npa mcom koma
TRANSCRIPT
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CHAPTER 1
INTRODUCTION
INTRODUCTION
Since the introduction of economic liberalization and financial sector reforms, Banks are under
growing pressure to bring down their NPAs so as to improve their performance and viability.
hat is bothering the bankers today is the management of Non!performing Assets. "ver the
period this problem has aggravated alarmingly and therefore needs urgent remedial actions, so in
this conte#t a good number of circular instruction$guidelines have been issued by bank$%eserve
Bank of &ndia.
%eserve Bank of &ndia, in the year '((', appointed a committee under the )hairmanship of Sh.
*.Narsimham to e#amine and give recommendation for &ncome %ecognition, Asset
)lassification and Provisioning of loan assets of Banks and +inancial &nstitutions. he
)ommittee e#amined the issues and recommended that a policy of &ncome %ecognition should
be ob-ective and based on record of recovery rather than on sub-ective considerations. "n the
basis of the recommendations of the Narsimhan )ommittee, %B& had issued guidelines to all
Scheduled )ommercial Banks on &ncome %ecognition, Assets )lassification and Provisioning in
April, '(( which have been modified from time to time by the %B& on the basis of e#perience
gained and suggestions received from various /uarters. he Prudential Norms for &ncome
%ecognition, Asset )lassification and Provisioning have come into effect from the accounting
year 0'.10.'((0.
Similarly, guidelines were issued by the %eserve Bank of &ndia in *arch, '((2 to All &ndia
+inancial &nstitutions viz. &3B&,&)&)&, &+)&, A4&S Bank and &&B&. Separate guidelines were alsoissued by the %B& on Prudential Norms to Non!Banking +inancial )ompanies in 5une, '((2 and
to %egional %ural banks in *arch, '((6. hey have adopted these guidelines for the purpose of
&ncome %ecognition and Assets )lassification from the accounting year '((7!(6. 8owever,
guidelines relating to provisioning for %%Bs have been made effective from the financial9 year
ended 0'.10.'((:. he definition of NPAs is also gradually becoming tough for %%Bs to cover
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all advances like )ommercial Banks. Although most of!the guidelines relating to %%Bs are
similar to that of )ommercial Banks, they have been made applicable in a phased manner for
%%Bs.
INDIAN BANKS FUNCTIONALLYdiverse and geographically widespread, have played a
crucial role in the socio! economic progress of the country. Banks e#tend credit to different types
of borrowers for many different purposes. +or most customers, bank credit is the primary source
of available debt financing.
+or banks good loans are the most profitable assets. %eturn comes in the form of loan interest,
fee income and investment and the most prominent assumed risk is credit risk. )redit risk
involves inability or unwillingness of customer or counterpart to meet commitments in relation
to lending once a loan is overdue and ceases to yield income it would become a Non Performing
Asset.
Proper management and speedy disposal of NPAs is one of the most critical tasks of banks
today. he problem of Non Performing Assets ;NPAs< in banks and financial institutions has
been a matter of grave concern not only for the banks but also the real economy in general, as
NPAs can choke further e#pansion of credit which would impede the economic growth of the
country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in
the economy. NPAs are not therefore the concern of only lenders but also the public at large.
=ranting of credit for economic activities is the prime duty of banking. Apart from raising
resources through fresh deposits, borrowings and recycling of funds received back from
borrowers constitute a ma-or part of funding credit dispensation activity. >ending is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which results into economic growth. 8owever lending also carries a risk called credit
risk, which arises from the failure of borrower. Non!recovery of loans along with interest forms a
ma-or hurdle in the process of credit cycle. hus, these loan losses affect the bank?s profitability
on a large scale. hough complete elimination of such losses is not possible, but banks can
always aim to keep the losses at a low level.
Non!performing Asset @NPA has emerged since over a decade as an alarming threat to the
banking industry in our country sending distressing signals on the sustainability and insurability
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of the affected banks. he positive results of the chain of measures affected under banking
reforms by the =overnment of &ndia and %B& in terms of the two Narasimhan )ommittee
%eports in this contemporary period have been neutralized by the ill effects of this surging threat.
3espite various correctional steps administered to solve and end this problem, concrete results
are eluding. &t is a sweeping and all pervasive virus confronted universally on banking and
financial institutions. he severity of the problem is however acutely suffered by Nationalised
Banks, followed by the SB& group, and the all &ndia +inancial &nstitutions.
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MEANING OF NPA
A Non-performin !""e#@NPA is defined as a credit facility in respect of which the interest
and$or installment of Bond finance principal has remained past due? for a specified period of
time. NPA is used by financial institutionsthat refer to loans that are in -eopardy of default. "nce
the borrower has failed to make interest or principle payments for (1 days the loan is considered
to be a non!performing asset. Non!performing assets are problematic for financial institutions
since they depend on interest payments for income. roublesome pressure from the economy can
lead to a sharp increase in non!performing loansand often results in massive write!downs.
ith a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt the (1 days? overdue? norm for identification of NPA, from the year
ending *arch 0', 112. Accordingly, with effect from *arch 0', 112, a non!performing asset
@NPAis a loan or an advance whereC
&nterest and$or installment of principal remain overdue for a period of more than (' days
in respect of a term loan,
he account remains out of order? for a period of more than (1 days, in respect of
an"verdraft$)ash )redit @"3$)),
he bill remains overdue for a period of more than (1 days in the case of bills purchased
and discounted,
&nterest and$or installment of principal remains overdue for twoharvest seasonsbut for a
period not e#ceeding two half years in the case of an advance granted for agricultural
purposes, and
Any amount to be received remains overdue for a period of more than (1 days in respect
of other accounts.
Non submission of Stock Statements for 0 )ontinuous Duarters in case of )ash )redit
+acility.
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https://en.wikipedia.org/wiki/Financial_institutionshttps://en.wikipedia.org/wiki/Default_(finance)https://en.wikipedia.org/wiki/Non-performing_loanhttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/wiki/Default_(finance)https://en.wikipedia.org/wiki/Non-performing_loanhttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/wiki/Financial_institutions -
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No active transactions in the account @)ash )redit$"ver 3raft$EP)$P)+) for more than
('days
sify non!performing assets further into the following three categories based on the period for
which the asset has remained non!performing and the realisability of the duesF
'. Sub!standard assetsF a sub standard asset is one which has been classified as NPA for a
period not e#ceeding ' months.
. 3oubtful AssetsF a doubtful asset is one which has remained NPA for a period e#ceeding
' months.
0. >oss assetsF where loss has been identified by the bank, internal or e#ternal auditor or
central bank inspectors. But the amount has not been written off, wholly or partly.
Sub!standard asset is the asset in which bank have to maintain '7G of its reserves. All those
assets which are considered as non!performing for period of more than ' months are called as
3oubtful Assets. All those assets which cannot be recovered are called as >oss Assets.
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ABOUT THE REPORT
Title of the study: - The present study is titled as A
PROJECT REPORT ON NPA MANAGEMENT INBANK(SBI!"
O#$e%ti&e of the study:-The following are the objective of
the study
o study the position of non performing assets in SB&.
o know the impact on NPA on strategic banking variable.
o know the reason for an asset becoming NPA.
Pe'iod of the study:-The period of the present study is
FEB 21!"
i)it*tio+s of the Study:-The present study has got all
the li#itations of e$planatory study #ethod"
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,*t* *+d Methodoloy:-For the purpose of the present
study % had referred internet& boo's& newspaper to collect
infor#ation"
CHAPTER $
PROFILE
STATE BANK OF INDIA
SB& is the largest bank in &ndia with deposits of %s 0, 6:,111 crore as on *arch 0', 117. &t
dominates the &ndian banking sector with a market share of around 1G in terms of total banking
sector deposits. he increasing focus on upgrading the technology back!bone of the bank will
enable it to leverage its reach better, improve service levels, provide new delivery platforms, and
improve operating efficiency to counter the threat of competition effectively. "nce the core
banking solution @)BS is fully implemented, it will cover over '1,111 branches and A*s of
the State Bank group, and emerge as the strongest technology enabled distribution network in
&ndia.
he increasing integration of SB& with its associate banks @associates and subsidiaries will
further strengthen its dominant position in the banking sector and position it as the country?s
largest universal bank.
Re"o%r&e-r!i"in &!p!'i(i#ie"
SB&?s funding profile is strong, underpinned by its strong retail deposit base. he bank is facing
increasing competition in its metropolitan and urban franchise. SB&?s strong franchise gives it
access to a steady source of stable retail funds, which constitute around 7(G of the total
resources as on *arch 0', 117 @76G as at *arch 0', 112.
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Savings deposits have shown a strong three!year growth of '(G. hus, despite a reduction in the
proportion of current account deposits, low!cost deposits have continued to constitute over 21G
of total deposits as at *arch 0', 117. he bank?s cost of deposits @e#cluding &*3 has
significantly reduced to 2.:1G for the 112!17 @refers to financial year from April ' to *arch
0', compared with 7.2HG in 110!12. he bank?s li/uidity position is very strong due to healthy
accretion to deposits, large limits in the call market, and significant surplus S>% investments.
SB& will maintain its strong funding profile and a low cost resource position in view of its strong
retail base and wide geographical reach.
E!rnin" profi(e #o rem!in oo)
SB& will maintain a good earnings profile in the medium term despite high pressure on yields due
to the increasing competition in the banking sector. SB&?s earning profile is characterised by
consistency in the return on assets @PA$Average Assets, at around 'G per annum for the past
three years, and diverse income streams. o maintain yields and pursue credit growth, the bank is
aggressively targeting retail finance and small and medium enterprises @S*Es. he bank?s core
fee income of 'G of average funds deployed bolsters its revenue profile. 8owever, with the
opening of government business like ta# collection to other banks and increased competition, the
growth in fee income is e#pected to slow down. he bank?s operating e#pense at .22G of
average funds deployed in 112!17 is in line with other public sector banks. he bank?s cost
structure is rigid as fi#ed employee cost accounted for :2G of the operating e#penditure in 112!
17. hus, despite good asset growth and technology efficiency gains, the bank?s operating costs
will remain high in the medium term. o be able to reap the full benefits of technology
implementation, the bank will have to reduce or redeploy work forceC since this is a sensitive
issue, it is e#pected to happen gradually.
he bank?s fund based and fee income earnings are diversified across industries, regions, asset
classes, and customer segments.
Strong diversification in income streams will ensure that the bank?s earnings remain relatively
stable, despite the decline in profitability in some segments.
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Comfor#!'(e &!pi#!( po"i#ion
SB& is ade/uately capitalized with a tier & capital ade/uacy ratio of H.12G and a large capital
base of %s 21.: billion as at *arch 0', 117. he bank has considerably improved its net
worth coverage for net NPAs to 2.2 times as at *arch 0', 117 due to lower slippages reflectingan improving asset /uality, witnessed across the entire banking sector. he capitalization levels
of SB& are ade/uate to address the asset side risks and support the business growth in the
medium term.
M!n!emen# "#r!#eie"
&n retail finance, the bank has leveraged its corporate relationships, pursued business growth
selectively, and has not competed based on interest rate. he bank has taken initiatives like on!
line ta# returns filing and faster transfer of funds to protect its dominant position in the
government business. he bank also has a clear technology strategy that will enable it to compete
with the new generation private sector banks in customer service and operational efficiency.
A""e# *%!(i#+ #o rem!in !# !,er!e (e,e("
he bank continues to have a high level of gross NPAs at 7.(7G of gross advances as at *arch
0', 117, compared with 2.(G for all scheduled commercial banks @S)Bs taken together. he
bank is facing challenges to improve the /uality of assets originated, as can be seen in the
consistently higher levels of slippages @additions to NPAs at .:'G in 112!17.
o contain NPAs and ensure credit growth, the bank has decided to focus on financing the retail
@personal segment as well as S*Es. he share of retail advances has increased to 2.:0G @%s
7.1H billion of total advances as at September 01 117. &n the retail loan segment, SB& is
targeting primarily the housing loans segment, which constitutes %s. H0.2' billion @72.0G of
total retail loans. he NPAs in retail finance are low currentlyC however they are steadily
increasing @especially in the housing finance portfolio and have started showing signs of stress.
SB&?s retail portfolio has grown at over 0:G )A=% in the last two years and hence a significant
portion of the portfolio is largely unseasoned. he housing finance portfolio has a '!month,
lagged gross NPA of 2.02G as at *arch 0', 117.he bank will face significant challenges in the
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medium term to develop effective credit appraisal and collection systems in order to contain
NPAs in retail finance. SB&?s asset /uality is e#pected to remain at average levels, as the bank?s
large and diverse asset portfolio reflects of the asset /uality of the banking system.
B%"ine"" )e"&rip#ion
SB& along with its associate banks offer a wide range of banking products and services across its
different client markets. he bank has entered the market of term lending to corporates and
infrastructure financing, traditionally the domain of the financial institutions. &t has increased its
thrust in retail assets in the last two years, and has built a strong market position in housing
loans.
SB&, through its non!banking subsidiaries, offers a host of financial services, viz., merchant
banking, fund management, factoring, primary dealership, broking, investment banking and
credit cards. SB& has commenced its life insurance business by setting up a subsidiary, SB& >ife
&nsurance )ompany >imited, which is a -oint venture with )ardiff S.A., one of the largest
insurance companies in +rance. SB& currently holds :2G e/uity in the -oint venture.
In)%"#r+ pro"pe"
o leverage benefits such as access to low cost resources and the facility to provide a larger
gamut of services, a number of finance companies such as Iotak *ahindra +inance >imited and
83+) >imited have promoted banks. Simultaneously, yet another emerging trend is that of
foreign banks promoting NB+)s to benefit from regulatory fle#ibility available to such entities
in areas like absence of statutory li/uidity ratio and cash reserve ratio re/uirements, priority
sector re/uirements, and corporate e#posure limits.
Ne pri,!#e "eor '!n." &!p#%re m!r.e# "/!re
ith technological edge and a strong marketing thrust, private sector banks have been stealing
market share in retail deposits and the corporate fee business from public sector banks. ogether
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with some foreign banks, these private banks have also aggressively entered the retail asset
financing space, hitherto the domain of non!banking finance companies.
=iven their focus on cross selling and optimizing their customer base, they now offer the entire
range of products and services on the asset and liability side to retail and wholesale customers
A""e# *%!(i#+ #o impro,e
Banks have not yet fully resolved the stress in the asset /uality of their legacy corporate loan
portfolios, however. hough slippages to NPAs and provisioning were high for some banks in
+J112, as they moved to the (1!day norm for recognising and provisioning for NPAs, the
treasury gains enabled significant provisioning to be made with the result that net NPAs for most
public sector banks are now less than 0G.
=oing forward, steady growth in gross domestic product should help improve the banks? asset
/uality and increase corporate lending. he securitization and reconstruction of financial assets
and enforcement of security interest @Sarfaesi Act should also help banks in limiting slippages
and improving NPA recoveries.
Be##er C!pi#!(i0!#ion (e,e("
Banks have demonstrated a fair amount of fle#ibility in raising fresh e/uity capital through
public issues in recent years, thereby improving their capitalization levels. he steady accruals to
net worth and falling non!performing asset levels have resulted in an improvement in the
capitalization position of banks in recent years.
C/!((ene" !/e!)
)ompetition from new private sector and foreign banks remains a key challenge for public sector
banks. hey need to reorient their staff and effectively utilize technology platforms to retain
customers and reduce costs. hey also need to fortify their credit risk management systems to
mitigate the risks arising from small!ticket lending to the retail, small and medium enterprises,
and services segments.
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Con"o(i)!#ion !n) emeren&e of %ni,er"!( '!n.in ro%p"
he cap on foreign ownership of banks has already been raised from 2(G to :2G. he
competition in the sector could get further intensified if the '1G cap on voting rights is also
rela#ed. New private sector banks are e#panding their geographical coverage and making inroads
into government business. he new private and foreign banks will continue to gain market share
from public sector banks because of their efficient cost structures, technological edge, focused
marketing approach and operational freedom. 8owever, the emergence of newer players would
be restricted if the private ownership of banks is capped at low levels. *ergers among PSBs
would create banks with even larger balance sheets and customer base. 8owever, the integration
process in such mergers is e#pected to be comple# and time long drawn.
hese would also be driven by =o& due to provisions of Banking )ompanies @Ac/uisition and
ransfer of Kndertakings Act '(6(, and hence political scenario will impact the timing and
permutations possible. Strategic alliances between banks and other financial sector players such
as insurance companies and mutual funds are also likely as banks attempt to enhance their
product range, leverage on economies of scale and reduce costs.
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CHAPTER
THEORETICAL 2IE3
CLASSIFICATION OF NPA
Banks are re/uired to classify NPAs further into the following three categories based on the
period for which the asset has remained non!performing and the reliability of the duesF
i4 S%'-"#!n)!r) A""e#"5A sub!standard asset is one which has remained NPA for a period
less than or e/ual to 'H months. &n such cases, the current net worth of the borrower, or
the current market value of the security charged is not enough to ensure recovery of the
dues to the banks in full. Such assets will have well defined credit weakness that
-eopardize the li/uidation of the debt and are characterized by the distinct possibility that
the bank will sustain a loss.
ii4 Do%'#f%( A""e#"5 A 3oubtful Asset which has remained NPA for a period e#ceeding 'H
months. &t has all the weaknesses inherent to a sub!standard asset with the added
characteristic that the collection or li/uidation in full L on the basis of currently known
facts L is highly /uestionable and improbable.
iii4 Lo"" A""e#"5 A loss asset is one where a loss has been identified by the bank or, internal
or e#ternal auditors but the amount has not been written off wholly.
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GUIDELINES FOR CLASSIFICATION OF NPAS
Broadly speaking, classification should be done taking into account the degree of well defined
credit weaknesses and the e#tent of dependence on collateral security for realization of dues.
Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs, especially in respect of high value accounts.
Accounts with temporary deficienciesF hese should be classified based on the past recovery
records.
Accounts regularize near about the balance sheet dateF hese accounts should be handled
with care and without scope for sub-ectivity. here the account indicates inherent weaknessbased on available data, it should be deemed as an NPA.
Asset classification should be borrower!wise and not facility!wiseF &f a single facility to a
borrower is classified as NPA, others should also be classified the same way, as it is difficult
to envisage only a solitary facility becoming a problem credit and not others.
Advances under consortium arrangementsF )lassification here should be based on the
recovery record of the individual member banks.
Accounts where there is erosion in the value of the securityF &f there is a significant @i.e. the
realizable value of the security is less than 71G of that assessed by the bank during
acceptance the account may be classified as NPA.
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NPA SOME ASPECTS AND ISSUES
'. he NPAs of banks in &ndia are considered to be at higher levels than those in other
countries. his issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and disclosure
measures initiated by %B& during recent years.
. he NPA *anagement Policy document of SB& lays down to contain net NPAs to less
than 7G of bank9s total loan assets in confirmity with the international standard. &t is,
therefore necessary that as per guidelines provided in NPA *anagement Policy
document, every effort be made at all levels to cut down the NPAs. All this re/uires
greater efforts and teamwork.
0. &t is essential to keep a constant watch over the non!performing assets not -ust to keep it
performing but also that once they become non!performing, effective measures are
initiated to get full recovery and where this is not possible, the various means are to be
initiated to get rid off the NPAs from the branch books.
2. NPAs adversely affect the wealth condition of the branch advances as also the
profitability of the branch. Some of the reasons for this are as underF
@a &nterest cannot be applied on the loan accounts classified as NPAs.
@b he Branch 9has to pay interest to central office on outstanding classified as NPA.
@c he Branch has to incur cost in supervision and follow up of such advances.
@d Provision has to be made on NPAs at Bank level.
7. Knder &ncome %ecognition, Assets )lassification and provisioning, NPA may be Sub
standard, 3oubtful or loss assets.
6. "nce the assets are classified as NPA, the Branch *anager has to take all the necessary
steps to get the dues recovered there!under to maintain the good health of advances and
the higher profitability at the!Branch. his re/uires management of NPAs in such a
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Planned and scientific manner that the percentage of NPAs to the total advances will be
minimum.
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RECOGNITION OF INCOME ON NON-PERFORMING LOANS 6NPLS7
Stricter regulations have been laid down by supervisory authorities in many countries with
regard to income recognition on Non!Performing >oans @NP>s. he suspension of interest
payments is re/uired on loans that are classified as 9non!performing9 ;9substandard9, 9doubtful9 and
9loss9s are considered non!accrued interest. Previously
accrued, but uncollected interest is reversed out of income. +ailure to do so would overstate
income. Kncollected interest is normally put in a memorandum account. NP>s are restored on an
accrual basis only after full settlement has been made on all delin/uent principal and interest. &t
would, therefore, be useful, if the accounts carry a footnote, e#plaining the accounting policies
followed with regard to recognition of income on NP>s.
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REASONS FOR RISE IN NPA"
+A)"%S +"% %&SE &N NPAs he banking sector has been facing the serious problems of the
rising NPAs. But the problem of NPAs is more in public sector banks when compared to private
sector banks and foreign banks. he NPAs in PSB are growing due to e#ternal as well as internal
factors.
E8TERNAL FACTORS
Ineffei,e re&o,er+ #ri'%n!(
he =ovt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. 3ue to their negligence and ineffectiveness in their work the bank suffers the
conse/uence of non!recover, their by reducing their profitability and li/uidity.
3i(f%( Def!%(#"
here are borrowers who are able to payback loans but are intentionally withdrawing it. hese
groups of people should be identified and proper measures should be taken in order to get back
the money e#tended to them as advances and loans.
N!#%r!( &!(!mi#ie"
his is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and
then &ndia is hit by ma-or natural calamities thus making the borrowers unable to pay back there
loans. hus the bank has to make large amount of provisions in order to compensate those loans,
hence end up the fiscal with a reduced profit. *ainly ours farmers depends on rain fall for
cropping. 3ue to irregularities of rain fall the farmers are not to achieve the production level thus
they are not repaying the loans
In)%"#ri!( "i&.ne""
&mproper pro-ect handling , ineffective management , lack of ade/uate resources , lack of
advance technology , day to day changing govt. Policies give birth to industrial sickness. 8ence
the banks that finance those industries ultimately end up with a low recovery of their loans
reducing their profit and li/uidity.
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L!&. of )em!n)
Entrepreneurs in &ndia could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow to
operate these activities. he banks recover the amount by selling of their assets, which covers a
minimum label. hus the banks record the nonrecovered part as NPAs and has to make provision
for it.
C/!ne on Go,#4 po(i&ie"
ith every new govt. banking sector gets new policies for its operation. hus it has to cope with
the changing principles and policies for the regulation of the rising of NPAs. eg. he fallout of
handloom sector is continuing as most of the weavers )o!operative societies have becomedefunct largely due to withdrawal of state patronage. he rehabilitation plan worked out by the
)entral govt to revive the handloom sector has not yet been implemented. So the over dues due
to the handloom sectors are becoming NPAs.
INTERNAL FACTORS
Defei,e Len)in pro&e""
here are three cardinal principles of bank lending that have been followed by the commercial
banks since long. i. Principles of safety ii. Principle of li/uidity iii. Principles of profitability
i. Principles of safety By safety it means that the borrower is in a position to repay the loan both
principal and interest. he repayment of loan depends upon the borrowersF
!4 C!p!&i#+ #o p!+
b. 3i((inne"" #o p!+
)apacity to pay depends uponF '. angible assets . Success in business illingness to pay
depends onF '. )haracter . 8onest 0. %eputation of borrower he banker should, there fore take
utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one
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and the borrower is capable of carrying it out successfully .he should be a person of integrity and
good character.
In!ppropri!#e #e&/no(o+
3ue to inappropriate technology and management information system, market driven decisions
on real time basis can not be taken. Proper *&S and financial accounting system is not
implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of
the bank should be computerised.
Improper "o# !n!(+"i"
he improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. hile providing unsecured advances the banks depend more on the honesty, integrity, and
financial soundness and credit worthiness of the borrower. M Banks should consider the
borrowers own capital investment. M it should collect credit information of the borrowers from a.
+rom bankers b. En/uiry from market$segment of trade, industry, business. c. +rom e#ternal
credit rating agencies. M Analyse the balance sheet rue picture of business will be revealed on
analysis of profit$loss a$c and balance sheet. M Purpose of the loan hen bankers give loan, he
should analyse the purpose of the loan. o ensure safety and li/uidity, banks should grant loan
for productive purpose only. Bank should analyse the profitability, viability, long term
acceptability of the pro-ect while financing.
Poor &re)i# !ppr!i"!( "+"#em
Poor credit appraisal is another factor for the rise in NPAs. 3ue to poor credit appraisal the bank
gives advances to those who are not able to repay it back. hey should use good credit appraisal
to decrease the NPAs.
M!n!eri!( )efi&ien&ie"
he banker should always select the borrower very carefully and should take tangible assets as
security to safe guard its interests. hen accepting securities banks should consider the '.
*arketability . Acceptability 0. Safety 2. ransferability.
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he banker should follow the principle of diversification of risk based on the famous ma#im do
not keep all the eggs in one basketOC it means that the banker should not grant advances to a few
big farms only or to concentrate them in few industries or in a few cities. &f a new big customer
meets misfortune or certain traders or industries affected adversely, the overall position of the
bank will not be affected. >ike "S)B suffered loss due to the "* )uttack, and "rissa hand
loom industries. he biggest defaulters of "S)B are the "* @'':.::lakhs, and the handloom
sector "rissa hand loom )S ltd @20(.61lakhs.
A'"en&e of re%(!r in)%"#ri!( ,i"i#
he irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan. he
NPAs due to wilful defaulters can be collected by regular visits.
Re (o!nin pro&e""
Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. 3ue to re loaning to the defaulters and
))Bs and PA)s, the NPAs of "S)B is increasing day by day.
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IMPACT OF NPAS ON BANKS5-
&n portion of the interest income is absorbed in servicing NPA.NPA is not merely non!
remunerative. &t is also cost absorbing and profit eroding.
&n the conte#t of severe competition in the banking industry, the weak banks are at disadvantage
for leveraging the rate of interest in the deregulated market and securing remunerative business
growth. he options for these banks are lost. he spread is the bread for the banks. his is the
margin between the cost of resources employed and the return therefrom. his is the margin
between the cost of resources employed and the return thereform. &n other words it is gap
between the return on funds deployed @&nterest earned on credit and investments and cost of
funds employed @&nterest paid on deposits.
hen the interest rates were directed by %B&, as heretofore, there was not option for banks. But
today in the deregulated market the banks decide their lending rates and borrowing rates. &n the
competitive money and capital *arkets, inability to offer competitive market rates adds to the
disadvantage of marketing and building new NPA has affected the profitability, li/uidity and
competitive functioning of banks and finally the psychology of the bankers in respect of their
disposition towards credit delivery and credit e#pansion.
14 Imp! on Profi#!'i(i#+
9T/e effi&ien&+ of '!n." i" no# !(!+" ref(ee) on(+ '+ #/e "i0e of i#"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 re/uired to make provisions for such NPAS from their current profits.
NPAS have a deleterious effect on the return on assets in several waysF
hey erode current profits through provisioning re/uirements.
hey result in reduced interest income.
hey re/uire higher provisioning re/uirements affecting profits and accretion to
capital funds and capacity to increase good /uality risk assets in future, and
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hey limit recycling of funds, set in asset!liability mismatches, etc.
here 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. &t would only postpone the process.
&n the conte#t of crippling effect on a bank9s operations in all spheres, asset /uality has been
placed as one of the most important parameters in the measurement of a bank9s performance
under the )A*E>S supervisory rating system of %B&.
Between 1'.12.(0 to 0'.10.11', SB& =roup incurred a total amount of %s. 0'7' )rores
towards provisioning NPA. his has brought Net NPA to %s. 060 )rores or 6.G of net
advances. o this e#tent the problem is contained but a what costQ
his costly remedy is made at the sacrifice of building healthy reserves for future capital
ade/uacy.
he 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 SB& =roup. &n turn SB&
=roup are seen as poor performers and unable to approach the market for raising additional
capital. E/uity issues of nationalized banks that have already tapped the market are now /uoted
at a discount in the secondary market. "ther bans hesitate to approach the market to rise new
issues. his has alternatively forced SB& =roup to borrow heavily from the debt market to build
ier && )apital to meet capital ade/uacy norms putting severe pressure on their profit marginsC
else they are to seek the bounty of the )entral =overnment for repeated %ecapitalization.
)onsidering the minimum cost of holding NPAs at :G p.a. @reckoning average cost of funds at
6G plus 'G service charge the net NPA of %s. 060 )roces absorbs a recurring holding ost of
%s. 011 )rores annually. )onsidering the average provisions made for the last H years which
works out to average of %s. 0011 crores from annum, a sizeab business.
&n the face of the deregulated banking industry, an ideal competitive working is reached, when
the banks are able to earn ade/uate amount of non!interest income to cover their entire operating
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e#penses i.e. a positive burden. &n that event the spread factor i.e. the difference between the
gross interest income and interest cost will constitute its operating profits.
heoretically even if the banks keeps 1G spread, it will still break even in terms of operating
profit and not return an operating loss. he net profit is the amount of the operating profit minus
the amount of provisions to be made including for ta#ation. "n account of the burden of heavy
NPA, many nationalised banks have little option and they are unable to lower lending rates
competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income
from off balance sheet business yielding non!interest income.
he following working results of SB& =roup an identified well manged nationalised banks for
the last two years and for the first nine months of the current financial year, will be revealing to
prove this statement.
Non!interest income fully absorbs the operating e#penses of this banks in the current financial
year for the first ( months. &n the last two financial years, though such income has substantially
covered the operating e#penses @between H1 to (1G there is still a deficit left.
he strength of SB& =roup is indentified by the following positive featureF
'. &t9s sizeable earnings under of non!interest income substantially$totally meets its non!
interest e#penses.
. &ts obligation for provisioning re/uirements is within bounds. @Net NPA$Net
Advances is '.(G
&t is worthwhile to compare the aggregate figures of the '( Nationalised banks for the year ended
*arch, 11', as published by %B& in its %eport on trends and progress of banking in &ndia.
&nterest on %ecapitalization Bonds is a income earned form the =overnment, who had issued the
%ecapitalization Bonds to the weak banks to sustain their capital ade/uacy under a bailout
package. he statistics above show the other weaknesses of the nationalised banks in addition to
the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as
underF
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heir operating e#penses are higher due to surplus manpower employed. age costs total
assets is much higher to PSBs compared to new private banks or foreign banks.
heir earnings from sources other than interest income are meagre. his is due to failure
to develop off balance sheet business through innovative banking products.
$4 Imp! on Li*%i)i#+ of #/e SBI Gro%p
hough SB& =roup are able to meet norms of )apital Ade/uacy, as per %B& guidelines, the facts
that their net NPA in the average is as much as :G is a potential threat for them. %B& has
indicated the ideal position as Rero percent Net NPA. Even
granting 0G net NPA within limits of tolerance the SB& =roup are holding an uncomfortable
burden at :.'G as at *arch 11'. hey have not been able to build additional capital needed for
business e#pansion through internal generations or by tapping the e/uity market, but have
resorted to &&!ier capital in the debt market or looking to recapitalistion by =overnment of
&ndia.
4 Imp! on O%#(oo. of B!n.er" #o!r)" Cre)i# De(i,er+4
he fear of NPA permeates the psychology of bank managers in the SB& =roup in entertaining
new pro-ects for credit e#pansion. &n the world of banking the concepts of business and risks are
inseparable. Business is an e#ercise of balancing between risk and reward. Accept -ustifiable
risks and implements de!risking steps. ithout accepting risk, there can be no reward. he
psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm
to fresh credit. his has affected adversely credit growth compared to growth of deposits,
resulting in a low )$3 %atio around 71 to 72G for the industry.
he fear psychosis also leads to e#cessive security!consiousness in the approach towards lending
to the small and medium sized credit customers. here is insistence on provision of collateral
security, sometimes up to 11G value of the advance, and conse/uently due to a feeling of
assumed protection on account of holding ade/uate security @albeit over!confidence. a tendency
towards la#ity in the standards of credit appraisal comes to the fore. &t is well know that the
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e#istence of collateral security at best may convert the credit e#tended to productive sectors into
an investment against real estate, but will not prevent the account turning into NPA. +urther
blocked assets and real estate represent the most illi/uid security and NPA in such advances has
the tendency to persist for a long duration.
SB& =roup have reached a dead!end of the tunnel and their future prosperity depends on an
urgent solution for handling this hovering threat.
:4 Imp! on Pro)%i,i#+5
8igh level of NPAs effect the productivity of the banks by increasing the cost of funds and by
reducing the efficiency of banks employees. )ost of funds is increased because due to non!
availability of sufficient internal sources they have to rely on e#ternal sources to fulfill their
future financial re/uirements. Productivity of employees is also reduced because it keeps staff
busy with the task of recovery of overdue. &nstead of devoting time for planning for development
through more credit and mobilization of resources the branch staff would primarily be engaged
in preparing a large value of returns and statements relating to sub!standard, doubtful and loss
assets, preparing proposal for filing of suits, waivement of legal action, compromise, write off or
in preparing 3&)=) claim papers etc.
;4 Imp! on o#/er 2!ri!'(e"5
8igh level of NPAs also leads to s/ueezing of interest spread, when asset becomes an NPA for
the first time it adversely affects the spread by not contributing to the interest income and from
the second year onwards it will have its impact on the bottom line of the balance sheet because of
provisioning to be made for it and not have incremental effect on the spread.
Now a days =ovt. does not encourage liberal capital support to be given to banks. Banks are
re/uired to bring their own capital by issuing share to the public, whereas high level of NPAs
leads to lower profits hence less or no profits available for e/uity shareholders hence lower EPS
and fall in the value of share. 3uring the year 11'!1 share of ' public sector banks were
traded on the NSE out of which share value of three PSBs have decreased. >ow market value of
shares has also forced the banks to borrow heavily debt market to build ier && capital to meet
capital ade/uacy norms, putting severe pressure on their profit margins.
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conse/uent depression in the market. +urther high level of NPAs can result in adding to the
inflationary potential in the economy and eroding the viability of the credit system as a whole.
Not only this, burden of NPAs is to be borne by the society as a whole. hen capital support is
given to PSB on A$c of losses booked and$ or erosion of capital due to NPAs, it comes out of
either =ovt. budgetary resources or from the public as per
>iberalization policy, whether this money is from ta# revenues or from the hard earned saving of
the investing public, in fact, the society is bearing the cost of these
NPAs. *oreover, =ovt. holds ma-ority of shares in PSBs in some banks '11G capital is in its
hand. Any dividend declared would have gone to the =ovt. and which can be spent on the
welfare and development program.
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RECOMMENDATION
Cre)i# !)mini"#r!#ionF A banks have to strengthen their credit administrative
machinery and put in place effective credit risk management systems to reduce the fresh
incidence of NPAs.
Be##er In"peion5 e shall keep a close watch on the manner in which NPA
reduction is taking place.
C!"/ Re&o,er+5 e should also insist that cash recoveries should more than offset
the fresh write!offs in NPAs.
Per&ep#ion5 he mindset of the borrowers needs to change so that a culture of proper
utilization of credit facilities and timely repayment is developed.
Fin!n&i!( S+"#em5 As you are aware, one of the main reason for corporate default is
on account of diversion of funds and corporate entities should come forward of avoid this
practice in the interest of strong and sound financial system.
Coor)in!#or5 E#tending credit involves lenders and borrowers and both should realize
their role and responsibilities. hey should appreciate the difficulties of each other and
should endeavor to work contributing to a healthy financial system.
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CHAPTER :
CONCLUSION
CONCLUSION
A strong banking sector is important for a flourishing economy. he failure of the banking
sector may have an adverse impact on other sectors.
"ver the years, much has been talked about NPA and the emphasis so far has been only on
identification and /uantification of NPAs rather than on ways to reduce and upgrade them.
here is also a general perception that the prescriptions of 21G of net bank credit to priority
sectors have led to higher NPAs, due to credit to these sectors becoming stickly managers of
rural and semi!urban branches generally sanction these loans. &n the changed conte#t of new
prudential norms and emphasis on /uality lending and profitability, mangers should make it
amply clear to potential borrowers that banks resources are scare and these are meant to
finance viable ventures so that these are repaid on time and relevant to other needy borrowers
for improving the economic lot of ma#imum number of households. 8ence selection of right
borrowers, viable economic activity, ade/uate finance and timely disbursement, correct and
use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing
of minimizing the incidence of new NPAs.
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BIBILOGRAPHY
BOOKS 5 &N3&AN +&NAN)&A> SJSE*
AK8"% F I8AN.
PKB>&S8E% F AA *)=%A 8&>>.
4"'i4&om
4i.ipe)i!4&om
4"&ri')4&om
http://www.sbi.com/http://www.wikipedia.com/http://www.scribd.com/http://www.sbi.com/http://www.wikipedia.com/http://www.scribd.com/