RESEARCH PROJECT REPORT

ON
NON PERFORMING ASSEST

SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE DEGREE OF

MASTER OF BUSINESS ADMINISTRATION
of

KURUKSHETRA UNIVERSITY
By

JEENUS GROVER
MBA III SEMESTER

UNDER THE SUPERVISION OF

R.C. AHUJA
CHIEF MANAGER

Acknowledgements

I express my sincere gratitude to .Company Supervisor Name (If any). (

Designation with Comp. Name..) and College Supervisor Name. (Designation
with College Name) for providing me an opportunity to work on this project. I am
very grateful for their constant support and guidance throughout the duration of the
entire project. I express my sincere thanks to Head of the Institution and our
present summer internship coordinatorsummer internship coordinator name..
for their guidance and support. I also express my thanks to ..If you want to add
any other Name.and ..If you want to add any other name..for their
encouragement and guidance. Lastly, I thank my parents, family members and
friends for their constant support in my endeavor.

Student Name

PREFACE
For quite sometimes now, there is a growing awareness in banks to bring down the level of nonperforming assets. NPAs are loans given to borrowers who do not pay the interest of principal for
a period of more than 90 days as on the balance sheet of a bank. NPAs are having an adverse
affect on profitability of banks. This is mainly on two counts:
1. De-recognition of interest on such assets. In other words, the bank cannot book interest
on such assets to their income on accrual basis.
2. And the requirement of heavy loan loss on such assets.
To bring the level of NPAs, the numerous strategies have been initiated in the past and are being
initiated at present by the government and banks. These strategies include not only account
specific actions but also framing policy guidelines, which help in effecting recoveries in such
accounts.In this Endeavour for reducing the level of NPAs, the banks have achieved quite
encouraging progress. Every year for the past few years, it has been observed that the percentage
of NPAs for previous banks in getting reduced considerably, but simultaneously, there has been
fresh slippage of accounts from the standard category to NPA category. However, the banks have
realized that the only way to check the standard assets to NPA category is to strengthen their presanction appraisal systems and their-up systems of loans and taking timely corrective action in
the accounts where some deterioration are observed.
The importance of the topic of NPA can be judged from a recent development in the Indian
economy in the form of enactment of Securitization and Reconstruction of Financial Assets
and Enforcement of Security Interest (SARFEASI) act which came into effect on 26th of
November, 2002.the act seeks to empower the banks to recover their dues from defaulting
customer in an effective manner. This new act is discussed in report.It hoped that this report will
prove to be of great help to develop a sense of understanding of the topic and enhance the
awareness of the topic.

August 2015

ABSTRACT
The accumulation of huge non-performing assets in banks has
assumed great importance. The depth of the problem of bad
debts was first realized only in early 1990s.
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 then on-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 a
bank, 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.
A well- built banking sector is significant for a prosperous
economy. The crash of the banking sector may have an
unfavorable blow on other sectors. A banker shall be very
cautious in lending, because banker is not lending money out of
his own capital. A major portion of the money lent comes from the
deposits received from the public and government share. At
present NPA in the banking sector is debate topic because NPA is
increasing year by year particularly in nationalized banks The
Gross Non-Performing Assets (GNPAs) of Nationalized Banks as on
March 2015 were Rs.2.67 LAKHS CRORE which amount to 5.43%
4

of Gross Advances. In this direction present paper is undertaken

to study the reasons for advances becoming NPA in the Indian
Commercial banks Sector and to give suitable suggestion to
overcome the mentioned problem

EXECUTIVE SUMMARY
Punjab National Bank was registered on 19th may 1894 under the Indian companies act with its
office in Anarkali Bazaar, Lahore. The bank is second largest government owned commercial
bank in India with about 6543 branches across the 3404 cities. It serves million of customers the
banks has ranked 248th biggest bank in the world by Bankers Almanac, London. PNB has
banking subsidiary in the UK, as well as branches in Hongkong and Kabul, and representative
of offices in Almaty, Shanghai, and Dubai.
The Circle Office, KARNAL was started on1980s, 3 districts were covered under circle office,
karnal which were karnal, panipat and sonipat 96 branches. The circle head DGM .R.K GUPTA
and AGM S.M. TRIPATHI and Chief Managers R.C. AHUJA.
The topic under study is non performing assets an asset is classified as non-performing assets
(NPAs) if the borrower does not pay dues in the form of principal and interest for a period of 180
days however with effects from march 2004, default status would be given to a borrower if dues
were not paid for 90 day. If any advance or credit facilities granted by bank to a borrower
become non-performing ,then the bank will have to treat all the advances/credit facilities granted
to that borrower as non-performing without having any regard to the fact that there may still exist
certain advances/credit facilities having performing status

BANK PROFILE
Bank opened for business on 12 April, 1895 in the building opposite the Arya Samaj Mandir in
Anarkali in Lahore. Authorised capital Rs. 2 lakhs, working capital was Rs. 20000. Total staff
strength of 9 and the total monthly salary amounted to Rs. 320.
Sardar Dayal Singh Majithia - founder of Dayal Singh College and the Tribune; as First
chairman.

THE FOUNDER
LALA LAJPATRAI ((1865-1928)

ORIGIN
VISION
To be a Leading Global Bank with Pan India footprints and become a
household brand in the Indo- Gangetic Plains, providing entire range of
financial products and services under one roof.

MISSION
Banking for the unbanked

The first Board of 7 Directors comprised:Lala Lalchand one of the founders of DAV College and President of its Management
Society;
1. Kali Prosanna Roy, eminent Bengali pleader & Chairman of the Reception committee of the
INC at its Lahore session in 1900;
2. Lala Harkishan Lal -first industrialist of Punjab;
3. EC Jessawala, a Parsi merchant and partner of Jamshedji & Co. of Lahore;
4. Lala Prabhu Dayal, a leading Rais of Multan;
5. Bakshi Jaishi Ram, an eminent Civil Lawyer of Lahore;

Lala Harkishan Lal, the first secretary to the Board and Shri Bulaki Ram Shastri Barrister
at Lahore, was appointed Manager.

Performance ab-initio :

Lala Lajpat Rai was the first to open an account with the bank .

A Maiden Dividend of 4% was declared after only 7 months of operation.

The first branch outside Lahore was opened in Rawalpindi in 1900.

In 1913, the banking industry in India was hit by a severe crisis. Failure of the Peoples
Bank of India As many as 78 banks failed during this crisis but Punjab National Bank
survived.
Mr. JH Maynard, the then Financial Commissioner, Punjab, remarked ...."Your Bank
survived...no doubt due to good management".

The Journey

Jalianwala Bagh Committee account was opened in the Bank, which in the decade that
followed, was operated by Mahatma Gandhi and Pandit Jawaharlal Nehru.

On March 31, 1947 - decided to transfer the registered office to Delhi. PNB was then
housed in the precincts of Sreeniwas in the salubrious Civil Lines, Delhi

The Bank was forced to close 92 offices in West Pakistan constituting 33 percent of the
total number and having 40% of the total deposits.

The SWADESHI BANK

Since inception in 1895, PNB has always been a "People's bank" serving millions of people
throughout the country and also had the proud distinction of serving great national leaders like
Sarvshri Jawahar Lal Nehru, Gobind Ballabh Pant, Lal Bahadur Shastri, Rafi Ahmed Kidwai,
Smt. Indira Gandhi etc. amongst other who banked with us.

YATRATHE JOURNEY :
Registered on 19 May 1894 under the Indian Companies Act , with its office in Anarkali
Bazaar, Lahore.

Started Business from BAISAKHI , the 13th April ,1895

1900: PNB established its first branch outside Lahore in Rawalpindi.

1904: PNB established branches in Karachi and Peshawar.

1940. absorbed Bhagwan Dass Bank, a scheduled bank located in Delhi Circle

1947: at the Partition of India forced PNB to close 92 offices in West Pakistan, 33% of
the total number, and which held 40% of the total deposits.

1951: acquired the 39 branches of Bharat Bank (est. 1942);

1960: PNB amalgamated

1961: PNB acquired Universal Bank of India. Indo Commercial Bank (est. 1933) in a
rescue
8

1963: The Government of Burma nationalized PNB's branch in Rangoon (Yangon).

1965: After the Indo-Pak war the government of Pakistan seized all the offices in
Pakistan of Indian banks, including PNB's head office, which may have moved to
Karachi.PNB also had one or more branches in East Pakistan (Bangladesh).

1969: PNB Nationalised, on 19 July 1969.

1978: PNB opened a branch in London.

1986 The Reserve Bank of India required PNB to transfer its London branch to State
Bank of India

1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue. 142 branches .

1993: Acquired New Bank of India.

1998: PNB set up a representative office in Almaty, Kazakhstan.

2003, PNB took over Nedungadi Bank

2004: PNB established a branch in Kabul, Afghanistan and a representative office in

Shanghai. Established an alliance with Everest Bank in Nepal( PNB owns 20% of Everest
Bank.)

2004: PNB opened a representative office in Dubai.

2006: Established PNBIL Punjab National Bank (International) in the UK, PNB also
opened a branch in Hong Kong.

2007: PNB established PNBIL - Punjab National Bank (International) - in the UK,
with two offices, one in London, and one in South Hall, Middlesex. Since then it has

opened a third branch in Leicester, and is planning a fourth in Birmingham.

2008: PNB opened a branch in Hong Kong.

2009: Established a representative office in Oslo, Norway.

2010, PNB purchased JSC Dena Bank in Kazakhstan. and now PNB owns 84% of what
has become JSC (SB) PNB.

In 2010, PNB established a subsidiary in Bhutan. PNB owns 51% of Druk PNB Bank, 1
May, PNB opened its branch in Dubai's financial center.

September 2011: PNB opened a representative office in Sydney, Australia.

December 2012: PNB acquired 30% stake in US based life Insurance company Metlife ,
renamed PNB MetLife India Limited

Subsidiaries
A. Domestic:
Sr No. Name of the Entity
i)

Country of Incorporation

Proportion of ownership%

PNB Gilts Ltd.

India

74.07

ii)

PNB Housing Finance Ltd.

India

51.01

iii)

PNB Investment Services Ltd.

India

100

iv)

PNB Insurance Broking Pvt. Ltd.# India

81

PNB Insurance Broking Company is non-functional. The Broking licence has been surrendered
and steps are being initiated for winding-up of the Company.

Domestic Joint Ventures :

1.

Principal PNB Asset Management Company Pvt. Ltd

2.

Principal Trustee Company Pvt. Ltd

3.

Assets Care & Reconstruction Enterprise Ltd.

4.

PNB Metlife India Insurance Company Ltd

B. International:
Sr. No
1

Name of the Entity

Country of incorporation

PNB (International) Ltd.

Proportion of ownership

United Kingdom

100%

Druk PNB Bank Ltd

Bhutan

51%

JSC SB PNB Kazakhstan

Kazakhstan

84.375%

10

Associates: (Bank having 20% or more stake)

A. Domestic:
Sr. No.

Name of Regional Rural Banks / Other Associates

Proportion of
ownership

Madhya Bihar Gramin Bank, Patna

35%

Sarva Haryana Gramin Bank, Rohtak

35%

Himachal Gramin Bank, Mandi

35%

Punjab Gramin Bank, Kapurthala

35%

Sarva UP Gramin Bank, Meerut

35%

Principal PNB Asset Management Co. Pvt. Ltd.

30%

Principal Trustee Co. Pvt. Ltd.

30%

Assets Care & Reconstruction Enterprise Ltd.

30%

PNB Metlife India Insurance Company Ltd

30%

B. Outside India:
Sr. No
Name of the Entity
of ownership
1
20%

Everest Bank Ltd

Country of incorporation

Proportion

Nepal

11

Name of Regional Rural Banks :

Sponsored by PNB ( Having 35% stake )
1.
2.
3.
4.
5.

Madhya Bihar Gramin Bank, Patna

Haryana Gramin Bank, Rohtak
Himachal Gramin Bank, Mandi
Punjab Gramin Bank, Kapurthala
Sarva UP Gramin Bank, Meerut

Corporate Social Responsibility

PNB Centenary Rural Dev. Trust :- Assist rural youth in gainful employment.
PNB Farmers Welfare Trust:- ( Detail in Next Slide )
PNB Rural Self Empl. Trg. Institutes ( PNBRSETIs ):- 30 in total distt. FLCC in all 67 lead distt.
PNB Vikas ( Village Adoption Scheme) :- 117 villages in 60 lead + 50 non lead distt.
Health & Social Initiatives :- Education, Health, Wind Energy, Sports etc.
ASHA Project :- rehabilitation of Slum area in Delhi.
Janmitra Rickshaw Project, Vegetable Producers Project , Women weavers etc.
PNB Prerna

PNB Farmers Welfare Trust

Established 10 FTCs :- Sachakhera ( Har.), Vidisha (M.P.), Neemrana (Raj.),

Shamsernagar (Pb), Saifai (UP), Labhandi ( Chhattisgarh), Mehraj ( Pb.), Pillayarpatti
( T.N.), Karapalli
(Orissa). 2 more under progress :- Jhalrapatan ( Raj.) and at Suti ( WB).- Trained more
than 4 lac farmers & 1 lac women.

Scholarship to meritorious children :- For passing Matic, Inter, Grad. With at least 60%
marks ) Scholarship Rs. 5000, 8000, 10000 respectively + addl. 1000 to Girl student.

12

Village adoption,Financial Inclusion.

AWARDS WON DURING THE YEAR 2014-2015

PMJDY Award of Excellence 2015 by Federation of Industry Trade &

Services.
FIPS Award for access to Banking and Financial Services through Kiosk
Banking Solution Technology by ELETS.
BSFI Awards for Bank with leading Financial Inclusion Initiatives 2015 by
ABP news.
Best Bank Branch by State Forum of Bankers Club Kerala.
IBA Banking Technology Awards 2014-15- Training and Human Resources,
e-Learning initiatives (PSU) Second Runners Up .
IBA Banking Technology awards 2014-15 Best Risk Management Initiatives
(winner).
Skoch Renaissance Award for people management: Skill Development &
Employment Generation .
MSME Banking Excellence Awards 2014- Best Bank for Financial inclusion
-Runners Up by Chambers of Indian Micro Small and Medium Enterprises
Banking Frontiers: Inspiring Work Place award.
Golden Peacock Business Excellence Award 2014 by Institute of Directors.
Golden Peacock Innovative Product/Service Award 2014 by Institute of
Directors.

Vigilance Excellence Award by Institute of Public Enterprises.

BOARD OF DIRECTORS
Shri. K.R.Kamath ,Chairman & Managing Director

Executive Directors
1. Shri Gauri Shankar, Executive Director
JOB PROFILE:
(1) HRD,Training & Board & Co-ordination
(2) Personnel Administration, Pension/ Provident Fund
(3)Information Technology
(4) Management Information Services Division
(5) Transaction Banking, Govt. Business
(6) Inspection & Audit & Management Audit & Review
(7) Marketing, MBD,Public Relation and Publicity including Joint Ventures &
Credit Card Venture
8) International Banking Division
(9) Credit Operation, Monitoring & Recovery(of FGMOs
Delhi,Chandigarh,Ludhiana,Shimla)

13

2. SH. K.V. Brahmaji Rao

Job profile:
(1)Integrated Risk Management & AFI including FRMD
(2) Management Advisory Services
(3) Treasury Operation and Subsidiaries in India
(4) Finance & Share Deptt
(5) Vigilance
(6) Resource Mobilization
7) Operations Division
8) New Initiative Division
(9) General Services Admn.,Ptg. & Stationery, Security & Rajbhasha
10) Credit Operation, Monitoring & Recovery (of FGMOs Mumbai,Meerut,
Lucknow,Agra
3. DR R.M SANGAPORE
Job Profile:
1) Financial Inclusion
(2)Priority Sector Lending
(3) Retail Assets
(4)Medium Small & Micro Enterprises (MSME
(5) Credit Monitoring including Industrial Rehabilitation & Credit Audit &
Review
(6) Recovery & Law Division
(7)Customer Care Centre
(8) Compliance Division
(9) Right to Information, KYC &

14

(10) Credit Operation, Monitoring & Recovery(of FGMOs

Kolkata,South,Patna,Jaipur,Bhopal) Field
General Managers' Offices Field General Managers' Offices Field General
Managers' Offices

Other Members of Board of Directors :

1.
2.
3.
4.
5.
6.
7.
8.
9.

Shri. Anurag Jain, IAS, Govt. of India Nominee Director

Shri. B P Kanungo, Reserve Bank of India Nominee Director
Shri. B B Chaudhry,Part-time non-official Director
Shri. G P Khandelwal, Part-time non-official Director
Shri. Devinder Kumar Singla, Shareholder Director
Dr. Sunil Gupta, Shareholder Director
Shri M. N. Gopinath,Shareholder Director
Shri. Dilip Kumar Saha, Officer Employee Director
Shri. Tara Chand Jhalani, Workmen Employee Director

15

INDIAN BANKING SECTOR

Banking in India has its origin as early as the Vedic period. It is believed that the transition from
money lending to banking must have occurred even before Manu, the great Hindu Jurist,
who has devoted a section of his work to deposits and advances and laid down rules relating to
rates of interest. During the Mogul period, the indigenous bankers played a very important role
in lending money and financing foreign trade and commerce. During the days of the East India
Company, it was the turn of the agency houses to carry on the banking business. The General
Bank of India was the first Joint Stock Bank to be established in the year 1786. The others
which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is
reported to have continued till 1906 while the other two failed in the meantime. In the first
th

half of the 19

century the East India Company established three banks;

1. Bank of Bengal in 1809

2. Bank of Bombay in 1840, and
3. Bank of Madras in 1843.
These three banks also known as Presidency Banks were independent units and functioned well.
These three banks were amalgamated in 1920 and a new bank The Imperial Bank of India was
th

established on 27

January 1921. With the passing of the State Bank of India Act in 1955 the

undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank
of India. The Reserve Bank which is the Central Bank was created in 1935 by passing
Reserve Bank of India Act, 1934. In the wake of the Swadeshi Movement, a number of banks
with Indian management were established in the country namely:
Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd,

Bank

of Baroda Ltd, T he Central Bank of India Ltd. On July 19, 1969, 14 major banks of the
country were nationalised and in 15

th

April 1980 six more Commercial Private Sector Banks

were also taken over by the government.

16

THE INDIAN BANKING INDUSTRY

The origin of the Indian banking industry may be traced to the establishment of the Bank of
Bengal in Calcutta (now Kolkata) in 1786. Since then, the industry has witnessed substantial
growth and radical changes. As of March 2002, the Indian banking industry consisted of 97
Commercial Banks, 196 Regional Rural Banks, 52 Scheduled Urban Co-operative Banks, and
16 Scheduled State Co-operative Banks.
The growth of the banking industry in India may be studied in terms of two broad phases: Pre
Independence (1786-1947), and Post Independence (1947 till date). The post independence
phase may be further divided into three sub-phases:

Pre-Nationalisation Period (1947-1969)

Post-Nationalisation Period (1969-1991)

Post-Liberalisation Period (1991- till date)

The two watershed events in the post independence phase are the nationalisation of banks
(1969) and the initiation of the economic reforms (1991). This section focuses on the
evolution of the banking industry in India post-liberalisation.

Banking Sector Reforms - Post- Liberalisation

In 1991, the Government of India (GOI) set up a committee under the chairmanship of
Mr. Narasimaham to make an assessment of the banking sector. The report of this committee
contained recommendations that formed the basis of the reforms initiated in 1991.
The banking sector reforms had the following objectives:
1. Improving the macroeconomic policy framework within which banks operate;
2. Introducing prudential norms;
3. Improving the financial health and competitive position of banks;
4. Building the financial infrastructure relating to supervision, audit technology and legal
framework; and
4. Improving the level of managerial competence and quality of human resources.
17

Introduction of Reserve Bank of India

Reserve Bank of India is also known as India's Central Bank. It was
established on 1st April 1935. Although the bank was initially owned
privately, it has been taken up the Government of India ever since, it was
nationalized. The bank has been vested with immense responsibility of
reviewing and reconstructing the economic stability of the country by
formulating economic policies and ensuring a proper exchange of
currency. In this regard, the Reserve Bank of India is also known as the
banker of banks.
The Central Office of the Reserve Bank was initially established in
Calcutta but was permanently moved to Mumbai in 1937. The Central
Office is where the Governor sits and where policies are formulated.
The Preamble of the Reserve Bank of India describes the basic functions
of the Reserve Bank as:"...to regulate the issue of Bank Notes and
keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to
its advantage."The Preamble of the RBI speaks about the basic functions
of the bank. It deals with the issuing the bank notes and keeping reserves
in order to secure monetary stability in the country. It also aims at
operating and boosting up the currency and credit infrastructure of India.

18

The role and functions of R.B.I in

Indian Economy:
1. Issue of Currency Notes: The RBI has the sole right or authority
or monopoly of issuing currency notes except one rupee note and coins
of smaller denomination. These currency notes are legal tender issued by
the RBI. Currently it is in denominations of Rs. 2, 5, 10, 20, 50, 100, 500,
and 1,000. The RBI has powers not only to issue and withdraw but even
to exchange these currency notes for other denominations. It issues these
notes against the security of gold bullion, foreign securities, rupee coins,
exchange bills and promissory notes and government of India bonds.
2. Banker to other Banks: The RBI being an apex monitory
institution has obligatory powers to guide, help and direct other
commercial banks in the country. The RBI can control the volumes of
banks reserves and allow other banks to create credit in that proportion.
Every commercial bank has to maintain a part of their reserves with its
parent's viz. the RBI. Similarly in need or in urgency these
3. Banker to government:

The RBI being the apex monitory body

has to work as an agent of the central and state governments. It performs
various banking function such as to accept deposits, taxes and make
payments on behalf of the government. It works as a representative of
the government even at the international level. It maintains government
accounts, provides financial advice to the government. It manages
government public debts and maintains foreign exchange reserves on
19

behalf of the government. It provides overdraft facility to the government

when it faces financial crunch.
4. Exchange Rate Management: It is an essential function of the
RBI. In order to maintain stability in the external value of rupee, it has to
prepare domestic policies in that direction. Also it needs to prepare and
implement the foreign exchange rate policy which will help in attaining
the exchange rate stability. In order to maintain the exchange rate
stability it has to bring demand and supply of the foreign currency (U.S
Dollar) close to each other.
5. Credit Control Function: Commercial bank in the country
creates credit according to the demand in the economy. But if this credit
creation is unchecked or unregulated then it leads the economy into
inflationary cycles. On the other credit creation is below the required
limit then it harms the growth of the economy. As a central bank of the
nation the RBI has to look for growth with price stability. Thus it
regulates the credit creation capacity of commercial banks by using
various credit control tools.
5.Supervisory Function: RBI has been endowed with vast
powers for supervising the banking system in the
country. It has powers to issue license for setting up
new banks, to open new branches, to decide
minimum reserves, to inspect functioning of
commercial banks in India and abroad, The and to
guide and direct the commercial banks in India. It
can have periodical inspections an audit of the
commercial banks in India.

20

TYPES OF BANKS:

1.

Reserve Bank of India:

Reserve Bank of India is the Central Bank of our
country. It was established on 1st April 1935 under the
RBI Act of 1934. It holds the apex position in the
banking structure. RBI performs various
developmental and promotional functions.
It has given wide powers to supervise and control the
banking structure. It occupies the pivotal position in the
21

monetary and banking structure of the country. In

many countries central bank is known by different
names.
For example, Federal Reserve Bank of U.S.A, Bank of
England in U.K. and Reserve Bank of India in India.
Central bank is known as a bankers bank. They have
the authority to formulate and implement monetary
and credit policies. It is owned by the government of a
country and has the monopoly power of issuing notes.

22

Image Courtesy: bankrupt-america.com/wpcontent/uploads/2012/03/IMG_0767-e1332095717298.jpg

23

2. Commercial Banks:
Commercial bank is an institution that accepts deposit,
makes business loans and offer related services to various
like accepting deposits and lending loans and advances to
general customers and business man.
These institutions run to make profit. They cater to the
financial requirements of industries and various sectors like
agriculture, rural development, etc. it is a profit making
institution owned by government or private of both.
Commercial bank includes public sector, private sector,
foreign banks and regional rural banks:
a. Public sector banks:
It includes SBI, seven (7) associate banks and nineteen (19)
nationalized banks. Altogether there are 27 public sector
banks. The public sector accounts for 90 percent of total
banking business in India and State Bank of India is the
largest commercial bank in terms of volume of all
commercial banks. It also includes PUNJAB NATIONAL
BANK.
b. Private sector banks:
Private sector banks are those whose equity is held by
private shareholders. For example, ICICI, HDFC etc.
Private sector bank plays a major role in the development of
Indian banking industry.

24

c. Foreign Banks:
Foreign banks are those banks, which have their head offices
abroad. CITI bank, HSBC, Standard Chartered etc. are the
examples of foreign bank in India.
d. Regional Rural Bank (RRB):
These are state sponsored regional rural oriented banks.
They provide credit for agricultural and rural development.
The main objective of RRB is to develop rural economy.
Their borrowers include small and marginal farmers,
agricultural labourers, artisans etc. NABARD holds the apex
position in the agricultural and rural development.
3. Co-operative Bank:
Co-operative bank was set up by passing a co-operative act
in 1904. They are organized and managed on the principal of
co-operation and mutual help. The main objective of cooperative bank is to provide rural credit.
The cooperative banks in India play an important role even
today in rural co-operative financing. The enactment of Cooperative Credit Societies Act, 1904, however, gave the real
impetus to the movement. The Cooperative Credit Societies
Act, 1904 was amended in 1912, with a view to broad basing
it to enable organization of non-credit societies.
Three tier structures exist in the cooperative banking:
i. State cooperative bank at the apex level.
ii. Central cooperative banks at the district level.
25

iii. Primary cooperative banks and the base or local level.

4. Scheduled and Non-Scheduled banks:
A bank is said to be a scheduled bank when it has a paid up
capital and reserves as per the prescription of RBI and
included in the second schedule of RBI Act 1934. Nonscheduled bank are those commercial banks, which are not
included in the second schedule of RBI Act 1934.
5. Development banks and other financial institutions:
A development bank is a financial institution, which
provides a long term funds to the industries for development
purpose. This organization includes banks like IDBI, ICICI,
IFCI etc. State level institutions like SFCs SIDCs etc. It
also includes investment institutions like UTI, LIC, and GIC
etc.

PNB CIRCLE OFFICE,

SECTOR 12, KARNAL
26

HISTORY:
Circle office was started in the year 1986. It
was firstly started as a REGIONAL OFFICE.
The first regional head of PNB regional office
was MR. RAM LAL MALHOTRA.

STRUCTURE:
3 LDM OFFICE (CHIEF LEAD DISTRICT
MANAGER)
3 RETAIL ASSET BRANCH
3 REGIONAL CLEARING CENTRE

FUNCTIONS:
Every bank manager has the power to
sanction the loan to different parties. But
when the amount of loan is so huge that
it is not in the power of branch manager
to sanction loan then branches refer
these type of cases to circle office for the
approval of such loans.
Then circle office analyze all the
documents and check whether the
documents are upto the specifications.
If all the guidelines are properly followed
by the borrower while applying for loan
27

then circle office give its approval to the

loan otherwise reject the loan application.
It is also known as CONTROLLING OFFICE.

CIRCLE OFFICE HANDELS 100

BRANCHES IN THE 3 DISTRICTS:
KARNAL, PANIPAT, SONIPAT.

INTRODUCTION TO CIRCLE
HEAD
28

MR. R.K. GUPTA is the circle

head of the Circle office, sector
12, Karnal.
He joined the circle office on
May 9, 2012.
His designation is as DGM in the
circle office.
He controls all the administrative
functions in the circle office.
He has a great experience in the
banking sector.

ORGANISATION SET UP

29

CONTROL

HEAD OFFICE
30

BUSINESS DIVISIONS

Corporate Marketing Division

Credit Division
CCD- Credit Card
Financial Inclusion
Gov. Business
IBD
Marketing Division
Marketing Services Division
Merchant Bkg.
MSME
PSLB
Retail Assets Division
Resource Mobi. Division
Recovery Division(SAMD)
Treasury
New Initiatives Division

SUPPORT DIVISIONS

Board & Coordination Division

General Admin Services. GAD - Branch Expansion
Human Resource Dev
IT Division
Law
MASD Mgmt. Inf. Sys.
Pension & PF
Personnel Administration Division
Print & Stat.
PR & Publicity.
Rajbhasha
Security Strategic Planning & Business Process
Training Dept.
Transaction Banking Division

CONTROL DIVISIONS
Compliance Division
Credit Audit & Review
Finance

31

Financial Products
Fraud Prevention
Inspection & Audit
Insurance Cell
IRMD - ALM
IRMD Integ. Risk Mgmt.
IRMD - Loans & Adv.
MARD
Share
Vigilance
Operations

Organisational Set up - FGMOs

No. of FGMOs:- 13 (Shall be controlling following circles)
1. Patna:-

for all 7 COs of Bihar & Jharkhand.

2. Kolkata:-

all 6 COs of West Bengal, North East and Orissa.

3. Lucknow:-

5 COs. Gorakhpur, Varanasi, Lucknow , Kanpur

,Faizabad.

4. Meerut :-

2 COs of UP viz. Meerut, Muz.ngr and 3 COs of

5. Agra :-

5 COs of West UP and Central UP.

6. Delhi :-

COs viz. North, Central, South Delhi and Noida.

7. Chandigarh :-

all 5 COs of Haryana and Chandigarh.

8. Ludhiana :9. Jaipur :-

all 7 COs of Punjab.

all 5 COs of Rajasthan.

10. Mumbai :-

all 5 COs of Maharashtra & Gujarat.

11. Chennai :-

all 6 COs of Kerala, AP, Karnataka, TN states.

12. Shimla :-

5 COs of J & K and Himachal Pradesh

13. Bhopal :-

4 COs of Madhya Pradesh and Chattisgarh.

Organizational set up : ZAOs

ZAOs are looking after the inspection of Branches and to ensure that compliance of
guidelines is being adhered to.

32

One ZAO is aligned one FGMO

Accordingly total No. of ZAOs : 13

Headed by Dy. General

CIRCLE OFFICE FUNCATIONAL STRUCTURE

Security
HRD
Inspection

Circle Office
Credit

GAD

Marketing

IT
PRD

33

NON-PERFORMING ASSETS
The world is going faster in terms of services and physical products. However it has been
researched that physical products are available because of the service industries. In the nation
economy also service industry plays vital role in the boosting up of the economy. The nations
like U.S, U.K, and Japan have service industries more than 55%. The banking sector is one of
appreciated service industries. The banking sector plays larger role in mobilizing money from
one end to other end. It helps almost every person in utilizing the money at their best. The
banking sector accepts the deposits of the people and provides fruitful return to people on the
invested money. But for providing the better returns plus principal amounts to the clients; it
becomes important for the banks to earn. The main sources of income for banks are the
interest that they earn on the loans that have been disbursed to general person, businessman,
or any industry for its development. Thus, we may find the input-output system in the
banking sector. Banks first, accepts the deposits from the people and secondly they lend this
money to people who are in the need of it. By the way of mobilizing money from one end to
another end, Banks earn their profits.
However, Indian banking sector has recently faced the serious problem of Non

34

Performing Assets. This problem has been emerged largely in Indian banking sector since three
decade. Due to this problem many Public Sector Banks have been adversely affected to
their performance and operations. In simple words Non Performing Assets problem is one
where banks are not able to recollect their landed money from the clients or clients have been
in such a condition that they are not in the position to provide the borrowed money to the
banks.The problem of NPAs is danger to the banks because it destroys the healthy financial
conditions of them.
The trust of the people would not be any more if the banks have higher NPAs. So
the problem of NPAs must be tackled out in such a way that would not destroy the
operational, financial conditions and would not affect the image of the banks. Recently, RBI
has taken number steps to reduce NPAs of the Indian banks. And it is also found that the many
banks have shown positive figures in reducing NPAs as compared to the past years.

MEANING OF NPAs
An asset is classified as non-performing assets (NPAs) if the borrower does not pay dues in
the form of principal and interest for a period of 180 days. However with effect from March
2004, default status would be given to a borrower if dues were not paid for 90 days. If any
advance or credit facilities granted by bank to a borrower become non-performing, then the
bank will have to treat all the advances/credit facilities granted to that borrower as nonperforming without having any regard to the fact that there may still exist certain advances /
credit facilities having performing status.

DEFINITIONS OF NPA
An asset, including a leased asset, becomes non-performing when it ceases to generate income
for the bank. A non-performing asset is a loan or advance where:

Interest and / or installment of principal remain overdue for a period of more than 90

days in respect of a term loan.

The account remains out of order for a period of 90 days, in respect of an Overdraft/ Cash
Credit (OD/CC).
35

The bill remains overdue for a period of more than 90 days in the case of bills purchased

and discounted.
Any amount to be received remains overdue for a period of more than 90 days in respect

of any other accounts.

The installment of principal or interest thereon remains overdue for two crops season for

the long duration crops.

The amount of liquidity facility remains outstanding for more than 90 days, in respect of
a securitization transaction undertaken in terms of guidelines on securitization dated

February 1,2006.
In respect of derivative transactions,the overdue receivables representing positive mark
to-market value of a derivative contract ,if these remain unpaid for a period of 90 days
from the specified due date for payment.

CLASSIFICATION OF LOANS
In India the bank loans are classified on the following basis.

Performing Assets:
Loans where the interest and/or principal are not overdue beyond 180 days at the end of the
financial year.

Non-Performing Assets:
Any loan repayment, which is overdue beyond 180 days or two quarters, is considered as NPA.
According to the securitisation and reconstruction of financial assets and enforcement of
security interest ordinance, 2002

non-performing asset(NPA) means an asset or

account of a 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 classifications issued by the Reserve Bank
Internationally, income from non-performing assets is not recognized on accrual basis,
but is taken into account as income only when it is actually received. It has been decided to
adopt similar practice in our country also. Banks have been advised that they should not charge
36

and take to income account the interest on all Non-performing assets. An asset becomes nonperforming for a bank when it ceases to generate income.

ASSET CLASSIFITION
ASSETS

PERFORMING ASSETS

NON-PERFORMING

OR

ASSETS

STANDERED ASSETS

SUB-STANDERED
ASSETS

DOUBTFUL
ASSETS

LOSS
ASSETS

37

LESS THAN
1 YEAR

1 TO 3

ABOVE

YEARS

3 YEARS

Reserve Bank of India (RBI) has issued guidelines on provisioning requirement

with respect to bank advances. In terms of these guidelines, bank advances are
mainly classified in to following categories:

STANDARD ASSETS:
Standard assets are one which does not carry any problems and which does not carry more than
normal risk attached to the business. Such assets should not be an NPA.

SUB-STANDARD ASSETS:
These assets involved the two types of view as follows
In respect to the norms of March 31, 2005 an asset would be classified as Sub standard if it
remained NPA for a period less than or equal to 12 months.
An assets where the terms of the loan agreement regarding interest & principal have been
regenerated or rescheduled after commencement of production, should be classified as substandard and should remain in such category for at least 12 months of satisfactory performance
under the re-negotiated terms.

DOUBTFUL ASSETS:
In respect to the norms of March 31, 2005 an asset is required to be classified as doubtful, if it
has remained NPA for more than 12 months.

38

A loan which is classified as doubtful has all the weaknesses inherent as that classified as Substandard with the added characteristic that the weaknesses make collection or liquidation in full,
on the basis of the currently known facts, conditions and values, highly questionable and
improbable.
Some types of these assets are
Less than 1 year
1 to 3 year
3 year and above

LOSS ASSETS
A loss asset is one where loss has been identified by the bank or internal or external auditors or
by the Co-operation department or by the RBI inspection but the amount has not been written of,
wholly or partly.

Guidelines for Classification of Assets

1. BASIC CONSIDERATION:
In simple terms the classification of assets should be done by considering the well defined credit
weaknesses & extent of dependence on collateral security for realization of dues.
In accounts where there is a potential threat to recovery on account and existence of other factor
such as fraud committed by borrowers it will not be prudent for bank to classify that account first
as sub-standard and then as doubtful. Such account should be straight away classified as doubtful
asset or loss asset, as appropriate, irrespective of the period for which it has remained as NPA.

2. ADVANCES GRANTED UNDER REHABILITATION PACKAGES:

Banks are not permitted to do classification of any advances in respect of which the term have
been re-negotiated unless the package of re-negotiated terms has worked satisfactory for a period
of one year.

39

A similar relaxation is also made in respect of SSI units which are identified as sick by banks
themselves and where rehabilitation packages programs have been drawn by the banks
themselves or under consortium arrangements.

3. INTERNAL SYSTEM FOR CLASSIFICATION OF ASSETS AS NPA:

Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs, especially in respect of high value accounts. The banks may
fix a minimum cut-off point to decide what would constitute a high value account depending
upon their respective business levels. The cut-off point should be valid for the entire accounting
year.Responsibility and validation level for proper assets classification may be fixed by bank.
The system should ensure that doubts in asset classification due to any reason are settled through
specified internal channels with in one month from the date on which the account would have
been classified as NPA as per extant guidelines.

PROVISION NORMS
General:

The

primary responsibility for making adequate provisions for any diminution in the

value of loan assets, investment or other assets is that of the bank managements and the
statutory auditors. The assessments made by the inspecting officers of the RBI is
furnished to the bank to assist the bank management and the statutory auditors in taking a
decision regard to making adequate and necessary provisions in terms of prudential

guidelines.
In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets in to prescribed categories as
detailed in paragraphs 4 supra. taking into account the time lag between an account
becoming doubtful of recovery , its recognition as such, the realization of the security

40

and the erosion over time in the value of security charged to the bank , the banks should
make provision against substandard assets ,doubtful assets ,loss assets as below:

Loss assets:
Loss assets should be written off. If loss assets are permitted to remain in the books for any
reason, 100 % of the outstanding should be provided for.

Doubtful asset
100% of the extent to which the advance is not covered by the realizable value of the security to
which the bank has a valid resources and realizable value is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the rates
ranging from 25 % to 100 % of the secured portion depending upon the period for which the
asset has remained doubtful:Period for which the advanced has remained in Provision requirement (%)
doubtful categories
Up to one year
One to three years
More than three years

15
25
40

Substandard assets
1) A general provision of 10 % on total outstanding should be made without making an
allowance for ECGC guarantee cover and securities available.
2) The unsecured exposures which are identified as substandard would attract additional
provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. However, in view
of certain safeguards such as escrow accounts available in respect of infrastructure lending,
infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20
percent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower
provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows
and also have clear a legal first claim on the cash flow. Provisioning requirement for unsecured
doubtful assets is 100 percent. Unsecured exposure is defined as an exposure where the
41

realizable value of the security, as assessed by the bank/approved values/Reserve Banks

inspection officers is not more than 10 percent, abinitio, of the outstanding exposure. Exposure
shall include all funded and non funded exposure. Security will mean tangible security properly
discharged to the bank and will not include intangible securities like guarantees (including State
government guarantees), comfort letters etc.
3) In order to enhance transparency and ensure correct reflection of the unsecured advances in
Schedule 9 of the banks balance sheet, it is advised that the following would be applicable from
the financial year 2009-10 onwards:a) For determining the amount of unsecured advances for reflecting in schedule 9 of the
published balance sheet, the rights, licenses, authorization, etc., charged to the bann respeks as
collateral in respect of projects (including infrastructure projects) financed by them should not be
reckoned as tangible security. Hence such advances shall be reckoned as unsecured.
b) However, banks may treat annuities under build-operate-transfer (BOT) model in respect of
road-highway projects and tool collection rights, where there are provisions to compensate the
project sponsor if a certain level of traffic is not achieved, as tangible securities subject to the
condition that banks right to receive annuities and tool collection rights is legally enforceable and
irrecoverable.
c) It is noticed that most of the infrastructure projects, especially road/ highway projects are usercharged based, for which the planning commission has published model concession agreements
(MCAs). These have been adopted by various ministers and state governments for their
respective public-private partnership (PPP) projects and they provide adequate comfort to the
lenders regarding security of their debts. In view of the above features , in case of PPP projects
,the debts due to lenders may be considered as secured to extend assured by the project authority
in terms of the concessions agreement , subject to the following conditions:

User charges/toll/tariff payments are in an escrow account where senior lender have

priority over withdraws by the concessionaire ;

There is sufficient risk mitigation, search such as pre-determined increase in user charges

or increase in concession period, in case project revenue are lower than anticipated;
The lenders have right of substitution on case of concessionaire default;

42

The lenders have a right to trigger termination in case of default in debt service;
Upon termination, project authority has obligation of Compulsory buy-out and
Repayment of debt due to pre-determined manner.

d) In all such cases, banks must satisfy themselves about the legal enforceability of the provision
of the tripartite agreement and factor in their past experience in such contracts.
Banks should also disclose the total amount of advances for which intangible securities such as
charge over the rights, licenses, authority etc has been taken as also the estimated value of such
intangible collateral. The disclosure may be made under a separate head in notes to accounts.
This would differentiate such loans from other entirely unsecured loans.

Standard assets
1) The provisioning requirements for all types of types of standard assets stand as below. Banks
should make general provision for standard assets at the following rates for the funded
outstanding on global loan portfolio basis:
a. Direct advances to agriculture and small and micro enterprises (SMEs). Sectors at 0.25 %.
b. Advances to commercial real Estate (CRE) sector at 1.00 %.
c. Advances to commercial real-Estate-residential housing sector (CRE-RH) at 0.75 %.
d. Housing loans extended as teaser rates and restructured advances as indicated in Para 5.9.13
and 12.4 respectively.
e. All other loans and advances not included in (a) (b) and (c) above at .40 %
2. The provisions on standard assets should not be reckoned for arriving at net NPAs.
3. The provisions towards standard assets need not be netted from gross advances but shown
separately as contingent provision against standard assets under other liabilities and provisions
others in schedule 5 of the balance sheet.

43

4. It is clarified that the medium enterprises will attract .40% standard asset provisioning. The
definition of the terms micro enterprises, small enterprises and medium enterprises shall be in
terms of master circular RPCD SME & NFS. BC.11 /06.02.31/2012-13 dated July 2, 2012 on
lending to micro, small & medium enterprises (MSME) sector.

INDIAN ECONOMY AND NPAs

Undoubtedly the world economy has slowed down, recession is at its peak, globally stock
markets have tumbled and business itself is getting hard to do. The Indian economy has been
much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system,
cutting of exposures to emerging markets by FIIs, etc.

Further, international rating agencies like, Standard & Poor have lowered India's credit rating to
sub-investment grade. Such negative aspects have often outweighed positives such as increasing
forex reserves and a manageable inflation rate.

Under such a situation, it goes without saying that banks are no exception and are bound to
face the heat of a global downturn. One would be surprised to know that the banks and
financial institutions in India hold non-performing assets worth Rs. 1,10,000 crores. Bankers
have realized that unless the level of NPAs is reduced drastically, they will find it difficult to
survive.

The actual level of Non Performing Assets in India is around $40 billion much higher than
governments estimation of $16 billion. This difference is largely due to the discrepancy in
accounting the NPAs followed by India and rest of the world. The Accounting norms of the
India are less stringent than those of the developed economies. the Indian banks also have the
tendency to extend the past dues. Considering the GDP of India nearly $470 billion, the NPAs
are 8% of total GDP, which was better than the many Asian countries. the NPA of china was
45%of the GDP, while Japan had NPAs of 25% of the GDP and Malaysia had 42%.

44

The aggregate level of the NPAs in Asia has increased from $1.5 billion in 2000 to $2 billion
in 2002.looking to such overall picture of the market, we can say that India is performing
well and the steps taken are looking favorable.

UNDERLYING REASONS FOR NPAs IN INDIA

An internal study conducted by RBI shows that in the order of prominence, the following
factors contribute to NPAs.

Internal Factors

Diversion of funds for

a)Expansion/diversification/modernization
b) Taking up new projects
c) Helping / promoting associate concerns time/cost overrun during the project
implementation stage

Business (product, marketing, etc.) failure

Inefficiency in management
Slackness in credit management and monitoring
Inappropriate technology/technical problems
Lack of co-ordination among lenders

External Factors

Recession

Input/power shortage

Price escalation
45

Exchange rate fluctuation

Accidents and natural calamities, etc.

Changes in Government policies in excise/ import duties, pollution control orders, etc.
As mentioned earlier, we held discussions with lenders and financial sector

experts on the causes of NPAs in India and whilst the above-mentioned causes were reaffirmed,
some others were also mentioned. A brief discussion is provided below.

Liberalization of economy/removal of restrictions/reduction of tariffs

A large number of NPA borrowers were unable to compete in a competitive market in
which lower prices and greater choices were available to consumers. Further, borrowers
operating in specific industries have suffered due to political, fiscal and social.compulsions,
compounding pressures from liberalization (e.g., sugar and fertilizer industries)

Lax monitoring of credits and failure to recognize Early Warning Signals

It has been stated that approval of loan proposals is generally thorough and each proposal passes
through many levels before approval is granted. However, the monitoring of sometimescomplex credit files has not received the attention it needed, which meant that early warning
signals were not recognised and standard assets slipped to NPA category without banks being
able to take proactive measures to prevent this. Partly due to this reason, adverse trends in
borrowers' performance were not noted and the position further deteriorated before action was
taken.

Over optimistic promoters

Promoters were often optimistic in setting up large projects and in some cases were not
fully above board in their intentions. Screening procedures did not always highlight these issues.
Often projects were set up with the expectation that part of the funding would be arranged from
the capital markets, which were booming at the time of the project appraisal. When the capital
markets subsequently crashed, the requisite funds could never be raised, promoters often lost
interest and lenders were left stranded with incomplete/unviable projects.
46

Directed lending
Loans to some segments were dictated by Government's policies rather than commercial
imperatives.

Highly leveraged borrowers

Some borrowers were under capitalized and over burdened with debt to absorb the changing
economic situation in the country. Operating within a protected market resulted in low
appreciation of commercial/market risk.

Funding mismatch
There are said to be many cases where loans granted for short terms were used to fund long
term transactions.

High Cost of Funds

Interest rates as high as 20% were not uncommon. Coupled with high leveraging and
falling demand, borrowers could not continue to service high cost debt.

47

EXISTING SYSTEMS/PROCEDURES FOR NPA

IDENTIFICATION AND RESOLUTION IN INDIA
Internal Checks & Control
Since high level of NPAs dampens the performance of the banks identification of potential
problem accounts and their close monitoring assumes importance.

Though most banks have Early Warning Systems (EWS) for identification of potential NPAs,
the actual processes followed, however, differ from bank to bank.
The EWS enable a bank to identify the borrower accounts which show signs of credit
deterioration and initiate remedial action. Many banks have evolved and adopted an elaborate
EWS, which allows them to identify potential distress signals and plan their options beforehand,
accordingly. The early warning signals, indicative of potential problems in the accounts, viz.
persistent irregularity in accounts, delays in servicing of interest, frequent devolvement of
L/Cs, units' financial problems, market related problems, etc. are captured by the system. In
addition, some of these banks are reviewing their exposure to borrower accounts every quarter
based on published data which also serves as an important additional warning system. These
early warning signals used by banks are generally independent of risk rating systems and asset
classification norms prescribed by RBI.

The major components/processes of a EWS followed by banks in India as brought out by a

study conducted by Reserve Bank of India at the instance of the Board of Financial Supervision
are as follows:
i)

Designating Relationship Manager/ Credit Officer for monitoring account/s ii)

Preparation of `know your client' profile

iii)

Credit rating system

iv)

Identification of watch-list/special mention category accounts v)

Monitoring of early warning signals

48

Relationship Manager/Credit Officer

The Relationship Manager/Credit Officer is an official who is expected to have complete
knowledge of borrower, his business, his future plans, etc. The Relationship Manager has to keep
in constant touch with the borrower and report all developments impacting the borrowal account.
As a part of this contact he is also expected to conduct scrutiny and activity inspections. In the
credit monitoring process, the responsibility of monitoring a corporate account is vested with
Relationship Manager/Credit Officer.

Know your client' profile (KYC)

Most banks in India have a system of preparing `know your client' (KYC) profile/credit report.
As a part of `KYC' system, visits are made on clients and their places of business/units.
The frequency of such visits depends on the nature and needs of relationship.

Credit Rating System

The credit rating system is essentially one point indicator of an individual credit exposure and
is used to identify measure and monitor the credit risk of individual proposal. At the
whole bank level, credit rating system enables tracking the health of banks entire credit
portfolio.
Most banks in India have put in place the system of internal credit rating. While most of the
banks have developed their own models, a few banks have adopted credit rating models
designed by rating agencies. Credit rating models take into account various types of risks viz.
financial, industry and management, etc. associated with a borrowal unit. The exercise is
generally done at the time of sanction of new borrowal account and at the time of review /
renewal of existing credit facilities.

49

Watch-list/Special Mention Category

The grading of the bank's risk assets is an important internal control tool. It serves the need of
the Management to identify and monitor potential risks of a loan asset. The purpose of
identification of potential NPAs is to ensure that appropriate preventive / corrective steps could
be initiated by the bank to protect against the loan asset becoming non-performing. Most of the
banks have a system to put certain borrowal accounts under watch list or special mention
category if performing advances operating under adverse business or economic conditions are
exhibiting certain distress signals. These accounts generally exhibit weaknesses which are
correctable but warrant banks' closer attention. The categorisation of such accounts in watch
list or special mention category provides.early warning signals enabling Relationship
Manager or Credit Officer to anticipate credit deterioration and take necessary preventive
steps to avoid their slippage into non performing advances.

Early Warning Signals

It is important in any early warning system, to be sensitive to signals of credit deterioration. A
host of early warning signals are used by different banks for identification of potential
NPAs. Most banks in India have laid down a series of operational, financial, transactional
indicators that could serve to identify emerging problems in credit exposures at an early stage.
Further, it is revealed that the indicators which may trigger early warning system depend not
only on default in payment of installment and interest but also other factors such as
deterioration in operating and financial performance of the borrower, weakening industry
characteristics, regulatory changes, general economic conditions, etc.
Early warning signals can be classified into five broad categories viz. (a) financial (b)
operational (c) banking (d) management and (e) external factors. Financial related
warning

signals

generally

emanate

from

the

borrowers'

balance

sheet,

income

expenditure statement, statement of cash flows, statement of receivables etc. Following common
warning signals are captured by some of the banks having relatively developed EWS.

50

Management related warning signals

Evidence of aged inventory/large level of inventory

Lack of co-operation from key personnel

Change in management, ownership, or key personnel

Desire to take undue risks

Family disputes

Poor financial controls

Banking related signals

Declining bank balances/declining operations in the account

Opening of account with other bank

Return of outward bills/dishonored cheques

Sales transactions not routed through the account

Frequent requests for loan

Frequent delays in submitting stock statements, financial data, etc.

Signals relating to external factors

Economic recession

Emergence of new competition

Emergence of new technology

Changes in government / regulatory policies

Natural calamities

51

2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various resolution
mechanisms introduced in the recent past which include the SRFAESI Act, one time settlement
schemes, setting up of the CDR mechanism, strengthening of DRTs.

From the data available of Public Sector Banks as on March 31, 2003, there were
1,522 numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50
million in all the public sector banks in India. The total gross value of these NPAs amounted to
Rs. 215 billion.

The total number of resolution approaches (including cases where action is to be

initiated) is greater than the number of NPAs, indicating some double counting. As can be
seen, suit filed and BIFR are the two most common approaches to resolution of NPAs in public
sector banks. Rehabilitation has been considered/adopted in only about 13% of the cases.
Settlement has been considered only in 9% of the cases. It is likely to have been adopted in
even fewer cases. Data available on resolution strategies adopted by public sector banks
suggest that Compromise settlement schemes with borrowers are found to be more effective
than legal measures. Many banks have come out with their own restructuring schemes
for settlement of NPA accounts.

3.Credit Information Bureau

State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information Services
(India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of information
between banks and FIs for curbing the growth of NPAs incorporated credit Information Bureau
(India) Limited (CIBIL) in January 2001. Pending the enactment of CIB Regulation Bill, the
RBI constituted a working group to examine the role of CIBs. As per the recommendations
of the working group, Banks and FIs are now required to submit the list of suit-filed cases of
Rs. 10 million and above and suitfiled cases of willful defaulters of Rs. 2.5 million and above

52

to RBI as well as CIBIL. CIBIL will share this information with commercial banks and FIs
so as to help them minimize adverse selection at appraisal stage. The CIBIL is in the
process of getting operationalised.
4.

Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default and

diversion and siphoning of funds. As per these guidelines a willful default occurs when a
borrower defaults in meeting its obligations to the lender when it has capacity to honor the
obligations or when funds have been utilized for purposes other than those for which finance
was granted. The list of willful defaulters is required to be submitted to SEBI and RBI to
prevent their access to capital markets. Sharing of information of this nature helps banks in
their due diligence exercise and helps in avoiding financing unscrupulous elements. RBI has
advised lenders to initiate legal measures including criminal actions,
wherever required, and undertake a proactive approach in change in management, where
appropriate.

5. Legal and Regulatory Regime

A. Debt Recovery Tribunals

DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions
Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal
(DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with
competence to entertain cases referred to them, by the banks and FIs for recovery of debts due
to the same. The order passed by a DRT is appealable to the Appellate Tribunal but no appeal
shall be entertained by the DRAT unless the applicant deposits 75% of the amount due from
him as determined by it. However, the Affiliate Tribunal may, for reasons to be received in
writing, waive or reduce the amount of such deposit. Advances of Rs. 1 mn and above can be
settled through DRT process.

53

An important power conferred on the Tribunal is that of making an interim order

(whether by way of injunction or stay) against the defendant to debar him from transferring,
alienating or otherwise dealing with or disposing of any property and the assets belonging to
him within prior permission of the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticised in respect of recovery made considering the size of NPAs in the
Country. In general, it is observed that the defendants approach the High Country challenging
the verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the
Act is often challenged in the court which hinders the progress of the DRTs. Lastly, many
needs to be done for making the DRTs stronger in terms of infrastructure.

B. Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act,
1987 helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counselling between the parties
and to reduce burden on the court, especially for small loans. Cases involving suit claims upto
Rs. l million can be brought before the Lokadalat and every award of the Lokadalat shall be
deemed to be a decree of a Civil Court and no appeal can lie to any court against the award
made by the Lokadalat.
Several people of particular localities/ various social

organisations

are

approaching

Lokadalats which are generally presided over by two or three senior persons including retired
senior civil servants, defense personnel and judicial officers. They take up cases which are
suitable for settlement of debt for certain consideration. Parties are heard and they explain their
legal position. They are advised to reach to some settlement due to social pressure of senior
bureaucrats or judicial officers or social workers. If the compromise is arrived at, the parties to
the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to
obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is
not adhered to by the parties, the suits pending in the court will proceed in accordance with
the law and parties will have a right to get the decree from the court.

54

In general, it is observed that banks do not get the full advantage of the
Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise
on the day when the Lokadalat meets. In any case, we should continue our efforts to seek the
help of the Lokadalat.
C.Enactment of SRFAESI Act
The "The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework
for setting up Asset Reconstruction Companies (ARCs) in India. In addition to asset
reconstruction and ARCs, the Act deals with the following largely aspects, viz.

Securitisation and Securitisation Companies

Enforcement of Security Interest

Creation of a central registry in which all securitization and asset reconstruction

transactions as well as any creation of security interests has to be filed.

The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has
issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003
for regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover
various aspects relating to registration, operations and funding of ARCS and resolution of
NPAs by ARCS. The RBI has also issued guidelines to banks and financial institutions on
issues relating to transfer of assets to ARCS, consideration for the same and valuation of
instruments issued by the ARCS. Additionally, the Central Government has issued the security
enforcement rules ("Enforcement Rules"), which lays down the procedure to be followed by a
secured creditor while enforcing its security interest pursuant to the Act.

The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their
security interest in relation to the underlying security without reference to the Court after
giving a 60 day notice to the defaulting borrower upon classification of the corresponding
financial assistance as a non-performing asset. The Act permits the secured creditors to take
any of the following measures:

Take over possession of the secured assets of the borrower including right to
55

transfer by way of lease, assignment or sale;

Take over the management of the secured assets including the right to
transfer by way of lease, assignment or sale;

Appoint any person as a manager of the secured asset (such person could be
the ARC if they do not accept any pecuniary liability); and

Recover receivables of the borrower in respect of any secured asset which has
been transferred.

After taking over possession of the secured assets, the secured creditors are required to obtain
valuation of the assets. These secured assets may be sold by using any of the following routes
to obtain maximum value.

By obtaining quotations from persons dealing in such assets or otherwise

interested in buying the assets;

By inviting tenders from the public;

By holding public auctions; or

By private treaty.

Lenders have seized collateral in some cases and while it has not yet been
possible to recover value from most such seizures due to certain legal hurdles, lenders are now
clearly in a much better bargaining position vis-a-vis defaulting borrowers than they were
before the enactment of SRFAESI Act. When the legal hurdles are removed, the bargaining
power of lenders is likely to improve further and one would expect to see a large number of
NPAs being resolved in quick time, either through security enforcement or through
settlements.

Asset Reconstruction Companies

Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The Act
designates any person holding not less than 10% of the paid-up equity capital of the ARC as a
sponsor and prohibits any sponsor from holding a controlling interest in, being the holding
company of or being in control of the ARC. The SRFAESI and SRFAESI Rules/

56

Guidelines require ARCS to have a minimum net-owned fund of not

less than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an
ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets.

ARCS have been granted a maximum realisation time frame of five years from the date of
acquisition of the assets. The Act stipulates several measures that can be undertaken by ARCs
for asset reconstruction. These include:
a)

Enforcement of security interest;

b)

Taking over or changing the management of the business of the borrower;

c)

The sale or lease of the business of the borrower;

d)

Settlement of the borrowers' dues; and e)

Restructuring or rescheduling of debt.

ARCS are also permitted to act as a manager of collateral assets taken over by the lenders
under security enforcement rights available to them or as a recovery agent for any bank or
financial institution and to receive a fee for the discharge of these functions. They can also be
appointed to act as a receiver, if appointed by any Court or DRT.

D. Institution of CDR Mechanism

The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for
resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism
instituted in India is broadly along the lines of similar systems in the UK, Thailand,
Korea and Malaysia. The objective of the CDR mechanism has been to ensure timely and
transparent restructuring of corporate debt outside the purview of the Board for Industrial and
Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is
intended to preserve viable corporates affected by certain internal/external factors and
minimise losses to creditors/other stakeholders through an orderly and coordinated
restructuring programme.

57

RBI has issued revised guidelines in February 2003 with respect to the CDR
mechanism. Corporate borrowers with borrowings from the banking system of Rs. 20 crores
and above under multiple banking arrangement are eligible under the CDR mechanism.
Accounts falling under standard, sub-standard or doubtful categories can be considered for

restructuring. CDR is a non-statutory mechanism based on debtor-creditor agreement and

inter-creditor agreement.
Restructuring helps in aligning repayment obligations for bankers with the cash flow
projections as reassessed at the time of restructuring. Therefore it is critical to prepare a
restructuring plan on the lines of the expected business plan alongwith projected cash flows.

The CDR process is being stabilized. Certain revisions are envisaged with respect to
the eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks
are not members of the CDR forum, and it is expected that they would be signing the
agreements shortly. However they attend meetings. The first ARC to be operational in IndiaAsset Reconstruction Company of India (ARGIL) is a member of the CDR forum. Lenders in
India prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender
arrangements and to increase transparency in the process. While in the RBI guidelines it
has been recommended to involve independent consultants, banks are so far resorting to their
internal teams for recommending restructuring programs.
As of March 31, 2003, 60 cases worth Rs. 44,369 crores had been referred to the
CDR, of which 29 cases worth Rs. 29,167 crores have been approved for restructuring.

58

E. Compromise Settlement Schemes

One Time Settlement Scheme
RBI has issued guidelines under the one time settlement scheme which will cover all NPAs in
all sectors, which have become doubtful or loss as on 31st March 2000. The scheme also covers
NPAs classified as sub-standard as on 31st March 2000, which have subsequently become
doubtful or loss. All cases on which the banks have initiated action under the SRFAESI Act and
also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from
the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance
are not covered.
As per the OTS scheme, for NPAs upto Rs. 10 crores, the minimum amount that should be
recovered should be 100% of the outstanding balance in the account. For NPAs above Rs. 10
crores the CMDs of the respective banks should personally supervise the settlement of NPAs
on a case to case basis, and the Board of Directors may evolve policy guidelines regarding one
time settlement of NPAs as a part of their loan recovery policy. As on March 31, 2003 under
the OTS scheme for NPAs upto Rs. 10 crores a total of
52,669 applications amounting to Rs. 519 crores were received. Of these recoveries affected
were for 30,888 cases amounting to Rs. 168 crores. For OTS under banks' own scheme the
corresponding recoveries were for 1.62 lakh accounts amounting to Rs. 1,583 crores

59

PUNJAB NATIONAL BANK, CIRCLE OFFICE : KARNAL

(RECOVERY SECTION)
B.O:
DATE:

Amt in Rs.

Name of account & account number

Other connected account if any
Date of advanced
Amount advanced
Activity or purpose
Date & amount of NPA
Present Outstanding
Recoverable Dues as per OTS policy
Memorandum Dues
Provision(upto last quarter)
Limitation
Party offer / OTS amount
Token money received
Repayment schedule of balance OTS amount
Sacrifice
Staff accountability
Mkt Value

NPRV

Detail & Value of primary Security

Detail &Value of collateral Security
Amount of irregularity

Negotiated Settlement Schemes

The RBI/Government has been encouraging banks to design and implement policies for
negotiated settlements, particularly for old and unresolved NPAs. The broad framework for
such settlements was put in place in July 1995. Specific guidelines were issued in May 1999
to public sector banks for one-time settlements of NPAs of small scale sector. This scheme
was valid until September 2000 and enabled banks to recover Rs 6.7 billion from various

60

accounts. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 million
and less. These guidelines were effective until June
2001 and helped banks recover Rs. 26 billion.

F. Increased Powers to NCLTs and the Proposed Repeal of BIFR

In India, companies whose net worth has been wiped out on account of accumulated losses
come under the purview of the Sick Industrial Companies Act (SICA) and need to be referred
to BIFR. Once a company is referred to the BIFR (and even if an enquiry is pending as to
whether it should be admitted to BIFR), it is afforded protection against recovery proceedings
from its creditors. BIFR is widely regarded as a stumbling block in recovering value
fromNPAs. Promoters systematically take refuge in SICA - often there is a scramble to file a
reference in BIFR so as to obtain protection from debt recovery proceedings. The recent
amendments to the Companies Act vest powers for revival and rehabilitation of companies
with the National Company Law Tribunal (NCLT), in place of BIFR, with modifications to
address weaknesses experienced under the SICA provisions.
The NCLT would prepare a scheme for reconstruction of any sick company and there is no bar
on the lending institution of legal proceedings against such company whilst the scheme is
being prepared by the NCLT. Therefore, proceedings initiated by any creditor seeking to
recover monies from a sick company would not be suspended by a reference to the NCLT
and, therefore, the above provision of the Act may not have much relevance any longer and
probably does not extend to the tribunal for this reason. However, there is a possibility of
conflict between the activities that may be undertaken by the ARC, e.g. change in
management, and the role of the NCLT in restructuring sick companies.
The Bill to repeal SICA is currently pending in Parliament and the process of staffing of NCLTs
has been initiated. This is expected to make recovery proceedings faster.

APPROPRIATENESS OF THE EXISTING SYSTEMS

Most of the participant lenders have special NPA management cells at Head Offices for
61

dealing with NPAs. The participants were generally of the view that though time and resources
were adequate for dealing with NPAs, skills needed to be improved upon.

Within the constraints of the existing legal and regulatory environment banks in India
have done a commendable job in bringing down the levels of NPAs in recent years. However,
with the tightening of NPA recognition norms, which would mean early recognition and faster
provisioning of NPAs, banks now need to evolve systems that help them identify potential
NPAs and take quick action to:

Prevent the potential NPA from actually becoming non-performing, and

Avoid increasing their exposure to such potential NPAs.

INTERNATIONAL PRACTICES ON NPA MANAGEMENT

Subsequent to the Asian currency crisis which severely crippled the financial system in most
In addition to the above, some of the more recent and aggressive steps to resolve NPAs have
been taken by Taiwan. Taiwanese financial institutions have been encouraged to merge
(though with limited success) and form bank based AMCs through the recent introduction of
Financial Holding Company Act and Financial Institution

Asian countries, the magnitude of NPAs in Asian financial institutions was

brought to light. Driven by the need to proactively tackle the soaring NPA levels the respective
Governments embarked upon a program of substantial reform.
This involved setting up processes for early identification and resolution of NPAs. The table
below provides a cross country comparison of approaches used for NPA resolution.

Mergers Act. Alongside the Ministry of Finance has followed a carrot and stick policy
of specifying the required NPA ratios for banks (5% by end 2003), while also providing
flexibility in modes of NPA asset resolution and a conducive regulatory and tax
environment. Deferred loss write-off provisions have been instituted to provide breathing
space for lenders to absorb NPA write-offs. While it is too early to comment on'lhe success of
62

the NPA resolution process in Taiwan, the early signs are encouraging. Detailed below are the
some key NPA management approaches adopted by banks in South East Asian countries.
1. Credit Risk Mitigation
As part of the overall credit function of the bank, early recognition of loans showing
signs of distress is a key component. Credit risk management focuses on assessing credit risk
and matching it with capital or provisions to cover expected losses from default.
2. Early Warning Systems
Loan monitoring is a continuous process and Early Warning Systems are in place for
staff to continuously be alert for warning signs.

3.Asset Management Companies

To resolve NPA problems and help restore the health and confidence of the financial sector, the
countries in South East Asia have used one broad uniform approach, i.e. they set up
specialised Asset Management Companies (AMCs) to tackle NPAs and put in place Debt
Restructuring mechanism to bring creditors and debtors together, often working along with
independent advisors. This broad approach was locally adapted and used with a varying degree
of efficacy across the region. For example, while in some countries a centralised government
sponsored AMC model has been used, in others a more decentralized approach has been
used involving the creation of several "bank- based" AMCs. Further different countries
have allowed/used different approaches (in- house restructuring versus NPA Sale) to resolve
their NPAs. Additionally, the efficacy of bankruptcy and foreclosure laws has varied in various
countries. A number of factors influenced the successful resolution of NPAs through sale to
AMCs and some of these key factors are discussed below

Increasing willingness to sell NPAs to AMCs

Bottlenecks often persist on account of reluctance of lenders to transfer assets to the
AMCs at values lower than the book value to prevent a hit to their financials. Banks in
Malaysia were encouraged to transfer their assets to Danaharta - AMC in Malaysia by
providing them with upside sharing arrangements and the facility to defer the write-off of

63

financial loss on transfer for 5 years. These incentives coupled with the directive of the Central
Bank to make adjustments in the book values of the assets not transferred to Danaharta (after
Danaharta identifies them) were sufficient to ensure effective sale to the AMC. In Taiwan, there
is a regulatory requirement to reduce for banks to reduce NPAs to
5% by the end of 2003. Consequently there is an increasing number of NPA auctions by the
banks.
Effective resolution strategy
A significant dimension influencing NPA resolution and investor participation is the ease of
implementation of recovery strategies. AMCs like Danaharta have been provided with a strong
platform to affect the resolution of NPAs with clearly laid down creditor's rights. Danaharta
has been allowed to foreclose property without reference to the Court and thus has been able
to dispose collateral swiftly by using the tender route. Special resolution mechanisms that have
involved minimal intervention of the Court have also served to entice investor interest in the
NPA market in certain countries like Taiwan. On the other hand the operations of Thailand
Asset Management Corporation, the Government owned AMC, have been hindered by
deficiencies in the Bankruptcy Law provisions.
Appointment of Special Administrators
In Malaysia, it has been able to exercise considerable influence over the restructuring process
through the appointment of special administrators that have prepared workout plans and
have exercised management control over the assets of the borrower during plan preparation
and implementation stages. The restructuring process affected by the automatic moratorium
that comes into place at the time of the administrators appointment

4. out of court restructuring

Most Asian countries adopted out of court restructuring mechanism to minimize
courtintervention

and speed up restructuring of potentially viable entities.

Internationally, restructuring of NPAs often involves significant operational restructuring in

addition to financial restructuring. The operational restructuring measures typically include the
following areas:
64

 Revenue enhancement
Cost reduction
Process improvement
Working capital management
Sale of redundant/surplus assts
Once the restructuring measures have been agreed by stakeholders, a complete
restructuring plan is prepared which takes into account all the agreed restructuring measures.
This includes establishment of a timetable and assignment of responsibilities. Usually, lenders
will also establish a protocol for monitoring of progress on the operational restructuring
measures. This would typically involve the appointment of an independent monitoring agency.
As seen from the Asian experience, in general, NPA resolution has been most
successful when

Flexibility in modes of asset resolution (restructuring, third party sales)

has been provided to lenders.

Conducive and transparent regulatory and tax environment, particularly

pertaining to deferred loss write offs, Foreign Direct Investment and

bankruptcy/foreclosure processes has been put in place.

Performance targets set for banks to get them to resolve NPAs by a certain

deadline.

Objective of the study

The objective of the making report is:

To know why NPAs are the great challenge to the Public Sector bank.

To know what steps are being taken by the Indian banking sector to reduce the NPAs?

65

To evaluate the comparative ratios of the Public Sector Banks with concerned to
the NPAs.

Review of literature
A number of studies related to performance and overdues of banking sector
have been conducted by many researchers and institutions in India. An
analytical attempt is being made to review some related works done to
organize them in a presentable form.
I.

Studies Prior to Financial Sector Reforms (1991):

The Maclegan Committee (1914), which is the historical document in the

annals of cooperative movement, has examined the performance of credit
cooperatives. It stated that when the funds are kept rotating, any loaning
66

function of the bank can gear up successfully and serve very useful purpose.
Unless the loans are repaid punctually, cooperation is both financially and
educationally an illusion.
Kalyani (1970) emphasized on a longer period for the repayment of long term
loans in India. He added that the total burden of interest would be relatively
higher in the long period than in the shorter period, but then this burden
would be spread over quite a long period, making it easier for the borrower
to repay his loan in easy instalments, thereby resulting in lesser overdues.
The All India Rural Credit Review Committee (1972) strongly stated that there
is an utter lack of administrative supervision, staff of right type and the
requisite scale of and, therefore, a full check on the utilization of loans is
rather difficult. Further it pointed out that the cooperative system had
remained stagnant both in respect of coverage of credit as well as borrowing
members as proportion to the total number of members. Cooperative credit
was short of standards of timeliness, adequacy and dependability. Generally
the overdues were heavy and were rising from year to year.
Datey, the Chairman of the Report of the study team on overdues in
cooperative credit institutions (1974) studied the problem of overdues in
cooperative banks and remarked. About three fourths of overdues arose due
to willful default besides internal reasons. And he suggested that stern
action on recalcitrant borrowers should be taken up.

67

Economic Survey (2005-2006), Monetary and Banking Developments:

According to this survey, the target for institutional credit for agriculture by
all the agencies was fixed at Rs.105,000 crores for the year 200405,ensuring 30% growth over previous years achievement. The overall
achievement by all agencies during 2004-05 was 1,15,243 crores, equivalent
to 32% growth over the previous years achievement. It further highlighted
that while the Commercial Banks and Regional Rural Banks over performed
vis--vis their target of Rs 57000 crores and 8500 crores, there was a
shortfall of over Rs.8000 crores by Cooperative Banks vis--vis their target of
39,000 crores, attributing the same to low resource base and inefficient
recovery system, thereby leading to excessive Overdues. The position of
NPAs has significantly improved in Scheduled Commercial Banks due to
wider options available to these for recovery of their dues on one hand and
sale of their NPAs to Asset Reconstruction Co(India) limited (ARCIL) on the
other hand. This resulted in NPAs declining by 6487 crores between March
2004 and end March 2005.
Bagchi, (2006). made an attempt to analyze the performance of Cooperative
Credit Institutions especially Primary Agriculture Credit Societies, and
observed that PACS could not match up to the increasing requirements of
growth dimensions in the Agri /Rural developments in the Post Independence
Period, although till the late 50s, they were the only available source of
institutional rural finance. According to the RBI Report on Trend and Progress
of Banking in India 2004-05, released on 24-11-05, the Cooperative Credit
Institutions had extended an amount of Rs.39, 638 crores to Agri-Allied
sectors i.e., about half of credit advanced by Commercial Banks (72,886
crores) and double the amount advanced by RRBs (11,718 crores). The
dismal performance of Cooperative Banks was due to unnecessary State
Government intervention and above all the inefficient loan recovery system
leading to NPAs.

This section provides an overview of some of the existing literature

with regard to the NPA. This literature review helps me to better
understanding of both research topics and of the existing gap:

68

Khedekar Pooja S. (2012) A strong Banking Sector is essential for a

flourishing economy.
Indian banking sector emerged stronger during 2010-11 in the
aftermath of global financial meltdown of 2008-10 under the
watchful eye of its regulator. The level of NPA's act as an indicator
showing the credit risks & efficiency of allocation of resource. NPA
involves the necessity of provisions, any increase in which bring
down the overall profitability of banks. An excessive rise in interest
rates over the past 18 months has led to a sharp increase in nonperforming assets. This not only affects the banks but also the
economy as a whole. This paper deals with understanding the
concept of NPA, the causes and overview of different sectors in
India.
Selvarajan B.and Vadivalagan, G.(2012)
Over the few years Indian banking, attempts to integrate with the
global banking has been facing lots of hurdles in its way due to
certain inherent weakness, despite its high sounding claims and
lofty achievements. In a developing country, banking is seen as an
important instrument of development, while with the demanding
Non-Performing Assets(NPAs), banks have become burden on the
economy. Non-Performing Assets are not merely non remunerative,
but they add cost to the credit Management. The fear of NonPerforming Assets permeates the psychology of bank managers in
entertaining new projects for credit expansion. Non-Performing
Assets is not a dilemma facing exclusively the bankers; it is in fact
an all pervasive national scourge swaying the entire Indian
economy. Non Performing Asset is a sore throat of the Indian
economy as a whole. Non Performing Assets have affected the
profitability, liquidity and competitive functioning of banks and
developmental of financial institutions and finally the psychology of
the bankers in respect of their disposition towards credit delivery
and credit expansion. NPAs do not generate any income for the
banks, but at the same time banks are required to make provisions
for such NPAs from their current profits. Apart from internal and
69

external complexities, increases in NPAs directly affects banks'

profitability sometimes even their existence.
Meeker Larry G. and Gray Laura (1987)
in 1983, the public was given its first opportunity to review bank
asset quality in the form of non-performingasset information. The
purpose of this study is to evaluate that information. A regression
analysis comparing the non-performing asset statistics with
examiner classifications of assets suggests that the non-performing
asset information can be a useful aid in analyzing the asset quality
of banks, particularly when the information is timely.
PaulPurnendu, Bose,Swapan andDhalla, Rizwan S.(2011)
In this paper we attempt to measure the relative efficiency of Indian
PSU banks on overall financial performances. Since, the financial
industry in a developing country like India is undergoing through a
very dynamic pace of restructuring, it is imperative for a bank to
continuously monitor their efficiency on Non-Performing Assets,
Capital Risk-Weighted Asset Ratio, Business per Employee, Return
on Assetsand Profit per Employee. Here, Non-Performing Assets is
a negative financial indicator. To prove empirically, we propose a
framework to measure efficiency of Indian public sector banks.
Veerakumar, K.(2012)
The Indian banking sector has been facing serious problems of
Raising Non-Performing Assets (NPAs). Like a canker worm, NPAs
have been eating the banking industries from within, since
nationalization of banks in 1969. NPAs have choked off quantum of
credit, restriction the recycling of funds and leads to asset-liability
mismatches. It also affected profitability, liquidity and solvency
position of the Indian banking sector. One of the major reasons for
NPAs in the banking sector is the 'Direct Lending System' by the
RBI under social banking motto of the Government, under which
scheduled commercial banks are required to lend 40% of their total
credit to priority sector.

70

The banks who have advanced to the priority sector and reached
the target suffocated on account of raising NPAs, since long. The
priority sector NPAs have registered higher growth both in
percentage and in absolute terms year after year. The present
paper is an attempt to study the priority sector advances by the
public, private and foreign bank group-wise, target achieved by
them and a comparative study on priority and non-priority sector
NPAs over the period of 10 years between 2001-02 and 2010-11.
This paper also aims to find out the categories of priority sector
advances which contribute to the growth of total priority sector NPAs
during the period under study.
Murthy, K. V. BhanuGupta, Lovleen.(2012)
One of the major reasons cited for this state of health of banking
industry has been the persistence of 'Non-performing Assets'
(NPAs). In this study the focus is on the impact of liberalization on
the non-performing assets of the four banking segments, namely,
public sector, old private sector, new private sector and foreign
banks by studying the overall trends in NPAs. We have used the
Structure-Conduct-Performance (S-C-P) approach that shows the
relationship between competition and conduct, concentration and
growth in NPAS. Our results show that on an average across the
banking industry segments, average non-performing assetsin the
past 11 years have been declining at the rate of 13% p.a.
compounded growth rate. The old private sector banks' Non
performing assets have reduced at the rate of 11.98% and that of
public sector banks have declined at the rate of 18% and foreign
banks at 11.4%. Though new private sector banks and the foreign
banks seem to be more efficient but their conduct does not show
consistency and stability

Joseph, Mabvure Tendai Edson, Gwangwava (2012)

The purpose of the study was to find out the causes of nonperforming loans in Zimbabwe. Loans form a greater portion of the
71

total assetsin banks. These assetsgenerate huge interest income

for banks which to a large extent determines the financial
performance of banks. However, some of these loans usually fall
into non-performingstatus and adversely affect the performance of
banks. In view of the critical role banks play in an economy, it is
essential to identify problems that affect the performance of these
institutions. This is because non-performing loans can affect the
ability of banks to play their role in the development of the economy.
A case study research design of CBZ Bank Limited was employed.
Interviews and questionnaires were used to collect data for the
study. The paper revealed that external factors are more prevalent
in causing non-performing loans in CBZ Bank Limited. The major
factors causing nonperforming loans were natural disasters,
government policy and the integrity of the borrower.
Toor N.S.(1994) stated that recovery of non-performing as-sets
through the process of compromise by direct talks rather than by the
lengthy and costly procedure of litigation. He suggested that by
constant monitoring, it is possible to detect, the sticky accounts ,the
incipient sickness of the early stages itself and an attempt could be
made to review the unit and put it back on the road to recovery
S.N. Bidani (2002)
Non-performing Assets are the smoking gun threatening the very
stability of Indian banks. NPAs wre
ck a banks profitability both through a loss of interest
income and write-off of the principal loan amount itself. This is
definitive book which tackles the subject of managing bank NPAs in
its entirely, starling right from the stage of their identification till the
recovery of dues in such ac-counts.

Debarsh and Sukanya Goyal (2012)

emphasized on management of non-performing assets in the
perspective of the public sector banks in India under strict asset
72

classification norms, use of latest technological platform based on

Core Banking Solution, recovery procedures and other bank specific
indicators in the context of stringent regulatory framework of the
RBI. Non-performing Asset is an important parameter in the analysis
of financial performance of a bank as it results in decreasing margin
and higher provisioning requirements for doubtful debts. The
reduction of non-per-forming asset is necessary to Improve
profitability of banks and comply with the capital adequacy norms as
per the Basel Accord.
Kavitha. N(2012), emphasized on the assessment of nonperforming assets on profitability its magnitude and impact. Credit of
total advances was in the formof doubtful assets in the past and has
an adverse impact on profitability of all Public Sector Banks affected
at very large extent when non-performing assets work with other
banking and also affect productivity and efficiency of the banking
groups. The study observed that there is increase in advances over
the period of the study.

73

RESEARCH METHODOLOGY
TYPE OF STUDY

DESCRIPTIVE

SAMPLE

PUNJAB NATIONAL BANK

DATA COLLECTION

SECONDARY DATA

SAMPLING UNIT

5 YEARS DATA FROM ANNUAL

REPORT OF PANJAB NATIONAL
BANK

74

Limitations of the study

The limitations that I felt in my study are:

It was critical for me to gather the financial data of the every bank of the Public Sector
Banks so the better evaluations of the performance of the banks are not possible.

Since my study is based on the secondary data, the practical operations as related to
the NPAs are adopted by the banks are not learned.

Since the Indian banking sector is so wide so it was not possible for me to cover all
the banks of the Indian banking sector.

75

RATIO ANALYSIS
The relationship between two related items of financial statements is known as ratio. A ratio is
just one number expressed in terms of another. The Ratio is customarily expressed in three
different ways. It may be expressed as a proportion between the two figures. Second it may be
expressed in terms of percentage. Third, it may be expressed in terms of rates.

The use of ratio has become increasingly popular during the last few years only. Originally, the
bankers used the current ratio to judge the capacity of the borrowing business enterprises to
repay the loan and make regular interest payments. Today it has assumed to be important tool
that anybody connected with the business turns to ratio for measuring the financial strength and
the earning capacity of the business.

RATIOS CALCULATED IN REPORT:1. Gross NPA Ratio.

2. Net NPA Ratio.
3. Provision Ratio.
4. Capital Adequacy Ratio.

76

GROSS NPA RATIO

Gross NPA ratio is the ratio of gross NPA to gross advances of the bank.
Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI
guidelines .the ratio is to be counted in terms of % and formula for GNPA is as follows:

GROSS NPA
RATIO

GROSS NPA
GROSS ADVANCES

10
0

GROSS NPA RATIO

7.00%
6.00%
5.00%
4.00%
3.00%
2.00%
1.00%
0.00%

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

77

INTERPRETATION
The table above indicates the quality of credit portfolio of the banks. High gross NPA ratio
indicates the low credit portfolio of bank and vice-a-versa. `

NET NPA RATIO

The net NPA % is the ratio of net NPA to net advances ,in which the provision is to be deducted
from the gross advance. The provision is to be made for NPA account. The formula for that is:

NET NPA
NET NPA
RATIO

NET ADVANCE

10
0

PROVISION

NET NPA RATIO

4.50%
4.00%
3.50%
3.00%
2.50%
2.00%
1.50%
1.00%
0.50%
0.00%

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

78

INTERPRITATION
The ratio indicates the degree of risk in the portfolio of the banks. High NPA ratio indicates the
high quantity of risky assets in the banks for which no provision are made.from the table it
becomes clear that the NPA ratio of almost all the banks have been improved quite well as
compared to the previous year.

PROVISION RATIO
Provisions are to be made for to keep safety against NPA , and it directly affect on the gross
profit of the banks. The provision ratio is nothing but total provision held for NPA to gross NPA
of the banks .the formula for that is

PROVISION
RATIO

TOTAL PROVISION
GROSS

NPAs

100

79

PROVISION RATIO
90.00%
80.00%
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

INTERPRETATION
This ratio indicates the degree of safety majors adopted by the banks. It has direct bearing on the
profitability, dividend and safety of shareholders fund. If the provision ratio is less , it indicates
that the banks has made under provision.

CAPITAL ADEQUACY RATIO

Capital adequacy ratio can be defined as ratio of the capital of the bank, to its assets ,which are
weighted/ adjusted according to risk attached to them.

CAPITAL ADEQUACY
RATIO

CAPITAL
RISK WEIGHTED ASSETS

10
0

80

CAPITAL ADEQUACY RATIO

14.50%
14.00%
13.50%
13.00%
12.50%
12.00%
11.50%

2009-2010 2010-2011 2011-2012 2012-2013 2013-2014 2014-2015

INTERPRETATION
As per prudential norms banks were required to achieve 14.16% CAR increased to 9% by
march 2010.for the purpose of capital adequacy achievement , the capital base i.e. Tire1+Tire2
should not be less than the prescribed % of total risk weighted assets of the bank.
Tire-I:Paid up capital, Statutory Reserve, Revenue capital reserves (excluding revolution
reserve) and other undisclosed reserves LESS accumulated losses till the current year,
investment in subsidiaries, other intangible assets.

Tire-II: Property Revaluation discounted by 55%, Subordinate Loans, Privately placed Bonds,
Hybrid capital, Investment Fluctuation Reserve, provisions on standard assets.

& Capital

should not exceed Tire-I

81

CASES RELATED TO NPA

Case1: This case is related to HUB Sonipat branch.
PUNJAB NATIONAL BANK
CIRCLE OFFICE: KARNAL
( RECOVERY SECTION)

Sr. no.
1
2
3

Particulars
Name of account
Activity
Whether unit is functioning

Remarks
Xyz
Housing OD
Yes
82

4
5
6
7
8
9
10
11
12
13

14
15

Date of original sanction /

date of renewal
Date of NPA
Primary security
Collateral security
Position as on 31.05.2015

Compromise status
Sarfeasi status

Restructuring / rehabilitation
Suit filed decreed status

28-03-2014
14-10-2015
42 lakhs
No
Asset status SS
Balance o/s 11.83
DI/SI
Provision
1.77
No
BM advised to issue
notice u/s 13(2) of
sarfeasi
No
Not yet filed

BM advised to arrange a meeting of the party at the circle office to

explore possibilities for early resolution of account.

INTERPRETATION:
XYZ has taken Housing Loan on 28.03.2014 which, due to non
payment of instalments for 3 months, considered as NPA on
14.10.2014. BM advised to issue notice u/s 13(2) of SARFEASI Act.

Case2: This case is related to Jundla branch.

PUNJAB NATIONAL BANK
CIRCLE OFFICE: KARNAL
( RECOVERY SECTION)

83

Sr. no.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Particulars
Name of account
Activity
Whether unit is functioning
Date of original sanction /
date of renewal
Date of NPA
Primary security
Collateral security
Position as on 31.05.2015

Compromise status
Sarfeasi status
Restructuring / rehabilitation
Suit filed decreed status

Remarks
ABCD
Agriculture
Yes
20-05-2014
26-03-2015
Agriculture land Rs.25.47
lakh
No
Asset status SS
Balance o/s 17.04 lakh
DI/SI
Provision
2.62
No
Not eligible
No
Not yet filed

Party has assured to regularize the account by the end of june, 2015.

INTERPRETATION:
ABCD ha s taken agricultural loan on 25.05.2014 which due to non
payment of instalments for the previous half year, considered as NPA
on 26.03.2015. This account is not eligible for SARFAESI Act .

84

SUGGESTION
Through RBI has introduced number of measures to reduce the problem of increasing NPAs of
the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act,
etc. A lot of measures are desired in terms of effectiveness of these measures. What I would like
to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as under.

(1)

Each bank should have its own independent credit rating agency which
should evaluate the financial capacity of the borrower before than credit facility.

85

(2)

The credit rating agency should regularly evaluate the financial condition of
the clients.

(3)

Special accounts should be made of the clients where monthly loan

concentration reports should be made.

(4)

It is also wise for the banks to carryout special investigative audit of all
financial and business transactions and books of accounts of the borrower
company when there is possibility of the diversion of the funds and
mismanagement.

(5)

The banks before providing the credit facilities to the borrower company
should analyse the major heads of the income and expenditure based on the
financial performance of the comparable companies in the industry to identify
significant variances and seek explanation for the same from the company
management. They should also analyse the current financial position of the
major assets and liabilities.

(6)

Banks should evaluate the SWOT analysis of the borrowing companies i.e. how
they would face the environmental threats and opportunities with the use of
their strength and weakness, and what will be their possible future growth in
concerned to financial and operational performance.

(7)

Independent settlement procedure should be more strict and faster and the
decision made by the settlement committee should be binding both borrowers
and lenders and any one of them failing to follow the decision of the
settlement committee should be punished severely.

(8)

There should be proper monitoring of the restructured accounts because there

86

is every possibility of the loans slipping into NPAs category again.

(9)

Proper training is important to the staff of the banks at the appropriate level
with on going process. That how they should deal the problem of NPAs, and
what continues steps they should take to reduce the NPAs.

(10)

Willful Default of Bank loans should be made a Criminal Offence.

(11)

No loan is to be given to a Group whose one or the other undertaking has

become a Defaulter.

CONCLUSION
A report is not said to be completed unless and until the conclusion is given to the report.
A conclusion reveals the explanations about what the report has covered and what is the
essence of the study. What my project report covers is concluded below.

The problem statement on which I focused my study is NPAs the big challenge before
the Public Sector Banks. The Indian banking sector is the important service sector that
helps the people of the India to achieve the socio economic objective. The Indian
banking sector has helped the business and service sector to develop by providing
them credit facilities and other finance related facilities. The Indian banking sector is
developing with good appreciate as compared to the global benchmark banks. The

87

Indian banking system is classified into scheduled and non scheduled banks. The Public
Sector Banks play very important role in developing the nation in terms of providing
good financial services. The Public Sector Banks have also shown good performance in

the last few years.

The only problem that the Public Sector Banks are facing today is the problem of non
performing assets. The non performing assets means those assets which are classified as
bad assets which are not possibly be returned back to the banks by the borrowers. If the
proper management of the NPAs is not undertaken it would hamper the business of the
banks. 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

funds.
If we analyse the past years data, we may come to know that the NPAs have increased
very drastically after 2001. in 1997 the gross NPAs of the Indian banking sector was
47,300crore where as in 2001 the figure was 63,883 and which increased at faster
rate in 2003 with 94,905crore. The Public Sector Banks involve its nearly 50% of share

in the NPAs.Thus we can imagine how Public Sector Banks are functioning.
The RBI has also been trying to take number of measures but the ratio of NPAs is not
decreasing of the banks. The banks must find out the measures to reduce the evolving
problem of the NPAs. If the concept of NPAs is taken very lightly it would be dangerous
for the Indian banking sector.

QUESTIONNAIRE REGARDING NPA

1. Do you know Punjab National Bank?
(a) Yes
(b) No
2. PNB bank is a
(a) Private Bank
(b) Public Bank
(c) Other Bank
3. What is the current NPA of PNB?
(a) Gross NPA : 2569486
88

(b) Net NPA

: 1539650

4. What are the steps taken by PNB to reduce NPA?

5. Name the bank which comes in your mind at very first &
why?

6. Do you think PNB is a safe place for your money?

(a) Yes
(b) No
7. Your level of satisfaction with PNB

8. If you have option against PNB which bank you will go for?
(a) HDFC
(b) AXIS (c) Others (mention, if any)
9. What is the current provision of PNB?
10. What do you mean by OTS?

11. What do you understand by SARFEASI Act ?

89

BIBLIOGRAPHY
M Y Khan and Public Sector Banks K Jain management Accounting Tata

McGraw-Hill Publishing Company Limited, new Delhi 1999.

Banking Finance (February 2003)
Banking Finance (April 2003)
IBA Bulletin (January 2004), (February 2003), Monthly journal published by
Indian Banks Associations.
Banking Annual (October 2003) published by Business Standard.
www.rbi.org.com
www.google.com

Search:
o Indian Banking Sector
o Nonperforming assets and banking sectors
o Impact of NPAs on the working of the Public Sector Banks
o Steps taken by govt. to reduce the NPAs of the banks

90

ANNEXURE
PNB ANNUAL REPORT 2009-10
http://www.pnbindia.in/upload/en/Annual_Reports_for_2009-10.pdf

PNB ANNUAL REPORT 2010-11

http://www.pnbindia.in/upload/en/Annual_Report_2010_2011.pdf

PNB ANNUAL REPORT 2011-12

file:///C:/Users/Bss/Downloads/PNB_Annual_Report_2012.pdf
PNB ANNUAL REPORT 2012-13
http://pnbindia.in/new/Upload/English/Financials/PDFs/PNBAnualReport201213.pdf

PNB ANNUAL REPORT 2013-14

http://pnbindia.in/new/Upload/English/Financials/PDFs/PNBANNUALREPORT2
01314.pdf

PNB ANNUAL REPORT 2014-2015

http://pnbindia.in/new/Upload/English/Financials/PDFs/PNBANNUALREPORT2
01415.pdf

91

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