PROJECT REPORT

ON
NON PERFORMING ASSETS OF PUNJAB
NATIONAL BANK
SUBMITTED BY

IN THE GUIDANCE OF

NAVPREET SINGH

DR. V.K. KHURANA

07114803914

SENIOR PROFESSOR

DEPARTMENT OF MANAGEMENT
MAHARAJA AGRASEN INSTITUTE OF TECHNOLOGY
(Affiliated to G.G.S.I.P. University)
Sector 22, Rohini, Delhi -110086
An ISO 9001:2008 Certified Institute
AICTE NBA Accredited Institute

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TOPICS
GUIDE CERTIFICATE
ACKNOWLEDGEMENT
ABSTRACT
INTRODUCTION
COMPANY PROFILE
PRODUCTS
LITERATURE REVIEW
RESEARCH METHOLOGY
DATA ANLYSIS
CONCLUSION
REFERENCE

PAGE NO.

Student Undertaking
This is to certify that I ____________________________

had completed

the Project titled title of the project in (name of the company) under the

guidance of Mr./Ms. (Faculty guide) in the partial fulfillment of the

requirement for the award of degree of MBA from Maharaja Agrasen
Institute of Technology (Affiliated to G.G.S.I.P. University), New Delhi.
This is an original piece of work and I had neither copied nor submitted it
earlier elsewhere.
Student Name and Signature
Course
Dated -

CERTIFICATE FROM GUIDE

This

is

to

certify

that

the

project

titled

_____________________________ is an academic work done by

________________________ submitted in the partial fulfillment of the
requirement for the award of the Degree of MBA from Maharaja Agrasen
Institute of Technology (Affiliated to G.G.S.I.P. University), New Delhi
under my guidance and direction. To the best of my knowledge and belief
the data and information presented by him/her in the project has not been
submitted earlier.
Name and signature of Faculty Guide
Designation

ACKNOWLEDGEMENT

I would like to thank all those who helped me through the project of
familiarization I would like to express my sincere appreciation to my guide
________________ for his enlightenment of my knowledge of feedback and
the Banking industry, valuable advice and kind support throughout the
process of dissertation completion
Most importantly, I would like to thank my parents and sister who were
always there to motivate me.

I would like to thank all the focus group

members for giving their valuable time and thoughts to my project.

I would like to thank all the customers and employees of Bank for sharing
their valuable thoughts which helped me shape this project

ABSTRACT

NPA plays an important role in performance measurement of any bank as it

reduces the overall profitability of the bank. In this research paper the
performance of the two public banks i.e. State Bank of India and Punjab
National Bank in concern with NPA management is evaluated. Through this
paper, it has been try to analyze how efficiently these two public sector
banks are managing their NPAs with the help of various financial and
statistical tools.

CHAPTER
1
INTRODUCTION

INDIAN BANKING INDUSTRY

A bank is a financial institution that provides banking and other financial

services to their customers. A bank is generally understood as an institution
which provides fundamental banking services such as accepting deposits and
providing loans. There are also nonbanking institutions that provide certain
banking services without meeting the legal definition of a bank. Banks are a
subset of the financial services industry. A banking system also referred as a
system provided by the bank which offers cash management services for
customers, reporting the transactions of their accounts and portfolios,
throughout the day. The banking system in India should not only be hassle
free but it should be able to meet the new challenges posed by the
technology and any other external and internal factors. For the past three
decades, Indias banking system has several outstanding achievements to its
credit. The Banks are the main participants of the financial system in India.
The Banking sector offers several facilities and opportunities to their
customers. All the banks safeguards the money and valuables and provide
loans, credit, and payment services, such as checking accounts, money
orders, and cashiers cheques. The banks also offer investment and insurance
products.

Need of the Banks

Before the establishment of banks, the financial activities were handled by
money lenders and individuals. At that time the interest rates were very high.
Again there were no security of public savings and no uniformity regarding
loans. So as to overcome such problems the organized banking sector was
established, which was fully regulated by the government. The organized
banking sector works within the financial system to provide loans, accept
deposits and provide other services to their customers.

1.2 History of Indian Banking System

The first bank in India, called The General Bank of India was established in
the year 1786. The East India Company established The Bank of
Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of Madras
(1843). The next bank was Bank of Hindustan which was established in
1870. These three individual units (Bank of Calcutta, Bank of Bombay, and
Bank of Madras) were called as Presidency Banks. Allahabad Bank which
was established in 1865 was for the first time completely run by Indians.
Punjab National Bank Ltd. was set up in 1894 with head quarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of
Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. In
1921, all presidency banks were amalgamated to 22 from the Imperial Bank
of India which was run by European Shareholders. After that the Reserve
Bank of India was established in April 1935.
At the time of first phase the growth of banking sector was very slow.
Between 1913 and 1948 there were approximately 1100 small banks in

India. To streamline the functioning and activities of commercial banks, the

Government of India came up with the Banking Companies Act, 1949 which
was later changed to Banking Regulation Act 1949 as per amending Act of
1965 (Act No.23 of 1965). Reserve Bank of India was vested with extensive
powers for the supervision of banking in India as a Central Banking
Authority. After independence, Government has taken most important steps
in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of
India was nationalized and was given the name "State Bank of India", to act
as the principal agent of RBI and to handle banking transactions all over the
country. It was established under State Bank of India Act, 1955. Seven banks
forming subsidiary of State Bank of India was nationalized in 1960. On 19th
July, 1969, major process of nationalization was carried out. At the same
time 14 major Indian commercial banks of the country were nationalized. In
1980, another six banks were nationalized, and thus raising the number of
nationalized banks to 20. Seven more banks were nationalized with deposits
over 200 Crores. Till the year 1980 approximately 80% of the banking
segment in India was under governments ownership. On the suggestions of
Narsimhan Committee, the Banking Regulation Act was amended in 1993
and thus the gates for the new private sector banks were opened.

INTRODUCTION OF PUNJAB NATIONAL BANK

PNB was founded in the year 1894 at Lahore (presently in Pakistan) as an
off-shoot of the Swadeshi Movement. Among the inspired founders were
Sardar Dayal Singh Majithia, Lala HarKishen Lal, Lala Lalchand, Shri Kali
Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram,
Lala Dholan Dass.
With a common missionary zeal they set about establishing a national bank;
the first one with Indian capital owned, managed and operated by the
Indians for the benefit of the Indians. The Lion of Punjab, Lala Lajpat Rai,
was actively associated with the management of the Bank in its formative
years.
The Bank made steady progress right from its inception. It has shown
resilience to tide over many a crisis. It withstood the crisis in banking
industry of 1913 and the severe depression of the thirties.
It survived the most critical period in its history the Partlition of
1947 when it was uprooted from its major area of operations. It was the
farsightedness of the management that the registered office of the Bank was
shifted from Lahore to Delhi in June 1947 even before the announcement
of the Partition.
LALA LAJPAT RAI
With the passage of time the Bank grew to strength spreading its wings from
one corner of the country to another. Some smaller banks like, The Bhagwan
Dass Bank Limited, Universal Bank of India, The Bharat Bank Limited, The
Indo-Commercial Bank Limited, The Hindustan Commercial Bank Limited
and The Nedungadi Bank were brought within its fold.

PNB has the privilege of maintaining accounts of the illustrious national

leaders like Mahatma Gandhi, Shri Jawahar Lal Nehru, Shri Lal Bahadur
Shastri, Shrimati Indira Gandhi besides the account of the famous Jalianwala
Bagh Committee.
Nationalization of the fourteen major banks on 19th July, 1969 was a major
step for the banking industry. PNB was one amongst these. As a result,
banking was given a new direction and thrust.
The banks were expected to reach people in every nook and corner, meet
their needs, and work for their economic enlistment. Removal of poverty and
regional imbalances were accorded a high priority.
PNB has always responded enthusiastically to the nation's needs. It has been
earnestly engaged in the task of national development. In the process, the
bank has emerged as a major nationalized bank.
Punjab National Bank (herein referred to as PNB) is one of the leading
banks in India and offers a wide variety of banking services, which include
corporate and personal banking, industrial finance, agricultural finance,
financing of trade and international banking. Among the clients of the Bank
are Indian conglomerates, medium and small industrial units, exporters, nonresident Indians and multinational companies. Punjab National Bank was
incorporated in the year 1895. Since its humble beginning over hundred
years ago, the bank has grown in stature to become one of the leading
banking institutions in India. PNB is the second largest PSU bank in India
with a dominant presence in north India. Keeping in tune with changing
times and to provide its customers more efficient and speedy service, the
Bank has taken major initiative in the field of computerization. All the
Branches of the Bank have been computerized. The Bank has also launched

aggressively the concept of "Any Time, Any Where Banking" through the
introduction of Centralized Banking Solution (CBS) and over 2000 offices
have already been brought under its ambit.

COMPANY PROFILE
Punjab National Bank is a state-owned commercial bank located in New
Delhi. The Bank is one of the Big Four Banks of India. They offer banking
products, and also operate credit card and debit card business, bullion
business, life and non-life insurance business, and gold coins and asset
management business. They are recognized as the Bank offering highest
levels of customer satisfaction in Delhi and Chennai. The Bank has the
largest domestic network of 4997 offices, including 46 extension counters
among Nationalized Banks. All their branches offer Core/ Centralized
Banking Solution (CBS) along with a variety of financial products catering
to different market segments. They has international presence in 9 countries,
with a branch at Kabul, 2 branches in Hong Kong, representative offices at
Almaty, Dubai, Shanghai and Oslo, a wholly owned subsidiary in UK (with
5 branches), and a joint venture with Everest Bank Ltd, Nepal. Punjab
National Bank was incorporated in the year 1895 at Lahore, undivided India.
The Bank has the distinction of being the first Indian bank to have been
started solely with Indian capital. In the year 1940, the Bank absorbed
Bhagwan Dass Bank, a scheduled bank located in Delhi circle. In the year
1951, they acquired the 39 branches of Bharat Bank and in the year 1961,
they acquired Universal Bank of India. Punjab National Bank was
nationalized in July 1969 along with 13 other banks. In the year 1986, they
acquired Hindustan Commercial, which added Hindustan's 142 branches to
the Bank's network. In the year 1993, they acquired New Bank of India
which the GOI. During the year 1996, they developed a packaged for
corporate customers for fast remittance of funds from different up-country
branches. In the year, they set up a representative office in Almaty,
Kazakhstan. In the year 2000, the Bank has introduced a scheme for

providing finance against mortgage of immovable property. In September

2000, they commenced their gold business in the form of Gold Import
Scheme. In November 2000, they launched an International Co-branded
Credit Card of Punjab National Bank and Hongkong & Shanghai Banking
Corporation (HPNBC) in New Delhi. In March 2002, the Bank came out
with their first Initial public offer (IPO) for 5,30,60,700 equity shares of Rs
10 each which resulted in the reduction of the government's shareholding in
the Bank. During the year 2002, they started their branch in M.G. Road,
Bangalore named as Mid-Corporate Branch (MCD) to provide their
corporate clients with a credit limit of Rs 3.5 crore and above. They made
joint venture with Infosys for the implementation of a Centralized Banking
Solution for them. Also, they made a tie up with Cisco Systems for
networking 3,870 branches as part of their Rs 150 crore plan. In the year
2003, the Bank took over Kozhikode-based Nedungadi Bank Ltd (NBL).
The Bank entered into an alliance with New India Assurance for selling their
general insurance products. Also, they opened a representative office in
London. During the year, PNB Capital Service Ltd was amalgamated with
the Bank. In June 2003, the Bank entered into an MoU with Principal
Financial Services Inc (USA) and Vijaya Bank for joint venture partnership
in Life Insurance, Pensions and Asset Managements (MF) business. Also,
they formed a strategic alliance with Infrastructure Leasing and Financial
Services Ltd (IL&FS) for setting up a private equity fund for investing in
domestic companies. In the year 2004, the Bank acquired the assets of
Hindustan Transmission Product Ltd. They signed a corporate agency
agreement with Export Credit Guarantee Corporation of India Ltd (ECGC)
for marketing ECGC's export credit insurance products through the network
of the bank's branches. Also, an MoU was signed with Intel for the

deployment of various IT-related solutions. During the year, the Bank signed
an MoU with ICICI Bank for ATM network sharing. They awarded a project
to Tata Consultancy Services (TCS) for implement human capital
management and payroll solution. They established a branch office in Kabul,
Afghanistan. Also, they opened a representative office in Shanghai. The
bank established an alliance with Everest Bank in Nepal that permits
migrants to transfer funds easily between India and Everest Bank's 12
branches in Nepal. In the year 2005, the Bank unveiled ATM at Edappal.
Also, they opened a representative office in Dubai. In the year 2006, the
Bank made a tie up with MasterCard International to launch a signaturebased debit card. Also, they made a tie up with Indian Airlines for online
booking of air tickets. They opened a new branch in Uttarakhand. In October
2007, the Bank entered into MoU with India Infrastructure Finance
Company with an aim to extend their cooperation and support to IIFC in
areas of creating a deal flow of infrastructure projects. In January 2008, the
Bank commenced commercial banking operations in Hong Kong. During the
year 2008-09, the Bank opened 168 branches, out of which 90 are new
branches and 78 branches was added through upgradation of Extension
Counters. They made collaboration with LIC for selling insurance policies
and also made a toe up with Oriental Insurance for selling non-life policies
on a referral basis. In June 2008, they entered into an MoU with ILFS
Cluster Development Initiative Ltd for providing finance for various
industrial infrastructure projects in the country. In September 2008, they
signed an MoU with SMC Global Securities Ltd and Networth Stock
Broking Ltd for providing online trading facility to Company's customers.
They offered a unique '3 in 1 account' comprising of Saving, Demat and
Trading account. In February 2009, they commercially launched their credit

cards with 2 types of consumer credit cards, namely Gold and Classic. Also,
they entered into an agreement with Oriental Insurance Company to market
insurance products, a practice also known as bancassurance. In March 2009,
the Bank entered into an understanding with Tata Motors for financing entire
range of passenger cars. Also, they executed an agreement with The Life
Insurance Corporation of India for banc assurance, life insurance under the
provisions of IRDA's Referral Arrangement. During the year 2009-10, the
Bank opened 524 domestic branches, out of which 347 are at new locations
while 177 branches was added through up gradation of existing Extension
Counters. They deployed 1400 ATMs taking the the total count of ATMs to
more than 3500 Nos. They opened two overseas branches 1 in Hong Kong
and another at DIFC Dubai and started a JV banking subsidiary 'DRUK PNB
Bank Ltd' in Bhutan. Also, they opened a representative office in Oslo,
Norway. During the year, the Bank sold 6.5% of their stake in UTI Assets
Management Co Ltd and UTI Trustee Pvt Ltd, thus bringing down their
stake in both these companies to 18.5%. They launched Corporate Credit
Card with Individual liability. Also they launched Merchant Acquiring
Business through installation of Point of Sale (PoS) Terminals at Merchant
Establishments and Internet Payment Gateway by integrating through
Merchant Website, with Brand Name PNB Biz. In May 2009, the Bank
incorporated a subsidiary company namely PNB Investment Services Ltd. In
November 2009, they entered into an agreement with FIM Bank (Malta),
Banca IFIS, Italy and Blend Financial Services Ltd, Mumbai for setting up a
joint venture company for providing factoring, forfeiting and trade finance
related business. During the year 2010-11, the Bank introduced new set of
products and services such as PNB Uphaar, PNB Suvidha and World Travel
Card. In December 13, 2010, they acquired 63.64% stake in JSC Dana Bank

of Kazakhstan. In January 12, 2011, the Bank's joint venture India factoring
and Finance Solutions Pvt Ltd started its commercial operations from Delhi,
Mumbai & Chennai. The total number of branches at the end of March 2011
rose to 5189. The branch network comprises 2047 Rural, 1154 Semi Urban,
1111 Urban and 877 Metropolitan branches. During the review period 210
domestic branches were opened. With 5189 branches, including 28
Extension Counters, the Bank has the largest network amongst the
nationalized banks. As part of customer segmentation, Bank has opened
specialized Branches that include 6 Micro Finance branches, 59 SME
branches, 11 International Banking Branches, 17 Asset Recovery
Management Branches, 13 Mid Corporate Branches, 11 Large Corporate
Branches, 73 Retail Asset Branches, 11 Agriculture Finance Branches, 3
high-tech agriculture branches, 1 Capital Market Services Branch and 1
International Service Branch. Besides, 41 Back Offices, 2 Special Foreign
Exchange Offices, 17 Special MICR Centers, 41 Service (Regional Clearing
Centre) centers, 4 Financial Inclusion Service Centers, 3 Centralized Draft
Payable Centers, 1 Central Clearing Service Centre and 1 Depository Back
Office are established to reduce delivery time and improve response time.
The Bank received permission from RBI for setting up a representative
office in Sydney, Australia. Also, they are in the process of entering into
Canada. The company is having an aim to increase the customer base to 150
million by the year 2015.

NON PERFORMING ASSETS

Banking industry plays an important role in the development of an economy.
Banks have become very cautious in extending loans. The reason being
mounting non-performing assets (NPAs). NPAs put detrimental impact on
the profitability, capital adequacy ratio and credibility of banks. An NPA is
defined as a loan asset, which has ceased to generate any income for a bank
whether in the form of interest or principal repayment. As per the prudential
norms suggested by the Reserve Bank of India (RBI), a bank cannot book
interest on an NPA on accrual basis. In other words, such interests can be
booked only when it has been actually received. Therefore, this has become
what is called as a critical performance area of the banking sector as the
level of NPAs affects the profitability of a bank. Therefore, an NPA account
not only reduces profitability of banks by provisioning in the profit and loss
account, but their carrying cost is also increased which results in excess &
avoidable management attention Apart from this, a high level of NPA also
puts strain on a banks net worth because banks are under pressure to
maintain a desired level of Capital Adequacy and in the absence of
comfortable profit level, banks eventually look towards their internal
financial strength to fulfill the norms thereby slowly eroding the net worth.
The present research paper focuses on NPA management between SBI &
PNB. An asset is classified as non-performing asset (NPA) 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 are not paid for 90 days. Classification of Bank Assets

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 into:

STANDARD ASSETS
Such an asset is not a non- performing asset. In other words, it carries not
more than normal risk attached to the business.
SUB-STANDARD ASSETS
It is classified as non- performing asset for a period not exceeding 18
months.
DOUBTFUL ASSETS
Asset that has remained NPA for a period exceeding 18 months is a doubtful
asset.
LOSS ASSETS
Here loss is identified by the banks concerned or by internal auditors or by
external auditors or by Reserve Bank India (RBI) inspection.
In terms of RBI guidelines, as and when an asset becomes a NPA, such
advances would be first classified as a sub-standard one for a period that
should not exceed 18 months and subsequently as doubtful assets. It should
be noted that the above classification is only for the purpose of computing
the amount
of provision that should be made with respect to bank advances and certainly
not for the purpose of presentation of advances in the banks balance sheet.

OBJECTIVES
To study the sources and investment of funds of PNB.
To examine the gross NPAs and net NPAs of PNB.
To study the impact of NPA on overall performance of selected banks.
To evaluate the efficiency in managing NPA between the selected
banks.
To make suggestions for better NPA management in selected banks.
To compare the total advances, net profits, gross NPA & net NPA.
To study the relationship between Nets profit and Net NPA of PNB.
To suggest measures to manage NPAs in PNB.

NON PERFORMING ASSETS AN OVERVIEW

A non-performing asset is defined as a credit facility in respect of which the
interest and/or installments of principal has remained over-due for a
specified length of time. With an aim of moving towards the international
best practices and ensuring greater transparency, a standard criterion of 90
days overdue norm was fixed for identification of NPA from the FY ending
March, 2004 in the Indian financial system. Thus, as per present convention,
a non-performing asset refers to a loan or an 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
more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The
bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted, Interest and/or installment of principal remains
overdue for two harvest seasons but for a period not exceeding two half
years in the case of an advance granted for agricultural purposes, and Any
amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
PUNJAB NATIONAL BANK
Inspite of the challenging phase of Indian Economy, PSB group continued
its efforts in maintaining the asset quality during the year 2011-12 by

accelerated recovery of NPAs through the well coordinated and sustained

efforts including action under SARFAESI Act 2002. Inspite of high fresh
slippage, the Gross and Net NPAs stood at 763.44 crore (1.65%) and 547.56
crore (1.19%) as against the level of 424.28 crore (0.99%) and 237.94 crore
(0.56%) as on 31.03.2011 respectively. The performance of the Banks under
recovery of NPAs during the year continued to be good. Aggressive and
focused efforts in Recovery could result in total recovery of over 331.36
crore including recovery of 108.75 crore in technically written-off
accounts. The position of Gross and Net NPAs as on 31.03.2012 vis--vis
previous year end is depicted under. Gross and Net NPA levels have
registered an increase in terms of absolute values and in terms of percentage
of overall assets in banks portfolio. The provisioning coverage ratio of the
bank (including the technically written off accounts) as on year ending
31/03/2014 stood at 64.15%.
A non-performing asset is defined as a credit facility in respect of which the
interest and/or installments of principal has remained over-due for a
specified length of time. With an aim of moving towards the international
best practices and ensuring greater transparency, a standard criterion of 90
days overdue norm was fixed for identification of NPA from the FY ending
March, 2004 in the Indian financial system. Thus, as per present convention,
a non-performing asset refers to a loan or an 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
more than 90 days, in respect of an Overdraft/Cash Credit (OD/CC), The
bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted, Interest and/or installment of principal remains
overdue for two harvest seasons but for a period not exceeding two half

years in the case of an advance granted for agricultural purposes, and Any
amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
Banks are required to classify their NPAs further into the following three
categories based on the period for which a specific asset has remained nonperforming as well as the reliability of the dues:
Sub-standard Assets
Doubtful Assets
Loss Assets
Sub-standard assets refer to all those assets (loans and advances) which
remain in the non-performing category for a period of 12 months. Doubtful
assets are the bank assets which remain in the non-performing category for a
period exceeding 12 months. Finally, Loss assets refer to the class of bank
assets which cannot be recovered at all. Provisioning Requirements for Asset
Categories As a part of its prudential bank management guidelines, RBI
ensures that adequate capital buffer is kept aside as cover for various asset
classes by the commercial banks. It works on the premise that asset
management should be an ongoing process and banks are mandated to
ensure that capital provisions are maintained at various stages of slippage of
an asset from standard assets to loss assets category. Table 1 within the
Tables & Exhibits highlights the asset provisioning guidelines mandated by
RBI for the commercial banks. Further, Table 11 indicates the provisions
maintained in absolute terms by the leading public sector banks for different
asset qualities. For the fiscal year 2011-12, Allahabad Bank, Bank of
Baroda, Bank of India, Central Bank of India, and State Bank of India have
recorded major increments in provisions for the advances falling under NPA

category. As far as standard assets are concerned Allahabad Bank, Bank of

Baroda, Bank of India, Indian Bank, and Punjab National Bank registered a
major increase during the same period. On a observing the amount of Bad
Debts written off from NPA accounts during 2011-12, Bank of Baroda, Bank
of India, Central Bank of India, Corporation Bank, and State Bank of India
major increment in this regard.
LITERATURE REVIEWS
NPA Monitoring and Recovery Management is the biggest challenge for the
Banking Industry. Asset quality of banks is one of the most important
indicators of their financial health. It also reflects the efficacy of banks
credit risk management and the recovery environment. It is important that
the signs of distress in all stressed accounts are detected early and those
which are viable are also extended restructuring facilities expeditiously to
preserve their economic value. Bhattacharya (2001) rightly points to the fact
that in an increasing rate regime, quality borrowers would switch over to
other avenues such as capital markets, internal accruals for their requirement
of funds. Under such circumstances, banks would have no option but to
dilute the quality of borrowers thereby increasing the probability of
generation of NPAs. In another study, Mohan (2003) observed that lending
rates of banks have not come down as much as deposit rates and interest
rates on Government bonds. In the Indian context, Rajaraman and Vasishtha
(2002) in an empirical study provided an evidence of significant bi-variate
relationship between an operating inefficiency indicator and the problem
loans of public sector banks. In a similar manner, largely from lenders
perspective, Das and Ghosh (2003) empirically examined non-performing
loans of Indias public sector banks in terms of various indicators such as

asset size, credit growth and macroeconomic condition, and operating

efficiency indicators. Sergio (1996) in a study of non-performing loans in
Italy found evidence that, an increase in the riskiness of loan assets is rooted
in a banks lending policy adducing to relatively unselective and inadequate
assessment of sect oral prospects. Guptas study (1983) on a sample of
Indian companies financed by ICICI concludes that certain cash flows
coverage ratios are better indicators of corporate sickness. Bhatia (1988) and
Sahoo, Mishra and Soothpathy (1996) examine the predictive power of
accounting ratios on a sample of sick and non-sick companies by applying
the multi discriminate analysis techniques. In both the studies, the selected
accounting ratios are effective in predicting industrial sickness with a high
degree of precision.

CHAPTER
2
RESEARCH
METHODOLOGY

RESEARCH METHODOLOGY
Methodology is the systematic, theoretical analysis of the methods applied
to a field of study, or the theoretical analysis of the body of methods and
principles associated with a branch of knowledge My research methodology
requires gathering relevant data from the annual reports of PNB and
compiling data in order to critically analyze the Total Advances, Net Profit,
Gross NPA, Net NPA of PNB and arrive at a more complete understanding
about performance of PNB The study uses the annual reports of Punjab
National Bank for the period of six years from 2006-07 to 2011-12. The data
has been analyzed by using tables and coefficient of correlation. Table is
used to compare total advances, gross NPA, net NPA & profits of PNB. By
using the coefficient of correlation we want to determine whether there is
any relation between Net Profits and Net NPA of PNB or not.

HYPOTHESES OF STUDY
H0 = There is no significant difference of NPA on overall performance
between selected banks.
H1= There is significant difference of NPA on overall performance between
selected banks.
H0 = There is no significant difference on efficiency in managing NPA
between selected banks.
H1= There is significant difference on efficiency in managing NPA between
selected banks.
RESEARCH DESIGN
1. THE SAMPLE:The universe of the study consist all the public sector banks. Here,
researcher has been selected two public sector banks i.e., SBI and PNB for
this comparative study.
2. THE DATA COLLECTION AND PERIOD OF THE STUDY:The study has been carried out for a three year, i.e., during 2010 11 to 2012
13. The reason behind selecting this period was availability of data for
both sample banks under study. The study is based on secondary data.
3. TOOLS AND TECHNIQUES:-

As per the nature of study following tools and techniques are used for testing
the hypotheses:
Tool:- Ratio Analysis
Statistical Techniques: - Mean, Standard deviation and T test

MANAGEMENT OF NON-PERFORMING ASSETS IN BANK

A mounting level of NPAs in the banking sector can severely affect the
economy in many ways. If NPAs are not properly managed, it can cause
financial and economic degradation which in turn signals and adverse
investment climate. Nonperforming Asset is an important constraint in the
study of financial performance of a bank as it results in declining margin and
higher provisioning requirement for doubtful debts. Various banks from
different categories together provide advances to different sectors like SSI,
agricultural, priority sector, public sector & others. These advances need to
be done pre-sanctioning evaluation and post-disbursement control to contain
rising non-performing assets in the Indian Banking sector. The decline of
NPA is essential to improve profitability of banks and fulfil with the capital
adequacy norms as per the Basel Accord
PNB TOTAL ADVANCES COMPARED WITH NET PROFIT, GROSS
NPA & NET NPA
YEAR

TOTAL
ADVANCES

NET PROFIT

GROSS NPA

NET NPA

2009- 2010
2010-2011
2011-2012
2012-2013
2013- 2014
2014- 2015
Table 1: PNB

9659652
11950156
15470298
18660121
24210700
29759795

1815
2049
3091
3804
4434
4884

339072
331929
250690
321441
437939
871962

72562
75378
26385
98169
203863
445423

total advances compared with net profit, gross NPA & net

NPA. Source: Annual Report of PNB

PNB TOTAL ADVANCES TO DIFFERENT SEGMENTS
2014- 2015

2013- 2014

2012-2013

2011-2012

2010-2011

2009- 2010

10000000
TOTAL ADVANCES

20000000
NET PROFIT

INTERPRETATION OF RESULT:

30000000

GROSS NPA

NET NPA

40000000

The table is comparing Total advances with NET Profit, Gross NPA & Net
NPA of PNB. With the help of this table we can get knowledge about
shaking performance of PNB. We can see that on one side total advances
given by PNB and Net Profits are increasing continuously since 2006.
Which shows that bank is performing very well. But Gross NPA & Net NPA
is also increasing which shows performance is declining due to
mismanagement of banks
IMPACT OF NPA
A. Liquidity Money is getting blocked lead to lack of enough cash in hand
which lead to borrowing money for short period of time from outside which
lead to additional cost to the bank. Difficulty in operating the functions of
bank is another cause of NPA. Due to lack of money Routine payments and
dues are not paid on time.
B. CREDIT LOSS
In case of bank is facing problem of NPA then it adversely affect the value
of bank in terms of market credit. It will lose its goodwill and brand image
because as we have discussed earlier that bank is not able to pay its dues on
time and its negative impact is that people start withdrawing their money
from bank which then cause liquidity problem and also decrease in
credibility.
C. INVOLVEMENT OF MANAGEMENT
Time and efforts of management is another indirect cost which bank has to
bear due to NPA otherwise time and efforts of management in handling and
managing NPA would have been diverted to some fruitful activities, which
would give good returns. Now a days banks have special employees to deal
and handle NPAs, which is additional cost to the bank.

D. PROFITABILITY
NPA means booking of money in terms of bad asset, which occurred due to
wrong choice of client. Because of the money getting blocked the
profitability of bank decreases not only by the amount of NPA but NPA lead
to opportunity cost also as that much of profit can be invested in some return
earning project/asset. So NPA not only affect current profits but also future
stream of profits, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return
on investment), which adversely affect current earning of bank.
RELATIONSHIP BETWEEN NET NPA & NET PROFITS OF PNB
Correlation: Correlation is a numerical measure used to determine the degree
of relationship between Variables.
PROFITS AND NET
NPA of PNB or not.
Formula: r = Ndxdy-dxdy (dx2 - (dx) 2 ) * (dy2 - (dy) 2 )
CALCULATION OF CORRELATION BETWEEN NET PROFIT &
NET NPA OF PNB
YEAR

NET PROFIT dx=X-A

2015

(X
4884

2014
2013
2012
2011
2010
2009

4434
3804
3091
2049
1815
X= 20077

A=1815
3069

dx2

NET NPA dy=Y-A

dy2

dxdy

9418761

(Y)
4454

A= 1267
3187

1015696

9780903

771
-285
-1003
-513
-541
dy= 1616

9
594441
81225
1006009
263169
292681
dy2=

2619
1989
1276
234
0
dx=

6859161
3956121
1628176
54756

9187

2191697

1239449

0
dx2=

2038
982
264
754
726
Y= 9218

By putting the above calculated values in our formulae we get:

2019249
-566865
-1279828
-120042

0
dx dy
=9833417

r = 6*9833417-9187*1616
(6*21916975- (20077)2 ) * (6*12394494- (1616)2 )
So r =.31

INTERPRETATION OF RESULT:
As we can see that r that is correlation coefficient is equal to 0.31. It means
that there is a positive relation between Net Profits and NPA of PNB. It
simply means that as profits increase NPA also increase. It is because of the
mismanagement on the side of bank. NPA is directly related to Total
Advances given by bank and banks main source of income is interest earned
by bank. Since we have seen earlier that total advances are increasing so
interest income is increasing and profits are also increasing. But as we know
there are two types of Customers (good and bad). Good customers leads to
increase in profits by paying interest and installments on total advances
timely and Bad customers leads to increase in NPA by not paying interest
and installment on total advances timely. This is because of mismanagement
and wrong choice of client. That is the only reason of positive relation
between NPA and Profits. But think if there is good management by bank
then amount of NPA decrease and Profits will increase more by the amount
not become NPA. Then there will be negative relation between profits and
NPA.

Table: PNBs Total Advances Compared with Net Profit, Gross NPA
&Net NPA
YEAR

TOTAL
ADVANCES

NET
PROFIT

GROSS NPA NET NPA

2005-06

74627

1439

2006-07

96597

1540

3391

726

2007-08

119502

2049

3319

754

2008-09

154703

3091

2506

264

2009-10

186601

3905

3214

982

2010-11

242107

4433

4379

2039

2011-12

293775

4884

8720

4454

2012-13

308725

4748

13466

7237

2013-14

349269

3343

13466

9917

2014-15

380534

3062

25695

15397

Source: Annual Reports of PNB

Above table shows the total advances, net profit, gross NPA, net NPA of
PNB. With the help of this table we find that the total advances of PNB
during the period 2005 to 2014-15 is increasing continuously which shows
that the banks performance is good. But on the other side the Gross NPA &
Net NPA is also increasing during this time period which shows that the
management of PNB is not satisfactory.

PNB TOTAL ADVANCES TABLE

400000

350000

300000

250000

200000TOTAL ADVANCES

NET PROFIT

GROSS NPA

NET NPA

150000

100000

50000

Above chart shows the total advances, net profit, gross NPA, net NPA of
PNB

Table: Total Advances as Compared to Net Profit

Year

Total Advances
Net profit

2005-06

74627

1439

2006-07

96597

1540

2007-08

119502

2049

2008-09

154703

3091

2009-10

186601

3905

2010-11

242107

4433

2011-12

293775

4884

2012-13

308725

4748

2013-14

349269

3343

2014-15

380534

3062

Source: Annual reports of PNB

Above table shows that the total advances is increasing continuously during
this time period but the total profit is increasing up to 2012-13 after that it is
declining. The main reason of reduction in profit is to increase in NPA at
higher level. Thus, it shows that the management of loans and recovery from
borrowers is not well.

NET PROFIT TO TOTAL ADVANCES

2014-15
2013-14
2012-13
2011-12
2010-11

Total Advances

Net profit

2009-10
2008-09
2007-08
2006-07
2005-06
0

50000

100000 150000 200000 250000 300000 350000 400000

Table (A) GROSS NPA TO TOTAL ADVANCES

Punjab National Bank
Year

Gross NPA s

Total Advances

Gross

2010- 11
2011- 12
2012- 13

4379
8720
13466

242107
293775
308725

Advances
0.018
0.030
0.044

NPA/Total

Interpretation: The table shows the Gross NPA against Total advances is
0.018, 0.030 and 0.044 in the year 2010-11, 2011-12 and 2012-13
respectively. This indicator shows the increase NPA during these years
PUNJAB NATIONAL BANK
Table (A) GROSS NPA TO TOTAL ADVANCES
Year

Gross NPAs

Total Advances

Gross

2010- 11
2011- 12
2012- 13

4379
8720
13466

242107
293775
308725

Advances
0.018
0.030
0.044

NPA/Total

GROSS NPAs TO TOTAL ADVANCES

350000

300000

250000

200000

150000

100000

50000

Gross NPA s
2012- 13

Total Advances
2013- 14

2014- 15

Interpretation: The table no.3 shows the Gross NPA against Total advances
is 0.018, 0.030 and 0.044 in the year 2010-11, 2011-12 and 2012-13
respectively. This indicator shows the increase NPA during these years

TABLE NET PROFIT TO TOTAL ADVANCES: GRAPHICAL

REPRESENTATION Punjab National Bank
Year
2010-11
2011-12
2012-13

Net Profit
4431
4884
4748

Total Advances
242107
293775
308725

Net Profit /Total Advances

0.018
0.017
0.015

NET PROFIT TO TOTAL ADVANCES

350000
300000
250000
200000
150000
100000
50000
0

2012-13

2013-14
Net Profit

2014-15

Total Advances

Interpretation: The table no.4 shows the Net Profit against Total advances
is 0.018, 0.017 and 0.015 in the year 2010-11, 2011-12 and 2012-13
respectively. This indicator shows the profit is decline due to controlling of
NPA.
STRESSED ASSETS MANAGEMENT GROUP (SAMG)
Towards giving focused attention to high value NPAs in SME and
Corporates, Stressed Assets Management Group (SAMG) was created in
April 2011 headed by a Deputy Managing Director. SAMG has 14 Stressed
Assets Management Branches (SAMBs) and 1 Resident Office under its
aegis. The SBI group further opened two new branches in March 2012 (one

in Ludhiana and Ernakulam). These branches handle NPAs and Advances

under Collection Account (AUCAs) with out-standings in excess of 1 crore.
Each branch has dedicated, trained staff including a legal expert for
expeditious resolution and is able to affect significant recoveries by resorting
to action under SARFAESI Act, DRT Act, sale to ARCs and negotiated
settlements.
In

addition,

115

Stressed

Assets

Resolution

Branches/Centers

(SARBs/SARCs) have been functioning under the NBG across the country
in Metro/Urban centers for quicker resolution of NPAs without-standings
upto 1 crore in MSME and Personal segments. The performance of SAMG
for the period 2011-12 is given as within Table 5. Punjab and Sind Bank
Inspite of the challenging phase of Indian Economy, PSB group continued
its efforts in maintaining the asset quality during the year 2011-12 by
accelerated recovery of NPAs through the well coordinated and sustained
efforts including action under SARFAESI Act 2002. Inspite of high fresh
slippage, the Gross and Net NPAs stood at 763.44 crore (1.65%) and 547.56
crore (1.19%) as against the level of 424.28 crore (0.99%) and 237.94 crore
(0.56%) as on 31.03.2011 respectively. The performance of the Banks under
recovery of NPAs during the year continued to be good. Aggressive and
focused efforts in Recovery could result in total recovery of over 331.36
crore including recovery of 108.75 crore in technically written-off
accounts. The position of Gross and Net NPAs as on 31.03.2012 vis--vis
previous year end is depicted under Table 6. Gross and Net NPA levels have
registered an increase in terms of absolute values and in terms of percentage
of overall assets in banks portfolio. The provisioning coverage ratio of the
bank (including the technically written off accounts) as on year ending
31/03/2012 stood at 64.15%. Canara Bank The bank had a Gross NPA level

of 4032 crore as on March 2012, along with a Gross NPA ratio of 1.73%.
Banks provision coverage ratio stood at 67.59% as on March 2012. The
bank took special care towards avoiding further slippages and overdue
accounts recovery was appreciable. Cash recovery during the year ending
March 2012 was amounting to 3295 crores (significantly up from the
previous FY figure of 2032 crore), indicating the rigorous efforts undertaken
by the bank. These efforts are ranging from identification of stressed
accounts for rephrasing in time, conduct of Canadalats at branch level and
mega-adalats at Circle level for one time settlements, regular follow up of
over-dues regarding loan accounts through Call Centres and e-auctions.
Bank has also put up unified risk management architecture to attain global
best practices for Risk Management initiatives in tune with New Capital
Adequacy framework prescribed by RBI. An independent risk management
structure is in place for integrated risk management, covering Credit,
Market, Operational and Group risk.
Taking on various types of risk is integral to the banking business. Of the
various types of risks your bank is exposed to, the most important are credit
risk, market risk and operational risk. The identification, measurement,
monitoring and management of risks remain a key focus area for the bank.
Business and revenue growth have therefore to be weighed in the context of
the risks implicit in the banks business strategy. The Risk Policy and
Monitoring Committee of the Board monitors the banks risk management
policies and procedures, vets treasury limits before they are considered by
the Board, and reviews portfolio composition and impaired credits. For
credit risk, distinct policies, processes and systems are in place for the retail
and wholesale businesses. In the retail loan businesses, the credit cycle is
managed through appropriate front-end credit, operational and collection

processes. For each product, programs defining customer segments,

underwriting standards, security structure etc., are specified to ensure
consistency of credit buying patterns. During the year 2011-12, the bank
obtained the ISO 9001:2008 re-certification of its retail credit underwriting
unit, which was confirmed for 35 sites. For wholesale credit exposures,
management of credit risk is done through target market definition,
appropriate

credit

approval

processes,

ongoing

post-disbursement

monitoring and remedial management procedures. As of March 31, 2012,

banks ratio of Gross NPAs to Gross Advances was 1.02%. Net NPAs (Gross
NPAs less specific loan loss provisions) were 0.2% of customer assets as of
March 31, 2012. The specific loan loss provisions that the Bank has made
for its NPAs continue to be more conservative than the regulatory
requirement. In addition, the bank has made general provisions for standard
assets which are as per regulatory prescription and dynamic counter cyclical
provisions or floating provisions which are made as per board approval
policy. The coverage ratio taking into account specific, general and floating
provisions was 199.7% as of March 31, 2012. In accordance with RBIs
guidelines on Basel II, the Bank is currently on the Standardized Approach
for Credit Risk, the Basic Indicator Approach for Operational Risk and the
Standardized Approach for Market Risk. Parallely, the Bank is progressing
with its initiative on meeting the requirements for adoption of the advanced
approaches for these risks under Basel II, brought out by RBI in this regard.

CHAPTER
3
FINDINGS AND
ANALYSIS

ASSET QUALITY TREND IN INDIAN BANKS

Significant improvements in terms of asset quality and performance have
been observed over the years with respect to Indian commercial banks. In

the post reforms period, the practice of safer banking practices by

emphasizing upon tighter accounting norms (Munniapan G. P., 2002).
Performance of Indian banks on the basis of Gross and Net NPAs from 1994
to 2000 and from 2007 to 2012 is listed in Table 7. On reviewing the Net
NPA position of the Indian banks over the specified time period it is evident
that though the NPA value in absolute terms have shown a consistent
increasing trend, but their share in total advances have shown a steady
decline during majority of the time periods observed. In the recent years
(2009-2012) commercial banks have seen a reversal of this trend, which may
be attributed to macroeconomic environment plagued by recession. Thus, the
banks have been able to increase their combined credit base significantly in
relation to the resulting NPAs during each year except for few aberrations,
particularly during the recent years. Further, the domestic advances by the
public sector banks occupying major portion of the Indian banking sector,
have shown increase across majority of the advance categories during the
fiscal year 2011-12 (Table 8). The advances forwarded under the priority
sector category and as well as to the public sector undertakings registered a
consistent increment across the observed banks, barring few. The interbank
advances though followed an opposite trend and recorded a decline within of
majority of the banks under study. The Indian banking sector received a
must needed competitive push when the private players were permitted to
enter the sector post the banking sector reforms initiated by RBI in early
1990s. A number of private players have forayed into the Indian banking
sector, both domestic and multinational, which in the present times has been
classified under two categories viz., Old Private Sector Banks and New
Private Sector Banks for the purpose of better monitoring and supervision.
Table 12 (Table & Exhibits) depicts advances position of leading Indian

private sector banks. Within the new banks category Axis Bank, HDFC Bank
and ICICI Bank have recorded significant increase in overall level of
advances during the fiscal period of 2011-12. Their individual quantum of
advances is comparable to combined advances position of old private sector
banks. As far as percentage growth in advances from the previous year is
concerned, Axis Bank and Yes Bank have shown a steep fall in percentage
growth in advances (17% and 44% respectively). Further, HDFC Bank and
ICICI Bank occupy a sizeable share of advance portfolios within the market.
Their individual percentage market share of advances (20.22% and 26.25%
respectively) is equivalent to combined advances of the old private sector
banks (23.81%). As a part of a recent initiative, the Ministry of Finance
(GOI) reviewed the process adopted by public sector banks after it found
these lenders are saddled with the biggest cases of corporate defaults. The
ministry, while preparing a case study of corporate defaults over a six month
period ending October, 2012, was perturbed that while the private banks
have largely managed to insulate their books from bad debts, PSBs failed to
follow even the basic checks and balances in some cases, like securing
collateral before sanctioning loans (ET, New Delhi, Oct 2012). Net NPA
ratio of PSBs rose 44 basis points to 1.53% in 2011-12 over the previous
year. In stark contrast, Net NPA ratio of private banks fell 10 basis points to
0.46% over the same period. One of the public sector banks had lent 700
crore to Kingfisher Airline despite a damning internal assessment.
SYMPTOMS OF RECOGNIZING A PERFORMING ASSET
TURNING INTO NPA
The banking groups, in public sector particularly, have been quite hard
pressed in recent times in terms of major portion of their advances turning

into NPAs. Following are some of common indications hinting a prospect of

an asset slipping into NPA bracket.
Non-payment of the initial installment.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Unpaid over-due bills.
Declining current ratio.
Payment which does not cover the interest and principal amount of
that installment
. While monitoring the accounts it is found that partial amount is
diverted to
Sister/parent company. Borrower has either initiated the process of
winding up or is not doing business.
Over-due receivables.
Stock statement not submitted on time.
External con-controllable factor like natural calamities where
borrower conduct his
business. Frequent changes in plan.
Non-payment of wages.
Avoidance of contact with bank.
Problem between partners.
Changes in Government policies.
Death of borrower.
Competition in the market

PREVENTIVE MEASURES FOR NON PERFORMING ASSETS

Identifying borrowers with genuine intent from those who are non-serious
with no commitment or stake in revival is a challenge confronting bankers.
Longer the delay in response, greater the injury to the account and the asset.
While financing/appraisal of credit requirements, funds flow analysis
in
Conjunction with the cash flow analysis should be done, rather than
only concentrating on funds flow analysis. The general perception
among borrowers is that it is lack of finance that leads to
Sickness and NPAs. However, management effectiveness in tackling
adverse business conditions is a very important aspect that affects a
borrowing units fortunes. During the exercise for assessment of
viability and restructuring, a practical and
Integrated approach by all the lending banks as also sharing of all
relevant information on the borrower would go a long way towards
overall success of rehabilitation exercise, given the probability of
success/failure.
As a part of asset portfolio decision by commercial banks, exposure to
predefined sensitive sectors viz., capital market sector and the real estate
sector should be kept within reasonable limits and their trends should be
subjected to stringent internal monitoring. Being vigilant towards such
advances helps avoiding their slippages into the NPA and bad debt
categories significantly. Table 10 portrays the trend of advances to sensitive
sectors by the major Indian public sector banks. From the table, it is evident
that the PSBs have been successful in terms of keeping their sensitive

advances in check. Majority of the banks have recorded a decline in

percentage lending to both the sensitive sectors during the fiscal year 201112 compared to the preceding fiscal of 2010-11.
METHODS FOR REDUCING NON PERFORMING ASSETS
All accounts where interest has not been collected should be reviewed at
Periodical intervals by appropriate authorities. In order to recover the
amount, one can adopt any way like persuasion, pressurization,
frequent interaction, showing sympathy etc. Repayment of a term loan
depends on income generating capacity of the borrowing unit.
Therefore, it is necessary to fix repayment program for a term loan
according to the income generating capacity of the unit.

After

classification of unit as sick, bank can make decision to offer a

Rehabilitation package. In that case, bank has to have a sympathetic
and positive approach and provide the relief package in time. Merger
is the process under which a sick unit is merged with a healthy unit, or
Sometimes, a healthy unit acquires a sick unit. A part of the
consideration paid to the sick unit by the healthy unit is used to
liquidate the NPA wholly or partly. Recovery of advances through
compromise settlement is accepted as an effective
Non-legal remedy. Under this borrower agrees to pay certain amount
of the bank after getting concessions. If all attempts of converting an
NPA into a performing asset fail, the bank is left
With no other option but to recall the advance and resort to legal
action by filing of recovery suits in the civil court or Debt Recovery
Tribunals. To do away with this specific requirement of filing a suit

with court towards recovery of NPAs, Government of India enacted

the Securitization and Reconstruction of Financial Assets &
Enforcement of Securities Interest (SARFAESI) Act or popularly
referred to as Securitization Act in the year 2002.

CAPITAL ADEQUACY COMPLIANCE

The Basel Committee recommendations on the capital adequacy ratios have
been proposed towards ensuring that the commercial banks maintain
adequate buffers in the form of capital as cover for advances granted under
various categories. The idea is that a banks own funds should also be
employed towards loan granting activity, instead of solely depending on
public deposits. Basel-II accords mandated a benchmark Capital Adequacy
Ratio (CAR) of 9% for the commercial banks. Government of India (GOI)
with a view towards safer banking practice raised CAR for Indian PSBs to
12%. As per the findings depicted within Table 13 (Basel-II CAR of PSBs
for the period 2010- 12), all the major Indian PSBs had consistently
achieved the benchmark CAR in line with Basel-II norms. This can be
attributed proactive approach of GOI by enforcing a higher much higher
CAR than the benchmark rate. All the PSBs successfully achieved the GOI
mandated CAR 12% during the observed years. Bank of India (in 2012),
Central Bank of India (in 2011) and State Bank of India (in 2011) had
narrowly missed the CAR prescribed by GOI. On the private banks front,
Table 14 (Basel-II CAR of Private Sector Banks for the period 2010-12),
indicates the fact that major banks have managed to achieved a significantly
higher CAR as compared to their public sector counterparts. This may be
attributed to robust and stringent asset risk management framework in place
within the private sector banks.

TYPES OF NPA
NPA may be classified into
A. GROSS NPA GROSS NPA is advance which is considered
irrecoverable, for which bank has made provisions, and which is still held in
banks' books of account.
B. NET NPA NET NPA is obtained by deducting items like interest due but
not recovered, part payment received and kept in suspense account from
Gross NPA.
ASSET CLASSIFICATION CATEGORIES OF NPAS
1. STANDARD ASSETS Standard assets are the ones in which the bank is
receiving interest as well as the principal amount of the loan regularly from
the customer. Here it is also very important that in this case the arrears of
interest and the principal amount of loan do not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is amount
due more than 90 days then it is NPA and NPAs are further need to classify
in sub categories. Banks are required to classify non-performing assets
further into the following three categories based on the period for which the
asset has remained non-performing and the reliability of the dues:
2. SUB-STANDARD ASSETS With effect from 31 March 2005, a
substandard asset would be one, which has remained NPA for a period less
than or equal to 12 month.

3. DOUBTFUL ASSETS A loan classified as doubtful if it remained in the

substandard category for 12 months.
4. LOSS ASSETS A loss asset is one which considered uncollectible and of
such little value that its continuance as a bankable asset is not warrantedalthough there may be some salvage or recovery value. Also, these assets
would have been identified as loss assets by the bank or internal or
external auditors or the RBI inspection but the amount would not have been
written-off wholly. Provisioning norms for NPAS After a proper
classification of loan assets the banks are required to make sufficient
provision against each of the NPA account for possible loan losses as per
prudential norms. The minimum amount of provision required to be made
against a loan asset is different for different types of assets. The details of
the provisioning requirements as per the RBI guidelines are furnished below:
In terms of RBI circular No RBI/2004/254/DBOD No. BP.BC.NO
97/21.04.141/2003-04 dated 17.06.2004, the Reserve Bank of India has
decided that w.e.f March31, 2005, a general provision of 10 percent on total
outstanding should be made without making any allowance for ECGC
guarantee cover and securities available.
NPAS UNDER SUBSTANDARD ASSETS CATEGORY The unsecured
exposures which are identified as substandard would attract additional
provision of 10 percent, i.e a total of 20 percent on the outstanding balance.
The provisioning requirement for unsecured doubtful assets is 100 percent.
NPAs under Doubtful category In terms of RBI Circular No.
2004/261/DBOD

BP.BC.99/21.04.048/2003-2004

dated

21.06.2004,

Reserve Bank decided to introduce graded higher provisioning according to

the age of NPAs in doubtful category for more than three years, with effect
from March 31, 2005. Consequently the increase in provisioning

requirement on the secured portion would be applied in a phase manner over

a three year period in respect of the existing stock of NPAs as classified as
doubtful for more three years as on March 31, 2004 as per clarification
given hereunder: In respect of all advance classified as doubtful for more
than three years on or after 1 April, 2004 the provisioning requirement
would be 100 percent. Accordingly the provisioning norm for advances
identified as doubtful for more than 3 years would be as Indicated below as
on March31, 2009.
(A) UNSECURED PORTION The portion of the advance which is not
covered by the realizable value of the tangible security to which the bank has
the valid recourse and the realizable value is estimated (b) Secured Portion
Upto 1 year : 20% (D1 Category) One to three years : 30% (D2 Category)
More than three years : 100% (D3 Category) NPAs under Loss category
Provisioning at 100% for loss category would continue Factors for rise in
NPAs The banking sector has been facing the serious problems of the rising
NPAs. But the problem of NPAs is more in public sector banks when
compared to private sector banks and foreign banks. The NPAs are growing
due to external as well as internal factors. External factors a. Ineffective
recovery - The Govt. has set up numbers of recovery tribunals, which works
for recovery of loans and advances. Due to their negligence and
ineffectiveness in their work the bank suffers the consequence of nonrecover, thereby reducing their profitability and liquidity.
B. WILFUL DEFAULTS - There are borrowers who are able to pay back
loans but are intentionally withdrawing it. These groups of people should be
identified and proper measures should be taken in order to get back the
money extended to them as advances and loans.

C. NATURAL CALAMITIES - This is the major factor, which is creating

alarming rise in NPAs of the PSBs. Every now and then India is hit by major
natural calamities thus making the borrowers unable to pay back there loans.
Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit.
D. INDUSTRIAL SICKNESS - Improper project handling, ineffective
management, lack of adequate resources , lack of advance technology , day
to day changing govt. Policies give birth to industrial sickness. Hence the
banks that finance those industries ultimately end up with a low recovery of
their loans reducing their profit and liquidity.
E. LACK OF DEMAND - Entrepreneurs in India could not foresee their
product demand and starts production which ultimately piles up their
product thus making them unable to pay back the money they borrow to
operate these activities. The banks recover the amount by selling of their
assets, which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to make provision for it.
F. CHANGE ON GOVT. POLICIES - With every new govt. banking
sector gets new policies for its operation. Thus it has to cope with the
changing principles and policies for the regulation of the rising of NPAs.
G. DIRECTED LOANS SYSTEM - Under this commercial banks are
required to supply 40% percentage of their credit to priority sectors. Most
significant sources of NPAs are directed loans supplied to the micro sector
are problematic of recoveries especially when some of its units become sick
or weak.
INTERNAL FACTORS

A. DEFECTIVE LENDING PROCESS - There are three cardinal

principles of bank lending that have been followed by the commercial banks
since long.
i. Principle of safety
ii. Principle of liquidity
iii. Principle of profitability.

B. INAPPROPRIATE TECHNOLOGY - Due to inappropriate technology

and management information system, market driven decisions on real time
basis cant be taken. Proper MIS and financial accounting system is not
implemented in the banks, which leads to poor credit collection, thus NPAs.
All the branches of the bank should be computerized.
C. IMPROPER SWOT ANALYSIS - The improper strength, weakness,
opportunity and threat analysis is another reason for rise in NPAs. While
providing unsecured advances the banks depend more on the honesty,
integrity, and financial soundness and credit worthiness of the borrower.
D. POOR CREDIT APPRAISAL SYSTEM - Poor credit appraisal is
another factor for the rise in NPAs. Due to poor credit appraisal the bank
give advances to those who are not able to repay it back. They should use
good credit appraisal to decrease the NPAs.
E. MANAGERIAL DEFICIENCIES -The banker should always select the
borrower very carefully and should take tangible assets as security to safe
guard its interests.
When accepting securities banks should consider the:
1. Marketability

2. Acceptability
3. Safety
4. Transferability The banker should follow the principle of diversification
of risk based on the famous maxim do not keep all the eggs in one basket, it
means that the banker should not grant advances to a few big farms only or
to concentrate them in few industries or in a few cities. If a new big
customer meets misfortune or certain traders or industries affected adversely,
the overall position of the bank will not be affected.
F. ABSENCE OF REGULAR INDUSTRIAL VISIT - The irregularities
in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and
principals on the loan. The NPAs due to wilful defaulters can be collected by
regular visits.
G. FAULTY CREDIT MANAGEMENT - like defective credit in recovery
mechanism, lack of professionalism in the work force.
IMPACT OF NPA
NPA impact the performance and profitability of banks. The most notable
impact of NPA is change in bankers sentiments which may hinder credit
expansion to productive purpose. Banks may incline towards more risk free
investments to avoid and reduce riskiness, which is not conducive for the
growth of economy. If the level of NPAs is not controlled timely they will:
Reduce the earning capacity of assets and badly affect the ROI.
The cost of capital will go up.
The assets and liability mismatch will widen.

Higher provisioning requirement on mounting NPAs adversely affect capital

adequacy ratio and banks profitability.

 The economic value additions (EVA) by banks gets upset because EVA is equal
to the net operating profit minus cost of capital.

NPAs causes to decrease the value of share sometimes even below their book
value in the capital market.

NPAs affect the risk facing ability of banks.

NPAS: EFFECT ON THE PERFORMANCE OF BANKS

The large percentages of NPAs have a deleterious impact on a banks profit
in a number of ways:
They result in reduced interest income
They

erode (eat

into)

current

profits through provisioning

requirements.
It leads into erosion of capital base and reduction in their
competitiveness Through creation of reserves and provisions that
come from profits, to act as cushions for loan losses.
Decline in profit has its bearing on variables like Capital to Risk Weighted
Assets Ratio (CRAR and cost).
To quote the committee on banking sector reforms (Narasimham Committee
II, 1998) NPAs constitute a real economic cost to the nation is that they
reflect the application of scarce capital & credit funds to unproductive uses.
The money locked up in NPAs is not available for productive uses to the
extent that bank seek to make provisions for NPAs or write them off. It is a

charge on their profits, NPAs, in short, is not just a problem for banks; they
are bad for the economy

A CASE STUDY OF RECOVERY POSITION OF NON

PERFORMING ASSETS OF PUNJAB NATIONAL BANK OF INDIA
Banking system plays a vital role in the economic system of a country by
mobilizing the nations savings and directing them into high investment
priorities for better utilization of available resources. Schumpeter, the first
modern economist considered banks to be the most important of all the
financial intermediaries in the financial system of a country. But in recent
times the banks have become very cautious in providing loans, the reason
behind is the non performing assets. Non Performing Assets are defined as
the loans which have ceased to generate any income for a bank whether in
the form of interest or principal amount. To bring down the level of NPAs, a
number of strategies have been initiated in the past and are being initiated at
present by the Government and the banks. In view of the vital role of non
performing assets on the profitability, Punjab National Bank have been
selected for the purpose of present research because both are the giant banks
in public and private sector, so a comparative study is made. In the present
study, the researcher proposes to make an analytical study in respect of Non

Performing Assets and their recovery management, so that it may be useful

at all banking levels regarding the efficient utilization of resources which
may lead to better working of the banking sector.
ASSET QUALITY TREND IN INDIAN BANKS
Significant improvements in terms of asset quality and performance have
been observed over the years with respect to Indian commercial banks. In
the post reforms period, the practice of safer banking practices by
emphasizing upon tighter accounting norms (Munniapan G. P., 2002).
Performance of Indian banks on the basis of Gross and Net NPAs from 1994
to 2000 and from 2007 to 2012 is listed in Table 7. On reviewing the Net
NPA position of the Indian banks over the specified time period it is evident
that though the NPA value in absolute terms have shown a consistent
increasing trend, but their share in total advances have shown a steady
decline during majority of the time periods observed. In the recent years
(2009-2012) commercial banks have seen a reversal of this trend, which may
be attributed to macroeconomic environment plagued by recession. Thus, the
banks have been able to increase their combined credit base significantly in
relation to the resulting NPAs during each year except for few aberrations,
particularly during the recent years. Further, the domestic advances by the
public sector banks occupying major portion of the Indian banking sector,
have shown increase across majority of the advance categories during the
fiscal year 2011-12 (Table 8). The advances forwarded under the priority
sector category and as well as to the public sector undertakings registered a
consistent increment across the observed banks, barring few. The interbank
advances though followed an opposite trend and recorded a decline within of
majority of the banks under study. The Indian banking sector received a

must needed competitive push when the private players were permitted to
enter the sector post the banking sector reforms initiated by RBI in early
1990s. A number of private players have forayed into the Indian banking
sector, both domestic and multinational, which in the present times has been
classified under two categories viz., Old Private Sector Banks and New
Private Sector Banks for the purpose of better monitoring and supervision.
Table 12 (Table & Exhibits) depicts advances position of leading Indian
private sector banks.. Their individual percentage market share of advances
(20.22% and 26.25% respectively) is equivalent to combined advances of
the old private sector banks (23.81%). As a part of a recent initiative, the
Ministry of Finance (GOI) reviewed the process adopted by public sector
banks after it found these lenders are saddled with the biggest cases of
corporate defaults. The ministry, while preparing a case study of corporate
defaults over a six month period ending October, 2012, was perturbed that
while the private banks have largely managed to insulate their books from
bad debts, PNBs failed to follow even the basic checks and balances in some
cases, like securing collateral before sanctioning loans (ET, New Delhi, Oct
2012). Net NPA ratio of PNBs rose 44 basis points to 1.53% in 2013-14 over
the previous year. In stark contrast, Net NPA ratio of private banks fell 10
basis points to 0.46% over the same period.
PREVENTIVE MEASURES FOR NON PERFORMING ASSETS
Identifying borrowers with genuine intent from those who are non-serious
with no commitment or stake in revival is a challenge confronting bankers.
Longer the delay in response, greater the injury to the account and the asset.
While financing/appraisal of credit requirements, funds flow analysis
in conjunction with the cash flow analysis should be done, rather than
only concentrating on funds flow analysis.

 The general perception among borrowers is that it is lack of finance

that leads to sickness and NPAs. However, management effectiveness
in tackling adverse business conditions is a very important aspect that
affects a borrowing units fortunes.
During the exercise for assessment of viability and restructuring, a
practical and integrated approach by all the lending banks as also
sharing of all relevant information on the borrower would go a long
way towards overall success of rehabilitation exercise, given the
probability of success/failure.

CHAPTER
4
LIMITATIONS &
CONCLUSIONS

LIMITATIONS OF STUDY
Every study has certain limitations. Same is true with this study also. Some
of the limitations faced during this study are:
1. For the purpose of this study only data of 5 years has been taken that is
from financial year 2010 to 2014.
2. The data would be collected from only 6 banks that is 3 private sector
banks and 3 public sector banks.
3. The study covers only one aspect that is comparison of trend and amount
of NPA in different public and private banks.
4. Convenience method of sampling has been used so all the units in the
universe (all public and private banks) did not have the equal chances of
selection.

CONCLUSION
The NPAs have always created a big problem for the banks in India. It is just
not only problem for the banks but for the economy too. The money locked
up in NPAs has a direct impact on profitability of the bank as Indian banks
are highly dependent on income from interest on funds lended. This study
shows that extent of NPA is comparatively very high in public sectors banks
as compared to private banks. Although various steps have been taken by
government to reduce the NPAs but still a lot needs to be done to curb this
problem. The NPAs level of our banks is still high as compared to the
foreign banks. It is not at all possible to have zero NPAs. The bank
management should speed up the recovery process. The problem of recovery
is not with small borrowers but with large borrowers and a strict policy
should be followed for solving this problem. The government should also
make more provisions for faster settlement of pending cases and also it
should reduce the mandatory lending to priority sector as this is the major
problem creating area. So the problem of NPA needs lots of serious efforts

otherwise NPAs will keep killing the profitability of banks which is not good
for the growing Indian economy at all.

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