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A CRITICAL STUDY OF NON PERFORMING ASSETS OF

COMMERCIAL BANKS IN MAHARASHTRA AN


INTERSECTORAL COMPARISON
A SYNOPSIS OF THESIS SUBMITTED TO

SHIVAJI UNIVERSITY, KOLHAPUR.

FOR THE DEGREE OF

DOCTOR OF PHILOSOPHY
IN COMMERCE

UNDER THE FACULTY OF COMMERCE


BY

MR. GAJANAN A. BHAKARE

M.Com., M.Phil, B.Ed.,G. D. C.& A

UNDER THE GUIDANCE

DR. V. M. CHAVAN

M.Com., M.Phil, Ph.D., FDPM (IIMA)

DIRECTOR,
BHARATI VIDYAPEETH DEEMED UNIVERSITY

INSTITUTE OF MANAGEMENT, KOLHAPUR

MAY, 2010

1. INTRODUCTION
After the Nationalization of banking sector, the Indian banking and
financial

system

has

made

commendable

progress

in

extending

in

geographical spread and financial reach. The banking industry in India is also
undergoing rapid changes with the introduction of financial sector reforms and
follow-up actions by Reserve Bank of India based on the Narasimham
Committee recommendations.
However before 1990 the Indian banking business was on the way to
dismal performance. Most of the nationalized, private and co-operative sector
banks outwardly were sharing profits, but in reality they were fictitious. As a
result the basic elements of the banking system were getting shattered.
M. Narasimham committee was to examine all aspects relating to the
structure, organization, functions and procedures of the Indian financial
system. Narasimham Committee gave preference to the prudential norms of
income reconstruction, assets classification and provisioning for the advance
portfolio of the banks and recognition of Non -Performing Assets and gradually
strengthening the financial position of banks.

2. STATEMENT OF THE PROBLEM


In a fast changing banking environment of today the very survival
of a banking organization depends on level of the income generated through
optimum use of assets after paying the cost of funds for acquiring them and
other administrative costs involved therein. Once the assets cease to
contribute the income, they are termed as Non Performing Assets, which not
only have cost of funds involved but also require to be operated as per
prudential norms.
One of the major problems being faced by banks and financial
institutions in India is that of bad debts termed as Non Performing Assets
(NPA). There are many reasons for the sorry state of affairs and major among

them are 1) Political interference, 2) Poor enforcement, 3) Archaic laws and


procedures,4) Corruptions at various levels and competition in various banking
institutions. 5) Flow of Funds etc.
After considering the importance of such a strategic affairs in Indian
banking industry it is felt necessary to carry out a study entitled A Critical
Study of Non Performing Assets of Commercial Banks in Maharashtra
An Intersectoral Comparison.

3. OBJECTIVES OF THE STUDY

The study basically aims at establishing a linkage between internal


efforts of bank and financial institution and growth of NPAs. In other words,
growth in NPAs can be checked considerably if bank and financial institutions
have suitable internal arrangements. The profitability of the financial institution
largely depends upon the level of income generated through optimum use of
the assets after paying the cost of funds for acquiring them and other
administrative cost involved therein. Once the assets cease contributing to the
income, they are termed as Non Performing Assets. The study is related to
internal systems, procedures and practices, for monitoring of NPAs and
recovery from the same. The research work has undertaken intersectoral
comparison of NPA of selected banks with the specific objectives, they are as
follows:

1) To examine the nature and the problem of the NPA position in selected
Banks.
2) To study recognized income of the selected banks.
3) To study the classification of assets into different categories of the
selected banks.
4) To examine the advances secured against certain instruments.

5) To make an intersectoral

comparison of NPA and other variables in the

selected banks.
6) To examine the steps taken for recovery in respect of NPA accounts.
7) To make specific recommendations on the basis of research work carried
out.

4. HYPOTHESES OF THE STUDY

1) The loan sanction procedure prevailing in the bank is prominent causing


factor for increasing NPA in cooperative and private commercial banks.
2) Increasing NPA has affected on survival of the bank.
3) Asset classification can be modified for minimizing NPA provisions.
4) The management of NPA is done more effectively by private sector banks
as compared to cooperative sector banks.

5. RESEARCH METHODOLOGY ADOPTED


Present thesis is outcome of research conducted by researcher
adopting survey method. A survey research is usually based on the sample
survey or census survey. The present work uses the sample survey method,
details of which are given belowUniverse
For the sample survey universe is 27 private sector scheduled
commercial banks and 57 urban co-operative banks presently functioning in
Maharashtra and three banks from each of the sectors situated in Pune,
Satara and Kolhapur Districts have been selected on the basis of
convenience for study in hand.

Sampling of banks
The number of
which

total

scheduled commercial banks in India is 57, in

Public Sector Banks are 27 and Private Sector Banks are 30. On the

other hand there are 73 co-operative scheduled banks in India out of which 30
banks are in Maharashtra. The study covers 3 banks from each of the sectors
on convenience sampling basis aggregating 11.11% private sector banks and
10% cooperative sector banks functioning in Maharashtra.
Sample Size
Banks
Private Sector

India
57

%
43.85

Maharashtra
27

%
47.36

Sample
3

%
11.11

Co-operative

73

56.15

30

52.63

10.00

Sector
Total

130

57

The private sector banks selected are:


1) The United Western Bank Ltd., Satara
2) The Ratnakar Bank Ltd., Kolhapur
3) The Ganesh Bank of Kurundwad Ltd., Kolhapur.
The cooperative sector banks selected for the purpose of study are:
1) The Karad Urban Cooperative Bank Ltd., Karad
2) The Ichalkaranji Janata Sahakari Bank Ltd. Ichalkaranji
3) Janata Sahakari Bank Ltd., Pune.

While deciding selection of banks, the researcher has also seen that
those banks should be large in size and growth, and establishment. All the
banks selected have more than 45 years of length of operations and all have
received Audit Class A for their banking operations. As the head offices of
the banks are situated in Western Maharashtra data collection was
convenient for the researcher.

6) DATA COLLECTION
For the study in hand primary and secondary data have been utilized:
I) Primary Data: The primary data is collected through questionnaire
administered to CEOs, AGMs, Branch Managers and NPA borrowers of the
banks covered under the study.
Break-up of Responses of Sampled Employees
No of
Name of banks

employees

CEO

AGM

Interviewed

Branch
Manager

Borrowers
And
others

Private Sector
The Ratnakar Bank Ltd
The United Western Bank Ltd
The Ganesh Bank of
Kurundwad Ltd

12
14

1
1

2
4

4
2

5
7

16

10

10

18

16

31

Co-operative Sector
The Ichalkaranji Janata
Sahakari Bank ltd
The Karad Urban co- op Bank
Ltd

Janata Shakari Bank Ltd

Total

71

In the same manner some opinions of the respondents mentioned


earlier were collected through personal discussions and their comments on
views of the researcher. Some amount of data was also collected from
inspection of record.

II) Secondary Data: Since the study is related to financial problem concerning
banks it was obvious to rely on the secondary data in the published form which
is extensively used for the purpose of the study in hand. Annual Reports from
1998 to 2007, bank publications, circulars, RBI notifications as to NPA
Accounts,

RBI

Publications

and

guidelines

on

NPA,

NPA

Reports,

classification of assets by RBI etc. This process is further supplemented by

extensive library research reviewing news papers, periodicals, magazines,


articles on NPA etc.
From the analysis of annual reports standard assets, sub standard
assets, doubtful assets, loss assets, net advances and net NPA amounts of
the sample banks covered under study for the period 1998 to 2007 have been
calculated and analyzed and interpreted for the purpose of study.
7) STATISTICAL TOOLS UTILIZED:
Entire data related to NPA is financial in nature which required careful
scrutiny for which relevant statistical tools have been utilized as per the need of
the study1) Percentages and
2) Comparative statements
8) SCOPE AND LIMITATIONS OF THE STUDY:
The scope of the study is restricted to the selected banks and the area
specified in methodology. The geographical limit of the study confined to three
districts of Western Maharashtra i.e. Pune, Satara and Kolhapur. Unfortunately
some banks were merged into some other banks which has caused a major
hurdle in data collection and has hampered the research work. As researcher
is a junior level bank employee; time remained a major constraint at all phases
of the study. Time limit was confined to 31st March 1998 to 31st March 2007.

9) CHAPTER SCHEME
The entire research work is divided in Seven Chapter

Chapter I

Research Methodology: Introduction, Statement of the

Problem, Objectives of the study, Hypotheses of the Study, Methodology,


Data Collection, Statistical Tools Utilized, Scope and Limitations of the study
and detailed Chapter Scheme.

Chapter II

Conceptual Background and

Review

of Literature:

Conceptual Background, Meaning and Definitions of NPA, RBI Guidelines for


NPA Norms, Suggestion of various guidelines of RBI, Review of Literature,
Conclusion.
Chapter III Profile of the Sample Banks: Introduction, The United
Western Bank Ltd., Satara, The Ratnakar Bank Ltd., Kolhapur, The Ganesh
Bank of Kurundwad Ltd., Kolhapur, The Karad Urban Cooperative Bank Ltd.,
Karad , The Ichalkaranji Janata Sahakari Bank Ltd. Ichalkaranji, The Janata
Sahakari Bank Ltd., Pune, Consolidated Performance of Private Sector
banks, Consolidated Performance of Cooperative Sector banks, Conclusion.

Chapter IV Analysis of Recovery of Non Performing Assets:


Introduction, Analysis of Legal Mechanism, Analysis of Legal Expenses
Incurred for Recovery, Factors responsible for NPAs of Selected Banks,
Classification of Assets of selected Banks, NPA Writeoff In respect of
selected banks, Financial Position of selected Banks, Conclusion.

Chapter V Analysis of NPA in Selected Sample of Banks: Introduction


Gross NPAs to Gross Advances Ratio, Net NPA to Net Advance, Gross NPAs
and Net NPAs to Total Assets, Conclusion.

Chapter VI Inter Sectoral Comparison of Selected Banks: Introduction,


Sectoral Comparison of Classification of Assets, Sectoral Comparison of
Recovery Mechanism, Sectoral comparison of NPA provision on profit,
Conclusion.
ChapterVII Observations, Recommendations and Conclusion of the
Study: Observations of the study, Recommendations made by the researcher,
Suggestions offered and Conclusion.

10) OBSERVATIONS OF THE STUDY


Based on the data analysis of selected banks from both the sectors the
researcher made the following observations1) According to the feedback from most senior Bank officers diverted use
of funds and willful Defaults are the major factors contributing to NPAs
in the banks from both the sectors.
2) The assets classification of NPAs showed that the net NPA in respect
of WB ranges between 4.83% and 10.72 % of net advances and on
account of this position the bank was merged into IDBI bank.
3) Relatively private sector possesses more standard assets as compared
to Co-operative sector. In Co-operative sector lowest standard assets
are observed in Janata Sahakari Bank Ltd. Pune.
4) The provisioning for the standard assets has been practiced by both
the sector banks. The Private sector banks implemented provisioning
from1998 whereas Co-operative sector initiated the same from 2001.
5) The two private sector banks i.e. GB and UWB merged in to Federal
Bank and IDBI Bank respectively due to high degree of NPA and
continuous losses incurred for successive three years besides failure to
maintain a capital base of Rs. 300 Corers as prescribed by RBI.
6) It is observed that NPAs have affected on profitability of both the
sector banks which is causal factor for vanishing them from the market.
7) As per RBI circular DBS- CO PPBC 9/11/01. 05-2002-2003 Dated
21st Dec. 2002 declared that action will be imposed upon the banks
which will fail to reduce NPAs upto 10% but not above 15%. In C-

operative sector Janata Sahakari Bank Pune found to be weak bank


and it was merged into Ratnagiri Co-operative Bank. In case of Private
sector banks GB and UWB were loss incurring banks having less than
Rs. 300 corers capital base

and were merged into Federal Bank and

IDBI respectively.
8) The performance of Co-operative banks in regards to gross NPA to
gross advances is not satisfactory as compared to private sector banks
covered under study.
9) High net NPA ratio is indicator of high risk. The ideal ratio of Net NPA
to Net Advances should not cross 3%. The intersectoral comparison
observed that both the sectors do not have ideal net NPA ratio.
10) The Private sector banks selected for the study performed better than
Co-operative banks with a ratio of 9.04%

Net NPA to Net Advances.

It is 12.85 % in Co-operative sector banks indicated weak performance.


11) The percentage of Gross NPA to total asset is 6% in Private Sector
banks covered under study which is 26.13% in case of Co-operative
sector banks.
12) According to RBI guidelines net NPA should not be in excess of 3% of
net advances. In case of the banks from both the sectors it is observed
that NPAs were higher than 3%.
13) The minimum recovery is observed on loans advanced to the friends
and relatives of Directors and Officers of the banks which could have
been recovered effectively through legal mechanism but unfortunately
this could not happen.
14) The recovery management found to be effective in Private sector
banks in comparison with Cooperative sector banks.

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15) Both the sector banks have improved their recovery management from
2001 and credit of this change goes to the second reforms of
Narshimham Committee Report.
16) In comparison with Private sector the cost of legal expenses of Cooperative sector is lower. Constantly without any exception; cost of
legal expenses of Co-operative sector ranged between 0.1% to 0.32%
indicating practice of not opting for legal mechanism. The cost incurred
by private sector is much higher and results are much better.

11) RECOMMENDATIONS OF THE STUDY


On the basis of the study conducted researcher has offered a set of
recommendations as underA) Recommendations for Head Offices of the Selected Banks
1) The loan application form is the basic document from which creditability
and credit worth of the borrower could be judged, this document be
developed with due care, get filled in properly; communicating all the
rules and regulations, penalties

in case of non payments to the

borrowers.
2) An account does not become an NPA overnight. The account gives
enough number of signals of the impending problems and banker
should be alert to catch these signals for quick analysis, react on the
same promptly and take corrective actions.
3) While making distinction between Standard and Sub-Standard
categories of assets, potential NPAs be assessed and recovery
attempts be made carefully.

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4) If the fresh NPA is increasing it is indication of the failure of NPA


management of the bank therefore fresh NPA level be kept at minimum
level.
5) The loans advanced to the friends and relatives of Directors and
officers can be effectively recovered through OTS, Compromise and
write-off mechanism. This task can effectively be done involving the
recommending authorities of the bank.
6) One Time Settlement, compromise and writeoff powers should be
assigned to the branch manager up to a minimum limit of amount this
will help to take immediate actions and resultantly NPA level will be
minimum.
7) While sanctioning a loan Quality assets of the borrower be assessed
carefully so that at the time of recovery if circumstances compel it can
be liquidated and advanced loan can be recovered. If required the
present loan sanctioning policy be modified to avoid losses affecting
profitability of the bank. This procedure be followed strictly in
cooperative sector as private sector is already strict as compared to
cooperative.
8)

To achieve better recovery in both the sectors separate legal


departments be developed and constant follow-up of cases be made
by filling suits, appointing of good advocates and time to time reporting
to management.

9) It is recommended for both the sectors the rescheduling of NPA


accounts should be arranged through installments of principal along
with interest.

This will result in increase in standard accounts and

decrease in NPA accounts.


10) The banks under study should adopt new recovery policy and different
schemes for example interest rebate, cut of interest with specific
12

period, loan mela, resettlement package etc. and they should also
resort to strong- arm technique for loan recovery. This will minimize
NPAs.
11) Recovery of NPAs is delicate matter. Hence need to have a team of
duly trained employees with adequate experience and equipped with
updated knowledge in the field of banking laws and practices, means
SARFACI, Suit filing, DRT Compromise etc. Even clerical staff involved
in this work needs proper orientation of the task.
12) It is recommended that banks in both the sectors should avoid to go
for private recovery agents for collecting dues.
13) In order to bring down the level of overall NPA present capital
adequacy norms should be reduced.
14) The bank should develop continuous relationship with the borrowers
and prefer to give silent listening to the problems and guide them in
their hard time to get proper cooperation in recovery.
B) Recommendations to Branch Offices of Selected Banks:
1) In case of cash credit monthly stock statement of the borrower should
be collected by the banks in all sectors and in case of term loans
personal visit to the site be paid to verify physical presence of the
assets. This should be done by the branch office of every bank.
2) In order to identify potential NPAs continuous scrutiny of the accounts
be undertaken and weak accounts be attended in time to avoid further
complications in the recovery.
3) The realistic picture of the NPA be communicated to the head office in
time. It is a practice in both the sectors to hesitate to give realistic view
of NPA in the branches.
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4) In case of fresh NPA attempt should be made to convert the account in


standard

account

by

extending

additional

credit

facility,

and

rescheduling. This will prevent the account to become NPA.


5) The borrowers be contacted by the branch offices in both the sectors
continuously to maintain minimum level of new NPA account and old
NPA account by applying their convincing skills.
6) The borrowers who are not ready for compromise as per the formula
offered by bank be taken to the court of law for legal proceedings.
7) The cases already pending in the court be given necessary follow up
under able legal guidance.
8) The staff members of the banks be offered suitable incentives for
converting NPA into standard accounts and recovery made.
9) RBI recommends that even one account out of more accounts is under
NPA in that case all accounts of same customers be treated as NPA
even though they are standard accounts. This norm be applied strictly
in all branches. This will dilute the lethargy in repayment of the loan.
10) The branch office should maintain the master list of NPA accounts with
all relevant information.
11) The banks should go for branch wise periodical recovery camps and
best performing banks be awarded with cash and non cash prizes.
12) The diverted use of funds is one of the major causes observed in the
study can be avoided by transferring the amount advanced directly to
the account of vendor-suppliers of the assets for which loans are
granted.

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13) In both the sectors the problem of big defaulters is serious therefore
legal action against such borrower be taken immediately under able
guidance without loosing time.
C) Suggestive Model for RBI:
1) Banks have been taking legal and un legal steps for making the
provisions as per the directives issued by the RBI time to time in this
context the researcher has recommended that the banks should adopt
the following policy to solve the NPA problem at bank level by making
provisions on the principal outstanding a) No provision requirement on standard assets.
b) Banks have to make the additional provision over one year
period under the head sub-standard additional provision with
minimum of 20 percent each year.
c) Assets classification and provision for non performing
advances as underAssets Classification
Standard Assets
Sub- standard Assets

Outstanding / Irregular

Provision

Installment

Requirement

Regular installment paid or due


for not more than 90days.

No provision

a) 3 months to 12 month

10%

b) 13 months to 36 month

depend upon value of

I ) 12 months

security

ii) 12 months

Secured

and

loan

.20%

75%

unsecured loan 100%


Secured

Loss Assets

loan

25%

loss assets

unsecured loan 100%


Secured loan 100%

has been identified by the bank

unsecured loan 100%

36 months treated

internal or by the external or by


co-operative department or by the
amount

has

not

wholly and partly

15

written-

off

It is clear that in the model NPAs total provision period is considered for
30 months instead of 60 months. Here only three step assets classification and
provision on the principal outstanding have been suggested. In this way banks
can make minimum provision of NPAs and higher level of profit without
compromising with financial help of the bank.
CONCLUSION
Non Performing Assets are universal problem for all banks irrespective
of the sector. It is a loss and is inevitable for every business including banking. It
originates from lethargy in sanction of loans and failure in a recovery. In the
study undertaken it is found the major loss on account of NPA is caused by
cooperative sector as compared to private sector where lethargy is a common
phenomenon. Though some of the cooperative banks have done better business
in past suffered NPAs on account of mergers of few other banks which were
financially weak and this affected on the financial position of the strong bank
(taking over bank). There are common characteristics which are responsible for
NPAs in selected banks due to diverted use of funds advanced, willful defaulters,
lack of supervision, political interference, weak legal support, outside pressures,
internal and external economic causes, faults in determining quality of bank
assets and fraudulent attitude of top management/officers. It is also observed
that two banks are merged in other banks due to such practices. Thus NPA is a
threat to the existence of bank. Default on account of big borrowers is a problem
in recovery for private sector but such borrowers are less in number in the
sample cooperative banks.
The quality of standard assets is important factor in determining NPA. In
private sector this quality is purposefully maintained. This process starts from
sanctioning of loans against proper securities, vigil on use of funds advanced,
constant follow up on repayments delayed, visit of bank officers, efficient use of
legal mechanism if required, which strengthen recovery process and ultimately
resulted in lower level of NPA. In cooperative sector it is observed that a liberal
view in the process of sanctioning loan, weak follow up and very limited use of
legal mechanism registered very low results in the process of recovery and
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NPAs found at higher level indicating low profitability as compared to private


sector. This indicates that the cooperative sector should adopt professional
banking management and sacrifice liberal banking resulting into problems like
NPA.
In cooperative sector controlling is exercised by NABARD, Cooperative
Department of the State Government and RBI. To large extent this causes
overlapping directives. In private sector only RBI exercises the control and
issues uniform directives. As the directives are coming from only one source it is
possible for private sector banks to act upon. This is reflected in their
performances and in sector wise comparison of the banks under study. The NPA
performances of private sector banks are better than cooperative sector banks.
The recovery management, legal mechanism found to be efficient in private
sector banks as compared to cooperative sector banks.

Mr. Gajanan A. Bhakare

Dr. V. M. Chavan

Research Student

Research Guide

17

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