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

RBI had issued guidelines to all Scheduled Commercial Banks on Income Recognition. guidelines were issued by the Reserve Bank of India in March. Asset Classification and Provisioning have come into effect from the accounting year 31. they have been made applicable in a phased manner for RRBs. IDBI. INDIAN BANKS FUNCTIONALLY diverse and geographically widespread. Although most of-the guidelines relating to RRBs are similar to that of Commercial Banks. 1994 and to Regional Rural banks in March. 1996. However. On the basis of the recommendations of the Narsimhan Committee.ICICI. Banks are under growing pressure to bring down their NPAs so as to improve their performance and viability. AXIS Bank and IIBI. Banks extend credit to different . have played a crucial role in the socio. appointed a committee under the Chairmanship of Sh. 1994 to All India Financial Institutions viz. 1992 which have been modified from time to time by the RBI on the basis of experience gained and suggestions received from various quarters.1993.1997. Assets Classification and Provisioning in April.03. What is bothering the bankers today is the management of Non-performing Assets. They have adopted these guidelines for the purpose of Income Recognition and Assets Classification from the accounting year 199596. Separate guidelines were also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June. in the year 1991. guidelines relating to provisioning for RRBs have been made effective from the financial' year ended 31.03. M. The Prudential Norms for Income Recognition.economic progress of the country. Over the period this problem has aggravated alarmingly and therefore needs urgent remedial actions.Narsimham to examine and give recommendation for Income Recognition. IFCI. Reserve Bank of India. Similarly.Since the introduction of economic liberalization and financial sector reforms. 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. The definition of NPAs is also gradually becoming tough for RRBs to cover all advances like Commercial Banks. so in this context a good number of circular instruction/guidelines have been issued by bank/Reserve Bank of India. Asset Classification and Provisioning of loan assets of Banks and Financial Institutions.

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

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

large limits in the call market.000 crore as on March 31. low-cost deposits have continued to constitute over 40% of total deposits as at March 31. SBI will maintain its strong funding profile and a low cost resource position in view of its strong retail base and wide geographical reach. 2004). 67. and significant surplus SLR investments. It dominates the Indian banking sector with a market share of around 20% in terms of total banking sector deposits. Thus. and improve operating efficiency to counter the threat of competition effectively. The bank’s cost of deposits (excluding IMD) has significantly reduced to 4.48% in 2003-04.000 branches and ATMs of the State Bank group. 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. The bank’s liquidity position is very strong due to healthy accretion to deposits. and emerge as the strongest technology enabled distribution network in India. SBI’s strong franchise gives it access to a steady source of stable retail funds. 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. 2005. Once the core banking solution (CBS) is fully implemented. improve service levels.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. The increasing focus on upgrading the technology back-bone of the bank will enable it to leverage its reach better. it will cover over 10. provide new delivery platforms. . 2005 (56% as at March 31. Resource-raising capabilities SBI’s funding profile is strong. underpinned by its strong retail deposit base. despite a reduction in the proportion of current account deposits. which constitute around 59% of the total resources as on March 31. compared with 5. 2005.

the growth in fee income is expected to slow down.72 billion as at March 31. The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of the operating expenditure in 2004-05. the bank will have to reduce or redeploy work force. since this is a sensitive issue. regions. asset classes. The bank has considerably improved its net worth coverage for net NPAs to 4. The capitalization levels of SBI are adequate to address the asset side risks and support the business growth in the medium term. SBI’s earning profile is characterised by consistency in the return on assets (PAT/Average Assets).04% and a large capital base of Rs 240. at around 1% per annum for the past three years.44% of average funds deployed in 2004-05 is in line with other public sector banks. Strong diversification in income streams will ensure that the bank’s earnings remain relatively stable. To be able to reap the full benefits of technology implementation. Thus.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. To maintain yields and pursue credit growth. with the opening of government business like tax collection to other banks and increased competition. despite good asset growth and technology efficiency gains.4 times as at March 31. Comfortable capital position SBI is adequately capitalized with a tier I capital adequacy ratio of 8. despite the decline in profitability in some segments. The bank’s operating expense at 2. the bank is aggressively targeting retail finance and small and medium enterprises (SMEs). and diverse income streams. However. 2005 due to lower slippages reflecting an improving asset quality. 2005. and customer segments. The bank’s fund based and fee income earnings are diversified across industries. . the bank’s operating costs will remain high in the medium term. it is expected to happen gradually. witnessed across the entire banking sector.

73% (Rs 522. the bank has leveraged its corporate relationships.71% in 2004-05. pursued business growth selectively. however they are steadily increasing (especially in the housing finance portfolio) and have started showing signs of stress.34% as at March 31. 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.Management strategies In retail finance. In the retail loan segment. 283. and has not competed based on interest rate. 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 is facing challenges to improve the quality of assets originated.3%) of total retail loans. 2005. which constitutes Rs. The bank has entered the market of term lending to corporates . SBI is targeting primarily the housing loans segment. compared with 4. 2005.9% for all scheduled commercial banks (SCBs) taken together.95% of gross advances as at March 31.The bank will face significant challenges in the medium term to develop effective credit appraisal and collection systems in order to contain NPAs in retail finance. SBI’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. To contain NPAs and ensure credit growth. lagged gross NPA of 4. as can be seen in the consistently higher levels of slippages (additions to NPAs) at 2. The share of retail advances has increased to 24. 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.41 billion (54.08 billion) of total advances as at September 30 2005. Business description SBI along with its associate banks offer a wide range of banking products and services across its different client markets. SBI’s asset quality is expected to remain at average levels. The NPAs in retail finance are low currently. the bank has decided to focus on financing the retail (personal) segment as well as SMEs. as the bank’s large and diverse asset portfolio reflects of the asset quality of the banking system.

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

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

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

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

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

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

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

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

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

the current practice may continue. These norms. A poverty alleviation and employment generation schemes. 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. Cleaning up the balance sheets of banks would thus make sense only if simultaneous steps are taken to prevent of limit the reemergence of new NPAs. These 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. 3. 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. 2. With regard to income recognition in India. 5. 6. Given the special needs of these sectors.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. There is a continuing need of Financial Corporations to extend Credit to SSI sector. 4. income stops occurring when interest/installment of principal is not paid within 180 days. we should . Government feels reluctant to accept the recommendation for reducing the scope of directed credit under priority sector because timy sector of industry and small businesses have problems with regard to obtaining credit and some remaining may be necessary for this sector. However. 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. which should be regarded as the minimum. 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. which is important segment of national economy but on commercial considerations and on basis of credit worthiness.

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

This is to be done in phased manner. 14. 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.

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

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 .

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

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 refers to the technique or the procedure that is adopted in selecting the sampling units from which inferences about the population is drawn. Sampling design is determined before the collection of the data. It helps in bringing into focus some inherent weakness in enterprise regarding which in depth study can be conducted by management. DATA COLLECTION TYPES OF DATA PRIMARY DATA SECONDRY DATA PRIMARY DATA: METHODS OF PRIMARY DATA OBSERVATION METHOD INTERVIEW METHIOD QUETIONAIRE METHOD SCHEDULE METHOD . Research design is flexible enough to provide opportunity for considering different aspects of problem under study.The present study is descriptive in nature.

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

has set of numbers of recovery tribunals. • Natural calamities This is the measure factor. 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. The NPAs in PSB are growing due to external as well as internal factors. lack of advance technology . which is creating alarming rise in NPAs of the PSBs. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans • Industrial sickness Improper project handling . their by reducing their profitability and liquidity. lack of adequate resources . which works for recovery of loans and advances. Thus the bank has to make large amount of provisions in order to compensate those loans. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks.REASONS FOR RISE IN NPAs FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. • Wilful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans. day to day changing govt. EXTERNAL FACTORS • Ineffective recovery tribunal The Govt. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. Mainly ours farmers depends on rain fall for cropping. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover. Policies give birth to industrial sickness. ineffective management .

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

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

60lakhs). • Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan.77lakhs).The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”. it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. The NPAs due to wilful defaulters can be collected by regular visits. • Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. . the NPAs of OSCB is increasing day by day. Like OSCB suffered loss due to the OTM Cuttack. Due to re loaning to the defaulters and CCBs and PACs. the overall position of the bank will not be affected. and the handloom sector Orissa hand loom WCS ltd (2439. and Orissa hand loom industries. If a new big customer meets misfortune or certain traders or industries affected adversely. The biggest defaulters of OSCB are the OTM (117.

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

93 to 31. 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. etc. In turn SBI Group are seen as poor performers and unable to approach the market for raising additional capital. SBI Group incurred a total amount of Rs. Considering the minimum cost of holding NPAs at 7% p. 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. Between 01.2001. Considering the average provisions made for the last 8 years which works out to average of Rs. 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.03. 3300 crores from annum.2% of net advances. a sizeab business. 32632 Crores or 6. 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.04. 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. It would only postpone the process. 31251 Crores towards provisioning NPA. . 32632 Croces absorbs a recurring holding ost of Rs. This has brought Net NPA to Rs.• They limit recycling of funds. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market. else they are to seek the bounty of the Central Government for repeated Recapitalization. set in asset-liability mismatches. Other bans hesitate to approach the market to rise new issues. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs. 2300 Crores annually. In the context of crippling effect on a bank's operations in all spheres.a.

the difference between the gross interest income and interest cost will constitute its operating profits. many nationalised banks have little option and they are unable to lower lending rates competitively. though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left. It's sizeable earnings under of non-interest income substantially/totally meets its non-interest expenses. Its obligation for provisioning requirements is within bounds.In the face of the deregulated banking industry. who had issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout package.e. On account of the burden of heavy NPA. 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. as published by RBI in its Report on trends and progress of banking in India. 2001. 2. (Net NPA/Net Advances is 1. Non-interest income fully absorbs the operating expenses of this banks in the current financial year for the first 9 months. In that event the spread factor i.92%) It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March.e. Theoretically even if the banks keeps 0% spread. an ideal competitive working is reached. Interest on Recapitalization Bonds is a income earned form the Government. 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. The statistics above show the other weaknesses of the nationalised banks in . will be revealing to prove this statement. The strength of SBI Group is indentified by the following positive feature: 1. when the banks are able to earn adequate amount of non-interest income to cover their entire operating expenses i. In the last two financial years. a positive burden. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation.

Without accepting risk. There is insistence on provision of collateral security.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. The fear psychosis also leads to excessive security-consiousness in the approach towards lending to the small and medium sized credit customers. Impact on Outlook of Bankers towards Credit Delivery. Wage costs total assets is much higher to PSBs compared to new private banks or foreign banks. 2. In the world of banking the concepts of business and risks are inseparable. They have not been able to build additional capital needed for business expansion through internal generations or by tapping the equity market. 3. but have resorted to II-Tier capital in the debt market or looking to recapitalistion by Government of India. resulting in a low C/D Ratio around 50 to 54% for the industry. sometimes up to 200% value of the advance. Their earnings from sources other than interest income are meagre. This has affected adversely credit growth compared to growth of deposits. Even granting 3% net NPA within limits of tolerance the SBI Group are holding an uncomfortable burden at 7.1% as at March 2001. the facts that their net NPA in the average is as much as 7% is a potential threat for them. The fear of NPA permeates the psychology of bank managers in the SBI Group in entertaining new projects for credit expansion. Accept justifiable risks and implements de-risking steps. Business is an exercise of balancing between risk and reward. Impact on Liquidity of the SBI Group Though SBI Group are able to meet norms of Capital Adequacy. as per RBI guidelines. and consequently due to a feeling of assumed protection on account of holding adequate security (albeit over- . RBI has indicated the ideal position as Zero percent Net NPA. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. This is due to failure to develop off balance sheet business through innovative banking products. 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). Now a days Govt. During the year 2001-02 share of 12 . but will not prevent the account turning into NPA. doubtful and loss assets. write off or in preparing DICGC claim papers etc. 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. 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. Impact on other Variables: High level of NPAs also leads to squeezing of interest spread. 5. Banks are required to bring their own capital by issuing share to the public. does not encourage liberal capital support to be given to banks. compromise. SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution for handling this hovering threat. Productivity of employees is also reduced because it keeps staff busy with the task of recovery of overdue. whereas high level of NPAs leads to lower profits hence less or no profits available for equity shareholders hence lower EPS and fall in the value of share. Instead of devoting time for planning for development through more credit and mobilization of resources the branch staff would primarily be engaged in preparing a large value of returns and statements relating to sub-standard. 4. 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. 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. waivement of legal action. a tendency towards laxity in the standards of credit appraisal comes to the fore.

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

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

5 crore and less as on 31 March 1997. 50. 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. [The above guidelines which were valid up to June 30. 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. . * The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July 1995 continues to be in place. particularly for old and unresolved cases falling under the NPA category. I would like to recapitulate at this stage. 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. * 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. The scheme was operative up to September 3. * An OTS Scheme covering advances of 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. 2000. 668 crore through compromise settlement under this scheme].000 in respect of NPAs of small/marginal farmers are being drawn up. More significant of them. 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. [Public sector banks recovered Rs. 2600 crore by September 2001].

5 lakh for compromise settlement under Lok Adalats.Calcutta and Chennai.38 crore as on September 30. Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act. . 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. 2001. Provisions for placement of more than one Recovery Officer.71 crore pertaining to public sector banks since inception of DRT mechanism and till September 30. 1864. 2001. 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. 6264. 40. through the forum of Lok Adalat. Mumbai. they could decide only 9814 cases for Rs. The public sector banks had recovered Rs. Lok Adaltas: Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and "loss" category. 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.30 crore.2. passed in March 2000 has helped in strengthening the functioning of DRTs. management. with outstanding balance of Rs. Delhi. power to attach defendant's property/assets before judgement. 3. The amount recovered in respect of these cases amounted to only Rs. penal provisions for disobedience of Tribunal's order or for breach of any terms of the order and appointment of receiver with powers of realization. Allahabad. 10 lakhs and above.

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

7. The experiment however has not taken off at the desired pace though more than six months have lapsed since introduction. Credit Information Bureau: Institutionalisation of information sharing arrangements through the newly formed Credit Information Bureau of India Ltd. 6. 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. I hope. identify the operational difficulties.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information dissemination on defaults to the financial system.R. would prevent those who take advantage of lack of system of information sharing amongst lending institutions to borrow large . The CDR structure has been headquartered in IDBI. if any. 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. 20 crore and above with the banks and financial institutions. (CIBIL) is under way. This. in the smooth implementation of the scheme and suggest measures to make the operation of the scheme more efficient. Corporate Debt Restructuring (CDR): Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs. 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. 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. Deputy Governor. some of them I would like to highlight. RBI is considering the recommendations of the S.the Government are contemplating several supporting measures including legal reforms.

9.744 crore. As on June 30. 263 notices involving outstanding amount of Rs. 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. The Security Interest (Enforcement) Rules. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. 2004. 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. A. and had recovered an amount of Rs. inter alia for enforcement of security interest for realisation of dues without the intervention of courts or tribunals. 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. which had in no small measures contributed to the incremental NPAs of banks. 2002: The Act provides. transparency. Corporate Governance: A Consultative Group under the chairmanship of Dr. 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. disclosure. 10. 19.amounts against same assets and property. 8. . Proposed guidelines on willful defaults/diversion of funds: RBI is examining the recommendation of Kohli Group on willful defaulters. and make recommendations for making the role of Board of Directors more effective with a view to minimising risks and overexposure.748 crore from 24. 27 public sector banks had issued 61.092 cases. audit committees etc. 1.

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

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

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. crore. 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. .STATE BANK OF INDIA TOTAL ASSET 2003YEAR TOTAL ASSET(RS. 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 .CR) Interpretation:.CR) 14000 12000 10000 8000 6000 4000 2000 0 200304 200405 200506 200607 200708 _GROSS NPA(RS.GROSS NPA YEAR _GROSS NPA(RS.above graph shows that Non-performing assets of SBI decreased from 2003-04 to2006-07 and increased in 2007-08.

YEAR NET NPA(RS. CR. CR.) 8000 7000 6000 5000 4000 3000 2000 1000 0 2003.2004.) Interpretation :-above graph show that net NPA decreasd from 2003-04 to 2005-06 and increased in 2006-07 to 2007-08.) 2003-04 5442 2004-05 5349 2005-06 4906 2006-07 5258 2007-08 7424 NET NPA(RS. CR. .200704 05 06 07 08 NET NPA(RS.2005.2006.

92 2007-08 3.61 2006-07 2.04 Interpretation : Above graph shows that the gross NPA (Ratio%)of SBI is decreased from 2004-05 to 2006-07 and increased in 2007-08.75 2004-05 5.GROSS NPA (RATIO%) YEAR GROSS NPA(RATIO%) 2003-04 7. 8 7 6 .96 2005-06 3.

65 2005-06 1.88 2006-07 1.78 4 3.48 2004-05 2.56 2007-08 1.5 1 0.NET NPA(RATIO%) YEAR NET NPA(RATIO%) 2003-04 3.5 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 .5 3 2.5 2 1.

04% and increased in 2004-05. It decreased from 2005-06 to 2007-08.45 2005-06 49.41 2007-08 45. State Bank of Patiala .04 2006-07 47.04 2004-05 59.04 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.YEAR PROVISION COVER 2003-04 57.

5 1 0.5 2 1.2004.35 2004-05 1. The net NPA decreased from 2003-04 to 2007-08.99 2006-07 2. FINDINGS 1.increased in 2006-07 and again decreased in 2007-08.6 2.2005.14 0.200704 05 06 07 08 GROSS NPA(%) NET NPA(%) Interpretation: Above graph shows that the gross NPA of SBP is decreased from 2003-04 to 2005-06.38 0.23 2005-06 1.42 0.2006.82 1.5 0 2003.65 1.YEAR GROSS NPA(%) NET NPA(%) 2003-04 1. REASON OF NPA IN BANK:- .83 2007-08 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.

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

 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 ..so that is very difficult can get the knowledge about everything .  No direct source of information available The information is collected from indirect sources so in some information data is not available.

The failure of the banking sector may have an adverse impact on other sectors. due to credit to these sectors becoming stickly managers of rural and semi-urban branches generally sanction these loans.A strong banking sector is important for a flourishing economy. adequate finance and timely disbursement. . viable economic activity. There is also a general perception that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs. Hence selectionof right borrowers. In the changed context of new prudential norms and emphasis on quality lending and profitability. correct and use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing of minimizing the incidence of new NPAs. Over the years. 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. 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.

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

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