A

“Research Project”
ON
“PROBLEM OF NPA AND ITS IMPACT ON
BANKS (WITH SPECIAL REFRENCE TO
STATE BANK OF INDIA)”

Submitted to
Punjab Technical University, Jalandhar in partial
fulfilment for the degree of Master of Business
Administration (Session 2008-2010)

Under the supervision of: - Submitted By:-

Dr. R.S GUPTA NAVJINDER GREWAL

HOD MGT DEPTT. MBA(II)YR

ROLL NO. (27)

 DECLARATION

I hereby certify that the work embodied in the project “Problem of NPA and its impact on
banks (with special reference to state bank of India" was done by me under the
supervision of Dr. R.S GUPTA (H.O.D MGT DEPTT,BCET)

The project is done for the partial fulfillment of Degree of Master of Business Administration
program of Punjab Technical University, Jalandhar from, Bhutta College Of Engineering
And Technology, Ludhiana. I have not submitted this report to any institute or University.

NAVJINDER GREWAL
 ACKNOWLEDGEMENT

My sincere thanks are due to all the contributors without whose efforts this project would not
have been completed. No task of this nature is a single person effort, so I am very thankful to
Dr. R.S GUPTA (H.O.D MGT DEPTT)

Under whose guidance I successfully completed my research project. Their unfailing interest
and support gave a new dimension to my work. They made it possible to collect abundance
of material, the relevant portion of which is quoted in this project.

I am also very grateful to all other Faculty of B.C.ET whose teaching methodology helped
me in completion of my project without any difficulty.

I also express my gratitude to the all respondent for their proper responses and cooperation
during my dissertation project.

I would like to extend my thanks to my all friends for their valuable suggestion and
cooperation at various stages during my project.

NAVJINDER GREWAL
 CHAPTER PLAN

S.No. Chapters Page No.

1. Introduction

Non –performing asset

• Classification of NPA

• Some issue of NPA

2. Review of literature

3. Objective of study

4. Research Methodology

• Research Design
• Sources of Data

5. Reason of NPA

6. Impact of NPA on Banks

7. Guidelines of RBI

8. Analysis and interpretation of data

9. Findings
10. Limitation

11. Recommendation

12. Conclusion

13.
Bibliography

INTRODUCTION TO THE PROJECT

Since the introduction of economic liberalization and financial sector reforms, Banks are
under growing pressure to bring down their NPAs so as to improve their performance and
viability. What is bothering the bankers today is the management of Non-performing Assets.
Over the period this problem has aggravated alarmingly and therefore needs urgent remedial
actions, so in this context a good number of circular instruction/guidelines have been issued
by bank/Reserve Bank of India.

Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of
Sh. M.Narsimham to examine and give recommendation for Income Recognition, Asset
Classification and Provisioning of loan assets of Banks and Financial Institutions. The
Committee examined the issues and recommended that a policy of Income Recognition
should be objective and based on record of recovery rather than on subjective considerations.
On the basis of the recommendations of the Narsimhan Committee, RBI had issued
guidelines to all Scheduled Commercial Banks on Income Recognition, Assets Classification
and Provisioning in April, 1992 which have been modified from time to time by the RBI on
the basis of experience gained and suggestions received from various quarters. The
Prudential Norms for Income Recognition, Asset Classification and Provisioning have come
into effect from the accounting year 31.03.1993.

Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India
Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were
also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June,
1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for
the purpose of Income Recognition and Assets Classification from the accounting year 1995-
96. However, guidelines relating to provisioning for RRBs have been made effective from
the financial' year ended 31.03.1997. The definition of NPAs is also gradually becoming
tough for RRBs to cover all advances like Commercial Banks. Although most of-the
guidelines relating to RRBs are similar to that of Commercial Banks, they have been made
applicable in a phased manner for RRBs.

INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played

a crucial role in the socio- economic progress of the country. Banks extend credit to different
types of borrowers for many different purposes. For most customers, bank credit is the
primary source of available debt financing.

For banks good loans are the most profitable assets. Return comes in the form of loan
interest, fee income and investment and the most prominent assumed risk is credit risk.
Credit risk involves inability or unwillingness of customer or counterpart to meet
commitments in relation to lending once a loan is overdue and ceases to yield income it
would become a Non Performing Asset.

Proper management and speedy disposal of NPAs is one of the most critical tasks of banks
today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has
been a matter of grave concern not only for the banks but also the real economy in general, as
NPAs can choke further expansion of credit which would impede the economic growth of the
country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions
in the economy. NPAs are not therefore the concern of only lenders but also the public at
large.

Granting of credit for economic activities is the prime duty of banking. Apart from raising
resources through fresh deposits, borrowings and recycling of funds received back from
borrowers constitute a major part of funding credit dispensation activity. Lending is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which results into economic growth. However lending also carries a risk called
credit risk, which arises from the failure of borrower. Non-recovery of loans along with
interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the
bank’s profitability on a large scale. Though complete elimination of such losses is not
possible, but banks can always aim to keep the losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the
banking industry in our country sending distressing signals on the sustainability and
insurability of the affected banks. The positive results of the chain of measures affected
under banking reforms by the Government of India and RBI in terms of the two Narasimhan
Committee Reports in this contemporary period have been neutralized by the ill effects of
this surging threat. Despite various correctional steps administered to solve and end this
problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted
universally on banking and financial institutions. The severity of the problem is however
acutely suffered by Nationalised Banks, followed by the SBI group, and the all India
Financial Institutions.
 STATE BANK OF INDIA

SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31, 2005. It
dominates the Indian banking sector with a market share of around 20% in terms of total
banking sector deposits. The increasing focus on upgrading the technology back-bone of the
bank will enable it to leverage its reach better, improve service levels, provide new delivery
platforms, and improve operating efficiency to counter the threat of competition effectively.
Once the core banking solution (CBS) is fully implemented, it will cover over 10,000
branches and ATMs of the State Bank group, and emerge as the strongest technology enabled
distribution network in India.

The increasing integration of SBI with its associate banks (associates) and subsidiaries will
further strengthen its dominant position in the banking sector and position it as the country’s
largest universal bank.

Resource-raising capabilities

SBI’s funding profile is strong, underpinned by its strong retail deposit base. The bank is
facing increasing competition in its metropolitan and urban franchise. SBI’s strong franchise
gives it access to a steady source of stable retail funds, which constitute around 59% of the
total resources as on March 31, 2005 (56% as at March 31, 2004).

Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in
the proportion of current account deposits, low-cost deposits have continued to constitute
over 40% of total deposits as at March 31, 2005. The bank’s cost of deposits (excluding
IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year from April
1 to March 31), compared with 5.48% in 2003-04. The bank’s liquidity position is very
strong due to healthy accretion to deposits, large limits in the call market, and significant
surplus SLR investments. SBI will maintain its strong funding profile and a low cost resource
position in view of its strong retail base and wide geographical reach.
Earnings profile to remain good

SBI will maintain a good earnings profile in the medium term despite high pressure on yields
due to the increasing competition in the banking sector. SBI’s earning profile is characterised
by consistency in the return on assets (PAT/Average Assets), at around 1% per annum for the
past three years, and diverse income streams. To maintain yields and pursue credit growth,
the bank is aggressively targeting retail finance and small and medium enterprises (SMEs).
The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile.
However, with the opening of government business like tax collection to other banks and
increased competition, the growth in fee income is expected to slow down. The bank’s
operating expense at 2.44% of average funds deployed in 2004-05 is in line with other public
sector banks. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of
the operating expenditure in 2004-05. Thus, despite good asset growth and technology
efficiency gains, the bank’s operating costs will remain high in the medium term. To be able
to reap the full benefits of technology implementation, the bank will have to reduce or
redeploy work force; since this is a sensitive issue, it is expected to happen gradually.

The bank’s fund based and fee income earnings are diversified across industries, regions,
asset classes, and customer segments.

Strong diversification in income streams will ensure that the bank’s earnings remain
relatively stable, despite the decline in profitability in some segments.

Comfortable capital position

SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a large capital
base of Rs 240.72 billion as at March 31, 2005. The bank has considerably improved its net
worth coverage for net NPAs to 4.4 times as at March 31, 2005 due to lower slippages
reflecting an improving asset quality, witnessed across the entire banking sector. The
capitalization levels of SBI are adequate to address the asset side risks and support the
business growth in the medium term.
Management strategies

In retail finance, the bank has leveraged its corporate relationships, pursued business growth
selectively, and has not competed based on interest rate. The bank has taken initiatives like
on-line tax returns filing and faster transfer of funds to protect its dominant position in the
government business. The bank also has a clear technology strategy that will enable it to
compete with the new generation private sector banks in customer service and operational
efficiency.

Asset quality to remain at average levels

The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at
March 31, 2005, compared with 4.9% for all scheduled commercial banks (SCBs) taken
together. The bank is facing challenges to improve the quality of assets originated, as can be
seen in the consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05.

To contain NPAs and ensure credit growth, the bank has decided to focus on financing the
retail (personal) segment as well as SMEs. The share of retail advances has increased to
24.73% (Rs 522.08 billion) of total advances as at September 30 2005. In the retail loan
segment, SBI is targeting primarily the housing loans segment, which constitutes Rs. 283.41
billion (54.3%) of total retail loans. The NPAs in retail finance are low currently; however
they are steadily increasing (especially in the housing finance portfolio) and have started
showing signs of stress. SBI’s retail portfolio has grown at over 37% CAGR in the last two
years and hence a significant portion of the portfolio is largely unseasoned. The housing
finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March 31, 2005.The bank
will face significant challenges in the medium term to develop effective credit appraisal and
collection systems in order to contain NPAs in retail finance. SBI’s asset quality is expected
to remain at average levels, as the bank’s large and diverse asset portfolio reflects of the asset
quality of the banking system.

Business description

SBI along with its associate banks offer a wide range of banking products and services across
its different client markets. The bank has entered the market of term lending to corporates
and infrastructure financing, traditionally the domain of the financial institutions. It has
increased its thrust in retail assets in the last two years, and has built a strong market position
in housing loans.

SBI, through its non-banking subsidiaries, offers a host of financial services, viz., merchant
banking, fund management, factoring, primary dealership, broking, investment banking and
credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI
Life Insurance Company Limited, which is a joint venture with Cardiff S.A., one of the
largest insurance companies in France. SBI currently holds 74% equity in the joint venture.

Industry prospects

To leverage benefits such as access to low cost resources and the facility to provide a larger
gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited
and HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that
of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such
entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements,
priority sector requirements, and corporate exposure limits.

New private sector banks capture market share

With technological edge and a strong marketing thrust, private sector banks have been
stealing market share in retail deposits and the corporate fee business from public sector
banks. Together with some foreign banks, these private banks have also aggressively entered
the retail asset financing space, hitherto the domain of non-banking finance companies.

Given their focus on cross selling and optimizing their customer base, they now offer the
entire range of products and services on the asset and liability side to retail and wholesale
customers
Asset quality to improve

Banks have not yet fully resolved the stress in the asset quality of their legacy
corporate loan portfolios, however. Though slippages to NPAs and provisioning were high
for some banks in FY2004, as they moved to the 90-day norm for recognising and
provisioning for NPAs, the treasury gains enabled significant provisioning to be made with
the result that net NPAs for most public sector banks are now less than 3%.

Going forward, steady growth in gross domestic product should help improve the banks’
asset quality and increase corporate lending. The securitization and reconstruction of
financial assets and enforcement of security interest (Sarfaesi) Act should also help banks in
limiting slippages and improving NPA recoveries.

Better Capitalization levels

Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through
public issues in recent years, thereby improving their capitalization levels. The steady
accruals to net worth and falling non-performing asset levels have resulted in an
improvement in the capitalization position of banks in recent years.

Challenges ahead

Competition from new private sector and foreign banks remains a key challenge for public
sector banks. They need to reorient their staff and effectively utilize technology platforms to
retain customers and reduce costs. They also need to fortify their credit risk management
systems to mitigate the risks arising from small-ticket lending to the retail, small and medium
enterprises, and services segments.
Consolidation and emergence of universal banking groups

The cap on foreign ownership of banks has already been raised from 49% to 74%. The
competition in the sector could get further intensified if the 10% cap on voting rights is also
relaxed. New private sector banks are expanding their geographical coverage and making
inroads into government business. The new private and foreign banks will continue to gain
market share from public sector banks because of their efficient cost structures, technological
edge, focused marketing approach and operational freedom. However, the emergence of
newer players would be restricted if the private ownership of banks is capped at low levels.
Mergers among PSBs would create banks with even larger balance sheets and customer base.
However, the integration process in such mergers is expected to be complex and time long
drawn.

These would also be driven by GoI due to provisions of Banking Companies (Acquisition
and Transfer of Undertakings) Act 1969, and hence political scenario will impact the timing
and permutations possible. Strategic alliances between banks and other financial sector
players such as insurance companies and mutual funds are also likely as banks attempt to
enhance their product range, leverage on economies of scale and reduce costs.
 Definition of NPAs (NON -PERFORMING ASSETS)

An asset, including a leased asset, becomes non-performing when it ceases to generate

income for the bank. A ‘non performing asset’ was defined as a credit facility in respect of
which the interest and / or installment of principal had remained ‘past due’ for a specified
period of time.

The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period

1993 Four Quarters

1994 Three Quarters

1995 Onwards Two quarters

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 improvements in the payment and settlement
systems, recovery climate, up gradation of technology in the banking sector, etc, it was
decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall 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 ‘our of order’ for a period of more than 180 days, in respect of an
overdraft/cash credit

iii. 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 agriculture
purposes
iv. Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.

With a view to move towards international best practices, it has been decided to adopt the ’90
days’ overdue norm for identification of NPAs, from 31st March, 2004.

‘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 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.
Classification of NPAs

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

i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a
period less than or equal to 18 months. In such cases, the current net worth of the
borrower, or the current market value of the security charged is not enough to ensure
recovery of the dues to the banks in full. Such assets will have well defined credit
weakness that jeopardize the liquidation of the debt and are characterized by the
distinct possibility that the bank will sustain a loss.

ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding
18 months. It has all the weaknesses inherent to a sub-standard asset with the added
characteristic that the collection or liquidation in full – on the basis of currently
known facts – is highly questionable and improbable.

iii. Loss Assets: A loss asset is one where a loss has been identified by the bank or,
internal or external auditors but the amount has not been written off wholly.

Guidelines for Classification of NPAs

Broadly speaking, classification should be done taking into account the degree of well
defined credit weaknesses and the extent of dependence on collateral security for realization
of dues.

Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs, especially in respect of high value accounts.
• Accounts with temporary deficiencies: These should be classified based on the past
recovery records.

• Accounts regularize near about the balance sheet date: These accounts should be handled
with care and without scope for subjectivity. Where the account indicates inherent
weakness based on available data, it should be deemed as an NPA.

• Asset classification should be borrower-wise and not facility-wise: If a single facility to a

borrower is classified as NPA, others should also be classified the same way, as it is
difficult to envisage only a solitary facility becoming a problem credit and not others.

• Advances under consortium arrangements: Classification here should be based on the

recovery record of the individual member banks.

• Accounts where there is erosion in the value of the security: If there is a significant (i.e.
the realizable value of the security is less than 50% of that assessed by the bank during
acceptance) the account may be classified as NPA.
NPA SOME ASPECTS AND ISSUES

1. The NPAs of banks in India are considered to be at higher levels than those in other
countries. This issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and
disclosure measures initiated by RBI during recent years.
2. The NPA Management Policy document of SBI lays down to contain net NPAs to
less than 5% of bank's total loan assets in confirmity with the international standard.
It is, therefore necessary that as per guidelines provided in NPA Management Policy
document, every effort be made at all levels to cut down the NPAs. All this requires
greater efforts and teamwork.
3. It is essential to keep a constant watch over the non-performing assets not just to keep
it performing but also that once they become non-performing, effective measures are
initiated to get full recovery and where this is not possible, the various means are to
be initiated to get rid off the NPAs from the branch books.
4. NPAs adversely affect the wealth condition of the branch advances as also the
profitability of the branch. Some of the reasons for this are as under:
(a) Interest cannot be applied on the loan accounts classified as NPAs.
(b) The Branch 'has to pay interest to central office on outstanding classified as
NPA.
(c) The Branch has to incur cost in supervision and follow up of such advances.
(d) Provision has to be made on NPAs at Bank level.
5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub
standard, Doubtful or loss assets.
6) Once the assets are classified as NPA, the Branch Manager has to take all the
necessary steps to get the dues recovered there-under to maintain the good health of
advances and the higher profitability at the-Branch. This requires management of NPAs
in such a Planned and scientific manner that the percentage of NPAs to the total advances
will be minimum.
 RECOGNITION OF INCOME ON

NON-PERFORMING LOANS (NPLS)

Stricter regulations have been laid down by supervisory authorities in many countries with
regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest
payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful'
and 'loss'].

Any uncollected interest payments on NPLs are considered non-accrued interest. Previously
accrued, but uncollected interest is reversed out of income. Failure to do so would overstate
income. Uncollected interest is normally put in a memorandum account. NPLs are restored
on an accrual basis only after full settlement has been made on all delinquent principal and
interest. It would, therefore, be useful, if the accounts carry a footnote, explaining the
accounting policies followed with regard to recognition of income on NPLs.

NARSIMHAN COMMITTEE'S RECOMMENDATIONS

Committee on Financial System (CFS) Narsimhan committee which reported in 1991,

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

a) To strength the foundation of financial system.

b) Related to this, streamlining procedures, upgrading technology and human

resource development.

c) Structural changes in the system.

1. It is recommended that an asset be classified as doubtful if it is in the sub standard
category for 18 months in the first instance and eventually for 12 months as loss if it
 has been so identified but not written off. These norms, which should be regarded as
the minimum, may be brought into force in a phased manner.
2. Corporations and FIs should avoid the practice of "ever greening" by making fresh
advances to their troubled constituents only with a view to settling interest dues and
avoiding classification of the loans in question as NPAs. The committee notes that the
regulatory and supervisory authorities are paying particular attention to such breaches
in the adherence to the spirit of the NPA definitions and are taking appropriate
corrective action.
3. The committee believes that objective should be to reduce the average level of net
NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. These targets
cannot be achieved in the absence of measure to tackle the problem of backlong
NPAs on one time basis and the implementation of strict prudential norms and
management efficiency.
4. There is no denying the fact that any effort at financial restructuring in the form of
having off NPAs portfolio from the books of the corporation or measures to initiate
the impact of high level of NPAs must go hand with operational restructuring.
Cleaning up the balance sheets of banks would thus make sense only if simultaneous
steps are taken to prevent of limit the reemergence of new NPAs.
5. Direct credit has a proportionately higher share in NPA portfolio of corporations and
has been one of the factors in erosion in the quality of asset portfolio. There is a
continuing need of Financial Corporations to extend Credit to SSI sector, which is
important segment of national economy but on commercial considerations and on
basis of credit worthiness. Government feels reluctant to accept the recommendation
for reducing the scope of directed credit under priority sector because timy sector of
industry and small businesses have problems with regard to obtaining credit and some
remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may
continue.
6. With regard to income recognition in India, income stops occurring when
interest/installment of principal is not paid within 180 days. However, we should
 move towards international Practices in this regard and introduce the norm of 90 days
in a phased manner by the 2002.
7. As an incentive to Bank is to make specific provision, the consideration be given to
making such provisions tax deductible.
8. Banks should pay greater attention to asset liability management to avoid mismatch
and to cover, among others, liquidity and interest rate risks.
9. It should be encouraged to adopt statistical risk management techniques like value at
risk in respect of balance sheet term which are susceptible to market price fluctuation,
Forex rate volatility and interest rate changes. While the RBI and IDBI may initially,
prescribe certain normative models for market risk management, the ultimate
objective should be that of building up their models and RBI blacklisting them for
their validity on a periodical basis.
10. There is a need for a greater use of computerized system than at present.
Computerization has to be recognized as an indispensable tool for improvement in
customer service, the institution and operation of better control systems, greater
efficiency in information technology.
11. State Financial Corporations at present are over regulated and over administered.
Supervision should be based on evolving prudential norms and regulations which
should be adhered to rather than excessive control over administrative and other
aspects of organisation and functioning. Internal audit and internal inspection systems
should be strengthened.
12. The main issues with regard to operations of Bank’s are to ensure operational
flexibility and measure of competition and adequate internal autonomy in matters of
loan sanctioning and internal administration.
13. This calls for some re-examination and the present relevance of directed credit
programme ablest in respect of those who are able to stand on their own feet and to
whom the directed credit programmes with the element of interest concessionality
that has accompanied has become a source of economic rent. It is recommended that
directed credit sector be redefined to comprise the small and marginal farmers, the
tiny sector of industry, small business and transport operators, village and cottage
industry, rural artisans and other weaker sections. The credit target for this redefined
 priority sector should hence forth be fixed at 10% of aggregate credit which would be
broadly in line with the credit flows to these sectors at present.
14. The committee believes that the balance sheets of banks and FIs should be made more
transparent and full disclosure made in Balance sheet. This is to be done in phased
manner.
 REVIEW OF LITERATURE

 Das (1990) has compared the various efficiency measures of public sector banks by
applying data envelopment analysis model and concluded that the level of NPAs
significant negative relationship with efficiency estimates.
 Verma (1999) has concluded that high level of NPAs leads to operational failure of
the bank.
 Berger and young (1997) has examined the relationship between problem loan and
bank efficiency by employing Granger-causality technique and found that high level
of problem loans cause banks of increase spending on monitoring, working out and /
or selling off these loans and possibly becomes more diligent in administering the
portion of their existing loan portfolio that is currently performing.
 Gupta (1997) has also concluded that NPAs on protifability of banks and leads to
liquidity crunch and slow down in the growth in GDP etc.
 Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit
making and six loss making banks and concluded that loss making banks maintained
higher NPAs in the loan portfolio which led them to show losses.
 Kwan and Eisenbeis (1994) also concluded that there is negative relationship
between efficiency and problem loans.
 Toor (1994) analysed that poor recovery management leads to reduction in yield on
advanced that poor recovery management leads to reduction in yield on advances,
reduced productivity loss in the credibility and put detrimental impact on the policies
of the banks.
 Murthy (1988) has examined that default bring down the return accruing and to them,
reduces effective rate of interest and reduces the funds’ recalculation and increase
their dependence on external sources thereby increasing the costs.
 ACCORDING TO S, RAJ KUMAR (2002) the SARFAESI act and the could
primarily used as powerful bargaining tool while negotiating with defaulter. This
puts bank on stronger ground in salvaging sticky loan
 OBJECTIVE OF STUDY

 To study the position of non performing assets in SBI group

 To know the impact on NPAon strategic banking variable.

 To know the reason for an asset becoming NPA

 RESEARCH METHODOLOGY

Meaning of Research

Research is defined as “a scientific & systematic search for pertinent information on a

specific topic”. Research is an art of scientific investigation. Research is a systemized effort
to gain new knowledge. It is a careful inquiry especially through search for new facts in any
branch of knowledge. The search for knowledge through objective and systematic method of
finding solution to a problem is a research.

PROBLEM STATEMENT

The research problems, in general refers to sum difficulty with a researcher experience in the
contest of either a particular a theoretical situation and want to obtain a salutation for same.
The present Dissertation has been undertaken to do the Problem of NPA in
State Bank of India.

RESEARCH DESIGN

TYPES OF
RESEARCH DESIGN

DESI

EXPLORATORY DESCRIPTIVE EXPERIMENTAL

RESEARCH
RESEARCH DESIGN
DESIGN
The present study is descriptive in nature, as it seeks to discover ideas and insight
to bring out new relationship. Research design is flexible enough to provide opportunity for
considering different aspects of problem under study. It helps in bringing into focus some
inherent weakness in enterprise regarding which in depth study can be conducted by
management.

SAMPLING DESIGN:

A sample design is a definite plan for obtaining a sample from the sampling frame. It refers
to the technique or the procedure that is adopted in selecting the sampling units from which
inferences about the population is drawn. Sampling design is determined before the
collection of the data.

DATA COLLECTION

TYPES OF DATA

PRIMARY SECONDRY
DATA DATA

PRIMARY DATA: -

METHODS OF PRIMARY DATA

OBSERVATION INTERVIEW QUETIONAIRE SCHEDULE

METHOD METHIOD METHOD METHOD
SECONDARY DATA: -
The secondary data on the other hand, are those which have already been collected by
someone else and which have already been passed through the statistical processes. When the
researcher utilizes secondary data then he has to look into various sources from where he can
obtain them. For e.g. Books, magazine, newspaper, Internet, publications and reports. In the

present study use of secondary data collected from website.

.
REASONS FOR RISE IN NPAs

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.

EXTERNAL FACTORS

• 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.

• Wilful Defaults

There are borrowers who are able to payback 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. Mainly ours farmers
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans

• 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.
 • Lack of demand

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

• Change on Govt. policies

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

INTERNAL FACTORS

• Defective Lending process

There are three cardinal principles of bank lending that have been followed by the
commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of
profitability

i. Principles of safety By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore
take utmost care in ensuring that the enterprise or business for which a loan is sought is a
sound one and the borrower is capable of carrying it out successfully .he should be a person
of integrity and good character.

• Inappropriate technology

Due to inappropriate technology and management information system, market driven

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

• Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,
and financial soundness and credit worthiness of the borrower. • Banks should consider the
borrowers own capital investment. • it should collect credit information of the borrowers
from a. From bankers b. Enquiry from market/segment of trade, industry, business. c. From
external credit rating agencies. • Analyse the balance sheet True picture of business will be
revealed on analysis of profit/loss a/c and balance sheet. • Purpose of the loan When bankers
give loan, he should analyse the purpose of the loan. To ensure safety and liquidity, banks
should grant loan for productive purpose only. Bank should analyse the profitability,
viability, long term acceptability of the project while financing.

• 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.

• Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider the 1.
Marketability 2. Acceptability 3. Safety 4. Transferability.
The banker should follow the principle of diversification of risk based on the famous maxim
“do not keep all the eggs in one basket”; it means that the banker should not grant advances
to a few big farms only or to concentrate them in few industries or in a few cities. If a new
big customer meets misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack,
and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM
(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

• Absence of regular industrial visit

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

• Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters
and CCBs and PACs, the NPAs of OSCB is increasing day by day.
IMPACT OF NPAS ON BANKS:-

In portion of the interest income is absorbed in servicing NPA.NPA is not merely non-
remunerative. It is also cost absorbing and profit eroding.

In the context of severe competition in the banking industry, the weak banks are at
disadvantage for leveraging the rate of interest in the deregulated market and securing
remunerative business growth. The options for these banks are lost. "The spread is the bread
for the banks". This is the margin between the cost of resources employed and the return
therefrom." This is the margin between the cost of resources employed and the return
thereform. In other words it is gap between the return on funds deployed (Interest earned on
credit and investments) and cost of funds employed (Interest paid on deposits).

When the interest rates were directed by RBI, as heretofore, there was not option for
banks. But today in the deregulated market the banks decide their lending rates and
borrowing rates. In the competitive money and capital Markets, inability to offer competitive
market rates adds to the disadvantage of marketing and building new NPA has affected the
profitability, liquidity and competitive functioning of banks and finally the psychology of the
bankers in respect of their disposition towards credit delivery and credit expansion.

1. Impact on Profitability
"The efficiency of banks is not always reflected only by the size of its balance sheet
but by the level of return on its assets. NPAS do not generate interest income for the
banks, but at the same time banks are required to make provisions for such NPAS from
their current profits.

NPAS have a deleterious effect on the return on assets in several ways:

• They erode current profits through provisioning requirements.

• They result in reduced interest income.
• They require higher provisioning requirements affecting profits and accretion to
capital funds and capacity to increase good quality risk assets in future, and
 • They limit recycling of funds, set in asset-liability mismatches, etc.
There is at times a tendency among some of the banks to understate the level of NPAs in
order to reduce the provisioning and boost up bottom lines. It would only postpone the
process.

In the context of crippling effect on a bank's operations in all spheres, asset quality has been
placed as one of the most important parameters in the measurement of a bank's performance
under the CAMELS supervisory rating system of RBI.

Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores
towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net
advances. To this extent the problem is contained but a what cost?

This costly remedy is made at the sacrifice of building healthy reserves for future capital
adequacy.

The enormous provisioning of NPA together with the holding cost of such non-productive
assets over the years has acted as a severe drain on the profitability of the SBI Group. In turn
SBI Group are seen as poor performers and unable to approach the market for raising
additional capital. Equity issues of nationalized banks that have already tapped the market are
now quoted at a discount in the secondary market. Other bans hesitate to approach the market
to rise new issues. This has alternatively forced SBI Group to borrow heavily from the debt
market to build Tier II Capital to meet capital adequacy norms putting severe pressure on
their profit margins; else they are to seek the bounty of the Central Government for repeated
Recapitalization.

Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds
at 6% plus 1% service charge) the net NPA of Rs. 32632 Croces absorbs a recurring holding
ost of Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years
which works out to average of Rs. 3300 crores from annum, a sizeab business.
In the face of the deregulated banking industry, an ideal competitive working is reached,
when the banks are able to earn adequate amount of non-interest income to cover their entire
operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference
between the gross interest income and interest cost will constitute its operating profits.

Theoretically even if the banks keeps 0% spread, it will still break even in terms of operating
profit and not return an operating loss. The net profit is the amount of the operating profit
minus the amount of provisions to be made including for taxation. On account of the burden
of heavy NPA, many nationalised banks have little option and they are unable to lower
lending rates competitively, as a wider spread is necessitated to cover cost of NPA in the face
of lower income from off balance sheet business yielding non-interest income.

The following working results of SBI Group an identified well manged nationalised banks
for the last two years and for the first nine months of the current financial year, will be
revealing to prove this statement.

Non-interest income fully absorbs the operating expenses of this banks in the current
financial year for the first 9 months. In the last two financial years, though such income has
substantially covered the operating expenses (between 80 to 90%) there is still a deficit left.

The strength of SBI Group is indentified by the following positive feature:

1. It's sizeable earnings under of non-interest income substantially/totally meets its

non-interest expenses.
2. Its obligation for provisioning requirements is within bounds. (Net NPA/Net
Advances is 1.92%)
It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year
ended March, 2001, as published by RBI in its Report on trends and progress of banking in
India.

Interest on Recapitalization Bonds is a income earned form the Government, who had
issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a
bailout package. The statistics above show the other weaknesses of the nationalised banks in
addition to the heavy burden they have to bear for servicing NPA by way of provisioning and
holding cost as under:

• Their operating expenses are higher due to surplus manpower employed. Wage costs
total assets is much higher to PSBs compared to new private banks or foreign banks.
• Their earnings from sources other than interest income are meagre. This is due to
failure to develop off balance sheet business through innovative banking products.

2. Impact on Liquidity of the SBI Group

Though SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines,
the facts that their net NPA in the average is as much as 7% is a potential threat for them.
RBI has indicated the ideal position as Zero percent Net NPA. Even

granting 3% net NPA within limits of tolerance the SBI Group are holding an
uncomfortable burden at 7.1% as at March 2001. They have not been able to build
additional capital needed for business expansion through internal generations or by
tapping the equity market, but have resorted to II-Tier capital in the debt market or
looking to recapitalistion by Government of India.

3. Impact on Outlook of Bankers towards Credit Delivery.

The fear of NPA permeates the psychology of bank managers in the SBI Group in
entertaining new projects for credit expansion. In the world of banking the concepts of
business and risks are inseparable. Business is an exercise of balancing between risk and
reward. Accept justifiable risks and implements de-risking steps. Without accepting risk,
there can be no reward. The psychology of the banks today is to insulate themselves with
zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit
growth compared to growth of deposits, resulting in a low C/D Ratio around 50 to 54%
for the industry.

The fear psychosis also leads to excessive security-consiousness in the approach towards
lending to the small and medium sized credit customers. There is insistence on provision
of collateral security, sometimes up to 200% value of the advance, and consequently due
to a feeling of assumed protection on account of holding adequate security (albeit over-
confidence). a tendency towards laxity in the standards of credit appraisal comes to the
fore. It is well know that the existence of collateral security at best may convert the credit
extended to productive sectors into an investment against real estate, but will not prevent
the account turning into NPA. Further blocked assets and real estate represent the most
illiquid security and NPA in such advances has the tendency to persist for a long
duration.

SBI Group have reached a dead-end of the tunnel and their future prosperity depends on
an urgent solution for handling this hovering threat.

4. Impact on Productivity:
High level of NPAs effect the productivity of the banks by increasing the cost of funds
and by reducing the efficiency of banks employees. Cost of funds is increased because
due to non-availability of sufficient internal sources they have to rely on external sources
to fulfill their future financial requirements. Productivity of employees is also reduced
because it keeps staff busy with the task of recovery of overdue. Instead of devoting time
for planning for development through more credit and mobilization of resources the
branch staff would primarily be engaged in preparing a large value of returns and
statements relating to sub-standard, doubtful and loss assets, preparing proposal for filing
of suits, waivement of legal action, compromise, write off or in preparing DICGC claim
papers etc.

5. Impact on other Variables:

High level of NPAs also leads to squeezing of interest spread, when asset becomes an
NPA for the first time it adversely affects the spread by not contributing to the interest
income and from the second year onwards it will have its impact on the bottom line of the
balance sheet because of provisioning to be made for it and not have incremental effect
on the spread.

Now a days Govt. does not encourage liberal capital support to be given to banks. Banks
are required to bring their own capital by issuing share to the public, whereas high level
of NPAs leads to lower profits hence less or no profits available for equity shareholders
hence lower EPS and fall in the value of share. During the year 2001-02 share of 12
public sector banks were traded on the NSE out of which share value of three PSBs have
decreased. Low market value of shares has also forced the banks to borrow heavily debt
market to build Tier II capital to meet capital adequacy norms, putting severe pressure on
their profit margins.

6. Qualitative aspects of the Micro Level Impact of NPAs:

High incidence of loan defaults shakes the confidence of general public in the soundness
of banking setup and indirectly effects the capacity of the banking system to mop up the
deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust
of foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened bi
Indian banks or confine their transaction to top Indian banks only. Moreover, it puts
negative effect on granting of autonomy to PSBs whreas it is must for banks in this
competitive environment. Banks having positive net profits for the last three years, Net
NPA level below 9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to
be fulfilled to get autonomous status, which becomes difficult in the situation of huge
level of NPAs

Inadequate recovery also inhibits the banks to draw refinance from higher level
agency. The eligibility of a bank to draw refinance from NABARD is linked to the %age
of recovery to demand in respect of direct, medium and long term loans for agriculture
and allied activities. It implies that refinance facility would be progressively reduced
depending on the position of NPAs and also on the No. of years in which a banks branch
remains in a particular category of default. Due to fear of NPAa banks are being taken
away from the basic function for which these were established it is becoming more &
more risky and less remunerative. They are floating their subsidiaries to manage mutual
funds, factoring, insurance business, Good money is spent to recover bad money.
Deterioration in the quality of loan assets and inability to come with new products makes
the Indian banks uncompetitive globally. Due to high cost, they cannot reduce lending
rate to meet the economy's demand of low lending rate. It is also biggest threat for capital
account convertibility.
7. Some areas of Macro-Economic Impact:
It is not only the banks which are affected higher level of NPAs but it is the economy as a
whole which pays for it. Banks are not putting enough resource in lending due to fear of
default. Once the credit to various sectors of the economy slow down, the economy is
badly hit. There is slowdown in growth in GDP, industrial output and fall in the profit
margins of the corporate and consequent depression in the market. Further high level of
NPAs can result in adding to the inflationary potential in the economy and eroding the
viability of the credit system as a whole.

Not only this, burden of NPAs is to be borne by the society as a whole. When capital
support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs, it
comes out of either Govt. budgetary resources or from the public as per

Liberalization policy, whether this money is from tax revenues or from the hard earned
saving of the investing public, in fact, the society is bearing the cost of these

NPAs. Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is
in its hand. Any dividend declared would have gone to the Govt. and which can be spent
on the welfare and development program.
 GUIDELINES BY RBI

Guidelines of Government and RBI for Reduction of NPAs

1. Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to take steps for
arresting the incidence of fresh NPAs and have also been creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. More significant of them,
I would like to recapitulate at this stage.

* The broad framework for compromise or negotiated settlement of NPAs advised by RBI
in July 1995 continues to be in place. Banks are free to design and implement their own
policies for recovery and write-off incorporating compromise and negotiated settlements
with the approval of their Boards, particularly for old and unresolved cases falling under
the NPA category. The policy framework suggested by RBI provides for setting up of an
independent Settlement Advisory Committees headed by a retired Judge of the High Court
to scrutinise and recommend compromise proposals.

* Specific guidelines were issued in May 1999 to public sector banks for one time non
discretionary and non discriminatory settlement of NPAs of small sector. The scheme was
operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through
compromise settlement under this scheme].

* Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore
and less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001
helped the public sector banks to recover Rs. 2600 crore by September 2001].

* An OTS Scheme covering advances of Rs. 25000 and below continues to be in

operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance
Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs of
small/marginal farmers are being drawn up.
2. Lok Adaltas:

Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss"
category, with outstanding balance of Rs. 5 lakh for compromise settlement under
Lok Adalats. Debt Recovery Tribunals have now been empowered to organize Lok
Adalats to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector
banks had recovered Rs. 40.38 crore as on September 30, 2001, through the forum of
Lok Adalat. The progress through this channel is expected to pick up in the coming
years particularly looking at the recent initiatives taken by some of the public sector
banks and DRTs in Mumbai.

3. Debt Recovery Tribunals:

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act,
passed in March 2000 has helped in strengthening the functioning of DRTs.
Provisions for placement of more than one Recovery Officer, power to attach
defendant's property/assets before judgement, penal provisions for disobedience of
Tribunal's order or for breach of any terms of the order and appointment of receiver
with powers of realization, management, protection and preservation of property are
expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs
in the times to come.

Though there are 22 DRTs set up at major centres in the country with Appellate
Tribunals located in five centres viz. Allahabad, Mumbai, Delhi,Calcutta and
Chennai, they could decide only 9814 cases for Rs. 6264.71 crore pertaining to public
sector banks since inception of DRT mechanism and till September 30, 2001. The
amount recovered in respect of these cases amounted to only Rs. 1864.30 crore.
 Looking at the huge task on hand, with as many as 33049 cases involving Rs.
42988.84 crore pending before them as on September 30, 2001, I would like the
banks to institute appropriate documentation system and render all possible assistance
to the DRTs for speeding up decisions and recovery of some of the well collateralised
NPAs involving large amounts. I may add that familiarisation programmes have been
offered in NIBM at periodical intervals to the presiding officers of DRTs in
understanding the complexities of documentation and operational features and other
legalities applicable of Indian banking system. RBI on its part has suggested to the
Government to consider enactment of appropriate penal provisions against
obstruction by borrowers in possession of attached properties by DRT Receivers, and
notify borrowers who default to honour the decree passed against them.

4. Circulation of information on defaulters:

The RBI has put in place a system for periodical circulation of details of willful
defaults of borrowers of banks and financial institutions. This serves as a caution list
while considering requests for new or additional credit limits from defaulting
borrowing units and also from the directors/proprietors/partners of these entities. RBI
also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and
above) against whom suits have been filed by banks and FIs for recovery of

their funds, as on 31st March every year. It is our experience that these measures had
not contributed to any perceptible recoveries from the defaulting entities. However,
they serve as negative basket of steps shutting off fresh loans to these defaulters. I
strongly believe that a real breakthrough can come only if there is a change in the
repayment psyche of the Indian borrowers

5. Recovery action against large NPAs:

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI
had advised the public sector banks to examine all cases of willful default of Rs 1
crore and above and file suits in such cases, and file criminal cases in regard to willful
defaults. Board of Directors are required to review NPA accounts of Rs. 1 crore and
above with special reference to fixing of staff accountability.On their part RBI and
 the Government are contemplating several supporting measures including legal
reforms, some of them I would like to highlight.

6. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to

provide a timely and transparent system for restructuring of the corporate debts of Rs.
20 crore and above with the banks and financial institutions. The CDR process would
also enable viable corporate entities to restructure their dues outside the existing legal
framework and reduce the incidence of fresh NPAs. The CDR structure has been
headquartered in IDBI, Mumbai and a Standing Forum and Core Group for
administering the mechanism had already been put in place. The experiment however
has not taken off at the desired pace though more than six months have lapsed since
introduction. As announced by the Hon'ble Finance Minister in the Union Budget
2002-03, RBI has set up a high level Group under the Chairmanship of Shri Vepa
Kamesam, Deputy Governor, RBI to review the implementation procedures of CDR
mechanism and to make it more effective. The Group will review the operation of the
CDR Scheme, identify the operational difficulties, if any, in the smooth
implementation of the scheme and suggest measures to make the operation of the
scheme more efficient.

7. Credit Information Bureau:

Institutionalisation of information sharing arrangements through the newly formed

Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the
recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the
scheme of information dissemination on defaults to the financial system. The main
recommendations of the Group include dissemination of information relating to suit-
filed accounts regardless of the amount claimed in the suit or amount of credit granted
by a credit institution as also such irregular accounts where the borrower has given
consent for disclosure. This, I hope, would prevent those who take advantage of lack
of system of information sharing amongst lending institutions to borrow large
 amounts against same assets and property, which had in no small measures
contributed to the incremental NPAs of banks.

8. Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It is

working out a proper definition covering such classes of defaulters so that credit
denials to this group of borrowers can be made effective and criminal prosecution can
be made demonstrative against willful defaulters.

9. Corporate Governance:

A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the
Reserve Bank to review the supervisory role of Boards of Banks and financial
institutions and to obtain feedback on the functioning of the Boards vis-a-vis
compliance, transparency, disclosure, audit committees etc. and make
recommendations for making the role of Board of Directors more effective with a
view to minimising risks and overexposure. The group is finalising its
recommendations shortly and may come out with guidelines for effective control and
supervision by bank boards over credit management and NPA prevention measures.

10. Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002:

The Act provides, inter alia for enforcement of security interest for realisation of dues
without the intervention of courts or tribunals. The Security Interest (Enforcement)
Rules, 2002 has also been notified by Government to enable Secured Creditors to
authorise their officials to enforce the securities and recover the dues from the
borrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 notices
involving outstanding amount of Rs. 19,744 crore, and had recovered an amount of
Rs. 1,748 crore from 24,092 cases.
PROBLEMS LOAN RECOVERY

1. Inadequate security and Erosion in value of security:

Generally, banks tend to find that there is a major gap in the valuation of the security,
as carried out at the time of providing the loan and at the time of loan recovery. The
value of the security has generally deteriorated over the period and according to
experts, it may further deteriorate by almost 10-50% if quick action is not taken for its
immediate sale.

2. Political interferences:

Political interference in the day -to-day functioning of public sector banks created a
number of problems for them. The populist policies of the national level politicians,
such as waiver in repayment only added to these problems.

3. Slow legal procedure:

Before the establishment of DRTs in 1993, the banks had to approach the normal
courts to recover their dues. There were provisions under various acts which
hampered the smooth takeover and sale of secured assets. The legal process could
take years to be completed, with the borrower having ample scope for delaying the
takeover of assets. A number of loopholes provided the borrower with opportunities
to delay or ignore repayment of loans. During this period, it was said by some
unscrupulous businessmen that - "there is no difference between equity and debt - you
never have to repay either of them ".

4. Swamping of DRTs with cases:

Once DRTs were established to quicken the pace of recovery procedures, the pace of
recovery improved quite a bit. However, the DRTs were soon drowned in the ever
increasing number of cases. The pending number of cases with the DRTs increased
manifold during the period 1993-2002.
5. Misuse of BIFR/SICA:

This was one of the favourite methods of willful defaulters to delay repayment. If the
defaulter's company is declared sick and taken for financial reconstruction under
BIFR, it is not possible to undertake any recovery proceeding against the company
.The procedure of financial reconstruction can take a number of years together,
thereby delaying recovery to a great extent.

6. Transfer of property Act, English mortgage:

Under provisions of Section 69 of Transfer of Property Act, mortgagee can take

possession of mortgaged property and sell the same without the intervention of the
Court only in the case of English Mortgage. In addition, mortgagee can take
possession of mortgaged property where there is specific provision in mortgage deed
and it is situated in the towns of Mumbai, Kolkata and Chennai only. In other cases,
intervention of the court is required.

However, this is very slow and time consuming process and by the time bank /FI is
able to get possession; the asset either does not exist or has become valueless.
ANALYISIS AND

INTERPRETATION
 STATE BANK OF INDIA

TOTAL ASSET

2003- 2004- 2005- 2006- 2007-

YEAR 04 05 06 07 08
TOTAL ASSET(RS.
CR) 407185 459883 494029 566565 721526

800000
700000
600000
500000
400000
YEAR
300000
TOTAL ASSET(RS. CR)
200000
100000
0
1 2 3 4 5 6
YEAR

Interpretation:-Above graph show that total assets of SBI is increased in 2004-05 by

52658 crore, in 2007-08 increased by 154961rs. crore. So assets of the SBI bank
increased from last five year.
 GROSS NPA

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

_GROSS NPA(RS.CR) 12667 12456 9628 9998 12837

_GROSS NPA(RS.CR)

14000
12000
10000
8000 _GROSS
6000 NPA(RS.CR)

4000
2000
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08

Interpretation:- above graph shows that Non-performing assets of SBI decreased

from 2003-04 to2006-07 and increased in 2007-08. There are so many reason of
increases of npa

NET NPA
 YEAR 2003-04 2004-05 2005-06 2006-07 2007-08
NET NPA(RS. CR.) 5442 5349 4906 5258 7424

NET NPA(RS. CR.)

8000
7000
6000
5000
4000
NET NPA(RS.
3000 CR.)
2000
1000
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08

Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and
increased in 2006-07 to 2007-08.
 GROSS NPA (RATIO%)

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

GROSS NPA(RATIO%) 7.75 5.96 3.61 2.92 3.04

8
Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased
from 2004-05 to 2006-07 and increased in 2007-08.

7
6
 NET NPA(RATIO%)

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

NET NPA(RATIO%) 3.48 2.65 1.88 1.56 1.78

3.5
3

2.5 YEAR
2
NET
1.5 NPA(RATIO%)
1

0.5
0
1 2 3 4 5 6

Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is decreased from
2004-05 to 2006-07 and increased in 2007-08

PROVISION COVER
 YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

PROVISION COVER 57.04 59.45 49.04 47.41 45.04

PROVISION COVER

70
60
POVISION COVER %

50
40
PROVISION COVER
30
20
10
0
2003-04 2004-05 2005-06 2006-07 2007-08
yEAR

Interpretation: Above graph shows that in 2003-04 provision cover of NPA is 57.04%
and increased in 2004-05. It decreased from 2005-06 to 2007-08.

State Bank of Patiala

 YEAR 2003-04 2004-05 2005-06 2006-07 2007-08
GROSS NPA(%) 1.82 1.65 1.38 2.14 1.42
NET NPA(%) 1.35 1.23 0.99 0.83 0.6

2.5
2
1.5 GROSS NPA(%)
1 NET NPA(%)
0.5
0
2003- 2004- 2005- 2006- 2007-
04 05 06 07 08

Interpretation: Above graph shows that the gross NPA of SBP is decreased from
2003-04 to 2005-06,increased in 2006-07 and again decreased in 2007-08. The net NPA
decreased from 2003-04 to 2007-08.

FINDINGS

1. REASON OF NPA IN BANK:-

 Default by customer
 Non-inspection of borrower
 Lack of expertise
 Imbalance of inventories
 Poor credit collection
 Lack of trained staff
 Lack of commitment to recovery
 Change in consumer preference

2 IMPACT OF NPA ON BANK

 Govt. Policies
 Impact of profitability
 Liquidity
 Impact on outlook of Banker to wards credit delivery
 Impact of productivity

RECOMMANDATIONS
  Credit administration: A banks have to strengthen their credit administrative
machinery and put in place effective credit risk management systems to reduce the fresh
incidence of NPAs.

 Better Inspection: We shall keep a close watch on the manner in which NPA
reduction is taking place.

 Cash Recovery: We should also insist that cash recoveries should more than
offset the fresh write-offs in NPAs.

 Perception: The mindset of the borrowers needs to change so that a culture of

proper utilization of credit facilities and timely repayment is developed.

 Financial System: As you are aware, one of the main reason for corporate default
is on account of diversion of funds and corporate entities should come forward of
avoid this practice in the interest of strong and sound financial system.

 Coordinator: Extending credit involves lenders and borrowers and both should
realize their role and responsibilities. They should appreciate the difficulties of each
other and should endeavor to work contributing to a healthy financial system.

LIMITATION OF STUDY

 Shortage of time :-
 .Time is very short for research ,so that is very difficult can get the knowledge about
everything .

 Information not sufficiently available

The source of data collection is secondary so the information available is not sufficient.

 No direct source of information available

The information is collected from indirect sources so in some information data is not
available.

 Secondary data:-

Information is not reliable because of secondary data

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

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

There is also a general perception that the prescriptions of 40% of net bank credit to
priority sectors have led to higher NPAs, due to credit to these sectors becoming stickly
managers of rural and semi-urban branches generally sanction these loans. In the changed
context of new prudential norms and emphasis on quality lending and profitability,
mangers should make it amply clear to potential borrowers that banks resources are scare
and these are meant to finance viable ventures so that these are repaid on time and
relevant to other needy borrowers for improving the economic lot of maximum number
of households. Hence selectionof right borrowers, viable economic activity, adequate
finance and timely disbursement, correct and use of funds and timely recovery f loans is
absolutely necessary pre conditions for preventing of minimizing the incidence of new
NPAs.
 BIBLIOGRAPHY

1. Finance India, September 2005 pp-957-961

2. Charted Financial Analysis, October 2005 pp-64

3. Charted Financial Analysis, October 2007 pp-31-31

4. Charted Financial Analysis, November 2007 pp-8-9

5. Charted Financial Analysis, August 2004 B.P. Dhaka pp-47-52

6. Business Today, May 2006 pp-34

7. Charted Financial Analysis, December 2005 pp-25-28

8. RBI Bulletin, July 1999 pp-34-36

9. RBI Bulletin, January 2004 pp-17-19

10. Alok Majumdar, NPAs: Recovery Blues, Treasury Management (Dec. 2000) pp 46-49

Books : KOTHARI C.R

Indian Financial System , VK publication ,pp-100-105

Website:

1. www.centurionbop.co.in/news/press_190505.html1

2. www.domainb.com/management/m_a/20060904_vijay_kalantri.html2

3. www.twincitiesbbs.com/php/subra/corporat.htm3

4. www.blonnet.com/2002/08/07/stories/2002080700050800.htm4

5. www.sbi.com

6. www.sbp.com