A STUDY ON NON PERFORMING ASSETS OF SBI AND CANARA BANK

CHAPTER I

INTRODUCTION

The three letters NPA Strike terror in banking sector and business circle today. NPA is
short form of Non Performing Asset. The dreaded NPA rule says simply this: when interest
or other dues to a bank remains unpaid for more than 90 days, the entire bank loan
automatically turns to a non performing asset. The recovery of loan has always been problem
for banks and financial institution. An asset becomes NPA when:

Interest and/or instalment 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 purposes, and

Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.

For any nation, banking system plays a vital role in the development of its sound
economy. Banking is an important segment of the tertiary sector and acts as a back bone of
economic progress. Banks are supposed to be more directly and positively related to the
performance of the economy.

Banks act as a development agency and are the source of hope and aspirations of the
masses. Commercial banks are the major players to develop the economy. A major threat to
banking sector is prevalence of Non-Performing Assets (NPAs). NPAs reflect the
performance of banks.

A high level of NPAs suggests high probability of a large number of credit defaults
that affect the profitability and net-worth of banks and also erodes the value of the asset. The
NPA growth involves the necessity of provisions, which reduces the overall profits and
shareholders value. In present scenario NPAs are at the core of financial problem of the
banks. Concrete efforts have to be made to improve recovery performance.

The main reasons of increasing NPAs are the target-oriented approach, which
deteriorates the qualitative aspect of lending by banks and wilful defaults, ineffective
supervision of loan accounts, lack of technical and managerial expertise on the part of
borrowers.

The purpose of the study is to identify the causes of loans becoming NPAs and to identify the
action plan to reduce the NPAs in Bank of Baroda.

DEFINITIONS:

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank.

A Non-Performing Asset (NPA) was defined as a credit facility in respect of which the
interest and/ or instalment of principal has remained past due for a specified period of time.

A non performing asset (NPA) is a loan or an advance where;

Interest and/or installment of principal remain overdue for a period of more than 90
days in respect of a term loan,

The account remains out of order for a period of more than 90 days ,in respect of an
overdraft/cash credit (OD/CC),

The bill remains overdue for a period of more than 90 days in case of bill purchased
or discounted,

the installment of principal or interest thereon remains overdue for two crop seasons for short
duration crops,

the instalment of principal or interest thereon remains overdue for one crop season for
long duration crops,
The amount of liquidity facility remains outstanding for more than 90 days, in respect
of a securitisation transaction undertaken in terms of guidelines on securitisation
dated February 1, 2006.
in respect of derivative transactions, the overdue receivables representing positive
mark-to-market value of a derivative contract, if these remain unpaid for a period of
90 days from the specified due date for payment.
 In case of interest payments, banks should, classify an account as NPA only if the
interest due and charged during any quarter is not serviced fully within 90 days from
the end of the quarter.

'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.

Problems due to NPA:

1. Owners do not receive a market return on their capital .in the worst case, if the banks
fails, owners lose their assets. In modern times this may affect a broad pool of
shareholders.

2. Depositors do not receive a market return on saving. In the worst case if the bank
fails, depositors lose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates, lower
deposit rates and higher lending rates repress saving and financial market, which
hamper economic growth.

4. Nonperforming loans epitomize bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in
misallocation of capital, and by extension, labour and natural resources.
Non Performing Asset may spill over the banking system and contract the money stock,
which may lead to economic contraction. This spillover effect can channelize through
liquidity or bank insolvency:

When many borrowers fail to pay interest, banks may experience liquidity shortage.
This can jam payment across the country,
Illiquidity constraints bank in paying depositors
An undercapitalized bank exceeds the banks capital base.

Types of NPA

A] Gross NPA

B] Net NPA

A] 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 non standard 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

B] Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross and
net NPA is quite high.

It can be calculated by following:

Net NPAs = Gross NPAs Provisions

Gross Advances - Provisions

ASSET CLASSIFICATION:

CATEGORIES OF NPAS

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.

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
reliability of the dues:

o Sub-standard Assets
o Doubtful Assets
o Loss Assets

(1) Sub-standard Assets:--

With effect from 31 March 2005, a sub standard asset would be one, which has remained
NPA for a period less than or equal to 12 month. The following features are exhibited by sub
standard 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 jeopardise the liquidation of the debt and are
characterised by the distinct possibility that the banks will sustain some loss, if deficiencies
are not corrected.

(2) 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.

Loss Assets:--

A loss asset is one which is considered as 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 the bank or
internal or external auditors or the RBI inspection but the amount would not have been
written-off wholly.

Impact of NPA on:

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 not only 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 shot\rtes 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.

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.

CHAPTER II

REVIEW OF LITERATURE

Prashanth K Reddy (research paper)(From article-International Journal of Economic

Practices and Theories, Vol. 1, No. 2, 2011 (October), e-ISSN 2247 7225)

Prashanth K. Reddy (2002) in his research paper on the topic, A comparative study of
Nonperforming Assets in India in the Global context examined the similarities and
dissimilarities, remedial measures. Financial sector reform in India has progressed rapidly on
aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry,
prudential norms and risk-based supervision. The study reveals that the sheltering of weak
institutions while liberalizing operational rules of the game is making implementation of
operational changes difficult and ineffective. Changes required to tackle the NPA problem
would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly
effective. This paper deals with the experiences of other Asian countries in handling of
NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests
mechanisms to handle the problem by drawing on experiences from other countries.

RBI turns heat on banks to check bad loans. (news paper article.)(from Hindustan
Times (New Delhi, India) October 13, 2011)

State-owned banks have witnessed a surge in the level of bad assets (loans) or NPAs in recent
times. The gross non-performing assets (NPA) of public sector banks stood at Rs. 71,047
crores for the period ended March, 2011. A loan that stops earning interest after 90 days is
defined as an NPA.

According to CRISIL(Credit Rating Information Services of India Ltd), the Indian arm of
global ratings major Standard and Poors, a slowdown in economic growth and increases in
equated monthly installments (EMIs) resulting from subsequent rate hikes by the RBI, would
also increase banks NPAs. Rising interest rates would increase the EMIs of home loan
borrowers alone by about Rs. 6000 crores annually, the study said. Banks, however, are
optimistic. There is no cause for concern as of now. We are focusing on recovery and we
have registered a very healthy recovery, TM Bhasin, chairman and managing director,
Indian Bank, told Hindustan Times.

In the wake of surging NPA levels, banks have decided to get tough on willful defaulters
borrowers who have not repaid their dues despite having the capacity to do so. An estimated
Rs. 11,000 crores of funds is locked up with willful defaulters. The central bank has also
asked banks to monitor their asset qualities on a regular basis, especially with interest
rates steadily inching upwards.

Finance minister Pranab Mukherjee, in his last meeting with bank chairmen, had asked SBI to
look into its asset quality. He is also said to have sought an explanation from banks on the
reason for the rise in the level of bad assets.

There has been a substantial increase in bad loans and this is primarily because public sector
banks have been very lenient on willful defaulters, said CH Venkatachalam, general
secretary, All India Bank Employees Association.

Dr. A. Shyamala (research paper)(From article-Dr. A. Shyamala NPAS IN INDIAN

BANKING SECTOR: IMPACT ON PROFITABILITY: Indian Streams Research
Journal (June; 2012))

Findings of the study indicated that Indian banking sector is facing a serious problem of NPA
is comparatively higher in public sector banks. To improve the efficiency and profitability,
various steps have been taken by the government to reduce the NPA. It is highly impossible
to have zero percentage NPA. But at least Indian banks can try competing with foreign banks
to maintain international standard.

Siraj.K.K and Prof. (Dr). P. Sudarsanan Pillai (research paper) (From article-
International Journal of Marketing, Financial Services & Management Research-ISSN
2277- 3622 Vol.2, No. 9, September (2013))

The researchers found that Non Performing Assets endangered negative impact on banking
stability and growth. Issue of NPA and its impact on erosion of profit and quality of asset was
not seriously considered in Indian banking prior to 1991. There are many reasons cited for the
alarming level of NPA in Indian banking sector. Asset quality was not prime concern in
Indian banking sector till 1991, but was mainly focused on performance objectives such as
opening wide networks/branches, development of rural areas, priority sector lending, higher
employment generation, etc. The accounting treatment also failed to project the problem of
NPA, as interest on loan accounts were accounted on accrual basis.

CHAPTER III

RESEARCH METHODOLOGY

RESEARCH:

Research is a process in which the researcher wishes to find out the end result for a given
problem and thus the solution helps in future course of action. The research has been defined
as A careful investigation or enquiry especially through search for new facts in branch of
knowledge

The study has been done in one of the leading Public sector bank. This study is based on
secondary data, which have been obtained from published sources i.e. Annual report for the
period of 5years (i.e. from 2012-2016).

STATEMENT OF PROBLEM:

NPAs always affect the profit & also the prestige of bank, so here the research problem is to
identify the causes for the NPA and to identify the action plan to reduce the NPA.

BACKGROUND OF THE PROBLEM:

NPAs always have adverse effect on the profitability of the bank & thereby increasing the
level of sub-standard assets. Banks have to take adequate measures to reduce NPA levels
since banks have responsibility to the various stake holders. This in turn would provide
chances of recovery from NPAs.
OBJECTIVES OF THE STUDY:

To understand the reasons for NPAs.

To assess the impact of NPA on banks profitability.

To suggest ways and needs to reduce NPA and its growth

To study the sources and deployment of funds of SBI& canara bank

To examine the gross NPAs and net NPAs of SBI& canara bank .

To investigate the impact of NPAs on profitability of the SBI& canara bank

To suggest measures to manage NPAs in SBI& canara bank effectively.

HYPOTHESIS:

Ho (Null) = There is no significant relationship between gross NPA & operating

profit.
H1 (Alternate) = There is significant relationship between gross NPA & operating
profit.

SAMPLING PLAN & METHODOLOGY:

Ten years data was collected with respect to gross NPAs & net profit & 6 years data was
obtained with respect to Standard, sub-standard, Doubtful & loss assets.

TYPE OF STUDY:

This is a descriptive cum analytical study.

DATA COLLECTION SOURCE:

PRIMARY:
Primary data is a type of information that is obtained directly from first-hand sources by
means of surveys, observation or experimentation. It is a data that has not been previously
published and is derived from a new or original research study and collected at the source.

SECONDARY:

Secondary data is all the information collected for purposes other than the completion of a
research project and it is used to gain initial insight into the research problem. It is classified
in terms of its source either internal or external.

The data for the current study was collected mainly from secondary sources like Companys
annual reports & records, Newspapers/Magazines were all used to collect information.

SCOPE OF THE STUDY

The present study of Non-performing assets is confined and restricted to the boundary
of commercial banks and data is analyzed since 2013-2016.
LIMITATIONS OF THE STUDY:

This study is limited to 5 years data.

Time was the major constraint for the study

A deep analysis is made non-performing assets only.

The performing assets do not pose any problems to credit management.

This study is only restricted to State Bank of India & canara bank only.

The result of the study may not be applicable to any other banks.

Since the part of the study is based on their perceptions, the findings may change over
the years in keeping with changes in environmental factor.

The present study does not ascertain the views from the borrowers who are not
directly concerned with management of non-performing asset

STATISTICAL TOOL USED:

Correlation Analysis
CORRELATION ANALYSIS:

Meaning:

Correlation analysis measures the relationship between two items, like, NPAs and Net profits
of Bank of Baroda. The resulting value (called the "correlation coefficient") shows if changes
in one item (e.g., NPAs) will result in changes in the other item (e.g., Net Profits).

Objective:

The main objective of this topic is to measure the degree of relationship between the
variables under consideration. The correlation analysis refers to the techniques used in
measuring the closeness of the relationship between the variables.

Definition:

When the relationship is of quantitative nature, the appropriate statistical tool for
discovering & measuring the relationship & expressing it in brief formula is known as
correlation.