A

“Research Project” ON
“PROBLEM OF NPA AND ITS IMPACT ON BANKS (WITH SPECIAL REFRENCE TO STATE BANK OF INDIA)”

Submitted to

Punjab Technical University, Jalandhar in partial fulfilment for the degree of Master of Business Administration (Session 2008-2010)

Under the supervision of: Dr. R.S GUPTA HOD MGT DEPTT.

Submitted By:NAVJINDER GREWAL MBA(II)YR ROLL NO. (27)

DECLARATION

I hereby certify that the work embodied in the project “Problem of NPA and its impact on banks (with special reference to state bank of India" was done by me under the supervision of Dr. R.S GUPTA (H.O.D MGT DEPTT,BCET)

The project is done for the partial fulfillment of Degree of Master of Business Administration program of Punjab Technical University, Jalandhar from, Bhutta College Of Engineering And Technology, Ludhiana. I have not submitted this report to any institute or University.

NAVJINDER GREWAL

ACKNOWLEDGEMENT

My sincere thanks are due to all the contributors without whose efforts this project would not have been completed. No task of this nature is a single person effort, so I am very thankful to Dr. R.S GUPTA (H.O.D MGT DEPTT) Under whose guidance I successfully completed my research project. Their unfailing interest and support gave a new dimension to my work. They made it possible to collect abundance of material, the relevant portion of which is quoted in this project. I am also very grateful to all other Faculty of B.C.ET whose teaching methodology helped me in completion of my project without any difficulty. I also express my gratitude to the all respondent for their proper responses and cooperation during my dissertation project. I would like to extend my thanks to my all friends for their valuable suggestion and cooperation at various stages during my project.

NAVJINDER GREWAL

CHAPTER PLAN
S.No.
1. Introduction Non –performing asset • Classification of NPA • Some issue of NPA 2. 3. 4. Review of literature Objective of study Research Methodology • Research Design • Sources of Data 5. Reason of NPA

Chapters

Page No.

6. 7. 8. 9.

Impact of NPA on Banks Guidelines of RBI Analysis and interpretation of data Findings

10. 11. 12. 13.

Limitation Recommendation Conclusion

Bibliography

INTRODUCTION TO THE PROJECT

However. INDIAN BANKS FUNCTIONALLY diverse and geographically widespread. Separate guidelines were also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June. M. guidelines relating to provisioning for RRBs have been made effective from the financial' year ended 31. The Committee examined the issues and recommended that a policy of Income Recognition should be objective and based on record of recovery rather than on subjective considerations. 1994 to All India Financial Institutions viz. RBI had issued guidelines to all Scheduled Commercial Banks on Income Recognition. have played a crucial role in the socio. they have been made applicable in a phased manner for RRBs. Banks extend credit to different .03. appointed a committee under the Chairmanship of Sh. The definition of NPAs is also gradually becoming tough for RRBs to cover all advances like Commercial Banks. The Prudential Norms for Income Recognition.Since the introduction of economic liberalization and financial sector reforms.03. What is bothering the bankers today is the management of Non-performing Assets.1993. Although most of-the guidelines relating to RRBs are similar to that of Commercial Banks. IFCI. AXIS Bank and IIBI. IDBI. Asset Classification and Provisioning have come into effect from the accounting year 31. Reserve Bank of India. They have adopted these guidelines for the purpose of Income Recognition and Assets Classification from the accounting year 199596. 1996. On the basis of the recommendations of the Narsimhan Committee. so in this context a good number of circular instruction/guidelines have been issued by bank/Reserve Bank of India. guidelines were issued by the Reserve Bank of India in March. Similarly.ICICI.1997.economic progress of the country. in the year 1991.Narsimham to examine and give recommendation for Income Recognition. Banks are under growing pressure to bring down their NPAs so as to improve their performance and viability. Assets Classification and Provisioning in April. Over the period this problem has aggravated alarmingly and therefore needs urgent remedial actions. 1992 which have been modified from time to time by the RBI on the basis of experience gained and suggestions received from various quarters. Asset Classification and Provisioning of loan assets of Banks and Financial Institutions. 1994 and to Regional Rural banks in March.

Credit risk involves inability or unwillingness of customer or counterpart to meet commitments in relation to lending once a loan is overdue and ceases to yield income it would become a Non Performing Asset. but banks can always aim to keep the losses at a low level. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. fee income and investment and the most prominent assumed risk is credit risk. Granting of credit for economic activities is the prime duty of banking. The problem of Non Performing Assets [NPAs] in banks and financial institutions has been a matter of grave concern not only for the banks but also the real economy in general. borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. NPAs are not therefore the concern of only lenders but also the public at large. which results into economic growth. However lending also carries a risk called credit risk. Return comes in the form of loan interest. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. For most customers. which arises from the failure of borrower. Apart from raising resources through fresh deposits. 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.types of borrowers for many different purposes. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy. Proper management and speedy disposal of NPAs is one of the most critical tasks of banks today. For banks good loans are the most profitable assets. Thus. Though complete elimination of such losses is not possible. bank credit is the primary source of available debt financing. as NPAs can choke further expansion of credit which would impede the economic growth of the country. these loan losses affect the bank’s profitability on a large scale. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. Despite various correctional steps administered to solve and end this .

and the all India Financial Institutions. The severity of the problem is however acutely suffered by Nationalised Banks. concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. . followed by the SBI group.problem.

67. . The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better. Once the core banking solution (CBS) is fully implemented. and significant surplus SLR investments. The bank’s liquidity position is very strong due to healthy accretion to deposits.000 crore as on March 31. large limits in the call market. and emerge as the strongest technology enabled distribution network in India. The bank is facing increasing competition in its metropolitan and urban franchise. The bank’s cost of deposits (excluding IMD) has significantly reduced to 4. low-cost deposits have continued to constitute over 40% of total deposits as at March 31. improve service levels. 2005. The increasing integration of SBI with its associate banks (associates) and subsidiaries will further strengthen its dominant position in the banking sector and position it as the country’s largest universal bank.70% for the 2004-05 (refers to financial year from April 1 to March 31). 2005 (56% as at March 31. compared with 5. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. underpinned by its strong retail deposit base.48% in 2003-04. 2004). provide new delivery platforms.000 branches and ATMs of the State Bank group. SBI’s strong franchise gives it access to a steady source of stable retail funds. and improve operating efficiency to counter the threat of competition effectively. 2005. despite a reduction in the proportion of current account deposits. Thus. Savings deposits have shown a strong three-year growth of 19%.STATE BANK OF INDIA SBI is the largest bank in India with deposits of Rs 3. SBI will maintain its strong funding profile and a low cost resource position in view of its strong retail base and wide geographical reach. which constitute around 59% of the total resources as on March 31. Resource-raising capabilities SBI’s funding profile is strong. it will cover over 10.

The bank’s operating expense at 2. . The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile. 2005. it is expected to happen gradually. since this is a sensitive issue. the bank will have to reduce or redeploy work force.Earnings profile to remain good SBI will maintain a good earnings profile in the medium term despite high pressure on yields due to the increasing competition in the banking sector. with the opening of government business like tax collection to other banks and increased competition. The capitalization levels of SBI are adequate to address the asset side risks and support the business growth in the medium term. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating expenditure in 2004-05. the bank is aggressively targeting retail finance and small and medium enterprises (SMEs). despite good asset growth and technology efficiency gains.04% and a large capital base of Rs 240. the growth in fee income is expected to slow down. and diverse income streams. Strong diversification in income streams will ensure that the bank’s earnings remain relatively stable. However. despite the decline in profitability in some segments. The bank’s fund based and fee income earnings are diversified across industries. and customer segments. To maintain yields and pursue credit growth. witnessed across the entire banking sector. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets). asset classes. Thus. The bank has considerably improved its net worth coverage for net NPAs to 4. To be able to reap the full benefits of technology implementation. Comfortable capital position SBI is adequately capitalized with a tier I capital adequacy ratio of 8. regions. 2005 due to lower slippages reflecting an improving asset quality.4 times as at March 31.44% of average funds deployed in 2004-05 is in line with other public sector banks. the bank’s operating costs will remain high in the medium term.72 billion as at March 31. at around 1% per annum for the past three years.

To contain NPAs and ensure credit growth.08 billion) of total advances as at September 30 2005. The bank has entered the market of term lending to corporates . pursued business growth selectively.95% of gross advances as at March 31. the bank has leveraged its corporate relationships.34% as at March 31. The NPAs in retail finance are low currently. 2005.Management strategies In retail finance.73% (Rs 522. SBI’s asset quality is expected to remain at average levels. Business description SBI along with its associate banks offer a wide range of banking products and services across its different client markets. compared with 4. SBI’s retail portfolio has grown at over 37% CAGR in the last two years and hence a significant portion of the portfolio is largely unseasoned.3%) of total retail loans. 2005. The bank has taken initiatives like on-line tax returns filing and faster transfer of funds to protect its dominant position in the government business. and has not competed based on interest rate. which constitutes Rs. The housing finance portfolio has a 12-month. The share of retail advances has increased to 24. the bank has decided to focus on financing the retail (personal) segment as well as SMEs. as the bank’s large and diverse asset portfolio reflects of the asset quality of the banking system. 283. The bank also has a clear technology strategy that will enable it to compete with the new generation private sector banks in customer service and operational efficiency. as can be seen in the consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05. Asset quality to remain at average levels The bank continues to have a high level of gross NPAs at 5. lagged gross NPA of 4.The bank will face significant challenges in the medium term to develop effective credit appraisal and collection systems in order to contain NPAs in retail finance. SBI is targeting primarily the housing loans segment. In the retail loan segment.9% for all scheduled commercial banks (SCBs) taken together. however they are steadily increasing (especially in the housing finance portfolio) and have started showing signs of stress.41 billion (54. The bank is facing challenges to improve the quality of assets originated.

offers a host of financial services.. Together with some foreign banks. factoring.. broking.A. yet another emerging trend is that of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements. and corporate exposure limits. viz. these private banks have also aggressively entered the retail asset financing space. traditionally the domain of the financial institutions. SBI. hitherto the domain of non-banking finance companies. Given their focus on cross selling and optimizing their customer base. one of the largest insurance companies in France. primary dealership. they now offer the entire range of products and services on the asset and liability side to retail and wholesale customers . a number of finance companies such as Kotak Mahindra Finance Limited and HDFC Limited have promoted banks. investment banking and credit cards.and infrastructure financing. SBI Life Insurance Company Limited. merchant banking. Industry prospects To leverage benefits such as access to low cost resources and the facility to provide a larger gamut of services. which is a joint venture with Cardiff S. SBI currently holds 74% equity in the joint venture. New private sector banks capture market share With technological edge and a strong marketing thrust. fund management. and has built a strong market position in housing loans. Simultaneously. SBI has commenced its life insurance business by setting up a subsidiary. through its non-banking subsidiaries. It has increased its thrust in retail assets in the last two years. priority sector requirements. private sector banks have been stealing market share in retail deposits and the corporate fee business from public sector banks.

They also need to fortify their credit risk management systems to mitigate the risks arising from small-ticket lending to the retail. and services segments. The securitization and reconstruction of financial assets and enforcement of security interest (Sarfaesi) Act should also help banks in limiting slippages and improving NPA recoveries. Better Capitalization levels Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through public issues in recent years. Though slippages to NPAs and provisioning were high for some banks in FY2004. the treasury gains enabled significant provisioning to be made with the result that net NPAs for most public sector banks are now less than 3%. The steady accruals to net worth and falling non-performing asset levels have resulted in an improvement in the capitalization position of banks in recent years. They need to reorient their staff and effectively utilize technology platforms to retain customers and reduce costs. steady growth in gross domestic product should help improve the banks’ asset quality and increase corporate lending.Asset quality to improve Banks have not yet fully resolved the stress in the asset quality of their legacy corporate loan portfolios. small and medium enterprises. however. . thereby improving their capitalization levels. Going forward. Challenges ahead Competition from new private sector and foreign banks remains a key challenge for public sector banks. as they moved to the 90-day norm for recognising and provisioning for NPAs.

The competition in the sector could get further intensified if the 10% cap on voting rights is also relaxed. New private sector banks are expanding their geographical coverage and making inroads into government business. These would also be driven by GoI due to provisions of Banking Companies (Acquisition and Transfer of Undertakings) Act 1969. the emergence of newer players would be restricted if the private ownership of banks is capped at low levels. and hence political scenario will impact the timing and permutations possible.Consolidation and emergence of universal banking groups The cap on foreign ownership of banks has already been raised from 49% to 74%. technological edge. However. leverage on economies of scale and reduce costs. The new private and foreign banks will continue to gain market share from public sector banks because of their efficient cost structures. . focused marketing approach and operational freedom. Strategic alliances between banks and other financial sector players such as insurance companies and mutual funds are also likely as banks attempt to enhance their product range. Mergers among PSBs would create banks with even larger balance sheets and customer base. the integration process in such mergers is expected to be complex and time long drawn. However.

The account remains ‘our of order’ for a period of more than 180 days. 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 agriculture purposes . i. up gradation of technology in the banking sector. Accordingly. as from that date. with effect from 31st March. Due to the improvements in the payment and settlement systems. including a leased asset. in respect of an overdraft/cash credit iii. a NPA shall be an advance where. it was decided to dispense with the ‘past due’ concept.Definition of NPAs (NON -PERFORMING ASSETS) An asset. becomes non-performing when it ceases to generate income for the bank. 2001. recovery climate. etc. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan ii. 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 1993 1994 1995 Onwards Specified period Four Quarters Three Quarters Two quarters An amount due under any credit facility is treated as ‘past due’ when it has not been paid within 30 days from the due date.

In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power. . 2004. ‘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. these accounts should be treated as ‘out of order’. With a view to move towards international best practices. from 31st March. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. 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. ‘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.iv. it has been decided to adopt the ’90 days’ overdue norm for identification of NPAs.

Guidelines for Classification of NPAs Broadly speaking. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18 months. especially in respect of high value accounts. Such assets will have well defined credit weakness that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the bank will sustain a loss. the current net worth of the borrower. 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. internal or external auditors but the amount has not been written off wholly. ii. classification should be done taking into account the degree of well defined credit weaknesses and the extent of dependence on collateral security for realization of dues. or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. iii. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs. Loss Assets: A loss asset is one where a loss has been identified by the bank or. 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.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.

• Accounts where there is erosion in the value of the security: If there is a significant (i. • Asset classification should be borrower-wise and not facility-wise: If a single facility to a borrower is classified as NPA. • Accounts regularize near about the balance sheet date: These accounts should be handled with care and without scope for subjectivity. • Advances under consortium arrangements: Classification here should be based on the recovery record of the individual member banks. others should also be classified the same way. Where the account indicates inherent weakness based on available data. . the realizable value of the security is less than 50% of that assessed by the bank during acceptance) the account may be classified as NPA. it should be deemed as an NPA.• Accounts with temporary deficiencies: These should be classified based on the past recovery records. as it is difficult to envisage only a solitary facility becoming a problem credit and not others.e.

NPA may be Sub standard. effective measures are initiated to get full recovery and where this is not possible.NPA SOME ASPECTS AND ISSUES 1. Interest cannot be applied on the loan accounts classified as NPAs. the various means are to be initiated to get rid off the NPAs from the branch books. the Branch Manager has to take all the necessary steps to get the dues recovered there-under to maintain the good health of advances and the higher profitability at the-Branch. It is essential to keep a constant watch over the non-performing assets not just to keep it performing but also that once they become non-performing. The NPA Management Policy document of SBI lays down to contain net NPAs to less than 5% of bank's total loan assets in confirmity with the international standard. . The Branch has to incur cost in supervision and follow up of such advances. 2. Doubtful or loss assets. Assets Classification and provisioning. Some of the reasons for this are as under: (a) (b) (c) (d) 5. All this requires greater efforts and teamwork. The Branch 'has to pay interest to central office on outstanding classified as NPA. 4. Provision has to be made on NPAs at Bank level. 6) Once the assets are classified as NPA. 3. Under Income Recognition. every effort be made at all levels to cut down the NPAs. It is. therefore necessary that as per guidelines provided in NPA Management Policy document. The NPAs of banks in India are considered to be at higher levels than those in other countries. NPAs adversely affect the wealth condition of the branch advances as also the profitability of the branch. This requires management of NPAs in such a Planned and scientific manner that the percentage of NPAs to the total advances will be minimum. This issue has attracted attention of public as also of international financial institutions and has gained further prominence in the wake of transparency and disclosure measures initiated by RBI during recent years.

'doubtful' and 'loss']. NPLs are restored on an accrual basis only after full settlement has been made on all delinquent principal and interest. streamlining procedures. Structural changes in the system. but uncollected interest is reversed out of income. c) 1. Committee has presented second generation reforms.RECOGNITION OF INCOME ON NON-PERFORMING LOANS (NPLS) Stricter regulations have been laid down by supervisory authorities in many countries with regard to income recognition on Non-Performing Loans (NPLs). explaining the accounting policies followed with regard to recognition of income on NPLs. if the accounts carry a footnote. Failure to do so would overstate income. meanwhile major changes have taken place in the domestic. indicating the movement towards global integration of financial services. The suspension of interest payments is required on loans that are classified as 'non-performing' ['substandard'. therefore. be useful. Previously accrued. economic and institutional science. a) b) To strength the foundation of financial system. Related to this. upgrading technology and human resource development. Any uncollected interest payments on NPLs are considered non-accrued interest. NARSIMHAN COMMITTEE'S RECOMMENDATIONS Committee on Financial System (CFS) Narsimhan committee which reported in 1991. Uncollected interest is normally put in a memorandum account. It would. It is recommended that an asset be classified as doubtful if it is in the sub standard category for 18 months in the first instance and eventually for 12 months as loss if it .

income stops occurring when interest/installment of principal is not paid within 180 days. 6. Direct credit has a proportionately higher share in NPA portfolio of corporations and has been one of the factors in erosion in the quality of asset portfolio. 5. the current practice may continue. These targets cannot be achieved in the absence of measure to tackle the problem of backlong NPAs on one time basis and the implementation of strict prudential norms and management efficiency. With regard to income recognition in India. 4. Cleaning up the balance sheets of banks would thus make sense only if simultaneous steps are taken to prevent of limit the reemergence of new NPAs. These norms. There is a continuing need of Financial Corporations to extend Credit to SSI sector. which is important segment of national economy but on commercial considerations and on basis of credit worthiness. 2. There is no denying the fact that any effort at financial restructuring in the form of having off NPAs portfolio from the books of the corporation or measures to initiate the impact of high level of NPAs must go hand with operational restructuring. which should be regarded as the minimum. we should . Given the special needs of these sectors. Corporations and FIs should avoid the practice of "ever greening" by making fresh advances to their troubled constituents only with a view to settling interest dues and avoiding classification of the loans in question as NPAs. 3. Government feels reluctant to accept the recommendation for reducing the scope of directed credit under priority sector because timy sector of industry and small businesses have problems with regard to obtaining credit and some remaining may be necessary for this sector. However.has been so identified but not written off. The committee believes that objective should be to reduce the average level of net NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. A poverty alleviation and employment generation schemes. may be brought into force in a phased manner. The committee notes that the regulatory and supervisory authorities are paying particular attention to such breaches in the adherence to the spirit of the NPA definitions and are taking appropriate corrective action.

the institution and operation of better control systems. the consideration be given to making such provisions tax deductible. among others. 13. 7. greater efficiency in information technology. village and cottage industry. liquidity and interest rate risks. rural artisans and other weaker sections. Banks should pay greater attention to asset liability management to avoid mismatch and to cover. It should be encouraged to adopt statistical risk management techniques like value at risk in respect of balance sheet term which are susceptible to market price fluctuation. 9. There is a need for a greater use of computerized system than at present. State Financial Corporations at present are over regulated and over administered. As an incentive to Bank is to make specific provision. Forex rate volatility and interest rate changes. the ultimate objective should be that of building up their models and RBI blacklisting them for their validity on a periodical basis. 8. 11. 10. While the RBI and IDBI may initially. The main issues with regard to operations of Bank’s are to ensure operational flexibility and measure of competition and adequate internal autonomy in matters of loan sanctioning and internal administration. small business and transport operators. Computerization has to be recognized as an indispensable tool for improvement in customer service. Internal audit and internal inspection systems should be strengthened.move towards international Practices in this regard and introduce the norm of 90 days in a phased manner by the 2002. It is recommended that directed credit sector be redefined to comprise the small and marginal farmers. Supervision should be based on evolving prudential norms and regulations which should be adhered to rather than excessive control over administrative and other aspects of organisation and functioning. 12. The credit target for this redefined . prescribe certain normative models for market risk management. This calls for some re-examination and the present relevance of directed credit programme ablest in respect of those who are able to stand on their own feet and to whom the directed credit programmes with the element of interest concessionality that has accompanied has become a source of economic rent. the tiny sector of industry.

. 14. This is to be done in phased manner.priority sector should hence forth be fixed at 10% of aggregate credit which would be broadly in line with the credit flows to these sectors at present. The committee believes that the balance sheets of banks and FIs should be made more transparent and full disclosure made in Balance sheet.

REVIEW OF LITERATURE  Das (1990) has compared the various efficiency measures of public sector banks by applying data envelopment analysis model and concluded that the level of NPAs significant negative relationship with efficiency estimates. Toor (1994) analysed that poor recovery management leads to reduction in yield on advanced that poor recovery management leads to reduction in yield on advances. Kwan and Eisenbeis (1994) also concluded that there is negative relationship between efficiency and problem loans. reduces effective rate of interest and reduces the funds’ recalculation and increase their dependence on external sources thereby increasing the costs. ACCORDING TO S. Verma (1999) has concluded that high level of NPAs leads to operational failure of the bank. This puts bank on stronger ground in salvaging sticky loan         . Gupta (1997) has also concluded that NPAs on protifability of banks and leads to liquidity crunch and slow down in the growth in GDP etc. RAJ KUMAR (2002) the SARFAESI act and the could primarily used as powerful bargaining tool while negotiating with defaulter. reduced productivity loss in the credibility and put detrimental impact on the policies of the banks. Berger and young (1997) has examined the relationship between problem loan and bank efficiency by employing Granger-causality technique and found that high level of problem loans cause banks of increase spending on monitoring. Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit making and six loss making banks and concluded that loss making banks maintained higher NPAs in the loan portfolio which led them to show losses. Murthy (1988) has examined that default bring down the return accruing and to them. working out and / or selling off these loans and possibly becomes more diligent in administering the portion of their existing loan portfolio that is currently performing.

 To know the reason for an asset becoming NPA .OBJECTIVE OF STUDY  To study the position of non performing assets in SBI group  To know the impact on NPAon strategic banking variable.

RESEARCH METHODOLOGY Meaning of Research Research is defined as “a scientific & systematic search for pertinent information on a specific topic”. It is a careful inquiry especially through search for new facts in any branch of knowledge. Research is a systemized effort to gain new knowledge. RESEARCH DESIGN TYPES OF RESEARCH DESIGN DESI EXPLORATORY RESEARCH DESIGN DESCRIPTIVE EXPERIMENTAL RESEARCH DESIGN . PROBLEM STATEMENT The research problems. The search for knowledge through objective and systematic method of finding solution to a problem is a research. in general refers to sum difficulty with a researcher experience in the contest of either a particular a theoretical situation and want to obtain a salutation for same. Research is an art of scientific investigation. The present Dissertation has been undertaken to do the Problem of NPA in State Bank of India.

The present study is descriptive in nature. SAMPLING DESIGN: A sample design is a definite plan for obtaining a sample from the sampling frame. It helps in bringing into focus some inherent weakness in enterprise regarding which in depth study can be conducted by management. Sampling design is determined before the collection of the data. as it seeks to discover ideas and insight to bring out new relationship. DATA COLLECTION TYPES OF DATA PRIMARY DATA SECONDRY DATA PRIMARY DATA: METHODS OF PRIMARY DATA OBSERVATION METHOD INTERVIEW METHIOD QUETIONAIRE METHOD SCHEDULE METHOD . It refers to the technique or the procedure that is adopted in selecting the sampling units from which inferences about the population is drawn. Research design is flexible enough to provide opportunity for considering different aspects of problem under study.

SECONDARY DATA: The secondary data on the other hand. Internet. For e. are those which have already been collected by someone else and which have already been passed through the statistical processes. . . publications and reports. In the present study use of secondary data collected from website. magazine. newspaper. When the researcher utilizes secondary data then he has to look into various sources from where he can obtain them.g. Books.

every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. • Natural calamities This is the measure factor. day to day changing govt. hence end up the fiscal with a reduced profit. EXTERNAL FACTORS • Ineffective recovery tribunal The Govt. Thus the bank has to make large amount of provisions in order to compensate those loans. which works for recovery of loans and advances. 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. lack of advance technology . Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover. ineffective management . Mainly ours farmers depends on rain fall for cropping. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. has set of numbers of recovery tribunals. their by reducing their profitability and liquidity.REASONS FOR RISE IN NPAs FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. . The NPAs in PSB are growing due to external as well as internal factors. which is creating alarming rise in NPAs of the PSBs. 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 . lack of adequate resources . • Wilful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. Policies give birth to industrial sickness.

Principle of liquidity iii. eg. Success in business Willingness to pay depends on: 1. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The repayment of loan depends upon the borrowers: a. Principles of safety ii. Honest 3. Tangible assets 2.• 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. • Change on Govt. INTERNAL FACTORS • Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. Thus the banks record the nonrecovered part as NPAs and has to make provision for it. which covers a minimum label. there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a . Character 2. Principles of profitability i. So the over dues due to the handloom sectors are becoming NPAs. Willingness to pay Capacity to pay depends upon: 1. Capacity to pay b. The banks recover the amount by selling of their assets. banking sector gets new policies for its operation. Reputation of borrower The banker should. policies With every new govt. The rehabilitation plan worked out by the Central govt to revive the handloom sector has not yet been implemented. i. Principles of safety By safety it means that the borrower is in a position to repay the loan both principal and interest. 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.

• Banks should consider the borrowers own capital investment. • Inappropriate technology Due to inappropriate technology and management information system. To ensure safety and liquidity.sound one and the borrower is capable of carrying it out successfully . • Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. • Analyse the balance sheet True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. From external credit rating agencies. • Improper swot analysis The improper strength. weakness. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. . viability. and financial soundness and credit worthiness of the borrower. • Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. Proper MIS and financial accounting system is not implemented in the banks. integrity. industry. Transferability. c. Enquiry from market/segment of trade. business. • it should collect credit information of the borrowers from a. banks should grant loan for productive purpose only. Marketability 2. All the branches of the bank should be computerised.he should be a person of integrity and good character. market driven decisions on real time basis can not be taken. • Purpose of the loan When bankers give loan. which leads to poor credit collection. They should use good credit appraisal to decrease the NPAs. Bank should analyse the profitability. thus NPA. he should analyse the purpose of the loan. long term acceptability of the project while financing. Acceptability 3. opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty. When accepting securities banks should consider the 1. Safety 4. From bankers b.

60lakhs). Due to re loaning to the defaulters and CCBs and PACs. If a new big customer meets misfortune or certain traders or industries affected adversely. and the handloom sector Orissa hand loom WCS ltd (2439. The NPAs due to wilful defaulters can be collected by regular visits. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. the NPAs of OSCB is increasing day by day. Like OSCB suffered loss due to the OTM Cuttack. the overall position of the bank will not be affected.77lakhs). 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.The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”. and Orissa hand loom industries. • 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. • Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. The biggest defaulters of OSCB are the OTM (117. .

They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future. The options for these banks are lost. But today in the deregulated market the banks decide their lending rates and borrowing rates. When the interest rates were directed by RBI." This is the margin between the cost of resources employed and the return thereform. the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. This is the margin between the cost of resources employed and the return therefrom. In the context of severe competition in the banking industry. 1. and . as heretofore. "The spread is the bread for the banks". NPAS do not generate interest income for the banks.NPA is not merely nonremunerative. NPAS have a deleterious effect on the return on assets in several ways: • • • They erode current profits through provisioning requirements. Impact on Profitability "The efficiency of banks is not always reflected only by the size of its balance sheet but by the level of return on its assets. liquidity and competitive functioning of banks and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. there was not option for banks.IMPACT OF NPAS ON BANKS:In portion of the interest income is absorbed in servicing NPA. but at the same time banks are required to make provisions for such NPAS from their current profits. They result in reduced interest income. In other words it is gap between the return on funds deployed (Interest earned on credit and investments) and cost of funds employed (Interest paid on deposits). In the competitive money and capital Markets. It is also cost absorbing and profit eroding. inability to offer competitive market rates adds to the disadvantage of marketing and building new NPA has affected the profitability.

(reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs.a. Considering the minimum cost of holding NPAs at 7% p. 31251 Crores towards provisioning NPA. else they are to seek the bounty of the Central Government for repeated Recapitalization. .04.2001. In the context of crippling effect on a bank's operations in all spheres.93 to 31. SBI Group incurred a total amount of Rs. Other bans hesitate to approach the market to rise new issues. This has brought Net NPA to Rs. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market. It would only postpone the process. 32632 Croces absorbs a recurring holding ost of Rs. Between 01. Considering the average provisions made for the last 8 years which works out to average of Rs. The enormous provisioning of NPA together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the SBI Group. 2300 Crores annually. a sizeab business.03.• They limit recycling of funds. etc. There is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning and boost up bottom lines. set in asset-liability mismatches. asset quality has been placed as one of the most important parameters in the measurement of a bank's performance under the CAMELS supervisory rating system of RBI. 3300 crores from annum.2% of net advances. To this extent the problem is contained but a what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy. 32632 Crores or 6. In turn SBI Group are seen as poor performers and unable to approach the market for raising additional capital. This has alternatively forced SBI Group to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins.

Its obligation for provisioning requirements is within bounds. 2. a positive burden.e. The strength of SBI Group is indentified by the following positive feature: 1. many nationalised banks have little option and they are unable to lower lending rates competitively. Theoretically even if the banks keeps 0% spread. Non-interest income fully absorbs the operating expenses of this banks in the current financial year for the first 9 months. though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left.92%) It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March. In the last two financial years. On account of the burden of heavy NPA. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. will be revealing to prove this statement. 2001.e. The statistics above show the other weaknesses of the nationalised banks in . as a wider spread is necessitated to cover cost of NPA in the face of lower income from off balance sheet business yielding non-interest income. as published by RBI in its Report on trends and progress of banking in India. when the banks are able to earn adequate amount of non-interest income to cover their entire operating expenses i.In the face of the deregulated banking industry. (Net NPA/Net Advances is 1. who had issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout package. In that event the spread factor i. Interest on Recapitalization Bonds is a income earned form the Government. It's sizeable earnings under of non-interest income substantially/totally meets its non-interest expenses. the difference between the gross interest income and interest cost will constitute its operating profits. The following working results of SBI Group an identified well manged nationalised banks for the last two years and for the first nine months of the current financial year. an ideal competitive working is reached. it will still break even in terms of operating profit and not return an operating loss.

They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market. Without accepting risk. Their earnings from sources other than interest income are meagre. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. the facts that their net NPA in the average is as much as 7% is a potential threat for them. The fear psychosis also leads to excessive security-consiousness in the approach towards lending to the small and medium sized credit customers. There is insistence on provision of collateral security. as per RBI guidelines. Impact on Outlook of Bankers towards Credit Delivery. and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over- . 2. Business is an exercise of balancing between risk and reward. Wage costs total assets is much higher to PSBs compared to new private banks or foreign banks. This has affected adversely credit growth compared to growth of deposits. RBI has indicated the ideal position as Zero percent Net NPA. Impact on Liquidity of the SBI Group Though SBI Group are able to meet norms of Capital Adequacy. but have resorted to II-Tier capital in the debt market or looking to recapitalistion by Government of India. This is due to failure to develop off balance sheet business through innovative banking products. Accept justifiable risks and implements de-risking steps.addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under: • • Their operating expenses are higher due to surplus manpower employed. Even granting 3% net NPA within limits of tolerance the SBI Group are holding an uncomfortable burden at 7. In the world of banking the concepts of business and risks are inseparable. sometimes up to 200% value of the advance.1% as at March 2001. resulting in a low C/D Ratio around 50 to 54% for the industry. 3. there can be no reward. The fear of NPA permeates the psychology of bank managers in the SBI Group in entertaining new projects for credit expansion.

Impact on other Variables: High level of NPAs also leads to squeezing of interest spread. doubtful and loss assets. compromise. preparing proposal for filing of suits. SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution for handling this hovering threat. does not encourage liberal capital support to be given to banks. but will not prevent the account turning into NPA. whereas high level of NPAs leads to lower profits hence less or no profits available for equity shareholders hence lower EPS and fall in the value of share. Instead of devoting time for planning for development through more credit and mobilization of resources the branch staff would primarily be engaged in preparing a large value of returns and statements relating to sub-standard. when asset becomes an NPA for the first time it adversely affects the spread by not contributing to the interest income and from the second year onwards it will have its impact on the bottom line of the balance sheet because of provisioning to be made for it and not have incremental effect on the spread. Further blocked assets and real estate represent the most illiquid security and NPA in such advances has the tendency to persist for a long duration. Productivity of employees is also reduced because it keeps staff busy with the task of recovery of overdue. Cost of funds is increased because due to non-availability of sufficient internal sources they have to rely on external sources to fulfill their future financial requirements. Impact on Productivity: High level of NPAs effect the productivity of the banks by increasing the cost of funds and by reducing the efficiency of banks employees. a tendency towards laxity in the standards of credit appraisal comes to the fore. 5. write off or in preparing DICGC claim papers etc. 4. Banks are required to bring their own capital by issuing share to the public. Now a days Govt. waivement of legal action. It is well know that the existence of collateral security at best may convert the credit extended to productive sectors into an investment against real estate.confidence). During the year 2001-02 share of 12 .

Moreover. Qualitative aspects of the Micro Level Impact of NPAs: High incidence of loan defaults shakes the confidence of general public in the soundness of banking setup and indirectly effects the capacity of the banking system to mop up the deposits. putting severe pressure on their profit margins. 100 Crore. Due to high cost. Reputed foreign suppliers do not accept letter of credit opened bi Indian banks or confine their transaction to top Indian banks only. owned funds of Rs. which becomes difficult in the situation of huge level of NPAs . factoring.public sector banks were traded on the NSE out of which share value of three PSBs have decreased. They are floating their subsidiaries to manage mutual funds. Net NPA level below 9%. Good money is spent to recover bad money. Banks having positive net profits for the last three years. CAR of > 8% are the 4 condition to be fulfilled to get autonomous status. of years in which a banks branch remains in a particular category of default. It also leads to loss of trust of foreign suppliers. . It is also biggest threat for capital account convertibility. It implies that refinance facility would be progressively reduced depending on the position of NPAs and also on the No. medium and long term loans for agriculture and allied activities. Deterioration in the quality of loan assets and inability to come with new products makes the Indian banks uncompetitive globally. insurance business. Due to fear of NPAa banks are being taken away from the basic function for which these were established it is becoming more & more risky and less remunerative. it puts negative effect on granting of autonomy to PSBs whreas it is must for banks in this competitive environment. The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to demand in respect of direct. Low market value of shares has also forced the banks to borrow heavily debt market to build Tier II capital to meet capital adequacy norms. It is a blot on the credibility of the banking system. they cannot reduce lending rate to meet the economy's demand of low lending rate. Inadequate recovery also inhibits the banks to draw refinance from higher level agency. 6.

Not only this. holds majority of shares in PSBs in some banks 100% capital is in its hand. the society is bearing the cost of these NPAs. whether this money is from tax revenues or from the hard earned saving of the investing public. When capital support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs. industrial output and fall in the profit margins of the corporate and consequent depression in the market. it comes out of either Govt. Some areas of Macro-Economic Impact: It is not only the banks which are affected higher level of NPAs but it is the economy as a whole which pays for it. Govt. and which can be spent on the welfare and development program. Once the credit to various sectors of the economy slow down. . Moreover. Any dividend declared would have gone to the Govt. Banks are not putting enough resource in lending due to fear of default.7. budgetary resources or from the public as per Liberalization policy. Further high level of NPAs can result in adding to the inflationary potential in the economy and eroding the viability of the credit system as a whole. in fact. burden of NPAs is to be borne by the society as a whole. the economy is badly hit. There is slowdown in growth in GDP.

2001 helped the public sector banks to recover Rs. More significant of them. I would like to recapitulate at this stage. 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. 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.GUIDELINES BY RBI Guidelines of Government and RBI for Reduction of NPAs 1. 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. * Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. [Public sector banks recovered Rs. 2000.000 in respect of NPAs of small/marginal farmers are being drawn up. * An OTS Scheme covering advances of Rs. The scheme was operative up to September 3. * Specific guidelines were issued in May 1999 to public sector banks for one time non discretionary and non discriminatory settlement of NPAs of small sector. 668 crore through compromise settlement under this scheme]. [The above guidelines which were valid up to June 30. * The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. 50. 25000 and below continues to be in operation and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister providing for OTS for advances up to Rs. 5 crore and less as on 31 March 1997. 2600 crore by September 2001].

Lok Adaltas: Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category. they could decide only 9814 cases for Rs. 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. . 3. 6264.Calcutta and Chennai. 40. Delhi. 10 lakhs and above. 5 lakh for compromise settlement under Lok Adalats. 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. 2001. through the forum of Lok Adalat. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. 2001. Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals located in five centres viz. The amount recovered in respect of these cases amounted to only Rs.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30.30 crore. management. Provisions for placement of more than one Recovery Officer. with outstanding balance of Rs.2. 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. Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act.38 crore as on September 30. Allahabad. 1864. The public sector banks had recovered Rs. Mumbai. power to attach defendant's property/assets before judgement. passed in March 2000 has helped in strengthening the functioning of DRTs.

RBI had advised the public sector banks to examine all cases of willful default of Rs 1 crore and above and file suits in such cases. 1 crore and above with special reference to fixing of staff accountability. they serve as negative basket of steps shutting off fresh loans to these defaulters.On their part RBI and . 1 crore and above) against whom suits have been filed by banks and FIs for recovery of their funds. It is our experience that these measures had not contributed to any perceptible recoveries from the defaulting entities. 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. However. 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.Looking at the huge task on hand. RBI also publishes a list of borrowers (with outstanding aggregating Rs. Recovery action against large NPAs: After a review of pendency in regard to NPAs by the Hon'ble Finance Minister. 2001. 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. and file criminal cases in regard to willful defaults. with as many as 33049 cases involving Rs. as on 31st March every year. 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. Board of Directors are required to review NPA accounts of Rs. 42988. 4. 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.84 crore pending before them as on September 30. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers 5. and notify borrowers who default to honour the decree passed against them.

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. Credit Information Bureau: Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. This. RBI to review the implementation procedures of CDR mechanism and to make it more effective. in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. 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. would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large . 7. Mumbai and a Standing Forum and Core Group for administering the mechanism had already been put in place. 20 crore and above with the banks and financial institutions. The CDR structure has been headquartered in IDBI. some of them I would like to highlight. Deputy Governor.R. RBI has set up a high level Group under the Chairmanship of Shri Vepa Kamesam. I hope. if any. RBI is considering the recommendations of the S. 6. 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. As announced by the Hon'ble Finance Minister in the Union Budget 2002-03.the Government are contemplating several supporting measures including legal reforms. The Group will review the operation of the CDR Scheme.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. (CIBIL) is under way. identify the operational difficulties.

Corporate Governance: A Consultative Group under the chairmanship of Dr. A. 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. 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.092 cases. 8. which had in no small measures contributed to the incremental NPAs of banks. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and overexposure. . 10. 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. 9. The Security Interest (Enforcement) Rules. 2004. 263 notices involving outstanding amount of Rs.amounts against same assets and property. 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-a-vis compliance. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. Proposed guidelines on willful defaults/diversion of funds: RBI is examining the recommendation of Kohli Group on willful defaulters. 27 public sector banks had issued 61. transparency. 1. 2002: The Act provides.744 crore. As on June 30. 19. audit committees etc. and had recovered an amount of Rs. disclosure.748 crore from 24. inter alia for enforcement of security interest for realisation of dues without the intervention of courts or tribunals.

Inadequate security and Erosion in value of security: Generally. such as waiver in repayment only added to these problems. 4. However. 2. Slow legal procedure: Before the establishment of DRTs in 1993. There were provisions under various acts which hampered the smooth takeover and sale of secured assets. the pace of recovery improved quite a bit. the banks had to approach the normal courts to recover their dues. the DRTs were soon drowned in the ever increasing number of cases. The pending number of cases with the DRTs increased manifold during the period 1993-2002. Swamping of DRTs with cases: Once DRTs were established to quicken the pace of recovery procedures. with the borrower having ample scope for delaying the takeover of assets. it was said by some unscrupulous businessmen that .PROBLEMS LOAN RECOVERY 1. Political interferences: Political interference in the day -to-day functioning of public sector banks created a number of problems for them. A number of loopholes provided the borrower with opportunities to delay or ignore repayment of loans. banks tend to find that there is a major gap in the valuation of the security.you never have to repay either of them ". The value of the security has generally deteriorated over the period and according to experts. as carried out at the time of providing the loan and at the time of loan recovery. . The populist policies of the national level politicians. The legal process could take years to be completed."there is no difference between equity and debt . it may further deteriorate by almost 10-50% if quick action is not taken for its immediate sale. During this period. 3.

intervention of the court is required. thereby delaying recovery to a great extent. it is not possible to undertake any recovery proceeding against the company . mortgagee can take possession of mortgaged property and sell the same without the intervention of the Court only in the case of English Mortgage. In addition. mortgagee can take possession of mortgaged property where there is specific provision in mortgage deed and it is situated in the towns of Mumbai. Misuse of BIFR/SICA: This was one of the favourite methods of willful defaulters to delay repayment. the asset either does not exist or has become valueless. If the defaulter's company is declared sick and taken for financial reconstruction under BIFR. this is very slow and time consuming process and by the time bank /FI is able to get possession.5.The procedure of financial reconstruction can take a number of years together. In other cases. English mortgage: Under provisions of Section 69 of Transfer of Property Act. . Transfer of property Act. Kolkata and Chennai only. 6. However.

ANALYISIS AND INTERPRETATION .

in 2007-08 increased by 154961rs. crore. . CR) Interpretation:-Above graph show that total assets of SBI is increased in 2004-05 by 52658 crore.STATE BANK OF INDIA TOTAL ASSET 2003YEAR TOTAL ASSET(RS. CR) 200405 459883 200506 494029 200607 566565 200708 721526 04 407185 800000 700000 600000 500000 400000 300000 200000 100000 0 1 2 3 YEAR 4 5 6 YEAR TOTAL ASSET(RS. So assets of the SBI bank increased from last five year.

There are so many reason of increases of npa NET NPA .above graph shows that Non-performing assets of SBI decreased from 2003-04 to2006-07 and increased in 2007-08.CR) Interpretation:.CR) 14000 12000 10000 8000 6000 4000 2000 0 200304 200405 200506 200607 200708 _GROSS NPA(RS.GROSS NPA YEAR _GROSS NPA(RS.CR) 2003-04 12667 2004-05 12456 2005-06 9628 2006-07 9998 2007-08 12837 _GROSS NPA(RS.

) Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and increased in 2006-07 to 2007-08.) 2003-04 5442 2004-05 5349 2005-06 4906 2006-07 5258 2007-08 7424 NET NPA(RS. CR.) 8000 7000 6000 5000 4000 3000 2000 1000 0 2003. . CR.200704 05 06 07 08 NET NPA(RS.2006. CR.YEAR NET NPA(RS.2004.2005.

92 2007-08 3.GROSS NPA (RATIO%) YEAR GROSS NPA(RATIO%) 2003-04 7. 8 7 6 .75 2004-05 5.96 2005-06 3.04 Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased from 2004-05 to 2006-07 and increased in 2007-08.61 2006-07 2.

88 2006-07 1.5 0 1 2 3 4 5 6 YEAR NET NPA(RATIO%) Interpretation: Above graph shows that the net NPA(Ratio%) of SBI is decreased from 2004-05 to 2006-07 and increased in 2007-08 PROVISION COVER .56 2007-08 1.NET NPA(RATIO%) YEAR NET NPA(RATIO%) 2003-04 3.48 2004-05 2.5 1 0.65 2005-06 1.5 2 1.78 4 3.5 3 2.

State Bank of Patiala .45 2005-06 49. It decreased from 2005-06 to 2007-08.YEAR PROVISION COVER 2003-04 57.04% and increased in 2004-05.41 2007-08 45.04 2004-05 59.04 2006-07 47.04 PROVISION COVER 70 POVISION COVER % 60 50 40 30 20 10 0 2003-04 2004-05 2005-06 2006-07 2007-08 yEAR PROVISION COVER Interpretation: Above graph shows that in 2003-04 provision cover of NPA is 57.

5 1 0.23 2005-06 1.38 0.83 2007-08 1.YEAR GROSS NPA(%) NET NPA(%) 2003-04 1.82 1. REASON OF NPA IN BANK:- .increased in 2006-07 and again decreased in 2007-08.2005.6 2. FINDINGS 1.2006.2004.99 2006-07 2.14 0. The net NPA decreased from 2003-04 to 2007-08.5 2 1.65 1.5 0 2003.35 2004-05 1.200704 05 06 07 08 GROSS NPA(%) NET NPA(%) Interpretation: Above graph shows that the gross NPA of SBP is decreased from 2003-04 to 2005-06.42 0.

Policies Impact of profitability Liquidity Impact on outlook of Banker to wards credit delivery Impact of productivity RECOMMANDATIONS . Default by customer        2 Non-inspection of borrower Lack of expertise Imbalance of inventories Poor credit collection Lack of trained staff Lack of commitment to recovery Change in consumer preference IMPACT OF NPA ON BANK      Govt.

 Financial System: As you are aware.  Perception: The mindset of the borrowers needs to change so that a culture of proper utilization of credit facilities and timely repayment is developed. Credit administration: incidence of NPAs. They should appreciate the difficulties of each other and should endeavor to work contributing to a healthy financial system.  Coordinator: Extending credit involves lenders and borrowers and both should realize their role and responsibilities. LIMITATION OF STUDY  Shortage of time :- . one of the main reason for corporate default is on account of diversion of funds and corporate entities should come forward of avoid this practice in the interest of strong and sound financial system. A banks have to strengthen their credit administrative machinery and put in place effective credit risk management systems to reduce the fresh  Better Inspection: We shall keep a close watch on the manner in which NPA reduction is taking place.  Cash Recovery: We should also insist that cash recoveries should more than offset the fresh write-offs in NPAs.

.  No direct source of information available The information is collected from indirect sources so in some information data is not available.  Secondary data:Information is not reliable because of secondary data CONCLUSION .Time is very short for research .so that is very difficult can get the knowledge about everything .  Information not sufficiently available The source of data collection is secondary so the information available is not sufficient.

much has been talked about NPA and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them. adequate finance and timely disbursement. There is also a general perception that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs. mangers should make it amply clear to potential borrowers that banks resources are scare and these are meant to finance viable ventures so that these are repaid on time and relevant to other needy borrowers for improving the economic lot of maximum number of households. Hence selectionof right borrowers. The failure of the banking sector may have an adverse impact on other sectors. viable economic activity.A strong banking sector is important for a flourishing economy. In the changed context of new prudential norms and emphasis on quality lending and profitability. Over the years. due to credit to these sectors becoming stickly managers of rural and semi-urban branches generally sanction these loans. correct and use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing of minimizing the incidence of new NPAs. .

2000) pp 46-49 Books : KOTHARI C.pp-100-105 Website: 1.centurionbop. 2.htm4 www.html1 www. 8.sbp. VK publication . July 1999 pp-34-36 RBI Bulletin. January 2004 pp-17-19 Alok Majumdar.twincitiesbbs. 3.P.sbi. 5.com . 5.com/2002/08/07/stories/2002080700050800. 9. NPAs: Recovery Blues.htm3 www.html2 www. October 2007 pp-31-31 Charted Financial Analysis.BIBLIOGRAPHY 1. 10. 2.domainb.com/management/m_a/20060904_vijay_kalantri. Dhaka pp-47-52 Business Today. 6. November 2007 pp-8-9 Charted Financial Analysis.blonnet.co. 7. Treasury Management (Dec. September 2005 pp-957-961 Charted Financial Analysis.R Indian Financial System . May 2006 pp-34 Charted Financial Analysis. 3. 4. December 2005 pp-25-28 RBI Bulletin. Finance India.com/php/subra/corporat. 6.in/news/press_190505. www. August 2004 B.com www. 4. October 2005 pp-64 Charted Financial Analysis.

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