Banking sector reforms in India has progressed promptly on aspects like interest rate
deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,
asset classification, income recognition and provisioning. But it could not match the pace with
which it was expected to. The accomplishment of these norms at the execution stages without
restructuring the banking sector as such is creating havoc, this research paper deals with the
problem of having non-performing assets, the reasons for mounting of non-performing assets and
the practices present in other countries for dealing with non-performing assets.
During pre-nationalization period and after independence, the banking sector remained in private
hands Large industries who had their control in the management of the banks were utilizing
major portion of financial resources of the banking system and as a result low priority was
accorded to priority sectors. Government of India nationalized the banks to make them as an
instrument of economic and social change and the mandate given to the banks was to expand
their networks in rural areas and to give loans to priority sectors such as small scale industries,
self-employed groups, agriculture and schemes involving women.
To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the
banking system to expand its network in a planned way and make available banking series to the
large number of population and touch every strata of society by extending credit to their
productive Endeavour’s. This is evident from the fact that population per office of commercial
bank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of
advances of public sector banks to priority sector increased from 14.6% in 1969 to 44% of the
net bank credit. The number of deposit accounts of the banking system increased from over 3
crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68
crores. The accumulation of huge non-performing assets in banks has assumed great importance.
The depth of the problem of bad debts was first realized only in early 1990s. The magnitude of
NPAs in banks and financial institutions is over Rs.1, 50,000 crores. While gross NPA reflects
the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is
increasingly evident that the major defaulters are the big borrowers coming from the non-priority
sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time
bound strategic approach. Public sector banks figure prominently in the debate not only because
they dominate the banking industries, but also since they have much larger NPAs compared with
the private sector banks. This raises a concern in the industry and academia because it is
generally felt that NPAs reduce the profitability of banks, weaken its financial health and erode
its solvency. For the recovery of NPAs a broad framework has evolved for the management of
NPAs under which several options are provided for debt recovery and restructuring. Banks and
FIs have the freedom to design and implement their own policies for recovery and write-off
incorporating compromise and negotiated settlements.
2. TYPES OF BANKS:
PUBLIC SECTOR BANKS:
Public sector banks are the ones in which the government has a major holding. Public Sector
Banks dominate 75% of deposits and 71% of advances in the banking industry. Public Sector
Banks control commercial banking India, these can be further classified into:
1) Nationalized banks
2) State Bank of India and its associates
3) Regional Rural Banks
PRIVATE SECTOR BANKS:
Private sector banks came into existence to supplement the performance of public sector banks
and serve the needs of the economy better. As the public sector banks were merely in the hands
of the government, banks had no incentive to make profits and improve their financial capability.
The main difference between public and private sector banks is only that public sector banks
follow the RBI interest rules strictly but private banks can make some changes in them but only
after the approval from the RBI. Private sector banks are the banks which are controlled by the
private lenders with the approval from the RBI. Their interest rates are slightly costly as
compared to public sector banks.
NPA (NON PERFORMING ASSET)
Action for enforcement of security interest can be initiated only if the secured asset is classified
as Non Performing Asset. Non Performing Asset means an asset or account of borrower, which
has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions 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 paid within 30
days from the due date. Due to the improvement in the payment and settlement systems,
recovery climate, up gradation of technology in the banking system, etc., it was decided 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 interest and /or installment of
principal remain overdue for a period of more than 180 days in respect of a Term Loan, the
account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash
Credit (OD/CC), the bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted, 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 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 greater transparency, it has been decided to adopt the '90 days overdue'
norm for identification of NPAs, form 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;
interest and /or installment of principal remain overdue for a period of more than 90 days in
respect of a Term Loan, the account remains 'out of order' for a period of more than 90 days, in
respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more than
90 days in the case of bills purchased and discounted, 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 any amount to be received remains overdue
for a period of more than 90 days in respect of other accounts. Non-Performing Asset or NPA, It
3. is called such as while it is an "Asset", it does not bring substantial income to its Owner or is just
dormant. Call it a white elephant if you wish. Basically, it is having something that should work
but does not. It is supposed to make Non- Performing Assets work. The RBI has issued
guidelines to banks for classification of assets into four categories.
A. Standard (Assets):
These are loans which do not have any problem are less risk.
B .Substandard (Assets):
These are assets which come under the category of NPA for a period of less than 12 months.
C. Doubtful (Assets):
These are NPA exceeding 12 months.
D. Loss (Assets):
Where loss has been identified by the bank or internal or external auditors or the RBI inspection
but the amount has not been written off wholly.
BENEFICIARIES OF THE STUDY:
The outcomes analyzed from this study would be beneficial to various sections such as:
Banks: This study would primarily benefit the banks in identifying the sectors to be given
priority for lending money.
Future Researchers: The results of the study would also benefit the future researchers as this
study would enhance their knowledge about the topic. They would get an insight of the present
scenario of this industry as this is the emerging industry in the financial sector of the economy.
Students: This research would help students in understanding of NPA concept as a whole.
NON PERFORMING ASSETS AS A MAJOR ISSUE AND CHALLENGE FOR
Non-performing Assets are threatening the stability and demolishing bank‘s profitability through
a loss of interest income, write-off of the principal loan amount itself. RBI issued guidelines in
1993 based on recommendations of the Narashimam Committee that mandated identification and
reduction of NPAs be treated as a national priority’ because the level of NPA act as an indicator
showing the bankers credit risks and efficiency of allocation of resource. The financial reforms
in Indian bank industry have helped largely to clean NPA which was around Rs 52,000 crores in
the year 2004. The earning capacity and profitability of the bank are highly affected due to this
GROSS NPA AND NET NPA
Gross NPA is an advance which is considered irrecoverable, for bank has made provisions, and
which is still held in banks' books of account. Net NPA is obtained by deducting items like
interest due but not recovered, part payment received and kept in suspense account from Gross
NPA. The Reserve Bank of India states that, compared to other Asian countries and the US, the
gross non-performing asset figures in India seem more alarming than the net NPA figure. The
problem of high gross NPAs is simply one of inheritance. Historically, Indian public sector
banks have been poor on credit recovery, mainly because of very little legal provision governing
foreclosure and bankruptcy, lengthy legal battles, sticky loans made to government public sector
undertakings, loan waivers and priority sector lending. Net NPAs are comparatively better on a
global basis because of the stringent provisioning norms prescribed for banks in 1991 by
Narashimam Committee. In India, even on security taken against loans, provision has to be
4. created. Further, Indian banks have to make a 100 per cent provision on the amount not covered
by the realizable value of securities in case of ''doubtful'' advance, while in some countries; it is
75 per cent or just 50 per cent. The ASSOCHAM Study titled - Solvency Analysis of the Indian
Banking Sectors, reveals that on an average 24 per cent rise in net non performing assets have
been registered by 25 public sector and commercial banks during the second quarter of the 2009
as against 2008. According to the RBI, "Reduction of NPAs in the Indian banking sector should
be treated as a national priority item to make the system stronger, resilient and geared to meet the
challenges of globalization. It is necessary that a public debate is started soon on the problem of
NPAs and their resolution."
Review of Literature:
According to a study by Brownbridge (1998), most of the bank failures were caused by
nonperforming loans. Arrears affecting more than half the loan portfolios were typical of the
failed banks. Many of the bad debts were attributable to moral hazard: the adverse incentives on
bank owners to adopt imprudent lending strategies, in particular insider lending and lending at
high interest rates to borrowers in the most risky segments of the credit markets.
Bloem and Gorter (2001) suggested that a more or less predictable level of non-performing
loans, though it may vary slightly from year to year, is caused by an inevitable number of ‘wrong
economic decisions by individuals and plain bad luck (inclement weather, unexpected price
changes for certain products, etc.). Under such circumstances, the holders of loans can make an
allowance for a normal share of non-performance in the form of bad loan provisions, or they may
spread the risk by taking out insurance. Enterprises may well be able to pass a large portion of
these costs to customers in the form of higher prices. For instance, the interest margin applied by
financial institutions will include a premium for the risk of nonperformance on granted loans.
At this time, banks’ non-performing loans increase, profits decline and substantial losses to
capital may become apparent. Eventually, the economy reaches a trough and turns towards a new
expansionary phase, as a result the risk of future losses reaches a low point, even though banks
may still appear relatively unhealthy at this stage in the cycle.
According to Gorter and Bloem (2002) non-performing loans are mainly caused by an inevitable
number of wrong economic decisions by individuals and plain bad luck (inclement weather,
unexpected price changes for certain products, etc.). Under such circumstances, the holders of
loans can make an allowance for a normal share of nonperformance in the form of bad loan
provisions, or they may spread the risk by taking out insurance.
Petya Koeva (2003), his study on the Performance of Indian Banks. During Financial
Liberalization states that new empirical evidence on the impact of financial liberalization on the
performance of Indian commercial banks. The analysis focuses on examining the behavior and
determinants of bank intermediation costs and profitability during the liberalization period. The
empirical results suggest that ownership type has a significant effect on some performance
indicators and that the observed increase in competition during financial liberalization has been
associated with lower intermediation costs and profitability of the Indian banks.
Das and Ghosh (2003) empirically examined non-performing loans of India’s public sector
banks in terms of various indicators such as asset size, credit growth and macroeconomic
condition, and operating efficiency indicators. Sergio (1996) in a study of non-performing loans
in Italy found evidence that, an increase in the riskiness of loan assets is rooted in a bank’s
5. lending policy adducing to relatively unselective and inadequate assessment of sectoral
Vradi et.al (2006), his study on´ Measurement of efficiency of bank in India concluded that in
modern world performance of banking is more important to stable the economy .in order to see
the efficiency of Indian banks we have see the fore indicators i.e. profitability, productivity,
assets, quality and financial management for all banks includes public sector, private sector
banks in India for the period 2000 and 1999 to 2002-2003. For measuring efficiency of banks we
have adopted development envelopment analysis and found that public sectors banks are more
efficient then other banks in India
Brijesh K. Saho et.al (2007), this paper attempts to examine, the performance trends of the
Indian commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings are
indicative in many ways. First, the increasing average annual trends in technical efficiency for all
ownership groups indicate an affirmative gesture about the effect of the reform process on the
performance of the Indian banking sector. Second, the higher cost efficiency accrual of private
banks over nationalized banks indicate that nationalized banks, though old, do not reflect their
learning experience in their cost minimizing behavior due to X-inefficiency factors arising from
government ownership. This finding also highlights the possible stronger disciplining role played
by the capital market indicating a strong link between market for corporate control and efficiency
of private enterprise assumed by property right hypothesis. And, finally, concerning the scale
elasticity behavior, the technology and market-based results differ significantly supporting the
empirical distinction between returns to scale and economies of scale, often used interchangeably
in the literature.
Roma Mitra et.al (2008), A stable and efficient banking sector is an essential precondition to
increase the economic level of a country. This paper tries to model and evaluate the efficiency of
50 Indian banks. The Inefficiency can be analyzed and quantified for every evaluated unit. The
aim of this paper is to estimate and compare efficiency of the banking sector in India. The
analysis is supposed to verify or reject the hypothesis whether the banking sector fulfils its
intermediation function sufficiently to compete with the global players. The results are insightful
to the financial policy planner as it identifies priority areas for different banks, which can
improve the performance. This paper evaluates the performance of Banking Sectors in India.
B.Satish Kumar (2008), in his article on an evaluation of the financial performance of Indian
private sector banks wrote Private sector banks play an important role in development of Indian
economy. After liberalization the banking industry underwent major changes. The economic
reforms totally have changed the banking sector. RBI permitted new banks to be started in the
private sector as per the recommendation of Narashiman committee. The Indian banking industry
was dominated by public sector banks. But now the situations have changed new generation
banks with used of technology and professional management has gained a reasonable position in
the banking industry.
M. Karunakar et.al (2008), Study the important aspect of norms and guidelines for making the
whole sector vibrant and competitive. The problem of losses and lower profitability of Non-
6. Performing Assets (NPA) and liability mismatch in Banks and financial sector depend on how
various risks are managed in their business. Besides capital to risk Weightage assets ratio of
public sector banks, management of credit risk and measures to control the menace of NPAs are
also discussed. The lasting solution to the problem of NPAs can be achieved only with proper
credit assessment and risk management mechanism. It is better to avoid NPAs at the market
stage of credit consolidation by putting in place of rigorous and appropriate credit appraisal
Nelson M. Waweru et.al (2009), Study that many financial institutions that collapsed in Kenya
since 1986 failed due to non performing loans, this study investigated the causes of
nonperforming loans, the actions that bank managers have taken to mitigate that problem and the
level of success of such actions. Using a sample of 30 managers selected from the ten largest
banks the study found that national economic downturn was perceived as the most important
external factor. Customer failure to disclose vital information during the loan application process
was considered to be the main customer specific factor. The study further found that Lack of an
aggressive debt collection policy was perceived as the main bank specific factor, contributing to
the non performing debt problem in Kenya.
Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of great
importance given its association with bank failure and financial crises, and it should therefore be
of interest to developing countries. The purpose of this paper is to build a multivariate model,
incorporating macroeconomic and bank-specific variables, to forecast non-performing loans in
the banking sector of Barbados. On an aggregate level, our model outperforms a simple random
walk model on all forecast horizons, while for individual banks; these forecasts tend to be more
accurate for longer prediction periods only.
7. RESEARCH PROBLEM:
Indian banking industry, which was in glory phase once upon a time, has been facing a lots of
challenges on non performing assets at present scenario. Many banks have kept their NPAs
under the control but some banks are not able to control their NPA levels. They are facing lots of
problems. There can be various reasons behind this NPA. Non-performing assets has been hitting
the profitability of the banks or it can be said that due to NPA, the profitability of the banks are
going down day by day. The subsidiary for this is the functioning of Debt Recovery Tribunal
(DRT) which is a judiciary for the bank for recovery amount from the default customers. These
can be considered as a research problem based on which the information is collected, the object
is measured and the data is analyzed and interpreted.
OBJECTIVES OF THE STUDY:
The objective of the project was to find how this Non-Performing Assets generate and what its
impact on the profitability of the bank and how it can be reduced. The study is addressed to the
To study the trend of NPAs during last nine years.
To determine the factors affecting NPA.
To find out the effectiveness of recovery mechanism adopted by banks for NPA.
To establish relationship between NPAs and profitability of private banks.
To suggest measures to reduce NPAs in private sector.
NEED OF THE STUDY:
The non-performing assets that are not able to generate income for the bank are the great threat
for the banking institution. Rather than generating profit for the bank, NPA drains off the income
earned by the other performing asset by the way of paying interest to the real owner of the
resources. It affects the overall profitability of the bank adversely by affecting the return on
equity and return on asset. There are certain ways through which it affects the financial
institutions are as follows:
Thus, the need of the study of the NPA is must necessary due to these reasons. These reasons are
the crucial for any bank at present. One has to realize these matters and has to take corrective
action against NPA reasons, as for as possible one has to convert all the NPA accounts into PA
accounts. As far as the importance of the study is concern, without the study, one can’t identify
the whole gamut of the NPA. To know, how the account is becoming NPA is must necessary.
After identifying the reason behind the particular NPA account, one can go for a step ahead. That
means for the step of how to convert into PA and how to prevent other account from becoming
NPA. As for as possible, one has to eradicate the reasons of NPAs. Thus, it is highly importance
to study NPA in detail.
SCOPE OF THE STUDY:
Being a project scope will be based on the day-to-day teamwork operations. The data will be
collected from various aspects of loans and advances in various private banks of Jalandhar and
8. To understand the concept of NPA in Indian Private Banking industry.
To understand the causes of NPA.
To analyze the past trends of NPA of Private banks.
H1: There exists a relationship between NPAs and profitability of private banks.
H2: The recovery mechanisms adopted by private banks are effective.
COLLECTION OF DATA:
The relevant data was collected from both primary and secondary sources. Census method of
data collection was applied to collect primary information. Research population for the study
comprised of private banks operating in Jalandhar and Phagwara (Punjab). The response rate for
the present study came to be 86.66 % since 13 banks responded out of 15 private banks in the
concerned area. The 13 banks surveyed are 1) Axis Bank, 2) Citi Bank, 3) Federal Bank; 4) HDFC
Bank, 5) ICICI Bank, 6) IndusInd Bank, 7) ING Vysya Bank, 8) Karnataka Bank, 9) Karur Vysya
Bank, 10) Kotak Mahindra Bank, 11) South Indian Bank, 12) Jammu and Kashmir Bank, 13) IDBI
The secondary sources comprised of various audited reports and publications of the Reserve
Bank of India. Detailed information were collected mainly from the various volumes of the
“Statistical Tables Relating to Banks in India” covering the period from 2000 - 2009 which were
published by the Statistical Department of Reserve Bank of India, Mumbai from the website
DATA COLLECTION FORM:
A structured questionnaire assessing work system, recovery system, processing loan applications
and other impeding factors associated with loan portfolio was used to collect primary
information from the private banks. Items based on 5-point Likert scale and multiple choice
questions were included in the questionnaire.
The analyses of primary data were conducted through descriptive statistics, factor analysis,
Pearson correlation and one-sample t-test. The secondary data was analyzed through column
charts, line charts, bar charts and percentages.
1. The secondary data was available for 9 years only.
2. The present study is confined to Jalandhar and Phagwara areas only.
3. The conclusions of the study are based on the responses of the banks and secondary
information. Thus, some amount of subjectivity might remain.