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1. INTRODUCTION:
The main aim of any individual is the utilization of money in the best manner since India is a
country where more than half of the population has a problem of running the family in an
efficient manner. However Indian people faced large number of problems until the development
of the full-fledged banking sector. The Indian banking sector started developing after the 1991
government policy. The banking sector has helped the Indian people to utilize the single money
in the best manner possible. People now have started investing their money in the bank. Banks
also provide good returns on the money deposited with them. The people now have understood
that banks provide them a good security of their deposits, so excess amounts are invested in the
banks. Thus, banks have helped the people to achieve their socio economic objectives. The banks
not only accept the deposits of the people but also provide them credit facility for their
development. Indian banking sector has helped the nation in developing its business and service
sectors. But recently banks are facing the problem of credit risk. It is found that many common
people and business people borrow from banks but due to some genuine or other reasons are not
able to pay back the amount drawn from the banks. The amount which is not given back to the
banks is known as non performing assets. Many banks are facing the problem of nonperforming
assets which hamper the business of the banks. Due to NPAs the income of the banks is reduced
and the banks have to make the large number of provisions that would curtail their profit. And
due to this the financial performance of the banks would not show good results. The main aim
behind making this report is to know how Public Sector Banks are operating their business and
how NPAs play their role in the operations of the Public Sector Banks. The present study also
focuses on the existing system in India to solve the problem of NPAs and comparative analysis
to understand which bank is playing what role with concern to NPAs. Thus, the study would help
the decision makers to understand the financial performance and growth of Public Sector Banks
with regard to NPAs.
The world is going faster in terms of services and physical products. However it has been found
that physical products are available because of the service industries. Service industry plays a
vital role in boosting the economy. Nations like U.S, U.K, and Japan the service industry is
contributing more than 55%. The banking sector is one of appreciated service industries. The
banking sector plays a large role in channelizing money from one end to other. It helps almost
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every person in utilizing his money to the best. The banking sector accepts the deposits of the
people and provides fruitful return to people on the invested money. But for providing better
returns plus principal amount to the clients; it becomes important for the banks to earn good
income. The main source of income for banks is the interest that they earn on the loans that have
been disbursed to the common man, businessman, or any industry for its development. Banks
first, accept the deposits from the people and then lend this money to people who are in the need
of it. Through channelizing money from one end to the other, banks earn their profits. However
as discussed earlier, the
Indian banking sector has recently faced a serious problem of Non Performing Assets. This
problem has emerged largely in the Indian banking sector since the last three decades. Due to
this problem many Public Sector Banks performances and operations have been adversely
affected. The problem of NPAs is dangerous for the banks because it destroys their healthy
financial conditions. The people would lose their trust in the banks, if they continue to have high
Non Performing Assets. So, the problem of NPAs must be tackled in such a manner that does not
destroy the operational, financial conditions and also not affect the image of the banks. Recently,
RBI has taken a number steps to reduce NPAs of the Indian banks. And it has also found out that
many banks have shown positive figures in reducing NPAs as compared to the past years.
1.1 STATEMENT OF PROBLEM:
The Banks in India face the problem of swelling nonperforming assets (NPAs) and the issue is
becoming more and more unmanageable. The NPAs have direct impact on banks profitability,
liquidity and equity. The NPAs of Indian Banks are relatively huge by international standard.
Therefore the biggest ever challenge that the banking industry now faces is management of
NPAs. It is true that banks have to restrict their lending operations to secured advances only
with adequate collateral securities.
In this connection banks must aware of the problems and recovery legislations of NPAs. Non-
performing assets means an advance where payment of interest or repayment of installments of
principal or both remains for a period of more than 180 days.
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The magnitude of NPAs have a direct impact on banks profitability as legally they are not
allowed to book income on such accounts and at the same time banks are forced to make
provision on such assets as per the RBI guidelines. The Indian Banking sector is facing a serious
situation in view of the mounting NPAs which are the tune of Rs. 56,000crores in March 2002.
NPAs an important parameter in the analysis of financial performance of banks. The reduction of
NPAs is necessary to improve profitability of the banks and comply with capital adequacy
norms.
Therefore, to solve the problems of existing NPAs, quality of appraisal supervision and follow
up should be improved. The NPAs can be avoided at the initial stage of credit consideration by
putting rigorous and appropriate credit appraisal mechanism. This is in order to recover the NPA
debt, the judicial systems should revamped and is essential to enforce the SARFAESI Act with
more stringent provisions to realize the securities and personal assets of the defaulters.
1.2 REVIEW OF LITERATURE:
Non-performing assets, also called non-performing loans, are loans, made by a bank or finance
company, on which repayments or interest payments are not being made on time. A loan is an
asset for a bank as the interest payments and the repayment of the principal create a stream of
cash flows. It is from the interest payments than a bank makes its profits. Banks usually treat
assets as non-performing if they are not serviced for some time. If payments are late for a short
time a loan is classified as past due. Once a payment becomes really late usually 90 days the loan
classified as non-performing. . Accordingly, with effect from March 31, 2005, a non-performing
asset (NPA) shell be a loan or an advance where;
i) Interest and installment of principal remain overdue for a period of more than 90 days in
respect of a Term Loan,
ii) The account remains ‘out of order’ for a period of more than 90 days, in respect of an
Overdraft/Cash Credit (ODICC),
iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,
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iv) For a period not exceeding two half years in the case of an advance granted for
agricultural purpose and,
v).Any amount to be received remains overdue for a period of more than 90 days.
1.3 OBJECTIVES OF STUDY:
To understand what is NPA.
To understand what are the underlying reasons for the emergence of the NPAs.
To understand the dimensions of nonperforming assets of bank.
To study the position of Non-performing Assets in State Bank of Patiala.
To study the procedure and tools used for management of NPSs.
To evaluate the ratio of the Bank with concerned to the NPSs.
1.4 RESEARCH METHODOLOGY:
Meaning of Research
Research is defined as “a scientific & systematic search for pertinent information on a specific
topic”. Research is an art of scientific investigation. Research is a systemized effort to gain new
knowledge. It is a careful inquiry especially through search for new facts in any branch of
knowledge. The search for knowledge through objective and systematic method of finding
solution to a problem is a research.
Design is basically a blue print of the research which includes the method of research, the
instruments to be used for method of sampling etc. It is a statement of; elements of a study those
that provides the details of the project. The design that is in the study is a Descriptive Design, a
descriptive
the phenomenon without establishing association factors, descriptive design was used
because it studies variables of people or respondents who are under the study involved
the survey of consumers views
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Intended to produce accurate descriptions of relevant to the decision being faced without that
some relationship exists between variables. It is the simplest of all the designs.
Sources of data:
The sources of data means from where we have to get data. There are mainly two sources of
data. These are:
Primary data: The Primary data are those which are collected a fresh and for the first time and
thus happens to be original in character.
Secondary data: The secondary data are those data which have already been collected by
someone else and which have already been passed through statistics process. We get published
data as maintained by finance departments of a concern or other publications like Annual report,
Magazines etc.
In my research only secondary type of data is collected.
Data sources:
Secondary sources of data:
Annual reports of the company
Internet
Finance books
This also included going through researches prepared by other students.
1.5 LIMITATION OF STUDY:
It was difficult to gather the financial data of Bank so the better evaluation of the performance of
the bank is not possible.
Managerial staff was quite busy to their work, so due to their schedule of work, I was not in a
position to discuss some important aspect in detail.
Analysis is only a means and not ends in itself. The analyst has to make interpretation and draw
his own conclusion. Different people may interpret the same analysis in different ways.
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2. INDUSTRY PROFILE
2.1 WHAT IS BANKING?
Banking in a traditional sense is the business of accepting deposits of money from public for the
purpose of lending and investment. These deposits can have a distinct feature of being
withdrawn able by cheques, which no other financial institution can offer. In addition, banks also
offer financial services, which include:
Issuing demand draft & traveler’s cheque.
Credit cards
Collection of cheques, bill of exchange.
Safe deposit lookers
Custodian services.
Investment and Insurance Services.
The business of banking is highly regulated since banks deal with money offered to them by the
public and ensuring the safety of this public money is one of the prime responsibilities of any
bank. That is why banks are expected to be prudent in their leading and investment activities.
Every bank has a compliance department, which is responsible to ensure that all the services
offered by the bank, and the processes followed are in compliance with the local regulations and
the Bank’s corporate policy.
The major regulations and act govern the banking business are:-
Banking Regulation Act, 1949
Foreign Exchange Management Act,1999
Indian Contract Act
Negotiable Instruments Act, 1881
Bank lend money either for productive purposes to individual, firms, Corporate etc. of for buying
house property, cars and other consumer durables and for investment purposes to individuals and
the others. However, banks do mot finance any speculative activity. Lending is risk taking.
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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 Bank of Hindustan, which started in 1790;
both 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
2.2 HISTORY OF BANKING IN INDIA
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a
consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and
still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company
that issues stock and requires shareholders to be held liable for the company's debt) It was not the
first though. That honor belongs to the Bank of Upper India, which was established in 1863, and
which survived until 1913, when it failed, with some of its assets and liabilities being transferred
to the Alliance Bank of Simla.
When the American Civil War stopped the supply of cotton to Lancashire from the Confederate
States, promoters opened banks to finance trading in Indian cotton. With large exposure to
speculative ventures, most of the banks opened in India during that period failed. The depositors
lost money and lost interest in keeping deposits with banks. Subsequently, banking in India
remained the exclusive domain of Europeans for next several decades until the beginning of the
20th century.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire
d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in
Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the
British Empire, and so became a banking center.
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The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in
Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in
1895, which has survived to the present and is now one of the largest banks in India.
Around the turn of the 20th Century, the Indian economy was passing through a relative period
of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial
and other infrastructure had improved. Indians had established small banks, most of which
served particular ethnic and religious communities.
The presidency banks dominated banking in India but there were also some exchange banks and
a number of Indian joint stock banks. All these banks operated in different segments of the
economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign
trade. Indian joint stock banks were generally undercapitalized and lacked the experience and
maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon
to observe, "In respect of banking it seems we are behind the times. We are like some old
fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome
compartments."
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi
movement. The Swadeshi movement inspired local businessmen and political figures to found
banks of and for the Indian community. A number of banks established then have survived to the
present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank
and Central Bank of India.
The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina
Kannada and Udupi district which were unified earlier and known by the name South Canara
( South Kanara ) district. Four nationalized banks started in this district and also a leading private
sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian
Banking".
During the First World War (1914-1918) through the end of the Second World War (1939-1945),
and two years thereafter until the independence of India were challenging for Indian banking
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Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India's independence marked the end of a regime of the
Laissez-faire for the Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the
government in 1948 envisaged a mixed economy. This resulted into greater involvement of the
state in different segments of the economy including banking and finance. The major steps to
regulate banking included:
The Reserve Bank of India, India's central banking authority, was nationalized on
January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public
Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India."
The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could have
common director.
Nationalization
Despite the provisions, control and regulations of Reserve Bank of India, banks in India except
the State Bank of India or SBI, continued to be owned and operated by private persons. By the
1960s, the Indian banking industry had become an important tool to facilitate the development of
the Indian economy. At the same time, it had emerged as a large employer, and a debate had
ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of
India, expressed the intention of the Government of India in the annual conference of the All
India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The
meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance and
nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969.
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Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political
sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery. With
the second dose of nationalization, the Government of India controlled around 91% of the
banking business of India. Later on, in the year 1993, the government merged New Bank of India
with Punjab National Bank. It was the only merger between nationalized banks and resulted in
the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the
nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian
economy
Liberalization
In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization,
licensing a small number of private banks. These came to be known as New Generation tech-
savvy banks, and included Global Trust Bank (the first of such new generation banks to be set
up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI
Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of
India, revitalized the banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and
foreign banks.
The next stage for the Indian banking has been set up with the proposed relaxation in the norms
for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights
which could exceed the present cap of 10%,at present it has gone up to 74% with some
restrictions.
The new policy shook the Banking sector in India completely. Bankers, till this time, were used
to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave
ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this
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led to the retail boom in India. People not just demanded more from their banks but also received
more.
Currently (2007), banking in India is generally fairly mature in terms of supply, product range
and reach-even though reach in rural India still remains a challenge for the private sector and
foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to
have clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage
volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time-especially in
its services sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As, takeovers, and asset
sales.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in
Kodak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been
allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005
that any stake exceeding 5% in the private sector banks would need to be vetted by them.
In recent years critics have charged that the non-government owned banks are too aggressive in
their loan recovery efforts in connection with housing, vehicle and personal loans. There are
press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.
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Phases of banking in India
Without a sound and effective banking system in India it cannot have a healthy economy. The
Banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.
For the past decades Indian banking system has several outstanding achievements to its credits.
The most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. This is one of the main reasons of India’s growth process.
The government regular policy for Indian banks since 1969 has paid rich dividends. With the
nationalization of 14 major private banks of India.
Not long ago, a account holder had to wait for a hour at the bank counters for getting a draft or
for withdrawing of his own money. Today he has a choice. Gone are the day when most efficient
bank transfer money from one branch to other in two days. Now it is simple as instant messaging
or dials a pizza. Money has become the order of the day.
The first bank in India, through conservative was established in 1786. From 1786 till today, the
journey of Indian banking system can be segregated into three distant phases. They are as
mentioned below:
Early Phase from 1786 to 1969 of Indian banks.
Nationalization of Indian banks and upto 1991 prior to Indian banking sector reforms.
New phase of Indian banking system with the advent of Indian financial and Indian
banking sector reforms after 1991.
To make this write up more explanatory, I prefix the scenario as phase I, phase II and phase III.
Phase I
The general bank of India was set up in the year 1786. Next came bank of Hindustan and Bengal
banks. The East Indian Company established bank of Bengal (1890), Bank of Bombay (1840)
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and Bank of Madras (1843) as independent unit and called it as presidency banks. These three
banks were amalgamated in 1920 and Imperial bank of India was established which started as
private shareholder banks, mostly European shareholders.
In 1865 Allahabad bank was established and first time exclusively by Indians, Punjab National
Bank Ltd was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of
India, Central bank of India, Bank of Baroda, Canara Bank, Indian bank, Bank of Mysore were
set up. Reserve Bank of India came in 1935.
During the first phase growth was very slow and bank also experienced periodic failure between
1913 to 1948. There were approximately 1100 banks mostly small. To streamline the functioning
and activities of commercial banks, the government of India came up with The Banking
Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending
Act of 1965 (Act No . 23 of 1965). Reserve Bank of India was vested with extensive powers for
the supervision of banking in India as the Central Banking Authority.
During those days’ people has lesser confidence in banks. As an aftermath deposit mobilization
was slow. Abreast of it the savings bank facility provided by the postal department was
comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955,
it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially
in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI
and to handle banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19July,
1969, major process of nationalization was carried out. It was the efforts of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were
nationalized.
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Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership.
The following are the steps taken by the Government of India to regulate banking institution in
the country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11000%.
Banking is the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products a reforms measure. In 1991, under the
chairmanship of M Narasimha, and facilities in the banking sector in its committee was set up by
his name which worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a
satisfactory service to customers. Phone banking and net banking is introduced. The entire
system became more convenient and swift. Time is given more importance than money.
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2.3 TYPES OF BANKS IN INDIA
With an increase in the range of financial activities in the Indian banking sector, there are
different of banks that cater to specific requirements of the customers. Today, we have banks
catering to customers through personalized services and banks that offer specific services.
Typically, banks can be classified on the basis of their activities. Examples of these activities
include investment, retail or business.
Main Types of Banks in India
http://www.lawisgreek.com/wp-content/uploads/2010/05/RBI-Lawisgreek.jpgThe extent of
ownership determines the type of banks that you see in India. Decades ago, nationalized banks
dominated the banking sector in India. In 1969, the major nationalization of
banks was spearheaded by none other than Prime Minister Indira Gandhi. The purpose was to
spread awareness to rural areas and make cheap finance options available to the poor and needy
farmers. That year, 14 major commercial banks were nationalized.
Today, the banking scenario has changed considerably. The following are the main types of
banks in India:
Privately Owned: These banks operate on a purely profit basis. Also called central banks and
new generation banks, these are controlled by the state governments of their respective countries.
While they are known to offer quick, easy and convenient options for customers, they are not
considered as reliable and committed to growing the wealth of their customers as nationalized
banks.
Publicly Owned: These banks are operated and controlled by the government. These banks
actively maintain a huge number of operations that constitute the country’s liquidity in the
banking sector. They are considered safe, reliable and committed to the customers and the
process established by the Reserve Bank of India.
These banks handle a number of tasks pertaining to the banking sector. Publicly owned banks
also determine the interest rates that other banks in the country offer.
Other Categories of Banks
The following categories include larger banks that have broader and multiple divisions:
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Retail banks: These banks deal with consumers and small business owners directly. The major
products offered by them include savings and current accounts, credit cards, and loans, such as
mortgages. These also cater to high net worth clients offering them wealth management services.
These can be further divided into
Offshore banks: Most of these are private banks that operate in spheres of reduced taxes.
Community banks: These banks operate on a local basis and serve people and markets
that have usually been devoid of banking services.
Postal savings banks: These banks operate in collaboration with the nation’s national
postal systems.
Building societies: Typically owned by their clients, these banks offer a broad range of
retail banking services.
Ethical banks: These banks only acknowledge investments that are socially and
environmentally useful.
Business banks: These banks serve medium scale businesses and organizations.
Corporate banks: These banks typically deal with major business entities.
Investment banks: These banks help clients in mergers and acquisitions and other
services related to financial markets. Some investment banks conduct underwriting
services only. Some investment banks are merchant banks that perform traditional
banking activities related to trade-finance.
All types of banks function well based on the extent of trust they are able to communicate with
their customers. Their customers, in turn, recommend them to others and avail more services
offered by these banks, expecting complete safety of their dealings.
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2.4 FUTURE OF BANKING IN INDIA
A healthy banking system is essential for any economy striving to achieve good growth and yet
remain stable in an increasingly global business environment. The Indian banking system has
witnessed a series of reforms in the past, like deregulation of interest rates, dilution of
government stake in PSBs, and increased participation of private sector banks. It has also
undergone rapid changes, reflecting a number of underlying developments. This trend has
created new competitive threats as well as new opportunities. This paper aims to foresee major
future banking trends, based on these past and current movements in the market.
Given the competitive market, banking will (and to a great extent already has) become a process
of choice and convenience. The future of banking would be in terms of integration. This is
already becoming a reality with new-age banks such as YES Bank, and others too adopting a
single-PIN. Geography will no longer be an inhibitor. Technology will prove to be the
differentiator in the short-term but the dynamic environment will soon lead to its saturation and
what will ultimately be the key to success will be a better relationship management.
‘The future belongs to bigger banks alone, as well as to those which have minimized their risks
considerably.’
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3. STATE BANK OF PATIALA: ALL ABOUT
State Bank of Patiala (SBP) is a nationalized Indian bank which is a subsidiary of
the State Bank of India. Founded in 1917 by the then Maharaja His Highness Bhupinder Singh,
erstwhile Patiala, the bank was initially named Patiala State Bank. It was named as State Bank of
Patiala after it became a subsidiary of SBI. The bank was set up with the sole aim of nurturing
the growth of agriculture, trade and industry. In 1948, the bank was brought under the control of
the Reserve Bank of India or RBI. Since its inception, the State Bank of Patiala has been
constantly working towards increasing its size and the volume of business.
Today State Bank of Patiala is a bank that has all the modern
amenities for its clients including computerized branches. There are more than 700 branches of
the bank spread all over the country catering to a diverse group of customer. Though the bank
has branches across the country, a majority of the branches can be found in the states of Punjab,
Delhi, Jammu & Kashmir, Gujarat, Madhya Pradesh, Haryana, Rajasthan and Himachal Pradesh.
3.1 STATE BANK OF PATIALA SERVICES:
State Bank of Patiala offers various types of services to its clients. SBP shares its
ATM network with other State Bank group members, so this means that the bank’s customers
have access to the more than 7000 State Bank Group ATMs across the country. Some of the
services offered by the bank consist of:
NRI Services
Govt. Business
Personal Banking
Internet Banking
SME & Corporate Banking
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Agriculture & Rural Banking
Personal Banking
Under the Personal Banking services offered by State Bank of Punjab, various
types of loans are given to customers, so that they can take care of all their monetary needs
without any hassles. SBP Loan to Pensioners is an attractive scheme for retired people. This
scheme is available to all Central, State Government, Defense and SBP pensioners whose
pension accounts are maintained by the bank. All the loans of State Bank of Patiala come with
easy repayment options and can be paid off very easily.
Some of the other services offered by the bank under personal banking consist of
SBP Loan against Mortgage of Immovable Property, SBP Loan for Earnest Money, SBP
Education Loan, SBP Loan against LIC / SBI-Life Products, SBP Loan for Rural Housings, SBP
Loan against RBI Relief Bonds, SBP Loan against Gold Ornaments, SBP Loan against Term
Deposits, SBP Home Loan Scheme, SBP Two Wheeler Loan, SBP Realty, SBP Loan to
Pensioners, SBP Career Loan, SBP Car Loan and SBP Personal Loan.
3.2 VISION AND MISSION:
Vision
To be a progressive Bank with customer centric philosophy blending modernity with tradition.
Mission
To continue our tradition of customers-focused approach for high growth and profitability , and
be the most preferred bank in our core area of operation meeting the expectations of all
stakeholders as a responsible corporate citizens.
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3.3 BOARD OF DIRECTORS
NAME DESIGNATION
Shri O.P.Bhatt Chairman
Shri Ashok Kumar Managing Director
Shri N.H.Siddiqui Nominated by Reserve Bank of India
Shri S.A. Thimmiah General Manager
Shri B.S. Gopalakrishna Deputy General Manager
Shri Sushil Gautam Workmen Director
Shri Rakesh Chander Jasra Non-Workmen Director
Shri Ashwani Kumar Gupta Nominated by State Bank of India
Shri Swarn Singh Boparai Nominated by State Bank of India
Dr. Abhijit Mukherjee Director
Shri R.K.Sood Under Secretary
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3.4 TOP MANAGEMENT
NAME DESIGNATION
Sh. Ashok Nayar Managing Directors
Sh. T. Lokeshaiah Chief General Manager
Sh. Salil Misra General Manager (Treasury)
Sh. Jasbir Singh General Manager (Vigilance)
Sh. S. Sridhar General Manager (Tech. & Insp.)
Sh. C.R.Roy Surendra General Manager (Comm. Banking)
Sh. R.D.Modi General Manager (Planning & Dev.)
Sh. Pukhraj Kanther General Manager (Operations)
21
3.5 SWOT ANALYSIS
Let’s analyze SWOT in order to know as to where the company stands
STRENGTH
Wide network
Large number of customers
Fast adaptability to technology
Brand image
WEAKNESS
Casual behaviour
Corruption and red tapism
Slow decision making due to large hierarchy
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OPPORTUNITIES
Home to home banking services
Diversification towards other fields
Globalization
THREATS
Stiff competition from other private players.
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4. MEANING OF NON PERFORMING ASSETS (NPA)
Non-performing assets, also called non-performing loans, are loans, made by a bank or finance
company, on which repayments or interest payments are not being made on time. An asset,
including a leased asset, becomes non-performing when it ceases to generate income for the
bank. 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.
Earlier an amount due under any credit facility was treated as "past due" when it has not been
paid within 30 days from the due date. However, with 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. Therefore,
w.e.f. 1st April, 2001, a Non performing asset (NPA) was an advance where:-
(a) Interest and /or installment of principal remain overdue for a period of more than 180 days in
respect of a Term Loan,
(b) The account remains 'out of order' for a period of more than 180 days, in respect of an
overdraft/ cash Credit (OD/CC),
(c) The bill remains overdue for a period of more than 180 days in the case of bills purchased
and discounted,
(d) 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
(e) Any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts.
However, the above definition was been further modified w.e.f. 31st March, 2003.
24
Till December, 2003, banks recognized a loan as an NPA if either the principal or the interest
was overdue for two quarters or 180 days. With a view to moving towards international best
practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue'
norm for identification of NPAs, from the year ending March 31, 2004. Thus, from March, 2004,
Banks have shifted to the 90-day income recognition norms for calculating NPAs.
Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a
loan or an advance where:-
(i) Interest and /or installment of principal remain overdue for a period of more than 90 days in
respect of a Term Loan,
(ii) The account remains 'out of order' for a period of more than 90 days, in respect of an
overdraft/ cash Credit(OD/CC),
(iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
(iv) 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
(v) 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 is treated as 'out of order'
(a) When the outstanding balance is more than drawing power or sanctioned limit; or
(b) When there are no credits continuously for six months or credits are not enough to cover the
interest debited during the same period; or
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(c) when the stock statement is delayed for 3 months or renewal of limits does not take place or
is delayed for 3 months (in case of exceptional cases it can be upto 6 months) even though
outstanding balance is within the sanctioned limit / drawing power.
Overdue
An amount is considered as overdue under any credit facility if it is not paid on the due date
fixed by the bank
However, some banks made additional provisions to adhere to the 90-day NPA recognition norm
even earlier. Some of such examples are:-
(a) Oriental Bank of Commerce (OBC) has declared itself a zero-NPA bank after shifting to the
90-day norm.
(b) Bank of Baroda adopted the 90-day norm from December 2003. The bank's net NPA on
December 31, 2003, slipped to 3.46 per cent, against 4.01 per cent in the corresponding period of
the last financial year.
(c) Corporation Bank adopted the 90-day NPA classification norm in December 2003. After the
adoption of the norm, the net NPA level of the bank as on December 31, 2003, decreased to 1.7
per cent from 2.4 per cent in the corresponding period of the last financial year.
(d) In the private sector, HDFC Bank adopted the 90-day norm in August 2003 and the overall
impact was marginal. The net NPA ratio of around 0.5 per cent of its advances is based on the
90-day norm.
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4.1 CLASSIFICATION OF ASSETS
CHART OF ASETS CLASSIFICATION
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ASSETS
PERFORMING ASSETS OR STANDARD ASSETS
NON-PERFORMING ASSETS
SUB-STANDARD ASSETS
DOUBTFUL ASSETS
LOSS ASSETS
PERFORMING ASSETS OR STANDARD ASSETS:-
These assets do not disclose any problem and also do not carry more than normal risk attached to
the business. Such assets are considered as performing assets.
Provisions Norms:- A general provision of a minimum of 0.25% of total standard assets should
be made as a matter of abundant cautions, even though there could be no risk of nonperforming
of default. It has been clarified by RBI that the provision should be made on global loan basis
and not on domestic advances alone.
CLASSIFICATION OF NON- PERFORMING ASSETS:-
Banks are required to classify non-performing assets further into the following three categories
based on the period for which the asset has remained non-performing and the reasonability of the
dues:
Sub-standard Assets
Doubtful Assets
Loss Assets.
Sub Standard Assets:-
A Sub-Standard Asset would be one which has been classified NPA for a period less than or
equal to 12 months. In such cases, the current net worth of the Borrower / Guarantor or the
current market value of the security charged is not enough to ensure recovery of the dues to the
banks in full.
In other words, such an asset will have well-defined credit weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
Provision Norms:- A general provision of 10%of the total outstanding.
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Doubtful Assets:-
An asset would be classified as Doubtful Asset if it has remained in the Substandard category for
a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as Sub-Standard, with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions and values,
highly questionable and improbable.
Provision Norms:-
a) 100% of the extent to which the advances is not covered by the realizable value of the
security in the possession of the bank. The reasonable value is estimated on realistic
basis.
b) Over and above item a) above, depending on the period for which the assets remained
doubtful 20% to 50% of the secured portion of the doubtful assets (i.e. estimated
realizable value of the outstanding) on the following basis:
Period for which the advances has been
considered as doubtful
% of provision
i) Upto 1 year 100% of unsecured + 20% of secured portion
ii) 1 to 3 years 100% of unsecured + 30% of secured portion
iii) More than 3 years 100% of unsecured portion + 50% of
secured portion
Loss Assets:-
A Loss Asset is one where loss has been identified by the bank or internal or external auditors or
the RBI Inspection, but the amount has not been written off wholly. In other words, such an asset
is considered uncollectible and of such little value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery value.
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Provision Norms: The entire assets should be written off. If the assets are to remain in the
books for any reason, then 100% of the outstanding should be provided.
4.2 GUIDELINE FOR THE CLASSIFICATION OF NPAs.
Broadly speaking classification should be done by taking into account the degree of well defined
credit weaknesses and the extent of dependence on collateral security for realization of dues.
Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs, especially in respect of high value amount.
Accounts will temporary deficiencies: These should be classified based on the past
recovery records.
Accounts regularize near about the balance sheet date: This accounts should be
handle with care and without scope of subjectivity. When he account indicates inherent
weakness based upon available data, it should be deemed as an NPA.
Assets classification should be borrower wise and not facility wise: if a single facility
to a borrower is classified as a NPA, other should also be classified the same way, as it is
difficult to envisage only a solitary facility becoming a problem credit and not others.
Advances under consortium arrangements: Classifications here should be based on
the recovery records of the individual member banks.
Accounts where there is a erosion in the value of a security: if there is a significant
(i.e. the realizable value of the security is less than 50% of that assessed by the banks
during acceptance) the amount may be classified as a NPA.
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4.3 TYPES OF NPA:
Gross NPA.
Net 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
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5. REASONS FOR NPA IN INDIA
The banking sector has been facing serious problem of rising NPAs. But the problem of NPAs is
more in public sector bank when compare to private banks and foreign banks. The NPAs is
growing in public sector bank due to external as well as internal factors.
External Factors:
Ineffective recovery tribunal
The government has set number of recovery tribunals, which works for the recovery of loans and
advances. Due to their negligence and ineffectiveness in their work bank suffers the consequence
of non- recover, their by reducing their profitability and liquidity.
Willful defaults
There are borrowers who are able to pay back loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order to get
back the money extended to them as advances and loans.
Natural Calamities
These are the measure factor, which is creating alarming rise in NPAs. India is hit by major
natural calamities thus making the borrowers unable to pay back their loans. Thus the bank has
to make large amount of provisions in order to compensate those loans, hence end up the fiscal
with reduced profits. Mainly our farmers depend upon rainfall for cropping. Due to irregularities
of rainfall the farmers are not to achieve the production level thus they are not repaying the
loans.
Industrial Sickness
Improper project handling, ineffective management , lack of adequate resources, lack of advance
technology, day to day changing government policies give birth to industrial sickness. Hence the
banks that finance those industries ultimately end up with low recovery of their loans reducing
their profit and liquidity.
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Lack of demand
Entrepreneurs in India could not foresees the product demand and start production which
ultimately piles up their products thus making them unable to pay back the money they borrow to
operate their activities. The banks recover the amount by selling of their assets , which cover the
minimum label. Thus the banks record the no recovered part as NPAs and have to make
provision for it.
Change on government policies
With every new government banking sector gets new policies for their operations. Thus it has to
cope with the changing principles and policies for the regulations of the rising of the NPAs eg.
The fallout of the handloom sector as the most of the weavers co-operative societies has
becomes defunct due to withdrawal of the state patronage. The rehabilitation plan worked out by
centre government to revive the handloom sector has not yet been implemented. So the overdues
due to the handloom sectors are becoming NPAs.
Internal Factors:
Defective leading process
There are three cardinal principles of bank lending that have been followed by the commercial
banks since long. i) Principle of safety ii) Principle of liquidity iii)Principle of profitability.
i) Principles of safety By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loans depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower the banker should, therefore take
utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one
and the borrower is capable of carrying it out successfully. He should be a person of integrity and
good character.
Inappropriate technology:
33
Due to inappropriate technology and management information system, market driven decision on
real time bases cannot be taken. Proper MIS and accounting system is not implemented in the
banks, which lead to poor credit collection, thus NPA. All the branches of bank should be
computerized.
Improper swot analysis:
The improper strength, weaknesses, opportunity and threat is also another reason for rise in an
NPAs. While providing unsecured advances bank depend more upon honesty, integrity, financial
soundness and credit worthiness of borrower. Bank should considered the borrower own capital
investment. It should collect the credit information of the borrower from a) banker b) Enquiry
from market segment of trade, industry , business c) From external credit rating agency d)
Analysis the balance sheet. True picture of the business will be reveled on analysis the profit loss
account and balance sheet. e) Purpose of loan. When the banker give loan he should analyses the
purpose of the loan to ensure safety and liquidity. Bank should grant loan for productive purpose
only. Bank should analyze the profitability, viability and long term acceptability of the project
while financing.
Poor credit appraisal system:
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank
gives advances to those who are not able to repay it back. They should use good credit appraisal
to decrease the NPAs
Managerial deficiencies:
The banker should always select the borrower very carefully and should take tangible assets as
security to safe guard its interests. When accepting securities banks should consider the
1.Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the
principle of diversification of risk based on the famous maxim
“do not keep all the eggs in one basket”; it means that the banker should not grant advances
to a few big farms only or to concentrate them in few industries or in a few cities. If a new
big customer meets misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack,
34
and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM
(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60 Lakhs)
Absence of regular industrial visit:
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to willful defaulters can be collected by regular visits.
Re loaning Process:
Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters
and CCBs and PCVs the NPA of OSCB is increasing day by day.
6. EFFECTS OF NPA ON BANKS
Effects on profitability:
The profitability of the banks is severely affected by NPA’s as
NPA do not generate any income.
Provisioning is required @ 10% to 100% depending upon the quality of assets.
Banks are required to meet the cost of funding these unproductive assets.
Banks also incur expenses for maintenance of NPA’s
Effects on Return on Assets (ROA) :
As NPA’s reduce earning capacity of assets, Return on Assets (ROA) gets affected. ROA is
inversely related to NPA’s.
Effect on Net worth:
Capital and reserves constitute total net worth of the banks. For example in the year of 1999-
2000 the aggregate total net worth of the public sector banks is Rs. 46052 crore and their net
35
NPA’s is about Rs. 26188 crore, but the actual net worth is Rs. 19864 crore. So NPA’s have
direct impact on net worth of the banks.
Effect on Capital Adequacy Ratio:
As NPA’s do not earn any income and reduce the profits by way of provisioning. They adversely
affect Capital Adequacy Ratio (CAR).
Effects on Autonomy:
In the emerging competitive banking scenario the autonomy package, provided by RBI/
Government to the public sector banks on the basis of certain criteria, provides advantages to the
banks. Maximum net NPA’s limit of 9% is one of the criteria for getting autonomy. It is one of
the factors, which has eluded many banks to get autonomy.
Effects on Rating:
As per the recommendations of Padmanabhan Committee the banks are to be rated on a joint
scale of A to E widely on the lines of International CAMELS rating model. NPA has directly or
indirectly have effect on the three factors such as C (Capital Adequacy) A (Asset Quality) and E
(Earnings) of the above rating model. Regulatory and credit rating agencies abroad are also not
comfortable with the high level of NPA’s as on Indian Banks.
Effects on productivity:
The productivity of the banks having higher NPAs would be low as the branch staff that could
have been utilized for the business mobilization would primarily be engaged in management of
NPAs it is one of the factors for low productivity.
Effects on business mobilization:
The presence of high NPAs would reduce the average yield on funds deployed. In order to earn
profits the bankers would be in search of low cost deposits and they have to face a lot of
difficulties in mobilizing, maintaining and serving such deposits in today’s competitive
environment. In case, the banks are not able to mobilize low cost deposits then to remain in
36
profit they will have to find the avenues of investment, advances where the earning is high and
funds are safe. But here again there is a lot of competition among the banks for such avenues.
The banks with high NPAs are thus in vicious circle.
Effect on Recycling of funds:
Recycling of funds is severely affected due to high NPAs in the banks. The banks are being
deprived of utilizing the funds blocked in NPAs in highly productive avenues.
Effects on capital restructuring:
In order to improve the prescribed capital adequacy ratio (CAR) and improve the working results
today or tomorrow all most all banks would be forced to approach the capital market for proper
restructuring of their capital base. Besides earning per share (EPS) the investing public observed
the quantum of NPAs the bank carries.
Effects on the image of the bank:
The high NPA’s in the balance sheet of a bank show a poor picture of the bank as it indicate
inefficiency and ineffectiveness in the credit management of the bank.
Effect on interest Rate:
Due to the high NPAs banks are charging high rate of interest on the good borrowers to
compensate the interest loss in the NPAs account. High NPAs in the banks have devastating
effects not only on the banks but also economy as whole. To explain its ill effect it is better to
quote extract from Narasimha committee Report 1998 which reads as NPAs constitute a real
economic cause to the nation in that they reflect the application of scare capital and credit funds
to unproductive uses. The money locked up in the NPAs is not available for productive use and
to the extent that banks seek. To make provisions for NPAs or to write off it is a charge on their
profit. To be able to do so banks have to charge their productive and diligent customers at higher
rate of interest. It is thus become a tax on efficiency. It is the customer who uses credit efficiently
those subsidies the inefficiency represented by NPAs.
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7. EARLIER SYMPTOMS:
By which one can recognize a performing asset turning in to non-performing asset Four
categories of early symptoms:-
1) 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.
2) Operational and Physical:
If information is received that the borrower has either initiated the process of winding up
or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where borrower
conduct his business.
Frequent changes in plan.
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Nonpayment of wages.
3) Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.
4) Others:
Changes in Government policies.
Death of borrower.
Competition in the market.
8. PREVENTIVE MEASURES FOR NPA:
Early Recognition of the Problem:
Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late to
retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues.
Identification of weakness in the very beginning that is:
When the account starts showing first signs of weakness regardless of the fact that it may not
have become NPA, is imperative. Assessment of the potential of revival may be done on the
basis of a techno-economic viability study. Restructuring should be attempted where, after an
objective assessment of the promoter’s intention, banks are convinced of a turnaround within a
scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to
facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through
legal means before the security position becomes worse.
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Identifying Borrowers With Genuine Intent :
Identifying borrowers with genuine intent from those who are non- serious with no commitment
or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the
branch level is paramount as they are the ones who have intelligent inputs with regard to
promoter’s sincerity, and capability to achieve turnaround. Based on this objective assessment,
banks should decide as quickly as possible whether it would be worthwhile to commit additional
finance. In this regard banks may consider having “Special Investigation” of all financial
transaction or business transaction, books of account in order to ascertain real factors that
contributed to sickness of the borrower. Banks may have penal of technical experts with proven
expertise and track record of preparing techno-economic study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a special
limit to such type of cases should be decided. This will obviate the need to route the additional
funding through the controlling offices in deserving cases, and help avert many accounts slipping
into NPA category.
Timeliness of Adequacy of Response:
Longer the delay in response greater the injury to the account and the asset. Time is a crucial
element in any restructuring or rehabilitation activity. The response decided on the basis of
techno-economic study and promoters commitment, has to be adequate in terms of extend of
additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.
Focus On Cash Flows:
While financing, at the time of restructuring the banks may not be guided by the conventional
fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh
credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow
rather than only on the basis of Funds Flow.
Management Effectiveness:
40
The general perception among borrower is that it is lack of finance that leads to sickness and
NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse
business conditions is a very important aspect that affects borrowing unit’s fortunes. A bank may
commit additional finance to an ailing unit only after basic viability of the enterprise also in the
context of quality of management is examined and confirmed. Where the default is due to deeper
malady, viability study or investigative audit should be done – it will be useful to have consultant
appointed as early as possible to examine this aspect. A proper techno- economic viability study
must thus become the basis on which any future action can be considered.
Multiple Financing:
During the exercise for assessment of viability and restructuring, a Pragmatic and unified
approach by all the lending banks/ FIs as also sharing of all relevant information on the
borrower would go a long way toward overall success of rehabilitation exercise, given the
probability of success/failure.
In some default cases, where the unit is still working, the bank should make sure that it
captures the cash flows (there is a tendency on part of the borrowers to switch bankers
once they default, for fear of getting their cash flows forfeited), and ensure that such cash
flows are used for working capital purposes. Toward this end, there should be regular
flow of information among consortium members. A bank, which is not part of the
consortium, may not be allowed to offer credit facilities to such defaulting clients.
Current account facilities may also be denied at non-consortium banks to such clients and
violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL)
may be very useful for meaningful information exchange on defaulting borrowers once
the setup becomes fully operational.
In a forum of lenders, the priority of each lender will be different. While one set of
lenders may be willing to wait for a longer time to recover its dues, another lender may
have a much shorter timeframe in mind. So it is possible that the letter categories of
lenders may be willing to exit, even a t a cost – by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into
account.
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Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a
timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and
above with the banks and FIs on a voluntary basis and outside the legal framework.
Under this system, banks may greatly benefit in terms of restructuring of large standard
accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple
banking arrangements.
9. TOOLS FOR RECOVERING NPA
For recovery of NPA there are different tools available. The important purpose of these tools
are to recover the loan amount from borrowers. These tools can be used according to the loan
amount. Following are the different recovery tools:
1. Compromise settlement schemes:
The RBI/Government of India have been constantly guarding 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 one time
nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme was
operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through
compromise settlement under this scheme].
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* 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, 2001helped 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 Hon'ble Finance Minister providing
for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal farmers are being
drawn up.
2. Lok Adalats:
The institution of Lok adalat constituted under the Legal Services Authorities Act, 1987 helps in
resolving disputes between the parties by conciliation, mediation, compromise or amicable
settlement. It is known for effecting mediation and counseling between the parties and to reduce
burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million
can be brought before the Lok adalat and every award of the Lok adalat shall be deemed to be a
decree of a Civil Court and no appeal can lie to any court against the award made by the Lok
adalat. Several people of particular localities various social organizations are approaching
Lokadalats which are generally presided over by two or three senior persons including retired
senior civil servants, defense personnel and judicial officers. They take up cases which are
suitable for settlement of debt for certain consideration. Parties are heard and they explain their
legal position. They are advised to reach to some settlement due to social pressure of senior
bureaucrats or judicial officers or social workers. If the compromise is arrived at, the parties to
the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to
obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is
not adhered to by the parties, the suits pending in the court will proceed in accordance with the
law and parties will have a right to get the decree from the court. In general, it is observed that
banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned
borrowers willing to go in for compromise on the day when the Lok adalat meets. In any case,
we should continue our efforts to seek the help of the Lok adalat.
43
3. Debt Recovery Tribunals:
DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act,
1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and
Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain
cases referred to them, by the banks and FIs for recovery of debts due to the same. The order
passed by a DRT is appealable to the Appellate Tribunal but no appeal shall be entertained by
the DRAT unless the applicant deposits 75% of the amount due from him as determined by it.
However, the Affiliate Tribunal may, for reasons to be received in writing, waive or reduce the
amount of such deposit. Advances of Rs. 1 million and above can be settled through DRT
process. An important power conferred on the Tribunal is that of making an interim order
(whether by way of injunction or stay) against the defendant to debar him from transferring,
alienating or otherwise dealing with or disposing of any property and the assets belonging to him
within prior permission of the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticized in respect of recovery made considering the size of NPAs in the
Country. In general, it is observed that the defendants approach the High Country challenging the
verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the Act is
often challenged in the court which hinders the progress of the DRTs. Lastly, many needs to be
done for making the DRTs stronger in terms of infrastructure.
4. 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. 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
44
breakthrough can come only if there is a change in the repayment psyche of the Indian
borrowers.
5. 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 Hon'ble Finance Minister in the Union Budget2002-03, RBI
has set up a high level Group under the Chairmanship of Shri VepaKamesam, 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.
6. 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 measures
contributed to the incremental NPAs of banks.
7. Proposed guidelines on willful defaults/diversion of funds:
45
RBI is examining the recommendation of Kohli Group on willful 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
willful defaulters.
8. Corporate Governance:
A Consultative Group under the chairmanship of Dr. A. Gangly 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-a-incompliance, transparency, disclosure, audit
committees etc. and make recommendations for making the role of Board of Directors more
effective with a view to minimizing risks and overexposure. The group is finalizing its
recommendations shortly and may come out with guidelines for effective control and supervision
by bank boards over credit management and NPA prevention measures.
9. Sale of assets to reconstruction companies:
With a view to develop a healthy secondary market for NPAs and to further increase the options
available to banks, RBI has issued guidelines for purchase/sale of NPAs (including Non-
performing investments) on cash basis, to SCs/ARCs/Banks/Fls/NBFCs.
A financial asset, including assets under multiple/consortium banking arrangements,
would be eligible for sale, if it has remained an NPA/Nonperforming investment in the
books of the bank for at least 2 years. .
The option of restructuring by the bank has been ruled out.
There is no prohibition against assignment of the loan, in the loan documents.
The loan should be fully disbursed without any outstanding commitment on part of the
Bank.
In case of working capital, the loan should be due and payable.
In case of contingent liability, the same may also be sold on crystallization.
Homogenous pool within Retail Non Performing Financial Assets on a portfolio basis
provided each of Non Performing Financial Assets of the pool has remained as Non
Performing for at least 2 years in the books of the bank.
46
NPAs not eligible for sale:
1) NPAs where rehabilitation is approved and repayment is flowing as per approved plan (if
however for any reason the OTS terms are not complying with the borrower/guarantor, then it
may be offered for sale).
2) NPAs where OTS is under process/is being negotiated and where 25% of the offer amount has
been deposited by the borrower/guarantor (if however, OTS proposal fails for any reason, then it
may be offered for sale).
3) Accounts where restructuring proposals are under consideration of CDR Cell (if the CDR
proposal fails and is rejected by CDR Cell then the financial asset may be offered like any other
eligible account).
The accounts which are classified as NPA and have the balance of Rs1lac or above are sold to
Assets Reconstruction Companies (ARC).
Whenever Central office decides to sell the selected NPA accounts to ARC and others, Regional
Offices to ensure that they submit the required details at the earliest and carry out the nodal
centre jobs required for due diligence
Valuation:
Valuation of the underlying securities of the accounts/assets being sold to
ARCs/Banks/Fls/NBFCs should be got done from a suitable agency identified from the panel of
approved valuers. Such valuation should not be more than 6 months old.
Reserve Price:
The reserve price will be fixed after proper evaluation· of the alternative realization routes viz.
DRT, seizure under SARFAESI Act and Compromise/GTS etc. Any price offer below the
reserve price will not be accepted. However, if for valid reasons, the reserve price is required to
be revised, the same will remain open with approval of the competent authority.
Acceptability of the price offered by SCs/ARCs/Banks/Fis/NBFCs:
47
The Participating SCs/ARCs/Banks/Fls/NBFCs are expected to make offer/offers to the Bank on
selected assets, thereafter the Bank will make its own assessment of the value offered. The price
offered will be evaluated on the basis of the following:
i) The status of the operations of the borrowing unit- whether a closed unit or a going concern.
ii) Valuation and reliability under conditions of distress sale of assets charged to the Bank
including collateral.
iii) Worth of the guarantors .
iv) Feasibility of recovery through various alternate means (Le. compromise offers by
borrowers, legal action, BIFR mandated winding up proceedings, enforcement of security rights
under the provisions of SARFAESI Act 2002 or any other offer in hand etc.).
All the price offers will be recorded and evaluated against the reserve price arrived at
beforehand. Negotiations with the purchaser/ highest bidder in the price offered for sale of the
assets would be done by the negotiating team already in place in case of negotiation of price
offer with SCs/ARCs/Banks/Fls/NBFCs. The Negotiating Committee will recommend for sale of
financial assets to the competent authority.
Terms and Transfer/Sale:
The branches will ensure that the evaluation is based on latest valuation so that in the
case of immovable assets such valuation is preferably less than 6 months old at the time
of entering into sale with the SCs/ARCs/Banks/Fls/NBFCs.
The sale will be transacted on cash basis only and without recourse and such sale should
discharge the bank completely.
The financial asset would be sold in such a way that the asset is taken off the books of the
Bank and after the sale there will not be any known liability devolving on the Bank.
It will have to ensure that subsequent to sale of financial asset, bank does not assume any
operational, legal, or any other type of risks relating to the financial assets sold.
No sale would be made at a contingent price whereby in the event of shortfall in the
realization, the bank would have to bear a portion of the shortfall.
48
The assignment of the financial assets should be after full receipt of the consideration
amount.
When negotiation is over and the final offer price has been decided by the Negotiating
Committee, the proposals to accept the offer should be put up to the competent authority or
above as per delegation of financial powers for compromise settlements
10. Enactment of SRFAESI Act:
The “The Securitization and Reconstruction of Financial Assets and Enforcement of Security
Interest Act” (SRFAESI) provides the formal legal basis and regulatory framework for setting up
Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs,
the Act deals with the following largely aspects,
Securitization and Securitization Companies
Enforcement of Security Interest
Creation of a central registry in which all securitization and asset reconstruction
transactions as well as any creation of security interests has to be filed.
Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued
Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for
regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover
various aspects relating to registration, operations and funding of ARCS and resolution of NPAs
by ARCS. The RBI has also issued guidelines to banks and financial institutions on issues
relating to transfer of assets to ARCS, consideration for the same and valuation of instruments
issued by the ARCS. Additionally, the Central Government has issued the security enforcement
rules (“Enforcement Rules”), which lays down the procedure to be followed by a secured
creditor while enforcing its security interest pursuant to the Act. The Act permits the secured
creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the
underlying security without reference to the Court after giving a 60 day notice to the defaulting
borrower upon classification of the corresponding financial assistance as a non-performing asset.
The Act permits the secured creditors to take any of the following measures:
49
Take over possession of the secured assets of the borrower including right to transfer by
way of lease, assignment or sale;
Take over the management of the secured assets including the right to transfer by way of
lease, assignment or sale;
Appoint any person as a manager of the secured asset (such person could be the ARC if
they do not accept any pecuniary liability); and
Recover receivables of the borrower in respect of any secured asset which has been
transferred. After taking over possession of the secured assets, the secured creditors are
required to obtain valuation of the assets. These secured assets may be sold by using any
of the following routes to obtain maximum value.
By obtaining quotations from persons dealing in such assets or otherwise interested in
buying the assets;
By inviting tenders from the public;
By holding public auctions; or
By private treaty.
Lenders have seized collateral in some cases and while it has not yet been possible to recover
value from most such seizures due to certain legal hurdles, lenders are now clearly in a much
better bargaining position vis-a-vis defaulting borrowers than they were before the enactment of
SRFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is likely to
improve further and one would expect to see a large number of NPAs being resolved in quick
time, either through security enforcement or through settlements. Under the SRFAESI Act
ARCS can be set up under the Companies Act, 1956. The Act designates any person holding not
less than 10% of the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor
from holding a controlling interest in, being the holding company of or being in control of the
ARC. The SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-
owned fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC should
maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted
assets. ARCS have been granted a maximum realization time frame of five years from the date of
50
acquisition of the assets. The Act stipulates several measures that can be undertaken by ARCs for
asset reconstruction. These include:
Enforcement of security interest;
Taking over or changing the management of the business of the borrower;
The sale or lease of the business of the borrower;
Settlement of the borrowers’ dues; and
Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by the lenders under
security enforcement rights available to them or as a recovery agent for any bank or financial
institution and to receive a fee for the discharge of these functions. They can also be appointed to
act as a receiver, if appointed by any Court or DRT.
51
10. ANALYSIS AND INTERPRETATION OF DATA:
Year wise NPA at State Bank of Patiala.
Year 2008 – 2009
Details Amount (Rs. In Crores) % of Total
Standard Assets 43401.1 98.69
Substandard Assets 264.62 0.60
Doubtful Assets 272.58 0.62
Loss Assets 36.70 0.08
Total 43975 100
Standard Assets Sub- Standard Assets
Doubtful Assets Loss Assets0
10
20
30
40
50
60
70
80
90
100
98.69
0.6 0.62 0.08
Series 3
Assets
in %
52
Year 2009-2010
Details Amount (Rs. in Crores) % of Total
Standard Assets 46056.39 97.86
Sub-Standard Assets 603.06 1.28
Doubtul Assets 331.76 0.70
Loss Assets 71.79 0.15
Total 47063 100
Standard Assets Sub-Standard Assets
Doubtful Assets Loss Assets0
10
20
30
40
50
60
70
80
90
100
97.83
1.28 0.7 0.15
Series 3Assets
in %
53
Year 2010-2011
Details Amount ( Rs. in Crores) % of Total
Standard Assets 50971.32 97.36
Sub-Standard Assets 602.02 1.14
Doubtful Assets 546.2 1.043
Loss Assets 233.46 0.44
Total 52353 100
Standard Assets Sub-Standard Assets
Doubtful Assets Loss Assets0
10
20
30
40
50
60
70
80
90
100
97.36
1.14 1.043 0.44
% of Total
Assets
in %
GROSS NPA
54
Years 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Gross NPA
(Rs. In
Crores)
524.41 520.94 573.90 1006.61 1381.68
2006-2007 2007-2008 2008-2009 2009-2010 2010-20110
200
400
600
800
1000
1200
1400
1600
524.41 520.94 573.9
1006.61
1381.68
Series 3Years
Rs. i
n Cr
ores
Interpretation:
The above graph shows that gross NPA of State Bank of Patiala decreased by Rs. 3.47 Crores in
year 2007-2008. Then it again increased to Rs. 573.9 Crores. In 2009-2010 gross NPA increased
by Rs. 432.71 Crores and reached at Rs. 1006.61 Crores. In 2010-2011 Gross NPA again
increased to 1381.68 Crores.
NET NPA
55
Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Net NPA (Rs.
in Crores)
238.41 216.99 263.63 482.72 620.77
2006-2007 2007-2008 2008-2009 2009-2010 2010-20110
100
200
300
400
500
600
700
238.41 216.99263.63
482.72
620.77
Column1Years
Rs.
in C
rore
s
Interpretation:
The above graph shows that Net NPA of State Bank of Patiala decreased by Rs. 21.42 Crores in
year 2007-2008. It again increased in 2008-2009 to 2010-2011. In year 2010-2011 Net NPA of
bank is Rs. 620.77 Crores.
MOVEMENT OF GROSS NPA
56
(Rs. in Crores)
Year 2007-2008 2008-2009 2009-2010 2010-2011
Opening
Balance
524.41 520.94 573.71 1006.61
Addition
during year
449.28 393.96 1001.71 1250.93
Reduction
during year
452.75 341.00 569.00 875.86
Closing balance 520.94 573.91 1006.61 1381.68
MOVEMENT OF NET NPA
(Rs. in Crores)
Year 2007-2008 2008-2009 2009-2010 2010-2011
Opening
balance
23.41 216.99 263.63 482.72
Addition during
year
372.49 301.09 705.81 841.57
Reduction
during year
393.91 254.45 486.72 703.52
Closing balance 216.99 263.63 482.72 620.77
SECTOR WISE NPA
57
Year 2009-2010
Sector % of NPA to total advantages in that sector
Agriculture and Allied activities 1.86
Industry ( micro& small , medium & large) 1.88
Services 2.32
Personal loans 2.91
Agriculture and Alied activities
Industry ( micro & small , medium &
large)
Services Personal Loans0
0.5
1
1.5
2
2.5
3
3.5
1.86 1.882.32
2.91
Series 3Sector
in %
Year 2010-2011
58
Sector % of NPA to total advantages in that sector
Agriculture and Allied activities 3.55
Industry ( micro & small , medium & large 2.28
Services 3.30
Personal loans 3.13
Agriculture and Allied activities
Industry ( micro & small, medium &
large)
Services Personal loans0
0.5
1
1.5
2
2.5
3
3.5
4
3.35
2.28
3.3 3.13
Series 3Sectors
in %
GROSS NPA RATIO
59
Gross NPA ratio:-Gross NPA ratio of gross NPA to gross advances of the bank. Gross NPA is
the sum of all loan assets that are classified as NPA as per RBI guidelines .The ratio is to be
counted in terms of percentage and formula for Gross NPA is as follows:-
Gross NPA = Gross NPA * 100
Gross advances
Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Gross NPA
ratio (%)
2.14 1.42 1.31 2.14 2.64
2006-2007 2007-2008 2008-2009 2009-2010 2010-20110
0.5
1
1.5
2
2.5
3
2.14
1.42 1.31
2.14
2.64
Series 3Year
in %
Interpretation:
Gross NPA Ratio shows the bank’s credit appraisal policy. High Gross NPA ratio means bank
have liberal appraisal policy and vice-versa. In State Bank of Patiala this ratio is 2.14% in year
2006-2007and it has been decreased from year 2006-2007 to 2008-2009 from 2.14% to 1.31%.
But it again increased in year 2009-2010 & 2010-2011 and reached at 2.64 %.
NET NPA RATIO
60
The net NPA percentage is the ratio of net NPA to net advances in which the provision is to be
deducted from the gross advances. The provision is to be made for NPA account. The formula
for that is
Net NPAs = Gross NPAs - Provisions *100
Gross Advances - Provisions
Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011
Net NPA
ratio (%)
0.83 0.60 0.60 1.04 1.21
2006-2007 2007-2008 2008-2009 2009-2010 2010-20110
0.2
0.4
0.6
0.8
1
1.2
1.4
0.830.6 0.6
1.041.21
Series 3Year
in %
Interpretation:
The Net NPA Ratio shows the degree of risk in portfolio of bank. High Net NPA ratio means
banks don’t have enough funds to do provision against the Gross NPA. In State Bank of Patiala
this Ratio is 0.83% in year 2006-2007 and it decreased from year 2006-2007 to 2008-2009 from
0.83% to 0.60% and again increased from year 2009-2010 to 2010-2011 from 1.04% to 1.21%.
PROVISION RATIO
61
Provision ratio is to be made for to keep safety against the NPA &directly affected on the gross
profit of the bank to gross of the banks. The formula is that:-
Provision ratio = Total Provision * 100
Gross NPAs
Year 2008-2009 2009-2010 2010-2011
Provision Ratio (%) 58.34 63.78 70.22
2008-2009 2009-2010 2010-20110
10
20
30
40
50
60
70
80
58.3463.78
70.22
Series 3Year
in %
Interpretation:
Provision ratio indicates the degree of safety measures adopted by the banks. It has direct bearing
on the profitability, dividend and safety of the shareholders. If provision ratio is less its indicates
that bank has made under provision. In year 2008-2009 provision ratio of State Bank of Patiala
was 58.34%. then it started increasing and has reached at 70.22% in 2010-2011.
CAPITAL ADEQUACY RATIO
62
The ratio of a Bank Capital to its Risk weighted Assets
Capital Adequacy Ratio = Capital * 100
Risk weighted Assets
Year 2007-2008 2008-2009 2009-2010 2010-2011
Capital
Adequacy Ratio
(%) Base I-I
12.50 11.43 12.45 12.25
Capital
Adequacy Ratio
(%) Base I-II
13.56 12.60 13.26 13.41
2007-2008
2008-2009
2009-2010
2010-2011
10
10.5
11
11.5
12
12.5
13
13.5
14
12.5
11.43
12.4512.25
13.56
12.6
13.26 13.41
Capital adequacy ratio(%) Base I-I
Capital adequacy ratio(%) Base I-IIYears
in %
Interpretation:
The capital adequacy ratio is important for them to maintain as per the banking regulations. Each
bank needs to create capital reserves to compensate the Non- Performing Assets. Each assets has
been given a risk weighted age as per RBI guidelines. Risk weighted assets= Assets * Risk
weighted age. So more the risk weighted assets more the bank has to maintain capital. The
capital adequacy ratio of state bank of Patiala is well above the minimum requirement of 9%
prescribed by RBI, and stood at 13.41% under Base I-II on March 2011 as against 13.26% as on
March 2010. It is 12.25% under Base I-I as on March 2011 as against 12.45% as on March
2010.
SUB-STANDARD ASSETS RATIO
63
It is the ratio of total substandard Assets to gross NPA of the Bank.
Sub – standard assets ratio = Total Sub- standard assets * 100
Gross NPA
(Rs. in Crores)
Year Sub-Standard Assets Gross NPA Sub –Standard
Assets Ratio (%)
2008-2009 264.62 573.90 46.10
2009-2010 603.06 1006.61 59.91
2010-2011 602.02 1381.68 43.57
2008-2009 2009-2010 2010-20110
10
20
30
40
50
60
70
46.1
59.9
43.57
Series 3years
in %
Interpretation:
This ratio shows the percentage of Sub-Standard Assets in Gross NPA of Bank. High Sub-
Standard Ratio means high proportion of Sub –Standard Assets in Gross NPA. High ratio shows
that the chances of recovery of assets are high. In State Bank of Patiala this ratio was 46.1% in
year 2008-2009. It increased to 59.9% in year 2009-2010 which is good for bank. In 2010-2011
it again decreased to 43.57% which is not good for bank.
DOUBTFUL ASSETS RATIO
64
It is the ratio of total doubtful Assets to gross NPAs of the bank
Doubtful Assets ratio = Total Doubtful Assets * 100
Gross NPA
Year Total Doubtful
Assets
Gross NPA Doubtful Assets
Ratio (%)
2008-2009 272.58 573.90 47.49
2009-2010 331.76 1006.61 32.95
2010-2011 546.2 1381.68 39.53
2008-2010 2009-2010 2010-20110
5
10
15
20
25
30
35
40
45
50
47.49
32.9539.53
Series 3Years
in %
Interpretation:
High Doubtful Ratio means more proportion of Doubtful Assets in Gross NPA. More Doubtful
Assets means bank should take action through recovery policy to reduce the level of Doubtful
Assets ratio. In State Bank of Patiala this ratio was 47.49% in year 2008-2009 and decreased to
32.95% in year 2009-2010 which is good for bank. In 2010-2011 it increased to 39.53% which is
good for bank.
LOSS ASSETS RATIO
65
It is the ratio of total loss asset to Gross NPA of the bank.
Loss Assets Ratio = Total Loss Assets * 100
Gross NPA
Year Total Loss Assets Gross NPA Loss Assets Ratio
(%)
2008-2009 36.70 573.90 6.39
2009-2010 71.79 1006.61 7.13
2010-2011 233.46 1381.68 16.89
2008-2009 2009-2010 2010-20110
2
4
6
8
10
12
14
16
18
6.39 7.13
16.89
Column1Years
in %
Interpretation:
High Loss Assets Ratio means more proportion of Loss assets in the Gross NPA. This should be
less in banks. The high ratio indicates that bank has more fraudulent accounts and it is bad for
bank. The bank must take necessary action to reduce the level of Loss Assets. In State Bank of
Patiala this ratio was 6.39% in year 2008-2009 but in 2009-2010 & 2010-2011 it increased from
7.13% to 16.89% which is not good for bank.
11. FINDINGS FROM RATIOS:
66
The Gross NPA ratio of bank is 2.14% in year 2006-2007and it has been decreased from
year 2006-2007 to 2008-2009 from 2.14% to 1.31%.But it again increased in year 2009-
2010 & 2010-2011 and reached at 2.64 % which is not good for bank.
The Net NPA ratio of bank was0.83% in year 2006-2007 and it decreased from year
2006-2007 to 2008-2009 from 0.83% to 0.60% and again increased from year 2009-2010
to 2010-2011 from 1.04% to 1.21%.
The provision ratio of State Bank of Patiala is 58.34%. Then it started increasing and has
reached at 70.22% in 2010-2011.
The capital adequacy ratio of state bank of Patiala is well above the minimum
requirement of 9% prescribed by RBI, and stood at 13.41% under Base I-II on March
2011 as against 13.26% as on March 2010. It is 12.25% under Base I-I as on March
2011 as against 12.45% as on March 2010.
It will be considered good if sub-standard ratio is high. The Sub-Standard ratio of bank
was 46.1% in year 2008-2009. It increased to 59.9% in year 2009-2010 which is good
for bank. In 2010-2011 it again decreased to 43.57% which is not good for bank.
Doubtful Assets should be low for the good health of bank. . In State Bank of Patiala this
ratio is 47.49% in year 2008-2009 and decreased to 32.95% in year 2009-2010 which is
good for bank. In 2010-2011 it increased to 39.53% which is good for bank.
In State Bank of Patiala this ratio is 6.39% in year 2008-2009 but in 2009-2010 & 2010-
2011 it increased from 7.13% to 16.89% which is not good for bank.
12. SUGGESTIONS:
67
Through RBI has introduced number of measures to reduce the problem of increasing NPAs of
the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act,
etc. A lot of measures are desired in terms of effectiveness of these measures. Suggestions for
reducing the evolutions of the NPAs of Public Sector Banks are as under.
Each bank should have its own independent credit rating agency which should evaluate
the financial capacity of the borrower before than credit facility.
The credit rating agency should regularly evaluate the financial condition of the clients.
Special accounts should be made of the clients where monthly loan concentration reports
should be made.
It is also wise for the banks to carryout special investigative audit of all financial and
business transactions and books of accounts of the borrower company when there is
possibility of the diversion of the funds and mismanagement.
The banks before providing the credit facilities to the borrower company should analyses
the major heads of the income and expenditure based on the financial performance of the
comparable companies in the industry to identify significant variances and seek
explanation for the same from the company management. They should also analyse the
current financial position of the major assets and liabilities.
Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they
would face the environmental threats and opportunities with the use of their strength and
weakness, and what will be their possible future growth in concerned to financial and
operational performance.
Independent settlement procedure should be more strict and faster and the decision
made by the settlement committee should be binding both borrowers and lenders
and any one of them failing to follow the decision of the settlement committee should be
punished severely.
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There should be proper monitoring of the restructured accounts because there is every
possibility of the loans slipping into NPAs category again.
Proper training is important to the staff of the banks at the appropriate level with ongoing
process. That how they should deal the problem of NPAs, and what continues steps they
should take to reduce the NPAs.
Willful Default of Bank loans should be made a Criminal Offence.
No loan is to be given to a Group whose one or the other undertaking has become a
Defaulter.
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13. CONCLUSION:
The Indian banking sector is the important service sector that helps the people of the India to
achieve the socio economic objectives. The Indian banking sector has helped the business and
service sector to develop by providing them credit facilities and other finance related facilities.
The Public Sector Banks have also shown good performance in the last few years. The only
problem that the Public Sector Banks are facing today is nonperforming assets. The non
performing assets means those assets which are classified as bad assets which are not possibly be
returned back to the banks by the borrowers. If the proper management of the NPAs is not
undertaken it would hamper the business of the banks. The NPAs would destroy the current
profit, interest income due to large provisions of the NPAs, and would affects the smooth
functioning of the recycling of the funds. The Public Sector banks involve its nearly 50% of
share in the NPAs. Thus we can imagine how Public Sector Banks are functioning.
Due to NPAs the income of the banks is reduced and the banks have to make the large number of
provisions that would curtail their profit. And due to this the financial performance of the banks
would not show good results. So, the problem of NPAs must be tackled in such a manner that
does not destroy the operational, financial conditions and also not affect the image of the banks.
Recently, RBI has taken a number steps to reduce NPAs of the Indian banks. And it has also
found out that many banks have shown positive figures in reducing NPAs as compared to the
past years.
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14. BIBLIOGRAPHY:
Annual Reports of State Bank of Patiala:
2006-2007
2007-2008
2008-2009
2009-2010
2010-2011
Internet sites:
www.sbp.co.in
www.rbi.org.in
http://en.wikipedia.org/wiki/Non-performing_asset
http://www.allbankingsolutions.com/non-performing-assets.htm
http://www.pravinthorat.com/effect-of-npa%E2%80%99s
http://www.indianmba.com/Faculty_Column/FC212/fc212.html
Books:
Khan.M.Y, Financial Services Tata McGraw Hill, New Delhi, Third edition.
Khan. M.Y, Indian Financial System Tata McGraw Hill, New Delhi, Fifth Edition
Bhole LM, Mahakul Jatinder Financial Institution and Markets (Structure, growth &
innovation) Tata McGraw Hill, New Delhi, Fifth Edition.
Babu G Ramesh Financial Services in India Ashok Kumar Mittal, New Delhi
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