Arayabhatta Institute of

Management & Technology

Seminar Submission for internal assessment requirement of
‘Seminar on Project Presentation’
for
Master of Business Administration
Punjab Technical University Jalandhar

Topic: Non-Performing Assets

Submitted to: Submitted by:

Mr. Pardeep Kumar Name: Parneet Kaur
(Class In-charge & Lect. Of FM) Roll No.:95202239175
Introduction of SBOP
An Associate Bank of the State Bank of India, State Bank
of Patiala (SBP) was established in 1917 by Late
Bhupinder Singh, the Maharaja of Patiala state. SBP
started its operations from one branch called 'Chowk
Fort', in Patiala. During the time of the establishment, the
state owned Bank was known as Patiala State Bank.
Patiala State Bank was renamed State Bank of
Patiala on 1 April 1960, when it became a wholly owned
undertaking of the Government of Punjab. There are as
many as 750 branches of SBP, spread across the major
cities of India.

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Introduction Of OBC
Established on 19th Feb' 1943 in Lahore, Oriental Bank
of Commerce (OBC) is one of the public sector banks in
India. Its modest beginning is creditable to its founder
Late Rai Bahadur Lala Sohan Lal, the first Chairman of
the OBC. Within four years of coming into existence, the
country partitioned, the Bank shifted its Registered Office
from Lahore to Amritsar. The Oriental Bank of Commerce
was nationalized on 15th April 1980. The bank has 1,508
branches.

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 Classification of
Assets

Performing Non-Performing
Assets Assets

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DEFINITION OF NPAS
A NPA is a loan or an advance where;
 Interest and/ or installment of principal remain overdue
for a period of more than 90 days in respect of a term
loan,
 The account remains “out of order” in respect of an
overdraft/ cash credit
 The bill remains overdue for a period of more than 90
days in the case of bills purchased and discounted
 The installment or interest remains overdue for two crop
seasons in case of short duration crops and for one crop
season in case of long duration crops

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 CATEGORIES OF NPA
Substandard Assets – Which has remained NPA for a
period less than or equal to 12 months.
Doubtful Assets – Which has remained in the sub-standard
category for a period of 12 months (mainly up to 3 years).
Loss Assets – 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.

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 PROVISIONING NORMS
Standard Assets – general provision of a minimum of
0.25%
Substandard Assets – 10% on total outstanding balance,
10 % on unsecured exposures identified as sub-standard.
Doubtful Assets – 100% to the extent advance not covered
by realizable value of security. In case of secured portion,
provision may be made in the range of 20% to 100%
depending on the period of asset remaining sub-standard
Loss Assets – 100% of the outstanding

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Impact of NPAs upon Banks
 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 & equity value.
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Underlying Reasons for NPAs in India
Internal Factors
Inefficiency in management
 Slackness in credit management and monitoring
Lack of co-ordination among lenders.
Problem of bad credit appraisal.
Inappropriate Technology/technical problems
 Funds borrowed for a particular purpose but not use for
the said purpose.
 Project not completed in time.
Poor recovery of receivables.

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Underlying Reasons for NPAs in India
Contd.
Excess capacities created on non-economic costs.
 In-ability of the corporate to raise capital through the issue
of equity or other debt instrument from capital markets.
 Business failures.
 Diversion of funds for expansion\modernization\setting up
new projects\ helping or promoting sister concerns.
 Willful defaults, siphoning of funds, fraud, disputes,
management disputes, Mis-appropriation etc.,
 Deficiencies on the part of the banks viz. in credit appraisal,
monitoring and follow-ups, delay in settlement of payments\
subsidiaries by government bodies etc.,
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Underlying Reasons for NPAs in India
External Factors
 Recession.
Input / power shortage
Price escalation.
Exchange rate fluctuation
Accidents and natural calamities,
Liberalization of Economy/ removal of
restrictions/reduction of tariffs.
Sluggish legal system.
 Long legal tangles.
 Changes that had taken place in labour laws
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Underlying Reasons for NPAs in India
Contd.
Lack of sincere effort & Industrial recession.
 Scarcity of raw material, labour and other resources.
Shortage of raw material, raw material\input price
escalation, power shortage, industrial recession, excess
capacity, natural calamities like floods, accidents.
 Failures, nonpayment\ over dues in other countries,
recession in other countries, externalization problems,
adverse exchange rates etc.
Government policies like excise duty changes, Import
duty changes etc.,
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Preventive Measurements for NPA

Early Recognition of the Problem

Identifying Borrowers with Genuine Intent
Timeliness and Adequacy of response
Focus on Cash Flows
Management Effectiveness
Multiple Financing

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Early Symptoms
Four categories of early symptoms:
Financial.
 Operational and Physical.
Attitudinal Changes.
Others ( death of person , competition in the market etc.)

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Sale of NPAs to other Banks
A NPA is eligible for sale to other banks only if it has remained a
NPA for at least two years 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 it is 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 period of 90 days from date of purchase and thereafter it
would depend on the record of recovery with 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&L account and if it is higher, the excess provision
will be utilized to meet the loss on account of sale of other NPA.

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Measures Initiated by RBI & Govt.
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
Financial Assets and Enforcement of Security Interest Act 2002
(SRFAESI)
Liquidation
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INTERNATIONAL PRACTICES
Credit Risk Mitigation
Early Warning Systems
Asset Management Companies
out of court restructuring

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 RESEARCH OPERATIONS
Significance of the study
The main aim behind making this report is to know how SBP is operating its
business and how NPAs play its role to the operations of the SBP bank. My study
is also focusing upon existing system in India to solve the problem of NPAs and
comparative analysis to understand which bank is playing what role with
concerned to NPAs. Thus, the study would help the decision maker to understand
the financial performance and growth of the concerned banks as compared to the
NPAs.

Objective of the study

To know which is better in terms of NPAs from both the banks

SBP and OBC banks.

 To understand what is Non Performing Assets and what are the
underlying reasons for the emergence of the NPAs.
To understand the impacts of NPAs on the operations of the Banks.
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Objectives of the study
To know what steps are being taken by the Indian banking
sector to reduce the NPAs?
To evaluate the comparative ratios of the SBP & OBC
banks.
To know why NPAs are the great challenge to Banks.
To understand the meaning & nature of NPAs.
To study the general reasons for assets become NPAs.
What are the methods adopted by the bank to look after
NPA management

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Need For Study
Following Type of need arises for this study:

To study what kind of role NPAs are playing upon the
operations of the Bank.
To know the variables available to control NPAs.
The need also has been felt to study the financial
performance of SBP bank.

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Scope of the Study
Banks can improve their financial position or can increase
their income from credits with the help of this project.
This project can be used for comparing the performance
of the bank with others.
This can also be applicable to know the reasons of
increase in NPAs.
This project also gives light upon Impact of NPAs.
Concept of NPAs can be made clear.
 To present a picture of movement of NPA in The SBOP
Bank.

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Limitations of the study
The data collected by me was not sufficient for report
studying.
I haven’t got enough time to study my report so that becomes
the cause of limitation in the study.
Since my study is based upon Secondary data, the practical
operations as related to NPAs are adopted by the banks are not
learned.
The solutions are not applicable to every bank.

 
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Research Methodology
Research Problem
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.

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.

 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.

Contd.

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 Contd.
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.
  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
 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.
 

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Contd.
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.

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.
 
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 Analysis
   Gross NPA Ratio:
Gross NPA
Gross NPA Ratio = *100
Gross Advances

As on March 31, 2009

Banks Gross Gross Gross NPA
NPAs Advances Ratio (%)
  (1) (2) (3)

State Bank of Patiala 57390 4396081

1.31
Oriental Bank of
105812 6906472
Commerce 1.53

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Gross NPA Ratio (Graphic presentation)

Gross NPA Ratio (%)

1.55

1.5

1.45

1.4
1.53 Gross NPA Ratio (%)
1.35

1.3
1.31
1.25

1.2
State Bank of Oriental Bank
Patiala of Commerce

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Interpretation
Findings
 
The table above indicates the quality of credit portfolio of
the banks. High gross NPA ratio indicates the low credit
portfolio of bank and vice-a-versa.
We can see from the above Chart that the Oriental Bank of
Commerce has the higher gross NPA ratio of 1.53 % as
compared to the State Bank of Patiala with 1.31%.

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 Net NPA Ratio
 Net NPA Ratio :
Gross NPA-Provision
Net NPA Ratio = * 100
  Gross Advances- Provisions

As on March 31, 2009

Banks Net Net Net NPA
NPAs Advances Ratio (%)
  (1) (2) (3)
State Bank of Patiala
26363 435872070 0.6
Oriental Bank of
Commerce 44243 63204285 0.7

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Net NPA Ratio (Graphic presentation)
Net NPA Ratio (%)

0.7

0.68

0.66

0.64
0.7 Net NPA Ratio (%)
0.62

0.6

0.58 0.6
0.56

0.54
State Bank of Patiala Oriental Bank of
Commerce

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Interpretation

Findings
 
High NPA ratio indicates the high quantity of risky assets
in the Banks for which no provision are made.
The OBC bank has the highest NPA ratio of 0.7 % as
compared to the State Bank of Patiala with 0.6% However
there is not too much difference.
 

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Provisioning Ratio
 Provision Ratio:
  Total Provision
Provision Ratio = * 100
Gross NPAs

Name of the Bank Provision Ratio (%)

State Bank of Patiala

58.34

Oriental Bank of
Commerce 57.90
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Provisioning Ratio(Graphic presentation)

Provision Ratio (%)

58.4
58.34
58.3

58.2

58.1

58
Name of the Bank
57.9 Provision Ratio (%)
57.9

57.8

57.7

57.6
State Bank of Oriental Bank
Patiala of
Commerce ...

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Interpretation
Findings
This Ratio indicates the degree of safety measures adopted
by the Banks.
It has direct bearing on the profitability, Dividend and
safety of shareholders’ fund.
If the provision ratio is less, it indicates that the Banks has
made under provision.
The highest provision ratio is showed by State Bank of
Patiala with58.34% as compared to OBC with 57.90%.

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Problem Asset Ratio
 Problem Asset Ratio:
Gross NPAs
Problem Asset Ratio = * 100
Total Assets
As on March 31, 2009
Banks Gross Problem
Total Assets
NPAs Asset Ratio
  (1) (2) (3)
State Bank of Patiala
57390 69665 0.82

Oriental Bank of
Commerce 105812 112539 0.94

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Problem Asset Ratio(Graphic presentation)

Problem Asset Ratio

100%
90%
80%
70%
60% 0.82 0.94
50%
40%
30%
20%
10%
0%
State Bank of Oriental Bank of
Patiala Commerce

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Interpretation
Findings

We determine the percentage of assets out of total assets /

advances that are likely to become the Non- performing
Assets as problematic assets.
From the above table it becomes clear that Oriental Bank of
Commerce have high problem Asset Ratio with 0.94% as
compare to SBOP.
That Ratio implies that the both above banks have the highest
probability of creating NPA’s in the near future. However
OBC have more chances of increasing future NPAs.

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Capital Adequacy Ratio
 Capital Adequacy Ratio:
  Capital
Capital Adequacy Ratio = * 100

Risk Weighted Assets

Capital Adequacy
Name of the Bank
 
Ratio (%)

State Bank of
Patiala 0.60

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Capital Adequacy Ratio
(Graphic presentation)

Capital Adequacy Ratio (%)

1
0.8
0.6
0.4
0.2
0
Name of the Bank
Capital Adequacy
Ratio (%)

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Interpretation
Findings
The capital adequacy ratio is important for them to
maintain as per the banking regulations.
Each bank needs to create the capital Reserve to
compensate the Non Performing Assets.
Each Asset has been given a risk weight age as per RBI
guidelines
Risk weighted Asset = Asset * Risk Weight age So,
More the Risk weighted Assets are, Bank has to maintain
more capital.
 As far as this ratio is concerned OBC is better than SBOP.
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Solutions
Don’t Eliminate – Manage
Effectiveness of ARCs
Well Developed Capital Markets
Contextual Decision Making
Securitization

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Findings
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.
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Recommendations
 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
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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