CONTENTS

CHAPTER TITLE PAGE NO

NO.
INTRODUCTION 6

HISTORY OF BANKING IN INDIA 9

1
INDIAN BANKING SECTOR 11
NON-PERFORMING ASSETS 12
DEFINITION OF NPA 12
RESEARCH METHODOLY 16

2 OBJECTIVES OF STUDY
SCOPE OF STUDY
SOURCE OF DATA
LIMITATIONS OF STUDY
3 REVIEW OF LITERATURE 18

ASSETS CLASSIFICATIONS OF NPA 19

PROVISIONING NORMS OF NPA 20
TYPES OF NPA 22
GUIDELINESS FOR CLASSIFICATION OF ASSETS 23
4 REASONS FOR ACCOUNT BECOMING NPA 27
EARLY SYMPTOMS 31
IMPACT OF NPA 32
CONSEQUENCES OF NPA 34
PREVENTIVES MEASURES OF NPA 36
STRATEGIES FOR MANAGEMET OF NPA 39
DATA ANALYSIS AND INTREPRETATION
5
ICICI BANK 47
STATE BANK OF INDIA 70
FINDINGS 79
6 SUGGESTIONS 80
CONCLUSION 81
7 BIBILOGRAPHY 82

1
 CHAPTER-1

Introduction

Banking sector plays an indispensable role in economic development of a country

through mobilization of savings and deployment of funds to the productive sectors. Bank
lending is very crucial for it makes it possible, the financing of agricultural, industrial and
commercial activities of the country. It is an established fact that a fragile banking system
can, not only hamper the development of a particular economy but also it can deepen the real
economic crisis and impose heavy social costs. So, the health of the banking system should
be one of the primary concerns of the government of each country.

Banks play a very useful and dynamic role in the economic life of every modern
state: They are important constituents of the money market and their demand deposits serve
as money in the modern community. The operations of commercial banks record the
economic pulse of economy of almost all countries big or small, rich or poor, socialist or
capitalist and they are faced with the problem of regional disparities in economic
development. Economic development is primarily linked with financial institutions and
commercial banks become prime movers of the economic development because of their
unique function of credit creation. In modern economy, bankers are to be considered not
merely as “dealers in money” but more realistically the “leaders in development”. Similarly,
banks are not just the storehouses of the country's wealth but are the reservoirs of resources
necessary for economic development.

Banks are the purveyors of money and credit to the factors of production in every
country and thus help in the acceleration of growth. Banks are also called custodians of
public money. Money and credit provide the pivot around which all our economic
activities cluster. Banks are the pivots of modern commerce; industrial innovations and
business expansions become possible through finance provided by banks. Finance is the
life blood of every country. It helps in capital formation and capital accumulation, which is
very much necessary for building infrastructure, and setting up of basic and key industries,
which are essential for long-term development.

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 The Banking sector is an indispensable financial service sector supporting
development plans through channelizing funds for productive purpose. Commercial Banks
mainly contribute to:

• Develop both internal and external trade of a country by providing loans to

retailers and wholesalers for their inventory and facilitating movement of goods
from one place to another or between the countries.

• Capital formation to accelerate the tempo of economic development by managing

the rate of saving. The development of the industrial sector by providing short-
term, medium-term and long-term loans to industry, to secure labour and other
factors of production.

• Develop employment generating activities by providing loans for the education of

youngsters in pursuing higher learning in engineering, medical and other
vocational institutions.

• Develop rural economy by providing credit facilities at cheaper rate to the large
agricultural sector and also other sectors of the rural economy by extending their
branches into the rural areas.

• Facilitate the Government motive and force for economic development, by

providing/ arranging finance to the government through various methods like
direct credit to the Government Various Government undertakings and through
subscribing public debt and investing money in various Government securities.
The economic development of the country is possible by following the monetary
policy of the central bank (Ministry of Finance through the Reserve Bank of
India).

Hence, banking is the essential industry, which not only caters to the development of
trade, commerce and industry, but also helps in removing many obstacles in the way of
economic development. Commercial banks are oldest, biggest and fastest growing financial
intermediaries in India. Commercial banking in India is a unique system, the like of which
exists nowhere in the world. The truth of this statement becomes clear as one studies the

3
philosophy and approaches that have contributed to the evolution of the banking policy,
programmers and operations in India.

Capital is the chief factor of modern production and entrepreneurs are unable to help
without adequate funds. Therefore, only banks can help them. Banks mobilize the dormant
capital of the country for productive purposes. Commercial banks play an important role in
mobilizing the savings of economically surplus units, which are widely scattered. The savings
of economically surplus units, when pooled together in commercial banks, result in a large
reservoir of social capital. The commercial banks become a source of capital which is in short
supply in a developing economy like India9. It will be equally true to state that without the
development of sound commercial banking, underdeveloped countries cannot hope to join the
rank of advanced countries10. Commercial banking increases its significance in an
underdeveloped country like India, as it has resorted to economic planning.

An increasing rate of savings is essential for the increasing requirements of productive

use or can be invested in bank-deposits; Government securities, capital formation for a
developing country. The savings can be put to direct equities, bonds, etc. Unfortunately, in
under-developed countries savings are very low because their incomes are very low and or
financial institutions are inadequate. Further, rural people who belong to higher income
groups, their saving potential is high. Such income earners tend to hold their savings mainly
in currency and to some extent in jewellery, in land or in the form of loans and advances
given to unorganized market. Often, they do so because of such factors as their ignorance of
the availability of different types of financial assets in which can hold their savings.

It is here that commercial banks can play a pivotal role as intermediaries by bridging the
gap between savings and investments. They mobilize the idle and dormant capital of the
community, through branch expansion in unbanked and under banked areas and by
introducing a variety of deposit schemes to suit the needs of individual depositors and make it
available to various productive purposes. Economic development depends upon the diversion
of economic resources from consumption to capital formation. Thus, a higher rate of savings
and investment can help in accelerating the rate of capital formation in a developing
economy.

The economic progress of a nation and development of banking is invariably interrelated.

The Banking sector is an indispensable financial service sector supporting development plans

4
through channelizing funds for productive purpose, intermediating flow of funds from surplus
to deficit units and supporting financial and economic policies of government. The stability

of banking hence is a pre-requisite for economic development and resilience against financial
crisis.

HISTORY OF BANKING IN INDIA

From the first bank in India till today, the journey of Indian Banking System can be
classified into 3 distinct phases:

• Early phase of Indian Banks, before 1947

• Nationalization of banks and the banking reforms
• New phase of Indian banking system, after 1991

Phase 1

Banking system commenced in India with the foundation of Bank of Hindustan in

Calcutta (now Kolkata) in 1770 which ceased to operate in 1823. After that many banks but
were not successful like General bank of India (1786-1791) and Oudh Commercial bank
(1881-1958)- the first commercial bank of India. The East India Company established Bank
of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units
and called them as Presidency Banks. These three banks were amalgamated in 1921 and the
Imperial Bank of India, a bank of private shareholders was established. Later Imperial Bank
of India was renamed as the State Bank of India in 1955. While some other banks which are
successful and continue to lead even now like Allahabad bank was established by Indians, in
1865. Punjab national bank was set up in 1894 with headquarters in Lahore at that time.
Between 1906 and 1913. Bank of India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank and Bank of Mysore were set up. In April 1935, Reserve Bank of India
was formed based on the recommendation of Hilton Young Commission set up in 1926. In
this period most of the bank were small and suffered from the high rate of failures. As a
result, public confidence is low in these banks and deposit mobilization was very slow.

5
People continued to rely on the unorganized sector that is moneylenders and indigenous
bankers.

Phases 2

The government took major initiatives in banking sector reforms after Independence. The
main characteristic feature of this phase is the Nationalization of the bank. With view of
economic planning nationalization emerged as the effective measures. In the year 1949, 1st
January the Reserve bank of India was nationalized under the terms of the reserve Bank of
India Act,1948. The government of India came up with Banking Companies Act, 1949
which was later changed to the Banking Regulation Act, 1949 as per Amending Act of 1965,
which empowered the Reserve Bank of India to regulate, control, and inspect the banks in
India. The government of India constituted the State Bank of India to act as the principal
agent of RBI. Seven banks were nationalized in 1959 and they became subsidiaries of the
State Bank of India. Fourteen commercial banks were nationalized on 19 July,1969. Smt.
Indira Gandhi was the Prime Minister of India, during 1969. In the second phase of the
banking sector reforms, seven more banks were nationalized in 1980. The stated reason for
the nationalisation was to give government more control of credit delivery.

Phase 3

This period saw a remarkable growth in the process of development of banks with
liberalization of economic policies. In 1991 the Narasimhan Committee gave its
recommendations i.e. to allow the entry of private sector players into banking system.
Following this RBI gave license to 10 private entities, out of which few survived the market
demands, which are-ICICI, HDFC, Axis Bank, IndusInd Bank, DCB. In 1998, the
Narsimham committee again recommended entry for more private players. As the result, RBI
gave license to kotak Mahindra Bank in 2001 and Yes Bank in 2004. In 2013-14, 3rd round of
bank licensing took place and in 2015 IDFC bank and Bandhan Bank emerged. To further
financial inclusion RBI also proposed to set up two new kinds of banks that are Payments
Banks and Small Banks. Now the country is flooded with foreign banks and ATM station.
Efforts are put to give the customers the satisfactory services. Phone banking and net banking
are introduced. The entire system has become more convenient

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INDIAN BANKING SECTOR

Banking in India, in the modern sense, originated in the last decade of the 18th
century. the first bank was the Bank of Hindustan which was established in 1770 and
liquidated in 1829-32 after that General Bank of India was established in 1786 but failed in
1791.

The State Bank of India (SBI), the largest and oldest bank still in existence. It was
originated and started working as the Bank of Calcutta in the first decade of the 19th century
that is mid -June 1806. In 1806, it was renamed as the Bank of Bengal. The Bank of Bengal
was one of three Presidency Banks, the other two were the Bank of Bombay incorporated on
15 April 1840 and the Bank Among of Madras incorporated on 1st July 1843. All this three
Presidency banks were incorporated as joint stock companies and were the result of royal
charters. These three banks received the right to issue paper currency till 1861 with the Paper
Currency Act, the right was taken over by the government of India. The Presidency Banks
Merged on 27th January 1921, and the reorganised banking entity took as its name Imperial
Bank of India. The Imperial Bank of India after India’s independence became the State Bank
of India in 1955. Till that the Reserve Bank of India was established in 1935 under the
Reserve Bank of India Act 1934.

In 1960, the State Banks of India was control over of eight state associated banks under
the State banks of India Act, 1959 (Subsidiary Banks), these are called now its associate
banks. In 1969 the Indian Government nationalised 14 major private banks. In 1980, six more
private banks were nationalised.

Today, our banking system is mainly divided into scheduled and non-scheduled banks.
Scheduled banks are further divided into commercial banks and cooperative banks.
Commercial banks can be further classified into Nationalised Banks, State Bank of India and
its Associates, Private Banks, Regional Rural Banks, Foreign Banks. The scheduled banks are
those which include under the 2nd schedule of the Reserve Bank of India act, 1934. On other
hand, cooperative banks are classified into urban and rural.

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NON-PERFORMING ASSET (NPA)

A major threat of banking sector is prevalence of Non-Performing Assets (NPAs).

The Non-Performing Assets (NPAs) problem is one of the foremost and the most formidable
problems that have shaken the entire banking industry in India like an earthquake. Like a
cancer worm, it has been eating the banking system from within, since long.

In banking, NPA are loans given to doubtful customers who may or may not repay the
loan on time. There are two types of assets viz. performing and non-performing. Performing
loans are standard loans on which both the principle and interest are secured, and their returns
is guaranteed.

A non-performing asset in the banking sector may be referred to an asset not

contributing to the income of the bank or which does not generate income for the bank.
NonPerforming assets means the debt which is given by the Bank is unable to recover it is
called NPA. It meant if any bank given loan to the customer and if the customers do not
repay principal amount and interest till 90 days then such loans become Non-performing
assets (NPA). Thus, nonperforming assets are basically non-performing loans. Non-
Performing Asset (NPA) is a result of asset Liability mismatch. A NPA account in the books
of account is an asset as it indicates the amount receivable from the Defaulters. Banks are not
allowed to book any income from NPAs. They have to make provision for NPAs or keep
money aside in case they cannot collect from the borrower, which affects profitability
adversely.

NPA is a virus affecting banking sector. It affects liquidity and profitability, in addition
posing threat on quality of asset and survival of banks. Hence, this has been considered to be
the most challenging problem facing the banking and financial sectors.

DEFINITION OF NPA

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

8
 A Non-Performing Asset (NPA) was defined as a credit facility in respect of which the
interest and/or installment of principal has remained „past due‟ or a specified period of time.
The specified period was reduced in a phased manner as under-

9
 i.

ii.

iii. With effect from March 1993 – Four Quarters

With effect from March, 1994 – Three Quarters
iv. With effect from March, 1995 – Two Quarters
With effect from March, 2001 – 180 days
v. With effect from March, 2004 – 90 days

A Non-Performing asset (NPA) is a loan or an advance where;

vi.
vii.
interest and/ or instalment of principal remains overdue for a period of more than 90 days in
respect of a term loan, the account remains ‘out of order’ as indicated at paragraph 2.2 below,
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, the instalment of principal
or interest thereon remains overdue for two crop seasons for short duration crops, the
instalment of principal or interest thereon remains overdue for one crop season for long
duration crops, the amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitisation transaction undertaken in terms of guidelines on securitisation
dated February 1, 2006.
in respect of derivative transactions, the overdue receivables representing positive mark-
tomarket value of a derivative contract, if these remain unpaid for a period of 90 days from
the specified due date for payment.

In case of interest payments, banks should, classify an account as NPA only if the interest
due and charged during any quarter is not serviced fully within 90 days from the end of the
quarter.

In addition, an account may also be classified as NPA in terms of paragraph 4.2.4 of this Master
Circular.

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13
‘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 90 days 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.

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. This will apply to Government
guaranteed accounts also.

• However, interest on advances against Term Deposits, National Savings Certificates (NSCs),
Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to
income account on the due date, provided adequate margin is available in the accounts.

• In the absence of a clear agreement between the bank and the borrower for the purpose of
appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should
adopt an accounting principle and exercise the right of appropriation of recoveries in a
uniform and consistent manner
• On an account turning NPA, banks should reverse the interest already charged and not
collected by debiting Profit and Loss account and stop further application of interest.
However, banks may continue to record such accrued interest in a Memorandum account in
their books. For the purpose of computing Gross Advances, interest recorded in the
Memorandum account should not be taken into account.

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CHAPTER 2

13
 RESAERCH METHODOLY

The design of any research project requires considerable attention to the research methods and the
proposed data analysis. Within the section we have attempted to provide some information about how
to produce a research design for the study.

OBJECTIVE OF THE STUDY

➢ To understand the concept of non-performing assets of Indian banks.

➢ To study the general reasons for assets become NPA.
➢ To study the different methods adopted by RBI to look after NPA management.
➢ To study the impact of non-performing assets on operation of banks
➢ To know what steps are being taken by Indian banking sector to reduce non-performing assets.
➢ To evaluate the ratio of the non-performing of ICICI banks and STATE BANK OF INDIA
banks.

SCOPE OF THE STUDY

The present study of the non-performing assets is confined restricted to the boundary of Indian banks
with reference to ICICI bank and SBI bank.

➢ To understand the causes and effects of NPA.

➢ To analyse the past trends of NPA of ICICI bank and SBI bank.
➢ This can be applicable to know the reasons for increasing in NPAs

SOURCE OF DATA

Source of data is Secondary. Secondary data refers to data which is already been generated and is
available for use. The data about NPA and its Composition, classification of loan assets, advances of
ICICI bank and SBI bank is taken from annual reports.

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LIMITATION OF STUDY

➢ Since my study is based on secondary data, the practical operation as related to NPAs are
adopted by the banks are not learned.
➢ NPAs are changing with the time. The study is done in the present environment without
forecasting future developments.
➢ The study is based on secondary data as published in annual reports of the banks.
➢ The study, as limitations, is confined only to the selected and restricted indicators and the study
is confined only for the period pf seven years.

CHAPTER 3

REVIEW OF LITERATURE

NPA is burning topic for the banking sector and many authors tried to study the reasons of
NPA, the problems created by NPA and the impact of NPA on the banking sector, and moreover
came to a solutions or remedies of the growing problems of NPA. Several papers have written and
gone through, and this part of this paper is attempting to present a review of all are available in the

15
same areas of non-performing assets of public banks, private banks, and other banks. This survey has
conducted a study on the existing papers, articles, journals and reports provided by different authors,
groups and committees from time to time.

Ayub Ahamed Ks, Vishwaanath Panwar, 2016: This paper tries to compare NPAs of public and
private sector banks. The study tells that NPA of Public sector banks are higher than private sector
banks. Further various steps have taken by government to reduce NPA and it should be followed for
solving the NPA problems or otherwise it will affect the profitability of the banks.

VR Singh,2016, This paper is based on study of Non-Performing assets of commercial banks and its
recover in India. The study concludes that NPA is not the problem for the banks but for the economy.
Although government has taken various steps to reduce NPA but still there not satisfactory. The NPAs
level of our banks are still high than foreign banks. Banks management should speed the recovery
process, strict policy should be followed for solving the problem and government should also make
more provision for faster settlement of pending cases.

UM Mishra, 2017 the paper analyses the classification of loan assets of banks. The study concludes
that before sanctioning of loans bank needs have correct and complete information of the customers.
Banks should also have good credit appraisal system so as to prevent NPA from occurring.

CHAPTER 4

ASSET CLASSIFICATION

Loan assets of the banks are broadly classified as performing asset (Standard asset) and non-
performing assets. Banks are required to classify nonperforming assets further into the following
three categories based on the period for which the asset has remained nonperforming and the realis
ability of the dues:

i. Substandard Assets ii. Doubtful Assets

iii. Loss Assets Standard Assets:

16
 A standard asset is a performing asset. Standard assets generate continuous income and repayments
as and when they fall due. Such assets carry a normal risk and are not NPA in the real sense. So, no
special provisions are required for Standard Assets.

Substandard Assets

With effect from March 31, 2005, a substandard asset would be one, which has remained NPA for
a period less than or equal to 12 months. Such an asset will have well defined credit weaknesses that
jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.

Doubtful Assets

With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months. A loan classified as doubtful has all the weaknesses
inherent in assets that were classified as substandard, with the added characteristic that the weaknesses
make collection or liquidation in full, – on the basis of currently known facts, conditions and values –
highly questionable and improbable.

Loss Assets

A loss asset is one where loss has been identified by the bank or internal or external auditors or
the RBI inspection, but the amount has not been written off wholly. In other words, such an asset is
considered uncollectible and of such little value that its continuance as a bankable asset is not
warranted although there may be some salvage or recovery value.

PROVISIONING NORMS OF NPA

The provisions should be made on the basis of classification of assets into four different
categories as stated above i.e. standard, substandard, doubtful & loss assets.

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 Standard Assets

1. The provisioning requirements for all types of standard assets stands as below. Banks should make
general provision for standard assets at the following rates for the funded outstanding on global
loan portfolio basis:

i) direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at
0.25 per cent; ii) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent; iii)
advances to Commercial Real Estate – Residential Housing Sector (CRE - RH) at
0.75 per cent1 iv) 2.00 percent of advances to
v) Housing loans extended at teaser rates. However, after 1 year from the date on which the
rates are reset at higher rates, the provision should be 0.40%

vi) In case Restructuring accounts classified as standard advances at 2.00 per cent vii)
All other loans and advances not included in (a) (b) and (c) above at 0.40 per cent.

2. The provisions on standard assets should not be reckoned for arriving at net NPAs.

3. The provisions towards Standard Assets need not be netted from gross advances but shown
separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and
Provisions Others' in Schedule 5 of the balance sheet.

Substandard assets

1. A general provision of 15 percent on total outstanding should be made without making any
allowance for ECGC guarantee cover and securities available.
2. The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional
provision of 10 per cent, i.e., a total of 25 per cent on the outstanding balance. However, in view
of certain safeguards such as escrow accounts available in respect of infrastructure lending,
infrastructure loan accounts which are classified as sub-standard will attract a provisioning of 20
per cent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower
provisioning, the banks should have in place an appropriate mechanism to escrow the cash flows
and also have a clear and legal first claim on these cash flows. The provisioning requirement for
unsecured ‘doubtful’ assets is 100 per cent.
3. Unsecured exposure is defined as an exposure where the realisable value of the security, as
assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10

18
 percent, ab-initio, of the outstanding exposure. ‘Exposure’ shall include all funded and non-funded
exposures (including underwriting and similar commitments). ‘Security’ will mean tangible
security properly discharged to the bank and will not include intangible securities like guarantees
(including State government guarantees), comfort letters etc.

Doubtful assets

1. 100 percent of the extent to which the advance is not covered by the realisable value of the security
to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.
2. In regard to the secured portion, provision may be made on the following basis, at the rates ranging
from 25 percent to 100 percent of the secured portion depending upon the period for which the asset
has remained doubtful:

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 Period for which the advance has Provision requirement (%)
remained in ‘doubtful’ category
Up to one year 25
One to three years 40
With
More than three years 100 a
view to bringing down divergence arising out of difference in assessment of the value of security, in
cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external
agencies appointed as per the guidelines approved by the Board would be mandatory in order to
enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour
of the bank should be got valued once in three years by valuers appointed as per the guidelines
approved by the Board of Directors.

Loss assets

Loss assets should be written off. If loss assets are permitted to remain in the books for any
reason, 100 percent of the outstanding should be provided for.

TYPES OF NPA

A] Gross NPA

B] Net NPA

Gross NPA:

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines
as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of
all the non-standard assets like as sub-standard, doubtful, and loss assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio = Gross NPAs

Gross Advances

Net NPA:

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 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

GUIDELINES FOR THE CLASSIFICATION OF ASSETS

Broadly speaking, classification of assets into above categories should be done taking into
account the degree of well-defined weakness and the extent of time lag of dues.

▪ Banks should establish appropriate internal system to eliminate the tendency to delay or postpone
the identification of NPAs, especially in respect of high value accounts. The banks should fix a
minimum cut-off point to decide what would constitute a high value account depending upon their
business levels. Responsibility and validation levels for ensuring proper asset classification may
be fixed by the banks. The system should ensure that doubts in asset classification due to any
reason are settled through specified internal channels within one month from the date on which
the account would have been classified as NPA as per guidelines.

▪ Accounts with temporary deficiencies:

The Classification of an asset as NPA should be based on record of recovery. Banks should
not classify an advance account as NPA merely due to the existence of some deficiencies which
are temporary in nature such as non-availability of adequate drawing power based on the latest
available stock statement, balance outstanding exceeding the limit temporarily, non-submission
of stock statements and non-renewal of limits on the due date, etc. In the matter of classification
of accounts with such deficiencies bank may follow the following guidelines:
i. Banks should ensure that the drawing in the working capital accounts are covered by
adequacy of current assets, since current assets are first appropriated in times of distress.
Drawing power is required to be arrived as based on the stock statement, which is current.
21
 However, considering the difficulties of large borrowers, stock statement relied upon the banks
for determining drawing power should not be older than the three months. The outstanding in
the account based on the drawing power calculated from the stock statement older than three
months, would be deemed as irregular. A working capital account will become NPA if such
irregular drawings are permitted in the account for a continuous period of 90 days even though
the unit may be working or borrowers‟ financial position is satisfactory.

ii. In case of constraints such as non-availability of financial statements and other data from the
borrowers, the branch should furnish evidence to show that renewal/review of credit limits is
already on and would be completed soon. In any case, delay beyond three months is not
considered desirable as a general discipline. Hence, accounts where the regular/ad hoc credit
limits have not been reviewed/ renewed within 90 days from the due date/date of ad hoc
sanction will be treated as NPA.

▪ Accounts regularized near balance sheet date:

The asset classification of accounts where a solitary or few credits are recorded before the
balance sheet date should be handled with care and without the scope of subjectivity. Where the
accounts show the inherent weakness on the basis of data available, the account should be
deemed as NPA. In other genuine cases, the bank must submit satisfactory evidence to the
statutory auditors and inspecting officers about the manner of regularization of the account to
eliminate doubts on their performing status.

▪ Asset classification to be borrower-wise and not facility wise:

i. It is difficult to envisage the situation when only one facility to the borrower becomes the
problem credit and not others. Therefore, all the facilities granted by the bank to a borrower
will have to be treated as NPA and not the particular facility or part thereof which has
become irregular.

ii. If the debits arising out of development of letter of credit or invoked guarantees are parked
in a separate account, the balance outstanding in the borrower’s principle operating account
for the purpose of application of prudential norms.

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▪ Advances under consortium arrangement:
Asset classification of accounts under consortium should be based on the record of recovery
of the individual member bank. Where the remittances from the borrower under consortium lending
arrangement are pooled with one bank and/or where the bank receiving remittances is not parting
with the share of other member banks, the account will be treated as not serviced in the books of
other member banks, and therefore be treated as NPA. The participating banks is the consortium
should, therefore, arrange to get their share of recovery transferred from the lead bank or get an
express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset
classification in their respective books.

▪ Accounts where there is erosion in the value of security:

i. A NPA need not go through the various stages of classification in case of serious credit
impairments and such assets should be straightway classified as doubtful or loss assets.
Erosion in the value of securities can be significant when the realizable value of the security
is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of
last inspection, as the case may be. Such NPAs may be straightaway classified under
doubtful category and provisioning should be made as applicable to doubtful assets.
ii. If the realizable value of the security, as assessed by the bank/approved valuers/RBI is less
than 10 percent of the outstanding in the borrower account, the existence of the security
should be ignored, and the asset should be straight away classified as a loss asset. It may be
either written off or fully provided for the bank.

▪ Agricultural Advances:
i. In respect of advances granted for agricultural purposes where interest and/or installment of
principal remains unpaid after it has become overdue for two harvest seasons but for a
period not exceeding two half-years, such an advance should be treated as NPA. The above
norms should be made applicable only in respect of short term agricultural loans for
production and marketing of seasonal agricultural crops such as paddy, wheat, oilseeds
sugarcane etc. but for the long-term duration crops, the loans will be treated as NPA, if the
installment of principal remains unpaid for one crop season beyond the due date. In respect
of other activities like horticulture, floriculture or allied activities such as animal husbandry,
poultry farming etc. and the assessment of NPA would be done as in the case of other
advances.

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 ii. Where natural calamities impair the repaying capacity of agricultural borrowers, banks may
decide their own relief measures-conversion of short-term loan into a term loan or re-
scheduling of the repayment periods; and /or sanctioning issued by RBI from time to time.

iii. In such cases of conversion or re-scheduling, the term loan as well as fresh short term loan
may be treated as current dues and need not to be classified as NPA. The classification of
these loans would thereafter be as per a new advance, governed by the revised terms and
conditions.

REASONS FOR AN ACCOUNT BECOMING NPA:

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the problem
of NPAs is more in public sector banks when compared to private sector banks and foreign banks.
The NPAs in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS

1. Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and
advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence
of non-recover, thereby reducing their profitability and liquidity.

2. Wilful Defaults
There are borrowers who are able to pay back 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.

24
3. Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and
then India is hit by major natural calamities thus making the borrowers unable to pay back their 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 our farmers depend on rain fall for cropping. Due to
irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying
the loans

4. Industrial sickness

Improper project handling, ineffective management, lack of adequate resources, lack of

advance technology, day to day changing govt. Policies give birth to industrial sickness. Hence the
banks that finance those industries ultimately end up with a low recovery of their loans reducing their
profit and liquidity.

5. Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow to
operate these activities. The banks recover the amount by selling of their assets, which covers a
minimum label. Thus, the banks record the non-recovered part as NPAs and has to make provision
for it.

6. Change on Government 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. E.g. The fallout of
handloom sector is continuing as most of the weaver’s Co-operative societies have become defunct
largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central govt.
to revive the handloom sector has not yet been implemented. So the over dues due to the handloom
sectors are becoming NPAs.

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INTERNAL FACTORS

1. Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial
banks since long. 1) Principles of safety 2) Principle of liquidity 3) Principles of profitability. By
safety it means that the borrower is in a position to repay the loan principal and interest. The
repayment of loan depends upon the borrowers: a) Capacity to

pay b) Willingness to pay

Capacity to pay depends upon: Tangible assets and Success in business. Willingness to pay
depends on: Character, Honest, Reputation of borrower. The banker should, therefore 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.

2. Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis cannot be taken. Proper Management Information System (MIS) and
financial accounting system is not implemented in the banks, which leads to poor credit collection,
thus NPA. All the branches of the bank should be computerized.

3. Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in
NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and
financial soundness and credit worthiness of the borrower.

• Banks should consider the borrowers own capital investment.

• It should collect credit information of the borrowers from a. From bankers b. Enquiry from
market/segment of trade, industry, business and from external credit rating agencies
• Analyse the balance sheet True picture of business will be revealed on analysis of profit/loss
a/c and balance sheet.

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 • Purpose of the loan When bankers give loan, he should analyse the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should
analyse the profitability, viability, long term acceptability of the project while financing.

4. Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the
bank gives advances to those who are not able to repay it back. They should use good credit appraisal
to decrease the NPAs.

5. Managerial deficiencies

The banker should always select the borrower very carefully and should take tangible assets
as security to safe guard its interests. When accepting securities banks should consider the- 1)
Marketability 2) Acceptability 3) Safety 4) Transferability. The banker should follow the
principle of diversification of risk based on the famous maxim “do not keep all the eggs in one
basket”; it means that the banker should not grant advances to a few big farms only or to concentrate
them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or
industries affected adversely, the overall position of the bank will not be affected.

6. Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.

7. Re loaning process

Non-remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and
CCBs and PACs, the NPAs of OSCB is increasing day by day.

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 The origin of the burgeoning problem of NPAs lies in the quality of managing credit risk by the
banks concerned. What is needed is having adequate preventive measures in place namely, fixing pre-
sanctioning appraisal responsibility and having an effective postdisbursement supervision. Banks
concerned should continuously monitor loans to identify accounts that have potential to become non-
performing.

To start with, performance in terms of profitability is a benchmark for any business enterprise
including the banking industry. However, increasing NPAs have a direct impact on banks
profitability as legally banks are not allowed to book income on such accounts and at the same time
banks are forced to make provision on such assets as per the Reserve Bank of India (RBI) guidelines.
Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through
various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of burgeoning
Non-performing assets

EARLY SYMPTOMS

By which one can recognize a performing asset turning into non- performing asset four categories
of early symptoms

A. Financial

• Non- payment of the very first installment in case of term loan.

• Bouncing of cheque due to insufficient balance in the accounts.
• Irregularity in installment.
• Irregularity of operations in the accounts.
• Unpaid overdue bills.
• Declining current ratio.
• Payment which does not cover the interest and principal amount of that installment.
• While monitoring the accounts it is found that principal amount is diverted to sister concern
or parent company.

B. Operational and physical:

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 • If information is received that the borrower has either initiated the process of winding up or
are not doing the business.

• Overdue receivables.
• Stock statement not submitted on time.
• External non- controllable factor like natural calamities in the city where borrower conduct
his business.
• Frequent changes in plan.
• Nonpayment of wages.

C. Attitudinal changes

• Use for personal comfort, stocks and shares by borrowers.

• Avoidance of contact with bank.
• Problem between partners.

D. Others

• Changes in government policies.

• Death of borrowers.
• Competition in the market.

IMPACT OF NPAs

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, the banks first needs to think is it possible to avoid NPA, if not be
then it is to look at the factor responsible for it and managing those factors. In the globalization era,
banking and financial sectors get high priority. Indian banking sector is having a serious problem due

29
to non-performing assets. The earning capacity and profitability of the bank are highly affected. While
the primary function of banks is to lend funds as loans to various sectors such as agriculture, trade,
personal loans, housing loans etc., In recent times the banks have become very careful in increasing
loans because of the main reason of increasing non-performing assets (NPAs). NPA is cleared as an
advance for which interest or repayment of principal or both remain outstanding for a period of more
than 90 days. The level of NPA act as an indicator viewing the bankers credit risks and competence of
allocation of resource. Non-performing Asset is an important factor in the analysis of financial
performance of a bank as it results in decreasing boundary and higher provisioning requirement for
doubtful debts. Various banks from different groups mutually provide advances to different sectors like
agricultural, priority sector, public sector and others.

The accumulation of huge non-performing assets in banks has assumed great importance. The
depth of the problem of bad debts was assumed great importance, which was first realized only in early
1990s. 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 must 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 academics because it is
generally felt that NPAs reduce the profitability of a bank, 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 Financial
Institutions have the freedom to design and implement their own policies for recovery and write-off
incorporating compromise and negotiated settlements. The impact of NPAs on banks is significantly
visible on the following areas:

1. 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 doesn’t affect current profit but also future stream of profit, which may lead to
loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low
Return on Investment (ROI), which adversely affect current earning of bank.

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2. LIQUIDITY

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

3. INVOLVEMENT 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. Now a day’s banks have special employees to deal
and handle NPAs, which is additional cost to the bank.

4. CREDIT LOSS

Bank is facing problem of NPA then it adversely affects the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to the people
who are putting their money in the banks.

CONSEQUENCES OF NPA

▪ Owners do not receive a market return on their capital and in the worst case, if the banks fail,
owners lose their assets. In modern times this may affect a broad pool of shareholders.

▪ Depositors do not receive a market return on saving. In the worst case if the bank fails,
depositors lose their assets or uninsured balance.
▪ 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.
▪ 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.

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 ▪ Non-performing asset may spill over the banking system and contract the money stock, which
may lead to economic contraction. This spillover effect can channelize through liquidity or
bank insolvency:
a) when many borrowers fail to pay interest, banks may experience liquidity shortage.
This can jam payment across the country.
b) Illiquidity constraints bank in paying depositors.
c) Under-capitalized banks exceed the bank’s capital base.

The most important business implication of the NPAs is that it leads to the credit risk
management assuming priority over other aspects of bank’s functioning. The bank’s whole machinery
would thus be pre-occupied with recovery procedures rather than concentrating on expanding business.
RBI, through various circulars, stipulated guidelines to manage NPA. The higher NPA engage banking
staff on NPA recovery measures that includes filing suits to recover loan amount instead of devoting
time for planning to mobilization of funds. Thus, NPA impact the performance and profitability of
banks. The most notable impact of NPA is change in banker’s sentiments which may hinder credit
expansion to productive purpose. Banks may incline towards more risk-free investments to avoid and
reduce riskiness, which is not conducive for the growth of economy24.

Banks cannot credit income to their profit and loss account to the debit of loan account unless
recovery thereof takes place. Interest or other charges already debited but not recovered have to be
provided for and provision on the amount of gross NPAs also to be made. All the loan accounts of the
borrower would be treated as NPA, if one account is NPA. Many authors emphasized the straddling
impact of NPA and stressed its impact on loan growth25. A higher NPA force banks to invest in risk-
free investments, thus directly affect the flow of funds for productive purpose. Issues relating to
NPA affect all sectors (in particular if parallel issues with defaulting trade credit is also considered).
The most serious impact, however, is on the financial institutions, which tend to own large portfolios,
indirectly; the customers of these financial intermediaries are also implicated; deposit holders,
shareholders and so forth. Add to this, NPA is not only affecting the banks and its intermediaries, it is
having impact on the development of the nation as well. For a bank, NPA means unsettled loan, for
which they have to incur financial losses. The cost for recovering NPA is as well considerable. There
are banking failures on account of the mounting NPA since it is affecting the profitability and long
run survival of the bank.

The NPA results in deleterious impact on the return on assets in the following ways.
The interest income of banks will fall, and it is to be accounted only on receipt basis.

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 ▪ Banks profitability is affected adversely because of the provision of doubtful debts and
consequent write off as bad debts.
▪ Return on Investment (ROI) is reduced.
▪ The capital adequacy ratio is disturbed as NPAs are entering into the calculation.
▪ The cost of capital will go up.
▪ The assets and liability mismatch will widen.
▪ The economic value additions (EVA) by banks gets upset because EVA is equal to the net
operating profit minus cost of capital and ▪ It limits recycling of the funds.

PREVENTIVE MEASURES FOR NPA

• Early Recognition of the Problem:

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late
to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues.
Identification of weakness in the very beginning that is : When the account starts showing first signs of
weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the
potential of revival may be done on the basis of a technoeconomic viability study. Restructuring should
be attempted where, after an objective assessment of the promoter’s intention, banks are convinced of a
turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it
is better to facilitate winding up/ selling of the unit earlier, so 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 banker. Here the role of frontline officials
at the branch level is paramount as they are the ones who has intelligent inputs with regard to
promoters’ sincerity, and capability to achieve turnaround. 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 all financial transaction
or business transaction, books of account in order to ascertain real factors that contributed to sickness
of the borrower. Banks may have penal of technical experts with proven expertise and track record of
preparing techno-economic study of the project of the borrowers.

33
 Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a special limit to
such type of cases should be decided. This will obviate the need to route the additional funding through
the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.

• 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 promoter’s commitment, has to be adequate in terms of extend of additional
funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible,
and bank may look at the exit option.

• 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’s fortunes. A bank may
commit additional finance to an align unit only after basic viability of the enterprise also in the
context of quality of management is examined and confirmed. Where the default is due to deeper
malady, viability study or investigative audit should be done – it will be useful to have consultant
appointed as early as possible to examine this aspect. A proper techno- economic viability study must
thus become the basis on which any future action can be considered.

• Multiple Financing
A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified
approach by all the lending banks/ FIs as also sharing of all relevant information on the

34
 borrower would go a long way toward overall success of rehabilitation exercise, given the
probability of success/failure.
B. In some default cases, where the unit is still working, the bank should make sure that it captures
the cash flows (there is a tendency on part of the borrowers to switch bankers once they default,
for fear of getting their cash flows forfeited), and ensure that such cash flows are used for
working capital purposes. Toward this end, there should be regular flow of information among
consortium members. A bank, which is not part of the consortium, may not be allowed to offer
credit facilities to such defaulting clients. Current account facilities may also be denied at non-
consortium banks to such clients and violation may attract penal action. The Credit Information
Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on
defaulting borrowers once the setup becomes fully operational.

C. In a forum of lenders, the priority of each lender will be different. While one set of lenders may
be willing to wait for a longer time to recover its dues, another lender may have a much
shorter timeframe in mind. So, it is possible that the letter categories of lenders may be
willing to exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any
plan for restructuring/rehabilitation may take this aspect into account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a

timely and transparent system for restructuring of the corporate debt of Rs. 20 crores and
above with the banks and FIs on a voluntary basis and outside the legal framework. Under
this system, banks may greatly benefit in terms of restructuring of large standard accounts
(potential NPAs) and viable sub-standard accounts with consortium/multiple banking
arrangements.

STRATEGIES FOR MANAGEMENT OF NPAS

Indian commercial banks are adopting the measures to reduce and control the NPAs in
accordance with the recommendations of RBI. These strategies are necessary to control NPAs.
Preventive measures are to prevent the asset from becoming a non-performing asset.
Banks has to concentrate on the following to minimize the level of NPAs.

A) Preventive Management B) Curative Management

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A) Preventive Management
Preventive measures are to prevent the asset from becoming a non-performing asset.
Banks has to concentrate on the following to minimize the level of NPAs.

1) Early Warning Signals (EWS)

The origin of the flourishing NPAs lies in the quality of managing credit assessment, risk
management by the banks concerned. Banks should have adequate preventive measures, fixing pre-
sanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks
should continuously monitor loans to identify accounts that have potential to become non-
performing.

It is important in any early warning system, to be sensitive to signals of credit deterioration.

A host of early warning signals are used by different banks for identification of potential NPAs. Most
banks in India have laid down a series of operational, financial, transactional indicators that could
serve to identify emerging problems in credit exposures at an early stage. Further, it is revealed that
the indicators which may trigger early warning system depend not only on default in payment of
installment and interest but also other factors such as deterioration in operating and financial
performance of the borrower, weakening industry characteristics, regulatory changes, and general
economic conditions. Early warning signals can be classified into five broad categories viz: (A)
Financial, (B) Operational, (C) Banking, (D) Management and (E) External factors.

A. Financial warning signals:

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: Persistent irregularity in the account, Default in repayment
obligation, Devolvement of LC/invocation of guarantees, Deterioration in
liquidity/working capital position, Substantial increase in long term debts in relation to
equity and declining sales.

B. Operational signals:

Following operational signals are captured by some of the banks: Operating

losses/net losses, rising sales and falling profits, Disproportionate increase in overheads
36
 relative to sales, rising level of bad debt losses Operational warning signals, Low activity
level in plant, Disorderly diversification/frequent changes in plan, Non-payment of
wages/power bills, Loss of critical customer/s, Frequent labor problems, Evidence of aged
inventory/large level of inventory.

C. Banking related signals:

Following are the banking related signals: Declining bank
balances/declining operations in the account, Opening of account with other bank, Return
of outward bills/dishonored cheque, Sales transactions not routed through the account,
frequent requests for loan, frequent delays in submitting stock statements, financial data,
etc.

D. Management related warning signals:

These following signals are related with management: Lack of co-operation from
key personnel, Change in management, ownership or key personnel, Desire to take undue
risks, Family disputes, Poor financial controls, Fudging of financial statements, Diversion
of funds, etc.

E. Signals relating to external factors:

Signals like Economic recession, Emergence of new competition,

Emergence of new technology, Changes in government / regulatory policies, Natural
calamities are related to external factors

2) Know your client (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.
The frequency of such visits depends on the nature and needs of relationship.

3) Credit Assessment and Risk Management Mechanism

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 Credit assessment and Risk management mechanism are ever lasting solution to the problem of
NPAs. Managing credit risk is a much more forward-looking approach and is mainly concerned
with managing the quality of credit portfolio before default takes place. The documentation of
credit policy and credit audit immediately after the sanction is necessary to upgrade the quality of
credit appraisal in banks. In a situation of liquidity overhang the enthusiasm of the banking
system is to increase lending with compromise

on asset quality, raising concern about adverse selection and potential danger of addition to the
NPAs stock. It is necessary that the banking system is equipped with prudential norms to
minimize if not completely avoid the problem of credit risk and develop an effective internal
credit risk models for the purpose of credit risk management.

4) Organizational restructuring
With regard to internal factors leading to NPAs the onus for containing the same rest with the
bank themselves. These will necessities organizational restructuring improvement in the
managerial efficiency, skill up gradation for proper assessment of credit worthiness and a change
in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the
last resort.

5) Reduce Dependence on Interest

The Indian banks are largely depending upon lending and investments. The banks in the
developed countries do not depend upon this income whereas 86 percent of income of Indian
banks is accounted from interest and the rest of the income is fee based. The banker can earn
sufficient net margin by investing in safer securities though not at high rate of interest. It
facilitates for limiting of high level of NPAs gradually. It is possible that average yield on loans
and advances net default provisions and services costs do not exceed the average yield on safety
securities because of the absence of risk and service cost.

6) 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
38
 correctable but warrant banks‟ closer attention. The categorization of such accounts in watch list or
special mention category provides early warning signals enabling Relationship Manager or Credit
Officer to anticipate credit deterioration and take necessary preventive steps to avoid their slippage
into non-performing advances.

7) 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 when funds
have been utilized for purposes other than those for which finance was granted. The list of willful
defaulters is required to be submitted to Securities Exchange Board of India (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. RBI has advised
lenders to initiate legal measures including criminal actions, wherever required, and undertake a
proactive approach in change in management, where appropriate.

B) CURATIVE MANAGEMENT

The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs
are released for recycling. The Central government and RBI have taken steps for controlling incidence
of fresh NPAs and creating legal and regulatory environment to facilitate the recovery of existing NPAs
of banks. They are as follows: 1) One Time Settlement Schemes/Compromise Settlement Schemes

This scheme covers all sectors sub-standard assets, doubtful or loss assets as on 31st March
2000. 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) Lok Adalat’s or People’s Courts

Lok Adalat’s are voluntary agencies created by the State Government to assist in matters of
loan compromise. Lok Adalat institutions help banks to settle disputes involving account in

39
“doubtful” and “loss” category, with outstanding balance of Rs.5 lakh for compromise settlement under
Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases
of NPAs of Rs. 10 lakhs and above. This mechanism has proved to be quite effective for speedy justice
and recovery of small loans. The progress through this channel is expected to pick up in the coming
years.

3) Debt Recovery Tribunals (DRTs)

The Debt Recovery Tribunals have been established by the Government of India under an Act of
Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts due to banks and
financial institutions. The Debt Recovery Tribunal is also the appellate authority for appeals filed
against the proceedings initiated by secured creditors under the Securitization and Reconstruction of
Financial Assets and Enforcement of Security Interest Act.

The recovery of debts due to banks and financial institution passed in March 2000 has helped in
strengthening the function of DRTs. Provision for placement of more than one recovery officer, power
to attach defendant’s property/assets before judgment, penal provision for disobedience of tribunal’s
order or for breach of any terms of order and appointment of receiver with power of realization,
management, protection and preservation of property are expected to provide necessary teeth to the
DRTs and speed up the recovery of NPAs in the times to come.

DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs,
have not been able make much impact on loan recovery due to variety of reasons like inadequate
number, lack of infrastructure, under staffing and frequent adjournment of cases. It is essential that
DRT mechanism is strengthened and vested with a proper enforcement mechanism to enforce their
orders. Non-observation of any order passed by the tribunal should amount to contempt of court, the
DRT should have right to initiate contempt proceedings. The DRT should empower to sell asset of the
debtor companies and forward the proceeds to the winding up court for distribution among the lenders.

4) Securitization and Reconstruction of Financial Assets and Enforcement of Security

Interest (SARFAESI) Act, 2002

The Government has passed the SARFAESI Act on 21 June 2002 in order to give teeth to the
banks to proceed against the “willful defaulter” and affect recoveries without the intervention of
courts and tribunals. Securitization is a relatively new concept that is taking roots in India of late. It is
still in its infancy with only a few market players. Securitization is considered an effective tool for
improvement of capital adequacy. It is also seen as a tool for transferring the reinvestment risk, apart
from credit risk helping the banks to maintain proper match between assets and liabilities.
Securitization can also help in reducing the risk arising out of credit exposure norms and the
40
imbalances of credit exposure, which can help in the maintenance of healthy assets. The SARFAESI
Act intends to promote Securitization, pool together NPAs of banks to realize them and make
enforcement of Security Interest Transfer.

The SARFAESI Act-2002 is seen as a booster, initially, for banks in tackling the menace of
NPAs without having to approach the courts. With certain loopholes still remaining in the act, the
experiences of banks were that the Act in its present form would not serve the envisaged objective of
optimum recovery of NPAs, particularly with the hard-core NPA borrowers dragging the banks into
endless litigation to delay the recovery process. The Supreme Court decision in regard to certain
proviso of the SARFAESI Act also indicated this view.

RECOVERY ACTION AGAINST LARGE NPAs

Among the various channels of recovery available to banks for dealing with bad loans, the SARFAESI
Act and the Debt Recovery Tribunals (DRTs) have been the most effective in terms of amount
recovered. The amount recovered as percentage of amount involved was the highest under the DRTs,
followed by SARFAESI Act. The RBI has directed the public sector bank to examine all cases of
willful default of Rs. One crore and above and file criminal cases against willful defaulters. The board
of directors are requested to review NPAs accounts of one crore and above with special reference to fix
staff accountability in individually.

SALE AND PURCHASE OF NPAs

For providing an additional option and developing a healthy secondary market for NPAs,
guidelines on sale/purchase of NPAs were issued in July 2005. The sale/purchase of NPA covers the
procedure for purchase/sale of non-performing financial assets (NPFA) by banks, including valuation
and pricing aspects; and prudential norms relating to asset classification, provisioning, accounting of
recoveries, capital adequacy and exposure norms and disclosure requirements.

41
 CHAPTER 5

DATA ANALYSIS AND INTERPRETATION

1. ICIC BANK

ICICI Bank Limited (Industrial Credit and Investment Corporation of India) is an Indian
multinational banking and financial services company headquartered in Mumbai, Maharashtra. In
2014, it was the second largest bank in India in terms of assets and third in term of market
capitalisation. It offers a wide range of banking products and financial services for corporate and
retail customers through a variety of delivery channels and specialised subsidiaries in the areas of
investment banking, life, non-life insurance, venture capital and asset management. The bank
42
currently has a network of 4867 branches and 14417 ATMs across India and has a presence in 19
countries including India.

ICICI Bank is one of the Big Four banks of India. The bank has subsidiaries in the
United Kingdom and Canada; branches in United States, Singapore, Bahrain, Hong Kong, Sri Lanka,
Qatar, Oman, Dubai International Finance Centre, China and South Africa; and representative offices in
United Arab Emirates, Bangladesh, Malaysia and Indonesia. The company's UK subsidiary has also
established branches in Belgium and Germany.

43
 Bandra Kurla Complex, Mumbai

Type Public
HISTORY
Traded as • BSE: 532174 OF ICICI
• NSE: ICICIBANK BANK
• NYSE: IBN
• BSE SENSEX Constituent
• CNX Nifty Constituent
Industry • Banking
• Financial services
1955; 63 years ago,
Founded

Mumbai, Maharashtra, India[1]

Headquarters

Area served Worldwide

Key people Girish Chandra Chaturvedi (Chairman)

Sandeep Bakhshi (MD & CEO)

Services Retail Financial Services

Card Services
Commercial Banking

Operating income ₹28,951 crore(US$4.0 billion) (2018)[4]

Net income ₹7,712 crore (US$1.1 billion) (2018)[4]

₹11.2 trillion (US$160 billion) (2018)[4]

Total assets

Number of 81,548 (2018)[5]

employees

ICICI Bank was established by the Industrial Credit and Investment Corporation of India
(ICICI), an Indian financial institution, as a wholly owned subsidiary in 1994. The parent company
was formed in 1955 as a joint-venture of the World Bank, India's publicsector banks and public-sector
insurance companies to provide project financing to Indian industry. The bank was founded as the
Industrial Credit and Investment Corporation of India Bank, before it changed its name to the
abbreviated ICICI Bank. The parent company was later merged with the bank. ICICI Bank launched
internet banking operations in 1998.

44
 ICICI's shareholding in ICICI Bank was reduced to 46 percent, through a public offering of shares
in India in 1998, followed by an equity offering in the form of American
Depositary Receipts on the NYSE in 2000. ICICI Bank acquired the Bank of Madura Limited in an all-
stock deal in 2001 and sold additional stakes to institutional investors during 2001-02.

In the 1990s, ICICI transformed its business from a development financial institution offering only
project finance to a diversified financial services group, offering a wide variety of products and
services, both directly and through a number of subsidiaries and affiliates like ICICI Bank. In 1999,
ICICI become the first Indian company and the first bank or financial institution from non-Japan Asia
to be listed on the NYSE.

In October 2001, the Boards of Directors of ICICI and ICICI Bank approved the merger of ICICI
and two of its wholly owned retail finance subsidiaries, ICICI Personal Financial Services Limited and
ICICI Capital Services Limited, with ICICI Bank. The merger was approved by shareholders of ICICI
and ICICI Bank in January 2002, by the High Court of Gujarat at Ahmedabad in March 2002 and by
the High Court of Judicature at Mumbai and the Reserve Bank of India in April 2002.

In 2008, following the 2008 financial crisis, customers rushed to ICICI ATMs and branches in
some locations due to rumours of an adverse financial position of ICICI Bank. The Reserve Bank of
India issued a clarification on the financial strength of ICICI Bank to dispel the rumours.

PRODUCTS OF ICICI BANK

Channels
ICICI Bank has the following channels through which it offers its products and services to its
customers.
• Branches
• ATMs
• Internet Banking
• Mobile Banking
• Phone Banking

45
ICICI Bank Products and Services
ICICI Bank offers a host of products and services to its clients, which include Deposits, Loans,
Cards, Investments, Insurance, Demat, NRI Services and Online Services etc.

Deposits
Following deposits are offered

• Savings Account
Savings account is the most convenient way of saving money and earning interest on it along
with enjoying enough liquidity. ICICI Bank makes saving even more rewarding by offering a higher
rate of interest. A complimentary debit card is offered to the account holders which gives them access
to the network of ATMs throughout the country. These cards also let the users save more in the form of
rewards and cashbacks. ICICI Bank presents a varied range of savings bank accounts and customers
can apply for these instantly through the online method.

• Fixed Deposit
one of the best ways of investing money for assured returns is fixed deposit. Open a fixed deposit
account with ICICI Bank and watch your money grow over a period of 7 days or a decade. You can opt
for a traditional plan or a reinvestment plan. A traditional one lets you earn interest monthly/quarterly
while in case of reinvestment plans the interest will be compounded quarterly and reinvested with the
principal amount. ICICI Bank also offers the loan against FD facility under which you can avail a
loan up to 90% of the value of your fixed deposit. Nomination facility, attractive interest rates and
convenient booking are a few other reasons why you should opt for ICICI Bank fixed deposits.

OTHER DEPOSITS ARE AS FOLLOW

• Special Savings Account

• Life Plus Senior Citizens Savings Account
• Security Deposits
• Recurring Deposits
• Tax-Saver Fixed Deposit
• Young Stars Savings Account
• Child Education Plan
• Salary Account
• Advantage Woman Savings Account
• EEFC Account
• Resident Foreign Currency (Domestic) Account

46
• Privilege Banking
• No Frills Account
• Rural Savings Account
• People's Savings Account
• Self Help Group Accounts • Outward Remittance
• Freedom Savings Account
• Family Banking

Loans
ICICI Bank offers following loan facilities:

• Home Loans
• Loan Against Property
• Personal Loans
• Car Loans
• Two-Wheeler Loans
• Commercial Vehicle Loans
• Loans Against Securities
• Loan Against Gold Ornaments
• Pre-approved Loans

ICICI Bank Credit Cards

The provision of paying for an expensive commodity in easy installments is the basic
advantage of using a credit card. An ICICI Credit Card provides the facility of cash, convenience and
a range of benefits, anywhere in the world.

The benefits associated with ICICI Bank Credit cards are:

• Free cards for a lifetime

• Insurance benefits
• Global emergency assistance service
• Discounts
• Utility payments
• Travel discounts and a few others.

ICICI Bank also offers a range of cards, each designed for a specific purpose as
follows:

47
 • Premium Card
• Co-branded Card
• Classic Card
• Affinity Card
• Picture Card
• Corporate Card
• EMI Card
• Preferred Card
• Value for Money Card

The Premium Credit Card from ICICI Bank provides the card bearer, the benefits of owning
an exclusive Credit Card for his/her convenience and usage. The card includes special deals to
complement the bearer's lifestyle. Other cards in this category include Super Gold Credit Cards,
Platinum Credit Cards along with Travel Cards for Airmiles, the best holiday packages and air
tickets. A Golf Credit Card comes with a free membership of the Indian Golf Union. The Co-Branded
Credit Card provides access to various useful commodities the consumption of which would
otherwise be expensive. For example, an ICICI Bank Co-Branded Card of a departmental chain can
enable the consumer to buy commodities at a lesser cost.
The Classic Credit Card category comprises the following:
• ICICI Bank Sterling Silver Credit Card
• ICICI Bank - American Express Green Credit Card
• ICICI Bank Visa Mini Card
• ICICI Bank Online Credit Card
EMI Credit Card provides unique credit facility, where the customer's monthly EAD (EMI
Amount Due) is fixed and inclusive of all charges. Any incremental purchases will not increase the
EAD paid by the customer but only result in the proportionate increase in the tenure of repayment.
The Value for Money Credit Card is the first in India of its kind. A no-frills Card packed with
benefits that matter. India's only internationally valid Value for Money Photo Card offers an
unmatched combination of features and convenience.
Thus as the introduction on credit card facility has brought about a revolution in the world of
purchases, the ICICI Credit Card has only taken this facility to the next level much to the
convenience of its millions of users worldwide.

ICICI Bank Investments Plans

48
 • ICICI Bank Tax Saving Bonds
• Mutual Funds
• Government of India Bonds
• Initial Public Offers (IPO) by Corporates
• Foreign Exchange Services
• ICICI Bank Pure Gold
• Senior Citizens Savings Scheme, 2004

Insurance Plans

• Home Insurance
• Health Insurance
• Health Advantage Plus
• Family Floater
• Personal Accident
• Travel Insurance
• Individual Overseas Travel Insurance
• Student Medical Insurance
• Motor Insurance
• Car Insurance
• Two-Wheeler Insurance
• Life Insurance
• ICICI Pru Lifetime Gold
• ICICI Pru Life State RP

NRI Services by ICICI Bank

Following services are offered to the NRIs:

• Money Transfer
• Bank Accounts
• Investments
• Home Loans
• Insurance
• Loans Against FD

49
 ICICI Mobile Banking

A user friendly automated service menu offers customers, a convenient access to their accounts
coupled with security. All the transactions are protected by a ATM PIN (Personal Identification
Number) which is a personal password to their respective Bank & Credit Card

Account and Tpin in case of Demat Account. Any additional assistance is provided by the Phone
Banking Officers (PBOs).
Self-Phone Banking (IVR) Access Mechanisms are as follows:

• For Deposits, customer needs to key-in his ATM or Debit Card Number and its corresponding ATM
PIN.
• For Credit Cards, customer needs to key-in his 16-digit Card Number and its corresponding ATM
PIN.
• For Demat Account Holders, customer needs to key-in his 14 Digit Demat Account Number and its
TPIN
• For Bond Account Holders, customer needs to key in the Bond Holder Number only. • All
the above facilities are obtained absolutely free of charge

Bank services:

• Account Balance
• Mini Statement
• Cheque Book Request
• Cheque Status Enquiry
• Stop Cheque Payment
• Utility Bill Payment
• Internet Userid
• Mobile banking Registration

Card Services:

• Outstanding Balance
• Details of Last Statement
50
• Details of Last Payment
• Last five Transactions
• Reward Points status

Demat Services:

• ISIN query
• Holding statement
• Transaction History
• Submitting Delivery Instructions
• Request for Instruction Booklet
• Information on Redemption:
• Information on Interest
• Information on Despatch of Bonds certificates

Other Services:

• Loss or Replacement of card

• Re-issue of ATM PIN
• Standing Instructions
• Complaints and suggestions
• Inquire about any ICICI Bank product

51
Ratio Analysis

The relationship between two related items of financial is known as ratio. A ratio is just one number
expressed in terms on another. The ratio is customarily expressed in their different ways. It may be
expressed as a proportion between the two figures. Second, it may be expressed in terms of
percentage. Third, it may express in terms of rate. The use of ratio become increasingly popular
during the last few years only. Originally, the bankers used the current ratio to judge the capacity of
borrowings business enterprises to repay the loan and make regular interest payments. Today it has
assumed to be important tools that anybody connected with the business turns to ratio for measuring
the financial strength and earning capacity of business.

Gross NPA Ratio

Gross NPA Ratio is the ratio of gross advances of the Bank. Gross is the sum of all loan assets
that are classified as NPA as per RBI guidelines, the ratio is to be counted in terms of percentage and
the formula for GNPA is as follows

Gross NPA Ratio = Gross NPAs

Gross Advances

TABLE 1

GROSS NPA RATIO

Gross NPA Gross Advances Gross NPA Ratio
Year Gross NPA Ratio GRAPH
(in millions) (in millions) (%)
1
12.00%
2012 94753 2537276 3.73
10.39%
2013
10.00% 96078 2902494 3.31
9.08%
2014 105058 3387026 3.10
2015 150946 3875220 3.90
Gross NPA Ratio

8.00%
2016 262212 4352639 6.02% 6.02
6.00%
2017 421593 4642320 9.08
2018 3.73% 532401 5123952
3.90% 10.39
4.00% 3.31% 3.10%

2.00%

0.00% 52
2012 2013 2014 2015 2016 2017 2018
Year
INTERPRETATION:

This analysis indicates the gross NPA ratio of ICICI bank from 2012 to 2018. As we know higher
the gross ratio, dangerous the position of banks. From above graph we can understand that the gross
NPA of ICICI bank in 2012 was 3.37% and after that it decreased in next two years but from 2015 it
started increasing every year and finally it has reached to 10.39% in 2018. This seems that ICICI
bank need to take more care, so it reduced the gross NPA.

NET NPA RATIO

The net NPA percentage is the ratio of NPA to net advances in which is to be deducted from the
gross advances. The provision is to be made for NPA account. The formula for that is.

Net NPA Ratio = Net NPAs *100

Net Advances

Table 2

Year Net NPA Net Advances (in

(In Million) Million) Net NPA Ratio (%)

2012 18608 2461131

NET NPA RATIO 0.76

2013 22306 2828722

Net NPA Ratio 0.79

2014
6.00 32980 3314946 5.640.99 5.71

2015
5.00 62555 3786828 1.65

2016 129630 4220057 3.07

4.00
Net NPA Ratio

2017 252168 4472894 3.07 5.64

3.00
2018 278235 4869786 5.71

2.00 1.65
53
0.99
1.00 0.76 0.79
 Years

INTERPRETATION

The above graph presents the Net NPA ratio of ICICI bank. It can be marked that the ratio is
continuously increasing i.e. from 0.76% to 5.71% in last seven years. The has failed to make
sufficient provision against NPAs.

Provision Ratio

Provision are to be made for to keep safety the NPA, and it directly effect on the gross profit of
the banks. The provision ratio is nothing, but total provision held for NPA to gross NPA of the banks.
The formula for that is:

Provision Ratio = Total Provision

Gross NPAs

Year Provision Gross NPA Provision Ratio

2012 76145 94753 80.36

2013 73772 96078 76.78

2014 72080 105058 68.61

2015 88392 150946 58.56

2016 132582 262212 50.56 54

2017 169426 421593 40.19

2018 254166 532401 47.74

Table 3

Graph 3

PROVISING RATIO
Provising Ratio
90.00
80.36
80.00 76.78
68.61
70.00
58.56
Provision Ratio

60.00
50.56 47.74
50.00
40.19
40.00
30.00
20.00
10.00
0.00
2012 2013 2014 2015 2016 2017 2018
year

55

INTERPRETATION
 This ratio indicates the degree of safety measures adopted by the banks. It has direct
bearing on the profitability, dividend and safety of shareholders’ fund,ision
if theratio
provis
less, it indicates that the banks has made under provision. The highest provisions
atio is r
showed by ICICI bank in
2012i.e.80.36%as compared to years. It can be seen that the
Sub-standard
provision ratio Assets Ratio in every year after 20122018
is decreasing but itinhas increased as compared
to 2017.

Substandard Asset Ratio = Total Substandard assets

Gross NPAs

SUBSTANDARAD ASSETS RATIO

Substandarad Assets Ratio
40.00
Substandard 34.09
35.00
Year gross advances Substandard Assets Ratio
substandarad Assets ratio

assets
30.00 95.63
15.15
2012
25.00 14.49
21.24 96.47 19.40
2013
20.00 18.72 19.40
17.24
15.1522.42 105.54 15.31 21.24
2014 13.95
15.00
152.42 17.24
2015 26.27
10.00
267.21 15.31
2016 40.91
5.00
425.52 34.09
2017 145.07
0.00
541.17 13.95
2018 2012 75.51 2013 2014 2015 2016 2017 2018
Years

Table 4

INTERPRETATION

56
 This analysis indicates the sub-standard assets ratio of ICICI banks. As lower the ratio more
advantages to the banks. From the above graph we can understand the ratio is highest in 2017 i.e. is
34.09% but it decreased to 13.95% in last year.

Doubtful Asset Ratio

Doubtful Assets Ratio = Total doubtful ratio

Gross NPAs

Table 5

Gross
Year Doubtful
advances
Asset Doubtful Asset Ratio
95.63 76.70
2012 73.35
96.47 70.39
2013 67.91
105.54 59.45
2014 62.74
152.42 66.02
2015 100.63
267.21 73.33
2016 195.94
425.52 60.89
2017 259.08
541.17 83.16
2018 450.03

57

DOUBTFUL ASSET RATIO

 Doubtful Asset Ratio
90.00 83.16
80.00 76.70
70.39 73.33
70.00 66.02

Doubtful Assets Ratio

59.45 60.89
60.00
50.00
40.00
30.00
20.00
10.00
0.00
2012 2013 2014 2015 2016 2017 2018
Years

INTERPRETATION

The above graph indicates the doubtful asset ratio of ICICI banks for last 7 years. The ratio of in
increased from 76.70% to 83.19% till 2018, which is not advantageous for the bank. In 2014 ratio
less i.e. 59.45%.

58
Loss Asset Ratio

Loss asset ratio = Total Loss Asset

Gross NPA

LOSS ASSETS RATIO

Loss Loss Assets ratio
Year Gross Advances Loss Assets Ratio
Assets
25.00
95.63 8.15
2012 7.79
201320.00 9.84 19.31 96.47 10.20
105.54
16.74 19.31
2014 20.38
Loss Assets Ratio

15.00 152.42 16.74

2015 25.52
267.21 11.36 11.36
2016 30.3610.20
10.00 8.15 425.52 5.02
2017 21.37
541.17 2.89
5.02
2018 5.00 15.63
2.89

0.00
2012 2013 2014 2015 2016 2017 2018
Years

INTERPRETATION

The above graph shows loss asset ratio of ICICI bank. The doubtful asset ratio is decreasing from
2015 which has decreased to 2.89 in 2018, which is good to the banks.

59
2. STATE BANK OF INDIA

The State Bank of India (SBI) is an Indian multinational, public sector banking and
financial services company. It is a government-owned corporation headquartered in Mumbai,
Maharashtra. The company is ranked 216th on the Fortune Global 500 list of the world's biggest
corporations as of 2017. It is the largest bank in India with a 23% market share in assets, besides a
share of one-fourth of the total loan and deposits market.

The bank descends from the Bank of Calcutta, founded in 1806, via the Imperial Bank of
India, making it the oldest commercial bank in the Indian subcontinent. The Bank of
Madras merged into the other two "presidency banks" in British India, the Bank of
Calcutta and the Bank of Bombay, to form the Imperial Bank of India, which in turn became the State
Bank of India in 1955. The Government of India took control of the Imperial Bank of India in 1955,
with Reserve Bank of India (India's central bank) taking a 60% stake, renaming it the State Bank of
India. In 2008, the government took over the stake held by the Reserve Bank of India.

State Bank Bhavna at Nariman Point in Mumbai

Type Public

Traded as NSE: SBIN

BSE: 500112
LSE: SBID
BSE SENSEX Constituent
CNX Nifty Constituent

Industry Banking, financial services

Founded June 1806, Bank of Calcutta

January 1921, Imperial Bank of India 60
1 July 1955, State Bank of India
2 June 1956, nationalization
 Headquarters Mumbai, Maharashtra

Area served Worldwide

State Bank
of India
Key people Rajnish Kumar (Chairman) Services

Products Consumer banking, corporate banking, finance and

insurance, investment banking, mortgage loans, private State Bank
of banking, private equity, savings, securities, asset India
management, wealth management, credit cards
Services are
most varied

Revenue ₹210,979 crores (US$29 billion) (2017) and

innovative
Operating ₹50,848 crores (US$7.1 billion) (2017) amongst all its
income

Net income ₹10,484 crores (US$1.5 billion) (2017)

Total assets ₹3,445,121 crores (US$480 billion) (2017)

Total equity ₹2.171 trillion (US$30 billion) (2016)

Owner Government of India (61.23%)

Number of 278,872 (2017)

employees

Website sbi.co.in

contemporaries. State Bank of India Services includes a host of products and services to suit all types
of consumers.

• Banking Subsidiaries- State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad
(SBH), State Bank of Indore (SBI), State Bank of Mysore (SBM), State Bank of Patiala
(SBP), State Bank of Saurashtra (SBS) and State Bank of Travancore (SBT).
• Foreign Subsidiaries - State bank of India International (Mauritius) Ltd. State Bank of India
(California), State Bank of India (Canada) and INMB Bank Ltd, Lagos.
• Non- banking Subsidiaries - SBI Capital Markets Ltd (SBICAP), SBI Funds Management
Pvt Ltd (SBI FUNDS), SBI DFHI Ltd (SBI DFHI), SBI Factors and Commercial Services Pvt
Ltd (SBI FACTORS) and SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)
• Joint ventures - SBI Life Insurance Company Ltd (SBI LIFE).
61
 Products & Services
• Personal Banking
• NRI Services
• Agriculture
• International
• Corporate
• SME
• Domestic Treasury

SBI Retail Banking

The following services are provided under Retail Banking:-

• Term Deposits
• Recurring Deposits
• Housing Loan
• Educational Loan
• Personal Loan
• For Pensioners
• Against Mortgage of Property
• Against Shares & Debentures
• Plus Scheme
• Medi-Plus Scheme
Apart from these, SBI also provides several other NRI services. The State Bank of India has its
presence all over India with 16,000 branches. Not only this, the bank has made its roots secured
internationally as well. At present, SBI has 131 branches in 32 countries all over the world.

SBI NRI Account

State Bank of India NRI Account as defined by FEMA can be opened by -

• An Indian citizen / Foreign National of Indian Origin resident outside India for purposes of
employment, carrying on business / vocation in circumstances as would indicate an intention to stay
outside India for an indefinite period.
• An individual, if stays less than 182 days in India, during the preceding financial year.

62
State Bank of India Loans
State Bank of India Loans disburses the following loan-products through its wide network of branches
in India and abroad. Loans to employees to buy shares of their companies.

• Home loans.
• SBI Saral Personal loans.
• Easy travel loans.
• Gram Nivas scheme.
• Car loan.
• Education loans.
• Property loans.
• Loan to pensioners.
• Loan against shares and debentures.
• Loan for earnest money deposits.
• Festival loans.
• Medi-plus scheme.
• Teachers-plus scheme.
• Tribal -plus scheme.
• Credit khazana.
• Rent plus.
• SBI career loans.

SBI Credit Cards Features

State Bank of India Credit Card offers the following features in serving its wide customer base:

• The State Bank of India Credit Card offers a Classic VISA card duly acceptable in India and
Nepal. It transfers all the advantages provided by the VISA Card.
• The present eligibility for applying for the State Bank of India Credit Card is ` 75,000 for
salaried and ` 60,000 p.a. for businessmen (kindly verify the rate with SBI before applying).
• SBI Credit Card is acceptable over 1,05,000 merchants in India and Nepal. The SBI Credit
Card is accepted to 117 cash-point locations in 57 cities from Leh to Port Blair.
• The daily withdrawal limit is ` 10,000.
• SBI Credit Card comes with an insurance of ‘2 lakhs on road’ and ‘4 lakhs by air’.

63
Ratio Analysis

Gross NPA Ratio

Gross NPA Ratio is the ratio of gross advances of the Bank. Gross is the sum of all loan assets that
are classified as NPA as per RBI guidelines, the ratio is to be counted in terms of percentage and the
formula for GNPA is as follows

Gross NPA Ratio = Gross NPAs

Gross Advances

64
 Year Gross NPA Gross Advances Gross NPA Ratio

2012 39676 867578 4.57

2013 51189 1045616 4.90

2014 61605 1209828 5.09

2015 56725 1300026 4.36

2016 98172 1463700 6.71

2017 112342 1571078 7.15

2018 223427 1934880 11.55

GROSS NPA RATIO

Gross NPA Ratio
14.00

12.00 11.55

10.00
Gross NPA Ratio

8.00 7.15
6.71
6.00 4.90 5.09
Year 4.57 Net NPA Net advances
4.36 Net NPA Ratio
4.00
2012 15818 843720 1.87
2.00
2013 21956 1016383 2.16
0.00
2014 31096 1179319 2.64
2012 2013 2014 2015 2016 2017 2018
2015 27590 1270891
Years 2.17

2016 55807 1421335 3.93

2017 58277 1517013 3.84

2018 110854 1822308 6.08

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INTERPRETATION

The above graph makes it very clear that the average gross NPA of SBI is not very satisfactory. It
has seemed that the gross NPA which was 407% in 2012 has increased and finally reached 11.55% in
2018. It seems that SBI need to take more care and follow ideal norms of granting advances, so that the
recovery is satisfactory leading to lower gross NPA.

NET NPA RATIO

The net NPA percentage is the ratio of NPA to net advances in which is to be deducted from the
gross advances. The provision is to be made for NPA account. The formula for that is.

Net NPA Ratio = Net NPAs *100

Net Advances

NET NPA RATIO

Net NPA Ratio
7.00
6.08
6.00

5.00
Net NPA Ratio

3.93 3.84
4.00

3.00 2.64
2.16 2.17
1.87
2.00

1.00

0.00
2012 2013 2014 2015 2016 2017 2018
Years 66
INTERPRETATION

The above graph presents the NPA ratio of SBI bank. It can be noticed that the net NPA ratio is
continuously increased in every year and reached to 6.08% in 2018. The bank had failed to make
sufficient provisions against NPA.

Provision Ratio

Provision are to be made for to keep safety the NPA, and it directly effect on the gross profit of
the banks. The provision ratio is nothing, but total provision held for NPA to gross NPA of the banks.
The formula for that is:

Provision Ratio = Total Provision

Gross NPAs

Year Provision Gross NPA Provision Ratio

2012 23858 PROVISION39676
RATO 60.13
2013 29233 51189 57.11
Provision Rato
2014 31096 61605 50.48
70.00
2015 29135 56725 51.36
60.13
2016
60.00 57.11
42365 98172 43.15
2017 54065 51.36
50.48 112342 48.13 50.38
50.00 48.13
2018 112573 223427 43.15 50.38
Provision Ratio

40.00

30.00

20.00

10.00 67

0.00
2012 2013 2014 2015 2016 2017 2018
INTERPRETATION

This ratio indicates the degree of safety measures adopted by the banks. The highest provisions ratio
is showed by SBI is 60.13% in 2012 after that year it been decreasing till 2016. In 2018 it was 50.38
%

CHAPTER 6

FINDINGS

• The percentage change in gross NPA to gross advances ratio and net NPA to net advances
ratio over the year is increasing.
• The both banks to make need to make more provision to recovery the NPAs
• The substandard ratio of ICICI bank have managed to be decreased.
• The doubtful ratio of ICICI banks have been increasing over the years.
• The loss assets of ICICI banks are showing decreasing trend.
• There is an adverse effect on profitability, liquidity of banks.
• There are different factors which are responsible to rise the NPAs of the banks.
• Different strategies are adopted by the banks to manage the rising NPAs of the banks
• NPAs reduce the earning capacity of banks and badly affect the profitability of the banks.

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SUGGESTION
• Banks should increase their income from other than interest as rise in NPA due to default in
interest income which may affect the profit drastically.
• RBI should revise existing credit appraisals and monitoring systems.
• Banks should improve and strengthen their loan recovery methods
• New body like Debt Recovery Tribunal should be established and capacity of DRTs should
be enhanced.
• All banks should keep check on advances being made during the time.
• There must be regular follow up with the customers and it is the duty of the banker to ensure
that there is no diversion of funds. This process can be taken up at regular intervals.
• Advances provided by banks need pre-sanctioning evaluation and post- disbursement control
so that NPA can decrease.
• Good management are needed on the side of the banks to decrease the level of NPA.
• Proper selection of the borrowers, complete information of customers must be known.

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CONCLUSION

A strong banking sector is important for a flourishing economy. The NPA is one of the
biggest problem that the Indian banks are facing today. The NPA also have adverse effects on
economy. If proper management of the NPA is not undertaken it would hamper the business
of the banks. If the concept of NPAs is taken lightly it would be dangerous for the Indian
banks. The NPAs destroys the current profit , interest income due to large provisions of the
NPAs and would also affect the smooth functioning of the banks. Banks also redistribute
losses to other borrowers by charging higher interest rates on loans. Lower deposit rates, etc.
which hamper economic growth.
This study shows the NPAs of both the banks ICICI banks and SBI are increasing each
year. NPA shows high level of risks and lower level of credit appraisal. Although various
preventive measures are adopted to stop an account becoming NPA. There are various
strategies are adopted to reduce the increasing NPAs. The bank management should speed up
the recovery process. The government should make more provision for faster settlement of
NPAs.
So, the problem of NPA needs lots of serious efforts to reduce the NPA. If no proper
measures are taken or efforts, the NPA will kill the profitability of banks which is not good
for the growing Indian economy.

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 CHAPTER 7

BIOLOGRAPHY

JOURNALS

• Dr. Ujjwal M. Mishra, Jayant R Pawaskar “A Study of Non-Performing Assets and its
Impact on Banking Sector”, Volume 03, Issue 01,March 2017 ISSN: 2395-7549

• Ayub Ahamed KS Vishwanath Panwar, “A Comparative Study of NON-

PERFORMING ASSETS (NPA) in Private Sector Banks and Public Sector Banks in
India”, IRACST – International Journal of Commerce, Business and Management (IJCBM),
ISSN: 2319–2828 Vol. 5, No.6, Nov-Dec 2016

• Vivek Rajbahadur Singh, “ A Study of Non-Performing Assets of Commercial Banks and it’s
recovery in India”, Pune Vol. 4, March 2016

WEBSITES

• https://shodhganga.inflibnet.ac.in
• https://m.rbi.org.in
• https://www.sbi.co.in
• https://www.icicibank.com
• https://business.mapsofindia.com/banks-in-india/state-bank-of-india •
https://business.mapsofindia.com/banks-in-india/icici-bank-ltd.html

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