SBI NPA Management Study

A Study on
NPA Management in SBI (State Bank of India)
A Project Report Submitted for the
Partial Fulfillment of the Requirement for the Award of the Degree
of
Master of Business Administration (MBA)
Supervised By Submitted By
DR. B.D. Mishra Meenakshi Dhirwani
(Associate Professor) Roll No. -13605023
2015
Department of Management studies
Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)

I
Certificate by the student
This is to certify that I, Meenakshi Dhirwani, a student of MBA Fourth Semester of the
batch 2013-15 (Roll No. 13605023) have carried out a project entitled “NPA Management
in SBI” under the supervision of Dr. B.D. Mishra (Associate Professor) in the Department
of Management Studies, Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G). This is an original
work carried out by me and the report has not been submitted to any other University for the
award of any degree of diploma.
Date: 13/ 5 /2015 Meenakshi Dhirwani
Place: Bilaspur MBA IVth
Semester
Batch:- 2013-15
Roll No.:- 13605023

II
Certificate by the supervisor
This is to certify that Ms. Meenakshi Dhirwani, a student of MBA fourth semester of the
2013- 15 batch (Roll No. 13605023) has carried out a project “NPA Management in SBI”
under my supervision and guidance. It is also certified that the student has compiled with all
the guidelines designed for the project of report. To the best of my knowledge this report is
an authentic record of the work carried out by the student and it is considered fit for being
referred to evaluation.
Date: 13/ 5 /2015 Dr. B.D. Mishra
Place: Bilaspur (Associate professor)
Department of Management Studies
Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)

III
COPY OF SYNOPSIS AS APPROVED BY THE
SUPERVISOR
TITLE:-A STUDY OF NPA MANAGEMENT IN SBI
OBJECTIVES:-
1. To understand what is non performing Assets and what are the underlying reasons for the
emergence of the NPA's
2. To study the position of NPA in SBI group
3. To understand the impact of NPA on strategic banking whole
4. To know the reason for an Asset becoming NPA
5. To suggest measures to reduce NPA
6. To study the methods adopted by the RBI to look after NPA management
7. To study why banks and financial institutions are facing problems of swelling NPAs even
after the passing of the act.
SIGNIFICANCE OF THE STUDY
The main aim of any person is the utilization of money in the best manner since the India is
country where more than half of population has problem of running the family in the most
efficient manner. However Indian people faced large number of problems till the
development of full- fledged banking sector. The Indian banking sector came into the
developing nature mostly after 1991 government policy. The banking sector has really helped
the Indian people to utilize the single money in the best manner as they want. The banks not
only accept the deposits of the people but also provide them credit facility for their
development. Indian banking sector has the nation in developing the business and services
sectors. But recently the banks are facing the problem of credit risk. It is found that many
general people and business people borrow from the banks but due to some genuine of other
reasons are not able to repay back is known as the non- performing assets. Many banks are
facing the problem of NPA which hampers the business of banks. Due to NPAs the income of
the banks is reduced and the banks have to make large number of the provision that would

IV
curtail the profit of the banks and due to that the financial performance of the bank would not
show good results.
The main aim behind making this report is to know how SBI is operating its business and
how NPAs play its role to the operations of the SBI bank. My study is also focusing upon
existing system in India to solve the problem of NPAs.
REASERCH METHODOLOGY
The key element of our methodology are as follow:-
1.Sample size:- the total sample size was 25. The respondent was bank members, especially
the bank manager, loan manager, the credit managers and the officers in charge of recovery
department.
2. Selection of the sample:-convenience sampling is used.
3. Sources of Data collection:- the source of data is important consideration for any project.
The data used it:
 Secondary data:-
Secondary data refers to the data which has already been generated and is available for use.
The data is taken from Reserve Bank of India website, SBI website and journals.
 Primary data:-
The primary data is collected through questionnaire,
4. Period of the study:- the period of the study is done on the basis of availability of data.
The data are collected i.e. from 2003-04 to 2007-08.
5. Research design:- the research conducted is to analyze the NPA management in SBI
bank. The nature of research is exploratory as well as diagnostic. This study is based on the
discussions conducted with officials of the bank. The various data provided by them, the RBI

V
circulars, journal, magazines, data from internet will be studied and interpretation made
thereof.
6. secondary information is obtained by the medium of internet, books and the journals of
various Management schools and the government web portals.
CHAPTER PLAN
1. Introduction
2. Company profile
3. NPA management
4. Data analysis and interpretation
5. Findings, conclusion and suggestion.

VI
ACKNOWLEDGEMENT
On the very outset of this report, I would like to extend my sincere & heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation & encouragement, I would not have made headway in the
project.
I am extremely thankful and pay my gratitude to my faculty guide Dr. B.D. Mishra for his
valuable guidance and support on this project in its presently.
I am extremely indebted to Dr. L.P. Pateriya sir for conscientious guidance and
encouragement to accomplish this assignment.
I extend my gratitude to Department of Management Studies, GGV, Bilaspur (C.G.) for
giving me this opportunity.
I also acknowledge with a deep sense of reverence, my gratitude towards my parents and
member of my family, who has always supported me morally as well as economically. At last
but not the least gratitude goes to all my friends who directly or indirectly helped me to
complete this project report
Any omission in this brief acknowledgement does not mean lack of gratitude.
Meenakshi Dhirwani
MBA IVth
Semester

VII
PREFACE
Master of business administration of finance is course which combines with theory and its
application as its contents of study in the field of management as a part of this course every
aspirant has to submit a major project report.
Granting of credit facilities for economic activities is the primary task of banking. Apart from
raising resources through fresh deposits, borrowings, etc. recycling of fund received bank
from borrowers constitutes a major part of funding credit dispensation activities. Non-
recovery of installment as also interest on the loan portfolio negates the effectiveness of this
process of the credit cycle. Non- recovery also affects the profitability of banks besides being
required to maintain more owned funds by way of capital and creation of reserves and
provision to act as cushion for the loan losses. Avoidance of loan losses is one of the pre-
occupation of management of banks. While complete elimination of such losses is not
possible, bank management aim to keep the losses at a low level. In fact, it is the level of non-
performing advances, which, to a great extent, widespread repercussions. To avoid shock
waves affecting the system, the salvaging exercise is done by the Government or by the
industry on the behest of Government/ central bank of the country putting pressure on the
exchequer.
This project aims at providing overall view on the existence of NPAs, their treatment, the
ways at resolving this issue and also a few reports on the recent developments in this field. If
this report will be fruitful to any organization by any means, we will consider our work
worthwhile.
Date: 13/5/2015 Meenakshi Dhirwani
Place- Bilaspur M.B.A IVth
Semester

VIII
LIST O TABLES AND CHARTS
TABLE
NO.
CONTENTS PAGE
NO.
4.1 TOTAL ASSET 60
4.2 GROSS NPA RATIO 61
4.3 NET NPA RATIO 63
4.4 TABLE OF ADVANCES AND GROSS NPA 64
4.5 CAPITAL ADEQUACY RATIO 65
4.6 PROVISION RATIO 66
4.7 WHAT ISNPA? 68
4.8 PERCENTGE OF NPA 69
4.9 TREND OF NPA 70
4.10 CAUSES OF NPA 71
4.11 STEPS TO BE TAKEN 72
4.12 METHOD OF MEASUREMENT OF NPA 74
4.13 MEASURE FOR RECOVERY OF NPA 75
4.14 RESPONSIBLE FOR NON-RECOVERY OF OUT STNDING
CREDIT
76
4.15 APPOINMENT MADE FOR REALIZING MONEY 77
4.16 LAW ACTS AS A STUMBLING BLOCK 78
4.17 TIME TAKEN TO RECOVER MONEY 79
4. 18 GOVERNMENT POLICIES RESPONSIBLE FOR NPA 80
4.19 CATETGORY FOR WHICH NPA IS LARGELY OBSERVED 81
4.20 POLITICAL INTERFERANCE AFFECTS NPA 82

IX
4.21 OUT OF COURT SETTLEMENT 83
4.22 DEVELOPING A TENDENCY OF DELIBERATE ATTEMPT
OF
DEFAULT AMONG BORROWERS
84
4.22 ADEQUACY OF CREDIT MONITORING SYSTEM 85
4.23 NECESSITY OF IMPROVEMENT 86
4.24 APPOINTMENT OF EXTERNAL RECOVERY AGENT 87
4.25 DELAY IN LEGAL PROCEDURES CREATE DIFFICULTY IN
RECOVERY
88
4.26 CASH INCENTIVE SCHEME 89
4.27 SATISFACTION FROM PRESENT INCENTIVE SCHEME 90
4.28 PROGRESS OF NPA 91
4.29 SIMILAR RECOVERY STRATEGY 92
4.30 STRATEGIE, HELPFUL IN REDUCING NPA 93

X
CONTENTS
S. NO PARTICULARS PAGE NO.
1. CERTIFICATE BY THE STUDENT I
2. CERTIFICATE BY THE SUPERVISOR II
3. COPY OF SYNOPSIS AS APPROVED BY THE SUPERVISOR III-V
4. PREFACE VI
5. ACKNOWLEDGEMENT VII
6. LIST OF TABLES AND CHARTS VIII- IX
7. EXECUTIVE SUMMARY 1
8. CHAPTER-1 INTRODUCTION 2- 7
1.1 NPA IN INDIAN BANK- CURRENT SCENERIO
1.2 OBJECTIVES OF THE PROJECT
1.3 SIGNIFICANCE OF THE STUDY
1.4 RESEARCH PROBLEM
1.5 RESEARCH METHODOLOGY
1.6 LIMITATIONS OF THE STUDY
1.7 CHAPTER PLAN
9. CHAPTER-2 BANKING INDUSTRY IN INDIA AND SBI 8- 30
2.1 INTRODUCTION OF BANKING SYSTEM IN INDIA
2.2 HISTORY OF INDIAN BANKING
2.3 THE INDIAN BANKING SYSTEM
2.4 THE STRUCTURE OF INDIAN BANKING

XI
2.5 BANKING DIVISIONS
2.6 SWOT ANALYSIS
2.7 IMPORTANCE OF BANKING SECTOR IN GROWING ECONOMY
2.8 EMERGING SCENERIO IN THE BANKING SECTOR
2.9 CONCERN
2.10 INTRODUCTION OF SBI
2.11 ABOUT LOGO
2.12 MISSION, VISSION AND VALUES
2.13 BOARD OF DIRECTORS
2.14 PRODUCTS AND SERVICES
10. CHAPTER-3 NPA MANAGEMENT 31- 59
3.1 MEANING OF NPA
3.2 INCOME RECOGNITION- POLICY
3.3 ASSET CLASSIFICATION
3.4 SALE OF NPA TO OTHER BANK
3.5 TYPES OF NPA
3.6 REASONSOF AN ACCOUNT BECOMING NPA
3.7 IMPACT OF NPA ON BANKS
3.8 EARLY SYMPTOMS
3.9 PREVENTIVE MEASURES OF NPA
3.10 GUIDELINES BY RBI
11. CHAPTER-4 DATA ANALYSIS AND INTERPRETATION 60- 100
4.1 RATIO ANALYSIS

XII
4.2 ANALYSIS BASED ON QUESTIONNAIRE
12. CHAPTER-5 FINDINGS, CONCLUSION AND SUGGESTION 101- 105
13. ANNEXURE 106- 111
14. BIBLIOGRAPHY 112

1
EXECUTIVE SUMMARY
The most important problem that the Indian banks are facing is the problem of their NPAs. It
is only since a couple of years that this particular aspect has been given so much importance.
The banks has to overcome these difficulty properly in order to effectively counter the
competition faced by the foreign banks. With the framing of law as per international
standards and setting up of Debt recovery tribunal we can say that steps have been taken in
this direction.
SARFAESI ACT 2002 (Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act) gave the banks the much needed teeth to curb the
menace of NPA’s. the non- performing assets (NPAs) of banks have at last begun shrinking.
As reported from surveys, it is understood that there has been substantial improvement in
non- performing assets and this has been because of several measures such as formation of
asset reconstruction companies, debt restructuring norms, securitization, provisioning norms
and prudential norms for income recognition. The problem is no doubt about recovery
management where the objective is to find out about the reasons behind NPAs and to create
networks for recovery.
An explorative study was adopted to achieve the objectives of the study. The major limitation
of the study was the lack of time. Even then, maximum care has been taken to arrive at
appropriate conclusion. The method adopted for collection of data was personal interview
with the bank officials and observation. It was also sourced from secondary data. After
collecting data from the respective sources, analysis and interpretation of data has been made.
Based on the findings, logical conclusion are drawn, and further, suitable suggestions and
recommendation are brought out. The entire project report is presented in the form of a report
using chapter scheme, developed logically and sequentially from ‘introduction’ to
‘bibliography’.

3
1.1 NPA IN INDIAN BANK- CURRENT SCENERIO
Non- performing assets (NPAs) are the smoking gun threatening the very stability of Indian
banks. NPAs wreck a bank’s profitability both through a loss of interest income and write-
off of the principal loan amount itself.
According to economic survey:- During 2012-13, the deteriorating asset quality of the
banking sector emerged as a major concern, with gross NPAs ( non-performing assets ) of
banks registering a sharp increase...Growth of NPA is a cause for concern," the Survey tabled
in Parliament by Finance Minister ArunJaitley said. The bad loans of public sector banks
were at 4.4 per cent in March 2014 compared with 2.09 per cent in 2008-09, it said, adding,
the gross NPA increased by almost four times from March 2010 (Rs 59,972 crore) to March
2014 (Rs 2,04,249 crore).
Increase in NPAs of banks is mainly accounted forby switchover to system-based
identification of NPAs by PSBs (public sector banks), slowdown of economic growth, and
aggressive lending bybanks in the past, especially during good times, it said.Overall NPAs or
bad loans of the banks, includingprivate sector lenders, increased from 2.36 percent to 3.90
per cent in March 2014. Increase was sharp in case of infrastructure with NPAs rising from
3.23 per cent to 8.22 per cent, it said. Infrastructure, iron and steel, textiles, aviation and
mining are five main sector that are stressed.
"The next wave of infrastructure financing will require a capable bond market." Despite, asset
quality deteriorating, the survey said the capital positions of Indian banks, including that of
public sector, remained strong and above the stipulated minimum.Highlighting challenges
and outlook, the Surveysaid financial markets continue to suffer from illiquidity and a major
objective should be to develop bond-currency derivative (BCD) nexus to equity market
quality levels.

4
1.2 OBJECTIVES OF THE STUDY
1. To understand what is non performing Assets and what are the underlying reasons for
the emergence of the NPA's
2. To study the position of NPA in SBI group
3. To understand the impact of NPA on strategic banking whole
4. To know the reason for an Asset becoming NPA
5. To suggest measures to reduce NPA
6. To study the methods adopted by the RBI to look after NPA management
7. To study why banks and financial institutions are facing problems of swelling NPAs
even after the passing of the act.
1.3 SIGNIFICANCE OF THE STUDY
The main aim of any person is the utilization of money in the best manner since the India is
country where more than half of population has problem of running the family in the most
efficient manner. However Indian people faced large number of problems till the
development of full- fledged banking sector. The Indian banking sector came into the
developing nature mostly after 1991 government policy. The banking sector has really helped
the Indian people to utilize the single money in the best manner as they want. The banks not
only accept the deposits of the people but also provide them credit facility for their
development. Indian banking sector has the nation in developing the business and services
sectors. But recently the banks are facing the problem of credit risk. It is found that many
general people and business people borrow from the banks but due to some genuine of other
reasons are not able to repay back is known as the non- performing assets. Many banks are
facing the problem of NPA which hampers the business of banks. Due to NPAs the income of
the banks is reduced and the banks have to make large number of the provision that would
curtail the profit of the banks and due to that the financial performance of the bank would not
show good results.

5
The main aim behind making this report is to know how SBI is operating its business and
how NPAs play its role to the operations of the SBI bank. My study is also focusing upon
existing system in India to solve the problem of NPAs.
1.4 REASEARCH 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.
1.5 RESEARCH PROBLEM
The key element of our methodology are as follow:-
1. Sample size:- the total sample size was 25. The respondent was bank members, especially
the bank manager, loan manager, the credit managers and the
officers in charge of recovery department.
2. Selection of the sample:-convenience sampling is used.
3. Sources of Data collection:- the source of data is important consideration for any project.
The data used it:

6
 Secondary data:-
Secondary data refers to the data which has already been generated and is available for use.
The data is taken from Reserve Bank of India website, SBI website and journals.
 Primary data:-
The primary data is collected through questionnaire,
4. Period of the study:- the period of the study is done on the basis of availability of data.
The data are collected i.e. from 2003-04 to 2007-08.
5. Research design:- the research conducted is to analyze the NPA management in SBI
bank. The nature of research is exploratory as well as diagnostic. This study is based on the
discussions conducted with officials of the bank. The various data provided by them, the RBI
circulars, journal, magazines, data from internet will be studied and interpretation made
thereof.
6. Secondary information is obtained by the medium of internet, books and the journals.
1.6 LIMITATIONS
The project was a very good learning experience but on the other side it was full of
challenging and difficulties. The most difficult part of the project was the interpretation with
the members of the banks with the purpose to collect feedback. The major constraints faced
can be listed as follow-
 It was not possible to collect the data from all the branches and members of the bank
due to the shortage of time data.
 Convincing respondent for filling up of the questionnaire was challenging.
 The secondary data was available for 5 years only.
 The conclusion of the study are based on the responces of the banks and secondary
information. Thus, some amount of subjectivity might remain.

7
 1.7 CHAPTER PLAN
1. Introduction
2. Company profile
3. NPA management
4. Data analysis and interpretation
5. Findings, conclusion and suggestion.

9
BANKING INDUSTRY IN INDIA
2.1 INTRODUCTION
A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. There are also non banking
institutions that provide certain banking services without meeting the legal definition of a
bank. Banks are a subset of the financial services industry.
A banking system also referred as a system provides by the bank which offers cash
management services for customers, reporting the transactions of their accounts and
portfolios, throughout the day. The banking system in India should not only be hassle free but
it should be able to meet the new challenges posed by the technology and any other external
and internal factors. For the past three decades, India’s banking system has several
outstanding achievements to its credit. The banks are the main participants of the financial
system in India. The banking sector offers several facilities and opportunities to their
customers. All the banks safeguard the money and valuables and provide loans, credit, and
payment services, such as checking accounts, money orders, and cashier’s cheques. The
banks also offer investment and insurance products. As a variety of models for cooperation
and integration among finance industries have emerged, some of the traditional distinctions
between banks, insurance companies and securities firms have diminished. In spite of these
changes, banks continue to maintain and perform their primary role- accepting deposits and
lending funds from these deposits.
2.2 History:Banking in India has its origin as carry as the Vedic period. It is believed that
the transition from money lending to banking must have occurred even before Manu, the
great Hindu jurist, who has devoted a section of his work to deposits and advances and laid
down rules relating to the interest. During the mogal period, the indigenous bankers played a
very important role in lending money and financing foreign trade and commerce. During the
days of East India Company, it was to turn of the agency houses top carry on the banking
business. The general bank of India was the first joint stock bank to be established in the year

10
1786.The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank
of Hindustan is reported to have continued till 1906, while the other two failed in the
meantime. In the first half of the 19th
Century the East India Company established three
banks; The Bank of Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras
in 1843.These three banks also known as presidency banks and were independent units and
functioned well. These three banks were amalgamated in 1920 and The Imperial Bank of
India was established on the 27th
Jan 1921, with the passing of the SBI Act in 1955, the
undertaking of The Imperial Bank of India was taken over by the newly constituted SBI. The
Reserve Bank which is the Central Bank was created in 1935 by passing of RBI Act 1934, in
the wake of swadeshi movement, a number of banks with Indian Management were
established in the country namely Punjab National Bank Ltd, Bank of India Ltd, Canara Bank
Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The Central Bank of India Ltd .On July 19th
1969, 14 Major Banks of the country were nationalized and in 15th
April 1980 six more
commercial private sector banks were also taken over by the government. The Indian
Banking industry, which is governed by the Banking Regulation Act of India 1949, can be
broadly classified into two major categories, non-scheduled banks and scheduled banks.
Scheduled Banks comprise commercial banks and the co-operative banks.
The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969
and resulted in a shift from class banking to mass banking. This in turn resulted in the
significant growth in the geographical coverage of banks. Every bank had to earmark a min
percentage of their loan portfolio to sectors identified as “priority sectors” the manufacturing
sector also grew during the 1970’s in protected environments and the banking sector was a
critical source. The next wave of reforms saw the nationalization of 6 more commercial
banks in 1980 since then the number of scheduled commercial banks increased four- fold and
the number of bank branches increased to eight fold.
After the second phase of financial sector reforms and liberalization of the sector in the early
nineties. The PSB’s found it extremely difficult to complete with the new private sector
banksand the foreign banks. The new private sector first made their appearance after the
guidelines permitting them were issued in January 1993.

11
2.3 The Indian Banking System:
Banking in our country is already witnessing the sea changes as the banking sector seeks new
technology and its applications. The best port is that the benefits are beginning to reach the
masses. Earlier this domain was the preserve of very few organizations. Foreign banks with
heavy investments in technology started giving some “Out of the world” customer services.
But, such services were available only to selected few- the very large account holders. Then
came the liberalization and with it a multitude of private banks, a large segment of the urban
population now requires minimal time and space for its banking needs.
Automated teller machines or popularly known as ATM are the three alphabets that have
changed the concept of banking like nothing before. Instead of tellers handling your own
cash, today there are efficient machines that don’t talk but just dispense cash. Under the
Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled
banks. The scheduled banks are those, which are entered in the Second Schedule of RBI Act,
1934. Such banks are those, which have paid- up capital and reserves of an aggregate value of
not less then Rs.5 lacs and which satisfy RBI that their affairs are carried out in the interest of
their depositors. All commercial banks Indian and Foreign, regional rural banks and state co-
operative banks are Scheduled banks. Non Scheduled banks are those, which have not been
included in the Second Schedule of the RBI Act, 1934.
The organized banking system in India can be broadly classified into three categories: (i)
Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative banks. The Reserve
Bank of India is the supreme monetary and banking authority in the country and has the
responsibility to control the banking system in the country. It keeps the reserves of all
commercial banks and hence is known as the “Reserve Bank”.

12
2.4 The Structure of Indian Banking:
The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of
the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are
again split into old banks and new banks.
2.5 BANKING DIVISIONS
 Retail banking – loans to individuals ( auto loan, housing loan, educational loan and
other personal loan) or small business.
 Wholesale banking – loans to mid and large corporate ( working capital loans, project
finance, team loans, lease finance)
RBI
unscheduledscheduled
cooperativecommercial
RRBforiegnprivatepublic Rural Urban

13
 Treasury operations – investment in equity, derivatives, commodities, mutual funds,
bonds, trading and forex operations.
 Other banking businesses – merchant banking, leasing business, hire purchase,
syndication services, etc.
2.6 SWOT ANALYSIS
STRENGHTS
 Valuable contribution to
GDP
 Regulatory environment
 Government support
WEAKNESSES
 Increasing NPA
 Low penetration
 Lack of product
differentiation
OPURTUNITIES
 Modern technology
 Untapped rural market
 Globalization
THREATS
 Unorganized money
lending market
 Customer
dissatisfaction
 Rise of monopolistic
structures

14
2.7 IMPORTANCE OF BANKING SECTOR IN A GROWING
ECONOMY
In the recent times when the service industry is attaining greater importance compared to
manufacturing industry, banking has evolved as a prime sector providing financial services to
growing needs of the economy.
Banking industry has undergone a paradigm shift from providing ordinary banking services
in the past to providing such complicated and crucial services like, merchant banking,
housing finance, bill discounting etc. This sector has become more active with the entry of
new players like private and foreign banks. It has also evolved as a prime builder of the
economy by understanding the needs of the same and encouraging the development by way
of giving loans, providing infrastructure facilities and financing activities for the promotion
of entrepreneurs and other business establishments.
For a fast developing economy like ours, presence of a sound financial system to mobilize
and allocate savings of the public towards productive activities is necessary. Commercial
banks play a crucial role in this regard.
The Banking sector in recent years has incorporated new products in their businesses, which
are helpful for growth. The banks have started to provide fee-based services like, treasury
operations, managing derivatives, options and futures, acting as bankers to the industry
during the public offering, providing consultancy services, acting as an intermediary between
two-business entities etc.At the same time, the banks are reaching
out to other end of customer requirements like, insurance premium payment, tax payment etc.
It has changed itself from transaction type of banking into relationship banking, where you
find friendly and quick service suited to your needs. This is possible with understanding the
customer needs their value to the bank, etc. This is possible with the help of well-organized
staff, computer based network for speedy transactions, products like credit card, debit card,
health card, ATM etc. These are the present trend of services. The customers at present ask
for convenience of banking transactions, like 24 hours banking, where they want to utilize the
services wheneverthere is a need. The relationship banking plays a major and important role

15
in growth, because the customers now have enough number of opportunities, and they choose
according to their satisfaction of responses and recognition they get. So the banks have to
play cautiously, else they may lose out the place in the market due to competition, where
slightest of opportunities are captured fast.
Another major role played by banks is in transnational business, transactions and networking.
Many leading Indian banks have spread out their network to other countries, which help in
currency transfer and earn exchange over it.
These banks play a major role in commercial import and export business, between parties of
two countries. This foreign presence also helps in bringing in the international standards of
operations and ideas. The liberalization policy of 1991 has allowed many foreign banks to
enter the Indian market and establish their business. This has helped large amount of foreign
capital inflow & increase our Foreign exchange reserve.
Another emerging change happening all over the banking industry is consolidation through
mergers and acquisitions. This helps the banks in strengthening their empire and expanding
their network of business in terms of volume and effectiveness.
2.8 EMERGING SCENARIO IN THE BANKING SECTOR
The Indian banking system has passed through three distinct phases from the time of
inception. The first was being the era of character banking, where you were recognized as a
credible depositor or borrower of the system. This era come to an end in the sixties. The
second phase was the social banking. Nowhere in the democratic developed world, was
banking or the service industry nationalized. But this was practiced in India. Those were the
days when bankers has no clue whatsoever as to how to determine the scale of finance to
industry. The third era of banking which is in existence today is called the era of Prudential
Banking. The main focus of this phase is on prudential norms accepted internationally

16
SBI Group-
The Bank of Bengal, which later became the State Bank of India. State Bank of India with its
seven associate banks commands the largest banking resources in India.
Nationalization-
The next significant milestone in Indian Banking happened in late 1960s when the then Indira
Gandhi government nationalized on 19th
July 1949, 14 major commercial Indian banks
followed by nationalization of 6 more commercial Indian banks in 1980.
The stated reason for the nationalization was more control of credit delivery. After this, until
1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu
growth of the Indian economy .After the amalgamation of New Bank of India with Punjab
National Bank, currently there are 19 nationalized banks in India.
Liberalization-
In the early 1990’s the then Narasimharao government embarked a policy of liberalization
and gave licences to a small number of private banks, which came to be known as New
generation tech-savvy banks, which included banks like ICICI and HDFC. This move along
with the rapid growth of the economy of India, kick started the banking sector in India, which
has seen rapid growth with strong contribution from all the sectors of banks, namely
Government banks, Private Banks and Foreign banks. However there had been a few hiccups
for these new banks with many either being taken over like Global Trust Bank while others
like Centurion Bank have found the going tough.
The next stage for the Indian Banking has been set up with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given
voting rights which could exceed the present cap of 10%, at pesent it has gone up to 49%
with some restrictions.

17
The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional
banks.All this led to the retail boom in India. People not just demanded more from their
banks but also received more.
2.9 CONCERN
Indian economy is one of the fastest growing economies of the world. The economy with its
vital geography and demography has specific requirements in order to traverse to the next
orbit and attain its full potential. Banks enable to cope with finance requirement for few
industries such as infrastructure, housing and real estate etc. India’s infrastructural financing
needs are not only huge but also vital. Traditionally banks have been the major source of
infrastructure financing and their exposure to infrastructure is already high at 17 per cent.
There are several major concerns which as noted below:
Intensifying competition
Indian banking industry has undergone qualitative changes due to banking sector reforms.
Indian banking sector, which is dominated by state- controlled, has facing formidable
challenges. Due to this new emerging competition, Indian banks, especially PSBs are trying
their best to improve their performance and preparing to compete in the emerging global
market. New private sector banks and foreign banks have more customer- centric policies,
high quality services, new attractive schemes and computerized branches. All these services
attracted more and more customers to their banks. In this context, there is a need to examine
the efficiency of public sector banks operating in India. Mainly, competition can intensify
and banks which is efficient. The transaction cost of customers could come down and a bank
which is efficient, nimble and customer focused would always be able to do better than
others. As a result of globalization, many new banks have the Indian banking industry,
further intensifying the competition.

18
Increasing NPA
The asset quality of banks is one of the most important indicator of their financial health. It
also reflects the efficiency of banks’ credit risk management and the recovery environment.
The Indian banks have shown very good performance as far as the financial operations are
concerned. But non- performing assets (NPA) has caused some concerns. Despite write- offs
gross NPAs have continued to rise significantly. The new accretion to NPAs has been much
faster than the reduction in existing NPAs due to lower levels of up gradation and recoveries.
To improve the banks’ ability their non –performing assets (NPAs) and restructured accounts
in an effective manner and considering that almost all branches of banks have been fully
computrized, the Reserve bank of India in its monetary policy statement 2012- 13 proposed
the following measures:
• To mandate banks to put in place a robust mechanism for early detection of signs of
distress, and measures, including prompt restructuring in the case of all viable accounts
wherever required, with view to presenting the economic value such accounts: and
• To mandate banks to have proper system generated- wise data on their NPA accounts,
write offs, compromise settlement, recovery and restructured accounts.
Despite these concerns, it is projected that the Indian banking industry will grow through
leaps and bounds looking at the huge growth potential of Indian economy. High population
base of India, rising disposable income, etc. will drive the growth og Indian banking industry
in the long- term.
COMPANY PROFILE
2.10 INTRODUCTIONSTATE BANK OF INDIA
Not only many financial institution in the world today can claim the antiquity and majesty of
the State Bank Of India founded nearly two centuries ago with primarily intent of imparting
stability to the money market, the bank from its inception mobilized funds for supporting
both the public credit of the companies governments in the three presidencies of British India
and the private credit of the European and India merchants from about 1860s when the Indian

19
economy book a significant leap forward under the impulse of quickened world
communications and ingenious method of industrial and agricultural production the Bank
became intimately in valued in the financing of practically and mining activity of the Sub-
Continent Although large European and Indian merchants and manufacturers were
undoubtedly thee principal beneficiaries, the small man never ignored loans as low as Rs.100
were disbursed in agricultural districts against glad ornaments. Added to these the bank till
the creation of the Reserve Bank in 1935 carried out numerous Central – Banking functions.
Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the
post depression exe. For instance – when business opportunities become extremely restricted,
rules laid down in the book of instructions were relined to ensure that good business did not
go post. Yet seldom did the bank contravenes its value as depart from sound banking
principles to retain as expand its business. An innovative array of office, unknown to the
world then, was devised in the form of branches, sub branches, treasury pay office, pay
office, sub pay office and out students to exploit the opportunities of an expanding economy.
New business strategy was also evaded way back in 1937 to render the best banking service
through prompt and courteous attention to customers.A highly efficient and experienced
management functioning in a well defined organizational structure did not take long to place
the bank an executed pedestal in the areas of business, profitability, internal discipline and
above all credibility A impeccable
financial status consistent maintenance of the lofty traditions if banking an observation of a
high standard of integrity in its operations helped the bank gain a pre- eminent status. No
wonders the administration for the bank was universal as key functionaries of India
successive finance minister of independent India Resource Bank of governors and
representatives of chamber of commercial showered economics on it.
Modern day management techniques were also very much evident in the good old days years
before corporate governance had become a puzzled the banks bound functioned with a high
degree of responsibility and concerns for the shareholders. An unbroken records of profits
and a fairly high rate of profit and fairly high rate of dividend all through ensured

20
satisfaction, prudential management and asset liability management not only protected the
interests of the Bank but also ensured that the obligations to customers were not met. The
traditions of the past continued to be upheld even to this day as the State Bank years itself to
meet the emerging challenges of the millennium.
2.11 ABOUT LOGO
THE PLACE TO
SHARE THE NEWS
...……
SHARE THE
VIEWS ……
Togetherness is the theme of this corporate loge of SBI where the world of banking services
meet the ever changing customers needs and establishes a link that is like a circle, it indicates
complete services towards customers. The logo also denotes a bank that it has prepared to do
anything to go to any lengths, for customers.
The blue pointer represent the philosophy of the bank that is always looking for the growth
and newer, more challenging, more promising direction. The key hole indicates safety and
security.

21
2.12 MISSION, VISION AND VALUES
MISSION STATEMENT:
To retain the Bank’s position as premiere Indian Financial Service Group, with world class
standards and significant global committed to excellence in customer, shareholder and
employee satisfaction and to play a leading role in expanding and diversifying financial
service sectors while containing emphasis on its development banking rule.
VISION STATEMENT:
 Premier Indian Financial Service Group with prospective world-class
Standards of efficiency and professionalism and institutional values.
 Retain its position in the country as pioneers in Development banking.
 Maximize the shareholders value through high-sustained earnings per
Share.
 An institution with cultural mutual care and commitment, satisfying and
Good work environment and continues learning opportunities.
VALUES:
 Excellence in customer service
 Profit orientation
 Belonging commitment to Bank
 Fairness in all dealings and relations
 Risk taking and innovative

22
 Team playing
 Learning and renewal
 Integrity
 Transparency and Discipline in policies and systems.
2.13 BOARD OF DIRECTORS
List of directors on the central board of state bank of India (As on 1st December, 2014)
S. No Name Designation Under section
of
SBI Act 1955
1 Smt. Arundhati Bhattacharya Chairman 19(a)
2 Shri. P. Pradeep Kumar Managing director 19(b)
3 Shri. B. Sriram Managing director 19(b)
4 Shri. V.G Kannan Managing director 19(b)
5 Shri. SanjivMalhotra Director 19(c)
6 Shri. Sunil Mehta Director 19(c)
7 Shri. M. D. mallya Director 19(c)
8 Shri. Deepak I. Amin Director 19(c)
9 Shri. S. K Mukherjee Officer employee
director
19(cb)
10 Dr. Rajiv Kumar Director 19(d)
11 Shri. HarichandraBahadursingh Director 19(d)
12 Shri. TribhuwanNathchaturvedi Director 19(d)
13 Dr. HasmukhAdhia Director 19(e)
14 Dr. Urjit R. Patel Director 19(f)

23
2.14 PRODUCTS AND SERVICES
PRODUCTS:
State Bank Of India renders varieties of services to customers through the following
products:
Personal Loan Product:
 SBI Term Deposits
 SBI Recurring Deposits
 SBI Housing Loan
 SBI Car Loan
 SBI Educational Loan
 SBI Personal Loan
 SBI Loan For Pensioners
 Loan Against Mortgage Of Property
 Loan Against Shares & Debentures
 Rent Plus Scheme
 Medi-Plus Scheme
 Rates Of Interest
SBI Housing loan
SBI Housing loan or Mortgage Loan schemes are designed to make it simple for you to make
a choice at least as far as financing goes!
'SBI-Home Loans'

24
features:
 No cap on maximum loan amount for purchase/ construction of house/ flat
 Option to club income of your spouse and children to compute eligible loan amount
 Provision to club expected rent accruals from property proposed to compute eligible
loan amount
Provision to finance cost of furnishing and consumer durables as part of project cost
 Repayment permitted upto 70 years of age
 Free personal accident insurance cover
 Optional Group Insurance from SBI Life at concessional premium (Upfront premium
financed as part of project cost)
 Interest applied on daily diminishing balance basis
 'Plus' schemes which offer attractive packages with concessional interest rates to
Govt. Employees, Teachers, Employees in Public Sector Oil Companies.
 Special scheme to grant loans to finance Earnest Money Deposits to be paid to Urban
Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/
flat
 No Administrative Charges or application fee
 Prepayment penalty is recovered only if the loan is pre-closed before half of the
original tenure (not recovered for bulk payments provided the loan is not closed)
 Provision for downward refixation of EMI in respect of floating rate borrowers who
avail Housing Loans of Rs.5 lacs and above, to avail the benefit of downward revision
of interest rate by 1% or more
 In-principle approval issued to give you flexibility while negotiating purchase of a
property
 ·Option to avail loan at the place of employment or at the place of construction
 Attractive packages in respect of loans granted under tie-up with Central/ State
Governments/ PSUs/ reputed corporates and tie-up with reputed builders (Please
contact your nearest branch for details)

25
SERVICES:
 DOMESTIC TREASURY
 SBI VISHWA YATRA FOREIGN TRAVEL CARD
 BROKING SERVICES
 REVISED SERVICE CHARGES
 ATM SERVICES
 INTERNET BANKING
 E-PAY
 E-RAIL
 RBIEFT
 SAFE DEPOSIT LOCKER
 GIFT CHEQUES
ATM SERVICES
STATE BANK NETWORKED ATM SERVICES
State Bank offers you the convenience of over 8000 ATMs in India, the largest network in
the country and continuing to expand fast! This means that you can transact free of cost at the
ATMs of State Bank Group (This includes the ATMs of State Bank of India as well as the
Associate Banks – namely, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State
Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra, and
State Bank of Travancore) and wholly owned subsidiary viz. SBI Commercial and
International Bank Ltd., using the State Bank ATM-cum-Debit (Cash Plus) card.
KINDS OF CARDS ACCEPTED AT STATE BANK ATMs
Besides State Bank ATM-Cum-Debit Card and State Bank International ATM-Cum-Debit
Cards following cards are also accepted at State Bank ATMs: -
1) State Bank Credit Card

26
2) ATM Cards issued by Banks under bilateral sharing viz. Andhra Bank,Axis Bank, Bank
of India, The Bank of Rajasthan Ltd., Canara Bank, Corporation Bank, Dena Bank, HDFC
Bank, Indian Bank, Indus Ind Bank, Punjab National Bank, UCO Bank and Union Bank of
India.
3) Cards issued by banks (other than banks under bilateral sharing) displaying Maestro,
Master Card, Cirrus, VISA and VISA Electron logos
4) All Debit/ Credit Cards issued by any bank outside India displaying Maestro, Master Card,
Cirrus, VISA and VISA Electron logos
Note: If you are a cardholder of bank other than State Bank Group, kindly contact your Bank
for the charges recoverable for usage of State Bank ATMs.
STATE BANK INTERNATIONAL ATM-CUM-DEBIT CARD
Eligibility:
All Saving Bank and Current Account holders having accounts with networked branches and
are:
 18 years of age & above
 Account type: Sole or Joint with “Either or Survivor” / “Anyone or Survivor”
 NRE account holders are also eligible but NRO account holders are not.

27
Benefits:
 Convenience to the customers traveling overseas
 Can be used as Domestic ATM-cum-Debit Card
 Available at a nominal joining fee of Rs. 200/-
 Daily limit of US $ 1000 or equivalent at the ATM and US $ 1000 or equivalent at
Point of Sale (POS) terminal for debit transaction
 Purchase Protection*up to Rs. 5000/- and Personal Accident cover*up to Rs.
2,00,000/-
 Charges for usage abroad: Rs. 150+ Service Tax per cash withdrawal Rs. 15 + Service
Tax per enquiry.
State Bank ATM-cum-Debit (State Bank Cash plus) Card:
India’s largest bank is proud to offer you unparalleled convenience viz. State Bank ATM-
cum-Debit(Cash Plus) card. With this card, there is no need to carry cash in your wallet. You
can now withdraw cash and make purchases anytime you wish to with your ATM-cum-Debit
Card.
Get an ATM-cum-Debit card with which you can transact for FREE at any of over 8000
ATMs of State Bank Group within our country.

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SBI GOLD INTERNATIONAL DEBIT CARD
E-PAY
Bill Payment at Online SBI (e-Pay) will let you to pay your Telephone, Mobile, Electricity,
Insurance and Credit Card bills electronically over our Online SBI website
E-RAIL
Book your Railways Ticket Online.
The facility has been launched wefIst September 2003 in association with IRCTC. The
scheme facilitates Booking of Railways Ticket Online.
The salient features of the scheme are as under:
 All Internet banking customers can use the facility.
 On giving payment option as SBI, the user will be redirected to onlinesbi.com. After
logging on to the site you will be displayed payment amount, TID No. and Railway
reference no.
 . The ticket can be delivered or collected by the customer.
 The user can collect the ticket personally at New Delhi reservation counter .
 The Payment amount will include ticket fare including reservation charges,
courier charges and Bank Service fee of Rs 10/. The Bank service fee has
been waived unto 31st July 2006.

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SAFE DEPOSIT LOCKER
For the safety of your valuables we offer our customers safe deposit vault or locker facilities
at a large number of our branches. There is a nominal annual charge, which depends on the
size of the locker and the centre in which the branch is located.
NRI HOME LOAN
SALIENTFEATURES
PURPOSE
Loans to NRIs & PIOs can be extended for the following purposes.
 To purchase/construct a new house / flat
 To repair, renovate or extend an existing house/flat
 To purchase an existing house/flat
 To purchase a plot for construction of a dwelling unit.
 To purchase furnishings and consumer durables, as a part of the project cost
AGRICULTURE / RURAL
State Bank of India Caters to the needs of agriculturists and landless agricultural labourers
through a network of 6600 rural and semi-urban branches. here are 972 specialized branches
which have been set up in different parts of the country exclusively for the development of
agriculture through credit deployment. These branches include 427 Agricultural Development
Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which
cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad
catering to the needs of hitech commercial agricultural projects.

31
3.1 MEANING OF NPA
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 improvements in the payment and settlement
systems, recovery climate, up gradation of technology in the banking sector, etc, it was
decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall 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 ‘our of order’ for a period of more than 180 days, in respect of an
overdraft/cash credit
iii. 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 agriculturepurposes
iv. Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.
With a view to move towards international best practices, it has been decided to adopt the ’90
days’ overdue norm for identification of NPAs, from 31st March, 2004. Accordingly with
effect from march 31, 2004, a non-perfoming 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)

32
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 installement 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 recived remains overdue for a period of more than 90 days in
respect of other accounts.
3.2 INCOME RECOGNITION- POLICY
 The policy of income recognition has to be objective and based on the record of
recovery. Internationally income from non-performing assets (NPA) is not recognised
on accrual basis but is booked as income only when it is actually received. Therefore,
the banks should not charge and take to income account interest on any NPA.
 However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided adequate margin is
available in the accounts.
 If Government guaranteed advances become NPA, the interest on such advances
should not be taken to income account unless the interest has been realised.
 If any advance, including bills purchased and discounted, become NPA as at the close
of any year, the entire interest accured and credited to income account in the past
periods, should be reversed or provided for if the same is not realized.

33
3.3 ASSET CLASSIFICATION
Assets are classified into following four categories:
 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 does 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.
Provisioning 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 seperately as ‘contingent provisions aginst 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 assets

34
Sub-standard Assets:-- With effect from 31 March 2005, a sub standard asset would be
one, which has remained NPA for a period less than or equal to 12 month. The following
features are exhibited by sub standard 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
jeopardise the liquidation of the debt and are characterised by the distinct possibility that the
banks will sustain some loss, if deficiencies are not corrected.
Provisioning norms: a general provision of 10% on total outstanding should be made
without making any allowance for DICGC/ECGC guarantee cover 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.
Provisioning 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:
 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:
1. 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.

35
2. 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.
LLoossss AAsssseettss::----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 the bank or
internal or external auditors or the RBI inspection but the amount would not have been
written-off wholly.
PPrroovviissiioonniinngg nnoorrmmss:: 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.
3.4 SALE OF NPA TO OTHER BANKS
 A NPA is eligible for sale to other banks only if it has remained a NPA for at least
two years in the books of the selling bank.
 The NPA must be held by the purchasing bank at least for a period of 15 months
before it is sold to other banbks but not to bank, which originally sold the NPA.
 The NPA may be classified as standard in the books of the purchasing banbk for a
period of 90 days from date of purchase and therefore it would depend on the record
of recovery with refrence of cash flows estimated while purchasing.
 The bank may purchase/ sell NPA only on without recourse basis.
 If the sale is conducted below the net book value, the short fall should be debited to
P&L account and if it is higher, the excess provision will be utilized to meet the loss
on account of sale of other NPA.

36
3.5 TYPES OF NPA
A] Gross NPA
B] 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 non standard 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 - Provisions

37
3.6 REASONS FOR AN ACCOUNT BECOMING NPA:
FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of
the rising NPAs. But the problem of NPAs is more in public sector banks when compared to
private sector banks and foreign banks. The NPAs in PSB are growing due to external as well
as internal factors.
EXTERNAL FACTORS
1· Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the
consequence of non-recover, their by reducing their profitability and liquidity.
2. Wilful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order to
get back the money extended to them as advances and loans.
3·Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers

38
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans
4·Industrial sickness
Improper project handling , ineffective management , lack of adequate resources , lack of
advance technology , day to day changing govt. Policies give birth to industrial sickness.
Hence the banks that finance those industries ultimately end up with a low recovery of their
loans reducing their profit and liquidity.
5·Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow
to operate these activities. The banks recover the amount by selling of their assets, which
covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to
make provision for it.
6·Change on Govt. policies
With every new govt. banking sector gets new policies for its operation. Thus it has to cope
with the changing principles and policies for the regulation of the rising of NPAs. Eg. The
fallout of handloom sector is continuing as most of the weavers Co-operative societies have
become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked
out by the Central govt. to revive the handloom sector has not yet been implemented. So the
over dues due to the handloom sectors are becoming NPAs.
INTERNAL FACTORS
1· Defective Lending process
There are three cardinal principles of bank lending that have been followed by the

39
commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of
profitability
i. Principles of safety By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore
take utmost care in ensuring that the enterprise or business for which a loan is sought is a
sound one and the borrower is capable of carrying it out successfully .he should be a person
of integrity and good character.
2· Inappropriate technology
Due to inappropriate technology and management information system, market driven
decisions on real time basis can not be taken. Proper MIS and financial accounting system is
not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerized.
3· Improper SWOT analysis
The improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,
and financial soundness and credit worthiness of the borrower. • Banks should consider the
borrowers own capital investment. • it should collect credit information of the borrowers

40
from a. From bankers b. Enquiry from market/segment of trade, industry, business.c. From
external credit rating agencies. • Analyze the balance sheet True picture of business will be
revealed on analysis of profit/loss a/c and balance sheet. • Purpose of the loan When bankers
give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks
should grant loan for productive purpose only. Bank should analyze the profitability,
viability, long term acceptability of the project while financing.
4· Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit
appraisal to decrease the NPAs.
5· Managerial deficiencies
The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider the 1.
Marketability 2.Acceptability 3.Safety 4.Transferability. The banker should follow the
principle of diversification of risk based on the famous maxim
“do not keep all the eggs in one basket”; it means that the banker should not grant advances
to a few big farms only or to concentrate them in few industries or in a few cities. If a new
big customer meets misfortune or certain traders or industries affected adversely, the overall
position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack,
and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM
(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

41
6· Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.
7· Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters
and CCBs and PACs, the NPAs of OSCB is increasing day by day.
3.7 IM PACT OF NPAS ON BANKS
In portion of the interest income is absorbed in servicing NPA.NPA is not merely non-
remunerative. It is also cost absorbing and profit eroding.
In the context of severe competition in the banking industry, the weak banks are at
disadvantage for leveraging the rate of interest in the deregulated market and securing
remunerative business growth. The options for these banks are lost. "The spread is the bread
for the banks". This is the margin between the cost of resources employed and the return
therefore. In other words it is gap between the return on funds deployed (Interest earned on
credit and investments) and cost of funds employed (Interest paid on deposits).
When the interest rates were directed by RBI, as heretofore, there was not option
forbanks. But today in the deregulated market the banks decide their lending rates and
borrowing rates. In the competitive money and capital Markets, inability to offer competitive
market rates adds to the disadvantage of marketing and building new NPA has affected the
profitability, liquidity and competitive functioning of banks and finally the psychology of the
bankers in respect of their disposition towards credit delivery and credit expansion.

42
1. Impact on Profitability
"The efficiency of banks is not always reflected only by the size of its balance sheet but by
the level of return on its assets. NPAS do not generate interest income for the banks, but at
the same time banks are required to make provisions for such NPAS from their current
profits. NPAS have a deleterious effect on the return on assets in several ways:
· They erode current profits through provisioning requirements.
· They result in reduced interest income.
· They require higher provisioning requirements affecting profits and accretion to
capital funds and capacity to increase good quality risk assets in future, and
· They limit recycling of funds, set in asset-liability mismatches, etc.
There is at times a tendency among some of the banks to understate the level of NPAs in
order to reduce the provisioning and boost up bottom lines. It would only postpone the
process.
In the context of crippling effect on a bank's operations in all spheres, asset quality has been
placed as one of the most important parameters in the measurement of a bank's performance
under the CAMELS supervisory rating system of RBI.
Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores
towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net
advances. To this extent the problem is contained but a what cost?
This costly remedy is made at the sacrifice of building healthy reserves for future
capitaladequacy.
The enormous provisioning of NPA together with the holding cost of such non-productive
assets over the years has acted as a severe drain on the profitability of the SBI Group. In turn
SBI Group are seen as poor performers and unable to approach the market for raising

43
additional capital. Equity issues of nationalized banks that have already tapped the market are
now quoted at a discount in the secondary market. Other bans hesitate to approach the market
to rise new issues. This has alternatively forced SBI Group to borrow heavily from the debt
market to build Tier II Capital to meet capital adequacy norms putting severe pressure on
their profit margins; else they are to seek the bounty of the Central Government for repeated
Recapitalization.
Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds
at 6% plus 1% service charge) the net NPA of Rs. 32632 Crores absorbs a recurring holding
ost of Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years
which works out to average of Rs. 3300 crores from annum, a size business.
in the face of the deregulated banking industry, an ideal competitive working is reached,when
the banks are able to earn adequate amount of non-interest income to cover their entire
operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference
between the gross interest income and interest cost will constitute its operating
profits.Theoretically even if the banks keeps 0% spread, it will still break even in terms of
operating profit and not return an operating loss. The net profit is the amount of the operating
profit minus the amount of provisions to be made including for taxation. On account of the
burden of heavy NPA, many nationalized banks have little option and they are unable to
lower lending rates competitively, as a wider spread is necessitated to cover cost of NPA in
the face of lower income from off balance sheet business yielding non-interest income.
The following working results of SBI Group an identified well managed nationalized banks
for the last two years and for the first nine months of the current financial year, will be
revealing to prove this statement.
Non-interest income fully absorbs the operating expenses of this banks in the currentfinancial
year for the first 9 months. In the last two financial years, though such income has
substantially covered the operating expenses (between 80 to 90%) there is still a deficit left.

44
The strength of SBI Group is indentified by the following positive feature:
1. It's sizeable earnings under of non-interest income substantially/totally meets itsnon-
interest expenses.
2. Its obligation for provisioning requirements is within bounds. (Net NPA/NetAdvances is
1.92%)
It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year
ended March, 2001, as published by RBI in its Report on trends and progress of banking in
India.
Interest on Recapitalization Bonds is a income earned form the Government, who had issued
the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout
package. The statistics above show the other weaknesses of the nationalised banks in addition
to the heavy burden they have to bear for servicing NPA by way of provisioning and holding
cost as under:
 Their operating expenses are higher due to surplus manpower employed. Wage
costs total assets is much higher to PSBs compared to new private banks or foreign
banks.
 Their earnings from sources other than interest income are meagre. This is due to
failure to develop off balance sheet business through innovative banking products.
2. Impact on Liquidity of the SBI Group
Though SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines,the
facts that their net NPA in the average is as much as 7% is a potential threat for them.
RBI has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA
within limits of tolerance the SBI Group are holding an uncomfortable burden at 7.1% as at
March 2001. They have not been able to build additional capital needed for business

45
expansion through internal generations or by tapping the equity market, but have resorted to
II-Tier capital in the debt market orlooking to recapitalistion by Government of India.
3. Impact on Outlook of Bankers towards Credit Delivery
The fear of NPA permeates the psychology of bank managers in the SBI Group inentertaining
new projects for credit expansion. In the world of banking the concepts ofbusiness and risks
are inseparable. Business is an exercise of balancing between risk and reward. Accept
justifiable risks and implements de-risking steps. Without accepting risk, there can be no
reward. The psychology of the banks today is to insulate themselves with zero percent risk
and turn lukewarm to fresh credit. This has affected adversely credit growth compared to
growth of deposits, resulting in a low C/D Ratio around 50 to 54% for the industry.
The fear psychosis also leads to excessive security-consiousness in the approach towards
lending to the small and medium sized credit customers. There is insistence on provision of
collateral security, sometimes up to 200% value of the advance, and consequently due to a
feeling of assumed protection on account of holding adequate security (albeit
overconfidence). a tendencytowards laxity in the standards of credit appraisal comes to the
fore. It is well know that the existence of collateral security at best may convert the credit
extended to productive sectors into an investment against real estate, but will not prevent the
account turning into NPA. Further blocked assets and real estate represent the most illiquid
security and NPA in such advances has the tendency to persist for a long duration.
SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an
urgent solution for handling this hovering threat.
4. Impact on Productivity:
High level of NPAs effect the productivity of the banks by increasing the cost of fundsand by
reducing the efficiency of banks employees. Cost of funds is increased becausedue to non-
availability of sufficient internal sources they have to rely on external sourcesto fulfill their
future financial requirements. Productivity of employees is also reducedbecause it keeps staff
busy with the task of recovery of overdue. Instead of devoting time for planning for
development through more credit and mobilization of resources thebranch staff would

46
primarily be engaged in preparing a large value of returns and statements relating to sub-
standard, doubtful and loss assets, preparing proposal for filing of suits, waivement of legal
action, compromise, write off or in preparing DICGC claim papers etc.
5.Impact on other Variables:
High level of NPAs also leads to squeezing of interest spread, when asset becomes anNPA
for the first time it adversely affects the spread by not contributing to the interestincome and
from the second year onwards it will have its impact on the bottom line of the balance sheet
because of provisioning to be made for it and not have incremental effect on the spread.
Now a days Govt. does not encourage liberal capital support to be given to banks. Banks are
required to bring their own capital by issuing share to the public, whereas high level of NPAs
leads to lower profits hence less or no profits available for equity shareholders hence lower
EPS and fall in the value of share. During the year 2001-02 share of 12 public sector banks
were traded on the NSE out of which share value of three PSBs have decreased. Low market
value of shares has also forced the banks to borrow heavily debt market to build Tier II
capital to meet capital adequacy norms, putting severe pressure on their profit margin
6. Qualitative aspects of the Micro Level Impact of NPAs:
High incidence of loan defaults shakes the confidence of general public in the soundness of
banking setup and indirectly effects the capacity of the banking system to mop up the
deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust of
foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened bi Indian
banks or confine their transaction to top Indian banks only. Moreover, it puts negative effect
on granting of autonomy to PSBs whereas it is must for banks in this competitive
environment. Banks having positive net profits for the last three years, Net NPA level below
9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to be fulfilled to get
autonomous status, which becomes difficult in the situation of huge level of NPAs.
Inadequate recovery also inhibits the banks to draw refinance from higher levelagency. The
eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to
demand in respect of direct, medium and long term loans for agriculture and allied activities.

47
It implies that refinance facility would be progressively reduced depending on the position of
NPAs and also on the No. of years in which a banks branch remains in a particular category
of default. Due to fear of NPAs banks are being taken away from the basic function for which
these were established it is becoming more & more risky and less remunerative. They are
floating their subsidiaries to manage mutual funds, factoring, insurance business, Good
money is spent to recover bad money. Deterioration in the quality of loan assets and inability
to come with new products makes the Indian banks uncompetitive globally. Due to high cost,
they cannot reduce lending rate to meet the economy's demand of low lending rate. It is also
biggest threat for capital account convertibility.
7. Some areas of Macro-Economic Impact:
It is not only the banks which are affected higher level of NPAs but it is the economy as a
whole which pays for it. Banks are not putting enough resource in lending due to fear of
default. Once the credit to various sectors of the economy slow down, the economy is badly
hit. There is slowdown in growth in GDP, industrial output and fall in the profitmargins of
the corporate and consequent depression in the market. Further high level of NPAs can result
in adding to the inflationary potential in the economy and eroding the viability of the credit
system as a whole.
Not only this, burden of NPAs is to be borne by the society as a whole. When
capital support is given to PSB on A/c of losses booked and/ or erosion of capital due to
NPAs, it comes out of either Govt. budgetary resources or from the public as per
Liberalization policy, whether this money is from tax revenues or from the hard earned
saving of the investing public, in fact, the society is bearing the cost of these NPAs.
Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is in its hand.
Any dividend declared would have gone to the Govt. and which can be spent on the welfare
and development program.

48
3.8 EARLY SYMPTOMS
By which one can recognize a performing asset turning ti to non- performing asset four
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 principal 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.

49
3. Attitudinal changes:
 Use for personal comfort, stocks and shares by borrowers.
 Avoidance of contact with bank.
 Problem between partners.
4. Others:
 Changes in government policies.
 Death of borrowers.
 Competition in the market.
3.9 PREVENTIVE MEASURES FOR NPA:
 EEaarrllyy RReeccooggnniittiioonn ooff tthhee PPrroobblleemm::--
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 asto recover whatever is possible through
legal means before the security position becomes worse.
 IIddeennttiiffyyiinngg BBoorrrroowweerrss wwiitthh GGeennuuiinnee IInntteenntt::
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 has intelligent inputs with
regard to promoters’ sincerity, and capability to achieve turnaround. Basedon this objective

50
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.
 TTiimmeelliinneessss aanndd AAddeeqquuaaccyy ooff rreessppoonnssee::--
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.
 FFooccuuss oonn CCaasshh FFlloowwss::
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.
 MMaannaaggeemmeenntt EEffffeeccttiivveenneessss::--
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

51
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.
 MMuullttiippllee FFiinnaanncciinngg::--
I. 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.
II. 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.
III. 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.

52
IV. Corporate Debt Restructuring mechanism has been institutionalized in
2001 to 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.
3.10 GUIDELINES BY RBI
Guidelines of Government and RBI for Reduction of NPAs
Compromise settlement schemes:
The RBI/Government of India have been constantly goading the banks to take steps
forarresting the incidence of fresh NPAs and have also been creating legal and
regulatoryenvironment to facilitate the recovery of existing NPAs of banks. More significant
of them,I would like to recapitulate at this stage.
The broad framework for compromise or negotiated settlement of NPAs advised by RBIin
July 1995 continues to be in place. Banks are free to design and implement their ownpolicies
for recovery and write-off incorporating compromise and negotiated settlementswith the
approval of their Boards, particularly for old and unresolved cases falling underthe NPA
category. The policy framework suggested by RBI provides for setting up of anindependent
Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinise
and recommend compromise proposals.
Specific guidelines were issued in May 1999 to public sector banks for one time
nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme was
operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through
compromise settlement under this scheme].

53
Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 croreand
less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001
helped the public sector banks to recover Rs. 2600 crore by September 2001]. An OTS
Scheme covering advances of Rs. 25000 and below continues to be inoperation and
guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister
providing for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal
farmers are being drawn up.
LokAdaltas:
LokAdalats help banks to settle disputes involving accounts in 'doubtful" and "loss"category,
with outstanding balance of Rs. 5 lakh for compromise settlement underLokAdalats. Debt
Recovery Tribunals have now been empowered to organize LokAdalats to decide on cases of
NPAs of Rs. 10 lakhs and above. The public sectorbanks had recovered Rs. 40.38 crore as on
September 30, 2001, through the forum ofLokAdalat. The progress through this channel is
expected to pick up in the comingyears particularly looking at the recent initiatives taken by
some of the public sectorbanks and DRTs in Mumbai.
Debt Recovery Tribunals:
The Recovery of Debts due to Banks and Financial Institutions (amendment) Act,passed in
March 2000 has helped in strengthening the functioning of DRTs.Provisions for placement of
more than one Recovery Officer, power to attachdefendant's property/assets before
judgement, penal provisions for disobedience ofTribunal's order or for breach of any terms of
the order and appointment of receiverwith powers of realization, management, protection and
preservation of property areexpected to provide necessary teeth to the DRTs and speed up the
recovery of NPAsin the times to come.Though there are 22 DRTs set up at major centres in
the country with AppellateTribunals located in five centres viz. Allahabad, Mumbai,
Delhi,CalcuttaandChennai, they could decide only 9814 cases for Rs. 6264.71 crore
pertaining to publicsector banks since inception of DRT mechanism and till September 30,

54
2001. Theamount recovered in respect of these cases amounted to only Rs. 1864.30
crore.Looking at the huge task on hand, with as many as 33049 cases involving Rs.42988.84
crore pending before them as on September 30, 2001, I would like thebanks to institute
appropriate documentation system and render all possible assistanceto the DRTs for speeding
up decisions and recovery of some of the well collateralized NPAs involving large amounts. I
may add that familiarisationprogrammes have beenoffered in NIBM at periodical intervals to
the presiding officers of DRTs inunderstanding the complexities of documentation and
operational features and otherlegalities applicable of Indian bankingsystem. RBI on its part
has suggested to theGovernment to consider enactment of appropriate penal provisions
againstobstruction by borrowers in possession of attached properties by DRT Receivers,
andnotify borrowers who default to honour the decree passed against them.
Circulation of information on defaulters:The RBI has put in place a system for periodical
circulation of details of willfuldefaults of borrowers of banks and financial institutions. This
serves as a caution listwhile considering requests for new or additional credit limits from
defaulting borrowing units and also from the directors/proprietors/partners of these entities.
RBIalso publishes a list of borrowers (with outstanding aggregating Rs. 1 croreandabove)
against whom suits have been filed by banks and FIs for recovery oftheir funds, as on 31st
March every year. It is our experience that these measures hadnot contributed to any
perceptible recoveries from the defaulting entities. However,they serve as negative basket of
steps shutting off fresh loans to these defaulters. Istrongly believe that a real breakthrough
can come only if there is a change in therepayment psyche of the Indian borrowers
Recovery action against large NPAs:
After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBIhad
advised the public sector banks to examine all cases of willful default of Rs 1 crore and above
and file suits in such cases, and file criminal cases in regard to willful defaults. Board of
Directors are required to review NPA accounts of Rs. 1 crore and above with special
reference to fixing of staff accountability.On their part RBI and the Government are
contemplating several supporting measures including legal reforms, some of them I would
like to highlight.

55
Corporate Debt Restructuring (CDR):
Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a
timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and
above with the banks and financial institutions. The CDR process would also enable viable
corporate entities to restructure their dues outside the existing legal framework and reduce the
incidence of fresh NPAs. The CDR structure has beenheadquartered in IDBI, Mumbai and a
Standing Forum and Core Group foradministering the mechanism had already been put in
place. The experiment howeverhas not taken off at the desired pace though more than six
months have lapsed sinceintroduction. As announced by the Hon'ble Finance Minister in the
Union Budget2002-03, RBI has set up a high level Group under the Chairmanship of
ShriVepaKamesam, Deputy Governor, RBI to review the implementation procedures of
CDRmechanism and to make it more effective. The Group will review the operation of
theCDR Scheme, identify the operational difficulties, if any, in the smoothimplementation of
the scheme and suggest measures to make the operation of thescheme more efficient.
Credit Information Bureau:
Institutionalisation of information sharing arrangements through the newly formedCredit
Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering
therecommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise thescheme
of information dissemination on defaults to the financial system. The mainrecommendations
of the Group include dissemination of information relating to suitfiledaccounts regardless of
the amount claimed in the suit or amount of credit grantedby a credit institution as also such
irregular accounts where the borrower has givenconsent for disclosure. This, I hope, would
prevent those who take advantage of lackof system of information sharing amongst lending
institutions to borrow largeamounts against same assets and property, which had in no small
measurescontributed to the incremental NPAs of banks.
Proposed guidelines on willful defaults/diversion of funds:
RBI is examining the recommendation of Kohli Group on willful defaulters. It isworking out
a proper definition covering such classes of defaulters so that creditdenials to this group of

56
borrowers can be made effective and criminal prosecution canbe made demonstrative against
willful defaulters.
Corporate Governance:
A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by theReserve
Bank to review the supervisory role of Boards of Banks and financialinstitutions and to
obtain feedback on the functioning of the Boards vis-à-viscompliance, transparency,
disclosure, audit committees etc. and makerecommendations for making the role of Board of
Directors more effective with aview to minimising risks and overexposure. The group is
finalising itsrecommendations shortly and may come out with guidelines for effective control
andsupervision by bank boards over credit management and NPA prevention measures.
Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002:
The Act provides, inter alia for enforcement of security interest for realisation of dueswithout
the intervention of courts or tribunals. The Security Interest (Enforcement)Rules, 2002 has
also been notified by Government to enable Secured Creditors toauthorise their officials to
enforce the securities and recover the dues from theborrowers. As on June 30, 2004, 27
public sector banks had issued 61, 263 noticesinvolving outstanding amount of Rs. 19,744
crore, and had recovered an amount ofRs. 1,748 crore from 24,092 cases.
3.11 PROBLEMS LOAN RECOVERY
1. Inadequate security and Erosion in value of security:
Generally, banks tend to find that there is a major gap in the valuation of the security,as
carried out at the time of providing the loan and at the time of loan recovery. Thevalue of the
security has generally deteriorated over the period and according toexperts, it may further
deteriorate by almost 10-50% if quick action is not taken for itsimmediate sale.

57
2. Political interferences:
Political interference in the day -to-day functioning of public sector banks created anumber of
problems for them. The populist policies of the national level politicians,such as waiver in
repayment only added to these problems.
3. Slow legal procedure:
Before the establishment of DRTs in 1993, the banks had to approach the normalcourts to
recover their dues. There were provisions under various acts whichhampered the smooth
takeover and sale of secured assets. The legal process couldtake years to be completed, with
the borrower having ample scope for delaying thetakeover of assets. A number of loopholes
provided the borrower with opportunitiesto delay or ignore repayment of loans. During this
period, it was said by someunscrupulous businessmen that - "there is no difference between
equity and debt – younever have to repay either of them ".
4. Swamping of DRTs with cases:
Once DRTs were established to quicken the pace of recovery procedures, the pace ofrecovery
improved quite a bit. However, the DRTs were soon drowned in the everincreasing number
of cases. The pending number of cases with the DRTs increasedmanifold during the period
1993-2002.
5. Misuse of BIFR/SICA:
This was one of the favourite methods of willful defaulters to delay repayment. If
thedefaulter's company is declared sick and taken for financial reconstruction underBIFR, it
is not possible to undertake any recovery proceeding against the company.The procedure of
financial reconstruction can take a number of years together,thereby delaying recovery to a
great extent.

SBI NPA Management Study

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