LOVELY PROFESSIONAL

UNIVERSITY

PROJECT REPORT ON NPA

SUBMITTED BY:HARI MOHAN (RT 1804 A15)

RACHIT (A08)
NAVKIRAN (A13)
AAKSHI (A12)

INTRODUCTION
The accumulation of huge non-performing assets in banks has assumed great importance. The depth
of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks
and financial institutions is over Rs.1,50,000 crores.

While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of
banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the
non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a
time bound strategic approach.
Public sector banks figure prominently in the debate not only because they dominate the banking
industries, but also since they have much larger NPAs compared with the private sector banks. This
raises a concern in the industry and academia because it is generally felt that NPAs reduce the
profitability of a banks, weaken its financial health and erode its solvency.
For the recovery of NPAs a broad framework has evolved for the management of NPAs under which
several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to
design and implement their own policies for recovery and write-off incorporating compromise and
negotiated settlements.

Introduction to the topic

The three letters NPA Strike terror in banking sector and business circle today. NPA is short form of
Non Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank
remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing
asset. The recovery of loan has always been problem for banks and financial institution. To come out of
these first we need to think is it possible to avoid NPA, no can not be then left is to look after the factor
responsible for it and managing those factors.

Definitions:

An asset, including a leased asset, becomes non-performing when it ceases to generate income for
the bank.

A non-performing asset (NPA) was defined as a credit facility in respect of which the interest and/ or
instalment of principal has remained past due for a specified period of time.

With a view to moving towards international best practices and to ensure greater transparency, it has
been decided to adopt the 90 days overdue norm for identification of NPAs, from the year ending
March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall be a
loan or an advance where;

Interest and/ or instalment of principal remain overdue for a period of

more than 90 days

in respect of a term loan,

The account remains out of order for a period of more than 90 days, in respect of an
Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of bills purchased
and discounted,

Interest and/or instalment 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
purposes, and

Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to
move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification
of an advance as NPA should not be changed on account of charging of interest at monthly rests.
Banks should, therefore, continue to classify an account as NPA only if the interest charged during any
quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002
and 90 days from the end of the quarter with effect from March 31, 2004.

HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial services. By the term bank is
generally understood an institution that holds a Banking Licenses. Banking licenses are granted by
financial supervision authorities and provide rights to conduct the most fundamental banking services
such as accepting deposits and making loans. There are also financial institutions that provide certain
banking services without meeting the legal definition of a bank, a so-called Non-bank. Banks are a
subset of the financial services industry.
The word bank is derived from the Italian banca, which is derived from German and means bench.
The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of
business bank, having its bench physically broken. Moneylenders in Northern Italy originally did
business in open areas, or big open rooms, with each lender working from his own bench or table.
Typically, a bank generates profits from transaction fees on financial services or the interest spread on
resources it holds in trust for clients while paying them interest on the asset. Development of banking
industry in India followed below stated steps.

Banking in India has its origin as early 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 rates
of interest.

Banking in India has an early origin where the indigenous bankers played a very important role
in lending money and financing foreign trade and commerce. During the days of the East India
Company, was the turn of the agency houses to carry on the banking business. The General
Bank of India was first Joint Stock Bank to be established in the year 1786. The others which
followed were the Bank Hindustan and the Bengal Bank.
1. Comprises balance of expired loans, compensation and other bonds such as National Rural
Development Bonds and Capital Investment Bonds. Annuity certificates are excluded.
2. These represent mainly non- negotiable non- interest bearing securities issued to
International Financial Institutions like International Monetary Fund, International Bank for
Reconstruction and Development and Asian Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident Funds, Special Deposits of
Non- Government

 In the post-nationalization era, no new private sector banks were allowed to be set up.
However, in 1993, in recognition of the need to introduce greater competition which could lead
to higher productivity and efficiency of the banking system,
new private sector banks were allowed to be set up in the Indian banking system. These new
banks had to satisfy among others, the following minimum requirements:
(i)

It should be registered as a public limited company;

(ii)

The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange;

(iv) The headquarters of the bank should be preferably located in a centre which does not
have the headquarters of any other bank; and
(v)

The bank will be subject to prudential norms in respect of banking operations, accounting
and other policies as laid down by the RBI. It will have to achieve capital adequacy of
eight per cent from the very beginning.

NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMING ASSETS) ?
Action for enforcement of security interest can be initiated only if the secured asset is classified as
Nonperforming asset.
Non performing asset means an asset or account of borrower ,which has been classified by bank or
financial institution as sub standard , doubtful or loss asset, in accordance with the direction or
guidelines relating to assets classification issued by RBI .
An amount due under any credit facility is treated as past due when it is not been paid within 30
days from the due date. Due to the improvement in the payment and settlement system, recovery
climate, up gradation of technology in the banking system etc, it was decided to dispense with past
due concept, with effect from March 31, 2001. Accordingly as from that date, a Non performing asset
shell be an advance where
i.

Interest and/or installment of principal remain overdue for a period of more than 180 days in
respect of a term loan,

ii.

The account remains out of order for a period of more than 180 days ,in respect of an
overdraft/cash credit (OD/CC)

iii.

The bill remains overdue for a period of more than 180 days in case of bill purchased or
discounted.

iv.

Interest and/or principal remains overdue for two harvest season but for a period not exceeding
two half years in case of an advance granted for agricultural purpose ,and

v.

Any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts
With a view to moving towards international best practices and to ensure greater transparency, it
has been decided to adopt 90 days overdue norms for identification of NPAs ,from the year ending
March 31,2004,a non performing asset 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)

iii.

The bill remains overdue for a period of more than 90 days in case of bill purchased or
discounted.

iv.

Interest and/or principal remains overdue for two harvest season but for a period not
exceeding two half years in case of an advance granted for agricultural purpose ,and

v.

Any amount to be received remains overdue for a period of more than 90 days in respect
of other accounts

Out of order
An account should be treated as out of order if the outstanding balance remains continuously in excess
of sanctioned limit /drawing power. in case where the out standing balance in the principal operating
account is less than the sanctioned amount /drawing power, but there are no credits continuously for
six months as on the date of balance sheet or credit are not enough to cover the interest debited
during the same period ,these account should be treated as out of order.
Overdue
Any amount due to the bank under any credit facility is overdue if it is not paid on due date fixed by
the bank.

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 :----------------------------------

 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.
Willful 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.
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 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.
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.
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 non recovered part as NPAs and has to make
provision for it.
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.
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 government to revive the handloom sector has not yet been
implemented. So the over dues due to the handloom sectors are becoming NPAs.
INTERNAL FACTORS :-------------------------------- Defective Lending process

There are three cardinal principles of bank lending that have been followed by the 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.

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.
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 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.

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.
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).
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 willful defaulters can be collected by regular visits.
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.

'Out of Order' status:

An account should be treated as 'out of order' if the outstanding balance remains continuously in
excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal
operating account is less than the sanctioned limit/drawing power, but there are no credits continuously
for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited
during the same period, these accounts should be treated as 'out of order'.

Overdue:
Any amount due to the bank under any credit facility is overdue if it is not paid on the due date fixed
by the bank

Types of NPA
A] Gross NPA
B] Net NPA
A] 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

B]

Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net
NPA shows the actual burden of 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

INCOME RECOGNITION

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.

Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of

outstanding debts should be recognised on an accrual basis over the period of time covered by
the re-negotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest on such advances should not
be taken to income account unless the interest has been realised.

Reversal of income:

If any advance, including bills purchased and discounted, becomes NPA as at the close of any
year, interest accrued and credited to income account in the corresponding previous year,
should be reversed or provided for if the same is not realised. This will apply to Government
guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should cease to
accrue in the current period and should be reversed or provided for with respect to past periods,
if uncollected.

Leased Assets

The net lease rentals (finance charge) on the leased asset accrued and credited to income

account before the asset became non-performing, and remaining unrealised, should be reversed
or provided for in the current accounting period.

The term 'net lease rentals' would mean the amount of finance charge taken to the credit of

Profit & Loss Account and would be worked out as gross lease rentals adjusted by amount of
statutory depreciation and lease equalisation account.

As per the 'Guidance Note on Accounting for Leases' issued by the Council of the Institute

of Chartered Accountants of India (ICAI), a separate Lease Equalisation Account should be

opened by the banks with a corresponding debit or credit to Lease Adjustment Account, as the
case may be. Further, Lease Equalisation Account should be transferred every year to the Profit &

Loss Account and disclosed separately as a deduction from/addition to gross value of lease rentals
shown under the head 'Gross Income'.

INDUSTRIAL BACKGROUND:

NTRODUCTION TO FINANCE:
In our present day of economy, finance is referred as the provision of money at a

time when it is

quired. Every enterprise big, small or medium needs finance to carry on its operation and achieve its

rgets. In fact, finance is so indispensable that it is rightly said that it is the Life blood of an enterprise.

ithout adequate finance,

n enterprise cant think of its existence. The study of principals, practices, procedures and problems

oncerning financial management of profit making organization engaged in the fields of industry, trade and

ommerce is undertaken under the discipline of BUSINESS FINANCE.

USINESS FINANCE:

he term business finance is composed of two words i.e. business and finance. Thus it is essential to

nderstand the meaning of these two words, which is the starting point to develop the whole concept of

nance.

EANING OF BUSINESS:

he word business may be interpreted in one way as State of being busy. All human creative activities which

e related to the production and distribution of goods and services for satisfying human needs are known as

usiness.

EANING OF FINANCE:

nance is referred to as the provision of money at a time when it is required. Finance refers to the

anagement of flow of money through an organization. Having studied the meaning of business and finance,

e can develop the meaning of the term business finance as an activity, which is concerned with the

cquisitions of funds and distribution of profits by a business firm. Thus business finance deals with the

cquisition, application, allocation of funds and financial control.

Current data
DEPOSIT- INVESTMENT-ADVANCES (RS.CRORE) of both sector banks and
comparison among them, year 2008-09.
Private Sector Banks:(Rs in crore)

Banks

Deposit

Investment

HDFC
ICICI
TOTAL

100769
244431
345200

43394
111454
154848

Advances
63427
225616
289043

Analysis:- From the above figure we can see that the ICICI Bank deposit-investment-advances are
quite high than HDFC Bank.

Public Sector Bank

Banks

Deposit

Investment

Advances

PNB

166457

53992

119502

Analysis :- In public sector Punjab National Bank deposit-investmentAdvances are quite high.

Comparison between ICICI BANK AND PUNJAB NATIONAL

BANK in term of deposit-investment-advances:Banks
ICICI
PNB

Deposit
244437
166457

Investment
111454
53992

Advances
225616
119502

Analysis: Here we have compared between ICICI BANK AND PUNJAB NATIONAL BANK in term of depositinvestment-advances. From the above figure we can see that ICICI bank deposit and advances are
quite higher than Punjab National Bank. But in case of Investment ICICI Bank investment amount is
doubled than Punjab National Bank amount.

Review of Literature
Sector Wise Split-up
As can be seen, the main culprits are not the priority sectors or PSUs, but are the large industries. If
government sops to agriculture and SSIs are excluded, the NPA in the priority sectors is even lower.
The problem India faces is not lack of strict prudential norms but
1. The legal impediments and time consuming nature of asset disposal process.
2. Postponement of the problem in order to report higher earnings
3. Manipulation by the debtors using political influence
A perverse effect of the slow legal process is that banks are shying away from risks by investing a
greater than required proportion of their assets in the form of sovereign debt paper.

The government recently enacted the Asset Reconstruction Ordinance to try and tackle the problem. It
gave wide ranging powers for banks to dispose of assets and allowed creation of Asset Reconstruction
Companies for this purpose.
Based on Loan loss provisioning
The net NPAs4 have continually declined from 14.46% in 1993-94 to 6.74% in 2000-01. RBI
regulations require that banks build provisions upto at least a level of 50% of their gross NPAs. The
current provisioning is 35% of gross NPAs.
Non-performing assets of 27 banks surge 25%
Mumbai: Amidst profit-making performances, bad loans of the banks increased significantly in the
fourth quarter of the last fiscal. Net non-performing assets (NNPAs) of 27 banks increased by 25.4% to
Rs 15,218 crore during January to March 2009, from Rs 12,138 crore recorded in the year-ago period.
Gross non-performing assets of the banks also increased 20.6% to Rs 34,503 crore. Net profit of these
banks rose 28% to Rs 7,483 crore in Jan-Mar '09. Some PSBs are trying to recover the NNPAs as per
RBI and its own recovery schemes.
For example, Oriental Bank, Indian Bank, IDBI Bank and State Bank Of Taravancore have reduced
their NNPAs during the period. IDBI Bank recovered the highest amount of Rs 134 crore during the
fourth quarter by bringing down the margin to Rs 949 crore from Rs 1083 crore.
Significant increase in NNPAs was seen in Yes Bank, South Ind Bank, State Bank of Hyderabad and
Indian Overseas Bank. The NNPAs of Yes Bank increased by 386.5% to Rs 41.16 crore in Jan-Mar '09.
The average NNPAs to net advances ratio of 27 banks increased to 0.84% in Jan-Mar'09 from the
year-ago figure of 0.75%.
A significant increase in the ratio was seen in the case of Bank of Baroda, ICICI Bank, Indian Overseas
Bank, ING Vysya and South Ind Bank.
The NPAs to net advances ratio of Bank of Baroda increased to 1.41% in Jan-Mar '09 from 0.47% in
the corresponding period of the last fiscal.
A highest decline in the ratio was registered in the case of IndusInd Bank. The ratio of NNPAs to net
advances of the bank decreased to 1.14% from 2.27%.The net non-performing assets of IndusInd
Bank decreased by 38.4% (highest among the 27 banks) to Rs 179.13 crore in Jan-Mar '09 from Rs
291.02 crore.
Romesh Sobti, MD & CEO of IndusInd Bank, said, Despite a challenging and deteriorating operating
environment, the bank has shown improvement in all the key parameters covering loan recovery,
profitability, productivity and efficiency."
The top five banks according to the ascending order of the ratio of NNPAs to advances in Jan-Mar '09
are ICICI Bank, Bank of Baroda, Indian Overseas Bank, Central Bank of India and ING Vysya.
In Jan-Mar '08, the top five were IndusInd Bank, ICICI Bank, Central Bank Of India, IDBI Bank and
Oriental Bank.
Two banks, namely ICICI Bank and Central Bank of India, are common in both the time period in the
list of.

Non-Performing Assets of Indian Public, Private and Foreign Sector Banks:

An Empirical Assessment
Gourav Vallabh
Anoop Bhatia
Saurabh Mishra
This paper explores an empirical approach to the analysis of Non-Performing Assets (NPAs) of public,
private, and foreign sector banks in India. The NPAs are considered as an important parameter to
judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial
stability and growth of the banking sector. This paper aims to find the fundamental factors which impact
NPAs of banks. A model consisting of two types of factors, viz., macroeconomic factors and bankspecific parameters, is developed and the behavior of NPAs of the three categories of banks is
observed. This model tries to extend the methodology of widely-known Altman model. The empirical
analysis assesses how macroeconomic factors and bank-specific parameters affect NPAs of a
particular category of banks. The macroeconomic factors of the model included are GDP growth rate
and excise duty, and the bank-specific parameters are Credit Deposit Ratio (CDR), loan exposure to
priority sector, Capital Adequacy Ratio (CAR), and liquidity risk. The results show that movement in
NPAs over the years can be explained well by the factors considered in the model for the public and
private sector banks. The collinearity between independent variables was measured by Durbin-Watson
test and VIF characteristic and it was found to be a little for public and private banks. The factors
included in the model explains 97.1% (adjusted R-square value of regression results) of variations in
NPAs of public banks and 76.9% of the same of private banks. The other important results derived
from the analysis include the finding that banks exposure to priority sector lending reduces NPAs.
ICICI Bank and Oriental Bank of Commerce (OBC) best in managing NPA
ICICI Bank and Oriental Bank of Commerce (OBC) have emerged as the top performing banks in terms of
cleaning their bad assets and bringing down non-performing assets, taking advantage of healthy GDP growth and
impressive topline and bottomline performance by borrowers.
According to Assocham Eco Pulse study, ICICI Bank was able to cut its NPA by 65.02 per cent while OBC
reduced its NPAs by 61.54 per cent as on March 31, 2006 as compared on March 31,2005.
Although the ICICI Bank reduced its bad assets by maximum percentage points among the 13 banks tracked by
the AEP study, it is OBC which has emerged as the best performer in terms of size of net NPAs. OBCs net NPAs
were 0.5 per cent while for the ICICI Bank the figure was 0.71 per cent. The Indian Overseas Bank, Corporation
Bank, UTI Bank and Bank of Baroda were the next best performers in cutting their net NPAs by 0.65 per cent,
0.64 per cent, 0.75 per cent and 0.87 per cent respectively.
Most of the commercial banks have substantially reduced their non-performing assets (NPAs) ranging between
29 per cent and 65 per cent, as they registered a handsome growth in their retail advances in the fourth quarter of
fiscal 2005-06. Riding on the above 8 per cent growth of economy, the NPAs of the scheduled commercial banks
went down by 44 per cent on an aggregate.
Other major Banks with significant reduction in their NPAs are Indian Overseas Bank (49 per cent), Corporation
Bank (43 per cent), Dena Bank (42 per cent), Bank of India (48 per cent), Bank of Baroda, Union Bank, Canara
Bank and IDBI Bank (40 per cent), UTI (30 per cent) and SBI (29 per cent). Hence, there is less drag on the
Balance Sheet because of reduction in the NPAs.

Non-Performing Assets in Indian Banks

In liberalizing economy banking and financial sector get high priority. Indian banking sector of having a
serious problem due non performing. The financial reforms have helped largely to clean NPA was
around Rs. 52,000 crores in the year 2004. The earning capacity and profitability of the bank are highly
affected due to this

NPA is defined as an advance for which interest or repayment of principal or both remain out standing
for a period of more than two quarters.
The level of NPA act as an indicator showing the bankers credit risks and efficiency of allocation of
resource.
Reasons:
Various studies have been conducted to analysis the reasons for NPA. What ever may be complete
elimination of NPA is impossible. The reasons may be widely classified in two:
(1) Over hang component
(2) Incremental component
Over hang component is due to the environment reasons, business cycle etc.
Incremental component may be due to internal bank management, credit policy, terms of credit etc.
Asset Classification :
The RBI has issued guidelines to banks for classification of assets into four categories.
1. Standard assets:
These are loans which do not have any problem are less risk.
2. Substandard assets:
These are assets which come under the category of NPA for a period of less then 12 months.
3. Doubtful assets:
These are NPA exceeding 12 months
4. Loss assets:
These NPA which are identified as unreliable by internal inspector of bank or auditors or by RBI.
The classification of assets of scheduled commercial bank.

Assets

2006

2007

2008

2009

Standard assets

494716
(88.6)

609972
(89.6)

709260
(91.2)

837130
(92.8)

Sub standard
assets

18206
(3.3)

21382
(3.1)

20078
(2.6)

21026
(2.3)

Doubtful assets

37756
(6.8)

41201
(6.1)

39731
(5.1)

36247
(4.36)

Loss assets

8001
(1.4)

8370
(1.2)

8971
(1.2)

7625
(0.8)

Total NPA

63963
(11.4)

70953
(10.4)

68780
(8.8)

Table 1

902027
(100)

(Amount Rs. crores)

Income recognition and provisioning

Income from NPA is not recognized on accrued basic but is booked as income only when, it is actually
received. RBI has also tightened red the provisions norms against asset classification. It ranges from
0.25% to 100% from standard asset to loss asset respectively.
Gross and net NPA of different sector of bank
Table 2

(end of March 31) (in %)

category

Gross NPA/ Gross Advance

2006

2007

2008

2009

Public sector
bank

12.37

11.09

9.36

7.79

Private sector

8.37

9.64

8.07

5.84

Foreign bank

6.84

5.38

5.25

4.62

Table 3

(end of March 31) (in %)

category

Net NPA / Net Advance

2006

2007

2008

2009

Public sector
bank

6.74

5.82

4.53

2.98

Private sector

2.27

2.49

2.32

1.32

Foreign bank

1.82

1.89

1.76

1.49

The table II and III shows that the percentage of gross NPA/ gross advance and net NPA/ net advance
are in a decreasing trend. This shows the sign of efficiency in public and private sector bamks.but still if
compared to foreign banks Indian private sector and public sector banks have a higher NPA.
Management of NPA
The table II&III shows that during initial sage the percentage of NPA was higher. This was due to show
ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal provision etc.
Various steps have been taken by the government to recover and reduce NPAs. Some of them are.
1. One time settlement / compromise scheme
2. Lok adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of Security
2002.
5. Corporate Reconstruction Companies
6. credit information on defaulters and role of credit information bureaus.

Interest Act

Rationale for the study

PROBLEMS DUE TO NPA
1. Owners do not receive a market return on there capital .in the worst case, if the banks fails,
owners loose their assets. In modern times this may affect a broad pool of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if the bank fails,
depositors loose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit
rates and higher lending rates repress saving and financial market, which hamper economic
growth.
4. Non performing loans epitomize bad investment. They misallocate credit from good projects,
which do not receive funding, to failed projects. Bad investment ends up in misallocation of
capital, and by extension, labour and natural resources.
Non performing asset may spill over the banking system and contract the money stock, which may
lead to economic contraction. This spill over effect can channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience
payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the banks capital base.

liquidity shortage.

This can jam

The three letters Strike terror in banking sector and business circle today. NPA is short form of Non
Performing Asset. The dreaded NPA rule says simply this: when interest or other due to a bank
remains unpaid for more than 90 days, the entire bank loan automatically turns a non performing
asset. The recovery of loan has always been problem for banks and financial institution. To come out of
these first we need to think is it possible to avoid NPA, no can not be then left is to look after the factor
responsible for it and managing those factors.

Interest and/or instalment 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
purposes, and

Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move
over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an
advance as NPA should not be changed on account of charging of interest at monthly rests. Banks
should, therefore, continue to classify an account as NPA only if the interest charged during any
quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002
and 90 days from the end of the quarter with effect from March 31, 2004.

OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was to:

To evaluate NPAs (Gross and Net) in different banks.

To analyze financial performance of banks at different level of NPA
To evaluate profitability positions of banks
To evaluate NPA level in different economic situation.
To Know the Concept of Non Performing Asset
To Know the Impact of NPAs
To learn Preventive Measures

RESEARCH METHODOLOGY
Type of Research
The research methodology adopted for carrying out the study were
In this project Descriptive research methodologies were use .
At the first stage theoretical study is attempted.
At the second stage Historical study is attempted.
At the Third stage Comparative study of NPA is undertaken.

Scope of the Study

Concept of Non Performing Asset
Guidelines
Impact of NPAs
Reasons for NPAs
Preventive Measures
Tools to manage NPAs

BIBLIOGRAPHY
http://www.rbi.com/doc/14245136/Non-Performing-Assets-of-Banks
http://www.allbusiness.com/company-activities-management/financial-performance/54844511.html
http://www.rbi.org.in/home.aspx
http://www.pnbindia.in/
http://www.arms.net.in/Arcil1/index.html