(g) Non Performing Assets

9

IV. Non Performing Assets (NPAs)

A debt obligation where the borrower has not paid any previously agreed upon interest and

principal repayments to the designated lender for an extended period of time. The performing

asset is therefore not yielding any income to the lender in the form of principal and interest pay,

then that performing assets becomes nonperforming assets.

For example, a mortgage in default would be considered non-performing. After a prolonged

period of non-payment, the lender will force the borrower to liquidate any assets that were

pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the

asset as an ad debt and then sell it at a discount to a collections agency.

A strong banking sector is important for flourishing economy. The failure of the banking sector

may have an adverse impact on other sectors. Non-performing assets (NPA) are one of the major

concerns for banks in India. A loan or lease that is not meeting its stated principal and interest

payments is said to be non-performing assets.

Most of the rise in NPA is due to problems with commercial loans. A lot of banks and financial

institutions in India are dealing with pending cases of this nature for over many years.

As per the Master Circular No. RBI/2011 – 12/66 DBOD.NO.BP.BC. 12 /21.04.048/2011 –

12 on Master Circular - Prudential norms on Income Recognition, Asset Classification and

Provisioning pertaining to Advances issued by Reserve bank of India

Non Performing Assets defined as

1. An asset, including a leased asset, becomes non performing when it ceases to generate

income for the bank.

2. A non performing asset (NPA) is a loan or an advance where;

2.1. Interest and/ or instalment of principal remain overdue for a period of more than 90

days in respect of a term loan

2.2. The account remains ‘out of order’ as indicated an account should be treated as 'out of

order' if the outstanding balance remains continuously in excess of the sanctioned

limit/drawing power. In cases where the outstanding balance in principal operating

account is less than the sanctioned limit/drawing power, but there are no credits

continuously for 90 days as on the date of Balance Sheet or credits are not enough to

10

cover the interest debited during the same period, these accounts should be treated as

'out of order’, in respect of an Overdraft/Cash Credit (OD/CC)

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

and discounted

2.4. The instalment of principal or interest thereon remains overdue for two crop seasons for

short duration crops.

2.5. The instalment of principal or interest thereon remains overdue for one crop season for

long duration crops

2.6. The amount of liquidity facility remains outstanding for more than 90 days, in respect

of a securitisation transaction undertaken in terms of guidelines on securitisation dated

February 1, 2006

2.7. In respect of derivative transactions, the overdue receivables representing positive mark-

to-market value of a derivative contract, if these remain unpaid for a period of 90 days

from the specified due date for payment.

Note: - “Banks should, classify an account as NPA only if the interest due and charged during

any quarter is not serviced fully within 90 days from the end of the quarter.”

Types of Non Performing Assets (NPAs)

NPAs are divided into two parts namely, (a) Gross NPAs, (b) Net NPAs

a) Gross NPAs: 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 non standard 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

b) Net NPAs: 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 as:

Net NPAs = Gross NPAs – Provisions / Gross Advances - Provisions

11

The Reserve Bank of India states that, compared to other Asian countries and the US, the gross

non-performing asset figures in India seem more alarming than the net NPA figure. The problem

of high gross NPAs is simply one of inheritance. Historically, Indian public sector banks have

been poor on credit recovery, mainly because of very little legal provision governing foreclosure

and bankruptcy, lengthy legal battles, sticky loans made to government public sector

undertakings, loan waivers and priority sector lending. Net NPAs are comparatively better on a

global basis because of the stringent provisioning norms prescribed for banks in 1991 by

Narasimham Committee.

Categories of NPAs

Banks are required to classify nonperforming assets further into the following three

categories based on the period for which the asset has remained nonperforming and the

reliability of the dues:

I. Substandard Assets

II. Doubtful Assets

III. Loss Assets

I. Substandard Assets: With effect from 31 March 2005, a substandard asset would be

one, which has remained NPA for a period less than or equal to 12 months. 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 jeopardise the

liquidation of the debt and are characterised by the distinct possibility that the banks will

sustain some loss, if deficiencies are not corrected.

12

II. Doubtful Assets: With effect from March 31, 2005, an asset would be classified as

doubtful 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

substandard, 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.

III. 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.

Government guaranteed advances

The credit facilities backed by guarantee of the Central Government though overdue may be

treated as NPA only when the Government repudiates its guarantee when invoked. This

exemption from classification of Government guaranteed advances as NPA is not for the purpose

of recognition of income. The requirement of invocation of guarantee has been delinked for

deciding the asset classification and provisioning requirements in respect of State Government

guaranteed exposures. With effect from the year ending 31 March 2006 State Government

guaranteed advances and investments in State Government guaranteed securities would attract

asset classification and provisioning norms if interest and/or principal or any other amount due to

the bank remains overdue for more than 90 days.

Banks provides major credit to two types of sectors namely Priority Sector and Non Priority

Sector and most of the Non Performing Assets (NPAs) comes from these sectors also.

13

Categories of Priority Sector

Priority Sector can be classified into following eight parts,

(a) Agriculture (Direct and Indirect finance): Direct finance to agriculture shall include

short, medium and long term loans given for agriculture and allied activities (dairy,

fishery, piggery, poultry, bee-keeping, etc.) directly to individual farmers, Self-Help

Groups (SHGs) or Joint Liability Groups (JLGs) of individual farmers without limit and

to others (such as corporate, partnership firms and institutions) up to the limits for taking

up agriculture/allied activities.

(b) Micro and Small Enterprises (Direct and Indirect Finance): Direct finance to micro

and small enterprises shall include all loans given to micro and small (manufacturing)

enterprises engaged in manufacture/ production, processing or preservation of goods, and

micro and small (service) enterprises engaged in providing or rendering of services, and

whose investment in plant and machinery and equipment (original cost excluding land

and building and such items as mentioned therein) respectively. The micro and small

(service) enterprises shall include small road & water transport operators, small business,

professional & self-employed persons, retail trade i.e. advances granted to retail traders

dealing in essential commodities (fair price shops), consumer co-operative stores and

advances granted to private retail traders with credit limits not exceeding Rs. 20 lakh and

all other service enterprises.

Indirect finance to small enterprises shall include finance to any person providing inputs to

or marketing the output of artisans, village and cottage industries, handlooms and to

cooperatives of producers in this sector.

(c) Micro Credit: Provision of credit and other financial services and products of very small

amounts not exceeding Rs. 50,000 per borrower, either directly or indirectly through a

SHG (Self-Help Groups ) / JLG (Joint Liability Groups) mechanism or to NBFC (Non

Banking Finance Companies / MFI (for on-lending up to Rs. 50,000 per borrower, will

constitute micro credit.

(d) Education Loans: Education loans include loans and advances granted to only

individuals for educational purposes up to Rs. 10 lakh for studies in India and Rs. 20 lakh

for studies abroad, and do not include those granted to institutions.

14

(e) Housing Loans: Loans up to Rs. 20 lakh to individuals for purchase / construction of

dwelling unit per family (excluding loans granted by banks to their own employees) and

loans given for repairs to the damaged dwelling units of families up to Rs. 1 lakh in rural

and semi-urban areas and up to Rs. 2 lakh in urban and metropolitan areas.

(f) State Sponsored Organizations for Scheduled Castes / Scheduled Tribes: Advances

sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes

for the specific purpose of purchase and supply of inputs to and/or the marketing of

the outputs of the beneficiaries of these organisations.

(g) Weaker Sections: The weaker sections under priority sector shall include the

following:

a. Small and marginal farmers with land holding of 5 acres and less, and landless

labourers, tenant farmers and share croppers;

b. Artisans, village and cottage industries where individual credit limits do not

exceed Rs. 50,000;

c. Beneficiaries of Swarnjayanti Gram Swarozgar Yojana

d. Scheduled Castes and Scheduled Tribes;

e. Beneficiaries of Differential Rate of Interest (DRI)

f. Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY);

g. Beneficiaries under the Scheme for Rehabilitation of Manual Scavengers

(SRMS);

h. Advances to Self Help Groups;

i. Loans to distressed poor to prepay their debt to informal sector,

against appropriate collateral or group security.

j. Loans granted under (a) to (i) above to persons from minority

communities as may be notified by Government of India from time to time.

In States, where one of the minority communities notified is, in fact, in

majority, item (j) will cover only the other notified minorities. These

States/Union Territories are Jammu & Kashmir, Punjab, Meghalaya,

Mizoram, Nagaland and Lakshadweep.

(h) Export Credit: This category will form part of priority sector for foreign banks

only.

15

Categories of Non Priority Sector

Non Priority Sector can be classified into following three parts,

(a) Industry

1) Mining & Quarrying

2) Food Manufacturing & Processing

a) Rice Mills, Flour & Dal Mills

b) Sugar

c) Edible Oil & Vanaspati (Cooking Oil)

d) Tea processing

e) Processing of fruits & Vegetables

f) Others

3) Beverage & Tobacco

4) Textiles

a) Cotton Textiles

b) Jute & Other Natural Fibre Textiles

c) Handloom Textiles & Khadi

d) Other Textiles & Textiles Products

5) Paper Products & Printing

6) Woods and Woods Products

7) Leather & Leather Products

8) Gems and Jewellery

9) Rubber & Plastic Products

10) Chemicals & Chemicals Products

a) Heavy Industrial Chemicals

b) Fertilisers

c) Drug & Pharmaceuticals

d) Non – Edible Oils

e) Other Chemicals & Chemicals Product

11) Petroleum Coal Products & Nuclear fuels

12) Manufacture of Cement & Cement Products

13) Basic Metals & Metals products

a) Iron & Steel

b) Non – Ferrous Metals (Base Metals)

c) Metal Products

16

14) Engineering

a) Heavy Engineering

b) Light Engineering

c) Electrical Machinery & Goods

d) Electronic Machinery & Goods

15) Vehicles Parts & Transport Equipments

16) Others industries

17) Electricity, Gas & Water

a) Electricity Generation & Transmission

b) Non – Conventional Energy

c) Gas Stream & Water Supply

18) Construction

a) Other than infrastructure

b) Infrastructure Construction

(b) Services

1) Transport Operators

2) Computer Software

3) Tourism, Hotels & Restaurants

4) Shipping

5) Professional Services

6) Telecommunication

7) Wholesale Trade

8) Retail Trade

9) Recreation Services

10) Commercial Real Estate

11) Non Banking Financing Companies

12) Other Services

(c) Personal Loans

1) Housing (excluding Priority Sector Housing)

2) Advances against Fixed Deposits (including FCNR(B) - Foreign Currency

Non-Resident (Bank) Account, NRNR - Non-resident Non-Repatriable

Term Deposit Account

3) Advances to individuals against share, bonds etc.

4) Education

17

5) Credit Card Outstanding

6) Vehicle Loans

7) Other Personal Loans

Factors Contributing for rising Non Performing Assets

There are many reasons as to why a loan goes bad. For a business, it could be because it fails to

take off. Such a situation may arise because of sudden health expenditure or job loss or death.

Often, it can be because of over-leveraging, when consumers borrow against most of their assets

and, may be, have unsecured loans too. In such a case, any hit on income can jeopardize all

repayments. They, however, can file for bankruptcy under Chapters 7, 11 and 13 of the United

States Bankruptcy Code. Indians don’t have such an option.

In India, the situation has worsened due to banks aggressively pushing loans, even unsecured

ones, to individuals to prevent idle assets on their books. President and founder of International

Consumer Rights Protection Council, an NGO, says most customers in India are not financially

educated and banks are luring them to take more and more loans, often without checking their

financial position.

The banking sector has been facing the serious problems of the rising NPAs. But the problem of

NPAs is more in public sector banks when compared to private sector banks and foreign banks.

The NPAs in PSB are growing due to external as well as internal factors.

A. External Factors

Ineffective Recovery Tribunal: The Govt. has set of numbers of recovery tribunals, which

works for recovery of loans and advances. Due to their negligence and ineffectiveness in their

work the bank suffers the consequence of non-recover, their by reducing their profitability and

liquidity.

Wilful 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: This is the major factor, which is creating alarming rise in NPAs of the

PSBs. Even now and then India is hit by major natural calamities thus making the borrowers

18

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 a reduced profit. Mainly our farmers

depend on rain fall for cropping. Due to irregularities of rain fall 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 a low

recovery of their loans reducing their profitability and liquidity.

Lack of Demand: Entrepreneurs in India could not foresee their product demand and starts

production which ultimately piles up their product thus making them unable to pay back the

money they borrow to operate these activities. The banks recover the amount by selling of their

assets, which covers a minimum label. Thus the banks record the non-recovered part as NPAs

and have to make provision for it.

Change in Government Policies: With every new Government banking sector gets new policies

for its operation. Thus it has to cope with the changing principles and policies for the regulation

of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co-

operative societies have become default largely due to withdrawal of state patronage. The

rehabilitation plan worked out by the Central Government to revive the handloom sector has not

yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.

B. Internal Factors

Defective Lending process: There are three cardinal principles of bank lending that have been

followed by the commercial banks since long. i) Principles of safety, ii) Principle of liquidity and

iii) Principles of Profitability. By safety it means that the borrower is in a position to repay the

loan both principal and interest. The repayment of loan depends upon the borrower’s - 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

19

2) Honesty

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.

Inappropriate Technology: Due to inappropriate technology and management information

system, market driven decisions on real time basis cannot be taken. Proper Management

Information System (MIS) and financial accounting system is not implemented in the banks,

which leads to poor credit collection, thus it leads to increase in NPAs. All the branches of the

bank should be computerized.

Improper SWOT Analysis and Findings:- The improper strength, weakness, opportunity and

threat Analysis and Findings: - is another reason for rise in NPAs. While providing unsecured

advances the banks depend more on the honesty, integrity, and financial soundness and credit

worthiness of the borrower.

• Banks should consider the borrowers own capital investment.

• It should collect credit information of the borrowers from bankers; enquiry from

market/segment of trade, industry, business and from external credit rating agencies.

• Analyze the Financial Statements: True picture of business will be revealed on Analysis

and Findings: - of Profit and loss Account and Balance Sheet.

• Purpose of the loan: When bankers give loan, it should analyze the purpose of the loan.

To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank

should analyze the profitability, viability, 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 notable 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 popular maxim “do not keep all

20

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

be affected.

Absence of Regular Industrial Visits: 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 principle on the loan. The NPAs due to wilful defaulters can be collected by regular

visits.

Re-loaning Process: Non remittance of recoveries to higher financing agencies and reloaning of

the same have already affected the smooth operation of the credit cycle. Due to re loaning to the

defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.

The origin of the burgeoning problem of NPAs lies in the quality of managing credit risk by the

banks concerned. What is needed is having adequate preventive measures in place namely, fixing

pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision.

Banks concerned should continuously monitor loans to identify accounts that have potential to

become non-performing.

To start with, performance in terms of profitability is a benchmark for any business enterprise

including the banking industry. However, increasing NPAs have a direct impact on banks

profitability as legally banks 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 Reserve Bank of India (RBI)

guidelines. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the

system through various rate cuts and banks fail to utilize this benefit to its advantage due to the

fear of burgeoning Non-performing assets.

21

V. Data Analysis and Finding

Report on Non Performing Loans by International Monetary Fund

“As per Global Financial Stability Report April 2013, International Monetary Fund - As

typically occurs after a sustained period of strong credit growth, some asset quality deterioration

has begun to appear, even as nonperforming loan rates remain low on a historical basis. Some

major emerging market economies, including Brazil, India, and Mexico, have seen upturns in

delinquency rates for certain types of loans. While many countries have been active in adopting

more stringent impaired loan recognition standards, there are concerns about asset restructuring

practices and lax definition of distressed assets in some cases (Figure 1.75). The resulting risk of

underestimating true asset quality problems appears particularly relevant in China and India. In

China, concerns remain focused on exposures toward local government financing vehicles, but

this must be weighed against the over-provisioning (some 300 percent) of recognized NPLs. In

India, slowing growth and project delays have led to an increase in restructured assets,

amounting to about 6 percent of total loans. In the 2008 cycle, 15 to 20 percent of similar loans

turned nonperforming. Nonetheless, recent annual trends show that on average, 8.5 percent

restructured loans slipped into the nonperforming category.

Despite the balance sheet expansion and moderate upturn in nonperforming loan rates, bank

capital levels remain generally adequate. However, in every region (but especially in eastern

Europe) there is a substantial subset of banks that may not be prepared to absorb losses from

negative shocks (Figure 1.76). Even Asia’s relatively high capital ratios could come under strain

22

if growth disappoints, or, alternatively, if additional capital is required to fund rapid balance

sheet expansion.

Trend Analysis of Non Performing Assets in Indian Banking System

Table 1: Annual Movement of Gross NPA of *Public Sector Banks from 2000-12

Year (End-March) Gross NPA (Rs. In Billion) Gross NPA (In %)

2000-01 546.72 3.09%

2001-02 564.73 3.29%

2002-03 540.90 -4.22%

2003-04 515.37 -4.72%

2004-05 483.99 -6.09%

2005-06 413.58 -14.55%

2006-07 389.68 -5.78%

2007-08 404.52 3.81%

2008-09 449.57 11.14%

2009-10 599.26 33.30%

2010-11 746.14 24.51%

2011-12 1124.89 50.76%

Source: Database on Indian Economy, Reserve Bank of India

Analysis and Findings:- After looking the above table 1 and chart regarding the Gross NPAs of

Public Sector Banks from 2000 to 2012, it is clear that from 2000-01 to 2005-06 trends of NPAs

was on downward from 3.09% to -14.55% but from 2006-07 it took “U” turn and increased

consistently from -5.78% to 50.76%. NPAs of Public Sector Banks has doubled in this 12 years

from Rs. 546.72 billion in 2000-01 to Rs.1124.89 billion in 2011-12, increased +105.75% and

+50.76% in 2011-12 in comparison to 2010-11.

*Note: - Public Sector Banks includes 27 PSU Banks namely State Bank of India and its seven subsidiaries, Bank of

India, Andhra Bank, Allahabad Bank, Bank of Baroda, Bank of Maharashtra, Canara Bank, Central Bank of India,

Corporation Bank, Dena Bank, Indian Overseas Bank, Indian Bank, Oriental Bank of Commerce, Punjab National

Bank, Punjab and Sind Bank, Syndicate Bank, Union Bank of India, United bank of India, UCO Bank, Vijaya Bank.

3.81%, 2007-08

33.30%, 2009-10

50.76%,2011-12

-20.00%

0.00%

20.00%

40.00%

60.00%

Annual Movement of Gross NPA of Public Sector Banks from 2000 to 2012

Gross NPA (In %)

23


Analysis and Findings: - Above table 2 and chart regarding the NPAs of Old Private Sector

Banks from 2000 to 2012 showing the dramatic movement in NPA. From 2000-01 to 2006-07,

NPAs were getting down consistently from 13.92% in 2000-01 to -21.02% in 2006-07. But from

2007-08 it took dramatic turnaround and increased consistently from -13.88% to 20.14% in

2008-09, but after 2009 it became down again from 17.90% in 2009-10 to 1.51% in 2011-12.

This entire picture clear shows that management of NPAs of Old Private Sector Banks is good.

They have managed their NPAs very well in these 12 years.

*Note: - Old Private Sector Banks includes 13 Banks namely Catholic Syrian Bank Ltd., City Union Bank Ltd.,

Dhanalakshmi Bank Ltd., Federal Bank Ltd., ING Vysya Bank Ltd., Jammu and Kashmir Bank Ltd., Karnataka Bank

Ltd., Karur Vysya Bank Ltd., Lakshmi Vilas Bank Ltd., Nainital Bank Ltd, Ratnakar Bank Ltd., South Indian Bank

Ltd., and Tamilnad Mercantile Bank Ltd.

11.62%, 2001-02

-21.02%, 2006-07

20.14%,2008-09

1.51%, 2011-12

-30.00%

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

Annual Movement of Gross NPA of Old Private Sector Banks from

2000 to 2012 Gross NPA (In %)

Table 2: Annual Movement of Gross NPA of *Old Private Sector Banks from 2000-12

Year (End-March) Gross NPAs (Rs. In Billion) Gross NPA (In %)

2000-01 43.46 13.92%

2001-02 48.51 11.62%

2002-03 45.50 -6.20%

2003-04 43.98 -3.34%

2004-05 42.00 -4.50%

2005-06 37.59 -10.50%

2006-07 29.69 -21.02%

2007-08 25.57 -13.88%

2008-09 30.72 20.14%

2009-10 36.22 17.90%

2010-11 36.99 2.13%

2011-12 37.55 1.51%

24

Table 3: Annual Movement of Gross NPAs of *New Private Sector Banks

from 2000 to 2012

Year (End-

March) Gross NPAs (Rs. In Billion) Gross NPA (In %)

2000-01 16.17 70.93%

2001-02 68.11 321.21%

2002-03 72.32 6.18%

2003-04 59.83 -17.27%

2004-05 45.82 -23.42%

2005-06 40.52 -11.57%

2006-07 62.87 55.16%

2007-08 104.40 66.06%

2008-09 138.54 32.70%

2009-10 140.17 1.18%

2010-11 145.41 3.74%

2011-12 141.14 -2.94%


Analysis and Findings: - Above table 3 and chart of Gross NPAs of New Private Sector Banks,

this clearly indicates the trend of Gross NPAs from 2000 to 2012 In 2001-02 NPAs increased

+321.21% in comparison to previous, but after that it became down and came up to -23.42% in

2004-05. From 2005-06, it came on upside up to +66.06% in 2007-08. And again it became

down up to -2.94% in 2011-12, which clearly shows that New Private Sector Banks have

managed their NPAs very well in these 12 years journey. And till end March-12 maintained

negatively.

*Note: - New Private Sector Banks includes 7 Banks namely Axis Bank Ltd., Development Credit Bank Ltd., HDFC Bank

Ltd., ICICI Bank Ltd., IndusInd Bank Ltd., Kotak Mahindra bank Ltd., and Yes Bank ltd.

70.93%, 2000-01

321.21%, 2001-02

66.06%, 2007-08

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

300.00%

350.00%

Annual Movement of Gross NPAs of New Private Sector Banks

from 2000 to 2012 Gross NPA (In %)

25


Analysis and Findings: - After analyzing the above table 4 is regarding Gross NPAs of Foreign

Banks in India, it clear that growth of NPAs was between 18.82% to -24.26% and further follow

up with up to 26.34% from 2000-01 to 2007-08. But after 2008 the dramatic changes became in

its and it increased up to +125.39% in 2008-09 and further follow up with dramatic turn around

and came down to -28.95% in 2010-11. But in 2011-12 it increased +20.30% in comparison to

2010-11.

*Note: - Foreign Banks in India includes 12 International Banks namely American Express Bank Ltd., State Bank of

Mauritius, Bank of America, Antwerp Diamond Bank, DSB Bank Ltd., Barclays Bank, Citi Bank, Deutsche Bank,

Hongkong and Shanghai Banking Corporation (HSBC), Standard Charted Bank, J.P. Morgan Chase Bank, Royal Bank

of Scotland.

18.82%, 2000-01 26.34%, 2007-08

125.39%, 2008-09

10.69%, 2009-10

20.30%, 2011-12

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

120.00%

140.00%

Annual Movement of Gross NPAs of Foreign Banks in India from 2000 to

2012 Gross NPA (In %)

Table 4: Annual Movement of Gross NPAs of *Foreign Banks in India from 2000

to 2012

Year (End-March) Gross NPA (Rs. In Billion) Gross NPA (In %)

2000-01 31.06 18.82%

2001-02 27.26 -12.23%

2002-03 28.45 4.37%

2003-04 28.94 1.72%

2004-05 21.92 -24.26%

2005-06 19.28 -12.04%

2006-07 22.63 17.38%

2007-08 28.59 26.34%

2008-09 64.44 125.39%

2009-10 71.33 10.69%

2010-11 50.68 -28.95%

2011-12 60.97 20.30%

26

Overall Analysis and Findings:-

In case of Public Sector Banks, There were sharp decline in NPAs from Rs. 546.72 billion in

2000-01 to Rs. 389.68 billion in 2006-07. Till this period NPAs declined -28.72%, after that

sharp upside was seen NPAs from Rs. 404.52 billion in 2007-08 to Rs. 1124.89 billion in 2011-

12. Till this period NPAs increased +178.08%. So direction was one side (decline phase from

2000-01 to 2006-07 and up phase from 2007-08 to 2011-12) in case Public Sector Banks NPAs

movement.

In case of Old Private Sector Banks, NPAs were Rs. 48.51 billion in 2001-02, increased

+11.62% in comparison to 2000-01, but it became down up to Rs. 26.91 billion in 2006-07,

decreased -21.02% in comparison to 2005-06 and again became up to Rs.30.72 billion in 2008-

09, increased +20.74% in comparison to 2007-08. After again became down up to +1.51% in

2011-12 in comparison to 2010-11.

In case of New Private Sector Banks, NPAs were Rs. 16.17 billion in 2000-01, +70.96%

increased in comparison to previous, but after 2011, dramatic change was seen and NPAs

jumped to Rs. 68.11 billion in 2001-02, +321.21% increased in comparison to 2000-01. Again it

became down to Rs. 45.82 billion in 2004-05, -23.42% in comparison to 2003-04, but again

jumped to Rs. 104.40 in 2007-08, increased +66.06% in comparison to 2006-07. After that it

became again down up to -2.94% in 2011-12 in comparison to 2010-11.

In case of Foreign Banks in India, NPAs were Rs. 31.06 billion in 2000-01, increased +18.82%

in comparison to previous. After that it became down up to Rs. 21.92 billion in 2004-05, -

24.26% in comparison to 2003-04. But after 2005, the dramatic movement was seen and it

jumped to Rs. 64.44 billion in 2008-09, increased +125.39% in comparison to 2007-08. Again it

became down to Rs. 50.68 billion in 2010-11, -28.95% in comparison to 2009-10. And after

2011, it became up to Rs. 60.97 billion in 2011-12, +20.30% in comparison to 2010-11.

After studying the trend Analysis and Findings: - of Gross NPAs in Public Sector Banks, Old

private Sector banks, New Private Sector Banks and Foreign Banks in India, it is clear that

trend of Gross NPAs in Public Sector Banks is stable means there is one side direction on

upside but in case of Old private Sector Banks, New Private Sector Banks, and Foreign

Banks in India, it’s not directional, huge volatility can be seen here.

27


Analysis and Findings: - The above table 5 and chart regarding Gross NPAs of Schedule

Commercial Banks in India from 2000 to 2012 represents the overall annual movement of Non

Performing Assets in Indian Banking System. There were sharp decline in NPAs from Rs.

708.61 billion in 2001-02 to Rs. 504.86 billion in 2006-07, declined -28.75% in this period, but

after that it took turn around and jumped on upside up, NPAs was Rs. 563.09 billion in 2007-08

and it jumped to Rs. 1370.96 billion in 2011-12, increased +143.47% in this period. So, it is

clear that NPAs of Schedule Commercial Banks are increasing consistently.

*Note: - Schedule Commercial Banks in India includes Public Sector Banks, Old Private Sector Banks, New Private

Sector Banks, and Foreign Banks in India.

11.17%, 2011-02

-13.94%, 2005-06

21.34%, 2008-09

15.61%, 2010-11

40%,2011-12

-20.00%

-10.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Annual Movement of Gross NPAs of Schedule Commercial Banks in

India from 2000 to 2012 Gross NPA (In %)

Table 5: Annual Movement of Gross NPAs of *Schedule Commercial

Banks in India from 2000 to 2012

Year (End-

March) Gross NPA (Rs. In Billion) Gross NPA (In %)

2000-01 637.41 5.52%

2001-02 708.61 11.17%

2002-03 687.17 -3.03%

2003-04 648.12 -5.68%

2004-05 593.73 -8.39%

2005-06 510.97 -13.94%

2006-07 504.86 -1.20%

2007-08 563.09 11.53%

2008-09 683.28 21.34%

2009-10 846.98 23.96%

2010-11 979.22 15.61%

2011-12 1370.96 40%

28

Percentage Composition of Non Performing Assets (NPAs) of Schedule

Commercial Banks (End March 2011 and March 2012)

Source: - http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14629

Table 6: Evaluation of NPAs from *Priority Sector and Non Priority Sector

Sector wise Composition of NPAs March 2011 (In %) March 2012 (In %)

NPAs from Priority Sector 51.80% 46.80%

NPAs from Non Priority Sector 48.20% 53.10%

After Analyzing the above table and matrix regarding NPAs from Priority Sector and Non

Priority Sector, it is clear that NPAs are coming from both the sector more than 45%, but NPAs

are high from Non Priority Sector is 53.10% in March 2012 in comparison to March 2011.

*Note: - Priority Sector includes Agriculture (Direct and Indirect Finance), Micro and Small Enterprises (Direct and

Indirect Finance), Micro Credit, Education Loan, Housing Loan, Weaker Section, Export Credit, and State Sponsored

Organization for Schedule Caste / Schedule tribes. Non Priority Sector includes Industry, Services, and Personal Loans.

29

Assets-wise Classification of Gross Non Performing Assets

Table7: Annual Movement of Assets-wise Classification of Gross NPAs from 2008 to 2012

Banks Group *Sub-Standard Assets *Doubtful Assets *Loss Assets

Public sector banks (In %) (In %) (In %)

2008 20.98% -4.52% -18.67%

2009 15.72% 8.60% 3.67%

2010 41.82% 19.18% 29.60%

2011 21.41% 29.48% 11.88%

2012 79.63% 47.32% -8.64%

Private Sector Banks

2008 66.66% 13.28% 32.15%

2009 44.58% 12.69% 8.12%

2010 -17.57% 30.40% 61.05%

2011 -49.31% 64.09% 31.08%

2012 16.59% -3.92% 1.18%

Foreign Banks in

India

2008 43.60% 21.70% -14.73%

2009 199.25% 30.86% 7.48%

2010 -16.06% 43.50% 81.82%

2011 -62.17% 46.59% 43.64%

2012 11.49% 5.57% 82.38%

Trend Analysis of Assets-wise Classification of Gross NPAs

Trend of Annual Movement of Assets-wise Classification of Gross NPAs of Public Sector

Banks from 2008 to 2012

Analysis and Findings: - After looking the above trend regarding the annual movement of

assets-wise classification of gross NPAs, it is clear that Sub-Standard Assets and Doubtful

Assets increased consistently. Sub-Standard Assets was 20.98% increased in 2008 in comparison

to previous and 79.63% increased in 2012 comparison to 2011. Doubtful Assets was -4.52%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

100.00%

2008 2009 2010 2011 2012

Sub-Standard Assets

Doubtful Assets

Loss Assets

30

decreased in 2008 in comparison to previous and 47.32% increased in 2012 in comparison to

2011. But Loss Assets declined consistently from 2010 to 2012.

Trend of Annual Movement of Assets-wise Classification of Gross NPAs of Private Sector


Analysis and Findings: - Above trend of annual movement of assets-wise classification of

Gross NPAs of private sector Banks from 2008 to 2012 clear states that private sector banks

have better control on NPAs in comparison to public sector banks. Where Sub-Standard Assets

increased 66.66% in 2008 in comparison to previous, but in 2011 it decreased -49.31% in

comparison to 2010. While Doubtful Assets increased consistently from 13.28% to 64.09%

from 2008 to 2011, but after that it declined sharply up to -3.92% in comparison to 2011. The

Loss Assets increased at 61.05% in 2010 in comparison to 2009 and decreased up to at 1.18% in

2012 in comparison to 2011.

Trend of Annual Movement of Assets-wise Classification of Gross NPAs of Foreign Banks

in India from 2008 to 2012

-60.00%

-40.00%

-20.00%

0.00%

20.00%

40.00%

60.00%

80.00%

2008 2009 2010 2011 2012

Sub-Standard Assets

Doubtful Assets

Loss Assets

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

2008 2009 2010 2011 2012

Sub-Standard Assets

Doubtful Assets

Loss Assets

31

Analysis and Findings: - After analyzing the above trend of annual movement of assets-wise

classification of Gross NPAs of Foreign Banks in India from 2008 to 2012. It is clear that Sub-

Standard Assets increased 199.25% in 2009 in comparison to 2008, but after that it decreased up

to -62.17% in 2011 in comparison to 2010. And it increased 11.49% in 2012 in comparison to

2011. Doubtful Assets increased consistently from 21.70% to 46.59% from 2008 to 2011, but

after that it decreased up to 5.57% in 2012 in comparison to 2011. Doubtful Assets increased

consistently from -14.73% to 82.38% from 2008 to 2012. All indicates that management of

NPAs Foreign Banks in India is not well.

*Note:

I. Substandard Assets

With effect from 31 March 2005, a substandard asset would be one, which has remained NPA

for a period less than or equal to 12 months. 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 jeopardise the liquidation of the debt and are characterised by the distinct

possibility that the banks will sustain some loss, if deficiencies are not corrected.

II. Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful 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 substandard, 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.

III. 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.

Gross NPAs = Substandard Assets + Doubtful Assets + Loss Assets

Gross NPAs Ratio of Schedule Commercial Banks from 2007

Source: - http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

The *Gross NPA Ratio (advances) ratio is

loan book. Higher the ratio reflects rising bad quality of loans.

how much Gross NPAs are there on every rupee Gross Advances

clear that Gross NPAs Ratio is increasing consistently from 2.2452 to 2.9384 from 2007

2011-12. Ratio is going for higher side means

country comparison of Gross NPAs Ratio

bad quality of loans, United States is on 7

*Note: Gross NPAs Ratio (%) = (Gross NPAs / Gross Advances) * 100

NPAs Ratio Cross Country Comparison:

Issue No. 6, Dec 2012, Page No 33

0

0.5

1

1.5

2

2.5

3

2.2452

Gross NPAs of Schedule Commercial


32

Gross NPAs Ratio of Schedule Commercial Banks from 2007-08 to 2011

://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

Gross NPA Ratio (advances) ratio is used as a measure of the overall quality of the bank’s

loan book. Higher the ratio reflects rising bad quality of loans. Gross NPAs Ratio indicates that

how much Gross NPAs are there on every rupee Gross Advances in percentage terms. Here,

t Gross NPAs Ratio is increasing consistently from 2.2452 to 2.9384 from 2007

Ratio is going for higher side means bad quality of loans are increasing.

country comparison of Gross NPAs Ratio of 14 countries, it is found that Greece is on the top in

bad quality of loans, United States is on 7th

position, India is on 9th

position and Singapore is last.

Gross NPAs Ratio (%) = (Gross NPAs / Gross Advances) * 100. Source for Gross

NPAs Ratio Cross Country Comparison: Reserve Bank of India, Financial Stability Report,

Issue No. 6, Dec 2012, Page No 33

2.9384

Gross NPAs of Schedule Commercial


08 to 2011-12

used as a measure of the overall quality of the bank’s

Gross NPAs Ratio indicates that

in percentage terms. Here, It is

t Gross NPAs Ratio is increasing consistently from 2.2452 to 2.9384 from 2007-08 to

bad quality of loans are increasing. After cross

Greece is on the top in

position and Singapore is last.

Source for Gross

Financial Stability Report,

33

NPAs of Schedule Commercial Banks Recovered through Various Channels

2010 – 2012

Source: - http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14629

Schedule Commercial Banks can approach Lok Adalats, Debt Recovery Tribunal (DRTs), and

SARFAESI Act for recovery of NPAs. Total number cases referred through these recovery

channels was more than 7 Lakh 47 thousand amount involved Rs. 500 billion in 2010-11, but

recovered only Rs. 157 billion. Total number cases referred was more than 6 Lakh 30 thousand

amount involved Rs. 611 billion in 2011-12, but recovered only Rs. 144 billion. It is clear

showing that recovery of NPAs through these three recovery channels are not working well. 35

Banks approach the DRTs in case they fail to recover total amount of their bad loans through the

SARFAESI Act. At present, there are 33 DRTs and five Debt Recovery Appellate Tribunals

across the country.

Overall Analysis and Findings: - After analysing the Trend of Annual Movement of Assets-

wise Classification of Gross NPAs Schedule Commercial Banks from 2008 to 2012, it is clear

that Sub-Standard Assets of Public Sector Banks continuously increased. But in case of Private

Sector Banks and Foreign Banks in India, it decreased. Doubtful Assets of Public Sector Banks

increased continuously from 2008 to 2012. But in case of Private Sector Banks and Foreign

Banks in India, it increased from 2008 to 2011 but after that it decreased. Loss Assets of Public

Sector Banks increased from 2008 to 2010, but after that it decreased. But in case of Private

Sector Banks it decreased from 2010 also. In case of Foreign Banks in India it increased sharply

after 2011. After studying the Gross NPAs Ratio, it is clear that bad quality of loans are

increasing consistently from 2007-08 to 2011-12 and recovery channel for recovering the NPAs

are not working well.

34

Provisioning Coverage Ratio of Schedule Commercial Banks in India

Source: Reserve Bank of India, Financial Stability Report, Issue No 6, Dec 2012, Page No.42 &

33

Analysis and Findings:- Provisioning Coverage Ratio is the key relationship in analysing assets

quality of the bank is between the cumulative provisions of the bank as on a particular date to

Gross NPAs. It is essentially the ratio of provisioning to gross non-performing assets and

indicates the extent of funds a bank has kept aside to cover loan losses. A high ratio suggests that

additional provisions to be made by the bank in the coming years.

It shows bank’s ability to absorb potential losses from its Non Performing Assets.

Above chart clear indicates that Public Sector Banks and Old Private Sector Banks’ ability to

absorb potential losses from its Non Performing Assets have decreased but increased in case of

New Private Sector Banks and Foreign Banks in India. But in totality ability to absorb potential

losses from its Non Performing Assets of all Schedule Commercial Banks have decreased. After

cross country comparison of Provision Coverage Ratio of 14 countries, it is clear that Brazil is on

top, United States is on 6th

position, India is on 11th

position and Australia is on last.

35

VI. Impact of Gross Non Performing Assets in the Economy at

glance

-100

-80

-60

-40

-20

0

20

40

60

80

Agriculture Grown Rate (in %)

Direct Finance for Agriculture

& Allied Activities (in %)

Indirect Finance for Agriculture

& Allied Activities (in %)

Induatrial Growth Rate (in %)

Finance to Industry (Small,

Medium and Large (In %)

GDP Growth Rate (In %)

GDP Growth Rate (In %)

Table 8: Impact of Gross Non Performing Assets in the Economy at glance

Gross NPAs

Agriculture

Grown Rate

Direct Finance for

Agriculture

Indirect Finance

for Agriculture

Industrial

Growth Rate

Finance to

Industry

(In %) (In %)

& Allied Activities

(In %)

& Allied

Activities (In %) (In %)

(Small,

Medium

and Large

(In %)

2000-01 3.09 -0.2 11.02 45.16 6.4 9.34

2001-02 3.29 6.3 15.05 -3.11 2.7 4.88

2002-03 -4.22 -7.2 22.06 29.89 7.1 28.72

2003-04 -4.72 10 24.48 20.38 7.4 5.9

2004-05 -6.09 1.6 34.92 26.47 9.4 35.15

2005-06 -14.55 5.1 41.05 58.5 9.7 30.08

2006-07 -5.78 4.2 27.69 44.4 12.2 26.68

2007-08 3.81 5.8 24.7 13.17 9.7 23.08

2008-09 11.14 0.1 23.41 18.47 4.4 22.84

2009-10 33.3 1 19.6 31.48 8.4 25

2010-11 24.51 7 13.37 0.94 7.2 23.59

2011-12 50.76 2.5 4.92 -76.95 3.9 21.29

36

Impact of Gross NPAs on Agriculture

Gross NPAs Vs Agriculture Growth Rate

Table 9: Gross NPAs Vs Agriculture Growth Rate from 2000-01 to 2011-12

Year

(End-

March) Gross NPA (In %) Agriculture Growth Rate (%)

2000-01 5.52 -0.2

2001-02 11.17 6.3

2002-03 -3.03 -7.2

2003-04 -5.68 10

2004-05 -8.39 1.6

2005-06 -13.94 5.1

2006-07 -1.2 4.2

2007-08 11.53 5.8

2008-09 21.34 0.1

2009-10 23.96 1

2010-11 15.61 7

2011-12 40 2.5

Source: Agriculture Growth rate :-

http://planningcommission.nic.in/data/datatable/0904/comp_data0904.pdf

Gross NPA :- http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

37

Analysis and Findings:- After Analysis and Findings: - the above table and chart regarding the

Gross NPAs vs. Agriculture Growth Rate, it is clear that when there is the change in the annual

movement of Gross NPAs in comparison to previous year then corresponding change in

Agriculture Growth Rate also.

Where Gross NPAs decreased -5.68% in 2003-04 in comparison to 2002-03 where it was -

3.03%, the resulting effect was Agriculture Growth Rate increased to 10% in 2003-04, where it

was -7.2% in 2002-03. In 2005-06, Gross NPAs decreased to -13.94% in comparison to 2004-05

where it was -8.39%, the resulting effect was Agriculture Growth Rate increased to 5.1% in

2005-06, where it was 1.6% in 2004-05. In 2008-09, Gross NPAs increased 21.34% in

comparison to previous year 2007-08 where it was 11.53%, so that Agriculture Growth Rate also

decreased to 0.1% in 2008-09 in comparison to previous year 2007-08 where it was 5.8%. In

2011-12, Gross NPAs increased 40% in comparison to previous year 2010-11 where it was

15.61%, the resulting effect was Agriculture Rate decreased to 2.5% in 2011-12 in comparison to

previous year 2010-11 where it was 7%.

So, it is clear that how annual movement in Gross NPAs affect the Agriculture Growth Rate.

If Regression and Correlation is done between Annual Movement in Gross NPAs and

Agriculture Growth Rate then we have following results:

Results of Regression & Correlation Analysis and Findings: - between Annual Movement of

Gross NPAs and Agriculture Growth Rate

Multiple R 0.415904193

R Square 0.172976298

Significance F 0.265551282

Correlation -0.415904193

Coefficients Standard Error t Stat P-value

Intercept 4.83420045 1.181155109 4.092774 0.004615

Gross NPA (In %) -0.074586135 0.061641722 -1.20999 0.265551

Analysis and Findings:- Regression is done between two variables one is Independent Variable

and another is Dependent Variable. Here Independent Variable is Annual Movement of Gross

NPAs and Dependent Variable is Agriculture Growth Rate. After doing Regression, we have R

Square also known as the coefficient of determination, is a commonly used statistic to evaluate

38

the model fit of a regression equation. That is, how good are all of your independent variables at

predicting your dependent variable? The value of R-square ranges from 0.0 to 1.0 and can be

multiplied by 100 to obtain a percentage of variance explained, here R Square is 0.17 which

means 17% variability in Agriculture Growth Rate from Gross NPAs or indicates that 17% of the

variance in Agriculture Growth Rate can be predicted from the variable Gross NPAs.

Significance F which measures the likelihood that the model as a whole describes a relationship

that emerged at random, rather than a real relationship. As with the p-value, the lower the

significance F value, the greater the chance that the relationships in the model are real. Here

Significance F is 0.26 which is higher than P-value tells that Gross NPAs have less effect on the

Agriculture Growth Rate, means there are some another variables which affect the Agriculture

Growth Rate also. The P-value is a percentage. It tells how likely it is that the coefficient for that

independent variable emerged by chance and does not describe a real relationship. For example

P-value of .05 means that there is a 5% chance that the relationship emerged randomly and a

95% chance that the relationship is real. Here P-value is very less that is 0.004 means it is 0.4%

that is P-value of this intercept is 99.6% correct.

After doing Correlation between Annual Movement of Gross NPAs and Agriculture Growth

Rate, it is -0.41 which indicates there is negative correlation between Annual Movement of

Gross NPAs and Agriculture Growth Rate, means if Annual Movement of Gross NPAs is on

upside or increasing then Agriculture Growth Rate will decrease or vice-versa.

39

Gross NPAs Vs Direct Finance for Agriculture & Allied Activities by

Schedule Commercial Banks

Table 10: Gross NPAs Vs Direct Finance for Agriculture

& Allied Activities by Schedule Commercial Banks from 2000-01 to 2011-12

Year (End-

March)

Gross NPA

(In %) Direct Finance for Agriculture & Allied Activities (%)

2000-01 5.52 11.02

2001-02 11.17 15.05

2002-03 -3.03 22.06

2003-04 -5.68 24.48

2004-05 -8.39 34.92

2005-06 -13.94 41.05

2006-07 -1.2 27.69

2007-08 11.53 24.70

2008-09 21.34 23.41

2009-10 23.96 19.96

2010-11 15.61 13.37

2011-12 40 4.92


Analysis and Findings:- After analysing the above table and chart regarding the Annual

Movement of Gross NPAs vs. Direct Finance for Agriculture and Allied Activities by Schedule

Commercial Banks from 2000-01 to 2011-2012, it is clear that when Annual Movement of Gross

NPAs is increasing then Direct Finance for Agriculture and Allied Activities by Schedule

Commercial Banks is decreasing or vice-versa.

40

Results of Regression & Correlation Analysis and Findings: - between Annual Movement

of Gross NPAs and Direct Finance for Agriculture & Allied Activities by Schedule

Commercial Banks


R Square 0.587653523




Intercept 25.87631177 2.225895552 11.625124 0.000000393522179633441

Gross NPA (In

%) -0.4942279 0.130917508 -3.775109 0.003630972

In this Regression Independent Variable is Annual Movement of Gross NPAs and Dependent

Variable is Direct Finance for Agriculture and Allied Activities by Schedule Commercial Banks.

After doing Regression, R Square is 0.58 which means 58% variability in Direct Finance for

Agriculture and Allied Activities by Schedule Commercial Banks from Annual Movement of

Gross NPAs or indicates that 58% of the variance in Direct Finance for Agriculture and Allied

Activities by Schedule Commercial Banks can be predicted from the variable Annual Movement

of Gross NPAs. As with the P-value, the lower the significance F value, the greater the chance

that the relationships in the model are real, here Significance F is 0.003630972 which is lower as

with the P-value shows that the relationship between dependent variable and independent

variable in the model are real. Here P-value is very less that is 0.000000393522179633441

means it is 0.0% that is this P-value of intercept is 100% correct.

After doing Correlation between Annual Movement of Gross NPAs and Direct Finance for

Agriculture and Allied Activities by Schedule Commercial Banks, it is -0.76 which indicates

there is highly negative correlation between Annual Movement of Gross NPAs and Direct

Finance for Agriculture and Allied Activities by Schedule Commercial Banks, means if Annual

Movement of Gross NPAs is on upside or increasing then Direct Finance for Agriculture and

Allied Activities by Schedule Commercial Banks will decrease or vice-versa.

41

Gross NPAs Vs Indirect Finance for Agriculture & Allied Activities by

Schedule Commercial Banks

Table 11: Gross NPAs Vs Indirect Finance for Agriculture

& Allied Activities by Schedule Commercial Banks from 2000-01 to 2011-12

Year (End-

March)

Gross NPA

(In %)

Indirect Finance for Agriculture & Allied Activities (In

%)

2000-01 5.52 45.16

2001-02 11.17 -3.11

2002-03 -3.03 29.89

2003-04 -5.68 20.38

2004-05 -8.39 26.47

2005-06 -13.94 58.50

2006-07 -1.2 44.40

2007-08 11.53 13.17

2008-09 21.34 18.47

2009-10 23.96 31.48

2010-11 15.61 0.94

2011-12 40 -76.95


42


of Gross NPAs and Indirect Finance for Agriculture & Allied Activities by Schedule

Commercial Banks


R Square 0.5770105




Intercept 31.018876 7.764679521 3.994869 0.002539267

Gross NPA (In %) -1.6867222 0.456684723 -3.69341 0.004153432

Analysis and Findings:- In this Regression Independent Variable is Annual Movement of Gross

NPAs and Dependent Variable is Indirect Finance for Agriculture and Allied Activities by

Schedule Commercial Banks. After doing Regression, R Square is 0.57 which means 57%

variability in Indirect Finance for Agriculture and Allied Activities by Schedule Commercial

Banks from Annual Movement of Gross NPAs or indicates that 57% of the variance in Indirect

Finance for Agriculture and Allied Activities by Schedule Commercial Banks can be predicted

from the variable Annual Movement of Gross NPAs. As with the P-value, the lower the

significance F value, the greater the chance that the relationships in the model are real, here

Significance F is 0.0041534 which is lower as with the P-value shows that the relationship

between dependent variable and independent variable in the model are real. Here P-value is very

less that is 0.002 means it is 0.2% that is the P-value of this intercept is 99.8% correct.

After doing Correlation between Annual Movement of Gross NPAs and Indirect Finance for

Agriculture and Allied Activities by Schedule Commercial Banks, it is -0.75 which indicates

there is highly negative correlation between Annual Movement of Gross NPAs and Indirect

Finance for Agriculture and Allied Activities by Schedule Commercial Banks, means if Annual

Movement of Gross NPAs is on upside or increasing then Indirect Finance for Agriculture and

Allied Activities by Schedule Commercial Banks will decrease or vice-versa.

43

Impact of Gross NPAs on Industry

Gross NPAs Vs Industrial Growth Rate

Table 12: Gross NPAs Vs Industrial Growth Rate from 2000-01 to 2011-12

Year

(End-

March) Gross NPA (In %) Industrial Growth Rate (%)

2000-01 5.52 6.4

2001-02 11.17 2.7

2002-03 -3.03 7.1

2003-04 -5.68 7.4

2004-05 -8.39 9.4

2005-06 -13.94 9.7

2006-07 -1.2 12.2

2007-08 11.53 9.7

2008-09 21.34 4.4

2009-10 23.96 8.4

2010-11 15.61 7.2

2011-12 40 3.9

Source: Industrial Growth Rate: -


Gross NPA: - http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home

44


of Gross NPAs and Industrial Growth Rate


R Square 0.42209781




Intercept 8.70180362 0.71531968 12.1649 0.00000193194360630492

Gross NPA (In

%) -0.094988 0.039295633 -2.4173 0.042029016


NPAs and Dependent Variable is Industrial Growth Rate. After doing Regression, R Square is

0.42 which means 42% variability in Industrial Growth Rate from Annual Movement of Gross

NPAs or indicates that 42% of the variance in Industrial Growth Rate can be predicted from the

variable Annual Movement of Gross NPAs. As with the P-value, the lower the significance F

value, the greater the chance that the relationships in the model are real, here Significance F is

0.042 which is lower as with the P-value shows that the relationship between dependent variable

and independent variable in the model are real. Here P-value is very less that is 0.00 means it is

0.0% that is the P-value of this intercept is 100% correct.

After doing Correlation between Annual Movement of Gross NPAs and Industrial Growth Rate,

it is -0.64 which indicates there is highly negative correlation between Annual Movement of

Gross NPAs and Industrial Growth Rate, means if Annual Movement of Gross NPAs is on

upside or increasing then Industrial Growth rate will decrease or vice-versa.

45

Gross NPAs Vs Finance to Industry (Small, Medium, and Large) by Schedule

Commercial Banks

Table 13: Gross NPAs Vs Finance to Industry (Small. Medium and Large)

by Schedule Commercial Banks from 2000-01 to 2011-12

Year (End-

March)

Gross NPA (In

%)

Finance to Industry (Small, Medium and Large)

(In %)

2000-01 5.52 9.34

2001-02 11.17 4.88

2002-03 -3.03 28.72

2003-04 -5.68 5.92

2004-05 -8.39 35.15

2005-06 -13.94 30.08

2006-07 -1.2 26.68

2007-08 11.53 23.08

2008-09 21.34 22.84

2009-10 23.96 24.66

2010-11 15.61 23.59

2011-12 40 21.29


Analysis and Findings:- After looking the above chart and table regarding the Annual

Movement of Gross NPAs and Finance to Industry (Small, Medium, and Large) by Schedule

Commercial Banks, it is clear that from 2004-05, Annual Movement of Gross NPAs affects the

Finance to Industry (Small, Medium, and Large) by Schedule Commercial Banks, means if

Annual Movement of Gross NPAs in on upside then Finance to Industry (Small, Medium, and

Large) by Schedule Commercial Banks is decreasing.

46

Results of Regression & Correlation Analysis and Findings: - between Annual Movement of

Gross NPAs and Finance to Industry (Small, Medium, and Large) by Schedule Commercial

Banks


R Square 0.695593601



Coefficients

Standard

Error t Stat P-value

Intercept 28.28929846 1.163808191 24.30753 0.0000003186687154970950

Gross NPA (In %) -0.213073757 0.057544449 -3.70277 0.010055342


NPAs and Dependent Variable is Finance to Industry (Small, Medium, and Large) by Schedule

Commercial Banks. After doing Regression, R Square is 0.69 which means 69% variability in

Finance to Industry (Small, Medium, and Large) by Schedule Commercial Banks from the

Annual Movement of Gross NPAs or indicates that 69% of the variance in Finance to Industry

(Small, Medium, and Large) by Schedule Commercial Banks can be predicted from the variable

Annual Movement of Gross NPAs. As with the P-value, the lower the significance F value, the

greater the chance that the relationships in the model are real, here Significance F is 0.010 which

is lower as with the P-value shows that the relationship between dependent variable and

independent variable in the model are real. Here P-value is very less that is 0.00 means it is 0.0%

that is the P-value of this intercept is 100% correct.

After doing Correlation between Annual Movement of Gross NPAs and Finance to Industry

(Small, Medium, and Large) by Schedule Commercial Banks, it is -0.83 which indicates there is

highly negative correlation between Annual Movement of Gross NPAs and Finance to Industry

(Small, Medium, and Large) by Schedule Commercial Banks, means if Annual Movement of

Gross NPAs is on upside or increasing then Finance to Industry (Small, Medium, and Large) by

Schedule Commercial Banks will decrease or vice-versa.

47

Impact of Gross NPAs on Banking

Gross NPAs always have impact on Banking, various studies done by others clearly shows how

Gross NPAs is responsible for negative impact on Banking like, Meena Sharma (2005) has

examined and find the NPAs affect a negative impact on the profitability, productivity,

achievement of capital adequacy level, funds deployment and mobilization policy, credibility of

the banking system and overall economy Ramakrishna Reddy. D and T.Sree Bhargavi (2004)

have identified the impact of NPAs on different financial parameters viz., ROA, ROE, CAR,

banks profitability etc. and indentified the NPAs are not just a problem for the banks, and they

are bad for the economy also. .

Non Performing Assets of banks are hurdles in economic growth and development of the

respective nations and breed multiple challenges for present and future. Every aspect of life,

business and other events are judged by their performance and ultimate result. Thus, the size of

the banks and its balance sheet is not only the criteria to judge the efficiency, effectiveness and

performance but also the level of return on its assets. The NPAs generally do not generate

interest income for banks but at the same time they are bound to provide provisions for NPAs

from their current profits and are major cause of concern. Profits are used for provisioning of

NPAs, which can be used for further capital formation and growth of Banking Sector.

The three letters “NPA” strike terror in banking sector and business circle today. NPA is short

form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other

due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a

non-performing asset. The recovery of loan has always been problem for banks and financial

institution. To come out of these, the banks first needs to think is it possible to avoid NPA, if not

be then it is to look at the factor responsible for it and managing those factors.

In the globalization era, banking and financial sectors get high priority. Indian banking sector is

having a serious problem due to non performing assets. The earning capacity and profitability of

the bank are highly affected. While the primary function of banks is to lend funds as loans to

various sectors such as agriculture, trade, personal loans, housing loans etc., In recent times the

banks have become very careful in increasing loans because of the main reason of increasing

non-performing assets (NPAs). NPA is cleared as an advance for which interest or repayment of

principal or both remain outstanding for a period of more than 90 days. The level of NPA act as

an indicator viewing the bankers credit risks and competence of allocation of resource. Non-

performing Asset is an important factor in the Analysis and Findings: - of financial performance

48

of a bank as it results in decreasing boundary and higher provisioning requirement for doubtful

debts. Various banks from different groups mutually provide advances to different sectors like

agricultural, priority sector, public sector and others.

The accumulation of huge non-performing assets in banks has assumed great importance. The

depth of the problem of bad debts was assumed great importance, which was first realized only

in early 1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000/-

crores. While gross NPA reflects the quality of the loans made by banks, net NPA shows the

actual burden of banks. Now it is increasingly evident that the major defaulters are the big

borrowers coming from the non-priority sector. The banks and financial institutions have to take

the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure

prominently in the debate not only because they dominate the banking industries, but also since

they have much larger NPAs compared with the private sector banks. This raises a concern in the

industry and academics because it is generally felt that NPAs reduce the profitability of a bank,

weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework

has evolved for the management of NPAs under which several options are provided for debt

recovery and restructuring. Banks and Financial Institutions have the freedom to design and

implement their own policies for recovery and write-off incorporating compromise and

negotiated settlements. The impact of NPAs on banks is significantly visible on the following

areas:

Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong

choice of client. Because of the money getting blocked the prodigality of bank decreases not

only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested

in some return earning project/asset. So, NPA doesn’t affect current profit but also future stream

of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of

reduction in profitability is low Return on Investment (ROI), which adversely affect current

earning of bank.

Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash and which

lead to borrowing money for shortest period of time which leads to additional cost to the

company. Difficulty in operating the functions of bank such as routine payments and dues is

another cause of NPA due to lack of money.

49

Involvement of Management: Time and efforts of management is another indirect cost which

bank has to bear due to NPA. Time and efforts of management in handling and managing NPA

would have diverted to some fruitful activities, which would have given good returns. Now a

day’s banks have special employees to deal and handle NPAs, which is additional cost to the

bank.

Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms

of market credit. It will lose its goodwill and brand image and credit which have negative impact

to the people who are putting their money in the banks.

� Further it has following deep impact on the return on assets :-

� The general interest income of banks will decline and will be accounted only on receipt

basis.

� Due to decline in interest income banks profitability get affected adversely because of the

providing of doubtful debts and consequent to writing it off as bad debts.

� Return on investments (ROI) gets reduced.

� The capital adequacy ratio gets disturbed due to inclusion of NPAs into its calculation.

� Due to uncertainty in return, high risk and NPAs the cost of capital will go up.

Due to NPAs, assets and liability mismatch increases. The Economic Value Addition (EVA) by

banks gets disturb, it is because EVA is equal to the Net Operating Profit minus Cost of Capital

and thus, it reduces recycling of the funds. As results are showing that when Gross Non

Performing Assets are increasing then bank’s ability to provide Direct and Indirect finance

facility for Agricultural and Allied Activities and Finance to small, medium and large industry is

decreasing.

50

VII. Review of Problem of Non Performing Assets by Print Media

Focus on Problem of NPAs by Print Media – Non Performing Assets in Indian

Banks – Business Standard, 11 Feb 2013

An article published by Business Standard, 11 Feb 2013 and author was Director –

General, Comptroller Auditor General of India.

Focus Points of Non Performing Assets in Indian Banks, Business Standard, 11 Feb 2013

As per the author “The Global rating agency, Moody’s, in its latest report of 2013, has

downgraded Indian Banking System’s rating outlook from ‘stable’ to ‘negative’. The

Reserve Bank of India (RBI) has also observed in its second quarter review of monetary

policy 2012-13 that the Non Performing Assets (NPAs) and restructured loans of banks

have been increasing significantly and major reason for deterioration in the assets quality

of banks is the lack of effective timely information exchange among banks on credit,

derivatives and un-hedged foreign currency exposure.”

“Latest quarterly results of banks shoe that NPAs of at least 35 banks rose from the last

fiscal 2011-12 by 28 percent reaching over Rs. 32000/- crore in the fast half of the current

financial year”

51

Govt Banks’ Profits Erode as Chiefs Worry About NPAs The Economic Times, 13 Feb

2013

Focus Points of Govt Banks’ Profits Erode as Chiefs Worry About NPAs Business Standard, 13

Feb 2013

As per the reporting “Analysts feel the act of cleaning up balance sheets immediately after

taking over is almost a trend now and happens too often to be mere coincidence. SBI’s

almost 100% fall in net profit on higher bad loans disclosure and provisioning to cover in

2011-12.

52

Top 30 Bad Loans Make for Half of NPAs, The Economic Times, 04 July 2013

Focus Points

“The ratio is highest for foreign banks with the top 30 non-performing loans accounting for

84% of the gross NPAs as on March 2013. In case of state-run banks, Bank of India has the

worst record on this count. Its top 30 NPAs account for 73.4% of the gross non performing

loans at end of March 2013. For public sector banks, the top 30 NPAs added up to worth

61,123 crore, constituting 39.7% of the Gross NPAs. Besides Bank of India, the other nine

state run banks where the top 30 NPAs are above 50% of gross NPAs include Andhra

Bank, Punjab &Sind bank, United Bank of India, Corporation Bank, Indian Bank, Vijaya

Bank, UCO bank and State Bank of Hyderabad. In case of new private sector banks, the

top 30 NPAs added up to 5,114 crore, 34.6% of gross NPAs, while for old private sector

banks it is 66.4% of gross NPAs.”

53

VIII. Suggestion improvement in reducing the NPAs, present policies,

procedures, etc., on the basis of the findings –

A strong financial system is central to the objective of strengthening the real economy of a

country and for its healthy and orderly growth. A financial system is a complex, well-integrated

set of sub-systems of Financial Institutions, Markets, Instruments, and Services which facilities

the transfer and allocation of funds, efficiently and effectively. Financial Institutions are

intermediaries that mobilize savings and facilitate the allocation of funds from surplus units to

deficit unit in an efficient manner. Good financial institutions are vital to the functioning of an

economy.

The financial systems of most of the developing countries are characterized by coexistence and

cooperation between the formal and informal financial sectors. The Indian financial system can

also be broadly classified into the formal (organized) financial system and the informal

(unorganized) financial system. In India, the financial sector comprises of banking and non-

banking financial institutions. There is no hard and fast rule to distinguish between banking and

nonbanking institutions. The banking system is at the heart of the financial system. The Indian

financial system comprises a large number of commercial and cooperative banks specialized

developmental banks for industry, agriculture, external trade and housing, social security

institutions, collective investment institutions, etc.

Banks play a very useful and dynamic role in the economic life of every modern state. They are

important constituents of the money market and their demand deposits serve as money in the

modern community. Banks can work as catalytic agents of growth by following the right kind of

policies in their working, depending upon the socioeconomic conditions prevailing in a country.

It is realized that since the banks have the required investment potentiality, they can make a

significant contribution in eradicating poverty, unemployment, and they can bring about

progressive reduction in inter-regional, inter-state, and inter sectoral disparities through rapid

expansion of banking services.

India’s banking system has several outstanding achievements to its credit. The Banks are the

main participants of the financial system in India. The Banking sector offers several facilities and

opportunities to their customers. All the banks safeguards the money and valuables and provide

loans, credit and payment services, such as checking accounts, money orders and cashier’s

cheques. The banks also offer investment and insurance products.

54

The Indian banking system has the Reserve Bank of India at the apex. It is the nerve centre of the

Indian monetary system. Since inception, the RBI has been guiding, monitoring, regulating,

controlling and promoting the destiny of the financial system in India. The commercial banks

help the economic development of a country by faithfully following the monetary policy of the

central bank i.e. RBI.

Within the banking institutions, the role of commercial banks has occupied a new meaning and

significance, in view of the changing structure and requirements of a developing economy. The

increasing horizon of commercial banks identifies itself with the problems and responsibilities

for making banking an instrument for bringing about an instrument for bringing about social and

economic transformation of a developing country. The banking is a basic industry, which not

only caters to the development of a trade, commerce and industry, but also helps in removing

many obstacles in the way of economic development.

Bank as an Institution, dealing with lending and collection of money in its most primitive and the

business of banks is to deal in money and with people. The activity of banking has to be carried

out to ensure healthy growth of the economy. Banks and borrowers face the future with

unpredictable uncertainties caused by the dynamics and have to adapt to the changing situations.

While banks have to instil confidence among the depositors and continue to maintain the

confidence level to continuously enjoy their patronage, they would like to have the same level of

confidence to lend to borrowers and of getting back the funds and when they require. Here lies

the problem; public confidence in banks and their confidence in borrowers have a direct link

with ‘Non Performing Assets’ (NPAs). More NPAs mean public/ depositors to that extent lose

confidence in bank’s ability to run the business effectively, efficiently and as viable units and

safeguard their interests. Such weak banks themselves lose confidence in identifying and

selecting the borrowers for their future expansion of credit and its safe return.

Uncertainty about the future scares the depositors, bankers and the borrowers. As such, the

bankers particularly need to know to stand on their own legs with the required financial strength

and managerial competence. Affordability of the RBI and the Government to continue to

support, banking system that is not so healthy is a matter of concern, but, is essential for healthy

growth of the economy.

55

The remedies attempted so far have certainly helped to create awareness about the serious of the

problem particularly among the bankers which reflect in their overall business complexion.

However, despite these measures, the borrowers do not seem to be concerned or affected and

they continue to be recalcitrant as they do not seem to be bothered about the NPAs created by

them, other than enjoying the benefits which they do not deserve. As stated earlier, Business

Ethics are fast disappearing and the safety of public money in borrowers hand is becoming a

major concern.

The remedies attempted so far have certainly helped to create awareness about the serious of the

problem particularly among the bankers which reflect in their overall business complexion.

However, despite these measures, the borrowers do not seem to be concerned or affected and

they continue to be recalcitrant as they do not seem to be bothered about the NPAs created by

them, other than enjoying the benefits which they do not deserve. As stated earlier, Business

Ethics are fast disappearing and the safety of public money in borrowers hand is becoming a

major concern.

A careful review of the available literature on NPAs reveals that NPs are to a great extent caused

due to the very nature of banking business involving people, money and environment. The

business environment is dependent on political, economical, social, and technological

developments which are influenced by the natural process of changes. Reforms have become the

order of the day and the changes are inevitable. The ability of banking to adjust and service these

changes and continue to be in business giving life support to the economy has been under

Constant threat because of the continued persistence of the problem of NPAs.

The positive side of reforms is that the banks have come to know of their real health and the bad

borrowers have been exposed. The negative aspect of the reforms that are banks shy away from

real banking business and try to keep the borrowers away and resort to relatively safer avenues

of Investment. If this trend continues, it will weaken the Economy, public will lose confidence in

Banking system and banks themselves would become difficult in conducting normal banking

business.

There is ample evidence in literature that the magnitude of the problem of NPAs is severe,

affecting the depositors, borrowers, shareholders, the economy and the public, particularly the

tax payers. Accumulated NPAs, fluctuations and narrow activity in the market are some of the

major issues which derail the major economics activities. Unless and until a lasting solution is

56

found to contain and minimize the problem and its impact, the banking system and the economy

cannot expect to contribute for the overall development of the country. Their mutual interests

also get greatly affected.

Many research studies have been taken up so far on the management of NPAs. However, the

main focus was laid only on identifying causes of NPAs and extending suggestions in the form

of some measures to be taken at micro level, that too specific to some individual banks.

Realizing the need, the present study has been proposed to make a comparative study of Public

Sector Banks, Old Private Sector Banks, New Private Sector Banks, Foreign Banks in India, and

Schedule Commercial Banks in India which is combination of Public Sector Banks, Old Private

Sector Banks, New Private Sector Banks, and Foreign Banks in India with regard to their Trend

Analysis and Findings: - of their Gross NPAs from 2000 – 2001 to 2011 – 2012, Assets-wise

Classification of Gross NPAs means Trend Analysis and Findings: - of Sub-Standard

Assets, Doubtful Assets, and Loss Assets of Public Sector Banks, Private Sector Banks,

includes both Old Private Sector Banks and New Private Sector Banks and Foreign Banks in

India from 2008 - 2012. Impact of Gross NPAs of Schedule Commercial Banks on

Agriculture Rate, Industrial Growth Rate, Direct Finance for Agriculture and Allied

Activities by Schedule Commercial Banks, Indirect Finance for Agriculture and Allied

Activities by Schedule Commercial Banks, Finance to Industry (Small, Medium and Large)

by Schedule Commercial Banks from 2000 – 2001 to 2011 - 2012 and Banking.

57

(1) Formulation of Non Performing Assets Index – NPAs Index

Problem of Non Performing Assets is the major problem in Indian Banking System. In 2005- -

2006 Gross NPAs of Schedule Commercial Banks was at -13.94% and after that it moved on

upside, it was 40% in 2011 – 2012, so it has been analyzed that Gross NPAs of the Schedule

Commercial Banks have jumped on upside very fast in last couple of year and only a barometer

or benchmark can help to reduce this problem because any such big movement in Stock Market,

Commodity Market, Forex Market, Government Securities Market, market could have been

foreseen and controlled as there are dedicated indices, In India Stock Market has two major

indices named S&P SENSEX (Index of Bombay Stock Exchange Limited), and NIFTY (Index

of National Stock Exchange of India Limited) which represents the movement in the Indian

Stock Market and growth and movement in 22 sectors of the economy in terms of stock prices,

In Commodity Market MCX COMDEX which has sub indices namely MCX METAL INDEX,

MCX ENERGY INDEX, and MCX AGRI INDEX which represents the performance of

commodities market and would be an ideal investment tool in commodities market over a period

of time, In Forex Market, at international level US Dollar Index (USDX) is there which is

an index (or measure) of the value of the United States dollar relative to a basket of foreign

currencies. It is a weighted geometric mean of the dollar's value compared only with "baker" of 6

other major currencies which are: Euro (EUR), 57.6% weight, Japanese yen (JPY) 13.6%

weight, Pound sterling (GBP), 11.9% weight, Canadian dollar (CAD), 9.1% weight, Swedish

krona (SEK), 4.2% weight, and Swiss franc (CHF) 3.6% weight.

Which reflects the movement in US Dollar against 6 major currencies, In Indian Government

Securities Market NSE Government Securities Index has launched by NSW which represents

prices components off the NSE Benchmark ZCYC (Zero Coupon Yield Curve), so that

movements reflect returns to an investor on account of change in interest rates only. And

regulatory measures to control such movements. Even small changes in any of the above

mentioned markets is capitalized and converted into profits. If the NPAs will have a proper

benchmark and a platform, then NPAs can be effectively managed and reduced because

benchmark shows what is happening in the market for example, for growth rate GDP is

benchmark which reflects the growth rate in the economy and participants in the market

react accordingly and volatility in Gross NPAs can be used for heavy financial benefits

with the help of benchmark for NPAs. Bank can very well judge their exposure in NPAs

and determine their risk premium with that benchmark. After looking the need of the

benchmark for NPAs, there is a need of a benchmark of NPAs which can be “Non –

Performing Assets Index – NPA Index” – a solution the problem of Gross NPAs.

58

Types of Non Performing Assets Index

There are following two types of Non Performing Assets Indices namely,

Types of Non Performing Assets Indices

Gross Banking NPA Index

Benchmark Index which is created to reflect Gross NPAs in Indian Banking Industry

(A) Industry

wise

(B) Assets wise

Agri NPAs

Index

SME NPAs

Index

Other Priority

NPAs Index

Non –Priority

NPAs Index

Agri -

Substandard

NPAs Index

SME -

Substandard

NPAs Index

Other Priority

- Substandard

NPAs Index

Non Priority -

Substandard

NPAs Index

Agri -Doubtful

NPAs Index

SME -

Doubtful NPAs

Index

Other Priority -

Doubtful NPAs

Index

Non Priority -

NPAs Index

Agri - Loss

NPAs Index

SME - Loss

NPAs Index

Other Priority -

Loss NPAs

Index

Non Priority -

Loss NPAs

Index

Tree of Gross NPAs Indices

A. Industry wise NPAs Indices

1) Agri NPAs Index

2) SME NPAs Index

3) Other Priority NPAs Index

4) Non-Priority NPAs Index

B. Assets wise NPAs Indices

1) Substandard NPAs Index

a) Agri Substandard NPAs Index

b) SME Substandard NPAs Index

59

c) Other Priority Substandard NPAs Index

d) Non – Priority Substandard NPAs Index

2) Doubtful NPAs Index

a) Agri Doubtful NPAs Index

b) SME Doubtful NPAs Index

c) Other Priority Doubtful NPAs Index

d) Non – Priority Doubtful NPAs Index

3) Loss NPAs Index

a) Agri Loss NPAs Index

b) SME Loss NPAs Index

c) Other Priority Loss NPAs Index

d) Non – Priority Loss NPAs Index

So, there are two types of Gross Banking NPA Index namely,

I. Gross Banking NPAs Index – Assets wise

1) Substandard NPAs Index

2) Doubtful NPAs Index

3) Loss NPAs Index

II. Gross Banking NPAs Index – Industry wise

1) Agri NPA Index

2) SME NPAs

3) Other Priority NPAs Index

4) Non-Priority NPAs Index

60

Explanation of Tree of NPAs Indices

Gross Banking NPA Index: Benchmark Index which is created to reflect Gross NPAs in Indian

Banking Industry.

A. Industry wise: Four Industry type indices are proposed to cover Industry defined

category exposure of NPAs.

1) Agri NPAs Index: This Index will reflect the Agriculture related Loans and

Advances, which turns into Non Performing Assets (NPAs). This index will

comprise of following indices:

a) Agri Substandard NPAs Index

b) Agri Doubtful NPAs Index

c) Agri Loss Assets NPAs Index

2) SME NPAs Index: Small and Micro Enterprise NPA Index will reflect the SME

related Loans and Advances, which turns into Non Performing Assets (NPAs).

This index will comprise of following indices:

a) SME Substandard NPAs Index

b) SME Doubtful NPAs Index

c) SME Loss NPAs Index

3) Other Priority NPAs Index: This index will reflect the Non Performing Assets

movement of Other Priority Sectors. This index will comprise of following

indices:

a) Other Priority Substandard NPAs Index

b) Other Priority Doubtful NPAs Index

c) Other Priority Loss NPAs Index

4) Non Priority NPA Index: This index will reflect the Non Performing Assets

movement of Non Priority Sectors. This index will comprise the following:

a) Non Priority Substandard NPA Index

b) Non Priority Doubtful NPA Index

61

c) Non Priority Loss NPA Index

B. Assets wise: Industry wise classification of nonperforming assets further into the

following three categories based on the period for which the asset has remained

nonperforming and the reliability of the dues. This index will comprise the following:

1) Substandard NPAs Index :- This index will reflect the movement of those NPAs

which has remained NPA for a period less than equal to 12 months

2) Doubtful NPAs Index :- This index will reflect the movement of those NPAs

which has remained in the substandard category for a period of 12 months

3) Loss NPAs Index: - This index will reflect the movement those NPAs which is

loss asset is one identified by Bank or internal or external.

Importance of Non Performing Assets Index

There are following importance of Non Performing Assets Index:

� It will be Early Warning Signal to the Indian Banking Industry

� Assistance to Credit Analyst in Indian Banking Industry

� Determination of Premium and Discount of NPA Portfolio to Securitisation Companies /

Reconstruction Companies

� It will provide a focused direction from objectivity to subjectivity to the RBI to take

decision on Sector Specific Credit Risk

� Improve Capital Recovery factor of the Bank

� Helps to the Borrower to judge its own Gearing

� It will increase the Productivity of NPA of the Banks

� True Price Discovery of NPA

� If it is tradable in the market then will provide good hedging opportunity to the Bank to

hedge its own NPA

� It will give new barometer to the market to capitalize high financial benefits

� Helps in Qualitative Debt Restructuring

62

Beneficiaries of NPAs Indices

There are following beneficiaries of NPAs Indices:

� Primary Beneficiary (Banks/Assets Reconstruction Companies / Securitisation

Companies):- Till Now Non Performing Assets have always been a part of Assets for the

banks but they don’t participate in circulation of money in the economy, hence it does not

contribute to any value addition to the Indian Banking System. Formulating the Index

and preparing a benchmark for the Banks and Financial Institutions will be helpful for

measuring the exposure in NPAs in the right direction as well as determining the risk

premium accordingly.

� Secondary Beneficiary (DIIs (Domestic Institutional Investors) & FIIs (Foreign

Institutional Investors / Assets Management Companies / Government):- After

successful implementation of NPA Index, if the Non Performing Assets generate a value

addition, the index can be tradable in the Market. If it becomes tradable DIIs (Domestic

Institutional Investors) will have something stable and of High Capital value to invest in,

and generate profit from it. These will be same applicable to FIIs (Foreign Institutional

Investors). Assets Management Companies manage a very huge capital to generate the

Return having low Risk. Opening Investment in Non Performing Assets through NPA

Index will open the wonderful opportunity to have an exposure in Indexed NPAs which

will lead to diversification and generate profit it. If NPA Index is there, then Banks are in

a Position to manage their NPAs very well in a systematic way. This will minimize the

reimbursement done by the Government leading in more fruitful allocation of Budget

Expenditure.

� Benefit to the Government: If NPA Index is there, then Banks are in a Position to

manage their NPAs very well in a systematic way. This will minimize the reimbursement

done by the Government leading in more fruitful allocation of Budget Expenditure.

� Benefit to Economy: - With the help of NPAs index, NPAs will be managed very well

and banks ability to provide credit facility in the economy will be increases which

enhance the growth in the economy.

� Benefit to the Agriculture: - As it has seen that when Gross NPAs increase then banks

ability to provide Direct and Indirect Finance for Agriculture and Allied Activities

decrease. There is high negative correlation between Gross NPAs and Direct and Indirect

Finance for Agriculture and Allied Activities by banks. If NPAs Index is there this will

63

reduce the Gross NPAs and will increase the bank’s ability to provide finance for

agriculture and allied activities.

� Benefit to the Industry: - As it has seen that when Gross NPAs increase then banks

ability to provide Finance to Industries (Small, Medium and Large) decrease. There is

high negative correlation between Gross NPAs and Finance to Industries (Small, Medium

and Large) by banks. If NPAs Index is there this will reduce the Gross NPAs and will

increase the bank’s ability to provide finance to Industries (Small, Medium and Large).

� Benefit to the profitability of the Banks: - As per the RBI guidelines, banks are

required to make provision regarding their NPAs, so more Gross NPAs means more

provision and all the profit of the banks are used in provisions for NPAs only. If NPAs

Index will be there then NPAs will be under controlled and less provision are required for

NPAs from the profits of the banks and bank will use those profit in business

development which will enhance the growth of Indian Banking Industry.

64

(2) Other Suggestions

There are following the other suggestions which can be helpful to manage and reduce the Non

Performing Assets, but if NPAs Index is there the all these things work automatically because

benchmark provides self automated system which work independently.

1. “Prevention is better than cure” or “A stitch in time saves nine”, holds good in

monitoring of credit portfolio and arresting fresh growth of NPAs as well. Hence, besides

recovery of NPAs containment of NPAs should be the focus of Banks. The magnitude of

the problem of NPAs calls for immediate corrective steps so that the problems are

contained. The NPAs issue needs to be tackled at two inter dependent levels. Nothing

motivates a banker more today than effective NPA management (1) Formulation of

policies and procedures to contain fresh addition and reduction of the current stock of

NPAs and (2) Reforms that will be needed to present future occurrence of NPAs these are

explained in further points in this section.

2. Some of the enactments related to NPAs are several decades old and in quite a few

cases, out of tune with present realties. These provision need to be amended urgently and

some new enactments are called for in order to cater to the requirements of the changed

and for more complex current economic and Business environment. In case of

Legislation on Bank raptly or fore closure; the related laws should be expeditiously

implemented. In the mean time, at least the special recovery measures available with

SFC’s should be made applicable to bank loans as well.

3. Enactment / amendment of Revenue Recovery Act, comprehensive amendment in the

DRT Act. Opening more DRT’s and DRATs, strengthening DRT set up modifications,

comprehensive amendment in sick industrial companies Act (SICA) and strengthening

BIFR branches (sick unit under SICA “Erosion of Net Work” should be substituted by

“debt default”), opening of special Rehabilitation and Recovery Branches (RARBs),

compromise settlements, credit Risk assessment system, exploring mergers and

acquisitions etc. steps should be taken to recovery of NPAs.

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4. The Bank management (Not Branch Level) should consider the following special and

specific strategies to curtail NPAs.

• Credit Audit to Pre-empt NPAs

• Identification of potential NPAs.

• Problem Loan review and Reporting.

• Monitoring of exposures during holding on operation.

• Risk management system.

• Strong and effective credit monitoring.

• Open and co-operative working relationship with borrowers.

• Effective legal framework to bring recovery suits to their logical conclusion.

• Effective recovery system with reasonable time frame.

• Compromise settlement should be explored as an effective non-legal option for

recovery.

• Explaining the policies and procedures adopted in making provisions towards NPAs.

• Write-off of bad loans by Banks are decided by the Board of Directors, depending

among others on the repayment cultures and legal system.

• Reporting the balance of uncollected interest on NPAs as a memorandum item, this

would be useful if addition and deletion during the preceding specified period for

reflection.

• General provisions may be required to be reported as a separated item” Capital and

Reserves”. The ‘Specific provisions’ may be required to be reported so as to facilitate

arriving at “Provision –Adjusted NPAs i.e. Net NPAs”.

• It should be a requirement that the system followed in the matter of classification of

Assets, should be explained fully in the from of Foot- Notes to the accounts in the

ease of NPAs.

• Direct constant with the borrowers. Involvement of staff at the branch level in

recovery programmes at the rural and semi-urban branches. (Recovery is not one-man

Job at rural areas).

• Monitoring of standard Assets on a quarterly basis.

• Branches with sizable NPAs should be identified, and skilled, Trained and motivated

staff should be posted.

• Periodical Meetings with the NPA borrowers should be convinced in order to

ascertain the reasons for defaults and true financial position of the borrowers units.

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• In case of doubtful and Loss Assets, periodical review to explore the possibilities for

quick write –offs in cases where these are fully provided for.

• At branch level, the branch manager in particular should accept the responsibility for

both bending and recovery of huge amounts.

5. Direct recovery is the best indicator for reduction of NPAs close follow-up, including

periodical inspection of Units, borrowers’ education and sympathetic consideration of

genuine problems of the borrowers will help banks in making better loan Recovery.

6. Complexities of documentation and operational features of Indian Banking system impeded

the recovery process. Placement of more recovery officers, training of tribunal recovery

officers about Banking practices, appointment of receives with power of realization,

protection and preservation of property, will definitely add momentum in the recovery of

NPAs.

7. Circulation of information among defaulters by banks or bank groups, strengthening

Settlement Advisory Committees (SACs), proper utilization of power vested on the banks

under the SRFAESI Act are empower the banks in their war against NPAs.

8. Proper perception and evaluation of risk is extremely important of Banks in case of NPAs,

like market risk, credit risk, liquidity risk, default risk, interest rate risk, forex risk and other

risks. At present environment is Fraught with risks of various kinds and dimensions, a tested

and sound credit risk model needs to be put in a place by banks to hamper NPAs.

9. The following are preventive and corrective measure for reducing the NPAs in Indian

Banking system.

• Banks should examine the viability of the project before providing financial assistance. It

is required to ensure that the project will generate sufficient returns on the recourses

invested in it.

• Sanction of financial assistance after proper appraisal alone is not sufficient for recovery

of advances. Disbursement of funds according to the requirements of the project,

effective supervision and timely follow up, involvement of all the staff members for

better recovery and update knowledge of NPA accounts are also equally essential. If

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proper care is taken for appraisal, supervision and follow-up of the advances, future

NPAs can be avoided.

• The service of professional should be used in credit appraisal. Towards implementing

such professionalism, professionals such as Charted Accountants, Engineers, Lawyers

etc. should be required and associated at all levels of credit appraisal (and of course at

other stages too).

• However, good the credit dispensation process may be, total elimination of NPAs is not

possible in banking business owing to the externalities, but their incidence can be

minimized by taking necessary precautions special care should be taken for those

advances which are showing irregularities and likely to become NPAs.

• There should be operational restricting covering aspects like revamping management,

staff and branch rationalization. Simultaneous steps should be taken to prevent

reemergence of NPAs by stricter application of prudential norms. By the use ‘Critical

Amount Concept’ and other strategies like Lok Adalat, CDR scheme and ARCs etc.,

NPAs in future can be reduced to a great extent.

10. There are some suggestions to enable scheduled commercial Banks, more effective for

managing NPAs successfully through MIS (Management Information system):

• Organized efforts should be made to ensure that there is a minimum duplication of effort

in collection of information each bank should have an effective statistical cell for

planning and developing the statistical services. Adequate training and documentation

should be provided for the operation and users of the system.

• There is need for an integrated financial reporting system of NPAs in banks. The

Management information system should clearly bring out the inter-relationship between

the volumes of NPAs, the cost and related collections and disbursements so that the

managerial decision-making may lead to improve in managing NPAs.

• To achieve competitiveness both in domestic and international market, the banking sector

necessarily needs to launch various efforts of innovation, with respect to NPAs.

• Management Information System have potential to improve the performance of the

organization or system by enhancing the (a) quality of decision-making process, (b)

quality of services provided by the staff in satisfying the customer needs, (c) efficiency of

recourses mobilization and (d) by providing a performance appraisal (accountability) of

the staff involved.

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• MIS can also be used as a training tool for improving the skills of manager and other

staff. As we are living in “Techno Era’ an effective Management Information System

(MIS) in organization has become panacea to exploit the opportunities and utilize its

strength to combat the threats as well as its weakness of banks in relation to NPAs.

11. There are few suggestions to enable Banks’ more effective for managing NPAs successfully

through morale and motivation.

• Employees should satisfy with the working hours of the bank in related to deal with

NPAs.

• Employees have to maintain good interpersonal relation with borrowers.

• Sense of responsibilities and belongingness with the organization and NPAs should

clearly reflect among the employees in dealing with NPAs.

• Remuneration commensurate with the task assigned and performed in case of NPAs.

• Physical facilities and the level of employee’s satisfaction. As per Herzberg’s Motivation

and Hygiene theory, working condition (environment) are one of the main factors which

affect an individual’s willingness to work and job satisfaction. Hence the employees

should have office equipment, computers and telecommunications facilities in the fields

and offices.

• Authority and decision making power makes one to feel important about his role in the

organization and acts like a motivating factor.

• Recognition of good work is very much important to boost the morale of the employees.

• Satisfaction level with Supervisory Mechanism and behaviour of the supervisors.

• Need for more Decentralization of Authority and Decision Making power.

• In general, a word of praise from the supervisors is enough for improving it but for

specific and extraordinary performance rewarding the employee publicly by management

is equally important. In the absence of recognition of good work, the performance of the

employees decrees and ultimately they lose interest in work.

• Similarly some clear-cut incentive schemes in financial terms viz. Cash prize advances

increments for better performance and achievement of targets may also be introduced.

Such schemes may bring sense of complete fineness amongst the employees and finally it

leads to good results for the bank. Similarly for non-performance some positive measures

may also be prescribed to bring the sense of commitment and involvement with the

organization among the employees.

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• Job enrichment can be done which is the horizontal expansion of jobs by including

greater variety of tasks and preparing the modules for better use of the skills.

• One way to reduce the boredom and monotony among the employees is job rotation in

which employees can be rotated from task to task without any major disruption in the

work flow. It helps in developing other skills and also a larger vision of the entire system.

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IX. Conclusion

Banking sector always plays an important role in the economy, it circulates the blood in the form

of liquidity in the whole body which is economy and Gross NPAs work as diseases in the

circulation and hits the circulation system badly. Major steps are required to remove this disease.

Only proper care taking and right medicine can remove or reduce this problem. Only Proper

standardized early warning signal or benchmark can control on this problem because benchmark

works on self automated driven system and market participants react accordingly to the

benchmark. For example there is a benchmark which represents the growth in Indian Baking

System called BANKNIFTY comprises of 12 banking stocks in which 6 banks from private

sector and 6 banks from public sector. Results came of all 12 banks and 3 banks showed bad

results out of 12 banks while other showed good results, after that market react accordingly

means stock price of those 3 banks showed sharp decline while others showed sharp upside. So

those 3 banks will think on their performance and look the lose holes that why they did perform

worst while others performed very well. Likewise, If NPAs Index is there, and bank disclose

their NPAs, some banks will disclose worst NPAs figure and some will disclose good NPAs

figure, Majority of banks disclose good NPAs figure means report less NPAs figure so that

NPAs Index will go down but due to worst reporting of NPAs means more NPAs by some

banks, the value of those Banks’ NPAs in the Index will increase. And those banks will think

again their lending quality analyze that why they are performing worst and other are performing

well.

“The important function of the benchmark is that it creates the credibility or goodwill in

the market for those who are in the under the benchmark. And also reflect the true picture

of the market. Banks generally use Credit Derivatives like Collateral Debt Obligation and

Credit Default Swap to hedge their loan portfolio which is based over the counter

negotiation, there is no standardization based on high risk of default. NPAs Index will also

give true direction the Credit Derivatives because NPAs Index reflects the value of loan

portfolio of the Banks. And Banks sell their Non Performing Assets or Non Performing

Loans portfolio to Assets Reconstruction Companies and clean their balance sheet from

NPAs. And Assets Reconstruction Companies restructures those loan portfolio and add

some discount or premium as per the quality of the loan portfolio then sells to other

investors like other banks, other Assets Reconstruction Companies, Foreign Institutional

Investors etc. So, in that case NPAs Index plays a very important role to decide discount

and premium on loan portfolio and whatever the other suggestions have been suggested in

“Other Suggestion” section will work properly if NPAs Index will be there because it will

71

reflect the true picture of NPAs in the Indian Banking System. If banks don’t perform as

per the benchmark then they will take step accordingly which has been suggested in the

other suggestion section to be with the market and benchmark, because what the market

needs is reflected by the benchmark.”

Scope for the further Research

Further research may be aimed at

1) Study of Gross Non Performing Assets of Indian Financial System including Schedule

Commercial Banks, Regional Rural Banks, Schedule Urban Co-operative Banks, Sate

Co-operative Banks, District Central Co-operative Banks, Rural Development Banks,

Non-Banking Financial Companies, Infrastructure Finance Companies to assess the real

problems and to work out strategies for reduction of NPAs., because present study only

focus on Gross NPAs of Schedule Commercial Banks which includes Public Sector

banks, Old Private Sector Banks, New Private Sector Banks, and Foreign Banks in India.

2) A detailed study on the Auditors’ role in disclosing NPAs and in strengthening

internal control mechanisms.

3) A detailed study on NPAs Index that how NPAs Index is helpful to reduce the NPAs and

its practical applicability.

4) Developing a Borrower’s Credit Rating System to enable banks to have effective Credit

Appraisal.

5) Studying the strength and weakness of legal system and to suggest legal reforms

required for debt recovery.

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