1

CHAPTER 1: INTRODUCTION

The accumulation of huge non-performing assets in banks has assumed great importance. The depth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000 crores.

While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach.

Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This has raised a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of banks, weakening its financial health and erode its solvency.

For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements

1.1 History of Indian Banking

A bank is a financial institution that provides banking and other financial services. By the term bank is generally understood an institution that holds a Banking Licenses. Banking licenses are granted by financial supervision authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so-called Non-bank. Banks are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is derived from German and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Moneylenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.

Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset. Development of banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest.

Banking in India has an early origin where the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, was the turn of the agency houses to carry on the banking business. The General Bank of India was first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank Hindustan and the Bengal Bank. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843.

These three banks also known as Presidency banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established in 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935 by passing Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for licensing, supervision and control of banks. Considering the proliferation of weak banks, RBI compulsorily merged many of them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. Accordingly, a high-level committee was set up on 14 August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial system. Based on the recommendations of the Committee (Chairman: Shri M. Narasimham), a comprehensive reform of the banking system was introduced in 1992-93. The objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. One of the important measures related to income recognition, asset classification and provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process.

In the post-nationalization era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition which could lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking system. These new banks had to satisfy among others, the following minimum requirements:

(i) (ii)

It should be registered as a public limited company; The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange; (iv) The headquarters of the bank should be preferably located in a does not have the headquarters of any other bank; and (v) The bank will be subject to prudential norms in respect of banking operations, accounting and other policies as laid down by the RBI. It will have to achieve capital adequacy of eight per cent from the very beginning. centre which

A high level Committee, under the Chairmanship of Shri M. Narasimham, was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. The Committee has submitted its report to the Government in April 1998. Some of the recommendations of the Committee, on prudential accounting norms, particularly in the areas of Capital Adequacy Ratio, Classification of Government guaranteed advances, provisioning requirements on standard advances and more disclosures in the Balance Sheets of banks have been accepted and implemented. The other recommendations are under consideration.

The banking industry in India is in a midst of transformation, credit goes to the economic liberalization of the country, which has changed business environment in the country. During the pre-liberalization period, the industry was merely focusing on deposit mobilization and branch expansion. But with liberalization, it found many of its advances under the non-performing assets (NPA) list. More importantly, the sector has become very competitive with the entry of many foreign and private sector banks. The face of banking is changing rapidly. There is no doubt that banking sector reforms have improved the profitability, productivity and efficiency of banks, but in the days ahead banks will have to prepare themselves to face new challenges.

Table 1: Key Developments in Indian Banking

1969 Government acquires ownership in major banks Almost all banking operations in manual mode Some banks had Unit record Machines of IBM for IBR & Pay roll 1970- 1980 Unprecedented expansion in geographical coverage, staff, business & transaction volumes and directed lending to agriculture, SSI & SB sector Manual systems struggle to handle exponential rise in transaction volumes - Outsourcing of data processing to service bureau begins Back office systems only in Multinational (MNC) banks' offices 1981- 1990 Regulator (read RBI) led IT introduction in Banks Product level automation on stand alone PCs at branches (ALPMs) In-house EDP infrastructure with Unix boxes, batch processing in Cobol for MIS. Mainframes in corporate office

1991-1995

Expansion slows down Banking sector reforms resulting in progressive de-regulation of banking, introduction of prudential banking norms entry of new private sector banks Total Branch Automation (TBA) in Govt. owned and old private banks begins New private banks are set up with CBS/TBA form the start

6 1996-2000 New delivery channels like ATM, Phone banking and Internet banking and convenience of any branch banking and auto sweep products introduced by new private and MNC banks Retail banking in focus, proliferation of credit cards Communication infrastructure improves and becomes cheap. IDRBT sets up VSAT network for Banks Govt. owned banks feel the heat and attempt to respond using intermediary technology, TBA implementation surges ahead under fiat from Central Vigilance Commission (CVC), Y2K threat consumes last two years

2000-2003

Alternate delivery channels find wide consumer acceptance IT Bill passed lending legal validity to electronic transactions Govt. owned banks and old private banks start implementing CBSs, but initial attempts face problems Banks enter insurance business launch debit cards

(Source: M.Y.KHAN, INDIAN FINANCIAL SYSYEM, 3 rd edition Publication by TATA McGraw hill)

1.2 What is NPA?

The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of Non Performing Asset. The dreaded NPA rule states: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. Recovery of loans has always been a problem for banks and other financial institutions. To avoid this one needs to know if NPAs can be avoided entirely, no they cant be. So, one has to study the factors responsible for it and manage those factors.

Definition: An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank. A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time. It is an asset or account of borrower ,which has been classified by bank or financial institution as sub

standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI . An amount due under any credit facility is treated as past due when it is not been paid

within 30 days from the due date. Due to the improvement in the payment and settlement system, 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 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 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 case of bill purchased or discounted.

iv.

Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in 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 90 days overdue norms for identification of NPAs , from the year ending March 31, 2004, a non performing asset shall 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) iii. The bill remains overdue for a period of more than 90 days in case of bill purchased or discounted. iv. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in 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

Out of order: An account should be treated as out of order if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. in case where the out-standing balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period ,these account 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 due date fixed by the bank.

1.3 Types of 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 non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio =

Gross NPAs Gross Advances

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

Net NPAs =

1.4 Income recognition Policy

The policy of income recognition has to be objective and based on the record of recovery. Internationally, income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.

10

Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-negotiated or rescheduled extension of credit. If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.

Reversal of income

If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, interest accrued and credited to income account in the corresponding previous year, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also. In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.

Leased Assets The net lease rentals (finance charge) on the leased asset accrued and credited to income account before the asset became non-performing, and remaining unrealised, should be reversed or provided for in the current accounting period. The term 'net lease rentals' would mean the amount of finance charge taken to the credit of Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount of statutory depreciation and lease equalisation account. As per the 'Guidance Note on Accounting for Leases' issued by the Council of the Institute of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the case may be. Further, Lease Equalisation Account should

11

be transferred every year to the Profit & Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals shown under the head 'Gross Income'.

Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned. In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.

Interest Application

There is no objection to the banks using their own discretion in debiting interest to an NPA account taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma accounts.

12

1.5 Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31st March each year after completion of audit. The NPAs would relate to the banks global portfolio, including the advances at the foreign branches. The Report should be furnished as per the prescribed format given in the Annexure I. While reporting NPA figures to RBI, the amount held in interest suspense account, should be shown as a deduction from gross NPAs as well as gross advances while arriving at the net NPAs. Banks which do not maintain Interest Suspense account for parking interest due on non-performing advance accounts, may furnish the amount of interest receivable on NPAs as a foot note to the Report. Whenever NPAs are reported to RBI, the amount of technical write off, if any, should be reduced from the outstanding gross advances and gross NPAs to eliminate any distortion in the quantum of NPAs being reported.

Figure 1: Reporting Format for Non-Performing Assets Gross and Net Position Reporting Format for Non-Performing Assets Gross and Net Position [Vide paragraph 3.5] Name of the Bank: Position as on .. (Rupees in crore up to two decimals)
Particulars Amount

Rs.
1. Gross advances * 2. Gross NPAs * 3. Gross NPAs as a percentage of gross advances

13
4. Total Deductions (i+ii+iii+iv) i) Balance in Interest Suspense account $ ii) DICGC/ECGC claims received and held pending adjustment iii) Part payment received and kept in suspense account iv) Total provisions held ** 5. Net advances (1-4) 6. Net NPAs (2-4) 7. Net NPAs as a percentage of net advances

*excluding
(Rs..crore)

technical

write

off

of

Rs.

crore.

** excluding amount of technical write off (Rs.. crores) and provision on standard assets $ banks which do not maintain an Interest Suspense account to park the accrued interest on NPAs, may furnish the amount of interest receivable on NPAs as a foot note to this statement

Note: For the purpose of this Statement, gross advances mean all outstanding loans and
advances including advances for which refinance has been received but excluding rediscounted bills, and advances written off at Head Office level (Technical write off). Source: http://www.caclubindia.com/forum/reporting-format-for-non-performing-assets-113786.asp

1.6 Problems due to NPAs

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

ii.

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

iii.

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

14

iv.

Non-performing loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. A bad investment ends up in misallocation of capital, and by extension, labor and natural resources.

Non-performing asset may spill over the banking system and contract the money stock, which may lead to economic contraction. This spillover effect can channelize through liquidity or bank insolvency:

a) When many borrowers fail to pay interest, banks may experience liquidity shortage which may jam payment across the country b) Illiquidity constraints bank in paying depositors c) Undercapitalized banks may exceed the banks capital base.

15

CHAPTER 2: REVIEW of LITERATURE

I.

Performance of Indian Public Sector Banks and Private Sector Banks: A Comparative Study by Kajal Chaudhary and Monika Sharma, 2011

This paper discusses comparisons of bank performance based on financial ratios. Banking institutions suffer from the problem that financial ratios might overstate performance because of inaccurate reporting of nonperforming assets (NPAs) or because NPAs tend to be lower in the initial years in the case of newly established banks. . The research explores an empirical approach to the analysis of Non-Performing Assets (NPAs) of public and privates banks in India. The NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. The findings stated that the comparisons of stock price performance suggest that, in the perception of the market, PSBs as a category can withstand competition from todays private banks. This finding undermines the proposition that disinvestment, cannot possibly contribute to any improvement in performance. Implication is, that listing on the exchanges, a profit orientation, and a measure of autonomy can together produce improvement in performance and that a transfer of ownership is not a pre-condition for such improvement. All these were aimed at generating income or employment to large number of rural masses comprising weaker sections of society, artisans, and agriculturists and self-employed persons including educated unemployed youth.

16

II.

Impact of non-performing assets on profitability and productivity of public sector banks in India by Mahipal Singh Yadav, 2011

This paper deals with the concept of non-performing assets, its magnitude and impact. One fourth credit of total advances was in the form of doubtful asset in the initial year of the nineties and has an adverse impact on profitability of public banks at aggregate or sectoral level indicating high degree of riskiness in credit portfolio and raising question mark on the credit appraisal. The profitability of all public sector banks affected at very large extent when nonperforming assets (NPAs) work with other banking strategic variables and also affect productivity and efficiency. Paper tells that banking sector does not work as general commodity production because of its many facets as an industry itself, as an input and the servicing providing sector also. The issue of non-performing assets (NPAs) came into existence in 1992 and its absolute amount is increasing continuously from Rs.39253 crore in1993 to Rs.48406 crore in 2006 (FICCI 1999) indicates poor quality in recovery management and high degree of riskiness in the creditportfolio of the public banks, resulted adverse impact on profitability of banks (Kaveri1995 and RBI 1999). This discussion and outing debate about non-performing assets (NPAs) of public sector banks necessitates to evaluate and analyses its impact on the profitability and productivity of public sector banks over a period of ten years to reach a final conclusion about strengthening or winding up state public banks.

III.

Resolving Non-performing Assets of the Indian Banking System by He Dong, 2008

This paper explains that credit quality is low in the public sector banks (PSBs) and Development Finance Institutions (DFIs), the dominant sub-sectors of the Indian banking system. The high incidence of non-performing assets (NPAs) was the result of many factors, including poor credit analysis skills and lending decisions, external shocks (e.g., unexpected slowdown in economic activities), and shortcomings in the legal and judicial system that prevent the timely exercise of creditor rights. Resolving the large stock of NPAs has been a policy priority since the start of economic reforms in the early 1990s. However, progress has

17

been limited. Recently, the authorities have been actively pursuing the proposal of establishing an asset reconstruction company (ARC) as a major instrument for facilitating the resolution of NPAs. Paper suggests that there are common factors that contribute to the success of asset management companies (AMCs). These include supporting legal and regulatory environment; strong leadership; operational independence; appropriately structured incentives; and commercial orientation. There are, however, alternative strategies for managing and disposing of impaired assets, depending on factors such as the type of asset, size and distribution, the structure of the banking system, and available management capacity in the banks and in the public sector. There is no single optimal solution but rather a combination of solutions for each country that may vary over time and for each bank.

IV.

A comparative study of Non Performing Assets in India in the Global context similarities and dissimilarities, remedial measures by Prashanth K Reddy, 2009

Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and riskbased 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 ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on experiences from other countries. The paper stresses the importance of a sound understanding of the macroeconomic variables and systemic issues pertaining to banks and the economy for solving the NPA problem along with the criticality of a strong legal framework and legislative framework. Foreign experiences must be utilized along with a clear understanding of the local conditions to create a tailor made solution which is transparent and fair to all stakeholders.

18

V.

Non-Performing Loans and Terms of Credit of Public Sector Banks in India by Rajiv Ranjan and Sarat Chandra Dhal, 2008

This paper explores an approach to the analysis of commercial banks' nonperforming loans (NPLs) in the Indian context. The analysis evaluates as to how banks non-performing loans are influenced by three major sets of economic and financial factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic shocks. The results of the analysis in the paper suggest that terms of credit variables have significant effect on the banks' non-performing loans in the presence of bank size induced risk preferences and macroeconomic shocks. Moreover, alternative measures of bank size could give rise to differential impact on bank's non-performing loans. In regard to terms of credit variables, changes in the cost of credit in terms of expectation of higher interest rate induce rise in NPAs. On the other hand, factors like horizon of maturity of credit, better credit culture, and favourable macroeconomic and business conditions lead to lowering of NPAs. Business cycle may have differential implications adducing to differential response of borrowers and lenders.

19

CHAPTER 3: RESEARCH METHODOLOGY

3.1 Primary Objectives

The basic idea behind undertaking the Project on NPA was to study of the concept of Non Performing Asset in Indian perspective. Objectives include: 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 banks) using NPA ratios & comparing NPA with profits. To check the proportion of NPA of different types of banks in different categories.

3.2 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. Use of hypothesis testing.

Test of Correlation: a) H0: There is no significant correlation between profits & NPAs of Public Sector Banks for last 9 years H1: There is correlation between profits & NPAs of Public Sector Banks for last 9 years

b) H0: There is no significant correlation between profits & NPAs of Private Sector Banks for last 9 years H1: There is correlation between profits & NPAs of Private Sector Banks for last 9 years

20

3.3 Data collection

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. Some of the common sources of collecting secondary data are with the help of journals, magazines, newspaper articles, books, periodicals, annual reports, company circulars, government publications, government websites and search engines.

3.4 Type of Research

The research methodology adopted for carrying out the study were In this project Descriptive research methodologies were use. At the first stage theoretical study is attempted. At the second stage Historical study is attempted. At the Third stage Comparative study of NPA is undertaken.

3.5 Data Analysis

Once the data is collected it needs to be analyzed. Data Analysis is a very important step in the entire research process. The entire research process can be a failure if the data analysis is not done properly so as to reach the objectives framed for the research. The process for analyzing starts with data editing, coding and data entry and lastly data analysis. The researcher would collect all secondary information regarding the NPAs and the changes in the banking sector over the years. Only those financial information and details which are important to lead the objectives would be picked up. Secondly the researcher would input all the relevant data in the excel sheet. The main place of the data entry would be in Excel Spreadsheet where the data would be entered, stored and analyzed for further use. This data can be analyzed at the users convenience by various forms like bars, charts and diagrams. The analysis includes analysis of strength and weakness of the banking sector as whole with regard to Non Performing Asset

21

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, nonpriority sector, public sector & others.

Further descriptive statistics, pie chart and bar graph showing the levels of NPA and its impact on the banks will bring more clarity in the data being analyzed.

3.6 Scope of the Study

Concept of Non Performing Asset Guidelines Impact of NPAs Reasons for NPAs Preventive Measures Tools to manage NPAs

3.7 Limitation

In this project I employed non-participant observation method especially by analyzing qualitative information from journals, books, magazines and many more reliable resources. However, the method does not involve direct interviews, which will slightly reduce objectivity and the accuracy of information. 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.

22

CHAPTER 4: PROVISIONING NORMS

4.1 Categories of NPAs

Standard Assets Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisation of the dues:

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

23

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 the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly.

4.2 Provisions Norms

General In order to narrow down the divergences and ensure adequate provisioning by banks, it was suggested that a bank's statutory auditors, if they so desire, they could have a dialogue with RBI's Regional Office/ inspectors who carried out the bank's inspection during the previous year with regard to the accounts contributing to the difference. Pursuant to this, regional offices were advised to forward a list of individual advances, where the variance in the provisioning requirements between the RBI and the bank is above certain cut off levels so that the bank and the statutory auditors take into account the assessment of the RBI while making provisions for loan loss, etc. The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.

In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should

24

make provision against sub-standard assets, doubtful assets and loss assets as below:

Loss Assets

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.

Doubtful Assets 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:

Period for which the advance has been considered as doubtful Up to one year One to three years More than three years: (1) Outstanding stock of NPAs as on March 31, 2004. (2) Advances classified as doubtful more than three years on or after April 1, 2004.

Provision requirement (%) 20 30 60% with effect from March 31,2005. 75% effect from March 31, 2006. 100% with effect from March 31, 2007.

25

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: a. As on 31.03.2003, 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. b. 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.

Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Valuers appointed as per the guidelines approved by the Board of Directors should get collaterals such as immovable properties charged in favour of the bank valued once in three years.

Sub-Standard Assets A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available.

Standard Assets 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.

26

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.

Floating Provisions

Some of the banks make a 'floating provision' over and above the specific provisions already made in respect of accounts identified as NPAs. The floating provisions, wherever available, could be set-off against provisions required to be made as per above stated provisioning guidelines. Considering that higher loan loss provisioning adds to the overall financial strength of the banks and the stability of the financial sector, banks are urged to voluntarily set apart provisions much above the minimum prudential levels as a desirable practice.

Provisions on Leased Assets Leases are peculiar transactions where the assets are not recorded in the books of the user of such assets as Assets, whereas they are recorded in the books of the owner even though the physical existence of the asset is with the user (lessee). Sub standard Assets i. ii. 10 percent of the 'net book value'. As per the 'Guidance Note on Accounting for Leases' issued by the ICAI, 'Gross book value' of a fixed asset is its historical cost or other amount substituted for historical cost in the books of account or financial statements. Statutory depreciation should be shown separately in the Profit & Loss Account. Accumulated depreciation should be deducted from the Gross Book Value of the leased asset in the balance sheet of the lesser to arrive at the 'net book value'. iii. Also, balance standing in 'Lease Adjustment Account' should be adjusted in the 'net book value' of the leased assets. The amount of adjustment in respect of each class of fixed assets may be shown either in the main balance sheet or in the Fixed Assets Schedule as a separate column in the section related to leased assets.

27

Doubtful assets

100 percent of the extent to which the finance is not secured by the realisable value of the leased asset. Realisable value to be estimated on a realistic basis. In addition to the above provision, the following provision on the net book value of the secured portion should be made, depending upon the period for which asset has been doubtful:

Period Up to one year One to three years More than three years

%age of provision 20 30 50

Loss assets

The entire asset should be written-off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for 'net book value'.

28

CHAPTER 5: IMPACT, REASONS AND IDENTIFICATION OF NPAs

5.1 Impact of NPAs

Profitability

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesnt affect

current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earnings of the bank.

Liquidity

Money gets blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for short period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money, routine payments and dues. Involvement of management

Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.

29

Credit Loss

Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It loses its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks.

5.2 Factors affecting NPA

The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors. External Factors Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity. Willful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit.

30

Mainly our farmers depend on rain fall for cropping. Due to irregularities of rain fall the

farmers are not to achieve the production level thus they are not repaying the loans. Industrial sickness

Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks have to record unrecovered part as NPAs and has to make provision for it. Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs.

The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.

31

Internal Factors Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. ii. iii. Principles of safety Principle of liquidity Principles of profitability

i.

Principles of safety

By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers: a. Capacity to pay depending upon 1. Tangible assets 2. Success in business b. Willingness to pay depending upon 1. Character 2. Honest 3. Reputation of borrower The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character. Inappropriate technology

Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting

32

system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized. Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_

a. From bankers. b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies.

Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss a/c and balance sheet.

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing. Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use

33

good credit appraisal to decrease the NPAs. Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the:

1. Marketability 2. Acceptability 3. Safety 4. Transferability.

The banker should follow the principle of diversification of risk based on the famous maxim do not keep all the eggs in one basket; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. Re-loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the

34

defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

5.3 Symptoms to recognize a performing asset turning in to Non-performing asset

Four categories of early symptoms: i. 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.

ii.

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. Non-payment of wages.

iii. Attitudinal Changes: Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank. Problem between partners.

35

iv. Others Changes in Government policies. Death of borrower. Competition in the market.

36

CHAPTER 6: PREVENTIVE MEASURES

Early Recognition of the Problem: Invariably, by the time banks start their efforts to get involved in a revival process, its too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of banks 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 promoters 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 has intelligent inputs with regard to promoters sincerity, and capability to achieve turnaround. Base don 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

37

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.

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 promoters 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 units fortunes. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done it will be useful to have consultant appointed as early as possible

38

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.

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 at a cost by a discounted settlement of the exposure. Therefore, any plan for

restructuring/rehabilitation may take this aspect into account.

Corporate Debt Restructuring: CDR mechanism has been institutionalized in 2001 to 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

39

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.

6.1 Tools for recovery of NPAs

Once NPA occurred, one must come out of it or it should be managed in most efficient manner. Legal ways and means are there to overcome and manage NPAs. We will look into each one of it. 6.1.1 Willful Default Lok Adalat and Debt Recovery Tribunal

Lok Adalat institutions help banks to settle disputes involving account in doubtful and loss category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. The progress through this channel is expected to pick up in the coming years.

The recovery of debts due to banks and financial institution passed in March 2000 has helped in strengthening the function of DRTs. Provision for placement of more than one recovery officer, power to attach defendants property/assets before judgment, penal provision for disobedience of tribunals order or for breach of any terms of order and appointment of receiver with power of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make much impact on loan recovery due to variety of reasons like inadequate number, lack of infrastructure, under staffing and frequent adjournment of cases. It is essential that DRT

40

mechanism is strengthened and vested with a proper enforcement mechanism to enforce their orders. Non observation of any order passed by the tribunal should amount to contempt of court, the DRT should have right to initiate contempt proceedings. The DRT should empowered to sell asset of the debtor companies and forward the proceed to the winding up court for distribution among the lenders. Securitization Act Asset Reconstruction

6.1.2 Inability to pay Consortium arrangements Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. Corporate debt Restructuring (CDR) Background: In spite of their best efforts and intentions, sometimes corporate find themselves in financial difficulty because of factors beyond their control and also due to certain internal reasons. For the revival of the corporate as well as for the safety of the money lent by the banks and FIs, timely support through restructuring in genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavours. Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in place institutional mechanism for restructuring of corporate debt and

41

need for a similar mechanism in India, a Corporate Debt Restructuring System has been evolved, as under : Objective: The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring of the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporate that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders programme. Structure: CDR system in the country will have a three-tier structure: i. CDR Standing Forum ii. CDR Empowered Group iii. CDR Cell through an orderly and coordinated restructuring

CDR Standing Forum The CDR Standing Forum would be the representative general body of all financial institutions and banks participating in CDR system. All financial institutions and banks should participate in the system in their own interest. CDR Standing Forum will be a self-empowered body, which will lay down policies and guidelines, guide and monitor the progress of corporate debt restructuring. The Forum will also provide an official platform for both the creditors and borrowers (by consultation) to amicably and collectively evolve policies and guidelines for working out debt restructuring plans in the interests of all concerned.

The CDR Standing Forum shall comprise Chairman & Managing Director, Industrial Development Bank of India; Managing Director, Industrial Credit & Investment Corporation of India Limited; Chairman, State Bank of India; Chairman, Indian Banks Association and Executive Director, Reserve Bank of India as well as Chairmen and Managing Directors of all banks and financial institutions participating as permanent

42

members in the system. The Forum will elect its Chairman for a period of one year and the principle of rotation will be followed in the subsequent years. However, the Forum may decide to have a Working Chairman as a whole-time officer to guide and carry out the decisions of the CDR Standing Forum.

A CDR Core Group will be carved out of the CDR Standing Forum to assist the Standing Forum in convening the meetings and taking decisions relating to policy, on behalf of the Standing Forum. The Core Group will consist of Chief Executives of IDBI, ICICI, SBI, Bank of Baroda, Bank of India, Punjab National Bank, Indian Banks Association and a representative of Reserve Bank of India.

The CDR Standing Forum shall meet at least once every six months and would review and monitor the progress of corporate debt restructuring system. The Forum would also lay down the policies and guidelines to be followed by the CDR Empowered Group and CDR Cell for debt restructuring and would ensure their smooth functioning and adherence to the prescribed time schedules for debt restructuring. It can also review any individual decisions of the CDR Empowered Group and CDR Cell.

The CDR Standing Forum, the CDR Empowered Group and CDR Cell (described in following paragraphs) shall be housed in IDBI. All financial institutions and banks shall share the administrative and other costs. The sharing pattern shall be as determined by the Standing Forum.

CDR Empowered Group and CDR Cell The individual cases of corporate debt restructuring shall be decided by the CDR Empowered Group, consisting of ED level representatives of IDBI, ICICI Limited and SBI as standing members, in addition to ED level representatives of financial institutions and banks who have an exposure to the concerned company. In order to make the CDR Empowered Group effective and broad based and operate efficiently and smoothly, it would have to be ensured that each financial institution and bank, as

43

participants of the CDR system, nominates a panel of two or three EDs, one of whom will participate in a specific meeting of the Empowered Group dealing with individual restructuring cases. Where, however, a bank / financial institution has only one Executive Director, the panel may consist of senior officials, duly authorized by its Board. The level of representation of banks/ financial institutions on the CDR Empowered Group should be at a sufficiently senior level to ensure that concerned bank / FI abides by the necessary commitments including sacrifices, made towards debt restructuring. The Empowered Group will consider the preliminary report of all cases of requests of restructuring, submitted to it by the CDR Cell. After the Empowered Group decides that restructuring of the company is prima-facie feasible and the enterprise is potentially viable in terms of the policies and guidelines evolved by Standing Forum, the detailed restructuring package will be worked out by the CDR Cell in conjunction with the Lead Institution.

The CDR Empowered Group would be mandated to look into each case of debt restructuring, examine the viability and rehabilitation potential of the Company and approve the restructuring package within a specified time frame of 90 days, or at best 180 days of reference to the Empowered Group.

There should be a general authorisation by the respective Boards of the participating institutions / banks in favour of their representatives on the CDR Empowered Group, authorising them to take decisions on behalf of their organization, regarding restructuring of debts of individual corporate.

The decisions of the CDR Empowered Group shall be final and action-reference point. If restructuring of debt is found viable and feasible and accepted by the Empowered Group, the company would be put on the restructuring mode. If, however, restructuring is not found viable, the creditors would then be free to take necessary steps for immediate recovery of dues and / or liquidation or winding up of the company, collectively or individually.

44

CDR Cell The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all their functions. The CDR Cell will make the initial scrutiny of the proposals received from borrowers / lenders, by calling for proposed rehabilitation plan and other information and put up the matter before the CDR Empowered Group, within one month to decide whether rehabilitation is prima facie feasible, if so, the CDR Cell will proceed to prepare detailed Rehabilitation Plan with the help of lenders and if necessary, experts to be engaged from outside. If not found prima facie feasible, the lenders may start action for recovery of their dues. To begin with, CDR Cell will be constituted in IDBI, Mumbai and adequate members of staff for the Cell will be deputed from banks and financial institutions. The CDR Cell may also take outside professional help. The initial cost in operating the CDR mechanism including CDR Cell will be met by IDBI initially for one year and then from contribution from the financial institutions and banks in the Core Group at the rate of Rs.50 lakh each and contribution from other institutions and banks at the rate of Rs.5 lakh each.

All references for corporate debt restructuring by lenders or borrowers will be made to the CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the corporate, to work out a preliminary restructuring plan in consultation with other stakeholders and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring plan in terms of the general policies and guidelines approved by the CDR Standing Forum and place for the consideration of the Empowered Group within 30 days for decision. The Empowered Group can approve or suggest modifications, so, however, that a final decision must be taken within a total period of 90 days. However, for sufficient reasons the period can be extended maximum upto 180 days from the date of reference to the CDR Cell.

45

Other features CDR will be a Non-statutory mechanism. CDR mechanism will be a voluntary system based on debtor-creditor agreement and inter-creditor agreement. The scheme will not apply to accounts involving only one financial institution or one bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium accounts with outstanding exposure of Rs.20 crore and above by banks and institutions.

The CDR system will be applicable only to standard and sub-standard accounts. However, as an interim measure, permission for corporate debt restructuring will be made available by RBI on the basis of specific recommendation of CDR "Core-Group", if a minimum of 75 per cent (by value) of the lenders constituting banks and FIs consent for CDR, irrespective of differences in asset classification status in banks/ financial institutions. There would be no requirement of the account / company being sick, NPA or being in default for a specified period before reference to the CDR Group. However, potentially viable cases of NPAs will get priority. This approach would provide the necessary flexibility and facilitate timely intervention for debt restructuring. Prescribing any milestone(s) may not be necessary, since the debt restructuring exercise is being triggered by banks and financial institutions or with their consent. In no case, the requests of any corporate indulging in wilful default or misfeasance will be considered for restructuring under CDR.

Reference to Corporate Debt Restructuring System could be triggered by (i) any or more of the secured creditor who have minimum 20% share in either working capital or term finance, or (ii) by the concerned corporate, if supported by a bank or financial institution having stake as in (i) above.

46

Legal Basis

The legal basis to the CDR mechanism shall be provided by the Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement. The debtors shall have to accede to the DCA, either at the time of original loan documentation (for future cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly, all participants in the CDR mechanism through their membership of the Standing Forum shall have to enter into a legally binding agreement, with necessary enforcement and penal clauses, to operate the System through laid-down policies and guidelines.

Stand-Still Clause

One of the most important elements of Debtor-Creditor Agreement would be 'stand still' agreement binding for 90 days, or 180 days by both sides. Under this clause, both the debtor and creditor(s) shall agree to a legally binding 'stand-still' whereby both the parties commit themselves not to taking recourse to any other legal action during the 'stand-still' period, this would be necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention judicial or otherwise.

The Inter-Creditors Agreement would be a legally binding agreement amongst the secured creditors, with necessary enforcement and penal clauses, wherein the creditors would commit themselves to abide by the various elements of CDR system. Further , the creditors shall agree that if 75% of secured creditors by value, agree to a debt restructuring package, the same would be binding on the remaining secured creditors.

Accounting treatment for restructured accounts

The accounting treatment of accounts restructured under CDR would be governed by the prudential norms indicated in circular DBOD. BP. BC. 98 / 21.04.048 / 2000-01 dated March 30, 2001. Restructuring of corporate debts under CDR could take place in the following stages: Before commencement of commercial production; After commencement of commercial production but before the asset has been classified as sub-standard;

47

After commencement of commercial production and the asset has been classified as sub-standard.

The prudential treatment of the accounts, subjected to restructuring under CDR, would be governed by the following norms:

Treatment of standard accounts restructured under CDR

A rescheduling of the instalments of principal alone, at any of the aforesaid first two stages [paragraph 5(a) and (b) above] would not cause a standard asset to be classified in the sub-standard category, provided the loan / credit facility is fully secured.

A rescheduling of interest element at any of the foregoing first two stages would not cause an asset to be downgraded to sub-standard category subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e. current PLR + the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved.

Treatment of sub-standard accounts restructured under CDR

A rescheduling of the instalments of principal alone, would render a sub-standard asset eligible to be continued in the sub-standard category for the specified period, provided the loan / credit facility is fully secured.

A rescheduling of interest element would render a sub-standard asset eligible to be

48

continued to be classified in sub-standard category for the specified period subject to the condition that the amount of sacrifice, if any, in the element of interest, measured in present value terms, is either written off or provision is made to the extent of the sacrifice involved. For the purpose, the future interest due as per the original loan agreement in respect of an account should be discounted to the present value at a rate appropriate to the risk category of the borrower (i.e., current PLR + the appropriate credit risk premium for the borrower-category) and compared with the present value of the dues expected to be received under the restructuring package, discounted on the same basis.

In case there is a sacrifice involved in the amount of interest in present value terms, as at (b) above, the amount of sacrifice should either be written off or provision made to the extent of the sacrifice involved. Even in cases where the sacrifice is by way of write off of the past interest dues, the asset should continue to be treated as sub-standard.

The sub-standard accounts at (ii) (a), (b) and (c) above, which have been subjected to restructuring, etc. whether in respect of principal instalment or interest amount, by whatever modality, would be eligible to be upgraded to the standard category only after the specified period, i.e., a period of one year after the date when first payment of interest or of principal, whichever is earlier, falls due, subject to satisfactory performance during the period. The amount of provision made earlier, net of the amount provided for the sacrifice in the interest amount in present value terms as aforesaid, could also be reversed after the one-year period.

During this one-year period, the sub-standard asset will not deteriorate in its classification if satisfactory performance of the account is demonstrated during the period. In case, however, the satisfactory performance during the one year period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.

49

The asset classification under CDR would continue to be bank-specific based on record of recovery of each bank, as per the existing prudential norms applicable to banks.

50

CHAPTER 7: DATA 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 of March 2011 as compared to 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 2010-11, the growth rate of banks lending to industries, personal loans and services sector witnessed a deceleration, while growth rate of banks lending to agriculture and allied activities increased substantially. Overall, the incremental CreditDeposit (C-D) ratio declined sharply reflecting the slowdown in credit growth, as corporate 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.

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 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.

51

I. NET NPAs OF BANKS: 2002-03 to 2010-11

30,000 25,000 20,000 15,000 10,000 5,000 0 Public Sector Banks Private Sector Banks Foreign Banks

Fig 2: Trend in Net NPAs of public, private and foreign sector banks

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 201011. The same trend has been observed in both Private and Foreign Sector Banks. The declining trend of NPA was due to the implementation of Securitization Act (2002). 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 2008.

The increase in NPA as per percent of advance of Private and Foreign Sector Banks

52

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.

53

II. COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS

30000 25000 20000 15000 10000 5000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Priority Sector Non-priority Sector Public Sector

Fig 3: Composition of NPAs of Public Sector Banks

Interpretation:
From the above chart it is observed that public sector category is the least contributor towards the NPA of public sector bank. In the initial years from 2003 to 2007, Non- priority sector contributes more towards NPA than priority sector. But in later years from 2007 its 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. In case of priority sector, it started falling from 2005 up to 2009 over previous year.

54

But in the later years i.e. from 2008 there is rise NPA because of defaults on the loan given to the farmers. It was highest in 2010. 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 2011 i.e. by 50%.Though the advance given to non-priority sector was higher than priority sector, NPAs of non-priority sector is comparatively.

55

III. COMPOSITION OF NPAs OF PRIVATE SECTOR BANK

14000 12000 10000 8000 6000 4000 2000 0 2003 2004 2005 2006 2007 2008 2009 2010 2011 Priority Sector Non-Priority Sector Public Sector

Fig 4: Composition of NPAs of Private Sector Banks

Interpretation:
From the above graph it is observed that public sector contributes very negligible towards the overall NPA of 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 2009 to 2011 there is increase in NPA of priority sector. In these years more advances was given to agriculture & housing sector. In the year 2009-10, 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 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

56

sector is almost 74% which is highest amongst the entire category. We can see the declining trend in NPA of non-priority sector from 2005 to 2008. This as a result of securitization Act, 2002.

57

IV. NPA AGAINST NET ADVANCES OF BANKS

2.5

1.5 Public Sector Banks 1 Private Sector Banks

0.5

0 2006-07 2007-08 2008-09 2009-10 2010-11

Fig 5: NPA against Net Advances of Banks

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 2007-08 then it got stable and started rising from 2009-10 onwards.

Public sector banks have been able to reduce this ratio by 66.7% from 2007 to 2011. Public sector banks as a result of stringent checks & control able to manage low ratio compare to other banks. For private sector bank the ratio increased by 25% in 2011 due to financial crises & also for public sector bank the reduction in 2011 was the lowest i.e. 12.5%

58

V. NET PROFIT VS NET NPA OF PUBLIC SECTOR BANKS

40000 35000 30000 25000 20000 15000 10000 5000 0 2002-032003-042004-052005-062006-072007-082008-092009-102010-11 Net NPA Net Profit

Fig 6: Net Profit vs Net NPA of Public Sector Banks

Interpretation:
It is observed from the above graph there does not exist any particular relationship between net profit & net NPA of public sector banks. There is constant increase in net profit from 2002-03 to 2005-06 & from 2007-08 to 2010-11. 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 2003-05 to 2007-09. Although the percentage of decrease of NPA over the previous year is low compared to percentage of rise in profit over previous year. The average of percentage decrease in net NPA YOY basis comes to 2.5%

59

VI. NET PROFIT VS NET NPA OF PRIVATE SECTOR BANKS

12000 10000 8000 6000 4000 2000 0 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Net NPA Net Profit

Fig 7: Net Profit vs Net NPA of Private Sector Banks

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 2003-05 to 2010-11. The average of percentage rise in net NPA comes to almost 15%.

60

V. GROSS NPA AND NET NPA OF PUBLIC SECTOR BANKS

6 5.5 5 4 3.6 3 2 1 0 2006-07 2007-08 2008-09 2009-10 2010-11 2.1 1.3 1.1 2.7 2.2 2 Gross NPAs/Gross Advances Net NPAs/Net Advances

0.8

0.7

Fig 8: Gross and Net NPA of Public Sector Banks

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 2006-07 to 2007-09. Similarly it has reduced by 25%, 18.5% & 9% respectively from 2007-08 to 2008-09, from 2008-09 to 2009-10 & 2009-10 to 2010-11. While in case of net NPA to net advances ratio, the percentage change is varying. It has reduced by 38% from 2006-07 to 2007-08. Similarly it has reduced by 15.38%, 27.27% & 12.5% respectively from 2007-08 to 2008-09, from 2008-09 to 2009-10 & 2009-10 to 2010-11.

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.

61

The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2007-08 [67%] & lowest in 2008-09 [59%]. In other years its closer to 63%. This gap is highest in 2008 because advances have increased tremendously over 2007. 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 advance 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.

62

VI. GROSS NPA AND NET NPA OF PRIVATE SECTOR BANKS

4 3.5 3 2.5 2 1.5 1 0.5 0 2006-07 2007-08 2008-09 2009-10 2010-11 1 1 1.2 1.9 1.5 2.5 2.2 Gross NPAs/Gross Advances 2.5 2.9

3.8

Fig 9: Gross and Net NPA of Private Sector Banks

Interpretation: The percentage change in of gross NPA to gross advances ratio is decreasing initially
& thereafter started rising from 2008-09. It has reduced by 34.2% from 2006-07 to 2007-08. Similarly, it has reduced by 12% from 2007-08 to 2008-09 & thereafter increased by 18.5% & 9% respectively from 2008-09 to 2009-10 & 2009-10 to 201011. While in case of net NPA to net advances ratio, the percentage change is var ying drastically. It has reduced by 47% from 2006-07 to 2007-08. It is unchanged from 2007-08 to 2008-09. It has increased by 20% & 25% respectively from 2008-09 to 2009-10 & 2009-10 to 2010-11. 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.

63

The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2007-08 [60%] & lowest in 2010-11 [48%]. In 2008 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.

64

HYPOTHESIS TESTING
TEST OF CO-RELATION

The test of co-relation is used to identify the co-relation between two variables. The variable in our study is Net NPA and Net profit. This test researcher has applied to identify the co-relation between two variables i.e. Net NPA and Net profit of Public and Private Sector Banks. 1.Public Sector Banks:

H0: There is no significant correlation between NPA and Profit of Public Sector Banks for last 9 years

H1: There is correlation between NPA and Profit of Public Sector Banks for last 9 years

r=

(X-X)*(Y-Y)

[(X-X)2*(Y-Y)2] 1/2

r=

-207100923.9 379534704

r=

- 0.54567

65

Thus, H0 (Null Hypothesis) is rejected.

2. Private Sector Banks:

H0: There is no significant correlation between NPA and Profit of Private Sector Banks for last 9 years

H1: There is correlation between NPA and Profit of Private Sector Banks for last 9 years

r = (X-X)*(Y-Y)
[(X-X)2*(Y-Y)2] 1/2

r=

18673820.57 38889840.77

r = 0.480172

Thus, H0 (Null Hypothesis) is rejected.

66

There is negative correlation between net profit & net NPA of public sector banks while its positive for private sector 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 and private sector 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.

67

CHAPTER 8: 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 an upward trend over the years as compared to others.

Net NPA against net advances increased more in Foreign and Private sector banks in 2010-11 while Public sector banks have succeeded in reducing net NPA against net advances made over the period of time.

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% for private sector banks.

68

CHAPTER 9: 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 2008 & 2009. Based on the asset classification viz. Standard Assets (STD), Sub-standard Assets (SUB), Doubtful Assets (DOUB) and Loss Assets (LOSS), a matrix can be formed with a given probability.

Since the probability of a loss asset being converted to any higher asset category is zero, p41 = p42 = p43 = 0 and thus p44 = 1. This transition matrix can be used to assess the loan quality of a firm level borrower by evaluating the financial position. However, this matrix will be difficult to apply to assess individual borrowers because unlike a firm level borrower, financial data of an individual is not available. Therefore, this matrix can be better applied for corporate borrowers.

69

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.

70

CHAPTER 10: 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.

71

REFERENCES
Mohant Rakesh (2008) The Role of Fiscal and Monetary Policies in Sustaining Growth With Stability in India ; Asian Economic Policy Review (2008) 3, 209 236 Bank Risk, Capitalization and Inefficiency Simon Kwan and Robert A. Eisenbeis Islam Shahidul and Rajan Ramkishen (2011) Bank lending channel of monetary policy transmission: India and the global financial crisis ; Int. J. Economics and Business Research, Vol. 3, No. 5, 2011 Bhaumik Sumon, Dang Vinh and Kutan Ali (2010) Implications of bank ownership for the credit channel of monetary policy transmission: Evidence from India ; William Davidson Institute Working Paper Number 988 May 2010 Dai, Meixing and Sidiropoulos, Moise, (2010) Monetary and fiscal policy interactions with central bank transparency and public investment; Journal of Monetary Economics 23,177-200. Singh Bhupal (2010), Monetary Policy Behaviour In India : Evidence From Taylor Type Policy Frameworks ; Department of Economic Analysis and Policy April 2010 Aleem Abdul (2010) Transmission mechanism of monetary policy in India ; Journal of Asian Economics Vol 21 Issue 2, April 2010 Pages 186-197

72

BIBLIOGRAPHY
Websites: 1) Tables in Annexure: Retrieved from: http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India

2) Tables in Annexure: Retrieved from http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to Banks of India

3) Master Circular: Retrieved from http://rbi.org.in/scripts/NotificationUser.aspx

4) Introduction to Banking Industry: Retrieved from http://en.wikipedia.org/wiki/Banking_in_India

5) Banking in India-2009-10 from http://www.ibef.org/industry/Banking.aspx

6) Recent History Of Indian Banking: Retrieved from: http://www.bankingindiaupdate.com/general.html

Books: 1) Marketing Research- An applied orientation by Naresh K. Malhotra, 4th Edition Publication by TATA McGraw Hill 2) Indian Financial System by MY Khan, 3rd edition Publication by TATA McGraw Hill

73

APPENDIX
Table 2: Trend in Net NPAs of public, private and foreign sector banks

Public Sector Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Banks 27,977 27,958 24,877 19,335 16,904 14,566 15,145 17,726 21,033

Private Sector Banks 3,700 6,676 3,963 4,128 4,212 3,171 4028 5,380 7,418

Foreign Banks 785 920 903 933 639 808 927 1247 2973

Source: Compiled from: http://www.rbi.org.in

Table 3: Composition of NPAs of Public Sector Banks

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priority Sector 24156 25150 24939 23841 21926 22374 22954 25287 24318

Non-priority Sector 27307 28405 26781 25698 23249 18664 15158 14163 19251

Public Sector 1711 903 1087 610 444 341 490 299 474

Source: Compiled from: http://www.rbi.org.in

74

Table 4: Composition of NPAs of Private Sector Banks

Year 2003 2004 2005 2006 2007 2008 2009 2010 2011

Priority Sector 1835 2546 2445 2482 2188 2284 2884 3419 3640

Non-Priority Sector 4452 9090 9327 7796 6569 5541 6353 9558 13172

Public Sector 123 31 95 75 42 4 3 0 75

Source: Compiled from: http://www.rbi.org.in

Table 5: NPA against Net Advances of Banks

Year

Public Sector Bank

Private Sector Bank

2006-07 2007-08 2008-09 2009-10 2010-11

2.1 1.3 1.1 0.8 0.7

1.9 1 1 1.2 1.5

Source: Compiled from: http://www.rbi.org.in

75

Table 6: Net Profit vs Net NPA of Public Sector Banks

Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Net NPA 27977 27958 24877 19335 16904 14566 15145 17726 21033 4317 8301 12295 16546 15784 16539 20152 26592 34394

Net Profit

Source: Compiled from: http://www.rbi.org.in

Table 7: Net Profit vs Net NPA of Private Sector Banks

Year 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

Net NPA 3700 6676 3963 4128 4212 3171 4028 5380 7418

Net Profit 1142 1779 2958 3481 3533 4975 6465 9522 10868

Source: Compiled from: http://www.rbi.org.in

76

Table 8: Gross and Net NPA of Public Sector Banks

Year

Gross NPAs/Gross Advances

Net NPAs/Net Advances

2006-07 2007-08 2008-09 2009-10 2010-11

5.5 3.6 2.7 2.2 2

2.1 1.3 1.1 0.8 0.7

Source: Compiled from: http://www.rbi.org.in

Table 9: Gross and Net NPA of Private Sector Banks

Year

Gross NPAs/Gross Advances

Net NPAs/Net Advances

2006-07 2007-08 2008-09 2009-10 2010-11

3.8 2.5 2.2 2.5 2.9

1.9 1 1 1.2 1.5

Source: Compiled from: http://www.rbi.org.in