1. INTRODUCTION

The world is going faster in terms of services and physical products. However it has been

researched that physical products are available because of the service industries. In the nation

economy also, service industry plays vital role in the boosting up of the economy. The nations

like U.S, U.K, and Japan have service industries more than 55%. Banking sector reforms in India

has progressed promptly on aspects like interest rate deregulation, reduction in statutory reserve

requirements, prudential norms for interest rates, asset classification, income recognition and

provisioning. But it could not match the pace with which it was expected to do. The

accomplishment of these norms at the execution stages without restructuring the banking sector

as such is creating havoc.

The efficiency of a bank is not always reflected only by the size of its balance sheet but by the

level of return on its assets. NPAs do not generate interest income for the banks, but at the same

time banks are required to make provisions for such NPAs from their current profits. The main

aim of any person is the utilization money in the best manner since the India is country where

more than half of the population has problem of running the family in the most efficient manner.

However Indian people faced large number of problem till the development of the full-fledged

banking sector. The Indian banking sector came into the developing nature mostly after the 1991

government policy. The banking sector has really helped the Indian people to utilize the single

money in the best manner as they want. People now have started investing their money in the

banks and banks also provide good returns on the deposited amount. The people now have at the

most understood that banks provide them good security to their deposits and so excess amounts

are invested in the banks. Thus, banks have helped the people to achieve their socio economic

objectives. The banks not only accept the deposits of the people but also provide them credit

facility for their development. Indian banking sector has the nation in developing the business

and service sectors. But recently the banks are facing the problem of credit risk. It is found that

many general people and business people borrow from the banks but due to some genuine or

other reasons are not able to repay back the amount drawn to the banks. The amount which is not

given back to the banks is known as the non performing assets. Many banks are facing the

problem of non- performing assets which hampers the business of the banks. Due to NPAs the

1

income of the banks is reduced. The world is going faster in terms of services and physical

products. However it has been researched that physical products are available because of the

service industries. In the nation economy also service industry plays vital role in the boosting up

of the economy. The nations like U.S, U.K, and Japan have service industries more than 55%.

The banking sector is one of appreciated service industries. The banking sector plays larger role

in channelizing money from one end to other end. It helps almost every person in utilizing the

money at their best. The banking sector accepts the deposits of the people and provides fruitful

return to people on the invested money. But for providing the better returns plus principal

amounts to the clients; it becomes important for the banks to earn. The main source of income

for banks is the interest that they earn on the loans that have been disbursed to general person,

businessman, or any industry for its development. Thus, we may find the input-output system in

the banking sector. Banks first, accepts the deposits from the people and secondly they lend this

money to people who are in the need of it. By the way of channelizing money from one end to

another end, Banks earn their profits.

However, Indian banking sector has recently faced the serious problem of Non Performing

Assets. This problem has been emerged largely in Indian banking sector since three decade. Due

to this problem many Public Sector Banks have been adversely affected to their performance and

operations. In simple words Non Performing Assets problem is one where banks are not able to

recollect their landed money from the clients or clients have been in such a condition that they

are not in the position to provide the borrowed money to the banks. The problem of NPAs is

danger to the banks because it destroys the healthy financial conditions of them. The trust of the

people would not be any more if the banks have higher NPAs. So. The problem of NPAs must be

tackled out in such a way that would not destroy the operational, financial conditions and would

not affect the image of the banks. Recently, RBI has taken number steps to reduce NPAs of the

Indian banks. And it is also found that the many banks have shown positive figures in reducing

NPAs as compared to the past years.

2

1.1 Rationale of the study

A strong banking sector is important for flourishing economy. The failure of the banking sector

may have an adverse impact on other sectors. Non-performing assets are one of the major

concerns for banks in India.

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 over all profits and shareholders value.

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 main aim behind making this report is to know how Public Sector Banks are operating their

business and how NPAs play its role to the operations of the Public Sector Banks. The report

NPAs are classified according to the sector, industry, and state wise. The present study also

focuses on the existing system in India to solve the problem of NPAs and comparative analysis

to understand which bank is playing what role with concerned to NPAs. Thus, the study would

help the decision makers to understand the financial performance and growth of Public Sector

Banks as compared to the NPAs.

That’s why the study of NPA’s become necessary due to the above mentioned reasons :

They erode current profits through provisioning requirements.

They result in reduced interest income.

They require higher provisioning requirements affecting profits and accretion to capital

funds and capacity to increase good quality risk assets in future, and

They limit recycling of funds, set in asset-liability mismatches, etc.

3

1.2 About the NPA

An asset is classified as Non-performing Asset (NPA) if due in the form of principal and

interest are not paid by the borrower for a period of 90 days. If any advance or credit

facilities granted by banks to a borrower becomes non-performing, then the bank will have to

treat all the advances/credit facilities granted to that borrower as non-performing without having

any regard to the fact that there may still exist certain advances / credit facilities having

performing status.

Though the term NPA connotes a financial asset of a commercial bank, which has stopped

earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm,

concern, industry and nation where that asset is idling. Viewed with this perspective, the NPA is

a result of an environment that prevents it from performing up to expected levels.

The definition of NPAs in Indian context is certainly more liberal with two quarters norm being

applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004

onwards.

NPAs –MEANING:

A NPA is a loan or an advance where Interest and/ or installment of principal remain

overdue for a period of more than 90 days in respect of a term loan,

The debt remains outstanding for 90 consecutive days or more beyond the scheduled

payment date or maturity.

The debt exceeds the borrower’s approved limit for 90 consecutive days or more.

Interest is due and uncollected for 90 days or more or

For overdrafts, the account has been inactive for 90 consecutive days and / or deposits are

insufficient to cover the interest capitalized during the period.

4

1.3 Classification of NPA / Asset classification

Once an asset falls under the NPA category, banks are required by the Reserve Bank of India

(RBI) to make provision for the uncollected interest on these assets. For the purpose they have to

classify their assets based on the strength and on collateral securities into:

1. Substandard Assets - Which has remained NPA for a period less than or equal to 12

months .

This is not a non-performing asset. It does not carry more than normal risk attached to the

business.

2. Doubtful Assets -

Which has remained in the sub-standard category for a period of 12 Months.

3. Loss Assets

where loss has been identified by the bank or internal or external auditors or the RBI

inspection but the amount has not been written off wholly.

It is an asset identified by the bank, auditors or by the RBI inspection as a loss asset.

It is an asset for which no security is available or there is considerable erosion in the

realizable value of the security.

5

Difficulties with the Non performing Assets

1.) Owners do not receive a market return on their capital . In the worst case,if the bank fails ,

owners lose their assets . In modern times, this may affect a broad pool of shareholders.

2.) Depositors do not receive a market return on savings. In the worst case if the bank

fails ,depositors lose their assets or uninsured balance. 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.

3.) Non performing loans represent bad investments . NPA misallocate credit from good

projects , which do not receive funding ,to failed projects.Bad investment end up in misallocation

of capital and , by extension ,labour and natural resources . The economy performs below its

production potential .

4.) Non performing loans may spill over the banking system and contract the money

stock ,which may lead to economic contaction .

This spillover effect can channelise through illiquidity or bank insolvency;

(a) When many borrowers fail to pay interest ,banks may experience liquidity shortages .These

shortages can jam payments across the country.

(b) Illiquidity constraints bank in paying depositors eg. Cashing their paychecks.

Banking panic follows . A run on bank by depositors as part of the national money stock become

inoperative . The money stock contracts and economic contraction follows

(c) Undercapitalised banks exceeds the banks capital base.

6

1.4 Guidelines for the classification of assets

1) classification of assets into above categories should be done taking into account the degree of

well defined credit weaknesses and the extent of dependencies on collateral security for the

realization of dues.

2.) Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPA’s especially in respect of high value of accounts .

3.) Account with temporary Deficiencies:

The classification of an asset as NPA should be based on the record of recovery .Bank should not

classify an advance account as NPA merely due to the existence of some deficiencies ,which are

temporary in nature as such as non – availability of adequate drawing power based on latest

stock .

4.) Asset classification to be borrower – wise and not facility-wise:

It is difficult to envisage a situation when only one facility to a borrower becomes a problem

credit and not others. Therefore , all the facilities granted by a bank to a borrower will have to be

treated as NPA and not the particular facility or a part thereof , which has become irregular.

5.) Advances under consortium arrangements :

Asset classified of accounts under consortium should be based on the record of recovery of the

individual member banks and other aspects having bearing on the recoverability of the advances.

6.) Accounts where there is erosion in the value of security can be reckoned as significant when

the realizable value of the security is less than 50percent of the value assessed by the bank or

accepted by RBI at the time of last inspection,as the case may be.Such NPAs may be straightway

classified under doubtful category and provisioning should be made as applicable to doubtful

assets.

7.) Agricultural Advances

7

(a.) In respect of advances granted for agricultural purpose purpose where interest and / or

installment of principal remains unpaid after it has become past due for two harvest seasons but

for a period not exceeding two half years , such an advance should be treated as NPA.

(b.) Where the natural calamities impair the repaying capacity of agricultural borrowers, banks

may decide on their own as a relief measure-conversion of the short –term production loan into a

term or re-schedulement of the repayment period.

(c.) In such cases of conversation or re-schedulement, the term loan as well as fresh short-term

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

8.) Restructuring /Rescheduling of loans:

A standard asset where the terms of the loan arrangement regarding interest and principal have

been renegotiated or rescheduled after the commencement of production should be as sub-

standard and should remain in such category for at least one year of satisfactory performance

under the renegotiated or restructured terms. In case of substandard and doubtful assets also,

rescheduling does not entitle a bank to upgrade the quality of advances automatically unless

there is satisfactory performance under the rescheduled –renegotiated terms.

9.) Exceptions :

As trading involves only buying and selling of commodities and the problems associated with

manufacturing units such as bottleneck in commercial production , time and cost

escalation ,etc.are not applicable to them , these. guidelines to traders.

8

1.5 There are several general reasons for an account becoming NPA

* Internal factors

* External factors

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.

2. Project not completed in time.

3. Poor recovery of receivables.

4. Excess capacities created on non-economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or other debt instrument

from capital markets.

6. Business failures.

7. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting

sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation

etc.,

9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay

in settlement of payments\ subsidiaries by government bodies etc.,

External factors:

1. Sluggish legal system -

Long legal tangles

Changes that had taken place in labour laws

Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.

9

4. Shortage of raw material, raw material\input price escalation, power shortage, industrial

recession, excess capacity, natural calamities like floods, accidents.

5. Failures, non payment\ over dues in other countries, recession in other countries,

externalization problems, adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes etc.,

* Other Causes

a) Failure to bring in Required capital

b) Too ambitious project

d) Unwanted Expenses

e) Over trading

f) Imbalances of inventories

g) Lack of proper planning

h) Dependence on single customers

i) Lack of expertise

j) Improper working Capital Mgmt.

k) Mis management

l) Diversion of Funds

m) Poor Quality Management

n) Heavy borrowings

o) Poor Credit Collection

p) Lack of Quality Control

a) Wrong selection of borrower

b) Poor Credit appraisal

c) Unhelpful in supervision

d) Tough stand on issues

e) Too inflexible attitude

f) Systems overloaded

g) Non inspection of Units

10

h) Lack of motivation

i) Delay in sanction

j) Lack of trained staff

k) Lack of delegation of work

l) Sudden credit squeeze by banks

m) Lack of commitment to recovery

n) Lack of technical, personnel & zeal to

a) Lack of Infrastructure

b) Fast changing technology

c) Un helpful attitude of Government

d) Changes in consumer preferences

e) Increase in material cost

f) Government policies

g) Credit policies

h) Taxation laws

i) Civil commotion

j) Political hostility

k) Sluggish legal system

l) Changes related to Banking amendment Act

m) Poor Credit discipline

n) Inadequate Credit & Risk Management

o) Diversion of funds by promoters

p) Funding of non-viable projects

r) In the early 1990s PSBs started suffering from acute capital inadequacy and lower/ negative

profitability. The parameters set for their functioning did not project the paramount need for

these corporate goals.

11

s) The banks had little freedom to price products, cater products to chosen segments or invest

funds in their best interest

t) Since 1970s, the SCBs functioned as units cut off from international banking and unable to

participate in the structural transformations and new types of lending products.

u) Audit and control functions were not independent and thus unable to correct the effect of

serious flaws in policies and directions

v) Banks were not sufficiently developed in terms of skills and expertise to regulate the

humongous growth in credit and manage the diverse risks that emerged in the process

w) Inadequate mechanism to gather and publicize credit information amongst commercial banks

x) Effective recovery from defaulting and overdue borrowers was hampered on account of

sizeable overhang component arising from infirmities in the existing process of debt recovery,

inadequate legal provisions on foreclosure and bankruptcy and difficulties in the execution of

court decrees.

12

1.5 UNDERLYING REASONS FOR NPAs IN INDIA

An internal study conducted by RBI shows that in the order of prominence, the following

factors contribute to NPAs.

Internal Factors

Diversion of funds for

Expansion/diversification/modernization

Taking up new projects

Helping/promoting associate concerns time/cost overrun during the project

implementation stage

Business (product, marketing, etc.) failure

Inefficiency in management

Slackness in credit management and monitoring

Inappropriate technology/technical problems

Lack of co-ordination among lenders

External Factors

Recession

Input/power shortage

Price escalation

Exchange rate fluctuation

Accidents and natural calamities, etc.

Changes in Government policies in excise/ import duties, pollution control orders, etc.

13

As mentioned earlier, we held discussions with lenders and financial sector experts on the

causes of NPAs in India and whilst the above-mentioned causes were reaffirmed, some others

were also mentioned. A brief discussion is provided below.

Liberalization of economy/removal of restrictions/reduction of tariffs

A large number of NPA borrowers were unable to compete in a competitive market in which

lower prices and greater choices were available to consumers. Further, borrowers operating in

specific industries have suffered due to political, fiscal and social compulsions, compounding

pressures from liberalization (e.g., sugar and fertilizer industries)

Tax monitoring of credits and failure to recognize Early Warning

Signals

It has been stated that approval of loan proposals is generally thorough and each proposal

passes through many levels before approval is granted. However, the monitoring of

sometimes-complex credit files has not received the attention it needed, which meant that

early warning signals were not recognized and standard assets slipped to NPA category

without banks being able to take proactive measures to prevent this. Partly due to this reason,

adverse trends in borrowers' performance were not noted and the position further deteriorated

before action was taken.

Over optimistic promoters

Promoters were often optimistic in setting up large projects and in some cases were not fully

above board in their intentions. Screening procedures did not always highlight these issues.

Often projects were set up with the expectation that part of the funding would be arranged

from the capital markets, which were booming at the time of the project appraisal. When the

capital markets subsequently crashed, the requisite funds could never be raised, promoters

often lost interest and lenders were left stranded with incomplete/unviable projects.

14

Directed lending

Loans to some segments were dictated by Government's policies rather than commercial

imperatives.

Highly leveraged borrowers

Some borrowers were undercapitalized and over burdened with debt to absorb the changing

economic situation in the country. Operating within a protected market resulted in low

appreciation of commercial/market risk.

Funding mismatch

There are said to be many cases where loans granted for short terms were used to fund long

term transactions.

High Cost of Funds

Interest rates as high as 20% were not uncommon. Coupled with high leveraging and falling

demand, borrowers could not continue to service high cost debt.

Willful Defaulters

There are a number of borrowers who have strategically defaulted on their debt service

obligations realizing that the legal recourse available to creditors is slow in achieving results.

15

1.6 PROCEDURES FOR NPA IDENTIFICATION AND RESOLUTION IN

INDIA

1. Internal Checks and Control

Since high level of NPAs dampens the performance of the banks identification of potential

problem accounts and their close monitoring assumes importance. Though most banks have

Early Warning Systems (EWS) for identification of potential NPAs, the actual processes

followed, however, 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 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 conducted by Reserve Bank of India at the instance of the Board of Financial

Supervision are as follows:

Designating Relationship Manager/ Credit Officer for monitoring account/s

Preparation of `know your client' profile

Credit rating system

Identification of watch-list/special mention category accounts

Monitoring of early warning signals

16

Relationship Manager/Credit Officer

The Relationship Manager/Credit Officer is an official who is expected to have 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 (KYC)

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.

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.

Watch-list/Special Mention Category

17

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 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. Early warning signals can be classified

into five broad categories viz.

(a) Financial

(b) Operational

(c) Banking

(d) Management and

(e) External factors.

Financial related warning signals generally emanate from the borrowers' balance sheet,

income expenditure statement, statement of cash flows, statement of receivables etc.

18

Following common warning signals are captured by some of the banks having relatively

developed EWS.

Financial warning signals

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

Rising sales and falling profits

Disproportionate increase in overheads relative to sales

Rising level of bad debt losses Operational warning signals

Low activity level in plant

Disorderly diversification/frequent changes in plan

Nonpayment of wages/power bills

Loss of critical customer/s

Frequent labor problems

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

19

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 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

20

NPA accounts. State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information

Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of

information between banks and FIs for curbing the growth of NPAs incorporated credit

Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of CIB

Regulation Bill, the RBI constituted a working group to examine the role of CIBs. As per the

recommendations of the working group, Banks and FIs are now required to submit the list of

suit-filed cases of Rs. 10 million and above and suit filed cases of willful defaulters of Rs. 2.5

million and above to RBI as well as CIBIL. CIBIL will share this information with

commercial banks and FIs so as to help them minimize adverse selection at appraisal stage.

The CIBIL is in the process of getting operationalised.

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 and Regulatory Regime

A. 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

21

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

settled through DRT process. An important power conferred on the Tribunal is that of making

an interim order (whether by way of injunction or stay) against the defendant to debar him

from transferring, alienating or otherwise dealing with or disposing of any property and the

assets belonging to him within prior permission of the Tribunal. This order can be passed even

while the claim is pending. DRTs are criticized in respect of recovery made considering the

size of NPAs in the Country. In general, it is observed that the defendants approach the High

Country challenging the verdict of the Appellate Tribunal which leads to further delays in

recovery. Validity of the Act is often challenged in the court which hinders the progress of the

DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of infrastructure.

B. 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. They take up

cases which are suitable for settlement of debt for certain consideration. Parties are heard and

they explain their legal position. They are advised to reach to some settlement due to social

pressure of senior bureaucrats or judicial officers or social workers. If the compromise is

arrived at, the parties to the litigation sign a statement in presence of Lokadalats which is

expected to be filed in court to obtain a consent decree. Normally, if such settlement contains

22

a clause that if the compromise is not adhered to by the parties, the suits pending in the court

will proceed in accordance with the law and parties will have a right to get the decree from the

court. In general, it is observed that banks do not get the full advantage of the Lokadalats. It

is difficult to collect the concerned borrowers willing to go in for compromise on the day

when the Lokadalat meets. In any case, we should continue our efforts to seek the help of the

Lokadalat.

C. 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. Additionally, the Central Government has issued the

security enforcement rules ("Enforcement Rules"), which lays down the procedure to be

followed by a secured creditor while enforcing its security interest pursuant to the Act. The

Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their

security interest in relation to the underlying security without reference to the Court after

23

giving a 60 day notice to the defaulting borrower upon classification of the corresponding

financial assistance as a non-performing asset.

The Act permits the secured creditors to take any of the following measures:

Take over possession of the secured assets of the borrower including right to

transfer by way of lease, assignment or sale;

Take over the management of the secured assets including the right to transfer

by way of lease, assignment or sale;

Appoint any person as a manager of the secured asset (such person could be

the ARC if they do not accept any pecuniary liability); and

Recover receivables of the borrower in respect of any secured asset which has

been transferred.

After taking over possession of the secured assets, the secured creditors are required to obtain

valuation of the assets. These secured assets may be sold by using any of the following routes

to obtain maximum value.

By obtaining quotations from persons dealing in such assets or otherwise

interested in buying the assets;

By inviting tenders from the public;

By holding public auctions; or

By private treaty.

Lenders have seized collateral in some cases and while it has not yet been possible to recover

value from most such seizures due to certain legal hurdles, lenders are now clearly in a much

better bargaining position vis-a-vis defaulting borrowers than they were before the enactment

of SRFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is

likely to improve further and one would expect to see a large number of NPAs being resolved

in quick time, either through security enforcement or through settlements.

Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The Act

designates any person holding not less than 10% of the paid-up equity capital of the ARC as a

sponsor and prohibits any sponsor from holding a controlling interest in, being the holding

24

company of or being in control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines

require ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000. Further,

the Directions require that an ARC should maintain, on an ongoing basis, a minimum capital

adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a maximum

realization time frame of five years from the date of acquisition of the assets.

The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction.

These include:

Enforcement of security interest;

Taking over or changing the management of the business of the borrower;

The sale or lease of the business of the borrower;

Settlement of the borrowers' dues; and

Restructuring or rescheduling of debt.

ARCS are also permitted to act as a manager of collateral assets taken over by the lenders

under security enforcement rights available to them or as a recovery agent for any bank or

financial institution and to receive a fee for the discharge of these functions. They can also be

appointed to act as a receiver, if appointed by any Court or DRT.

D. Institution of CDR Mechanism

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of

NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India is

broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The

objective of the CDR mechanism has been to ensure timely and transparent restructuring of

corporate debt outside the purview of the Board for Industrial and Financial Reconstruction

(BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable

corporate affected by certain internal/external factors and minimize losses to creditors/other

stakeholders through an orderly and coordinated restructuring programme. RBI has issued

revised guidelines in February 2003 with respect to the CDR mechanism. Corporate

borrowers with borrowings from the banking system of Rs. 20crores and above under multiple

banking arrangement are eligible under the CDR mechanism. Accounts falling under standard,

25

sub-standard or doubtful categories can be considered for restructuring. CDR is a non-

statutory mechanism based on debtor-creditor agreement and inter-creditor agreement.

Restructuring helps in aligning repayment obligations for bankers with the cash flow

projections as reassessed at the time of restructuring. Therefore it is critical to prepare a

restructuring plan on the lines of the expected business plan along with projected cash flows.

The CDR process is being stabilized. Certain revisions are envisaged with respect to the

eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks are

not members of the CDR forum, and it is expected that they would be signing the agreements

shortly. However they attend meetings. The first ARC to be operational in India- Asset

Reconstruction Company of India (ARGIL) is a member of the CDR forum. Lenders in India

prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender

arrangements and to increase transparency in the process. While in the RBI guidelines it has

been recommended to involve independent consultants, banks are so far resorting to their

internal teams for recommending restructuring programs.

E. Compromise Settlement Schemes

One Time Settlement Schemes

NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The scheme

also covers NPAs classified as sub-standard as on 31st March 2000, which have subsequently

become doubtful or loss. All cases on which the banks have initiated action under the

SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree

being obtained from the Courts/DRTs/BIFR are covered. However cases of willful default,

fraud and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores,

the minimum amount that should be recovered should be 100% of the outstanding balance in

the account.

Negotiated Settlement Schemes

The RBI/Government has been encouraging banks to design and implement policies for

negotiated settlements, particularly for old and unresolved NPAs. The broad framework for

such settlements was put in place in July 1995. Specific guidelines were issued in May 1999

26

to public sector banks for one-time settlements of NPAs of small scale sector. This scheme

was valid until September 2000 and enabled banks to recover Rs 6.7 billion from various

accounts. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 million

and less. These guidelines were effective until June 2001 and helped banks recover Rs. 26

billion.

F. Increased Powers to NCLTs and the Proposed Repeal of BIFR

In India, companies whose net worth has been wiped out on account of accumulated losses

come under the purview of the Sick Industrial Companies Act (SICA) and need to be referred

to BIFR. Once a company is referred to the BIFR (and even if an enquiry is pending as to

whether it should be admitted to BIFR), it is afforded protection against recovery proceedings

from its creditors. BIFR is widely regarded as a stumbling block in recovering value for

NPAs. Promoters systematically take refuge in SICA - often there is a scramble to file a

reference in BIFR so as to obtain protection from debt recovery proceedings. The recent

amendments to the Companies Act vest powers for revival and rehabilitation of companies

with the National Company Law Tribunal (NCLT), in place of BIFR, with modifications to

address weaknesses experienced under the SICA provisions. The NCLT would prepare a

scheme for reconstruction of any sick company and there is no bar on the lending institution

of legal proceedings against such company whilst the scheme is being prepared by the NCLT.

Therefore, proceedings initiated by any creditor seeking to recover monies from a sick

company would not be suspended by a reference to the NCLT and, therefore, the above

provision of the Act may not have much relevance any longer and probably does not extend to

the tribunal for this reason. However, there is a possibility of conflict between the activities

that may be undertaken by the ARC, e.g. change in management, and the role of the NCLT in

restructuring sick companies. The Bill to repeal SICA is currently pending in Parliament and

the process of staffing of NCLTs has been initiated.

27

INDIAN ECONOMY AND NPAs

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock

markets have tumbled and business itself is getting hard to do. The Indian economy has been

much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting

of exposures to emerging markets by FIIs, etc. Further, international rating agencies like,

Standard & Poor have lowered India's credit rating to sub-investment grade. Such negative

aspects have often outweighed positives such as increasing forex reserves and a manageable

inflation rate.

After the global financial turmoil in 2008, Indian banks begin the new year with a lurking fear

that their Non Performing Assets would go up with their portfolios coming under severe stress.

There is already a visible strain on consumer, credit card and vehicle loan portfolios and many

banks have taken conscious decision to scale down their advances to risky sectors. Some banks

have also revised their credit growth targets downwards as the year has come to a close.

"The ongoing financial crisis has had its toll on export-related sectors like IT, textile and SMEs.

This may indirectly impact banks' asset quality. There is, therefore, a pressing need to ensure

adequate risk-management mechanisms to overcome this challenge," Bank of

Baroda's  Chairman and Managing Director M D Mallya told PTI.

Indian banks witnessed a sharp jump in their gross NPAs for the first time in six years in FY08,

compelling many of them to enhance their existing risk assessment tools.

Gross NPAs of commercial banks in FY08 escalated by Rs 6,136 crore (Rs 61.36 billion),

according to figures released by the Reserve Bank.

Though there was no need to be unduly alarmed, banks need to follow certain standard

parameters to ensure the quality of their lending portfolios, Mallya said.

28

A similar view was echoed by ICICI Bank's CEO-elect Chanda Kochhar who said the lender has

taken a conscious decision "to follow certain parameters" to ensure asset quality.

Despite pressures emanating from global financial markets, Indian banks witnessed a healthy 25

to 29 per cent average growth in credit disbursals, primarily in housing, auto and infrastructure

loans.

IndusInd Bank's  Head of Wholesale Banking Group J Moses Harding supported this view

saying that the present economic downturn has affected the repayment capacities of small firms,

exerting pressure on the banks' lending portfolios.

"There is a pressure on SMEs as many of them are unable to repay their advances in the current

scenario. This situation is likely to last in the short term. Banks need to adjust their risk

management mechanisms to face the situation," Harding said.

Banks witnessed a huge credit demand from their corporate clients who found their foreign

funding sources drying up in the aftermath of the global meltdown which originated with the

subprime-crisis in America in mid-2007. The growth in credit in the industry in 2008 was in the

range of 25 to 29 per cent on account of working capital requirements of small, mid and large-

sized industries, bankers expect an average 25 per cent in their credit in 2009.

While government-owned banks were quick to respond to the recent signals from policy-makers

by reducing interest rates periodically, many private banks are yet to follow suit, mainly owing

to pressure on their margins.

Government-owned banks have effected an up to 1 to 1.5 per cent reduction in their Prime

Lending Rates in the recent past heeding calls from the government and the Reserve Bank to do

so in order to ensure a credit pick-upBanking sector reforms in India has progressed promptly on

aspects like interest rate deregulation, reduction in statutory reserve requirements, prudential

norms for interest rates, asset classification, income recognition and provisioning. But it could

not match the pace with which it was expected to do. The accomplishment of these norms at the

execution stages without restructuring the banking sector as such is creating havoc. This research

paper deals with the problem of having non-performing assets, the reasons for mounting of non-

29

performing assets and the practices present in other countries for dealing with non-performing

assets.

During pre-nationalization period and after independence, the banking sector remained in private

hands Large industries who had their control in the management of the banks were utilizing

major portion of financial resources of the banking system and as a result low priority was

accorded to priority sectors. Government of India nationalized the banks to make them as an

instrument of economic and social change and the mandate given to the banks was to expand

their networks in rural areas and to give loans to priority sectors such as small scale industries,

self-employed groups, agriculture and schemes involving women.

To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the

banking system to expand its network in a planned way and make available banking series to the

large number of population and touch every strata of society by extending credit to their

productive endeavours. This is evident from the fact that population per office of commercial

bank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of

advances of public sector banks to priority sector increased form 14.6% in 1969 to 44% of the

net bank credit. The number of deposit accounts of the banking system increased from over 3

crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68

crores.

30

1.7 Objective of the study

Primary objective:

The primary objective of the making report is:

To know why NPAs are the great challenge to the Public Sector Banks.

Secondary objectives:

To understand what is Non Performing Assets and what are the underlying reasons for

the emergence of the NPAs.

To understand the impacts of NPAs on the operations of the Public Sector Banks.

To know what steps are being taken by the Indian banking sector to reduce the NPAs

31

2. Review of Literature

18 May 2008, Aman Dhall & Raja Awasthi, TNN

NEW DELHI: If non-performing assets (NPAs) are any parameter to judge the efficiency of

banks, then private sector such as ICICI Bank and HDFC Bank surely need to take a lesson or

two from the public sector banks on how to clean bad debts from their books.

In the financial year 2007-’08, even as public sector banks (barring State Bank of Saurashtra) put

up an inspired show to drastically reduce the NPAs, the two private majors — ICICI Bank and

HDFC Bank — have struggled to fix the problem of higher proportion of non-performing debt

(see table). While in the case of HDFC Bank the increase in the gross NPAs in percentage terms

is marginal (1.5 %), there are worrying signs for India’s largest private bank, ICICI Bank which

witnessed a rise of approximately 59% in the gross NPAs in percentage terms.

To get the real picture, SundayET made calculations of gross NPAs in percentage terms and not

in volume terms as one tends to ignore the change in the asset size of a bank in the latter’s case.

To give you an example, in volume terms, State Bank of India (SBI) reported a jump of more

than 20% in bad loans from Rs 9,998 to Rs 12,037 crore during the last financial year but if

calculations are made in percentage terms there is an improvement in gross NPAs by 2.73%.

This is because not only bad loans have increased but also the asset size of bank too. So it would

be unfair to conclude that the bank faired badly in cleaning bad assets without looking at the

picture in real terms, that is percentage.

ICICI Bank deputy chief financial officerRajesh Jha told SundayET that the increase in the

NPAs is inevitable as the bank is expanding its retail portfolio. “If one says, that we didn’t

anticipate, it will be wrong. In fact, we are already prepared for the fact that NPAs will rise in the

coming financial year too,” he said. “Currently, almost 20% of the retail loans are unsecured.

Whatsoever cautious you may be, when you are expanding it is difficult to get rid of bad debts.

32

Out of every 100 loans, three or four eventually go bad,” he said. However, he felt that

comparison with public sector banks is unwarranted as their portfolio is different. In terms of

volume, on March 31, 2008, ICICI Bank’s gross NPAs stood at Rs 7,580 crore, in comparison

with Rs 4,126 crore a year ago, which is an increase of almost 84% .

Amongst large public sector banks, the best performing bank was central bankof India which

reduced its gross NPAs in percentage terms by 34%. Similarly, Indian Bank and Punjab & Sind

Bank were the best performers among the medium-size and small-size public sector banks’

category, reducing gross NPAs by approximately 35% and 69% respectively.

Among the State Bank group, the shining star was State Bank of Hyderabad that cut down on

gross NPAs by almost 30% in percentage terms. During the last financial year, the only dark spot

amongst the public sector banks was State Bank of Saurashtra which had bad debts increasing by

26% in percentage terms.

A senior economist has pointed out that it’s more of a cyclical downturn because of stress in

small-ticket retail loans, which is leading to high NPAs. “It should be noted that the private

banks have made huge earnings through retail portfolio in the last five-seven years, which has

resulted in their valuations soaring,” he said. According to him, the reasons for low NPAs in

public setor banks is primarily due to their less aggresive approach in the retail loan segment.

As the financial crisis devours more banks in the US and the disease spreads to Europe, investors

appear to be concerned about the fate of local banks as well. While the broader market has fallen

by about 40% from its peak (as measured from the S&P CNX Nifty), the banking sector

benchmark Bank Nifty has shed nearly 50%. However, bank fundamentals suggest concerns

appear to be over done.

The Reserve Bank of India's recently released report 'A Profile of Banks : 2007-08' shows the net

NPA ratio of the scheduled commercial banks fell further and was placed at 1% of advances at

the end of March 2008. And the capital to risk-weighted assets ratio (capital adequacy ratio) was

33

placed at a healthy 13% at the end of the year. What is perhaps worrying the market is that the

NPA levels could rise sharply in the next few years.

Net non-performing assets (NPAs) of Indian banks had declined because of a deceleration in new

accruals, and a rapid increase in credit over the last few years. In the case of nationalised banks,

for instance, advances grew at over 30% CAGR over the four years to 2007-08. This strong

growth also helped bring down net NPAs relative to advances. But there are signs that the tide

may have turned; the NPA situation could deteriorate rapidly.

A Goldman Sachs study of Indian banks, for instance, shows that there was a trend reversal in

new NPA accrual rate. After declining steadily though to 2006, the new accrual rate increased in

2007 (see chart). In keeping with this trend, the gross NPA ratios have also inched up

marginally. This trend reversal in 2007 is, however, based on data for major banks only, which

accounted for about 64% of gross bank credit.

As banks tighten credit, and indications are there that this is already happening in the case of

short-term loans, borrowers may find it difficult to refinance their loans. They may then be

forced into default. The small and medium enterprises (SMEs) which have received a large share

of the incremental credit in the last few years are particularly vulnerable. Goldman Sachs expects

NPAs to double from the levels seen in 2007, largely because of the stress in the SME and mid-

sized corporate segments.

The retail portfolio of banks is the other worry. Some of the aggressive private sector banks have

over 60% of their portfolio in the retail segment. The variable rate lending, largely in the

mortgage portfolio, is likely to come under stress. Interest rates have risen nearly five percentage

points from their near 7% lows. The attendant increase in monthly installments has been of the

order of 50% in many cases, even after the option of extending tenure has been exhausted. An

increase of this magnitude is sure to cause stress. Besides, lending standards may also have been

compromised in search for high retail growth. Therefore, delinquencies are likely to be higher

even in the case of retail portfolio.

34

The immediate impact of this would be lower profitability in the years ahead, as provisioning

would have to increase in line with higher bad assets. However, it is unlikely that bad assets

would reach anywhere near crisis levels. Indian banks are adequately capitalised and the

deterioration in asset quality is more cyclical; after strong credit growth there is invariably an

increase in NPAs. Also, on the positive side, banks have nearly 30% of their portfolio in

government securities .

.

The consensus is that interest rates are already near their peak and if inflation starts to moderate

some softening in monetary policy is likely towards the end of the fiscal. In fact, yield on

benchmark ten-year paper have already drifted down from their recent peaks, causing banks'

bond portfolio to appreciate sharply. To the extent some banks are able to book these gains the

effect of provisioning could be offset. In all, a usual business cycle issue with Indian banks.

B. Sathish Kumar

In liberalizing economy banking and financial sector get high priority. Indian banking sector of

having a serious problem due non performing. The financial reforms have helped largely to clean

NPA was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability of the

bank are highly affected due to this

NPA is defined as an advance for which interest or repayment of principal or both remain out

standing for a period of more than two quarters. The level of NPA act as an indicator showing

the bankers credit risks and efficiency of allocation of resource.

The Indian banking sector is facing a serious problem of NPA. The extent of NPA is

comparatively higher in public sectors banks. (Table II&III). To improve the efficiency and

profitability, the NPA has to be scheduled. Various steps have been taken by government to

reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks

can try competing with foreign banks to maintain international standard.

35

3. Research methodology

Formulating the problem

Providing credit facility to the borrower is one of the important factors as far as the

banking sector is concerned. On the basis of the analyzed factor, I felt that the important

issue right now as far as the credit facilities are provided by bank is non performing assets.

I started knowing about the basics of the NPAs and decided to study on the NPAs. So, I

Research Design

The research design for this study is basically analytical because it utilizes the large

number of data of the Public Sector Banks.

Type of the data

Primary data takes much time and are also expensive whereas the secondary data are easy

to search and are not expensive too. For my study I have utilized totally the secondary

data.

Data Source

Reserve Bank of India

36

Data Analysis

&

Interpretation

4. Following are the Public sector Banks included

37

for the Ratio analysis .

1. Allahabad Bank

2. Andhra Bank

3. Bank of Baroda

4. Bank of India

5. Bank of Maharashtra

6. Canara Bank

7. Central Bank of India

8. Corporation Bank

9. Dena Bank

10. Indian Bank

11. Indian Overseas bank

12. Oriental Bank of Commerce

13. Punjab National Bank

14. Punjab and Sind Bank

15. State Bank of India

16. State Bank of India & its associates.

State Bank of Hyderabad

State Bank of India

State Bank of Indore

State Bank of Mysore

State Bank of Saurashtra

State Bank of Travancore

17. Syndicate Bank

18. UCO Bank

19. Union Bank of India (UBI)

20. Vijaya Bank

4. RATIO ANALYSIS

38

4.1 GROSS NPA RATIO:

Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank.Gross NPA is the

sum of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is to be

counted in terms of percentage and the formula for GNPA is as follows:

Gross NPA ratio = (Gross NPA / Gross advances)*100

Gross NPAs to Gross Advances

39

S. No.

Name of Bank 2006 2007 2008

1 2 3 4 5

Nationalized

Bank

1 Allahabad Bank 3.9 2.6 2.0

2 Andhra Bank 1.9 1.4 1.1

3 Bank of Baroda 3.9 2.5 1.8

4 Bank of India 3.7 2.4 1.7

5 Bank of

Maharashtra

5.5 3.5 2.6

6 Canara Bank 2.3 1.5 1.3

7 Central Bank of

India

6.8 4.8 3.2

8 Corporation

Bank

2.6 2.1 1.5

9 Dena Bank 6.4 4.1 2.4

10 Indian Bank 2.9 1.9 1.2

11 Indian overseas

bank

3.4 2.3 1.6

12 Oriental Bank

of Commerce

6.0 3.2 2.3

13 Punjab & Sind

Bank

9.6 2.4 0.7

14 Punjab National

Bank

4.1 3.5 2.7

15 Syndicate bank 4.0 3.0 2.7

16 UCO Bank 3.3 3.2 3.0

17 Union Bank of

India

3.8 2.9 2.2

18 United Bank of

India

4.7 3.6 2.7

19 Vijaya Bank 3.2 2.3 1.6

20 State Bank of

India

3.9 2.9 3.0

21 State Bank of

Bikaner &

Jaipur

2.4 2.2 1.740

Source : Reserve Bank of India

Findings from the above table :

The table above indicates the quality of credit portfolio of the banks. High gross NPA

ratio indicates the low credit portfolio of bank and vice-a-versa.

We can see from the above table that the Central Bank of India has the higher gross

NPA ratio of 3.2 % followed by the State Bank of India & UCO Bank with 3.0 %. The

Punjab National Bank, Syndicate Bank of India and united Bank of India also have

higher gross NPA ratio with 2.7% in 2008.

Whereas the state Andhra Bank , Punjab & Sind Bank , State Bank of hyderabad

showed lower ratio with 1.1 %, 0.7 % and 0.9% in the year 2008 .

4.2 NET NPA RATIO:

The net NPA percentage is the ratio of net NPA to net advances, in which the provision is to

be deducted from the gross advance. The provision is to be made for NPA account. The

formula for that is :

41

(i) Net NPA Ratio = (Gross NPA-Provision /Gross Advances-Provisions) * 100

Net NPA to Gross Advances

S. No.

Name of Bank 2006 2007 2008

1 2 3 4 5

Nationalized

Bank

1 Allahabad Bank 0.84 1.07 0.80

2 Andhra Bank 0.24 0.17 0.15

3 Bank of Baroda 0.87 0.60 0.47

4 Bank of India 1.49 0.74 0.52

5 Bank of

Maharashtra

2.03 1.21 0.87

6 Canara Bank 1.12 0.94 0.84

7 Central Bank of

India

2.59 1.70 1.45

8 Corporation

Bank

0.64 0.47 0.32

9 Dena Bank 3.04 1.99 0.94

10 Indian Bank 0.79 0.35 0.24

11 Indian overseas

bank

0.65 0.55 0.60

12 Oriental Bank

of Commerce

0.49 0.49 0.99

13 Punjab & Sind

Bank

2.43 0.66 0.37

14 Punjab National

Bank

0.29 0.76 0.64

42

15 Syndicate bank 0.86 0.76 0.97

16 UCO Bank 2.10 2.14 1.98

17 Union Bank of

India

1.56 0.96 0.17

18 United Bank of

India

1.95 1.50 1.10

19 Vijaya Bank 0.85 0.59 0.57

20 State Bank of

India

1.88 1.56 1.78

21 State Bank of

Bikaner &

Jaipur

1.18 1.09 0.83

22 State Bank of

Hyderabad

0.36 0.22 0.16

23 State Bank of

Indore

1.83 1.04 0.73

24 State Bank of

Mysore

0.74 0.45 0.43

25 State Bank of

Patiala

0.99 0.83 0.60

26 State Bank of

Saurashtra

1.16 0.70 0.91

27 State Bank of

Travancore

1.47 1.08 0.94

Source : Reserve Bank of India

Findings from the above table :

High NPA ratio indicates the high quantity of risky assets in the Banks for which no

provision are made.

43

From the table it becomes clear that the NPA ratio of almost all the Banks have been

improved quite well as compared to the previous year.

The UCO bank has the highest NPA ratio of 1.98 % followed by the State Bank of

India with 1.78 % & Central Bank of India with 1.45% . The Andhra Bank has

showed the lowest NPA ratio .15% and State Bank of Hyderabad, Union Bank of India

have also showed lower NPA ratio with .16 % and .17 % in 2008.

4.3 PROVISION RATIO:

Provisions are to be made to keep safety against the NPA, & it directly affect on the gross

profit of the Banks. The provision Ratio is nothing but total provision held for NPA to gross

NPA of the Banks. The formula for that is,

44

(i) Provision Ratio = (Total Provision/Gross NPA)*100

(ii) [ Additional Formulae: Net NPA = Gross NPA – Provision

Therefore , Provision = Gross NPA – Net NPA ]

Provision Ratio

S. No.

Name of Bank 2006 2007 2008

1 2 3 4 5

Nationalized

Bank

1 Allahabad Bank 79.21 59.78 60.43

2 Andhra Bank 87.99 88.09 85.58

3 Bank of Baroda 78.32 76.02 75.09

4 Bank of India 60.89 69.91 69.34

5 Bank of

Maharashtra

64.61 66.18 36.48

6 Canara Bank 50.95 37.93 36.48

7 Central Bank of

India

63.78 65.86 54.89

8 Corporation

Bank

75.41 77.27 78.28

9 Dena Bank 54.4 50.99 62.37

10 Indian Bank 73.59 81.28 79.95

11 Indian overseas

bank

8.4 76.98 63.56

12 Oriental Bank

of Commerce

92.29 85.16 57.90

13 Punjab & Sind 76.58 73.51 50.58

45

Bank

14 Punjab National

Bank

93.3 78.59 77.29

15 Syndicate bank 79.25 74.93 64.79

16 UCO Bank 36.42 33.2 33.87

17 Union Bank of

India

60.25 67.89 92.29

18 United Bank of

India

59.27 59.24 59.78

19 Vijaya Bank 73.65 74.48 64.49

20 State Bank of

India

48.98

47.41

42.16

21 State Bank of

Bikaner &

Jaipur

51.85 51.88 42.16

22 State Bank of

Hyderabad

83.35 82.52 81.73

23 State Bank of

Indore

39.02 45.93 49.69

24 State Bank of

Mysore

78.28 80.48 75.10

25 State Bank of

Patiala

37.58 54.53 58.34

26 State Bank of

Saurashtra

37.58 36.65 36.71

27 S tate Bank of 54.68 50.45 53.10

Source : Reserve Bank of India

Findings from the above table

46

This Ratio indicates the degree of safety measures adopted by the Banks.

It has direct bearing on the profitability, Dividend and safety of shareholders’ fund.

If the provision ratio is less, it indicates that the Banks has made under provision.

The highest provision ratio is showed by corporation Bank with Union Bank of India with 92.29% followed by Andhra Bank of commerce with 85.58 % & State Bank of Hyderabad with 81.73% . in the year 2008 .

The lowest provision ratio is showed UCO Bank with only 33.87 % followed by Bank of Maharastra & Canara bank With 36.48%

4.4 PROBLEM ASSET RATIO:

It is the ratio of gross NPA to total asset of the bank. The formula for that is:

Problem Asset Ratio = (Gross NPAs/Total Assets ) * 100

Problem asset ratio

Name of Bank 2006 2007 2008

47

S. No.

1 2 3 4 5

Nationalized Bank

1 Allahabad Bank 2.14 1.61 1.21

2 Andhra Bank 1.07 0.83 0.66

3 Bank of Baroda 2.10 0.14 1.10

4 Bank of India 2.20 1.48 1.07

5 Bank of

Maharashtra

3.02 2.10 1.59

6 Canara Bank 1.35 0.90 0.78

7 Central Bank of

India

3.59 2.76 1.90

8 Corporation Bank 1.54 1.18 0.88

9 Dena Bank 3.57 2.36 1.48

10 Indian Bank 1.40 0.97 0.70

11 Indian overseas

bank

1.69 1.36 0.98

12 Oriental Bank of

Commerce

3.31 1.96 1.41

13 Punjab & Sind

Bank

3.31 1.32 0.44

14 Punjab National

Bank

4.94 2.08 1.67

48

15 Syndicate bank 2.16 3.79 0.16

16 UCO Bank 0.24 2.01 1.84

17 Union Bank of

India

1.00 1.82 1.34

18 United Bank of

India

2.35 1.93 1.40

19 Vijaya Bank 0.91

20 State Bank of India 1.95 1.76 1.78

21 State Bank of

Bikaner & Jaipur

1.95 1.34 1..06

22 State Bank of

Hyderabad

14.11 0.71 0.50

23 State Bank of

Indore

1.12 1.19 9.06

24 State Bank of

Mysore

1.75 1.42 1.08

25 State Bank of

Patiala

2.05 1.10 0.88

26 State Bank of

Saurashtra

13.17 0.65 0.82

27 State Bank of

Travancore

0.95 1.42 0.69

Source : Reserve Bank of India

49

Findings from the above table :

We determine the percentage of assets out of total assets / advances that are likely to

become the Non performing Assets as problematic assets .

From the above table it becomes clear that Punjab and Sind Bank and Dena Bank have

the high ratio of 8.6% and 8.0%.

That Ratio implies that the both above banks have the highest probability of creating

NPA’s in the near future .

4.5 CAPITAL ADEQUACY RATIO

Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which

are weighted/adjusted according to risk attached to them i.e.

Capital Adequacy Ratio = Capital/ Risk Weighted Assets* 100

Capital adequacy ratio

50

Source :

Reserve

Bank of

S. No.

Name of Bank 2006 2007 2008

1 2 3 4 5

1 Allahabad Bank 13.37 1.07 0.80

2 Andhra Bank 14.00 0.17 0.15

3 Bank of Baroda 13.65 0.60 0.47

4 Bank of India 10.75 0.95 0.52

5 Bank of

Maharashtra

11.27 1.21 0.87

6 Canara Bank 11.22 0.94 0.84

7 Central Bank of

India

11.03 1.70 1.45

8 Corporation

Bank

13.02 0.47 0.32

9 Dena Bank 10.62 1.99 0.94

10 Indian Bank 13.19 0.35 0.24

11 Indian overseas

bank

13.04 0.55 0.60

12 Oriental Bank of

Commerce

11.04 0.49 0.99

13 Punjab & Sind

Bank

12.83 0.66 0.37

14 Punjab National

Bank

11.95 0.76 0.64

15 Syndicate bank 11.73 0.76 0.97

16 UCO Bank 11.12 2.14 1.98

17 Union Bank of

India

11.41 0.96 0.17

18 United Bank of

India

13.12 1.50 1.10

19 Vijaya Bank 13.12 0.59 0.57

20 State Bank of

India

11.88 1.56 1.78

21 State Bank of

Bikaner &

Jaipur

12.08 1.09 0.83

22 State Bank of 12.08 0.22 0.16

51

india

Findings from the above table :

The capital adequacy ratio is important for them to maintain as per the banking

regulations.

Each bank needs to create the capital Reserve to compensate the Non Performing Assets.

Each Asset has given a risk weightage as per RBI guidelines

Risk weighted Asset = Asset * Risk Weightage

So, More the Risk weighted Assets are , Bank has to maintain more capital .

As far as this ratio is concerned the UCO Bank has shown much appreciated result by

acquiring the ratio of 1.98 % followed by the State Bank of India and Central Bank of

India having ratios of 1.78% and 1.45% .

4.6 SUB-STANDARD ASSETS RATIO

It is the ratio of Total Substandard Assets to Gross NPA of the bank.

Substandard Assets Ratio= total substandard assets /Gross NPAs*100

It indicates scope of up gradation/improvement in NPA.

52

Higher substandard asset ratio means that in whole NPA the sub standard ratio has major

proportion, which indicates that there is a high scope for advance up gradation or

improvement because it will be very easy to recover the loan as minimum duration of

default.

4.7 DOUBTFUL ASSET RATIO:

It is the ratio of Total Doubtful Assets to Gross NPAs of the bank.

Doubtful Asset Ratio =Total doubtful assets/Gross NPAs*100

It indicates the scope of compromise for NPA reduction.

4.8 LOSS ASSET RATIO:

It is the ratio of total loss assets to Gross NPA of the bank.

Loss Asset Ratio=Total Loss Assets /Gross NP A* 100

It indicates the proportion of bad loans in the banks.

However if the ratio increases in the recent year, which is detrimental to the bank. The

bank must take necessary steps to control this ratio, as it is the indication that there is

increasing incidence of erosion of securities and fraudulent Loan Accounts in the

bank.

53

Findings

Recommendations

&

Conclusion

54

1.) Gross NPA Ratio for 2008 - Findings

0

0.5

1

1.5

2

2.5

3

3.5

Series1

Findings from the above table :

High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa.

We can see from the above table that the Central Bank of India has the higher gross

NPA ratio of 3.2 % followed by the State Bank of India & UCO Bank with 3.0 %. The

Punjab National Bank, Syndicate Bank of India and united Bank of India also have

higher gross NPA ratio with 2.7% in 2008.

Whereas the state Andhra Bank , Punjab & Sind Bank , State Bank of hyderabad

showed lower ratio with 1.1 %, 0.7 % and 0.9% in the year 2008 .

55

3.) Net NPA Ratio for 2008 – Findings

0

0.5

1

1.5

2

2.5

Series1

Findings from the above table :

This ratio indicates the degree of risk in the portfolio of the banks. High NPA ratio indicates the high quantity of risky assets in the Banks for which no provision are made.

From the table it becomes clear that the NPA ratio of almost all the Banks have been improved quite well as compared to the previous year.

The UCO bank has the highest NPA ratio of 1.98 % followed by the State Bank of India with 1.78 % & Central Bank of India with 1.45% . The Andhra Bank has showed the lowest NPA ratio .15% and State Bank of Hyderabad, Union Bank of India have also showed lower NPA ratio with .16 % and .17 % in 2008

3.) Provisioning Ratio - Findings

56

Series1

Findings from the above table

This Ratio indicates the degree of safety measures adopted by the Banks.

It has direct bearing on the profitability, Dividend and safety of shareholders’ fund.

If the provision ratio is less, it indicates that the Banks has made under provision.

The highest provision ratio is showed by corporation Bank with Union Bank of India with 92.29% followed by Andhra Bank of commerce with 85.58 % & State Bank of Hyderabad with 81.73% . in the year 2008 .

The lowest provision ratio is showed UCO Bank with only 33.87 % followed by Bank of Maharastra & Canara bank With 36.48%

4.) Problem Asset Ratio - Findings

57

0123456789

10

allha

bad

bank

andh

ra ba

nk

bank

of in

dia

cana

ra b

ank

corp

oratio

n ba

nk

india

n ban

k

orient

al ban

k of c

omm

erce

punja

b na

tiona

l bank

uco

bank

unite

d bank

of in

dia

state

ban

k of in

dia

state

ban

k of h

ydera

bad

state

of m

ysor

e

state

ban

k of s

aura

stra

c

Findings from the above table :

We determine the percentage of assets out of total assets / advances that are likely to

become the Non performing Assets as problematic assets .

From the above table it becomes clear that Punjab and Sind Bank and Dena Bank have

the high ratio of 8.6% and 8.0%.

That Ratio implies that the both above banks have the highest probability of creating

NPA’s in the near future .

58

5.) Capital Adequacy Ratio - Findings

0

0.5

1

1.5

2

2.5

Series1

Findings from the above table :

The capital adequacy ratio is important for them to maintain as per the banking

regulations.

Each bank needs to create the capital Reserve to compensate the Non Performing Assets.

Each Asset has given a risk weightage as per RBI guidelines

Risk weighted Asset = Asset * Risk Weightage

So, More the Risk weighted Assets are , Bank has to maintain more capital .

As far as this ratio is concerned the UCO Bank has shown much appreciated result by

acquiring the ratio of 1.98 % followed by the State Bank of India and Central Bank of

India having ratios of 1.78% and 1.45% .

Recommendations of the study

59

Through RBI has introduced number of measures to reduce the problem of increasing NPAs

of the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI

act, etc. A lot of measures are desired in terms of effectiveness of these measures. What I

would like to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as

under.

(1) Each bank should have its own independent credit rating agency which should evaluate the

financial capacity of the borrower before than credit facility.

(2) The credit rating agency should regularly evaluate the financial condition of the clients.

(3) Special accounts should be made of the clients where monthly loan concentration reports

should be made.

(4) It is also wise for the banks to carryout special investigative audit of all financial and

business transactions and books of accounts of the borrower company when there is

possibility of the diversion of the funds and mismanagement.

(5) The banks before providing the credit facilities to the borrower company should analyze

the major heads of the income and expenditure based on the financial performance of the

comparable companies in the industry to identify significant variances and seek explanation

for the same from the company management. They should also analyze the current financial

position of the major assets and liabilities.

(6) Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they

would face the environmental threats and opportunities with the use of their strength and

weakness, and what will be their possible future growth in concerned to financial and

operational performance.

(7) Independent settlement procedure should be more strict and faster and the decision made

by the settlement committee should be binding both borrowers and lenders and any one of

them failing to follow the decision of the settlement committee should be punished severely

Conclusion of the Study

60

1. The NPA is one of the biggest problem that the Public Sector Banks are facing today is the

problem of nonperforming assets. If the proper management of the NPAs is not undertaken

it would hamper the business of the banks.

2. In absolute terms, the last three years have seen an increase in the net NPAs of

25 public sector banks by 24 per cent. According to the numbers, the last year it saw

a 17 percent rise in the sticky assets.

3.The largest public sector lender, SBI, has seen an increase in the net NPAs by a whopping

41 percent in 2007-08 .

4.As the global slowdown has crept into the economy, bankers feel that in more loans are

going to turn bad in the coming quarters and therefore they want RBI to relax the deadline

for loan reconstruction.

5. Due to Recession & slowdown in the Indian economy would result in emerging

NPA ‘s for the public sector banks from textiles, real estate, retail, exports and auto sectors.

6.The RBI has also been trying to take number of measures but the ratio of NPAs is not

decreasing of the banks. The banks must find out the measures to reduce the evolving

problem of the NPAs.

7.The reduction of the NPAs would help the banks to boost up their profits, smooth recycling

of funds in the nation. This would help the nation to develop more banking branches and

developing the economy by providing the better financial services to the nation.

8. 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.

10.) As a result of the NPA’s owners do not receive a market return on their capital . In the

worst case,if the bank fails, owners lose their assets & this may affect a broad pool of

shareholders & act as a rain on Profitability.

61

11.) 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 .

12.) When many borrowers fail to pay interest ,banks may experience liquidity

shortages .These shortages can jam payments across the country and as a result Non

performing loans may spill over the banking system and contract the money stock ,which

may lead to economic contraction .

13.) Banks need to create capital reserve to writeoff the mounting NPA’s burden .

14.) “A Man without money is like a bird without wings”, the Rumanian proverb insists the

importance of the money. A bank is an establishment, which deals with money. The basic

functions of Commercial banks are the accepting of all kinds of deposits and lending of

money. In general there are several challenges confronting the commercial banks in its day

today operations. The main challenge facing the commercial banks is the disbursement of

funds in quality assets (Loans and Advances) or other wise it leads to Non-performing

assets.”

Limitations of the study

62

The limitations that I felt in my study are:

It was critical for me to gather the financial data of the every bank of the Public Sector

Banks so the better evaluations of the performance of the banks are not possible.

Since my study is based on the secondary data, the practical operations as related to the

NPAs are adopted by the banks are not learned.

Since the Indian banking sector is so wide so it was not possible for me to cover all the

banks of the Indian banking sector.

Provision for the classification of the Assets / NPA’s differs within each public sector

bank & this information is not available Publicly .

The RBI norms for the classification of assets / NPA’s are available on a pay site & not

publicly available through any source .

.

63

(8) There should be proper monitoring of the restructured accounts because there is every

possibility of the loans slipping into NPAs category again.

(9) Proper training is important to the staff of the banks at the appropriate level with ongoing

process. That how they should deal the problem of NPAs, and what continues steps they

should take to reduce the NPAs.

(10) Willful Default of Bank loans should be made a Criminal Offence.

(11) No loan is to be given to a Group whose one or the other undertaking has become a

Defaulter.

64

BIBLIOGRAPHY

Websites:

http://www.equitymaster.com/stockquotes/mystocks.asp

http://moneyterms.co.uk/interest_spread/

http://economictimes.indiatimes.com/Features/The_Sunday_ET/Economy/

Private_banks_struggle_to_manage_their_non-performing_assets/articleshow/

3049718.cms#write

www.123eng.com

http://www.rupeetimes.com/experts/joseph_samson_5.html

http://www.rupeetimes.com/news/personal_loan/

banks_ask_rbi_to_relax_npa_norms_for_real_estate_sector_1919.html

http//:www.rbi.org.com

http//:www.money.radiff.com

http//:www.economictimes.indiatimes.com

65