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

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

Though complete elimination of such losses is not possible. 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. but banks can always aim to keep the losses at a low level. Proper management and speedy disposal of NPAs is one of the most critical tasks of banks today. bank credit is the primary source of available debt financing. However lending also carries a risk called credit risk. Granting of credit for economic activities is the prime duty of banking. Thus. For banks good loans are the most profitable assets.types of borrowers for many different purposes. these loan losses affect the bank’s profitability on a large scale. which results into economic growth. 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. For most customers. 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. fee income and investment and the most prominent assumed risk is credit risk. 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. NPAs are not therefore the concern of only lenders but also the public at large. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. as NPAs can choke further expansion of credit which would impede the economic growth of the country. Apart from raising resources through fresh deposits. Despite various correctional steps administered to solve and end this . which arises from the failure of borrower. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. Return comes in the form of loan interest. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the economy.

followed by the SBI group. 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.problem. and the all India Financial Institutions. .

it will cover over 10. Resource-raising capabilities SBI’s funding profile is strong. 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. compared with 5. 2005 (56% as at March 31. SBI’s strong franchise gives it access to a steady source of stable retail funds. provide new delivery platforms. 2005. large limits in the call market. 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.000 crore as on March 31. 2005. The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better. and improve operating efficiency to counter the threat of competition effectively.48% in 2003-04. The bank’s liquidity position is very strong due to healthy accretion to deposits. and significant surplus SLR investments. low-cost deposits have continued to constitute over 40% of total deposits as at March 31. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits.70% for the 2004-05 (refers to financial year from April 1 to March 31). The bank is facing increasing competition in its metropolitan and urban franchise. 67.000 branches and ATMs of the State Bank group. improve service levels. . despite a reduction in the proportion of current account deposits. Thus. Once the core banking solution (CBS) is fully implemented. The bank’s cost of deposits (excluding IMD) has significantly reduced to 4. and emerge as the strongest technology enabled distribution network in India. 2004). 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. underpinned by its strong retail deposit base.

at around 1% per annum for the past three years. it is expected to happen gradually. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating expenditure in 2004-05.4 times as at March 31. 2005 due to lower slippages reflecting an improving asset quality. The bank’s fund based and fee income earnings are diversified across industries. Thus. despite the decline in profitability in some segments. the bank will have to reduce or redeploy work force. the growth in fee income is expected to slow down. To maintain yields and pursue credit growth. However. and customer segments. The bank’s operating expense at 2. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets). The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile. with the opening of government business like tax collection to other banks and increased competition. the bank’s operating costs will remain high in the medium term. The capitalization levels of SBI are adequate to address the asset side risks and support the business growth in the medium term. since this is a sensitive issue. despite good asset growth and technology efficiency gains. asset classes. the bank is aggressively targeting retail finance and small and medium enterprises (SMEs).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. witnessed across the entire banking sector.72 billion as at March 31. Strong diversification in income streams will ensure that the bank’s earnings remain relatively stable. The bank has considerably improved its net worth coverage for net NPAs to 4.04% and a large capital base of Rs 240.44% of average funds deployed in 2004-05 is in line with other public sector banks. . and diverse income streams. regions. 2005. Comfortable capital position SBI is adequately capitalized with a tier I capital adequacy ratio of 8. To be able to reap the full benefits of technology implementation.

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. which constitutes Rs.41 billion (54. and has not competed based on interest rate. the bank has leveraged its corporate relationships. In the retail loan segment. 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. pursued business growth selectively.9% for all scheduled commercial banks (SCBs) taken together.08 billion) of total advances as at September 30 2005. The bank has entered the market of term lending to corporates . Business description SBI along with its associate banks offer a wide range of banking products and services across its different client markets. Asset quality to remain at average levels The bank continues to have a high level of gross NPAs at 5. as the bank’s large and diverse asset portfolio reflects of the asset quality of the banking system.95% of gross advances as at March 31.3%) of total retail loans. however they are steadily increasing (especially in the housing finance portfolio) and have started showing signs of stress.34% as at March 31. The housing finance portfolio has a 12-month. the bank has decided to focus on financing the retail (personal) segment as well as SMEs. The share of retail advances has increased to 24. The NPAs in retail finance are low currently. compared with 4.71% in 2004-05. 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. To contain NPAs and ensure credit growth. The bank is facing challenges to improve the quality of assets originated.Management strategies In retail finance. SBI’s asset quality is expected to remain at average levels. 2005. 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. SBI is targeting primarily the housing loans segment. as can be seen in the consistently higher levels of slippages (additions to NPAs) at 2. 283.73% (Rs 522.

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

Better Capitalization levels Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through public issues in recent years. Going forward. and services segments. 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%. thereby improving their capitalization levels. small and medium enterprises. however. 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. They need to reorient their staff and effectively utilize technology platforms to retain customers and reduce costs. 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. Challenges ahead Competition from new private sector and foreign banks remains a key challenge for public sector banks. . steady growth in gross domestic product should help improve the banks’ asset quality and increase corporate lending. They also need to fortify their credit risk management systems to mitigate the risks arising from small-ticket lending to the retail. Though slippages to NPAs and provisioning were high for some banks in FY2004. as they moved to the 90-day norm for recognising and provisioning for NPAs.Asset quality to improve Banks have not yet fully resolved the stress in the asset quality of their legacy corporate loan portfolios.

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

etc. up gradation of technology in the banking sector. including a leased asset. 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. i. Accordingly. recovery climate. The account remains ‘our of order’ for a period of more than 180 days. it was decided to dispense with the ‘past due’ concept. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan ii. as from that date.Definition of NPAs (NON -PERFORMING ASSETS) An asset. 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. in respect of an overdraft/cash credit iii. with effect from 31st March. becomes non-performing when it ceases to generate income for the bank. 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 . a NPA shall be an advance where. 2001. Due to the improvements in the payment and settlement systems.

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

Loss Assets: A loss asset is one where a loss has been identified by the bank or. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18 months. internal or external auditors but the amount has not been written off wholly. . 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.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. Guidelines for Classification of NPAs Broadly speaking. 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. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs. 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. ii. In such cases. or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full. the current net worth of the borrower. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a period less than or equal to 18 months. especially in respect of high value accounts. iii.

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

NPAs adversely affect the wealth condition of the branch advances as also the profitability of the branch. 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. Interest cannot be applied on the loan accounts classified as NPAs. The NPAs of banks in India are considered to be at higher levels than those in other countries. NPA may be Sub standard. 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. It is. 4.NPA SOME ASPECTS AND ISSUES 1. Some of the reasons for this are as under: (a) (b) (c) (d) 5. This requires management of NPAs in such a Planned and scientific manner that the percentage of NPAs to the total advances will be minimum. The Branch 'has to pay interest to central office on outstanding classified as NPA. 6) Once the assets are classified as NPA. Under Income Recognition. 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. . 2. All this requires greater efforts and teamwork. the various means are to be initiated to get rid off the NPAs from the branch books. Doubtful or loss assets. 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. 3. Assets Classification and provisioning. Provision has to be made on NPAs at Bank level. every effort be made at all levels to cut down the NPAs. effective measures are initiated to get full recovery and where this is not possible. The Branch has to incur cost in supervision and follow up of such advances. therefore necessary that as per guidelines provided in NPA Management Policy document.

streamlining procedures. Any uncollected interest payments on NPLs are considered non-accrued interest. c) 1. upgrading technology and human resource development. The suspension of interest payments is required on loans that are classified as 'non-performing' ['substandard'. 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 . Failure to do so would overstate income. therefore. be useful. economic and institutional science. meanwhile major changes have taken place in the domestic. Committee has presented second generation reforms. It would. Previously accrued. but uncollected interest is reversed out of income. NPLs are restored on an accrual basis only after full settlement has been made on all delinquent principal and interest. Structural changes in the system. NARSIMHAN COMMITTEE'S RECOMMENDATIONS Committee on Financial System (CFS) Narsimhan committee which reported in 1991. 'doubtful' and 'loss']. if the accounts carry a footnote.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). Related to this. indicating the movement towards global integration of financial services. Uncollected interest is normally put in a memorandum account. explaining the accounting policies followed with regard to recognition of income on NPLs. a) b) To strength the foundation of financial system.

These norms. which is important segment of national economy but on commercial considerations and on basis of credit worthiness. 4. which should be regarded as the minimum. A poverty alleviation and employment generation schemes. 3. may be brought into force in a phased manner. 2. 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. we should . 5.has been so identified but not written off. 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. the current practice may continue. With regard to income recognition in India. 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. However. There is a continuing need of Financial Corporations to extend Credit to SSI sector. income stops occurring when interest/installment of principal is not paid within 180 days. 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. 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. 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. 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. Given the special needs of these sectors. 6. 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.

the institution and operation of better control systems. There is a need for a greater use of computerized system than at present.move towards international Practices in this regard and introduce the norm of 90 days in a phased manner by the 2002. While the RBI and IDBI may initially. 8. prescribe certain normative models for market risk management. The credit target for this redefined . small business and transport operators. the ultimate objective should be that of building up their models and RBI blacklisting them for their validity on a periodical basis. 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. 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. the tiny sector of industry. Banks should pay greater attention to asset liability management to avoid mismatch and to cover. 9. rural artisans and other weaker sections. village and cottage industry. 13. 7. Computerization has to be recognized as an indispensable tool for improvement in customer service. 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. 10. liquidity and interest rate risks. It is recommended that directed credit sector be redefined to comprise the small and marginal farmers. As an incentive to Bank is to make specific provision. 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. Internal audit and internal inspection systems should be strengthened. State Financial Corporations at present are over regulated and over administered. Forex rate volatility and interest rate changes. 11. 12. greater efficiency in information technology. among others. the consideration be given to making such provisions tax deductible.

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. . 14. The committee believes that the balance sheets of banks and FIs should be made more transparent and full disclosure made in Balance sheet.

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. 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. 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. 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. This puts bank on stronger ground in salvaging sticky loan         . Murthy (1988) has examined that default bring down the return accruing and to them. reduced productivity loss in the credibility and put detrimental impact on the policies of the banks. ACCORDING TO S. RAJ KUMAR (2002) the SARFAESI act and the could primarily used as powerful bargaining tool while negotiating with defaulter.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. 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. Verma (1999) has concluded that high level of NPAs leads to operational failure of the bank. 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.

 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.

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

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

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

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

eg. i. Capacity to pay b. The repayment of loan depends upon the borrowers: a. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs.• 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. Principles of profitability i. policies With every new govt. The banks recover the amount by selling of their assets. banking sector gets new policies for its operation. Honest 3. Reputation of borrower The banker should. Success in business Willingness to pay depends on: 1. Principles of safety ii. Tangible assets 2. 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. Principles of safety By safety it means that the borrower is in a position to repay the loan both principal and interest. Principle of liquidity iii. there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a . The rehabilitation plan worked out 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. • Change on Govt. which covers a minimum label. Willingness to pay Capacity to pay depends upon: 1. Thus the banks record the nonrecovered part as NPAs and has to make provision for it. INTERNAL FACTORS • Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. Character 2.

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

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

" This is the margin between the cost of resources employed and the return thereform. liquidity and competitive functioning of banks and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. inability to offer competitive market rates adds to the disadvantage of marketing and building new NPA has affected the profitability. but at the same time banks are required to make provisions for such NPAS from their current profits. When the interest rates were directed by RBI. 1. They result in reduced interest income. In the context of severe competition in the banking industry. 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. the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. "The spread is the bread for the banks". But today in the deregulated market the banks decide their lending rates and borrowing rates. This is the margin between the cost of resources employed and the return therefrom.IMPACT OF NPAS ON BANKS:In portion of the interest income is absorbed in servicing NPA. It is also cost absorbing and profit eroding. as heretofore. 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). NPAS do not generate interest income for the banks. In the competitive money and capital Markets.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. and . there was not option for banks.

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. a sizeab business. else they are to seek the bounty of the Central Government for repeated Recapitalization. Other bans hesitate to approach the market to rise new issues. 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. 31251 Crores towards provisioning NPA.04. 2300 Crores annually. 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. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market.03. 32632 Croces absorbs a recurring holding ost of Rs.93 to 31.2001. 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. etc. 32632 Crores or 6. In the context of crippling effect on a bank's operations in all spheres. It would only postpone the process.a. SBI Group incurred a total amount of Rs. 3300 crores from annum. In turn SBI Group are seen as poor performers and unable to approach the market for raising additional capital. 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.2% of net advances. Between 01. . This has brought Net NPA to Rs. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs.• They limit recycling of funds. set in asset-liability mismatches. Considering the average provisions made for the last 8 years which works out to average of Rs. Considering the minimum cost of holding NPAs at 7% p.

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

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

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. 4. 5. but will not prevent the account turning into NPA. Productivity of employees is also reduced because it keeps staff busy with the task of recovery of overdue. doubtful and loss assets. Impact on other Variables: High level of NPAs also leads to squeezing of interest spread. waivement of legal action. Now a days Govt. 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. 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. Banks are required to bring their own capital by issuing share to the public. During the year 2001-02 share of 12 .confidence). compromise. 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. write off or in preparing DICGC claim papers etc. 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. 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. a tendency towards laxity in the standards of credit appraisal comes to the fore. preparing proposal for filing of suits. 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. 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.

of years in which a banks branch remains in a particular category of default.public sector banks were traded on the NSE out of which share value of three PSBs have decreased. CAR of > 8% are the 4 condition to be fulfilled to get autonomous status. . Reputed foreign suppliers do not accept letter of credit opened bi Indian banks or confine their transaction to top Indian banks only. factoring. Inadequate recovery also inhibits the banks to draw refinance from higher level agency. It implies that refinance facility would be progressively reduced depending on the position of NPAs and also on the No. Banks having positive net profits for the last three years. it puts negative effect on granting of autonomy to PSBs whreas it is must for banks in this competitive environment. putting severe pressure on their profit margins. 100 Crore. It is also biggest threat for capital account convertibility. which becomes difficult in the situation of huge level of NPAs . Deterioration in the quality of loan assets and inability to come with new products makes the Indian banks uncompetitive globally. 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. 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. 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. They are floating their subsidiaries to manage mutual funds. Moreover. Good money is spent to recover bad money. The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to demand in respect of direct. owned funds of Rs. It is a blot on the credibility of the banking system. insurance business. Net NPA level below 9%. they cannot reduce lending rate to meet the economy's demand of low lending rate. It also leads to loss of trust of foreign suppliers. 6. Due to high cost. medium and long term loans for agriculture and allied activities.

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

* 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. 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. The scheme was operative up to September 3. 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. I would like to recapitulate at this stage. 2600 crore by September 2001]. * Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs.GUIDELINES BY RBI Guidelines of Government and RBI for Reduction of NPAs 1. 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. 2001 helped the public sector banks to recover Rs. 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. . 50. 2000. * An OTS Scheme covering advances of Rs. [Public sector banks recovered Rs. More significant of them. 5 crore and less as on 31 March 1997. 668 crore through compromise settlement under this scheme]. [The above guidelines which were valid up to June 30.000 in respect of NPAs of small/marginal farmers are being drawn up. * The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place.

Mumbai. passed in March 2000 has helped in strengthening the functioning of DRTs. 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. 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.Calcutta and Chennai. through the forum of Lok Adalat. 2001. Provisions for placement of more than one Recovery Officer. . 1864. Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30. 10 lakhs and above.30 crore. they could decide only 9814 cases for Rs. power to attach defendant's property/assets before judgement. 40.2. 2001. Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals located in five centres viz. Delhi. Lok Adaltas: Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category. Allahabad. 6264. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to decide on cases of NPAs of Rs. with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalats. 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. The public sector banks had recovered Rs. 3. management.38 crore as on September 30. The amount recovered in respect of these cases amounted to only Rs.

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

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

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

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

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

ANALYISIS AND INTERPRETATION .

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. 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. crore. in 2007-08 increased by 154961rs.

CR) 2003-04 12667 2004-05 12456 2005-06 9628 2006-07 9998 2007-08 12837 _GROSS NPA(RS. 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.GROSS NPA YEAR _GROSS NPA(RS.CR) 14000 12000 10000 8000 6000 4000 2000 0 200304 200405 200506 200607 200708 _GROSS NPA(RS.CR) Interpretation:.

200704 05 06 07 08 NET NPA(RS.) 8000 7000 6000 5000 4000 3000 2000 1000 0 2003.2006. . CR.YEAR NET NPA(RS. CR. CR.2005.) 2003-04 5442 2004-05 5349 2005-06 4906 2006-07 5258 2007-08 7424 NET NPA(RS.) Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and increased in 2006-07 to 2007-08.2004.

75 2004-05 5. 8 7 6 .GROSS NPA (RATIO%) YEAR GROSS NPA(RATIO%) 2003-04 7.96 2005-06 3.92 2007-08 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 1.65 2005-06 1.78 4 3.48 2004-05 2.5 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 1.5 3 2.NET NPA(RATIO%) YEAR NET NPA(RATIO%) 2003-04 3.5 1 0.5 2 1.

04 2006-07 47. It decreased from 2005-06 to 2007-08.04 2004-05 59. State Bank of Patiala .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 57.41 2007-08 45.YEAR PROVISION COVER 2003-04 57.04% and increased in 2004-05.45 2005-06 49.

99 2006-07 2.5 2 1.14 0.2006.83 2007-08 1. The net NPA decreased from 2003-04 to 2007-08.42 0.YEAR GROSS NPA(%) NET NPA(%) 2003-04 1.65 1.5 1 0.2004.2005.6 2.38 0.23 2005-06 1. REASON OF NPA IN BANK:- .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 2005-06.5 0 2003. FINDINGS 1.increased in 2006-07 and again decreased in 2007-08.82 1.

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.

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.  Cash Recovery: We should also insist that cash recoveries should more than offset the fresh write-offs in NPAs.  Coordinator: Extending credit involves lenders and borrowers and both should realize their role and responsibilities.  Perception: The mindset of the borrowers needs to change so that a culture of proper utilization of credit facilities and timely repayment is developed. They should appreciate the difficulties of each other and should endeavor to work contributing to a healthy 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. Credit administration: incidence of NPAs.  Financial System: As you are aware.

 Information not sufficiently available The source of data collection is secondary so the information available is not sufficient..so that is very difficult can get the knowledge about everything .Time is very short for research .  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 .

viable economic activity. 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. Over the years. The failure of the banking sector may have an adverse impact on other sectors. 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. Hence selectionof right borrowers. . correct and use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing of minimizing the incidence of new 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.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. due to credit to these sectors becoming stickly managers of rural and semi-urban branches generally sanction these loans.

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

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