Non-Performing Assets on Banks

Submitted by:
JAHANGIR

Z SHAIKH

T.Y.B.C.B.I. (SEMESTER V)
Under the guidance of :
Prof. ALOK HARDIKAR.

Submitted to:
University of Mumbai

RAJASTHANI SAMMELANS
GHANSHYAMDAS SARAF COLLEGE
Affiliated to University of Mumbai
ACCREDITED BY NAAC WITH A GRADE
&

Durgadevi Saraf Junior College

(Arts & Commerce)
S.V Road, Malad (West),
Mumbai 4000 064.
Year : 2014 -2015

RAJASTHANI SAMMELANS
GHANSHYAMDAS SARAF COLLEGE
Affiliated to University of Mumbai
ACCREDITED BY NAAC WITH A GRADE
&

Durgadevi Saraf Junior College

(Arts & Commerce)
S.V Road,

Malad

(West),

Mumbai 4000 064.

CERTIFICATE
I

Prof. ALOK HARDIKAR, hereby certify that Master: Shaikh Jahangir

Zulfiquar Ali , a student of Ghanshyamdas Saraf College of T.Y.B.C.B.I.
(Semester V) has completed project on Non-Performing Assets on

Private & Public Banks Submit " in the academic year 2014-2015. This
information submitted is true and original to the best of my knowledge.

External Examiner :
Date :

Project Co-ordinator :

Principal :

College Seal:

Date:
2

ACKNOWLEDGEMENT

All these years we have just studying and passing. But this time
we have got an opportunity to make such a project study. So it is very
obvious for me to thank all those people associated with the making of the
project. I would like to thank the University of Mumbai for giving me this
chance.
I owe a great many thanks to my project guide Prof. ALOK HARDIKAR
, who has been a constant support and guidance throughout the making of
my project and for monitoring my project with attention and care. She has
taken the pains to go through the project and make necessary corrections
as needed.
I would also like to thank our course coordinator Mrs. Urvi Jain, for
being a moral support to us during this project.
I express thanks to my college Principal Mrs. Sujata Karmarkar, for
extending her support.
And last but not the least I would take the opportunity to thank my
parents without whom the project would have been a distant reality.
Sincere thanks to all my fellow mates and well wishers.

DECLARATION

I Master: Shaikh Jahangir Julfiquar Ali, a student of Ghanshyamdas

Saraf College of Arts & Commerce, T.Y.B.C.B.I. (Semester V) hereby
declare that I have completed project on Non-Performing Assets on
Private & Public Banks Submitted in the academic year 2014-2015.
This information submitted is true and original to the best of my
knowledge.

Date :

Signature of Student:

INDEX.
SR.NO

1.

2.

PA
N
6

TOPIC
Research methodology
Introduction
Problem statement/ objectives of the researchers
Data collection sources
Indian banking industry

3.

Early history
From world war I to independences

4.

Recent history of Indian banking

16

5.

Banking in Indian : 2009-2010

6.

Industry analysis

20

7.

Introduction to NPA
Types of NPA
Reason for an account becoming NPA
Impact on NPA
Early symptoms

22

8.

Preventives measures for NPA

30

9.

Procedures for NPA identification & resolution in india

32

10.

Enactment of SCFAESI act

37

11.

Analysis on NPA
Articles on NPA

40

12.

Conclusion & CASE- STUDY

49

13.

BIBLIOGRAPHY & REFRENCES

50

RESEARCH METHODOLOGY
I. Introduction
The banking industry has undergone a sea change after the first phase of
economic liberalization in 1991 and hence credit management. While the
primary function of banks is to lend funds as loans to various sectors such
as agriculture, industry, personal loans, housing loans etc., in recent times
the banks have become very cautious in extending loans. The reason being
mounting non-performing assets (NPAs). An NPA is defined as a loan
asset, which has ceased to generate any income for a bank whether in the
form of interest or principal repayment. As per the prudential norms
suggested by the Reserve Bank of India (RBI), a bank cannot book interest
on an NPA on accrual basis. In other words, such interests can be booked
only when it has been actually received. Therefore, an NPA account not
only reduces profitability of banks by provisioning in the profit and loss
account, but their carrying cost is also increased which results in excess &
avoidable management attention. Apart from this, a high level of NPA also
puts strain on a banks net worth because banks are under pressure to
maintain a desired level of Capital Adequacy and in the absence of
comfortable profit level, banks eventually look towards their internal
financial strength to fulfill the norms thereby slowly eroding the net worth.

Problem statement/Objective of the research

To study of the concept of Non Performing Asset in Indian

perspective.

To study NPA standard of RBI

To study the Reasons for & Impact of NPAs

To evaluate the efficiency in managing Non Performing Asset of

different types of banks (Public, Private & Foreign banks) using
NPA ratios & comparing NPA with profits.

To check the proportion of NPA of different types of banks in

different categories

Data Collection Sources:

Secondary Data
Secondary data refers to the data which has already been generated and is
available for use.The data about NPAs & its composition, classification of
loan assets, profits (net & gross) & advances of different banks is taken
from Reserve Bank of India website.

Scope of the study

To understand the concept of NPA in Indian Banking industry.

To understand the causes & effects of NPA

To analyze the past trends of NPA of Public, Private & Foreign

banks in different sector.

INDIAN BANKING INDUSTRY

INTRODUCTION:
Banking in India originated in the last decades of the 18th century. The
oldest bank in existence in India is the State Bank of India, a governmentowned bank that traces its origins back to June 1806 and that is the
largest

commercial

bank

in

the

country.

Central

banking

is

the

responsibility of the Reserve Bank of India, which in 1935 formally took

over these responsibilities from the then Imperial Bank of India, relegating
it to commercial banking functions. After India's independence in 1947, the
Reserve Bank was nationalized and given broader powers. In 1969 the
government nationalized the 14 largest commercial banks; the government
nationalized the six next largest in 1980.Currently, India has 96 scheduled
commercial banks (SCBs) - 27 public sector banks (that is with the
Government of India holding a stake), 31 private banks (these do not have
government stake; they may be publicly listed and traded on stock
exchanges) and 38 foreign banks. They have a combined network of over
53,000 branches and 17,000 ATMs. According to a report by ICRA
Limited, a rating agency, the public sector banks hold over 75 percent of
total assets of the banking industry, with the private and foreign banks
holding 18.2% and 6.5% respectively

EARLY HISTORY:
Banking in India originated in the last decades of the 18th century. The
first banks were The General Bank of India which started in 1786, and the
Bank of Hindustan, both of which are now defunct. The oldest bank in
existence in India is the State Bank of India, which originated in the Bank
of Calcutta in June 1806, which almost immediately became the Bank of
Bengal. This was one of the three presidency banks, the other two being
the Bank of Bombay and the Bank of Madras, all three of which were
established under charters from the British East India Company. For many
years the Presidency banks acted as quasi-central banks, as did their
successors. The three banks merged in 1921 to form the Imperial Bank of
India, which, upon India's independence, became the State Bank of India.
Indian merchants in Calcutta established the Union Bank in 1839, but it
failed in 1848 as a consequence of the economic crisis of 1848-49. The
Allahabad Bank, established in 1865 and still functioning today, is the
oldest Joint Stock bank in India. It was not the first though. That honor
belongs to the Bank of Upper India, which was established in 1863, and
which survived until 1913, when it failed, with some of its assets and
liabilities being transferred to the Alliance Bank of Simla.When the
American Civil War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance trading in Indian
cotton. With large exposure to speculative ventures, most of the banks
opened in India during that period failed. The depositors lost money and
lost interest in keeping deposits with banks. Subsequently, banking in India
remained the exclusive domain of Europeans for next several decades until
the beginning of the 20th century . Foreign banks too started to arrive,
particularly in Calcutta, in the 1860s. The Comptoired 'Escompte de Paris opened
a branch in Calcutta in 1860, and another in Bombay in 1862; branches in
Madras and Pondichery, then a French colony, followed. HSBC established itself
in Bengal in 1869. Calcutta was the most active trading port in India, mainly due
to the trade of the British Empire, and so became a banking center.

The Bank of Bengal, which later became the State Bank of India.

The first entirely Indian joint stock bank was the Oudh Commercial Bank,
established in 1881 in Faizabad. It failed in 1958. The next was the
Punjab National Bank, established in Lahore in 1895, which has survived
to the present and is now one of the largest banks in India.Around the
turn of the 20th Century, the Indian economy was passing through a
relative period of stability. Around five decades had elapsed since the
Indian Mutiny, and the social, industrial and other infrastructure had
improved. Indians had established small banks, most of which served
particular ethnic and religious communities. The presidency banks dominated
banking in India but there were also some exchange banks and a number
of Indian joint stock banks. All these banks operated in different segments
of the economy. The exchange banks, mostly owned by Europeans,
concentrated on financing foreign trade. Indian joint stock banks were
generally undercapitalized and lacked the experience and maturity to
compete with the presidency and exchange banks. This segmentation let
Lord Curzon to observe, "In respect of banking it seems we are behind the
times. We are like some old fashioned sailing ship, divided by solid
wooden bulkheads into separate and cumbersome compartments."The period
between 1906 and 1911, saw the establishment of banks inspired by the
Swedishmovement. The Swedish movement inspired local businessmen and
political figures to found banks of and for the Indian community. A
number of banks established then have survived to the present such as
Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara
10

Bank and Central Bank of India.The fervor of Swedish movement lead to

establishing of many private banks in Dakshina Kannada and Udupi district
which were unified earlier and known by the name South Canara ( South
Kanara ) district. Four nationalised banks started in this district and also a
leading private sector bank.

11

FROM WORLD WAR I TO INDEPENDENCE:

The period during the First World War (1914-1918) through the end of the
Second World War (1939-1945), and two years thereafter until the
independence of India were challenging for Indian banking. The years of
the First World War were turbulent, and it took its toll with banks simply
collapsing despite the Indian economy gaining indirect boost due to warrelated economic activities.

Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab
and

West

Bengal,

paralyzing

banking

activities

for

months.

India's

independence marked the end of a regime of the Laissez-faire for the

Indian banking. The Government of India initiated measures to play an
active role in the economic life of the nation, and the Industrial Policy
Resolution adopted by the government in 1948 envisaged a mixed
economy. This resulted into greater involvement of the state in different
segments of the economy including banking and finance.

The major steps to regulate banking included:

In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of
India. In 1949, the Banking Regulation Act was enacted which empowered
the Reserve Bank of India (RBI) "to regulate, control, and inspect the
banks in India.The Banking Regulation Act also provided that no new bank
or branch of an existing bank could be opened without a license from the
RBI, and no two banks could have common directors.However, despite
these provisions, control and regulations, banks in India except the State
Bank of India, continued to be owned and operated by private persons.
This changed with the nationalization of major banks in India on 19 July
1969.
12

Nationalization
By the 1960s, the Indian banking industry had become an important tool
to facilitate the development of the Indian economy. At the same time, it
had emerged as a large employer, and a debate had ensued about the
possibility to nationalise the banking industry. Indira Gandhi, the-then Prime
Minister of India expressed the intention of the GOI in the annual
conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalisation." The paper was received with positive
enthusiasm. Thereafter, her move was swift and sudden, and the GOI
issued an ordinance and nationalised the 14 largest commercial banks with
effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national
leader of India, described the step as a "masterstroke of political sagacity."
Within two weeks of the issue of the ordinance, the Parliament passed the
Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it
received the presidential approval on 9 August 1969.A second dose of
nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of
credit delivery. With the second dose of nationalization, the GOI controlled
around 91% of the banking business of India. Later on, in the year 1993,
the government merged New Bank of India with Punjab National Bank. It
was the only merger between nationalized banks and resulted in the
reduction of the number of nationalised banks from 20 to 19. After this,
until the 1990s, the nationalised banks grew at a pace of around 4%,
closer to the average growth rate of the Indian economy

13

Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a

policy of liberalization, licensing a small number of private banks. These
came to be known as New Generation tech-savvy banks, and included
Global Trust Bank (the first of such new generation banks to be set up),
which

later

amalgamated

with

Oriental

Bank

of

Commerce,

Axis

Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move,
along with the rapid growth in the economy of India, revitalized the
banking sector in India, which has seen rapid growth with strong
contribution from all the three sectors of banks, namely, government banks,
private banks and foreign banks.The next stage for the Indian banking has
been setup 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 present it has gone
up to 74% with some restrictions.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. Currently (2007),
banking in India is generally fairly mature in terms of supply, product
range and reach-even though reach in rural India still remains a challenge
for the private sector and foreign banks. In terms of quality of assets and
capital adequacy, Indian banks are considered to have clean, strong and
transparent balance sheets relative to other banks in comparable economies
in its region. The Reserve Bank of India is an autonomous body, with
minimal pressure from the government. The stated policy of the Bank on
the Indian Rupee is to manage volatility but without any fixed exchange
rate-and this has mostly been true. With the growth in the Indian economy
expected to be strong for quite some time-especially in its services sector14

the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong. One may also expect M&As,
takeovers, and asset sales.In March 2006, the Reserve Bank of India
allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a
private sector bank) to 10%. This is the first time an investor has been
allowed to hold more than 5% in a private sector bank since the RBI
announced norms in 2005 that any stake exceeding 5% in the private
sector banks would need to be vetted by them.In recent years critics have
charged that the non-government owned banks are too aggressive in their
loan recovery efforts in connection with housing, vehicle and personal
loans. There are press reports that the banks' loan recovery efforts have
driven defaulting borrowers to suicide.

15

RECENT HISTORY OF INDIAN BANKING

Indian banking system, over the years has gone through various phases
after establishment of Reserve Bank of India in 1935 during the British
rule, to function as Central Bank of the country. Earlier to creation of
RBI, the central bank functions were being looked after by the Imperial
Bank of India. With the 5-year plan having acquired an important place
after the independence, the Govt. felt that the private banks may not
extend the kind of cooperation in providing credit support, the economy
may need. In 1954 the All India Rural Credit Survey Committee submitted
its report recommending creation of a strong, integrated, Statesponsored,
State-partnered commercial banking institution with an effective machinery
of branches spread all over the country. The recommendations of this
committee led to establishment of first Public Sector Bank in the name of
State Bank of India on July 01, 1955 by acquiring the substantial part of
share capital by RBI, of the then Imperial Bank of India. Similarly during
1956-59, as a result of re-organisation of princely States, the associate
banks came into fold of public sector banking.
On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition
and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger
commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629
cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of
advances. Subsequently in 1980, 6 more banks were nationalised which
brought 91% of the deposits and 84% of the advances in Public Sector
Banking. During December 1969, RBI introduced the Lead Bank Scheme
on the recommendations of FK Nariman Committee.Meanwhile, during 1962
Deposit Insurance Corporation was established to provide insurance cover to
the depositors.In the post-nationalization period, there was substantial
increase in the no. of branches opened in rural/semi-urban

16

centres bringing down the population per bank branch to 12000 appx.
During 1976, RRBs were established (on the recommendations of M.
Narasimham Committee report) under the sponsorship and support of public
sector banks as the 3rd component of multi-agency credit system for
agriculture and rural

development. The Service Area Approach

was

introduced during 1989.While the 1970s and 1980s saw the high growth
rate of branch banking net-work, the consolidation phase started in late 80s
and more particularly during early 90s, with the submission of report by
the Narasimham Committee on Reforms in Financial Services Sector during
1991.
In these five decades since independence, banking in India has evolved
through four distinct phases:
Foundation phase: can be considered to cover 1950s and 1960s till the
nationalization of banks in 1969. The focus during this period was to lay
the foundation for a sound banking system in the country. As a result the
phase witnessed the development of necessary legislative framework for
facilitating re-organization and consolidation of the banking system, for
meeting the requirement of Indian economy. A major development was
transformation of Imperial Bank of India into State Bank of India in 1955
and nationalizationof 14 major private banks during 1969.
Expansion phase: had begun in mid-60s but gained momentum after
nationalization of banks and continued till 1984. A determined effort was
made to make banking facilities available to the masses. Branch network of
the banks was widened at a very fast pace covering the rural and semiurban

population,

which

had

no

access

to

banking

hitherto.

Most

importantly, credit flows were guided towards the priority sectors. However
this weakened the lines of supervision and affected the quality of assets of
banks and pressurized their profitability and brought competitive efficiency
of the system at a low ebb.

17

Consolidation phase: The phase started in 1985 when a series of policy

initiatives were taken by RBI which saw marked slowdown in the branch
expansion. Attention was

paid

to improving

house-keeping,

customer

service, credit management, staff productivity and profitability of banks.

Measures were also taken to reduce the structural constraints that obstructed
the growth of money market.
Reforms phase: The macro-economic crisis faced by the country in 1991
paved the way for extensive financial sector reforms which brought
deregulation of interest rates, more competition, technological changes,
prudential guidelines on asset classification and income recognition, capital
adequacy, autonomy packages etc.

18

BANKING IN INDIA: 2009-10

The Indian banking system is financially stable and resilient to the shocks
that may arise due to higher non-performing assets (NPAs) and the global
economic crisis, according to a stress test done by the Reserve Bank of
India (RBI).Significantly, the RBI has the tenth largest gold reserves in the
world after spending US$ 6.7 billion towards the purchase of 200 metric
tons of gold from the International Monetary Fund(IMF) in November
2009. The purchase has increased the country's share of gold holdings in
its foreign exchange reserves from approximately 4 per cent to about 6 per
cent.Following the financial crisis, new deposits have gravitated towards
public sector banks. According to RBI's 'Quarterly Statistics on Deposits
and Credit of Scheduled Commercial Banks: September 2009', nationalized
banks, as a group, accounted for 50.5 per cent of the aggregate deposits,
while State Bank of India (SBI) and its associates accounted for 23.8 per
cent. The share of other scheduled commercial banks, foreign banks and
regional rural banks in aggregate deposits were 17.8 per cent, 5.6 per cent
and 3.0 per cent, respectively.With respect to gross bank credit also,
nationalized banks hold the highest share of 50.5 per cent in the total bank
credit, with SBI and its associates at 23.7 per cent and other scheduled
commercial banks at 17.8 per cent. Foreign banks and regional rural banks
had a share of 5.5 per cent and 2.5 per cent respectively in the total bank
credit.The report also found that scheduled commercial banks served 34,709
banked centres. Of these centres, 28,095 were single office centres and 64
centres had 100 or more bank offices.The confidence of non-resident
Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows
increased since April 2009 and touched US$ 45.5 billion on July 2009.

19

INDUSTRY ANALYSIS

S.W.O.T. ANALYSIS OF INDIAN BANKING INDUSTRY

STRENGTH

Bank lending has been a significant driver of GDP growth and

employment.

The vast networking & growing number of branches & ATMs.

Indian banking system has reached even to the remote corners of
the country.

The government's regular policy for Indian bank since 1969 has
paid rich dividends with the nationalization of 14 major private
banks of India.

WEAKNESS
PSBs need to fundamentally strengthen institutional skill levels
especially

in

sales

and

marketing,

service

operations,

risk

management and the overall organizational performance ethic &

strengthen human capital.

Old private sector banks also have the need to fundamentally

strengthen skill levels.

Refusal to dilute stake in PSU banks: The government has refused

to dilute its stake in PSU banks below 51% thus choking the
20

headroom available to these banks for raining equity capital.

OPPORTUNITY

Banks will no longer enjoy windfall treasury gains that the decadelong secular decline in interest rates provided. This will expose the
weaker banks.

With increased interest in India, competition from foreign banks

will only intensify.

Given the demographic shifts resulting from changes in age profile

and househol income,consumers will increasingly demand enhanced
institutional capabilities and service levels from banks.

Reach in rural India for the private sector and foreign banks

THREATS
Threat of stability of the system: failure of some weak banks has
often threatened the stability of the system.

Rise in inflation figures which would lead to increase in interest

rates.

Increase in the number of foreign players would pose a threat to

the PSB as well as the private players.

21

INTRODUCTION TO NPA
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 improvement in the payment and settlement
systems, recovery climate, up gradation of technology in the banking
system, etc., it was decided to dispense with 'past due' concept, with effect
from March 31, 2001. Accordingly, as from that date, a Non performing
asset (NPA) shell be an advance where:
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 the
case of bills purchased and discounted,
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
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
22

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) 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 the
case of bills purchased and discounted,
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
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 acounts.

23

TYPES OF NPA:
1. Gross NPA
2. 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 nonstandard 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 NPAs: 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

24

REASONS FOR AN ACCOUNT BECOMING NPA:

1. Internal factors
2. External factors
Internal factors:
1) Funds borrowed for a particular purpose but not use for the said
purpose.
2) Project not completed in time.
3) Poor recovery of receivables.
4) Excess capacities created on non-economic costs.
5) Business failures.
6) Willful defaults, siphoning of funds, fraud, disputes, management
disputes, misappropriation etc.

External factors:
1) Sluggish legal system

Long legal tangles

Changes that had taken place in labour laws

Lack of sincere effort.

2) Scarcity of raw material, power and other resources.

3) Industrial recession.
25

4) Shortage of raw material, raw material\input price escalation, power

shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5) Failures, nonpayment\ over dues in other countries, recession in other
countries,
externalization problems, adverse exchange rates etc.
6) Government policies like excise duty changes, Import duty changes etc.,

The RBI has summarized the finer factors contributing to higher

level of NPAs in the Indian banking sector as:

Diversion of funds, which is for expansion, diversification,

modernization, undertaking new projects and for helping associate
concerns. This is also coupled with recessionary trends and failures
to tap funds in capital and debt markets.

Business failures (such as product, marketing etc.), which are due

to inefficient management system, strained labour relations,
inappropriate technology/ technical problems, product obsolescence
etc.

Recession, which is due to input/ power shortage, price variation,

accidents, natural calamities etc. The externalization problems in
other countries also lead to growth NPAs in Indian banking sector.

Time/ cost overrun during project implementation stage.

Governmental policies such as changes in excise duties, pollution

control orders etc.

Willful defaults, which are because of siphoning-off funds, fraud/

misappropriation, promoters/ directors disputes etc.
26

Deficiency on the part of banks, viz, delays in release of limits

and payments/ subsidies by the Government of India

IMPACT OF NPA:
Profitability:
NPA means booking of money in terms of bad asset, which occurred due
to wrong choice of client. Because of the money getting blocked the
prodigality of bank decreases not only by the amount of NPA but NPA
lead to opportunity cost also as that much of profit invested in some
return earning project/asset. So NPA doesnt affect current profit but also
future stream of profit, which may lead to loss of some long-term
beneficial opportunity.

Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at
hand which lead to borrowing money for shortest period of time which
lead to additional cost to the company. Difficulty in operating the functions
of bank is another cause of NPA due to lack of money.Routine payments
and dues.

Involvement of management:
Time and efforts of management is another indirect cost which bank has to
bear due to NPA. Time and efforts of management in handling and
managing NPA would have diverted to some fruitful activities, which would
have given good returns bank.

Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank
in terms of market credit. It will lose its goodwill and brand image and
27

credit which have negative impact to the people who are putting their
money in the banks.

EARLY SYMPTOMS:
By which one can recognize a performing asset turning in to nonperforming 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.

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.
28

Frequent changes in plan.

Nonpayment of wages.

3) Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.

Problem between partners.

4) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.

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PREVENTIVE MEASUREMENT FOR NPA:

Early Recognition of the problem:
Invariably, by the time banks start their efforts to get involved in a revival
process, its too late to retrieve the situation- both in terms of rehabilitation
of the project and recovery of bank 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

techno-economic

viability study. Restructuring

should

be

attempted where, after an objective assessment of the promoters 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 as to recover whatever
is possible through legal means before the security position becomes worse.

Identifying borrowers with genuine intent :

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 haveintelligent inputs with regard to promoters sincerity,
and capability to achieve turnaround. Based on this objective 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

financial transaction or business transaction,

30

books of account in order to ascertain real factors that contributed to

sickness of the borrower.

Timeliness and Adequacy of response:

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
promoters 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.

Focus on cash flows:

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.

Management Effectiveness:
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 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.
31

PROCEDURES FOR NPA IDENTIFICATION AND

RESOLUTION IN INDIA:
1. Internal Checks and Control
Since high level of NPAs dampens the performance of the banks
identification of potential problem accounts and their close monitoring
assumes importance. Though most banks have Early Warning Systems
(EWS) for identification of potential NPAs, the actual processes followed,
however, differ from bank to bank. The EWS enable a bank to identify the
borrower accounts which show signs of credit deterioration and initiate
remedial action. Many banks have evolved and adopted an elaborate EWS,
which allows them to identify potential distress signals and plan their
options beforehand, accordingly. The major components/processes of a EWS
followed by banks in India as brought out by a study conducted by
Reserve Bank of India at the instance of the Board of Financial
Supervision are as follows:

Designating Relationship Manager/ Credit Officer for monitoring

account/s

Preparation of `know your client' profile

Credit rating system

Relationship Manager/Credit Officer

32

The Relationship Manager/Credit Officer is an official who is expected to

have completeknowledge of borrower, his business, his future plans, etc.
The Relationship Manager has to keep in constant touch with the borrower
and report all developments impacting the borrowable account. As a part of
this contact he is also expected to conduct scrutiny and activity inspections.

Know your client' profile (KYC)

Most banks in India have a system of preparing `know your client' (KYC)
profile/credit report. As a part of `KYC' system, visits are made on clients
and their places of business/units

Credit Rating System

The credit rating system is essentially one point indicator of an individual
credit exposure and is used to identify measure and monitor the credit risk
of individual proposal. At the whole bank level, credit rating system
enables tracking the health of banks entire credit portfolio. Credit rating
models take into account various types of risks viz. financial, industry and
management, etc. associated with a borrowable unit.

Watch-list/Special Mention Category

The grading of the bank's risk assets is an important internal control tool.
It serves the need of the Management to identify and monitor potential
risks of a loan asset. The purpose of identification of potential NPAs is to
ensure that appropriate preventive / corrective steps could be initiated by
the bank to protect against the loan asset becoming non-performing. Most
of the banks have a system to put certain borrowable accounts under watch
list or special mention category if performing advances operating under
adverse business or economic conditions are exhibiting certain distress
signals. These accounts generally exhibit weaknesses which are correctable
33

but warrant banks' closer attention.

The Early warning signal a can be classified into five broad categories viz.
a) Financial
b) Operational
c) Banking
d) Management and
e) External factors.

Financial related warning signals generally emanate from the borrowers'

balance sheet,income expenditure statement, statement of cash flows,
statement of receivables etc.Following common warning signals are captured
by some of the banks having relatively developed EWS.

Financial warning signals

Persistent irregularity in the account

Default in repayment obligation

Devolvement of LC/invocation of guarantees

Deterioration in liquidity/working capital position

Management related warning signals

34

Lack of co-operation from key personnel

Desire to take undue risks

Family disputes

Poor financial controls

Banking related signals

Declining bank balances/declining operations in the account

Opening of account with other bank

Return of outward bills/dishonored cheques

Sales transactions not routed through the account

Signal relating to external factors

Economic recession
Emergence of new technology
Changes in government / regulatory policies

2. Management/ Resolution of NPAs

A reduction in the total gross and net NPAs in the Indian financial system
indicates a significant improvement in management of NPAs. This is also
on account of various resolution mechanisms introduced in the recent past
which include the SRFAESI Act, one time settlement schemes, setting up
of the CDR mechanism, strengthening of DRTs. From the data available of
Public Sector Banks as on March 31, 2003, there were 1,522 numbers of
NPAs as on March 31, 2003 which had gross value greater than Rs. 50
million in all the public sector banks in India. The total gross value of
35

these NPAs amounted to Rs. 215 billion. The total number of resolution
approaches (including cases where action is to be initiated) is greater than
the number of NPAs, indicating some double counting. As can be seen,
suit filed and BIFR are the two most common approaches to resolution of
NPAs in public sector banks. Rehabilitation has been considered/ adopted in
only about 13% of the cases. Settlement has been considered only in 9%
of the cases. It is likely to have been adopted in even fewer cases. Data
available on resolution strategies adopted by public sector banks suggest
that Compromise settlement schemes with borrowers are found to be more
effective than legal measures. Many banks have come out with their own
restructuring schemes for settlement of NPA accounts.

3. Willful Defaulters
RBI has issued revised guidelines in respect of detection of willful default
and diversion and siphoning of funds. As per these guidelines a willful
default occurs when a borrower defaults in meeting its obligations to the
lender when it has capacity to honor the obligations or whenfunds have
been utilized for purposes other than those for which finance was granted.
The list of willful defaulters is required to be submitted to SEBI and RBI
to prevent their access to capital markets. Sharing of information of this
nature helps banks in their due diligence

exercise and helps in avoiding

financing unscrupulous elements.

4. Legal and Regulatory Regime

Debt Recovery Tribunals:

DRTs were set up under the Recovery of Debts due to Banks and
Financial Institutions Act, 1993. Under the Act, two types of Tribunals
were set up i.e. Debt Recovery Tribunal (DRT) and Debt Recovery
Appellate Tribunal (DRAT). The DRTs are vested with competence to
36

entertain cases referred to them, by the banks and FIs for recovery of
debts due to the same. The order passed by a DRT is appealable to the
Appellate Tribunal but no appeal shall be entertained by the DRAT unless
the applicant deposits 75% of the amount due from him as determined by
it.

Enactment of SRFAESI Act

The "The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act" (SRFAESI) provides the formal legal
basis

and regulatory framework for setting up Asset

Reconstruction

Companies (ARCs) in India. In addition to asset reconstruction and ARCs,

the Act deals with the following largely aspects
Securitization and Securitization Companies
Enforcement of Security Interest
Creation of a central registry in which all securitization and
asset reconstruction transactions as well as any creation of
security interests has to be filed.
The Reserve Bank of India (RBI), the designated regulatory authority for
ARCS has issued Directions, Guidance Notes, Application Form and
Guidelines to Banks in April 2003 for regulating functioning of the
proposed ARCS and these Directions/ Guidance Notes cover various aspects
relating to registration, operations and funding of ARCS and resolution of
NPAs by ARCS. The RBI has also issued guidelines to banks and financial
institutions on issues relating to transfer of assets to ARCS, consideration
for

the

same

and

valuation

of

instruments

issued

by

the

ARCS.

Additionally, the Central Government has issued the security enforcement

37

rules ("Enforcement Rules"), which lays down the procedure to be followed

by a secured creditor while enforcing its security interest pursuant to the
Act. The Act permits the secured creditors (if 75% of the secured creditors
agree) to enforce their security interest in relation to the underlying
security without reference to the Court after giving a 60 day notice to the
defaulting borrower upon classification of the corresponding financial
assistance as a non-performing asset.

The Act permits the secured creditors to take any of the following
measures:
Take over possession of the secured assets of the borrower
including right to transfer by way of lease, assignment or sale;
Take over the management of the secured assets including the right
to transfer by way of lease, assignment or sale.
By obtaining quotations from persons dealing in such assets or
otherwise
interested in buying the assets;
By inviting tenders from the public;
By holding public auctions; or
By private treaty.
Lenders have seized collateral in some cases and while it has not yet been
possible to recover value from most such seizures due to certain legal
hurdles, lenders are now clearly in a much better bargaining position vis-avis defaulting borrowers than they were before the enactment of SRFAESI
Act. Under the SRFAESI Act ARCS can be set up under the Companies
Act, 1956. The Act designates any person holding not less than 10% of
38

the paid-up equity capital of the ARC as a sponsor and prohibits any
sponsor from holding a controlling interest in, being the holding company
of or being in control of the ARC. The SRFAESI and SRFAESI Rules/
Guidelines require ARCS to have a minimum net-owned fund of not less
than Rs. 20,000,000. Further, the Directions require that an ARC should
maintain, on an ongoing basis, a minimum capital adequacy ratio of 15%
of its risk weighted assets. ARCS have been granted a maximum
realization time frame of five years from the date of acquisition of the
assets.

Compromise Settlement Schemes

1) One Time Settlement Schemes

NPAs in all sectors, which have become doubtful or loss as on 31st March
2000. The scheme also covers NPAs classified as sub-standard as on 31st
March 2000, which have subsequently become doubtful or loss. All cases
on which the banks have initiated action under the SRFAESI Act and also
cases pending before Courts/DRTs/BIFR, subject to consent decree being
obtained from the Courts/DRTs/BIFR are covered. However cases of willful
default, fraud and malfeasance are not covered. As per the OTS scheme,
for NPAs up to Rs. 10crores,the minimum amount that should be recovered
should be 100% of the outstanding balance in the account.

2) Negotiated Settlement Schemes

The RBI/Government has been encouraging banks to design and implement
policies for negotiated settlements, particularly for old and unresolved
NPAs. The broad framework for such settlements was put in place in July
1995. Specific guidelines were issued in May 1999to public sector banks
39

for one-time settlements of NPAs of small scale sector. This scheme was
valid until September 2000 and enabled banks to recover Rs 6.7 billion
from various accounts. Revised guidelines were issued in July 2000 for
recovery of NPAs of Rs. 50

million and less. These guidelines were

effective until June 2001 and helped banks recover Rs. 26 billion.

3)Increased Powers to NCLTs and the Proposed Repeal of

BIFR
In India, companies whose net worth has been wiped out on account of
accumulated losses come under the purview of the Sick Industrial
Companies Act (SICA) and need to be referred to BIFR. Once a company
is referred to the BIFR (and even if an enquiry is pending as to whether
it should be admitted to BIFR), it is afforded protection against recovery
proceedings from its creditors. BIFR is widely regarded as a stumbling
block in recovering value for NPAs. Promoters systematically take refuge in
SICA - often there is a scramble to file a reference in BIFR so as to
obtain protection from debt recovery proceeding.

40

ANALYSIS ON NPA

OVERALL ANALYSIS:

41

42

43

44

45

46

47

ARTICLE ON NPA
Reserve Bank Governor Raghuram Rajan today said it is too early to
declare victory over the high non-performing assets in the system, which
will improve only with an uptick in growth expected during this fiscal.
"I think, the most immediate problem we have to confront is that of rising
level of stressed assets in the banking system. Fortunately in the last
quarter those levels of stressed assets tapered off or flattened out. But, it is
too early to declare victory," he told reporters here after the central board
meeting of the monetary authority.
Rajan, who has initiated a slew of measures, including asking banks to
work together to spot and resolve asset stress early, said the remedy for
this lies in "stronger governance actions" like clearing projects and growth
numbers inching up faster.
"Growth bails out lot of past bad decisions. So I believe that as growth
comes back, and I fully expect that growth will be stronger over the
course of the year, that some of the bad assets will turn back performing,"
he said.
It can be noted that lenders, especially the public sector banks, are saddled
with a high amount of asset stress due to a slew of problems including
economic gloom, projects not getting cleared by the executive and also
some judicial interventions like the ban on mining.
As of March 2014, total NAPs stood at a high 4.4 per cent for the
system, with multiple analysts fearing it will go up further.
Commenting on on the early detection and redressal of NPAs which
incentivises banks to detect an issue early and also includes penalties for
being late, Rajan said it is still early days for the system but bankers have
informed him that promoters are finding it difficult to con the lenders now.
Meanwhile, even though he declined to offer a reaction on the Budget
presented today saying he had not read it, Rajan said the central bank will
be working in close coordination with the government on aspects like
creating a new monetary policy framework which was announced by
Finance Minister Arun Jaitley.
On the movement of the rupee and the level where the RBI would like
the currency to be, Rajan said the rupee is holding on to a level currently,
and RBI will not be "too interventional" in the market.
48

He, however, added that it will work towards reducing volatility in the
currency in either direction.
On the concerns about the oil prices adding to inflationary pressures, Rajan
said crude prices have stabilised after hitting a high of USD 116 a barrel
and added that RBI will be vigilant on the issue.
With the funding needs of the infrastructure sector pegged to over USD 1
trillion during the ongoing 12th Plan period, Rajan underscored the need
for developing right models to ensure credit flow to the sector.

49

CONCLUSION
The NPA is one of the biggest problems that the Indian Banks are facing
today. If the proper management of the NPAs is not undertaken it would
hamper the business of the banks. If the concept of NPAs is taken very
lightly it would be dangerous for the Indian banking sector. The NPAs
would destroy the current profit, interest income due to large provisions of
the NPAs, and would affect the smooth functioning of the recycling of the
funds Banks also redistribute losses to other borrowers by charging higher
interest rates. Lower deposit rates and higher lending rates repress savings
and financial markets, which hampers economic growth.Public sector banks
are more efficient than private sector & foreign banks with regard to the
management of nonperforming assets. Even among private sector bank, old
private sector banks are more efficient than new private sector banks. But
efficient management of NPA is not the sole factor that determines the
overall efficiency of banks.

50

51

CASE STUDY FOR NPA IN COMMERCIAL

BANK:
A well-built banking sector is significant for a prosperous economy. The
crash of the banking sector may have an unfavorable blow on other
sectors. A banker shall be very cautious in lending, because banker is not
lending money out of his own capital. A major portion of the money lent
comes from the deposits received from the public and government share.
At present NPA in the banking sector is debate topic because NPA is
increasing year by year particularly in nationalized banks The Gross NonPerforming Assets (GNPAs) of Nationalized Banks as on June 2012 were
Rs.73,038 crore which amount to 2.94% of Gross Advances. In this
direction present paper is undertaken to study the reasons for advances
becoming NPA in the Indian Commercial banks Sector and to give suitable
suggestion to overcome the mentioned problem.

52

BIBLIOGRAPHY:
Website:
1) Introduction to Banking Industry: Retrieved on 25th January,
2010 from http://en.wikipedia.org/wiki/Banking_in_India
2) Banking in India-2009-10:Retrieved on 30th January, 2010 from
http://www.ibef.org/industry/Banking.aspx
3) Recent History Of Indian Banking: Retrieved on 7th February,
2010 from http://www.bankingindiaupdate.com/general.html

53

REFERENCES:
1.Maria Boyazny (Spring 2005), Taming the Asian Tiger: Revival on
Non-Performing Assets on the Asian Continent.The Journal of Private
Equity
2. Rosy Kalra (2012), Non-Performing Assets of Commercial Banks- A
Case Study. The IUP Journal of Monetary Economics
3. Satpathy and Patnaik, (2012), Portfolio of NPA-By Classification of
Banks. BVMIR Management Edge
4. Siraj and Pillai (2011), Asset Quality and Profitability of Indian
Scheduled Commercial Banks during Financial Crisis. International
Research Journal of Finance and Economics
5. A Shymala (2012), NPAs in Indian Banking Sector: Impact on
Profitability. Indian Streams Research Journal
6. Kavitha N (2011), NPAs of Scheduled Commercial Banks in India A
Case Analysis, Global Journal of Arts & Management
7. Parul Khanna (2012), Managing Non-Performing Assets in Commercial
Banks., Gian Jyoti E-Journal
8. Vemula &Mahalingam (2012), Non- Performing Assets: An Indian
Perspective., Thought Paper, Infosys Finacle
9. IIBF (2008), Principles and Practices of Banking
10. http://nonperformingassets.in/about-non-performing-assets-npa/10-meaningof-npa

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