Economic Project

ECONOMICS
PROJECT
TOPIC: - A STUDY OF NON-PERFORMING ASSETS AND CENTRAL BANK

PROCEDURE TO RECOVER IT
0
PILLAI COLLEGE OF ART, COMMERCE & SCIENCE (AUTONOMOUS)
NEW PANVEL 410 206
AFFILIATED TO UNIVERSITY OF MUMBAI
CONTINUOUS ASSESSMENT-II
ACADEMIC YEAR 2019-2020

SEMESTER VI
ECONOMICS
UNDER THE GUIDANCE OF

Mr. Rizvi Sir
By,
TYBAF B
1
INDEX
Serial Particulars Page No.
No.
1 Introduction to Non-Performing Asset 3-12
2 Non-Performing Asset In Indian Scheduled commercial banks 13-21

Nabira Sayyed ;8493
3 Study on NPA on SBI 22-30

Priyanka Shewale ; 8499
4 Study of NPA on ICICI Bank 31-38

Ruchi Shinde ; 8500
5 Underlying reason for NPA in India 39-44

Divya Patil ; 8471
6 Extent & effect of the NPA problem in India 45-54

Shraddha Sonawane ; 8506
7 What led to the rise in NPA? How NPA affect banks? 55-66
Simiran Poojary ; 8477
8 Recent changes in the RBI’s guidelines to bank regarding NPA 67-75

Fatema Photographer ; 8475
9 Central bank procedure to recover NPA 76-82

Urja Patel ; 8469
10 Conclusion 83
Bibliography 84
2
INTRODUCTION
The banks are commercial organization and the main business of banking is to collect the deposits from the
public and lend it to the individuals, business concerns, institution etc. The lending business is associated with
risk. One of the risks in lending is the possibility of account becoming nonperforming assets. Non-performing
assets (NPAs) do not earn interest income and repayment of loan to bank does not take place according to
repayment schedule affecting income of the bank and their by profitability.
The non- performing assets do not generate interest but at the same time require banks to make provision for
such non- performing assets out of their current profit.
The term Non-Performing Assets figured in the Indian banking sector after introduction of financial sector
reforms in 1992. The prudential norms on income recognition, assets classification and provisioning thereon
are implemented from the financial year 1992-93, as per the recommendation of the committee on the Financial
System (Narsimham Committee). These norms have brought in quantification and objectivity into the
assessment and provisioning for NPAs. Reserve Bank of India constantly endeavours to ensure that
prescriptions in this regard are close to international norms.
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 provision for such NPAs from their current output.
NPAs have an adverse effect on the return on assets in several ways-
• They erode current profits through provisioning requirements.

• They result in reduced income.
• They require higher provisioning requirements affecting profits and accretion to capital funds and
capacity to increase good quality risk assets in future.
• They limit recycling of funds, set in asset liability mismatch.
3
What Is a Non-Performing Asset (NPA)?
A nonperforming asset (NPA) refers to a classification for loans or advances that are in default or in arrears.
A loan is in arrears when principal or interest payments are late or missed. A loan is in default when the lender
considers the loan agreement to be broken and the debtor is unable to meet his obligations.
KEY TAKEAWAYS
• Nonperforming assets (NPAs) are recorded on a bank's balance sheet after a prolonged period of non-
payment by the borrower.
• NPAs place financial burden on the lender; a significant number of NPAs over a period of time may
indicate to regulators that the financial health of the bank is in jeopardy.
• NPAs can be classified as a substandard asset, doubtful asset, or loss asset, depending on the length of
time overdue and probability of repayment.
• Lenders have options to recover their losses, including taking possession of any collateral or selling
off the loan at a significant discount to a collection agency.
4
Definition
Non-Performing Assets
Definition: A non performing asset (NPA) is a loan or advance for which the principal or interest payment
remained overdue for a period of 90 days.
Description: banks are required to classify NPAs further into substandard, doubtful and loss assets.
1. Substandard assets: assets which has remained NPA for a period less than or equal to 12 months.
2. Doubtful assets: an asset would be classified as doubtful if it has remained in the substandard category
for a period of 12months.
3. Loss assets: as per RBI, “loss asset is considered uncollectible and of such little value that its
continuance as a bankable asset is not warranted, although there may be some salvage or recovery
value.”
5
OBJECTIVES
The study aims to achieve the following objectives:
1) To understand the concept of NPA.

2) To study the Non- Performing Assets in Indian scheduled commercial banks.
3) To study NPA on SBI.
4) To study NPA on ICICI bank.
5) To understand the underlying reasons for NPA in India.
6) To understand the effects of Non-Performing Assets problem in India.
7) To identify the causes of NPAs in Indian banking system.
8) To study the role of NPA in banking sector.
9) To study the preventive mechanism for NPA and Compromise settlement scheme.
10) To understand the recent changes in the RBI’s guidelines.
11) To study the Central bank procedure to recover NPA.
6
PRUDENTIAL ACCOUNTING NORMS:
Prior to the financial sector reforms in the year 1992-93, banks used to debit interest to the loan account on
accrual basis and recognized the same as income even in accounts with poor record of recovery. Recognizing
income on accrual basis in accounts where the realization is in doubt is not a prudential practice. As per the
recommendation of the Narsimham Committee, as stated earlier, the Reserve Bank of India introduced
prudential accounting norms applicable from the financial year 1992-93; interest is not to be debited on the
accrual basis but on the cash basis. The prudential accounting norms are based on the NPA concept, N for No
income, P for provisioning and A for asset classification.
The prudential accounting norms comprise of the following:
(1) Income Recognition;
(2) Asset Classification and
(3) Provisioning Norms.
INCOME RECOGNITION:
For the purpose of income recognition, banks are required to classify their loan account into two categories:
(a) Performing Assets [PA]
(b) Non-performing Assets [NPA] If the asset is „Performing‟, income is recognized on an accrual basis.
If the asset is „Non-Performing‟, interest thereon is to be recognized only on cash basis, i.e., when it is actually
realized. Banks may book dividend income on shares of corporate bodies on accrual basis, provided dividends
on the shares have been declared in the Annual General Meetings and the owners‟ right to receive the payment
is established. 122 Hence if dividend is not declared before finalizing the accounts, it cannot be taken to income
account. In respect of income from Government securities and bonds and debenture of corporate bodies where
interest rates are predetermined, income could be booked on accrual basis, provided interest is serviced
regularly and is not in arrears.
7
TYPES AND CLASSIFICATION OF NPA
1. TERM LOAN: Term loan is a medium-term source financed primarily by banks and financial institutions.
Such a type of loan is generally used for financing of expansion, diversification and modernization of
projects so this type of financing is also known as project financing. Term loans are repayable in periodic
instalments.
a. SHORT-TERM LOANS: A short-term loan is a type of advance offered for a duration ranging between
12 to 18 months. Some lenders, however, also consider advances of up to 5 years or 60 months as short-
term loans. Borrowers usually avail these loans to meet their immediate, medium-sized funding needs that
they can repay easily within a short span.
b. INTERMEDIATE-TERM LOANS: Financial institutions generally classify intermediate or mid-term

loans as the ones that come with a tenor ranging between 3 to 5 years. These term loans are sufficiently
making for big-budget funding needs of businesses like purchasing machinery purchase, boosting the
working capital, etc. Affordable of these loans allow businesses to repay the loan from regular cash flow.
c. LONG-TERM LOANS: Long terms loans are Available at attractive term loan interest rates, long-term
loans come with an extended tenor that can reach up to 25 years. Easy EMI option makes these advances
convenient to repay over the long tenor while fulfilling a business’s requirement for lump sum funding.
Usually such loans are secured in nature.
2. CASH CREDIT AND OVERDRAFT: Credit is a type of short-term loan facility in which the
withdrawal of money by the company is not restricted to the amount the borrower holds in his cash credit
account but up to a predefined limit. Overdraft means the act of overdrawing money from the bank account.
Bank Overdraft is a facility provided by the bank to its customers withdraws money more than the amount
he holds in his account.
a. STANDARD ASSETS: Standard asset is one which does not disclose any problems and which does not
carry more than normal risk attached to the business. Such an asset should not be an NPA. As per the
norms, banks have to make a general provision of 0.40% for all loans and advances except that given
towards agriculture and small and medium enterprise (SEM) sector.
b. SUB-STANDARD ASSETS: Sub-standard asset is an asset class drawn within the broader and much-
known non-performance asset category of banks on the basis of term for which the asset class has not
performed and extent of dues realization from collateral security with banks. An asset is sub-standard if
any commitment either interest or repayment is overdue for more than 90 days.
8
c. DOUBTFUL DEBT: A doubtful asset is an asset that has been non-performing for more than 12
months. Loss assets are loans with losses identified by the bank, auditor, or inspector that need to be fully
written off. They typically have an extended period of non-payment, and it can be reasonably assumed that
it will not be repaid.
d. LOSS ASSETS: A loss asset is one where loss has been identified by the bank or internal or external
auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an
asset is considered uncollectible and of such little value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery value. If the loan is not repaid even after it
remains sub-standard asset for more than 3 years, it may be identified as unrecoverable by internal /
external audit and it would be called loss asset.
9
HOW IS NPA CALCULATED
The Reserve Bank of India has issued master direction on Income Recognition and Asset classification norms
which provide you with a detail explanation as to when does an asset needs to be classified as NPA.
Vaguely any asset for which interest or principal is overdue for more than 90 days becomes NPA.
Formula: Net non-performing assets = Gross NPAs – Provisions. Gross NPA Ratio is the ratio of total
gross NPA to total advances (loans) of the bank. Net NPA to Advances (loans) Ratio is the ratio of
Net NPA to advances
The Reserve Bank of India defines Net NPA as Net NPA = Gross NPA – (Balance in Interest Suspense
account + DICGC/ECGC claims received and held pending adjustment + Part payment received and kept in
suspense account + Total provisions held).
Nonperforming Assets or NPA are the loans and advances given by the bank/NBFC which have stopped
generating income for the bank.
10
LIMITATIONS OF NONPERFORMING ASSETS
Nonperforming assets typically refer to loans that have problems getting paid on time or getting paid at all. It
is a classification commonly used by financial institutions to designate loans that are unpaid for at least 90
days, have more than 90 days' worth of interest delayed or refinanced or have no expectation of payments
continuing. Knowing the disadvantages of nonperforming assets can help you avoid ending up as a lender or
borrower of this type of loan.
1. Ineffective Recovery Tribunal:

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to
their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, thereby
reducing their profitability and liquidity
2. Wilful Defaults:
There are borrowers who are able to pay back loans but are intentionally withdrawing it. These groups of
people should be identified and proper measures should be taken in order to get back the money extended to
them as advances and loans.
3. Natural Calamities:
This is the major factor, which is creating alarming rise in NPAs of the PSBs. Even now and then India is hit
by major natural calamities thus making the borrowers unable to pay back their loans. Thus, the bank has to
make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced
profit. Mainly our farmers depend on rain fall for cropping. Due to irregularities of rain fall the farmers are
not to achieve the production level thus they are not repaying the loans.
4. Industrial Sickness:
Improper project handling, ineffective management, lack of adequate resources, lack of advance technology,
day to day changing Government policies give birth to industrial sickness. Hence the banks that finance those
industries ultimately end up with a low recovery of their loans reducing their profitability and liquidity.
5. Lack of Demand:
Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up
their product thus making them unable to pay back the money they borrow to operate these activities. The
banks recover the amount by selling of their assets, which covers a minimum label. Thus, the banks record the
non-recovered part as NPAs and have to make provision for it.
11
6. Change in Government Policies:
With every new Government banking sector gets new policies for its operation. Thus, it has to cope with the
changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is
continuing as most of the weaver’s Co-operative societies have become default largely due to withdrawal of
state patronage. The rehabilitation plan worked out by the Central Government to revive the handloom sector
has not yet been implemented. So, the over dues due to the handloom sectors are becoming NPAs.
7. Inappropriate Technology:
Due to inappropriate technology and management information system, market driven decisions on real time
basis cannot be taken. Proper Management Information System (MIS) and financial accounting system is not
implemented in the banks, which leads to poor credit collection, thus it leads to increase in NPAs. All the
branches of the bank should be computerized.
8. Improper SWOT Analysis:

The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While
providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and
credit worthiness of the borrower.
• Banks should consider the borrowers own capital investment.

• It should collect credit information of the borrowers from bankers; enquiry from market/segment of trade,
industry, business and from external credit rating agencies.
• Analyse the Financial Statements: True picture of business will be revealed on analysis of Profit and loss
Account and Balance Sheet.
• Purpose of the loan: When bankers give loan, it should analyse the purpose of the loan. To ensure safety and
liquidity, banks should grant loan for productive purpose only. Bank should analyse the profitability, viability,
long term acceptability of the project while financing.
9. Poor Credit Appraisal System:

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances
to those who are notable to repay it back. They should use good credit appraisal to decrease the NPAs.
10. Managerial Deficiencies:

The banker should always select the borrower very carefully and should take tangible assets as security to safe
guard its interests. When accepting securities banks should consider the – 1) Marketability 2) Acceptability 3)
Safety 4) Transferability.
12
Nabira Sayyed
Roll: - 8493
A Study of Non-Performing Assets of Commercial Banks and it’s recovery in

India.
Introduction
The banking system in India comprises commercial and cooperative banks, of which the Former accounts for
more than 90 per cent of banking systems are assets. Besides a few foreign And Indian private banks, the
commercial banks comprise nationalized banks (majority equity Holdings with the Government), the State
Bank of India (SBI) (majority equity holding being With the Reserve Bank of India) and the associate banks
of SBI (majority holding being with State Bank of India). These banks, along with regional rural banks,
constitute the public sector (State owned) banking system in India the banking industry has undergone a sea
change after the first phase of economic liberalization in 1991 and hence credit management. Asset quality
was not prime concern in Indian banking sector till 1991, but was mainly focused on performance objectives
such as opening wide networks/branches, development of rural Areas, priority sector lending, higher
employment generation, etc. While the primary function of banks is to lend funds as loans to various sectors
such as agriculture, industry, personal Loans, housing loans etc., but in recent times the banks have become
very cautious in extending Loans. The reason being mounting nonperforming assets (NPAs) and nowadays
these are one of the major concerns for banks in India. Bankers are the custodians and distributors of the liquid
capital of the country. Therefore, most important function of the banking system is to mobilize the savings of
the people by accepting deposits from the public. The banker becomes the trustee of the surplus balances of
the public.
Deposit mobilization promotes the economic prosperity by controlling the money circulation and canalizing
for development and productive purposes. In order to mobilize deposits, the Commercial banks undertake
deposit mobilization through various deposit schemes suited to the different sections of the people. The
deposits along with other sources of funds namely Capital, reserves and borrowings, form the sources of funds
for the banks. The lending and Investment activities of the bank are based on the sources of funds.
The banks, in their books, have different kind of assets, such as cash in hand, balances with Other banks,
investment, loans and advances, fixed assets and other assets. The Non-Performing Asset (NPA) concept is
restricted to loans, advances and investments. As long as an asset generates the income expected from it and
does not disclose any unusual risk other
Then normal commercial risk, it is treated as performing asset, and when it fails to generate the expected
income it becomes a “Non-Performing Asset”.
In other words, a loan asset becomes a Non-Performing Asset (NPA) when it ceases to
13
Generate income, i.e. interest, fees, commission or any other dues for the bank for more than 90 Days. A NPA
is an advance where payment of interest or repayment of installment on principal Or both remains unpaid for
a period of two quarters or more and if they have become ‘past Due’. An amount under any of the credit
facilities is to be treated as past due when it remains Unpaid for 30 days beyond due date. Non-Performing
Assets are also called as Non-Performing Loans. It is made by a bank or Finance company on which
repayments or interest payments are not being made on time. A Loan is an asset for a bank as the interest
payments and the repayment of the principal create a Stream of cash flows. It is from the interest payments
that a bank makes its profits. Banks Usually treat assets as non-performing if they are not serviced for some
time. If payments are Late for a short time, a loan is classified as past due and once a payment becomes really
late (Usually 90 days), the loan is classified as non-performing. A high level of nonperforming Assets,
compared to similar lenders, may be a sign of problems. Narasimham Committee that mandated identification
and reduction of NPAs to be treated as a national priority because NPA direct toward credit risk that bank
faces and its efficiency in Allocating resources. Profitability and earnings of banks are affected due to NPA
numbers. If We glance on the numbers of non-performing assets, we may come to know that in the year 1995
the NPAs were Rs. 38385 crore and reached to 71047 crores in 2011 in Public sector Banks and comparatively
in the year 2001 the NPAs were Rs. 6410 crore and reached to Rs.
17972 crores in 2011 in Private sector banks.
14
Non-Performing Assets in Indian Scheduled Commercial Banks
Table 1 – Gross Advances and Gross NPA’S of SCB’s (Amount in Rupees Billion)
Year Gross Advances Gross NPAs Gross NPAs

(Amount) (Percentage)
2007-2008 6809.58 708.61 10.4
2008-2009 7780.43 687.17 8.8
2009-2010 9020.26 648.12 7.2
2010-2011 11526.82 593.73 5.2
2011-2012 15513. 78 510.97 3.3
2012-2013 20125.10 504.86 2.5
2013-2014 25078.85 563.09 2.3
2014-2015 30382.54 683.28 2.3

2015-2016 35449. 846.98 65 2.4
2016-2017 40120.79 979.00 2.5
2017-2018 46655.44 1370.96 2.9
2018-2019 68757.48 2641.95 3.8
The above table depicts the number of Gross Advances, Gross NPA and the percentage of Gross NPA during
the period of 2007-08 to 2018-19. The number of advances of has increased from Rs. 6810 Billion in 2007-08
to Rs. 68757 Billion in 2018-19. The amount of gross NPA has increased from Rs. 708.61 billion in 2007-08
to Rs. 2642 billion in 2018-19. Similarly, NPA percentage is also showing the rising trend from 2.3 in 2014
to 3.8 in 2018.
Table 2 – Net Advances and Net NPAS of SCBs (Amount in Rupees Billion)
Year Net Advances Net NPAs (Amount) Net NPAs
(Percentage)
2015-2016 6458.59 355.54 5.5

2016-2017 7404.73 296.92 4.0
2017-2018 8626.43 243.96 2.8
2018-2019 67352.32 1426.57 2.1
15
The above table shows the number of Net Advances, Net NPA and the percentage of Net NPA During the
period of 2015-16 to 2018-19. The number of advances has increased from Rs.6458.59 billion in 2015-16 to
67352.32 billion in 2018-19. Further, the amount of NPA has Also increased from Rs. 355.54 billion to
Rs1426.57 billion during the period (2015-16 to 2018-19).
The percentage of Net NPA has first declined from 5.5 in 2015-16 to 1.0 in 2018-19. Then it Has increased to
2.10% in 2018-19
Figure 1 – Scheduled Commercial Banks (Gross and Net NPAs)
The below figure shows the trend of Gross NPA and Net NPA in billion for the period of 13 years starting
from 2006-07 till 2018-19. The x-axis represents the years i.e. as the period of (2006-07 – 2018-19) whereas
y-axis represent the amount of NPA. We can observe here that The Gross and Net amount of NPA has been
showing an upward trend beginning from 2014-15 To 2018-19.
3000
2500
2000
1500
GROSS NPA'S
1000 NET NPA'S
500
16
Figure 2 – Gross and Net NPA (in Percentage)
Chart Title
10
8
6
4
2
0
2016-17 2017-18 2018-19
GROSS NPA'S(PERCENTAGE) NET NPA'S(PERCENTAGE)
The above figure portrays the trend of Gross NPA and Net NPA in percentages for the period of 3 years i.e.
from 2016-17 till 2018-19. The x-axis represents the years whereas y-axis Represents the percentage of NPA.
We can observe here that the Gross and Net percentage of NPA has been showing downward trend from 2016
to 2017-18 and an upward trend beginning from 2017-18 to 2018-19.
Figure 3 – Net NPAs as a Percentage of Net Advances (SCBs)
NET ADVANCES
2018-
2019
2017-
2018 2006-2007
2016-2017
2015-2016
2007-2008
2014-2015
2013-2014 2008-
2012-2013 2009- 2009
2010
2011-2012
2010-2011
The above figure shows NPAs as a Percentage of Net Advances which was lowest 1.0 % in 2011-12 & 2012-
13 and highest 5.5 % in 2006-07. It was 2.2 % in 2018-19.
17
Table 3 – Showing NPAs recovered by SCBs through Lok Adalats (Amount in Crore)
Item 2013 2014 2015 2016 2017 2018

Number of 1,86,535 5,48,308 7,78,833 6,16,0184 8,40,691 16,36,957
Cases
Amount 2142 4023 7235 5254 6600 23200

Involved
Amount 176 96 112 200 400 1400
recovered
% of Amount 8.2 2.4 1.55 2.87 6.1 6.2
recovered
Table 3 is showing NPAs of commercial banks recovered through Lok Adalats during the Study period of
2013 to 2018. From the analysis of the table, it is clear that the number of cases Referred to Lok Adalats for
the recovery of NPAs of commercial banks has increased largely in 2018 as compared to 2013. However, if
we look at the amount recovered by Lok Adalats During the study period, it shows a continuous decline
from 2013 to 2014 and then it shows Improvement from 2015 to 2018, but it is much less than the other
recovery channels. These Lok Adalats are only successful in recovering 1400 crore out of 23200 crore
means only 6.2% Of the total amount involved in NPAs of the commercial banks. Due to its inefficiency in
Recovering, the amount involved in NPAs, the commercial banks resorting to others means of Recovery.
Table 4. Showing NPAs recovered by SCBs through DRTs (Amount in Crore)
Item 2013 2014 2015 2016 2017 2018

Number of 3728 2004 6019 12872 13365 28258
Cases
Referred
Amount 4130 9797 14092 24100 31000 55300
Involved
Amount 3348 3133 3930 4100 4400 5300
Recovered
% of 51.9 81.1 32.00 27.89 17.00 9.5
Amount
recovered
to Total
Amount
Table 4 is showing NPAs of commercial banks recovered through DRTs during the study Period of 2013 to
2018. From the analysis of the table, it is clear that the number of cases for the recovery of NPAs referred to
DRTs is increasing through the study period and also the Amount involved in these cases and the amount
recovered through DRTs has increased. DRTs Shows their efficiency in 2014-15 where it recovers 81.1pc of
18
the total amount involved in NPAs and in later years also the amount recovered by DRTs is quite significant.
This is the Basic reason why the commercial banks are approaching DRTs for the recovery of their NPAs as
compared to Lok Adalats in which the percentage of recovered amount of NPAs is very low. Though we can
say that there is a slight decrease in the percentage of amount recovered by DRTs of the NPAs of commercial
banks, though these are a significant recovery channel for the commercial banks.
Table 5. Showing NPAs recovered by SCBs through SARFAESI Act (Amount in Crore)
Item 2012 2013 2014 2015 2016 2017 2018

Number 83,94 2 61,760 78,366 1,18,642 1,40,991 1,94,707
of Cases
Referred
Amount 7263 12067 14249 30604 35300 68100 94600
Involved
Amount 4429 3982 4269 11561 10100 18500 24400
Recovered
% of 61.0 33.0 30.00 37.78 28.6 27.1 25.8
Amount
recovered
to
Total
Amount
Table 5 is showing NPAs of commercial banks recovered through SARFAESI Act during the Study period of
2012 to 2018. From the analysis of the table, it is clear that the number of cases Referred to SARFAESI Act
and the amount of NPAs involved is increased largely during the Study period. This is done because of the
efficiency of SARFAESI Act in recovering these NPAs of commercial banks. From the table it is clear that
the SARFAESI Act is able to Recover 25.8% of the amount of NPAs of the cases referred to it in the year
2018. In 2012 Recovery percentage was quite higher 61.0% this act has emerged as a blessing in disguise for
the commercial banks as now they are using this act largely in recovering their NPAs in order to increase their
profitability.
Impact of NPA
NPA impact the performance and profitability of banks. The most notable impact of NPA is change in banker’s
sentiments which may hinder credit expansion to productive purpose. Banks may incline towards more risk-
free investments to avoid and reduce riskiness, which is Not conducive for the growth of economy. If the level
of NPAs is not controlled timely they Will:
19
1) Reduce the earning capacity of assets and badly affect the ROI.
2) The cost of capital will go up.
3) The assets and liability mismatch will widen.
4) Higher provisioning requirement on mounting NPAs adversely affect capital adequacy ratio and banks
profitability.
5) The economic value additions (EVA) by banks get upset because EVA is equal to the net operating
profit minus cost of capital.
6) NPAs causes to decrease the value of share sometimes even below their book value in the capital
market.
7) NPAs affect the risk facing ability of banks.
Findings
1) Gross NPAs of scheduled commercial banks have increased from Rs. 708 Billion in 2006-07 to Rs
2642 Billion in 2018-19.
2) Net NPAs of scheduled commercial banks have increased from Rs. 355 Billion in 2006-07 to Rs. 986
Billion in 2018-19.
3) NPAs as a Percentage of Net Advances which was lowest 1.0 % in 2011-12&2012-13 and highest 5.5
% in 2006-07. It was 2.2 % in 2018-19.
4) The average Percentage of Net NPAs during 2006-07 to 2018-19 was around 2.0%Number of Cases
Referred to Lok Adalat was 1,86,535 in 2013 and reached to 16,36,957in 2018.
5) Rs. 2535 crores of NPAs of SCBs recovered through Lok Adalat during 2014 to 2018.
6) Rs. 27231 crores of NPAs of SCBs recovered through DRTs during 2014 to 2018
7) Rs. 77241 crores of NPAs of SCBs recovered through SARFAESI Act during 2014 to2018
Ineffective recovery, wilful defaults and Defective lending process are the important factors which are
responsible for the rise of NPAs in banks. NPAs reduce the earning capacity banks and badly affect the ROI.
Recommendations for management of NPAs

1) RBI should revise existing credit appraisals and monitoring systems.
2) Banks should improve upon and strengthen the loan recovery methods.
3) Credit appraisal and post –loan monitoring are crucial steps which need to concentrate by
4) All the public sector banks.
5) There should be no diversion of funds. This process can be taken up at regular intervals.
6) Personal visits should be made after sanction and disbursal of credit.
7) Monitoring of the operations of the accounts of borrowed units should be done
periodically.
20
8) Managers under credit monitoring and recovery department should have dynamism in Their work.
Many managers say that “we do not fear to negotiate but we do not negotiate Out of fear. Such fear
leads to arbitrary negotiation, which fails.
9) Frequent discussions with the staff in the branch and taking their suggestions for recovery of dues.
10) Assisting the borrowers in developing his/her entrepreneurial skill will not only establish good relation
between the borrowers but also help the bankers to keep a track of their funds.
11) RBI may initiate actions against defaulters like, publishing names of defaulters in Newspapers,
broadcasting media, which is helpful to other banks and financial institutions.
12) As a part of curative measures, bankers may resort to Compromise Settlement or One-time Settlement.
13) Lok Adalats and Debt Recovery Tribunals are other ways for the recovery of dues.
21
PRIYANKA SHEWALE
ROLL NO. -8499
STATE BANK OF INDIA
The State Bank of India (SBI) is an Indian multinational, public sector banking and financial
services statutory body. It is a government corporation statutory body headquartered in Mumbai, Maharashtra.
SBI is ranked as 236th in the Fortune Global 500 list of the world's biggest corporations of 2019. It is the
largest bank in India with a 23% market share in assets, besides a share of one-fourth of the total loan and
deposits market.
The bank descends from the Bank of Calcutta, founded in 1806, via the Imperial Bank of India, making it the
oldest commercial bank in the Indian subcontinent. The Bank of Madras merged into the other two
"presidency banks" in British India, the Bank of Calcutta and the Bank of Bombay, to form the Imperial Bank
of India, which in turn became the State Bank of India in 1955. The Government of India took control of the
Imperial Bank of India in 1955, with Reserve Bank of India (India's central bank) taking a 60% stake,
renaming it the State Bank of India.
❖ History
The roots of the State Bank of India lie in the first decade of the 19th century when the Bank of Calcutta later
renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal was one of three Presidency
banks, the other two being the Bank of Bombay (incorporated on 15 April 1840) and the Bank of
Madras (incorporated on 1 July 1843). All three Presidency banks were incorporated as joint stock
companies and were the result of royal charters. These three banks received the exclusive right to issue paper
currency till 1861 when, with the Paper Currency Act, the right was taken over by the Government of India.
The Presidency banks amalgamated on 27 January 1921, and the re-organised banking entity took as its
name Imperial Bank of India. The Imperial Bank of India remained a joint stock company but without
Government participation.
Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve Bank of India, which is India's
central bank, acquired a controlling interest in the Imperial Bank of India. On 1 July 1955, the Imperial Bank
of India became the State Bank of India. In 2008, the Government of India acquired the Reserve Bank of
India's stake in SBI so as to remove any conflict of interest because the RBI is the country's banking regulatory
authority.
22
❖ Nationalization-
The next significant milestone in Indian Banking happened in late 1960s when the then Indira Gandhi
government nationalized on 19th July 1949, 14 major commercial Indian banks I followed by nationalization
of 6 more commercial Indian banks in 1980.
The stated reason for the nationalization was more control of credit delivery. After this, until 1990s, the
nationalized banks grew at a Leisurely pace of around 4% also called as the Hindu I growth of the Indian
economy After the amalgamation of New Bank of India with Punjab Antinomy Bank; currently there are 19
nationalized banks in India
❖ Liberalization-
In the early 1990's the then Narsinimrao government embarked a policy of liberalization and gave censes to a
small number of private banks, which came to be known as New generate ion tech-savvy banks, which inbred
banks like ICICI and HDFC. This move along with the rapid growth of the economy of Indian kick started the
banking sector in India which has seen rapid growth with strong contribution from all the sectors of banks,
namely Government barks Private Banks and Foreign harks. However there had Bern a few hiccups I for these
new banks with many other being taken over like CIBA Trust Bank which others:
The new policy shook the Banking sector h India competes. Bankers all this time, were used to the 4-6-4
method (Borrow at 4%Lend at 6%: co home at 4) of function. The new wave ushered in a modern outboxes
method of working like traditional banks. All this led to the retail boom in India People not just demanded
more from their banks but also received more.
❖ Non-banking subsidiaries
Apart from five of its associate banks (merged with SBI since 1 April 2017), SBI's non-banking subsidiaries
include:
• SBI Capital Markets Ltd

• SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
• SBI Life Insurance Company Limited
In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas (with 26% of the remaining
capital), to form a joint venture life insurance company named SBI Life Insurance company Ltd.
23
About logo
Togetherness is the theme of this corporate loge of SBI where the word of banking services meets the ever-
changing customer’s needs and establishes a link that is lice a circle, it indicates complete services towards
customers. The logo also denotes a bank that has prepared to do anything to go to any lengths, for customers.
The blew pointer represent the philosophy of the bank that s always booking for the growth and newer, more
challenging more promising direction. The key hook indicates safety and I security.
MISSION, VISION AND VALUES MISSION STATEMENT:
To retain the Bank's position as premiere Indian Financial Service Group, with world chess standards and
significant global committed to excellence in customer, shareholder an Evading role in expanding and
diversifying finance employee satisfaction and to play. Service sectors while conning on its development
banking rul. Emphasis
❖ VISION STATEMENT:
•Premier Indian Financial Service Group with prospective world-class
Standards of effect agency and professionalism and national value.
•Retain its position in the country Development banking
Maximize the shareholders’ value through high-sustained earnings per Share.
❖ PRODUCTS:
State Bank of India renders verifies of services to customers through the blowing products:
• Personal Loan Product:

• SBI Term Deposits
• SBI Recurring Deposits
• SBI Housing Loan
• SBI Car Loan
24
• SBI Educational Loan
• SBI Personal Loan
• SBI Loan for Pensioners
• Loan Against Mortgage of Property Loan Against Shares & Debentures
• Rent PHs Schema
• Midi PHs Schema
• Rates Of interest
Reasons for NPAS in Banks an account does not become an NPA overnight. It gives signals sufficiently in
advance that steps can be taken to prevent the slippage of the account into NPA category. An account becomes
an NPA due to causes attributable to the borrower, the lender and for reasons beyond the control of both. An
internal study conducted by the RBI shows that in the order of prominence, the following factors contribute to
NPAs.
❖ Internal Factors
• Diversion of funds for -Expansion/diversification/modernization.-Taking up new projects. -
Helping/promoting associate concerns.
• Time/cost overrun during the project implementation.
• Inefficient management.
• Strained labour relations.
• Inappropriate technology/technical problems.
• Product obsolescence, etc. Poor credit Appraisals, monitoring and follow up, improper SWOT analysis
on the part of banks.
❖ External Factors
• Recession.
• Input or power shortage.
• Price escalation.
• Exchange rate fluctuation.
• Accidents and natural calamities.
• Changes in government policy such as excise, import and export duties, pollution control order etc.
Wilful defaulters have been there because they knew that legal recourse available to the lenders is time
consuming and slow.
• Sickness of the industry also leads to gradual erosion of the liquidity and units start failing to honour
its obligations for the loan payments.
25
• Heavy funds are locked up in these units. Political tool-Directed credit to SSI and Rural sectors has
been there Manipulation by the debtors using political influence has been a cause for high industrial
bad debts.
In the current perspective, the Economic Survey, 2012-13(paragraph 5.32) identifies the following as the
“main” reasons for the growing NPAs:
a) Switchover to a system- based identification of NPAs by PSBs
b) Prevailing macro-economic situation in the country;
c) Increased interest rates in the recent past;
d) Lower economic growth; and
e) Aggressive lending by banks in the past, especially during good times.
❖ Listings and shareholdings
As on 31 March 2017, Government of India held around 61.23% equity shares in SBI. The Life Insurance
Corporation of India, itself state-owned, is the largest non-promoter shareholder in the company with 8.82%
shareholding.
Shareholders Shareholding
Promoters: Government of India 54.23%
FIIs/GDRs/OCBs/NRIs 18.17%
Banks & Insurance Companies 10.00%
Mutual Funds & UTI 8.29%
Others 9.31%
Total 100.0%
26
Gross NPAs and Net NPAs
Year Gross NPA Net NPA Rs. Percentage to Gross Advances Rs. Percentage to Net Advances
Gross NPA Net NPA

Year Rs. Percentage to Rs. Percentage to
Gross Advances Net Advances
2002-03 13506.07 9.34 6183.00 4.49
2003-04 12667.21 7.75 5441.73 3.45
2004-05 12455.73 5.96 5348.89 2.64
2005-06 9628.14 3.60 4911.41 1.88
2006-07 9998.22 2.92 5257.72 1.56
2007-08 12837.36 3.04 7424.33 1.78
2008-09 15588.66 2.84 9552.02 1.76
2009-10 19534.89 3.09 10870.17 1.72
2010-11 25326.29 3.34 12346.90 1.63
2011-12 39676.46 4.57 15818.85 1.82
Data Analysis: -
A close scrutiny of the Table 3 uncovers the fact that SBI has been spectacularly managing the gross NPAs
segments. An international standard of gross NPAs shows that it would be 2 to 3 per cent. The gross NPAs
which stood at 9.34 per cent in the year 2002-03 gradually slipped down to 2.84 per cent in the year 2008-09
and afterwards it was increased as 4.57 per cent in 2011-12.
27
(Rs. In crores)
Particulars FY2016 FY2017* FY2018 FY2019
Gross NPA 98,173 1,77,866 2,23,427 1,72,750
Gross NPA% 6.50% 9.11% 10.91% 7.53%
Net NPA% 3.81% 5.19% 5.73% 3.01%
❖ Asset Quality of SBI (Non- Performing Asset)

• Gross NPA Ratio at 10.91% increased sequentially by 56 bps in Q4FY18.
• Net NPA Ratio at 5.73% increased sequentially by 12 bps in Q4FY18.
• Provision Coverage Ratio improved by 464 bps YoY from 61.53% as on Mar 17 to 66.17% as on Mar
18. Sequentially the same has increased by 25 bps.
• Provision Coverage Ratio without AUCA improved by 490 bps YoY from 45.48% to 50.38%.
Sequentially the same has increased from 48.59% as on Dec 17 to 50.38% as on Mar 18.
• Provision Coverage Ratio on NCLT List 1 and List 2 at 56% and 75% respectively. Overall Provision
Coverage Ratio on NCLT accounts is 63%.
28
70
60
50
Gross NPA(%)
40
Net NPA (%)
30 PCR (%)
PCR(%) without AUCA
20
10
0
Mar-17 Dec-17 Mar-18
Gross NPAs increased from Rs. 1, 77,866 Cr as on Mar 17 to Rs. 2, 23,427 Cr as on Mar 18, whereas Net
NPA increased from Rs. 96,978 Cr to Rs. 1, 10,855 Cr during the same period.
29
SBI Recovery
SBI has put up 11 non-performing assets (NPAs) for sale to ARCs and financial companies
to recover dues of nearly Rs 1,019 crore.
SBI has put up 11 non-performing assets (NPAs) for sale to ARCs and financial companies to recover dues of
nearly Rs 1,019 crore.
The country's largest lender said the e-auction of these NPA accounts will take place on November 22.
"In terms of the bank's policy on sale of financial assets in line with the regulatory guidelines, we place these
accounts for sale to ARCs/ Banks/ NBFCs/ FIs," SBI said in an auction notice on its website.
Of these 11 accounts, Janki Corp Ltd has the highest outstanding dues of Rs 592.53 crore.
Among others, Venus Remedies Ltd has to repay Rs 83.01 crore, SBS Transpose Logistics Pvt Ltd Rs 63.36
crore, R S Luth Education Trust Rs 60.62 crore, Nilachal Iron & Power Ltd Rs 52.41 crore and Sri Balmukund
Polyp last Rs 50.12 crore. The rest of the five companies owe the bank the remaining Rs 117 crore.
The interested asset reconstruction companies (ARCs)/ banks/ non-banking finance. Once the deal is finalised,
the assignment deed and other legal formalities will be completed in the shortest possible time as mutually
agreed upon, it added. SBI's gross NPAs rose to 10.69 per cent of the total advances at the end of the first
quarter ended June this fiscal year, as against 9.97 per cent a year ago. In value terms, they increased to Rs 2,
12,840 crores, from Rs 1, 88,068 crores. SBI has reported a hefty loss of Rs 4,876 crore for the June quarter
due to higher NPA
30
Ruchi Shinde
Roll No: - 8500
ICICI BANK
ICICI Bank Limited is an Indian multinational banking and financial service company headquartered
in Mumbai, Maharashtra with its registered office in Vadodara, Gujarat. As of 2018, ICICI Bank is the second
largest bank in India in terms of assets and market capitalisation. It offers a wide range of banking products
and financial services for corporate and retail customers through a variety of delivery channels and specialised
subsidiaries in the areas of investment banking, life insurance, non- life insurance, venture capital and asset
management. The bank has a network of 4882 branches and 15101 ATMs across India and has a presence in
17 countries including India.
ICICI Bank is one of the big four banks of India. The bank has subsidiaries in the United Kingdom and
Canada; branches in United States, Singapore, Bahrain, Hong Kong, Qatar, Oman, Dubai International
Finance Centre, China] and South Africa; and representative offices in United Arab Emirates, Bangladesh,
Malaysia and Indonesia. The company's UK subsidiary has also established branches in Belgium and
Germany.
HISTORY
ICICI Bank was established by the Industrial Credit and Investment Corporation of India (ICICI), an
Indian financial institution, as a wholly owned subsidiary in 1994. The parent company was formed in 1955
as a joint-venture of the WORLD BANK, India's public-sector banks and public-sector insurance companies
to provide project financing to Indian industry. The bank was founded as the Industrial Credit and Investment
Corporation of India Bank, before it changed its name to the abbreviated ICICI Bank. The parent company
was later merged with the bank.
ICICI Bank launched internet banking operations in 1998.
ICICI's shareholding in ICICI Bank was reduced to 46 percent, through a public offering of shares in India in
1998, followed by an equity offering in the form of American depositary receipts on the NYSE in 2000.ICICI
Bank acquired the BANK OF MUDRA Limited in an all-stock deal in 2001 and sold additional stakes to
institutional investors during 2001-02.
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 a financial institution from non-Japan Asia to be listed on the NYSE.
31
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.
In 2008, following the 2008 FINANCIAL CRISIS, customers rushed to ICICI ATMs and branches in some
locations due to rumours of an adverse financial position of ICICI Bank. The Reserve Bank of India issued a
clarification on the financial strength of ICICI Bank to dispel the rumours.
Role in Indian financial infrastructure
The bank has contributed to the set-up of a number of Indian institutions to establish financial infrastructure
in the country over the years:
• The NATIONAL STOCK EXCHANGE was promoted by India's leading financial institutions (including
ICICI Ltd.) in 1992 on behalf of the Government of India with the objective of establishing a nationwide
trading facility for equities, debt instruments and hybrids, by ensuring equal access to investors all over
the country through an appropriate communication network.
• In 1987, ICICI Ltd along with UTI set up CRISIL as India's first professional CREDIT RATING
AGENCY.
• NCDEX was set up in 2003, by ICICI Bank Ltd, LIC, NABARD, NSE, Canara bank, CRISIL, Goldman
Sachs, Indian farmers fertilizers co-operative limited (IFFCO) and Punjab national bank.
• ICICI Bank has facilitated setting up of "FINO Cross Link to Case Link Study" in 2006, as a company
that would provide technology solutions and services to reach the underserved
and underbanked population of the country. Using technologies like smart cards, biometrics and a basket
of support services, FINO enables financial institutions to conceptualise, develop and operationalise
projects to support sector initiatives in microfinance and livelihoods.
• Entrepreneurship Development Institute of India (EDII) was set up in 1983, by the erstwhile apex financial
institutions like IDBI, ICICI, IFCI and SBI with the support of the government of Gujrat as a national
resource organisation committed to entrepreneurship development, education, training and research.
• Eastern Development Finance Corporation (NEDFI) was promoted by national level financial institutions
like ICICI Ltd in 1995 at Guwahati, Assam for the development of industries, infrastructure, animal
husbandry, Agri-horticulture plantation, medicinal plants, sericulture, aquaculture, poultry and dairy in the
North Eastern states of India.
• Following the enactment of the Securitisation Act in 2002, ICICI Bank, together with other institutions,
set up Asset Reconstruction Company India Limited (ARCIL) in 2003. ARCIL was established to acquire
32
non-performing assets (NPAs) from financial institutions and banks with a view to enhance the
management of these assets and help in the maximisation of recovery.
• ICICI Bank has helped in setting up credit information bureau of Indian limited (CIBIL), India's first
national credit bureau in 2000. CIBIL provides a repository of information (which contains the credit
history of commercial and consumer borrowers) to its members in the form of credit information reports.
Subsidiaries
1. Domestic
• ICICI Prudential life insurance Company Limited

• ICICI Lombard General Insurance Company Limited
• ICICI Prudential Asset Management Company Limited
• ICICI Prudential Trust Limited
• ICICI Securities Limited
• ICICI Securities Primary Dealership Limited
• ICICI Venture Funds Management Company Limited
• ICICI Home Finance Company Limited
• ICICI Investment Management Company Limited
• ICICI Trusteeship Services Limited
• ICICI Prudential Pension Funds Management Company Limited.
2. International
• ICICI Bank USA

• ICICI Bank UK PLC
• ICICI Bank Germany
• ICICI Bank Eurasia Limited Liability Company
• ICICI Securities Holdings Inc.
• ICICI Securities Inc.
• ICICI International Limited.
33
MISSION, VISION AND VALUE OF MISSION STATEMENT
The official vision statement of ICICI Bank is: "To be the leading provider of financial services in India and
a major global bank." The mission statement of ICICI Bank consists of several points, but the first is to become
the first choice among customers by providing world-class services.
ICICI Bank is an Indian multinational banking service that was established in 1994. Other points of its mission
statement include expanding its business on a global scale, playing a significant role in realizing India's
economic potential, positively contributing to the markets in which it operates, and maintaining a high level
of governance and ethics.
Advantages and Disadvantages of ICICI Bank
Most people when selecting an investment option, only focus on the advantages related to the option. But to make an
informed investment decision, it is very important to know the good as well as the bad of the option you select.
While the advantages of savings account are plenty, there are also a few drawbacks too that you should know
about before opening a new account. Some of the most important advantages and disadvantages of savings
account are discussed below-
❖ Advantages
1. Earn Interest
A savings account helps you earn interest on the deposited amount. To attract new customers, banks now offer
higher interest rates and a host of other benefits such as discounts on locker rentals, unlimited ATM
transactions, and more. Moreover, some of the banks also offer many different types of savings account to
meet the different needs of the customers.
2. Safest Investment Option
One of the biggest advantages of saving account is unlike most other investment options; a savings bank
account does not invest your money but still offers modest returns. All you need to do is to deposit money in
your savings account to take advantage of this feature.
3. Minimum Investment Amount
Browse through the different investment options and you’ll see that a savings account is also the most
affordable. You are simply required to keep the minimum balance in your account to keep earning interest.
This minimum deposit amount can be different for every bank.
34
Disadvantages
1. Interest Rates Can Change
One important disadvantage of a savings bank account is that the interest rates offered by the bank are variable.
This means that the bank has the right to make changes to the interest rate. While the changes are generally
minimal, it is possible that the interest rate of a savings account now can be lower 6 months down the line.
2. Easy Access
While easy access to funds is seen as one of the most important features of savings account, it can also work
as a disadvantage for some people. As these accounts allow you to access your funds anytime you like, people
are more tempted to spend. This can make long-term savings challenging.
3. Minimum Balance Requirement
When you open a savings bank account, you’ll be required to maintain a minimum average balance in your
account. If you fail to maintain this balance, the bank charges a penalty for the same. So, before opening an
account, make sure that you check the minimum balance requirements of the bank and always maintain this
balance to avoid the penalty.
ICICI Bank Logo New
In 1997, ICICI Bank changed its name from The Industrial Credit and Investment Corporation of India Limited
to ICICI Ltd. ICICI is the acronym obtained from the full form of ICICI bank. And a year later in 1998, ICICI
bank introduced new logo symbolising common corporate identity of ICICI group. The ICICI Corporate
Identity took a new direction, assuming a new significance.
35
Meaning of New ICICI Bank logo
• The new ICICI logo depicts a dynamic individual with drive and conviction and personifies the human
capital of this company, which is indispensable to its further progress.
• The individual in the ICIC logo also symbolises the strong retail identity of the group, whether it be in the
form of reaching out to a shareholder or individual customers.
• The ‘I’ in the logo also stands for numerous uno, a position that ICICI has always strived to achieve. It
also lends itself to representing the ICICI name.
• The new corporate colours reflect ICICI’s core values,
o Orange embodying dynamism,
o Blue standing for trust and depth,
o Grey representing warmth
o Maroon symbolising stability
o White epitomising the highest form of ethics.
36
Non-performing asset: a case study of ICICI bank
INTRODUCTION
The Indian banking sector has undergone a drastic change and has evolved considerably over several decades.
While banks have become more and more profitable in terms of higher revenues, attracting foreign capital and
diversifying their operations, they are also suffering from major issues such as compromised asset quality,
capital inadequacy and stressed balance sheets. This has affected the performance of the banking sector and
has raised questions about its sustainability. Today profit is a sign of vitality and success in a competitive
scenario. It ensures survival and growth and can eventually become the only parameter for performance
evaluation. NPA provision is one of the major determinants of profit. Hence, for a bank, NPA has become
very significant.
OBJECTIVES
• To examine the NPA trends of ICICI bank for past four years
• To list the cause of occurrence of NPA.
• To check whether there exists any linear relationship between net profit and net NPA in case of ICICI.
RESEARCH METHODOLOGY
The present study is based on secondary data analysis. The data has been collected from various web sources
like annual reports of bank, information bulletins and journals.
For analyzing the data collected, correlation analysis using SPSS has been done and compares various
parameters, charts, and tables have been made use of.
Here, NPA is the independent variable and net profit is the dependent variable. So we see if due to any changes
in the net NPA, the net profit change or not, if yes, whether positively or negatively.
Data analysis
In the below section, various parameters related to NPA are compared and analyzed.
Year Total advance Net profit Gross NPA Net NPA

2016 338,703 9,810 10,506 3,298
2017 387,522 11,175 15,095 6,256
2018 435,264 9,726 25,721 13,297
2019 464,232 9,801 13,297 25,451
37
INTERPRETATION OF THE TABLE
The table is comparing total advance with net profit, gross NPA and net NPA of ICICI bank. With the help of
this table we can get knowledge about growing performance of the bank. We can see that total advance given
by the ICICI bank and net profits are increasing continuously since 2016. Which shows that bank is performing
very well.
CAUSE OF NPA
• One very important reason behind the rising in npa is the relaxed lending norms especially for corporate
when their financial status and credit rating is not analyzed properly.
• Public sector bank provides around 80% of the credit to industries and it is this part of the credit
distribution that forms a great chunk of NPA.
• Public sector lending and extending loans in agriculture sector has a substantial contribution to the
rising NPAs of the banking sector.
• Inappropriate project handling, ineffective management, lack of adequate resources, day to day
changing government policies produce industrial sickness. hence the bank finance those industries that
ultimately give them a low recovery of their loans reducing their profit and liquidity.
CONCLUSION
The management of nonperforming asset is a daunting task for every bank in the banking industry. The very
important reasons and necessity for management of NPA is due to their multi-dimensional effect on the
operations, performance and position of the bank.
The present study concludes that non- performing asset is the biggest challenge faced by ICICI bank as it leads
to downfall in the liquidity of the bank and creates bad debts on them. Profitability is being affected due to
fluctuations in the NPA levels.
38
Divya Patil
Roll No.: - 8471
Underlying Reasons for NPA
As per Reserve Bank of India (RBI) data on global operations, aggregate gross advances of Public Sector
Banks (PSBs) increased from Rs. 18,19,074 crores as on 31.3.2008 to Rs. 52,15,920 crores as on 31.3.2014.
As per RBI inputs, the primary reasons for spurt in stressed assets have been observed to be, inter-alia,
aggressive lending practices, wilful default / loan frauds / corruption in some cases, and economic slowdown.
Asset Quality Review (AQR) initiated in 2015 for clean and fully provisioned bank balance-sheets revealed
high incidence of NPAs. Further, all such schemes for restructuring stressed loans were withdrawn. Primarily
as a result of transparent recognition of stressed assets as NPAs, gross NPAs of PSBs, as per RBI data on
global operations, rose from Rs. 2, 79,016crore as on 31.3.2015, to Rs. 8, 95,601 crores as on 31.3.2018, and
as a result of Government’s 4R’s strategy of recognition, resolution, recapitalisation and reforms, have since
declined by Rs. 89,189 crores to Rs. 8, 06,412 crore as on 31.3.2019 (provisional data).
Over the last four years, Government has taken comprehensive steps under its 4R’s strategy of recognising
NPAs transparently, resolving and recovering value from stressed accounts, recapitalising PSBs, and reforms
in banks and financial ecosystem to ensure a responsible and clean system.
Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much discussion and
scrutiny. The Standing Committee on Finance recently released a report on the banking sector in India, where
it observed that banks’ capacity to lend has been severely affected because of mounting NPAs. The Estimates
Committee of Lok Sabha is also currently examining the performance of public sector banks with respect to
their burgeoning problem of NPAs, and loan recovery mechanisms available.
Additionally, guidelines for banks released by the Reserve Bank of India (RBI) in February 2018 regarding
timely resolution of stressed assets have come under scrutiny, with multiple cases being filed in courts against
the same. In this context, we examine the recent rise of NPAs in the country, some of their underlying causes,
and steps taken so far to address the issue.
39
What is the extent and effect of the NPA problem in India?
Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorized as:
(I) a standard asset (a loan where the borrower is making regular repayments), or
(ii) A non-performing asset. NPAs are loans and advances where the borrower has stopped making interest
or principal repayments for over 90 days.
As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy
stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks.
For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.
In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total
loans in 2008 to 9.3% in 2017 (Figure 1). This indicates that an increasing proportion of a bank’s assets have
ceased to generate income for the bank, lowering the bank’s profitability and its ability to grant further credit.
Escalating NPAs require a bank to make higher provisions for losses in their books. The banks set aside more
funds to pay for anticipated future losses; and this, along with several structural issues, leads to low
profitability. Profitability of a bank is measured by its Return on Assets (RoA), which is the ratio of the bank’s
net profits to its net assets. Banks have witnessed a decline in their profitability in the last few years (Figure
2), making them vulnerable to adverse economic shocks and consequently putting consumer deposits at risk.
What reason led to the rise in NPAs Problem?

Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global
commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector.
40
A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the economy was
booming and business outlook was very positive. Large corporations were granted loans for projects based on
extrapolation of their recent growth and performance. With loans being available more easily than before,
corporations grew highly leveraged, implying that most financing was through external borrowings rather than
internal promoter equity. But as economic growth stagnated following the global financial crisis of 2008, the
repayment capability of these corporations decreased. This contributed to what is now known as India’s Twin
Balance Sheet problem, where both the banking sector (that gives loans) and the corporate sector (that takes
and has to repay these loans) have come under financial stress.
When the project for which the loan was taken started underperforming, borrowers lost their capability of
paying back the bank. The banks at this time took to the practice of ‘ever greening’, where fresh loans were
given to some promoters to enable them to pay off their interest. This effectively pushed the recognition of
these loans as non-performing to a later date, but did not address the root causes of their unprofitability.
Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs. Although
the size of frauds relative to the total volume of NPAs is relatively small, these frauds have been increasing,
and there have been no instances of high profile fraudsters being penalised.
How Indian banks' big NPA problem evolved over years

By Dinesh Unnikrishnan and Kishor Kadam
41
The writing was on the wall; just that no one wanted to acknowledge it. The bad loan crisis that has gripped
India’s Rs 95 trillion banking sector didn’t happen overnight.
For years, Indian lenders, especially state-run banks, were engaged in volume game to balloon their balance
sheets and appease their promoter (the government). That has been so ever since nationalisation of these banks
happened in two stages (beginning 1969). Governments often treated these banks as their extended arms and
used them for populist measures.
There used to be competition among sarkari banks to flag their total business number on front-pages of national
newspapers but very little attention was paid to the quality of assets. Every outgoing chairman passed the buck
to his successor.
“That was a time (2011-2013) when everyone rushed to give money to corporations, no matter what the credit
perception was. Everyone expected a miraculous pick-up in the economy,” recalled a former banker with a
nationalised bank who now works as a consultant.
First takes a look at how the NPA picture of India’s government-owned banks has evolved so far:
42
From Rs 53,917 crore, Indian banks gross non-performing assets (GNPAs) in September 2008 (just before
the 2008 global financial crisis broke out following the collapse of Lehman Brothers); the bad loans have now
grown to Rs 3, 41, 641crore in September 2015. In other words, the total GNPAs of banks, as a percentage of
the total loans, has grown from 2.11 per cent to 5.08 percent.
43
Surprisingly, in the pre-crisis period, private banks topped the list of banks with highest NPAs (see the chart).
A quick look at the top ten NPA scorers in September 2008 shows ICICI Bank at the top.
This was followed by small and medium-sized private sector banks such as Karnataka Bank, Lakshmi Vilas
Bank, Kotak Mahindra and IndusInd Bank. Among the few sarkari banks that figure in the list are Central
Bank, UCO Bank and Syndicate Bank.
By March 2009, a few months before the Congress-led UPA II assumed power, the scene began changing
gradually. More state-run banks began appearing in the picture. The country’s largest lender by assets, State
Bank of India (SBI) and Indian Overseas Bank found place in the list of top NPA scorers. Still private sector
lenders figured prominently in the list with ICICI and DCB Bank leading the pack. To be sure, there is no
direct link between the ascension of UPA-II and the increase in the NPA picture, but this is when the state-run
banks began feeling the heat of NPAs.
44
Shraddha Sonawane
Roll No: -8506
EXTENT AND EFFECT OF THE NPA PROBLEM IN INDIA
The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much
discussion and scrutiny. The Standing Committee on Finance recently released a report on the banking sector
in India, where it observed that banks’ capacity to lend has been severely affected because of mounting NPAs.
The Estimates Committee of Lok Sabha is also currently examining the performance of public sector banks
with respect to their burgeoning problem of NPAs, and loan recovery mechanisms available.
the same. In this context, we examine the recent rise of NPAs in the country, some of their underlying causes,
and steps taken so far to address the issue.
Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorized as:
(i) A standard asset (a loan where the borrower is making regular repayments)
OR
(ii) NPAs are loans and advances where the borrower has stopped making interest or principal
repayments for over 90 days.
I. A STANDARD ASSETS (A LOAN WHERE THE BORROWER IS MAKING

REGULAR REPAYMENTS):
Standard Asset is one which does not disclose any problems and which does not carry more than normal
risk attached to the business. Such an asset should not be an NPA. Standard asset for a bank is an asset
that is not classified as an NPA. The asset exhibits no problem in the normal course other than the
usual business risk. Sub-standard asset is an asset class drawn within the broader and much-known
non-performance asset category of banks on the basis of term for which the asset class has not
performed and extent of dues realization from collateral security with banks. In general, NPAs are the
assets that have ceased to generate income for the banks. Further, on the basis of some other criterion
stipulated for different kind of accounts, assets of the bank are classified as NPAs.
Standard assets provision:
1.Banks are required to make a general provision for standard assets as under;
2. Direct advance to agriculture or small and micro enterprise: 0.25%,
3.Commercial real estate residential 0.75%, for real estate commercial 1% and teaser housing loan
2% For all other standard assets (loans and advances): 40%
45
II. NPAs loans and advances where the borrower has stopped making interest or
principal repayments for over 90 days:
NPAs are loans and advances where the borrower has stopped making interest or principal repayments for
over 90 days. About 85% of these NPAs are from loans and advances of public sector banks. For
instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.
A loan turns into a Non-Performing Asset (NPA) if the customer fails to pay either the interest or part of the
principal or both. As specified by the Reserve Bank of India, term loans on which interest or installment of
principal remain overdue for a period of more than 90 days from the end of a particular quarter is called an
NPA.
NPAs PROBLEMS GROWING RAPIDLY:
paying back the bank. The banks at this time took to the practice of ‘evergreening’, where fresh loans were
and there have been no instances of high profile fraudsters being penalised.
THIS PROBLEM COMES ABOUT:
46
In that period, commercial credit (or what is called ‘non-food credit’) doubled. It was a period in which the
world economy as well as the Indian economy was booming. Indian firms borrowed furiously in order to avail
of the growth opportunities they saw coming. Most of the investment went into infrastructure and related areas
— telecom, power, roads, aviation, steel. Businessmen were overcome with exuberance and they believed, as
many others did, that India had entered an era of 9% growth. But soon after, as the Economic Survey of 2016-
17 notes, many things began to go wrong.
There were problems in acquiring land and getting environmental clearances and several projects got stalled.
Project costs soared. At the same time, with the onset of the global financial crisis in 2007-08 and the
slowdown in growth after 2011-12, revenues fell well short of forecasts. As a result, financing costs rose as
policy rates were tightened in India in response to the crisis. Further, the depreciation of the rupee meant higher
outflows for companies that had borrowed in foreign currency. This combination of adverse factors made it
difficult for companies to service (i.e. maintain and repay) their loans to Indian banks.
The year 2014-15 marked a watershed because of tightening of banking norms.
The Reserve Bank of India (RBI), acting in the belief that NPAs were being under-stated, introduced tougher
norms for NPA recognition under an Asset Quality Review.
NPAs in 2015-16 almost doubled over the previous year as a result. It is not as if bad decisions had suddenly
happened. It’s just that the cumulative bad decisions of the past were now coming to be more accurately
captured.
Higher NPAs mean higher provisions on the part of banks. [A provision is an amount that you put in aside in
your accounts to cover a future liability. The purpose of a provision is to make a current year's balance more
accurate, as there may be costs which could, to some extent, be accounted for in either the current or previous
financial year]
Provisions rose to a level where banks, especially PSBs, started making losses.
Their capital got eroded as a result.
Capital from the government was slow in coming and it was barely adequate to meet regulatory norms for
minimum capital. Without adequate capital, bank credit cannot grow.
Once NPAs happen, it is important to effect to resolve them quickly. Otherwise, the interest on dues causes
NPAs to rise relentlessly.
TO SOLVE THE PROBLEM OF GROWING NPA’s:
47
The measures taken to resolve and prevent NPAs can broadly be classified into two kinds – first, regulatory
means of resolving NPAs per various laws (like the Insolvency and Bankruptcy Code), and second, remedial
measures for banks prescribed and regulated by the RBI for internal restructuring of stressed assets.
The Insolvency and Bankruptcy Code (IBC) was enacted in May 2016 to provide a time-bound 180-day
recovery process for insolvent accounts (where the borrowers are unable to pay their dues). Under the IBC,
the creditors of these insolvent accounts, presided over by an insolvency professional, decide whether to
restructure the loan, or to sell the defaulter’s assets to recover the outstanding amount. If a timely decision is
not arrived at, the defaulter’s assets are liquidated. Proceedings under the IBC are adjudicated by the Debt
Recovery Tribunal for personal insolvencies, and the National Company Law Tribunal (NCLT) for corporate
insolvencies. 701 cases have been registered and 176 cases have been resolved as of March 2018 under the
IBC.
The Indian banking system is beleaguered with non-performing assets (NPAs). According to the Reserve Bank
of India’s Financial Stability Report of December 2017, they currently stand at 10.2 per cent of all assets,
while stressed assets, which are believed to be NPAs in effect, stand at 12.8 per cent. Related frauds amount
to INR 612.6 billion in the last five financial years and governance failures on account of integrity and
competence issues plague the banking system.
I) Public Sector Banks:
Public Sector Banks (PSBs) constitute over 70 per cent of the banking system and are in a state of crisis.
Participants believed that fundamental reforms tended to happen when crisis hit and this was an opportune
moment for such reforms and expressed optimism that this was likely under this government.
ii) RBI governance and regulation:
The RBI as a regulator has had qualified success in the face of structural impediments, including limited
control over PSBs. RBI’s internal governance as well as its regulation of NPAs needs improvement.
THE PROBLEM PUBLIC OWNERSHIP OF BANKS:
Since the problem is more concentrated in PSBs, some have argued that public ownership must be the problem.
Public ownership of banks, according to them, is beset with corruption and incompetence (reflected in poor
appraisal of credit risk). The solution, therefore, is to privatise the PSBs, at least the weaker ones.
There are problems with this idea of privatising PSBs.
First, there are wide variations within each ownership category (within Indian banks).
48
In 2018, the State Bank of India’s (SBI’s) gross NPA/gross advances ratio was 10.9%. This was not much
higher than that of the second largest private bank, ICICI Bank, 9.9%.
The ratio at a foreign bank, Standard Chartered Bank, 11.7%, was higher than that of SBI.
Moreover, private and foreign banks were part of consortia that are now exposed to some of the largest NPAs.
Therefore, the explanation lies elsewhere.
A brief look at the state of PSBs show that they are not in as bad a shape as many make them out to be.
For example, PSBs had a higher exposure to the five most affected sectors — mining, iron and steel, textiles,
infrastructure and aviation.
These sectors accounted for 29% of advances and 53% of stressed advances at PSBs in December 2014. For
private sector banks, the comparable figures were 13.9% and 34.1%.
Rough calculations show that PSBs accounted for 86% of advances in these five sectors. (By an interesting
coincidence, this number is exactly the same as the PSBs’ share in total NPAs)
As mentioned earlier, infrastructure projects were impacted by the global financial crisis and environmental
and land acquisition issues. In addition, mining and telecom were impacted by adverse court judgments. Steel
was impacted by dumping from China. Thus, the sectors to which PSBs were heavily exposed were impacted
by factors beyond the control of bank management.
Wholesale privatisation of PSBs is thus not the answer to such a complex problem.
We need a broad set of actions, some immediate and others over the medium-term and aimed at preventing
the recurrence of such crises.
IMPACT OF NPA ON BANKS:

“NPA’s Non-performing assets are the assets of the banks which are not performing, banks to run the
economy also provides short-term and long-term loans to the industries, individuals, farmers, a bank
also give loan against the home, vehicles and many more.
In some cases, the borrower unable to pay the interest amount on time as well as unable to return the principal
amount too, in that case, bank declares that amount as nonperforming. The bank also runs the recovery scenario
for that amount, the impact of NPA on the profitability of banks brings a dent on the balance sheet of the bank,
but until then the amount is nonperforming. The increase of Non-Performing Assets also affects
the expectation of Stakeholder as well as investors, Banks has to run the proper evaluation of the proposal at
the first instance, this will reveal the status of unviable projects too. Bank need to collect full information about
Industry, management, future prospects etc before approving the Loan.
49
Banks are the backbone of our economy. Loans and advances given by the banks sometime defaults which
cause NPA (Non-Performing Assets). Let us discuss about Impact of Banking NPA- the Black Hole :
THE NPA CRISIS:
The NPA crisis has been long in making and its genesis can be traced to events that happened in the past
couple of decades especially the onset of the economic and financial market boom in the mid-2000s. In
confluence with global trends, Indian economy entered the exuberant phase with economic growth surging to
the 9%-10% range.
50
The irrational exuberance of the Indian economy and the financial markets found its expression in the
investment plans of the private non-financial corporate sector in India especially the manufacturing sector.
India’s Investment – GDP ratio (nominal terms) moved up from 26% in FY04 to 35% in FY08. This was
financed by the inception of the biggest credit boom in the history of India – both non-food credit and credit
to the Industry segment doubled in a short span of three years from FY05 to FY08.
Overall corporate in-debtless increased much further as they were beneficiaries of the sharp surge in capital
inflows reaching the level of around 9% of the GDP in FY08. To summarize, the corporate sector leveraged
itself to the hilt to take advantage of the perceived growth advantages afforded by a rapidly growing economy.
However, the boom came to an end in FY08 as the bursting of the global credit bubble in FY08 led to a change
in the growth expectations. Concomitantly, companies were coming to terms with the fact that fresh
investments in India were significantly more expensive than anticipated due to cost and time overruns in
securing land and environment clearances The situation was further exacerbated by the significant increase in
financing costs for the companies from FY11 onwards as the RBI switched from massive monetary easing
post the global financial crisis to significant tightening to bring down the inflation from double-digit levels.
Financing costs soared as the repo rate almost doubled from the low of 4.75% in September 2009.
In parallel, there was significant rupee depreciation as average rates increased from an average level of low-
40s in around FY08 to mid-50s by FY12 and mid-60s by FY16. Depreciation of the order of more than 50%
over a span of a few years had a significant impact on the debt servicing ability of the over-extended corporate
sector.
51
THE NPA CRISIS – CURRENT SITUATION: ALL LOANS (EXCLUDING RETAIL
LENDING):
The below chart illustrates the enormity of the NPA challenge faced by the Indian financial system – especially
in the Aggregate Lending Ex. Retail Segment. System-wide NPAs (as measured by Ex. Retail Outstanding
Balance of all Banks and NBFCs) has increased by 432 bps to 15.7% over the past one year ending march
31st. The PSU Banks have been the biggest driver of this trend as the combined NPA of the PSU banks has
increased massively from 13.2% in 1Q16 to 19.4% in 1Q17. The centrality of the PSU Banks in the ongoing
NPA saga is readily apparent from the fact that this sector accounts for around 78%-80% of all system-wide
NPAs in the past five quarters – roughly 15 pps higher than their share of outstanding balances.
Banking headlines over the last few months have been dominated by a decline in specific bank share prices
that have highlighted both the broader credit issues in the economy and the lack of speed in recognition of
Non-Performing Assets (NPAs). However, the problems around the Punjab & Maharashtra Co-operative Bank
Limited (PMC) came as a stark reminder that the banking system clean up in India still has significant work
to be done not just in terms of credit quality selection but also structural corporate governance issues that form
the fundamental pillar of the economic growth agenda.
The four primary issues that the recent news around Indian banks brings to the fore are:
i) Poor decision making due to a lack of capacity to judge project quality.

ii) A structural asset-liability mismatch for the banks due to longer-dated assets and short-dated
liabilities.
iii) A delay in recognising NPAs on the books.
iv) Outright fraud and absence of fundamental corporate governance standards. While the first two factors
have received significant coverage, the last two factors probably deserve even greater attention going
forward given the grave issues that have once again reared their ugly head over the previous few
months.
An alternative way to view the issues above is as the building blocks on which any credit framework is built.
Solutions that address the fourth point mentioned are the basic premise of a robust and functional credit
mechanism. Solutions for the third point build on those for the fourth, and so on. Essentially, the banking
system solutions need to build on one over the other. Otherwise, solutions that provide higher capacity for
lending institutions to judge project quality will be rendered useless without basic corporate governance
standards.
It is also vital to once again emphasise that the solutions for all four problems mentioned above are distinct.
While the first two revolve primarily around the skill and capacity of the lender to assess sectoral, company
52
and project risk keeping in mind the micro-structure of their balance sheets, the last two are to a large extent
related to the level of corporate governance. The solutions needed to tide over the four main banking issues
are therefore distinct, and yet equally necessary to resolve the problems at hand.
Going forward, both the central bank and the banking regulators must further emphasise solutions that allow
for better, more precise and more consistent classification of NPAs on banking books, while at the same time
ensuring that the information flows through the system. At its very core, the issues revolving around
information asymmetry need to be urgently addressed. Timely recognition of NPAs is essential not just for the
asset quality reviewal of the bank in question, but also to ensure that the NPA classification information
regarding the credit instrument or company in question is passed onto the market for better decision making.
One immediate action that is required is resolving the NPAs:
i. Banks have to accept losses on loans.

ii. They should be able to do so without any fear of harassment by the investigative agencies.
iii. The Indian Banks’ Association has set up a six-member panel to oversee resolution plans of lead
lenders. To expedite resolution, more such panels may be required.
iv. An alternative is to set up a Loan Resolution Authority, if necessary, through an Act of Parliament.
v. Also, the government must infuse at one go whatever additional capital is needed to recapitalise banks
providing such capital in multiple instalments is not helpful.
How serious is India’s NPA issue?
More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge amount.
The figure roughly translates to near 10% of all loans given. This means that about 10% of loans are never
53
paid back, resulting in substantial loss of money to the banks. When restructured and unrecognised assets are
added the total stress would be 15-20% of total loans. NPA crisis in India is set to worsen. Restructuring norms
are being misused. This bad performance is not a good sign and can result in crashing of banks as happened
in the sub-prime crisis of 2008 in the United States of America. Also, the NPA problem in India is worst when
comparing other emerging economies in BRICS.
What can be the possible reasons for NPAs?
● Diversification of funds to unrelated business/fraud.

● Lapses due to diligence.
● Business losses due to changes in business/regulatory environment.
● Lack of morale, particularly after government schemes which had written off loans.
● Global, regional or national financial crisis which results in erosion of margins and profits of
companies, therefore, stressing their balance sheet which finally results into non-servicing of interest
and loan payments. (For example, the 2008 global financial crisis).
● The general slowdown of entire economy for example after 2011 there was a slowdown in the Indian
economy which resulted in the faster growth of NPAs.
● The slowdown in a specific industrial segment, therefore, companies in that area bear the heat and
some may become NPAs.
● Unplanned expansion of corporate houses during the boom period and loan taken at low rates later
being serviced at high rates, therefore, resulting in NPAs.
● Due to mal-administration by the corporate, for example, wilful defaulters.
● Due to mis-governance and policy paralysis which hampers the timeline and speed of projects,
therefore, loans become NPAs. For example, the Infrastructure Sector.
● Severe competition in any particular market segment. For example, the Telecom sector in India.
● Delay in land acquisition due to social, political, cultural and environmental reasons.
● A bad lending practice which is a non-transparent way of giving loans.
● Due to natural reasons such as floods, droughts, disease outbreak, earthquakes, tsunami etc.
● Cheap import due to dumping leads to business loss of domestic companies. For example, the Steel
sector in India.
54
SIMIRAN POOJARY
ROLLNO: 8477
WHAT LED TO THE RISE IN NPA
INTRODUCTION
The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much
discussion and scrutiny. The Standing Committee on Finance recently released a report on the banking sector
in India, where it observed that banks’ capacity to lend has been severely affected because of mounting NPAs.
The Estimates Committee of Lok Sabha is also currently examining the performance of public sector banks
with respect to their burgeoning problem of NPAs, and loan recovery mechanisms available.
the same. In this context, we examine the recent rise of NPAs in the country, some of their underlying
causes, and steps taken so far to address the issue.
❖ WHAT LED TO THE RISE IN NPAS?
55
paying back the bank. The banks at this time took to the practice of ‘ever greening’, where fresh loans were
and there have been no instances of high-profile fraudsters being penalised.
56
Asset-Liability from a bank's perspective - If a person/company/entity borrows a loan, for him that loan is
a liability which needs to pay to the lender. On the other hand, if he deposits money in any account, that would
be his asset. It is exact opposite from the bank's perspective. So, all the savings account, current account and
fixed deposits are liabilities from a bank's point of view. It is because bank is liable to pay interests on these
deposits ranging from 0% to 10% in India, even higher in some cases. When Bank lends loan to any person or
company, bank earns interest on that, anywhere between 4% to 40%. So, from a Bank's perspective, the loan
it has lent is its assets and the deposit it carries is its liabilities. A Bank keeps money from individuals and
companies, pays them interests, uses this money (which belongs to others) to give loans on an interest, higher
than it pays. Basically, banks are paying interest for using that money. The difference between interest it earns
from loans and the interest it pays to the depositors is called Interest Margin and is the primary source of
Bank's income. There are other sources too but, we would ignore them for this discussion.
NPA - Full form of NPA is Non performing Asset. By definition, for a bank it means any asset (loan/credit
facility) which hasn't performed for over a period of time, i.e. Bank has not received any interest and principle
for a loan which it gave to a person or entity for a period. Usually this period is 90 days. So, an asset which
was supposed to generate income for bank has stopped not only generating additional income for the bank but
also its principle amount.
For example, bank has Rs 500 as deposits from 5 different individuals and pays them Rs 4 every year as
interest. Bank keeps Rs 100 as statutory requirements and lends Rs 400 to 4 different people (Rs 100 each at
10% simple interest). Ideally these borrowers should pay Rs 10 each year as interest and pay back Rs 100 at
the end of the loan period to the bank. So, bank earns Rs 40 as interest, while pays 20, so its net interest earning
57
is Rs 20. However, what if 1 of the borrowers’ defaults? He stops the payment of Rs 10 and is also unwilling
to return the original; sum of Rs 100. Now the bank, has not only lost opportunity to earn interest, it has also
lost the 100 rupees, which belonged to the depositor. So, Bank has 400 (deposit) + 30(interest earned) while
it owes the depositors 500 (original deposit money) + 20 (interest to be paid to depositors). Hence bank
straightaway loses Rs 90. This is just a simple example. Interests usually work compounded, are reducing and
payable monthly along with principle amount known as the EMIs. So even if 5% of the borrowers start
defaulting, the bank will be in a mess.
Why Indian Banks have such high NPA - Within Indian Banks it is the public sector banks (banks owned
by Central/State govt.) which is facing huge NPAs. Private sector banks like ICICI, HDFC, and Axis etc too
have NPAs but they are fairly negligible compared to public sector banks. Usually the banks have a
conservative credit policy which has many filters such as previous credit profile, if the loan seeker has
defaulted in the past, his cash flow, i.e. if his future income is stable and reliable, if it is a secured loan, then
if the property/asset on which loan is sought, has sufficient value so that bank can liquidate it if necessary and
many such filters. Yet, despite this diligence, banks do have NPAs. However, the question is why have the
public sector banks like UBI, BI, SBI, and PNB along with 25 banks, having such abnormally high NPA?
There are 2 groups of defaulters who have majorly contributed to this. 1st group is big companies and corporate
houses. Public Banks, possibly under political and economic pressure gave loans to a lot of companies who
defaulted. The 2nd group is that of farmers. Since 2012, despite a lot of farm loan waiver schemes, the Agri
sector has led to high NPAs. So, the high NPAs of these banks have got more to do with politics during the
previous govt. regime than lack of diligence. A lot of this 'scam' is being uncovered only now, even though
the roots would have been planted way back in 2012-13
58
❖ There are multiple reasons why NPAs are growing in India, some that are our own
making and some as externalities:
First, global slowdown and tepid demand:
Borrowers need loans for leverage and capital; but since earnings are slowing, customers have delayed their
payables, profits are being squeezed, exports (dollar value) are on a decline due to weak global demand, and
these borrowers simply don’t have money to pay back. Case in point: one of the most leveraged industries is
the steel industry in India. With steel prices going off the cliff due to dumping by China, Korea and Japan,
steel makers are left with huge losses. Credit Suisse estimates that the $50 billion of debt in the books of the
major steel companies is around 15 times their collective operating profit in fiscal year 2015. Yep, it’s pretty
bad.
Second, it wasn’t just the US banks that had gone berserk pre-2008:
The period before the sub-prime mortgage crises was a boom year for the world economy. Optimism was
high and credit growth was at an all-time high. Banks gave out loans without indiscriminately without checking
for credit worthiness. This is what led to the housing bubble and it is what is leading to our mess too. Defaults
were inevitable.
Third, crony capitalism:
59
Surprise? The priority sector for the public sector includes PPP projects. As for the PPP projects, “contracts
to the private partners were awarded without competitive bidding and as part of rent-seeking transactions,
firms bid aggressively at commercially unviable terms, bidders did not have sufficient professional expertise,
and so on.” as has been reported widely in the media. And that’s not it. The government holds considerable
influence on all public banks. It appoints all the officials and boards of banks and in fact, the government itself
is represented on their boards by senior officials of the Finance Ministry. Without the tacit agreement of the
government, the large loans made out by these PSU banks couldn’t have been possible. There are numerous
examples of loans been advanced where they shouldn’t have been: The case of Rajagopal even Kingfisher and
Reliance?
Fourth, regulatory delays in the Infra Sector (perhaps the most important):
As per the BOT (Build-Operate-Transfer) model of PPP Infrastructure development in India, private players
create Special Purpose Vehicles that makes each project act as an individual entity. These projects are highly
leveraged (on an average 70%) since the gestation period is long and uncertainty is high, equity funding isn’t
attractive to investors. Therefore, promoters start with high debt and hope to raise equity nearer to the
completion of the project to get higher valuations when uncertainty is lower and rewards are nearer for
investors. But, as is painfully typical in India, projects are inevitably delayed due to delays in procuring
permissions, clearances and land acquisition. This leaves promoters with high risk leverage and no equity to
bank upon. Further, interest costs shoot up drastically by this time and interest costs further erode profitability.
Low cash flows lead to more delays and the vicious cycle goes on.
60
HOW NPA AFFECT BANKS
The problem of NPAs in the Indian banking system is one of the foremost and the most formidable problems
that had impact the entire banking system. Higher NPA ratio trembles the confidence of investors, depositors,
61
lenders etc. It also causes poor recycling of funds, which in turn will have deleterious effect on the deployment
of credit. The non-recovery of loans effects not only further availability of credit but also financial soundness
of the banks.
1. Profitability: NPAs put detrimental impact on the profitability as banks stop to earn income on one
hand and attract higher provisioning compared to standard assets on the other hand. On an average,
banks are providing around 25% to 30% additional provision on incremental NPAs which has direct
bearing on the profitability of the banks.
2. Asset (Credit) contraction: The increased NPAs put pressure on recycling of funds and reduces
the ability of banks for lending more and thus results in lesser interest income. It contracts the money
stock which may lead to economic slowdown.
3. Liability Management: In the light of high NPAs, Banks tend to lower the interest rates on
deposits on one hand and likely to levy higher interest rates on advances to sustain NIM. This may
become hurdle in smooth financial intermediation process and hampers banks’ business as well as
economic growth.
4. Capital Adequacy: As per Basel norms, banks are required to maintain adequate capital on risk-
weighted assets on an ongoing basis. Every increase in NPA level adds to risk weighted assets which
warrant the banks to shore up their capital base further. Capital has a price tag ranging from 12% to
18% since it is a scarce resource.
5. Shareholders’ confidence: Normally, shareholders are interested to enhance value of their

investments through higher dividends and market capitalization which is possible only when the bank
posts significant profits through improved business. The increased NPA level is likely to have adverse
impact on the bank business as well as profitability thereby the shareholders do not receive a market
return on their capital and sometimes it may erode their value of investments. As per extant guidelines,
banks who’s Net NPA level is 5% & above are required to take prior permission from RBI to declare
dividend and also stipulate cap on dividend pay-out.
6. Public confidence: Credibility of banking system is also affected greatly due to higher level NPAs
because it shakes the confidence of general public in the soundness of the banking system. The
increased NPAs may pose liquidity issues which is likely to lead run on bank by depositors. Thus, the
increased incidence of NPAs not only affects the performance of the banks but also affect the economy
as a whole.
62
In a nutshell, the high incidence of NPA has cascading impact on all important financial ratios of the banks
viz., Net Interest Margin, Return on Assets, Profitability, Dividend Pay-out, Provision coverage ratio, Credit
contraction etc., which may likely to erode the value of all stakeholders including Shareholders, Depositors,
Borrowers, Employees and public at large.
The key challenge going forward for Indian banks is to expand credit portfolio and effectively manage NPAs
while maintaining profitability. Asset quality continues to be the core function and also biggest challenge for
the banks in the present dynamic environment. Though, management of asset quality is a balance sheet issue
of individual banks, it has wider macro-economic implications. In order to overcome the associated risks
including externalities, there is an imminent need for the banks to have well-structured and effective credit
monitoring system in place coupled with appropriate business.
63
A strong banking sector is important for flourishing economy. The failure of the banking sector may have
an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India.
NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number
of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset.
The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders’
value. The problem of NPAs is not only affecting the banks but also the whole economy. In fact, level of
NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. This arises
when the lending business of banking also carries a risk called credit risk, which arises from the failure of
borrower.
The higher is the amount of non-performing assets (NPAs), the weaker will be the bank’s revenue
stream.
In the short-term, many banks have the ability to handle an increase in nonperforming assets — they might
have strong reserves or other capital that can be used to offset the losses. But after a while, if that capital is
used up, nonperforming loans will imperil a bank’s health. Think of nonperforming assets as dead weight on
the balance sheet.
Here is the impact of the NPAs:
1. As the NPA of the banks will rise, it will bring a scarcity of funds in the Indian security markets.
Few banks will be willing to lend if they are not sure of the recovery of their money.
64
2. The shareholders of the banks will lose a lot of money as banks themselves will find it tough to
survive in the market.
3. This will lead to a crisis of confidence in the market. The price of loans, i.e. the interest rates will
shoot up badly. Shooting of interest rates will directly impact the investors who wish to take loans
for setting up infrastructural, industrial projects etc.
4. It will also impact the retail consumers like us, who will have to shell out a higher interest rate for a
loan.
5. All of this will lead to a situation of low off take of funds from the security market. This will hurt
the overall demand in the Indian economy. And, finally it will lead to lower growth rates and of
course higher inflation because of the higher cost of capital.
6. This trend may continue in a vicious circle and deepen the crisis.
7. Total NPAs have touched figures close to the size of UP budget. Imagine if all the NPA was
recovered, how well it can augur for the Indian economy.
65
Fatema photographer
Roll No: -8475
RECENT CHANGES IN THE RBI’S GUIDELINES TO BANK REGARDING NON-

PERFORMING ASSET
1. Top highlights from RBI's monetary policy:

Sovereign bonds rallied in India, sending benchmark yields to their lowest since November 2017, after the
central bank cut its key rate and left the door open for more policy easing to shore up a sagging economy. The
rupee held losses, while stocks extended declines.
• Home and car buyers would be hoping for cheaper loans from banks after the Reserve Bank of India today cut
key policy rates for the third time in a row.
• A reduction in policy rates will come with a reduction in market yields even if the transmission to the real
economy via lower lending rates from the banking system may take some time.
• Low inflation and subdued growth are the drivers of the move. Yet, the real concern is lack of transmission of
rate cuts into effective lending rate. Liquidity conditions also remain tight for large part of the corporate sector.
Effective transmission and adequate liquidity remain key challenges.
A reduction in interest rates will affect different types of debt funds differently depending upon their portfolio.
Not all debt funds react similarly to a fall in market yields.
• The RBI rate cut is expected to bring down EMIs on home and auto loans, and reduce the debt repayment
burden on corporate. In all, the central bank has reduced the benchmark lending rate by 0.75 percentage point
since February this year.
• The benchmark BSE Sense was trading 333.32 points, or 0.83 per cent, lower at 39,750.22, and the broader
Nifty fell 114.35 points, or 0.95 per cent, to 11,907.30.
• The Governor’s assurance that adequate liquidity will be provided will ensure that the present surplus liquidity
situation will sustain: Dr. VK Vijayakumar, Chief Investment Strategist, Geodic Financial Services.
Expect government to remain broadly fiscal-prudent: RBI Governor
• RBI will issue a revised circular on NPA classification in the next 3-4 days.
• RBI says a change instance to accommodative means that a rate increase is off the table.
• RBI said there is a case for more players in the Small Finance Bank sector. RBI will issue draft guidelines for
‘on tap’ licensing of small finance banks by the end of August 2019.RBI MPC projects upward bias in food
inflation in near term due to rising prices of food items.
• To promote digital transactions, RBI has decided to waive off RTGS and NEFT charges.
66
• Risks around the baseline inflation trajectory emanate from uncertainties relating to the monsoon, unseasonal
spikes in vegetable prices, international fuel prices and their pass-through to domestic prices, geo-political
tensions, financial market volatility and the fiscal scenario, RBI said.
• Expressing concern on a sharp slowdown in investment activity along with a continuing moderation in private
consumption growth, the MPC said growth impulses have weakened significantly as reflected in a further
widening of the output gap compared to the April 2019 policy.
"Interest rates on longer tenor money market instruments remained broadly aligned with the overnight WACR,
reflecting near full transmission of the reduction in policy rate," the RBI report said.
• On transmission of rate cuts, RBI noted that the transmission of cumulative reduction of 50 bps in the policy
repo rate in February and April this year was 21 bps to the weighted average lending rate (WALR) on fresh
rupee loans.
• Inflation expectations of households in the May 2019 round of Reserve Bank’s survey declined by 20 basis
points for the three-month ahead horizon compared with the previous round, but remained unchanged for the
one-year ahead horizon.
• RBI has revised consumer price inflation forecast for the first half of fiscal year 2019-20 to 3-3.1% from 2.9-
3% earlier, while the projection for the second half stands revised to 3.4-3.7% from 3.5-3.8% earlier.
The MPC revised both its growth and inflation forecasts for the current fiscal. GDP growth has been revised
downwards to 7% from the earlier projection of 7.2%. The MPC expects growth in in the range of 6.4-6.7%
in the first half of FY20 and 7.2-7.5% in the second half.
• The benchmark equity indices Sense and Nifty was trading negative since the beginning of the day as investors
were cautious ahead of the RBI monetary policy. Sense was down 150.69 points, or 0.38%, at 39,932.85 while
the broader Nifty was trading at 11,955.30 falling 66.35%, or 0.55%.
• Most economists expect the RBI to cut repo rate by 25 basis points to 5.75%. Two-thirds of 66 economists
polled by Reuters expect the MPC to wrap up on Thursday by cutting the repo rate by 25 basis points.
Bloomberg said 31 of 43 economists it surveyed expect a 25-bps rate cut.
• India Ratings has warned that rate cut is unlikely to stimulate demand in the near term due to the absence of
quick resonance in the financial market.
• Apart from its likely rate cut, the RBI will have to tackle issues surrounding sluggish monetary policy
transmission. Despite lowering rates by 50 basis points this year, bank lending costs have been rather sticky
amid tighter liquidity. Those conditions, though, are showing nascent signs of easing.
67
2. RBI issues new guidelines on bad loans, replaces one-day default rule
The Reserve Bank of India (RBI) recently issued new guidelines on resolving bad loans, replacing a circular
that the Supreme Court rejected.
The RBI said that lenders should review accounts within 30 days of default and initiate a resolution plan before
the default--revising its earlier 1-day default norm. All lenders must put in place board-approved policies for
resolution of stressed assets, the RBI said.
Lenders will have to submit weekly report of instances of default by all borrowers with aggregate exposure of
Rs 5 crore and above.
Here are key points of the RBI circular, as reported by Reuters:
• RBI says lenders shall recognise incipient stress in loan accounts, immediately on default, by classifying such
assets as special mention accounts

• It is expected that the lenders initiate the process of implementing a resolution plan (RP) even before a default
• Lenders shall report credit information on all borrowers having aggregate exposure of Rs crore and above with
them
• Lenders shall enter into an inter-creditor agreement (ICA)
• ICA to provide rules for finalisation, implementation of RP for those with credit facilities from more than one
lender
• RBI says intent to evergreen stressed accounts by lenders will be subjected to stringent actions including higher
provisioning & monetary penalties

• Resolution plans shall provide for payment not less than the liquidation value due to the dissenting lenders
• On accounts with aggregate exposure above a threshold with lenders, resolution plan to be implemented within
180 days from review period end

• Lenders shall undertake a review of the borrower account within thirty days from default
• Joint lenders' forum (JLF) as mandatory institutional mechanism for resolution of stressed accounts stands
discontinued.
68
3. RBI Monetary Policy Highlights: Rate cut by 25 bps; policy stance changed
For the third time in a row, the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC) cut interest
rates by 25 basis points, as was widely expected.
At the end of a three-day MPC meeting, RBI Governor Shakti kanta Das announced its second bi-monthly
monetary policy statement for 2019-20. In a unanimous decision, the MPC also decided to change the stance
of monetary policy from neutral to accommodative.
Amid slowing economic growth and rising global uncertainty, the RBI had decreased the short-term lending
rate (repo rate) by 25 basis points each in its last two policy reviews.
4. Failed Transactions: RBI Asks Banks to Pay Rs100 per Day Compensation for Delay
in Crediting the Money
Those customers who have been making rounds of their bank to get back their hard-earned money after a
failed transaction (usually in ATMs or online), here is good news. The Reserve Bank of India (RBI) has asked
all banks to pay a penalty of Rs100 per day for the delay in crediting money in customer's account after a
failed transaction.
"It has been observed that a large number of customer complaints emanate on account of unsuccessful or
‘failed’ transactions. Wherever financial compensation is involved, the same should be affected to the
customer’s account Suo moto, without waiting for a complaint or claim from the customer. Customers who
do not get the benefit of redress of the failure as defined in the turnaround time (TAT), can register a complaint
to the Banking Ombudsman of RBI," the central bank said in a notification.
69
However, these directions are applicable only for domestic transactions or where both the originator and
beneficiary are within India.
A ‘failed transaction’ is one that has not been completed due to any reason not attributable to the customer,
such as failure in communication links, non-availability of cash in an automated teller machine (ATM) and
time-out of sessions. Failed transactions also include credits, which could not be affected to the beneficiary
account due to lack of full information or lack of proper information and delay in initiating a reversal
transaction.
For failed transactions like cash not dispensed from ATMs, RBI has asked banks to auto-reverse the
transactions within transaction date (T) +5 days. For any delay after this period, the banks are mandated to pay
a compensation of Rs100 per day to the customer, automatically.
At the same time, for several online transactions, like card to card transfer, immediate payment system (IMPS),
unified payments interface (UPI), Aadhaar payment bridge system (APBS), National Automated Clearing
House (NACH) and prepaid payment instruments (PPIs) including cards and wallets, the banks are mandated
to reverse the transaction within T+1 days.
5. All debit cards may get MDR waiver
The Central Board of Direct Taxes has also notified a fine of Rs 5,000 per day for businesses with a turnover
of over Rs 50 crore if they fail to offer digital means of payments. India could expand the merchant discount
rate or MDR waiver to all debit card networks including Visa and MasterCard as part of the country’s big plan
to push digital payment systems.
“There is thinking that the scope of the waiver be expanded to other payment systems,” an official said.
The official said the government is keen to ensure acceptance of digital payment systems and is looking that
various options. The official said there has been a clamour from payments systems and banks for the
government absorbing the MDR charges, but there is no thinking to take it up. The official said banks are duty
bound to provide for payment infrastructure keeping in view of the saving they will make on account of
reduced expenditure on cash management.
6. One can soon deposit cash at any ATM

After making payments interoperable between banks with its Unified Payments Interface (UPI), the
National Payments Corporation of India (NPCI) is pushing top banks to make cash deposit too an
interoperable feature at their ATMs and branches.
NPCI believes that an interoperable cash-deposit system enabled through its National Financial Switch
(NFS), initially developed by Institute for Development & Research in Banking Technology (IDBRT),
could help reduce the cost of currency handling for the entire banking system, said four people aware of
70
the matter. This will also help ATM operators reduce the costs to replenish cash at ATMs, as the
currencies deposited through the machines can be “recycled” for withdrawals as well.
“All major private and public-sector banks have been asked to join the interoperable network,” a priprovate
banker said on the conditions of anonymity. “However, for banks, before accepting these terms, there are
several factors to be considered, such as tackling of counterfeit currency deposits through this mode and a
thorough reconciliation framework, before a widespread adoption of the platform will be seen.”
While 14 banks are already operating live on the Interoperable Cash Deposit network, NPCI estimates that
around 30,000 ATMs of top banks could immediately be upgraded into interoperable deposit machines using
the IDBRT-developed mechanism, without any significant hardware upgrades, another person.
NPCI didn’t respond till press time Thursday to an email seeking comment. This plan once fully implemented
will, for example, allow a bank customer of HDFC Bank to make cash deposits at ATMs enabled with deposit
facilities at State Bank of India branches or offsite locations.
The facility would be largely beneficial for ecommerce players & food aggregators where delivery agents can
reduce high costs of handling cash accumulated by instant credits made at deposits accepting ATMs.
Union Bank, Canara Bank, Andhra Bank and South Indian Banks are among the banks currently providing
interoperable deposit facilities.
Punjab and Maharashtra Cooperative Bank, where last year the Reserve Bank of India froze customer accounts
owing to financial irregularities, is also among the banks which give customers interoperable deposit
The interchange, or the charges for processing these deposits, is currently fixed at Rs 25 for deposits below
Rs 10,000, the person cited above said. For deposits above Rs 10,000, it is Rs 50. “Interoperability between
banks is what made UPI so popular.
While the percentage of the ‘cashing’ transactions are minuscule as compared to ‘cash-out’ facilities, an
interoperable system can lead to enhanced convenience for the customer,” said Kaushik Roy, vice-president
and country leader, South Asia, at payments technology company ACI Worldwide. “From an infrastructure
point of view, no significant upgrades would be needed for deposit-accepting machines as authentication
follows the same pathway as cash withdrawals,” he said.
7. RBI issues revised circular on stressed loans
Two months after the Supreme Court quashed RBI’s February 12 circular which had mandated the lenders to
start the resolution even in case of one day default, the RBI issued a revised circular for resolving stressed
assets by offering lenders a 30-day period to label on account of NPA.
The new directions, however, retain the basic spirits of the February 12 circular as it mandates higher
provisioning, bankruptcy options as well as do not allow any other resolution methods outside the new norms.
71
The Supreme Court had on April 2 struck down RBI’s February 12 circular whereby the central bank had
mandated lenders to initiate resolution or restructuring of loans even if the default was recorded for a single
day. Revising its 1-day default norm, RBI has now said that the lenders should now review the accounts within
30 days of default and initiate a resolution plan before the default.
Following are the key details of the new RBI circular: -
• Under the new ‘Prudential framework for resolution of stressed assets’, lenders will have complete discretion
to design, implement resolution plan
• Banks may start resolution, IBC process within 30 days of default.
• Once a borrower is reported to be in default by any lenders, they may review of the borrower account within
30 days from the day of default.
• Lenders should follow a board-approved policy for resolution of bad loans.
• Mandatory to sign inter-creditor agreement by all lenders, which will provide for a majority decision making
criteria.
• RBI changed its earlier norm of 100% approval from creditors. ICA shall now provide any decision agreed by
lenders representing 75% by value of total outstanding credit facilities and 60% of lenders by number shall be
binding upon all the lenders, helping speed up the resolution process.
• Lenders must resolve over Rs 2000 crore NPA account within 180 days.
• Higher provisioning for delay in resolution. Lenders will have to make 35% provisions- first 20% for 180 days
and then an additional 15% if no resolution is found within 365 days.
• The accounts would be classified according to this timetable-
SMA Sub-categories Basis for classification- Principal or Interest payment or any other amount wholly or
partly overdue
SMA-0 1-30 days
SMA-1 31-60 days
SMA-2 61-90 days
72
Assessing the new rules to solve the NPA problem
The government has empowered the Reserve Bank of India (RBI) to help resolve the issue of non-performing
assets (NPAs). The RBI has also since directed the banks that the joint lenders’ forums (JLFs) should
implement the corrective action plans (CAPs) within the prescribed timelines. So, the big question is—will
the bad loans now get resolved more efficiently than was the case until a few weeks ago? Let us look at the
issue closely.
As per the RBI directive, banks will now have to agree to a common approach for restructuring or recovery of
each non-performing loan (NPL). The common approach will be the one adopted by the lead bank, along with
a few more banks so as to meet the thresholds of 60% of lenders by value and 50% by number. The desirability
of this approach assumes that the interests of all banks need to be aligned with or subsumed within the interest
of the lead bank. It is doubtful that the smaller banks would be happy with this measure for the simple reason
that if the same was true, all the members of the JLF would have anyway agreed with the lead lender and a
prescription by the RBI would not have been required in the first place. Having said that, this seems to be a
fair approach to the extent that the JLF can now move forward with majority support.
However, we need to evaluate as to whether even after getting the JLF aligned, will we face some other critical
bottlenecks? In my view, the real problem has been the absence of a reliable and coherent basis for JLF
members to agree to a common plan. Let us try and understand this.
When a troubled asset, like a power project, underlying an NPL, is to be revived or transacted with an asset
reconstruction company (ARC), the fundamental requirement for an optimal decision process is the data on
the costs and benefits involved in the process. The parties involved would need to have reliable data to put
their money on the table. The required data would include the operational, financial, and regulatory pay-offs
from the power project, post-restructuring or recovery actions. While the data is more easily available for an
operational project, it is not so for an under-construction project. For example, the projected operational and
financial performance for a thermal project depends on multiple variables like the power purchase agreement
(PPA), fuel supply agreement (FSA), environmental clearance status, timelines for construction, etc. Each of
these variables is prone to uncertainties.
In the absence of reliable data regarding the elements of the pay-off to the banks, each bank would adopt a
stance that is aligned with its risk appetite and preferences. It is known that the process of the bank getting
back its dues through the legal recovery process is usually slow, uncertain, and value destructive. There is no
market clearing mechanism to serve as a guide for the pricing decisions in the restructuring or recovery to be
done by the banks. This leads to a widening of the bid-ask spreads, reflecting the uncertainty in the pricing of
risk in the transaction. As a result, the transaction either does not get consummated or if forced to consummate,
leads to a sub-optimal situation for certain stakeholders. Till now the absence of an agreement within the JLF
reflected the former and in the revised circumstances, the forced agreement within the JLF will reflect the
73
latter. Now the same logic will get extended when a buyer of the NPL (or the underlying asset) is brought into
the game. There is neither a junk bond market nor have there been any significant transactions of impaired
businesses to serve as a guide for valuation. In the absence of any shadow pricing of the junk loans or the
impaired underlying assets, the potential buyers of the same are expected to quote low prices to hedge their
risk on account of high uncertainty, while buying the same from the banks. While we may hope to count on
competition among the buyout funds, they would, in aggregate, be still expected to behave in their collective
interest and not be truly competitive.
So, what can we expect from the new paradigm? While the timelines for recovery are expected to be more
streamlined, there are caveats to the same.
For one, the banks will be under pressure to close the transactions soon and this could at times lead to under-
pricing of the loans, to the advantage of the buyers.
Second, the provisions made by the banks till now could turn out to be inadequate. These provisions would,
till now, have been based on expected losses from the NPLs. But now we are talking of losses based on
potentially lower realizations than expected earlier. Third, it might turn out to be a case of missing the woods
for the trees. While the NPLs would be off the books of the banks, some of them would still require significant
recapitalization, as they would have lost a significant amount of capital and credit-making capacities as well.
As a final thought, even as the process of JLF is being streamlined and disciplined, it would be helpful if the
government and the RBI can help create an improved market for distressed assets at the
earliest
In the long term, this is of course an imperative for the banking system as well as the economy. In the short
term, an increased flow of capital into the stressed assets transactions should be encouraged with specific
policy and tax incentives for a limited time period. This will help in a more competitive market and better
price discovery. We have begun the journey of correction and must take it to the most optimal conclusion.
Hemant Manuj is an associate professor of finance at SP Jain Institute of Management and Research.
74
Urja Patel
Roll No: -8469
POLICY ON COLLECTION OF DUES AND REPOSSESSION OF SECURITY AND RECOVERY

OF DUES IN NPA ACCOUNTS:
I. PREAMBLE:
1. CENTRAL BANK OF INDIA’s Debt Collection Policy is centred around dignity and respect to customers,
built on fostering customer confidence, long term relationship, by extending courtesy, fair treatment and
judicious persuasion.
2. The transparent policy of the Bank aims at resorting to collection of dues and repossession of security in
the normal course.
3. The bank will not follow policies or practices that are unduly coercive in collection of dues.
4. Before fixing the repayment schedule for any loan sanctioned by the Bank, the customer will be consulted
taking into account his paying capacity and cash flow pattern and he will be explained the method of
calculation of interest and how the Equated Monthly Instalments (EMI) and interest is calculated and payments
through any other mode of repayment will be appropriated against interest and principal due from the
customer. It is expected of the customers to adhere to the repayment schedule agreed to and approach the bank
for assistance and guidance in case of genuine difficulty in meeting repayment obligations.
5. The Bank’s Policy aims at recovery of dues in the event of default and is not aimed at whimsical deprivation
of the property offered as security.
6. The Policy reckons fairness and transparency in valuation, repossession and realization of security by
adopting follow up measures for recovery of dues and repossession of security in consonance with the law.
75
II. DECENT APPROACH AND DECORUM TO BE FOLLOWED BY THE BANK’S STAFF
MEMBERS / AUTHORISED REPRESENTATIVES IN COLLECTION / SECURITY
REPOSSESSION:
1. The customer would be contacted ordinarily at the place of his/her choice and in the absence of any specified
place, at the place of his/her residence and if unavailable at the residence, at the place of business/occupation.
2. Identity and authority of persons authorized to represent bank for follow up and recovery of dues would be
made known to the borrowers at the first instance, by displaying the authority letter issued by the bank upon
request.
3. The bank would respect privacy of its borrowers.
4. The bank is committed to ensure that all written and verbal communication with its borrowers will be in
simple business language and bank will adopt civil manners for interaction with borrowers.
5. Normally, the bank’s representatives will contact the borrower between 0700 hours and 1900 hours, unless
the special circumstances of his/her business or occupation requires the bank to contact at a different time.
6. As far as possible, the borrowers’ requests to avoid calls at a particular time or at a particular place would
be honoured.
7. The efforts made for the recovery of dues and the copies of communication sent to the customers, if any,
will be documented and kept on record 8. Inappropriate occasions, such as bereavement in the family or such
other calamitous occasions will be avoided for making calls/visits to collect dues.
III. GIVING NOTICE TO BORROWERS:
Even though written communications, telephonic reminders or visits by the bank’s representatives to the
borrowers’ place or residence will be used as loan follow up measures, the bank will not initiate any legal or
other recovery measures including repossession of the security without giving due notice in writing. Any
genuine difficulties expressed or disputes raised by the customers will be considered by the banks before
initiating recovery measures. Bank will follow all such procedures as required under law for
recovery/repossession of security.
IV. REPOSSESSION OF SECURITY:
1. Repossession of security is aimed at recovery of dues and not to deprive the borrower of the property.
2. The recovery process through repossession of security will normally involve repossession, valuation of
security and realisation thereof through appropriate means, which would be carried out in a fair and transparent
manner.
76
3. Repossession will be done only after issuing the notice in writing and following due process of law.
4. The bank will take all reasonable care for ensuring the safety and security of the property after taking
custody in the ordinary course of business and necessary costs will be charged to the borrower.
V. VALUATION AND SALE OF PROPERTY:
1. Valuation and sale of property repossessed by the bank will be carried out as per law and in a fair and
transparent manner.
2. The bank will have right to recover from the borrower the balance due if any, after sale of property. Excess
amount if any, obtained on sale of property will be returned to the borrower after meeting all the related
expenses provided the bank is not having any other claims against the customer.
3. In case of hypothecated assets after taking possession if no payment is forthcoming, a sale notice of 7 days’
time to respond will be sent to the borrower. Thereafter, the bank will arrange for sale of the hypothecated
assets in such manner as deemed fit by the bank.
4. In respect of cases under SARFAESI Act, as per the provisions of the Act, 30 days’ notice of sale will be
sent.
5. When sale by public auction (traditional auction / e-auction) or by tender is envisaged, the same will be
published in 2 leading newspapers out of which one is in local vernacular paper.
VI. OPPORTUNITY TO THE BORROWER TO TAKE BACK THE SECURITY:
1. It is re-iterated that the bank will resort to repossession of security only for the purpose of realization of its
dues as the last resort and not with intention of depriving the borrower of the property.
2. Accordingly, the bank will be willing to consider handing over possession of property to the borrower any
time after repossession and before sale transaction of the property takes place, provided the bank dues are
cleared in full.
3. If satisfied with the genuineness of borrower’s inability to pay the loan instalments as per schedule which
resulted in repossession of security, the bank may consider handing over the property after receiving the
instalments in arrears, however after being convinced of the arrangements made by the borrower to ensure
timely repayment of remaining instalments in future.
4. If the amounts are repaid, either as stipulated by the bank or dues settled as agreed to by the bank, possession
of seized assets will be handed back to the borrower within a reasonable time after getting permission from
the competent/sanctioning authority of the bank or Court/DRT concerned, if recovery proceedings are filed
and pending before such forums. The Repossession will be considered if the entire expenses and up to date
77
full dues of the Bank are paid before the actual sale or transfer of the security and subject to court orders, if
any.
VII. ENGAGEMENT OF RECOVERY AGENTS:
1. The bank may utilize the services of recovery/enforcement agents appointed as per regulatory guidelines,
for collection of dues and repossession of securities.
2. The name and address of all Recovery/Enforcement Agents on the bank’s approved panel will be placed on
the bank’s website for public information.
3. Only recovery/enforcement agents from the approved panels will be engaged by the bank 4. In case bank
engages service of such recovery/enforcement/seizure agent for any recovery case, the identity of the agent
will be disclosed to the borrower and such agents will be required to follow a code of conduct covering their
dealings with the customers.
VIII. APPLICATION FOR COMPROMISE SETTLEMENT AND ITS PROCESSING:
1. The compromise should be a negotiated settlement.
2. The branch should acknowledge the request letter for compromise amount offered.
3. Terms & conditions of compromise and recovery process.
4. Terms and conditions of compromise should be negotiated with the party and put in writing duly
acknowledged to him to avoid any confusion while conveying the sanction later on.
5. Mode of repayment should be clearly laid in sanction.
6. Sanction of compromise proposal should be conveyed to the borrower promptly detailing therein terms and
conditions of compromise and mode of repayment.
7. On repayment of full and final dues of compromise, branch should issue no dues certificate on request of
the party as per provisions of the Recovery Policy and terms of sanction.
8. Branch to withdraw all suits filed against the borrower on full and final payment of the compromise amount
as per terms and conditions of the compromise and provided there are no other bank’s claims enforceable
against the borrowers.
9. Branch to release the title deed of the property to the borrower /guarantor on full and final payment of the
compromise amount as per terms and conditions of the sanction.
IX. GRIEVANCE REDRESSAL MECHANISM:
78
For effective implementation of the Policy, one Grievance Redressed Cell would be established at:
1. Central Office consisting of GM (Revco), GM (Credit) and GM (P.S.) for redressed of grievances if any
arising out of decisions of Ronal Office and Central Office functionaries.
2. Ronal Office consisting of Ronal Manager, Chief Manager (recovery) and Chief Internal Auditor of the
Zone for redressed of grievances if any arising out of decisions of Regional Office functionaries.
3. Regional Office consisting of Regional Manager, Asst. Regional Manager (recovery) and Chief Internal
Auditor of the Zone for redressed of grievances, if any, arising out of decisions of Branch functionaries
4. Response to a complaint whether positive or negative or requiring more time for redressed would be given
within a maximum period of four weeks from the date of complaint, unless the nature of complaint is such
that requires verification of voluminous facts and figures.
Symptoms of Recognizing a Performing Asset turning into NPA:
The banking groups, in public sector particularly, have been quite hard pressed in recent times in terms of
major portion of their advances turning into NPAs. Following are some of common indications hinting a
prospect of an asset slipping into NPA bracket.
• Non-payment of the initial instalment.

• Bouncing of cheque due to insufficient balance in the accounts.
• Irregularity in instalment.
• Unpaid over-due bills.
• Declining current ratio.
• Payment which does not cover the interest and principal amount of that instalment.
• While monitoring the accounts it is found that partial amount is diverted to sister/parent Company.
• Borrower has either initiated the process of winding up or is not doing business.
• Over-due receivables.
• Stock statement not submitted on time.
• External con-controllable factor like natural calamities where borrower conduct his business.
• Frequent changes in plan.
• Non-payment of wages.
• Avoidance of contact with bank.
• Problem between partners.
• Changes in Government policies.
• Death of borrower.
• Competition in the market.
79
Preventive Measures for Non-Performing Assets Identifying:
Borrowers with genuine intent from those who are non-serious with no commitment or stake in revival are a
challenge confronting banker.
• Longer the delay in response, greater the injury to the account and the asset.
• While financing/appraisal of credit requirements, funds flow analysis in conjunction with the cash flow
analysis should be done, rather than only concentrating on funds flow analysis.
• The general perception among borrowers is that it is lack of finance that leads to sickness and NPAs.
However, management effectiveness in tackling adverse business conditions is a very important aspect
that affects a borrowing unit’s fortunes.
• During the exercise for assessment of viability and restructuring, a practical and integrated approach
by all the lending banks as also sharing of all relevant information on the borrower would go a long
way towards overall success of rehabilitation exercise, given the probability of success/failure.
As a part of asset portfolio decision by commercial banks, exposure to predefined sensitive sectors viz.,
capital market sector and the real estate sector should be kept within reasonable limits and their trends
should be subjected to stringent internal monitoring. Being vigilant towards such advances helps avoiding
their slippages into the NPA and bad debt categories significantly. Table 10 portrays the trend of advances
to sensitive sectors by the major Indian public sector banks. From the table, it is evident that the PSBs have
been successful in terms of keeping their sensitive advances in check. Majority of the banks have recorded
a decline in percentage lending to both the sensitive sectors during the fiscal year 2011-12 compared to
the preceding fiscal of 2010-11.
Methods for Reducing Non-Performing Assets:
• All accounts where interest has not been collected should be reviewed at periodical intervals by
appropriate authorities. In order to recover the amount, one can adopt any way like persuasion,
pressurization, frequent interaction, showing sympathy etc. Repayment of a term loan depends on
income generating capacity of the borrowing unit. Therefore, it is necessary to fix repayment
program for a term loan according to the income generating capacity of the unit.
• After classification of unit as sick, bank can make decision to offer a rehabilitation package. In that
case, bank has to have a sympathetic and positive approach and provide the relief package in time.
• Merger is the process under which a sick unit is merged with a healthy unit, or sometimes, a healthy
unit acquires a sick unit. A part of the consideration paid to the sick unit by the healthy unit is used
to liquidate the NPA wholly or partly.
• Recovery of advances through compromise settlement is accepted as an effective non-legal
remedy. Under this borrower agrees to pay certain amount of the bank after getting concessions.
80
• If all attempts of converting an NPA into a performing asset fail, the bank is left with no other
option but to recall the advance and resort to legal action by filing of recovery suits in the civil
court or Debt Recovery Tribunals. To do away with this specific requirement of filing a suit with
court towards recovery of NPAs, Government of India enacted the Securitization and
Reconstruction of Financial Assets & Enforcement of Securities Interest (SARFAESI) Act or
popularly referred to as Securitization Act in the year 2002.
81
Conclusion
The Non-Performing assets are the outcome of credit activity of the bank, which is their most important
function to earn profit. The credit is associated with risk and therefore the bank cannot totally avoid non-
performing assets. However, strict compliance of lending norms, steady growth of credit spread over different
segments and activities, careful planning, monitoring and follow up banks can control the advances turning in
to non-performing advances. Even in case of NPAs, recovery or reduction is possible by adopting various
strategies. Although, elaborate guidelines on management of non-performing assets have been prescribed, it
is necessary to keep in mind that application of these guidelines may or may not bring the desired results. For
this it is necessary to devise branch specific strategy based on the analysis of non-performing assets and then
focusing on recovery by adopting different methods. Management of non-performing assets is not limited to
recovery of dues. It involves careful planning, understanding the reasons for default, problems/ faced by
individual borrower and then deciding appropriate course of action for recovery. This naturally requires
dedicated and trained staff at branch totally involved in the process and used exclusively for management of
NPAs. Carrying cost is one of the tools for analysis of non-performing assets at the branch, which helps
deciding priorities for recovery, and future plans for credit expansion. Although, at controlling offices the
significance of the concept is well understood it is not percolated down to field level staff. It is therefore
necessary to create awareness among the ground level staff about the concept and application of it for
appropriate and focused strategy at branch level to improve branch profitability.
82
Bibliography
• Joshi P.N. (2003), “Non-Performing Assets - Causes, Extent and Remedies”

• Dr. Bachhawat N.M. (2001) “Management of Non-Performing Assets in Commercial Bank”
• Vora K.H. (2007) “Management of Non-Performing Assets and Asset Reconstruction Company”
• Upadhyay H.V. (1994) “Recovery through SEIZURE: Some Aspects”
• Govil A. (2000), “Need for Revival of Loss-Making Branches”
• Dr. Kulkarni J.B. (2003), management of Non-Performing Assets”
• Darshan N.V (2001), “The Secret of Recovery”
• Dr. Chakraborty K.C. (2005) “Management of NPAs Trends and Challenges”
• Kannan K. (2001) “Creation of Performing Assets from NPA to PA”
• Dr. Kumar M.K., Reddy C.M. and Muktha K.C. (2004) “Causes of NPAs and Remedial Measures”
• Dr. Mohan Reddy P. and Narayana Reddy D.L. (2004), “Non- Performing Assets in Regional Rural Banks: A
Study of RayalaseemaGrameena Bank”
83

Economic Project

Încărcat de

Informații document

Titlu original

Drepturi de autor

Formate disponibile

Partajați acest document

Partajați sau inserați document

Opțiuni de partajare

Vi se pare util acest document?

Este necorespunzător acest conținut?

Drepturi de autor:

Formate disponibile

Economic Project

Încărcat de

Drepturi de autor:

Formate disponibile

ECONOMICS

TOPIC: - A STUDY OF NON-PERFORMING ASSETS AND CENTRAL BANK

ACADEMIC YEAR 2019-2020

UNDER THE GUIDANCE OF

2 Non-Performing Asset In Indian Scheduled commercial banks 13-21

3 Study on NPA on SBI 22-30

4 Study of NPA on ICICI Bank 31-38

5 Underlying reason for NPA in India 39-44

6 Extent & effect of the NPA problem in India 45-54

8 Recent changes in the RBI’s guidelines to bank regarding NPA 67-75

9 Central bank procedure to recover NPA 76-82

NPAs have an adverse effect on the return on assets in several ways-

• They erode current profits through provisioning requirements.

1) To understand the concept of NPA.

The prudential accounting norms comprise of the following:

(1) Income Recognition;

(2) Asset Classification and

(3) Provisioning Norms.

(a) Performing Assets [PA]

b. INTERMEDIATE-TERM LOANS: Financial institutions generally classify intermediate or mid-term

1. Ineffective Recovery Tribunal:

8. Improper SWOT Analysis:

• Banks should consider the borrowers own capital investment.

9. Poor Credit Appraisal System:

10. Managerial Deficiencies:

A Study of Non-Performing Assets of Commercial Banks and it’s recovery in

Year Gross Advances Gross NPAs Gross NPAs

2007-2008 6809.58 708.61 10.4

2008-2009 7780.43 687.17 8.8

2009-2010 9020.26 648.12 7.2

2010-2011 11526.82 593.73 5.2

2011-2012 15513. 78 510.97 3.3

2012-2013 20125.10 504.86 2.5

2013-2014 25078.85 563.09 2.3

2014-2015 30382.54 683.28 2.3

2015-2016 6458.59 355.54 5.5

Figure 1 – Scheduled Commercial Banks (Gross and Net NPAs)

GROSS NPA'S(PERCENTAGE) NET NPA'S(PERCENTAGE)

Figure 3 – Net NPAs as a Percentage of Net Advances (SCBs)

Item 2013 2014 2015 2016 2017 2018

Amount 2142 4023 7235 5254 6600 23200

Table 4. Showing NPAs recovered by SCBs through DRTs (Amount in Crore)

Item 2013 2014 2015 2016 2017 2018

Item 2012 2013 2014 2015 2016 2017 2018

Recommendations for management of NPAs

ROLL NO. -8499

STATE BANK OF INDIA

• SBI Capital Markets Ltd

MISSION, VISION AND VALUES MISSION STATEMENT:

•Premier Indian Financial Service Group with prospective world-class

Standards of effect agency and professionalism and national value.

•Retain its position in the country Development banking

Maximize the shareholders’ value through high-sustained earnings per Share.

• Personal Loan Product:

a) Switchover to a system- based identification of NPAs by PSBs

b) Prevailing macro-economic situation in the country;

c) Increased interest rates in the recent past;

d) Lower economic growth; and

e) Aggressive lending by banks in the past, especially during good times.

❖ Listings and shareholdings

Promoters: Government of India 54.23%

Banks & Insurance Companies 10.00%

Mutual Funds & UTI 8.29%