A RESEARCH PROJECT ON

GROWTH OF NPAS IN INDIA- A STUDY OF PUBLIC SECTOR &

PRIVATE SECTOR BANKS
SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE DEGREE OF MASTERS OF
BUSINESS ADMINISTRATION
Affiliated to
Punjabi University, Patiala

2014
Supervised by

Submitted by

Ms. Parul Munjal

MANISHA BHARDWAJ
2105
MBA (4th)
1

CERTIFICATE
This is to certify that the project report entitled Growth Of NPAs in India- A Study of Public
Sector & Private Sector Banks being submitted by Manisha Bhardwaj, is a bonafide research work
completed under my guidance and supervision. It is complete in all respects and may be submitted for the
degree of Master Of Business Adminitration.
This is an original research work and has not been submitted for any other degree at this or any
other university.

Dated

(Ms. Parul Munjal)

Professor
Chandigarh group of colleges
Gharuan

ACKNOWLEDGEMENT
A research work is never the work of a single person. It is a combination of ideas, views and
suggestions. The research work is an excellent tool for learning and exploration. In writing this report, I
received valuable assistance and guidance from a number of persons to whom I want to express my
gratefulness.
I am beholden to lecturer Ms. Parul Munjal for according kind permission to take up this project. I am
grateful to him from the core of my heart for his wholehearted support, which has made the study
possible.
I shall be failing in my duty if I do not express a word of gratitude to all my family members who not
only encouraged me in taking up this work but also stood beside me throughout. I have no hesitation in
admitting that for their kind cooperation, I would naver completed this work on time.
I hope that those will forgive my forgetfulness in case I have failed to acknowledge their
contributions in this mammoth task inadvertenly.

MANISHA BHARDWAJ

DECLARATION
I undersigned hereby declare that the Major project report submitted to my college Chandigarh Group
Of College. In partial fulfillment for the degree of master of business administration on Growth Of
NPAs in India- A Study of Public Sector & Private Sector Banks is a result of my own work under
continuous guidance and kind co-operation of our college faculty member. I have not submitted this
Project report to any other university for the award of degree.

Guides Signature
.

..

(Ms. Parul Munjal)

(Manisha Bhardwaj)

CHAPTERS

Chapter 1: Introduction

Chapter 2: Review of literature

Chapter 3: Research Methodology

Chapter 4: Data Analysis and Interpretation.

Chapter5: Findings, Recommendation, Limitations and Conclusion

Bibliography and Annexure

TABLE OF CONTENTS

Certificate

Acknowledgment

ii

Decleration

iii

Chapter No.

Chapter Title

Page No.

Introduction

8-47

Review of Literature

48-50

Database and Methodology

51-55

Analysis and Interpretation

56-71

Summary and Conclusion

72-75

Bibliography

76

PREFACE
6

Granting of credit facilities for economic activities is the primary task of banking. Apart from raising
resources through fresh deposits, borrowings, etc. recycling of funds received back from borrowers
constitutes a major part of funding credit dispensation activities. Non-recovery of installments as also
interest on the loan portfolio negates the effectiveness of this process of the credit cycle. Non-recovery
also affects the profitability of banks besides being required to maintain more owned funds by way of
capital and creation of reserves and provisions to act as cushion for the loan losses. Avoidance of loan
losses is one of the pre-occupations of management of banks. While complete elimination of such losses
is not possible, bank managements aim to keep the losses at a low level. In fact, it is the level of nonperforming advances, which, to a great extent, differentiates between a good and a bad bank. Mounting
NPAs may also have more widespread repercussions. To avoid shock waves affecting the system, the
salvaging exercise is done by the Government or by the industry on the behest of Government/ central
bank of the country putting pressure on the exchequer.
In India, the NPAs, which are considered to be at higher levels than those in other countries, have, of late,
attracted the attention of public as also of international financial institutions. This has gained further
prominence in the wake of transparency and disclosure measures initiated by the RBI during recent years.

This project aims at providing an o overall view on the existence of NPAs, their treatment, the ways at
resolving this issue and also a few reports on the recent developments in this field.

CHAPTER 1 :
INTRODUCTION

INTRODUCTION OF BANKING INDUSTRY

DEFINITION OF BANK
An organization, usually a corporation, chartered by a state or federal government, which does
most or all of the following: receives demand deposits and time deposits, honors instruments drawn on
them, and pays interest on them; discounts notes, makes loans, and invests in securities; collects checks,
drafts, and notes; certifies depositor's checks; and issues drafts and cashier's checks.
DEFINITION OF BANKING
In general terms, The business activity of accepting and safeguarding money owned by other
individuals and entities, and then lending out this money in order to earn a profit
So we can say that Banking is a company, which

transacts

the business of banking. The Banking Regulations Acts

defines

the business as banking by stating the essential function

of

banker.
The term banking is defined as Accepting for
purpose of leading or investment, deposits of money

the
from the

public, repayable on demand or otherwise and

withdrawal by cheque, draft, order or otherwise.
HISTORY OF BANKING IN INDIA
Without a sound and effective banking system

in India

it cannot have a healthy economy. The banking system of India should not only be hassle free but it
should be able to meet new challenges posed by the technology and any other external and internal
factors.
For the past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or

cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the
country. This is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich dividends with the
nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for
withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank
transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a
pizza. Money has become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786 till today, the
journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned
below:
. Early phase from 1786 to 1969 of Indian Banks
.Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms
. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector
Reforms after 1991To make this write-up more explanatory, we divide scenario in Phase I, Phase II
and Phase III
PHASE -I
The General Bank of India was set up in the year 1786. Next were Bank of Hindustan and Bengal
Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of
Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated
in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly
Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National
Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India,

10

Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of India came up with The Banking
Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of
1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision
of banking in India as the Central Banking Authority.
PHASE II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955,
it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural
and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle
banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July,
1969, major process of nationalization was carried out. It was the effort of the then City Minister of India,
Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven
more banks. This step brought 80% of the banking segment in India under Government ownership.
The following are the steps taken by the Government of India to Regulate Banking Institutions in
the Country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

11

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

Banking in the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

PHASE III
This phase has introduced many more products and facilities in the banking sector in its reforms
measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which
worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a
satisfactory service to customers. Phone banking and net banking is introduced. The entire system became
more convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to
a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange exposure.
RESERVE BANK OF INDIA (RBI)
The central bank of the country is the Reserve Bank of India (RBI). It was established in April
1935 with a share capital of Rs.5 crores on the basis of the recommendations of the Hilton Young
Commission. The share capital was divided into shares of Rs.100 each fully paid which was entirely
owned by private shareholders in the beginning. The Government held shares of nominal value of Rs.2,
20,000
Reserve Bank of India was nationalized in the year 1949. The general superintendence and
direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four
Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the
Government to give representation to important elements in the economic life of the country, and four
nominated Directors by the Central Government to represent the four local Boards with the headquarters
12

at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and economic interests and the
interests of co-operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of
1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:

To regulate the issue of banknotes to maintain reserves with a view to securing monetary stability
and

To operate the credit and currency system of the country to its advantage

ORGANISATION STRUCTURE OF RBI

THE BANKING SYSTEM
Almost 80% of the business is still controlled by Public Sector Banks (PSBs). PSBs are still
dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock
exchanges.
The RBI has given licenses to new private sector banks as part of the liberalization process. The
RBI has also been granting licenses to industrial houses. Many banks are successfully running in the retail
and consumer segments but are yet to deliver services to industrial finance, retail trade, small business
and agricultural finance.
The PSBs will play an important role in the industry due to its number of branches and foreign
banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient banking
system, the onus is on the Government to encourage the PSBs to be run on professional lines.

13

BANKING SECTORS IN INDIA

BANKS

Public

Private

Co-operative

Sector bank

sector bank

bank

Regional Rural
bank

Foreign
bank

Private banking in India was practiced since the beginning of banking system in India. The first
private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It is one of the
fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth largest development bank in the
world as Private Banks in India and has promoted a world class institutions in India.
The first Private Bank in India to receive an in principle approval from the Reserve Bank of India
was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in
India as part of the RBI's liberalisation of the Indian Banking Industry. It was incorporated in August
1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled
Commercial Bank in January 1995.
ING Vysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a
pride of place for having the first branch inception in the year 1934. With successive years of patronage
and constantly setting new standards in banking, ING Vysya Bank has many credits to its account.

14

INTRODUCTION OF PUBLIC SECTOR BANKS

Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held by a
government. The shares of these banks are listed on stock exchanges. There are a total of 21 PSBs in
India.
The Central Government entered the banking business with the nationalization of the Imperial Bank Of
India in 1955. A 60% stake was taken by the Reserve Bank of India and the new bank was named as
the State Bank of India. The seven other state banks became the subsidiaries of the new bank when
nationalised on 19 July 1960.[2] The next major nationalisation of banks took place in 1969 when the
government of India, under prime minister Indira Gandhi, nationalised an additional 14 major banks. The
total deposits in the banks nationalised in 1969 amounted to 50 crores. This move increased the presence
of nationalised banks in India, with 84% of the total branches coming under government control.[3]
The next round of nationalisation took place in April 1980. The government nationalised six banks. The
total deposits of these banks amounted to around 200 crores. This move led to a further increase in the
number of branches in the market, increasing to 91% of the total branch network of the country. The
objectives behind nationalisation where:

To break the ownership and control of banks by a few business families,

To prevent the concentration of wealth and economic power,

To mobilize savings from masses from all parts of the country,

To cater to the needs of the priority sectors.....

The share of the banking sector held by the public banks continued to grow through the 1980s,
and by 1991 the public sector banks accounted for 90% of the banking sector. A year later, in
March, 1992, the combined total of branches held by public sector banks was 60,646 across India,
and deposits accounted for Rs. 1,10,000 crore. The majority of these banks were profitable, with
only one out of the 27 public sector banks reporting a loss.[4]
Problem, with nationalised banks reporting a combined loss of Rs. 1160 crores. However, the
early 2000s saw a reversal of this trend, such that in 2002-03 a profit of Rs. 7780 crores by the
15

public sector banks: a trend that continued throughout the decade, with a Rs. 16856 crore profit in
2008-2009.

INTRODUCTION OF PRIVATE SECTOR BANKS

The private-sector banks in India represent part of the indian banking sector that is made up of both
private and public sector banks. The "private-sector banks" are banks where greater parts of stake
or equity are held by the private shareholders and not by government.
Banking in India has been dominated by public sector banks since the 1969 when all major banks were
nationalised by the Indian government. However since liberalisation in government banking policy in
1990s, old and new private sector banks have re-emerged. They have grown faster and bigger over the
two decades since liberalisation using the latest technology, providing contemporary innovations and
monetary tools and techniques.[1]
The private sector banks are split into two groups by financial regulators in India, old and new. The old
private sector banks existed prior to the nationalisation in 1969 and kept their independence because they
were either too small or specialist to be included in nationalisation. The new private sector banks are
those that have gained their banking license since the liberalisation in the 1990s.
Private-sector banks have been functioning in India since the very beginning of the banking system.
Initially, during 1921, the private banks like bank of Bengal, bank of Bombay and bank of Madras were in
service, which all together formed Imperial Bank of India.
Reserve Bank of India(RBI) came in picture in 1935 and became the centre of every other bank taking
away all the responsibilities and functions of Imperial bank. Between 1969 and 1980 there was rapid
increase in the number of branches of the private banks. In April 1980, they accounted for nearly 17.5
percent of bank branches in India. In 1980, after 6 more banks were nationalised, about 10 percent of the
bank branches were those of private-sector banks.[2] The share of the private bank branches stayed nearly
same between 1980 and 2000.[3]
Then from the early 1990s, RBI's liberalisation policy came in picture and with this the government gave
licences to a few private banks, which came to be known as new private-sector banks.
There are two categories of the private-sector banks: "old" and "new".
16

The old private-sector banks have been operating since a long time and may be referred to those banks,
which are in operation from before 1991 and all those banks that have commenced their business after
1991 are called as new private-sector banks.
Housing Development Finance Corporation Limited was the first private bank in India to receive license
from RBI as a part of the RBI's liberalization policy of the banking sector, to set up a bank in the privatesector banks in India.

OLD PRIVATE SECTOR BANKS

The banks, which were not nationalized at the time of bank nationalization that took place during 1969
and 1980 are known to be the old private-sector banks. These were not nationalized, because of their
small size and regional focus.[6] Most of the old private-sector banks are closely held by certain
communities their operations are mostly restricted to the areas in and around their place of origin. Their
Board of directors mainly consist of locally prominent personalities from trade and business circles. One
of the positive points of these banks is that, they lean heavily on service and technology and as such, they
are likely to attract more business in days to come with the restructuring of the industry round the corner.

17

INTRODUCTION TO NPA
MEANING OF NPA:
Non Performing Asset means an asset or account of borrower, which has been classified by a bank or
financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past
due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment
and settlement systems, recovery climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that
date, a Non performing asset (NPA) shell be an advance where
i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of
a Term Loan,
ii. The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash
Credit(OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and
discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not
exceeding two half years in the case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in respect of other
accounts.
With a view to moving towards international best practices and to ensure greater transparency, it has been
decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31,
2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an
advance where;
i. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of
a Term Loan,
ii. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash
Credit(OD/CC),
18

iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not
exceeding two half years in the case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in respect of other
accounts.

INDIAN ECONOMY AND NPA

Gross NPAs (non-performing assets) in Indian banking sector have declined sharply to close to 3.0
per cent in 2012 (15.7 per cent at end-March 2002). Net NPAs of the banking sector are now at close to
one per cent and the gap between the gross and net NPAs has narrowed over the years. Recovery of dues
is also more than the fresh slippages.
The decline in NPAs is particularly significant as income recognition, asset classification and
provisioning norms were tightened over the years. For instance, banks now follow 90-day delinquency
norm as against 180-day earlier. Banks are also required to make general provisioning (0.40 per cent) for
standard advances.
According to Reserve Bank of India, improved profitability, underpinned by robust
macroeconomic environment and upturn in interest rate cycle, has enabled banks to reduce the backlog of
NPAs.

NARSIMHAN COMMITTEE

FIRST COMMITTEE
The committee on financial system, also known as Narsimhan Committee, under the chairmanship

of Shri M. Narsimhan, appointed by the RBI recommended the introduction of these prudential
accounting norms by Indian Banks in its report submitted in December 1991. The committee was of view
of that

19

A.

If banks want to know the true and fair financial health of bank then they should observed the
prudential accounting norms while making balance sheet and profit & loss account.

B.

Classification of assets has to be done on the basis of objective criteria.

C.

Provisioning should be made on the basis of classification into four different categories.

The income recognition, Assets Classification and provisioning norms also known as Prudential
Accounting Norms, provided that a bank should not show profit which is merely a book profit by
resorting to practice like debiting interest to a loan account irrespective of its chance of recovery and
booking the same as income or by not making provisions towards loan losses.

NARSIMHAN COMMITTEES RECOMMENATIONS

Committee has suggested that banks should operate on the basis of financial autonomy and
operational flexibility.

It has recommended Capital Adequacy Norm of 8%

These norms are applicable to all UCBs from 1st April, 1992.

SECOND COMMITTEE
The first committee had made recommendations in 1991, which had resulted in basic changes in
the matter of treatment of income, assets classification and provisioning norms, etcit was considered
necessary for government to continue the improvement with striker rules in future also and for that
second committee was made to continue changes with certain modifications.

The second committee includes the following points:

1.

If bank is working in foreign countries at presently then for them the Capital Adequacy Norm is
9% which was 8% earlier.

2.

Banks cant classify the account as NPA which are guaranteed by the Central / State government,
effective from the year 2000-2001.

20

3.

As per the existing norms, no provisions for standard assets but from March 31 st 2000, there is a
norm of 0.25 percent on standard assets.

4.

Banks have to make a provision of 2.5% on their investment in Government securities with effect
from the year ending 31st March, 2000. In future, this provision is likely to be raised to 5%.

5.

The present norm is of 180 days for the account to be treated as NPA but after 31 st March, 2000,
this period is reduced to 90 days only.

6.

Banks have been asked to reduce the level of NPA to 5% of their total advances till 31 st March,
2000. The percentage has to be brought down to less than 3% with effect from 31st March, 2002.

21

ASSETS CLASSIFICATION

CHART OF ASSETS CLASSIFICATION

ASSETS

PERFORMING ASSETS

NON-PERFORMING

OR

ASSETS

STANDERED ASSETS

SUB-STANDERED
ASSETS

LESS THAN
1 YEAR

DOUBTFUL
ASSETS

1 TO 3
YEARS

LOSS
ASSETS

ABOVE
3 YEARS

22

DEFINITION AS PER THE CLASSIFICATION OF ASSETS

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement with respect to bank
advances. In terms of these guidelines, bank advances are mainly classified in to following categories:
1.

STANDARD ASSETS:
Standard assets are one which does not carry any problems and which does not carry more than
normal risk attached to the business. Such assets should not be an NPA.

2.

SUB-STANDARD ASSETS:
These assets involved the two types of view as follows

In respect to the norms of March 31, 2005 an asset would be classified as Sub standard if it
remained NPA for a period less than or equal to 12 months.

An assets where the terms of the loan agreement regarding interest & principal have been
regenerated or rescheduled after commencement of production, should be classified as substandard and should remain in such category for at least 12 months of satisfactory performance
under the re-negotiated terms.

1.

DOUBTFUL ASSETS:
In respect to the norms of March 31, 2005 an asset is required to be classified as doubtful, if it has

remained NPA for more than 12 months.

A loan which is classified as doubtful has all the weaknesses inherent as that classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the
basis of the currently known facts, conditions and values, highly questionable and improbable.
Some types of these assets are
A.

Less than 1 year

B.

1 to 3 year

C.

3 year and above

23

2.

LOSS ASSETS
A loss asset is one where loss has been identified by the bank or internal or external auditors or by

the Co-operation department or by the RBI inspection but the amount has not been written of, wholly or
partly.

24

TYPES OF NPA:

1. Gross NPA
2. Net NPA
Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It
consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated
with the help of following ratio: Gross NPAs Ratio = Gross NPAs
Gross Advances

Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burdenof banks. Since in India, bank balance sheets contain a huge
amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions
the banks have to make against the NPAs according to the central bank guidelines, are quite significant.
That is why the difference between gross and net NPA is quite high. It can be calculated by following:

Net NPAs = Gross NPAs Provisions

Gross Advances Provisions

REASONS FOR AN ACCOUNT BECOMING NPA:

25

1. Internal factors
2. External factors
Internal factors:
1) Funds borrowed for a particular purpose but not use for the said purpose.
2) Project not completed in time.
3) Poor recovery of receivables.
4) Excess capacities created on non-economic costs.
5) In-ability of the corporate to raise capital through the issue of equity or other debt instrument from
capital markets.
6) Business failures.
7) Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister
concerns.
8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation etc.
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delaying
settlement of payments\ subsidiaries by government bodies etc.,
External factors:
1) Sluggish legal system
Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material\input price escalation, power shortage, industrial recession,
excess capacity, natural calamities like floods, accidents.
5) Failures, nonpayment\ over dues in other countries, recession in other countries, externalization
problems, adverse exchange rates etc.
26

6) Government policies like excise duty changes, Import duty changes etc.,

The RBI has summarized the finer factors contributing to higher level of NPAs in the Indian banking
sector as:
Diversion of funds, which is for expansion, diversification, modernization, undertaking new
projects and for helping associate concerns. This is also coupled with recessionary trends and failures
to tap funds in capital and debt markets.
Business failures (such as product, marketing etc.), which are due to inefficient management
system, strained labour relations, inappropriate technology/ technical problems, product obsolescence
etc.
Recession, which is due to input/ power shortage, price variation, accidents, natural calamities etc.
The externalization problems in other countries also lead to growth of NPAs in Indian banking sector.
Time/ cost overrun during project implementation stage.
Governmental policies such as changes in excise duties, pollution control orders etc. Willful
defaults, which are because of siphoning-off funds, fraud/ misappropriation, promoters/ directors
disputes etc.
Deficiency on the part of banks, viz, delays in release of limits and payments/ subsidies by the
Government of India.

IMPACT OF NPA:

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
27

long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing
money for shortest period of time which lead to additional cost to the company. Difficulty in operating the
functions of bank is another cause of NPA due to lack of money. Routine payments and dues.
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.
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.

EARLY SYMPTOMS:

By which one can recognize a performing asset turning in to non-performing asset .

Four categories of early symptoms:1) Financial:
Non-payment of the very first installment in case of term loan.
28

 Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining Current Ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that partial amount is diverted to sister concern or parent
company.

2) Operational and Physical:

If information is received that the borrower has either initiated the process of winding up or are not
doing the business.

Overdue receivables.

Stock statement not submitted on time.

External non-controllable factor like natural calamities in the city where borrower conduct his
business.

Frequent changes in plan.

Nonpayment of wages.
29

3) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.

4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.

PREVENTIVE MEASUREMENT FOR NPA:

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.
30

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

Timeliness and 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.
31

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 techno- economic viability study must thus become the basis on which any future action can be
considered.
Multiple Financing:
During the exercise for assessment of viability and restructuring, a Pragmatic and unified
approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower
would go a long way toward overall success of rehabilitation exercise, given the probability of
success/failure.
In 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.
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
32

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.
Corporate Debt Restructuring mechanism has been institutionalized in 2001 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.

PROCEDURES FOR NPA IDENTIFICATION AND RESOLUTION IN INDIA:

1. Internal Checks and Control

Since high level of NPAs dampens the performance of the banks identification of potential problem
accounts and their close monitoring assumes importance. Though most banks have Early Warning
Systems (EWS) for identification of potential NPAs, the actual processes followed, however, differ from
33

bank to bank. The EWS enable a bank to identify the borrower accounts which show signs of credit
deterioration and initiate remedial action. Many banks have evolved and adopted an elaborate EWS,
which allows them to identify potential distress signals and plan their options beforehand, accordingly.
The early warning signals, indicative of potential problems in the accounts, viz. persistent irregularity in
accounts, delays in servicing of interest, frequent devolvement of L/Cs, units' financial problems, market
related problems, etc. are captured by the system. In addition, some of these banks are reviewing their
exposure to borrower accounts every quarter based on published data which also serves as an important
additional warning system. These early warning signals used by banks are generally independent of risk
rating systems and asset classification norms prescribed by RBI. The major components/processes of a
EWS followed by banks in India as brought out by a study conducted by Reserve Bank of India at the
instance of the Board of Financial Supervision are as follows:
Designating Relationship Manager/ Credit Officer for monitoring account/s
Preparation of `know your client' profile
Credit rating system
Identification of watch-list/special mention category accounts
Monitoring of early warning signals

Relationship Manager/Credit Officer

The Relationship Manager/Credit Officer is an official who is expected to have complete knowledge of
borrower, his business, his future plans, etc. The Relationship Manager has to keep in constant touch with
the borrower and report all developments impacting theborrowable account. As a part of this contact he is
also expected to conduct scrutiny and activity inspections. In the credit monitoring process, the
responsibility of monitoring a corporate account is vested with Relationship Manager/Credit Officer.

Know your client' profile (KYC)

Most banks in India have a system of preparing `know your client' (KYC) profile/credit report. As a part
of `KYC' system, visits are made on clients and their places of business/units. The frequency of such
visits depends on the nature and needs of relationship.
34

Credit Rating System

The credit rating system is essentially one point indicator of an individual credit exposure and is used to
identify measure and monitor the credit risk of individual proposal. At the whole bank level, credit rating
system enables tracking the health of banks entire credit portfolio. Most banks in India have put in place
the system of internal credit rating. While most of the banks have developed their own models, a few
banks have adopted credit rating models designed by rating agencies. Credit rating models take into
account various types of risks viz. financial, industry and management, etc. associated with a borrowable
unit. The exercise is generally done at the time of sanction of new borrowable account and at the time of
review renewal of existing credit facilities.

Watch-list/Special Mention Category

The grading of the bank's risk assets is an important internal control tool. It serves the need of the
Management to identify and monitor potential risks of a loan asset. The purpose of identification of
potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the bank to
protect against the loan asset becoming non-performing. Most of the banks have a system to put certain
borrowable accounts under watch list or special mention category if performing advances operating under
adverse business or economic conditions are exhibiting certain distress signals. These accounts generally
exhibit weaknesses which are correctable but warrant banks' closer attention. The categorization of such
accounts in watch list or special mention category provides early warning signals enabling Relationship
Manager or Credit Officer to anticipate credit deterioration and take necessary preventive steps to avoid
their slippage into non performing advances. Early Warning Signals It is important in any early warning
system, to be sensitive to signals of credit deterioration. A host of early warning signals are used by
different banks for identification of potential NPAs. Most banks in India have laid down a series of
operational, financial, transactional indicators that could serve to identify emerging problems in credit
exposures at an early stage. Further, it is revealed that the indicators which may trigger early warning
system depend not only on default in payment of installment and interest but also other factors such as
deterioration in operating and financial performance of the borrower, weakening industry characteristics,

35

regulatory changes, general economic conditions, etc. Early warning signals can be classified into five
broad categories viz.
a) Financial
b) Operational
c) Banking
d) Management and
e) External factors.

Financial related warning signals generally emanate from the borrowers' balance sheet, income
expenditure statement, statement of cash flows, statement of receivables etc. Following common warning
signals are captured by some of the banks having relatively developed EWS.

Financial warning signals

Persistent irregularity in the account
Default in repayment obligation
Devolvement of LC/invocation of guarantees
Deterioration in liquidity/working capital position
Substantial increase in long term debts in relation to equity
Declining sales
Operating losses/net losses
Rising sales and falling profits
Disproportionate increase in overheads relative to sales
36

 Rising level of bad debt losses Operational warning signals

Low activity level in plant
Disorderly diversification/frequent changes in plan
Nonpayment of wages/power bills
Loss of critical customer/s
Frequent labor problems
Evidence of aged inventory/large level of inventory

Management related warning signals

Lack of co-operation from key personnel
Change in management, ownership, or key personnel
Desire to take undue risks
Family disputes
Poor financial controls
Fudging of financial statements
Diversion of funds

Banking related signals

Declining bank balances/declining operations in the account
Opening of account with other bank
Return of outward bills/dishonored cheques
37

 Sales transactions not routed through the account

Frequent requests for loan
Frequent delays in submitting stock statements, financial data, etc.

Signals relating to external factors

Economic recession
Emergence of new competition
Emergence of new technology
Changes in government / regulatory policies
Natural calamities
2.

Management/Resolution of NPAs

A reduction in the total gross and net NPAs in the Indian financial system indicates a significant
improvement in management of NPAs. This is also on account of various resolution mechanisms
introduced in the recent past which include the SRFAESI Act, one time settlement schemes, setting up of
the CDR mechanism, strengthening of DRTs. From the data available of Public Sector Banks as on March
31, 2003, there were 1,522 numbers of NPAs as on March 31, 2003 which had gross value greater than
Rs. 50 million in all the public sector banks in India. The total gross value of these NPAs amounted to Rs.
215 billion. The total number of resolution approaches (including cases where action is to be initiated) is
greater than the number of NPAs, indicating some double counting. As can be seen, suit filed and BIFR
are the two most common approaches to resolution of NPAs in public sector banks. Rehabilitation has
been considered/ adopted in only about 13% of the cases. Settlement has been considered only in 9% of
the cases. It is likely to have been adopted in even fewer cases. Data available on resolution strategies
adopted by public sector banks suggest that Compromise settlement schemes with borrowers are found to
be more effective than legal measures. Many banks have come out with their own restructuring schemes
for settlement of NPA accounts. State Bank of India, HDFC Limited, M/s. Dun and Bradstreet
Information Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
information between banks and FIs for curbing the growth of NPAs incorporated credit Information
Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of CIB Regulation Bill, the RBI
38

constituted a working group to examine the role of CIBs. As per the recommendations of the working
group, Banks and FIs are now required to submit the list of suit-filed cases of Rs. 10 million and above
and suit filed cases of willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will
share this information with commercial banks and FIs so as to help them minimize adverse selection at
appraisal stage. The CIBIL is in the process of getting operationalised.

3. Willful Defaulters

RBI has issued revised guidelines in respect of detection of willful default and diversion and siphoning of
funds. As per these guidelines a willful default occurs when a borrower defaults in meeting its obligations
to the lender when it has capacity to honor the obligations or whenfunds have been utilized for purposes
other than those for which finance was granted. The list of willful defaulters is required to be submitted to
SEBI and RBI to prevent their access to capital markets. Sharing of information of this nature helps banks
in their due diligence exercise and helps in avoiding financing unscrupulous elements. RBI has advised
lenders to initiate legal measures including criminal actions, wherever required, and undertake a proactive
approach in change in management, where appropriate.

4. Legal and Regulatory Regime

Debt Recovery Tribunals DRTs were set up under the Recovery of Debts due to Banks and Financial
Institutions Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal
(DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain
cases referred to them, by the banks and FIs for recovery of debts due to the same. The order passed by a
DRT is appealable to the Appellate Tribunal but no appeal shall be entertained by the DRAT unless the
applicant deposits 75% of the amount due from him as determined by it. However, the Affiliate Tribunal
may, for reasons to be received in writing, waive or reduce the amount of such deposit. Advances of Rs. 1
million and above can be settled through DRT process. An important power conferred on the Tribunal is
that of making an interim order (whether by way of injunction or stay) against the defendant to debar him
39

from transferring, alienating or otherwise dealing with or disposing of any property and the assets
belonging to him within prior permission of the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticized in respect of recovery made considering the size of NPAs in the Country. In
general, it is observed that the defendants approach the High Country challenging the verdict of the
Appellate Tribunal which leads to further delays in recovery. Validity of the Act is often challenged in the
court which hinders the progress of the DRTs. Lastly, many needs to be done for making the DRTs
stronger in terms of infrastructure.

Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987 helps in resolving
disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known
for effecting mediation and counseling between the parties and to reduce burden on the court, especially
for small loans. Cases involving suit claims up to Rs. l million can be brought before the Lokadalat and
every award of the Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any
court against the award made by the Lokadalat. Several people of particular localities various social
organizations are approaching Lokadalats which are generally presided over by two or three senior
persons including retired senior civil servants, defense personnel and judicial officers. They take up cases
which are suitable for settlement of debt for certain consideration. Parties are heard and they explain their
legal position. They are advised to reach to some settlement due to social pressure of senior bureaucrats or
judicial officers or social workers. If the compromise is arrived at, the parties to the litigation sign a
statement in presence of Lokadalats which is expected to be filed in court to obtain a consent decree.
Normally, if such settlement contains a clause that if the compromise is not adhered to by the parties, the
suits pending in the court will proceed in accordance with the law and parties will have a right to get the
decree from the court. In general, it is observed that banks do not get the full advantage of the Lokadalats.
It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the
Lokadalat meets. In any case, we should continue our efforts to seek the help of the Lokadalat.

Enactment of SRFAESI Act

40

The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act"
(SRFAESI) provides the formal legal basis and regulatory framework for setting up Asset Reconstruction
Companies (ARCs) in India. In addition to asset reconstruction and ARCs, the Act deals with the
following largely aspects,
Securitization and Securitization Companies
Enforcement of Security Interest
Creation of a central registry in which all securitization and asset reconstruction transactions as well as
any creation of security interests has to be filed.
The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued Directions,
Guidance Notes, Application Form and Guidelines to Banks in April 2003 for regulating functioning of
the proposed ARCS and these Directions/ Guidance Notes cover various aspects relating to registration,
operations and funding of ARCS and resolution of NPAs by ARCS. The RBI has also issued guidelines to
banks and financial institutions on issues relating to transfer of assets to ARCS, consideration for the
same and valuation of instruments issued by the ARCS. Additionally, the Central Government has issued
the security enforcement rules ("Enforcement Rules"), which lays down the procedure to be followed by a
secured creditor while enforcing its security interest pursuant to the Act. The Act permits the secured
creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the
underlying security without reference to the Court after giving a 60 day notice to the defaulting borrower
upon classification of the corresponding financial assistance as a non-performing asset. The Act permits
the secured creditors to take any of the following measures:
Take over possession of the secured assets of the borrower including right to transfer by way of lease,
assignment or sale;
Take over the management of the secured assets including the right to transfer by way of lease,
assignment or sale;
Appoint any person as a manager of the secured asset (such person could be the ARC if they do not
accept any pecuniary liability); and

41

 Recover receivables of the borrower in respect of any secured asset which has been transferred. After
taking over possession of the secured assets, the secured creditors are required to obtain valuation of the
assets. These secured assets may be sold by using any of the following routes to obtain maximum value.
By obtaining quotations from persons dealing in such assets or otherwise interested in buying the
assets; By inviting tenders from the public;
By holding public auctions; or
By private treaty.
Lenders have seized collateral in some cases and while it has not yet been possible to recover value from
most such seizures due to certain legal hurdles, lenders are now clearly in a much better bargaining
position vis-a-vis defaulting borrowers than they were before the enactment of SRFAESI Act. When the
legal hurdles are removed, the bargaining power of lenders is likely to improve further and one would
expect to see a large number of NPAs being resolved in quick time, either through security enforcement
or through settlements. Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The
Act designates any person holding not less than 10% of the paid-up equity capital of the ARC as a
sponsor and prohibits any sponsor from holding a controlling interest in, being the holding company of or
being in control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a
minimum net-owned fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC
should maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted
assets. ARCS have been granted a maximum realization time frame of five years from the date of
acquisition of the assets. The Act stipulates several measures that can be undertaken by ARCs for asset
reconstruction. These include:
Enforcement of security interest;
Taking over or changing the management of the business of the borrower;
The sale or lease of the business of the borrower;
Settlement of the borrowers' dues; and
Restructuring or rescheduling of debt.

42

ARCS are also permitted to act as a manager of collateral assets taken over by t he lenders under security
enforcement rights available to them or as a recovery agent for any bank or financial institution and to
receive a fee for the discharge of these functions. They can also be appointed to act as a receiver, if
appointed by any Court or DRT.

Institution of CDR Mechanism

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of
viable entities facing financial difficulties. The CDR mechanism instituted in India is broadly along the
lines of similar systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR mechanism
has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board
for Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is
intended to preserve viable corporate affected by certain internal/external factors and minimize losses to
creditors/other stakeholders through an orderly and coordinated restructuring programme. RBI has issued
revised guidelines in February 2003 with respect to the CDR mechanism. Corporate borrowers with
borrowings from the banking system of Rs. 20crores and above under multiple banking arrangement are
eligible under the CDR mechanism. Accounts falling under standard, sub-standard or doubtful categories
can be considered for restructuring. CDR is a nonstatutory mechanism based on debtor-creditor
agreement and inter-creditor agreement. Restructuring helps in aligning repayment obligations for
bankers with the cash flow projections as reassessed at the time of restructuring. Therefore it is critical to
prepare a restructuring plan on the lines of the expected business plan along with projected cash flows.

43

44

The CDR process is being stabilized. Certain revisions are envisaged with respect to the eligibility criteria
(amount of borrowings) and time frame for restructuring. Foreign banks are not members of the CDR
forum, and it is expected that they would be signing the agreements shortly. However they attend
meetings. The first ARC to be operational in India- Asset Reconstruction Company of India (ARGIL) is a
member of the CDR forum. Lenders in India prefer to resort to CDR mechanism to avoid unnecessary
delays in multiple lender arrangements and to increase transparency in the process. While in the RBI
guidelines it has been recommended to involve independent consultants, banks are so far resorting to their
internal teams for recommending restructuring programs.

Compromise Settlement Schemes

1) One Time Settlement Schemes
NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The scheme also covers
NPAs classified as sub-standard as on 31st March 2000, which have subsequently become doubtful or
loss. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending
before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are
covered. However cases of willful default, fraud and malfeasance are not covered. As per the OTS
scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of
the outstanding balance in the account.

2) Negotiated Settlement Schemes

The RBI/Government has been encouraging banks to design and implement policies for negotiated
settlements, particularly for old and unresolved NPAs. The broad framework for such settlements was put
in place in July 1995. Specific guidelines were issued in May 1999to public sector banks for one-time
settlements of NPAs of small scale sector. This scheme was valid until September 2000 and enabled banks
to recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July 2000 for recovery
of NPAs of Rs. 50 millionand less. These guidelines were effective until June 2001 and helped banks
recover Rs. 26 billion. ST. XAVIERS COLLEGE (AUTONOMOUS), KOLKATA Page 27

45

Increased Powers to NCLTs and the Proposed Repeal of BIFR

In India, companies whose net worth has been wiped out on account of accumulated losses come under
the purview of the Sick Industrial Companies Act (SICA) and need to be referred to BIFR. Once a
company is referred to the BIFR (and even if an enquiry is pending as to whether it should be admitted to
BIFR), it is afforded protection against recovery proceedings from its creditors. BIFR is widely regarded
as a stumbling block in recovering value for NPAs. Promoters systematically take refuge in SICA - often
there is a scramble to file a reference in BIFR so as to obtain protection from debt recovery proceedings.
The recent amendments to the Companies Act vest powers for revival and rehabilitation of companies
with the National Company Law Tribunal (NCLT), in place of BIFR, with modifications to address
weaknesses experienced under the SICA provisions. The NCLT would prepare a scheme for
reconstruction of any sick company and there is no bar on the lending institution of legal proceedings
against such company whilst the scheme is being prepared by the NCLT. Therefore, proceedings initiated
by any creditor seeking to recover monies from a sick company would not be suspended by a reference to
the NCLT and, therefore, the above provision of the Act may not have much relevance any longer and
probably does not extend to the tribunal for this reason. However, there is a possibility of conflict
between the activities that may be undertaken by the ARC, e.g. change in management, and the role of the
NCLT in restructuring sick companies. The Bill to repeal SICA is currently pending in Parliament and the
process of staffing of NCLTs has been initiated.

46

OBJECTIVES

1. To find out the growth of NPAs in India.

2. To identify if the NPAs have increased more in Public sector or in Private sector.
3. To trace the areas that are major contributors to NPAs.
4. To evaluate the efficiency in managing Non Performing Asset of different types of banks (Public,
Private banks) using NPA ratios & comparing NPA with profits.
5. To check the proportion of NPA of different types of banks in different categories.

47

CHAPTER 2
REVIEW OF LITERATURE

48

REVIEW OF LITERATURE

Krishnamurthi, C.V.(2000) observed that the rising NON PERFOMING ASSETS is serious
diseases for the public sector banks .It shows that the gross NON PERFOMING ASSET of
PUBLIC SSECTOR BANKS are mounting very heavily .The NON PERFOMING ASSET curses
lie between a gross of Rs.39.253 crores in 1992 -93 to Rs.45,463 crores in1997-98. Banerjee,B.
and Dan,A.K (2006) analyzed that NON PERFOMING ASSETs are one of the most crucial
problem which is faced by bank to require attention for improvement in the management of PSBs
are increasing very speedily at present scenario due to following reason . one is government has
got to bail out banks with monetary fund provisions sporadically and ultimately taxpayers bear
the value .Second is cash borrowed for investment ,for not utilized properly ,affects the creation
of assets and therefore the growth of economy is vulnerable .The author has urged many strategic

measures to manage Non playing assets of Public sector banks.

Munniappan (2002) studied the diseases of NON PERFOMING ASSET into two factors .One is
internal factor in respect of portfolio of funds for expansion, modernization and diversification,
accept new projects etc. Second is external factor in respect of recession in economy, other
countries suffered from non performing assets assessment, input/power shortage, price up and
downs uncertain natural calamities etc. Prashanth k Reddy (2002) in his study focuses on
comparative study on Non-Performing Assets in India in the Global context. Similarities and
dissimilarities, remedial measures and conclude the importance of a sound understanding of the
macroeconomic variables and systemic issues pertaining to banks and the economy for solving the
NPAs. Dong He (2002) reviews the nature of Non-Performing Assets in the Indian banking system
and discusses the key design features that would be important for the Assets Reconstruction

Companies to play an effective role in resolving such NPAs.

Jatna, Ranu (2009) states main cause of mounting NON PERFOMING ASSETs in public sector
banks is malfunctioning of the banks. Narasimham Committee identified the NON PERFOMING

ASSETs as one of the possible effects of malfunctioning of PUBLIC SECTOR BANKS.

Prof G.V.Bhavani Prasad and Veera D (2011) examined that the reason behind the falling
revenues from traditional sources is 78% of the total NON PERFOMING ASSETs accounted in
PUBLIC SECTOR BANKS.

49

Manish B Raval (2012) studies to understand the major composition of NON PERFOMING
ASSETS in Indian Banks and compared the three compositions i.e. Priority sector, Non Priority
sector and others sector of NON PERFOMING ASSETS between Nationalized and SBI and its
associates. The researcher stated that there is no significant difference between three
compositions of NON PERFOMING ASSETS to total NON PERFOMING ASSETS in

nationalized banks and SBI and its associates.

Aggarwal and Mittal (2012)1 pointed out that the major reasons for NPA includes improper
selection of borrowers activities, weak credit appraisal system, industrial problems, inefficient
management, slackness in credit management and monitoring, lack of proper follow-up,
recessions and natural calamities and other uncertainties.

50

CHAPTER 3
METHODOLOGY
OF
THE STUDY

RESEARCH METHODOLOGY
51

Research methodology is way to systematically solve the research problem. It is a plan of action for a research
project and explains in detail how data are collected and analyzed. Research Methodology may be understood as a
science of studying how research is done scientifically. It can cover a wide range of studies from simple description
and investigation to the construction of sophisticated experiment.
Meaning Of Research:
Research is an art of scientific investigation. The advanced learners dictionaries of current English lay are
down the meaning of research as, a careful investigation (or) inquiry especially through search for new facts in
any branch of knowledge. Redmen and Mary define research as a systematic effort to gain knowledge.

Research Methodology
Research methodology refers to the logic behind the methods used in context of our research study and explains
why we are using particular method or technique.

Research Design:
A Research design is plan that specifies the objectives of the study, method to be adopted in the collection of the
data, tools in analysis of data and helpful to frame hypothesis. A research design is the arrangement of
condition for collection and analysis of data in a manner that aims to combine relevance to research purpose
with economy in procedure.

Research design is needed because it facilitates the smooth sailing of the various project operations, thereby
making the project as efficient as possible yielding maximal information with minimal expenditure of effort time
and money. Also it minimizes bias and maximizes the reliability of the data collected.

The foregoing review indicates that existing studies concentrated on PSBs & comparison of PSBs with
private & foreign banks. But the present study has focused on the comparison of NPAs between public
and private sector banks. The banks selected for the study are prominent banks among all banks in their
respective sector and includes:
52

 Public Sector Banks

Private Sector Banks
For the study, secondary data has been collected using annual report of Reserve Bank of India
publication including Trend & Progress of banking in India, statistical tables related to banks in India
and report on currency and finance. Articles and papers relating to NPA published in different business
journals, magazines, newspaper, periodicals were studied and data available on internet and other sources
has also been used. Major guidelines issued by RBI from time to time were studied in depth. Along with
this assets quality of banks and
recommendations also studied. In the present study, Measure of central tendency, frequency distribution,
Standard Deviations, coefficient of variation and test have been used to analyze and interpret the data. In
the light of objective mentioned above, the present study is confirmed to examine the various aspects of
NPAs in PSBs & Private banks of India (selected banks). The study covers the period from 2000-01 to
2011-2012.
Sources of Data collection

There are two sources of data collection. They are:

SECONDARY DATA SOURCE
The secondary data are those, which have already been collected by someone else thorough Books,
Internet, Television, journals, Magazines, etc. Secondary sources such as Booklets, Monthly journal,
Magazines, Official files etc. The data about NPAs & its composition, classification of loan assets, profits
(net & gross) & advances of different banks is taken from Reserve Bank of India website and
indiastat.com.

Expected contribution of the study

53

The analysis made as a part of this study may contribute in a way analysis of strength and weakness of the
banking sector as whole with regard to Non Performing Asset of banks. Various banks from different
categories together may make efforts to overcome limitations for lending money to different sectors like
agricultural, SSI, Priority sector, non-priority sector, public sector & others.

Limitation
There are some data which are available for just 3 years while the same data for its counterparts were
available for 9 years. So exact comparison was not possible.

54

CHAPTER 4
ANALYSIS &
INTERPRETATION

NET NPAs OF BANKS: 2001-02 to 2011-2012

55

Interpretation:
From the above it is observed that net NPA of public sector banks has a declining trend up to year
2007-08 and after that it has a rising trend till 2011-12. The same trend has been observed in both
Private and Foreign Sector Banks. The declining trend from 2004 to 2007 of NPA was due to the
implementation of Securitization Act (2002).
Net NPAs of public sector banks in absolute and in percentage terms has also come down from 5.82%
to 0.94% in the period of 2001-02 to 2008-09.But comparatively in private sector banks net NPAs as
absolute and in percentage term to net advances have also come down from 5.73% to 0.70% in the
period of 2001-02 to 2007-08 as shown in fig.
Net NPAs of private sector banks has declined from 0.70% to 0.60% from 2007-08 to 2011-12 except
2008-09(0.90%) and 2009-10(0.82%). So even after implementation of prudential norms in early
nineties and serious concern raised by government about growing size of NPAs, public sector banks
paid least attention to all these warnings, which subsequently lead to turning fresh loans of banks into
non performing category. So falling ratio of NPAs in terms of advances is not a true indicator of
performance of public sector banks in the field of NPAs.

GROSS NPAs OF BANKS: 2001-02 to 2011-2012

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Interpretation:
The studies have been carried out using the RBI reports on banks (Annual Financial Reports)
information /data obtain from banks and discussion with bank officials. The public sector and private
sector banks showed a declining trend in gross and NPAs over the period of study as shown in Table
but public sector banks has higher NPA compare to Private sector banks. The reason for it is that
private sector banks have a secured loan policy as compared to public sector banks.
It has been observed that gross NPAs as absolute and in percentage terms with gross advances of
public sector banks have declined from 11.09% to 2.00% in the period of 2001-02 to 2008-09, whereas
gross NPAs as percentage with gross advances of Private sector banks have declined from 9.64% to
2.30% in the period of 2001-02 to 2007-08 as shown in fig.
Again gross NPAs of public sector banks in absolute and in percentage terms has started increasing
from 2.00% to 3.30% from the period of 2008-09 to 2011-2012 whereas gross NPAs of private sector
banks has started declining from 2.30% to 1.80% from the period of 2007-08 to 2011-12 except 200809(2.36%) and2009-10(2.32%). Growing size of gross NPAs in absolute form has been real cause of
worry.

Asset Quality:
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Movements in Non-performing Assets Bank Group-wise

Public Sector

Nationalized SBI Group

Old Pvt. Banks New Pvt. Banks

Banks
Banks
Gross NPAs
As at end- 40089

23410

15303

2557

9901

March 2009
Addition

31338

17822

12879

2094

10520

26271

15863

9829

1579

6510

25368

18352

3072

13911

March 2010
Net NPAs
As at end- 17726

8245

8398

740

4640

March 2009
As at end- 21033

9339

10745

1165

6253

during

the

year
Recovered
during

the

year
Written

off 0

during

the

year
As at

end- 45156

March 2010
Gross NPAs/Gross Advances Ratio
End-March

2.2

2.1

2.6

2.3

2.4

2009
End-March

1.8

2.5

2.3

2.8

2010
Net NPAs/Net Advances Ratio
End-March

0.8

0.7

1.4

0.7

1.1

2009
End-March

0.7

0.7

1.5

0.9

1.3

2010

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Interpretation:
The trend of improvement in the asset quality of banks continued during the year. Indian banks recovered a
higher amount of NPAs during 2009-10 than that during the previous year. Though the total amount recovered
and written-off at Rs.38,828 in 2009-10 was higher than Rs.28,283 crore in 2008-09, it was lower than fresh
addition of NPAs (Rs.52,382 crore) during the year. As a result, the gross NPAs of SCBs increased across all

59

the bank groups. In this context, it may be noted that in the present context of financial turmoil, some slippage
in NPAs could be expected.
Nevertheless, it may be noted that this slippage was moderate as compared to the problems faced by banks
all over the world. The hardening of interest rates might have made the repayment of loans difficult for some
borrowers, resulting in some increase in NPAs in this sector. It may be noted that the increase in gross NPAs
was more noticeable in respect of new private sector and foreign banks, which have been more active in the
real estate and housing loans segments.
Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to gross advances of foreign
banks increased significantly during the year, while that of private sector banks increased marginally. The
NPAs ratio of all other bank groups declined.

CLASSIFICATION OF LOAN ASSET OF BANKS:

PUBLIC SECTOR BANKS

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Interpretation:
The above frequency distribution chart states that standard asset is increasing every year till 2010 & on the
contrary all the other types of asset i.e. Sub-standard, Doubtful & Loss Asset are decreasing every asset. This
proves that public sector banks have succeeded in reducing NPA over the years.
Public sector banks have taken various measures to reduce NPA also convert Sub- Standard, Doubtful &
loss asset into the above category Standard, Sub-Standard & Doubtful asset. The rise in sub standard ratio has
major proportion indicates that there is a high scope of up gradation or improvement in NPA recovery in initial
stage because it will be very easy to recover the loan as minimum duration of default.

PRIVATE SECTOR BANKS

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Interpretation:
The above chart clearly states that the rise in the standard assets over the years compensates the fall in the
other three types of assets. But in the year 2010, the percentage of Sub-Standard asset is highest among all the
year. In 2010 percentage of standard asset has reduced by 0.5% which is compensated by increase in SubStandard & doubtful assets. This increase is due to interest & principle amount unpaid due to financial crisis in
2009. The percentage of doubtful asset has reduced to a great extent amongst all. So the private sector banks
have managed to reduce the doubtful asset.

COMPOSITION OF NPAs OF BANK SECTOR WISE:

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PUBLIC SECTOR BANKS

Interpretation:
From the above chart it is observed that public sector category is the least contributor towards the NPA
of public sector bank. In the initial years from 2002 to 2006, Non-priority sector contributes more
towards NPA than priority sector. But in later years from 2007 its other way round, where priority
sector contributes more than Non-priority sector.

Priority sector consist of advance given to agriculture, SSI, & other priority sector advances. Non
priority sector consist of large industries, medium industries & other non priority sectors.

In case of priority sector, it started falling from 2004 up to 2006 over previous year. But in the later
years i.e. from 2007 there is rise NPA because of defaults on the loan given to the farmers. It will
decrease in 2010-11 and rise in 2012.In order to reduce that, waiver package was announced in union
budget of 2009.It may also be noted that the increase in NPAs was more noticeable in priority sector,
which have been more active in the real estate and housing loans segments.

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 NPA in non priority sector is reducing constantly from 2003 to 2009 i.e. by 50% and take hike in
2010.Though the advance given to non-priority sector was higher than priority sector, NPAs of non-priority
sector is comparatively.

PRIVATE SECTOR BANKS

Interpretation:
Priority sector category on an average constitutes almost 34% of the total advances made by the
private sector banks. While average NPA of priority sector constitutes of 25% of total NPA. In later
years from 2011 to 2012 there is increase in NPA of priority sector. In these years more advances was
given to agriculture & housing sector.
In the year 2011-12, the real estate market was on boom, which encouraged people to take more loans.
But after the subprime crisis there was sudden fall in real estate market & people became default to
pay the loan.

In case of non-priority sector, the average advances made are 60.5% of total advance made by private
sector banks. But the average NPA of non-priority sector is almost 74% which is highest amongst the

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entire category. We can see the declining trend in NPA of non-priority sector from 2004 to 2007. This
as a result of securitization Act, 2002.

COMPARISON OF NET PROFIT AND NET NPA OF BANKS:

PUBLIC SECTOR BANKS

Interpretation:
It is observed from the above graph there exist no particular relationship between net profit &
net NPA of public sector banks. There is constant increase in net profit from 2001-02 to 200405 & from 2006-07 to 2011-12.
On the contrary public sector banks have managed to reduce net NPA constantly from 2002-03
to 2006-07. Although the percentage of reduction over the previous year is low compared to
percentage of rise in profit over previous year. The average of percentage decrease in net NPA
YOY basis comes to 2.5%.

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PRIVATE SECTOR BANKS:

Interpretation:
It is clearly observed from the line graph that there is continuous rise in net profit of private sector
banks over the years. The average of percentage increase in net profits of private sector banks comes
to approximately 34%.
On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from
2001-02 to 2009-10. The average of percentage rise in net NPA comes to almost 15%.

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NPA TO ADVANCE RATIO OF BANK:

COMPARISON OF NPA WITH ADVANCES-PUBLIC SECTOR
BANKS

Interpretation:
The percentage in reduction of gross NPA to gross advances ratio is decreasing year on year
i.e. it has reduced by 34.5% from 2005-06 to 2006-07. Similarly it has reduced by 25%,
18.5% & 9% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09, 2008-09 to
2009-10, 2010-2011 to 2011-2012.
While in case of net NPA to net advances ratio, the percentage change is varying. It has
reduced by 38% from 2005-06 to 2006-07. Similarly it has reduced by 15.38%, 27.27% &
12.5% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09 2008-09 to 2009-10
& 2010-2011 to 2011-2012.

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 The above calculated figure states that the provisions made for NPA & other items like interest
due but not recovered, part payment received and kept in suspense account, etc which
isdeducted from Gross NPA is changing over the years. It is not decreasing in same proportion
as gross NPA.
The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2006-07
[67%] & lowest in 2007-08 [59%]. In other years it near to 63%. This gap is highest in 2007
because in 2007 advances have increased tremendously over 2006. Due to which NPA also
increased & so provisions also increased.
The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to net
advances is decreasing over the years. In all the public sector bank has succeeded to reduce the
non performing assets against the advances made over the years.

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Comparison of NPA with Advances- Private Sector Banks

Interpretation:
The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years states that private sector banks makes more provisions in gross NPA & gross
advances.
The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2006-07
[60%] & lowest in 2009-10 [48%]. In other years it near to 54%. In 2007 there is highest
increase in advances over previous year amongst all the year. This resulted increase in NPA
which in turn increased the provisions and unrecognized interest income.
Private sector banks have not succeeded to reduce NPA as against the advances made over the
years as both the ratios are increasing in later years.

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CHAPTER 5
FINDINGS,
CONCLUSION &
SUGGESTIONS

70

OVERALL FINDINGS
NPAs were more noticeable in respect of new private sector, which have been more active in the real
estate and housing loans segments. It shows a upward trends over the years as compared to others.
Among all sectors, public sector banks have managed to reduce NPAs over the years. NPA profile in
the < 2% category of public sector banks was reached to 100% in 2009-10 as compared to Private
banks which was around 80%.
Net NPA against net advances increased more in Private sector banks in 2011-12 while Public sector
banks have succeeded in reducing net NPA against net advances made over the period of time.
The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the
years states that public sector banks makes more provisions in gross NPA & gross advances as
compared to private banks.
Public sector banks almost 75% of income comes from Interest/Discount on advances/bill. Whereas it
is just 55% & 43% for private sector banks.

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SUGGESTIONS
New body like Debt Recovery Tribunal should be established & capacity of DRTs should be enhanced.
All banks should keep stringent check on advance being made to real estate & housing segment as
these segment contributed highly towards the NPA in 2011 & 2012.
Uneven scale of repayment schedule with higher repayment in the initial years normally should be
preferred.
Private sector should focus more on recovery of sub-standard & doubtful assets.
Public sector banks should increase their non-interest income, as rise in NPA due to default in interest
income may affect the profits drastically.

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CONCLUSION
The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper management of
the NPAs is not undertaken it would hamper the business of the banks. If the concept of NPAs is taken very
lightly it would be dangerous for the Indian banking sector. The NPAs would destroy the current profit,
interest income due to large provisions of t he NPAs, and would affect the smooth functioning of the recycling
of the funds.
Banks also redistribute losses to other borrowers by charging higher interest rates. Lower deposit rates and
higher lending rates repress savings and financial markets, which hampers economic growth.
Public sector banks are more efficient than private sector with regard to the management of nonperforming
assets. Even among private sector bank, old private sector banks are more efficient than new private sector
banks. But efficient management of NPA is not the sole factor that determines the overall efficiency of banks.

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BIBLIOGRAPHY
I. Books
Management Of Non-Performing Assets In Banks by Sugan C Jain
Managing Non-performing Assets in Banks S. N. Bidani

II. Magazines
Investor
Business India
III. e-Newspapers
The Economic Times
The Business Standard
I V. Published Material
RBI Guidelines Circulars on Income Recognition and Asset Classification
Report on Trend and Progress of Banking in India 2009-10
Statistical Tables Relating to Banks of India
Master Circular
V. Other Sources Internet Websites
http://www.rbi.org.in/
http://www.indiastat.com/

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