank 36814 4442760 0.83Bank of Baroda 184293 14484487 1.27Bank of India 247088 14473156 1.71Bank of Maharashtra 79841 3481728 2.29Canara Bank 216797 13903691 1.56Central Bank of India 231655 8674027 2.67Corporation Bank 55922 4892712 1.14Dena Bank 62077 2918536 2.13IDBI Bank Limited 143569 10391507 1.38Indian Bank 45918 5183064 0.89Indian Overseas Bank 192341 7580954 2.54Oriental Bank of Commerce 105812 6906472 1.53Punjab & Sind Bank 16104 2469810 0.65Punjab National Bank 276746 15609845 1.77Syndicate Bank 159454 8249504 1.93UCO Bank 153951 6966905 2.21Union Bank of India 192335 9826485 1.96United Bank of India 101956 3572745 2.85Vijaya Bank 69882 3587463 1.95Note : Data are provisional. Figures are rounded off. Data pertain to the balance-sheets of banks.Source : Department of Banking Supervision, RBI.

BRM Research Report

Table 5b Advances v/s NPAs Private Sector

TABLE B7: BANK-WISE GROSS NON-PERFORMING ASSETS, GROSS ADVANCES AND GROSS

NPA RATIO OF SCHEDULED COMMERCIAL BANKS - 2009 (Concld.)(Amount in Rs. lakh)

BanksAs on March 31, 2009

Gross NPAs Gross AdvancesGross NPA Ratio

(%) (1) (2) (3)

Other Scheduled Commercial BanksAxis Bank 89048 8212012 1.08Bank of Rajasthan 16092 788464 2.04Catholic Syrian Bank 17178 376372 4.56City Union Bank 10208 568622 1.80Development Credit Bank 30555 348005 8.78Dhanalakshmi Bank 6443 323160 1.99Federal Bank 58954 2290680 2.57HDFC Bank 198392 10023935 1.98ICICI Bank 964931 22362109 4.32IndusInd Bank 25502 1584653 1.61ING Vysya Bank 20939 1675437 1.25Jammu & Kashmir Bank 55927 2121971 2.64Karnataka Bank 44320 1212297 3.66Karur Vysya Bank 20586 1056290 1.95Kotak Mahindra Bank 73071 1695921 4.31Lakshmi Vilas Bank 14405 531978 2.71Nainital Bank 1898 113900 1.67Ratnakar Bank 1728 81294 2.13SBI Commercial & International Bank 461 31534 1.46South Indian Bank 26056 1196516 2.18Yes Bank 8493 1244686 0.68All Scheduled Commercial Banks 7006342 303158730 2.31Note : Data are provisional. Figures are rounded off. Data pertain to the balance-sheets of banks.Source : Department of Banking Supervision, RBI.

BRM Research Report

Table 6a Net Profit of 2011 & 2010

TABLE 9.1 BANK GROUP-WISE EARNINGS AND EXPENSES OF SCHEDULED COMMERCIAL BANKS IN INDIA - 2009-10 AND 2010-11 (Amount in

Rs. crore)

Items

For the year ended March 31 State Bank Nationalised Public of India & Banks$ Sector

its Associates Banks 2010 2011 2010 2011 2010 2011

(1) (2) (3) (4) (5) (6) Number of reporting banks 7 6 20 20 27 26 I.Interest Earned 97954 10982

820802

9256490 30598

336631

8 a) Interest/discount on advances/bills 71298 81904 15440

8191195 22570

627309

9 b) Income on Investments 23571 25797 50522 60644 74092 86441 c) Interest on balances with RBI and other inter-Bank Funds

1802 669 2040 2714 3842 3383

d) Others 1283 1458 1059 1936 2342 3394 II.Other Income 18394 19240 30500 28625 48893 47865 a) Commission, exchange and broker-age

11993 14179 10384 11965 22377 26144

b) Net Profit(loss) on sale and revalu-ation of investment

2732 1292 8993 3471 11725 4763

c) Net Profit(loss) on sale of land,building and other Assets

-11 -21 2 3 -9 -19

d) Net profit(loss) on exchange trans-actions

1813 1703 2598 3559 4411 5262

e) Miscellaneous income 1866 2087 8523 9628 10390 11715Total(I+II) 11634

712906

823852

8285115 35487

641418

3 III. Interest expended 66229 67018 14571

2164135 21194

023115

3 a) Interest on deposits 60825 59862 13231

5146471 19314

120633

3 b) Interest on RBI/inter-bank borrow-ings

1431 2927 2868 5264 4299 8191

c) Others 3972 4229 10529 12400 14501 16629 IV. Operating expenses 25283 29146 40792 53819 66075 82965 a) Payments to and provisions for em-ployees

15652 18476 25463 35757 41115 54233

b) Rent, taxes and lighting 2067 2297 3133 3604 5200 5901 c) Printing and stationery 297 317 425 467 722 784 d) Advertisement and publicity 264 306 434 630 699 936 e) Depreciation on bank's property 1194 1253 2000 2128 3193 3380 f) Directors' fees, allowances and ex-penses

2 2 17 16 19 18

g) Auditors' fees and expenses 170 184 370 410 540 594 h) Law charges 116 139 172 213 288 352 i) Postage, telegrams, telephones, etc. 371 414 636 683 1007 1097

BRM Research Report

j) Repairs and maintenance 402 436 813 926 1215 1362 k) Insurance 932 1065 2120 2500 3052 3565 l) Other expenditure 3817 4256 5208 6487 9025 10743 V.Net Interest Income(I-III) 31725 42810 62317 92355 94042 13516

5 VI. Provisions and contingencies 12403 21041 25200 34123 37604 55164 VII. Operating Profit(I+II-III-IV) 24836 32904 52025 67161 76861 10006

5 VIII. Profit (loss) during the year 12433 11863 26824 33038 39257 44901Notes : 1. $ Includes IDBI Bank Ltd. Source : Annual accounts of banks of respective years.

Table 6b Net Profit of 2011 & 2010

TABLE 9.1 BANK GROUP-WISE EARNINGS AND EXPENSES OF SCHEDULED COMMERCIAL BANKS IN INDIA - 2009-10 AND 2010-11 (Contd.) (Amount in

Rs. crore)

Items

For the year ended March 31 Old Private New Private

Sector Private Sector

Sector Banks

Banks Banks

201

0 2011 201

0 2011 2010 2011

(7) (8) (9) (10) (11) (12) Number of reporting banks 15 14 7 7 22 21 I.Interest Earned 2049

72329

96230

97352

882806 96827

a) Interest/discount on advances/bills 15474

17646

44229

51467

59703 69113

b) Income on Investments 4750 5463 15842

19869

20592 25332

c) Interest on balances with RBI and other inter-Bank Funds

211 137 851 746 1062 882

d) Others 62 54 1387 1446 1449 1499 II.Other Income 3152 3029 1727

11769

720423 20726

a) Commission, exchange and broker-age

1066 1241 11346

13732

12413 14972

b) Net Profit(loss) on sale and revalu-ation of investment

810 379 2093 181 2903 560

c) Net Profit(loss) on sale of land,build-ing and other Assets

2 18 97 31 99 49

d) Net profit(loss) on exchange transac-tions

274 298 2307 2607 2581 2905

e) Miscellaneous income 999 1093 1428 1147 2428 2240Total(I+II) 2364

92632

87958

09122

5103229 11755

3 III. Interest expended 1407

61476

83713

04234

751206 57115

BRM Research Report

a) Interest on deposits 13466

13898

28302

31510

41768 45408

b) Interest on RBI/inter-bank borrowings 138 220 2662 3646 2800 3866 c) Others 471 650 6165 7192 6637 7842 IV. Operating expenses 4715 5600 1813

62200

622851 27606

a) Payments to and provisions for em-ployees

2737 3413 6690 8902 9427 12315

b) Rent, taxes and lighting 424 489 1973 2317 2397 2806 c) Printing and stationery 57 62 377 480 434 541 d) Advertisement and publicity 61 86 279 469 340 555 e) Depreciation on bank's property 269 293 1429 1556 1698 1850 f) Directors' fees, allowances and ex-penses

6 6 3 3 9 10

g) Auditors' fees and expenses 23 23 7 8 30 31 h) Law charges 18 17 178 124 196 141 i) Postage, telegrams, telephones, etc. 102 110 781 753 882 864 j) Repairs and maintenance 111 118 1347 1537 1458 1656 k) Insurance 199 215 570 680 769 895 l) Other expenditure 710 769 4502 5176 5211 5945 V.Net Interest Income(I-III) 6421 8531 2517

93118

131601 39711

VI. Provisions and contingencies 2545 2858 13516

12261

16061 15119

VII. Operating Profit(I+II-III-IV) 4858 5959 24315

26872

29173 32831

VIII. Profit (loss) during the year 2312 3101 10799

14610

13111 17712

Source : Annual accounts of banks of respective years.

Table 6c Net Profit of 2008 & 2009

TABLE 9.1 BANK GROUP-WISE EARNINGS AND EXPENSES OF SCHEDULED COMMERCIAL BANKS IN INDIA - 2007- 08 AND 2008- 09

(Amount in Rs. crore)

Items

For the year ended March 31 State Bank of India

& its Associates Nationalised

Banks $ Other Scheduled

Commercial Banks

2008 2009 2008 2009 2008 2009(1) (2) (3) (4) (7) (8)

Number of reporting banks 8 7 20 20 23 22I. Interest earned 70427 89196 142647 184232 70990 85066 a) Interest/discount on ad-vances/bills

51354 65903 102746 138806 51359 62389

b) Income on Investments 16916 21030 36203 42050 17816 20268 c) Interest on balances with RBI and other inter-Bank Funds

1407 1751 2743 2327 1512 1368

d) Others 750 512 955 1049 303 1041II. Other income 11817 16072 20980 26108 17007 17948 a) Commission, exchange and brokerage

7926 9739 6874 8736 10579 11887

BRM Research Report

b) Net Profit(loss) on sale and revaluation of investment

1519 3268 5551 7798 2773 2895

c) Net Profit(loss) on sale of land,building and other assets

11 -5 42 93 79 -2

d) Net profit(loss) on exchange transactions

932 1479 2059 2833 943 1409

e) Miscellaneous income 1429 1591 6454 6648 2633 1759Total(I+II) 82244 105268 163627 210340 87997 103014III. Interest expended 47809 61771 101093 131677 48495 56957 a) Interest on deposits 41588 54961 91130 119352 39665 46588 b) Interest on RBI/inter-bank borrowings

3231 2901 2189 3412 2807 3574

c) Others 2990 3909 7774 8913 6023 6795IV. Operating expenses 16992 20086 29670 35103 20268 21781 a) Payments to and provisions for employees

10294 12331 18366 21919 7114 8526

b) Rent, taxes and lighting 1367 1708 2338 2735 1596 2135 c) Printing and stationery 239 285 374 403 475 467 d) Advertisement and publicity 200 283 348 491 485 387 e) Depreciation on bank's prop-erty

1029 994 1698 1831 1420 1629

f) Directors' fees, allowances and expenses

2 2 13 17 8 9

g) Auditors' fees and expenses 152 158 315 326 24 27 h) Law charges 76 90 127 148 109 168 i) Postage, telegrams, tele-phones, etc.

260 327 423 499 961 913

j) Repairs and maintenance 299 226 571 722 1031 1229 k) Insurance 613 752 1389 1692 585 694 l) Other expenditure 2461 2930 3708 4320 6460 5597V. Provisions and contingen-cies

8438 11515 15277 21064 9713 13411

Total expenses@ 64801 81857 130763 166780 68763 78738VI. Profit (loss) during the year 9005 11896 17587 22496 9521 10865Notes : 1 . $ Includes IDBI Bank Ltd. 2. @ : Excluding Provisions and Contingencies Source : Annual accounts of banks of respective years .

Table 6d Net Profit of 2007 & 2008

TABLE 9.1 BANK GROUP-WISE EARNINGS AND EXPENSES OF SCHEDULED COMMERCIAL BANKS IN INDIA - 2006- 07 AND 2007- 08

(Amount in Rs. crore) For the year ended March 31Items SBI & its Associ-

atesNationalised

Banks $ Other SCB

2007 2008 2007 2008 2007 2008

(1) (2) (3) (4) (7) (8) Number of reporting banks 8 8 20 20 25 23I. Interest earned 53465 70427 110720 143597 4956

8711

29

BRM Research Report

a) Interest/discount on advances/bills 36148 51354 74396 102726 34762

51360

b) Income on Investments 14858 16916 32259 37173 12844

17944

c) Interest on balances with RBI and other inter-Bank Funds

2114 1407 3365 2743 1729 1522

d) Others 345 750 700 955 233 303II. Other income 9419 11817 14265 20098 1231

3168

69 a) Commission, exchange and brokerage 6661 7926 5873 7074 7886 105

45 b) Net Profit(loss) on sale and revaluation of in-vestment

190 1519 1258 4614 1217 2631

c) Net Profit(loss) on sale of land,building and other Assets

7 11 304 42 107 79

d) Net profit(loss) on exchange transactions 526 932 1628 2036 1240 909 e) Miscellaneous income 2035 1429 5202 6332 1863 270

5Total(I+II) 62884 82244 124985 163695 6188

1879

98III. Interest expended 32606 47809 69353 101093 3285

6484

95 a) Interest on deposits 28260 41588 60536 91130 2632

0396

65 b) Interest on RBI/inter-bank borrowings 1665 3231 1740 2189 2154 280

7 c) Others 2681 2990 7077 7774 4382 602

3IV. Operating expenses 15986 16992 27269 29605 1531

9202

70 a) Payments to and provisions for employees 10470 10294 17333 18268 5264 711

3 b) Rent, taxes and lighting 1235 1367 2057 2378 1099 159

6 c) Printing and stationery 219 239 334 374 371 475 d) Advertisement and publicity 113 200 314 348 398 485 e) Depreciation on bank's property 932 1029 1602 1698 1232 142

1 f) Directors' fees, allowances and expenses 2 2 10 13 7 8 g) Auditors' fees and expenses 100 152 231 315 19 24 h) Law charges 70 76 125 127 79 109 i) Postage, telegrams, telephones, etc. 160 260 345 423 697 961 j) Repairs and maintenance 232 295 496 571 768 103

1 k) Insurance 525 613 1149 1389 454 585 l) Other expenditure 1928 2465 3273 3701 4931 646

2V. Provisions and contingencies 7720 8438 14783 15411 7238 971

5Total expenses@ 48592 64801 96622 130698 4817

5687

65VI. Profit (loss) during the year 6572 9005 13580 17586 6468 951

8Notes : 1 . $ Includes IDBI Bank Ltd. 2. @ : Excluding Provisions and Contin-gencies

BRM Research Report

Source : Annual accounts of banks of respective years .

Table 7a Net NPA of 2010 & 2011

TABLE B6 : MOVEMENT OF NON-PERFORMING ASSETS (NPAs) OF SCHEDULEDCOMMERCIAL BANKS - 2010 AND 2011

(Amount in Rs. lakh)

Bank Name

Gross NPAs Net NPAs

As on March

31, 2010

Addition during

the year

Reduc-tion dur-

ing the year

Write-off dur-ing the

year

As on March

31, 2011

As on March

31, 2010

As on March

31, 2011(1) (2) (3) (4) (5) (6) (7)

SBI and its Associates

State Bank of India1953489 1814570 834745

400685

2532629 1087017 1234690

State Bank of Bikaner & Jaipur 61185 61671 22740 16576 83540 27018 34133

State Bank of Hyderabad 64898 117108 66961 - 115045 28893 56272

State Bank of Mysore 59526 78273 51425 - 86374 29979 46788

State Bank of Patiala 100661 125093 87586 - 138168 48272 62077

State Bank of Travancore 64198 74506 55181 - 83523 35040 45099

Nationalised Banks 0 0Allahabad Bank 122180 174707 132095 - 164792 47015 73637

Andhra Bank 48787 79468 28691 - 99564 9572 27368

Bank of Baroda 240069 189701 114520 - 315250 60232 79088

Bank of India 488265 290838 297948 - 481155 220745 194499

Bank of Maharashtra 120979 69915 73524 - 117370 66243 61895

Canara Bank 259031 350837 300947 - 308921 179970 234733

Central Bank of India 245800 140900 147300 - 239400 72700 84700

Corporation Bank 65094 81294 67365 - 79023 19725 39774

Dena Bank 64199 75869 55844 - 84224 42753 54895

IDBI Bank Ltd. 212938 198732 133197 - 278473 140632 167791

Indian Bank 51010 95392 72371 - 74031 14493 39704

Indian Overseas Bank 361108 216926 269075 - 308959 199497 132842

Oriental Bank of Commerce 146875 155600 110421 - 192054 72382 93815

Punjab and Sind Bank 20615 38345 16532 - 42428 11663 23794

Punjab National Bank 321441 433670 317172 - 437939 98169 203863

Syndicate Bank 200682 159297 100082 - 259897 96320 103084

UCO Bank 166643 272991 65961 58637 315036 96628 182455

Union Bank of India267089 292354 84561

112600

362282 96533 180344

United Bank of India 137230 98415 100067 - 135578 77855 75741

Vijaya Bank 99445 136226 109752 - 125919 58183 74116

Total 2937529 3607197

Old Private Sector Banks Catholic Syrian Bank 14929 10787 6471 - 19245 7052 10840

City Union Bank 8823 12066 9641 - 11248 3967 4842

Dhanlaxmi Bank 7750 4113 5154 - 6709 4194 2677

Federal Bank 82097 87584 54848 - 114833 12879 19069

ING Vysya Bank 23451 23602 15904 15610 15539 22183 9179

Jammu & Kashmir Bank 46231 28914 15818 7445 51882 6433 5324

BRM Research Report

Karnataka Bank 54964 32376 17123 - 70217 18861 28034

Karur Vysya Bank 23534 5355 6074 - 22815 3095 1387

Lakshmi Vilas Bank 32517 13754 30492 - 15779 25778 7288

Nainital Bank 2342 1528 1726 - 2144 0 0

Ratnakar Bank 2764 485 1098 - 2151 1136 689

SBI Comm. & Intl. Bank 327 - 5 119 203 39 36

South Indian Bank 21100 10651 8717 - 23034 6157 6002

Tamilnad Mercantile Bank 11500 10005 7392 - 14113 1998 2931

New Private Sector Banks 0 0Axis Bank 131800 144831 49872 66817 159942 41900 41035

Development Credit Bank 31918 5071 10632 - 26357 10762 4123

HDFC Bank181676 142313 37703

116852

169434 39205 29641

ICICI Bank 948065 286563 231202 - 1003426 384111 240736

Indusind Bank 25547 19038 6926 11073 26586 10183 7282

Kotak Mahindra Bank 76734 21749 23275 14859 60349 36025 21116

Yes Bank 6020 4982 1781 1168 8052 1299 915

Total 637256 443146

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