A

PROJECT REPORT

ON

COMPARATIVE ANALYSIS OF

NON PERFORMING ASSETS

OF PRIVATE & PUBLIC SECTOR BANKS

SUBMITTED TO

SAURASHTRA UNIVERSITY

RAJKOT

PROJECT GUIDE

Mrs. REENA PATEL

SUBMITTED BY

YAMINI JOSHI

ROLL NO: 23

Class - C

ACADEMIC YEAR-2009-10

R. K. College of Engineering & Technology College BHAVANAGAR HIGHWAY,

KASTURBA DHAM,

RAJKOT -360020.

DECLARATION

I Yamini Joshi do hereby declare that the project report entitled Comparative

Analyses on Non Performing Asset of Private and Public Sector Banks being submitted

to Saurashta University, Rajkot is my own piece of work and it has not been submitted to

any other institute or published at any time before.

YAMINI JOSHI

R.K. College of Eng & Technology,

MBA,

Rajkot.

Signature

_______________

Date

Place

ACKNOWLEDGEMENT

At outset, we would like to thank the institutions for having provided us with an

opportunity to carry out a project of this magnitude that helped me satisfy my curiosity as far

as my area of interest was concerned.

The essence of this project, i.e. its contents have been compiled with help of varied

sources of secondary database, but we would specially like to acknowledge the support,

suggestions and feedback received from my Project Guide- Mrs. Reena Patel . I would like

to thank Dr. J. Ramamohana Rao. for the guidance he has given to me in the conduction of

my project work. I am thankful to all the professors whose positive attitude, guidance and

faith in my ability spurred me to perform well.

A lot of other people have also contributed directly and indirectly to completion of

this project would not have seen light of the day. Our hearts felt gratitude to all of them.

I am also indebted to all lecturers, friends and associates for their valuable advice,

stimulated suggestions and overwhelming support without which the project would not have

been a success.

EXECUTIVE SUMMERY

The most important problem that the Indian banks are facing is the problem of their

NPAs. It is only since a couple of years that this particular aspect has been given so much

importance. The banks have to overcome these difficulties properly in order to effectively

counter the competition faced by the foreign banks. With the framing of laws as per

international standards and setting up of Debt recovery tribunal we can say that steps have

been taken in this direction.

While gross NPA reflects the quality of the loans made by banks, net NPA shows the

actual burden of banks. Now it is increasingly evident that the major defaulters are the big

borrowers coming from the non-priority sector. The banks and financial institutions have to

take the initiative to reduce NPAs in a time bound strategic approach.

Public sector banks figure prominently in the debate not only because they dominate

the banking industries, but also since they have much larger NPAs compared with the private

sector banks. NPAs reduce the profitability of a bank, weaken its financial health and erode

its solvency.

For the recovery of NPAs a broad framework has evolved for the management of

NPAs under which several options are provided for debt recovery and restructuring. Banks

and FIs have the freedom to design and implement their own policies for recovery and write-

off incorporating compromise and negotiated settlements

As India witness slowdown in economic activity, banks will face a lower demand for

loans. NPA’s will also increase on account of borrowers finding it difficult to repay loans.

Credit growth is expected to fall to 14% in 2009-10, in comparison to 22% of last financial

year. Rise in NPA’s would mainly be attributed to export oriented small and medium

enterprises (SME’s)which are hard hit due surging costs.

The growth in credit in the industry in 2008 was in the range of 25-29 per cent on

account of working capital requirements of small-, mid- and large-size industries, and the

bankers expect an average 25 per cent rise in their credit in 2009. While state-owned banks

were quick to respond to the recent signals from policy-makers by reducing interest rates

periodically, many Private Sector Banks (PSB) are yet to follow the suit, mainly owing to

pressure on their margins.

Introduction

The banking industry has been a backbone for the economic growth of the country.

Though the technological revolution was yet to hit the banking industry till late eighties it

created lot of new jobs.

The sudden explosion in the business volume brought pressure on the quality of

output. This environment sowed the seeds of what is now known as NPAs. Unchecked

proliferation of banking, lack of matching technology and growth of adequate human

resources severely affected the quality of credit appraisal, supervision and debt recovery. The

emphasis is on recovery.

The existing loopholes in the legal system encourage the borrowers to take undue

advantage of them. Even the setting up of executive recovery boards has failed to contain the

NPAs. Of course, the safest way to check further NPAs is to prevent about their occurring.

This calls for efficient management of the recovery of the NPAs. This will eventually lead to

reducing the NPAs. This study is basically to identify the Debt recovery problems and how

they are managed for efficient recovery considering the present scenario.

The RBI also nationalized good amount of commercial banks for proving socio

economic services to the people of the nation. In 2009 Public Sector Banks has advances

2283473Crore & NPA is 35918crore. Private Sector Banks has advances 578398crore &

NPA is 16852crore

The asset quality of Indian banks has shown substantial improvement in recent years

Net NPA improved 0.73 per cent as against 0.83 percent in 2007-08. However, 2008-09 and

2009-10 has the potential to reverse this trend.

However, the only problem of the Banks these days are the increasing level of the non

performing assets. The non performing assets of the Banks have been increasing regularly

year by year. The only problem that hampers the possible financial performance of the Public

Sector Banks is the increasing results of the non performing assets.

The non performing 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 sheet but by the

level of return on its assets. NPAs do not generate interest income for the banks, but at the

same time banks are required to make provisions for such NPAs from 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 accretion to

capital 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 also tried to develop many schemes and tools to reduce the non

performing assets by introducing internal checks and control scheme, relationship managers

as stated by RBI who have complete knowledge of the borrowers, credit rating system, and

early warning system and so on. The RBI has also tried to improve the securitization Act and

SRFAESI Act and other acts related to the pattern of the borrowings.

Though RBI has taken number of measures to reduce the level of the non performing

assets the results is not up to the expectations. To improve NPAs each bank should be

motivated to introduce their own precautionary steps. Before lending the banks must evaluate

the feasible financial and operational prospective results of the borrowing companies. They

must evaluate the business of borrowing companies by keeping in considerations the overall

impacts of all the factors that influence the business.

CHAPTER -1

OVER VIEW/

INTRODUCTION

INDIAN BANKING

Banking can be descried as the business of running an establishment where money is

deposited in accounts, withdrawn and borrowed also by the customers. Banks perform their

function of attracting deposits and providing credit. However banks today function for

customer satisfaction rather than being just a mere intermediary.

Without a sound and effective banking system in India it cannot have a healthy

economy. The banking system of India should not only be hassle free but it should be able to

meet new challenges posed by the technology and any other external and internal factors.

Development of banking industry in India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed that the

transaction from money lending to banking must have occurred even before Manu, the great

Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down

rules relating to rates of interest.

Banking in India has an early origin where the indigenous bankers played a very

important role in lending money and financing foreign trade and commerce. During the days

of the East India Company, was the turn of the agency houses to carry on the banking

business. The General Bank of India was first Joint Stock Bank to be established in the year

1786. The others which followed were the Bank Hindustan and the Bengal Bank.

The Reserve Bank of India which is the Central Bank was created in 1935 by passing

Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in

1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for

licensing, supervision and control of banks.

This is true not only in the case of India but also of other countries. Although, the

business of banking is as old as authentic history, banking institutions have since than

changed in character and content very much. They have developed from a few simple

operations involving the satisfaction of a few individual wants to the complicated mechanism

of modern banking, involving the satisfaction of capital slowly seeking employment and thus

providing the very life blood of commerce.

The Post Independence Period (from 1947-1969):

Post independence scenario in the banking sector saw that “Class Banking” was being

followed wherein main stream banking was being controlled by few industrialists mostly

serving the narrow interests of the industries to which they were connected and catering to

the needs of a certain class of customers. A liberal credit policy was not followed in lending

to the priority and neglected sectors, including Agriculture and Small-scale industry.

Thus, a need was felt to literally overhaul the Indian Banking System to serve the

needs of the economically weaker sections of the society across the length and breadth of the

country. It had become very much necessary that “Mass Banking” replace “Class Banking”.

Thus path breaking measures, like, passing of the Banking Laws (Amendment) Act in 1968,

nationalization of 14 major commercial banks in 1969, etc., were taken to achieve the desired

social and economic objectives.

Development in the Banking Sector in the Post Nationalization Times (from 1969-1999):

Considering the proliferation of weak banks, RBI compulsorily merged many of them

with stronger banks in 1969. Early phase from 1786 to 1969 of Indian Banks

The post nationalization period has witnessed a phenomenal growth in branch

expansion of public sector banks from 8262 branches in 1969 to more than 45000 branches

(inclusive of 14000 regional Rural Bank Branches).

During the three decades the Business Mix of the PSBs also rose in geometrical

progression. Aggregate Deposits, which were Rs. 4,623crores in 1969 increased to more than

Rs.5, 00,000crores in 1999 and total credit rose from Rs. 3825crores to more than

Rs2,00,000crores during the same period.

Consequently, employment potential in the banking sector itself increased in leaps

and bounds, giving rise to the commonly held view that there was over recruitment of staff

and excessive operating expenses consuming most of the revenue thereby eroding the

profits/net worth of the Banks. Recent introduction of Voluntary Retirement Schemes by

almost all the PSBs proves this point.

Post Reforms, Period

In 1991 the Indian economy was facing a grave crisis in all fronts-Forex reserves

touched an abysmal low, increased deficit in the oil pool account and a severe resource

crunch had a strangle hold on the economy. It was at this juncture that a new parliament

under the stewardship of Shri P.V. Narasimha Rao decided to go in for sweeping changes in

the economic front and with Dr. Manmohan Singh as Finance Minister the government

unveiled the Economic Reforms Package.

The post liberalization era loosened the noose resulting in growing financial

disintermediation, emergence of new financial products and services, greater need for

professional.

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector

Reforms. New phase of Indian Banking System with the advent of Indian Financial &

Banking Sector Reforms after 1991 Acumen and wider use of technology – revolutionizing

the concept of banking in India – leading towards that all important goal of a commercial

establishment – PROFITS.

Banking Industry in India has always revolved around the traditional function of

deposits and credit. Their role had been defined as to assist the overall economic growth with

majority of share being controlled by the Government of India in most of the banks. But with

the process of liberalization, the banking industry has also undergo tremendous change in the

last 5 years. The market, which was largely controlled by the public sector banks, has now

been facing stiff competition not only from foreign players but also from the new generation

private sector banks. The rules of the game have been changing with the RBI introducing new

norms to make banks more accountable and to adopt the practices followed worldwide.

Structure of Indian Banking System

Non scheduled Scheduled

Deposit Banks Foreign Banks Commercial BanksCo-operative Banks

State Co-operative Banks at State LevelCentral Co-operative Banks at District Level

Central Bank

Public Sector Private Sector

Land Development Bank

InvestmentBank

Exchange Bank

Saving Bank

Structure of Indian Banking System

STATUS WISE BIFURCATION OF BANKS

1. Scheduled Banks.

2. Non-Scheduled Banks.

Non-Scheduled Banks:

The banks, which are not included in the second schedule of RBI Act, 1934, are

known as non-scheduled banks. Such banks total share capital is less than five lakhs. These

banks are not governed according to the RBI Act and they receive no benefits from the RBI.

These banks have no place in the list of recognized banks of the RBI. These banks are not

much trusted by the people and they do not get handsome deposits. Since 1951 the numbers

of such banks have been gradually decreasing. In 1979 there were only five non-scheduled

banks.

Generally now days we found many cooperative banks which are belongs to the non-

schedule co-operative banks. Following are the types of non-schedule banks they are work

like the schedule banks but here difference in its status and it not having the status of the

schedule banks.

Deposits Banks

Central Banks

Exchange Banks

Investment or Industrial Banks

Land Development Bank

Savings Banks

Scheduled Banks:

In first schedule, Government of India notifies the Primary Banks, which are licensed

and whose demand and time liability are not less than 50crores in 1987.Government of India

notifies the Primary banks, which are licensed and whose demand and time liability are not

less than 100crores can only qualify to be included in the second schedule since 1993.

A bank becomes scheduled when it fulfils the followings:

‘A’ grade rating from RBI

Demand and Time Liability over 100Crores

Satisfy the RBI guidelines related to CRR and SLR

As per the norms Priority Sector wise lending

Benefits of Being a Scheduled co-operative are described below:

RBI would provide Rediscounting facility at nominal rate

RBI gives remittance facility at par

The demerit of being a scheduled co-operative bank is that the bank will not get 0.5%

subsidy from RBI.

The conferment of scheduled status on the banks has certain advantages like refinance

facility, directly industrial finance from Reserve Bank of India, avail of Reserve Bank of

India Remittance facility scheme, accept deposits from local bodies, quasi-government

organization, religious, and charitable institutions, guarantees and cheques issued by Banks

are accepted by Government Departments. At the same time, it casts greater responsibility on

the banks in the maintenance of books of accounts and submission of returns.

Scheduled banks which included

(i) Public Sector Banks

(ii) Private sector Banks

(iii) Foreign Exchange Banks

(iv) Co-Operative Banks

TYPES OF BANKS

Regional Rural Bank

Nationalize Bank

State Bank Group

Co-operative Bank

Private Bank

Foreign Bank

Nationalize Banks

The Banking Company Act establishes it in July 1969 by nationalization of 14 major banks

of India. The sent percent ownership of the bank is of government of India.

State Bank Group

The State Bank of India was established under the State Bank of India Act, 1955, the

subsidiary banks under the State Bank of India (subsidiary Banks) Act, 1959. The Reserve

Bank of India owns the State Bank of India, to a large extent, and rest of the part is some

private ownership in the share capital of State Bank of India. The State Bank of India owns

the subsidiary Banks.

Old Private Banks

These banks are registered under Company Act, 1956. Basic difference between co-operative

banks and private banks is its aim. Co-operative banks work for its member and private banks

work for earn profit.

New Private Banks

These banks lead the market of Indian banking business in very short period, because of its

variety of services and approach to handle customer, also because of long working hours and

speed of services. This is also registered under the Company Act, 1956.

Foreign Banks

Foreign Bank means multi-countries bank. In case of India Foreign Banks are such Banks,

which open its branch office in India and their head office is outside of India.

Regional Rural Banks (RRB)

Regional Rural Banks are added in Indian Banking since October 1975. The Government of

India in terms of the provision of the Regional Rural Bank Act 1976 has established these

banks. The distinctive feature of Regional Rural Bank is that through it is a separate body

corporate with the Commercial Bank, which has sponsored the proposal to establish it. The

Central Government, while establishing a Regional Rural Bank at the request of a

Commercial Bank, shall specify the local limits within which it shall operate. The Regional

Rural Bank may establish its branches or agencies at any place within the notified area.

Co-operative Banks

1. State Co-operative Banks

State Co-operative Bank means the principal Co-operative society in the state. The primary

objective of which is the financing other co-operative societies in the state.

2. Central / District Co-operative Banks

Central / District co-operative Bank means the principal co-operative society in a district, the

primary objective of which is the financing of other co-operative in that particular district.

3. Primary / Urban Co-operative Banks

The primary objective of principal business of which the transaction is of banking business

and paid up share capital and reserve of which are not less than rupees 100,000 and bye-laws

of which do not permit admission of any other co-operative society as a member.

REGULATORY AUTHORITIES

The RBI and the SEBI together regulate the activities of commercial banks in India.

The urban co-operative banks, in addition to these regulatory authorities, have State Co-

operative Banks (SCBs) and the District Co-operative Banks (DCBs) to monitor their

activities.

In the policy framework, the important priority in the past few years has been to

introduce appropriate norms in respect of capital adequacy, income recognition and

provisioning. The RBI has introduced new guidelines to accelerate credit disbursement in

infrastructure. The liberalization has changed the future course of the Indian banking scene.

This has set trends in greater specialization in niche markets such as retail, hi-tech

agriculture, exports, small-scale industries and corporate sector. There will be a market shift

from the interest-based activities to investment and foreign exchange operations/bullion trade

to shore up the bottom line.

RBI:

The Hilton-young commission, appointed in 1926 has recommended the necessity of

centrally empowered institution to have effective control over currency and financial

transaction in the country. Accordingly, the Government had then passed Reserve Bank of

India Act, 1934 and established the Reserve Bank of India with effect from 1 st April 1935.

The principal aim behind this was to organize proper control over the currency management

in the interest of country benefits and to maintain financial stability. With this, the RBI

mainly looks after the following important functions:

To keep effective control over creation of credits and currency supply

To control the Banking transactions of Central and State Governments

To act as Central administered Authority of all other Banks in the Country.

To organize control over Foreign Currency Transaction

To assist for improvement in financial aspects of the country

PROBLEMS OF INDIAN BANKING INDUSTRY

The Indian banking industry is facing serious problems because of the competition

posed by the foreign banks. On one hand, the entry of foreign banks was advantageous to the

Indian banks in the sense that foreign banks brought in latest technology along with them.

But on the other hand, it took away a big share of the Indian banks by using their technology

over here. Even though a major part of the private banks have adopted those technologies and

are in neck-to-neck competition with these banks, the main onus for development lies with

the nationalized banks of our country, as they are the ones within the reach of the masses of

our country. Hence technology up gradation is very much essential here.

Secondly, up to a couple of years earlier, the Indian banks functioned mainly as an

intermediary offering loans and deposits to its customer. It is only now that the concept of

“customer-the-king” has popped up.

The third and the most important problem that the Indian banks are facing is the

problem of their NPAs (Non-Performing Assets). It is only since a couple years that this

particular aspect has been given so much importance. The increasing amount of NPAs eats

away major part of the banks profits.

The banks have to overcome these difficulties properly in order to effectively counter

the competition faced by the foreign banks. With the framing of laws as per international

standards and setting up of Debt Recovery Tribunals we can say that steps have been taken in

this direction.

NON PERFORMING ASSETSNON PERFORMING ASSETS

“A Man without money is like a bird without wings”, the Rumanian proverb insists

the importance of the money. A bank is an establishment, which deals with money. The

basic functions of Commercial banks are the accepting of all kinds of deposits and lending of

money. In general there are several challenges confronting the commercial banks in its day to

day operations which lead to quality assets (Loans and Advances) or otherwise it leads to

Non-performing assets.

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

income for the bank. A ‘non-performing asset’ (NPA) was defined as a credit facility in

respect of which the interest and/ or installment of principal has remained ‘past due’ for a

specified period of time.

The efficiency of a bank is not always reflected only by the size of its balance sheet

but by the level of return on its assets. NPAs do not generate interest income for the banks,

but at the same time banks are required to make provisions for such NPAs from their current

profits. The main aim of any person is the utilization of money in the best manner since India

is a country where than half of the population has problem of running the family in the most

efficient manner.

But for providing the better returns plus principal amounts to the clients; it becomes

important for the banks to earn. The main source of income for banks is the interest that they

earn on the loans that have been disbursed to general person, businessman, or any industry

for its development. Thus, we may find the input-output system in the banking sector.

Banks first, accepts the deposits from the people and secondly they lend this money 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.

MEANING OF NPAsMEANING OF NPAs

An asset which ceases to generate income for the bank is called. a Non-Performing

Asset. 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. 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 NPAs, from the year ending March 31,

2005. Accordingly, with effect form March 31, 2005, a non-performing asset (NPA) shell be

a loan or an advance where;

1. Interest and/or installment of principal remain overdue for a period of more than

90 days in respect of a Term Loan,

2. The account remains 'out of order' for a period of more than 90 days, in respect of

an Overdraft/Cash Credit (ODICC),

3. The bill remains overdue for a period of more than 90 days in the case of bills

purchased and discounted,

4. For a period not exceeding two half years in the case of an advance granted for

agricultural purpose, and

5. 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 sanctioned limit /drawing power. in case where the out standing

balance in the principal operating account is less than the sanctioned amount /drawing

power, but there are no credits continuously for six months as on the date of balance sheet or

credit 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 due date

fixed by the bank.

TYPES of NPATYPES of NPA

1. Gross NPA1. Gross NPA

2. Net NPA2. Net NPA

1. Gross NPA:1. Gross NPA:

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

guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by

banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss

assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs

Gross Advances

2. Net NPA:2. 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 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 = Gross NPAs – Provisions

Gross Advances - Provisions

REPORTING FORMAT FOR NPA – GROSS AND NET NPA

Name of the Bank:

Position as on………

PARTICULARS RS

1) Gross Advanced *

2) Gross NPA *

3) Gross NPA as %age of Gross Advanced

4) Total deduction( a +b+ c+ d )

( a ) Balance in interest suspense a/c **

( b ) DICGC/ECGC claims received and held pending

adjustment

( c ) part payment received and kept in suspense a/c

( d ) Total provision held ***

5) Net advanced ( 1-4 )

6) Net NPA ( 2-4 )

7) Net NPA as a %age of Net Advance

*excluding Technical write-off of Rs.______ crore

**Banks which do not maintain an interest suspense a/c to park the accrued interest

on NPAs may furnish the amount of interest receivable on NPAs.

***Excluding amount of Technical write-off (Rs.______ crore) and provision on

standard assets. (Rs._____ crore).

ASSET CLASSIFICATIONASSET CLASSIFICATION

1. Standard Assets:1. Standard Assets:

Standard assets are the ones in which the bank is receiving interest as well as the

principal amount of the loan regularly from the customer. Here it is also very important that

in this case the arrears of interest and the principal amount of loan do not exceed 90 days at

the end of financial year. If asset fails to be in category of standard asset that is amount due

more than 90 days then it is NPA and NPAs are further need to classify in sub categories.

2. Non Performing Assets:

Banks are required to classify non-performing assets further into the following three

categories based on the period for which the asset has remained non-performing with effect

from 31 March 2005:

I. Sub standard Assets

II. Doubtful Assets

III. Loss asset

I.I. Sub-standard Assets:--Sub-standard Assets:--

A sub standard asset would be one, which has remained NPA for a period less than or

equal to 12 month. The following features are exhibited by sub standard assets: the current

net worth of the borrowers / guarantor or the current market value of the security charged is

not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined

credit weaknesses that jeopardise the liquidation of the debt and are characterised by the

distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

II.II. Doubtful Assets:--Doubtful Assets:--

An asset would be classified as doubtful if it remained in the sub-standard category for 12

months.

III. Loss Assets:--Loss Assets:--

A loss asset is one which considered uncollectible and of such little value that its continuance

as a bankable asset is not warranted- although there may be some salvage or recovery value.

Also, these assets would have been identified as ‘loss assets’ by the bank or internal or

external auditors or the RBI inspection but the amount would not have been written-off

wholly.

IMPACT of NPAIMPACT of NPA

1.1. Profitability:Profitability:

NPA means booking of money in terms of bad asset, which occurred due to wrong

choice of client. Because of the money getting blocked the prodigality of bank decreases not

only by the amount of NPA but NPA lead to opportunity cost also as that much of profit

invested in some return earning project/asset. So NPA doesn’t affect current profit but also

future stream of profit, which may lead to loss of some long-term beneficial opportunity.

Another impact of reduction in profitability is low ROI (return on investment), which

adversely affect current earning of bank.

2.2. Liquidity:Liquidity:

Money is getting blocked, decreased profit lead to lack of enough cash at hand which

lead to borrowing money for shot\rtes period of time which lead to additional cost to the

company. Difficulty in operating the functions of bank is another cause of NPA due to lack of

money. Routine payments and dues.

3.3. Involvement of management:Involvement of management:

Time and efforts of management is another indirect cost which bank has to bear due

to NPA. Time and efforts of management in handling and managing NPA would have

diverted to some fruitful activities, which would have given good returns. Now day’s banks

have special employees to deal and handle NPAs, which is additional cost to the bank.

4.4. Credit loss:Credit loss:

Bank is facing problem of NPA then it adversely affect the value of bank in terms of

market credit. It will lose it’s goodwill and brand image and credit which have negative

impact to the people who are putting their money in the banks.

REASONS FOR NPAREASONS FOR NPA

Reasons can be divided in to two broad categories:

A] Internal Factor B] External Factor

Internal Factors:Internal Factors:

Internal Factors are those, which are internal to the bank and are controllable by banks

Poor lending decision:

Non-Compliance to lending norms:

Lack of post credit supervision:

Failure to appreciate good payers:

Excessive overdraft lending:

Non – Transparent accounting policy:

External Factors:External Factors:

External factors are those, which are external to banks they are not controllable by banks.

Socio political pressure

Chang in industry environment

Endangers macroeconomic disturbances

Natural calamities

Industrial sickness

Diversion of funds and willful defaults

Time/ cost overrun in project implementation

Labour problems of borrowed firm

Business failure

Inefficient management

Obsolete technology

Product obsolete Preventive Measurement for NPA

PRECAUTIONARY MEASUREPRECAUTIONARY MEASURE

Early Recognition of the Problem: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.

Identifying Borrowers with Genuine Intent: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. Base 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

proven expertise and track record of preparing techno-economic study of the project of the

borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or sudden

requirement of additional fund may be entertained 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.

Multiple Financing:Multiple Financing:

A. 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.

B. 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.

C. In a forum of lenders, the priority of each lender will be different. While one set of

lenders may be willing to wait for a longer time to recover its dues, another lender

may have a much shorter timeframe in mind. So it is possible that the letter categories

of lenders may be willing to exit, even a t a cost – by a discounted settlement of the

exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into

account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to

provide a timely and transparent system for restructuring of the corporate debt of Rs.

20 crore and above with the banks and FIs on a voluntary basis and outside the legal

framework. Under this system, banks may greatly benefit in terms of restructuring of

large standard accounts (potential NPAs) and viable sub-standard accounts with

consortium/multiple banking arrangements.

Timeliness and Adequacy of response: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.

Focus on Cash Flows: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.

Management Effectiveness: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 a borrowing unit’s

fortunes. A bank may commit additional finance to a unit only after basic viability of the

enterprise also in the context of quality of management is examined and confirmed. Where

the default is due to deeper malady, viability study or investigative audit should be done – it

will be useful to have consultant appointed as early 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.

CH ---------------2

SIGNIFICANCE OF THE STUDY

The main aim behind making this report is to know how Banks are operating their

business and how NPAs play its role to the operations of the Public Sector Banks & Private

Sector Banks.

The present study also focuses on the existing system in India to solve the problem of

NPAs and comparative analysis to understand which bank is playing what role with

concerned to NPAs. Thus, the study would help the decision makers to understand the

financial performance and growth of Banks as compared to the NPAs.

The aim of the report is to know that there is difference between NPA of different Public

sector bank & different Private sector bank and reasons behind that. We also can get the idea

of trends of NPA in banks and to know factors behind that.

Major topics we have attempted to cover in this project are

Loans, Advances and Deposit of Banks

Comparison of Loans, Advances and Deposit of Banks

NPA Ratio of Public sector bank

NPA Ratio of Private sector bank

Difference between both sectors

NPA Trend

This study has increased the possibility of getting the dues back from the NPA

accounts.

This study can help the banks in identifying the reasons behind the NPAs.

This study also differentiated between the willful and the situational defaulters so

the bank can take better decisions regarding the recovery of the loans.

Bank can compare its NPA & its Assets with its competitive banks

This study will be useful to those people who want to join the banking sector.

This study will also help other students who will undergo training in banking

sector.

LITERATURE REVIEW

A literature review discusses publishes information in a particular subject area, and

sometimes information in a particular subject area within a certain a certain time period.

Procedure for reviewing the literature

Search for existing literature

Review the literature selected

Develop a theoretical framework

Develop a conceptual framework

For the study of NPA Researcher has evaluated published books, Journals and

periodicals. In Punjab of Journals of Business studies (April – 2005) total three articles

have been published regarding the banking area. Usha Arrora and Recha verma have

written an articles of banking sector reforms on performances evaluation in public sector

bank in India. After the introduction of reformer prudential norms have been introduced.

This article indicate the performs evaluation public sector bank in post reforms period of

the bases of four parameters data of financial, operational, productivity and profitability

second articles has been written of new revolution Indian banking industry by Pooja

Manhotra and Balvinar singh. The main focuses of this article was various types of

electronic devices provides by the bank Dr. Anju sinsla and R.S. Arrora has written an

article on comparative studies kneda’s banks and Indian’s bank.

In addition to this Indian Journal of comparative (June 2003) Dr. S.G. Sharma and

S.C. Bradia has written an article on meaning of NPA in banks Total 27 banks of 3

groups have been analysis by the researcher. Prof. Miss Mihira vashwani has written

article on produces in banks.

CH------------------------------------3

RESEARCH METHODOLOGY

What is RESEARCH?

Most common meaning of research is to a search for knowledge. One can also define

research as a scientific and systematic search for pertinent information on a specific topic. In

fact, research is an art of scientific investigation it means “Systematize effort to gain new

knowledge.

“Research means an original contribution to the existing stock of knowledge.”

Research is an organized, systematic, data based, critical, scientific inquiry or

investigation into a specific problem. As the term ‘Research’ refers to the Systematic method

consisting of enunciating the problem, formulating a hypothesis, collecting the factor of data

analysis the facts and researching certain conclusions either in the foam of solutions towards

the concerned problem or in certain generalization for some theoretical formulation.

RESEARCH METHODOLOGY

The research methodology means the way in which we would complete our

prospected task. Before undertaking any task it becomes very essential for any one to

determine the problem of study. I have adopted the following procedure in completing my

report study.

1. Research Problem

2. Objective of the Study

3. Data Collection and Period of Research

4. Research Design

5. Assumption and Hypotheses

6. Tools and Technique used

7. Limitation of the study

8. Future Scope of the study

1. Research Problem

Research Problem refers to the some difficulty which researcher experiences in the

context to which some solution is require. But in formulation of Research Problem there

should be some of the points to be taken into account.

Basically there should be some objective behind Research if there is nothing there is no problem. There must be an individual or group which has some problem.There must be alternative for obtaining the objective that you want to achieve.There must be doubt in mind.

“Non Performing Assts the great challenge to the Public Sector Banks & Private Sector

Banks” is the main problem of the bank. I want to know that there is any difference between

NPA of Public sector bank & Private sector bank. Reasons behind that and symptoms which

can be used to reduce the NPA.

2. Objective of the Study

Primary objective:

The primary objective of the making report is:

To know why NPAs are the great challenge to the Banks

Secondary objectives:

The secondary objectives of preparing this report are:

To understand what is Non Performing Assets and what are the underlying reasons

for the emergence of the NPAs.

To understand the impacts of NPAs on the operations of the Private Sector Banks

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 the

NPAs?

To evaluate the comparative ratios of the Public Sector Banks & Private sector bank

with concerned to the NPAs.

How to reduce NPA?

3. Data Collection and Period of Research

Data collection

The data source can be primary or secondary. The primary data are those data which

are used for the first time in the study. However such data take place much time and are also

expensive. Where as the secondary data are those data which are already available in the

market. These data are easy to search and are not expensive for my study I have utilized

totally the secondary data.

All the secondary data has been collected from the different websites. The required

information are also collected from the respective bulletins of RBI, website of the

stockharts.com is also adhered.

The data of the bank has been from annual reports of the company published in the

various web sites. The data collections from these sources have been used and complied with

due care as per the requirement of the study. This is the secondary data collection method, so,

there is no requirement of the making questionnaire.

Secondary Data

Company manuals

Annual reports of the bank

www.sbi.com

www.pnb.com

www.denabank.com

www.axisbank.com

www.yesbank.com

www.kotakmahondrabank.com

www.finance.indiamart.com

www.highbeam.com

www.rbi.com

Analysing the data

The primary data would not be useful until and unless they are well 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 turned them in the useful tabulations. So, that can

become useful in my report study.

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 towards its objectives. The interpretation of the data is

required so that the others can understand the crux of the study in more simple way without

any problem so I have added the chapter of analysis that would explain others to understand

my study in simpler way.

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 the concerned authorities.

Period of Research

4. 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 the large

number of data of the Public Sector Banks & Private Sector Banks.

A research design is pattern or an outline of a research project’s working. It is a

Statement of only the essential elements of a study, those that provide the basic guidelines for

the details of the project. It comprises a series of prior decisions that taken together provide a

master plan for executing a research project. A research design serves as a bridge between

what has been established i.e. the research objective and what is to be done, in conduct of the

study to realize those objectives.

If there were no research design, the research would have only foggy notion about

what is to be done. There are numerous specific designs, which can be classified into three

broad categories. Research design is the conceptual structure within which the research

would be conducted. In fact, it is the general blueprint for the collection, measurement and

analysis of data.

Exploratory Study

An exploratory study is undertaken when not much is known about situation at hand,

or no information is available on how many similar problems or research issues have been

solved in the past. In such cases, extensive preliminary work needs to be done to gain

familiarity with the phenomena in the situation, and understand what is occurring, before we

develop a model and set up a rigorous design for comprehensive investigation.

Exploratory studies are also necessary when some facts are known, but more

information is needed for developing a viable theoretical framework. In sum, exploratory

studies are important for boating good grasp of the phenomena of interest and advancing

knowledge through subsequently theory building and by hypothesis testing. The research

design in the project is exploratory design. The data are analyzed and based on the data

suggestions are given.

This research is based on the secondary data. That’s why its area of the study is data

which is taken from the balance sheet of the bank. And it is collect from the company’s

financial overview, balance sheet, and the profit and loss account, annual report.

5. Assumption and Hypotheses

Hypothesis

Vary often it is required to make decision about population on the basis of sample

information such as decisions are called statistical decisions. In attempting to reach decisions

it is often necessary to make assumptions about the population. Such assumptions which are

not necessarily true are called statistical hypothesis.

There are two types of hypothesis.

i. Null hypothesis

ii. Alternate Hypothesis

1. Null Hypothesis:-(Ho)

The null hypothesis assets that there is no difference between that there is no difference

between the sample statistic and population parameter and whether difference is there, is

attributable to sampling errors, null hypothesis is generally donated by Ho.

2. Alternate Hypothesis:-(H1)

Any hypothesis which is complementary to the Null Hypothesis and it is denoted by

H1.The two Hypothesis are constructed so that if one is true, the other is falls and if one is

false, the other is true.

To study and examine the objectives, the following hypothesis has been formulated;

1. There is no difference between NPA of Public Sector Banks

2. There is no difference between NPA Private Sector Banks

3. There is no difference between NPA of Public Sector Banks & Private Sector Banks

6. Tools and Technique used

ANOVA TEST

Ms- Excel

Ms-Word

7. Limitation 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 Public

Sector Banks & Private Sector Banks so the better evaluations of the performance of

the banks are not possible.

Since my study is based on the secondary data, the practical operations as related to

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 all

the banks of the Indian banking sector.

8. Future Scope of the study

I have covered five Public Sector Bank & Five Private Sector Bank of India . Specially

DENA Bank. SBI, BOB,UBI, PNB as Public Sector Bank &ICICI, AXIS, YES Bank,

KOTAK, HDFC BANK as Private Sector Bank.

I have covered data financial year ending 2009 covering NPA , loans ,advances & investment

at all. Npa effect on the profitability of Bank is the main aim of the project.

Thus NPA has the potential to directly affect the economy of the country. Many big nations

are suffering from this disease of high NPAs. Our country also now having a large portion of

bank credit locked in NPAs and hence NPA is receiving greater importance. That’s the chief

reason why I selected it as a subject for my summer project.

CH---------------------4

ANALYSIS & INTERPRETATION

For the purpose of analysis and comparison between private sector and public sector

banks, we take five-five banks in both sectors to compare the non performing assets of banks.

For better understanding we further get idea gross NPA and net NPA in percentage as well as

in rupees, deposit – investment – advances.

Deposit – Investment – Advances is the first in the analysis because due to these we

can understand the where the bank stands in the competitive market. As at end of March

2009, in private sector ICICI Bank is the highest deposit-investment-advances figures in

rupees Crore, second is HDFC Bank and YES Bank has least figures.

In public sector banks STATE BANK OF INDIA has highest deposit-investment-advances

but when we look at graph first three means Bank of Baroda and Bank of India are almost the

similar in numbers and Dena Bank is stands for last in public sector bank. When we compare

the private sector banks with public sector banks among these banks, we can understand the

more number of people prefer to choose public sector banks for deposit-investment.

But when we compare the private sector bank ICICI Bank with the public sector

banks ICICI Bank is more deposit-investment figures and first in the all banks.

PUBLIC SECTOR BANK

DEPOSIT-INVESTMENT-ADVANCES (RS.CRORE), year 2008-09.

BANK DEPOSIT INVESTMENT ADVANCES

SBI 742073 275953 542503

BOB 192396 52445 143985

DENA 43050 12473 28877

UBI 138702 42996 96534

PNB 209760 63385 154702

SBI BOB DENA UBI PNB0

100000

200000

300000

400000

500000

600000

700000

800000PUBLIC SECTOR BANK

DepositInvestmentAdvances

Bank

Rs Ii

n Cr

ore

Here, from these chart we can find out that the highest NPA, advances, deposit is of SBI.

PUBLIC SECTOR BANK (2008-09)

BANK ADVANCES GROS

S NPA

GROSS

NPA%

NET

NPA

NET

NPA%

SBI 542503 15714 2.86 9677 1.79

BOB 143985 1842 1.27 451 0.31

DENA 28877 620. 2.13 313 1.09

UBI 96534 1923 1.96 325 0.34

PNB 154702 2506 1.60 263 0.17

SBI BOB DENA UBI PNB0

0.5

1

1.5

2

2.5

3

3.5

Gross NPA %Net NPA %

PRIVATE SECTOR BANK

BANK DEPOSIT INVESTMENT ADVANCES

KOTAK 15644 9110 16625

AXIS 117374 46330 81556

HDFC 142811 58817 98883

ICICI 218347 103058 218310

YES 16169 7117 12403

KOTAK AXIS HDFC ICICI YES0

50000

100000

150000

200000

250000

DepositInvestmentAdvances

Here, from these chart we can find out that the highest NPA, advances, deposit is of ICICI.

PRIVATE SECTOR BANK (2008-09)

BANK ADVANCES GROSS GROSS NET NET NPA

NPA NPA % NPA %

KOTAK 16625 689 4.31 396 2.39

AXIS 81556 897 0.96 327 0.35

HDFC 98883 1988 1.98 627 0.6

ICICI 218310 9649 4.32 4553 2.09

YES 12403 213 1.71 174 0.85

KOTAK AXIS HDFC ICICI YES0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

Gross NPA Net NPA

STATE BANK OF INDIA & ICICI BANK

BANK DEPOSIT INVESTMEN

T

ADVANCES GROSS NPA

SBI 742073 275953 542503 15714

ICICI 218347 103058 218310 9649

SBI ICICI0

100000

200000

300000

400000

500000

600000

700000

800000

DepositInvesmentAdvancesGROSS NPA

From this we have c compared the ICICI Bank & SBI Bank Loans Advances .We found that

there is highest NPA of SBI than ICICI Bank.

2005-06 2006-07 2007-08 2008-090

100000

200000

300000

400000

500000

600000

9628 9998 12837

15714

261801

337337

416768

542503

SBI

NPAAdvances

2005-06 2006-07 2007-08 2008-090

20000

40000

60000

80000

100000

120000

140000

160000

2390 2092 1981 1843

59912

83621

106701

143986

BOB

NPAAdvances

2005-06 2006-07 2007-08 2008-090

5000

10000

15000

20000

25000

30000

35000

949 744 573 621

14231

18303

23023

28877

DENA

NPAAdvances

2005-06 2006-07 2007-08 2008-090

20000

40000

60000

80000

100000

120000

2098 1873 1657 1923

5337962386

74266

96534

UBI

NPAAdvances

2005-06 2006-07 2007-08 2008-090

20000

40000

60000

80000

100000

120000

140000

160000

180000

3138 3391 3319 2507

74627

96596

119501

154702

PNB

NPAAdvances

2005-06 2006-07 2007-08 2008-090

2000

4000

6000

8000

10000

12000

14000

16000

18000

38 282 453 689

6348

10924

1555216625

KOTAK

NPAAdvances

2005-06 2006-07 2007-08 2008-090

10000

20000

30000

40000

50000

60000

70000

80000

90000

378 419 495 898

22314

36876

59661

81557

AXIS

NPAAdvances

2005-06 2006-07 2007-08 2008-090

20000

40000

60000

80000

100000

120000

509 658 907 1988

35061

46945

63427

98883

HDFC

NPAAdvances

2005-06 2006-07 2007-08 2008-090

50000

100000

150000

200000

250000

2223 4126 7580 9649

146163

195866

225616 218311

ICICI

NPAAdvances

2005-06 2006-07 2007-08 2008-090

2000

4000

6000

8000

10000

12000

14000

0 0 11 84.93

2407

6290

9430

12403

YES

NPAAdvances

COMPARISION BETWEEN STATE BANK OF INDIA &ICICI BANK

NPA OF LAST FOUR YEARS

2008-09 2007-08 2006-07 2005-060

2000400060008000

1000012000140001600018000 SBI

SBI

2008-09 2007-08 2006-07 2005-060

2000

4000

6000

8000

10000

12000

ICICI

ICICI

BANK 2008-09 2007-08 2006-07 2005-06

SBI 15714 12837 9998 9628

BANK 2008-09 2007-08 2006-07 2005-06

ICICI 9649 7579 4126 2222

2008-09 2007-08 2006-07 2005-060

2000

4000

6000

8000

10000

12000

14000

16000

18000

SBIICICI

BANK 2008-09 2007-08 2006-07 2005-06

SBI 15714 12837 9998 9628

ICICI 9649 7579 4126 2222

ANOVA TEST

NPA VALUE

YEAR PUBLIC SECTOR BANKS PRIVATE SECTOR BANKS OVERALL TREND

SBI BOB DENA UBI PNB KOTAK AXIS HDFC ICICI YES

2005-06 9628 2390 949 2098 3138 38 378 509 2223 0 2135.1

2006-07 9998 2092 744 1873 3391 282 419 658 4126 0 2358.3

2007-08 12837 1981 573 1657 3319 453 495 907 7580 11 2981.3

2008-09 15714 1843 621 1923 2507 689 898 1988 9649 85 3591.7

AVERAGE

12044.25

2076.5

721.75

1887.75

3088.75

365.5 547.5

1015.5

5894.5

24

Public sector bank

Anova: Single

Factor

           

             

SUMMARY            

Groups Count Sum Average Varianc

e

   

Column 1 4 48177 12044.25 8040307    

Column 2 4 8306 2076.5 54055    

Column 3 4 2887 721.75 28138.2

5

   

Column 4 4 7551 1887.75 32970.2

5

   

Column 5 4 12355 3088.75 161742.

9

   

             

             

ANOVA            

Source of Variation SS Df MS F P-value F crit

Between Groups 337768631.2 4 8444215

8

50.7634

9

1.53E-

08

3.05556

8

Within Groups 24951640 15 1663443      

             

Total 362720271.2 19        

Private sector bank

Anova: Single

Factor

           

             

SUMMARY            

Groups Count Sum Average Variance    

Column 1 4 1462 365.5 75512.3

3

   

Column 2 4 2190 547.5 56949.6

7

   

Column 3 4 4062 1015.5 447292.

3

   

Column 4 4 23578 5894.5 1118156

2

   

Column 5 4 96 24 1680.66

7

   

             

             

ANOVA            

Source of

Variation

SS df MS F P-value F crit

Between Groups 95580844.8 4 2389521

1

10.1569

4

0.00034

9

3.05556

8

Within Groups 35288990 15 2352599      

             

Total 130869834.

8

19        

Public & private sector bank

Anova: Single

Factor

           

             

SUMMARY            

Groups Count Sum Average Variance    

Column 1 4 48177 12044.25 8040307    

Column 2 4 8306 2076.5 54055    

Column 3 4 2887 721.75 28138.25    

Column 4 4 7551 1887.75 32970.25    

Column 5 4 12355 3088.75 161742.9    

Column 6 4 1462 365.5 75512.33    

Column 7 4 2190 547.5 56949.67    

Column 8 4 4062 1015.5 447292.3    

Column 9 4 23578 5894.5 1118156

2

   

Column 10 4 96 24 1680.667    

             

             

ANOVA            

Source of

Variation

SS df MS F P-value F crit

Between Groups 490680989.6 9 5452011 27.15117 4.77E- 2.21069

0 12 7

Within Groups 60240630 30 2008021      

             

Total 550921619.6 39        

CONCLUSIONIf the co-operative banks desire to stand in competition with the private sector banks

and the foreign banks, they should over a period of time, be in a position to bring down NPAs

to manageable proportion. Moreover, the government should take measures to facilitate the

efforts of the banks in the recovery of the loans, which currently takes inordinately long time.

The relevant legal provision should be appropriately amended. The fact that the NPAs are

gradually going down generates hope about the future of the banks, though we should keep in

mind another simple fact that in absolute amount, this has not happened.

The burning problem of tackling NPAs, which have been better, termed as sticky

assets, is deep rooted and has gripped the banking sector for ages. This situation in most of

the cases would not have occurred had the banker been more objective at the time of

appraising the loan proposal itself. A common mistake made by most of the bankers is that

they really too much on the technical side of the credit evaluator. Most of them feel that

today’s sophisticated analytical tools of financial statement will provide all the details

required for the decision making ignoring totally the importance of informal of non-technical

credit investigation which throws a lot of light in other areas like character capacity,

competence etc., of the borrower and promoters/partners. If a credit proposal is processed

properly and sanctioned and disbursed in time and inadequate amount and monitored right

from the beginning then this enhances the performance of assets. Such assets becoming NPA

is relatively less than another, which has been processed in haste, appraised mechanically,

delayed in sanction and disbursed in inadequate quantum.

As a part of the re-engineering exercise, banks must work out a clearly defined

working, control and reporting systems. The system of instant accountability must devolve as

all decision-making centers, whenever there is a deviation from the laid down procedures.

The NPA reduction technique of “Slippage Management” along with proper credit

appraisal and the occasional firefighting of NPA will certainly help to reduce the incidents of

NPA in the banking industry thereby improving the bank’s profitability.

At present loan is classified a non performing when the interest and installment of

principal remains overdue for a period of more than 180 days as against the international best

practice of 90 days payment delinquency with a view to moving towards international best

practices and to ensure greater transparency.

Banks need to substantially upgrade their existing Managerial Information System for

collecting data on loans, where the interest and/or installment of principal remains overdue

for a period of more than 90 days in order to crystallize NPAs on a 90 days norm. Banks

should commence making additional provisions for such loans, which would strengthen their

Balance Sheet.

In addition, it can be stated that the surest way of curtailing NPAs is to prevent their

occurrence. The tenets of this approach lie in the following:

i) Proper risk management systems should be put in place in the banks.

ii) Strong and effective credit monitoring.

iii) An open and co-operative working relationship between banks and borrowers that would

allow exchange of confidences and initiation of corrective action early. But to manage

the existing NPAs effectively, the banks must adopt a structured NPA management

policy for guidance of operating functionaries.

iv) Finally, an effective legal framework will be needed to bring recovery suits to their

logical conclusion and effect recoveries, within a reasonable time frame. Compromise

Settlements should be explored as an effective non-legal option for recovery.

FINDINGS

REASONS OF NPAs

Several factors are responsible forever increasing size of NPAs in Private sector bank.

The Indian banking industry has one of the highest percent of NPAs compared to

international levels. A few prominent reasons for assets becoming NPAs are as under:

Poor credit appraisal system. Lack of vision/fore sightedness while

sanctioning/reviewing

Or enhancing credit limits.

Lack of proper monitoring and follow up measures.

Reckless advances to achieve the budgetary targets.

Lack of sincere corporate culture. Inadequate legal provisions on foreclosure and

Bankruptcy.

Change in economic policies/environment.

Non-transparent accounting policy and poor auditing practices.

Lack of coordination between Banks/FIs.

Abolition of license raj and tough competition in the liberalized Indian economy.

Improper system of preparing the repayment schedule

System inefficiencies due to incorrect data feeding.

Communication gap between the bank and the borrower.

Poor recovery procedures in the banks.

Insufficient motivation level of staff in the banks.

Employees’ lack of knowledge about the rules and regulations of the bank.

Willful Default, fraud, misappropriation etc.

Deficiencies on the part of the banks such as negligence in credit appraisal, monitoring

and

Follow up, delay in release of limits etc.

RECOMMENDATIONS

SLIPPAGE MANAGEMENT:

Any performing assets does not turn into non-performing overnight. The “Performing

Asset” passes through a relatively longer period of 2 quarters. During this journey, every

asset gives out certain signals for warning the banker that something bad is about to happen.

Depending upon the type of credit facility and nature of business these distress signals

may look like:

Non-Payment of the very first installment in case of term loans.

Cheques drawn on the account are bouncing.

The overdue bill is lying unpaid.

Installments are irregular.

Amount paid is not fully covering the principal and interest debit.

Bank has information that party is not doing the business.

Post-sanction inspection report speaks of diversion.

Once signals start to come in, the banker is supposed to act immediately. Any

symptom unattended would lead to major complications. Steps taken at the initial stage itself

would help to keep the accounts performing. This type of constant and continuous

surveillance requires co-operation and attention from all concerned in a branch. Any one-shot

measure like “recover camps” can at best be of supplementary nature but never a permanent

solution.

ABC ANALYSIS OF THE OVERDUES:

The deposit mobilization and credit expansion takes place simultaneously. But at the

same time credit administration to keep NPAs under control has to be effective. ABC

analysis of the over dues by categorizing the overdue accounts should be done according to

the quantum of overdue whereby more attention can be paid on such chronic accounts.

Segregation of over dues should be done where the quantum of expected recovery is high and

the branch is willing.

NON LEGAL MEASURES:

Reminder System:

The cheapest mode of recovery is by sending reminders to the borrowers before the

loan installment falls due. Generally response to this arrangement particularly from honest

borrowers is encouraging. But efforts need to be strengthened in banks in sending reminders

on timely basis.

Visits to Borrowers Business Premises/ Residence:

This is a more dependable measure of recovery. Visits need to be properly planned.

Involvement of staff at all levels in the bank branch is called for. Costs involved in recovery

need to be kept to the minimum. Frequent visits are called for in case of hard-core borrowers.

Over the years, it is observed that the number and quality of visits are going down

consequently and because of this the recovery process is affected.

Rescheduling Unpaid Loan Installments:

In respect of small advances, bankers need to be sympathetic is respect of sincere and

hardworking borrowers. If such borrowers will to pay loan installments unpaid loan

installments may be rescheduled. Banker’s efforts need to be strengthened in this regard.

Loan Compromise:

This is the last resort of recovery. This should be voluntary. It calls for professional

approach in preparing the compromise proposal for which each back is expected to introduce

a scheme. Delay in taking decisions should be avoided. In addition training of operating staff

is essential to change their mindset. For effective recovery, loan compromise should be taken

upon priority basis.

Appointment of Professional Agencies for Recovery:

Banks should consider the appointment of outside professional agencies whose

services can be utilized to ascertain the whereabouts of the borrowers and enforcement of

securities. This should be done after examining the credentials of the professionals. It is also

essential to keep a constant vigil on their practices.

CREDIT RISK MANAGEMENT

This is a proactive approach to manage the credit portfolio. NPAs are the legacy of

the past and credit risk management is action in the present for the future. It is concerned

more with the quantity of the credit portfolio before default. It involves:

Selection:

Borrowers’ financial condition, profitability cash flows, industry, collateral, etc.

Limitation:

It ensures that individual or group borrowers concentrated are not very large and the

regulations or the banks themselves prescribe exposure limits.

Diversification:

It is related to limitation and is based on the age-old principle of not putting all the

eggs in one basket.

CREDIT APPRAISALS AND CREDIT AUDIT:

NPA reduction achieved by banks has been offset due to accretion of new NPAs.

Prevention of the deterioration of asset quality and timely handling of potential NPA account

assumes significance, sound credit appraisals, credit risk evaluation, centralized data base,

credit monitoring, compliance of terms of sanction, timely review of renewals, periodic

interaction with borrowers market and economic intelligence and human resources

management are equally important.

FACTORING:

Factoring means the business of collecting someone else’s debt on their behalf. A

company sells its receivables to a factor at a discount. The factor then sets out to collect the

money owed. Its profit comes when it has collected more than the discounted price that it

paid for the debts. The company that sells its debts to a factor gets a helpful boost to its cash

flow.

BIBLIOGRAPHY

Web Sites:-

www.rbi.org.in

www.google.com

Books:-

Banko 2008 & 2009 diary

Indian Financial System

Research methodology

Magazine, Journals and Annual Reports:-

The Financial Express

Annual Report of this bank (Last five years)

BIBLIOGRAPHY

Books and Magazines:

Research Methodology (C.R.Kothari), New Age International Publishers.

Indian Financial System (Bharti Phathak), Personal Education,New Delhi-2004

Financial Management (Chandra Prasanna),Tata Mc Graw Hill,New Delhi.

Annual Reports

Annual Report of Raj Bank, 2006-07 and 2007-2008.

Newspapers:

Akila, 31 march 2008.

Phulchhab,1st April 2008

Brochures and Catalogues Provided By:

Raj Bank

Internet Web-Sites:

www.google.com

www.rajco-op bank.com

The main aim of any person is the utilization money in the best manner since the India

is country were more than half of the population has problem of running the family in the

most efficient manner. However Indian people faced large number of problem till the

development of the full-fledged banking sector. The Indian banking sector came into the

developing nature mostly after the 1991 government policy. The banking sector has really

helped the Indian people to utilize the single money in the best manner as they want. People

now have started investing their money in the banks and banks also provide good returns on

the deposited amount. The people now have at the most understood that banks provide them

good security to their deposits and so excess amounts are invested in the banks.

Thus, banks have helped the people to achieve their socio economic objectives. The

banks not only accept the deposits of the people but also provide them credit facility for their

development. Indian banking sector has the nation in developing the business and service

sectors. But recently the banks are facing the problem 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 to repay back the amount drawn to the banks. The amount which is not

given back to the banks is known as the non performing assets. Many banks are facing the

problem of non performing assets which hampers the business of the banks. Due to NPAs the

income of the banks is reduced and the banks have to make the large number of the

provisions that would curtail the profit of the banks and due to that the financial performance

of the banks would not show good results

The main aim behind making this report is to know how Banks are operating their

business and how NPAs play its role to the operations of the Public Sector Banks & Private

Sector Banks.