LOVELY PROFESSIONAL

UNIVERSITY

PROJECT REPORT ON NPA

SUBMITTED BY:-

HARI MOHAN (RT 1804 A15)

RACHIT (A08)
NAVKIRAN (A13)
AAKSHI (A12)

INTRODUCTION
The accumulation of huge non-performing assets in banks has assumed great
importance. The depth of the problem of bad debts was first realized only in early
1990s. The magnitude of NPAs in banks and financial institutions is over
Rs.1,50,000 crores.

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. This raises a concern in the industry and academia
because it is generally felt that NPAs reduce the profitability of a banks, 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.

Introduction to the topic

The three letters “NPA” Strike terror in banking sector and business circle today.
NPA is short form of “Non Performing Asset”. The dreaded NPA rule says simply
this: when interest or other due to a bank remains unpaid for more than 90 days, the
entire bank loan automatically turns a non performing asset. The recovery of loan
has always been problem for banks and financial institution. To come out of these
first we need to think is it possible to avoid NPA, no can not be then left is to look
after the factor responsible for it and managing those factors.
Definitions:

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 instalment of principal has remained ‘past due’ for a specified
period of time.

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, 2004. Accordingly, with effect
from March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance
where;

 Interest and/ or instalment of principal remain overdue for a period of

more than 90 days in respect of a term loan,

 The account remains ‘out of order’ for a period of more than 90 days, in
respect of an Overdraft/Cash Credit (OD/CC),

 The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,

 Interest and/or instalment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes, and

 Any amount to be received remains overdue for a period of more than 90

days in respect of other accounts.
 As a facilitating measure for smooth transition to 90 days norm, banks have
been advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should, therefore, continue to
classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter with effect from April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.

HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial services. By
the term bank is generally understood an institution that holds a Banking Licenses.
Banking licenses are granted by financial supervision authorities and provide rights
to conduct the most fundamental banking services such as accepting deposits and
making loans. There are also financial institutions that provide certain banking
services without meeting the legal definition of a bank, a so-called Non-bank. Banks
are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is derived from German and
means bench. The terms bankrupt and "broke" are similarly derived from banca
rotta, which refers to an out of business bank, having its bench physically broken.
Moneylenders in Northern Italy originally did business in open areas, or big open
rooms, with each lender working from his own bench or table.
Typically, a bank generates profits from transaction fees on financial services or the
interest spread on resources it holds in trust for clients while paying them interest on
the asset. Development of banking industry in India followed below stated steps.

Ø Banking in India has its origin as early as the Vedic period. It is believed that
the transition from money lending to banking must have occurred even before
Manu, the great Hindu Jurist, who has devoted a section of his work to
deposits and advances and laid down rules relating to rates of interest.
Ø 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.

1. Comprises balance of expired loans, compensation and other bonds such

as National Rural Development Bonds and Capital Investment Bonds.
Annuity certificates are excluded.
2. These represent mainly non- negotiable non- interest bearing securities
issued to International Financial Institutions like International Monetary
Fund, International Bank for Reconstruction and Development and Asian
Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident Funds,
Special Deposits of Non- Government

Ø In the post-nationalization era, no new private sector banks were allowed to

be set up. However, in 1993, in recognition of the need to introduce greater
competition which could lead to higher productivity and efficiency of the
banking system,
Ø new private sector banks were allowed to be set up in the Indian banking
system. These new banks had to satisfy among others, the following
minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located in a centre
which does not have the headquarters of any other bank; and
(v) The bank will be subject to prudential norms in respect of banking
operations, accounting and other policies as laid down by the RBI. It
 will have to achieve capital adequacy of eight per cent from the very
beginning.

NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMING ASSETS) ?

Action for enforcement of security interest can be initiated only if the secured asset is
classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which has been
classified by bank or financial institution as sub –standard , doubtful or loss asset, in
accordance with the direction or guidelines relating to assets classification issued
by RBI .

An amount due under any credit facility is treated as “past due” when it is not been
paid within 30 days from the due date. Due to the improvement in the payment and
settlement system, recovery climate, up gradation of technology in the banking
system etc, it was decided to dispense with “past due “concept, with effect from
March 31, 2001. Accordingly as from that date, a Non performing asset shell be an
advance where

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

than 180 days in respect of a term loan,

ii. The account remains ‘out of order ‘ for a period of more than 180 days ,in
respect of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 180 days in case of bill
purchased or discounted.

iv. Interest and/or principal remains overdue for two harvest season but for a
period not exceeding two half years in case of an advance granted for
agricultural purpose ,and

v. Any amount to be received remains overdue for a period of more than 180
days in respect of other accounts

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt ’90 days overdue ‘norms for
identification of NPAs ,from the year ending March 31,2004,a non performing
asset shell be a loan or an advance where;
 i. Interest and/or installment of principal remain overdue for a period of
more than 90 days in respect of a term loan,

ii. The account remains ‘out of order ‘ for a period of more than 90 days
,in respect of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 90 days in case of
bill purchased or discounted.

iv. Interest and/or principal remains overdue for two harvest season but
for a period not exceeding two half years in case of an advance
granted for agricultural purpose ,and

v. Any amount to be received remains overdue for a period of more than

90 days in respect of other accounts

Out of order

An account should be treated as out of order if the outstanding balance remains

continuously in excess of 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.

FACTORS FOR RISE IN NPAs

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

 Ineffective recovery tribunal

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

 Willful Defaults

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

 Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of

the PSBs. every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank has to
make large amount of provisions in order to compensate those loans, hence
end up the fiscal with a reduced profit.

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

irregularities of rain fall the farmers are not to achieve the production level
thus they are not repaying the loans.

 Industrial sickness

Improper project handling , ineffective management , lack of adequate

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

 Lack of demand

Entrepreneurs in India could not foresee their product demand and starts
production which ultimately piles up their product thus making them unable to
pay back the money they borrow to operate these activities. The banks
recover the amount by selling of their assets, which covers a minimum label.
Thus the banks record the non recovered part as NPAs and has to make
provision for it.
 Change on Govt. policies

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

The fallout of handloom sector is continuing as most of the weavers

Co-operative societies have become defunct largely due to withdrawal of state
patronage. The rehabilitation plan worked out by the Central government to
revive the handloom sector has not yet been implemented. So the over dues
due to the handloom sectors are becoming NPAs.

 INTERNAL FACTORS :-
---------------------------------

 Defective Lending process

There are three cardinal principles of bank lending that have been followed by
the commercial banks since long.
i. Principles of safety
ii. Principle of liquidity
iii. Principles of profitability

i. Principles of safety :-

By safety it means that the borrower is in a position to repay the loan both
principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon:

1. Tangible assets
2. Success in business

Willingness to pay depends on:

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

 Inappropriate technology

Due to inappropriate technology and management information system, market

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

 Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another

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

 Banks should consider the borrowers own capital investment.

 it should collect credit information of the borrowers from_

a. From bankers.
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies.

 Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss a/c

and balance sheet.

 Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive
purpose only. Bank should analyze the profitability, viability, long term
acceptability of the project while financing.
 Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it back.
They should use good credit appraisal to decrease the NPAs.

 Managerial deficiencies

The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting
securities banks should consider the_

1. Marketability
2. Acceptability
3. Safety
4. Transferability.

The banker should follow the principle of diversification of risk based on the
famous maxim “do not keep all the eggs in one basket”; it means that the
banker should not grant advances to a few big farms only or to concentrate
them in few industries or in a few cities. If a new big customer meets
misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and
the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

 Absence of regular industrial visit

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

 Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of

the same have already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB
is increasing day by day.
'Out of Order' status:

An account should be treated as 'out of order' if the outstanding balance remains

continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the
date of Balance Sheet or credits are not enough to cover the interest debited during
the same period, these accounts should be treated as 'out of order'.

‘Overdue’:
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on
the due date fixed by the bank

Types of NPA

A] Gross NPA
B] Net NPA

A] 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
B] 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

INCOME RECOGNITION

Income recognition – Policy

 The policy of income recognition has to be objective and based on the record
of recovery. Internationally income from non-performing assets (NPA) is not
recognised on accrual basis but is booked as income only when it is actually
received. Therefore, the banks should not charge and take to income account
interest on any NPA.

 However, interest on advances against term deposits, NSCs, IVPs, KVPs and
Life policies may be taken to income account on the due date, provided
adequate margin is available in the accounts.

 Fees and commissions earned by the banks as a result of re-negotiations or

rescheduling of outstanding debts should be recognised on an accrual basis
over the period of time covered by the re-negotiated or rescheduled extension
of credit.
  If Government guaranteed advances become NPA, the interest on such
advances should not be taken to income account unless the interest has
been realised.

Reversal of income:

 If any advance, including bills purchased and discounted, becomes NPA as at

the close of any year, interest accrued and credited to income account in the
corresponding previous year, should be reversed or provided for if the same is
not realised. This will apply to Government guaranteed accounts also.

 In respect of NPAs, fees, commission and similar income that have accrued
should cease to accrue in the current period and should be reversed or
provided for with respect to past periods, if uncollected.

Leased Assets

 The net lease rentals (finance charge) on the leased asset accrued and
credited to income account before the asset became non-performing, and
remaining unrealised, should be reversed or provided for in the current
accounting period.

 The term 'net lease rentals' would mean the amount of finance charge taken
to the credit of Profit & Loss Account and would be worked out as gross lease
rentals adjusted by amount of statutory depreciation and lease equalisation
account.

 As per the 'Guidance Note on Accounting for Leases' issued by the

Council of the Institute of Chartered Accountants of India (ICAI), a separate
Lease Equalisation Account should be opened by the banks with a
 corresponding debit or credit to Lease Adjustment Account, as the case may be.
Further, Lease Equalisation Account should be transferred every year to the
Profit & Loss Account and disclosed separately as a deduction from/addition to
gross value of lease rentals shown under the head 'Gross Income'.

INDUSTRIAL BACKGROUND:

INTRODUCTION TO FINANCE:
In our present day of economy, finance is referred as the provision of money at a
time when it is required. Every enterprise big, small or medium needs finance to carry on its
operation and achieve its targets. In fact, finance is so indispensable that it is rightly said
that it is the “Life blood of an enterprise”. Without adequate finance,
an enterprise can’t think of its existence. The study of principals, practices, procedures and
problems concerning financial management of profit making organization engaged in the
fields of industry, trade and commerce is undertaken under the discipline of “BUSINESS
FINANCE”.

BUSINESS FINANCE:
The term business finance is composed of two words i.e. business and finance. Thus it is
essential to understand the meaning of these two words, which is the starting point to
develop the whole concept of finance.
MEANING OF BUSINESS:
The word business may be interpreted in one way as “State of being busy”. All human
creative activities which are related to the production and distribution of goods and services
for satisfying human needs are known as business.

MEANING OF FINANCE:
Finance is referred to as the provision of money at a time when it is required. Finance refers
to the management of flow of money through an organization. Having studied the meaning
of business and finance, we can develop the meaning of the term business finance as an
activity, which is concerned with the acquisitions of funds and distribution of profits by a
business firm. Thus business finance deals with the acquisition, application, allocation of
funds and financial control.

Current data

DEPOSIT- INVESTMENT-ADVANCES (RS.CRORE) of both sector

banks and comparison among them, year 2008-09.

Private Sector Banks:-

(Rs in crore)

Banks Deposit Investment Advances

HDFC 100769 43394 63427
ICICI 244431 111454 225616
TOTAL 345200 154848 289043

Analysis:- From the above figure we can see that the ICICI Bank deposit-
investment-advances are quite high than HDFC Bank.

Public Sector Bank

Banks Deposit Investment Advances

PNB 166457 53992 119502

Analysis :- In public sector Punjab National Bank deposit-investment-

Advances are quite high.

Comparison between ICICI BANK AND PUNJAB NATIONAL

BANK in term of deposit-investment-advances:-

Banks Deposit Investment Advances

ICICI 244437 111454 225616
PNB 166457 53992 119502

Analysis: -
Here we have compared between ICICI BANK AND PUNJAB NATIONAL BANK in
term of deposit-investment-advances. From the above figure we can see that ICICI
bank deposit and advances are quite higher than Punjab National Bank. But in case
of Investment ICICI Bank investment amount is doubled than Punjab National Bank
amount.
 Review of Literature

Sector Wise Split-up

As can be seen, the main culprits are not the priority sectors or PSU’s, but are the
large industries. If government sops to agriculture and SSI’s are excluded, the NPA
in the priority sectors is even lower.

The problem India faces is not lack of strict prudential norms but
1. The legal impediments and time consuming nature of asset disposal process.
2. ‘Postponement’ of the problem in order to report higher earnings
3. Manipulation by the debtors using political influence

A perverse effect of the slow legal process is that banks are shying away from risks
by investing a greater than required proportion of their assets in the form of
sovereign debt paper.

The government recently enacted the Asset Reconstruction Ordinance to try and
tackle the problem. It gave wide ranging powers for banks to dispose of assets and
allowed creation of Asset Reconstruction Companies for this purpose.

Based on Loan loss provisioning

The net NPAs4 have continually declined from 14.46% in 1993-94 to 6.74% in 2000-
01. RBI regulations require that banks build provisions upto at least a level of 50% of
their gross NPAs. The current provisioning is 35% of gross NPAs.

Non-performing assets of 27 banks surge 25%

Mumbai: Amidst profit-making performances, bad loans of the banks increased

significantly in the fourth quarter of the last fiscal. Net non-performing assets
(NNPAs) of 27 banks increased by 25.4% to Rs 15,218 crore during January to
March 2009, from Rs 12,138 crore recorded in the year-ago period.

Gross non-performing assets of the banks also increased 20.6% to Rs 34,503 crore.
Net profit of these banks rose 28% to Rs 7,483 crore in Jan-Mar '09. Some PSBs are
trying to recover the NNPAs as per RBI and its own recovery schemes.

For example, Oriental Bank, Indian Bank, IDBI Bank and State Bank Of Taravancore
have reduced their NNPAs during the period. IDBI Bank recovered the highest
amount of Rs 134 crore during the fourth quarter by bringing down the margin to Rs
949 crore from Rs 1083 crore.
Significant increase in NNPAs was seen in Yes Bank, South Ind Bank, State Bank of
Hyderabad and Indian Overseas Bank. The NNPAs of Yes Bank increased by
386.5% to Rs 41.16 crore in Jan-Mar '09.

The average NNPAs to net advances ratio of 27 banks increased to 0.84% in Jan-
Mar'09 from the year-ago figure of 0.75%.

A significant increase in the ratio was seen in the case of Bank of Baroda, ICICI
Bank, Indian Overseas Bank, ING Vysya and South Ind Bank.

The NPAs to net advances ratio of Bank of Baroda increased to 1.41% in Jan-Mar
'09 from 0.47% in the corresponding period of the last fiscal.

A highest decline in the ratio was registered in the case of IndusInd Bank. The ratio
of NNPAs to net advances of the bank decreased to 1.14% from 2.27%.The net non-
performing assets of IndusInd Bank decreased by 38.4% (highest among the 27
banks) to Rs 179.13 crore in Jan-Mar '09 from Rs 291.02 crore.

Romesh Sobti, MD & CEO of IndusInd Bank, said, “Despite a challenging and
deteriorating operating environment, the bank has shown improvement in all the key
parameters covering loan recovery, profitability, productivity and efficiency."

The top five banks according to the ascending order of the ratio of NNPAs to
advances in Jan-Mar '09 are ICICI Bank, Bank of Baroda, Indian Overseas Bank,
Central Bank of India and ING Vysya.

In Jan-Mar '08, the top five were IndusInd Bank, ICICI Bank, Central Bank Of India,
IDBI Bank and Oriental Bank.

Two banks, namely ICICI Bank and Central Bank of India, are common in both the
time period in the list of.

Non-Performing Assets of Indian Public, Private and Foreign Sector Banks:

An Empirical Assessment

Gourav Vallabh
Anoop Bhatia
Saurabh Mishra

This paper explores an empirical approach to the analysis of Non-Performing Assets

(NPAs) of public, private, and foreign sector banks in India. The NPAs are
considered as an important parameter to judge the performance and financial health
of banks. The level of NPAs is one of the drivers of financial stability and growth of
the banking sector. This paper aims to find the fundamental factors which impact
NPAs of banks. A model consisting of two types of factors, viz., macroeconomic
factors and bank-specific parameters, is developed and the behavior of NPAs of the
three categories of banks is observed. This model tries to extend the methodology of
widely-known Altman model. The empirical analysis assesses how macroeconomic
factors and bank-specific parameters affect NPAs of a particular category of banks.
The macroeconomic factors of the model included are GDP growth rate and excise
duty, and the bank-specific parameters are Credit Deposit Ratio (CDR), loan
exposure to priority sector, Capital Adequacy Ratio (CAR), and liquidity risk. The
results show that movement in NPAs over the years can be explained well by the
factors considered in the model for the public and private sector banks. The
collinearity between independent variables was measured by Durbin-Watson test
and VIF characteristic and it was found to be a little for public and private banks. The
factors included in the model explains 97.1% (adjusted R-square value of regression
results) of variations in NPAs of public banks and 76.9% of the same of private
banks. The other important results derived from the analysis include the finding that
banks’ exposure to priority sector lending reduces NPAs.

ICICI Bank and Oriental Bank of Commerce (OBC) best in managing NPA

ICICI Bank and Oriental Bank of Commerce (OBC) have emerged as the top performing
banks in terms of cleaning their bad assets and bringing down non-performing assets, taking
advantage of healthy GDP growth and impressive topline and bottomline performance by
borrowers.

According to Assocham Eco Pulse study, ICICI Bank was able to cut its NPA by 65.02 per
cent while OBC reduced its NPAs by 61.54 per cent as on March 31, 2006 as compared on
March 31,2005.

Although the ICICI Bank reduced its bad assets by maximum percentage points among the 13
banks tracked by the AEP study, it is OBC which has emerged as the best performer in terms
of size of net NPAs. OBC’s net NPAs were 0.5 per cent while for the ICICI Bank the figure
was 0.71 per cent. The Indian Overseas Bank, Corporation Bank, UTI Bank and Bank of
Baroda were the next best performers in cutting their net NPAs by 0.65 per cent, 0.64 per
cent, 0.75 per cent and 0.87 per cent respectively.

Most of the commercial banks have substantially reduced their non-performing assets (NPAs)
ranging between 29 per cent and 65 per cent, as they registered a handsome growth in their
retail advances in the fourth quarter of fiscal 2005-06. Riding on the above 8 per cent growth
of economy, the NPAs of the scheduled commercial banks went down by 44 per cent on an
aggregate.

Other major Banks with significant reduction in their NPAs are Indian Overseas Bank (49 per
cent), Corporation Bank (43 per cent), Dena Bank (42 per cent), Bank of India (48 per cent),
Bank of Baroda, Union Bank, Canara Bank and IDBI Bank (40 per cent), UTI (30 per cent)
and SBI (29 per cent). Hence, there is less drag on the Balance Sheet because of reduction in
the NPAs.

Non-Performing Assets in Indian Banks

In liberalizing economy banking and financial sector get high priority. Indian banking
sector of having a serious problem due non performing. The financial reforms have
helped largely to clean NPA was around Rs. 52,000 crores in the year 2004. The
earning capacity and profitability of the bank are highly affected due to this

NPA is defined as an advance for which interest or repayment of principal or both

remain out standing for a period of more than two quarters.

The level of NPA act as an indicator showing the bankers credit risks and efficiency
of allocation of resource.

Reasons:

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

(1) Over hang component

(2) Incremental component

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

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

terms of credit etc.

Asset Classification :

The RBI has issued guidelines to banks for classification of assets into four
categories.

1. Standard assets:
These are loans which do not have any problem are less risk.

2. Substandard assets:
These are assets which come under the category of NPA for a period of less then 12
months.

3. Doubtful assets:
These are NPA exceeding 12 months

4. Loss assets:
These NPA which are identified as unreliable by internal inspector of bank or
auditors or by RBI.

The classification of assets of scheduled commercial bank.

Assets 2006 2007 2008 2009

494716 609972 709260 837130
Standard assets
(88.6) (89.6) (91.2) (92.8)
Sub standard 18206 21382 20078 21026
assets (3.3) (3.1) (2.6) (2.3)
 37756 41201 39731 36247
Doubtful assets
(6.8) (6.1) (5.1) (4.36)
8001 8370 8971 7625
Loss assets
(1.4) (1.2) (1.2) (0.8)
63963 70953 68780 902027
Total  NPA
(11.4) (10.4) (8.8) (100)

Table 1                                                                                        (Amount Rs. crores)

Income recognition and provisioning

Income from NPA is not recognized on accrued basic but is booked as income only
when, it is actually received. RBI has also tightened red the provisions norms against
asset classification. It ranges from 0.25% to 100% from standard asset to loss asset
respectively.

Gross and net NPA of different sector of bank

Table 2                                                                                 (end of March 31) (in %)

category Gross NPA/ Gross Advance

2006 2007 2008 2009
Public sector 12.37 11.09 9.36 7.79
bank
Private sector 8.37 9.64 8.07 5.84
Foreign bank 6.84 5.38 5.25 4.62

Table 3                                                                                  (end of March 31) (in %)

category Net NPA / Net Advance

2006 2007 2008 2009
Public sector 6.74 5.82 4.53 2.98
bank
Private sector 2.27 2.49 2.32 1.32
Foreign bank 1.82 1.89 1.76 1.49

The table II and III shows that the percentage of gross NPA/ gross advance and net
NPA/ net advance are in a decreasing trend. This shows the sign of efficiency in
public and private sector bamks.but still if compared to foreign banks Indian private
sector and public sector banks have a higher NPA.

Management of NPA
The table II&III shows that during initial sage the percentage of NPA was higher. This
was due to show ineffective recovery of bank credit, lacuna in credit recovery
system, inadequate legal provision etc. Various steps have been taken by the
government to recover and reduce NPAs. Some of them are.

1. One time settlement / compromise scheme

2. Lok adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of Security
Interest Act 2002.
5. Corporate Reconstruction Companies
6.  credit information on defaulters and role of credit information bureaus.

Rationale for the study

PROBLEMS DUE TO NPA

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

2. Depositors do not receive a market return on saving. In the worst case if the
bank fails, depositors loose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates,

lower deposit rates and higher lending rates repress saving and financial
market, which hamper economic growth.

4. Non performing loans epitomize bad investment. They misallocate credit from
good projects, which do not receive funding, to failed projects. Bad investment
ends up in misallocation of capital, and by extension, labour and natural
resources.

Non performing asset may spill over the banking system and contract the money
stock, which may lead to economic contraction. This spill over effect can channelize
through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience liquidity
shortage. This can jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the banks capital base.
The three letters Strike terror in banking sector and business circle today. NPA is
short form of “Non Performing Asset”. The dreaded NPA rule says simply this: when
interest or other due to a bank remains unpaid for more than 90 days, the entire
bank loan automatically turns a non performing asset. The recovery of loan has
always been problem for banks and financial institution. To come out of these first
we need to think is it possible to avoid NPA, no can not be then left is to look after
the factor responsible for it and managing those factors.

 Interest and/or instalment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes, and

 Any amount to be received remains overdue for a period of more than 90

days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should, therefore, continue to
classify an account as NPA only if the interest charged during any quarter is not
serviced fully within 180 days from the end of the quarter with effect from April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.

OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was to:
 To evaluate NPAs (Gross and Net) in different banks.
 To analyze financial performance of banks at different level of NPA
 To evaluate profitability positions of banks
 To evaluate NPA level in different economic situation.
 To Know the Concept of Non Performing Asset
 To Know the Impact of NPAs
  To learn Preventive Measures

RESEARCH METHODOLOGY
Type of Research

The research methodology adopted for carrying out the study were
 In this project Descriptive research methodologies were use .
 At the first stage theoretical study is attempted.
 At the second stage Historical study is attempted.
 At the Third stage Comparative study of NPA is undertaken.

Scope of the Study

 Concept of Non Performing Asset
 Guidelines
 Impact of NPAs
 Reasons for NPAs
 Preventive Measures
 Tools to manage NPAs

BIBLIOGRAPHY
http://www.rbi.com/doc/14245136/Non-Performing-Assets-of-Banks
http://www.allbusiness.com/company-activities-management/financial-
performance/5484451-1.html
http://www.rbi.org.in/home.aspx
http://www.pnbindia.in/
http://www.arms.net.in/Arcil1/index.html