Comparative Analysis of Non Performing Assets of Public Sector, Private Sector & Foreign Banks


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Comparative Analysis of Non Performing Assets of Public Sector, Private Sector & Foreign Banks

  1. 1. 01/04/2011Comparative Analysis of Non Performing Assets of Public Sector Banks, Private Sector Banks & Foreign Banks A Project Report Submitted By GAURAV S. GODWANIIn partial fulfillment for the award of the degree of BACHELOR IN COMMERCE (HONOURS) Under Dr. P. P. Ghosh of ST. XAVIER’S COLLEGE (AUTONOMOUS) Under University of Calcutta ROLL NO: 3-01-08-0573
  2. 2. PREFACEGranting of credit facilities for economic activities is the primary task of banking.Apart from raising resources through fresh deposits, borrowings, etc. recycling offunds received back from borrowers constitutes a major part of funding creditdispensation activities. Non-recovery of installments as also interest on the loanportfolio negates the effectiveness of this process of the credit cycle. Non-recoveryalso affects the profitability of banks besides being required to maintain moreowned funds by way of capital and creation of reserves and provisions to act ascushion for the loan losses. Avoidance of loan losses is one of the pre-occupationsof management of banks. While complete elimination of such losses is not possible,bank managements aim to keep the losses at a low level. In fact, it is the level ofnon-performing advances, which, to a great extent, differentiates between a goodand a bad bank. Mounting NPAs may also have more widespread repercussions. Toavoid shock waves affecting the system, the salvaging exercise is done by theGovernment or by the industry on t he behest of Government/ central bank of thecountry putting pressure on the exchequer.In India, the NPAs, which are considered to be at higher levels than those in othercountries, have, of late, attracted the attention of public as also of internationalfinancial institutions. This has gained further prominence in the wake oftransparency and disclosure measures initiated by the RBI during recent years.This project aims at providing an o ov erall view on t he existence of NPAs, theirtreatment, the ways at resolving this issue and also a f ew reports on the recentdevelopments in this field.
  3. 3. ACKNOWLEDGEMENTFirst of all I would like to take this opportunity to thank my College for havingprojects as a part of the B.Com Curriculum.I wish to express my heartfelt gratitude to the following individuals who have playeda crucial role in the research for this project. Without their active cooperation thepreparation of this project could not have been completed within the specified timelimit.The first person I would like to acknowledge is my guide Dr. P. P. Ghosh, ofSt. Xavier’s College Kolkata, who supported me throughout this project withutmost co-operation and patience. I am very much thankful to you sir, for sparingyour precious and valuable time for me and for helping me in doing this project. I amalso thankful to the Vice Principal and Dean of Commerce, who gave us anopportunity to make this project in our final year.Finally, to all my friends who helped me in making this project. I want to thankthem for all their help, support, interest and valuable hints.
  4. 4. TABLE OF CONTENTSSr. TOPICS Pg.No. No. 1. Introduction to NPA’s 1-27  Meaning of NPA 1  Asset Classification 3  Types of NPA 7  Reasons for an Account becoming an NPA 8  Impact of NPA 10  Early Symptoms 11  Preventive Measurement of NPA 13  Procedure of NPA Identification & Resolutions in India 16 2. Objectives & Beneficiaries 28 3. Research Methodology 29 4. Analysis 31-58 5. Hypothesis Testing 59-64 6. Overall Findings 65 7. Conclusion 66 8. Suggestion 67 9. Bibliography 68
  5. 5. INTRODUCTION TO NPAMEANING OF NPA:Non Performing Asset means an asset or account of borrower, which has been classified by abank or financial institution as sub-standard, doubtful or loss asset, in accordance with thedirections or guidelines relating to asset classification issued by RBI.An amount due under any credit facility is treated as "past due" when it has not been paidwithin 30 days from the due date. Due to the improvement in the payment and settlementsystems, recovery climate, up gradation of technology in the banking system, etc., it wasdecided to dispense with past due concept, with effect from March 31, 2001. Accordingly,as from that date, a Non performing asset (NPA) shell be an advance where i. Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan, ii. The account remains out of order for a period of more than 180 days, in respect of an overdraft/ cash Credit(OD/CC), iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts.With a view to moving towards international best practices and to ensure greatertransparency, it has been decided to adopt the 90 days overdue norm for identification ofNPAs, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004,a non-performing asset (NPA) shell be a loan or an advance where; i. Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, ii. The account remains out of order for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC),1ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 1
  6. 6. iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and v. Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 2
  7. 7. ASSET CLASSIFICATION:Assets are classified into fo llowing four catego ries: Standard Assets: Sub-standard Assets Doubtful Assets Loss Assets Standard Assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan do not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories. Provisio ning Norms:  From the year ending 31.03.2000, the banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio basis.  The provisions on standard assets should not be reckoned for arriving at net NPAs.  The provisions towards Standard Assets need not be netted from gross advances but shown separately as Contingent Provisions against Standard Assets under Other Liabilities and Provisions - Others in Schedule 5 of the balance sheet. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the reasonability of the dues: 1) Sub-standard Assets 2) Doubtful Assets 3) Loss AssetsST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 3
  8. 8. Sub-standard Assets: With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by substandard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Provisio ning Norms: A general provision of 10 percent on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover and securities available. Doubtful Assets: A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values – highly questionable and improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. Provisio ning Norms:  100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.  In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful:ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 4
  9. 9. Period for which the advance has been Provision considered as doubtful requirement (%) Up to one year 20 One to three years 30 More than three years: 60% with effect from March (1) Outstanding stock of NPAs as on 31, 2005. March 31, 2004. 75% effect from March 31, (2) Advances classified as „doubtful‟ 2006. more than three years on or after 100% with effect from March April 1, 2004. 31, 2007.  Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2003 has to be made in phases as under: i. As on31.03.2003, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category. ii. As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31.03.2002.  Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year. Loss Assets: A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted- although there may be some salvage or recovery value. Also, these assets would have been identified as “Loss assets” by t he bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 5
  10. 10. Provisio ning Norms: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 6
  11. 11. TYPES OF NPA: 1. Gross NPA 2. Net NPA Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio: Gross NPAs Ratio = Gross NPAs Gross Advances Net NPA: Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burdenof banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following: Net NPAs = Gross NPAs – Provisions Gross Advances - ProvisionsST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 7
  12. 12. REASONS FOR AN ACCOUNT BECOMING NPA: 1. Internal factors 2. External factors Internal factors: 1) Funds borrowed for a particular purpose but not use for the said purpose. 2) Project not completed in time. 3) Poor recovery of receivables. 4) Excess capacities created on non-economic costs. 5) In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. 6) Business failures. 7) Diversion of funds for expansionmodernizationsetting up new projects helping or promoting sister concerns. 8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis- appropriation etc. 9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow- ups, delaying settlement of payments subsidiaries by government bodies etc., External factors: 1) Sluggish legal system –  Long legal tangles  Changes that had taken place in labour laws  Lack of sincere effort. 2) Scarcity of raw material, power and other resources. 3) Industrial recession. 4) Shortage of raw material, raw materialinput price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents. 5) Failures, nonpayment over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc. 6) Government policies like excise duty changes, Import duty changes etc.,ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 8
  13. 13. The RBI has summarized the finer factors contributing to higher level of NPAs in the Indian banking sector as:  Diversion of funds, which is for expansion, diversification, modernization, undertaking new projects and for helping associate concerns. This is also coupled with recessionary trends and failures to tap funds in capital and debt markets.  Business failures (such as product, marketing etc.), which are due to inefficient management system, strained labour relations, inappropriate technology/ technical problems, product obsolescence etc.  Recession, which is due to input/ power shortage, price variation, accidents, natural calamities etc. The externalization problems in other countries also lead to growth of NPAs in Indian banking sector.  Time/ cost overrun during project implementation stage.  Governmental policies such as changes in excise duties, pollution control orders etc.  Willful defaults, which are because of siphoning-off funds, fraud/ misappropriation, promoters/ directors disputes etc.  Deficiency on the part of banks, viz, delays in release of limits and payments/ subsidies by the Government of India.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 9
  14. 14. IMPACT OF NPA: Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client. Because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn‟t affect current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank. Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money. Routine payments and dues. Involve ment of management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now day‟s banks have special employees to deal and handle NPAs, which is additional cost to the bank. Credit loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 10
  15. 15. EARLY SYMPTOMS:By which one can recognize a performing asset turning in to non-performing assetFour categories of early symptoms:-1) Financial:  Non-payment of the very first installment in case of term loan.  Bouncing of cheque due to insufficient balance in the accounts.  Irregularity in installment.  Irregularity of operations in the accounts.  Unpaid overdue bills.  Declining Current Ratio.  Payment which does not cover the interest and principal amount of that installment.  While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.2) Operational and Physical:  If information is received that the borrower has either initiated the process of winding up or are not doing the business.  Overdue receivables.  Stock statement not submitted on time.  External non-controllable factor like natural calamities in the city where borrower conduct his business.  Frequent changes in plan.  Nonpayment of wages.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 11
  16. 16. 3) Attitudinal Changes:  Use for personal comfort, stocks and shares by borrower.  Avoidance of contact with bank.  Problem between partners.4) Others:  Changes in Government policies.  Death of borrower.  Competition in the market.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 12
  17. 17. PREVENTIVE MEASUREMENT FOR NPA: Early Recognition of the Problem: Invariably, by the time banks start their efforts to get involved in a revival process, it‟s too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank‟s dues. Identification of weakness in the very beginning that is : When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoter‟s intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse. Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who have intelligent inputs with regard to promoters‟ sincerity, and capability to achieve turnaround. Based on this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 13
  18. 18. Timeliness and Adequacy of response: Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoter‟s commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option. Focus on Cash Flows : While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow. Management Effectiveness: The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit‟s fortunes. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered. Multiple Financing:  During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 14
  19. 19.  In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.  In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account.  Corporate Debt Restructuring mechanism has been institutionalized in 2001 t o provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 15
  20. 20. PROCEDURES FOR NPA IDENTIFICATION ANDRESOLUTION IN INDIA:1. Internal Checks and Control Since high level of NPAs dampens the performance of the banks identification of potential problem accounts and their close monitoring assumes importance. Though most banks have Early Warning Systems (EWS) for identification of potential NPAs, the actual processes followed, however, differ from bank to bank. The EWS enable a bank to identify the borrower accounts which show signs of credit deterioration and initiate remedial action. Many banks have evolved and adopted an elaborate EWS, which allows them to identify potential distress signals and plan their options beforehand, accordingly. The early warning signals, indicative of potential problems in the accounts, viz. persistent irregularity in accounts, delays in servicing of interest, frequent devolvement of L/Cs, units financial problems, market related problems, etc. are captured by the system. In addition, some of these banks are reviewing their exposure to borrower accounts every quarter based on published data which also serves as an important additional warning system. These early warning signals used by banks are generally independent of risk rating systems and asset classification norms prescribed by RBI. The major components/processes of a EWS followed by banks in India as brought out by a study conducted by Reserve Bank of India at the instance of the Board of Financial Supervision are as follows:  Designating Relationship Manager/ Credit Officer for monitoring account/s  Preparation of `know your client profile  Credit rating system  Identification of watch-list/special mention category accounts  Monitoring of early warning signals Relationship Manager/Credit Officer The Relationship Manager/Credit Officer is an official who is expected to have complete knowledge of borrower, his business, his future plans, etc. The Relationship Manager has to keep in constant touch with the borrower and report all developments impacting theST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 16
  21. 21. borrowable account. As a part of this contact he is also expected to conduct scrutiny and activity inspections. In the credit monitoring process, the responsibility of monitoring a corporate account is vested with Relationship Manager/Credit Officer. Know your client profile (KYC) Most banks in India have a system of preparing `know your client (KYC) profile/credit report. As a part of `KYC system, visits are made on clients and their places of business/units. The frequency of such visits depends on the nature and needs of relationship. Credit Rating System The credit rating system is essentially one point indicator of an individual credit exposure and is used to identify measure and monitor the credit risk of individual proposal. At the whole bank level, credit rating system enables tracking the health of banks entire credit portfolio. Most banks in India have put in place the system of internal credit rating. While most of the banks have developed their own models, a few banks have adopted credit rating models designed by rating agencies. Credit rating models take into account various types of risks viz. financial, industry and management, etc. associated with a borrowable unit. The exercise is generally done at the time of sanction of new borrowable account and at the time of review renewal of existing credit facilities. Watch-list/Special Mention Category The grading of the banks risk assets is an important internal control tool. It serves the need of the Management to identify and monitor potential risks of a loan asset. The purpose of identification of potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the bank to protect against the loan asset becoming non-performing. Most of the banks have a system to put certain borrowable accounts under watch list or special mention category if performing advances operating under adverse business or economic conditions are exhibiting certain distress signals. These accounts generally exhibit weaknesses which are correctable but warrant banks closer attention. The categorization of such accounts in watch list or special mention categoryST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 17
  22. 22. provides early warning signals enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take necessary preventive steps to avoid their slippage into non performing advances. Early Warning Signals It is important in any early warning system, to be sensitive to signals of credit deterioration. A host of early warning signals are used by different banks for identification of potential NPAs. Most banks in India have laid down a series of operational, financial, transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. Further, it is revealed that the indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, general economic conditions, etc. Early warning signals can be classified into five broad categories viz. a) Financial b) Operational c) Banking d) Management and e) External factors. Financial related warning signals generally emanate from the borrowers balance sheet, income expenditure statement, statement of cash flows, statement of receivables etc. Following common warning signals are captured by some of the banks having relatively developed EWS. Financial warning signals  Persistent irregularity in the account  Default in repayment obligation  Devolvement of LC/invocation of guarantees  Deterioration in liquidity/working capital position  Substantial increase in long term debts in relation to equity  Declining sales  Operating losses/net lossesST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 18
  23. 23.  Rising sales and falling profits  Disproportionate increase in overheads relative to sales  Rising level of bad debt losses Operational warning signals  Low activity level in plant  Disorderly diversification/frequent changes in plan  Nonpayment of wages/power bills  Loss of critical customer/s  Frequent labor problems  Evidence of aged inventory/large level of inventory Management related warning signals  Lack of co-operation from key personnel  Change in management, ownership, or key personnel  Desire to take undue risks  Family disputes  Poor financial controls  Fudging of financial statements  Diversion of funds Banking related signals  Declining bank balances/declining operations in the account  Opening of account with other bank  Return of outward bills/dishonored cheques  Sales transactions not routed through the account  Frequent requests for loan  Frequent delays in submitting stock statements, financial data, etc. Signals relating to external factors  Economic recession  Emergence of new competition  Emergence of new technology  Changes in government / regulatory policies  Natural calamitiesST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 19
  24. 24. 2. Management/Resolution of NPAs A reduction in the total gross and net NPAs in the Indian financial system indicates a significant improvement in management of NPAs. This is also on account of various resolution mechanisms introduced in the recent past which include the SRFAESI Act, one time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs. From the data available of Public Sector Banks as on March 31, 2003, there were 1,522 numbers of NPAs as on March 31, 2003 which had gross value greater than Rs. 50 million in all the public sector banks in India. The total gross value of these NPAs amounted to Rs. 215 billion. The total number of resolution approaches (including cases where action is to be initiated) is greater than the number of NPAs, indicating some double counting. As can be seen, suit filed and BIFR are the two most common approaches to resolution of NPAs in public sector banks. Rehabilitation has been considered/ adopted in only about 13% of the cases. Settlement has been considered only in 9% of the cases. It is likely to have been adopted in even fewer cases. Data available on resolution strategies adopted by public sector banks suggest that Compromise settlement schemes with borrowers are found to be more effective than legal measures. Many banks have come out with their own restructuring schemes for settlement of NPA accounts. State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information Services (India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of information between banks and FIs for curbing the growth of NPAs incorporated credit Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs. As per the recommendations of the working group, Banks and FIs are now required to submit the list of suit-filed cases of Rs. 10 million and above and suit filed cases of willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share this information with commercial banks and FIs so as to help them minimize adverse selection at appraisal stage. The CIBIL is in the process of getting operationalised.3. Willful Defaulters RBI has issued revised guidelines in respect of detection of willful default and diversionST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 20
  25. 25. and siphoning of funds. As per these guidelines a willful default occurs when a borrower defaults in meeting its obligations to the lender when it has capacity to honor the obligations or whenfunds have been utilized for purposes other than those for which finance was granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent their access to capital markets. Sharing of information of this nature helps banks in their due diligence exercise and helps in avoiding financing unscrupulous elements. RBI has advised lenders to initiate legal measures including criminal actions, wherever required, and undertake a proactive approach in change in management, where appropriate.4. Legal and Regulatory Regime Debt Recovery Tribunals DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with competence to entertain cases referred to them, by the banks and FIs for recovery of debts due to the same. The order passed by a DRT is appealable to the Appellate Tribunal but no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the amount due from him as determined by it. However, the Affiliate Tribunal may, for reasons to be received in writing, waive or reduce the amount of such deposit. Advances of Rs. 1 million and above can be settled through DRT process. An important power conferred on the Tribunal is that of making an interim order (whether by way of injunction or stay) against the defendant to debar him from transferring, alienating or otherwise dealing with or disposing of any property and the assets belonging to him within prior permission of the Tribunal. This order can be passed even while the claim is pending. DRTs are criticized in respect of recovery made considering the size of NPAs in the Country. In general, it is observed that the defendants approach the High Country challenging the verdict of the Appellate Tribunal which leads to further delays in recovery. Validity of the Act is often challenged in the court which hinders the progress of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of infrastructure.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 21
  26. 26. Lokadalats The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987 helps in resolving disputes between the parties by conciliation, mediation, compromise or amicable settlement. It is known for effecting mediation and counseling between the parties and to reduce burden on the court, especially for small loans. Cases involving suit claims up to Rs. l million can be brought before the Lokadalat and every award of the Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any court against the award made by the Lokadalat. Several people of particular localities various social organizations are approaching Lokadalats which are generally presided over by two or three senior persons including retired senior civil servants, defense personnel and judicial officers. They take up cases which are suitable for settlement of debt for certain consideration. Parties are heard and they explain their legal position. They are advised to reach to some settlement due to social pressure of senior bureaucrats or judicial officers or social workers. If the compromise is arrived at, the parties to the litigation sign a statement in presence of Lokadalats which is expected to be filed in court to obtain a consent decree. Normally, if such settlement contains a clause that if the compromise is not adhered to by the parties, the suits pending in the court will proceed in accordance with the law and parties will have a right to get the decree from the court. In general, it is observed that banks do not get the full advantage of the Lokadalats. It is difficult to collect the concerned borrowers willing to go in for compromise on the day when the Lokadalat meets. In any case, we should continue our efforts to seek the help of the Lokadalat. Enactment of SRFAESI Act The "The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition to asset reconstruction and ARCs, the Act deals with the following largely aspects,  Securitization and Securitization Companies  Enforcement of Security InterestST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 22
  27. 27.  Creation of a central registry in which all securitization and asset reconstruction transactions as well as any creation of security interests has to be filed. The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April 2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance Notes cover various aspects relating to registration, operations and funding of ARCS and resolution of NPAs by ARCS. The RBI has also issued guidelines to banks and financial institutions on issues relating to transfer of assets to ARCS, consideration for the same and valuation of instruments issued by the ARCS. Additionally, the Central Government has issued the security enforcement rules ("Enforcement Rules"), which lays down the procedure to be followed by a secured creditor while enforcing its security interest pursuant to the Act. The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce their security interest in relation to the underlying security without reference to the Court after giving a 60 day notice to the defaulting borrower upon classification of the corresponding financial assistance as a non-performing asset. The Act permits the secured creditors to take any of the following measures:  Take over possession of the secured assets of the borrower including right to transfer by way of lease, assignment or sale;  Take over the management of the secured assets including the right to transfer by way of lease, assignment or sale;  Appoint any person as a manager of the secured asset (such person could be the ARC if they do not accept any pecuniary liability); and  Recover receivables of the borrower in respect of any secured asset which has been transferred. After taking over possession of the secured assets, the secured creditors are required to obtain valuation of the assets. These secured assets may be sold by using any of the following routes to obtain maximum value.  By obtaining quotations from persons dealing in such assets or otherwise interested in buying the assets;  By inviting tenders from the public;  By holding public auctions; or  By private treaty.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 23
  28. 28. Lenders have seized collateral in some cases and while it has not yet been possible to recover value from most such seizures due to certain legal hurdles, lenders are now clearly in a much better bargaining position vis-a-vis defaulting borrowers than they were before the enactment of SRFAESI Act. When the legal hurdles are removed, the bargaining power of lenders is likely to improve further and one would expect to see a large number of NPAs being resolved in quick time, either through security enforcement or through settlements. Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The Act designates any person holding not less than 10% of the paid-up equity capital of the ARC as a sponsor and prohibits any sponsor from holding a controlling interest in, being the holding company of or being in control of the ARC. The SRFAESI and SRFAESI Rules/ Guidelines require ARCS to have a minimum net-owned fund of not less than Rs. 20,000,000. Further, the Directions require that an ARC should maintain, on an ongoing basis, a minimum capital adequacy ratio of 15% of its risk weighted assets. ARCS have been granted a maximum realization time frame of five years from the date of acquisition of the assets. The Act stipulates several measures that can be undertaken by ARCs for asset reconstruction. These include:  Enforcement of security interest;  Taking over or changing the management of the business of the borrower;  The sale or lease of the business of the borrower;  Settlement of the borrowers dues; and  Restructuring or rescheduling of debt. ARCS are also permitted to act as a manager of collateral assets taken over by t he lenders under security enforcement rights available to them or as a recovery agent for any bank or financial institution and to receive a fee for the discharge of these functions. They can also be appointed to act as a receiver, if appointed by any Court or DRT.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 24
  29. 29. Source: Institution of CDR Mechanism The RBI has instituted the Corporate Debt Restructuring (CDR) mechanism for resolution of NPAs of viable entities facing financial difficulties. The CDR mechanism instituted in India is broadly along the lines of similar systems in the UK, Thailand, Korea and Malaysia. The objective of the CDR mechanism has been to ensure timely and transparent restructuring of corporate debt outside the purview of the Board for Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The framework is intended to preserve viable corporate affected by certain internal/external factors and minimize losses to creditors/other stakeholders through an orderly and coordinated restructuring programme. RBI has issued revised guidelines in February 2003 with respect to the CDR mechanism. Corporate borrowers with borrowings from the banking system of Rs. 20crores and above under multiple banking arrangement are eligible under the CDR mechanism. Accounts falling under standard, sub-standard or doubtful categories can be considered for restructuring. CDR is a nonstatutory mechanism based on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in aligning repayment obligations for bankers with the cash flow projections as reassessed at the time of restructuring. Therefore it is critical to prepare a restructuring plan on the lines of the expected business plan along with projected cash flows.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 25
  30. 30. The CDR process is being stabilized. Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings) and time frame for restructuring. Foreign banks are not members of the CDR forum, and it is expected that they would be signing the agreements shortly. However they attend meetings. The first ARC to be operational in India- Asset Reconstruction Company of India (ARGIL) is a member of the CDR forum. Lenders in India prefer to resort to CDR mechanism to avoid unnecessary delays in multiple lender arrangements and to increase transparency in the process. While in the RBI guidelines it has been recommended to involve independent consultants, banks are so far resorting to their internal teams for recommending restructuring programs. Compromise Settlement Schemes 1) One Time Settlement Schemes NPAs in all sectors, which have become doubtful or loss as on 31st March 2000. The scheme also covers NPAs classified as sub-standard as on 31st March 2000, which have subsequently become doubtful or loss. All cases on which the banks have initiated action under the SRFAESI Act and also cases pending before Courts/DRTs/BIFR, subject to consent decree being obtained from the Courts/DRTs/BIFR are covered. However cases of willful default, fraud and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account. 2) Negotiated Settlement Schemes The RBI/Government has been encouraging banks to design and implement policies for negotiated settlements, particularly for old and unresolved NPAs. The broad framework for such settlements was put in place in July 1995. Specific guidelines were issued in May 1999to public sector banks for one-time settlements of NPAs of small scale sector. This scheme was valid until September 2000 and enabled banks to recover Rs 6.7 billion from various accounts. Revised guidelines were issued in July 2000 for recovery of NPAs of Rs. 50 millionand less. These guidelines were effective until June 2001 and helped banks recover Rs. 26 billion.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 26
  31. 31. Increased Powers to NCLTs and the Proposed Repeal of BIFR In India, companies whose net worth has been wiped out on account of accumulated losses come under the purview of the Sick Industrial Companies Act (SICA) and need to be referred to BIFR. Once a company is referred to the BIFR (and even if an enquiry is pending as to whether it should be admitted to BIFR), it is afforded protection against recovery proceedings from its creditors. BIFR is widely regarded as a stumbling block in recovering value for NPAs. Promoters systematically take refuge in SICA - often there is a scramble to file a reference in BIFR so as to obtain protection from debt recovery proceedings. The recent amendments to the Companies Act vest powers for revival and rehabilitation of companies with the National Company Law Tribunal (NCLT), in place of BIFR, with modifications to address weaknesses experienced under the SICA provisions. The NCLT would prepare a scheme for reconstruction of any sick company and there is no bar on the lending institution of legal proceedings against such company whilst the scheme is being prepared by the NCLT. Therefore, proceedings initiated by any creditor seeking to recover monies from a sick company would not be suspended by a reference to the NCLT and, therefore, the above provision of the Act may not have much relevance any longer and probably does not extend to the tribunal for this reason. However, there is a possibility of conflict between the activities that may be undertaken by the ARC, e.g. change in management, and the role of the NCLT in restructuring sick companies. The Bill to repeal SICA is currently pending in Parliament and the process of staffing of NCLTs has been initiatedST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 27
  32. 32. OBJECTIVES I. Problem statement/Objective of the research  To study of the concept of Non Performing Asset in Indian perspective.  To study NPA standard of RBI  To study the Reasons for & Impact of NPAs  To evaluate the efficiency in managing Non Performing Asset of different types of banks (Public, Private & Foreign banks) using NPA ratios & comparing NPA with profits.  To check the proportion of NPA of different types of banks in different categories. II. Beneficiaries of the study The outcomes analyzed from this study would be beneficial to various sections such as:  Banks: This study would definitely benefit the banks in a way that directs them as to which sector should be given priority for lending money.  Further Researchers: The major beneficiaries from the project would be the researchers themselves as this study would enhance their knowledge about the topic. They get an insight of the present scenario of this industry as this is the emerging industry in the financial sector of the economy.  Student: To get the understanding of NPA concept as a whole.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 28
  33. 33. RESEARCH METHODOLOGY I. Research Design The research design that will be use is Descriptive Research.  Involves gathering data that describe events and then organizes, tabulates, depicts, and describes the data.  Uses description as a tool to organize data into patterns that emerge during analysis.  Often uses visual aids such as graphs and charts to aid the reader.  Using of hypothesis testing. Test of Correlation: a) H0: There is no significant correlation between profits & NPAs of Public Sector Banks for last 9 years H1: There is correlation between profits & NPAs of Public Sector Banks for last 9 years b) H0: There is no significant correlation between profits & NPAs of Private Sector Banks for last 9 years H1: There is correlation between profits & NPAs of Private Sector Banks for last 9 years c) H0: There is no significant correlation between profits & NPAs of Foreign Banks for last 9 years H1: There is correlation between profits & NPAs of Foreign Banks for last 9 years II. Data Collection Sources Secondary Data Secondary data refers to the data which has already been generated and is available for use. The data about NPAs & its composition, classification of loan assets, profits (net & gross) & advances of different banks is taken from Reserve Bank of India website and XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 29
  34. 34. III. Scope of the study  To understand the concept of NPA in Indian Banking industry.  To understand the causes & effects of NPA  To analyze the past trends of NPA of Public, Private & Foreign banks in different sector.IV. Expected contribution of the study The analysis made as a part of this study may contribute in a way analysis of strength and weakness of the banking sector as whole with regard to Non Performing Asset of banks. Various banks from different categories together may make efforts to overcome limitations for lending money to different sectors like agricultural, SSI, Priority sector, non-priority sector, public sector & others. V. Limitation There are some data which are available for just 3 years while the same data for its counterparts were available for 9 years. So exact comparison was not possible.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 30
  35. 35. ANALYSISOVERALL ANALYSIS:Scheduled Commercial banks (SCBs) in India remained robust against the backdrop ofglobal financial crisis. It is noteworthy that contrary to the trend in some advanced countries,the leverage ratio (Tier I capital to total assets ratio) in India has remained high reflecting thestrength of the Indian banking system. However, the Indian banking sector was notcompletely insulated from the effects of the slowdown of the India economy.The consolidated balance sheets of SCBs, expanded by 21.2 per cent as at end-March 2010as compared with 25.0 per cent in the previous year. While the balance sheet of public sectorbanks maintained their growth momentum, the private sector banks and foreign banksregistered a deceleration in growth rate.During 2009-10, the growth rate of banks‟ lending to industries, personal loans and servicessector witnessed a deceleration, while growth rate of banks‟ lending to agriculture and alliedactivities increased substantially. Overall, the incremental Credit–Deposit (C-D) ratiodeclined sharply reflecting the slowdown in credit growth, as corporates deferred theirinvestments against the backdrop of widespread uncertainty.It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio inIndia has remained high reflecting the strength of the Indian banking system. For instance, asobserved by the World Bank , the leverage ratio of banks in the UK witnessed a declinethroughout 1990s, which was accentuated after 2000 to reach a level of about 3 per cent by2009 from around 5 per cent in the 1990s. On the other hand, the leverage ratio for Indianbanks has risen from about 4.1 per cent in March 2002 to reach a level of 6.3 per cent byMarch 2010.The balance sheets of public sector banks maintained their growth momentum, the privatesector banks and foreign banks registered a deceleration in growth rate. Furthermore, the oldST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 31
  36. 36. private sector banks, which had been registering a significantly lower growth rate than their newer counterparts in the recent past, managed a better performance this year. NET NPAs OF BANKS: 2001-02 to 2009-10 Graph: 1 Source: Interpretation:  From the above it is observed that net NPA of public sector banks has a declining trend up to year 2006-07 and after that it has a rising trend till 2009-10. The same trend has been observed in both Private and Foreign Sector Banks. The declining trend from 2004 to 2007 of NPA was due to the implementation of Securitization Act (2002).ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 32
  37. 37.  But the increase in NPA was increasing in absolute term, as NPA as per percent of advance shows a declining trend in Public Sector Banks while that of in Private and Foreign Sector Banks shows an upward trend that is increase in NPA as per percent of advance after 2007.  The increase in NPA as per percent of advance of Private and Foreign Sector Banks is because of they have a major proportion of lending in non- priority sectors includes Medium and large scale industries which was highly affected by global financial crisis.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 33
  38. 38. SOUNDNESS INDICATORS: 1. Capital Quality 2. Asset Quality Capital Quality: A sound and efficient banking system is end product for maintaining financial stability. Therefore, considerable emphasis has been placed on strengthening the capital requirements in recent years. The Capital to Risk-weighted Assets Ratio (CRAR) of SCBs, a measure of the capacity of the banking system to absorb unexpected losses, improved further to 13.2 per cent at end-March 2010 from 13.0 per cent at end-March 2009. The asset quality of banks in India has been improving over the past few years as reflected in the declining NPA to advances ratio. It is especially noteworthy that notwithstanding the pressures of a slowdown in the economy and an atmosphere of uncertainty, the net NPA to net advances ratio increased only marginally to 1.1 per cent as at end March 2010 from 1.0 per cent as at end March 2009. Significantly, gross NPA to gross advances ratio remained constant at 2.3 per cent. Thus, in terms of the two crucial soundness indicators, viz., capital and asset quality, the Indian banking sector has exhibited resilience amidst testing times. Graph: 2 Source: XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 34
  39. 39. Asset Quality: Movements in Non-performing Assets – Bank Group-wise Old New Public State Private Private Sector Nationalized Bank Sector Sector Foreign Banks Banks Group Banks Banks BanksGross NPAsAs at end-March 2009 40089 23410 15303 2557 9901 2872Addition during theyear 31338 17822 12879 2094 10520 8430Recovered during theyear 26271 15863 9829 1579 6510 2954Written off during theyear 0 0 0 0 0 1514As at end-March 2010 45156 25368 18352 3072 13911 6833Net NPAsAs at end-March 2009 17726 8245 8398 740 4640 1247As at end-March 2010 21033 9339 10745 1165 6253 2973Gross NPAs/GrossAdvances RatioEnd-March 2009 2.2 2.1 2.6 2.3 2.4 1.8End-March 2010 2 1.8 2.5 2.3 2.8 4Net NPAs/NetAdvances RatioEnd-March 2009 0.8 0.7 1.4 0.7 1.1 0.9End-March 2010 0.7 0.7 1.5 0.9 1.3 1.7 Source: ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 35
  40. 40. Interpretation:  The trend of improvement in the asset quality of banks continued during the year. Indian banks recovered a higher amount of NPAs during 2009-10 than that during the previous year. Though the total amount recovered and written-off at Rs.38,828 in 2009-10 was higher than Rs.28,283 crore in 2008-09, it was lower than fresh addition of NPAs (Rs.52,382 crore) during the year. As a result, the gross NPAs of SCBs increased across all the bank groups. In this context, it may be noted that in the present context of financial turmoil, some slippage in NPAs could be expected.  Nevertheless, it may be noted that this slippage was moderate as compared to the problems faced by banks all over the world. The hardening of interest rates might have made the repayment of loans difficult for some borrowers, resulting in some increase in NPAs in this sector. It may be noted that the increase in gross NPAs was more noticeable in respect of new private sector and foreign banks, which have been more active in the real estate and housing loans segments.  Gross NPAs (in absolute terms) increased for all the banks. The gross NPAs to gross advances of foreign banks increased significantly during the year, while that of private sector banks increased marginally. The NPAs ratio of all other bank groups declined. While net NPAs to net advances ratio of all the banks increased over the previous year except that of nationalized banks.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 36
  41. 41. FREQUENCY DISTRIBUTION OF BANKS ACCORDING TOLEVEL OF NPAs: Frequency Distribution of Banks according to level of NPAs 100% 90% 80% 70% 60% 50% > 10% 40% 5% to 10% 30% 2% to 5% 20% < 2% 10% 0% Pvt.SB FB FB Pvt.SB FB Pvt.SB FB Pvt.SB FB Pvt.SB PSB PSB PSB PSB PSB 2005-06 2006-07 2007-08 2008-09 2009-10 Graph: 3 Source: In the year 2005-06, the Public sector banks (PSBs) had around 60% of their NPA profile in the < 2% category which increased 75% in 2006-07, 90% in 2007-08 - 2008-09 & 100% in 2009-10. PSBs 30% NPA profile in the year 2005-06 belongs to 2% to 5% category which reduced over the years and has been totally eliminated in 2009-10. PSBs did not have any of its banks in > 10% category. Private sector banks (Pvt.SBs) was having the worst situation in 2005-06 where 50% of its bank was in 2% to 5% category. While this ratio is declining over the years 2008-09 this is compensated by the rise in number of banks in < 2%. 5 Pvt. SB‟s banks were inST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 37
  42. 42. 5% to10% category in 2005-06 which was totally eliminated in 2008-09. But due to poor financial condition in 2009-10, there is increase in number of banks in higher NPA category. Foreign banks (FB) were comparatively in good position compare to privat e sector banks in the initial years. 70% of its NPA profile belongs to < 2% category. The number of banks increased in < 2% category. So among all three sectors, public sector banks managed to reduce NPAs over the years.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 38
  43. 43. COMPOSITION OF NPAs OF BANK SECTOR WISE: COMPOSITION OF NPAs OF PUBLIC SECTOR BANKS - 2002 TO 2010 30000 25000 Amount in Rs. Crore 20000 15000 10000 5000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Priority Sector 24156 25150 24939 23841 21926 22374 22954 25287 24318 Non-priority Sector 27307 28405 26781 25698 23249 18664 15158 14163 19251 Public Sector 1711 903 1087 610 444 341 490 299 474Graph: 4.1 Source:  From the above chart it is observed that public sector category is the least contributor towards the NPA of public sector bank. In the initial years from 2002 to 2006, Non- priority sector contributes more towards NPA than priority sector. But in later years from 2007 it‟s other way round, where priority sector contributes more than Non- priority sector.  Priority sector consist of advance given to agriculture, SSI, & other priority sector advances. Non priority sector consist of large industries, medium industries & other non priority sectors.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 39
  44. 44.  In case of priority sector, it started falling from 2004 up to 2006 over previous year. But in the later years i.e. from 2007 there is rise NPA because of defaults on the loan given to the farmers. It was highest in 2009. In order to reduce that, waiver package was announced in union budget of 2009. It may also be noted that the increase in NPAs was more noticeable in priority sector, which have been more active in the real estate and housing loans segments.  NPA in non priority sector is reducing constantly from 2003 to 2009 i.e. by 50%.Though the advance given to non-priority sector was higher than priority sector, NPAs of non-priority sector is comparatively.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 40
  45. 45. COMPOSITION OF NPAs OF PRIVATE SECTOR BANKS - 2002 TO 2010 14000 12000 Amount in Rs. Crore 10000 8000 6000 4000 2000 0 2002 2003 2004 2005 2006 2007 2008 2009 2010 Priority Sector 1835 2546 2445 2482 2188 2284 2884 3419 3640 Non-Priority Sector 4452 9090 9327 7796 6569 5541 6353 9558 13172 Public Sector 123 31 95 75 42 4 3 0 75Graph: 4.2 Source:  From the above graph it is observed that public sector contributes very negligible towards the overall NPA of foreign banks. The major reason for this is that on an average only 3.5% of total advance is made towards public sector category.  Priority sector category on an average constitutes almost 34% of the total advances made by the private sector banks. While average NPA of priority sector constitutes of 25% of total NPA. In later years from 2008 to 2010 there is increase in NPA of priority sector. In these years more advances was given to agriculture & housing sector.  In the year 2007-08, the real estate market was on boom, which encouraged people to take more loans. But after the subprime crisis there was sudden fall in real estate market & people became default to pay the loan.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 41
  46. 46.  In case of non-priority sector, the average advances made are 60.5% of total advance made by private sector banks. But the average NPA of non-priority sector is almost 74% which is highest amongst the entire category. We can see the declining trend in NPA of non-priority sector from 2004 to 2007. This as a result of securitization Act, 2002.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 42
  47. 47. COMPOSITION OF NPAs OF FORIEGN BANKS - 2008 TO 2010 Amount in Rs. Crore 7000 6000 5000 4000 3000 2000 1000 0 2008 2009 2010 Priority Sector 331 402 649 Non-Priority Sector 2,120 2712.0 6506 Public Sector 0 0 0Graph: 4.3 Source:  It is observed from the chart there is no NPA in public sector category in all the three years because there was no advance made to public sector category.  Non-priority sector contributes highest towards the NPA of foreign banks because non-priority sector constitute approximately 65% of the total advances made by foreign banks. So NPA will also be more in non-priority sector.  NPA is low in priority sector because very few advances are made in priority sector & that too are made to SSI.  The advances are made to medium & large scale industries in non-priority sector. As foreign banks are having global presence they are more affected by the global meltdown & financial crisis of 2008. So its effect is seen by sudden rise in NPA in 2009.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 43
  48. 48. COMPARISON OF NET NPA OF OLD AND NEW PRIVATESECTOR BANKS: 2001-02 to 2009-10Graph: 5 Compiled from:  From the above chart it is clearly observed that net NPA of old private sector banks has a declining trend over the years on the contrary new private sector banks has an upward trend.  Old private sector banks which is passing from lower growth rate in recent past, starts performing better than their new counterparts. Old private sector banks are more efficient than that of new private sector banks in managing NPA.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 44
  49. 49. NET NPAs AS PERCENTAGE OF ADVANCES OF BANKS: Net NPAs/Net Advances 2.5 2 NPA as % of Advance 1.5 1 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10 Public Sector 2.1 1.3 1.1 0.8 0.7 Private Sector 1.9 1 1 1.2 1.5 Foriegn Sector 0.9 0.8 1 0.9 1.7 Graph: 6 Source:  From the above it is clearly observed that only public sector banks have succeeded in reducing net NPA against net advances made over the period of time. It is constantly reducing each year, whereas in case of private sector bank it has reduced in 2006-07 then it got stable and started rising from 2008-09 onwards.  In case of foreign banks it is fluctuating over the years. Public sector banks have been able to reduce this ratio by 66.7% from 2006 to 2010. Public sector banks as a result of stringent checks & control able to manage low ratio compare to other banks. Also the ratio increased by 89% for foreign banks where the foreign banks were badly affected by the global meltdown. Even for private sector bank the ratio increased by 25% in 2010 due to financial crises & also for public sector bank the reduction in 2010 was the lowest i.e. 12.5%ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 45
  50. 50. CLASSIFICATION OF LOAN ASSET OF BANKS: Classification of Loan Asset of Public Sector Banks Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset 0.9 0.7 0.5 0.3 0.2 0.2 1.5 1.1 1.0 2.3 1.0 0.9 3.4 1.0 4.3 1.1 1.2 2.6 97.2 97.7 97.9 96.1 94.6 92.2 2005 2006 2007 2008 2009 2010 Graph: 7.1 Compiled from: Interpretation:  The above frequency distribution chart states that standard asset is increasing every year & on the contrary all the other types of asset i.e. Sub-standard, Doubtful & Loss Asset are decreasing every asset. This proves that public sector banks have succeeded in reducing NPA over the years.  Public sector banks have taken various measures to reduce NPA also convert Sub- Standard, Doubtful & loss asset into the above category Standard, Sub-Standard & Doubtful asset. The rise in sub standard ratio has major proportion indicates that there is a high scope of up gradation or improvement in NPA recovery in initial stage because it will be very easy to recover the loan as minimum duration of default.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 46
  51. 51. Classification of Loan Asset of Private Sector Banks Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset 0.5 0.4 0.3 0.2 0.3 0.3 1.0 0.9 1.0 1.5 2.5 1.1 0.8 1.5 3.6 2.0 1.0 1.8 97.4 97.6 97.3 96.8 96.1 94.2 2005 2006 2007 2008 2009 2010Graph: 7.2 Compiled from: Interpretation:  The above chart clearly states that the rise in the standard assets over the years compensates the fall in the other three types of assets. But in the year 2010, the percentage of Sub-Standard asset is highest among all the year. In 2010 percentage of standard asset has reduced by 0.5% which is compensated by increase in Sub- Standard & doubtful assets. This increase is due to interest & principle amount unpaid due to financial crisis in 2009. The percentage of doubtful asset has reduced to a great extent amongst all. So the private sector banks have managed to reduce the doubtful asset.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 47
  52. 52. Classification of Loan Asset of Foriegn Banks Standard Asset Sub-Standard Asset Doubtful Asset Loss Asset 0.5 0.4 0.2 0.2 0.8 0.5 0.5 0.6 1.5 0.7 1.3 1.1 1.2 1.0 1.8 0.9 3.5 1.6 97.9 98.1 98.1 97.0 95.7 95.2 2005 2006 2007 2008 2009 2010Graph: 7.3 Compiled from:  The proportion of Standard Asset is increasing from 2005 and started getting stable in 2008 & 2009. But it has fallen in 2010. The proportion of other three types of assets is falling over the years, but in 2010 there is great increase in the proportion of Sub- Standard asset which is as a result of decrease in proportion of Standard asset. This increase in Sub-Standard asset is because of interest & principle amount unpaid, due to poor global conditions, for the loan provided in a 2009. The interest & principle amount remained unpaid for period of more than 180 days but less than 1 year.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 48
  53. 53. COMPARISON OF NET PROFIT AND NET NPA OF BANKS: Comparison of Net Profit And Net NPA - Public Sector Banks 40000 35000 30000 Amount in Rs. Crore 25000 20000 15000 10000 5000 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Net NPA 27977 27958 24877 19335 16904 14566 15145 17726 21033 Net Profit 4317 8301 12295 16546 15784 16539 20152 26592 34394Graph: 8.1 Source:  It is observed from the above graph there exist no particular relationship between net profit & net NPA of public sector banks. There is constant increase in net profit from 2001-02 to 2004-05 & from 2006-07 to 2009-10. The average of percentage increase in net profit YOY basis comes to 32.3%  On the contrary public sector banks have managed to reduce net NPA constantly from 2002-03 to 2006-07. Although the percentage of reduction over the previous year is low compared to percentage of rise in profit over previous year. The average of percentage decrease in net NPA YOY basis comes to 2.5%ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 49
  54. 54. Comparison of Net Profit And Net NPA - Private Sector Banks 12000 10000 Amount in Rs. Crore 8000 6000 4000 2000 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Net NPA 3700 6676 3963 4128 4212 3171 4028 5380 7418 Net Profit 1142 1779 2958 3481 3533 4975 6465 9522 10868Graph: 8.2 Source:  It is clearly observed from the line graph that there is continuous rise in net profit of private sector banks over the years. The average of percentage increase in net profits of private sector banks comes to approximately 34%.  On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from 2001-02 to 2009-10. The average of percentage rise in net NPA comes to almost 15%.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 50
  55. 55. Comparison of Net Profit And Net NPA - Foreign Banks 9000 8000 7000 Amount in Rs. Crore 6000 5000 4000 3000 2000 1000 0 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 Net NPA 785 920 903 933 639 808 927 1247 2973 Net Profit 945 1492 1824 2243 3098 4109 5343 7544 8459Graph: 8.3 Source: Interpretation:  The above line graph shows net profit of foreign banks is increasing throughout the period from 2001-02 to 2009-10. The average of percentage increase in net profit YOY basis comes to 32%. Whereas in case of net profit there is no continuous upward or downward movement.  But overall there is rise in net NPA of foreign banks. The average of percentage increase in net NPA YOY basis comes to approximately 25%. So this shows there is positive relationship between net NPA & net profit of foreign banks.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 51
  56. 56. NPA TO ADVANCE RATIO OF BANK: Comparison of NPA with Advances- Public Sector Banks 6 5.5 5 4 Gross NPAs/Gross 3.6 Advances 3 2.7 Net NPAs/Net 2.1 2.2 Advances 2 2 1.3 1 1.1 0.8 0.7 0 2005-06 2006-07 2007-08 2008-09 2009-10Graph: 9.1 Compiled from:  The percentage in reduction of gross NPA to gross advances ratio is decreasing year on year i.e. it has reduced by 34.5% from 2005-06 to 2006-07. Similarly it has reduced by 25%, 18.5% & 9% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09 & 2008-09 to 2009-10.  While in case of net NPA to net advances ratio, the percentage change is varying. It has reduced by 38% from 2005-06 to 2006-07. Similarly it has reduced by 15.38%, 27.27% & 12.5% respectively from 2006-07 to 2007-08, from 2007-08 to 2008-09 & 2008-09 to 2009-10.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 52
  57. 57.  The above calculated figure states that the provisions made for NPA & other items like interest due but not recovered, part payment received and kept in suspense account, etc which is deducted from Gross NPA is changing over the years. It is not decreasing in same proportion as gross NPA.  The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2006-07 [67%] & lowest in 2007-08 [59%]. In other years it near to 63%. This gap is highest in 2007 because in 2007 advances have increased tremendously over 2006. Due to which NPA also increased & so provisions also increased.  The line graph clearly states that the ratio of gross NPA to gross advances & net NPA to net advances is decreasing over the years. In all the public sector bank has succeeded to reduce the non performing assets against the advances made over the years.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 53
  58. 58. Comparison of NPA with Advances- Private Sector Banks 4 3.8 3.5 3 2.9 2.5 2.5 2.5 2.2 2 1.9 Gross NPAs/Gross Advances 1.5 1.5 1.2 1 1 1 Net NPAs/Net Advances 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10Graph: 9.2 Compiled from:  The percentage change in of gross NPA to gross advances ratio is decreasing initially & thereafter started rising from 2007-08. It has reduced by 34.2% from 2005-06 to 2006-07. Similarly it has reduced by 12% from 2006-07 to 2007-08 & thereafter increased by 18.5% & 9% respectively from 2007-08 to 2008-09 & 2008-09 to 2009- 10.  While in case of net NPA to net advances ratio, the percentage change is var ying drastically. It has reduced by 47% from 2005-06 to 2006-07. It is unchanged from 2006-07 to 2007-08. It has increased by 20% & 25% respectively from 2007-08 to 2008-09 & 2008-09 to 2009-10.  The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio over the years states that private sector banks makes more provisions in gross NPA & gross advances.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 54
  59. 59.  The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2006-07 [60%] & lowest in 2009-10 [48%]. In other years it near to 54%. In 2007 there is highest increase in advances over previous year amongst all the year. This resulted increase in NPA which in turn increased the provisions and unrecognized interest income.  Private sector banks have not succeeded to reduce NPA as against the advances made over the years as both the ratios are increasing in later years.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 55
  60. 60. Comparison of NPA with Advances- Foreign Banks 4.5 4 4 3.5 3 2.8 2.5 Gross NPAs/Gross 2 2 Advances 1.8 1.8 1.7 1.5 Net NPAs/Net Advances 1 0.9 1 0.9 0.8 0.5 0 2005-06 2006-07 2007-08 2008-09 2009-10Graph: 9.3 Compiled from:  The gross NPA to gross advances ratio is decreasing till 2007-08.It is unchanged in 2008-09 & then increased in 2009-10. It has reduced by 28.5% & 10% respectively from 2005-06 to 2006-07 & from 2006-07 to 2007-08. It has increased tremendously by 122% from 2008-09 to 2009-10.  While in case of net NPA to net advances ratio, there is great volatility. It has reduced by 11% from 2005-06 to 2006-07. Thereafter it increased by 25% in 2007-08. Again it reduced by 10% in 2009 and finally increased by 89% in 2009-10.  The steep rise in gross NPA & net NPA 2009-10 is due to poor global conditions.ST. XAVIER’S COLLEGE (AUTONOMOUS), KOLKATA Page 56