PROJECT REPORT

on
NPA and its impact on JK Bank.

NPA and its impact on JK Bank.

With special reference to J&K Bank Ltd (Rawalpora)

In partial fulfillment of the award for

Masters Degree in Business Administration (MBA)

Submitted by:

HUZAIF YOUNUS
EnrollNo:17036113002

Submitted to:
SOUTH CAMPUS KASHMIR UNIVERSITY, ANANTNAG J&K

ACKNOWLEDGEMENT
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First of all I would like to express my gratitude to Almighty Allah, who bestowed His blessings
upon me and gave me courage and right type of environment for completion of my project.

I am grateful to BUSINESS SCHOOL,KASHMIR UNIVERSITY for giving me the

opportunity to work on this project which may turn into a milestone for my bright future.

I have taken strenuous efforts to make this project a success. However, it would not have been
possible without the kind support and help of many individuals and the organization of J&K
Bank. I am thankful to the staff of the JK Bank for providing information all over the company
and also to Business unit RAWALPORA, Srinagar who constantly kept me directing all the time.
I am thankful to my family, friends and other people for helping in completion of the Project
Report.

This project was a great source of learning and value addition for me.

HUZAIF YOUNUS

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CONTENTS
CHAPTER-I
INTRODUCTION 5-6
CHAPTER-II
BANKING IN INDIA 7
NATIONALISATION 7-8
LIBERIZATION 9
CHAPTER-III
J&K BANK LTD 10-11
CHAPTER-IV
MEANING OF NPA 12-13
NPA CONCEPT AND PRUDENTIAL NORMS 13-16
TYPES OF NPA 16-17
GUIDELINES FOR CLASSIFICATION
OF ASSETS 17-21
NPA SOME ASPECTS AND ISSUES 21
CHAPTER –V
LITERATURE REVIEW 22-24
CHAPTER-VI
RESEARCH METHODOLOGY 25
RESEARCH DESIGN 25
RESEARCH OBJECTIVES 25
NEED OF THE STUDY 25
SAMPLING AREA 26
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 SAMPLING SIZE 26
SAMPLING TECHNIQUE 26
DATA COLLECTION 26
STATISTICAL TOOLS 26
CHAPTER-VII
RESULTS AND DISCUSSION 27-45
CHAPTER-VIII
REASONS FOR RISE OF
NPA IN JK BANK LTD. 46-48
CHAPTER-IX
IMPACT OF NPA ON PERFORMANCE
OF BANKS 48-50
PROBLEMS IN LOAN RECOVERY 50-51
CHAPTER-X
FINDINGS 52
CHAPTER-XI
SUGGESTION, CONCLUSIONS AND LIMITATIONS 52-55
BIBLIOGRAPHY 56
ANNEXURE 57-59

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INTRODUCTION
Since the introduction of economic liberalization and financial sector reforms, banks are
under growing pressure to bring down their non-performing assets (NPA) so as to improve
their performance and viability. What is bothering the bankers today is the management of
non-performing assets. Over the period this problem has aggravated alarmingly and therefore
needs urgent remedial actions, so in this context a good number of circular
instruction/guidelines have been issued by bank/Reserve Bank of India. Reserve Bank of
India (RBI), in the year 1991, appointed a committee under the chairmanship of Sh.
M.Narsimham to examine and give recommendation for income recognition, asset
classification and provisioning of loan assets of banks and financial institutions. The
committee examined the issues and recommended that a policy of income recognition should
be objective and based on record of recovery rather than on subjective considerations. On the
basis of the recommendations of the Narsimhan committee, had issued guidelines to all
scheduled commercial banks on income recognition, assets classification and provisioning in
April, 1992 which have been modified from time to time by the RBI on the basis of
experience gained and suggestions received from various quarters. The prudential norms for
income recognition asset classification and provisioning have come into effect from the
accounting year 03-03-1993.Similarly, guidelines were issued by the Reserve Bank of India
in March, 1994 to All India financial institutions viz. Industries development bank of India
(IDBI),Industrial credit and Investment corporation of India (ICICI),Industrial finance
corporation of India(IFCI), Axis Bank and Industrial Investment bank of India(IIBI).
Separate guidelines were also issued by the RBI on prudential norms to non-banking
financial companies in June,1994 and to regional rural banks in march, 1996. They have
adopted these guidelines for the purpose of income recognition and assets classification from
the accounting year 1995-96. However, guidelines relating to provisioning for regional rural
banks RRBs have been made effective from the financial year ended 31.03.1997. The
definition of NPAs is also gradually becoming tough for regional rural banks(RRBs) to cover
all advances like commercial banks. Although most of-the guidelines relating to RRBs are
similar to that of commercial banks, they have been made applicable in a phased manner for
RRBs. Indian banks functionally diverse and geographically widespread, have played a
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crucial role in the socio- economic progress of the country. Banks extend credit to different
types of borrowers for many different purposes. For most customers, bank credit is the
primary source of available debt financing. For banks good loans are the most profitable
assets. Return comes in the form of loan interest, fee income and investment and the most
prominent assumed risk is credit risk. Credit risk involves inability or unwillingness of
customer or counterpart to meet commitments in relation to lending once a loan is overdue
and ceases to yield income it would become a Non Performing Asset. Proper management
and speedy disposal of NPAs is one of the most critical tasks of banks today. The problem of
Non- Performing Assets [NPAs] in banks and financial institutions has been a matter of
grave concern not only for the banks but also the real economy in general, as NPAs can
choke further expansion of credit which would impede the economic growth of the country.
Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in the
economy. NPAs are not therefore the concern of only lenders but also the public at large
granting of credit for economic activities is the prime duty of banking. Apart from raising
resources through fresh deposits, borrowings and recycling of funds received back from
borrowers constitute a major part of funding credit dispensation activity. Lending is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which results into economic growth. However lending also carries a risk called
credit risk, which arises from the failure of borrower. Non-recovery of loans along with
interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the
bank’s profitability on a large scale. Though complete elimination of such losses is not
possible, but banks can always aim to keep the losses at a low level. Non-performing asset
(NPA) has emerged since over a decade as an alarming threat to the banking industry in our
country sending distressing signals on the sustainability and insurability of the affected
banks. The positive results of the chain of measures affected under banking reforms by the
Government of India and RBI in terms of the two Narasimhan committee reports in this
contemporary period have been neutralized by the ill effects of this surging threat. Despite
various correctional steps administered to solve and end this problem, concrete results are
eluding. It is a sweeping and all pervasive virus confronted universally on banking and
financial institutions. The severity of the problem is however acutely suffered by nationalized
banks, followed by the SBI group, and the all India financial institutions.

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BANKING IN INDIA In the modern sense

originated in the last decades of the 18th century. Among the first banks were the Bank of
Hindustan, which was established in 1770 and liquidated in 1829-32; and the General Bank of
India, established in 1786 but failed in 1791.The largest bank, and the oldest still in existence, is
the SBI. It originated as the Calcutta Bank (Bank of Calcutta) in June 1806. In 1809, it was
renamed as the Bank of Bengal. This was one of the three banks funded by a presidency
government; the other two were the Bank of Bombay and the Bank of Madras. The three banks
were merged in 1921 to form the Imperial Bank of India, which upon India's independence,
became the State Bank of India in 1955. For many years the presidency banks had acted as quasi-
central banks, as did their successors, until the Reserve Bank of India was established in 1935,
under the Reserve Bank of India Act, 1934.In 1960, the State Banks of India was given control
of eight state-associated banks under the State Bank of India (Subsidiary Banks) Act, 1959.
These are now called its associate banks. In 1969 the Indian Govt. Nationalized 14 major private
banks. In 1980, 6 more private banks were nationalized. These nationalized banks are the
majority of lenders in the Indian economy. They dominate the banking sector because of their
large size and widespread networks .The Indian banking sector is broadly classified into
scheduled banks and non-scheduled banks. The scheduled banks are those which are included
under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further
classified into: nationalized banks; State Bank of India and its associates; Regional rural banks
(RRBs); foreign banks; and other Indian private sector banks. The term commercial bank refers
to both scheduled and non-scheduled commercial banks which are regulated under the Banking
Regulation Act, 1949.Generally banking in India is fairly mature in terms of supply, product
range and reach-even though reach in rural India and to the poor still remains a challenge. The
government has developed initiatives to address this through the State bank of India expanding
its branch network and through the national bank for agriculture and rural development with
facilities like microfinance.

NATIONALIZATION IN THE 1960s

Despite the provisions, control and regulations of the Reserve bank of India, banks in
India except the state bank of India (SBI), continued to be owned and operated by private
persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large employer, and a
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debate had ensued about the nationalization of the banking industry. Indira Gandhi, the then
Prime Minister of India, expressed the intention of the government of India in the annual
conference of the All India congress meeting in a paper entitled "Stray thoughts on Bank
Nationalization. Thereafter, her move was swift and sudden. The government of India issued an
ordinance ('banking companies (acquisition and transfer of undertakings) ordinance, 1969') and
nationalized the 14 largest commercial banks with effect from the midnight of 19 July 1969.
These banks contained 85 percent of bank deposits in the country. Jayaprakash Narayan, a
national leader of India, described the step as a "masterstroke of political sagacity." within two
weeks of the issue of the ordinance, the parliament passed the banking companies (acquisition
and transfer of undertaking) bill, and it received the presidential approval on 9 August 1969.A
second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason
for the nationalization was to give the government more control of credit delivery. With the
second dose of nationalization, the government of India controlled around 91% of the banking
business of India. Later on, in the year 1993, the government merged new bank of India with
Punjab national bank. It was the only merger between nationalized banks and resulted in the
reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the
nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian
economy. The 14 largest commercial banks with effect from the midnight of 19 July 1969. These
banks contained 85 percent of bank deposits in the country of Jaya Prakash Narayan, a national
leader of India, described the step as a "masterstroke of political sagacity." within two weeks of
the issue of the ordinance, the parliament passed the banking companies (acquisition and transfer
of undertaking) bill, and it received the presidential approval on 9 August 1969.A second dose of
nationalization of 6 more commercial banks followed in 1980. The stated reason for the
nationalization was to give the government more control of credit delivery. With the second dose
of nationalization, the government of India controlled around 91% of the banking business of
India. Later on, in the year 1993, the government merged new bank of India with Punjab bank of
India. It was the only merger between nationalized banks and resulted in the reduction of the
number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks
grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

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LIBERALIZATION IN THE 1990s
In the early 1990s, the then government embarked on a policy of liberalization, licensing
a small number of private banks. These came to be known as New Generation tech-savvy banks,
and included Global Trust Bank (the first of such new generation banks to be set up), which later
amalgamated with Oriental Bank of Commerce , Unit Trust of India(UTI) BANK (since renamed
Axis Bank),Industrial Credit and Investment Corporation of India (ICICI) BANK and Housing
Development Finance Corporation (HDFC) BANK .This move, along with the rapid growth in
the Economy of India, revitalized the banking sector in India, which has seen rapid growth with
strong contribution from all the three sectors of banks, namely, government banks, private banks
and foreign banks. The next stage for the Indian banking has been set up with the proposed
relaxation in the norms for foreign direct investment, where all foreign investors in banks may be
given voting rights which could exceed the present cap of 10% at present. It has gone up to 74%
with some restrictions. The new policy shook the banking sector in India completely. Bankers,
till this time, were used to the 4–6–4 method (borrow at 4%; lend at 6%; go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for
traditional banks. All this led to the retail boom in India. People demanded more from their
banks and received more.

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J&K BANK LIMITED
Jammu & Kashmir Bank is the only bank in the country with majority ownership vested with a
state government – the government of Jammu & Kashmir. It is the sole banker to the
Government of Jammu & Kashmir. J&K Bank functions as a universal bank in Jammu &
Kashmir and as a specialized bank in the rest of the country. It is also the only private sector
bank designated as RBI‟s agent for banking business, and carries out the banking business of the
Central government, besides collecting central taxes for central board of direct taxes
(CBDT).J&K Bank follows a two-legged business model whereby it seeks to increase lending in
its home state which results in higher margins despite modest volumes, and at the same time,
seeks to capture niche lending opportunities on a Pan-India basis to build volumes and improve
margins J&K Bank operates on the principle of „socially empowering banking‟ and seeks to
deliver innovative financial solutions for household, small and medium enterprises. The bank, is
incorporated in 1938, and is listed on the NSE and the BSE. It has a track record of uninterrupted
profits and dividends for four decades. The J&K Bank is rated P1+, indicating the highest degree
of safety by Credit Rating Information Services of India Limited(CRISIL).
VISION
“To catalyze economic transformation and capitalize on growth.” J&K BANK‟S vision is to
engender and catalyze economic transformation of Jammu and Kashmir and capitalize from the
growth induced financial prosperity thus engineered. The Bank aspires to make Jammu and
Kashmir state the most prosperous state in the country, by helping create a new financial
architecture for the J&K economy, at the center of which will be the J&K Bank.
MISSION
The mission of J&K bank is two-fold:

● To provide the people of J&K international quality financial service and solutions and
● To be a super-specialist bank in the rest of the country.

PAST PERFORMANCE

* The aggregate business of the bank stood at Rs136919 Crore at the end of the financial year
2017-18.

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* The total deposits of the Bank grew by Rs7543 Crore from Rs72463 Crore as on 31st March,
2017 to Rs80006 Crore as on 31st March,20178, a growth of 10.41 percent. CASA deposits of
the bank at Rs40715 Crore constituted 50.89 percent of total deposits of the bank.

* Cost of deposits for current FY stood at 5.01 percent.

* The net advances of the Bank stood at Rs56913 Crore as on 31st March, 2018.

* Yield on advances for the current FY stood at 8.77 percent.

* Priority sector advances (Gross) stood at Rs21621.43 Crore as on 31st March, 2018.

* The bank effected cumulative cash recovery, up-gradation of NPA’s and technical write-off of
Rs3098.00 Crore during FY 2017-18.

* Investment portfolio of the bank stood at Rs18880 Crore as on 31st March, 2018.

* The Gross Profit for the financial year 2017-18 stood at 1381.87 Crore.

* The bank registered a Net Profit of Rs202.72 Crore for the financial year 2017-18.

* The Net Worth of the bank stood at Rs6161.21 Crore on 31st March 2018..

Areas Branches
Metro 170

Urban 106

Semi-Urban 152

Rural 476

Total 904 (as per annual report 2017-18)

FUTURE PLANNING AND TURNOVER

To build a global brand we need to do two things- go global physically and second more
importantly, have a unique business model product offering and services standards, all of which
are globally recognized. We have taken initial step to achieve the first. As of today, after the state
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government. Our second largest shareholders are foreign institutional investors with a combined
stake of almost 36%.

MEANING OF NPA

Commercial Banks’ assets are of various types. All those assets which generate periodical
income are called as Performing Assets (PA) while all those assets which do not generate
periodical income are called as Non-Performing Assets (NPA). If the customers do not repay
principal amount and interest for a certain period of time then such loans become Non-
performing assets(NPA). Thus non-performing assets are basically non-performing loans. For a
bank, a Non-Performing Asset (NPA) or bad debt is usually a loan that is not producing income.
Earlier it was largely applicable to businesses. But things have changed with banks widely
extending consumer loans (home, car, personal and education, among others) and strict asset
classification norms. If a borrower misses paying his Equated Monthly Installment (EMI) for 90
days, the loan is considered as bad or NPA. High NPAs are a sign of bad financial health. This
has wide-ranging ramifications for a bank, especially in the stock market and money market. So,
as soon as a debt goes bad, the banks want it either made better or taken out of their books. An
asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are
not paid by the borrower 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. 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 or credit facilities granted to that borrower as non-performing without
having any regard to the fact that there may still exist certain advances or credit facilities having
performing status.

DEFINITION An asset, including a leased asset, becomes non-performing when it ceases

to generate income for the bank. A ‘non-performing asset’ (NPA) was defined as ‘an asset
should be classified as non-performing , if the interest and/or principal amount have not been
received or remained outstanding for one quarter from the day such income/installments has
fallen due. With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the ‘90 days’ overdue’ norm for identification of

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NPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a
Nonperforming asset (NPA) shall be 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 90days, 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 90days in respect
of other accounts.
As a facilitating measure for smooth transition to 90 days’ norm, banks have been advised to
move over to charging of interest at monthly rests, by April 1,2002. However, the date of
classification of an advance as NPA should not be changed on account of charging of interest at
monthly rests. Banks should, therefore, continue to classify an account as NPA only if the
interest charged during any quarter is not serviced fully within 180 days from the end of the
quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from
March 31, 2004.
NPA represent bad loans, the borrowers of which failed to satisfy their repayment obligations.
Michael et al (2006)15 emphasized that NPA in loan portfolio affect operational efficiency
which in turn affects profitability, liquidity and solvency position of banks. Batra, S (2003)16
noted that in addition to the influence on profitability, liquidity and competitive functioning,
NPA also affect the psychology of bankers in respect of their disposition of funds towards credit
delivery and credit expansion. NPA generate a vicious effect on banking survival and growth,
and if not managed properly leads to banking failures. Many researches including Chijoriga
M.M. (2000)17 and Dash et al (2010)18 showed the relationship bank failures and higher NPA
worldwide.
NPA CONCEPT AND PRUDENTIAL NORMS

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 The banks, in their books, have different kind of assets, such as cash in hand, balances
with other banks, investment, loans and advances, fixed assets and other assets. The non-
performing asset or NPA concept is restricted to loans, advances, and investments. As long as an
asset generates the income expected from it and does not disclose any unusual risk other than
normal commercial risk, it is treated as a ‘Performing Asset’, and when it fails to generate the
expected income, it becomes a ‘Non-Performing asset’. In other words, a loan asset becomes a
non-performing asset (NPA) when it ceases to generate income, i.e. interest, fees, commission,
or any other dues for the bank for more than 90 days. In line with international practices and as
per the recommendations of Narsimham committee, The Reserve Bank of India (RBI) for the
first time issue certain guidelines for treating a credit facility as a non-performing asset to be
followed from the accounting year 1992-93. These guidelines though, greatly welcome, could
not fully address the problems of non-performance. RBI has subsequently been issuing number
of circulars from time to time containing instructions or guidelines to banks on matters relating
to prudential norms of income recognition, asset classification and provisioning so as to move
towards greater consistency and transparency in the published accounts. With the introduction of
prudential norms, the health-code-based system for classification of advances and all related
reporting requirements has ceased to be the subject of supervisory interest.
The attempt of RBI is to frame a policy for income recognition that is objective and based on
record or recovery rather than on any subjective consideration. Likewise, the classification of the
assets of banks has to be done on the basis of objective criterion, which would ensure a uniform
and consistent application of the norms. In addition, the provisioning has to be made on the basis
of classification of the assets, which should further be ceased on the period for which the asset
has the realizable value thereof. An attempt has been made to consolidate the various circulars
issued by RBI as of 17th July, 2004 on the above subject matter.
PRUDENTIAL ACCOUNTING NORMS
Prior to the financial sector reforms in the year 1992-93, banks used to debit interest to
the loan account on accrual basis and recognized the same as income even in accounts with poor
record of recovery. Recognizing income on accrual basis in accounts where the realization is in
doubt is not a prudential practice. As per the recommendation of the Narsimham committee, as
stated earlier, the Reserve Bank of India introduced prudential accounting norms applicable from
the financial year 1992-93, interest is not to be debited on the accrual basis but on the cash basis.
The prudential accounting norms are based on the NPA concept, N for No income, P for

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provisioning and A for asset classification. The prudential accounting norms comprise of the
following:
1. Income recognition
2. Asset classification
3. Provisioning
1. Income recognition
For the purpose of income recognition, banks are required to classify their loan account into two
categories:
a. Performing Assets (PA)
b. Non-performing Assets (NPA)
If the asset is ‘performing’, income is recognized on an accrual basis. If the asset is ‘non-
performing’, interest thereon is to be recognized only on cash basis, i.e., when it is actually
realized. Banks may book dividend income on shares of corporate bodies on accrual basis,
provided dividends on the shares have been declared in the Annual General Meetings and the
owners’ right to receive the payment is established. Hence if dividend is not declared before
finalizing the accounts, it cannot be taken to income account. In respect of income from
Government securities and bonds and debenture of corporate bodies where interest rates are
predetermined, income could be booked on accrual basis, provided interest is serviced regularly
and is not in arrears.
As per the RBI guidelines, applicable from 1992-93 onwards, once a loan account is identified as
NPA, the bank should do the following:
➢ Not to charge/debit interest to the account on accrual basis.
➢ To charge interest to the account only when it’s actually received.
To reverse the amount of interest already charged on accrual basis in the accounting period to the
extent it remains un-recovered on the date of the classification it as NPA. If any performing asset
of the previous period has become NPA in the current period, all interest income relating to that
NPA credited to the Profit and Loss Account of the previous period, to the extent unrealized
interest. The unrealized interest is to be transferred from income account to interest suspense
account, where maintained, or credited to party’s account. This applies to unrealized interest on
Government guaranteed accounts too. Other items of income such as fees, commission, locker
rent, etc. are transaction-oriented and hence may be recognized as income only on realization. If

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income such as fees, commission, etc. is booked, on accrual basis, in the case of an account that
has turned NPA, the same should be reversed.
In case of NPA where interest income has ceased to accrue, the fees, commission and similar
receipts should neither be debited to the account nor credited as income and even if credited,
should be reversed or provided for to the extent to which it is uncollected.
Any amount recovered even partially towards interest in case of an account can be recognized as
income, provided such credits in the account towards interest are not out of fresh/additional
facilities sanctioned.
In case of rescheduling or negotiation of loan, the fees, interest, commission, etc., should be
recognized on accrual basis over the period of time covered by the renegotiated or rescheduled
extension of credit. Thus the income would be recognized on accrual basis from the date of
rescheduling, as in a fresh account.
2. Asset Classification
Taking into accounts the degree of well-defined credit weaknesses and the extent of dependence
on collateral security for realization, the MGCs should classify assets into standard, substandard,
doubtful and loss assets.
3. Provisioning
Based on the asset classification banks are required to make provision against the NPAs at 100%
for loss assets; 100% percent of the unsecured portion plus 20% to 50 % of the secured portion,
depending on the period for which the account has remained in doubtful category; and 10% etc.
Banks have constituted recovery cells, recovery branches, NPA management departments and fix
recovery targets.
Policies evolved and steps taken in this regard are critically examined during the annual on-site
inspection of banks. The off-site returns also provide RBI an insight in to the quality of credit
portfolio and quarterly intervals.
Introduction of prudential norms on income recognition, asset classification and provisioning
during 1992 - 93 and other steps initiated apart from brining in transparency in the loan portfolio
of the banking industry have significantly contributed towards improvement of the pre-sanction
appraisal and post-sanction supervision which is reflected in lowering of the levels of fresh
accretion of nonperforming advances of banks after 1992.
TYPES OF NPAS
NPAs are broadly divided into: a) Gross NPAs, and b) Net NPAs

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a) Gross NPAs: Gross NPAs are the sum total of all loan assets that are classified as NPAs as
per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made
by banks. It consists of all the non-standard assets like as sub-standard, doubtful and loss assets.
It can be calculated with the help of following ratio:
Gross NPAs Ratio = Gross NPAs / Gross Advances
b) Net NPAs: Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very time
consuming, the provisions the banks have to make against the NPAs according to the central
bank guidelines, are quite significant. That is why the difference between gross and net NPA is
quite high.
It can be calculated as:
Net NPAs = Gross NPAs – Provisions / Gross Advances - Provisions
The Reserve Bank of India states that, compared to other Asian countries and the US, the gross
non-performing asset figures in India seem more alarming than the net NPA figure. The problem
of high gross NPAs is simply one of inheritance. Historically, Indian public sector banks have
been poor on credit recovery, mainly because of very little legal provision governing foreclosure
and bankruptcy, lengthy legal battles, sticky loans made to government public sector
undertakings, loan waivers and priority sector lending. Net NPAs are comparatively better on a
global basis because of the stringent provisioning norms prescribed for banks in 1991 by
Narasimham committee.
NPAs have also been divided or classified into four types basing on the type of asset.
● Standard Assets: A standard asset is a performing asset. Standard assets generate continuous
income and repayments as and when they fall due. Such assets carry a normal risk and are
not NPA in the real sense. So, no special provisions are required for standard assets.
● Sub-Standard Assets: All those assets (loans and advances) which are considered as non-
performing for a period of 12 months are called as sub- standard assets.
● Doubtful Assets: All those assets which are considered as non-performing for period of
more than 12 months are called as doubtful assets.
● Loss Assets: All those assets which cannot be recovered are called as Loss Assets. These
assets can be identified by the Central bank or by the auditors.

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GUIDELINES FOR THE CLASSIFICATION OF ASSETS AS NPA
Broadly speaking, classification of assets should be done taking into account the degree
of well-defined weakness and the extent of time lag of dues.
● Banks should establish appropriate internal system to eliminate the tendency of delay or
postpone the identification of NPAs, especially in respect of high value accounts. The banks
should fix a minimum cut-off point to decide what would constitute a high value account
depending upon their business levels. Responsibility and validation levels for ensuring proper
asset classification may be fixed by the banks. The system should ensure that doubts in asset
classification due to any reason are settled through specified internal channels within one
month from the date on which the account would have been classified as NPA as per
guidelines.
● Accounts with temporary deficiencies: The Classification of an asset asNPA should be based
on record of recovery. Banks should not classify an advance account as NPA merely due to
the existence of some deficiencies which are temporary in nature such as non-availability of
adequate drawing power based on the latest available stock statement, balance outstanding
exceeding the limit temporarily, non-submission of stock statements and non-renewal of
limits on the due date, etc. In the matter of classification of accounts with such deficiencies
bank may follow guidelines.
● Banks should ensure that the drawing in the working capital accounts are covered by
adequacy of current assets, since current assets are first appropriated in times of distress.
Drawing power is required to be arrived as based on the stock statement, which is current.
However, considering the difficulties of large borrowers, stock statement relied upon the
banks for determining drawing power should not be older than the three months. The
outstanding in the account based on the drawing power calculated from the stock statement
older than three months, would be deemed as irregular. A working capital account will
become NPA if such irregular drawings are permitted in the account for a continuous period
of 90 days even though the unit may be working or borrowers’ financial position is
satisfactory. In case of constraints such as non-availability of financial statements and other
data from the borrowers, the branch should furnish evidence to show that renewal/review of
credit limits is already on and would be completed soon.In any case, delay beyond three
months is not considered desirable as a general discipline. Hence, accounts where the

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 regular/ad hoc credit limits have not been reviewed/ renewed within 90 days from the due
date/date of ad hoc sanction will be treated as NPA.
● Accounts regularized near balance sheet date: The asset classification of accounts where a
solitary or few credits are recorded before the balance sheet date should be handled with care
and without the scope of subjectivity. Where the accounts show the inherent weakness on the
basis of data available, the account should be deemed as NPA. In other genuine cases, the
bank must submit satisfactory evidence to the statutory auditors and inspecting officers about
the manner of regularization of the account to eliminate doubts on their performing status.
● Asset classification to be borrower-wise and not facility wise:
a) It is difficult to envisage the situation when only one facility to the borrower becomes
the problem credit and not others. Therefore, all the facilities granted by the bank to a
borrower will have to be treated as NPA and not the particular facility or part thereof
which has become irregular.
b) If the debits arising out of development of letter of credit or invoked guarantees are
parked in a separate account, the balance outstanding in the borrower’s principle
operating account for the purpose of application of prudential norms.
● Advances under consortium arrangement: Asset classification of accounts under consortium
should be based on the record of recovery of the individual member bank. Where the
remittances from the borrower under consortium lending arrangement are pooled with one
bank and/or where the bank receiving remittances is not parting with the share of other
member banks, the account will be treated as not serviced in the books of other member
banks, and therefore be treated as NPA. The participating banks is the consortium should,
therefore, arrange to get their share of recovery transferred from the lead bank or get an
express consent from the lead bank for the transfer of their share of recovery, to ensure
proper asset classification in their respective books.
● Accounts where there is erosion in the value of security:
a) A NPA need not go through the various stages of classification in case of serious credit
impairments and such assets should be straightway classified as doubtful or loss assets. Erosion
in the value of securities can be significant when the realizable value of the security is less
than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last
inspection, as the case may be.

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 Such NPAs may be straightaway classified under doubtful category and provisioning
should be made as applicable to doubtful assets.
b) If the realizable value of the security, as assessed by the bank /approved values /RBI is
less than 10 percent of the outstanding in the borrower account, the existence of the
security should be ignored and the asset should be straight away classified as a loss asset.
It may be either written off or fully provided for the bank.

ASSET QUALITY, NPAS AND DIRECTED CREDIT

The stability of financial institution is determined mainly based on its quality of assets and
performance indicators. Quality of assets determines the survival and existence of business.
Performance is judged on the basis of profitability. The financial institutions were considered
stable during crisis period if the profitability and quality of assets is not affected. The stability of
banking sector is vital for economic growth. The commercial banks dominate the sector,
comprising more than three-fifths of the financial system assets. The financial intermediation by
banks in India has played a central role in supporting the growth process, by mobilizing
savings”. So any issues in banking sector directly impact the wellbeing of the economy. The
emphasis during post-liberalization era in Indian banking sector is focused on improving the
transparency and to integrate best practices in banking sector.
● An Asset is classified as doubtful, if in substandard category for 18 months, from the present
norm of 24 months in the first instance and eventually for 12 months.
● For the purpose of evaluating the quality of asset portfolio Government guaranteed advances
that have turned sticky should be treated as NPAs.
● To reduce the average level of net NPAs for all banks to below 5 percent by the year 2000
and to 3 per cent by 2002. For those banks with international presence the objective should
be to reduce the gross NPAs to 5 per cent and 3 per cent by the year 2000 and 2002
respectively and net NPAs to 3 per cent and 0 percent by these dates.
● All loan assets in the doubtful and loss categories which represent bulk of the hard core
NPAs in most banks should be identified and their realizable value determined. These assets
could be transferred to an Asset Reconstruction Company (ARC), which would, in turn, issue
bonds, equal to the realizable value of the assets transferred.
● Alternatively the banks in difficulty could issue bonds that form part of Tier II capital. This
will help the banks to blaster capital adequacy, which has been eroded because of the
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 provisioning requirements for NPAs. As the banks in difficulty may find it difficult to attract
subscribers to bonds, Government will need to guarantee these instruments, which would
then make them eligible for Statutory Liquidity Ratio(SLR) investment by banks and
approved instruments for Guaranteed Investment Certificate(GIC) and Provident Fund(PF) .
● The interest subsidy element in credit for the priority sector should be totally eliminated and
even interest rates on loans under Rs.2 Lakhs should be deregulated for scheduled
commercial banks as has been done in the case of Regional Rural Banks and Cooperative
Credit Institutions.
NPA SOME ASPECTS AND ISSUES

1. The NPAs of banks in India are considered to be at higher levels than those in other
countries. This issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and disclosure
measures initiated by RBI during recent years.
2. The NPA Management Policy document of SBI lays down to contain net NPAs to less than
5% of banks total loan assets in conformity with the international standard. It is, therefore
necessary that as per guidelines provided in NPA Management Policy document, every effort
be made at all levels to cut down the NPAs. All this requires greater efforts and teamwork.
3. It is essential to keep a constant watch over the non-performing assets not just to keep it
performing but also that once they become non-performing, effective measures are initiated
to get full recovery and where this is not possible, the various means are to be initiated to get
rid off the NPAs from the branch books.
4. NPAs adversely affect the wealth condition of the branch advances as also the profitability
of the branch. Some of the reasons for this are as under:
(a) Interest cannot be applied on the loan accounts classified as NPAs.
(b) The Branch has to pay interest to central office on outstanding classified as NPA.
(c) The Branch has to incur cost in supervision and follow up of such advances.
(d) Provision has to be made on NPAs at Bank level.
5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub
Standard, Doubtful or loss assets.
6. Once the assets are classified as NPA, the Branch Manager has to take all the necessary steps
to get the dues recovered there-under to maintain the good health of advances and the higher

Page | 21
 profitability at the-Branch. This requires management of NPAs in such a Planned and
scientific manner that the percentage of NPAs to the total advances will be minimum.

LITERATURE REVIEW
According to a study by Brownbridge (1998), most of the bank failures were caused by
nonperforming loans. Arrears affecting more than half the loan portfolios were typical of the
failed banks. Many of the bad debts were attributable to moral hazard: the adverse incentives on
bank owners to adopt imprudent lending strategies, in particular insider lending and lending at
high interest rates to borrowers in the most risky segments of the credit markets.
Bloem and Gorter (2001) suggested that a more or less predictable level of non-
performing loans, though it may vary slightly from year to year, is caused by an inevitable
number of ‘wrongeconomic decisions by individuals and plain bad luck (inclement weather,
unexpected price changes for certain products, etc.). Under such circumstances, the holders of
loans can make an allowance for a normal share of non-performance in the form of bad loan
provisions, or they may spread the risk by taking out insurance. Enterprises may well be able to
pass a large portion of these costs to customers in the form of higher prices. For instance, the
interest margin applied by financial institutions will include a premium for the risk of
nonperformance on granted loans. At this time, banks’ non-performing loans increase, profits
decline and substantial losses to capital may become apparent. Eventually, the economy reaches
a trough and turns towards a new expansionary phase, as a result the risk of future losses reaches
a low point, even though banks may still appear relatively unhealthy at this stage in the cycle.
According to Gorter and Bloem (2002) non-performing loans are mainly caused by an
inevitable number of wrong economic decisions by individuals and plain bad luck (inclement
weather, unexpected price changes for certain products, etc.). Under such circumstances, the
holders of loans can make an allowance for a normal share of nonperformance in the form of bad
loan provisions, or they may spread the risk by taking out insurance.
PetyaKoeva (2003), his study on the Performance of Indian Banks. During Financial
Liberalization states that new empirical evidence on the impact of financial liberalization on the

Page | 22
performance of Indian commercial banks. The analysis focuses on examining the behavior and
determinants of bank intermediation costs and profitability during the liberalization period. The
empirical results suggest that ownership type has a significant effect on some performance
indicators and that the observed increase in competition during financial liberalization has been
associated with lower intermediation costs and profitability of the Indian banks.
Das and Ghosh (2003) empirically examined non-performing loans of India’s public
sector banks in terms of various indicators such ascredit 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 bank’s lending
policy adducing to relatively unselective and inadequate assessment of sectoral prospects.
Vradi et.al (2006), his study on´ Measurement of efficiency of bank in India concluded
that in modern world performance of banking is more important to stable the economy .In order
to see the efficiency of Indian banks we have to see the fore indicators i.e. profitability,
productivity, assets, quality and financial management for all banks includes public sector,
private sector banks in India for the period 2000 and 1999 to 2002-2003. For measuring
efficiency of banks we have adopted development envelopment analysis and found that public
sectors banks are more efficient than other banks in India
Brijesh K. Saho et.al (2007), this paper attempts to examine, the performance trends of
the Indian commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings are
indicative in many ways. First, the increasing average annual trends in technical efficiency for all
ownership groups indicate an affirmative gesture about the effect of the reform process on the
performance of the Indian banking sector. Second, the higher cost efficiency accrual of
privatebanks over nationalized banks indicate that nationalized banks, though old, do not reflect
their learning experience in their cost minimizing behavior due to X-inefficiency factors arising
fromgovernment ownership. This finding also highlights the possible stronger disciplining role
played by the capital market indicating a strong link between market for corporate control and
efficiency of private enterprise assumed by property right hypothesis. And, finally, concerning
the scale elasticity behavior, the technology and market-based results differ significantly
supporting the empirical distinction between returns to scale and economies of scale
Roma Mitra et.al (2008), A stable and efficient banking sector is an essential
precondition to increase the economic level of a country. This paper tries to model and evaluate
the efficiency of 50 Indian banks. The Inefficiency can be analyzed and quantified for every

Page | 23
evaluated unit. The aim of this paper is to estimate and compare efficiency of the banking sector
in India. The analysis is supposed to verify or reject the hypothesis whether the banking sector
fulfills its intermediation function sufficiently to compete with the global players. The results are
insightful to the financial policy planner as it identifies priority areas for different banks, which
can improve the performance. This paper evaluates the performance of Banking Sectors in India.
B.Satish Kumar (2008), in his article on an evaluation of the financial performance of
Indian private sector banks wrote Private sector banks play an important role in development of
Indian economy. After liberalization the banking industry underwent major changes. The
economic reforms totally have changed the banking sector. RBI permitted new banks to be
started in the private sector as per the recommendation of Narashiman committee. The Indian
banking industry was dominated by public sector banks. But now the situations have changed
new generation banks with used of technology and professional management has gained a
reasonable position in the banking industry.
M. Karunakar et.al (2008), Study the important aspect of norms and guidelines for
making the whole sector vibrant and competitive. The problem of losses and lower profitability
of Non-Performing Assets (NPA) and liability mismatch in Banks and financial sector depend on
how various risks are managed in their business. Besides capital to risk Weightage assets ratio of
public sector banks, management of credit risk and measures to control the menace of NPAs are
also discussed. The lasting solution to the problem of NPAs can be achieved only with proper
credit assessment and risk management mechanism. It is better to avoid NPAs at the market
stage of credit consolidation by putting in place of rigorous and appropriate credit appraisal
mechanisms.
Nelson M. Waweru et.al (2009), Study that many financial institutions that collapsed in
Kenya since 1986 failed due to non-performing loans, this study investigated the causes of non-
performing loans, the actions that bank managers have taken to mitigate that problem and the
level of success of such actions. Using a sample of 30 managers selected from the ten largest
banks the study found that national economic downturn was perceived as the most important
external factor. Customer failure to disclose vital information during the loan application process
was considered to be the main customer specific factor. The study further found that Lack of an
aggressive debt collection policy was perceived as the main bank specific factor, contributing to
the non performing debt problem in Kenya.

Page | 24
 Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of great
importance given its association with bank failure and financial crises, and it should therefore be
of interest to developing countries. The purpose of this paper is to build a multivariate model,
incorporating macroeconomic and bank-specific variables, to forecast non-performing loans in
the banking sector of Barbados. On an aggregate level, our model outperforms a simple random
walk model on all forecast horizons, while for individual banks; these forecasts tend to be more
accurate for longer prediction periods only.

RESEARCH METHODOLOGY
RESEARCH DESIGN
The study is exploratory in nature. Exploratory research refers to the that type of research where
the researcher aims at getting new insights into the phenomenon.

RESEARCH OBJECTIVE
Indian banking industry, which was in glory phase once upon a time, has been facing a lots
of challenges on non- performing assets at present scenario. Many banks have kept their NPA
sunder the control but some banks are not able to control their NPA levels. They are facing lots
of problems. There can be various reasons behind this NPA. Non-performing assets has been
hitting the profitability of the banks or it can be said that due to NPA, the profitability of the
banks are going down day by day. The subsidiary for this is the functioning of Debt Recovery
Tribunal(DRT) which is a judiciary for the bank for recovery amount from the default customers.
Under this consideration the present study focus on studying NPA and banking sector. For this
the following objectives were formulated:
➢ To analyze the impact of non- performing assets on banking sector.
➢ To study the position of non-performing assets in JK bank Ltd
➢ To study the reason for an asset becoming NPA
➢ To analyze the volume of NPA of JK bank ltd.

NEED OF THE STUDY

The non-performing assets that are not able to generate income for the bank are the great threat
for the banking institution. Rather than generating profit for the bank, NPA drains off the income
earned by the other performing asset by the way of paying interest to the real owner of there

Page | 25
sources. It affects the overall profitability of the bank adversely by affecting the return on equity
and return on asset. There are certain ways through which it affects the financial institutions are
as follows:
Thus, the need of the study of the NPA is must necessary due to these reasons. These reasons are
the crucial for any bank at present. One has to realize these matters and has to take corrective
action against NPA reasons, as for as possible one has to convert all the NPA accounts into PA
accounts. As far as the importance of the study is concern, without the study, one can’t
identifythe whole gamut of the NPA. To know, how the account is becoming NPA is must
necessary.
After identifying the reason behind the particular NPA account, one can go for a step ahead.
Thatmeans for the step of how to convert into PA and how to prevent other account from
becoming NPA.
SAMPLING AREA: Srinagar District

Table I showing Deposits and Advances of JK bank

Year Deposits Advances

2011-2012 53,346.90 cr 33,077.42 cr
2012-2013 64,220.62 cr 39,200.41 cr
2013-2014 69,335.86 cr 46,384.60 cr
2014-2015 65,756.18 cr 44,585.81 cr
2015-2016 69,390.12 cr 50,193.21 cr
2016-2017 72,463.09 cr 49,816.11 cr

Table II showing gross NPA to gross Advances Ratio

YEAR NPA
2012-2013 1.62%
2013-2014 1.66%
2014-2015 5.97%
2015-2016 8.32%
2016-2017 12.53%

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Chart II depicting Gross NPA to Gross Advances Ratio of JK bank over the last 5 financial years

INTERPRETATION: There is more than seven-fold increase in gross NPAs betwe

Series 1
Column1
Column2

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

en 2012
and 2017. It is significant to note that during 2013-14 the ratio of gross NPAs to gross advances
was only 1.66 per cent, steep change by 5.97 per cent in 2014-15, 8.32 per cent in 2015-16 but
worsened to 12.53 per cent during 2016-17. This is mainly attributed to deterioration in asset
quality of the bank in the form of rising substandard/doubtful assets.

Table III showingNet NPA TO Net Advances Ratio

YEAR NPA
2012-13 0.14%
2013-14 0.22%
2014-15 2.77%
2015-16 4.31%
2016-17 8.26%

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 Column2
Column1
Series 1

2012-2013 2013-2014 2014-2015 2015-2016 2016-2017

Chart III depicting Net NPA to Net Advances Ratio over the last 5 financial years

INTERPRETATION: As per the above analysis it has been found that the net NPA to net
advances ratio, which was 0.14 per cent in 2012-13, 2.77 per cent in 2014-15, 4.31 per cent in
2015-16 and the same worsened to 8.26 per cent in 2016-17.

Table IV showing Dividend paid to shareholders from the last six years

Years %age of dividend Price per share

2010-11 260% 2.60
2011-12 335% 3.35
2012-13 500% 5.00
2013-14 500% 5.00
2014-15 210% 2.10
2015-16 175% 1.75

INTERPRETATION: The above analysis depicts that The dividend paid for 2010-11, 2011-12,
2012-13 and 2013-14 was 260 per cent (that is, Rs 2.60 per share), 335 per cent (that is Rs 3.35
Page | 28
per share), 500 per cent (that is, Rs 5.00 per share), 500 per cent(that is, Rs 5.00 per share).The
dividend paid for 2014-15 is 210 percent compared to 2013-14 indicates a net decrease of 58 per
cent over the previous year. While as dividend paid for 2015-16 is 175 percent , when compared
to 2013-14 indicates a net decrease of 65 percent.

Table V showing mounting Gross NPA level of JK Bank (in crores)

Year Amount
2010-2011 519
2011-2012 517
2012-2013 644
2013-2014 783
2014-2015 2764

Series 1
Column1
Series 3

Chart V depicting the position of NPAs in Crores of J&K over the last 5 years

INTERPRETATION :The above analysis reveals that the bank is saddled with mounting gross
NPAs which were recorded at a whopping amount of Rs 2,764 Crores in 2014-15 as against Rs
783 Crores during 2013-14, indicating more than two and a half-fold increase over the relevant
previous year. This state of affairs has put the bank in a tight spot. It is for the first time in the
history of the bank to witness such soaring bad assets. A peep into the previous Annual Reports
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of the bank reveals that during the FYs 202012-13, 2011-12 and 2010-11 gross NPAs level
remained only at Rs 644 Crores, Rs 517 Crores and Rs 519 Crores respectively.

REASONS FOR RISE IN NPAs OF J&K BANK LTD

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 in PSB are growing due to external as well as internal factors.

External factors
Ineffective recovery tribunal: The Govt. has set of 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 non-recover, their by reducing their profitability and liquidity.

Willful Defaults: There are borrowers who are able to payback loans but are intentionally
withdrawing it. These groups of people should be identified and proper measures should be taken
in order to get back the money extended to them as advances and loans .

Natural calamities: This is the measure 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 payback 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. Mainly ours farmers
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve

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 the production level thus they are not repaying the loans. It could be well witnessed by the fact
that one of the strong reasons for poor performance in NPAs of jk bank was Kashmir hit by
floods

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.

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 non recovered part as NPAs
and has to make provision for it.

Change in 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. e.g. The fallout of handloom sector is continuing as most of the weavers Co-
operative societies have become defunct largely due to withdrawal of state patronage. The
rehabilitation plan worked out by the Central govt. to revive the handloom sector has not yet
been implemented. So the over dues due to the handloom sectors are becoming NPAs.

Internal factors

Defective Lending process: There are three cardinal principles of bank lending that have been
followed by the commercial banks since long. i) Principles of safety ii) Principle of liquidity iii)
Principles of profitability. Principlesof safety means that the borrower is in a position to repay
the loan both principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay
b. Willingness to pay.
Capacity to pay depends upon:
1. Tangible assets. 2. Success in business
Willingness to pay depends on:

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 1. Character 2. Honest 3. Reputation of borrower
The banker should, therefore take utmost care in ensuring that the enterprise or business for which a loan
is sought is a sound one and the borrower is capable of carrying it out successfully. He should be
a person of integrity and good character.

Inappropriate technology: Due to inappropriate technology and management information

system, market driven decisions on real time basis cannot be taken. Proper MIS and financial
accounting system is not implemented in the banks, which leads to poor credit collection, thus
NPA. All the branches of the bank should be computerized.

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.

• Banks should consider the borrowers own capital investment.

• It should collect credit information of the borrowers from bankers, Enquiry from
market/segment of trade, industry, business, From external credit rating agencies.

• Analyze the balance sheet True picture of business will be revealed on analysis of profit/loss
a/c and balance sheet.

• Purpose of the loan when bankers give loan, he should analyze the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should
analyze the profitability, viability, long term acceptability of the project while financing.

Poor credit appraisal system: Poor credit appraisal is another factor for the rise in NPAs. Due
to poor credit appraisal the bank gives advances to those who are not able to repay it back. They
should use good credit appraisal to decrease the NPAs.

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. Acceptability3. Safety4. 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

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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. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM(117.77lakhs), and the handloom sector
Orissa hand loom WCS ltd (2439.60lakhs).

Absence of regular industrial visits 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 willful defaulters can be collected by
regular visits.

IMPACT OF NPAs ON PERFORMANCE OF BANKS : The

three letters “NPA” strike terror in banking sector and business circle today. NPA is short form
of “Non-Performing Asset”. The dreaded NPA rule says simply this: when interest or other due
to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a non-
performing asset. The recovery of loan has always been problem for banks and financial
institution. To come out of these, the banks first needs to think is it possible to avoid NPA, if not
be then it is to look at the factor responsible for it and managing those Factors. In the
globalization era, banking and financial sectors get high priority. Indian banking sector is having
a serious problem due to Non-performing assets. The earning capacity and profitability of the
bank are highly affected. While the primary function of banks is to lend funds as loans to various
sectors such as agriculture, trade, personal loans, housing loans etc., In recent times the banks
have become very careful in increasing loans because of the main reason of increasing non-
performing assets (NPAs). NPA is cleared as an advance for which interest or repayment of
principal or both remain outstanding for a period of more than 90 days. The level of NPA act as
an indicator viewing the bankers credit risks and competence of allocation of resource. Non-
performing Asset is an important factor in the analysis of financial performance of a bank as it
results in decreasing boundary and higher provisioning requirement for doubtful debts. Various
banks from different groups mutually provide advances to different sectors like agricultural,
priority sector, public sector and others. The accumulation of huge non-performing assets in
banks has assumed great importance. The depth of the problem of bad debts was assumed great
importance, which was first realized only in early 1990s. The magnitude of NPAs in banks and

Page | 33
financial institutions is over Rs.1,50,000/- crores. While gross NPA reflects the quality of the
loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident
that the major defaulters are the big borrowers coming from the non-priority sector. The banks
and financial institutions have to take the initiative to reduce NPAs in a time bound strategic
approach. Public sector banks figure prominently in the debate not only because they dominate
the banking industries, but also since they have much larger NPAs compared with the private
sector banks. This raises a concern in the industry and academics 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 abroad framework has evolved for the management of NPAs under which
several options are provided for debt recovery and restructuring. Banks and Financial Institutions
have the freedom to design and implement their own policies for recovery and write-off
incorporating compromise and negotiated settlements. The impact of NPAs on banks is
significantly visible on the following areas:

PROFITABILITY
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of
client. Because of the money getting blocked the prodigality of bank decreases not only by the
amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some
return earning project/asset. So, NPA doesn’t affect current profit but also future stream of profit,
which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in
profitability is low Return on Investment (ROI), which adversely affect current earning of bank.
LIQUIDITY
Money is getting blocked, decreased profit lead to lack of enough cash and which lead to
borrowing money for shortest period of time which leads to additional cost to the company.
Difficulty in operating the functions of bank such as routine payments and dues is another cause
of NPA due to lack of money.
INVOLVEMENT OF MANAGEMENT
Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to some
fruitful activities, which would have given good returns. Now a day’s banks have special
employees to deal and handle NPAs, which is additional cost to the bank.
CREDIT LOSS
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Bank is facing problem of NPA then it adversely affects the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting their money in the banks.

PROBLEMS IN LOAN RECOVERY

1. Inadequate security and Erosion in value of security: Generally, banks tend to find that there is
a major gap in the valuation of the security, as carried out at the time of providing the loan and at
the time of loan recovery. The value of the security has generally deteriorated over the period
and according to experts, it may further deteriorate by almost 10-50% if quick action is not taken
for its immediate sale.

2. Political interferences: Political interference in the day -to-day functioning of public sector
banks created a number of problems for them. The populist policies of the national level
politicians, such as waiver in repayment only added to these problems.

3. Slow legal procedure: Before the establishment of DRTs in 1993, the banks had to approach
the normal courts to recover their dues. There were provisions under various acts which
hampered the smooth takeover and sale of secured assets. The legal process could take years to
be completed, with the borrower having ample scope for delaying the takeover of assets. A
number of loopholes provided the borrower with opportunities to delay or ignore repayment of
loans. During this period, it was said by some unscrupulous businessmen that - "there is no
difference between equity and debt - you never have to repay either of them ".

4. Swamping of Debt Recovery Tribunals(DRTs) with cases: Once DRTs were established to
quicken the pace of recovery procedures, the pace of recovery improved quite a bit. However,
the DRTs were soon drowned in the ever increasing number of cases. The pending number of
cases with the DRTs increased manifold during the period 1993-2002.

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FINDINGS

➢ J&K bank has witnessed highest ratio of Non-Performing Assets (NPA) to net advances
stood as 8.26% on 31st march 2017. Compared with 4.31% as on 31st March 2016 and
2.77% as on 31st march 2015.
➢ J&K bank has witnessed highest ratio of Non-Performing Assets (NPA) to net gross
advances stood at 12.53% as on 31st march 2017. Compared with 8.32% as on 31st
December 2016 and 5.97% as on 31st march 2015.
➢ The Jammu and Kashmir Bank has recorded a conspicuous growth in deposits from
2012(53,349.90 cr) to 2014(69,335.86 cr) which is the back bone of any bank but has got
decrease in deposits in the year ending 2015 March 31st (65,756.18 cr) and afterwards it
has increased again in 2016 and 2017 with amount (69390.12 cr) and (72,463.09 cr)
respectively.
➢ The net NPA was maximum in 2016-2017 that is 8.26% and it was minimum in 2012-
2013 that is 0.14%.
➢ The Gross NPA ratio was minimum in 2012-2013 that is 1.62% and it was maximum in
2016-2017 that is 12.53%.
➢ JK Bank has paid lowest dividend to its shareholders from the last 5 years in the year
2015-16 at 175% (1.75 Rs. Per share) pertaining to other relevant previous years as:
2014-15 at 210% (2.10 Rs. Per share), 2013-2014 at 500% (5.Rs per share), in 2012-
2013 at 500% (5 Rs. Per share) and in 2011-2012 at 335% (3.35 Rs. Per share).
➢ Political instability is more affected to become an account NPA as respondents strongly
agree that they are affected by the shutdown of their business.
➢ Natural calamities is more affected to become an account as NPAs which could be
clearly seen in the previous year ending 31st March 2015 from deposits to Net NPA
level.

SUGGESTIONS, CONCLUSIONS AND LIMITATIONS

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SUGGESTIONS

On the basic finding following suggestions has been provided t the concern:

❖ The bank’s Management Committee should thoroughly investigate any investment before
committing money to it. It should learn about the investment, check and verify its legitimacy
and follow-up on the background of the individual or organization;
❖ Appropriate credit appraisal and risk management mechanism is badly needed. The bank’s
Integrated Risk Management Committee should put into operation an early warning system,
appoint a Nodal Office for recovery and monitor recoveries efficiently and effectively. It
should recognize financial distress early, take prompt steps to resolve it and ensure fair
recovery for lenders/investors
❖ The ‘Bank Management’ should pursue a policy that would enable the mobilization of low-
cost deposits and their deployment in highly productive, but credit-starved sectors of the J&K
economy. These sectors, apart from being high-yielding, would accelerate the desired
diversification of the Bank’s Credit Portfolio and also help fulfill the bank’s priority sector
obligations
❖ A separate periodic audit, under the supervision of bank’s Audit Committee, is required for
NPAs and the external auditor should periodically submit a special report
❖ More importantly, the government which is the main stakeholder to the tune of 53 per cent
equity holdings, should concern itself first why bank’s NPAs are mounting and accordingly
should take appropriate measures for the purpose. Unfortunately, bureaucracy is aware of
what is happening in the organization but it does not bother to see the problems in it.
❖ A careful and rigorous appraisal f bank assets quality in relation to financial situations has to
be made regularly
❖ The overall Banking Environment should be improved through reduction of Government
intervention in Credit Management
❖ The Jammu and Kashmir bank ltd should lay strategies to boost doubtful assets as NPA
volume of these assets is increasing year by year
❖ The rate of interest charged should be brought down so the Bank should work only on the
strategies to fix up the competitive interest Rates to satisfy the customers
❖ The bank should validate the financial capability of the customers at present and future
before issuing the loans
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❖ The bank should employ a credit monetary policy that could analyze the reasons for high
NPA. The credit section should carefully watch the warning signals viz. Non Payment of
Quarterly interest, Dishonor of cheque
❖ The Bank should practice loan screening before advancing loans to Beneficiaries to vacillate
the necessity of Loan
❖ Bank should employ the following methods for management of NPA :
● Compromise with customer
● Legal remedies
● Regular training program to Employees
● Recovery Camps
● The Bank should maintain close contact with the borrowers
● Proper weightage should be given to the location, condition and marketing title and
possession of security mortgage
● Bank should maintain a special recovery cell for recovery of Non-Performing Assets
● Conduct persuasive action to customers having the potential to pay their Loan
● Operating staff credit skills should be upgraded
● Bank should prevent diversion of funds by the promoters
● The Bank should strengthen banking supervision, accounting and auditing standards.

CONCLUSIONS

Risk is part of lending, but it can be minimized by taking precautions. NPA’s can be
reduced, if appropriate steps are taken at appropriate time. Hence banks must take appropriate
steps for reducing NPA’s. It is not possible to eliminate totally NPAS in the banking business but
can be minimized. It is always wise to follow the proper policy appraisal, supervision and
follow-up of advances to avoid NPAs. The banks should not only take steps for reducing present
NPAs, but necessary precautions should also be taken to avoid future NPAs. Banks should
reduce their bench marks prime lending rate and encourage credit to the key sectors

For any bank to serve in this competitive world it has to ensure its Non- Performing Assets are
minimizing by improving new strategies on credit collection from the customers

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As per the analysis, Jammu and Kashmir Bank Ltd, Non -Performing Assets average level is
1.18% which is above the RBI permissible limit. But still it is acceptable while looking in the
competition in the market. A significant progress has been made till now in NPA management in
J&K bank ltd. But still a lot has to be done

LIMITATIONS

1. This being an academic study suffers from time constraints. Thus, time factor was major
limitation.
2. The sample size was 40 only.
3. The study is confined to Srinagar city. Hence, the results might not be applicable for
other districts.

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BIBLIOGRAPHY:
BOOKS
➢ Kothari C.R, Research Methodology: Methods and Techniques, New Age International,
2004.
➢ Malhotra Naresh K, Marketing Research- An Applied Orientation; Edition-Fourth;
Publication-Pearson Education India, 2010

Newspapers and Magazines

➢ Annual Reports of J&K bank ltd

➢ The Economic Times
➢ Business Standard
➢ Deccan Chronicle
➢ The Hindu

WEBSITES
➢ http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India
➢ http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to Banks of
India
➢ http://rbi.org.in/scripts/NotificationUser.aspx
➢ http://en.wikipedia.org/wiki/Banking_in_India
➢ http://www.ibef.org/industry/Banking.aspx
➢ http://www.bankingindiaupdate.com/general.html

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 ANNEXURE
QUESTIONNAIRE
I the student of MBA-General. (3rd sem) of the Chandigarh University, Gharuan ,Punjab would
like you to express your opinion about Impact of NPA’s on Banks.

The information sought will be used for the academic purpose only and will be kept confidential

Kindly fill the questionnaire as per the instructions given.

A) Name: _______________________________________________________

B) Designation____________________________________________________

C) Branch Address________________________________________________

D) E-mail Id______________________________________________________

____________________________________________________

1. Do you agree that NPA affect the current profits?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

2. NPA also affect the future stream of profits?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

3. NPA leads to liquidity problems for a bank?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

4. NPA leads to the increase in the indirect expenses?

i) Agree ii) Strongly agree iii) Neutral iv) Disagree v) Strongly disagree

5. NPA leads to the wastage of resources?

i) Agree ii) Strongly agree iii) Neutral iv) Disagree v) Strongly disagree

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6. NPA damages the brand image?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

7. NPA impedes the operations of the business?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

8. Low NPA leads can help the Banks in devising the customer oriented schemes?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

9. NPA affects the budgetary policy of the bank?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

10. NPA hinders the growth of the bank?

i) Agree ii) Strongly agree iii) Neutral iv) Disagree v) strongly disagree

11. NPA leads to banks to distribute losses to other borrowers by sharing by interest rates?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

12. NPA loans epitomize Bad investment?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

13. Liquidity constraints for banks in paying depositors?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

14. NPA leads to credit risk management?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

15. Banks get preoccupied with recovery procedures rather than concentrating on expanding
business?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

16. NPA leads to change in banking sentiments which may hinder credit expansion in productive
purposes?
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 i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

17. NPA leads banks to incline towards risk-free investment leading to fewer Profits?

i) Agree ii) Strongly agree iii) Neutral iv) Disagree v) Strongly Disagree

18. Higher NPA leads banks to frame strict norms for governing loan?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

19. NPA is so dangerous that it may lead to Bankruptcy?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

20. NPA lead owners to receive a market return on their capital?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

21. If the BANK fails, owners lose their Assets?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

22. NPA lead depositors not to receive market return on their capital?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

23. If the bank fails, depositors lose their savings?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

24. NPA leads to slowdown in the growth of GDP?

i) Agree II) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

25. NPA leads to market depression?

i) Agree ii) Strongly Agree iii) Neutral iv) Disagree v) Strongly Disagree

Thank you for your time and cooperation.

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