I

CONTENTS
Chapter Particulars Page
No.
Declaration I
Certificate II
Acknowledgement III
Abstracts IV
I Introduction 1-6
II Theoretical Framework 7-31
• Review of Literature 8
• Indian Banking System and 11
Structure
• Non Performing Assets in India 16
 NPA and Its Classification 19
 Asset Classification 21
• Factors contributing to Increase
in NPAs of Banks 22
• Impacts of NPAs 27
• Non Performing Asset Recovery 28
Mechanism
 III Data analysis and 32-47
Interpretation
• NPAs of India Over Last Five 33
Years India’s position in
global NPA Ratio 40
• Relationship between NPA &
Net Profit 43
• Recovery of NPAs by Banks 46

IV Conclusion 48-52
• Conclusion 49
• Suggestions 50

Reference V

ABSTRACTS

A banking systemis a group or network of institutions that provide

financial services for us. These institutions are responsible for operating a payment
system, providing loans, taking deposits, and helping with investments.

Banking in India, in the modern sense, originated in the last decade of

the 18th century. Among the first banks were the Bank of Hindustan, which was
established in 1770 and liquidated in 1829–32; and the General Bank of India,
established in 1786 but failed in 1791.
 Money provided by the bank to entities for fulfilling their short term
requirements is known as Advances. The loan is a kind
of debt while Advances are credit facility granted to customers by banks.

A Non-performing Asset (NPA) is defined as a credit facility in respect

of which the interest and/or installment of Bond finance principal has remained
'past due' for a specified period of time.

According to the Reserve Bank of India (RBI), the gross non-performing

assets in Indian banks, specifically inpublic sector banks, are valued at around Rs
400,000 crore (~US$61.5 billion), which represents 90% of the total NPA in India,
withprivate sector banksaccounting for the remainder.

IV
Chapter I : Introduction
• INTRODUCTION

• OBJECTIVES OF THE STUDY

• RESEARCH METHODOLOGY

[1]
INTRODUCTION
The Indian banking sector has been facing serious problems of raising
NonPerforming Assets (NPAs). The NPAs growth has a direct impact on profitability
of banks. Non- performing assets are one of the major concerns for scheduled
commercial banks in India. As for the recommendations of Narasimham committee
and Verma committee, some steps have been taken to solve the problem of old
NPAs in the balance sheets of the banks. It continues to be expressed from every
corner that there has rarely been any systematic evaluation of the best way of
tackling the problem. There seems to be no unanimity in the proper policies to be
followed in resolving this problem. 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. NPAs affect the liquidity and profitability, in addition to posing threat on
quality of asset and survival of banks. 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. It is
necessary to trim down NPAs to improve the financial health in the banking system.
An attempt is made in this paper to understand NPA, the status and trend of NPAs
in Indian Scheduled commercial banks, The factors contributing to NPAs, reasons
for high impact of NPAs on Scheduled commercial banks in India and recovery of
NPAS through various channels.

The banking system in India comprises commercial and cooperative banks, of which
the former accounts for more than 90 per cent of banking system’s assets. Besides
a few foreign and Indian private banks, the commercial banks comprise
nationalized banks (majority equity holding is with the Government), the State
Bank of India (SBI) (majority equity holding being with the Reserve Bank of India)
and the associate banks of SBI (majority holding being with State Bank of India).
These banks, along with regional rural banks, constitute the public sector (state
owned) banking system in India. The banking industry has undergone a sea change
after the first phase of economic liberalization in 1991 and hence credit
management.

[2]
Asset quality was not prime concern in Indian banking sector till 1991, but was
mainly focused on performance objectives such as opening wide
networks/branches, development of rural areas, priority sector lending, higher
employment generation, etc. While the primary function of banks is to lend funds
as loans to various sectors such as agriculture, industry, personal loans, housing
loans etc., but in recent times the banks have become very cautious in extending
loans. The reason being mounting nonperforming assets (NPAs) and nowadays
these are one of the major concerns for banks in India.

Bankers are the custodians and distributors of the liquid capital of the country.
Therefore most important function of the banking system is to mobilize the savings
of the people by accepting deposits from the public. The banker becomes the
trustee of the surplus balances of the public. Deposit mobilization promotes the
economic prosperity by controlling the money circulation and canalizing for
development and productive purposes. In order to mobilize deposits, the
commercial banks undertake deposit mobilization through various deposit
schemes suited to the different sections of the people. The deposits along with
other sources of funds namely capital, reserves and borrowings, form the sources
of funds for the banks. The lending and investment activities of the bank are based
on the sources of funds.

The banks, in their books, have different kind of assets, such as cash in hand,
balances with other banks, investment, loans and advances, fixed assets and other
assets. The Non-Performing Asset (NPA) concept is restricted to loans, advances
and investments. As long as an asset generates the income expected from it and
does not disclose any unusual risk other than normal commercial risk, it is treated
as performing asset, and when it fails to generate the expected income it becomes
a “Non-Performing Asset”.

In other words, a loan asset becomes a Non Performing Asset (NPA) when it ceases
to generate income, i.e. interest, fees, commission or any other dues for the bank
for more than 90 days. A NPA is an advance where payment of interest or

[3]
repayment of installment on principal or both remains unpaid for a period of two
quarters or more and if they have become ‘past due’. An amount under any

[4]
of the credit facilities is to be treated as past due when it remain unpaid for 30 days
beyond due date.

Non-Performing Assets are also called as Non-Performing Loans. It is made by a

bank or finance company on which repayments or interest payments are not being
made on time. A loan is an asset for a bank as the interest payments and the
repayment of the principal create a stream of cash flows. It is from the interest
payments that a bank makes its profits. Banks usually treat assets as nonperforming
if they are not serviced for some time. If payments are late for a short time, a loan
is classified as past due and once a payment becomes really late (usually 90 days),
the loan is classified as non-performing. A high level of nonperforming assets,
compared to similar lenders, may be a sign of problems. Narasimham Committee
that mandated identification and reduction of NPAs to be treated as a national
priority because NPA direct toward credit risk that bank faces and its efficiency in
allocating resources. Profitability and earnings of banks are affected due to NPA
numbers.. NPAs stood at Rs 10,03,404 Crores of India as of 31stJune 2018.

The main aim of any person is the utilisation of money in the best manner since
India is the country where more than half of the population has problem pf running
the family in the most efficient manner. However Indian people faced large number
of problem till the development of full fledged banking sector. The Indian banking
sector came into the developing nature mostly after the 1991 government
policy.The banking sector has really helped the Indian people to utilize the single in
the best manner as they want.

The banks not only accept the deposits of the people but also provide them credit
facility for their development.Indian banking sector play an important role in
developing the business and service sectors.But recently the banks are facing the
problem of credit risk. It is found that many general people and business people
borrow from the banks but due to some genuine or other reasons are not able to

[5]
repay back is known as non -performing assets. Many banks are facing the
problem of NPA which hampers the business of banks. Due to NPAs the income of
the bank is reduced amd the banks have to make the large number of provisions
that would curtail the profit of the banks and due to that the f inancial
performance of banks would show good results.

The main aim behind making this report is to know how the rising in non -
performing assets affecting the Indian economy. My study is also focusing on
existing system in India to solve the problem of NP As and comparative analysis to
understand which bank is playing what role with concerned to NPAs.Thus, the
study would help thr decision maker to understand the financial performance and
growth of the concerned banks as compared to the NPAs.

OBJECTIVES OF THE STUDY

i. To know the NPA position on quarterly basis from 2017-18

ii. To analyze the bank-wise NPAs and NPA ratio of 2018 and the increment in
NPAs in two years upto June 2018

iii. To find out the NPA figures of different private and public sector banks over
last five years.

iv. To explore India's position of acquiring NPA across the globe.

v. To understand the recovery mechanism of different banks.

[6]
RESEARCH METHODOLOGY
This research study is descrpitive in nature. This paper aims to explore the NPA
position,NPA ratio of different public and private sector banks. The study has been
focused on the quarterly results of banks from 2016-2018 to get idea about the
increments in NPA of banks in India. The bank wise NPA data has been studied for
the year 2018 to know the current situation of banking sector. The impact of Gross
NPA on net profits of different banks banks has been analysed for the year 2008-
2018.The data for this study has been used from secondary sources such as RBI's
circulars and reports, newspapers ,journals, articles etc.

The statistical tools such as tables , bar diagrams and graphs, ratios and percentages
and Correlation have been used for this study.

The paper “Non-Performing Assets In Indian Banking Sector”

consists of seven chapters. The first chapter provides an introduction of the
study and explains about the objectives of the study and the research
methodology used in this project.

The second chapter includes the review of literature which explains different
studies conducted relating to the non-performing assets and their findings.

The third chapter provides a brief knowledge about the Indian banking system
and the banking structure existing in the country.

The fourth chapter gives information regarding the Non-performing assets in

India, the classification of NPA accounts and various types of assets.

The fifth chapter explains about the factors contributing to the rise in NPA of
banks and the impact of rise in NPA on banks and business. It also provides
information regarding the recovery mechanism of NPA existing in the country.

The sixth chapter provides the data regarding the Gross NPAs and NPA ratio of
different banks. The chapter explains about the trends taking place in the
banking sector regarding the profits and the NPA for different years.

[7]
The seventh chapter concludes the project and provides suggestions regarding
the measures to be taken to reduce NPAs.

[8]
ChapterII: Theoritical Framework

• REVIEW OF LITERATURE
• INDIAN BANKING SYSTEM AND STRUCTURE
• NON PERFOTMING ASSETS IN INDIA
• FACTORS CONTRIBUTING TO INCREASE IN
NPAs
• IMPACTS OF NPAs
• NON PERFORMING ASSET RECOVERY SYSTEM

REVIEW OF LITERATURE

[9]
Many published articles are available in the area of non-performing assets and a
large number of researchers have studied the issue of NPA in banking industry. A
review of the relevant literature has been described.

Kumar (2013) in his study on A Comparative study of NPA of Old Private Sector
Banks and Foreign Banks has said that Non-performing Assets (NPAs) have become
a nuisance and headache for the Indian banking sector for the past several years.
One of the major issues challenging the performance of commercial banks in the
late 90s adversely affecting was the accumulation of huge nonperforming assets
(NPAs).

Selvarajan & Vadivalagan (2013) in A Study on Management of Non-Performing

Assets in Priority Sector reference to Indian Bank and Public Sector Banks (PSBs)
find that the growth of Indian Bank’s lending to Priority sector is more than that of
the Public Sector Banks as a whole. Indian Bank has slippages in controlling of NPAs
in the early years of the decade.

Singh (2013) in his paper entitled Recovery of NPAs in Indian commercial banks says
that the origin of the problem of burgeoning NPA’s lies in the system of credit risk
management by the banks. Banks are required to have adequate preventive
measures in fixing pre- sanctioning appraisal responsibility and an effective post-
disbursement supervision. Banks should continuously monitor loans to identify
accounts that have potential to become non- performing.

Gupta (2012) in her study A Comparative Study of Non-Performing Assets of SBI &
Associates & Other Public Sector Banks had concluded that each bank should have
its own independence credit rating agency which should evaluate the financial
capacity of the borrower before credit facility and credit rating agencies should
regularly evaluate the financial condition of the clients.

Rai (2012) in her study on Study on performance of NPAs of Indian commercial

banks find out that corporate borrowers even after defaulting continuously never

[10]
had the fear of bank taking action to recover their dues. This is because there was
no legal framework to safeguard the real interest of banks.

Chatterjee C., Mukherjee J. and Das (2012) in their study on Management of

nonperforming assets - a current scenario has concluded that banks should find out
the original reasons/purposes of the loan required by the borrower. Proper
identification of the guarantor should be checked by the bank including scrutiny of
his/her wealth.

Kaur K. and Singh B. (2011) in their study on Non-performing assets of public and
private sector banks (a comparative study) studied that NPAs are considered as an
important parameter to judge the performance and financial health of banks. The
level of NPAs is one of the drivers of financial stability and growth of the banking
sector.

Prasad G.V.B. and Veena (2011) in their study on NPAs Reduction Strategies for
Commercial Banks in India stated that the NPAs do not generate interest income
for banks but at the same time banks are required to provide provisions for NPAs
from their current profits, thus NPAs have destructive impact on the return on
assets in the following ways.

Chaudhary K. and Sharma M. (2011) in their research stated that An efficient

management information system should be developed. The bank staff involved in
sanctioning the advances should be trained about the proper documentation and
charge of securities and motivated to take measures in preventing advances
turning into NPA.

Karunakar (2008), in his study Are non - Performing Assets Gloomy or Greedy from
Indian Perspective, has highlighted problem of losses and lower profitability of
Non- Performing Assets (NPA) and liability mismatch in Banks and financial sector
depend on how various risks are managed in their business. The lasting solution to
the problem of NPAs can be achieved only with proper credit assessment and risk
management mechanism.

[11]
Bhatia (2007) in his research paper explores that NPAs are considered as an
important parameter to judge the performance and financial health of banks. The
level of NPAs is one of the drivers of financial stability and growth of the banking
sector.

Kaur (2006) in her thesis titled Credit management and problem of NPAs in Public
Sector Banks, suggested that for effective handling of NPAs, there is an urgent need
for creating proper awareness about the adverse impact of NPAs on profitability
amongst bank staff, particularly the field functionaries. Bankers should have
frequent interactions and meeting with the borrowers for creating better
understanding and mutual trust.

Balasubramaniam C.S. (2001) highlighted the level of NPAs is high with all banks
currently and the banks would be expected to bring down their NPA. This can be
achieved by good credit appraisal procedures, effective internal control systems
along with their efforts to improve asset quality in their balance sheets.

High Non-Performing assets is one of the many problem created by lending to

priority sectors along with the problems like low profitability, high transaction cost
etc, Uppal (2009) .

Despite the significance of agriculture in contribution to economy, appropriate

credit system has not developed in this connection and the existing system is
plagued with increasing NPAs, Baijal (2015) .

Goyal, Agrawal and Agrawal (2015) concluded that priority sector lending is a
major contributor to NPAs in public and private sector banks.These studies indicate
that there is a significant contribution of priority sector lending towards the NPAs
in public sectors banks.

[12]
 In relation to the non-priority sector, there is also a significant relation between
both priority and non-priority sector NPAs in contributing to the total NPAs in public
sector banks, Nagarajan, Sathyanarayan & Ali (2014).

INDIAN BANKING SYSTEM

A Bank is an institution which accepts deposits from the general public and extends
loans to the households, the firms and the government. Banks are those
institutions which operate in money. Thus, they are money traders, with the
process of development functions of banks are also increasing and diversifying
now, the banks are not nearly the traders of money, they also create credit. Their
activities are increasing and diversifying. Hence it is very difficult to give a
universally acceptable definition of bank. "Banking business" means the business
of receiving money on current or deposit account, paying and collecting cheques
drawn by or paid in by customers, the making of advances to customers, and
includes such other business as the Authority may prescribe for the purposes of
this Act.

Indian Banking Structure

The structure of Indian banking system that developed during the
preindependence period was without any purposive control and direction. There
were no comprehensive banking laws except the Bank Charter Act 1876 which
regulated the three presiding bank and the Indian Companies Act 1913 provided
some safe guards against bank failures.

[13]
 [12]

Reserve Bank of India:

The apex or central bank of India is the RBI aka Reserve Bank of India. RBI was
established on 1st April, 1935 on the recommendation of Young Hilton Committee.
RBI is regulated as per the RBI Act, 1934. RBI was later nationalized on 1st January,
1949. RBI acts as a banker to both State and Central Government. It also acts as a
lender of last resort to other Banks in India. RBI is also responsible for making the
monetary policy. Another important function of RBI is to issue currency and
maintain its circulation in India. Power of regulating foreign reserves is also vested
with RBI.

As seen in the above diagram, banks which are regulated by RBI can be broadly
classified into three categories:-

i.Commercial Banks

ii.Co-operative Banks

iii.Development Banks

Commercial Banks:

Commercial Banks are financial intermediaries that accept deposits from customers
for the purpose of lending. Commercial Banks are sometimes also known as
Business Banks. Commercial Banks include:-

I. Public Sector Banks:

Banks in which the government has the majority stakes are called Public Sector
Banks. These Include


SBI and its 5 Associate Banks

[15]
 
19 Nationalized Banks –Banks that were earlier private but were later
 brought under the control of govt.
 
1 Other Public Sector Bank i.e. IDBI

II.Private Sector Banks:

Banks in which individuals have the majority stakes are called Private Sector Banks.
These include


Indian Banks: Example ICICI, HDFC, Axis Bank, etc.


Foreign Banks:

Foreign Banks mean multi-countries bank. In case of Indian foreign banks are such
banks which open its branch office in India and their head office are outside of
India. HSBC Bank, City Bank, Standard Chartered Bank , Bank of Tokyo, Bank of
America are the examples of Foreign Banks working in India. These banks are
mainly concerned with financing foreign trade.Following are the various functions
of foreign banks :-
⦁ Remitting money from one country to another country,
⦁ Discounting of foreign bills,
⦁ Buying and Selling Gold and Silver, and
⦁ Helping Import and Export Trade

iii.Regional Rural Banks:

Banks that are specially designed to cater to the credit needs of the rural and
weaker sections of the society are called Regional Rural Banks. They aim to bring a
large strata of unbanked population of India under the ambit of Banking Sector.

Co-operative Banks:

When a group of people belonging to same locality, or a professional community

enters into the business of banking, they form Co-operative Banks. Usually these

[16]
people share common interests and goals. The members of the co-operative banks
are the owners, as well as, the customers of the Bank. These include

1. Primary Agricultural Societies: These operate at the village level.

2. Central Co-operative Societies: These operate at district level and manage
various primary societies.
3. State Co-operative Societies: These operate at state level and manage
various central co-operative societies.

Development Banks:

These banks are special financial intermediaries that provide short and long term
loans for the sole purpose of promoting development in the country. They provide
finance to both public and private sector. These include

5 Agricultural Development Banks: These banks aims for the

agriculturaldevelopment. So it provides finances to the rural people, agricultural
labourers, farmers, etc. Example : National Bank for Agriculture and Rural
Development (NABARD)
6 Industrial Development Banks: Industrial / Development banks collect cash
byissuing shares & debenturesand providing long-term loans to industries. The
main objective of these banks is to provide long-term loans for expansion and
modernisation of industries.
In India such banks are established on a large scale after independence.
Example SIDBI, IFCI, IDBI, etc.

7 Export-Import Development Banks: Example Export Import Bank of India(EXIM)

8 Housing Development Banks: Example National Housing Bank (NHB)

[17]
NON-PERFORMING ASSETS IN INDIA
Assets mean valuable resources or properties owned by an organization. The
organization utilized this assets in an efficient manner to their full capacity to attain
the main goals of the organization i.e. income yield, improving productivity and
profitability.

Optimizing the performance of assets is the most important part of overall asset
management. In order to assess the performance of any organization, the efficiency
of its assets should be analysed. The focus has shifted from nearly an asset
management to asset-liability management (ALM) in order to achieve the optimum
efficiency of the organization.

For the banking sector, efficient management of its assets is of principal importance
because banks are the custodians of public funds and they lend other people‟s
money. To protect the interest of the public as well as the banks itself, deliberate
efforts are needed for efficient asset management. If the assets and liabilities of
the banks are not managed in well manner, it can cause a serious problem for bank
as well as for the society as a whole. In order to increase profitability of the banks,
serious efforts are required for managing the assets and liabilities of the banks. If
the assets are not managed in an appropriate manner, they turned to non-
performing state. Such assets are generally termed as 'NonPerforming Assets'. In
the field of bank, non-performing assets include nonperforming cash and bank
balances, non-performing loans and advances,interest on which is not realizable. If
the amount of such non-performing assets increases, it can cause serious problem
for the bank. In the current age most of the banks are facing the problem of non-
performing assets. It has become a serious concern for the bankers. The alarming
situation of non-performing assets is an issue of concern not only to the bank
management but also to the authorities regulating the working of the banks and to
the policy makers at the national level

[18]
The term ‘Non-Performing Assets’ (NPA)

In human life, sickness, bankruptcy and death are not welcome, but they do occur.
So is the case with industrial or agricultural units, which fall sick, go into liquidation
and die much against the wishes of all concerned. Realities cannot be escaped; it is
necessary to face them. In the context of NPA's, the situation is no different. In the
current age the term 'non-performing assets' is the highly discussed issue in the
banking and financial sector. All the management thinkers, policy makers and
strategists are discussing this issue on a high scale. But actually the non-performing
asset is not a new concept. It was in existence in olden days also without having a
proper coinage of the term. A non-performing asset in the banking sector was
termed as an asset not contributing to the income of the bank. In other words it is
a 'zero-yielding asset'. The zero-yielding assets include surplus cash and banker's
balance held over the norms, amount lying in suspense account, investments in
shares or debentures of companies not yielding any dividend or interest, advances
where interest is not realized and even the principal amount is difficult to recover.

In Indian banking sector also the concept of NPA is not new. In olden days the assets
were classified into eight categories as follows:

a) Satisfactory

b) Irregular

c) Sick-viable under nursing

d) Sick-non-viable/sticky

e) Advances recalled

f) Suit filed accounts

[19]
g) Decreed debts

h) Debts classified by the banks as bad/doubtful

Out of these eight categories last four categories were deemed to be

nonperforming loans. It is interesting to note that this classification was left to the
discretion of each bank and there was no objective attempt to segregate badloans
from good loans.

In the year 1991, The Narasimham Committee on Financial Sector Reforms (CFSR)
and in the year 1998, The Narasimham Committee on Banking Sector Reforms
(CBSR) focused on this zero- yielding assets. The committee created various norms
for the zero-yielding assets and the new term “Non-Performing Assets” was coined
by the committee. The term “Non-Performing Assets” is now widely used in the
banking sector. It has become a burning issue of the modern age of the banking
industry.

The term non-performing assets can be defined both in the wider and the narrow
sense. While in the narrower sense, it includes only non-earning credit portfolio, in
the wider sense it may include also the volume of unutilized cash balances and
unutilized or underutilized physical assets like building and premises. In the wider
sense it may also include non-performing human resources-a large volume of work
force not effectively utilized. This is the generalized definition of the nonperforming
assets but the present research is focused on the norms developed by RBI on the
basis of recommendations given by The Narasimham Committee.

In order to quantify NPA problem, The Narasimham Committee, 1991 made it

mandatory on the part of the banks to publish annually the magnitude of NPAs.
According to The Narasimham Committee, 1991 NPAs are those categories of

[20]
assets (advances, bills discounted, overdraft, cash credits etc…….) for which any
amount remains due for a period of 180 days

NPA and Its Classification

A non-performing asset, in a narrow sense, may be defined as an asset which does

not directly contribute to the corporate profits or yield any positive returns. This
may be appropriate when applied to loans and advances. However, there are other
assets such as cash balances held which are certainly require for business
operations but do not yield any direct return. Although banks cannot completely
do away with such nonperforming assets from their books, they have to manage to
keep them at a minimum possible level to maximize profits. The term
nonperforming asset has been defined by several experts, SARFAESI Act and RBI on
the basis of recommendation of Narasimham Committee.

⦁SARFEASI Act, 2002 defined NPA as “an asset or account of borrower, which has beenclassified by a bank or financial
institutions as sub-standard, doubtful or loss assets in accordance with the direction issued the Reserve Bank of India”.

⦁As per RBI guidelines advances are classified into performing and nonperforming advances (NPAs). NPAs are further
classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI.

An asset, including a leased asset, becomes nonperforming when it ceases to generate

income for the Bank. An NPA is a loan or an advance where:

I.Interest and/or installment of principal remains overdue for a period of more than 90
days in respect of a term loan.

II.The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC).

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

IV.A loan granted for short duration crops will be treated as an NPA if the installments of
principal or interest thereon remain overdue for two crop seasons.

[21]
V.A loan granted for long duration crops will be treated as an NPA if the installments of
principal or interest thereon remain overdue for one crop season.

The Bank classifies an account as an NPA only if the interest imposed during any quarter
is not fully repaid within 90 days from the end of the relevant quarter. This is a key to

[22]
the stability of the banking sector. There should be no hesitation in stating that Indian
banks have done a remarkable job in containment of non-performing loans (NPL)
considering the overhang issues and overall difficult environment.

In fact, recovery management is also linked to the banks‟ interest margins. The cost and
recovery management supported by enabling legal framework hold the key to future
health and competitiveness of the banks. No doubt, improving recovery management in
India is an area requiring expeditious and effective actions in legal, institutional and
judicial processes. In 2001 the norms of recognizing the NPA were somewhat liberal but
in 2004 the RBI revised the norms and made them stricter. Below given is the comparative
presentation of RBI guidelines for NPAs recognition.

TABLE:- RBI Guidelines for NPAs Recognition

Loans & Advances Guidelines applicable Guidelines applicable from 31-
from 31-3-2001 3-2004

Termloaninterestand/or
installmentremain overdue for
90 days
more than 180 days

Overdraft/credit account Remains out of order Remains out of order

Bill purchased and discounted

remains over due for more than
90 days
180 days

Agriculturalloaninterest and/or Twoharvest seasons but Two harvest seasons but not
installments remains over due for notexceedingtwo and exceeding two and half years
half years

Other accounts-any amount to

bereceived remains over due for
more 90 days
180 days
than

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 [20]

ASSET CLASSIFICATION
For the evaluation of bank performance, it is important to identify the quality of assets of the
bank. In the light of Narasimham Committee recommendations, the Reserve Bank of India has
redefined the non-performing assets and advised all commercial banks in public sector, old and
new private sector banks, development banks and the cooperative banks, to classify their
advances into four broad categories i.e. Standard, Substandard, Doubtful and Loss assets.The

standard assets are treated as performing assets and the remaining three categories
are treated as non-performing assets.

Banks are required to classify non-performing assets further into the following three categories
based on the period for which the asset has remained non-performing and the realisability of
the dues:

• Sub-standard Assets Doubtful Assets

• Loss Assets

Sub-standard Assets

With effect from 31 March 2005, a sub-standard asset would be one, which has remained NPA
for a period less than or equal to 12 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 banks in full. In other words, such an asset will have well
defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by
the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in
the sub-standard category for a period of 12 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 weaknesses make collection or liquidation in full, – on the basis of
currently known facts, conditions and values – highly questionable and improbable.

Loss Assets

[25]
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 recovery value.

Factors Contributing to Increase in

NonPerforming Assets of Banks
The banking sector has been facing the severe problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector
banks and foreign banks, the NPAs in PSB are increasing due to external as well as
internal factors.


External Factors

a.Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of
loans and advances, due to their carelessness and ineffectiveness in their work the
bank suffers the consequence of non-recover, thereby reducing their profitability
and liquidity.

b. Willful Defaults

There are borrowers who are competent to pay back loans but are intentionally
withdrawing it. These groups of people should be recognized and proper measures
should be taken in order to get back the money extended to them as advances and
loans.

c. Natural calamities

This is the measure factor, which is creating alarming increase in NPAs of the PSBs.
every now and then India is hit by major natural calamities thus making the
borrowers unable to pay back there loans. Thus the bank has to make large amount

[26]
of provisions in order to pay damages those loans, hence end up the fiscal with a
reduced profit. Basically ours farmers depends on rain fall for cropping. Due to
irregularities of rain fall the farmers are not to attain the production level thus they
are not repaying the loans.

[27]
d. Industrial sickness

Inappropriate project handling , ineffective management , lack of adequate

resources , lack of advance technology , day to day changing govt. Policies produce
industrial sickness. Therefore the banks that finance those industries ultimately end
up with a low recovery of their loans reducing their profit and liquidity.

e. Lack of demand

Entrepreneurs in India could not predict their product demand and starts
production which ultimately piles up their product thus making them unable to pay
back the money they borrow to operate these activities. The banks recover the
amount by selling of their assets, which covers a smallest label. Therefore the banks
record the non- recovered part as NPAs and have to make provision for it.

f. Change on Govt. policies

With every new govt. banking sector gets new policies for its operation, so it has to
cope with the changing principles and policies for the regulation of the rising of
NPAs. For example, the fallout of handloom sector is continuing as most of the
weavers Co-operative societies have become defunct largely due to withdrawal of
state patronage. The rehabilitation plan worked out by the Central government to
renew the handloom sector has not yet been implemented, so the over dues due
to the handloom sectors are becoming NPAs.


Internal Factors
a.Defective Lending process

There are three cardinal principles of bank lending that have been followed by the
commercial banks, that is, Principles of safety, Principle of liquidity, Principles of
profitability. Principles of safety mean that the borrower is in a position to pay back

[28]
the loan, including both principal and interest. The refund of loan depends upon
the borrowers, Capacity to pay and Willingness to pay.
Capacity to pay depends upon, Tangible assets, Success in business. Willingness to
pay depends on, Character, Honest, Reputation of borrower. The banker should,
therefore take utmost care in ensuring that the enterprise or business for which a
loan is sought is a sound one and the borrower is competent of carrying it out
successfully, he should be a person of integrity and good character.

b. Inappropriate technology

Due to improper technology and management information system, market driven

decisions on real time basis can not be taken. Proper MIS and financial accounting
system is not implemented in the banks, which leads to poor credit collection, so
NPA, therefore all the branches of the bank should be computerized.

c. Improper SWOT analysis

The inappropriate strength, weakness, opportunity and threat analysis is another

reason for increase in NPAs. While providing unsecured advances the banks depend
more on the honesty, integrity, and financial soundness and credit worthiness of
the borrower, so, banks should consider the borrowers own capital investment and
bank should collect credit information of the borrowers from, a. Bankers b. Enquiry
from market/segment of trade, industry, business. c. From external credit rating
agencies.

Banker should examine the balance sheet which shows the true picture of business
will be revealed on analysis of profit/loss a/c and balance sheet. When bankers give
loan, he should examine the purpose of the loan. To make sure safety and liquidity,
banks should grant loan for productive purpose only. Bank should examine the
profitability, viability, long term acceptability of the project while financing.

d. Poor credit appraisal system

[29]
Deprived credit appraisal is an additional factor for the increase in NPAs, due to
poor credit appraisal the bank gives advances to those who are not able to repay it
back. They should use better credit appraisal to reduce the NPAs.
e. Managerial deficiencies

The banker should always select the borrower very cautiously and should take
tangible assets as security to safe guard its interests. When accepting securities,
banks should consider, the Marketability, Acceptability, Safety, Transferability etc.
The banker should follow the principle of diversification of risk based on the famous
maxim “do not keep all the eggs in one basket”, which means that the banker
should not grant advances to a few big farms only or to concentrate them in few
industries or in a few cities. If a latest big customer meets misfortune or certain
traders or industries affected adversely, the overall position of the bank will not be
affected.

f. Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs, absence of regularly visit of
bank officials to the customer point decreases the collection of interest and
principals on the loan. So the NPAs can be collected by regular visits.

The growth and proliferation in the activities of the bank has led to everincreasing
non-performing assets that have mounted to a huge amount during the last decade
or so. The quantum of NPAs has been calculated and put at different figures mainly
due to absence of correct statistics and the method on the basis adopted for
calculating the percentage of NPAs in relation to either the total assets of the bank
or the quantity of loan portfolio or on the basis of the number of the accounts or
the size of the outstanding advances.

For a large number of years, the banks have been taking credit in its books, on basis
of accrued interest income, even for the sum of periodic interest that was not really

[30]
paid by the borrower. This was done by raising debit in suspense account and
crediting amount equivalent to the periodic interest in the loan account of the
borrower.

After objections from the auditors and income tax authority the banks altered
strategy and started giving extra loans to the defaulting borrowers for the
purpose of making payments to the bank for adjustment of the over dues, in many
cases the due dates of payments were postponed and even the entire period of the
loan was extended further again and again. As if to attach fire to the fuel, ambitious
programme for branch progress and extension of banking services led to new
recruitments, transfers, relocation and unhealthy competition amongst offices of
the same bank, but at the same time adequate facilities available for training of the
staff were not expanded.

In the anxiety to attain business targets the rules and procedures for prudent
banking were conveniently forgotten. Even the senior management setup
conveniently relaxed the rules for proper appraisal of the loan proposals, the
provisions of standard bank sanction letter, errors in execution of the loan
agreements, deeds of hypothecation and mortgages were more often overlooked
for compliance in the hurry for disbursement and attainment of targets for
purposes of building up record of achievements and reporting.

The study of about 900 top NPA accounts in 27 public sector banks that has been
tabulated from the available information revealed by RBI, that the following are the
important factors for units becoming sick/weak and constantly accounts turning
NPA in the order of prominence:

* Diversification of funds mostly for expansion \diversification \ modernization,

taking up of new projects, is the single most prominent reason. Besides being so,
this factor also has significant proportion of cases, when compared to other
factors.

* Internal factor failure of business (product), inefficient management,

inappropriate technology, product obsolescence.

[31]
* External factor comprising industrial recession, price escalation, power shortage,
accidents etc.,

* Other factors in order or prominence are Government Policies like changes in

Import \ Excise duties etc., willful default, fraud \ misappropriation, disputes etc.,
(No. 8 above – Internal factor) and lastly, deficiencies on the part of banks delays
in release of limits and delay in settlement of payments by government bodies.

IMPACT OF NPAs
Following are the impact of NPAs:-

• Lenders suffer lowering of profit margins.

• Stress in banking sector causes less money available to fund other projects,
therefore, negative impact on the larger national economy.

• Higher interest rates by the banks to maintain the profit margin.

• Redirecting funds from the good projects to the bad ones.

• As investments got stuck, it may result in it may result in unemployment.

• In the case of public sector banks, the bad health of banks means a bad
return for a shareholder which means that government of India gets less
money as a dividend. Therefore it may impact easy deployment of money for
social and infrastructure development and results in social and political
cost.

• Investors do not get rightful returns.

• Balance sheet syndrome of Indian characteristics that is both the banks and
the corporate sector have stressed balance sheet and causes halting of the
investment-led development process.

[32]
 • NPAs related cases add more pressure to already pending cases with the
judiciary.

How are businesses getting affected?

When an entrepreneur gets an order, he uses working capital from banks which
finances the raw material inventory and work-in-progress.

After production, delivery and collection of final payments, he pays interest on that
working capital and draws it down with the bank until the next order.
If the working capital cycle remains intact and accommodative, businesses are not
hit by a squeeze on financing. But with severe constraints on such finance, all
businesses are hit, irrespective of how good demand may be.

Public sector banks (PSBs), comprising 21 “nationalised banks” and six of the State
Bank of India group, account for almost 70 per cent of the assets and liabilities of
the system.

Non-Performing Assets Recovery Mechanism

Reduction in NPAs is the most important task for the banks. It is the burning issue
for the RBI as well as the Government of India to control the NPAs. The government
of India has taken certain steps for reducing NPAs of the Indian banking sector. For
this, the government has established a recovery mechanism that involves the
following steps.

I.Sending reminders and visiting the borrower’s business premises/residence:

[33]
The banks should take continuous follow – up for collecting the advances. The bank
should adopt the policy of “the older the advances, the tighter the follow – up. The
bank should send reminders to the borrowers on a periodical basis or the bank
should visit the premises of the business or the residence of the borrowers. The
bank should make it a point that the reminders are sent on time and without fail.
Frequent visits should be taken in the case of hardcore borrowers. The visit should
not be only the formality but it should bring some quality results.

II. Recovery camps:

In case of agricultural advances and advances given to seasonal businesses,

recovery camps should be organize during the peak season of the business or
during the harvest season in agriculture. In the recovery camp the banks can
recover maximum advances by offering some discount or certain other relaxations.
Such recovery camp should be properly planned to ensure maximum advantage. It
is advisable to take the help of outsi ders such as local panchayatofficials,
regional bank managers and similar other person. Such camps should be widely
publicized to ensure maximum recovery of loans.

III. Redesigning unpaid loan installments:

The bank should make an effort to redesign the loan repayment schedule for those
borrowers who are unable to repay the loans. The banks can reduce the amount of
installment and can extend the time for repayment of the loan. This will convince
the borrowers that they can repay the loan. The banks need to be sympathetic to
the sincere borrowers.

IV. One-time settlement/Compromise scheme:

The bank can start compromise schemes or one-time settlement schemes for the
recovery of loans. The RBI in consultation with the government of India has issued
the guidelines for such one-time settlement/compromise scheme for the dues of
commercial banks up to Rs. 10,00,000.

[34]
V. Rehabilitation of sick units:

The banks should identify sick units in SSI as well as in medium and large scale
industry. The banks should introduce rehabilitation package for such sick units
according to RBI guidelines. While introducing such rehabilitation package, the
bank should keep in mind that the causes of sickness should be genuine and the
project should be viable in terms of debt-service coverage ratio.

VI. Filing of civil suits or legal actions for recovery:

Where the compromise proposals given by the banks are not accepted by the
borrowers, it is better for the banks to file the civil suits instead of waiting for the
long time. The bank should start immediate actions against such borrowers
because there are chances of their willful default.

VII. Asset Reconstruction Companies (ARC):

The Committee on Banking Sector Reforms (CBSR) Report suggest remedies to
recover the NPAs as well their subsequent transfer as asset through Asset
Reconstruction Companies. The most effective way of removing NPAs from the
books of the weak banks would be to move these out to a separate agency which
will buy the loans and make it own efforts for their recovery. The ARC’s efforts are
profit oriented and its aim is to recover from the acquired assets more than the
price paid for it. These companies are to be registered with the RBI with a minimum
capital base of Rs.2,00,00,000.

VIII. Lok adalats:

Lok adalats are voluntary agencies created by state governments to assist in

matters of loan compromise. Lok adalats work out an acceptable compromise and

[35]
issue a recovery certificate which shortens the period of obtaining a court decree.
The government should make an effort to give wide publicity to the scheme,
besides educating the bankers and borrowers about Lok adalats. Lok adalats have
been set up for the recovery of dues in accounts falling in the doubtful and loss
categories with outstanding balance up to Rs.5,00,000 by way of compromise
settlements. Government has recently revised the monetary ceiling of cases to be
referred to Lok adalats organized by civil courts from Rs.5,00,000 to Rs.20,00,000.
RBI has issued guidelines to commercial banks advising them to make use of Lok
adalats.

IX. SARFAESI Act:

SARFAESI is the preferred route for finding solution to NPA. There was no legal
provision for facilitating securitization of financial asset of the bank and financial
institutions or power to take possession of securities and sell them. This resulted in
slow recovery of defaulting loan and mounting levels of NPA of bank and financial
institutions and a need was felt for keeping pace with changing commercial practice
and financial sector reforms. Keeping with this, an enabling legislative and
regulatory framework was put in place with the enactment of the Securitization
and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002. The primary objective of the act is reduction of NPA levels of banks or
financial institutions and unlocking value from distressed asset in the banking and
financial system.

X. Debt Recovery Tribunal (DRT):

The government of India passed the recovery of Debts due to Banks and Financial
Institutions (amendment) Act, 2000. This act has helped in strengthening the
functioning of DRTs. Provisions for placement of more than one recovery officer,
power to attach defendant’s property or asset before judgment, penal provision
for disobedience of tribunal’s order or for breach of any terms has provided
necessary strength to DRTs.

XI. Corporate Debt Restructuring (CDR):

[36]
Corporate Debt Restructuring mechanism has been introduced in the year 2001.
The aim is to provide a timely and transparent system for restructuring of the
corporate debt of Rs.20,00,00,000 and above with the banks and financial
institutions. The CDR process enables the companies to restructure their dues and
reduce the incidence of fresh NPAs. It reforms the loan servicing obligation of the
borrower and gives some concession in the interest rate.

XII. Revenue Recovery Act:

On the basis of recommendations of Talwar Committee, a simplified procedure for

recovery of commercial banks’ dues has been introduced. The recommendations
of the committee have been accepted by most of the states but the results in terms
of recovery are not encouraging.

XIII. Settlement of claim with Deposit Insurance and Credit Guarantee

Corporation of India (DICGC):

Bank should submit their proposals for outstanding loans with DICGC for
settlement of their claims and reduce their NPAs. DICGC will recover the
outstanding loans on behalf of the banks.

[37]
CHAPTER III: DATA ANALYSIS AND
INTERPRETATION

• NPA OF INDIAN BANKS OVER

FIVE YEARS TILL JUNE 2018
• INDIA’S POSITION IN GLOBAL NPA RATIO
• RELATIONSHIP BETWEEN NPA AND NET PROFIT
• RECOVERY OF NPA

NPA OF INDIAN BANKS OVER LAST FIVE

YEARS TILL JUNE 2018

[38]
 Indian banks' gross non-performing assets (NPAs), or bad loans, stood at Rs
10.25 lakh crore as on 31 March 2018. On quarter, the pile has grown by Rs 1.39 lakh
crore or 16 percent from Rs 8.86 lakh crore as on 31 December 2017. This chunk now
accounts for 11.8 percent of the total loans given by the banking industry. For
financial year 2018, the total bad loans of these banks rose by a whopping Rs 3.13
lakh crore.

Taking note of the alarming bad loans situation, the Narendra Modi-led
government, last year, announced a Rs 2.11 lakh crore bank recapitalisation plan to
pull out state-run banks from the mess. As much as 90 percent of the
abovementioned sticky assets are on the books of government-owned banks. A
break-up of the NPAs shows that 21 public sector banks (PSBs) saw their bad loans
pile grow by Rs 1.19 lakh crore (or 15.4 percent) to Rs 8.97 lakh crore in the March
2018 quarter, compared to December 2017's figures, while that of 18 private banks
surged by Rs 19,446 crore or 17.9 percent to Rs 1.28 lakh crore in the March 2018
quarter from Rs 1.09 lakh crore in the December 2017 quarter.After making
provisions, the net bad loans of these banks stood at Rs 5.18 lakh crore in the March
2018 quarter as against Rs 4.69 lakh crore in the December 2017 quarter.

Industry leader, the State Bank of India (SBI), which tops the NPA chart, has
logged an increase of Rs 24,286 crore in bad loans in the March quarter to Rs 2.23
lakh crore. The Nirav Modi scam-hit Punjab National Bank (PNB) has reported the
maximum rise of Rs 29,100 crore in gross NPAs to Rs 86,620 crore in the March
quarter. Barring the Bank of India (BoI) and Oriental Bank of Commerce (OBC), most
other PSBs' also recorded a rise in bad loans during the quarter. While Bank of India's
gross bad loans declined by Rs 1,920 crore in the March quarter, that of OBC was
down by Rs 1,417 crore.

Among private banks, the gross NPAs of ICICI Bank and Axis Bank have risen
significantly. ICICI Bank's bad loans pile grew by Rs 8,024 crore or 17.4 percent in the
March 2018 quarter to Rs 54,063 crore; Axis Bank's widened by Rs 9,248 crore or 37

[39]
 percent to Rs 34,249 crore in the March 2018 quarter from Rs 25,001 crore during
the December 2017 quarter.

These seven charts throw more light on the bad loans crisis that has engulfed the
nation's banking sector:

( https://infogram.com/bank-gross-npas-1h8j4x73gkxp6mv)

(fig 2)
The Modi government has time and again blamed the previous UPA-regime for
the bad loan mess, saying NPAs are a legacy issue. It isn't clear whether the
government has grasped the gravity of the situation. Indeed, the government has
taken steps to address the bad loans mess like the NPA ordinance, giving the central
bank more power to direct banks to take action against loan defaulters, and the
passage of the Insolvency and Bankruptcy Code (IBC).

[40]
 While these steps are welcome, they are unlikely to help solve the bad loans
problem in the immediate future. It will take years before banks can get rid of NPAs,
accumulated over the years on account of multiple factors.Over last five years from
December 2013 to June 2018 gross NPAs of Indian Banks increased from Rs.
2,52,275 to 10,03,404 . Which is a drastic change in gross NPAs in our banking
structure,which is affecting our GDP. In 2013 the growth rate of Indian GDP is 6.6%
and in 2018 it is 7.3%, which is not that satisfactory when compared to the global
market. The lower rate of growth in GDP is clearly affected by incresing NPA % over
these years.

(I) PUBLIC SECTOR BANKS GROSS NPAs(Quarterly till

June 2018 )

[41]
 (https://infogram.com/psbs-gross-npas-1hxj48nmeprd4vg)(fig 3)
From this above data we can see that from December 2013 the Gross NPAs increased
from Rs 2,28,244 to 8,74,071 in June 2018.
This is also showing from Dec 2013 to Sep 2015 the rate of increment is slower
than the rate of increment for the period Sep 2015 to June 2016. Because of
demonitisation the NPA is increased in a slower rate and reached its lower in March
2017 among last 10 quarters. In recent data the NPA stands at Rs 8,74,071 in June
2018, decreasing from Rs 8,96,601 in March 2018.

(II) PRIVATE BANKS’ GROSS NPA (Quarterly data)

(https://infogram.com/private-banks-gross-npas-1hmr6gl8z8m94nl)

[42]
 (fig 4)

Like previous diagram in this histogram we can see NPAs of private banks stands
at Rs 1,29,333 by increased from Rs 1,23,627 in March 2018 in a increasing order
from December 2013 from Rs 24,031

(III)PUBLIC SECTOR BANKS’ WITH HIGHER GROSS

NPA

(fig 5)

[43]
 From this above chart we can see that SBI stands at number one in the higher
gross NPAs among other Public sector Banks with Rs. 2,12,840 followed By PNB
Rs.82,889,BOI Rs.60,604,IDBI Rs.57,807 and at bottom UCO Bank with Rs.29,786.

(IV)PRIVATE BANKS WITH HIGHER GROSS NPS

(in Rs. Crore)

[44]
 (fig 6)

As on 2018 ICICI Banks is standing at the Top with Rs.53,465 followed by Axis
Bank Rs.32,662 HDFC
RS.9,539
J &K Bank Rs. 6242
Kotak Mahindra Bank at Rs. 3,899 and ending with South Indian Bank at Rs. 2,552.

INDIA’S POSITION IN GLOBAL NPARATIO

The non-performing asset (NPA) issue facing banks has dominated headlines for
several months now and the fact that we are still unsure of whether or not all have
been recognised does cause some discomfort. In this context it is compelling to see
how the Indian banking system stands on a global yardstick.

This is important because NPAs have resulted due to several judgment calls made
in the past, which in hindsight were incorrect. Lending operations in the banking
[45]
system are linked with expectations of how the economy will behave. If the
economy is growing at a fast pace, it is assumed that the same will prevail in future.
The problem hence, is that there always seem to be progressive expectations when
the economy does well. This is where judgement gets blurred and errors get into
the system as credit evaluation goes awry.

(fig 7)

This picture is showing the Position of India at Global level among other country.Where
we stand at 6th position with 9.98% of NPAs in our banks.

Business cycles
When business cycles are buoyant and interest rates low, companies go in for
big investments and banks are gung-ho as everything looks plausible. Growth in bank
credit averaged 19 per cent per annum between FY08 and FY12 when the repo rate
was first lowered from 7.75 per cent to 5 per cent before being increased to 8.5 per
cent by FY12.
During these phases, the interest cost also ceases to matter as it is assumed
that it is a small component of the cost and can be absorbed with the topline growing
[46]
rapidly. Corporate sales growth in those years averaged 15-20 per cent on a recurring
basis.
It is not surprising that bank credit during this period grew rapidly, by an
average annual rate of 19 per cent. It was then the economy was impacted by various
controversies in the natural resources sectors which, in particular, thwarted
investments and led to an increase in stalled projects as bureaucrats were not willing
to take decisions. Bank credit growth subsequently slowed and the average growth
rate came down to 11 per cent between FY13 and FY17.
This surrealism was hence shattered as the economy moved from a canter to a
trot (GDP growth also slid by around 1 per cent per annum for these two periods
with different base years), leaving banks holding the rotten eggs. This does provoke
a debate on whether or not we have brought about high growth by inflating
investment through erroneous lending.
In several countries that saw rapid growth — starting with the East Asian Tiger
economies in the 1980s and 1990s as well as China when it posted growth of over 10
per cent on a sustained basis on the back of an investment-driven model — there
was reason to believe that financial decisions were fogged by a misleading futuristic
windshield.
At 10 per cent, India is in the more ‘unsatisfactory’ league of nations with high NPAs.
The ones which are more problematic are Greece, Italy, Portugal, Ireland and
Russia. Quite interestingly, the top four were part of the PIIGS group which
epitomised the euro crisis of 2010. Spain has moved away with a ratio of 4.5 per
cent, while the rest still struggle to rein them.One thing that stands out is that some
of the Latin American nations like Brazil and Argentina are doing much better on this
front while even Turkey, which has other challenges in terms of currency and growth,
has a low ratio of less than 3 per cent. India’s NPAs were also around 3 per cent when
there were various camouflages available under corporate debt restructuring.
However, ever since the RBI brought about the concept of asset quality
recognition in 2016, banks progressively revealed the same which has, in turn,
stressed the system. The very developed nations with large economies like the US,

[47]
the UK, Japan and Germany have sound banking systems with NPA ratios of less than
2 per cent, while China scores well at 1.7 per cent.
The NPA issue does not just end with an adverse portfolio. As provisions have
been made on an accelerated recognition of the same, the profitability of banks has
been affected.
The return on assets at 0.33 per cent for Indian banks is comparable to those of
the very developed countries. However, this could lead to a misleading conclusion
that Indian banking system is on par with them.
Western banks operate on smaller interest rate spreads on much larger balance
sheets which lowers their return on assets. Similarly, a larger volume of capital
lowers the return on net worth. This means that if the interest rate spreads were
lowered by Indian banks then profitability at the present levels would not be
maintained. Therefore, in a way both deposit-holders as well as borrowers are
confronting unfavourable interest rate schedules.
The positive side
The good part of the story is that hopefully all the NPAs have been placed on
the table. And, the IBC (Insolvency and Bankruptcy Code) has seen the first big
resolution and there would be more to follow. This is critical because the recovery
rates in India have been very low at 15-20 per cent while the system needs to move
towards 50-75 per cent over a period of time.
Given the time-bound manner of resolution of the NPAs, there is hope that
there would the proverbial light at the end of a tunnel which has a fixed length. The
system may have to struggle for another year or so, but the 2019-20 fiscal could be
brighter.

RELATIONSHIP BETWEEN NPA AND NET PROFIT

Normally the profitability of the banking sector depends on recovery of loans on
time which are disbursed to the different sectors. The performance of banking sector
depends on how effectively you manage the non-performing assets. Except SBI and
Punjab National Bank all the banks are facing problems with respect to NPAs. It does not
indicate that the more NPAs the more profits for SBI but the largest bank of India is able

[48]
to receive more profits only because of its wide variety of financial services and effective
management of NPAs. But if NPAs continue in the same manner then even large banks
will also stumble like Lehman Brothers in USA which resulted in International economic
crisis.
The net profits of SBI in 2007 was Rs 4541.31 crores and it increased upto
Rs.9166.05 crores in 2010.It again reduced to Rs.7370.35 crores in 2011 and further
increased upto Rs 14104.98 crores in 2013 and decreased to Rs 10891.17 crores in
2014. It gained Rs.13101.57 crores in 2015 and again the profits reduced to Rs
9950.65 crores in 2016.
The net profits of Bank of India has risen from Rs.1125.95 crores in 2007 to
Rs.3009.41 crores in 2009 and then it reduced to rs.1738.56 crores in 2010. Further
it increased to Rs.2488.71 crores in 2011 and the profits increased upto Rs.2732.65
crores in 2014. Again it declined to Rs. 1748.32 crores and there was sharp decline
in profits and was found to be negative i.e., Rs.-6334.98 crores in
2016.

The United Bank of Indiahad profits of Rs.267.28 crores in 2007 which rose
to Rs.318.95 crores in 2008 and declined to Rs.184.71 crores in 2009.Then the
profits of the bank had a positive growth for three years 2010-2012.Further the
profits declined to almost half to Rs.391.90 crores in the year 2013 and the profits
were found to be negative in 2014 i.e., Rs. -1213.44 crores. The profits were
positive in 2015 i.e., Rs.255.99 crores and negative in 2016 i.e., Rs. -281.96 crores.

The profits of Indian Overseas Bank has been positive for the years 2007-
2014.It found to be negative for the years 2015 and 2016.

The Punjab National Bank had experienced positive growth from the year
2007-2012.Then the profits of the bank reduced from Rs.4747.67 crores in the year
2013 to Rs.3944.40 crores in 2016.

The Central Bank of India has positive growth in net profits from 20072013
whereas it was found to be negative in 2014 i.e., R-1262.84 crores. The profits

[49]
rose in 2015 to Rs. 606.45 crores and again it was negative in 2016 i.e., rs. -
1117.67 crores.

Non-performing assets of seven banks

The gross NPA have been continuously increasing for all he banks for he
specified period. As the business operations of the bank increasing the amount of
NPAs have also increased. The Gross NPA of SBI has risen from Rs.9998 crores in
2007 to Rs.98172.80 crores in 2016. It is observed that SBI has highest Gross NPA
as compared to other banks.

(fig 8)

Bank of India had zero Gross NPA from 2007 to 2010. The bank had NPA ofRs.4811.55
crores in 2011 and it increased upto Rs. 49879.12 crores in 2016.

United Bank of India, Bank of Baroda, Indian Overseas Bank, Punjab

National Bank and Central Bank India also have faced growth in the Gross NPA in
all thesubsequent years from 2007-2016.
The Punjab National Bank also had higher NPAs followed by State Bank of
India
[50]
 NPA of the banks went on increasing in all the years but a drastic raise was
observed in the year 2016. The percentage raise of NPA of the banks in the year 2016
as compared to 2015 were SBI – 73.07, BOI- 124.75, UBI- 44.53, BOB-149.18, IOB-
101.37, PNB- 117 and CBI- 91.36

[51]
RECOVERY OF NPA
In an indication of deteriorating management of non-performing assets (NPAs),
the rate of recovery of banks’ gross NPAs has been steadily declining for the past 12
years and hit the lowest level of 20.8 per cent in 2016-17, according to the latest data
from the Reserve Bank of India (RBI). Recovery of written-off loans through various
channels, such as debt recovery tribunals (DRTs), has also been falling year-on-year.
While the loan recovery rate has been falling, the number of cases being referred to
the National Company Law Tribunal (NCLT) benches for insolvency resolution has
been correspondingly rising since the enactment of the Insolvency and Bankruptcy
Code (IBC) last year.

Recovery of banks’ NPAs remained poor, having declined to 20.8 per cent by
end-March 2017 from 61.8 per cent in 2009.. After peaking in 2009 and remaining
well above 40 per cent in the earlier years, the recovery rate has declined over the
years. Banks were able to recover higher amount through secured loans, term loans
and exposure to real estate.

During the 2015-17 period, the average recovery ratio of Indian banks was 26.4
per cent, with recovery by private sector banks at 41 per cent being much higher
than by public sector banks (PSBs) at 25.1 per cent. Banks continue to pursue various
recovery measures for NPAs as well as written-off loans. A higher recovery rate
indicates the ability of banks to prune their NPAs. During this twoyear period, banks
and financial institutions recovered an average of around 10 per cent through the
existing legal recovery channels, including DRTs, the Securitisation and
Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI)
Act, and Lok Adalats.

The recovery percentage through these three channels fell to 9.8 per cent in
2016-17, down from 10.3 per cent in 2015-16. Out of Rs 2.86 lakh crore worth of bad
loans being chased through DRTs, SARFAESI and Lok Adalats, banks were able to
recover Rs 28,000 crore worth of loans in 2016-17. In the previous financial year, the
banks and financial institutions could recover Rs 22,800 crore worth of bad loans out
[52]
of total Rs 2.21 lakh crore being chased through these legal channels.“The
proceedings of the annual review of state-run banks by finance minister Arun Jaitley
on Tuesday highlighted the possible recovery of Rs 1.8 lakh crore in bad loans
through resolution mechanisms as well as from the insolvency and bankruptcy code
cases of some large borrowers with huge accumulated bad loans.”
“We find NPAs are coming down… debtors are paying up because they may have
to face IBC proceedings otherwise,” Jaitley said.” From The Telegraph

(https://www.telegraphindia.com/business/npa-recovery-on-track/cid/1670109)

[53]
Chapter IV: CONCLUSION

• Conclusion
• Suggestions

CONCLUSION

[54]
The Non-Performing Assets have always created a big problem for the banks in
India. It is just not only problem for the banks but for the economy too. The money
locked up in NPAs has a direct impact on profitability of the bank as Indian banks
are highly dependent on income from interest on funds lent. This study shows that
extent of NPA is comparatively very high in public sectors banks. Although various
steps have been taken by government to reduce the NPAs but still a lot needs to be
done to curb this problem. The NPAs level of our banks is still high as compared to
the foreign banks. It is not at all possible to have zero NPAs. The bank management
should speed up the recovery process. The problem of recovery is not with small
borrowers but with large borrowers and a strict policy should be followed for
solving this problem. The government should also make more provisions for faster
settlement of pending cases and also it should reduce the mandatory lending to
priority sector as this is the major problem creating area. So the problem of NPA
needs lots of serious efforts otherwise NPAs will keep killing the profitability of
banks which is not good for the growing Indian economy at all.
Suggestions for Reducing Non-Performing Assets
The non-performing asset is like termite which eats the whole financial system. If
this termite is not controlled, it will be dangerous for the financial system. The
government has taken several policy decisions and has prepared several strategies
to control the high rate of NPAs in the banking sector. But these steps have not
created desired effect on the rate of NPAs. Here are some suggestions for reducing
nonperforming assets. If these suggestions are implemented effectively, they will
be helpful for reducing NPAs with immediate effect.

I. Proper selection of borrower/activity:

When the borrower/activity is wrongly selected, it definitely results into NPAs. To

reduce this danger, the banks should take enough care in selection of the
borrower/activity. For this the bank should perform an in-depth investigation about
the creditworthiness of the borrower. The bank must collect as much information

[55]
as possible. After making thorough analysis of this information, the bank should
take the decision whether to sanction the loan or not.

II. Regular post-sanction follow up:

Generally it happens that after sanctioning the loan, banks do not take any follow
up of the borrower. Lack of regular follow up makes the borrower careless in the
repayment of loans. And it results into default. To remove this danger, the bank
must take regular follow up of the borrower after sanctioning the loan. Follow up
taken at a regular interval will keep the borrower alert and the chances of default
will be reduced. Reporting to the top level management of the bank about the
repayment schedule of the borrower should be done regularly.

III. Establishment of a recovery cell:

The efforts made by the banks to recover the amount of loan are not enough. In
this situation the amounts of NPAs are continuously rising. The bank should form a
special recovery cell to recover the outstanding amount of loan. This recovery cell
is responsible to recover the outstanding loans. For this, the recovery cell is
empowered to take necessary steps to recover the outstanding loans.
IV. Publishing the name of defaulters in local news papers:

This can be an effective step for recovering the outstanding loans from the
defaulters. The banks should publish the names of such defaulters in the local news
papers with outstanding amounts. This will affect the dignity of such defaulter and
there are chances that they may repay the amount of loan. This will be a helpful
step for other banks also. By considering the names of defaulters, other banks
would not sanction loans to such defaulter.

V. Set up a group of auctioneers:

Generally the assets that are kept as security are auctioned to recover the amount
of default. But there are no bidders to purchase such moveable or immovable

[56]
property due to the fear of the defaulters. Because of this the bank can not realize
the full amount of default. In such case the bank should assign such case to a special
group of auctioneer that will find out an appropriate bidder so that the full amount
of default can be realized by selling the securitized property held with the bank.

VI. Constant touch with persons trading with the borrower:

To know about the creditworthiness of the borrower and to obtain market report
in regard to his trade dealings and solvency, the bank should keep a touch with the
persons trading with the borrower. By this the bank can take immediate steps as
and when some negative information about the borrower is received from the
market.

VII. Setting up of credit investigation and information agency:

The banks should establish an agency which is assigned the duty to investigate
about the creditworthiness of the borrowers. The information obtained by such
agency should be easily accessible by all the bankers. This will be helpful in the
selection of borrowers. Before sanctioning the loan, such agency should be
contacted to obtain the information about the creditworthiness of the borrowers.
This will reduce the chances of wrong selection of borrower.

[57]
VIII. Legislative changes:
The government should pass some legislation in the direction of effective recovery
of outstanding loans. By passing the legislation, recovery tribunals, recovery cell,
lok-adalatas etc. should be given more authority and they should be made
autonomous institutions. If they have more power to recover the outstanding
loans, they can take immediate and effective steps for the recovery. This kind of
institutions will be helpful for the banks to make the legal recovery of outstanding
loans.

IX. Interest discounts for prompt repayments:

To reduce the NPAs, the bank should start some schemes under which the
defaulters are given a special interest discount if they make the prompt repayment
of the outstanding amount. This step may be helpful to recover the outstanding
amount from those defaulters who have sense of market credit.

X. Asset Reconstruction Fund:

The NPAs of weak banks may be transferred to state owned asset reconstruction
fund (ARF), managed by an independent private sector firms. The ARF will buy the
NPAs from the weak banks at a price it decides. Its objective will be to make profits
out of deals. It is just like business buying impaired loans, recovering them and in
the process, making profits.

[58]
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VI