EXECUTIVE SUMMARY

The accumulation of huge non-performing assets in banks has assumed great importance. The depth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks and financial institutions is over

Rs.1,50,000 crores.

While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of a bank, weaken its financial health and erode its solvency.

For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 1

OBJECTIVES
y y 9T know why NPAs are the great challenge to the Public Sector Banks. To understand what is Non Performing Assets and what are the underlying reasons for the emergence of the NPAs. y y To understand the impacts of NPAs on the operations of the Public Sector Banks. To know what steps are being taken by the Indian banking sector to reduce the NPAs? y To evaluate the comparative ratios of the Public Sector Banks with concerned to the NPAs.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 2

RESEARCH METHODOLOGY

Primary Data: Interaction with employee at Bank of Baroda regarding their perceptions towards NPA. Secondary data: 1] 2] Internet for getting the contents of NPA. Annual Report of Bank of Baroda.

The research methodology means the way in which we would complete our prospected task. Before undertaking any task it becomes very essential for anyone to determine the problem of study. I have adopted the following procedure in completing my report study. 1. Formulating the problem 2. Research design 3. Determining the data sources 4. Analysing the data 5. Interpretation 6. Preparing research report

(1) Formulating the problem I am interested in the banking sector and I want to make my future in the banking sector so decided to make my research study on the banking sector. I analysed first the factors that are important for the banking sector and I came to know that providing credit facility to the borrower is one of the important factors as far as the banking sector is concerned. On the basis of the analysed factor, I felt that the important issue right now as far as the credit facilities are provided by bank is non performing assets. I started knowing about the basics of the NPAs and decided to study on the NPAs. So, I chose the topic Non Performing Assts the great

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 3

challenge before the Public Sector Banks.

(2) Research Design The research design tells about the mode with which the entire project is prepared. My research design for this study is basically analytical. Because I have utilised the large number of data of the Public Sector Banks.

(3) Determining the data source The data source can be primary or secondary. The primary data are those data which are used for the first time in the study. However such data take place much time and are also expensive. Whereas the secondary data are those data which are already available in the market. These data are easy to search and are not expensive too. For my study I have utilised totally the secondary data.

(4) Analysing the data The primary data would not be useful until and unless they are well edited and tabulated. When the person receives the primary data many unuseful data would also be there. So, I analysed the data and edited them and turned them in the useful tabulations. So, that can become useful in my report study.

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

(6) Project writing This is the last step in preparing the project report. The objective of the report writing was to report the findings of the study to the concerned authorities.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 4

LIMITATIONS
The limitations that I felt in my study are: y It was critical for me to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible. y Since my study is based on the secondary data, the practical operations as related to the NPAs are adopted by the banks are not learned.

Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 5

1. INTRODUCTION

1.1 Introduction to the topic:

The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of Non Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, no cannot be then left is to look after the factor responsible for it and managing those factors.

1.2 Definitions:
An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.

A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or instalment of principal has remained past due for a specified period of time.

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, 2011. Accordingly, with effect from March 31, 2011, a non-performing asset (NPA) shall be a loan or an advance where;

Interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan,

The account remains out of order for a period of more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC),

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

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 6

Interest and/or instalment 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 purposes, and

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

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2010. However, the date of classification of an advance as NPA should not be changed on account of charging of interest at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2010 and 90 days from the end of the quarter with effect from March 31, 2011.

1.3 History of Indian Banking:

A bank is a financial institution that provides banking and other financial services. By the term bank is generally understood an institution that holds a Banking Licenses. Banking licenses are granted by financial supervision authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so-called Non-bank. Banks are a subset of the financial services industry. The word bank is derived from the Italian banca, which is derived from German and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Moneylenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table.

Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset. Development of banking industry in India followed below stated steps.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 7

1. 4 What is a NPA (Non-Performing Assets)?

Action for enforcement of security interest can be initiated only if the secured asset is classified as Nonperforming asset. Non-performing asset means an asset or account of borrower ,which has been

classified by bank or financial institution as sub standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI . With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt 90 days overdue norms for identification of NPAs, from the year ending March 31, 2011, a non performing asset 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) iii. The bill remains overdue for a period of more than 90 days in case of bill purchased or discounted. iv. Interest and/or principal remains overdue for two harvest season but for a period not exceeding two half years in case of an advance granted for agricultural purpose ,and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

1.5 Factors for Rise in NPAs

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

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 8

 Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.

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

 Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit.

 Industrial sickness Improper project handling, ineffective management, lack of adequate resources, lack of advance technology, day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.  Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long.

 Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 9

 Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.

1.6 Problems Due To NPA

1. Owners do not receive a market return on there capital .in the worst case, if the banks fails, owners lose their assets. In modern times this may affect a broad pool of shareholders. 2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors lose their assets or uninsured balance. 3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth. 4. Non-performing loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by extension, labour and natural resources. Non-performing asset may spill over the banking system and contract the money stock, which may lead to economic contraction. This spill over effect can channelize through liquidity or bank insolvency: a) When many borrowers fail to pay interest, banks may experience liquidity shortage. This can jam payment across the country, b) Illiquidity constraints bank in paying depositors, c) Undercapitalized banks exceed the banks capital base.

1.7 'Out of Order' Status:

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 10

date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order'.

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

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 11

2. TYPES OF NPA
A] 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 non standard assets like as sub-standard,

doubtful, and loss assets. It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs Gross Advances

B] Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of 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:

Net NPAs = Gross NPAs Provisions Gross Advances - Provisions

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 12

REPORTING FORMAT FOR NPA GROSS AND NET NPA

Name of the Bank: Position as on PARTICULARS 1) Gross Advanced * 2) Gross NPA * 3) Gross NPA as %age of Gross Advanced 4) Total deduction( a+b+c+d ) ( a ) Balance in interest suspense a/c ** ( b ) DICGC/ECGC claims received and held pending adjustment ( c ) part payment received and kept in suspense a/c ( d ) Total provision held *** 5) Net advanced ( 1-4 ) 6) Net NPA ( 2-4 ) 7) Net NPA as a %age of Net Advance *excluding Technical write-off of Rs.________crore. Amount Rs.

**Banks which do not maintain an interest suspense a/c to park the accrued interest on NPAs may furnish the amount of interest receivable on NPAs.

***Excluding amount of Technical write-off (Rs.______crore) and provision on standard assets. (Rs._____crore).

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 13

3. CATEGORIES OF NPA

1. Standard Asset are treated as standard when interest and installment are received regularly 2. Sub-Standard Assets are treated as sub-standard when interest and installment are not received within 180 days. 3. Doubtful Assets are treated as doubtful when interest and Installments are not received within 180 months. 4. Loss Assets are treated as loss assets when interest and installment are not received.

NPA PROVISION (Source: Secondary data) LOAN CLASSIFICATION Standard Asset Sub standard Asset PERIODS After 90 days After 90 days to 18 months Doubtful Loss Bad & doubtful In every case provision overdue interest is 100% After 18 months to 30 After 30 months to 40 20% of loan amt. 50% of loan amt. 100% of loan amt. PROVISION IN % 0.25% of loan amt. 10% of loan amt.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 14

4. PREVENTIVE MEASUREMENT FOR NPA

y Early Recognition of the Problem:-

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

Identifying Borrowers with Genuine Intent:-

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

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

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 15

need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.

Timeliness & Adequacy of Response:-

Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoters commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.

Focus on Cash Flows:-

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

Management Effectiveness:-

The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing units 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 technoeconomic viability study must thus become the basis on which any future action can be considered.

Multiple Financing:-

A. During the exercise for assessment of viability and restructuring, a Pragmatic

and unified approach by all the lending banks/ FIs as also sharing of all
Page 16

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.

B. In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd. (CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one
set 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.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2010

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

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 17

5. HOW TO REDUCE NPAs?

y y y y y y y

Arrest- slippage in existing standard assets. Identify new / probable NPAs List out high value NPA accounts. Examine security aspect. Consider rescheduling in genuine cases. Recovery planning: Distribute accounts among staff members/ Director/officers. Meet the borrowers frequently

Review of NPAs Account: Branch wise monthly statement Opening Balance (1) (2) (3)

(+) Fresh Addition Cash Recoveries

------------------------------Closing Balance (4)

NPA = Cash Recoveries (3) Closing Balance (4) y y y y Review accounts if interest is not served in the last month Regular limits review on due date Ensure there is no erosion in the value of security & There is no threat to recovery for any reason.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 18

6. MAJOR DEVELOPMENTS IN BANKING AND FINANCE

6.1 Banking Developments The RBI allowed resident Indians to maintain foreign currency accounts. The accounts to be known as resident foreign currency (domestic) accounts, can be used to park forex received while visiting any place abroad by way of payment for services, or money received from any person not resident in India, or who is on a visit to India, in settlement of any lawful obligations. These accounts will be maintained in the form of current accounts with a cheque facility and no interest is paid on these accounts. With a view to liberalise gold trading, the Reserve Bank has decided to permit authorised banks to enter into forward contracts with their constituents like exporters of gold products, jewellery manufacturers and trading houses, in respect of the sale, purchase and loan transactions in gold with them. The tenor of such contracts should not exceed 6 months. The Reserve Bank of India has told foreign banks not to shut down branches without informing the central bank well in advance. Foreign banks have been further advised by the Reserve Bank of India to furnish a detailed plan of closure to ensure that their customers interests and conveniences are addressed properly. The RBI has prohibited urban co-operative banks from acting as agents or subagents of money transfer service schemes. The RBI has allowed banks to invest undeployed foreign currency non-resident (FCNR-B) funds in the overseas markets in the long-term fixed income securities with ratings a notch lower than highest safety. Earlier, banks were allowed to invest only in long-term securities with highest safety ratings by international agencies. The RBI has defined the term willful defaulter paving the way for banks to acquire assets of defaulting companies through the Securitisation Ordinance and reduce their NPAs faster. According to the RBI a willful defaulter is one who has not used bank funds for the purpose for which it was taken and who has not repaid loans despite having adequate liquidity. International credit rating agency Standard & Poor has estimated that the level of gross problematic assets in India can move into the 35-70 per cent range in the event of a recession. It has also estimated that
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 19

the level of non-performing assets (NPAs) in the system to be at 25 per cent, of which only 30 per cent can be recovered. The Cabinet cleared a financial package for IDBI and agreed to take over the contingent liabilities to the tune of Rs.2500 crore over five years. The IDBI Act will be repealed during the winter session of the Parliament, paving the way for IDBIs conversion into a banking company. The IDBI would be given access to retail deposits, to enable it to bring down the cost of funds, but will be spared from priority sector lending and SLR requirements for existing liabilities. The RBI has issued guidelines for setting up of offshore banking units (OBUs) within special economic zones (SEZs) in various parts of the country. Minimum investment of $10 million is required for setting up an OBU. All commercial banks are allowed to set up one OBU each. OBUs have to undertake wholesale banking operations and should deal only in foreign currency. Deposits of the OBUs will not be covered by deposit insurance. The loans and advances of OBUs would not be reckoned as net bank credit for computing priority sector lending obligations. The OBUs will be regulated and supervised by the exchange control department of the RBI. With a view to develop the derivatives market in India and making available hedged currency exposures to residents an RBI Committee headed by Smt. Grace Koshie, recommended phased introduction of foreign currency-rupee (FC/NR) options. _ The Reserve Bank of India has notified the draft scheme for merging Nedungadi Bank with Punjab National Bank. This is the first formal step towards bringing about a merger between the two Banks.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 20

7. PUBLIC SECTOR BANKS

7.1 Public Sector Banks: Before the independence, the banking system in India was primarily associated with urban sector. After independence, the banks had to spread out into rural and un- banked areas and make credit available to the people of those areas.

In 1969 the government nationalized 14 major commercial banks. Still the wide disparities continued. To reduce the disparities the government nationalized 6 more commercial banks in 1980 government came to own 28 banks including SBI and its 7 subsidiaries. Today, we are having a fairly well developed banking system with different classes of banks-public sector banks, foreign banks, and private sector banks-both old and new generation.

In July 1993, New Bank of India was merged with Punjab National Bank. Now, there are 27 banks in the public sector viz. State Bank of India and its 7 associates, 19 commercial banks exclusive of Regional Rural.

In terms of sheer geographical spread, the public sector system is the largest. The statistics are as follows: a network of 64000, branches-one branch for every 14000 Indian with over 64 crores customers. This labour intensive network has built-in cost, which makes the public sector banks inherently uncompetitive. Reduction of branches to achieve cost saving has not received a munch thrust as it should. Public sector banks are characterized by mammoth branch network,

huge work force, relatively lesser mechanization, and huge volume but of less value business transactions, social objectives and their own legacy system and procedures.

Improving profitability in general requires efforts in several directions, i.e. cutting in cost, improving productivity, better recovery of loan and to reduce high level of NPAs. The public sector banks have to build up the cost-benefit culture in their operations. When there is a thin margin in banking operation, the public sector banks in India have to increase the turnover. Previously, Indian banks
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 21

were relying on high credit deposit ratio. Now, the Indian banks have to depend on the volume of high business turnover. The returns on assets have to be improved.

7.2 Challenges For The Public Sector: Indian banks functionally diverse and geographically widespread have played a crucial role in the socio-economic progress of the country after independence. Growth of large number of medium and big industries and entrepreneurs in diverse fields were the direct results of the expansion of activities of banks. The rapid growth, forever lead to strains in the operational efficiency of the banks and the accumulation of non-performing assets (NPAs) in their loans portfolio. The uncomfortably high level of NPAs of banks however is a cause for worry and it should be brought down to international acceptable levels for creating a vibrant and competitive financial system. NPAs are serious strains on the profitability of the banks as they cannot book income on such accounts and their funding cost provision requirement is a charge on their profit. Although S & P cited as a reasons for mounting of NPAs priority sector lending, outdated legal system which not only encourages the incidence of NPAs but also prolongs their existence by placing a premium on default and delay in finalization of rehabilitation packages by the Board for Industrial and Financial Reconstruction are some of the major causes for the rising of NPAs. The following deficiencies were noticed in the managing Credit Risk: y y y y y y y y y y y The absence of written policies. The absence of portfolio concentration limits. Excessive centralization or decentralization of lending authorities. Cursory financial analysis of borrower. Infrequent customer contact. Inadequate checks and balances in credit process The absence of loan supervision A failure to improve collateral position as a credit deteriorate Excessive overdraft lending. Incomplete credit files The absence of the assets classification and loan-loss provisioning standards

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 22

A failure to control and audit the credit process effectively.

In July 1993, New Bank of India was merged with Punjab National Bank. Now, there are 27 banks in the public sector viz. State Bank of India and its 7 associates, 19 commercial banks exclusive of Regional Rural. Following are the 21 public sector banks. 1. 2. 3. 4. 5. 6. 7. 8. 9. Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank

10. Indian Bank 11. Indian Overseas bank 12. Punjab National Bank 13. Punjab and Sind Bank 14. State Bank of India 15. State Bank of India & its associates 1) State Bank of Hyderabad 2) State Bank of Patiala 3) State Bank of Indore 4) State Bank of Mysore 5) State Bank of Saurashtra 6) State Bank of Travancore 7) State Bank of Bikaner & Jaipur 16. Syndicate Bank 17. UCO Bank 18. Union Bank of India (UBI) 19. Vijaya Bank 20. United Bank of India

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 23

Public Sector Banks: Total Assets, Gross NPA, and Net NPA
Name of the Bank NATIONALI S-ED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of India Associates of SBI State Bank of Bikaner & Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore 13887.58 15504.24 18038.14 715.00 585.12 580.29 409.67 342.11 281.79 22056.56 20389.41 63322.04 59566.57 19039.87 66520.64 47260.31 19703.20 17908.60 26640.54 30294.48 24764.46 20937.25 70910.07 69805.86 21470.45 72135.15 52613.67 23604.19 18842.07 30262.94 35441.12 28050.92 24678.36 76476.85 76626.77 24923.18 82054.93 57105.16 26271.98 20161.96 35375.22 41154.72 1821.31 470.10 4185.72 3434.00 876.63 2150.29 3253.00 484.74 1928.26 2359.07 1631.40 2001.85 524.14 4489.30 3722.00 906.42 2112.44 3376.00 527.05 1996.02 2175.35 1818.54 1841.50 580.70 4167.90 3804.00 957.54 2474.78 3244.00 657.34 1616.58 1629.82 1896.48 1074.64 219.02 1850.54 2138.00 497.67 1345.99 1830.00 171.19 1280.31 949.93 917.58 1160.1 237.23 1913.1 2304.0 479.71 1288.3 1699.0 253.43 1227.2 903.58 957.51 886.9 206.2 1700. 2382. 459.1 1453. 1562. 198.3 997.2 754.9 912.2 Total Assets 2009 2010 2011 2009 Gross NPA 2010 2011 2009 Net NPA 2010 2011

27072.43 13402.38 63519.22 28243.22 27331.18 38977.74 21482.82 14256.61 626987.8 315644.2

32236.93 13753.57 72914.66 31756.19 31381.37 44357.89 22776.38 16144.80 706109.0 348228.2

33987.63 14490.91 86221.80 34435.43 34914.08 51060.49 24270.68 19079.37 791281.4 375876.5

585.76 1026.15 3460.10 1074.60 1284.02 2056.33 1411.15 594.92 34087.55 15874.97

951.79 1091.84 4139.86 1299.13 1332.65 1215.50 602.69 36763.05 36763.05 15485.85

1146.25 1246.89 4980.06 1420.17 1366.49 2387.61 959.08 505.54 36882.7 13506.0

397.11 634.13 1871.11 530.64 655.92 1201.22 602.30 356.06 18523.36 6856.26

453.80 651.21 1810.0 689.59 723.59 1338.3 541.99 373.24 19005. 6810.2

225.2 639.4 1526. 700.0 697.1 1253. 406.0 205.8 17169 6183.

18426.03 8222.52 9413.49 14324.81 8583.06 14482.67

22120.80 9845.90 10353.67 17372.51 9369.85 16493.37

26131.54 11376.37 11335.75 21288.90 10873.91 91030.16

1075.29 325.19 581.01 688.99 568.54 757.93

898.52 320.10 624.61 628.02 443.25 727.61

734.84 295.25 562.01 531.29 354.34 635.26

555.06 202.57 336.96 336.20 262.38 495.97

417.47 153.46 361.51 254.78 203.57 425.05

315.39 137.84 272.90 160.85 163.96 280.00

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 24

Total of 7 Associates Total of State Bank Group Total of Public Sector Bank S

87340.17 402984.3 1029972.

101060.4 449228.6 1155397.

118077.7 493954.2 1285235.

4711.95 20586.92 54674.47

4227.23 19713.08 56476.13

3698.28 17204.35 54087.08

2598.81 9455.07 27978.43

2157.9 8968.2 27973.

1612.7 7795.7 24963.

Public Sectors Banks: Profits

Name of the Bank NATIONALIS ED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of India Gross
2009

Provisions &contingency
2011 2009 2010 2011 2009

Net profit
2010 2011

profit 2010

266.01 248.72 1036.47 772.02 239.98 1131.23 470.48 532.06 76.83 61.59 306.60 534.10 102.74 145.21 297.79 213.70 511.25 136.72 178.48 8062.05 3466.78

407.98 425.38 1309.26 1408.45 415.05 1656.24 704.36 622.94 335.39 307.15 616.36 917.10 163.70 1473.80 355.24 475.98 869.24 237.16 252.51 12953.2 6044.83

515.8 754.83 1716.62 2030.00 520.58 1997.37 923.85 852.52 493.83 590.25 794.14 1163.06 280.84 2317.29 618.79 624.04 1303.92 556.02 432.36 18486.1 7775.40

226.0 127.5 761.8 520.1 194.7 846.1 424.0 270.2 342.9 335.5 190.6 331.2 89.48 481.5 62.86 180.7 355.7 117.5 107.7 5966. 2362.

327.7 223.1 763.3 903.2 269.6 914.8 541.0 314.8 324.0 273.9 386.1 596.5 140.6 911.4 104.6 311.4 555.1 118.1 121.6 8101. 3613.

949.84 351.84 943.84 1179.00 298.56 978.48 618.33 436.53 379.14 401.42 378.04 706.11 276.41 1475.09 274.66 416.55 751.23 250.83 235.80 10702.2 4670.40

39.91 121.19 274.66 251.88 45.19 285.10 46.46 261.84 -266.12 -274.00 115.93 202.89 13.26 263.64 234.94 33.00 155.47 19.14 70.73 2095.10 1604.25

80.21 202.27 545.93 505.22 145.41 741.40 163.30 308.10 11.36 33.22 230.21 320.55 23.04 562.39 250.55 164.52 314.13 119.04 130.90 4851.76 2431.62

165.9 402.9 772.7 851.0 222.0 1018. 305.5 415.9 114.1 188.8 419.1 456.9 4.43 842.2 344.1 207.4 552.6 305.1 196.5 7783. 3105.

Associates of SBI State Bank of 268.30 Bikaner & Jaipur

390.62

440.85

162.9

226.1

237.5

105.37

164.50

203.2

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 25

State Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7 Associates Total of State Bank Group Total of Public Sector Bank S

448.39 172.46 137.94 399.12 116.38 230.24 1772.83 5739.61 13801.6

600.05 342.24 234.79 564.63 221.26 321.26 2674.85 8719.68 21672.9

757.95 421.00 352.75 739.54 286.63 455.00 3453.72 11229.1 29715.2

298. 108.4 112.2 238.0 102.6 132.7 1155. 3577. 9484.

373. 217.1 168.8 331.6 139.2 200.3 1656. 5270. 13371

456.5 220.6 236.8 417.5 194.0 283.9 2047. 6717. 17419

150.22 63.99 25.72 161.10 13.11 97.49 417.59 2221.84 4316.94

226.49 125.10 65.90 232.94 82.09 120.93 1017.86 3449.48 8301.24

301.4 200.3 115.9 322.0 92.55 171.0 1406. 4511. 12295

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 26

8. NPA CHARACTERISTICS IN INDIA

8.1 Size of NPA Portfolios Reviewed On an overall basis, in comparison to the Gross NPA portfolio of the financial sector in India for the year ended March 31 2011, approximately Rs. 452 billion from the total gross NPAs of Indian banking sectors Public Sector Banks cover 55% of gross NPAs Private sector banks cover 11% of gross NPAs Foreign sector banks cover 3.02%, and Financial institutions cover 29%

8.2 Sectoral Segmentation Banks in India are required to reserve a part of their lending for the priority sector. Broadly this comprises the sub-sectors such as Agriculture, Small Scale Industries, and other activities such as small business, retail trade, small transport operators, professional and self employed persons, housing, education loans, micro-credit etc. In addition, certain investments in bonds issued by State Financial Corporations (SFCs), State Industrial Development Corporations (SIDCs), etc. are also recognized as priority sector lending provided such bonds have been issued exclusively to finance priority sector activities.

As seen from the Chart below, around 23% of the NPA portfolio is in the priority sector including agriculture, small scale and others. The balance 77% belongs to NPAs in the non-priority sector which includes NPAs pertaining to public sector undertakings, corporate and retail borrowers. Within the non-priority sector, a large proportion of NPAs (more than 96%) by gross value are in the corporate segment. The largest proportion among the corporate borrowers is private sector corporate borrowers.

Since the sectoral segmentation norms are applicable to banks only the above graph is somewhat skewed (participant lenders included financial institutions).
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 27

Given below is the sectoral segmentation in public sector banks only. Priority sector NPAs constitutes 46% of the NPA portfolio of participant public sector banks by value. In the non-priority sector corporate borrowers form the largest proportion of NPAs.

8.3 Industry Classification Most of the participant lenders have provided us with detailed NPA profile for large NPAs. The remainder of our analysis for NPA profiling, therefore, focuses on the large NPA portfolio. The total large NPA (individual gross value above Rs 10 million) portfolio of the participating banks amounts to Rs 357 billion approximately. The top 5 industries with maximum Large NPAs (by gross value) for the participant lenders included in this study are Textiles, Iron & Steel,

Chemicals, Engineering and (non ferrous) Metals. The Large NPAs of these 5 industries alone comprise approximately half of the total Large NPA portfolio (by gross value) of the participating lenders. At 15%, the Textiles industry is the single largest contributor to the gross Large NPAs of the participating lenders. It is followed by Iron & Steel with 14%, Chemicals with 9%, Engineering with 8% and
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 28

Metals with 5%. The participant lenders provided loan grading segmentation of the Large NPAs in the top 5 industries viz. textiles, iron & steel, chemicals, engineering and metals. Only about 20% of the Large NPA portfolio by gross value is in sub-standard assets. This indicates that the rehabilitation potential of about 80% of the Large NPA portfolio in each of the top 5 industries is somewhat limited.

Nearly 68% of the gross NPAs by gross value are in the doubtful category. Within this, 28% by gross value are in the C3 subcategory. It might be worth noting that C3 category comprises assets that have been non-performing for at least 5 years and that there is no upper time limit on holding assets in the C3 category if the lender is able to provide evidence that collateral exists. Also nearly 15% to 18% of the Large NPAs in each of the top industries (other than Chemicals) are loss assets.

8.4 State-wise Distribution Data was collected from participant lenders on state wise distribution of their Large NPAs. The top 5 states with maximum Large NPAs (by gross value) for the lenders included in this study are Maharashtra (including Goa), Gujarat, Delhi
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 29

(including Rajasthan), Andhra Pradesh and Tamil Nadu. The Large NPAs in these 5 states alone comprise approximately 65% of the total Large NPA portfolio (by gross value) of the lenders in the sample.

Maharashtra (including Goa) with nearly 24% is the single largest contributor to the gross Large NPAs of the participant lenders. It is followed by Gujarat with 11%, Delhi (including Rajasthan) with slightly more than 10%, Andhra Pradesh with 10% and Tamil Nadu with just under 10%.

8.5 Region-wide Distribution The NPA portfolios of lenders covered in the study have been segmented into the following regions: Northern - J&K, Himachal Pradesh, Punjab, Haryana, Delhi, Rajasthan, Uttaranchal and UP Eastern - North eastern states, West Bengal, Orissa, Bihar and Jharkhand Southern - Tamil Nadu, Kerala, Pondicherry, Andhra Pradesh, Karnataka Western - Maharashtra, Goa, Gujarat Central - Madhya Pradesh, Chattisgarh Based on the above segmentation, the region-wide distribution of Large NPAs of the participant Lenders taken together is provided in the Chart below: The Western region (with 35%) has the maximum Large NPAs (by gross value) of the participating lenders. This is followed by the Southern and Northern Regions
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 30

with 24% each. Eastern and Central regions have a lower proportion of NPAs by gross value at 10% and 6% respectively.

On an overall basis, the geographical distribution of NPAs is clearly linked to the level of industrialization in various parts of India. The Western region in general and Maharashtra and Gujarat, in particular, are amongst the more industrialized areas of India. As a result, these areas have also attracted the maximum amount of bank credit. The slowdown in industrial activity during the past few years has also been more pronounced in these areas, which has resulted in a higher proportion of NPAs.

8.6 Operating Status of Assets In order to assess the rehabilitation potential of the Large NPAs, we had requested banks to provide break-down of their Large NPA portfolio between

operating/non- operating and implementation status. The table below provides a break-up of the NPA portfolio of all participating banks on the basis of operating status. As can be seen, only a very small proportion of the Large NPA portfolio (by gross value) is under implementation. The remaining is more or less equally split between assets which are operating and those which are not.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 31

8.7 Security Profile The data on break-up of the number and gross value of the Large NPAs based on the type of security (Fixed assets/current assets) was also received from the participant lenders. It can be seen from the Chart below that 89% of the secured large NPAs are secured against Fixed Assets, which suggests that some value might be preserved even if assets are not operating.

8.8 Possible Increase in Near Future Several measures are being taken both by the Government, Reserve Bank of India and by the banks and institutions themselves to reduce the level of NPAs in the system. While the absolute value of NPAs has been increasing marginally, the NPA ratios (both gross and net) have been declining over the last few years. In fact in the year ended March 31, 2010, the levels of NPAs have also declined in absolute terms also as compared to the previous year. The Indian system is moving towards international practices which utilize significant qualitative measures in addition to quantitative measures. Such a change may contribute to standard loans being graded as NPAs in the future. Also, according to some estimates, the application of the 90 days past due criteria from March 31, 2011 (as proposed by RBI) will increase gross NPAs by 3-5% of gross advances.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 32

9. UNDERLYING REASONS FOR NPAs IN INDIA

An internal study conducted by RBI shows that in the order of prominence, the following factors contribute to NPAs. 9.1 Internal Factors y y y y Diversion of funds for Expansion/diversification/modernization Taking up new projects Helping/promoting associate concerns time/cost overrun during the project implementation stage y y y y y Business (product, marketing, etc.) failure Inefficiency in management Slackness in credit management and monitoring Inappropriate technology/technical problems Lack of co-ordination among lenders

9.2 External Factors y y y y y y Recession Input/power shortage Price escalation Exchange rate fluctuation Accidents and natural calamities, etc. Changes in Government policies in excise/ import duties, pollution control orders, etc. As mentioned earlier, we held discussions with lenders and financial sector experts on the causes of NPAs in India and whilst the above-mentioned causes were reaffirmed, some others were also mentioned. A brief discussion is provided below. y Liberalization of economy/removal of restrictions/reduction of tariffs

A large number of NPA borrowers were unable to compete in a competitive market in which lower prices and greater choices were available to consumers. Further, borrowers operating in specific industries have suffered due to political,
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 33

fiscal and social compulsions, co mp ou n di ng p r es s ur es from liberalization (e.g., sugar and fertilizer industries). y Lax monitoring of credits and failure to recognize Early Warning Signals

It has been stated that approval of loan proposals is generally thorough and each proposal passes through many levels before approval is granted. However, the monitoring of sometimes-complex credit files has not received the attention it needed, which meant that early warning signals were not recognised and standard assets slipped to NPA category without banks being able to take proactive measures to prevent this. Partly due to this reason, adverse trends in borrowers' performance were not noted and the position further deteriorated before action was taken. y Over optimistic promoters

Promoters were often optimistic in setting up large projects and in some cases were not fully above board in their intentions. Screening procedures did not always highlight these issues. Often projects were set up with the expectation that part of the funding would be arranged from the capital markets, which were booming at the time of the project appraisal. When the capital markets subsequently crashed, the requisite funds could never be raised, promoters often lost interest and lenders were left stranded with incomplete/unviable projects. y Directed lending

Loans to some segments were dictated by Governments policies rather than commercial imperatives. y Funding mismatch

There are said to be many cases where loans granted for short terms were used to fund long term transactions. y High Cost of Funds

Interest rates as high as 20% were not uncommon. Coupled with high leveraging and falling demand, borrowers could not continue to service high cost debt. y Willful Defaulters

There are a number of borrowers who have strategically defaulted on their debt service obligations realizing that the legal recourse available to creditors is slow in achieving results.
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 34

10. IMPACT OF NPA

10.1 Profitability:NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesnt

affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.

10.2 Liquidity:Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes 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.

10.3 Involvement of Management:Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.

10.4 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.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 35

11. RATIO ANALYSIS

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

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

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

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 36

S.No.
1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Name of Bank
2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of India Associates of SBI State Bank of Bikaner & Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7 Associates Total of State Bank Group Total of Public Sector Bank S

Gross NPA to Gross advances 2009 2010 2011 3 4 5

17.66 6.13 14.11 10.25 12.35 7.48 16.05 5.40 25.34 21.76 11.81 5.21 18.45 11.71 7.87 11.64 11.20 21.54 10.00 12.16 12.93 16.94 5.26 12.39 9.37 10.44 6.22 14.70 5.19 24.11 17.86 11.35 6.57 18.19 11.38 8.35 9.59 10.77 16.36 9.39 11.01 11.95 13.65 4.89 11.02 8.55 9.55 5.96 13.06 5.27 17.86 12.39 10.29 6.94 19.25 11.58 8.32 8.24 8.96 12.15 6.18 9.17 9.34

2 3 1 2 3 4 5 6 7

12.91 14.03 9.46 12.83 9.66 14.57 11.38

9.36 10.08 7.18 12.07 6.94 10.18 9.41

8.15 7.28 5.53 10.14 4.80 7.32 6.67

12.73 12.37

11.23 11.09

8.68 9.36

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 37

The table above indicates the quality of credit portfolio of the banks. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa. We can see from the above table that the Punjab and Sind Bank has the higher gross NPA ratio of 19.25 % followed by the Dena Bank with 17.86 %. The Allahabad Bank, Central Bank of India and united Bank of India also have higher gross NPA ratio with 13.65 %, 13.06% and 12.15%. Whereas the state Bank of Patiala, Andhra Bank and Canara Bank showed lower ratio with 4.8 %, 4.89 % and 5.96 % in the year 2011.

11.2 Net NPA Ratio The net NPA percentage is the ratio of net NPA to net advances, in which the provision is to be deducted from the gross advance. The provision is to be made for NPA account. The formula for that is:

S.No. 1
1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Name of Bank 2
NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian OverseasBank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of

Net NPA to Net Advances 2009 2010 2011 3 4 5

11.25 2.95 5.77 5.64 7.41 4.84 9.72 1.98 18.37 10.06 7.01 3.60 12.27 6.74 4.05 6.35 6.87

11.03 2.45 4.23 6.02 5.81 3.89 7.98 2.31 16.31 8.28 6.32 3.2 11.7 5.32 4.63 5.45 6.26 7.9 6.02

7.26 1.79 5.27 5.59 4.82 3.59 6.74 1.65 11.83 6.15 5.23 1.4 10.89 3.86 4.29 4.36 4.91 5.52 2.8

India United Bank of India 10.50 Vijaya Bank 6.23

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 38

Total of 19 NAT. Bank S

7.56

6.63

5.05

2 3 1 2 3 4 5 6 7

State Bank of India Associates of SBI State Bank of Bikaner & Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7 Total of State Total of Public

6.03

5.63

4.5

7.83 7.82 5.91 7.65 4.92 7.30 7.75 7.03 6.90 7.37

4.96 4.97 3.58 7.36 2.94 4.95 5.72 4.93 5.28 6.15

4.13 3.25 2.66 5.19 1.49 3.53 3.06 3.33 3.92 4.59

This ratio indicates the degree of risk in the portfolio of the banks. High NPA ratio indicates the high quantity of risky assets in the Banks for which no provision are made. From the table it becomes clear that the NPA ratio of almost all the Banks have been improved quite well as compared to the previous year. The Dena bank has the highest NPA ratio of 11.83 % followed by the Punjab and the Sind Bank with 10.89 %. The Oriental Bank of Commerce has showed the lowest NPA ratio 1.4 % and State Bank of Patiala, Andhra Bank have also showed lower NPA ratio with 1.49 % and 1.79% in 2011.

11.3 Provision Ratio Provisions are to be made for to keep safety against the NPA, & it directly affect on the gross profit of the Banks. The provision Ratio is nothing but total provision held for NPA to gross NPA of the Banks. The formula for that is,

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 39

S.No.
1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Name of Bank
2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 NAT. Bank S

2009 3

Provision Ratio 2010 4

2011 5

12.41359 27.12827 18.20021 15.14677 22.22032 39.34958 13.03443 55.74535 17.78598 14.22552 11.68812 56.54534 8.719973 13.91781 5.849618 14.07922 17.3017 8.332211 18.11168 17.50478 14.88211

16.37335 42.56687 17.00332 24.26733 29.7467 43.30727 16.02666 59.73437 16.23381 12.59246 21.23407 62.67559 12.88284 22.01548 8.05847 23.37148 45.66927 19.5988 0.330767 22.0371 23.33233

51.57969 60.58894 22.64546 30.99369 31.1799 39.53806 19.06073 66.40856 23.45322 24.62971 19.93377 61.60174 22.16795 29.61992 19.33994 30.48321 31.46368 26.15319 46.64319 29.01683 34.58001

2 3 1 2 3 4 5 6

State Bank of India Associates of SBI State Bank of Bikaner & Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra

22.78741 16.37118 23.07381

38.64336 18.66124 41.42786

40.9416 24.79229 38.00241

2.68102 6.931275

3.762056 8.911607

5.682238 10.97581

11.71304

15.36264

20.2686

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 40

State Bank of Travancore Total of 7 Associates Total of State Bank Group Total of Public Sector Bank S

6.173586 35.51276 738.0781 491.8792

9.48382 49.08146 999.9431 669.9186

11.47415 63.10697 1021.935 1077.571

This Ratio indicates the degree of safety measures adopted by the Banks. It has direct bearing on the profitability, Dividend and safety of shareholders fund. If the provision ratio is less, it indicates that the Banks has made under provision. The highest provision ratio is showed by corporation Bank with 66.40 % followed by Oriental Bank of commerce with 61.60 %. The lowest provision ratio is showed state Bank of Patiala with only 10.97 % in the year 2011. 11.4 Problem Asset Ratio It is the ratio of gross NPA to total asset of the bank. The formula for that is:

S.No. 1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14

Name of the Bank 2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank

Proble asset ratio 2009 2010 2011 3 4 5

0.082575 0.023056 0.066102 0.05765 0.046042 0.032325 0.068832 0.024602 0.107672 0.088552 0.053851 0.021637 0.076565 0.054473 0.080836 0.025034 0.06331 0.053319 0.042217 0.029284 0.064166 0.022329 0.105934 0.071882 0.051312 0.029525 0.079386 0.056777 0.065648 0.023531 0.054499 0.049643 0.03842 0.03016 0.056807 0.025021 0.08018 0.046072 0.046082 0.033726 0.086046 0.057759

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 41

15 16 17 18 19 2 1 2 3 4 5 6 7

Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of India State Bank of Bikaner & Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Total of 7 Associates Total of State Bank Group Total of Public Sector Bank S

0.038048 0.04698 0.052757 0.065687 0.041729 0.054367 0.050294 0.025513 0.509056 0.364796 0.061197 0.250527 0.224613 0.00555 0.004785 0.00229 0.025513

0.04091 0.042466 0.027402 0.026461 2.277083 0.052064 0.04447 0.0377 0.040619 0.032511 0.060327 0.03615 0.047306 0.044115 0.041829 0.043882 0.04888

0.041242 0.039139 0.04676 0.039516 0.026497 0.046611 0.035932 0.131147 0.029777 0.003861 0.007334 0.021317 0.004318 0.011124 0.140769 0.853307 1.5289

It has been direct bearing on return on assets as well as liquidity risk management of the bank. High problem asset ratio, which means high liquid. from the above table it becomes clear that Punjab and Sind Bank and Dena Bank have the high ratio of 8.6% and 8.0%.thts ratio implies that the both above banks have the liquid assets through which they will be able torepay their liabilities of deposits quickly as compared to other banks.

11.5 Capital Adequacy Ratio Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which are weighted/adjusted according to risk attached to them i.e.

As per prudential Norms Banks were required to achieve 8% CAR, increased to 9% by March 2000. For the purpose of capital Adequacy Achievement, the capital base i.e. Tire I + Tire II should not be less than the prescribed % of total Risk Weighted Assets of the bank.
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 42

S.No.
1 1 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 2 3 1 2 3 4 5 6 7

Name of the Bank 2009

2 NATIONALISED BANKS Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab and Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total of 19 NAT. Bank S State Bank of India Associates of SBI State Bank of Bikaner & Jaipur State Bank of Heyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore 3 10.5 13.4 12.8 12.23 10.64 9.84 10.02 13.03 7.73 -12.77 10.24 11.81 11.42 10.24 11.72 9.05 10.86 10.40 11.50 12.79 12.39 12.28 12.73 11.16 12.37 13.89 11.79

Capital adequacy ratio 2010

4 10.62 12.59 11.32 10.68 11.16 11.88 9.58 17.90 7.64 1.70 10.82 10.99 10.70 10.70 12.12 9.64 11.07 12.02 12.25 13.35 12.26 13.67 12.78 11.81 12.55 13.20 12.54

2011
5 11.15 13.62 12.65 12.02 11.76 12.50 10.51 18.50 9.33 10.85 11.30 14.04 10.43 12.02 11.03 10.04 12.41 15.17 12.66 13.50 13.08 14.91 13.09 11.62 13.57 13.68 11.30

The capital adequacy ratio is important for the to maintain as per the banking regulations. As far as this ratio is concerned the Corporation Bank has shown much appreciated result by acquiring the ratio of 18.50% followed by the United Bank of India and State Bank of Hydrabad having ratios of 15.17%and 14.91%. But one remarkable performance is done by the Indian Bank which had CAR in negative with -12.77% in 2009 but improved its performance in 2011 by acquiring CAR 10.85%.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 43

11.6 Sub-Standard Assets Ratio It is the ratio of Total Substandard Assets to Gross NPA of the bank.

The ratios calculated below are for the entire public sector banks: (Rs. In crore) Year Substandard Assets Gross NPAs 2009 14745 54674.47 2010 15788 56476.13 2011 14909 54087.08

Calculations of ratio: 2009 26.96% 2010 27.95% 2011 27.56%

It indicates scope of up gradation/improvement in NPA. Higher substandard asset ratio means that in whole NPA the sub standard ratio has major proportion, which indicates that there is a high scope for advance up gradation or improvement because it will be very easy to recover the loan as minimum duration of default. Till 2009 this ratio of PSB was very high but dropped in recent years & than again it increased, which means there is a need of advance up gradation.

11.7 Doubtful Asset Ratio: It is the ratio of Total Doubtful Assets to Gross NPAs of the bank.

(Rs. In crore)

Year
Doubtful Assets Gross NPAs

2009 33485 54674.47

2010 33658 56476.13

2011 32340 54087.08

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 44

The ratios calculated below are for the entire public sector banks: 2009 2010 2011 61.24% 59.59% 59.79% It indicates the scope of compromise for NPA reduction. Above table shows the doubtful asset ratio of PSB, which is quite low in 2009 but has increased in recent years. This means that the bank will have to go through compromise measure for increasingly number of times as its substandard ratio has decreased in recent years.

11.8 Loss Asset Ratio: It is the ratio of total loss assets to Gross NPA of the bank.

(Rs. In crore)

Year
Loss Assets Gross NPAs

2009 6544 54674.47

2010 7061 56476.13

2011 6840 54087.08

The ratios calculated below are for the entire public sector banks: 2009 2010 2011 11.96% 12.50% 12.65%

It indicates the proportion of bad loans in the bank. Above table shows Loss Asset Ratio of PSB, which shows that the bank has maintained lower loss asset ratio, which indicate that the bank has lower bad loans. However compared to the ratio of 2007-2008 the same has increased in the recent year, which is detrimental to the bank. The bank must take necessary steps to control this ratio, as it is the indication that there is increasing incidence of erosion of securities and fraudulent Loan Accounts in the bank.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 45

12. SUGGESTIONS
Through RBI has introduced number of measures to reduce the problem of increasing NPAs of the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness of these measures. What I would like to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as under: (1) Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility. (2) The credit rating agency should regularly evaluate the financial condition of the clients. (3) Special accounts should be made of the clients where monthly loan concentration reports should be made. (4) It is also wise for the banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement. (5) Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with the use of their strength and weakness, and what will be their possible future growth in concerned to financial and operational performance. (6) Independent settlement procedure should be more strict and faster and the decision made by the settlement committee should be binding both borrowers and lenders and any one of them failing to follow the decision of the settlement committee should be punished severely. (7) Proper training is important to the staff of the banks at the appropriate level with ongoing process. That how they should deal the problem of NPAs, and what continues steps they should take to reduce the NPAs. (8) (9) Willful Default of Bank loans should be made a Criminal Offence. No loan is to be given to a Group whose one or the other undertaking has become a Defaulter.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 46

13. CONCLUSION
Classifications of Loan Assets of PSBs:
Standard Bank Group/Year Assets Amount Public Sector Banks 2008 2,73,618 84.1 16,033 4.9 29,252 9.0 2009 3,26,783 86.0 16,361 4.3 30,535 8.0 2010 3,87,360 87.6 14,745 3.3 33,485 7.6 2011 4,52,862 88.9 15,788 3.1 33,658 6.6 6,425 2.0 51,710 15.9 3,25,328 6,398 1.7 53,294 14.0 3,80,077 6,544 1.5 54,774 12.4 4,42,134 7,061 1.4 56,507 11.1 5,09,369 Substandard Assets Doubtful Loss Assets Total NPAs Assets % Total Advances Amount

% Amount % Amount % Amount % Amount

As per the above table, given the maximum advances in 2011 amount which 5,09,369 crore which increase from the 3,25,328.

They are trying to reduce the NPA by various means. In 2011 total NPA of PSBs has 11.1%, which is reduce from the 15.9% in 2008

Percentage of standard assets increased from 84.1% to 88.9% during the 2008 to 2011. % of loss assets, decreased from 2.0% to 1.4% during the 2008 to 2011.

In future, if it will reduce in this manner then it will reduce up to 0% NPA.

The glance of NPAs year by year Year 2005 2006 2007 2008 2009 2010 2011
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

NPAs 47,300 50,815 58,554 60,408 63,883 80246 94905

Page 47

However the problem of NPAs has made its home since last three and half decade, since then it is found that the NPAs are increasing year by year. If we look to the numbers of the NPAs , we may find that in 2005 the NPAs were at Rs.47,300 crore and in 2009 they were at Rs. 63,883, but after this period the NPAs increased in the Indian banking sector very drastically. It reached to

Rs.80246crore in 2010 and in 2011 it touched to the Rs. 94,905crore. Recently RBI is taking its measures but but the result is not up to the expectations and no doubt that some of the measures have been wrathful to the banks, what I think is that those steps should be taken out that would help the banks to reduce the problem of increasing NPAs. The Banks should also be very specific while providing credit facility to the borrowers. The ba nks before giving credit

facilities should perform basic calculations of the borrowers capacity to pay the debt back. However, this only is not necessary, banks should regularly evaluate the financial position of the borrower companies. A report is not said to be completed unless and until the conclusion is given to the report. A conclusion reveals the explanations about what the report has covered and what is the essence of the study. What my project report covers is concluded below. The problem statement on which I focused my study is NPAs the big challenge before the Public Sector Banks. The Indian banking sector is the important service sector that helps the people of the India to achieve the socio economic objective. The Indian banking sector has helped the business and service sector to develop by providing them credit facilities and other finance related facilities. The Indian banking sector is developing with good appreciate as compared to the global benchmark banks. The Indian banking system is classified into scheduled and non scheduled banks. The Public Sector Banks play very important role in developing the nation in terms of providing good financial services. The Public Sector Banks have also shown good performance in the last few years. The only problem that the Public Sector Banks are facing today is the problem of non-performing assets. The non performing assets means those assets which are
NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 48

classified as bad assets which are not possibly be returned back to the banks by the borrowers. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. The NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of the funds.

If we analyse the past years data, we may come to know that the NPAs have increased very drastically after 2003. In 2005 he gross NPAs of the Indian banking sector was 47,300 crore where as in 2009 the figure was 63,883 and which increased at faster rate in 2011 with 94,905 crore. The Public Sector Banks involve its nearly 50% of share in the NPAs. Thus we can imagine how Public Sector Banks are functioning. The RBI has also been trying to take number of measures but the ratio of NPAs is not decreasing of the banks. The banks must find out the measures to reduce the evolving problem of the NPAs. If the concept of NPAs is taken very lightly it

would be dangerous for the Indian banking sector. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of funds in the nation. This would help the nation to develop more banking branches and developing the economy by providing the better financial services to the nation.

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 49

BIBLIOGRAPHY:
 Banking Annual (October 2011) published by Business Standard.  Annual Report of Bank of Baroda 2010-2011.

WIBLIOGRAPHY:
 www.google.com  www.rbi.org.in

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 50

ANNEXURE

NPA CHALLENGE TO THE PUBLIC SECTOR BANKS

Page 51