A

Dissertation Report
On

A Study on Non - Performing Assets in Banking

Sector

Submitted in partial fulfillment for the award of

Degree of Master of Business Administration

Scholar Supervisor
Dimple Dr. Niti Goel
Submitted to
Department of Business Administration
NIT Kurukshetra
Apr 2014

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 CERTIFICATE

This is to certify that the project entitled “A study on Non - Performing

Assets in Banking sector ” has been submitted by Dimple, Roll no.4122045. In

partial fulfillment of the requirements for the award of degree of Master of

Business Administration From National Institute of Technology, Kurukshetra.

The results embodied in the project have not been submitted to any other

University or Institution for the award of any Degree or Diploma.

Project Coordinator Dr. Rajender Kumar

Dr. Niti Goel Head of Department
(Assistant Professor) DBA
Department of Business Administration NIT K
NIT K

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 ACKNOWLEDGEMENT

Inspiration & Perseverance always played a key role in the success of any venture. At the
level of practice, it is often difficult to get knowledge without Guidance. Project is like a
bridge between theoretical & practical. With this willing I joined this project. I would like to
express my gratitude towards all those who gave a helping hand to me in preparing this
project.
I feel obliged in taking the opportunity to Dr. Niti Goel for giving me proper guidance.
Last but not the least I am thankful to the HOD, Dr. Rajender Kumar , teachers & friends for
their kind support & encouragement provided by them & for boosting up my morale during
this project report.

With sincere thanks………………

DIMPLE

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 DECLARATION

I here by declare that the dissertation “Non - Performing Assets” in Banking System”
submitted for the MASTERS DEGREE OF BUSINESS ADMINISTRATION is my original
work and the dissertation has not formed the basis for the award of any degree, diploma,
associate ship, fellowship or similar others titles. It has not been submitted to any other
University or Institution for the award or degree or diploma.

Date Name DIMPLE

Roll no 4122045

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 CONTENTS
Page
No.
CHAPTER-1 INTRODUCTION

Ø Industry Profile
Ø Profile of selected banks
Ø Project
CHAPTER-2 LITRATURE REVIEW

CHAPTER-3 RESEARCH METHODOLOGY

Ø Meaning of Research
Ø Objectives of the Study
Ø Sample Design
Ø Data Collection

CHAPTER-4 ANALYSIS AND INTERPRETATION

CHAPTER-5 FINDINGS AND CONCLUSION

CHAPTER-6 RECOMMENDATIONS
BIBLIOGRAPHY
ANNEXURE

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6
 PROFILE OF SELECTED BANKS

BANKS PROFILE

1) STATE BANK OF INDIA:-

‘State Bank of India (SBI), with a 200 year history, is the largest commercial bank in India in
terms of assets, deposits, profits, branches, customers and employees. The Government of
India is the single largest shareholder of this Fortune 500 entity with 61.58% ownership. SBI
is ranked 60th in the list of Top 1000 Banks in the world by "The Banker" in July 2012.

State Bank of India is one of the Big Four banks of India, along with ICICI Bank, Punjab
National Bank and Bank of Baroda.

The bank traces its ancestry to British India, through the Imperial Bank of India, to the
founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian
Subcontinent. Bank of Madras merged into the other two presidency banks—Bank of
Calcutta and Bank of Bombay—to form the Imperial Bank of India, which in turn became the
State Bank of India. Government of India owned the Imperial Bank of India in 1955, with
Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008,
the government took over the stake held by the Reserve Bank of India.

The origins of State Bank of India date back to 1806 when the Bank of Calcutta (later called
the Bank of Bengal) was established. In 1921, the Bank of Bengal and two other banks (Bank
of Madras and Bank of Bombay) were amalgamated to form the Imperial Bank of India. In
1955, the Reserve Bank of India acquired the controlling interests of the Imperial Bank of
India and SBI was created by an act of Parliament to succeed the Imperial Bank of India.

The SBI group consists of SBI and five associate banks. The group has an extensive network,
with over 20000 plus branches in India and another 186 offices in 34 countries across the
world. As of 31st March 2013, the group had assets worth USD 392 billion, deposits of USD
299 billion and capital & reserves in excess of USD 23.03 billion. The group commands over
23% share of the domestic Indian banking market.
SBI’s non- banking subsidiaries/joint ventures are market leaders in their respective areas and
provide wide ranging services, which include life insurance, merchant banking, mutual funds,

7
 credit cards, factoring services, security trading and primary dealership, making the SBI
Group a truly large financial supermarket and India’s financial icon. SBI has arrangements
with over 1500 various international / local banks to exchange financial messages through
SWIFT in all business centres of the world to facilitate trade related banking business,
reinforced by dedicated and highly skilled teams of professionals.

Recent awards and recognitions

· SBI was ranked as the top bank in India based on tier 1 capital by The Banker magazine in a

2014 ranking.
· SBI was ranked 298th in the Fortune Global 500 rankings of the world's biggest corporations

for the year 2012.

· SBI won "Best Public Sector Bank" award in the D&B India's study on 'India's Top Banks

2013'.
· State Bank of India won three IDRBT Banking Technology Excellence Awards 2013 for

“Electronic Payment Systems”, “Best use of technology for Financial Inclusion”, and
“Customer Management & Business Intelligence” in the large bank category.
· SBI won National Award for its performance in the implementation of Prime Minister’s

Employment Generation Programme (PMEGP) scheme for the year 2012.

· Best Online Banking Award, Best Customer Initiative Award & Best Risk Management

Award (Runner Up) by IBA Banking Technology Awards 2010

2) PUNJAB NATIONAL BANK:-

Punjab National Bank (PNB) is an Indian financial services company based in New Delhi,
India. Founded in 1895, the bank has over 5,800 branches and over 6,000 ATMs across 764
cities. It serves over 80 million customers.

Punjab National Bank is one of the Big Four banks of India, along with State Bank of India,
ICICI Bank and Bank of Baroda. It is the third largest bank in India in terms of asset size
(US$6.6 billion by the end of FY 2012-13). The bank has been ranked 248th biggest bank in
the world by the Bankers' Almanac.

8
PNB has a banking subsidiary in the UK, as well as branches in Hong Kong, Dubai and
Kabul. It has representative offices in Almaty (Kazakhstan), Dubai, Shanghai (China), Oslo
(Norway) and Sydney (Australia).

Punjab National Bank was registered on 19 May 1894 under the Indian Companies Act, with
its office in Anarkali Bazaar, Lahore. The founding board was drawn from different parts of
India professing different faiths and a varied back-ground with, however, the common
objective of providing country with a truly national bank which would further the economic
interest of the country. PNB's founders included several leaders of the Swadeshi movement
such as Dyal Singh Majithia and Lala Harkishan Lal, Lala Lalchand, Shri Kali Prosanna Roy,
Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala
Lajpat Rai was actively associated with the management of the Bank in its early years. The
board first met on 23 May 1894. Ironically, the PNB Website now claims Lala Lajpat Rai to
be the founding father, surpassing Rai Mul Raj and Dyal Singh Majithia. The bank opened
for business on 12 April 1895 in Lahore.

PNB has the distinction of being the first Indian bank to have been started solely with Indian
capital that has survived to the present. (The first entirely Indian bank, Commercial Bank,
was established in 1881 in Faizabad, but failed in 1958.)

PNB has had the privilege of maintaining accounts of national leaders such as Mahatma
Gandhi, Jawahar Lal Nehru, Lal Bahadur Shastri, Indira Gandhi, as well as the account of the
famous Jalianwala Bagh Committee.[1]

Awards and Recognitions:

Owing to its performance during the year 2013, Bank earned many laurels and accolades in
recognition to its service towards doing good to society and on its overall performance.
Recently, PNB was awarded with “Vigilance Excellence Award” by Institute of Public
Enterprises, ‘Global CSR Excellence and Leadership Award’ for ‘Organisations with Best
CSR Practices’ and ‘Bank with leading Financial Inclusion Initiatives Award’ by ABP News.
Apart from these, the Bank has been conferred with ‘IBA Banking Technology Awards’
under the category of Best Risk Management and Security Initiatives and ‘Banking
Technology Excellence Award’ under Customer Management and Business Excellence

9
Initiatives by IDBRT, Hyderabad. Further the Bank has been recognized as ‘Best Banker’
under Agriculture Credit and Inclusion by The Sunday Standard.

In terms of accolades, PNB has been adjudged as the ‘Most profitable Bank’ amongst Public
sector banks by Financial Express and Ernst & young survey on India’s Best Bank. Globally,
'The Banker' Magazine, London has ranked PNB at 170th position amongst World's Top 1000
Banks in 2013, up from 175th position in 2012. Forbes Magazine has placed PNB at 668th
place amongst 2000 global giants.

Business Performance:

During Q3 FY’14, Punjab National Bank maintained it NUMBER ONE position in

Domestic Business, Domestic Deposits, Domestic Advances, Saving Deposits, CASA
Deposits, Total Income, Interest Income, Non Interest Income, and Operating Profit amongst
nationalized bank.

Global Reach (Branches and Subsidiaries):

Backed by strong domestic performance, the Bank has its global aspirations as well.
Presently, the Bank has its overseas presence in 10 countries by way of 5 branches (Hong
Kong, Dubai, Kabul & OBU-Mumbai), 3 Subsidiaries (London, Bhutan & Kazakhstan) , a
Joint Venture (at Nepal) and 5 Representative Offices (Sydney, Shanghai, Oslo, Dubai &
Almaty ).

3)HDFC BANK:-

HDFC Bank Limited was incorporated in August 1994. It was promoted by Housing
Development Finance Corporation Limited (HDFC), India's largest housing finance
company. It was among the first companies to receive an 'in principle' approval from the
Reserve Bank of India (RBI) to set up a bank in the private sector. The Bank started
operations as a scheduled commercial bank in January 1995 under the RBI's liberalization
policies.

On 26 February 2000, Times Bank Limited owned by The Times Group (Bennett, Coleman
& Co.) was merged with HDFC Bank Ltd. This was the first merger of two private banks in

10
India. Shareholders of Times Bank received 1 share of HDFC Bank for every 5.75 shares of
Times Bank.

On 23 May 2008, HDFC Bank acquired Centurion Bank of Punjab taking its total branches to
more than 1,000. The amalgamated bank emerged with a base of about Rs. 1,22,000 crore
and net advances of about Rs. 89,000 crore. The balance sheet size of the combined entity is
more than Rs. 1,63,000 crore.

Products

HDFC Bank offers the following four core products:

Personal banking

Under Personal Banking, HDFC offers:

· Accounts & Deposits

· Loans
· Cards
· Demat
· Investments
· Insurance
· Forex
· Premium Banking
· Private Banking

NRI banking

Under NRI Banking, HDFC offers:

· Accounts & Deposits

· Money Transfer
· Investments & Insurance
· Research Reports
· Loans
· Premium Banking

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 · Payment Services

SME banking
Under SME Banking, HDFC offers:

· Accounts & Deposits

· Business Financing
· Trade Services
· Payments & Collections
· Cards

Wholesale banking

HDFC offers Wholesale Banking for Corporates and Financial Institutions & Trusts. The
Bank also provides services such as Investment Banking and other services in the
Government sector.

4)ICICI BANK:-

ICICI Bank is an Indian multinational banking and financial services company

headquartered in Mumbai. It is the second largest bank in India by assets and by market
capitalzation, as of 2014. It offers a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery channels and through its
specialized subsidiaries in the areas of investment banking, life, non-life insurance, venture
capital and asset management. The Bank has a network of 3,539 branches and 11,162 ATMs
in India, and has a presence in 19 countries.

ICICI Bank is one of the Big Four banks of India, along with State Bank of India, Punjab
National Bank and Bank of Baroda. The bank has subsidiaries in the United Kingdom,
Russia, and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka,
Qatar and Dubai International Finance Centre; and representative offices in United Arab
Emirates, China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The
company's UK subsidiary has also established branches in Belgium and Germany.

12
In March 2013, Operation Red Spider showed high-ranking officials and some employees of
ICICI Bank involved in money laundering. After a government inquiry, ICICI Bank
suspended 18 employees and faced penalties from the Reserve Bank of India in relation to the
activity.

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity offering
in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition of Bank of
Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary market sales by
ICICI to institutional investors in fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at
the initiative of the World Bank, the Government of India and representatives of Indian
industry. The principal objective was to create a development financial institution for
providing medium-term and long-term project financing to Indian businesses.

In the 1990s, ICICI transformed its business from a development financial institution offering
only project finance to a diversified financial services group offering a wide variety of
products and services, both directly and through a number of subsidiaries and affiliates like
ICICI Bank. In 1999, ICICI become the first Indian company and the first bank or financial
institution from non-Japan Asia to be listed on the NYSE.

ICICI Bank awards in 2014

· ICICI Bank has been honoured as The Best Service Provider - Risk Management, India at
The Asset Triple A Transaction Banking, Treasury, Trade and Risk Management Awards
2014.
· Mr Rakesh Jha has been ranked as the Best CFO in India at the 14th Annual Finance
Asia's Best Managed Companies Poll.
· ICICI Bank has won The Corporate Treasurer Awards 2013 in the categories of 'Best
Cash Management Bank in India' & 'Best Trade Finance Bank in India'.
· ICICI Bank has been awarded the 'Best Retail Bank in India', 'Best Microfinance
Business' and Best Retail Banking Branch Innovation' under the 'Excellence in Retail
Financial Services awards 2014' by The Asian Banker.
· Ms Chanda Kochhar, MD & CEO, ICICI Bank, has been named among Fortune's 50 most
powerful women in business for the fourth consecutive year.
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· Ms. Chanda Kochhar, MD and CEO received the 'Mumbai Women Of The Decade'
award by ASSOCHAM.

5) AXIS BANK:-

Axis bank
Axis Bank Limited (formerly UTI Bank) is the third largest private sector bank in India. It
offers financial services to customer segments covering Large and Mid-Corporates, MSME,
Agriculture and Retail Businesses.Axis Bank has its headquarters in Mumbai, Maharashtra.
History
Axis Bank began its operations in 1994, after the Government of India allowed new private
banks to be established. The Bank was promoted in 1993 jointly by the Administrator of the
Unit Trust of India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance
Corporation Ltd., National Insurance Company Ltd., The New India Assurance Company,
The Oriental Insurance Corporation and United India Insurance Company. The Unit Trust of
India holds a special position in the Indian capital markets and has promoted many leading
financial institutions in the country.
Axis Bank (erstwhile UTI Bank) opened its registered office in Ahmedabad and corporate
office in Mumbai in December 1993. The first branch was inaugurated on 02nd April 1994 in
Ahmedabad by Dr. Manmohan Singh, the then Finance Minister of India.
Operations
Indian Business: As on 30-Sep-2013, the Bank had a network of 2225 branches and extension
counters and 11796 ATMs. Axis Bank has the largest ATM network among private banks in
India and it operates an ATM at one of the world’s highest sites at Thegu, Sikkim at a height
of 4,023 meters (13,200 ft) above sea level.
International Business: The Bank has seven international offices with branches at
Singapore, Hong Kong, Dubai (at the DIFC) and Colombo and representative offices at
Shanghai, Dubai and Abu Dhabi, which focus on corporate lending, trade finance,
syndication, investment banking and liability businesses. In addition to the above, the Bank
has a presence in UK with its wholly owned subsidiary Axis Bank UK Limited.
Awards and recognitions\

· Bank of the Year Money Today FPCIL Awards 2012–13

· Best Bank CNBC-TV18 India’s Best Bank and Financial Institution Awards 2012

14
· Best Bank Runner-up – Outlook Money Awards 2012
· 'Consistent Performer' in 'India’s Best Banks – 2012 survey' by Business Today and
KPMG
· Fastest Growing Large Bank Dun & Bradstreet – Polaris Financial Technology
Banking Awards 2012
· Fastest Growing Large Bank Businessworld Best Banks Survey 2012
· Best Domestic Bond House The Asset Triple A Country Awards 2012
· India Bond House of the year IFR ASIA – Country Awards 2012
· Deal Maker of the Year in Rupee Bonds Businessworld Magna Awards – India's Best
Deal Makers 2012
· The Best Emerging Bullion Dealing Bank 9th India International Gold Convention-
2011-12
· Best Acquiring Institution in South Asia Visa LEADER Award at Visa’s 2012
APCEMEA Security Summit, Bali
· Gold Shield for Excellence in Financial Reporting in the Private Banks category –
2011–12 from Institute of Chartered Accountants of India

15
 INTRODUCTION TO THE PROJECT

It's a known fact that the banks and financial institutions in India face the problem of swelling
non-performing assets (NPAs) and the issue is becoming more and more unmanageable. In
order to bring the situation under control, some steps have been taken recently. The
Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 was passed by Parliament, which is an important step towards elimination or
reduction of NPAs.

NPAs: AN ISSUE FOR BANKS AND FIIs IN INDIA

To start with, performance in terms of profitability is a benchmark for any business enterprise
including the banking industry. However, increasing NPAs have a direct impact on banks
profitability as legally banks are not allowed to book income on such accounts and at the
some time are forced to make provision on such assets as per the Reserve Bank of India
(RBI) guidelines.

Also, with increasing deposits made by the public in the banking system, the banking
industry cannot afford defaults by borrower s since NPAs affects the repayment capacity of
banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system
through various rate cuts and banks fail to utilize this benefit to its advantage due to the tear
of burgeoning non-performing assets.

INDIAN ECONOMY AND NPAs

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

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

16
Under such a situation, it goes without saying that banks are no exception and are bound to
face the heat of a global downturn. One would be surprised to know that the banks and
financial institution in India hold non performing assets worth Rs. 110000 crores Bankers
have realized that unless the level of NPAs is reduced drastically, they will find it difficult to
survive.

GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobilizing the deposits and utilizing it for lending to
industry. Lending business is generally encouraged because it has the effect of funds being
transferred from the system to productive purposes, which results into economic growth.

However lending also carries credit risk, which arises from the failure of borrower to fulfill
its contractual obligations either during the course of a transaction or on a future obligation.

A question that arises is how much risk can a bank afford to take? Recent happenings in the
business world -Enron, WorldCom, Xerox, Global Crossing do not give much confidence to
banks. In case after case, these giant corporate becan1e bankrupt and failed to provide
investors with clearer and more complete information thereby introducing a degree of risk
that many investors could neither anticipate nor welcome. The history of financial institutions
also reveals the fact that the biggest banking failures were due to credit risk. Due to this,
banks are restricting their lending operations to secured avenues only with adequate collateral
on which to fall back upon in a situation of default.

MEANING OF NPAs

An asset which ceases to generate income for the bank is called a Non-Performing Asset. An
asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest
are not paid by the borrower for a period of 180 days. With a view to moving towards
international best practices and to ensure greater transparency, it has been decided to adopt
the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2005.
Accordingly, with effect form March 31, 2005, a non-performing asset (NPA) shell be a loan
or an advance where;

1. Interest and/or installment of principal remain overdue for a period of more than 90 days
in respect of a Term Loan,

17
2. The account remains 'out of order' for a period of more than 90 days, in respect of an
Overdraft/Cash Credit (ODICC),

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

4. For a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and

5. Any amount to be received remains overdue for a period of more than 90 days in respect
of other accounts.

ADVERSE EFFECTS OF NPAs

An NPA on the balance sheet of an institution deteriorates its health in several ways:

1. Problem of moral hazard: Interest income cannot be booked on the loan declared as
an NPA, and so profits get affected. In addition, provisioning against assets creates
further losses. Thus, financial institutions have a tendency to rollover non- performing
loans. The borrower is given more loans to pay interest on past loans and repay
whatever amount is possible.

2. Adverse Incentive: A bank with say 25% NPA, will have to earn on 75% of its assets
to meet its expenses and make a profit. It will have a tendency to go for more risky
ventures promising higher rates of return, since 750/(; of the loan portfolio will have
to pay for 100% of the liabilities and risky venture always have a greater probability
of becoming 'non- performing', thus completing the self- fulfilling cycle.

3. Huge Opportunity Cost: Assuming Rs. 1,00,000 crore locked up due to NPAs
started earning interest, say at 10%, it would immediately boost the interest yield of
the nationalized banks by anything between 1.6 and 1.8%. This increased yield could
then translate into reduced interest rates for the banks' clients.

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REASONS BEHIND HUGE LEVEL OF NPAs IN THE INDIAN
BANKING SYSTEM (IBS)

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by
the banks concerned. Any lending activity involves the following three stages where
discretion needs to be exercised: evaluation and assessment of the proposal; continuing
support during the loan period by additional loan or by non-fund based activities; and exit
decision and modality. Studies have shown that Indian financial institutions have shown
extremes of behavior at each of the above stages. In many instances, loans have been
sanctioned because of vested interests. Promoter banker nexus or promoter-politician linkage
have been exploited to siphon off-funds from the banking system, Post loan disbursal,
bankers are supposed to keep track of the key signals that indicate the health of the loan
recipient and monitor project progress. Banks concerned should continuously monitor loans
to identify accounts that have potential to become non-performing.

RBI GUIDELINES ON INCOME RECOGNITION (interest income on

NPAs)

Banks recognize income including interest income on advances on accrual basis. That is,
income is accounted for as and when it is earned.

The prima-facie condition for accrual of income is that it should not be unreasonable to
expect its ultimate collection. However, NPAs involves significant uncertainty with respect to
its ultimate collection.

Considering this fact, in accordance with the guidelines for income recognition issued by the
Reserve Bank of India (RBI), banks should not recognize interest income on such NPAs until
it is actually realized.

ACCOUNTING STANDARD 9 (AS 9) ON REVENUE RECOGNITION

The Accounting Standard 9 (AS 9) on 'Revenue Recognition' issued by the Institute Of

Chartered Accountants of India (ICAI) requires that the revenue that arises from the use by
others of enterprise resources yielding interest should be recognized only when there is no
significant uncertainty as to its measurability or collect ability.

19
Also, interest income should be recognized on a time proportion basis after taking into
consideration rate applicable and the total amount outstanding.

Usage of financial statements in assessing the risk of default for lenders

For banks and financial institutions, both the balance sheet and income statement have a key
role to play by providing valuable information on a borrower's viability. However, the
approach of scrutinizing financial statements is a backward looking approach. This is
because; the focus of accounting is on past performance and current positions.

The key accounting ratios generally used for the purpose of ascertaining the creditworthiness
of a business entity are that of debt-equity ratio and interest coverage ratio. Highly rated
companies generally have low leverage. This is because; high leverage is followed by high
fixed interest charges, non-payment of which results into a default

High cost of funds due to NPAs

Quite often genuine borrowers face the difficulties ill raising funds from banks due to
mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine.
Borrowers or if the funds are provided, they come at a very high cost to compensate the
lender's losses caused due to high level of NPAs.

Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where
the interest rate on working capital charged by banks is higher.

With the enactment of the Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002, banks can issue notices to the defaulters to pay
up the dues and the borrowers will have to clear their dues within 60 days. Once the borrower
receives a notice from the concerned bank and the financial institution, the secured assets
mentioned in the notice cannot be sold or transferred without the consent of the lenders.

The main purpose of this notice is to inform the borrower that either the sum due to the bank
or financial institution is paid by the borrower or else the former will take action by way of
taking over the possession of assets. Besides assets, banks can also takeover the management
of the company. Thus the bankers under the aforementioned Act will have the much-needed
authority to either sell the assets of the defaulting companies or change their management.

20
But the protection under the said Act only provides a partial solution. What banks should
ensure is that they should move with speed and charged with momentum in disposing off the
assets. This is because as uncertainty increases with the passage of time, there is all
possibility that the recoverable value of asset also reduces and it cannot fetch good price. If
faced with such a situation than the very purpose of getting protection under the
Securitisation Act, 2002 would be defeated and the hope of seeing a must ha\re growing
banking sector can easily vanish.

RBI GUIDELINES ON CLASSIFICATION OF BANK ADVANCES

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with respect
to bank advances. In terms of these guidelines, bank advances are mainly classified into:

Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not
more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18

months.

Doubtful Assets: Asset that has remained NP A for a period exceeding 18 months is a
doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by
external auditors or by Reserve Bank India (RBI) inspection.

In terms of RBI guidelines, as and when an asset becomes a NPA, such advances, would be
first classified as a sub-standard one for a period that should not exceed 18 months and
subsequently as doubtful assets.

It should be noted that the above classification is only for the purpose of computing the
amount of provision that should be made with respect to bank advances and certainly not for
the purpose of presentation of advances in the banks balance sheet.

The Third Schedule to the Banking Regulation Act, 1949, solely governs presentation of
advances in the balance sheet.

Banks have started issuing notices under the Securitisation Act, 2002 directing the defaulter
to either pay back the dues to the bank or else give the possession of the secured assets

21
mentioned in the notice. However, there is a potential threat to recovery if there is substantial
erosion in the value of security given by the borrower or if borrower has committed fraud.
Under such a situation it will be prudent to directly classify the advance as a doubtful or loss
asset, as appropriate.

RBI GUIDELINES ON PROVISIONING REQUIREMENT OF BANK ADVANCES

As and when an asset is classified as an NPA, the bank has to further sub-classify it into sub-
standard, loss and doubtful assets. Based on this classification, bank makes the necessary
provision against these assets.

Reserve Bank of India (RBI) has issued guidelines on provisioning requirements of bank
advances where the recovery is doubtful. Banks are also required to comply with such
guidelines in making adequate provision to the satisfaction of its auditors before declaring
any dividends on its shares.

In case of loss assets, guidelines specifically require that full provision for the amount
outstanding should be made by the concerned bank. This is justified on the grounds that such
an asset is considered uncollectible and cannot be classified as bankable asset.

Also in case of doubtful assets, guidelines requires the bank concerned to provide entirely the
unsecured portion and in case of secured portion an additional provision of 20%-50% of the
secured portion should be made depending upon the period for which the advance has been
considered as doubtful.

For instance, for NPAs which are up to 1-year old, provision should be made of 20% of
secured portion, in case of 1-3 year old NPAs up to 30% of the secured portion and finally in
case of more than 3 year old NP As up to 50% of secured portion should be made by the
concerned bank.

In case of a sub-standard asset, a general provision of 10% of total out standings should be
made.

Reserve Bank of India (RBI) has merely laid down the minimum provisioning requirement
that should be complied with by the concerned bank on a mandatory basis. However, where
there is a substantial uncertainty to recovery, higher provisioning should be made by the bank
concerned.

22
CREDIT RISK AND NPAs

Quite often credit risk management (CRM) is confused with managing non-performing assets
(NPAs). However there is an appreciable difference between the two. NPAs are a result of
past action whose effects are realized in the present i.e. they represent credit risk that has
already materialized and default has already taken place.

On the other hand managing credit risk is a much more forward-looking approach and is
mainly concerned with managing the quality of credit portfolio before default takes place. In
other words, an attempt is made to avoid possible default by properly managing credit risk.

Considering the current global recession and unreliable inforn1ation in finaI1cial statements,
there is high credit risk in the banking and lending business.

To create a defense against such uncertainty, bankers are expected to develop an effective
internal credit risk models for the purpose of credit risk management.

IMPORTANCE OF CREDIT RATING

Fundamentally Credit Rating implies evaluating the creditworthiness of a borrower by an

independent rating agency. Here objective is to evaluate the probability of default. As such,
credit rating does not predict loss but it predicts the likelihood of payment problems.

Credit rating has been explained by Moody's a credit rating agency as forming an opinion of
the future ability, legal obligation and willingness of a bond -issuer or obligor to make full
and timely payments on principal and interest due to the investors.

Banks do rely on credit rating agencies to measure credit risk aIld a.'\sign a probability of
default.

A credit rating agency generally slot companies into risk buckets that indicate company's
credit risk and is also reviewed periodically. Associated with each risk bucket is the
probability of default that is derived from historical observations of default behavior in each
risk bucket.

However, credit rating is not foolproof. In fact, Enron was rated investment grad~ till as late
as a month prior to it's filing for Chapter 11 bankruptcy when it was assigned an in default
status by the rating agencies. It depends on the information available to the credit rating

23
agency. Besides, there may be conflict of interest, which a credit rating agency may not be
able to resolve in the interest of investors and lenders.

Stock prices are an important (but not the sole) indicator of the credit risk involved. Stock
prices are much more forward looking in assessing the creditworthiness of a business
enterprise. Historical data proves that stock prices of companies such as Enron and
WorldCom had started showing a falling trend many months prior to it being downgraded by
credit rating agencies.

REVIEW OF NPAs (Asset-wise):

The operational guidelines for monitoring and follow-up of non-peri~rn1ing assets in respect
of various categories of assets are detailed here below:

Sub-standard assets:

In respect of industrial units showing signs of sickness, prompt steps shall be taken to
conduct viability study/nursing progran1me for deciding the future course of action to be
taken.

ln respect of advances backed by securities like vehicle, machinery , gold. Crops, steps shall
be taken to enforce the securities. In case of hypothetical securities like vehicles, machinery,
goods, etc., the same shall be sold through public auction and proceeds shall be adjusted
towards reduction of dues. In case of pledged securities like goods/shares and
debentures/bonds etc., steps hall be taken to sell the same as per the prescribed procedure. In
case of jewel loans, the securities shall be disposed off through public auction following the
procedure lad down and he loans shall not be allowed to remain in NPA. Category. If the
dues are not adequately covered by securities. The possibilities of an out of court settlement
shall be examined soon so as to avoid incurring of further expenditure and also considering
the delay involved in realization of dues.

Any slippage from this category will render the account doubtful, thus increasing the
provision requirement. This is the most important and crucial area where regular monitoring
is required to improve the status of the account.

24
Doubtful/loss assets:

Under these categories, there would be both suit filed and non-suit filed accounts. In case of
non-suit filed accounts, the recovery is to be pursued more vigorously and after adjustment of
securities, exhausting all the remedies and persuasive methods, steps shall be taken to resort
to legal action expeditiously within the validity period of the documents.

NARSIMHAN COMMITTEE'S RECOMMENDATIONS

Committee on financial system (CFS) Narsimhan committee which reported in 1991,

meanwhile major changes have taken place in the domestic, economic and institutional
science, indicating the movement towards global integration of financial services. Committee
has presented second-generation reforms.

1. To strengthen the foundation of financial system

2. Related to this, streamlining procedures, upgrading technology and human resource

development.

3. Structural changes in the system

It is recommended that an asset can be classified as doubtful if it is in the sub standard

category for 18 months in the first instance and eventually for 12 months as loss if it has been
so identified but not written off. These norms, which should be regarded as the minimum,
may be brought into force in a phased manner.

Corporation and FI should avoid the practice of 'ever greening' by making fresh advances to
their troubled constituents only with a view to settling interest dues and avoiding
classification of the loans in question as NPAs. The committee notes that the regulatory and
supervisory' authorities are paying particular attention and such breaches in tile adherence to
he spirit of the NPA definition and are taking appropriate connective action.

There is no denying the fact that any effort at financial restructuring in the form of having off
NP As portfolio from the books of the corporation or measures to initiate the impact of high
level of NPAs must go hand with operational structuring. Cleaning up the balance sheets of
banks thus make sense only if simultaneous steps are taken to prevent of limit the re-
emergence of new NPAs.

25
Direct credit has a proportionately higher share in NPAs portfolio of corporations and has
been one of the factors in erosion in the quality of asset portfolio. There is a continuing need
of Financial Corporations to extend Credit to SS 1 sector, which is important segment of
national economy but on commercial considerations and on basis of credit worthiness.
Government feels reluctant to accept the recommendation for reducing the scope of directed
credit under priority sector because tiny sector of industry and small businesses have problem
with regard to obtaining credit and some remaining may be necessary for this sector. Poverty
alleviation and employment generation schemes. Given the special needs of these sectors, the
current practice may continue.

As an incentive to bank is to make specific provision, the consideration be given to making

such provisions tax deductible.

Banks should pay greater attention to asset liability management to avoid such mismatch and
to cover, among others, liquidity and interest rate risks.

There is a need for greater use of computerized system. Computerization has to be recognized
as an indispensable tool for improvement in customer service. The institution and operation
of better control systems, greater efficiency in information technology.

The main issue with regard to operations of banks is to ensure operational flexibility and
measure of competition and adequate internal autonomy in matters of loan sanctioning and
internal administration.

The committee believes that the balance sheets of banks and f7Is should be made more
transparent and full disclosure made in balance sheet. "This is to be done in phased manner.

NORMS FOR TREATING VARIOUS ADVANCES AS NPAs

An asset which ceases to generate income for the bank is called a non-performing asset
(NPA). The basic factor to determine whether an account is NPA or not is the record of
recovery and not the availability of security. RBI has advised following norms for identifying
the kind of advances as non -performing.

26
LOANS (loans repayable in installments):

A loan shall be treated as NPA if interest and/or installment of principal remain overdue/or a
period of more than 90 days.

Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due
date fixed by the bank. Hence a loan account shall be treated as NPA as on 31.03.2004, if
interest and/or installment of principal remain overdue for a period of more than 90 days.

Illustrations:

Ø If interest due for the month-ended 31.12.2004 is not paid, it becomes NPA on
30.03.2005 (i.e. overdue for more than 90 days). Hence the amount shall be
classified as NP A as on 31.03.2005

Ø If installment towards principal due on 01.01.2005 is not paid, it becomes NPA as

on 31.03.2005 (i.e. overdue for more than 90 days).

Special case:

Equated monthly installments: In case of loans repayable in equated monthly installments

where a part of the interest is including in the installment, NPA status shall be determined on
the basis of non-payment of equated monthly installments and not with reference to the date
of debit of monthly interest.

Loans with moratorium for payment of interest: In the case of bank finance given for
industrial projects or for agricultural plantations etc. where moratorium is available for
payment of interest, payment of interest becomes due only after the moratorium or gestation
period is over. Therefore such amounts of interest becomes overdue and hence NPA, with
reference to date of debit of interest. They become overdue after due date for payment of
interest, if uncollected.

Staff housing loans: In case of housing loan or similar advances granted to staff members
where interest is payable after recovery of principal, interest need not be considered as
overdue from the first month onwards Such loans/advances should be classified as NP A only
when there is a default in repayment of installment of principal or payment of interest on the
respective due dates.

27
Advance payments: Where the borrower has made advance payment of installments fixed
towards the loan as on 31.03.2004 the loan account is regular, such loan account need not be
treated as NPA even if technically interest is due for more than 90 days.

CASH CREDIT/OVERDRAFT:

A cash credit/overdraft account shall be treated as NPA if it remains 'out of order' for 90
days.

An account shall be treated as out of order if the outstanding balance remains continuously in
excess of the sanctioned limit/drawing power, whichever is less but there are no credits
simultaneously for 90 days as on the date of balance sheet or credits are not enough to cover
the interest debited during the same period, these accounts should be treated as' out of' order’.

Illustration:

If a cash credit/overdraft if within limit but there are no credits continuously during the
period from 02.01.2005 to 31.03.2005, the account becomes NPA on 31.03.2005(i.e. no
credits continuously for 90 days).

BILLS PURCHASED/DISCOUNTED:

A Bill purchased/discounted shall be treated as NPA if it remains overdue for a period of

more than 90 days. Hence a cheque /draft/bill purchased/discounted shall be treated as NPA
as on 31.03.2005 if it remains overdue for more than 90 days as on 31.03.2005.

AGRICULTURAL LOANS:

An agricultural advance shall be treated as NPA if interest and/or installment of principal

remains overdue for two harvest seasons but for a period not exceeding two half years.

Hence in respect of advances granted for agricultural purpose where interest and/or
installment of principal remains unpaid for two harvest seasons but for a period not exceeding
two half years after it has become due, such advance should be treated as NPA. In respect of
agricultural advances such as dairy, poultry, sericulture, animal husbandry, fishery etc,
income recognition, Asset classification and provisioning should be done on the same basis
as non-agricultural advances as per 90 days noun.

28
OTHER ACCOUNTS:

Any other credit facility shall be treated as NPA if any amount to be received remains
overdue for a period of more than 90 days.

Hence any other credit facility shall be classified as NPA as on 31.0 3.2005 if
interest/principal remains overdue for more than 90 days.

ACCOUNTS, WHICH NEED NOT BE CLASSIFIED AS NPA:

Loans on deposits and loans against Govt. securities:

Advances fully secured against term deposit (inclusive of accrued interest, if any), NSC,
Indira Vikas Patra (IVP), Kisan Vikas Patra (KVP) and LIC Policies should not be treated as
NP A. Such securities are exempt from provision requirement and hence, they shall be
classified as Perforn1ing assets only.

Advances guaranteed by State/Central Government:

Govt. guaranteed advances mean the advances repayment of which is guaranteed by State or
Central Government, by executing guarantee bond/guarantee letter by the concerned
Government department. Borrower accounts of Public Sector Undertakings should not be
treated as Government Guaranteed Accounts unless specific Guarantee bond/guarantee letter
is executed by the concerned Govt. Department.

The credit facilities backed by guarantee of the Central Govt. though overdue may be treated
as NP A only when the Government repudiates its guarantee when invoked. This exemption
from classification of Govt. guaranteed advances, as NP A is not for the purpose of
recognition of income.

Advances sanctioned against State Government guarantees should be classified as NP A in

the normal course, if the guarantee is invoked and remains in default for more than 90 days.

If State /Central Govt. guarantee is not adequate to cover the full liability, asset classification
and provisioning norms shall be applied on uncovered portion.

29
Further, in case of Government guaranteed accounts. When suit is filed against the borrower
as well as against the concerned Government, it should be classified as sub-standard, doubtful
or loss asset applying the norms as applicable to other advances.

MEASURES IN CASE OF NON-PAYMENT

If the borrower pays within 60 days no further action is required. However if he fails to pay
full amount within specified period the secured creditor can take one or more of the following
measures to recover his dues.

Take possession of the secured assets of the borrower including the right to transfer by way
of lease, assignment or sale for realizing the secured asset.

Takeover the management of secured asset of the borrower including the right to transfer by
way of lease, assignment or sale and realize the secured asset.

SECURITASATION

A Tool for Management of NPA

Securitisation is the buzzword in today's world of finance. It's not a new subject to the
developed economies. It is certainly a new concept for the emerging markets like India.

The technique of securitisation definitely holds a great promise for a developing country like
India.

One of the major issues in the Development of banking sector in India is the reducing of non-
performing assets in their balance sheets. One such financial innovation to reduce non-
performing assets is "Securitisation". Securitisation is the financial instrument of the new
Millennium.

The process of securitisation creates the strata of risk-return and different maturity securities
and is marketable into the capital markets as per the needs of the investors. It has become one
of the most important financing vehicles in the developed countries like USA. Its use is

30
rapidly expanding worldwide. Securitisation enables many companies to raise funds at a
lower cost than through traditional financing.

Definition

"Securitisation is the process of pooling and re-packaging of homogeneous illiquid financial

assets into marketable securities that can be sold to investors".

"Every such process which converts a financial relation into a transaction'" In simple words: -
"Selling the cash flow generated from the assets (either existing or future) against the charge
of the assets, by converting them into homogeneous market negotiable instruments is known
as Securitisation".

Nature of the SPV:

Selection of a proper financial vehicle through which non-performing loans can be

transferred out of the banks' books is a key issue. It may take three forms:-

1) Government Owned Government Managed: Considering the size of the capital that
will be needed for this exercise, the problems relating to pricing of the assets to be
transferred, the desirability of making these transfers unchallengeable by the borrower or
anyone else and the urgent need for changes in the available legal framework so that early
enforcement of the lender's rights becomes possible, it would be best if the ownership of
the transferred assets lies with the government. The government shall also appoint a
management team to handle the agency.

2) Government Owned Privately Managed: The government body owning the assets may
not possess the necessary skills and attitude to ensure their recovery and it may suffer
from the limitations, which most public sector units suffer. It would therefore be prudent
to have a management structure in which the ownership of the assets will lie with the
government and the management thereof, with a separate private sector entity having the
necessary expertise and organization. Being in the private sector it will have the
managerial and operational flexibility, which the public sector units do not normally have
and will be able to employ/hire, the needed expertise.

31
3) Privately Owned and Privately managed: Here an independent private player may
purchase the NP As from the Banks and manage them professionally. However a private
player entering such high-risk business is less likely. Though the revenue model would
primarily be commission based, the profitability poses a question mark for the entry of
the private player. Thus a SPV owned by the government or the issuing bank and
professionally managed would be the ideal structure for the Indian condition.

Ø Securitisation is the process of pooling and repackaging of homogeneous illiquid

financial assets into marketable securities that can be sold to investors. It has emerged as
an important means of financing in recent times. A typical securitisation transaction
consists of following steps:

Ø Creation of special purpose vehicle to hold the financial assets underlying the securities;

Ø Sale of the financial assets by the originator or holder of the assets to special purpose
vehicle, which will hold the assets and realize the assets.

Issuance of securities by the SPV, to investors, against the financial assets held by it. This
process leads to the financial asset been taken of the balance sheet of the originator, thereby
relieving pressures of capital adequacy, and provides immediate liquidity to the originator.

32
SECURITISATION SURUCTURE

Importance for Securitisation

The generic need for securitisation is as old as that for organized financial markets from the
distinction between a financial relation and a financial transaction earlier, we understand that
a relation in variably needs the coming together and remaining together of two entities. These
entities might involve a number of financial intermediaries in the process, but a relation
involves fixity over a second time.

Financial market develops in response to the need to involve the large number of investors in
the market place. As the number of investor increases, the average size per investor comes
down – This is a simple rule of the market place because growing size means involvement of
a wider base of investors. The small investors are not a professional investor: He is not as

33
such in the business of investment. Hence, he needs an instrument which is easier to
understand, and is liquid. These two needs said the stage for evolution of financial instrument
which would convert financial claims into liquid, easy to understand and homogenous
products, at times carrying certified quality labels, which would be available in small
denominations to suit everyone’s purse. Thus securitisation in a generic sense is basic to the
world of Finance, and it is truism to say that it envelops the entire range of financial
instruments, and hence, the entire range of financial assets.

Parties involved

Securitisation program usually involved several participant each carrying out a specialist
function, such as creating and analyzing the asset pool, administration, credit rating,
accounting, legal negotiation etc. This includes;

Ø The originator – also interchangeably referred to as the seller – is the entity whose
receivable portfolio forms the basis for asset backed security (ABS) issuance.

Ø Special Purpose vehicle (SPV), which as the issuer of ABS ensures distancing of the
instrument from the originator.

Ø The Investors – The Investors may be in the form of individuals or institutional investors
like FI’s and Mutual Funds etc. They buy a participating interest in the total pool of
receivables and receive their payment in the form of interest and principals as per agreed
pattern.

Other Parties

Ø The obligor is the originators debtor (borrower of the original loan).

Ø The servicer who bears all administrative responsibilities relating to the securitisation
transaction.

Ø The trustee or the investor representative, who act in a fiduciary capacity safe guarding
the interest of the investors in the ABS.

Ø The credit rating agencies, which provide an objective estimate of the credit risk in the
transaction by assigning a well, defined credit rating.

34
Ø The regulators, whose principal concerns related to the capital adequacy, liquidity and the
balance sheet treatment of the transaction.

Ø Specialist functionaries such as legal and tax councils, accounting firms, pool auditors
etc.

REASONS FOR HUGE LEVEL OF NPAs

1. Willful Default:

If the borrower doesn't pay though he has the capacity to pay. He is termed as willful
defaulter. The features of willful default are wrong use of funds and siphoning of funds.

2. Improper functioning of Debt Recovery Tribunals

Although the setting up of Debt Recovery Tribunals had raised much hope about speeding up
of the recovery proceedings initiated by banks these hopes have largely remained unfulfilled.
At quite a few places, the DRTs are still to be set up and, even where these have been set up,
they are not yet fully equipped to handle very large number of cases already before them or
those that can be placed before them. In some of the DRTs, the number of pending cases is
quite large. While the government has been reviewing the operations of DRTs, as yet a Stage
has not come when it can be said that these are helping recoveries of banks' dues
substantially. In fact it has failed to achieve the declared objective of disposal of' cases within
six months in speedy recovery of advances.

3.Project appraisal Deficiencies: -

It includes deficiencies regarding technical feasibility" economic viability and project

management deficiencies in regard to implementation, production, and labor “marketing"
financial and administrative.

4. Ineffective Credit Monitoring: -

Ineffective credit monitoring al1d follow-up mechanism of' the banks have also
contributed to slippage of' standard loans into bad loans.

5. Diversion of Funds: -

35
Diversion of' funds mostly for expansion/diversification/modernization and taking up new
projects and for promoting associated concerns is a prominent reason for high level of NPAs.

6. External factors: -

The RBI study noted that non-availability of raw materials, power shortage, transport
bottlenecks, financial bottlenecks, change in Govt. policy, natural calamities, industrial
sickness, increase in import cost, increase in overhead cost, market saturation, product
obsolescence, fill in demand and others were responsible for weak performance in 48% of
units assisted by the banks resulting into advances given to them turning bad.

7. Ineffective legal system: -

It is one of the most important factors contributing to enormously high level of NPAs in
Banks. Antiquated legal system, extremely slow judicial system and dismal record of
enforcement machineries have contributed significantly to high level of NPAs.

8. Failure of suppliers: -

The failure of suppliers to adhere to promised/committed delivery schedules due to various

reasons is also one of the causes for an increase in the level of NPA.

9. International development: -

Sudden international development adversely affects viability of production units e.g. OIL
Crisis, fertilizer plants based on petro chemical feedstock became suddenly enviable.

10. Promoter-banker nexus: -

In many instances, loans have been sanctioned because of vested interests. Promoter-banker
nexus have been exploited to siphon off funds from the banking system.

11. Operational factors: -

It is regarding the current and prospective risk to earnings arising from fraud, error and the
inability to deliver products or services and maintain a competitive position.

12. Strategic Factors: - It includes adverse business decisions, improper implementation of

of decisions or lack of responsiveness to industry changes.

36
37
 LITERATURE REVIEW

A large number of researchers have been studied to the issue of NON PERFOMING ASSET
in banking industry .A review of the relevant literature has been described as under:

THE TREASURY MANAGEMENT, DECEMBER 2004, vinay kumar,PG62-

66”securitisation:issues and perspectives”
At The Global Level, SECURITISATION is becoming more popular among Fis. It is meant
to avoid disparity between assets and liabilities of banks/Fis. In order to promote
securitisation in India RBI has constituted a working group on assets securitisation. Though
securitisation is in a nascent stage, it holds great promise in areas like infrastructure, power
and housing.

Chartered Secretary, February 2003, V.S.Datey, Pg. 128-135 “THE SARFAESI ACT”
The securities and reconstruction of financial assets and enforcement of security interest act,
2002 made effective on 21.6.2002 is a step to reduce NPAs of Banks. The act also makes
provision for asset reconstruction and securitisation.

Das & Ghosh (2003)

Studied non performing loans of Indian PUBLIC SECTOR BANKS on the basis of various
indicators like as assts size, operating efficiency, and macroeconomics condition and credit
growth.

Gupta, S and Kumar, S (2004)

defined that redeeming features of banking sector reforms is the continuing downfall in gross
and net NON PERFOMING ASSET as a proportion of total assets for all bank groups .NON
PERFOMING ASSETS needs resolution otherwise it can break the backbone of entire
economic system with financial system.

Jatna, Ranu (2009)

States main cause of mounting NON PERFOMING ASSETs in public sector banks is
malfunctioning of the banks. Narasimham Committee identified the NON PERFOMING
ASSETs as one of the possible effects of malfunctioning of PUBLIC SECTOR BANKS.

38
Dong he (2002) in his study focuses on the nature of NON PERFOMING ASSET in
Indian banking system and define the important role of assets reconstruction companies in
resolving NON PERFOMING ASSETS.

Krishnamurthi, C.V.(2000) observed that the rising NON PERFOMING ASSETS is

serious diseases for the public sector banks .It shows that the gross NON PERFOMING
ASSET of PUBLIC SSECTOR BANKS are mounting very heavily .The NON
PERFOMING ASSET curses lie between a gross of Rs.39.253 crores in 1992 -93 to
Rs.45,463 crores in 1997-98.

Munniappan (2002) studied the diseases of NON PERFORMING ASSET into two
factors .One is internal factor in respect of portfolio of funds for expansion, modernization
and diversification, accept new projects etc. Second is external factor in respect of recession
in economy, other countries suffered from non performing assets assessment, input/power
shortage, price up and downs uncertain natural calamities etc.

Banerjee,B. and Dan,A.K (2006) analyzed that NON PERFOMING ASSETs are one of
the most crucial problem which is faced by bank to require attention for improvement in the
management of PSBs are increasing very speedily at present scenario due to following reason
. One is government has got to bail out banks with monetary fund provisions sporadically and
ultimately taxpayers bear the value. Second is cash borrowed for investment ,for not utilized
properly ,affects the creation of assets and therefore the growth of economy is vulnerable
.The author has urged many strategic measures to manage Non playing assets of Public sector
banks

39
RESEARCH METHODOLOGY

40
Research methodology is a way to systematically solve the research problem. It is a science
of studying how research is done scientifically.
Research is an original contribution to the existing stock of knowledge making for its
advancement. It is a systemized effort to increase knowledge. It comprises of defining
problem, developing hypothesis, collecting, organizing and analyzing data and making
evaluations.
Research done by us is descriptive in nature as descriptive research includes surveys and fact
finding enquiries of different kinds. The main characteristic of descriptive method is that
researcher has no control over the variables; he can only report what has happened or what is
happening.

· To understand the concept of Non-performing Assets and thereby providing a solution to

the problem.

OBJECTIVES OF THE STUDY

41
 1. To compare the NPA’s of private and public sector banks.

2. To understand the meaning & nature of NPAs.

3. To examine the causes for NPAs in public sector banks as well as private sector
banks.

4. To study the position of Non-performing Assets in various banks.

5. To study the procedure and tools used for management of NPAs.

6. To suggest banks how to improve and reduce their NPA.

Sources of Data: -

42
Secondary Data

Secondary Data are those, which have already been collected by someone else and which
have already been passed through the statistical process. This data is collected from the
following sources.

ü Reports of State Bank of India, AXIS bank, HDFC,PNB & ICICI bank.

ü Magazines

ü Journals

ü Newspapers

ü Internet websites

Sample design:
I have taken Non Performing assets of banking sector and analysis the data of selected banks
include SBI,AXIS,HDFC, PNB,ICICI of their last three years performance.

Tools used

In order to study the Non performance assets of banking sector,the secondary data
was analyzed through column chart and percentage bar chart.

43
1. Total advances of SBI , PNB, HDFC, ICICI & AXIS BANK

44
 Table no.1 (Rs. Cr.)

Banks 2010-2011 2011-2012 2012-2013 TOTAL

SBI 54504.49 59243.27 72603.79 186351.55

PNB 274746.58 301346.52 320218.45 866311.55

HDFC 1608314 1988375 2472451 6069140

ICICI 2560193 2921254 3299741 8781188

AXIS 142407.83 169759.54 196965.96 509133.33

3500000
3000000
2500000 SBI
2000000 PNB

1500000 HDFC
ICICI
1000000
AXIS
500000
0
2010-2011 2011-2012 2012-2013

Source: Compiled personally from annual reports

Interpretation:-
From the above table and graph reseacher finds that Total advances of all the selected banks
is incresing in the year 2012-13. As the advances of all the selected banks are increasing but
ICICI bank shows higher Total advances in comparision to other banks during the period of
the study. On the other hand SBI have lower advances during the period of the study.

2.Gross NPAs of all selected banks.

Table no.2 (Rs. Cr.)

45
Banks
2010-2011 2011-2012 2012-2013 TOTAL

25326.29 39676.46 51189.39 116192.14

SBI

4379.39 8719.62 13469.79 26568.8

PNB

1694.34 1999.39 2334.64 6028.37

HDFC

10034.26 9475.33 9607.75 29117.34

ICICI

159.94 1806.30 2393.42 4359.66

AXIS
Source:
Compil
ed personally from annual reports
Interpretation
It is clear from above the table & diagram shows that gross NPA’s of the selected banks are
increasing during the period of the study. But major part of my study is acquired by SBI and
this bank has higher gross NPA’s in the last year i.e 2012-2013 and PNB hold the second
position in the same year & AXIS bank has the lowest gross NPA’s in all the years.

3.% of NPA in all selected banks.

Table no.3 (%)

Banks 2010-2011 2011-2012 2012-2013 TOTAL

1.63 1.82 2.10 5.55%

SBI

0.85 1.52 2.35 4.72%

PNB

46
 0.20 0.20 0.30 0.70%
HDFC

0.75 0.76 0.94 2.45%

ICICI

0.26 0.25 0.32 0.83%

AXIS

2.5

2
SBI
1.5 HDFC
AXIS
1
ICICI
0.5 PNB

0
2010-2011 2011-2012 2012-2013

Source: Compiled personally from annual reports

Interpretation:
From the above graph and diagram shows that PNB bank have higher NPA percentage in all
the three respective years & HDFC and AXIS bank shows the lower NPA percentage during
the period of the study. This shows that major part my study is covered by PNB because PNB
bank shows the highest gross NPA’s in the last year 2012-2013.

4. % of NPA to net advances of all selected banks.

Table no.4 (%)

Banks 2010-2011 2011-2012 2012-2013 TOTAL

1.63% 1.93% 2.10% 5.66%

SBI

47
 0.85% 0.97% 1.09% 2.91%
PNB

0.19% 0.23% 0.59% 1.01%

HDFC

1.11% 1.31% 1.45% 3.87%

ICICI

0.29% 0.35% 0.62% 1.26%

AXIS

2.50%

2.00%
SBI
1.50%
HDFC
AXIS
1.00%
ICICI
0.50% PNB

0.00%
2010-2011 2011-2012 2012-2013

Source: Compiled personally from annual reports

Interpretation:

The above graph depicts that percentage of net advances of all the selected banks is
increasing during the period of the study. SBI bank shows the highest net advances in the last
year 2012-2013. SBI shows the highest increase in percentage of net advances and HDFC
shows the lowest percentage of the same.

5. Total assets of all selected banks.

Table no.5 (Rs. Cr.)

Banks
2010-2011 2011-2012 2012-2013 Total

48
SBI 1647898.25 1929956.18 2133158.34 571101.7

PNB 386283.81 470445.39 4,96,577.10

1356306.03

HDFC 2779629 3149550 4077230 10006409

ICICI 5337679 619522869 67448217 692308765

AXIS 242566.65 285416.51 340557.13 868540.29

70000000

60000000

50000000 SBI
40000000 PNB

30000000 HDFC
ICICI
20000000
AXIS
10000000

0
2010-2011 2011-2012 2012-2013

Source: Compiled personally from annual reports

Interpretation:
It is clear from the above diagram and graph shows that ICICI bank has highest total assets in
2011-2012. On the other hand SBI have lower toatal assets in during the period of the study.

6. Percentage of Gross NPA of all selected banks.

Table no.6 (%)

49
Banks
2010-2011 2011-2012 2012-2013 TOTAL

3.28% 4.44% 4.75% 12.47%

SBI

1.79% 2.93% 3.37% 8.09%

PNB

1.05% 1.02% 0.97% 3.04%

HDFC

4.47% 3.62% 3.22% 11.31%

ICICI

1.01% 0.94% 1.06% 3.01%

AXIS

5.00%
4.50%
4.00%
3.50% SBI
3.00% HDFC
2.50%
AXIS
2.00%
1.50% ICICI
1.00% PNB
0.50%
0.00%
2010-2011 2011-2012 2012-2013

Source: Compiled personally from annual reports

Interpretation:
From the above table and graph reseacher finds that percentage of gross NPA’s of all banks
is increasing during the period of study. But SBI have highest percentage among all banks in
all the year and AXIS bank has lowerest in the percentage in all the three years during the
period of my study.

50
7. AVERAGE ADVANCES OF ALL BANKS DURING THE PERIOD OF
THE STUDY.
Table no.7 (Rs. Cr.)

BANKS SBI PNB HDFC ICICI AXIS

TOTAL 186351.55 866311.55 6069140 8781188 509133.33

9000000
8000000
7000000
6000000
5000000
4000000 TOTAL
3000000
2000000
1000000
0
SBI HDFC AXIS ICICI PNB

Source: Compiled personally from annual reports

Interpretation
It is clear from the above diagram and table shows that ICICI bank has highest average
advances Whereas SBI have lowest average advances during the period of my study. HDFC
is placed at the second and third one is PNB. Second lowest advances are shown by AXIS
bank.

51
8. Average Assets of all selected banks.
Table no.10 (Rs. Cr.)

BANKS
SBI PNB HDFC ICICI AXIS

TOTAL 571101.7 1356306.03 10006409 692308765 868540.29

70000000
60000000
50000000
40000000
30000000 TOTAL

20000000
10000000
0
SBI HDFC AXIS ICICI PNB

Source: Compiled personally from annual reports

Interpretation:
It shows clear from the above table and graph shows that average assets of ICICI bank have
higher in the value and SBI have lower value during the period of my study. HDFC is placed
at the second and third one is PNB. Second lowest advances are shown by AXIS bank.

52
53
FINDINGS

Ø From the above graph we have concluded that Total advances of all the selected banks is
incresing in the year 2012-13.Acording to our study as advances of all the selected banks
are kept on increasing but ICICI bank has higher Total advances in comparision to
other banks and SBI has less total advances in all the three years.

Ø According my study we have concluded that gross NPA’s of the banks we have taken into
consideration are increasing year by year but major part of my study is acquired by SBI
and this bank has higher gross NPA’s in the last year i.e 2012-2013 and PNB hold the
second position in the same year & AXIS bank has the lowest gross NPA’s in all the
years

Ø As we earlier concluded that NPA’s of all the selected banks are kept on increasing so
their percentage value is also increasing above graph shows that PNB have higher NPA
percentage in all the three respective years & HDFC and AXIS bank shows the lower but
fluctuating values in three years. This shows that major part my study is covered by
PNB.

Ø As per my study we concluded that percentage of gross npa’s of all banks is increasing
year per year but SBI have highest percentage among all banks in all the year and AXIS
bank has lowerest in the percentage in all the three years.

Ø This graph shows the comparison between the total advances and total assets of all banks
we have taken into consideration . In this table total asset of five selected banks is
compared with total advances of the same banks from the year 2010 to 2013 .In the year
2011-2012 total assets are shows very high value in comparison to total advances.

Ø This graph shows the comparison between the Net NPA and Gros NPA of all banks we
have taken into consideration . In this table Gross NPA of five selected banks is
compared with Net NPA of the same banks from the year 2010 to 2013 .In the year
2012-2013 Net NPA are shows very high value in comparison toGross NPA.as Gross
NPA is kept on increasing in all the three years

54
Ø In this graph we took the average advances of all the selected banks .from my study we
concluded that average advances of ICICI bank have higher in the value and SBI have
lower value among all the slected banks.HDFC is placed at the second and third one is
PNB. Second lowest advances are shown by AXIS bank.

Ø In this graph we took the average assets of all the selected banks .from my study we
concluded that average assets of ICICI bank have higher in the value and SBI have lower
value among all the selected banks. HDFC is placed at the second and third one is PNB.
Second lowest advances are shown by AXIS bank.

55
CONCLUSION

A strong banking sector is important for a flourishing economy. The failure of the banking
sector may have an adverse impact on other sectors.

Over the years, much has been talked about NPAs and the emphasis so far has been only on
identification and quantification of NPAs rather than on ways to reduce and upgrade them.

Managers of rural and semi-urban branches generally sanction these loans. Hence, selection
of right borrowers, viable economic activity, adequate finance and timely disbursement,
correct end use of funds and timely recovery of loans is absolutely necessary pre conditions
for preventing or minimizing the incidence of new NPAs.

It is high time to take stringent measures to curb NPAs and see to it that the Non-Performing
Assets may not turn banks into Non-Performing Banks; instead steps should be taken to
covert Non-Performing Assets into Now-Performing Assets.

56
LIMITATIONS

Ø The topic was contemporary and had limited data available. But an attempt to present the
best has been done.

Ø Time has been the biggest constraints but all efforts have been made to get all the relevant
information required for a study.

Ø The study period is fixed for three years only since 2010 to 2013.

57
58
 RECOMMENDATION

· There surely is a need to distinguish between willful and unwilling defaulters. In case of
the latter category of defaulters the law should not be as harsh as in case of willful
defaulters.

· The act should be judiciously and selectively applied so that NPAs could be converted
into performing assets.

· Compromise wherever possible and desirable should be resorted to as per bank’s extent
terms and conditions.

· Creation of additional benches and enhancing the capacity of DRT (debt recovery
tribunal) can be rationalized and delays could be avoided.

· Segregation of the benches should be done in order to ensure that a flood of small cases
do not retard the disposal of larger cases.

· In order to reduce the balance of NPAs, Bank should constantly review and monitor the
accounts and the progress of the project for which the loan has been sanctioned.

59
60
BIBLIOGRAPHY

Journals and magazines

· CARLTON PEREIRA,“INVESTING IN NPAs” ,Economic and political weekly,

October 16, 2004, Page 4602-4604

· B P Dhaka,“SARFAESI ACT: THE DIAGNOSIS” Chartered Financial Analyst, August

2004, Page 58-62

· Raj Kumar S Adukia, “SECURITISATION – AN OVERVIEW”, The chartered

Accountant, February 2005, Page NO. 978-985

· MPM Vinay Kumar, SECURITISATION : ISSUES AND PERSPECTIVES”, Treasury

Management, December 2004, Page 62-65

· V S Datey, “SECURITISATION, RECONSTRUCTION AND ENFORCEMENT OF

SECURITY INTEREST,Chartered Secretary, Feburary 2003, Page 128-135

WEBSITES:

· www.statebankofindia.com
· www.reservebankofindia.org
· www.indianbanksassociation.org
· www.tribuneindia.com
· www.moneycontrol.com

61
 DATA ANALYSIS:-

Ø Total Assets & NPA’s of public banks

TOTAL ASSETS (Rs. Cr.) NET NPAs (%)

Sn. NATIONALINED 2010 2011 2012 2013 2010 2011 2012 2013
BANK
1 Allahabad Bank 1,21,907.29 1,51,600.39 1,83,310.89 2,04,818.51 0.66% 0.79% 0.98% 3.19%
2 Andhra Bank 90,383.24 1,09,332.48 1,25,683.16 1,47,559.32 0.17% 0.38% 0.91% 2.45%
3 Bank of Baroda 2,84,272.58 3,66,213.77 4,57,412.01 5,59,338.33 0.34% 0.35% 0.54%
4 Bank of India 14,50,143.97 16,47,898.25 18,29,956.18 2133,158.34 1.72% 1.63% 1.82% 2.10%
5 Bank of Maharashtra 7,10,640 7,64,548 9,11,558 1,169.807 1.6% 1.3% 0.8% 0.5%
6 Canaera Bank 2,66,524.67 3,39,165.74 3,79,083.31 4,19,324.27 1.06% 1.10% 1.46% 2.18%
7 Central Bank of India 1,82,671.62 2,09,757.33 2,29,799.74 2,68,129.55 0.54% 0.55% 3.09% 2.90%
9 Dena Bank 57,586.58 70,838.42 87,387.92 1,13,440.42 1.21% 1.22% 1.01% 1.39%
10 Indian Bank 84,053.83 1,01,389.31 1,21,718.31 1,41,419.20 0.23% 0.53% 1.33% 2.26%
11 Indian Overseas Bank 1,31,091.63 1,78,784.28 2,19,637.13 2,44,656.03 1.15% 1.19% 1.35% 2.50%
12 Oriental Bank of 1,37,431.00 1,61,343.38 1,78,130.17 2,00,697.20 0.75% 0.98% 2.21% 2.27%
Commerce
13 Punjab & Sind Bank 56,664.88 68,550.14 72,905.27 8,477.90 0.50% 0.56% 0.19% 2.16%
14 Punjab National Bank 3,03,569.42 3,86,283.81 4,70,445.39 4,96,577.10 0.53% 0.85% 1.52% 2.35%
15 Syndicate Bank 1,39,050.81 1,56,538.58 1,82,467.75 2,16,442.80 1.07% 0.97% 0.96% 0.76%
16 UCO Bank 1,37,319.50 1,63,398.45 1,80,498.40 1,98,651.40 1.17% 1.84% 1.96% 3.17%
17 Union Bank of India 1,95,161.84 2,35,984.45 2,62,211.44 3,11,860.81 1.15% 1.19% 1.70% 1.61%
18 United Bank of India 77,004.99 90.040.53 1,020,10.39 1,41,615.11 1.32% 1.42% 1.72% 2.87%
19 Vijaya Bank 70,222.08 82,013.37 95,764.01 1,10,981.75 1.40% 1.52% 1.72% 1.30%
TOTAL OF 19 4,49,569,99.93 5283680.68 5994215.46 5918251.847 16.57% 18.37% 25.27% 35.96%
NATIONALISED
BANKS [I]

62
 TOTAL ASSETS (Rs. Cr.) NET NPAs (%)

2010 2011 2012 2013 2010 2011 2012 2013

[II] State Bank of 16,47,898.25 18,29,956.18 21,33,158.34 3.20% 3.28 4.44% 4.75%
India (SBI) 14,50,143.97 %
[III] ASSOCIATES OF
SBI

1 State Bank of 54,189.68 62,954.50 72,528.15 86,016.82 0.80% 0.83% 1.92% 2.27%
Bikaner & Jaipur

2 State Bank of 1,053,413.74 1,223,736.21 1,335,519.24 1,556,261.03 1.52% 1.60% 1.61% 1.64%
Hyderabad
3 State Bank of 45,408.93 52,302.46 60,403.58 67,232.76 0.98% 1.38% 1.93% 2.69%
Mysore
4 State Bank of 7,60,76,96,71 8,128,624,60 9,852,707,26 1,085,506,268 1.04% 1.21% 1.35% 1.62%
Patiala
5 State Bank of 59,454.70 70,976.75 85,949.33 1,01,579.33 0.95% 0.98% 1.54% 1.46%
Travancore
TOTAL OF 5 1,212,467.05 1,409,969.92 1,554,400.30 1,087,215,77 5.29% 6.00 8.35% 9.68%
ASSOCIATES 8.61 %
(III )

TTOTAL OF 2662611.00 3057868.10 3963114.50 110854735.9 8.49% 9.28 12.79% 14.43

SSTATE BANK 5 % %
GGROUP.[II+III

TOTAL OF 76,196,10.93 83,415,48.78 99,573,29.96 116772987.79 25.06 27.65 38.06% 50.39

PUBLIC 7 % % %
SECTOR
BANKS[I+II+III

63
 Total Assets & Gross NPAs of New Private Bank

TOTAL ASSETS (Rs. Cr.) GROSS NPAs(%)

Sn.
BANKS 2010 2011 2012 2013 2010 2011 2012 2013

NEW
PRIVATE
SECTOR
BANK

IDBI Bank 2,36,102.18 2,53,557.60 2,90,696.68 3,22,666.20 1.32% 1.76% 2.49% 3.22%
1 Ltd.

ICICI 4,893,473 5,337,679 6,192,869 6,748,217 4.00%

4.47% 3.62% 3.20%
2 Bank Ltd.

HDFC 2,229,475 2,779,629 3,410,550 4,077,230 1.01%

1.05% 1.02% 0.97%
3 Bank Ltd.

Indusind 35,369.52 46,635.84 57,596.07 73,306.52 0.95% 1.01% 0.98% 1.03%

4 Bank Ltd.

Kotak 37,436.32 50,850.67 65,666.79 83,693.69 1.98% 2.03% 1.56% 1.55%

5 Mahindra
Bank Ltd.
7,195,754 8,214,795 9,726,682 10,982,447 9.26% 10.32% 9.67% 9.97%
TOTAL
OF
banks OF
PRIVATE
BANKS

64