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Chapter 1: Introduction of Project

1.1 Introduction of Topic Non-performing Assets

The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of Non Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days the entire bank loan automatically turns a non performing asset. The reco!ery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to a!oid NPA no cannot be then left is to look after the factor responsible for it and managing those factors.

!ANIN":An asset that ceases to generate income for the bank is called Non"Performing Asset. NPA are ad!ances that ha!e ceased to perform. An ad!ance asset will cease to be a Performing asset and will be deemed to ha!e become a Non"Performing asset when there is A default in the payment of interest amounts which are debited to the ad!ance account. A default in the repayment of the installments pertaining to the principal amount of the ad!ance.

#!$INITI%N %$ NPA:
&Non Performing Asset means an asset or account of 'orro(er) (hich has 'een c*assified 'y a 'an+ or financia* institution as su'-standard) dou'tfu* or *oss asset) in accordance (ith the directions or guide*ines re*ating to asset c*assification issued 'y ,-I. An asset including a leased asset becomes non"performing when it ceases to generate income for the bank.

A #non"performing asset$ %NPA& was defined as a credit facility in respect of which the interest and' or instalment of principal has remained #past due$ for a specified period of time. (ith a !iew to mo!ing towards international best practices and to ensure greater transparency it has been decided to adopt the )*+ days o!erdue) norm for identification of NPAs form the year ending ,arch -. /++0. Accordingly with effect from ,arch -. /++0 a non"performing asset %NPA& shell be a loan or an ad!ance where1 interest and 'or installment of principal remain o!erdue for a period of more than *+ days in respect of a Term 2oan the account remains )out of order) for a period of more than *+ days in respect of an o!erdraft' cash 3redit%45'33& the bill remains o!erdue for a period of more than *+ days in the case of bills purchased and discounted interest and' or installment of principal remains o!erdue for two har!est seasons but for a period not e6ceeding two half years in the case of an ad!ance granted for agricultural purpose and any amount to be recei!ed remains o!erdue for a period of more than *+ days in respect of other accounts.

1.. /ignificance of Project

The outcomes analy7ed from this study would be beneficial to !arious sections such as: -an+s: This study would definitely benefit the banks in a way that directs them as to which sector should be gi!en priority for lending money. $urther ,esearchers: The ma8or beneficiaries from the pro8ect would be the researchers themsel!es as this study would enhance their knowledge about the topic. They get an insight of the present scenario of this industry as this is the emerging industry in the financial sector of the economy. /tudent: To get the understanding of NPA concept as a whole.

1.0 ,ationa*e1 ,eason 'ehind the Project

.. Study the concept of Non"Performing Assets. /. To study 3lassification of the asset in NPA. -. To study rates of NPA pro!ision according to classification of the asset. 0. To study !arious rules and policies guidelines issued by 9:;. <. To understand !arious account statements we ha!e to prepare in the NPA account.

1.2 /cope of the project

The term NPA connotes a financial asset of a bank which has stopped earning an e6pected reasonable return1 it is also a reflection of the producti!ity of the unit firm concern industry and nation where that asset is idling. =iewed with this perspecti!e the NPA is a result of an en!ironment that pre!ents it from performing up to e6pected le!els. Scope of NPAs deals with two sets of policies .. 9elating to e6isting NPAs. /. To reduce fresh NPA generation. As far as old NPAs are concerned a bank can remo!e it on its own or sell the assets to A,3s to clean up its balance sheet. >or pre!enting fresh NPAs the bank itself should adopt proper policies.

Chapter .: ,esearch
..1 %'jecti3es of the /tudy


To study general reason for asset becoming NPAs. To highlight effecti!e NPA ,anagement Policies. To make the suggestion to o!ercome the problem of regarding the NPAs. To e!aluate profitability positions of banks To ?now the ;mpact of NPAs To ?now the 9easons for NPAs To determine the factors affecting NPA

... ,esearch #esign

The research design that will be use is 5escripti!e 9esearch. ;n!ol!es gathering data that describe e!ents and then organi7es tabulates depicts and describes the data. @ses description as a tool to organi7e data into patterns that emerge during analysis.

4ften uses !isual aids such as graphs and charts to aid the reader.

..0 /amp*e #esign

:ank of ,aharashtra ?oradi :ranch.

..2Too*s 4 techni5ues for data co**ection

Aere both primary as well as secondary data would be used.

1. P,I A,6 #ATA

;nter!iew of :ankers. 2. SECONDARY DATA-

Annual report :ooks ;nternet

..7 8imitation of the study

The study is based on the ,aster 3ircular issued by the 9:;. The study is only for the academic purpose. ;t was critical for me to gather the financial data of ,aharashtra :ank.

Chapter 0:Chapteri9ation
Ch.1 Introduction IN#IAN -AN:IN" IN#;/T,6:
:anking in ;ndia originated in the last decades of the .Bth century. The oldest bank in e6istence in ;ndia is the State :ank of ;ndia a go!ernment"owned bank that traces its origins back to Cune .B+D and that is the largest commercial bank in the country. 3entral banking is the responsibility of the 9eser!e :ank of ;ndia which in .*-< formally took o!er these responsibilities from the then ;mperial :ank of ;ndia relegating it to commercial banking functions. After ;ndia)s independence in .*0E the 9eser!e :ank was nationali7ed and gi!en broader powers. ;n .*D* the go!ernment nationali7ed the .0 largest commercial banks1 the go!ernment nationali7ed the si6 ne6t largest in .*B+. Since the dawn of independence ;ndian financial sector in general and banking in particular has leaped giant strides into a systemati7ed growth en!ironment. ;ndian :anks ha!e consolidated their growth year after year. ,easures like setting up of 9eser!e :ank of ;ndia as the regulator bank nationali7ation and other reforms ha!e worked as catalyst in the de!elopment dri!e. There was always a need to ha!e regulated uniform and prudent accounting policies for the banks with special reference to the credit risk in!ol!ed in lending acti!ities so that the significant growth in the business !olumes of banks was ably supported by a well set regulatory norms. 3urrently ;ndia has .D* scheduled commercial banks %S3:s& " /B public sector banks %that is with the Fo!ernment of ;ndia holding a stake& -. pri!ate banks %these do not ha!e go!ernment stake1 they may be publicly listed and traded on stock e6changes& and 0foreign banks. They ha!e a combined network of o!er <- +++ branches and .E +++ AT,s. According to a report by ;39A 2imited a rating agency the public sector banks hold o!er E< percent of total assets of the banking industry with the pri!ate and foreign banks holding .B./G and D.<G respecti!ely.

A bank is an institution that accepts deposits of money from the public withdrawal by cheHue and uses the money collected for lending to the household the firm and the go!ernment. An organi7ation usually a corporation chartered by a state or federal go!ernment which does most or all of the following: recei!es demand deposits and time deposits honors instruments drawn on them and pays interest on them1 discounts notes makes loans and in!ests in securities1 collects checks drafts and notes1 certifies depositor)s checks1 and issues drafts and cashier)s checks. IN#IAN -AN:IN" ,!";8ATI%N ACT) 1929 define the acti!ity of the bank as: &accepting for the purpose of *ending or in3esting of deposits of money from the pu'*ic repaya'*e on demand or other(ise) and (ithdra(a* 'y che5ue) draft and order or other(ise.< >ollowing are the three important features of this definition of commercial bank: .. Issential function of a bank is that it accepts cheHueable deposits from the public. :ank accepts deposits from the public at large. ,oreo!er these deposits are repayable on the demand and withdrawal is allowed by cheHue.


The second essential function of a bank is that the bank uses these deposits for lending to other and undertaking in!estment in securities.


3reation of money is a uniHue characteristic of commercial bank. Their debts circulate as money in the economy. :anks ha!e the power to create and destroy through their lending acti!ities. ,oney created by commercial bank is known as :ank ,oney.

Ch.. ,esearch ,esearch



9esearch ,ethodology is the systematic design collection analysis J reporting of data J findings rele!ant to appraisal specific situation facing the company. The 9esearch was an e6ploratory type which aims at finding the true potential of the organi7ation and also a Hualitati!e analysis regarding the 9eco!ery Performance of NPA of a Nagpur 3ity 9egion of :ank of ,aharashtra.

Type of ,esearch
!=p*oratory 1 $ormu*ati3e ,esearch: I6ploratory research is a preliminary study of the sub8ect matter. ;t aims to del!e into the nuances of the problem. ;t is usually a preliminary study and is followed by descripti!e e6perimental research. ;t does not ha!e a formal and rigid design as the researcher may ha!e to change his focus or direction depending on the a!ailability of new ideas and relationships among !ariables. ;t attempts to see what is there rather than trying to predict the underlying relationships. An e6ploratory study usually in!ol!es three steps" a re!iew of pertinent literature an e6perience sur!ey and an analysis of insight stimulating cases.

8earning the Theoretica* aspects:

=arious data on Non"Performing Assets ha!e been collected from :ank of ,aharashtra and the theoretical aspects ha!e been understood.

Ana*y9ing the #ata:"

The data of 9eco!ery Performance of Nagpur 3ity 9egion of :ank of ,aharashtra was collected and analy7ed with !arious Fraphs. (ith the help of Annual 9eport of the :ank of ,aharashtra and figures made a!ailable for Nagpur 3ity 9egion the present NPA of the Nagpur 3ity 9egion are studied and analysis has been made in the pro8ect. 4n the basis of that analysis some >indings and Suggestions are gi!en at the end of the pro8ect.

Ch.0 Company Profi*e

-an+ of

aharashtra established on .Dth September .*-< with an authori7ed capital of

9s .+.++ lakh. ;t is a Public Sector :ank. ;t came into commencement on B th >ebruary .*-D. >irst branch was opened at :a8irao 9oad Pune on D th >ebruary .*-D. Thereafter it was shifted to new corporate office at 24?,ANFA2 Shi!a8i Nagar Pune in .*EB. At today$s date :ank of ,aharashtra has .<B* :ranches and .- e6tension counter spread o!er // States and / @nion territories. The :ank of ,aharashtra has a network of <+/ AT,$s with =;SA connecti!ity. :ank of ,aharashtra pro!ides facilities in area like Agriculture Aigh Tech 4!erseas ;ndustrial financing = Sat facility 9emote access Kuery terminal Tele banking facility and AT, etc. :ank of ,aharashtra also pro!ides banking and other financial ser!ices to corporate and pri!ate customers. The :ank offers personal banking cash management retail loans and other financial ser!ices. These ser!ices include deposits sa!ings'current bank account !ehicle loans personal loans retail trade finance global banking lending to priority sector and small scale sector foreign e6change and e6port finance corporate loans and eHuipment loans. :ank of ,aharashtra has full"fledged Training 3ollege ;nformation Technology Training ;nstitute and Staff Training 3enters. The ob8ecti!es behind establishing :ank of ,aharashtra were to mobili7e the sa!ings of household and e6tend financial support to persons of small means who were then not considered for credit facilities by banks. ;n a nutshell the philosophy of founder fathers of the :ank was something more than what has been emphasi7ed about the role of Public Sector :anks in the economic upliftment of rural poor and neglected segments of the society. The bank has fine tuned its ser!ices to cater to the needs of the common man and incorporated the latest technology in banking offering a !ariety of customi7ed ser!ices. The Aim for :ank is to cater to all types of needs of the entire family in the whole country. ;ts

dream is >%ne $ami*y) %ne -an+)

aharashtra -an+>. The - ,$s of the :ank are

,obili7ation of ,oney ,oderni7ation of ,ethods and ,oti!ation of Staff.

To be a !ibrant forward looking techno"sa!!y customer centric bank ser!ing di!erse sections of the society enhancing shareholders$ and employees$ !alue while mo!ing towards global presence.

To ensure Huick and efficient response to customer e6pectations. To inno!ate products and ser!ices to cater to di!erse sections of society. To adopt latest technology on a continuous basis. To build proacti!e professional and in!ol!ed workforce. To enhance the shareholders$ wealth through best practices and corporate go!ernance. To enter international arena through branch network. To be a !ibrant forward looking techno"sa!!y customer centric bank ser!ing di!erse sections of the society enhancing shareholders) and employees) !alue while mo!ing towards global presence. %ur 8ogo The #eepma* (ith its many lights rising to greater heights. The Pi**ar 4ur institution" Symbolising strength. The #iyas 4ur :ranches" Symbolising ser!ice. The 0 @s symbolising

obilisation of ,oney odernisation of ,ethods and oti!ation of Staff.


TI3AN424FL (;TA PI9S4NA2 T4@3A %;t is this philosophy that enables :ank of ,aharashtra to reach out to its customers and cater to the needs of the classes and masses.&

The bank wishes to cater all types of needs of the entire family in the whole country. ;ts motto is %ne $ami*y) %ne -an+) aharashtra -an+

Special Services: All ;ndia help line numbers are .B++"///"-0+ J .B++"//+"BBB. AT, facility Tele banking 5epository ser!ices Touch screen facility and ,obile =an information center facility for rural areas. :ank has established its own corporate Networking ,AAANIT connecting <D/ locations i.e. </0 branches -/ regional offices < circle offices training colleges training centers and central offices. :ank is establishing its own 5ata 3enter at ;T Park ?haradi and Pune. ,aharashtra :ank has full"fledged Training 3ollege ;nformation Technology Training ;nstitute and - Staff Training 3enters. :ank of ,aharashtra is now working as corporate agent for life and non life insurance products of 2;3 of ;ndia and @nited ;ndia ;nsurance 3ompany. :ank has entered in to agreement with ,rs. T3S for pro!iding 3ore :anking Solution M:AN3SM and has appointed ,rs. Irnst J Loung as consultants for implementation of 3:S in D++ branches >or speedy and Huality processing of retail loans ./ 9etail Asset branches were opened taking the total number of 9etail Asset :ranches to .<. The :ank has established 9ural 5e!elopment 3enters at Aadpsar J :higwan. ;t has also established ,ISIT; at Pune Aurangabad and Nagpur 3enters for training the new entrepreneurs. Framin ,ahila =A :A2 =ikas ,andal is established at Pune for the de!elopment of the women and children in rural areas and forming Self Aelp Froups. :ank of ,aharashtra acts as 2ead :anker in D 5istricts and works as State 2e!el con!ener of :anker)s committee for ,aharashtra State.

$uture P*ans: Systematic approach for reducing Net NPA le!el to below .+<G. 3onsolidation of 9egional 9ural :anks sponsored by :ank of ,aharashtra. I6tensi!e use of (ide Area Network",AAANIT inter"connecti!ity of branches by pro!iding more customer"centric applications like Any :ranch :anking Ser!ice 5emat etc. I6tending 9TFS facility to 0<+ plus branches. SAFs with special reference to agriculture to be promoted and financing be implemented so as to increase financing to small and marginal farmers. Plan to open /<+ new branches. ;nstallation of ED< new AT,s taking total number of AT,s to ./DE. Sale of Fold 3oins through designated branches. 5oor Step :anking" 3ash and 3heHue pick up facility to AN;$s and 3orporate customers. =alue added Pay 9oll Accounts for 3orporate employees. Special AS:A product for corporate clients

C% PAN6A/ P,%$I8! A/ %N 6!A, !N#!# .01.-.010

Company Profi*e: !=changes: Tota* #eposits: Tota* Ad3ances: ajor Industry: /u' Industry: N!T P,%$IT -an+ %f aharashtra

-% 9200B.00 Crores BC09B.00 Crores $inancia* /ector Commercia* -an+s BC0

Ch.2 ,e3ie( of 8iterature


According to a study 'y -ro(n'ridge D199EF) most of the bank failures were caused by nonperforming loans. Arrears affecting more than half the loan portfolios were typical of the failed banks. ,any of the bad debts were attributable to moral ha7ard: the ad!erse incenti!es on bank owners to adopt imprudent lending strategies in particular insider lending and lending at high interest rates to borrowers in the most risky segments of the credit markets. -*oem and "orter D.001F suggested that a more or less predictable le!el of non"performing loans though it may !ary slightly from year to year is caused by an ine!itable number of #(rong economic decisions by indi!iduals and plain bad luck %inclement weather une6pected price changes for certain products etc.&. @nder such circumstances the holders of loans can make an allowance for a normal share of non"performance in the form of bad loan pro!isions or they may spread the risk by taking out insurance. Interprises may well be able to pass a large portion of these costs to customers in the form of higher prices. >or instance the interest margin applied by financial institutions will include a premium for the risk of nonperformance on granted loans. At this time banks$ non"performing loans increase profits decline and substantial losses to capital may become apparent. I!entually the economy reaches a trough and turns towards a new e6pansionary phase as a result the risk of future losses reaches a low point e!en though banks may still appear relati!ely unhealthy at this stage in the cycle. According to "orter and -*oem D.00.F non"performing loans are mainly caused by an ine!itable number of wrong economic decisions by indi!iduals and plain bad luck %inclement weather une6pected price changes for certain products etc.&. @nder such circumstances the holders of loans can make an allowance for a normal share of nonperformance in the form of bad loan pro!isions or they may spread the risk by taking out insurance. Petya :oe3a D.000F his study on the Performance of ;ndian :anks. 5uring >inancial 2iberali7ation states that new empirical e!idence on the impact of financial liberali7ation on the performance of ;ndian commercial banks. The analysis focuses on e6amining the beha!ior and determinants of bank intermediation costs and profitability during the liberali7ation period. The empirical results suggest that ownership type has a significant effect on some performance indicators and that the obser!ed increase in competition during financial liberali7ation has been associated with lower intermediation costs and profitability of the ;ndian banks. #as and "hosh D.000F empirically e6amined non"performing loans of ;ndia$s public sector banks in terms of !arious indicators such as asset si7e credit growth and macroeconomic condition and operating efficiency indicators. Sergio %.**D& in a study of non"performing loans in ;taly found e!idence that an increase in the riskiness of loan assets is rooted in a bank$s lending policy adducing to relati!ely unselecti!e and inadeHuate assessment of sectoral prospects. ?radi et.a* D.00CF his study onN ,easurement of efficiency of bank in ;ndia concluded that in modern world performance of banking is more important to stable the economy .in order to see the efficiency of ;ndian banks we ha!e see the fore indicators i.e. profitability producti!ity assets Huality and financial management for all banks includes public sector pri!ate sector banks in ;ndia for the period /+++ and .*** to /++/"/++-. >or measuring efficiency of banks we ha!e adopted de!elopment en!elopment analysis and found that public sectors banks are more efficient then other banks in ;ndia.

-rijesh :. /aho et.a* D.00BF) this paper attempts to e6amine the performance trends of the ;ndian commercial banks for the period: .**E"*B " /++0"+<. 4ur broad empirical findings are indicati!e in many ways. >irst the increasing a!erage annual trends in technical efficiency for all ownership groups indicate an affirmati!e gesture about the effect of the reform process on the performance of the ;ndian banking sector. Second the higher cost efficiency accrual of pri!ate banks o!er nationali7ed banks indicate that nationali7ed banks though old do not reflect their learning e6perience in their cost minimi7ing beha!ior due to O" inefficiency factors arising from go!ernment ownership. This finding also highlights the possible stronger disciplining role played by the capital market indicating a strong link between market for corporate control and efficiency of pri!ate enterprise assumed by property right hypothesis. And finally concerning the scale elasticity beha!ior the technology and market"based results differ significantly supporting the empirical distinction between returns to scale and economies of scale often used interchangeably in the literature. ,oma itra et.a* D.00EF) A stable and efficient banking sector is an essential precondition to increase the economic le!el of a country. This paper tries to model and e!aluate the efficiency of <+ ;ndian banks. The ;nefficiency can be analy7ed and Huantified for e!ery e!aluated unit. The aim of this paper is to estimate and compare efficiency of the banking sector in ;ndia. The analysis is supposed to !erify or re8ect the hypothesis whether the banking sector fulfils its intermediation function sufficiently to compete with the global players. The results are insightful to the financial policy planner as it identifies priority areas for different banks which can impro!e the performance. This paper e!aluates the performance of :anking Sectors in ;ndia. -./atish :umar D.00EF) in his article on an e!aluation of the financial performance of ;ndian pri!ate sector banks wrote Pri!ate sector banks play an important role in de!elopment of ;ndian economy. After liberali7ation the banking industry underwent ma8or changes. The economic reforms totally ha!e changed the banking sector. 9:; permitted new banks to be started in the pri!ate sector as per the recommendation of Narashiman committee. The ;ndian banking industry was dominated by public sector banks. :ut now the situations ha!e changed new generation banks with used of technology and professional management has gained a reasonable position in the banking industry. M. Karunakar et.al (2008), Study the important aspect of norms and guidelines for making the whole sector !ibrant and competiti!e. The problem of losses and lower profitability of Non" Performing Assets %NPA& and liability mismatch in :anks and financial sector depend on how !arious risks are managed in their business. :esides capital to risk (eightage assets ratio of public sector banks management of credit risk and measures to control the menace of NPAs are also discussed. The lasting solution to the problem of NPAs can be achie!ed only with proper credit assessment and risk management mechanism. ;t is better to a!oid NPAs at the market stage of credit consolidation by putting in place of rigorous and appropriate credit appraisal mechanisms. Ne*son . Ga(eru et.a* D.009F) Study that many financial institutions that collapsed in ?enya since .*BD failed due to non performing loans this study in!estigated the causes of nonperforming loans the actions that bank managers ha!e taken to mitigate that problem

and the le!el of success of such actions. @sing a sample of -+ managers selected from the ten largest banks the study found that national economic downturn was percei!ed as the most important e6ternal factor. 3ustomer failure to disclose !ital information during the loan application process was considered to be the main customer specific factor. The study further found that 2ack of an aggressi!e debt collection policy was percei!ed as the main bank specific factor contributing to the non performing debt problem in ?enya. :e3in "reenidge et.a* D.010F) study the e!aluation of non"performing loans is of great importance gi!en its association with bank failure and financial crises and it should therefore be of interest to de!eloping countries. The purpose of this paper is to build a multi!ariate model incorporating macroeconomic and bank"specific !ariables to forecast non"performing loans in the banking sector of :arbados. 4n an aggregate le!el our model outperforms a simple random walk model on all forecast hori7ons while for indi!idual banks1 these forecasts tend to be more accurate for longer prediction periods only.

Ch.7 #ata Ana*ysis 4 Interpretation


Ad3ances Position of -an+ of


Ch.C Conc*usion Ch.B ,ecommendation -i'*iography

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