Indian Banking System Has Undergone Significant

Published Date: 02 Nov 2017

ABSTRACT

The Indian banking system has undergone significant transformation following financial

sector reforms. It is adopting international best practices with a vision to strengthen the

banking sector. The public sector banks dominate the Indian banking system with almost 72 percent market share in the total deposits and advances of the industry followed by private sector banks. Several prudential and provisioning norms have been introduced, and these are pressurizing banks to improve efficiency and trim down NPAs to improve the financial health in the banking system. In the background of these developments, this study strives to examine the state of affair of the NPAs of the public sector banks and private sector banks in India. The study is analytical in nature, and it is based on the secondary retrieved from Report on Trend and Progress of Banking in India, Report on Currency and Finance etc. The scope of the study is limited to the analysis of NPAs of the public sector banks for the period 2006-07 to 2010-11. It examines trend of NPAs; quality of assets; health of several loan assets; sector wise NPAs etc. Statistical tools such as descriptive statistics, correlation and regression analysis is used to analyze the data. The study observed increase in gross as well as Net NPAs in absolute terms and improved asset quality of banks.

AMITY UNIVERSITY UTTAR PRADESH

AMITY BUSINESS SCHOOL

DECLARATION

I, Mohit Gupta student of Masters of Business Administration from Amity Business School, Amity University Uttar Pradesh hereby declare that I have completed Dissertation on "Study of Non Performing Assets in Indian commercial banks" as part of the course requirement.

I further declare that the information presented in this project is true and original to the best of my knowledge.

Date: Mohit Gupta

Enroll. No: A0101911021

Place: Noida MBA Class of 2013

AMITY UNIVERSITY UTTAR PRADESH

AMITY BUSINESS SCHOOL

CERTIFICATE

I, Lakhwinder Singh Dhillon hereby certify that Mohit Gupta student of Masters of Business Administration at Amity Business School, Amity University Uttar Pradesh has completed Dissertation on "Study of Non Performing Assets in Indian commercial banks", under my guidance.

Ms. Lakhwinder Singh Dhillon

Lecturer

Department of Finance

Acknowledgement

This report is the result of efforts put in by many people who contributed to it by offering valuable suggestions, encouraging advises, constructive criticism and proper guidance. At this level of understanding, it is often difficult to understand the wide spectrum of knowledge without proper guidance & advice. Their support and surveillance through out the project stand out as beacon of inspiration to us.

I would also like extend my heartfelt thanks to my faculty guide Ms. Lakhwinder Singh Dhillon, for her continuance guidance, her immense interest, valuable guidance, constant inspiration and kind co-operation throughout the period of work undertaken and furnishing me with the in-depth theoretical knowledge.

Mohit Gupta

TABLE OF CONTENTS

ABSTRACT

DECLARATION

CERTIFICATE

ACKNOWLEDGEMENT

S.No

Chapter name

Page no.

1

Introduction

1-17

2

Literature review

18-19

3

Research methodology

20-22

4

Data interpretation and analysis

23-41

5

Conclusion and Recommendations

42-43

REFERENCES

CHAPTER 1

INTRODUCTION

OVERVIEW

Banks plays a vital part in the development of any economy. Strength of any economy also depends on the efficiency of its banking system. Everywhere in the world, the banking industry was the first to experience the impact of financial sector reforms. India, being an emerging economy, also experienced these reforms, as banking institutions in India has been assigned a significant role in financing the process of planned economic growth.

Since 1991-92, several reforms were introduced to strengthen the financial system and to improve the functions of various segments of Indian financial service industry. These reforms includes the dismantling of administered lending and deposit rates, permission to undertake new activities (such as investment banking, securities trading, and insurance), the easing of entry barriers and the introduction of stringent accounting norms (relating to income recognition, assets classification, provisioning and securities valuation). Entry norms for private and foreign banks have been liberalized significantly. These economic reforms initiated in 1991 would have been remained incomplete without the overhaul of the Indian banking sector. The norms, which were introduced in 1991, their main motive was to make the whole banking sector vibrant and competitive, and this was a gradual process undertaken with utmost care and least it should disrupt the banking sector. Slowly the Reserve Bank of India (RBI) has freed the interest rate, but marginally increased now, both on the deposit and lending spectrums at present. It has also relaxed the Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR) and also unlocking more and more funds in the financial markets. On the deposit side, the bank is free to offer any rate of interest depending upon their asset – liability position. But the RBI regulates the savings rate. Similarly, the banks, based on their risk perception can charge the flexible rate on lending operations.

During pre-nationalization period and after independence, the banking sector was in private hands. Large industries who had their control in the management of the banks were utilizing major portion of financial resources of the banking system because of which low priority was given to priority sectors. Banks were nationalized by the Government of India to make them an instrument of economic and social change and the mandate given to the banks was to expand their networks in rural areas and to give loans to priority sectors such as Small-scale industries, self-employed groups, agriculture and schemes involving women.

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 has not been able to 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.

At this moment, the biggest challenge is to deal with the deteriorating financial health of the banking sector. The important financial institutions like Industrial Finance Corporation of India (IFCI) and Industrial Development Bank of India (IDBI) are also not in the good health, which require government support for revitalizing themselves. The other vibrant dimension of the banking sector is to reduce the Non – performing assets (NPA). During 1980 to 1996, there was a crisis in the banking sector World over. According to a study 73 percent of the member countries of the International Monetary Fund (IMF) have experienced serious banking problems but most of these member countries were developing nations only. One of the main reasons for the crisis is building up of Non-Performing Assets in the banking and financial sector. India has also experienced the problem of raising NPA. Apart from compromise on object credit assessment of borrowers due to political economy considerations, laxities in legal system, accounting disclosure practices, recession and willful default have lead to the accumulation of NPAs. It is not wrong to say that there are no controls but they are much lesser as compared to the controls that was existed before the initiation of banking reforms.

Meaning of NPA (NON PERFORMING ASSETS)

An asset is classified as non-performing asset (NPAs) if the borrower does not pay dues in the form of principal and interest for a period of 90 days. If any advance or credit facilities has been given by bank to a borrower that became 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.

Secured asset should be classified as Non-performing asset for initiation of action for enforcement of security interest. Non Performing Asset means an asset or loan given by banks, which a bank or financial institution classifies as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

With a view to become consistent with international best practices and to ensure greater transparency, it is decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. So, with effect form 31stMarch, 2004, a non-performing asset (NPA) shall be a loan or an advance where;

Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan,

The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit (OD/CC),

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

Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and

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

Types of NPA

Gross NPA: As per the RBI guidelines, Gross NPAs are the sum total of all loan assets that are classified as NPAs as on Balance sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non-standard assets- Sub-standard, Doubtful, and Loss assets.

Net NPAs: Net NPAs are those NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. In India, provisions made by the banks according to the guidelines of central banks regarding NPAs are significant because of the large amount of NPAs in the balance sheet of banks and the process of recovery of and writing off loan is very time consuming. That is why the difference between gross and net NPA is quite high.

Assets classification

The RBI has issued guidelines to banks for classification of assets into four categories.

Standard Assets: Standard assets are those assets for which the bank is receiving timely payment of interest as well as the principal amount of the loan from the customer. It should be kept in mind that the arrears of interest and the principal amount of loan should not exceed 90 days at the end of financial year. If the arrears of interest and principle asset are for more than 90 days then the asset would not be classified as standard asset.

Banks has to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues.

Substandard Assets: Sub-standard asset is one which has remains NPA for a period less than or equal to 12 months.

An asset where re-negotiation or rescheduling of loan over the term regarding interest and principal of loan has been done, should be classified as sub-standard and should remain in this category for at least two years of satisfactory performance under the re-negotiated or rescheduled terms.

In other words, the classification of assets should not be upgraded merely as a result, of re-scheduling unless there is satisfactory compliance of the above condition.

Doubtful Assets: An asset would be classified as doubtful asset if it has remained in the sub-standard category for a period of 12 months. A loan classified as doubtful has all the inherent weaknesses of sub-standard assets, with the added characteristic that the weaknesses make collection or liquidation in full.

Under doubtful NPA there are three sub categories:

D1 i.e. upto 1 year: 20% provision is made by banks.

D2 i.e. upto 2 year: 30% provision is made by bank

D3 i.e. upto 3 year: 100% provision is made by bank.

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

Adverse affects of the non-performing assets

Profitability: NPA means refers to the loan or assets that stops generating income for the bank, which occurred due to wrong choice of client. Because the money gets blocked into the loans which are not generating any income to the bank 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. Therefore, NPA does not only affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduced profitability is low ROI (return on investment), which adversely affect current earning of bank.

Liquidity: Money of the bank get blocked in to the loan assets which becomes bad, profit of the bank decreases which reduces the cash in hand of the bank because of which bank has to lend money for shorter period of time which becomes an added cost to the company. Lack of money, because of which banks face difficulty in operating functions, could be another cause of NPA.

Involvement of management: Banks also has to bear the indirect costs due to NPA in the form of time and efforts of management. Time and efforts of management that has to be spent on handling and managing NPAs, could be used to some other fruitful activities which would have given more returns. Nowadays banks have special departments to deal with the problem of NPAs, which is additional cost to the bank.

Credit loss: Banks are facing the problem of NPA that adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit that have negative impact to the people who are putting their money in the banks.

Lending by banks has been highly politicized. It is well known that loans aregiven to various industrial houses on political considerations not on commercial considerations and viability of project; some politician would ask the bank to extend the loan to a particular corporate and the bank would oblige. In normal circumstances banks would make a thorough study of the actual need of the party concerned before extending any loan, the prospects of the business in which it is engaged, its track record, the quality of management and so on. Since these factors are not considered, many of the loans become NPAs.

Another dimension of the politicization of bank lending is the loans for the weaker sections of the society and the waiving of the loans to farmers. Banks fritter away most of the depositor’s money at the instance of politicians, while the same depositors are being made to pay through taxes to cover the losses of the bank.

General methods of management of NPAs

The management of NPA is the difficult task in practice. Management of NPAs means, how to settle the NPAs account in the books. In simple, it focuses on the methods of settlement of NPAs account. These methods are different from bank to bank. Some of these methods are-

Organizational Restructuring: With regard to internal factors leading to NPAs the onus for containing, the same rest with the bank themselves. These will necessities organizational restructuring improvement in the managerial efficiency, skill up gradation for proper assessment of credit worthiness and a change in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the last resort.

Reduce Dependence on Interest: The Indian banks are largely dependent on lending and investments. Where major portion of the income (86% approx.) of Indian banks comes from the interest and rest from the fee based, the banks in the developed countries are not dependent upon this income. The banker can earn sufficient net margin by investing in safer securities though not at high rate of interest. It facilitates for limiting of high level of NPAs gradually. It is possible that average yield on loans and advances, net default provisions and services costs do not exceed the average yield on safety securities because of the absence of risk and service cost.

Recovery: At the organization level, all accounts where interest is not collected should be reviewed at periodical intervals to appropriate authorities. Lest the time and energy is frittered away in following up and recovering small amounts, monitoring should be focused at critical branches having concentration of high value NPAs. In order to recover the amount, many ways can be adopted like persuasion, pressurization, frequent interaction as a appropriate level, showing sympathy, treating the borrower as a friend etc. Recovery is not a one-man job, to bring the desired result the-branch head should secure total involvement and commitment of the staff working with him. More active follow up on the irregular accounts need to be done with a view to contain the damage before the irregularity blows out of proportion.

Rehabilitation of potentially viable units: After a unit is classified as a Sick, Bank can make a decision to offer a rehabilitation package. In that case, Bank has to have a sympathetic and positive approach and provide the relief package in time. Such a package should have aim to help the unit in easing its debt burden, improving its liquidity position and its activity level and its profitability so that the unit would be in a position to continue to serve its repayment obligations as agreed upon including those forming a part of the package. Rehabilitation is a long drawn process. One should not look for the results in the short run. The bank should however ensure to have the Right of Recompense incorporated in the agreement while giving the package to the borrowers, so that it can claim reimbursement of the sacrifices made, relief given, once the unit is successfully rehabilitated as a result of the package.

Compromise/Negotiable Settlement: Recovery of loans and advances through compromise settlement is accepted as an effective non-legal remedy in the cases where it is appropriated to adopt this option. Under this option, borrower agrees to pay certain amount of the total outstanding to the bank after getting certain concessions. In this regard, it is recognized that each of the compromise offers received from the borrower is unique as the circumstances that necessitate consideration of these, as a recoveryoption will vary from case to case. Every Bank has framed its own policy on compromise/negotiated settlement of loans and advances.

Establishment of Asset Recovery Branches: Some banks have opened asset recovery branches at critical center for undertaking recovery. Bad and doubtful assets of various existing branches are transferred to the recovery branch, which may have trained staff with necessary background for recovery .The Specialized Recovery Branches may give undivided attention to recovery of dues. Establishment of such specialized branches may help in reducing NPAs.

Preventive Measurement for NPA

Early Recognition of the Problem: Invariably, by the time banks start their efforts to get involved in a revival process, it is too late to retrieve the situation both in terms of rehabilitation of the project and recovery of bank’s dues. It is imperative to identify the of weakness in the very beginning i.e., when the account starts showing first signs of weakness regardless of the fact that it may not have become NPA. Assessment of the potential of revival could be done, based on a techno-economic viability study. Restructuring should be attempted where bank after doing an objective assessment of the promoter’s intention, are convinced of a turnaround within a scheduled timeframe. In respect of very unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the frontline officials at the branch level has to play a crucial role as they are the ones who have intelligent inputs with regard to promoters’ sincerity, and capability to achieve turnaround. Banks should decide as quickly as possible based on objective assessment whether it would be worthwhile to commit additional finance. In order to identify real factors that caused NPA or that contributed to sickness of the borrower banks may consider having "Special Investigation" of all financial transaction or business transaction, books of account. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level and for this purpose, a special limit to such type of cases should be decided.

Timeliness and Adequacy of response: Longer the delay in response, greater the injury to the account and the asset. For any restructuring or rehabilitation activity, time is a very crucial element. The response decided based on techno-economic study and promoter’s commitment has to be adequate in terms of extend of additional funding, relaxations etc. Under the restructuring exercise, the package of assistance may be flexible and bank may look at the exit option.

Focus on Cash Flows: While financing at the time of restructuring, the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than on the basis of Funds Flow only.

Management Effectiveness: The general reason thought by borrowers that results in sickness and NPAs is lack of finance. However, this may not be the case all the time. Management effectiveness to tackle adverse business conditions is a very important aspect that affects a borrowing unit’s fortunes. A bank may commit additional finance to an ailing unit only after basic viability of the enterprise, also in the context of quality of management is examined and confirmed. Viability study or investigative audit should be done where the default is due to deeper malady – it will be useful to have consultant appointed as early as possible to examine this aspect. Thus, basis of future action should be on a proper techno-economic viability study.

Steps taken by the government of India

Over the past year or so, the government of India has taken several steps to help create an enabling environment for NPL resolution. Notable among these are:

Lok Adalats: The Lok Adalats institutions are set up by the government to help banks to settle disputes involving accounts in doubtful and loss categories. These are proved to be an effective institution for settlement of dues in respect of smaller loans. The Lok Adalats have been empowered to decide for NPAs of Rs. 10 lakhs and above.

Debt Recovery Tribunals (DRT): In order to expedite speedy disposal of high value claims of banks Debt Recovery Tribunals were setup. The Central Government has amended the recovery of debts due to banks and financial institutions Act in January 2000 for enhancing the effectiveness of DRTs. The provisions for placement of more than one recovery officer, power to attach dependents property before judgment, penal provision for disobedience of Tribunals order and appointment of receiver with powers of realization, management, protection and preservation of property.

Corporate Debt Restructuring (CDR): The corporate debt restructuring is one of the methods suggested for the reduction of NPAs. Its objective is to ensure a timely and transparent mechanism for restructure of corporate debts of viable corporate entities affected by the contributing factors outside the purview of BIFR, DRT and other legal proceedings for the benefit of concerned. The CDR has three tier structure viz.,

CDR standing forum

CDR empowered group and

CDR cell are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in times to come.

Circulation of Information of Defaulters: The RBI has put a system in place where periodical details of willful defaulters of banks and financial institutions are circulated. The RBI also publishes a list of borrowers (with outstanding aggregate rupees one crore and above) against whom banks and financial institutions in recovery of funds have filed suits as on 31stMarch every year. When the banks will receive request for additional credit limits from the defaulting borrowing units and from the directors, proprietors and partners of these entities, this list will serve as a caution list for them.

CHAPTER 2

LITERATURE REVIEW

M. Karunakar, Mrs. K.Vasuki and Mr. S. Saravanan (2008), analyzed the problem of losses, liability mismatch and lower profitability of Non-Performing Assets (NPA) in the banks and financial sector. It depends on how the various risks are managed in their business. In this paper, an attempt was made to explain ‘what is NPA’, the magnitude of NPAs, reasons for high NPAs and the impact of these NPAs on Indian banking system and its operations. Besides capital to risk weightage assets ratio of public sector banks, management of credit risk and measures to control the menace of NPAs were also discussed. The problem of NPAs can be solved only through proper credit assessment and risk management mechanism. It is better to avoid NPAs at the market stage of credit consolidation by putting in place of rigorous and appropriate credit appraisal mechanisms.

Rajiv Ranjan and Sarat Chandra Dhal (2003), did research on the non-performing loans of the commercial banks of India.. The empirical analysis evaluated as to how banks’ non-performing loans were influenced by three major sets of economic and financial factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic shocks. Regression model was used in this study and the result revealed that terms of credit variables have significant effect on the non-performing loans of banks in the presence of bank size induced risk preferences and macroeconomic shocks. Moreover, alternative measures of bank size could give rise to differential impact on bank's non-performing loans. With regard to terms of credit variables, changes in the cost of credit in terms of expectation of higher interest rate induce rise in NPAs. On the other hand, factors like horizon of maturity of credit, better credit culture, and favorable macroeconomic and business conditions lead to lowering of NPAs. Business cycle may have differential implications adducing to differential response of borrowers and lenders.

Nor Hayati Ahmad (2002) described how credit risk built-up as non-performing loans increased because of the economic effects of the Asian Financial Crisis. In this paper the linkage between non-performing loans, risk and asset quality of Malaysian commercial banks, finance companies and merchant banks was analyzed. Poor quality of credit decisions and weak internal risk management controls of Malaysian banks revealed the extent of deterioration in market values of these banks from non-performing loans.

Manoj Kumar Dash and Gaurav Kabra (2010), analyzed the sensitivity of non-performing loans to macroeconomic and bank specific factors in India. In particular, regression analysis was done and a panel dataset covering 10 years (1998-99 to 2008-09) was considered to examine the relationship between non-performing loans and several key macroeconomic and bank specific variables. Firm-level data was used in this study, which is rarely used by analysts who study non-performing loans. Therefore, this study extends literature on non-performing loans and utilizes both macroeconomic and bank specific variables. This paper might also have important practical implications for commercial bankers and bank regulators/supervisors in the Indian Banking system. It found a significant positive relationship between non-performing loans and the real effective exchange rate. This means that deterioration in international competitiveness of the local economy (as reflected by an appreciation in the real effective exchange rate) may result in higher levels of non-performing loans.

B. Sathish Kumar (2010), found out that the Indian banking sector is facing a serious problem of NPA. In public sectors banks, the extent of NPA was comparatively higher. The NPA has to be scheduled to improve the efficiency and profitability. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard.

Nachiket Mor (2009), found some major micro-level issues that are at the root of why unsustainable performance levels are being observed within Banks. The authors argue that unless the micro level issues are dealt with, even after the systemic issues are resolved, the problem of NPAs or other failures of the intermediation process may resurface with greater intensity. The manner in which banks manage the three phases in the life cycle of an asset (creation, monitoring and recovery) determines the quality of the intermediation process within a bank. In this paper, the need for internally consistent business models to guide the behaviour of a bank in each of these three phases is discussed.

Prashanth K Reddy (2005), discussed about the financial sector reform in India which has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk based supervision but the progress on the structural-institutional aspects has been much slower and is a cause for concern. It tells about what changes are required to tackle the NPA problem. This paper also deals with the experiences of other Asian countries in handling of NPAs. It also suggests mechanisms to handle the problem by drawing on experiences from other countries .

Magazine name – Capital Market Dec. 2009 issue, The article taken for reference from this magazine and the article is named "Short term pains, long-term gain" on Pg.-4. It discusses about the rising NPAs, increase in provision coverage, sluggish credit offtake and dwindling treasury income. It states that these measures are going to set ways for better valuations. It tells about how the BSE Bankex has outperformed the BSE Sensex by recording robust returns of 174%. It discusses about various banks namely Bank of India, Union Bank of India, State Bank of India, Bank of Baroda, Punjab National Bank and IndusInd Bank have reached their all time high during Oct. – Nov. 2009 period. It discusses about the preparedness of various banks for reducing NPAs i.e. by improving capital adequacy ratio, increasing the minimum provision coverage ratio, introducing new policies for broader interest rate regime, creating more transparent system and extending banking reach. It also discusses about the benchmark prime lending rate (BPLR) concept of RBI which helps to ensure appropriate pricing of loans.

Report on "Maximizing Value of Non-Performing Assets" by Organisation For Co-Operation and Development (OECD), This report deals with the changing dynamics in Asian Non Performing Loans and the sociological reflections on Insolvency reforms in East Asia. But more importantly it mentions different country reports of Asian region. In case of India "Sumant Batra" discusses the developments in India. It tells us about what is NPA and gives an overview of non performing assets in India. It also discusses about the factors contributing to NPAs and its impact on the working of commercial banks. The legal reforms and the RBI guidelines for NPAs are discussed.

Shantanu Das (2008), The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent times the banks have become very cautious in extending loans. The reason being mounting non-performing assets (NPAs). An NPA is defined as a loan asset, which has ceased to generate any income for a bank whether in the form of interest or principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a bank cannot book interest on an NPA on accrual basis. In other words, such interests can be booked only when it has been actually received. Therefore, this has become what is called as a ‘critical performance area’ of the banking sector as the level of NPAs affects the profitability of a bank as shown in the figure below.

Mohan (2003) observed that lending rates of banks have not come down as much as deposit rates and interest rates on Government bonds. While banks have reduced their prime lending rates (PLRs) to some extent and are also extending sub-PLR loans, effective lending rates continue to remain high. This development has adverse systemic implications, especially in a country like India where interest cost as a proportion of sales of corporates are much higher as compared to many emerging economies.

Prof. (Dr). P. Sudarsanan Pillai ( 2009 ), discussed that NPA is a virus affecting banking sector. It affects liquidity and profitability, in addition posing threat on quality of asset and survival of banks. This study explored movement of various NPA indicators; Gross NPA, Net NPA, Additions to NPA, Reductions to NPA and Provisions towards NPA and compare it with Total Advances and Total Deposits of banks. The study utilized bank-group wise performance statistics for post-millennium period up to the period ended 31st December 2011. The study utilized growth rate calculating using AAG rate, correlation and regression study to analyze the movement and significance of NPA indicators during the period. The effect global financial crisis on the NPA indicators as well is explained. The study concluded that NPA still remains a major threat and the incremental component explained through additions to NPA poses a great question mark on efficiency of credit risk management of banks in India.

Rajiv Ranjan and Sarat Chandra Dhal (2006), This paper explores an empirical approach to the analysis of commercial banks' nonperforming loans (NPLs) in the Indian context. The empirical analysis evaluates as to how banks’ non-performing loans are influenced by three major sets of economic and financial factors, i.e., terms of credit, bank size induced risk preferences and macroeconomic shocks. The empirical results from panel regression models suggest that terms of credit variables have significant effect on the banks' non-performing loans in the presence of bank size induced risk preferences and macroeconomic shocks. Moreover, alternative measures of bank size could give rise to differential impact on bank's non-performing loans. In regard to terms of credit variables, changes in the cost of credit in terms of expectation of higher interest rate induce rise in NPAs. On the other hand, factors like horizon of maturity of credit, better credit culture, favorable macroeconomic and business conditions lead to lowering of NPAs. Business cycle may have differential implications adducing to differential response of borrowers and lenders.

CHAPTER 3

RESEARCH METHODS AND PROCEDURES

Purpose of the Study

To examine the state of affair of the NPAs in the Public sector banks and Private sector banks of India.

To know the difference between Gross NPA’s, Net NPA’s ,NPA to advances & NPA to assets.

To determine the causes of NPA’s & measures adopted to overcome NPA problem.

To analyze the NPA’s of selected public & private sector banks.

SBI

PNB

ICICI Bank

HDFC Bank

Standard Chartered Bank

Corporation Bank

Research Design

The type of research design followed was descriptive . Descriptive research does not fit neatly into the definition of either quantitative or qualitative research methodologies, but instead it can utilize elements of both, often within the same study. The term descriptive research refers to the type of research question, design, and data analysis that will be applied to a given topic. Descriptive statistics tell what is, while inferential statistics try to determine cause and effect. Involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data. Descriptive research was done to analyze the NPA’s of different public and private sector banks and to see how they have been varying over the years .

Data Collection

Analytical research has been used in this study. The nature of this study is such that it eradicates the necessity of doing primary research. The research is based on secondary source of information. The analysis & presentation of various figures relate to selected banks has been shown with the help of tables & graphs. Line charts & column charts have also been used to differentiate figures relating to different banks.

Source of Information

A Secondary source of information has been used . The data has been collected from Books, Journals, Economic Times , Reports ,Websites & websites of selected banks have been used to complete this study.

Limitations

Secondary data can be general and vague and may not really help in efficient decision making.

The data maybe old and out of date.

The information and data may not be accurate and might be incomplete .

The analysis of the NPA’s of the banks has been done on the basis of secondary data so it may give wrong conclusions if the data is not accurate .

CHAPTER 4

DATA ANALYSIS AND INTERPRETATION

4.1 Analysis of trend of Gross advances and Gross Non-performing assets:

TABLE 1

Gross Advances And Gross NPAs Of Public Sector Banks

Years

Gross Advances(cr.)

Gross NPAs

Amount(cr.)

Percent to Gross Advances

Percent to Total Assets

2006-07

8,77,825

48,399

5.5

2.7

2007-08

11,34,724

41,358

3.6

2.1

2008-09

14,64,493

38,968

2.7

1.6

2009-10

18,19,074

40,595

2.2

1.3

2010-11

22,83,473

45,156

2

1.2

Source: Trends & progress of banking in India, RBI Publication

Inference : In the above table the trend of gross advances, gross NPAs, ratio of gross NPAs to Gross Advances, and ratio of gross NPAs to total assets is shown. It is apparent from Table 1 that gross advances of the banks have shown a rising trend since 2006-07. Gross advances of the public sector banks in absolute term have increased from Rs 8,77,825 crore in 2005-06 to Rs 22,83,473 crore in 2010-11. There is sharp increase of 160.13 percent in gross advances of the public sector banks during the study period. The gross NPAs of the banks in absolute terms amounted to Rs 48,399 crore in 2007-08, and Rs 41358 crore ,Rs 38968 crore, Rs 40945 crore, Rs 45156crore in year 2006-07, 2008-09, 2009-10 and 2010-11 respectively. The gross NPAs have decreased by 7.2 percent in the year 2010-11 over 2006-07. An in-depth analysis into gross NPAs shows that the gross NPAs of the public sector banks have declined up to the year 2008-09, and increased in the last two years of study i.e. 2009-10, and 2010-11. The study observed that the gross NPAs of public sector banks have depicted a mixed trend over the period of study. It is found based on analysis of data that the asset quality of public sector banks improved consistently in the past few years as reflected in the decline in the two ratios i.e. gross NPAs as percentage of gross advances, and gross NPAs as percentage of total assets.

TABLE 2

Gross Advances And Gross NPAs Of Private Sector Banks

Years

Gross Advances(cr.)

Gross NPAs

Amount(cr.)

Percent to Gross Advances

Percent to Total Assets

2006-07

197832

8782

3.8

2.1

2007-08

317690

7811

2.5

1.4

2008-09

420745

9256

2.2

1.2

2009-10

525845

12983

2.5

1.4

2010-11

585065

16983

2.9

1.7

Source: Trends & progress of banking in India, RBI Publication

Looking at the trend of gross advances of private sector banks, we can see from the Table 2 that gross advances of these banks have also shown a rising trend. Gross advances in absolute terms have increased from Rs 197832 in 2006-07 to Rs 585065 in 2010-11, an increase of more than 195% in a period of only 5 years. There is a three times increase in these advances. The gross NPA of the private sector banks have also increased from Rs8782 to Rs 16983 in years 2010-11, almost doubled in this period of 5 years. An in-depth analysis into gross NPAs shows that the gross NPAs of the private sector banks have declined up only in the year 2008-09 in last 5 years, and after that increased in the last three years of study i.e. 2008-09, 2009-10, and 2010-11. The NPA has increased significantly in the last 2 years. The study observed that the gross NPAs of private sector banks have depicted a mixed trend over the period of study.

It is found based on analysis of data that the asset quality of private sector banks improved in initial years but again started declining in the recent years as reflected in the ups and down in the two ratios i.e. gross NPAs as percentage of gross advances, and gross NPAs as percentage of total assets.

4.2 Analysis of trend of Net advances and Net non-performing assets:

The study then investigated net advances, net NPAs, ratio of net NPAs to net Advances, and ratio of net NPAs to total assets (Table3).

The study found that the net advances of the public sector banks have increased in absolute term from Rs 8,48,912 in year 2006-07 to Rs 22,60,156 crore in year 2009-10,showing increase of 166 percent in 2010-11 over 2006-07. Over the period of study, Net NPAs in absolute term have registered increase of 24 percent. The study observed a mix trend in net NPAs of public sector banks over the period of study. It found that Net NPAs have decreased during the period of 2007-08 only, thereafter; it has shown an increasing trend. It is observed that despite increase in gross non performing assets (NPAs) in absolute terms during the year, asset quality of public sector banks improved in the past few years.

TABLE 3

Net Advances And Net NPAs Of Public Sector Banks

Years

Net Advances(cr.)

Net NPAs

Amount(cr.)

Percent to Net Advances

Percent to Total Assets

2006-07

8,48,912

16,904

2

1

2007-08

11,06,288

14,566

1.3

0.7

2008-09

14,40,146

15,145

1.1

0.6

2009-10

17,97,504

17,836

1

0.6

2010-11

22,60,156

21,033

0.9

0.6

Source: Trends & progress of banking in India, RBI Publication

Inference : It is reflected in the decline in these two ratios i.e. net NPAs as percentage of net advances, and net NPAs as percentage of total assets. Hence, it can be said that as a whole there is improvement in the asset quality of public sector banks.

In Private sector banks, net advances in absolute terms have increased from Rs. 191397 to Rs 575336 over a period of last 5 years, registering an increase of more than 200 percent. In this period, the Net NPAs of banks has also increased from Rs 4212 crore in 2006-07 to Rs 7418 crore in 2010-11, i.e. 76 percent increase.

TABLE 4

Net Advances And Net NPAs Of Private Sector Banks

Years

Net Advances(cr.)

Net NPAs

Amount(cr.)

Percent to Net Advances

Percent to Total Assets

2006-07

191397

4212

1.9

1

2007-08

312962

3171

1

0.6

2008-09

414752

4028

1

0.5

2009-10

518403

5607

1.2

0.6

2010-11

575336

7418

1.5

0.7

Source: Trends & progress of banking in India, RBI Publication

Inference : It has been observed a mix trend in net NPAs of private sector banks over the period of study. It found that Net NPAs have decreased during the period of 2007-08, thereafter; it has shown an increasing trend. It is observed that despite of increase in gross non- performing assets (NPAs) in absolute terms during the year, asset quality of private sector banks improved in the initial years but the performance again declined in the last 2 years as reflected in the increase in ratios i.e. Net NPAs as percentage of net advances, and net NPAs as percentage of total assets. Hence, it can be said that as a whole there is improvement during this period in the asset quality of private sector banks but the quality has started declining in recent times.

Comparative performance of Selected Banks

4.3.1 Gross Profit/loss as percentage of total assets (in %)

FY07

FY08

FY09

FY10

FY11

State Bank Of India

1.74

2.07

2.34

2.39

2.29

Punjab National bank

2.02

2.69

3.05

1.90

1.98

Corporation Bank

2.64

3.24

3.11

3.03

2.60

ICICI Bank

0.52

2.41

1.98

1.76

1.87

HDFC Bank

2.29

2.33

2.38

2.61

2.69

Standard Chartered

3.84

3.80

4.01

2.87

3.58

Source: Trends & progress of banking in India, RBI Publication

Inference : It can be seen that the gross profit as a percentage of total assets is highest in case of Standard Chartered Bank. Its performance from FY07 to FY11 was stable but it declined in FY09-10. However it managed to raise it gross profits again in FY-10. Punjab National Bank & corporation bank has shown a decline in its Gross Profits due to stiff competition from the private sector banks. From the above graph it can be inferred that ICICI Bank has also started performing quite well over the years.

4.3.2 Net Profit/Loss as a percentage of Total assets (In %)

FY07

FY08

FY09

FY10

FY11

State Bank of India

0.70

0.83

0.90

0.94

0.89

Corporation Bank

1.31

1.58

1.73

1.19

1.10

PNB

0.77

0.98

1.08

1.12

0.99

ICICI Bank.

0.25

1.13

1.31

1.20

1.01

HDFC Bank

1.25

1.27

1.20

1.29

1.18

Standard Chartered

2.02

2.92

1.74

1.62

1.88

Source: Trends & progress of banking in India, RBI Publication

Inference : ICICI’s net profit as a percentage of total assets has shown a steady increase from the FY08-FY10.The profits rose mainly because of improvement in the banking business rather then treasury related profits. But it has declined marginally in the FY11. Still the absolute contribution of treasury related profits remain high.

As far as Net Profits are concerned Standard Chartered Bank has not been able to earn well after the FY09 .

4.3.3 Interest Income as a percentage of Total Assets (In %)

FY07

FY08

FY09

FY10

FY11

State Bank of India

8.56

8.27

7.47

7.05

7.25

Corporation Bank

8.24

8.00

7.55

6.63

6.48

PNB

9.12

8.68

7.60

6.70

6.60

ICICI Bank.

2.07

8.77

7.19

5.61

5.48

HDFC Bank

7.16

6.62

6.02

6.02

6.09

Standard Chartered

8.12

7.80

7.35

6.70

6.34

Source: Trends & progress of banking in India, RBI Publication

Inference : Interest Incomes as a percentage of Total assets are very close at end of the FY11 in all the six banks selected. There is an instability in the Interest income of ICICI Bank as compared to the other selected banks.

4.3.4 Operating Expenses as percentage of Total Assets ( In %)

FY07

FY08

FY09

FY10

FY11

State Bank of India

2.07

2.11

2.27

2.19

2.37

Corporation Bank

1.63

1.79.

1.97

1.97

1.84

PNB

2.47

2.39

2.32

2.60

2.08

ICICI Bank.

0.60

1.88

2.05

1.97

1.78

HDFC Bank

1.76

1.90

1.91

2.11

2.30

Standard Chartered

2.22

1.98

2.26

2.26

2.00

Source: Trends & progress of banking in India, RBI Publication

Inference : In operating expenses as a percentage of total assets, the private sector bank ICICI has shown a sharp increase since FY08. The highest operating expenses are evident in Punjab national bank as compared to other selected banks.

CHAPTER 5

CONCLUSIONS AND RECOMMENDATIONS

Conclusions

The gross advances of the public sector banks have shown a rising trend since 2006-07. Gross advances of the public sector banks in absolute term have increased from Rs 8,77,825 crore in 2005-06 to Rs 22,83,473 crore in 2010-11 . It is found based on analysis of data that the asset quality of public sector banks improved .

The study observed that the gross NPAs of private sector banks have depicted a mixed trend over the period of study. It is found based on analysis of data that the asset quality of private sector banks improved in initial years but again started declining in the recent years as reflected in the ups and down in the two ratios i.e. gross NPAs as percentage of gross advances, and gross NPAs as percentage of total assets.

It is observed that despite increase in gross non performing assets (NPAs) in absolute terms during the year, asset quality of public sector banks improved in the past few years.

In Private sector banks, net advances in absolute terms have increased from Rs. 191397 to Rs 575336 over a period of last 5 years, registering an increase of more than 200 percent.

It can be seen that the gross profit as a percentage of total assets is highest in case of Standard Chartered Bank. Its performance from FY07 to FY11 was stable but it declined in FY09-10. . Punjab National Bank & corporation bank has shown a decline in its Gross Profits due to stiff competition from the private sector banks.

ICICI’s net profit as a percentage of total assets has shown a steady increase from the FY08-FY10.The profits rose mainly because of improvement in the banking business rather then treasury related profits.

Interest Incomes as a percentage of Total assets are very close at end of the FY11 in all the six banks selected. There is an instability in the Interest income of ICICI Bank as compared to the other selected banks.

In operating expenses as a percentage of total assets, the private sector bank ICICI has shown a sharp increase since FY08. The highest operating expenses are evident in Punjab national bank as compared to other selected banks.

Recommendations

Public sector banks should become more cautious while granting agriculture loans to farmers. They should check the credibility of the farmers and proper identification should be done.

Banks should try to find the actual reasons for the NPAs.

Proper identification of the guarantor should be done and his/her wealth be checked so that he/she could not lead the banks.

Banks should consider the market demand or condition of the product for which loan is to be granted.

Before giving loan on any asset banks should make sure that the collateral security should not be disputed asset and neither any loan is taken on that security.

Banks should randomly check the stock and receivable position to have knowledge of the true picture of the situation, whether the company is in good condition to meet the loan requirement or not.

Steps should be taken to speed up the recovery process, which is very slow and lengthy at present. Government need to put some effort to make some rule to make the speedy recovery possible.

Limitations

Secondary data can be general and vague and may not really help in efficient decision making.

The data maybe old and out of date.

The information and data may not be accurate and might be incomplete .

The analysis of the NPA’s of the banks has been done on the basis of secondary data so it may give wrong conclusions if the data is not accurate .