INTRODUCTION

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 Securitisation 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. 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 same time 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 fail to utilize this benefit to its advantage due to the tear of burgeoning non-performing assets.

INDIAN ECONOMY AND NPAs

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIIs, etc. Further, international rating agencies like, standard & Poor have lowered Indias credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate. Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. One would be surprised to know that the banks and financial institutions in India hold non- performing assets worth Rs. 1,10,000 crores. Bankers

have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive. The actual level of Non Performing Assets in India is around $40 billion much higher than governments estimation of $16 billion. This difference is largely due to the discrepancy in accounting the NPAs followed by India and rest of the world. The accounting norms of the India are less stringent than those of the developed economies. The Indian banks also have the tendency to extend the past dues. Considering the GDP of India nearly $470 billion, the NPAs are 8% of total GDP, which was better than the many Asian countries . The NPA of china was 45% of the GDP, while Japan had NPAs of 25% of the GDP and Malaysia had 42%. The aggregate level of the NPAs in Asia has increased from $1.5 billion in 2000 to $2 billion in 2002. Looking to such overall picture of the market, we say that India is performing well and the steps taken are looking favorable.

GLOBAL DEVELOPMENTS AND NPAs

The core banking business is of mobilizing the deposits and utilizing it for lending to industry. Lending business is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However lending also carries credit risk, which arises from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or on a future obligation. A question that arises is how much risk can a bank afford to take? Recent happenings in the business world -Enron, WorldCom, Xerox, Global Crossing do not give much confidence to banks. In case after case, these giant corporate became bankrupt and failed to provide investors with clearer and more complete information thereby introducing a degree of risk that many investors could neither anticipate nor welcome. The history of financial institutions also reveals the fact that the biggest banking failures were due to credit risk. Due to this, banks are restricting their lending operations to secured avenues only with adequate collateral on which to fall back upon in a situation of default.

NON PERFORMING ASSETS

The world is going faster in terms of services and physical products. However it has been researched that physical products are available because of the service industries. In the nation economy also service industry plays a 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 are the interest that they earn on the loans that have been disbursed to general person, businessman, or any industry for its development. Thus, we may find the input-output system in the banking sector. Banks first, accepts the deposits from the people and secondly they lend this money to people who are in the need of it. By the way of 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 NPA as compared to the past years.

MEANING OF NPAs
An asset which ceases to generate income for the bank is called. a Non-Performing Asset. An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2005. Accordingly, with effect from March 31, 2005, a non-performing asset (NPA) shell be a loan or an advance where; i. Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan ii. The account remains 'out of order' for a period of more than 90 days, in respect of an Overdraft/Cash Credit (ODICC), iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. For a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

CLASSIFICATION OF NPAs
Banks are required to classify NPAs further into the following three categories based on the period for which the asset has remained non-performing and the reliability of the dues: i. Sub-standard Assets: A sub- standard asset is one which has remained NPA for a period less than or equal to 18 months. In such cases, the net worth of the borrower, or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. Such assets will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain a loss. ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18 months. It has all the weaknesses inherent to a sub-standard asset with the added characteristic that the collection or liquidation in full- on the basis of currently known facts- is highly questionable and improbable. iii. Loss Assets: A loss asset is one where a loss been identified by the bank or, internal or external auditors but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

GUIDELINES FOR CLASSIFICATION OF NPAs

Classification should be done taking into account the degree of well defined credit weaknesses and the extent of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. Accounts with temporary deficiencies: These should be classified on the past recovery records. Accounts regularize near about the balance sheet date: These accounts should be handled with care and without scope for subjectivity. Where the account

indicates inherent weakness based on available data, it should be deemed as an NPA. Asset classification should be borrower- wise and not facility- wise: if a single facility to a borrower is classified as NPA, others should also be classified the same way, as it is difficult to envisage only a solitary facility becoming a problem credit and not others. Advances under consortium arrangements: classification here should be based on the recovery record of the individual member banks. Accounts where there is erosion in the value of the security: if there is a significant (i.e. the realizable value of the security is less than 50% of that assessed by the bank during acceptance) the account may be classified as NPA.

REASONS FOR HUGE LEVEL OF NPAs External Factors: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 achieve the 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 and administrative.

4. Ineffective Credit Monitoring: Ineffective credit monitoring, al1 the 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. Natural calamities:This is the measure factor, which is creating alarming rise in NPAs of the PSBs. Every now and then india is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans.

7. Industrial sickness:Improper project handling, ineffective management, lack of adequate resources, lack of advance technology, day to day changing government. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.

Internal 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 into advances given to them turning bad. 1. Ineffective legal system: It is one of the most important factors contributing to enormously high level of NPAs in Banks. Antiquated legal system, extremely slow judicial system and dismal record of enforcement machineries have contributed significantly to high level of NPAs.

2. Inappropriate technology:-

Due to inappropriate technology and management information system, market driven decisions on real time basis cannot be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized.

3. Failure of suppliers: The failure of suppliers to adhere to promised/committed delivery schedules due to various reasons is also one of the causes for an increase in the level of NPA.

4. 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.

5. Promoter-banker nexus: In many instances, loans have been sanctioned because of vested interests. Promoterbanker nexus have been exploited to siphon off funds from the banking system.

6. 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.

7. Strategic Factors: - It includes adverse business decisions, improper implementation of decisions or lack of responsiveness to industry changes.

8. Poor credit appraisal system:Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.

9. Absence of regular industrial visit:The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits.

OTHER CAUSES RESPONSIBLE FOR INCREASING NPAs

The banking sector has been facing the serious problems of the rising NPAs. In fact PSBs are facing more problems than the private sector banks and foreign banks. The NPAs in PSBs are growing due to external as well as internal factors. One of the main causes of NPAs in the banking sector is the Directed loans system under which commercial banks are required to supply 40% percentage of their credit to priority sectors. Most significant sources of NPAs are directed loans supplied to the micro sector are problematic of recoveries especially when some of its units become sick or weak. PSBs 7 percent of net advances were directed to these units Poverty elevation programs like IRDP, RREP, SUME, SEPUP, JRY, PMRY etc., failed on various grounds in meeting their objectives. The huge amount of loan granted under these schemes was totally unrecoverable by banks due to political manipulation, misuse of funds and non-reliability of target audience of these sections. Loans given by banks are their assets and as the repayments of several of the loans were poor, the quality of these assets was steadily deteriorating. In India the scope for branch expansion in rural and semi urban areas is vast and also necessary. Increasingly, NBFCs operating at such places are coming under regulatory pressure and are likely to abandon their intermediation role. These branches find priority sector financing as the main business available especially in rural/semi-urban centers. Operational restructuring of banks should ensure that NPAs in the priority sectors are reduced, but not priority sector lending. This will remain a priority for the survival of banks. Any decisions about insulating Indian banks from priority sector financing should not be reached until full-scale research is undertaken, taking into account several sources including records of credit guarantee.

EARLY SYMPTOMS BY WHICH ONE CAN RECOGNIZE A PERFORMING ASSET TURNING IN TO NON-PERFORMING ASSET
Four categories of early symptoms:

Financial:
Non-payment of the very first instalment in case of term loan. Bouncing of cheque due to insufficient balance in the accounts. Irregularity in instalment. Irregularity of operations in the accounts. Unpaid overdue bills. Declining Current Ratio. Payment which does not cover the interest and principal amount of that installment. While monitoring the accounts it is found that partial amount is derived to sister concern or parent company.

Operational and Physical:

If information is received that the borrower has either initiated the process of winding up or are not doing the business. Overdue receivables. Stock statement not submitted on time. External non- controllable factor like natural calamities in the city where borrower conduct his business. Frequent changes in plan. Non- payment of wages.

Attitudinal changes:
Use for personal comfort, stocks and shares by borrower. Avoidance of contact with bank. Problem between partners.

Others:
Changes in Government policies. Death of borrower. Competition in the market.

ADVERSE EFFECTS OF NPAs

An NPA on the balance sheet of an institution deteriorates its health in several ways: Profitabilty: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another effect of reduction in profitability is low ROI ( return on investment), which adversely affect current earning of bank. Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shorter period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Involvement of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank. Credit Loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks. Problem of moral hazard: Interest 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. 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. Huge Opportunity 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.

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 -issue 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 ailed a.'\sign a probability of default. A credit rating agency generally 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

SECURITISATION: A TOOL FOR MANAGEMENT OF NPA

Securitization is the buzzword in today's world of finance. It's not a new subject to the developed economies. It is certainly a new concept for the emerging markets like India. The technique of securitization definitely holds a great promise for a developing country like India. One of the major issues in the Development of banking sector in India is the reducing of nonperforming assets in their balance sheets. One such financial innovation to reduce nonperforming assets is "Securitization". Securitization is the financial instrument of the new millennium. The process of securitization creates the strata of risk-return and different maturity securities and is marketable into the capital markets as per the needs of the investors. It has become one of the most important financing vehicles in the developed countries like USA. Its use is rapidly expanding worldwide. Securitization enables many companies to raise funds at a lower cost than through traditional financing.

Definition
"Securitisation is the process of pooling and re-packaging of homogeneous illiquid financial assets into marketable securities that can be sold to investors". "Every such process which converts a financial relation into a transaction'" In simple words: "Selling the cash flow generated from the assets (either existing or future) against the charge of the assets, by converting them into homogeneous market negotiable instruments is known as Securitisation".

IMPORTANCE OF SECURITISATION

The generic need for securitisation is as old as that for organized financial markets from the distinction between a financial relation and a financial transaction earlier, we understand that a relation in variably needs the coming together and remaining together of two entities. These entities might involve a number of financial intermediaries in the process, but a relation involves fixity over a second time. Financial market develops in response to the need to involve the large number of investors in the market place. As the number of investor increases, the average size per investor come down This is a simple rule of the market place because growing size means involvement of a wider base of investors. The small investors are not a professional investor: He is not as such in the business of investment. Hence, he needs an instrument which is easier to understand, and is liquid. These two needs said the stage for evolution of financial instrument which would convert financial claims into liquid, easy to understand and homogenous products, at times carrying certified quality labels, which would be available in small denominations to suit everyones purse. Thus securitisation in a generic sense is basic to the world of Finance, and it is truism to say that it envelops the entire range of financial instruments, and hence, the entire range of financial assets.

Parties involved
Securitisation program usually involved several participant each carrying out a specialist function, such as creating and analyzing the asset pool, administration, credit rating, accounting, legal negotiation etc. These include; The originator also interchangeably referred to as the seller is the entity whose receivable portfolio forms the basis for asset backed security (ABS) issuance. Special Purpose vehicle (SPV), which as the issuer of ABS ensures distancing of the instrument from the originator. The Investors The Investors may be in the form of individuals or institutional investors like FIs and Mutual Funds etc. They buy a participating interest in the total pool of receivables and receive their payment in the form of interest and principals as per agreed

pattern total pool of receivables and receive their payment in the form of interest and principals as per agreed pattern.

Securitiation act
The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial Institutions to recover their non-performing assets without the intervention of the Court. The Act provides three alternative methods for recovery of non-performing assets include: Securitization Asset Reconstruction Enforcement of security without the intervention of court.

STRATEGIES FOR OVERCOMING NPAs

Various steps have been taken by the government and RBI to recover and reduce NPAs. These strategies are necessary to control NPAs. 1. Preventive management and 2. Curative management A. Preventive Management: Preventive measures are to prevent the asset from becoming a non performing asset. Banks has to concentrate on the following to minimize the level of NPAs. 1. Early Warning Signals The origin of the flourishing NPAs lies in the quality of managing credit assessment, risk management by the banks concerned. Banks should have adequate preventive measures, fixing pre sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks should continuously monitor loans to identify accounts that have potential to become non-performing.It is important in any early warning system, to be sensitive to signals of credit deterioration. A host of early warning signals are used by different banks for

identification of potential NPAs. Most banks in India have laid down a series of operational, financial, transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. Further, it is revealed that the indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, and general economic conditions. Early warning signals can be classified into five broad categories viz. (a) Financial (b) Operational (c) Banking (d) Management and (e) External factors. Financial related warning signals generally emanate from the borrowers balance sheet, income expenditure statement, statement of cash flows, statement of receivables etc. Following common warning signals are captured by some of the banks having relatively developed EWS. 2. Financial warning signals Persistent irregularity in the account Default in repayment obligation Devolvement of LC/invocation of guarantees Deterioration in liquidity/working capital position Substantial increase in long term debts in relation to equity Declining sales Operating losses/net losses Rising sales and falling profits

 Disproportionate increase in overheads relative to sales Rising level of bad debt losses Operational warning signals Low activity level in plant Disorderly diversification/frequent changes in plan Nonpayment of wages/power bills Loss of critical customer/s Frequent labor problems Evidence of aged inventory/large level of inventory 3. Management related warning signals Lack of co-operation from key personnel Change in management, ownership, or key personnel Desire to take undue risks Family disputes Poor financial controls Fudging of financial statements Diversion of funds 4. 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 B. Curative Management The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs are released for recycling. The Central government and RBI have taken steps for controlling incidence of fresh NPAs and creating legaland regulatory environment to facilitate the recovery of existing NPAs of banks. They are: 1. One Time Settlement Schemes This scheme covers all sectors sub standard assets, doubtful or loss assets as on 31st March 2000. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account.

2. Recovery At the organization level, all accounts where interest has not been 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 NP As. In order to recover the amount, one can adopt any way like persuasion, pressurization, frequent

interaction as a appropriate level, showing syn1pathy, treating the borrower as a friend etc. recovery is not a one-man job. The-branch head should secure total involvement and commitment of the staff working with him to bring about the desired results. Irregular accounts need to be more actively followed up with a view to containing the damage before the irregularity blows out of proportion. If is the irregular portion in any account is fully recovered, such account will be eligible for immediate reclassification as a standard asset.

3. Compromise/Negotiable Settlement Recovery of advances through compromise settlement is accepted as an effective nonlegal remedy in case where it is appropriated to adopt this option. Under this borrower agrees to pay certain amount of 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 recovery option will vary from case to case. Every Bank has framed its own policy .on compromise/negotiated settlement of loans and advances-

4. Stress Asset Recovery Cell: Banks have a specific cell for NPA, which is called as Stress Asset Recovery Cell. The cell continuously work on How Recoveries Can Be Done. Bank does its recovery by sending notices, by bidding and by taking a legal action .DECREE is a paper of court or the permission given by the court to sell the land or an asset.

5. Debt Recovery Tribunal It is the special court established by the Central Government for the purpose of bank or any financial institutions recovery. The judges of this court are retires judges of high court. In this court only the recovery cases of 10 lakhs and above can be filed.

6. Recovery through Lok Adalats: Lok Adalat is an arrangement wherein suit filed as well as non-suit filled accounts are referred by the banks for speedy settlement of the dispute through conciliation. On a mutual agreement, the settlements are arrived at the Iok Adalat and the concessions are extended as under.

7. Circulation of information on defaulters: The RBI has put in place a system for periodical circulation of details of willful defaults of borrowers of banks and financial institutions. This serves as a caution list while considering requests for new or additional credit limits from defaulting borrowing units and also from the directors/ proprietors/ partners of these entities. RBI also publishes a list of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds, as on 31st march every year.

8. Corporate Governance:A consultative Group under the chairmanship od Dr.A. Ganguly was set by the Reserve Bank to review the supervisory role of Boards of Banks and financial institutions and to obtain feedback on the functioning of the Boards vis-a- vis compliance, transparency, disclosure, audit committees etc. and make

recommendations for making the role of Board of directors more effective with a view to minimizing risks and overexposure. The group is finalizing its recommendations shortly and may come out with guidelines for effective control and supervision by bank over credit management and NPA prevention measures.

ARCIL
The first asset reconstruction company (ARC) in the country to commence the business of resolution of non-performing loans (NPLs) acquired from Indian banks and financial institutions. It commenced business consequent to the enactment of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (Securitisation Act, 2002). As the first ARC, Arcil played a pioneering role in setting standards for the industry in India. It has been spearheading the drive to recreate value out of NPLs and in doing so, it continues to play a proactive role in reenergizing the Indian industry through critical times. In 2008, Arcil launched a retail NPL resolution initiative through Arcil Arms (a division of Arcil).

The leader
As the leader in this genre of business, Arcil undertook significant efforts in market seeding, creating awareness and acquainting banks and financial institutions with the concept and business model, attracting capital to this new class of asset, et all. Arcil has facilitated development of a business environment, which today has attracted many players to set up business in this domain. It has meaningfully engaged the investors through dialogue and dissemination of information. This is expected to lead to flow of new of new capital for the asset class in the near future. Some of the significant initiatives of Arcil in this context are:

Participation in the process of framing of guidelines by RBI for the acquisition, resolution and valuation of NPL and operating guidelines for conducting asset reconstruction business in India

Rationalization of stamp duty payable on acquisition of NPL from sellers in several States in the country thereby reducing the transaction costs, which is a sine-qua-non for business viability (all major States have provided for remission in stamp duty to notional levels)

Setting up a valuation framework in line with international best practices which addresses sellers expectations as well as investors perspective in the Indian context (sellers doubling as investors)

Creation of a unique transaction model taking into account conflicting interests of sellers doubling as investors(in the absence of new money) in the Special Purpose Vehicles (SPV) with Arcil as trustee for the investors in the trusts, by sharing upside from the resolution

Setting up a fund involving third party investors (not being sellers doubling as investors)

Establishment of a framework for rating of security receipts(SRs) with underlying NPLs and the security interest a first of its kind in India.

Corporate debt restructuring

The need for a corporate debt restructuring often arises when a company is going through financial hardship and is having difficulty in meeting its obligations. If the troubles are enough to pose a high risk of the company going bankrupt, it can negotiate with its creditors to reduce these burdens and increase its chances of avoiding bankruptcy. In the U.S., Chapter 11 proceedings allow for a company to get protection from creditors with the hopes of renegotiating the terms on the debt agreements and survive as a going concern. Even if the creditors don't agree to the terms of a plan put forth, if the court determines that it is fair it may impose the plan on creditors.

INDUSTRY INTRODUCTION

The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major Categories, non-scheduled banks and scheduled banks. Scheduled banks Comprise commercial banks and the co-operative banks. In terms of Ownership, commercial banks can be further grouped into nationalized Banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These Banks have over 67,000 branches spread across the country in every city and villages of all nook and corners of the land. The first phase of financial reforms resulted in the nationalization of 14 major Banks in 1969 and resulted in a shift from Class banking to Mass Banking. This in turn resulted in a significant growth in the geographical Coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The Manufacturing sector also grew during the 1970s in protected environs the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold. And that was not the limit of growth. After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight New private sector banks are presently in operation. These banks due to their late start has access to state-of-the-art technology, which in turn helps them to save on manpower costs. During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25 percent share in deposits and28.1 percent share in Credit. The 20 nationalized banks accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of foreign banks (numbering 42), regional rural banks and other scheduled Commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000.about the detail of the current scenario we will go through the trends in modern economy of the country.

Current Scenario:
The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (NPAs) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. PSBs, which currently account for more than78 percent of total banking industry assets are saddled with NPAs (a mind- boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional

banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes. The private players however cannot match the PSBs great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition(M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, HDFC Banks merger with Times Bank Icici Banks acquisition of ITC Classic, Anagram Finance and Bank of Madurai. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a Pandoras Box and brought about the realization that all was not well in the functioning of many of the private sector banks. Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following Indias commitment to the W To agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. Tasks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners. Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation, invest in an insurance company for providing infrastructure and services support and set up of a separate joint venture insurance company with risk participation

Aggregate Performance of the Banking Industry

Aggregate deposits of scheduled commercial banks increased at a compounded annual average growth rate (Cagr) of 17.8 percent during 1969-99, while bank credit expanded at a Cagr of 16.3 percent per annum. Banks investments in government and other approved securities recorded a Cagr of 18.8 percent per annum during the same period. In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of only 6.0 percent as against the previous years 6.4 percent. The WPI Index (a measure of inflation) increased by 7.1 percent against 3.3 percent in FY00. Similarly, money supply (M3) grew by around 16.2 percent as against 14.6 percent a year ago. The growth in aggregate deposits of the scheduled commercial banks at15.4 percent in FY01 percent was lower than that of 19.3 percent in the previous year, while the growth in credit by SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago. The industrial slowdown also affected the earnings of listed banks. The net profits of 20 listed banks dropped by 34.43 percent in the quarter ended

March 2001. Net profits grew by 40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in the fourth quarter of 2000-2001. IDBI BANK LTD. On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfil the norms, it was a feat achieved with its own share of difficulties. The CAR, which at present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on the Basle Committee recommendations. Any bank that wishes to grow its assets needs to also shore up its capital at the same time so that its capital as a percentage of the risk-weighted assets is maintained at the stipulated rate. While the IPO route was a much-fancied one in the early90s, the current scenario doesnt look too attractive for bank majors. Consequently, banks have been forced to explore other avenues to shore up their capital base. While some are wooing foreign partners to add to the capital others are employing the M& A route. Many are also going in for right issues at prices considerably lower than the market prices to woo the investors.

Interest Rate Scene

The two years, post the East Asian crises in 1997-98 saw a climb in the global interest rates. It was only in the later half of FY01 that the US Fed cut interest rates. India has however remained more or less insulated. The past 2 years in our country was characterized by a mounting intention of the Reserve Bank Of India (RBI)to steadily reduce interest rates resulting in a narrowing differential between global and domestic rates. The RBI has been affecting bank rate and CRR cuts at regular intervals to improve liquidity and reduce rates. The only exception was in July2000 when the RBI increased the Cash Reserve Ratio (CRR) to stem the fall in the rupee against the dollar. The steady fall in the interest rates resulted in squeezed margins for the banks in general.

Governmental Policy
After the first phase and second phase of financial reforms, in the 1980scommercial banks began to function in a highly regulated environment, with administered interest rate structure, quantitative restrictions on credit flows, high reserve requirements and reservation of a significant proportion of lendable resources for the priority and the government sectors. The restrictive regulatory norms led to the credit rationing for the private sector and the interest rate controls led to the unproductive use of credit and low levels of investment and growth. The resultant financial repression led to decline in productivity and efficiency and erosion of profitability of the banking sector in general. This was when the need to develop a sound commercial banking system was felt. This was worked out mainly with the help of the recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector reforms called for interest rate flexibility for banks, reduction in reserve requirements, and a number of structural measures. Interest rates have thus been steadily deregulated in the past few years with banks being free to fix their Prime Lending Rates(PLRs) and deposit rates for most banking products. Credit market reforms included introduction of new instruments of credit, changes in the credit delivery system and integration of functional roles of diverse players, such as, banks, financial institutions and non-banking financial companies (Nbfcs).Domestic Private Sector Banks were allowed to be set up, PSBs were allowed to access the markets to shore up their Cars. Implications Of Some Recent Policy Measures:

The allowing of PSBs to shed manpower and dilution of equity are moves that will lend greater autonomy to the industry. In order to lend more depth to the capital markets the RBI had in November 2000 also changed the capital market exposure norms from 5 percent of banks incremental deposits of the previous year to 5 percent of the banks total domestic credit in the previous year. But this move did not have the desired effect, as in, while most banks kept away almost completely from the capital markets, a few private sector banks went overboard and exceeded limits and indulged in dubious stock market deals. The chances of seeing banks making a comeback to the stock markets are therefore quite unlikely in the near future. The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net worth to meet CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment.

Norms of NPAs in banking Industry A. BASEL I Norms:

The history of the Basel International codes and Standards (BIS) relating to minimum capital adequacy for banks goes back to the developed countries' initiative in 1988 to protect the Organization for Economic Cooperation and Development (OECD) banks from the financial crises common during the 1980s. Basel I norms, were set out in 1988 and accepted over the years by around 100 Central Banks across the globe under what came to be known as the Basel Accord. The original accord, now known as Basel-I, was quite simple and adopted a straight-forward `one size fits all approach' that does not distinguish between the differing risk profiles and risk management standards across banks. The Indian monetary authorities implemented the Basel II by 1999 .The banks were to assess their assets and off-balance-sheet risks taken and incorporate them on their balance-sheet. Basel I norms prescribed a minimum capital adequacy ratio (CRAR)of 8 % for Banks which were signatories to the Basel Accord. Basel I framework was confined to the prescription of only minimum capital requirements for banks, the Basel II framework expands this approach not only to capture certain additional risks in the minimum capital ratio but also includes two additional areas, Supervisory Review Process and Market Discipline through increased disclosure. Thus emerged RBI guidelines on investments and operations risk, paving the way for adoption of what have come to be known as Basel II norms.

B. BASEL II Norms:
It is the second accord which focuses on operational risk along with market risk and credit risk. Basel II tries to ensure that the anomalies existed in Basel I are corrected. The process of implementing Basel II norms in India is being carried out in phases. Phase I has been carried out for foreign banks operating in India and Indian banks having

operational presence outside India with effect from March 31,2008. In phase II, all other scheduled commercial banks (except Local Area Banks and RRBs) will have to adhere to Basel II guidelines by March 31, 2009. With the deadline of March 31, 2009 for full implementation of Basel II norms fast approaching, banks are looking to maintain a cushion in their respective capital reserves. The minimum capital to risk-weighted asset ratio (CRAR) in India is placed at 9%, one percentage point above the Basel II requirement. All the banks have their Capital to Risk Weighted Assets Ratio (CRAR) above the stipulated requirement of Basel guidelines (8%) and RBI guidelines (9%). As per Basel II norms, Indian banks should maintain tier I capital of at least 6%. The Government of India has emphasized that public sector banks should maintain CRAR of 12%. For this, it announced measures to re-capitalize most of the public sector banks, as these banks cannot dilute stake further, as the Government is required to maintain a stake of minimum 51% in these banks

BANKS OVERVIEW

STATE BANK OF INDIA ABOUT SBI

State Bank of India (SBI) is a Public Sector Banking Organization (PSB), in which the Government of India is the biggest shareholder. It is the largest bank in India and is ranked at 380 in 2008 Fortune Global 500 lists, and ranked 219 in 2008 Forbes Global 2000. Measured by the number of branch offices, SBI is the second largest bank in the world. SBI traces its ancestry back to the Bank of Calcutta, which was established in 1806; this makes SBI 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. With an asset base of $126 billion and its reach, it is a regional banking behemoth. In recent years the bank has focused on four priorities, first, reducing its huge staff through the Golden handshake scheme known as the Voluntary Retirement Scheme, second, computerizing its operations, third, implementation of Business Process ReEngineering(BPR), and fourth, trying to change the rude attitude of its staff through a program aptly named 'Parivartan' or 'change'. On the whole, the Bank has been successful in the first three initiatives but has failed in Parivartan. The evolution of State Bank of India can be traced back to the first decade of the 19th century. It began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. The bank was redesigned as the Bank of Bengal, three years later, on 2 January 1809. It was the first ever joint-stock bank of the British India, established under the sponsorship of the Government of Bengal. Subsequently, the Bank of Bombay (established on 15 April 1840) and the Bank of Madras (established on 1 July 1843) followed the Bank of Bengal. An important turning point in the history of State Bank of India is the launch of the first Five Year Plan of independent India, in 1951. The Plan aimed at serving the Indian economy in general and the rural sector of the country, in particular. Until the Plan, the commercial banks of the country, including the Imperial Bank of India, confined their services to the urban sector. Moreover, they were not equipped to respond to the growing needs of the economic revival taking shape in the rural areas of the country. Therefore, in order to serve the economy as a whole and rural sector in particular, the All India Rural Credit Survey Committee recommended the formation of a state-partnered and state-sponsored bank. The All India Rural Credit Survey Committee proposed the take over of the Imperial Bank of India, and integrating with it, the former state-owned or state-associate banks. Subsequently, an Act was passed in the Parliament of India in May 1955. As a result, the State Bank of India (SBI) was established on 1 July 1955. This resulted in making the State Bank of India more powerful, because as much as a quarter of the resources of the Indian banking system were controlled directly by the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed in 1959. The Act enabled the State Bank of India to make the eight former State-associated banks as its subsidiaries.

The State Bank of India emerged as a pacesetter, with its operations carried out by the 480 offices comprising branches, sub offices and three Local Head Offices, inherited from the Imperial Bank. Instead of serving as mere repositories of the community's savings and lending to creditworthy parties, the State Bank of India catered to the needs of the customers, by banking purposefully. The bank served the heterogeneous financial needs of the planned economic development. Branches The corporate center of SBI is located in Mumbai. In order to cater to different functions, there are several other establishments in and outside Mumbai, apart from the corporate center. The bank boasts of having as many as 14 local head offices and 57 Zonal Offices, located at major cities throughout India. It is recorded that SBI has about 10000 branches, well networked to cater to its customers throughout India. ATM Services SBI provides easy access to money to its customers through more than 8500 ATMs in India. The Bank also facilitates the free transaction of money at the ATMs of State Bank Group, which includes the ATMs of State Bank of India as well as the Associate Banks State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, etc. You may also transact money through SBI Commercial and International Bank Ltd by using the State Bank ATM-cum-Debit (cash plus) card.

Products And Services

Personal Banking

SBI Term Deposits SBI Loan For Pensioners SBI Recurring Deposits Loan Against Mortgage Of Property SBI Housing Loan Loan Against Shares & Debentures SBI Car Loan Rent Plus Scheme SBI Educational Loan Medi-Plus Scheme

Other Services

Agriculture/Rural Banking NRI Services ATM Services Demat Services Corporate Banking Internet Banking

Mobile Banking International Banking Safe Deposit Locker RBIEFT E-Pay E-Rail SBI Vishwa Yatra Foreign Travel Card Broking Services Gift Cheques

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 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. In Aug 2008 State Bank of Saurashtra (SBS) was merged with SBI notwithstanding protests from the Unions of both Banks. It is reported that officers of SBS were appeased by promising them uncalled for sops. The manner in which the whole thing was done exposes the weakness of the Management vis a vis its employees.

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

ALLAHABAD BANK

Allahabad Bank (Hindi: ), which began operations in 1865, has its headquarters in Kolkata is the oldest joint stock bank in India. The bank was founded in the historical city Allahabad in 1865 and now the bank has crossed 2500 branches on 31th march 2012. The Chairman and Managing Director of the bank is Shri J. P. Dua. The bank has a branch in Hong Kong and a representative office in Shenzen.

History
19th Century On 24 April 1865: A group of Europeans at Allahabad founded Allahabad Bank. Allahabad Bank is therefore now the oldest joint stock bank in India. 20th Century In 1920, P & O Banking Corporation acquired Allahabad Bank with a bid price of Rs.436 per share. Then in 1927 Chartered Bank of India, Australia and China acquired P&O Bank. However, Chartered Bank continued to operate Allahabad Bank as a separate entity. On 19 July 1969, the Government nationalized Allahabad Bank, together with 13 other banks. In October 1989, Allahabad Bank acquired United Industrial Bank, a Calcutta-based bank that had been established in 1940. Two years alter, Allahabad Bank established AllBank Finance Ltd, a wholly owned Merchant Banking subsidiary. 21st Century The government's ownership of Allahabad Bank was reduced in October 2002 when the bank engaged in an Initial Public Offering (IPO) of 10 crores of shares, each with a face value Rs.10. The IPO reduced the Government's shareholding to 71.16%. Then in April 2005 the bank conducted a second public offering of 10 crores of shares, each with a face value Rs.10 and selling at a premium of Rs.72. This offering reduced the Government's ownership to 55.23%. In June 2006 the bank opened its first office outside India when it opened a representative office in Shenzen, China. In February 2007, Allahabad Bank opened its first overseas branch, in Hong Kong. In March, the bank's business crossed Rs.1,00,000 crores mark.

Products and Services Products: 1.Deposits products

Flexi-Fix Deposit Rs. 5 Banking All Bank Tax Benefit term Deposit Scheme All Bank Premium SB Account All Bank Mahila Sanchey Account All Bank Vikash SB Account All Bank Premium Current Account Current Plus Deposit Scheme Sishu Mangal Deposit Scheme All Bank Monthly Plus

2. Retail credit products

Housing Loan Education Loan Car Loan Saral Loan Personal Loan for Pensioners Personal Loan for Doctors Loan against NSC/KVP All Bank Rent Loan All Bank Property Scheme All Bank Furnishing Loan Gold Loan Scheme All Bank Mobile Scheme Overdraft Facility in SB Accounts All Bank Trade Scheme

3. Other credit products

Akshay krishi- Kisan Credit Card Scheme All Bank- Expo

Other Services
ASBA (Application Supported by Blocked Amount) All Ayushman Bima Yojana Cash Management Services Depository Services International Debit-cum-ATM card Real Time Gross Settlement (RTGS) National Electronic Funds Transfer (NEFT) Gold Card Scheme for Exporters Regional MSME Care Centres Online Payments Inward Money Transfer Services Mobile Banking Services Account Portability

PUNJAB NATIONAL BANK

Punjab National Bank (PNB) is an Indian financial services company based in New Delhi, India. PNB is the third largest bank in India by assets. It was founded in 1894 and is currently the second largest state-owned commercial bank in India ahead of Bank of Baroda with about 5000 branches across 764 cities. It serves over 37 million customers. The bank has been ranked 248th biggest bank in the world by the Bankers Almanac, London. The bank's total assets for financial year 2007 were about US$60 billion. PNB has a banking subsidiary in the UK, as well as branches in Hong Kong, Dubai and Kabul, and representative offices in Almay, Dubai, Oslo, and Shanghai.

History
Punjab National Bank was registered on 19 May 1894 under the Indian Companies Act with its office in Anarkali Bazaar Lahore. The founding board was drawn from different parts of India professing different faiths and a varied back-ground with, however, the common objective of providing country with a truly national bank which would further the economic interest of the country. PNB's founders included several leaders of the Swadeshi movement such as Dyal Singh Majithia and Lala Harkishan Lal, Lala Lalchand, Shri Kali Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the management of the Bank in its early years. The board first met on 23 May 1894. Ironically, the PNB Website now claims Lala Lajpat Rai to be the founding father, surpassing Rai Mul Raj and Dyal Singh Majithia. With a common missionary zeal they set about establishing a national bank; the first one with Indian capital- owned, managed and operated by the Indians for the benefit of the Indians. The Lion of Punjab, Lala Lajpat Rai, was actively associated with the management of the Bank in iis formative years. The Bank made steady progress right from its inception. It has shown resilience to tide over many a crisis. It withstood the crisis in banking industry of 1913 and the severe depression of the thirties. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital that has survived to the present. (The first entirely Indian bank, the Oudh Commercial Bank, was established in 1881 in Faizabad, but failed in 1958.) PNB has had the privilege of maintaining accounts of national leaders such as Mahatma Gandhi, Shri Jawahar Lal Nehru, Shri Lal Bahadur Shastri, Shrimati Indira Gandhi, as well as the account of the famous Jalianwala Bagh Committee.

Nationalisation of the fourteen major banks on 19th july, 1969 was a major step for the banking industry. PNB was one amongst these. As a result, banking was given a new direction and thrust. The banks were expected to reach people in every nook and corner, meet their needs, and work for their economic upliftment. Removal of poverty and regional imbalances were accorded a high priority. PNB has always responded enthusiastically to the nations needs. It has been earnestly engaged in the task of national development. In the process, the bank has emerged as a major nationalized bank.

Timeline

1895: PNB commenced its operations in Lahore. 1904: PNB established branches in Karachi and Peshawar. 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi Circle. 1947: At the Partition of India and the commencement of Pakistani independence, PNB lost its premises in Lahore, but continued to operate in Pakistan. PNB had already shifted its registered office from Lahore to Calcutta in June 1947 even before the announcement of the Partition. 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat Bank became Bharat Nidhi Ltd. 1960: PNB again shifted its head office, this time from Calcutta to Delhi. 1961: PNB acquired Universal Bank of India. 1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon). September 1965: After the Indo-Pak war the government of Pakistan seized all the offices in Pakistan of Indian banks. PNB also had one or more branches in East Pakistan (Bangladesh). 1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue. 1969: The Government of India (GOI) nationalized PNB and 13 other major commercial banks, on 19 July 1969. 1976 or 1978: PNB opened a branch in London. 1986 The Reserve Bank of India required PNB to transfer its London branch to State Bank of India after the branch was involved in a fraud scandal. 1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. The acquisition added Hindustan's 142 branches to PNB's network. 1993: PNB acquired New Bank of India, which the GOI had nationalized in 1980. 1998: PNB set up a representative office in Almaty, Kazakhstan. 2003: PNB took over Nedungadi Bank, the oldest private sector bank in Kerala. At the time of the merger with PNB, Nedungadi Bank's shares had zero value, with the result that its shareholders received no payment for their shares. PNB also opened a representative office in London.

2004: PNB established a branch in Kabul, Afghanistan.

PNB also opened a representative office in Shanghai. PNB established an alliance with Everest Bank in Nepal that permits migrants to transfer funds easily between India and Everest Bank's 12 branches in Nepal.

2005: PNB opened a representative office in Dubai. 2007: PNB established PNBIL Punjab National Bank (International) in the UK, with two offices, one in London, and one in South Hall. Since then it has opened a third branch in Leicester, and is planning a fourth in Birmingham. 2008: PNB opened a branch in Hong Kong. 2009: PNB opened a representative office in Oslo, Norway, and a second branch in Hong Kong, this in Kowloon. 2010: PNB received permission to upgrade its representative office in the Dubai International Financial Centre to a branch.

Products and Services

1. Savings Fund Account Total Freedom Salary Account, PNB Prudent Sweep, PNB Vidyarthi SF Account, PNB Mitra SF . 2. Account Current Account PNB Vaibahv, PNB Gaurav, PNB Smart Roamer. 3. Fixed Deposit Schemes Spectrum Fixed Deposit Scheme, Anupam Account, Mahabachat Schemes, Multi Benefit Deposit . 4. Scheme Credit Schemes Flexible Housing Loan, Car Finanace, Personal Loan, Credit Cards. 5. Social Banking Mahila Udyam Nidhi Scheme, Krishi Card, PNB Farmers Welfare Trust 6. Corporate Banking Gpld Card scheme for exporters, EXIM finance . 7. Business Sector PNB Karigar credit card, PNB Kushal Udhami, PNB Pragati Udhami, PNB Vikas Udhami Apart from these, the PNB also offers locker facilities, senior citizens schemes, PPF schemes and various E-services.

Awards:
Ranked among top 50 companies by the leading financial daily, Economic Times.

Ranked as 323rd biggest bank in the world by Bankers Almanac (January 2006), London. Earned 9th place among India's Most Trusted top 50 service brands in Economic Times- A.C Nielson Survey. Included in the top 1000 banks in the world according to The Banker, London. Golden Peacock Award for Excellence in Corporate Governance - 2005 by Institute of Directors. FICCI's Rural Development Award for Excellence in Rural Development 2005. National Award for Excellence in SSI Lending- Ranked 2nd for four consecutive years from 2002 to 2005 The Banker's Almanac - Ranked 3rd amongst banking sector in India and 323rd rank in the world in 2006 The Banker, London- Ranked 386 amongst Top 1000 Global Banks in July 2005 AC Nielson Survey - 9th amongst Top 50 Most Trusted Services Brands in India Golden Peacock Award- for excellence in corporate governance in 2005.

PNB Overseas Offices

PNB has a banking subsidiary in the United Kingdom, as well as branches in Hong Kong and Kabul. It has representative offices in Almaty, Shanghai and Dubai.

Coming into Being

The bank was established in 1895 at Lahore. PNB's founders included several leaders of the Swadeshi movement like Dyal Singh Majithia, Lala HarKishen Lal, Lala Lalchand, Kali Prosanna Roy, EC Jessawala, Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the bankss management in its early years. It holds the distinction of being the first Indian bank to have been started solely with Indian capital. In 1969, it was nationalized by the Government of India along with 13 other banks.

Subsidiaries of Punjab National Bank

PNB Gilts PNB Housing Finance PNB Investment Services PNB Insurance Broking PNB Life Insurance Co.

Joint Ventures of Punjab National Bank

Principal PNB Asset Management Company Principal Trustee Company Assets Care Enterprises India Factoring & Finance Solutions

Fortune India 500 Ranking

Punjab National Bank was ranked #26 in the Fortune India 500 ranking of 2011.

Forbes Global 2000 Ranking

Punjab National Bank was ranked #1243 in the Forbes Global 2000.

PNB METLIFE
Punjab National Bank has entered into a strategic alliance with Metlife India Insurance, headquartered in Bangalore and Gurgaon, which has operated in India since 2001 and is an affiliate of MetLife. The new entity, Pnb Metlife markets insurance products through PNB's branches.

RATIO ANALYSIS

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

GROSS NPA RATIO: Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is to be counted in terms of percentage.

NET NPA RATIO: The net NPA percentage is the ratio of net NPA to net advances, in which the provision is to be deducted from the gross advance. The provision is to be made for NPA account.

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

PROBLEM ASSET RATIO: It is the ratio of gross NPA to total assets of the banks.

CAPITAL ADEQUACY RATIO: Capital Adequacy Ratio can be defined as ratio of the capital of the Bank, to its assets, which are weighted / adjusted according to risk attached to them.

OBJECTIVES OF THE STUDY

Primary objective: To know the performance of Indian Public Sector Banks with special reference to Non Performing Assets. Secondary objective: To know the reasons for an asset becoming Non-Performing Asset. To study the position of Non-performing Assets in various banks To study the procedure and tools used for management of NPAs.

RESEARCH METHODOLOGY

Research Research can be defined as the search for knowledge, or as any systematic investigation, to establish novel facts, solve new or existing problems, prove new ideas, or develop new theories, usually using a scientific method. Research Methodology The system of collecting data for research projects is known as research methodology. The data may be collected for either theoretical or practical research for example management research may be strategically conceptualized along with operational planning methods and change management. Research Design A research design is the arrangement of conditions for collection and analysis of data in a manner that aims to combine relevance to the research purpose with economy in procedure. Decision regarding what, where, when, how much, by what means concerning an inquiry or a research study constitute a research design. Types of Research Design:1. Exploratory: - Exploratory research design is also termed as formulative research design. The main purpose of this study is that of formulating a problem for more precise investigation or of developing the working hypothesis from an operational point of view. The major emphasis in such studies is on the discovery of ideas and insights. 2. Descriptive:- Descriptive research design are those studies which are concerned with describing the characteristics of a particular individual, or of a group. Descriptive Research design is used in this report.

Methods of Data Collection

Primary Data: - : Primary data related to reasons of NPAs collected from 15 bank officials Secondary Data:- Secondary Data are those, which have already been collected by someone else and which have already been passed through the statistical process. Secondary data is also used to gain initial insight into the research problem.

Secondary data is used. This data is collected from the following sources. Annual reports of the banks and financial manuals. Reserve Bank of India annual reports. Internet

DATA ANALYSIS AND INTERPRETATION Analysis of Primary Data

Component Matrix
a

Component 1 Inefficiency in management improper credit management and monitoring lack of coordination among lenders Problem of bad credit appraisal Technical problems Funds not used for said purpose Project not completed in time Poor recovery receivables Business Failures Willful defaults,fraud,disputes,mi s appropriation Change of government policies Loans sanctioned for agriculture purpose Extraction Method: Principal Component Analysis. .346 .659 .388 -.084 .289 .635 -.238 -.524 .161 .203 .369 .241 -.697 .488 .492 .146 .156 -.375 .134 -.595 .492 .314 .274 -.364 .543 -.173 -.624 .234 -.319 -.014 -.886 .394 .076 -.612 .141 .122 .161 .124 -.166 .253 .150 .184 .717 .487 .092 .352 .156 .510 -.132 -.541 .005 -.483 .488 .023 -.155 .639 2 -.241 3 .238 4 .404 5 .102

INTERPRETATION The five components extracted from factor analysis for reasons of NPAs. Inefficiency in management. Loans sanctioned for agriculture purposes. Problem of bad credit appraisal Business Failures Willful defaults, fraud, disputes, misappropriation.

This means that these five components have the most weight and are the primary reasons for NPAs.

COMPARATIVE RATIO ANALYSIS

GROSS NPA RATIO %= NPA Gross Advances x 100

Banks

2007-2008

2008-2009

2009-2010

SBI

3.04%

2.98%

3.28%

Allahabad Bank

2.00%

1.81%

1.71%

PNB

2.7%

1.77%

1.71%

3.50% 3.00% 2.50% 2.00% 1.50% 1.00% 0.50% 0.00% 2007-2008 2008-2009 2009-2010 SBI Allahabad Bank PNB

Source: Reserve Bank of India

INTERPRETATION The table above indicates the quality of credit portfolio of the banks. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa.

We can see from the above Chart that the State Bank of India has the higher gross NPA ratio of 3.28% as compared to the Allahabad i.e1.71% and Punjab National Bank i.e 1.71%

We can see that State Bank of India has increased their NPAs from the previous year at much higher rate, whereas other banks are successful in diminishing it.

NET NPA RATIO

Net NPA Ratio = Gross NPA-Provisions

x 100

Gross Advances-Provisions

Banks SBI Allahabad Bank PNB

2007-08 2.57% 1.48% 2.44%

2008-09 2.53% 1.29% 1.25%

2009-10 2.35% 0.55% 1.18%

14.5 14 13.5 13 12.5 12 11.5 11 10.5 2007-08 2008-09 2009-10 SBI Allahabad Bank PNB

Source: Reserve Bank of India

INTERPRETATION High NPA ratio indicates the high quantity of risky assets in the Banks for which no provision are made. The SBI has the highest NPA ratio i.e. (2.35%) as compared to Allahabad Bank i.e. (0.55%) and PNB i.e. (1.18%).

PROVISIONING RATIO

Provision Ratio = Total Provision x 100 Gross NPAs

Banks SBI Allahabad Bank PNB

2007-08 15.58% 26.56% 11.36%

2008-09 15.14% 29.04% 29.67%

2009-10 28.86% 68.00% 31.09%

14.5 14 13.5 13 12.5 12 11.5 11 10.5 2007-08 2008-09 2009-10 SBI Allahabad Bank PNB

Source: Reserve Bank of India

INTERPRETATION

This Ratio indicates the degree of safety measures adopted by the Banks. It has direct bearing on the Profitability, Dividend and safety of shareholders fund.

If the provision ratio is less, it indicates that the Banks has made under provision.

The highest provision ratio is showed by Allahabad Bank with 68.00% as compared to SBI i.e. 28.86% and PNB i.e. 31.09%.

PROBLEM ASSET RATIO

Problem Asset Ratio = Gross NPAs x 100 Total Assets

Banks SBI Allahabad Bank PNB

2007-08 1.77 1.218 1.667

2008-09 1.694 1.104 1.120

2009-10 1.693 1.003 1.083

14.5 14 13.5 13 12.5 12 11.5 11 10.5 2007-08 2008-09 2009-10 SBI Allahabad Bank PNB

Source: Reserve Bank of India

INTERPRETATION

We determine the percentage of assets out of total assets / advances that are likely to become the Non- performing Assets as problematic assets.

From the above table it becomes clear that State Bank of India have high problem Asset Ratio with 1.693% as compare to Allahabad Bank and Punjab national Bank

That Ratio implies that the SBI have the highest probability of creating NPAs in the near future.

CAPITAL ADEQUACY RATIO

Capital Adequacy Ratio = Capital

x 100

Risk weighted Asset

Banks SBI Allahabad Bank PNB

2007-08 13.47 12.04 13.46

2008-09 14.25 13.11 14.03

2009-10 13.39 13.62 14.16

14.5 14 13.5 13 12.5 12 11.5 11 10.5 2007-08 2008-09 2009-10 SBI Allahabad Bank PNB

Source: Reserve Bank of India

INTERPRETATION

The capital adequacy ratio is important for them to maintain as per the banking regulations.

Each bank needs to create the capital Reserve to compensate the Non Performing Assets.

Each Asset has been given a risk weight age as per RBI guidelines Risk weighted Asset = Asset * Risk Weight age So, More the Risk weighted Assets are, Bank has to maintain more capital.

As far as this ratio is concerned PNB is better than SBI and Allahabad Bank.

FINDINGS

SBI

Bank shows high NPAs Ratio as compare to Allahabad Bank and Punjab

National Bank.

In Analysis Allahabad Bank show low risk profile whereas SBI has high risk profile.

SBI will have the major probability of facing NPAs in the near future.

Study also indicates that major NPA increases because of govt. recommended priority sectors.

Allahabad Bank has better provisioning as compared to other banks and PNB have better capital adequacy ratio than SBI and Allahabad Bank.

CONCLUSION

There has been a continuous decrease in the time period considered to declare a loan as non-performing. The continuous decrease in the time period is to bring the Indian banking norms at par with international norms. This move will certainly reduce the NPAs and in turn improve the asset quality of the banks. Till recent past, corporate borrowers even after defaulting continuously never had the fear of bank taking action to recover their dues. This is because there was no legal framework to safeguard the real interest of banks. However with the introduction of SARFAESI ACT banks can issue notices to defaulters to repay their loans. Also, the Supreme Court has given the banks the freedom to sell mortgage assets of the borrowers, if they do not respond to the legal proceedings initiated by lender. This enables banks to get rid of sticky loans thereby improving their bottom lines.

LIMITATIONS OF THE STUDY

o The study was conducted with only past 3 years, which may not be considered appropriate. o The study was conducted in six months of duration which might be a short time period for the effective study of the NPAs in the Banking Industry. o The study may have been affected by the judgments and bias of the researcher. o The number of banks undertake i.e. 3 were used which are very small and doesnt reflect the entire NPAs in the Banking Industry.

SUGGESTIONS There surely is a need to distinguish between willful and unwilling defaulters. In case of
the latter category of defaulters the law should not be as harsh as in case of willful defaulters.

The act should be judiciously and selectively applied so that NPAs could be converted
into performing assets.

Compromise wherever possible and desirable should be resorted to as per banks extent
terms and conditions.

Creation of additional benches and enhancing the capacity of DRT (debt recovery
tribunal) can be rationalized and delays could be avoided.

Segregation of the benches should be done in order to ensure that a flood of small cases
do not retard the disposal of larger cases.

In order to reduce the balance of NPAs, Bank should constantly review and monitor the
accounts and the progress of the project for which the loan has been sanctioned.

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

BIBLIOGRAPHY

BOOKS REFERRED: Macro economics MISHRA and PURI Banking and law practices-S.L. GUPTA Marketing Research NARESH MALHOTRA.

JOURNALS REFERRED: Journal of Reserve Bank of India Economic survey

WEBSITES VISITED: www.Marketresearch.com www.Google.com www.reservebankofindia.com www.statebankofindia.com www.allahabadbank.com www.punjabnationalbank.com

RESEARCH REPORTS. Indian bank association report Antique research India bulls report Research paper of Prasanta K Reddy Reports of SH. V. Leeladhar