Certificate Repaired)

8/3/2019 Certificate Repaired)

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CERTIFICATE BY THE HEAD OF THE DEPARTMENT

Mr. Sanjay Kumar ParidaHead of the Department,P.G. Department of Finance & Management.

This is to certify that Miss.priyadarshini sahoo , a bonafide student of Master

of Finance and Control has completed the project entitled NON PERFORMING

ASSETS CHALLENGE TO THE KOTAK MAHINDRA BANK. This project has been submitted

as a partial fulfillment of the requirement for the Masters Degree of Finance and

Control Examination, 2010.

To the best of my knowledge no work with such caption and content has been submitted to any other University or institution for the award of any degree.

Date:-

Place: - (MR. SANJAY K. PARIDA)


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CERTIFICATE BY THE GUIDE

Faculty Member,nameP.G. Department of Finance & Management.

This is to certify that Miss.priyadarshini sahoo, a bonafide student of Master

of Finance and Control has completed the project entitled NON PERFORMING

ASSETS CHALLENGE TO THE KOTAK MAHINDRA BANK. This project has been submitted

as a partial fulfillment of the requirement for the Masters degree of Finance and

Control Examination, 2010.

Date:-

Place: - ()


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DECLARATION

I Miss. priyadarshini sahoo here by declaration entitled NONPERFORMING ASSETS CHALLENGE TO THE KOTAK MAHINDRA BANK. is my originaleffort and it has not submitted to any other organization And university other thanVIVEKANANDA INSTITUTION OF SOCIAL WORK & SOCIAL SCIENCE(VISWASS) AND INDIAN OVERSEAS BANK BHUBANESWAR for any

purpose. This project has been Complied for partial fulfillment of the award of master of finance and control from VIVEKANANDA INSTITUTION OFSOCIAL WORK & SOCIAL SCIENCE ( VISWASS) AND.BHUBANEWAR 2009-11.

Date: Name

Place; Bhubaneswar Roll no:137590092028


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Acknowledgement

It is my proved privilege to express the feeling of my gratitude to several personswho helped me directly or indirectly to conduct this project work.

I acknowledge with sincere gratitude and deep sense of reverence to.. Indian Overseas Bank, Bhubaneswar , I would also like to thank allthe staff of Indian overseas bank for their kind and generous co-operation.

I am greatly indebted and remain ever obliged to my concerned faculty MR RAKESH KUMAR PATRA who have helped me directly and indirectly tocomplete my project work on my respect.

I am extremely thankful to the course co-ordination and faculties of themaster of finance and control for their coordination and cooperation.

I am also extremely thankful to all those persons who have positivelyhelped me and respond my questionnaires, around which the whole project cyclerevolves. I also thank all my friends who have more or less contributed to the

preparation of this project report. I will be always indebted to them.

Date:

Place: Bhubaneswar. Name


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CONTENTSSL NO PARTICULARS PAGE NO

1 Introduction2 Objective of the study3 Need of the study

4 Scope of the study5 Methodology of the study6 Limitation of the study7 Company Profile8910

111213141516 SWOT Analysis banking

industry

17 PEST analysis in bankingindustry18 Data Analysis &

Interpretation19 Findings


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20 Suggestion21 Conclusion22 Bibliography

23 Annexure

LIST OF TABLES AND FIGURES


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CHAPTER-1

INTRODUCTION


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INTRODUCTIONAfter liberalization the Indian banking sector developed very appreciate. TheRBIalso nationalized good amount of commercial banks for proving socio economicservicesto the people of the nation.The Public Sector Banks have shown very goodperformance as far as the financial operations are concerned. If we look to theglance of the financial operations, we may find that deposits of public to the PublicSector Banks have increased from859,461.95crore to 1,079,393.81crore in 2003,the investments of the Public Sector Banks have increased from 349,107.81crore to545,509.00crore, and however the advances have also been increased to549,351.16crore from 414,989.36crore in 2003.The total income of the public sectorbanks have also shown good performance since the last few years and currently it is128,464.40crore. The Public Sector Banks have also shown comparatively goodresult. The gross profits of the Public Sector Banks currently 29,715.26crore which


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has been doubled to the last to last year, and the net profit of the Public SectorBanks is 12,295,47crore.However, the only problem of the Public Sector Banksthese days are the increasing level of the non performing assets. The nonperforming assets of the Public Sector Banks have been increasing regularly year byyear. If we glance on the numbers of non performing assets we may come to know

that in the year 1997 the NPAs were47,300crore and reached to 80,246crore in2002.The only problem that hampers the possible financial performance of thePublic Sector Banks is the increasing results of the non performing assets. The nonperforming assets impacts drastically to the working of the banks.

The efficiency of a bank is not always reflected only by the size of its balance sheetbut by the level of return on its assets. NPAs do not generate interest income for thebanks, but at the same time bank share required to make provisions for such NPAsfrom their current profits

NPAs have a deleterious effect on the return on assets in several ways

They erode current profits through provisioning requirements

They result in reduced interest income

They require higher provisioning requirements affecting profits and accretiontocapital funds and capacity to increase good quality risk assets in future, and

They limit recycling of funds, set in asset-liability mismatches, etc.The RBI has alsotried to develop many schemes and tools to reduce the non performing assets byintroducing internal checks and control scheme, relationship managers as stated byRBI who have complete knowledge of the borrowers, credit rating system, and earlywarning system and so on. The RBI has also tried to improve the securitization Actand SRFAESI Act and other acts related to the pattern of the borrowings. ThoughRBI has taken number of measures to reduce the level of the non performing assetsthe results is not up to the expectations. To improve NPAs each bank should bemotivated to introduce their own precautionary steps. Before lending the banksmust evaluate the feasible financial and operational prospective results of theborrowing companies. They must evaluate the business of borrowing companies bykeeping in considerations the overall impacts of all the factors that influence thebusiness

RESEARCH OPERATION1. Significance of the study


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The main aim of any person is the utilization money in the best manner sincetheIndia is country were more than half of the population has problem of runningthe familyin the most efficient manner. However Indian people faced large numberof problem tillthe development of the full-fledged banking sector. The Indianbanking sector came intothe developing nature mostly after the 1991 government

policy. The banking sector hasreally helped the Indian people to utilise the singlemoney in the best manner as theywant. People now have started investing theirmoney in the banks and banks also providegood returns on the deposited amount.

The people now have at the most understood that banks provide them goodsecurity to their deposits and so excess amounts are invested inthe banks. Thus,banks have helped the people to achieve their socio economicobjectives.The banksnot only accept the deposits of the people but also provide them creditfacility fortheir development. Indian banking sector has the nation in developing the businessand service sectors. But recently the banks are facing the problem of credit risk.It isfound that many general people and business people borrow from the banks butdueto some genuine or other reasons are not able to repay back the amount drawnto the banks. The amount which is not given back to the banks is known as the nonperformingassets. Many banks are facing the problem of non performing assetswhich hampers the business of the banks. Due to NPAs the income of the banks isreduced and the bankshave to make the large number of the provisions that wouldcurtail the profit of the banksand due to that the financial performance of the bankswould not show good resultsThe main aim behind making this report is to know howPublic Sector Banks areoperating their business and how NPAs play its role to theoperations of the Public Sector Banks. The report NPAs are classified according tothe sector, industry, and state wise.The present study also focuses on the existingsystem in India to solve the problem of NPAs and comparative analysis tounderstand which bank is playing what role withconcerned to NPAs.Thus, the studywould help the decision makers to understand thefinancial performance and growthof Public Sector Banks as compared to the NPAs.

Objective of the studyPrimary objective:

*The primary objective of the making report is:

*To know why NPAs are the great challenge to the Public Sector Banks

Secondary objectives:

*The secondary objectives of preparing this report are:

*To understand what is Non Performing Assets and what are the underlyingreasonsfor the emergence of the NPAs.


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

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

*To evaluate the comparative ratios of the Public Sector Banks with concerned tothe NPAs

Research methodology The research methodology means the way in which we would complete ourprospected task. Before undertaking any task it becomes very essential for any oneto determine the problem of study. I have adopted the following procedure incompleting my report study.

1. Formulating the problem

2. Research design

3. Determining the data sources

4. Analysing the data

5. Interpretation

6. Preparing research report

(1) Formulating the problem

I am interested in the banking sector and I want to make my future in the bankingsector so decided to make my research study on the banking sector. I analysed firstthe factors that are important for the banking sector and I came to know thatproviding credit facility to the borrower is one of the important factors as far as thebanking sector is concerned. On the basis of the analysed factor, I felt that theimportant issue right now as far as the credit facilities are provided by bank is nonperforming assets. I started knowing about the basics of the NPAs and decided tostudy on the NPAs. So, I chose the topic

Non Performing Assts the great challenge before the Public Sector

Banks.(2) Research Design

The research design tells about the mode with which the entire project is prepared.My research design for this study is basically analytical. Because I have utilised thelarge number of data of the Public Sector Bank


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(3) Determining the data source

The data source can be primary or secondary. The primary data are thosedatawhich are used for the first time in the study. However such data take placemuch time and are also expensive. Where as the secondary data are those datawhich are already available in the market. These data are easy to search and arenot expensive too. for my study I have utilised totally the secondary data.(4)Analysing the dataThe primary data would not be useful until and unless they arewell edited and tabulated. When the person receives the primary data many unuseful data would also be there. So, I analysed the data and edited them and turnedthem in the useful tabulations. So, that can become useful in my report study.(5)Interpretation of the data With use of analysed data I managed to prepare my

project report. But the analyzing of data would not help the study to reach towardsits objectives. The interpretation of the data is required so that the others canunderstand the crux of the study in more simple way without any problem so I haveadded the chapter of analysis that would explain others to understand my study insimpler way.(6) Project writing This is the last step in preparing the project report.

The objective of the report writing was to report the findings of the study to theconcerned authorities

4. Limitations of the study

* The limitations that I felt in my study are:

* It was critical for me to gather the financial data of the every bank of the PublicSector Banks so the better evaluations of the performance of the banks are notpossible.

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

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


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CHAPTER-2

INDIAN BANKINGSECTOR


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INDIAN BANKING SECTORBanking in India has its origin as early as the Vedic period. It is believed

that the transition from money lending to banking must have occurred even beforeManu, the great Hindu Jurist, who has devoted a section of his work to deposits andadvances and laid down rules relating to rates of interest. During the Mogul period,

the indigenous bankers played a very important role in lending money and financingforeign trade and commerce. During the days of the East India Company, it was theturn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The otherswhich followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in themeantime. In the first half of the 19th

century the East India Company established three banks; the Bank of Bengal in1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These threebanks also known as Presidency Banks were independent units and functioned well.

These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27 th January 1921.

With the passing of the State Bank of India Act in 1955 the undertaking of theImperial Bank of India was taken over by the newly constituted State Bank of India.

The Reserve Bank which is the Central Bank was created in 1935 by passingReserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a numberof banks with Indian management were established in the country namely, PunjabNational Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of thecountry were nationalized and in 15thApril 1980 six more commercial private sectorbanks were also taken over by the government.

Indian Banking: A Paradigm shift-A regulatory point of view

The decade gone by witnessed a wide range of financial sector reforms,with many of them still in the process of implementation. Some of the recently


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initiated measures by the RBI for risk management systems, anti money launderingsafeguards and corporate governance in banks, and regulatory framework for nonbank financial companies, urban cooperative banks, government debt market andforex clearing and payment systems are aimed at streamlining the functioning of these instrumentalities besides cleansing the aberrations in these areas. Further,

one or two all India development financial institutions have already commenced theprocess of migration towards universal banking set up. The banking sector has torespond to these changes, consolidate andrealign their business strategies andreach out for technology support to survive emerging competition. Perhaps takingnote of these changes in domestic as well as international arena All of we will agreethat regulatory framework for banks was one area which has seen a sea-changeafter the financial sector reforms and economic liberalization andglobalisationmeasures were introduced in 1992-93. These reforms followed broadly theapproaches suggested by the two Expert Committees both set up under thechairmanship of Shri M. Narasimham in 1991 and 1998, the recommendations of which are by now well known. The underlying theme of both the Committees was toenhance the competitive efficiency and operational flexibility of our banks whichwould enable the mto meet the global competition as well as respond in a betterway to the regulatory and supervisory demand arising out of such liberalisation of the financial sector. Most of there commendations made by the two ExpertCommittees which continued to be subject matter of close monitoring by theGovernment of India as well as RBI have been implemented. Government of Indiaand RBI have taken several steps to :-

(a) Strengthen the banking sector,

(b) Provide more operational flexibility to banks,

(c) Enhance the competitive efficiency of banks,

(d) Strengthen the legal framework governing operations of banks.

Regulatory measures taken to strengthen the Indian Banking sectors

The important measures taken to strengthen the banking sector are briefly, thefollowing:

Introduction of capital adequacy standards on the lines of the Basel norms,

prudential norms on asset classification, income recognition and provisioning,

Introduction of valuation norms and capital for market risk for investments

Enhancing transparency and disclosure requirements for published accounts ,

Aligning exposure norms single borrower and group-borrower ceiling with inter-national best practices


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Introduction of off-site monitoring system and strengthening of the supervisoryframework for banks.

(A) Some of the important measures introduced to provide more operational flexibility

to banks are:

Besides deregulation of interest rate, the boards of banks have been given theauthority to fix their prime lending rates. Banks also have the freedom to offervariable rates of interest on deposits, keeping in view their overall cost of funds.

Statutory reserve requirements have significantly been brought down.

The quantitative firm-specific and industry-specific credit controls were

abolishedand banks were given the freedom to deploy credit, based on theircommercial judgment, as per the policy approved by their Boards.

The banks were given the freedom to recruit specialist staff as per theirrequirements,

The degree of autonomy to the Board of Directors of banks wassubstantiallyenhanced.

Banks were given autonomy in the areas of business strategy such as, opening of branches / administrative offices, introduction of new products and certain otheroperational areas.

(b) Some of the important measures taken to increase the competitive efficiency of banks are the following:

Opening up the banking sector for the private sector participation

Scaling down the shareholding of the Government of India in nationalisedbanksand of the Reserve Bank of India in State Bank of India.

(c) Measures taken by the Government of India to provide a more conducive legal environment for recovery of dues of banks and financial institutions are:

Setting up of Debt Recovery Tribunals providing a mechanism for expeditiousloanrecoveries.

Constitution of a High Power Committee under former Justice Shri Eradi tosuggestappropriate foreclosure laws.


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An appropriate legal framework for securitisation of assets is engaging theattention of the Government,

Due to this paradigm shift in the regulatory framework for banks had achievedthe desired results. The banking sector has shown considerable degree of resilience.

(a) The level of capital adequacy of the Indian banks has improved: the CRAR of public sector banks increased from an average of 9.46% as on March 31, 1995to11.18% as on March 31, 2001.

(b) The public sector banks have also made significant progress in enhancing theirasset quality, enhancing their provisioning levels and improving their profits.

The gross and net NPAs of public sector banks declined sharply from 23.2%and14.5% in 1992-93 to 12.40% and 6.7% respectively, in 2000-01.

Similarly, in regard to profitability, while 8 banks in the public sector recorded

operating and net losses in 1992-93, all the 27 banks in the public sector showedoperating profits and only two banks posted net losses for the year ended March31,2001.

The operating profit of the public sector banks increased from Rs.5628 crore asonMarch 31, 1995 to Rs.13,793 crore as on March 31, 2001.

The net profit of public sector banks increased from Rs.1116 crore to Rs.4317croreduring the same period, despite tightening of prudential norms on provisioningagainst loan losses and investment valuation. The accounting treatment forimpaired assets is now closer to the international best practices and the final

accounts of banks are transparent and more amenable to meaningful interpretationof their performance.

WAY FORWARD

RBI president recently recommended Indian banks to go for larger provisioningwhen the profits are good without frittering them away by way of dividends,however tempting it may be. As a method of compulsion, RBI has recently advisedbanks to create an Investment Fluctuation Reserve up to 5 per cent of the

investment portfolio to protect the banks from varying interest rate regime. Hefurther added that one of the means for improving financial soundness of a bank isby enhancing the provisioning standards of the bank. The cumulative provisionsagainst loan losses of public sector banks amounted to a mere 41.67% of theirgross NPAs for the year ended March 31, 2001. The amount of provisions held bypublic sector banks is not only low by international standards but there has beenwide variation in maintaining the provision among banks.


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Some of the banks in the public sector had as low provisioning againstloan losses as 30% of their gross NPAs and only 5 banks had provisions in excess of 50% of their gross NPAs. This is inadequate considering that some of the countriesmaintain provisioning against impaired assets at as high as 140%. Indian Banksshould improve the provisioning levels to at least 50% of their gross NPAs. There

should therefore be an attitudinal change in banks policy as regards appropriationof profits and full provisioning towards already impaired assets should become apriority corporate goal. He also suggested that banks should also develop a conceptof building desirable capital over and above the minimum CRAR which is insistedupon in developed regulatory regimes like UK. This can be at, say around 12percent as practiced even today by some of the Indian banks, so as to provide wellneeded cushion for growth in risk weighted assets as well as provide for unexpectederosion in asset values. As banks would have observed, the changes in theregulatory framework are now brought in by RBI only through an extensiveconsultative process with banks as well as public wherever warranted. While thisserves the purpose of impact assessment on the proposed measures it also puts thebanks on notice to initiate appropriate internalre adjustment to meet the emergingregulatory prescriptions.

Though adequate transitionalroute has been provided for switchover tonew regulatory measures such as scaling down the exposure to capital market,tightening the prudential requirements like switch over to 90 day NPA norm,reduction in exposure norms, etc., I observe from the various quarters 14from whichRBI gets its inputs that the banks are yet to take serious steps towardsimplementation of these measures. The Boards of banks have been accordedconsiderable autonomy in regard to their corporate strategy as also several other

operational matters. This does not; however, seem to have translated to anysubstantial improvement in customer service. It needs to be recognised thatmeeting the requirements of the customer whether big or small efficiently and ina cost effective manner, alone will enable the banks to withstand the globalcompetition as also the competition from non-bank institutions. The profitability of the public sector banks is coming under strain.

Despite there silience shown by our banks in the recent times, the incomefrom recapitalisation bonds accounted for a significant portion of the net profits forsome of the nationalised banks. The Return on Assets (RoA) of public sector bankshas, on an average, declined from0.54 for the year ended March 31, 1999 to 0.43for the year ended March 31, 2001. Therefore, the Boards attention needs to befocused on improving the profitability of the bank. The interest income of publicsector banks as a percentage of total assets has shown a declining trend since1996-97: it declined from 9.69 in 1996-97to 8.84 in 2000-01. Similarly, the spread(net interest income) as a percentage of total assets also declined from 3.16 in1996-97 to 2.84 in 2000-01.A disheartening feature is that a large number of publicsector banks have recorded far below the median RoA of 0.4% for 2000-01 in their


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peer group. Incidentally the RoA recorded by new private banks and foreign banksranged from 0.8% to 1% for the same period. An often quoted reason for the declinein profitability of public sector banks is the stock of NPAs which has become a dragon the banks profitability. As you are aware, the stock of NPAs does not add to theincome of the bank while at the same time, additional cost is incurred for keeping

them on the books. To help the public sector banks in clearing the old stock of chronic NPAs, RBI had announced one-time nondiscretionary and nondiscriminatory compromise settlement schemes in 2000 and 2001.Though manybanks tried to settle the old NPAs through this transparent route, the response wasnot to the extent anticipated as the banks had been bogged down by the usual fearpsychosis of being averse to settling dues where security was available.

The moot point is if the underlying security was not realised over decades in manycases due to extensive delay in litigation process, should not the banks have takenadvantage of the one time opportunity provided under RBI scheme to cleanse theirbooks of chronic NPAs? This would have helped in realizing the carrying costs onsuch non-income earning NPAs and released the funds for recycling. If better stepsare taken placed in this connection then the performance of the Public Sector Bankscan show very good and healthy results in the shorter period. To make the betterfuture of the Public Sector Banks, the Boards need to be alive to the decliningprofitability of the banks. One of the reasons for the low level of profitability of public sector banks is the high operating cost. The cost income ratio(which is alsoknown as efficiency ratio of public sector banks) increased from 65.3 percent for theyear ended March 31, 2000 to 68.7 per cent for the year ending March 31,2001.

The staff expenses as a proportion to total income formed as high as 20.7% forpublic sector banks as against 3.3% for new banks and 8.2% for foreign banks forthe year ended March 31, 2001. There is thus an imperative need for the banks togo for costcutting exercise and rationalise the expenses to achieve better efficiencylevels inoperation to withstand declining interest rate regime. Boards of banks havemuch more freedom now than they had a decade ago, and obviously they have toplay the role of change agents. They should have the expertise to identify, measureand monitor the risks facing the bank and be capable to direct and supervise thebanks operations and in particular, its exposures to various sectors of the economy,and monitoring / review thereof, pricing strategies, mitigation of risks, etc. TheBoard of the banks should also ensure compliance with the regulatory framework,and ensure adoption of the best practices in regard to risk management andcorporate governance standards. The emphasis in the second generation of reformsought to be in the areas of risk management and enhancing of the corporategovernance standards in banks.


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ING Vysya Bank

Lakshmi Vilas Bank

South Indian Bank

The Nainital Bank Ltd.

Yes Bank

City union Bank

DIFFERENTS BETWEEN PRIVATE SECTOR AND PUBLICSECTOR BANK

Public Sector bank means any Government Sector

Bank/Institute that goes public... means that issues it

share to general public.. It also has a greater share of

Government (more than 50%) so that the main motto of social

welfare other than Maximising Profit remains.

Where as Private Sector Banks are those Banks where the

management is controlled by Private individuals and

Government does not have any say in the management of these

banks.Maximising profit is the basic motto.

INDUSTRY ANALYSIS

S.W.O.T. ANALYSIS OF INDIAN BANKING INDUSTRY


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STRENGTH

Indian banks have compared favourably on growth, asset quality andprofitability with other regional banks over the last few years. Thebanking index has grown at a compounded annual rate of over 51 percent since April 2001 as compared to a 27 percent growth in themarket index for the same period.

Policy makers have made some notable changes in policy andregulation to help strengthen the sector. These changes includestrengthening prudential norms, enhancing the payments system andintegrating regulations between commercial and co-operative banks.

Bank lending has been a significant driver of GDP growth andemployment.

The vast networking & growing number of branches & ATMs. Indianbanking system has reached even to the remote corners of thecountry.

The government's regular policy for Indian bank since 1969 has paidrich dividends with the nationalization of 14 major private banks of India.

In terms of quality of assets and capital adequacy, Indian banks areconsidered to have clean, strong and transparent balance sheetsrelative to other banks in comparable economies in its region.

India has 88 scheduled commercial banks (SCBs) - 27 public sectorbanks (that is with the Government of India holding a stake)aftermerger of New Bank of India in Punjab National Bank in 1993, 29private banks (these do not have government stake; they may bepublicly listed and traded on stock exchanges) and 31 foreign banks.

They have a combined network of over 53,000 branches and 17,000 ATMs.According to a report by ICRA Limited, a rating agency, the public sector


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banks hold over 75 percent of total assets of the banking industry, with theprivate and foreign banks holding 18.2% and 6.5% respectively.

Foreign banks will have the opportunity to own up to 74 per cent of

Indian private sector banks and 20 per cent of government ownedbanks .

WEAKNESS

PSBs need to fundamentally strengthen institutional skill levelsespecially in sales and marketing, service operations, riskmanagement and the overall organizational performance ethic &strengthen human capital.

Old private sector banks also have the need to fundamentallystrengthen skill levels.

The cost of intermediation remains high and bank penetration islimited to only a few customer segments and geographies.

Structural weaknesses such as a fragmented industry structure,restrictions on capital availability and deployment, lack of institutionalsupport infrastructure, restrictive labour laws, weak corporategovernance and ineffective regulations beyond Scheduled CommercialBanks (SCBs), unless industry utilities and service bureaus.

Refusal to dilute stake in PSU banks: The government has refused todilute its stake in PSU banks below 51% thus choking the headroomavailable to these banks for raining equity capital.

Impediments in sectoral reforms: Opposition from Left and resultantcautious approach from the North Block in terms of approving mergerof PSU banks may hamper their growth prospects in the medium term.

OPPORTUNITY

The market is seeing discontinuous growth driven by new products andservices that include opportunities in credit cards, consumer finance


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and wealth management on the retail side, and in fee-based incomeand investment banking on the wholesale banking side. These requirenew skills in sales & marketing, credit and operations.

Banks will no longer enjoy windfall treasury gains that the decade-longsecular decline in interest rates provided. This will expose the weakerbanks.

With increased interest in India, competition from foreign banks willonly intensify.

Given the demographic shifts resulting from changes in age profile andhousehold income, consumers will increasingly demand enhanced

institutional capabilities and service levels from banks.

New private banks could reach the next level of their growth in theIndian banking sector by continuing to innovate and developdifferentiated business models to profitably serve segments like therural/low income and affluent/HNI segments; actively adoptingacquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing andretaining more leadership capacity

Foreign banks committed to making a play in India will need to adoptalternative approaches to win the race for the customer and build avalue-creating customer franchise in advance of regulations potentiallyopening up post 2009. At the same time, they should stay in the gamefor potential acquisition opportunities as and when they appear in thenear term. Maintaining a fundamentally long-term value-creationmindset.

Reach in rural India for the private sector and foreign banks.

With the growth in the Indian economy expected to be strong for quitesome time especially in its services sector-the demand for bankingservices, especially retail banking, mortgages and investment servicesare expected to be strong.


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The Reserve Bank of India (RBI) has approved a proposal from thegovernment to amend the Banking Regulation Act to permit banks totrade in commodities and commodity derivatives.

Liberalization of ECB norms: The government also liberalized the ECBnorms to permit financial sector entities engaged in infrastructurefunding to raise ECBs. This enabled banks and financial institutions,which were earlier not permitted to raise such funds, explore this routefor raising cheaper funds in the overseas markets.

In an attempt to relieve banks of their capital crunch, the RBI hasallowed them to raise perpetual bonds and other hybrid capitalsecurities to shore up their capital. If the new instruments find takers,it would help PSU banks, left with little headroom for raising equity.

Significantly, FII and NRI investment limits in these securities havebeen fixed at 49%, compared to 20% foreign equity holding allowed inPSU banks.

THREATS

Threat of stability of the system: failure of some weak banks has oftenthreatened the stability of the system.

Rise in inflation figures which would lead to increase in interest rates.

Increase in the number of foreign players would pose a threat to thePSB as well as the private players

PEST ANALYSIS OF INDIAN BANKING INDUSTRY: PEST analysis of any industry investigates the important factors that affect theindustry and influence the companies operating in the sector. PEST stands forPolitical, Economic, Social and Technological analysis. The PEST Analysis is atool to analyze the forces that drive the industry and how those factors caninfluence the industry


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POLITICAL FACTORSGovernment and RBI policies affect the banking sector. Sometimes looking into the politicaladvantage of a particular party, the Government declares some measures to their benefits like waiver of short-term agricultural loans, to attract the farmer s votes. By doing so the profits of the bank getaffected. Various banks in the cooperative sector are open and run by the politicians. They exploitthese banks for their benefits. Sometimes the government appoints various chairmen of the banks.Various policies are framed by the RBI looking at the present situation of the country for better control over the banks.

FOCUS ON REGULATIONS OF GOVERNMENT

Banking is least affected as compare to other developed economy which isattributed to Reserve Bank of India for its robust policy framework, stricterprudential regulations with respect to capital and liquidity. This gives India anadvantage in terms of credibility over other countries. Government affects theperformance of banking sector most by legislature and framing policy government

through its budget affects the banking activities securitization act has given morepower to banking sector against defaulting borrowers.

MONETARY POLICY

Monetary Policy 2009-2010 Bank Rate: The Bank Rate has been retained unchangedat 6.0%. Repo Rate It has been reduced under the Liquidity Adjustment Facility(LAF) by 25 basis points from 5.0% to 4.75% with immediate effect. Reverse RepoRate : It has been reduced under LAF by 25 basis points from 3.5% to 3.25% withimmediate effect. RBI has retained the option to conduct overnight or longer termrepo/reverse repo under the LAF depending on market conditions and other relevantfactors. Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.


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FDI LIMIT

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20percent during the first quarter of this fiscal came as a welcome announcement toforeign players wanting to get a foot hold in the Indian Markets by investing inwilling Indian partners who are starved of net worth to meet CAR norms. Ceiling forFII investment in companies was also increased from 24.0 percent to 49.0 percentand have been included within the ambit of FDI investment

BUDGET MEASURES

Budget Provisions:-

Increase Farm Credit : The FM has further increase the farm credit target for 2009-10 at Rs325000 crore compared to Rs 287000 crore targeted in 2008-09.

Subvention of 1% to be paid as incentive to farmers : The Budget continued the Interestsubvention scheme for short-term crop loans up to Rs 300000 per farmer at theinterest rate of 7% per annum. Also additional subvention of 1% to be paid from thisyear, as incentive to those farmers who repay short-term crop loans on schedule.Also additional allocation of Rs 411 corer over Interim Budget 2009-10 was made forthe same.

Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by sixmore months for farmers owing more than 2 hectare of land. The Union Budget 2008-09 allowedthese farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of 30thJune 2009. Currently this facility has been extended from 30th June, 2009 to 31st December, 2009.


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Setting up of separate task force for those not covered under the debt waiver scheme: Thegovernment also announced that it will set up a task force to examine the issue of debt taken by alarge number of farmers in some regions of Maharashtra from private money lenders who were notcovered by the loan waiver scheme announced last year.

OTHER PROVISIONS

The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner.

To allow scheduled commercial banks setting up off-site ATMs without prior approval subject toreporting.

To provide banking facilities in under-banked/un-banked areas in the next three years. A sub-committee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same.

The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least oneCentre/Point of Sales (POS) for banking services in each of the un-banked blocks.

BUDGET IMPACT

The Union Budget 2008-09 has focused on farm credit. The agriculture sector has recorded a growthof about 4% per annum with substantial increase in plan allocations and capital formation in thesector. The one-time bank loan waiver of nearly Rs 71000 crore (Rs 710 billion) to cover anestimated 40 million farmers was one of the major highlights of the last Budget. This Union Budgethas provided further six months extension of 25% rebate on loan for farmers owing more than 2hectare of land. With Government bearing this burden, banks would not be affected much. It willonly help banks to clear their most stubborn NPA accounts on banks book. Moreover the emphasizeon hiking promoter shareholding in Public sector banks, expanding network with ATM's, opening of

banking centre in un-banked blocks are some of the positive moves for the sector. N.R. INSTITUTE


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On the flipside, the spike in government borrowings is set to adversely affect the treasury income of banks in general and public sector banks in particular, through rise in yields on governmentsecurities.

OUTLOOK

The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking sector as awhole. However it has increased the Government borrowing to Rs 451093 crore (Rs 4510.93 billion)compared to Rs 361782 crore (Rs 3617.82 billion) targeted in the Interim Budget 2009-10. This islikely to push the Bond yields high moving forward. Despite ample liquidity in the system, the 10year benchmark yield has zoomed above 7% levels owing to rise in borrowing target. Hardening of yields is likely to affect treasury profits of banks in general and Public sector banks in particular.


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ECONOMIC FACTORS

Banking is as old as authentic history and the modern commercial banking are traceable to ancienttimes. In India, banking has existed in one form or the other from time to time. The present era in

banking may be taken to have commenced with establishment of bank of Bengal in 1809 under thegovernment charter and with government participation in share capital. Allahabad bank was startedin the year 1865 and Punjab national bank in 1895, and thus, others followed. Every year RBIdeclares its 6 monthly policy and accordingly the various measures and rates are implemented whichhas an impact on the banking sector. Also the Union budget affects the banking sector to boost theeconomy by giving certain concessions or facilities. If in the Budget savings are encouraged, thenmore deposits will be attracted towards the banks and in turn they can lend more money to theagricultural sector and industrial sector, therefore, booming the economy. If the FDI limits arerelaxed, then more FDI are brought in India through banking channels

GROWING ECONOMY / GDP

Indian economy has registered a growth of more that 9 per cent for last three year and is expected tomaintain robust growth rate as compare to other developed and developing countries. BankingIndustry is directly related to the growth of the economy. The contributions of various sectors in theIndian GDP for 2007-2008 are as follows: Agriculture: 17% Industry: 29% ServiceSector: 54% It isgreat news that today the service sector is contributing more than half of the Indian GDP. It takesIndia one step closer to the developed economies of the world. Earlier it was agriculture whichmainly contributed to the Indian GDP. The Indian government is still looking up to improve the GDPof the country and so several steps have been taken to boost the economy. Policies of FDI, SEZs and

NRI investment have been framed to give a push to the economy and hence the GDP. N.R.


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LOW INTEREST RATES

Reserve Bank of India controls the Interest rate, which is based on several monetary policies.Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry. Ason September 11, 2009 Bank Rate was 6.00 per cent, the same as on the corresponding date of lastyear. Call money rates (borrowing & lending) were in the range of 1.50/3.47 per cent as comparedwith 5.25/11.00 per cent on the corresponding date of last year.

INFLATION RATES

Inflation represents a rise in general level of prices of goods and services over a period of time. Itleads to an erosion in the purchasing power of money. Resultantly, each unit of currency buys fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate from the highof 12.63 per cent to 3.92 per cent. To fight against the slowdown of the Economy, Government of India & Reserve Bank of India took many fiscal as well as monetary actions. Clubbed with fiscal &monetary actions, decreasing commodity prices, decreasing crude prices and lowering interest rate,we expect that Indian Economy could again register a robust growth rate in the year 2009-10.Inflation stands at 3.92 per cent on 7th February 2009 against a high of 12.63 per cent on 9th August2008.


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AGRICULTURE CREDIT

Agriculture has been the mainstay of our economy with 60% of our population deriving their sustenance from it. In the recent past, the sector has recorded a growth of about 4% per annum withsubstantial increase in plan allocations and capital formation in the sector. Agriculture credit flowwas Rs 2,87,000 crore in 2008-09. The target for agriculture credit flow for the year 2009-10 is beingset at Rs.3,25,000 crore. To achieve this, I propose to continue the interest subvention scheme for short term crop loans to farmers for loans upto Rs.3 lakh per farmer at the interest rate of 7% per annum. For this year, the government shall pay an additional subvention of 1% as an incentive tothose farmers who repay their short term crop loans on schedule. Thus, the interest rate for thesefarmers will come down to 6% per annum. For this, I am making an additional Budget provision of Rs 411 crore over Interim BE.

DEBT RELIEF FOR FARMERS

The one-time bank loan waiver of nearly Rs 71,000 corer to cover an estimated 40 million farmerswas one of the major highlights of the last Budget. Under the Agricultural Debt Waiver and DebtRelief Scheme (2008), farmers having more than two hectares of land were given time upto 30thJune, 2009 to pay 75% of their overdue. Due to the late arrival of monsoon, I propose to extend this

period by six months up to 31st December, 2009.


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SOCIO CULTUREAL FACTORS

Socio culture factors also affect the business. They show in which people behave in country. Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and consumption habit of

people, their language, beliefs and values affect the business. Banking industry is also operates under this social environment and it is also affect by this factor. These factor are changing continuously people s life style, their behavior, consumption pattern etc. is changing and also creatingopportunities and threat for banking industry. There are some socio-culture factors that affect

banking in India have been analyzed below.

TRADITIONAL MAHAJAN PRATHA

Before the birth of the banks, people of India were used to borrow money local moneylenders,shahukars, shroffs. They were used to charge higher interest and also mortgage land and house.Farmers were exploited by these shahukars. But farmers need money. So, they did not have anychoice other than going to shahukar and borrowing money from them in spite of exploitation by these

people. But after emergence of banks attitude of people was changed. Traditional mahajan pratha stillexist in India specially in rural areas. This affects the banking sector. Rural people afraid to go to bank to borrow money instead they prefer to borrow from shahukar whith whom they haverelationships from the time of their fore fathers. Banking infrastructure is also week in some interior areas of India. So, this is reason it still exist.

SHIFT TOWARDS NUCLEAR FAMILY

Attitude of people of India is changing. Now, younger generation wants to remain separate from their parents after they get married. Joint families are breaking up. There are many reasons behind that.But banking sector is positively affected by this trend. A family need home consumer durableslikefreeze, washing machine, television, bike, car, etc.. so, they demand for these products and

borrow from banks. Recently there is boost


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in housing finance and vehicle loans. As they do not have money they go for installments. So, bankssatisfy nuclear families wants.

CHANGE IN LIFE STYLE

Life style of India is changing rapidly. They are demanding high class products. They have becomemore advanced. People want everything car, mobile, etc.. what their fore father had dreamed for.

Now teenagers also have mobile and vehicle. Even middle class people also want to have wellfurnished home, television, mobile, vehicle and this has opened opportunities for banking secter totap this change. Everything is available so it has become easy to purchase anything if you do nothave lump sum.

POPULATION

Increase in population is one of he important factor, which affect the private sector banks. Bankswould open their branches after looking into the population demographics of the area. Percentage of deposit in any branches of banks depends upon the population demographic of that area. The

population of India is about 102.90 is expected to reach about 119.70 cores in 2011. About 70% of population is below 35years of age. They are in the prime earning stage and this increase the earningof the banks. Total Deposits mobilized by the Private Sector Banks increased from Rs, 2,52,335 croreas on 31st March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Deposits showed a subduedgrowth during 2004-05.Income distributions also affects the operations and overall business of

private sector banks.

LITERACY RATE

Literacy rate in India is very low compared to developed countries. Illiterate people hesitate totransact with banks. So, this impacts negatively on banks. But there is positive side of this as well i.e.illiterate people trust more on banks to deposit their money, they do not have market information.Opportunities in stocks or mutual funds. So, they look bank as their sole and safe alternative.


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TECHNOLOGICAL FACTORS

TECHNOLOGY IN BANKS

Technology plays a very important role in bank s internal control mechanisms as well as servicesoffered by them. It has in fact given new dimensions to the banks as well as services that they cater toand the banks are enthusiastically adopting new technological innovations for devising new productsand services.

ATM

The latest developments in terms of technology in computer and telecommunication have encouragedthe bankers to change the concept of branch banking to anywhere banking. The use of ATM andInternet banking has allowed anytime, anywhere banking facilities. Automatic voice recordersnow answer simple queries, currency accounting machines makes the job easier and self-service

counters are now encouraged. Credit card facility has encouraged an era of cashless society. TodayMasterCard and Visa card are the two most popular cards used world over. The banks have nowstarted issuing smartcards or debit cards to be used for making payments. These are also called aselectronic purse. Some of the banks have also started home banking through telecommunicationfacilities and computer technology by using terminals installed at customers home and they can makethe balance inquiry, get the statement of accounts, give instructions for fund transfers, etc. ThroughECS we can receive the dividends and interest directly to our account avoiding the delay or chance of losing the post.

IT SERVICES & MOBILE BANKING

Today banks are also using SMS and Internet as major tool of promotions and giving great utility to

its customers. For example SMS functions through simple text messages sent from your mobile. Themessages are then recognized by the bank to provide you with the required information. All thesetechnological changes have forced the bankers to adopt customer-based approach instead of product-

based approach Technology


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Advancement has changed the face of traditional banking systems. Technology advancement hasoffer 24X7 banking even giving faster and secured service.

CORE BANKING SOLUTIONS

It is the buzzword today and every bank is trying to adopt it is the centralizebanking platform through which a bank can control its entire operation theadoption of core banking solution will help bank to roll out new product andservices.

CHAPTER

-3


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COMPANY

PROFILE

PROFILE OF KOTAK MAHINDRA BANK LTD.

A bank is a place where a man deals with money and credit. The bank saves

ones money and makes it available to those who need it and helps in the

remittance of money from Mane place to another.

KOTAK MAHINDRA BANK LTD has put in place state of the art technology to

give class benefits to all customers. This system has cross branch

functionalities, which enable on-line transfer of funds across all KMBL bank

locations.


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Other co-operative, private and foreign bank could avail of network and other

product and service, which have been engineered to suit the need of banking

sector.

Service offered by KMBL is customaries to the needs. That is well equipped to

respond constantly changing and unique environment and can provide a

comprehensive banking solution, whatever the line of business.

COMPANY OVERVIEW

Kotak Mahindra established in 1984, Kotak Mahindra is one of India's leading

financial institutions, offering complete financial solutions. From commercial

banking, to stock broking, to mutual funds, to life insurance, to investment banking,

the group caters to the financial needs of individuals and corporate.

In February 2003, Kotak Mahindra Finance Ltd, the group's

flagship company was given the license to carry on banking business by the

Reserve Bank of India (RBI). Kotak Mahindra Finance Ltd. is the first company in the

Indian banking history to convert to a bank. Recently, Kotak Mahindra Bank Ltd and

HDFC Bank have signed a Memorandum of Understanding to share their ATM

network. This agreement will give customers of the two banks access to over

1400 ATMs across the country. While HDFC Bank has 1335 ATMs across 228

locations in the country, Kotak Mahindra Bank has 75 ATMs at 41 locations,

accessible 24 hours a day, 365 days a year. Kotak Mahindra Bank is offering access

to HDFC Bank ATM network free of cost to most of its customers. The charges for

HDFC Bank customer for using Kotak Mahindra's ATM sare Rs.18 for Cash

withdrawals and Rs. 7 for Query-based transactions such as balance enquiry.


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About Kotak Mahindras international business

One of the leading financial services conglomerates in India, Kotak has significant

presence in various businesses including commercial banking, retail banking, stock

broking, asset management, life insurance and investment banking.

With an international presence since 1994, the international subsidiaries of Kotak

Mahindra Bank Ltd. operating through offices in London, New York, Dubai,

Mauritius, San Francisco and Singapore specialize in providing services to specialist

overseas investors seeking to invest into India. Investors can access the asset

management capabilities of the international subsidiaries through funds domiciled


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outside India. They offer asset management services to institutions and high net

worth individuals based outside India through a range of offshore Indian funds, as

well as through specific advisory and discretionary investment management

mandates for institutional investors. Kotak is a differentiated solution provider for

India investments with a wide range of India investment solutions that span all

major asset classes including listed equity, private equity, real estate and fixed

income. They also lead manage and underwrite international issuances of

securities. With its commendable track record, large presence on the ground and a

large team of dedicated staff in India, Kotak is suitably positioned for managing

assets in the Indian Capital markets.

BUSINESS DESCRIPTION


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Type -- Private, BSE & NSE

Founded -- 1985 (as Kotak Mahindra Finance Ltd)

Headquarters-- Kotak Mahindra Bank Ltd.,

Nariman Bhawan, Nariman Point

Mumbai, India.

Key people -- Mr. K.M. Gherda, Chairman

Mr. Uday Kotak, Executive Vice Chairman & Managing Director.

Dr. Shankar Acharya.

Industry -- Banking

Products -- Deposit accounts, Loans, Investment services, Business banking

solutions, Treasury and fixed income products etc.
http://en.wikipedia.org/wiki/Image:Ka.gif


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Mission -- The mission is to consistently provide the full-spectrum of intelligent

financial choices and be preferred provider of the highest quality service in the

chosen business area.

CORPORATE IDENTITY

The KA symbol is the corporate Identity of the Kotak Mahindra Bank Ltd (KMBL).

This KA symbol represents that the Bank has infinite number of ways to meet

the unlimited wants and needs of mans

ABOUT KOTAK MAHINDRA BANK

Kotak Mahindra is one of India's leading banking and financial servicesorganizations, offering a wide range of financial services that encompass everysphere of life. From commercial banking, to stock broking, to mutual funds, to lifeinsurance, to investment banking, the group caters to the diverse financial needs of individuals and corporate sector.

The group has a net worth of over Rs. 100.6 billion and has a distribution network of branches, franchisees, representative offices and satellite offices across cities andtowns in India, and offices in New York, London, San Francisco, Dubai, Mauritius andSingapore servicing around 8 million customer accounts.

History of Kotak Mahindra bank

Milestones that have shaped the Kotak Mahindra Group, since 1986


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Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it hasbeen a steady and confident journey leading to growth and success. The milestonesof the group growth story are listed below yearwise

1986 Kotak Mahindra Finance Ltd started the activity of Bill Discounting1987

Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase market

1990 The Auto Finance division was started

1991 The Investment Banking Division was started. Took over FICOM, one of India'slargest financial retail marketing networks

The Auto Finance division was started

1992 Entered the Funds Syndication sector

1995 Brokerage and Distribution businesses incorporated into a separate company

- Securities. Investment banking division incorporated into a separatecompany - Kotak Mahindra Capital Company

1996 The Auto Finance Business is hived off into a separate company - Kotak

Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited).Kotak Mahindra takes a significant stake in Ford Credit Kotak

Mahindra Limited, for financing Ford vehicles. The launch of MatrixInformation Services Limited marks the Group's entry into informationdistribution.

1998 Entered the mutual fund market with the launch of Kotak Mahindra Asset

Management Company.


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2000 Kotak Mahindra tied up with Old Mutual plc. for the Life Insurance business. Kotak Securities launched its on-line broking site.

Commencement of private equity activity through setting up of KotakMahindra Venture Capital Fund.

2001 Matrix sold to Friday Corporation. Launched Insurance Services. Kotak Securities Ltd. was incorporated

2003 Kotak Mahindra Finance Ltd. converted into a commercial bank - the firstIndian company to do so.

2004 Launched India Growth Fund, a private equity fund.

2005Kotak Group realigned joint venture in Ford Credit; their stake in KotakMahindra Prime was bought out (formerly known as Kotak Mahindra PrimusLtd) and Kotak groups stake in Ford credit Kotak Mahindra was sold.

Launched a real estate fund.

2006 Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital

Company and Kotak Securities.

2008 Launched a Pension Fund under the New Pension System.

2009 Kotak Mahindra Bank Ltd. opened a representative office in Dubai Entered Ahmedabad Commodity Exchange as anchor investo


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2010 Ahmedabad Derivatives and Commodities Exchange, a Kotak anchored

enterprise, became operational as a national commodity exchange.

PRODUCT AND SERVICES

BANKING & SAVINGS:

Banking Accounts

Credit Cards

Demat

Deposits

NRI Services

Privy League

Convenience Banking

INVESTMENT & INSURANCE:

Life Insurance

Mutual Funds

Share Trading

Structured Product

Gold

Estate Planning

CORPORATE & INSTITUTIONAL

Corporate Finance


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Investment Banking

Institutional Equities

Treasury

LOANS & BORROWINGS:

Car Finance

Home Loans

Loans Against Property

Personal Loans

Commercial Loans

CHAPTER-4

INTRODUCTION ON


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NON PERFORMING

ASSERTS

1. INTRODUCTION on NPA

The world is going faster in terms of services and physical products. However it hasbeen researched that physical products are available because of the serviceindustries. In the nation economy also, service industry plays vital role in theboosting up of the economy. The nations like U.S, U.K, and Japan have serviceindustries more than 55%. Banking sector reforms in India has progressed promptlyon aspects like interest rate deregulation, reduction in statutory reserverequirements, prudential norms for interest rates, asset classification, incomerecognition and provisioning. But it could not match the pace with which it wasexpected to do. The accomplishment of these norms at the execution stageswithout restructuring the banking sector as such is creating havoc.

The efficiency of a bank is not always reflected only by the size of its balance sheetbut by the level of return on its assets. NPAs do not generate interest income for thebanks, but at the same time banks are required to make provisions for such NPAsfrom their current profits. The main aim of any person is the utilization money in thebest manner since the India is country where more than half of the population hasproblem of running the family in the most efficient manner. However Indian peoplefaced large number of problem till the development of the full-fledged bankingsector. The Indian banking sector came into the developing nature mostly after the1991 government policy. The banking sector has really helped the Indian people toutilize the single money in the best manner as they want. People now have startedinvesting their money in the banks and banks also provide good returns on thedeposited amount. The people now have at the most understood that banks providethem good security to their deposits and so excess amounts are invested in the


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banks. Thus, banks have helped the people to achieve their socio economicobjectives. The banks not only accept the deposits of the people but also providethem credit facility for their development. Indian banking sector has the nation indeveloping the business and service sectors. But recently the banks are facing theproblem of credit risk. It is found that many general people and business people

borrow from the banks but due to some genuine or other reasons are not able torepay back the amount drawn to the banks. The amount which is not given back tothe banks is known as the non performing assets. Many banks are facing theproblem of nonperforming assets which hampers the business of the banks. Due toNPAs the

income of the banks is reduced. The world is going faster in terms of services andphysical products. However it has been researched that physical products areavailable because of the service industries. In the nation economy also serviceindustry plays vital role in the boosting up of the economy. The nations like U.S,U.K, and Japan have service industries more than 55%. The banking sector is one of appreciated service industries. The banking sector plays larger role in channelizingmoney from one end to other end. It helps almost every person in utilizing themoney at their best. The banking sector accepts the deposits of the people andprovides fruitful return to people on the invested money. But for providing thebetter returns plus principal amounts to the clients; it becomes important for thebanks to earn. The main source of income for banks is the interest that they earn onthe loans that have been disbursed to general person, businessman, or any industryfor its development. Thus, we may find the input-output system in the bankingsector. Banks first, accepts the deposits from the people and secondly they lend thismoney to people who are in the need of it. By the way of channelizing money from

one end to another end, Banks earn their profits.However, Indian banking sector has recently faced the serious problem of NonPerforming Assets. This problem has been emerged largely in Indian banking sectorsince three decade. Due to this problem many Public Sector Banks have beenadversely affected to their performance and operations. In simple words NonPerforming Assets problem is one where banks are not able to recollect their landedmoney from the clients or clients have been in such a condition that they are not inthe position to provide the borrowed money to the banks. The problem of NPAs isdanger to the banks because it destroys the healthy financial conditions of them.

The trust of the people would not be any more if the banks have higher NPAs. So. The problem of NPAs must be tackled out in such a way that would not

destroy the operational, financial conditions and would not affect the image of thebanks. Recently, RBI has taken number steps to reduce NPAs of the Indian banks.And it is also found that the many banks have shown positive figures in reducingNPAs as compared to the past years

Rationale of the study


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A strong banking sector is important for flourishing economy. The failure of thebanking sector

may have an adverse impact on other sectors. Non-performing assets are one of themajor

concerns for banks in India.

NPAs reflect the performance of banks. A high level of NPAs suggests highprobability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves thenecessity of provisions, which reduces the over all profits and shareholders value.

The issue of Non Performing Assets has been discussed at length for financialsystem all over the

world. The problem of NPAs is not only affecting the banks but also the whole

economy. In fact

high level of NPAs in Indian banks is nothing but a reflection of the state of health of the

industry and trade.

The main aim behind making this report is to know how Public Sector Banks areoperating their business and how NPAs play its role to the operations of the PublicSector Banks. The report NPAs are classified according to the sector, industry, andstate wise. The present study also focuses on the existing system in India to solvethe problem of NPAs and comparative analysis to understand which bank is playingwhat role with concerned to NPAs. Thus, the study would help the decision makersto understand the financial performance and growth of Public Sector Banks ascompared to the NPAs.

Thats why the study of NPAs become necessary due to the above mentionedreasons :

They erode current profits through provisioning requirements.

They result in reduced interest income.

They require higher provisioning requirements affecting profits and accretion tocapital funds and capacity to increase good quality risk assets in future, and

They limit recycling of funds, set in asset-liability mismatches, etc.


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NPAs MEANING:

A NPA is a loan or an advance where Interest and/ or installment of principal remainoverdue for a period of more than 90 days in respect of a term loan,

The debt remains outstanding for 90 consecutive days or more beyond thescheduled

payment date or maturity.

The debt exceeds the borrowers approved limit for 90 consecutive days or more.

Interest is due and uncollected for 90 days or more or

.For overdrafts, the account has been inactive for 90 consecutive days and / ordeposits are

insufficient to cover the interest capitalized during the period.Classification of NPA / Asset classification

Once an asset falls under the NPA category, banks are required by the ReserveBank of India (RBI) to make provision for the uncollected interest on these assets.For the purpose they have to classify their assets based on the strength and oncollateral securities into:

1.Substandard Assets

Which has remained NPA for a period less than or equal to 12 months .

This is not a non-performing asset. It does not carry more than normal riskattached to the business.

2.Doubtful Assets

Which has remained in the sub-standard category for a period of 12 Months.

3. Loss Assets

where loss has been identified by the bank or internal or external auditors or theRBI

inspection but the amount has not been written off wholly.

It is an asset identified by the bank, auditors or by the RBI inspection as a lossasset.

It is an asset for which no security is available or there is considerable erosion in the


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realizable value of the security.

Difficulties with the Non performing Assets

1.) Owners do not receive a market return on their capital. In the worst case, if thebank fails,

owners lose their assets . In modern times, this may affect a broad pool of shareholders.

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

3.) Non performing loans represent bad investments. NPA misallocate credit from

good projects , which do not receive funding ,to failed projects. Bad investment endup in misallocation of capital and , by extension ,labor and natural resources . Theeconomy performs below its production potential .

4.) Non performing loans may spill over the banking system and contract the moneystock

, which may lead to economic contraction .

This spillover effect can channelize through illiquidity or bank insolvency;

(a) When many borrowers fail to pay interest, banks may experience liquidityshortages .These

Shortages can jam payments across the country.

(b) Illiquidity constraints bank in paying depositors eg. Cashing their paychecks.

Banking panic follows . A run on bank by depositors as part of the national moneystock become inoperative . The money stock contracts and economic contractionfollows

(c) Under capitalized banks exceeds the banks capital base.

TYPES OF NPA:

11 GROSS NPA

22.. NET NPA

GROSS NPA


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Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as

on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all

the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs -ProvisionsGross Advances- Provisions

NET NPA

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net

NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount

of NPAs and the process of recovery and write off of loans is very time consuming, the provisions t

The banks have to make against the NPAs according to the central bank guidelines, are quite

Significant. That is why the difference between gross and net NPA is quite high. It can be calculated

by following:

NET NPAs Ratio = Gross NPAs -ProvisionsGross Advances- Provisions

About the NPA

An asset is classified as Non-performing Asset (NPA) if due in the form of principal and

interest are not paid by the borrower for a period of 90 days.If any advance or credit

facilities granted by banks to a borrower becomes non-performing, then the bank willhave to treat all the advances/credit facilities granted to that borrower as non-


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performing without having any regard to the fact that there may still exist certainadvances / credit facilities having performing

status.

Though the term NPA connotes a financial asset of a commercial bank, which hasstopped earning an expected reasonable return, it is also a reflection of the productivityof the unit, firm, concern, industry and nation where that asset is idling. Viewed withthis perspective, the NPA is a result of an environment that prevents it from performingup to expected levels.

The definition of NPAs in Indian context is certainly more liberal with two quarters normbeing applied for classification of such assets. The RBI is moving over to one-quarternorm from 2004 onwards.

Reasons for NPA

Various studies have been conducted to analysis the reasons for NPA. What ever maybe complete elimination of NPA is impossible. The reasons may be widely classified intwo:

(1) Over hang component

(2) Incremental component

Over hang component is due to the environment reasons, business cycle etc.

Incremental component may be due to internal bank management, credit policy, termsof credit etc.


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CHAPTER -4

FACTOR,S AFFECTINGON NPA

EXTERNAL FACTORS :-


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Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances.

Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover,

their by reducing their profitability and liquidity.

Willful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing it. These groupsof people should be identified and proper measures should be taken in order to get back the money extended tothem as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then

India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the

bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a

reduced profit.

Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers

are not to achieve the production level thus they are not repaying the loans.

Industrial sickness

Improper project handling , ineffective management , lack of adequate resources , lack of advance

technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance

those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up

their product thus making them unable to pay back the money they borrow to operate these activities. The

banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the

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

Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the

changing principles and policies for the regulation of the rising of NPAs.The fallout of handloom sector is continuing as most of the weavers Co-operative societies have

become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central

government to revive the handloom sector has not yet been implemented. So the over dues due to the

handloom sectors are becoming NPAs.

INTERNAL FACTORS :-


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Defective Lending process

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

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

Principles of safety:-

By safety it means that the borrower is in a position to repay the loan both principal and interest. The

repayment of loan depends upon the borrowers:

a. Capacity to payb. Willingness to pay

Capacity to pay depends upon:

1. Tangible assets

2. Success in business

Willingness to pay depends on:

1. Character 2. Honest3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise or business for which a loan issought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management information system, market driven decisions on real time

basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which

leads to poor credit collection, thus NPA. All the branches of the bank should be computerized.Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While

providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and

credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.


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it should collect credit information of the borrowers from_

a. From bankers.

b. Enquiry from market/segment of trade, industry, business.

c. From external credit rating agencies.

Analyze the balance sheet.

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

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks

should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term

acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives

advances to those who are not able to repay it back. They should use good credit appraisal to decrease the

NPAs.

Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets as security to safe

guard its interests. When accepting securities banks should consider the_

1. Marketability

2. 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 notgrant advances to a few big farms only or to concentrate them in few industries or in afew cities. If a new big customer meets misfortune or certain traders or industriesaffected adversely, the overall position of the bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest

defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd

(2439.60lakhs).


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Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bankofficials to the customer point decreases the collection of interest and principals on theloan. The NPAs due to willful defaulters can be collected by regular visits.

Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the

smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of

OSCB is increasing day by day.

Provisioning Norms:

(i) Sub-standard assets

A general provision of 10percent on total outstanding should be made withoutmaking any allowance for ECGC guarantee cover and securities available. At timesbank give loans, which are unsecured. i.e. the loan is sanctioned without anysecurity. Such account becomes NPA and is classified as substandard thenprovision on 20% would be made. Banks are permitted to phase the additionalprovisioning consequent upon the reduction in the transition period fromsubstandard to doubtful asset from 18 to 12 months over a four year periodcommencing from the year ending March 31, 2005, with a mini-mum of 20 % eachyear. EXAMPLE: An asset be-came NPA o r the first time on 31st March 2004.Balance outstanding in the account isRs.25 lacks. Account is classified as substandard and there- ore provision o Rs.2.5 lacks is made as on 31st March 2004.Asper the old norms; the as-set would have remained in the category o sub-standardas on31st March 2005. However due to reduction in period from 12months to 18months, the asset got migrated to doubtful Category as on 31st March 2005and,therefore, bank will have to make provision o Rs.5 lacsi.e.20% o Rs.25 lacks.

Thus, additional provision o Rs.2.5 lacks. This additional provision o Rs.2.5 lacks


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can be spread over a period of four years with mini-mum provision o Rs.50, 000/each year.

ii) Doubtful assets

a) 100 percent o the extent to which the advance is not covered by the realizablevalue of the security to which the bank has a valid recourse and the realizable valueis estimated on a realistic basis.

b) In regard to the secured portion, provision may be made on the following basis,at the rates ranging from 20 percent to 100percent of the secured portiondepending upon the period for which the asset has remained doubtful TheChartered Accountant 1335 March 2006.

As per the provisioning norms applicable to year ended31st March 2004, or asset,which were doubtful for more than three years (doubtful 3), 50% provision was

required to make secured portion. However, any asset, which gets migrated todoubtful 3 categories, 100% provision is required to be made on the entire balancei.e. secured portion also. However, assets which were already in the Doubtful 3category, provision as indicated above will be required to be made.

(iii) Loss assets

Loss assets should be written off. If loss assets are per-mitted to remain in thebooks for any reason, 100 percent of the outstanding should be provided for.Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs.5 corer and above stockaudit at annual intervals by external agencies appointed as per the guidelinesapproved by the Board of the bank would be mandatory in order to enhance thereliability on stock valuation. Collaterals such as immovable properties charged infavor of the bank should beget valued once in three years by values appointed asper the guidelines approved by the Board of Directors.

(iv) Standard assets

A general provision of a minimum of 0.40 %on standard assets on global loanportfolio basis.

(v) Provisions under Special Circumstances

a. In respect of additional credit facilities granted to SSI units, which are identifiedas sick and where rehabilitation packages/nursing programmers have been drawn


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by the banks themselves or under consortium arrangements, no provision need bemade for a period of one year.

b. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and lifepolicies would attract provisioning requirements as applicable to their asset

classification status.

c. Advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements.

d. Advances covered by ECGC/CGTSI In the case of advances classified asdoubtful and guaranteed by ECGC/CGTSI, provision is required to be made only forthe balance in excess of the amount guaranteed by the Corporation. Further, whilearriving at the provision required to be made for doubtful assets, realizable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision should be made.

e. Provisioning norms for sale of financial assets to Securitization Company (SC) /Reconstruction compa

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