36883180-non-performing-assets-in-sbi-group-130312102006-phpapp01.pdf

7/25/2019 36883180-non-performing-assets-in-sbi-group-130312102006-phpapp01.pdf

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A

Research Project

ON

PROBLEM OF NPA AND ITS IMPACT ON

BANKS (WITH SPECIAL REFRENCE TO

STATE BANK OF INDIA

S!"#$tte% to

Punjab Technical University, Jalandhar in partial

fulfilment for the degree of Master of Business

Administration (Session !!"#!$!

&'%er the s!er)$s$o' o*+ , S!"#$tte% B-+,

Dr. R.S /&PTA NA01INDER /REWAL

HOD M/T DEPTT. MBA(II2R

ROLL NO. (34


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DECLARATION

% hereby certify that the &or' embodied in the project Pro"5e# o* NPA a'% $ts $#act o'

"a'6s (7$th sec$a5 re*ere'ce to state "a'6 o* I'%$a8 &as done by me under the

supervision of Dr. R.S /&PTA (H.O.D M/T DEPTT9BCET

The project is done for the partial fulfillment of (egree of Master of Business Administration

program of Punjab Technical University, Jalandhar from9 Bh!tta Co55e:e O* E':$'eer$':

A'% Tech'o5o:-9 L!%h$a'a.% have not submitted this report to any institute or University)

*A+J%*(- .-/A0


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ACKNOWLED/EMENT

My sincere than's are due to all the contributors &ithout &hose efforts this project &ould not

have been completed) *o tas' of this nature is a single person effort, so % am very than'ful to

Dr. R.S /&PTA (H.O.D M/T DEPTT

Under &hose guidance % successfully completed my research project) Their unfailing interest

and support gave a ne& dimension to my &or') They made it possible to collect abundance

of material, the relevant portion of &hich is 1uoted in this project)

% am also very grateful to all other 2aculty of B)3)T &hose teaching methodology helped

me in completion of my project &ithout any difficulty)

% also e4press my gratitude to the all respondent for their proper responses and cooperation

during my dissertation project)

% &ould li'e to e4tend my than's to my all friends for their valuable suggestion and

cooperation at various stages during my project)

NA01INDER /REWAL


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CHAPTER PLAN

S.No. Chaters Pa:e No.

;. I'tro%!ct$o'

No'


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;. L$#$tat$o'

;;. Reco##e'%at$o'

;3.

;=.

Co'c5!s$o'

B$"5$o:rah-

INTROD&CTION TO THE PRO1ECT


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Since the introduction of economic liberali5ation and financial sector reforms, Ban's are

under gro&ing pressure to bring do&n their *PAs so as to improve their performance and

viability) /hat is bothering the ban'ers today is the management of *on#performing Assets)

6ver the period this problem has aggravated alarmingly and therefore needs urgent remedial

actions, so in this conte4t a good number of circular instruction7guidelines have been issued

by ban'7-eserve Ban' of %ndia)

-eserve Ban' of %ndia, in the year $88$, appointed a committee under the 3hairmanship of

Sh) M)*arsimham to e4amine and give recommendation for %ncome -ecognition, Asset

3lassification and Provisioning of loan assets of Ban's and 2inancial %nstitutions) The

3ommittee e4amined the issues and recommended that a policy of %ncome -ecognition

should be objective and based on record of recovery rather than on subjective considerations)

6n the basis of the recommendations of the *arsimhan 3ommittee, -B% had issued

guidelines to all Scheduled 3ommercial Ban's on %ncome -ecognition, Assets 3lassification

and Provisioning in April, $88 &hich have been modified from time to time by the -B% on

the basis of e4perience gained and suggestions received from various 1uarters) The

Prudential *orms for %ncome -ecognition, Asset 3lassification and Provisioning have come

into effect from the accounting year 9$)!9)$889)

Similarly, guidelines &ere issued by the -eserve Ban' of %ndia in March, $88: to All %ndia

2inancial %nstitutions vi5) %(B%,%3%3%, %23%, A;%S Ban' and %%B%) Separate guidelines &ere

also issued by the -B% on Prudential *orms to *on#Ban'ing 2inancial 3ompanies in June,

$88: and to -egional -ural ban's in March, $88


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types of borro&ers for many different purposes) 2or most customers, ban' credit is the

primary source of available debt financing)

2or ban's good loans are the most profitable assets) -eturn comes in the form of loan

interest, fee income and investment and the most prominent assumed ris' is credit ris')

3redit ris' involves inability or un&illingness of customer or counterpart to meet

commitments in relation to lending once a loan is overdue and ceases to yield income it

&ould become a *on Performing Asset)

Proper management and speedy disposal of *PAs is one of the most critical tas's of ban's

today) The problem of *on Performing Assets *PAs in ban's and financial institutions has

been a matter of grave concern not only for the ban's but also the real economy in general, as

*PAs can cho'e further e4pansion of credit &hich &ould impede the economic gro&th of the

country) Any bottlenec' in the smooth flo& of credit is bound to create adverse repercussions

in the economy) *PAs are not therefore the concern of only lenders but also the public at

large)

.ranting of credit for economic activities is the prime duty of ban'ing) Apart from raising

resources through fresh deposits, borro&ings and recycling of funds received bac' from

borro&ers constitute a major part of funding credit dispensation activity) 0ending is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, &hich results into economic gro&th) >o&ever lending also carries a ris' called

credit ris', &hich arises from the failure of borro&er) *on#recovery of loans along &ith

interest forms a major hurdle in the process of credit cycle) Thus, these loan losses affect the

ban'Cs profitability on a large scale) Though complete elimination of such losses is not

possible, but ban's can al&ays aim to 'eep the losses at a lo& level)

*on#performing Asset D*PAE has emerged since over a decade as an alarming threat to the

ban'ing industry in our country sending distressing signals on the sustainability and

insurability of the affected ban's) The positive results of the chain of measures affected

under ban'ing reforms by the .overnment of %ndia and -B% in terms of the t&o *arasimhan

3ommittee -eports in this contemporary period have been neutrali5ed by the ill effects of

this surging threat) (espite various correctional steps administered to solve and end this


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problem, concrete results are eluding) %t is a s&eeping and all pervasive virus confronted

universally on ban'ing and financial institutions) The severity of the problem is ho&ever

acutely suffered by *ationalised Ban's, follo&ed by the SB% group, and the all %ndia

2inancial %nstitutions)


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STATE BANK OF INDIA

SB% is the largest ban' in %ndia &ith deposits of -s 9,


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Ear'$':s ro*$5e to re#a$' :oo%

SB% &ill maintain a good earnings profile in the medium term despite high pressure on yields

due to the increasing competition in the ban'ing sector) SB%Cs earning profile is characterised

by consistency in the return on assets DPAT7Average AssetsE, at around $F per annum for the

past three years, and diverse income streams) To maintain yields and pursue credit gro&th,

the ban' is aggressively targeting retail finance and small and medium enterprises DSMsE)

The ban'Cs core fee income of $F of average funds deployed bolsters its revenue profile)

>o&ever, &ith the opening of government business li'e ta4 collection to other ban's and

increased competition, the gro&th in fee income is e4pected to slo& do&n) The ban'Cs

operating e4pense at )::F of average funds deployed in !!:#!= is in line &ith other public

sector ban's) The ban'Cs cost structure is rigid as fi4ed employee cost accounted for @:F of

the operating e4penditure in !!:#!=) Thus, despite good asset gro&th and technology

efficiency gains, the ban'Cs operating costs &ill remain high in the medium term) To be able

to reap the full benefits of technology implementation, the ban' &ill have to reduce or

redeploy &or' forceG since this is a sensitive issue, it is e4pected to happen gradually)

The ban'Cs fund based and fee income earnings are diversified across industries, regions,

asset classes, and customer segments)

Strong diversification in income streams &ill ensure that the ban'Cs earnings remain

relatively stable, despite the decline in profitability in some segments)

Co#*orta"5e ca$ta5 os$t$o'

SB% is ade1uately capitali5ed &ith a tier % capital ade1uacy ratio of ")!:F and a large capital

base of -s :!)@ billion as at March 9$, !!=) The ban' has considerably improved its net

&orth coverage for net *PAs to :): times as at March 9$, !!= due to lo&er slippages

reflecting an improving asset 1uality, &itnessed across the entire ban'ing sector) The

capitali5ation levels of SB% are ade1uate to address the asset side ris's and support the

business gro&th in the medium term)


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Ma'a:e#e't strate:$es

%n retail finance, the ban' has leveraged its corporate relationships, pursued business gro&th

selectively, and has not competed based on interest rate) The ban' has ta'en initiatives li'e

on#line ta4 returns filing and faster transfer of funds to protect its dominant position in the

government business) The ban' also has a clear technology strategy that &ill enable it to

compete &ith the ne& generation private sector ban's in customer service and operational

efficiency)

Asset !a5$t- to re#a$' at a)era:e 5e)e5s

The ban' continues to have a high level of gross *PAs at =)8=F of gross advances as at

March 9$, !!=, compared &ith :)8F for all scheduled commercial ban's DS3BsE ta'entogether) The ban' is facing challenges to improve the 1uality of assets originated, as can be

seen in the consistently higher levels of slippages Dadditions to *PAsE at )@$F in !!:#!=)

To contain *PAs and ensure credit gro&th, the ban' has decided to focus on financing the

retail DpersonalE segment as &ell as SMs) The share of retail advances has increased to

:)@9F D-s =)!" billionE of total advances as at September 9! !!=) %n the retail loan

segment, SB% is targeting primarily the housing loans segment, &hich constitutes -s) "9):$

billion D=:)9FE of total retail loans) The *PAs in retail finance are lo& currentlyG ho&everthey are steadily increasing Despecially in the housing finance portfolioE and have started

sho&ing signs of stress) SB%Cs retail portfolio has gro&n at over 9@F 3A.- in the last t&o

years and hence a significant portion of the portfolio is largely unseasoned) The housing

finance portfolio has a $#month, lagged gross *PA of :)9:F as at March 9$, !!=)The ban'

&ill face significant challenges in the medium term to develop effective credit appraisal and

collection systems in order to contain *PAs in retail finance) SB%Cs asset 1uality is e4pected

to remain at average levels, as the ban'Cs large and diverse asset portfolio reflects of the asset

1uality of the ban'ing system)

B!s$'ess %escr$t$o'

SB% along &ith its associate ban's offer a &ide range of ban'ing products and services across

its different client mar'ets) The ban' has entered the mar'et of term lending to corporates


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and infrastructure financing, traditionally the domain of the financial institutions) %t has

increased its thrust in retail assets in the last t&o years, and has built a strong mar'et position

in housing loans)

SB%, through its non#ban'ing subsidiaries, offers a host of financial services, vi5), merchant

ban'ing, fund management, factoring, primary dealership, bro'ing, investment ban'ing and

credit cards) SB% has commenced its life insurance business by setting up a subsidiary, SB%

0ife %nsurance 3ompany 0imited, &hich is a joint venture &ith 3ardiff S)A), one of the

largest insurance companies in 2rance) SB% currently holds @:F e1uity in the joint venture)

I'%!str- rosects

To leverage benefits such as access to lo& cost resources and the facility to provide a larger

gamut of services, a number of finance companies such as Hota' Mahindra 2inance 0imited

and >(23 0imited have promoted ban's) Simultaneously, yet another emerging trend is that

of foreign ban's promoting *B23s to benefit from regulatory fle4ibility available to such

entities in areas li'e absence of statutory li1uidity ratio and cash reserve ratio re1uirements,

priority sector re1uirements, and corporate e4posure limits)

Ne7 r$)ate sector "a'6s cat!re #ar6et share

/ith technological edge and a strong mar'eting thrust, private sector ban's have been

stealing mar'et share in retail deposits and the corporate fee business from public sector

ban's) Together &ith some foreign ban's, these private ban's have also aggressively entered

the retail asset financing space, hitherto the domain of non#ban'ing finance companies)

.iven their focus on cross selling and optimi5ing their customer base, they no& offer the

entire range of products and services on the asset and liability side to retail and &holesale

customers


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Asset !a5$t- to $#ro)e

Ban's have not yet fully resolved the stress in the asset 1uality of their legacy

corporate loan portfolios, ho&ever) Though slippages to *PAs and provisioning &ere high

for some ban's in 2I!!:, as they moved to the 8!#day norm for recognising and

provisioning for *PAs, the treasury gains enabled significant provisioning to be made &ith

the result that net *PAs for most public sector ban's are no& less than 9F)

.oing for&ard, steady gro&th in gross domestic product should help improve the ban'sC

asset 1uality and increase corporate lending) The securiti5ation and reconstruction of

financial assets and enforcement of security interest DSarfaesiE Act should also help ban's inlimiting slippages and improving *PA recoveries)

Better Ca$ta5$at$o' 5e)e5s

Ban's have demonstrated a fair amount of fle4ibility in raising fresh e1uity capital through

public issues in recent years, thereby improving their capitali5ation levels) The steady

accruals to net &orth and falling non#performing asset levels have resulted in an

improvement in the capitali5ation position of ban's in recent years)

Cha55e':es ahea%

3ompetition from ne& private sector and foreign ban's remains a 'ey challenge for public

sector ban's) They need to reorient their staff and effectively utili5e technology platforms to

retain customers and reduce costs) They also need to fortify their credit ris' management

systems to mitigate the ris's arising from small#tic'et lending to the retail, small and medium

enterprises, and services segments)


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Co'so5$%at$o' a'% e#er:e'ce o* !'$)ersa5 "a'6$': :ro!s

The cap on foreign o&nership of ban's has already been raised from :8F to @:F) The

competition in the sector could get further intensified if the $!F cap on voting rights is also

rela4ed) *e& private sector ban's are e4panding their geographical coverage and ma'ing

inroads into government business) The ne& private and foreign ban's &ill continue to gain

mar'et share from public sector ban's because of their efficient cost structures, technological

edge, focused mar'eting approach and operational freedom) >o&ever, the emergence of

ne&er players &ould be restricted if the private o&nership of ban's is capped at lo& levels)

Mergers among PSBs &ould create ban's &ith even larger balance sheets and customer base)

>o&ever, the integration process in such mergers is e4pected to be comple4 and time long

dra&n)

These &ould also be driven by .o% due to provisions of Ban'ing 3ompanies DAc1uisition

and Transfer of Underta'ingsE Act $8


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De*$'$t$o' o* NPAs (NON ,PERFORMIN/ ASSETS

An asset, including a leased asset, becomes non#performing &hen it ceases to generate

income for the ban') A non performing assetC &as defined as a credit facility in respect of

&hich the interest and 7 or installment of principal had remained past dueC for a specified

period of time)

The specified period &as reduced in a phased manner as underK

2ear e'%$': March =; Sec$*$e% er$o%

$889 2our Luarters

$88: Three Luarters

$88= 6n&ards T&o 1uarters

An amount due under any credit facility is treated as past dueC &hen it has not been paid

&ithin 9! days from the due date) (ue to the improvements in the payment and settlement

systems, recovery climate, up gradation of technology in the ban'ing sector, etc, it &as

decided to dispense &ith the past dueC concept, &ith effect from 9$st

March, !!$)

Accordingly, as from that date, a *PA shall be an advance &here,

i) %nterest and7or installment of principal remain overdue for a period of more than $"! days

in respect of a term loan

ii) The account remains our of orderC for a period of more than $"! days, in respect of an

overdraft7cash credit

iii) %nterest and7or installment of principal remains overdue for t&o harvest seasons but for a

period not e4ceeding t&o half years in the case of an advance granted for agriculture

purposes


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iv) Any amount to be received remains overdue for a period of more than $"! days in respect

of other accounts)

/ith a vie& to move to&ards international best practices, it has been decided to adopt the C8!

daysC overdue norm for identification of *PAs, from 9$stMarch, !!:)

O!t o* Or%erG Stat!s

An account should be treated as out of orderC if the outstanding balance remains

continuously in e4cess of the sanctioned limit7dra&ing po&er) %n cases &here the outstanding

balance in the principal operating account is less than the sanctioned limit7dra&ing po&er,

but there are no credits continuously for si4 months as on the date of Balance Sheet or credits

are not enough to cover the interest debited during the same period, these accounts should be

treated as out of orderC)

O)er%!eG

Any amount due to the ban' under any credit facility is overdueC if it is not paid on the due

date fi4ed by the ban')


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C5ass$*$cat$o' o* NPAs

Ban's are re1uired to classify *PAs further into the follo&ing three categories based on the

period for &hich the asset has remained non#performing and the reliability of the duesK

i. S!",sta'%ar% Assets+ A sub#standard asset is one &hich has remained *PA for a

period less than or e1ual to $" months) %n such cases, the current net &orth of the

borro&er, or the current mar'et value of the security charged is not enough to ensure

recovery of the dues to the ban's in full) Such assets &ill have &ell defined credit

&ea'ness that jeopardi5e the li1uidation of the debt and are characteri5ed by the

distinct possibility that the ban' &ill sustain a loss)

ii. Do!"t*!5 Assets+ A (oubtful Asset &hich has remained *PA for a period e4ceeding

$" months) %t has all the &ea'nesses inherent to a sub#standard asset &ith the added

characteristic that the collection or li1uidation in full on the basis of currently

'no&n facts is highly 1uestionable and improbable)

iii. Loss Assets+ A loss asset is one &here a loss has been identified by the ban' or,

internal or e4ternal auditors but the amount has not been &ritten off &holly)

/!$%e5$'es *or C5ass$*$cat$o' o* NPAs

Broadly spea'ing, classification should be done ta'ing into account the degree of &ell

defined credit &ea'nesses and the e4tent of dependence on collateral security for reali5ation

of dues)

Ban's should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of *PAs, especially in respect of high value accounts)


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Accounts &ith temporary deficienciesK These should be classified based on the past

recovery records)

Accounts regulari5e near about the balance sheet dateK These accounts should be handled&ith care and &ithout scope for subjectivity) /here the account indicates inherent

&ea'ness based on available data, it should be deemed as an *PA)

Asset classification should be borro&er#&ise and not facility#&iseK %f a single facility to a

borro&er is classified as *PA, others should also be classified the same &ay, as it is

difficult to envisage only a solitary facility becoming a problem credit and not others)

Advances under consortium arrangementsK 3lassification here should be based on the

recovery record of the individual member ban's)

Accounts &here there is erosion in the value of the securityK %f there is a significant Di)e)

the reali5able value of the security is less than =!F of that assessed by the ban' during

acceptanceE the account may be classified as *PA)


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NPA SOME ASPECTS AND ISS&ES

$) The *PAs of ban's in %ndia are considered to be at higher levels than those in other

countries) This issue has attracted attention of public as also of international financial

institutions and has gained further prominence in the &a'e of transparency and

disclosure measures initiated by -B% during recent years)

) The *PA Management Policy document of SB% lays do&n to contain net *PAs to

less than =F of ban'?s total loan assets in confirmity &ith the international standard)

%t is, therefore necessary that as per guidelines provided in *PA Management Policy

document, every effort be made at all levels to cut do&n the *PAs) All this re1uires

greater efforts and team&or')

9) %t is essential to 'eep a constant &atch over the non#performing assets not just to 'eep

it performing but also that once they become non#performing, effective measures are

initiated to get full recovery and &here this is not possible, the various means are to

be initiated to get rid off the *PAs from the branch boo's)

:) *PAs adversely affect the &ealth condition of the branch advances as also the

profitability of the branch) Some of the reasons for this are as underK

DaE %nterest cannot be applied on the loan accounts classified as *PAs)

DbE The Branch ?has to pay interest to central office on outstanding classified as

*PA)

DcE The Branch has to incur cost in supervision and follo& up of such advances)

DdE Provision has to be made on *PAs at Ban' level)

=) Under %ncome -ecognition, Assets 3lassification and provisioning, *PA may be Sub

standard, (oubtful or loss assets)


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RECO/NITION OF INCOME ON

NON,PERFORMIN/ LOANS (NPLS

Stricter regulations have been laid do&n by supervisory authorities in many countries &ith

regard to income recognition on *on#Performing 0oans D*P0sE) The suspension of interest

payments is re1uired on loans that are classified as ?non#performing? ?substandard?, ?doubtful?

and ?loss?)

Any uncollected interest payments on *P0s are considered non#accrued interest) Previously

accrued, but uncollected interest is reversed out of income) 2ailure to do so &ould overstate

income) Uncollected interest is normally put in a memorandum account) *P0s are restored

on an accrual basis only after full settlement has been made on all delin1uent principal and

interest) %t &ould, therefore, be useful, if the accounts carry a footnote, e4plaining the

accounting policies follo&ed &ith regard to recognition of income on *P0s)

NARSIMHAN COMMITTEES RECOMMENDATIONS

3ommittee on 2inancial System D32SE *arsimhan committee &hich reported in $88$,

mean&hile major changes have ta'en place in the domestic, economic and institutional

science, indicating the movement to&ards global integration of financial services) 3ommittee

has presented second generation reforms)

aE To strength the foundation of financial system)

bE -elated to this, streamlining procedures, upgrading technology and human

resource development)

cE Structural changes in the system)

$) %t is recommended that an asset be classified as doubtful if it is in the sub standard

category for $" months in the first instance and eventually for $ months as loss if it


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has been so identified but not &ritten off) These norms, &hich should be regarded as

the minimum, may be brought into force in a phased manner)

2. 3orporations and 2%s should avoid the practice of Never greeningN by ma'ing fresh

advances to their troubled constituents only &ith a vie& to settling interest dues and

avoiding classification of the loans in 1uestion as *PAs) The committee notes that the

regulatory and supervisory authorities are paying particular attention to such breaches

in the adherence to the spirit of the *PA definitions and are ta'ing appropriate

corrective action)

9) The committee believes that objective should be to reduce the average level of net

*PAs for all ban'?s to belo& =F by the year !!! and 9F by !!) These targets

cannot be achieved in the absence of measure to tac'le the problem of bac'long

*PAs on one time basis and the implementation of strict prudential norms and

management efficiency)

:) There is no denying the fact that any effort at financial restructuring in the form of

having off *PAs portfolio from the boo's of the corporation or measures to initiate

the impact of high level of *PAs must go hand &ith operational restructuring)

3leaning up the balance sheets of ban's &ould thus ma'e sense only if simultaneous

steps are ta'en to prevent of limit the reemergence of ne& *PAs)

=) (irect credit has a proportionately higher share in *PA portfolio of corporations and

has been one of the factors in erosion in the 1uality of asset portfolio) There is a

continuing need of 2inancial 3orporations to e4tend 3redit to SS% sector, &hich is

important segment of national economy but on commercial considerations and on

basis of credit &orthiness) .overnment feels reluctant to accept the recommendation

for reducing the scope of directed credit under priority sector because timy sector of

industry and small businesses have problems &ith regard to obtaining credit and some

remaining may be necessary for this sector) A poverty alleviation and employment

generation schemes) .iven the special needs of these sectors, the current practice may

continue)


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move to&ards international Practices in this regard and introduce the norm of 8! days

in a phased manner by the !!)

@) As an incentive to Ban' is to ma'e specific provision, the consideration be given to

ma'ing such provisions ta4 deductible)

") Ban's should pay greater attention to asset liability management to avoid mismatch

and to cover, among others, li1uidity and interest rate ris's)

9. %t should be encouraged to adopt statistical ris' management techni1ues li'e value at

ris' in respect of balance sheet term &hich are susceptible to mar'et price fluctuation,

2ore4 rate volatility and interest rate changes) /hile the -B% and %(B% may initially,

prescribe certain normative models for mar'et ris' management, the ultimate

objective should be that of building up their models and -B% blac'listing them for

their validity on a periodical basis)

$!) There is a need for a greater use of computeri5ed system than at present)

3omputeri5ation has to be recogni5ed as an indispensable tool for improvement in

customer service, the institution and operation of better control systems, greater

efficiency in information technology)

$$) State 2inancial 3orporations at present are over regulated and over administered)

Supervision should be based on evolving prudential norms and regulations &hich

should be adhered to rather than e4cessive control over administrative and other

aspects of organisation and functioning) %nternal audit and internal inspection systems

should be strengthened)

12. The main issues &ith regard to operations of Ban'Cs are to ensure operational

fle4ibility and measure of competition and ade1uate internal autonomy in matters of

loan sanctioning and internal administration)

$9) This calls for some re#e4amination and the present relevance of directed credit

programme ablest in respect of those &ho are able to stand on their o&n feet and to

&hom the directed credit programmes &ith the element of interest concessionality

that has accompanied has become a source of economic rent) %t is recommended that

directed credit sector be redefined to comprise the small and marginal farmers, the

tiny sector of industry, small business and transport operators, village and cottage

industry, rural artisans and other &ea'er sections) The credit target for this redefined


23/59

priority sector should hence forth be fi4ed at $!F of aggregate credit &hich &ould be

broadly in line &ith the credit flo&s to these sectors at present)

14. The committee believes that the balance sheets of ban's and 2%s should be made more

transparent and full disclosure made in Balance sheet) This is to be done in phased

manner)


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RE0IEW OF LITERAT&RE

Das (;has compared the various efficiency measures of public sector ban's by

applying data envelopment analysis model and concluded that the level of *PAs

significant negative relationship &ith efficiency estimates)

0er#a (;has concluded that high level of *PAs leads to operational failure of

the ban')

Ber:er a'% -o!': (;4has e4amined the relationship bet&een problem loan and

ban' efficiency by employing .ranger#causality techni1ue and found that high level

of problem loans cause ban's of increase spending on monitoring, &or'ing out and 7

or selling off these loans and possibly becomes more diligent in administering the

portion of their e4isting loan portfolio that is currently performing)

/!ta (;4has also concluded that *PAs on protifability of ban's and leads to

li1uidity crunch and slo& do&n in the gro&th in .(P etc)

Ka)er$(;?has also e4amined the impact of *PAs on profitability by ta'ing profit

ma'ing and si4 loss ma'ing ban's and concluded that loss ma'ing ban's maintained

higher *PAs in the loan portfolio &hich led them to sho& losses)

K7a' a'% E$se'"e$s (;> also concluded that there is negative relationship

bet&een efficiency and problem loans)

Toor (;>analysed that poor recovery management leads to reduction in yield on

advanced that poor recovery management leads to reduction in yield on advances,

reduced productivity loss in the credibility and put detrimental impact on the policies

of the ban's)

M!rth- (;E has e4amined that default bring do&n the return accruing and to them,

reduces effective rate of interest and reduces the fundsC recalculation and increasetheir dependence on e4ternal sources thereby increasing the costs)

ACCORDIN/ TO S9 RA1 K&MAR (33 the SARFAESI act a'% the co!5%

r$#ar$5- !se% as o7er*!5 "ar:a$'$': too5 7h$5e 'e:ot$at$': 7$th %e*a!5ter. Th$s

!ts "a'6 o' stro':er :ro!'% $' sa5)a:$': st$c6- 5oa'


25/59

OB1ECTI0E OF ST&D2

To study the position of non performing assets in SB% group

To 'no& the impact on *PAon strategic ban'ing variable)

To 'no& the reason for an asset becoming *PA


26/59

RESEARCH METHODOLO/2

Mea'$': o* Research

-esearch is defined as Oa scientific systematic search for pertinent information on a

specific topicQ) -esearch is an art of scientific investigation) -esearch is a systemi5ed effort

to gain ne& 'no&ledge) %t is a careful in1uiry especially through search for ne& facts in any

branch of 'no&ledge) The search for 'no&ledge through objective and systematic method of

finding solution to a problem is a research)

PROBLEM STATEMENT

The research problems, in general refers to sum difficulty &ith a researcher e4perience in the

contest of either a particular a theoretical situation and &ant to obtain a salutation for same)

The rese't D$ssertat$o' has "ee' !'%erta6e' to %o the Pro"5e# o* NPA $'

State Ba'6 o* I'%$a.

RESEARCH DESI/N

T2PES OF

RESEARCH DESI/N

;P06-AT6-I

-SA-3>

(S3-%PT%+ ;P-%M*TA0

-SA-3>

(S%.*


27/59

The rese't st!%- $s %escr$t$)e $' 'at!re, as it see's to discover ideas and insight

to bring out ne& relationship) -esearch design is fle4ible enough to provide opportunity for

considering different aspects of problem under study) %t helps in bringing into focus some

inherent &ea'ness in enterprise regarding &hich in depth study can be conducted by

management)

SAMPLIN/ DESI/N+

A sample design is a definite plan for obtaining a sample from the sampling frame) %t refers

to the techni1ue or the procedure that is adopted in selecting the sampling units from &hich

inferences about the population is dra&n) Sampling design is determined before the

collection of the data)

DATA COLLECTION

PRIMAR2 DATA+ ,

T2PES OF DATA

P-%MA-I

(ATA

S36*(-I

(ATA

METHODS OF PRIMAR2 DATA

6BS-+AT%6*

MT>6(

LUT%6*A%-

MT>6(

%*T-+%/

MT>%6(

S3>(U0

MT>6(


28/59

SECONDAR2 DATA+ ,

The secondary data on the other hand, are those &hich have already been collected by

someone else and &hich have already been passed through the statistical processes) /hen the

researcher utili5es secondary data then he has to loo' into various sources from &here he can

obtain them) 2or e)g) Boo's, maga5ine, ne&spaper, %nternet, publications and reports) I' the

rese't st!%- !se o* seco'%ar- %ata co55ecte% *ro# 7e"s$te.

)


29/59

REASONS FOR RISE IN NPAs

2A3T6-S 26- -%S %* *PAs The ban'ing sector has been facing the serious problems of

the rising *PAs) But the problem of *PAs is more in public sector ban's &hen compared to

private sector ban's and foreign ban's) The *PAs in PSB are gro&ing due to e4ternal as &ell

as internal factors)

ETERNAL FACTORS

I'e**ect$)e reco)er- tr$"!'a5

The .ovt) has set of numbers of recovery tribunals, &hich &or's for recovery of loans and

advances) (ue to their negligence and ineffectiveness in their &or' the ban' suffers the

conse1uence of non#recover, their by reducing their profitability and li1uidity)

W$5*!5 De*a!5ts

There are borro&ers &ho are able to paybac' loans but are intentionally &ithdra&ing it)

These groups of people should be identified and proper measures should be ta'en in order to

get bac' the money e4tended to them as advances and loans)

Nat!ra5 ca5a#$t$es

This is the measure factor, &hich is creating alarming rise in *PAs of the PSBs) every no&

and then %ndia is hit by major natural calamities thus ma'ing the borro&ers unable to pay

bac' there loans) Thus the ban' has to ma'e large amount of provisions in order to

compensate those loans, hence end up the fiscal &ith a reduced profit) Mainly ours farmers

depends on rain fall for cropping) (ue to irregularities of rain fall the farmers are not to

achieve the production level thus they are not repaying the loans

I'%!str$a5 s$c6'ess

%mproper project handling , ineffective management , lac' of ade1uate resources , lac' of

advance technology , day to day changing govt) Policies give birth to industrial sic'ness)

>ence the ban's that finance those industries ultimately end up &ith a lo& recovery of their

loans reducing their profit and li1uidity)


30/59

Lac6 o* %e#a'%

ntrepreneurs in %ndia could not foresee their product demand and starts production &hich

ultimately piles up their product thus ma'ing them unable to pay bac' the money they

borro& to operate these activities) The ban's recover the amount by selling of their assets,

&hich covers a minimum label) Thus the ban's record the nonrecovered part as *PAs and

has to ma'e provision for it)

Cha':e o' /o)t. o5$c$es

/ith every ne& govt) ban'ing sector gets ne& policies for its operation) Thus it has to cope

&ith the changing principles and policies for the regulation of the rising of *PAs) eg) The

fallout of handloom sector is continuing as most of the &eavers 3o#operative societies have

become defunct largely due to &ithdra&al of state patronage) The rehabilitation plan &or'ed

out by the 3entral govt to revive the handloom sector has not yet been implemented) So the

over dues due to the handloom sectors are becoming *PAs)

INTERNAL FACTORS

De*ect$)e Le'%$': rocess

There are three cardinal principles of ban' lending that have been follo&ed by the

commercial ban's since long) i) Principles of safety ii) Principle of li1uidity iii) Principles of

profitability

i) Principles of safety By safety it means that the borro&er is in a position to repay the loan

both principal and interest) The repayment of loan depends upon the borro&ersK

a. Caac$t- to a-

b) W$55$':'ess to a-

3apacity to pay depends uponK $) Tangible assets ) Success in business /illingness to pay

depends onK $) 3haracter ) >onest 9) -eputation of borro&er The ban'er should, there fore

ta'e utmost care in ensuring that the enterprise or business for &hich a loan is sought is a


31/59

sound one and the borro&er is capable of carrying it out successfully )he should be a person

of integrity and good character)

I'aror$ate tech'o5o:-

(ue to inappropriate technology and management information system, mar'et driven

decisions on real time basis can not be ta'en) Proper M%S and financial accounting system is

not implemented in the ban's, &hich leads to poor credit collection, thus *PA) All the

branches of the ban' should be computerised)

I#roer s7ot a'a5-s$s

The improper strength, &ea'ness, opportunity and threat analysis is another reason for rise in

*PAs) /hile providing unsecured advances the ban's depend more on the honesty, integrity,

and financial soundness and credit &orthiness of the borro&er) R Ban's should consider the

borro&ers o&n capital investment) R it should collect credit information of the borro&ers

from a) 2rom ban'ers b) n1uiry from mar'et7segment of trade, industry, business) c) 2rom

e4ternal credit rating agencies) R Analyse the balance sheet True picture of business &ill be

revealed on analysis of profit7loss a7c and balance sheet) R Purpose of the loan /hen ban'ers

give loan, he should analyse the purpose of the loan) To ensure safety and li1uidity, ban's

should grant loan for productive purpose only) Ban' should analyse the profitability,

viability, long term acceptability of the project &hile financing)

Poor cre%$t ara$sa5 s-ste#

Poor credit appraisal is another factor for the rise in *PAs) (ue to poor credit appraisal the

ban' gives advances to those &ho are not able to repay it bac') They should use good credit

appraisal to decrease the *PAs)

Ma'a:er$a5 %e*$c$e'c$es

The ban'er should al&ays select the borro&er very carefully and should ta'e tangible assets

as security to safe guard its interests) /hen accepting securities ban's should consider the $)

Mar'etability ) Acceptability 9) Safety :) Transferability)


32/59

The ban'er should follo& the principle of diversification of ris' based on the famous ma4im

Odo not 'eep all the eggs in one bas'etQG it means that the ban'er should not grant advances

to a fe& big farms only or to concentrate them in fe& industries or in a fe& cities) %f a ne&

big customer meets misfortune or certain traders or industries affected adversely, the overall

position of the ban' &ill not be affected) 0i'e 6S3B suffered loss due to the 6TM 3uttac',

and 6rissa hand loom industries) The biggest defaulters of 6S3B are the 6TM

D$$@)@@la'hsE, and the handloom sector 6rissa hand loom /3S ltd D:98)

officials to the customer point decreases the collection of interest and principals on the loan)

The *PAs due to &ilful defaulters can be collected by regular visits)

Re 5oa'$': rocess

*on remittance of recoveries to higher financing agencies and re loaning of the same have

already affected the smooth operation of the credit cycle) (ue to re loaning to the defaulters

and 33Bs and PA3s, the *PAs of 6S3B is increasing day by day)


33/59

IMPACT OF NPAS ON BANKS:-

%n portion of the interest income is absorbed in servicing *PA)*PA is not merely non#

remunerative) %t is also cost absorbing and profit eroding)

%n the conte4t of severe competition in the ban'ing industry, the &ea' ban's are at

disadvantage for leveraging the rate of interest in the deregulated mar'et and securing

remunerative business gro&th) The options for these ban's are lost) NThe spread is the bread

for the ban'sN) This is the margin bet&een the cost of resources employed and the return

therefrom)N This is the margin bet&een the cost of resources employed and the return

thereform) %n other &ords it is gap bet&een the return on funds deployed D%nterest earned on

credit and investmentsE and cost of funds employed D%nterest paid on depositsE)

/hen the interest rates &ere directed by -B%, as heretofore, there &as not option for

ban's) But today in the deregulated mar'et the ban's decide their lending rates and

borro&ing rates) %n the competitive money and capital Mar'ets, inability to offer competitive

mar'et rates adds to the disadvantage of mar'eting and building ne& *PA has affected the

profitability, li1uidity and competitive functioning of ban's and finally the psychology of the

ban'ers in respect of their disposition to&ards credit delivery and credit e4pansion)

1. Impact on Profitability

8The e**$c$e'c- o* "a'6s $s 'ot a57a-s re*5ecte% o'5- "- the s$e o* $tsbalancesheet

but by the level of return on its assets) *PAS do not generate interest income for the

ban's, but at the same time ban's are re1uired to ma'e provisions for such *PAS from

their current profits)

*PAS have a deleterious effect on the return on assets in several &aysK

They erode current profits through provisioning re1uirements)

They result in reduced interest income)

They re1uire higher provisioning re1uirements affecting profits and accretion to

capital funds and capacity to increase good 1uality ris' assets in future, and


34/59

They limit recycling of funds, set in asset#liability mismatches, etc)

There is at times a tendency among some of the ban's to understate the level of *PAs in

order to reduce the provisioning and boost up bottom lines) %t &ould only postpone the

process)

%n the conte4t of crippling effect on a ban'?s operations in all spheres, asset 1uality has been

placed as one of the most important parameters in the measurement of a ban'?s performance

under the 3AM0S supervisory rating system of -B%)

Bet&een !$)!:)89 to 9$)!9)!!$, SB% .roup incurred a total amount of -s) 9$=$ 3rores

to&ards provisioning *PA) This has brought *et *PA to -s) 9


35/59

%n the face of the deregulated ban'ing industry, an ideal competitive &or'ing is reached,

&hen the ban's are able to earn ade1uate amount of non#interest income to cover their entire

operating e4penses i)e) a positive burden) %n that event the spread factor i)e) the difference

bet&een the gross interest income and interest cost &ill constitute its operating profits)

Theoretically even if the ban's 'eeps !F spread, it &ill still brea' even in terms of operating

profit and not return an operating loss) The net profit is the amount of the operating profit

minus the amount of provisions to be made including for ta4ation) 6n account of the burden

of heavy *PA, many nationalised ban's have little option and they are unable to lo&er

lending rates competitively, as a &ider spread is necessitated to cover cost of *PA in the face

of lo&er income from off balance sheet business yielding non#interest income)

The follo&ing &or'ing results of SB% .roup an identified &ell manged nationalised ban's

for the last t&o years and for the first nine months of the current financial year, &ill be

revealing to prove this statement)

*on#interest income fully absorbs the operating e4penses of this ban's in the current

financial year for the first 8 months) %n the last t&o financial years, though such income has

substantially covered the operating e4penses Dbet&een "! to 8!FE there is still a deficit left)

The strength of SB% .roup is indentified by the follo&ing positive featureK

$) %t?s si5eable earnings under of non#interest income substantially7totally meets its

non#interest e4penses)

) %ts obligation for provisioning re1uirements is &ithin bounds) D*et *PA7*et

Advances is $)8FE

%t is &orth&hile to compare the aggregate figures of the $8 *ationalised ban's for the year

ended March, !!$, as published by -B% in its -eport on trends and progress of ban'ing in

%ndia)

%nterest on -ecapitali5ation Bonds is a income earned form the .overnment, &ho had

issued the -ecapitali5ation Bonds to the &ea' ban's to sustain their capital ade1uacy under a

bailout pac'age) The statistics above sho& the other &ea'nesses of the nationalised ban's in


36/59

addition to the heavy burden they have to bear for servicing *PA by &ay of provisioning and

holding cost as underK

Their operating e4penses are higher due to surplus manpo&er employed) /age costs

total assets is much higher to PSBs compared to ne& private ban's or foreign ban's)

Their earnings from sources other than interest income are meagre) This is due to

failure to develop off balance sheet business through innovative ban'ing products)

3. I#act o' L$!$%$t- o* the SBI /ro!

Though SB% .roup are able to meet norms of 3apital Ade1uacy, as per -B% guidelines,

the facts that their net *PA in the average is as much as @F is a potential threat for them)

-B% has indicated the ideal position as ero percent *et *PA) ven

granting 9F net *PA &ithin limits of tolerance the SB% .roup are holding an

uncomfortable burden at @)$F as at March !!$) They have not been able to build

additional capital needed for business e4pansion through internal generations or by

tapping the e1uity mar'et, but have resorted to %%#Tier capital in the debt mar'et or

loo'ing to recapitalistion by .overnment of %ndia)

=. I#act o' O!t5oo6 o* Ba'6ers to7ar%s Cre%$t De5$)er-.

The fear of *PA permeates the psychology of ban' managers in the SB% .roup in

entertaining ne& projects for credit e4pansion) %n the &orld of ban'ing the concepts of

business and ris's are inseparable) Business is an e4ercise of balancing bet&een ris' and

re&ard) Accept justifiable ris's and implements de#ris'ing steps) /ithout accepting ris',

there can be no re&ard) The psychology of the ban's today is to insulate themselves &ith

5ero percent ris' and turn lu'e&arm to fresh credit) This has affected adversely credit

gro&th compared to gro&th of deposits, resulting in a lo& 37( -atio around =! to =:F

for the industry)

The fear psychosis also leads to e4cessive security#consiousness in the approach to&ards

lending to the small and medium si5ed credit customers) There is insistence on provision

of collateral security, sometimes up to !!F value of the advance, and conse1uently due

to a feeling of assumed protection on account of holding ade1uate security Dalbeit over#


37/59

confidenceE) a tendency to&ards la4ity in the standards of credit appraisal comes to the

fore) %t is &ell 'no& that the e4istence of collateral security at best may convert the credit

e4tended to productive sectors into an investment against real estate, but &ill not prevent

the account turning into *PA) 2urther bloc'ed assets and real estate represent the most

illi1uid security and *PA in such advances has the tendency to persist for a long

duration)

SB% .roup have reached a dead#end of the tunnel and their future prosperity depends on

an urgent solution for handling this hovering threat)

>. I#act o' Pro%!ct$)$t-+

>igh level of *PAs effect the productivity of the ban's by increasing the cost of funds

and by reducing the efficiency of ban's employees) 3ost of funds is increased because

due to non#availability of sufficient internal sources they have to rely on e4ternal sources

to fulfill their future financial re1uirements) Productivity of employees is also reduced

because it 'eeps staff busy &ith the tas' of recovery of overdue) %nstead of devoting time

for planning for development through more credit and mobili5ation of resources the

branch staff &ould primarily be engaged in preparing a large value of returns and

statements relating to sub#standard, doubtful and loss assets, preparing proposal for filing

of suits, &aivement of legal action, compromise, &rite off or in preparing (%3.3 claim

papers etc)

?. I#act o' other 0ar$a"5es+

>igh level of *PAs also leads to s1uee5ing of interest spread, &hen asset becomes an

*PA for the first time it adversely affects the spread by not contributing to the interest

income and from the second year on&ards it &ill have its impact on the bottom line of the

balance sheet because of provisioning to be made for it and not have incremental effect

on the spread)

*o& a days .ovt) does not encourage liberal capital support to be given to ban's) Ban's

are re1uired to bring their o&n capital by issuing share to the public, &hereas high level

of *PAs leads to lo&er profits hence less or no profits available for e1uity shareholders

hence lo&er PS and fall in the value of share) (uring the year !!$#! share of $


38/59

public sector ban's &ere traded on the *S out of &hich share value of three PSBs have

decreased) 0o& mar'et value of shares has also forced the ban's to borro& heavily debt

mar'et to build Tier %% capital to meet capital ade1uacy norms, putting severe pressure on

their profit margins)

@. J!a5$tat$)e asects o* the M$cro Le)e5 I#act o* NPAs+

>igh incidence of loan defaults sha'es the confidence of general public in the soundness

of ban'ing setup and indirectly effects the capacity of the ban'ing system to mop up the

deposits) %t is a blot on the credibility of the ban'ing system) %t also leads to loss of trust

of foreign suppliers) -eputed foreign suppliers do not accept letter of credit opened bi

%ndian ban's or confine their transaction to top %ndian ban's only) Moreover, it puts

negative effect on granting of autonomy to PSBs &hreas it is must for ban's in this

competitive environment) Ban's having positive net profits for the last three years, *et

*PA level belo& 8F, o&ned funds of -s) $!! 3rore, 3A- of "F are the : condition to

be fulfilled to get autonomous status, &hich becomes difficult in the situation of huge

level of *PAs

)

%nade1uate recovery also inhibits the ban's to dra& refinance from higher level

agency) The eligibility of a ban' to dra& refinance from *ABA-( is lin'ed to the Fage

of recovery to demand in respect of direct, medium and long term loans for agriculture

and allied activities) %t implies that refinance facility &ould be progressively reduced

depending on the position of *PAs and also on the *o) of years in &hich a ban's branch

remains in a particular category of default) (ue to fear of *PAa ban's are being ta'en

a&ay from the basic function for &hich these &ere established it is becoming more

more ris'y and less remunerative) They are floating their subsidiaries to manage mutual

funds, factoring, insurance business, .ood money is spent to recover bad money)(eterioration in the 1uality of loan assets and inability to come &ith ne& products ma'es

the %ndian ban's uncompetitive globally) (ue to high cost, they cannot reduce lending

rate to meet the economy?s demand of lo& lending rate) %t is also biggest threat for capital

account convertibility)


39/59

4. So#e areas o* Macro,Eco'o#$c I#act+

%t is not only the ban's &hich are affected higher level of *PAs but it is the economy as a

&hole &hich pays for it) Ban's are not putting enough resource in lending due to fear of

default) 6nce the credit to various sectors of the economy slo& do&n, the economy is

badly hit) There is slo&do&n in gro&th in .(P, industrial output and fall in the profit

margins of the corporate and conse1uent depression in the mar'et) 2urther high level of

*PAs can result in adding to the inflationary potential in the economy and eroding the

viability of the credit system as a &hole)

*ot only this, burden of *PAs is to be borne by the society as a &hole) /hen capital

support is given to PSB on A7c of losses boo'ed and7 or erosion of capital due to *PAs, it

comes out of either .ovt) budgetary resources or from the public as per

0iberali5ation policy, &hether this money is from ta4 revenues or from the hard earned

saving of the investing public, in fact, the society is bearing the cost of these

*PAs) Moreover, .ovt) holds majority of shares in PSBs in some ban's $!!F capital is

in its hand) Any dividend declared &ould have gone to the .ovt) and &hich can be spent

on the &elfare and development program)


40/59

/&IDELINES B2 RBI

/!$%e5$'es o* /o)er'#e't a'% RBI *or Re%!ct$o' o* NPAs

;. Co#ro#$se sett5e#e't sche#es+

The -B%7.overnment of %ndia have been constantly goading the ban's to ta'e steps for

arresting the incidence of fresh *PAs and have also been creating legal and regulatory

environment to facilitate the recovery of e4isting *PAs of ban's) More significant of them,

% &ould li'e to recapitulate at this stage)

V The broad frame&or' for compromise or negotiated settlement of *PAs advised by -B%

in July $88= continues to be in place) Ban's are free to designand implement their o&n

policies for recovery and &rite#off incorporating compromise and negotiated settlements

&ith the approval of their Boards, particularly for old and unresolved cases falling under

the *PA category) The policy frame&or' suggested by -B% provides for setting up of an

independent Settlement Advisory 3ommittees headed by a retired Judge of the >igh 3ourt

to scrutinise and recommend compromise proposals)

V Specific guidelines &ere issued in May $888 to public sector ban's for one time non

discretionary and non discriminatory settlement of *PAs of small sector) The scheme &as

operative up to September 9, !!!) Public sector ban's recovered -s)


41/59

3. Lo6 A%a5tas+

0o' Adalats help ban's to settle disputes involving accounts in ?doubtfulN and NlossN

category, &ith outstanding balance of -s) = la'h for compromise settlement under

0o' Adalats) (ebt -ecovery Tribunals have no& been empo&ered to organi5e 0o'

Adalats to decide on cases of *PAs of -s) $! la'hs and above) The public sector

ban's had recovered -s) :!)9" crore as on September 9!, !!$, through the forum of

0o' Adalat) The progress through this channel is e4pected to pic' up in the coming

years particularly loo'ing at the recent initiatives ta'en by some of the public sector

ban's and (-Ts in Mumbai)

=. De"t Reco)er- Tr$"!'a5s+

The -ecovery of (ebts due to Ban's and 2inancial %nstitutions DamendmentE Act,

passed in March !!! has helped in strengthening the functioning of (-Ts)

Provisions for placement of more than one -ecovery 6fficer, po&er to attach

defendant?s property7assets before judgement, penal provisions for disobedience of

Tribunal?s order or for breach of any terms of the order and appointment of receiver

&ith po&ers of reali5ation, management, protection and preservation of property are

e4pected to provide necessary teeth to the (-Ts and speed up the recovery of *PAs

in the times to come)

Though there are (-Ts set up at major centres in the country &ith Appellate

Tribunals located in five centres vi5) Allahabad, Mumbai, (elhi,3alcutta and

3hennai, they could decide only 8"$: cases for -s)


42/59

0oo'ing at the huge tas' on hand, &ith as many as 99!:8 cases involving -s)

:8"")": crore pending before them as on September 9!, !!$, % &ould li'e the

ban's to institute appropriate documentation system and render all possible assistance

to the (-Ts for speeding up decisions and recovery of some of the &ell collateralised

*PAs involving large amounts) % may add that familiarisation programmes have been

offered in *%BM at periodical intervals to the presiding officers of (-Ts in

understanding the comple4ities of documentation and operational features and other

legalities applicable of %ndian ban'ing system) -B% on its part has suggested to the

.overnment to consider enactment of appropriate penal provisions against

obstruction by borro&ers in possession of attached properties by (-T -eceivers, and

notify borro&ers &ho default to honour the decree passed against them)

>. C$rc!5at$o' o* $'*or#at$o' o' %e*a!5ters+

The -B% has put in place a system for periodical circulation of details of &illful

defaults of borro&ers of ban's and financial institutions) This serves as a caution list

&hile considering re1uests for ne& or additional credit limits from defaulting

borro&ing units and also from the directors7proprietors7partners of these entities) -B%

also publishes a list of borro&ers D&ith outstanding aggregating -s) $ crore and

aboveE against &hom suits have been filed by ban's and 2%s for recovery of

their funds, as on 9$st March every year) %t is our e4perience that these measures had

not contributed to any perceptible recoveries from the defaulting entities) >o&ever,

they serve as negative bas'et of steps shutting off fresh loans to these defaulters) %

strongly believe that a real brea'through can come only if there is a change in the

repayment psyche of the %ndian borro&ers

?. Reco)er- act$o' a:a$'st 5ar:e NPAs+

After a revie& of pendency in regard to *PAs by the >on?ble 2inance Minister, -B%

had advised the public sector ban's to e4amine all cases of &illful default of -s $

crore and above and file suits in such cases, and file criminal cases in regard to &illful

defaults) Board of (irectors are re1uired to revie& *PA accounts of -s) $ crore and

above &ith special reference to fi4ing of staff accountability)6n their part -B% and


43/59

the .overnment are contemplating several supporting measures including legal

reforms, some of them % &ould li'e to highlight)

@. Cororate De"t Restr!ct!r$': (CDR+

3orporate (ebt -estructuring mechanism has been institutionalised in !!$ to

provide a timely and transparent system for restructuring of the corporate debts of -s)

! crore and above &ith the ban's and financial institutions) The 3(- process &ould

also enable viable corporate entities to restructure their dues outside the e4isting legal

frame&or' and reduce the incidence of fresh *PAs) The 3(- structure has been

head1uartered in %(B%, Mumbai and a Standing 2orum and 3ore .roup for

administering the mechanism had already been put in place) The e4periment ho&ever

has not ta'en off at the desired pace though more than si4 months have lapsed since

introduction) As announced by the >on?ble 2inance Minister in the Union Budget

!!#!9, -B% has set up a high level .roup under the 3hairmanship of Shri +epa

Hamesam, (eputy .overnor, -B% to revie& the implementation procedures of 3(-

mechanism and to ma'e it more effective) The .roup &ill revie& the operation of the

3(- Scheme, identify the operational difficulties, if any, in the smooth

implementation of the scheme and suggest measures to ma'e the operation of the

scheme more efficient)

4. Cre%$t I'*or#at$o' B!rea!+

%nstitutionalisation of information sharing arrangements through the ne&ly formed

3redit %nformation Bureau of %ndia 0td) D3%B%0E is under &ay) -B% is considering the

recommendations of the S)-)%yer .roup D3hairman of 3%B%0E to operationalise the

scheme of information dissemination on defaults to the financial system) The main

recommendations of the .roup 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 &here the borro&er has given

consent for disclosure) This, % hope, &ould prevent those &ho ta'e advantage of lac'

of system of information sharing amongst lending institutions to borro& large


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amounts against same assets and property, &hich had in no small measures

contributed to the incremental *PAs of ban's)

. Proose% :!$%e5$'es o' 7$55*!5 %e*a!5ts%$)ers$o' o* *!'%s+

-B% is e4amining the recommendation of Hohli .roup on &illful defaulters) %t is

&or'ing out a proper definition covering such classes of defaulters so that credit

denials to this group of borro&ers can be made effective and criminal prosecution can

be made demonstrative against &illful defaulters)

. Cororate /o)er'a'ce+

A 3onsultative .roup under the chairmanship of (r) A) .anguly &as set up by the

-eserve Ban' to revie& the supervisory role of Boards of Ban's and financial

institutions and to obtain feedbac' on the functioning of the Boards vis#a#vis

compliance, transparency, disclosure, audit committees etc) and ma'e

recommendations for ma'ing the role of Board of (irectors more effective &ith a

vie& to minimising ris's and overe4posure) The group is finalising its

recommendations shortly and may come out &ith guidelines for effective control and

supervision by ban' boards over credit management and *PA prevention measures)

;. Sec!r$t$at$o' a'% Reco'str!ct$o' o* F$'a'c$a5 Assets a'% E'*orce#e't o*

Sec!r$t- I'terest Act9 33+

The Act provides, inter aliafor enforcement of security interest for realisation of dues

&ithout the intervention of courts or tribunals) The Security %nterest DnforcementE

-ules, !! has also been notified by .overnment to enable Secured 3reditors to

authorise their officials to enforce the securities and recover the dues from the

borro&ers) As on June 9!, !!:, @ public sector ban's had issued


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PROBLEMS LOAN RECO0ER2

;. I'a%e!ate sec!r$t- a'% Eros$o' $' )a5!e o* sec!r$t-+

.enerally, ban's tend to find that there is a major gap in the valuation of the security,

as carried out at the time of providing the loan and at the time of loan recovery) The

value of the security has generally deteriorated over the period and according to

e4perts, it may further deteriorate by almost $!#=!F if 1uic' action is not ta'en for its

immediate sale)

3. Po5$t$ca5 $'ter*ere'ces+

Political interference in the day #to#day functioning of public sector ban's created a

number of problems for them) The populist policies of the national level politicians,

such as &aiver in repayment only added to these problems)

=. S5o7 5e:a5 roce%!re+

Before the establishment of (-Ts in $889, the ban's had to approach the normal

courts to recover their dues) There &ere provisions under various acts &hich

hampered the smooth ta'eover and sale of secured assets) The legal process could

ta'e years to be completed, &ith the borro&er having ample scope for delaying the

ta'eover of assets) A number of loopholes provided the borro&er &ith opportunities

to delay or ignore repayment of loans) (uring this period, it &as said by some

unscrupulous businessmen that # Nthere is no difference bet&een e1uity and debt # you

never have to repay either of them N)

>. S7a#$': o* DRTs 7$th cases+

6nce (-Ts &ere established to 1uic'en the pace of recovery procedures, the pace of

recovery improved 1uite a bit) >o&ever, the (-Ts &ere soon dro&ned in the ever

increasing number of cases) The pending number of cases &ith the (-Ts increased

manifold during the period $889#!!)


46/59

?. M$s!se o* BIFRSICA+

This &as one of the favourite methods of &illful defaulters to delay repayment) %f the

defaulter?s company is declared sic' and ta'en for financial reconstruction under

B%2-, it is not possible to underta'e any recovery proceeding against the company

)The procedure of financial reconstruction can ta'e a number of years together,

thereby delaying recovery to a great e4tent)

@. Tra's*er o* roert- Act9 E':5$sh #ort:a:e+

Under provisions of Section


47/59

ANAL2ISIS AND

INTERPRETATION


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STATE BANK OF INDIA

TOTAL ASSET

YEAR

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08TOTAL ASSET(RS.

CR) 407185 459883 494029 566565 721526

0

100000

200000

300000

400000

500000

600000

700000

800000

1 2 3 4 5 6

YEAR

YEAR

TOTAL ASSET(RS. CR)

I'terretat$o'+,A"o)e :rah sho7 that tota5 assets o* SBI $s $'crease% $' 3>,? "-

?3@? crore9 $' 34, $'crease% "- ;?>@;rs. crore. So assets o* the SBI "a'6

$'crease% *ro# 5ast *$)e -ear.


49/59

!OSS NPA

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

_ROSS !"A(RS.CR) 12667 12456 9628 9998 12837

_ROSS !"A(RS.CR)

0

2000

4000

6000

8000

10000

12000

14000

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

_ROSS

!"A(RS.CR)

I'terretat$o'+,a"o)e :rah sho7s that No',er*or#$': assets o* SBI %ecrease%

*ro# 3=,> to3@,4 a'% $'crease% $' 34,. There are so #a'- reaso' o*

$'creases o* 'a

NET NPA


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YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

!ET !"A(RS. CR.) 5442 5349 4906 5258 7424

0

1000

2000

3000

4000

5000

6000

7000

8000

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

!ET !"A(RS. CR.)

!ET !"A(RS.

CR.)

I'terretat$o' +,above graph sho& that net *PA decreasd from !!9#!: to !!=#!< and

increased in !!


51/59

!OSS NPA "!ATIO#$

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

ROSS !"A(RAT#O$) 7.75 5.96 3.61 2.92 3.04

I'terretat$o' +Above graph sho&s that the gross *PA D-atioFEof SB% is decreased

from !!:#!= to !!


52/59

NET NPA(RATIO

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

!ET !"A(RAT#O$) 3.48 2.65 1.88 1.56 1.78

0

0.5

1

1.5

2

2.5

3

3.5

4

1 2 3 4 5 6

YEAR

!ET

!"A(RAT#O$)

I'terretat$o'+Above graph sho&s that the net *PAD-atioFE of SB% is decreased from

!!:#!= to !!


53/59

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

"RO%#S#O! CO%ER 57.04 59.45 49.04 47.41 45.04

"RO%#S#O! CO%ER

0

10

20

30

40

50

60

70

2003-04 2004-05 2005-06 2006-07 2007-08

yEAR

POVISI

ONCOVER%

"RO%#S#O! CO%ER

I'terretat$o'+A"o)e :rah sho7s that $' 3=,> ro)$s$o' co)er o* NPA $s ?4.>

a'% $'crease% $' 3>,?. It %ecrease% *ro# 3?,@ to 34,.

State Ba'6 o* Pat$a5a


54/59

YEAR 2003-04 2004-05 2005-06 2006-07 2007-08

ROSS !"A($) 1.82 1.65 1.38 2.14 1.42

!ET !"A($) 1.35 1.23 0.99 0.83 0.6

0

0.5

1

1.5

2

2.5

2003-

04

2004-

05

2005-

06

2006-

07

2007-

08

ROSS !"A($)

!ET !"A($)

I'terretat$o'+A"o)e :rah sho7s that the :ross NPA o* SBP $s %ecrease% *ro#

3=,> to 3?,@9$'crease% $' 3@,4 a'% a:a$' %ecrease% $' 34,. The 'et NPA

%ecrease% *ro# 3=,> to 34,.

FINDIN/S

1. REASON OF NPA IN BANKK#


55/59

(efault by customer

*on#inspection of borro&er

0ac' of e4pertise

%mbalance of inventories

Poor credit collection

0ac' of trained staff

0ac' of commitment to recovery

3hange in consumer preference

3 IMPACT OF NPA ON BANK

.ovt) Policies

%mpact of profitability

0i1uidity

%mpact on outloo' of Ban'er to &ards credit delivery

%mpact of productivity

RECOMMANDATIONS


56/59

Cre%$t a%#$'$strat$o'K A ban's have to strengthen their credit administrative

machinery and put in place effective credit ris' management systems to reduce the fresh

incidence of *PAs.

Better I'sect$o'+ /e shall 'eep a close &atch on the manner in &hich *PA

reduction is ta'ing place)

Cash Reco)er-+ /e should also insist that cash recoveries should more than

offset the fresh &rite#offs in *PAs)

Percet$o'+ The mindset of the borro&ers needs to change so that a culture of

proper utili5ation of credit facilities and timely repayment is developed)

F$'a'c$a5 S-ste#+ As you are a&are, one of the main reason for corporate default

is on account of diversion of funds and corporate entities should come for&ard of

avoid this practice in the interest of strong and sound financial system)

Coor%$'ator+ 4tending credit involves lenders and borro&ers and both should

reali5e their role and responsibilities) They should appreciate the difficulties of each

other and should endeavor to &or' contributing to a healthy financial system)

LIMITATION OF ST&D2

Shorta:e o* t$#e +,


57/59

)Time is very short for research ,so that is very difficult can get the 'no&ledge about

everything )

I'*or#at$o' 'ot s!**$c$e't5- a)a$5a"5e

The source of data collection is secondary so the information available is not sufficient)

No %$rect so!rce o* $'*or#at$o' a)a$5a"5e

The information is collected from indirect sources so in some information data is not

available)

Seco'%ar- %ata+,

%nformation is not reliable because of secondary data

CONC&'SION


58/59

A strong ban'ing sector is important for a flourishing economy) The failure of the

ban'ing sector may have an adverse impact on other sectors)

6ver the years, much has been tal'ed about *PA and the emphasis so far has been only

on identification and 1uantification of *PAs rather than on &ays to reduce and upgradethem)

There is also a general perception that the prescriptions of :!F of net ban' credit to

priority sectors have led to higher *PAs, due to credit to these sectors becoming stic'ly

managers of rural and semi#urban branches generally sanction these loans) %n the changed

conte4t of ne& prudential norms and emphasis on 1uality lending and profitability,

mangers should ma'e it amply clear to potential borro&ers that ban's resources are scare

and these are meant to finance viable ventures so that these are repaid on time andrelevant to other needy borro&ers for improving the economic lot of ma4imum number

of households) >ence selectionof right borro&ers, viable economic activity, ade1uate

finance and timely disbursement, correct and use of funds and timely recovery f loans is

absolutely necessary pre conditions for preventing of minimi5ing the incidence of ne&

*PAs)


59/59

BIBLIOGRAPHY

1. Finance India, September 2005 pp-957-961

2. Charted Financial Analysis, October 2005 pp-64

3. Charted Financial Analysis, October 2007 pp-31-31

4. Charted Financial Analysis, November 2007 pp-8-9

5. Charted Financial Analysis, August 2004 B.P. Dhaka pp-47-52

6. Business Today, May 2006 pp-34

7. Charted Financial Analysis, December 2005 pp-25-28

8. RBI Bulletin, July 1999 pp-34-36

9. RBI Bulletin, January 2004 pp-17-19

10. Alok Majumdar, NPAs: Recovery Blues, Treasury Management (Dec. 2000) pp 46-49

Books : KOTHARI C.R

Indian Financial System , VK publication ,pp-100-105

Website:

1. www.centurionbop.co.in/news/press_190505.html1

2. www.domainb.com/management/m_a/20060904_vijay_kalantri.html2

3. www.twincitiesbbs.com/php/subra/corporat.htm3

4. www.blonnet.com/2002/08/07/stories/2002080700050800.htm4

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