“NON PERFORMING ASSET A THREAT TO INDIAN BANKING INDUSTRY”A STUDY ON NON PERFORMING

ASSETS IN PRIORITY SECTOR LENDING OF PUBLIC SECTOR BANKS.

TABLE OF CONTENTS

PARTICULARS PAGE NO.

1.1 INTRODUCTION1.1A HISTORY OF BANKING IN INDIA1.1B DEFINITION OF BANKING1.1C BANKING STRUCTURE IN INDIA1.1D PUBLIC SECTOR BANKS1.1E DEFINITION OF NPA1.1F FACTORS FOR RISE IN NPA1.1G GUIDELINES BY RBI1.1H DEFINITION PRIORITY SECTOR LENDING1.1I CATEGORIES UNDER PRIORITY SECTOR

1.1 I A AGICULTURE1.1 I B MICRO AND SMALL ENREPRISES1.1 I C WEAKER SECTIONS1.1 I D INVESTMENT IN SECURITISED ASSET1.1 I E OUTRIGHT PURCHASES1.1 I F INTER BANK PARTICIPATION CERTIFICATES BOUGHT BY BANKS1.1 I G BANK LOANS TO MFIS FOR ON-LENDING

1.1J NON-ACHIEVEMENT OF PRIORITY SECTOR TARGETS

1.1K COMMON GUIDELINES FOR PRIORITY SECTOR LOANS

1.2 RESEARCH DESIGN1.2A STATEMENT OF THE PROBLEM1.2B OBKECTIVES OF THE STUDY1.2C HYPOTHESIS OF THE STUDY1.2D SCOPE OF THE STUDY1.2E SAMPLING METHOD1.2F DATA COLLECTION METHODS1.2G GENERAL METHODOLOGY OF THE STUDY1.2H LIMITATIONS OF THE STUDY1.2I CHAPTERISATION OF THE STUDY

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LIST OF TABLES

PARTICULARS PAGE NO.

5.1A IMPACT OF PRIORITY SECTOR LENDING ON NPA OF PSBs

1 TABLE SHOWING THE DESCRIPTIVE STATISTICS OF THE VARIABLES

2 TABLE SHOWING THE CORRELATIONS BETWEEN THE VARIABLES

3 TABLE SHOWING THE MODEL SUMMARY4 TABLE SHOWING THE ANOVA VALUES5 TABLE SHOWING THE COEFFICIENT VALUES

5.1B IMPACT OF PRIORITY SECTOR NPAs ND NON PRIORITY SECTOR NPAs ON TOTAL NPAs OF PSBs

6 TABLE SHOWING CORRELATION OF PRIORITY SECTOR NPAS AND NON PRIORITY SECTOR NPAS

5.1C IMPACT OF RECOVERY OF NPAs ON TOTAL NPAs OF PSBs

6 TABLE SHOWING THE DESCRIPTIVE STATISTICS OF THE VARIABLES

7 TABLE SHOWING THE CORRELATIONS BETWEEN THE VARIABLES

8 TABLE SHOWING THE MODEL SUMMARY9 TABLE SHOWING THE ANOVA VALUES10 TABLE SHOWING THE COEFFICIENT VALUES.

5.1D IMPACT OF NET NPA ON PRIORITY SECTOR NPA

11 TABLE SHOWING THE T TEST VALUES

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1.1 INTRODUCTION

Presently, in India also almost all the sectors such as IT sector, automobile industry and

share market are not in a very good condition. But, quite interestingly, the banking sector

of India is booming day-by-day and that too even in the period of global crisis Banks acts

as the backbone of modern business. Development of a country mainly depends on banks.

Banks play an important role in the economic development of a country. The Indian

banking has come from a long way from being a sleepy business institution to a highly

proactive and dynamic entity. The Indian banking sector has emerged as one of the

strongest drivers of India’s economic growth. The Indian banking industry (US$ 1.22

trillion) has made outstanding advancement in last few years, even during the times when

the rest of the world was struggling with financial meltdown. India's economic

development and financial sector liberalization have led to a transformation of the Indian

banking sector over the past two decades.Today Indian Banking is at the crossroads of an

invisible revolution. The sector has undergone significant developments and investments

in the recent past. Most of banks provide various services such as Mobile banking, SMS

Banking, Net banking and ATMs to their clients Indian banks, the dominant financial

intermediaries in India, have made high quality progress over the last five years, as is

evident from several factors, including annual credit growth, profitabilityIn this growing

economic and financial sector reforms banks are faced with many challenges .what is

bothering the bank today is the management of non-performing asset.

Over the years the banks are facing this problem and therefore needs urgent remedial

actions.Non-performing assets are problematic for banks. pressure from the economy can

lead to a sharp increase in non-performing loans and often results in massive write-

downs.one of the important function of the bank is lending money to its customers by way

of loans and advances. For banks loans are the most profitable assets. Return comes in the

form of loan interest, fee income and investment. The most assumed risk is the credit risk

and it involves inability or unwillingness of customer to meet the commitments in relation

to the loan. Once a loan is overdue and cease to yield income it would be a non performing

asset. It is a serious concern for banks since they depend on interest payments for income.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the

banking industry in our country sending distressing signals on the sustainability and

insurability of the affected banks. The positive results of the chain of measures affected

under banking reforms by the Government of India and RBI in terms of the two

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Narasimhan Committee Reports in this contemporary period have been neutralized by the

ill effects of this surging threat. Despite various correctional steps administered to solve

and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus

confronted universally on banking and financial institutions. The severity of the problem is

however acutely suffered by Nationalised Banks, followed by the SBI group, and the all

India Financial Institutions. The Non-Performing Assets (NPAs) of the Indian banking

sector have been incessantly rising in the past six months. Historically, in 1997, NPAs

were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure

stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to

2012 and assets under reconstruction had trebled during the same period. India’s biggest

lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans.

According to a recently published Credit Suisse Group AG report, 10 large industrial

houses account for 13% of total assets financed by the Banking system, which means that

bank lending is getting increasingly skewed. Further, of the total reconstructed assets,

8.24% belong to the large manufacturing sector, 3.99% are from the services sector while

1.45% are from the agricultural sector.

The namebank derives Italian word banco "desk/bench" used during the Renaissance by

Jewish Florentine bankers, who used to make their transactions above a desk covered by a

green tablecloth. However, there are traces of banking activity even in ancient times,

which indicates that the word 'bank' might not necessarily come from the word 'banco'. In

fact the word traces its origins back to the Ancient Roman Empire, where moneylenders

would set up their stalls in the middle of enclosed courtyards called macella ona long

bench called a bancu, from which the words banco and bank are derived. As a

moneychanger, the merchant at the bancu did not so much invest money as merely convert

the foreign currency into the only legal tender in Rome that of the Imperial Mint.

1.1 A HISTORY OF BANKING

The first banks were probably the religious temples of the ancient world, and were

probably established sometime during the third millennium B.C. Banks probably predated

the invention of money. Deposits initially consisted of grain and later other goods

including cattle, agricultural implements, and eventually precious metals such as gold, in

the form of easy-to-carry compressed plates. Temples and palaces were the safest places to

store gold as they were constantly attended and well built. As sacred places, temples

presented an extra deterrent to would-be thieves. There are extant records of loans from

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the 18th century BC in Babylon that were made by temple priests/monks to

merchants Pythius, who operated as a merchant banker throughout Asia Minor at the

beginning of the 5th century B.C., is the first individual banker of whom we have records. 

1.1 B DEFINITION OF BANKING

The definition of a bank varies from country to country. Under English common law, a

banker is defined as a person who carries on the business of banking, which is specified

as:

conducting current accounts for his customers

paying cheques drawn on him, and

Collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act that codifies

the law in relation to negotiable instruments, including cheques, and this Act contains a

statutory definition of the term banker: banker includes a body of persons, whether

incorporated or not, who carry on the business of banking'. Although this definition

seems circular, it is actually functional, because it ensures that the legal basis for bank

transactions such as cheques does not depend on how the bank is organized or regulated.

The business of banking is in many English common law countries not defined by

statute but by common law, the definition above. In other English common law

jurisdictions there are statutory definitions of the business of banking or banking

business. When looking at these definitions it is important to keep in minds that they are

defining the business of banking for the purposes of the legislation, and not necessarily

in general. In particular, most of the definitions are from legislation that has the purposes

of entry regulating and supervising banks rather than regulating the actual business of

banking. However, in many cases the statutory definition closely mirrors the common

law one. Examples of statutory definitions:

"banking business" means the business of receiving money on current or

deposit account, paying and collecting cheques drawn by or paid in by

customers, the making of advances to customers, and includes such other

Business as the Authority may prescribe for the purposes of this Act;

"banking business" means the business of either or both of the following:

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receiving from the general public money on current, deposit, savings.

other similar account repayable on demand or within less than [3 months] or with a

period of call or notice of less than that period;

paying or collecting cheques drawn by or paid in by customers

Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit,

direct debit and internet banking, the cheque has lost its primacy in most banking systems

as a payment instrument.

1.1 C Banking Structure In India 

The commercial banking structure in India consists of scheduled commercial banks and

unscheduled banks. Scheduled banks constitute those banks that are included in the

Second Schedule of Reserve Bank of India (RBI) Act, 1934.

As on June 30, 1999, there were 300 scheduled banks in India having a total network of

64,918 branches. The scheduled commercial banks in India comprise State Bank of India

and its associates (8), nationalised banks (19), foreign banks (45), private sector banks

(32), co-operative banks, and regional rural banks. Before the nationalization of Indian

banks, the State Bank of India (SBI) was the only nationalized bank, which was

nationalized on July 1, 1955, under the SBI Act of 1955. The nationalization of seven

State Bank subsidiaries took place in 1959.

After the nationalization of banks in India, the branches of the public sector banks rose to

approximately 800 percent in deposits and advances took a huge jump by 11,000 percent. 

Nationalization Process

1955: Nationalization of State Bank of India

1959: Nationalization of SBI subsidiaries

1969: Nationalization of 14 major banks

1980: Nationalization of seven banks with deposits over Rs 200 crore

Banks In India

In India, banks are segregated in different groups. Each group has its own benefits and

limitations in operations. Each has its own dedicated target market. A few of them work in

the rural sector only while others in both rural as well as urban. Many banks are catering

in cities only. Some banks are of Indian origin and some are foreign players.

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Banks in India can be classified into:

Public Sector Banks

Private Sector Banks  

Cooperative Banks

Regional Rural Banks

Foreign Banks

One aspect to be noted is the increasing number of foreign banks in India. The RBI has

shown certain interest to involve more foreign banks. This step has paved the way for a

few more foreign banks to start business in India.

Types Of Banks

There are various types of banks which operate in our country to meet the financial

requirements of different categories of people engaged in agriculture, business, profession

etc. on the basis of functions, the banking institution may be divided into following types:

1. Central Bank

A central bank functions as the apex controlling institution in the banking and financial

system of the country. It functions as the controller of credit, banker’s bank and also

enjoys the monopoly of issuing currency on behalf of the government. A central bank is

usually control and quite often owned, by the government of a country. The Reserve Bank

of India (RBI) is such a bank within an India.

2. Commercial Banks

It operates for profit. It accepts deposits from the general public and extends loans to the

households, the firms and the government. The essential characteristics of commercial

banking are as follows:

- Acceptance of deposits from public

- For the purpose of lending or investment

- Repayable on demand or lending or investment.

- Withdrawal by means of an instrument, whether a cheque or otherwise.

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Another distinguish feature of commercial bank is that a large part of their deposits are

demand deposits with drawable and transferable by cheque.

3. Development Banks

It is considered as a hybrid institution which combines in itself the functions of a finance

corporation and a development corporation. They also act as a catalytic agent in promoting

balanced and viable development by assuming promotional role of discovering project

ideas, undertaking feasibility studies and also provide technical, financial and managerial

assistance for the implementation of project. In India ‘Industrial Development Bank on

India’ (IDBI) is the unique example of development bank. It has been designated as the

principal institution of the country for co-ordinating the working of the institutions

engaged in financing, promoting or development of industry.

4. Co-operative Banks

The main business of co-operative banks is to provide finance to agriculture. They aim at

developing a system of credit. Agriculture finance is a special field. The co-operative

banks play a useful role in providing cheap exit facilities to the farmers. In India there are

three wings of co-operative credit system namely –

1. Short term 2. Medium-term, 3. Long term credit.

5. Specialised Banks

These banks are established and controlled under the special act of parliament. These

banks have got the special status. One of the major bank is ‘National Bank for

Agricultural and Rural development’ (NABARD) established in 1982, as an apex

institution in the field of agricultural and other economic activities in rural areas. In 1990 a

special bank named small industries development Bank of India (SIDBI) was established.

It was the subsidiary of Industrial development Bank of India. This bank was established

for providing loan facilities, discounting and rediscounting of bills, direct assistance and

leasing facility.

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6. Indigenous Bankers

That unorganised unit which provides productive, unproductive, long term, medium term

and short term loan at the higher interest rate are known as indigenous bankers. These

banks can be found everywhere in cities, towns and villages.

7. Rural Banking

A set of financial institution engaged in financing of rural sector is termed as ‘Rural

Banking’. The polices of financing of these banks have been designed in such a way so

that these institution can play catalyst role in the process of rural development.

8. Saving Banks

These banks perform the useful services of collecting small savings commercial banks

also run “saving bank” to mobilise the savings of men of small means. Different countries

have different types of savings bank viz. Mutual savings bank, Post office saving,

commercial saving banks etc.

9. Export - Import Bank

These banks have been established for the purpose of financing foreign trade. They

concentrate their working on medium and long-term financing. The Export-Import Bank

of India (EXIM Bank) was established on January 1, 1982 as a statutory corporation

wholly owned by the central government.

10. Foreign Exchange Banks

These banks finance mostly to the foreign trade of a country. Their main function is to

discount, accept and collect foreign bulls of exchange. They also buy and self foreign

currencies and help businessmen to convert their money into any foreign currency they

need. Over a dozen foreign exchange banks branches are working in India have their head

offices in foreign countries.

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1.1 D Public Sector Banks

Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held

by a government. The shares of these banks are listed on stock exchanges. There are a

total of 21 PSBs in India.Public sector banks are also called as nationalised banks.The

Central Government entered the banking business with the nationalization of the Imperial

Bank Of India in 1955. A 60% stake was taken by the Reserve Bank of India and the new

bank was named as the State Bank of India. The seven other state banks became the

subsidiaries of the new bank when nationalised on 19 July 1960.The next major

nationalisation of banks took place in 1969 when the government of India, under prime

minister Indira Gandhi, nationalised an additional 14 major banks. The total deposits in

the banks nationalised in 1969 amounted to 50 crores. This move increased the presence

of nationalised banks in India, with 84% of the total branches coming under government

control.The next round of nationalisation took place in April 1980. The government

nationalised six banks. The total deposits of these banks amounted to around 200 crores.

This move led to a further increase in the number of branches in the market, increasing to

91% of the total branch network of the country. The objectives behind nationalisation

where:

To break the ownership and control of banks by a few business families,

To prevent the concentration of wealth and economic power,

To mobilize savings from masses from all parts of the country,

To cater to the needs of the priority sectors.....

1.1 E Definition of NPAs (NON -PERFORMING ASSETS)

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

income for the bank. A ‘non performing asset’ was defined as a credit facility in respect

of which the interest and / or installment of principal had remained ‘past due’ for a

specified period of time. The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period

1993 Four Quarters

1994 Three Quarters

1995 Onwards Two quarters

An amount due under any credit facility is treated as ‘past due’ when it has not been paid

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within 30 days from the due date. Due to the improvements in the payment and settlement

systems, recovery climate, up gradation of technology in the banking sector, etc, it was

decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.

Accordingly, as from that date, a NPA shall be an advance where

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

90 days in respect of a term loan,

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

an Overdraft/Cash Credit (OD/CC),

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

purchased and discounted,

Interest and/or installment of principal remains overdue for two harvest seasons

but for a period not exceeding two half years in the case of an advance granted for

agricultural purposes,

NPA is a classification used by financial institutions that refer to loans that are in jeopardy

of default. Once the borrower has failed to make interest or principal payments for 90 days

the loan is considered to be a non-performing asset. Non-performing assets are

problematic for financial institutions especially banks since they depend on interest

payments for income. Troublesome pressure from the economy can lead to a sharp

increase in non-performing loans and often results in massive write-downs. With a view to

moving towards international best practices and to ensure greater transparency, it has been

decided to adopt the ‘90 days’ overdue’ norm for identification of NPAS, from march 31st

2004 . The Non-Performing Assets (NPAs) of the Indian banking sector have been

incessantly rising in the past six months. Historically, in 1997, NPAs were 15.8% of loans

for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of

loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2013 and assets under

reconstruction had trebled during the same period. India’s biggest lender, State Bank of

India, is experiencing an NPA level of 4.99% of total loans. According to a recently

published Credit Suisse Group AG report, 10 large industrial houses account for 13% of

total assets financed by the Banking system, which means that bank lending is getting

increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large

manufacturing sector, 3.99% are from the services sector while 1.45% are from the

agricultural sector.

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‘Out of Order’ Status

An account should be treated as ‘out of order’ if the outstanding balance remains

continuously in excess of the sanctioned limit/drawing power. In cases where the

outstanding balance in the principal operating account is less than the sanctioned

limit/drawing power, but there are no credits continuously for six months as on the date of

Balance Sheet or credits are not enough to cover the interest debited during the same

period, these accounts should be treated as ‘out of order’.

‘Overdue’

Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the

due date fixed by the bank.

Classification of NPAs

Banks are required to classify NPAs further into the following three categories based on

the period for which the asset has remained non-performing and the reliability of the dues:

i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a

period less than or equal to 18 months. In such cases, the current net worth of the

borrower, or the current market value of the security charged is not enough to ensure

recovery of the dues to the banks in full. Such assets will have well defined

creditweakness that jeopardize the liquidation of the debt and are characterized by

thedistinct possibility that the bank will sustain a loss.

ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding

18 months. It has all the weaknesses inherent to a sub-standard asset with the added

characteristic that the collection or liquidation in full – on the basis of currently known

facts – is highly questionable and improbable.

iii. Loss Assets: A loss asset is one where a loss has been identified by the bank or,

internal or external auditors but the amount has not been written off wholly. Sub-standard

asset is the asset in which bank have to maintain 10% of its reserves. All those assets

which are considered as non-performing for period of more than 12 months are called as

Doubtful Assets. All those assets which cannot be recovered are called as Loss Assets.

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1.1 F FACTORS FOR RISE IN NPAs

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

problem of NPAs is more in public sector banks when compared toprivate sector banks

and foreign banks. The NPAs in PSB are growing due to external as well as internal

factors.

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 payback 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 measure factor, which is creating alarming rise in NPAs of the PSBs. every

nowand then India is hit by major natural calamities thus making the borrowers unable to

payback there 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 ours farmers

depends 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 govt. 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 profit 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,

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which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and

has to make provision for it.

Change on Govt. policies

With every new govt. 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. eg.

The fallout of handloom sector is continuing as most of the weavers Co-operative societies

have become defunct largely due to withdrawal of state patronage. The rehabilitation plan

workedout by the Central govt to revive the handloom sector has not yet been

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

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 iii. Principles

of profitability.

i. Principles of safety By safety it means that the borrower is in a position to repay the loan

both principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business

b. Willingness to pay

Willingness to paydepends on: 1. Character 2. Honest 3. Reputation of borrower The

banker should, therefore take utmost care in ensuring that the enterprise or business for

which a loan is sought is. Sound one and the borrower is capable of carrying it out

successfully .he should be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis cannot be taken. Proper MIS and financial accounting system

is not implemented in the banks, which leads to poor credit collection, thus NPA. All the

branches of the bank should be computerised.

Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise

in NPAs. While providing unsecured advances the banks depend more on the honesty,

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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 a. From bankers b. Enquiry from market/segment of trade, industry,

business. c. From external credit rating agencies. Analyse the balance sheet True picture of

business will be revealed on analysis of profit/loss a/c and balance sheet. Purpose of the

loan When bankers give loan, he should analyse the purpose of the loan. To ensure safety

and liquidity, banks should grant loan for productive purpose only. Bank should analyse

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 not able to repay it back. They should use good

credit appraisal to decrease the NPAs.

Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible

assets as security to safe guard its interests. When accepting securities banks should

consider the 1.Marketability 2. Acceptability 3. Safety 4. Transferability.

The banker should follow the principle of diversification of risk based on the famous

maxim“do not keep all the eggs in one basket”; it means that the banker should not grant

advances to a few big farms only or to concentrate them in few industries or in a few

cities. If a new big customer meets misfortune or certain traders or industries affected

adversely, the overall position of the bank will not be affected. Like OSCB suffered loss

due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of

OSCB are the OTM(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd

(2439.60lakhs).

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank

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

loan. The NPAs due to wilful defaulters can be collected by regular visits. Re loaning

process Non remittance of recoveries to higher financing agencies and re loaning of the

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

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

1.1 G GUIDELINES BY RBI

Guidelines of Government and RBI for Reduction of NPAs

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1. Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to take steps for

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

environment to facilitate the recovery of existing NPAs of banks. More significant of

them:

The broad framework for compromise or negotiated settlement of NPAs advised by RBIin

July 1995 continues to be in place. Banks are free to design and implement their own

policies for recovery and write-off incorporating compromise and negotiated settlements

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

the NPA category. The policy framework suggested by RBI provides for setting up of an

independent Settlement Advisory Committees headed by a retired Judge of the High Court

to scrutinise and recommend compromise proposals.

Specific guidelines were issued in May 1999 to public sector banks for one time

nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme

was operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore

through compromise settlement under this scheme].

Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5

croreand less as on 31 March 1997. [The above guidelines which were valid up to June 30,

2001helped the public sector banks to recover Rs. 2600 crore by September 2001].

An OTS Scheme covering advances of Rs. 25000 and below continues to be inoperation

and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister

providing for OTS for advances up to Rs. 50,000 in respect of NPAs ofsmall/marginal

farmers are being drawn up.

2. Lok Adaltas:

Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and

"loss"category, with outstanding balance of Rs. 5 lakh for compromise settlement under

Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to

decide on cases of NPAs of Rs. 10 lakhs and above. The public sectorbanks had recovered

Rs. 40.38 crore through the forum of Lok Adalat. The progress through this channel is

expected to pick up in the coming years particularly looking at the recent initiatives taken

by some of the public sector banks and DRTs in Mumbai.

3. Debt Recovery Tribunals:

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

in March 2000 has helped in strengthening the functioning of DRTs. Provisions for

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placement of more than one Recovery Officer, power to attach defendant's property/assets

before judgement, penal provisions for disobedience of Tribunal's order or for breach of

any terms of the order and appointment of receiver with powers of realization,

management, protection and preservation of property are expected to provide necessary

teeth to the DRTs and speed up the recovery of NPAs in the times to come. Though there

are 22 DRTs set up at major centres in the country with Appellate Tribunals located infive

centres viz. Allahabad, Mumbai, Delhi,Calcutta and Chennai, they could decide only 9

814 cases . The amount recovered in respect of these cases amounted to only Rs. 1864.30

crore. Looking at the huge task on hand, with as many as 33049 cases involving Rs.

42988.84 crore pending before them I would like the banks to institute appropriate

documentation system and render all possible assistance to the DRTs for speeding up

decisions and recovery of some of the well collateralised NPAs involving large amounts. I

may add that familiarisation programmes have been offered in NIBM at periodical

intervals to the presiding officers of DRTs in understanding the complexities of

documentation and operational features and other legalities applicable of Indian banking

system. RBI on its part has suggested to the Government to consider enactment of

appropriate penal provisions against obstruction by borrowers in possession of attached

properties by DRT Receivers, and notify borrowers who default to honour the decree

passed against them.

4. Circulation of information on defaulters:

The RBI has put in place a system for periodical circulation of details of willful defaults of

borrowers of banks and financial institutions. This serves as a caution list while

considering requests for new or additional credit limits from defaulting borrowing units

and also from the directors/proprietors/partners of these entities. RBI also publishes a list

of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits

have been filed by banks and FIs for recovery of their funds, as on 31st March every year.

It is our experience that these measures had not contributed to any perceptible recoveries

from the defaulting entities. However, they serve as negative basket of steps shutting off

fresh loans to these defaulters. I strongly believe that a real breakthrough can come only if

there is a change in the repayment psyche of the Indian borrowers

5. Recovery action against large NPAs:

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBIhad

advised the public sector banks to examine all cases of willful default of Rs 1 crore and

above and file suits in such cases, and file criminal cases in regard to willful defaults.

17

Board of Directors are required to review NPA accounts of Rs. 1 crore and above with

special reference to fixing of staff accountability.On their part RBI and the Government

are contemplating several supporting measures including legalreforms, some of them I

would like to highlight.

6. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a

timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and

above with the banks and financial institutions. The CDR process would also enable

viable corporate entities to restructure their dues outside the existing legal framework and

reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI,

Mumbai and a Standing Forum and Core Group for administering the mechanism had

already been put in place. The experiment however has not taken off at the desired pace

though more than six months have lapsed since introduction. As announced by the Hon'ble

Finance Minister in the Union Budget 2002-03, RBI has set up a high level Group under

the Chairmanship of Shri Vepa Kamesam, Deputy Governor, RBI to review the

implementation procedures of CDR mechanism and to make it more effective. The Group

will review the operation of the CDR Scheme, identify the operational difficulties, if any,

in the smooth implementation of the scheme and suggest measures to make the operation

of the scheme more efficient.

7. Credit Information Bureau:

Institutionalisation of information sharing arrangements through the newly formed Credit

Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the

recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the

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

recommendations of the Group include dissemination of information relating to suitfiled

accounts regardless of the amount claimed in the suit or amount of credit granted by a

credit institution as also such irregular accounts where the borrower has given consent for

disclosure. This, I hope, would prevent those who take advantage of lack of system of

information sharing amongst lending institutions to borrow large amounts against same

assets and property, which had in no small measures contributed to the incremental NPAs

of banks.

8. Proposed guidelines on willful defaults/diversion of funds:

18

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working

out a proper definition covering such classes of defaulters so that credit denials to this

group of borrowers can be made effective and criminal prosecution can be made

demonstrative against willful defaulters.

9. Corporate Governance:

A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the

Reserve Bank to review the supervisory role of Boards of Banks and financial institutions

and to obtain feedback on the functioning of the Boards vis-à-vis

compliance,transparency, disclosure, audit committees etc. and make recommendations

for making the role of Board of Directors more effective with a view to minimising risks

and overexposure. The group is finalising its recommendations shortly and may come out

with guidelines for effective control and supervision by bank boards over credit

management and NPA prevention measures.

10. Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002:

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

without the intervention of courts or tribunals. The Security Interest (Enforcement) Rules,

2002 has also been notified by Government to enable Secured Creditors to authorise their

officials to enforce the securities and recover the dues from the borrowers. As on June 30,

2004, 27 public sector banks had issued 61, 263 notices involving outstanding amount of

Rs. 19,744 crore, and had recovered an amount of Rs. 1,748 crore from 24,092 cases.

1.1 H DEFINITION PRIORITY SECTOR LENDING

Priority Sector Lending is an important role given by the Reserve Bank of India (RBI) to

the banks for providing a specified portion of the bank lending to few specific sectors like

agriculture or small scale industries. This is essentially meant for an all round

development of the economy as opposed to focusing only on the financial sector. Priority

sector lending is providing easy, adequate and timely credit to priority sectors that

otherwise would not receive easy finance. The scope of priority sectors is confined to

sectors that impact huge population segment, weaker sections in the society and sectors

that are labour-intensive. Consequently,the sectors covered within the ambit of priority

sectors include agriculture, education, export credit, housing, micro and small enterprises

(MSME) among others. Under the priority sector lending initiative, banks generally

19

disburse loans of small value to various sectors to aid the development of overall Indian

economy.The interest rate on loans extended under the scheme are in line with the

directives issued by the Central bank from time to time i.e. in the present scenario linked

to the Base rate of banks.

Since Nationalization of major commercial banks in 1969, banking sector has been

utilized as a powerful vehicle to carry on the Government’s development programmes.

The priority sector activities have been given adequate financial assistance through Banks.

Among the 20 point programmes announced by the Prime Minister, Mrs. Indira Gandhi,

poverty alleviation, creation of employment opportunities, promotion of self employment,

protection and promotion of village and cottage industries, encouraging entrepreneurs and

similar socio economic development programmes were given top priority. Thus various

employment generation activities, Agricultural development activities and activities

related to small Scale industries have been classified under priority sector. In other words,

some areas of fields in a country, depending on its economic condition or government

interest are called Priority Sectors, i.e. industry and agriculture. These may further be

subdivided. Banks are directed by the central bank of the country that loans must be given

on reduced rates of interest with discounts to promote these fields; such lending is called

Prime Sector Lending. Priority sector was first properly announced in 1972, after the

National Credit Council emphasized that there should be a larger involvement of the

commercial banks in the priority sector. In 1974, the banks were given a target of 33.33 %

as share of the priority sector in the total bank credit. This was later revised on the

recommendation of the Dr. K S Krishnaswamy committee and raised to 40%.

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Targets and sub targets for PSL

CategoriesDomestic commercial banks / Foreign banks Foreign

banks with

with 20 and above branches less than 20 branches

Total Priority

40 per cent of Adjusted Net Bank Credit (ANBC) 32 per cent of ANBC or

or credit equivalent amount of Off-Balance SheetCEOBE, whichever is

Sector Exposure (CEOBE), whichever is higher. higher.18 per cent of ANBC or CEOBE, whichever ishigher.

No specific target.

Of this, indirect lending in excess of 4.5% ofTotal Agriculture Forms partof total

ANBC or CEOBE, whichever is higher, will not be priority sector targetreckoned for computing achievement under 18per cent target.

Advances to micro and small enterprises sector No specific target.

Micro & Small will be reckoned in computing achievement Forms partof total

Enterprises (MSE) under the overall priority sector target of 40 per priority sector target.cent of ANBC or CEOBE, whichever is higher;Export credit is not a separate category. Export

No specific target.credit to eligible activities under agriculture and

Export Credit MSE will be reckoned for priority sector lending Forms partof total

under respective categories. priority sector target.

Advances to 10 per cent of ANBC or CEOBE, whichever isNo specific target inthe total priority sector

Weaker Sections higher. target.

1.1 I Description of the Categories under priority sector

1.1 I a. Agriculture

1.Direct Agriculture

Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups

(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data on

such loans], directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal

husbandry, poultry, bee-keeping and sericulture (up to cocoon stage).

1. Short-term loans to farmers for raising crops, i.e. for crop loans. This will include

traditional/non-traditional plantations, horticulture and allied activities.

2. Medium & long-term loans to farmers for agriculture and allied activities (e.g. purchase of

agricultural implements and machinery, loans for irrigation and other developmental

activities undertaken in the farm, and development loans for allied activities).

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3. Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,

sorting, grading and transporting of their own farm produce.

4. Loans to farmers up to 50 lakh against pledge/hypothecation of agricultural produce

(including warehouse receipts) for a period not exceeding 12 months, irrespective of

whether the farmers were given crop loans for raising the produce or not.

5. Loans to small and marginal farmers for purchase of land for agricultural purposes.

6. Loans to distressed farmers indebted to non-institutional lenders.

7. Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies

(FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) ceded to or managed/

controlled by such banks for on lending to farmers for agricultural and allied activities.

8. Loans to farmers under Kisan Credit Card Scheme.

9. Export credit to farmers for exporting their own farm produce.

Loans to corporates including farmers' producer companies of individual farmers,

partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied

Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to

cocoon stage) up to an aggregate limit of 2 crore per borrower for the following activities:

1. Short-term loans to farmers for raising crops, i.e. for crop loans.

2. This will include traditional/non-traditional plantations, horticulture and allied activities.

3. Medium & long-term loans to farmers for agriculture and allied activities (e.g. purchase of

agricultural implements and machinery, loans for irrigation and other developmental

activities undertaken in the farm, and development loans for allied activities).

4. Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,

grading and sorting.

5. Export credit for exporting their own farm produce.

2.Indirect agriculture

Loans to corporates including farmers' producer companies of individual farmers,

partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied

Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to

cocoon stage)

1. If the aggregate loan limit per borrower is more than 2 crore the entire loan should be

22

treated as indirect finance to agriculture.

2. Loans up to 50 lakh against pledge/hypothecation of agricultural produce (including

warehouse receipts) for a period not exceeding 12 months, irrespective of whether the

farmers were given crop loans for raising the produce or not.

3.Other indirect agriculture loans

1. Loans up to 5 crore per borrower to dealers /sellers of fertilizers, pesticides, seeds, cattle

feed, poultry feed, agricultural implements and other inputs.

2. Loans for setting up of Agriclinics and Agribusiness Centres.

3. Loans up to 5 crore to cooperative societies of farmers for disposing of the produce of

member.

4. Loans to Custom Service Units managed by individuals, institutions or organizations who

maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., and

undertake farm work for farmers on contract basis.

5. Loans for construction and running of storage facilities (warehouse, market yards, godowns

and silos), including cold storage units designed to store agriculture produce/products,

irrespective of their location.

6. Loans to MFIs for on-lending to farmers for agricultural and allied activities as per the

conditions specified in paragraph VIII of this circular.

7. Loans sanctioned to NGOs, which are SHG Promoting Institutions, for on-lending to

members of SHGs under SHG-Bank Linkage Programme for agricultural and allied

activities. The all inclusive interest charged by the NGO/SHG promoting entity should not

exceed the Base Rate of the lending bank plus eight percent per annum.

8. Loans sanctioned to RRBs for on-lending to agriculture and allied activities.

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1.1 I.b. Micro and Small Enterprises

The limits for investment in plant and machinery/equipment for manufacturing / service enterprise, as notified by Ministry of Micro Small and Medium Enterprises:

Manufacturing sector

Enterprises Investment in plant and machinery

Micro Enterprises Do not exceed twenty five lakh rupees

Small Enterprises More than twenty five lakh rupees but does

not exceed five crore rupees

Service Sector

Enterprises Investment in equipment

Micro Enterprises Does not exceed ten lakh rupees

Small Enterprises More than ten lakh rupees but does not exceed

two crore rupees

Bank loans to micro and small enterprises both manufacturing and service are eligible to be

classified under priority sector as per the following:

1.Direct Finance

a.Manufacturing Enterprises

The Micro and Small enterprises engaged in the manufacture or production of goods to any industry

specified in the first schedule to the Industries (Development and regulation) Act, 1951 and as

notified by the Government from time to time. The manufacturing enterprises are defined in terms

of investment in plant and machinery.

b.Loans for food and agro processing

Loans for food and agro processing will be classified under Micro and Small Enterprises, provided

the units satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in

MSMED Act, 2006.

c. Service Enterprises

Bank loans up to 5 crore per unit to Micro and Small Enterprises engaged in providing or

rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.

Export credit to MSE units (both manufacturing and services) for exporting of goods/services

produced/rendered by them.

d.Khadi and Village Industries Sector (KVI)

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All loans sanctioned to units in the KVI sector, irrespective of their size of operations, location and

amount of original investment in plant and machinery. Such loans will be eligible for classification

under the sub-target of 60 percent prescribed for micro enterprises within the micro and small

enterprises segment under priority sector.

2. Indirect Finance

1. Loans to persons involved in assisting the decentralized sector in the supply of inputs to and

marketing of outputs of artisans, village and cottage industries.

2. Loans to cooperatives of producers in the decentralized sector viz. artisans village and

cottage industries.

3. Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the conditions

specified in the master circular.

e. Education

Loans to individuals for educational purposes including vocational courses upto 10 lakh for studies

in India and 20 lakh for studies abroad.

f. Housing

1. Loans to individuals up to 25 lakh in metropolitan centres with population above ten lakh

and 15 lakh in other centres for purchase/construction of a dwelling unit per family

excluding loans sanctioned to bank’s own employees.

2. Loans for repairs to the damaged dwelling units of families up to 2 lakh in rural and semi-

urban areas and up to 5 lakh in urban and metropolitan areas.

3. Bank loans to any governmental agency for construction of dwelling units or for slum

clearance and rehabilitation of slum dwellers subject to a ceiling of 10 lakh per dwelling

unit.

4. The loans sanctioned by banks for housing projects exclusively for the purpose of

construction of houses only to economically weaker sections and low income groups, the

total cost of which do not exceed 10 lakh per dwelling unit. For the purpose of identifying

the economically weaker sections and low income groups, the family income limit of

1,20,000 per annum, irrespective of the location, is prescribed.

5. Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance,

for on-lending for the purpose of purchase/construction/reconstruction of individual

25

dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an

aggregate loan limit of 10 lakh per borrower, provided the all inclusive interest rate

charged to the ultimate borrower is not exceeding lowest lending rate of the lending bank for

housing loans plus two percent per annum.

6. The eligibility under priority sector loans to HFCs is restricted to five percent of the

individual bank’s total priority sector lending, on an ongoing basis. The maturity of bank

loans should be co-terminus with average maturity of loans extended by HFCs. Banks

should maintain necessary borrower-wise details of the underlying portfolio

g. Export Credit

1. Export Credit extended by foreign banks with less than 20 branches will be reckoned for

priority sector target achievement.

2. As regards the domestic banks and foreign banks with 20 and above branches, export credit

is not a separate category under priority sector.

h. Others

1. Loans, not exceeding 50,000 per borrower provided directly by banks to individuals and

their SHG/JLG, provided the borrower’s household annual income in rural areas does not

exceed 60,000/- and for non-rural areas it should not exceed 1,20,000/-.

2. Loans to distressed persons not exceeding 50,000 per borrower to prepay their debt to

non-institutional lenders.

3. Loans outstanding under loans for general purposes under General Credit Cards (GCC).

4. If the loans under GCC are sanctioned to Micro and Small Enterprises, such loans should be

classified under respective categories of Micro and Small Enterprises.

5. Overdrafts, up to 50,000 (per account), granted against basic banking / savings accounts

provided the borrowers household annual income in rural areas does not exceed .60,000/-

and for non-rural areas it should not exceed 1,20,000/-.

6. Loans 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.

7. Loans sanctioned by banks directly to individuals for setting up off-grid solar and other off-

grid renewable energy solutions for households.

1.1 I.c Weaker Sections

26

1. Priority sector loans to the following borrowers will be considered under Weaker Sections

category:-

(a) Small and marginal farmers;

(b) Artisans, village and cottage industries where individual credit limits do not exceed

50,000;

2. Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY), now National Rural

Livelihood Mission (NRLM);

3. Scheduled Castes and Scheduled Tribes;

4. Beneficiaries of Differential Rate of Interest (DRI) scheme;

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

6. Beneficiaries under the Scheme for Rehabilitation of Manual Scavengers (SRMS);

7. Loans to Self Help Groups;

8. Loans to distressed farmers indebted to non-institutional lenders;

9. Loans to distressed persons other than farmers not exceeding 50,000 per borrower to

prepay their debt to non-institutional lenders;

10. Loans to individual women beneficiaries upto 50,000 per borrower;

11. Loans sanctioned under (a) to (k) above to persons from minority communities as may be

notified by Government of India from time to time.

. 1.1 I .d. Investments by banks in securitised assets

1. Investments by banks in securitised assets, representing loans to various categories of

priority sector, except 'others' category, are eligible for classification under respective

categories of priority sector (direct or indirect) depending on the underlying assets

provided:

the securitised assets are originated by banks and financial institutions and are eligible to be

classified as priority sector advances prior to securitisation and fulfil the Reserve Bank of

India guidelines on securitisation.

the all inclusive interest charged to the ultimate borrower by the originating entity should

not exceed the Base Rate of the investing bank plus 8 percent per annum

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2. Investments made by banks in securitised assets originated by NBFCs, where the underlying

assets are loans against gold jewellery, are not eligible for priority sector status.

1.1 I .e. Transfer of Assets through Direct Assignment /Outright purchases

1.Assignments/Outright purchases of pool of assets by banks representing loans under

various categories of priority sector, except the 'others' category, will be eligible for

classification under respective categories of priority sector (direct or indirect) provided:

The assets are originated by banks and financial institutions and are eligible to be

classified as priority sector advances prior to the purchase and fulfil the Reserve Bank

of India guidelines on outright purchase/assignment.

The eligible loan assets so purchased should not be disposed of other than by way of

repayment.

The all inclusive interest charged to the ultimate borrower by the originating entity

should not exceed the Base Rate of the purchasing bank plus 8 percent per annum.

2.When the banks undertake outright purchase of loan assets from banks/ financial

institutions to be classified under priority sector, they must report the nominal amount

actually disbursed to end priority sector borrowers and not the premium embedded

amount paid to the sellers.

3.Purchase/ assignment/investment transactions undertaken by banks with NBFCs, where

the underlying assets are loans against gold jewellery, are not eligible for priority sector

status.

1.1 I .f. Inter Bank Participation Certificates bought by Banks

Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk sharing basis, shall

be eligible for classification under respective categories of priority sector, provided the

underlying assets are eligible to be categorized under the respective categories of priority

sector and the banks fulfill the Reserve Bank guidelines on IBPCs.

1.1 I .g. Bank loans to MFIs for on-lending

1. Bank credit to MFIs extended on, or after, April 1, 2011 for on-lending to individuals

and also to members of SHGs / JLGs will be eligible for categorisation as priority

sector advance under respective categories viz., agriculture, micro and small

enterprise, and 'others', as indirect finance, provided not less than 85% of total assets

of MFI (other than cash, balances with banks and financial institutions, government

securities and money market instruments) are in the nature of “qualifying assets”. In

28

addition, aggregate amount of loan, extended for income generating activity, is not

less than 70% of the total loans given by MFIs. A “qualifying asset” shall mean a

loan disbursed by MFI, which satisfies the following criteria:

The loan is to be extended to a borrower whose household annual income in rural

areas does not exceed 60,000/- while for non-rural areas it should not exceed

1,20,000/-.

Loan does not exceed 35,000/- in the first cycle and 50,000/- in the subsequent

cycles.

Total indebtedness of the borrower does not exceed 50,000/-.

Tenure of loan is not less than 24 months when loan amount exceeds 15,000/- with

right to borrower of prepayment without penalty.

The loan is without collateral.

Loan is repayable by weekly, fortnightly or monthly installments at the choice of the

borrower.

2. Further, the banks have to ensure that MFIs comply with the following caps on margin and

interest rate as also other ‘pricing guidelines’, to be eligible to classify these loans as priority

sector loans.

Margin cap at 12% for all MFIs. The interest cost is to be calculated on average

fortnightly balances of outstanding borrowings and interest income is to be calculated

on average fortnightly balances of outstanding loan portfolio of qualifying assets.

Interest cap on individual loans at 26% per annum for all MFIs to be calculated on a

reducing balance basis.

Only three components are to be included in pricing of loans viz., (a) a processing fee

not exceeding 1% of the gross loan amount, (b) the interest charge and (c) the

insurance premium.

The processing fee is not to be included in the margin cap or the interest cap of 26%.

Only the actual cost of insurance i.e. actual cost of group insurance for life, health and

livestock for borrower and spouse can be recovered; administrative charges may be

recovered as per IRDA guidelines.

There should not be any penalty for delayed payment.

No Security Deposit/ Margin are to be taken.

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3.The banks should obtain from MFI, at the end of each quarter, a Chartered Accountant’s

Certificate stating, inter-alia, that (i) 85% of total assets of the MFI are in the nature of

“qualifying assets’’, (ii) the aggregate amount of loan, extended for income generation

activity, is not less than 70% of the total loans given by the MFIs.

1.1 J. Non-achievement of priority sector targets

All scheduled commercial banks having shortfall in lending to priority sector target/sub shall

be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF)

established with NABARD and other Funds with NABARD/NHB/SIDBI/other Financial

Institutions, as decided by the Reserve Bank from time to time.

For the purpose of allocation of RIDF and other Funds, as decided by Reserve Bank from

time to time, the achievement levels of priority sector lending as on the March 31 st will be

taken into account. The deposits under the various Funds will be called upon by NABARD or

such other Financial Institutions as per the terms and conditions of the scheme.

The interest rates on banks’ contribution to RIDF or any other Funds, periods of deposits, etc.

shall be fixed by Reserve Bank of India from time to time and will be communicated to the

concerned banks every year by the Reserve Bank at the time of allocation of funds.

The misclassifications reported by the Reserve Bank’s Department of Banking Supervision

would be adjusted/ reduced from the achievement of that year, to which the amount of

declassification/ misclassification pertains, for allocation to various funds in subsequent

years.Non-achievement of priority sector targets and sub-targets will be taken into account

while granting regulatory clearances/approvals for various purposes. Priority Sector-Data

Reporting System facilitate the data on priority sector advances has to be furnished by banks

as per the extant guidelines on reporting.

1.1 K. Common guidelines for priority sector loans

Banks should comply with the following common guidelines for all categories of advances

under the priority sector.

1. Rate of interest

The rates of interest on various categories of priority sector loans will be as per DBOD

directives issued from time to time.

2. Service charges

No loan related and adhoc service charges/inspection charges should be levied on priority

sector loans up to 25,000.

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3. Receipt, Sanction/Rejection/Disbursement Register

A register/ electronic record should be maintained by the bank, wherein the date of receipt,

sanction/rejection/disbursement with reasons thereof, etc., should be recorded. The

register/electronic record should be made available to all inspecting agencies.

4. Issue of Acknowledgement of Loan Applications

Banks should provide acknowledgement for loan applications received under priority sector

loans. Bank Boards should prescribe a time limit within which the bank communicates its

decision in writing to the applicants.

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PART-B

1.2RESEARCH DESIGN

1.2A STATEMENT OF THE PROBLEM

Non-performing assets of banks are one of the biggest hurdles in the way of socio-economic

development of India. The level of NPAs of the banking system in India is still too high. It

affects the financial standing of the banks so that it is a heavy burden to the banks. A vigorous

effort has to be made by the banks to strengthen their internal control and risk management

systems and to setup early warning signals for timely detection and action.. The problem of NPA

is not limited to only Indian public sector banks, but it prevails in the entire banking industry.

Major portion of bad debts in Indian Banks arose out of lending to the priority sector at the

dictates of politicians and bureaucrats. If only banks had monitored their loans effectively, the

bad debt problem could have been contained if not eliminated. The top management of the

public banks was forced by politicians and bureaucrats to throw good money after bad in the

case of unscrupulous borrowers. Many big borrowers defaulted only due to the recession in the

economy. The absence of proper bankruptcy laws and the dilatory legal procedure in enforcing

security rights are the root cause of bad debts in banks. Added to these, there are many other

reasons why public sector banks have highest level of NPAs. The NPA problem of banking

institutions in India is exaggerated by deriving NPA figures based on percentage against risk

assets instead of total earning assets. To improve recovery and to minimize NPAs, banks are

expected to do a continuous recovery exercise through various methods adopting newer

strategies. The above are various issues faced by banks related to lending and recovery.Public

Sector Banks cannot stop lending. Lending will continue, recovery also must be continued. This

study aims at a thorough analysis of the functions of a bank in lending and recovery with special

reference to public sector Banks, in the present competitive, deregulated and technologically

improved banking environment.

1.2 B OBJECTIVE OF THE STUDY

1. To know and study about the non-performing assets in Indian Public sector Banks.

2. To study the trend of NPAs during last 11 years

3. To determine the factors affecting NPA.

4. To find out the significant impact of Priority Sector Lending on the Total NPA of public

sector Banks.

5. Comparison of NPA in Priority Sector and Non priority sector of Public Sector Banks .

32

6. To make appropriate suggestions to avoid future NPAs and to manage existing NPAs in

public sector Banks.

7. To find out the impact of recovery of NPAs on total NPAs of public sector banks

8. To find out impact of Net NPA and Gross NPA ratio on priority sector NPA ratio of priority

sector advances.

1.2C HYPOTHESIS OF THE STUDY

Q. Is there any significant impact of Priority Sector Lending on NPA of public sector Banks?

H0: There is no significant impact of Priority Sector Lending on Total NPA of Banks?

H1: There is significant impact of Priority Sector Lending on Total NPA of Banks?

Q.Is there any significant relation between priority sector NPAs and non-priority sector NPAs in

contributing towards total npas of psbs?

H0:There is no significant relation between priority sector NPAs and non-priority sector NPAS

towards total NPAS of PSBS.

H1: There is significant relation between priority sector NPAs and non-priority sector NPAS

towards total NPAS of PSBS.

Q.Is there any significant impact of recovery of NPAS on total NPAs of PSBs?

H0: There is no significant impact of Recovery of NPAs on total NPAs of Public sector banks

H1: There is a significant impact of Recovery of NPAs on total NPAs of Public sector banks

Q.Is there any impact of Gross NPA ratio and Net NPA ratio on priority sector NPA ratio of

public sector banks?

H0:There is no significant impact of Gross NPA Ratio and Net NPA ratio on priority sector NPA

ratio of PSBs.

H1: There is significant impact of Gross NPA Ratio and Net NPA ratio on priority sector NPA

ratio of PSBs.

1.2D SCOPE OF THE STUDY

1. To understand the concept of NPA in Indian Banking industry.

2. The study may help the government in creating & implementing new strategies to control

NPAs in priority sector.

3. The study will help to select appropriate techniques suited to manage the NPAs and develop a

time bound action plan to arrest the growth of NPAs in public sector banks.

4. The study could provide measures to avoid future NPAs and manage existing NPAs of public

sector banks.

33

1.2E SAMPLING METHOD

For the purpose of analysing NPA the whole population of public sector banks is taken into

consideration.The data on Priority sector and Non priority sector of public sector banks is also

taken. Also the Advances and NPA in Priority Sector has been taken into consideration

1.2F DATA GENERATION

The data collected is mainly secondary in nature. The sources of data for this thesis include the

literature published by Indian Bank and the Reserve Bank of India. The data used to observe

Advances and NPA in priority sector is taken for the period of 11 years .The data is collected

from financial institutions and research institutions. The period of the study is from 2003 to

2013.The secondory data consist various audited reports and publications of reserve bank of

India.Detailed Informations were collected from the statistical tables published by the statistical

department of Reserve bank of India.

1.2G General Methodology Adopted For The Study

The methodology used in the research study is regression model wherein, the data is used to

find out how the dependent variable is the outcome of various independent variables. For this

purpose, the dependent variable is the Non-performing assets and independent variables are

priority sector lending ,Non priority sector lending and advances of the bank,Gross NPA,Net

NPA.Simple linear regression model is used when there is only one independent variable which

affect the dependent variable. To make the analysis meaningful advanced statistical tools like –

Ratios, Mean and percentages were applied. To test the hypothesizes Correlation Regressionand

t test were applied with the help of SPSS Software package.

1.2H LIMITATIONS OF THE STUDY

1. The study on management of non-performing assets is limited to the Indian public sector

Bank.

2. The conclusions of the study are based on the secondary information. Thus, some amount of

subjectivity might remain.

3. Reasons for NPAs and Management of NPAs are changing with the time. The study is done

in the present environment without foreseeing future developments.

4. The bank wise analyses of NPAs towards priority sector lending was not possible due to time

constraints.

5. Since the NPAs are critical banks are not willing to part all information relating with them.

6. The basis for identifying NPAs are taken from Reserve bank of India circulars.

34

1.2 I Chapterisation Of The Study

The first chapter gives an introduction about history of banking, Meaning and definition of

banks and its functions. It then focuses on the Non performing assets of public sector banks in

India with special attention to the priority sector lending.

The second chapter consists of the literature reviews by different authors on the Non

performing assetsof banks. They mainly explains about the the management of non performing

assets in the banking sector in India particularly public sector banks and the methodologies used

to determine the NPAS in banking sector.

The third chapter gives a brief summary of the banking sector in india and its current

scenario. A summary of all the public sector banks in the country is also explained.

The fourth chapter brings in the theoretical framework of the study where, the statistical tool

used for the research purpose is explained in detail and how the data was anlaysed with the

selected tool. The tool was used to analyse the significance of the information collected for 11

years.

The fifth chapter explains the relevant output of the information collected when analysed

using linear regression in SPSS. It tracks down the performance of public sector banks with

respect to the descriptive statistics, correlation, annova, r square, adjusted r square, f-value, p-

value significance level. The tool analyses the data and the relevant interpretation is provide with

each output.The ‘t’ test is also used in the study.

The sixth chapter summarises the whole research study in short. It consists of the finding

derived by using the statistical package on the data collected. The tool is used to find out the

dependence of one variable on another variable. The conclusion conveys the final result of the

study where the output of public sector bank is analysed .

35

2.REVIEW OF LITERATURE

Prashanta Athma (2000), in his study “Performance of Public Sector Banks – A case study

of State Bank of Hyderabad, made an attempt to evaluate the performance of Public Sector

Commercial Banks with special emphasis on State bank of Hyderabad. The period of the

study for the evaluation of performance is from 1980 to 1993-94. In this study, the author has

outlined the growth and progress of commercial banking in India and analaysed the trends in

deposits, various components of profits of SBH with other PSB’s, Associate banks of SBI and

SBI. Statistical techniques like ratios, percentages, compound annual rate of growth and

averages are computed for the purpose of meaningful comparison and analysis. The major

findings of this study are that since nationalisation, the progress of banking in India has been

very impressive. All three types of deposits have continuously grown during the study period,

though the rate of growth was highest in the fixed deposits. A comparison of SBH

performance in respect of resource mobilization with other banks showed the average growth

of deposits of SBH is higher than any other bank group. Profits of SBH showed an increasing

trend indicating a more than proportionate increase in the spread than in burden. Finally,

majority of the customers have given a very positive opinion about various statements

relating to counter service offered by SBH.

Jain (2002) in his thesis titled, “Non-performing Assets in Commercial and Development

Banks in India” focused that the future profitability of banks would depend on their alertness,

operational efficiency, customer orientation, creation of large volume of performing assets,

attainment of optimum levels of productivity. Since retail customers are fast becoming more

demanding in the current competitive environment, banks have to offer value-added services.

Harnessing technology to improve productivity, to ensure required standard of customer

service and internal efficiency, continual product innovation and strengthening of competitive

edge on an on-going basis to mass business will be the key factors that will impact banking

sector in the days to come. Ensuring optimum performance by each manager and staff will

also be vital. Another critical factor upon which would hinge the future of banking system

would be the ability and competence of banks to build up large volumes of quality assets in a

constantly increasing competitive environment, while adhering to prudential norms and

maintaining prescribed levels of capital adequacy on risk assets simultaneously. Continuous

quest for skill up gradation at all levels, development of vision, mission and commitment are

some of the aspects, which require urgent attention by the banking industry in future. He

concluded that banks, which are pro-active, respond quickly to the changing needs of the

36

customer, and give adequate attention to the changing scenario, alone can survive

successfully, perform well and prosper.

Rajiv Ranjan and Sarat Chandra Dhal,(2003) This paper explores an empirical approach

to the analysis of commercial banks' nonperforming loans (NPLs) in the Indian context. The

empirical analysis evaluates as to how banks’ non-performing loans are influenced by three

major sets of economic and financial factors, i.e., terms of credit, bank size induced risk

preferences and macroeconomic shocks. The empirical results from panel regression models

suggest that terms of credit variables have significant effect on the banks' non-performing

loans in the presence of bank size induced risk preferences and macroeconomic shocks.

Moreover, alternative measures of bank size could give rise to differential impact on bank's

non-performing loans. In regard to terms of credit variables, changes in the cost of credit in

terms of expectation of higher interest rate induce rise in NPAs. On the other hand, factors

like horizon of maturity of credit, better credit culture, favorable macroeconomic and business

conditions lead to lowering of NPAs. Business cycle may have differential implications

adducing to differential response of borrowers and lenders.

Nachiket Mor and Bhavna Sharma, (2002) highlighted some major micro-level issues that

were believed to be the root of why unsustainable performance levels are being observed

within banks. It was argued that unless the micro level issues would be dealt with, even after

the systemic issues being resolved, the problem of NPAs or other failures of the

intermediation process may resurface with greater intensity. According to the researchers, the

manner in which banks manage the three phases in the life cycle of an asset (creation,

monitoring and recovery) determines the quality of the intermediation process within a bank.

In the paper, the needs for internally consistent business models to guide the behaviour of a

bank in each of these three phases’ were discussed. It was argued that the set of

organizational competencies, the regulatory framework in which the banks operate, the

quality of disclosure and the incentive structure of the management and Boards produce an

inconsistent framework, which lead to an unsustainable performance level for a bank. The

role of statistics such as the Economic Value of Equity (EVE) and EVE at Risk (EVER) (if

mandatory disclosed on a monthly basis) in making these inconsistencies visible and

therefore aiding in their elimination, was also explored in the paper.

S. Ramasastri and N. K.Unnikrishnan (2005) studied that, NPAs are largely fallout of

banks' activities with regard to advances, both at the management and implementation levels

(including overall controls by the top management), the credit appraisal system, monitoring

of end-usage of funds. It also depends on the overall economic environment, the business

37

cycle and the legal environment for recovery of defaulted loans. Since the overall

environment is more or less same for all banks, non-performing loans of individual banks are

mainly a result of management controls and systems put in place by them and recovery

procedures. They concluded that higher than average credit expansion can further strengthen

banks if there is a good credit appraisal systems, strict recovery procedures and overall checks

and balances by the top management.

Jaynal Ud-din Ahmed (2010) conducted a study on “ Priority Sector Lending By

Commercial Banks in India” The priority sector lending is mainly intended to ensure that the

assistance from the banking system to those sectors of the economy which has not received

adequate support of institutional finance. The attainment of the socio economic priorities of

the government like growth of agriculture, promotion of small entrepreneurs and

development of backward area etc is the major responsibility of commercial banks. The

commercial banks played a significant role among the institutional sources of credit for

priority sector in India. The significance of bank credit in the priority sector can be observed

against the backdrop of increasing quantum of such credit to this sector. In order to study the

growth scenario of sector-wise NPAs, linear growth rate and compound growth rate has been

considered. A comparison of credit targets and actual achievements has been made to judge

the credit performance. Besides this simple tabulation, percentage analysis has also been

used. The socialization of bank credit has been the subject matter of PSL by the banks. The

banks operating in the study area, keeping in view of their aim and objectives for the

economic development under the lead bank schemes, have made an effort in providing

financial support to agriculture and SSI. The PSL is done in the districts through annual credit

plans.

Poongavanam.S (2010) conducted study on ‘Non-performing assets: Issues, Causes and

remedial Solution” and highlighted the main causes of NPA in India. While the primary

function of banks is to lend funds as loans to various sectors such as agriculture, industry,

personal loans, housing loans etc., in recent times the banks have become very cautious in

extending loans, this is due to mounting nonperforming assets (NPAs). Therefore, an NPA

account not only reduces profitability of banks by provisioning in the profit and loss account,

but their carrying cost is also increased which results in excess & avoidable management

attention. The article also mention about the reason of an asset turning NPA from economic

side, industry side, borrower side and from the banking side. The article also highlights the

reasons for an assets becoming NPA and remedial measures are to be taken. Due to various

steps taken by the Government of India, NPA levels were reduced to considerable level.

38

(Nearly 2.7% of the loans on the balance sheet of bank, from 8.8%).So it is an indication for

the bankers with bad loan in their portfolio to take appropriate actions immediately.

Ramachandran reddy(2011), focused their attention on the seriousness of NPA in the public

sector banks. They argued that with the introduction of the international norms of the income

recognition, asset calculation and the provision in the banking sector, managing non-

performing has emerged as one of the major challenges facing public sector banks. They felt

that total elimination of the NPAs is not possible in the banking business owing to

externalities but their incidence can be minimized. To reduce the seriousness of the problem,

they suggest that the banks should adopt proper policies of appraisal, supervision and follow

of advances, special recovery cells may be set up at all regional zonal levels. Recovery

officers should be appointed at making necessary provision s and contingencies. Seven banks

were operating in B category (those banks, which after operating profits would have not

sufficient funds to provide for the provisions thereby incurring net losses. And the remaining

was placed in the E category those banks which were to earn significant income to sufficient

operating profits. Apart from studying the profitability of the above mentioned banks, capital

adequacy and other balance sheet trends were also discussed. Moreover, same short term and

long term strategies for enhancing the profitability level were suggested.

Kamalpreet Kaur, Balraj Singh (2011) In their research, “Non-Performing Assets Of

Public And Private Sector Banks” explained the effect of NPA on the profitability and net-

worth of banks. The NPAs growth involves the necessity of provisions, which reduces the

overall profits and shareholders’ value. The problem of NPAs is not only affecting the banks

but also the whole economy. The Indian banking sector is facing a serious problem of NPAs.

The extent of NPAs is comparatively higher in public sectors banks. The level of NPAs is one

of the drivers of financial stability and growth of the banking sector. The Financial companies

and institutions are nowadays facing a major problem of managing the Non-Performing

Assets (NPAs) as these assets are proving to become a major setback for the growth of the

economy. Both types of banks showed a declining trend in gross and net NPAs over the

period of the study. In view of several options available to banks for dealing with NPAs,

banks have been able to recover a significant amount of NPAs. Both public and private sector

banks recovered a higher amount of NPAs during 2008-09 than that during the previous year.

They concluded that NPAs have always been a big worry for the banks in India. It is just not

a problem for the banks; they are bad for the economy too. The money locked up in NPAs is

not available for productive use and adverse effect on banks' profitability is there. The extent

39

of NPA is comparatively higher in public sectors banks. In this study it is found that to

improve the efficiency and profitability, the NPAs have to be scheduled. Various steps have

been taken by government to reduce the NPAs.

Suresh Patidar and Ashwini Kataria (2012) were conducted a study to analyse priority

sector lending by selected public and private sector banks in India. They assessed this based

on statistical tools like regression analysis, ratio analysis and t-test. The authors found the

significant impact of priority sector lending on total NPA of Public Sector banks, whereas in

case of Private Sector Banks, there was no significant impact of priority sector lending on

total NPA of Banks. Also the result showed the significant difference between NPA of SBI &

Associates, Old Private Banks and New Private Banks with the NPA of Nationalized Banks,

the benchmark category.

Veerakumar (2012) reviewed on “Non-Performing Assets in Priority Sector: A Threat to

Indian Scheduled Commercial Banks”. This research study aims to find out the categories of

priority sector advances which contribute to the growth of total priority sector NPAs during

the study period of 10 years between 2001-02 and 2010-11. The researcher found that, the

Gross NPAs of Scheduled Commercial Banks have been increasing year after year. The

NPAs in priority sector were more in public sector banks when compared to private and

foreign banks. NPAs in Priority sector have significant impact on total NPAs in Public sector

banks, whereas in Private sector banks, NPAs in priority sector have no significant impact on

total NPAs.

Najmi Shabbir (2013) analyses the breakup of Priority Sector Advances to Sub-sectors

within the overall Priority Sector advances (PSA). After nationalisation of the Banks, the

banks directed lending to certain sectors, such as, Agriculture, Small Scale Industries and

weaker section and others, which are collectively known as Priority Sector. This was

emphasized in his article ‘sector wise priority sector advances in India’. Under this Sectoral

and Sub-sectoral targets have been laid down from time to time, with the aim of upliftment of

these sectors and to bring about a balanced development of the country. The comparative

analysis of Agricultural Sector advances and Small Scale Industries advances by SCBs and

PSBs (Public Sector Banks) from 1969 to 2011 has been carried out. In this paper an analysis

of Agricultural Sector, Small Scale Industries and Micro and Small Enterprises within the

PSA has been presented and advances to these sectors have been analysed over a period of

time. It was found that over the selected period of time, indirect advances to agriculture had

increased while direct advances decreased from 80 percent of Agricultural credit in 1999 to

40

68 percent in 2007. Non Public Sector Scheduled Commercial banks have been giving a

lesser percentage in terms of direct credit to agriculture and more to indirect credit.

Sambha et al. (2013) highlighted in the research, the problems of NPAs are more serious in

Public Sector Banks than Private Sector Banks. Reduction of NPAs in banking sector should

be treated as a national priority to make the Indian banking system more strong and resilient.

The major chunk of NPAs came from priority-sector as well as non-priority sector. In priority

sector, the Gross NPAs showed declined trend in the year 2007 and increased trend in the

year 2008 & 2011 due to the implementation of the one-time settlement scheme for small and

marginal farmers. In Non-Priority Sector, the Gross NPAs showed an increasing trend during

study period.

B.Selvarajan & Dr. G. Vadivalagan (2013), carried out a study on “Management of Non-

Performing Assets in Priority Sector reference to Indian Bank and Public Sector Banks

(PSBs)” In India the magnitude of the problem of bad debts was not taken seriously.

Subsequently, following the recommendations of Narasimham committee and Verma

committee, some steps have been taken to solve the problem of old NPAs in the balance

sheets of the banks. It continues to be expressed from every corner that there has rarely been

any systematic evaluation of the best way of tackling the problem. There seems to be no

unanimity in the proper policies to be followed in resolving this problem. There is also no

consistency in the application of NPA norms, ever since these have been recognized. The

present study is an analytical study. For this study, primary data and secondary data are

collected. The primary data is collected from the borrowers with the help of questionnaire.

The secondary data is collected from the annual reports of Indian Bank and Reserve Bank of

India website. The Priority sector advances have been analysed in detail under three major

heads, viz., Agriculture, Small Scale Industries and Other Priority Sector. Further weaker

section advances, which forms part of Priority sector, have also been studied. The data related

to Priority sector advances for 10 years have been collected for Indian Bank and for the

Public Sector Banks as a whole. The data have been tabulated comfortably with required

percentage calculation and mean calculations. Timely action is essential to ensure future

growth of the Bank.

Dr.P.Raman (2013), conducted a study on “A Study on the Performance of Commercial

Banks towards Priority Sector Advances in Tamil Nadu”. This study analyses the

performance of the commercial bank in the area of priority sector lending for a period of 10

years (2000–2001 to 2009–2010). For analysing the performance of the commercial banks

41

tools like percentage analysis, growth rate and average are used. Availability of cheap and

adequate credit is a boon for the Economic Development (ED) of a country. By providing

credit to farmers, industries, traders, housing, Education loan and small businessmen the

economic progress can be achieved. The study is attempted to analyse about the various

bankers providing financial assistance to priority sector. The present research pays its

attention on both Public sector and Private sector banks in Tamil Nadu and the expected and

perceived quality on banking services and the satisfaction level of the particular service of the

bank. This study employs analytical type of methodology; the present study has used

secondary data. The secondary data at the national level was collected from the publishers of

Government of India, RBI, and Indian banks association such as economic survey, lead banks

annual report, report on trends and progress in banking, Report on currency and finance,

statistical tables relating to bank in India etc. It is evident that the Non-performing asset in

India has adversely affected the profitability and efficient functioning of the banks. To

improve the efficiency and profitability, the NPA has to be scheduled. Various steps have

been taken by government to reduce the NPA. It is highly impossible to have zero percentage

NPA. Expect to see a further improvement in the operating cost structure of public sector

banks as they improve their scale of operations.

42

3.1 INDUSTRY PROFILE

The Indian banking industry has evolved and transformed itself from a socialist licensed raj

business to a liberalized, modernized & technology oriented white elephant of India. Banking

industry is the backbone for any economy & is the key indicator to see & analyze the level of

development of a country.

The Indian banking Industry has been undergoing major changes, reflecting a number of

underlying developments. Advancement in communication and information technology has

facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick

dissemination of information. Structural reforms in the banking sector have improved the

health of the banking sector. The reforms recently introduced include the enactment of the

Securitization Act to step up loan recoveries, establishment of asset reconstruction

companies, initiatives on improving recoveries from Non-performing Assets (NPAs) and

change in the basis of income recognition has raised transparency and efficiency in the

banking system. Spurt in treasury income and improvement in loan recoveries has helped

Indian Banks to record better profitability

On the other hand there are many challenges as well which the Indian banking industry has to

face in the road ahead like that of financial inclusion, deregulation of interest rates on saving

deposits, slow industrial growth, a large government deficit, increased stress on some sectors

(such as, State utilities, airlines, and microfinance) & the implementation of Basel III. The

Indian banks even braved the subprime crises that rocked the global financial sector in 2008.

The Indian banks ability to protect asset health through prudent lending helped them emerge

from this crisis unscathed.

Nevertheless seeing the credentials of the Indian Banks one can safely conclude that the

industry might have many stumbling blocks in the ‘Road Ahead’ but when ever encountered

with such blocks in the past it has used them as a stepping stone & has always ‘Transformed’

itself ( for the better) and ‘Evolved’ as a winner

43

Growth Rate:

The total assets of Indian banks, which are regulated by the Reserve Bank of India (RBI) and

the Ministry of Finance (MoF), were pegged at Rs 82,99,220 crore (US$ 1564.8 billion)

during FY12. Further, the revenues of Indian banks grew almost four-fold from US$ 11.8

billion to US$ 46.9 billion over the decade spanning 2001-10.

The banking sector of India has an annual growth rate of 23 percent, contributing nearly 6

percent of GDP & employing nearly 7.4 million people & has outperformed most banking

indices in the world with highest total returns to shareholders at 36.76%. The Indian banking

sector has a large market still unexplored with the Indian households being one of the highest

savers in the world accounting for 69% of India gross national saving of which only 47% is

accessed by the banks.

3.2 COMPANY PROFILE

1.BANK OF BARODA

Bank of Baroda (BoB) was founded by Maharaja Sayajirao Gaekwad in July 1908. It started with

a paid up capital of Rs10 lakh. Bank of Baroda is one of the leading commercial banks in India.

The Bank's solutions includes personal banking, which includes deposits, gen-next services, retail

loans, credit cards, debit cards, services and lockers; business banking. Bank of Baroda is a

pioneer in various customer centric initiatives in the Indian banking sector. Bank is amongst first

in the industry to complete an all-inclusive rebranding exercise wherein various novel customer

centric initiatives. The total income is Rs. 388272.793 Million (year ending Mar 2013) and net

profit - Rs. 44807.2 Million (year ending Mar 2013).

2.STATE BANK OF INDIA

The evolution of State Bank of India can be traced back to the first decade of the 19th century. It

began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. State Bank of

India is the largest state-owned banking and financial services company in India. The Bank

provides banking services to the customer. In addition to the banking services, the Bank through

their subsidiaries, provides a range of financial services, which include life insurance, merchant

banking, mutual funds, credit card, factoring, security trading, pension fund management and

primary dealership in the money market. It is a government-owned corporation with its

headquarters in Mumbai, Maharashtra. As of December 2013, it had assets of US$388 billion,

44

making it the largest banking and financial services company in India by assets. Mrs. Arundhati

Bhattacharya is the current CEO of State Bank Of India Ltd.

3.PUNJAB NATIONAL BANK

Punjab National Bank is a state-owned commercial bank located in New Delhi. The Bank is one of

the Big Four Banks of India. They offer banking products, and also operate credit card and debit

card business, bullion business, life and non-life insurance business, and gold coins and asset

management business. Mr. KR Kamath is the CEO of Punjab National Bank. PNB is the third

largest bank in India in terms of asset size. It was founded in 1895 as a private banking company

by Lala Lajpat Rai. The total income  is Rs. 461092.519 Million (year ending Mar 2013) and net

profit - Rs. 47476.715 Million

4.UNION BANK

Union Bank of India was established on 11th November 1919 with its headquarters in the

city of Bombay now known as Mumbai.The Head Office building of the Bank in Mumbai

was inaugurated by Mahatma Gandhi, the Father of the nation in the year 1921 Resources

are mobilized through Current, Savings and Term Deposits and through refinance and

borrowings from abroad. The Bank has a large clientele base of over 49 million.On the

technology front the Bank has taken early initiatives and 100% of its branches are

computerized. The Bank has also introduced Core Banking Solution with connectivity

between branches. 100% of the business of the Bank is under Core Banking Solution

making it a leader among its peers in infusion of technology. Many innovative products

are developed using the technology platform to offer an array of choices to customers,

adding speed and convenience to transactions. Technology will also enable the Bank to

derive substantial cost reduction while creating the requisite capacity to handle the ever

increasing volume of business in a competitive environment that offers immense

opportunities. At the end of March 2013 the Bank achieved total business level of Rs.

4,75,673  crore (Rupees four lakh seventy five thousand six hundred seventy three

crore).Behind all these achievements is a dedicated team of staff, which is truly

cosmopolitan in its composition. Many generations of members of staff have contributed

in building up the strong edifice of the Bank. The present team of over 31,000 members of

staff distinguishes itself with its customer centricity, willingness to learn and adherence to

values enabling us to be recognized as a caring organization where people enjoy their

45

work and relationship with customers.

5.BANK OF INDIA

Bank of India was founded on 7th September, 1906 by a group of eminent businessmen

from Mumbai. The Bank was under private ownership and control till July 1969 when it

was nationalisedalong with 13 other banks.Beginning with one office in Mumbai, with a

paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over

the years and blossomed into a mighty institution with a strong national presence and

sizable international operations. In business volume, the Bank occupies a premier position

among the nationalised banks. The Bank has 4545 branches in India spread over all states/

union territories including specialized branches. These branches are controlled through 50

Zonal Offices. There are 54 branches/ offices and 5 Subsidaries and 1 joint venture

abroad. Presently Bank has overseas presence in 20 foreign countries spread over 5

continents – with 53 offices including 4 Subsidiaries, 4 Representative Offices and 1 Joint

Venture, at key banking and financial centres viz., Tokyo, Singapore, Hong Kong,

London, Jersey, Paris and New York.Contribution of foreign branches in the global

business of the Bank as at 31.03.2013 is as under:

Deposits22.98%

Advances 30.36%

Business Mix 26.19%

6.ALLAHABAD BANK

Allahabad Bank  is a nationalised bank with its head-quarters in Kolkata, India. It is the

oldest joint stock bank of India. It was founded in Allahabad in 1865.As of 31 March

2012, it had over 2,500 branches across India. The bank has a branch in Hong Kong and a

representative office in Shenzen. The government's ownership of Allahabad Bank shrank

in October 2002 after the bank engaged in an Initial Public Offering (IPO) of  100

million (US$1.6 million) of shares, each with a face value   10. The IPO reduced the

46

Government's shareholding to 71.16%. Then in April 2005 the bank conducted a second

public offering of   100 million of shares, each with a face value   10 and selling at a

premium of   72. This offering reduced the Government's ownership to 55.23%.In June

2006 the bank opened its first office outside India when it opened a representative office

in Shenzen, Mainland China. In February 2007, Allahabad Bank opened its first overseas

branch, in Hong Kong. In March 2013, the bank's business crossed the   10 million

million mark.

7.ANDHRA BANK

It is a medium-sized public sector bank (PSB), with a network of 2000+ branches, 15

extension counters, 38 satellite offices and 1563

automated teller machines (ATMs) as on 30 Nov 2013. During 2011–12, the bank entered

the states of Tripura and Himachal Pradesh. The bank now operates in 25 states and three

Union Territories.The Government of India owns 58% of its share capital and is going to

increase it to 62.14% by infusing  2 billion (US$32 million) in capital. The state

owned Life Insurance Corporation of India holds 10% of the shares. The bank has done a

total business of  2230 billion (US$36 billion) for the fiscal year ended 31 March 2013.

Andhra Bank is 100% CBS as on date. This will benefit the customers, who will have

access to banking andfinancial services anytime, anywhere through multiple delivery

channels. Andhra Bank is a pioneer in introducing Credit Cards in the country in 1981

8.BANK OF MAHARASHTRA

Bank of Maharashtra is a major bank of Maharashtra, India, registered on 16 September

1935 with an authorised capital of   1 million. It commenced business on 8 February

1936.Known as a common man's bank since its inception, the bank's initial financial

assistance  to small units has given birth to many of today's industrial houses. After

nationalisation in 1969, the bank expanded rapidly. The Bank has the largest network of

branches by any Public sector bank in the state of Maharashtra.The Bank was founded by

a group of visionaries led by the late V. G. Kale and the late D. K. Sathe and registered as

a Banking Company on 16 September 1935 at Pune. Today, Bank of Maharashtra has

over 15 million customers across the length and breadth of the country served through

1825 branches in 29 states and 2 union territories.Bank of Maharashtra has informed that

Shri Narendra Singh who had assumed the office of Chairman & Managing Director from

1 February 2013, has demitted his office on 30 September 2013 on attaining

47

superannuation. Shri Sushil Muhnot is new Chairman & Managing Director.

9.CANARA BANK

Canara Bank is an Indian state-owned bank headquartered in Bangalore, Karnataka. It was

established in 1906, making it one of the oldest banks in the country. As of December

2013, the bank had a network of 3564 branches and 4000 ATMs spread across India. The

bank also has offices abroad in London, Hong Kong, Moscow, Shanghai, Doha,

and Dubai. Widely known for customer centricity, Canara Bank was founded in 1906 by

Shri Ammembal Subba Rao Pai, a great visionary and philanthropist, at Mangalore, then a

small port in Karnataka. The bank was nationalised in 1969. Today, Canara Bank

occupies a premier position in the comity of Indian banks with an unbroken record of

profits since its inception.

10.Central Bank Of India

Central Bank of India,a government-owned is one of the oldest and largest commercial

banks in India. It is based in Mumbai. The bank has 4100 branches and 270 extension

counters across 27 Indian states and three Union Territories. At present, Central Bank of

India has one overseas office, which is a joint venture with Bank of India, Bank of

Baroda, and the Zambian government. The Zambian government holds 40 per cent stake

and each of the banks has 20 per cent. Recently it has also opened a representative office

at Nairobi, Kenya. Central bank of India is one of 18 Public Sector banks in India to

get recapitalisation  finance from the government over the next 24 months. Central Bank

of India has approached the reserve bank of India (RBI) for permission to open

representative offices in five more locations - Singapore, Dubai, Doha, London and Hong

Kong. As on 31 March 2013, the bank's reserves and surplus stood at   6,868.85 crore. Its

total business at the end of the last fiscal amounted to   2,09,757.33 crore.

11.CORPORATION BANK

Corporation Bank is a public sector banking company headquartered in Mangalore, India.

The bank has pan-India presence with 6,677 functional units comprising 1869 branches,

1425 ATMs & 3545 branchless banking units as of 31 March 2013.The total business of

the bank during the financial year 2012-13 has been 2,84,722 crores, as on 31 March

2013. The total deposits have grown to 1,66,005 crores. Total income of the bank reached

16,942.02 crores during this period. Operating profit of the bank reached 3,037 crores and

net profit reached 1,434.67 crores.

48

12.DENA BANK

Dena Bank is one of the earliest banks inIdia headquartered in Mumbai. Dena Bank was

founded on 26 May 1938, by the family of Devkaran Nanjee under the name Devkaran

Nanjee Banking Company Ltd. It is one of thenationalised banks of India.It became a

public limited  in December 1939 and later the name was changed to Dena Bank Ltd. It

has a network of over 1400 branches.The logo of Dena Bank depicts Goddess Lakshmi,

the Goddess of Wealth, according to Hindu mythology. The 'D' in the logo reflects the

dynamism, dedication and the drive towards customer satisfaction

13.IDBI BANK

IDBI Bank Ltd. is today one of India's largest commercial Banks. Headquartered in

Mumbai, IDBI Bank today rides on the back of a robust business strategy, a highly

competent and dedicated workforce and a state-of-the-art information technology

platform, to structure and deliver personalised and innovative Banking services and

customised financial solutions to its clients across various delivery channels. As on March

31, 2013 IDBI Bank has a balance sheet of Rs. 3,22,769 crore and business size of Rs

4,23,423 crore. Mr. M. S. Raghavan is the chairman and managing director of IDBI bank.

As an Universal Bank, IDBI Bank, besides its core banking and project finance domain,

has an established presence in associated financial sector businesses like Capital Market,

Investment Banking and Mutual Fund Business.

14.INDIAN BANK

Indian bank is an indian state-owned financial services company headquartered

in chennai, india. it has 22,000 employees, 2100 branches and is one of the big public

sector banks of india . it has overseas branches in colombo, jaffna, sri lanka, singapore,

and 229 correspondent banks in 69 countries. since 1969 the government of india has

owned the bank, which celebrated its centenary in 2007.

15.INDIAN OVERSEAS BANK

Indian Overseas Bank (IOB) is a major bank based in Chennai (Madras), with more than

3078 domestic branches, 3 extension counters and six branches overseas as of 31.03.2012.

Indian Overseas Bank has an ISO CERTIFIED in-house Information Technology

department, which has developed the software that 3003 branches use to provide online

49

banking to customers; the bank has achieved 100% networking status as well as 100%

CBS status for its branches. IOB also has a network of about 2100 ATMs all over India

and IOB's InternationalVISA Debit Card is accepted at all ATMs belonging to the Cash

Tree and NFS networks. IOB offers internet Banking (E-See Banking) & Mobile Banking

and is one of the banks that the Govt. of India has approved for online payment of

taxes.The bank's business more than doubled in the last four years.The net profit for the

year ended March 31, 2012 stood at Rs 1,050.13 crore. Total income stood at Rs

19,578.13 crore as against Rs 13,326.56 crore registered during the same period last

financial year.For the full year, the total business grew by 24 per cent to Rs 3,21,707 crore

from Rs 2,59,020 crore.IOB has planned to achieve total business of Rs 3.85 trillion to Rs

4 trillion this fiscal.

16.ORIENTAL BANK OF COMMERCE

Oriental Bank of Commerce is an India-based bank established in Lahore (then a city

of British India, and currently in Pakistan), is one of the public sector banks in India. The

bank was nationalised on 15 April 1980. At that time total working of the bank was  483

crores having 19th position among the 20 nationalised banks. Within a decade the bank

turned into one of the most efficient and best performing banks of India. The bank has

progressed on several fronts crossing the Business Mix mark of  2 lac crores as on 31

March 2010 making it the seventh largest public sector Bank in India, achievement of

100% CBS, reorienting of lending strategy through Large & Mid Corporates and

establishment of new wings viz., Rural Development and Retail & Priority Sector. The

Bank has to its utmost credit lowest staff cost with highest productivity in the Indian

banking industry

17.PUNJAB & SIND BANK

Punjab & Sind Bank (P&SB) is a major Public Sector bank in Northern India and working

100% on CBS platform. The banks government shareholding is 79.86%. Of its 1249

branches and offices spread throughout India, almost 515 are in Punjab state. The bank's

corporate headquarters is in New Delhi. Its net profit is 339.22 crores and net NPA is

2.14% for the year ending 2012-13. The banks net profit for the quarter ending June 2013

is 121.71 crores. Total business of the bank is 1,32,000 crores. Business per employee is

14.35 crore & business per branch is 108.49 crores. Bank has registered a tremendous

50

growth rate in Housing, Auto & Retail loan scheme. Under DBT (Direct Benefit Scheme)

bank had opened 81,204 accounts in 43 districts. The bank has recently started two

variants of Rupay cards- Rupay debit card and Rupay Kissan credit card. After fully CBS

environment, bank has been continiously launching different-different products. Today,

Punjab & Sind Bank providing Internet banking, Mobile banking, tele banking, and sms

alert facility to his customers and giving highest rate of interest on fixed deposits for

senior citizens. Punjab & Sind Bank also providing a variety of savingslike Basic saving

account for students, pension saving account for pensioners, saving general accounts and

saving premier account. In current account, the bank providing two types account- current

account general and current account premier. Recently, the bank has opened a HUB in

Chandigarh city for housing loan proposals. Its tag line is "Where service is a way of life".

18.SYNDICATE BANK

Syndicate Bank was established in 1925 in Udupi, the abode of Lord Krishna in coastal

Karnataka with a capital of Rs.8000/- by three visionaries - Sri Upendra Ananth Pai, a

businessman, Sri Vaman Kudva, an engineer and Dr.T M A Pai, a physician - who shared

a strong commitment to social welfare. The Bank is well equipped to meet the challenges

of the 21st century in the areas of information technology, knowledge and

competition. The Bank provides a range of financial products and services to the retail

customers, including housing loans, retail trade loans, vehicle loans, consumer loans,

education loans, mortgage loans and investment loans. They also offer other services,

such as TeleBanking, short messaging service banking and data warehousing. Mr. Sudhir

Kumar Jain is the chairman and managing director of Syndicate bank. The total income is

Rs. 182950.451 Million (year ending Mar 2013) and net profit of Rs. 20044.218 Million

(year ending Mar 2013).

19.UCO BANK

Uco Bank, formerly United commercial bank, established in 1943 in Kolkata, is one of the

oldest and major commercial banks of India. Ghanshyam Das Birla, an eminent Indian

industrialist, during the Quit India movement of 1942, had conceived the idea of

organising a commercial bank with Indian capital and management, and the United

Commercial Bank Limited was incorporated to give shape to that idea. The Bank was

51

started with Kolkata as its Head Office with an issued capital of  2 crores and a paid-up

capital of  1 crore. The bank, along with 13 major commercial banks of India, was

nationalised on 19 July 1969 by the Government of India. Its name was changed to UCO

Bank, in 1985, by an act of Indian Parliament as a bank in Bangladesh existed with the

name “United Commercial Bank” which caused confusion in the international banking

arena. As of 6 January 2013 the bank had 2550 Service Units spread all over India, with

four overseas branches two each in Singapore and Hong Kong. The Bank has 44 Zonal

Offices spread all over India. UCO Bank's headquarter is located in Kolkata.

20.UNITED BANK OF INDIA

United Bank of India (UBI) is a state-owned financial services company headquartered

in Kolkata, West Bengal, India. Presently the bank has a three-tier organizational setup

consisting of its Head office in Kolkata, 35 Regional offices and 2001 branches spread all

over India. However, its major presence is in eastern India. The bank has three full

fledged overseas branches, one each at Kolkata, New Delhi and Mumbai. United Bank of

India now aims to expand its international activities. On 30 March 2009, the Indian

government approved the restructuring of United Bank of India. The government

proposed to invest 2.5 billion rupees in shares by 31 March and another 5.50 billion in the

next fiscal year in Tier-I capital instruments. The move is part of the Indian government's

program to improve the capital base of the state-owned banks.

21.VIJAYA BANK

Vijaya Bank, was established by Shri. Attavar Balakrishna Shetty at Bunts Hostel in

Mangalore on October 23, 1931. Since it was established on Vijayadashami Day, it was

named ‘Vijaya Bank. The objective was to promote banking habits, thrift and

entrepreneurship among the farming community of Dakshina Kannada district in

Karnataka State. The bank became a scheduled bankin 1958. Vijaya Bank steadily grew

into a large All Indian bank, with nine smaller banks merging with it during 1963-68. The

bank wasnationalised on April 15, 1980. The bank has built a network of 1502 branches,

864 centers, 48 Extension Counters and 1500 ATMs as on 12.02.2014, that span all 28

states and 4 union territories in the country.. All branches are functioning on the

CBS(Core Banking Solution) platform, covering 100% of the Bank's business.

52

4. CONCEPTUAL FRAMEWORK

A conceptual framework is an analytical tool with many variations and contexts. It is used to

make conceptual distinctions and organize ideas. The analytical tool used for the study is

Simple linear Regression,correlation(two tailed test) and T Test.

4.1 A Simple linear regression 

simple linear regression is the least squares estimator of a linear regression model with a

single explanatory variable. In other words, simple linear regression fits a straight

line through the set of n points in such a way that makes the sum of squaredresiduals of the

model (that is, vertical distances between the points of the data set and the fitted line) as small

as possible.

The adjective simple refers to the fact that this regression is one of the simplest in statistics.

The slope of the fitted line is equal to thecorrelation between y and x corrected by the ratio of

53

standard deviations of these variables. The intercept of the fitted line is such that it passes

through the center of mass (x, y) of the data points.

The general formula for simple linear regression model is:

Y=a+Bx

Y’ = A predicted value of Y (which is your dependent variable)

a = the value of Y when X is equal to zero. This is also called the “Y Intercept”.

b = the change in Y for each 1 increment change in value of X

X = your first independent variable for which you are trying to predict value of Y’

Applying Simple linear Regression For The Research Study:

For the purposes of conducting the research,simple linear regression model has been used for

a period of 11 years. Simple linear regression is used to determine if a relationship exists

between the dependent variable and the independent variable.In this research study the

following equation are used:

1.NPA,t = α0 + α1 PSL,t + μ,t

Where,

NPA,t = NPA of public sector Bank at time t.

α0 = Intercept of Regression Equation.

α1 = Slope of the Regression Equation.

PSL,t = Priority Sector Lending of public sector bank at time t.

2.NPA,t = α0 + α1 RNPA,t + μ,t

Where,

NPA,t = NPA of public sector Bank at time t.

α0 = Intercept of Regression Equation.

α1 = Slope of the Regression Equation.

RNPA,t = Recovery Non performing asset, t.

54

4.1 B CORRELATION TWO TAILED TEST

When we are using a significance level of 0.05, a two-tailed test allots half of your alpha to

testing the statistical significance in one direction and half of your alpha to testing statistical

significance in the other direction.  This means that .025 is in each tail of the distribution of

your test statistics. When using a two-tailed test, regardless of the direction of the relationship

we hypothesize, we are testing for the possibility of the relationship in both directions.  For

example, we may wish to compare the mean of a sample to a given value x using a t-test. Our

null hypothesis is that the mean is equal to x. A two-tailed test will test both if the mean is

significantly greater than x and if the mean significantly less than x. The mean is considered

significantly different from x if the test statistic is in the top 2.5% or bottom 2.5% of its

probability distribution, resulting in a p-value less than 0.05. 

Applying correlation two tailed For The Research Study:

It is done to find out if there is any correlation between priority sector advances and non

priority sector advances in contributing towards total NPAs.For this purpose the priority

sector advances and non priority sector advances for 11 years of PSBs are taken into

consideration. If p-value is less than 0.05, reject the null hypothesis and accept the alternative

hypothesis.

4.1 C Paired Sample T test

The Paired-Samples T Test procedure compares the means of two variables for a single

group. The procedure computes the differences between values of the two variables for

each case and tests whether the average differs from 0.

Example. In a study on high blood pressure, all patients are measured at the beginning of

the study, given a treatment, and measured again. Thus, each subject has two measures,

often called before and after measures. An alternative design for which this test is used is a

matched-pairs or case-control study, in which each record in the data file contains the

response for the patient and also for his or her matched control subject. In a blood pressure

study, patients and controls might be matched by age (a 75-year-old patient with a 75-

year-old control group member).

55

Statistics. For each variable: mean, sample size, standard deviation, and standard error of

the mean. For each pair of variables: correlation, average difference in means, t test, and

confidence interval for mean difference (you can specify the confidence level). Standard

deviation and standard error of the mean difference.

Applying Paired Simple T test For The Research Study:

In this research study paired simple T test is done to find out the impact of Gross NPA ratio

and Net NPA ratio on the priority sector NPA ratio.For this purpose the Gross NPA ratio and

Net NPA ratio of PSBs for a period of 11 years is taken into consideration.The priority sector

NPA ratio is also taken for the study.

5. DATA ANALYSIS AND INTERPRETATION

Graph 1: Graph showing the priority sector advances in the public sector banks.

56

Interpretation:

We can see that there is gradually increase in the amount of advances given to priority

sectors especially in reference to the agriculture sector. In 2003, the advances were to the tune

of Rs. 20000 crores and it saw a increase to Rs.80000 crores. A huge of the advances went to

the agriculture sector in order to meet the farmer’s requirements as well to cover the losses in

an event of uncertain calamities. The next sector that achieved such a target was the small

medium industries sector.

Graph 2: Graph representing the non-performing assets of the public sector banks

YEAR

20032004

20052006

20072008

20092010

20112012

20130

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

TOTAL NPAS OF PUBLIC SECTOR BANKS

TOTAL NPAS OF PUBLIC SECTOR BANKS

Interpretation

57

You can see that the NPA’s have tripled over the decade to the tune of Rs.150000 Cr of

the public sector banks. A high ratio of the NPA would certainly bring an negative impact to

the bank as a whole , if the NPA increases at the same pace in the near future it would prove

fatal for the banks and a question of the existence will come into being.

5.1 C .Based on the data gathered for Public sector banks for 11 years, the following output has been derived by using simple linear regression model in SPSS:

Regression:simple linear regression is done to find the impact of priority sector lending on NPA of PSBs.

Table 1:Table showing descriptive statistics of variables

LOG TOTAL

NPAS OF

PSBS

LOG TOTAL PRIORITY SECTOR ADVANCES

N

Valid 11 11

Missing 0 0

Mean 10.9690 13.2410

Std. Error of

Mean.13566 .19094

Median 10.8227 13.3220

Mode 10.56a 12.21a

58

Std. Deviation .44994 .63327

Variance .202 .401

Skewness 1.434 -.361

Std. Error of

Skewness.661 .661

Kurtosis 1.269 -1.163

Std. Error of

Kurtosis1.279 1.279

Range 1.40 1.86

Minimum 10.56 12.21

Maximum 11.96 14.06

Interpretation

The descriptive statistics table can be used to summarize the data gathered. It helps to get the

descriptive information of the data .From the table the following observation has been

observed:

The mean of the variables used in the analysis. The Independent variable priority

sector advances has the highest mean.

The standard error of mean describes the error term in each of the mean values.

The standard deviation of both the variables is less than one so the deviation from the

mean is less.

The variance measures how the set of numbers is spread out. It will be always

positive.

Skewness is used to show both positive and negative skew values rather than balanced

value. It is the risk when the data is skewed to the left or right of the mean.

Standard error of skewness denotes the error terms with respect to skewness values.

The minimum and maximum values represents the highest and lowest values of the

variables.

59

60

Correlations

Table 2:Table showing correlation values

LOG TOTAL NPAS

OF PSBS

LOG TOTAL

PRIORITY

SECTOR

ADVANCES

Pearson Correlation

LOG TOTAL NPAS OF PSBS 1.000 .620

LOG TOTAL PRIORITYSECTOR

ADVANCES.620 1.000

Sig. (1-tailed)

LOG TOTAL NPAS OFPSBS . .021

LOG TOTAL PRIORITYSECTOR

ADVANCES.021 .

N

LOG TOTAL NPAS OF PSBS 11 11

LOG TOTAL PRIORITYSECTOR

ADVANCES11 11

Interpretation:

1. Pearson Correlation -These numbers measure the strength and direction of the linear

relationship between the two variables. The correlation coefficient can range from -1

to +1, with -1 indicating a perfect negative correlation, +1 indicating a perfect positive

correlation, and 0 indicating no correlation at all. A variable correlated with itself will

always have a correlation coefficient of 1.

2. Sig. (1-tailed) -This is the p-value associated with the correlation

3. N - This is number of observations that were used in the correlation.  Because we have

no missing data in this data set, all correlations were based on 11 observations.

61

Model Summary

Table 3:Table showing model summary

Model R R Square Adjusted R

Square

Std. Error of the

Estimate

Change Statistics

R Square

Change

F Change df1

1 .732a .535 .477 .37217 .535 5.616 1

a. Predictors: (Constant), LOGTOTALPRIORITYSECTORADVANCES

b. Dependent Variable: LOGTOTALNPASOFPSBS

R – It is a measure of the correlation between the observed value and the predicted value of the criterion variable. The R value is .732 which shows simple correlation.

R Square (R2) – It is the square of this measure of correlation and indicates the

proportion of the variance in the criterion variable which is accounted for by the model.

In essence, this is a measure of how good a prediction of the criterion variable we can

make by knowing the predictor variables.. A value between 0 and 1 is always better.

Higher value is always appreciated.It shows NPAs are effected by 53.5 % and 46.5% by

some other factors.

Durbin-Watson –The value should always betwwen 0 and 4.Here the value derived is

0.359 which shows positive auto correlation.

ANOVAa

62

Model Summary b

Model Change Statistics Durbin-Watson

df2 Sig. F Change

1 9a .042 .359

Model Sum of Squares df Mean Square F Sig.

1

Regression .778 1 .778 5.616 .042b

Residual 1.247 9 .139

Total 2.024 10

a. Dependent Variable: LOGTOTALNPASOFPSBS

b. Predictors: (Constant), LOGTOTALPRIORITYSECTORADVANCES

ANOVA-The ANOVA table indicates that the regression model predicts the outcome variable significantly well, p < 0.042, which is less than 0.05, and we can say that, there is a significant impact of Priority sector advances on total NPAs of Public sector banks by rejecting null hypothesis.

63

Coefficientsa

Table4:Table showing anova values

Model Unstandardized Coefficients Standardized

Coefficients

t Sig.

B Std. Error Beta

1

(Constant) 5.137 2.463 2.086 .067

LOG TOTAL

PRIORITYSECTOR

ADVANCES

.440 .186 .620 2.370 .042

Coefficientsa

Table 5:Table showing coefficient values

Model 95.0% Confidence Interval for B Collinearity Statistics

Lower Bound Upper Bound Tolerance VIF

1

(Constant) -.435 10.710

LOG TOTAL

PRIORITYSECTOR

ADVANCES

.020 .861 1.000 1.000

Dependent Variable: LOGTOTALNPASOFPSBS

Interpretation:

For coefficients with 95% confidence level, the beta value is a measure of how strongly each

predictor variable influences the criterion variable. The beta is measured in units of standard

deviation. The beta values change, depending on which predictors are included in the model.

Higher the value of beta, greater is the impact of independent variable on the dependent

variable. Here the independent variable has greater impact on dependent variable

64

5.1 D .Pearson Correlation

Pearson correlation is done to find relation between priority sector NPAs and non priority sector NPAs on total NPAs of PSBs

Table:6 Showing correlation of Priority sector NPAs and Non priority sector NPAs

LOG

PRIORITY

SECTOR

NPAS

LOG NONPRIORITY SECTOR NPAS

LOG PRIORITYSECTOR

NPAS

Pearson Correlation 1 .906**

Sig. (2-tailed) .000

N 11 11

LOG

NONPRIORITYSECTOR

NPAS

Pearson Correlation .906** 1

Sig. (2-tailed) .000

N 11 11

**. Correlation is significant at the 0.01 level (2-tailed).

Note: If p-value is less than 0.05, reject the null hypothesis and accept the alternative hypothesis

Interpretation

The table exhibits the correlation of priority sector NPAs and Non priority sector NPAs.

It is a two tailed test. It is done for a period of 11 years. For this the whole population of PSBs

is taken into consideration. Null hypothesis is rejected as the Pearson correlation is 0.906 and

p=.000(p<0.05) at confidence level of 0.01. Since p<0.05 ,there is a significant relation

between priority sector NPAs and Non priority sector NPAs in contributing to total NPAs of

PSBs.

65

5.1 E.Based on the data gathered for Public sector banks for 11 years, the following output has been derived by using simple linear regression model in SPSS:

Regression:simple linear regression is done to find the impact of Recovery of NPAs on Total NPAs of PSBs.

Descriptive Statistics

Table 6: Table showing descriptive statistics

LOG RECOVERY OF NPAS

IN PSBS

N

Valid 11

Missing 0

Mean 10.2121

Std. Error of Mean .11537

Median 10.0450

Mode 9.82a

Std. Deviation .38263

Variance .146

Skewness 1.113

Std. Error of Skewness .661

Kurtosis .121

Std. Error of Kurtosis 1.279

Range 1.15

Minimum 9.82

a. Multiple modes exist. The smallest value is shown

66

The descriptive statistics table can be used to summarize the data gathered. The data has been

done with frequencies tab to get the categorical values. It helps to get the descriptive

information of the data. From above table we can observe that:

The mean of the variables used in the analysis. The dependent variable total NPAs has

the highest mean.

The standard error of mean describes the error term in each of the mean values.

The standard deviation shows how much variation or dispersion from the mean value

exists.

The variance measures how a set of numbers is spread out. It is always positive.

Skewness is used to show both positive and negative skew values rather than balanced

value. It is the risk when the data is skewed to the left or right of the mean.

Standard error of skewness denotes the error terms with respect to skewness values.

67

Interpretation

The descriptive statistics command also gives a correlation matrix showing the

Pearson correlation between the variables.

1. Pearson Correlation -These numbers measure the strength and direction of the linear

relationship between the two variables. The correlation coefficient can range from -1

to +1, with -1 indicating a perfect negative correlation, +1 indicating a perfect positive

correlation, and 0 indicating no correlation at all. A variable correlated with itself will

always have a correlation coefficient of 1.

2. Sig. (1-tailed) -This is the p-value associated with the correlation.

3. N - This is number of observations that were used in the correlation.  Because we have

no missing data in this data set, all correlations were based on 11 observations.

68

Correlations

Table 7:Table showing correlation values

LOG TOTAL NPAS OF

PSBS

LOG RECOVERY OF NPAS

IN PSBS

Pearson

Correlation

LOG TOTAL NPAS OF PSBS 1.000 .909

LOG RECOVERY OF NPAS IN

PSBS.909 1.000

Sig. (1-

tailed)

LOG TOTAL NPAS OF PSBS . .000

LOG RECOVERY OF NPAS IN

PSBS.000 .

N

LOG TOTAL NPAS OF PSBS 11 11

LOGRECOVERYOFNPASINPSBS 11 11

Model Summaryb

Table 8;Table showing model summary

Model R R Square Adjusted R

Square

Std. Error of

the Estimate

Change Statistics

R Square

Change

F Change df1

1 .909a .826 .806 .19801 .826 42.637 1

Model Summaryb

Model Change Statistics Durbin-Watson

df2 Sig. F Change

1 9a .000 .779

b. Predictors: (Constant), LOGRECOVERYOFNPASINPSBS

c. Dependent Variable: LOGTOTALNPASOFPSBS

R – It is a measure of the correlation between the observed value and the predicted value of

the criterion variable. The R value is 0.909 which represent simple correlation. It represents

high degree of correlation between Recovery of NPAs and Total NPAs.

R Square (R2) – It is the square of this measure of correlation and indicates the proportion of

the variance in the criterion variable which is accounted for by the model. In essence, this is a

measure of how good a prediction of the criterion variable we can make by knowing the

predictor variables. A value between 0 and 1 is always better. Higher value is always

appreciated. The R2 is .826 which suggests that there 82.6% effect of recovery of NPAs on

Total NPAs of PSBs.

69

Adjusted R Square – It is value gives the most useful measure of the success of our model.

Adjusted R Square value is calculated which takes into account the number of variables in

the model and the number of observations (participants) the model is based on. It tells about

what % of variability in the Dependent variable is accounted for the independent variable .In

this case the percentage of variability is about 80.6%.

Durbin-Watson - The value should always between 0 and 4.Here the value derived is 0.779

which shows positive auto correlation.

ANOVAa

Table 9:Table showing Anova values

Model Sum of Squares df Mean Square F Sig.

1

Regression 1.672 1 1.672 42.637 .000b

Residual .353 9 .039

Total 2.024 10

a. Dependent Variable: LOGTOTALNPASOFPSBS

Predictors: (Constant), LOGRECOVERYOFNPASINPSBS

The ANOVA table indicates that the regression model predicts the outcome variable

significantly well, p < 0.000, which is less than 0.05, and we can say that, there is a

significant impact of Recovery of NPAs on total NPAs of Public sector banks by rejecting

null hypothesis.Here the significance level is 0.000 which shows that there is significant

relation between Recovery of NPAs and Total NPAs

Coefficientsa

Tabe 10: Table showing coefficient values

Model Unstandardized

Coefficients

Standardized

Coefficients

t Sig.

B Std. Error Beta

1

(Constant) .057 1.672 .034 .973

LOGRECOVERYOFNPASINPSBS 1.069 .164 .909 6.530 .000

70

Coefficientsa

Model 95.0% Confidence Interval for B Collinearity Statistics

Lower Bound Upper Bound Tolerance VIF

1

(Constant) -3.726 3.840

LOGRECOVERYOFNPASINPSBS .698 1.439 1.000 1.000

a.Dependent Variable: LOGTOTALNPASOFPSBS

For coefficients with 95% confidence level, the beta value is a measure of how strongly

each predictor variable influences the criterion variable. The beta is measured in units of

standard deviation. The beta values change, depending on which predictors are included in

the model. Higher the value of beta, greater is the impact of independent variable on the

dependent variable. Here the independent variable has greater impact on dependent variable

71

5.1 F.T Test

To find the impact of Net NPA ratio on priority sector NPA ratio of PSBs.

Paired Samples Correlations

Table11:Table showing T Test values

N Correlation Sig.

Pair

1

LOGPRIORITYSECTORNPARATIO

& LOGNETNPARATIO11 .944 .000

Paired Samples Test

Paired Differences

Mean Std. Deviation Std. Error

Mean

95%

Confidence

Interval of the

Difference

Lower

Pair 1LOGPRIORITYSECTORNPARATIO

- LOGNETNPARATIO1.25411 .21717 .06548 1.10821

Paired Samples Test

Paired Differences t df Sig. (2-tailed)

95% Confidence

Interval of the

Difference

Upper

Pair 1

LOG PRIORITYSECTOR NPA

RATIO – LOG NET NPA

RATIO

1.40000 19.153 10 .000

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Interpretation

The observed mean difference is 1.254. Since the value of t is 19.153 at p< .000, the

mean difference (1.254) between Gross NPA ratio and Priority sector NPA ratio is

statistically significant. According to the Sig. of 0.000 (which is less than 0.05), the Null

hypothesis is rejected. Therefore, it can be inferred that there is a significant relationship

between Net NPA ratio and Priority sector NPA ratio of public sector banks during the study

period.

5.1 G.T Test

To find the impact of Gross NPA ratio on priority sector NPA ratio of PSBs.

Paired Samples Statistics

Table 12:Table Showing T Test values

Paired Samples Correlations

N Correlation Sig.

Pair 1LOGPRIORITYSECTORNPARATIO &

LOGGROSSNPARATIO11 .990 .000

73

Paired Samples Test

Paired Differences

Mean Std. Deviation Std. Error Mean 95% Confidence

Interval of the

Difference

Lower

Pair 1

LOG PRIORITYSECTOR

NPA RATIO – LOG GROSS

NPA RATIO

.41910 .13065 .03939 .33133

Paired Samples Test

Paired Differences t df Sig. (2-tailed)

95% Confidence

Interval of the

Difference

Upper

Pair 1

LOG PRIORITYSECTOR NPA

RATIO – LOG GROSS NPA

RATIO

.50688 10.639 10 .000

Interpretation

The observed mean difference is .4191. Since the value of t is 10.639 at p < .000, the

mean difference (.4191) between Gross NPA ratio and Priority sector NPA ratio is

statistically significant. According to the Sig. of 0.000 (which is less than 0.05), the Null

hypothesis is rejected. Therefore, it can be inferred that there is a significant relationship

between Gross NPAratio and Priority sector NPA ratio of public sector banks during the

study period.

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6.1FINDINGS

The major findings of the present study are:

There is a declining trend in Gross NPAs and Net NPAs of Public sector banks till

2008-09 but it increased in the later years.

Total NPAs had inreased by 191.43% from 38,602 crores in the year 2007 to rs

1,12,500 crores in the year 2013.

The total priority sector credit of public sector banks have raised from Rs. 1,99,786

crore to Rs. 11,30,700 crore. The priority sector NPAs of public sector banks have

raised from Rs. 24,938.36 crore at the end of March, 2003 to Rs. 56,200 crore at the

end of March, 2013.

Public sector banks recovered a higher amount of NPAs during 2011-12 than that

during the previous year. Though the total amount recovered Rs. 47,800 crore in

Public sector banks in 2012-13 was higher than Rs 37,160 crore in 2010-11.

There is significant relation between Priority sector NPAs and Non-priority sector

NPAs in contributing to total NPAs of PSBs.

There is a significant relationship between Gross NPA ratio and Priority sector NPA

ratio of public sector banks during the study period.

There is a significant relationship between Net NPA ratio and Priority sector NPA ratio

of public sector banks during the study period.

There is a positive correlation between Priority sector advances and total NPAs.

There is a significant impact of Priority sector advances on total NPAs of Public sector

banks.

There is a significant impact of Recovery of NPAs on total NPAs of Public sector

banks.

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6.1 a.Suggestions for reducing NPAs

1. Effective and regular follow-up of the end use of the funds sanctioned is required to

ascertain any embezzlement or diversion of funds. This process can be undertaken every

quarter so that any account converting to NPA can be properly accounted for.

2. Combining traditional wisdom with modern statistical tools like Value-at-risk analysis and

Markov Chain Analysis should be employed to assess the borrowers. This is to be

supplemented by information sharing among the bankers about the credit history of the

borrower. In case of new borrowers, especially corporate borrowers, proper analysis of the

cash flow statement of last five years is to be done carefully.

3. A healthy Banker-Borrower relationship should be developed. Many instances have been

reported about forceful recovery by the banks, which is against corporate ethics. Debt

recovery will be much easier in a congenial environment.

4. Assisting the borrowers in developing his entrepreneurial skills will not only establish a

good relation between the borrowers but also help the bankers to keep a track of their funds.

5. Countries such as Korea, China, Japan, Taiwan have a well functioning Asset

Reconstruction/ Recovery mechanism wherein the bad assets are sold to an Asset

Reconstruction Company (ARC) at an agreed upon price. In India, there is an absence of

such mechanism and whatever exists, it is still in nascent stage. One problem that can be

accorded is the pricing of such loans. Therefore, there is a need to develop a common

prescription for pricing of distressed assets so that they can be easily and quickly disposed.

The ARCs should have clear ‘financial acquisition policy’ and guidelines relating to proper

diligence and valuation of NPA portfolio.

6. Some tax incentives like capital gain tax exemption, carry forward the losses to set off the

same with other income of the Qualified Institutional Borrowers (QIBs) should be granted so

as to ensure their active participation by way of investing sizeable amount in distressed

assets of banks and financial institutions.

7. So far the Public Sector Banks have done well as far as lending to the priority sector is

concerned. However, it is not enough to make lending to this sector mandatory; it must be

made profitable by sharply reducing the transaction costs. This entails faster embracing of

technology and minimizing documentation.

8. Commercial Banks should be allowed to come up with their own measures to address the

problem of NPAs. This may include waiving and reducing the principal and interest on such

loans, or extending the loans, or settling the loan accounts. They should be fully authorized

76

and they should be able to apply all the preferential policies granted to the AMC.

9. Another way to manage the NPAs by the banks is Compromise Settlement Schemes or

One Time Settlement Schemes. However, under such schemes the banks keep the actual

amount recovered secret. Under these circumstances, it is necessary to bring more

transparency in such deals so that any flaw could be removed.

10.The borrowers of the priority sector loan and the bank officials involved in the scheme

should try to keep up the schedule of repayment. There is need for prompt and regular

repayment of loan to the concerned bank. Delay in repayment is likely to reduce the quantum

of loan for the prospective borrowers under the priority sector lending. Borrowers should be

properly motivated to stick to the schedule of repayment of loan by the bank officials.

11. There is need for the borrowers to improve their skills through training prior to obtaining

the sanctioning of the priority sector loan so that they can use loan productively and repay

them.

12. Productive use of priority sector loans needs the linking of the borrower’s products with

marketing. There is need for introducing business consciousness among artisans and other

small units who avail of priority sector loans.

13. It is desirable to adopt indirect financing of priority sector borrowers through unions like

weavers cooperatives and handloom development corporations, dairy cooperatives, etc.,

instead of direct financing so that credit administration, supervision and recovery are easier

14.Priority sector loans at low rates of interest should be given only to weaker sections and

not to the affluent under the label of priority sector. This will help banks to improve

monitoring and supervision of these advances on the weaker sections and their own

profitability.

15.The Public sector banks providing priority sector loans should properly supervise the use

of the loan by the beneficiary loanees, so that the loan amount is used for the purpose for

which it is obtained. A system of periodical visits by the bank officials of the projects

financed under the priority sector scheme must be enforced.

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6.2CONCLUSION

The NPAs have always been a big worry for the banks in India. It is just not a problem for the

banks; they are bad for the economy too. The money locked up in NPAs is not available for

productive use and adverse effect on banks' profitability is there. The extent of NPA is

comparatively higher in propriety sector lending. To improve the efficiency and profitability,

the NPAs have to be scheduled. The RBI and the Government of India have taken number

steps to reduce NPAs of the SCBs. This has led to decline in the level of NPAs of the Indian

banking sector. But a lot more needs to be done. The NPA level of our banks is still high as

compared to the international standards. It is highly impossible to have zero. percentage

NPAs. But at least Indian banks can try competing with foreign banks to maintain

international standard. One cannot ignore the fact that a part of the reduction in NPAs is due

to the writing off bad loans by the banks. Priority sector bank lending has been an instrument

of India’s financial policy which aims at restoring sectional balance within credit

disbursement and for channelling credit to the weaker sections within these sectors. The Bank

Company Acquisition Act 1969 leading to the nationalisation of the 14 commercial banks has

implicitly made it clear in its preamble. All the banking institutions involving in priority

sector lending have provided maximum amount of loan advances to Agriculture and Allied

activities compared to other priority sectors like SSIs, and Non-farm sectors. The viability of

priority lending by banks depends on the competence and integrity of the institutions

comprising it. It is found that the viability of the public sector banks has been eroded due to

two factors viz.

Directed investment in terms of minimum statutory liquidity ratio and

Directed lending to priority sectors.

The declining profitability of public sector banks has been related to the priority sector

lending as one of the causes viz.,

Increasing the quantum of interest subsidised loans causing heavy interest income

losses.

Causing highest establishment expenditure to supervise small amounts without

matching productivity.

Raising level of credit outstanding of sick limits requesting in the poor recovery of

small loans.

Expanding the volume of non-performing assets (NPA).

78

The borrowers of the priority sector loan and the bank officials involved in the scheme should

try to keep up the schedule of repayment. There is need for prompt and regular repayment of

loan to the concerned bank. Delay in repayment is likely to reduce the quantum of loan for the

prospective borrowers under the priority sector lending. Borrowers should be properly

motivated to stick to the schedule of repayment of loan by the bank officials. The Indian

banks should take care to ensure that they give loans to creditworthy customers as prevention

is always better than cure.

79

ARTICLES

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Lending: A Comparative Study between Public Sector Banks and Private Sector

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i) Rajaraman, Indira, and G. Vasistha, (2002), “Nonperforming Loans of Public Sector

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Reports:

Report on Trend and Progress of Banking in India (2003-12) issues .

Annual reports of Public sector banks .

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Websites:

www.rbi.org.in

www.moneycontrol.com

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