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EXECUTIVE SUMMARY

Since the introduction of the economic liberalization and financial sector reforms, Banks are under growing pressure to bring down their NPAs so as to improve their performance and viability. What is bothering the bankers today is the management of Non-Performing Assets. Over the period this problem has aggravated alarmingly and therefore needs remedial actions, so in this context a good number of circular instruction/guidelines have been issued by banks/Reserve Bank of India.

Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of Sh. M. Narsimham to examine and give recommendation for Income Recognition, Assets Classification and Provision of loan assets of Bank and Financial Institutions. The committee examined the issues and recommended that a policy of Income Recognition should be objective and based on record of recovery rather than on subjective considerations. On the basis of the recommendations of the Narsimhan Committee, RBI had issued guidelines to all Scheduled Commercial Banks on Income Recognition, Assets Classification and Provisioning in April, 1992 which have been modified from time to time by the RBI on the basis of experience gained and suggestions received from various quarters. The Prudential Norms for Income Recognition, Asset Classification and Provisioning have come into effect from the accounting year 31.03.1993.

Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India Financial Institutions viz. IDBI, ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June, 1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for the purpose of Income Recognition and Assets Classification from the accounting year 1995-96. However, guidelines relating to provisioning for RRBs have been made effective from the financial year ended 31.03.1997. The definition of NPAs is also gradually becoming tough for RRBs to cover all advances like Commercial Banks. Although most of-the guidelines relating to RRBs are similar to that of Commercial Banks, they have been made applicable in a phased manner for RRBs.

INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played a crucial role in the socio- economic progress of the country. Banks extend credit to different types of borrowers for many different purposes. For most customers, bank credit is the primary source of available debt financing.

For banks good loans are the most profitable assets. Return comes in the form of loan interest, fee income and investment and the most prominent assumed risk is credit risk. Credit risk involves inability or unwillingness of customer or counterpart to meet commitments in relation to lending once a loan is overdue and ceases to yield income it would become a Non Performing Asset.

Proper management and speedy disposal of NPAs is one of the most critical tasks of banks today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has been a matter of grave concern not only for the banks but also the real economy in general, as

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NPAs can choke further expansion of credit which would impede the economic growth of the country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. NPAs are not therefore the concern of only lenders but also the public at large.

Granting of credit for economic activities is the prime duty of banking. Apart from raising resources through fresh deposits, borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However lending also carries a risk called credit risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the bank’s profitability on a large scale. Though complete elimination of such losses is not possible, but banks can always aim to keep the losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and insurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalized Banks, followed by the SBI group, and the all India Financial Institutions.

DESIGN OF THE STUDY

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TITLE OF THE PROJECT:-

“Reason of burgeoning NPAs and steps to improve recovery mechanism”.

SCOPE OF THE STUDY:-

Scope of my study restricted only to State Bank of India NPAs, Deposits and Advances.

NEED FOR THIS STUDY:-

This study will help to know the recent Norms of NPA. This study helps to know how NPA Causing Problems to Banking Sector and what

might be the solution to overcome from this problem.

OBJECTIVE OF THE STUDY:-

To study the RBI norms on Non Performing Assets, and the various reasons for the existence of huge level of NPA in Indian banking.

To study the various steps taken by the banks to bring down the NPA’s in respective bank branches.

To recommend measures for Improving performance and reduction of Non Performing Assets.

METHODOLOGY:-

1. Primary Data:-Views of the concerned officials were gathered by directly interacting with them, and such data was found very useful while analyzing and drawing conclusions.

2. Secondary Data:- Recent RBI norms of NPA. Press Release and Analyst Presentation of FY 2012-2013. Official web sites of SBI and other websites.

LIMITATION:-

The study is based mostly on secondary data. Data has been drawn from journals, so information may not be complete. For the analysis only the advances and NPA percentages of banks provisions and

contingencies as a whole are taken into consideration.

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INTRODUCTION

It’s a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPA’s) and the issue is becoming more and more

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unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed by Parliament, which is an important step towards elimination or reduction of NPA’s.

MEANING OF NPA:-

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

NPA IN INDIAN BANKING SYSTEM:-

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

In a dynamic world, it is true that new ideas and new concepts that emerge through such changes caused by social evolution bring beneficial effects, but only after levying a heavy initial toll. The process of quickly integrating new innovations in the existing set-up leads to an immediate disorder and unsettled conditions. People are not accustomed to the new models. These new formations take time to configure, and work smoothly. The old is cast away and the new is found difficult to adjust. Marginal and sub-marginal operators are swept away by these convulsions. Banks being sensitive institutions entrenched deeply in traditional beliefs and conventions were unable to adjust themselves to the changes. They suffered easy victims to this upheaval in the initial phase.

Consequently banks underwent this transition-syndrome and languished under distress and banking crises surfaced in quick succession one following the other in many countries. But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in developed capitalist countries particularly in Europe, witnessed a remarkable innovative growth in the banking industry, whether measured in terms of deposit growth, credit growth, growth intermediation instruments as well as in network.During all these years the Indian Banking, whose environment was insulated from the global context and was denominated by State controls of directed credit delivery, regulated interest rates, and investment structure did not participate in this vibrant banking revolution. Suffering the dearth of innovative spirit and choking under undue regimentation, Indian

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banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. Continued political interference, the absence of competition and total lack of scientific decision-making, led to consequences just the opposite of what was happening in the western countries. Imperfect accounting standards and opaque balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive deterioration and structural weakness of the country’s banking institutions to public view. This enabled the nationalized banks to continue to flourish in a deceptive manifestation and false glitter, though stray symptoms of the brewing ailment were discernable here and there.

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

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

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

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

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

Similarly NPA concerns of individual Banks summarized as a whole and expressed as an average for the entire bank cannot convey a dependable picture. It is being statistically stated that bank X or Y has 12% gross NPA. But if we look down further within that Bank there are a few pockets possessing bulk segments of NPA ranging 50% to 70% gross , which should consequently convey that there should also be several other segments with 3 to 5% or even NIL % NPA, averaging the banks whole performance to 12%. Much criticism is made about the obligation of Nationalized Banks to extend priority sector advances. But banks have neither fared better in non-priority sector. The comparative performance under priority and non-priority is only a difference of degree and not that of kind.The assessment of the mix-of contributing factors includes:

1. Human factors (those pertaining to the bankers and the credit customers),2. Environmental imbalances in the economy on account of wholesale changes and also3. Inherited problems of Indian banking and industry.

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

No bank appears to have conducted studies involving a cross-section of its operating field staff, including the audit and inspection functionaries for a candid and comprehensive introspection based on a survey of the variables of NPA burden under different categories of sectoral credit, different regions and in individual branches categorized as with high, medium and low incidence of NPA. We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. Ex-bankers, i.e. the professional bankers who have retired from service, but possess adepth of inside knowledge do not out-pour candidly their views. After three decades of nationalized banking, we must have some hundreds of retired Bank executives in the country, who can boldly and independently, but objectively voice their views. Everyone is satisfied in blaming the others. Bank executives hold willful defaulters responsible for all the plague. Industry and business blames the government policies.

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

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

The credit portfolio of a nationalized bank also includes a number of low-risk and risk-free segments, which cannot create NPA. Small personal loans against banks own deposits and other tangible and easily marketable securities pledged to the bank and held in its custody are of this category. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. Then there is food credit given to FCI for food

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procurement and similar credits given to major public Utilities and Public Sector Undertakings of the Central Government. It is only the residual fragments of Bank credit that are exposed to credit failures and reasons for NPA can be ascertained by scrutinizing this segment.

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

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

Recognizing NPA as a sore throat of the Indian economy, the field level participants should first address themselves to find the solution. Why not representatives of industries and commerce and that of the Indian Banks Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentralization of management in banking sector, and accepting self-discipline and self-reliance? What are the deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In short, the functional staff of the Bank along with the representatives of business and industry has to accept a candid introspection and arrive at a code of discipline in any final solution. And preventive action to be successful should start from the credit-recipient level and then extend to the bankers. RBI and Government of India can positively facilitate the process by providing enabling measures. Do not try to set right industry and banks, but help industry and banks to set right themselves. The new tool of deregulated approach has to be accepted in solving NPA.

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DEFINATION OF NPAs (NON -PERFORMING ASSETS)

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A ‘non performing asset’ was defined as a credit facility in respect of which the interest and / or installment of principal had remained ‘past due’ for a specified period of time.

An amount due under any credit facility is treated as ‘past due’ when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, up gradation of technology in the banking sector, etc, it was decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001. Accordingly, as from that date, a NPA shall be an advance where:

i. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan.

ii. The account remains ‘out of order’ for a period of more than 180 days, in respect of an overdraft/cash credit.

iii. Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agriculture purposes.

iv. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.

With a view to move towards international best practices, it has been decided to adopt the ’90 days’ overdue norm for identification of NPAs, from 31st March, 2004.

‘Out of Order’ Status:-

An account should be treated as ‘out of order’ if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.

‘Overdue’:-

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.

CLASSIFICATION OF NPAs

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Banks are required to classify NPAs further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues:

1. Sub-standard Assets:-A sub-standard asset is one which has remained NPA for a period less than or equal to 18 months. In such cases, the current net worth of the borrower, or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. Such assets will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain a loss.

2. Doubtful Assets:-A Doubtful Asset which has remained NPA for a period exceeding 18 months. It has all the weaknesses inherent to a sub-standard asset with the added characteristic that the collection or liquidation in full – on the basis of currently known facts – is highly questionable and improbable.

3. Loss Assets:-A loss asset is one where a loss has been identified by the bank or, internal or external auditors but the amount has not been written off wholly.

GUIDELINES FOR CLASSIFICATION OF NPAs:-

Broadly speaking, classification should be done taking into account the degree of well defined credit weaknesses and the extent of dependence on collateral security for realization of dues.

Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts.

1. Accounts with temporary deficiencies: These should be classified based on the past recovery records.

2. Accounts regularize near about the balance sheet date: These accounts should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness based on available data, it should be deemed as an NPA.

3. Asset classification should be borrower-wise and not facility-wise: If a single facility to a borrower is classified as NPA, others should also be classified the same way, as it is difficult to envisage only a solitary facility becoming a problem credit and not others.

4. Advances under consortium arrangements: Classification here should be based on the recovery record of the individual member banks.

5. Accounts where there is erosion in the value of the security: If there is a significant (i.e. the realizable value of the security is less than 50% of that assessed by the bank during acceptance) the account may be classified as NPA.

NPA SOME ASPECTS AND ISSUES

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1. The NPAs of banks in India are considered to be at higher levels than those in other countries. This issue has attracted attention of public as also of international financial institutions and has gained further prominence in the wake of transparency and disclosure measures initiated by RBI during recent years.

2. The NPA Management Policy document of SBI lays down to contain net NPAs to less than 5% of banks total loan assets in conformity with the international standard. It is, therefore necessary that as per guidelines provided in NPA Management Policy document, every effort is made at all levels to cut down the NPAs. All this requires greater efforts and teamwork.

3. It is essential to keep a constant watch over the non-performing assets not just to keep it performing but also that once they become non-performing, effective measures are initiated to get full recovery and where this is not possible, the various means are to be initiated to get rid of the NPAs from the branch books.4. NPAs adversely affect the wealth condition of the branch advances as also the profitability of the branch. Some of the reasons for this are as under:

(a) Interest cannot be applied on the loan accounts classified as NPAs.

(b) The Branch has to pay interest to central office on outstanding classified as NPA.

(c) The Branch has to incur cost in supervision and follow up of such advances.

(d) Provision has to be made on NPAs at Bank level.

5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub standard, Doubtful or loss assets.

6. Once the assets are classified as NPA, the Branch Manager has to take all the necessary steps to get the dues recovered there-under to maintain the good health of advances and the higher profitability at the-Branch. This requires management of NPAs in such a Planned and scientific manner that the percentage of NPAs to the total advances will be minimized.

RECOGNITION OF INCOME ON NON-PERFORMING LOANS (NPLS)

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Stricter regulations have been laid down by supervisory authorities in many countries with regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest payments is required on loans that are classified as non-performing [substandard, doubtful and loss].

Any uncollected interest payments on NPLs are considered non-accrued interest. Previously accrued, but uncollected interest is reversed out of income. Failure to do so would overstate income. Uncollected interest is normally put in a memorandum account. NPLs are restored on an accrual basis only after full settlement has been made on all delinquent principal and interest. It would, therefore, be useful, if the accounts carry a footnote, explaining the accounting policies followed with regard to recognition of income on NPLs.

NARSIMHAN COMMITTEES RECOMMENDATIONS

Committee on Financial System (CFS) Narsimhan committee which reported in 1991, meanwhile major changes have taken place in the domestic, economic and institutional science, indicating the movement towards global integration of financial services. Committee has presented second generation reforms.

a) To strength the foundation of financial system.b) Related to this, streamlining procedures, upgrading technology and human resource

development.c) Structural changes in the system.

1. It is recommended that an asset be classified as doubtful if it is in the sub standard category for 18 months in the first instance and eventually for 12 months as loss if it has been so identified but not written off. These norms, which should be regarded as the minimum, may be brought into force in a phased manner.

2. Corporations and FIs should avoid the practice of "ever greening" by making fresh advances to their troubled constituents only with a view to settling interest dues and avoiding classification of the loans in question as NPAs. The committee notes that the regulatory and supervisory authorities are paying particular attention to such breaches in the adherence to the spirit of the NPA definitions and are taking appropriate corrective action.

3. The committee believes that objective should be to reduce the average level of net NPAs for all banks to below 5% by the year 2000 and 3% by 2002. These targets cannot be achieved in the absence of measure to tackle the problem of back long NPAs on one time basis and the implementation of strict prudential norms and management efficiency.

4. . There is no denying the fact that any effort at financial restructuring in the form of having off NPAs portfolio from the books of the corporation or measures to initiate the

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impact of high level of NPAs must go hand with operational restructuring. Cleaning up the balance sheets of banks would thus make sense only if simultaneous steps are taken to prevent of limit the reemergence of new NPAs.

5. . There is no denying the fact that any effort at financial restructuring in the form of having off NPAs portfolio from the books of the corporation or measures to initiate the impact of high level of NPAs must go hand with operational restructuring. Cleaning up the balance sheets of banks would thus make sense only if simultaneous steps are taken to prevent of limit the reemergence of new NPAs.

6. With regard to income recognition in India, income stops occurring when interest/installment of principal is not paid within 180 days. However, we should move towards international Practices in this regard and introduce the norm of 90 days in a phased manner by the 2002.

7. As an incentive to Bank is to make specific provision, the consideration be given to making such provisions tax deductible.

8. Banks should pay greater attention to asset liability management to avoid mismatch and to cover, among others, liquidity and interest rate risks.

9. It should be encouraged to adopt statistical risk management techniques like value at risk in respect of balance sheet term which are susceptible to market price fluctuation, Forex rate volatility and interest rate changes. While the RBI and IDBI may initially, prescribe certain normative models for market risk management, the ultimate objective should be that of building up their models and RBI blacklisting them for their validity on a periodical basis.

10. There is a need for a greater use of computerized system than at present. Computerization has to be recognized as an indispensable tool for improvement in customer service, the institution and operation of better control systems, greater efficiency in information technology.

11. State Financial Corporations at present are over regulated and over administered. Supervision should be based on evolving prudential norms and regulations which should be adhered to rather than excessive control over administrative and other aspects of organization and functioning. Internal audit and internal inspection systems should be strengthened.

12. The main issues with regard to operations of Bank’s are to ensure operational flexibility and measure of competition and adequate internal autonomy in matters of loan sanctioning and internal administration.

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13. This calls for some re-examination and the present relevance of directed credit programme ablest in respect of those who are able to stand on their own feet and to whom the directed credit programmes with the element of interest concessionality that has accompanied has become a source of economic rent. It is recommended that directed credit sector be redefined to comprise the small and marginal farmers, the tiny sector of industry, small business and transport operators, village and cottage industry, rural artisans and other weaker sections. The credit target for this redefined priority sector should hence forth be fixed at 10% of aggregate credit which would be broadly in line with the credit flows to these sectors at present.

14. The committee believes that the balance sheets of banks and FIs should be made more transparent and full disclosure made in Balance sheet. This is to be done in phased manner.

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STATE BANK OF INDIA

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SBI is the largest bank in India with deposits of Rs 12,02,740 crores as on March 31, 2013. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better, improve service levels, provide new delivery

platforms, and improve operating efficiency to counter the threat of competition effectively As of March 31, 2012, the Bank had a network of 20,193 branches, including 5,096 branches of its five associate banks, and emerge as the strongest technology enabled distribution network in India.

SBI provides easy access to money to its customers through more than 27000 ATMs in India. The Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which includes the ATMs of State Bank of India as well as the Associate Banks – State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact money through SBI Commercial and International Bank Ltd by using the State Bank ATM-cum-Debit (Cash Plus) card. 

The increasing integration of SBI with its associate banks (associates) and subsidiaries will further strengthen its dominant position in the banking sector and position it as the country’s largest universal bank.

CONSOLIDATED RESULTS:-

FY13 OVER FY12:

Operating Profit increased from Rs. 40,713 crores in FY12 to Rs. 40,922 crores in FY13.

Net Profit (after minority interest) increased from Rs.15,343 crores in FY12 to Rs. 17,916 crores in FY13.(YOY growth 16.77%)

Earning per Share increased by 10.5% from Rs.242 in FY12 to Rs. 267 in FY13.

SBI STAND ALONE RESULTS:-

HIGHLIGHTS:

Net Profit increased from Rs. 11,707 crores in FY12 to Rs.14,105 crores in FY13 (20.48% YOY growth).

Cumulative Domestic Net Interest Margin continues to be healthy at 3.66%. CASA at 46.50%, Saving Bank Deposits cross Rs. 4 lakh crores.

PROFITABILITY:-

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FY13 OVER FY12:

Total Interest Income increased from Rs 1,06,521 crores in FY12 to Rs 1,19,657 crores in FY13 (12.33%YOY growth).

Interest Income on Advances increased from Rs.81,078 crores in FY12 to Rs. 90,537 crores in FY13 (11.67%YOY growth).

Interest Income on Resource Operation increased from Rs.24,300 crores in FY12 to Rs.27,746 crores in FY13 (14.18%YOY growth).

Total Interest Expenses increased from Rs.63,230 crores in FY12 to Rs.75,326 crores in FY13 (19.13%YOY growth).

Interest Expenses on Deposits increased from Rs.55,644 crores in FY12 to Rs. 67,465 crores in FY13 (21.24%YOY growth).

Operating Expenses increased from Rs.26,069 crores in FY12 to Rs.29,284 crores in FY13 (12.33%YOY growth).

Staff Expenses increased from Rs. 16,974 crores in FY12 to Rs.18,381 crores in FY13 (8.29%YOY growth).

Operating Profit is at Rs.31,082 crores in FY13. Net Profit increased from Rs. 11,707 crores in FY12 to Rs. 14,105 crores in FY13

(20.48% YOY growth).

DEPOSITS:-

Deposits of the Bank increased from Rs 10,43,647 crores in Mar 12 to Rs.12,02,740 crores in Mar 13, a growth of 15.24%.

Savings Bank Deposits increased from Rs.3,59,847 crores in Mar 12 to Rs.4,14,907 crores in Mar 13 (15.30% YOY growth).

ADVANCES:-

Gross Advances increased from Rs 8,93,613 crores in Mar 12 to Rs 10,78,557 crores in Mar 13 (20.70% YOY growth).

Credit Deposit Ratio (Domestic) increased from 78.51% in Mar 12 to 82.42% in Mar 13, an increase of 391 bps.

Large Corporate Advances increased from Rs 1,25,340 crores in Mar 12 to Rs 1,75,831 crores in Mar 13 (40.28% YOY growth).

Mid-Corporate Advances increased from Rs 1,73,381 crores in Mar 12 to Rs.2,04,853 crores in Mar 13 (18.15% YOY growth).

Retail Advances increased from Rs.1,82,427 crores in Mar 12 to Rs 2,09,694 crores in Mar 13 (14.95 % YOY growth).

Home Loans increased from Rs 1,02,739 crores in Mar 12 to Rs 1,19,467 crores in Mar 13 (16.28% YOY growth).

Auto Loans increased by 35.47% YOY from Rs.18,306 crores to Rs.24,800 crores and Education Loans increased by 9.43% YOY from Rs.12,566 crores to Rs.13,751 crores.

pg. 19

SME Advances increased from Rs. 1,63,745 crores in Mar 12 to Rs.1,84,128 crores in Mar 13 (12.45%YOY growth).

Direct Agri Advances increased from Rs.86,281 crores in Mar 12 to Rs.1,08,584 crores in Mar 13 (25.85% YOY growth).

International Advances increased from Rs 1,35,724 crores in Mar 12 to Rs.1,69,065 crores in Mar 13 (YOY growth of 24.57%), with a USD denominated growth of 16.76%.

ASSET QUALITY:-

ASSETS QUALITY SHOULD IMPROVE:

SBI Q4FY13 standalone PAT stood at Rs3299.22 cr (down 18.5% y-o-y and 2.9% q-o-q). The asset quality improved during the quarter. NIMs of the bank declined on y-o-y as well as q-o-q basis. Gross NPAs and Net NPAs have come down to 4.75% and 2.1% compared to 5.3% and 2.6% respectively in Q3FY13. There was increase in the provisions during the quarter which led to degrowth in PAT on a y-o-y basis and q-o-q basis. CASA ratio rose during the quarter on q-o-q basis but was lower on y-o-y basis and stood at 46.5% for Q4FY13.

On a consolidated basis, SBI reported muted 2% y-o-y and 0.5% q-o-q decrease in net interest income to Rs15303.4 cr. Other income de-growth of 30.8% y-o-y to Rs9471.7 crores dragged down the operating profit by 20.4% to Rs9667 crores, which along with increase in provisions (offset by decline in tax rate) led to Consolidated PAT of Rs3817.8 crores, down 24.3% Y-O-Y and 17.9% Q-O-Q.

During FY13, Consolidated RoA remained flat at 0.89% but margins deteriorated as NIM declined to 3.16% from 3.48%, asset quality slipped with Gross NPA at 4.47% against 4.15% and Net NPA at 2.07% against 1.81%.

MANAGEMENT STRATEGIES:-

In retail finance, the bank has leveraged its corporate relationships, pursued business growth selectively, and has not competed based on interest rate. The bank has taken initiatives like on-line tax returns filing and faster transfer of funds to protect its dominant position in the government business. The bank also has a clear technology strategy that will enable it to compete with the new generation private sector banks in customer service and operational efficiency.

BUSINESS DESCRIPTION:-

pg. 20

SBI along with its associate banks offer a wide range of banking products and services across its different client markets. The bank has entered the market of term lending to corporate and infrastructure financing, traditionally the domain of the financial institutions. It has increased its thrust in retail assets in the last two years, and has built a strong market position in housing loans.SBI, through its non-banking subsidiaries, offers a host of financial services, viz., merchant banking, fund management, factoring, primary dealership, broking, investment banking and credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI Life Insurance Company Limited, which is a joint venture with Cardiff S.A., one of the largest insurance companies in France. SBI currently holds 74% equity in the joint venture.

CHALLENGES AHEAD:-

Competition from new private sector and foreign banks remains a key challenge for public sector banks. They need to reorient their staff and effectively utilize technology platforms to retain customers and reduce costs. They also need to fortify their credit risk management systems to mitigate the risks arising from small-ticket lending to the retail, small and medium enterprises, and services segments.

pg. 21

REASONS FOR RISE IN NPAs

FACTORS FOR RISE IN NPAs:-

pg. 22

The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS:-

Ineffective recovery tribunal :-

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.

Willful Defaults :-

There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.

Natural Calamities :-

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans.

Industrial Sickness :-

Improper project handling, ineffective management, lack of adequate resources, lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their Loans reducing their profit and liquidity.

Lack of Demand :-

Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to make provision for it.

Change on Govt. Policies :-

pg. 23

With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. eg. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS:-

Defective Lending process :-

There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of profitability i. Principles of safety by safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers:a. Capacity to payb. Willingness to payCapacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower the banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.

Improper SWOT Analysis :-

The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment. It should collect credit information of the borrowers froma) From bankers b) Enquiry from market/segment of trade, industry, business. c) From external credit rating agencies. Analyze the balance sheet True picture of business will be revealed on analysis of

profit/loss a/c and balance sheet. Purpose of the loan when bankers give loan, he should analyze the purpose of the

loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing.

Poor credit Appraisal System :-

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial Deficiencies :-

pg. 24

The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the: 1. Marketability 2. Acceptability 3. Safety 4. Transferability

The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

Absence Of Regular Industrial Visit :-

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits.

Re loaning Process :-

Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

GUIDELINES BY RBI

pg. 25

Guidelines of Government and RBI for Reduction of NPAs

Broadly speaking, recovery measures could be classified into two categories, namely, legal measures and non-legal measures.

LEGAL MEASURES

1. Lok Adaltas:

Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had recovered Rs. 40.38 crores as on September 30, 2001, through the forum of Lok Adalat. The progress through this channel is expected to pick up in the coming years particularly looking at the recent initiatives taken by some of the public sector banks and DRTs in Mumbai.

2. Debt Recovery Tribunals:

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of more than one Recovery Officer, power to attach defendant's property/assets before judgement, penal provisions for disobedience of Tribunal's order or for breach of any terms of the order and appointment of receiver with powers of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come.

Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals located in five centers viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could decide only 9814 cases for Rs. 6264.71 crores pertaining to public sector banks since inception of DRT mechanism and till September 30, 2001. The amount recovered in respect of these cases amounted to only Rs. 1864.30 crores.

Looking at the huge task on hand, with as many as 33049 cases involving Rs. 42988.84 crore pending before them as on September 30, 2001, I would like the banks to institute appropriate documentation system and render all possible assistance to the DRTs for speeding up decisions and recovery of some of the well collateralized NPAs involving large amounts. I may add that familiarization programmes have been offered in NIBM at periodical intervals to the presiding officers of DRTs in understanding the complexities of documentation and operational features and other legalities applicable of Indian banking system. RBI on its part has suggested to the Government to consider enactment of appropriate penal provisions against obstruction by borrowers in possession of attached properties by DRT Receivers, andnotify borrowers who default to honour the decree passed against them.

pg. 26

3. Circulation of information on defaulters:

The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors/proprietors/partners of these entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds, as on 31st March every year. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. However, they serve as negative basket of steps shutting off fresh loans to these defaulters. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers

4. Recovery action against large NPAs:

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI had advised the public sector banks to examine all cases of willful default of Rs 1 crore and above and file suits in such cases, and file criminal cases in regard to willful defaults. Board of Directors are required to review NPA accounts of Rs. 1 crore and above with special reference to fixing of staff accountability. On their part RBI and the Government are contemplating several supporting measures including legal reforms, some of them I would like to highlight.

5. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and above with the banks and financial institutions. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. As announced by the Hon'ble Finance Minister in the Union Budget 2002-03, RBI has set up a high level Group under the Chairmanship of Shri Vepa Kamesam, Deputy Governor, RBI to review the implementation procedures of CDR mechanism and to make it more effective. The Group will review the operation of the CDR Scheme, identify the operational difficulties, if any, in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient.

6. Credit Information Bureau:

Institutionalization of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system. The main recommendations of the Group include dissemination of information relating to suit filed accounts regardless of the amount claimed in the suit or amount of credit granted by a credit institution as also such irregular accounts where the borrower has given consent for disclosure. This, I hope, would prevent those who take advantage of lack of system of information sharing amongst lending

pg. 27

institutions to borrow large amounts against same assets and property, which had in no small measures contributed to the incremental NPAs of banks.

7. Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working out a proper definition covering such classes of defaulters so that credit denials to this group of borrowers can be made effective and criminal prosecution can be made demonstrative against willful defaulters.

8. Corporate Governance:

A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the Reserve Bank to review the supervisory role of Boards of Banks and financial institutions and to obtain feedback on the functioning of the Boards vis-à-vis compliance, transparency, disclosure, audit committees etc. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and overexposure. The group is finalising its recommendations shortly and may come out with guidelines for effective control and supervision by bank boards over credit management and NPA prevention measures.9. Asset Reconstruction Corporation:

It is proposed to set up ARCs in the private sector to take over NPAs in the public sector banks. The RBI will be the regulator of these ATCs. The ARC will buy NPAs of the banks and financial institutions at the pre-determined discounted value and issue NPA redemption bonds, which carry a fixed return. ARCs are expected to be managed by professionals to effect maximum recovery of NPA, which will help in redemption of bonds after some time. The Finance Ministry has finalized the draft Bill to set up ARCs. Though the proposed scheme seems to be attractive, its success will depend upon the efficiency of DRTs and courts. Further, if ARC is going to depend on the staff deputed by weak banks, its recovery chances are doubtful.

NON-LEGAL MEASURES

1. Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to take steps for arresting the incidence of fresh NPAs and have also been creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. More significant of them, I would like to recapitulate at this stage.

The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. Banks are free to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements with the approval of their Boards, particularly for old and unresolved cases falling under the NPA category. The policy framework suggested by RBI provides for setting up of an independent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinize and recommend compromise proposals.

pg. 28

Specific guidelines were issued in May 1999 to public sector banks for onetime non discretionary and non discriminatory settlement of NPAs of small sector. The scheme was operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crores through compromise settlement under this scheme].

Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crores and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001 helped the public sector banks to recover Rs. 2600 crores by September 2001].

An OTS Scheme covering advances of Rs. 25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal farmers are being drawn up.

2. Reminder System:

The cheapest mode of recovery is by sending reminders to the borrowers before the loan installment falls due. Generally, responses to this arrangement particularly from honest borrowers are encouraging. But efforts need to be strengthened in banks in sending reminders on timely basis.

3. Visit to Borrower’s Business Premise/Residence:

This is a more dependable measure of recovery. Visits need to be properly planned. Involvement of staff at all levels in the bank branch is called for. Costs involved in recovery need to be kept to the minimum. Frequent visits are called for in case of hardcore borrowers. Over the years, it is observed that the number and quality of visits are going down. Consequently, the recovery process is affected.

4. Recovery Camps:

In respect of agricultural advances, recovery camps should be organized during the harvest season. To ensure maximum advantage, recovery camps need to be properly planned. It is also essential to take the help of outsiders, particularly, revenue officers in the state government, local panchayat officials and regional approach to give a wide publicity of the recovery camps to be organized in the local area, mobilize as many farmers as possible and motivate the staff to get involved in the recovery drive.

5. Rephrasing Unpaid Loan Installments:

In respect of small advances, bankers need to be system pathetic in respect of sincere and hardworking borrowers. If such borrowers fail to pay loan installments due to natural calamities or for some other convincing reasons, unpaid loan installments may be replaced/rescheduled. Bankers’ efforts need to be strengthened in the regard.

pg. 29

6. Rehabilitation of Sick Units:

Sick units both in SSI and non SSI sectors should be identified on timely basis keeping in mind the official definitions. Causes of sickness should be genuine. If the project is found viable in terms of Debt Service Coverage Ratio (DSCR), rehabilitation package has to be prepared keeping in mind the broad parameters suggested by the RBI. The package should be implemented at the earliest by the bank and the borrower. Close monitoring of the progress of implementation is called for. There are several success stories on rehabilitation of sick units. But in general, it is observed that the success rate in revival of sickness is discouraging. Further, in the process of financial sector reforms, banks and FIs are hesitant to rehabilitate due to the threat of failure in rehabilitation. Recently, the RBI has permitted banks not to make provision for sick SSI units during the first year of implementation. New guidelines on rehabilitation of sick SSI units will also be issued soon by the RBI. For successful rehabilitation, it is essential to create a sense of urgency on the part of both banks and borrowers. Efforts on the part of the government in terms of concessions, relief’s etc. should be made on timely basis. Understanding between bank and SFCs should be strengthened. Above all, stern action against willful defaulters is called for.

7. Appointment of Professional Agencies for Recovery:

Recently, IBA has worked out certain guidelines for banks on matters concerning the appointment of outside professional agencies whose services can be utilized to ascertain the whereabouts of the borrowers and enforcement of securities. There is some hesitancy on the part of public sector banks in engaging them for recovery purposes due to unpleasant experiences in certain cases. But during the post – VRS scenario, it is suggested to seek such outsourcing. This should be done after examining the credentials of the professionals. It is also essential to keep a constant vigil on their practice.

PROBLEMS LOAN RECOVERY

pg. 30

1. Inadequate security and Erosion in value of security:

Generally, banks tend to find that there is a major gap in the valuation of the security, as carried out at the time of providing the loan and at the time of loan recovery. The value of the security has generally deteriorated over the period and according to experts, it may further deteriorate by almost 10-50% if quick action is not taken for its immediate sale.

2. Political interferences:

Political interference in the day -to-day functioning of public sector banks created a number of problems for them. The populist policies of the national level politicians, such as waiver in repayment only added to these problems.

3. Slow legal procedure:

Before the establishment of DRTs in 1993, the banks had to approach the normal courts to recover their dues. There were provisions under various acts which hampered the smooth takeover and sale of secured assets. The legal process could take years to be completed, with the borrower having ample scope for delaying the takeover of assets. A number of loopholes provided the borrower with opportunities to delay or ignore repayment of loans. During this period, it was said by some unscrupulous businessmen that - "there is no difference between equity and debt – you never have to repay either of them ".

4. Swamping of DRTs with cases:

Once DRTs were established to quicken the pace of recovery procedures, the pace of recovery improved quite a bit. However, the DRTs were soon drowned in the ever increasing number of cases. The pending number of cases with the DRTs increased manifold during the period 1993-2002.

5. Misuse of BIFR/SICA:

This was one of the favorite methods of willful defaulters to delay repayment. If the defaulter's company is declared sick and taken for financial reconstruction under BIFR, it is not possible to undertake any recovery proceeding against the company. The procedure of financial reconstruction can take a number of years together, thereby delaying recovery to a great extent.

6. Transfer of property Act, English mortgage:

Under provisions of Section 69 of Transfer of Property Act, mortgagee can take possession of mortgaged property and sell the same without the intervention of the Court only in the case of English Mortgage. In addition, mortgagee can take possession of mortgaged property where there is specific provision in mortgage deed and it is situated in the towns of Mumbai, Kolkata and Chennai only. In other cases, intervention of the court is required.

However, this is very slow and time consuming process and by the time bank /FI is able to get possession; the asset either does not exist or has become valueless.

pg. 31

LITERATURE REVIEW

pg. 32

According to a study by Brownbridge (1998), most of the bank failures were caused by nonperforming loans. Arrears affecting more than half the loan portfolios were typical of the failed banks. Many of the bad debts were attributable to moral hazard: the adverse incentives on bank owners to adopt imprudent lending strategies, in particular insider lending and lending at high interest rates to borrowers in the most risky segments of the credit markets.

Bloem and Gorter (2001) suggested that a more or less predictable level of non-performing loans, though it may vary slightly from year to year, is caused by an inevitable number of ‘wrong economic decisions by individuals and plain bad luck (inclement weather, unexpected price changes for certain products, etc.). Under such circumstances, the holders of loans can make an allowance for a normal share of non-performance in the form of bad loan provisions, or they may spread the risk by taking out insurance. Enterprises may well be able to pass a large portion of these costs to customers in the form of higher prices. For instance, the interest margin applied by financial institutions will include a premium for the risk of nonperformance on granted loans. At this time, banks’ non-performing loans increase, profits decline and substantial losses to capital may become apparent. Eventually, the economy reaches a trough and turns towards a new expansionary phase, as a result the risk of future losses reaches a low point, even though banks may still appear relatively unhealthy at this stage in the cycle.

According to Gorter and Bloem (2002) non-performing loans are mainly caused by an inevitable number of wrong economic decisions by individuals and plain bad luck (inclement weather, unexpected price changes for certain products, etc.). Under such circumstances, the holders of loans can make an allowance for a normal share of nonperformance in the form of bad loan provisions, or they may spread the risk by taking out insurance.

Petya Koeva (2003), his study on the Performance of Indian Banks. During Financial Liberalization states that new empirical evidence on the impact of financial liberalization on the performance of Indian commercial banks. The analysis focuses on examining the behavior and determinants of bank intermediation costs and profitability during the liberalization period. The empirical results suggest that ownership type has a significant effect on some performance indicators and that the observed increase in competition during financial liberalization has been associated with lower intermediation costs and profitability of the Indian banks.

Das and Ghosh (2003) empirically examined non-performing loans of India’s public sector banks in terms of various indicators such as asset size, credit growth and macroeconomic condition, and operating efficiency indicators. Sergio (1996) in a study of non-performing loans in Italy found evidence that, an increase in the riskiness of loan assets is rooted in a bank’s lending policy adducing to relatively unselective and inadequate assessment of sectoral prospects.

Das (1990) has compared the various efficiency measures of public sector banks by applying data envelopment analysis model and concluded that the level of NPAs significant negative relationship with efficiency estimates.

Verma (1999) has concluded that high level of NPAs leads to operational failure of the bank.

pg. 33

Berger and young (1997) has examined the relationship between problem loan and bank efficiency by employing Granger-causality technique and found that high level of problem loans cause banks of increase spending on monitoring, working out and / or selling off these loans and possibly becomes more diligent in administering the portion of their existing loan portfolio that is currently performing.

Gupta (1997) has also concluded that NPAs on profitability of banks and leads to liquidity crunch and slow down in the growth in GDP etc.

Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit making and six loss making banks and concluded that loss making banks maintained higher NPAs in the loan portfolio which led them to show losses.

Kwan and Eisenbeis (1994) also concluded that there is negative relationship between efficiency and problem loans.

Toor (1994) analysed that poor recovery management leads to reduction in yield on advanced that poor recovery management leads to reduction in yield on advances, reduced productivity loss in the credibility and put detrimental impact on the policies of the banks.

Murthy (1988) has examined that default bring down the return accruing and to them, reduces effective rate of interest and reduces the funds’ recalculation and increase their dependence on external sources thereby increasing the costs.

ACCORDING TO S, RAJ KUMAR (2002) the SARFAESI act and this could primarily use as powerful bargaining tool while negotiating with defaulter. This puts bank on stronger ground in salvaging sticky loan.

pg. 34

RESEARCH METHODOLOGY

Research is defined as “a scientific & systematic search for pertinent information on a specific topic”. Research is an art of scientific investigation. Research is a systemized effort to gain new knowledge. It is a careful inquiry especially through search for new facts in any branch of knowledge. The search for knowledge through objective and systematic method of finding solution to a problem is a research.

PROBLEM STATEMENT:-

The research problems, in general refers to sum difficulty with a researcher experience in the contest of either a particular a theoretical situation and want to obtain a salutation for same. The present Project has been undertaken to do the Problem of NPA in State Bank of India.

RESEARCH DESIGN:-

The present study is descriptive in nature, as it seeks to discover ideas and insight to bring out new relationship. Research design is flexible enough to provide opportunity for considering different aspects of problem under study. It helps in bringing into focus some inherent weakness in enterprise regarding which in depth study can be conducted by management.

SAMPLING DESIGN:-

A sample design is a definite plan for obtaining a sample from the sampling frame. It refers to the technique or the procedure that is adopted in selecting the sampling units from which inferences about the population is drawn. Sampling design is determined before the collection of the data.

pg. 35

DATA COLLECTION:-

PRIMARY DATA:-

SECONDARY DATA: -

The secondary data on the other hand, are those which have already been collected by someone else and which have already been passed through the statistical processes. When the researcher utilizes secondary data then he has to look into various sources from where he can obtain them. For e. g. Books, magazine, newspaper, Internet, publications and reports. In the present study use of secondary data collected from website.

pg. 36

ANALYSIS AND INTERPRETATION

1. GROSS NPA RATIO:

Gross NPA is the sum of the total assets which are classified as the NPA by bank at the end of every year. Gross NPA is the ratio of Gross NPA to Gross Advances. It is expressed in percentage form.

Gross NPA ratio= Gross NPAGross Advances

× 100

YEAR 2008 2009 2010 2011 2012GROSS NPA RATIO 3.04 2.86 3.05 3.28 4.44

Graphical Representation

2006 2008 2010 2012 2014012345

GROSS NPA RATIO

GROSS NPA RATIO

Interpretation:

The gross NPA Ratio of SBI reveals fluctuating trend. The Gross NPA Ratio of SBI was 3.04 in the year 2007 – 08 and then in the year 2008 – 09 declined up to 2.86. In the year 2009 – 10 ratio was increased up to 3.05 and after that increased up to 4.44 in the last year of the study period.

2. NET NPA RATIO:

The Net NPA Ratio is the ratio of net NPA to Net Advances. This ratio shows the degree of risk in bank’s portfolio. Net NPA ratio can be obtain by Gross NPA minus the NPA provisions divided by Net advances.

Net NPA Ratio= Gross NPA−provisionGross Advances−Provision

×100

pg. 37

Gross NPA-Provision=Net NPAGross Advances-Provision=Net Advances

YEAR 2008 2009 2010 2011 2012NET NPA RATIO 1.78 1.79 1.72 1.63 1.82

Graphical Representation

2007 2008 2009 2010 2011 2012 20131.51.61.71.81.9

NET NPA RATIO

NET NPA RATIO

Interpretation:

For SBI, Net NPA Ratio show fluctuating trend during the study period. In the year 2007 – 08 ratio was 1.78 and in the year 2008 – 09 ratio was increased by 0.01. And finally ratio was increased in the year 2011 – 12 i.e., 1.82.

3. PROBLEM ASSETS RATIO:

This ratio is also known as the Gross NPA to Total Assets ratio. This ratio shows the percentage of risk on the total assets of the bank. High ratio means high risk for bank.

Problem Asset Ratio= Gross NPATotal Assets

×100

YEAR 2008 2009 2010 2011 2012PROBLEM ASSETS RATIO 1.78 1.65 1.85 2.06 2.97

Graphical Representation:

pg. 38

2006 2008 2010 2012 201401234

PROBLEM ASSETS RATIO

PROBLEM ASSETS RATIO

Interpretation:

For SBI, Problem Assets Ratio show fluctuating trend during the study period. In the year 2007 – 08 ratio was 1.78 and in the year 2008 – 09 ratio was declined up to 1.62. After then ratio increased in the last three year i.e., 1.85, 2.06, 2.97 respectively.

4. CAPITAL ADEQUECY RATIO

Capital Adequacy Ratio= CapitalRisk Weighted Assets

×100

YEAR 2008 2009 2010 2011 2012CAPITAL ADEQUECY RATIO 13.47 14.29 13.39 11.98 13.86

Graphical Representation:

2006 2008 2010 2012 2014101112131415

CAPITAL ADEQUECY RATIO

CAPITAL ADEQUECY RATIO

Interpretation:

pg. 39

Capital adequacy ratio if SBI shows increasing trend in first two years (2009 – 10 and 2010 – 11). During the 2009 – 10 ratio was 13.39 and in the year 2010 – 11 ratio was declined up to 11.98 and in the year 2011 – 12 ratio was increased by 1.88.

5. SUB-STANDARD ASSET RATIO:

YEAR 2008 2009 2010 2011 2012SUB-STANDARD ASSET

RATIO 42.31 49.96 45.32 44.74 45.70

Graphical Representation:

2006 2008 2010 2012 20143540455055

SUB-STANDARD ASSET RATIO

SUB-STANDARD ASSET RATIO

Interpretation:

The Sub - Standard Assets Ratio of SBI reveals that fluctuating trend during the study period, ratio was highest in the year 2008 – 09 i.e., 49.96 and lowest in the year 2007 –08 i.e., 42.31.

6. DOUBTFUL ASSETS RATIO:

YEAR 2008 2009 2010 2011 2012DOUBTFUL ASSET

RATIO 47.38 40.16 42.74 44.52 46.26

Graphical Representation:

pg. 40

2006 2008 2010 2012 201435

40

45

50DOUBTFUL ASSET RATIO

DOUBTFUL ASSET RATIO

Interpretation:

For SBI, this ratio shows that in the year 2007 - 08 ratio was 47.38 and then in the year 2008 – 09 ratio was declined up to 40.16. After that in the last three year ratio was increased i.e., 42.74, 44.52 and 46.26 respectively.

7. LOSS ASSETS RATIO:

YEAR 2008 2009 2010 2011 2012LOSS ASSET

RATIO10.3

3 9.88 11.94 10.74 8.04

Graphical Representation:

2007 2008 2009 2010 2011 2012 20130

5

10

15LOSS ASSET RATIO

LOSS ASSET RATIO

Interpretation:

The Loss Assets Ratio of SBI shows fluctuating trend during the study period. In the year 2007 – 08 ratio was 10.33 and in the year 2008 – 09 ratio was declined by 0.45. in the last year ratio was decreased up to 8.04.

pg. 41

pg. 42

FINDINGS

1. Gross NPA ratio shows the bank’s credit appraisal policy. High Gross NPA ratio means bank have liberal appraisal policy and vice-versa. In the graph we can see that the ratio has increased from year to year. However it is revels from the chart that bank’s Gross NPA ratio is continuously increasing which is not a positive trend for bank and we can say that bank has not good appraisal system.

2. Net NPA ratio shows the degree of risk in portfolio of bank. High net NPA ratio means banks don’t have enough fund to do provision against the Gross NPA. In State Bank of India the decreased continuously till year 2011 then increased stiffly till end of the year 2012. The Bank’s highest Net NPA ratio is 1.82 and it shows that the degree of risk is high.

When all bank will do provision then Net NPA will become zero but if we want to know the true and fair situation of bank we must consider the Gross NPA of bank.

3. This ratio shows the percentage of risk on the assets of bank. It shows the level of risk on bank’s assets. High ratio shows the high risk on liquidity. From 2008 to 2012 the ratio is continuously increasing except in 2009. So this ratio indicates the level of risk is very high. That Ratio implies that the banks have the highest probability of creating NPA’s in the near future.

4. Each Bank needs to create the capital Reserve to compensate the Non-Performing Assets. The capital adequacy ratio is important for them to maintain as per the regulations. Each Asset has been given a risk weight age as per RBI guidelines

Risk weighted Asset = Asset * Risk are, Bank has to maintain more capital.

5. It will be considered good if the Sub-standard assets ratio is high. High Sub-Standard ratio means more proportion of Sub-Standard asset in the Gross NPA. The Graph shows that the Sub-Standard ratio was increased in 2012 very slightly and it is good sign for bank. As the level of Sub-Standard assets are more the chances of recovery of NPA are high.

6. This ratio shows the percentage of Doubtful assets in the Gross NPA of bank. High Doubtful assets ratio means more proportion of Doubtful asset in the Gross NPA. More Doubtful assets means Bank should take action through recovery policy to reduce the level of Doubtful assets. As the Doubtful assets ratio is high which shows that bank should take quick action to reduce that level. This ratio should be less for the bank.

pg. 43

7. This ratio shows the percentage of loss assets in the Gross NPA of bank. Low loss assets ratio means less proportion of loss asset in the Gross NPA. This should be good for bank. The lower ratio indicates that bank has less or minimum no of fraudulent account and it is good for bank. The bank has taken necessary action to reduce the level of loss assets.

RECOMMENDATION

Credit administration: The banks have to strengthen their credit administrative machinery and put in place effective credit risk management systems to reduce the fresh incidence of NPAs.

Better Inspection: We shall keep a close watch on the manner in which NPA reduction is taking place.

Cash Recovery: We should also insist that cash recoveries should more than offset the fresh write-offs in NPAs.

Financial System: As you are aware, one of the main reason for corporate default is on account of diversion of funds and corporate entities should come forward of avoid this practice in the interest of strong and sound financial system.

Perception: The mindset of the borrowers needs to change so that a culture of proper utilization of credit facilities and timely repayment is developed.

Coordinator: Extending credit involves lenders and borrowers and both should realize their role and responsibilities. They should appreciate the difficulties of each other and should endeavor to work contributing to a healthy financial system.

CONCLUSION

A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Over the years, much has been talked about NPA and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them. There is also a general perception that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs, due to credit to these sectors becoming strictly managers of rural and semi-urban branches generally sanction these loans. In the changed context of new prudential norms and emphasis on quality lending and profitability, mangers should make it amply clear to potential borrowers that banks resources are scare and these are meant to finance viable ventures so that these are repaid on time and relevant to other needy borrowers for improving the economic lot of maximum number of households. Hence selection of right borrowers, viable economic activity, adequate finance and timely disbursement, correct and use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing of minimizing the incidence of new NPAs.

pg. 44

BIBLIOGRAPHY

pg. 45

Bidani, S.N, “Managing Non-Performing Assets in banks”

Kothari, C.R., “Research Methodology”, Revised Second edition, New Age International Publishers, New Delhi, 2006, ISBN no. 81-224-1522-9

Murli, S, “Bank Credit Management”, Himalaya Publishing House, New Delhi, 2008. Das, S.K, “Tits and Bits of General Advances and Financial Services”

Websites:

www.rbi.org.in

www.sbi.co.in

www.economywatch.com

www.allbankingsolutions.com

www.economictimes.com

www.livemint.com

Other Resources

1. Annual reports of the banks2. RBI bulletins and journals3. Financial Magazines

pg. 46