CERTIFICATE

This is to certify that Mr. HemantGurkha M.B.A 4th semester student of Amity Global Business School, Ahmedabad has done research project on the topicComparative Analysis of NPA of Public Sector Banks, Private Sector Banks & Foreign Banks. He successfully completed his project under my guidance. This project certifies the work of the candidate based on actual analysis of the concerned project.

Date: Place: - Ahmedabad

Prof. Swati Gupta (Faculty Guide-)

DECLARATION
I, HEMANT GURKHA, student of MBA from AMITY GLOBAL BUSINESS SCHOOL, AHMEDABAD hereby declare that I have completed this project Comparative Analysis of NPA of Public Sector Banks, Private Sector Banks & Foreign Banksin the academic year 200911. The information submitted is true and original to the best of knowledge.

Date: Place: Ahmedabad

HemantGurkha (MBA 4th semester)

ACKNOWLEGEMENT
I want to thank Prof. Swati Gupta, our Faculty Guide for their kind co-operation & for sharing their experience and knowledge and for giving their invaluable help and support in the completion of Grand Report successfully. With deep sense of gratitude, I would like to take the opportunity to thank Mr. Manish Dholakia (campus Head- AGBS Ahmadabad )for his kind facilitation during the project without his prudent guidance this project would not have been materialized. Last but not he least I would like to express my sincere thanks to all those who helped me directly or indirectly to make this project successful.

HEMANT GURKHA

EXECUTIVE SUMMARY

A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of banks, weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements. The problem of NPA is quite serious in public sector banks however, whereas the ratio of NPAs to net advances grow up in the public sector bank in 2010 as compared to the year 2008,the opposite is observed in the domestic private sector banks. In contrast in the foreign banks the problem of NPAs is of low density.

Table of Contents
CERTIFICATE ............................................................................................................................... 1 DECLARATION ............................................................................................................................ 2 ACKNOWLEGEMENT ................................................................................................................. 3 EXECUTIVE SUMMARY ............................................................................................................ 4 INTRODUCTION .......................................................................................................................... 7
HISTORY ................................................................................................................................................ 7 POST-INDEPENDENCE ......................................................................................................................... 9

BANKS IN INDIA ....................................................................................................................... 15 BANKING IN INDIA................................................................................................................... 21 SWOT ANALYSIS OF INDIAN BANKING SECTORS ........................................................... 25 INTRODUCTION TO NPA ......................................................................................................... 29 IMPACT OF NPA: ....................................................................................................................... 34 RESEARCH DESIGN .................................................................................................................. 36 ANALYSIS ................................................................................................................................... 38 FINDINGS .................................................................................................................................... 57 CONCLUSION ............................................................................................................................. 60 ANNEXURE................................................................................................................................. 62 REFERENCES / BIBLIOGRAPHY............................................................................................. 70

Introduction

INDIAN BANKING INDUSTRY

Introduction
After liberalization the Indian banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks for proving socio economic services to the people of the nation. Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

History
Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to
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speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoired'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the

present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities

Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Nationalisation
By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. Indira Gandhi, thethen Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquition and Transfer of Undertaking) Bill, and it received the presidential approval on 9th August, 1969. A second dose of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India.

After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

Liberalisation
In the early 1990s the then Narasimha Rao government embarked on a policy of liberalisation and gave licences to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as UTI Bank(now re-named as Axis Bank) (the first of such new generation banks to be set up), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kickstarted the banking sector in
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India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 49% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. The banking system remains, as always, the most dominant segment of the financial sector. Indian banks continue to build on their strengths under the regulator's watchful eye and hence, have emerged stronger. In the annual international ranking conducted by UK-based Brand Finance Plc, 18 Indian banks have been included in the Brand Finance Global Banking 500. In fact, the State Bank of India (SBI) which is the first Indian bank to be ranked among the Top 50 banks in the world, has improved its position from 36th to 34th, as per the Brand Finance study released on February 1, 2011. The brand value of SBI has enhanced to US$ 1,119 million. ICICI Bank, the only other Indian bank in the top 100 club has improved its position with a brand value of US$ 2,501 million. According to the study, Indian banks contributed 1.7 per cent to the total global brand value at US$ 14,741 million and grew by 19 per cent in 2011. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: June 2010', nationalised banks, as a group, accounted for 51.3 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 22.8 per cent. The share of New private sector banks, Old private sector banks, Foreign banks and Regional Rural banks in aggregate deposits was 13 per cent, 4.8 per cent, 5.1 per cent and 3.1 per cent respectively.
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With respect to gross bank credit also, nationalised banks hold the highest share of 51.5 per cent in the total bank credit, with SBI and its associates at 23.2 per cent and New Private sector banks at 13 per cent. Foreign banks, Old private sector banks and Regional Rural banks held relatively lower shares in the total bank credit with 5.3 per cent, 4.6 per cent and 2.5 per cent respectively. The report also found that scheduled commercial bank offices (with deposits of INR 10 crore or more) accounted for 65.2 per cent of the bank offices, 96.6 per cent in terms of aggregate deposits and 94 per cent in total bank credit. Significantly, on a year-on-year basis, bank credit grew by 24.4 percent in 2010 as against RBIs projections of 20 percent for the entire fiscal 2010-11. However, deposits lagged behind at 16.5 percent versus a projection of 18 percent. India's foreign exchange reserves stood at US$ 299.39 billion as on January 21, 2011, according to the data in the weekly statistical supplement released by the Reserve Bank of India. Indians working overseas sent more money back home than any of their global counterparts, remitting US$ 50 billion in 2009 despite a worldwide economic slowdown and anti-immigration measures adopted by industrialized countries.

Major Developments
Indian Bank has received the Central Bank of Sri Lanka's nod to open its branch at Jaffna in Sri Lanka. Indian Bank has signed an agreement with Weizmann Forex Ltd, and will now offer foreign remittances service over the counter at all its branches. The National Payment Corporation of India is rolling out an instant interbank mobile payment service (IMPS) that will enable retail customers of seven banks to enjoy 24X7 funds transfer. State Bank of India, Bank of India, Union Bank of India, ICICI Bank, HDFC Bank, Axis Bank and YES Bank on November 22, 2010 became the first set of banks to go live with the IMPS.

12

Amongst the private banks, owing to strong growth in interest income, the countrys third-largest private sector lender, Axis Bank, reported a net profit of US$ 166.3 million for the second quarter of FY11, a 38.28 per cent increase from US$ 120.3 million a year ago. HDFC Bank, Indias second largest private lender reported a 32.7 percent rise in net profits at US$ 204.3 million for the quarter ended September 30, 2010.

Government Initiatives
The Cabinet, on December 1, 2010 approved to provide an additional amount of US$ 1.33 billion, in addition to the US$ 3.32 billion already provided in the Budget 2010-11, to ensure Tier I CRAR (Capital to Risk Weighted Assets) of all Public Sector Banks (PSBs) at 7 per cent and also to raise Government of India holding in all PSBs to 58 per cent. It also approved that the exact amount, mode of capitalization and other terms and conditions would be decided in consultation with the banks at the time of infusion. The proposed capital infusion would enhance the lending capacity of the PSBs to meet the credit requirement of the economy in order to maintain and accelerate the economic growth momentum. The RBI has allowed banks to make changes in the repayment schedules or drawdown without prior approval from the central bank. However, such a change could be made on the condition that the average maturity of the loan should remain the same. The move is expected to make external commercial borrowing (ECB) transactions easier. Transactions both through automatic and approval routes can take advantage of this change. Now, without the prior approval of RBI, Indian companies may borrow up to US$ 500 million in a year. As part of further liberalisation of the extant branch licensing policy in respect of regional rural banks (RRBs), they have been permitted to open branches in Tier 3 to Tier 6 centres (with population up to 49,999 as per Census 2001) without the Reserve Bank's prior authorisation provided-

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The capital to risk-weighted assets ratio (CRAR) is at least 9 per cent; The net non-performing assets (NPAs) are less than 5 per cent; They have not defaulted in the maintenance of cash reserve ratio (CRR)/statutory liquidity ratio (SLR) during the last year; and

They have earned a net profit in the last financial year.

On the lending side, the Base Rate system replaced the Benchmark Prime Lending Rate (BPLR) system with effect from July 1, 2010. Base Rates of scheduled commercial banks (SCBs) were fixed in the range of 5.50-9.00 per cent. Subsequently, several banks reviewed and increased their Base Rates in the range of 1050 basis points by October 2010. Base Rates of major banks, accounting for over 94 per cent in total bank credit, are in the range of 7.50-8.50 per cent. Banks have also raised their BPLRs in the range of 25-75 basis points for their old loans. As at end-July 2010, around 70,000 branches of 98 banks had participated in the national electronic funds transfer (NEFT) system and the volume of transactions processed increased to 9.5 million in July 2010. In the central bank's Third Quarter Review of Monetary Policy 2010-11, RBI Governor D Subbarao has said that the repo rate and reverse repo rates would be increased by 25 basis points under the liquidity adjustment facility (LAF) with immediate effect. Repo rate increased from 6.25 per cent to 6.5 per cent while reverse repo rate has been raised from 5 per cent to 5.25 per cent. The cash reserve ratio (CRR) of scheduled banks has been retained at 6.0 per cent of their net demand and time liabilities (NDTL). On the basis of an assessment of the current liquidity situation, the RBI also decided to extend additional liquidity support upto April 8, 2011 to scheduled commercial banks under the LAF to the extent of up to 1 per cent of their net demand and time liabilities (NDTL), which was set to expire on January 28, 2011.

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Banks in India
35 31 30 25 20 15 10 5 0 public Banks Private Banks No. of Banks Foreign Banks 27 22

Public bank
A Public Sector bank is one in which, the Government of India holds a majority stake. It is as good as the government running the bank. Since the public decide on who runs the government, these banks that are fully/partially owned by the government are called public sector banks.

Private bank
A company whose ownership is private. As a result, it does not need to meet the strict Securities and Exchange Commission filing requirements of public companies. Private companies may issue stock and have shareholders. However, their shares do not trade on public exchanges and are not issued through an initial public offering. In general, the shares of these businesses are less liquid and the values are difficult to determine.

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Nationalised Banks List in India Bank Name Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank IDBI Bank (Industrial Development Bank of India) Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sind Bank State Bank of India Syndicate Bank Union Bank of India UCO Bank United Bank of India Vijaya Bank Private Banks List in India Bank Names Axis Bank (UTI Bank) HDFC Bank (Housing Development Finance Corp.) ICICI Bank (Industrial Credit and Investment Cor. of India) Kotak Mahindra Bank Karnataka Bank Yes Bank IndusInd Bank The Nainital Bank Ltd ING Vysya Bank South Indian Bank KarurVysya Bank

Foreign Banks List in India Name of Bank ABN AMRO Bank Abu Dhabi Commercial Bank Ltd American Express Bank Antwerp Diamond Bank Arab Bangladesh Bank Bank International Indonesia Bank of America Bank of Bahrain & Kuwait Bank of Ceylon Bank of Nova Scotia Bank of Tokyo Mitsubishi Barclays Bank BNP Paribas Calyon Bank ChinaTrust Commercial Bank Citibank DBS Bank Deutsche Bank HSBC Ltd (Hongkong& Shanghai Banking Corporation) JPMorgan Chase Bank Krung Thai Bank Mashreq Bank Mizuho Corporate Bank Oman International Bank Royal Bank of Scotland Shinhan Bank SocieteGenerale Sonali Bank Standard Chartered Bank State Bank of Mauritius UBS(Swiss bank) VTB

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RECENT HISTORY OF INDIAN BANKING

Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of reorganisation of princely States, the associate banks came into fold of public sector banking. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organised sectors of industry and trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. The scheme however, did not provide any remedy. Though a no. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of
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Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee.

Meanwhile, during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. In the post-nationalisation period, there was substantial increase in the no. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. The Service Area Approach was introduced during 1989. While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. In these five decades since independence, banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and

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affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system at low ebb. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc. Bank Nationalization Organised banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent.

Move towards State ownership of banks started with the nationalisation of RBI and passing of Banking Companies Act 1949. On the recommendations of All India Rural Credit Survey Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. Similarly, the conversion of 8 State-owned banks (State Bank of Bikaner and State Bank of Jaipur were two separate banks earlier and merged) into subsidiaries (now associates) of SBI during 1959 took place. During 1968 the scheme of social control was introduced, which was closely followed by nationalisation of 14 major banks in 1969 and another six in 1980.

Keeping in view the objectives of nationalisation, PSBs undertook expansion of reach and services. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out

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of which 58% in rural areas) and no. of people served per branch office came down from 65000 in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The expansion is significant in terms of geographical distribution. States neglected by private banks before 1969 have a vast network of public sector banks. The PSBs including RRBs, acount for 93% of bank offices and 87% of banking system deposits.

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BANKING IN INDIA
The Indian banking system is financially stable and resilient to the shocks that may arise due to higher non-performing assets (NPAs) and the global economic crisis, according to a stress test done by the Reserve Bank of India (RBI). Significantly, the RBI has the tenth largest gold reserves in the world after spending US$ 6.7 billion towards the purchase of 200 metric tons of gold from the International Monetary Fund (IMF) in November 2009. The purchase has increased the country's share of gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6 per cent. Following the financial crisis, new deposits have gravitated towards public sector banks. According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks: September 2009', nationalized banks, as a group, accounted for 50.5 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per cent. The share of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively. With respect to gross bank credit also, nationalized banks hold the highest share of 50.5 per cent in the total bank credit, with SBI and its associates at 23.7 per cent and other scheduled commercial banks at 17.8 per cent. Foreign banks and regional rural banks had a share of 5.5 per cent and 2.5 per cent respectively in the total bank credit. The report also found that scheduled commercial banks served 34,709 banked centres. Of these centres, 28,095 were single office centres and 64 centres had 100 or more bank offices. The confidence of nonresident Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Nonresident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as on January 8, 2010, according to the RBI's February bulletin.

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Major Developments
The State Bank of India (SBI) has posted a net profit of US$ 1.56 billion for the nine months ended December 2009, up 14.43 per cent from US$ 175.4 million posted in the nine months ended December 2008. The SBI is adding 23 new branches abroad bringing its foreign-branch network number to 160 by March 2010. This will cement its leading position as the bank with the largest global presence among local peers. Amongst the private banks, Axis Bank's net profit surged by 32 per cent to US$ 115.4 million on 21.2 per cent rise in total income to US$ 852.16 million in the second quarter of 2009-10, over the corresponding period last year. HDFC Bank has posted a 32 per cent rise in its net profit at US$ 175.4 million for the quarter ended December 31, 2009 over the figure of US$ 128.05 million for the same quarter in the previous year.

Government Initiatives
In its platinum jubilee year, the RBI, the central bank of the country, in a notification issued on June 25, 2009, said that banks should link more branches to the National Electronic Clearing Service (NECS). Ideally, all core-banking-enabled branches should be part of NECS. NECS was introduced in September 2008 for centralized processing of repetitive and bulk payment instructions. Currently, a little over 26,000 branches of 114 banks are enabled to participate in NECS. In the Third Quarter Review of Monetary Policy for 2009-10, the RBI observed that the Indian economy showed a degree of resilience as it recorded a better-than-expected growth of 7.9 per cent during the second quarter of 2009-10. In its Third Quarter Review of Monetary Policy for 2009-10, the RBI hiked the Cash Reserve Ratio (CRR) by 75 basis points (bps) to 5.75 per cent, while keeping repo and reverse repo rates unchanged. According to the RBI, the stance of monetary policy for the remaining period of 2009-10 will be to: Anchor inflation expectations and keep a vigil on inflation trends and respond swiftly through policy adjustments Actively manage liquidity to ensure credit demands of productive sectors are met adequately Maintain an interest rate environment consistent with financial stability and price stability.
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The money supply (M3) growth on a year-on-year basis at 18.9 per cent as on October 9, 2009, remained above the indicative projection of 18.0 per cent set out in the First Quarter Review of July 2009. The main source of M3 expansion was bank credit to the government, reflecting large market borrowings of the Government. Meanwhile, outstanding bank credit in the 15 days up to January 29 2010 rose by US$ 4.32 billion, pointing to a revival in credit growth. This is the highest year-on-year growth recorded since August 14, 2009.

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SWOT ANALYSIS

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SWOT ANALYSIS OF INDIAN BANKING SECTORS

STRENGTH
Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. Bank lending has been a significant driver of GDP growth and employment. Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.
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Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.

WEAKNESS
PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic & strengthen human capital. Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital. Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.

OPPORTUNITY
The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks.
26

With increased interest in India, competition from foreign banks will only intensify. Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks.

New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity

Foreign banks committed to making a play in India will need to adopt alternative approaches to win the race for the customer and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset.

Reach in rural India for the private sector and foreign banks. With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.

The Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives.

Liberalisation of ECB norms: The government also liberalised the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.

Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.

27

THREATS
Threat of stability of the system: failure of some weak banks has often threatened the stability of the system. Rise in inflation figures which would lead to increase in interest rates. Increase in the number of foreign players would pose a threat to the PSB as well as the private players.

28

INTRODUCTION TO NPA
Granting of credit for economic activities is the prime duty of banking. Apart from raising resources through fresh deposits, borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However lending also carries a risk called credit risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the banks profitability on a large scale. Though complete elimination of such losses is not possible, but banks can always aim to keep the losses at a low level.

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 endurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

Meaning of NPA:
Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. 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. Due to the improvement in the payment and settlement systems, recovery climate, up gradation
29

of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where:i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, ii. The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where; i. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, ii. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC), iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.

30

Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that asset is idling. Viewed with this perspective, the NPA is a result of an environment that prevents it from performing up to expected levels.

The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004 onwards.

TYPES OF NPA: 1. GROSS NPA 2. NET NPA

GROSS NPA

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio =

NET NPA

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following:

31

Net NPAs =

REASONS FOR AN ACCOUNT BECOMING NPA:

1. Internal factors 2. External factors

Internal factors: 1) Funds borrowed for a particular purpose but not use for the said purpose. 2) Project not completed in time. 3) Poor recovery of receivables. 4) Excess capacities created on non-economic costs. 5) In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. 6) Business failures. 7) Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. 8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation etc. 9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delaying settlement of payments\ subsidiaries by government bodies etc.,

External factors: Sluggish legal system Long legal tangles Changes that had taken place in labour laws

32

Lack of sincere effort. Scarcity of raw material, power and other resources. Industrial recession. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents. Failures, nonpayment\ over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc. Government policies like excise duty changes, Import duty changes etc.,

The RBI has summarized the finer factors contributing to higher level of NPAs in the Indian banking sector as: Diversion of funds, which is for expansion, diversification, modernization, undertaking new projects and for helping associate concerns. This is also coupled with recessionary trends and failures to tap funds in capital and debt markets. Business failures (such as product, marketing etc.), which are due to inefficient management system, strained labour relations, inappropriate technology/ technical problems, product obsolescence etc. Recession, which is due to input/ power shortage, price variation, accidents, natural calamities etc. The externalization problems in other countries also lead to growth of NPAs in Indian banking sector. Time/ cost overrun during project implementation stage. Governmental policies such as changes in excise duties, pollution control orders etc. Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation, promoters/ directors disputes etc. Deficiency on the part of banks, viz, delays in release of limits and payments/ subsidies by the Government of India.

33

IMPACT OF NPA:
Profitability
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank.

Liquidity
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Routine payments and dues.

Involvement of management:Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now days banks have special employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks.

34

Management of NPA

1. One time settlement / compromise scheme 2. Lokadalats 3.Debt Recovery Tribunals 4.Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002. 5. Corporate Reconstruction Companies 6. Credit information on defaulters and role of credit information bureaus.

35

RESEARCH DESIGN
Title of the study
Comparative Analysis of NPA of Public Sector Banks, Private Sector Banks & Foreign Banks

Objectives of the project

To study of the concept of Non Performing Asset in Indian perspective. To study NPA standard of RBI To study the Reasons for & Impact of NPAs To evaluate the efficiency in managing Non Performing Asset of different types of banks (Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.

Scope of the study

To understand the concept of NPA in Indian Banking industry. To understand the causes & effects of NPA To analyze the past trends of NPA of Public, Private & Foreign banks in different sector.

Data Collection Sources

Secondary Data Secondary data refers to the data which has already been generated and is available for use. The data about NPAs & its composition, classification of loan assets, profits (net & gross) & advances of different banks is taken from Reserve Bank of India website.

36

Analysis

37

ANALYSIS

No of Banks in India

27 31

22

public Banks

Private Banks

Foreign Banks

Interpretation:

Up to the financial year 2009 2010 the public sector increase to 27 nationalized banks and 22 banks adds in private sector banks while 31 banks includes in foreign sector banks.

38

NET NPA

Net NPA
Public Banks Private Banks Foreign Banks 57013

44043 38602 39749

16887 12977 9240 2451 2007 2008 3114 2009 7155

17382 7125

2010

Interpretation: From the above it is observed that net NPA of public sector banks has a declining trend up to year 2005-06 and after that it has a rising trend till 2009-10. The same trend has been observed in both Private and Foreign Sector Banks. The declining trend from 2003 to 2006 of NPA was due to the implementation of Securitization Act (2002) but from 2007 it show the upward trends. But the increase in NPA was increasing in absolute term, as NPA as per percent of advance shows a declining trend in Public Sector Banks while that of in Private and Foreign Sector Banks shows an upward trend that is increase in NPA as per percent of advance after 2006.

The increase in NPA as per percent of advance of Private and Foreign Sector Banks is because of they have a major proportion of lending in non- priority sectors includes Medium and large scale industries which was highly affected by global financial crisis.

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Classification of Gross and Net NPA

Gross-Net NPA
Public sector Banks Private sector Banks 59926 44957 Foreign banks

16926 6444

17639 7180

2008-2009

2009-2010

Interpretation: The trend of improvement in the asset quality of banks continued during the year. Indian banks recovered a higher amount of NPAs during 2008-09 than that during the previous year. Though the total amount of NPA is Rs. in 2008-09 was higher than Rs.70, 327 crore in 2007-08, it was

Nevertheless, it may be noted that this slippage was moderate as compared to the problems faced by banks all over the world. The hardening of interest rates might have made the repayment of loans difficult for some borrowers, resulting in some increase in NPAs in this sector. It may be noted that the increase in gross NPAs was more noticeable in respect of new private sector and foreign banks, which have been more active in the real estate and housing loans segments. Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to gross advances of foreign banks increased significantly during the year, while that of private sector banks increased marginally. The NPAs ratio of all other bank groups declined. While net NPAs to net advances ratio of all the banks increased over the previous year except that of nationalized banks.

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Composition of NPAs of Public Sector Banks

Composition of NPAs of Public Sector Banks

Priority Sector Non-Priority Sector Public Sector

66.8 60.58 60.65 56.13 43.09

38.26 32.38

38.22

1.16 2007 2008

0.82 2009

1.13 2010

0.79

Interpretation: Priority sector consist of advance given to agriculture, SSI, & other priority sector advances. Non priority sector consist of large industries, medium industries & other non priority sectors. In case of priority sector, it shows a fluctuating trend up and down from the year 2007 to 2010. But in the later years i.e. from 2006 there is rise NPA because of defaults on the loan given to the farmers. It was highest in 2008. In order to reduce that, waiver package of Rs. 60,000 crore was announced in union budget of 2008.It may also be noted that the increase in NPAs was more noticeable in priority sector, which have been more active in the real estate and housing loans segments.in 2010 priority sector decrease which is lowest from the past four years data. NPA in non priority sector is reducing constantly from 2002 to 2008.Though the advance given to non-priority sector was higher than priority sector, NPAs of non-priority sector is comparatively.

41

Composition of NPAs of Private Sector Banks

14000 12000 10000 8000 6353 6000 4000 2000 3 0 2007 2008 2009 2010 0 75 0 3419 3640 4792 2884 9558 13172

12592

Priority Sector Non Priority Sector Public Sector

Interpretation:

overall NPA of foreign banks. The major reason for this is that on an average only 3.5% of total advance is made towards public sector category. Priority sector category on an average constitutes almost 34% of the total advances made by the private sector banks. While average NPA of priority sector constitutes of 25% of total NPA. In later years from 2007 to 2010 there is increase in NPA of priority sector. In these years more advances was given to agriculture & housing sector. In the year 2008-09, the real estate market was on boom, which encouraged people to take more loans. But after the subprime crisis there was sudden fall in real estate market & people became default to pay the loan. In case of non-priority sector, the average advances made are 60.5% of total advance made by private sector banks. But the average NPA of non-priority sector is almost 74% which is highest amongst the entire category. We can see the declining trend in NPA of non-priority sector in 2010. This as a result of securitization Act, 2002.

42

Composition of NPAs of foreign Sector Banks

7000 6000 5000 4000 3000 2120 2000 1000 0 2007 2008 331 402 0 0 649 2712

6506

Priority Sector Non- Priority Sector Public Sector

0 2009

Interpretation: It is observed from the chart there is no NPA in public sector category in all the three years because there was no advance made to public sector category. Non-priority sector contributes highest towards the NPA of foreign banks because non-priority sector constitute approximately 65% of the total advances made by foreign banks. So NPA will also be more in non-priority sector.

are made to SSI. The advances are made to medium & large scale industries in non-priority sector. As foreign banks are having global presence they are more affected by the global meltdown & financial crisis of 2008. So its effect is seen by sudden rise in NPA in 2009.

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Comparison of net NPA of old and new Private sector banks

7000 6000 5000 4000 3000 2000 891 1000 0 Old Private sector banks New Private sector banks 2007 891 3137 740 3137 4640

6253 5234

1165

1271

2008 740 4640

2009 1165 6253

2010 1271 5234

Interpretation: From the above chart it is clearly observed that net NPA of old private sector banks has a declining trend over the years on the contrary new private sector banks has an upward trend. Old private sector banks which is passing from instant growth rate in recent past, starts performing better than their new counterparts. Old private sector banks are more efficient than that of new private sector banks in managing NPA.

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Net NPA to Net Advance of Public, Private & Foreign Sector Banks
4.5 4 3.5 3 2.5 2 1.5 1 0.5 0 2007 2008 2009 2010 1.1 0.8 0.94 1.1 1 1.2 1.29 1.03 1 0.9 1.81 1.82 Foreign banks Private sector banks Public sector banks

Interpretation:

From the above it is clearly observed that only public sector banks is increasing their net NPA against net advances made over the period of time. It was increased from 2008 to 2010; whereas in case of private sector bank it has reduced in 2005-06 then it got stable at the end of the year 2010. In case of foreign banks it is fluctuating over the years. The problem of NPA is quite serious in public sector banks however, whereas the ratios of NPAs to net advances grow up in the public sector bank in 2010 as compared to the year 2008, the opposite is observed in the domestic private sector banks. In contrast in the foreign banks the problem of NPAs is of low density.

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Classification of Loan Assets

Public Sector Banks

Standard assets Sub-standard Assets Doubtful Assets

1.45

1.13

0.98 0.93

0.98

0.99 1.03

1.1

97.19

97.66

97.91

97.73

2007

2008

2009

2010

Interpretation:

The above frequency distribution chart states that standard asset is increasing every year & on the contrary all the other types of asset i.e. Sub-standard, Doubtful & Loss Asset are decreasing every asset. This proves that public sector banks have succeeded in reducing NPA over the years. arious measures to reduce NPA also convert Sub-Standard, Doubtful & loss asset into the above category Standard, Sub-Standard & Doubtful asset. The rise in sub standard ratio has major proportion indicates that there is a high scope of up gradation or improvement in NPA recovery in initial stage because it will be very easy to recover the loan as minimum duration of default.classification of loan assets(private bank)

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Private banks

Private sector Bank

Standard assets Sub-standard assets Doubtful assets

1 1.11 0.94

0.97 2.03 1.54

1.12 1.48

97.64 96.25 96.75

97.03

2007

2008

2009

2010

Interpretation: The above chart clearly states that the rise in the standard assets over the years compensates the fall in the other three types of assets. But in the year 2009, the percentage of Sub-Standard asset is highest among all the year. In 2009 percentage of standard asset has reduced by 0.5% which is compensated by increase in Sub-Standard & doubtful assets. This increase is due to interest & principle amount unpaid due to financial crisis in 2009. The percentage of doubtful asset has reduced to a great extent amongst all. So the private sector banks have managed to reduce the doubtful asset.

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Foreign Banks

Foreign sector Bank

standard Asstes Sub-Standard Assets Doubtful Asstes

0.49 1.07

0.47 1.2

0.59

0.86

3.46

2.94

98.08

98.09 95.7 95.74

2007

2008

2009

2010

Interpretation:

proportion of other three types of assets is falling over the years, but in 2009 there is great increase in the proportion of Sub-Standard asset which is as a result of decrease in proportion of Standard asset. This increase in Sub-Standard asset is because of interest & principle amount unpaid, due to poor global conditions, for the loan provided in a 2008. The interest & principle amount remained unpaid for period of more than 180 days but less than 1 year.

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Capitals

Capitals
39555 40000 35000 30000 Axis Title 25000 20000 15000 10000 5000 0 2009 2010 Public Banks 13536 13544 Private Banks 4241 4549 Foreign Banks 25513 39555 4241 4549 13536 13544 25513

Interpretation: In these charts how much capitals is made by all the banks. In public bank slight increase in capitals and in private bank capitals was increased by 3.5% and capital of foreign bank was increased much compare to public and private sector banks by 22%. It shows that people take more interest in foreign bank its capital was increased by borrowing, deposits etc.

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Borrowings

67902

134598 368528

private banks

public banks

foreign banks

Interpretation: Borrowing of all the banks are to high as compare to previous years public sectors banks covers 64% from the total borrowings while private banks achieved 24% and foreign banks covers 12% borrowing from the total borrowing in 2010. More borrowing suggest to lend more to the customers so it will chance that banks will increase their NPA by itself.

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Percentage contribution of CASA to incremental deposits

CASA Deposits 78.3 71.7 68 51.6

48.4 32 21.7

28.3

2007

2008

2009

2010

Interpretation:

Borrowings, the major non-deposit liability for banks, constituted 8.7 per cent of their total liabilities in 2009-10. Similar to deposits, borrowings also recorded a sharp deceleration in growth adding to the overall slowdown in banks balance sheets in 2009-10. A decline in the growth of borrowings could be seen across all bank groups but was most striking in the case of foreign banks. As per the above chart deposits always on the high percentage compare to CASA in order to get better return on the deposits as compare to CASA.

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Major Assets of Scheduled Commercial Banks

Bank Credit 4.8 In 2009-10, there was a decline in the growth in bank credit like in the previous year. Bank credit, which had reached a high of over 30 per cent in 2004-05, exhibited a continued decline in the subsequent years, reaching a low of 16.6 per cent in 2009-10. As deposits are the most important source of funds for banks, a slowdown in the growth of deposits was expected to translate itself into a slowdown in bank credit growth. Thus, notwithstanding the signs of recovery of the Indian economy and a low interest rate regime, on a year-on-year basis, bank credit growth registered a slowdown in 2009-10. However, on an intra-year basis, there were signs of a pick up in bank credit after November 2009, as economic recovery became more broad-based.

Investments

Investments
Investments in approved securities Investments in non- approved securities2 87 74.4 72.3 72.7

25.6

27.7 13

27.3

2007

2008

2009

22010

52

Interpretation: In 2009-10, investments of SCBs, like bank credit, showed a deceleration in growth. Moreover, there was a perceptible change in the composition of investments of SCBs, as the percentage contribution of investments in approved securities to incremental investments showed a decline in 2009-10 in contrast to a striking increase in 2008-09, when banks had shown preference for low-risk investments following market uncertainties resulting from the global financial crisis.

DEPOSITS

Deposits
Public sector banks Old private sector banks New private sector banks Foreign Banks

7.9 16.9 4.6

8.4 17.2 4.5

8.5 15.2 4.4

7.2 14.6 4.5

70.5

69.9

71.9

73.7

2007

2008

2009

2010

Interpretation: The slowdown in the growth of balance sheets in 2009-10 largely emanated from deposits, the major component of liabilities of SCBs . Bank deposits, which constituted around 78 per cent of the total liabilities of SCBs, registered a decelerated growth for the third consecutive year since 2007- 08. One of the factors responsible for a decline in the deposits growth in 2009-10 was the prevalence of low interest rates for a major part of the year.

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Credit-Deposit and Investment-Deposit Ratios of Scheduled Commercial Banks

Bank Group- wise Credit - Deposit ratio

2008 2009 2010 79.8 73.3 72.6 73.2 67.4 64.5 67.1 83.2 80.7 84.3 77.3 68.6

Public sector banks

Old Private sector banks

New Private banks

Foreign sector banks

Interpretation: In 2009-10, the series of incremental credit-deposit and investment-deposit ratios drifted away from each other since mid-October 2009 reflecting banks growing preference for credit over investments. The outstanding credit-deposit ratio at end-March 2010 was marginally lower at 73.6 per cent as compared to 73.8 per cent at end-March 2009. Conversely, the investmentdeposit ratio was marginally higher at 36.2 per cent at end-March 2010 as compared to 35.7 per cent at end March 2009. Foreign banks, which had the highest (outstanding) credit-deposit ratio, witnessed a steep fall in this ratio between 2008 and 2009, and then further between 2009 and 2010. At end-March 2010, foreign banks along with old private sector banks were in the lowest brackets with regard to credit-deposit ratio in comparison with public and new private sector banks.

54

Location wise deposits (India and Outside Deposits)

Chart Title
4000000 3500000 3000000 2500000 2000000 1500000 1000000 500000 0 In India(2009) In India(2010) outside India(2009) outside India(2010) Public Banks 2980576 3530145 132171 161657 Private Bnaks 723398 808777 12979 14024 Foreign Banks 214076 237848

Interpretation: In the above chart it shows how much deposits are made in India or Outsideindia. In public sector bank 8.4% deposits increase compare to 2009, silimarily growth of 5.6% in private sectors bank and 5.3% growth will be shown in foreign bank as compare to 2009. Deposits outside India in public sector bank will be increasing their percentage up to 10% and private bank and also their outside deposits by 3.9%.

55

FINDINGS

56

FINDINGS

NPAs were more noticeable in respect of new private sector and foreign banks, which have been more active in the real estate and housing loans segments. It shows a upward trends over the years as compared to others. Net NPA against net advances increased more in Foreign and Public sector banks in 2010. While Private sector banks have succeeded in reducing net NPA against net advances made over the period of time. Among all three sectors, public sector banks constantly were increasing their NPAs over the years. It will increase 40% to 42% from year 2007 to 2010.The problem of NPAs is relatively very servereIn the domestic private sector banks as compared to the foreign banks. In the former the e ratio of net NPAs to net advances has been rising, whereas in the latter group it has come down in the late nineties. Actually, because of their policy of writing down loans, the foreign banks have been able to keep the NPAs at low level. Standard assets of the all three banks was changing very slightly The proportion of standard assets in Private sector banks reduced in 2010 which was compensated by increase in substandard and doubtful assets. In Foreign sectors banks the proportion of sub-standard asset has decreased 0.52% of loan assets in 2010 which was 3.46% of sub-standard assets in 2010. Capitals among three banks foreign banks capital was to high as compare to domestic banks and it was increased by 35 t0 37% in the year 2010. Customer deposits were also increased as compare to CASA (Current Account Saving Account),but as per the data deposit was decrease by 26.7% and CASA was increased by the same percentage 26.7%. The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the years states that public sector banks makes more provisions in gross NPA & gross advances as compared to private and foreign banks. In 2009-10, the series of incremental credit-deposit and investment-deposit ratios drifted away from each other since mid-October 2009 reflecting banks growing preference for credit over
57

investments. The outstanding credit-deposit ratio at end-March 2010 was marginally lower at 73.6 per cent as compared to 73.8 per cent at end-March 2009. Conversely, the investment-deposit ratio was marginally higher at 36.2 per cent at end-March 2010 as compared to 35.7 per cent at end March 2009. Foreign banks, which had the highest (outstanding) credit-deposit ratio, witnessed a steep fall in this ratio between 2008 and 2009, and then further between 2009 and 2010.5 At end-March 2010, foreign banks along with old private sector banks were in the lowest brackets with regard to credit-deposit ratio in comparison with public and new private sector banks.

58

CONCLUSION

59

CONCLUSION
The NPA is one of the biggest problems that the Indian Banks are facing today. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. The NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of the fund.

60

ANNEXURE

61

ANNEXURE
Year 2004-05 Bnaks <2% 2% to 5% 5% to 10% PSB 17 9 2 Pvt.SB 10 15 5 FB 22 2 2 2005-06 PSB 22 6 0 Pvt.SB 17 9 2 FB 26 0 0 2006-07 PSB 26 2 0 Pvt.SB 21 3 1 FB 27 1 0 2007-08 PSB 26 2 0 Pvt.SB 22 1 0 FB 25 2 0 2008-09 PSB 27 0 0 Pvt.SB 18 4 0 FB 24 5 1 Table: 1:- Frequency Distribution of Banks according to level of NPAs >10% 0 0 4 0 0 3 0 0 1 0 0 1 0 0 0

Table: 2:- Net NPAs of Banks: 2000-01 to 2008-09 year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Public Sector BANK 27,977 27,958 24,877 19,335 16,904 14,566 15,145 17,726 21,033 29644 Private sector Bank 3,700 6,676 3,963 4,128 4,212 3,171 4,028 5,380 7,418 6506 Foreign Banks 785 920 903 933 639 808 927 1247 2973 2975

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Table: 3:- Composition of NPAs of Public Sector Banks - 2001 To 2009 year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Priority Sector 24156 25150 24939 23841 21926 22374 22954 25287 24318 30848 Non Priority sector 27307 28405 26781 25698 23249 18664 15158 14163 19251 25929 Public sector 1711 903 1087 610 444 341 490 299 474 524

Table: 4:- Composition of NPAs of Private Sector Banks - 2001 To 2009 year 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Priority Sector 1835 2546 2445 2482 2188 2284 2884 3419 3640 4792 Non Priority Sector 4452 9090 9327 7796 6569 5541 6353 9558 13172 12592 Public Sector 123 31 95 75 42 4 3 0 75 0

Table: 5:- Composition of NPAs of Foreign Sector Banks 2007 To 2009 Year 2007 2008 2009 Priority Sector 331 402 649 Non- Priority Sector 2120 2712 6506 Public Sector 0 0 0

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Table: 6:- Net NPAs of Old and New Private Sector Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Old Private Sector Banks 2771 3013 2598 2142 1859 1375 891 740 1165 1271 New Private sector Banks 929 3663 1365 1986 2353 1796 3137 4640 6253 5234

Table: 7:- Net NPA to Net Advance of Public, Private & Foreign Sector Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Public Sector Bank 2.1 1.3 1.1 0.8 0.94 1.10 Private Sector Bank 1.9 1 1 1.2 1.29 1.03 Foreign Bank 0.9 0.8 1 0.9 1.81 1.82

Table: 8:- Classification of Loan Asset of Public Sector Banks in percentage Year 2004 2005 2006 2007 2008 2009 2010 Standard Asset 92.2 94.6 96.1 97.2 97.7 97.9 97.8 Sub- Standard Asset 2.6 1.2 1.1 1.0 1.0 0.9 1.05 Doubtful Asset 4.3 3.4 2.3 1.5 1.1 1.0 0.92 Loss Asset 0.9 0.7 0.5 0.3 0.2 0.2 0.19

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Table: 9:- Classification of Loan Asset of Private Sector Banks in percentage Year 2004 2005 2006 2007 2008 2009 2010 Standard Asset 94.2 96.1 97.4 97.6 97.3 96.8 97.27 Sub- Standard Asset 1.8 1.0 0.8 1.1 1.5 2.0 1.37 Doubtful Asset 3.6 2.5 1.5 1.0 0.9 1.0 1.02 Loss Asset 0.5 0.4 0.3 0.2 0.3 0.3 0.34

Table: 10:- Classification of Loan Asset of Foreign Sector Banks in percentage Year 2004 2005 2006 2007 2008 2009 2010 Standard Asset 95.2 97.0 97.9 98.1 98.1 95.7 95.7 Sub- Standard Asset 1.6 0.9 1.0 1.1 1.2 3.5 2.94 Doubtful Asset 1.8 1.3 0.7 0.5 0.5 0.6 0.86 Loss Asset 1.5 0.8 0.5 0.4 0.2 0.2 0.45

Table: 11:- Net NPAs & Net Profit of Public Sector Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Net NPA 27977 27958 24877 19335 16904 14566 15145 17726 21033 Net Profit 4317 8301 12295 16546 15784 16539 20152 26592 34394

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Table: 12:- Net NPAs & Net Profit of Private Sector Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Net NPA 3700 6676 3963 4128 4212 3771 4028 5380 7418 Net Profit 1142 1779 2958 3481 3533 4975 6465 9522 10868

Table: 13:- Net NPA & Net Profit of Foreign Banks: 2000-01 to 2008-09 Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 Net NPA 785 920 903 933 693 808 927 1247 2973 Net Profit 945 1492 1824 2243 3098 4109 5343 7544 8459

Table: 14:- NPA ratios of Public Sector Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Gross NPAs/Gross Advances 5.5 3.6 2.7 2.2 2 2.19 Net NPAs/ Net Advances 2.1 1.3 1.1 0.8 0.94 1.10

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Table: 15:- NPA ratios of Private Sector Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Gross NPAs/Gross Advances 3.8 2.5 2.2 2.5 2.9 2.74 Net NPAs/ Net Advances 1.9 1 1 1.2 1.29 1.03

Table: 16:- NPA ratios of Foreign Banks: 2004-05 to 2008-09 Year 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Gross NPAs/Gross Advances 2.8 2 1.8 1.8 4 4.29 Net NPAs/ Net Advances 0.9 0.8 1 0.9 1.81 1.82

Table: 17:- Net NPA to Net Advance Ratio of Private Sector Banks Year 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Old Private Sector Banks 7.3 7.1 5.2 3.8 2.7 1.7 1 0.7 0.9 0.83 New Private sector Banks 3.1 4.9 1.5 1.7 1.9 0.8 1 1.1 1.4 1.09

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Table: 18:- Frequency Distribution of Banks Income Non Interest Income 0.27 0.55 0.61 0.28 0.49 0.57 0.27 0.46 0.58 0.24 0.44 0.56 0.23 0.42 0.55 0.24 0.39 0.54

Year 2004-05

Bnaks PSB Pvt.SB FB PSB Pvt.SB FB PSB Pvt.SB FB PSB Pvt.SB FB PSB Pvt.SB FB PSB Pvt.SB FB

2005-06

2006-07

2007-08

2008-09

2009-10

Interest Income 0.73 0.45 0.39 0.72 0.51 0.43 0.73 0.54 0.42 0.76 0.5 0.44 0.77 0.58 0.45 0.76 0.61 0.46

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References / Bibliography

69

References / Bibliography
Books: Commercial Banking by G. P. Kapoor ET wealth edition

Websites: www.rbi.org.in www.wikipedia.org www.bankingindiaupdate.com www.indianexpress.com

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