RESEARCH REPORT

ON
“Comparative Analysis of Non-Performing Assets of
Public Sector Banks, Private Sector Banks & Foreign
Banks”

Submitted for the partial fulfillment of the requirement for the award of

Bachelor of Business Administration

SHARDA UNIVERSITY
(2013-2016)

Submitted To:- Submitted by: -

Prof. P. K. Aggarwal Rahul Singh
2013009186
 PREFACE

Granting of credit facilities for economic activities is the primary task of banking. Apart
from raising resources through fresh deposits, borrowings, etc. recycling of funds
received back from borrowers constitutes a major part of funding credit dispensation
activities. Non-recovery of installments as also interest on the loan portfolio negates the
effectiveness of this process of the credit cycle. Non-recovery also affects the
profitability of banks besides being required to maintain more owned funds by way of
capital and creation of reserves and provisions to act as cushion for the loan losses.
Avoidance of loan losses is one of the pre-occupations of management of banks. While
complete elimination of such losses is not possible, bank managements aim to keep the
losses at a low level. In fact, it is the level of non-performing advances, which, to a great
extent, differentiates between a good and a bad bank. Mounting NPAs may also have
more widespread repercussions. To avoid shock waves affecting the system, the
salvaging exercise is done by the Government or by the industry on the behest of
Government/ central bank of the country putting pressure on the exchequer.

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

This project aims at providing an o overall view on the existence of NPAs, their
treatment, the ways at resolving this issue and also a few reports on the recent
developments in this field.
 ACKNOWLEDGEMENT

First of all I would like to take this opportunity to thank my College for having
projects as a part of the B.B.A Curriculum.

I wish to express my heartfelt gratitude to the following individuals who have played a
crucial role in the research for this project. Without their active cooperation the
preparation of this project could not have been completed within the specified time limit.

The first person I would like to acknowledge is my guide Dr. P. K Aggarwal. Who
supported me throughout this project with utmost co-operation and patience. I am
very much thankful to you sir, for sparing your precious and valuable time for me and
for helping me in doing this project.

Finally, to all my friends who helped me in making this project. I want to thank
them for all their help, support, interest and valuable hints.
 TABLE OF CONTENTS

Sr. TOPICS Pg.

No. No.
1. Introduction to NPA’s 1-27
Meaning of NPA 1
Asset Classification 3
Types of NPA 7
Reasons for an Account becoming an NPA 8
Impact of NPA 10
Early Symptoms 11
Preventive Measurement of NPA 13
Procedure of NPA Identification &
Resolutions in India 16
2. Objectives & Beneficiaries 28

3. Research Methodology 29

4. Analysis 31-60

5. Overall Findings 61

6. Conclusion 62

7. Suggestion 63

8. Bibliography 64
 INTRODUCTION TO NPA

MEANING OF NPA:
Non-Performing Asset means an asset or account of borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it has not been paid
within 30 days from the due date. Due to the improvement in the payment and settlement
systems, recovery climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as
from that date, a Non performing asset (NPA) shell be an advance where
i. Interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit (OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
With a view to moving towards international best practices and to ensure greater transparency,
it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the
year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-
performing asset (NPA) shell be a loan or an advance where;
i. Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit (OD/CC),
Page 1
 iii. The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in
Respect of other accounts.

Page 2
 ASSET CLASSIFICATION:
Assets are classified into following four categories:
 Standard Assets:

 Sub-standard Assets

 Doubtful Assets

 Loss Assets

Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the principal
amount of the loan regularly from the customer. Here it is also very important that in this
case the arrears of interest and the principal amount of loan do not exceed 90 days at the
end of financial year. If asset fails to be in category of standard asset that is amount due
more than 90 days then it is NPA and NPAs are further need to classify in sub categories.

Provisioning Norms:
 From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis.

 The provisions on standard assets should not be reckoned for arriving at net NPAs.

 The provisions towards Standard Assets need not be netted from gross advances but
shown separately as 'Contingent Provisions against Standard Assets' under 'Other
Liabilities and Provisions - Others' in Schedule 5 of the balance sheet.

Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
reasonability of the dues:
1) Sub-standard Assets
2) Doubtful Assets
3) Loss Assets

Page 3
 Sub-standard Assets:
With effect from 31 March 2005, a substandard asset would be one, which has remained
NPA for a period less than or equal to 12 month. The following features are exhibited by
substandard assets: the current net worth of the borrowers / guarantor or the current market
value of the security charged is not enough to ensure recovery of the dues to the banks in
full; and the asset has well-defined credit weaknesses that jeopardize the liquidation of the
debt and are characterized by the distinct possibility that the banks will sustain some loss,
if deficiencies are not corrected.

Provisioning Norms:
A general provision of 10 percent on total outstanding should be made without making
any allowance for DICGC/ECGC guarantee cover and securities available.

Doubtful Assets:
A loan classified as doubtful has all the weaknesses inherent in assets that were classified
as sub-standard, with the added characteristic that the weaknesses make collection or
liquidation in full, on the basis of currently known facts, conditions and values – highly
questionable and improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if it remained in
the sub-standard category for 12 months.

Provisioning Norms:
 100 percent of the extent to which the advance is not covered by the realisable value of
the security to which the bank has a valid recourse and the realisable value is estimated
on a realistic basis.

 In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the
period for which the asset has remained doubtful:

Page 4
 Period for which the advance has been Provision
considered as doubtful requirement (%)

Up to one year 20

One to three years 30

More than three years: 60% with effect from March

(1) Outstanding stock of NPAs as on 31, 2005.
March 31, 2004. 75% effect from March 31,
(2) Advances classified as „doubtful‟ 2006.
more than three years on or after 100% with effect from March
April 1, 2004. 31, 2007.

 Additional provisioning consequent upon the change in the definition of doubtful

assets effective from March 31, 2003 has to be made in phases as under:

i. As on31.03.2003, 50 percent of the additional provisioning requirement on the
assets which became doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.
ii. As on 31.03.2002, balance of the provisions not made during the previous year, in
addition to the provisions needed, as on 31.03.2002.
 Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12
months over a four year period commencing from the year ending March 31, 2005,
with a minimum of 20 % each year.

Loss Assets:
A loss asset is one which considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted- although there may be some
salvage or recovery value. Also, these assets would have been identified as “Loss
assets” by t he bank or internal or external auditors or the RBI inspection but the
amount would not have been written-off wholly.
Page 5
 Provisioning Norms:
The entire asset should be written off. If the assets are permitted to remain in the
books for any reason, 100 percent of the outstanding should be provided for.

Page 6
TYPES OF NPA:
1. Gross NPA
2. Net NPA

Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss
assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs

Gross Advances

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

Net NPAs = Gross NPAs – Provisions

Gross Advances - Provisions

Page 7
 REASONS FOR AN ACCOUNT BECOMING NPA:
1. Internal factors
2. External factors

Internal factors:
1) Funds borrowed for a particular purpose but not use for the said purpose.
2) Project not completed in time.
3) Poor recovery of receivables.
4) Excess capacities created on non-economic costs.
5) In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6) Business failures.
7) Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-
appropriation etc.
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delaying settlement of payments\ subsidiaries by government bodies etc.,

External factors:
1) Sluggish legal system –
 Long legal tangles

 Changes that had taken place in labour laws

 Lack of sincere effort.

2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5) Failures, nonpayment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6) Government policies like excise duty changes, Import duty changes etc.,

Page 8
 The RBI has summarized the finer factors contributing to higher level of NPAs in the
Indian banking sector as:

 Diversion of funds, which is for expansion, diversification, modernization, undertaking

new projects and for helping associate concerns. This is also coupled with recessionary
trends and failures to tap funds in capital and debt markets.


 Business failures (such as product, marketing etc.), which are due to inefficient
management system, strained labour relations, inappropriate technology/ technical
problems, product obsolescence etc.


 Recession, which is due to input/ power shortage, price variation, accidents, natural
calamities etc. The externalization problems in other countries also lead to growth of
NPAs in Indian banking sector.


 Time/ cost overrun during project implementation stage.


 Governmental policies such as changes in excise duties, pollution control orders etc.


 Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation,
promoters/ directors disputes etc.


 Deficiency on the part of banks, viz, delays in release of limits and payments/
subsidies by the Government of India.

Page 9
IMPACT OF NPA:
Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong choice
of client. Because of the money getting blocked the prodigality of bank decreases not only
by the amount of NPA but NPA lead to opportunity cost also as that much of profit
invested in some return earning project/asset. So NPA doesn‟t affect current profit but
also future stream of profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.

Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead
to borrowing money for shortest period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to
lack of money. Routine payments and dues.

Involvement of management:
Time and efforts of management is another indirect cost which bank has to bear due to
NPA. Time and efforts of management in handling and managing NPA would have
diverted to some fruitful activities, which would have given good returns. Now day‟s
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.

Page 10
 EARLY SYMPTOMS:
By which one can recognize a performing asset turning in to
non-performing asset

Four categories of early symptoms:-

1) Financial:
 Non-payment of the very first installment in case of term loan.

 Bouncing of cheque due to insufficient balance in the accounts.

 Irregularity in installment.

 Irregularity of operations in the accounts.

 Unpaid overdue bills.

 Declining Current Ratio.

 Payment which does not cover the interest and principal amount of that installment.

 While monitoring the accounts it is found that partial amount is diverted to
sister concern or parent company.


2) Operational and Physical:

 If information is received that the borrower has either initiated the process of
winding up or are not doing the business.

 Overdue receivables.

 Stock statement not submitted on time.

 External non-controllable factor like natural calamities in the city where
borrower conduct his business.

 Frequent changes in plan.

 Nonpayment of wages.

Page 11
 3) Attitudinal Changes:

 Use for personal comfort, stocks and shares by borrower.


 Avoidance of contact with bank.

 Problem between partners.



4) Others:

 Changes in Government policies.


 Death of borrower.

 Competition in the market.

Page 12
PREVENTIVE MEASUREMENT FOR NPA:
Early Recognition of the Problem:
Invariably, by the time banks start their efforts to get involved in a revival process, it‟s
too late to retrieve the situation- both in terms of rehabilitation of the project and recovery
of bank‟s dues. Identification of weakness in the very beginning that is : When the
account starts showing first signs of weakness regardless of the fact that it may not have
become NPA, is imperative. Assessment of the potential of revival may be done on the
basis of a techno-economic viability study. Restructuring should be attempted where, after
an objective assessment of the promoter‟s intention, banks are convinced of a turnaround
within a scheduled timeframe. In respect of totally unviable units as decided by the bank,
it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is
possible through legal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent:

Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones who have
intelligent inputs with regard to promoters‟ sincerity, and capability to achieve turnaround.
Based on this objective assessment, banks should decide as quickly as possible whether it
would be worthwhile to commit additional finance.
In this regard banks may consider having “Special Investigation” of all financial
transaction or business transaction, books of account in order to ascertain real factors that
contributed to sickness of the borrower. Banks may have penal of technical experts with
proven expertise and track record of preparing techno-economic study of the project of the
borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route
the additional funding through the controlling offices in deserving cases, and help avert
many accounts slipping into NPA category.
Page 13
 Timeliness and Adequacy of response:
Longer the delay in response, grater the injury to the account and the asset. Time is a
crucial element in any restructuring or rehabilitation activity. The response decided on the
basis of techno-economic study and promoter‟s commitment, has to be adequate in terms
of extend of additional funding and relaxations etc. under the restructuring exercise. The
package of assistance may be flexible and bank may look at the exit option.

Focus on Cash Flows:

While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading picture.
Appraisal for fresh credit requirements may be done by analyzing funds flow in
conjunction with the Cash Flow rather than only on the basis of Funds Flow.

Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in tackling
adverse business conditions is a very important aspect that affects a borrowing unit‟s
fortunes. A bank may commit additional finance to an aling unit only after basic viability
of the enterprise also in the context of quality of management is examined and confirmed.
Where the default is due to deeper malady, viability study or investigative audit should be
done – it will be useful to have consultant appointed as early as possible to examine this
aspect. A proper techno- economic viability study must thus become the basis on which
any future action can be considered.

Multiple Financing:
 During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks/ FIs as also sharing of all relevant
information on the borrower would go a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.
Page 14
  In some default cases, where the unit is still working, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch
bankers once they default, for fear of getting their cash flows forfeited), and ensure
that such cash flows are used for working capital purposes. Toward this end, there
should be regular flow of information among consortium members. A bank, which is
not part of the consortium, may not be allowed to offer credit facilities to such
defaulting clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit Information
Bureau of India Ltd.(CIBIL) may be very useful for meaningful information
exchange on defaulting borrowers once the setup becomes fully operational.


 In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender may
have a much shorter timeframe in mind. So it is possible that the letter categories of
lenders may be willing to exit, even a t a cost – by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into
account.


 Corporate Debt Restructuring mechanism has been institutionalized in 2001 t o
provide a timely and transparent system for restructuring of the corporate debt of Rs.
20 crore and above with the banks and FIs on a voluntary basis and outside the legal
framework. Under this system, banks may greatly benefit in terms of restructuring of
large standard accounts (potential NPAs) and viable sub-standard accounts with
consortium/multiple banking arrangements.

Page 15
 PROCEDURES FOR NPA IDENTIFICATION AND
RESOLUTION IN INDIA:
1. Internal Checksand control
Since high level of NPAs dampens the performance of the banks identification of potential
problem accounts and their close monitoring assumes importance. Though most banks
have Early Warning Systems (EWS) for identification of potential NPAs, the actual
processes followed, however, differ from bank to bank. The EWS enable a bank to identify
the borrower accounts which show signs of credit deterioration and initiate remedial
action. Many banks have evolved and adopted an elaborate EWS, which allows them to
identify potential distress signals and plan their options beforehand, accordingly. The early
warning signals, indicative of potential problems in the accounts, viz. persistent
irregularity in accounts, delays in servicing of interest, frequent devolvement of L/Cs,
units' financial problems, market related problems, etc. are captured by the system. In
addition, some of these banks are reviewing their exposure to borrower accounts every
quarter based on published data which also serves as an important additional warning
system. These early warning signals used by banks are generally independent of risk rating
systems and asset classification norms prescribed by RBI.
The major components/processes of a EWS followed by banks in India as brought out by a
study conducted by Reserve Bank of India at the instance of the Board of Financial
Supervision are as follows:
 Designating Relationship Manager/ Credit Officer for monitoring account/s

 Preparation of `know your client' profile

 Credit rating system

 Identification of watch-list/special mention category accounts

 Monitoring of early warning signals

Relationship Manager/Credit Officer

The Relationship Manager/Credit Officer is an official who is expected to have complete
knowledge of borrower, his business, his future plans, etc. The Relationship Manager has
to keep in constant touch with the borrower and report all developments impacting the
Page 16
 borrowable account. As a part of this contact he is also expected to conduct scrutiny and
activity inspections. In the credit monitoring process, the responsibility of monitoring a
corporate account is vested with Relationship Manager/Credit Officer.

Know your client' profile (KYC)

Most banks in India have a system of preparing `know your client' (KYC) profile/credit
report. As a part of `KYC' system, visits are made on clients and their places of
business/units. The frequency of such visits depends on the nature and needs of
relationship.

Credit Rating System

The credit rating system is essentially one point indicator of an individual credit exposure
and is used to identify measure and monitor the credit risk of individual proposal. At the
whole bank level, credit rating system enables tracking the health of banks entire credit
portfolio. Most banks in India have put in place the system of internal credit rating. While
most of the banks have developed their own models, a few banks have adopted credit
rating models designed by rating agencies. Credit rating models take into account various
types of risks viz. financial, industry and management, etc. associated with a borrowable
unit. The exercise is generally done at the time of sanction of new borrowable account and
at the time of review renewal of existing credit facilities.

Watch-list/Special Mention Category

The grading of the bank's risk assets is an important internal control tool. It serves the
need of the Management to identify and monitor potential risks of a loan asset. The
purpose of identification of potential NPAs is to ensure that appropriate preventive /
corrective steps could be initiated by the bank to protect against the loan asset becoming
non-performing. Most of the banks have a system to put certain borrowable accounts
under watch list or special mention category if performing advances operating under
adverse business or economic conditions are exhibiting certain distress signals. These
accounts generally exhibit weaknesses which are correctable but warrant banks' closer
attention. The categorization of such accounts in watch list or special mention category
Page 17
 provides early warning signals enabling Relationship Manager or Credit Officer to
anticipate credit deterioration and take necessary preventive steps to avoid their slippage
into non performing advances. Early Warning Signals It is important in any early warning
system, to be sensitive to signals of credit deterioration. A host of early warning signals
are used by different banks for identification of potential NPAs. Most banks in India have
laid down a series of operational, financial, transactional indicators that could serve to
identify emerging problems in credit exposures at an early stage. Further, it is revealed
that the indicators which may trigger early warning system depend not only on default in
payment of installment and interest but also other factors such as deterioration in operating
and financial performance of the borrower, weakening industry characteristics, regulatory
changes, general economic conditions, etc. Early warning signals can be classified into
five broad categories viz.
a) Financial
b) Operational
c) Banking
d) Management and
e) External factors.

Financial related warning signals generally emanate from the borrowers' balance sheet,
income expenditure statement, statement of cash flows, statement of receivables etc.
Following common warning signals are captured by some of the banks having relatively
developed EWS.

Financial warning signals

 Persistent irregularity in the account

 Default in repayment obligation

 Devolvement of LC/invocation of guarantees

 Deterioration in liquidity/working capital position

 Substantial increase in long term debts in relation to equity

 Declining sales

 Operating losses/net losses
Page 18
  Rising sales and falling profits

 Disproportionate increase in overheads relative to sales

 Rising level of bad debt losses Operational warning signals

 Low activity level in plant

 Disorderly diversification/frequent changes in plan

 Nonpayment of wages/power bills

 Loss of critical customer/s

 Frequent labor problems

 Evidence of aged inventory/large level of inventory
Management related warning signals
 Lack of co-operation from key personnel

 Change in management, ownership, or key personnel

 Desire to take undue risks

 Family disputes

 Poor financial controls

 Fudging of financial statements

 Diversion of funds
Banking related signals
 Declining bank balances/declining operations in the account

 Opening of account with other bank

 Return of outward bills/dishonored cheques

 Sales transactions not routed through the account

 Frequent requests for loan

 Frequent delays in submitting stock statements, financial data, etc.
Signals relating to external factors
 Economic recession

 Emergence of new competition

 Emergence of new technology

 Changes in government / regulatory policies

 Natural calamities

Page 19
 2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various
resolution mechanisms introduced in the recent past which include the SRFAESI Act, one
time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs. From
the data available of Public Sector Banks as on March 31, 2003, there were 1,522 numbers
of NPAs as on March 31, 2003 which had gross value greater than Rs. 50 million in all the
public sector banks in India. The total gross value of these NPAs amounted to Rs. 215
billion. The total number of resolution approaches (including cases where action is to be
initiated) is greater than the number of NPAs, indicating some double counting. As can be
seen, suit filed and BIFR are the two most common approaches to resolution of NPAs in
public sector banks. Rehabilitation has been considered/ adopted in only about 13% of the
cases. Settlement has been considered only in 9% of the cases. It is likely to have been
adopted in even fewer cases. Data available on resolution strategies adopted by public
sector banks suggest that Compromise settlement schemes with borrowers are found to be
more effective than legal measures. Many banks have come out with their own
restructuring schemes for settlement of NPA accounts. State Bank of India, HDFC
Limited, M/s. Dun and Bradstreet Information Services (India) Pvt. Ltd. and M/s. Trans
Union to serve as a mechanism for exchange of information between banks and FIs for
curbing the growth of NPAs incorporated credit Information Bureau (India) Limited
(CIBIL) in January 2001. Pending the enactment of CIB Regulation Bill, the RBI
constituted a working group to examine the role of CIBs. As per the recommendations of
the working group, Banks and FIs are now required to submit the list of suit-filed cases of
Rs. 10 million and above and suit filed cases of willful defaulters of Rs. 2.5 million and
above to RBI as well as CIBIL. CIBIL will share this information with commercial banks
and FIs so as to help them minimize adverse selection at appraisal stage. The CIBIL is in
the process of getting operationalised.

3. Willful Defaulters

Page RBI20 has issued revised guidelines in respect of detection of willful default and diversion
 and siphoning of funds. As per these guidelines a willful default occurs when a borrower
defaults in meeting its obligations to the lender when it has capacity to honor the
obligations or whenfunds have been utilized for purposes other than those for which
finance was granted. The list of willful defaulters is required to be submitted to SEBI and
RBI to prevent their access to capital markets. Sharing of information of this nature helps
banks in their due diligence exercise and helps in avoiding financing unscrupulous
elements. RBI has advised lenders to initiate legal measures including criminal actions,
wherever required, and undertake a proactive approach in change in management, where
appropriate.

4. Legala and Regulatory Regime

Debt Recovery Tribunals
DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions
Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal
(DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with
competence to entertain cases referred to them, by the banks and FIs for recovery of debts
due to the same. The order passed by a DRT is appealable to the Appellate Tribunal but no
appeal shall be entertained by the DRAT unless the applicant deposits 75% of the amount
due from him as determined by it. However, the Affiliate Tribunal may, for reasons to be
received in writing, waive or reduce the amount of such deposit. Advances of Rs. 1 million
and above can be settled through DRT process. An important power conferred on the
Tribunal is that of making an interim order (whether by way of injunction or stay) against
the defendant to debar him from transferring, alienating or otherwise dealing with or
disposing of any property and the assets belonging to him within prior permission of the
Tribunal. This order can be passed even while the claim is pending. DRTs are criticized in
respect of recovery made considering the size of NPAs in the Country. In general, it is
observed that the defendants approach the High Country challenging the verdict of the
Appellate Tribunal which leads to further delays in recovery. Validity of the Act is often
challenged in the court which hinders the progress

of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of
infrastructure.
Page 21
 Lok adalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987
helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counseling between the
parties and to reduce burden on the court, especially for small loans. Cases involving suit
claims up to Rs. l million can be brought before the Lokadalat and every award of the
Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any
court against the award made by the Lokadalat. Several people of particular localities
various social organizations are approaching Lokadalats which are generally presided over
by two or three senior persons including retired senior civil servants, defense personnel
and judicial officers. They take up cases which are suitable for settlement of debt for
certain consideration. Parties are heard and they explain their legal position. They are
advised to reach to some settlement due to social pressure of senior bureaucrats or judicial
officers or social workers. If the compromise is arrived at, the parties to the litigation sign
a statement in presence of Lokadalats which is expected to be filed in court to obtain a
consent decree. Normally, if such settlement contains a clause that if the compromise is
not adhered to by the parties, the suits pending in the court will proceed in accordance with
the law and parties will have a right to get the decree from the court. In general, it is
observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect
the concerned borrowers willing to go in for compromise on the day when the Lokadalat
meets. In any case, we should continue our efforts to seek the help of the Lokadalat.

Enactment of SRFAESI Act

The "The Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory
framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition to
asset reconstruction and ARCs, the Act deals with the following largely aspects,

 Securitization and Securitization Companies

Page 22Enforcement of Security Interest

  Creation of a central registry in which all securitization and asset reconstruction
transactions as well as any creation of security interests has to be filed.
The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued
Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for
regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover
various aspects relating to registration, operations and funding of ARCS and resolution of
NPAs by ARCS. The RBI has also issued guidelines to banks and financial institutions on
issues relating to transfer of assets to ARCS, consideration for the same and valuation of
instruments issued by the ARCS. Additionally, the Central Government has issued the
security enforcement rules ("Enforcement Rules"), which lays down the procedure to be
followed by a secured creditor while enforcing its security interest pursuant to the Act. The
Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their
security interest in relation to the underlying securit y without reference to the Court after
giving a 60 day notice to the defaulting borrower upon classification of the corresponding
financial assistance as a non-performing asset. The Act permits the secured creditors to
take any of the following measures:
 Take over possession of the secured assets of the borrower including right to
transfer by way of lease, assignment or sale;

 Take over the management of the secured assets including the right to transfer by
way of lease, assignment or sale;

 Appoint any person as a manager of the secured asset (such person could be the
ARC if they do not accept any pecuniary liability); and

 Recover receivables of the borrower in respect of any secured asset which has been
transferred. After taking over possession of the secured assets, the secured
creditors are required to obtain valuation of the assets. These secured assets may be
sold by using any of the following routes to obtain maximum value.

 By obtaining quotations from persons dealing in such assets or otherwise interested
in buying the assets;

  By inviting tenders from the public;
 By holding public auctions; or

 By private treaty.
Page 23
 Lenders have seized collateral in some cases and while it has not yet been possible to
recover value from most such seizures due to certain legal hurdles, lenders are now clearly
in a much better bargaining position vis-a-vis defaulting borrowers than they were before
the enactment of SRFAESI Act. When the legal hurdles are removed, the bargaining
power of lenders is likely to improve further and one would expect to see a large number
of NPAs being resolved in quick time, either through security enforcement or through
settlements. Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956.
The Act designates any person holding not less than 10% of the paid-up equity capital of
the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in,
being the holding company of or being in control of the ARC. The SRFAESI and
SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less
than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an
ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets.
ARCS have been granted a maximum realization time frame of five years from the date of
acquisition of the assets. The Act stipulates several measures that can be undertaken by
ARCs for asset reconstruction. These include:
 Enforcement of security interest;

 Taking over or changing the management of the business of the borrower;

 The sale or lease of the business of the borrower;

 Settlement of the borrowers' dues; and

 Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by t he lenders
under security enforcement rights available to them or as a recovery agent for any bank or
financial institution and to receive a fee for the discharge of these functions. They can also
be appointed to act as a receiver, if appointed by any Court or DRT.

Page 24
 Source: http://www.rbi.org.in

Institution of CDR Mechanism

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of
NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India
is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The
objective of the CDR mechanism has been to ensure timely and transparent restructuring of
corporate debt outside the purview of the Board for Industrial and Financial Reconstruction
(BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable
corporate affected by certain internal/external factors and minimize losses to creditors/other
stakeholders through an orderly and coordinated restructuring programme. RBI has issued
revised guidelines in February 2003 with respect to the CDR mechanism. Corporate
borrowers with borrowings from the banking system of Rs. 20crores and above under
multiple banking arrangement are eligible under the CDR mechanism. Accounts falling
under standard, sub-standard or doubtful categories can be considered for restructuring.
CDR is a nonstatutory mechanism based on debtor-creditor agreement and inter-creditor
agreement. Restructuring helps in aligning repayment obligations for bankers with the cash
flow projections as reassessed at the time of restructuring. Therefore it is critical to prepare a
restructuring plan on the lines of the expected business plan along with projected cash flows.

Page 25
 The CDR process is being stabilized. Certain revisions are envisaged with respect to the
eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks
are not members of the CDR forum, and it is expected that they would be signing the
agreements shortly. However they attend meetings. The first ARC to be operational in
India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum.
Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in
multiple lender arrangements and to increase transparency in the process. While in the
RBI guidelines it has been recommended to involve independent consultants, banks are so
far resorting to their internal teams for recommending restructuring programs.

Compromise Settlement Schemes

1) OneTime Settlement Schemes
NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The
scheme also covers NPAs classified as sub-standard as on 31st March 2000, which
have subsequently become doubtful or loss. All cases on which the banks have
initiated action under the SRFAESI Act and also cases pending before
Courts/DRTs/BIFR, subject to consent decree being obtained from the
Courts/DRTs/BIFR are covered. However cases of willful default, fraud and
malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the
minimum amount that should be recovered should be 100% of the outstanding balance
in the account.

2) Negotiated Settlement Schemes

The RBI/Government has been encouraging banks to design and implement policies
for negotiated settlements, particularly for old and unresolved NPAs. The broad
framework for such settlements was put in place in July 1995. Specific guidelines were
issued in May 1999to public sector banks for one-time settlements of NPAs of small
scale sector. This scheme was valid until September 2000 and enabled banks to
recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July
2000 for recovery of NPAs of Rs. 50 millionand less. These guidelines were effective
until June 2001 and helped banks recover Rs. 26 billion.
Page 26
 Increased Powers to NCLTs and the Proposed Repeal of BIFR
In India, companies whose net worth has been wiped out on account of accumulated losses
come under the purview of the Sick Industrial Companies Act (SICA) and need to be
referred to BIFR. Once a company is referred to the BIFR (and even if an enquiry is
pending as to whether it should be admitted to BIFR), it is afforded protection against
recovery proceedings from its creditors. BIFR is widely regarded as a stumbling block in
recovering value for NPAs. Promoters systematically take refuge in SICA - often there is a
scramble to file a reference in BIFR so as to obtain protection from debt recovery
proceedings. The recent amendments to the Companies Act vest powers for revival and
rehabilitation of companies with the National Company Law Tribunal (NCLT), in place of
BIFR, with modifications to address weaknesses experienced under the SICA provisions.
The NCLT would prepare a scheme for reconstruction of any sick company and there is no
bar on the lending institution of legal proceedings against such company whilst the scheme
is being prepared by the NCLT. Therefore, proceedings initiated by any creditor seeking to
recover monies from a sick company would not be suspended by a reference to the NCLT
and, therefore, the above provision of the Act may not have much relevance any longer
and probably does not extend to the tribunal for this reason. However, there is a possibility
of conflict between the activities that may be undertaken by the ARC, e.g. change in
management, and the role of the NCLT in restructuring sick companies. The Bill to repeal
SICA is currently pending in Parliament and the process of staffing of NCLTs has been
initiated

Page 27
 OBJECTIVES

I. Problem statement/Objective of the research

 To study of the concept of Non Performing Asset in Indian perspective.

 To study NPA standard of RBI

 To study the Reasons for & Impact of NPAs

 To evaluate the efficiency in managing Non Performing Asset of different types of banks
(Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.
 To check the proportion of NPA of different types of banks in different categories.

II. Beneficiaries of the study

The outcomes analyzed from this study would be beneficial to various sections such as:

 Banks: This study would definitely benefit the banks in a way that directs them as to
which sector should be given priority for lending money.

 FurtherResearchers: The major beneficiaries from the project would be the
researchers themselves as this study would enhance their knowledge about the topic.
They get an insight of the present scenario of this industry as this is the emerging
industry in the financial sector of the economy.

 Student: To get the understanding of NPA concept as a whole.

Page 28
 RESEARCH METHODOLOGY

I. Research Design
The research design that will be use is Descriptive Research.
 Involves gathering data that describe events and then organizes, tabulates, depicts,
and describes the data.

 Uses description as a tool to organize data into patterns that emerge during analysis.

 Often uses visual aids such as graphs and charts to aid the reader.

 Using of hypothesis testing.



II. Data Collection Sources
Secondary Data
Secondary data refers to the data which has already been generated and is available for
use. The data about NPAs & its composition, classification of loan assets, profits (net &
gross) & advances of different banks is taken from Reserve Bank of India website and
indiastat.com.

Page 29
III. Scope of the study
 To understand the concept of NPA in Indian Banking industry.

 To understand the causes & effects of NPA

 To analyze the past trends of NPA of Public, Private & Foreign banks in different
sector.

IV. Expected contribution of the study

The analysis made as a part of this study may contribute in a way analysis of strength and
weakness of the banking sector as whole with regard to Non Performing Asset of banks.
Various banks from different categories together may make efforts to overcome
limitations for lending money to different sectors like agricultural, SSI, Priority sector,
non-priority sector, public sector & others.

V. Limitation
There are some data which are available for just 3 years while the same data for its
counterparts were available for 9 years. So exact comparison was not possible.

Page 30
 ANALYSIS

OVERALL ANALYSIS:
Scheduled Commercial banks (SCBs) in India remained robust against the backdrop of global
financial crisis. It is noteworthy that contrary to the trend in some advanced countries, the
leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting the
strength of the Indian banking system. However, the Indian banking sector was not completely
insulated from the effects of the slowdown of the India economy.

The consolidated balance sheets of SCBs, expanded by 21.2 per cent as at end-March 2010 as
compared with 25.0 per cent in the previous year. While the balance sheet of public sector
banks maintained their growth momentum, the private sector banks and foreign banks
registered a deceleration in growth rate.

During 2009-10, the growth rate of banks‟ lending to industries, personal loans and services
sector witnessed a deceleration, while growth rate of banks‟ lending to agriculture and allied
activities increased substantially. Overall, the incremental Credit–Deposit (C-D) ratio declined
sharply reflecting the slowdown in credit growth, as corporates deferred their investments
against the backdrop of widespread uncertainty.

It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in
India has remained high reflecting the strength of the Indian banking system. For instance, as
observed by the World Bank , the leverage ratio of banks in the UK witnessed a decline
throughout 1990s, which was accentuated after 2000 to reach a level of about 3 per cent by
2009 from around 5 per cent in the 1990s. On the other hand, the leverage ratio for Indian
banks has risen from about 4.1 per cent in March 2002 to reach a level of 6.3 per cent by
March 2010.

The balance sheets of public sector banks maintained their growth momentum, the private
sector banks and foreign banks registered a deceleration in growth rate. Furthermore, the old
Page 31
 private sector banks, which had been registering a significantly lower growth rate than their
newer counterparts in the recent past, managed a better performance this year.

 NET NPAs OF BANKS: 2001-02 to 2009-10

Graph: 1 Source: http://www.rbi.org.in

Interpretation:
 From the above it is observed that net NPA of public sector banks has a declining
trend up to year 2006-07 and after that it has a rising trend till 2009-10. The same
trend has been observed in both Private and Foreign Sector Banks. The declining trend
from 2004 to 2007 of NPA was due to the implementation of Securitization Act
(2002).

Page 32
  But the increase in NPA was increasing in absolute term, as NPA as per percent of
advance shows a declining trend in Public Sector Banks while that of in Private and
Foreign Sector Banks shows an upward trend that is increase in NPA as per percent of
advance after 2007.

 The increase in NPA as per percent of advance of Private and Foreign Sector Banks is
because of they have a major proportion of lending in non- priority sectors includes
Medium and large scale industries which was highly affected by global financial crisis.

Recent NPAs

Page 33
SOUNDNESS INDICATORS:
1. Capital Quality
2. Asset Quality

Capital Quality:
A sound and efficient banking system is end product for maintaining financial stability.
Therefore, considerable emphasis has been placed on strengthening the capital requirements
in recent years. The Capital to Risk-weighted Assets Ratio (CRAR) of SCBs, a measure of
the capacity of the banking system to absorb unexpected losses, improved further to 13.2 per
cent at end-March 2010 from 13.0 per cent at end-March
2009. The asset quality of banks in India has been improving over the past few years as
reflected in the declining NPA to advances ratio. It is especially noteworthy that
notwithstanding the pressures of a slowdown in the economy and an atmosphere of
uncertainty, the net NPA to net advances ratio increased only marginally to 1.1 per cent as at
end March 2010 from 1.0 per cent as at end March 2009. Significantly, gross NPA to gross
advances ratio remained constant at 2.3 per cent. Thus, in terms of the two crucial soundness
indicators, viz., capital and asset quality, the Indian banking sector has exhibited resilience
amidst testing times.

Graph: 2 Source: http://www.rbi.org.in

Page 34
 Asset Quality:

Movements in Non-performing Assets – Bank Group-wise

Old New
Public State Private Private
Sector Nationalized Bank Sector Sector Foreign
Banks Banks Group Banks Banks Banks

Gross NPAs
As at end-March 2009 40089 23410 15303 2557 9901 2872
Addition during the
Year 31338 17822 12879 2094 10520 8430
Recovered during the
Year 26271 15863 9829 1579 6510 2954
Written off during the
Year 0 0 0 0 0 1514
As at end-March 2010 45156 25368 18352 3072 13911 6833
Net NPAs
As at end-March 2009 17726 8245 8398 740 4640 1247
As at end-March 2010 21033 9339 10745 1165 6253 2973
Gross NPAs/Gross
Advances Ratio
End-March 2009 2.2 2.1 2.6 2.3 2.4 1.8
End-March 2010 2 1.8 2.5 2.3 2.8 4
Net NPAs/Net
Advances Ratio
End-March 2009 0.8 0.7 1.4 0.7 1.1 0.9
End-March 2010 0.7 0.7 1.5 0.9 1.3 1.7
Source: http://www.rbi.org.in
Page 35
 Interpretation:
 The trend of improvement in the asset quality of banks continued during the year. Indian
banks recovered a higher amount of NPAs during 2009-10 than that during the previous
year. Though the total amount recovered and written-off at Rs.38,828 in 2009-10 was
higher than Rs.28,283 crore in 2008-09, it was lower than fresh addition of NPAs
(Rs.52,382 crore) during the year. As a result, the gross NPAs of SCBs increased across
all the bank groups. In this context, it may be noted that in the present context of
financial turmoil, some slippage in NPAs could be expected.

 Nevertheless, it may be noted that this slippage was moderate as compared to the
problems faced by banks all over the world. The hardening of interest rates might have
made the repayment of loans difficult for some borrowers, resulting in some increase in
NPAs in this sector. It may be noted that the increase in gross NPAs was more
noticeable in respect of new private sector and foreign banks, which have been more
active in the real estate and housing loans segments.

 Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to gross
advances of foreign banks increased significantly during the year, while that of private
sector banks increased marginally. The NPAs ratio of all other bank groups declined.
While net NPAs to net advances ratio of all the banks increased over the previous year
except that of nationalized banks.

Page 36
FREQUENCY DISTRIBUTION OF BANKS ACCORDING TO
LEVEL OF NPAs:

Frequency Distribution of Banks according to level of NPAs

100%
90%
80%
70%
60%
50% > 10%
40% 5% to 10%
30% 2% to
20% 5% < 2%

10%
0%

FB
PSB

PSBPvt.SBFB
FB

Pvt.SB
Pvt.SB
PSB
FB

2008-09 2009-10
Pvt.SB
PSB
FB
Pvt.SB
PSB

2005-06 2006-07 2007-08

Graph: 3 Source: http://www.rbi.org.in

Interpretation:
 In the year 2005-06, the Public sector banks (PSBs) had around 60% of their NPA profile
in the < 2% category which increased 75% in 2006-07, 90% in 2007-08 - 2008-09 &
100% in 2009-10. PSBs 30% NPA profile in the year 2005-06 belongs to 2% to 5%
category which reduced over the years and has been totally eliminated in 2009-10. PSBs
did not have any of its banks in > 10% category.
 Private sector banks (Pvt.SBs) was having the worst situation in 2005-06 where 50% of its
bank was in 2% to 5% category. While this ratio is declining over the years 2008-09 this is
compensated by the rise in number of banks in < 2%. 5 Pvt. SB‟s banks were in

Page 37
 5% to10% category in 2005-06 which was totally eliminated in 2008-09. But due to poor
financial condition in 2009-10, there is increase in number of banks in higher NPA
category.

 Foreign banks (FB) were comparatively in good position compare to privat e sector banks
in the initial years. 70% of its NPA profile belongs to < 2% category. The number of
banks increased in < 2% category. So among all three sectors, public sector banks
managed to reduce NPAs over the years.

Page 38
 COMPOSITION OF NPAs OF BANK SECTOR WISE:

COMPOSITION OF NPAs OF PUBLIC SECTOR

inAmount CroreRs.

BAInterpretation:
 From the above chart it is observed that public sector category is the least contributor
towards the NPA of public sector bank. In the initial years from 2002 to 2006, Non-
priority sector contributes more towards NPA than priority sector. But in later years
from 2007 it‟s other way round, where priority sector contributes more than Non-
priority sector.


 Priority sector consist of advance given to agriculture, SSI, & other priority sector
advances. Non priority sector consist of large industries, medium industries & other
non priority sectors.

Page 39
  In case of priority sector, it started falling from 2004 up to 2006 over previous year.
But in the later years i.e. from 2007 there is rise NPA because of defaults on the loan
given to the farmers. It was highest in 2009. In order to reduce that, waiver package
was announced in union budget of 2009.It may also be noted that the increase in NPAs was
more noticeable in priority sector, which have been more active in the real estate and housing
loans segments.


 NPA in non priority sector is reducing constantly from 2003 to 2009 i.e. by

50%.Though the advance given to non-priority sector wa

s higher than priority sector, NPAs of non-priority sector is comparatively.

Page 40
TION OF N

inAmount Rs. Crore

Graph: 4.2 Source: h ttp://www.indiastat.com/

2002 2003 2004 2005 2006 2007 2008 2009 2010
Priority Sector 1835 2546 2445 2482 2188 2284 2884 3419 3640
Non-Priority Sector 4452 9090 9327 7796 6569 5541 6353 9558 13172
Interpretation:
Public Sector 123 31 95 75 42 4 3 0 75
 From the above graph it is observed that public sector contributes very negligible
towards the overall NPA of foreign banks. The major reason for this is that on an
average only 3.5% of total advance is made towards public sector category.


 Priority sector category on an average constitutes almost 34% of the total advances
made by the private sector banks. While average NPA of priority sector constitutes of
25% of total NPA. In later years from 2008 to 2010 there is increase in NPA of
priority sector. In these years more advances was given to agriculture & housing
sector.

 In the year 2007-08, the real estate market was on boom, which encouraged people to
take more loans. But after the subprime crisis there was sudden fall in real estate

Page 41 market & people became default to pay the loan.

  In case of non-priority sector, the average advances made are 60.5% of total advance
made by private sector banks. But the average NPA of non-priority sector is almost
74% which is highest amongst the entire category. We can see the declining trend in
NPA of non-priority sector from 2004 to 2007. This as a result of securitization Act,
2002.

Page 42
 Amount in Rs. Crore
COMPOSITION OF NPAs OF

Graph: 4.3 Source: http://www.indiastat.com//

Interpretation:
 It is observed from the chart there is no NPA in public sector category in all the three
years because there was no advance made to public sector category.


 Non-priority sector contributes highest towards the NPA of foreign banks because non-
priority sector constitute approximately 65% of the total advances made by foreign
banks. So NPA will also be more in non-priority sector.

 NPA is low in priority sector because very few advances are made in priority sector
& that too are made to SSI.

 The advances are made to medium & large scale industries in non-priority sector. As
foreign banks are having global presence they are more affected by the global
meltdown & financial crisis of 2008. So its effect is seen by sudden rise in NPA in
2009.
Page 43
The poor business environment is among the prime factors for rising NPAs.
Business environment refers to economy, regulatory regime, legal system and
political climate in which banks are operating. These factors include recession in
the economy, sudden change in global & domestic markets, lack of conducive legal
system for loan recovery i.e. inadequate legal provisions on foreclosure &
bankruptcy laws and dilatory legal procedures in enforcing security rights.
Additionally, lack of cohesive regulatory framework, political pronouncements like
debt relief, Socio-political pressures on commercial credit decisions, vitiated loan
repayment culture, policy reversal i.e. changes in governmental policies etc. are
reasons for generation and increase of NPAs in the system because these
tweaking of norms change the profitability structures for a very large amount of
investment that has already been sunk in various venture. A typical example could
be cancellation of Telecom & Coal mine licences, which could have been awarded
wrongly in the first place.
COMPARISON OF NET NPA OF OLD AND NEW PRIVATE
SECTOR BANKS: 2001-02 to 2009-10

Graph: 5 Compiled from: http://www.rbi.org.in

Interpretation:
 From the above chart it is clearly observed that net NPA of old private sector banks
has a declining trend over the years on the contrary new private sector banks has an
upward trend.


 Old private sector banks which is passing from lower growth rate in recent past, starts
performing better than their new counterparts. Old private sector banks are more
efficient than that of new private sector banks in managing NPA.

Page 44
 NET NPAs AS PERCENTAGE OF ADVANCES OF BANKS:

Graph: 6 Source: http://www.indiastat.com/

Interpretation:
 From the above it is clearly observed that only public sector banks have succeeded in
reducing net NPA against net advances made over the period of time. It is constantly
reducing each year, whereas in case of private sector bank it has reduced in 2006-07
then it got stable and started rising from 2008-09 onwards.

 In case of foreign banks it is fluctuating over the years. Public sector banks have been
able to reduce this ratio by 66.7% from 2006 to 2010. Public sector banks as a result
of stringent checks & control able to manage low ratio compare to other banks. Also
the ratio increased by 89% for foreign banks where the foreign banks were badly
affected by the global meltdown. Even for private sector bank the ratio increased by
25% in 2010 due to financial crises & also for public sector bank the reduction in

Page 45 2010 was the lowest i.e. 12.5%

 CLASSIFICATION OF LOAN ASSET OF BANKS:

Classification of Loan Asset of Public Sector

Banks
Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset

0.2 0.2
0.9 0.7 0.5 0.3 1.1 1.0
1.5
2.3 1.0 0.9
3.4 1.0
4.3 1.1
1.2

2.6
97.2 97.7 97.9
96.1
94.6
92.2

2005 2006 2007 2008 2009 2010

Graph: 7.1 Compiled from: http://www.rbi.org.in

Interpretation:
 The above frequency distribution chart states that standard asset is increasing every
year & on the contrary all the other types of asset i.e. Sub-standard, Doubtful & Loss
Asset are decreasing every asset. This proves that public sector banks have succeeded
in reducing NPA over the years.


 Public sector banks have taken various measures to reduce NPA also convert Sub-
Standard, Doubtful & loss asset into the above category Standard, Sub-Standard &
Doubtful asset. The rise in sub standard ratio has major proportion indicates that there
is a high scope of up gradation or improvement in NPA recovery in initial stage
because it will be very easy to recover the loan as minimum duration of default.

Page 46
 Classification of Loan Asset of Private Sector
Banks
Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset

0.5 0.4 0.3 0.2 0.3 0.3

1.5 1.0 0.9 1.0
2.5 1.1 1.5
3.6 0.8 2.0
1.0

1.8
97.4 97.6 97.3
96.1 96.8

94.2

2005 2006 2007 2008 2009 2010

Graph: 7.2 Compiled from: http://www.rbi.org.in

Interpretation:
 The above chart clearly states that the rise in the standard assets over the years
compensates the fall in the other three types of assets. But in the year 2010, the
percentage of Sub-Standard asset is highest among all the year. In 2010 percentage of
standard asset has reduced by 0.5% which is compensated by increase in Sub-Standard
& doubtful assets. This increase is due to interest & principle amount unpaid due to
financial crisis in 2009. The percentage of doubtful asset has reduced to a great extent
amongst all. So the private sector banks have managed to reduce the doubtful asset.

Page 47
 Classification of Loan Asset of Foriegn Banks
Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset

0.8 0.5 0.4 0.2 0.2

1.5 0.7 0.5 0.5 0.6
1.3 1.0 1.1 1.2
1.8 0.9 3.5

1.6

97.9 98.1 98.1

97.0
95.7
95.2

2005 2006 2007 2008 2009 2010

Graph: 7.3 Compiled from: http://www.rbi.org.in

Interpretation:
 The proportion of Standard Asset is increasing from 2005 and started getting stable in
2008 & 2009. But it has fallen in 2010. The proportion of other three types of assets is
falling over the years, but in 2010 there is great increase in the proportion of Sub-
Standard asset which is as a result of decrease in proportion of Standard asset. This
increase in Sub-Standard asset is because of interest & principle amount unpaid, due to
poor global conditions, for the loan provided in a 2009. The interest & principle
amount remained unpaid for period of more than 180 days but less than 1 year.

Page 48
 COMPARISON OF NET PROFIT AND NET NPA OF BANKS:

Interpretation:
 It is observed from the above graph there exist no particular relationship between net
profit & net NPA of public sector banks. There is constant increase in net profit from
2001-02 to 2004-05 & from 2006-07 to 2009-10. The average of percentage increase
in net profit YOY basis comes to 32.3%


 On the contrary public sector banks have managed to reduce net NPA constantly from
2002-03 to 2006-07. Although the percentage of reduction over the previous year is
low compared to percentage of rise in profit over previous year. The average of
Page 49
percentage decrease in net NPA YOY basis comes to 2.5%
120

Graph: 8.2 Source: http://www.indiastat.com/

Interpretation:
 It is clearly observed from the line graph that there is continuous rise in net profit of
private sector banks over the years. The average of percentage increase in net profits of
private sector banks comes to approximately 34%.


 On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in
net NPA from 2001-02 to 2009-10. The average of percentage rise in net NPA comes
to almost 15%.

Page 50
 Comparison1.of Net Profit

1000
0

Interpretation
 The above line graph shows net profit of foreign banks is increasing throughout the
period from 2001-02 to 2009-10. The average of percentage increase in net profit
YOY basis comes to 32%. Whereas in case of net profit there is no continuous upward
or downward movement.


 But overall there is rise in net NPA of foreign banks. The average of percentage
increase in net NPA YOY basis comes to approximately 25%. So this shows there is
positive relationship between net NPA & net profit of foreign banks.

Page 51
 NPA TO ADVANCE RATIO OF BANK:

Graph: 9.1 Compiled from: http://www.rbi.org.in/

Interpretation:
 The percentage in reduction of gross NPA to gross advances ratio is decreasing year on
year i.e. it has reduced by 34.5% from 2005-06 to 2006-07. Similarly it has reduced by
25%, 18.5% & 9% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09
& 2008-09 to 2009-10.


 While in case of net NPA to net advances ratio, the percentage change is varying. It
has reduced by 38% from 2005-06 to 2006-07. Similarly it has reduced by 15.38%,
27.27% & 12.5% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09 &
2008-09 to 2009-10.

Page 52
  The above calculated figure states that the provisions made for NPA & other items like
interest due but not recovered, part payment received and kept in suspense account, etc
which is deducted from Gross NPA is changing over the years. It is not decreasing in
same proportion as gross NPA.


 The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2006-07 [67%] & lowest in 2007-08 [59%]. In other years it near to 63%. This gap is
highest in 2007 because in 2007 advances have increased tremendously over 2006.
Due to which NPA also increased & so provisions also increased.


 The line graph clearly states that the ratio of gross NPA to gross advances & net NPA
to net advances is decreasing over the years. In all the public sector bank has
succeeded to reduce the non performing assets against the advances made over the
years.

Page 53

0
 2005-06 2006-07 2007-08 2008-09 2009-10

Graph: 9.2 Compiled from: http://www.rbi.org.in

Interpretation:
 The percentage change in of gross NPA to gross advances ratio is decreasing initially
& thereafter started rising from 2007-08. It has reduced by 34.2% from 2005-06 to
2006-07. Similarly it has reduced by 12% from 2006-07 to 2007-08 & thereafter increased by
18.5% & 9% respectively from 2007-08 to 2008-09 & 2008-09 to 2009-
10.

 While in case of net NPA to net advances ratio, the percentage change is varying drastically. It has
reduced by 47% from 2005-06 to 2006-07. It is unchanged from

2006-07 to 2007-08. It has increased by 20% & 25% respectively from 2007-08 to
2008-09 & 2008-09 to 2009-10.


 The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years states that private sector banks makes more provisions
in gross NPA & gross advances.
Page 54
  The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2006-07 [60%] & lowest in 2009-10 [48%]. In other years it near to 54%. In 2007
there is highest increase in advances over previous year amongst all the year.

This resulted increase in NPA which in turn increased the provisions and
unrecognized interest income.


 Private sector banks have not succeeded to reduce NPA as against the advances made
over the years as both the ratios are increasing in later years.

Page 55
 Comparison of NPA with Advances-
Foreign Banks
4.5

4 4

3.5
3
2.8
2.5
Gross NPAs/Gross
2 2 Advances
1.8 1.8 1.7
1.5 Net NPAs/Net
Advances
1 0.9 1 0.9
0.8
0.5

0
2005-06 2006-072007-08 2008-092009-10

Graph: 9.3 Ccompiled from: http://www.rbi.org.in

Interpretation:
 The gross NPA to gross advances ratio is decreasing till 2007-08.It is unchanged in
2008-09 & then increased in 2009-10. It has reduced by 28.5% & 10% respectively
from 2005-06 to 2006-07 & from 2006-07 to 2007-08. It has increased tremendously
by 122% from 2008-09 to 2009-10.


 While in case of net NPA to net advances ratio, there is great volatility. It has reduced
by 11% from 2005-06 to 2006-07. Thereafter it increased by 25% in 2007-08. Again
it reduced by 10% in 2009 and finally increased by 89% in 2009-10.


 The steep rise in gross NPA & net NPA 2009-10 is due to poor global conditions.

Page 56
  The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2005-06 & lowest in 2007-08. In 2005-06 provisions & unrecognized interest income
was highest compare to other years while it was lowest in 2007-08.


 The line graph clearly states that the ratio of gross NPA to gross advances & net NPA
to net advances is decreasing over the years. In all the public sector bank has
succeeded to reduce the non performing assets against the advances made over the
years.


 Thus in foreign banks gross NPA to gross advances ratio & net NPA to net advances
ratio are not having parallel movement throughout the period. The change in net NPA
to net advances is quite higher than gross NPA to gross advances.

Page 57
Graph: 9.4 Source: http://www.rbi.org.in

Interpretation:
 From the above chart it is clearly observed that old private sector banks are constantly
improving in terms of net NPA to net advances ratio which is represented by declining
trend from 2001-02 to 2009-10. While on the other hand for new private sector banks
net NPA to net advances ratio is fluctuating over the years.

Page 58
Interpretation:

 There is negative correlation between net profit & net NPA of public sector banks while
it is positive for private sector & foreign banks.

 Net profit consists of income earned by the banks. Income is divided into two parts
interest income & other income. Interest income includes Interest/Discount on
advances/bill, Income on investments, Interest on balances with RBI and other inter-
bank funds, others. While non-interest income includes fee income components such as
commission, brokerage and exchange transactions, sale of investments, corporate
finance transactions, M&A deals; and any other income other than the interest income
generated by the bank. But in interest income, income from Interest/Discount on
advances/bill is the major contributor towards NPA.

 Average 75% of total earning of public sector bank comes from Interest/Discount on
advances/bill which is 55% & 43% for private sector banks & foreign banks. If we
consider the last six years average of percentage increase in income from
Interest/Discount on advances/bill YOY basis then public sector bank records only
18% increase while its 33% for both private sector & foreign banks. But for private
sector & foreign banks rise in income from Interest/Discount on advances/bill
contributes minimal to the rise in overall income.

 The income other than Interest/Discount on advances/bill income for all the banks
together i.e. public sector, private sector and foreign banks on an average stood at
32.8% of the total income, but it is highest in foreign banks i.e. 57% & 45% for private
sector banks.


 The last six years average of percentage increase in income other than Interest/Discount
on advances/bill income YOY basis was highest for foreign banks i.e. 26% which is
15% & 19% for public sector bank & private sector banks respectively.

Page 59
 Frequency Distribution of Banks Income
100%

80%

60%
40%
Non-interest
B

B
P

P
S

F
v
s

s
t
.

Income
20%
Interest Income
0%

Pvt
.SB
Pvt.S
PSBs

PS
FBsPSBsPvt.SBsFBs

FBsPSBsPvt.SBsFBs
Bs
PSBsPvt.SBs

s
Bs

Fs
2005 2006 2007 2008 2009 2010

Graph: 10 Compiled from: http://www.rbi.org.in

 Public sector banks depend excessively on their interest income as compared to their
peers in the private sector and their fee-based earnings coming from services remain
quite low.


 The higher proportion of non-interest income in private sector & foreign banks is due
to the value added services offered by these banks. There are some services which are
offered by private sector banks but not by public sector banks. These include Forex
Desk, Derivatives Desk, Technology Finance, Syndication Services, Real Time Gross
Settlement, Channel Financing, Corporate Salary Account, Bankers to Right/Public
Issue. Foreign banks offers some more services other than the above mentioned
services like Global Trade Solutions, Factoring Solutions, Derivatives Clearing, asset
management, private equity placement. So the private sector & foreign banks earn
higher non-interest income because of such value added services.

Page 60
 OVERALL FINDINGS

 NPAs were more noticeable in respect of new private sector and foreign banks, which have
been more active in the real estate and housing loans segments. It shows a upward trends over
the years as compared to others


 The old private sector banks, which had been registering a significantly lower growth rate than
their newer counterparts in the recent past, managed a better performance this year.


 Among all three sectors, public sector banks have managed to reduce NPAs over the years.
NPA profile in the < 2% category of public sector banks was reached to 100% in 2009-10 as
compared to Private and Foreign sector banks which was around 80%


 Net NPA against net advances increased more in Foreign and Private sector banks in 2009-10
while Public sector banks have succeeded in reducing net NPA against net advances made
over the period of time


 Public sector banks have managed to increase the standard assets over the years. The
proportion of standard assets in Private sector banks reduced in 2009 and 2010 which was
compensated by increase in sub-standard and doubtful assets. In Foreign sectors banks the
proportion of sub-standard asset has increased tremendously by 3.5% of loan assets in 2010
which was 1.2% of loan assets in 2009.


 The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years states that public sector banks makes more provisions in gross NPA & gross
advances as compared to private and foreign banks.


 Public sector banks almost 75% of income comes from Interest/Discount on advances/bill.
Whereas it is just 55% & 43% for private sector banks & foreign banks.

Page 61
 CONCLUSION

The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper
management of the NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. The
NPAs would destroy the current profit, interest income due to large provisions of t he NPAs,
and would affect the smooth functioning of the recycling of the funds

Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which hampers
economic growth.

Public sector banks are more efficient than private sector & foreign banks with regard to the
management of nonperforming assets. Even among private sector bank, old private sector banks
are more efficient than new private sector banks. But efficient management of NPA is not the
sole factor that determines the overall efficiency of banks

Page 62
 SUGGESTIONS

 New body like Debt Recovery Tribunal should be established & capacity of DRTs should
be enhanced.


 All banks should keep stringent check on advance being made to real estate & housing
segment as these segment contributed highly towards the NPA in 2009 & 2010.


 Uneven scale of repayment schedule with higher repayment in the initial years
normally should be preferred.


 Private sector & Foreign banks should focus more on recovery of sub-standard &
doubtful assets.


 Public sector banks should increase their non-interest income, as rise in NPA due to
default in interest income may affect the profits drastically.

Page. 63
 BIBLIOGRAPHY

I. Books
 Management Of Non-Performing Assets In Banks by Sugan C Jain

 Managing Non-performing Assets in Banks S. N. Bidani


II.Magazines

 Investor

 Business India

III. e-Newspapers
 The Economic Times

 The Business Standard

I V. Published Material
 RBI Guidelines Circulars on Income Recognition and Asset Classification

 Report on Trend and Progress of Banking in India 2009-10

 Statistical Tables Relating to Banks of India

 Master Circular


V.Other Sources Internet Websites

 http://www.rbi.org.in/

 http://www.indiastat.com/

Page 64