Professional Documents
Culture Documents
EXECUTIVE SUMMARY
EXECUTIVE SUMMARY
of Indian banks before 1992,banks did not disclose the bad debts sustained by
them and provision made by them fearing that it may have an adverse. Owing to
prudential norms strengthen the banks financial position and enhance transparency
achieve the objectives of the study, and the study was conducted in Dhanalakshmi
Bank Limited., Kerala on “An analysis of NPA in commercial banks with special
reference to Dhanalakshmi Bank Limited”. The general objective of the study was
to analyze the NPA level in commercial banks. However the study was conducted
3. To examine how far the bank has been successful in reducing the NPA
level.
The major limitation of the study was the paucity of time. Even then,
maximum care has been taken to arrive at appropriate conclusion. The method
adopted for collection of data was personal interview with bank officials using
Inventory schedule as a tool for the same, and it was also sourced from the
secondary data. After collecting data from the respective sources, analysis &
interpretation of data has been made. On analyzing the data, the following
results.
Based on the findings, logical conclusions are drawn, and further, suitable
suggestions & recommendations are brought out. The entire project report is
INTRODUCTION
2.INTRODUCTION
The Indian has been liberalized and globalize during the last decade or so. It
has exposed the Indian financial sector to international competition in fairly
significant manner. To cope with the growing competition in the present scenario
the Indian banks have embarked on a massive exercise to revamp the system.
Despite the overall progress made by the financial system over the years, the
operational efficiency of the banking system has been unsatisfactory,
characterized by low profitability, high and growing NPAs and relatively low
capital base.
NPAs have turned out to be a major stumbling factor affecting the
profitability of Indian banks. Before 1992,bank did not disclose the bad debts
sustained by them and the provision made by them fearing that it may have an
adverse impact. The banks used to take income even on NPAs on accrual basis.
This helped them to disclose false profits. Owing to low levels of profitability, the
banks owned funds had to be strengthened by repeated intention of additional
capital by the government. The introduction of prudential norms to strengthen the
banks financial position and enhance transparency is considered as a milestone
measure in the financial sector reforms. These prudential norms, which relate to
income recognition, asset classification, provisioning for bad and doubtful debt
and capital adequacy serve three great purposes.
1. Income recognition norms reflect a true picture of the income and
expenditure of the bank.
2. The asset classification and provisioning norms help in assessing the quality
of the asset portfolio of the bank.
3. They also act as tool of financial discipline and compel banks to look at the
quality of loans assets and the risk attached to the lending
In India, NPAs are considered to at higher levels than most other countries,
have of late attracted the attention of public as also of international institutions.
This has gained further prominence in the wake of transparency and disclosures
measures initiated by R.B.I. during the recent years .We have also to conform to
international accounting standards, if Indian banks are to get their due place and
recognition in the global market.
The present study was undertaken in this context to analyze and understand
the impact of NPA are having on the performance of commercial banks in general
there affecting the whole financial system. The scope of this study is limited
especially to the organization selected ie. Dhanalakshmi Bank.
The general objective of the study was to analyze the NPA level in commercial
banks. However the study was conducted with the following specific objectives.
3. To examine how far the bank has been successful in reducing the NPA
level.
Sampling Technique
bank is the source of data and therefore, since he is the only one source of
Head Quarters at Thrissur, Kerala, and the necessary primary data is collected
using Inventory Schedule. Both primary and secondary data were collected &
Primary data:- were collected using Inventory schedule & also through interview,
held with the Finance Manager in presence of the other officials of Dhanalakshmi
Bank Ltd.
Secondary data:- were collected from the published annual reports of the
Dhanalakshmi Bank and other sources. Such data collected were analyzed for
some kind of a trend and its impact on the profit of the bank.
The data collected were analyzed with the help of statistical tools like frequency,
percentage and trend analysis. Tables are used to represent the consolidated data.
The was conducted in the Head Office of the Dhanalakshmi Bank limited in
Dhanalakshmi bank.
Limited.
This study will help to know the drawbacks of the present recovery
strategies.
This study will help them to think about new innovative recovery strategy.
For this purpose I have covered officials of the bank from various
department.
A casual interaction with the officials of the bank revealed that NPA is a severe
factor, which has been affected their profitability for years. Therefore the problem
strategy and to come out with a set of recommendation which will help them to
effective recovery of borrowings. Therefore the problem chosen for the study of
Bank Limited”.
2.6 LIMITATIONS OF THE STUDY
The major limitation of the study was the paucity of time. Even then, maximum
care has been taken to arrive at appropriate conclusion. Following are the limitations
of the study:
2. For the purpose of collecting vital information, Finance Manager of the bank
is only contacted & interviewed. Since he is an individual, his biases may have
3. Though the subject matter pertains to commercial banks, only one scheduled
bank. i.e. Dhanalakshmi bank ltd. is considered for this study. Other commercial
banks, as also the other scheduled banks are outside the purview of this study.
study.
India, to examine the structure and functioning of the existing financial systems of
India and suggest financial reforms. The report of the committee was tabled in the
While the most of the recommendations made by the committee in the 1 phase
manner, some of them are yet to be considered for the same. These measures
implemented so far have revolutionized the structure of the banking industry and
its operations.
Recommendations
basis of the health of the loans assets and the record of adherence to repayment of
installments and interest on due dates. The committee also recommended that the
the basis of classification of such assets based on the age of irregularity, security
cover available etc. The RBI accepted the recommendations of the committee with
regard to introduction of norms for income recognition and asset classification and
The asset of a bank are cash and balances with RBI, balances with banks and
money at call and short notice, investment in government and other securities,
advances (including loans and advances, bill purchased, discounts and other credit
for the bank but they incur various inherent costs like a) Cost of deposit b) Cost of
A cash credit / over draft account will have to be treated as NPA if account
b. The balance outstanding is within the limit / drawing / drawing power but
there is no credit in the account continuously for six months as on the balance
sheet date.
c. There is credit but such credit is not enough to cover the interest debited
programs: -
180 days.
Note: When the prudential norms were introduced in 1992, the concept of ‘past
due’ was incorporated and it was classified that an amount should be classified as
past due when it remains outstanding for 30 days beyond the due date. However
dispense with the past due concept with effect from 31st March 2001. Hence to
all account to become NPA, cut off date is September 30th of the Year under
audit.
overdue and unpaid for two quarters or more. For bills discounted, for the
unusance period and grace period should be taken to consideration for arriving at
unpaid after it has become past due for two harvest season but for a period
E. Miscellaneous accounts
Any other credit facility or account should be treated as NPA if any amount
As per RBI circular gross advance means all outstanding loans and advances
for which refinance has been received but excluding rediscounted risks and
advances written off at Head Office level. The gross NPA and net NPA are
advances including all Interest Suspense account where the bank is following the
Interest Suspense account. The following are deducted from gross NPA to arrive
at net NPA.
d. Total provisions held excluding technical write off made at Head Office and
monitoring was introduced in 1985 to 86 by RBI by way of the Head Code system
advances, quality of credit portfolio and the extend of advances causing concern
immense use to bank management for control purposes. RBI advised all
assigning each approval account with a health code (in eight categories) indicating
its quality.
Despite all these true picture was still not displayed. In order the ensure
greater transparency in the borrowal account and to reflect actual health quality of
compressing the health V code into four broad groups, taking into account the
degree of well defined credit weakness and the extend of dependence on security
Standard asset: Standard asset is one, which does not disclose any problems and
does not carry more than normal risk attached to the business.
Sub standard assets: Sub standard asset is one, which is a non-performing asset
assets for a period exceeding 18 months. A loan classified as doubtful has all the
account in full, on the basis of currently known facts, conditions and values,
Loss assets: Loss assets is one, where loss has been identified by the banks or
internal or external auditors or RBI inspecting official but the amount has not been
The RBI has advised banks to adopt 90 days norm instead of 180 days for
classification of assets as in impaired one with effect from MARCH 2004 and to
start making additional provisions for such asserts from March 2002 to absorb the
impact due to reduction of NPA period. The accounts which may turn NPA with
The classification of assets into above categories should be done taking into
account the degree of well-defined credit weakness and the extend of dependence
high value accounts. The bank may fix a minimum cut off point to decide what
would constitute a high value account depending upon their respective business
levels. The cut off point will be valid for the entire accounting year.
Banks should not classify an advance as NPA merely due to the existence of some
drawing power base don the latest available stock statement, balance outstanding
exceeding the limits temporarily, non submission of stock statements and non
becomes a problems credit and not others. Therefore, all the facilities granted by
a bank to a borrower will have to be treated as NPA and not the particular facility
record of recovery of the individual member banks and other aspects having a
borrower under consortium lending arrangements are pooled with one bank and /
or where the banks receiving remittances is not parting with the share of other
member banks, the account will be treated as not serviced in the books of the
other member banks and therefore, be treated as NPA. The banks particularly in
the consortium should, therefore, arrange to get their share of recovery transferred
from the lead bank or get an express consent from the lead bank for the transfer of
books.
serious credit impairment and such assets should be straight away classified as
reckoned as significant when realizable value of the security is less than 50% of
the value assessed by the bank or accepted by the RBI at the time of last
inspection, as the case may be. Such NPAs may be straight away classified under
assets.
valuers / RBI is less than 10% of the outstanding in the borrowal accounts, the
existence of security should be ignored and the asset should be straight away
classified as loss asset. It may be either written off or fully provided for by the
bank.
to substandard shall not be made due to subsequent recoveries unless the account
is regularized and comes out of the NPA status. In other words, the date on which
receipt for NPA accounts. For performing assets, income can be recognized on
the basis of receipts, accrual or both. Due to the implementation of the prudential
Provisioning
There is time lag between an account becoming doubtful for recovery, the
realization of security and erosion over a period of time in its value. So RBI
directive now requires the banks to make provisions in their balance sheet for all
The entire assets should be written off if the assets are permitting to remain
in the books for any reason, 100% of the outstanding should be provided for.
Doubtful assets:
a. 100 percent of the extend to which the advance is not covered by realizable
value of the security to which the banks has a valid recourse and the realizable
b. In regard to the secured portion, provision may be made on the following basis,
at the rate ranging from 20% to 50% of the secured portion depending upon the
Table 3.1
Period for which the advance has been considered as doubtful and provision
considered as doubtful
1- 3 Year 30
doubtful assets effective from March 31st 2001 has to be made in phases as under.
the reduction in the transition period from sub standard to doubtful assets from 18
to 12 months over a four year period commencing from the year ending March
making any allowance for DICGC / ECGC guarantee cover and securities
available.
Standard assets
a. From the year ending 31-03-2000, the banks should make a general
basis.
b. The provisions on standard assets should not be reckoned for arriving at net
NPAs.
c. The provision towards standard assets need not be netted from gross
under ‘other liabilities and provisions – others’ in schedule five of the balance
sheet.
For arriving at the provision amount, the following matters may be kept in
mind.
a. For finding the secured portion only the tangible security (both primary and
collateral) is considered.
to the uncollected INTEREST account. This amount has to be reduced from the
outstanding amount.
global economy. Many are still languishing unable to get released from the old
set-up, while a few progressive corporate are making a niche for themselves in the
global context.
During this decade the reforms have covered almost every segment of the
financial sector. In particular, it is the banking sector, which experienced major
reforms. The reforms have taken the Indian banking sector far away from the days
of nationalization. Increase in the number of banks due to the entry of new private
and foreign banks; increase in the transparency of the banks' balance sheets
through the introduction of prudential norms and norms of disclosure; increase in
the role of the market forces due to the deregulated interest rates, together with
rapid computerisation and application of the benefits of information technology to
banking operations have all significantly affected the operational environment of
the Indian banking sector.
As banking in the country was deregulated and international standards came
to be accepted and applied, banks had to unlearn their traditional operational
methods of directed credit, directed investments and fixed interest rates, all of
which had led to deterioration in the quality of loan portfolios, inadequacy of
capital and the erosion of profitability. Banks have now an entirely different
environment under which to operate, to innovate and thrive in a highly
competitive market and their success depended on their ability to act and adopt to
market changes. These called for new strategies, different from those that related
to regulated banking in a captive environment
In the background of these complex changes when the problem of NPA was
belatedly recognised for the first time at its peak velocity during 1992-93, there
was resultant chaos and confusion. As the problem in large magnitude erupted
suddenly banks were unable to analyze and make a realistic or complete
assessment of the surmounting situation. It was not realised that the root of the
problem of NPA was centered elsewhere in multiple layers, as much outside the
banking system, more particularly in the transient economy of the country, as
within. Banking is not a compartmentalized and isolated sector delinked from the
rest of the economy. As has happened elsewhere in the world, a distressed
national economy shifts a part of its negative results to the banking industry. In
short, banks are made ultimately to finance the losses incurred by constituent
industries and businesses. The unprepared ness and structural weakness of our
banking system to act to the emerging scenario and de-risk itself to the challenges
thrown by the new order, trying to switch over to globalisation were only
aggravating the crisis. Partial perceptions and hasty judgments led to a policy of
ad-hoc-ism, which characterized the approach of the authorities during
the last two-decades towards finding solutions to banking ailments and
dismantling recovery impediments. Continuous concern was expressed. Repeated
correctional efforts were executed, but positive results were evading. The problem
was defying a solution.
But why? The threat of NPA was being surveyed and summarized by RBI
and Government of India from a remote perception looking at a bird's-eye-view
on the banking industry as a whole delinked from the rest of the economy. A
bird's eye view is distinct, extensive and even sharp, but it is limited to the view
appearing at the surface or top-layer. It is a not an exhaustive or in-depth view.
Restricted merely as a top-layer view it is partial and is not even a top-to-bottom
view, where a bottom-to-top-view alone can enlighten the correct contributing
factors. Flying at a great height the bird can of-course survey a wide area, but it
perceives only a telescopic view of the roof- top and not the contents that exist
inside the several structures. A simple look at the whole provides summarised
perception. But it is not a homogeneous whole that is being perceived. RBI looks
at the banking industry's average on a macro basis, consolidating and tabulating
the data submitted by different institutions. It has collected extensive statistics
about NPA in different financial sectors like commercial banks, financial
institutions, RRBs, urban cooperatives, NBFC etc. But still it is a distant view of
one outside the system and not the felt view of a suffering participant. Individual
banks inherit different cultures and they finance diverse sectors of the economy
that do not possess identical attributes. There are distinct diversities as among the
29 public sector banks themselves, between different geographical regions and
between different types of customers using bank credit. There are three weak
nationalised banks that have been identified. But there are also correspondingly
two better performing banks like Corporation and OBC. There are also banks that
have successfully contained NPA and brought it to single digit like Syndicate
(Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so
simple to be generalised for the industry as a whole to prescribe a readymade
package of a common solution for all banks and for all times.
Similarly NPA concerns of individual Banks summarised as a whole and
expressed, as an average for the entire bank cannot convey a dependable picture.
It is being statistically stated that bank X or Y has 12% gross NPA. But if we look
down further within that Bank there are a few pockets possessing bulk segments
of NPA ranging 50% to 70% gross, which should consequently convey that there
should also be several other segments with 3 to 5% or even NIL % NPA,
averaging the bank's whole performance to 12%. Much criticism is made about
the obligation of Nationalised Banks to extend priority sector advances. But banks
have neither fared better in non-priority sector. The
The RBI sees NPAs in the Indian banking sector as a historic legacy due to
lacunae in credit recovery, largely and arising from inadequate legal provisions on
execution of the decrees awarded by the court. At the end of March 1998, about
46 per cent of NPAs were in respect of suit filed accounts (Filed by 27 public
sector and 6 private sector banks) where the recovery was as low as 4.3 per cent
and significant portion of suits have been pending for more than a decade.
The efficiency of our legal system can also assessed by the value of cases
pending in the courts of law representing about Rs. 21,825 crores. In order to
expedite disposal of high value claims of banks Debt Recovery Tribunals (DRTs)
were set up. The performance of ten DRTS currently working may also not be
3.3.2.Political interference
The Indian banking system has been extensively misused for political
reasons in the past. A large part of their bad debts are a legacy of this misuse.
The NPAs in priority sector advances of public sector banks are 46 to 49 per cent
of their overall NPAs while priority sector advances from only 30 to 32 per cent
environment.
banking arena has been almost flooded with new entrants including private banks,
foreign banks, non-banking finance companies merchant bankers, chit funds etc.
Heavy weight foreign banks with huge capital base, latest technology innovative
and globally tested products are spreading their wings and wooing away
customers from the Indian banks that are steeped in a tradition of inefficiency and
lethargy. These banks enjoy a competitive edge in providing services, which are
competitively priced and have better quality, wider range of products and
specialized services. They are technology drive and have locational advantages.
The large branch network of Indian public sector banks serves as a non-
regulatory barrier to competition. It is found that after the entry of new private
sector banks in India the market share of foreign banks in the market for deposits
suffered. This was because the new entrants were primarily competing with these
banks. In this context the recent trends in the NPA profile of the players is
interesting. The following Table shows that in the past three years the NPAs of
the public sector banks have been falling while those of private and foreign banks
have been rising. It appears that intense competition in a small segment of the
The banks are now exposed to a much greater degree of risk primarily
arising out of the potential loss on an asset or a portfolio. For this the banks have
to develop skills to identify assess and minimize the risks and enhance the returns.
If there is a mismatch between assets and liabilities the banks may be exposed to
interest rate risk, liquidity risk and foreign exchange risk, credit risk and price
risk. Narasimham Committee II has also addressed this issue bringing into focus
proactive rather than reactive. Under risk management, corporate governance has
also to be stressed to develop an effective control system. Information networking
present accurate picture of the level of risk. The income recognition norms being
debts in their books on accrual basis. Thus these financial statements did not
reflect the level of bad debts and presented a misleading rosy picture of their
detected.
Besides the above there are several factors related to the borrower, which
effective. The Group will review the operation of the CDR Scheme, identify the
operational difficulties, if any, in the smooth implementation of the scheme and
suggest measures to make the operation of the scheme more efficient.
3.5.8. Credit Information Bureau
Institutionalisation of information sharing arrangements through the newly
formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI is
considering the recommendations of the S.R.Iyer Group (Chairman of CIBIL) to
operationalise the scheme of information dissemination on defaults to the
financial system. The main recommendations of the Group include dissemination
of information relating to suit-filed accounts regardless of the amount claimed in
the suit or amount of credit granted by a credit institution as also such irregular
accounts where the borrower has given consent for disclosure. This, I hope, would
prevent those who take advantage of lack of system of information sharing
amongst lending institutions to borrow large amounts against same assets and
property, which had in no small measure contributed to the incremental NPAs of
banks
3.5.9. Proposed guidelines on willful defaults/diversion of funds
RBI is examining the recommendation of Kohli Group on willful defaulters.
It is working out a proper definition covering such classes of defaulters so that
credit denials to this group of borrowers can be made effective and criminal
prosecution can be made demonstrative against willful defaulters.
3.5.10. Corporate Governance
A Consultative Group under the chairmanship of Dr. A.S. Ganguly was set
up by the Reserve Bank to review the supervisory role of Boards of banks and
financial institutions and to obtain feedback on the functioning of the Boards vis-
à-vis compliance, transparency, disclosures, audit committees etc. and make
recommendations for making the role of Board of Directors more effective with a
view to minimizing risks and over-exposure. The Group is finalizing its
recommendations shortly and may come out with guidelines for effective control
and supervision by bank boards over credit management and NPA prevention
measures.
[Dr. Bimal Jalan, Governor, RBI, in a speech titled "Banking and Finance in
the New Millennium." delivered at 22nd Bank Economists Conference, New
Delhi, 5th February, 2001]
They have expressed a fear that the provisions could make bankers trigger
happy in seizing the assets of the defaulters.
There fear is clearly misplaced. Banks and financial institutions do
reschedule loans when they are conceived that there is great chance for a
defaulting company to service and payback its loans.
The demand to make a distinction between willful and genuine default make
no sense. In any case, the banks and financial institutions do fear the normal risk
of lending and are prepared for certain permissible percentage of loans turning
into NPAs.
Quite a few financial institution and banks have already initiated measures to
recover their dues from chronic defaulters. ICICI bank, IDBI and IFCI, for
instance, have sent notices to 22 companies, which collectively owe them Rs.
1,200 crore. In addition, IDBI has issued notices to 17 borrowers for an amount
aggregating Rs. 1,640 crore. The State Bank of India has issued notices to about
70 defaulters while others are also in the process of doing so.
According to banking sources, initially the banks and FIs would target only
units defaulting willfully as selling off of assets of going concerns will not be
difficult.
They feel that once the asset reconstruction companies get established,
seizing agencies and turnaround specialists come into being and receivers and
liquidators tone up their act, banks and Fls would be in a position to make use of
the legislation on a much bigger scale.
The big question now is: To what extent the new legislation would help in
recovering the ‘loot’? Not much, unless the banks and financial institutions make
a conscious and serious effort to change their work culture and strengthen the
regulatory framework and standards of governance. For the present state of
affairs, the Fls, and banks are equally responsible.
The standards of professional competence and governance in these
institutions are far from satisfactory. There are no proper project appraisals at the
time of granting loans, political interference and corruption are rampant, and
papering over bad loans and granting of fresh advances to defaulters is a rule
rather than an exception.
The second prerequisite for success in significantly bringing down the NPAs
with the help of new provisions would be the redesigning of the entire financial
sector matrix.
There is an urgent need to create an array of liquidators, receivers, seizing and
securitizing agencies, legal experts and industry specialists.
At present, the banks and FIs do not have the requisite expertise for taking
over the assets or managements of the defaulters or to liquidate the assets of the
defaulting companies.
It needs to be ensured that the lenders are not stuck with the assets taken
over. The accent should be on quick liquidation of the seized assets and
realization of dues within a reasonable time frame.
31st 2001, according to the Reserve Bank of India report, on trends and progress
of banking in India. The relative level in the US would be less than 2%. Given
the fact that the total capital and reserves of SCBs were around 5.23% of total
assets, one might jump to the conclusion that NPA was more than capital and
reserves. But, the net NPA amounting Rs. 32,468 crore represent less than half of
capital resources at Rs. 67,741.47 crore. This is because a good chunk of the
assets of banks comprises investment in Government securities which is fully
realizable and risk free. Further, all NPAs are not irrecoverable and banks do
have some securities to back up the NPAs. Therefore, it is clear that the Indian
banking system is basically safe; well, some banks are reportedly more
adventurous than others, like a south based private bank that was in the headlines
recently.
In any comparison between Indian and China, except perhaps in the area of
democracy, China comes out on top. Certainly, in industrialization, export
performance; in the level of discipline among the populace and adherence to law,
China should rank better. Therefore, banks in China would, one might presume,
be healthier than Indian banks. Facts portray a contrary picture. As per the
banker magazine (A sister publication of financial times of U.K), the level of NPA
to total assets I the two biggest banks in China, commercial bank of China and
bank of China were 25.01 % and 28.8% respectively in 200. As against this,
NPAs of Indian banks were 2.5% of total assets (Not advances) as on March 31 st
2001. Banks in India are thus in a much better state of health than their counter
parts in China.
In some respects, the problem of NPA in public sector banks is more acute
than private banks, but the picture is somewhat blurred. The NPA was 6.7% of
advances for public bank sector against 5.4% for private sector banks and 2.2
percent for foreign banks in 2001. However, for the older private sector banks,
that are other than those that started in the 1990s, the NPA was 7.3%, which is
higher than public sector banks. These are average figures. Looking at figures of
individual banks, some of the private and foreign banks reflect a pathetic figure as
compared to the public sector. The highest level in public sector bank was in
Dena Bank (18.29%) and four others have higher than 10%. The highest figure
among all banks was a foreign banks, Bank International Indonesia at 50.75% and
four other foreign banks have more than 20%.
The belief that, by separating the hard core NPA and selling them to a
recovery agency, the problem of NPA could be resolved has caught the
imagination of many seasoned veterans in Banking. Many expert committees
have recommended the setting up of Asset Reconstruction Company or Fund
(ARC or ARF) on the lines of the model tried out in the US and other country. It
is debatable if ARC would be a useful tool under Indian conditions.
The borrowers of the banking system could be broadly classified into
business and industrial concerns and households and individuals. Households and
individuals, including agricultural sector, contribute to around 26% of total
advances, excluding loans to food procurement agencies.
In these cases, the ARF would not be of any help as banks do succeed in
enforcing their rights against recalcitrant borrowers to a considerable extent or
recover by reducing the dues by mutual agreement.
The first Narasimham Committee which brought about revolutionary
changes in the banking and financial system in 1991 suggested the formation of
ARF “to facilitate recovery of dues from clients in respect of whom banks and
financial institutions have already taken a decision to recall the loan and proceed
with the enforcement of security”.
It was also stressed that ARF should focus on large borrowers. The total
number of suit filed against borrowers enjoying advances of Rs. 1 crore and above
from the banking system was 5013 aggregating Rs. 27988.59 crore as on March
31st 2000, according to the RBI publication. These suits are pending in various
courts to cope with the enormous number of cases before them; one estimate puts
these at a few crore cases. It is extremely doubtful if a separate ARF can expedite
matters.
In any case, these would have already been fully written of in the banks
books and the cases would be handled to the law departments of various banks.
The ARF would only act as the extended legal arm of banks; it would certainly be
inappropriate to buy these dues from banks, as the recovery would take years.
ARF or ARC might be helpful in cases of commercial borrowers who
default in payment of their dues, where banks have not written them off. In such
cases, if the borrowers are industrial companies, the cases would come under a
separate agency, Board for Industrial and Financial Reconstruction (BIFR), whose
first objective, as the name implies, is to see if the company can be rehabilitated.
This, it has become evident over the last few years, has created a problem of
“morel hazard”; the owners and managers, who were largely responsible for
making the company sick, are given fresh money for them to take further gambles
with others funds. In cases where fresh funds are required, obviously an ARF,
which cannot lend, is not the solution. The government has decaled that BIFR
would be closed and a more expeditious legal structure set up. But this could take
some time.
The main handicap under which banks suffer in recovering their dues is the
legal frame work, which some feel, is debtor friendly. Many defaulting borrowers
know that banks cannot force them to repay quickly, even if banks have security,
due to the long time taken in courts to enforce the security. To alleviate the
problems of banks, Debt Recovery Tribunals were set up for speedy enforcement
of law against defaulting borrowers, whose dues exceed Rs. 10 lakh. There are
loans given to state and central public sector units, which have failed to repay.
The operations of Debt Recovery Tribunals are such that they have not so far
made a dent in the NPA position of banks.
While on the subject, it is worth recording that even where advance is
guaranteed by central or state governments and the primary borrower is unable to
repay the guaranteeing government rarely, if ever, owners its legal obligations as
guarantor, because the bureaucrats want to ensure that the government does not
face a loss or the loss is largely reduced. The fact of the governments failing to
honor financial obligations gives rise to a curious phenomenon. A guarantor
would fail to pay, if he is either unwilling or unable to pay. The existence of bad
loans is due to many causes, such as faulty initial scrutiny by banks, defective
follow up of loans, economic slow down cheating by borrowers and the like; is
causes require a separate study for the present discussion, the RBI report sums up
succinctly “at the policy level, there is need for legislation which will make
recovery process smoother and legal action quicker”.
Creation of ARF or even Debt Recovery Tribunals appears to the mere
palliatives for chronic illness that has so far defied solution. So long as borrowers
know that the long arm of law would take years, perhaps decades, to bring them to
books, banks would be sufferers and uninformed public would tend to blame the
banks for problems over which banks have little control.
CHAPTER – IV
human history. In ancient Rome and Greece, the practice of storing precious
mettles and coins at safe places and loaning out money for public and private
purposes on interest was prevalent. In England, banking had it origin with the
London gold smiths who in the 17th century began to accept deposits from the
merchants and others for safe keeping of money and other valuables. As public
enterprise, banking made it first appearance in Italy in 1157 when the Bank of
Calcutta. Bu this bank failed in 1832. In fact, the, real beginning of the modern
commercial banking in the country was made with the establishment of the Bank
of Bengal in 1806. Later on, the Bank of Bombay and Bank of Madras was also
set up in 1840 and 1843 respectively. All these banks were presidency banks:-
In 1881, the first purely Indian bank that is Oudh commercial bank came in
to being. It was followed by the setting up of the Punjab National Bank in 1894
and Peoples bank in 1901. The Swadeshi movement of 1905 encouraged the
a. The Imperial Bank of India was nationalized and renamed as the State Bank
of India in 1995.
b. Then, 8 former state associated banks were reconstituted into 7 subsidiary
banks of the SBI which are now called the associate banks of the SBI
d. Regional Rural banks were established in 1974, which are 196 in number at
present.
Modern banks in India are joined stock banks. They are registered under the
Indian companies Act. They are classified by the RBI into two categories:-
Scheduled banks are those banks, which are included in the second schedule
of the RBI Act, 1934 and have a paid up capital and reserves not less than Rs. 5
lakhs. The operations of these banks are controlled and regulated by the Reserve
bank.
growth of industrialization, banks can also influence the direction in which these
country. It is the growth of commercial banking in the 18th and 19th centuries
following ways.
a. Capital formulation
h. Regional development
2001. NPA not only reduces the yield on advances but also reduces the
compared with Rs. 63,741 crore at the end of the previous year. The gross NPAs
for end March 2002 include an amount of Rs. 4,512 crore on account of merger.
During the same period, net NPAs increased by 9.5% to Rs. 35,546 crore from Rs.
32,461 crore at the end March 2001. For public sector banks, gross NPAs stood at
Rs. 56,507 crore as at the end of March 2002, comprising 79.7% of the sticky
across bank groups is provided in Table 4.3. The NPAs of PSBs increased
marginally during the year in spite of the substantial recoveries, whereas for
however, had substantial addition to their NPAs, reflecting the impact of merger
for scheduled commercial banks increased from 4.0% in 2000 – 2001 to 5.9% in
2001-2002. In absolute terms, the quantum of incremental gross NPAs was Rs.
Among banks groups, there was decline in incremental gross NPAs for the state
bank groups and foreign banks. New private sector banks, incremental gross
NPAs recorded a large increase from Rs. 671 crore in 2000 – 2001 to Rs. 5205
net NPAs of commercial scheduled banks, over the same period increased from
Rs. 2,389 crore to Rs. 3,084 crore which was also largely due to substantial
increase in incremental net NPAs of new private banks (Table 4.4). As percent of
increased from 1.8% to 3.0% in 2001 to 2002, incremental net NPA to total assets
A PROFILE
5.1.VISION
when banking was less known to the people. In a high literate state of Kerala, the
bank grew in strength over the years. The DLB has today 153 branches spread
over Kerala, Tamil Nadu, Karnataka, Andhra, Maharashtra, Gujarat, West Bengal
(Kolkata) and New Delhi. The bank has ambitious plans for growth in branches,
Even though started by traditional businessmen, the bank has achieved substantial
sophistication in the various banking services provided. Of the 153 branches, All
branches are classified as NRI branches, All branches are computerized and in the
process of implementing Wide Area Network, ATM's, Any Branch Banking and
and businessmen. The bank has already achieved Capital Adequacy Norms
Table 5.1
Amount in
Crores
Increase / % Increase /
Deposits of Index with
Decrease over decrease over
Year the bank year 1996-97
the previous the previous
(Rs) as base year
years figure years figure
100.00
1996-97 840.58 --- ---
108.97
1997-98 915.96 151.34 +18.0
The aggregate deposits of the bank has increased from 840.58 crore to 1639.543
crores during the period 1996-97 to 2001-02. On analyzing the trend of such
increase in the deposits over the period we can clearly see that it is increasing at a
decreasing rate. The modest growth especially during the last three years is mainly
due to a conscious decision on to shed the highest cost deposits, more particularly
from institutions. With focus on bringing down the cost of deposit, field function
areas have been constantly exhorted to step up the share of low cost of deposit.
ADVACES OF THE DHANALAKSHMI BANK LIMITED
(FROM 1992-93 TO 2001-02)
Table 5.2
Amount in Crores
Increase / % Increase /
Advance of Index with
Decrease over decrease over
Year the Bank year 1992-93
the previous the previous
(Rs) as base year
years figure years figure
1992-93 110.6 --- --- 100.00
The aggregate advances of the bank has increased from 110.06 crores to 993.51
crores during the period 1992-93 to 2001-02.The credit appraisal system was fine
tuned and effective system was put to place to ensure the quality of asset. A tenor
linked prime lending rate was introduced during the year 2001 to give a boost to
short term lending. Exposure to various sectors is strictly maintained within the
stipulated ceiling. The system and procedures were streamlined to incipient
irregularities in the asset step without delay. A substantial positive change in
credit dispensation and monitoring was initiated through a visited credit policy.
Which primarily aim at segmentation of the retail and corporate portfolios for
improved thrust in both these areas.
COST OF DEPOSIT OF DHANALAKSHMI BANK LIMITED
(FROM 97-98 TO 01-02)
Table 5.3
The cost of deposit of Dhanalakshmi Bank shown a constant decrease during the
period 1998-99 to 2001-02 except for the year 1998-99 in which there was a slight
increase of .07%.
On analyzing the trend of decrease in the cost of deposit we can see that it is
decreasing at decreasing rate. Such a decreasing trend in the cost of deposit,
achieving by systematic branch wise monitoring. Also shift in deposit portfolio of
the bank from high cost deposit to low cost deposit also has contributed to the
efforts.
NET PROFIT OF DHANALAKSHMI BANK LIMITED
(FROM 1994-95 TO 2001-02)
Table 5.4
Amount in crores
Increase / % Increase /
Index with
Net Profit of Decrease over decrease over
Year year 94-95 as
the Bank the previous the previous
base year
years figure years figure
1994-95 442 --- --- 100.00
The profitability of the bank has increased from 4.42 crores to 10.07 crores
during the period 1995-96 to 2001-02.this increase was not steady. The banks
profitability was severely affected during the years 1998-99 and 2000-01.One of
the reasons was the continuous fall in the interest and the adverse market
conditions due to which the profit n trading in investment was reduced by 3.18
crores
Voluntary Retirement Scheme (VRS) also added to the burden by an amount
of 2.48 crores. Another major contribution was the impaired loan assets, which
were written off instead of being provided for. The continuous fall in the interest
rate continued even in 2001-02, but the treasury market contributed appreciably to
the profitability.
STAFF PRODUCTIVITY OF DHANALAKSHMI BANK LIMITED
(FROM 95-96 TO 01-02)
Table 5.5
Increase / % Increase /
Productivity / Index with
Decrease over decrease over
Year Business per year 1994-95
the previous the previous
employee as base year
years figure years figure
1994-95 63.0 --- --- 100.00
The staff productivity of the banks has increased from 63 lakhs to 199.24 lakhs
over the period 1994-95 to 2001-02.The bank has recognized that up gradation of
employee skills at all levels is essential to meet competitive challenges.
Accordingly, the Dhanalakshmi bank’s staff training imparts timely training to the
employees covering areas like forex, credit, non-performing assets management,
priority sector, human resource management, automation, customer service,
marketing etc. The bank is also at times introduce staff welfare measures aimed at
increasing the motivational level of employees with a futuristic vision and to offer
professional service to clients well experienced and qualified youngsters were
recruited both from the market and the campus.
CHAPTER VI
ANALYSIS OF NPAs OF
DHANALAKSHMI BANK LMITED
A bank is an institution, which deals with money and credit. It accepts
deposits from public, makes the funds available to those who need them, and
helps in the remittances of money from one place to another. In other words, a
banks collects money from those who have it to spare or who are saving it out of
A unique function of the bank is to create credit. In fact, credit creation is the
natural outcome of the process of advancing loans as adopted by the banks. When
a bank advances a loan to its customers it does not lend cash but open an account
in the borrower’s name and credit the amount of loan to this account. Thus
Creation of such deposit is called credit creation. Which results in a net increase in
the money stock of the economy. Banks have the ability to create many times
more than their deposit and this ability of multiple credit creation depends up on
When these loans taken are not repaid so much of funds has gone out of the
financial system and the cycle of lending-repaying-re lending is broken. The bank
has to repay it’s depositors and others from whom money has been borrowed. If
the borrowers does not repay, the bank has to borrow additional capital funds to
repay the depositors and creditors. This lead to a situation where bank also
reluctant to lend fresh loans thus chocking the system. Once the credit to the
various sectors of the economy slows down, economy is badly hurt. There will be
slow down in the growth in industrial output and fall in the profit margins of the
Particular
Particulars:
Chart 6.1
ANALYSIS
The aggregate net non-performing asset of the bank is on an upward trend. But
taking on a yearly basis, not much trend could be identified out of the four years of
rate registering an increase of 14% and 18.5% respectively. But in the third year
there was a decline in the rate of increase, say, and the net non performing assets
increased only by 7%. This can be seen from the chart above.
INTEPRETATION
The movement of NPA seems to have increased at an increasing rate, even though
slight decrease is observed in the rate of growth in some years. So from data
analyzed above, it can be assumed that the bank has taken either stringent steps to
reduce the NPA or it might not have given more advances during that year.
NET ADVANCES OF DHANALAKSHMI BANK LIMITED
(FROM 1998-99 TO 2001-02)
Table-6.3
Particulars:
Chart 6.2
ANALYSIS
The advances of the bank show an upward trend through the period 1998-99 to
2001-02. This can be seen from the data regarding the advances of the bank
during this period. Net advances of the bank increased by 26.8% in the first year,
15.8% in the second year 4.8% in the third year. From this it could be seen that
such increase in net advances is increasing at a decreasing rate over the period
under study.
INTERPRETATION
from increase in the net advances. While increasing advances may be necessary for
the survival & progress of the bank itself, it should not mean increased justification
for the higher incidence of non-performing assets. If recovery were good, perhaps,
NPA could have been reduced. In other words, increased NPA can be directly
Table-6.4
Chart 6.3
ANALYSIS
To understand the real impact of non-performing assets, the chart is drawn taking
the net non-performing assts of the bank as a percentage of the net advances.
From such chart, what can be seen is that the said percentage (the net non
performing assets as percentage of net advances) was constantly increasing for the
first three years and showed a sudden decline in 1999-2000 before increasing
again.
INTERPRETATION
Even though there was a sharp increase in the advances given by the bank in the year
1999-2000, it can be seen that Net NPA decreased to a great extent in that year. From
this we can assume that bank must have taken up fruitful efforts to recover money
from the willful defaulters. On the other hand, borrowers may have become incapable
to pay back, possibly because their business did not take off as expected. In this case,
Project evaluation department may have not evaluated the prospects of the project
properly. Alternatively, the entrepreneur / the borrower may not have encashed
potential market opportunities. These aspects may have increased the NPA of the
bank. However, some stringent measures may have played a role in controlling the
Table-6.5
Provision
225.00 661.00 629.00 1070.00 3322.00 3631.00
towards NPA
Net profit during
791.00 840.00 387.00 1128.00 677.00 1007.00
the year
Chart 6.4
ANALYSIS
On analyzing profit and loss account of the bank, it could be seen that
provisions and contingencies is one herd, which has a negative impact on the net
profit of the banks, and provisions made towards non-performing assets, being
net profit and provision made towards non performing assets, a sharp increase can
be seen in the provision made towards non performing assets in the year 1999-
2000, which could be explained by the tightening of provision norms which made
it compulsory for banks to keep a provision of .25% even on their standard assets
INTERPRETATION
bank. In the present day scenario profit is not just an accounting concept of excess
of income over the expenditure, but is surely more which ensures survival and
bank,. as the profit margin depends up on the synthesis of cost and yield (by
yielding no income) reduce the profit. Here in the case of Dhanalakshmi bank
limited, the provision made towards NPA has increased at an increasing rate over
the year, which has a negative impact on the profit of the bank. So we can assume
that profit of the bank might have affected negatively because of the exorbitant
provision towards NPA. This may be because, in the event of absolute non-
Particular
From the table above it could be seen that even though there is a substantial
increase in the reductions in non-performing assets over the years, the additions are
also on the increasing at a higher rate. As a result, the net result, the recovery is
affected, showing a decline a decline in the trend which is clearly shown in the chart
below, with net recovery during the year taken as a percentage of gross non
performing assets
NET RECOVERY OFDHANALAKSHMI BANK LIMITED AS A
PERCENTAGE OF THEIR GROSS NPA
(FROM 1999-00 TO 2001-02)
Table-6.7
Particulars
Recovery as a %
--- 18.04 12.84 7.52
of gross NPAs
Chart 6.5
ANALYSIS
The net recovery during the year 1999-2000 was 18.04% of gross non performing
assets, while it was 12.84% and 7.52% in the following two years i.e., in 2000-01
and 2001-02 respectively, i.e., the net recovery is declining not only by amount
but also with respect to its contribution as a percentage of gross non performing
INTERPRETATION
The above analysis reflects that the Bank’s recovery strategy may not be
inefficient recovery strategy. While the strategy for recovery may have been good,
the bank’s recovery in-charge officials may not have taken the necessary
Herculean efforts towards the same in order to save the bank from the current
Chapter –VII
RECOVERY PROCEDURE OF DHANALAKSHMI
BANK LIMITED
NPA accounts are to be grouped and classified borrower wise and not
facility wise ie. If a borrower enjoys more than one facility and one of them
become NPA, than all facilities enjoyed by the borrower should be treated as NPA
as doubtful and loan asset without keeping them under sub-standard asset.
The bank also keeps flagging the NPA accounts to have real time
surveillance over such accounts. The TBA package available in the computer is
• Filing suits
The letter sent to the borrower should not include a general offer of discount,
reduction of interest etc. Such offers should be made only during individual
should not be permitted to be present while discussions are going on with one
borrower
It has been decided to organize recovery melas in respect of accounts, which are
either border line or identified as NPAs in certain identified centers where the
incidents of NPAs Sis on the higher side. The venue of such recovery Melas is
Branches to contact the NPA / border line borrowers personally and fix a date(s)
zonal head so as to enable to take spot decisions according to the merit of the case.
Where there is cluster of branches situated in a particular area, the borrower of the
Branches / Zonal heads should also explore the possibility of the recovery /
recovery of dues with sacrifice. The sacrifice is on the part of the bank only and
who decides whether to go in for compromise or not. It not the right of any
customer.
should ensure the recovery of dues to the maximum extend possible at minimum
expense.
Recourse to legal procedure is not only time consuming but also expensive.
Bank resorts to legal recourse for recovery of the dues as a last resort even though
other process will also be continued simultaneously for realization of the amount.
The avoidable delay on the part of the operating staff may on account of the
without making any substantial remittance towards the account shall not be relied
upon.
On the receipt of necessary approval / sanction for filing suit, branches shall
arrange to issue legal notice within five days if not already issued. If issued
During the notice period, draft plaint shall be got prepared from the
advocate.
On the expiry of the notice period given at the time of issuance of legal
notice, branches shall furnish the response of the parties along with draft plaint,
together with all security documents, title deed etc. of zonal office / legal sanction
On getting the draft plaint duly approved by the zonal office / company
office, arrangements for filing suit to be made and completed within 10 days.
CHAPTER VIII
8.1. FINDINGS
From analyzing the data collected, the various parameters like the deposits,
advances, gross NPA, Net NPAs, cost of deposits, staff productivity etc. of the
bank over a past few years, the following findings were arrived at.
• Net advances is also increasing but at decreasing rate over the period
under study.
• Provision made towards NPAs were on a sharp increase affecting the net
profit adversely.
• The net result, the recovery is affected, showing a decline in the trend.
includes: -
Defective documentation
registrar of companies.
resulting in.
Failure to detect incipient signs of sickness.
It has been proved beyond doubt that non-performing assets in banks ought
in depth appraisal focused on risk inherent in proposal and credit rating of clients
and ends with effective value addition to the bank. Appraisal and monitoring are
therefore the two most important factors in order to prevent the occurrence of
NPAs at the first instance. Some of the strategies at the preventive stage are as
follows: -
CASES.
In order to expedite disposal of high value claims of bank Debt Recovery
Tribunal were set up. The performance of ten DRT’s currently working may also
March 1997,only a sum of Rs.178 crore has been recovered. The report submitted
by the study group set up by the R.B.I. to streamline the functioning of DRT’s is
Banks may create special cells at their head offices/zonal offices to monitor
progress in regard to cases filed with/ transferred to DRT’s. Similar cells, assisted
by law officers may be created for follow up of high value suits and execution of
decrees obtained.
Recalcitrant borrowers are coming forward, especially from the areas where
With view to cleaning the balancing the balance sheet , write offs in small
NPA account of doubtful and loss categories where chances of recovery are bleak,
Regular training programme on credit and NPA management for all levels of
Tackling NPAs through non legal measures like quick review of potential
would go long way in guiding bank functionaries to effectively deal with problem
loan account.
By holding recovery camps and Lok Adalat, counseling the borrowers could
be done.
8.2.8. REHABILITATION
8.2.9. RESCHEDULEMENT
The public sector banks should use their wide network of branches and
infrastructure to deepen their lending for whole sale and retail trade, housing,
To mitigate the problem of NPAs, reduce the incremental credit deposit ratio
of banks over a period. So that the banks reduce their average credit deposit ratios
and the incremental NPAs will be zero. If by investing in safer securities though at
high rates of interest, the banks can earn sufficient net margins, then it is possible
to gradually eliminate their high NPA levels. It is possible that average yields on
loans and advances net of default provisions and service costs may not far exceed
the average yields on safer security which net yield by definition because of
INCOME
Indian banks are largely dependent on the lending and investment, while the
banks in the developed countries do not depend up on this income. 86%of income
of Indian banks is accounted by interest, U.S. banks derive only 62% of income
is only 59%, Germany 64% and Switzerland 51%. The rest of income is fee based.
Indian banks have to look for source from services and products. Non-interest
income should come from innovative products and not through higher service
According to Sir De, the winner of writers association life time achievement
award 1997, on banking research, the basic pitfalls of Indian banking systems
are:-
edge. Indian banks have to give more concentration to remove the above-
1. Effective recovery
5. Pressure on guarantors.
BIBLIOGRAPHY
a. Analysis of NPAs of commercial banks – Analyst July
2000.
b. V. Venugopal – ‘Prudential norms for banks and NBFC’s
– Revised 5th Edition.
c. Annual reports of Dhanalakshmi Bank Limited.
d. www.rbi.com
e. www.dhanbank.com
f. www.research.com (Personal website of R. Kannan)
g. Report on trend and progress of banking in India 2001-
2002 – RBI
h. Professional Banker
November 2002
September 2002
April 2002
NAME:SIBICHAN.C.J
ADDRESS:
01BUCM:2050 IV SEM
MBA
R.V.I.M
BANGA
LORE
DECLARATION
I, Sibichan .C.J., here by declare that this project work is the
outcome of my efforts and not a replica of any other report/work submitted to any
university or boards.
I also declare the same report has not been submitted to any other
University or Board for the award of any other degree or diploma.
PLACE:
SIBICHAN.C.J
DATE:
ACKNOWLEDGEMENTS
Exchanges of ideas generates a new object to work in a better way. Apart from
the ability labor and time devotion, guidance and co-operation are two pillars for
the success of a project. Whenever a person is helped or co-operated by others,
his heart is bound to pay gratitude to others.
In this chain, I am immensely thankful and convey my sincere gratitude to my
project guide,K.Sethunath. Mgr.Fin,DBL , for his enlightening guidance,
constant inspiration and keen interest shown on me during making of this
project. I deliberate my profound sense of gratitude to him.
2. INTRODUCTION
7 RECOVERYPROCEDUREOF
DHANALAKSHMI BANK LIMITED
8 FIDINGS AND SUGGESTIONS
LISTS OF TABLES
TABLE TITLE PAGE
NO.
3.1 PERIOD FOR WHICH THE ADVANCE HAS BEEN CONSIDERED AS
DOUBTFUL AND PROVISION REQUIREMENT FOR EACH PERIOD
4.5 BANK GROUP WISE INCREMENTAL RATIO OF GROSS AND NET NPA
LIST OF CHARTS
TITLE PAGE
GRAPH NO.
NO.
6.1 NET NPA FIGURES OF DHANALAKSHMI LIMITED
(FROM 1998-99 TO 2001-02)
This is to certify that the project work titled ‘AN ANALYSIS OF NPA IN
COMMERCIAL BANKS WITH SPECIAL REFERENECE TO DHANAL;AKSHMI
BANK LIMITED’ is the outcome of bonafide research work carried out personally by
Mr.SIBICHAN.C.J.
Reg.No. 01 BUCM 2050
under my supervision and guidance This has not formed a part of any degree or
diploma of any University / Institution / Board prior to this submission to Bangalore
University as a partial fulfillment of the requirements for the award of MBA degree to
him.
Place : BANGALORE
Prof.R.Krishna
Date : - 08 – ’03
An analysis of NPA
in Commercial Banks
By
Mr.SIBICHAN.C.J.
Reg.No. 01 BUCM 2050
Under the guidance of
S. REMESH
. Consultant & MBA Faculty
R.V.I.M
BANGALORE.
2001 – 2003
R.V.INSTITUTE OF MANAGEMENT
S.S.M.R.V. COLLEGE
CA – 17, 36th Cross, 26th Main, 4th ‘T’ block, Jayanagar, Bangalore - 41
IMPLICATIONS OF NARASIMHAM COMMITTEE REPORT
The Narasimhan Committee, as part of the second phase of the banking sector
reforms, has recommended a tightening of the asset classification and provisioning
norms with an objective of moving towards the international norms. It has
recommended that an asset should be classified as doubtful when the borrowers fail to
clear the interest payment in one quarter (90 days) instead of the current practice of
two quarters (180 days) and government guaranteed advances, which have turned
sticky, should be treated as NPAs.
Tightening of these norms will force banks to make additional provisioning. However,
an internal State Bank of India estimate says the impact of the tightening of the NPA
norms on its balance-sheet will be only one percentage point increase in NPAs. SBI's
current NPA level is pegged at about six per cent. SBI along with the Calcutta-based
Allahabad Bank has for the first time made the provisioning (.25 percentage points)
for their standard assets in fiscal 1998.
One significant point to note is that the banking industry traditionally shows
underestimation of NPAs as there is always a difference in perception between the
auditors and the RBI inspectors. For instance, in fiscal 1997, the industry
underestimated its NPAs to Rs 38.62 billion and underprovided to the extent of Rs
14.12 billion.
The Board for Financial Supervision of the RBI has cited the following reasons for
the lower recognition of NPAs and subsequent under-provisioning:
"Essentially arising from the wrong classification of NPAs, there was a variation in
the level of loan loss provisioning actually held by the bank and the level required to
be made as per the assessment of the RBI inspectors," the internal document said.
The worst "offender" is the public sector banking industry. Nineteen nationalised
banks along with State Bank of India and its seven associate banks have
underestimated their NPAs by Rs 30.29 billion. While the RBI estimates the PSU
banks' NPAs at Rs 469.07 billion, the actual NPAs acknowledged by these banks are
much lower at Rs 438.77 billion. The difference between the RBI estimates and actual
provisioning in PSU banks is pegged at Rs 10.74 billion in March 1997.
In percentage terms, however, nine new generation private sector banks showed the
maximum amount of ''NPA amouflaging" and under provisioning. While the RBI
estimated the NPAs of new private banks at Rs 3.28 billion, the actual figure shown
by these banks is only Rs 2.05 billion.
Similarly, the difference between the RBI estimate and the actual provisioning is Rs
968.5 million. While the RBI inspection teams put the right provisioning requirement
at Rs 1.20 billion, the new private banks made provision of only Rs 234.5 million.
In contrast, the old private sector banks underestimate their NPAs by a meagre Rs
6.52 billion. Nearly 26 old private sector banks registered NPAs to the tune of Rs
21.38 billion in March 1997 while the RBI felt the actual NPAs should have been
pegged at Rs 27.90 billion.
The difference between the RBI estimates and actual provisioning is a paltry Rs 1.61
billion. Old private sector banks provided for Rs 4.93 billion in March 1996 while the
RBI inspection teams opined the provisioning needed to be at Rs 6.55 billion.