Final Report4

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CERTIFICATE

This is to certify that Mr. HemantGurkha M.B.A 4th

semester student of AmityGlobal Business School, Ahmedabad has done research project on the topicComparative

Analysis of NPA of Public Sector Banks, Private Sector Banks & Foreign Banks . He

successfully completed his project under my guidance. This project certifies the work of the

candidate based on actual analysis of the concerned project.

Date: - Prof. Swati Gupta

Place: - Ahmedabad (Faculty Guide-)
http://www.gujaratmba.com/free-mba-projects-finance-marketing-details.php?project_id=13http://www.gujaratmba.com/free-mba-projects-finance-marketing-details.php?project_id=13http://www.gujaratmba.com/free-mba-projects-finance-marketing-details.php?project_id=13http://www.gujaratmba.com/free-mba-projects-finance-marketing-details.php?project_id=13http://www.gujaratmba.com/free-mba-projects-finance-marketing-details.php?project_id=13


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DECLARATION

I, HEMANT GURKHA, student of MBA from AMITY GLOBAL BUSINESS SCHOOL,

AHMEDABAD hereby declare that I have completed this project Comparative Analysis of

NPA of Public Sector Banks, Private Sector Banks & Foreign Banksin the academic year 2009-

11. The information submitted is true and original to the best of knowledge.

Date: HemantGurkha

Place: Ahmedabad (MBA 4th semester)


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ACKNOWLEGEMENT

I want to thank Prof. Swati Gupta, our Faculty Guide for their kind co-operation &

for sharing their experience and knowledge and for giving their invaluable help and support in

the completion of Grand Report successfully.

With deep sense of gratitude, I would like to take the opportunity to thank Mr. Manish

Dholakia (campus Head- AGBS Ahmadabad )for his kind facilitation during the project without

his prudent guidance this project would not have been materialized.

Last but not he least I would like to express my sincere thanks to all those who helped me

directly or indirectly to make this project successful.

HEMANT GURKHA


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EXECUTIVE SUMMARY

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 over all profits and shareholders value. The issue of

Non Performing Assets has been discussed at length for financial system all over the world. The

problem of NPAs is not only affecting the banks but also the whole economy. In fact high level

of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and

trade.

While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual

burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers

coming from the non-priority sector. The banks and financial institutions have to take the

initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure

prominently in the debate not only because they dominate the banking industries, but also since

they have much larger NPAs compared with the private sector banks. This raises a concern in

the industry and academia because it is generally felt that NPAs reduce the profitability of banks,

weaken its financial health and erode its solvency.

For the recovery of NPAs a broad framework has evolved for the management of NPAs under

which several options are provided for debt recovery and restructuring. Banks and FIs have the

freedom to design and implement their own policies for recovery and write-off incorporating

compromise and negotiated settlements.

The problem of NPA is quite serious in public sector banks however, whereas the ratio of NPAs

to net advances grow up in the public sector bank in 2010 as compared to the year 2008,the

opposite is observed in the domestic private sector banks. In contrast in the foreign banks the

problem of NPAs is of low density.


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Table of Contents

CERTIFICATE ............................................................................................................................... 1

DECLARATION ............................................................................................................................ 2

ACKNOWLEGEMENT ................................................................................................................. 3

EXECUTIVE SUMMARY ............................................................................................................ 4

INTRODUCTION .......................................................................................................................... 7

HISTORY ................................................................................................................................................ 7

POST-INDEPENDENCE ......................................................................................................................... 9

BANKS IN INDIA ....................................................................................................................... 15

BANKING IN INDIA................................................................................................................... 21

SWOT ANALYSIS OF INDIAN BANKING SECTORS ........................................................... 25

INTRODUCTION TO NPA ......................................................................................................... 29

IMPACT OF NPA: ....................................................................................................................... 34

RESEARCH DESIGN .................................................................................................................. 36

ANALYSIS ................................................................................................................................... 38

FINDINGS .................................................................................................................................... 57CONCLUSION ............................................................................................................................. 60

ANNEXURE................................................................................................................................. 62

REFERENCES / BIBLIOGRAPHY............................................................................................. 70


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Introduction


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INDIAN BANKING INDUSTRY

Introduction

After liberalization the Indian banking sector developed very appreciate. The RBI also

nationalized good amount of commercial banks for proving socio economic services to the

people of the nation. Banking in India originated in the last decades of the 18th century. The first

banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which

started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of

India, which originated in the Bank of Calcutta in June 1806, which almost immediately became

the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of

Bombay and the Bank of Madras, all three of which were established under charters from the

British East India Company. For many years the Presidency banks acted as quasi-central banks,

as did their successors. The three banks merged in 1921 to form the Imperial Bank of India,

which, upon India's independence, became the State Bank of India.

History

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a

consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and

still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that

issues stock and requires shareholders to be held liable for the company's debt) It was not the

first though. That honor belongs to the Bank of Upper India, which was established in 1863, andwhich survived until 1913, when it failed, with some of its assets and liabilities being transferred

to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate

States, promoters opened banks to finance trading in Indian cotton. With large exposure to
http://en.wikipedia.org/wiki/Bank_of_Bengalhttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/Allahabad_Bankhttp://en.wikipedia.org/wiki/Alliance_Bank_of_Simlahttp://en.wikipedia.org/wiki/American_Civil_Warhttp://en.wikipedia.org/wiki/Lancashirehttp://en.wikipedia.org/wiki/Confederate_Stateshttp://en.wikipedia.org/wiki/Confederate_Stateshttp://en.wikipedia.org/wiki/Confederate_Stateshttp://en.wikipedia.org/wiki/Confederate_Stateshttp://en.wikipedia.org/wiki/Lancashirehttp://en.wikipedia.org/wiki/American_Civil_Warhttp://en.wikipedia.org/wiki/Alliance_Bank_of_Simlahttp://en.wikipedia.org/wiki/Allahabad_Bankhttp://en.wikipedia.org/wiki/State_Bank_of_Indiahttp://en.wikipedia.org/wiki/Imperial_Bank_of_Indiahttp://en.wikipedia.org/wiki/Bank_of_Madrashttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Bombayhttp://en.wikipedia.org/wiki/Bank_of_Bengal


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present such as Bank of India,Corporation Bank, Indian Bank,Bank of Baroda,Canara Bank

and Central Bank of India.

The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina

Kannada and Udupi district which were unified earlier and known by the name South Canara (

South Kanara ) district. Four nationalised banks started in this district and also a leading private

sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian

Banking".

During the First World War (1914-1918) through the end of the Second World War (1939-1945),

and two years thereafter until the independence of India were challenging for Indian banking.

The years of the First World War were turbulent, and it took its toll with banks simply collapsing

despite the Indian economy gaining indirect boost due to war-related economic activities

Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,

paralyzing banking activities for months. India's independence marked the end of a regime of the

Laissez-faire for the Indian banking. The Government of India initiated measures to play an

active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the

government in 1948 envisaged a mixed economy. This resulted into greater involvement of the

state in different segments of the economy including banking and finance. The major steps to

regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on

January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public

Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of

India (RBI) "to regulate, control, and inspect the banks in India."
http://en.wikipedia.org/wiki/Bank_of_Indiahttp://en.wikipedia.org/wiki/Corporation_Bankhttp://en.wikipedia.org/wiki/Indian_Bankhttp://en.wikipedia.org/wiki/Bank_of_Barodahttp://en.wikipedia.org/wiki/Canara_Bankhttp://en.wikipedia.org/wiki/Central_Bank_of_Indiahttp://en.wikipedia.org/wiki/Dakshina_Kannadahttp://en.wikipedia.org/wiki/Dakshina_Kannadahttp://en.wikipedia.org/wiki/Udupi_districthttp://en.wikipedia.org/wiki/First_World_Warhttp://en.wikipedia.org/wiki/Second_World_Warhttp://en.wikipedia.org/wiki/Indian_independence_movementhttp://en.wikipedia.org/wiki/Economy_of_Indiahttp://en.wikipedia.org/wiki/Partition_of_Indiahttp://en.wikipedia.org/wiki/Punjab,_Indiahttp://en.wikipedia.org/wiki/West_Bengalhttp://en.wikipedia.org/w/index.php?title=Indian_independence_goverment&action=edit&redlink=1http://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Mixed_economyhttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Mixed_economyhttp://en.wikipedia.org/wiki/Government_of_Indiahttp://en.wikipedia.org/wiki/Laissez-fairehttp://en.wikipedia.org/w/index.php?title=Indian_independence_goverment&action=edit&redlink=1http://en.wikipedia.org/wiki/West_Bengalhttp://en.wikipedia.org/wiki/Punjab,_Indiahttp://en.wikipedia.org/wiki/Partition_of_Indiahttp://en.wikipedia.org/wiki/Economy_of_Indiahttp://en.wikipedia.org/wiki/Indian_independence_movementhttp://en.wikipedia.org/wiki/Second_World_Warhttp://en.wikipedia.org/wiki/First_World_Warhttp://en.wikipedia.org/wiki/Udupi_districthttp://en.wikipedia.org/wiki/Dakshina_Kannadahttp://en.wikipedia.org/wiki/Dakshina_Kannadahttp://en.wikipedia.org/wiki/Central_Bank_of_Indiahttp://en.wikipedia.org/wiki/Canara_Bankhttp://en.wikipedia.org/wiki/Bank_of_Barodahttp://en.wikipedia.org/wiki/Indian_Bankhttp://en.wikipedia.org/wiki/Corporation_Bankhttp://en.wikipedia.org/wiki/Bank_of_India


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The Banking Regulation Act also provided that no new bank or branch of an existing

bank could be opened without a license from the RBI, and no two banks could have

common directors.

Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate the

development of the Indian economy. At the same time, it has emerged as a large employer, and

a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, the-

then Prime Minister of India expressed the intention of the GOI in the annual conference of the

All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The

paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and

the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from

the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the

step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance,

the Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill,

and it received the presidential approval on 9th August, 1969.

A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated

reason for the nationalisation was to give the government more control of credit delivery. With

the second dose of nationalisation, the GOI controlled around 91% of the banking business of

India.

After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the

average growth rate of the Indian economy.

Liberalisation

In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation

and gave licences to a small number of private banks, which came to be known as New

Generation tech-savvy banks, which included banks such as UTI Bank(now re-named as Axis

Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This

move, along with the rapid growth in the economy of India, kickstarted the banking sector in


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India, which has seen rapid growth with strong contribution from all the three sectors of banks,

namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms

for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights

which could exceed the present cap of 10%,at present it has gone up to 49% with some

restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used

to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave

ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this

led to the retail boom in India. People not just demanded more from their banks but also received

more.

The banking system remains, as always, the most dominant segment of the financial sector.

Indian banks continue to build on their strengths under the regulator's watchful eye and hence,

have emerged stronger.

In the annual international ranking conducted by UK-based Brand Finance Plc, 18 Indian banks

have been included in the Brand Finance Global Banking 500. In fact, the State Bank of India

(SBI) which is the first Indian bank to be ranked among the Top 50 banks in the world, has

improved its position from 36th to 34th, as per the Brand Finance study released on February 1,

2011. The brand value of SBI has enhanced to US$ 1,119 million. ICICI Bank, the only other

Indian bank in the top 100 club has improved its position with a brand value of US$ 2,501

million. According to the study, Indian banks contributed 1.7 per cent to the total global brand

value at US$ 14,741 million and grew by 19 per cent in 2011.

According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial

Banks: June 2010', nationalised banks, as a group, accounted for 51.3 per cent of the aggregate

deposits, while State Bank of India (SBI) and its associates accounted for 22.8 per cent. The

share of New private sector banks, Old private sector banks, Foreign banks and Regional Rural

banks in aggregate deposits was 13 per cent, 4.8 per cent, 5.1 per cent and 3.1 per cent

respectively.


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With respect to gross bank credit also, nationalised banks hold the highest share of 51.5 per cent

in the total bank credit, with SBI and its associates at 23.2 per cent and New Private sector banks

at 13 per cent. Foreign banks, Old private sector banks and Regional Rural banks held relatively

lower shares in the total bank credit with 5.3 per cent, 4.6 per cent and 2.5 per cent respectively.

The report also found that scheduled commercial bank offices (with deposits of INR 10 crore or

more) accounted for 65.2 per cent of the bank offices, 96.6 per cent in terms of aggregate

deposits and 94 per cent in total bank credit.

Significantly, on a year-on-year basis, bank credit grew by 24.4 percent in 2010 as against RBIs

projections of 20 percent for the entire fiscal 2010-11. However, deposits lagged behind at 16.5

percent versus a projection of 18 percent.

India's foreign exchange reserves stood at US$ 299.39 billion as on January 21, 2011, according

to the data in the weekly statistical supplement released by the Reserve Bank of India.

Indians working overseas sent more money back home than any of their global counterparts,

remitting US$ 50 billion in 2009 despite a worldwide economic slowdown and anti-immigration

measures adopted by industrialized countries.

Major Developments

Indian Bank has received the Central Bank of Sri Lanka's nod to open its branch at Jaffna in Sri

Lanka.

Indian Bank has signed an agreement with Weizmann Forex Ltd, and will now offer foreign

remittances service over the counter at all its branches.

The National Payment Corporation of India is rolling out an instant interbank mobile paymentservice (IMPS) that will enable retail customers of seven banks to enjoy 24X7 funds transfer.

State Bank of India, Bank of India, Union Bank of India, ICICI Bank, HDFC Bank, Axis Bank

and YES Bank on November 22, 2010 became the first set of banks to go live with the IMPS.


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Amongst the private banks, owing to strong growth in interest income, the countrys third-largest

private sector lender, Axis Bank, reported a net profit of US$ 166.3 million for the second

quarter of FY11, a 38.28 per cent increase from US$ 120.3 million a year ago.

HDFC Bank, Indias second largest private lender reported a 32.7 percent rise in net profits at

US$ 204.3 million for the quarter ended September 30, 2010.

Government Initiatives

The Cabinet, on December 1, 2010 approved to provide an additional amount of US$ 1.33

billion, in addition to the US$ 3.32 billion already provided in the Budget 2010-11, to ensure

Tier I CRAR (Capital to Risk Weighted Assets) of all Public Sector Banks (PSBs) at 7 per cent

and also to raise Government of India holding in all PSBs to 58 per cent. It also approved that the

exact amount, mode of capitalization and other terms and conditions would be decided in

consultation with the banks at the time of infusion.

The proposed capital infusion would enhance the lending capacity of the PSBs to meet the credit

requirement of the economy in order to maintain and accelerate the economic growth

momentum.

The RBI has allowed banks to make changes in the repayment schedules or drawdown without

prior approval from the central bank. However, such a change could be made on the condition

that the average maturity of the loan should remain the same. The move is expected to make

external commercial borrowing (ECB) transactions easier. Transactions both through automatic

and approval routes can take advantage of this change. Now, without the prior approval of RBI,

Indian companies may borrow up to US$ 500 million in a year.

As part of further liberalisation of the extant branch licensing policy in respect of regional rural

banks (RRBs), they have been permitted to open branches in Tier 3 to Tier 6 centres (with

population up to 49,999 as per Census 2001) without the Reserve Bank's prior authorisation

provided-


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The capital to risk-weighted assets ratio (CRAR) is at least 9 per cent;

The net non-performing assets (NPAs) are less than 5 per cent;

They have not defaulted in the maintenance of cash reserve ratio (CRR)/statutory

liquidity ratio (SLR) during the last year; and

They have earned a net profit in the last financial year.

On the lending side, the Base Rate system replaced the Benchmark Prime Lending Rate (BPLR)

system with effect from July 1, 2010. Base Rates of scheduled commercial banks (SCBs) were

fixed in the range of 5.50-9.00 per cent. Subsequently, several banks reviewed and increased

their Base Rates in the range of 1050 basis points by October 2010. Base Rates of major banks,

accounting for over 94 per cent in total bank credit, are in the range of 7.50-8.50 per cent. Banks

have also raised their BPLRs in the range of 25-75 basis points for their old loans.

As at end-July 2010, around 70,000 branches of 98 banks had participated in the national

electronic funds transfer (NEFT) system and the volume of transactions processed increased to

9.5 million in July 2010.

In the central bank's Third Quarter Review of Monetary Policy 2010-11, RBI Governor D

Subbarao has said that the repo rate and reverse repo rates would be increased by 25 basis points

under the liquidity adjustment facility (LAF) with immediate effect. Repo rate increased from6.25 per cent to 6.5 per cent while reverse repo rate has been raised from 5 per cent to 5.25 per

cent.

The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their net

demand and time liabilities (NDTL).

On the basis of an assessment of the current liquidity situation, the RBI also decided to extend

additional liquidity support upto April 8, 2011 to scheduled commercial banks under the LAF to

the extent of up to 1 per cent of their net demand and time liabilities (NDTL), which was set to

expire on January 28, 2011.


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Banks in India

Public bank

A Public Sector bank is one in which, the Government of India holds a majority stake. It is asgood as the government running the bank.

Since the public decide on who runs the government, these banks that are fully/partially ownedby the government are called public sector banks.

Private bank

A company whose ownership is private. As a result, it does not need to meet the strict Securities and

Exchange Commission filing requirements of public companies. Private companies may issue stock and

have shareholders. However, their shares do not trade on public exchanges and are not issued through

an initial public offering. In general, the shares of these businesses are less liquid and the values are

difficult to determine.

27

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0

5

10

15

20

25

30

35

public Banks Private Banks Foreign Banks

No. of Banks


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Foreign Banks List in India

Name of Bank

ABN AMRO Bank

Abu Dhabi Commercial Bank Ltd

American Express Bank

Antwerp Diamond BankArab Bangladesh Bank

Bank International Indonesia

Bank of America

Bank of Bahrain & Kuwait

Bank of Ceylon

Bank of Nova Scotia

Bank of Tokyo Mitsubishi

Barclays Bank

BNP Paribas

Calyon Bank

ChinaTrust Commercial Bank

Citibank

DBS Bank

Deutsche Bank

HSBC Ltd(Hongkong& Shanghai Banking Corporation

JPMorgan Chase BankKrung Thai Bank

Mashreq Bank

Mizuho Corporate Bank

Oman International Bank

Royal Bank of Scotland

Shinhan Bank

SocieteGenerale

Sonali Bank

Standard Chartered Bank

State Bank of Mauritius

UBS(Swiss bank)

VTB

Nationalised Banks List in India

Bank Name

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

IDBI Bank (Industrial Development Bank of India)

Indian Bank

Indian Overseas Bank

Oriental Bank of CommercePunjab National Bank

Punjab & Sind Bank

State Bank of India

Syndicate Bank

Union Bank of India

UCO Bank

United Bank of India

Vijaya Bank

Private Banks List in India

Bank Names

Axis Bank (UTI Bank)

HDFC Bank (Housing Development Finance Corp.)

ICICI Bank (Industrial Credit and Investment Cor. of India)

Kotak Mahindra Bank

Karnataka Bank

Yes BankIndusInd Bank

The Nainital Bank Ltd

ING Vysya Bank

South Indian Bank

KarurVysya Bank


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RECENT HISTORY OF INDIAN BANKING

Indian banking system, over the years has gone through various phases after establishment of

Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country.

Earlier to creation of RBI, the central bank functions were being looked after by the Imperial

Bank of India. With the 5-year plan having acquired an important place after the independence,

the Govt. felt that the private banks may not extend the kind of cooperation in providing credit

support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted

its report recommending creation of a strong, integrated, State-sponsored, State-partnered

commercial banking institution with an effective machinery of branches spread all over thecountry. The recommendations of this committee led to establishment of first Public Sector Bank

in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share

capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-

organisation of princely States, the associate banks came into fold of public sector banking.

Another evaluation of the banking in India was undertaken during 1966 as the private banks

were still not extending the required support in the form of credit disbursal, more particularly to

the unorganised sector. Each leading industrial house in the country at that time was closely

associated with the promotion and control of one or more banking companies. The bulk of the

deposits collected, were being deployed in organised sectors of industry and trade, while the

farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on

money lenders who used to exploit them by charging higher interest rates. In February 1966, a

Scheme of Social Control was set-up whose main function was to periodically assess the demand

for bank credit from various sectors of the economy to determine the priorities for grant of loans

and advances so as to ensure optimum and efficient utilisation of resources. The scheme

however, did not provide any remedy. Though a no. of branches were opened in rural area but

the lending activities of the private banks were not oriented towards meeting the credit

requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of

Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of


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Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for

80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of

the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI

introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee.

Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance

cover to the depositors. In the post-nationalisation period, there was substantial increase in the

no. of branches opened in rural/semi-urban centres bringing down the population per bank

branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M.

Narasimham Committee report) under the sponsorship and support of public sector banks as the

3rd component of multi-agency credit system for agriculture and rural development. The Service

Area Approach was introduced during 1989.

While the 1970s and 1980s saw the high growth rate of branch banking net-work, the

consolidation phase started in late 80s and more particularly during early 90s, with the

submission of report by the Narasimham Committee on Reforms in Financial Services Sector

during 1991.

In these five decades since independence, banking in India has evolved through four distinct

phases:

Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in

1969. The focus during this period was to lay the foundation for a sound banking system in the

country. As a result the phase witnessed the development of necessary legislative framework for

facilitating re-organisation and consolidation of the banking system, for meeting the requirement

of Indian economy. A major development was transformation of Imperial Bank of India into

State Bank of India in 1955 and nationalisation of 14 major private banks during 1969.

Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and

continued till 1984. A determined effort was made to make banking facilities available to the

masses. Branch network of the banks was widened at a very fast pace covering the rural and

semi-urban population, which had no access to banking hitherto. Most importantly, credit flows

were guided towards the priority sectors. However this weakened the lines of supervision and


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affected the quality of assets of banks and pressurized their profitability and brought competitive

efficiency of the system at low ebb.

Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by

RBI which saw marked slowdown in the branch expansion. Attention was paid to improving

house-keeping, customer service, credit management, staff productivity and profitability of

banks. Measures were also taken to reduce the structural constraints that obstructed the growth of

money market.

Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for

extensive financial sector reforms which brought deregulation of interest rates, more

competition, technological changes, prudential guidelines on asset classification and income

recognition, capital adequacy, autonomy packages etc.

Bank Nationalization

Organised banking in India is more than two centuries old. Till 1935 all the banks were in private

sector and were set up by individuals and/or industrial houses which collected deposits from

individuals and used them for their own purposes. In the absence of any regulatory framework,

these private owners of banks were at liberty to use the funds in any manner, they deemed

appropriate and resultantly, the bank failures were frequent.

Move towards State ownership of banks started with the nationalisation of RBI and passing of

Banking Companies Act 1949. On the recommendations of All India Rural Credit Survey

Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI.

Similarly, the conversion of 8 State-owned banks (State Bank of Bikaner and State Bank of

Jaipur were two separate banks earlier and merged) into subsidiaries (now associates) of SBI

during 1959 took place. During 1968 the scheme of social control was introduced, which was

closely followed by nationalisation of 14 major banks in 1969 and another six in 1980.

Keeping in view the objectives of nationalisation, PSBs undertook expansion of reach and

services. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out


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of which 58% in rural areas) and no. of people served per branch office came down from 65000

in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The

expansion is significant in terms of geographical distribution. States neglected by private banks

before 1969 have a vast network of public sector banks. The PSBs including RRBs, acount for

93% of bank offices and 87% of banking system deposits.


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BANKING IN INDIA

The Indian banking system is financially stable and resilient to the shocks that may arise due to

higher non-performing assets (NPAs) and the global economic crisis, according to a stress testdone by the Reserve Bank of India (RBI). Significantly, the RBI has the tenth largest gold

reserves in the world after spending US$ 6.7 billion towards the purchase of 200 metric tons of

gold from the International Monetary Fund (IMF) in November 2009. The purchase has

increased the country's share of gold holdings in its foreign exchange reserves from

approximately 4 per cent to about 6 per cent. Following the financial crisis, new deposits have

gravitated towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and

Credit of Scheduled Commercial Banks: September 2009', nationalized banks, as a group,

accounted for 50.5 per cent of the aggregate deposits, while State Bank of India (SBI) and its

associates accounted for 23.8 per cent. The share of other scheduled commercial banks, foreign

banks and regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per

cent, respectively. With respect to gross bank credit also, nationalized banks hold the highest

share of 50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per cent and

other scheduled commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a

share of 5.5 per cent and 2.5 per cent respectively in the total bank credit. The report also found

that scheduled commercial banks served 34,709 banked centres. Of these centres, 28,095 were

single office centres and 64 centres had 100 or more bank offices. The confidence of non-

resident Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows increased

since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin.

Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Non-

resident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion

as on January 8, 2010, according to the RBI's February bulletin.


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The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9, 2009,

remained above the indicative projection of 18.0 per cent set out in the First Quarter Review of

July 2009. The main source of M3 expansion was bank credit to the government, reflecting large

market borrowings of the Government. Meanwhile, outstanding bank credit in the 15 days up to

January 29 2010 rose by US$ 4.32 billion, pointing to a revival in credit growth. This is the

highest year-on-year growth recorded since August 14, 2009.


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SWOT ANALYSIS


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SWOT ANALYSIS OF INDIAN BANKING SECTORS

STRENGTH

Indian banks have compared favourably on growth, asset quality and profitability with

other regional banks over the last few years. The banking index has grown at a

compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per

cent growth in the market index for the same period.

Policy makers have made some notable changes in policy and regulation to help

strengthen the sector. These changes include strengthening prudential norms, enhancing

the payments system and integrating regulations between commercial and co-operative

banks.

Bank lending has been a significant driver of GDP growth and employment.

Extensive reach: the vast networking & growing number of branches & ATMs. Indian

banking system has reached even to the remote corners of the country.

The government's regular policy for Indian bank since 1969 has paid rich dividends with

the nationalisation of 14 major private banks of India.

In terms of quality of assets and capital adequacy, Indian banks are considered to have

clean, strong and transparent balance sheets relative to other banks in comparable

economies in its region.

India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with

the Government of India holding a stake)after merger of New Bank of India in Punjab

National Bank in 1993, 29 private banks (these do not have government stake; they may

be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a

combined network of over 53,000 branches and 17,000 ATMs. According to a report by

ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total

assets of the banking industry, with the private and foreign banks holding 18.2% and

6.5% respectively.


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Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector

banks and 20 per cent of government owned banks.

WEAKNESS

PSBs need to fundamentally strengthen institutional skill levels especially in sales and

marketing, service operations, risk management and the overall organisational

performance ethic & strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skill levels.

The cost of intermediation remains high and bank penetration is limited to only a few

customer segments and geographies.

Structural weaknesses such as a fragmented industry structure, restrictions on capital

availability and deployment, lack of institutional support infrastructure, restrictive labour

laws, weak corporate governance and ineffective regulations beyond Scheduled

Commercial Banks (SCBs), unless industry utilities and service bureaus.

Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in

PSU banks below 51% thus choking the headroom available to these banks for raining

equity capital.

Impediments in sectoral reforms: Opposition from Left and resultant cautious approach

from the North Block in terms of approving merger of PSU banks may hamper their

growth prospects in the medium term.

OPPORTUNITY

The market is seeing discontinuous growth driven by new products and services that

include opportunities in credit cards, consumer finance and wealth management on theretail side, and in fee-based income and investment banking on the wholesale banking

side. These require new skills in sales & marketing, credit and operations.

Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in

interest rates provided. This will expose the weaker banks.


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With increased interest in India, competition from foreign banks will only intensify.

Given the demographic shifts resulting from changes in age profile and household

income, consumers will increasingly demand enhanced institutional capabilities and

service levels from banks.

New private banks could reach the next level of their growth in the Indian banking sector

by continuing to innovate and develop differentiated business models to profitably serve

segments like the rural/low income and affluent/HNI segments; actively adopting

acquisitions as a means to grow and reaching the next level of performance in their

service platforms. Attracting, developing and retaining more leadership capacity

Foreign banks committed to making a play in India will need to adopt alternative

approaches to win the race for the customer and build a value-creating customer

franchise in advance of regulations potentially opening up post 2009. At the same time,

they should stay in the game for potential acquisition opportunities as and when they

appear in the near term. Maintaining a fundamentally long-term value-creation mindset.

Reach in rural India for the private sector and foreign banks.

With the growth in the Indian economy expected to be strong for quite some time-

especially in its services sector-the demand for banking services, especially retail

banking, mortgages and investment services are expected to be strong.

The Reserve Bank of India (RBI) has approved a proposal from the government to amend

the Banking Regulation Act to permit banks to trade in commodities and commodity

derivatives.

Liberalisation of ECB norms: The government also liberalised the ECB norms to permit

financial sector entities engaged in infrastructure funding to raise ECBs. This enabled

banks and financial institutions, which were earlier not permitted to raise such funds,

explore this route for raising cheaper funds in the overseas markets.

Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed

them to raise perpetual bonds and other hybrid capital securities to shore up their capital.

If the new instruments find takers, it would help PSU banks, left with little headroom for

raising equity. Significantly, FII and NRI investment limits in these securities have been

fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.


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THREATS

Threat of stability of the system: failure of some weak banks has often threatened the

stability of the system.

Rise in inflation figures which would lead to increase in interest rates.

Increase in the number of foreign players would pose a threat to the PSB as well as the

private players.


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INTRODUCTION TO NPA

Granting of credit for economic activities is the prime duty of banking. Apart from

raising resources through fresh deposits, borrowings and recycling of funds received back from

borrowers constitute a major part of funding credit dispensation activity. Lending is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, which results into economic growth. However lending also carries a risk called credit

risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a

major hurdle in the process of credit cycle. Thus, these loan losses affect the banks profitability

on a large scale. Though complete elimination of such losses is not possible, but banks can

always aim to keep the losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to

the banking industry in our country sending distressing signals on the sustainability and

endurability of the affected banks. The positive results of the chain of measures affected under

banking reforms by the Government of India and RBI in terms of the two NarasimhanCommittee Reports in this contemporary period have been neutralized by the ill effects of this

surging threat. Despite various correctional steps administered to solve and end this problem,

concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on

banking and financial institutions. The severity of the problem is however acutely suffered by

Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

Meaning of NPA:

Non Performing Asset means an asset or account of borrower, which has been classified

by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the

directions or guidelines relating to asset classification issued by RBI. An amount due under any

credit facility is treated as "past due" when it has not been paid within 30 days from the due date.

Due to the improvement in the payment and settlement systems, recovery climate, up gradation


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of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with

effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell

be an advance where:-

i. Interest and /or installment of principal remain overdue for a period of more than 180 days in

respect of a Term Loan,

ii. The account remains 'out of order' for a period of more than 180 days, in respect of an

overdraft/ cash Credit(OD/CC),

iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and

discounted,

iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a

period not exceeding two half years in the case of an advance granted for agricultural purpose,

and

v. Any amount to be received remains overdue for a period of more than 180 days in respect of

other accounts.

With a view to moving towards international best practices and to ensure greater transparency, it

has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year

ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset

(NPA) shell be a loan or an advance where;

i. Interest and /or installment of principal remain overdue for a period of more than 90 days in

respect of a Term Loan,

ii. The account remains 'out of order' for a period of more than 90 days, in respect of an

overdraft/ cash Credit(OD/CC),

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

discounted,

iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a

period not exceeding two half years in the case of an advance granted for agricultural purpose,

and

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

other accounts.


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Though the term NPA connotes a financial asset of a commercial bank, which has stopped

earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm,

concern, industry and nation where that asset is idling. Viewed with this perspective, the NPA is

a result of an environment that prevents it from performing up to expected levels.

The definition of NPAs in Indian context is certainly more liberal with two quarters norm being

applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004

onwards.

TYPES OF NPA:

1. GROSS NPA2. NET NPA

GROSS NPA

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines

as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists

of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated

with the help of following ratio:

Gross NPAs Ratio =

NET NPA

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.

Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a hugeamount of NPAs and the process of recovery and write off of loans is very time consuming, the

provisions the banks have to make against the NPAs according to the central bank guidelines, are

quite significant. That is why the difference between gross and net NPA is quite high. It can be

calculated by following:


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Net NPAs =

REASONS FOR AN ACCOUNT BECOMING NPA:

1. Internal factors

2. External factors

Internal factors:

1) Funds borrowed for a particular purpose but not use for the said purpose.

2) Project not completed in time.

3) Poor recovery of receivables.

4) Excess capacities created on non-economic costs.

5) In-ability of the corporate to raise capital through the issue of equity or other debt instrument

from capital markets.

6) Business failures.

7) Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting

sister concerns.

8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation

etc.

9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,

delaying settlement of payments\ subsidiaries by government bodies etc.,

External factors:

Sluggish legal systemLong legal tangles

Changes that had taken place in labour laws


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Lack of sincere effort.

Scarcity of raw material, power and other resources.

Industrial recession.

Shortage of raw material, raw material\input price escalation, power shortage, industrial

recession, excess capacity, natural calamities like floods, accidents.

Failures, nonpayment\ over dues in other countries, recession in other countries,

externalization problems, adverse exchange rates etc.

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

The RBI has summarized the finer factors contributing to higher level of NPAs in the Indian

banking sector as:

Diversion of funds, which is for expansion, diversification, modernization, undertaking

new projects and for helping associate concerns. This is also coupled with recessionary

trends and failures to tap funds in capital and debt markets.

Business failures (such as product, marketing etc.), which are due to inefficient

management system, strained labour relations, inappropriate technology/ technical

problems, product obsolescence etc.

Recession, which is due to input/ power shortage, price variation, accidents, natural

calamities etc. The externalization problems in other countries also lead to growth ofNPAs in Indian banking sector.

Time/ cost overrun during project implementation stage.

Governmental policies such as changes in excise duties, pollution control orders etc.

Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation,

promoters/ directors disputes etc.

Deficiency on the part of banks, viz, delays in release of limits and payments/ subsidies

by the Government of India.


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IMPACT OF NPA:

Profitability

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of

client. Because of the money getting blocked the prodigality of bank decreases not only by the

amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some

return earning project/asset. So NPA doesnt affect current profit but also future stream of profit,

which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in

profitability is low ROI (return on investment), which adversely affect current earning of bank.

LiquidityMoney is getting blocked, decreased profit lead to lack of enough cash at hand which lead to

borrowing money for shortest period of time which lead to additional cost to the company.

Difficulty in operating the functions of bank is another cause of NPA due to lack of money.

Routine payments and dues.

Involvement of management:-

Time and efforts of management is another indirect cost which bank has to bear due to NPA.

Time and efforts of management in handling and managing NPA would have diverted to some

fruitful activities, which would have given good returns. Now days banks have special

employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss

Bank is facing problem of NPA then it adversely affect the value of bank in terms of market

credit. It will lose its goodwill and brand image and credit which have negative impact to the

people who are putting their money in the banks.


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Management of NPA

1. One time settlement / compromise scheme

2. Lokadalats

3.Debt Recovery Tribunals

4.Securitization and reconstruction of financial assets and enforcement of Security Interest

Act 2002.

5. Corporate Reconstruction Companies

6. Credit information on defaulters and role of credit information bureaus.


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RESEARCH DESIGN

Title of the study

Comparative Analysis of NPA of Public Sector Banks, Private Sector Banks & Foreign

Banks

Objectives of the project

To study of the concept of Non Performing Asset in Indian perspective.

To study NPA standard of RBI

To study the Reasons for & Impact of NPAs

To evaluate the efficiency in managing Non Performing Asset of different types of banks

(Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.

Scope of the study

To understand the concept of NPA in Indian Banking industry.

To understand the causes & effects of NPA To analyze the past trends of NPA of Public,

Private & Foreign banks in different sector.

Data Collection Sources

Secondary Data Secondary data refers to the data which has already been generated and

is available for use. The data about NPAs & its composition, classification of loan assets,profits (net & gross) & advances of different banks is taken from Reserve Bank of India

website.


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Analysis


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ANALYSIS

No of Banks in India

Interpretation:

Up to the financial year 20092010 the public sector increase to 27 nationalized banks and 22

banks adds in private sector banks while 31 banks includes in foreign sector banks.

27

22

31

public Banks Private Banks Foreign Banks


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NET NPA

Interpretation:

From the above it is observed that net NPA of public sector banks has a declining trend up to

year 2005-06 and after that it has a rising trend till 2009-10. The same trend has been observed in

both Private and Foreign Sector Banks. The declining trend from 2003 to 2006 of NPA was due

to the implementation of Securitization Act (2002) but from 2007 it show the upward trends.

But the increase in NPA was increasing in absolute term, as NPA as per percent of advance

shows a declining trend in Public Sector Banks while that of in Private and Foreign Sector Banks

shows an upward trend that is increase in NPA as per percent of advance after 2006.

The increase in NPA as per percent of advance of Private and Foreign Sector Banks is because of

they have a major proportion of lending in non- priority sectors includes Medium and large scale

industries which was highly affected by global financial crisis.

38602 39749

44043

57013

924012977

16887 17382

2451 3114

7155 7125

2007 2008 2009 2010

Net NPAPublic Banks Private Banks Foreign Banks


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Classification of Gross and Net NPA

Interpretation:

The trend of improvement in the asset quality of banks continued during the year. Indian banks

recovered a higher amount of NPAs during 2008-09 than that during the previous year. Though

the total amount of NPA is Rs. in 2008-09 was higher than Rs.70, 327 crore in 2007-08, it was

Nevertheless, it may be noted that this slippage was moderate as compared to the problems faced

by banks all over the world. The hardening of interest rates might have made the repayment of

loans difficult for some borrowers, resulting in some increase in NPAs in this sector. It may be

noted that the increase in gross NPAs was more noticeable in respect of new private sector and

foreign banks, which have been more active in the real estate and housing loans segments.

Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to gross advances of

foreign banks increased significantly during the year, while that of private sector banks increased

marginally. The NPAs ratio of all other bank groups declined. While net NPAs to net advances

ratio of all the banks increased over the previous year except that of nationalized banks.

44957

59926

16926 17639

6444 7180

2008-2009 2009-2010

Gross-Net NPA

Public sector Banks Private sector Banks Foreign banks


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Composition of NPAs of Public Sector Banks

Interpretation:

Priority sector consist of advance given to agriculture, SSI, & other priority sector advances. Non

priority sector consist of large industries, medium industries & other non priority sectors.

In case of priority sector, it shows a fluctuating trend up and down from the year 2007 to 2010.

But in the later years i.e. from 2006 there is rise NPA because of defaults on the loan given to the

farmers. It was highest in 2008. In order to reduce that, waiver package of Rs. 60,000 crore was

announced in union budget of 2008.It may also be noted that the increase in NPAs was more

noticeable in priority sector, which have been more active in the real estate and housing loans

segments.in 2010 priority sector decrease which is lowest from the past four years data.

NPA in non priority sector is reducing constantly from 2002 to 2008.Though the advance given

to non-priority sector was higher than priority sector, NPAs of non-priority sector is

comparatively.

60.58

66.8

60.6556.13

38.26

32.38

38.2243.09

1.16 0.82 1.13 0.79

2007 2008 2009 2010

Composition of NPAs of Public Sector Banks

Priority Sector Non-Priority Sector Public Sector


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Composition of NPAs of Private Sector Banks

Interpretation:

overall NPA of foreign banks. The major reason for this is that on an average only 3.5% of total

advance is made towards public sector category.

Priority sector category on an average constitutes almost 34% of the total advances made by the

private sector banks. While average NPA of priority sector constitutes of 25% of total NPA. In

later years from 2007 to 2010 there is increase in NPA of priority sector. In these years more

advances was given to agriculture & housing sector.

In the year 2008-09, the real estate market was on boom, which encouraged people to take more

loans. But after the subprime crisis there was sudden fall in real estate market & people became

default to pay the loan.

In case of non-priority sector, the average advances made are 60.5% of total advance made by

private sector banks. But the average NPA of non-priority sector is almost 74% which is highest

amongst the entire category. We can see the declining trend in NPA of non-priority sector in

2010. This as a result of securitization Act, 2002.

28843419 3640

4792

6353

9558

1317212592

3 0 75 00

2000

4000

6000

8000

10000

12000

14000

2007 2008 2009 2010

Priority Sector

Non Priority Sector

Public Sector


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Composition of NPAs of foreign Sector Banks

Interpretation:

It is observed from the chart there is no NPA in public sector category in all the three years

because there was no advance made to public sector category.

Non-priority sector contributes highest towards the NPA of foreign banks because non-priority

sector constitute approximately 65% of the total advances made by foreign banks. So NPA will

also be more in non-priority sector.

are made to SSI.

The advances are made to medium & large scale industries in non-priority sector. As foreign

banks are having global presence they are more affected by the global meltdown & financial

crisis of 2008. So its effect is seen by sudden rise in NPA in 2009.

0

1000

2000

3000

4000

5000

6000

7000

2007 2008 2009

331 402649

2120

2712

6506

0 0 0

Priority Sector

Non- Priority Sector

Public Sector


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Comparison of net NPA of old and new Private sector banks

Interpretation:

From the above chart it is clearly observed that net NPA of old private sector banks has a

declining trend over the years on the contrary new private sector banks has an upward trend.Old private sector banks which is passing from instant growth rate in recent past, starts

performing better than their new counterparts. Old private sector banks are more efficient than

that of new private sector banks in managing NPA.

0

1000

2000

3000

4000

5000

6000

7000

2007 2008 2009 2010

Old Private sector banks 891 740 1165 1271

New Private sector banks 3137 4640 6253 5234

891 740

1165 1271

3137

4640

6253

5234


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Net NPA to Net Advance of Public, Private & Foreign Sector Banks

Interpretation:

From the above it is clearly observed that only public sector banks is increasing their net NPAagainst net advances made over the period of time. It was increased from 2008 to 2010; whereas

in case of private sector bank it has reduced in 2005-06 then it got stable at the end of the year

2010.

In case of foreign banks it is fluctuating over the years. The problem of NPA is quite serious in

public sector banks however, whereas the ratios of NPAs to net advances grow up in the public

sector bank in 2010 as compared to the year 2008, the opposite is observed in the domestic

private sector banks. In contrast in the foreign banks the problem of NPAs is of low density.

1.10.8 0.94

1.1

11.2

1.29 1.03

10.9

1.811.82

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

2007 2008 2009 2010

Foreign banks

Private sector banks

Public sector banks


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Classification of Loan Assets

Interpretation:

The above frequency distribution chart states that standard asset is increasing every year & on

the contrary all the other types of asset i.e. Sub-standard, Doubtful & Loss Asset are decreasing

every asset. This proves that public sector banks have succeeded in reducing NPA over the years.

arious measures to reduce NPA also convert Sub-Standard,

Doubtful & loss asset into the above category Standard, Sub-Standard & Doubtful asset. The rise

in sub standard ratio has major proportion indicates that there is a high scope of up gradation or

improvement in NPA recovery in initial stage because it will be very easy to recover the loan as

minimum duration of default.classification of loan assets(private bank)

97.1997.66 97.91 97.73

1.03

0.990.93 1.1

1.451.13 0.98 0.98

2007 2008 2009 2010

Public Sector Banks

Standard assets Sub-standard Assets Doubtful Assets


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Private banks

Interpretation:

The above chart clearly states that the rise in the standard assets over the years compensates the

fall in the other three types of assets. But in the year 2009, the percentage of Sub-Standard asset

is highest among all the year. In 2009 percentage of standard asset has reduced by 0.5% which is

compensated by increase in Sub-Standard & doubtful assets. This increase is due to interest &

principle amount unpaid due to financial crisis in 2009. The percentage of doubtful asset has

reduced to a great extent amongst all. So the private sector banks have managed to reduce the

doubtful asset.

2007 2008 2009 2010

97.64

96.2596.75 97.03

1.11

1.54

2.03 1.48

1

0.94

0.971.12

Private sector Bank

Standard assets Sub-standard assets Doubtful assets


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Foreign Banks

Interpretation:

proportion of other three types of assets is falling over the years, but in 2009 there is greatincrease in the proportion of Sub-Standard asset which is as a result of decrease in proportion of

Standard asset. This increase in Sub-Standard asset is because of interest & principle amount

unpaid, due to poor global conditions, for the loan provided in a 2008. The interest & principle

amount remained unpaid for period of more than 180 days but less than 1 year.

2007 2008 2009 2010

98.08 98.09

95.7 95.74

1.07 1.2

3.46 2.94

0.49 0.47 0.59 0.86

Foreign sector Bankstandard Asstes Sub-Standard Assets Doubtful Asstes


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Capitals

Interpretation:

In these charts how much capitals is made by all the banks. In public bank slight increase in

capitals and in private bank capitals was increased by 3.5% and capital of foreign bank wasincreased much compare to public and private sector banks by 22%. It shows that people take

more interest in foreign bank its capital was increased by borrowing, deposits etc.

0

5000

10000

15000

20000

25000

30000

35000

40000

Public Banks Private Banks Foreign Banks

2009 13536 4241 25513

2010 13544 4549 39555

13536

4241

25513

13544

4549

39555

AxisTitle

Capitals


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Borrowings

Interpretation:

Borrowing of all the banks are to high as compare to previous years public sectors banks covers

64% from the total borrowings while private banks achieved 24% and foreign banks covers 12%

borrowing from the total borrowing in 2010. More borrowing suggest to lend more to the

customers so it will chance that banks will increase their NPA by itself.

368528

134598

67902

private banks public banks foreign banks


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Interpretation:

Borrowings, the major non-deposit liability for banks, constituted 8.7 per cent of their total

liabilities in 2009-10. Similar to deposits, borrowings also recorded a sharp deceleration ingrowth adding to the overall slowdown in banks balance sheets in 2009-10. A decline in the

growth of borrowings could be seen across all bank groups but was most striking in the case of

foreign banks. As per the above chart deposits always on the high percentage compare to CASA

in order to get better return on the deposits as compare to CASA.

28.332

21.7

48.4

71.768

78.3

51.6

2007 2008 2009 2010

Percentage contribution of CASA to incremental deposits

CASA Deposits


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Major Assets of Scheduled Commercial Banks

Bank Credit

4.8 In 2009-10, there was a decline in the growth in bank credit like in the previous year. Bank

credit, which had reached a high of over 30 per cent in 2004-05, exhibited a continued decline in

the subsequent years, reaching a low of 16.6 per cent in 2009-10. As deposits are the most

important source of funds for banks, a slowdown in the growth of deposits was expected to

translate itself into a slowdown in bank credit growth. Thus, notwithstanding the signs of

recovery of the Indian economy and a low interest rate regime, on a year-on-year basis, bank

credit growth registered a slowdown in 2009-10. However, on an intra-year basis, there were

signs of a pick up in bank credit after November 2009, as economic recovery became morebroad-based.

Investments

74.4 72.3

87

72.7

25.6 27.7

13

27.3

2007 2008 2009 22010

Investments

Investments in approved securities Investments in non- approved securities2


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Interpretation:

In 2009-10, investments of SCBs, like bank credit, showed a deceleration in growth. Moreover,

there was a perceptible change in the composition of investments of SCBs, as the percentage

contribution of investments in approved securities to incremental investments showed a decline

in 2009-10 in contrast to a striking increase in 2008-09, when banks had shown preference for

low-risk investments following market uncertainties resulting from the global financial crisis.

DEPOSITS

Interpretation:

The slowdown in the growth of balance sheets in 2009-10 largely emanated from deposits, the

major component of liabilities of SCBs . Bank deposits, which constituted around 78 per cent of

the total liabilities of SCBs, registered a decelerated growth for the third consecutive year since

2007- 08. One of the factors responsible for a decline in the deposits growth in 2009-10 was the

prevalence of low interest rates for a major part of the year.

70.5 69.9 71.9 73.7

4.6 4.5 4.44.5

16.9 17.2 15.2 14.6

7.9 8.4 8.5 7.2

2007 2008 2009 2010

Deposits

Public sector banks Old private sector banks New private sector banks Foreign Banks


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Credit-Deposit and Investment-Deposit Ratios of Scheduled Commercial

Banks

Interpretation:

In 2009-10, the series of incremental credit-deposit and investment-deposit ratios drifted away

from each other since mid-October 2009 reflecting banks growing preference for credit over

investments. The outstanding credit-deposit ratio at end-March 2010 was marginally lower at

73.6 per cent as compared to 73.8 per cent at end-March 2009. Conversely, the investment-

deposit ratio was marginally higher at 36.2 per cent at end-March 2010 as compared to 35.7 per

cent at end March 2009. Foreign banks, which had the highest (outstanding) credit-deposit ratio,

witnessed a steep fall in this ratio between 2008 and 2009, and then further between 2009 and

2010. At end-March 2010, foreign banks along with old private sector banks were in the lowest

brackets with regard to credit-deposit ratio in comparison with public and new private sector

banks.

73.367.4

79.884.3

72.6

64.5

83.277.3

73.2

67.1

80.7

68.6

Public sector banks Old Private sector banks New Private banks Foreign sector banks

Bank Group- wise Credit - Deposit ratio2008 2009 2010


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Location wise deposits (India and Outside Deposits)

Interpretation:

In the above chart it shows how much deposits are made in India or Outsideindia. In public

sector bank 8.4% deposits increase compare to 2009, silimarily growth of 5.6% in private sectors

bank and 5.3% growth will be shown in foreign bank as compare to 2009. Deposits outside India

in public sector bank will be increasing their percentage up to 10% and private bank and also

their outside deposits by 3.9%.

Public Banks Private Bnaks Foreign Banks

In India(2009) 2980576 723398 214076

In India(2010) 3530145 808777 237848

outside India(2009) 132171 12979

outside India(2010) 161657 14024

0

500000

1000000

1500000

2000000

2500000

3000000

3500000

4000000

Chart Title


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FINDINGS


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FINDINGS

NPAs were more noticeable in respect of new private sector and foreign banks, which have beenmore active in the real estate and housing loans segments. It shows a upward trends over the

years as compared to others.

Net NPA against net advances increased more in Foreign and Public sector banks in 2010.

While Private sector banks have succeeded in reducing net NPA against net advances made over

the period of time.

Among all three sectors, public sector banks constantly were increasing their NPAs over the

years. It will increase 40% to 42% from year 2007 to 2010.The problem of NPAs is relatively

very servereIn the domestic private sector banks as compared to the foreign banks. In the former

the e ratio of net NPAs to net advances has been rising, whereas in the latter group it has come

down in the late nineties. Actually, because of their policy of writing down loans, the foreign

banks have been able to keep the NPAs at low level.

Standard assets of the all three banks was changing very slightly The proportion of standard

assets in Private sector banks reduced in 2010 which was compensated by increase in sub-

standard and doubtful assets. In Foreign sectors banks the proportion of sub-standard asset has

decreased 0.52% of loan assets in 2010 which was 3.46% of sub-standard assets in 2010.

Capitals among three banks foreign banks capital was to high as compare to domestic banks and

it was increased by 35 t0 37% in the year 2010. Customer deposits were also increased as

compare to CASA (Current Account Saving Account),but as per the data deposit was decrease

by 26.7% and CASA was increased by the same percentage 26.7%.

The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio

over the years states that public sector banks makes more provisions in gross NPA & gross

advances as compared to private and foreign banks.

In 2009-10, the series of incremental credit-deposit and investment-deposit ratios drifted away

from each other since mid-October 2009 reflecting banks growing preference for credit over


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investments. The outstanding credit-deposit ratio at end-March 2010 was marginally lower at

73.6 per cent as compared to 73.8 per cent at end-March 2009.

Conversely, the investment-deposit ratio was marginally higher at 36.2 per cent at end-March

2010 as compared to 35.7 per cent at end March 2009. Foreign banks, which had the highest(outstanding) credit-deposit ratio, witnessed a steep fall in this ratio between 2008 and 2009, and

then further between 2009 and 2010.5At end-March 2010, foreign banks along with old private

sector banks were in the lowest brackets with regard to credit-deposit ratio in comparison with

public and new private sector banks.
http://rbi.org.in/scripts/PublicationsView.aspx?id=12976#F5http://rbi.org.in/scripts/PublicationsView.aspx?id=12976#F5http://rbi.org.in/scripts/PublicationsView.aspx?id=12976#F5http://rbi.org.in/scripts/PublicationsView.aspx?id=12976#F5


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CONCLUSION


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CONCLUSION

The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper

management of the NPAs is not undertaken it would hamper the business of the banks. If the

concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. The

NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and

would affect the smooth functioning of the recycling of the fund.


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ANNEXURE


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ANNEXURE

Table: 1:- Frequency Distribution of Banks according to level of NPAs

Table: 2:- Net NPAs of Banks: 2000-01 to 2008-09

year Public Sector BANK Private sector Bank Foreign Banks2000-01 27,977 3,700 785

2001-02 27,958 6,676 920

2002-03 24,877 3,963 903

2003-04 19,335 4,128 933

2004-05 16,904 4,212 639

2005-06 14,566 3,171 808

2006-07 15,145 4,028 927

2007-08 17,726 5,380 1247

2008-09 21,033 7,418 2973

2009-10 29644 6506 2975

Year Bnaks 10%

2004-05 PSB 17 9 2 0

Pvt.SB 10 15 5 0

FB 22 2 2 4

2005-06 PSB 22 6 0 0

Pvt.SB 17 9 2 0

FB 26 0 0 3

2006-07 PSB 26 2 0 0

Pvt.SB 21 3 1 0

FB 27 1 0 1

2007-08 PSB 26 2 0 0

Pvt.SB 22 1 0 0FB 25 2 0 1

2008-09 PSB 27 0 0 0

Pvt.SB 18 4 0 0

FB 24 5 1 0


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Table: 3:- Composition of NPAs of Public Sector Banks - 2001 To 2009

year Priority Sector Non Priority sector Public sector2000-01 24156 27307 1711

2001-02 25150 28405 903

2002-03 24939 26781 1087

2003-04 23841 25698 610

2004-05 21926 23249 444

2005-06 22374 18664 341

2006-07 22954 15158 490

2007-08 25287 14163 299

2008-09 24318 19251 474

2009-10 30848 25929 524

Table: 4:- Composition of NPAs of Private Sector Banks - 2001 To 2009

year Priority Sector Non Priority Sector Public Sector

2001 1835 4452 123

2002 2546 9090 31

2003 2445 9327 95

2004 2482 7796 75

2005 2188 6569 42

2006 2284 5541 42007 2884 6353 3

2008 3419 9558 0

2009 3640 13172 75

2010 4792 12592 0

Table: 5:- Composition of NPAs of Foreign Sector Banks2007 To 2009

Year Priority Sector Non- Priority Sector Public Sector

2007 331 2120 0

2008 402 2712 0

2009 649 6506 0


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Table: 6:- Net NPAs of Old and New Private Sector Banks: 2000-01 to 2008-09

Year Old Private Sector Banks New Private sector Banks

2000-01 2771 929

2001-02 3013 3663

2002-03 2598 1365

2003-04 2142 1986

2004-05 1859 2353

2005-06 1375 1796

2006-07 891 3137

2007-08 740 4640

2008-09 1165 6253

2009-10 1271 5234

Table: 7:- Net NPA to Net Advance of Public, Private & Foreign Sector Banks: 2004-05 to

2008-09

Year Public Sector Bank Private Sector Bank Foreign Bank

2004-05 2.1 1.9 0.9

2005-06 1.3 1 0.8

2006-07 1.1 1 1

2007-08 0.8 1.2 0.9

2008-09 0.94 1.29 1.81

2009-10 1.10 1.03 1.82

Table: 8:- Classification of Loan Asset of Public Sector Banks in percentage

Year Standard Asset Sub- StandardAsset

Doubtful Asset Loss Asset

2004 92.2 2.6 4.3 0.9

2005 94.6 1.2 3.4 0.7

2006 96.1 1.1 2.3 0.5

2007 97.2 1.0 1.5 0.3

2008 97.7 1.0 1.1 0.2

2009 97.9 0.9 1.0 0.22010 97.8 1.05 0.92 0.19


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Table: 9:- Classification of Loan Asset of Private Sector Banks in percentage

Year Standard Asset Sub- StandardAsset


2004 94.2 1.8 3.6 0.5

2005 96.1 1.0 2.5 0.42006 97.4 0.8 1.5 0.3

2007 97.6 1.1 1.0 0.2

2008 97.3 1.5 0.9 0.3

2009 96.8 2.0 1.0 0.3

2010 97.27 1.37 1.02 0.34

Table: 10:- Classification of Loan Asset of Foreign Sector Banks in percentage

Year Standard Asset Sub- Standard

Asset


2004 95.2 1.6 1.8 1.5

2005 97.0 0.9 1.3 0.8

2006 97.9 1.0 0.7 0.5

2007 98.1 1.1 0.5 0.4

2008 98.1 1.2 0.5 0.2

2009 95.7 3.5 0.6 0.2

2010 95.7 2.94 0.86 0.45

Table: 11:- Net NPAs & Net Profit of Public Sector Banks: 2000-01 to 2008-09

Year Net NPA Net Profit

2000-01 27977 4317

2001-02 27958 8301

2002-03 24877 12295

2003-04 19335 16546

2004-05 16904 15784

2005-06 14566 16539

2006-07 15145 20152

2007-08 17726 26592

2008-09 21033 34394


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Table: 12:- Net NPAs & Net Profit of Private Sector Banks: 2000-01 to 2008-09

Year Net NPA Net Profit

2000-01 3700 1142

2001-02 6676 1779

2002-03 3963 29582003-04 4128 3481

2004-05 4212 3533

2005-06 3771 4975

2006-07 4028 6465

2007-08 5380 9522

2008-09 7418 10868

Table: 13:- Net NPA & Net Profit of Foreign Banks: 2000-01 to 2008-09

Year Net NPA Net Profit2000-01 785 945

2001-02 920 1492

2002-03 903 1824

2003-04 933 2243

2004-05 693 3098

2005-06 808 4109

2006-07 927 5343

2007-08 1247 7544

2008-09 2973 8459

Table: 14:- NPA ratios of Public Sector Banks: 2004-05 to 2008-09

Year Gross NPAs/Gross Advances Net NPAs/ Net Advances

2004-05 5.5 2.1

2005-06 3.6 1.3

2006-07 2.7 1.1

2007-08 2.2 0.8

2008-09 2 0.94

2009-10 2.19 1.10


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Table: 15:- NPA ratios of Private Sector Banks: 2004-05 to 2008-09


2004-05 3.8 1.9

2005-06 2.5 1

2006-07 2.2 12007-08 2.5 1.2

2008-09 2.9 1.29

2009-10 2.74 1.03

Table: 16:- NPA ratios of Foreign Banks: 2004-05 to 2008-09


2004-05 2.8 0.9

2005-06 2 0.8

2006-07 1.8 12007-08 1.8 0.9

2008-09 4 1.81

2009-10 4.29 1.82

Table: 17:- Net NPA to Net Advance Ratio of Private Sector Banks

Year Old Private Sector Banks New Private sector Banks

2000-01 7.3 3.1

2001-02 7.1 4.9

2002-03 5.2 1.52003-04 3.8 1.7

2004-05 2.7 1.9

2005-06 1.7 0.8

2006-07 1 1

2007-08 0.7 1.1

2008-09 0.9 1.4

2009-10 0.83 1.09


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Table: 18:- Frequency Distribution of Banks Income

Year Bnaks InterestIncome

NonInterestIncome

2004-05 PSB 0.73 0.27Pvt.SB 0.45 0.55

FB 0.39 0.61

2005-06 PSB 0.72 0.28

Pvt.SB 0.51 0.49

FB 0.43 0.57

2006-07 PSB 0.73 0.27

Pvt.SB 0.54 0.46

FB 0.42 0.58

2007-08 PSB 0.76 0.24

Pvt.SB 0.5 0.44

FB 0.44 0.562008-09 PSB 0.77 0.23

Pvt.SB 0.58 0.42

FB 0.45 0.55

2009-10 PSB 0.76 0.24

Pvt.SB 0.61 0.39

FB 0.46 0.54

7/31/2019 Final Repo

Documents

Final Report4