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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

UNEARTHING THE EPIDEMIC OF NON-PER FORMING ASSETS -A STUDY WITH REFERENCE TO PUBLIC SECTOR BANKS IN INDIA
DR.HOSMANI.A.P*; MR.JAGADISH HUDAGI**
*Associate professor, Department of Commerce, Gulbarga University Gulbarga, Karnataka. **Research Scholar, Department of Commerce, Gulbarga University.

INTRODUCTION The economic reforms initiated by the then finance minister and present prime minister of India Dr. Manmohan Singh would have been remained incomplete without the overhaul of Indian banking sector. The important aspect of norms and guidelines for making the whole sector vibrant and competitive. The problem of losses and lower profitability of Non-Performing Assets (NPA) and liability mismatch in banks and financial sector depend on how various risks are managed in their business. Non-performing Assets (NPAs) are the smoking gun threatening the very stability of Indian banks. NPAs wreck a banks profitability both through a loss of interest income and write-off of the principal loan amount itself. In a bid to stem the lurking rot, RBI issued in 1993 guidelines based on recommendations of the Narasimham Committee that mandated identification and reduction of NPAs. Their implementation immediately pushed many banks into the red. So serious is the problem that an RBI report suggested that reducing NPAs be treated as a National Priority. According to the concept of Non-Performing Assets in banks are those assets, which cease to generate income for the banks and remain irregular due to non payment of interest and

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ZENITH
International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

affected by the high level of NPAs. Controlling the growing NPAs becomes a challenging task in Indian economic scenario. It affects the liquidity, profitability, and equity. This present research paper is designed to examine the existing position of banks in respect of Non performing assets, ascertain the causes of the problem and its remedial measures. STATEMENT OF THE PROBLEM Credit is like putting paste out of a tooth paste, it is easy to get it but recovery is some what difficult, like putting that paste back in to the tube. That is the reason why good money lent, some times becomes bad and doubtful, in the banking parlance it is called as Non-Performing Asset. NPA are like flab, which causes in convenience to the Banking sector, it is a brought forward legacy accumulated over the past decades, when prudent norms of Banking were unoccupied relaxing by the radiance of security provided by government ownership. It is not wrong to have pursued social goals, but this does not justify relegating banking goals and fiscal discipline to the background. Ever increasing NPAs have a direct impact on profitability, liquidity and solvency. Since Indian banking industry is largely dominated by Public sector banks with almost two third share of total advances in the economy it is facing an acute problem with regard to NPAs. There is a need to manage the ever increasing level of NPAs. Keeping this issue in view the present study has undertaken. REVIEW OF LITRATURE: In the context of banking sector, the issue of Non performing assets has been studied and keenly observed by plenty of researchers, a synoptic review of the relevant literature on the topic of NPAs has been described as under. Basavaraj.G.Bhavi, (1990), a teacher fellow, conducted a study on Assessment of Regional rural banks credit on target groups- A case study of Krishna Grameena Bank. The essential objective of the study is to Banks credit on target groups in terms, Formation of assets, and to examine the extent of repayment of loan and overdue position and reasons for over dues. Bhatacharya (2002), studied NPA management of banks and stated that surest way of containing NPAs is to prevent their occurrence. He offered suggestion on proper risk management, strong and effective credit monitoring, co-operative working relationship between banks and borrower etc should be tenets of NPA management policy. Ramkrishna and Bhargavi (2004), study on Non performing asset management, found that the asset quality of commercial banks has improved considerably due to bringing in the reform packages. C.Chandrakant, (2007), conducted a study on Non performing assets in Karnataka State financial Corporation A case study of Gulbarga Division. The main objective of the study was to assess the impact of NPA. And he suggested that better credit risk management will be an effective tool in resolving the issue NPAs.
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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

Ashok Khurana and Mandeep Singh (2009), stated that issue of mounting NPAs is a challenging to public to public sector banks. The study found that the asset wise classification of PSBs is in right direction and there is significant variation in the recovery of NPAs in the different sector. The research observed that PSBs should not be loaded with the twin object of profitability and social weal fair. NATURE AND SCOPE OF THE STUDY The present study is empirical and descriptive in nature. The study is confined to examine the state of Non performing assets in Commercial banks operating in India wise public sector banks has been taken in to account, a period of 5 years has been considered. OBJECTIVES OF THE STUDY The banking sector striving very hard to nullify NPAs, in fact it is the level of NPAs that to a great extent determines its fincial health. Hence the following objectives have been set for our study. 1. To study the magnitude and trend of NPA of Public sector banks in India. 2. To evaluate the asset portfolio and NPA proportion of Public sector bank. 3. To study the strength and weakness in recovery aspect, and provision created for NPAs in sample banks. 4. To focus on sector wise NPAs and determine depth of it. 5. To offer necessary measures for effective management of NPAs in the light of our findings. For this purpose Public sector banks which are operating in India are considered. An attempt also been made to cross sectional analysis of NPAs. HYPOTHESIS OF THE STUDY 1. There is no significant association between gross NPAs to gross advances of the public sector banks. 2. There is no significant difference between, priority sector, public sector, & non priority sector from NPAs point of view. 3. There is no significant relation between various recovery channels, likewise Lok Adalats, DRTs and SARFESI Act. 4. There is no significant reduction in the portion of gross NPAs to gross advances.

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ZENITH
International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

METHODOLOGY The study is descriptive and investigative in nature, it evaluate the NPAs level in public sector, banks for a period between 2005-06 to 2009-10. By going through the path of objectives set for the study, the relevant secondary data has been collected through various sources like, RBI web site, Trend and progress in banking various issues, economic survey of India. The data so collected has been tabulated and analyzed by using various ratio techniques the study also examines the trend of NPAs in various sample banks. The findings of the study are inconformity with the statistical tools applied as such, Average, ANOVA, correlation, and comparative percentage analysis. ANALYSIS AND INERPRETAION It is the quality of loan assets which determines the financial viability and strength. The increasing overdue advances turning as a cause of non performing assets in public sector banks in India. This not only hampers the profitability but also dry out the liquidity of the bank. Complete avoidance of such losses is tough task, the management of a bank most of the strive hard avoid such losses. The volume of such non performing assets decides the fate of a bank. In order to assess the waves of non performing assets in public sector banks in India, the data has been tabulated shown in the following tables. TABLE-1: GROSS NPAS OF PUBLIC SECTOR BANKS. (AMOUNT IN-CORERS) GrossYear Advances 2005-06 2006-07 2007-08 2008-09 2009-10 1134724 1464493 1819074 2282081 2736347 NPAs 41358 38968 40595 44957 59926 3.6 2.7 2.2 1.97 2.19
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Gross %

Gross NPAs to Gross Advances ratio. Sources: RBI Trends & report of Banking in India 2005-2010

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

TABLE-2: CORRELATION BETWEEN GROSS NPAs AND GROSS ADVANCES Gross NPAs Gross NPAs Pearsons Correlation Level of Sig. (2-tailed) N 5 1 Gross Advances Public Sector Banks 0.838 10.1 5

TABLE-3: ANOVA TEST Model 1 Regression Residual Total Sum of Squares 204717000 86994400 291711400 d.f 1 3 4 Mean square 204717000 28998133.33 7.06 10.1 F Sign.

Predictor: (Constant) Gross advances,(Dependent variable) Gross NPAs. It can be noticed from the table that the gross advances public sector banks increased from amt 1134724 crore in 2005-06 to amt 2736347 crore in 2009-10. A drastic raise of 241.14 percent between 2005-06 to 2009-10. It is clear from the fact that there is continuous upturn trend of gross advances during the study period. At the same time gross NPAs of the public sector banks have raised from amt 41358 crore in 2005-06 to amt 59926 crore in 2009-10. It has shown an increase of 144.89 percent during the study period, in case of gross NPAs also an increase has been recorded. The statistical test of Pearson correlation shows that there is a high degree of positive correlation between gross advances and gross NPAs with r = 0.838. From table values of ANOVA, F= 7.06 and at 5 percent level of significance the table value which is higher, thus the null hypothesis of no significance between gross NPAs and gross advances of public sector banks has been accepted.

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

TABLE-4: NET NPAs OF PUBLIC SECTOR BANKS. (AMOUNT IN-CORERS) Public sector Banks Year 2005-06 2006-07 2007-08 2008-09 2009-10 Total Average Net Advances 1106288 1440146 1797504 2250532 2694910 9289380 1857876 Net NPAs Percentage 14566 15145 17836 21155 29644 98346 19669 1.3 1.1 1.0 0.9 1.1 5.4 1.06

Net NPAs to Net Advances ratio. Sources: RBI Trends & report of Banking in India 2005-2010 Net advances public sector banks increased in absolute terms from amt 1106288 crore in 2005-06 to amt 2694910 crore in 2009-10. A drastic raise of 243.59 percent between 2005-06 to 2009-10. It is clear from the fact that there is continuous upturn growth of Net advances during the study period. By looking at the Net NPAs of the public sector banks an increasing trend is noticed from amt 14566 crore in 2005-06 to amt 29644 crore in 2009-10. It has shown an increase of 203.51 percent during the study period. During the study period on an average Net advances of public sector bank is amt 1857876 crore, on other hand the average Net NPA is amt 19669 crore 1.06 percent of average advances which is quite an alarming indication by looking at the volume of Net NPAs ( Table 4).

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ZENITH
International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

TABLE-5: CLASSIFICATION OF LOAN ASSETS. (AMOUNT IN-CORERS) Bank Group

Standard Assets

SubStandard Assets

Doubtful Assets

Loss Assets

Total NPAs

Amount Year Amount % Amount 11453 14275 17290 26603 28791 19682 % 1.0 1.0 1.0 0.9 1.0 0.9 Amount 25028 19873 19291 21019 25383 22119 % 2.2 1.4 1.1 0.9 0.9 1.3 5636 4826 4018 4296 5750 4905 % 0.5 0.3 0.2 0.1 0.2 0.26 Amount 42117 38974 40598 51918 59924 46706 % 3.7 2.7 2.2 2.2 2.1 2.6

% Change 00 -1.0 -0.5 00 -0.1 -0.5

2005-06 1092607 96.2 2006-07 1425519 97.3 2007-08 1778476 97.8 2008-09 2237556 97.9 2009-10 2673534 97.8 Average 1841538 97.4

Figures in percentage column are loan assets as a percentage to Total loan assets of respective year. Classification of Assets as RBI guidelines Sources: RBI Trends & report of Banking in India 2005-2010 Loan assets of banks are classified in to four categories i.e. standard assets, sub-standard assets, doubt full assets, and loss assets. Standard assets being the good quality of loan assets on the other hand sub-standard assets, doubt full assets, and loss assets put together constitutes non performing assets. All the other three categories of NPAs as a percentage to loan assets are recorded a decline trend over the study period. Sub-standard assets showed a reduction from 1.0 percent in 2005-06 to 0.9 percent in 2009-10. The doubt full assets reduced from 2.2 percent in 2005-06 to 1.3 percent in 2009-10. The loss assets also registered decline from 0.5 percent in 2005-06 to 0.26 in 2009-10. Overall the non performing assets came down considerably i.e. from 3.7 percent in 2005-06 to 2.1 percent in 2009-10. Indicating a positive trend of financial soundness. The average standard assets, sub-standard assets, doubt full assets, and loss assets are amt 1841538 crore, amt 19682 crore, amt 22119 crore and amt 4905 crore. Lastly the average NPAs being amt 46706 crore (Table-5).

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

TABLE-6: SECTOR WISE NPAs OF PUBLIC SECTOR BANKS: (AMOUNT IN-CORERS) Priority Sector Year Amount 2005-06 2006-07 2007-08 2008-09 2009-10 Average 22374 22954 25287 24318 30848 25156 % 54.0 59.1 63.6 55.2 53.8 57.1 Non Priority Sector Amount 18664 15158 14163 19251 25929 18633 % 45.1 39.2 35.6 43.7 45.3 41.7 Public Sector Amount 340 490 299 474 524 425.4 % 0.8 1.2 0.7 1.1 0.9 0.94 Total NPA Amount 41378 38602 39749 44043 57301 44215 % 100.0 100.0 100.0 100.0 100.0 100.0

Figures in percentage column are loan assets as a percentage to NPAs amount. Sector wise NPA to Gross NPA percentage. Sources: RBI Trends & report of Banking in India 2005-2010 TABLE-7: ANOVA TEST Sources of Variation Between Within Total Sum of Squares 1642800000 131417000 1774220000 d.f 2 12 14
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Mean Square 821401000 10951400

F-Value

Table Value 3.89 at 5% level of significance

75.004

In the above Table.No-6 NPAs have been classified in to three sectors i.e. priority sector, public sector and non priority sector. As per the guidelines on lending. The average sector wise NPAs of priority sector, non-priority sector and public sector observed as follows amt 25156 crore, amt 18633 crore and amt 425.4 crore respectively. It is found that asset quality of banks recorded considerable improvement in reduction of NPAs on an average with respect to public sector i.e.0.94 percent compared to an average of 57.1 percent with priority sector and an average of 41.7 percent in case of non-priority sector (Table-6).

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

Sector wise analysis of ANOVA shows that F=75.004 at 5 percent level of significance the table value is 3.89 percent which is lower, thus the null hypothesis of there is no significant difference between, priority sector, public sector, & non priority sector has been rejected (Table-7). TABLE 11: PROVISSION FOR NPA. (AMOUNT IN-CORERS) Public sector Banks Year NPA Amt 2005-06 2006-07 2007-08 2008-09 2009-10 Average 41358 38968 40595 44957 59926 45161 ProvisionAmt 25024 22139 21180 22658 28402 23881 % 60.5 56.8 52.1 50.4 47.4 52.9

Gross NPAs & percentage of provision. Sources: RBI Trends & report of Banking in India 2005-2010 The NPA provisioning for the year 2005-06 amt 25024 crore where as the volume increased to 28402 crore, but it is interesting to note that even though the volume increased considerably the percentage of provisioning came down significantly i.e. in 2005-06 from 60.5 percent to 47.4 percent. At the same time on average 52.9 percent provision has been made during the study period (Table-11).
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RECOVERY MEASURES FOR BAD LOANS The Reserve Bank of India concerning to the issue of bad loans proposed prompt corrective action (PCA) mechanism for controlling the menace of NPA and has introduced various measures like Credit risk management models, Compromise settlement methods, effective use of Debt Recovery Tribunals (DRTs), Asset Reconstruction Companies, Securitization and Reconstruction of Financial Assets and Enforcement of security interest (SARFAESI) Act-2002, circular of information on defaulters, Corporate Debt Restructuring (CDR), Lok Adalats and so on to curb the epidemics of NPAs. In the following table-9 an attempt has been made to measure the performance of various recovery channels through which the bad loans commercial banks in India have been recovered.

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

TABLE-9: NPAS RECOVERY THROUGH VARIOUS CHANNELS (AMOUNT IN-CORERS) Lok Adalats Year 2005-06 2006-07 2007-08 2008-09 2009-10 Average Amount Involved 2144 758 2142 4023 7235 3260 Reco very 265 106 176 96 112 151 DRTs Amount Involved 6273 9156 5819 4130 9797 7035 Reco very 4735 3463 3020 3348 3133 3540 SARFAESI ACT Amount Involved 8517 9058 7263 12067 14249 10231 Reco very 3363 3749 4429 3982 4269 3958 Amount Involved 16934 18972 15224 20220 31281 20526 Total Reco very 8363 7318 7625 7426 7514 7649 % 49.38 38.57 50.08 36.72 24.02 37.26

NPA amount recovered through various Legal modes and its percentage. Sources: RBI Trends & report of Banking in India 2005-2010. TABLE-10: ANOVA TEST Sources of Variation Between Within Total Sum of Squares 43592500 2643910 46236400 d.f 2 12 14 Mean Square 21796200 220326 98.92 F-Value Table Value 3.89 at 5% level of significance

The various recovery channels have been introduced from time to time for expediting the recovery of bad loan amount banks. Among the several channels of recovery available with the banks, debt recovery tribunals (DRTs) and SARFAESI Act have been the most effective in terms of amount recovered. On an average recovery amount from DRTs measured as 50.31 percent and the SARFAESI Act stood at 38.68 percent but in case of Lok Adalats it is just 4.63 percent from bad loans. Even by looking at the over all recovery percent of bad loans it was 49.38 percent in 2005-06 it came down drastically to 37.26 percent in 2009-10 (Table-9).

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

The statistical test of ANOVA table shows F= 98.92 and at 5 percent level of significance the table value is 3.89 which is lower, thus the null hypothesis of there is no significant relation between various recovery channels has been rejected (Table-10). REASONS AND CAUSES FOR NPA There are numerous factors responsible for the alarming level of non performing assets. Some of the most crucial aspects of such reasons are mentioned as under. Improper and ineffective proposal appraisal system. Inefficient credit risk management. Reckless funding in order to achieve the illegitimate loan sanctioning targets. Intentional will full defaulters and faulty projects. Recession and variation in economic conditions. Poor audit practices and building up pressure for loan sanction. Direct lending under subsidy schemes. Un-sound financial condition of the borrower.

MAJOR FINDINGS OF THE STUDY Stitch in times save nine, timely support may save a genuine unit. Have head and heart together, for a human approach. The followings are some of the important findings of the study. The fund blocked in as Gross NPA is huge i.e. amt 59926 crore during the year 2009-10. But there is no time frame and follow up to recover the blocked amount. The NPA level during the study period is quite alarming but it is positive sign to note that the percentage of NPAs is reducing i.e. it was 3.6 in 2005-06 and came down to 2.19 in 2009-10. The non performing assets came down considerably i.e. from 3.7 percent in 2005-06 to 2.1 percent in 2009-10. Indicating a positive trend of financial soundness. Sector wise analysis of NPAs shows that the proportion of NPAs for the priority sector loan has increased on an average i.e. 57.1 percent compared to 41.7 percent to non priority sector and only 0.94 percent to public sector. Result of ANOVA sector wise break up of NPAs indicates that the null hypothesis of no significant association between, priority sector, public sector, & non priority sector has been rejected.
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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

Like wise ANOVA result of various recovery channels, indicates that the null hypothesis of no significant relation between various recovery channels has been rejected. Specific recovery targets wise monthly, quarterly, and annually were fixed, but these targets neither monitored properly nor achieved regularly. Lack of commitment towards the work by the bank employees. Political involvement in the administration. In ability to adopt, changes and rigidity in decision making by the public sector banks compared to Private sector banks, Foreign banks and NBFC to improve its performance.

SUGGESTIONS In the light of our findings of the study, following suggestions offered to deal effectively in reducing the non performing assets. Third Basel Committee report on banking supervision should be completely implemented in regular practices of the bank. IFRS accounting practices need to be adopted to have more transparent and effective accounting system. Introducing KYC norms effectively & client profile cards to have proper monitoring system. It is better to discourage too ambitious loan proposal where ambitious projects and over enthusiastic promoters involved, it may take longer gestation period to implement the project & which invents high risk. NPAs management cell can be constituted at Head Office and Branch Offices to monitor the cases. To look into the NPA Portfolio of every branch. CONCLUSION Indian banking industry is largely dominated by public sector banks with almost two third share of total advances in the economy. The committee report on banking supervision Basel-III and IFRS accounting practices need to be adopted since the global rules with respect banking and accounting practices are changing, this in tern helps in better asset quality management and transparency in accounting. The study conducted on the topic unearthing the epidemic of non performing assets with reference to public sector banks in India, found that there is a slight improvement in the asset quality reflected by decline in the diverse NPA percentage. But even then the quantum of NPAs is alarming with public sector banks in India, since NPA being as an important parameter for assessing financial performance of banks the mounting volume of NPAs will deter the financial health in terms of profitability liquidity and economies of scale in operation. The bank has to take timely action against degradation of good performing assets.

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International Journal of Multidisciplinary Research Vol.1 Issue 8, December 2011, ISSN 2231 5780

BIBLIOGRAPHY 1. Dr. Vibha jain, Non performing assets in Commercial banks, Google books 2007. 2. Parameshwaran, R, and Natarajan, S, Indian Banking Sultan Chand and Sons, 2002. 3. R.K. Bharadwaj, Chetya Anuradha R, Majumdar kakali, Quantitative Techniques for Business Managers Himalaya publication 2009. 4. T.V. Gopalkrishna, Management of non performing assets a study with reference to public sector banks in India, Indian Institute of Banking and Finance, Google books, 2004. 5. Subharao, P, principles and practice of Bank Management, Himalaya publication 1988. 6. Dr. Jaynal Ud-din Ahmed, The Management Accountant, Management of non performing assets of Commercial Banks in India, June 2009. 7. Dr.Ashok Khurana and Dr.Mandeep singh, NPA management: A study of new private Sector Banks in India, Indian journal of finance, September 2010. 8. Dr. K.Rajender, Management of non performing assets in public sector banks. The Indian Journal of commerce, January-March 2009. 9. Reserve Bank of India Reports, 2005-06 to 2009-10. 10. Report on Trends and Progress in Banking 2005-06 to 2009-10. 11. Shri, M, Narashimam Working Group Recommendations 1975. 12. Google Web site.

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