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Non Performing Assets and its impact on Profitability of New Private Sector Banks

BABASAB PATIL

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Executive Summery
The future of Indian Banking represents a unique mixture of unlimited opportunities amidst insurmountable challenges. On the one hand we see the scenario represented by the rapid process of globalization presently taking shape bringing the community of nations in the world together, transcending geographical boundaries, in the sphere of trade and commerce, and even employment opportunities of individuals. All these indicate newly emerging opportunities for Indian Banking. But on the darker side we see the accumulated morass, brought out by three decades of controlled and regimented management of the banks in the past. It has siphoned profitability of the many banks, accumulated bloated NPA and threatens Capital Adequacy of the Banks and their continued stability. New Private Sector Banks in India can solve their problems only if they assert a spirit of self-initiative and self-reliance through developing their in-house expertise. They have to imbibe the banking philosophy inherent in de-regulation NPA is a problem created by the Banks and they have to find the cause and the solution - how it was created and how the Banks are to overcome it. An attempt is made in this study the present situation and to arrive at a solution to solve this problem.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Design of the study


Title of the project: Non Performing Assets and its impact on Profitability of New Private Sector Banks.

Scope of study: Scope of my study restricted only to 7 New Private Sector Banks NPA
datas and Advances, and for Comparison of Credit risk path 7 old selected Private Banks is taken. Need For Study: This study will help to know the recent norms of NPA. This study helps to know how NPA Causing Problems to Banking Sector and what might be the solution to overcome from this problem and also its impact on Profitability of New Profit Banks.

STATEMENT OF THE PROBLEM


Profitability is considered as a benchmark for evaluating performance of any business enterprise including the banking industry. However, increasing Non- Performing Assets, have a direct impact on profitability of banks and financial institutions. Legally speaking banks and financial institutions are not allowed to book income on such account and at the same times they are forced to make provision on such assets. So This project is undertaken to now impact of NPA on Profitability of New Private Sector Banks.

Objectives of Study

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
1. To study the RBI norms on Non Performing Assets, and the various reasons for the existence of huge level of NPA in Indian banking. 2. To know the performance comparison of New Private Banks Non performing asset for past 3 years. 3. To know the impact of non performing assets on profitability of New Private Banks, and comparison of credit risk path of New Private Banks with 7 selected Old Private Banks. 4. To study the various steps taken by the banks to bring down the NPAs in respective bank branches. 5. To recommend measures for Improving performance and reduction of Non Performing Assets.

Methodology
Primary Data: Views of the concerned officials were gathered by directly interacting with them, and such data was found very useful while analyzing and drawing conclusions. Secondary Data: Recent RBI norms of NPA. IBA Bulletin 0f 2005-06 is referred to collect data for Net NPA, and Advances. Web site of UTI Bank and other Web sites.

Plan of analysis: In this study quadrant analysis is used on the calculated figures. Limitations: The study is based mostly on secondary data. Data has been drawn from journals, so information may not be complete. For the analysis only the advances and NPA percentages of banks and operating profit, provisions and contingencies as a whole and net profit of New PSBs are taken into consideration.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
INTRODUCTION It's a known fact that the banks and financial institutions in India face the problem of swelling non-performing assets (NPAs) and the issue is becoming more and more unmanageable. In order to bring the situation under control, some steps have been taken recently. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 was passed by Parliament, which is an important step towards elimination or reduction of NPAs. MEANING OF NPAs: An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 180 days. However with effect from March 2004, default status would be given to a borrower if dues are not paid for 90 days. If any advance or credit facilities granted by bank to a borrower become nonperforming, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exist certain advances / credit facility. NPA IN INDIAN BANKING SYSTEM: NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst of turbulent structural changes overtaking the international banking institutions, and when the global financial markets were undergoing sweeping changes. In fact after it had emerged the problem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the maze of defective accounting standards that still continued with Indian Banks up to the Nineties and opaque Balance sheets. In a dynamic world, it is true that new ideas and new concepts that emerge through such changes caused by social evolution bring beneficial effects, but only after levying a heavy initial toll. The process of quickly integrating new innovations in the existing set-up leads to an immediate disorder and unsettled conditions. People are not accustomed to the

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
new models. These new formations take time to configure, and work smoothly. The old is cast away and the new is found difficult to adjust. Marginal and sub-marginal operators are swept away by these convulsions. Banks being sensitive institutions entrenched deeply in traditional beliefs and conventions were unable to adjust themselves to the changes. They suffered easy victims to this upheaval in the initial phase. Consequently banks underwent this transition-syndrome and languished under distress and banking crises surfaced in quick succession one following the other in many countries. But when the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in developed capitalist countries particularly in Europe, witnessed a remarkable innovative growth in the banking industry, whether measured in terms of deposit growth, credit growth, growth intermediation instruments as well as in network. During all these years the Indian Banking, whose environment was insulated from the global context and was denominated by State controls of directed credit delivery, regulated interest rates, and investment structure did not participate in this vibrant banking revolution. Suffering the dearth of innovative spirit and choking under undue regimentation, Indian banking was lacking objective and prudential systems of business leading from early stagnation to eventual degeneration and reduced or negative profitability. Continued political interference, the absence of competition and total lack of scientific decision-making, led to consequences just the opposite of what was happening in the western countries. Imperfect accounting standards and opaque balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive deterioration and structural weakness of the country's banking institutions to public view. This enabled the nationalized banks to continue to flourish in a deceptive manifestation

and false glitter, though stray symptoms of the brewing ailment were discernable here and there.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
The government hastily introduced the first phase of reforms in the financial and banking sectors after the economic crisis of 1991. This was an effort to quickly resurrect the health of the banking system and bridge the gap between Indian and global banking development. Indian Banking, in particular PSBs suddenly woke up to the realities of the situation and to face the burden of the surfeit of their woes. Simultaneously major revolutionary transitions were taking place in other sectors of the economy on account the ongoing economic reforms intended towards freeing the Indian economy from government controls and linking it to market driven forces for a quick integration with the global economy. Import restrictions were gradually freed. Tariffs were brought down and quantitative controls were removed. The Indian market was opened for free competition to the global players. The new economic policy in turn revolutionalised the environment of the Indian industry and business and put them to similar problems of new mixture Of opportunities and challenges. As a result we witness today a scenario of banking, trade and industry in India, all undergoing the convulsions of total reformation battling to kick off the decadence of the past and to gain a new strength and vigor for effective links with the 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 computerization and application of the benefits of information technology to banking operations have all significantly affected the operational environment of the Indian banking sector. In the background of these complex changes when the problem of NPA was belatedly recognized for the first time at its peak velocity during 1992-93, there was

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
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 realized 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 globalization 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. 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. 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, 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 nationalized 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

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross NPA 6.13%). The scenario is not so simple to be generalized 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 summarized 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 Nationalized Banks to extend priority sector advances. But banks have neither fared better in non-priority sector. The comparative performance under priority and non-priority is only a difference of degree and not that of kind. The assessment of the mix-of contributing factors includes: 1. human factors (those pertaining to the bankers and the credit customers), 2. environmental imbalances in the economy on account of wholesale changes and also 3. Inherited problems of Indian banking and industry. Variable skill, efficiency and level integrity prevailing in different branches and in different banks accounts for the sweeping disparities between inter-bank and intra-bank performance. We may add that while the core or base-level NPA in the industry is due to common contributory causes, the inter-se variations are on account of the structural and operational disparities. The heavy concentrated prevalence of NPA is definitely due to human factors contributing to the same. No bank appears to have conducted studies involving a cross-section of its operating field staff, including the audit and inspection functionaries for a candid and comprehensive

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
introspection based on a survey of the variables of NPA burden under different categories of sectoral credit, different regions and in individual Branches categorized as with high, medium and low incidence of NPA. We do not hear the voice of the operating personnel in these banks candidly expressed and explaining their failures. Ex-bankers, i.e. the professional bankers who have retired from service, but possess a depth of inside knowledge do not out-pour candidly their views. After three decades of nationalized banking, we must have some hundreds of retired Bank executives in the country, who can boldly and independently, but objectively voice their views. Everyone is satisfied in blaming the others. Bank executives hold 'willful defaulters' responsible for all the plague. Industry and business blames the government policies. Important fact-revealing information for each NPA account is the gap period between the date, when the advance was originally made and the date of its becoming NPA. If the gap is long, it is the case of a sunset industry. Things were all right earlier, but economic variance in trade cycles or market sentiments have created the NPA. Credit customers who are in NPA today, but for years were earlier rated as good performers and creditworthy clients ranging within the top 50 or 100. Significant part of the NPA is on account of clout banking or willfully given bad loans. Infant mortality in credit is solely on account of human factors and absence of human integrity. Credit to different sectors given by the PSBs in fact represents different products. Advance to weaker sections below Rs.25000/- represents the actual social banking. NPA in this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI and big industries each calls for different strategies in terms of credit assessment, credit delivery, project implementation, and post advance supervision. NPA in different sector is not caused by the same resultant factors. Containing quantum of NPA is therefore to be programmed by a sector-wise strategy involving a role of the actively engaged participants who can tell where the boot pinches in each case. Business and industry has equal responsibility to accept accountability for containment of NPA. Many of the present

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
defaulters were once trusted and valued customers of the banks. Why have they become unreliable now, or have they? The credit portfolio of a nationalized bank also includes a number of low-risk and risk-free segments, which cannot create NPA. Small personal loans against banks' own deposits and other tangible and easily marketable securities pledged to the bank and held in its custody are of this category. Such small loans are universally given in almost all the branches and hence the aggregate constitutes a significant figure. Then there is food credit given to FCI for food procurement and similar credits given to major public Utilities and Public Sector Undertakings of the Central Government. It is only the residual fragments of Bank credit that are exposed to credit failures and reasons for NPA can be ascertained by scrutinizing this segment. Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all pervasive national scourge swaying the entire Indian economy. NPA is a sore throat of the Indian economy as a whole. The banks are only the ultimate victims, where life cycle of the virus is terminated. Now, how does the Government suffer? What about the recurring loss of revenue by way of taxes, excise to the government on account of closure of several lakhs of erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure erected with considerable investment by the nation? As per statistics collected three years back there are over two and half million small industrial units representing over 90 percent of the total number of industrial units. A majority of the industrial work force finds employment here and the sector's contribution to industrial output is substantial and is estimated at over 35 percent while its share of exports is also valued to be around 40 percent. Out of the 2.5 million, about 10% of the small industries are reported to be sick involving a bank credit outstanding around Rs.5000 to 6000 Crores, at that period. It may be even more now. These closed units represent some thousands of displaced workers Previously enjoying gainful employment. Each closed unit whether large, medium or small occupies costly developed industrial land. Several items of machinery form security for the

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
NPA accounts should either be lying idle or junking out. In other words, large value of land, machinery and money are locked up in industrial sickness. These are the assets created that have turned unproductive and these represent the real physical NPA, which indirectly are reflected in the financial statements of nationalized banks, as the ultimate financiers of these assets. In the final analysis it represents instability in industry. NPA represents the owes of the credit recipients, in turn transferred and parked with the banks. Recognizing NPA as a sore throat of the Indian economy, the field level participants should first address themselves to find the solution. Why not representatives of industries and commerce and that of the Indian Banks' Association come together and candidly analyze and find an everlasting solution heralding the real spirit of deregulation and decentralization of management in banking sector, and accepting self-discipline and self-reliance? What are the deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In short, the functional staff of the Bank along with the representatives of business and industry has to accept a candid introspection and arrive at a code of discipline in any final solution. And preventive action to be successful should start from the credit-recipient level and then extend to the bankers. RBI and Government of India can positively facilitate the process by providing enabling measures. Do not try to set right industry and banks, but help industry and banks to set right themselves. The new tool of deregulated approach has to be accepted in solving NPA.

REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPAS IN THE INDIAN BANKING SYSTEM (IBS):

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks concerned should continuously monitor loans to identify accounts that have potential to become non-performing. To start with, performance in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning non-performing assets.

Some of the other reasons were:

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
After the nationalization of banks sector wise allocation of credit disbursements became compulsory. Banks were compelled to give credit to even those sectors, which were not considered to be very profitable, keeping in mind the federal policy. People in the agricultural sector were hardly interested in returning the loans as they were confident that the loans with the interest would be written off by the successive governments. The small scale industries also availed credit even though they were not sure of performing to the extent of returning the loans. Banks were also not in the position to press enough securities to cover the loans in calls of timings. Even if the assets were provided they proved to be substandard assets as the values that could be realized were very low. Free distribution done during loan mails (congress regime) also contributed to the heavy increase in NPAs. The slackness in effort by the bank authorities to collect or recover loan advances in time also contributes to the increase in NPAs. Lack of accountability of the officers, who sanctioned the loans led to a caste whole approach by the officers recovering the loans. Loans sanctioned to under servicing candidates due to pressure from the ministers and other politicians also led to the non recovery of debts. Poor credit appraisal system, lack of vision while sanctioning credit limits. Lack of proper monitoring. Reckless advances to achieve the budgetary targets.

Lack of sincere corporate culture, inadequate legal provisions on foreclosure and bankruptcy.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Change in economic policies/environment. Lack of co-ordination between banks.

Some of the internal factors of the organization leading to NPAs are: Division of funds for expansion, diversification, modernization, undertaking new projects and for helping associate concerns, this is coupled with recessionary trends and failure to tap funds in the capital and debt markets. Business failure( product, marketing etc.,),inefficient management, strained labor relations, inappropriate technology, technical problems, product obsolescence etc., Recession , shortage of input, power shortage, price escalation, accidents, natural calamities, besides externalization problem in other countries leading to non payment of overdue. Time/cost overrun during the project implementation stage. Government policies like changes in the excise duties, pollution control orders. Willful default, siphoning off of funds, fraud, misappropriation, promoters/directors disputes etc., Deficiencies on the part of the banks like delay in release of limits and delay in release of payments/subsidies by the government.

Operational definitions:

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
NPA: An asset is classified as non-performing asset (NPAs) if dues in the form of principal and interest are not paid by the borrower for a period of 90 days. Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business. Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18 months Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a doubtful asset. Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks. Statutory Liquidity Ratio (SLR): It is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
RBI GUIDELINES ON INCOME RECOGNITION (INTEREST INCOME ON NPAs) Income Recognition: Income from Non Performing Assets should not recognize on accrual basis but should be booked as income only when it is actually received. Therefore interest should not be charged and taken into income account till the account become standard asset.

Interest charged to be stopped Provision to be made

Over Due: Any amount due to the Bank under any credit facility is Over due if it is not paid on the due date fixed by the Bank. Out of Order: An account should be treated as out of order

If the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for 90 days as on the date of Banks Balance Sheet or Where are credits are not enough to cover the interest debited during the same period.

A Non Performing Asset shall be an advance where: Term Loan: Interest and/ or installment of principal remain over due for a period of more than 90 days. Cash Credit/ Over Draft: If the account remains out of order for a period more than 90 days. Bills: Overdue for a period of more than 90 days. Other accounts: Any amount to be received remains overdue for a period of more than 90 days.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Short duration crops: If the installment of principal or interest there on remains overdue for two crop seasons. Long duration crops: If installment of principal or interest there on remains overdue for One Crop season. An account would be classified as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.

ASSET CLASSIFICATION
Standard Assets: Is one which does not disclose any problem and which does not carry more than normal risks attached to the business. Substandard Assets: Which has remained NPA for a period of less than or equal to 12 months. Doubtful Assets: If it has remained NPA for a period exceeding 12 months. Loss Assets: A loss asset is one where loss has been identified by the bank.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
RBI GUIDELINES ON PROVISIONING REQUIREMENT OF BANK ADVANCES: Loss Assets: 100% of the outstanding amount. Doubtful Assets: 100% of unsecured portion. Secured portion Up to one year One to three years More than 3 years 1. Outstanding stock of NPA as on 31.3.2004 2. Advances classified as doubtful more 20% 30% 75% w.e.f.31st March, 06 100% w.e.f.31st March,07 100% w.e.f.31st March,05

than 3 years on or after 31.3.2004 Substandard Assets: Secured portion 10% and unsecured portion 20% on total outstanding. Standard Assets: A general provision of 0.40% (For direct Agriculture & SME Sector 0.25%). Provisioning for standard assets will be done at corporate office centrally.

Calculation of Net NPA (Non Performing Asset)

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Formula: GROSS NPA LESS: Balance in Interest Suspense Account LESS: DICGC/ECGC Claims received but pending for adjustment LESS: Part payment received and kept in suspense account Illustration: (Based on annual reports of UTI bank 2005-06) Particulars Gross NPA of UTI for the year 2006 LESS: Balance from interest suspense account LESS: DICGC/ECGC Claims received but pending for adjustment LESS: Part payment received and kept in Suspense A/c NET NON PERFORMING ASSETS NET NPA IN PERCENTAGE Amount 37428 12704 36 2928 21760 0.97%

THE NARASIMHAN COMMITTEE'S FIRST REPORT The salient features of these reforms include:

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Phasing out of statutory pre-emption - The SLR requirement have been brought down from 38.5% to 25% and CRR requirement from 7.50% to 5.75%. (Presently 4.5%)

Deregulation of interest rates - All lending rates except for lending to small borrowers and a part of export finance have been de-regulated. Interest on all deposits are determined by banks except on savings deposits.

Capital adequacy - CAR of 9 % prescribed with effect from March 31, 2000. Other prudential norms - Income recognition, asset classification and provisioning norms has been made applicable. The provisioning norms are more prudent, objective, transparent, and uniform and designed to avoid subjectivity.

Debt Recovery Tribunals - 22 DRTs and 5 DRATs have already been set up and 7 more DRTs will be set up during the current financial year. Comprehensive amendment in the Act have been made to make the provisions for adjudication, enforcement and recovery more effective.

Transparency in financial statements - Banks have been advised to disclose certain key parameters such as CAR, percentage of NPAs, provisions for NPAs, net value of investment, Return on Assets, profit per employee and interest income as percentage to working funds.

Entry of new private sector banks - 9 new private sector banks have been set up with a view to induce greater competition and for improving operational efficiency of the banking system. Competition has been introduced in a controlled manner and today we have nine new private sector banks and 36 foreign banks in India competing with the public sector banks both in retail and corporate banking

Functional autonomy - The minimum prescribed Government equity was brought to 51%. Nine nationalized banks raised Rs.2855 crores from the market during 19942001. Banks Boards have been given more powers in operational matters such as rationalization of branches, credit delivery and recruitment of staff.

Hiving off of regulatory and supervisory control - Board for financial supervision was set up under the RBI in 1994 bifurcating the regulatory and supervisory functions.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
NARASIMHAN COMMITTEE- SECOND REPORT The Narasimhan Committee on Banking Reforms, in its second report, has combined drastic surgery with a strong dose of medicine to cure the ailing industry. Onperforming assets (NPAs) have been the bane of the industry. The panel has identified poor credit decisions by managements, cyclical changes in the economic environment, directed credit and crude forms of behest-lending as the factors responsible for poor asset quality. The panel points a finger at priority sector credit as having a high contamination coefficient and suggests that quantitative targets have caused erosion of asset quality. It laments the fact that infusion of recapitalization funds notwithstanding, NPAs remain uncomfortably high. Yet it recommends that advances covered by government guarantees that have turned sticky should also be reckoned as net NPAs. The Narasimhan Committee's solution for NPAs is the creation of an Asset Reconstruction Fund (ARF), which will take over the bad debts of banks from their balance sheets to enable them to start on a clean slate. Recapitalization through budgetary infusion, the panel correctly points out, is not a sustainable option. But bankers are skeptical about the workability of the ARF. A senior banker asked, "At what price will the ARF take over my NPAs? How will the discount be worked out?" He said that the ARF cannot bail out banks under the present legal system. Although every bad debt is secured, banks cannot encash the security because of legal hurdles. The Urban Land Ceiling Act is a major deterrent to debt recovery. Bankers say that the legal system has to be revamped to facilitate recovery so that the ARF can pick up "NPAs at a viable price". The committee has recommended that net NPAs be brought down to less than 5 per cent by the year 2000 and 3 per cent by the year 2002. "Easier said than done," says a top banker. "Already we do a lot of window-dressing. Outstanding accounts are shown as priority lending to meet targets. We keep lending to defaulters to roll over the NPAs. Fixing unrealistic targets will be counterproductive."

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
The committee has recommended that banks should not lend to defaulters, but bankers say that this is unrealistic. They claim that in the absence of fresh loans, the defaulting companies will close down, and leading to loss of jobs. "Will that be acceptable?" asks a banker. Bankers also complain that they are forced by the Board for Industrial and Financial Reconstruction (BIFR) to lend to sick companies, yet more often than not there is no turnaround and the accounts turn bad. Credit Risk and NPAs: Quite often credit risk management (CRM) is confused with managing nonperforming assets (NPAs). However there is an appreciable difference between the two. NPAs are a result of past action whose effects are realized in the present i.e. they represent credit risk that has already materialized and default has already taken place. On the other hand managing credit risk is a much more forward-looking approach and is mainly concerned with managing the quality of credit portfolio before default takes place. In other words, an attempt is made to avoid possible default by properly managing credit risk. Considering the current global recession and unreliable information in financial statements, there is high credit risk in the banking and lending business. To create a defense against such uncertainty, bankers are expected to develop an effective internal credit risk models for the purpose of credit risk management.

Usage of financial statements in assessing the risk of default for lenders: For banks and financial institutions, both the balance sheet and income statement have a key role to play by providing valuable information on a borrowers viability. However, the approach of scrutinizing financial statements is a backward looking

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
approach. This is because; the focus of accounting is on past performance and current positions. The key accounting ratios generally used for the purpose of ascertaining the creditworthiness of a business entity are that of debt-equity ratio and interest coverage ratio. Highly rated companies generally have low leverage. This is because; high leverage is followed by high fixed interest charges, non-payment of which results into a default. Capital Adequacy Ratio (CAR) of RBI and Basel committee on banking supervision (BCBS): Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian banks. The minimum CAR which the Indian Banks are required to meet at all times is set at 9%. It should be taken into consideration that the bank's capital refers to the ability of bank to withstand losses due to risk exposures. To be more precise, capital charge is a sort of regulatory cost of keeping loans (perceived as risky) on the balance sheet of banks. The quality of assets of the bank and its capital are often closely related. Quality of assets is reflected in the quantum of NPAs. By this, it implies that if the asset quality was poor, then higher would be the quantum of nonperforming assets and vice-versa. Market risk is the risk arising due to the fluctuations in value of a portfolio due to the volatility of market prices. Operational risk refers to losses arising due to complex system and processes. It is important for a bank to have a good capital base to withstand unforeseen losses. It indicates the capability of a bank to sustain losses arising out of risky assets. The Basel Committee on Banking Supervision (BCBS) has also laid down certain minimum risk based capital standards that apply to all internationally active commercial

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
banks. That is, bank's capital should at least be 8% of their risk-weighted assets. This infact helps bank to provide protection to the depositors and the creditors. The main objective here is to build a sort of support system to take care of unexpected financial losses thereby ensuring healthy financial markets and protecting depositors. IMPACT OF EXCESS LIQUIDITY: One should also not forget that the banks are faced with the problem of increasing liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in the system through various rate cuts. Banks can get rid of its excess liquidity by increasing its lending but, often shy away from such an option due to the high risk of default. In order to promote certain prudential norms for healthy banking practices, most of the developed economies require all banks to maintain minimum liquid and cash reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity Ratio (SLR). Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with itself in the form of cash reserves or by way of current account with the Reserve Bank of India (RBI), computed as a certain percentage of its demand and time liabilities. The objective is to ensure the safety and liquidity of the deposits with the banks. On the other hand, Statutory Liquidity Ratio (SLR) is the one which every banking company shall maintain in India in the form of cash, gold or unencumbered approved securities, an amount which shall not, at the close of business on any day be less than such percentage of the total of its demand and time liabilities in India as on the last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time. A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up in RBI's vaults and further infuses greater funds into a system. However, almost all the

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
banks are facing the problem of bad loans, burgeoning non-performing assets, thinning margins, etc. as a result of which, banks are little reluctant in granting loans to corporates. As such, though in its monetary policy RBI announces rate cut but, such news are no longer warmly greeted by the bankers. HIGH COST OF FUNDS DUE TO NPAs: Quite often genuine borrowers face the difficulties in raising funds from banks due to mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine borrowers or if the funds are provided, they come at a very high cost to compensate the lenders losses caused due to high level of NPAs. Therefore, quite often corporate prefer to raise funds through commercial papers (CPs) where the interest rate on working capital charged by banks is higher. With the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, banks can issue notices to the defaulters to pay up the dues and the borrowers will have to clear their dues within 60 days. Once the borrower receives a notice from the concerned bank and the financial institution, the secured assets mentioned in the notice cannot be sold or transferred without the consent of the lenders. The main purpose of this notice is to inform the borrower that either the sum due to the bank or financial institution be paid by the borrower or else the former will take action by way of taking over the possession of assets. Besides assets, banks can also takeover the management of the company. Thus the bankers under the aforementioned Act will have the much needed authority to either sell the assets of the defaulting companies or change their management. But the protection under the said Act only provides a partial solution. What banks should ensure is that they should move with speed and charged with momentum in

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
disposing off the assets. This is because as uncertainty increases with the passage of time, there is all possibility that the recoverable value of asset also reduces and it cannot fetch good price. If faced with such a situation than the very purpose of getting protection under the Securitization Act, 2002 would be defeated and the hope of seeing a must have growing banking sector can easily vanish. Non Performing Assets of New Private Sector Banks-Sector wise (2006 data) Centurion Bank of Panjab Ltd Sector Agriculture Small Scale Industries Others HDFC Bank Ltd Sector Agriculture Small Scale Industries Others Amount( in Crore) 22.85 19.15 174.26 Percentage to total 3.92 3.28 29.88 Amount( in Crore) 10.68 11.23 8.99 Percentage to total 3.39 3.57 2.85

ICICI Bank Ltd. Sector Agriculture Small Scale Industries Others Indusind Bank Ltd Sector Agriculture Amount( in Crore) 110.37 Percentage to total 41.06 Amount( in Crore) 45.65 35.58 13.06 Percentage to total 2.05 1.60 0.59

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Small Scale Industries Others Kotak Mahindra Bank Ltd Sector Agriculture Small Scale Industries Others UTI Bank Ltd Sector Agriculture Small Scale Industries Others Amount( in Crore) 56.71 13.84 0.30 Percentage to total 15.17 3.70 0.08 Amount( in Crore) 3.26 15.36 Percentage to total 8.17 38.49 12.92 24.80 4.81 9.23

RECOVERY MEASURES:
s

Broadly speaking, recovery measures could be classified into two categories, namely, legal measures and non-legal measures. Legal Measures 1. Debt Recovery Tribunals(DRT) In the context of recovery from NPAs DRT are assuming great importance since efforts are on to set up & more DRT during this year and also to strengthen them. Though the recovery through DRT is at present less than two per cent of the claim amount, banks and Fls have to depend heavily on them. Efforts are on to amend the recovery act to assign more powers to DRTs. More importantly, the borrowers tendency to challenge the verdict of the Appellate Tribunals in the High court to seek natural-justice needs to be checked,

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Otherwise, early recovery efforts through DRTs would be futile. Secondly, training of presiding officers of Tribunals about the intricacies of banking practices is very essential. Further, the numbers of recovery officers have to be enhanced in every DRT for effective recovery. Finally, banks and Fls have to come forward to provide liberal help to DRTs to equip them in terms of infrastructure, manpower, etc.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

2. National Company Law Tribunal : As per the announcement made in the Budget-2001-02, Sick Industrial Company Act will be repealed and Board for Industrial Finance and Reconstruction will be woundup. As an alternative arrangement, it is proposed to set up NCLT by amending the Companies Act 1956. In August 2001, the NCLT is expected to consolidate the powers of BIFR, High court and Company Law Board to avoid multiplicity of forums. In matters of rehabilitation of sick units, all concerned parties are supposed to abide by the orders of NCLT. There shall be 10 benches, which will deal with rehabilitation, reconstruction and winding-up of companies. It is estimated to complete the entire process during a period of 2-3 years as against 20-27 years presently taken. The Tribunal will have, in addition, powers of contempt of court. A rehabilitation and revival fund will be constituted to make interim payment of dues to workers of a company declared sick or is under liquidation, protection of assets of sick company and rehabilitate sick companies. While NCLT will be acting on the lines of BIFR in the matters of rehabilitation viability of the projects will be assessed on cash test and not in the present test of net-time limit for completing each formality relating to rehabilitation and winding-up. Though the Bill is well drafted to ensure NCLT to become time wise, and more effective than BIFR in respect of rehabilitation and winding-up, doubts are raised about the implementation of the Bill taking into account the present political economy. In any case, it is too early to comment.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
3. Corporate Debt Restructuring Body A need was felt to special agency to facilitate debt restructuring because there has been some hesitancy on the part of Bank and financial institution to implement RBI guidelines on debt restructuring recently three-tire body, CDR has been set up to coordinate corporate debt restructuring program. It is yet to be operationalized CDR consist of Forum Group and cell. While the forum evolves broad policy guidelines, the group takes decisions on the proposals pecommended by the Cell. Initially, the borrower approaches his Lead bank/FI with a request to restructure debt which in turn puts up the proposal to the Cell. The CDR Covers only multiple banking accounts enjoying credit facilities exceeding Rs.20crore. Cases of DRT, BIFR and willful defaults, doubtful and loss accounts and suitfiled cased are outside the purview of the CDR. Thus standard and sub-standard accounts are only eligible to seek CDR shelter. Decisions of the group are based on the super majority principle. If 75 percent of the secured creditors agree to the rehabilitation plan, it is binding on the other banks/Fis. The CDR is a voluntary system based on debtor- creditor agreement and intercreditors agreement. No banker/borrower can take recourse to any legal action during the stand-still period of 90-180 days. Lastly, CDR will observe the RBI Guideline on Debt Restructuring issued in March 2006. While the arrangements under CDR seem to be feasible from the debt restructuring perspective, its success depends upon the cooperation extended by borrowers and bankers, on the one hand, and understanding among banks and Fis, on the other. Doubts are raised about the implementation of these agreements taking into the present working of the loan consortium arrangements.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
4. Asset Reconstruction Corporation. It is proposed to set up ARCs in the private sector to take over NPAs in the public sector banks. The RBI will be the regulator of these ATCs. The ARC will buy NPAs of the banks and financial institutions at the pre-determined discounted value and issue NPA redemption bonds, which carry a fixed return. ARCs are expected to be managed by professionals to effect maximum recovery of NPA, which will help in redemption of bonds after some time. The Finance Ministry has finalized the draft Bill to set up ARCs. Though the proposed scheme seems to be attractive, its success will depend upon the efficiency of DRTs and courts. Further, if ARC is going to depend on the staff deputed by weak banks, its recovery chances are doubtful. 5. Company Mergers. Under the Companies Act, 1956, mergers are permitted. In 1977, Sec 72-A was inserted in the Income Tax Act to offer tax incentives to healthy companies which take over the sick companies and prepare revival plans. Response to this scheme formalities as per the instructions of the High Court and Income Tax Department. Tax incentives are found to be inadequate to motivate healthy companies to come forward and take advantage of the scheme. Recovery of bank dues on company-mergers is not assured since hardly 7.8 per cent of sick companies are successfully revived. Encouraged by the success achieved in company mergers in developed countries, a review of the scheme under section 72-A of IT Act is called for.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

NON LEGAL MEASURES


1. Reminder System The cheapest mode of recovery is by sending reminders to the borrowers before the loan installment falls due. Generally, response to this arrangement particularly from honest borrowers is encouraging. But efforts need to be strengthened in banks in sending reminders on timely basis. 2. Visit to Borrowers Business Premise/Residence This is a more dependable measure of recovery. Visits need to be properly planned. Involvement of staff at all levels in the bank branch is called for. Costs involved in recovery need to be kept to the minimum. Frequent visits are called for in case of hardcore borrowers. Over the years, it is observed that the number and quality of visits are going down. Consequently, the recovery process is affected. 3. Recovery Camps In respect of agricultural advances, recovery camps should be organized during

the harvest season. To ensure maximum advantage, recovery camps need to be properly planned. It is also essential to take the help of outsiders, particularly, revenue officers in the state government, local panchayat officials, regional approach to give a wide publicity of the recovery camps to be organized in the local area, mobilize as many farmers as possible and motivate the staff to get involved in the recovery drive.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
4. Rephrasing Unpaid Loan Installments In respect of small advances, bankers need to be system pathetic in respect of sincere and hardworking borrowers. If such borrowers fail to pay loan installments due to natural calamities or for some other convincing reasons, unpaid loan installments may be replased/rescheduled. Bankers efforts need to be strengthened in the regard. 5. Rehabilitation of Sick Units Sick units both in SSI and non SSI sectors should be identified on timely basis keeping in mind the official definitions. Causes of sickness should be genuine. If the project is found viable in terms of Debt Service Coverage Ratio (DSCR), rehabilitation package has to be prepared keeping in mind the broad parameters suggested by the RBI. The package should be implemented at the earliest by the bank and the borrower. Close monitoring of the progress of implementation is called for. There are several success stories on rehabilitation of sick units. But in general, it is observed that the success rate in revival of sickness is discouraging. Further, in the process of financial sector reforms, banks and Fis are hesitant to rehabilitate due to the threat of failure in rehabilitation. Recently, the RBI has permitted banks not to make provision for sick SSI units during the first year of implementation. New guidelines on rehabilitation of sick SSI units will also be issued soon by the RBI. For successful rehabilitation, it is essential to create a sense of urgency on the part of both banks and borrowers. Efforts on the part of the government in terms of concessions, reliefs etc. Should be made on timely basis. Understanding

between bank and SFCs should be strengthened. Above all, stern action against willful defaulters is called for.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
6. Loan Compromise This is the last resort of recovery. This should be voluntary. It calls for a

professional approach in preparing the compromise proposal for which each bank is expected to introduce a scheme. Committee approach should be adopted to decide on the loan compromise. Delays in taking decisions should be avoided. Recently, one Time Settlement (OTS) scheme was introduced by the RBI. The overall response to the scheme was limited. Hence, each bank is expected to come out with its own OTS scheme. In addition, training of operating staff is essential to change their mindset. For effective recovery, loan compromise should be taken up on priority basis. 7. Appointment of Professional Agencies for Recovery Recently, IBA has worked out certain guidelines for banks on matters concerning the appointment of outside professional agencies whose services can be utilized to ascertain the whereabouts of the borrowers and enforcement of securities. There is some hesitancy on the part of public sector banks in engaging them for recovery purposes due to unpleasant experiences in certain cases. But during the post VRS scenario, it is

suggested to seek such outsourcing. This should be done after examining the credentials of the professionals. It is also essential to keep a constant vigil on their practice.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Unit Trust of India Bank


UTI Bank was the first of the new private banks to have begun operations in 1994, after the Government of India allowed new private banks to be established. The Bank was promoted jointly by the Administrator of the specified undertaking of the, Unit Trust of India. Life Insurance Corporation of India (LIC) General Insurance Corporation Ltd. Other four PSU companies, i.e. National Insurance Company Ltd., The New India Assurance Company, The Oriental Insurance Corporation and United Insurance Company Ltd. The Bank today is capitalized to the extent of Rs. 280.51 Crores with the public holding (other than promoters) at 72.46 %. The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. Presently the Bank has a very wide network of more than 469 branch offices and Extension Counters. The Bank has a network of over 2016 ATMs providing 24hrs a day banking convenience to its customers. This is one of the largest ATM networks in the country. The Bank has strengths in both retail and corporate banking and is committed to adopting the best industry practices internationally in order to achieve excellence. Mission of UTI Bank: Customer Service and Product Innovation tuned to diverse needs of individual and corporate clientele. Continuous technology upgradation while maintaining human values. Progressive globalization and achieving international standards. Efficiency and effectiveness built on ethical practices.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Core Values Customer Satisfaction through --Providing quality service effectively and efficiently --Smile, it enhances your face value" is a service quality stressed on --Periodic Customer Service Audits Maximization of Stakeholder value Success through Teamwork, Integrity and People

Promoters:
UTI Bank Ltd. has been promoted by the largest and the best Financial Institution of the country, UTI. The Bank was set up with a capital of Rs. 115 crore, with UTI contributing Rs. 100 crore, LIC - Rs. 7.5 crore and GIC and its four subsidiaries contributing Rs. 1.5 crore each.

Board of Directors: The Bank has 12 members on the Board. Dr. P. J. Nayak is the Chairman and Managing Director of the Bank. The members of the Board are : Dr. P. J. Nayak Shri Surendra Singh Shri N.C. Singhal Shri A.T. Pannir Selvam Shri J.R. Varma Dr. R. H. Patil Smt. Rama Bijapurkar Shri R B L Vaish Shri S. Chatterjee Shri S B Mathur Shri M V Subbiah Shri Ramesh Ramanathan Chairman & Managing Director Director Director Director Director Director Director Director Executive Director (Whole Time Director) Director Director Director

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
History of UTI Bank

1993- The Bank was incorporated on 3rd December and Certificate of business on14th
December. The Bank transacts banking business of all description. UTI Bank Ltd. was promoted by Unit Trust of India, Life Insurance Corporation of India, General Insurance Corporation of India and its four subsidiaries. - The bank was the first private sector bank to get a license under the new guidelines issued by the RBI

1994 First branch of UTI Bank inaugurated at Ahmedabad by Dr. Manmohan Singh,
Hon'ble Finance Minister, Government of India.

1995 Completes first profitable year in operation 1996 Crosses Rs.1000 crore deposit mark 1997 The Bank obtained license to act as Depository Participant with NSDL and
applied for registration with SEBI to act as `Trustee to Debenture Holders'. - Rupees 100 crores was contributed by UTI, the rest from LIC Rs 7.5 crores, GIC and its four subsidiaries Rs 1.5 crores each.

1998 The Bank has 28 branches in urban and semi urban areas as on 31st July. All the
branches are fully computerised and networked through VSAT. ATM services are available in 27 branches. - The Bank came out with a public issue of 1,50,00,000 No. of equity shares of Rs 10 each at a premium of Rs 11 per share aggregating to Rs 31.50 crores and Offer for sale of 2,00,00,000 No. of equity shares for cash at a price of Rs 21 per share. Out of the public issue 2,20,000 shares were reserved for allotment on preferencial basis to employees of UTI Bank. Balance of 3,47,80,000 shares were offered to the public. - The company offers ATM cards, using which account-holders can withdraw money from any of the bank's ATMs across the country which are interconnected by VSAT. - UTI Bank has launched a new retail product with operational flexibility for its customers. BABASAB PATIL -39-

Non Performing Assets and its impact on Profitability of New Private Sector Banks
- UTI Bank will sign a co-brand agreement with the market, leader, Citibank NA for entering into the highly promising credit card business. - UTI Bank promoted by India's pioneer mutual fund Unit Trust of India along with LIC, GIC and its four subsidiaries.

1999 - UTI Bank and Citibank have launched an international co-branded credit card.
- UTI Bank and Citibank have come together to launch an international co branded credit card under the MasterCard umbrella. - UTI Bank Ltd has inaugurated an off site ATM at Ashok Nagar here, taking the total number of its off site ATMs to 13.m 2000 -The Bank has announced the launch of Tele-Depository Services for its depository clients. - UTI Bank has launch of `iConnect', its Internet banking Product. -UTI Bank has signed a memorandum of understanding with equitymaster.com for e-broking activities of the site. - Infinity.com financial Securities Ltd., an e-broking outfit is typing up with UTI Bank for a banking interface. - Geojit Securities Ltd, the first company to start online trading services, has signed a MoU with UTI Bank to enable investors to buy\sell demat stocks through the company's website. - Indiabulls has signed a memorandum of understanding with UTI Bank. - UTI Bank has entered into an agreement with Stock Holding Corporation of India for providing loans against shares to SCHCIL's customers and funding investors in public and rights issues. - UTI Bank has tied up with L&T Trade.com for providing customized online trading solution for brokers.

2001 - UTI Bank launched a private placement of non-convertible debentures to rise up to Rs 75 crore. - UTI Bank has opened two offsite ATMs and one extension counter

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
with an ATM in Mangalore, taking its total number of ATMs across the country to 355. - UTI Bank has recorded a 62 per cent rise in net profit for the quarter ended September 30, 2001, at Rs 30.95 crore. For the second quarter ended September 30, 2000, the net profit was Rs 19.08 crore. The total income of the bank during the quarter was up 53 per cent at Rs 366.25 crore. 2002 - UTI Bank Ltd has informed BSE that Shri B R Barwale has resigned as a Director of the Bank w.e.f. January 02, 2002. A C Shah, former chairman of Bank of Baroda, also retired from the bank's board in the third quarter of last year. His place continues to be vacant. M Damodaran took over as the director of the board after taking in the reins of UTI. B S Pandit has also joined the bank's board subsequent to the retirement of K G Vassal. - UTI Bank Ltd has informed that Shri Paul Fletcher has been appointed as an Additional Director Nominee of CDC Financial Service (Mauritius) Ltd of the Bank.And Shri Donald Peck has been appointed as an Additional Director (nominee of South Asia Regional Fund) of the Bank. - UTI Bank Ltd has informed that on laying down the office of Chairman of LIC on being appointed as Chairman of SEBI, Shri G N Bajpai, Nominee Director of LIC has resigned as a Director of the Bank. 2002 - B Paranjpe & Abid Hussain cease to be the Directors of UTI Bank. - UTI Bank Ltd has informed that in the meeting of the Board of Directors following decisions were taken: Mr Yash Mahajan, Vice Chairman and Managing Director of Punjab Tractors Ltd was appointed as an Additional Director with immediate effect. Mr N C Singhal former Vice Chairman and Managing Director of SCICI was appointed as an Additional Director with immediate effect. - UTI Bank Ltd has informed BSE that a meeting of the Board of Directors of the Bank is scheduled to be held on October 24, 2002 to consider and take on record the unaudited half yearly/quarterly financial results of the Bank for the half year/Quarter ended September 30, 2002.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
-UTI Bank Ltd has informed that Shri J M Trivedi has been appointed as an alternate director to Shri Donald Peck with effect from November 2, 2002. 2003 -UTI Bank Ltd has informed BSE that at the meeting of the Board of Directors of the company held on January 16, 2003, Shri R N Bharadwaj, Managing Director of LIC has been appointed as an Additional Director of the Bank with immediate effect. - UTI Bank, the private sector bank has opeaned a branch at Nellore. The bank's Chairman and Managing Director, Dr P.J. Nayak, inaugurating the bank branch at GT Road on May 26. Speaking on the occasion, Dr Nayak said, "This marks another step towards the extensive customer banking focus that we are providing across the country and reinforces our commitment to bring superior banking services, marked by convenience and closeness to customers. -UTI has been authorised to launch 16 ATMs on the Western Railway Stations of Mumbai Division. -UTI filed suit against financial institutions IFCI Ltd in the debt recovery tribunal at Mumbai to recover Rs.85cr in dues. -UTI bank made an entry to the Food Credit Programme, it has made an entry into the 59 cluster which includes private sector, public sector, old private sector and co-operative banks. - Shri Ajeet Prasad, Nminee of UTI has resigned as the director of the bank. - Banks Chairman and MD Dr.P.J.Nayak inaugurated a new branch at Nellore. -UTI bank allots shares under Employee Stock Option Scheme to its employees. -UTI Bank ties up with UK govt fund for contract farming -Shri B S Pandit, nominee of the Administrator of the Specified Undertaking of the Unit Trust of India (UTI-I) has resigned as a director from the Bank w.e.f November 12, 2003.

2004 -Comes out with Rs. 500 mn Unsecured Redeemable Non-Convertible Debenture
Issue, issue fully subscribed

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
-UTI Bank Ltd has informed that Shri Ajeet Prasad, Nominee of the Administrator of the Specified Undertaking of the Unit Trust of India (UTI - I) has been appointed as an Additional Director of the Bank w.e.f. January 20, 2004. -UTI Bank opens new branch in Udupi -UTI Bank ties up with Shriram Group Cos -Unveils premium payment facility through ATMs applicable to LIC & UTI Bank customers -Metaljunction (MJ)- the online trading and procurement joint venture of Tata Steel and Steel Authority of India (SAIL)- has roped in UTI Bank to start off own equipment for Tata Steel. -DIEBOLD Systems Private Ltd, a wholly owned subsidiary of Diebold Incorporated, has secured a major contract for the supply of ATMs and services to UTI Bank -HSBC completes acquisition of 14.6% stake in UTI Bank for $67.6 m -UTI Bank installs ATM in Thiruvananthapuram -Launches `Remittance Card' in association with Remit2India, a Web site offering money-transfer services

2005: UTI Bank appointed by Government of Karnataka as the sole banker for the
Bangalore One (B1) project. - UTI Bank launches a powerful version of Kisan Credit Card. - UTI Bank gets listed on the London Stock Exchange, raises US$ 239.30 million through Global Depositary Receipts (GDRs). - UTI Bank and Bajaj Allianz join hands to distribute general insurance products. - UTI Bank and Visa International launch Mobile Refill facility - Anytime, Anywhere Pre-Paid Mobile Refill for all Visa Cardholders in India. - UTI Bank wins International Financing Review (IFR) Asia India Bond House award for the year 2005. - UTI Bank extends banking services to the rural milk producers in Anand and Kheda districts in Gujarat.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

2006: UTI Bank and UTI Mutual Fund to launch a new service for sale and redemption
of mutual fund schemes through the Banks ATMs across the country. - UTI Bank opens its first international branch in Singapore. - UTI Bank and LIC join hands to launch an Annuity Card for group pensioners of LIC. - UTI Bank ties up with Geojit Financial Services to offer Online Trading service to its customers.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks SWOT Analysis Strength
UTI Bank has been in the banking industry since 1994. It has successfully completed 12 years in the Banking industry. The bank has a sound network i.e
Anywhere Banking facility in 450 Branches and 1891ATM's at strategic locations in India.

Weakness Tedious procedures have to be followed before advancing loans causing inconvenience to customers.

UTI Bank stands one among the top ten banks in India and is ranked 1st in growth in business The bank is having well experienced, trained, most dedicated and committed staff. In has a strong customer base. Opportunities Global with NRIs. The bank can optimize the growth opportunities arising out of retail banking and small and medium enterprises (SMEs). Further expansion of ATMs networks and possible arrangements of sharing networks of other banks by issuing mutual funds and insurance. aspirations of Indian consumers and growing integration

Threat
Bank is facing competition from its other Private Sector Banks and even the foreign Banks Changing economic will policies have of Government serious

impact on interest rates and reserve ratio maintained with RBI

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Products and Services of UTI Bank Consumer banking UTI Bank is providing in consumer banking the following products and services: Savings Account Salary Power Power Salute Priority Banking Women Account Senior Privilege AZAADI"- No Frills Savings Account RFC (D) Account Fixed Deposits Recurring Deposits Lockers Debit Card Travel Currency Card Encash 24 Remittance Card Visa Money Transfer Power Transfer

Current Account Normal Current Account Business Advantage Account Business Classic Account Business Privilege Account Channel One

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Demand drafts at correspondent bank locations available at very nominal charges. Free Pay Order facility. Free Demand Drafts Intercity Cash Deposit Intercity Cash Withdrawal Home Branch Cash Withdrawal Retail loans - UTI Bank is providing following loan facilities to the customers in retail loan section. Power Drive Power Home Asset Power Personal Power Loans against Securities Consumer Power Study Power

Corporate banking - In corporate banking UTI Bank is providing following services. Cash Management Services Lending/Financing Trade Service Current Account Fixed Deposits Working capital finance

Lending/Financing

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Cash credit / working capital demand loan Loan against FCNR (B) deposit Term lending Project loan Bill finance supply / purchase bills Channel finance Asset securitization Line of credit Bank guarantees

Trade Service Trade Finance Bills Discounting L/C Backed bill discounting Drawee Bill Discounting Drawer Bill Discounting Financial advisory service It is banks endeavor to offer customer complete personal finance solutions. Through banks financial Advisory Services bank understand customers investment requirements and design tailor made financial solutions for them. Beyond merely advising customers, Bank will also help the customers to invest in a variety of instruments including. Mutual Funds Bank assurance Equity Tax consultancy

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
IPO Buzz Fixed Income Products Portfolio Tracker NRI SERVICES In UTI Bank, realize that as an NRI, customer banking needs are special. And in keeping with this philosophy, and offer valued NRI customers a plethora of services customized to their needs, such as The entire bouquet of NRI Deposit Products & Services. International Debit Card with Accident Insurance cover Free Internet Banking facility Portfolio Investment scheme for capital market transactions. Correspondent Banking/Remittance arrangements in all major currencies Depository Services eDepository Services Debenture Trusteeship Clearing bank for NSE/BSE/OTECI Clearing Members for Derivatives Segment Broker Financing Issue Management M&A Advisory IPO Funding Online Trading

Capital markets

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Government Business UTI Bank is the First Private Sector Bank to be authorised by the Reserve Bank of India (RBI) and Government of India for collecting Taxes on behalf of a State Government. The Bank is handling Collection of Commercial Taxes in the twin cities of Hyderabad and Secunderabad for Govt. of Andhra Pradesh since July 2001. UTI Bank is now authorised by Reserve Bank of India and Govt. of India for conducting all Central Government and State Government Business commencing with October 1, 2003. The authorisation means the Bank can undertake the following business on behalf of Central and State Governments: Treasury Foreign Exchange Desk International Banking Money Market Desk Constituent SGL Facility Retail G-sec Deposit Rate Newsletter Foreign Exchange

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Findings And Analysis


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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Design of the study


Title of the project: Non Performing Assets and its impact on Profitability of New Private Sector Banks.

Scope of study: Scope of my study restricted only to 7 New Private Sector Banks NPA
datas and Advances, and for Comparison of Credit risk path 7 old selected Private Banks are taken. Need For Study: This study will help to know the recent norms of NPA. This study helps to know how NPA Causing Problems to Banking Sector and what might be the solution to overcome from this problem and also its impact on Profitability of New Profit Banks.

STATEMENT OF THE PROBLEM


Profitability is considered as a benchmark for evaluating performance of any business enterprise including the banking industry. However, increasing Non- Performing Assets, have a direct impact on profitability of banks and financial institutions. Legally speaking banks and financial institutions are not allowed to book income on such account and at the same times they are forced to make provision on such assets. So This project is undertaken to now impact of NPA on Profitability of New Private Sector Banks.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Objectives of Study 6. To study the RBI norms on Non Performing Assets, and the various reasons for the existence of huge level of NPA in Indian banking. 7. To know the performance comparison of New Private Banks Non performing asset for past 3 years. 8. To know the impact of non performing assets on profitability of New Private Banks, and comparison of credit risk path of New Private Banks with 7 selected Old Private Banks. 9. To study the various steps taken by the banks to bring down the NPAs in respective bank branches. 10. To recommend measures for Improving performance and reduction of Non Performing Assets.

Methodology
Primary Data: Views of the concerned officials were gathered by directly interacting with them, and such data was found very useful while analyzing and drawing conclusions. Secondary Data: Recent RBI norms of NPA. IBA Bulletin 0f 2005-06 is referred to collect data for Net NPA, and Advances. Web site of UTI Bank and other Web sites.

Plan of analysis: In this study quadrant analysis is used on the calculated figures. Limitations: The study is based mostly on secondary data. Data has been drawn from journals, so information may not be complete.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
For the analysis only the advances and NPA percentages of banks and operating profit, provisions and contingencies as a whole and net profit of New PSBs are taken into consideration. Impact of Provisions and Contingencies on Net Profit of New Private Banks. Performance comparison of New Private Sector Banks Operating Profit of 3 years S No 1 2 3 4 5 6 7 8 Banks Bank of Panjab Ltd* Centurion Bank Ltd* HDFC Bank Ltd ICICI Bank Ltd Indusind Bank Ltd. Kotak Mahindra Bank Ltd. UTI Bank Ltd Yes Bank
5000 4000 3000 2000 1000 0
Lt Ce d* nt ur io n B HD ank Lt FC d* Ba IC nk IC Lt In Ko du I Ba d ta nk si k nd M Lt d Ba ah in nk dr L a Ba td. n UT k L I B td. an k Lt Ye d s Ba nk

Operating Profit ( in Crore) 2003-04 2004-05 2005-06 103 19 12 1008 2481 445 127 698 31 1344 2956 401 133 566 (4) 148 1979 4691 225 211 994 99

2003-04 2004-05 2005-06

-1000
Pa nj ab Ba nk of

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Interpretation: As we seen in graph ICICI Bank Ltd. Operating Profit is increasing year by year followed by HDFC Bank Ltd.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Performance comparison of New Private Sector Banks Provisions and Contingencies of 3 years S No 1 2 3 4 5 6 7 8 Banks Bank of Panjab Ltd* Centurion Bank Ltd* HDFC Bank Ltd ICICI Bank Ltd Indusind Bank Ltd. Kotak Mahindra Bank Ltd. UTI Bank Ltd Yes Bank Provisions and Contingencies ( in Crore) 2003-04 2004-05 2005-06 66 81 117 498 844 183 48 420 6 678 951 191 49 231 0 60 1108 2151 188 92 509 44

2500 2000 1500 1000 500 0


Lt Ce d* nt ur io n B HD ank Lt FC d* Ba IC nk IC In I B Ltd Ko du an ta si k k nd M Lt d Ba ah in nk dr L a Ba td. n UT k L I B td. an k Lt Ye d s Ba nk

2003-04 2004-05 2005-06

Interpretation: ICICI Bank Ltd making large Provisions for losses compares to HDFC Bank Ltd and UTI Bank Ltd may be because of their credit worthiness.

Ba nk

of

Pa nj ab

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Performance comparison of New Private Sector Banks Net Profit 3 years S No 1 2 3 4 5 6 7 8 Banks Bank of Panjab Ltd* Centurion Bank Ltd* HDFC Bank Ltd ICICI Bank Ltd Indusind Bank Ltd. Kotak Mahindra Bank Ltd. UTI Bank Ltd Yes Bank 2003-04 37 (105) 510 1637 262 79 278 Net Profit (in Crore) 2004-05 2005-06 (61) 25 666 2005 210 85 335 (4) 88 871 2540 37 118 485 55

3000 2500 2000 1500 1000 500 0


Lt Ce d* nt ur io n B HD ank Lt FC d* Ba IC nk IC In I B Ltd Ko du an ta si k k nd M Lt d Ba ah in nk dr L a Ba td. n UT k L I B td. an k Lt Ye d s Ba nk

2003-04 2004-05 2005-06

-500
Pa nj ab

Interpretation: ICICI Bank Ltd and HDFC Bank LTD Net Profit is Increasing Even though lot of Money has spent on Provision and Contingency. It may be because of their risk taking ability.

Ba nk

of

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Analysis of above data: As we see the above graphs, ICICI Bank Ltd Operating Profit is increasing year by year followed by HDFC Bank Ltd. UTI Bank Ltd Operating Profit is decreased in 2004-05 but its suddenly increased to 994crore in 2005-2006. But Bank of Panjab Ltd Operating Profit for 2003-04 is 103 crore but suddenly it decreases to 19 crore 1n 2004-05, then it amalgamated with Centurian Bank Whose Operating Profit is Comparatively Low in 200304 and 2004-05 after amalgamation it increases to 148crore. Even Indusind Bank Ltd Operating Profit is go on Decreasing and as Yes Bank is very new so initially it had made loss of 4crore but made 99crore operating profit in 2005-06. Provisions and Contingencies made by ICICI Bank Ltd and HDFC Bank Ltd is Comparatively high it may be because of risk taking ability and have strong financial background with more experience, And also these banks are able to provide adequate finance to Different Sectors. As we seen UTI Bank Ltd Operating Profit in 2004-05 decreased and in 2005-06 increased so the Provisions made is low in 2004-05 but high in 2005-06 it may be because of large advances made by bank in 2005-06. But Bank of Panjab Ltd Operating Profit gone down in 2004-05 to 19crore but it has incurred to make 81crore Provisions and Contingencies it may be because of wrong Strategy made by bank to provide finance and to maintain operating Profit, same situation has faced by Centurion Bank Ltd in the year 2005-06. So only Both Bank of Panjab Ltd and Centurion Bank Ltd Amalgamated to make strong finance Background. Indusind Bank Operating Profit coming down year by year. Kotak Mahindra is performing better enough next to ICICI Bank, HDFC Bank, UTI Bank. As Yes Bank is new so initially it incurred 4crore loss so no provisions were made but it made Provisions in 2005-06. ICICI Bank Ltd, HDFC Bank Ltd and UTI Bank Ltd had comparatively high Net Profit it may be because of risk taking ability and strong financial background with more experience. As heavy Provisions were incurred by Bank of Panjab Ltd and Centurion Bank Ltd till 2004-05 had amalgamated to make Positive Net profit and named themselves as Centurion Bank of Panjab Ltd. Indusind Bank have to adopt different strategy to increase net profit as it incurring loss from past 3 years.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Analysis of Gross and Net NPA by taking 3 years Advances paid by New Private Sector Bank. Bank of Panjab Ltd Banks 2003-04 2004-05 2005-06 Gross Advances 2709 2520 Gross NPA 168 126 Gross NPA(%) 6.20 5.00 Net Advances 2353 2417 Net NPA 126 112 Net NPA(%) 5.35 4.64 -

Centurion Bank Ltd Banks 2003-04 2004-05 2005-06 Intrepretation: As Bank of Panjab Ltd and Centurion Bank has amalgamated in 2005 September, so we can see a decrease in Gross NPA from 12.96% to 4.6% and Net NPA decreases to 1.13%. Of course it is a good sign to the company as it came below 5%, because if NPA ratio of any Bank is more than 5% then it is said that the Banks need to adopt proper strategy for recovery of debt. Gross Advances 1705 2291 6848 Gross NPA 221 156 315 Gross NPA(%) 12.96 6.81 4.6 Net Advances 1556 2194 6533 Net NPA 69 55 74 Net NPA(%) 4.43 2.49 1.13

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

HDFC Bank Ltd Banks 2003-04 2004-05 2005-06 Interpretation: From the above table we can see that Gross NPA of HDFC Bank Ltd has decreasing from 1.86 to 1.40 from 2003-04 to 2005-06. This accomplishment is on account of credit growth, which was higher than the growth of Gross NPA and not through appreciable recovery of NPA. There is neither reduction nor even containment of the threat because as we seen increase in Net NPA from Past 3 years. ICICI Bank Ltd Banks 2003-04 2004-05 2005-06 Interpretation: From above table we can see that Gross NPA of ICICI Bank Ltd has decreasing from 4.70 to 1.50 from 2003-04 to 2005-06. This accomplishment is on account of credit growth, which was higher than the growth of Gross NPA and not through appreciable recovery of NPA. There is neither reduction nor even containment of the threat. ICICI Bank Ltd is providing high advances compare to other banks in 2005-2006. Gross Advances 65106 91920 148200 Gross NPA 3060 3925 2223 Gross NPA(%) 4.70 4.27 1.50 Net Advances 64948 91405 146163 Net NPA 1423 1505 1053 Net NPA(%) 2.19 1.65 0.72 Gross Advances 18064 25976 36357 Gross NPA 336 439 509 Gross NPA(%) 1.86 1.69 1.40 Net Advances 17745 25566 35061 Net NPA 28 61 155 Net NPA(%) 0.16 0.24 0.44

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Indusind Bank Ltd Banks 2003-04 2004-05 2005-06 Interpretation: Indusind Bank need to adopt strategy in reducing NPA as its advances were more in 200405 and also Gross NPA has increased it may be because of their credit worth. And again it decreases Gross NPA in 2005-06 this ups and down can affect credit worthiness of the bank. Kotak Mahindra Bank Ltd. Banks 2003-04 2004-05 2005-06 Interpretation: Kotak Mahindra Bank Ltd Net NPA is Increasing from 2003-04 to 2004-05 and again it decreases to 0.24 in 2005-06. it implied that NPA of Kotak Mahindra Bank are in ups and down it may be because of any natural calamities or change in recovery measures etc. but Gross NPA and Net NPA of Kotak Mahindra Bank is less than 1%. So its good sign to Bank. Gross Advances 2105 4058 6353 Gross NPA 20 28 38 Gross NPA(%) 0.95 0.69 0.60 Net Advances 2097 4017 6349 Net NPA 3 15 15 Net NPA(%) 0.14 0.37 0.24 Gross Advances 7848 9093 9376 Gross NPA 259 321 269 Gross NPA(%) 3.3 3.53 2.90 Net Advances 7301 9000 9310 Net NPA 212 244 195 Net NPA(%) 2.90 2.71 2.09

UTI Bank Ltd

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Banks 2003-04 2004-05 2005-06 Interpretation UTI Bank Ltd Gross and Net NPA has decreases from 2.93 to 1.70 and 1.20 to 0.98 respectively from 2003-04 to 2005-06. This accomplishment is on account of credit growth, which was higher than the growth of Gross NPA and not through appreciable recovery of NPA. There is neither reduction nor even containment of the threat. Gross Advances 9386 15628 22400 Gross NPA 275 311 374 Gross NPA(%) 2.93 1.99 1.70 Net Advances 9363 15603 22314 Net NPA 112 217 218 Net NPA(%) 1.20 1.39 0.98

Performance Comparison of Net NPA of New Private Sector Banks New PSBs Bank of Panjab Ltd* 2003-04 4.69 2004-05 4.64 2005-06 0

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Centurion Bank Ltd* HDFC Bank Ltd ICICI Bank Ltd Indusind Bank Ltd. Kotak Mahindra Bank Ltd. UTI Bank Ltd Yes Bank 4.43 0.16 2.21 2.72 0.17 1.29 0 2.49 0.24 1.65 2.71 0.37 1.39 0 1.13 0.44 0.72 2.09 0.24 0.98 0

5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

Bank of Panjab Ltd* Centurion Bank Ltd* HDFC Bank Ltd ICICI Bank Ltd Indusind Bank Ltd. Kotak Mahindra Bank Ltd. UTI Bank Ltd Yes Bank

2003-04

2004-05

2005-06

Interpretation: From above chart we can see that Bank of Panjab Ltds NPA increasing till its amalgamated with Centurion Bank Ltd, and came nearer to 5%, after amalgamation both Bank of Panjab Ltd and Centurion Bank Ltd named themselves as Centurion Bank of

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Panjab Ltd. And in 2005-06 its NPA comes down 1.13% comparatively from previous year NPA. We can say that HDFC Bank Ltd has strong financial background and credit worthiness so it can provide more advances to people and also it is efficient enough to recover those advances so its Net NPA has coming down and it is less than 1%. So HDFC is performing well. In 2003-04 ICICI Bank Ltd Net NPA is more but its declining slowly and came to 0.72 from 2.21 in 2005-06. it may be because of its credit worthiness and strong recovery measures. ICICI Bank Ltd is real risk taker so we cannot compare it with other small banks because it providing high advances compare to other banks. Indusind Bank Ltd Net NPA almost same for 2003-04 to 2004-05 and declines to 2.09 in 2005-06. As Kotak Mahindra Bank Ltd providing comparatively low advances to avoid credit risk so its NPA is low compare to other Banks. Even UTI Bank is performing well in recovering debts so its NPA came down from previous year.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
IMPACT OF NPAS ON BANKS' PROFITS AND LENDING PROWESS: "The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time banks are required to make provisions for such NPAs from their current profits. NPAs have a deleterious effect on the return on assets in several ways

They erode current profits through provisioning requirements They result in reduced interest income They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and They limit recycling of funds, set in asset-liability mismatches, etc there is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning and boost up bottom lines. It would only postpone the In the context of crippling effect on a bank's operations in all spheres, asset quality has been placed as one of the most important parameters in the measurement of a bank's performance under the CAMELS supervisory rating system of RBI.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Credit risk path of the New Private Banks by Comparing with selected 7 Old PSBs using Quadrant Analysis. Credit risk path of the New Private Banks:

New Private Banks


Bank of Panjab Ltd*

NPA to Net Advances ( %) 2005 4.64 2.49 2006 1.13

Advances(crores)

Quadrant analysis

2005 2417 2194

2006 6533

2005 HL HL

2006 HL

Centurion Bank Ltd* HDFC Bank Ltd ICICI Bank Ltd Indusind Bank Ltd. Kotak Mahindra Bank Ltd. UTI Bank Ltd

0.24 1.65 2.71 0.37

0.44 0.72 2.09 0.24 0.98

25566 91405 9000 4017 15603

37661 146163 9310 6349 22314

LH LH HL LL LL

LH LH HL LL LL

1.39

Interpretation Credit risk path of the New PSBs: A Quadrant Analysis

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
In the chart below an attempt is made to trace the relationship between NPA proportion and the size of credit portfolio (advances) of New Private Banks. For this purpose proportion of gross NPAs representing credit risk inherent is taken on the X- axis and gross credit levels are taken on the Y-axis. Since these two parameters are assets, which are stock concept variables, they have been plotted on the basis of 2 years 2005 and 2006 for a comparative analysis. QUADRANT TABLE- 2005
LEVEL CREDIT LEVEL NPA LOW (BELOW AVG) (L) HIGH (ABOVE AVG) (H)

LOW HIGH

LL (2) HL (3)

LH (2) HH (0)

QUADRANT TABLE- 2006


LEVEL CREDIT LEVEL NPA LOW (BELOW AVG) (L) HIGH (ABOVE AVG) (H)

LOW HIGH

LL (2) HL (2)

LH (2) HH (0)

As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH, HL and HH (the figures are arrived at by taking the averages). The average of NPAs for BABASAB PATIL -69-

Non Performing Assets and its impact on Profitability of New Private Sector Banks
the year 2005 is 1.93% and this figure is measured against each bank, any percentage above this figure falls in the H category and percentage below 1.93% falls in the L category. The same applies with the advances. The average of advances for 2005 is 21,457 crores and 37,622 crores for 2006. The average of NPA for 2006 is 0.93%. L represents low or below average of the New Private Banks and, H represents high or above average. E.g. while LL means low in credit size and low in NPAs, LH implies low in NPA and High in credit size. The following facts are visible from the quadrant table: 1).As depicted in the tables, most of the new private banks fall in the HL quadrant. In 2005 there were 3 banks, which was 2 in 2006. As seen in the quadrants, the NPA was high compared to its credit size and the credit size is low in the New Sector Banks it might be because these banks hesitate to take risk and improper recovery measures. 2).There was 2 banks in the LL quadrant in 2005 which remain same in 2006 also. It means NPA Level and Credit size is low. 3). Bank of Panjab Ltd* is in HL quadrant, there is high level of NPA and Low Advances in 2005 . So only Bank of Panjab Ltd. has merged with Centurion Bank in 2005 September and named as Centurion Bank of Panjab Ltd but still its in HL quadrant so still this banks has to adopt proper strategy in providing advances and recovering debts. 5) The best performing bank in this sector was the ICICI Bank which was high in its credit size compared to the rest of the banks and still maintained a low NPA level followed by HDFC Bank Ltd..

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Credit risk path of the 7 selected Old PSBs:

Old Private Banks


City Union Bank Ltd Development Credit Bank Ltd ING Vysya Bank Ltd Lord Krishna Bank Ltd Bank of Rajastan Ltd The United Western Bank Ltd. The Karnatak Bank Ltd

NPA to Net Advances ( %) 2005 3.37 6.34 2006 1.95 4.50

Advances(crores)

Quadrant analysis

2005 2013 2156

2006 2550 1867

2005 LL HL

2006 LL HL

2.13 4.22 2.50

1.76 3.11 0.99

9081 1387 2896

10232 1421 4065

LH HL LL

LH HL LL

5.83

5.66

3976

4006

HH

HL

2.29

1.18

6287

7792

LH

LH

Interpretation

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Credit risk path of the 7 Private Sector Banks: A Quadrant Analysis In the chart below an attempt is made to trace the relationship between NPA proportion and the size of credit portfolio (advances) of 7 old Private Banks. For this purpose proportion of gross NPAs representing credit risk inherent is taken on the X- axis and gross credit levels are taken on the Y-axis. Since these two parameters are assets, which are stock concept variables, they have been plotted on the basis of 2 years 2005 and 2006 for a comparative analysis. QUADRANT TABLE- 2005
LEVEL CREDIT LEVEL NPA LOW (BELOW AVG) (L) HIGH (ABOVE AVG) (H)

LOW HIGH

LL (2) HL (2)

LH (2) HH (1)

QUADRANT TABLE- 2006


LEVEL CREDIT LEVEL NPA LOW (BELOW AVG) (L) HIGH (ABOVE AVG) (H)

LOW HIGH

LL (2) HL (3)

LH (2) HH (0)

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH, HL and HH (the figures are arrived at by taking the averages). The average of NPAs for the year 2005 is 3.81% and this figure is measured against each bank, any percentage above this figure falls in the H category and percentage below 3.81% falls in the L category. The same applies with the advances. The average of advances for 2005 is 3971 crores and 4562 crores for 2006. The average of NPA for 2006 is 2.74%. L represents low or below average of the PSBs and, H represents high or above average. E.g. while LL means low in credit size and low in NPAs, LH implies low in NPA and High in credit size. The following facts are visible from the quadrant table: 1).As depicted in the table in 2005, out of 7 Private Sector Banks, 2 are fall under LL, i.e. Low in NPA and Low in credit size, 2 fall under LH i.e. Low in NPA and High in credit size. And remaining out of 3, 2 fall under HL i.e. High in NPA and Low in credit size. 2) As depicted in the table in 2006, out of 7 Private Sector Banks, 2 are fall under LL, i.e. Low in NPA and Low in credit size, 2 falls under LH i.e. Low in NPA and High in credit size. And 3 fall under HL i.e. High in NPA and Low in credit size. 3) There were 2 banks in the HL quadrant in 2005 which increased to 3 in 2006. It means NPA Level is increasing year by year. 4). The United Western Bank Ltd moved from HH to HL , there is high level of NPA and High Advances in 2005 which moved to High level of NPA and Low level of advances in 2006. Its not good sign to Bank because as in 2005 there is High NPA and Credit size so Bank reduces its advances in 2006, but also its NPA increasing. 5) The best performing bank in this sector was the ING Vysya Bank which was high in its credit size compared to the rest of the banks and still maintained a low NPA level.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks
Comparison of New Private Banks credit path with Old selected Private Banks credit path by using above Quadrant Analysis. When compare to Old PBs, New PBs are performing well from past 2 years. Old PBs Net NPA on Advances are crossing 5% or nearer to 5 %, but almost all New PBs Net NPA on Advances are below 3%. It is good sign to New PSBs as it has strong credit path. New PBs are taking high risk by Providing more and more advances when compare to Old PB, Majority of Old PBs provide advances to Priority sectors whose recovery are very difficult, because advances paid for agriculture are very difficult to recover, but New PBs are able to provide advances to both priority and non priority sectors but it not expanded its services over villages. Thats why New PBs recovering its advances very quickly. Adverse Effects of NPA on the Working of New Private Banks: NPA has affected the profitability, liquidity and competitive functioning of New Private Banks and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion. Between 2004 and 2006 New Private Banks incurred a total amount of Rs.4399 Crores towards provisioning NPA. This has brought Net NPA to Rs.5780 Crores or 1.20% of net advances. To this extent the problem is contained, but at what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capital adequacy. The enormous provisioning of NPA together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the New Private Banks. In turn New Private Banks are seen as poor performers and unable to approach the market for raising additional capital. This has alternatively forced New Private Banks to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins, else they are to seek the bounty of the Central Government for repeated Recapitalization.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Findings:
The brightest spot in the Indian banking industry in 2005-2006 was the massive cleaning up of banks balance sheets by reducing non performing assets (NPAs). The net NPAs of 7 New Private Banks are reduced by (-) 18% while compare to previous year, i.e. from 2097 to 1709. Which was 6% higher Net NPA in 2004-05 when compare to 2003-04. Net Profit of New Private Banks are increased by 28% from 2004-05 to 2005-06. It may be because of provisions made in 2006 is comparatively low. Most of the New Private Banks fall under LL quadrant i.e. Low in NPA and Low in credit path in 2005-06. All New Private Banks Net NPA on advances is less than 5% in 2005-06, its good sign for companies to increase profit. New Private Banks recorded a growth in advances of 50.3% in 2006 as compare to 42.5% of the previous year. When compare to total advances of Old Private Banks rose from 34.9% to 40.37%. we can say New PSBs Credit capacity is more while compare to Old PSBs. Most banks were able to take advantage of fat profits from treasury operations, brought about by the lower interest rates, to make higher provisions for bad debts. As a result, out of 7 new Private Banks, 2 New Private Banks- i.e. HDFC Bank Ltd and Kotak Mahindra Bank Ltd Net NPA on advances has become less than 1%. Followed by ICICI Bank Ltd. And UTI Bank Ltd Net NPA on advances are less than 2%. ICICI is Best Performer in New Private Banks as it providing higher advances by taking risk compare to other banks, and is able to its NPA less than 2%.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Suggestions
1. Fixing up the budget for profits and recovery rather than for advances. Budget oriented approach at times leads to release of credit facilities without ensuring compliance of covenants of sanction. A suitable mechanism could be drawn at each bank level to provide monetary benefits/ re-organization of the operating staff particularly for recovery in NPAs write-off cases. 2. Projects with old technology should not be considered for finance. 3. Up gradation of credit skills of the operating staff working in advance to avoid over and under finance. 4. Timely sanction/ release of loan to avoid time and cost overruns. and also proper checking of documents while sanctioning loan are recommended. 5. It is suggested for possible restructuring of banks through mergers and acquisitions to keep themselves competitive in the high credit risk market in India. 6. One of best solution to overcome NPA is OTS ( One Time Settlement), RBI has advised all banks to provide a simplified mechanism for one time settlement of loans where the principle amount is equal to or less than 25000/- and which have become doubtful and loss assets.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Conclusion
An attempt is made in this study to present a comprehensive picture of nonperforming advances of New Private banks in India, touching upon various quantitative and qualitative trends in the post reform period, besides carrying out with some policy and strategic implications. Undoubtedly India is one of the few countries where NPA levels are very high as there is an increase in the percentage of gross advances eroding their Profit by major basic points, after netting the provision. New Private Banks NPA has come down i.e. less than 1%. While compare to old Private Banks whose NPA is more than 5%. It may be because of the proportion of credit risk among the priority sector advances is double that of non-priority advances implying the irrationality of (administered) price controls, which still exists in some form. External factors outweigh the internal factors contributing to this high accumulation of NPAs. If the banks have to survive in the competitive and increasingly globalize market conditions they should be helped both by the RBI and the government in the form of faster recovery climate, especially for the legal processes of enforcement of contracts. The quadrant analysis of credit risk clearly identifies that 7 New Private banks are comparatively performing well when compare to old selected PSBs. It also offers scope for mergers and acquisitions among the banks to be better prepared for high risk credit marketing in India. And also quadrant analysis helps to identify profitability position of New Private Banks by using advances provided and Non Performing Assets. Unless New Private Banks adopt proper Strategy to prevent huge level of NPAs, it go on affecting Profitability of Banks.

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Abbreviation used:
IBA: Indian Banking Association NPA: Non Performing Assets PBs: Private Banks UTI Bank Ltd: Unit Trust of India Bank ICICI Bank Ltd : Industrial Credit and Investment Corporation of India HDFC Bank Ltd.: Housing Development Finance Corporation Bank Ltd

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Non Performing Assets and its impact on Profitability of New Private Sector Banks

Bibliography
Indian Banking Association (IBA) Bulletin 2005-06 Websites www.Indianbankingassociation.com www.utibank.com www.Google.com

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