“Research Project” ON

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.



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.



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.


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


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



AXIS Bank and IIBI. Reserve Bank of India. guidelines relating to provisioning for RRBs have been made effective from the financial' year ended 31. Asset Classification and Provisioning have come into effect from the accounting year 31. However.1993. have played a crucial role in the socio. RBI had issued guidelines to all Scheduled Commercial Banks on Income Recognition. 1994 and to Regional Rural banks in March. 1996.03. Banks extend credit to different . Over the period this problem has aggravated alarmingly and therefore needs urgent remedial actions. They have adopted these guidelines for the purpose of Income Recognition and Assets Classification from the accounting year 199596. What is bothering the bankers today is the management of Non-performing Assets.ICICI. IDBI. Assets Classification and Provisioning in April.economic progress of the country. Separate guidelines were also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June.Narsimham to examine and give recommendation for Income Recognition. 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. IFCI. Asset Classification and Provisioning of loan assets of Banks and Financial Institutions. guidelines were issued by the Reserve Bank of India in March. M. appointed a committee under the Chairmanship of Sh.03. INDIAN BANKS FUNCTIONALLY diverse and geographically widespread.1997. 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. Although most of-the guidelines relating to RRBs are similar to that of Commercial Banks. so in this context a good number of circular instruction/guidelines have been issued by bank/Reserve Bank of India. Banks are under growing pressure to bring down their NPAs so as to improve their performance and viability. they have been made applicable in a phased manner for RRBs. 1994 to All India Financial Institutions viz. On the basis of the recommendations of the Narsimhan Committee. Similarly. in the year 1991. 1992 which have been modified from time to time by the RBI on the basis of experience gained and suggestions received from various quarters.

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

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

and significant surplus SLR investments. 2005. 2004). 67.000 crore as on March 31. which constitute around 59% of the total resources as on March 31. 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. SBI will maintain its strong funding profile and a low cost resource position in view of its strong retail base and wide geographical reach. and emerge as the strongest technology enabled distribution network in India. Savings deposits have shown a strong three-year growth of 19%. improve service levels. low-cost deposits have continued to constitute over 40% of total deposits as at March 31. .STATE BANK OF INDIA SBI is the largest bank in India with deposits of Rs 3. SBI’s strong franchise gives it access to a steady source of stable retail funds. provide new delivery platforms. 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. Once the core banking solution (CBS) is fully implemented.70% for the 2004-05 (refers to financial year from April 1 to March 31). it will cover over 10. compared with 5. 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 branches and ATMs of the State Bank group. 2005. large limits in the call market. Resource-raising capabilities SBI’s funding profile is strong. 2005 (56% as at March 31.48% in 2003-04. The bank’s liquidity position is very strong due to healthy accretion to deposits. The bank is facing increasing competition in its metropolitan and urban franchise. Thus. The bank’s cost of deposits (excluding IMD) has significantly reduced to 4. despite a reduction in the proportion of current account deposits.

it is expected to happen gradually. Thus. and customer segments.44% of average funds deployed in 2004-05 is in line with other public sector banks. despite the decline in profitability in some segments. asset classes. despite good asset growth and technology efficiency gains.04% and a large capital base of Rs 240. 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. since this is a sensitive issue. The bank’s fund based and fee income earnings are diversified across industries. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets).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. 2005. at around 1% per annum for the past three years. . regions. The capitalization levels of SBI are adequate to address the asset side risks and support the business growth in the medium term. the bank will have to reduce or redeploy work force. the growth in fee income is expected to slow down. However.4 times as at March 31. the bank’s operating costs will remain high in the medium term. and diverse income streams. the bank is aggressively targeting retail finance and small and medium enterprises (SMEs). The bank’s operating expense at 2. To maintain yields and pursue credit growth. witnessed across the entire banking sector. Strong diversification in income streams will ensure that the bank’s earnings remain relatively stable. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating expenditure in 2004-05. 2005 due to lower slippages reflecting an improving asset quality. To be able to reap the full benefits of technology implementation. The bank has considerably improved its net worth coverage for net NPAs to 4.72 billion as at March 31. Comfortable capital position SBI is adequately capitalized with a tier I capital adequacy ratio of 8.

The housing finance portfolio has a 12-month. Asset quality to remain at average levels The bank continues to have a high level of gross NPAs at 5. the bank has leveraged its corporate relationships. compared with 4. SBI is targeting primarily the housing loans segment.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. The share of retail advances has increased to 24. lagged gross NPA of 4.34% as at March 31.95% of gross advances as at March 31. SBI’s asset quality is expected to remain at average levels. 283.41 billion (54. 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. the bank has decided to focus on financing the retail (personal) segment as well as SMEs.3%) of total retail loans.73% (Rs 522. To contain NPAs and ensure credit growth. as the bank’s large and diverse asset portfolio reflects of the asset quality of the banking system. The bank has entered the market of term lending to corporates . In the retail loan segment. The NPAs in retail finance are low currently. 2005. Business description SBI along with its associate banks offer a wide range of banking products and services across its different client markets. which constitutes Rs. however they are steadily increasing (especially in the housing finance portfolio) and have started showing signs of stress.9% for all scheduled commercial banks (SCBs) taken together.71% in 2004-05.08 billion) of total advances as at September 30 2005.Management strategies In retail finance. pursued business growth selectively. as can be seen in the consistently higher levels of slippages (additions to NPAs) at 2. and has not competed based on interest rate. 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. 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. 2005. The bank is facing challenges to improve the quality of assets originated.

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

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. Better Capitalization levels Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through public issues in recent years. steady growth in gross domestic product should help improve the banks’ asset quality and increase corporate lending. thereby improving their capitalization levels. 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. Though slippages to NPAs and provisioning were high for some banks in FY2004. 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. small and medium enterprises. Going forward. 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%. and services segments.Asset quality to improve Banks have not yet fully resolved the stress in the asset quality of their legacy corporate loan portfolios. They also need to fortify their credit risk management systems to mitigate the risks arising from small-ticket lending to the retail. .

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

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

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

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

it should be deemed as an NPA. • Asset classification should be borrower-wise and not facility-wise: If a single facility to a borrower is classified as NPA. as it is difficult to envisage only a solitary facility becoming a problem credit and not others. • 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.• Accounts with temporary deficiencies: These should be classified based on the past recovery records. • 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.e. 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.

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

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

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. 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. which should be regarded as the minimum. 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. A poverty alleviation and employment generation schemes. 3. 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. 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. These norms. 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. 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. With regard to income recognition in India. 5. However. which is important segment of national economy but on commercial considerations and on basis of credit worthiness. we should . 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. may be brought into force in a phased manner. 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. Given the special needs of these sectors. 6. 2.has been so identified but not written off.

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

The committee believes that the balance sheets of banks and FIs should be made more transparent and full disclosure made in Balance sheet. .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. This is to be done in phased manner.

ACCORDING TO S. Verma (1999) has concluded that high level of NPAs leads to operational failure of the bank. reduces effective rate of interest and reduces the funds’ recalculation and increase their dependence on external sources thereby increasing the costs. This puts bank on stronger ground in salvaging sticky loan         . 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. 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. RAJ KUMAR (2002) the SARFAESI act and the could primarily used as powerful bargaining tool while negotiating with defaulter. 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. reduced productivity loss in the credibility and put detrimental impact on the policies of the banks. 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. 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. Murthy (1988) has examined that default bring down the return accruing and to them. Kwan and Eisenbeis (1994) also concluded that there is negative relationship between efficiency and problem loans.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.

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

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 DESIGN TYPES OF RESEARCH DESIGN DESI EXPLORATORY RESEARCH DESIGN DESCRIPTIVE EXPERIMENTAL RESEARCH DESIGN . The present Dissertation has been undertaken to do the Problem of NPA in State Bank of India.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. 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. PROBLEM STATEMENT The research problems.

Research design is flexible enough to provide opportunity for considering different aspects of problem under study. 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.The present study is descriptive in nature. as it seeks to discover ideas and insight to bring out new relationship. 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.

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

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

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

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

• Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs. and Orissa hand loom industries. the NPAs of OSCB is increasing day by day.The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”. The biggest defaulters of OSCB are the OTM (117. . • Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. The NPAs due to wilful defaulters can be collected by regular visits. If a new big customer meets misfortune or certain traders or industries affected adversely. the overall position of the bank will not be affected. 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. and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).77lakhs). Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. Like OSCB suffered loss due to the OTM Cuttack.

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

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. 31251 Crores towards provisioning NPA. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs.03. 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. .a. In the context of crippling effect on a bank's operations in all spheres.04. set in asset-liability mismatches. a sizeab business. It would only postpone the process. SBI Group incurred a total amount of Rs. etc. Between 01. 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. Considering the minimum cost of holding NPAs at 7% p. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market.• They limit recycling of funds. 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. 32632 Crores or 6. Considering the average provisions made for the last 8 years which works out to average of Rs. This has brought Net NPA to Rs. 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. else they are to seek the bounty of the Central Government for repeated Recapitalization. 2300 Crores annually. 3300 crores from annum.93 to 31. Other bans hesitate to approach the market to rise new issues. 32632 Croces absorbs a recurring holding ost of Rs.2% of net advances.2001.

The statistics above show the other weaknesses of the nationalised banks in . Interest on Recapitalization Bonds is a income earned form the Government. when the banks are able to earn adequate amount of non-interest income to cover their entire operating expenses i. 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. an ideal competitive working is reached. as published by RBI in its Report on trends and progress of banking in India. 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. In that event the spread factor i. It's sizeable earnings under of non-interest income substantially/totally meets its non-interest expenses. will be revealing to prove this statement. Theoretically even if the banks keeps 0% spread. 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. On account of the burden of heavy NPA. Its obligation for provisioning requirements is within bounds. 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: 1.92%) It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March. though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left.In the face of the deregulated banking industry. 2.e. Non-interest income fully absorbs the operating expenses of this banks in the current financial year for the first 9 months. the difference between the gross interest income and interest cost will constitute its operating profits. 2001.e. In the last two financial years. who had issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout package. (Net NPA/Net Advances is 1. a positive burden.

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

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

6. 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. insurance business. owned funds of Rs. . They are floating their subsidiaries to manage mutual funds. Reputed foreign suppliers do not accept letter of credit opened bi Indian banks or confine their transaction to top Indian banks only. Due to high cost. putting severe pressure on their profit margins. It also leads to loss of trust of foreign suppliers. Banks having positive net profits for the last three years. 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. CAR of > 8% are the 4 condition to be fulfilled to get autonomous status. It is also biggest threat for capital account convertibility. Good money is spent to recover bad money.public sector banks were traded on the NSE out of which share value of three PSBs have decreased. Deterioration in the quality of loan assets and inability to come with new products makes the Indian banks uncompetitive globally. 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. The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to demand in respect of direct. medium and long term loans for agriculture and allied activities. Moreover. which becomes difficult in the situation of huge level of NPAs . they cannot reduce lending rate to meet the economy's demand of low lending rate. factoring. 100 Crore. it puts negative effect on granting of autonomy to PSBs whreas it is must for banks in this competitive environment. It is a blot on the credibility of the banking system. Net NPA level below 9%. of years in which a banks branch remains in a particular category of default. 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.

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

More significant of them. [Public sector banks recovered Rs. * 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. . * An OTS Scheme covering advances of Rs. 668 crore through compromise settlement under this scheme]. 2001 helped the public sector banks to recover Rs. 2600 crore by September 2001]. I would like to recapitulate at this stage.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 broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. * Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 50.000 in respect of NPAs of small/marginal farmers are being drawn up. 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. 2000. 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. 5 crore and less as on 31 March 1997. [The above guidelines which were valid up to June 30. 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. 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.

3. Allahabad. Mumbai. 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. management. protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. 40. 2001. 10 lakhs and above. 6264.30 crore. 5 lakh for compromise settlement under Lok Adalats. Lok Adaltas: Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category. 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. Delhi. power to attach defendant's property/assets before judgement.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30.2. passed in March 2000 has helped in strengthening the functioning of DRTs. The amount recovered in respect of these cases amounted to only Rs.Calcutta and Chennai.38 crore as on September 30. 1864. Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act. they could decide only 9814 cases for Rs. Provisions for placement of more than one Recovery Officer. The public sector banks had recovered Rs. 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. Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals located in five centres viz. . with outstanding balance of Rs.

they serve as negative basket of steps shutting off fresh loans to these defaulters. 42988. 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. 2001. However. Recovery action against large NPAs: After a review of pendency in regard to NPAs by the Hon'ble Finance Minister. 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. 1 crore and above with special reference to fixing of staff accountability. Board of Directors are required to review NPA accounts of Rs. I may add that familiarisation programmes have been offered in NIBM at periodical intervals to the presiding officers of DRTs in understanding the complexities of documentation and operational features and other legalities applicable of Indian banking system. RBI also publishes a list of borrowers (with outstanding aggregating Rs. with as many as 33049 cases involving Rs. 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.84 crore pending before them as on September 30.On their part RBI and . RBI on its part has suggested to the Government to consider enactment of appropriate penal provisions against obstruction by borrowers in possession of attached properties by DRT Receivers. and file criminal cases in regard to willful defaults. as on 31st March every year. and notify borrowers who default to honour the decree passed against them. 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. 4. I strongly believe that a real breakthrough can come only if there is a change in the repayment psyche of the Indian borrowers 5. 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.Looking at the huge task on hand.

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

transparency. 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. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and overexposure. 2004. disclosure.amounts against same assets and property.748 crore from 24. and had recovered an amount of Rs. 9. 263 notices involving outstanding amount of Rs. 2002: The Act provides. 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. The Security Interest (Enforcement) Rules. A. which had in no small measures contributed to the incremental NPAs of banks. . Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. inter alia for enforcement of security interest for realisation of dues without the intervention of courts or tribunals. As on June 30.744 crore. Corporate Governance: A Consultative Group under the chairmanship of Dr. 19. 10. 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. Proposed guidelines on willful defaults/diversion of funds: RBI is examining the recommendation of Kohli Group on willful defaulters. 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.092 cases. 1. 27 public sector banks had issued 61. 8. audit committees etc.

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

mortgagee can take possession of mortgaged property where there is specific provision in mortgage deed and it is situated in the towns of Mumbai. 6. thereby delaying recovery to a great extent.5. the asset either does not exist or has become valueless. 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. In other cases. it is not possible to undertake any recovery proceeding against the company . this is very slow and time consuming process and by the time bank /FI is able to get possession.The procedure of financial reconstruction can take a number of years together. . If the defaulter's company is declared sick and taken for financial reconstruction under BIFR. Misuse of BIFR/SICA: This was one of the favourite methods of willful defaulters to delay repayment. However. English mortgage: Under provisions of Section 69 of Transfer of Property Act. In addition. intervention of the court is required. Kolkata and Chennai only.


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. in 2007-08 increased by 154961rs. CR) Interpretation:-Above graph show that total assets of SBI is increased in 2004-05 by 52658 crore. . So assets of the SBI bank increased from last five year. crore.STATE BANK OF INDIA TOTAL ASSET 2003YEAR TOTAL ASSET(RS.

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

2005.2006.200704 05 06 07 08 NET NPA(RS.) 8000 7000 6000 5000 4000 3000 2000 1000 0 2003. CR.YEAR 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. CR.2004. CR. .) 2003-04 5442 2004-05 5349 2005-06 4906 2006-07 5258 2007-08 7424 NET NPA(RS.

GROSS NPA (RATIO%) YEAR GROSS NPA(RATIO%) 2003-04 7.04 Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased from 2004-05 to 2006-07 and increased in 2007-08. 8 7 6 .96 2005-06 3.61 2006-07 2.92 2007-08 3.75 2004-05 5.

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 .65 2005-06 1.78 4 3.88 2006-07 1.56 2007-08 1.5 3 2.5 1 0.48 2004-05 2.5 2 1.NET NPA(RATIO%) YEAR NET NPA(RATIO%) 2003-04 3.

04% and increased in 2004-05.04 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. State Bank of Patiala .45 2005-06 49. It decreased from 2005-06 to 2007-08.04 2004-05 59.41 2007-08 45.YEAR PROVISION COVER 2003-04 57.

6 2.14 0.2005.83 2007-08 1.5 1 0.99 2006-07 2.2006.200704 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.increased in 2006-07 and again decreased in 2007-08.42 0.35 2004-05 1. FINDINGS 1.2004.5 0 2003.82 1. The net NPA decreased from 2003-04 to 2007-08.65 1.38 0. REASON OF NPA IN BANK:- .23 2005-06 1.YEAR GROSS NPA(%) NET NPA(%) 2003-04 1.5 2 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.

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. LIMITATION OF STUDY  Shortage of time :- .  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. They should appreciate the difficulties of each other and should endeavor to work contributing to a healthy financial system.  Cash Recovery: We should also insist that cash recoveries should more than offset the fresh write-offs in NPAs. Credit administration: incidence of NPAs.  Coordinator: Extending credit involves lenders and borrowers and both should realize their role and responsibilities. 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.

 Secondary data:Information is not reliable because of secondary data CONCLUSION .  Information not sufficiently available The source of data collection is secondary so the information available is not sufficient..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.so that is very difficult can get the knowledge about everything .

Over the years. correct and use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing of minimizing the incidence of new NPAs. . The failure of the banking sector may have an adverse impact on other sectors. 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. adequate finance and timely disbursement. 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. 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. viable economic activity.A strong banking sector is important for a flourishing economy.

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

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