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Submitted To: Dr. Aamir Bhutta

Submitted By: Ume e Aimen Qayyum

BS. (Hons.) Banking & Finance
Department of Management Sciences
GC University, Faisalabad

Signature of Author: __________________________

Ume e Aimen Qayyum,
GC University, Faisalabad.

Accepted By: _______________________________

Dr. Aamir Bhutta
Professor, Department of Management Sciences,
Thesis Supervisor.

There has been alarming increase in the amount of non-performing loans (NPLs) during
the last 30 months of the present government. According to the latest figures available in
the Ministry of Finance the stock of NPLs to Rs. 290 billion by end 2001 from Rs. 207
billion in 2000 and Rs. 185 billion in the year 1999. According to the latest country report
of the World Bank this amount may increase to Rs 384 billion by end of the current year.

Recovery of stuck up loans was one of the prime objectives of General Musharraf, when
he took over in October 1999, the then previous government. The recovery drive
launched by the National Accountability Bureau (NAB) made wholesale arrests of the
businessmen, even on circumstantial defaults, resulting in severe backlash and further
loss of confidence. NAB was able to recover few billions rupee from the erring
industrialists, but during the process many industries fell sick. The contracting economic
activity in the country fuelled further failures, and more loans were categoried as non-

Section Page

1. Introduction……………………………………………………….. 3
1.1 General Description……………………………………………. 3
1.2 Problems to be studied………………………………………… 3
1.3 Objectives of the Research Project……………………………. 3
1.4 The relevance of the Research……………………………........ 3
2. Background & Literature Review…………………………………. 4
3. Methodology ………………………………………………………
1. Introduction

1.1 General Description:

Non-performing loans (NPL) are a world-wide issue that affects the stability of financial
markets in general and the viability of the banking industry in particular. A non-
performing loan is a loan that is in default or close to being in default. Many loans
become non-performing after being in default for 3 months, but this can depend on the
contract terms. This research paper was undertaken to analyze the Non-performing loans
(NPL) and its growth in Faisalabad region.Research was conducted by taking the sample
of banks, in which bank has the key role in financing the NPLs in Faisalabad region. Data
were collected through personal visits of the main branches of financial institutions and
sample banks within the Faisalabad region.

1.2 Problem to be Studied:

As you would be aware that compilation of figures of non-performing loans (NPLs) of
banks has remained a very problematic issue both for the government as well as for the
State Bank of Pakistan in the past. In this connection different figures of NPLs remained
under circulation from time to time, which created confusions and doubts in the minds of
the general public and policy makers.
“A loan is nonperforming when payments of interest and principal are past due by 90
days or more, or at least 90 days of interest payments have been capitalized, refinanced or
delayed by agreement, or payments are less than 90 days overdue, but there are other
good reasons to doubt that payments will be made in full”. The NPL problem is often
cited as one of the potential risks that may cause economic and financial instability in
Pakistan, although the Pakistanis economy has not been growing fast with major

1.3 Objective of Research Project:

The general objective of the study was to analyze the NPA level in commercial banks.
However the study was conducted with the following specific objectives.
1. To analyze the NPL level of banks.
2. To study the recovery procedures of banks.
3. To examine how far the bank has been successful in reducing the NPL level.
4. To suggest measures for efficient management of NPL.

1.4 The relevance of the research.

It seems there are a million different ways to borrow money. But the thing to consider is
the type of loan that we need. If we want a relatively small amount, say Rs5, 00,000 we
shall want a personal loan. Although it’s difficult to tell what makes a personal loan
“personal” as opposed to a standard loan, it does appear that generally lending institutions
apply the label “personal” to loans that are put to personal uses.

2. Background & Literature Review

Over the last three decades, banking crises have become more prominent for both
developed and developing countries. Caprio and Klingebiel (1996, 1997 and 1999), for
example, have identified over eighty-six separate episodes of large-scale bank insolvency
across a wide range of developed and developing countries in the 80s and 90s while
Kaminsky and Reinhart (1999) report 102 banking or currency crises from 1970 to 1995
among a sample of 20 industrialized and developing countries.
Between 1999 and 2001 Turkey experienced systemic financial difficulties punctuated by
a series of banking and currency crises--June-December 1999, November 2000, and
February 2001--that wiped out the capital of the Savings Deposit Insurance Fund (SDIF
SDIF SGML Document Interchange Format
SDIF Saving Deposit Insurance Fund (Turkey)
SDIF Sony Digital Interface Format
SDIF Standard Document Interchange Format
SDIF Sequential Difference
SDIF Sound Description Interface Format ) banks, decimated the equity of the other
public and private banks, and necessitated a bailout by the International Monetary Fund.
Over this period, 22 private banks were seized by the regulator, the Banking Regulation
and Supervisory Agency (BRSA), and several state banks were reorganized. By the end
of 2001 the BRSA had injected over USD USD
In currencies, this is the abbreviation for the U.S. Dollar.

The currency market, also known as the Foreign Exchange market, is the largest financial
market in the world, with a daily average volume of over US $1 trillion. 42 billion into
the banking sector and Turkey's gross domestic product stood 5.5% lower then in 1998.

The Pakistani financial system has been in a transitional period from a predominantly
administered system to a market oriented one since the early 1980s. The Pakistani
banking system, in particular, faced a number of bottlenecks that were similar to those of
other countries of comparable development like India, Bangladesh and even Turkey. A
fundamental problem was the large volume of non-performing loans (NPLs) that have
accumulated since the nationalization of the banking system in the 1970s.

This paper contributes to the literature on non-performing bank loans in developing

countries by investigating the behaviour of credit managers in Turkey and Pakistan who
actually make the lending decisions. The study identifies factors that contributed to an
increase in NPLs in large state-owned commercial banks over the period 1999-2001 and
1996-1998 in Turkey and Pakistan respectively. A major feature of the paper is the use of
survey methodology to obtain primary data. We had face-to-face interviews with 110
senior credit managers in the four major commercial banks in Turkey As of September
2006, the size of the banking industry is 88.2% of total financial sector in Turkey. There
are 51 banks as of September 2006: 3 public, 16 private, 14 foreign, 13 non-commercial,
4 participation banks. and 100 credit managers in five large state-owned commercial
banks of Pakistan. Then we use the application of the ordered probit model In statistics, a
probit model is a popular specification of a generalized linear model, using the probit
link function. Probit models were introduced by Chester Ittner Bliss in 1935. for
analysing the survey data.
3. Methodology
3.1 Research Design
A purposeful investigation of a problem research helps an organization in finding out
causes and clues for making sound and effective decisions by applying scientific
methodology to the art of management. Research can be of two types namely
Exploratory research and Conclusive research.
Exploratory research is investigation of relationships among variables without
knowing why they are studied. It borders on an idle curiosity approach, differing from it
only in that the investigator thinks there may be a payoff in the application somewhere
in the forest of questions. In Conclusive research there are two types namely
Descriptive research and Experimental research.
Descriptive research allows both implicit & explicit hypotheses to be tested depending on
the research problem. Experiments are artificial in the sense that the situations are usually
created for testing purposes in experimental research.

3.2 Sampling Technique

Sampling refers to selecting a part of the population to represent the characteristics of the
population. However, in this study, Finance Manager of the bank is the source of data and
therefore, since he is the only one source of information, there is no question of any
sampling. He is interviewed at the Bank’s Head Quarters at Thrissur, Kerala, and the
necessary primary data is collected using Inventory Schedule. Both primary and
secondary data were collected & used for drawing conclusions for the study.
Primary data:- were collected using Inventory schedule & also through interview, held
with the Finance Manager in presence of the other officials of Dhanalakshmi Bank Ltd.
Secondary data:- were collected from the published annual reports of the Dhanalakshmi
Bank and other sources. Such data collected were analyzed for some kind of a trend and
its impact on the profit of the bank.

Tools used for Analysis of Data

The data collected were analyzed with the help of statistical tools like frequency,
percentage and trend analysis. Tables are used to represent the consolidated data.
Graphical representation is also used for better comprehension & presentation.