Analysis of Non Performing

Asset in Public and Private

Banks

Submitted By:
Name: KHALID HUSSAIN
Course: MBA(G) SEM-4
Enrollment No: A7001914032
Specialization: FINANCE

Under Guidance Of:

Faculty Guide: DR. ARUN KUMAR BHADAURIA
Designation: LECTURER
ABS, LUCKNOW

AMITY BUSINESS SCHOOL

AMITY UNIVERSITY UTTAR PRADESH

STUDENTS CERTIFICATE

Certified that this report is prepared based on the Dissertation project

undertaken by me on Analysis of Non Performing Asset in Public and Private Banks
from 23rd Dec 2015 to 4 April 2016, under the guidance of Dr. Arun Kumar
Bhadauria in partial fulfilment of the requirement for award of degree of Masters of
Business Administration from Amity University, Uttar Pradesh.

Date-

--------------Khalid Hussain

----------------Dr. Arun Kumar Bhadaauria

Lecturer

----------------Mr. V. P. Sahi
Director (ABS)

FACULTY CERTIFICATE

Forwarded here with a dissertation report on Analysis of Non Performing Asset in

Public and Private Banks submitted by Khalid Hussain, Enrolment No

A7001914032, student of MBA(G) VIth Semester (2014-16).

This project work is partial fulfilment of the requirement for the degree of Masters
of Business Administration from Amity University Lucknow Campus, Uttar
Pradesh.

-------------------------------Dr. Arun Kumar Bhadauria

Lecturer
Amity University,
Lucknow Campus

ACKNOWLEDGEMENT

TABLE OF CONTENTS

SL.NO

PARTICULARS

PAGE
NO.

1.

CHAPTER I

CHAPTER - II

15 TO 35

INTRODUCTION

2.

COMPANY PROFILE

3.

CHAPTER III

36 TO 39

WORKING CAPITAL MANAGEMENT:-AN OVERVIEW

4.

CHAPTER IV
WORKING CAPITAL MANAGEMENT AT GST
(DATA ANALYSIS AND INTERPRETATION)

40 TO 66

5.

CHAPTER V
FINDINGS
SUGGESTIONS
CONCLUSIONS

6.

BIBLIOGRAPHY
REFERENCES
ANNEXURES

ABSTRACT
A strong banking sector is important for flourishing economy. One of the most important and
major roles played by banking sector is that of lending business. It is generally encouraged
because it has the effect of funds being transferred from the system to productive purposes,
which also results into economic growth. As there are pros and cons of everything, the same is
with lending business that carries credit risk, which arises from the failure of borrower to fulfil
its contractual obligations either during the course of a transaction or on a future obligation. The
failure of the banking sector may have an adverse impact on other sectors. Non- performing

assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A
high level of NPAs suggests high probability of a large number of credit defaults that affect the
profitability and net-worth of banks and also erodes the value of the asset. The NPA growth
involves the necessity of provisions, which reduces the overall profits and shareholders value.
The issue of Non Performing Assets has been discussed at length for financial system all over the
world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact
high level of NPAs in Indian banks is nothing but a reflection of the state of health of the
industry and trade. This project deals with understanding the concept of NPAs, its magnitude and
major causes for an account becoming non-performing, projection of NPAs over next years in
banks and concluding remarks.
The magnitude of NPAs have a direct impact on Banks profitability legally they are not
allowed to book income on such accounts and at the same time banks are forced to make
provisions on such assets as per RBI guidelines The RBI has advised all State Co-operative
Banks as well as the Central Co-operative Banks in the country to adopt prudential norms from
the year ending 31-03-1997. These have been amended a number of times since 1997. As per
their guidelines the meaning of NPAs, the norms regarding assets classification and provisioning
Its now very known that the banks and financial institutions in India face the problem of
amplification of non-performing assets (NPAs) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, various steps have been taken.
Among all other steps most important one was the introduction of Securitization and
Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by
Parliament, which was an important step towards elimination or reduction of NPAs.
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, However with effect from March
2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance
or credit facility granted by bank to a borrower becomes nonperforming, then the bank will have
to treat all the advances/credit facilities granted to that borrower as non-performing without
having any regard to the fact that there may still exist certain advances / credit facilities having
performing status. The NPA level of our banks is way high than international standards. One
cannot ignore the fact that a part of the reduction in NPAs is due to the writing off bad loans by
banks. Indian banks should take care to ensure that they give loans to credit worthy customers. In

this context the dictum prevention is always better than cure acts as the golden rule to reduce
NPAs.

CHAPTER-I

INTRODUCTION TO
BANK

Introduction of Banking
Bank A financial institution that is licensed to deal with money and its substitutes by accepting
time and demand deposits, making loans, and investing in securities. The bank generates profits
from the difference in the interest rates charged and paid. The development of banking is an
inevitable precondition for the healthy and rapid development of the national economic structure.
Banking institutions have contributed much to the development of the developed countries of the
world. Today we cannot imagine the business world without banking institutions. Banking is as
important as blood in the human body. Due to the development of banking advances are

increased and business activities developing so it is rightly said, "The development of banking is
not only the root but also the result of the development of the business world." After
independence, the Indian government also has taken a series of steps to develop the banking
sector. Due to considerable efforts of the government, today we have a number of banks such as
Reserve Bank of India, State Bank of India, nationalized commercial banks, Industrial Banks and
cooperative banks. Indian Banks contribute a lot to the development of agriculture, and trade and
industrial sectors. Even today the banking system of India possess certain limitations, but one
cannot doubt its important role in the development of the Indian economy.
Early history
Banking in India originated in the last decades of the 18th century. The first banks were The
General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now
defunct. The oldest bank in existence in India is the State Bank of India, which originated in the
Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was
one of the three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East India Company.
For many years the Presidency banks acted as quasi-central banks, as did their successors. The
three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.

Banking in India
Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with
the Government of India holding a stake), 31 private banks (these do not have government stake;
they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a
combined network of over 53,000 branches and 49,000 ATMs. According to a report by
ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the transition from
money lending to banking must have occurred even before Manu, the great Hindu Jurist, who
has devoted a section of his work to deposits and advances and laid down rules relating to rates
of interest. During the Mogul period, the indigenous bankers played a very important role in
lending money and financing foreign trade and commerce. During the days of the East India
Company, it was the turn of the agency houses to carry on the banking business. The General
Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which
followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to
have continued till 1906 while the other two failed in the meantime. In the first half of the 19 th
century the East India Company established three banks; the Bank of Bengal in 1809, the Bank
of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as
Presidency Banks were independent units and functioned well. These three banks were
amalgamated in 1920 and a new bank, the Imperial Bank of India was established on
27thJanuary 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the
Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve
Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934.
In the wake of the Swadeshi Movement, a number of banks with Indian management were
established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank
Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969,
14 major banks of the country were nationalized and in 15th April 1980 six more commercial
private sector banks were also taken over by the government.

Banking in India
Structure of the organized banking sector in India.

RBI
Central bank and supreme monetary
Authority

SBI and

Foreign
Regional
Associate
Banks
Rural
Public sector
Commercial
(40) Banks (8)
Banks(196)

Banks (27) Banks

Scheduled Banks
OtherUrban
State Cocooperatives
Operatives
National
Private
Sector
Co-Operatives
(52)
(16)
Banks
(19) (30)
Banks

CHAPTER-II

CONCEPT OF NPAs

NPA (NON PERFORMING ASSET)

Action for enforcement of security interest can be initiated only if the secured asset is classified
as Non Performing Asset. Non Performing Asset means an asset or account of borrower, which
has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines relating to asset classification issued by RBI. An
amount due under any credit facility is treated as "past due" when it has not been paid within 30

days from the due date. Due to the improvement in the payment and settlement systems,
recovery climate, up gradation of technology in the banking system, etc., it was decided to
dispense with 'past due' concept, with effect from March 31, 2001.
Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where 1. Interest and /or installment of principal remain overdue for a period of more than 180 days in
respect of a Term Loan,
2. The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash credit (OD/CC),
3. The bill remains overdue for a period of more than 180 days in the case of bills purchased and
discounted,
4. Interest and/ or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural purpose,
and
5. Any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts.
With a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year
ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset
(NPA) shell be a loan or an advance where:1. Interest and /or installment of principal remain overdue for a period of more than 90 days in
respect of a Term Loan,
2. The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC),
3. The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
4. Interest and/ or installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural purpose,
and

5. Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.
In case of agriculture advance
1. A loan granted to a short duration crop will be treated as NPA, if the installment or interest
thereon remains overdue for two crop seasons.
2. A loan granted for long duration (crop season longer than one years) crops will be treated as
NPA, if the installment/interest remain unpaid for one crop season.

Assets Classification and Provisions

Non-Performing Asset or NPA, It is called such as while it is an "Asset", it does not bring
substantial income to its Owner or is just dormant. The RBI has issued guidelines to banks for
classification of assets into four categories:1. Standard assets
2. Sub-standard assets

3. Doubtful assets; and

4. Loss assets
1. Standard Advances/Assets: are those, which do not disclose any problem and do not
carry more than normal risk attached to the business. Such assets are considered to be
performing asset. A general provision of 0.25% has to be provided on global loan
portfolio basis.
2. Sub-Standard Advances: With effect from 31 March 2005, a substandard asset would be
one, which has remained NPA for a period less than or equal to 12 months. Such an asset
will have well defined credit weaknesses that jeopardize liquidation of the debt and are
characterized by distinct possibility that bank will sustain some loss. Accordingly a
general provision of 10% on outstanding has to be provided on substandard assets.
3. Doubtful assets- These are the assets which have remained NPAs for a period exceeding
12 months and which are not considered as a loss advance. A loan classified as doubtful
has all the weaknesses inherent in assets that were classified as sub-standard, with the
added characteristic that the weakness make collection or liquidation in full,- on the basis
of currently known facts, conditions and values- highly questionable and improbable.
Banks have to provide 100 percent of the unsecured portion of the outstanding advance
after netting realized amount in respect of DICGC scheme (Deposit Insurance and Credit
Guarantee Corporation) and realized/realizable amount of guarantee cover under ECGC
(Export Credit Guarantee Corporation) schemes.

Period for which the

Provision requirements (%)

advance has remained

in Doubtful category
Up to one year
One to three years

20
30

More than three years

I. Outstanding stock of NPAs as on

- 60 percent with effect from March31,2005

March31,2004

-75 percent with effect from

March 31, 2006.
-100 percent with effect from

II. Advances classified as doubtful for more

March31,2007
100 percent with effect from March 31,2005

than three years on or after

April1,2004

4. Loss Assets Loss assets are those where loss has been identified by the bank or
internal /external auditors or RBI inspectors but the amount has not been written off,
wholly or partially. Any NPAs would get classified as loss assets if they were
irrecoverable or marginally collectible and cannot be classified as bankable asset.
Companies have to provide 100% of these outstanding advances.

NPA IDENTIFICATION NORMS

With effect from 31st March2004, a loan or advance would become NPA where:i.

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

ii.

in respect of a term loan,

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

iii.

Overdraft/Cash Credit (OD/CC),

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

iv.

and discounted,
With effect from September 2004, loans granted for short duration crops will be
treated as NPA, if the installment of principal or interest thereon remains overdue for

two crop seasons and loans granted for long duration crops will be treated as NPA, if
v.

installment of principal or interest thereon remains overdue for one crop season, and
Any amount to be received remains overdue for a period of more than 90 days in respect
of other accounts.

Out of Order: An account should be treated as 'out of order' if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding
balance in the principal operating account is less than the sanctioned limit/drawing power, but
there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not
enough to cover the interest debited during the same period, these accounts should be treated as
'out of order'.
Overdue: Any amount due to the bank under any credit facility is overdue if it is not paid on
the due date fixed by the bank. The date of NPA will be the actual date on which slippage
occurred, as mentioned below:

For Term Loan/Demand Loan Accounts:- The date on which interest and/or
installment of principal have remained overdue for a period of more than 90 days.

For Overdraft/Cash Credit Accounts:- The date on which the account completed a period of
more than 90 days of being continuously out of order.

Income Recognition Policy

1. The Policy of income recognition has to be objective and based on the record of recovery.
Internationally income from non-performing asset (NPA) is not recognized on accrual basis but
is booked as income only when it is actually received. Therefore, the banks should not charge
and take to income account interest on any NPA.
2. On an account turning NPA, banks should reverse the interest already charged and not
collected by debiting profit and loss account, and stop further application of interest. However,
banks may continue to record such accrued interest in a memorandum account in their books.

3. However, interest on advances against term deposits, NSCs, IVPs, KVPs, and Life policies
may be taken to income account on the due date, provided adequate margin is available in the
accounts.
4. If government guaranteed advances become NPA, the interest on such advances should not be
taken to income account unless the interest has been realized.
5. If any advance, including bills purchased and discounted, become s NPA as at the close of any
year, the entire interest accrued and credited to income account in the past periods, should be
reversed or provided for if the same is not realized. This will apply to government guaranteed
accounts also.

Types of NPA

Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by
banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss
assets. It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs / Gross Advances

Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross
and net NPA is quite high. It can be calculated by following:
Net NPAs = Gross NPAs Provisions / Gross Advances Provisions

Gross NPA is an advance which is considered irrecoverable, for bank has made provisions, and
which is still held in banks' books of account. Net NPA is obtained by deducting items like
interest due but not recovered, part payment received and kept in suspense account from Gross
NPA. The Reserve Bank of India states that, compared to other Asian countries and the US, the
gross non-performing asset figures in India seem more alarming than the net NPA figure. The
problem of high gross NPAs is simply one of inheritance. Historically, Indian public sector banks
have been poor on credit recovery, mainly because of very little legal provision governing
foreclosure and bankruptcy, lengthy legal battles, sticky loans made to government public sector
undertakings, loan waivers and priority sector lending.
Net NPAs are comparatively better on a global basis because of the stringent provisioning norms
prescribed for banks in 1991 by Narashimam Committee. In India, even on security taken against
loans, provision has to be created. Further, Indian banks have to make a 100 per cent provision
on the amount not covered by the realizable value of securities in case of ''doubtful'' advance,
while in some countries; it is 75 per cent or just 50 per cent. The ASSOCHAM Study titled
-Solvency Analysis of the Indian Banking Sectors, reveals that on an average 24 per cent rise in
net non performing assets have been registered by 25 public sector and commercial banks during
the second quarter of the 2009 as against 2008. According to the RBI, "Reduction of NPAs in the
Indian banking sector should be treated as a national priority item to make the system stronger,
resilient and geared to meet the challenges of globalization. It is necessary that a public debate is
started soon on the problem of NPAs and their resolution."

Difficulties with the Non-Performing Assets:

1. Owners do not receive a market return on their capital. In the worst case, if the bank fails,
owners lose their assets. In modern times, this may affect a broad pool of shareholders.
2. Depositors do not receive a market return on savings. In the worst case if the bank
fails,depositors lose their assets or uninsured balance. Banks also redistribute losses to
other borrowers by charging higher interest rates. Lower deposit rates and higher lending
rates repress savings and financial markets, which hampers economic growth.
3. Nonperforming loans epitomize bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in

misallocation of capital and, by extension, labour and natural resources. The economy
performs below its production potential.
4. Nonperforming loans may spill over the banking system and contract the money stock,
which may lead to economic contraction. This spillover effect can channelize through
illiquidity or bank insolvency; (a) when many borrowers fail to pay interest, banks may
experience liquidity shortages. These shortages can jam payments across the country, (b)
illiquidity constraints bank in paying depositors e.g. cashing their paychecks. Banking
panic follows. A run on banks by depositors as part of the national money stock become
inoperative. The money stock contracts and economic contraction follows (c)
undercapitalized banks exceeds the banks capital base.
Lending by banks has been highly politicized. It is common knowledge that loans are given to
various industrial houses not on commercial considerations and viability of project but on
political considerations; some politician would ask the bank to extend the loan to a particular
corporate and the bank would oblige. In normal circumstances banks, before extending any loan,
would make a thorough study of the actual need of the party concerned, the prospects of the
business in which it is engaged, its track record, the quality of management and so on. Since this
is not looked into, many of the loans become NPAs. The loans for the weaker sections of the
society and the waiving of the loans to farmers are another dimension of the politicization of
bank lending.

CHAPTER-III

Impact/ Effects of NPA upon banks

A strong banking sector is important for flourishing economy. The failure of the banking sector
may have an adverse impact on other sectors. Non-performing assets are one of the major
concerns for banks in India. The only problem that hampers the possible financial performance
of the public sector banks is the increasing results of the Non- performing Assets. The
Nonperforming Assets impacts drastically to the working of the banks. The efficiency of a bank
is not always reflected only by the size of its balance sheet but by the level of return on its assets.
NPAs do not generate interest income for the banks, but the same time banks are required to
make provisions for such NPAs from their current profits.

They erode current profits through provisioning requirements.

They result in reduced interest income.
They require higher provisioning requirements affecting profits and accretion to capital.
They limit recycling of funds, set in assets-liability mismatches, etc.
Adverse impact on Capital Adequacy Ratio.
ROE and ROA goes down because NPAs do not earn.
Banks rating gets affected.
Banks cost of raising funds goes up.
RBIs approval required for declaration of dividend if Net NPA ratio is above 3%.
Bad effect on Goodwill.
Bad effect on equity value.

The RBI has also develop many schemes and tools to reduce the NPA assets by introducing
internal checks and control scheme, relationship mangers as stated by RBI who have complete
knowledge of the borrowers, credit rating system , and early warning system and so on.
The RBI has also tried to improve the securitization Act and SRFAESI Act and other acts related
to the pattern of the borrowings.
Though RBI has taken number of measures to reduce the level of the Non performing Assets the
result is not up to expectations. To improve NPAs each bank should be motivated to introduce
their own precautionary steps. Before lending the banks must evaluate the feasible financial and
operational prospective results of the borrowing companies or customer. They must evaluate the
borrowing companies by keeping in considerations the overall impacts of all the factors that
influence the business. NPAs reflect the performance of banks. A high level of NPAs suggests
high probability of a large number of credit defaults that affect the profitability and net worth of
banks and also erodes the value of the asset. The NPA growth involves the necessity of
provisions, which reduces the overall profits and shareholders value.

Impact of NPA on the operations of banks

1. Profitability

NPA means booking of money in terms of bad asset, which occurred due to wrong choice of
client. Because of the money getting blocked the prodigality of bank decreases not only by the
amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some
return earning project/asset. So NPA does not affect current profit but also future stream of profit,
which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in
profitability is low ROI (return on investment), which adversely affect current earning of bank.
2. Liquidity
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest period of time which lead to additional cost to the company.
Difficulty in operating the functions of bank is another cause of NPA due to lack of money.
3. 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.
4. Credit Loss
If a bank is facing problem of NPA, then it adversely affects the value of bank in terms of market
for credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting in their money in the banks (C.S. Balasubramaniam, 2011).

Early symptoms by which one can recognize

a performing asset turning in to Nonperforming asset
Four categories of early symptoms:
i.

Financial:
Non-payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment
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 diverted to sister concern
or parent company.

ii.

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.

iii.

External non-controllable factor like natural calamities in the city where borrower

conduct his business.

Frequent changes in plan
Nonpayment of wages

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

iv.

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

Reasons for an asset turning NPA (Causes

responsible for rising NPAs)
A strong banking sector is important for a flourishing economy. The failure of the banking sector
may have an adverse impact on other sectors. The Indian banking system, which was operating
in a closed economy, now faces the challenges of an open economy. It is very unfortunate that
non-performing assets have increased not due to economic slowdown, delay in implementation
of project, it is due to improper assessment of the proposals. Many banks still rely upon
proposals come chartered accountants, intermediaries etc who just want to earn commission
bring in proposal and recovery procedure is not effective. There are cases banks have lend crores
of rupees, in spite of borrower had no background of business activity. The gross NPAs of public
sector banks stood at Rs. 78,199 crores by the end of June 2011. As far as old NPAs are
concerned, a bank can remove it on its own or sell the assets to AMCs to clean up its balance
sheet. For preventing fresh NPAs, the bank itself should adopt proper policies. There are various
factors behind the transformations of assets from performing to non-performing. The causes are
funds borrowed for a particular Projects not completed in time, Poor recovery of receivables,
lack of proper follow-up, Delay in sanctioning, Non-co-operation of Govt. Agencies in recovery,
Social-political pressures, Imbalances of inventories, Poor quality management, Willful defaults,
Natural calamities, Product failure due to lack of demand or quality, Industrial recession, power
shortage, industrial recession, excess capacity, Strikes, lockouts and labor problems, Heavy
market competition, Sluggish legal system, Low morale and
ethics.
The banking sector has been facing the serious problems of the rising NPAs. In fact public
sector banks are facing more problems than the private sector banks. The NPAs in public
sector banks 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 (G.V. Bhavani Prasad &
D. Veena, 2011).
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. Public
sector banks 7 percent of net advances were directed to these units (M. Karunakar et al,2008).
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 schemes.
The reason were generally classified into two
1. Overhand component due to environmental reasons, business cycle etc
2. Incremental component due to internal bank management, credit policy, term of
credit etc.

There are various reasons either jointly or singly responsible for an asset becoming NPA can be
classified as follows:a) Reasons from the economic side
1. Political: Mindset regarding paradigm, proactive, fiscal responsible, major portion of

NPA arise out of lending to priority sector at the dictates of politicians and bureaucrats.
2. Economic: Growth, distribution, efficient allocation of resource.
3. Social: Acceptability, mobility, education.
4. Technological: Lack of adoption of IT makes data processing difficult.
5. Legal: loan contracts are not enforceable naturally be a tendency to default.
6. Environmental: Liberalization and globalization.
b) Reasons from the industry side
1. Global competition.
2. Cyclical downswing.
3. Sunset industry industry growing slowly or declining.
4. Frequent changes in regulatory norms.
c) Reasons from the borrower side
1. Misconceived project.
2. Poor governance.
3. Product failure.
4. Bungling management.
5. Diversion of fund.
6. Dormant capital structure.
7. Regulator changes.
d) Reasons from the banking side:- An account does not become an NPA overnight. It
gives signals sufficiently in advance that steps can be taken to prevent the slippage of the
account into NPA category. An account becomes an NPA due to causes attributable to the
borrower, the lender and for reasons beyond the control of both. An internal study
conducted by the RBI shows that in the order of prominence, the following factors
contribute to NPAs.
Internal Factors

Diversion of funds for

-Expansion/diversification/modernization.
-Taking up new projects.
-Helping/promoting associate concerns.
Time/cost overrun during the project implementation.
Inefficient management.
Strained labour relations.
Inappropriate technology/technical problems.
Product obsolescence, etc.
Poor credit Appraisals, monitoring and follow up, improper SWOT analysis on the

part of banks.
Parameter set for functioning was deficient.
Lack of freedom to choose product and pricing.
Wrong lending decision.
Lack of Resource and poor training.
Lack of system and procedure.
Lack of ability to handle assets and liability.
Lack of mechanism of credit information dissemination.
Lack of an effective judicial system for recovery from defaulters.
Collateral based lending to idle assets.
Fixing of price and quantum of loans.
Lack of effective IT system and MIS.

External Factors

Recession.
Input or power shortage.
Price escalation.
Exchange rate fluctuation.
Accidents and natural calamities.
Changes in government policy such as excise, import and export duties, pollution

control order etc.

Willful defaulters have been there because they knew that legal recourse available to

the lenders is time consuming and slow.

Sickness of the industry also leads to gradual erosion of the liquidity and units start
failing to honor its obligations for the loan payments. Heavy funds are locked up in

these units.
Political tool-Directed credit to SSI and Rural sectors has been there
Manipulation by the debtors using political influence has been a cause for high

industrial bad debts.

Unexposed to international marketing methods and products.

e) Reasons from the loan structuring side

1. High debt equity ratio.

2. Timing of raising equity.
3. Discrepancy between rate of interest charged and realistic rate of return.
4. Inconsistency between revenue generation and the loan repayment schedule.
5. Lack of binding penal clause and performance guarantees.
6. Rising interest rate.
f) Reason from the security side
There is a tendency among bank and institution to depend excessively on collateral for advancing
loans. It is important to presume that if the borrower default in repaying then the security given
will be helpful for recovery of loan. Clearly this logic is unacceptable. Emphasis should be on
cash generation and a charge on this should be built into the loan contract through some escrow
mechanism.
g) Reason from the regulatory side
Frequently regulator changes can turn assets non performing. Accounting reason like reduction
in income recognition norms from 180 days to 90 days could be one reason and political related
issues could be the other reason.

SALE OF NPA TO OTHER BANKS

A NPA is eligible for sale to other banks only if it has remained a NPA for at least two

years in the books of the selling bank

The NPA must be held by the purchasing bank at least for a period of 15 months before it
is sold to other banks but not to bank, which originally sold the NPA.

The NPA may be classified as standard in the books of the purchasing bank for a period
of 90 days from date of purchase and thereafter it would depend on the record of recovery

with reference to cash flows estimated while purchasing.

The bank may purchase/ sell NPA only on without recourse basis.
If the sale is conducted below the net book value, the short fall should be debited to P&L
account and if it is higher, the excess provision will be utilized to meet the loss on
account of sale of other NPA.

Measures to Control NPAs

In present scenario NPAs are at the core of financial problem of the banks. Concrete efforts
have to be made to improve recovery performance. Measures required to be undertaken are
mainly two fold. Banks should make efforts first to avoid fresh addition on NPAs by their
effective presentation appraisal and secondly to recover the amount from accounts which have
already turned bad.
1. Preventive Measures:

Most of the bankers feel that genuine viability problem of the borrowing units, weakness
in credit appraisal system, absence of effective monitoring and supervision of loan
account, absence of credit information sharing among the banks etc. are some of the

significant causative factors of high level of NPAs internal to the banks.

So for preventive the fresh inflow of funds into the non-performing category, banks

should reformulate their credit appraisal techniques.

Proper evaluation of the loan application may help in detecting the unviable projects at

the first instance.

Full information about unit, industry, its financial stake, management etc. should be

collected.
Industrial cell should be established at the bank level, which would have complete

information about the industry and its prospects in future.

Proper credit monitoring should be equally emphasized. There should be proper flow of
information from the units regarding their financial area, annual accounts, stock reports
etc., which would enable the banker to know the need based credit requirement of

borrower and warning signals for taking quick remedial action.

Banks should inspect the progress of the project or the business. Separate monitoring
department should be established in large branches for periodical review of accounts,
comparative risk analysis and compliance of terms and conditions of sanction. Equal

emphasis should be given for monitoring of standard assets also.

Banks should be equipped with latest credit risk management techniques to protect the
bank funds and minimize insolvency risks. Banks should develop credit derivatives
markets to avoid these risks. There should be regular outflow of senior bank officers
from all public sector banks for specialized training in training institute to equip them
with latest procedures and practices.

2.

Curative Measures:

Besides making efforts to stop the fresh additions of NPAs banks have to take
steps to recover the amount from assets, which have already slipped into NPAs
category. Significant causative factors highlighted were slow recovery of legal
cases, willful default induced by officially announced loan waiver schemes etc.

the Indian legal system is sympathetic towards the borrowers and works against

the banks interest.

Despite most of their loans being backed by security, banks are unable to enforce their
claims on the collateral, when the loans turn non-performing and therefore loan

recoveries have been insignificant.

The Narshimham Committee on financial system (1991) has recommended the
establishment of Debt Recovery Tribunals (DRT) for the speedy recovery of the assets
from NPAs category. On the basis of recommendations 22 DRTs were established by
passing the bill on Recovery of Debt due to Banks and Financial Institutions Act 1993.
But the performance of DTRs for the past years has not been found satisfactory or up to

the mark.
The Act has some limitations, which must be removed to make its effective

implementation.
At present one presiding officer is handling at least 80-90 cases per day. It is suggested
that DRT Act may be amended to enable the central government to appoint additional

presiding officers for speedy disposal of recovery cases.

One of the major factors accounting for delay in disposing of application by DRT is the
delay caused due to refusal by defendants to accept the summons, and at times due to

change in address too.

DRT may be empowered to order service of summons by hand, registered post and by
publications simultaneously. Attachment of immovable property of borrower is not

admitted due to service of summons.

Enforcement of security and obtaining court decree take unduly long time, it encourages
willful default and ultimately the banks may be compelled to write off loans. Willful

default should be declared a criminal offence.

Government should not go for mass waiver of interest/ installments as it sends unhealthy
signals to the borrower. During 1990-91 there was a massive waiver of rural debt
amounting to over Rs. 15000 crore and Rs. 65000 crore in 2008. These types of activities

put a premium on willful default and dishonesty. It lowers the repayment ethics.
In case of government sponsored schemes government should assist in recovery. It may
be noted that suggestions enumerated will go a long way in reducing the NPAs. This will
only considerably improve the profitability of the banks, improve the quality of assets,

but also make the Indian "Banking system stringent, resilient and geared to meet the
challenges of globalization (Mohan Kumar & Govind Singh, 2012)

CHAPTER-IV

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 India's credit rating to sub-investment grade. Such negative
aspects have often outweighed positives such as increasing for 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 $2.5 billion in 2007 to
$3.4 billion in 2009.looking to such overall picture of the market, we can say that India is
performing well and the steps taken are looking favourable.

NPA MANAGEMENT PRACTICES IN

INDIA

Formation of the Credit Information Bureau (India) Limited (CIBIL)

Release of Willful Defaulters List. RBI also releases a list of borrowers with aggregate
outstanding of Rs.1 crore and above against whom banks have filed suits for recovery of

their funds
Reporting of Frauds to RBI
Norms of Lenders Liability framing of Fair Practices Code with regard to lenders
liability to be followed by banks, which indirectly prevents accounts turning into NPAs

on account of banks own failure

Risk assessment and Risk management

RBI has advised banks to examine all cases of willful default of Rs.1 crore and above and
file suits in such cases. Board of Directors are required to review NPA accounts of Rs.1

crore and above with special reference to fixing of staff accountability.

Reporting quick mortality cases
Special mention accounts for early identification of bad debts. Loans and advances
overdue for less than one and two quarters would come under this category. However,
these accounts do not need provisioning

MEASURES INITIATED BY RBI AND

GOVERNMENT OF
INDIA FOR REDUCTION OF NPAs
NPA MANAGEMENT RESOLUTION: Compromise Settlement Schemes
Restructuring / Reschedulement
Lok Adalat
Corporate Debt Restructuring Cell
Debt Recovery Tribunal (DRT)
Proceedings under the Code of Civil Procedure
Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR
National Company Law Tribunal (NCLT)
Sale of NPA to other banks

I.

Sale of NPA to ARC/ SC under Securitization and Reconstruction of Financial

Assets and Enforcement of Security Interest Act 2002 (SRFAESI)

Liquidation

Compromise settlement schemes :

The RBI / Government of India have been constantly goading the banks to take steps for
arresting the incidence of fresh NPAs and have also been creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. More significant of them, I
would like to recapitulate at this stage.
The broad framework for compromise or negotiated settlement of NPAs advised by
RBI in July 1995 continues to be in place. Banks are free to design and implement their own
policies for recovery and write-off incorporating compromise and negotiated settlements
with the approval of their Boards, particularly for old and unresolved cases falling under the
NPA category. The policy framework suggested by RBI provides for setting up of an
independent Settlement Advisory Committees headed by a retired Judge of the High Court to
scrutinize and recommend compromise proposals.
Specific guidelines were issued in May 1999 to public sector banks for onetime nondiscretionary and non-discriminatory settlement of NPAs of small sector. The scheme was
operative up to September 30, 2000. [Public sector banks recovered Rs. 668 crore through
compromise settlement under this scheme.]
Guidelines were modified in July 2000 for recovery of the stock of NPAs of
Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid up to
June 30, 2001 helped the public sector banks to recover Rs. 2600 crore by September 2001]
An OTS Scheme covering advances of Rs.25000 and below continues to be in operation and
guidelines in pursuance to the budget announcement of the Honble Finance Minister
providing for OTS for advances up to Rs.50,000 in respect of NPAs of small/marginal
farmers are being drawn up.

Negotiating for compromise settlements:-

The first crucial step towards meaningful NPA management is to accept that recoveries are one's
own responsibility. To keep the Bank's operating cycle going smoothly, it is essential that this
realization of one's duties be transformed into deeds by resorting to various methods of recovery.
Of the various methods available for NPA Management, Compromise Settlements are the most
attractive, if handled in a professional manner.
Advantages
i.

Saves money, time and manpower

Banks are mainly concerned with recovery of dues, to the maximum possible extent, at minimum
expense. By entering into compromise settlements, the objective is achieved. Also, a lot of
executive time is saved because most of the usual problems / delays associated with court action
are avoided.
ii.

Projects a helpful image of the Bank

A well-concluded compromise settlement, which results in a WIN-WIN for the Bank as well as
the borrower, is a strong positive propaganda for the Bank. The impression generated is that the
Bank is capable not only of sympathy, but also empathy.
iii.

Expedites recycling of funds

Compromise settlements aim at quick recovery. Recovery means funds becoming available for
recycling and, additional interest generation.
iv.

Cleanses Balance Sheet

With the NPA level going down, and the additional funds becoming available for recycling as
fresh advances, the asset quality of the Bank is bound to go up. Improved asset quality signifies
higher profits by reduced provisions and increased interest income. With additions to the
reserves, the capital position also improves, improving the Capital Adequacy position.

Besides the above, compromise offers the best option when,

The documents are defective and cannot be rectified,

 security is not enforceable,

forced sale is extremely difficult, or would result only in realizing a paltry amount
and
The borrowers become untraceable and recovery can be only though guarantors.

Disadvantages
i.

Compromise involves loss, since full recovery is not possible. In fact, full

ii.

recovery is not even envisaged, but sacrifice is.

It may be viewed as a reward for default, especially if chronic default cases are

iii.
iv.

settled by negotiations.
It may have a demonstrative effect, and so may vitiate the culture of repayment
There is also the possibility of misuse or, even, malafides, since assessment of
situation is highly subjective.

Practical aspects of compromise settlements

Every compromise proposal needs to be looked at individually, evaluated strictly on merits, and
negotiated properly for maximization of benefit to the Bank. Hence, a straight jacket approach is
not possible, neither is it desirable, to give strict guidelines for compromise settlements.

II.

Restructuring and Rehabilitation

A. Banks are free to design and implement their own policies for restructuring/ rehabilitation of
the NPA accounts
B. Re-schedulement of payment of interest and principal after considering the Debt service
coverage ratio, contribution of the promoter and availability of security

III.

Lok Adalats

Lok Adalat institutions help banks to settle disputes involving accounts in doubtful and loss
category, with outstanding balance of Rs.5 lakhs for compromise settlement under Lok Adalats.

Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases
of NPAs of Rs.10 lakhs and above. The public sector banks had recovered Rs.40.38 crore as on
September 30, 2001, through the forum of Lok Adalat. The progress through this channel is
expected to pick up in the coming years particularly looking at the recent initiatives taken by
some of the public sector banks and DRTs in Mumbai. Some of features are

IV.

Small NPAs up to Rs.20 Lakhs

Speedy Recovery
Veil of Authority
Soft Defaulters
Less expensive
Easier way to resolve

Debt Recovery Tribunals

The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed in

March 2000 has helped in strengthening the functioning of DRTs. Provisions for placement of
more than one Recovery Officer, power to attach defendants property/assets before judgment,
penal provisions for disobedience of Tribunals order or for breach of any terms of the order and
appointment of receiver with powers of realization, management, protection and preservation of
property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs
in the times to come.
Though there are 22 DRTs set up at major centers in the country with Appellate Tribunals
located in five centers viz. Allahabad, Mumbai, Delhi, Calcutta and Chennai, they could decide
only 9814 cases for Rs.6264.71 crore pertaining to public sector banks since inception of DRT
mechanism and till September 30, 2001.The amount recovered in respect of these cases
amounted to only Rs.1864.30 crore.
Looking at the huge task on hand with as many as 33049 cases involving Rs.42988.84 crore
pending before them as on September 30, 2001, I would like the banks to institute appropriate
documentation system and render all possible assistance to the DRTs for speeding up decisions
and recovery of some of the well collateralized NPAs involving large amounts. I may add that
familiarization programmes have been offered in NIBM at periodical intervals to the presiding
officers of DRTs in understanding the complexities of documentation and operational features
and other legalities applicable of Indian banking system. RBI on its part has suggested to the

Government to consider enactment of appropriate penal provisions against obstruction by

borrowers in possession of attached properties by DRT receivers, and notify borrowers who
default to honor the decrees passed against them.

V.

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. It is our experience that these
measures had not contributed to any perceptible recoveries from the defaulting entities. However,
they serve as negative basket of steps shutting off fresh loans to these defaulters. I strongly
believe that a real breakthrough can come only if there is a change in the repayment psyche of
the Indian borrowers.

VI.

Recovery action against large NPAs

After a review of pendency in regard to NPAs by the Honble Finance Minister, RBI had advised
the public sector banks to examine all cases of willful default of Rs 1 crore and above and file
suits in such cases, and file criminal cases in regard to willful defaults. Board of Directors are
required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff
accountability. On their part RBI and the Government are contemplating several supporting
measures

VII.

Asset Reconstruction Company:

An Asset Reconstruction Company with an authorized capital of Rs.2000 crore and initial paid
up capital Rs.1400 crore is to be set up as a trust for undertaking activities relating to asset
reconstruction. It would negotiate with banks and financial institutions for acquiring distressed

assets and develop markets for such assets. Government of India proposes to go in for legal
reforms to facilitate the functioning of ARC mechanism

VIII.

Legal Reforms

The Honorable Finance Minister in his recent budget speech has already announced the proposal
for a comprehensive legislation on asset foreclosure and Securitization. Since enacted by way of
Ordinance in June 2002 and passed by Parliament as an Act in December 2002.

IX.

Corporate Debt Restructuring (CDR)

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely
and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the
banks and financial institutions. The CDR process would also enable viable corporate entities to
restructure their dues outside the existing legal framework and reduce the incidence of fresh
NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a Standing Forum and
Core Group for administering the mechanism had already been put in place. The experiment
however has not taken off at the desired pace though more than six months have lapsed since
introduction. As announced by the Honble Finance Minister in the Union Budget 2002-03, RBI
has set up a high level Group under the Chairmanship of Shri. Vepa Kamesam, Deputy Governor,
RBI to review the implementation procedures of CDR mechanism and to make it more effective.
The Group will review the operation of the CDR Scheme, identify the operational difficulties, if
any, in the smooth implementation of the scheme and suggest measures to make the operation of
the scheme more efficient.

X.

Credit Information Bureau

Institutionalization of information sharing arrangements through the newly formed Credit

Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations
of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information

dissemination on defaults to the financial system. The main recommendations of the Group
include dissemination of information relating to suit-filed accounts regardless of the amount
claimed in the suit or amount of credit granted by a credit institution as also such irregular
accounts where the borrower has given consent for disclosure. This, I hope, would prevent those
who take advantage of lack of system of information sharing amongst lending institutions to
borrow large amounts against same assets and property, which had in no small measure
contributed to the incremental NPAs of banks.

XI.

Proposed guidelines on wilful defaults/diversion of funds

RBI is examining the recommendation of Kohli Group on wilful defaulters. It is working out a
proper definition covering such classes of defaulters so that credit denials to this group of
borrowers can be made effective and criminal prosecution can be made demonstrative against
wilful defaulters.

XII.

Corporate Governance

A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set up 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--vis compliance, transparency, disclosures, audit
committees etc. and make recommendations for making the role of Board of Directors more
effective with a view to minimizing risks and over-exposure. The Group is finalizing its
recommendations shortly and may come out with guidelines for effective control and supervision
by bank boards over credit management and NPA prevention measures. [Dr. Bimal Jalan,
Governor, RBI, in a speech titled "Banking and Finance in the New Millennium." delivered at
22nd Bank Economists Conference, New Delhi, 5th February, 2001]

CHAPTER-V

RESEARCH
METHODOLOGY

Research Methodology
Research Methodology is the systematic way of solving research problem. According to Green
and Tail A research design is the specification of the method and procedure of acquiring the
information needed. It is the overall operational pattern or framework of the project that
stipulates which information is to be collected, from where it is to be collected and by what
procedure.

Objectives:

To know what is NPA.

To state the present status of NPA in banks.
To know the reasons for an asset becoming Non-Performing Asset
To study the position of Non-performing Assets in various banks.
To know why NPA are the greater challenge to banks?
To know what steps are been taken by the Indian banking system to reduce NPA?
To study the procedure and tools used for management of NPAs.
What are the measures adopted by banks to look after NPA management?

Type of Research:This project Analysis of Non Performing Asset in Public and Private Banks is considered
as an exploratory research.
Exploratory research is basically a secondary research such as reviewing available literature
and/or data, or qualitative approaches such as informal discussions with consumers, employees,
management or competitors, and more formal approaches through in-depth interviews, focus

groups, projective methods, case studies or pilot studies. The Internet allows for research
methods that are more interactive in nature.
Method of data collection
The data which has been collected for the mentioned project is from secondary data source. The
secondary data are those which have already collected and stored. Secondary data easily get
those secondary data from records, annual reports of the company etc. It will save the time,
money and efforts to collect the data. The secondary data has been sourced from journals,
magazines, articles and media reports. Different news articles, Books and Web were used which
were enumerated and recorded.

CHAPTER-V

DATA ANALYSIS AND

INTERPRETATIONS

Analysis of NPAs of public and private sector

banks
Source: RBI annual financial report, NPA of public & private sector banks
Comparison of Gross NPAs and Net NPAs of Public Sector & Private Sector Banks
Public Sector

Private Sector

Years
2001-02
2002-03
2003-04
2004-05
2005-06

Bank
Gross NPAs(%)
11.09
9.36
7.80
5.50
3.60

Net NPAs(%)
5.82
4.54
3.00
2.00
1.30

Bank
Gross NPAs(%)
9.64
8.08
5.85
6.00
4.40

Net NPAs(%)
5.73
4.95
2.80
2.70
1.70

2006-07
2007-08
2008-09
2009-10
2010-11
2011-12

2.70
2.20
2.00
2.20
2.40
3.30

1.10
1.00
0.94
1.09
1.20
1.70

3.10
2.30
2.36
2.32
1.97
1.80

1.00
0.70
0.90
0.82
0.53
0.60

12

10

Public Sector Bank Gross

NPAS(%)
Private Sector Bank Gross
NPAS(%)

Comparison of Gross NPAs of Public Sector & Private Sector Banks

Public Sector Bank Net

NPAS(%)

Private Sector Bank Net

NPAS(%)
2

Comparison of Net NPAs of Public Sector & Private Sector Banks

INTERPRETATION:The public sector and private sector banks showed a declining trend in gross and net NPAs over
the period of study as shown in Table but public sector banks has higher NPA compare to Private

sector banks. The reason for it is that private sector banks have a secured loan policy as
compared to public sector banks.
It has been observed that gross NPAs as absolute and in percentage terms with gross advances of
public sector banks have declined from 11.09% to 2.00% in the period of 2001-02 to 2008-09,
whereas gross NPAs as percentage with gross advances of Private sector banks have declined
from 9.64% to 2.30% in the period of 2001-02 to 2007-08. On the other hand net NPAs of public
sector banks in absolute and in percentage terms has also come down from 5.82% to 0.94% in
the period of 2001-02 to 2008-09.But comparatively in private sector banks net NPAs as absolute
and in percentage term to net advances have also come down from 5.73% to 0.70% in the period
of 2001-02 to 2007-08. Again gross NPAs of public sector banks in absolute and in percentage
terms has started increasing from 2.00% to 3.30% from the period of 2008-09 to 2011-2012
whereas gross NPAs of private sector banks has started declining from 2.30% to 1.80% from the
period of 2007-08 to 2011-12 except 2008-09(2.36%) and2009-10(2.32%).On the other side net
NPAs of public sector banks in absolute and in percentage terms has increased from 0.94% to
1.70% from 2008-09 to 2011-12. On the contrary net NPAs of private sector banks has declined
from 0.70% to 0.60% from 2007-08 to 2011-12 except 2008-09(0.90%) and 2009-10 (0.82%).
So even after implementation of prudential norms in early nineties and serious concern raised by
government about growing size of NPAs, public sector banks paid least attention to all these
warnings, which subsequently lead to turning fresh loans of banks into non performing category.
So falling ratio of NPAs in terms of advances is not a true indicator of performance of public
sector banks in the field of NPAs. In fact, growing size of gross NPAs in absolute form has been
real cause of worry.

LIMITATIONS

The data collected my me was not sufficient for dissertation project.

I havent got enough time to study my report so that become a cause of limitation to my
project.

Since my study is based upon secondary data, the practical operations as related to NPAs
adopted by banks are not learned.

Solutions are not applicable to every bank .

FINDINGS

The reduction in loan installment to 90 days may raise the NPA levels in the short

run. But in turn will improve the asset quality of the banks.

2. The lenders cannot take undue advantage of the new act. Provisions for lenders

liquidity have been added to protect the borrowers against irresponsible claims by

lenders.

3. Private Banks have more efficient management of NPAs as compared to PSBs.

4. Gross NPAs of PSBs are 51537 and whereas private sector Banks are 5771.17.

5. Due to the introduction of securitisation, public sector banks have been able to

reduce their NPAs to a considerable event.

6. Securitization Act is remarkable legislation in the Indian Banking history, certain

issues are yet to be resolved for effective, implementation of the Act.

7. NPA art can help reset lending rates.

8. The net NPAs of UBI has reduced from 9.5% to 5.33%

9. The net NPAs of SBI has reduced from 6.527% to 3.44%

10. The net NPA of OBC has risen from 3.54 to 10.25%.

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.

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 SARFAECI ACT banks can issue notices to
defaulters to repay their loans. Also, the Supreme Court has recently 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.
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