FINALREPORT

ON
NON PERFORMING ASSET
OF
SBI

BY: TO BE SUBMITED TO:

Sumit Kumar Upadhyay Faculty Mentor:
Roll No: 1901247065 Dr. Sisir Kumar Mishra

REGIONAL COLLEGE OF MANAGEMENT

(2019-21 BATCH)

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 ACKNOWLEDGEMENT

I have put my best efforts in this management project. However, it would not have been possible
without the kind support and help of many individuals and my institution, Regional College of
Management. I would like to extend my sincere thanks to all of them.
First, I thank Almighty God for providing me with everything that I required in completing this
project.
I am highly indebted to my mentor, Dr. Sisir Kumar Mishra for his guidance and constant
supervision as well as for providing necessary information regarding the project and also for his
support in completing the project.
I would like to express my special gratitude towards my parents for their kind co-operation and
encouragement which helped me in the completion of this project.
My thanks and appreciations also goes to my friends in doing the project and to the people who
have willingly helped me out with their abilities.

Thank You.

2
 CONTENTS

Sr. No. Particulars Page No.

01. Introduction 4
02. Company Profile 6
03. NPA concept 9
04. Literature Review 32
05. Research Methodology 33
06. Analysis 35
07. NPA management policy 37
08. Findings 38
09. Conclusion 39
11. References 40

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 Introduction

A strong banking sector is important for flourishing economy. One of the most important and
major roles played by banking sector is that of lending business. It is generally encouraged
because it has the effect of funds being transferred from the system to productive purposes,
which also results into economic growth. As there are pros and cons of everything, the same is
with lending business that carries credit risk, which arises from the failure of borrower to fulfill
its contractual obligations either during the course of a transaction or on a future obligation. The
failure of the banking sector may have an adverse impact on other sectors. Non- performing
assets are one of the major concerns for banks in India. NPAs reflect the performance of banks.
A high level of NPAs suggests high probability of a large number of credit defaults that affect
the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth
involves the necessity of provisions, which reduces the overall profits and shareholders’ value.
The issue of Non-Performing Assets has been discussed at length for financial system all over
the world. The problem of NPAs is not only affecting the banks but also the whole economy. In
fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the
industry and trade. This project deals with understanding the concept of NPAs, its magnitude and
major causes for an account becoming non-performing, projection of NPAs over next years in
banks and concluding remarks.

The magnitude of NPAs have a direct impact on Banks profitability legally they are not
allowed to book income on such accounts and at the same time banks are forced to make
provisions on such assets as per RBI guidelines The RBI has advised all State Co-operative
Banks as well as the Central Co-operative Banks in the country to adopt prudential norms from
the year ending 31-03-1997. These have been amended a number of times since 1997. As per
their guidelines the meaning of NPAs, the norms regarding assets classification and provisioning
Its now very known that the banks and financial institutions in India face the problem of
amplification of non-performing assets (NPAs) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, various steps have been taken.
Among all other steps most important one was the introduction of Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by
Parliament, which was an important step towards elimination or reduction of NPAs.

An asset is classified as non-performing asset (NPAs) if dues in the form of principal

and interest are not paid by the borrower for a period of 180 days, however with effect from
March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any
advance or credit facility granted by bank to a borrower becomes nonperforming, then the bank
will have to treat all the advances/credit facilities granted to that borrower as non-performing
without having any regard to the fact that there may still exist certain advances / credit facilities
having performing status. The NPA level of our banks is way high than international standards.
One cannot ignore the fact that a part of the reduction in NPA’s is due to the writing off bad
loans by banks. Indian banks should take care to ensure that they give loans to credit worthy
customers.In this context the dictum “prevention is always better than cure” acts as the golden
rule to reduce NPA’s.

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 Introduction of Banking

Bank A financial institution that is licensed to deal with money and its substitutes by accepting
time and demand deposits, making loans, and investing in securities. The bank generates profits
from the difference in the interest rates charged and paid.

The development of banking is an inevitable precondition for the healthy and rapid development
of the national economic structure. Banking institutions have contributed much to the
development of the developed countries of the world. Today we cannot imagine the business
world without banking institutions. Banking is as important as blood in the human body. Due to
the development of banking advances are increased and business activities developing so it is
rightly said," The development of banking is not only the root but also the result of the
development of the business world." After independence, the Indian government also has taken
aseries of steps to develop the banking sector. Due to considerable efforts of the
government,today we have a number of banks such as Reserve Bank of India, State Bank of
India,nationalized commercial banks, Industrial Banks and cooperative banks. Indian Banks
contributea lot to the development of agriculture, and trade and industrial sectors. Even today the
bankingsystem of India possess certain limitations, but one cannot doubt its important role in
thedevelopment of the Indian economy.

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 Company profile of SBI

The evolution of State Bank of India can be traced back to the first decade of the 19th century.
Itbegan with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank
wasredesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first ever
jointstockbank of the British India, established under the sponsorship of the Government of
Bengal.Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of
Madras(established on 1 July 1843) followed the Bank of Bengal. These three banks dominated
themodern banking scenario in India, until when they were amalgamated to form the Imperial
Bankof India, on 27 January 1921.
An important turning point in the history of State Bank of India is the launch of the first Five
Year Plan of independent India, in 1951. The Plan aimed at serving the Indian economy
ingeneral and the rural sector of the country, in particular. Until the Plan, the commercial banks
ofthe country, including the Imperial Bank of India, confined their services to the urban
sector.Moreover, they were not equipped to respond to the growing needs of the economic
revivaltaking shape in the rural areas of the country. Therefore, in order to serve the economy as
awhole and rural sector in particular, the All India Rural Credit Survey Committee
recommendedthe formation of a state-partnered and state-sponsored bank.
The All India Rural Credit Survey Committee proposed the takeover of the Imperial Bank of
India, and integrating with it, the former state-owned or state-associate banks. Subsequently,
anAct was passed in the Parliament of India in May 1955. As a result, the State Bank of India
(SBI)was established on 1 July 1955. This resulted in making the State Bank of India more
powerful,because as much as a quarter of the resources of the Indian banking system were
controlleddirectly by the State. Later on, the State Bank of India (Subsidiary Banks) Act was
passed in1959. The Act enabled the State Bank of India to make the eight former State-
associated banksas its subsidiaries.
The State Bank of India emerged as a pacesetter, with its operations carried out by the 480
offices comprising branches, sub offices and three Local Head Offices, inherited from
theImperial Bank. Instead of serving as mere repositories of the community's savings and
lending tocreditworthy parties, the State Bank of India catered to the needs of the customers, by
bankingpurposefully. The bank served the heterogeneous financial needs of the planned
economicdevelopment.

Branches
The corporate center of SBI is located in Mumbai. In order to cater to different functions, there
are several other establishments in and outside Mumbai, apart from the corporate center. The
bank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at major
cities throughout India. It is recorded that SBI has about 10000 branches, well networked to cater
to its customers throughout India.

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ATM Services
SBI provides easy access to money to its customers through more than 8500 ATMs in India. The
Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which
includes the ATMs of State Bank of India as well as the Associate Banks – State Bank of
Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact
money through SBI Commercial and International Bank Ltd by using the State Bank ATM-cum-
Debit (Cash Plus) card.

Subsidiaries
The State Bank Group includes a network of eight banking subsidiaries and several non-
bankingsubsidiaries. Through the establishments, it offers various services including merchant
banking services, fund management, factoring services, primary dealership in government
securities, credit cards and insurance.

The eight banking subsidiaries are:

• State Bank of Bikaner and Jaipur (SBBJ)

• State Bank of Hyderabad (SBH)
• State Bank of Indore (SBIR)
• State Bank of Mysore (SBM)
• State Bank of Patiala (SBP)
• State Bank of Saurashtra (SBS)
• State Bank of Travancore (SBT)

Products and Services

Personal Banking
• SBI Term Deposits SBI Loan for Pensioners
• SBI Recurring Deposits Loan against Mortgage of Property
• SBI Housing Loan against Shares & Debentures
• SBI Car Loan Rent plus Scheme
• SBI Educational Loan medi-Plus Scheme

Other Services

• Agriculture/Rural Banking
• NRI Services
• ATM Services
• Demat Services
• Corporate Banking

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• Internet Banking
• Mobile Banking
• International Banking
• Safe Deposit Locker
• RBIEFT
• E-Pay
• E-Rail
• SBI Vishwa Yatra Foreign Travel Card
• Broking Services
• Gift cheques

INDIAN ECONOMY AND NPAS

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock
markets have tumbled and business itself is getting hard to do. The Indian economy has been
much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting
of exposures to emerging markets by FIIs, etc.

Further, international rating agencies like, Standard & Poor have lowered
India's credit rating to sub-investment grade. Such negative aspects have often outweighed
positives such as increasing for reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception and are
bound to face the heat of a global downturn. One would be surprised to know that the banks and
financial institutions in India hold non-performing assets worth Rs. 1,10,000 crores. Bankers
have realized that unless the level of NPAs is reduced drastically, they will find it difficult to
survive.

As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the
economy stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances
of public sector banks. For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh
crore.

In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from
2.3% of total loans in 2008 to 9.3% in 2017. This indicates that an increasing proportion of a
bank’s assets have ceased to generate income for the bank, lowering the bank’s profitability and
its ability to grant further credit.

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Non-Performing Assets (NPA) –Concept

In banking, NPA are loans given to doubtful customers who may or may not repay the loan on
time. There are two types of assets viz. performing and non-performing. Performing loans are
standard loans on which both the principle and interest are secured and their return is guaranteed.

Non-Performing Assets means the debt which is given by the Bank is unable to recover it is
called NPA .Non- Performing Asset [NPA] is a result of asset Liabilitymismatch, A NPA
account in the books of accounts is an asset as it indicates the amountreceivable from the
Defaulters. It means if any bank gives loan to the customer if the interest forthat loan is not paid
by the customer till 90 days then that account is called as NPA account.

A loan or lease that is not meeting its stated principal and interest payments. Banks usually
classify as nonperforming assets any commercial loans which are morethan 90 days overdue and
any consumer loans which are more than 180 days overdue. Moregenerally, an asset which is not
producing income.

Definitions:

An asset, including a leased asset, becomes Non-Performing when it ceases to generate income
for the bank.

A’ non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest
and/or installment of principal has remained ‘past due’ for a specified period of time. The
specified period was reduced in a phased manner as under:

w.e.f. 31.03.1993 : four quarters

w.e.f. 31.03.1994: three quarters
w.e.f. 31.03.1995: two quarters
w.e.f. 31.03.2001: 180 days
w.e.f. 31.03.2004 : 90 days

90 days’ delinquency norms are not applicable to Agriculture segment

With the effect from March 31, 2004, NPA shall be a loan or an advance where:

1. Term loan: Interest and /or installment of principal remain over-due for a period
of morethan 90 days.
2. Cash credit/over draft: The account remains ‘out of order’ for a period of more
than 90 days.
3. Bills:The bill remains overdue for a period of more than 90days from due date
ofpayment.
4. Other loans:Any amount to be received remains overdue for a period of more
than 90days.

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 5. Agricultural Accounts: In the case of agriculture advances, where repayment is
based on income from crop. An account will be classified as NPA as under:

a) If loan has been granted for short duration crop: interest and/or
installment of Principal remains overdue for two crop seasons
beyond the due date.
b) If loan has been granted for long duration crop: Interest and/or
installment of principal remains overdue for one crop seasons
beyond due date.

RBI introduced, in 1992, the prudential norms for income recognition, asset classification &
provisioning – IRAC norms in short – in respect of the loan portfolio of the Co-operative Banks.
The objective was to bring out the true picture of a bank’s loan portfolio. The fallout of this
momentous regulatory measure for the management of the CBs was to divert its focus to
profitability, which till then used to be a low priority area for it. Asset quality assumed greater
importance for the CBs when Maintenance of high quality credit portfolio continues to be a
major challenge for the CBs, especially with RBI gradually moving towards convergence with
more stringent global norms for impaired assets. The quality of a bank’s loan portfolio can
impact its profitability, capital and liquidity. Asset quality problems are at the root of other
financial problems for banks, leading to reduced net interest income and higher provisioning
costs. If loan losses exceed the Bad and Doubtful Debt Reserve, capital strength is reduced.
Reduced income means less cash, which can potentially strain liquidity. Market knowledge that
the bank is having asset quality problems and associated financial conditions may cause outflow
of deposits. Thus, the performance of a bank is inextricably linked with its asset quality.
Managing the loan portfolio to minimize bad loans is, therefore, fundamentally important for a
financial institution in today’s extremely competitive and market driven business environment.
This is all the more important for the CBs, which are at a disadvantage of the commercial banks
in terms of professionalized management, skill levels, technology adoption and effective risk
management systems and procedures. Management of NPAs begins with the consciousness of a
good portfolio, which warrants a better understanding of risks in lending. The Board has to
decide a strategy keeping in view the regulatory norms, the business environment, its market
share, the risk profile, the available resources etc. The strategy should be reflected in Board
approved policies and procedures to monitor implementation. The essential components of sound
NPA management are:-

i. quick identification of NPAs,

ii. their containment at a minimum level,
iii. Ensuring minimum impact of NPAs on the financials.

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 Classification of loans

In India bank loans are classified on the following basis:

Performing Assets:

Loans where the interest and/or principal are not overdue beyond 180 days at the end of the
financial year.

Non-Performing assets:

Any loan repayment, which is overdue beyond 180 days or two quarters, is considered as NPA.
According to the securitization and re construction of financial assets and enforcement of
security interest Ordinance, 2002 “non-performing assets” (NPA) means “an asset or a/c of a
borrower, which has been classified by a bank or financial institution as substandard, doubtful or
loss asset, in accordance with the directions or guidelines relating to asset classification issued by
the Reserve Bank.

ASSET CLASIFICATION

Assets can be categorized into Four categories namely (1) Standard (2) Sub -Standard
(3) Doubtful (4) Loss the last three categories are classified as NPAs based on the period for
which the asset has remained non-performing and the reliability of the dues.

I. Standard asset:The loan accounts which are regular and do not carry more than normal
risk. Within standard assets, there could be accounts which though have not become
NPAbut are irregular. Such accounts are called as special Mention accounts.

II. Sub-standard asset: With effect from 31.3.2005, a sub- standard asset is one, which is
classified as NPA for a period not exceeding 12 Months (earlier it was 18 months). In
such cases, the current net worth of the borrower/ guarantor or the current market value
of the security charged is not enough to ensure recovery of the dues to the bank in full. In
other words, such an asset will have well defined credit weakness that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.

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III. Doubtful asset: With effect from 31 march 2005, an asset is to be classified as doubtful,
if it has remained NPA or sub-standard for a period exceeding 12 months (earlier it was
18 months). A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as sub-standard, with the added characteristic that the weakness make
collection or liquidation in full- on the basis of currently known facts, conditions and
values- highly questionable and improbable.

IV. Loss asset: A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off wholly. In
other words, such an asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted although there may be some salvage or
recoverable value.

When a Sub Standard account is classified as Doubtful or Loss without waiting for 12 months: If
the realizable value of tangible security in a sub Standard account which was secured falls below
10% of the outstanding, it should be classified loss asset without waiting for 12 months and if the
realizable value of security is 10% or above but below 50% of the outstanding, it should be
classified as doubtful irrespective of the period for which it has remained NPA.

NPA IDENTIFICATION NORMS

With effect from 31st March’2004, a loan or advance would become NPA where;

i. Interest and 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 ofan
Overdraft/Cash Credit (OD/CC),

iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,

iv. With effect from September 2004, loans granted for short duration crops will betreated
as NPA, if the installment of principal or interest thereon remains overdue for twocrop
seasons and loans granted for long duration crops will be treated as NPA, ifinstallment
of principal or interest thereon remains overdue for one crop season, and

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 v. Any amount to be received remains overdue for a period of more than 90days 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 the sanctioned limit/drawing power. In cases where the outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power, but
there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period, these accounts should be treated as
'out of order'.

Overdue:Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on
the due date fixed by the bank.

The date of NPA will be the actual date on which slippage occurred, as mentionedbelow:-

For Term Loan/Demand Loan Accounts

The date on which interest and/or instalment of principal have remained overdue for a period of
more than 90 days.

For Overdraft/Cash Credit Accounts

The date on which the account completed a period of more than 90 days of beingcontinuously
out of order.

Income Recognition – Policy

1. The Policy of income recognition has to be objective and based on the record of recovery.
Internationally income from non-performing asset (NPA) is not recognized 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.
2. On an account turning NPA, banks should reverse the interest already chargedand not
collected by debiting profit and loss account, and stop further applicationof interest.
However, banks may continue to record such accrued interest in amemorandum account
in their books.
3. However, interest on advances against term deposits, NSCs, IVPs, KVPs, andLife
policies may be taken to income account on the due date, provided adequatemargin is
available in the accounts.
4. If government guaranteed advances become NPA, the interest on such advancesshould
not be taken to income account unless the interest has been realized.
5. If any advance, including bills purchased and discounted, become s NPA as atthe close of
any year, the entire interest accrued and credited to income accountin the past periods,
should be reversed or provided for if the same is not realized.
This will apply to government guaranteed accounts also.

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 PROVISING NORMS

There is time lag between an account becoming doubtful for recovery, the realization of security
and erosion over a period of time in its value. So RBI directive now requires the banks to make
provisions in their balance sheet for all non-standard loss assets. Provisioning is made on all
types of assets i.e. Standard, Sub Standard, Doubtful and loss assets.

1. Standard Assets:RBI vides its circular dated 15.11.2008, revised the provisioning
requirements. For all types of standard assets it has been reduced to a uniform level of
0.40 per cent of outstanding at global basis except in the case of direct advances to
agricultural and SME sectors, which shall continue to attract a provisioning of 0.25
per cent. The provision on standard assets relating to exposure in commercial real
estate has been increased again to 1% as per policy statement issued in Oct 09. The
provisions on standard assets should not be reckoned for arriving at net NPAs. The
provisions towards standard assets need not be netted from gross advances but shown
separately as ‘Contingent Provisions against standard assets’ under ‘other Liabilities
and provisions others’ in schedule 5 of the balance sheet .

2. Sub Standard Assets:In respect of sub-standard assets the rate of provision is 10%
of outstanding balance without considering ECGC guarantee cover or securities
available. However, if the loan was unsecured from the begging (‘unsecured
Exposure’), there would be additional provision of 10% i.e. total provision would be
20% of outstanding balance. Unsecured exposure is defined as an exposure where the
realizable value of the security, as assessed by the bank/ Reserve Bank’s inspecting
officers, is not more than 10 percent, of the outstanding exposure.

3. Doubtful assets:In case of doubtful assets, while making provisions, realizable value
of security is to be considered. 100% provision is made for unsecured portion. In case
of secured portion, the rate of provision depends on age of the doubtful assets as
under:

Age of doubt full asset Provision as% of secured portion

Doubt full up to 1 year; D1 20% of RVS (Realizable value of
security)
Doubt full more than 1 year to 3 year; D2 30% of RVS
Doubt full more than 3 year; D3 50% of RVS

Thus, if an account is doubtful for more than 3 years, then 50% of the provision is to be made
both for secured and unsecured portion. If an advance has been guaranteed by
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DICGC/CGFT/ECGC and is doubtful, then provision on secured portion will be as in other cases
but provision on unsecured portion will be made after deducting the claim available. For
example. If the outstanding amount in D2 account is Rs 10 lac, security is rs lac, and DICGC
cover is 50%, then on Rs 6lac, the provision will be at the rate of 30% and of the unsecured
portion of Rs 4lac, provision will be made at the rate of 50% on Rs 2 lac.

4. Loss Asset: 100% of the outstanding amount. While making provisions on NPAs,
amount lying in suspense interest account and derecognized interest should be
deducted from gross advance and provisions be made on the balance amount.

5. Overall Provisions: With a view to improving the provisioning cover and enhancing
the soundness of individual banks, RBI has proposed in /Oct 09 policy that banks
should augment their provisioning cushions consisting of specific provisions against
NPAs as well as floating provisions, and ensure that their total provisioning coverage
ratio, including floating provisions, is not less than 70 percent.

Impact/ Effects of NPA upon banks

A strong banking sector is important for flourishing economy. The failure of the banking sector
may have an adverse impact on other sectors. Non-performing assets are one of the major
concerns for banks in India. The only problem that hampers the possible financial performance
of the public sector banks is the increasing results of the Non- performing Assets. The
Nonperforming Assets impacts drastically to the working of the banks. The efficiency of a bank
is not always reflected only by the size of its balance sheet but by the level of return on its assets.
NPAs do not generate interest income for the banks, but the same time banks are required to
make provisions for such NPAs from their current profits.

 They erode current profits through provisioning requirements.

 They result in reduced interest income.
 They require higher provisioning requirements affecting profits and accretion to
capital.They limit recycling of funds, set in assets-liability mismatches, etc.
 Adverse impact on Capital Adequacy Ratio.
 ROE and ROA goes down because NPAs do not earn.
 Bank’s rating gets affected.
 Bank’s cost of raising funds goes up.
 RBI’s approval required for declaration of dividend if Net NPA ratio is above 3%.
 Bad effect on Goodwill.
 Bad effect on equity value.

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The RBI has also develop many schemes and tools to reduce the NPA assets by introducing
internal checks and control scheme, relationship mangers as stated by RBI who have complete
knowledge of the borrowers, credit rating system , and early warning system and so on. The RBI
has also tried to improve the securitization Act and SRFAESI Act and other acts related to the
pattern of the borrowings.

Though RBI has taken number of measures to reduce the level of the Non-performing Assets the
result is not up to expectations. To improve NPAs each bank should be motivated tointroduce
their own precautionary steps. Before lending the banks must evaluate the feasiblefinancial and
operational prospective results of the borrowing companies or customer. They mustevaluate the
borrowing companies by keeping in considerations the overall impacts of all thefactors that
influence the business. NPAs reflect the performance of banks. A high level of NPAssuggests
high probability of a large number of credit defaults that affect the profitability and networthof
banks and also erodes the value of the asset. The NPA growth involves the necessity
ofprovisions, which reduces the overall profits and shareholders’ value.

Causes for an Account becoming NPA

 Those Attributable to Borrower

a) Failure to bring in required capital

b) Too ambitious project
c) Longer gestation period
d) Unwanted Expenses
e) Over trading
f) Imbalances of inventories
g) Lack of proper planning
h) Dependence on single customers
I) Lack of expertise
j) Improper working Capital Mgmt.
k) Miss management
l) Diversion of Funds
m) Poor Quality Management
n) Heavy borrowings
o) Poor Credit Collection
p) Lack of Quality Control

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 Causes Attributable to Banks

a) Wrong selection of borrower

b) Poor Credit appraisal
c) Unhelpful in supervision
d) Tough stand on issues
e) Too inflexible attitude
f) Systems overloaded
g) Non inspection of Units
h) Lack of motivation
i) Delay in sanction
j) Lack of trained staff
k) Lack of delegation of work
l) Sudden credit squeeze by banks
m) Lack of commitment to recovery
n) Lack of technical, personnel & zeal to work.

 Other Causes

a) Lack of Infrastructure
b) Fast changing technology
c)Un helpful attitude of Government
d) Changes in consumer preferences
e) Increase in material cost
f) Government policies
g) Credit policies
h) Taxation laws
I) Civil commotion
j) Political hostility
k) Sluggish legal system
l) Changes related to Banking amendment Act

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 Early symptoms by which one can recognize a performing asset
turning in to Non-performing asset

Four categories of early symptoms:

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 sisterconcern
or parent company.

Operational and Physical:

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

Attitudinal Changes:

 Use for personal comfort, stocks and shares by borrower

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  Avoidance of contact with bank
 Problem between partners

Others:

 Changes in Government policies

 Death of borrower
 Competition in the market

SALE OF NPA TO OTHER BANKS

 A NPA is eligible for sale to other banks only if it has remained a NPA for at least
twoyears in the books of the selling bank
 The NPA must be held by the purchasing bank at least for a period of 15 months before
itis sold to other banks but not to bank, which originally sold the NPA.
 The NPA may be classified as standard in the books of the purchasing bank for a periodof
90 days from date of purchase and thereafter it would depend on the record of
recoverywith reference to cash flows estimated while purchasing.
 The bank may purchase/ sell NPA only on without recourse basis.
 If the sale is conducted below the net book value, the short fall should be debited to
P&Laccount and if it is higher, the excess provision will be utilized to meet the loss
onaccount of sale of other NPA.

19
 Preventive Measurement for NPA

 Early Recognition of the Problem:

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

 Identifying Borrowers with Genuine Intent:

Identifying borrowers with genuine intent from those who are non- serious with no commitment
or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the
branch level is paramount as they are the ones who has intelligent inputs with regard to
promoters’ sincerity, and capability to achieve turnaround. Based on this objective assessment,
banks should decide as quickly as possible whether it would be worthwhile to commit additional
finance.

In this regard banks may consider having “Special Investigation” of all financial transaction or
business transaction, books of account in order to ascertainreal factors that contributed to
sickness of the borrower. Banks may have penal of technical experts with proven expertise and
track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level,and for this purpose a special
limit to such type of cases should be decided. This willobviate the need to route the additional
funding through the controlling offices indeserving 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

20
techno-economic study and promoter’s commitment, has to be adequate in terms of extend of
additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.

 Focus on Cash Flows:

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

 Management Effectiveness:

The general perception among borrower is that it is lack of finance that leads to sickness and
NPAs. But this may not be the case all the time. Managementborrowing unit’s fortunes. A bank
may commit additional finance to an align unit only after basic viability of the enterprise also in
the context of quality of management is examined andconfirmed. Where the default is due to
deeper malady, viability study or investigative auditshould be done – it will be useful to have
consultant appointed as early as possible to examinethis aspect. A proper techno- economic
viability study must thus become the basis on which anyfuture action can be considered.

 Multiple Financing:

A. 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.

B. 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.

C. In a forum of lenders, the priority of each lender will be different. While one set oflenders
may be willing to wait for a longer time to recover its dues, another lender mayhave a

21
 much shorter timeframe in mind. So it is possible that the letter categories oflenders may
be willing to exit, even a t a cost – by a discounted settlement of theexposure. Therefore,
any plan for restructuring/rehabilitation may take this aspect intoaccount.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to

providea timely and transparent system for restructuring of the corporate debt of Rs. 20
crore andabove with the banks and FIs on a voluntary basis and outside the legal
framework.Under this system, banks may greatly benefit in terms of restructuring of large
standardaccounts (potential NPAs) and viable sub-standard accounts with
consortium/multiplebanking arrangements.

NPA MANAGEMENT PRACTICES IN INDIA

 Formation of the Credit Information Bureau (India) Limited (CIBIL).

 Release of Willful Defaulter’s List. RBI also releases a list of borrowers withaggregate
outstanding of Rs.1 crore and above against whom banks have filedsuits for recovery of
their funds.
 Reporting of Frauds to RBI.
 Norms of Lender’s Liability – framing of Fair Practices Code with regard tolender’s
liability to be followed by banks, which indirectly prevents accountsturning into NPAs on
account of bank’s own failure.
 Risk assessment and Risk management.
 RBI has advised banks to examine all cases of willful default of Rs.1 crore andabove and
file suits in such cases. Board of Directors are required to review NPAaccounts of Rs.1
crore and above with special reference to fixing of staffaccountability.
 Reporting quick mortality cases.
 Special mention accounts for early identification of bad debts. Loans andadvances
overdue for less than one and two quarters would come under thiscategory. However,
these accounts do not need provisioning.

22
 NPA MANAGEMENT – RESOLUTION

 Compromise Settlement Schemes

 Restructuring / Reschedulement
 Lok Adalat
 Corporate Debt Restructuring Cell
 Debt Recovery Tribunal (DRT)
 Proceedings under the Code of Civil Procedure
 Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR
 National Company Law Tribunal (NCLT)
 Sale of NPA to other banks
 Sale of NPA to ARC/ SC under Securitization and Reconstruction of FinancialAssets and
Enforcement of Security Interest Act 2002 (SRFAESI)
 Liquidation

MEASURES INITIATED BY RBI AND GOVERNMENT OF

INDIA FOR REDUCTION OF NPAs

 Compromise settlement schemes :

The RBI / Government of India have been constantly goading the banks totake steps for arresting
the incidence of fresh NPAs and have also been creating legaland regulatory environment to
facilitate the recovery of existing NPAs of banks.More significant of them, I would like to
recapitulate at this stage.

The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July
1995 continues to be in place. Banks are free to design andimplement their own policies for
recovery and write-off incorporating compromiseand negotiated settlements with the approval of
their Boards, particularly for old andunresolved cases falling under the NPA category. The
policy framework suggested byRBI provides for setting up of an independent Settlement
Advisory Committeesheaded by a retired Judge of the High Court to scrutinize and
recommendcompromise proposals.

Specific guidelines were issued in May 1999 to public sector banks for onetime non-
discretionary and non-discriminatory settlement of NPAs of smallsector. The scheme was
operative up to September 30, 2000. [Public sector banksrecovered Rs. 668 crore through
compromise settlement under this scheme.]

23
 Guidelines were modified in July 2000 for recovery of the stock of NPAs ofRs. 5 crore and less
as on 31 March 1997. [The above guidelines which were valid upto June 30, 2001 helped the
public sector banks to recover Rs. 2600 crore bySeptember 2001]

An OTS Scheme covering advances of Rs.25000 and below continues to be in operation and
guidelines in pursuance to the budget announcement of the HonorableFinance Minister providing
for OTS for advances up to Rs.50,000 in respect of NPAsof small/marginal farmers are being
drawn up.

Negotiating for compromise settlements;

The first crucial step towards meaningful NPA management is to accept that recoveries are
one'sown responsibility. To keep the Bank's operating cycle going smoothly, it is essential that
thisrealization of one's duties be transformed into deeds by resorting to various methods of
recovery.

Of the various methods available for NPA Management, Compromise Settlements are the
mostattractive, if handled in a professional manner.

Advantages

i. Saves money, time and manpower

Banks are mainly concerned with recovery of dues, to the maximum possible extent, at
minimumexpense. By entering into compromise settlements, the objective is achieved. Also, a
lot ofexecutive time is saved because most of the usual problems / delays associated with court
actionare avoided.

ii. Projects a helpful image of the Bank

A well-concluded compromise settlement, which results in a ‘WIN-WIN’ for the Bank as well
asthe borrower, is a strong positive propaganda for the Bank. The impression generated is that
the
Bank is capable not only of sympathy, but also empathy.

iii. Expedites recycling of funds

Compromise settlements aim at quick recovery. Recovery means funds becoming available
forrecycling and, additional interest generation.

iv. Cleanses Balance Sheet

24
 With the NPA level going down, and the additional funds becoming available for recycling
asfresh advances, the asset quality of the Bank is bound to go up. Improved asset quality
signifieshigher profits by reduced provisions and increased interest income. With additions to
thereserves, the capital position also improves, improving the Capital Adequacy position.

Besides the above, compromise offers the best option when,

I. The documents are defective and cannot be rectified,
II. Security is not enforceable,
III. Forced sale is extremely difficult, or would result only in
realizing apaltry amount and
IV. The borrowers become untraceable and recovery can be only
thoughguarantors.

Disadvantages

i. Compromise involves loss, since full recovery is not possible. In fact, full recovery is not
even envisaged, but sacrifice is.
ii. It may be viewed as a reward for default, especially if chronic default cases are settled by
negotiations.
iii. It may have a demonstrative effect, and so may vitiate the culture ofrepayment
iv. There is also the possibility of misuse, sinceassessment of situation is highly subjective.

Practical aspects of compromise settlements

Every compromise proposal needs to be looked at individually, evaluated strictly on merits, and
negotiated properly for maximization of benefit to the Bank. Hence, a straight jacket approach is
not possible, neither is it desirable, to give strict guidelines for compromise settlements.

 Restructuring and Rehabilitation:

A. Banks are free to design and implement their own policies for restructuring/
rehabilitationof the NPA accounts
B. Reschedulement of payment of interest and principal after considering the Debt
service coverage ratio, contribution of the promoter and availability of security.

25
  Lok Adalats
Lok Adalat institutions help banks to settle disputes involvingaccounts in “doubtful” and “loss”
category, with outstanding balance of Rs.5 lakh forcompromise settlement under Lok Adalats.
Debt Recovery Tribunals have now beenempowered to organize Lok Adalats to decide on cases
of NPAs of Rs.10 lakhs andabove. The public sector banks had recovered Rs.40.38crore as on
September 30,2001, through the forum of Lok Adalat. The progress through this channel is
expected to pick up in the coming years particularly looking at the recent initiatives taken by
some of the public sector banks and DRTs in Mumbai. Some of features are

 Small NPAs up to Rs.20 Lakhs

 Speedy Recovery
 Veil of Authority
 Soft Defaulters
 Less expensive
 Easier way to resolve

 Debt Recovery Tribunals

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in
March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of
more than one Recovery Officer, power to attach defendant’s property/assets before judgment,
penal provisions for disobedience of Tribunal’s order or for breach of any terms of the order and
appointment of receiver with powers 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.
Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals
located in five centers viz. Allahabad, Mumbai, Delhi, Calcuttaand Chennai, they could decide
only 9814 cases for Rs.6264.71crore pertaining topublic sector banks since inception of DRT
mechanism and till September 30,2001.The amount recovered in respect of these cases amounted
to only Rs.1864.30crore.
Looking at the huge task on hand with as many as 33049 cases involving Rs.42988.84crore
pending before them as on September 30, 2001, I wouldlike the banks to institute appropriate
documentation system and render all possibleassistance to the DRTs for speeding up decisions
and recovery of some of the wellcollateralized NPAs involving large amounts. I may add that
familiarizationprogrammes have been offered in NIBM at periodical intervals to the
presidingofficers of DRTs in understanding the complexities of documentation and
operationalfeatures and other legalities applicable of Indian banking system. RBI on its part
hassuggested to the Government to consider enactment of appropriate penal provisionsagainst
obstruction by borrowers in possession of attached properties by DRTreceivers, and notify
borrowers who default to honour the decrees passed againstthem.

26
  Circulation of information on defaulters

The RBI has put in place a system for periodical circulation of details of willful defaults of
borrowers of banks and financial institutions. This serves as a caution list while considering
requests for new or additional credit limits from defaulting borrowing units and also from the
directors /proprietors / partners of these entities. RBI also publishes a list of borrowers (with
outstanding aggregating Rs.1 crore and above) against whom suits have been filed by banks and
FIs for recovery of their funds, as on 31st March every year. It is our experience that these
measures had not contributed to any perceptible recoveries from the defaulting entities.
However, they serve as negative basket of steps shutting off fresh loans to these defaulters. I
strongly believe that a real breakthrough can come only if there is a change in the repayment
psyche of the Indian borrowers.

 Recovery action against large NPAs

After a review of pendency in regard to NPAs by the Hon’ble Finance Minister, RBI had advised
the public sector banks to examine all cases of willful default of Rs 1 crore and above and file
suits in such cases, and file criminal cases in regard to willful defaults. Board of Directors are
required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff
accountability. On their part RBI and the Government are contemplating several supporting
measures

 Asset Reconstruction Company:

An Asset Reconstruction Company with an authorized capital of

Rs.2000 crores and initial paid up capital Rs.1400 crores is to be set up as a trust for undertaking
activities relating to asset reconstruction. It would negotiate with banks and financial institutions
for acquiring distressed assets and develop markets for such assets. Government of India
proposes to go in for legal reforms to facilitate the functioning of ARC mechanism

 Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely
and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the
banks and financial institutions. The CDR process would also enable viable corporate entities to
restructure their dues outside the existing legal framework and reduce the incidence of fresh
NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a Standing Forum and

27
Core Group for administering the mechanism had already been put in place. The experiment
however has not taken off at the desired pace though more than six months have lapsed since
introduction. As announced by the Hon’ble Finance Minister in the Union Budget 2002-03, RBI
has set up a high level Group under the Chairmanship of Shri. Vepa Kamesam, Deputy
Governor, RBI to review the implementation procedures of CDR mechanism and to make it
more effective. The Group will review the operation of the CDR Scheme, identify the
operational difficulties, if any, in the smooth implementation of the scheme and suggest
measures to make the operation of the scheme more efficient.

 Credit Information Bureau:

Institutionalization of information sharing arrangements through the newly formed Credit

Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations
of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information
dissemination on defaults to the financial 50 system. The main recommendations of the Group
include dissemination of information relating to suit-filed accounts regardless of the amount
claimed in the suit or amount of credit granted by a credit institution as also such irregular
accounts where the borrower has given consent for disclosure. This, I hope, would prevent those
who take advantage of lack of system of information sharing amongst lending institutions to
borrow large amounts against same assets and property, which had in no small measure
contributed to the incremental NPAs of banks.

 Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working out a
proper definition covering such classes of defaulters so that credit denials to this group of
borrowers can be made effective and criminal prosecution can be made demonstrative against
willful defaulters.

 Corporate Governance:

A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up by the Reserve
Bank to review the supervisory role of Boards of banks and financial institutions and to obtain
feedback on the functioning of the Boards vis-à-vis compliance, transparency, disclosures, audit
committees etc. and make recommendations for making the role of Board of Directors more
effective with a view to minimizing risks and over-exposure. The Group is finalizing its
recommendations shortly and may come out with guidelines for effective control and supervision
by bank board’s over credit management and NPA prevention measures.

[Dr. Bimal Jalan, Governor, RBI, in a speech titled "Banking and Finance in the New
Millennium." delivered at 22nd Bank Economists Conference, New Delhi, 5th February, 2001]

28
 INTERNATIONAL PRACTICES ON NPA MANAGEMENT
Subsequent to the Asian currency crisis which severely crippled the financial system in most In
addition to the above, some of the more recent and aggressive steps to resolve NPAs have been
taken by Taiwan. Taiwanese financial institutions have been encouraged to merge (though with
limited success) and form bank based AMCs through the recent introduction of Financial
Holding Company Act and Financial Institution Asian countries, the magnitude of NPAs in
Asian financial institutions was brought to light. Driven by the need to proactively tackle the
soaring NPA levels the respective Governments embarked upon a program of substantial reform.
This involved setting up processes for early identification and resolution of NPAs. The table
below provides a cross country comparison of approaches used for NPA resolution. Mergers Act.
Alongside the Ministry of Finance has followed a carrot and stick policy of specifying the
required NPA ratios for banks (5% by end 2003), while also providing flexibility in modes of
NPA asset resolution and a conducive regulatory and tax environment. Deferred loss write-off
provisions have been instituted to provide breathing space for lenders to absorb NPA write-offs.
While it is too early to comment on’ he success of the NPA resolution process in Taiwan, the
early signs are encouraging. Detailed below are the some key NPA management approaches
adopted by banks in South East Asian countries.

1. Credit Risk Mitigation

As part of the overall credit function of the bank, early recognition of loans showing signs of
distress is a key component. Credit risk management focuses on assessing credit risk and
matching it with capital or provisions to cover expected losses from default.

2. Early Warning Systems

Loan monitoring is a continuous process and Early Warning Systems are in place for staff to
continuously be alert for warning signs.

3. Asset Management Companies

To resolve NPA problems and help restore the health and confidence of the financial sector, the
countries in South East Asia have used one broad uniform approach, i.e. they set up specialized
Asset Management Companies (AMCs) to tackle NPAs and put in place Debt Restructuring
mechanism to bring creditors and debtors together, often working along with independent
advisors. This broad approach was locally adapted and used with a varying degree of efficacy
across the region. For example, while in some countries a centralized government sponsored
AMC model has been used, in others a more decentralized approach has been used involving the
creation of several "bank-based" AMCs. Further different countries have allowed/used different

29
approaches (in-house restructuring versus NPA Sale) to resolve their NPAs. Additionally, the
efficacy of bankruptcy and foreclosure laws has varied in various countries.

4. out of court restructuring

Most Asian countries adopted “out of court” restructuring mechanism to minimize court
intervention and speed up restructuring of potentially viable entities. Internationally,
restructuring of NPAs often involves significant operational restructuring in addition to financial
restructuring. The operational restructuring measures typically include the following areas:

 Revenue enhancement
 Cost reduction
 Process improvement
 Working capital management
 Sale of redundant/surplus assts

Once the restructuring measures have been agreed by stakeholders, a complete restructuring plan
is prepared which takes into account all the agreed restructuring measures. This includes
establishment of a timetable and assignment of responsibilities. Usually, lenders will also
establish a protocol for monitoring of progress on the operational restructuring measures. This
would typically involve the appointment of an independent monitoring agency. As seen from the
Asian experience, in general, NPA resolution has been most successful when

 Flexibility in modes of asset resolution (restructuring, third party sales) has been
provided to lenders.
 Conducive and transparent regulatory and tax environment, particularly pertaining to
deferred loss write offs, Foreign Direct Investment and bankruptcy/foreclosure processes
has been put in place.
 Performance targets set for banks to get them to resolve NPAs by a certain deadline.

Difficulties with the Non-Performing Assets:

1. Owners do not receive a market return on their capital. In the worst case, if the bank fails,
owners lose their assets. In modern times, this may affect a broad pool of shareholders.
2. Depositors do not receive a market return on savings. In the worst case if the bank fails,
depositors lose their assets or uninsured balance. 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.
3. Nonperforming loans epitomize bad investment. They misallocate credit from good projects,
which do not receive funding, to failed projects. Bad investment ends up in misallocation of
capital and, by extension, labour and natural resources. The economy performs below its
production potential.
4. Nonperforming loans may spill over the banking system and contract the money stock, which
may lead to economic contraction. This spillover effect can channelize through illiquidity or
bank insolvency; (a) when many borrowers fail to pay interest, banks may experience liquidity
shortages. These shortages can jam payments across the country, (b) illiquidity constraints bank

30
in paying depositors e.g. cashing their paychecks. Banking panic follows. A run on banks by
depositors as part of the national money stock become inoperative. The money stock contracts
and economic contraction follows (c) undercapitalized banks exceeds the bank’s capital base.
Lending by banks has been highly politicized. It is common knowledge that loans are given to
various industrial houses not on commercial considerations and viability of project but on
political considerations; some politician would ask the bank to extend the loan to a particular
corporate and the bank would oblige. In normal circumstances banks, before extending any loan,
would make a thorough study of the actual need of the party concerned, the prospects of the
business in which it is engaged, its track record, the quality of management and so on. Since this
is not looked into, many of the loans become NPAs.

The loans for the weaker sections of the society and the waiving of the loans to farmers are
another dimension of the politicization of bank lending.

31
Literature review

A non-performing loan is a loan that is in default or close to being in default. Many loans
become non-performing after being in default for 3 months, but this can depend on the contract
terms.

"A loan is nonperforming when payments of interest and principal are past due by 90 days or
more, or at least 90 days of interest payments have been capitalized, refinanced or delayed by
agreement, or payments are less than 90 days overdue, but there are other good reasons to doubt
that payments will be made in full".

Source: http://www.articlesbase.com/authors/anthony-dean/53396

It’s now very known that the banks and financial institutions in India face the problem of
amplification of non-performing assets (NPAs) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, various steps have been taken.
Among all other steps most important one was the introduction of Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by
Parliament, which was an important step towards elimination or reduction of NPAs. The NPA
level of our banks is way high than international standards. One cannot ignore the fact that a part
of the reduction in NPA's is due to the writing off bad loans by banks. Indian banks should take
care to ensure that they give loans to credit worthy customers. In this context the dictum
"prevention is always better than cure" acts as the golden rule to reduce NPA's.

Source: http://ezinearticles.com/?expert=Zainul_Abidin

32
Research refers to search for knowledge. One can also define research as a scientific and
systematic search for pertinent information on a specific topic. It is an art of scientific
investigation.

Research Methodology

The research methodology is a systematic way of studying the research problem. The research
methodology means the way in which we can complete our prospected task. Before undertaking
any task it becomes very essential for anyone to determine the problem of study. I have adopted
the following procedure in completing my report study.

1. Research Problem.
2. Research Design.
3. Determining the data sources.
4. Analyzing the Data.
5. Interpretation.
6. Preparing research report.

(1) Research Problem

I am interested in Finance and I want to make my future in it. So, I have decided to make my
research study on the banking sector (NPAs). Providing Credit facility to the borrower is one of
the important factors as far as banking sector is concerned. As my training is at bank I have got
the project upon Non Performing Assets the great challenge before the banks. This is my
problem to be studied.

(2) Research Design

The research design tells about the mode with which the entire project is prepared. My research
design for this study is basically analytical. Because I have utilized the large number of data of
the banking sector. In this project theoretical study is also attempted.

(3) Determining the data source

The data source can be primary or secondary. The primary data are those data which are used for
the first time in the study. However such data take place much time and are also expensive.
Whereas the secondary data are those data which are already available in the market these data
are easy to search and are not expensive too. For my study I have utilized almost totally the
secondary data .But somehow I have also used primary data in shape of interviews.

(4) Tools used for analysis of data

The data collected were analyzed with the help of statistical tools like Ratio analysis, and trend
analysis. Tables are used to represent the consolidated data. Graphical representation is also used
for better comprehension & presentation

33
 (5) Analyzing the Data

The Primary or secondary data both would never be useful until they are edited and studied or
analyzed. When the person receives the data many unuseful data would also be there. So, I
analyzed the data and edited it and turned it in the useful manner So, that it can become useful in
my report study.

(6) Interpretation of the data

With the use of analyzed data I managed to prepare my project report. But analyzing of the data
would not help my study to reach towards its objectives. The interpretation of the data is required
so that the others can understand the Crux of the study in more simple way without any problem
so I have added the chapter of analysis that would explain others to understand my study in
simpler way.

(7) Project Writing

This is the last step in preparing the project report. The objective of the report writing was to
report the findings of the study to the concerned authorities. And to attach all the requirements
with your report.

34
 Ratio Analysis

The relationship between two related items of financial statement is known as ratio. A ratio is
just one number expressed in terms of another. The ratio is customarily expressed in three
different ways. It may be expressed as a proportion between the two figures.
Second it may be expressed in terms of percentage. Third, it may be expressed in terms of rates.

The use of ratio has become increasingly popular during the last few years only. Originally, the
bankers used the current ratio to Judge the capacity of the borrowing business enterprises to
repay the loan and make regular interest payments. Today it has assumed to be important tool
that anybody connected with the business turns to ratio for measuring the financial strength and
earning capacity of the business.

1. Gross NPA Ratio:

Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the sum
of all loan assets that are classified as NPA as per RBI guidelines, The ratio is to be counted in
terms of percentage and the formula for GNPA is as follows:

Gross NPA
Gross NPA ratio= * 100
Gross Advance

Banks Gross NPAs Gross Advances Gross NPA Ratio (%)

State Bank of India 57390 4396081 1.31
Oriental Bank of 105812 6906472 1.53
Commerce

Interpretation:

The above table indicates the quality of Credit portfolio of the banks. High gross NPA ratio
indicates the low Credit portfolio of bank and vice-versa. We can see from the above table the
OBC has higher gross NPA ratio of 1.53. Whereas the SBP showed lower ratio with 1.31 as
compare to OBC bank.

35
 2. Net NPA Ratio :

The net NPA Percentage is the ratio of NPA to net advances in which the provision is to be
deducted from the gross advances. The provision is to be made for NPA account. The formula
for that is:

Gross NPA-Provision
Net NPA Ratio = * 100

Gross Advances- Provisions

Gross NPA – Provision = Net NPA

Gross Advances – Provision = Net Advances

Banks Net NPAs Net Advances Net NPA ratios

State Bank Of India 26363 435872070 0.6
Oriental Bank Of 44243 63204285 0.7
Commerce

Interpretation:

The above table indicates the quality of Non Performing Assets of the banks. High Net NPA
ratio indicates the low Credit portfolio & risk of bank and vice-versa. We can see from the above
table the OBC has higher Net NPA ratio of 0.7. Whereas the SBP showed lower ratio with 0.6 as
compare to OBC bank.

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NPA MANAGEMENT POLICY : OBJECTIVES

 To bring down gross NPA ratio to less than 5% and Net NPA ratio to less than 1.75% by
 March 2006.
 Early identification of Special Mention Accounts and proper review of the same to avert
their slippage into NPA category.
 Creation of Stressed Assets Management Group has led to increased focus on high value
NPAs. Our top priority at this hour revolves around arresting new NPAs and reducing
existing level of NPAs.
 Prompt finalization of CDR packages, Rehabilitation packages and their timely
implementation.
 Targets to be set on recovery, write off, rephasement or recourse to CDR/ARCIL.
 Formulating a policy defining Exit Route for weak Standard Assets, such as Special
Mention Accounts, before they turn non-performing.

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Findings:
In my research I have find following things

 OBC Bank shows high NPAs Ratio as compare to SBOP Bank.

 High NPAs Ratio shows low credit portfolio of OBC Bank.
 In analysis SBOP low risk profile as compare to OBC in terms of NPAs.
 Study also indicates that major NPA increases because of govt. recommended priority
sectors.
 SBOP has better provisioning as compare to OBC however OBC have better capital
adequacy ratio than SBOP.

Recommendations / Suggestions:

In my study I have found some limitations. For that I can suggest both the Banks following
suggestions or areas of improvement:-

 Both the Banks should give stress upon credit appraisal.

 The credit should be backed up by securitization.
 Banks should create effectiveness in Management.
 Credit officer should focus upon cash flow.
 Timely check out should be adopted.
 Both Banks should make good provisioning policy.
 Banks should try their best to recover NPAs.
 The problem should be identified very early so that companies can try their best to stop
an asset or A/C becoming NPA.
 Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they
would face the environmental threats and opportunities with the use of their strength and
weakness, and what will be their possible future growth in concerned to financial and
operational performance.
 Each bank should have its own independent credit rating agency which should evaluate
the financial capacity of the borrower before than credit facility.
 The credit rating agency should regularly evaluate the financial condition of the clients.

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Conclusion:

A report is not said to be completed unless and until the conclusion is given to the report. A
conclusion reveals the explanations about what the report has covered and what is the essence of
the study. What my project report covers is concluded below. The problem statement on which I
focused my study is “NPAs the big challenge before the Banks”. The Indian banking sector is the
important service sector that helps the people of the India to achieve the socio economic
objective. The Indian banking sector has helped the business and service sector to develop by
providing them credit facilities and other finance related facilities. The Indian banking sector is
developing with good appreciate as compared to the global benchmark banks. The Indian
banking system is classified into scheduled and non scheduled banks. The Banks play very
important role in developing the nation in terms of providing good financial 82 services. The
SBOP Bank has also shown good performance in the last few years. The only problem that the
Bank is facing today is the problem of nonperforming assets. The non performing assets means
those assets which are classified as bad assets which are not possibly be returned back to the
banks by the borrowers. If the proper management of the NPAs is not undertaken it would
hamper the business of the banks. The NPAs would destroy the current profit, interest income
due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of
the funds. If we analyze the past years data, we may come to know that the NPAs have increased
very drastically. The RBI has also been trying to take number of measures but the ratio of NPAs
is not decreasing of the banks. The bank must have to find out the measures to reduce the
evolving problem of the NPAs. If the concept of NPAs is taken very lightly it would be
dangerous for the Bank. The reduction of the NPAs would help the bank to boost up their profits,
smooth recycling of funds in the nation. This would help the nation to develop more banking
branches and developing the economy by providing the better financial services to the nation.

India is a developing country. So, for continuity in its development it can prefer non –zero level
of NPAs. AS the name suggests itself NPAs are those assets which never generate profit to
Banks. And are threats for Banks. Banks should try their best to manage these non ceasing assets
or never try to remove or terminate. Because it is very difficult to vanish these assets. The NPAs
adversely affect profits and financial viability of banks. Compromise is one of the measures to
reduce the NPAs. It has its limitations and may have adverse effects and hence has to be used
judiciously with proper understanding of the genuine problems and concerns of each other. To
conclude this study we can say about this report, that

 Both the bank shows very much high NPA ratios.

 NPAs represent high level of risk & low level of credit appraisal.
 There are so many preventive measures available those can be adopted to stop an Asset
or A/C becoming NPA.
 There are some certain guidelines made by RBI for NPAs which are adopted by banks.
 SBOP is better in all terms than OBC instead of capital Adequacy.

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 References

www.wiki.answers.com
www.rbi.org.in
www.google.co.in
www.investorsworld.com

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