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I. Introduction
The banking industry has undergone a sea change after the first phase of economic
liberalization in 1991 and hence credit management. While the primary function of banks is
to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing
loans etc., in recent times the banks have become very cautious in extending loans. The
reason being mounting non-performing assets (NPAs). An NPA is defined as a loan asset,
which has ceased to generate any income for a bank whether in the form of interest or
principal repayment. As per the prudential norms suggested by the Reserve Bank of India
(RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests
can be booked only when it has been actually received.
Therefore, an NPA account not only reduces profitability of banks by provisioning in the
profit and loss account, but their carrying cost is also increased which results in excess &
avoidable management attention. Apart from this, a high level of NPA also puts strain on a
banks net worth because banks are under pressure to maintain a desired level of Capital
Adequacy and in the absence of comfortable profit level, banks eventually look towards their
internal financial strength to fulfill the norms thereby slowly eroding the net worth.
1) Test of Correlation:
a) H0: There is no significant correlation between profits & NPAs of Public Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Public Sector Banks for last 9
years
b) H0: There is no significant correlation between profits & NPAs of Private Sector
Banks for last 9 years
H1: There is correlation between profits & NPAs of Private Sector Banks for last
9 years
c) H0: There is no significant correlation between profits & NPAs of Foreign Banks
for last 9 years
H1: There is correlation between profits & NPAs of Foreign Banks for last 9 years
Banks: This study would definitely benefit the banks in a way that directs them as to
which sector should be given priority for lending money.
IX. Limitation
There are some data which are available for just 3 years while the same data for its
counterparts were available for 9 years. So exact comparison was not possible.
INTRODUCTION:
Banking in India originated in the last decades of the 18th century. The oldest bank in
existence in India is the State Bank of India, a government-owned bank that traces its origins
back to June 1806 and that is the largest commercial bank in the country. Central banking is
the responsibility of the Reserve Bank of India, which in 1935 formally took over these
responsibilities from the then Imperial Bank of India, relegating it to commercial banking
functions. After India's independence in 1947, the Reserve Bank was nationalized and given
broader powers. In 1969 the government nationalized the 14 largest commercial banks; the
government nationalized the six next largest in 1980.
Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake), 31 private banks (these do not have
government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign
banks. They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively
EARLY HISTORY:
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan, both of which are
now defunct. The oldest bank in existence in India is the State Bank of India, which
originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank
of Bengal. This was one of the three presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under charters from the
British East India Company. For many years the Presidency banks acted as quasi-central
banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.
N.R. INSTITUTE OF BUSINESS MANAGEMENT 9
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865
and still functioning today, is the oldest Joint Stock bank in India. It was not the first though.
That honor belongs to the Bank of Upper India, which was established in 1863, and which
survived until 1913, when it failed, with some of its assets and liabilities being transferred to
the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian cotton. With large
exposure to speculative ventures, most of the banks opened in India during that period failed.
The depositors lost money and lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The
Comptoired'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay
in 1862; branches in Madras and Pondichery, then a French colony, followed. HSBC
established itself in Bengal in 1869. Calcutta was the most active trading port in India,
mainly due to the trade of the British Empire, and so became a banking center.
The Bank of Bengal, which later became the State Bank of India.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in
The presidency banks dominated banking in India but there were also some exchange banks
and a number of Indian joint stock banks. All these banks operated in different segments of
the economy. The exchange banks, mostly owned by Europeans, concentrated on financing
foreign trade. Indian joint stock banks were generally undercapitalized and lacked the
experience and maturity to compete with the presidency and exchange banks. This
segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the
times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into
separate and cumbersome compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swedish
movement. The Swedish movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to
the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara
Bank and Central Bank of India.
The fervor of Swedish movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara
( South Kanara ) district. Four nationalised banks started in this district and also a leading
private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of
Indian Banking".
1913 12 274 35
1915 11 56 5
1916 13 231 4
1917 9 76 25
1918 7 209 1
Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West
Bengal, paralyzing banking activities for months. India's independence marked the end of
a regime of the Laissez-faire for the Indian banking. The Government of India initiated
measures to play an active role in the economic life of the nation, and the Industrial
Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This
resulted into greater involvement of the state in different segments of the economy
including banking and finance.
The major steps to regulate banking included:
In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of India.
N.R. INSTITUTE OF BUSINESS MANAGEMENT 12
In 1949, the Banking Regulation Act was enacted which empowered the Reserve
Bank of India (RBI) "to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an
existing bank could be opened without a license from the RBI, and no two banks
could have common directors.
However, despite these provisions, control and regulations, banks in India except the
State Bank of India, continued to be owned and operated by private persons. This
changed with the nationalization of major banks in India on 19 July 1969.
Nationalization
By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had ensued about the possibility to nationalise the banking
industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the
GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalisation." The paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and
nationalised the 14 largest commercial banks with effect from the midnight of July 19,
1969. Jayaprakash Narayan, a national leader of India, described the step as a
"masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the
Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking)
Bill, and it received the presidential approval on 9 August 1969.
Liberalisation
In the early 1990s, the then NarsimhaRao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be known as
New Generation tech-savvy banks, and included Global Trust Bank (the first of such new
generation banks to be set up), which later amalgamated with Oriental Bank of
Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,
along with the rapid growth in the economy of India, revitalized the banking sector in
India, which has seen rapid growth with strong contribution from all the three sectors of
banks, namely, government banks, private banks and foreign banks.
The next stage for the Indian banking has been setup with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in banks may be given
voting rights which could exceed the present cap of 10%,at present it has gone up to 74%
with some restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks.All this led to the retail boom in India. People not just demanded more
from their banks but also received more.
Currently (2007), banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks
are considered to have clean, strong and transparent balance sheets relative to other banks
in comparable economies in its region. The Reserve Bank of India is an autonomous
body, with minimal pressure from the government. The stated policy of the Bank on the
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake
in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor
has been allowed to hold more than 5% in a private sector bank since the RBI announced
norms in 2005 that any stake exceeding 5% in the private sector banks would need to be
vetted by them.
In recent years critics have charged that the non-government owned banks are too
aggressive in their loan recovery efforts in connection with housing, vehicle and personal
loans. There are press reports that the banks' loan recovery efforts have driven defaulting
borrowers to suicide.
Another evaluation of the banking in India was undertaken during 1966 as the private banks
were still not extending the required support in the form of credit disbursal, more particularly
to the unorganised sector. Each leading industrial house in the country at that time was
closely associated with the promotion and control of one or more banking companies. The
bulk of the deposits collected, were being deployed in organised sectors of industry and
trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed
had to depend on money lenders who used to exploit them by charging higher interest rates.
In February 1966, a Scheme of Social Control was set-up whose main function was to
periodically assess the demand for bank credit from various sectors of the economy to
determine the priorities for grant of loans and advances so as to ensure optimum and efficient
utilisation of resources. The scheme however, did not provide any remedy. Though a no. of
branches were opened in rural area but the lending activities of the private banks were not
oriented towards meeting the credit requirements of the priority/weaker sectors.
On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of
Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of
N.R. INSTITUTE OF BUSINESS MANAGEMENT 16
Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting
for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought
91% of the deposits and 84% of the advances in Public Sector Banking. During December
1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman
Committee.
Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance
cover to the depositors.
In the post-nationalization period, there was substantial increase in the no. of branches
opened in rural/semi-urban centre‟s bringing down the population per bank branch to 12000
appx. During 1976, RRBs were established (on the recommendations of M. Narasimham
Committee report) under the sponsorship and support of public sector banks as the 3rd
component of multi-agency credit system for agriculture and rural development. The Service
Area Approach was introduced during 1989.
While the 1970s and 1980s saw the high growth rate of branch banking net-work, the
consolidation phase started in late 80s and more particularly during early 90s, with the
submission of report by the Narasimham Committee on Reforms in Financial Services Sector
during 1991.
In these five decades since independence, banking in India has evolved through four distinct
phases:
Foundation phase can be considered to cover 1950s and 1960s till the nationalization of
banks in 1969. The focus during this period was to lay the foundation for a sound banking
system in the country. As a result the phase witnessed the development of necessary
legislative framework for facilitating re-organization and consolidation of the banking
system, for meeting the requirement of Indian economy. A major development was
transformation of Imperial Bank of India into State Bank of India in 1955 and nationalization
of 14 major private banks during 1969.
Consolidation phase: The phase started in 1985 when a series of policy initiatives were
taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to
improving house-keeping, customer service, credit management, staff productivity and
profitability of banks. Measures were also taken to reduce the structural constraints that
obstructed the growth of money market.
Reforms phase: The macro-economic crisis faced by the country in 1991 paved the way for
extensive financial sector reforms which brought deregulation of interest rates, more
competition, technological changes, prudential guidelines on asset classification and income
recognition, capital adequacy, autonomy packages etc.
Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7
billion towards the purchase of 200 metric tons of gold from the International Monetary Fund
(IMF) in November 2009. The purchase has increased the country's share of gold holdings in
its foreign exchange reserves from approximately 4 per cent to about 6 per cent.
Following the financial crisis, new deposits have gravitated towards public sector banks.
According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial
Banks: September 2009', nationalized banks, as a group, accounted for 50.5 per cent of the
aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per
cent. The share of other scheduled commercial banks, foreign banks and regional rural banks
in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively.
With respect to gross bank credit also, nationalized banks hold the highest share of 50.5 per
cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled
commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5
per cent and 2.5 per cent respectively in the total bank credit.
The report also found that scheduled commercial banks served 34,709 banked centres. Of
these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices.
The confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI
fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per
the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident
(FCNR) accounts and Non-resident External Rupee Accounts. India's foreign exchange
reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February
bulletin.
The SBI is adding 23 new branches abroad bringing its foreign-branch network number to
160 by March 2010. This will cement its leading position as the bank with the largest global
presence among local peers.
Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4
million on 21.2 per cent rise in total income to US$ 852.16 million in the second quarter of
2009-10, over the corresponding period last year. HDFC Bank has posted a 32 per cent rise
in its net profit at US$ 175.4 million for the quarter ended December 31, 2009 over the figure
of US$ 128.05 million for the same quarter in the previous year.
Government Initiatives
In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued
on June 25, 2009, said that banks should link more branches to the National Electronic
Clearing Service (NECS). Ideally, all core-banking-enabled branches should be part of
NECS. NECS was introduced in September 2008 for centralized processing of repetitive and
bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled
to participate in NECS.
In the Third Quarter Review of Monetary Policy for 2009-10, the RBI observed that the
Indian economy showed a degree of resilience as it recorded a better-than-expected growth
of 7.9 per cent during the second quarter of 2009-10.
In its Third Quarter Review of Monetary Policy for 2009-10, the RBI hiked the Cash Reserve
Ratio (CRR) by 75 basis points (bps) to 5.75 per cent, while keeping repo and reverse repo
rates unchanged.
STRENGTH
Indian banks have compared favourably on growth, asset quality and profitability
with other regional banks over the last few years. The banking index has grown at a
compounded annual rate of over 51 per cent since April 2001 as compared to a 27
percent growth in the market index for the same period.
Policy makers have made some notable changes in policy and regulation to help
strengthen the sector. These changes include strengthening prudential norms,
enhancing the payments system and integrating regulations between commercial and
co-operative banks.
Bank lending has been a significant driver of GDP growth and employment.
The vast networking & growing number of branches & ATMs. Indian banking system
has reached even to the remote corners of the country.
The government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalization of 14 major private banks of India.
In terms of quality of assets and capital adequacy, Indian banks are considered to
have clean, strong and transparent balance sheets relative to other banks in
comparable economies in its region.
India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is
with the Government of India holding a stake)after merger of New Bank of India in
Punjab National Bank in 1993, 29 private banks (these do not have government stake;
they may be publicly listed and traded on stock exchanges) and 31 foreign banks.
N.R. INSTITUTE OF BUSINESS MANAGEMENT 24
They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold
over 75 percent of total assets of the banking industry, with the private and foreign
banks holding 18.2% and 6.5% respectively.
Foreign banks will have the opportunity to own up to 74 per cent of Indian private
sector banks and 20 per cent of government owned banks.
Old private sector banks also have the need to fundamentally strengthen skill levels.
The cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies.
Refusal to dilute stake in PSU banks: The government has refused to dilute its stake
in PSU banks below 51% thus choking the headroom available to these banks for
raining equity capital.
Impediments in sectoral reforms: Opposition from Left and resultant cautious
approach from the North Block in terms of approving merger of PSU banks may
hamper their growth prospects in the medium term.
The market is seeing discontinuous growth driven by new products and services that
include opportunities in credit cards, consumer finance and wealth management on
the retail side, and in fee-based income and investment banking on the wholesale
banking side. These require new skills in sales & marketing, credit and operations.
Banks will no longer enjoy windfall treasury gains that the decade-long secular
decline in interest rates provided. This will expose the weaker banks.
With increased interest in India, competition from foreign banks will only intensify.
Given the demographic shifts resulting from changes in age profile and household
income, consumers will increasingly demand enhanced institutional capabilities and
service levels from banks.
New private banks could reach the next level of their growth in the Indian banking
sector by continuing to innovate and develop differentiated business models to
profitably serve segments like the rural/low income and affluent/HNI segments;
actively adopting acquisitions as a means to grow and reaching the next level of
performance in their service platforms. Attracting, developing and retaining more
leadership capacity
Foreign banks committed to making a play in India will need to adopt alternative
approaches to win the “race for the customer” and build a value-creating customer
franchise in advance of regulations potentially opening up post 2009. At the same
time, they should stay in the game for potential acquisition opportunities as and when
they appear in the near term. Maintaining a fundamentally long-term value-creation
mindset.
Reach in rural India for the private sector and foreign banks.
The Reserve Bank of India (RBI) has approved a proposal from the government to
amend the Banking Regulation Act to permit banks to trade in commodities and
commodity derivatives.
Liberalization of ECB norms: The government also liberalized the ECB norms to
permit financial sector entities engaged in infrastructure funding to raise ECBs. This
enabled banks and financial institutions, which were earlier not permitted to raise
such funds, explore this route for raising cheaper funds in the overseas markets.
In an attempt to relieve banks of their capital crunch, the RBI has allowed them to
raise perpetual bonds and other hybrid capital securities to shore up their capital. If
the new instruments find takers, it would help PSU banks, left with little headroom
for raising equity. Significantly, FII and NRI investment limits in these securities
have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU
banks.
Threat of stability of the system: failure of some weak banks has often threatened the
stability of the system.
Increase in the number of foreign players would pose a threat to the PSB as well as
the private players.
PEST analysis of any industry investigates the important factors that affect the industry and
influence the companies operating in the sector. PEST stands for Political, Economic, Social
and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the
industry and how those factors can influence the industry.
Government and RBI policies affect the banking sector. Sometimes looking into the
political advantage of a particular party, the Government declares some measures to their
benefits like waiver of short-term agricultural loans, to attract the farmer‟s votes. By
doing so the profits of the bank get affected. Various banks in the cooperative sector are
open and run by the politicians. They exploit these banks for their benefits. Sometimes
the government appoints various chairmen of the banks.
Various policies are framed by the RBI looking at the present situation of the country for
better control over the banks.
MONETARY POLICY
Monetary Policy 2009-2010
Bank Rate: The Bank Rate has been retained unchanged at 6.0%.
Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis
points from 5.0% to 4.75% with immediate effect.
Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3.5% to
3.25% with immediate effect. RBI has retained the option to conduct overnight or longer
term repo/reverse repo under the LAF depending on market conditions and other relevant
factors.
Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.
BUDGET MEASURES
Budget Provisions:-
Increase Farm Credit: The FM has further increase the farm credit target for 2009-
10 at Rs 325000 crore compared to Rs 287000 crore targeted in 2008-09.
Subvention of 1% to be paid as incentive to farmers: The Budget continued the
Interest subvention scheme for short-term crop loans up to Rs 300000 per farmer at
the interest rate of 7% per annum. Also additional subvention of 1% to be paid from
this year, as incentive to those farmers who repay short-term crop loans on schedule.
Also additional allocation of Rs 411 crore over Interim Budget 2009-10 was made for
the same.
Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver
scheme by six more months for farmers owing more than 2 hectare of land. The
Union Budget 2008-09 allowed these farmers 25% rebate on loan if they repay 75%
of their overdue within stipulated period of 30th June 2009. Currently this facility has
been extended from 30th June, 2009 to 31st December, 2009.
OTHER PROVISIONS
The threshold for non-promoter public shareholding for all listed companies to be
raised in a phased manner.
To allow scheduled commercial banks setting up off-site ATMs without prior
approval subject to reporting.
To provide banking facilities in under-banked/un-banked areas in the next three years.
A sub-committee of State level Bankers Committee (SLBC) would identify and
formulate an action plan for the same.
The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at
least one Centre/Point of Sales (POS) for banking services in each of the un-banked
blocks.
BUDGET IMPACT
The Union Budget 2008-09 has focused on farm credit. The agriculture sector has
recorded a growth of about 4% per annum with substantial increase in plan allocations
and capital formation in the sector. The one-time bank loan waiver of nearly Rs 71000
crore (Rs 710 billion) to cover an estimated 40 million farmers was one of the major
highlights of the last Budget. This Union Budget has provided further six months
extension of 25% rebate on loan for farmers owing more than 2 hectare of land. With
Government bearing this burden, banks would not be affected much. It will only help
banks to clear their most stubborn NPA accounts on banks book.
Moreover the emphasize on hiking promoter shareholding in Public sector banks,
expanding network with ATM's, opening of banking centre in un-banked blocks are some
of the positive moves for the sector.
OUTLOOK
The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking
sector as a whole. However it has increased the Government borrowing to Rs 451093
crore (Rs 4510.93 billion) compared to Rs 361782 crore (Rs 3617.82 billion) targeted in
the Interim Budget 2009-10.
This is likely to push the Bond yields high moving forward. Despite ample liquidity in
the system, the 10 year benchmark yield has zoomed above 7% levels owing to rise in
borrowing target. Hardening of yields is likely to affect treasury profits of banks in
general and Public sector banks in particular.
Banking is as old as authentic history and the modern commercial banking are traceable
to ancient times. In India, banking has existed in one form or the other from time to time.
The present era in banking may be taken to have commenced with establishment of bank
of Bengal in 1809 under the government charter and with government participation in
share capital. Allahabad bank was started in the year 1865 and Punjab national bank in
1895, and thus, others followed.
Every year RBI declares its 6 monthly policy and accordingly the various measures and
rates are implemented which has an impact on the banking sector. Also the Union budget
affects the banking sector to boost the economy by giving certain concessions or
facilities. If in the Budget savings are encouraged, then more deposits will be attracted
towards the banks and in turn they can lend more money to the agricultural sector and
industrial sector, therefore, booming the economy. If the FDI limits are relaxed, then
more FDI are brought in India through banking channels
INFLATION RATES
Inflation represents a rise in general level of prices of goods and services over a period of
time. It leads to an erosion in the purchasing power of money. Resultantly, each unit of
currency buys fewer goods and services Different fiscal and monetary policies have
curbed the Inflation rate from the high of 12.63 per cent to 3.92 per cent.
To fight against the slowdown of the Economy, Government of India & Reserve Bank of
India took many fiscal as well as monetary actions. Clubbed with fiscal & monetary
actions, decreasing commodity prices, decreasing crude prices and lowering interest rate,
we expect that Indian Economy could again register a robust growth rate in the year
2009-10. Inflation stands at 3.92 per cent on 7th February 2009 against a high of 12.63
per cent on 9th August 2008.
Socio culture factors also affect the business. They show in which people behave in
country. Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying
and consumption habit of people, their language, beliefs and values affect the business.
Banking industry is also operates under this social environment and it is also affect by
this factor.
These factor are changing continuously people‟s life style, their behavior, consumption
pattern etc. is changing and also creating opportunities and threat for banking industry.
There are some socio-culture factors that affect banking inIndia have been analyzed
below.
POPULATION
Increase in population is one of he important factor, which affect the private sector banks.
Banks would open their branches after looking into thepopulation demographics of the
area. Percentage of deposit in any branches of banks depends upon the population
demographic of that area. The population of India is about 102.90 is expected to reach
about 119.70 cores in 2011. About 70% of population is below 35years of age. They are
in the prime earning stage and this increase the earning of the banks. Total Deposits
mobilized by the Private Sector Banks increased from Rs, 2,52,335 crore as on 31st
March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Deposits showed a subdued
growth during 2004-05.Income distributions also affects the operations and overall
business of private sector banks.
LITERACY RATE
Literacy rate in India is very low compared to developed countries. Illiterate people
hesitate to transact with banks. So, this impacts negatively on banks. But there is positive
side of this as well i.e. illiterate people trust more on banks to deposit their money, they
do not have market information. Opportunities in stocks or mutual funds. So, they look
bank as their sole and safe alternative.
TECHNOLOGY IN BANKS
Technology plays a very important role in bank‟s internal controlmechanisms as well as
services offered by them. It has in fact given new dimensions to the banks as well as
services that they cater to and the banks are enthusiastically adopting new technological
innovations for devising new products and services.
ATM
The latest developments in terms of technology in computer and telecommunication have
encouraged the bankers to change the concept of branch banking to anywhere banking.
The use of ATM and Internet banking has allowed „anytime, anywhere banking‟
facilities.
Automatic voice recorders now answer simple queries, currency accounting machines
makes the job easier and self-service counters are now encouraged.
Credit card facility has encouraged an era of cashless society. Today MasterCard and
Visa card are the two most popular cards used world over. The banks have now started
issuing smartcards or debit cards to be used for making payments. These are also called
as electronic purse. Some of the banks have also started home banking through
telecommunication facilities and computer technology by using terminals installed at
customers home and they can make the balance inquiry, get the statement of accounts,
give instructions for fund transfers, etc. Through ECS we can receive the dividends and
interest directly to our account avoiding the delay or chance of loosing the post.
MEANING OF NPA:
Non Performing Asset means an asset or account of borrower, which has been classified by a
bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the
directions or guidelines relating to asset classification issued by RBI.
An amount due under any credit facility is treated as "past due" when it has not been paid
within 30 days from the due date. Due to the improvement in the payment and settlement
systems, recovery climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly,
as from that date, a Non performing asset (NPA) shell be an advance where
i. Interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit(OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
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, 2004. Accordingly, with effect from March 31, 2004,
a non-performing asset (NPA) shell be a loan or an advance where;
i. Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC),
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here it is also very important
that in this case the arrears of interest and the principal amount of loan do not exceed 90
days at the end of financial year. If asset fails to be in category of standard asset that is
amount due more than 90 days then it is NPA and NPAs are further need to classify in
sub categories.
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
reasonability of the dues:
1) Sub-standard Assets
2) Doubtful Assets
3) Loss Assets
Doubtful Assets:
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.
With effect from March 31, 2005, an asset would be classified as doubtful if it remained
in the sub-standard category for 12 months.
Up to one year 20
assets effective from March 31, 2003 has to be made in phases as under:
i. As on31.03.2003, 50 percent of the additional provisioning requirement on the
assets which became doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.
ii. As on 31.03.2002, balance of the provisions not made during the previous
year, in addition to the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12
months over a four year period commencing from the year ending March 31, 2005,
with a minimum of 20 % each year.
Loss Assets:
A loss asset is one which 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. Also, these assets would have been identified as „loss assets‟ by the bank
Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made
by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss
assets. It can be calculated with the help of following ratio:
Ne t NP A:
Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burdenof banks. Since in India, bank
balance sheets contain a huge amount of NPAs and the process of recovery and write off
of loans is very time consuming, the provisions the banks have to make against the NPAs
according to the central bank guidelines, are quite significant. That is why the difference
between gross and net NPA is quite high.
It can be calculated by following:
Internal factors:
1) Funds borrowed for a particular purpose but not use for the said purpose.
2) Project not completed in time.
3) Poor recovery of receivables.
4) Excess capacities created on non-economic costs.
5) In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6) Business failures.
7) Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-
appropriation etc.
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delaying settlement of payments\ subsidiaries by government bodies etc.,
External factors:
1) Sluggish legal system –
Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5) Failures, nonpayment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
The RBI has summarized the finer factors contributing to higher level of NPAs in the
Indian banking sector as:
Business failures (such as product, marketing etc.), which are due to inefficient
management system, strained labour relations, inappropriate technology/ technical
problems, product obsolescence etc.
Recession, which is due to input/ power shortage, price variation, accidents, natural
calamities etc. The externalization problems in other countries also lead to growth of
NPAs in Indian banking sector.
Governmental policies such as changes in excise duties, pollution control orders etc.
Deficiency on the part of banks, viz, delays in release of limits and payments/
subsidies by the Government of India.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for shortest period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to
lack of money. Routine payments and dues.
Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of
market credit. It will lose its goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks.
1) Financial:
3) Attitudinal Changes:
4) Others:
Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in
tackling adverse business conditions is a very important aspect that affects a borrowing
unit‟s fortunes. A bank may commit additional finance to an aling unit only after basic
viability of the enterprise also in the context of quality of management is examined and
confirmed. Where the default is due to deeper malady, viability study or investigative
audit should be done – it will be useful to have consultant appointed as early as possible
to examine this aspect. A proper techno- economic viability study must thus become the
basis on which any future action can be considered.
Multiple Financing:
During the exercise for assessment of viability and restructuring, a Pragmatic and
unified approach by all the lending banks/ FIs as also sharing of all relevant
information on the borrower would go a long way toward overall success of
rehabilitation exercise, given the probability of success/failure.
In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender
may have a much shorter timeframe in mind. So it is possible that the letter categories
of lenders may be willing to exit, even a t a cost – by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into
account.
Financial related warning signals generally emanate from the borrowers' balance sheet,
income expenditure statement, statement of cash flows, statement of receivables etc.
Following common warning signals are captured by some of the banks having relatively
developed EWS.
2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various
resolution mechanisms introduced in the recent past which include the SRFAESI Act,
one time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs.
From the data available of Public Sector Banks as on March 31, 2003, there were 1,522
numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50
million in all the public sector banks in India. The total gross value of these NPAs
amounted to Rs. 215 billion. The total number of resolution approaches (including cases
where action is to be initiated) is greater than the number of NPAs, indicating some
double counting. As can be seen, suit filed and BIFR are the two most common
approaches to resolution of NPAs in public sector banks. Rehabilitation has been
considered/ adopted in only about 13% of the cases. Settlement has been considered only
in 9% of the cases. It is likely to have been adopted in even fewer cases. Data available
on resolution strategies adopted by public sector banks suggest that Compromise
settlement schemes with borrowers are found to be more effective than legal measures.
Many banks have come out with their own restructuring schemes for settlement of NPA
accounts. State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information
Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
information between banks and FIs for curbing the growth of NPAs incorporated credit
Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of
CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs.
As per the recommendations of the working group, Banks and FIs are now required to
submit the list of suit-filed cases of Rs. 10 million and above and suit filed cases of
willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share
this information with commercial banks and FIs so as to help them minimize adverse
selection at appraisal stage. The CIBIL is in the process of getting operationalised.
Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987
helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counseling between the
parties and to reduce burden on the court, especially for small loans. Cases involving suit
claims up to Rs. l million can be brought before the Lokadalat and every award of the
Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any
court against the award made by the Lokadalat. Several people of particular localities
various social organizations are approaching Lokadalats which are generally presided
over by two or three senior persons including retired senior civil servants, defense
personnel and judicial officers. They take up cases which are suitable for settlement of
debt for certain consideration. Parties are heard and they explain their legal position.
They are advised to reach to some settlement due to social pressure of senior bureaucrats
or judicial officers or social workers. If the compromise is arrived at, the parties to the
litigation sign a statement in presence of Lokadalats which is expected to be filed in court
to obtain a consent decree. Normally, if such settlement contains a clause that if the
compromise is not adhered to by the parties, the suits pending in the court will proceed in
accordance with the law and parties will have a right to get the decree from the court. In
general, it is observed that banks do not get the full advantage of the Lokadalats. It is
difficult to collect the concerned borrowers willing to go in for compromise on the day
when the Lokadalat meets. In any case, we should continue our efforts to seek the help of
the Lokadalat.
OVERALL ANALYSIS:
Scheduled Commercial banks (SCBs) in India remained robust against the backdrop of
global financial crisis. It is noteworthy that contrary to the trend in some advanced countries,
the leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting the
strength of the Indian banking system. However, the Indian banking sector was not
completely insulated from the effects of the slowdown of the India economy.
The consolidated balance sheets of SCBs, expanded by 21.2 per cent as at end-March 2009
as compared with 25.0 per cent in the previous year. While the balance sheet of public sector
banks maintained their growth momentum, the private sector banks and foreign banks
registered a deceleration in growth rate.
During 2008-09, the growth rate of banks‟ lending to industries, personal loans and services
sector witnessed a deceleration, while growth rate of banks‟ lending to agriculture and allied
activities increased substantially. Overall, the incremental Credit–Deposit (C-D) ratio
declined sharply reflecting the slowdown in credit growth, as corporates deferred their
investments against the backdrop of widespread uncertainty.
It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in
India has remained high reflecting the strength of the Indian banking system. For instance, as
observed by the World Bank (2009)5, the leverage ratio of banks in the UK witnessed a
decline throughout 1990s, which was accentuated after 2000 to reach a level of about 3 per
cent by 2008 from around 5 per cent in the 1990s. On the other hand, the leverage ratio for
Indian banks has risen from about 4.1 per cent in March 2001 to reach a level of 6.3 per cent
by March 2009.
The balance sheets of public sector banks maintained their growth momentum, the private
sector banks and foreign banks registered a deceleration in growth rate. Furthermore, the old
Net NPA
30,000
25,000
20,000
15,000
Public Sector Banks
Private Sector Banks
10,000
Foreign Sector Banks
5,000
Interpretation:
From the above it is observed that net NPA of public sector banks has a declining
trend up to year 2005-06 and after that it has a rising trend till 2008-09. The same
trend has been observed in both Private and Foreign Sector Banks. The declining
trend from 2003 to 2006 of NPA was due to the implementation of Securitization Act
(2002).
Capital Quality:
A sound and efficient banking system is end product for maintaining financial stability.
Therefore, considerable emphasis has been placed on strengthening the capital
requirements in recent years. The Capital to Risk-weighted Assets Ratio (CRAR) of
SCBs, a measure of the capacity of the banking system to absorb unexpected losses,
improved further to 13.2 per cent at end-March 2009 from 13.0 per cent at end-March
2008. The asset quality of banks in India has been improving over the past few years as
reflected in the declining NPA to advances ratio. It is especially noteworthy that
notwithstanding the pressures of a slowdown in the economy and an atmosphere of
uncertainty, the net NPA to net advances ratio increased only marginally to 1.1 per cent
as at end March 2009 from 1.0 per cent as at end March 2008. Significantly, gross NPA
to gross advances ratio remained constant at 2.3 per cent. Thus, in terms of the two
crucial soundness indicators, viz., capital and asset quality, the Indian banking sector has
exhibited resilience amidst testing times.
Old New
Public State Private Private
Sector Nationalized Bank Sector Sector Foreign
Banks Banks Group Banks Banks Banks
Gross NPAs
As at end-March 2008 40089 23410 15303 2557 9901 2872
Addition during the
year 31338 17822 12879 2094 10520 8430
Recovered during the
year 26271 15863 9829 1579 6510 2954
Written off during the
year 0 0 0 0 0 1514
As at end-March 2009 45156 25368 18352 3072 13911 6833
Net NPAs
As at end-March 2008 17726 8245 8398 740 4640 1247
As at end-March 2009 21033 9339 10745 1165 6253 2973
Gross NPAs/Gross
Advances Ratio
End-March 2008 2.2 2.1 2.6 2.3 2.4 1.8
End-March 2009 2 1.8 2.5 2.3 2.8 4
Net NPAs/Net
Advances Ratio
End-March 2008 0.8 0.7 1.4 0.7 1.1 0.9
End-March 2009 0.7 0.7 1.5 0.9 1.3 1.7
Source: http://www.rbi.org.in
100%
90%
80%
70%
60%
50% > 10%
40% 5% to 10%
30% 2% to 5%
20% < 2%
10%
0%
Pvt.SB
Pvt.SB
Pvt.SB
Pvt.SB
Pvt.SB
PSB
PSB
PSB
PSB
PSB
FB
FB
FB
FB
FB
2004-05 2005-06 2006-07 2007-08 2008-09
Interpretation:
In the year 2004-05, the Public sector banks (PSBs) had around 60% of their NPA profile
in the < 2% category which increased 75% in 2005-06, 90% in 2006-07 - 2007-08 &
100% in 2008-09. PSBs 30% NPA profile in the year 2004-05 belongs to 2% to 5%
category which reduced over the years and has been totally eliminated in 2008-09. PSBs
did not have any of its banks in > 10% category.
Private sector banks (Pvt.SBs) was having the worst situation in 2004-05 where 50% of
its bank was in 2% to 5% category. While this ratio is declining over the years 2007-08
this is compensated by the rise in number of banks in < 2%. 5 Pvt. SB‟s banks were in
Foreign banks (FB) were comparatively in good position compare to private sector banks
in the initial years. 70% of its NPA profile belongs to < 2% category. The number of
banks increased in < 2% category. So among all three sectors, public sector banks
managed to reduce NPAs over the years.
25000
Amount in Rs. Crore
20000
15000
10000
5000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Priority Sector 24156 25150 24939 23841 21926 22374 22954 25287 24318
Non-priority Sector 27307 28405 26781 25698 23249 18664 15158 14163 19251
Public Sector 1711 903 1087 610 444 341 490 299 474
Interpretation:
From the above chart it is observed that public sector category is the least contributor
towards the NPA of public sector bank. In the initial years from 2001 to 2005, Non-
priority sector contributes more towards NPA than priority sector. But in later years
from 2006 it‟s other way round, where priority sector contributes more than Non-
priority sector.
Priority sector consist of advance given to agriculture, SSI, & other priority sector
advances. Non priority sector consist of large industries, medium industries & other
non priority sectors.
NPA in non priority sector is reducing constantly from 2002 to 2008 i.e. by
50%.Though the advance given to non-priority sector was higher than priority sector, NPAs
of non-priority sector is comparatively.
14000
12000
Amount in Rs. Crore
10000
8000
6000
4000
2000
0
2001 2002 2003 2004 2005 2006 2007 2008 2009
Priority Sector 1835 2546 2445 2482 2188 2284 2884 3419 3640
Non-Priority Sector 4452 9090 9327 7796 6569 5541 6353 9558 13172
Public Sector 123 31 95 75 42 4 3 0 75
Interpretation:
From the above graph it is observed that public sector contributes very negligible
towards the overall NPA of foreign banks. The major reason for this is that on an
average only 3.5% of total advance is made towards public sector category.
Priority sector category on an average constitutes almost 34% of the total advances
made by the private sector banks. While average NPA of priority sector constitutes of
25% of total NPA. In later years from 2007 to 2009 there is increase in NPA of
priority sector. In these years more advances was given to agriculture & housing
sector.
In the year 2007-08, the real estate market was on boom, which encouraged people to
take more loans. But after the subprime crisis there was sudden fall in real estate
market & people became default to pay the loan.
N.R. INSTITUTE OF BUSINESS MANAGEMENT 79
In case of non-priority sector, the average advances made are 60.5% of total advance
made by private sector banks. But the average NPA of non-priority sector is almost
74% which is highest amongst the entire category. We can see the declining trend in
NPA of non-priority sector from 2003 to 2006. This as a result of securitization Act,
2002.
7000
6000
5000
4000
3000
2000
1000
0
2007 2008 2009
Priority Sector 331 402 649
Non-Priority Sector 2,120 2712.0 6506
Public Sector 0 0 0
Non-priority sector contributes highest towards the NPA of foreign banks because
non-priority sector constitute approximately 65% of the total advances made by
foreign banks. So NPA will also be more in non-priority sector.
NPA is low in priority sector because very few advances are made in priority sector
& that too are made to SSI.
The advances are made to medium & large scale industries in non-priority sector. As
foreign banks are having global presence they are more affected by the global
meltdown & financial crisis of 2008. So its effect is seen by sudden rise in NPA in
2009.
NET NPA
7,000
6,000
5,000
Old private
4,000 sector banks
New private
3,000
sector banks
2,000
1,000
Interpretation:
From the above chart it is clearly observed that net NPA of old private sector banks
has a declining trend over the years on the contrary new private sector banks has an
upward trend.
Old private sector banks which is passing from lower growth rate in recent past, starts
performing better than their new counterparts. Old private sector banks are more
efficient than that of new private sector banks in managing NPA.
2
NPA as % of Advance
1.5
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Public Sector 2.1 1.3 1.1 0.8 0.7
Private Sector 1.9 1 1 1.2 1.5
Foriegn Sector 0.9 0.8 1 0.9 1.7
In case of foreign banks it is fluctuating over the years. Public sector banks have been
able to reduce this ratio by 66.7% from 2005 to 2009. Public sector banks as a result
of stringent checks & control able to manage low ratio compare to other banks. In the
year 2008-09 the ratio increased by 89% for foreign banks where the foreign banks
were badly affected by the global meltdown. Even for private sector bank the ratio
increased by 25% in 2009 due to financial crises & also for public sector bank the
reduction in 2009 was the lowest i.e. 12.5%
2.6
97.2 97.7 97.9
96.1
94.6
92.2
Interpretation:
The above frequency distribution chart states that standard asset is increasing every
year & on the contrary all the other types of asset i.e. Sub-standard, Doubtful & Loss
Asset are decreasing every asset. This proves that public sector banks have succeeded
in reducing NPA over the years.
Public sector banks have taken various measures to reduce NPA also convert Sub-
Standard, Doubtful & loss asset into the above category Standard, Sub-Standard &
Doubtful asset. The rise in sub standard ratio has major proportion indicates that there
is a high scope of up gradation or improvement in NPA recovery in initial stage
because it will be very easy to recover the loan as minimum duration of default.
1.8
97.4 97.6 97.3
96.1 96.8
94.2
Interpretation:
The above chart clearly states that the rise in the standard assets over the years
compensates the fall in the other three types of assets. But in the year 2009, the
percentage of Sub-Standard asset is highest among all the year. In 2009 percentage of
standard asset has reduced by 0.5% which is compensated by increase in Sub-
Standard & doubtful assets. This increase is due to interest & principle amount unpaid
due to financial crisis in 2009. The percentage of doubtful asset has reduced to a
great extent amongst all. So the private sector banks have managed to reduce the
doubtful asset.
1.6
Interpretation:
The proportion of Standard Asset is increasing from 2004 and started getting stable in
2007 & 2008. But it has fallen in 2009. The proportion of other three types of assets
is falling over the years, but in 2009 there is great increase in the proportion of Sub-
Standard asset which is as a result of decrease in proportion of Standard asset. This
increase in Sub-Standard asset is because of interest & principle amount unpaid, due
to poor global conditions, for the loan provided in a 2008. The interest & principle
amount remained unpaid for period of more than 180 days but less than 1 year.
35000
30000
Amount in Rs. Crore
25000
20000
15000
10000
5000
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Net NPA 27977 27958 24877 19335 16904 14566 15145 17726 21033
Net Profit 4317 8301 12295 16546 15784 16539 20152 26592 34394
Interpretation:
It is observed from the above graph there exist no particular relationship between net
profit & net NPA of public sector banks. There is constant increase in net profit from
2000-01 to 2003-04 & from 2005-06 to 2008-09. The average of percentage increase
in net profit YOY basis comes to 32.3%
On the contrary public sector banks have managed to reduce net NPA constantly from
2001-02 to 2005-06. Although the percentage of reduction over the previous year is
low compared to percentage of rise in profit over previous year. The average of
percentage decrease in net NPA YOY basis comes to 2.5%
10000
Amount in Rs. Crore
8000
6000
4000
2000
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Net NPA 3700 6676 3963 4128 4212 3171 4028 5380 7418
Net Profit 1142 1779 2958 3481 3533 4975 6465 9522 10868
On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in
net NPA from 2000-01 to 2008-09. The average of percentage rise in net NPA comes
to almost 15%.
6000
5000
4000
3000
2000
1000
0
2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Net NPA 785 920 903 933 639 808 927 1247 2973
Net Profit 945 1492 1824 2243 3098 4109 5343 7544 8459
Interpretation:
The above line graph shows net profit of foreign banks is increasing throughout the
period from 2000-01 to 2008-09. The average of percentage increase in net profit
YOY basis comes to 32%. Whereas in case of net profit there is no continuous
upward or downward movement.
But overall there is rise in net NPA of foreign banks. The average of percentage
increase in net NPA YOY basis comes to approximately 25%. So this shows there is
positive relationship between net NPA & net profit of foreign banks.
4
Gross NPAs/Gross
3.6
Advances
3
2.7 Net NPAs/Net
2.1 2.2 Advances
2 2
1.3
1 1.1
0.8 0.7
0
2004-05 2005-06 2006-07 2007-08 2008-09
Interpretation:
The percentage in reduction of gross NPA to gross advances ratio is decreasing year
on year i.e. it has reduced by 34.5% from 2004-05 to 2005-06. Similarly it has
reduced by 25%, 18.5% & 9% respectively from 2005-06 to 2006-07, from 2006-07
to 2007-08 & 2007-08 to 2008-09.
While in case of net NPA to net advances ratio, the percentage change is varying. It
has reduced by 38% from 2004-05 to 2005-06. Similarly it has reduced by 15.38%,
27.27% & 12.5% respectively from 2005-06 to 2006-07, from 2006-07 to 2007-08 &
2007-08 to 2008-09.
The difference in gross NPA/ gross advances & net NPA/net advances is highest in
2005-06 [67%] & lowest in 2006-07 [59%]. In other years it near to 63%. This gap
is highest in 2006 because in 2006 advances have increased tremendously over 2005.
Due to which NPA also increased & so provisions also increased.
The line graph clearly states that the ratio of gross NPA to gross advances & net NPA
to net advances is decreasing over the years. In all the public sector bank has
succeeded to reduce the non performing assets against the advances made over the
years.
3
2.9
2.5 2.5 2.5
2.2
2
1.9 Gross NPAs/Gross
Advances
1.5 1.5
1.2
1 1 1 Net NPAs/Net
Advances
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Interpretation:
The percentage change in of gross NPA to gross advances ratio is decreasing initially
& thereafter started rising from 2006-07. It has reduced by 34.2% from 2004-05 to
2005-06. Similarly it has reduced by 12% from 2005-06 to 2006-07 & thereafter
increased by 18.5% & 9% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-
09.
While in case of net NPA to net advances ratio, the percentage change is varying
drastically. It has reduced by 47% from 2004-05 to 2005-06. It is unchanged from
2005-06 to 2006-07. It has increased by 20% & 25% respectively from 2006-07 to
2007-08 & 2007-08 to 2008-09.
The percentage change in gross NPA to gross advances ratio & net NPA to net
advances ratio over the years states that private sector banks makes more provisions
in gross NPA & gross advances.
Private sector banks have not succeeded to reduce NPA as against the advances made
over the years as both the ratios are increasing in later years.
4 4
3.5
3
2.8
2.5
Gross NPAs/Gross
2 2 Advances
1.8 1.8 1.7
1.5 Net NPAs/Net
Advances
1 0.9 1 0.9
0.8
0.5
0
2004-05 2005-06 2006-07 2007-08 2008-09
Interpretation:
The gross NPA to gross advances ratio is decreasing till 2006-07.It is unchanged in
2007-08 & then increased in 2008-09. It has reduced by 28.5% & 10% respectively
from 2004-05 to 2005-06 & from 2005-06 to 2006-07. It has increased tremendously
by 122% from 2007-08 to 2008-09.
While in case of net NPA to net advances ratio, there is great volatility. It has reduced
by 11% from 2004-05 to 2005-06. Thereafter it increased by 25% in 2006-07. Again
it reduced by 10% in 2008 and finally increased by 89% in 2008-09.
The steep rise in gross NPA & net NPA 2008-09 is due to poor global conditions.
The line graph clearly states that the ratio of gross NPA to gross advances & net NPA
to net advances is decreasing over the years. In all the public sector bank has
succeeded to reduce the non performing assets against the advances made over the
years.
Thus in foreign banks gross NPA to gross advances ratio & net NPA to net advances
ratio are not having parallel movement throughout the period. The change in net NPA
to net advances is quite higher than gross NPA to gross advances.
6
Net NPA/Net Advance
Interpretation:
From the above chart it is clearly observed that old private sector banks are constantly
improving in terms of net NPA to net advances ratio which is represented by
declining trend from 2000-01 to 2008-09. While on the other hand for new private
sector banks net NPA to net advances ratio is fluctuating over the years.
TEST OF CO-RELATION
The test of co-relation is used to identify the co-relation between two
variables. The variable in our study is Net NPA and Net profit. This test
researcher has applied to identify the co-relation between two variables i.e.
Net NPA and Net profit of Public, Private and Foreign Sector Banks.
Net Net
NPA Profit
∑[(X-X)2*(Y-Y)2] 1/2
r= -207100923.9
379534704
r = - 0.54567
r= ∑ (X-X)*(Y-Y)
∑ [(X-X)2*(Y-Y)2] 1/2
r= 18673820.57
38889840.77
r= 0.480172
r= ∑ (X-X)*(Y-Y)
∑[(X-X)2*(Y-Y)2] 1/2
r= 10334943.88
13373740.04
r = 0.772778883
There is negative correlation between net profit & net NPA of public sector banks
while it is positive for private sector & foreign banks.
Net profit consists of income earned by the banks. Income is divided into two parts
interest income & other income. Interest income includes Interest/Discount on
advances/bill, Income on investments, Interest on balances with RBI and other inter-
bank funds, others. While non-interest income includes fee income components such
as commission, brokerage and exchange transactions, sale of investments, corporate
finance transactions, M&A deals; and any other income other than the interest income
generated by the bank. But in interest income, income from Interest/Discount on
advances/bill is the major contributor towards NPA.
Average 75% of total earning of public sector bank comes from Interest/Discount on
advances/bill which is 55% & 43% for private sector banks & foreign banks. If we
consider the last six years average of percentage increase in income from
Interest/Discount on advances/bill YOY basis then public sector bank records only
18% increase while its 33% for both private sector & foreign banks. But for private
sector & foreign banks rise in income from Interest/Discount on advances/bill
contributes minimal to the rise in overall income.
The income other than Interest/Discount on advances/bill income for all the banks
together i.e. public sector, private sector and foreign banks on an average stood at
32.8% of the total income, but it is highest in foreign banks i.e. 57% & 45% for
private sector banks.
The last six years average of percentage increase in income other than
Interest/Discount on advances/bill income YOY basis was highest for foreign banks
i.e. 26% which is 15% & 19% for public sector bank & private sector banks
respectively.
80%
60%
40%
Non-interest
Income
20%
Interest Income
0%
Pvt.SBs
Pvt.SBs
Pvt.SBs
Pvt.SBs
Pvt.SBs
Pvt.SBs
FBs
FBs
PSBs
PSBs
FBs
PSBs
PSBs
FBs
FBs
PSBs
PSBs
FBs
2004 2005 2006 2007 2008 2009
Public sector banks depend excessively on their interest income as compared to their
peers in the private sector and their fee-based earnings coming from services remain
quite low.
The higher proportion of non-interest income in private sector & foreign banks is due
to the value added services offered by these banks. There are some services which are
offered by private sector banks but not by public sector banks. These include Forex
Desk, Derivatives Desk, Technology Finance, Syndication Services, Real Time Gross
Settlement, Channel Financing, Corporate Salary Account, Bankers to Right/Public
Issue. Foreign banks offers some more services other than the above mentioned
services like Global Trade Solutions, Factoring Solutions, Derivatives Clearing, asset
management, private equity placement. So the private sector & foreign banks earn
higher non-interest income because of such value added services.
X1 X2 X3
K-1
= 3(14681-7962.5)2 + 3(5629-7962.5)2 + 2(3577.5-7962.5)2
(3-1)
= 190206843.5
2
= 95103421.75
S= ∑(X - X)2
k-1
= 95103421.75
84889525.7
Fcal = 1.12
Ftab = k-1
NT-k
= 2/5
Interpretation:
As Fcal is less than Ftab, null hypothesis is accepted, which means that there is no
significant difference in NPAs of different types of banks among various sectors.
So this states that the mean behavior of NPAs of all the types of bank i.e. public sector,
private sector & foreign banks seems to be same in different sectors i.e. priority sector,
non-priority sector & public sector for the year 2009.
NPAs were more noticeable in respect of new private sector and foreign banks, which have
been more active in the real estate and housing loans segments. It shows a upward trends
over the years as compared to others
The old private sector banks, which had been registering a significantly lower growth rate
than their newer counterparts in the recent past, managed a better performance this year.
Among all three sectors, public sector banks have managed to reduce NPAs over the years.
NPA profile in the < 2% category of public sector banks was reached to 100% in 2008-09 as
compared to Private and Foreign sector banks which was around 80%
Net NPA against net advances increased more in Foreign and Private sector banks in 2008-09
while Public sector banks have succeeded in reducing net NPA against net advances made
over the period of time
Public sector banks have managed to increase the standard assets over the years. The
proportion of standard assets in Private sector banks reduced in 2008 and 2009 which was
compensated by increase in sub-standard and doubtful assets. In Foreign sectors banks the
proportion of sub-standard asset has increased tremendously by 3.5% of loan assets in 2009
which was 1.2% of loan assets in 2008.
The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years states that public sector banks makes more provisions in gross NPA & gross
advances as compared to private and foreign banks.
Public sector banks almost 75% of income comes from Interest/Discount on advances/bill.
Whereas it is just 55% & 43% for private sector banks & foreign banks.
New body like Debt Recovery Tribunal should be established & capacity of DRTs should be
enhanced.
All banks should keep stringent check on advance being made to real estate & housing
segment as these segment contributed highly towards the NPA in 2008 & 2009.
Based on the asset classification viz. Standard Assets (STD), Sub-standard Assets (SUB),
Doubtful Assets (DOUB) and Loss Assets (LOSS), a matrix can be formed with a given
probability.
Since the probability of a loss asset being converted to any higher asset category is zero,
p41 = p42 = p43 = 0 and thus p44 = 1.
This transition matrix can be used to assess the loan quality of a firm level borrower by
evaluating the financial position. However, this matrix will be difficult to apply to assess
individual borrowers because unlike a firm level borrower, financial data of an individual is
not available. Therefore, this matrix can be better applied for a firm level or corporate level
borrower.
Private sector & Foreign banks should focus more on recovery of sub-standard & doubtful
assets.
Public sector banks should increase their non-interest income, as rise in NPA due to default
in interest income may affect the profits drastically.
The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper
management of the NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.
The NPAs would destroy the current profit, interest income due to large provisions of the
NPAs, and would affect the smooth functioning of the recycling of the funds
Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which hampers
economic growth.
Public sector banks are more efficient than private sector & foreign banks with regard to the
management of nonperforming assets. Even among private sector bank, old private sector
banks are more efficient than new private sector banks. But efficient management of NPA is
not the sole factor that determines the overall efficiency of banks.
Books:
1) Marketing Research- An Applied Orientation by Naresh K. Malhotra;
Edition-Fourth; Publication-New Delhi
Websites:
1) Tables in Annexure: Retrieved on 19th February, 2010 from
http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of
Banking in India
2) Tables in Annexure: Retrieved on 25th February, 2010 from
http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to
Banks of India
3) Master Circular: Retrieved on 3rd March, 2010 from
http://rbi.org.in/scripts/NotificationUser.aspx
4) Introduction to Banking Industry: Retrieved on 25th January, 2010 from
http://en.wikipedia.org/wiki/Banking_in_India
5) Banking in India-2009-10:Retrieved on 30th January, 2010 from
http://www.ibef.org/industry/Banking.aspx
6) Recent History Of Indian Banking: Retrieved on 7th February, 2010 from
http://www.bankingindiaupdate.com/general.html
Table: 7:- Net NPA to Net Advance of Public, Private & Foreign Sector Banks: 2004-05
to 2008-09
Year Public Sector Bank Private Sector Bank Foreign Bank
2004-05 2.1 1.9 0.9
2005-06 1.3 1 0.8
2006-07 1.1 1 1
2007-08 0.8 1.2 0.9
2008-09 0.7 1.5 1.7
Compiled from: http://www.rbi.org.in
Table: 11:- Net NPAs & Net Profit of Public Sector Banks: 2000-01 to 2008-09
Year Net NPA Net Profit
2000-01 27977 4317
2001-02 27958 8301
2002-03 24877 12295
2003-04 19335 16546
2004-05 16904 15784
2005-06 14566 16539
2006-07 15145 20152
2007-08 17726 26592
2008-09 21033 34394
Compiled from: http://www.rbi.org.in
Table: 13:- Net NPA & Net Profit of Foreign Banks: 2000-01 to 2008-09
Year Net NPA Net Profit
2000-01 785 945
2001-02 920 1492
2002-03 903 1824
2003-04 933 2243
2004-05 639 3098
2005-06 808 4109
2006-07 927 5343
2007-08 1247 7544
2008-09 2973 8459
Compiled from: http://www.rbi.org.in