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    • International Journal of Advanced Research in OF ADVANCED ISSN 0976 – 6324 INTERNATIONAL JOURNAL Management (IJARM), RESEARCH (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME IN MANAGEMENT (IJARM) ISSN 0976 - 6324 (Print) ISSN 0976 - 6332 (Online) Volume 4, Issue 3, September - December 2013, pp. 18-33 © IAEME: www.iaeme.com/ijarm.asp Journal Impact Factor (2013): 4.7271 (Calculated by GISI) www.jifactor.com IJARM ©IAEME AN ASSESSMENT OF RISK MANAGEMENT IN BANKING SECTOR: A STUDY WITH SPECIAL REFERENCE TO PUBLIC AND PRIVATE SECTOR BANKS IN INDIA *Dr. C. MAHADEVA MURTHY and **Prof. S.N. PATHI *Chairman & Associate Professor, Department of Studies and Research in Management, Karnataka State Open University, Mukthagangotri, Mysore-570006, Karnataka, India. **Professor, Department of Business Administration, Berhampur University, Berhampur- 760007, Odisha, India. ABSTRACT In banking sector risk management is a key issue connected to the financial system stability. Banking activities is becoming more complex, compounded by exploding technological capabilities, expanding product offerings and deregulation of competition. In other words, banking is a business of risk. For this reason, efficient risk management is extremely required. In this connection, banks have been moving towards the use of sophisticated models for measuring and managing risks. The Indian banking system is better prepared to adopt Basel II than it was for Basel I due to better risk awareness. The Basel II Accord had led the banks to new prudential norms like capital adequacy and identification of bad debts. Recently many banks have appointed senior managers to oversee a formal risk management function. The effective risk management lies with the ability to gauge the risks and to take appropriate measures. In the light of this, an analysis was carried out to highlight the NPAs position of Public and Private Sector Banks in India. The trend of NPAs in public and private sector banks in the last nineteen years shows that the level of NPAs in relation to the total assets has declined. The extent of NPA is comparatively higher in public sector banks compare to the private sector and foreign banks. The study also focuses on the risk management practices of Public and Private Sector Banks after the implementation of Basel II with the help of capital adequacy ratio for a period of 2007 to 2012. Hence an efficient risk management system is needed. Key words: Risk Management, Financial System, Basel II, Capital Adequacy Ratio, NPAs Public and Private Sector Banks. 18
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME INTRODUCTION The Indian Banking industry has drastically changed due to liberalization and deregulation process started in 1991. The financial system is the lifeline of the economy. The changes in the economy get mirrored in the performance of the banking industry. In order to strengthen the performance of banking sector, it is adopting international best practices with its vision. Rising global competition, increasing deregulation, introduction of innovative products and delivery channels have given rise to risk in banking sector. The success of risk management lies in the ability to guage the risks and take appropriate measures. Several prudential and provisioning norms have been introduced. Under Basel II accord, capital allocation will be based on the risk inherent in the asset. Banks generally face various risks such as credit risk, market risk, operational risk, liquidity risk etc. of all the type of risks, credit risk is the most important one. Credit risk is all about loans and their defaults, and loan transactions account for more than 50.00 per cent of all banking activities. Credit risk management is a structured approach to managing uncertainties through risk assessment, developing strategies to manage it, and mitigation of risk using managerial resources. The strategies include transferring to another party, avoiding the risk, reducing the negative effects of the risk, and accepting some or all of the consequences of particular risk. The NPA concept was introduced in India by the Reserve Bank of India with effect from 1st April 1992 and prudential norms were issued regarding the methods of identifying NPAs, classification and income recognition. The NPAs is in reality works out a ratio of non-performing credit to total credit. Bankers are now required to recognize such loans faster and then classify them as problem assets. The basic factor to determine whether an account is NPA or not, is the record of recover and not the availability of security. Before making a further analysis on NPAs and its causative factor, an understanding of how banks classify their advances is necessary. RISK STRUCTURE The word ‘risk’ is derived from an Italian word ‘resicare’ which means ‘to dare’. It means risk is more a ‘choice’ than a ‘fate’. An extension of this analogy reveals risk is a possibility of loss or injury perils and the degree of uncertainty in return. Banks in the process of financial intermediation are facing with one or more of the following risk categories. • Credit Risk • Market Risk • Operational Risk A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-Performing Asset (NPA) is one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders’ value. Assets which generate periodical income are called as performing assets. Assets which do not generate periodical income are called as non-performing assets. NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI. An asset, including a leased asset becomes nonperforming when it ceases to generate income for the bank for a specified period of time. 19
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME The quality of Indian banks assets is likely to deteriorate over the next two years. This will be driven by the slowdown in the economy, and by the aging of loans made in recent years. The NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. The Financial companies and institutions are nowadays facing a major problem of managing the Non Performing Assets (NPAs) as these assets are proving to become a major setback for the growth of the economy. NPAs in simple words may be defined as the borrower does not pay principal and interest for a period of 180 days. However, it is taken into consideration now that default status would be given to a borrower if dues are not paid for 90 days. In banking business evaluation of capital position a bank must consider both the static and dynamic costs. The static costs and perhaps the dynamic costs, depend in part on the penalties regulators impose for inadequate capital ratio. The levels and changes in capital position variety of non-regulatory costs have associated. During the seventies there were no regulations that specified minimum capital ratios. Regulators dissatisfied with many banks capital ratio, at the beginning of the eighties. In 1981 U.S. regulators specified minimum capital to asset ratios for all banks. As a result, in 1983, banks were required to raise their capital-to asset ratios to some pre-specified minimum. Subsequently other counties followed. The Basel committee on Banking Supervision (BIS) was formed in response to the messy liquidation of a Frankfurt bank in New York. Under the auspices of the Bank for International Settlement (BIS) Basel I refer to a round of deliberations by central banks from around the world. During 1988 BIS published a set of minimal capital requirements for banks. This is also known as 1988 Basel Accord. In 1992 this was enforced by law in (G-10) countries. In India, Capital Adequacy Ratio (CAR) was introduced from April 1992. THE BASEL I NORMS India began implementing the Basel I in April 1992. The standards are almost entirely addressed to credit risk, the main risk incurred by banks. The document consists of two main sections, which covera. The definition of capital; and b. The structure of risk weights. Based on the Basel norms, the RBI also issued similar capital adequacy norms for the Indian banks. According to these guidelines, the banks will have to identify their Tier- I and Tier-II capital and assign risk weights to the assets. Having done this they will have to assess the Capital to Risk Weighted Assets Ratio (CRAR). Banks in India have been making efforts to reduce their NPAs post Basel I implementation and thereafter. Tier-I Capital • Paid-up capital • Statutory Reserves • Disclosed free reserves • Capital reserves representing surplus arising out of sale proceeds of assets Equity investments in subsidiaries, intangible assets and losses in the current period and those brought forward from previous periods will be deducted from Tier I capital. 20
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME Tier-II Capital • Undisclosed Reserves and Cumulative Perpetual Preference Shares • Revaluation Reserves • General Provisions and Loss Reserves Basel II NORMS Basel II is the second of the Basel Accords recommended for banking laws and regulations issued by the BCBS and BIS. The focus of Basel II is on risk determination and quantification of credit, market and operational risks faced by banks. With this objective, on June 26, 2004, The Basel Committee on Banking Supervision released “International Convergence of Capital Measurement and Capital Standards: A revised Framework”, which is commonly known as Basel II Accord was introduced. Basel 1 initially had Credit Risk and afterwards included- Market Risk. In Basel II, apart from Credit & Market Risk; Operational Risk was considered in Capital Adequacy Ratio calculation. Basel II norms consist of three pillars. The first pillar, minimum capital requirements, develops and expands on the standardized 1988 rules. The risk weighting system describes and replaces the earlier system by using external credit ratings. The second pillar is the supervisory review of capital adequacy which seeks to ensure that the bank’s position is consistent with its overall risk profile and strategy, and as such encourages early supervisory intervention. Supervisors want the ability to require banks which show a greater degree of risk to hold a minimum capital in excess of 8.00 per cent. The third pillar, market discipline, encourages high disclosure standards and enhances the role of market participants in encouraging banks to hold adequacy capital. REVIEW OF LITERATURE There are numerous empirical studies conducted on NPAs and Basel Accord in India as well as abroad. Present review deals with the empirical studies conducted in Indian context on Non-performing Assets and Basel Accord of Public and Private Sector banks. The following are the various studies in this field. Jackson (1999) points out that one of the reasons why the Basel Committee adopted a single standard for internationally active banks is that the framework would strengthen the soundness and stability of the international banking system by encouraging organizations to boost their capital positions. Moreover, the framework established a structure that was intended to: (1) make regulatory capital more sensitive to differences in risk profiles among banking organizations; (2) take off-balance sheet exposures explicitly into account in assessing capital adequacy; and (3) lower the disincentives to holding liquid, low risk assets. Rao (2004) views that Basel I norms aim at ensuring capital adequacy of banks as a proportion of the risk-weighted assets. Vyas et.al (2007) studied the impact of capital regulation norms like Basel II on the credit growth of Indian banks and concluded that capital regulations do not seem to affect credit growth in spite of the growing concerns about banks’ stability. Rekha (2005) carried out the study to examine non-performing assets, credit risk management practices, Basel II and risk based supervision between public and private sector banks. The period of the study is 1994 to 2003. She opined that 70.00 per cent of the risk is from credit risk, remaining 30.00 per cent is from market risk and operational risk. She suggested that ‘better portfolio equilibrium, establishing risk management information 21
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME system, redesigning the internal rating system and early warning signals can be the better risk management methods. Bodla and Verma (2009) examined the implementation of the risk management framework and operational risk management framework by the commercial banks. Their study revealed that irrespective of sector and size of bank, the risk management and the operational risk management framework of banks in India are on the right track and they are based on the RBI’s guidelines. Credit risk is the most important risk faced by the scheduled commercial banks in India they revealed. They examined many banks have designed operational risk management framework on the lines of Basel Accords. Goyal (2010) focuses on risk management process, challenges and opportunities in implementation of Basel II in Indian banking industry. He opined that ganging risk and taking appropriate position will lead to success. He revealed that Indian banks have adopted best structures, processes and technologies available worldwide and have moved from strength to strength. Kumar (2010) conducted a study in Delhi to find out the various methodologies used by the banks in their operational risk management activity complaining the rules and regulations. The study reveal that the operational risk management functions is predominantly gaining importance in banking operations in India along with credit risk. He concluded that the banks are ready to improve their existing risk management framework in accordance with Basel II to deal with risks more effectively. Ayyappan and Ramachandran (2011) conducted a study of 22 public sector and 15 private sector banks to predict the determinants of the credit risk in the Indian Commercial banking sector by using an econometric model. The outcome of the study is the nonperforming assets had a strong and statistically significant positive influence on the current non-performing assets. They opined that the problem of NPA is not only affecting the banks but also the whole economy. Mehra (2011) focused on operational risk by using advanced measurement approach for analysis. The study reveals that operational risk has higher awareness but given less importance. Small sized public sector and old private sector banks were lagging behind. The Study revealed that there is a wide gap between Indian banks and the AMA compliant banks worldwide in operational risk management practices. OBJECTIVES OF THE STUDY The present study attempts to achieve the following objectives 1. To analyze the risk structure and Basel I & II norms of banking business; 2. To assess the trend of NPAs position in Indian Public and Private Sector Banks an overview; 3. To highlight the NPAs position of selected countries in the world; 4. To predict the status of capital adequacy ratio of Basel I and II of both public and Private Sector Banks in India; and 5. To offer findings, suggestions in the light of the study. RESEARCH METHODOLOGY Research is considered as journey from unknown to the known. Methodology is the way to solve the research problem systematically. The present study is purely based on data 22
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME gathered from secondary sources. The required secondary data constitutes the main source of information, suitable for the purpose of the present study. The sources of secondary data were annual publications of Reserve Bank of India, RBI Bulletins, Indian Banks Association Bulletins, Mumbai, National Institute of Bank Management (NIMB), Pune, the journal of Indian Institute of Banking & Finance, Annual Reports of various banks, daily newspapers such as Financial Experts, Business Line, and Business Standards were also used for the purpose of the study and also various referred articles, books and journals and data available on internet and other sources has also been used. Major guidelines issued by RBI from time to time were studied in depth. In the light of the objectives of the study, the study is divided into the components of risk management as, 1) NPAs Position: Public and Private Sector Banks; 2) Countries NPAs Position; and 3) CAR of Public and Private Sector Banks – Basel I and Basel II. The methodology used to analyze the NPAs of public and private sector banks is percentages. The NPAs position in public and private sector banks has been taken in the following categories. 1) Gross NPAs; and 2) Net NPAs. The data has been collected from the RBI website for the period of nineteen years from 1993-94 to 2011-12. The study also divided the component of CAR of Public sector and Private sector banks in the following categories. 1. SBI and Associates; 2. Nationalized Banks; 3. Old Private Sector Banks; and 4. New Private Sector banks. The study analyses Countries NPAs position, it also depicts trends in Capital Adequacy Ratio of both Public Sector Banks and Private Sector Banks under Basel I and Basel II in India. Analysis and Interpretation Part-A: Non-performing Assets (NPAs) Position (i) NPAs Position in India NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders· value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing, but a reflection of the state of health of the industry and trade. Table No. 1 exhibits the trend of non-performing assets as a percentage to total assets in Public and Private Sector Banks in India during last Nineteen years. It is clear from the table that the percentage of gross NPAs of public sector banks is decreased from 24.80 per 23
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME cent to 3.30 per cent from 1993-94 to 2011-12. The gross NPAs in private sector banks is also decreased from 6.23 per cent to 2.10 per cent from 1993-94 to 2011-12. Similarly, the percentage of net NPAs of public sector banks is decreasing in all years except in the year 1996-97. The percentage of net non-performing assets in private sector banks was 3.36 per cent in 1993-94 and it has come down to 0.50 per cent in the year 2011-12. While the declining trend in NPAs is a positive sign for management of public sector banks, a comparison with the private sector banks reveals that the ratio of gross and net NPAs has been consistently higher than private sector banks. Thus, the relative efficiency of public sector banks in managing NPAs is poor in comparison to private sector banks. Table No.1 NPAs Position in Public and Private Sector Banks: An Overview Year Public Sector Banks Private Sector Banks Gross NPAs Net NPAs Gross NPAs Net NPAs 1993-94 24.80 14.5 6.23 3.36 1994-95 19.50 10.7 6.47 4.10 1995-96 18.00 8.90 7.45 4.34 1996-97 17.84 9.18 8.49 5.37 1997-98 16.02 8.15 8.67 5.26 1998-99 15.89 8.13 10.44 6.92 1999-00 13.98 7.42 8.17 5.14 2000-01 12.37 6.74 8.37 4.44 2001-02 11.09 5.82 9.64 5.73 2002-03 9.36 4.54 8.08 4.95 2003-04 7.79 2.90 5.80 1.32 2004-05 5.53 2.60 3.90 1.85 2005-06 3.64 1.22 2.60 1.09 2006-07 2.66 1.01 2.40 0.97 2007-08 2.23 1.00 2.70 1.20 2008-09 2.00 0.90 3.20 1.50 2009-10 2.20 1.10 2.74 1.01 2010-11 2.40 1.20 2.25 0.67 2011-12 3.30 1.70 2.10 Source: Report on Trend and Progress of Banking in India from 1993-2012. 24 0.50
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME r Graph No.1 NPAs Position of Public Sector Banks 24.8 Gross and Net NPAs Position of Public Sector Banks Gross NPAs 5.53 2.6 3.64 1.22 2.66 1.01 2.23 1 2 0.9 2.2 1.1 2.4 1.2 3.3 1.7 5 Net NPAs 2.9 4.54 7.79 9.36 11.09 5.82 12.37 6.74 13.98 7.42 16.02 15.89 8.13 10 8.15 8.9 10.7 15 9.18 14.5 Per centage 20 17.84 18 19.5 25 0 Years Graph No.1.A NPAs Position of Private Sector Banks 5.8 2.1 Net NPAs 0.5 2.25 0.67 2.74 1.01 1.5 2.7 1.2 2.4 0.97 2.6 1.09 1.85 1.32 2 3.2 Gross NPAs 3.9 4.95 5.73 5.14 8.08 8.37 8.17 6.92 7.45 8.67 5.26 5.37 4.44 4.1 3.36 4 Years 25 2011-12 2010-11 2009-10 2008-09 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99 1997-98 1996-97 1995-96 1994-95 0 1993-94 per centage 6 4.34 6.47 8 6.23 10 8.49 12 9.64 10.44 Gross and Net NPAs position of of Private Sector Banks
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME International Comparisons of NPA levels In order to get a global picture it is essential to look at the NPAs in the different countries of the world. Since the concept of NPA developed in India only in the post -reform era, it would be useful to look at recent figures rather than adhere to a historical account. While comparing the NPA levels of different countries, it should be remembered that the features relating to NPA reporting/evaluation practices are not uniform across the globe. In some countries, the NPA level may be low because losses are written off at an early stage & vice-versa. Bank Non-performing loans to total gross loans are the value of non-performing loans divided by the total value of the loan portfolio. The loan amount recovered as non-performing should be the gross value of the loan as recorded on the balance sheet, not just the amount that is overdue. The table No. 2 indicates the International Comparisons of NPA level of different countries from 2007-2012. In the year 2007 Malaysia had the highest NPA of 6.50 per cent. This was followed by Turkey and India and their percentage stood at 3.30 and 2.70 respectively. In the year 2012, USA stands first with holding 3.90 per cent of level of NPA, India stayed in Second with having 3.00 per cent of level of NPA, further followed by Turkey-2.50 per cent, Japan-2.40 per cent, Malaysia-2.20 per cent, Australia-1.90 per cent, Korea-1.50 per cent, Hong Kong-0.60 per cent. Therefore proper measures need to be taken to reduce the percentage of NPA. Table No. 2 Countries NPAs Position (%) Countries 2007 2008 2009 2010 2011 2012 USA 1.4 3.0 5.4 4.9 4.1 3.9 India 2.7 2.4 2.4 2.5 2.3 3.0 Turkey 3.3 3.4 5.0 3.5 2.6 2.5 Japan 1.5 1.4 1.6 2.5 2.4 2.4 Malaysia 6.5 4.8 3.6 3.4 2.7 2.2 Australia 0.6 1.3 2.0 2.2 2.0 1.9 Korea 0.7 1.1 1.2 1.9 1.4 1.5 Hong Kong 0.8 1.2 1.6 0.8 0.7 0.6 Source: www.worldbank.org 26
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME r Graph No.2 Countries NPAs position 6.5 Countries NPAs Position 4.8 3.6 3.4 2008 0.8 1.2 1.6 0.8 0.7 0.6 1 0.7 1.1 1.2 1.9 1.4 1.5 1.3 2 2.2 2 1.9 2.5 2.4 2.4 2.7 2.2 2009 0.6 2 2007 1.5 1.4 1.6 3 2.7 2.4 2.4 2.5 2.3 3 3 4 2.6 2.5 3.3 3.4 3.5 4.1 3.9 5 1.4 Per centage 6 5 5.4 4.9 7 2010 2011 2012 0 USA India Turkey Japan Malaysia Australia Korea Hong Kong Countries Part-B: Trends in Capital Adequacy Ratio ( dequacy (CAR) values in India It is noted that most of the earlier studies focus on Basel II norms for Indian banks and explain the conceptual framework. Little attention is paid to analysis of CAR that can help in (i) identifying why there is a change in CAR between and among banks from one year change to the next and (ii) ascertaining how the banks will be affected if the CAR is maintained at lower than the regulatory level. This can be inferred from the recent crises faced by US banks – many were forced to close down. In the year 2008, 25 banks became bankrupt including the o big ones like Lehmann Brothers. The present (2011) debt crisis of the US government may also bring in some problems in the banking sector in view of lower ratings awarded by the rating agencies. This study tries to identify the status of CAR of the commercial banks in India, examine the trends and ascertain the impact of Basel II norms on CAR. It also analyzes the implementation of CAR by banks in India. The situation is displayed through tables and throug graphs and also discussed. The study pertains to public, private and foreign commercial banks operating in India. The data used for the study are secondary, drawn from published work and the RBI’s progress reports on banks and the guidelines issued by the BIS. issued Capital Adequacy Standards in India Capital adequacy is deemed to control risk appetite of the bank by aligning the incentives of bank owners with depositors and other creditors. In this background next we examine the CAR of Public and Private Sector Banks. Public Sector banks include SBI and subsidiaries and Nationalized Banks and Private Sector banks include old private sector banks and new private sector banks. 27
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME Public and Private Sector Banks Capital Adequacy Ratio - Basel I CAR is a measure of a banks’ capital and it is expressed as a percentage of a bank’s risk weighted credit exposures. Also known as “Capital to Risk Weighted Assets Ratio (CRAR) CAR = Tier one Capital + Tier Two Capital Risk Weighted Assets Ever since its introduction in 1988, capital adequacy ratio has become an important benchmark to assess the financial strength and soundness of banks. We examine the CAR of Public and Private Sector banks (operating in India) for the years 2007 to 2012 as per Basel norms I and II. The banks are grouped into four: SBI and its subsidiaries, nationalized banks, old private sector banks, new private sector banks. Table No. 3 show the CAR values of Public and Private Sector banks. SBI and subsidiaries CAR ratio was increased from 12.21 per cent to 12.25 per cent from 2007 to 2012 as against Nationalized banks showed a increasing trend from 12.21 per cent to 13.47 per cent from 2007 to 2012. In case of old private sector banks CAR increased from 12.77 per cent to 14.55 per cent from 2007 to 2012. New Private sector banks CAR also increased from 12.47 per cent to 16.87 per cent from 2007 to 2012. New Private Sector banks, on the other hand, during 2012 have the highest average and also maximum variability in CAR with 16.87 per cent, followed by the old private sector banks with 14.55 per cent and Nationalized Banks with 13.47 per cent. The lowest capital adequacy ratio was found in SBI & Subsidiaries with 13.31 per cent. To conclude, private sector banks capital adequacy ratio is more than public sector banks. Table No. 3 Group Average CAR for Banks - Basel I: 2007 to 2012 SL No. Banks 2007 2008 2009 2010 2011 2012 1 SBI & Subsidiaries 12.21 12.81 12.07 13.31 11.87 12.25 2 Nationalized banks 12.21 11.84 11.87 12.03 12.15 13.47 3 Old private sector banks 12.77 13.59 13.76 14.18 13.15 14.55 4 New private sector banks 12.47 14.12 15.19 16.76 16.52 16.87 Source: Report on Trend and Progress of Banking in India. 28
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME r Graph No. 3 CAR of Public and Private Sector Banks – Basel I 12.25 13.47 14.55 16.87 16.52 11.87 12.15 13.15 13.31 12.03 14.18 16.76 12.07 11.87 13.76 15.19 12.81 11.84 13.59 14.12 18 16 14 12 10 8 6 4 2 0 12.21 12.21 12.77 12.47 Capital Adequacy Ratio of Public and Private Sector Banks - Basel I SBI & Subsidiaries banks Nationalized Old Private sector banks Nationalized New private sector banks Nationalized New private sector banks 2007 2008 2009 2010 2011 2012 Years Public and Private Sector Banks Capital Adequacy Ratio - Basel II Table No. 4 depicts the CAR for banks on Basel II. Compared to Basel I, the CAR is lower under Basel II possibly due to proper maintenance of operational risk being included under the latter. Surprisingly this is same in the case of private banks also. It may be noted er that the variation in CAR is minimal in for public sector banks with 14.12 per cent, followed cent by private sector banks with 16.66 per cent. The highest capital adequacy ratio is found in acy New Private Sector Banks and its percentage stood at 17.40. Table No. 4 Group Average CAR for Banks - Basel II: 2009 to 2012 SL No. Banks 2009 2010 2011 2012 1 SBI & Subsidiaries ries 13.34 13.51 12.66 13.70 2 Nationalized banks 13.32 13.29 13.49 13.03 3 Old private sector banks 14.54 14.90 14.15 14.12 4 New private sector banks 15.34 17.40 16.28 16.66 Source: Report on Trend and Progress of Banking in India. rogress 29
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME r Graph No. 4 Group Average CAR for Banks - Basel II: 2009 to 2012 16.66 13.7 13.03 14.12 16.28 12.66 13.49 14.15 14 13.51 13.29 14.9 16 13.34 13.32 14.54 15.34 18 17.4 CAR of Public and Private Sector Banks – Basel I SBI & Subsidiaries 12 Nationalized banks 10 Old private sector banks 8 New private sector banks 6 4 2 0 2009 2010 2011 2012 Years FINDINGS OF THE STUDY The following are the major findings of the study 1. There is a decline in the percentage of NPAs from 14.50 per cent to 1.70 per cent in cen public sector banks over a period of study. 2. There is also decline the percentage of NPAs from 3.36 per cent to 0.50 per cent in private sector banks from 1993-94 to 2011-12. 1993 3. The level of NPA in public sector banks hold larger share compared to private sector banks. 4. It is found that USA stands first among all the countries in terms of percentage of NPA with 3.9 per cent in the year 2012. 5. India stands Second next to USA with holding 3.00 percentage of NPA level then followed by Turkey-2.50 per cent, Japan-2.40 per cent, Malaysia-2.20 per cent, 2.50 Japa 2.20 Australia-1.90 per cent, Korea 1.90 Korea-1.50 per cent, Hong Kong-0.60 per cent in the year 0.60 2012. 6. The Average CAR - Basel I is more in New Private Sector Banks that is 16. per 16.87 cent followed by Old Private Sector Banks with 14.55 per cent. 7. The Average CAR - Basel II is more in New Private Sector Banks that is 17.40 per cent then the old Private Sector Banks with 14.90 per cent. 30
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME SUGGESTIONS The following are the major suggestions for the study 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. The level of NPA in Public Sector is very much high when compared to Private Sector Banks, therefore proper management is required to reduce the percentage of NPA. The Banks should try to achieve better portfolio equilibrium so that proper supervision will exist. The government has to lay more emphasis in providing finance to the wide range of activities in the services sector. An objective and reliable database has to be built up for which bank has to analyze its own past performance data relating to loan defaults, operational losses etc. It is also need for building in a risk orientation in individual officers at the operating level, to create awareness about credit assessment skills and risk mitigation processes is needed. Public sector banks need to set up modern IT infrastructure in place within one two years in line with foreign and new generation private banks. There is a need of centralized database so that core banking solution can be implemented. Early warning signals for initiating sickness must be identified and proactive remedial action should be taken up in time. Banks to look at the three-fold method of arresting fresh inflows of NPAs, reducing existing NPAs and bringing about a culture of doing away with NPAs. Banks should take legal measures against willful defaulters to recovery of debts. Though, the legal measures are lengthy, complex and expensive, they are the only way to recover the debts from them. Regular contact with borrowers and regular monitoring of the accounts is very necessary. Risk taking systems should be developed to cover newer risks. Existing NPAs should be taken seriously and banks should set up speedy recovery cells and task forces to deal with them. Branches having sizable NPAs should be identified and skilled and trained personnel should be placed there. Doubtful and loss assets should be reviewed periodically to explore possibilities for a quick write-off in cases where they are fully provided for. Incentives schemes for employees and interest discounts for prompt repayments should be adopted by banks to bring about a culture of zero NPAs. CONCLUSION The NPA is the root cause of the global financial crisis that we observed recently. The world is still trying to recover from the after-effects of the crisis. The problem of NPA has received considerable attention after the liberalization of the financial sector in India. The NPAs have always been a big worry for the banks in India. It is just not a problem for the banks; they are bad for the economy too. The extent of NPA is comparatively higher in public sectors banks. To improve the efficiency and profitability, the NPAs have to be scheduled. Various steps have been taken by government to reduce the NPAs in both Public 31
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME and Private Sector Banks in India. This has led to decline in the level of NPAs of the Indian banking sector. The NPAs level of our banks is still high as compared to the international standards. It is highly impossible to have zero percentage NPAs. But at least Indian banks can try competing with foreign banks to maintain international standard. One cannot ignore the fact that a part of the reduction in NPAs is due to the writing off bad loans by the banks. The Indian banks should take care to ensure that they give loans to creditworthy customers as prevention is always better than cure. REFERENCES 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. Gupta and Meera Mehta, “Indian banks and Basel - II: An Econometric Analysis”, Indian Journal of Finance, June 2011, pp.11-19. Yogieta S. Mehra., (2011), Presented paper titled “Operational Risk Management in Indian Banks: Impact of Ownership and Size on Range of Practices for Implementation of Advanced Measurement” at the “The Thirteenth Annual Conference on Money and Finance in the Indian Economy”. Krishn A. Goyal., (2010). Risk Management in Indian Banks: Some Emerging Issues, Int. Eco. J. Res., Vol. 1, Issue 1, pp. 101-109. Rekha, Arunkumar., (2005). Risk Management in Commercial Banks – A Case Study of Public and Private Sector Banks, Ninth Capital Market Conference, Indian Institute of Capital Market, Mumbai. Bodla, B.S. and Verma Richa., (2009). Credit Risk Management Framework at Banks in India, the IUP Journal of Bank Management, Vol. VIII, Issue 1, pp. 47-72. Alfriend, M, “International Risk-based Capital Standards; History and Explanation”, Federak Reserve Bank of Richmond Economic Review, December 1988, pp.28-34. Gupta and Meera Mehta, “Indian banks and Basel - II: An Econometric Analysis”, Indian Journal of Finance, June 2011, pp.11-19. A Study of Non-Performing Assets on Selected Public and Private Sector Banks Priyanka Mohnani1, Monal Deshmukh- International Journal of Science and Research (IJSR), India Online ISSN: 2319‐7064. Operational risk management in Indian banks: impact of ownership and size on range of practices for implementation of advanced measurement approach - Dr. Yogieta S. Mehra. Report on Trend and Progress of Banking n India from 1993-2012. Risk management in Indian banks: some emerging issues Dr. Krishn A. Goyal, Int. Eco. J. Res., 2010 1(1) 102-109. Kasturi Nageshwara Rao, “The New Basel Accord”, ICFAI University Press, Hyderabad, 2004. Ayyappan and Ramachandran (2011). Credit Risk Determinants of Public and Private Sector Banks in India, European Journal of Economics, Issue 34, pp. 78-88. Aashish Kumar Lal., (2010). Risk Management of Various Banks in Public and Private Sector, Dissertation, Skyline Business School, June 19th 2010, pp. 33-35. www.indianbankers.com. www.rbiorg.in. www.worldbank.org. http://www.rbi.org.in, (different dates). http://www.economictimes.com. 32
    • International Journal of Advanced Research in Management (IJARM), ISSN 0976 – 6324 (Print), ISSN 0976 – 6332 (Online), Volume 4, Issue 3, September - December 2013 © IAEME 20. http://www.banksofindia.com 21. R.Shenbagavalli, S.Senthilkumar and Dr.T.Ramachandran, “A Strategy to Manage the NPAs of Public Sector Banks”, International Journal of Management (IJM), Volume 4, Issue 3, 2013, pp. 1 - 7, ISSN Print: 0976-6502, ISSN Online: 0976-6510. 22. Dr.N.Kannan, “Risk and Technology Management in Banking Industry”, International Journal of Management (IJM), Volume 1, Issue 1, 2010, pp. 43 - 58, ISSN Print: 09766502, ISSN Online: 0976-6510. 23. Dr. C. Mahadeva Murthy and Prof. S.N. Pathi, “Risk Management in Banking: A Study with Reference to State Bank of India (SBI) and Associates”, International Journal of Management (IJM), Volume 4, Issue 4, 2013, pp. 119 - 130, ISSN Print: 0976-6502, ISSN Online: 0976-6510. 33