To study on Advanced Financial Accounting, Final Account & Statutory

Requirement for Banking Companies, Preparing Provision of Non-Performing

Assets of Banking.

A Project Submitted to
University of Mumbai for partial completion of the degree of

Master in Commerce

Under the Faculty of Commerce

By

Khan Amina Bano

Under the Guidance of

Prof. Ismail Shaikh

Prakash Degree College Of Commerce & Science

Shantilal Modi Road, Kandivali (W),

Mumbai - 400067

December 2023
 Khan Amina Bano

To study on Advanced Financial Accounting,

Final Account & Statutory Requirement for Banking Companies,Preparing

Provision of Non-Performing

26/12/2023
 Declaration by learner

I the undersigned Miss. Khan Amina Bano here by, declare that the work embodied in this project work
titled “To study on Advanced Financial Accounting, Final Account & Statutory Requirements for Banking
Companies, Preparing Provision of Non-Performing Assets of Banking.”,forms my own contribution to the
research work carried out under the guidance of Prof. Ismail Shaikh is a result of my own research work and
has not been previously submitted to any other University for any other Degree/ Diploma to this or any other
University.Wherever reference has been made to previous works of others, it has been clearly indicated as
such and included in the bibliography.I, here by further declare that all information of this document has
been obtained and presented in accordance with academic rules and ethical conduct.

Name and Signature of the Learner

Khan Amina Bano

Certified by
prof. Ismail Shaikh

Name and Signature of the Guiding Teacher

 Acknowledgment

To list who all have helped me is difficult because they are so numerous and the depth is so enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions in the
completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this project.

I would like to thank my Principal, Dhanashir Mota for providing the necessary facilities required for
completion of this project.

I take this opportunity to thank our Coordinator Prof. Ismail Shaikh, for her moral support and guidance.

I would also like to express my sincere gratitude towards my project guide Prof. Ismail Shaikh whose
guidance and care made the project successful.

I would like to thank my College Library, for having provided various reference books and magazines
related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in the completion of
the project especially my Parents and Peers who supported me throughout my project.
 INDEX

CHAPTERS PARTICULAR PAGENO

1. INTRODUCTION 1 to 21

RESEARCH
2. METHODOLOGY 22 to 54

3. LITERATURE REVIEW 55 to 65

DATA ANALYSIS,
4. INTERPRETATION & 66 to 87
PRESENTATION

CONCLUSION &
5. 88 to 95
SUGGESTION
CHAPTERS- 1 INTRODUCTION

1.1 BASICS, SELECTION AND RELEVANCE

1.2 INTRODUCTION

1.3 INTRODUCTION OF BANKING

1.4 EARLY HISTORY

1.5 BRIEF PROFILE STUDY AREA

1.6 DEFINITION

1.7 DIFFERENT CONCEPT

1
1.1 BASICS, SELECTION AND RELEVANCE:

A strong banking sector is important for flourishing economy. One of the most important and major roles
played by banking sector is that of lending business. It is generally encouraged because it has the effect of
funds being transferred from the system to productive purposes, which also results into economic growth. As
there are pros and cons of everything, the same is with lending business that carries credit risk, which arises
from the failure of borrower to fulfill its contractual obligations either during the course of a transaction or
on a future obligation. The failure of the banking sector may have an adverse impact on other sectors. Non-
performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks.
A high level of NPAs suggests high probability of a large number of credit defaults that affect the
profitability and net-worth of banks and also crodes the value of the asset. The NPA growth involves the
necessity of provisions, which reduces the overall profits and shareholders' value. The issue of Non-
Performing Assets has been discussed at length for financial system all over the world. The problem of
NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks
is nothing but a reflection of the state of health of the industry and trade. This project deals with
understanding the concept of NPAs, its magnitude and major causes for an account becoming non-
performing, projection of NPAs over next years in banks and concluding remarks.

The magnitude of NPAs have a direct impact on Banks profitability legally they are not allowed to book
income on such accounts and at the same time banks are forced to make provisions on such assets as per RBI
guidelines The RBI has advised all State Co-operative Banks as well as the Central Co-operative Banks in
the country to adopt prudential norms from the year ending 31- 03-1997. These have been amended a
number of times since 1997. As per their guidelines the meaning of NPAs, the norms regarding assets
classification and provisioning Its now very known that the banks and financial institutions in India face the
problem of amplification of non-performing assets (NPAs) and the issue is becoming more and more
unmanageable. In order to bring the situation under control, various steps have been taken. Among all other
steps most important one was the introduction of Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 by Parliament, which was an important step towards elimination
or reduction of NPAs.

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 facility granted by bank to a
borrower becomes nonperforming, then the bank will have to treat all the advances/credit facilities granted
to that borrower as non-performing without having any regard to the fact that there may still exist certain
advances / credit facilities having performing status. The NPA level of our banks is way high than
international standards.

2
One cannot ignore the fact that a part of the reduction in NPA's is due to the writing off bad loans by banks.
Indian banks should take care to ensure that they give loans to credit worthy customers. In this context the
dictum "prevention is always better than cure" acts as the golden rule to reduce NPA's.

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 NPA, from the year ending March 31, 2004.
Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) is a loan or an advance where;

⚫ Interest and/or instalment of principal remain overdue for a period of more than 91 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 instalment 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.

⚫ Non submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.

⚫ No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than 91days

Further 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:

1. Sub-standard assets: a sub-standard asset is one which has been classified as NPA for a period not
exceeding 12 months.

2. Doubtful Assets; a doubtful asset is one which has remained NPA for a period exceeding 12 months.

3. Loss assets: where loss has been identified by the bank, internal or external auditor or central bank
inspectors. But the amount has not been written off, wholly or partly. Sub-standard asset is the asset in which
bank have to maintain 15% of its reserves. All those assets which are considered as non-performing for
period of more than 12 months are called as Doubtful Assets. All those assets which cannot be recovered are
called as Loss Assets.

3
1.2 INTROUCTION

India aims to become a $5 trillion economy by the year 2024-25-and for this purpose it needs to expand its
infrastructure capabilities exponentially. To support its infrastructure growth, a healthy financial sector - in
particular a healthy banking sector is needed. The growth of any economy largely depends on its banking
sector (Liang & Reichert, 2006). An efficient banking system has to achieve three goals: profit, high-quality
service to customers, and sufficient funds to lend to borrowers. Furthermore, a profitable banking sector also
has more capacity to absorb shocks and provide relative stability to the economy. For this purpose, it is
important to analyze the impact of bad loans on the performance of the banking sector.

Growing Non-performing assets (NPA) may have a potentially significant impact on bank's profitability.
RBI has defined NPA as those assets for which the principal or interest payment remains overdue for a
period of 90 days. Within NPA there are 3 sub-category- substandard assets, doubtful assets and loss assets
depending upon the number of days the loan has remained overdue. If assets are NPA for a period less than
or equal to 12 months then it is a substandard asset. Similarly, a doubtful asset is defined as an asset which
has remained as an NPA for a period of more than 12 months. The combination of the above three types of
assets forms total NPAs in a bank.

Through NPA, an asset becomes unproductive and also the bank is unable to recover the initial loan amount.
So while the earnings of banks fall as interest income falls, there is also the cost of capital erosion of banks.
This means that banks have to keep a larger amount as provision to account for this NPA- which means there
is impact on the future earning ability of banks. Non-performing loans have a negative impact on operating
costs and cost efficiency of banks (Allen N Berger, 1997). A rise in NPA beyond the risk threshold can have
significant effects on the stability of bank, reducing consumer confidence in functioning of these banks.

Credit is required for faster growth of the economy but any kind of macroeconomic shock can impact those
outstanding advances badly and may turn them non-performing. Causes of rise in NPA are related to - low
scrutiny by banks, wilful defaults, low earnings affecting ability of entities to pay back loans, economic
slowdown, government policies, etc. It has been observed that a major portion of NPAs is contributed by
several top industrialists- dirty dozen in case of India, Generally, the NPAs in agriculture and priority sector
is comparatively lower than that of the corporate houses (Sikdar, 2020). Most of the current NPA originated
during the mid-2000s, during the period of high economic growth and positive business outlook. This led to
an easy flow of credit. But post Global Financial crisis of 2008, the economy stagnated and so did the
repayment capacity of these businesses.

This contributed to what is now known as India's Twin Balance Sheet problem, where both the banking
sector (that gives loans) and the corporate sector (that takes and has to repay these loans) have come under
financial stress. (Union Budget-2014) The banks then took 'evergreening' of loans, where fresh loans were
given to some promoters to enable them to pay off their interest.

4
This effectively pushed the recognition of these loans as non-performing to a later date, but did not address
the root causes of their unprofitability. Further, recently there have also been frauds of high magnitude that
have contributed to rising NPAS.

There are several potential factors, including non-performance of loans, affecting the profitability of banks-
which have been taken as bank specific characteristics-like NPA, costs of deposits, non-interest income,
interest income, operational efficiency (measured as total wages to total income) (Allen N.Berger, 1997),
capital adequacy ratio, level of priority sector advances (Bhargav Pandya, 2015).

NPA expands to non-performing assets (NPA). Reserve Bank of India defines Non Performing Assets in
India as any advance or loan that is overdue for more than 90 days.

“An asset becomes non-performing when it ceases to generate income for the bank,” said RBI in a circular
form 2007.

To be more attuned to international practises, RBI implemented the 90 days overdue norm for identifying
NPAs has been made applicable from the year ended March 31, 2004. Depending on how long the assets
have been an NPA, there are different types of non-performing assets as well.

Nonperforming assets are listed on the balance sheet of a bank or other financial institution. After a
prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were
pledged as part of the debt agreement. If no assets were pledged, the lender might write-off the asset as bad
debt and then sell it at a discount to a collection agency.

Banking has various tools to measure its users' stability, performance, and credibility. Any slight imbalance
could harm the bank's reputation. Non-Performing Assets (NPA) are one way to assess the strength and
stability of a bank's finances.
The banking sector is a keystone of any financial system. The smooth functioning of the banking sector
ensures the healthy condition of an entire economy. In the process of accepting deposits and lending, loans
banks create credit. The funds received from the borrowers by way of interest on loan and repayments of
principal are recycled for raising resources. However, building up of non-performing assets (NPAs) disrupts
this flow of credit. It hampers credit growth and affects the profitability of the banks as well. NPAs are the
leading indicators to judge the performance of the banking sector. As per Reserve Bank of India (RBI)
reports on November 2018, the gross amount of poor quality loans is in excess of Rs 9 lakh crores, which
shows the severe impact it has on lending practices of banks and their liquidity positions. This growth is a
result of quadrupling during the past five years, which shows the poor practice of banks with regard to
lending.

5
1.3 INTRODUCTION OF BANKING:

Bank A financial institution that is licensed to deal with money and its substitutes by accepting time and
demand deposits, making loans, and investing in securities. The bank generates profits from the difference in
the interest rates charged and paid. The development of banking is an inevitable precondition for the healthy
and rapid development of the national economic structure. Banking institutions have contributed much to the
development of the developed countries of the world. Today we cannot imagine the business world without
banking institutions. Banking is as important as blood in the human body. Due to the development of
banking advances are increased and business activities developing so it is rightly said, the development of
banking is not only the root but also the result of the development of the business world." After
independence, the Indian government also has taken a series of steps to develop the banking sector. Due to
considerable efforts of the government, today we have a number of banks such as Reserve Bank of India,
State Bank of India, nationalized commercial banks, Industrial Banks and cooperative banks. Indian Banks
contribute a lot to the development of agriculture, and trade and industrial sectors. Even today the banking
system of India possess certain limitations, but one cannot doubt its important role in the development of the
Indian economy.

Banking in India

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the
Government of India holding a stake), 31 private banks (these do not have government stake; they may be
publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over
53,000 branches and 49,000 ATMs. According to a report by ICRA Limited, a rating agency, the public
sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks
holding 18.2% and 6.5% respectively.

6
1.4 EARLY HISTORY:

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank
of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank
in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which
almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two
being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from
the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did
their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India.

INDIAN BANKING SECTOR

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

The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In
the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809,
the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency
Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new
bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank
of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted
State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve
Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian
management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara
Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14
major banks of the country were nationalized and in 15th April 1980 six more commercial private sector
banks were also taken over by the government.

7
The issue of Non-Performing Assets (NPAs) in the Indian banking sector has become the subject of much
discussion and scrutiny. The Standing Committee on Finance recently released a report on the banking
sector in India, where it observed that banks' capacity to lend has been severely affected because of
mounting NPAS. The Estimates Committee of Lok Sabha is also currently examining the performance of
public sector banks with respect to their burgeoning problem of NPAs, and loan recovery mechanisms
available.

Additionally, guidelines for banks released by the Reserve Bank of India (RBI) in February 2018 regarding
timely resolution of stressed assets have come under scrutiny, with multiple cases being filed in courts
against the same. In this context, we examine the recent rise of NPAs in the country, some of their
underlying causes, and steps taken so far to address the issue.

8
Banks give loans and advances to borrowers. Based on the performance of the loan, it may be categorized as:
(i) a standard asset (a loan where the borrower is making regular repayments), or (ii) a non-performing asset.
NPAs are loans and advances where the borrower has stopped making interest or principal repayments for
over 90 days.

As of March 31, 2018, provisional estimates suggest that the total volume of gross NPAs in the economy
stands at Rs 10.35 lakh crore. About 85% of these NPAs are from loans and advances of public sector banks.
For instance, NPAs in the State Bank of India are worth Rs 2.23 lakh crore.

In the last few years, gross NPAs of banks (as a percentage of total loans) have increased from 2.3% of total
loans in 2008 to 9.3% in 2017 (Figure 1). This indicates that an increasing proportion of a bank's assets have
ceased to generate income for the bank, lowering the bank's profitability and its ability to grant further credit.

Escalating NPAs require a bank to make higher provisions for losses in their books. The banks set aside
more funds to pay for anticipated future losses; and this, along with several structural issues, leads to low
profitability. Profitability of a bank is measured by its Return on Assets (ROA), which is the ratio of the
bank's net profits to its net assets. Banks have witnessed a decline in their profitability in the last few years
(Figure 2), making them vulnerable to adverse economic shocks and consequently putting consumer deposits
at risk.

Some of the factors leading to the increased occurrence of NPAs are external, such as decreases in global
commodity prices leading to slower exports. Some are more intrinsic to the Indian banking sector.

A lot of the loans currently classified as NPAs originated in the mid-2000s, at a time when the economy was
booming and business outlook was very positive. Large corporations were granted loans for projects based
on extrapolation of their recent growth and performance. With loans being available more easily than before,
corporations grew highly leveraged, implying that most financing was through external borrowings rather
than internal promoter equity. But as economic growth stagnated following the global financial crisis of
2008, the repayment capability of these corporations decreased. This contributed to what is now known as
India's Twin Balance Sheet problem, where both the banking sector (that gives loans) and the corporate
sector (that takes and has to financial stress).

When the project for which the loan was taken started underperforming, borrowers lost their capability of
paying back the bank. The banks at this time took to the practice of 'evergreening', where fresh loans were
given to some promoters to enable them to pay off their interest. This effectively pushed the recognition of
these loans as non- performing to a later date, but did not address the root causes of their unprofitability.

Further, recently there have also been frauds of high magnitude that have contributed to rising NPAs.
Although the size of frauds relative to the total volume of NPAs is relatively small, these frauds have been
increasing, and there have been no instances of high profile fraudsters being penalised.

9
1.5 BRIEF PROFILE STUDY AREA:

A Brief Study on NPA: Impact on Banks

NPA, or Non-Performing Assets, are those assets on which either the instalments of interest or principal or
both remain overdue for about 90 days.

An asset in any firm refers to its resources that hold a certain economic value, and that economic value can
provide future benefit to the firm. Thus, according to RBI (Reserve Bank of India), for any asset on which
the interest remains unpayable for a period of 90 days, the asset becomes non- performing. These non-
performing assets decrease the profitability of banks in the country, as the bank gains a negative image and
the account holders lose their trust in them. Talking globally, India ranks 5th in dealing with the NPAs.
According to the surveys, the gross NPAs of the banking sector on June 30, 2018, were 11.52%, whereas, on
March 31, 2018, the gross NPA was 11.68%. The NPAs on public sector banks in 2019 were approximately
7.3 trillion INR, whereas, in 2021, it is approximately 6 trillion INR. Let's study the causes of the rise in
NPA, its impacts on banks, and the measurestaken to reduce NPAs in detail.

Causes of Rising of NPAs in Indian Banks

The major causes that give rise to NPAs in the banking sector are as follows:

• The economy of India was blooming in the early 2000s, due to which the banks provided a considerable
amount of loans to businessmen and companies. However, these companies were not able to carry out their
functions and were not able to pay their debts too. This led to the rising costs and the recession of 2008.

• The relaxed lending norms to the corporate houses contribute greatly

• The relaxed lending norms to the corporate houses contribute greatly to the increase of NPAs in the
banking sector. The banks provide unsecured loans without proper analysis, which greatly contributes to the
increase of NPA.

• There were bans on mining projects, which greatly affected the industries such as the iron and steel sector.
Their operating cost was higher than their income, thus, they were unable to pay back their loans to the
banks. This mainly affects the public sector banks of India.

• The priority sector lending contributes to the increment of NPA by giving loans for agriculture, education,
MSMEs and housing. The education loans alone contribute about 20% of the NPAs of the SBI.

10
Impact of NPAs on Banks

The most basic impacts of NPAs on the banks of India are as follows:

• The increase in NPAs reduces the profitability of the banks due to their lack of credibility. This NPA also
harshly affect the capitals base of the public sector banks. Due to the continuous rise of NPAs of any bank,
the condition becomes chronic, and the banks face severe crises while trying to stabilise again.

• The account holders lose their trust in the banks and want to withdraw their money. This hugely affects the
banking system and the bank teeters on the verge of collapse.

• The banks are forced to decrease their interest rate on saving deposits to increase the margin as a result of
high NPA.

Thus, we can conclude that the high NPA on banks creates a negative impact on both the credibility and
functioning of the banks.

Classification of NPAs

The banks classify NPAs into three primary categories, which are as follows:

1. Substandard assets: The asset that has been in the NPA for only 12 months or lesser, these types of
assets are Substandard assets.

2. Doubtful assets: Any asset that is in the state of non-performing for more than 12 months is a doubtful
asset of NPAs.

3. Loss assets: The loss assets are the case of non-payment for a longer period. As the name suggests, in the
lost assets of the banks, an auditor or any inspector identifies the loans that will never be repaid and should
be fully written off.

Nationalised Banks:

(The list of some of the nationalised banks of India are as follows):

• Allahabad Bank

• Bank of Baroda.

• Bank of Maharashtra.

• Central Bank of India.

• Canara Bank.

• Dena Bank.
11
• Indian Bank

• Bank of India.

Strategies to Solve the Problem of NPAs in Banks

Several measures or strategies can be taken to solve the problem of NPA in banks and to increase the
profitability of banks, some of which are as follows:

⚫ It is necessary to make senior executives of the company accountable for the lapses, instead of blaming
the junior executives.

• There is a certain need for the betterment of corporate governance over the banks.

• The government should give the banks more authority to eradicate the problem of high NPAs.

• The Effective Management Information System (MIS) is a must to implement for maintaining effective
credit risk management.

• To check the stressed assets, there should be the setting up of reconstruction companies.

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

EXTERNAL FACTORS

Ineffective Recover

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, thereby
reducing their profitability and liquidity.

Willful 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.

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 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.
12
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 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.

INTERNAL FACTORS

Defective Lending Process

There are three cardinal principles of bank lending that have been followed by the commercialbanks since
long.

i. Principle of safety

ii. Principle of liquidity

iii. Principle of profitability

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 NPAs. All the branches of the bank should be computerized.

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.

13
1.6 DEFINITION

What is NPA......

Non performing advances or non-performing Assets (or non-performing loans) are loans that are not being
repaid or serviced through Interest payments on time.

Definition:

when interest or other dues to a bank remain unpaid for more than 90 days the entire bank loan automatically
turns a “Non-Performing Asset”.

Non - Performing Assets (NPA'S)

In the last 20 years, banks have expanded their areas of coverage. Today, banks have covered almost all
corners of the country. As the growth of banking sector is developing rapidly certain weaknesses have
developed in recent years. One of them is NON-PERFORMING ASSESTS (NPA'S)

Meaning

When an asset stops generating income for the bank then it is said to be a Non performing Asset.

Apart from internal and external complexities, increase in their existence.

DEFINITION OF NON PERFORMING ASSETS (NPAs)

A non performing asset (NPA) is a loan or an advance where;

* Interest and/or instalment of principal remain overdue for a period of more than 90 days in respect of a
term loan,

* the account remains 'out of order' 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.

* the instalment of principal or interest thereon remains overdue for two crop seasons for short duration
crops and for one crop season for long duration crops,

* the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation
transaction undertaken in terms of guidelines on securitisation dated Feb 1,2006,

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

Banks should, classify an account as NPA only if the interest due and charged during any quarter is not
serviced fully within 90 days from the end of the quarter.

14
DEFINITIONS (NPA)

Definition 1:

A debt obligation where the borrower has not paid any previously agreed upon interest and principal
repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not
yielding any income to the lender in the form of principal and interest payments. Whereas All those assets
which generate periodical income are called as Performing Assets (PA).

Definition 2:

An asset, including a leased asset, becomes non-performing when it ceases to generate income for the bank.
A non-performing asset (NPA) is 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 in
respect of an Overdraft/Cash Credit (OD/CC), the account become overdue.

Definition 3:

Out of Order and Overdue/Past due situation; Wherein the outstanding balance remains continuously in
excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal
operating account is less than the sanctioned limit/drawing power. Additionally there are no credits
continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest
debited" during the same period.

Definition: A non performing asset (NPA) is a loan or advance for which the principal or interest payment
remained overdue for a period of 90 days.

Description: Banks are required to classify NPAs further into Substandard, Doubtful and Loss assets.

15
1.7 DIFFERENT CONCEPTS

NPA from a banking angle. (Main indicators)

* Applies to both individuals and Corporate Facility accounts.

* The account remains overdrawn in respect of an overdraft/ cash credit. In other words, Default occurs
when a debtor is unable to meet the legal obligation of debt repayment. Borrowers may default when they
are unable to make the required payment or are unwilling to honor the debt.

* 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 remain overdue for a period of more than 90 days in respect of a
term loan

* In case of Agricultural loans, the installment or interest remains overdue for two crop seasons.

Preventive Measurement for NPA - Early Recognition of the Problem:

* It has always been the case that by the time banks start their efforts to get involved in a revival process, it's
too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank's dues.
Identification of weakness in the very beginning is the key. When the account starts showing first signs of
weakness regardless of the fact that it may not have become NPA, assessment of the potential of revival may
be done on the basis of a techno-economic viability study.

* Restructuring should be attempted where, after an objective assessment of the promoter's intention, banks
are convinced of a turnaround within a scheduled time frame. In respect of totally unviable units as decided
by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is
possible through legal means before the security position becomes worse. The big challenge is to identify
Borrowers with Genuine Intent from those who are non- serious with no commitment or stake in revival is a
challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they
are the ones who has intelligent inputs with regard to promoters sincerity and capability to achieve
turnaround.

* Based on this objective, banks should decide as quickly as possible whether it would be worthwhile to
commit additional finance. The tasks to be done should include investigation of all financial transaction or
business transaction, books of account in order to ascertain real factors that contributed to sickness of the
borrower. Banks may have a panel of technical experts with proven expertise and track record of preparing
techno-economic study of the project of the borrowers. Borrowers having genuine problems due to
temporary mismatch in fund flow or sudden requirement of additional fund may be entertained. By this way,
banks can help in deserving cases and help avert many accounts slipping into NPA category. Timeliness is
key to all these.

16
Impact of NPAs upon Banks:

* First and foremost they erode current profits through provisioning requirements resulting in reduced
interest and other income. Year on year as the bank's NPA's go on increasing, higher provisioning is required.
This adds fuel affecting profitability and impacting the bank's capital.

* A stage comes when they also limit recycling of funds resulting in an increase in assets-liability
mismatches, etc. The other impact would be on the bank's Capital Adequacy Ratio, ROE and ROA go down
as NPAs do not earn. Bank's rating gets affected and its cost of raising funds goes up.

* The other reasons: Slackness in credit management and monitoring. A lack of co-ordination among lenders.
In their enthusiasm to lend, credit appraisal done hurriedly and sought approvals and disbursed without
completing all necessary documentation.

* NPA's could also result when the banks is unable to gauge the end use of funds by the borrower, delays in
project completion and poor recovery of receivables.

* Creation of excess capacities created on non-economic costs. Inability by the corporates to raise capital
through the issue of equity or other debt instrument from capital markets.

* Business failures, diversion of funds for expansion modernization setting up new projects and helping or
promoting sister concerns, Willful defaults, siphoning of funds, frauds and internal management disputes in
the borrowers company.

* External factors also have a role to play as power shortage, price escalation of raw materials, exchange rate
fluctuation, accidents and natural calamities and sluggish legal system. The list can go on and on. Therefore
it is of paramount importance to closely monitor the loan portfolio so as to contain the NPA situation.

* Increase in NPAs leads to a cautious approach to new lending opportunities thereby tending towards
gradual reduction in new business deals as a matter of abundant precaution.

* Excessive focus on Credit Risk Management, close monitoring of accounts by the concemed department
and the banks internal audit department.

Main reasons for NPA occurrence

*Annual review not completed on time.

*Poor Credit discipline and imperfect documentation.

*Inadequate Risk Management measures.

*Funding of non-viable projects.

*Improper assessment of clients banking requirements.

17
*Influenced by external forces which leads to the creation of loans which are risky and marginal from the
outset.

*Internal monitoring system is inadequate.

* Pursuit of profitability at the expense of prudence.

*High decentralization of the lending decision.

*Mismatch of assets and liabilities. Unmanaged sectoral exposure.

*The portfolio is being grown at a rapid rate.

*Changes in the lending culture e.g. Where the lending culture changed from centralized to decentralized.

*Other macroeconomic policies that are impacting the loan portfolio.

*Where internal policies and procedures are allowed to weaken.

*Loose underwriting standards.

*Growth in interconnected borrowings.

*Where lending opportunities are contracting.

*Where the financial sector is expanding beyond the capacity of the central bank to effectively regulate and
monitor.

*Poor performance by the business sector.

*Rising interest rates on loans/OD/discounting .

*Eroding margins in the business.

*Diversion of funds by promoters.

Other contributing factors for NPAS

* While the steep growth in new facilities and credit extension over the years was a welcome sign, banks
FELL SHORT in assessment of the ongoing business relationship and manage the diverse risks that emerged
in the process

* Credit control functions were not necessarily independent of the bank's Marketing and Business
Development functions and thus were slow to correct the effect of serious flaws in policies, procedures and
directions

* Credit, Legal and Loan documentation and administration units functioned independently and were kept
away from business lending activities.

18
* Structural transformations and new types of lending products on offer.

* Bankers Reports: Inadequate mechanism to gather and disseminate timely credit information amongst
commercial banks.

* Large borrowers default: For multi banked customers, effective recovery could be hampered on account of
sizeable and diverse exposure among the banks, extended documentation, no clear cut mechanism on debt
recovery, inadequate legal provisions on foreclosure and bankruptcy and difficulties in the execution of court
decrees.

* Risk Mitigants were only the part of a Loan Application and there was little mechanism to monitor them.

NPA and Agricultural Loans

* Agricultural advances: A loan granted for short duration crops will be treated as NPA, if the installment of
principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops
will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season.
The crop season for each crop means the period up to harvesting of the crops raised as would be determined
by the respective country.

* Agricultural advances: Long duration crops would be crops with crop season longer than one year. Crops,
which are not long duration crops, would be treated as short duration crops Where natural calamities impair
the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure -
conversion of the short-term production loan into a term loan or re-schedulement of the repayment period
and the sanctioning of fresh short-term loan Income.

Export Project Finance and NPA

* Situation: There could be instances where the actual importer has paid the dues to the bank abroad but the
bank in turn is unable to remit the amount due to political developments such as war, strife, UN embargo, etc.
Where the lending bank is able to establish through documentary evidence the above fact, the asset
classification may be made after a period of one year from the date the amount was deposited by the
importer in the bank abroad. Please note that the primary responsibility for making adequate provisions for
any diminution in the value of loan assets, investment or other assets is that of the bank managements and
the statutory auditors.

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NPA AND CREDIT RATING

*Credit Rating implies evaluating the creditworthiness of a borrower by an independent rating agency.

*Credit rating agencies generally slot companies into risk buckets depending on the Industry analysis.

*Credit rating is not fool-proof.

*Credit rating information is to be treated as an additional source of information only by the concerned Loan
Officer of the bank.

*Necessary due diligence of the corporate account portfolio is an on going process at the bank in order to
take necessary protection and steps so that the health of the portfolio does not deteriorate.

Special Accounts Department Main Tasks

*To study the past trends of NPA

*To calculate the weighted of NPA in risk management in Banking

*To analyze financial performance of banks at different level of NPA

*To evaluate profitability positions of banks

*To evaluate NPA level in different economic situation.

*To Know the Concept of Non Performing Asset

*To Know the Impact of NPAS

*To Know the Reasons for NPAs

*To learn Preventive Measures

Main NPA types in banks.

*Gross NPAs: Defined as the sum total of all loan assets that are classified as NPAs in the banks' books as
on Balance Sheet date. Gross NPA is the total outstandings of the portfolio of all the non standard assets like
as sub-standard, doubtful, and loss assets.

*Net NPAs: Defined as those type of NPAs in which the bank has deducted the provision regarding NPAs
thus showing the actual current outstanding of the bank.

*In other words: Gross NPA is the amount outstanding in the borrowers account, in the books of the bank
other than the interest which has been recorded and not debited to the borrowers account.

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*Net NPA is the amount of Gross NPA less (1) interest debited to the borrower and not received and not
recognised as income and kept in a interest suspense account, (2) amount of provision held in respect of
NPA's and (3) amount of claims received and not appropriated.

*Net NPA= Gross NPA-(Balance in Interest Suspense account + Claims received if any and pending for
adjustment + Part payment received and kept in suspense account + Total provisions held).

*In countries as India, bank balance sheets contain a huge amount of NPAs. Added to this, the process of
recovery and write off of loans is very time consuming. Therefore the timely provisions the banks have to
make against their NPAs are quite significant. That is why the difference between gross and Net NPA is
quite high.

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CHAPTERS- 2 RESEARCH METHODOLOGY

2.1 OBJECTIVES

2.2 HYPOTHESIS

2.3 SCOPE OF STUDY

2.4 LIMITATION OF THE STUDY

2.5 SIGNIFICANCE OF NPAs

2.6 SELECTION OF PROBLEM

2.7 SAMPLE SIZE

2.8 OTHER TERM RELATED TO NPAs

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2.1 OBJECTIVES OF THE STUDY

Primary objective:

*To Study the challenges faced by public and private sector banks with NPA's in India.

*To analyze the NPA position of selected public and private sector banks in India.

Secondary objectives:

*To understand what is Non-Performing Assets and what are the underlying reasons for the emergence of
the NPAs.

*To understand the impacts of NPAs on the operations of the Public and Private Sector Banks.

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

The study is addressed to the following objectives:

*To study the trend of NPA.

*To determine the factors affecting NPA.

*To find out the effectiveness of recovery mechanism adopted by bank for NPA.

*To establish relationship between NPAs and profitability of bank

The objective of the project was to find how Non- Performing Assets impact the profitability of the banks
and how it can be reduced.

*The study is addressed to the following objectives:

*Understand the concept of nonperforming assets of top five private sector banks.

*To study the trend of NPAS during last five years.

*To study the banking operations in general, in India.

*The study the various reasons for NPA in Indian banking.

*To analyze different catagories of NPA’s of selected banks.

*To compare the efficiency of operations with respect to NPA between public sector banks and private
banks/ foreign banks.

23
*To study the various steps taken by the banks to bring down the Nap's in respective bank branches.

*To arrive at methods to bring down NPA to acceptable level.

OBJECTIVES

*To compare the Total Advances, Net Profit, Gross NPA & Net NPA of HDFC Bank.

*To study the impact of NPA on banks.

*To access the performance of Bank.

*To study the relationship between Net profit and Net NPA of HDFC Bank.

NPA Strategic Objectives

• The NPA has aligned its strategic objectives directly to that of JCPS Delivery Agreement.

*The following are the strategic objectives of the NPA:

- Increased successful prosecution of serious crime

- Improved collaboration with JCPS partners

-Improved prosecution of JCPS officials charged with corruption

- Improve justice services for the victims of crime

- Increased successful prosecutions of serious corruption

- Increased prosecution of cyber crime.

→ OBJECTIVES OF THE STUDY

Primary Objectives:

*To evaluate Gross NPA and Net NPA in different banks.

*To study the past trends of NPA.

Secondary Objectives:

*To calculate the weighted of NPA in risk management in Bank.

*To analyze financial performance of banks at different level.

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Objectives

*Promotion of ethical conduct in NPA

*Education and awareness

*Prevention of unethical conduct, corruption and fraud

*Detection and investigation of unethical conduct, corruption and fraud

*Management of IMU

Objectives

*The classification of assets of banks has to be done on the basis of objective criteria, which would ensure a
uniform and consistent application of the norms.

*The provisioning should be made on the basis of the classification of assets based on the period for which
the asset has remained non- performing and the availability of security and the realisable value thereof.

NPA STRATEGIC OBJECTIVES

The following are the strategic objectives of the NPA:

*Increased successful prosecution

*Improved prosecution of specialised prosecution cases that require

*Ensure profit is removed from crime

*Ensure threatened witnesses are successfully protected

If the customers do not repay principal amount and interest for a certain period of time then such
loans become non-performing assets (NPA). In a narrow sense, a non-performing asset may be defined
as an asset which does not directly contribute to the corporate profits or yield any positive returns.

Objectives of the Study

*To study the status of Non Performing Assets of Indian Scheduled Commercial Banks in India

*To study the impact of NPAs on Banks.

*To know the recovery of NPAS through various channels.

*To make appropriate suggestions to avoid future NPAs and to manage existing NPAs in Banks.
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2.2 HYPOTHESIS

Hypothesis

1. The Effect of EPS Change is more than the NPA Change on share prices of Indian Commercial Banks.

2. EPS Positively whereas NPA negatively affects to share prices of Indian Commercial Banks.

Gross NPA

Testing of Hypothesis

In order to test the significance of differences in gross NPA among different bank groups in India, the
following hypothesis is tested using ANOVA single factor.

H0: Null Hypothesis:

There is no significant difference in the Gross NPA among different commercial banks during the study

period.

H1: Alternative hypothesis:

There is significant difference in the Gross NPA among different commercial banks during the study period.

ANOVA Single Factor- Gross NPA

Source of
SS Df MS F F crit Result
Variation
Between Groups 6.05E+12 3 2.02E+12 4.78 2.86* Significant
Within Groups 1.52E+13 36 4.21E+11
Total 2.12E+13 39

* Significant at 5 % level

It is clear from the table that there is significant difference in the Gross NPA among different commercial
banks under study because the calculated value of F is higher than the critical value of F. So the null
hypothesis is rejected and alternative hypothesis is accepted. Hence, there is significant difference in Gross
NPA of banks under study.

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 Net NPA

Testing of Hypothesis

In order to test the significance of differences in Net NPA among different bank groups in India, the
following hypothesis is tested using ANOVA single factor.

H0: Null Hypothesis:

There is no significant difference in the Net NPA among different commercial banks during the study period.

H1: Alternative hypothesis:

There is significant difference in the Net NPA among different commercial banks during the study period

ANOVA Single Factor- Net NPA

Source of Variation SS Df MS F F crit Result

Between Groups 2.23E+12 3 7.43E+11 4.72 2.86* Significant

Within Groups 5.66E+12 36 1.57E+11
Total 7.89E+12 39
* Significant at 5 % level

It is clear from the table that there is significant difference in the Net NPA among different commercial
banks under study because the calculated value of F is higher than the critical value of F. So the null
hypothesis is rejected and alternative hypothesis is accepted. Hence, there is significant difference in Net
NPA of banks under study.

Additions in NPA

Testing of Hypothesis

In order to test the significance of differences in Additions NPA among different bank groups in India, the
following hypothesis is tested using ANOVA single factor.

H0: Null Hypothesis:

There is no significant difference in the Additions NPA among different commercial banks during the study
period.

27
 H1: Alternative hypothesis:

There is significant difference in the Additions NPA among different commercial banks during the study
period

ANOVA Single Factor- Additions in NPA

Source of Variation SS Df MS F F crit Result

Between Groups 3.05E+12 3 1.02E+12 4.87 2.86* Significant

Within Groups 7.5E+12 36 2.08E+11
Total 1.05E+13 39
* Significant at 5 % level

It is clear from the table that there is significant difference in the Additions in NPA among different
commercial banks under study because the calculated value of F is higher than the critical value of F. So the
null hypothesis is rejected and alternative hypothesis is accepted. Hence, there is significant difference in
Additions in NPA of banks under study.

Reductions in NPA

Testing of Hypothesis

In order to test the significance of differences in Reductions NPA among different bank groups in India, the
following hypothesis is tested using ANOVA single factor.

H0: Null Hypothesis:

There is no significant difference in the Reductions NPA among different commercial banks during the
study period.

H1: Alternative hypothesis:

There is significant difference in the Reductions NPA among different commercial banks during the study
period

ANOVA Single Factor - Reductions in NPA

Source of Variation SS Df MS F F crit Result

Between Groups 3.12E+11 3 1.03E+11 15.76 2.86* Significant

Within Groups 2.37E+11 36 6.59E+09
Total 5.49E+11 39
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 * Significant at 5 % level

It is clear from the table that there is significant difference in the Reductions in NPA among different
commercial banks under study because the calculated value of F is higher than the critical value of F. So the
null hypothesis is rejected and alternative hypothesis is accepted. Hence, there is significant difference in
Reductions in NPA of banks under study.

Provisions for NPA

Testing of Hypothesis

In order to test the significance of differences in Provisions NPA among different bank groups in India, the
following hypothesis is tested using ANOVA single factor.

H0: Null Hypothesis:

There is no significant difference in the Provisions NPA among different commercial banks during the study
period.

H1: Alternative hypothesis:

There is significant difference in the Provisions NPA among different commercial banks during the study
period.

ANOVA Single Factor- Provisions for NPA

Source of Variation SS Df MS F F crit Result

Between Groups 4.18E+11 3 1.4E+11 4.35 2.87* Significant

Within Groups 1.15E+12 36 3.2E+10
Total 1.57E+12 39

* Significant at 5 % level

It is clear from the table that there is significant difference in the Provisions for NPA among different
commercial banks under study because the calculated value of F is higher than the critical value of F. So the
null hypothesis is rejected and alternative hypothesis is accepted. Hence, there is significant difference in
Provisions for NPA of banks under study.

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2.3 SCOPE OF STUDY

Scope of the Study

The present study is analysis of Non-performing Assets of Financial Institutions. The study analyses the
different factors that create Non- Performing Assets in Selected Sectors. The scope of the study includes an
analytical study of Non-Performing Assets of Public Sector, Private Sector and Co-operative Sector Banks.

Non-performing Asset is a vital factor in the examination of financial performance of a bank. Non
Performing Asset is the key term for the banking corporations. Non Performing Assets show the competence
of the performance of the banks. Non Performing Assets means which amount is not received by the bank in
return of loans disbursed. Non Performing Assets affect not only the finance institution but the total financial
system. Thus a selective study has been done on public sector banks in India to evaluate the effect of Non
Performing Assets on the profitability of banks. Banks today are not judged only on the basis of number of
branches and volume of deposits but also on the basis of standard of assets. NPAs negatively affect on the
profitability, liquidity and solvency of the banks so in this paper we have worked out to find the impact on
NPA to primary sector lending impact on the Profitability of the bank.

Banks in India have changed a lot over the course of time along with that the system have changed as well.
The accounting and managing the accounts have taken a big leap. With these change the risk of default has
increased significantly as well, now banks around the globe are exposed to much higher risk then they are in
past. This paper show the impact on NPA's with change in different element as return on asset, net total asset
and net profit. Regression analysis of the data show promising result about the analysis this show that with
rise in NPA's there is rise in other factor as well.

Banking companies were exposed to different risks while doing there core business, especially while lending
loans. Which lead to increase in NPA's. NPA's is a huge problem for a developing country like India.

The study has the following scope:

*The study could suggest measures for the banks to avoid future NPAs & to reduce existing

*The study may help the government in creating & implementing new strategies to control NPAs.

*The study will help to select appropriate techniques suited to manage the NPAs and develop a time bound
action plan to check the growth of NPAs.

The scope of the study is limited to the analysis of NPAs of the public sector banks and the period seven
years. It examines trend of NPAs in weaker sections in both public sector and private sector banks. The data
has been analysed by statistical tools such as percentages and Compound Annual Growth Rate.
30
The banking sector of India consists of public sector banks, private sector banks, co-operative banks and
foreign banks. But among these four types' public sector banks still dominate the banking industry, with
approximate 82% of the market share in total deposit and advances of the industry. The public sector banks
play a crucial role in the Indian economy, by contributing directly to the GDP, and mobilizing savings and
channelizing investments. But after managing every challenge successfully and by giving standard services
to the customers. NPA becomes the biggest of all challenges and managing NPA is one of the hardest tasks
for The scope of the study is in between the financial year 2008-2013on the public sector banks, which
include the State Bank of India and its Associates, and the other Nationalised banks of India.

Performance of banks is measured in terms of both income generation and quality of assets. Non-Performing
Assets reveal the quality of assets, possibility of losses and reduction in income levels due to provision
against such loses.

The Concept of NPA

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 (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 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, ie interest, fees,
commission or any other dues for the bank for more than 90 days ANPA is an advance where payment of
interest or repayment of installment on principal or both remains unpaid for a period of two quarters or more
and if they have become "past due. An amount under any of the credit facilities is to be treated as past due
when it remain unpaid for 30 days beyond due date.

Non Performing Assets are also called as Non Performing Loans. It is made by a bank or finance company
on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the
interest payments and the repayment of the principal create a stream of cash flows. It is from the interest
payments that a bank makes its profits. Banks usually treat assets as non-performing if they are not serviced
for some time. If payments are late for a short time, a loan is classified as past due and once a payment
becomes really late (usually 90 days), the loan is classified as non-performing. A high level of non-
performing assets, compared to similar lenders, may be a sign of problems.

Non-Performing Assets (NPAs) are loans or advances issued by banks or financial institutions that no longer
bring in money for the lender since the borrower has failed to make payments on the principal and interest of
the loan for at least 90 days.

31
A debt that has been past due and unpaid for a predetermined period is known as a non-performing asset
(NPA).

When the ratio of NPAs in a bank's loan portfolio rises, its income and profitability fall, its capacity to lend
falls, and the possibility of loan defaults and write-offs rise.

To address this issue, the government and the Reserve Bank of India have introduced various policies and
methods to manage and reduce the amount of non- performing assets (NPAs) in the banking sector.

Keeping aside the technical definition, provisioning means an amount that the banks set aside from their
profits or income in a particular quarter for non- performing assets, such as assets that may turn into losses in
the future. It is a method by which banks provide for bad assets and maintain a healthy book of accounts.

Provisioning is done according to which category the asset belongs. The categories have been mentioned in
the above section. Not only the type of asset but provisioning also depends on the type of bank. Like, Tier-1
banks and Tier-Il banks provisioning norms.

Scope of the Study

With the opening up of the economy, rapid changes are taking place in the technology and
financial sector, exposing banks to greater risks. Thus, in the present scenario efficient project appraisal has
assumed a great importance as it can check and prevent induction of weak accounts to our loan portfolio. All
possible steps need to be taken to strengthen pre sanction appraisal as "prevention is better than cure".

The report seeks to present a comprehensive picture of credit management in the bank as its
effectiveness is highlighted by the quality of its loan portfolio. These form important pillars of any financial
business.

In the Indian financial circumstances, it becomes important to keep a track on borrower's accounts
to prevent from becoming NPA. This requires a continuous evaluation. Further, the sick units may undergo
restructuring as well as bifurcating. Hence the study covers all these aspects.

32
2.4 LIMITATION OF THE STUDY

Nonperforming assets typically refer to loans that have problems getting paid on time or getting paid at all. It
is a classification commonly used by financial institutions to designate loans that are unpaid for at least 90
days, have more than 90 days' worth of interest delayed or refinanced or have no expectation of payments
continuing. Knowing the disadvantages of nonperforming assets can help you avoid ending up as a lender or
borrower of this type of loan.

Reduced Income

Interest Income is the first account that gets hit whenever an asset is declared nonperforming. Lending
companies such as banks are primarily in the business of earning income from interest paid by borrowers. A
loan that has fallen into the nonperforming asset category has not yielded interest for at least 90 days. Any
decrease in interest payments will translate into a decrease in net income. A company's income level falls as
the amount of nonperforming assets climbs.

Unrecoverable Principal

The principal, or money used by banks to finance loans, comes largely from the bank's depositors. Banks
borrow the money deposited by account holders and loan it to their customers. It is imperative for the bank
to recover the money, because it's not the bank's money in the first place. When a borrower defaults on loan
payments, the bank is unable to recover the principal. Unrecoverable principal must be replaced by the bank
to keep its depositors' funds intact.

Reduced Cash Flow

Companies react to high levels of nonperforming assets by tightening credit policies. Unrecoverable income
and a decrease in interest collections translate into less cash flow. With an increase in nonperforming assets
and with less cash floating around, lending companies tend to resort to tighter credit policies. This outcome
can slow down economic growth, because some businesses won't be able to obtain a loan.

Negative Indicator

Nonperforming assets can be used as indicators of a lender's ability to manage its loan portfolio efficiently.
The efficiency of lending companies in recovering their principal and earning interest can be measured by
comparing their nonperforming assets ratio against those of peer companies. Dividing the amount of
nonperforming assets by the total gross loans will yield this ratio. A lending company's efficiency rating
deteriorates as the ratio increases.

Limitation of the Study

1. An extensive study could not be undertaken due to lack of time and Money.

2. Managers didn't provide any confidential data.

33
3. Analysis is based on information provided by the Banks

4. The study entirely based on quantitative data, qualitative factors are not taken into consideration for the
purpose of the study.

*The time provided for the study (around 45 days) is too short to cover all the aspects of the study.

*The political instability in the valley breaks the rhythm of study.

*Time allowed for the study was short. This limitation narrowed the scope of the study.

*Political instability in the region prevented to conduct the research in the manner in which it could have
been conducted.

*Negative responses from some of the respondents made it difficult to interpret the data casily.

*The survey is limited to district Srinagar only. So the respondents were of this district only. This limitation
may have brought biasness in the study.

*Some of the ambiguous replies which I omitted by taking them as unnecessary could generate wrong
results.

Disadvantages

i. Compromise involves loss, since full recovery is not possible. In fact, full recovery is not even envisaged,
but sacrifice is.

ii. It may be viewed as a reward for default, especially if chronic default cases are settled by negotiations.

iii. It may have a demonstrative effect, and so may vitiate the culture of repayment.

iv. There is also the possibility of misuse or, even, malafides, since assessment of situation is highly
subjective.

Practical aspects of compromise settlements

Every compromise proposal needs to be looked at individually, evaluated strictly on merits, and negotiated
properly for maximization of benefit to the Bank. Hence, a straight jacket approach is not possible, neither is
it desirable, to give strict guidelines for compromise settlements.

Difficulties with the Non-Performing Assets:

1. Owners do not receive a market return on their capital. In the worst case, if the bank fails, owners lose
their assets. In modern times, this may affect a broad pool of shareholders.

34
2. Depositors do not receive a market return on savings. In the worst case if the bank fails, depositors lose
their assets or uninsured balance. Banks also redistribute losses to other borrowers by charging higher
interest rates. Lower deposit rates and higher lending rates repress savings and financial markets, which
hampers economic growth.

3. Nonperforming loans epitomize bad investment. They misallocate credit from good projects. which do not
receive funding, to failed projects. Bad investment ends up in misallocation of capital and, by extension,
labour and natural resources. The economy performs below its production potential.

4. Nonperforming loans may spill over the banking system and contract the money stock, which may lead to
economic contraction. This spillover effect can channelize through illiquidity or bank insolvency: (a) when
many borrowers fail to pay interest, banks may experience liquidity shortages. These shortages can jam
payments across the country, (b) illiquidity constraints bank in paying depositors e.g. cashing their
paychecks. Banking panic follows. A run on banks by depositors as part of the national money stock become
inoperative. The money stock contracts and economic contraction follows (c) undercapitalized banks
exceeds the bank's capital base.

Lending by banks has been highly politicized. It is common knowledge that loans are given to various
industrial houses not on commercial considerations and viability of project but on political considerations;
some politician would ask the bank to extend the loan to a particular corporate and the bank would oblige. In
normal circumstances banks, before extending any loan, would make a thorough study of the actual need of
the party concerned, the prospects of the business in which it is engaged, its track record, the quality of
management and so on. Since this is not looked into, many of the loans become NPAs.

The loans for the weaker sections of the society and the waiving of the loans to farmers are another
dimension of the politicization of bank lending.

GST Impact on Banking NPA

*The impact of GST on banks and NBFCs would be so significant that operation, transactions, accounting,
and compliance will have to be completely rethought.

*They must get separate registration for each state in which they operate under GST . In terms of regularity
and the number of returns, the compliance burden has also grown.

Payment Banks impact on the Indian banking system.

*payment banks will intensify competition in the banking business. The entrance of new businesses form
diverse industries setting up these payment banks, bringing their own marketing concepts and different
clients on board, would exacerbate the competition for customer in an already congested banking industry.

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Impact of NPA on Economy

*Rising NPAs damage the bank's reputation, causing the public to lose faith in banks. Depositors may
withdraw their funds, forcing banks to run out of liquidity.

*Banks are unable to lend for other productive activities in the economy due to a shortage of liquidity.

*The reduction in investment may cause the economy to stall, resulting in unemployment, inflation, a bear
market, and so on.

*Banks will be obliged to raise interest rates in order to retain their profit margins, further harming the
economy.

Impact on NPAs on Banks

• Increasing NPAs not only impair banks' earnings but also undermine their reputation. In reality, the
enormous volume of NPAs with commercial banks threatens to destroy half of public sector banks' capital
base.

• If a bank begins to experience losses and the fundamentals are not remedied, the problem may grow
chronic and erode depositor confidence.

Impact of NPAs on Industry

• During the years 2006-11, credit growth to the industrial sector was larger than GDP growth and credit
growth. As a result, the share of NPAs in the industrial sector was significantly greater than in other sectors.

• As a result, in the later stages, banks were hesitant to support the demands of the industrial sector, stifling
its expansion.

• In reality, credit has shrunk in some areas, such as the Micro, Small, and Medium Enterprises (MSME)
market.

Impact on Infrastructure

• The infrastructure accounted for biggest chunk of NPAs and the banks are now reluctant to fund this sector.

• As infrastructure is one of the most important sectors in the economy which fuels the growth of other
sectors, draining of resources to infrastructure may hamper the growth of the Indian economy.

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2.5 SIGNIFICANCE OF NPAs

Significance of NPAs

It is important for both the borrower and the lender to be aware of performing versus non-performing assets.
For the borrower, if the asset is non-performing and interest payments are not made, it can negatively affect
their credit and growth possibilities. It will then hamper their ability to obtain future borrowing.

For the bank or lender, interest earned on loans acts as a main source of income. Therefore, non-performing
assets will negatively affect their ability to generate adequate income and thus, their overall profitability. It is
important for banks to keep track of their non-performing assets because too many NPAs will adversely
affect their liquidity and growth abilities.

Non-performing assets can be manageable, but it depends on how many there are and how far they are past
due. In the short term, most banks can take on a fair amount of NPAs. However, if the volume of NPAs
continues to build over a period of time, it threatens the financial health and future success of the lender.

Reasons for NPAs in India

• Public sector banks give a large share of credit to industries, and it is this element of credit distribution that
accounts for a large portion of NPA. In the instance of Kingfisher Airlines' financial difficulties, SBI issued
a large loan from which it was unable to recoup.

• Prior to the 2008 financial crisis, India's economy was booming. During this time, banks extended large
amounts of credit to corporations in the hope that the good times would continue in the future. However, the
future does not necessarily follow the same pattern as the past.

• Their capacity to repay debts was hampered by low incomes. This is one of the primary reasons for the rise
in NPAs at public sector banks.

• Another key contributor to increased NPAs was the loosening of corporate lending standards. Their
financial situation and credit rating were not thoroughly examined.

• The priority sector lending (PSL) sector has significantly contributed to the NPAs.

• Agriculture, education, housing, and MSMEs are among the priority sectors. According to SBI estimates,
school loans account for 20% of NPAs

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Significance of NPA reduction

*Increase in profitability.

*Consistent income generation.

*Increase in free reserves.

*Availability of more funds for operative purposes.

*Less provisioning requirements.

*Strengthens bank's reputation.

*Enhances customer confidence.

*Highlights sound credit monitoring system of bank.

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2.6 SELECTION OF PROBLEM.

Once a loan is written off by a bank, it goes out from the asset book of the bank. The bank writes off a loan
after the borrower has defaulted on the loan repayment and there is a very low chance of recovery. The
lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as loss.

Resolving the NPA Problem

• The legacy of the NPAs must be resolved as quickly as possible so that banks can focus on resuming
lending.

• Some assets that are classified as Loss assets should be written off from banks books.

• The new Bankruptcy code can be a game changer but will take time to operationalise.

• In many cases, the projects can be turned around through a combination of fresh capital from investors and
new management.

• RBI has devised two schemes in this regard: the Strategic Debt Restructuring Scheme, which allows the
bank to convert their debts into equity, take control of the company and then induced a new management to
turn it around.

• Action has been initiated under the SDR, but no successful revival has been completed so far.

• The second RBI scheme is the Scheme for Sustainable Structuring of Stressed Assets (S4A) under which
bank can offer existing management an opportunity to rehabilitate the project by dividing the debt into two
parts: a "sustainable component" which can be serviced by the project based on some assumption by revenue
and the "excess component" which can be converted into equity or redeemable preference shares.

• Sustainable debt must be more than 50% of the total debt.

• S4A leaves the project in the hands of existing managements and also gives the banks more flexibility in
the time taken to resolve the problem. A key issue is how large a part of the debt is deemed to be sustainable.
Management and banks are bound to differ on this issue.

• There is much talk of selling assets to privately managed asset reconstruction companies (ARCs), which
can then organize the turnaround.

• Another idea is that the proposed National Infrastructure and Investment Fund (NIIF), operating with
private partners, provide both equity and new credit to stressed infrastructure projects going through the
SDR mechanism.

39
• The problem could be solved by creating a government-owned "bad bank" which purchases problem loans
from the banks and concentrates on turning the projects around, possibly with the help of private ARCS.

• Bank managements will be much more willing to sell assets at a discounted price to another public sector
company, which will then undertake the task of negotiating the best deal with potential new owners. The
terms of reference of the new entity can be sufficiently clarified to encourage it to negotiate the best possible
deal with new private managements. It could work in partnership with ARCS to fulfil this mandate.

Solutions

Don't Eliminate - Manage

Studies have shown that management of NPAs rather than elimination is prudent. India's growth rate and
bank spreads are higher than western nations. As a result we can support a non-zero level of NPAs which
balances the risk vis-à-vis return appropriate to the Indian context.

Effectiveness of ARCS

Concerns have been raised about their relevance to India. A significant percentage of the NPAS of the PSB's
are in the priority sector.

40
Loans in rural area are difficult to collect and Banks by virtue of their sheer reach are better placed to
recover these loans, Lok Adalats and Debt Recovery Tribunal are other effective mechanism to handle this
task. ARCS should focus on larger borrowers. Further, there is a need for private sector and foreign
participation in the ARC.

Private parties will look to active resolution of the problem and not merely regard t as book transaction.
Moving NPAs to an ARC doesn't get rid of the Problem in China; Potential investors are still worried about
the risks of non enforcement of the ownership Rights of the assets they purchase from the ARCs. Action and
measures have to be taken to build investor confidence.

Well Developed Capital Markets

Numerous papers have stressed the criticality of a well developed capital market in the restructuring process.
A capital market brings liquidity and a mechanism for write off of loans. Without this a bank may seek to
postpone the NPA problem for of capital adequacy problems and resort to tactics like ever greening. Monitor
by bond holder is better as they have no motive to sustain uneconomic activity. Further, the banks can
manage credit risk better as it is easier to sell or securitize loans and negotiate credit derivates. Indian debt
market is relatively under developed and attention should be focused on building liquidity and volumes.

Contextual Decision Making

Regulations must incorporate a contextual perspective (like temporary cash flow problems) and clients
should be handled in a manner which reflects true value of their assets and future to pay. The top
management should delegate authority and back decisions of this kind taken b middle level managers.

Securitization

This has been used extensively in china, Japan and Korea and has attracted international participants due to
lower liquidity risks. The Resolution Trust Corporation has helped to develop a securitization market in Asia
and has taken over around $ 460 billion as bad Assets from over 750 failed banks. Its highly standardized
product appeals to a broad investor base. Securitization. ICRA estimates the current market size to be around
3000 Crores.

Statement of the Problem

The profitability strength of the banks will depend to a great extent on the level of its NPA level.If a bank
has a high level of NPA thenit's existence will be under great threat. Such bank will lose the confidence of
the customers.

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Steps taken to tackle NPA

The Debt Recovery Tribunals (DRTS) - 1993

The Recovery of Debts and Bankruptcy Act (RDB Act) of 1993 establishes Debts Recovery Tribunals
(DRTs). DRTS are constituted for debt recovery, insolvency resolution, and individual bankruptcy, among
other things.

Credit Information Bureau - 2000

Credit Information Bureau (India) Limited was the previous name for TransUnion CIBIL Limited. It is
India's first Credit Information Company, having been founded in 2000. It gathers and stores credit-related
information from individuals and businesses, such as loans and credit cards.

Lok Adalats 2001

Lok Adalat institutions assist banks in resolving disputes involving accounts classified as "doubtful" or
"loss," with an outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalat.

Compromise Settlement - 2001

A compromise settlement is a negotiated settlement in which a borrower proposes to pay and the bank agrees
to accept as a complete and final settlement of its dues a sum less than the entire amount due to the bank
under the relevant loan contract.

SARFAESI Act - 2002

The SARFAESI Act of 2002 has two basic goals: recovering non-performing assets (NPAs) from financial
institutions and banks in a timely and effective way. If a borrower defaults on his or her obligation, it
authorises financial institutions and banks to sell residential and commercial assets at auction.

ARC (Asset Reconstruction Companies)

An asset reconstruction business is a sort of financial firm that acquires a bank's debtors at a mutually
agreed-upon price and seeks to collect the debts or linked securities on its own. The ARCS assume a portion
of the bank's debts that are classified as Non- Performing Assets.

Corporate Debt Restructuring - 2005

The rearrangement of a distressed company's existing commitments to its creditors is referred to as corporate
debt restructuring.

The goal of a corporate debt restructuring is to restore a company's liquidity so that it can avoid bankruptcy.

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5:25 rule 2014

The 5:25 strategy allows banks to make long-term loans of 20-25 years to match project cash flow while
refinancing them every 5 or 7 years. This is anticipated to align financial flows with payback schedules,
making long-term infrastructure investments sustainable.

Joint Lenders Forum - 2014

The Joint Lender's Forum is a specialised organisation of lender banks designed to expedite decisions when
an asset (loan) worth more than Rs 100 crore is discovered to be a stressed asset. In 2014, the RBI released
recommendations for the creation of JLFS for the effective management of stressed assets.

Mission Indradhanush - 2015

The Mission Indradhanush for PSBs intends to reorganise public sector bank operations so that they can
compete with private sector banks. It aims to revitalise economic development by reducing political
meddling in PSB operations and boosting lending.

Strategic debt restructuring (SDR) - 2015

The RBI's Strategic Debt Restructuring Scheme, or SDR, allows banks that have made loans to corporations
to convert a portion of the total outstanding loan amount and interest into substantial shareholder equity in
the firm.

Asset Quality Review - 2015

A unique assessment known as the Asset Quality Review was conducted in 2015-16. (AQR). Asset quality
rating evaluates the riskiness of assets in a portfolio. According to the RBI's AQR, the examined banks had a
higher level of asset quality deterioration or non performing assets (NPAs).

Sustainable structuring of stressed assets (S4A) - 2016

The S4A Scheme seeks to achieve a comprehensive financial restructuring of large debted enterprises by
allowing lenders (banks) to purchase equity in the stressed project. The plan allows for the financial
restructuring of big projects while also assisting lenders in dealing with stressed assets.

Insolvency and Bankruptcy code Act- 2016

The Insolvency and Bankruptcy Code, 2016 (IBC) was adopted in response to rising non- performing debts.
It intends to address non- performing assets by developing a centralized framework for insolvency resolution
of companies, partnership partnerships, and individuals in a timely way.

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2.7 SAMPLE SIZE

Non-Performing Assets (NPA)

When the borrower stops paying interest or principal on a loan, the lender will lose money. Such a loan is
known as Non-Performing Asset (NPA). Indian Banking industry is seriously affected by Non-Performing
Assets. In the best interest of our readers, we have come up with a comprehensive post on NPAs, in which
analyze the entire issue in detail.

How serious is India’s NPA issue?

*More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge
amount.

*The figure roughly translates to near 10% of all loans given.

*This means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks.

*When restructured and unrecognised assets are added the total stress would be 15-20% of total loans.

*NPA crisis in India is set to worsen.

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*Restructuring norms are being misused.

*This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime
crisis of 2008 in the United States of America.

*Also, the NPA problem in India is worst when comparing other emerging economies in BRICS.

WHAT IS NPA

IMPACT OF NPA

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CLASSIFICATION OF NPA

TYPES OF NPA

46
WHAT IS NPA

NON PERFORMING ASSESTS

47
CAUSES OF NPA

SOLUTION OF NPA

48
EXAMPLE

1. HOUSE LOAN

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2. CREDIT CARD DEBT

3. LOAN FOR EQUIPMENT

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2.8 OTHER TERM RELATED TO NPAs

Other Terms Related to NPAs

Write-off effect

A write-off is an accounting move that decreases the value of an asset while debiting a liabilities account at
the same time.

Twin Balance Sheet

A twin balance sheet is a scenario in which banks are under severe stress and corporations are overleveraged
to the point of being unable to repay their debts. A twin balance sheet problem follows a predictable pattern.
Their businesses grow during a boom, leaving them with debts they cannot repay.

Four Balance Sheet Challenge

The Four Balance Sheet Challenge comprises the initial two sectors, infrastructure businesses, and banks, as
well as NBFCs and real estate enterprises. India's Four Balance Sheet Challenge has its origins in the Twin
Balance Sheet Problem.

A non-performing asset (NPA) is a financial institution categorization for loans and advances on
which the principle is past due and no interest payments have been paid for an extended period of
time. It is vital to remember that if a borrower has numerous facilities with a bank and one of them
becomes an NPA, then all of the bank's facilities must be classified as NPAs, not just the one that has
turned irregular.

GROSS NON PERFORMING ASSETS

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NEWS

• Recently, according to data furnished by the Reserve Bank of India (RBI), the mega write-off exercise
has enabled banks to reduce their non-performing assets (NPAs) or defaulted loans by Rs 10,09,510 crore
($123.86 billion) in the last five years.

• But, banks have been able to recover only 13 percent of it so far.

About the news

• This huge write-off would have been enough to wipe out 61 per cent of India's estimated gross fiscal
deficit of Rs 16.61 lakh crore for 2022-23.

• The banking sector reported a decline in gross NPAs to Rs 7, 29,388 crore, or 5.9 per cent of the total
advances as of March 2022.

* Gross NPAs were 11.2 per cent in 2017- 18.

• Once a loan is written off by a bank, it goes out from the asset book of the bank.

* The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very
low chance of recovery.

• The lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as loss.

• Public sector banks reported the maximum share of write-offs at Rs 734,738 crore enough to wipe out 61
per cent of India's estimated gross fiscal deficit of Rs 16.61 lakh crore for 2022-23.

• The banking sector reported a decline in gross NPAs to Rs 7, 29,388 crore, or 5.9 per cent of the total
advances as of March 2022.

• Gross NPAs were 11.2 per cent in 2017- 18.

• Once a loan is written off by a bank, it goes out from the asset book of the bank.

• The bank writes off a loan after the borrower has defaulted on the loan repayment and there is a very low
chance of recovery.

• The lender then moves the defaulted loan, or NPA, out of the assets side and reports the amount as loss.

• Public sector banks reported the maximum share of write-offs at Rs 734,738 crore accounting for nearly
73 per cent of the exercise.

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Causes for Banking NPA

Financial crisis

• Before the financial crisis of 2008 India's economy was in a boom phase.

• During this period banks lent extensively to corporates in the expectation that the good times will
continue in future.

Earning of the corporates

• Low earnings affected their ability to pay back loans. This is one of the most important reasons behind the
increase in NPA of public sector banks.

Relaxed lending norms

• Another major reason for rising NPA was the relaxed lending norms for corporate houses.

• Their financial status and credit rating were not analysed properly.

Public Sector banks

• It provides a major portion of the credit to industries and it is this part of the credit distribution that forms
a great portion of NPA.

The priority sector lending (PSL) sector

• This has contributed substantially to the NPAs. Priority sectors include agriculture, education, housing,
MSMEs.

Credit default by promoters

• There are also cases of credit default by promoters, where the funds have been diverted by over-invoicing
imports, sourced via a promoter owned subsidiary abroad or exporting to shell companies and then declaring
that they defaulted.

Issues with NPA

• Provisioning

• The bad loans lead to banks having to save a part of their operating revenue to account for bad loans
which is called Provisioning.

• The technical term used for provisioning is Capital Adequacy Ratio (CAR) or Capital to Risk (weighted)
Assets Ratio (CRAR).

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• Less profitable

• The banks are required to provision for bad loans out of their operating income.

• The concerned bank becomes less profitable because it has to use some of its profits from other loans to
make up for the loss on the bad loans.

• Risk-averse

• The officials of such banks hesitate from extending loans to business ventures that may remotely appear
risky for the fear of aggravating an already high level of non-performing assets (or NPAs).

• Downfall in the share markets

• Any reduction in the perceived valuation of the banks might lead to loss of share value of the banks,
leading to general downfall in the share markets. This could result in wiping out shareholders’ for the loss on
the bad loans.

• Risk-averse

• The officials of such banks hesitate from extending loans to business ventures that may remotely appear
risky for the fear of aggravating an already high level of non-performing assets (or NPAs).

• Downfall in the share markets

• Any reduction in the perceived valuation of the banks might lead to loss of share value of the banks,
leading to general downfall in the share markets. This could result in wiping out shareholders' wealth from
the financial markets.

• Rising Bad Loans

• In spite of various efforts, a substantial amount of NPAs continue on the balance sheets of banks primarily
because the stock of bad loans as revealed by the Asset Quality Review is not only large but fragmented
across various lenders.

Way forward

• The writing off NPAs is a regular exercise carried by banks to clean up the balance sheet.

• It is primarily intended at cleansing the balance sheet and achieving taxation efficiency.

• In Technically Written Off accounts: loans are written off from the books at the Head Office, without
foregoing the right to recovery.

• Write-offs are generally carried out against accumulated provisions made for such loans.

• Once recovered, the provisions made for those loans flow back into the profit and loss account of banks.

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CHAPTER 3 LITERATURE REVIEW

55
Review of Literature

*The researcher has made a study about the performance of private and public sector banks and their system
of management of NPA's. The researcher has also given recommendation as to how the NPA level can be
approved by the bank. (Kajal and Monika 2011)

*The researcher attempts to analyze the trends, causesand impact of NPA's. This paper deals with the
comparative study of advances and NPA in Public and private sector Banks.(Pratap 2012)

*The researcher, through his study, has discussed the concept and causes of NPA's. This paper also suggests
the strategies to be followed by Commercial Banks to manage and reduce NPA's. (Bhavani and Veena 2011)

*The researcher has discussed the causes and consequences of NPA's and has also suggested strategies for
improvement of NPA level.(Mohan and Govind 2012).

The review of literature is utmost important in any research as it offers an explanation for the necessity of
the current research initiatives. NPA is a burning concern for the banking sector. The present study is the
accumulated review of the literature in respect of understanding the reasons of NPA, the problems created by
NPA and the impact of NPA on the banking sector, their performance of banking sector regarding NPA, and
moreover came to a solution or remedies of the growing problem of NPA which is made by many authors.
The review of the literature is used to formulate the theoretical analysis of Non-performing loans undertaken
in the present study.

The various studies of npa is divided into the following two Context:

A) Study of NPA in Indian Context

B) Study of NPA in International Context

A) Study of NPA in Indian Context

Research Papers and theses

Ranjan and Dhal (2003) explored an empirical approach to the analysis of commercial banks' on
performing loans (NPLs) in the Indian context. They evaluated as to how banks' non-performing loans are
influenced by three major sets of economic and financial factors, ie, terms of credit, bank size induced risk
preferences and macroeconomic shocks. The empirical results from panel regression models suggest that
terms of credit variables have significant effect on the banks' non-performing loans in the presence of bank
size induced risk preferences and macroeconomic shocks. On the other hand, factors like horizon of maturity
of credit, better credit culture, favorable macroeconomic and business conditions lead to lowering of NPAs.

Ved Pal and Malik (2007) in their empirical paper examined the difference in financial characteristics of
public, private and foreign sector banks based on factors such as profitability, liquidity, risk and efficiency.

56
Multinomial regression analysis was used and results revealed that foreign banks proved to be high
performer in generating business with a given level of resources and they are better equipped with
managerial practices and in terms of skills and technology. Foreign banks were more consistent with market
system as reflected in terms of net interest margin. The public banks emerged as the next best performer
after foreign banks. It was high performer in economizing their expenses which was reflected from expense
rate and efficiency ratio. The private sector banks emerged with a better utilizer of resources as compared to
PSB's.

Bhatia (2007) in his research paper entitled, "Non-Performing Assets of Indian Public, Private and Foreign
Sector Banks: An Empirical Assessment", explores an empirical approach to the analysis of Non-Performing
Assets (NPAs) of public, private, and foreign sector banks in India. This paper aims to find the fundamental
factors which impact NPAs of banks. A model consisting of two types of factors, viz., macroeconomic
factors and bank-specific parameters, is developed and the behaviour of NPAs of the three categories of
banks is observed.

Ashok Khurana and Mandeep Singh (2010) stated that issue of mounting NPAs is a challenging to public
sector banks. The study found that the asset wise classification of PSBs is in right direction and there is
significant variation in the recovery of NPAs in the different sector. The research observed that PSBs should
not be loaded with the twin object of profitability and social welfare.

Malyadri and Sirisha (2011) this study examine the NPA of Public Sector banks and Private sector banks
of weaker sections for the period seven years in India. The secondary data compiled from Report on Trends
and Progress of Banking in India, 2004-10 which has been analyzed by statistical tool such as percentages
and compound Annual Growth rate. This study reveals that the public sector banks have achieved a greater
penetration compared to the private sector banks.

Kaur and Saddy (2011) in the research paper entitled "A Comparative Study of Non-Performing Assets of
Public and Private Sector Banks" an attempt is made to clarify the concept of NPA, the factors contributing
to NPAS, the magnitude of NPAs, reasons for high NPAs and their impact on Indian banking operations.
Besides, management of credit risk and measures to control the threat of NPAs are also discussed.

Jha and Sarangi (2011) analyzed the performance of seven public sector and private sector banks for the
year 2009-10. They used three sets of ratios, operating performance ratios, financial ratios, and efficiency
ratios. In all eleven ratios were used. They found that Axis Bank took the first position, followed ICICI Bank
BOL, PNB. Axis Bank to SBI, IDBI, and HDFC, in that order.

57
Books

The study made by Prof. E. Gordon and Dr. K. Natarajan who published a book on, "Banking Theory,
Law and Practice" in Himalaya Publishing House. In this book they studied Magnitude of NPA, factors
contributing to NPAs like internal factors. external factors and other factors. Early Warning Signals like
financial, operational, banking, managerial and External signals were discussed. Management of NPAs by
adopting some techniques are discussed in this book.

Dr. P.K. Srivastava had written a book on "Basics of Banking & Finance" which is published in Himalaya
Publishing House. In this book author had discussed Norms for treating different advances as non-
performing. Impact of NPAs, Assets classification. Some important aspect on provisioning of NPAs.
Guidelines for classification of Assets, NPA- recovery measures, Sector-wise NPAs of public sector banks.
Reasons for NPAs, RBI tightens norms for Banks Non-performing lease assets etc.

B) Study of NPA in International Context

Prashanth K. Reddy (2002) in his research paper on the topic, "A comparative study of Non Performing
Assets in India in the Global context" examined the similarities and dissimilarities, remedial measures.
Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in
reserve requirements, barriers to entry, prudential norms and risk-based supervision. The study reveals that
the sheltering of weak institutions while liberalizing operational rules of the game is making implementation
of operational changes difficult and ineffective. This paper deals with the experiences of other Asian
countries in handling of NPAs. It further looks into the effect of the reforms on the level of NPAs and
suggests mechanisms to handle the problem by drawing on experiences from other countries.

Isaac k. Otchere (2005) conducted a study on the performance of privatized banks in middle and low
income countries shows mixed results by "Competitive and value effects of bank privatization in Developed
courtiers "The paper observed that private banks in developed countries have experienced significant
improvements in operating performance. A comparison of the performance of privatized banks in developed
and developing countries suggests that privatization has encouraged excessive risk taking among privatized
banks in developing countries with the consequence that those banks carry large NPAs than their
counterparts in the developed countries. They also observed that consistent with the competitive effect
hypothesis, investors view privatization announcements as foreshadowing bad news for rival banks.

Thomas P. Ferguson (2007) conducted a research on "Observations on the Securitization of Non-

Performing Loans in Russia". Asset securitization is a 15 burgeoning trend in Russia as companies burdened
by poor credit ratings seek access to capital at lower costs than they would be allowed in traditional equity or
debt markets. Study indicates that securitization of these bad loans has not occurred in Russia at the levels
one might expect. This has been due to both a relatively small amount of loans that under-perform as well as
legal and regulatory impediments that have discouraged investors and lenders alike.

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The study has been conducted to examine the expansion of consumer credit in Russia and the circumstances
under which it is occurring indicate that the level of non-performing loans is due to rapidly increase and as
the rationale for maintaining the impediments that stand in the way of securitizing these loans is being re-
examined, those impediments are being scaled back to make way for market participants to engage in such
securitizations. Thus, this article anticipates a significant rise in the level of non-performing loans, which
will be logically paired with an increased interest of Russian lenders in securitizing these assets.

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 nonperforming 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.

REVIEW OF LITERATURE

In the past bank's NPAs were analyzed by many researchers in India and a good number of papers were
published by them. The researcher has reviewed more than 100 papers related to the study. The details of
more relevant literature reviewed by the researcher are as under-

Saha, M., and Zaman, A. (2021) in their study titled Management of NPAs in banks with special reference
to UBI found that with the decrease in NPA level, profitability of banks increased.

Hawaldar, I.T, Spulkar, C., Lokesh, A., Birau, R., Robegen, C. (2020) in their study analysing non-
performing assets in agriculture loans. A case study in India concluded that there is no significant difference
in pre and post sanction of agriculture loans and management of non-performing assets by banks. The wilful
default by borrowers and more NPAs in banks are due to debt waiver policies announced by political parties.

Jethwani, B., Dave, D., All, T., Phansalker, S., and Ahhirao, S. (2020) in their study Indian agriculture
GDP and NPA: A regression model found that the repayment of farm loan adversely affects as factors like
rural population, low export value of crop and low crop production for the year. It should be understood that
the farm loan waivers cannot solve the problem.

Selvam, P. and Premnath S., (2020) in their study titled "Impact of coronavirus on NPA and GDP of
Indian Economy" finds that the NPAs increased during the period and suggested that govemment should
resolve pending cases quickly and stop mandatory landings which is the real problem segment.

59
Sharma S., Rathore D.S., and Prasad, J. (2019) They found that both in public & private sector banks the
major reason for the NPAs is miss-utilisation of bank loans and poor recovery management. The NPAs are
increasing in agriculture and industries. They suggested improving corporate governance for better
operational and credit decision.

Kumar, S., Singh, R., Pratibha, B. T. and Pandurang, A.K. (2019) in their study titled "priority sector
lending and NPA status, impact and issues" found that NPAS of public sector banks for twelve years (2005
to 2016), the NPA percentage in priority sector increased during 2005 to 2008 and 2012 to 2016, Whereas in
non- priority sector NPA's decreased from 2005 to 2009 and remain constant/stable from 2009 to 2011 and
increased from 2011 to 2016. Priority & non priority NPA both contribute to the total NPAs of public sector
banking.

Shiv Kumar, V. and Devenadhan, K. (2019) Done a study analyzing the factors implication of NPAs in
SBI through factor analysis to be encountered. Researchers view that implication of NPAs are at a moderate
level. It can be concluded that the loan asset management of SBI has put the right measures to address the
bad effects of funding mismanagement and to resolve serious adverse effects of NPA.

Rana C., (2018) in his study titled "Management of NPA in context of Indian banking system concluded
that NPA impacts profitability, liquidity and results in credit loss. There are two types of NPAs - gross NPA
and net NPA. NPAs also impact low yield on advances, adverse impact on capital adequacy. As a preventive
measure, he suggested stopping multiple financing and early recognition of the problem.

Kaur, M. and Kumar, R. (2018) In their research titled sectoral analysis of NPA's during pre and post
crisis period of selected commercial banks" studied that NPA's of priority & non priority sector, a
comparison was made between public & private sector banks. They found in their study that during the pre-
crisis period the level of NPA in the priority sector was higher in public & private banks, whereas after the
crisis both showed a negative growth rate in NPAs. It was also evident from the study that the crisis had no
impact on the banking sector as the NPA's were declined after the crisis period. The growth of NPA in
private sector banks was higher than the public sector banks. It was discovered during the pre-crisis period
NPA in non- priority sectors was decreasing in public sector banks, but the private sector banks were
showing an increase in NPA's. NPA increased at a higher rate during the post crisis period. pre-crisis period-
2001-02 to 2007-08. post crisis period - 2008-09 to 2013-14.

Meher, B. (2018) Impact of demonetization on NPAs of Indian banks, focus on how the demonetization
would influence this most pivotal issue of banking industry. The researcher found that in the short run, a
positive effect of demonetization can be seen in which current NPAs of the banks decreased a bit.

60
Pradhan, T.K. (2012) In the study named NPA management in commercial banks in Orissa. He found that
the borrowers are willful defaulters, misutilizing the loan amount and how the legal system is one of the
major causes of a loan becoming NPA. 92% bank officers want out of court settlement than legal action as
legal action takes a longer time due to which NPAs grow further than getting resolved. They further
suggested that proper processing and proper assessment of loan amount and establishing technical feasibility
and economic viability before granting loan. Nearly 82% borrowers are willful defaulters. Assessment of
credit requirements should be done properly.

Narayanmurthy, A., Kalamkar, S. S. (2005) Indebtedness of farmer households across the states: recent
trends, status and determinants. The researcher attempted to find out the incidence and extent of farmer's
indebtedness across the states. They find that socio-economic characteristics of the state have low and high
incidence and extent of indebtedness. The study covers 17 states covering 90% of India's gross cropped area
during 2000-2001. According to study, incidence of indebtedness ranges from 18% in Assam to 82% in
Andhra Pradesh in the year 2003. On the other hand, incidence of indebtedness is higher among
agriculturally advanced states like AP, Punjab, TN, Karnataka, Haryana etc. The same increase is seen in
2003 as compared to 1991-1992. The extent of indebtedness has also increased from Rs.1254 in 1991-92 to
Rs.3804 in 2003. It varies state to state like Punjab (12,832), Kerala (10,465), Haryana (8027). The
indebtedness on the basis of gross cropped area reduced in Haryana (7600), Tamil Nadu (4557). Developed
agricultural states are also having high indebtedness.

GAPS IN LITERATURE REVIEW

口 Many researchers have studied NPAs of banks, but as per literature available no research has been
conducted regarding NPAs of small and marginal farmers.

口 Many studies highlighted agriculture NPAs but no research focussed on small and marginal farmer's
NPAs.

口 As per researcher knowledge, the studies conducted so far on NPAs are based on secondary data from
RBI, NABARD & Banks etc. but no study has been conducted which has been conducted by collecting
primary data directly from small and marginal farmers.

口 The literature review made by the researcher so far shows that many of the variables were not covered in
studies such as Government policies of waivers of loans, wilful default by farmers, natural calamities, loan
utilized for unproductive purposes, health hazard in the family of borrower, communication gap between
bank and farmer, crop failure, higher spending on social needs, insufficient funds given by banks, unforeseen
expenditure, inability to wait for fair price and high cost of production etc. The researcher has planned to
cover this gap in the study.

61
LITERATURE REVIEW

A large number of researchers have been studied to the issue of non-performing asset (NPA) in banking
industry.A review of the relevant literature has been described as under: Non Performing Assets engender
negative impact on banking stability and growth. Issue of NPA and its impact on erosion of profit and
quality of asset was not seriously considered in Indian banking prior to 1991. There are many reasons cited
for the alarming level of NPA in Indian banking sector. Asset quality was not prime concern in Indian
banking sector till 1991, but was mainly focused on performance objectives such as opening wide
networks/branches, development of rural areas, priority sector lending, higher employment generation, etc.
The accounting treatment also failed to project the problem of NPA, as interest on loan accounts were
accounted on accrual basis (Siraj K.K. and P. Sudarsanan Pillai, 2012).

A Committee on Banking Sector Reforms known as Narasimham Committee was set up by RBI to study the
problems faced by Indian banking sector and to suggest measures revitalize the sector. The committee
identified NPA as a major threat and recommended prudential measures for income recognition, asset
classification and provisioning requirements. These measures embarked on transformation of the Indian
banking sector into a viable, competitive and vibrant sector. The committee recommended measures to
improve "operational flexibility" and "functional autonomy" so as to enhance "efficiency, productivity and
profitability" (Chaudhary & Singh, 2012).

The main cause of mounting NPAs in public sector banks is malfunctioning of the banks. Narasimham
Committee identified the NPAs as one of the possible effects of malfunctioning of public sector banks
(Ramu, N., 2009). It has been examined that the reason behind the falling revenues from traditional sources
is 78% of the total NPAs accounted in public sector banks (Bhavani Prasad, G. and Veena, V.D., 2011). An
evaluation of the Indian experience in Financial Sector Reforms Published in the RBI Bulletin gives stress to
the view that the sustained improvement of the economic activity and growth is greatly enhanced by the
existence of a financial system developed in terms of both operational and allocation efficiency in
mobilizing savings and in channelizing them among competing demands (G.Rangarajan, 1997). It has been
observed that the current banking Scenario and the need for the policy change, opines that a major concern
addressed by the banking sector reform is the improvement of the financial health of banks. The Introduction
of prudential norms is better financial discipline by ensuring that the banks are alert to the risk profile of
their loan portfolios (S.P.Talwar (1998).

The Reserve Bank of India has also conducted a study to ascertain the contributing factors for the high level
of NPAs in the banks covering 800 top NPA accounts in 33 banks (RBI Bulletin, July 1999). The study has
found that the proportion of problem loans in case of Indian banking sector always been very high. The
problem loans of these banks, in fact, formed 17.91 percent of their gross advances as on March 31. 1989.
This proportion did not include the amounts locked up in sick industrial units. Hence, the proportion of
problem loans indeed was higher.
62
However, the NPAs of Indian Banks declined to 17.44 percent as on March 31, 1997 after introduction of
prudential norms. In case of many of the banks, the decline in ratio of NPAS was mainly due to
proportionately much higher rise in advances and a lower level of NPAs accretion after 1992.

The study also revealed that the major factors contributing to loans becoming NPAs include diversion of
funds for expansion, diversification, modernization, undertaking new projects and for helping associate
concerns. This is coupled with recessionary trend and failure to tap funds in the capital and debt markets,
business failure (product, marketing, etc.), inefficient management, strained labour relations, inappropriate
technology/technical problems, product obsolescence, recession input/power shortage, price escalation,
accidents, natural calamities, Government policies like changes in excise duties, pollution control orders, etc.

The RBI report concluded that reduction of NPAs in banking sector should be treated as a national priority
issue to make the Indian banking system stronger, resilient and geared to meet the challenges of
globalization (Parul Khanna, 2012)

Das and Ghosh (2003) empirically examined non-performing loans of India's 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 bank's lending policy adducing to relatively unselective
and inadequate assessment of sectorial 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 seen 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 private banks 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 from government 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.

63
And, finally, concerning the scale elasticity behaviour, the technology and market-based results differ
significantly supporting the empirical distinction between returns to scale and economies of scale, often used
interchangeably in the literature.

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. y. 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.

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.

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.

Literature review

A non-performing loan is a loan that is in default or close to being in default. Many loans become non-
performing after being in default for 3 months, but this can depend on the contract terms.

"A loan is nonperforming when payments of interest and principal are past due by 90 days or more, or at
least 90 days of interest payments have been capitalized, refinanced or delayed by agreement, or payments
are less than 90 days overdue, but there are other good reasons to doubt that payments will be made in full"

Source: http://www.articlesbase.com/authors/anthony-dean/53396

Title: The Good, The Bad, And The Non-Performing Mortgages

64
It's now very known that the banks and financial institutions in India face the problem of amplification of
non-performing assets (NPAS) and the issue is becoming more and more unmanageable. In order to bring
the situation under control, various steps have been taken. Among all other steps most important one was the
introduction of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act, 2002 by Parliament, which was an important step towards elimination or reduction of NPAs. The NPA
level of our banks is way high than international standards. One cannot ignore the fact that a part of the
reduction in NPA's is due to the writing off bad loans by banks. Indian banks should take care to ensure that
they give loans to credit worthy customers. In this context the dictum "prevention is always better than cure"
acts as the golden rule to reduce NPA's.

Source: http://ezinearticles.com/?expert-Zainul Abidin

REVIEW OF LITERATURE

Ram Bilas Agarwal, Dr.Mredu Goyal (2021) the author entitled is, "Non-Performing Assets of Banks".
The study analysis COVID 19 pandemic has further worsened the NPA position of Banks. No study came
across which is done on the basic of primary data collected from the small and marginal farmers directly to
find out the difficulties faced by them in repayment of loan in their self-actual version.

M. Saptarshi, Jayadatta. S, Pragati Pattan, Sejal. K. Bhurat (2021) "A Study On NonPerforming Assets
Management With Reference To ICICI Bank studied on the Nonperforming assets management with
reference to ICICI Bank This study uses historical research method for collection and analysis of data. And
intends to find out the strategy requited to reduce NPAs. The conclusion suggests that banks should follow
the credit assessment procedure, adequate paperwork, frequent loan monitoring and internal risk reporting
mechanism to reduce NPA.

65
CHAPTER 4 DATA ANALYSIS, INTERPRETATION AND PRESENTATION

66
 DATA ANALYSIS

OVERALL ANALYSIS:

Scheduled Commercial banks (SCBs) in India remained robust against the backdrop of global financial crisis.
It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio (Tier I capital to
total assets ratio) in India has remained high reflecting the strength of the Indian banking system. However,
the Indian banking sector was not completely insulated from the effects of the slowdown of the India
economy.

The consolidated balance sheets of SCBs, expanded by 21.2 per cent as at end-March 2010 as compared
with 25.0 per cent in the previous year. While the balance sheet of public sector banks maintained their
growth momentum, the private sector banks and foreign banks registered a deceleration in growth rate.

During 2009-10, the growth rate of banks" lending to industries, personal loans and services sector witnessed
a deceleration, while growth rate of banks" lending to agriculture and allied activities increased substantially.
Overall, the incremental Credit-Deposit (C-D) ratio declined sharply reflecting the slowdown in credit
growth, as corporates deferred their investments against the backdrop of widespread uncertainty.

It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio in India has
remained high reflecting the strength of the Indian banking system. For instance, as observed by the World
Bank, the leverage ratio of banks in the UK witnessed a decline throughout 1990s, which was accentuated
after 2000 to reach a level of about 3 per cent by 2009 from around 5 per cent in the 1990s. On the other
hand, the leverage ratio for Indian banks has risen from about 4.1 per cent in March 2002 to reach a level of
6.3 per cent by March 2010.

The balance sheets of public sector banks maintained their growth momentum, the private sector banks and
foreign banks registered a deceleration in growth rate. Furthermore, the old private sector banks, which had
been registering a significantly lower growth rate than their newer counterparts in the recent past, managed a
better performance this year.

67
* NET NPAS OF BANKS: 2001-02 to 2009-10

Interpretation:

*From the above it is observed that net NPA of public sector banks has a declining trend up to year 2006-07
and after that it has a rising trend till 2009-10. The same trend has been observed in both Private and Foreign
Sector Banks. The declining trend from 2004 to 2007 of NPA was due to the implementation of
Securitization Act (2002).

*But the increase in NPA was increasing in absolute term, as NPA as per percent of advance shows a
declining trend in Public Sector Banks while that of in Private and Foreign Sector Banks shows an upward
trend that is increase in NPA as per percent of advance after 2007.

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

68
COMPOSITION OF NPAS OF BANK SECTOR WISE:

Interpretation:

➤From the above chart it is observed that public sector category is the least contributor towards the NPA of
public sector bank. In the initial years from 2002 to 2006, Non- priority sector contributes more towards
NPA than priority sector. But in later years from 2007 it's other way round, where priority sector contributes
more than Non- priority sector.

➤Priority sector consist of advance given to agriculture, SSI, & other priority sector advances. Non priority
sector consist of large industries, medium industries & other non priority sectors.

➤In case of priority sector, it started falling from 2004 up to 2006 over previous year. But in the later years
ie. from 2007 there is rise NPA because of defaults on the loan given to the farmers. It was highest in 2009.
In order to reduce that, waiver package was announced in union budget of 2009. It may also be noted that
the increase in NPAs was more noticeable in priority sector, which have been more active in the real estate
and housing loans segments.

➤NPA in non priority sector is reducing constantly from 2003 to 2009 ie. by 50%. Though the advance
given to non-priority sector was higher than priority sector, NPAs of non-priority sector is comparatively.

69
Interpretation:

➤From the above graph it is observed that public sector contributes very negligible towards the overall NPA
of foreign banks. The major reason for this is that on an average only 3.5% of total advance is made towards
public sector category.

➤Priority sector category on an average constitutes almost 34% of the total advances made by the private
sector banks. While average NPA of priority sector constitutes of 25% of total NPA. In later years from
2008 to 2010 there is increase in NPA of priority sector. In these years more advances was given to
agriculture & housing sector.

➤In the year 2007-08, the real estate market was on boom, which encouraged people to take more loans.
But after the subprime crisis there was sudden fall in real estate market & people became default to pay the
loan.

➤In case of non-priority sector, the average advances made are 60.5% of total advance made by private
sector banks. But the average NPA of non-priority sector is almost 74% which is highest amongst the entire
category. We can see the declining trend in NPA of non-priority sector from 2004 to 2007. This as a result of
securitization Act, 2002.

70
Interpretation:

➤It is observed from the chart there is no NPA in public sector category in all the three years because there
was no advance made to public sector category.

➤Non-priority sector contributes highest towards the NPA of foreign banks because non-priority sector
constitute approximately 65% of the total advances made by foreign banks. So NPA will also be more in
non-priority sector.

➤NPA is low in priority sector because very few advances are made in priority sector & that too are made
to SSI.

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

71
COMPARISON OF NET NPA OF OLD AND NEW PRIVATE SECTOR BANKS: 2001-02 to 2009-10

Interpretation:

➤From the above chart it is clearly observed that net NPA of old private sector banks has a declining trend
over the years on the contrary new private sector banks has an upward trend.

➤Old private sector banks which is passing from lower growth rate in recent past, starts performing better
than their new counterparts. Old private sector banks are more efficient than that of new private sector banks
in managing NPA.

NET NPAS AS PERCENTAGE OF ADVANCES OF BANKS:

72
Interpretation:

➤From the above it is clearly observed that only public sector banks have succeeded in reducing net NPA
against net advances made over the period of time. It is constantly reducing each year, whereas in case of
private sector bank it has reduced in 2006-07 then it got stable and started rising from 2008-09 onwards.

➤In case of foreign banks it is fluctuating over the years. Public sector banks have been able to reduce this
ratio by 66.7% from 2006 to 2010. Public sector banks as a result of stringent checks & control able to
manage low ratio compare to other banks. Also the ratio increased by 89% for foreign banks where the
foreign banks were badly affected by the global meltdown. Even for private sector bank the ratio increased
by 25% in 2010 due to financial crises & also for public sector bank the reduction in 2010 was the lowest ie.
12.5%.

CLASSIFICATION OF LOAN ASSET OF BANKS:

Interpretation:

➤The above frequency distribution chart states that standard asset is increasing every year & on the contrary
all the other types of asset i.e. Sub-standard, Doubtful & Loss Asset are decreasing every asset. This proves
that public sector banks have succeeded in reducing NPA over the years.

➤Public sector banks have taken various measures to reduce NPA also convert Sub- Standard, Doubtful &
loss asset into the above category Standard, Sub-Standard & Doubtful asset. The rise in sub standard ratio
has major proportion indicates that there is a high scope of up gradation or improvement in NPA recovery in
initial stage because it will be very easy to recover the loan as minimum duration of default.

73
Interpretation:

➤It is clearly observed from the line graph that there is continuous rise in net profit of private sector banks
over the years. The average of percentage increase in net profits. of private sector banks comes to
approximately 34%.

➤On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from
2001-02 to 2009-10. The average of percentage rise in net NPA comes to almost 15%.

74
Interpretation:

➤The above line graph shows net profit of foreign banks is increasing throughout the period from 2001-02
to 2009-10. The average of percentage increase in net profit. YOY basis comes to 32%. Whereas in case of
net profit there is no continuous upward or downward movement.

➤But overall there is rise in net NPA of foreign banks. The average of percentage increase in net NPA YOY
basis comes to approximately 25%. So this shows there is positive relationship between net NPA & net
profit of foreign banks.

NPA TO ADVANCE RATIO OF BANK:

Interpretation:

➤The percentage in reduction of gross NPA to gross advances ratio is decreasing year on year ie. it has
reduced by 34.5% from 2005-06 to 2006-07. Similarly it has reduced by 25%, 18.5% & 9% respectively
from 2006-07 to 2007-08, from 2007-08 to 2008-09 & 2008-09 to 2009-10.

➤While in case of net NPA to net advances ratio, the percentage change is varying. It has reduced by 38%
from 2005-06 to 2006-07. Similarly it has reduced by 15.38%, 27.27% & 12.5% respectively from 2006-07
to 2007-08, from 2007-08 to 2008-09 & 2008-09 to 2009-10.

➤The above calculated figure states that the provisions made for NPA & other items like interest due but
not recovered, part payment received and kept in suspense account, ete which is deducted from Gross NPA
is changing over the years. It is not decreasing in same proportion as gross NPA.

75
➤The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2006-07 [67%] &
lowest in 2007-08 [59%]. In other years it near to 63%. This gap is highest in 2007 because in 2007
advances have increased tremendously over 2006. Due to which NPA also increased & so provisions also
increased.

➤The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to net advances is
decreasing over the years. In all the public sector bank has succeeded to reduce the non performing assets
against the advances made over the years.

Interpretation:

➤The percentage change in of gross NPA to gross advances ratio is decreasing initially & thereafter started
rising from 2007-08. It has reduced by 34.2% from 2005-06 to 2006-07. Similarly it has reduced by 12%
from 2006-07 to 2007-08 & thereafter. increased by 18.5% & 9% respectively from 2007-08 to 2008-09 &
2008-09 to 2009- 10.

➤While in case of net NPA to net advances ratio, the percentage change is varying drastically. It has
reduced by 47% from 2005-06 to 2006-07. It is unchanged from 2006-07 to 2007-08. It has increased by
20% & 25% respectively from 2007-08 to 2008-09 & 2008-09 to 2009-10.

➤The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the
years states that private sector banks makes more provisions in gross NPA & gross advances.

76
➤The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2006-07 [60%] &
lowest in 2009-10 [48%]. In other years it near to 54%. In 2007 there is highest increase in advances over
previous year amongst all the year. This resulted increase in NPA which in turn increased the provisions and
unrecognized interest income.

➤Private sector banks have not succeeded to reduce NPA as against the advances made over the years as
both the ratios are increasing in later years.

Interpretation:

➤The gross NPA to gross advances ratio is decreasing till 2007-08.It is unchanged in 2008-09 & then
increased in 2009-10. It has reduced by 28.5% & 10% respectively from 2005-06 to 2006-07 & from 2006-
07 to 2007-08. It has increased tremendously by 122% from 2008-09 to 2009-10.

➤While in case of net NPA to net advances ratio, there is great volatility. It has reduced by 11% from 2005-
06 to 2006-07. Thereafter it increased by 25% in 2007-08. Again it reduced by 10% in 2009 and finally
increased by 89% in 2009-10.

➤The steep rise in gross NPA & net NPA 2009-10 is due to poor global conditions.

➤The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2005-06 & lowest in
2007-08. In 2005-06 provisions & unrecognized interest income was highest compare to other years while it
was lowest in 2007-08.

77
➤The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to net advances is
decreasing over the years. In all the public sector bank has succeeded to reduce the non performing assets
against the advances made over the years.

➤Thus in foreign banks gross NPA to gross advances ratio & net NPA to net advances ratio are not having
parallel movement throughout the period. The change in net NPA to net advances is quite higher than gross
NPA to gross advances.

Interpretation:

➤From the above chart it is clearly observed that old private sector banks are constantly improving in terms
of net NPA to net advances ratio which is represented by declining trend from 2001-02 to 2009-10. While on
the other hand for new private sector banks net NPA to net advances ratio is fluctuating over the years.

DATA ANALYSIS & INTERPRETATION

To analyse the data, first of all we need to study about what data analysis and interpretation is. It is the
process by which sense and meaning are made of the data gathered in qualitative research, and by which the
emergent knowledge is applied to clients' problems. This data often takes the form of records of group
discussions and interviews, but is not limited to this. Through processes of revisiting and immersion in the
data, and through complex activities of structuring, re-framing or otherwise exploring it, the researcher looks
for patterns and insights relevant to the key research issues and uses these to address the client's brief.

In this chapter some comparative analysis have been done to achieve the objectives of the study. This is
accomplished through various ratios analysis and correlation between net profits and net NPA's.

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COMPARATIVE RATIOS

Gross NPA's Ratio (%)

Interpretation:

➤This analysis indicates the Gross NPA Ratio of Public Sector Banks and Private Sector Banks from 2012
till 2016. As we know very well that higher this ratio, more dangerous position it is for the banks.

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➤From the above chart we can clearly understand that rate of growth of Gross NPA of Public Sector Banks
is increasing since 2012 to 2016 which is 3,17% to 9.28% but in Private Sector Banks initially it decreases in
2013 from 2.09% to 1.77% and after that it also start increasing which raise up to 2.83% in 2016.

➤But we can say that increase in Gross NPA ratio of Public Sector Banks is very alarming which has
increased from 3.17% to 9.28% whereas in Private Sector Banks it rises from 2.09% to 2.83% only from
year 2012 to 2016.

Net NPA Ratio (%)

Interpretation:

➤This analysis indicates the Net NPA Ratio of Public Sector Banks and Private Sector Banks from 2012 till
2016. As we know very well that higher this ratio, more dangerous position it is for the banks.

➤From the above chart we can clearly understand that rate of growth of Net NPA of Public and Private
Sector Banks is increasing since 2012 to 2016 which is 1.69% to 5.72% and 0.51% to 1.37% respectively.

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➤But we can say that increase in Net NPA Ratio of Public Sector Banks is very alarming which has
increased by 4.03% whereas in Private Sector Banks it rises by 0.86% only from year 2012 to 2016.

Provisions Ratio (%)

Interpretation:

➤This analysis indicates the Provision Ratio of Public Sector Banks and Private Sector Banks from 2012 till
2016. As we know very well that higher this ratio, more safe position for banks,

➤From the above chart we can clearly understand that due to increasing rate of Gross NPA's of Public and
Private Sector Banks, provisions made by these banks are decreasing since 2012 to 2016 which is 47.37% to
40.67% and 75.83% to 52.24% respectively.

➤We can say that if provisions are decreasing and private sector banks are having less NPA's as compared
to Public Sector Banks even then they are making more provisions to be on the safer side.

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Comparison of Gross NPA Ratio and Net NPA of Public Sector Bank

Interpretation:

➤This analysis indicates the relationship between gross NPA ratio and net NPA ratio. These both are
showing increasing trend from 2012 to 2016 in Public Sector Banks.

➤Above chart shows that gross NPA's are more as compared to net NPA, which means more provisions are
made by public sector banks so as to reduce the risk of non recovery.

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Comparison of Gross NPA Ratio and Net NPA of Private Sector Bank

Interpretation:

➤This analysis indicates the relationship between gross NPA ratio and net NPA ratio. These both are
showing increasing trend from 2012 to 2016 in Private Sector Banks.

➤Above chart shows that gross NPA's are more as compared to net NPA, which means more provisions are
made by private sector banks so as to reduce the risk of non recovery.

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COMPOSITION OF LOAN ASSET OF BANKS

Standard Assets Ratio (%)

Interpretation:

➤This analysis indicates the Standard Asset Ratio of Public Sector Banks and Private Sector Banks from
2012 till 2016. As we know very well that higher this ratio, more advantageous it is for the banks.

➤From the above chart we can clearly understand that the Standard Asset Ratio of Public and Private Sector
Banks is decreasing constantly from 2012 to 2016 & has fallen down to 3.43% from 5.29% for Private
Sector Bank & to 0.98% from 3,40% for Public Sector Bank. So, we can determine that Private Sector bank
is in beneficial position than Public Sector Bank.

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Sub-standard Assets Ratio (%)

Interpretation:

➤This analysis indicates the Sub-Standard Asset Ratio of Public Sector Banks and Private Sector Banks
from 2012 till 2016. As we know very well that lower this ratio, more advantageous it is for the banks.

➤From the above chart we can clearly understand that the Sub-Standard Asset Ratio of Public and Private
Sector Banks is decreasing constantly from 2012 to 2016 & has fallen down to 0.17% from 0.26% for
Private Sector Bank & to 0.04% from 0.06% for Public Sector Bank. So, we can determine that Public
Sector bank is in beneficial position than Private Sector Bank.

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Doubtful Assets Ratio (%)

Interpretation:

➤This analysis indicates the Doubtful Asset Ratio of Public Sector Banks and Private Sector Banks from
2012 till 2016. As we know very well that lesser this ratio, more advantageous it is for the banks.

➤From the above chart we can clearly understand that the Doubtful Asset Ratio of Public Sector Banks is
increasing slightly and Private Sector Banks is showing constant trend from 2012 to 2016. Since the ratio for
both the banks have a marginal difference, therefore the only thing which differentiates the banks is that this
ratio for public is increasing and for Private it is constant. So, Private Sector Banks gain advantage from this
ratio.

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NPA RECOVERY ANALYSIS

Percentage of Net Amount Recovered

Interpretation:

➤Above Chart clearly showing NPAs of scheduled commercial banks recovered through various channels
during the study period of 2012 to 2016.

➤SARFAESI Act is the most effective channel of NPA recovery. Rs. 13,200 Crores were recovered through
this channel in 2015-16. But it is in fewer amounts as compared to in year 2012-13.

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CHAPTER 5 CONCLUSION & SUGGESTION

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*CONCLUSION

• The problems of Non-performing assets (NPAs) are a serious issue and danger to Public banks as well as
Private Banks, because it destroys the sound financial position of them. The customers and the public would
not keep trust on the banks any more if the banks have higher rates of NPAs. So the problem of NPAs must
be handled in such a manner that would not ruin the financial positions and affect the image of the banks. It
finds that level of NPAs both gross and net is increasing. It also finds that there is a negative relationship
between Total advances and Net NPA of HDFC Bank Ltd. This is because of mismanagement and wrong
choice of client. To improve the efficiency and profitability, the NPA has to be reduced further.

• The incidence of non- performing assets (NPAs) are affecting the performance of credit institutions both
financially and psychologically. The non-performing assets have become a major cause of concern. Imbibing
the credit management skills has become all the more important for improving the bottom line of the
banking sector.

• In the whole research it was found that bank is very aware about maintaining their NPA level. Bank's
sound financial position and ongoing expansion of its branches shows the sound management system of the
bank. Bank is successful on maintaining its NPA less than 1%. If bank tries more to prevent accounts from
turning into NPAs then it can make more profits.

• Non Performing Assets are one of the most influencing factors that effect the profit rate of banking sector.
RBI suggested various measures to recover the loss from NPA's like Increasing the rate of Provisioning
Coverage Ratio(PCR), conduct more recovery camps, resale of NPA's to Asset Reconstruction Companies
etc.,

• RBI governor Raghuram Rajan has given strict guidelines to all public and private sector banks to control
the growing rate of NPA's which will ultimately effect the performance of whole banking sector.

• NPA is a virus affecting banking sector. It affects profitability, liquidity and solvency, in addition posing
threat on quality of asset and survival of banks. It still remains a major concern for banks in India. The
increased level of additions to NPA remained as an area of concern as it indicates the real efficiency of credit
risk management. The recessionary pressures faced by the banking sector is an important reason for the
growth of NPA indicators, it should be managed to maintain a healthy and viable banking environment.

• The credit management skills have become more important for improving the bottom-line of the banking
sector.

• The various global risks associated with the banking industry will expose the credit assets to greater risks
while serious efforts need to be taken for recovery measures.

• Banks need to be equipped with necessary risk appraisal system to minimize credit defaults.

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• Several experiments have been tried to curb NPAs (viz., BIFR/SICA, lok adalats, DRTS, OTS, SARFAESI
etc) but nothing has hit the mark in tackling NPAs.

• The Credit management Practice is standard as per international norm in Bank.

• The Risk appetite of Bank is moderate along with its high growth offensive marketing strategy and NPA
quality measurement.

• Most of the NPA factors contributed in bank is from Macro economic reasons and particular year 2009 FY
is worst case in NPA management point of view.

• The profitability of bank is not impacted by NPA.

• The competitive NPA management among peers PSB is satisfactory

• The CAR is adequately comfortable.

• Government of India is trying hard to rescue the banks, particularly looking at the downfall of PSBs in the
country. Recently, the center had announced recapitalization of PSBs with 2.11 lakh crore However, there is
still a strong need felt for stricter laws in NPA management. Wilful defaulters particularly must be treated
under a separate, dedicated Act. Moreover, there must be rigorous practices adopted to take correct decisions
for granting loans to individual borrowers or companies.

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

The only problem that the Banks are facing today is the problem of non-performing assets. Then on
performing assets means those assets which are classified as bad assets which are not possibly be returned
back to the banks by the borrowers. If the proper management of the NPAs is not undertaken it would
hamper the business of the banks. The NPAs would destroy the current profit, interest income due to large
provisions of the NPAs, and would affect the smooth functioning of the recycling of the funds.

If we analyze the past years data, we may come to know that the NPAs have increased very drastically after
2001. The RBI has also been trying to take number of measures but the ratio of NPAs is not decreasing of
the banks. The banks must find out the measures to reduce the evolving problem of the NPAs. If the concept
of NPAs is taken very lightly it would be dangerous for the Indian banking sector.

The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of funds in the
nation. This would help the nation to develop more banking branches and developing the economy by
providing the better financial services to the nation.

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Optimal banking structure defined by relative size, accessibility and outreach, and allocation of credit is
evaluated from empirical data for changes consistent with dynamic needs of Indian economy during reform
era. Despite significant movements on the above parameters, ideal accomplishments were far from
satisfactory, and thus further reforms were needed. Reserve Bank of India imposed deregulation and
prudential norms for reforming banks that have made substantial impact on banks' balance sheet and other
performance variables. Consolidation and restructuring initiatives muted by policy constraints and
consequences were marginal variations in the level of concentration and competition in Indian banking.
Market-oriented banking reforms contributed to performance of banks. Notable achievements were lower
average cost combined with growth of total factor productivity, superior profitability and intensive advanced
technology adoption. But current high non-performing assets ratio is a drag on banks' profitability as it was
the case in 1990s despite a drastic fall in the ratio in intervening years followed by its upward trend in post-
global crisis.

The Act provides a framework under which commercial banking in India is supervised and regulated. The
Act supplements the Companies Act, 1956. Primary Agricultural Credit Society and cooperative land
mortgage banks are excluded from the Act. The Act gives the Reserve Bank of India (RBI) the power to
license banks, have regulation over shareholding and voting rights of shareholders; supervise the
appointment of the boards and management; regulate the operations of banks; lay down instructions for
audits, control moratorium, mergers and liquidation; issue directives in the interests of public good and on
banking policy, and impose penalties. In 1965, the Act was amended to include cooperative banks. under its
purview by adding the Section 56. Cooperative banks, which operate only in one state, are formed and run
by the state government. But, RBI controls the licensing and regulates the business operations. The Banking
Act was a supplement to the previous acts related to banking.

The NPAs level of our banks is still high. 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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*SUGGESTIONS

• Bank management may possess specialized credit rating agencies to finalize the borrowing capacity of the
potential borrowers before offering credit to the needy people.

• Bank should exercise proper pre sanction scrutiny and post sanction supervision and control.

• Bank should conduct loan recovery camp in certain time period.

• Bank should provide training and awareness programs regarding the replacement of loans and effective use
of funds.

• The bank should arrange programs for its members and customer about how to maintain their credit score,
because if they get the information about (CIBIL) and they may start repaying on time to maintain their
CIBIL score, which is helpful for bank to maintain its NPA level.

• Bank should be concentrating on the income level of clients, investments avenues with steady returns and
comparatively minimal risk should be proposed.

• Bank should try to identify their borrowers with genuine intent. It is a big challenge for bank but it can
prevent NPAs. This can be done through arranging special investigation' of financial or business transaction
of a borrower.

• Banks should have the well-defined policies in respect of their loan portfolio & those policies should be
communicated to the staff at the service points clearly.

• All loan accounts are to be reviewed at periodical intervals & they should be renewed in time wherever
required.

• Borrowers are to be contacted at periodical intervals & the managers should be in position to ascertain the
financial position of the borrowers at each stage.

• By strengthening security & improving activity level, non performing accounts can turn the corner.

• Ethical business will lead to reduced non-performing assets to a great extent.

• Improving the recovery management Monitoring accounts

• Keeping regular contact with borrowers

• Fixing recovery targets

• Arranging recovery camps

• BOD are the key players in the management of banks but they are granted little autonomy.

• The nominees of Government /RBI dominate the banks boards due to their vast powers.

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➤ There should be proper monitoring of the restructured accounts because there is every possibility of the
loans slipping into NPAs category again.

➤ All banks should keep stringent check on advances being made during the time.

➤ Public sector should focus more on recovery of doubtful assets.

➤ Private sector banks should increase their income from sources other than interest, as rise in NPA due to
default in interest income may affect the profits drastically.

➤ RBI should revise existing credit appraisals and monitoring systems.

➤ Banks should improve upon and strengthen their loan recovery methods.

➤ Credit appraisal and post-loan monitoring are crucial steps which need to be concentrated by all the banks.

➤ There must be regular follow-up with the customers and it is the duty of banker to ensure that there is no
diversion of funds. This process can be taken up at regular intervals.

➤ Personal visits should be made after sanction and disbursal of credit and further close monitoring of the
operations of the accounts of borrowed units should be done periodically.

➤ Advances provided by banks need pre-sanctioning evaluation and post-disbursement control so that NPA
can decrease.

➤ Good management needed on the side of banks to decrease the level of NPA.

➤ Proper selection of borrowers & follow ups required to get timely payment.

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*OVERALL FINDINGS

➤ NPAs were more noticeable in respect of new private sector and foreign banks, which have been more
active in the real estate and housing loans segments. It shows a upward trends over the years as compared to
others.

➤ The old private sector banks, which had been registering a significantly lower growth rate than their
newer counterparts in the recent past, managed a better performance this year.

➤ Among all three sectors, public sector banks have managed to reduce NPAs over the years. NPA profile
in the < 2% category of public sector banks was reached to 100% in 2009-10 as compared to Private and
Foreign sector banks which was around 80%

➤ Net NPA against net advances increased more in Foreign and Private sector banks in 2009-10 while
Public sector banks have succeeded in reducing net NPA against net advances made over the period of time

➤ Public sector banks have managed to increase the standard assets over the years. The proportion of
standard assets in Private sector banks reduced in 2009 and 2010 which was compensated by increase in sub-
standard and doubtful assets. In Foreign sectors banks the proportion of sub-standard asset has increased
tremendously by 3.5% of loan assets in 2010 which was 1.2% of loan assets in 2009,

➤ The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the
years states that public sector banks makes more provisions in gross NPA & gross advances as compared to
private and foreign banks.

➤ Public sector banks almost 75% of income comes from Interest/Discount on advances/bill. Whereas it is
just 55% & 43% for private sector banks & foreign banks.

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*BIBLIOGRAPHY

WEBSITES

* http://www.rbi.org.in

* performing-assets-of-public-sector-private-sector-foreign-banks

* https://testbook.com/ias-preparation/non-performing-assets

* https://www.slideshare.net/parneetwalia/project-report-on-npas

* https://www.google.com/url?q=https://www.ies.gov.in/pdfs/Shivani-Mohan-IMPACT-OF-NPA-ON-
PROFITABILITY-OF-SCHEDULED-
COMMERCIAL.pdf&usg=AOvVaw3EosEXqaOeVHA5PVCRp8ag&hl=en-US

* https://www.smallcase.com/learn/npa-non-performing-assets/

* www.jasscacs.edu.in

* http://www.indiastat.com

* http://iba.org.in

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