A MINOR PROJECT REPORT

ON

A STUDY ON THE IMPACT OF NPA'sON BANKING INDUSTRY

Submitted in partial fulfillment of requirement of Bachelor of

Commerce (B.Com)

B.Com IIND SEMESTER MORNING SHIFT

BATCH 2017-2020

Submitted to: Submitted by:

MsDikshitaKathuria AISHANI AHUJA
Designation: Enrollment no.
Assistant Professor 42314188817

JAGANNATH INTERNATIONAL MANAGEMENT SCHOOL

KALKAJI
 ACKNOWLEDGEMENTS
A lot of effort has gone into this training report. My thanks are due to many
people with whom I have been closely associated.

I would like all those who have contributed in completing this project. First of all, I

would like to send my sincere thanks to MsDikshitaKathuriafor her helpful hand in

the completion of my project.

I would like to thank my entire beloved family & friends for providing me support,
as and when required, without which this project would not have completed on
time.
 CONTENTS

D e s c r i p t i o n Page No.
A c k n o w l e d g e m e n t ( i ) ( i )
C o n t e n t s w i t h p a g e n o . ( i i )
L i s t o f t a b l e s ( i i i )
L i s t o f f i g u r e s ( i i i )
E x e c u t i v e S u m m a r y 5
C e r t i f i c a t e o f c o m p l e t i o n 6
I n t r o d u c t i o n t o t o p i c 7
O b j e c t i v e s 1 4
L i t e r a t u r e r e v i e w 1 5
I n d i a n B a n k i n g I n d u s t r y 3 4
R e s e a r c h M e t h o d o l o g y 4 8
A n a l y s i s & I n t e r p r e t a t i o n 5 0
F i n d i n g s & I n f e r e n c e s 5 6
L i m i t a t i o n s 5 7
R e c o m m e n d a t i o n s a n d C o n c l u s i o n 5 9
A p p e n d i c e s 6 0
B i b l i o g r a p h y 6 1
 LIST OF TABLES

L I S T O F T A B L E S
S . n o T a b l e t i t l e Page No.
1 Table 1 PSB’s betting on restructuring 2 5
2 Figure 2 % of cumulative provisions made on Gross NPA s 2 7
3 R e s e a r c h R e p o r t

EXECUTIVE SUMMARY
For the purpose of analysis and comparison between Public and private
sector banks, We have taken five banks from both sectors to compare the
non-performing assets of banks. For understanding we further bifurcate
the non-performing assets in priority sector and non-priority sector, gross
NPA and net NPA in percentage as well as in rupees, deposit – investment–
advances.

Further we also analysis on the basis of Deposit – Investment – Advances to get

the clear view where the bank stands in the competitive market. At the end of
March 2008, in private sector ICICI Bank is the highest deposit-investment-
advances figure in rupees crores, second is HDFC Bank and KOTAK Bank has
least figure.
In public sector banks Punjab National Bank has the highest deposit investment-
advances but when we look at the graph we can see that the Bank of Baroda and
Bank of India are almost the similar in numbers and Dena Bank is stands last in
public sector bank. When we compare the private sector banks with public sector
banks, we can understand the more number of people prefer to choose public
sector banks for deposit-investment.
 CERTIFICATE OF COMPLETION

This is to certify that I Aishani Ahuja Bcom(H) – 2nd semester (morning) from Jagannath
International Management School ,has completed her project on the topic “A study on the
impact of NPA’s on the Banking Sector under my guidance . Her work is appreciable.

Project Guide:

Ms Dikshita Kathuria
Assistant Professor
 CHAPTER I
INTRODUCTION TO THE TOPIC
“An organization, usually a corporation, chartered by a state or federal government,
which does most or all of the following: receives demand deposits and time deposits,
honors instruments drawn on them, and pays interest on them; discounts notes,
makes loans, and invests in securities; collects checks, drafts, and notes; certifies
depositor's checks; and issues drafts and cashier's checks.”
DEFINITION OF BANKING
In general terms, “The business activity of accepting and safeguarding money
owned by other individuals and entities, and then lending out this money in order
to earn a profit”
So we can say that Banking is a company, which transacts the business of
banking. The Banking Regulations Acts defines the business as banking by
stating the essential function of a banker.
The term banking is defined as “Accepting for the purpose of leading or
investment, deposits of money from the public, repayable on demand or
otherwise and withdrawal by cheque, draft, order or otherwise.”

HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it
should be able to meet new challenges posed by the technology and any other
external and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking
system has reached even to the remote corners of the country. This is one of the
main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice. Gone
are days when the most efficient bank transferred money from one branch to
other in two days. Now it is simple as instant messaging or dials a pizza. Money
has become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786
till today, the journey of Indian Banking System can be segregated into three
distinct phases. They are as mentioned below:
©. Early phase from 1786 to 1969 of Indian Banks
©.Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms
©. New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991To make this write-up more explanatory, we
divide scenario in Phase I, Phase II and Phase III PHASE I
The General Bank of India was set up in the year 1786. Next were Bank of
Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which started
as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians,
Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,
Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of
India came in 1935.
During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks,
mostly small. To streamline the functioning and activities of commercial banks,
the Government of India came up with The Banking Companies Act, 1949 which
was later changed to Banking Regulation Act 1949 as per amending Act of 1965
(Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers
for the supervision of banking in India as the Central Banking Authority.
PHASE II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960
on 19th July, 1969, major process of nationalization was carried out. It was the
effort of the then City Minister of India, Mrs. Indira Gandhi. 14 major commercial
banks in the country were nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in
India under Government ownership.
The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:
©. 1949: Enactment of Banking Regulation Act.
©. 1955: Nationalization of State Bank of India.
©. 1959: Nationalization of SBI subsidiaries.
©. 1961: Insurance cover extended to deposits.
©. 1969: Nationalization of 14 major banks.
©. 1971: Creation of credit guarantee corporation.
©. 1975: Creation of regional rural banks.
©. 1980: Nationalization of seven banks with deposits over 200 crore.
Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.
PHASE III
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking and net
banking is introduced. The entire system became more convenient and swift.
Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered
from any crisis triggered by any external macroeconomics shock as other East
Asian Countries suffered. This is all due to a flexible exchange rate regime, the
foreign reserves are high, the capital account is not yet fully convertible, and
banks and their customers have limited foreign exchange exposure.
RESERVE BANK OF INDIA (RBI)
The central bank of the country is the Reserve Bank of India (RBI). It was
established in April 1935 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was
divided into shares of Rs. 100 each fully paid which was entirely owned by
private shareholders in the beginning. The Government held shares of nominal
value of Rs. 2, 20,000
Reserve Bank of India was nationalized in the year 1949. The general
superintendence and direction of the Bank is entrusted to Central Board of
Directors of 20 members, the Governor and four Deputy Governors, one
Government official from the Ministry of Finance, ten nominated Directors by the
Government to give representation to important elements in the economic life of
the country, and four nominated Directors by the Central Government to
represent the four local Boards with the headquarters at Mumbai, Kolkata,
Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and
economic interests and the interests of co-operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act,
1934 (II of 1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:
©. To regulate the issue of banknotes to maintain reserves with a view to
securing monetary stability and
©. To operate the credit and currency system of the country to its advantage

ORGANISATION STRUCTURE OF RBI

THE BANKING SYSTEM
Almost 80% of the business is still controlled by Public Sector Banks (PSBs).
PSBs are still dominating the commercial banking system. Shares of the leading
PSBs are already listed on the stock exchanges.
The RBI has given licenses to new private sector banks as part of the
liberalization process. The RBI has also been granting licenses to industrial
houses. Many banks are successfully running in the retail and consumer
segments but are yet to deliver services to industrial finance, retail trade, small
business and agricultural finance.
The PSBs will play an important role in the industry due to its number of
branches and foreign banks facing the constraint of limited number of branches.
Hence, in order to achieve an efficient banking system, the onus is on the
Government to encourage the PSBs to be run on professional lines.
BANKING SECTORS IN INDIA
BANKS

Public Private Co-operative Regional Rural Foreign

Sector bank Sector bankbankbank bank

CO-OPERATIVE BANKS
The Co-operative banks have a history of almost 100 years. The Co-operative
banks are an important constituent of the Indian Financial System, judging by the
role assigned to them, the expectations they are supposed to fulfill, their number,
and the number of offices they operate. The co-operative movement originated in
the West, but the importance that such banks have assumed in India is rarely
paralleled anywhere else in the world. Their role in rural financing continues to be
important even today, and their business in the urban areas also has increased
phenomenally in recent years mainly due to the sharp increase in the number of
primary co-operative banks.
Some of the co-operative banks are quite forward looking and have developed
sufficient core competencies to challenge state and private sector banks.
According to NAFCUB the total deposits & landings of Co-operative Banks is
much more than Old Private Sector Banks & also the New Private Sector Banks.
This exponential growth of Co-operative Banks is attributed mainly to their much
better local reach, personal interaction with customers, and their ability to catch
the nerve of the local clientele.
Though registered under the Co-operative Societies Act of the Respective States
(where formed originally) the banking related activities of the co-operative banks
are also regulated by the Reserve Bank of India. They are governed by the
Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act,
1965.
CO-OPERATIVE BANKS FINANCE RURAL AREA AS UNDER
©. Farming
©. Cattle
©. Milk
©. Hatchery
©. Personal finance
CO-OPERATIVE BANKS FINANCE URBEN AREA AS UNDER
©. Self-employment
©. Industries
©. Small scale units
©. Home finance
©. Consumer finance
©. Personal finance
FACTS ABOUT CO-OPERATIVE BANK
©. Some cooperative banks in India are more forward than many of the state and
private sector banks.
©. According to NAFCUB the total deposits & landings of Cooperative Banks in
India is much more than Old Private Sector Banks & also the New Private Sector
Banks.
©. This exponential growth of Co operative Banks in India is attributed mainly to
their much better local reach, personal interaction with customers, and their
ability to catch the nerve of the local client.
 OBJECTIVE

 To study and understand the concept of NPA

 To analyze the bank’s policy to recover the level of NPA
 To understand the effect of NPA on banks profit and its prestige
 To understand how corrective measures taken by bank for NPA
 To understand RBI’S rules and regulations for the control of NPA
 To understand the credit appraisal policy and NPA recovery policy of bank
 CHAPTER-II

LITRATURE REVIEW
India’s Rs 77 trillion (US$ 1.30 trillion)-banking industry is well at par with global
standards and norms. Prudent practises and conventional framework adopted by
the regulator, Reserve Bank of India (RBI), have insulated Indian banks from the
global financial crisis.
The country has 87 scheduled commercial banks with deposits worth Rs.71.6
trillion (US$ 1.21 trillion) as on 31 May, 2013. Of this, 26 are public sector banks,
which control over 70 per cent of India’s banking sector, 20 are private banks and
41 are foreign banks. Of the total, 41 banks are listed with a total market
capitalisation of Rs.9.35 trillion (US$ 158.16 billion) as per the recent statistics.
Key Statistics
 According to the RBI’s ‘Quarterly Statistics on Deposits and Credit of
Scheduled Commercial Banks’, September 2012, Nationalised Banks
accounted for 52.0 per cent of the aggregate deposits, while the State
Bank of India (SBI) and its Associates accounted for 22.3 per cent. The
share of New Private Sector Banks, Old Private Sector Banks, Foreign
Banks, and Regional Rural Banks in aggregate deposits was 13.6 per
cent, 4.8 per cent, 4.3 per cent and 2.9 per cent, respectively.

Nationalised Banks accounted for the highest share of 50.9 per cent in
gross bank credit followed by State Bank of India and its Associates (22.1
per cent) and New Private Sector Banks (14.7 per cent). Foreign Banks,
Old Private Sector Banks and Regional Rural Banks had shares of around
4.9 per cent, 4.9 per cent and 2.6 per cent, respectively.
 India's foreign exchange (forex) reserves stood at US$ 280.19 billion for
the week ended July 12, 2013, according to data released by the central
bank. The value of foreign currency assets (FCA) - the biggest component
of the forex reserves – stood at US$ 252.14 billion, according to the
weekly statistical supplement released by the RBI.
  The number of mobile banking transactions doubled to 5.6 million in
January 2013 from 2.8 million in January 2012. The value of these
transactions increased three-times to Rs 625 crore (US$ 105.73 million)
during the month from Rs 191 crore (US$ 32.31 million) in the
corresponding month last year.
 Moreover, non-resident Indians (NRIs) parked deposits aggregating US$
14.18 billion in the financial year ended March 2013, depicting an increase
of 19 per cent over the previous year.
Recent Developments
 India's leading infrastructure development and finance company
Infrastructure Leasing & Financial Services Limited (IL&FS), has inked a
Memorandum of Understanding (MoU) with Industrial and Commercial
Bank of China (Asia) Limited (ICBC (Asia)), for mutual cooperation in
infrastructure project development services and financial services related
thereto.

The agreement envisages a scope of cooperation between the two

financial entities for providing infrastructure project development services,
including financial services relating thereto, trade, corporate banking,
investment banking and treasury related services, debt raising, advisory
and other form of permissible economic cooperation for such projects
across Northern and Eastern Asia and is expected to facilitate more
business opportunities for both the institutions in these geographies.
 Meanwhile, Standard Chartered Bank has announced that it will buy US-
based Morgan Stanley’s domestic private wealth management business.
The deal, to be completed by the end of 2013, would boost Standard
Chartered’s private wealth assets under management by 25 per cent or
about US$ 750 million.
 Marking another milestone in achieving financial inclusion, Vodafone India
and ICICI Bank have partnered to launch a mobile money transfer and
payment service, M-Pesa. The service will allow customers to transfer
money to any mobile phone in India, remit funds to bank accounts, deposit
and withdraw cash from designated outlets, pay utility bills, and shop at
 select merchant establishments.

The new service will initially be offered in West Bengal, Bihar and
Jharkhand through 8,300 authorised agents. It will be made available
across India by 2014-15.
 Public sector lender SBI intends to make a strong position in refinance
market in 2013. The bank offers lowest lending rates for buying homes.
The fast growing market of ‘home loans transferred from other banks’
consists 25 per cent of the total home loans disbursed by the bank in
FY13. SBI made Rs 30,000 crore (US$ 5.08 billion) of home loans in
2012-13.
 Meanwhile, US-based Customers Bancorp Inc (CUBI) has plans to infuse
US$ 51 million in multiple securities of Religare Enterprises Ltd. Religare
is currently aspiring for a banking licence to enter the banking industry.

The investments will take place through a combination of primary and

secondary market transactions.
Government Initiatives
India’s central bank is about to propose fundamental changes in the structure of
Indian banking industry. The suggestions include consolidation of some large
banks to create two-three global ones, setting up of smaller banks, separate
licenses for specific banking operations instead of a single universal one,
continuous licensing for new banks and conversion of some urban cooperative
banks into full-fledged commercial banks.
Also, the RBI has, for the time being, relaxed the norm that stipulates non-
banking finance companies (NBFCs) to have a minimum gap of six months
between two non-convertible debentures (NCDs) issues. The move is aimed at
streamlining the process of moving into a more robust asset-liability management
framework in a non-disruptive manner.
Road Ahead
Over the past few years, Indian banking system has majorly went revamp and
modernisation. The new infrastructure adopted by the banking system is mainly
comprised of information technology (IT) products and services.
Indian banking and securities companies will spend around US$ 422 billion on IT
products and services in 2013. That will imply a 13 per cent rise from Rs 37,300
crore (US$ 6.31 billion) spent in 2012. IT services is the largest overall spending
category at Rs 13,200 crore (US$ 2.23 billion) in 2013. This ensures that IT
service providers lay a strong focus on the financial services sector, according to
a study by research and analyst firm Gartner.
It’s a known fact that the banks and financial institutions in India face the problem
of swelling non-performing assets (NPA’s) and the issue is becoming more and
more unmanageable. In order to bring the situation under control, some steps
have been taken recently. The Securitization and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 was passed by
parliament, which is an important step towards elimination or reduction of NPA’s.
MEANING OF NPA’s:
An asset is classified as non-performing asset (NPA’s) if the borrower does not
pay dues in the form of principal and interest for a period of 90 days. However
with effect from March 2004, default status would be given to a borrower if dues
are not paid for 90 days, if any advance or credit facilities granted by bank to a
borrower become non-performing, then the bank will have to treat all the
advances/credit facilities granted to that borrower as non-performing without
having any regard to the fact that there may still exist certain advances/ credit
facilities having performing status. In simple words, an asset which ceases to
yield is a non-performing asset.
Thirty days past due
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) shall be an advance where:
1. interest and /or installment of principal remain overdue for a period of
more than 180 days in respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 180 days, in
respect of an overdraft/ cash Credit(OD/CC),
 3. the bill remains overdue for a period of more than 180 days in the case of
bills purchased and discounted,
4. 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
5. Any amount to be received remains overdue for a period of more than 180
days in respect of other accounts.
Many institutions now try to sell their non-performing assets through companies
like KIM-LAR, INC. which helps facilitate the sale of these bundled portfolios. The
non-performing assets often include mortgage loans, car loans, credit card debt
and installment loans.
Ninety days overdue
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, form the year ending March 31, 2004. Accordingly, with
effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an
advance where:
1. interest and /or installment of principal remain overdue for a period of
more than 90 days in respect of a Term Loan,
2. the account remains 'out of order' for a period of more than 90 days, in
respect of an overdraft/ cash Credit(OD/CC),
3. the bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,
4. 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

EMERGENCE OF THE WORD NON-PERFORMING ASSET:

The issues relating to definition, management or the mismanagement and
recommendations calling for spectacular solutions to the problem of non-
performing advances of banks are being deliberated at frequent intervals during
last decade or so. In late 80s the concept of classification of bank advances in
several health code categories took place though the terminology non-performing
advances did not exist at that time. This is followed by early 90s Anglo-American
model of categorization of bank lending portfolio in several blocks of
nomenclature in that included the non-performing advances. The rapid popularity
of the phenomenon can be ascribed to the opening up of the Indian economy
and consequent pressure from western powers to influence our banking system
in the name of international standards of accounting, congruence of banking
supervision by Basle committee, and so on. The sudden shock of guidelines
relating to non-performing advances and simultaneous of income recognition
made the Indian banking system totter and a number of public sector banks
started incurring losses from the mid-nineties. Then came the recommendations
of the Narasimham committee with the proposition of creating asset-
reconstruction fund for cleaning the balance sheets of the banks of non-
performing advances as a one-time measure.
The committee has defined non-performing assets as advances here, as on the
date of balance sheet,
1. In respect of term loans, interest remains past due for a period of more
than 90 days.
2. Overdrafts and cash credits accounts remain out of order for more than 90
days.
3. Bills purchased and discounted remain over due and unpaid for a period
of more than 90 days.

An amount is considered past due when it remains outstanding for 30 days

beyond the due date.
 As per latest guidelines issued by Reserve Bank of India the Non
Performing Asset is an advance where;
 Interest and or installment of principal remain overdue for a
period of more than 90 days in respect of term Loans.
 The account remains out of order for more than 90 days in
respect of an Overdraft and Cash credit accounts.
 The bill remains overdue for the period of more than 90 days
in case of Bills Purchased and Discounted.
  The loan asset has not been renewed within 90 days from
its due date of renewal.
 The stock statements have not been obtained within a
period of 90 days from the due date.
 The interest and or installment of principal remain un-paid
for one crop season beyond the due date in case of long-
term agriculture crop loans.
 (Long-term crop loan would be the crops with crop season
longer than one year and crops, which are not longer
duration crops, would be treated as short duration crops.
 Any amount to be received remains overdue for a period of
more than 90 days in respect of other account.
RBI has notified regulations concerning the income recognition of banks while
accepting the recommendations of the Narsimham committee report. The
following is the regulations regarding income recognition of banks:
 Interest income should not be recognized until it is realized. A non-
performing asset is one when it is overdue for two quarters or more.
 In respect of non-performing assets, interest is not to be recognized
on accrual basis but it is to be treated as income only when it is
actually received. NPA’s banks should not charge or take into
account the interest.

 In overdue bill, interest should not be charged or taken as income

unless realized. Interest accrued and credited to prior accounting
period in respect of non-performing assets should be reversed or
provided for in the current account if such interest still remains
uncollected.
CLASSIFICATION OF ASSETS FOR MAKING PROVISION:
For the purpose of making provisions for bad and doubtful loans and advances,
banks need to classify them into the following broad categories:
 Performing assets
 Non-performing asset
I) PERFORMING ASSETS:
Performing assets is also known as standard assets/loans, where the interest or
principal are not overdue beyond 180 days at the end of the financial year. Such
loans don’t carry more than the normal business risk.
II) NON-PERFORMING ASSETS:
Any loan the repayment of which is overdue beyond 90 days or two quarters is
considered as NPA. It is further classified into:
a. Standard.
b. Sub-standard assets
c. Doubtful assets
d. Loss assets
Standard Assets: are those assets, which do not disclose any problem and
generate income for the Bank, requires to be provided @0.25% on aggregate
balance as on the balance sheet date.
Sub-Standard Assets: If the interest and or installment of principal remains over
due for a period of more than 90 days, the assets are to be classified as Sub-
Standard assets and are to be provided @10% of aggregate balance as on
balance sheet date. With effect from March, 2005 percentage of provision has
been increased from 10% to 20%.
Doubtful Assets: The assets which have remained in Sub-standard category for
a period of 18 months, are to be classified as Doubtful assets. With effect from
March 2005,the periodicity of 18 months has been reduced to 12 months for
classifying as Doubtful assets. The assets are to be provided @20%. 30%, 50%
for secured portion depending upon the age in Doubtful category as mentioned
below and 100% in respect of un-secured portion i.e short fall in value of security:
a) Up to one year 20%
b) One year to three years 30%
c) Three years and above 50%
With effect from March, 2005 the provision rates in respect of doubtful assets
with three years ago in doubtful category has been increased for the secured
portion to the extent of 100%. However, the provision in respect of assets which
have already completed three years in doubtful category as on 31.03.2004 are to
be provided @ 60%,.75% and 100% as on 31.03.2005, 31.03.2006 and
31.03.2007 respectively.
Loss Assets: are those assets, which have no security in terms of mortgage or
hypothecation and a provision @100% is required as per prudential norms.
Loan assets classified as non-performing can be upgraded as performing assets
as soon as the borrower pays in full the arrears of interest and installment of
principal. However, in case of re-scheduled/ re-structured loan assets, an asset
can be up graded only if the interest and or installment of principal have been
serviced regularly as per terms and conditions of re-negotiated re-scheduled
terms for the period of one year.
Gross NPA:
Sum of Gross balances of Sub-standard, Doubtful and Loss assets
Gross NPA percentage:
Gross NPA divided by Gross advances multiply by 100.An increasing trend
implies gradual increase in bad credit portfolio.
Net NPA:
Sum of Net balances of Sub-standard, doubtful and loss assets
(Gross balance- Provision=Net balance)
Net NPA percentage:
Net NPA divided by Net advances multiply by 100. Net advances means Gross
advance minus Provisions for NPA’s.
After classifying assets into above categories, banks are required to make
provision against these assets for the interest not collected by them. In terms of
exact prudential regulations, the provisioning norms are as under:
Asset Classification P r o v i s i o n r e q u i r e m e n t s

Standard assets 0 . 2 5 %

Substandard assets 1 0 %

D o u b t f u l a s s e t s 20% - 50% of the secured portion depending on the

age of NPA, and 100% of the unsecured portion .

L o s s a s s e t s It may be either written off or fully provided by the bank.

The increasing levels of bad quality loans marred the prospects of nationalized
banks in the past few years. As a result banks shifted their focus from the
industrial segment to the corporate lending. This has curtailed the incremental
NPAs to a certain extent. In FY01, gross NPAs of public sector banks (PSBs)
increased by 3% compared to 9% jump in NPA levels of new private sector
banks. The RBI has tightened the prudential norms regarding classifying assets
as non-performing in line with the international standards. Accordingly, with effect
from FY04, an asset will be classified as NPA if the interest is overdue for 90
days (instead of 180 days). These norms are likely to strengthen the balance
sheet of banks, notwithstanding the fact that in the near term the higher
provisions could trim the profit growth.
The norms are tightened even for financial institutions (FIs). They are worst
affected by the NPA wave thanks to lending to the commodity and economy
sensitive sectors, not to mention that loans to steel, chemicals and textile sector
played a key role in dragging down performance of FIs. So far they have been
enjoying the privilege of recognizing a loan as NPA only if principal is overdue for
more than 365 days and interest is outstanding for over 180 days. With a view to
bring greater transparency, the RBI has proposed to reduce the time limit to 180
days (for principal). On the one hand imposition of stricter norms could lead to a
difficult time for FIs; permitting them an option of restructuring their loans could
give them some leeway.

PSB’s betting on restructuring

Gross NPAs (Rsbn) FY08 FY09 Change

Public sector banks 5 1 7 5 3 3 3 . 1 %

O ld p ri va t e b a n k s 3 8 4 0 5 . 3 %

New private banks 9 9 8 . 6 %

Foreign banks 2 4 2 6 10.9%

Financial institutions 1 4 3 1 5 7 9 . 7 %

T o t a l 731 766 4 . 8 %

Table 1 PSB’s betting on restructuring

To facilitate the speedy recovery of NPAs, the RBI came up with the idea of a
one-time settlement scheme for outstanding loans in FY01. PSB’s have
recovered about Rs 8bn from 2lakh accounts in the last fiscal. Although, the
scheme was extended till June 30, 2009, the response was not very
encouraging, partly due to the legal impediments. However, the scheme actually
gave the bankers an opportunity to make contact with borrowers, which were
earlier in touch with only legal advisors or accountants. Empowering banks to
enforce their charge without intervention of court could result in expeditious
recovery of bad debts in future.
Apart from this scheme, the government has designed major policy reforms in
order to enhance the efficiency of the banking system. It has decided to set up 7
more debt recovery tribunals (DRTs) in addition to the existing 22 and 5 appellate
tribunals. It has also proposed to bring in legislation for facilitating foreclosure
and enforcement of securities in case of default. Replacement of SICA (Sick
Industrial Companies Act) was another major step. The RBI has already asked
banks to file criminal cases against borrowers who are willful defaulters. These
initiatives are expected to aid banks to quickly recover their dues from the
borrowers.
NPA analysis
( R s m ) Gross NPAs Gross NPAs as a % Net NPAs as a % of Provision coverage*
of total loans t o t a l l o a n s

P r i v a t e s e c t o r b a n k s

ICICI Bank 4 , 2 1 0 6 . 0 % 2 . 2 % 6 3 . 4 %

HDFC Bank 1 , 4 6 8 3 . 2 % 0 . 4 % 8 5 . 9 %

UTI Bank 2 , 2 5 8 4 . 7 % 3 . 8 % 1 9 . 7 %

IDBI Bank 1 , 5 0 0 4 . 8 % 3 . 1 % 3 6 . 0 %

P u b l i c s e c t o r b a n k s

S B I 158,750 1 4 . 0 % 6 . 0 % 5 6 . 9 %

Union Bank 4 , 8 4 7 5 . 6 % 2 . 0 % 6 4 . 7 %

B O B 41,860 1 5 . 3 % 6 . 8 % 5 5 . 8 %

F I s
I C I C I 59,880 9 . 9 % 4 . 9 % 5 0 . 2 %

H D F C 3 , 0 0 1 2 . 3 % 0 . 9 % 6 2 . 4 %
* Figure 2 % of cumulative provisions made on Gross NPAs
Although ratio of net NPAs to net advances have been declining in the past two
years, it hardly offers any comfort. This is due to the fact that in absolute terms
NPAs are still very high (Rs 766 bn). Therefore, it will be a challenge for banks to
overcome this problem. For this, the internal control system and risk
management system are required to be strengthened by banks. There should be
a system for timely detection of NPAs. An important means for positioning
appropriate risk management techniques is the MIS development, which requires
building up of strong database and other information sets.
The growing NPAs are a source of worry for the Finance Minister too. Looking at
the changing scenario in the world markets, the problem becomes more ironical
because Indian banking at this juncture cannot afford to remain unresponsive to
the global requirements.
However, the outlook for the current fiscal looks bleak. Industrial production has
slowed down and the recent economic data point to a recession. Credit off take is
also lackluster. It does seem, at this point, that NPA levels of banks would not
come down significantly during the current year. Prashant K Reddy
(Research paper)
The 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. 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. But progress on the
structural-institutional aspects has been much slower and is a cause for concern
the sheltering of weak institutions while liberalizing operational rules of the game
is making implementation of operational changes difficult and in effective.
Changes required to tackle the NPA problem would have to span the entire
gamut of judiciary, polity and the bureaucracy to be truly effective.
SubhashisKundu (Research paper)
Banking sector reforms in India has progressed promptly on aspects like interest
rate deregulation, reduction in statutory reserve requirements, prudential norms
for interest rates, asset classification, income recognition and provisioning. But it
could not match the pace with which it was expected to do. The accomplishment
of these norms at the execution stages without restructuring the banking sector
as such is creating havoc. This research paper deals with the problem of having
non-performing assets. The reasons for mounting of non-performing assets and
the practices present in other countries for dealing with non-performing assets.
Non Performing Assets (ARTICLE)
Genesis of Asset Reconstruction Company
Most countries in the grip of systemic financial and economic crisis have
attempted system-wide clean up of NPAs as a part of restructuring of their
banking system. Often, solutions to a system-wide clean up of NPAs result in
creation of Asset Reconstruction Companies (ARCs), which are typically public/
government owned. ARCs act as debt aggregators and engage in acquisition of
NPAs. Thus ARCs take away the distraction by isolating NPAs from the banking
system and act as "bad bank". This leaves rest of the banking system free to act
as "good bank" and return to equity markets and normal banking business.
Governments encourage transfer of assets to ARCs through creation of
supportive environment. Governments may also provide special powers to ARCs
that are not otherwise available to banking system.
Indian scenario;
The problem of recovery from NPAs, in the Indian banking system, was
recognized by the Government of India (GOI) as far back as in 1997, when the
"Narasimham Committee" was appointed. The Narasimham Committee Report
mentioned that an important aspect of the continuing reform process was to
reduce the high level of NPAs as a means of banking sector reform. It was
expected that with a combination of policy and institutional development, new
NPAs in future could be lower; however, the problem of the huge backlog of
existing NPAs still remained. This problem of NPAs, impinged severely on banks
performance and their profitability. The Report envisaged creation of an "Asset
Recovery Fund" to take the NPAs off the lender's books at a discount. Unlike in
some countries where ARCs have been set up post financial crises and for the
purpose of bailout, in India, the GOI proactively initiated certain measures to
control NPAs.

Resolving Non-performing Assets of the Indian Banking System

He, Dong (2002): Resolving Non-performing Assets of the Indian Banking
System. Published in: India: Selected Issues and Statistical Appendix IMF
Country Report No. 02/193 (2002)
Abstract
This paper reviews the nature of non-performing assets in the Indian banking
system and discusses the key design features that would be important for the
Asset Reconstruction Companies to play an effective role in resolving such non-
performing assets.
PROBLEMS AND RECOVERY OF NPA AT BRANCH BANKS
Posted: Sep 30, 2009
Problems of swelling non-performing assets (NPAs) and the issue are becoming
more and more unmanageable. The NPAs have direct impact on banks
profitability, liquidity and equity. The NPAs of Indian Banks are relatively huge by
international standard. Therefore the biggest ever challenge that the banking
industry now faces is management of NPAs. It is true that banks have to restrict
their lending operations to secured advances only with adequate collateral
securities.
In this connection banks must aware of the problems and recovery legislations
of NPAs Nonperforming assets means an advance where payment of interest or
repayment of installments of principal or both remains for a period of more than
180 days.
The magnitude of NPAs have a direct impact on banks profitability as legally
they are not allowed to book income on such accounts and at the same time
banks are forced to make provision on such assets as per the RBI guidelines.
The Indian Banking sector is facing a serious situation in view of the mounting
NPAs which are the tune of Rs.56,000 crores in March 2002.NPAs is an
important parameter in the analysis of financial performance of banks. The
reduction of NPAs is necessary to improve profitability of the banks and comply
with capital adequacy norms.
Therefore, to solve the problems of existing NPAs, quality of appraisal
supervision and follow up should be improved. The NPAs can be avoided at the
initial stage of credit consideration by putting rigorous and appropriate credit
appraisal mechanism. This is in order to recover the NPA debt, the judicial
systems should revamped and is essential to enforce the SARFAESI Act with
more stringent provisions to realize the securities and personal assets of the
defaulters.
"http://www.articlesbase.com/banking-articles/problems-and-recovery-of-npa-at-
branch-banks-1284736.html"
Are Non Performing Assets Gloomy from Indian Perspective
By: Arpita on 14 February 2010
Continued growth in NPA threatens the repayment capacity of the banks and
erodes the confidence reposed by them in the banks. In fact high level of NPAs
has an adverse impact on the financial strength of the banks who in the present
era of globalisation, are required to conform to stringent International Standards.
“Non Performing Asset” means an asset or account of a borrower, which has
been classified by bank or financial institution as substandard, doubtful or loan
asset. After nationalisation and globalisation the initial directive that banks were
given was to expand their branch network, increase the saving rate and extent
credits to rural, urban and the most important SSI sectors. No doubt this mandate
has been achieved admirably under the regulation of economic reforms initiated
in 1991 by the then Finance Minister and present Prime minister Dr. Manmohan
Singh. No doubt it would have been incomplete without the overhaul of Indian
Banking System. Then all of a sudden focus shifted towards improving quality of
assets and better risk management.
Performance measurement of Banks -NPA analysis & credentials of
Parameters
Posted: Sep 28, 2009
Over the last few years Indian Banking, in its attempt to integrate itself with the
global banking has been facing lots of hurdles in its way due to its inherent
weaknesses, despite its high sounding claims and lofty achievements. In a
developing country like ours, banking is seen as an important instrument of
development, while with the strenuous NPAs, banks have become helpless
burden on the economy. Looking to the changing scenario at the world level, the
problem becomes more ironical because Indian banking, cannot afford to remain
unresponsive to the global requirements. The banks are, however, aware of the
grim situation and are trying their level best to reduce the NPAs ever since the
regulatory authorities i.e., Reserve Bank of India and the Government of India
are seriously chasing up the issue. Banks are exposed to credit risk, liquidity risk,
interest risk, market risk operational risk and management/ownership risk. It is
the credit risk which stands out as the most dreaded one. Though often
associated with lending, credit risk arises whenever a party enters into an
obligation to make payment or deliver value to the bank. The nature and extent of
credit risk, therefore, depend on the quality of loan assets and soundness of
investments. Based on the income, expenditure, net interest income, NPAs and
capital adequacy one can comment on the profitability and the long run
sustenance of the bank. Further, a comparative study on the performance of
various banks can be done using a ratio analysis of these parameters.
Journal of Asset Management (2010) 11, 62–70. doi:10.1057/jam.2010.1
Dynamics of emerging India's banking sector assets: A simple model
Soumitra K Mallick1, Amitava Sarkar2, Kalyan K Roy3, Tamal Duttachaudhuri4
and Anjan Chakrabarti5
Abstract
Banking sector loans are the principal source of capital for small and medium
business ventures in India, comprising firms that are not large enough to be
registered with stock exchanges. Non-performing assets (NPAs) are an important
measure of the success of these businesses, as well as of their levels of
discretion in carrying out their commercial activities conditional on their role in
developing India's entrepreneurship outside the stock markets. In this article we
analyze certain properties of NPAs in Indian Banks over the 1990s, when
liberalization was introduced by opening up a significant portion of the public
sector, allowing private banks to do business. We arrive at three conclusions for
emerging India's banking sector. First, NPAs (as a ratio of loans and advances)
are significantly sticky over time. Second, larger NPAs are associated with larger
advances and vice-versa. Third, NPAs do not seem to have spiralled out of
control over the 1990s. A simple co integration test is carried out and a set of
dynamic graphs, using notions of ‘fibration’, is presented to support the results.
ANALYSIS BASED ON ARTICLES
Indian banks (particularly nationalized banks) are struggling to come out of the
‘net’ of non-performing assets. The rising level of non-performing assets (NPAs)
amounting to about Rs 600 bn has plagued the Indian banking system. Thus
urgent cleaning up of bank balance sheet has become a crucial issue.
Banks are in the risk business. In the process of providing financial services, they
assume various kinds of risks viz. credit risk, market risk, operational risk,
interest risk and country risk. Among these different types of risks, credit
constitutes the most dominant asset in the balance sheet, accounting for about
60% of total assets. The credit risk is generally made up of transaction risk
(default risk) and portfolio risk. The risk management is a complex function and
requires specialized skills and expertise. As a result managing credit risk
efficiently assumes greater significance.
 CHAPTER III
BANKING SECTOR

2.1 HISTORY
SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31,
2005. It dominates the Indian banking sector with a market share of around 20% in
terms of total banking sector deposits. The increasing focus on upgrading the
technology back-bone of the bank will enable it to leverage its reach better, improve
service levels, provide new delivery platforms, and improve operating efficiency to
counter the threat of competition effectively. Once the core banking solution (CBS)
is fully implemented, it will cover over 10,000 branches and ATMs of the State Bank
group, and emerge as the strongest technology enabled distribution network in
India.
The increasing integration of SBI with its associate banks (associates) and
subsidiaries will further strengthen its dominant position in the banking sector and
position it as the country’s largest universal bank.

2.3. LIST OF KEY MANAGEMENT PERSONNEL

SHRI T.Y. PRABHU

Executive Director
Shri T.Y. Prabhu was appointed as Executive Director on 6th June, 2007. He has
over 39 years of Banking experience. Prior to joining the Bank, Shri Prabhu joined
Canara Bank in 1970 and later became General Manager of its Circle Office in New
Delhi. Shri Prabhu's experience covers a broad range of banking areas including
international division, Corporate Credit, Commercial Credit, Foreign Exchange,
Treasury and Investments and general administration. During his time with Canara
Bank, Shri Prabhu worked in Regional Rural Bank, handled Large Borrowal
Accounts, Sick Industries Accounts, BIFR Accounts, Treasury and International
Operation. He was deputed by Canara Bank to its wholly owned subsidiary in Hong
Kong during 1994-1997.

Shri Prabhu had also worked in domestic treasury and handled initial public offering
of Canara Bank as well as various other assignments including integration work
relating to domestic as well as forex treasury. During his tenure with Canara Bank,
he was appointed by the RBI as a member of the Advisory Group on Foreign
Exchange Management Act Regulations relating to Services like remittances etc.

Shri Prabhu is a graduate in Commerce and has a degree in Law. He is a Certified

Associate of the Indian Institute of Bankers(CAIIB).
........................................................
SHRI S.Raman
Executive Director
Mr. S. Raman joined the Union Bank of India as Executive Director on 15th October,
2008.

Prior to joining the Union Bank of India, Mr. Raman was with the Bank of India for
over 34 years and had exposure to different segments including Corporate Banking,
International Business and Human Resources Management. Mr. Raman served in
different parts of the country including Mumbai, New Delhi, Ahmedabad, Pune,
Hyderabad, Bhubaneshwar and Nagpur in different capacities including as Zonal
Manager in Orissa and Gujarat.

Mr. Raman also had two stints Overseas - at Jersey (UK) from 1983 to 1987 and as
Chief Executive of Bank of India’s US Operations from June 2005 to October 2008,
during which period the Center showed spectacular progress.

Mr. Raman has had a distinguished academic background. A B.Com. from

Osmania University (with a Second Rank) followed by an M.A. in Economics from
Nagpur University (with First Rank and a Gold Medal). He also holds a Diploma in
Business Management (again with an University Second Rank), a Senior Diploma
in German Language besides CAIIB from the Indian Institute of Bankers and ACIB
from the Chartered Institute of Bankers, London.
.
Mr. Raman currently oversees the portfolios of Risk Management, Human
Resources, Rural Business, General Administration and Retail.
........................................................

Government of India Nominee

SHRI K.V. EAPEN
Shri Eapen represents Government of India on the Board of Directors of the Bank
w.e.f. from 10th June, 2008. He is an IAS Officer of the Assam- Meghalaya cadre of
1984 batch and is presently Joint Secretary, Dept. of Financial Services,
Government of India, New Delhi. An alumni of St. Stephen's College, University of
Delhi, he has a Bachelor of Arts degree and a Post Graduate degree in Economics.
He also holds a Post Graduate Diploma in Management from Management
Development Institute Gurgaon and an M.Sc. in Macro Economic Policy and
Planning from the University of Bradford, United Kingdom.

He has worked in different districts of Assam and Meghalaya spanning more than a
decade in District Administration. In addition he has experience in areas such as
Health and Family Welfare, Tourism, Planning and Programme Implementation,
Agriculture and Industries . He was also Finance Secretary of Assam for two
years. He has also served in various Central Ministries such as Commerce and
Industry, Tourism and the Department of Personnel and Training.He is also
Government of India nominee director on the Board of IFCI Ltd.
.......................................................
Government of India nominee on the recommendation of RBI.
SHRI K. SIVARAMAN
Nominated by Government of India, on the recommendation of Reserve Bank of
India, as Director with effect from 27th February, 2007, under sub-section (3) of
section 9 of the Banking Companies (Acquisition and Transfer of Undertakings) Act,
1970. He is a retired Senior Executive from Reserve Bank of India. He has a post
graduate degree in Statistics ( M.Sc. from Banaras Hindu University, Varanasi,
India) He has more than 37 years experience in the Banking Industry with
specialisation in Banking Supervision, Development Finance, Training and Financial
Sector Reforms. Additionally, he is a Certified Associate of Indian Institute of
Bankers.
........................................................

Chartered Accountant Director

K.S. SREENIVASAN

Nominated by Government of India as a part-time non-official Director under

Chartered Accountant category, effective 11th October, 2006, under sub-section
(3)(g) of section 9 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1970. He is a qualified Chartered Accountant practising for more
than 24 years with wide experience in Accounting, Finance, Taxation, Forensic
Audit, Investigation, Mergers & Takeover, and Bank Auditing. He also has vast
experience in Alternate Dispute Redressal Mechanism including
Arbitration. Additionally, he is a Diploma holder in Computer Applications with
special emphasis on Banking Application and Client Server Technology and also a
Post-Professional Diploma in Computerised Information Systems Audit (DISA). He
is also pursuing his Phd. in Economics.
Completed Executive Management Program of Crestcom International , Denver,
Colorado, USA. Successfully completed the AMFI - (Association of Mutual Funds of
India) Advisors Module of National Stock Exchange Certification in Financial
Markets (NCFM). He is regularly consulted by many leading Educational Institutions
on Resource Development , Curriculum framing and acts as Anchor for Personal
Interviews ( PI) and Group Discussions (GD).
........................................................
Director representing Workmen Employees
SHRI N. SHANKAR
WORKMEN DIRECTOR
Government nominated Director under Clause (e) of Sub-Section (3) of Section 9 of
the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. A
Bank employee since 1979 and is presently a Special Assistant in M. S. Marg
branch, Mumbai. Currently, he is the General Secretary, Union Bank Staff Union,
Mumbai and Organizing Secretary of AIUBEA the majority recognized Union in the
Bank. He is also the Joint Secretary of Maharashtra State Bank Employees
Federation covering more than 50,000 employees and is also the National General
Council member. He is also a member of many Committees at various levels that
take up updating AIBEA movement. He is a Graduate in the faculty of Science and
a member of the Institute of Cost and Works Accountants of India.

An employee representative on the PF Trustee in the Union Bank of India

employees PF Trust for the last eight years, he has been instrumental in bringing
about various improvements and streamlining the functioning of the department
through Union Parivar resulting in speedy disbursement of PF Loans and
Retirement dues.

He is also involved in the Cooperative Society movement in Navi Mumbai and is the
key member of the action committee formed by Navi Mumbai Municipal Corporation
and Citizens to implement Municipal tax etc.
........................................................

Director representing Officer Employees

DEBASIS GHOSH
Government nominated Officer Employee Director, effective 22nd November, 2005,
under Clause (f) of sub-section (3) of Section 9 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970. He is a Science Graduate and
an MBA. Additionally, he has separate Diplomas in Computer Science and Rural
Development apart from a Post Graduate Diploma in Marketing Management. His
professional qualification is CAIIB. He is a Direct recruited Officer since 1985 and
handled different gamut of Banking covering areas like International Banking,
Recovery of NPAs, Priority Sector Advances and Rural Financing, Credit,
Relationship Banking, Merchant Banking and Risk Management Department.
Currently, he is Vice President, Union Bank of India Officers' Federation and
General Secretary of Delhi State Unit. He serves on a number of Committees of the
Board.
........................................................
Government Nominee Director under General Category
SMT. RANI SATISH
Nominated by Government of India as a part-time non-official Director with effect
from 2nd January, 2007, under sub-section 3(h) and (3-A) of section 9 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970. She is a
Post Graduate in Political Science and has been involved in various social welfare
activities spanning over three decades, particularly in the fields of education,
culture, social welfare, women empowerment and NGO activities.
........................................................
Government Nominee Director under General Category
SHRI ASHOK SINGH
Nominated by Government of India as a part-time non-official Director effective 19th
February, 2008 under sub-section 3(h) and (3-A) of section 9 of the Banking
Companies (Acquisition and Transfer of Undertakings) Act, 1970. He is a graduate
in the faculty of Science and a post graduate in Law from Lucknow University.

He is a social worker and a trade union leader actively associated with Congress
party from his youth. Presently he is a member of AICC Mughalsarai ( Chandoli)
and Vice Chairman, Labour Cell, AICC .He currently holds important positions in
several trade / labour unions and federations at the national level such as
Chairman, Labour Cell, PCC, Uttar Pradesh Congress Committee, President, U.P.
State Branch of INTUC, Indian National Sugar Mill Workers' Federation, President,
Indian National Defence workers' Federation, Vice President, Indian National
Electricity Workers' Federation and INTUC He is the Vice Chairman of National
committee on child labour. He is also a member on the Board of Trustee of the
Employees Provident Fund managed by the Ministry of Labour, Government of
India, member on the Board of Governors of the Indian Institute of Management,
Lucknow, member, National Committee on sugar,under the Ministry of Labour,
Member Court of the University, Allahabad and Governing Body , National Council
of Rural Institutes, Hyderabad, Govt. of India. Shri Singh was appointed to act as a
delegate representing several trade unions to attend a number of the international
labour conference. Shri Singh is a Chairman of standing Committee for effective co-
ordination between Industry & Technical Education Institutions constituted by
Government of India, Ministry of Human Resource Development and Committee for
monitoring the extension of social security to the construction workers under
Ministry of labour.
He was AICC Observer for Nagaland State in the President Election held in the
year 2007and also the Chairman of the National Youth Council, Indian National
Trade Union Congress (INTUC). 1994-95

2.4 CURRENT SALES, PRODUCT MIX

SBI’s funding profile is strong, underpinned by its strong retail deposit base. The
bank is facing increasing competition in its metropolitan and urban franchise. SBI’s
strong franchise gives it access to a steady source of stable retail funds, which
constitute around 59% of the total resources as on March 31, 2005 (56% as at
March 31, 2004).
Savings deposits have shown a strong three-year growth of 19%. Thus, despite a
reduction in the proportion of current account deposits, low-cost deposits have
continued to constitute over 40% of total deposits as at March 31, 2005. The bank’s
cost of deposits (excluding IMD) has significantly reduced to 4.70% for the 2004-05
(refers to financial year from April 1 to March 31), compared with 5.48% in 2003-04.
The bank’s liquidity position is very strong due to healthy accretion to deposits,
large limits in the call market, and significant surplus SLR investments. SBI will
maintain its strong funding profile and a low cost resource position in view of its
strong retail base and wide geographical reach.

2.5 MARKET POSITION

SBI will maintain a good earnings profile in the medium term despite high
pressure on yields due to the increasing competition in the banking sector. SBI’s
earning profile is characterised by consistency in the return on assets
(PAT/Average Assets), at around 1% per annum for the past three years, and
diverse income streams. To maintain yields and pursue credit growth, the bank is
aggressively targeting retail finance and small and medium enterprises (SMEs).
The bank’s core fee income of 1% of average funds deployed bolsters its
revenue profile. However, with the opening of government business like tax
collection to other banks and increased competition, the growth in fee income is
expected to slow down. The bank’s operating expense at 2.44% of average
funds deployed in 2004-05 is in line with other public sector banks. The bank’s
cost structure is rigid as fixed employee cost accounted for 74% of the operating
expenditure in 2004-05. Thus, despite good asset growth and technology
efficiency gains, the bank’s operating costs will remain high in the medium term.
To be able to reap the full benefits of technology implementation, the bank will
have to reduce or redeploy work force; since this is a sensitive issue, it is
expected to happen gradually.

The bank’s fund based and fee income earnings are diversified across industries,
regions, asset classes, and customer segments.

Strong diversification in income streams will ensure that the bank’s earnings
remain relatively stable, despite the decline in profitability in some segments.
Comfortable capital position

SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a
large capital base of Rs 240.72 billion as at March 31, 2005. The bank has
considerably improved its net worth coverage for net NPAs to 4.4 times as at
March 31, 2005 due to lower slippages reflecting an improving asset quality,
witnessed across the entire banking sector. The capitalization levels of SBI are
adequate to address the asset side risks and support the business growth in the
medium term.
Management strategies

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

Asset quality to remain at average levels

The bank continues to have a high level of gross NPAs at 5.95% of gross
advances as at March 31, 2005, compared with 4.9% for all scheduled
commercial banks (SCBs) taken together. The bank is facing challenges to
improve the quality of assets originated, as can be seen in the consistently higher
levels of slippages (additions to NPAs) at 2.71% in 2004-05.

To contain NPAs and ensure credit growth, the bank has decided to focus on
financing the retail (personal) segment as well as SMEs. The share of retail
advances has increased to 24.73% (Rs 522.08 billion) of total advances as at
September 30 2005. In the retail loan segment, SBI is targeting primarily the
housing loans segment, which constitutes Rs. 283.41 billion (54.3%) of total retail
loans. The NPAs in retail finance are low currently; however they are steadily
increasing (especially in the housing finance portfolio) and have started showing
signs of stress. SBI’s retail portfolio has grown at over 37% CAGR in the last two
years and hence a significant portion of the portfolio is largely unseasoned. The
housing finance portfolio has a 12-month, lagged gross NPA of 4.34% as at
March 31, 2005.The bank will face significant challenges in the medium term to
develop effective credit appraisal and collection systems in order to contain
NPAs in retail finance. SBI’s asset quality is expected to remain at average
levels, as the bank’s large and diverse asset portfolio reflects of the asset quality
of the banking system.

Business description

SBI along with its associate banks offer a wide range of banking products and
services across its different client markets. The bank has entered the market of
term lending to corporates and infrastructure financing, traditionally the domain of
the financial institutions. It has increased its thrust in retail assets in the last two
years, and has built a strong market position in housing loans.

SBI, through its non-banking subsidiaries, offers a host of financial services, viz.,
merchant banking, fund management, factoring, primary dealership, broking,
investment banking and credit cards. SBI has commenced its life insurance
business by setting up a subsidiary, SBI Life Insurance Company Limited, which
is a joint venture with CardiffS.A., one of the largest insurance companies in
France. SBI currently holds 74% equity in the joint venture.

Industry prospects
To leverage benefits such as access to low cost resources and the facility to
provide a larger gamut of services, a number of finance companies such as
Kotak Mahindra Finance Limited and HDFC Limited have promoted banks.
Simultaneously, yet another emerging trend is that of foreign banks promoting
NBFCs to benefit from regulatory flexibility available to such entities in areas like
absence of statutory liquidity ratio and cash reserve ratio requirements, priority
sector requirements, and corporate exposure limits.

New private sector banks capture marketshare

With technological edge and a strong marketing thrust, private sector banks have
been stealing market share in retail deposits and the corporate fee business from
public sector banks. Together with some foreign banks, these private banks have
also aggressively entered the retail asset financing space, hitherto the domain of
non-banking finance companies.

Given their focus on cross selling and optimizing their customer base, they now
offer the entire range of products and services on the asset and liability side to
retail and wholesale customers

Asset quality to improve

Banks have not yet fully resolved the stress in the asset quality of
their legacy corporate loan portfolios, however. Though slippages to NPAs and
provisioning were high for some banks in FY2004, as they moved to the 90-day
norm for recognising and provisioning for NPAs, the treasury gains enabled
significant provisioning to be made with the result that net NPAs for most public
sector banks are now less than 3%.

Going forward, steady growth in gross domestic product should help improve the
banks’ asset quality and increase corporate lending. The securitization and
reconstruction of financial assets and enforcement of security interest (Sarfaesi)
Act should also help banks in limiting slippages and improving NPA recoveries.

Better Capitalization levels

Banks have demonstrated a fair amount of flexibility in raising fresh equity capital
through public issues in recent years, thereby improving their capitalization
levels. The steady accruals to net worth and falling non-performing asset levels
have resulted in an improvement in the capitalization position of banks in recent
years.

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

Consolidation and emergence of universal banking groups

The cap on foreign ownership of banks has already been raised from 49% to
74%. The competition in the sector could get further intensified if the 10% cap on
voting rights is also relaxed. New private sector banks are expanding their
geographical coverage and making inroads into government business. The new
private and foreign banks will continue to gain market share from public sector
banks because of their efficient cost structures, technological edge, focused
marketing approach and operational freedom. However, the emergence of newer
players would be restricted if the private ownership of banks is capped at low
levels. Mergers among PSBs would create banks with even larger balance
sheets and customer base. However, the integration process in such mergers is
expected to be complex and time long drawn.

These would also be driven by GoI due to provisions of Banking Companies

(Acquisition and Transfer of Undertakings) Act 1969, and hence political scenario
will impact the timing and permutations possible. Strategic alliances between
banks and other financial sector players such as insurance companies and
mutual funds are also likely as banks attempt to enhance their product range,
leverage on economies of scale and reduce costs.
2.6 DIRECT COMPETITORS

- Axis Bank
- ICICI Bank

2.7 FUTURE PLANS

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

generate income for the bank. A ‘non performing asset’ was defined as a credit
facility in respect of which the interest and / or installment of principal had
remained ‘past due’ for a specified period of time.
The specified period was reduced in a phased manner as under:
Year ending March 31 Speci f i ed peri o d
1 9 9 3 Four Quarters
1 9 9 4 Three Quarters
1 9 9 5 O n w a r d s Two quarters
An amount due under any credit facility is treated as ‘past due’ when it has not
been paid within 30 days from the due date. Due to the improvements in the
payment and settlement systems, recovery climate, up gradation of technology in
the banking sector, etc, it was decided to dispense with the ‘past due’ concept,
with effect from 31st March, 2001. Accordingly, as from that date, a NPA shall be
an advance where,
i. Interest and/or installment of principal remain overdue for a period of more
than 180 days in respect of a term loan
ii. The account remains ‘our of order’ for a period of more than 180 days, in
respect of an overdraft/cash credit
iii. Interest and/or installment of principal remains overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agriculture purposes
iv. Any amount to be received remains overdue for a period of more than 180
days in respect of other accounts.
With a view to move towards international best practices, it has been decided to
adopt the ’90 days’ overdue norm for identification of NPAs, from 31 st March,
2004.
‘Out of Order’ Status
An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on
the date of Balance Sheet or credits are not enough to cover the interest debited
during the same period, these accounts should be treated as ‘out of order’.
‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid
on the due date fixed by the bank.

RESEARCH METHODOLOGY
NPA always affect the profit of bank and 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.

SECONDARY DATA

A secondary data is that data that is required to conduct the study and can be
obtained from books, journals, magazines, records etc. Secondary data is data
taken by the researcher from secondary sources, internal or external. Secondary
data is collected from following sources: -
1) Magazines and journals
2) Company websites.
3) Internet
4) Books
LIMITATION
Many constraints were involved in doing this study. Some of them are as follows.
 The most significant limitation has been the individuals involved in this
study were very busy and did not spare much time in discussion.
 The sample size selected for the survey was too small as compared to
large population.
 The project was carried out only in the Delhi, so findings on data gathered
can be best true for Delhi only and not applicable to other parts of state
and country.
Indian stock market is a market where sentiments play a major role in price;
hence 100% accurate predictions cannot be made about its future path

CHAPTER-IV
 DATA ANALYSIS AND FINDINGS

The following is the data analysis of the banking sector

TOTAL ASSET
Y E A R 2007-08 2008-09 2009-10 2010-11 2011-12
TOTAL ASSET(RS. CR) 407185 459883 494029 566565 721526
 800000
700000
600000
500000
400000
YEAR
300000
TOTAL ASSET(RS. CR)
200000
100000
0
1 2 3 4 5 6
YEAR

Interpretation:-Above graph show that total assets of SBI is increased in

2004-05 by 52658 crore, in 2007-08 increased by 154961rs. crore. So
assets of the SBI bank increased from last five year.

GROSS NPA

Y E A R 2007-08 2008-09 2009-10 2010-11 2011-12

12667 12456 9628 9998 12837
_GROSS NPA(RS.CR)
 _GROSS NPA(RS.CR)

14000
12000
10000
8000 _GROSS
6000 NPA(RS.CR)

4000
2000
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08

Interpretation:- above graph shows that Non-performing assets of SBI

decreased from 2003-04 to2006-07 and increased in 2007-08. There are so
many reason of increases of npa

NET NPA

Y E A R 2007-08 2008-09 2009-10 2010-11 2011-12

NET NPA(RS. CR.) 5442 5349 4906 5258 7424

 NET NPA(RS. CR.)

8000
7000
6000
5000
4000
NET NPA(RS.
3000 CR.)
2000
1000
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08

Interpretation :-above graph show that net NPA decreasd from 2003-04 to
2005-06 and increased in 2006-07 to 2007-08.

GROSS NPA (RATIO%)

Y E A R 2003-04 2004-05 2005-06 2006-07 2007-08

GROSS NPA(RATIO%) 7.75 5.96 3.61 2.92 3.04

GROSS NPA(RATIO%)

8
7
6
5
4
GROSS
3 NPA(RATIO%)
2
1
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08
Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is
decreased from 2004-05 to 2006-07 and increased in 2007-08.

NET NPA(RATIO%)

Y E A R 2007-08 2008-09 2009-10 2010-11 2011-12

NET NPA(RATIO%) 3 . 4 8 2 . 6 5 1 . 8 8 1 . 5 6 1 . 7 8

3.5

2.5 YEAR

2
NET
1.5 NPA(RATIO%)

0.5

0
1 2 3 4 5 6

Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is

decreased from 2004-05 to 2006-07 and increased in 2007-08

PROVISION COVER
Y E A R 2007-08 2008-09 2009-10 2010-11 2011-12
PROVISION COVER 57.04 59.45 49.04 47.41 45.04

PROVISION COVER

70
POVISION COVER %

60
50
40
PROVISION COVER
30
20
10
0
2003-04 2004-05 2005-06 2006-07 2007-08
yEAR

Interpretation: Above graph shows that in 2003-04 provision cover of NPA

is 57.04% and increased in 2004-05. It decreased from 2005-06 to 2007-08.

State Bank of Patiala

Y E A R 2007-08 2008-09 2009-10 2010-11 2011-12

GROSS NPA(%) 1 . 8 2 1 . 6 5 1 . 3 8 2 . 1 4 1 . 4 2
NET NPA(%) 1 . 3 5 1 . 2 3 0 . 9 9 0 . 8 3 0 . 6

2.5
2
1.5 GROSS NPA(%)
1 NET NPA(%)
0.5
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08

Interpretation: Above graph shows that the gross NPA of SBP is decreased
from 2003-04 to 2005-06,increased in 2006-07 and again decreased in 2007-
08. The net NPA decreased from 2003-04 to 2007-08.

FINDINGS AND INFERENCES

1. REASON OF NPA IN BANK:-

  Default by customer
 Non-inspection of borrower
 Lack of expertise
 Imbalance of inventories
 Poor credit collection
 Lack of trained staff
 Lack of commitment to recovery
 Change in consumer preference

2 IMPACT OF NPA ON BANK

 Govt. Policies
 Impact of profitability
 Liquidity
 Impact on outlook of Banker to wards credit delivery
 Impact of productivity

LIMITATIONS

Many constraints were involved in doing this study. Some of them are as follows.
 The major limitaion involved is that the project cannot be carried out on
primary research as gathering data from banks is very difficult.
 NPA is a vast topic so all the factors cannot be considered
 Profitability and liquity cannot be judged only on the basis of NPA.

RECOMMENDATION

 Credit administration: A banks have to strengthen their credit

administrative machinery and put in place effective credit risk
management systems to reduce the fresh incidence of NPAs.
  Better Inspection: We shall keep a close watch on the manner in which
NPA reduction is taking place.

 Cash Recovery: We should also insist that cash recoveries should

more than offset the fresh write-offs in NPAs.

 Perception: The mindset of the borrowers needs to change so that a

culture of proper utilization of credit facilities and timely repayment is
developed.

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

 Coordinator: Extending credit involves lenders and borrowers and

both should realize their role and responsibilities. They should appreciate
the difficulties of each other and should endeavor to work contributing to a
healthy financial system.

CONCLUSION

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

APPENDICES
 (A) TEXT BOOKS
1.) Financial Management by P.N. Reddy, H.R. Appannaiah and
B.G.Satyaprasad.
2.) Financial Management by Prassana Chandra (Tata Mc Graw Hill
Publications).
3.) Business Research Methods by O.R. Krishnaswami and B.G.
Satyaprasad.
4.) Law and Practice of Banking by H.R. Appannaiah, P.N. Reddy and
S.Vijayendra.
5.) Greater Kashmir.
6.) Hand book of banking information by N S Tour.
(B) WEBSITES
1.) www.jkbank.net

2.) www.banking .com

3.) www.rbi.org

Finance India, September 2005 pp-957-961

2. Charted Financial Analysis, October 2005 pp-64
3. Charted Financial Analysis, October 2007 pp-31-31
4. Charted Financial Analysis, November 2007 pp-8-9
5. Charted Financial Analysis, August 2004 B.P. Dhaka pp-47-52
6. Business Today, May 2006 pp-34
7. Charted Financial Analysis, December 2005 pp-25-28
8. RBI Bulletin, July 1999 pp-34-36
9. RBI Bulletin, January 2004 pp-17-19