A

PROJECT REPORT
ON
COMPARATIVE ANALYSIS OF NON PERFORMING ASSETS OF PRIVATE
SECTOR BANK AND PUBLIC SECTOR BANK”.

A Project Submitted to
University of Mumbai for partial completion of the degree of
Bachelor of Management Studies
Under the Faculty of Commerce

By
NAVEEN.B.SINGH

42

Under the Guidance of

Prof.Ameya Ghatge

Shailendra Education Society`s Arts, Commerce & Science College,

Shailendra Nagar, Dahisar(E),Mumbai-400068.

April 2024
 2

Declaration by learner
I the undersigned Mr. Naveen.B.Singh here by, declare that the work embodied in this
project work “Comparative Analysis of Non Performing Assets Of Private
Sector Bank and Public Sector Bank”, forms my own contribution to the research work
carried out under the guidance of
Prof.Ameya Ghatge 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 Mr. Naveen.B.Singh.

Certified by

Name and signature of the Guiding Teacher

Prof.Ameya Ghatge.
 3

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, Dr.Swati Pitale for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator Asst.Prof.Rupal Dalal, for her moral
support and guidance.

I would also like to express my sincere gratitude towards my project guide

Prof.Ameya Ghatge 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.
4
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INDEX
SR TITLE OF CHAPTER PAGE NO.
NO.

1. INTODUCTION 6

2. REVIEW OF LITERATURE 29

3. RESEARCH METHODOLOGY 31

4. DATA ANALYSIS AND INTERPRETATION 59

5. CONCLUSION 72

6. BIBLIOGRAPHY 74

7. APPENDIX 75
 6

1.1 INTRODUCTION OF BANKING

A bank is a financial institution and a financial intermediary that

accepts
deposits and channels those deposits into lending activities, either directly
by loaning or indirectly through capital markets.

A bank may be defined as an institution that accepts deposits,

makes loans,
pays checks, and provides financial services. A bank is a financial
intermediary for the safeguarding, transferring, exchanging, or lending of
money. A primary role of banks is connecting those with funds, such as
investors and depositors, to those seeking funds, such as individuals or
businesses needing loans. A bank is the connection between customers that
have capital deficits and customers with capital surpluses.

Banks distribute the medium of exchange. Banking is a business.

Banks sell
their services to earn money, and they must market and manage those
services in a competitive field. Banks are financial intermediaries that
safeguard, transfer, exchange, and lend money and like other businesses
that must earn a profit to survive. Understanding this fundamental idea
helps you to understand how banking systems work, and helps you
understand many modern trends in banking and finance.

Banking is a unique business

The services banks offer to customers have to do almost entirely
with
handling money or finances for other people. Banks are critical to our
economy. The primary function of banks is to put their account holders'
money to use by lending it out to others who are in need of the same.
Money is a medium of exchange, an agreed-upon system for
measuring the
value of goods and services. Once, and still in some places today, precious
stones, animal products, or other goods of value might be used as a medium
of exchange. This system was used for centuries, before the invention of
money. People used to exchange the goods or services for other goods or
 7

services in return. This system is also known as “Barter System” and an

age-old method that was adopted by people to exchange their services and
goods. Roman soldiers were sometimes paid in salt, because it was critical
to life and was a scarce commodity at those times.
Anything with an agreed-upon value might be a medium of
exchange.

services in a competitive field. Banks are financial intermediaries that

safeguard, transfer, exchange, and lend money and like other businesses that
must earn a profit to survive. Understanding this fundamental idea hel
were nationalized. These nationalized banks are the majority of lenders in the
Indian economy. They dominate the banking sector because of their large size
and widespread networks. The Indian banking sector is broadly classified into
scheduled and non-scheduled banks. The scheduled banks are those included
under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled
banks are further classified into: nationalized banks; State Bank of India and its
associates; Regional Rural Banks (RRBs); foreign banks; and other Indian
private
were nationalized. These nationalized banks are the majority of lenders in the
Indian economy. They dominate the banking sector because of their large size
and widespread networks. The Indian banking sector is broadly classified into
scheduled and non-scheduled banks. The scheduled banks are those included
under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled
banks are further classified into: nationalized banks; State Bank of India and its
associates; Regional Rural Banks (RRBs); foreign banks; and other Indian
private
 8

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. 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 than91days
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.
 9

2. Doubtful Assets : a doubtful asset is one which has remained NPA for a peri od
exceeding 12months.
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 mainta in 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.
 10

A bank is a financial institution and a financial intermediary that accepts

deposits and channels those deposits into lending activities, either directly by loaning
or indirectly through capital markets.

A bank may be defined as an institution that accepts deposits, makes loans,

pays checks, and provides financial services. A bank is a financial intermediary for
the safeguarding, transferring, exchanging, or lending of money. A primary role of
banks is connecting those with funds, such as investors and depositors, to those
seeking funds, such as individuals or businesses needing loans. A bank is the
connection between customers that have capital deficits and customers with capital
surpluses.

Banks distribute the medium of exchange. Banking is a business. Banks

sell
their services to earn money, and they must market and manage those services in a
competitive field. Banks are financial intermediaries that safeguard, transfer,
exchange, and lend money and like other businesses that must earn a profit to
survive. Understanding this fundamental idea helps you to understand how banking
systems work, and helps you understand many modern trends in banking and
finance.

Banking is a unique business

The services banks offer to customers have to do almost entirely with
handling money or finances for other people. Banks are critical to our economy. The
primary function of banks is to put their account holders' money to use by lending it
out to others who are in need of the same.
Money is a medium of exchange, an agreed-upon system for measuring the
value of goods and services. Once, and still in some places today, precious stones,
animal products, or other goods of value might be used as a medium of exchange.
This system was used for centuries, before the invention of money. People used to
exchange the goods or services for other goods or services in return. This system is
also known as “Barter System” and an age-old method that was adopted by people
to exchange their services and goods. Roman soldiers were sometimes paid in salt,
because it was critical to life and was a scarce commodity at those times.
Anything with an agreed-upon value might be a medium of exchange.

1.2 How banks are created?

 11

Banks and money are essential to maintaining economies and they impact
the entire societies and nations. Hence they are closely regulated and strict
procedures and principles are advised to be followed by the banks by various
authorities and governments. In the United States, banks may be chartered by federal
or state governments and in India government decides the rules for opening any
banks or its branches.
From a business structure perspective, most of the Banks are corporations
or cooperative societies and may be owned by groups of individuals, corporations,
or some combination of the two. Around the world banks are supervised by
governments to guarantee the safety and stability of the money supply and of the
country.

1.3 Types of banks:

Banks provide a multitude of financial services beyond the traditional
practices of holding deposits and lending money. Commercial, retail, and central
banks are three main types.
Understand the difference between the three:
Commercial Banks: Provide familiar services such as checking and savings
accounts, credit cards, investment services, and others. Historically, offered their
services only to businesses, including credit and debit cards, bank accounts, deposits
and loans, and secured and unsecured loans. Due to deregulation, commercial banks
are also competing more with investment banks in money market operations, bond
underwriting, and financial advisory work.
Retail Banks: Developed to help individuals not served by commercial banks.
Provide basic banking services to individual consumers. These institutions help
customers save money, acquire loans, and invest. They also offer a wide range of
financial services to a broad customer base. Examples include savings banks, savings
and loan associations, and credit unions and examples of products and services
include safe deposit boxes, checking and savings accounting, certificates of deposit
(CDs), mortgages, and car loans.
Central Banks: Banks formed, owned and regulated by the government to manage,
regulate, and protect both the money supply and the other banking institutions.
Guarantee stable monetary and financial policy from country to country. Typical
functions include implementing monetary policy, managing foreign exchange and
gold reserves, making decisions regarding official interest rates, acting as banker to
 12

the government and other banks, and regulating and supervising the banking
industry.
Central banks serve as the government's banker. Central banks issue currency and
conduct monetary policy.

1.4 Benefits of banking:

Safety: It’s risky to keep your money in cash as it could be lost, stolen, or destroyed.
Financial institutions keep your funds safe.
Convenience: With banks, there's no need to carry cash. If you need cash, you can
easily access your funds virtually anywhere.
Security: Banks follow stringent laws and regulations and at most banks, funds are
insured.
Financial Future: As individual you'll have access to financial professionals to help
you. Knowledgeable advice of bankers is a valuable resource to help you build a
better financial future.
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.5 HISTORY
Modern banking in India originated in the last decade of the 18th
century. Among the first banks were the Bank of Hindustan, which was
established in 1770 and liquidated in 1829–32; and the General Bank of
India, established in 1786 but failed in 1791. The largest and the oldest bank
which is still in existence is the State Bank of India (S.B.I). It originated
and started working as the Bank of Calcutta in mid-June 1806. In 1809, it
was renamed as the Bank of Bengal. This was one of the three banks
founded by a presidency government, the other two were the Bank of
Bombay in 1840 and the Bank of Madras in 1843. The three banks were
merged in 1921 to form the Imperial Bank of India, which upon India's
independence, became the State Bank of India in 1955. For many years the
presidency banks had acted as quasi-central banks, as did their successors,
until the Reserve Bank of India was established in 1935, under the Reserve
Bank of India Act, 1934.
In 1960, the State Banks of India was given control of eight state-associated
banks under the State Bank of India (Subsidiary Banks) Act, 1959. These
are now called its associate banks. In 1969 the Indian government
nationalized 14 major private banks; one of the big banks was Bank of India.
In 1980, 6 more private banks were nationalized. These nationalized banks
are the majority of lenders in the Indian economy. They dominate the
banking sector because of their large size and widespread networks. The
Indian banking sector is broadly classified into scheduled and non-
scheduled banks. The scheduled banks are those included under the 2nd
Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are
further classified into: nationalized banks; State Bank of India and its
associates; Regional Rural Banks (RRBs); foreign banks; and other Indian
private sector banks. The term commercial banks refer to both scheduled
and non-scheduled commercial banks regulated under the Banking
Regulation Act, 1949.
Generally, the supply, product range and reach of banking in India is fairly
mature-even though reach in rural India and to the poor still remains a
challenge. The government has developed initiatives to address this through
the State Bank of India expanding its branch network and through the
National Bank for Agriculture and Rural Development (NABARD) with
facilities like microfinance.
 14

As per the Reserve Bank of India (RBI), India’s banking sector is

sufficiently capitalized and well-regulated. The financial and economic
conditions in the country are far superior to any other country in the world.
Credit, market and liquidity risk studies suggest that Indian banks are
generally resilient and have withstood the global downturn well.
Indian banking industry has recently witnessed the roll out of innovative
banking models like payments and small finance banks. RBI’s new
measures may go a long way in helping the restructuring of the domestic
banking industry.
The digital payments system in India has evolved the most among 25
countries with India’s Immediate Payment Service (IMPS) being the only
system at level 5 in the Faster Payments Innovation Index (FPII).

Market Size
The Indian banking system consists of 18 public sector banks, 22 private
sector banks, 46 foreign banks, 53 regional rural banks, 1,542 urban
cooperative banks and 94,384 rural cooperative banks as of September
2019. In FY07-18, total lending increased at a CAGR of 10.94 per cent and
total deposits increased at a
CAGR of 11.66 per cent. India’s retail credit market is the fourth largest in
the emerging countries. It increased to US$ 281 billion on December 2017
from US$ 181 billion on December 2014.
 15

1.6 What is Non-Performing Asset (NPA)?

Non-Performing Assets refers to that classification of loans and advances
in the books of a lender in which the there is no payment of interest and
principal have been received and are “past due”. In most of the cases debt
has been classified as Non-Performing Assets where the loan payments
have been outstanding for more than 90 days. In the term sheet/sanction
letter of every loan, the period of default under which the loan will be
classified as non-performing assets are generally mentioned.
A Non-Performing Assets (NPA) is generally classified on the bank’s
balance sheet and the % of NPA out of the total advances has become a vital
ratio for the banks to keep a check on before making the results public.
More than 90 days where payment is due on the banks’ loans and advances
move to non-performing assets (NPA).
As we note from above, Bank of America has an NPA of around $4,170
million that has accrued for Non-Performing Assets (NPA) Example
For example,
Company XYZ has taken a loan of $100 million from Bank ADCB on which
it needs to pay $10,000 of interest every month for 5 years. Now on the
borrower defaults on the payment for three consecutive months i.e. 90 days
then the bank needs to classify the loan as a non-performing asset in their
balance sheet for that financial yea90 days or more.

KEY TAKEAWAYS
➢ Nonperforming assets (NPAs) are recorded on a bank's balance sheet
after a prolonged period of non-payment by the borrower.
➢ NPAs place financial burden on the lender; a significant number of
NPAs over a period of time may indicate to regulators that the
financial health of the bank is in jeopardy.
➢ NPAs can be classified as a substandard asset, doubtful asset, or loss
asset, depending on the length of time overdue and probability of
repayment.
 16

➢ Lenders have options to recover their losses, including taking

possession of any collateral or selling off the loan at a significant
discount to a collection agency.

1.7 How Non-Performing Assets (NPA) Work?

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 a bad debt and then sell it at a discount to a collection agency.
In most cases, debt is classified as nonperforming when loan payments have not
been made for a period of 90 days. While 90 days is the standard, the amount
of elapsed time may be shorter or longer depending on the terms and
conditions of each individual loan. A loan can be classified as a
nonperforming asset at any point during the term of the loan or at its
maturity.
For example, assume a company with a $10 million loan with interest-only
payments of $50,000 per month fails to make a payment for three
consecutive months. The lender may be required to categorize the loan as
nonperforming to meet regulatory requirements. Alternatively, a loan can
also be categorized as nonperforming if a company makes all interest
payments but cannot repay the principal at maturity.
Carrying nonperforming assets, also referred to as nonperforming loans, on
the balance sheet places significant burden on the lender. The nonpayment
of interest or principal reduces the lender's cash flow, which can disrupt
budgets and decrease earnings. Loan loss provisions, which are set aside to
cover potential losses, reduce the capital available to provide subsequent
loans to other borrowers. Once the actual losses from defaulted loans are
determined, they are written off against earnings. Carrying a significant
amount of NPAs on the balance sheet over a period of time is an indicator
to regulators that the financial health of the bank is at risk.

Types of Non-Performing Assets (NPA)

#1 – Term Loans
A term loan i.e. plain vanilla debt facility will be treated as an NPA when
the principal or the interest installment of the loan has been due for more
than 90 days.
 17

#2 – Cash Credit and Overdraft

A cash credit or an overdraft when remaining past due for more than 90 days
it can be treated as an NPA.
#3 – Agricultural Advances
Agricultural advances that have been past due for more than two crop
seasons for short crop duration or one crop duration for long duration crops.
There could be various other types of NPAs including residential
mortgage, home equity loans, credit card loans and non-credit card
outstanding, direct and indirect consumer loans.

1.8 Classification of NPA for Banks

Banks are required to make sub standardization of the non-
performing
assets (NPA) into the following type of four broad groups: –
#1 – Standard Assets
Standard assets are those assets which have remained non-
performing assets
for a period of 12 months or less than 12 months and the risk of the asset is
normal
#2 – Sub- Standard Assets
For a period of more than 12 months, non-performing assets are
classified
under sub-standard assets. Such kind of advances possess more than normal
risk and the creditworthiness of the borrower is quite weak. Banks are
generally ready to take some haircut on the loan amounts which are
categorized under this asset class
#3 – Doubtful Debts
For a period, which is exceeding 18 months, non-performing
assets come
under the category of Doubtful Debts. Doubtful debts itself means that the
bank is highly doubtful of the recovery of its advances. The collection of
such kind of advances is highly questionable and there is the least
probability that the loan amount can be recovered from the party. Such kind
of advances put the bank liquidity and reputation at jeopardy.
 18

NPA identification norms

With effect from 31 March 2004, a loan or advance would become
NPA where
i. Interest and/ or installment of principal remain overdue for a period
of more than 90 days in respect of term loan,
ii. The account remains ‘out of order’ for a period of more than 90 days,
in respect of an Overdraft/cash credit (OD/CC).
iii. The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted,
iv. With effect from September 2004, loans granted for short duration
crops will be treated as NPA, if the installment of principal or interest
there on remain overdue for two crop season and loans granted for
long duration crops will be treated as NPA. If installment of principal
or interest there on remains overdue for one crop season, and
v. Any amount to be received remains overdue for a period of more than
90 days in respect of other accounts.
Out of Order: An account should be treated as out of order if the
outstanding balance remains continuously in excess of the sanctioned
limit/drawing power. In cases where the outstanding balance in the
principle operating amount is less than the sanctioned limit/drawing
power, but there are no credits continuously for 90 as on the date of
balance sheet or credits are not enough to cover the interest debited
during the same period, these account should be treated as ‘out of
order’.
Overdue: Any amount due to the bank under any credit facility is
‘overdue’ if it is not paid on the due date fixed by the bank.
The date of NPA will be the actual date on which slippage occurred, as
mentioned below: -
➢ For Term Loan/Demand Loan Accounts
➢ The date on which interest and/or installment of principle have
remained overdue for a period of more than 90 days.
➢ For Overdraft/Cash Credit Accounts
➢ The date on which the account completed a period of more than
90 days of being continuously out of order.
 19

Income recognition — policy

a) The Policy of income recognition has to be objective and based on
the record
Of recovery. Internationally income from non-performing
asset (NPA) is not recognized on accrual basis but is booked as
income only when it is actually received. Therefore, the banks
should not charge and take to income account interest on any NPA.
b) On an account turning NPA, banks should reverse the interest
already charged
and not collected by debiting profit and loss account, and Stop further
application Of interest. However, banks may continue to record such
accrued interest in a memorandum account in their books.
c) However, interest on advances against tern deposits, N SCS, VPs,
K VPs, and Life policies may be taken to income account on the due date,
provided adequate margin is available in the accounts.
d) If government guaranteed advances become NPA, the interest on
such advances should not be taken to income account unless the interest
has been realized.
e) If any advance, including bills purchased and discounted, become
s NPA as at the close of any year, the entire interest accrued and credited
to income account in the past periods, should be reversed or provided for
if the same is not realized.
This Will apply to government guaranteed accounts also.

Provisioning norms for NPAS

After a proper classification of loan assets, the banks are required to make
sufficient provision against each of the NPA account for possible loan
losses as per prudential norms. The minimum amount of provision required
to be made against a loan asset is different for different types of assets. The
details of the provisioning requirements as per the RBI guidelines are
furnished below:
 20

In terms of RBI circular, No RBI/2004/254/DBOD No.BP.BC.NO

97/21.04.141/2003-04 dated 17.06.2004, the Reserve Bank of India has
decided that
w.e.f March31,2005, a general provision of 10 percent on total outstanding
should be made without making any allowance for ECGC guarantee cover
and securities available.
NPAs under Substandard Assets Category The ‘unsecured exposures’
which are identified as ‘substandard’ would attract additional provision of
10percent, i.e. a total of 20 percent on the outstanding balance. The
provisioning requirement for unsecured doubtful assets is 100 percent.
NPAs under Doubtful category
In terms of RBI Circular No. 2004/261/DBOD
BP.BC.99/21.04.048/2003- 2004 dated 21.06.2004, Reserve Bank decided
to introduce graded higher provisioning according to the age of NPAs in
doubtful category for more than three years, with effect from March 31,
2005.
Consequently, the increase in provisioning requirement on the secured
portion would be applied in a phase manner over a three-year period in
respect of the existing stock of NPAs as classified as ‘doubtful for more
three years as on March 31, 2004 as per clarification given hereunder: In
respect of all advance classified as doubtful for more than three years on or
after 1 April, 2004 the provisioning requirement would be 100 percent.
Accordingly, the provisioning norm for advances identified as doubtful
for
more than 3 years would be as Indicated below as on March31, 2009.
(a) Unsecured Portion
The portion of the advance which is not covered by the realizable value of
the tangible security to which the bank has the valid recourse and the
realizable value is estimated on a realistic basis, provision would be to the
extent of100%.
(b) Secured Portion
Up to 1 year: 20% (D1 Category)
One to three years: 30% (D2 Category)
More than three years: 100% (D3 Category)
NPAs under Loss category
Provisioning at 100% for loss category would continue
 21

The things banks need to bear in mind before making loan advances:
#1 – Character
The character of the borrower needs to judge and the willingness of the
company to repay debt needs to ponder upon. The management, history,
revenue pipelines, stock performance and media coverages of the company
should be taken into consideration to rightly make an opinion about the
company
#2 – Collateral
The value of the collateral which has been pledged needs to be assessed and
proper valuation of the property/asset should be done keeping the loan to
value ratio in mind
#3 – Capacity
The capacity that the company’s financials and the future revenue
projections of the company should be analyzed by the banker. Also, existing
lenders which are already on the company’s balance sheet needs to be
studied properly in order to get the right collateral before providing
advances
#4 – Condition
At last the overall environment and the market and industry condition
should be kept in mind. External and internal factors that can affect the
business in future should be considered and needs to be analyzed in detail.
The Banks are the backbone of an economy which needs to strive in this
dynamic and challenging environment. Hence choosing the right clients and
business partner will make the economy sustainable and will save the world
from another 2008 global financial crisis. For non-performing assets, a
proper strategy and restrictions should be kept on the banks should limited
credit is only available and is available to only those corporations who
actually deserve it.

Recording Non-Performing Assets (NPA)

Banks are required to classify nonperforming assets into one of three
categories according to how long the asset has been non-performing: sub-
standard assets, doubtful assets, and loss assets.
A sub-standard asset is an asset classified as an NPA for less than 12 months.A
doubtful asset is an asset that has been non-performing for more than 12
months. Loss assets are loans with losses identified by the bank auditor, or
inspector that need to be fully written off.
 22

Special Considerations
Recovering Losses
Lenders generally have four options to recoup some or all losses resulting
from nonperforming assets. When companies struggle to service their debt,
lenders may take proactive steps to restructure loans to maintain cash flow
and avoid classifying the loan as nonperforming altogether. When loans in
default are collateralized by the borrower's assets, lenders can take
possession of the collateral and sell it to cover losses.
Lenders can also convert bad loans into equity, which may appreciate to the
point of full recovery of principal lost in the defaulted loan. When bonds
are converted to new equity shares, the value of the original shares is usually
eliminated. As a last resort, banks can sell bad debts at steep discounts to
companies that specialize in loan collections. Lenders typically sell
defaulted loans that are unsecured or when other methods of recovery are
deemed to not be cost-effective.
 23

1.9 Difference Between Gross NPA and Net NPA

What is Gross Non-Performing Assets?

Gross non-performing assets is a term used by financial institutions
to refer to the sum of all the unpaid loans which are classified as non-
performing loans. Credit institutions offer loans to their customers
who fail to be honored and within ninety days, financial institutions
are obligated to classify them as non- performing assets because they
are not receiving either principle or net payments.

What is Net Non-Performing Assets?

Net non-performing assets is a term used by credit institutions to
refer to the sum of the non-performing loans less provision for bad
and doubtful debts. Credit institutions tend to provide a
precautionary amount to cover the unpaid debts.
Therefore, if one deducts provision for unpaid debts from the unpaid
debts, the resulting amount refers to the net non-performing assets.

GROSS NPA NET NPA

 24

1.MEANING One of the main On the other hand, net-

difference between gross non performing loans is
non- the amount that results
performing assets and after deducting
net non-performing provision for doubtful
assets arises from the and unpaid debts from
meaning. Gross non- the sum of the loans
performing assets refer defaulted. It is the actual
to the total amount of the loss that the
debts that an organization incurs after
organization has failed loan defaults.
to collect or the people
owing the organization
has failed to honor their
contractual obligations
of paying both the
principal and interest
amount.

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2.DEFAULT Credit institutions offer a Non-performing loans are

PERIOD grace period after which an listed as default after ninety
individual is required to days which is
start paying the loan and its internationally recognized.
associated interests. If the Any amount that is due
payment duration expires, after the ninety-day grace
the institution is obligated period is classified as a
to write-off those debts default. However, net-non
which are not paid. performing asset does not
have a grace period and is
immediately calculated and
classified as a net non-
performing asset.
 25

3.METHOD OF Gross non-performing Gross non-performing

CALCULATION loans are the sum of all the loans are the sum of all the
loans that have been loans that have been
defaulted by the individuals defaulted by the individuals
who have acquired loans who have acquired loans
from the financial from the financial
institution. This means that institution. This means that
all loans defaulted are all loans defaulted are
added together to form added together to form gross
gross non-performing non-performing assets.
assets.
Gross NPA = (A1 + A2 +
Gross NPA = (A1 + A2 + A3 ................................... +
A3 ................................... + An)/Gross Advances
An)/Gross Advances
Where A1 stands for loans
Where A1 stands for loans given to person number
given to person number one.
one.

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 26

4.ACTUAL LOSS The other difference between Net non-performing assets

gross non- constitute the actual loss
performing assets and net experienced by the
non-performing assets is organization after debts
what the organization refers have defaulted. Since the
to as the actual loss facing credit institution has
the company. Gross non- already provided for
performing assets do not unpaid loans, the provided
constitute the actual loss amount is deducted from
facing the organization. default amount which
results in the actual loss
experienced by the
organization.

5.CAUSES There are some significant Although net non-

factors that have been performing assets are
highlighted to be the principal products of gross
extreme causes of gross non-performing assets,
non-performing assets there is a significant
include poor government difference in that the
policies, industrial amount provided by the
sickness, natural calamities, credit institution to cover for
willful defaults, and unpaid debts plays a
ineffective recovery vital role in determining the
tribunal among others. amount of net non-
performing assets.
 27

6.EFFECTS Some of the significant On the hand, net non-

causes of gross non- performing assets have
performing assets include significant impacts on
the bad effect on the profitability and liquidity
goodwill of the company of the company. Low
and bad effect on the equity liquidity means that the
value of the organization. A company does not have
company with bad equity enough cash to meet its
value experiences obligations when they fall
difficulties in attracting due which means the
investors due to low return company cannot afford to
on investment and low share run the daily activities
value of the company.

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 Summary of Gross NPA and Net NPA

Gross non-performing assets refer to the sum of all the loans that have been defaulted
by the borrowers within the provided period of ninety days while net non-performing
assets are the amount that results after deducting provision for unpaid debts from
gross NPA.
The gross non-performing asset does not amount to the actual loss of the
organization because the provision for unpaid debts has not been deducted, but net
non-performing assets amount to the actual loss of the organization because the
provision for unpaid loans has already been deducted.
Gross non-performing assets lead to a bad effect on company goodwill and bad
effects on the equity value of the organization while net non-performing assets lead
to low profitability and liquidity in the company cash reserves.
Other differences between gross and net non-performing loans include the method of
calculation, causes, and default period among others.

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 CHAPTER:2
Review of Literature
Many published articles are available in the area of nonperforming assets
and a large number of researchers have studied the issue of NPA in banking industry.
A review of the relevant literature has been described as under:
Kumar (2013) in his study on A Comparative study of NPA of Old Private Sector
Banks and Foreign Banks has said that Non-Performing Assets (NPAs) have become
a nuisance and headache for the Indian banking sector for the past several years. One
of the major issues challenging the performance of commercial banks in the late 90s
adversely affecting was the accumulation of huge nonperforming assets (NPAs). The
quality of loan portfolio is very crucial for the health and existence of the banks.
High level of (NPAs) has many implications on profitability, productivity, liquidity,
solvency, capital adequacy and image of the bank.
Selvarajan & Vadivalagan (2013) in A Study on Management of Non-Performing
Assets in Priority Sector reference to Indian Bank and Public Sector Banks (PSBs)
their research paper has studied that the growth of Indian Bank’s lending to Priority
sector is more than that of the Public Sector Banks as a whole. Indian Bank has
slippages in controlling of NPAs in the early years of the decade. Therefore, the
management of banks must pay special attention towards the NPA management and
take appropriate steps to arrest the creation of new NPAs, besides making recoveries
in the existing NPAs. Timely action is essential to ensure future growth of the Bank.
Gupta (2012) in her study A Comparative Study of Non-Performing Assets of SBI
& Associates & Other Public Sector Banks had concluded that each bank should
have its own independence credit rating agency which should evaluate the financial
capacity of the borrower before than credit facility. An effective committee can be
formed for management of NPA comprising of financial experts who have wide
knowledge in this field. Banks can appoint professionals to identify the genuine
borrowers & can analyze their profile. NPA can be considered as a crucial rating
factor for any bank; it should continuously monitor the borrowers A/C to prevent
NPA. The credit rating agencies should regularly evaluate the financial condition.
Kaur and Singh (2011) in their study on Nonperforming assets of public and private
sector banks (a comparative study) studied that NPAs are considered as an important
parameter to judge the performance and financial health of banks. The level of NPAs
is one of the drivers of financial stability and growth of the banking sector.

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Managing the Non-Performing Assets (NPAs) as these assets are proving to become
a major setback for the growth of the economy.
Rai (2012) in her study on Study on performance of NPAs of Indian commercial
banks said that till recent past, corporate borrowers even after defaulting
continuously never had the fear of bank taking action to recover their dues. This
is because there was no legal framework to safeguard the real interest of banks.
However, with the introduction of SARFAECI ACT banks can issue notices to
defaulters to repay their loans. Also, the Supreme Court has recently given the banks
the freedom to sell mortgage assets of the borrowers, if they do not respond to the
legal proceedings initiated by lender. This enables banks to get sticky loans thereby
improving their bottom lines.

Conclusion of the Literature Review

After studying all these research papers, some major points can be concluded, like
NPA are becoming a major threat to the profitability of both Public as well as
Private sector banks. The level of NPA is more in Public sector banks than private
banks and the most important reason of high level of NPA in public sector banks is
priority sector lending or directed loan system. Besides this, various studies show
that the other important reason for rising NPA level are poor credit appraisal
system and poor follow up of the borrower. And unavailability of credit rating
information about the borrower is also not available. Among the important ways of
curbing rising NPA level is that banks should have their own independent credit
agency and a proper credit appraisal of the projects should be done before granting
loan to anyone. And effective follow up should be done once the loan is granted.
Changes in legal framework as well as government policies regarding priority
sector lending needs to be changed.

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 CHAPTER:3

Research methodology
The present study is based on secondary data analysis. The data has been
collected from various web sources like annual reports of respective Banks,
information bulletins and journals. The main source from which the data is collected
is from RBI official website. The data collected were analyzed with the help of
statistical tools like Ratio analysis, and trend analysis. Tables are used to represent
the consolidated data. Graphical representation is also used for better comprehension
& presentation Here, NPA is the independent variable and net profit is the dependent
variable. So we see if due to any changes in the net NPA, the net profits change or
not, if yes, whether positively or negatively

Type of Research
The research methodology adopted for carrying out the study were
➢ In this project descriptive research methodologies were use.
➢ At the first stage theoretical study is attempted.
➢ At the second stage comparative study of NPA is undertaken.

Sources of data
➢ The source of data is secondary.
➢ Articles, journals, annual report, web sites, etc.

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3.1 Objective of the study
The basic idea behind undertaking the project topic of NPA is:

➢ The main objective of the study is compare the NPAs of private sector
banks and public sector bank.
➢ To evaluate NPAs (gross and net) in different banks from different sector.
➢ To analyze financial performance of banks at different level of NPA.
➢ To evaluate NPA level in different economic situation.
➢ To know the concept of Non-Performing Asset.
➢ To know the impact of NPAs. ➢ To learn preventive measures.

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3.2 EFFECT OF NPA ON BANKING SECTOR

As we already seen in the previous chapters The role of the banking sector
in economic transformation is significant as banks play a vital role in providing the
desired financial resources to the needy sectors. Bank itself possess the controlling
power of the economy. The flow of money person to person, business to business,
country to country just due to the banking system. Banks fuels the economical
vehicle to run smoothly, and also said as the backbone of the economy.

Impact of NPA On Banks

“NPA’s Non-performing assets are the assets of the banks which are not
performing, banks to run the economy also provide short-term and long-term loans
to the industries, individuals, farmers, a bank also gives loan against the home,
vehicles and many more.
In some cases, the borrower unable to pay the interest amount on time as
well as unable to return the principal amount too, in that case, bank declares that
amount as nonperforming.
The bank also runs the recovery scenario for that amount, the impact of
NPA on the profitability of banks brings a dent on the balance sheet of the bank, but
until then the amount is nonperforming.
The increase of Non-Performing Assets also affects the expectation of
Stakeholder as well as investors, Banks has to run the proper evaluation of the
proposal at the first instance, this will reveal the status of unviable projects too. Bank
need to collect full information about Industry, management, future prospects etc.
before approving the Loan.

Impact of Non-Performing Assets on Balance Sheet

High Non-Performing Assets are the foremost problem for the banking
system for any economy, that shakes the whole banking system of the country. The
confidence level of the investor, Depositors, Stack holders also effects. This also
causes the rotation of money.

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Profitability due to NPA
Non-Performing Assets not only reduces the profit of the Bank but also increases the
Loss. Also, banks also providing 25 % to 30% additional provision on Non-
Performing Assets which directly impact the Profitability of the Bank.

Liability Management
Due to high Non-Performing Assets, Bank for forced for lower the interest rates of
the deposit and on advances likely to pay Higher interest rates on advances. This
situation is a very difficult situation and also hamper the banking business.

Share Holders confidence

Not in the Banking sector, but shareholders need their money in safe hands,
Shareholders are interested in the enhancement of investment and market
capitalization.
High Non-Performing Assets reduces the confidence level of the investor which
significantly impact the Share price of the Bank in this situation, banks stop payout
of dividend to the shareholders, which was not in the interest of the investor.

Public Confidence
The poor performance of the Bank due to increases in Non-Performing Assets not
only lower the sentiments of the investor but the bank also loses the faith of Public,
this directly affects the deposits into the bank.
High Non-Performing Assets affects the economy as a whole.
NPA and society are parallel paths move together for the growing Economy.
NPA’s are the loan provided to the business companies which are not in the slab of
performance.

Effects of High NPA’s for Banks

Higher NPA impact the revenue strength of the banks and also lose the confidence
level of consumers and depositors, banks are back boon to the Financial economy of
every country. Here are some effects in details:
➢ Changes in Interest Rates

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Higher NPA reflects the reduction of interest rate on the deposit into banks, only
poor public directly impact the consequences of Higher NPA’s of the bank. Levies
of charges for every operation
Looking at the above scenario, the bank is recovering their losses by levies charges
on those operations which were free of cost like –
Withdrawal limit from ATM
Withdrawal number of times
Cash deposits in other branches
Internet transaction charges
Increase in Current account deficit
Confidence in Share Holders
Higher NPA’s in banking system losing the confidence of shareholders, and the
depositors, they are switching the segments and losing the trust in the system.
Effect on the serious borrower
Increase in NPA not only affect the public but also affecting the serious honest
borrower with good credentials and credit ranking. they have to suffer and on the
other hand, the economy is losing hope of improvement.
On an account turning NPA, banks should reverse the interest already
charged and not collected by debiting profit and loss account, and Stop further
application.

Causes for an Account becoming NPA

Those Attributable to Borrower
a) Failure to bring in Required capital
b) TOO ambitious project
c) Longer gestation period

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 d) Unwanted Expenses
e) Over trading
f) Imbalances of inventories
g) Lack of proper planning
h) Dependence on single customers
l) Lack of expertise
j) Improper working Capital Mgmt.
k) Miss management
l) Diversion of Funds
m) Poor Quality Management
n) Heavy borrowings
o) Poor Credit Collection
p) Lack of Quality Control

Causes Attributable to Banks

a) Wrong selection of borrower
b) Poor Credit appraisal
c) Unhelpful in supervision
d) Tough stand on issues
e) TOO inflexible attitude
n) Systems overloaded
g) Non inspection of Units
h) Lack of motivation
i) Delay in sanction
j) Lack of trained staff

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k) Lack of delegation of work
l) Sudden credit squeezes by banks
m) Lack of commitment to recovery

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Other Ca uses
a) Lack of Infrastructure
b) Fast changing techno logy
c) Un helpful attitude of Government
d) Changes in consumer preferences
e) Increase in material cost n Government policies g) Credit policies
h) Taxation laws
l) Civil commotion
j) Political hostility
k) Sluggish legal system
l) Changes related to Banking Amendment Act

Early symptoms by which one can recognize a performing asset

turning in to Non-performing asset Four categories of early symptoms:
1. Financial:
Non-payment of the very first instalment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in instalment
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining g Current Ratio
Payment which does not cover the interest and principal amount of that
instalment
While monitoring the accounts it is found that partial amount is diverted to
sister Concern or parent company

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2. Operational and Physical:
If information is received that the borrower has either initiated the process of
winding up or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non-controllable factor like natural calamities in the city where
borrower conduct his business.
Frequent changes in plan
Non-payment of wages

3. Attitudinal Changes:
Use for personal comfort, stocks and shares by borrower
Avoidance of contract with bank
Problem between partners

4. Others:
Changes in Government policies
Death of borrower
Competition in the market.

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SALE OF NPA TO OTHER BANKS

A NPA is eligible for sale to Other banks only if it has remained a NPA for at
least two years in the books of the selling bank. The NPA must be held by the
purchasing bank at least for a period of 1 5 months before it is sold to Other
banks but not to bank, which originally sold the NPA. The NPA may be
classified as standard in the books of the purchasing bank for a period of 90
days from date of purchase and thereafter it would depend on the record of
recovery with reference to cash flows estimated while purchasing. The bank
may purchase' sell NPA only on Without recourse basis. If the sale is
conducted below the net book value, the short fall should be debited to P&L
account and if it is higher, the excess provision Will be utilized to meet the
loss on account of sale of other NPA.

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3.3 FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector
banks and foreign banks. The NPAs are growing due to external as well as internal
factors.

External factors
a. Ineffective recovery - The Govt. has set up numbers of recovery tribunals,
which works for recovery of loans and advances. Due to their negligence and
ineffectiveness in their work the bank suffers the consequence of non-recover,
thereby reducing their profitability and liquidity.

b. 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.

c. Natural calamities - This is the major factor, which is creating alarming rise
in NPAs of the PSBs. Every now and then India is hit by major natural
calamities thus making the borrowers unable to pay back their loans. Thus the
bank has to make large amount of provisions in order to compensate those
loans, hence end up the fiscal with a reduced profit.

d. Industrial sickness - Improper project handling, ineffective management, lack

of adequate resources, lack of advance technology, day to day changing govt.
Policies give birth to industrial sickness. Hence the banks that finance those
industries ultimately end up with a low recovery of their loans reducing their
profit and liquidity.

e. Lack of demand - Entrepreneurs in India could not foresee their product

demand and starts production which ultimately piles up their product thus
making them unable to pay back the money they borrow to operate these

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 covers a minimum label. Thus the banks record the non-recovered part as NPAs
and has to make provision for it.

f. Change on govt. Policies - With every new govt. banking sector gets new
policies for its operation. Thus it has to cope with the changing principles and
policies for the regulation of the rising of NPAs.

g. Directed loans system - Under this commercial banks are required to supply
40% percentage of their credit to priority sectors. Most significant sources of
NPAs are directed loans supplied to the ―micro sector are problematic of
recoveries especially when some of its units become sick or weak.

Internal factors

a. Defective lending process - There are three cardinal principles of bank

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

b. Inappropriate technology - Due to inappropriate technology and

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

c. Improper swot analysis - The improper strength, weakness, opportunity and

threat analysis is another reason for rise in NPAs. While providing unsecured
advances the banks depend more on the honesty, integrity, and financial
soundness and credit worthiness of the borrower.

d. Poor credit appraisal system - Poor credit appraisal is a not her factor for the
rise in NPAs. Due to poor credit appraisal the bank give advances to those

Page | 42
 who are not able to repay it back. They should use good credit appraisal to
decrease the NPAs.

e. Managerial deficiencies -The banker should always select the borrower very
carefully and should take tangible assets as security to safe guard its interests.
When accepting securities banks should consider the:
1. Marketability 2. Acceptability 3. Safety 4. Transferability
The banker should follow the principle of diversification of risk based on the famous
maxim do not keep all the eggs in one basket, it means that the banker should not
grant advances to a few big farms only or to concentrate them in few industries or
in a few cities. If a new big customer meets misfortune or certain traders or industries
affected adversely, the overall position of the bank will not be affected.

f. Absence of regular industrial visit - The irregularities in spot visit also

increases the NPAs. Absence of regularly visit of bank officials to the
customer point decreases the collection of interest and principals on the loan.
The NPAs due to willful defaulters can be collected by regular visits.

g. Faulty credit management - like defective credit in recovery mechanism,

lack of professionalism in the work force.

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 MEASURES TO CONTROL NPA
It is proved beyond doubt that NPAs in bank ought to be kept at the lowest
level. This would be possible only if two pronged approaches viz., A). Preventive
management and B). Curative management is followed.

❖ PREVENTIVE MANAGEMENT:
A. Credit Assessment and Risk Management
▪ Mechanism: A lasting solution to the problem of NPAs can be achieved only
with proper credit assessment and risk management mechanism. The
documentation of credit policy and credit audit immediately after the sanction
is necessary to upgrade the quality of credit appraisal in banks. In a situation
of liquidity overhang the enthusiasm of the banking system is to increase
lending with compromise on asset quality, raising concern about adverse
selection and potential danger of addition to the NPAs stock. It is necessary
that the banking system is equipped with Prudential norms to minimize if not
completely avoid the problem of credit risk.

Credit appraisal Standards:

a. Qualitative:
At the outset, the proposition is examined from the angle of viability and also from
the Bank's prudential levels of exposure to the borrower, Group and Industry.
Thereafter, a view is taken about the past experience the bank has with the promoters,
if there is a track record to go by. Where it is a new connection for the Bank but the
entrepreneurs are already in business, opinion reports from existing bankers and
published data if available are carefully perused. In case of a maiden venture, in
addition to the drill mentioned above, an element of subjectivity is introduced as
scant historical data would be available and weight age is given on impressions
gained out of the serious dialogues with the promoter and his business contacts.

b. Quantitative:
The basic quantitative parameters underpinning the Bank's credit appraisal for
working capital are as follows: -

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i. Liquidity:
Current Ratio (CR) of 1.5 is generally considered as a benchmark level of liquidity.
However, the approach has to be flexible. CR of 1.5 is only indicative and may not
be deemed Mandatory. In cases where the CR is projected at a level lower than the
benchmark or a slippage in the CR is proposed, it alone will not be a reason for
rejection of the loan proposal or for sanction of the loan at a lower level. In such
cases, the reasons for low CR or slippage should be carefully examined and in
deserving cases the CR as projected may be accepted. In cases where projected CR
is found acceptable, working capital finance as requested may be sanctioned. In
specific cases where warranted, such sanction can be with a condition that the
borrower should bring in additional long term funds to a specified extent by a given
future date. Where it is felt that the projected CR is not acceptable but the borrower
deserves assistance subject to certain conditions, suitable written commitment should
be obtained from the borrower to the effect that he would be bringing in required
amounts within a mutually agreed time frame.

ii. Net Working Capital:

Although this is a corollary of current ratio, the movements in Net Working Capital
are watched to ascertain whether there is a mismatch of long term sources vis-à-vis
long term uses for purposes which may not be readily acceptable to the Bank so that
corrective measures can be suggested.

iii. Financial Soundness:

This will be dependent upon the owner's stake or the leverage. Here again the
benchmark will be different for manufacturing, trading, hire-purchase and leasing
concerns. For industrial ventures a Total Outside Liability/ Tangible Net Worth ratio
of 3.0 is reasonable but deviations in selective cases for understandable reasons may
be accepted by the sanctioning authority.

iv. Turn-Over:
The trend in turn-over is carefully gone into both in terms of quantity and value as
also market share wherever such data are available. What is more important is to
establish a steady output if not a rising trend in quantitative terms because sales
realization may be varying on account of price fluctuations.

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v. Profits:
While net profit is the ultimate yardstick, cash accruals, i.e., profit before
depreciation and taxation conveys a more comparable picture in view of changes in
rate of depreciation and taxation which may have taken place in the intervening
years. However, for the sake of proper assessment, the non-operating income are
excluded as these are usually one time or Extraordinary income. Companies
incurring net losses consistently over 2 or more years will be given special attention,
their accounts closely monitored, and if necessary, exit options explored.

vi. Credit Rating:

Wherever the company has been rated by a Credit Rating Agency for any instrument
such as CP/ FD, this will be taken into account while arriving at a final decision.
However, as the credit rating involves additional expenditure, the banks do not
normally insist on this and only use this tool if such an agency had already looked
into the company finances.

vii. Capital ‘Markets:

Where the Company's shares are listed on stock exchanges, the movement of the
price of its share, the market value of shares vis-à-vis those of competitors in the
same industry, response to public/ rights issues are also kept in view as these are
reflective of the corporate image in the eyes of the investors' community.

viii. Term Loan / Deferred payment guarantee:

• In case of term loans and deferred payment guarantees, the project report is
obtained from the customer which may have been compiled either in-house
or by a firm of Consultants/ merchant bankers. The technical feasibility and
economic viability is vetted by the Bank and wherever it is felt necessary, the
Credit Officer would seek the benefit of a second opinion either from the
Bank's Technical Consultancy cell or from the consultants of the Bank.
• Promoter's contribution of at least 20% in the total equity is what banks
normally expect, but the promoter's contribution may vary largely in mega
projects. Therefore, there cannot be a definitive benchmark. The sanctioning
authority will have the necessary discretion to permit deviations.
• The other basic parameter would be the net debt service coverage ratio i.e.

Page | 46
 • basis DSCR should not be below 1.75. These ratios are indicative and
deviations may be permitted Selectively by the sanctioning authority.
• (iv) As regards margin on security, this will depend on Debt: Equity gearing
for the project, which should preferably be near about 1.5: 1 and should not in
any case be above 2:1, i.e., Debt should not be more than 2 times the Equity
contribution. Deviations from the norm may be permitted very selectively by
the sanctioning authority in exceptional cases.
• (v) Other parameters governing working capital facilities would also govern
Term Credit Facilities to the extent applicable.

ix. Lending to Non-Banking Financial Companies (NBFCs):

RBI have been issuing guidelines from time to time regarding lending by banks to
NBFCs in order to ensure their healthy and orderly functioning and growth. In the
context of mandatory registration with RBI, prescribed for all NBFCs under
provisions of the RBI Act, in May 1999, RBI removed the ceiling on bank credit
linked to Net Owned Funds (NOF), in respect of all NBFCs which are statutorily
registered with RBI and are engaged in the principal business of Equipment Leasing
(EL), Hire Purchase (HP) and Loan and Investment companies. As regards bank
finance to the NBFCs which do not require to be registered with RBI, banks have
been permitted to take their credit decisions on the basis of purpose of credit, nature
and quality of underlying assets, repayment capacity of borrowers, as also risk
perception, etc. In respect of Residuary Non-Banking Companies (RNBCs)
registered with RBI, bank finance would continue to be restricted to the extent of
their NOF. RBI have also advised that bank finance should not be extended to
NBFCs for certain activities like investments in shares and debentures, advances to
subsidiaries / group companies, investments in inter-corporate loans/deposits, etc.
The Bank's approach to financing NBFCs has been formulated within the RBI
guidelines issued from time to time. Given the special features of NBFCs, as
different from manufacturing units, a separate Credit Risk Assessment (CRA) model
has been put in place for assessment of NBFCs. Half-yearly reviews of CRA rating
have been made obligatory for units rated as risky (may be B3).

x. Financing of infrastructure projects:

In view of the national importance attached to infrastructure development, its
criticality to Economic development of the country, the potential for large volume
business and the special skills required for credit appraisal / assessment, some banks,

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 telecommunication, housing, industrial park or any other public facility of a similar
nature as may be notified by CBDT in the Gazette from time to time. Financing of
infrastructure projects is characterized by large capital costs, long gestation period
and high leverage ratios. Banks can sanction term loans to infrastructure projects
within the overall ceiling of the prudential exposure norms. Further, subject to
certain safeguards, banks are also permitted to exceed the single borrower / group
exposure norm to the extent of 10%, provided the additional exposure is for the
purpose of financing infrastructure projects.

xi. Lease Finance:

The exposures under lease finance are generally subject to compliance with the
following
Standards:
➢ Normally exposure will be for full payment financial leases to be granted on
the basis of Recovery of cost of asset during a single lease term.
➢ Aggregate outstanding lease exposure to a single unit not to exceed 50% of the
lessee's net worth or Rs.200 cr. in case of a Public Sector Undertaking (Rs.100
cr. in case of Private Sector company), whichever is less.
➢ Banks normally limit its exposure to no more than 25% of the outlay proposed
in single project on plant, machinery and other equipment’s.
➢ Greenfield projects are accepted by the Banks only after sufficient afterthought
for its exposure.
➢ Bank will endeavor to diversify its lease portfolio over a range of industries and
a variety of equipment to avoid concentration of exposures.
➢ Bank selectively participate in leasing syndications with certain reputed
organizations like IDBI, ILFS etc., particularly in high value leases.
➢ Aggregate outstanding leases normally don’t exceed 10% of the bank’s total
advances.

B. Letters of Credit, Guarantees and bills discounting:

Banks normally open Letters of Credit (LCs), issue guarantees/
acceptances and discount bills under LCs only in respect of genuine
commercial and trade transactions of borrower constituents who have been
sanctioned regular credit facilities by the Bank. The prescription would not,
however, prohibit the Bank from accepting such bankable business from non

Page | 48
 purchase/ discount/ negotiate bills bearing the “without recourse” clause.
Bank would not ordinarily discount bills drawn by front finance companies
set up by large industrial groups on other group companies. While
discounting bills of services sector, Bank would ensure that actual services
are rendered and accommodation bills are not discounted. Fair Practices Code
(FPC) for lenders.
The Banks continuously attempt to introduce transparent and fair practices,
as envisaged by RBI, in respect of acknowledging loan applications, their
quick processing, appraisal and sanction, stipulation of terms and conditions,
post disbursement supervision, changes in terms and conditions, recovery
efforts etc.

Early Recognition of the Problem:

Invariably, 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, (that is when the account starts showing first
signs of weakness regardless of the fact that it may not have become NPA) is
imperative. 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 timeframe. 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.

C. Identifying Borrowers with genuine intent

Identifying 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 have intelligent inputs with regard to promoters‟
sincerity, and capability to achieve turnaround. Based on this objective
assessment, banks should decide as quickly as possible whether it would be
worthwhile to commit additional finance. In this regard banks may consider
having “Special 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 penal of technical experts with

Page | 49
 fund may be entertained at branch level, and for this purpose a special limit to
such type of cases should be decided. This will obviate the need to route the
additional funding through the controlling offices in deserving cases, and help
avert many accounts slipping into NPA category

D. Timeliness and adequacy of response:

Longer the delay in response, grater the injury to the account and the
asset. Time is a crucial element in any restructuring or rehabilitation activity.
The response decided on the basis of techno-economic study and promoter’s
commitment, has to be adequate in terms of extend of additional funding and
relaxations etc. under the restructuring exercise. The package of assistance
may be flexible and bank may look at the exit option.

E. Focus on Cash flows:

While financing, at the time of restructuring the banks may not be
guided by the conventional fund flow analysis only, which could yield a
potentially misleading picture. Appraisal for fresh credit requirements may be
done by analyzing funds flow in conjunction with the Cash Flow rather than
only on the basis of Funds Flow.
In some default cases, where the unit is still working, the bank should
make sure that it captures the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for fear of getting their cash
flows forfeited), and ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of information among
consortium members. A bank, which is not part of the consortium, may not be
allowed to offer credit facilities to such defaulting clients. Current account
facilities may also be denied at non-consortium banks to such clients and
violation may attract penal action. The Credit Information Bureau of India
Ltd.(CIBIL) may be very useful for meaningful information exchange on
defaulting borrowers once the setup becomes fully operational.

F. Management Effectiveness:
The general perception among borrower is that it is lack of finance
that leads to sickness and NPAs. But this may not be the case all the time.
Management effectiveness in tackling adverse business conditions is a very
important aspect that affects borrowing unit’s fortunes. A bank may commit
additional finance to an ailing unit only after basic viability of the enterprise
also in the context of quality of management is examined and confirmed.

Page | 50
 as possible to examine this aspect. A proper techno- economic viability study
must thus become the basis on which any future action can be considered.

G. Multiple Financing:
During the exercise for assessment of viability and restructuring, a
Pragmatic and unified approach by all the lending banks/ FIs as also sharing
of all relevant information on the borrower would go a long way toward overall success
of rehabilitation exercise, given the probability of success/failure.

Broadly, the objectives of post-sanction follow up, supervision and

monitoring are as under:

(a) Follow up function:

• ensures the end-use of funds
• to relate the out standings to the assets level on a continuous basis
• to correlate the activity level to the projections made at the time of the sanction
/renewal of the credit facilities
• to detect deviation from terms of sanction.
• to make periodic assessment of the health of the advances by noting some of
the key indicators of performance like profitability, activity level, and
management of the unit and ensure that the assets created are effectively
utilized for productive purposes and are well maintained.
• to ensure recovery of the instalments of the principal in case of term loans as
per the scheduled repayment program and all interest.
• to identify early warning signals, if any, and initiate remedial measures there
by averting the incidence of incipient sickness.
• to ensure compliance with all internal and external reporting requirements
covering the credit area.

(b) Supervision function:

• to ensure that effective follow up of advances is in place and asset quality of
good order is maintained.
• to look for early warning signals, identify ‘incipient sickness’ and initiate
proactive remedial measures.

Page | 51
(c) Monitoring function:
• to ensure that effective supervision is maintained on loans / advances and
appropriate responses are initiated wherever early warning signals are seen.
• to monitor on an ongoing basis, the asset portfolio by tracking changes from
time to time.
• Chalking out and arranging for carrying out specific actions to ensure high
percentage of ‘Standard Assets’.
• Detailed operative guidelines on the following aspects of effective credit
monitoring are in place:

• Post-sanction responsibilities of different functionaries

• Reporting for control
• Security documents, Statement of stocks and book debts
• Computation of drawing power (DP) on eligible current assets and maintaining
of DP register

❖ CURATIVE MEASURES TO TACKLE NPAS:

H. Credit Risks of NPAs: The most of the public sector banks are incapable of
visualizing the risk they are going to face in the emerging global economic
scenario. The risk management machinery adopted requires a comprehensive
overhaul of the system by the banks in this changing condition. The second
consultative document on the New Basle capital accord on banking
supervision has given a stress on the risk management aspect of the banks by
introducing a more risk sensitive standardized approach towards capital
adequacy. In spite of the stringent recommendations and RBIs apprehensions
of the adequate preparedness of the banking sector in adopting instructions, it
is quite clear about the willingness of the banks to vigorously pursue effective
credit risk management mechanism by visualizing the magnitude of credit risk
management to curtail the growth of mounting NPAs. The concept of
recovering debts through Debt Recovery Tribunals has become a grand
failure. The concept of establishing Asset Reconstruction Company (ARC)
has greatly benefited the banks in containing the NPAs at a manageable level.
The ARC is to take over the bad debts of the public sector banks. These banks
have the option of either liquidating the assets of defaulting companies
overwriting off these bad debts altogether. The viable solution available to the
I.

Page | 52
 implementing a risk management system are considered to be the call of the
hour. The risk is inherent and absolutely unavoidable in banking sector. The
risk is considered to be potential loss of an asset and portfolio is likely to
suffer due to various reasons. It is around for centuries and thought to be the
dominant financial risk today.
The risk can be defined as the risk of erosion of value due to simple default
and non-payment of the debt by the borrower. The degree of risk is reflected
in the borrower’s credit rating, the premium it pays for funds and market
price of the debts. In such a situation the financial institutions may increase
their net market exposure sometimes at the expense of increasing the credit
risk to certain parties. The credit derivatives allow financial institutions to
change
their exposure to a range of credit related risks. There are various structures that allow the
transference of credit risk from one party to another. In some cases, the bank
can buy protection in the form of default puts to transfer the credit risk to an
insurance company or other financial investors. Moreover, the bank may swap
one credit for another credit of equal rating to reduce its exposure to one party.
The credit risk management has two basic objectives 1) It manages the asset
portfolio in a manner which ensures that the banks have adequate capital to
hedge their risks and 2) It matches the return to the risk. It comprises of two
basic steps viz.

J. Identification and Ascertainment of Credit Default Risk:

In order to assess the credit default risk, the concerned bank has to check the
following five C’s from the borrower.
▪ Cash flows reflecting the earning capacity of the borrower.
▪ Collateral - the tangible assets of the borrowers who intends to mortgage.
▪ Character – the management capabilities of the concerned party. ▪
Conditions - the loan covenants to safeguard the lenders interest and ▪ Capital -
referring to the buffer to absorb earnings shocks.
Utilization of credit default protection measures and instruments: Once the
credit default is ascertained and quantified, credit default protection measures
and instruments like credit default swaps, credit default options and credit
linked notes can be utilized.

➢ Credit Default Swap: It is a bilateral financial contract in which buyer pays a

periodic fee expressed in fixed basis points on the notional amount in return

Page | 53
 creditors of the reference credit in the event of its default. The credit event
various from bank to bank and from transaction to transaction. The credit
events are predefined in the agreement, which includes 1. Bankruptcy 2.
Insolvency 3. Rating, and downgrading below agreed threshold 4. Failure to
adjust for new payment obligation and 5. Debt Rescheduling. The credit event
triggers the obligation of the seller of default protection to the purchaser of
the same. The investors who need to protect themselves against default but
do not want to sell them at risk security for accounting, tax and regulatory
reasons can buy a credit default swap.

➢ Credit Limited Notes (CLN): These are known as credit swaps in which buyer
makes periodic payments of a fixed percentage of the reference asset to the
seller over the life of the swap. Then the seller promises a payment in the case
of credit default for the reasons viz., bankruptcy, delinquency and credit rating
down grade. The payments may be either a pre - determined amount and also decrease in
the market value of the reference obligation that may cause the credit event.
The seller calls the structure away from the investor and delivers the
defaulting notes against them on the happening of credit event. The CLN are
like bonds in character and are acceptable to certain banks. They are not
allowed to involve in credit default swap.

K. Corporate Debt Restructuring (CDR): The corporate debt restructuring is

one of the methods suggested for the reduction of NPAs. Its objective is to
ensure a timely and transparent mechanism for restructure of corporate debts
of viable corporate entities affected by the contributing factors outside the
purview of BIFR, DRT and other legal proceedings for the benefit of
concerned. The CDR has three tier structure viz., a. CDR standing forum b.
CDR empowered group and c. CDR cell.

❖ PROCEDURES FOR NPA IDENTIFICATION AND

RESOLUTION IN INDIA:
L. Internal Checks and Control
Since high level of NPAs dampens the performance of the banks identification
of potential problem accounts and their close monitoring assumes importance.
Though most banks have Early Warning Systems (EWS) for identification of
potential NPAs, the actual processes followed, however, differ from bank to

Page | 54
signals, indicative of potential problems in the accounts, viz. persistent
irregularity in accounts, delays in servicing of interest, frequent devolvement
of L/Cs, units' financial problems, market related problems, etc. are captured
by the system. In addition, some of these banks are reviewing their exposure
to borrower accounts every quarter based on published data which also serves
as an important additional warning system. These early warning signals used
by banks are generally independent of risk rating systems and asset
classification norms prescribed by RBI. The major components/processes of
a EWS followed by banks in India as brought out by a study conducted by
Reserve Bank of India at the instance of the Board of Financial Supervision
are as follows:
1) Designating Relationship Manager/ Credit Officer for monitoring accounts
2) Preparation of `know your client' profile
3) Credit rating system
4) Identification of watch-list/special mentions category accounts.
5) Monitoring of early warning signals

1) Relationship Manager/Credit Officer

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

2) Know your client' profile (KYC)

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

Page | 55
 The credit rating system is essentially one-point indicator of an individual
credit exposure and is used to identify measure and monitor the credit risk of
individual proposal. At the whole bank level, credit rating system enables
tracking the health of banks entire credit portfolio. Most banks in India have
put in place the system of internal credit rating. While most of the banks have
developed their own models, a few banks have adopted credit rating models
designed by rating agencies. Credit rating models take into account various
types of risks viz. financial, industry and management, etc. associated with a
borrowable unit. The exercise is generally done at the time of sanction of new
borrowable account and at the time of review renewal of existing credit
facilities.

4) Watch-list/Special Mention Category

The grading of the bank's risk assets is an important internal control tool. It
serves the need of the Management to identify and monitor potential risks of
a loan asset. The purpose of identification of potential NPAs is to ensure that
appropriate preventive / corrective steps could be initiated by the bank to
protect against the loan asset becoming non-performing.
Most of the banks have a system to put certain borrowable accounts under
watch list or
special mention category if performing advances operating under adverse business or
economic conditions are exhibiting certain distress signals. These accounts
generally exhibit weaknesses which are correctable but warrant banks' closer
attention.

M. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system
indicates a
significant improvement in management of NPAs. This is also on account of
various resolution mechanisms introduced in the recent past which include the
SARFAESI Act, one-time settlement schemes, setting up of the CDR
mechanism, strengthening of DRTs. From the data available of Public Sector
Banks as on March 31, 2003, there were 1,522 numbers of NPAs as on March
31, 2003 which had gross value greater than Rs. 50 million in all the public
sector banks in India. The total gross value of these NPAs amounted to Rs.
215 billion.

Page | 56
 counting. As can be seen, suit filed and BIFR are the two most common
approaches to resolution of NPAs in public sector banks. Rehabilitation has
been considered/ adopted in only about 13% of the cases. Settlement has been
considered only in 9% of the cases. It is likely to have been adopted in even
fewer cases. Data available on resolution strategies adopted by public sector
banks suggest that Compromise settlement schemes with borrowers are found
to be more effective than legal measures. Many banks have come out with
their own restructuring schemes for settlement of NPA accounts. State Bank
of India, HDFC Limited, M/s. Dun and Bradstreet Information Services
(India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange
of information between banks and FIs for curbing the growth of NPAs
incorporated credit Information Bureau (India) Limited (CIBIL) in January
2001. Pending the enactment of CIB Regulation Bill, the RBI constituted a
working group to examine the role of CIBs. As per the recommendations of
the working group, Banks and FIs are now required to submit the list of suit-
filed cases of Rs. 10 million and above and suit filed cases of willful
defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL shares
this information with commercial banks and FIs so as to help them minimize
adverse selection at appraisal stage.

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

O. Legal and Regulatory Regime

➢ Debt Recovery Tribunals (DRT): In order to expedite speedy disposal of high

value claims of banks Debt Recovery Tribunals were setup. The Central

Page | 57
 The provisions for placement of more than one recovery officer, power to
attach dependents property before judgment, penal provision for disobedience
of Tribunals order and appointment of receiver with powers of realization,
management, protection and preservation of property are expected to provide
necessary teeth to the DRTs and speed up the recovery of NPAs in times to
come.

➢ Lok Adalats: The Lok Adalats institutions help banks to settle disputes
involving
accounts in doubtful and loss categories. These are proved to be an effective
institution for settlement of dues in respect of smaller loans. The Lok Adalats
and Debt Recovery Tribunals have been empowered to organize Lok Adalats
to decide for NPAs of Rs. 10 lakhs and above. The institution of Lok Adalats
constituted under the Legal Services Authorities Act, 1987 helps in resolving
disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counselling
between the parties and to reduce burden on the court, especially for small
loans.

Page | 58
 CHAPTER:4

ANALYSIS OF NPA OF PRIVATE SECTOR BANK AND

PUBLIC SECTOR BANK .
COMPANY PROFILE OF THE BANKS

1) STATE BANK OF INDIA

The State Bank of India (SBI) is an Indian multinational, public
sector banking and financial services statutory body. It is a government
corporation statutory body headquartered in Mumbai, Maharashtra. SBI is
ranked as 236th in the Fortune Global 500 list of the world's biggest
corporations of 2019. It is the largest bank in India with a 23% market share
in assets, besides a share of one-fourth of the total loan and deposits market.
The bank descends from the Bank of Calcutta, founded in 1806, via
the Imperial Bank of India, making it the oldest commercial bank in the Indian
subcontinent. The Bank of Madras merged into the other two "presidency
banks" in British India, the Bank of Calcutta and the Bank of Bombay, to form
the Imperial Bank of India, which in turn became the State Bank of India in
1955. The Government of India took control of the Imperial Bank of India in
1955, with Reserve Bank of India (India's central bank) taking a 60% stake,
renaming it the State Bank of India.
SBI provides a range of banking products through its network of
branches in India and overseas, including products aimed at non-resident
Indians (NRIs). SBI has 16 regional hubs and 57 zonal offices that are located
at important cities throughout India. SBI has over 24000 branches in India. As
of 31 March 2017, the SBI group had 59,291 ATMs. Since November 2017,
SBI also offers an integrated digital banking platform named YONO.
Apart from five of its associate banks (merged with SBI since 1 April
2017), SBI's non-banking subsidiaries include:
SBI Capital Markets Ltd
SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
SBI Life Insurance Company Limited
In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas
(with 26% of the remaining capital), to form a joint venture life insurance
company named SBI Life Insurance company Ltd.

Page | 59
 HDFC Bank Ltd. is an Indian banking and financial services company
headquartered in Mumbai, Maharashtra. It has a base of 104154 permanent
employees as of 30 June 2019. HDFC Bank is India’s largest private sector lender
by assets. It is the largest bank in India by market capitalization as of February
2016. It was ranked 60th in 2019 Brands’ Top 100 Most Valuable Global Brands.
HDFC Bank was incorporated in 1994, with its registered office in
Mumbai, Maharashtra, India. Its first corporate office and a full service branch
at Sandoz House, Worli were inaugurated by the then Union Finance Minister,
Manmohan Singh.
As of June 30, 2019, the Bank's distribution network was at 5500
branches across 2,764 cities. The bank also installed 4.30 Lakhs POS terminals
and issued 235.7 Lakhs debit cards and 1.2 crores credit cards in FY 2017.
HDFC Bank provides a number of products and services including
wholesale banking, retail banking, treasury, auto loans, two wheeler loans,
personal loans, loans against property, consumer durable loan, lifestyle loan and
credit cards. Along with this various digital product are Payzapp and SmartBUY.
HDFC Bank merged with Times Bank in February 2000. This was the first
merger of two private banks in the New Generation private sector banks category.
In 2008, Centurion Bank was acquired by HDFC Bank. HDFC Bank
Board approved the acquisition of CBoP for 95.1 billion INR in one of the largest
mergers in the financial sector in India

YEAR
TOTAL ADVANCES

SBI (in crores) HDFC (in crores)

2017-18 1934880 658333.09
2018-19 2185877 819401.22
2019-20 2325290 993702.88
2020-21 2449498 1132836.63
2021-22 2733967 1368820.93

Page | 60
Comparative analysis of banks of NPA trends

TOTAL ADVANCES
3000000
2733967
2449498
2500000 2325290
2185877
1934880
2000000

1500000 1368820.93
1132836.63
993702.88
1000000 819401.22
658333.09

500000

0
2017-18 2018-19 2019-20 2020-21 2021-22

SBI HDFC

Page | 61
 YEAR NET PROFIT
SBI(in crores ) HDFC(in crores)
2017-18 -6547 17486.73
2018-19 862 21078.17
2019-20 14488 26257.32
2020-21 20410 31116.53
2021-22 31676 36961.36

Page | 62
2. Net profit

NET PROFIT
40000 36961.36
35000 31676
31116.53
30000 26257.32
25000
21078.17 20410
20000 17486.73
14488
15000

10000

5000
862
0
2017-18 2018-19 2019-20 2020-2021 2021-22
-5000

-10000 -6547

SBI HDFC

Page | 63
3. Gross NPA and Net NPA

Page | 64
 NET NPA
120000
110854.7

100000

65894.74
80000

60000 51871.3
36809.72
40000 7965.71
2
20000

0
2017-18 3214.52
2018-19 3542.36
2019-20 4554.82
2020-212021-22 4407.68
2601.02
SBIHDFC

4. RATIOs/ PERCENTAGE OF GROSS NPA AND NET NPA.

Year Gross NPA Ratio

SBI % HDFC%
2017-18 10.91 1.30
2018-19 7.53 1.36
2019-20 6.15 1.26
2020-21 4.98 1.32
2021-22 3.97 1.17

Year Net NPA Ratio

SBI % HDFC%
2017-18 5.73 0.40
2018-19 3.01 0.39
2019-20 2.23 0.36
2020-21 1.50 0.40
2021-22 1.02 0.32

Page | 65
CAPITAL ADEQUACY RATIO

Capital adequacy ratio

20 18.8
18
16
13.83
14
12
10
8
6
4
2
0
2021-22

SBI HDFC

Page | 66
Capital adequacy ratio can be defined as ratio of the capital of the bank, to its assets,
which are weighted/adjusted to risk attached to them i.e.

Chart - 5

Interpretation:
Each Bank needs to create the capital Reserve to compensate the Non-Performing
Assets. Here, HDFC Bank has shown Better capital adequacy ratio with 18.8% as
compare to SBI with 13.83%. So, we can say that HDFC Bank has much power than
SBI to compensate for NPAs.

Page | 67
 Capital adequacy ratio
Year
SBI HDFC

2021-22 13.83 18.8

Provision coverage ratio

Yea
r SBI HDFC%
%
2021-22 75.04 87

Page | 68
PROVISION COVERAGE RATIO

Provision coverage ratio

88
86
84
82
80
78
76
74
72
70
68
2021-22

SBI HDFC

Page | 69
 The key ratio in analyzing asset quality of the bank is between the total
provision balances of the bank as on a particular date to gross NPAs. It is a
measure that indicates the extent to which the bank has provided for the weaker .
.
Formula:
Net non-performing assets = Gross NPAs – Provisions.
Gross NPA Ratio is the ratio of total gross NPA to total advances (loans) of the bank.
Net NPA to Advances (loans) Ratio is the ratio of Net NPA to advances. It is used as a
measure of the overall quality of the bank’s loan book.
Provision Coverage Ratio = Total provisions / Gross NPAs.

Page | 70
 Findings

The following findings were drawn from the above data analysis-
➢ SBI Bank shows high NPAs Ratio as compare to HDFC Bank.
➢ High NPAs Ratio shows low credit portfolio of SBI Bank.
➢ In analysis HDFC low risk profile as compare to SBI in terms of
NPAs.
➢ Study also indicates that major NPA increases because of govt.
recommended priority sectors.
➢ HDFC have better capital adequacy ratio than SBI.
➢ The total advances have shown an upwards trend for both SBI and
HDFC Bank.
➢ Net profits for SBI have been fluctuating over the years whereas
in case of HDFC Bank. it has largely been consistent to around
10,000 crores.
➢ In the case of % Gross NPA, performance of Private Sector Bank-
HDFC is doing better as compared to Public Sector Bank –SBI
Bank
➢ In case of % net NPA also, performance of HDFC is observed to
be improving over the years and hence creation of less non-
performing assets as compared to SBI Bank Percentage net NPA
for SBI Bank is observed to be continuously rising.

Page | 71
5.1 CONCLUSION

The present study concludes that non- performing assets is a biggest

challenge faced by both HDFC Bank and State Bank of India as it leads to
downfall in liquidity balance of the Banks and creates bad debts on them.
Profitability is being affected due to the fluctuations in NPA levels over the years.
On comparing the two Banks based on the effect on its profitability, SBI has
higher NPAs as compared to HDFC Bank. Because of its public nature. Since SBI
is a public sector Bank, it is more vulnerable to give up on the returns of the loans
extended to the general public.
One other reason for high NPAs can be a sharp rise in the provisioning of the bad
loans. Besides rising NPA, SBI has not managed its profits consistent, which
depicts that the overall management of the resources of the Bank is not better.
On the other hand, the net NPAs for HDFC bank are continuously decreasing since
2014 so, as compared to SBI they are in a much better condition. The HDFC Bank
has also shown good performance in the last few years. On the other hand, SBI
Bank is facing the problem of non-performing assets.
The NPAs means those assets which are categorized as bad assets which are not
probably be reverted back to the Banks by the mortgagors. If the precise
management of the Non-performing assets is not acknowledged it would hinder the
trade of the Banks.
The Non-performing assets would abolish the recent profit, interest revenue due
to large provisions of the Non-performing assets, and would upset the smooth
working of the reutilizing of the funds. To conclude this study, we can say about
this report, that

• SBI Bank shows very much high NPA ratios as compare to HDFC.
• NPAs represent high level of risk & low level of credit appraisal.
• There are some certain guidelines made by RBI for NPAs which are
adopted by Banks.
• HDFC is better in all terms than SBI.

Page | 72
5.2 SUGGESTIONS

➢ The Banker should take utmost care by ensuring that the enterprise or
business for which a loan is sought is a sound one and the borrower is
capable of carrying it out successfully, he should be a person of high
integrity, credibility and good character.
➢ The Banks, instead of providing loans to small farmers, should make
provisions to grant them insurance policies for crop protection and income
security.
➢ Banker should examine the balance sheet which shows the true picture of
business will be revealed on analysis of profit/loss a/c and balance sheet.
While extending loans, Banks should examine the purpose of the loan.
➢ The problem should be identified very early so that companies can try their
best to stop an asset or A/C becoming NPA and Bank should try their best
to recover NPAs.
➢ Banks should evaluate the SWOT analysis of the borrowing companies i.e.
how they would face the environmental threats and opportunities with the
use of their strength and weakness, and what will be their possible future
growth in concerned to financial and operational performance.
➢ Each Bank should have its own independent credit rating agency which
should evaluate the financial capacity of the borrower before than credit
facility.

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5.3 Bibliography

➢ www.wallstreemojo.com
➢ www.ibet.org
➢ www.technofun.com
➢ www.scribd.com
➢ www.financialcontrol.in
➢ www.investopedia.com
➢ www.shodhganga.inflibnet.ac.in
➢ www.differencebetwwen.net
➢ www.rbi.org.in ➢
www.monycontrol.com ➢
www.blog.stockedge.com
➢ www.worldwidejournals.com
➢ www.economictimes.indiatimes.com
➢ www.academia.edu
➢ www.slideshare.net

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 APPENDIX
1. What does NPA stand for?
o A) National Payment Association
o B) Non-Performing Assets
o C) New Public Accounting
o D) Non-Performing Advances
o Correct Answer: B) Non-Performing Assets
2. Which category of assets is considered an NPA?
o A) Assets generating high income
o B) Assets with regular repayments
o C) Assets where principal or interest payments are overdue for more than 90
days
o D) Assets secured by collateral
o Correct Answer: C) Assets where principal or interest payments are
overdue for more than 90 days
3. What are the three categories of NPAs?
o A) Sub-standard, doubtful, and loss assets
o B) Good loans, bad loans, and high-value loans
o C) Performing, non-performing, and doubtful assets
o D) Priority sector, non-priority sector, and agricultural loans
o Correct Answer: A) Sub-standard, doubtful, and loss assets
4. Which type of bank is characterized by a majority stake held by the
government?
o A) Private sector bank
o B) Foreign bank
o C) Public sector bank
o D) Cooperative bank
o Correct Answer: C) Public sector bank
5. What is the primary cause of NPAs in the banking sector?
o A) Rapid industry growth
o B) Efficient management practices
o C) Decline in asset quality
o D) Stable economic conditions
o Correct Answer: C) Decline in asset quality
6. Which term refers to the unauthorized usage of another person’s property or
money?
o A) Arson
o B) Bancassurance
o C) Indemnity
o D) Embezzlement
o Correct Answer: D) Embezzlement
7. Which type of loan is classified as a non-performing asset?
o A) Loans repaid on time
o B) Loans generating high interest
o C) Loans not being repaid by the borrower
o D) Loans secured by collateral
o Correct Answer: C) Loans not being repaid by the borrower
8. What is the primary objective of NPAs tribunals in India?
o A) Promoting economic growth
o B) Resolving legal disputes
o C) Recovering bad loans

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 o D) Ensuring efficient credit appraisal
o Correct Answer: C) Recovering bad loans
9. Which type of bank is characterized by a majority stake held by private
shareholders?
o A) Public sector bank
o B) Cooperative bank
o C) Foreign bank
o D) Private sector bank
o Correct Answer: D) Private sector bank
10. What is the primary reason for NPAs in private banks?
o A) Inefficient credit appraisal
o B) Strict regulatory policies
o C) High interest rates
o D) Effective risk management
o Correct Answer: A) Inefficient credit appraisal
11. Which financial ratio is commonly used to assess a bank’s asset quality?
o A) Return on Assets (ROA)
o B) Debt-to-Equity Ratio
o C) Non-Performing Asset Ratio (NPA Ratio)
o D) Price-to-Earnings (P/E) Ratio
o Correct Answer: C) Non-Performing Asset Ratio (NPA Ratio)
12. What is the impact of high NPAs on a bank’s profitability?
o A) Increases profitability due to higher interest income
o B) Decreases profitability due to provisioning requirements
o C) Has no impact on profitability
o D) Improves the bank’s credit rating
o Correct Answer: B) Decreases profitability due to provisioning
requirements
13. Which regulatory body oversees the functioning of banks in India?
o A) Reserve Bank of India (RBI)
o B) Securities and Exchange Board of India (SEBI)
o C) Ministry of Finance
o D) Indian Banks’ Association (IBA)
o Correct Answer: A) Reserve Bank of India (RBI)
14. Question: Which financial institution regulates and supervises banks in India?
o A) Securities and Exchange Board of India (SEBI)
o B) Reserve Bank of India (RBI)
o C) National Stock Exchange (NSE)
o D) Insurance Regulatory and Development Authority (IRDAI)
o Answer: B) Reserve Bank of India (RBI)
15. Question: What is the primary objective of NPAs classification?
o A) To penalize borrowers
o B) To assess credit risk
o C) To increase interest rates
o D) To promote loan disbursement
o Answer: B) To assess credit risk
16. Question: Which type of asset is considered a loss asset?
o A) An asset with irregular repayments
o B) An asset overdue for more than 180 days
o C) An asset overdue for more than 365 days
o D) An asset overdue for more than 120 days
o Answer: C) An asset overdue for more than 365 days

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17. Question: How do NPAs impact a bank’s profitability?
o A) Positively, by increasing interest income
o B) Negatively, by reducing interest income
o C) Irrelevant, as NPAs don’t affect profitability
o D) By increasing operational costs
o Answer: B) Negatively, by reducing interest income
18. Question: Which type of bank is characterized by private ownership and
management?
o A) Public Sector Bank
o B) Foreign Bank
o C) Cooperative Bank
o D) Private Sector Bank
o Answer: D) Private Sector Bank
19. Question: What is the purpose of provisioning for NPAs?
o A) To increase profits
o B) To cover potential losses
o C) To reduce taxes
o D) To attract investors
o Answer: B) To cover potential losses
20. Question: Which ratio indicates the proportion of NPAs in a bank’s loan portfolio?
o A) Debt-to-equity ratio
o B) NPA-to-asset ratio
o C) Return on assets
o D) Price-to-earnings ratio
o Answer: B) NPA-to-asset ratio

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