CHAPTER-1

INTRODUCTION

 What are NPA’s & DFI

 Classification of Assets

 Causes of NPA’s & DFI

 History and Development of NPA’s & DFI

 History and Development of Banks ( HDFC & AXIS)

 “An Empirical Analysis of Non Performing Assets of DFI”

(with special reference of HDFC & AXIS Bank)

INTRODUCTION

The banking system in India comprises commercial and cooperative banks of which the

former accounts for more than 90 per cent of banking system‟s assets. Moreover a few

foreign & Indian private banks, the commercial banks consist of nationalized banks

(majority equity holding is with the Government), the State Bank of India (SBI) (majority

equity holding being with the RBI) and the associate banks of SBI (majority holding

being with State Bank of India). These banks, along with regional rural banks, constitute

the public sector (state owned) banking system in India While the primary function of

banks is to lend funds as loans to various sectors such as agriculture, industry, personal

loans, housing loans etc., but in recent times the banks have become very cautious in

extending loans. The reason being mounting nonperforming assets (NPAs) and currently

these are one of the main concerns for banks in India. Bankers are the custodians and

distributors of the liquid capital of the country. Important function is to mobilize the

savings of the people by accepting deposits from the public. The banker becomes the

trustee of the surplus balances of the public. Deposit mobilization promotes the economic

opulence by scheming the money circulation & canalizing for development and

productive purposes. In order to mobilize deposits, the commercial banks undertake

deposit mobilization through various deposit schemes suited to the different sections of

the people. The deposits along with other sources of funds namely capital, reserves and

borrowings, form the sources of funds for the banks. The lending and investment

activities of the bank are based on the sources of funds. The banks, in their books, have

different kind of assets, such as cash in hand, balances with other banks, investment,

loans and advances, fixed assets and other assets. The Non Performing Asset (NPA)

concept is restricted to loans, advances and investments. As long as an asset generates the

income expected from it and does not disclose any unusual risk other than normal

commercial risk, it is treated as performing asset, and when it fails to generate the

expected income it becomes a “Non-Performing Asset”. In other words, a loan asset

becomes a Non Performing Asset (NPA) when it ceases to generate income, i.e. interest,

fees, commission or any other dues for the bank for more than 90 days. A NPA is an

advance where payment of interest or repayment of installment on principal or both

remains unpaid for a period of two quarters or more and if they have become „past due‟.

An amount under any of the credit facilities is to be treated as past due when it remain

unpaid for 30 days beyond due date. Non-Performing Assets are also called as Non-

Performing Loans. It is made by a bank or finance company on which repayments or

interest payments are not made on time. A loan is an asset for a bank as the interest

payments and the repayment of the principal form a stream of cash flows. The interest

payments that a bank makes its profits. Banks usually treat assets as non-performing if

they are not serviced for some time. DFIs provide a broad range of financial services in

developing countries, such as loans or guarantees to investors and entrepreneurs,

equity participation in firms or investment funds and financing for public infrastructure

projects.

1.1 WHAT ARE NPA’s & DFI ?

Non-Performing Asset: Today non-performing assets are the subject of major concerns

to the banking sector and the other non-banking financial institutions. A loan or lease that

does not meet the stated principal amount and the interest amount payments is termed as

non-performing assets. NPA can be classified into commercial loans which are overdue

for more than 90 days, and consumer loans which are due for more than 180 days, and

rise in NPA is due to the overdue of the commercial loans, there are a lot of pending

cases which are being handled by the Indian banks and other financial institutions. (RBI

Website) The financial reforms were undertaken by the Government of India based on

the Narasimham Committee report I and II, Reserve Bank of India introduced some

prudential norms to address the credit monitoring policy, which were being pursued by

the banks and other NBFCs. To strengthen the recovery of loans and dues by the banks

and the other financial institutions, Government of India in the year 1993, promulgated

the recovery of debts due to banks and other financial institutions act and the

securitization and reconstruction of financial assets and enforcement of security interest

act in the year 2002. But statistics shows NPA level is ever increasing day by day, and

the said act, which was introduced by the Government of India, is not serving the

purpose, they were actually formed. The reason behind it can be the banks approach and
attitude towards financing and recovery of loans especially from the small and medium

enterprises and also the lack of knowledge about the law and its practice in banking and

also violations of the RBI directives/circulars, which are essential to follow by every

bank and financial institutions. (Non-Performing Assets) In the financial year 2013, the

non-performing assets had gone up to Rs. 95825 crores, according to the CRISIL report,

the gross NPA will increase from 3.3% on 03.2013, to 4% by 03.2014. An important

question is to be answered by the banks and other financial institutions about the recovery

of the dues, and banks approach towards focusing on the “efficiency and fairness” and

also become understanding when dealing genuine difficulties in managing the fraud. A

strong banking and financial sector is important for a developing economy and the failure

of which may have adverse effect on all the sectors. (RBI website)

ACCORDING TO RBI MEANING OF NPA:

a) An asset, including a leased asset, becomes non-performing when it ceases to

generate income for the bank.

b) A non-performing asset (NPA) is a loan or an advance where;

i. Interest and/ or installment of principal continue to be unpaid for a period of more

than 90 days in respect of a term loan,

ii. The account remains „unaccessed‟ as indicated below, in respect of an Overdraft

/Cash Credit (OD/CC),

iii. The bill remains unpaid for a period of more than 90 days in the case of bills

purchased & discounted,

iv. The repayment of principal or interest thereon remains overdue for two crop

seasons for short duration crops, the installment of principal or interest thereon

remains unpaid for one crop season for long duration crops.

v. The installment of principal or interest thereon remains overdue for one crop

season for long duration crops,

vi. The amount of liquidity facility remains outstanding for more than 90 days, in

respect of a securitization transaction undertaken in terms of guidelines on

securitization dated February 1, 2006.

vii. In respect of derivative transactions, the overdue receivables in lieu of positive

mark-to-market value of a derivative contract, if these continue unpaid for a period

of 90 days from the particular due date for payment.

c) Banks categorize an account as NPA only if the interest outstanding & charged for

the period of any quarter is not serviced completely in 90 days from the end of the

quarter.

d) „Out of Order‟ statuses: Account must be treated as 'out of order' if the outstanding

balance leftovers constantly in excess of the approved limit/drawing power. In

cases where the outstanding balance in the major 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 sufficient to cover the interest

debited during the same period, these accounts should be treated as 'out of order'.

e) „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. (rbi.org.in).

DEVELOPMENT FINANCE INSTITUTIONS (DFI)

Development finance institutions (DFI) occupy an intermediary space between public

and private investment, „facilitating international capital flows‟ in the words of the Chief

Executive of CDC, Britain‟s DFI (formerly the Commonwealth Development

Corporation). Distinct from aid agencies through their focus on profitable investment and

operations according to market rules, DFIs share a common focus on fostering economic

growth and sustainable development. Their mission lies in servicing the investment

shortfalls of developing countries and bridging the gap between commercial investment

and state development aid. DFI provide a broad range of financial services in developing

countries, such as loans or guarantees to investors and entrepreneurs, equity participation

in firms or investment funds and financing for public infrastructure projects. DFI develop

projects in industrial fields or in countries where commercial banks are restrained about

investing lacking some form of official collateral. DFIs are also active in financing small

and medium-size enterprises, sustaining micro loans to companies, frequently viewed as

too risky by private sources of financing. A benefit of this approach is that DFI often find
themselves with first-mover advantage in markets with strong growth potential. A case in

point is the famous African experience of Celtel Telecommunications Company, where

DFIs invested early as part of their developmental charter and later found themselves

ending with enormous profits. DFIs depend on profits from their investments to ensure

resources for further engagements. Currently, this model is proving successful, with

institutions such as CDC or the European Bank for Reconstruction and Development

(EBRD) outperforming emerging market indices.

Bilateral development finance institutions are majority-owned by national governments

and have historically served to implement government foreign development and co-

operation policies. Multilateral DFIs, also known as international finance institutions

(IFIs), usually have greater financing capacity and provide a forum for close co-operation

between governments. Both types of institutions retain operational independence from

their funding governments. Backed by government funds and guarantees ensuring their

credit-worthiness, DFIs can raise large amounts of funds on international capital markets

to provide loans or equity investment on competitive, even subsidized, terms.

Through their developmental mission and public funding, DFI have, by definition, a

higher risk tolerance and a longer investment horizon. DFI can call upon the guarantees

of the state and are free from the short-term constraints of private investors. Thus, DFI

have the capacity to make long-term investments at attractive rates in markets to which

the private sector find too risky to commit. Furthermore, DFI pay no corporate tax or

dividends. Bilateral DFI tend to make partnerships with the private sector in developing
countries, while the regional development banks generally focus primarily on loans to the

public sector (e.g. via sovereign loans for commercially –run public enterprises). The

Asian Development Bank also has major exposure to equity investments in the private

sector. The EBRD provides direct investment on commercial terms to public and private

sector projects, such as backing infrastructure plans, but also large commercial ventures

in its region of specialization (Eastern Europe through to Central Asia). The financial

support DFIs bring to relatively high-risk projects is intended to serve as a catalyst,

helping to attract and mobilize the involvement of other sources of private capital. In

addition, development banks often act in cooperation with governments and other

organizations in providing funds for management consultancy and technical assistance,

and serving as channels for policy implementation in areas such as governance,

compliance with environmental regulations, good business practices and sustainability.

Bilateral Regional

CDC-Britain ADB - Asian Development Bank

PROPARCO- France IADB - Inter American Development Bank

FMO - Netherlands AFDB - African Development Bank

DEG - Germany EIB - European Investment Bank

OPIC - United States EBRD - European Bank for Reconstruction

Multilaterals

IFC - International Finance Corporation

MIGA - Multilateral Investment Guarantee Agency (World Bank)

DFI‟s involvement can serve to mitigate risk, serving as a public guarantee in countries

and sectors where private sector actors would be unwilling to operate alone. Their public

status allows DFIs to make longer maturity loans at good interest rates, advantageous

guarantees and undertake high-risk equity investment. DFI‟s may also help lower the cost

of capital for firms through partial credit risk guarantees.

The IFC and EBRD are by far the biggest DFIs in terms of annual commitments to the

private sector. Some concentrate primarily on loans (EIB, Proparco) others primarily on

equity (CDC). The equity portion within the total portfolio of European DFIs reached 52

per cent in 2016, up from 41 per cent in 2015, a significant shift away from loan finance

towards equity stake holding. AFDB and ADB and IADB lend principally to sovereign

states.

1.2 CLASSIFICATION OF ASSETS

Non-performing assets are further classified into three categories based on the span for

which the asset has remained non-performing and the recovery of the dues. As per the

RBI guidelines any loan repayment which is delayed beyond 180 days has to be

identified as NPAs. NPAs are classified into:-

i). SUBSTANDARD ASSETS:

With effect from March 31, 2005, a substandard asset would be the one, which has

remained as a nonperforming asset for a period of less than or equal to 12 months. It

means those which are NPA for a period not exceeding two years. Substandard assets

have credit weaknesses that jeopardize the liquidation of the debt and there are also

possibility of incurring and sustaining some losses if the deficiencies are not corrected.

Ii). DOUBTFUL ASSETS:

With effect from March 31, 2005, an asset is classified as uncertain if it has remained as a

sub-standard asset for a period of 12 months. A loan classified under the doubtful

category has all the limitation characteristics as defined for the sub-standard assets; also it

has added characteristics that the weakness makes full liquidation or collection, on the

basis of the presently known conditions, facts, and values that are highly unsure and

questionable. Doubtful Assets are Loans which have remained NPA for a period

exceeding two years and which are not considered as loss assets. NPA accounts

belonging to this category are further classified as:

D1 – The account remains NPA for 3rd year.

D2 – The account remains NPA for 4th and 5th year.

D3 – The account remains NPA for 6th year onwards.

iii). LOSS ASSETS:

A loss asset is one where loss has been identified by the bank‟s internal auditors and

RBI‟s external auditors, but the amount has not been written off wholly or partly. These
kinds of assets are also considered as uncollectible, and of little value that its persistence

or maintenance as a bankable asset is not warranted or acceptable though there may be

some salvage or resurgence value (RBI Website).

In other words, such assets are considered as uncollectible. As per RBI guidelines

provisions for NPA are to be made as under:

a) 10% of sub-standard assets

b) 20% for doubtful assets

c) 100% for loss assets

Table: 1

Category and Parameters of NPA’s

No. Category Parameters Provision Requirement

1. Substandard "Remained NPA for a period
Asset not less than or equal to one
year.
"In such cases, the current net
worth of the borrower or
guarantor or market value of
the security charged is not
enough to ensure recovery of
the bank's dues :
*15% of the sum of the net
investment in The lease and the
unrealized portion of finance
income not of finance charge
component.
*Additional 10% for unsecured
lease exposure i.e. total 25%.

"Likely to sustain some loss if

 deficiencies are not corrected

2. Doubtful "Remained in substandard *100% of the finance not secured

Asset category beyond 1 year :
*Recovery - highly
questionable and improbable.
by the realizable value of the
leased asset.
* Additional provision on the
unrealized portion of finance
income net of finance charge
component of the secured portion
as under: - Period for the advance
remained in doubtful category and
the provision (%)

Up to one year is 25% provision

One to three years 40% provision,

More than three years 100%.

3. Loss Asset "Asset considered uncollectible To be written off or 100% of the

and of little value but no
written off wholly by the bank.
"Continuance as bankable
assets although it may have
some salvage or recovery
value.
sum of the net investment in the
lease and the unrealized portion of
finance income net of finance
charge component.

As per recent guidelines even on standard assets a provision @ 0.25% is required to be

made. Following quotation from Narasimham Committee Report 1998 is worth quoting

“NPAs in 1992 were high for most of our PSBs and for some, high enough to warrant

concern, especially where the ratio of NPAs to Capital funds was disturbing high and in

some cases exceed net worth and undermined solvency. If the depositor‟s money in such

cases was not at risk, as it strictly would otherwise have been, it is because of the
implicitly guarantee provided by the state ownership of the banks. Since 1992, there has

been some enhancement even with a progressive tightening of the definition in the level

of NPAs of the public sector banks as a group. In spite of some write-off of loss accounts

in this phase, gross NPAs, which perhaps reflects the true extent of contamination of the

portfolios, were as high as 23.2% of the total advances in March 1993 but it came down

from 14.5% in March 1994 to around Rs.20, 000 Crores or 9.2% in March, 1997.

To find out the causes of NPAs in Indian banking sector, the total NPAs are to be

classified into two broad categories viz.

i. Legacy NPA’s

ii. New NPA’s

i. Legacy NPA’s:

These are the NPAs acquired even before the prudential accounting norms were

introduced. Government has given the charge of social banking to the PSBs & issued

guidelines and framed policies whereby 40% of the total advances must go to priority

sector. Here only the quantity of advances is emphasized ignoring the quality of lending.

The Narasimham committee report assets “Directed Credit has proportionately higher

share in NPA portfolio of banks and has been one of the factors responsible for erosion in

the quality of banks assets”.

In this connection Narasimham Committee Report 1998 quotes “the causes of high

proportion of NPAs are varied. Poor credit decision by bank management, difficult

recovery environment and changes both cyclical and structural in the larger economic

environment represent some of the micro and macro aspects of this. This is not all.

International experience has shown, a high prevalence of NPAs could be traced by

policies of direct credit, not to speak of crude form of request lending. There is no

inherent blunder in setting out social priorities for bank lending. Social banking need not

clash with canons of sound banking but when banks are required by command to meet

definite quantitative targets, there is, as our experience has shown, the risk of erosion of

the quality of loan portfolio.”

ii. New NPA’s:

a). A critical analysis of NPAs in various banks reveals that in addition to priority sector,

advances to large industries also forms part of NPAs. The share of small advances of

rural sector is very small compared to the large advances. NPAs in percentage terms in

some of the priority sector advances may be higher but quantum wise, its contribution to

total NPAs is not very significant. Whereas percentage of NPAs in case of large advances

may be lower but it forms the major chunk of the total NPAs. Priority sector advances, as

a percentage of NPAs may be higher, but quantity-wise, are not a high figure. Large

advances, as a percentage of NPAs are lower, but quantity-wise is a higher figure.

b). Non-performing Asset (NPA) has emerged since over a decade as an alarming risk to

the banking business in our country sending upsetting signals on the sustainability of the

pretentious banks. The positive results of the series of measures affected under banking

reforms by the Government of India and RBI in terms of the two Narasimham Committee

Reports in this modern period have been neutralized by the ill effects of this surging

threat. Regardless of various correctional steps administered to solve and end this

problem, solid results are eluding. It is a sweeping and all persistent virus confronted

universally on banking and financial institutions. The severity of the problem is however

actually suffered by Public Sector banks, Private Sector Banks, Co-operative banks &

NBFC.

Resource arrangement classifications of NPA’s are:-

1. Standard resources :

Standard resources are the ones in which the bank is accepting enthusiasm and

additionally the vital measure of the advance frequently from the client. Here it is

likewise essential that for this situation the back payments of intrigue and the key

measure of credit don't surpass 90 days toward the finish of monetary year. On the off

chance that benefit neglects to be in classification of standard resource that is sum due

over 90 days then it is NPA and NPAs are further need to group in sub classifications.

Banks are required to characterize non-performing resources encourage into the

accompanying three classes in light of the period for which the benefit has remained

non-performing and the dependability of the duty.

2. Sub-standard resources :

With effect from 31 March 2005, a substandard resource would be one, which has

remained NPA for a period not exactly or equivalent to year.

3. Dicey resources :

An advance named farfetched on the off chance that it stayed in the substandard class for

a year.

4. Misfortune resources :

A misfortune resource is one which considered uncollectible and of such little esteem

that its continuation as a bankable resource is not justified in spite of the fact that there

might be some rescue or recuperation esteem. Likewise, these advantages would have

been recognized as „loss assets‟ by the bank or interior or outside inspectors or the RBI

examination yet the sum would not have been composed off completely. Provisioning

standards for NPA‟s after an appropriate arrangement of credit resources the banks are

required to influence adequate arrangement against each of the NPA‟s to represent

conceivable advance misfortunes according to prudential standards.

The base measure of arrangement required to be made against an advance resource is

distinctive for various sorts of benefits. The banks recuperate the sum by offering of their

benefits, which covers a base name. In this way the banks record the non-recuperated part

as NPA‟s and needs to make arrangement for it. if Change on

• Reduce the winning limit of advantages and seriously influence the ROI.

• The cost of capital will go up.

• The resources and risk jumble will broaden.

• Higher provisioning necessity on mounting NPAs unfavorably influences capital

sufficiency proportion and banks gainfulness.

• The monetary esteem increments (EVA) by banks gets furious on the grounds that EVA

is equivalent to the net working benefit short cost of capital.

• NPAs causes to diminish the estimation of offer here and there even underneath their

book an incentive in the capital market.

• NPAs influence the hazard confronting capacity of banks.

1.3 CAUSES OF NPA’s & DFI

In the past articles, many authors have found out many reasons for NPA. Few are: Market

Failure, Wilful Defaults, Poor follow-up and Supervision, Non-cooperation from Banks,

Poor Legal framework, Lack of Entrepreneurial Skills, Diversion of funds (Santanu Das,

2010)Zahoor Ahmad, Dr. M. Jegadeeshwaran (2013) in their paper “Comparative Study

On NPA Management of Nationalized Banks” has analyzed, improper selection of

borrower‟s activities, weak credit appraisal system Industrial problem, inefficiency in

management of borrower, slackness in credit management and monitoring, lack of proper

follow up by bank, recession in the market, and natural calamities and other uncertainties,

as the reasons for the NPA. On the other hand (Ashly Lynn Joseph, 2014) in his paper „A

Study on Analyzing the Trend of NPA Level in Private Sector Banks and Public Sector

Banks‟has identified few external, internal and other factors that are involved in the

formation of NPA and those are : diversion of fund for expansion, diversification,

modernization or for taking up new projects, diversion of fund for assisting or promoting

associate concerns, time or cost overrun during the project implementation stage,

business failure due to product failure, failure in marketing etc, inefficiency in bank

management, slackness in credit management and monitoring, and inappropriate

technology or problems related to modern technology. The external factors include

recession in the economy as a whole, input or power shortage, price escalation of inputs,

exchange rate fluctuations, and change in government policies. Other factors comprise

liberalization of the market and the resulting pressures from liberalization like several

competitions, decline of tariffs etc, deprived monitoring of credits and failure to make out

early caution signals shown by standard assets, unexpected crashing of capital market &

inability to raise adequate funds, mismatching of funds i.e. using loan granted for short

term for long term transactions, granting of loans to certain sectors of the economy on the

basis of government directives rather than commercial imperatives. (Namita Rajput,

et.al., 2012) also analyzed some reasons behind the formation of NPA, and also found the

impact of the NPA on banking operations and (Satpal, 2014) also tried to find out some
 external factors and some internal factors which affects the NPA like (Ashly Lynn

Joseph, 2014), and also found the impacts of NPA.

The business of banking essentially involves intermediation-acceptance of deposits and

channeling these deposits in to lending activities. Since the deposits expected from the

depositors repaid to them by the bank, they are known as banks‟ „Liabilities‟ and as the

credit given to the borrowers are to be received back from them, they are termed as

banks‟ „Assets‟ so assets are banks‟ loans and advances1. In the long-established banking

business of lending financed by deposits from customers, Commercial Banks are faced

with the risk of fail to pay by the borrower in the payment of either principal or interest.

This risk in banking parlance is termed as „Credit Risk‟ and accounts where payment of

interest and /or repayment of principal are not forthcoming are treated as Non-Performing

Assets2, as per the Reserve Bank of India, an asset, including a leased asset, becomes

non-Performing when it ceases to generate income for the bank. Subsistence of NPA is

vital ingredient of banking & has some Non-Performing Assets in its advance portfolio.

Though, high level of NPA is a foundation of concern to any financial institution.

CAUSES OF INCREASING NPA’s

 At the time of collection of primary data the researcher has interacted with some of the

borrower who has taken the loan from banks and other financial institutions. The

respondents have spoke about the problems which they are facing for taking the loan or

for borrowing the money. They said the government is constantly saying that we are
 simplifying the procedure but the fact is that still the procedure is too complicated and

banks are demanding lots many documents. Some time it becomes so difficult for a

borrower to arrange such papers.

 When the researcher asked about the repayment of loan amount they seem so reluctant

about the repayment. Surprisingly they are not aware with the concept of

nonperforming assets.

 One more thing the researcher has observed during the study that they are borrowing

money beyond their capacity. Simultaneously they are not having proper financial

planning.

 During interacting with borrower it is observed that most of the borrowers are not

aware with the stringent recovery norms.

 Some of the borrowers are also found misleader by the middle man.

The Financial institutions sector has been facing the severe problems of the rising NPA‟s.

But the problem of NPA‟s is more in public sector banks when compared to private

sector banks and foreign banks, the NPAs in PSB are increasing due to external as well as

internal factors.
External Factors:

a. Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans

and advances, due to their carelessness and ineffectiveness in their work the bank suffers

the consequence of non-recover, their by reducing their profitability and liquidity.

b. Willful Defaults

There are borrowers who are competent to pay back loans but are intentionally

withdrawing it. These groups of people should be recognized and proper measures should

be taken in order to get back the money extended to them as advances and loans.

c. Natural calamities

This is the measure aspect, which is creating alarming boost in NPAs of the PSBs. every

now and then India is hit by foremost natural calamities thus making the borrowers

incapable to pay back there loans. Thus the bank has to make large amount of

requirements in order to pay indemnity those loans, hence end up the fiscal with a

reduced profit. Basically ours farmers depends on rain fall for cropping. Due to

irregularities of rain fall the farmers are not to achieve the production level thus they are

not repaying the loans.

d. Industrial sickness

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

lack of advance technology , day to day changing govt. Policies produce industrial

sickness. Therefore the banks that finance those industries ultimately end up with a low

recovery of their loans reducing their profit and liquidity.

e. Lack of demand

Entrepreneurs in India could not forecast their product demand & starts production that

ultimately loads up their product thus making them incapable to pay back the money they

borrow to manage these activities. The banks recover the amount by selling of their

assets, which covers a smallest label. Therefore the banks trace the none improved part as

NPA‟s and has to make provision for it.

f. Change on Govt. policies

With every new govt. banking region gets new policies for its function, to cope with the

varying ideology and policies for the directive of the rising of NPAs. For example, the

fallout of handloom sector is enduring as most of the weavers Co-operative societies have

become defunct largely due to pulling out of state patronage. The plan worked out by the

Central government to refurbish the handloom sector has not yet been implemented, so

the over dues due to the handloom sectors are fetching NPA‟s.
Internal Factors :

a. Defective Lending process

There are three fundamental principles of bank lending followed by the commercial

banks, that is, Principles of safety, Principle of liquidity, Principles of profitability.

Principles of safety mean that the borrower is in a situation to pay back the loan,

including both principal and interest. The refund of loan depends upon the borrowers,

Capacity to pay and Willingness to pay. Capacity to pay depends upon, Tangible assets,

Success in business. Willingness to pay depends on, Character, Honest, Reputation of

borrower.

b. Inappropriate technology

Due to improper technology and management information system, market derived

decisions on real time basis cannot be taken. Appropriate MIS and financial accounting

structure is not implemented in the banks that lead to poor credit compilation, so NPA.

c. Improper SWOT analysis

The inappropriate strength, weakness, opportunity and threat analysis is another reason

for increase in NPAs. While providing unsecured advances the banks depend more on the

honesty, integrity, and financial soundness and credit worthiness of the borrower, so,

banks should consider the borrowers own capital investment and bank should collect

credit information of the borrowers from :

a. Bankers

b. Enquiry from market/segment of trade, industry, business.

c. From external credit rating agencies.

d. Poor credit appraisal system

Deprived credit appraisal is an additional factor for the increase in NPAs, due to poor

credit appraisal the bank gives advances to those who are not able to repay it back &

must use better credit appraisal to reduce the NPAs.

e. Managerial deficiencies

The banker should always select the borrower very cautiously and should take touchable

assets as security to safe guard its interests.

f. Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs, lack of recurrently visit of bank

officials to the customer point decreases the assortment of interest and principals on the

loan, so the NPAs can be collected by regular visits.

The growth & propagation in the actions of the bank has led to ever-increasing non-

performing assets that have mounted to a enormous amount for the period of the last

decade or so. The quantum of NPA‟s has been calculated and put at diverse figures

mainly due to absence of exact statistics and the method on the basis adopted for

scheming the percentage of NPA‟s in relation to either the total assets of the bank or the

quantity of loan portfolio or on the basis of the number of the accounts or the size of the

outstanding advances.

For a large number of years, the banks have been taking credit in its books, on basis of

accrued interest income, even for the sum of periodic interest that was not really paid by
the borrower. This was done by raising debit in suspense account and crediting amount

equivalent to the periodic interest in the loan account of the borrower.

After objections from the auditors and income tax authority the banks altered strategy and

started giving extra loans to the defaulting borrowers for the purpose of making payments

to the bank for adjustment of the over dues, in many cases the due dates of payments

were postponed and even the entire period of the loan was extended further again and

again. As if to attach fire to the fuel, ambitious programmed for branch progress and

extension of banking services led to new recruitments, transfers, relocation and unhealthy

competition amongst offices of the same bank, but at the same time adequate facilities

available for training of the staff were not expanded.

In the anxiety to attain business targets the rules and procedures for prudent banking were

conveniently forgotten. Even the senior management setup opportunely comfortable the

rules for proper appraisal of the loan proposals, the requirements of standard bank

sanction letter, errors in execution of the loan agreements, deeds of hypothecation and

mortgages were more often disregarded for conformity in the hurry for disbursement and

realization of targets for purposes of building up record of achievements and reporting.

NPA’s KEY FACTORS

The following factors confronting the borrowers are responsible for incidence of NPA‟s

in the banks:-

(i) Diversion of funds for expansion/modernization/setting up new projects/helping

promoting sister concerns.

(ii) Time/cost overrun while implementing projects.

(iii) Factors like raw-material shortage, raw-material/Input price escalation, power

shortage, industrial recession, surplus capacity, natural calamities like floods, accident etc

which are external.

(iv) Business failure like product deteriorating to capture market, incompetent

management, strike/strained labor associations, wrong technology, technical problem,

product obsolescence, etc.

(v) Non-payment/over dues in other countries, recession in other countries,

externalization problems, adverse exchange rate, etc are some failures.

(vi) Policies like excise, import duty changes, deregulation, pollution control orders, etc

which dealt by Government.

(vii) Willful default, siphoning of funds, fraud, embezzlement, and

promoters/management disputes etc.

Besides above, factors such as deficiencies on the part of the banks viz. deficiencies in

credit appraisal, monitoring and follow-up; delay in release of limits; delay in settlement

of payments/subsidies by Government bodies, etc. are also attributed for the incidence of

NPA‟s 3.

1.4 HISTORY AND DEVELOPMENT OF NPA’s AND DFI

 History & Development of NPA’s: Banks classify an account as NPA if the interest

due and charged on that account during a quarter is not serviced fully within 90 days

from the end of the quarter.

RBI defines NPA as an asset when it ceases to generate income for the bank. Banks

categorize an account as NPA if the interest due & charged on that account for the period

of a quarter is not serviced fully within 90 days from the end of the quarter. Higher the

NPA, the more loss a bank will face.

Gross NPA of private banks during last five years:

For private banks, Yes Bank is the best performer followed by HDFC Bank, Axis Bank,

Kotak Mahindra Bank and ICICI Bank. Whereas public banks face a fast ascends in their

NPAs, private banks have been able to counter the bad loans & stayed stable.

TABLE: 02
PRIVATE BANKS
Gross NPA of private banks during last five years
Figures in Rs Crores

Kotak
Assets HDFC AXIS ICICI YES
Year Mahindra

Year 2016 Advances 464,593.96 338,773.72 435,263.94 98,209.93 118,665.3

Gross NPA 4,392.83 6,087.51 26,221.25 748.96 2,838.11

Year 2015 Advances 365,495.03 281,083.03 387,522.07 75,549.82 66,160.71

Gross NPA 3,438.38 4,110.19 15,094.69 313.40 1,237.23

Year 2014 Advances 303,000.03 230,066.76 338,702.65 55,632.96 53,027.63

Gross NPA 2,989.28 3,146.41 10,505.84 174.93 1,059.44

Year 2013 Advances 239,720 196,965.96 290,249.44 46,999.57 48,468.98

Gross NPA 2,334.64 2,393.42 9,607.75 94.32 758.11

Year 2012 Advances 195,420 169,759.54 253,727.66 37,988.64 39,079.23

Gross NPA 1,999.39 1,806.30 9,475.33 83.86 614.19

Gross NPA percentage of private banks during last five years:

NPAs of Yes Bank and HDFC Bank have remained stable during the last five years

where as ICICI Bank and Axis Bank has seen a significant rise in the share of their bad

loans.

Figure: 01

Gross NPA % of Private Banks

Securitization & Reconstruction of Financial Assets & Enforcement of Security Interest

(SARFAESI) Act 2002 was

.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0.0enacted

by the government to decrease NPAs. Act gives authority to financial institutions to

auction properties (residential/commercial) to recover from the bad loans. However RBI

needs to propose more solutions to put a hold on the rising NPA.

History & Development of DFI

History of DFI: DFI are financial institutions which were established provides project

appraisal & project finance to the Indian industry. The first DFI to be established was the

Industrial Finance Corporation of India in 1948. The role of DFIs in industrial financing

has considerable amount of interest among researchers. A good volume of literary work

has been done on the DFIs & their role in financing to the Indian industry. The role of

DFIs in credit facilitation to the industrial sector is vital. The industrial sector of any

country is the strength of character of its economy. It is therefore important to keep the

industrial sector robust and in good shape. For this, the governing & regulating

authorities should ensure that the these financial institutions should not face any

bottlenecks in raising funds at cheaper rates since the funds will be further utilized for

priority lending and in financing new technologies. Regular banking sector does not

facilitate project appraisal and long term finance for regular projects and new

technologies. This lacuna gave rise to the establishment of DFIs to cater to the specific
needs of the Indian industrial sector so that it can thrive well and make the Indian

economy healthy. DFIs are created in developing countries to resolve market failures,

especially in regard to financing of long-term investments. The DFIs played a very

significant role in rapid industrialization of the Continental Europe. Many of the DFIs

were sponsored by national governments and international agencies. The first

government sponsored DFI was created in Netherlands in 1822. In France, significant

developments in long-term financing took place after establishment of DFIs such as

Credit Foncier and Credit Mobilizer, over the period 1848-1852. In Asia, establishment

of Japan Development Bank and other term-lending institution fostered rapid

industrialization of Japan. While the reach of the banking system was expanded to

mobilize resources and extend working capital finance on an ever-increasing scale, to

different sectors of the economy, the DFI were established mainly to cater to the demand

for long-term finance by the industrial sector. The first DFI established in India in 1948

was Industrial Finance Corporation of India (IFCI) followed by setting up of State

Financial Corporation‟s (SFCs) at the State level after passing of the SFCs Act, 1951.

Development of DFI: Besides IFCI & State Finance Corporations (SFCs) in the early

segment of India economy, a number of other financial institutions were set up, which

included as Industrial Credit and Investment Corporation of India Ltd. (ICICI Ltd.) was

set up in 1955, Life Insurance Corporation of India (LIC) in 1956, Refinance Corporation

for Industries Ltd. in 1958 (later taken over by IDBI), Agriculture Refinance Corporation

(precursor of ARDC and NABARD) in 1963, Unit Trust of India (UTI) & Industrial
Development Bank of India (IDBI) in 1964, Rural Electrification Corporation Ltd. &

Housing and Urban Development Corporation Ltd. (HUDCO Ltd.) in 1969-70, Industrial

Reconstruction Corporation of India Ltd. (precursor of IIBI Ltd.) in 1971 and General

Insurance Company (GIC) in 1972.It may be noted here that although the powers to

regulate financial institutions had been made available to RBI the definition of term

„financial institution‟ was made precise and comprehensive by amendment to the RBI

Act Section 45-I (c) in 1974.

INDUSTRIAL FINANCE CORPORATION OF INDIA (IFCI)

The IFCI was the first DFI of India. It was established on 1st July 1948 under the ambit

of Industrial Finance Corporation Act as a statutory corporation, the purpose of setting

IFCI was to extend institutional credit to medium and large scale industries it‟s status was

changed to a public limited company on1st July 1993 with an objective to provide it more

liberty & flexibility in terms of operations. It is a company & is governed by a board and

its board of directors is nominated by its shareholders. IFCI‟s activities are classified in to

two headings i.e. financial & promotional activities.

Financing Activities:-

1. Project Financing:

It is the core business of IFCI & it‟s main objective behind the incorporation of the DFI

was to fund green field projects. Financial assistance is provided by way of medium or

long term credit for setting up new projects, expansion or diversification schemes,
modernization/balancing schemes of existing projects. Financial support is provided in

the form of rupee loans, foreign currencies, underwriting & contribution of shares &

debentures & providing guarantee for delayed payments & loans.

2. Financial Services:

IFCI provides assistance to meet specific needs of corporate during specifically designed

schemes. The various fund based products offered are equipment finance, equipment

credit, equipment leasing, supplier‟s/ buyer‟s credit, leasing & hire purchase issues,

working capital term loans, short term loans, equipment procurement, installment credit

& others.

3. Corporate Advisory Services:

IFCI provides advisory services in the areas of projects, infrastructure, corporate finance,

investment banking & corporate restructuring. It provides customized services in areas of

investment appraisals, corporatization, disinvestments, business restructuring, bid process

management and arrangement of joint ventures. It is catalyst in channelizing foreign

direct investments and provides a range of services to prospective foreign investors. IFCI

also provides consultancy services on certain policy linked technical & financial matters

to regulatory agencies in unusual infrastructure sectors namely electricity, telecom, oil

and gas, insurance and education.

4. Corporate Advisory Services to Foreign Investors:

IFCI provides a whole range of services to forthcoming foreign investors, explicitly

facilitating the foreign business entities through information services, necessary office

infrastructure for the startup operations of the organization, coordination for obtaining the

required approval/ clearances from government departments and agencies, inputs on

markets, materials and manpower available in the country, inputs on available

manufacturing facilities, syndication services for obtaining the essential capital, research

inputs & information regarding tax incentives, tariff protections & opportunities for

acquisitions, mergers and amalgamations.

1.5 HISTORY AND DEVELOPMENT OF BANKS (HDFC & AXIS)

HDFC BANK:

HDFC Bank was incorporated in 1994 registered workplace is

in Mumbai, with initial company workplace, Worli were inaugurated by Manmohan

Singh (Union Finance Minister). The bank's distribution network was at 4,725 branches

and 12,360 ATMs across 2687 cities and cities. (As of 30-06-017)

Services and product HDFC Bank provides number of product & services moreover as

wholesale banking, retail banking, treasury, auto loans, 2 wheeler loans, personal loans,

loans against property & credit cards.

The most recent entry within the league is 'Project AI', HDFC Bank, would deploy robots

at various bank branches. Such robots offer services like money withdrawal or deposit,

forex, fixed deposits & demat services showing on a screen to customers.

The HDFC Bank commenced operations as a scheduled banking

company in January 1995. HDFC was along with the 1st to receive an 'in principle'

authorization from the Reserve Bank of India (RBI) to set up a bank in the private sector,

RBI's liberalization of the Indian Banking Industry during 1994.

The HDFC was incepted in 1977 is India's premier housing financial institution & enjoys

an impeccable record in India furthermore in international markets, also has

developed vital experience in retail mortgage loans to entirely diverse market segments &

conjointly contains a giant base company customer base for its housing connected credit

facilities. With its expertise within the monetary markets, a robust market name, huge

shareholder base and distinctive customer franchise, HDFC was ideally positioned to

market a bank within the Indian Territories. HDFC provides diversified business &

banking transactional services & treasury merchandise to wholesale & retail customers.

The bank has 03 key business segments:

Wholesale Banking Services – The Bank's intended market ranges from huge, blue–

chip manufacturing corporate to small & mid–sized company & agri–based businesses.

Retail Banking Services – aims to supply target market customers diversity of

financial & banking products/services, giving the customer of single window facility for
all his/her necessities for banking.

Treasury – at intervals this business, the bank has 03 main product areas – Foreign

Exchange and Derivatives, Native Currency Money Market & Debt Securities and

Equities. The Treasury business is chargeable for managing the returns and market risk

on this investment portfolio.

AXIS BANK:

In private-sector 3rd largest bank Axis Bank Ltd in India servicing a comprehensive

suite of financial products. Banks head office in Mumbai & Registered in Ahmadabad,

offering complete spectrum of financial services & mid-size company, SME & retail

businesses.

The shares by promoters (National Insurance Company Limited, New India Assurance

Company Ltd, GIC, LIC & UTI etc.) Remaining share unit owned by Mutual Funds

Institution, FIIs, Financial Institutions (banks), Insurance companies, corporate bodies &

individual investors among others.

Indian Business

Bank has branches in India in the following States/UTs.

• Andaman and Nicobar Island

• Andhra Pradesh

• Arunachal Pradesh
• Assam

• Bihar

• Chandigarh

• Chhattisgarh

• Dadra and Nagar Haveli

• Daman and Diu

• Delhi

• Goa

International Business

There are 09 international offices of bank among branches at Singapore, Hong

Kong, Dubai (at the DIFC), Shanghai & representative offices at Dhaka, Dubai, to

facilitate specialize in syndication, investment banking, corporate lending, trade finance

& liability businesses. The Bank incorporates a presence in United Kingdom amid

its entirely owned subsidiary Axis Bank (UK) Limited.

Retail Banking

Services offered by bank for lending to individuals/small businesses product, ATM

services, liability & card product/services, web banking, depository, advisory services,

and (NRI) services. Axis bank is participant in RBI's NEFT enabled in banks list.
Corporate Banking

1. Credit:

Diversified offers provided by banks for loan & fee-based product & services to Large &

Mid-corporate customers SME businesses. Such product & services demand & short-

term loans, embrace money credit facilities, project finance, credit, factoring,

channel financing, structured product, discounting of bills, documentary credits,

guarantees, exchange & derivative product. Liability product as well as current accounts,

certificates and deposits and time deposits also are offered to large & mid-corporate

segments.

2. Transaction Banking:

It provides integrated product & services to customers in areas of money management

services, current accounts, capital market services, trade, exchange and derivatives, cross-

border trade and correspondent banking services and tax collections on behalf of the

govt. & State Govt. in India.

3. Treasury: The

Treasury manages the funding position of the Bank manages & maintains its regulatory

reserve needs. It invests in sovereign and corporate debt instruments & engages in

proprietary trading in equity and other financial instruments. Also invests in commercial

papers, mutual funds and floating rate instruments as a part of the management of short

term surplus liquidity. Also offers diversified treasury product and services to the
customers.

4. Syndication:

The Bank additionally provides services of placement and syndication within

the kind of native currency bonds, rupee and foreign term loans and

external industrial borrowings.

5. Investment Banking and Trustee Services:

Services provided by its owned subsidiaries. Axis Capital Ltd. provides investment

banking services with reference to equity capital markets, institutional stock broking

besides M&A advisory. Axis Trustee Services Ltd. is affianced in trusteeship, performing

as debenture trustee &as trustee to different securitization trusts.

International Banking Provide corporate banking, trade finance, treasury and risk

management through the branches at Singapore, Hong Kong, DIFC, Shanghai. Retail

liability product from its branches. Dhaka Office was inaugurated during the current

financial year.

6. Demonetization related Money Laundering:

Many Axis Bank staff was arrested for facilitating money laundering activities in 2016

Demonetization. Some media highlighted the disproportionate no. of cases linking the

bank & claimed that the bank's aggressive performance targets & internal culture fostered

such activities.
7. Axis Pay:

The new introduced UPI can make easy banking transactions by means of only a single

'Virtual Payment Address' (VPA), as transferring money to an account, the sender will

not be enforced to provide details like the account number and bank's IFSC Code, but can

transact using only the VPA.

8. Ping Pay:

Ping Pay, a multi-social payment system, bank launched in 2015 that enables customers

to transfer funds by means of their smart phones to both Axis Bank accounts &

other banks' account holders.

9. Axis Thought Factory:

Axis Bank has an in-house innovation team and an accelerator programmed which is

located in Bangalore. The Innovation Lab work closely with the startup community that

is redefining banking in the digital era. Axis Bank becomes the first Indian bank to

introduce a dedicated innovation lab in the country by this launch.

10. Insta Personal Loan:

„Instant Personal Loan‟ service which is on smart phones & ATM kiosks which is served

by Axis Bank. Customers can avail immediate 24X7 loan approval & payout, which gets

credited directly into their account.

11. Locker booking:

Online locker booking service launched by Axis bank throughout the mobile app to avail

services to customers to check availability from their homes & book immediately.

12. Microfinance Institutions (MFI) Lending:

A tablet-based loan newly developed structure to digitize the entire lending course of

action of MFI business, which will substitute the existing paper based loan sanctioning

process.

13. Multicurrency Forex cards:

Axis Bank offer to Indian travelers a contactless multicurrency Forex cards enabling

faster & more opportune transactions in abroad. Technology has also been extended to

the Bank‟s Debit & Credit card platforms. The in-house payment gateway which enables

for secure e-commerce transaction processing capability & reduces the cost incurred on

using external gateways.

14. Asha home loans:

This home loan product, caters to first time home buyers in the lower income section, &

helps them by providing service an affordable EMI options.

15. ISIC Forex Card:

ISIC Forex card for students which is served as first photo travel currency card available

in USD, EUR, GBP & AUD currencies. It can be used across 34 million merchant

locations & at over 2 million MasterCard ATMs globally.

16. eKYC:

eKYC is an online, paperless Aadhar card-based practice for fulfilling KYC necessities to

start investing in mutual funds without compliance of any documents. SEBI has freshly in

2017, permitted Aadhar-based KYC to be used for MF investments, for the convenience

of investors.

Authentication of KYC enables any person to open new accounts with all SEBI-

registered intermediaries such as stock brokers, portfolio managers, depository

participants, mutual funds & venture capital funds prevents the need to repeat standard

KYC. The first step in starting your investment in mutual fund is KYC compliance. The

normal KYC process requires submission of KYC form beside with investor signature &

additional documents for ID & address proof. In-person verification (IPV) & sighting the
original documents needs to be completed by a competent person. eKYC completely

eliminates paperwork & IPV to complete the whole KYC process.

Axis Bank is first organization in India to introduce biometrics-based KYC has also

partnered with visa to launch “eKYC” (electronic know your customer) facility, offering

convenience, speed & ease to Aadhar-registered individuals to open bank accounts.

17. Subsidiaries:

The Bank has ten wholly owned subsidiaries:

 Axis Private Equity Ltd.

 Axis Trustee Services Ltd.

 Axis Asset Management Company Ltd.

 Axis Mutual Fund Trustee Ltd.

 Axis Bank UK Ltd.

 Axis Securities Ltd.

 Axis Direct

 Axis Finance Ltd.

 Axis Securities Europe Ltd.

The strengths of banks are in both retail & corporate, which is dedicated to adopting the

finest industry practices which are also internationally in order to realize excellence.

In November 2010 Axis Bank entered a deal to buy the investment banking & equities

units of Enam Securities for $456 million, the equities arm of Axis Bank, will merge with
the investment banking business of Enam Securities. Enam will demerge its investment

banking, institutional equities, retail equities & distribution of financial products, and

non–banking finance businesses and merge them, as per the deal with Axis Securities.