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Non perfoming assets @ uti bank project report mba finance

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Non perfoming assets @ uti bank project report mba finance

Non perfoming assets @ uti bank project report mba finance

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  • 1. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” BABASAB PATIL -1-
  • 2. “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 unlimitedopportunities amidst insurmountable challenges. On the one hand we see the scenariorepresented by the rapid process of globalization presently taking shape bringing thecommunity of nations in the world together, transcending geographical boundaries, in thesphere of trade and commerce, and even employment opportunities of individuals. Allthese indicate newly emerging opportunities for Indian Banking. But on the darker sidewe see the accumulated morass, brought out by three decades of controlled andregimented management of the banks in the past. It has siphoned profitability of the manybanks, accumulated bloated NPA and threatens Capital Adequacy of the Banks and theircontinued stability. New Private Sector Banks in India can solve their problems only if they assert aspirit of self-initiative and self-reliance through developing their in-house expertise. Theyhave to imbibe the banking philosophy inherent in de-regulation NPA is a problemcreated by the Banks and they have to find the cause and the solution - how it was createdand how the Banks are to overcome it. An attempt is made in this study the presentsituation and to arrive at a solution to solve this problem. BABASAB PATIL -2-
  • 3. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Design of the studyTitle of the project: “Non Performing Assets and its impact on Profitability of New Private SectorBanks”.Scope of study: Scope of my study restricted only to 7 New Private Sector BanksNPA data’s and Advances, and for Comparison of Credit risk path 7 old selected PrivateBanks 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 anybusiness enterprise including the banking industry. However, increasing Non-Performing Assets, have a direct impact on profitability of banks and financialinstitutions. Legally speaking banks and financial institutions are not allowed to bookincome on such account and at the same times they are forced to make provision on suchassets. So This project is undertaken to now impact of NPA on Profitability of NewPrivate Sector Banks. BABASAB PATIL -3-
  • 4. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Objectives of Study 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 NPA’s in respective bank branches. 5. To recommend measures for Improving performance and reduction of Non Performing Assets. MethodologyPrimary Data:Views of the concerned officials were gathered by directly interacting with them, andsuch 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 PSB’s are taken into consideration. BABASAB PATIL -4-
  • 5. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” INTRODUCTION Its a known fact that the banks and financial institutions in India face the problemof swelling non-performing assets (NPA’s) and the issue is becoming more and moreunmanageable. In order to bring the situation under control, some steps have been takenrecently. The Securitization and Reconstruction of Financial Assets and Enforcement ofSecurity Interest Act, 2002 was passed by Parliament, which is an important step towardselimination or reduction of NPA’s.MEANING OF NPA’s: An asset is classified as non-performing asset (NPA’s) if dues in the form ofprincipal and interest are not paid by the borrower for a period of 180 days. Howeverwith effect from March 2004, default status would be given to a borrower if dues are notpaid for 90 days. If any advance or credit facilities granted by bank to a borrower becomenon-performing, then the bank will have to treat all the advances/credit facilities grantedto that borrower as non-performing without having any regard to the fact that there maystill exist certain advances / credit facility.NPA IN INDIAN BANKING SYSTEM: NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in themidst of turbulent structural changes overtaking the international banking institutions,and when the global financial markets were undergoing sweeping changes. In fact after ithad emerged the problem of NPA kept hidden and gradually swelling unnoticed andunperceived, in the maze of defective accounting standards that still continued withIndian Banks up to the Nineties and opaque Balance sheets. In a dynamic world, it is true that new ideas and new concepts that emergethrough such changes caused by social evolution bring beneficial effects, but only afterlevying a heavy initial toll. The process of quickly integrating new innovations in the BABASAB PATIL -5-
  • 6. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”existing set-up leads to an immediate disorder and unsettled conditions. People are notaccustomed to the new models. These new formations take time to configure, and worksmoothly. 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 sensitiveinstitutions entrenched deeply in traditional beliefs and conventions were unable to adjustthemselves to the changes. They suffered easy victims to this upheaval in the initialphase. Consequently banks underwent this transition-syndrome and languished underdistress and banking crises surfaced in quick succession one following the other in manycountries. But when the banking industry in the global sphere came out of thismetamorphosis to re-adjust to the new order, they emerged revitalized and as morevibrant and robust units. Deregulation in developed capitalist countries particularly inEurope, witnessed a remarkable innovative growth in the banking industry, whethermeasured in terms of deposit growth, credit growth, growth intermediation instruments aswell as in network. During all these years the Indian Banking, whose environment was insulated fromthe global context and was denominated by State controls of directed credit delivery,regulated interest rates, and investment structure did not participate in this vibrantbanking revolution. Suffering the dearth of innovative spirit and choking under undueregimentation, Indian banking was lacking objective and prudential systems of businessleading from early stagnation to eventual degeneration and reduced or negativeprofitability. Continued political interference, the absence of competition and total lack ofscientific decision-making, led to consequences just the opposite of what was happeningin the western countries. Imperfect accounting standards and opaque balance sheetsserved as tools for hiding the shortcomings and failing to reveal the progressivedeterioration and structural weakness of the countrys banking institutions to public view.This enabled the nationalized banks to continue to flourish in a deceptive manifestation BABASAB PATIL -6-
  • 7. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”and false glitter, though stray symptoms of the brewing ailment were discernable hereand there. The government hastily introduced the first phase of reforms in the financial andbanking sectors after the economic crisis of 1991. This was an effort to quickly resurrectthe health of the banking system and bridge the gap between Indian and global bankingdevelopment. Indian Banking, in particular PSB’s suddenly woke up to the realities of thesituation and to face the burden of the surfeit of their woes. Simultaneously majorrevolutionary transitions were taking place in other sectors of the economy on accountthe ongoing economic reforms intended towards freeing the Indian economy fromgovernment controls and linking it to market driven forces for a quick integration withthe global economy. Import restrictions were gradually freed. Tariffs were brought downand quantitative controls were removed. The Indian market was opened for freecompetition to the global players. The new economic policy in turn revolutionalised theenvironment of the Indian industry and business and put them to similar problems of newmixture Of opportunities and challenges. As a result we witness today a scenario ofbanking, trade and industry in India, all undergoing the convulsions of total reformationbattling to kick off the decadence of the past and to gain a new strength and vigor foreffective links with the global economy. Many are still languishing unable to get releasedfrom the old set-up, while a few progressive corporate are making a niche for themselvesin the global context. During this decade the reforms have covered almost every segment of thefinancial 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 ofnationalization. Increase in the number of banks due to the entry of new private andforeign banks; increase in the transparency of the banks balance sheets through theintroduction of prudential norms and norms of disclosure; increase in the role of themarket forces due to the deregulated interest rates, together with rapid computerization BABASAB PATIL -7-
  • 8. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”and application of the benefits of information technology to banking operations have allsignificantly affected the operational environment of the Indian banking sector. In the background of these complex changes when the problem of NPA wasbelatedly recognized for the first time at its peak velocity during 1992-93, there wasresultant chaos and confusion. As the problem in large magnitude erupted suddenly bankswere unable to analyze and make a realistic or complete assessment of the surmountingsituation. It was not realized that the root of the problem of NPA was centered elsewherein multiple layers, as much outside the banking system, more particularly in the transienteconomy of the country, as within. Banking is not a compartmentalized and isolatedsector delinked from the rest of the economy. As has happened elsewhere in the world, adistressed national economy shifts a part of its negative results to the banking industry. Inshort, banks are made ultimately to finance the losses incurred by constituent industriesand businesses. The unprepared ness and structural weakness of our banking system toact 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 perceptionsand hasty judgments led to a policy of ad-hoc-ism, which characterized the approach ofthe authorities during the last two-decades towards finding solutions to banking ailmentsand dismantling recovery impediments. Continuous concern was expressed. Repeatedcorrectional efforts were executed, but positive results were evading. The problem wasdefying a solution. The threat of NPA was being surveyed and summarized by RBI and Governmentof India from a remote perception looking at a birds-eye-view on the banking industry asa whole delinked from the rest of the economy. RBI looks at the banking industrysaverage on a macro basis, consolidating and tabulating the data submitted by differentinstitutions. It has collected extensive statistics about NPA in different financial sectorslike commercial banks, financial institutions, urban cooperatives, NBFC etc. But still it isa 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 BABASAB PATIL -8-
  • 9. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”economy that do not possess identical attributes. There are distinct diversities as amongthe 29 public sector banks themselves, between different geographical regions andbetween different types of customers using bank credit. There are three weak nationalizedbanks that have been identified. But there are also correspondingly two better performingbanks like Corporation and OBC. There are also banks that have successfully containedNPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (GrossNPA 6.13%). The scenario is not so simple to be generalized for the industry as a wholeto 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 andexpressed as an average for the entire bank cannot convey a dependable picture. It isbeing statistically stated that bank X or Y has 12% gross NPA. But if we look downfurther within that Bank there are a few pockets possessing bulk segments of NPAranging 50% to 70% gross , which should consequently convey that there should also beseveral other segments with 3 to 5% or even NIL % NPA, averaging the banks wholeperformance to 12%. Much criticism is made about the obligation of Nationalized Banksto extend priority sector advances. But banks have neither fared better in non-prioritysector. The comparative performance under priority and non-priority is only a differenceof 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 indifferent banks accounts for the sweeping disparities between inter-bank and intra-bankperformance. We may add that while the core or base-level NPA in the industry is due tocommon contributory causes, the inter-se variations are on account of the structural and BABASAB PATIL -9-
  • 10. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”operational disparities. The heavy concentrated prevalence of NPA is definitely due tohuman factors contributing to the same. No bank appears to have conducted studies involving a cross-section of its operatingfield staff, including the audit and inspection functionaries for a candid andcomprehensive introspection based on a survey of the variables of NPA burden underdifferent categories of sectoral credit, different regions and in individual Branchescategorized as with high, medium and low incidence of NPA. We do not hear the voice ofthe 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 adepth of inside knowledge do not out-pour candidly their views. After three decades ofnationalized banking, we must have some hundreds of retired Bank executives in thecountry, who can boldly and independently, but objectively voice their views. Everyoneis satisfied in blaming the others. Bank executives hold willful defaulters responsible forall the plague. Industry and business blames the government policies. Important fact-revealing information for each NPA account is the gap periodbetween the date, when the advance was originally made and the date of its becomingNPA. 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. Creditcustomers who are in NPA today, but for years were earlier rated as good performers andcreditworthy clients ranging within the top 50 or 100. Significant part of the NPA is onaccount of clout banking or willfully given bad loans. Infant mortality in credit is solelyon account of human factors and absence of human integrity. Credit to different sectors given by the PSB’s in fact represents different products.Advance to weaker sections below Rs.25000/- represents the actual social banking. NPAin this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI and bigindustries each calls for different strategies in terms of credit assessment, credit delivery,project implementation, and post advance supervision. NPA in different sector is notcaused by the same resultant factors. Containing quantum of NPA is therefore to be BABASAB PATIL -10-
  • 11. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”programmed by a sector-wise strategy involving a role of the actively engagedparticipants who can tell where the boot pinches in each case. Business and industry hasequal responsibility to accept accountability for containment of NPA. Many of thepresent defaulters were once trusted and valued customers of the banks. Why have theybecome unreliable now, or have they? The credit portfolio of a nationalized bank also includes a number of low-risk andrisk-free segments, which cannot create NPA. Small personal loans against banks owndeposits and other tangible and easily marketable securities pledged to the bank and heldin its custody are of this category. Such small loans are universally given in almost all thebranches and hence the aggregate constitutes a significant figure. Then there is foodcredit given to FCI for food procurement and similar credits given to major publicUtilities and Public Sector Undertakings of the Central Government. It is only theresidual fragments of Bank credit that are exposed to credit failures and reasons for NPAcan be ascertained by scrutinizing this segment. Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an allpervasive national scourge swaying the entire Indian economy. NPA is a sore throat ofthe Indian economy as a whole. The banks are only the ultimate victims, where life cycleof the virus is terminated. Now, how does the Government suffer? What about the recurring loss of revenueby way of taxes, excise to the government on account of closure of several lakhs oferstwhile vibrant industrial units and inefficient usage of costly industrial infrastructureerected with considerable investment by the nation? As per statistics collected three yearsback there are over two and half million small industrial units representing over 90percent of the total number of industrial units. A majority of the industrial work forcefinds employment here and the sectors contribution to industrial output is substantial andis estimated at over 35 percent while its share of exports is also valued to be around 40percent. Out of the 2.5 million, about 10% of the small industries are reported to be sickinvolving a bank credit outstanding around Rs.5000 to 6000 Crores, at that period. It may BABASAB PATIL -11-
  • 12. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”be even more now. These closed units represent some thousands of displaced workersPreviously enjoying gainful employment. Each closed unit whether large, medium orsmall occupies costly developed industrial land. Several items of machinery form securityfor the NPA accounts should either be lying idle or junking out. In other words, largevalue of land, machinery and money are locked up in industrial sickness. These are theassets created that have turned unproductive and these represent the real physical NPA,which indirectly are reflected in the financial statements of nationalized banks, as theultimate 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 thebanks. Recognizing NPA as a sore throat of the Indian economy, the field levelparticipants should first address themselves to find the solution. Why not representativesof industries and commerce and that of the Indian Banks Association come together andcandidly analyze and find an everlasting solution heralding the real spirit of deregulationand decentralization of management in banking sector, and accepting self-discipline andself-reliance? What are the deficiencies in credit delivery that leads to its misuse, abuseor loss? How to check misuse and abuse at source? How to deal with erring Corporate? Inshort, the functional staff of the Bank along with the representatives of business andindustry has to accept a candid introspection and arrive at a code of discipline in any finalsolution. And preventive action to be successful should start from the credit-recipientlevel and then extend to the bankers. RBI and Government of India can positivelyfacilitate the process by providing enabling measures. Do not try to set right industry andbanks, but help industry and banks to set right themselves. The new tool of deregulatedapproach has to be accepted in solving NPA. BABASAB PATIL -12-
  • 13. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPA’S IN THEINDIAN BANKING SYSTEM (IBS): The origin of the problem of burgeoning NPA’s lies in the quality of managingcredit risk by the banks concerned. What is needed is having adequate preventivemeasures in place namely, fixing pre-sanctioning appraisal responsibility and having aneffective post-disbursement supervision. Banks concerned should continuously monitorloans to identify accounts that have potential to become non-performing. To start with, performance in terms of profitability is a benchmark for anybusiness enterprise including the banking industry. However, increasing NPA’s have adirect impact on banks profitability as legally banks are not allowed to book income onsuch accounts and at the same time banks are forced to make provision on such assets asper the Reserve Bank of India (RBI) guidelines. Also, with increasing deposits made by the public in the banking system, thebanking industry cannot afford defaults by borrowers since NPA’s affects the repaymentcapacity of banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity in thesystem through various rate cuts and banks fail to utilize this benefit to its advantage dueto the fear of burgeoning non-performing assets. BABASAB PATIL -13-
  • 14. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Some of the other reasons were: • 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 NPA’s. • The slackness in effort by the bank authorities to collect or recover loan advances in time also contributes to the increase in NPA’s. • 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. BABASAB PATIL -14-
  • 15. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” • Lack of sincere corporate culture, inadequate legal provisions on foreclosure and bankruptcy. • Change in economic policies/environment. • Lack of co-ordination between banks. Some of the internal factors of the organization leading to NPA’s 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. BABASAB PATIL -15-
  • 16. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Operational definitions:NPA: An asset is classified as non-performing asset (NPA’s) if dues in the form ofprincipal 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 carriesnot more than normal risk attached to the business.Sub-standard Assets: It is classified as non-performing asset for a period not exceeding18 monthsDoubtful Assets: Asset that has remained NPA for a period exceeding 18 months is adoubtful asset.Loss Assets: Here loss is identified by the banks concerned or by internal auditors or byexternal auditors or by Reserve Bank India (RBI) inspectionCash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itselfin 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 objectiveis to ensure the safety and liquidity of the deposits with the banks.Statutory Liquidity Ratio (SLR): It is the one which every banking company shallmaintain in India in the form of cash, gold or unencumbered approved securities, anamount which shall not, at the close of business on any day be less than such percentageof the total of its demand and time liabilities in India as on the last Friday of the secondpreceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time. BABASAB PATIL -16-
  • 17. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”RBI GUIDELINES ON INCOME RECOGNITION (INTEREST INCOME ONNPA’s) Income Recognition: Income from Non Performing Assets should not recognize onaccrual basis but should be booked as income only when it is actually received. Thereforeinterest should not be charged and taken into income account till the account becomestandard asset. ♦ Interest charged to be stopped ♦ Provision to be madeOver 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 Bank’s 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 ofmore than 90 days.Cash Credit/ Over Draft: If the account remains out of order for a period more than90 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 than90 days. BABASAB PATIL -17-
  • 18. “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 remainsoverdue for two crop seasons.Long duration crops: If installment of principal or interest there on remains overdue forOne Crop season. An account would be classified as NPA only if the interest charged during anyquarter is not serviced fully within 90 days from the end of the quarter. ASSET CLASSIFICATIONStandard Assets:Is one which does not disclose any problem and which does not carry more than normalrisks 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. BABASAB PATIL -18-
  • 19. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”RBI GUIDELINES ON PROVISIONING REQUIREMENT OF BANKADVANCES:Loss Assets: 100% of the outstanding amount.Doubtful Assets: 100% of unsecured portion.Secured portionUp to one year 20%One to three years 30%More than 3 years1. Outstanding stock of NPA as on 75% w.e.f.31st March, 06 31.3.2004 100% w.e.f.31st March,072. Advances classified as “doubtful more 100% w.e.f.31st March,05 than 3 years” on or after 31.3.2004Substandard Assets: Secured portion 10% and unsecured portion 20% on totaloutstanding.Standard Assets: A general provision of 0.40% (For direct Agriculture & SME Sector0.25%). Provisioning for standard assets will be done at corporate office centrally. BABASAB PATIL -19-
  • 20. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Calculation of Net NPA (Non Performing Asset)Formula:GROSS NPALESS: Balance in Interest Suspense AccountLESS: DICGC/ECGC Claims received but pending for adjustmentLESS: Part payment received and kept in suspense accountIllustration: (Based on annual reports of UTI bank 2005-06) Particulars Amount Gross NPA of UTI for the year 2006 37428 LESS: Balance from interest suspense account 12704LESS: DICGC/ECGC Claims received but pending for 36 adjustmentLESS: Part payment received and kept in Suspense A/c 2928 NET NON PERFORMING ASSETS 21760 NET NPA IN PERCENTAGE 0.97%THE NARASIMHAN COMMITTEES FIRST REPORTThe salient features of these reforms include: BABASAB PATIL -20-
  • 21. “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 NPA’s, provisions for NPA’s, 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 1994-2001. 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. BABASAB PATIL -21-
  • 22. “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, hascombined drastic surgery with a strong dose of medicine to cure the ailing industry. On-performing assets (NPA’s) have been the bane of the industry. The panel has identifiedpoor credit decisions by managements, cyclical changes in the economic environment,directed credit and crude forms of behest-lending as the factors responsible for poor assetquality. The panel points a finger at priority sector credit as having a high contaminationcoefficient and suggests that quantitative targets have caused erosion of asset quality. Itlaments the fact that infusion of recapitalization funds notwithstanding, NPA’s remainuncomfortably high. Yet it recommends that advances covered by government guaranteesthat have turned sticky should also be reckoned as net NPA’s. The Narasimhan Committees solution for NPA’s is the creation of an AssetReconstruction Fund (ARF), which will take over the bad debts of banks from theirbalance sheets to enable them to start on a clean slate. Recapitalization through budgetaryinfusion, the panel correctly points out, is not a sustainable option. But bankers areskeptical about the workability of the ARF. A senior banker asked, "At what price willthe ARF take over my NPA’s? How will the discount be worked out?" He said that theARF cannot bail out banks under the present legal system. Although every bad debt issecured, banks cannot encash the security because of legal hurdles. The Urban LandCeiling Act is a major deterrent to debt recovery. Bankers say that the legal system has tobe revamped to facilitate recovery so that the ARF can pick up "NPA’s at a viable price". The committee has recommended that net NPA’s be brought down to less than 5per cent by the year 2000 and 3 per cent by the year 2002. "Easier said than done," says atop banker. "Already we do a lot of window-dressing. Outstanding accounts are shown aspriority lending to meet targets. We keep lending to defaulters to roll over the NPA’s.Fixing unrealistic targets will be counterproductive." BABASAB PATIL -22-
  • 23. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” The committee has recommended that banks should not lend to defaulters, butbankers say that this is unrealistic. They claim that in the absence of fresh loans, thedefaulting companies will close down, and leading to loss of jobs. "Will that beacceptable?" asks a banker. Bankers also complain that they are forced by the Board forIndustrial and Financial Reconstruction (BIFR) to lend to sick companies, yet more oftenthan not there is no turnaround and the accounts turn bad.Credit Risk and NPA’s: Quite often credit risk management (CRM) is confused with managing non-performing assets (NPA’s). However there is an appreciable difference between the two.NPA’s are a result of past action whose effects are realized in the present i.e. theyrepresent 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 approachand is mainly concerned with managing the quality of credit portfolio before default takesplace. In other words, an attempt is made to avoid possible default by properly managingcredit risk. Considering the current global recession and unreliable information infinancial statements, there is high credit risk in the banking and lending business. Tocreate a defense against such uncertainty, bankers are expected to develop an effectiveinternal 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 statementhave a key role to play by providing valuable information on a borrower’s viability.However, the approach of scrutinizing financial statements is a backward looking BABASAB PATIL -23-
  • 24. “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 currentpositions. The key accounting ratios generally used for the purpose of ascertaining thecreditworthiness of a business entity are that of debt-equity ratio and interest coverageratio. Highly rated companies generally have low leverage. This is because; high leverageis 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 Indianbanks. The minimum CAR which the Indian Banks are required to meet at all times is setat 9%. It should be taken into consideration that the banks capital refers to the ability ofbank 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 andits capital are often closely related. Quality of assets is reflected in the quantum ofNPA’s. By this, it implies that if the asset quality was poor, then higher would be thequantum of non-performing assets and vice-versa. Market risk is the risk arising due to the fluctuations in value of a portfolio due tothe volatility of market prices. Operational risk refers to losses arising due to complex system and processes. It isimportant for a bank to have a good capital base to withstand unforeseen losses. Itindicates the capability of a bank to sustain losses arising out of risky assets. The Basel Committee on Banking Supervision (BCBS) has also laid down certainminimum risk based capital standards that apply to all internationally active commercial BABASAB PATIL -24-
  • 25. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”banks. That is, banks capital should at least be 8% of their risk-weighted assets. Thisinfact 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 ofunexpected financial losses thereby ensuring healthy financial markets and protectingdepositors.IMPACT OF EXCESS LIQUIDITY: One should also not forget that the banks are faced with the problem of increasingliquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity inthe system through various rate cuts. Banks can get rid of its excess liquidity byincreasing its lending but, often shy away from such an option due to the high risk ofdefault. In order to promote certain prudential norms for healthy banking practices, mostof the developed economies require all banks to maintain minimum liquid and cashreserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory LiquidityRatio (SLR). Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain withitself in the form of cash reserves or by way of current account with the Reserve Bank ofIndia (RBI), computed as a certain percentage of its demand and time liabilities. Theobjective 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 everybanking company shall maintain in India in the form of cash, gold or unencumberedapproved securities, an amount which shall not, at the close of business on any day beless than such percentage of the total of its demand and time liabilities in India as on thelast Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) mayspecify from time to time. A rate cut (for instance, decrease in CRR) results into lesser funds to be locked upin RBIs vaults and further infuses greater funds into a system. However, almost all the BABASAB PATIL -25-
  • 26. “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, thinningmargins, 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 areno longer warmly greeted by the bankers.HIGH COST OF FUNDS DUE TO NPA’s: Quite often genuine borrowers face the difficulties in raising funds from banksdue to mounting NPA’s. Either the bank is reluctant in providing the requisite funds tothe genuine borrowers or if the funds are provided, they come at a very high cost tocompensate the lender’s losses caused due to high level of NPA’s. 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 Assetsand Enforcement of Security Interest Act, 2002, banks can issue notices to the defaultersto pay up the dues and the borrowers will have to clear their dues within 60 days. Oncethe borrower receives a notice from the concerned bank and the financial institution, thesecured assets mentioned in the notice cannot be sold or transferred without the consentof the lenders. The main purpose of this notice is to inform the borrower that either the sum dueto the bank or financial institution be paid by the borrower or else the former will takeaction by way of taking over the possession of assets. Besides assets, banks can alsotakeover the management of the company. Thus the bankers under the aforementionedAct will have the much needed authority to either sell the assets of the defaultingcompanies or change their management. But the protection under the said Act only provides a partial solution. What banksshould ensure is that they should move with speed and charged with momentum in BABASAB PATIL -26-
  • 27. “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 fetchgood price. If faced with such a situation than the very purpose of getting protectionunder the Securitization Act, 2002 would be defeated and the hope of seeing a must havegrowing banking sector can easily vanish.Non Performing Assets of New Private Sector Banks-Sector wise (2006 data)Centurion Bank of Panjab Ltd Sector Amount( in Crore) Percentage to total Agriculture 10.68 3.39 Small Scale Industries 11.23 3.57 Others 8.99 2.85HDFC Bank Ltd Sector Amount( in Crore) Percentage to total Agriculture 22.85 3.92 Small Scale Industries 19.15 3.28 Others 174.26 29.88ICICI Bank Ltd. Sector Amount( in Crore) Percentage to total Agriculture 45.65 2.05 Small Scale Industries 35.58 1.60 Others 13.06 0.59Indusind Bank Ltd Sector Amount( in Crore) Percentage to total Agriculture 110.37 41.06 BABASAB PATIL -27-
  • 28. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Small Scale Industries 12.92 4.81 Others 24.80 9.23Kotak Mahindra Bank Ltd Sector Amount( in Crore) Percentage to total Agriculture 3.26 8.17 Small Scale Industries - - Others 15.36 38.49UTI Bank Ltd Sector Amount( in Crore) Percentage to total Agriculture 56.71 15.17 Small Scale Industries 13.84 3.70 Others 0.30 0.08RECOVERY 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 sinceefforts 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 claimamount, banks and Fls have to depend heavily on them. Efforts are on to amend therecovery act to assign more powers to DRTs. More importantly, the borrowers tendencyto challenge the verdict of the Appellate Tribunals in the High court to seek natural- BABASAB PATIL -28-
  • 29. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”justice needs to be checked, Otherwise, early recovery efforts through DRTs would befutile. Secondly, training of presiding officers of Tribunals about the intricacies ofbanking practices is very essential. Further, the numbers of recovery officers have to beenhanced in every DRT for effective recovery. Finally, banks and Fls have to comeforward to provide liberal help to DRTs to equip them in terms of infrastructure,manpower, etc. BABASAB PATIL -29-
  • 30. “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 CompanyAct will be repealed and Board for Industrial Finance and Reconstruction will be wound-up. As an alternative arrangement, it is proposed to set up NCLT by amending theCompanies Act 1956. In August 2001, the NCLT is expected to consolidate the powersof BIFR, High court and Company Law Board to avoid multiplicity of forums. Inmatters of rehabilitation of sick units, all concerned parties are supposed to abide by theorders of NCLT. There shall be 10 benches, which will deal with rehabilitation,reconstruction and winding-up of companies. It is estimated to complete the entireprocess during a period of 2-3 years as against 20-27 years presently taken. The Tribunalwill have, in addition, powers of contempt of court. A rehabilitation and revival fund will be constituted to make interim payment ofdues to workers of a company declared sick or is under liquidation, protection of assets ofsick company and rehabilitate sick companies. While NCLT will be acting on the lines ofBIFR in the matters of rehabilitation viability of the projects will be assessed on cash testand not in the present test of net-time limit for completing each formality relating torehabilitation and winding-up. Though the Bill is well drafted to ensure NCLT tobecome 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 presentpolitical economy. In any case, it is too early to comment. BABASAB PATIL -30-
  • 31. “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 hasbeen some hesitancy on the part of Bank and financial institution to implement RBIguidelines on debt restructuring recently three-tire body, CDR has been set up tocoordinate corporate debt –restructuring program. It is yet to be operationalized CDRconsist of Forum Group and cell. While the forum evolves broad policy guidelines, thegroup takes decisions on the proposals pecommended by the Cell. Initially, the borrowerapproaches his Lead bank/FI with a request to restructure debt which in turn puts up theproposal to the Cell. The CDR Covers only multiple banking accounts enjoying creditfacilities exceeding Rs.20crore. Cases of DRT, BIFR and willful defaults, doubtful andloss accounts and suit-filed cased are outside the purview of the CDR. Thus standard andsub-standard accounts are only eligible to seek CDR shelter. Decisions of the group arebased on the super majority principle. If 75 percent of the secured creditors agree to therehabilitation plan, it is binding on the other banks/Fis. The CDR is a voluntary system based on debtor- creditor agreement and inter-creditors agreement. No banker/borrower can take recourse to any legal action during thestand-still period of 90-180 days. Lastly, CDR will observe the RBI Guideline on DebtRestructuring issued in March 2006. While the arrangements under CDR seem to befeasible from the debt restructuring perspective, its success depends upon the cooperationextended by borrowers and bankers, on the one hand, and understanding among banksand Fis, on the other. Doubts are raised about the implementation of these agreementstaking into the present working of the loan consortium arrangements. BABASAB PATIL -31-
  • 32. “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 publicsector banks. The RBI will be the regulator of these ATCs. The ARC will buy NPAs ofthe banks and financial institutions at the pre-determined discounted value and issue NPAredemption bonds, which carry a fixed return. ARCs are expected to be managed byprofessionals to effect maximum recovery of NPA, which will help in redemption ofbonds 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 theefficiency of DRTs and courts. Further, if ARC is going to depend on the staff deputedby weak banks, its recovery chances are doubtful. 5. Company Mergers. Under the Companies Act, 1956, mergers are permitted. In 1977, Sec 72-A wasinserted in the Income Tax Act to offer tax incentives to healthy companies which takeover the sick companies and prepare revival plans. Response to this scheme formalitiesas per the instructions of the High Court and Income Tax Department. Tax incentives arefound to be inadequate to motivate healthy companies to come forward and takeadvantage of the scheme. Recovery of bank dues on company-mergers is not assuredsince hardly 7.8 per cent of sick companies are successfully revived. Encouraged by thesuccess achieved in company mergers in developed countries, a review of the schemeunder section 72-A of IT Act is called for. BABASAB PATIL -32-
  • 33. “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 beforethe loan installment falls due. Generally, response to this arrangement particularly fromhonest borrowers is encouraging. But efforts need to be strengthened in banks insending reminders on timely basis. 2. Visit to Borrower’s Business Premise/Residence This is a more dependable measure of recovery. Visits need to be properlyplanned. Involvement of staff at all levels in the bank branch is called for. Costsinvolved in recovery need to be kept to the minimum. Frequent visits are called for incase of hardcore borrowers. Over the years, it is observed that the number and quality ofvisits are going down. Consequently, the recovery process is affected. 3. Recovery Camps In respect of agricultural advances, recovery camps should be organized duringthe harvest season. To ensure maximum advantage, recovery camps need to be properlyplanned. It is also essential to take the help of outsiders, particularly, revenue officers inthe state government, local panchayat officials, regional approach to give a widepublicity of the recovery camps to be organized in the local area, mobilize as manyfarmers as possible and motivate the staff to get involved in the recovery drive. BABASAB PATIL -33-
  • 34. “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 ofsincere and hardworking borrowers. If such borrowers fail to pay loan installments dueto natural calamities or for some other convincing reasons, unpaid loan installments maybe 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 basiskeeping in mind the official definitions. Causes of sickness should be genuine. If theproject is found viable in terms of Debt Service Coverage Ratio (DSCR), rehabilitationpackage 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. Closemonitoring of the progress of implementation is called for. There are several successstories on rehabilitation of sick units. But in general, it is observed that the success ratein 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 thefirst year of implementation. New guidelines on rehabilitation of sick SSI units will alsobe issued soon by the RBI. For successful rehabilitation, it is essential to create asense of urgency on the part of both banks and borrowers. Efforts on the part of thegovernment in terms of concessions, relief’s etc. Should be made on timely basis.Understanding between bank and SFCs should be strengthened. Above all, stern actionagainst willful defaulters is called for. BABASAB PATIL -34-
  • 35. “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 aprofessional approach in preparing the compromise proposal for which each bank isexpected to introduce a scheme. Committee approach should be adopted to decide on theloan compromise. Delays in taking decisions should be avoided. Recently, one TimeSettlement (OTS) scheme was introduced by the RBI. The overall response to thescheme was limited. Hence, each bank is expected to come out with its own OTSscheme. In addition, training of operating staff is essential to change their mindset. Foreffective 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 concerningthe appointment of outside professional agencies whose services can be utilized toascertain the whereabouts of the borrowers and enforcement of securities. There is somehesitancy on the part of public sector banks in engaging them for recovery purposes dueto unpleasant experiences in certain cases. But during the post – VRS scenario, it issuggested to seek such outsourcing. This should be done after examining the credentialsof the professionals. It is also essential to keep a constant vigil on their practice. BABASAB PATIL -35-
  • 36. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” BABASAB PATIL -36-
  • 37. “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 in1994, after the Government of India allowed new private banks to be established. TheBank was promoted jointly by the Administrator of the specified undertaking of the, UnitTrust 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 publicholding (other than promoters) at 72.46 %.The Banks Registered Office is at Ahmedabad and its Central Office is located atMumbai. Presently the Bank has a very wide network of more than 469 branch officesand Extension Counters. The Bank has a network of over 2016 ATMs providing 24hrs aday banking convenience to its customers. This is one of the largest ATM networks in thecountry. The Bank has strengths in both retail and corporate banking and is committed toadopting 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. BABASAB PATIL -37-
  • 38. “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 PeoplePromoters:UTI Bank Ltd. has been promoted by the largest and the best Financial Institution of thecountry, 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 andManaging Director of the Bank.The members of the Board are : Dr. P. J. Nayak Chairman & Managing Director Shri Surendra Singh Director Shri N.C. Singhal Director Shri A.T. Pannir Selvam Director Shri J.R. Varma Director Dr. R. H. Patil Director Smt. Rama Bijapurkar Director Shri R B L Vaish Director Shri S. Chatterjee Executive Director (Whole Time Director) Shri S B Mathur Director Shri M V Subbiah Director Shri Ramesh Ramanathan Director BABASAB PATIL -38-
  • 39. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”History of UTI Bank1993- The Bank was incorporated on 3rd December and Certificate of business on14thDecember. The Bank transacts banking business of all description. UTI Bank Ltd. waspromoted by Unit Trust of India, Life Insurance Corporation of India, GeneralInsurance Corporation of India and its four subsidiaries.- The bank was the first private sector bank to get a license under the new guidelinesissued by the RBI1994 – First branch of UTI Bank inaugurated at Ahmedabad by Dr. Manmohan Singh,Honble Finance Minister, Government of India.1995 – Completes first profitable year in operation1996 – Crosses Rs.1000 crore deposit mark1997 – 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 banks ATMs across the country which are inter- connected by VSAT. - UTI Bank has launched a new retail product with operational flexibility for its customers. BABASAB PATIL -39-
  • 40. “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 Indias 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.m2000 -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 buysell demat stocks through the companys 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 SCHCILs 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 BABASAB PATIL -40-
  • 41. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” counter 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 banks 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 banks 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 BABASAB PATIL -41-
  • 42. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” the unaudited half yearly/quarterly financial results of the Bank for the half year/ Quarter ended September 30, 2002. -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 banks 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. BABASAB PATIL -42-
  • 43. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”2004 -Comes out with Rs. 500 mn Unsecured Redeemable Non-Convertible Debenture Issue, issue fully subscribed -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 Co’s -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 $67.6 m -UTI Bank installs ATM in Thiruvananthapuram -Launches `Remittance Card in association with Remit2India, a Web site offering money-transfer services2005: UTI Bank appointed by Government of Karnataka as the sole banker for the Bangalore One (B1) project. - UTI Bank launches a powerful version of Kisan Credit Card. - UTI Bank gets listed on the London Stock Exchange, raises US$ 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. BABASAB PATIL -43-
  • 44. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” - 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.2006: UTI Bank and UTI Mutual Fund to launch a new service for sale and redemption of mutual fund schemes through the Bank’s 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. BABASAB PATIL -44-
  • 45. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”SWOT Analysis Strength Weakness  UTI Bank has been in the banking  Tedious procedures have to be industry since 1994. It has followed before advancing loans successfully completed 12 years in causing inconvenience to customers. the Banking industry.  The bank has a sound network i.e Anywhere Banking facility in 450 Branches and 1891ATMs at strategic locations in India.  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 Threat  Global aspirations of Indian  Bank is facing competition from its consumers and growing integration other Private Sector Banks and even with NRIs. the foreign Banks  The bank can optimize the growth  Changing economic policies of opportunities arising out of retail Government will have serious banking and small and medium impact on interest rates and reserve enterprises (SMEs). ratio maintained with RBI  Further expansion of ATMs networks and possible arrangements of sharing networks of other banks by issuing mutual funds and insurance. BABASAB PATIL -45-
  • 46. “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 TransferCurrent Account  Normal Current Account  Business Advantage Account  Business Classic Account  Business Privilege Account  Channel One BABASAB PATIL -46-
  • 47. “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 WithdrawalRetail loans - UTI Bank is providing following loan facilities to the customers in retailloan section.  Power Drive  Power Home  Asset Power  Personal Power  Loans against Securities  Consumer Power  Study PowerCorporate banking - In corporate banking UTI Bank is providing following services.  Cash Management Services  Lending/Financing  Trade Service  Current Account  Fixed DepositsLending/Financing  Working capital finance  Cash credit / working capital demand loan BABASAB PATIL -47-
  • 48. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”  Loan against FCNR (B) deposit  Term lending  Project loan  Bill finance supply / purchase bills  Channel finance  Asset securitization  Line of credit  Bank guaranteesTrade ServiceTrade Finance  Bills Discounting  L/C Backed bill discounting  Drawee Bill Discounting  Drawer Bill Discounting Financial advisory service It is bank’s endeavor to offer customer complete personal finance solutions.Through bank’s financial Advisory Services bank understand customers investmentrequirements and design tailor made financial solutions for them. Beyond merely advising customers, Bank will also help the customers to invest ina variety of instruments including.  Mutual Funds  Bank assurance  Equity  Tax consultancy  IPO Buzz  Fixed Income Products BABASAB PATIL -48-
  • 49. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”  Portfolio Tracker NRI SERVICES In UTI Bank, realize that as an NRI, customer banking needs are special. And inkeeping with this philosophy, and offer valued NRI customers a plethora of servicescustomized 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 currenciesCapital markets  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 BABASAB PATIL -49-
  • 50. “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 Bankof India (RBI) and Government of India for collecting Taxes on behalf of a StateGovernment. The Bank is handling Collection of Commercial Taxes in the twin cities ofHyderabad and Secunderabad for Govt. of Andhra Pradesh since July 2001. UTI Bank is now authorised by Reserve Bank of India and Govt. of India forconducting all Central Government and State Government Business commencing withOctober 1, 2003. The authorisation means the Bank can undertake the followingbusiness 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 BABASAB PATIL -50-
  • 51. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” BABASAB PATIL -51-
  • 52. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Findings And Analysis BABASAB PATIL -52-
  • 53. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Design of the studyTitle of the project: “Non Performing Assets and its impact on Profitability of New Private SectorBanks”.Scope of study: Scope of my study restricted only to 7 New Private Sector BanksNPA data’s and Advances, and for Comparison of Credit risk path 7 old selected PrivateBanks 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 anybusiness enterprise including the banking industry. However, increasing Non-Performing Assets, have a direct impact on profitability of banks and financialinstitutions. Legally speaking banks and financial institutions are not allowed to bookincome on such account and at the same times they are forced to make provision on suchassets. So This project is undertaken to now impact of NPA on Profitability of NewPrivate Sector Banks. BABASAB PATIL -53-
  • 54. “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 NPA’s in respective bank branches. 10. To recommend measures for Improving performance and reduction of Non Performing Assets. MethodologyPrimary Data:Views of the concerned officials were gathered by directly interacting with them, andsuch 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. BABASAB PATIL -54-
  • 55. “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 PSB’s 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 yearsS No Banks Operating Profit ( in Crore) 2003-04 2004-05 2005-06 1 Bank of Panjab Ltd* 103 19 - 2 Centurion Bank Ltd* 12 31 148 3 HDFC Bank Ltd 1008 1344 1979 4 ICICI Bank Ltd 2481 2956 4691 5 Indusind Bank Ltd. 445 401 225 6 Kotak Mahindra Bank Ltd. 127 133 211 7 UTI Bank Ltd 698 566 994 8 Yes Bank - (4) 99 5000 4000 3000 2003-04 2000 2004-05 1000 2005-06 0 -1000 d d nk du I Ba d d* Ba td. d* I B td. Lt Lt Lt Ba Lt Lt L UT k L k nk nk nk an ab HD ank s Ba n Ye Ba nj B Pa FC IC nd n a io IC dr of si ur in nk nt ah In Ba Ce M k ta Ko BABASAB PATIL -55-
  • 56. “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 yearby year followed by HDFC Bank Ltd. BABASAB PATIL -56-
  • 57. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Performance comparison of New Private Sector Banks Provisions andContingencies of 3 yearsS No Banks Provisions and Contingencies ( in Crore) 2003-04 2004-05 2005-06 1 Bank of Panjab Ltd* 66 81 - 2 Centurion Bank Ltd* 117 6 60 3 HDFC Bank Ltd 498 678 1108 4 ICICI Bank Ltd 844 951 2151 5 Indusind Bank Ltd. 183 191 188 6 Kotak Mahindra Bank Ltd. 48 49 92 7 UTI Bank Ltd 420 231 509 8 Yes Bank - 0 44 2500 2000 2003-04 1500 2004-05 1000 2005-06 500 0 d* d d I B Ltd d* Ba td. nk I B td. Lt Lt Lt Lt L Ba UT k L k k nk nk ab HD ank an an n s Ba Ba Ye nj B Pa FC IC nd n a io dr of IC si ur in du nk nt ah In Ba Ce M k ta KoInterpretation:ICICI Bank Ltd making large Provisions for losses compares to HDFC Bank Ltd and UTIBank Ltd may be because of their credit worthiness. BABASAB PATIL -57-
  • 58. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” BABASAB PATIL -58-
  • 59. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Performance comparison of New Private Sector Banks Net Profit 3 yearsS No Banks Net Profit (in Crore) 2003-04 2004-05 2005-06 1 Bank of Panjab Ltd* 37 (61) - 2 Centurion Bank Ltd* (105) 25 88 3 HDFC Bank Ltd 510 666 871 4 ICICI Bank Ltd 1637 2005 2540 5 Indusind Bank Ltd. 262 210 37 6 Kotak Mahindra Bank Ltd. 79 85 118 7 UTI Bank Ltd 278 335 485 8 Yes Bank - (4) 55 3000 2500 2000 2003-04 1500 2004-05 1000 2005-06 500 0 -500 d d* d d* I B Ltd Ba td. nk I B td. Lt Lt Lt Lt L Ba UT k L k k nk nk ab HD ank an an n s Ba Ba Ye nj B Pa FC IC nd n a io dr of IC si ur in du nk nt ah In Ba Ce M k ta KoInterpretation:ICICI Bank Ltd and HDFC Bank LTD Net Profit is Increasing Even though lot of Moneyhas spent on Provision and Contingency. It may be because of their risk taking ability. BABASAB PATIL -59-
  • 60. “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 yearby year followed by HDFC Bank Ltd. UTI Bank Ltd Operating Profit is decreased in2004-05 but its suddenly increased to 994crore in 2005-2006. But Bank of Panjab LtdOperating Profit for 2003-04 is 103 crore but suddenly it decreases to 19 crore 1n2004-05, then it amalgamated with Centurian Bank Whose Operating Profit isComparatively Low in 2003-04 and 2004-05 after amalgamation it increases to 148crore.Even Indusind Bank Ltd Operating Profit is go on Decreasing and as Yes Bank is verynew 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 isComparatively high it may be because of risk taking ability and have strong financialbackground with more experience, And also these banks are able to provide adequatefinance to Different Sectors. As we seen UTI Bank Ltd Operating Profit in 2004-05decreased and in 2005-06 increased so the Provisions made is low in 2004-05 but high in2005-06 it may be because of large advances made by bank in 2005-06. But Bank ofPanjab Ltd Operating Profit gone down in 2004-05 to 19crore but it has incurred to make81crore Provisions and Contingencies it may be because of wrong Strategy made by bankto provide finance and to maintain operating Profit, same situation has faced byCenturion Bank Ltd in the year 2005-06. So only BothBank of Panjab Ltd and Centurion Bank Ltd Amalgamated to make strong financeBackground. Indusind Bank Operating Profit coming down year by year. KotakMahindra is performing better enough next to ICICI Bank, HDFC Bank, UTI Bank. AsYes Bank is new so initially it incurred 4crore loss so no provisions were made but itmade Provisions in 2005-06. ICICI Bank Ltd, HDFC Bank Ltd and UTI Bank Ltd had comparatively high NetProfit it may be because of risk taking ability and strong financial background with moreexperience. As heavy Provisions were incurred by Bank of Panjab Ltd and CenturionBank Ltd till 2004-05 had amalgamated to make Positive Net profit and namedthemselves as Centurion Bank of Panjab Ltd. Indusind Bank have to adopt differentstrategy to increase net profit as it incurring loss from past 3 years. BABASAB PATIL -60-
  • 61. “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 PrivateSector Bank.Bank of Panjab Ltd Banks Gross Gross Gross Net Net Net Advances NPA NPA(%) Advances NPA NPA(%) 2003-04 2709 168 6.20 2353 126 5.35 2004-05 2520 126 5.00 2417 112 4.64 2005-06 - - - - - -Centurion Bank Ltd Banks Gross Gross Gross Net Net Net Advances NPA NPA(%) Advances NPA NPA(%) 2003-04 1705 221 12.96 1556 69 4.43 2004-05 2291 156 6.81 2194 55 2.49 2005-06 6848 315 4.6 6533 74 1.13Intrepretation:As Bank of Panjab Ltd and Centurion Bank has amalgamated in 2005 September, so wecan see a decrease in Gross NPA from 12.96% to 4.6% and Net NPA decreases to1.13%. Of course it is a good sign to the company as it came below 5%, because if NPAratio of any Bank is more than 5% then it is said that the Banks need to adopt properstrategy for recovery of debt. BABASAB PATIL -61-
  • 62. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”HDFC Bank Ltd Banks Gross Gross Gross Net Net Net Advances NPA NPA(%) Advances NPA NPA(%) 2003-04 18064 336 1.86 17745 28 0.16 2004-05 25976 439 1.69 25566 61 0.24 2005-06 36357 509 1.40 35061 155 0.44Interpretation:From the above table we can see that Gross NPA of HDFC Bank Ltd has decreasing from1.86 to 1.40 from 2003-04 to 2005-06. This accomplishment is on account of creditgrowth, which was higher than the growth of Gross NPA and not through appreciablerecovery of NPA. There is neither reduction nor even containment of the threat becauseas we seen increase in Net NPA from Past 3 years.ICICI Bank Ltd Banks Gross Gross Gross Net Net Net Advances NPA NPA(%) Advances NPA NPA(%) 2003-04 65106 3060 4.70 64948 1423 2.19 2004-05 91920 3925 4.27 91405 1505 1.65 2005-06 148200 2223 1.50 146163 1053 0.72Interpretation:From above table we can see that Gross NPA of ICICI Bank Ltd has decreasing from4.70 to 1.50 from 2003-04 to 2005-06. This accomplishment is on account of creditgrowth, which was higher than the growth of Gross NPA and not through appreciablerecovery of NPA. There is neither reduction nor even containment of the threat. ICICIBank Ltd is providing high advances compare to other banks in 2005-2006. BABASAB PATIL -62-
  • 63. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Indusind Bank Ltd Banks Gross Gross Gross Net Net Net Advances NPA NPA(%) Advances NPA NPA(%) 2003-04 7848 259 3.3 7301 212 2.90 2004-05 9093 321 3.53 9000 244 2.71 2005-06 9376 269 2.90 9310 195 2.09Interpretation:Indusind Bank need to adopt strategy in reducing NPA as its advances were more in2004-05 and also Gross NPA has increased it may be because of their credit worth. Andagain it decreases Gross NPA in 2005-06 this ups and down can affect credit worthinessof the bank.Kotak Mahindra Bank Ltd. Banks Gross Gross Gross Net Net Net Advances NPA NPA(%) Advances NPA NPA(%) 2003-04 2105 20 0.95 2097 3 0.14 2004-05 4058 28 0.69 4017 15 0.37 2005-06 6353 38 0.60 6349 15 0.24Interpretation:Kotak Mahindra Bank Ltd Net NPA is Increasing from 2003-04 to 2004-05 and again itdecreases to 0.24 in 2005-06. it implied that NPA of Kotak Mahindra Bank are in ups anddown 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 signto Bank.UTI Bank Ltd BABASAB PATIL -63-
  • 64. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Banks Gross Gross Gross Net Net Net Advances NPA NPA(%) Advances NPA NPA(%) 2003-04 9386 275 2.93 9363 112 1.20 2004-05 15628 311 1.99 15603 217 1.39 2005-06 22400 374 1.70 22314 218 0.98InterpretationUTI Bank Ltd Gross and Net NPA has decreases from 2.93 to 1.70 and 1.20 to 0.98respectively from 2003-04 to 2005-06. This accomplishment is on account of creditgrowth, which was higher than the growth of Gross NPA and not through appreciablerecovery of NPA. There is neither reduction nor even containment of the threat.Performance Comparison of Net NPA of New Private Sector Banks New PSB’s 2003-04 2004-05 2005-06 4.69 4.64 0Bank of Panjab Ltd* BABASAB PATIL -64-
  • 65. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Centurion Bank 4.43 2.49 1.13 Ltd* HDFC Bank Ltd 0.16 0.24 0.44 ICICI Bank Ltd 2.21 1.65 0.72Indusind Bank Ltd. 2.72 2.71 2.09 Kotak Mahindra 0.17 0.37 0.24 Bank Ltd. 1.29 1.39 0.98 UTI Bank Ltd Yes Bank 0 0 0 Bank of Panjab 5 Ltd* 4.5 Centurion Bank 4 Ltd* 3.5 HDFC Bank Ltd 3 2.5 ICICI Bank Ltd 2 1.5 Indusind Bank 1 Ltd. 0.5 Kotak Mahindra 0 2003-04 2004-05 2005-06 Bank Ltd. UTI Bank Ltd Yes BankInterpretation: From above chart we can see that Bank of Panjab Ltd’s NPA increasing till it’samalgamated with Centurion Bank Ltd, and came nearer to 5%, after amalgamation bothBank of Panjab Ltd and Centurion Bank Ltd named themselves as Centurion Bank of BABASAB PATIL -65-
  • 66. “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 previousyear NPA. We can say that HDFC Bank Ltd has strong financial background and creditworthiness so it can provide more advances to people and also it is efficient enough torecover those advances so its Net NPA has coming down and it is less than 1%. SoHDFC is performing well. In 2003-04 ICICI Bank Ltd Net NPA is more but its declining slowly and came to0.72 from 2.21 in 2005-06. it may be because of its credit worthiness and strong recoverymeasures. ICICI Bank Ltd is real risk taker so we cannot compare it with other smallbanks because it providing high advances compare to other banks. Indusind Bank Ltd Net NPA almost same for 2003-04 to 2004-05 and declines to2.09 in 2005-06. As Kotak Mahindra Bank Ltd providing comparatively low advances to avoidcredit risk so its NPA is low compare to other Banks. Even UTI Bank is performing well in recovering debts so its NPA came downfrom previous year. BABASAB PATIL -66-
  • 67. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”IMPACT OF NPA’S ON BANKS PROFITS AND LENDING PROWESS: "The efficiency of a bank is not always reflected only by the size of its balancesheet but by the level of return on its assets. NPA’s do not generate interest income forthe banks, but at the same time banks are required to make provisions for such NPA’sfrom their current profits.NPA’s 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 NPA’s in order to reduce the provisioning and boost up bottom lines. It would only postpone the In the context of crippling effect on a banks operations in all spheres, asset quality has been placed as one of the most important parameters in the measurement of a banks performance under the CAMELS supervisory rating system of RBI. BABASAB PATIL -67-
  • 68. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Credit risk path of the New Private Bank’s by Comparing with selected 7 Old PSB’susing Quadrant Analysis.Credit risk path of the New Private Bank’s: New Private NPA to Net Advances(crores) Quadrant Advances analysis Banks ( %) 2005 2006 2005 2006 2005 2006 Bank of Panjab Ltd* 4.64 - 2417 - HL - Centurion Bank Ltd* 2.49 1.13 2194 6533 HL HL HDFC Bank Ltd 0.24 0.44 25566 37661 LH LH ICICI Bank Ltd 1.65 0.72 91405 146163 LH LH Indusind Bank Ltd. 2.71 2.09 9000 9310 HL HL Kotak Mahindra Bank 0.37 0.24 4017 6349 LL LL Ltd. UTI Bank Ltd 1.39 0.98 15603 22314 LL LLInterpretationCredit risk path of the New PSB’s: A Quadrant Analysis BABASAB PATIL -68-
  • 69. “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 NPAproportion and the size of credit portfolio (advances) of New Private Bank’s. For thispurpose proportion of gross NPA’s representing credit risk inherent is taken on the X-axis and gross credit levels are taken on the Y-axis. Since these two parameters areassets, which are stock concept variables, they have been plotted on the basis of 2 years2005 and 2006 for a comparative analysis. QUADRANT TABLE- 2005 LEVEL LOW (BELOW AVG) HIGH (ABOVE AVG) CREDIT LEVEL (L) (H)NPALOW LL (2) LH (2)HIGH HL (3) HH (0) QUADRANT TABLE- 2006LEVEL LOW (BELOW AVG) HIGH (ABOVE AVG) CREDIT LEVEL (L) (H)NPALOW LL (2) LH (2)HIGH HL (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 NPA’s for BABASAB PATIL -69-
  • 70. “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 percentageabove this figure falls in the H category and percentage below 1.93% falls in the Lcategory. The same applies with the advances. The average of advances for 2005 is21,457 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 Bank’s and, ‘H’ represents high orabove average. E.g. while LL means low in credit size and low in NPA’s, LH implies lowin 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. In2005 there were 3 banks, which was 2 in 2006. As seen in the quadrants, the NPA washigh compared to its credit size and the credit size is low in the New Sector Banks itmight 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. Itmeans NPA Level and Credit size is low.3). Bank of Panjab Ltd* is in HL quadrant, there is high level of NPA and Low Advancesin 2005 . So only Bank of Panjab Ltd. has merged with Centurion Bank in 2005September and named as Centurion Bank of Panjab Ltd but still its in HL quadrant so stillthis 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 itscredit size compared to the rest of the banks and still maintained a low NPA levelfollowed by HDFC Bank Ltd.. BABASAB PATIL -70-
  • 71. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Credit risk path of the 7 selected Old PSB’s: Old Private NPA to Net Advances(crores) Quadrant Advances analysis Banks ( %) 2005 2006 2005 2006 2005 2006 City Union Bank Ltd 3.37 1.95 2013 2550 LL LL Development Credit 6.34 4.50 2156 1867 HL HL Bank Ltd ING Vysya Bank Ltd 2.13 1.76 9081 10232 LH LHLord Krishna Bank Ltd 4.22 3.11 1387 1421 HL HL Bank of Rajastan Ltd 2.50 0.99 2896 4065 LL LL The United Western 5.83 5.66 3976 4006 HH HL Bank Ltd.The Karnatak Bank Ltd 2.29 1.18 6287 7792 LH LHInterpretation BABASAB PATIL -71-
  • 72. “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 NPAproportion and the size of credit portfolio (advances) of 7 old Private Bank’s. For thispurpose proportion of gross NPA’s representing credit risk inherent is taken on the X-axis and gross credit levels are taken on the Y-axis. Since these two parameters areassets, which are stock concept variables, they have been plotted on the basis of 2 years2005 and 2006 for a comparative analysis. QUADRANT TABLE- 2005 LEVEL LOW (BELOW AVG) HIGH (ABOVE AVG) CREDIT LEVEL (L) (H)NPALOW LL (2) LH (2)HIGH HL (2) HH (1) QUADRANT TABLE- 2006LEVEL LOW (BELOW AVG) HIGH (ABOVE AVG) CREDIT LEVEL (L) (H)NPALOW LL (2) LH (2)HIGH HL (3) HH (0) BABASAB PATIL -72-
  • 73. “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 NPA’s forthe year 2005 is 3.81% and this figure is measured against each bank, any percentageabove this figure falls in the H category and percentage below 3.81% falls in the Lcategory. The same applies with the advances. The average of advances for 2005 is 3971crores and 4562 crores for 2006. The average of NPA for 2006 is 2.74%. ‘L’ representslow or below average of the PSB’s and, ‘H’ represents high or above average. E.g. whileLL means low in credit size and low in NPA’s, LH implies low in NPA and High incredit 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 creditsize. 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 creditsize. 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 meansNPA Level is increasing year by year.4). The United Western Bank Ltd moved from HH to HL , there is high level of NPA andHigh Advances in 2005 which moved to High level of NPA and Low level of advances in2006. Its not good sign to Bank because as in 2005 there is High NPA and Credit size soBank 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 inits credit size compared to the rest of the banks and still maintained a low NPA level. BABASAB PATIL -73-
  • 74. “Non Performing Assets and its impact on Profitability of New Private Sector Banks”Comparison of New Private Bank’s credit path with Old selected Private Bank’scredit path by using above Quadrant Analysis. • When compare to Old PB’s, New PB’s are performing well from past 2 years. • Old PB’s Net NPA on Advances are crossing 5% or nearer to 5 %, but almost all New PB’s Net NPA on Advances are below 3%. It is good sign to New PSB’s as it has strong credit path. • New PB’s are taking high risk by Providing more and more advances when compare to Old PB’, • Majority of Old PB’s provide advances to Priority sectors whose recovery are very difficult, because advances paid for agriculture are very difficult to recover, but New PB’s are able to provide advances to both priority and non priority sectors but it not expanded its services over villages. That’s why New PB’s 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 NewPrivate Banks and finally the psychology of the bankers in respect of their dispositiontowards credit delivery and credit expansion. Between 2004 and 2006 New Private Banksincurred a total amount of Rs.4399 Crores towards provisioning NPA. This has broughtNet NPA to Rs.5780 Crores or 1.20% of net advances. To this extent the problem iscontained, but at what cost? This costly remedy is made at the sacrifice of buildinghealthy reserves for future capital adequacy. The enormous provisioning of NPA togetherwith the holding cost of such non-productive assets over the years has acted as a severedrain on the profitability of the New Private Banks. In turn New Private Bank’s are seenas poor performers and unable to approach the market for raising additional capital. Thishas alternatively forced New Private Bank’s to borrow heavily from the debt market tobuild Tier II Capital to meet capital adequacy norms putting severe pressure on theirprofit margins, else they are to seek the bounty of the Central Government for repeatedRecapitalization. BABASAB PATIL -74-
  • 75. “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 (NPA’s). The net NPA’s of 7 New Private Bank’s 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 Bank’s 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 Bank’s fall under LL quadrant i.e. Low in NPA and Low in credit path in 2005-06. • All New Private Bank’s Net NPA on advances is less than 5% in 2005-06, its good sign for companies to increase profit. • New Private Bank’s 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 Bank’s rose from 34.9% to 40.37%. we can say New PSB’s Credit capacity is more while compare to Old PSB’s. • 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 Bank’s, 2 New Private Bank’s- 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%. BABASAB PATIL -75-
  • 76. “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 NPA’s 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. BABASAB PATIL -76-
  • 77. “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 non-performing advances of New Private banks in India, touching upon various quantitativeand qualitative trends in the post reform period, besides carrying out with some policyand strategic implications. Undoubtedly India is one of the few countries where NPAlevels are very high as there is an increase in the percentage of gross advances erodingtheir Profit by major basic points, after netting the provision. New Private Banks NPA has come down i.e. less than 1%. While compare to oldPrivate Bank’s whose NPA is more than 5%. It may be because of the proportion ofcredit risk among the priority sector advances is double that of non-priority advancesimplying the irrationality of (administered) price controls, which still exists in some form.External factors outweigh the internal factors contributing to this high accumulation ofNPA’s. If the banks have to survive in the competitive and increasingly globalize marketconditions they should be helped both by the RBI and the government in the form offaster recovery climate, especially for the legal processes of enforcement of contracts. The quadrant analysis of credit risk clearly identifies that 7 New Private banks arecomparatively performing well when compare to old selected PSB’s. It also offers scopefor mergers and acquisitions among the banks to be better prepared for high risk creditmarketing in India. And also quadrant analysis helps to identify profitability position ofNew Private Banks by using advances provided and Non Performing Assets. Unless New Private Banks adopt proper Strategy to prevent huge level of NPA’s,it go on affecting Profitability of Banks. BABASAB PATIL -77-
  • 78. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” BABASAB PATIL -78-
  • 79. “Non Performing Assets and its impact on Profitability of New Private Sector Banks” Abbreviation used:IBA: Indian Banking AssociationNPA: Non Performing AssetsPB’s: Private BanksUTI Bank Ltd: Unit Trust of India BankICICI Bank Ltd : Industrial Credit and Investment Corporation of IndiaHDFC Bank Ltd.: Housing Development Finance Corporation Bank Ltd BABASAB PATIL -79-
  • 80. “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 BABASAB PATIL -80-

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