A REPORT ON

NONPERFORMING
ASSETSCHALLENGE TO THE
PUBLIC SECTOR BANK
ICICI

NTRODUCTION
After liberalization the Indian banking sector developed very appreciate. The RBI
also nationalized good amount of commercial banks for proving socio economic services
to the people of the nation.
The Public Sector Banks have shown very good performance as far as the
financial operations are concerned. If we look to the glance of the financial operations,
we may find that deposits of public to the Public Sector Banks have increased from
859,461.95crore to 1,079,393.81crore in 2003, the investments of the Public Sector
Banks have increased from 349,107.81crore to 545,509.00crore, and however the
advances have also been increased to 549,351.16crore from 414,989.36crore in 2003.
The total income of the public sector banks have also shown good performance
since the last few years and currently it is 128,464.40crore. The Public Sector Banks have
also shown comparatively good result. The gross profits of the Public Sector Banks
currently 29,715.26crore which has been doubled to the last to last year, and the net profit
of the Public Sector Banks is 12,295,47crore.
However, the only problem of the Public Sector Banks these days are the
increasing level of the non- performing assets. The non -performing assets of the Public
Sector Banks have been increasing regularly year by year. If we glance on the numbers of
non- performing assets we may come to know that in the year 1997 the NPAs were
47,300crore and reached to 80,246crore in 2002.
The only problem that hampers the possible financial performance of the Public
Sector Banks is the increasing results of the non- performing assets. The non -performing
assets impacts drastically to the working of the banks. The efficiency of a bank 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.

The RBI has also tried to develop many schemes and tools to reduce the non
performing assets by introducing internal checks and control scheme, relationship
managers as stated by RBI who have complete knowledge of the borrowers, credit
rating system, and early warning system and so on. The RBI has also tried to improve
the securitization Act and SRFAESI Act and other acts related to the pattern of the
borrowings.
Though RBI has taken number of measures to reduce the level of the non
performing assets the results is not up to the expectations. To improve NPAs each bank
should be motivated to introduce their own precautionary steps. Before lending the
banks must evaluate the feasible financial and operational prospective results of the
borrowing companies. They must evaluate the business of borrowing companies by
keeping in considerations the overall impacts of all the factors that influence the
business.

RESEARCH OPERATION
1. Significance of the study
The main aim of any person is the utilization money in the best manner since
the India is country were more than half of the population has problem of running the
family in the most efficient manner. However Indian people faced large number of
problem till the development of the full-fledged banking sector. The Indian banking
sector came into the developing nature mostly after the 1991 government policy. The
banking sector has really helped the Indian people to utilise the single money in the best
manner as they want. People now have started investing their money in the banks and
banks also provide good returns on the deposited amount. The people now have at the
most understood that banks provide them good security to their deposits and so excess
amounts are invested in the banks. Thus, banks have helped the people to achieve their
socio economic objectives.

The banks not only accept the deposits of the people but also provide them
credit facility for their development. Indian banking sector has the nation in developing
the business and service sectors. But recently the banks are facing the problem of credit
risk. It is found that many general people and business people borrow from the banks
but due to some genuine or other reasons are not able to repay back the amount drawn
to the banks. The amount which is not given back to the banks is known as the non
performing assets. Many banks are facing the problem of non performing assets which
hampers the business of the banks. Due to NPAs the income of the banks is reduced and
the banks have to make the large number of the provisions that would curtail the profit
of the banks and due to that the financial performance of the banks would not show
good results
The main aim behind making this report is to know how Public Sector Banks
are operating their business and how NPAs play its role to the operations of the Public
Sector Banks. The report NPAs are classified according to the sector, industry, and state
wise. The present study also focuses on the existing system in India to solve the
problem of NPAs and comparative analysis to understand which bank is playing what
role with concerned to NPAs.Thus, the study would help the decision makers to
understand the financial performance and growth of Public Sector Banks as compared
to the NPAs.

2. Objective of the study

Primary objective:
The primary objective of the making report is:
To know why NPAs are the great challenge to the Public Sector Banks

Secondary objectives:
The secondary objectives of preparing this report are:
To understand what is Non Performing Assets and what are the underlying
reasons for the emergence of the NPAs.
To understand the impacts of NPAs on the operations of the Public Sector
Banks.

To know what steps are being taken by the Indian banking sector to reduce
the NPAs?
To evaluate the comparative ratios of the Public Sector Banks with
concerned to the NPAs.

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

Formulating the problem

I am interested in the banking sector and I want to make my future in the

banking
sector so decided to make my research study on the banking sector. I analysed first the
factors that are important for the banking sector and I came to know that providing
credit facility to the borrower is one of the important factors as far as the banking sector
is concerned. On the basis of the analysed factor, I felt that the important issue right
now as far as the credit facilities are provided by bank is non performing assets. I
started knowing about the basics of the NPAs and decided to study on the NPAs. So, I
chose the topic Non Performing Assts the great challenge before the Public Sector
Banks.
(2)

Research Design

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

(3)

Determining the data source

The data source can be primary or secondary. The primary data are those data
which are used for the first time in the study. However such data take place much time
and are also expensive. Whereas the secondary data are those data which are already
available in the market. These data are easy to search and are not expensive too.for my
study I have utilised totally the secondary data.
(4)

Analysing the data

The primary data would not be useful until and unless they are well edited and
tabulated. When the person receives the primary data many unuseful data would also be
there. So, I analysed the data and edited them and turned them in the useful tabulations.
So, that can become useful in my report study.
(5)

Interpretation of the data

With use of analysed data I managed to prepare my project report. But the
analyzing of data would not help the study to reach towards its objectives. The
interpretation of the data is required so that the others can understand the crux of the
study in more simple way without any problem so I have added the chepter of analysis
that would explain others to understand my study in simpler way.
(6)

Project writing
This is the last step in preparing the project report. The objective of the report

writing was to report the findings of the study to the concerned authorities.

4. Limitations of the study

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

INDUSTRY PROFILE AND

COMPANY PROFILE
THE INDIAN BANKING INDUSTRY
The origin of the Indian banking industry may be traced to the establishment of
the Bank of Bengal in Calcutta (now Kolkata) in 1786. Since then, the industry has
witnessed substantial growth and radical changes. As of March 2002, the Indian banking
industry consisted of 97 Commercial Banks, 196 Regional Rural Banks, 52 Scheduled
Urban Co-operative Banks, and 16 Scheduled State Co-operative Banks.
The growth of the banking industry in India may be studied in terms of two broad
phases: Pre Independence (1786-1947), and Post Independence (1947 till date). The post
independence phase may be further divided into three sub-phases:
Pre-Nationalisation Period (1947-1969)

Post-Nationalisation Period (1969-1991)

Post-Liberalisation Period (1991- till date)

The two watershed events in the postindependence phase are the nationalisation
of banks (1969) and the initiation of the economic reforms (1991). This section focuses
on the evolution of the banking industry in India post-liberalisation.

1. Banking Sector Reforms - Post-Liberalisation

In 1991, the Government of India (Gol) set up a committee under the
chairmanship of Mr. Narasimaham to make an assessment of the banking sector. The
report of this committee contained recommendations that formed the basis of the reforms
initiated in 1991.
The banking sector reforms had the following objectives:
1. Improving the macroeconomic policy framework within which banks operate;
2. Introducing prudential norms;
3. Improving the financial health and competitive position of banks;
4. Building the financial infrastructure relating to supervision, audit technology and legal
framework; and
5. Improving the level of managerial competence and quality of human resources.

1.1 Impact of Reforms on Indian Banking Industry

With the initiation of the reforms in the financial sector during the 1990s, the
operating environment of banks and term-lending institutions has radically transformed.
One of the fall-outs of the liberalisation was the emergence of nine new private sector
banks in the mid1990s that spurred the incumbent foreign, private and public sector
banks to compete more fiercely than had been the case historically. Another development
of the economic liberalisation process was the opening up of a vibrant capital market in
India, with both equity and debt segments providing new avenues for companies to raise
funds. Among others, these two factors have had the greatest influence on banks
operating in India to broaden the range of products and services on offer. The reforms
have touched all aspects of the banking business. With increasing integration of the
Indian financial markets with their global counterparts and greater emphasis on risk
management practices by the regulator, there have been structural changes within the
banking sector. The impact of structural reforms on banks' balance sheets (both on the
asset and liability sides) and the environment they operate in is discussed in the following
sections.
1.2 Reforms on the Liabilities Side
Reforms of Deposit Interest Rate
Beginning 1992, a progressive approach was adopted towards deregulating the
interest rate structure on deposits. Since then, the rates have been freed gradually.
Currently, the interest rates on deposits stand completely deregulated (with the exception
of the savings bank deposit rate). The deregulation of interest rates has helped Indian
banks to gain more control on the cost of their deposits, the main source of funding for
Indian banks. Besides, it has given more, flexibility to banks in managing their AssetLiability positions.

Increase in Capital Adequacy Requirement

During the 1990s, the Reserve Bank of India (RBI) adopted a strategy aimed at all
banks attaining a Capital Adequacy Ratio (CAR) of 8% in a phased manner. On the
recommendations of the Committee on Banking Sector Reforms, the minimum CAR was
further raised to 9%, effective March 31, 2000.While the stipulation of a higher Capita!
Adequacy' Ratio has increased the capital requirement of banks; it has provided more
stability to the Indian banking system.
1.3 Reforms on the Asset Side

Reforms on the Lending Interest Rate

During 1975-76 to 1980-81, the RBI prescribed both the minimum lending rate
and the ceiling rate. During 1981-82 to 1987-88. The RBI prescribed only the ceiling rate.
During 198889 to 1994-95, the RBI switched from prescribing a ceiling rate to fixing a
minimum lending rate. From 1991 onwards, interest rates have been increasingly freed.
At present, banks can offer loans at rates below the Prime Lending Rate (PLR) to
exporters or other creditworthy borrowers (including public enterprises), and have only to
announce the FLR and the maximum spread charged over it. The deregulation of lending
rates has given banks the flexibility to price loan products on the basis of their own
business strategies and the risk profile of the borrower. It has also lent a competitive
advantage to banks with lower cost of funds.

Lower Cash Reserve and Statutory Liquidity Requirements

During the early 1980s, statutory pre-emption in the form of Cash Reserve Ratio
(CRR) and Statutory Liquidity Ratio (SLR) accounted for 42% of the deposits. In the
1990s, the figure rose to 53.5%, which during the post-liberalisation period has been
gradually reduced. At present, banks are required to maintain a CRR of 4% of the Net
Demand and Time Liabilities (NDTL) (excluding liabilities subject to zero CRR
prescriptions). The RBI has indicated that the CRR would eventually be brought down to
the statutory minimum level of 3% over a period of time.
The SLR, which was at a peak of 38.5% during September 1990 to December
1992, now stands lower at the statutory minimum of 25%.A decrease in the CRR and
SLR requirements implies an increase in the share of deposits available to banks for loans
and advances. It also means that bank's now have more discretion in the allocation of

funds, which if deployed efficiently, can have a positive impact on their profitability. By
increasing the amount of invisible funds available to banks, the reduction in the CRR and
SLR requirements has also enhanced the need for efficient risk management systems in
banks.

Asset Classification and Provisioning Norms

Prudential norms relating to asset classification have been changed postliberalisation. The earlier practice of classifying assets of different quality into eight
`health codes" has now been replaced by the system of classification into four categories
(in accordance with the international norms): standard, sub-standard, doubtful, and loss
assets. On 1st April 2000, provisioning requirements of a minimum of 0.25% were
introduced for standard assets. For the sub-standard, doubtful and loss asset categories,
the provisioning requirements remained at 10%, 20-50% (depending on the duration for
which the asset has remained doubtful), and 100%, respectively, the recognition norms
for NPAs have also been tightened gradually. Since March 1995, loans with interest
and/or installment of principal overdue for more than 180 days are classified as nonperforming. This period will be shortened to 90 days from the year ending 31st' March
2004.
1.4 Structural Reforms

Increased Competition
With the initiation of banking-sector reforms, a more competitive environment
has been ushered in. Now banks are not only competing within themselves, but also with
non-banks, such as financial services companies and mutual funds. While existing banks
have been allowed greater flexibility in expanding their operations, new private sector
banks have also been allowed entry. Over the last decade nine new private sector banks
have established operations in the country. Competition amongst Public Sector Banks
(PSBs) has also intensified. PSBs are now allowed to access the capital market to raise
funds. This has diluted Government's shareholding, although it remains the major
shareholder in PSBs, holding a minimum 51% of their total equity. Although competition
in the banking sector has reduced the share of assets and deposits of the PSBs, their
dominant positions, especially of the large ones, continues.
Although the PSBs will remain major players in the banking industry, they are likely
to face tough competition, from both private sector banks and foreign banks. Moreover,
the banking industry is likely to face stiff competition from other players like non-bank

finance companies, insurance companies, pension funds and mutual funds. The increasing
efficiency of both the equity and debt markets has also accelerated the process of
financial disintermediation, putting additional pressure on banks to retain their customers.
Increasing competition among banks and financial intermediaries is likely to reduce the
Net Interest Spread of banks.

Banks entry into New Business Lines

Banks are increasingly venturing into new areas, such as, Insurance and Mutual
Funds, and offering a wider bouquet of products and services to satisfy the diverse needs
of their customers. With the enactment of the Insurance Regulatory and Development
Authority (IRBA) Act, 1999, banks and NBFCs have been allowed to enter the insurance
business. The RBI has also issued guidelines for-banks' entry into insurance, according to
which, banks need to obtain prior approval of the RBI to enter the insurance business. So
far, the RBI has accorded its approval to three of the 39 commercial banks that had
sought entry into insurance.
Insurance presents a new business opportunity for banks. The opening up of the insurance
business to banks is likely to help them emerge as financial supermarkets like their
counterparts in developed countries.

Increased thrust on Banking Supervision and Risk Management

To strengthen banking supervision, an independent Board for Financial
Supervision (BFS) under the RBI was constituted in November 1994. The Board is
empowered to exercise integrated supervision over all credit institutions in the financial
system, including select Development Financial Institutions (DFIs) and Non Banking
Financial Companies (NBFCs), relating to credit management, prudential norms and
treasury operations. A comprehensive rating system, based on the CAMELS
methodology, has also been instituted for domestic banks; for foreign banks, the rating
system is based on CACS. This rating system has been supplemented by a technologyenabled quarterly off- site surveillance system.
To strengthen the Risk Management Process in banks, in line with proposed Basel
11 accord, the RBI has issued guidelines for managing the various types of risks that
banks are exposed to. To make risk management an integral part of the Indian banking
system, the RBI has also issued guidelines for Risk based Supervision (RBS) and Risk
based Internal Audit (RBIA).

These reform initiatives are expected to encourage banks to allocate funds across
various lines of business on the basis of their Risk adjusted Return on Capital (RAROC).
The measures would also help banks be in line with the global best practices of risk
management and enhance their competitiveness.
The Indian banking industry has come a long way since the nationalisation of
banks in 1969. The industry has witnessed great progress, especially over the past 12
years, and is today a dynamic sector. Reforms in the banking sector have enabled banks
explore new business opportunities rather than remaining confined to generating revenues
from conventional streams. A wider portfolio, besides the growing emphasis on consumer
satisfaction, has led to the Indian banking sector reporting robust growth during past few
years.
It is clear that the deregulation of the economy and of the Banking sector over the
last decade has ushered in competition and enabled Indian banks to better take on the
challenges of globalisation.
1.5 Operational and Efficiency Benchmarking

Benchmarking of Return on Equity

Return on Equity (ROE) is an indicator of the profitability of a bank from the
shareholder's perspective. It is a measure of Accounting Profits per unit of Book Equity
Capital. The ROE of Indian banks for the year ended 31st March 2003, was in the range
of 14 - 40%; the median ROE. Being 23.72% for the same period. On the other hand, the
global benchmark banks had a median ROE of 12.72% for the year ended 31st December
2002.
In recent years, Indian banks have reported unusually high trading incomes,
driven mainly by the scope to booking profits that arise from a sharply declining interest
rate environment. However, such high trading income may not be sustainable in future.
The adjusted median ROE for Indian banks (adjusted for trading income) stands at 5.42%
for Indian banks for FY2003 as compared with 11.77% for the global benchmark
banks.After adjusting for trading income, the median ROE of Indian hanks stands lower
than the same for the global benchmark banks, thus implying that the contribution of
trading income to the RoE of Indian banks is significant.

Further, the ROE benchmarking method favors banks that operate with low levels
of equity or high leverage. To assess the impact of the leverage factor on the ROE of
banks, "Equity Multiplier is presented in the next section.

Benchmarking of Equity Multiplier

Equity Multiplier (EM) is defined as "Total Assets divided by Net Worth". This is
the reciprocal of the Capital-to-Asset ratio, which indicates the leverage of a bank
(amount of Assets of a bank pyramided on its equity capital). Banks with a higher
leverage will be able to post a higher ROE with a similar level of Return on Asset (ROA),
because of the multiplier effect. However, the banking industry is safer with a lower
leverage or a higher proportion of equity capital in the total liability. Capital is important
for banks for two main reasons:
Firstly, capital is viewed as the ultimate line of protection against any potential
losscredit, market, or operating risks. While loan and investment provisions are
associated with expected losses, capital is a cushion against unexpected losses.
Secondly, capital allows banks to pursue their growth objectives; a bank has to
maintain a minimum capital adequacy ratio in accordance with regulatory requirements.
A bank with insufficient capital may not be able to take advantage of growth
opportunities offered by the external operating environment the same way as another
bank with a higher capital base could.

Benchmarking of Return on Assets

ROA is defined as Net Income divided by Average Total Assets. The ratio
measures a bank's Profits per currency unit of Assets. The median ROA for Indian banks
was 1.15% for FY2003. For the global benchmark banks, the ROA ranged from 0.05% to
1.44% for the year ended December 2002, with the median at 0.79%.
For the year ended December 2002, Bank of America reported the highest ROA
(1.44%) among the global benchmark banks, followed by Citi group Inc. (1.42%). The
median value for Indian banks at 1.15% was higher than that of ABN AMRO Bank,
Deutsche Bank, Rabo Bank and Standard Chartered Bank. Two banks, namely Bank of
America and Citigroup Inc., posted higher ROAs as compared with the European and
other banks for both FY2003 and FY2002 primarily on the strength of higher Net Interest
Margins. The reasons for the Net Interest Margins being higher are discussed in the
sections that follow.

As with the ROE analysis, here too adjustments for non-recurring

income/expenses must be made while comparing figures on banks' ROA. Adjusting for
trading income, for both Indian banks and the global benchmark banks, the median works
out to be lower for Indian banks vis-a-vis the global benchmark banks for FY 2003.
I have further analysed the effect of adjustment for trading income on the ROAs
of both Indian Banks and the Global Benchmark Banks. Here, it must be noted that the
global benchmark banks have a more diversified income portfolio as compared with
Indian banks, and a decline in interest rate could have increased profitability of global
benchmark banks indirectly in more ways than one. However, from the disclosures
available in the annual reports of the global banks, it is not possible to quantify the
impact of declining interest rates on their profitability (`thus, the same has not been
adjusted for in this analysis). Nevertheless, to further analyse the profitability (per unit of
assets) of Indian banks vis-a-vis the global benchmark banks, ICRA has conducted a
ROA decomposition analysis.
1.6 Decomposition of Return on Assets

Net Interest Margin

Net Interest Margin (NIM) measures the excess income of a bank's earnings
assets (primarily loans, fixed-income investments, and interbank exposures) over its
funding costs. To the past, for banks NIM was the main source of earnings, which were
therefore directly correlated with the margin levels. But with NIM declining significantly
in many countries, banks are now trying to compensate the "lost" margins with non-fund
based fee incomes and trading income. Despite these changes, net interest income
continues to account for a significant share of the earnings of most banks. The median
NIM for Indian banks was 3.16% for FY2003 and 3.92% for FY2002. The figures
compare favorably with those of the global benchmark banks.
Before drawing inferences on the NIM benchmarking results, three aspects must be
considered, namely: (a) The external operating environment, (b) The quality and type of
assets, and (c) Accounting policies followed by banks.

COMPANY PROFILE
ICICI Bank is India's second-largest bank with total assets of about Rs.1,676.59
bn(US$ 38.5 bn) at March 31, 2014 and profit after tax of Rs. 20.05 bn(US$ 461 mn) for
the year ended March 31, 2014 (Rs. 16.37 bn(US$ 376 mn) in fiscal 2004). ICICI Bank
has a network of about 573 branches and extension counters and over 2,000 ATMs. ICICI
Bank offers a wide range of banking products and financial services to corporate and
retail customers through a variety of delivery channels and through its specialised
subsidiaries and affiliates in the areas of investment banking, life and non-life insurance,
venture capital and asset management. ICICI Bank set up its international banking group
in fiscal 2002 to cater to the cross border needs of clients and leverage on its domestic
banking strengths to offer products internationally. ICICI Bank currently has subsidiaries
in the United Kingdom, Canada and Russia, branches in Singapore and Bahrain and
representative offices in the United States, China, United Arab Emirates, Bangladesh and
South Africa.
ICICI Bank's equity shares are listed in India on the Bombay Stock Exchange and
the National Stock Exchange of India Limited and its American Depositary Receipts
(ADRs) are listed on the New York Stock Exchange (NYSE).

ICICI Bank was originally promoted in 1994 by ICICI Limited, an Indian financial
institution, and was its wholly-owned subsidiary. ICICI's shareholding in ICICI Bank was
reduced to 46% through a public offering of shares in India in fiscal 1998, an equity
offering in the form of ADRs listed on the NYSE in fiscal 2000, ICICI Bank's acquisition
of Bank of Madura Limited in an all-stock amalgamation in fiscal 2001, and secondary
market sales by ICICI to institutional investors in fiscal 2001 and fiscal 2002.
ICICI was formed in 1955 at the initiative of the World Bank, the Government of
India and representatives of Indian industry. The principal objective was to create a
development financial institution for providing medium-term and long-term project
financing to Indian businesses.
In the 1990s, ICICI transformed its business from a development financial
institution offering only project finance to a diversified financial services group offering a
wide variety of products and services, both directly and through a number of subsidiaries
and affiliates like ICICI Bank. In 1999, ICICI become the first Indian company and the
first bank or financial institution from non-Japan Asia to be listed on the NYSE.
After consideration of various corporate structuring alternatives in the context of the
emerging competitive scenario in the Indian banking industry, and the move towards
universal banking, the managements of ICICI and ICICI Bank formed the view that the
merger of ICICI with ICICI Bank would be the optimal strategic alternative for both
entities, and would create the optimal legal structure for the ICICI group's universal
banking strategy.

The merger would enhance value for ICICI shareholders through the merged
entity's access to low-cost deposits, greater opportunities for earning fee-based income
and the ability to participate in the payments system and provide transaction-banking
services.
The merger would enhance value for ICICI Bank shareholders through a large
capital base and scale of operations, seamless access to ICICI's strong corporate
relationships built up over five decades, entry into new business segments, higher market
share in various business segments, particularly fee-based services, and access to the vast
talent pool of ICICI and its subsidiaries. In October 2001, the Boards of Directors of
ICICI and ICICI Bank approved the merger of ICICI and two of its wholly-owned retail
finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital
Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI
and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March
2002, and by the High Court of Judicature at Mumbai and the Reserve Bank of India in
April 2002. Consequent to the merger, the ICICI group's financing and banking
operations, both wholesale and retail, have been integrated in a single entity.
*Free float holding excludes all promoter holdings, strategic investments and cross
holdings among public sector entities.

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REVIEW OF LITERATURE
NON-PERFORMING ASSETS
The world is going faster in terms of services and physical products. However it
has been researched that physical products are available because of the service industries.
In the nation economy also service industry plays vital role in the boosting up of the
economy. The nations like U.S, U.K, and Japan have service industries more than 55%.
The banking sector is one of appreciated service industries. The banking sector plays
larger role in channelising money from one end to other end. It helps almost every person
in utilizing the money at their best. The banking sector accepts the deposits of the people
and provides fruitful return to people on the invested money. But for providing the better
returns plus principal amounts to the clients; it becomes important for the banks to earn.
the main source of income for banks are the interest that they earn on the loans that have
been disbursed to general person, businessman, or any industry for its development.
Thus, we may find the input-output system in the banking sector. Banks first, accepts the
deposits from the people and secondly they lend this money to people who are in the need
of it. By the way of channelising money from one end to another end, Banks earn their
profits.
However, Indian banking sector has recently faced the serious problem of Non
Performing Assets. This problem has been emerged largely in Indian banking sector since
three decade. Due to this problem many Public Sector Banks have been adversely
affected to their performance and operations. In simple words Non Performing Assets
problem is one where banks are not able to recollect their landed money from the clients
or clients have been in such a condition that they are not in the position to provide the
borrowed money to the banks.
The problem of NPAs is danger to the banks because it destroys the healthy
financial conditions of the them. The trust of the people would not be anymore if the
banks have higher NPAs. So. The problem of NPAs must be tackled out in such a way
that would not destroy the operational, financial conditions and would not affect the
image of the banks. recently, RBI has taken number steps to reduce NPAs of the Indian
banks. And it is also found that the many banks have shown positive figures in reducing
NPAs as compared to the past years.

MEANING OF NPAS
An asset is classified as non-performing asset (NPAs) if the borrower does not pay
dues in the form of principal and interest for a period of 180 days. However with effect
from March 2004, default status would be given to a borrower if dues were not paid for
90 days. If any advance or credit facilities granted by bank to a borrower become nonperforming, then the bank will have to treat all the advances/credit facilities granted to
that borrower as non-performing without having any regard to the fact that there may still
exist certain advances / credit facilities having performing status.

WHAT IS A NPAs (NON PERFORMING ASSETS)

Action for enforcement of security interest can be initiated only if the secured
asset is classified as Non Performing Asset. Non Performing Asset means an asset or
account of borrower, which has been classified by a bank or financial institution as substandard, 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,
upgradation 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 Interest and /or installment of principal remain overdue for
a period of more than 180 days in respect of a Term Loan,
The account remains 'out of order' for a period of more than 180 days, in
respect of an overdraft/ cash Credit (OD/CC),
The bill remains overdue for a period of more than 180 days in the case of
bills purchased and discounted,
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
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, form the year ending March 31, 2004. Accordingly, with effect form March 31,
2004, a non-performing asset (NPA) shell be a loan or an advance where;

Interest and /or installment of principal remain overdue for a period of more than 90
days in respect of a Term Loan,
The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,
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
Any amount to be received remains overdue for a period of more than 90 days in respect
of other accounts.

CLASSIFICATION OF LOANS
In India the bank loans are classified on the following basis.
Performing Assets:
Loans where the interest and/or principal are not overdue beyond 180 days at the
end of the financial year.
Non-Performing Assets:
Any loan repayment, which is overdue beyond 180 days or two quarters, is
considered as NPA. According to the securitisation and reconstruction of financial assets
and enforcement of security interest ordinance, 2002 non-performing asset(NPA)
means an asset or account of a 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 classifications issued by the Reserve Bank
Internationally, income from non-performing assets is not recognized on accrual
basis, but is taken into account as income only when it is actually received. It has been
decided to adopt similar practice in our country also. Banks have been advised that they
should not charge and take to income account the interest on all Non-performing assets.
An asset becomes non-performing for a bank when it ceases to generate income.

The basis for treating a credit facility as non-performing is as follows:

INCOME RECOGNITION:
S.N

I.

II.

Nature of Credit Facility

Term Loans

Cash Credit & Overdrafts

Basis for Treating

as NPA
A term loan is to be treated as NPA if
interest remains past due for a period of 4
quarters for the year ended 31-3-1993,3
quarters for the year ended 31-3-1994 and
2 quarters for the year ended 31-3-1995
and onwards.
Past due means an amount reaming out
standing or unpaid for 30 days beyond due
date. For e.g., interest due on 31-3-1993
becomes past due on 30-4-1993, if it is not
received by that date.
A cash credit or overdraft account should
be treated as NPA if the account remains
out of order for a period of four quarters
during the year ended 31-3-1993,three
quarters during the year ended 31-3-1994
and two quarters during the year ended 313-1995 and onwards. An account may be
treated as out of order if any of the
following three conditions is met
The balance outstanding in the account
remains continuously in excess of the
sanctioned limit or drawing power.
OR
The balance outstanding is within the
limit/drawing power, but there are no
credits in the account continuously for a
period of six months as on the date of the
balance sheet of the bank.

OR
There are some credits but the credits
are not enough to cover the interest
debited to the account during the same
period.
III.

Bill Purchased and Discounted

An account should be treated as NPA if the

bill remains overdue and unpaid for a
period of four quarters during the year
st
ended 31 March, 1994 and two quarters
st

during the year ended 31 March, 1995 and

onwards.
It may be added that overdue interest
should not be charged and taken to income
account in respect of overdue bills unless it
is realized.
IV.

Other Accounts
Any other credit facility should be treated
as NPA if any amount to be received in
respect of that facility remains past due for
a period of four quarters during the year
st
ended 31 March 1993. There quarters
st
during the year ended 31 March 1994 and
two quarters during the year ended 31
March 1995 and onwards.

st

ASSET CLASSIFITION:
S.N

Category of assets

Basis for Deciding the category

I. Standard Assets
An asset, which does not disclose any
problem and also does not carry more than
normal risk attached to the business, it
should not fall under this category of NPA.
II. Sub-Standard Assets
An asset, which has been identified as NPA
for a period not exceeding two years.
In the case of term loan, if installments of
principal are overdue for more than one year
but not exceeding two years, it is to be
treated as sub-standard asset.
An asset where the terms of the loan
agreement regarding interest and principal
have been re-negotiated or re-scheduled
should be classified as sub-standard and
should remain in such category for at least
two years of satisfactory performance under
the re-negotiated or rescheduled terms.
In other words, the classification of assets
should not be upgraded merely as a result of
re-scheduling unless there is satisfactory
compliance of the above condition.
III. Doubtful Assets

An asset, which remains NPA for more than

two years.
Here too, rescheduling does not entitle a
bank to upgrade the quality of an advance
automatically.

In the case of a term loan, if installments of principal

are overdue for more than two years, it is to be
treated as doubtful.
IV.

Loss Assets
An asset where loss has been identified by the bank
or internal/external auditors or by RBI inspection
but the amount has not been written-off, wholly or
partly. In other words, such an asset is considered
unrealizable and of such little value that its
continuance as a bankable asset is not warranted
although there may be some salvage or recovery
value.

3. Industry Classification
Most of the participant lenders have provided us with detailed NPA profile for
large NPAs. The remainder of our analysis for NPA profiling, therefore, focuses on the
large NPA portfolio. The total large NPA (individual gross value above Rs 10 million)
portfolio of the participating banks amounts to Rs 357 billion approximately.
The top 5 industries with maximum Large NPAs (by gross value) for the
participant lenders included in this study are Textiles, Iron & Steel, Chemicals,
Engineering and (non ferrous) Metals. The Large NPAs of these 5 industries alone
comprise approximately half of the total Large NPA portfolio (by gross value) of the
participating lenders. At 15%, the Textiles industry is the single largest contributor to the
gross Large NPAs of the participating lenders. It is followed by Iron & Steel with 14%,
Chemicals with 9%, Engineering with 8% and Metals with 5%.
The participant lenders provided loan grading segmentation of the Large NPAs in
the top 5 industries viz. textiles, iron & steel, chemicals, engineering and metals. Only
about 20% of the Large NPA portfolio by gross value is in sub-standard assets. This
indicates that the rehabilitation potential of, about 80% of the Large NPA portfolio in
each of the top 5 industries is somewhat limited.

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

Industry Classification
15%
14%

49%

9%
5%

Textiles
Engineering

Iron & Steel

Metals

8%

Chemicals
Other

4.State-wise Distribution
Data was collected from participant lenders on state wise distribution of their
Large NPAs. The top 5 states with maximum Large NPAs (by gross value) for the lenders
included in this study are Maharashtra (including Goa), Gujarat, Delhi (including
Rajasthan), Andhra Pradesh and Tamil Nadu. The Large NPAs in these 5 states alone
comprise approximately 65% of the total Large NPA portfolio (by gross value) of the
lenders in the sample.
Maharashtra (including Goa) with nearly 24% is the single largest contributor to
the gross Large NPAs of the participant lenders. It is followed by Gujarat with 11%,
Delhi (including Rajasthan) with slightly more than 10%, Andhra Pradesh with 10% and
Tamil Nadu with just under 10%.

State Wise Distribution

24%
35%
11%
10%
Maharashtra
Andhra Pradesh

10%

Gujarat
Tamil Nadu

10%
Delhi, Rajesthan
Other

5. Region-wise Distribution
The NPA portfolios of lenders covered in the study have been segmented into the
following regions:

Northern - J&K, Himachal Pradesh, Punjab, Haryana, Delhi, Rajasthan,

Uttaranchal and UP

Eastern - North eastern states, West Bengal, Orissa, Bihar and Jharkhand
Southern - Tamil Nadu, Kerala, Pondicherry, Andhra Pradesh, Karnataka

Western - Maharashtra, Goa, Gujarat

Central - Madhya Pradesh, Chattisgarh Based on the above segmentation,

the region-wise distribution of Large NPAs of the participant Lenders taken together is
provided in the Chart below:
The Western region (with 35%) has the maximum Large NPAs (by gross value) of
the participating lenders. This is followed by the Southern and Northern Regions with
24% each. Eastern and Central regions have a lower proportion of NPAs by gross value at
10% and 6% respectively.
On an overall basis, the geographical distribution of NPAs is clearly linked to the
level of industrialization in various parts of India. The Western region in general and
Maharashtra and Gujarat, in particular, are amongst the more industrialized areas of
India. As a result, these areas have also attracted the maximum amount of bank credit.
The slowdown in industrial activity during the past few years has also been more
pronounced in these areas, which has resulted in a higher proportion of NPAs.

Regional Distribution
6%

24%

36%
10%
24%
Northern

Estern

Southern

Western Central

6. Operating Status of Assets

In order to assess the rehabilitation potential of the Large NPAs, we had requested
banks to provide break-down of their Large NPA portfolio between operating/nonoperating and implementation status. The table below provides a break-up of the NPA
portfolio of all participating banks on the basis of operating status. As can be seen, only a
very small proportion of the Large NPA portfolio (by gross value) is under
implementation. The remaining is more or less equally split between assets which are
operating and those which are not.

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

8. Possible Increase in Near Future

Several measures are being taken both by the Government, Reserve Bank of India
and by the banks and institutions themselves to reduce the level of NPAs in the system.
While the absolute value of NPAs has been increasing marginally, the NPA ratios (both
gross and net) have been declining over the last few years. In fact in the year ended
March 31, 2003, the levels of NPAs have also declined in absolute terms also as
compared to the previous year. The Indian system is moving towards international
practices which utilize significant qualitative measures in addition to quantitative
measures. Such a change may contribute to standard loans being graded as NPAs in the
future. Also, according to some estimates, the application of the 90 days past due criteria
from March 31, 2004 (as proposed by RBI) will increase gross NPAs by 3-5% of gross
advances.

UNDERLYING REASONS FOR NPAS IN INDIA

An internal study conducted by RBI shows that in the order of prominence, the
following factors contribute to NPAs.
Internal Factors

Diversion of funds for

o Expansion/diversification/modernization
o Taking up new projects
o Helping/promoting associate concerns time/cost overrun during the
project implementation stage
Business (product, marketing, etc.) failure

Inefficiency in management
Slackness in credit management and monitoring

Inappropriate technology/technical problems

Lack of co-ordination among lenders

External Factors

Recession
Input/power shortage
Price escalation

Exchange rate fluctuation

Accidents and natural calamities, etc.

Changes in Government policies in excise/ import duties, pollution control orders,

etc.
As mentioned earlier, we held discussions with lenders and financial sector
experts on the causes of NPAs in India and whilst the above-mentioned causes were
reaffirmed, some others were also mentioned. A brief discussion is provided below.
Liberalization of economy/removal of restrictions/reduction of tariffs
A large number of NPA borrowers were unable to compete in a competitive
market in which lower prices and greater choices were available to consumers. Further,
borrowers operating in specific industries have suffered due to political, fiscal and social
compulsions, compounding pressures from liberalization (e.g., sugar and fertilizer
industries)
Lax monitoring of credits and failure to recognize Early Warning Signals
It has been stated that approval of loan proposals is generally thorough and each

proposal passes through many levels before approval is granted. However, the monitoring
of sometimes-complex credit files has not received the attention it needed, which meant
that early warning signals were not recognised and standard assets slipped to NPA
category without banks being able to take proactive measures to prevent this. Partly due
to this reason, adverse trends in borrowers' performance were not noted and the position
further deteriorated before action was taken.
Over optimistic promoters
Promoters were often optimistic in setting up large projects and in some cases
were not fully above board in their intentions. Screening procedures did not always
highlight these issues. Often projects were set up with the expectation that part of the
funding would be arranged from the capital markets, which were booming at the time of
the project appraisal. When the capital markets subsequently crashed, the requisite funds
could never be raised, promoters often lost interest and lenders were left stranded with
incomplete/unviable projects.
Directed lending
Loans to some segments were dictated by Government's policies rather than
commercial imperatives.
Highly leveraged borrowers
Some borrowers were under capitalized and over burdened with debt to absorb the
changing economic situation in the country. Operating within a protected market resulted
in low appreciation of commercial/market risk.
Funding mismatch
There are said to be many cases where loans granted for short terms were used to
fund long term transactions.
High Cost of Funds
Interest rates as high as 20% were not uncommon. Coupled with high leveraging and
falling demand, borrowers could not continue to service high cost debt.
Willful Defaulters
There are a number of borrowers who have strategically defaulted on their debt
service obligations realizing that the legal recourse available to creditors is slow in
achieving results

EXISTING SYSTEMS/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 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:
i)
Designating Relationship Manager/ Credit Officer for monitoring account/s
ii)
Preparation of `know your client' profile
iii)
Credit rating system
iv)
Identification of watch-list/special mention category accounts
v)
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 the borrowal 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.

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 borrowal unit. The
exercise is generally done at the time of sanction of new borrowal 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 borrowal 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 categorisation 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, 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
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
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.
3. Credit Information Bureau
State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information
Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
information between banks and FIs for curbing the growth of NPAs incorporated credit
Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of
CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs.
As per the recommendations of the working group, Banks and FIs are now required to
submit the list of suit-filed cases of Rs. 10 million and above and suitfiled 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.
4. 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 when funds 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.
5. Legal and Regulatory Regime
A. 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 mn 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 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 criticised 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.
B. 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 counselling
between the parties and to reduce burden on the court, especially for small loans. Cases
involving suit claims upto 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 organisations 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.
C. Enactment of SRFAESI Act
The "The Securitisation 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, viz.
Securitisation and Securitisation 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

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.

Asset Reconstruction Companies

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 realisation 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:
a)
Enforcement of security interest;
b)
Taking over or changing the management of the business of the borrower;
c)
The sale or lease of the business of the borrower;
d)
Settlement of the borrowers' dues; and
e)
Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by the
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.

D. 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 corporates affected by certain internal/external factors and
minimise 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. 20
crores 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 non-statutory 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 alongwith projected cash
flows.
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.
As of March 31, 2003, 60 cases worth Rs. 44,369 crores had been referred to the
CDR, of which 29 cases worth Rs. 29,167 crores have been approved for restructuring.

E. Compromise Settlement Schemes

One Time Settlement Schemes

RBI has issued guidelines under the one time settlement scheme which will cover
all 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 upto Rs. 10 crores, the minimum amount that
should be recovered should be 100% of the outstanding balance in the account. For NPAs
above Rs. 10 crores the CMDs of the respective banks should personally supervise the
settlement of NPAs on a case to case basis, and the Board of Directors may evolve policy
guidelines regarding one time settlement of NPAs as a part of their loan recovery policy.
As on March 31, 2003 under the OTS scheme for NPAs upto Rs. 10 crores a total of
52,669 applications amounting to Rs. 519 crores were received. Of these recoveries
affected were for 30,888 cases amounting to Rs. 168 crores. For OTS under banks' own
scheme the corresponding recoveries were for 1.62 lakh accounts amounting to Rs. 1,583
crores.

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 1999 to 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 million and less. These guidelines were effective until June
2001 and helped banks recover Rs. 26 billion.
F. 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 from

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. This is expected to make recovery proceedings
faster.

APPROPRIATENESS OF THE EXISTING SYSTEMS

Most of the participant lenders have special NPA management cells at Head
Offices for dealing with NPAs. The participants were generally of the view that though
time and resources were adequate for dealing with NPAs, skills needed to be improved
upon.
Within the constraints of the existing legal and regulatory environment banks in
India have done a commendable job in bringing down the levels of NPAs in recent years.
However, with the tightening of NPA recognition norms, which would mean early
recognition and faster provisioning of NPAs, banks now need to evolve systems that help
them identify potential NPAs and take quick action to:

Prevent the potential NPA from actually becoming non-performing, and

Avoid increasing their exposure to such potential NPAs.

INTERNATIONAL PRACTICES ON NPA MANAGEMENT

Subsequent to the Asian currency crisis which severely crippled the financial
system in most In addition to the above, some of the more recent and aggressive steps to
resolve NPAs have been taken by Taiwan. Taiwanese financial institutions have been
encouraged to merge (though with limited success) and form bank based AMCs through
the recent introduction of Financial Holding Company Act and Financial Institution
Asian countries, the magnitude of NPAs in Asian financial institutions was
brought to light. Driven by the need to proactively tackle the soaring NPA levels the
respective Governments embarked upon a program of substantial reform.
This involved setting up processes for early identification and resolution of NPAs. The
table below provides a cross country comparison of approaches used for NPA resolution.
Mergers Act. Alongside the Ministry of Finance has followed a carrot and stick
policy of specifying the required NPA ratios for banks (5% by end 2003), while also
providing flexibility in modes of NPA asset resolution and a conducive regulatory and tax
environment. Deferred loss write-off provisions have been instituted to provide breathing
space for lenders to absorb NPA write-offs. While it is too early to comment on'lhe
success of the NPA resolution process in Taiwan, the early signs are encouraging.
Detailed below are the some key NPA management approaches adopted by banks in
South East Asian countries.
1. Credit Risk Mitigation
As part of the overall credit function of the bank, early recognition of loans
showing signs of distress is a key component. Credit risk management focuses on
assessing credit risk and matching it with capital or provisions to cover expected losses
from default.
2. Early Warning Systems
Loan monitoring is a continuous process and Early Warning Systems are in place
for staff to continuously be alert for warning signs.

3. Asset Management Companies

To resolve NPA problems and help restore the health and confidence of the
financial sector, the countries in South East Asia have used one broad uniform approach,
i.e. they set up specialised Asset Management Companies (AMCs) to tackle NPAs and
put in place Debt Restructuring mechanism to bring creditors and debtors together, often
working along with independent advisors. This broad approach was locally adapted and
used with a varying degree of efficacy across the region. For example, while in some
countries a centralised government sponsored AMC model has been used, in others a
more decentralized approach has been used involving the creation of several "bankbased" AMCs. Further different countries have allowed/used different approaches (inhouse restructuring versus NPA Sale) to resolve their NPAs. Additionally, the efficacy of
bankruptcy and foreclosure laws has varied in various countries. A number of factors
influenced the successful resolution of NPAs through sale to AMCs and some of these
key factors are discussed below

Increasing willingness to sell NPAs to AMCs

Bottlenecks often persist on account of reluctance of lenders to transfer assets to
the AMCs at values lower than the book value to prevent a hit to their financials. Banks
in Malaysia were encouraged to transfer their assets to Danaharta - AMC in Malaysia by
providing them with upside sharing arrangements and the facility to defer the write-off of
financial loss on transfer for 5 years. These incentives coupled with the directive of the
Central Bank to make adjustments in the book values of the assets not transferred to
Danaharta (after Danaharta identifies them) were sufficient to ensure effective sale to the
AMC. In Taiwan, there is a regulatory requirement to reduce for banks to reduce NPAs to
5% by the end of 2003. Consequently there is an increasing number of NPA auctions by
the banks.

Effective resolution strategy

A significant dimension influencing NPA resolution and investor participation is
the ease of implementation of recovery strategies. AMCs like Danaharta have been
provided with a strong platform to affect the resolution of NPAs with clearly laid down
creditor's rights. Danaharta has been allowed to foreclose property without reference to
the Court and thus has been able to dispose collateral swiftly by using the tender route.
Special resolution mechanisms that have involved minimal intervention of the Court have
also served to entice investor interest in the NPA market in certain countries like Taiwan.
On the other hand the operations of Thailand Asset Management Corporation, the

Government owned AMC, have been hindered by deficiencies in the Bankruptcy Law
provisions.

Appointment of Special Administrators

In Malaysia, it has been able to exercise considerable influence over the
restructuring process through the appointment of special administrators that have
prepared workout plans and have exercised management control over the assets of the
borrower during plan preparation and implementation stages. The restructuring process
affected by the automatic moratorium that comes into place at the time of the
administrators appointment.
4. out of court restructuring
Most Asian countries adopted out of court restructuring mechanism to minimize
court intervention and speed up restructuring of potentially viable entities. Internationally,
restructuring of NPAs often involves significant operational restructuring in addition to
financial restructuring. The operational restructuring measures typically include the
following areas:
Revenue enhancement

Cost reduction
Process improvement

Working capital management

Sale of redundant/surplus assts
Once the restructuring measures have been agreed by stakeholders, a complete
restructuring plan is prepared which takes into account all the agreed restructuring
measures. This includes establishment of a timetable and assignment of responsibilities.
Usually, lenders will also establish a protocol for monitoring of progress on the
operational restructuring measures. This would typically involve the appointment of an
independent monitoring agency.
As seen from the Asian experience, in general, NPA resolution has been most
successful when

Flexibility in modes of asset resolution (restructuring, third party sales)

has been provided to lenders.

Conducive and transparent regulatory and tax environment, particularly

pertaining to deferred loss write offs, Foreign Direct Investment and
bankruptcy/foreclosure processes has been put in place.

Performance targets set for banks to get them to resolve NPAs by a certain
deadline.

RATIO ANALYSIS
The relationship between two related items of financial statements is known as
ratio. A ratio is just one number expressed in terms of another. The Ratio is customarily
expressed in three different ways. It may be expressed as a proportion between the two
figures. Second it may be expressed in terms of percentage. Third, it may be expressed in
terms of rates.
The use of ratio has become increasingly popular during the last few years only.
Originally, the bankers used the current ratio to judge the capacity of the borrowing
business enterprises to repay the loan and make regular interest payments. Today it has
assumed to be important tool that anybody connected with the business turns to ratio for
measuring the financial strength and the earning capacity of the business.

1. GROSS NPA RATIO:

Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank.
Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI
guidelines. The ratio is to be counted in terms of percentage and the formula for GNPA is
as follows:
Gross NPA
Gross NPA ratio = Gross advances*100

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

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

Gross NPA to Gross advances

2001
2002
2003
4
5
17.66
6.13
14.11
10.25
12.35

16.94
5.26
12.39
9.37
10.44

13.65
4.89
11.02
8.55
9.55

7.48
16.05

6.22
14.70

5.96
13.06

5.40
25.34
21.76
11.81

5.19
24.11
17.86
11.35

5.27
17.86
12.39
10.29

5.21

6.57

6.94

18.45

18.19

19.25

11.71

11.38

11.58

7.87
11.64
11.20
21.54

8.35
9.59
10.77
16.36

8.32
8.24
8.96
12.15

10.00

9.39

6.18

Total of 19 NAT.
Bank S
State Bank of
India

12.16

11.01

9.17

12.93

11.95

9.34

12.91

9.36

8.15

14.03

10.08

7.28

9.46

7.18

5.53

12.83

12.07

10.14

9.66

6.94

4.80

14.57

10.18

7.32

11.38

9.41

6.67

Total of State
Bank Group

12.73

11.23

8.68

Total of Public
Sector Bank S

12.37

11.09

9.36

Associates of SBI

State Bank of
Bikaner & Jaipur
State Bank of
Heyderabad
State Bank of
Indore
State Bank of
Mysore
State Bank of
Patiala
State Bank of
Saurashtra
State Bank of
Travancore

2
3
4
5
6
7

Total of 7
Associates

The table above indicates the quality of credit portfolio of the banks. High gross
NPA ratio indicates the low credit portfolio of bank and vice-a-versa. We can see from
the above table that the Punjab and Sind Bank has the higher gross NPA ratio of 19.25
% followed by the Dena Bank with 17.86 %. The Allahabad Bank, Central Bank of
India and united Bank of India also have higher gross NPA ratio with 13.65 %,
13.06% and 12.15%. Whereas the state Bank of Patiala, Andhra Bank and Canara
Bank showed lower ratio with 4.8 %, 4.89 % and 5.96 % in the year 2003.

2. NET NPA RATIO

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

Net NPA Ratio =

Gross Advances-Provisions

* 100

S.No.

Name of Bank

Net NPA to Net Advances

2001
2002
2003
3
4
5

NATIONALISED
BANKS

1
2
3
4
5

Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of
Maharashtra

11.23
2.95
6.77
6.72
7.41

11.09
2.45
4.98
6.02
5.81

7.08
1.79
3.72
5.59
4.82

6
7

Canara Bank
Central Bank of
India

4.84
9.72

3.89
7.98

3.59
6.74

8
9
10
11

Corporation Bank
Dena Bank
Indian Bank
Indian Overseas
Bank

1.98
18.37
10.06
7.01

2.31
16.31
8.28
6.32

1.65
11.83
6.15
5.23

12

Oriental Bank of
Commerce

3.60

3.2

1.4

13

Punjab and Sind

Bank

12.27

11.7

10.89

14

Punjab National
Bank

6.74

5.32

3.86

15
16
17

Syndicate Bank
UCO Bank
Union Bank of
India

4.05
6.35
6.87

4.63
5.45
6.26

4.29
4.36
4.91

18

United Bank of
India

10.50

7.9

5.52

19

Vijaya Bank
Total of 19 NAT.

6.23
7.56

6.02
6.63

2.8
5.05

Bank S
State Bank of
India

Associates of SBI

1
2
3
4
5
6
7

6.03

5.63

4.5

State Bank of
Bikaner & Jaipur
State Bank of
Heyderabad
State Bank of
Indore
State Bank of
Mysore
State Bank of
Patiala
State Bank of
Saurashtra
State Bank of
Travancore

7.83

4.96

4.13

7.82

4.97

3.25

5.91

3.58

2.66

7.65

7.36

5.19

4.92

2.94

1.49

7.30

4.95

3.53

7.75

5.72

3.06

Total of 7
Associates

7.03

4.93

3.33

Total of State
Bank Group

6.90

5.28

3.92

Total of Public
Sector Bank S

7.37

6.15

4.59

This ratio indicates the degree of risk in the portfolio of the banks. High NPA ratio
indicates the high quantity of risky assets in the Banks for which no provision are made.
From the table it becomes clear that the NPA ratio of almost all the Banks have been
improved quite well as compared to the previous year. The Dena bank has the highest
NPA ratio of 11.83 % followed by the Punjab and the Sind Bank with 10.89 %. The
Oriental Bank of Commerce has showed the lowest NPA ratio 1.4 % and State Bank of
Patiala, Andhra Bank have also showed lower NPA ratio with 1.49 % and 1.79 % in
2003.

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

Provision Ratio=

S.No.
1
1

Gross NPAs

*100

Name of Bank
2

Provision Ratio
2002
2003
4
5

2001
3

NATIONALISED
BANKS

12.41359
27.12827
18.20021
15.14677

16.37335
42.56687
17.00332
24.26733

51.57969
60.58894
22.64546
30.99369

Allahabad Bank

Andhra Bank

Bank of Baroda

4
5

Bank of India
Bank of
Maharashtra

22.22032

29.7467

31.1799

6
7

Canara Bank
Central Bank of
India

39.34958

43.30727

39.53806

13.03443

16.02666

19.06073

Corporation Bank

Dena Bank

10
11

Indian Bank
Indian Overseas
Bank

55.74535
17.78598
14.22552

59.73437
16.23381
12.59246

66.40856
23.45322
24.62971

11.68812

21.23407

19.93377

12

Oriental Bank of
Commerce

56.54534

62.67559

61.60174

13

Punjab and Sind

Bank

8.719973

12.88284

22.16795

Punjab National
Bank

13.91781

22.01548

29.61992

5.849618
14.07922
17.3017

8.05847
23.37148
45.66927

19.33994
30.48321
31.46368

8.332211

19.5988

26.15319

14
15

Syndicate Bank

16

UCO Bank

17
18

Union Bank of India

United Bank of
India

19

18.11168

0.330767

46.64319

17.50478
14.88211

22.0371
23.33233

29.01683
34.58001

22.78741

38.64336

40.9416

16.37118
23.07381

18.66124
41.42786

24.79229
38.00241

2.68102
6.931275

3.762056
8.911607

5.682238
10.97581

11.71304

15.36264

20.2686

6.173586

9.48382

11.47415

Total of 7
Associates

35.51276

49.08146

63.10697

Total of State Bank

Group

738.0781

999.9431

1021.935

Total of Public
Sector Bank S

491.8792

669.9186

1077.571

Vijaya Bank
Total of 19 NAT.
Bank S

2
3

State Bank of India

Associates of SBI

State Bank of
Bikaner & Jaipur
State Bank of
Heyderabad

2
3
4
5
6
7

State Bank of Indore

State Bank of
Mysore
State Bank of Patiala
State Bank of
Saurashtra
State Bank of
Travancore

This Ratio indicates the degree of safety measures adopted by the Banks. It has
direct bearing on the profitability, Dividend and safety of shareholders fund. If the
provision ratio is less, it indicates that the Banks has made under provision. The
highest provision ratio is showed by corporation Bank with 66.40 % followed by
Oriental Bank of commerce with 61.60 %. The lowest provision ratio is showed state
Bank of Patiala with only 10.97 % in the year 2003.

4. Problem asset ratio

It is the ratio of gross NPA to total asset of the bank. The formula for that is:

GrossNPAs
Problem Asset Ratio = TotalAssets
S.No.

Name of the Bank

1
1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

2
1
2
3
4

* 100

NATIONALISED BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank
Total of 19 NAT. Bank S
State Bank of India
State Bank of Bikaner & Jaipur
State Bank of Heyderabad
State Bank of Indore
State Bank of Mysore

Proble asset ratio

2001
2002
2003
3
4
5
0.082575

0.080836 0.065648

0.023056

0.025034 0.023531

0.066102

0.06331 0.054499

0.05765

0.053319 0.049643

0.046042

0.042217 0.03842

0.032325

0.029284 0.03016

0.068832

0.064166 0.056807

0.024602

0.022329 0.025021

0.107672

0.105934 0.08018

0.088552

0.071882 0.046072

0.053851

0.051312 0.046082

0.021637

0.029525 0.033726

0.076565

0.079386 0.086046

0.054473

0.056777 0.057759

0.038048

0.04091 0.041242

0.04698

0.042466 0.039139

0.052757

0.027402 0.04676

0.065687

0.026461 0.039516

0.041729

2.277083 0.026497

0.054367

0.052064 0.046611

0.050294 0.04447

0.035932

0.025513 0.0377

0.131147

0.509056

0.040619 0.029777

0.364796

0.032511 0.003861

0.061197

0.060327 0.007334

5
6
7

State Bank of Patiala

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

0.250527

0.03615

0.021317

0.224613

0.047306

0.004318

0.00555

0.044115

0.011124

0.004785

0.041829

0.140769

0.00229

0.043882

0.853307

0.025513

0.04888

1.5289

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

5. Capital Adequacy Ratio

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

Capital

100

Risk Weighted Assets

As per prudential Norms Banks were required to achieve 8% CAR, increased to

9% by March 2000. For the purpose of capital Adequacy Achievement, the capital base
i.e. Tire I + Tire II should not be less than the prescribed % of total Risk Weighted Assets
of the bank.
S.No.

Name of the Bank

1
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19

NATIONALISED BANKS
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank
Total of 19 NAT. Bank S
State Bank of India
Associates of SBI
State Bank of Bikaner & Jaipur
State Bank of Heyderabad
State Bank of Indore

2
3
1
2
3

2001
3

Capital adequacy ratio

2002
2003
4
5

10.5
13.4
12.8
12.23
10.64
9.84
10.02
13.03
7.73
-12.77
10.24
11.81
11.42
10.24
11.72
9.05
10.86
10.40
11.50

10.62
12.59
11.32
10.68
11.16
11.88
9.58
17.90
7.64
1.70
10.82
10.99
10.70
10.70
12.12
9.64
11.07
12.02
12.25

11.15
13.62
12.65
12.02
11.76
12.50
10.51
18.50
9.33
10.85
11.30
14.04
10.43
12.02
11.03
10.04
12.41
15.17
12.66

12.79

13.35

13.50

12.39
12.28
12.73

12.26
13.67
12.78

13.08
14.91
13.09

4
5
6
7

State Bank of Mysore

State Bank of Patiala
State Bank of Saurashtra
State Bank of Travancore

11.16
12.37
13.89
11.79

11.81
12.55
13.20
12.54

11.62
13.57
13.68
11.30

The capital adequacy ratio is important for the to maintain as per the banking
regulations. As far as this ratio is concerned the Corporation Bank has shown much
appreciated result by acquiring the ratio of 18.50% followed by the United Bank of India
and State Bank of Hydrabad having ratios of 15.17%and 14.91%. But one remarkable
performance is done by the Indian Bank which had CAR in negative with -12.77% in
2001 but improved its performance in 2003 by acquiring CAR 10.85%
Tire-I: Paid up capital, Statutory Reserve, Revenue capital reserves (excluding
revolution reserve) and other undisclosed reserves LESS accumulated losses till the
current year, investment in subsidiaries, other intangible assets.
Tire-II: Property Revaluation discounted by 55%, Subordinate Loans, Privately placed
Bonds, Hybrid capital, Investment Fluctuation Reserve, provisions on standard assets. &
Capital should not exceed Tire-I

6. SUB-STANDARD ASSETS RATIO

It is the ratio of Total Substandard Assets to Gross NPA of the bank.
total substandard assets
Substandard Assets Ratio= Gross NPAs *100
The ratios calculated below are for the entire public sector banks:
(Rs. In crore)
Year
Substandard Assets
Gross NPAs

2001
14745
54674.47

2002
15788
56476.13

2003
14909
54087.08

Calculations of ratio
2001
26.96%

2002
27.95%

2003
27.56%

It indicates scope of up gradation/improvement in NPA. Higher substandard asset

ratio means that in whole NPA the sub standard ratio has major proportion, which
indicates that there is a high scope for advance up gradation or improvement because it
will be very easy to recover the loan as minimum duration of default. Till 2000 this ratio
of PSB was very high but dropped in recent years &than again it increased, which means
there is a need of advance up gradation.

7. DOUBTFUL ASSET RATIO:

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

total doubtful assets

*100

Gross NPAs

Year
Doubtful Assets
Gross NPAs

2001
33485
54674.47

2002

2003

33658
56476.13

32340
54087.08

The ratios calculated below are for the entire public sector banks:
2001
61.24%

2002
59.59%

2003
59.79%

It indicates the scope of compromise for NPA reduction. Above table shows the
doubtful asset ratio of PSB, which is quite low in 2000 but has increased in recent years.
This means that the bank will have to go through compromise measure for increasingly
number of times as its substandard ratio has decreased in recent years.

8. LOSS ASSET RATIO:

It is the ratio of total loss assets to Gross NPA of the bank.
Total Loss Assets
Loss Asset Ratio=
Gross NP A
* 100

Year
Loss Assets
Gross NPAs

2001
6544
54674.47

2002

2003

7061
56476.13

6840
54087.08

The ratios calculated below are for the entire public sector banks:
2001
11.96%

2002
12.50%

2003
12.65%

It indicates the proportion of bad loans in the bank. Above table shows
sLoss Asset Ratio of PSB, which shows that the bank has maintained lower loss
asset ratio, which indicate that the bank has lower bad loans. However compared
to the ratio of 1999-2000 the same has increased in the recent year, which is
detrimental to the bank. The bank must take necessary steps to control this ratio,
as it is the indication that there is increasing incidence of erosion of securities
and fraudulent Loan Accounts in the bank.

Analysis
Fish eye view of the ratio analysis
Ratios
1. Gross NPA Ratio
2. Net NPA Ratio
3. Provision Ratio
4. Problem Asset Ratio
5. Capital Adequacy Ratio

Good performers

Bad performers

Classifications of Loan Assets of PSBs:

Bank
Group/Year

Standard

Substandard

Assets

Assets

Amount

Doubtful Loss Assets Total NPAs

Assets

Total
Advances

% Amount % Amount % Amount % Amount

Amount

Public
Sector
Banks
1999 2,73,618 84.1 16,033 4.9 29,252 9.0

6,425 2.0 51,710 15.9 3,25,328

2000 3,26,783 86.0 16,361 4.3 30,535 8.0

6,398 1.7 53,294 14.0 3,80,077

2001 3,87,360 87.6 14,745 3.3 33,485 7.6

6,544 1.5 54,774 12.4 4,42,134

2002 4,52,862 88.9 15,788 3.1 33,658 6.6

7,061 1.4 56,507 11.1 5,09,369

As per the above table, given the maximum advances in 2002 amount which 5,01,369
crore which increase from the 3,25,328.
They are trying to reduce the NPA by various means. In 2002 total NPA of PSBs has
11.9% , which is reduce from the 15.9% in 1999
Percentage of standard assets increased from 84.1% to 88.9% during the 1990 to 2002. %
of loss assets, decreased from 2.0% to 1.4% during the 1999 to 2002.
In future, if it will reduce in this manner then it will reduce up to 0% NPA.

Sector Wise Classification 0f NPA:

(Amount in Rs.
crore)
Bank
Group

Priority Sector

Non-priority
Public Sector
Total
Sector
Amount Per cent Amount Per cent Amount Per cent Amount

A. State Bank of India and its Associates

1995
6967
1996
7041
1997
7247
1998
7470
1999
8318
2000
8947
2001
8928
2002
9019
B. NATIONALIZED BANKS
1995
12242
1996
12065
1997
13527
1998
13714
1999
14288
2000
14768
2001
15228
2002
16121
C. Public Sector Banks (A+B)
1995
19209
1996
19106
1997
20774
1998
21184
1999
22606
2000
23715
2001
24159
2002
25139

52.5
53.7
50.4
48.1
44.6
45.2
44.2
45.7

5496
5263
6291
7390
9668
10266
10050
10105

41.4
40.1
43.8
47.6
51.9
51.9
49.8
51.2

809
816
829
662
655
560
1213
619

6.1
6.2
5.8
4.3
3.5
2.8
6.0
3.1

13271
13120
14367
15522
18641
19773
20191
19744

48.7
45.6
46.3
45.5
43.2
44.1
46.2
43.9

12366
13804
15050
15717
17940
18258
17257
20146

49.2
52.2
51.5
52.2
54.3
54.5
52.3
54.8

507
595
632
700
841
495
498
496

2.0
2.2
2.2
2.3
2.5
1.5
1.5
1.3

25115
26464
29209
30130
33069
33521
32983
36763

50.0
48.3
47.7
46.4
43.7
44.5
45.4
44.5

17861
19067
21341
23107
27608
28524
27307
30251

46.5
48.2
49.0
50.6
53.4
53.5
51.4
53.5

1316
1411
1461
1362
1496
1055
1711
1116

3.4
3.6
3.4
3.0
2.9
2.0
3.2
2.0

38385
39584
43577
45653
51710
53294
53174
56507

SECTOR-WISE NPA POSITION

2%
45%
53%

Priority Sector
Public Sector

Non-priority Sector

The above chart represent the NPA position in different types of sectors like
priority, Non priority and public sector. The highest % of NPAs are in the Non-priority
sector under which the criteria of to given loans are not to be maintained strictly so far.
The NPA % of Non-priority sector is highest with 53% whereas 45% NPAs in priority
sector which included agriculture, small-scale industry, small business etc.

The glance of NPAs year by year

(Rs. In crore)
year
1997
1998
1999
2000
2001
2002
2003

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

However the problem of NPAs has made its home since last three and half decade,
since then it is found that the NPAs are increasing year by year. If we look to the numbers
of the NPAs , we may find that in 1997 the NPAs were at Rs.47,300crore and in 2001
they were at Rs. 63,883, but after this period the NPAs increased in the Indian banking
sector very drastically. It reached to Rs.80246crore in 2002 and in 2003 it touched to the
Rs. 94,905crore.
Recently RBI is taking its measures but but the result is not up to the expectations
and no doubt that some of the measures have been wrathful to the banks, what I think is
that those steps should be taken out that would help the banks to reduce the problem of
increasing NPAs. The Banks should also be very specific while providing credit facility
to the borrowers. The banks before giving credit facilities should perform basic
calculations of the borrowers capacity to pay the debt back. However, this only is not
necessary, banks should regularly evaluate the financial position of the borrower
companies.

Suggestions

Through RBI has introduced number of measures to reduce the problem of

increasing NPAs of the banks such as CDR mechanism. One time settlement schemes,
enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness of
these measures. What I would like to suggest for reducing the evolutions of the NPAs of
Public Sector Banks are as under.
(1)

Each bank should have its own independent credit rating agency which
should evaluate the financial capacity of the borrower before than credit
facility.

(2)

The credit rating agency should regularly evaluate the financial condition
of the clients.

(3)

Special accounts should be made of the clients where monthly loan

concentration reports should be made.

(4)

It is also wise for the banks to carryout special investigative audit of all
financial and business transactions and books of accounts of the borrower
company when there is possibility of the diversion of the funds and
mismanagement.

(5)

The banks before providing the credit facilities to the borrower company
should analyse the major heads of the income and expenditure based on
the financial performance of the comparable companies in the industry to
identify significant variances and seek explanation for the same from the
company management. They should also analyse the current financial
position of the major assets and liabilities.

(6)

Banks should evaluate the SWOT analysis of the borrowing companies i.e.
how they would face the environmental threats and opportunities with the
use of their strength and weakness, and what will be their possible future
growth in concerned to financial and operational performance.

(7)

Independent settlement procedure should be more strict and faster and the
decision made by the settlement committee should be binding both
borrowers and lenders and any one of them failing to follow the decision
of the settlement committee should be punished severely.

(8)

There should be proper monitoring of the restructured accounts because

there is every possibility of the loans slipping into NPAs category again.

(9)

Proper training is important to the staff of the banks at the appropriate

level with on going process. That how they should deal the problem of
NPAs, and what continues steps they should take to reduce the NPAs.

(10)

Willful Default of Bank loans should be made a Criminal Offence.

(11)

No loan is to be given to a Group whose one or the other undertaking has

become a Defaulter.

Conclusion To The Problem

A report is not said to be completed unless and until the conclusion is
given to the report. A conclusion reveals the explanations about what the report
has covered and what is the essence of the study. What my project report covers is
concluded below.
The problem statement on which I focused my study is NPAs the big
challenge before the Public Sector Banks. The Indian banking sector is the
important service sector that helps the people of the India to achieve the socio
economic objective. The Indian banking sector has helped the business and
service sector to develop by providing them credit facilities and other finance
related facilities. The Indian banking sector is developing with good appreciate as
compared to the global benchmark banks. The Indian banking system is classified
into scheduled and non scheduled banks. The Public Sector Banks play very
important role in developing the nation in terms of providing good financial
services. The Public Sector Banks have also shown good performance in the last
few years.
The only problem that the Public Sector Banks are facing today is the
problem of non performing assets. The non performing assets means those assets
which are classified as bad assets which are not possibly be returned back to the
banks by the borrowers. If the proper management of the NPAs is not undertaken
it would hamper the business of the banks. The NPAs would destroy the current
profit, interest income due to large provisions of the NPAs, and would affect the
smooth functioning of the recycling of the funds.
If we analyse the past years data, we may come to know that the NPAs
have increased very drastically after 2001. in 1997 the gross NPAs of the Indian
banking sector was 47,300crore where as in 2001 the figure was 63,883 and
which increased at faster rate in 2003 with 94,905crore. The Public Sector Banks
involve its nearly 50% of share in the NPAs.Thus we can imagine how Public
Sector Banks are functioning.
The RBI has also been trying to take number of measures but the ratio of
NPAs is not decreasing of the banks. The banks must find out the measures to

reduce the evolving problem of the NPAs. If the concept of NPAs is taken very
lightly it would be dangerous for the Indian banking sector. The reduction of the
NPAs would help thebanks to boost up their profits, smooth recycling of funds in
the nation. This would help the nation to develop more banking branches and
developing the economy by providing the better financial services to the nation.

BIBLIOGRAPHY

M Y Khan and Public Sector Banks K Jain management Accounting Tata

McGraw-Hill Publishing Company Limited,new Delhi 1999.
Banking Finance (February 2003)
Banking Finance (April 2003)

IBA Bulletin (January 2004), (February 2003), Monthly journal published by

Indian Banks Associations.
Banking Annual (Octomber 2003) published by Business Standard.

www.rbi.org.com
www.google.com
Search:
o Indian Banking Sector
o Non performing assets and banking sectors
o Impact of NPAs on the working of the Public Sector Banks
o Steps taken by govt. to reduce the NPAs of the banks