My Print Report

8/8/2019 My Print Report

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A STUDY OF NON PERFORMING ASSETS IN LEADING NATIONALISED

BANKSPage 1

OVERVIEW OF THE BANKING INDUSTRY

Banking in India originated in the last decades of the 18th century.

The oldest bank in existence in India is the State Bank of India, a

government-owned bank that traces its origins back to June 1806

and that is the largest commercial bank in the country. Central

banking is the responsibility of the Reserve Bank of India, which in

1935 formally took over these responsibilities from the then

Imperial Bank of India, relegating it to commercial banking

functions. After India's independence in 1947, the Reserve Bank

was nationalized and given broader powers. In 1969 the

government nationalized the 14 largest commercial banks; the

government nationalized the six next largest in 1980.

Currently, India has 88 scheduled commercial banks (SCBs) - 27

public sector banks (that is with the Government of India holding a

stake), 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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STRUCTURE OF INDIAN BANKING

Reserve Bank of India is the regulating body for the Indian

Banking Industry. It is a mixture of Public sector, Private

sector, Co-operative banks and foreign banks. The private

sector banks are further spilt into old banks and new banks.


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Non Performing Assets & its impact on Operating profit

of Bank.

The world is going faster in terms of services and physicalproducts. However it has been researched that physical products

are available because of the service industries. In the nation

economy also, service industry plays vital role in the boosting up of

the economy. The nations like U.S, U.K, and Japan have service

industries more than 55%. Banking sector reforms in India has

progressed promptly on aspects like interest rate deregulation,

reduction in statutory reserve requirements, prudential norms for

interest rates, asset classification, income recognition and

provisioning. But it could not match the pace with which it was

expected to do. The accomplishment of these norms at the

execution stages without restructuring the banking sector as such is

creating havoc.

The efficiency of a bank is not always reflected only by the size of

its balance sheet but by the level of return on its assets. NPAs do

not generate interest income for the banks, but at the same time

banks are required to make provisions for such NPAs from their

current profits. The main aim of any person is the utilization money

in the best manner since the India is country where more than half

of the population has problem of running the family in the most

efficient manner. However Indian people faced large number of

problem till the development of the full-fledged banking sector. The

Indian banking sector came into the developing nature mostly after

the 1991 government policy. The banking sector has really helped

the Indian people to utilize the single money in the best manner as

they want. People now have started investing their money in the


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banks and banks also provide good returns on the deposited

amount. The people now have at the most understood that banks

provide them good security to their deposits and so excess amounts

are invested in the banks. Thus, banks have helped the people to

achieve their socio economic objectives.

The banks not only accept the deposits of the people but also

provide them credit facility for their development. Indian banking

sector has the nation in developing the business and service sectors.

But recently the banks are facing the problem of credit risk. It is

found that many general people and business people borrow from

the banks but due to some genuine or other reasons are not able to

repay back the amount drawn to the banks. The amount which is

not given back to the banks is known as the non performing assets.

Many banks are facing the problem of non- performing assets

which hampers the business of the banks. Due to NPAs the income

of the banks is reduced. The world is going faster in terms of

services and physical products. However it has been researched

that physical products are available because of the service

industries. In the nation economy also service industry plays vital

role in the boosting up of the economy. The nations like U.S, U.K,

and Japan have service industries more than 55%. The banking

sector is one of appreciated service industries.

The banking sector plays larger role in channelizing money from

one end to other end. It helps almost every person in utilizing the

money at their best. The banking sector accepts the deposits of the

people and provides fruitful return to people on the invested

money. But for providing the better returns plus principal amounts

to the clients; it becomes important for the banks to earn. The main

source of income for banks is the interest that they earn on the loans

that have been disbursed to general person, businessman, or any


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industry for its development. Thus, we may find the input-output

system in the banking sector. Banks first, accepts the deposits from

the people and secondly they lend this money to people who are in

the need of it. By the way of channelizing money from one end to

another end, Banks earn their profits.

However, Indian banking sector has recently faced the serious

problem of Non Performing Assets. This problem has been

emerged largely in Indian banking sector since three decade. Due to

this problem many Public Sector Banks have been adversely

affected to their performance and operations. In simple words Non

Performing Assets problem is one where banks are not able to

recollect their landed money from the clients or clients have been in

such a condition that they are not in the position to provide the

borrowed money to the banks. The problem of NPAs is danger to

the banks because it destroys the healthy financial conditions of

them. The trust of the people would not be any more if the banks

have higher NPAs. So the problem of NPAs must be tackled out in

such a way that would not destroy the operational, financial

conditions and would not affect the image of the banks. Recently,

RBI has taken number steps to reduce NPAs of the Indian banks.

And it is also found that the many banks have shown positive

figures in reducing NPAs as compared to the past years.

Thats why the study of NPAs become necessary due to the

above mentioned reasons :

y They erode current profits through provisioning

requirements.

y They result in reduced interest income.


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y They require higher provisioning requirements affecting

profits and accretion to capital funds and capacity to

increase good quality risk assets in future, and

y They limit recycling of funds, set in asset-liability

mismatches, etc.

NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA

To start with, performance in terms of profitability is a benchmark

for any business enterprise including the banking industry.

However, increasing NPAs have a direct impact on banks

profitability as legally banks are not allowed to book income on

such accounts and at the sometime are forced to make provision on

such assets as per the Reserve Bank of India (RBI) guidelines. Also,

with increasing deposits made by the public in the banking system,

the banking industry cannot afford defaults by borrower s since

NPAs affects the repayment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess

liquidity in the system through various rate cuts and banks failto utilize this benefit to its advantage due to the tear of

burgeoning non-performing assets.

About the NPA

An asset is classified as Non-performing Asset (NPA) if due in

the form of principal and interest are not paid by the borrower for

a period of 90 days. If any advance or credit facilities granted by

banks to a borrower become non-performing, then the bank will

have to treat all the advances/credit facilities granted to that

borrower as non-performing without having any regard to the fact

that there may still exist certain advances/credit facilities having

performing status.


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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 preventsit

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.

NPAs MEANING:

y A NPA is a loan or an advance where Interest and/ or

installment of principal remain overdue for a period of

more than 90 days in respect of a term loan,

y The debt remains outstanding for 90 consecutive days or

more beyond the scheduled payment date or maturity.

y The debt exceeds the borrowers approved limit for 90

consecutive days or more.

y Interest is due and uncollected for 90 days or more or

y For overdrafts, the account has been inactive for 90

consecutive days and / or deposits are insufficient to

cover the interest capitalized during the period.

NPAs reflect the performance of banks. A high level of NPAs

suggests high probability of a large number of credit defaultsthat 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.


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It's a known fact that the banks and financial institutions in

India face the problem of swelling non-performing assets

(NPAs) and the issue is becoming more and more

unmanageable. In order to bring the situation under control,

some steps have been taken recently. The Securitization and

Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 was passed by Parliament, which is an

important step towards elimination or reduction of NPAs.

DEFINITION GIVEN BY THE NARASIMHAN

COMMITTEE:

Committee on financial system (CFS) Narsimhan committee which

reported in 1991, meanwhile major changes have taken place in the

domestic, economic and institutional science, indicating the

movement towards global integration of financial services.

Committee has presented second-generation reforms.

1. To strengthen the foundation of financial system

2. Related to this, streamlining procedures, upgrading

technology and human resource development.

3. Structural changes in the system

The committee has defined non-performing assets as advances

here, as on the date of balance sheet,

1. In respect of term loans, interest remains past due for a

period of more than 90 days.

2. Overdrafts and cash credits accounts remain out of order for

more than 90 days.


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3. Bills purchased and discounted remain over due and unpaid

for a period of more than 90 days.

An amount is considered past due when it remains outstanding for

30 days beyond the due date.

RBI REGULATION REGARDING INCOME

RECOGNITION, ASSETS CLASSIFICATION AND

PROVISIONING:

INCOME RECOGNITION:

RBI has notified regulations concerning the income recognition of

banks while accepting the recommendations of the Narasimham

committee report. The following is the regulations regarding

income recognition of banks:

y Interest income should not be recognized until it is

realized. A non-performing asset is one when it is

overdue for two quarters or more.

y In respect of non-performing assets, interest is not to

be recognized on accrual basis but it is to be treated as

income only when it is actually received. NPAs banks

should not charge or take into account the interest.

y In overdue bill, interest should not be charged or

taken as income unless realized. Interest accrued and

credited to prior accounting period in respect of non-

performing assets should be reversed or provided for

in the current account if such interest still remains

uncollected.


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CLASSIFICATION OF ASSETS FOR MAKING

PROVISION:

For the purpose of making provisions for bad and doubtful loans

and advances, banks need to classify them into the following broad

categories:

Performing assets

Non-performing asset

I) PERFORMING ASSETS:

Performing assets is also known as standard assets/loans, where

the interest or principal are not overdue beyond 180 days at the end

of the financial year. Such loans dont carry more than the normal

business risk.

II) NON-PERFORMING ASSETS:

Any loan the repayment of which is overdue beyond 180 days or

two quarters is considered as NPA. It is further classified into:

a. Sub-standard assets

b. Doubtful assets

c. Loss assets

(a) SUB-STANDARD ASSETS:

Sub-standard asset is one which has been classified as NPA for a

period not exceeding two years. With effect from 31 March 2001, a

sub-standard asset is one, which has remained NPA for a period

less than or equal to 18 months. In such cases, the current net worth

of the borrower/guarantor or the current market value of the

security charged is not enough to ensure weaknesses that

jeopardize the liquidation of the debt and are characterized by the

distinct possibility that the bank will sustain some loss, if

deficiencies are not corrected.


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(b) DOUBTFUL ASSETS:

A doubtful asset is one, which has remained NPA for a period

exceeding two years. With effect from 31st March 2001, an asset is to

be classified as doubtful, if it has remained NPA for a period

exceeding 18 months. A loan classified as doubtful has all the

weaknesses inherent in that classified as sub-standard with the

added characteristic that the weaknesses make collection or

liquidation in full, on the basis of currently known facts, conditions

and values, highly questionable and improbable.

(c) 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 been written off, wholly or partly. 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. The assets, which have

been wholly written off should not be reported in BSR-1. however,

in case of partly written off assets, the amount of technical write off,

if any, should be reduced from the outstanding gross advances.

It should be noted that the above classification is only for the

purpose of computing the amount of provision that should be made

with respect to bank advances and certainly not for the purpose of

presentation of advances in the banks balance sheet.

The Third Schedule to the Banking Regulation Act, 1949, solely

governs presentation of advances in the balance sheet. Banks have

started issuing notices under the Securitization Act, 2002 directing

the defaulter to either pay back the dues to the bank or else give the

possession of the secured assets mentioned in the notice. However,


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there is a potential threat to recovery if there is substantial erosion

in the value of security given by the borrower or if borrower has

committed fraud. Under such a situation it will be prudent to

directly classify the advance as a doubtful or loss asset, as

appropriate.

ADVERSE EFFECTS OF NPAs

An NPA on the balance sheet of an institution deteriorates its health

in several ways:

1. PROBLEM OF MORAL HAZARDInterest

income cannot be booked on the loan declared as an NPA,

and so profits get affected. In addition, provisioning against

assets creates further losses. Thus, financial institutions have

a tendency to rollover non- performing loans. The borrower

is given more loans to pay interest on past loans and repay

whatever amount is possible.

2. ADVERSE INCENTIVE:A bank with

say 25% NPA, will have to earn on 75% of its assets to meet

its expenses and make a profit. It will have a tendency to go

for more risky ventures promising higher rates of return,

since 750/(; of the loan portfolio will have to pay for 100% of

the liabilities and risky venture always have a greater

probability of becoming 'non- performing', thus completing

the self- fulfilling cycle.


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3. HUGE OPPURTUNITY COST:

Assuming Rs. 1, 00,000 crore locked up due to NPAs

started earning interest, say at 10%, it would immediately

boost the interest yield of the nationalized banks by anything

between 1.6 and 1.8%. This increased yield could then

translate into reduced interest rates for the banks' clients.

CREDIT RISK AND NPAs

Quite often credit risk management (CRM) is confused with

managing non-performing assets (NPAs). However there is an

appreciable difference between the two. NPAs are a result of past

action whose effects are realized in the present i.e. they represent

credit risk that has already materialized and default has already

taken place. On the other hand managing credit risk is a much more

forward-looking approach and is mainly concerned with managing

the quality of credit portfolio before default takes place. In other

words, an attempt is made to avoid possible default by properly

managing credit risk.

Considering the current global recession and unreliable

inforn1ation in finaI1cial statements, there is high credit risk in the

banking and lending business. To create a defense against such

uncertainty, bankers are expected to develop an effective internal

credit risk models for the purpose of credit risk management.


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IMPORTANCE OF CREDIT RATING

Fundamentally Credit Rating implies evaluating the

creditworthiness of a borrower by an independent rating agency.

Here objective is to evaluate the probability of default. As such,

credit rating does not predict loss but it predicts the likelihood of

payment problems. Credit rating has been explained by Moody's a

credit rating agency as forming an opinion of the future ability,

legal obligation and willingness of a bond -issuer or obligor to

make full and timely payments on principal and interest due to the

investors. Banks do rely on credit rating agencies to measure credit

risk as a sign of probability of default. A credit rating agencygenerally slot companies into risk buckets that indicate company's

credit risk and is also reviewed periodically. Associated with each

risk bucket is the probability of default that is derived from

historical observations of default behavior in each risk bucket.

However, credit rating is not foolproof. In fact, Enron was rated

investment grade till as late as a month prior to its filing for

Chapter 11 bankruptcy when it was assigned an in default status by

the rating agencies. It depends on the information available to the

credit rating agency. Besides, there may be conflict of interest,

which a credit rating agency may not be able to resolve in the

interest of investors and lenders.

Stock prices are an important (but not the sole) indicator of

the credit risk involved. Stock prices are much more forward

looking in assessing the creditworthiness of a business

enterprise. Historical data proves that stock prices of

companies such as Enron and WorldCom had started

showing a falling trend many months prior to it being

downgraded by credit rating agencies.


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NORMS FOR TREATING VARIOUS ADVANCES AS

NPAs

An asset which ceases to generate income for the bank is called a

non-performing asset (NPA). The basic factor to determine whether

an account is NPA or not is the record of recovery and not the

availability of security. RBI has advised following norms for

identifying the kind of advances as non -performing.

LOANS (loans repayable in installments):

A loan shall be treated as NPA if interest and/or installment of

principal remain overdue/or a period of more than 90 days. Any

amount due to the bank under any credit facility is 'overdue' if it is

not paid on the due date fixed by the bank. Hence a loan account

shall be treated as NPA as on 31.03.2004, if interest and/or

installment of principal remain overdue for a period of more than

90 days.

Illustrations:

y If interest due for the month-ended 31.12.2004 is not

paid, it becomes NPA on 30.03.2005 (i.e. overdue for

more than 90 days). Hence the amount shall be

classified as NP A as on 31.03.2005

y If installment towards principal due on 01.01.2005 is

not paid, it becomes NPA as on 31.03.2005 (i.e.

overdue for more than 90 days).


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SPECIAL CASE:

Equated monthly installments: In case of loans repayable in

equated monthly installments where a part of the interest is

including in the installment, NPA status shall be determined on the

basis of non-payment of equated monthly installments and not with

reference to the date of debit of monthly interest.

Loans with moratorium for payment of interest: In the case of bank

finance given for industrial projects or for agricultural plantations

etc. where moratorium is available for payment of interest,

payment of interest becomes due only after the moratorium or

gestation period is over. Therefore such amounts of interest

becomes overdue and hence NPA, with reference to date of debit of

interest. They become overdue after due date for payment of

interest, if uncollected.

Staff housing loans: In case of housing loan or similar advances

granted to staff members where interest is payable after recovery of

principal, interest need not be considered as overdue from the first

month onwards Such loans/advances should be classified as NP A

only when there is a default in repayment of installment of

principal or payment of interest on the respective due dates.

Advance payments: Where the borrower has made advance

payment of installments fixed towards the loan as on 31.03.2004 the

loan account is regular, such loan account need not be treated as

NPA even if technically interest is due for more than 90 days.


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CASH CREDIT/OVERDRAFT:

A cash credit/overdraft account shall be treated as NPA if it

remains 'out of order' for 90 days. An account shall be treated as out

of order if the outstanding balance remains continuously in excessof the sanctioned limit/drawing power, whichever is less but there

are no credits simultaneously for 90 days as on the date of balance

sheet or credits are not enough to cover the interest debited during

the same period, these accounts should be treated as' out of' order.

Illustration: If a cash credit/overdraft if within limit but there are

no credits continuously during the period from 02.01.2005 to

31.03.2005, the account becomes NPA on 31.03.2005(i.e. no credits

continuously for 90 days).

BILLS PURCHASED/DISCOUNTED:

A Bill purchased/discounted shall be treated as NPA if it remains

overdue for a period of more than 90 days. Hence a

cheque/draft/bill purchased/discounted shall be treated as NPA

as on 31.03.2005 if it remains overdue for more than 90 days as on

31.03.2005.

AGRICULTURAL LOANS:

An agricultural advance shall be treated as NPA if interest and/or

installment of principal remains overdue for two harvest seasons

but for a period not exceeding two half years. Hence in respect of

advances granted for agricultural purpose where interest and/or

installment of principal remains unpaid for two harvest seasons but

for a period not exceeding two half years after it has become due,

such advance should be treated as NPA. In respect of agricultural

advances such as dairy, poultry, sericulture, animal husbandry,


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fishery etc, income recognition, Asset classification and

provisioning should be done on the same basis as non-agricultural

advances as per 90 days noun.

OTHER ACCOUNTS:

Any other credit facility shall be treated as NPA if any amount to be

received remains overdue for a period of more than 90 days. Hence

any other credit facility shall be classified as NPA as on 31.0 3.2005

if interest/principal remains overdue for more than 90 days.

ACCOUNTS, WHICH NEED NOT BE CLASSIFIED ASNPA:

Loans on deposits and loans against Govt. securities: Advances

fully secured against term deposit (inclusive of accrued interest, if

any), NSC, Indira VikasPatra (IVP), KisanVikasPatra (KVP) and LIC

Policies should not be treated as NP A. Such securities are exempt

from provision requirement and hence, they shall be classified as

Perforn1ing assets only.

Advances guaranteed by State/Central Government: Govt.

guaranteed advances mean the advances repayment of which is

guaranteed by State or Central Government, by executing

guarantee bond/guarantee letter by the concerned Government

department. Borrower accounts of Public Sector Undertakings

should not be treated as Government Guaranteed Accounts unless

specific Guarantee bond/guarantee letter is executed by the

concerned Govt. Department.

The credit facilities backed by guarantee of the Central Govt.

though overdue may be treated as NP A only when the

Government repudiates its guarantee when invoked. This


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exemption from classification of Govt. guaranteed advances, as NP

A is not for the purpose of recognition of income.

Advances sanctioned against State Government guarantees should

be classified as NPA in the normal course, if the guarantee isinvoked and remains in default for more than 90 days. If State

/Central Govt. guarantee is not adequate to cover the full liability,

asset classification and provisioning norms shall be applied on

uncovered portion. Further, in case of Government guaranteed

accounts. When suit is filed against the borrower as well as against

the concerned Government, it should be classified as sub-standard,

doubtful or loss asset applying the norms as applicable to other

advances.


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PROCEDURES FOR NPA IDENTIFICATION AND

RESOLUTION IN INDIA

1. Internal Checks and Control

Since high level of NPAs dampens the performance of the banks

identification of potential problem accounts and their close monitoring

assumes importance. Though most banks have Early Warning Systems

(EWS) for identification of potential NPAs, the actual processes

followed, however, differ from bank to bank. The EWS enable a bank

to identify the borrower accounts which show signs of credit

deterioration and initiate remedial action. Many banks have evolved

and adopted an elaborate EWS, which allows them to identify potential

distress signals and plan their options beforehand, accordingly. The

early warning signals, indicative of potential problems in the accounts,

viz. persistent irregularity in accounts, delays in servicing of interest,

frequent devolvement of L/Cs, units' financial problems, market

related problems, etc. are captured by the system. In addition, some of

these banks are reviewing their exposure to borrower accounts every

quarter based on published data which also serves as an important

additional warning system. These early warning signals used by banks

are generally independent of risk rating systems and asset classification

norms prescribed by RBI.

The major components/processes of a EWS followed by banks in India

as brought out by a study conducted by Reserve Bank of India at the

instance of the Board of Financial Supervision are as follows:

Designating Relationship Manager/ Credit Officer for

monitoring account/s

Preparation of `know your client' profile

Credit rating system

Identification of watch-list/special mention category accounts

Monitoring of early warning signals


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Relationship Manager/Credit Officer

The Relationship Manager/Credit Officer is an official who is

expected to have complete knowledge of borrower, his business, his

future plans, etc. The Relationship Manager has to keep in constant

touch with the borrower and report all developments impacting the

borrowable account. As a part of this contact he is also expected to

conduct scrutiny and activity inspections. In the credit monitoring

process, the responsibility of monitoring a corporate account is

vested with Relationship Manager/Credit Officer.

Know your client' profile (KYC)

Most banks in India have a system of preparing `know your client'

(KYC) profile/credit report. As a part of `KYC' system, visits are

made on clients and their places of business/units. The frequency

of such visits depends on the nature and needs of relationship.

Credit Rating System

The credit rating system is essentially one point indicator of an

individual credit exposure and is used to identify measure and monitor

the credit risk of individual proposal. At the whole bank level, credit

rating system enables tracking the health of banks entire credit

portfolio. Most banks in India have put in place the system of internal

credit rating. While most of the banks have developed their own

models, a few banks have adopted credit rating models designed by

rating agencies. Credit rating models take into account various types of

risks viz. financial, industry and management, etc. associated with a

borrow-able unit. The exercise is generally done at the time of sanction


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of new borrow-able account and at the time of review / renewal of

existing credit facilities.

Watch-list/Special Mention Category

The grading of the bank's risk assets is an important internal control

tool. It serves the need of the Management to identify and monitor

potential risks of a loan asset. The purpose of identification of potential

NPAs is to ensure that appropriate preventive / corrective steps could

be initiated by the bank to protect against the loan asset becoming non-

performing. Most of the banks have a system to put certain borrowable

accounts under watch list or special mention category if performing

advances operating under adverse business or economic conditions are

exhibiting certain distress signals. These accounts generally exhibit

weaknesses which are correctable but warrant banks' closer attention.

The categorization of such accounts in watch list or special mention

category provides early warning signals enabling Relationship

Manager or Credit Officer to anticipate credit deterioration and take

necessary preventive steps to avoid their slippage into non performing

advances.

Early Warning Signals

It is important in any early warning system, to be sensitive to signals of

credit deterioration. A host of early warning signals are used by

different banks for identification of potential NPAs. Most banks in

India have laid down a series of operational, financial, transactional

indicators that could serve to identify emerging problems in credit

exposures at an early stage. Further, it is revealed that the indicators

which may trigger early warning system depend not only on default in

payment of instalment and interest but also other factors such as

deterioration in operating and financial performance of the borrower,

weakening industry characteristics, regulatory changes, general

economic conditions, etc. Early warning signals can be classified into

five broad categories viz.


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(a) Financial

(b) Operational

(c) Banking

(d) Management and

(e) External factors.

Financial related warning signals generally emanate from the

borrowers' balance sheet, income expenditure statement, statement of

cash flows, statement of receivables etc. Following common warning

signals are captured by some of the banks having relatively developed

EWS.

Financial warning signals

Persistent irregularity in the account

Default in repayment obligation

Devolvement of LC/invocation of guarantees

Deterioration in liquidity/working capital position

Substantial increase in long term debts in relation to

equity

Declining sales

Operating losses/net losses

Rising sales and falling profits

Disproportionate increase in overheads relative to sales

Rising level of bad debt losses Operational warning

signals

Low activity level in plant

Disorderly diversification/frequent changes in plan

Non-payment of wages/power bills

Loss of critical customer/s

Frequent labour problems

Evidence of aged inventory/large level of inventory

Management related warning signals


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Lack of co-operation from key personnel

Change in management, ownership, or key personnel

Desire to take undue risks

Family disputes

Poor financial controls

Fudging of financial statements

Diversion of funds

Banking related signals

Declining bank balances/declining operations in the

account

Opening of account with other bank

Return of outward bills/dishonored cheques

Sales transactions not routed through the account

Frequent requests for loan

Frequent delays in submitting stock statements,

financial data, etc. Signals relating to external factors

Economic recession

Emergence of new competition

Emergence of new technology

Changes in government / regulatory policies

Natural calamities


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COMPANY PROFILE

Introduction of SBI:

State Bank of India (SBI) is India's largest commercial bank. SBI

has a vast domestic network of over 16000 branches

(approximately 14% of all bank branches) and commands one-fifth

of deposits and loans of all scheduled commercial banks in India.

The State Bank Group includes a network of eight banking

subsidiaries and several non-banking subsidiaries offering

merchant banking services, fund management, factoring services,

primary dealership in government securities, credit cards and

insurance.

The eight banking subsidiaries are:

1-State Bank of Bikaner and Jaipur (SBBJ)

2-State Bank of Hyderabad (SBH)

3-State Bank of India (SBI)

4-State Bank of Indore (SBIR)

5-State Bank of Mysore (SBM)

6-State Bank of Patiala (SBP)

7-State Bank of Saurashtra (SBS)

8-State Bank of Travancore (SBT)

The origins of State Bank of India date back to 1806 when the Bank

of Calcutta (later called the Bank of Bengal) was established. In

1921, the Bank of Bengal and two other Presidency banks (Bank of

Madras and Bank of Bombay) were amalgamated to form the

Imperial Bank of India. In 1955, the controlling interest in the

Imperial Bank of India was acquired by the Reserve Bank of India

and the State Bank of India (SBI) came into existence by an act of

Parliament as successor to the Imperial Bank of India. Today, State


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Bank of India (SBI) has spread its arms around the world and has a

network of branches spanning all time zones. SBI's International

Banking Group delivers the full range of cross-border finance

solutions through its four wings - the Domestic division, the

Foreign Offices division, the Foreign Department and the

International Services division.

SBI provides a range of banking products through its vast network

in India and overseas, including products aimed at NRIs. The State

Bank Group, with over 16000 branches, has the largest branch

network in India. With an asset base of $250 billion and $195 billion

in deposits, it is a regional banking behemoth. It has a market share

among Indian commercial banks of about 20% in deposits and

advances, and SBI accounts for almost one-fifth of the nations

loans.

State Bank of India (SBI) (LSE: SBID) is the largest bank in India. If

one measures by the number of branch offices and employees, SBI

is the largest bank in the world. Established in 1806 as Bank of

Calcutta, it is the oldest commercial bank in the Indian

subcontinent. SBI provides various domestic, international and NRI

products and services, through its vast network in India and

overseas.

The government nationalized the bank in 1955, with the Reserve

Bank of India taking a 60% ownership stake. In recent years the

bank has focused on three priorities,

y 1), reducing its huge staff through Golden handshake

schemes known as the Voluntary Retirement Scheme, which

saw many of its best and brightest defect to the private

sector,

y 2), computerizing its operations and


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y 3), changing the attitude of its employees (through an

ambitious programme aptly named 'Parivartan' which

means change) as a large number of employees are very rude

to customers.

Timeline:

o June 2 , 1806: The Bank of Calcutta established

o January 2, 1809: This became the Bank of Bengal.

o April 15, 1840: Bank of Bombay established.

o July 1, 1843: Bank of Madras established.

o 1861: Paper Currency Act passed.

o January 27, 1921: all three banks amalgamated to form

Imperial Bank of India.

o July 1, 1955: State Bank of India formed; becomes the

first Indian bank to be nationalized.

o 1959: State Bank of India (Subsidiary Banks) Act

passed, enabling the State Bank of India to take over

eight former State-associated banks as its subsidiaries.

o 1980s When Bank of Cochin in Kerala faced a

financial crisis, the government merged it with State

Bank of India.

o June 29, 2007: The Government of India today

acquired the entire Reserve Bank of India (RBI)

shareholding in State Bank of India (SBI), consisting of

over 314 million equity shares at a total amount of

over 355 billion rupees.

Associate banks:

There are seven other associate banks that fall under SBI. They all

use the "State Bank of" name followed by the regional headquarters'

name. These were originally banks belonging to princely states

before the government nationalized them in 1959. In tune with the


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first Five Year Plan, emphasizing the development of rural India,

the government integrated these banks with the State Bank of India

to expand its rural outreach. The State Bank group refers to the

seven associates and the parent bank. All the banks use the same

logo of a blue keyhole. Currently, the group is merging all the

associate banks into SBI, which will create a "mega bank", and one

hopes, streamline operations and unlock value.

MANAGEMENT:

The bank has 14 directors on the Board and is responsible for the

management of the Banks business. The board in addition to

monitoring corporate performance also carries out functions such

as approving the business plan, reviewing and approving the

annual budgets and borrowing limits and fixing exposure limits.

Mr. O. P. Bhatt is the Chairman of the bank. The five-year term of

Mr. Bhatt will expire in March 2011.Mr. Bhatt has more than 30

years of experience in the Indian banking industry and is seen as

futuristic leader in his approach towards technology and customer

service. Mr. T S Bhattacharya is the Managing Director of the bank

and known for his vast experience in the banking industry.

Recently, the senior management of the bank has been broadened

considerably. The positions of CFO and the head of treasury have

been segregated and new heads for rural banking and for corporate

development and new business banking have been appointed.

Shareholding & Liquidity (Till 30th Sept. 2008)

Reserve Bank of India is the largest shareholder in the bank with

59.7% stake followed by overseas investors including GDRs with

19.78% stake as on September 06. Indian financial institutions held

12.3% while Indian public held just 8.2% of the stock. RBI is the


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monetary authority and having majority shareholding reflects

conflict of interest. Now the government is rectifying the above

error by transferring RBIs holding to itself. Post this, SBI will have

a further headroom to dilute the GOIs stake from 59.7% to 51.0%,

which will further improve its CAR and Tier I ratio.

Growth

With 11,448 branches and a further 6500+ associate bank branches,

the SBI has extensive coverage. Following its arch-rival ICICI Bank,State Bank of India has electronically networked most of itsmetropolitan, urban and semi-urban branches under its CoreBanking System (CBS), with over 4500 branches being incorporatedso far. The bank has one of the largest ATM networks in the region,with more than 9000 ATMs across India.

The State Bank of India has had steady growth over its history,though the Harshad Mehta scam in 1992 marred its image. In recentyears, the bank has sought to expand its overseas operations bybuying foreign banks. According to the Forbes 2000 listing it tops

all Indian companies.

In recent past, SBI has acquired banks in Mauritius, Kenya andIndonesia. The bank had total staff strength of 198,774 as on 31stMarch, 2006. Of this, 29.51% are officers, 45.19% clerical staff andthe remaining 25.30% were sub-staff. The bank is listed on theBombay Stock Exchange, National Stock Exchange, Kolkata Stock

Reserve Bank of India

Mutual Funds/UTI

Financial

Institutions/Banks

Overseas investors

including FIIs/OCBs/NRIsGDR Issues

Others

59.7%

6%

6.3%

11.9%

7.9%

8.2%


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Exchange, Chennai Stock Exchange and Ahmadabad StockExchange while its GDRs are listed on the London Stock Exchange.

SBI group accounts for around 25% of the total business of thebanking industry while it accounts for 35% of the total foreign

exchange in India. With this type of strong base, SBI has displayeda continued performance in the last few years in scaling up itsefficiency levels. Net Interest Income of the bank has witnessed aCAGR of 13.3% during the last five years. During the same period,net interest margin (NIM) of the bank has gone up from as low as2.9% in FY02 to 3.40% in FY06 and currently is at 3.32%.

It is the only Indian bank to feature in the top 100 world banks inthe Fortune Global 500 rating and various other rankings.

Activities:State Bank of India administrative structure is wellequipped to oversee the large network of branches in India andabroad. The State Bank of India 14 Local Head Offices and 57 ZonalOffices are located at important cities spread throughout thecountry. State Bank of India has 52 foreign offices in 34 countriesacross the globe. The Corporate Accounts Group is a StrategicBusiness Unit of the Bank set up exclusively to fulfill the specializedbanking needs of top corporate in the country. The main activitiesof are into

Personal Banking.

NRI Services

Agriculture

SME

Corporate

Domestic Treasury

International


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Foreign Offices:

State Bank of India is present in 32 countries, where it has 84 officesserving the international needs of the bank's foreign customers, andin some cases conducts retail operations. The focus of these officesis India-related business.

SBI & NPABeing the largest bank SBI is the largest lender to the various sectorof the society and hence faces the huge problem of the nonperforming assets. The Reserve Bank of India has asked thecountrys largest lender State Bank of India to increase its provisioncoverage ratio for bad loans, considering the low provisions madeby it when compared to the industry average.


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Presently, the bank has made provisions at 38.72 percent for thecurrent fiscal which is very low when compared with the industryaverage of 52 percent. The regulator feelsthat the bank mustmaintain an average PCR (Provision Coverage Ratio) of 50

percent, considering the increase in number of home loansdefaults in recent past.

The regulator (RBI) feels that the SBI must maintain an averagePCR of 50 percent, considering the increase in number of homeloans defaults in recent past. The PCR of its peer banks, PunjabNational Bank and Bank of Baroda stood at 90 percent and 75percent respectively. The regulator has also indicated a drop inSBI PCR on y-o-y basis. In 2005-06, the PCR of the bank was 49percent. The PCR was lowered to 38 percent in 2008-09.

However, the bank reasoned that the loan loss provisions made byit are in accordance with the regulator guidelines.

REASONS BEHIND HUGE LEVEL OF NPAs IN THE INDIANBANKING SYSTEM

The origin of the problem of burgeoning NPAs lies in the quality of

managing credit risk by the banks concerned. Any lending activity

involves the following three stages where discretion needs to be

exercised: evaluation and assessment of the proposal; continuing

support during the loan period by additional loan or by non -fund

based activities; and exit decision and modality. Studies have

shown that Indian financial institutions have shown extremes of

behavior at each of the above stages. In many instances, loans have

been sanctioned because of vested interests. Promoter banker nexus

or promoter-politician linkage have been exploited to siphon off-

funds from the banking system, Post loan disbursal, bankers are

supposed to keep track of the key signals that indicate the health of

the loan recipient and monitor project progress. Banks concerned

should continuously monitor loans to identify accounts that have

potential to become non-performing.


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1. Willful Default:

If the borrower doesn't pay though he has the capacity to

pay. He is termed as willful defaulter. The features of willful

default are wrong use of funds and siphoning of funds.

2. Improper functioning of Debt Recovery Tribunals

Although the setting up of Debt Recovery Tribunals had

raised much hope about speeding up of the recovery

proceedings initiated by banks these hopes have largely

remained unfulfilled. At quite a few places, the DRTs are

still to be set up and, even where these have been set up,

they are not yet fully equipped to handle very large number

of cases already before them or those that can be placed

before them. In some of the DRTs, the number of pending

cases is quite large. While the government has been

reviewing the operations of DRTs, as yet a Stage has not

come when it can be said that these are helping recoveries

of banks' dues substantially. In fact it has failed to achievethe declared objective of disposal of' cases within six

months in speedy recovery of advances.

3. Project appraisal Deficiencies: -

It includes deficiencies regarding technical feasibility"

economic viability and project management deficiencies in regard

to implementation, production, and labor marketing" financial andadministrative.


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4. Ineffective Credit Monitoring: -

Ineffective credit monitoring and follow-up mechanism of'

the banks have also contributed to slippage of' standard loans into

bad loans.

5. Diversion of Funds: -

Diversion of' funds mostly for

expansion/diversification/modernization and taking up new

projects and for promoting associated concerns is a prominent

reason for high level of NPAs.

6. External factors: -

The RBI study noted that non-availability of raw materials,

power shortage, transport bottlenecks, financial bottlenecks, change

in Govt. policy, natural calamities, industrial sickness, increase in

import cost, increase in overhead cost, market saturation, product

obsolescence, fill in demand and others were responsible for weak

performance in 48% of units assisted by the banks resulting intoadvances given to them turning bad.

7. Ineffective legal system: -

It is one of the most important factors contributing to

enormously high levelof NPAs in Banks. Antiquated legal system,

extremely slow judicial system and dismal record of enforcement

machineries have contributed significantly to high level of NPAs.


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8. International development: -

Sudden international development adversely affects viability

of production units e.g. OIL Crisis, fertilizer plants based on petro

chemical feedstock became suddenly enviable.

9. Promoter-banker nexus: -

In many instances, loans have been sanctioned because of

vested interests. Promoter-banker nexus have been exploited to

siphon off funds from the banking system.

10.Operational factors: -

It is regarding the current and prospective risk to earnings

arising from fraud, error and the inability to deliver products or

services and maintain a competitive position.

11. Strategic Factors: -

It includes adverse business decisions, improper implementation

of decisions or lack of responsiveness to industry changes.


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RESEARCH METHODOLOGY

The project titled A STUDY OF NON PERFORMING ASSETS

IN LEADING NATIONALISED BANKS shall be the result of

Descriptive research.

The conception of the research design plan is a critical step in the

research process. The design of the study constitutes the blue print

for the collection, measurement and analysis of the data. In other

words, the research design is a conceptual structure with in which

research is conducted.Research methodology is designed in order

to solve a research problem. I have conducted a descriptive research

to understand and develop knowledge on the existing problem of

Non-performing Assets.

Objectives of the Study

The broad objectives of the present study are:

y To understand the meaning & nature of NPAs.

y To examine the causes for NPAs in public

sector banks.

y To analyze the NPA and its relation with

operating profit of the bank

y To study the general reasons for assets become

NPAs.

y What is the criterion to recover the advances

from the bank.y What are the methods adopted by the bank to

look after NPA management


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Statement of problem:

The bank will always face the problem of NPA because of poor

recovery of advances granted by the bank and several other reasons

like adopting a poor recovery strategies so when the loan is not

recovered from the bank effectively and efficiently that balance

amount will become the NPA to the bank it may create some huge

problem to the banks net profit.

Scope of this study:

y To present a picture of movement of NPA in

Nationalized bank.

y To know how NPA level will affect the profit of the

bank.

SIGNIFICANCE OF STUDY:

The main aim behind making this report is to know how

Nationalized Banks are operating their business and how NPAs

play its role to the operations of the Public Sector Banks. The

present study also focuses on the existing system in India to solve

the problem of NPAs and comparative analysis to understandwhich bank is playing what role with concerned to NPAs. Thus, the

study would help the decision makers to understand the financial

performance and growth of Public Sector Banks as compared to the

NPAs.

Thats why the study of NPAs become necessary due to the

above mentioned reasons :

y They erode current profits through provisioning

requirements.

y They result in reduced interest income.


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y They require higher provisioning requirements affecting

profits and accretion to capital funds and capacity to increase

good quality risk assets in future, and

y They limit recycling of funds, set in asset-liability mismatches,

etc.

3.4HYPOTHESIS

H0: There is no significant relationship between gross

NPA of a bank to it operating profit.

H1: There is a significant relationship between gross

NPA of a bank to its operating profit.

Sources of data:The study is based on the

secondary data.

Secondary Data:Secondary data are those which

have already been passed through the statistical

process. The data which was pre-essential for this

study relating to management of NPA was based on

secondary source of data. This data was collected

from materials provided by bank, annual reports,

management reports, magazines, journals, RBI

circulars and some essential books on banking was

referred.

Annual reports of nationalized banks.

y Magazines

y Journals

y Newspapers

y RBIs Annual reports.


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y Quarterly bulletins of nationalized banks.

y Nationalized banks websites.

Websites of the sample banks:

www.statebankofindia .com

www.iba.org.in

www.rbi.org

Brochures from the bank branch in Nagpur

Magazines & JournalsNews Papers: 1) Business Standard 2) Economic

Times


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DATA ANALY

& INT TATION

1) Presen

i n of data through various charts. 2)Interpretation of

data.

Comparative study of NPA among

1. Nationali ed ban

s 2.Private Ban

s3.Foreign Ban

Table: 1FLUCTUATION IN LAST

yrs NPA IN SBI:

Items

006-07

007-08

008-09

No. of offices 96

10

5

11

7

No. of employees 185388 179205 205896Business per employee (in Rs.

lakh) 357.00 456.00 556.00Profit per employee (in Rs. lakh) 2.37 3.73 4.74Capital and Reserves & surplus 31299 49033 57948Deposits 435521 537404 742073Investments 149149 189501 275954

Advances 337336 416768 542503

Interest income 37242 48950 63788Other income 6765 8695 12691Interest expended 22184 31929 42915Operating expenses 11824 12609 15649

Cost of Funds (CoF) 4.55 5.64 5.85

Ret on advances adjusted to CoF 3.74 3.70 3.83Wages as % to total expenses 23.33 17.48 16.64

Return on Assets 0.84 1.01 1.04

CRAR 12.34 13.54 14.25

Net NPA ratio 1.56 1.78 1.76

Fig 1.1

0

0.2

0.4

0.6

0.8

1

1.2

Return on Assets

Figure 1.1 shows the

increase in return on

assets in the last three

years


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Non-Performing Assets as percentage of Total Assets Scheduled Commercial Banks

Table

:- Gross NPA of different sector of bank

BANK 2006-07 2007-08 2008-09ScheduledCommercialBanks

1.5 1.3 1.3

Foreign BanksinIndia

1.8 1.8 4.0

Private SectorBanks

2.2 2.5 2.9

Public SectorBanks 1.6 1.3 1.2

Nationali edBanks 1.6 1.3 1.1

State BankAssociates 1.6 1.5 1.4

State Bank ofIndia 1.8 1.8 1.6

13

15

18

13 13

13 15

0

05

1

15

2

2 5Gross NPA 2 6- 7


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11

16!

" "

11

11!

13

16!

#

# $5

11

$

5

%

" & 5

3

Gross NPA 2 7- 8

1'

3'

%1

!

9 8! 1 ' 1% !

#

# $5

1

1 & 5

%

% $

5

3

3&5

4

4$ 5

Gross NPA 2 8- 9


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Table(

:-Net NPA of different sectors of bank

BANK 2006-07 2007-08 2008-09

ScheduledCommercialBanks

0.6 0.6 0.6

Foreign BanksinIndia

1.0 0.9 1.7

Private SectorBanks

1.0 1.2 1.5

Public SectorBanks 0.6 0.6 0.6

Nationali ) ed

Banks 0.5 0.4 0.4

State BankAssociates 0.8 0.8 0.8

State Bank ofIndia 0.9 1.0 1.0

110

180

190

110

90

150

170

0

01 2

01 2

036

0 3 8

1

112

NETNP 00 -0


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114

165

22 5

115

74

155

16 4

0

072

0 8 4

0 8 6

0 8 9

1

17 2

17 4

NET NPA 2 7- 8

9@

26A

23A

9@

6 @12 @

15@

00 B 20 B 40 B 60

B81

1C2

1 C 41

C6

1B8

NET NPA 2 8-

The table shows that the percentage of gross NPA/ gross advance and net NPA/ netadvance are in a static trend. This shows the sign of efficiency in public and privatesector banks. But still if compared to foreign banks Indian private sector and publicsector banks have a lesser NPA.


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TableD

:-GROSS NPA V/S OPERATING PROFIT

ITE F

S 2006-07 2007-08 2008-09 PROJECTED2009-10

GROSS NPALEVEL 490 472 413 392

OPERATINGPROFIT

517 589 627 693

y Inference: From the chart, it is understood that as the grossNPA level started decreasing in recent year, operating profitstarted increasing drastically.


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Table 5:-Recent year NPA Performance Chart

STATEBANK

OFINDIA

2006-07 2007-08 2008-09 Groupaverage

2008-09

All Banksaverage

NETNPARATIO

1.56 1.78 1.76 1.45 1.0

y Inference: In recent years Net NPA ratio has come increased,whichis very much above the standard level of 1, which isnot favorable for the bank.


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Table 6:-COMPARASION WITG

OTG

ER GROUPBANKS

Banks SBI SBI &ASSOCIATES

NATIONALISED BANKS

FOREIGNBANKS

ALLBANKS

NETNPARATIO

1.56

0.633 0.7 0.7155 1

y Inference: Compared to all other group banks SBM is in

good position with 1.56 NPA ratio.


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Table 7:-Non-Performing Assets of Public Sector Banks Sector-wise (As at

end- march 20009.

(Amount in Rs. crore)

Bank AGRI SSI Others PrioritySector

PublicSector

Non-PrioritySector

Tot.

amt % amt % amt % amt % amt

% amt % amt

PSB 5708 13.0 6984 15.9 11626 26.4 24318 55.2 474 1.1 19251 43.7 44042

NB 3707 14.2 4958 18.9 7206 27.5 15871 60.6 297 1.1 10001 38.2 26169

SBG 2001 11.2 2026 11.3 4420 24.7 8447 47.3 177 1.0 9250 51.8 17874

SBI 1789 11.8 1712 11.3 3509 23.2 7010 46.4 163 1.1 7932 52.5 15105

From the table, we can conclude that the non priority sector & priority

sector are the major contributors to the NPA in public sector banks &

nationalized banks. While public sector has the minimum NPA rate in all

the banks.


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FINDINGS

y The bank has achieved its target because the net profit is also

increased and there is a decrease in NPAs. So it is in better

position compared to last year.

y The total NPA is 413 crore, last year it was 472. Crore.

y The loans and advances have been increased from 2007-08 to

2008-09

y There is decrease in doubtful assets compared to last year.

y Priority sector & Non priority sector is the major contributor

to the NPA in nationalized banks while public sector is the

least contributor to the NPA.

y There is a slight decrease in ROA but there is a slight increase

in ROE.


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CONCLUSION

The Indian banking sector is facing a serious problem of NPA. The

extent of NPA is comparatively higher in public sectors banks. To

improve the efficiency and profitability, the NPA has to be

scheduled. Various steps have been taken by government to reduce

the NPA. It is highly impossible to have zero percentage NPA. But

at least Indian banks can try competing with foreign banks to

maintain international standard. The NPA is one of the biggest

problems that the Public Sector Banks are facing today .If the

proper management of the NPAs is not undertaken it would

hamper the business of the banks. In absolute terms, the last three

years have seen an increase in the net NPAs of 25 public sector

banks by 24 per cent. According to the numbers, the last year it saw

a 17 percent rise in the sticky assets.

The largest public sector lender, SBI, has seen an increase in the net

NPAs by a whopping 41 percent in 2007-08.As the global slowdown

has crept into the economy, bankers feel that in more loans are

going to turn bad in the coming quarters and therefore they want

RBI to relax the deadline for loan reconstruction. Due to Recession

& slowdown in the Indian economy would result in emerging

NPAs for the public sector banks from textiles, real estate, retail,

exports and auto sectors. The RBI has also been trying to take

number of measures but the ratio of NPAs is not decreasing of the

banks. The banks must find out the measures to reduce the

evolving problem of the NPAs. The reduction of the NPAs would

help the banks to boost up their profits, smooth recycling of funds

in the nation. This would help the nation to develop more banking

branches and developing the economy by providing the better

financial services to the nation.


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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 funds.

As a result of the NPAs owners do not receive a market return on

their capital. In the worst case, if the bank fails, owners lose their

assets & this may affect a broad pool of shareholders & act as a rain

on Profitability.

Banks also redistribute losses to other borrowers by charging higher

interest rates. Lower deposit rates and higher lending rates repress

savings and financial markets, which hampers economic growth

.When many borrowers fail to pay interest, banks may experience

liquidity shortages .These shortages can jam payments across the

country and as a result Non performing loans may spill over the

banking system and contract the money stock, which may lead to

economic contraction.

Banks need to create capital reserve to write-off the mounting

NPAs burden. A Man without money is like a bird without

wings, the Rumanian proverb insists the importance of the money.A bank is an establishment, which deals with money. The basic

functions of Commercial banks are the accepting of all kinds of

deposits and lending of money. In general there are several

challenges confronting the commercial banks in its day - today

operations. The main challenge facing the commercial banks is the

disbursement of funds in quality assets (Loans and Advances) or

otherwise it leads to Non-performing assets.


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RECOMMENDATIONS:

It is recommended that the proper documentation and verification

to be made before sanctioning the loan. Empowering staff to make

decisions related to sanctioning of loans. Constant interactions have

to be maintained with the customers to keep track of their loan

payment. Strict measures have to be taken while issuing or

sanctioning the loan. The measures can include verification of job

and salary slips, verification of securities and the like.

1) Effective and regular follow-up of the end use of the funds

sanctioned is required to ascertain any embezzlement or diversion

of funds. This process can be undertaken every quarter so that any

account converting to NPA can be properly accounted for.

2) A healthy Banker-Borrower relationship should be developed.

Many instances have been reported about forceful recovery by the

banks, which is against corporate ethics. Debt recovery will be

much easier in a congenial environment.

3) Assisting the borrowers in developing his entrepreneurial skills

will not only establish a good relation between the borrowers but

also help the bankers to keep a track of their funds.

4) Countries such as Korea, China, Japan, Taiwan have a well

functioning Asset Reconstruction/ Recovery mechanism wherein

the bad assets are sold to an Asset Reconstruction Company (ARC)

at an agreed upon price. In India, there is an absence of such

mechanism and whatever exists, it is still in nascent stage. One

problem that can be accorded is the pricing of such loans.

Therefore, there is a need to develop a common prescription forpricing of distressed assets so that they can be easily and quickly

disposed. The ARCs should have clear financial acquisition policy

and guidelines relating to proper diligence and valuation of NPA

portfolio.


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BANKSPage 53

5) Some tax incentives like capital gain tax exemption, carry

forward the losses to set off the same with other income of the

Qualified Institutional Borrowers (QIBs) should be granted so as to

ensure their active participation by way of investing sizeable

amount in distressed assets of banks and financial institutions.

6) So far the Public Sector Banks have done well as far as lending to

the priority sector is concerned. However, it is not enough to make

lending to this sector mandatory; it must be made profitable by

sharply reducing the transaction costs. This entails faster embracing

of technology and minimizing documentation.

7) Commercial Banks should be allowed to come up with their own

measures to address the problem of NPAs. This may include

waiving and reducing the principal and interest on such loans, or

extending the loans, or settling the loan accounts. They should be

fully authorized and they should be able to apply all the

preferential policies granted to the asset management companies.

8) Another way to manage the NPAs by the banks is Compromise

Settlement Schemes or One Time Settlement Schemes. However,

under such schemes the banks keep the actual amount recoveredsecret. Under these circumstances, it is necessary to bring more

transparency in such deals so that any flaw could be removed.


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Bibliography

y Books1) Non Performing Assets in Indian banks

( B. Satish Kumar)

2) Non Performing assets in Commercial Banks

( Vibha Jain)

3) Management of Non Performing Assets in

Banks And Financial Institutions

(B Ramachandra Reddy)

y Magazines1) The Indian Banker

2) The Banker

3) Business world

y Newspaper1) Economic times

2) Business Standard

yWebsites 1) www.statebankofindia .com

2) www.iba.org.in

3) www.rbi.org

y Bank manuals

Documents

My Print Report