Npa of commercial banks

www.cpmr.org.in Opinion: International Journal of Management 68
ISSN:2277-4637(Online)|ISSN:2231-5470(Print) Opinion Vol. 3, No. 1, June 2013
AComparativeAnalysisofNon-PerformingAssets
(NPAs)ofSelectedCommercialBanksinIndia
Samir*
Deepa Kamra**
ABSTRACT
With the introduction of international norms for
income recognition, asset classification and
provisioning in the banking sector, managing NPAs
has emerged as one of the major challenges facing
Indian banks. Banks today are judged not only on
the basis of number of branches and volume of
deposits but also on the basis of quality of assets.
Non-performing assets constitute a major portfolio
of the Banks portfolio and hence are an inevitable
burden on the banking industry. NPAs adversely
affect the profitability, liquidity and solvency of the
banks. This paper analyses the position of NPAs in
selected banks namely State Bank of India (SBI),
Punjab National Bank (PNB) and Central Bank of
India (CBI).It also highlights the policies pursued
by the banks to tackle the NPAs and suggests a
multi-pronged strategy for speedy recovery of NPAs
in banking sector.
Keywords: Non-Performing Assets, Priority sector,
Sector-wise Classifications
I. INTRODUCTION
The incidence of non-performing assets (NPAs) is
affectingtheperformanceofthecreditinstitutionsboth
financiallyandpsychologically.Non-performingasset
(NPA) is not only non-performing but also makes the
banker and the bank non-performing as it:
• Preventsordelaysrecyclingoffunds.
• denies income from the asset by way of interest
• Erodes profit by way of provisions.
NPAis a disorder resulting in non-performance of
a portion of loan portfolio leading to no recovery or
less recovery / income to the lender. NPAs represent
thequantified“CreditRisk”.Italsoplayshavoconthe
mentalmake-upofthebankerwhereinthebankertries
togoslowonlending,fearingfutureNPAs,itmaylead
todelayanddenialofcreditresultinginlowoff-takeof
lendablefunds.
NPAs are an inevitable burden on the banking
industry. Hence, the success of a bank depends upon
themethodsofmanagingNPAsandkeepingthemwithin
tolerancelevel.
II.AIMANDMETHODOLOGY
Aimofthepresentresearchpaperistoanalyzethetrends
in NPAs in terms of values, gross and net NPAs as a
percentage of gross advances and net advances, gross
and net NPAs as a percentage of Total Assets
respectively. The paper details about the sector-wise
classification of NPAs, reasons for their occurrence,
*Asst. Professor, Dept. of Commerce, Swami Shraddhanand College, University of Delhi, New Delhi.
** Asst. Professor, Dept. of Business Studies, Deen Dayal Upadhyaya College, University of Delhi, New Delhi.

theeffectsofNPAsonbanks,andfrequencydistribution
of public sector banks by ratio of net NPAs to net
advances. The study spans the period starting from
1996-1997 to 2009-2010.The data for the study has
been sourced from Reserve Bank of India(RBI)
bulletins, statistical tables relating to banks in India,
ReportontrendandprogressofbankinginIndia,issued
bytheRBI. Thestudyalsosuggestsmulti-prongedand
diversified strategy for speedy recovery of NPAs in
commercialbanksinIndia.
III. CONCEPTUAL FRAMEWORK
OF NPAS
The concept of NPAs originated when Reserve Bank
of India introduced ‘prudential norms, on the
recommendationsoftheNarashimamCommitteeinthe
year 1992-93.As per the prudential norms laid down
byRBI,”Anassetisconsideredas“non-performing”if
interestoninstallmentsofprincipaldueremainunpaid
formorethan180days(fromMarch31,2004,ithasbeen
decided to adopt the ,90 days, overdue norm for
identificationofNPAs).
Insimplewords,aslongastheexpectedincomeis
realizedfromtheasset,itistreatedasperformingasset
butwhenitfailstogenerateincomeordelivervalueon
due date it is treated as non-performing asset. Growth
ofnon-performingassetsonthebalancesheetofbanks
erodesthesolvency,profitabilityandfinancialhealthof
banks.
With a view to moving towards international best
practices and to ensure greater transparency, 90 days
overduenormforidentificationofNPAsinsteadof180
days has been adopted from the year ending March
31st
2004.Accordingly, a non-performing asset would
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 remain ¸out of order, in respect of
overdraft/cashcredit;
III. the bill remain overdue for a period of more than
90daysincaseofbillpurchasedanddiscounted;
IV. interest and or installment of principal remains
overdue for two harvest seasons but for a period
not exceeding two half years in the case of an
advancegrantedforagriculturalpurposes;and
V. Anyamounttobereceivedremainsoverduefora
period of more than 90 days in respect of other
accounts.
(Anyamountduetothebankunderanycreditfacility
is“Overdue”ifitisnotpaidontheduedatefixedbythe
bank).
Banks have been advised by the RBI that they
should identify the non-performing assets and ensure
thatinterestonsuchassetsisnotrecognizedasincome
and taken to the profit and loss account. Banks are to
recognize their income on accrual basis in respect of
incomeonperformingassetsandoncashbasisinrespect
of income on non-performing assets. Any interest
accrued and credited to income account must be
cancelled by a reserve entry once the credit facility
comes under the category of non-performing assets.
3.1 Assets Classification and Provisions
Banksarerequiredtoclassifytheloanassets(advances)
intofourcategoriesviz.
I. Standard assets
II. Sub-standard assets
III. Doubtfulassets;and
IV. Loss assets
StandardAdvances/Assets: are those, which do
not disclose any problem and do not carry more than
normal risk attached to the business. Such assets are
consideredtobeperformingasset.Ageneralprovision
of 0.25% has to be provided on global loan portfolio
basis.
Sub-Standard Advances: With effect from 31
March 2005, a substandard asset would be one,
Which has remained NPAfor a period less than or
equalto12months.Suchanassetwillhavewelldefined
creditweaknessesthatjeopardizeliquidationofthedebt
and are characterized by distinct possibility that bank
willsustainsomeloss.Accordinglyageneralprovision
*

of 10% on outstanding has to be provided on sub-
standard assets.
Doubtful assets- These are the assets which have
remained NPAs for a period exceeding 12 months and
whicharenotconsideredasalossadvance.Bankshave
to provide 100 percent of the unsecured portion of the
outstanding advance after netting realized amount in
respect of DICGC scheme (Deposit Insurance and
CreditGuaranteeCorporation)andrealized/realizable
amountofguaranteecoverunderECGC(ExportCredit
Guarantee Corporation) schemes.
Period for which the Provision requirements (%)
advance has remained
in Doubtful category
Up to one year 20
One to three years 30
More than three years
I. Outstanding stock of NPAs - 60 percent with effect from
as on March31,2004 March31,2005
-75 percent with effect from
March 31, 2006.
-100 percent with effect from
March31,2007
II.Advances classified as 100 percent with effect from
doubtful for more than March 31,2005
three years on or after
April1,2004
Loss Assets – Loss assets are those where loss
has been identified by the bank or internal /external
auditorsorRBIinspectorsbuttheamounthasnotbeen
written off, wholly or partially.Any NPAs would get
classified as loss assets if they were irrecoverable or
marginally collectible and cannot be classified as
bankable asset. Companies have to provide 100% of
theseoutstandingadvances.
Note:provisiontowardsstandardassetsshouldnot
be deducted from advances but shown separately as
contingent provisions against standard assets under
“Other liabilities and provisions” others in schedule V
of the balance sheet.
3.2 Reasons for NPAs in Banks
AnaccountdoesnotbecomeanNPAovernight.Itgives
signalssufficientlyinadvancethatstepscanbetakento
preventtheslippageoftheaccountintoNPAcategory.
AnaccountbecomesanNPAduetocausesattributable
to the borrower, the lender and for reasons beyond the
controlofboth.AninternalstudyconductedbytheRBI
shows that in the order of prominence, the following
factors contribute to NPAs.
Internal Factors
• Diversionoffundsfor
-Expansion/diversification/modernization.
-Taking up new projects.
-Helping/promotingassociateconcerns.
• Time/cost overrun during the project
implementation.
• Inefficientmanagement.
• Strainedlabourrelations.
• Inappropriatetechnology/technicalproblems.
• Product obsolescence, etc.
• PoorcreditAppraisals,monitoringandfollowup,
improper SWOT analysis on the part of banks.
External Factors
• Recession.
• Input or power shortage.
• Priceescalation.
• Exchangeratefluctuation.
• Accidentsandnaturalcalamities.
• Changes in government policy such as excise,
import and export duties, pollution control order
etc.
• Willful defaulters have been there because they
knew that legal recourse available to the lenders
istimeconsumingandslow.
• Sickness of the industry also leads to gradual
erosion of the liquidity and units start failing to
honour its obligations for the loan payments.
Heavy funds are locked up in these units.
• Political tool-Directed credit to SSI and Rural
sectors has been there
• Manipulation by the debtors using political
influencehasbeenacauseforhighindustrialbad
debts.

In the current perspective, the Economic Survey,
2012-13(paragraph5.32)identifiesthefollowingasthe
“main”reasonsforthegrowingNPAs:
a) Switchover to a system- based identification of
NPAs by PSBs
b) prevailingmacro-economicsituationinthecountry;
c) Increased interest rates in the recent past;
d) Lowereconomicgrowth;and
e) Aggressivelendingbybanksinthepast,especially
duringgoodtimes.
3.3 NPAs: Effect on the Performance of
banks
ThelargepercentagesofNPAshaveadeleteriousimpact
on a bank’s profit in a number of ways:
• theyresultinreducedinterestincome
• They erode (eat into) current profits through
provisioningrequirements.
• it leads into erosion of capital base and reduction
intheircompetitiveness
• Through creation of reserves and provisions that
come from profits, to act as cushions for loan
losses.
• Decline in profit has its bearing on variables like
Capital to Risk WeightedAssets Ratio (CRAR
and cost).
Toquotethecommitteeonbankingsectorreforms
(NarasimhamCommitteeII,1998)“NPAsconstitutea
real economic cost to the nation is that they reflect the
application of scarce capital & credit funds to
unproductive uses. The money locked up in NPAs is
notavailableforproductiveusestotheextentthatbank
seek to make provisions for NPAs or write them off. It
is a charge on their profits, NPAs, in short, is not just a
problem for banks; they are bad for the economy”.
IV.ANALYSISOFPERFORMANCE
WITH REFERENCE TO NPAS
Non-performing assets are one of the important
parametersofanalyzingfinancialperformanceofbanks.
ThispartofthepaperfocusesontrendanalysisofNPAs
andevaluatesthefinancialhealthofcommercialbanks.
4.1 Gross NPAs and Net NPAs (as a
percentage of advances and Total Assets)
Gross NPAs is an advance which is considered
irrecoverable,forbankhasmadeprovisions,andwhich
is still held in banks books of account.Net NPAs are
obtained from gross NPAs after deduction of the
following:
• Interest due but not received: i.e. balances in
interestsuspenseaccount.
• Claimsreceivedfromcreditguarantorsandkept
insuspenseaccountspendingfinalsettlement.
• Part payment received and kept in suspensions
;and
• Totalprovisionsheld.
• Similarly gross advances consists of bills
purchasedanddiscounted,cashcredits,overdrafts
andloansandtermloans,whereasnetadvanceis
calculatedbynettingoutbillsdiscounted,DICGC
claimsetc.,fromgrossadvances.GrossNPAisa
better indicator than net NPAs since the former
doesnotincorporatetheendogenousprovisioning
process;thisisbecausebanksmakeprovisioning
forNPAsaccordingtotheircapacities.NetNPAs
does not present a true picture of NPAs so they
will have to be supplemented by gross NPAs
figures.
Table-1
Gross and Net NPAs of SBI, PNB and
CBI as a percentage of advances and assets
during 1996-97 to 2009-2010
GROSS NPAs/ GROSS ADVANCES RATIO and
GROSS NPAs TO TOTAL ASSETS RATIO
GNPA/GADV GNPA/T.ASSETS
Year SBI PNB CBI SBI PNB CBI
1996-1997 16.02 16.31 25 7.01 6.92 9.55
1997-1998 14.14 14.5 20.47 6.38 6.15 7.91
1998-1999 15.56 14.12 17.41 6.32 6.11 6.9
1999-2000 14.25 13.19 16.63 5.88 5.78 6.87

2000-2001 12.93 11.71 16.06 5.11 5.45 6.88
2001-2002 11.95 11.38 14.7 4.39 5.68 6.42
2002-2003 9.34 11.58 13.06 3.59 5.78 5.68
2003-2004 7.75 9.35 12.55 3.11 4.56 4.88
2004-2005 5.96 5.96 9.5 2.71 3 3.8
2005-2006 3.9 4.1 6.8 1.95 2.2 3
2006-2007 2.9 3.5 4.8 1.76 2.1 2.76
2007-2008 3 2.7 3.2 1.78 1.66 1.89
2008-2009 2.98 1.77 2.67 1.63 1.1 1.6
2009-2010 3.28 1.71 2.32 1.85 1.08 1.34
Source: Compiled from Statistical Tables Relating to Banks in India,
Various issues
• It is observed from theTable 1. The gross NPAs
togrossadvanceratiohasshownadecliningtrend
in selected commercial banks over the period of
study.GrossNPAstoGrossadvanceratioofSBI
decreased from 16.02 percent in 1996-97 to 3.28
percent in 2009-2010. In case of PNB, this ratio
showsasignificantdeclinefrom16.31percentto
1.71 percent in 2009-2010.CBI has shown
commendableprogressinrestrictingthisratiowith
a decline from 25 percent in 1996-97 to 2.32
percentin2009-10.Asignificantimprovementin
recoveryofNPAs,alongwithariseingrossloans
and advances led to sharp decline in the gross
NPAstogrossadvancesratio.Thesettingsofthe
AssetReconstructionCompanyLimited(ARCIL),
DebtRecoveryTribunalandtheSARFASEIAct
have been effective in recovering of NPAs in the
bankingsector.
• ThegrossNPAsaspercentageoftotalassetshave
significantly reduced across all the banks from
1996-97 to 2009-10.This decline can be
attributedtothesignificantimprovementintheasset
qualitywitharapidincreaseinquantumofcredit
to the commercial sector.
• High level of NPAs in PSBs can be attributed to
thefollowingpossiblefactors:
1. Various credits related welfare programs are
carried out through public sector banks as they
have a widespread network in the rural areas.
2. The problem of high gross NPAs is also one of
inheritance.Historically,Indianpublicsectorbanks
have been poor on credit recovery due to a weak
legal provision governing foreclosure and
bankruptcy, lengthy legal battles, sticky loans
made to PSUs, loan waivers and priority sector
lending.
3. PSBs also suffer due to lax system of granting
advances,poorpost-loanfollowupandpolitically
motivatedpolicyframework.
• Allbankshavebeenmakingeffortstocontainthe
NPAs level and reduce the drag on their
profitability. Even as individual banks devised
various policies for containment of NPAs, the
magnitude of the problem of slippage of
performing assets to NPAs category has become
a cause of permanent concern in the banks.
4.2 Analysis of NPAs in SBI, PNB and CBI
on basis of Net NPAs/Net Advances and
Total Assets
Table-2
NET NPAs/ NETADVANCES RATIO and
NET NPAs TO TOTALASSETS RATIO
NNPA/NADV NNPA/T.ASSETS
Year SBI PNB CBI SBI PNB CBI
1996-1997 7.3 10.38 14.4 2.89 4.11 4.8
1997-1998 6.07 9.57 12.21 2.5 3.84 4.28
1998-1999 7.18 8.96 9.79 2.65 3.66 3.55
1999-2000 6.41 8.52 9.84 2.4 3.54 3.76
2000-2001 6.03 6.74 9.72 2.35 2.95 3.87
2001-2002 5.63 5.32 7.98 1.96 2.48 3.23
2002-2003 4.5 3.86 6.74 1.58 1.77 2.74
2003-2004 3.48 0.98 5.57 1.33 0.44 2.01
2004-2005 2.65 0.2 2.98 1.16 0.1 1.2
2005-2006 1.9 0.3 2.59 0.99 0.1 1.3
2006-2007 1.56 0.76 1.7 0.93 0.4 0.9
2007-2008 1.78 0.64 1.45 1 0.4 0.9
2008-2009 1.79 0.17 1.24 1 0.1 0.7
2009-2010 1.72 0.53 0.69 1.03 0.33 0.4
Source: Compiled from Statistical Tables Relating to Banks in India,
Various issues

It is observed from the table that Net NPAs to Net
Advance ratio has shown a declining trend in selected
commercial banks over the period of study. Net NPAs
to Net Advance ratio of SBI decreased from 7.3
percent in 1996-97 to 1.72 percent in 2009-2010 .In
case of PNB, this ratio has improved from 10.38
percent to 0.53 percent in 2009-2010.CBI exhibits
commendable progress with a decline from 14.40
percent in 1996-97 to 0.69 percent in 2009-10.
The asset quality of banks in India has been
improving over the past few years as reflected in the
declining NPAtoAdvances ratio. It is noteworthy that
notwithstanding the pressures of a slowdown in the
economy and an uncertain macroeconomic scenario,
the net NPAto netAdvances ratio remained stable in
case of SBI, while for the other two banks exhibited a
declineinthisratio.
4.3 SECTOR –WISE NPAS OFSBI, PNB
ANDCBI
The total NPAs of banks are classified into three
categories viz. Priority Sector, Public Sector and Non
priority Sector. The Sectoral distribution of NPAs
showed a growing proportion of priority sector NPAs
between 2009 and 2010. Priority sector NPAs, which
constituted approximately half of the total NPAs of
domestic banks up to 2008, exhibited a steep decline
in 2009 attributable primarily to theAgricultural Debt
Waiver and Debt Relief Scheme of 2008. Between
2009 and 2010, the share of priority sector NPAs
increasedfordomesticbanks,partlyareflectionofthe
impactofthefinancialcrisisandtheeconomicslowdown
that had set in thereafter.
4.3.1 STATE BANK OFINDIA
The proportion of NPAs in Priority Sector to the total
NPAsoftheSBIhassignificantlyincreasedfrom44.44
percent to 50.87 percent and the total amount of NPAs
in Public sector decreased from Rs. 1090.40 crores in
2000-01 to Rs.235 crores in 2009-10.
At the end of March 2010, the percentage of
PrioritysectorNPAsinTotalNPAswas50.87percent
for State Bank of IndiaThe sharp rise in NPAs of non-
priority sector was reflective of the slowdown in the
economyandstressedfinancialconditionsofcorporates.
TheNPAsintheprioritysectorincreasedduring2007-
08, mainly due to increase in NPAs of the agriculture
sector.
Table 3
Sector-Wise Classification of NPAs of SBI
Year Priority % Public Sector % Non Priority % Total NPAs %
Sector (i) NPAs (ii) Sector NPAs (ii) (i+ii+iii)
2000-01 6876.32 44.44 1090.4 7.05 7506.26 48.51 15472.98 100.00
2001-02 6942.42 44.83 506.4 3.27 8037.05 51.90 15485.87 100.00
2002-03 6171.23 46.55 381.2 2.88 6704.84 50.57 13257.27 100.00
2003-04 5764.83 48.70 109.06 0.92 5963.02 50.38 11836.91 100.00
2004-05 5604.68 48.12 90.32 0.78 5952.43 51.11 11647.43 100.00
2005-06 5906.49 57.51 33.2 0.32 4329.83 42.16 10269.52 100.00
2006-07 5810.19 58.86 149.32 1.51 3911.5 39.63 9871.01 100.00
2007-08 7561.28 60.12 91.16 0.72 4923.64 39.15 12576.08 100.00
2008-09 7010 46.41 163 1.08 7932 52.51 15105 100.00
2009-10 9073 50.87 235 1.32 8529 47.82 17837 100.00
r * 0.82 0.51 0.94
r** -0.54 0.39 0.52
r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.
r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.

Thecalculatedvalueofcoefficientofcorrelation,r,
of the different sectors to the total amounts of sector
wise NPAs observed a positive correlation ,but the
proportionate NPArecovery in the Priority Sector has
recordeda negativecorrelation,r=-0.54whichshows
increase in NPAs in the priority Sector.
4.3.2 Punjab National Bank
The proportion of NPAs in Priority Sector to theTotal
NPAsofthePNBhassignificantlyincreasedfrom41.04
percent to 76.88 percent whereas the Non-Priority
Sector amounts decreased from Rs. 1993.52 crores in
2000-01 to Rs.739 crores in 2009-10.The value of
Public sector NPAs shows a fluctuating trend over the
period of study and is minimum in the year 2008-09.
Table 4
Sector-Wise Classification of NPAs of PNB
2000-01 1419.98 41.04 46.6 1.35 1993.52 57.61 3460.1 100.00
2001-02 1728.31 41.75 59.43 1.44 2352.12 56.82 4139.86 100.00
2002-03 2039.91 40.96 35.72 0.72 2904.43 58.32 4980.06 100.00
2003-04 1979.17 42.38 65.12 1.39 2625.84 56.23 4670.13 100.00
2004-05 1740.76 46.53 39.52 1.06 1961.06 52.42 3741.34 100.00
2005-06 1809.55 57.66 34.16 1.09 1294.57 41.25 3138.28 100.00
2006-07 2511.6 74.08 90.16 2.66 788.51 23.26 3390.27 100.00
2007-08 2761.59 83.20 52.84 1.59 504.87 15.21 3319.3 100.00
2008-09 2436 88.01 1 0.04 331 11.96 2768 100.00
2009-10 2471 76.88 4 0.12 739 22.99 3214 100.00
r* -0.33 0.37 0.90
r** -0.84 0.16 0.83
Thecalculatedvalueofcoefficientofcorrelation,r,
of the different sectors to the total amounts of sector
wise NPAs observed a positive correlation in case of
public sector NPAs and non-priority sector NPAs but
negativecorrelationof-0.33hasbeenobservedincase
of priority sector to the total NPAs amount, also the
proportionate NPArecovery in the Priority Sector has
recorded a high degree of negative correlation, r = -
0.84 which shows increase in NPAs in the priority
Sector.
4.3.3 Central Bank of India
The proportion of NPAs in Priority Sector to theTotal
NPAs of CBI has increased from 48.68 percent to
67.45percentwhereastheNon-PrioritySectoramounts
decreased from Rs. 26.96 crores in 2000-01 to Rs.8
crores in 2009-10. The value of Public sector NPAs
shows a fluctuating trend over the period of study and
isminimumintheyear2008-09.
Non-Priority Sector amounts decreased from
Rs. 1642.77 crores in 2000-01 to Rs.792 crores in
2009-10.Public sector NPAs shows a fluctuating
trend over the period of study and is minimum in the
year 2009-10.

Table 5
Sector-Wise Classification of NPAs of CBI
2000-01 1583.6 48.68 26.96 0.83 1642.77 50.50 3253.33 100.00
2001-02 1708.99 50.63 25.01 0.74 1641.69 48.63 3375.69 100.00
2002-03 1721.04 53.06 123 3.79 1399.41 43.15 3243.45 100.00
2003-04 1724.59 55.78 21.14 0.68 1346.19 43.54 3091.92 100.00
2004-05 1585.44 60.48 12.71 0.48 1023.26 39.03 2621.41 100.00
2005-06 1597.68 59.52 6.47 0.24 1080.03 40.24 2684.18 100.00
2006-07 1598.86 62.16 10.15 0.39 962.97 37.44 2571.98 100.00
2007-08 1651.44 70.28 0.81 0.03 697.59 29.69 2349.84 100.00
2008-09 1587 68.38 59 2.54 675 29.08 2321 100.00
2009-10 1658 67.45 8 0.33 792 32.22 2458 100.00
r* 0.53 0.39 0.98
r** -0.97 0.31 0.94
Thecalculatedvalueofcoefficientofcorrelation,r,ofthedifferentsectorstothetotalamountsofsectorwise
NPAs observed a positive correlation in case of public sector NPAs, Priority sector and non-priority sector
NPAs,alsotheproportionateNPArecoveryinthePrioritySectorhasrecordedahighdegreeofnegativecorrelation,
r = - 0.97 which shows increase in NPAs in the priority Sector.
4.4 PRIORITYSECTOR NPAS IN SBI, PNB and CBI
The Priority Sector includesAgriculture, Small-scale Industries (SSIs) and Other Sectors, with a view to ensure
flow of credit to these underdeveloped sectors, commercial banks in India were advised to grant at least 40
percent of their total advances to the borrowers in the Priority Sectors. Following tables depict the priority sector
composition of NPAs in selected banks i.e. SBI, PNB and CBI.
Table 6
Priority Sector NPAs of SBI
Year Agriculture (i) % SSI(ii) % Others(iii) % Total Priority %
Sector (i+ii+iii)
2000-01 2351.18 34.19 2898.42 42.15 1626.72 23.66 6876.32 100.00
2001-02 2520.49 36.31 2794.22 40.25 1627.71 23.45 6942.42 100.00
2002-03 2369.39 38.39 2302.57 37.31 1499.27 24.29 6171.23 100.00
2003-04 2124.26 36.85 1741.07 30.20 1899.5 32.95 5764.83 100.00
2004-05 1912.68 34.13 1371.97 24.48 2320.03 41.39 5604.68 100.00
2005-06 1929.21 32.66 1238.89 20.98 2738.39 46.36 5906.49 100.00
2006-07 1977.18 34.03 1074.78 18.50 2758.23 47.47 5810.19 100.00
2007-08 2915.12 38.55 1260.11 16.67 3386.05 44.78 7561.28 100.00
2008-09 1789 25.52 1712 24.42 3509 50.06 7010 100.00

2009-10 2322 25.59 2168 23.90 4583 50.51 9073 100.00
r 0.48 0.34 0.68
R² 0.23 0.12 0.46
r = Coefficient of Correlation,R2
=Coefficient of Determination
Table 7
Priority Sector NPAs of PNB
Sector (i+ii+iii)
2000-01 384.81 27.10 568.88 40.06 466.29 32.84 1419.98 100.00
2001-02 443.9 25.68 687.09 39.76 597.32 34.56 1728.31 100.00
2002-03 512.23 25.11 929.91 45.59 597.77 29.30 2039.91 100.00
2003-04 474.05 23.95 928.17 46.90 576.95 29.15 1979.17 100.00
2004-05 354.46 20.36 908.3 52.16 478.6 27.48 1741.36 100.00
2005-06 432.17 23.88 796.94 44.04 580.5 32.08 1809.61 100.00
2006-07 647.39 25.78 991.32 39.47 872.89 34.75 2511.6 100.00
2007-08 1011.61 36.63 910.51 32.97 839.47 30.40 2761.59 100.00
2008-09 537 22.04 1000 41.05 899 36.90 2436 100.00
2009-10 977 39.55 1165 47.17 328 13.28 2470 100.00
r 0.84 0.76 0.56
R² 0.73 0.41 0.26
Table 8
Priority Sector NPAs of CBI
Sector (i+ii+iii)
2000-01 346.78 21.90 737.71 46.58 499.11 31.52 1583.6 100.00
2001-02 396.34 23.19 789.37 46.19 523.28 30.62 1708.99 100.00
2002-03 441.1 25.63 746.75 43.39 533.19 30.98 1721.04 100.00
2003-04 459.78 26.66 683.39 39.63 581.42 33.71 1724.59 100.00
2004-05 356.34 22.48 627.55 39.58 601.55 37.94 1585.44 100.00
2005-06 413.39 25.87 607.46 38.02 576.83 36.10 1597.68 100.00
2006-07 450.67 28.19 519.47 32.49 628.72 39.32 1598.86 100.00
2007-08 535.83 32.45 636.3 38.53 479.31 29.02 1651.44 100.00
2008-09 417 26.26 659 41.50 512 32.24 1588 100.00
2009-10 421 25.39 922 55.61 315 19.00 1658 100.00
r 0.40 0.46 -0.16
R² 0.08 0.30 0.04

The decline in Priority Sector NPAs during 2008-
09 was contributed by the agricultural sector, partly
reflectingtheeffectofthedebtwaiverschemeforfarmers
announced by the Central Government in 2007.NPAs
of SBI decreased from 34.19 Percent at the end of
March2001to25.59percentattheendofMarch2010.
TheNPAsincaseofSSIsdeclinedfrom42.15percent
in 2000-01 to 23.90 in 2009-10.The other sectors
amount of NPAs increased from Rs. 1626.72 crores
with 23.66 percent at the end of March 2001 to Rs.
4583 crores with 50.51 percent at the end of March
2010.Thecalculatedvalueofcoefficientofcorrelation
,r, of Priority Sector shows that there is a positive
CorrelationasregardstherecoveryofmountingNPAs
inAgriculture,SSIandothersectorstothetotalPriority
Sector of PSBs, coefficient of correlation being
0.48,0.34 and .68 over the period of study in case of
SBI.
4.5 Distribution of PSBs by Ratio of Net NPAs
to Net Advances
ThedistributionofPSBsusingtheratioofnetNPAsto
netAdvances is used to examine the performance of
banks in improving the recovery of mounting NPAs;
this ratio has been divided into 4 categories i.e. up to
2%,2-5%, 5-10% and above 10%.The table reveals
thatallthePSBswereunderthecategoryofbelow2%
of net NPAs at the end March 2009.This shows that
there is an effective recovery of mounting NPAs in all
the PSBs and improvement in the financial health of
Indian banks in recent years.
Table 9
DistributionofPSBsbyRatioofnet
NPAs to net advances
Year No. of PSBs lie under the rate of NPA Total
Below 2% 2%-5% 5%-10% Above 10% PSBs
1999-00 0 22 5 0 27
2000-01 1 5 16 5 27
2001-02 0 11 13 3 27
2002-03 4 14 7 2 27
2003-04 11 13 3 0 27
2004-05 19 7 2 0 28
2005-06 23 5 0 0 28
2006-07 27 1 0 0 28
2007-08 28 0 0 0 28
2008-09 27 0 0 0 27
V. CONCLUSION
The incidence of non-performing assets (NPAs) is
affecting the performance of credit institutions both
financially and psychologically. The non-performing
assetshavebecomeamajorcauseofconcern.Imbibing
the credit management skills has become all the more
importantforimprovingthebottom-lineofthebanking
sector. It becomes essential to master the expertise for
monitoringexposurelevels,industryscenariosandtimely
action in respect of troubled industries. Skills of NPA
management, include working out negotiated
settlements,compromisesconstitutingactivesettlement,
advisory committees, restructuring and rehabilitation,
effective recourse to suitable legal remedies are to be
supplementedwithmostsuitablelegalreformsbybanks
to recover dues well in time so that the financial
soundnessofthebankingsectorwillnotbeundermined.
On the international front, the various global risks
associated with the banking industry will expose the
credit assets to greater risks while serious efforts need
to be taken for recovery measures, banks need to be
equippedwithnecessaryriskappraisalsystemtominimize
creditdefaults.
The position of NPAs continues to haunt Indian
bankingSector.Severalexperimentshavebeentriedto
curbNPAs(viz.,BIFR/SICA,lokadalats,DRTs,OTS,
SARFAESIetc)butnothinghashitthemarkintackling
NPAs.ThevalidityofbothDRT/Securitizationactwas
challenged and still hangs in dilemma, which has
dampened the spirits of bankers.
Acleardiscriminationiswarrantedwhileformulating
any strategy in addressing the problem of genuine and
willfuldefaulters.Thereshouldbearealcrackdownon
willfuldefaultersandtheirassetswhetherornotcharged
to banks should be declared as national assets and be
disposed in a transparent manner, without major legal
hurdles.

Nevertheless,theprocessofNPAmanagementdoes
notstartafterfilingasuitbutstartswiththeidentification
of a right borrower.The problem of NPAis greater in
the public sector banks as compared to private and
foreignbanksinIndia.Similarly,theproblemofNPAs
is more in non-priority sector than priority and public
sector. Further, SSI sector has largest share in the total
NPAofprioritysector.Asaresultofthis,financialhealth
of banks has been affected adversely. Hence, banks in
India must apply the basic principles of financial
managementtosolvetheproblemsofmountingNPA.
From the above analysis, following suggestions
emergewhichmaycontributetowardsreductioninthe
mountingnon-performingassetsinbanks;
• Improving the recovery management-Sound
functioningofbanksdependsontimelyrecovery
of credit, hence, banks should develop suitable
recovery programs for assessing and classifying
theoverdues,monitoringaccounts,keepingregular
contact with borrowers ,fixing recovery targets,
arrangingrecoverycamps,trainingthepersonnel
andlinkingmarketingofproduceandrecovery.
• Improving the corporate governance practices-
GovernmentofIndiahadinitiatedmanyeconomic
reforms in the financial sectors but minimal
attention has been devoted to the issues of
corporategovernanceinbanks.BODarethekey
players in the management of banks but they are
granted little autonomy. The nominees of
Government/RBIdominatethebanksboardsdue
to their vast powers. Hence, there is an urgent
need to remove the dominance in order to take
appropriate decision to improve their financial
health.
• UpgradingTechnology-Computerbasedbanking
systemhashelpedthebankmanagementtosolve
someoftheinherentproblems.Computerization
canfurtherhelpthemanagementingettingrequired
informationinordertotakeproperdecisionswhile
grantingloans/advances.
• Inculcating ethics in borrowers- Ethics in
borrowers is necessary to make the banking
sectormoreefficient.However,manyborrowers
aredefaultersnotbecauseoflowincomebutdue
tolackofethics.Hence,banksshoulduseNGO’s
and other voluntary organizations to educate the
borrowers regarding the importance of timely
repaymentofcredit.
• ImprovingthecreditManagement-Management
of credit is essential for proper functioning of
banks. Preparation of credit planning, appraisal
of credit proposals, timely sanction and
disbursements,postsanctionfollow-upandneed
based credit are the some areas of credit
managementthatneedsimprovementinorderto
reduce the NPAs.
• Effectivelegalsystem-GovernmentofIndia/RBI
had initiated many legal measures to bring down
NPAin banks. However, there are some flaws in
each legal measure which need improvement in
order to bring down NPAin banks.
• When the RBI grants new banking license, there
should be a condition that for the first 10 years
there cannot be any loan write-offs. Later, write-
off amounts must be borne by the shareholders,
which is to be certified by external auditors. A
separate statement should be made so that all
stakeholdersareawaretowhatextenttheirprofits
were affected due to the write-off.
• Banks should reduce dependence on interest
income- Indian banks are largely dependent on
the lending and investment as in comparison to
developedcountries.Indianbanksshouldlookfor
sources (income) from fee based services and
products.
• CreditInformationBureau-Theinstitutionalization
ofinformationsharingarrangementisnowpossible
through the newly formed Credit information
Bureau of India Limited (CIBIL) it was set up in
the year 2001, by SBI, HDFC, and two foreign
technologypartners.Thiswillpreventthosewho
take advantage of lack of system of information
sharingamongstleadinginstitutionstoborrowlarge
amount against same assets and property, which
hasinnomeasurescontributedtotheincremental
of NPAs of banks.

• CirculationofInformationofDefaulters-RBIhas
putinplaceasystemforperiodicalcirculationof
detailsofwillfuldefaultersofbanksandfinancial
institutions.RBIalsopublishesalistofborrowers
(withoutstandingaggregaterupeesonecroreand
above) against whom banks and financial
institutionsinrecoveryoffundshavefiledsuitsas
on31stMarcheveryyear.Thisservesasacaution
list while considering a request for new or
additionalcreditlimitsfromdefaultingborrowing
units and also from the directors, proprietors and
partnersoftheseentities.
• DebtRecoveryTribunals(DRTs)-Inthecontext
of recovery from NPAs, banks and FIs depend
heavilyonDRTs.Thesetribunalsweresetupfor
suits of the value of recovery over Rs. 10 lakhs,
whileHighCourtsandDistrictCourtswouldtake
up cases of lesser values. The government has
amended the Debt Recovery Tribunal
(procedures) rules, 2003 to facilitate better
administrationoftheactincludingpluralremedies
for banks like power to attach defendant’s
propertybeforejudgementetc.Theyhavethehuge
task on their hands.
(DRTs were set up under the recovery of debts
due to banks and financial institution act, 1993).
The following table depicts the NPAs recovered
throughvariouschannelsbySCBs.
Table 10
NPAs recovered by SCBs throughVarious
Channels(AmountinRs.Crores)
One-time Lok DRTs SARFAESI
Settlement/ Adalats Act
compromise
Scheme
No. of Cases 139562 186100 7544 2661#
referred
2003-04 Amount 1510 1063 12305 7847
Involved
Amount 617 149 2117 1156
Recovered
No. of Cases 132781 185395 4744 39288#
referred
2004-05 Amount 1332 801 14317 13244
Involved
Amount 880 113 2688 2391
Recovered
No. of Cases 10262 268090 3534 41180#
referred
2005-06 Amount 772 2144 6273 8517
Involved
Amount 608 265 4735 3363
Recovered
No. of Cases __ 160368 4028 60178#
referred
Amount __ 758 9156 8517
2006-07 Involved
Amount __ 106 3463 3363
Recovered
No. of Cases __ 186535 3728 83942#
referred
Amount __ 2142 5819 7263
2007-08 Involved
Amount __ 176 3020 4429
Recovered
No. of Cases __ 548308 2004 61760#
referred
Amount __ 2142 5819 7263
2008-09 Involved
Amount __ 176 3020 4429
Recovered**
No. of Cases __ 778833 6019 78366#
referred
2009-10 Amount __ 7235 9797 14249
Involved
Amount __ 112 3133 4269
Recovered**
No. of Cases __ 616018 12872 118642#
referred
Amount __ 5300 14100 30600
2010-11 Involved
Amount __ 200 3900 11600
Recovered**
No. of Cases __ 476073 13365 140991#
referred
Amount __ 1700 24100 35300
2011-12 Involved
Amount __ 200 4100 10100
Recovered**
# Number of notices issued under section 13(2) of the SARFAESI
Act.
Source: Report on Trend and Progress of Banking in India, Various
issues, RBI.
**Refers to amount recovered during the given year which could be
with reference to cases referred during the given year as well as
during the earlier years.

Usingthenewinstitutionsandlegaloptions,banks
and financial institutions accelerated their recovery of
NPAs. In 2002, SARFAESIAct (Securitisation and
ReconstructionofFinancialAssetsandEnforcementof
Security Interest) was passed and it empowered the
creditors to foreclose non-performing loans and the
underlying collateral without going through a lengthy
judicial or tribunal process. This act was passed with
the aim of enabling banks and financial institutions to
realizelong-termassets,managetheproblemofliquidity,
reduceassetliabilitymismatchesandimproverecovery
by taking possession of securities, selling them and
reducing NPAs.The ordinance also allows banks and
financialinstitutionstoutilizetheservicesofARCs/SCs
for speedy recovery of dues from defaulters and to
reduce their NPAs.The ordinance contains provisions
that would make it possible for ARCs/SCs to take
possession directly of the secured assets and/or the
management of the defaulting borrower companies
without resorting to the time-consuming process of
litigationandwithoutallowingborrowerstotakeshelter
under the provisions of SICA/BIFR.All these efforts
improvedtherecoveryofNPAsbycommercialbanks.
The NPAs recovered by scheduled commercial banks
through various channels is presented in the above
Table.During2011-12,totalamountofNPAsrecovered
through the Securitisation and Reconstruction of
FinancialAssets and Enforcement of Security Interest
Act(SARFAESIAct),DebtRecoveryTribunals(DRTs)
and LokAdalats registered a decline compared with
thepreviousyear.Ofthetotalamountrecoveredthrough
these channels, recoveries under the SARFAESIAct
constituted almost 70 per cent.At present, there are 33
DRTs and five Debt Recovery Appellate Tribunals
across the country.
SARFAESIActandthedebtrecoverytribunals(DRTs)
have proved to be most effective in terms of amount
recovered among the various channels of recovery for
dealing with bad loans. .In terms of cases, the highest
number(3405720)werereferredtothelokadalatsand
the lowest (57838) to the DRTs over the period 2003-
2012. In terms of the amount involved, the DRTs
recovered the highest amount of around Rs. 30504
crores out of Rs 99997 crores and Lok Adalats the
least, Rs. 1497 crores out of Rs.25166 crores for the
period 2003-12. In terms of the recovery, 58 percent
of the amount involved was recovered through one –
timesettlement/Compromiseschemes.DRTsrecovered
around30.5percentandlokAdalatsrecoveredaround
5.63 percent, while 35.71 percent of the amount was
recovered under the SARFAESI Act for the period
2003-2012.
VI. REFERENCES
1. PricewaterhouseCoopers,“Managementofnon-
performingassetsbyIndianbanks”,IBABulletin,
Jan 2004.
2. SamirandAnubha(2005),“Managementofnon-
performing assets (NPAs) in public sector,
private-sector and foreign banks”, pp.71-76,
vol.VII, No-1&2 in Musings, journal of
management, Centre For Management
Development.
3. Shri A.S. Shiralashetu and Dr.Akash,
S.B.(2006),” Management of non-performing
assets in commercial banks-some issues”,
Bankingandfinance
4. Dr.G.SudarsanaReddy,(2004)Managementof
non-performing assets (NPAs) in Public sector
banks”,Bankingandfinance.
5. Samir, Deepa Kamra and N.S
Rana.(2010)”Non-Performing Assets(NPAs)
impede performance of Public Sector Banks”,
pp.6-13,Vol. 7,No.3 in Masterstroke, The
JournalofMasterSchoolof Management,ISSN
0972-9895
6. ReportonTrendandProgressofbankinginIndia,
VariousIssues.
7. Statistical Tables relating to Banks in India,
VariousIssues.
8. http://rbi.org.in.
9. http://iba.org.in

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