Professional Documents
Culture Documents
Foreign Banks
Submitted in partial fulfilment of the requirements for the award of the Degree
of
MASTER OF BUSINESS ADMINISTRATION
Under the guidance of:
Dr. Matloob Ullah Khan
Submitted By:
Rameez Tassaduq
DEPARTMENT OF MANAGEMENT STUDIES
Faculty of Management Studies and Information Technology
JAMIA HAMDARD University
PREFACE
Granting of credit facilities for economic activities is the primary task of banking. Apart from
raising resources through fresh deposits, borrowings, etc. recycling of funds received back from
borrowers onstitutesc a major part of funding credit dispensation activities. Non-recovery of
installments as also interest on the loan portfolio negates the effectiveness of this process of the
credit cycle. Non-recovery also affects the profitability of banks beside being required to maintain
more owned funds by way of capital and creation of reserves and provisions to act as cushion for
the loan losses. Avoidance of loan losses is one of the pre-occupations
of management of banks. While complete elimination of such losses is not possible, bank
managements aim to keep the losses at a low level. In fact, it is the level of non-performing
advances, which, to a great extent, differentiates between a good and a bad bank. Mounting NPAs
may also have more widespread repercussions. To
avoid shock waves affecting the system, the salvaging exercise is done by the Government or by the
industry on t he behest of Government/ central bank of the country putting pressure on the
exchequer.
In India, the NPAs, which are considered to be at higher levels than those in other countries, have,
of late, attracted the attention of public as also of international
financial institutions. This has gained further prominent in the wake of transparency and
disclosure measures initiated by the RBI during recent years.
This project aims at providing an overall view on the existence of NPAs,their
treatment, the ways at resolving this issue and also a few reports on the recent developments in this
field.
ACKNOWLEDGEMENT
First of all I would like to take this opportunity to thank my College for having
projects as a part of the MBA Program.
I wish to express my heartfelt gratitude to the following individuals who have played a
crucial role in the research for this project. Without their active cooperation the
preparation of this project could not have been completed within the specified time limit.
The first person I would like to acknowledge is my guide Dr. Matloob ullah
Khan,who supported me throughout this project with utmost co-operation and patience.
I am very much thankful to you sir, for sparing your precious and valuable time for me
and for helping me in doing this project.
Finally, to all my friends who helped me in making this project. I want to thank
them for all their help, support, interest and valuable hints.
Sr.
TOPICS
No.
1.
Pg.
No.
Introduction to NPAs
1-27
Meaning of NPA
Asset Classification
Types of NPA
8
10
Early Symptoms
11
13
Procedure
of
NPA
Identification
Resolutions in India
&
16
2.
28
3.
Research Methodology
29
4.
Analysis
31-58
5.
Hypothesis Testing
59-64
6.
Overall Findings
65
7.
Conclusion
66
8.
Suggestion
67
9.
Bibliography
68
INTRODUCTION TO NPA
MEANING OF NPA:
Non-Performing Asset means an asset or account of borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by RBI.
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 improvement in the payment and settlement
systems, recovery climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as
from that date, a Non performing asset (NPA) shell 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(OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iv.Interest and/ or installment of principal remains overdue for two harvest seasons but for
a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
With a view to moving towards international best practices and to ensure greater transparency,
it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the
year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a nonperforming asset (NPA) shell be a loan or an advance where;
i. Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC),
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iii. The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv.Interest and/ or installment of principal remains overdue for two harvest seasons but for
a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
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ASSET CLASSIFICATION:
Assets are classified into following four categories:
Standard Assets:
Sub-standard Assets
Doubtful Assets
Loss Assets
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this
case the arrears of interest and the principal amount of loan do not exceed 90 days at the
end of financial year. If asset fails to be in category of standard asset that is amount due
more than 90 days then it is NPA and NPAs are further need to classify in sub categories.
Provisioning Norms:
From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Contingent Provisions against Standard Assets' under 'Other
Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.
Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
reasonability of the dues:
1) Sub-standard Assets
2) Doubtful Assets
3) Loss Assets
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Sub-standard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained
NPA for a period less than or equal to 12 month. The following features are exhibited by
substandard assets: the current net worth of the borrowers / guarantor or the current
market value of the security charged is not enough to ensure recovery of the dues to the
banks in full; and the asset has well-defined credit weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.
Provisioning Norms:
A general provision of 10 percent on total outstanding should be made without making
any allowance for DICGC/ECGC guarantee cover and securities available.
Doubtful Assets:
A loan classified as doubtful has all the weaknesses inherent in assets that were classified
as sub-standard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently known facts, conditions and values highly
questionable and improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if it remained
in the sub-standard category for 12 months.
Provisioning Norms:
100 percent of the extent to which the advance is not covered by the realisable value of
the security to which the bank has a valid recourse and the realisable value is
estimated on a realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the
period for which the asset has remained doubtful:
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Provision
considered as doubtful
requirement (%)
Up to one year
20
30
31, 2005.
2006.
April 1, 2004.
31, 2007.
Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12
months over a four year period commencing from the year ending March 31, 2005,
with a minimum of 20 % each year.
Loss Assets:
A loss asset is one which considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted- although there may be some salvage or
recovery value. Also, these assets would have been identified as Loss assets by t he
bank or internal or external auditors or the RBI inspection but the amount would not have
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Provisioning Norms:
The entire asset should be written off. If the assets are permitted to remain in the books
for any reason, 100 percent of the outstanding should be provided for.
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TYPES OF NPA:
1. Gross NPA
2. Net NPA
Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss
assets. It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs
Gross Advances
Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burdenof banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross
and net NPA is quite high.
It can be calculated by following:
Net NPAs = Gross NPAs Provisions
Gross Advances - Provisions
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Internal factors:
1) Funds borrowed for a particular purpose but not use for the said purpose.
2) Project not completed in time.
3) Poor recovery of receivables.
4) Excess capacities created on non-economc costs.
5) In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6) Business failures.
7) Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc.
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and followups, delaying settlement of payments\ subsidiaries by government bodies etc.,
External factors:
1) Sluggish legal system
Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5) Failures, nonpayment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6) Government policies like excise duty changes, Import duty changes etc.,
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The RBI has summarized the finer factors contributing to higher level of NPAs in the
Indian banking sector as:
Diversion of funds, which is for expansion, diversification, modernization, undertaking
new projects and for helping associate concerns. This is also coupled with
recessionary trends and failures to tap funds in capital and debt markets.
Business failures (such as product, marketing etc.), which are due to inefficient
management system, strained labour relations, inappropriate technology/ technical
problems, product obsolescence etc.
Recession, which is due to input/ power shortage, price variation, accidents, natural
calamities etc. The externalization problems in other countries also lead to growth of
NPAs in Indian banking sector.
Time/ cost overrun during project implementation stage.
Governmental policies such as changes in excise duties, pollution control orders etc.
Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation,
promoters/ directors disputes etc.
Deficiency on the part of banks, viz, delays in release of limits and payments/
subsidies by the Government of India.
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IMPACT OF NPA:
Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong choice
of client. Because of the money getting blocked the prodigality of bank decreases not only
by the amount of NPA but NPA lead to opportunity cost also as that much of profit
invested in some return earning project/asset. So NPA doesnt affect current profit but
also future stream of profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead
to borrowing money for shortest period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to
lack of money. Routine payments and dues.
Involvement of management:
Time and efforts of management is another indirect cost which bank has to bear due to
NPA. Time and efforts of management in handling and managing NPA would have
diverted to some fruitful activities, which would have given good returns. Now days
banks have special employees to deal and handle NPAs, which is additional cost to the
bank.
Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of
market credit. It will lose its goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks.
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EARLY SYMPTOMS:
By which one can recognize a performing asset turning in to
non-performing asset
Four categories of early symptoms:1) Financial:
Non-payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that partial amount is diverted to
sister concern or parent company.
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3) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.
4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
12
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Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that affects a borrowing units
fortunes. A bank may commit additional finance to an aling unit only after basic viability
of the enterprise also in the context of quality of management is examined and confirmed.
Where the default is due to deeper malady, viability study or investigative audit should be
done it will be useful to have consultant appointed as early as possible to examine this
aspect. A proper techno- economic viability study must thus become the basis on which
any future action can be considered.
Multiple Financing:
During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks/ FIs as also sharing of all relevant
information on the borrower would go a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.
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In some default cases, where the unit is still working, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch
bankers once they default, for fear of getting their cash flows forfeited), and ensure
that such cash flows are used for working capital purposes. Toward this end, there
should be regular flow of information among consortium members. A bank, which is
not part of the consortium, may not be allowed to offer credit facilities to such
defaulting clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit Information
Bureau of India Ltd.(CIBIL) may be very useful for meaningful information
exchange on defaulting borrowers once the setup becomes fully operational.
In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender
may have a much shorter timeframe in mind. So it is possible that the letter categories
of lenders may be willing to exit, even a t a cost by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into
account.
Corporate Debt Restructuring mechanism has been institutionalized in 2001 t o
provide a timely and transparent system for restructuring of the corporate debt of Rs.
20 crore and above with the banks and FIs on a voluntary basis and outside the legal
framework. Under this system, banks may greatly benefit in terms of restructuring of
large standard accounts (potential NPAs) and viable sub-standard accounts with
consortium/multiple banking arrangements.
15
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borrowable account. As a part of this contact he is also expected to conduct scrutiny and
activity inspections. In the credit monitoring process, the responsibility of monitoring a
corporate account is vested with Relationship Manager/Credit Officer.
Know your client' profile (KYC)
Most banks in India have a system of preparing `know your client' (KYC) profile/credit
report. As a part of `KYC' system, visits are made on clients and their places of
business/units. The frequency of such visits depends on the nature and needs of
relationship.
Credit Rating System
The credit rating system is essentially one point indicator of an individual credit exposure
and is used to identify measure and monitor the credit risk of individual proposal. At the
whole bank level, credit rating system enables tracking the health of banks entire credit
portfolio. Most banks in India have put in place the system of internal credit rating. While
most of the banks have developed their own models, a few banks have adopted credit
rating models designed by rating agencies. Credit rating models take into account various
types of risks viz. financial, industry and management, etc. associated with a borrowable
unit. The exercise is generally done at the time of sanction of new borrowable account and
at the time of review renewal of existing credit facilities.
Watch-list/Special Mention Category
The grading of the bank's risk assets is an important internal control tool. It serves the
need of the Management to identify and monitor potential risks of a loan asset. The
purpose of identification of potential NPAs is to ensure that appropriate preventive /
corrective steps could be initiated by the bank to protect against the loan asset becoming
non-performing. Most of the banks have a system to put certain borrowable accounts
under watch list or special mention category if performing advances operating under
adverse business or economic conditions are exhibiting certain distress signals. These
accounts generally exhibit weaknesses which are correctable but warrant banks' closer
attention. The categorization of such accounts in watch list or special mention category
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2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various
resolution mechanisms introduced in the recent past which include the SRFAESI Act, one
time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs. From
the data available of Public Sector Banks as on March 31, 2003, there were 1,522
numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50 million
in all the public sector banks in India. The total gross value of these NPAs amounted to
Rs. 215 billion. The total number of resolution approaches (including cases where action
is to be initiated) is greater than the number of NPAs, indicating some double counting. As
can be seen, suit filed and BIFR are the two most common approaches to resolution of
NPAs in public sector banks. Rehabilitation has been considered/ adopted in only about
13% of the cases. Settlement has been considered only in 9% of the cases. It is likely to
have been adopted in even fewer cases. Data available on resolution strategies adopted by
public sector banks suggest that Compromise settlement schemes with borrowers are
found to be more effective than legal measures. Many banks have come out with their
own restructuring schemes for settlement of NPA accounts. State Bank of India, HDFC
Limited, M/s. Dun and Bradstreet Information Services (India) Pvt. Ltd. and M/s. Trans
Union to serve as a mechanism for exchange of information between banks and FIs for
curbing the growth of NPAs incorporated credit Information Bureau (India) Limited
(CIBIL) in January 2001. Pending the enactment of CIB Regulation Bill, the RBI
constituted a working group to examine the role of CIBs. As per the recommendations of
the working group, Banks and FIs are now required to submit the list of suit-filed cases of
Rs. 10 million and above and suit filed cases of willful defaulters of Rs. 2.5 million and
above to RBI as well as CIBIL. CIBIL will share this information with commercial banks
and FIs so as to help them minimize adverse selection at appraisal stage. The CIBIL is in
the process of getting operationalised.
3. Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default and diversion
and siphoning of funds. As per these guidelines a willful default occurs when a borrower
defaults in meeting its obligations to the lender when it has capacity to honor the
obligations or whenfunds have been utilized for purposes other than those for which
finance was granted. The list of willful defaulters is required to be submitted to SEBI and
RBI to prevent their access to capital markets. Sharing of information of this nature helps
banks in their due diligence exercise and helps in avoiding financing unscrupulous
elements. RBI has advised lenders to initiate legal measures including criminal actions,
wherever required, and undertake a proactive approach in change in management, where
appropriate.
infrastructure.
Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987
helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counseling between the
parties and to reduce burden on the court, especially for small loans. Cases involving suit
claims up to Rs. l million can be brought before the Lokadalat and every award of the
Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any
court against the award made by the Lokadalat. Several people of particular localities
various social organizations are approaching Lokadalats which are generally presided over
by two or three senior persons including retired senior civil servants, defense personnel
and judicial officers. They take up cases which are suitable for settlement of debt for
certain consideration. Parties are heard and they explain their legal position. They are
advised to reach to some settlement due to social pressure of senior bureaucrats or judicial
officers or social workers. If the compromise is arrived at, the parties to the litigation sign
a statement in presence of Lokadalats which is expected to be filed in court to obtain a
consent decree. Normally, if such settlement contains a clause that if the compromise is
not adhered to by the parties, the suits pending in the court will proceed in accordance
with the law and parties will have a right to get the decree from the court. In general, it is
observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect
the concerned borrowers willing to go in for compromise on the day when the Lokadalat
meets. In any case, we should continue our efforts to seek the help of the Lokadalat.
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Lenders have seized collateral in some cases and while it has not yet been possible to
recover value from most such seizures due to certain legal hurdles, lenders are now clearly
in a much better bargaining position vis-a-vis defaulting borrowers than they were before
the enactment of SRFAESI Act. When the legal hurdles are removed, the bargaining
power of lenders is likely to improve further and one would expect to see a large number
of NPAs being resolved in quick time, either through security enforcement or through
settlements. Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956.
The Act designates any person holding not less than 10% of the paid-up equity capital of
the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in,
being the holding company of or being in control of the ARC. The SRFAESI and
SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less
than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an
ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets.
ARCS have been granted a maximum realization time frame of five years from the date of
acquisition of the assets. The Act stipulates several measures that can be undertaken by
ARCs for asset reconstruction. These include:
Enforcement of security interest;
Taking over or changing the management of the business of the borrower;
The sale or lease of the business of the borrower;
Settlement of the borrowers' dues; and
Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by t he lenders
under security enforcement rights available to them or as a recovery agent for any bank or
financial institution and to receive a fee for the discharge of these functions. They can also
be appointed to act as a receiver, if appointed by any Court or DRT.
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Source: http://www.rbi.org.in
Institution of CDR Mechanism
The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution
of NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in
India is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia.
The objective of the CDR mechanism has been to ensure timely and transparent
restructuring of corporate debt outside the purview of the Board for Industrial and Financial
Reconstruction (BIFR), DRTs or other legal proceedings. The framework is intended to
preserve viable corporate affected by certain internal/external factors and minimize losses to
creditors/other stakeholders through an orderly and coordinated restructuring programme.
RBI has issued revised guidelines in February 2003 with respect to the CDR mechanism.
Corporate borrowers with borrowings from the banking system of Rs. 20crores and above
under multiple banking arrangement are eligible under the CDR mechanism. Accounts
falling under standard, sub-standard or doubtful categories can be considered for
restructuring. CDR is a nonstatutory mechanism based on debtor-creditor agreement and
inter-creditor agreement. Restructuring helps in aligning repayment obligations for bankers
with the cash flow projections as reassessed at the time of restructuring. Therefore it is
critical to prepare a restructuring plan on the lines of the expected business plan along with
projected cash flows.
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The CDR process is being stabilized. Certain revisions are envisaged with respect to the
eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks
are not members of the CDR forum, and it is expected that they would be signing the
agreements shortly. However they attend meetings. The first ARC to be operational in
India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum.
Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in
multiple lender arrangements and to increase transparency in the process. While in the
RBI guidelines it has been recommended to involve independent consultants, banks are so
far resorting to their internal teams for recommending restructuring programs.
Compromise Settlement Schemes
1) One Time Settlement Schemes
NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The
scheme also covers NPAs classified as sub-standard as on 31st March 2000, which
have subsequently become doubtful or loss. All cases on which the banks have
initiated action under the SRFAESI Act and also cases pending before
Courts/DRTs/BIFR,
subject
to
consent
decree
being
obtained
from
the
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27
OBJECTIVES
I. Problem statement/Objective of the research
To study of the concept of Non Performing Asset in Indian perspective.
To study NPA standard of RBI
To study the Reasons for & Impact of NPAs
To evaluate the efficiency in managing Non Performing Asset of different types of banks
(Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.
To check the proportion of NPA of different types of banks in different categories.
II. Beneficiaries of the study
The outcomes analyzed from this study would be beneficial to various sections such as:
Banks: This study would definitely benefit the banks in a way that directs them as to
which sector should be given priority for lending money.
Further Researchers: The major beneficiaries from the project would be the
researchers themselves as this study would enhance their knowledge about the topic.
They get an insight of the present scenario of this industry as this is the emerging
industry in the financial sector of the economy.
Student: To get the understanding of NPA concept as a whole.
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RESEARCH METHODOLOGY
I. Research Design
The research design that will be use is Descriptive Research.
Involves gathering data that describe events and then organizes, tabulates, depicts,
and describes the data.
Uses description as a tool to organize data into patterns that emerge during analysis.
Often uses visual aids such as graphs and charts to aid the reader.
Using of hypothesis testing.
Test of Correlation:
a) H0: There is no significant correlation between profits & NPAs of Public Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Public Sector Banks for last 9
years
b) H0: There is no significant correlation between profits & NPAs of Private Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Private Sector Banks for last 9
years
c) H0: There is no significant correlation between profits & NPAs of Foreign Banks
for last 9 years
H1: There is correlation between profits & NPAs of Foreign Banks for last 9 years
AI.
BI.
IV.
V.Limitation
There are some data which are available for just 3 years while the same data for its
counterparts were available for 9 years. So exact comparison was not possible.
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ANALYSIS
OVERALL ANALYSIS:
Scheduled Commercial banks (SCBs) in India remained robust against the backdrop of global
financial crisis. It is noteworthy that contrary to the trend in some advanced countries, the
leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting the
strength of the Indian banking system. However, the Indian banking sector was not
completely insulated from the effects of the slowdown of the India economy.
The consolidated balance sheets of SCBs, expanded by 21.2 per cent as at end-March 2010 as
compared with 25.0 per cent in the previous year. While the balance sheet of public sector
banks maintained their growth momentum, the private sector banks and foreign banks
registered a deceleration in growth rate.
During 2009-10, the growth rate of banks lending to industries, personal loans and services
sector witnessed a deceleration, while growth rate of banks lending to agriculture and allied
activities increased substantially. Overall, the incremental CreditDeposit (C-D) ratio
declined sharply reflecting the slowdown in credit growth, as corporates deferred their
investments against the backdrop of widespread uncertainty.
It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in
India has remained high reflecting the strength of the Indian banking system. For instance, as
observed by the World Bank , the leverage ratio of banks in the UK witnessed a decline
throughout 1990s, which was accentuated after 2000 to reach a level of about 3 per cent by
2009 from around 5 per cent in the 1990s. On the other hand, the leverage ratio for Indian
banks has risen from about 4.1 per cent in March 2002 to reach a level of 6.3 per cent by
March 2010.
The balance sheets of public sector banks maintained their growth momentum, the private
sector banks and foreign banks registered a deceleration in growth rate. Furthermore, the old
Page
31
private sector banks, which had been registering a significantly lower growth rate than their
newer counterparts in the recent past, managed a better performance this year.
Graph: 1
Source: http://www.rbi.org.in
Interpretation:
From the above it is observed that net NPA of public sector banks has a declining
trend up to year 2006-07 and after that it has a rising trend till 2009-10. The same
trend has been observed in both Private and Foreign Sector Banks. The declining trend
from 2004 to 2007 of NPA was due to the implementation of Securitization Act
(2002).
Page 32
But the increase in NPA was increasing in absolute term, as NPA as per percent of
advance shows a declining trend in Public Sector Banks while that of in Private and
Foreign Sector Banks shows an upward trend that is increase in NPA as per percent of
advance after 2007.
The increase in NPA as per percent of advance of Private and Foreign Sector Banks is
because of they have a major proportion of lending in non- priority sectors includes
Medium and large scale industries which was highly affected by global financial
crisis.
33
Page
SOUNDNESS INDICATORS:
1. Capital Quality
2. Asset Quality
Capital Quality:
A sound and efficient banking system is end product for maintaining financial stability.
Therefore, considerable emphasis has been placed on strengthening the capital requirements
in recent years. The Capital to Risk-weighted Assets Ratio (CRAR) of SCBs, a measure of
the capacity of the banking system to absorb unexpected losses, improved further to 13.2
per cent at end-March 2010 from 13.0 per cent at end-March
2009. The asset quality of banks in India has been improving over the past few years as
reflected in the declining NPA to advances ratio. It is especially noteworthy that
notwithstanding the pressures of a slowdown in the economy and an atmosphere of
uncertainty, the net NPA to net advances ratio increased only marginally to 1.1 per cent as at
end March 2010 from 1.0 per cent as at end March 2009. Significantly, gross NPA to gross
advances ratio remained constant at 2.3 per cent. Thus, in terms of the two crucial
soundness indicators, viz., capital and asset quality, the Indian banking sector has exhibited
resilience amidst testing times.
Graph: 2
Source: http://www.rbi.org.in
Page 34
Asset Quality:
Movements in Non-performing Assets Bank Group-wise
Public
Old
New
State
Private
Private
Sector
Nationalized
Bank
Sector
Sector
Foreign
Banks
Banks
Group
Banks
Banks
Banks
Gross NPAs
As at end-March 2009
40089
23410
15303
2557
9901
2872
31338
17822
12879
2094
10520
8430
26271
15863
9829
1579
6510
2954
1514
45156
25368
18352
3072
13911
6833
As at end-March 2009
17726
8245
8398
740
4640
1247
As at end-March 2010
21033
9339
10745
1165
6253
2973
End-March 2009
2.2
2.1
2.6
2.3
2.4
1.8
End-March 2010
1.8
2.5
2.3
2.8
End-March 2009
0.8
0.7
1.4
0.7
1.1
0.9
End-March 2010
0.7
0.7
1.5
0.9
1.3
1.7
Gross NPAs/Gross
Advances Ratio
Net NPAs/Net
Advances Ratio
Source: http://www.rbi.org.in
Page 35
Interpretation:
The trend of improvement in the asset quality of banks continued during the year. Indian
banks recovered a higher amount of NPAs during 2009-10 than that during the previous
year. Though the total amount recovered and written-off at Rs.38,828 in 2009-10 was
higher than Rs.28,283 crore in 2008-09, it was lower than fresh addition of NPAs
(Rs.52,382 crore) during the year. As a result, the gross NPAs of SCBs increased across
all the bank groups. In this context, it may be noted that in the present context of
financial turmoil, some slippage in NPAs could be expected.
Nevertheless, it may be noted that this slippage was moderate as compared to the
problems faced by banks all over the world. The hardening of interest rates might have
made the repayment of loans difficult for some borrowers, resulting in some increase in
NPAs in this sector. It may be noted that the increase in gross NPAs was more
noticeable in respect of new private sector and foreign banks, which have been more
active in the real estate and housing loans segments.
Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to gross
advances of foreign banks increased significantly during the year, while that of private
sector banks increased marginally. The NPAs ratio of all other bank groups declined.
While net NPAs to net advances ratio of all the banks increased over the previous year
except that of nationalized banks.
Page 36
> 10%
40%
5% to 10%
30%
2% to 5%
20%
< 2%
200506
200607
200708
Graph: 3
200809
FB
PSB
Pvt.SB
FB
Pvt.SB
PSB
FB
PSB
Pvt.SB
FB
PSB
Pvt.SB
FB
0%
PSB
Pvt.SB
10%
200910
Source: http://www.rbi.org.in
Frequency Distribution of Banks according to level of NPAs
Interpretation:
In the year 2005-06, the Public sector banks (PSBs) had around 60% of their NPA profile
in the < 2% category which increased 75% in 2006-07, 90% in 2007-08 - 2008-09 &
100% in 2009-10. PSBs 30% NPA profile in the year 2005-06 belongs to 2% to 5%
category which reduced over the years and has been totally eliminated in 2009-10. PSBs
did not have any of its banks in > 10% category.
Private sector banks (Pvt.SBs) was having the worst situation in 2005-06 where 50% of
its bank was in 2% to 5% category. While this ratio is declining over the years 2008-09
this is compensated by the rise in number of banks in < 2%. 5 Pvt. SBs banks were in
Page 37
5% to10% category in 2005-06 which was totally eliminated in 2008-09. But due to poor
financial condition in 2009-10, there is increase in number of banks in higher NPA
category.
Foreign banks (FB) were comparatively in good position compare to privat e sector banks
in the initial years. 70% of its NPA profile belongs to < 2% category. The number of
banks increased in < 2% category. So among all three sectors, public sector banks
managed to reduce NPAs over the years.
38
Page
COMPOSITION OF NPAs OF
PUBLIC SECTOR
BANKS - 2002
TO 2010
Amount
Rs.in Crore
30000
25000
20000
15000
10000
5000
0
Priority Sector
Non-priority
Sector
Public Sector
Graph: 4.1
903
1087
610
444
341
490
299
474
Source: http://www.indiastat.com/
Interpretation:
From the above chart it is observed that public sector category is the least contributor
towards the NPA of public sector bank. In the initial years from 2002 to 2006, Nonpriority sector contributes more towards NPA than priority sector. But in later years
from 2007 its other way round, where priority sector contributes more than Nonpriority sector.
Priority sector consist of advance given to agriculture, SSI, & other priority sector
advances. Non priority sector consist of large industries, medium industries & other
non priority sectors.
Page 39
In case of priority sector, it started falling from 2004 up to 2006 over previous year. But
in the later years i.e. from 2007 there is rise NPA because of defaults on the loan given
to the farmers. It was highest in 2009. In order to reduce that, waiver package was
announced in union budget of 2009.It may also be noted that the increase in NPAs was
more noticeable in priority sector, which have been more active in the real estate and housing
loans segments.
NPA in non priority sector is reducing constantly from 2003 to 2009 i.e. by
50%.Though the advance given to non-priority sector was higher than priority sector, NPAs
of non-priority sector is comparatively.
40
Page
COMPOSITION OF NPAs OF
PRIVATE SECTOR
BANKS - 2002 TO 2010
reCro
14000
12000
Amountins.R
10000
8000
6000
4000
2000
0
Priority Sector
Non-Priority
Sector
Public Sector
2002 2003
1835 2546
2004
2445
2005
2482
2006
2188
2007
2284
2008
2884
2009
3419
4452 9090
9327
7796
6569
5541
6353
9558 13172
95
75
42
123
Graph: 4.2
31
2010
3640
75
Source: http://www.indiastat.com
Interpretation:
From the above graph it is observed that public sector
contributes very negligibletowards the overall NPA of
foreign banks. The major reason for this is that on an
average only 3.5% of total advance is made towards
public sector category.
Priority sector category on an average constitutes
almost34%of the total advancesmade by the
private sector banks. While average NPA of priority
Page
41
In case of non-priority sector, the average advances made are 60.5% of total advance
made by private sector banks. But the average NPA of non-priority sector is almost
74% which is highest amongst the entire category. We can see the declining trend in
NPA of non-priority sector from 2004 to 2007. This as a result of securitization Act,
2002.
Page
42
COMPOSITION OF NPAs
OF
Page
43
Amountin Rs.Crore
2008
331
2009
402
2010
649
2,120
2712.0
6506
Public Sector
Graph: 4.3
Source: http://www.indiastat.com//
Interpretation:
It is observed from the chart there is no NPA in public sector category in all the
threeyears because there was no advance made to public sector category.
Non-priority sector contributes highest towards the NPA of foreign banks
becausenon-priority sector constitute approximately 65% of the total advances
made by foreign banks. So NPA will also be morein non-priority sector.
NPA is low in priority sector because very few advances are made in priority
sector& that too are made to SSI.
The advances are made to medium & large scale industries in non-priority sector.
Asforeign banks are having global presence they are more affected by the global
meltdown & financial crisis of 2008. So its effect is seen by sudden rise in NPA in
2009.
Graph: 5
Interpretation:
From the above chart it is clearly observed that net NPA of old private sector banks has
a declining trend over the years on the contrary new private sector banks has an
upward trend.
Old private sector banks which is passing from lower growth rate in recent past, starts
performing better than their new counterparts. Old private sector banks are more
efficient than that of new private sector banks in managing NPA.
Page
44
2.5
2
1.5
1
0.5
0
Public
Sector
Private
Sector
Foriegn
Sector
Graph: 6
2005-06
2006-07
2007-08
2008-09
2009-10
2.1
1.3
1.1
0.8
0.7
1.9
1.2
1.5
0.9
0.8
0.9
1.7
Source: http://www.indiastat.com/
Interpretation:
From the above it is clearly observed that only public sector banks have succeeded
inreducing net NPA against net advances made over the period of time. It is
constantly reducing each year, whereas in case of private sector bank it has reduced in
2006-07 then it got stable and started rising from 2008-09 onwards.
In case of foreign banks it is fluctuating over the years. Public sector banks have
beenable to reduce this ratio by 66.7% from 2006 to 2010. Public sector banks as a
result of stringent checks & control able to manage low ratio compare to other banks.
Also the ratio increased by 89% for foreign banks where the foreign banks were badly
affected by the global meltdown. Even for private sector bank the ratio increased by
Page
45
25% in 2010 due to financial crises & also for public sector bank the
0.9
4.3
0.7
3.4
Sub-Standard
Asset
0.5
2.3
1.1
Doubtful
Asset
0.3
1.5
1.0
0.2
1.1
1.0
Loss Asset
0.2
1.0
0.9
1.2
2.6
94.6
96.1
97.2
97.7
2008
2009
97.9
92.2
2005
2006
2007
Graph: 7.1
2010
Interpretation:
The above frequency distribution chart states that standard asset is increasing every
year & on the contrary all the other types of asset i.e. Sub-standard, Doubtful & Loss
Asset are decreasing every asset. This proves that public sector banks have succeeded
in reducing NPA over the years.
Public sector banks have taken various measures to reduce NPA also convert SubStandard, Doubtful & loss asset into the above category Standard, Sub-Standard &
Doubtful asset. The rise in sub standard ratio has major proportion indicates that there
is a high scope of up gradation or improvement in NPA recovery in initial stage
because it will be very easy to recover the loan as minimum duration of default.
Page 46
0.4
Sub-Standard
Asset
0.3
0.2
1.0
0.3
0.9
1.1
1.5
97.4
97.6
97.3
2007
200
8
1.5
3.6
2.5
Doubtful
Asset
0.8
Loss Asset
0.3
1.0
2.0
1.0
1.8
96.1
96.8
94.2
2005
Graph: 7.2
2006
2009
2010
Interpretation:
The above chart clearly states that the rise in the standard assets over the
yearscompensates the fall in the other three types of assets. But in the year 2010, the
percentage of Sub-Standard asset is highest among all the year. In 2010 percentage of
standard asset has reduced by 0.5% which is compensated by increase in Sub-Standard
& doubtful assets. This increase is due to interest & principle amount unpaid due to
financial crisis in 2009. The percentage of doubtful asset has reduced to a great extent
amongst all. So the private sector banks have managed to reduce the doubtful asset.
Page 47
1.5
1.8
Sub-Standard
Asset
0.8
0.5
0.7
1.3
1.0
0.4
0.5
1.1
0.2
0.5
1.2
0.9
3.5
1.6
97.0
97.9
98.
1
98.1
95.7
95.2
2005
Graph: 7.3
0.2
0.6
2006
2007
2008
2009
2010
Interpretation:
The proportion of Standard Asset is increasing from 2005 and started getting stable in
2008 & 2009. But it has fallen in 2010. The proportion of other three types of assets is
falling over the years, but in 2010 there is great increase in the proportion of SubStandard asset which is as a result of decrease in proportion of Standard asset. This
increase in Sub-Standard asset is because of interest & principle amount unpaid, due
to poor global conditions, for the loan provided in a 2009. The interest & principle
amount remained unpaid for period of more than 180 days but less than 1 year.
48
Page
35000
30000
25000
20000
15000
10000
5000
0
200102
2002- 200303
04
200405
2005- 200606 07
2007- 200808
09
200910
16904 14566
15145 17726
21033
15784 16539
20152 26592
34394
Graph: 8.1
Source: http://www.indiastat.com/
Interpretation:
It is observed from the above graph there exist no particular relationship between net
profit & net NPA of public sector banks. There is constant increase in net profit from
2001-02 to 2004-05 & from 2006-07 to 2009-10. The average of percentage increase
in net profit YOY basis comes to 32.3%
On the contrary public sector banks have managed to reduce net NPA constantly from
2002-03 to 2006-07. Although the percentage of reduction over the previous year is
low compared to percentage of rise in profit over previous year. The average of
percentage decrease in net NPA YOY basis comes to 2.5%
49
Page
Amountin Rs.Crore
10000
8000
6000
4000
2000
0
2002032003-04
200405
200506
3700
6676
3963
4128
4212
3171
4028
5380
7418
1142
1779
2958
3481
3533
4975
6465
9522
10868
2001-02
Net NPA
Net
Profit
Graph: 8.2
200607
200708
2008- 200909
10
Source: http://www.indiastat.com/
Interpretation:
It is clearly observed from the line graph that there is continuous rise in net profit of
private sector banks over the years. The average of percentage increase in net profits
of private sector banks comes to approximately 34%.
On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in
net NPA from 2001-02 to 2009-10. The average of percentage rise in net NPA comes
to almost 15%.
Page 50
AmountniRs.Crore
8000
7000
6000
5000
4000
3000
2000
1000
0
2008092009-10
785
920
903
933
639
808
927
1247
2973
945
1492
1824
2243
3098
4109
5343
7544
8459
2001-02
Net NPA
Net
Profit
Graph: 8.3
Source: http://www.indiastat.com/
Interpretation:
The above line graph shows net profit of foreign banks is increasing throughout the
period from 2001-02 to 2009-10. The average of percentage increase in net profit
YOY basis comes to 32%. Whereas in case of net profit there is no continuous
upward or downward movement.
But overall there is rise in net NPA of foreign banks. The average of percentage
increase in net NPA YOY basis comes to approximately 25%. So this shows there is
positive relationship between net NPA & net profit of foreign banks.
Page 51
4
3.6
3
2.7
2.1
1.3
1.1
Net NPAs/Net
2.2
0.8
0.7
Advances
0
2005-06
2006-07
Graph: 9.1
2007-08
2008-09
2009-10
Interpretation:
The percentage in reduction of gross NPA to gross advances ratio is decreasing year on
year i.e. it has reduced by 34.5% from 2005-06 to 2006-07. Similarly it has reduced
by 25%, 18.5% & 9% respectively from 2006-07 to 2007-08, from 2007-08 to 200809 & 2008-09 to 2009-10.
While in case of net NPA to net advances ratio, the percentage change is varying. It has
reduced by 38% from 2005-06 to 2006-07. Similarly it has reduced by 15.38%,
27.27% & 12.5% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09 &
2008-09 to 2009-10.
Page
52
The above calculated figure states that the provisions made for NPA & other items like
interest due but not recovered, part payment received and kept in suspense account,
etc which is deducted from Gross NPA is changing over the years. It is not decreasing
in same proportion as gross NPA.
The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2006-07 [67%] & lowest in 2007-08 [59%]. In other years it near to 63%. This gap is
highest in 2007 because in 2007 advances have increased tremendously over 2006.
Due to which NPA also increased & so provisions also increased.
The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to
net advances is decreasing over the years. In all the public sector bank has succeeded
to reduce the non performing assets against the advances made over the years.
53
Page
3.8
3.5
3
2.5
2.2
2
1.9
1.5
1.5
1
2006-07
2007-08
1.2
Gross
NPAs/Gross
Advances
Net NPAs/Net
Advances
0.5
0
2005-06
Graph: 9.2
2008-09
2009-10
Interpretation:
The percentage change in of gross NPA to gross advances ratio is decreasing
initially& thereafter started rising from 2007-08. It has reduced by 34.2% from
2005-06 to 2006-07. Similarly it has reduced by 12% from 2006-07 to 2007-08 &
thereafter increased by 18.5% & 9% respectively from 2007-08 to 2008-09 & 200809 to 2009-10.
While in case of net NPA to net advances ratio, the percentage change is var
yingdrastically. It has reduced by 47% from 2005-06 to 2006-07. It is unchanged
from 2006-07 to 2007-08. It has increased by 20% & 25% respectively from 2007-08
to 2008-09 & 2008-09 to 2009-10.
The percentage change in gross NPA to gross advances ratio & net NPA to
netadvances ratio over the years states that private sector banks makes more
provisions in gross NPA & gross advances.
Page
54
The difference in gross NPA/ gross advances & net NPA/net advances is highest
in2006-07 [60%] & lowest in 2009-10 [48%]. In other years it near to 54%. In
2007 there is highest increase in advances over previous year amongst all the year.
This resulted increase in NPA which in turn increased the provisions and
unrecognized interest income.
Private sector banks have not succeeded to reduce NPA as against the advances made
over the years as both the ratios are increasing in later years.
Page
55
3.5
3
2.8
2.5
2
1.5
1
0.9
0.8
1.8
1.8
0.9
1.7
Gross
NPAs/Gross
Advances
Net NPAs/Net
Advances
0.5
0
2005-06
2006-07
2007-08
Graph: 9.3
2008-09
2009-10
Interpretation:
The gross NPA to gross advances ratio is decreasing till 2007-08.It is unchanged in
2008-09 & then increased in 2009-10. It has reduced by 28.5% & 10% respectively
from 2005-06 to 2006-07 & from 2006-07 to 2007-08. It has increased tremendously
by 122% from 2008-09 to 2009-10.
While in case of net NPA to net advances ratio, there is great volatility. It has reduced
by 11% from 2005-06 to 2006-07. Thereafter it increased by 25% in 2007-08. Again
it reduced by 10% in 2009 and finally increased by 89% in 2009-10.
The steep rise in gross NPA & net NPA 2009-10 is due to poor global conditions.
56
Page
The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2005-06 & lowest in 2007-08. In 2005-06 provisions & unrecognized interest income
was highest compare to other years while it was lowest in 2007-08.
The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to
net advances is decreasing over the years. In all the public sector bank has succeeded
to reduce the non performing assets against the advances made over the years.
Thus in foreign banks gross NPA to gross advances ratio & net NPA to net advances
ratio are not having parallel movement throughout the period. The change in net NPA
to net advances is quite higher than gross NPA to gross advances.
Page
57
Graph: 9.4
Source: http://www.rbi.org.in
Interpretation:
From the above chart it is clearly observed that old private sector banks are constantly
improving in terms of net NPA to net advances ratio which is represented by declining
trend from 2001-02 to 2009-10. While on the other hand for new private sector banks
net NPA to net advances ratio is fluctuating over the years.
Page
58
HYPOTHESIS TESTING
TEST OF CO-RELATION
The test of co-relation is used to identify the co-relation between two
variables. The variable in our study is Net NPA and Net profit. This test
researcher has applied to identify the co-relation between two variables i.e.
Net NPA and Net profit of Public, Private and Foreign Sector Banks.
Public Sector Banks:
H0: There is no significant correlation between NPA and Profit of Public
Sector Banks for last 9 years
H1: There is correlation between NPA and Profit of Public Sector Banks
for last 9 years
Net
NPA
Year
X
2001-02 27977
2002-03 27958
2003-04 24877
2004-05 19335
2005-06 16904
2006-07 14566
2007-08 15145
2008-09 17726
2009-10 21033
Total
185521
Mean
20,613
Net
Profit
Y
4317
8301
12295
16546
15784
16539
20152
26592
34394
154921
17,213
X
20,613
20,613
20,613
20,613
20,613
20,613
20,613
20,613
20,613
Y
17,213
17,213
17,213
17,213
17,213
17,213
17,213
17,213
17,213
X- X
7,364
7,345
4,264
-1,278
-3,709
-6,047
-5,468
-2,887
420
Y- Y
-12896
-8912
-4918
-667
-1429
-674
2939
9379
17181
(X -X)2
54228496
53949025
18181696
1633284
13756681
36566209
29899024
8337541
176383
216728339
(X- X)*(Y-Y)
166308364 -94966586
79419466
-65456877
24182200
-20968391
444396
851953
2040898
5298677
454734
4077734
8638779
-16071436
87965641
-27081675
295186761
7215676
664641238 -207100924
(Y-Y)
Page 59
r=
(X-X) *(Y-Y)
[(X-X)2*(Y-Y)2] 1/2
r=
-207100923.9
379534704
r=
- 0.54567
Year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Total
Average
3700
6676
3963
4128
4212
3171
4028
5380
7418
42676
4742
1142
1779
2958
3481
3533
4975
6465
9522
10868
44723
4969
4742
4742
4742
4742
4742
4742
4742
4742
4742
X -X
4969
4969
4969
4969
4969
4969
4969
4969
4969
-1042
1934
-779
-614
-530
-1571
-714
638
2676
Y-Y
-3828
-3190
-2012
-1488
-1436
5
1496
4553
5899
(X-X)
1085326
3741170
606513
376738
280677
2467380
509496
407606
7161443
16636349
(Y-Y)
14651015
10176830
4046150
2213384
2061678
28
2238152
20727765
34795553
90910555
(X- X)*(Y-Y)
3987621
-6170352
1566539
913162
760701
-8302
-1067862
2906676
15785639
18673821
*(Y-Y)
r=
(X-X)
[(X-X)2*(Y-Y)2] 1/2
r=
18673820.57
38889840.77
r=
0.480172
Year
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09
2009-10
Total
Average
X
785
920
903
933
639
808
927
1247
2973
10135
1126
Y
945
1492
1824
2243
2002
3069
4585
6612
7510
30282
3365
X
1126
1126
1126
1126
1126
1126
1126
1126
1126
r=
Y
3365
3365
3365
3365
3365
3365
3365
3365
3365
X-X
-341
-206
-223
-193
-487
-318
-199
121
1847
Y-Y
-2420
-1873
-1541
-1122
-1362
-296
1220
3247
4145
(X-X)
116350
42478
49774
37288
237268
101189
39642
14522
3412162
4050674
(Y-Y)
5855077
3506618
2373654
1258046
1855907
87679
1489506
10544914
17183457
44154859
(X-X)*(Y-Y)
825373
385945
343725
216588
663587
94192
-242994
391326
7657202
10334944
(X-X) *(Y-Y)
[(X-X)2*(Y-Y)2] 1/2
r=
10334943.88
13373740.04
r = 0.772778883
H0 (Null Hypothesis) is rejected
Page 62
Interpretation:
There is negative correlation between net profit & net NPA of public sector banks while
it is positive for private sector & foreign banks.
Net profit consists of income earned by the banks. Income is divided into two parts
interest income & other income. Interest income includes Interest/Discount on
advances/bill, Income on investments, Interest on balances with RBI and other interbank funds, others. While non-interest income includes fee income components such
as commission, brokerage and exchange transactions, sale of investments, corporate
finance transactions, M&A deals; and any other income other than the interest income
generated by the bank. But in interest income, income from Interest/Discount on
advances/bill is the major contributor towards NPA.
Average 75% of total earning of public sector bank comes from Interest/Discount on
advances/bill which is 55% & 43% for private sector banks & foreign banks. If we
consider the last six years average of percentage increase in income from
Interest/Discount on advances/bill YOY basis then public sector bank records only
18% increase while its 33% for both private sector & foreign banks. But for private
sector & foreign banks rise in income from Interest/Discount on advances/bill
contributes minimal to the rise in overall income.
The income other than Interest/Discount on advances/bill income for all the banks
together i.e. public sector, private sector and foreign banks on an average stood at
32.8% of the total income, but it is highest in foreign banks i.e. 57% & 45% for
private sector banks.
The last six years average of percentage increase in income other than Interest/Discount
on advances/bill income YOY basis was highest for foreign banks i.e. 26% which is
15% & 19% for public sector bank & private sector banks respectively.
Page
63
Non-interest
Income
20%
2005
Graph: 10
2006
2007
2008
2009
FBs
PSBsPvt.SBs
PSBsPvt.SBsFBs
PSBsPvt.SBsFBs
PSBsPvt.SBsFBs
FBs
PSBsPvt.SBs
PSBsPvt.SBsFBs
0%
Interest
Income
2010
Public sector banks depend excessively on their interest income as compared to their
peers in the private sector and their fee-based earnings coming from services remain
quite low.
The higher proportion of non-interest income in private sector & foreign banks is due
to the value added services offered by these banks. There are some services which are
offered by private sector banks but not by public sector banks. These include Forex
Desk, Derivatives Desk, Technology Finance, Syndication Services, Real Time Gross
Settlement, Channel Financing, Corporate Salary Account, Bankers to Right/Public
Issue. Foreign banks offers some more services other than the above mentioned
services like Global Trade Solutions, Factoring Solutions, Derivatives Clearing, asset
management, private equity placement. So the private sector & foreign banks earn
higher non-interest income because of such value added services.
Page 64
OVERALL FINDINGS
NPAs were more noticeable in respect of new private sector and foreign banks, which have
been more active in the real estate and housing loans segments. It shows a upward trends over
the years as compared to others
The old private sector banks, which had been registering a significantly lower growth rate
than their newer counterparts in the recent past, managed a better performance this year.
Among all three sectors, public sector banks have managed to reduce NPAs over the years.
NPA profile in the < 2% category of public sector banks was reached to 100% in 2009-10 as
compared to Private and Foreign sector banks which was around 80%
Net NPA against net advances increased more in Foreign and Private sector banks in 2009-10
while Public sector banks have succeeded in reducing net NPA against net advances made
over the period of time
Public sector banks have managed to increase the standard assets over the years. The
proportion of standard assets in Private sector banks reduced in 2009 and 2010 which was
compensated by increase in sub-standard and doubtful assets. In Foreign sectors banks the
proportion of sub-standard asset has increased tremendously by 3.5% of loan assets in 2010
which was 1.2% of loan assets in 2009.
The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years states that public sector banks makes more provisions in gross NPA & gross
advances as compared to private and foreign banks.
Public sector banks almost 75% of income comes from Interest/Discount on advances/bill.
Whereas it is just 55% & 43% for private sector banks & foreign banks.
Page 65
CONCLUSION
The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper
management of the NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. The
NPAs would destroy the current profit, interest income due to large provisions of t he NPAs,
and would affect the smooth functioning of the recycling of the funds
Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which hampers
economic growth.
Public sector banks are more efficient than private sector & foreign banks with regard to the
management of nonperforming assets. Even among private sector bank, old private sector
banks are more efficient than new private sector banks. But efficient management of NPA is not
the sole factor that determines the overall efficiency of banks
Page
66
SUGGESTIONS
New body like Debt Recovery Tribunal should be established & capacity of DRTs should
be enhanced.
All banks should keep stringent check on advance being made to real estate & housing
segment as these segment contributed highly towards the NPA in 2009 & 2010.
Uneven scale of repayment schedule with higher repayment in the initial years
normally should be preferred.
Private sector & Foreign banks should focus more on recovery of sub-standard &
doubtful assets.
Public sector banks should increase their non-interest income, as rise in NPA due to
default in interest income may affect the profits drastically.
Page
67
BIBLIOGRAPHY
I. Books
Management Of Non-Performing Assets In Banks by Sugan C Jain
Managing Non-performing Assets in Banks S. N. Bidani
AI. Magazines
Investor
Business India
BI. e-Newspapers
The Economic Times
The Business Standard
I V. Published Material
RBI Guidelines Circulars on Income Recognition and Asset Classification
Report on Trend and Progress of Banking in India 2009-10
Statistical Tables Relating to Banks of India
Master Circular
V. Other Sources Internet Websites
http://www.rbi.org.in/
http://www.indiastat.com/
68
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