comparative analysis of non performing assets
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EXECUTIVE SUMMARY
The undergone project is the part of the Summer Internship project focused on Banking Sector.
This project helped me to get the deeper understanding of the Non Performing Assets and how a
bank needs to continuously monitor its advances to ensure the success of the bank to strengthen
the financial position.
The banking industry has undergone a sea change after the first phase of economic liberalization
in 1991 and hence credit management. While the primary function of banks is to lend funds as
loans to various sectors such as agriculture, industry, personal loans, housing loans etc., in recent
times the banks have become very cautious in extending loans. The reason being mounting non-
performing assets (NPAs). An NPA accounts not only for reduction in profitability of banks by
provisioning in the profit and loss account, but their carrying cost is also increased which results
in excess & unavoidable management attention. Apart from this, a high level of NPA also puts
strain on a banks net worth because banks are under pressure to maintain a desired level of
Capital Adequacy and in the absence of comfortable profit level, banks eventually look towards
their internal financial strength to fulfill the norms thereby slowly eroding the net worth.
For the study three year data (i.e. financial year 2008, 2009, 2010) has been collected for all the
public sector banks for calculating the ratios related to non performing assets. Then these data
were framed in tabulated form from which various charts were derived. The primary objective of
this project is to study Non Performing Assets of the Central Bank of India and compare it with
other public sector banks.
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This important analysis is performed usually by finance professionals in order to manage their
NPAs. This analysis is made by using the information and data taken from the financial excels of
the company and for other banks information various government sites were referred. These
type of analysis are usually presented to top management as one of their basis in making crucial
business decisions regarding the framing of policies like that of provision for npa, policies for
advance granting, etc. This experience was an emphasis on the importance of these data which
could be the roots of decisions made by management that can make or break the company.
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INTRODUCTION
After liberalization the Indian banking sector developed very appreciably and is
continuously growing at a much faster rate day by day. The step taken RBI to
nationalized certain number of commercial banks for proving socio economic services to
the people of the nation also proved to be milestone in the banking sector and among
these nationalized banks one bank was Central Bank of India who has also paid his part
of role in development of the economy in several ways.
The Central Bank of India has shown very good performance as far as the financial
operations are concerned. If we take a look at the financial operations of the bank, we
will find that deposits of public in the Central Bank of India has increased from 110320
crore in year 2008 to 162107 crore in year 2010 as compared to the Public Sector Banks,
which have increased from 24,37,698 crore in year 2008 to 3691799 crore in year 2010,
the investments of the Central Bank of India has increased from 31455 crore in 2008 to
50563 crore, and the advances have also been increased to 105383 crore in 2010 from
72997 crore in 2008 as compared to Public Sector Banks 1785159 crore in 2008 to
2703811 crore in 2010. The total income of the Central Bank of India has also shown
good performance since the last few years and currently is at 13799 crore. The Public
Sector Banks have also shown comparatively good result with total income of 354876
crore.
The major problem of the Public Sector Banks these days are the non performing assets
which have direct bearing of it on the banks profitability. The non performing assets of
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the Public Sector Banks have decreased to a great extent as compared to the last decade
but it has been increasing regularly year by year from last few years. If we take a quick
glance on the numbers of non performing assets we may come to know that in the year
2008 the NPAs were 40,277crore and reached to 59,927crore in 2010. If we talk
particularly about Central Bank of India, its NPA were at 2350 crore in year 2008 which
increased to 2458 by the end of financial year 2010.
The only problem that hampers the possible financial performance of the Public Sector
Banks is the increasing results of the non performing assets. The non performing assets
impacts drastically to the working of the banks. The efficiency of a bank is not always
reflected only by the size of its balance sheet but by the level of return on its assets. NPAs
do not generate interest income for the banks, but at the same time banks are required to
make provisions for such NPAs from their current profits. NPAs have a deleterious effect
on the return on assets in several ways
They erode current profits through provisioning requirements
They result in reduced interest income
They require higher provisioning requirements affecting profits and accretion to capital
funds and capacity to increase good quality risk assets in future, and
They limit recycling of funds, set in asset-liability mismatches, etc.
The RBI has implemented many schemes and tools to reduce the non performing assets
by introducing internal checks and control scheme, relationship managers as stated by
RBI who have complete knowledge of the borrowers, credit rating system, and early
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warning system and so on. The RBI has also tried to improve the securitization Act and
SRFAESI Act, 2002 and other acts related to the pattern of the borrowings. Though RBI
has taken number of measures to reduce the level of the non performing assets the results
are improving and has shown a great difference from the last decade. To improve NPAs
each bank should be motivated to introduce their own precautionary steps. Before lending
the banks must evaluate the feasible financial and operational prospective results of the
borrowing companies. They must evaluate the business of borrowing companies by
keeping in considerations the overall impacts of all the factors that influence the business.
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OBJECTIVE OF THE STUDY
Primary objective:- The primary objective of making this report is:
To study Non Performing Assets of the Central Bank of India and compare it with
other public sector banks.
Secondary objectives:- The secondary objectives of preparing this report are:
To understand what is Non Performing Assets and what are the underlying
reasons for the emergence of the NPAs.
To understand the impacts of NPAs on the operations of the Public Sector Banks.
To know the steps taken to reduce the NPAs.
To evaluate the comparative ratios of the Public Sector Banks with concerned to
the NPAs.
USE OF THE STUDY
The analysis made as a part of this study may contribute in a way analysis of strength and
weakness of the banking sector as whole with regard to Non Performing Asset of banks.
Various banks may make efforts to overcome limitations for lending money to different
sectors like agricultural, SSI, Priority sector, non-priority sector, public sector & others.
.
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COMPANY PROFILE
Established in 1911, Central Bank of India is one of the oldest commercial banks of
India, and reportedly is the first truly Indian bank which was totally owned and
established by Indian without any foreign help. The establishment of the Bank was the
ultimate realisation of the dream of Sir Sorabji Pochkhanawala, founder of the Bank. Sir
Pherozesha Mehta was the first Chairman of a truly 'Swadeshi Bank'. In fact, such was
the extent of pride felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank of
India as the 'property of the nation and the country's asset'. He also added that 'Central
Bank of India lives on people's faith and regards itself as the people's own bank'. In the
year 1969 the bank was nationalized by the Government of India.
During the past 100 years of history the Bank has weathered many storms and faced
many challenges. The Bank could successfully transform every threat into business
opportunity and excelled over its peers in the Banking industry.
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A number of innovative and unique banking activities have been launched by Central
Bank of India and a brief mention of some of its pioneering services are as under:
1921 Introduction to the Home Savings Safe Deposit Scheme to build saving/thrift
habits in all sections of the society.
1924 An Exclusive Ladies Department to cater to the Bank's women clientele.
1926 Deposit Locker facility and Rupee Travelers Cheques.
1929 Setting up of the Executor and Trustee Department.
1932 Deposit Insurance Benefit Scheme.
1962 Recurring Deposit Scheme.
Subsequently, even after the nationalization of the Bank in the year 1969, Central Bank
continued to introduce a number of innovative banking services as under:
1976 The Merchant Banking Cell was established.
1980 Centralcard, the credit card of the Bank was introduced.
1986 'Platinum Jubilee Money Back Deposit Scheme' was launched.
1989 The housing subsidiary Cent Bank Home Finance Ltd. was started with its
headquarters at Bhopal in Madhya Pradesh.
1994 Quick Cheque Collection Service (QCC) & Express Service was set up to
enable speedy collection of outstation cheques.
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Further in line with the guidelines from Reserve Bank of India as also the Government of
India, Central Bank has been playing an increasingly active role in promoting the key
thrust areas of agriculture, small scale industries as also medium and large industries. The
Bank also introduced a number of Self Employment Schemes to promote employment
among the educated youth.
Among the Public Sector Banks, Central Bank of India can be truly described as an All
India Bank, due to distribution of its large network in 27 out of 29 States as also in 3 out
of 7 Union Territories in India. Central Bank of India holds a very prominent place
among the Public Sector Banks on account of its network of 3728 branches and 178
extension counters at various centers throughout the length and breadth of the country.
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CORPORATE VISION
To emerge as a strong, vibrant and pro-active Bank/Financial Super Market and to
positively contribute to the emerging needs of the economy through consistent
harmonization of human, financial and technological resources and effective risk control
systems.
CORPORATE MISSION
To transform the customer banking experience into a fruitful and enjoyable one.
To leverage technology for efficient and effective delivery of all banking services.
To have bouquet of product and services tailor-made to meet customers aspirations.
The pan-India spread of branches across all the state of the country will be utilized to
further the socio economic objective of the Government of India with emphasis on
Financial Inclusion.
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INTRODUCTION OF
NON PERFORMING ASSETS
The world is going faster in terms of services and physical products. However it has been
researched that physical products are available because of the service industries. In the nation
economy also service industry plays vital role in the boosting up of the economy. The banking sector
is one of appreciated service industries. The banking sector plays larger role in channelizing money
from one end to other end. The banking sector accepts the deposits of the people and provides fruitful
return to people on the invested money. But for providing the better returns plus principal amounts to
the clients; it becomes important for the banks to earn. the main source of income for banks are the
interest that they earn on the loans that have been disbursed to general person, businessman, or any
industry for its development. Thus, we may find the input-output system in the banking sector. Banks
first, accepts the deposits from the people and secondly they lend this money to people who are in the
need of it. By the way of channelizing money from one end to another end, Banks earn their profits.
However, Indian banking sector has faced the serious problem of Non Performing Assets.
This problem has been emerged largely in Indian banking sector since three decade. Due to this
problem many Public Sector Banks have been adversely affected to their performance and operations.
In simple words Non Performing Assets problem is one where banks are not able to recollect their
landed money from the clients or clients have been in such a condition that they are not in the position
to provide the borrowed money to the banks.
The problem of NPAs is dangerous to the banks because it destroys the healthy financial
conditions of them. The trust of the people would not be anymore if the banks have higher NPAs. The
problem of NPAs must be tackled out in such a way that would not destroy the operational, financial
conditions and would not affect the image of the banks. Recently, RBI has taken number steps to
reduce NPAs of the Indian banks. And it is also found that the many banks have shown positive
figures in reducing NPAs as compared to the past years.
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MEANING OF NPAs
An asset is classified as non-performing asset (NPAs) if the borrower does not
pay dues in the form of principal and interest for a period of 180 days. However, now a
days, default status would be given to a borrower if dues were not paid for 90 days. If any
advance or credit facilities granted by bank to a borrower become non-performing, then
the bank will have to treat all the advances/credit facilities granted to that borrower as
non-performing without having any regard to the fact that there may still exist certain
advances / credit facilities having performing status. NPA is defined as an advance for
which interest or repayment of principal or both remain out standing for a period of more
than two quarters. The level of NPA act as an indicator showing the bankers credit risks
and efficiency of allocation of resource.
Action for enforcement of security interest can be initiated only if the secured asset is
classified as Non Performing Asset. Non Performing Asset means an asset or account of
borrower, which has been classified by a bank or financial institution as sub- standard,
doubtful or loss asset, in accordance with the directions or guidelines relating to asset
classification issued by RBI. An amount due under any credit facility is treated as "past
due" when it has not been paid within 30 days from the due date. Due to the improvement
in the payment and settlement systems, recovery climate, upgradation of technology in
the banking system, etc., it was decided to dispense with 'past due' concept, with effect
from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA)
shell be an advance where
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i) Interest and /or installment of principal remain overdue for a period of more than
180 days in respect of a Term Loan,
ii) The account remains 'out of order' for a period of more than 180 days, in respect
of an overdraft/ cash Credit (OD/CC),
iii) The bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
iv) Interest and/ or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted
for agricultural purpose, and
v) Any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for
identification of NPAs, form the year ending March 31, 2004. Accordingly, with
effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an
advance where;
i) Interest and /or installment of principal remain overdue for a period of more than
90 days in respect of a Term Loan,
ii) The account remains 'out of order' for a period of more than 90 days, in respect of
an overdraft/ cash Credit (OD/CC),
iii) Any amount to be received remains overdue for a period of more than 90 days in
respect of other accounts.
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ASSET CLASSIFICATION
1. Standard Assets:- An asset, which does not disclose any problem and also does not
carry more than normal risk attached to the business, it should not fall under this category
of NPA.
2. Sub-Standard Assets- An asset, which has been identified as NPA for a period not
exceeding two years. In the case of term loan, if installments of principal are overdue for
more than one year but not exceeding two years, it is to be treated as sub-standard asset.
An asset where the terms of the loan agreement regarding interest and principal have
been re-negotiated or re-scheduled should be classified as sub-standard and should
remain in such category for at least two years of satisfactory performance under the re-
negotiated or rescheduled terms.
3. Doubtful Assets- An asset, which remains NPA for more than two years. Here too,
rescheduling does not entitle a bank to upgrade the quality of an advance automatically.
In the case of a term loan, if installments of principal are overdue for more than two
years, it is to be treated as doubtful.
4. Loss Assets- An asset where loss has been identified by the bank or by
internal/external auditors or by RBI inspection but the amount has not been written-off,
wholly or partly. In other words, such an asset is considered unrealizable and of such
little value that its continuance as a bankable asset is not warranted although there may be
some salvage or recovery value.
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REASONS FOR NPA
1) INTERNAL FACTORS
2) EXTERNAL FACTORS
Internal Factors:
1) Funds borrowed for a particular purpose but not use for the said purpose.
2) Project not completed in time.
3) Poor recovery of receivables.
4) Excess capacities created on non-economic costs.
5) In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6) Business failures.
7) Diversion of funds for expansion\modernization\setting up new projects\ helping or
promoting sister concerns.
8) Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-
appropriation etc.
9) Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delaying settlement of payments\ subsidiaries by government bodies etc.,
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External Factors:
1) Sluggish legal system
Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5) Failures, nonpayment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6) Government policies like excise duty changes, Import duty changes etc.,
The above-mentioned causes are discussed below with some other reasons:-
Liberalization of economy/removal of restrictions/reduction of tariffs - A largenumber of NPA borrowers were unable to compete in a competitive market in which
lower prices and greater choices were available to consumers. Further, borrowers
operating in specific industries have suffered due to political, fiscal and social
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compulsions, compounding pressures from liberalization (e.g., sugar and fertilizer
industries).
Lax monitoring of credits and failure to recognize Early Warning Signals - It has
been stated that approval of loan proposals is generally thorough and each proposal
passes through many levels before approval is granted. However, the monitoring of
sometimes-complex credit files has not received the attention it needed, which meant that
early warning signals were not recognized and standard assets slipped to NPA category
without banks being able to take proactive measures to prevent this. Partly due to this
reason, adverse trends in borrowers' performance were not noted and the position further
deteriorated before action was taken.
Over optimistic promoters - Promoters were often optimistic in setting up largeprojects and in some cases were not fully above board in their intentions. Screening
procedures did not always highlight these issues. Often projects were set up with the
expectation that part of the funding would be arranged from the capital markets, which
were booming at the time of the project appraisal. When the capital markets subsequently
crashed, the requisite funds could never be raised, promoters often lost interest and
lenders were left stranded with incomplete/unviable projects.
Directed lending - Loans to some segments were dictated by Government's policiesrather than commercial imperatives.
Highly leveraged borrowers - Some borrowers were under capitalized and overburdened with debt to absorb the changing economic situation in the country. Operating
within a protected market resulted in low appreciation of commercial/market risk.
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Funding mismatch -There are said to be many cases where loans granted for shortterms were used to fund long term transactions.
High Cost of Funds High interest rates were not uncommon. Coupled with highleveraging and falling demand, borrowers could not continue to service high cost debt.
Willful Defaulters -There are a number of borrowers who have strategically defaultedon their debt service obligations realizing that the legal recourse available to creditors is
slow in achieving results
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IMPACT OF NPA
Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong choice
of client. Because of the money getting blocked the prodigality of bank decreases not
only by the amount of NPA but NPA lead to opportunity cost also as that much of profit
invested in some return earning project/asset. So NPA 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 ROI (return on
investment), which adversely affect current earning of bank.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for shortest period of time which lead to additional cost to the
company. Difficulty in operating the functions of bank is another cause of NPA due to
lack of money. Routine payments and dues.
Involvement of management:
Time and efforts of management is another indirect cost which bank has to bear due to
NPA. Time and efforts of management in handling and managing NPA would have
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diverted to some fruitful activities, which would have given good returns. Now day s
banks have special employees to deal and handle NPAs, which is additional cost to the
bank.
Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of
market credit. It will lose its goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks.
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IDENTIFICATION AND RESOLUTION OF
NPAs
1. Internal Checks and Control:- Since high level of NPAs dampens the performance
of the banks identification of potential problem accounts and their close monitoring
assumes importance. Though most banks have Early Warning Systems (EWS) for
identification of potential NPAs, the actual processes followed, however, differ from
bank to bank. The EWS enable a bank to identify the borrower accounts which show
signs of credit deterioration and initiate remedial action. Many banks have evolved and
adopted an elaborate EWS, which allows them to identify potential distress signals and
plan their options beforehand, accordingly. The early warning signals, indicative of
potential problems in the accounts, viz. persistent irregularity in accounts, delays in
servicing of interest, frequent, units' financial problems, market related problems, etc. are
captured by the system. In addition, some of these banks are reviewing their exposure to
borrower accounts every quarter based on published data which also serves as an
important additional warning system. These early warning signals used by banks are
generally independent of risk rating systems and asset classification norms prescribed by
RBI.
The major components/processes of a EWS followed by banks in India are as
follows:-
i) Designating Relationship Manager/ Credit Officer for monitoring account/s
ii) Preparation of `know your client' profile
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iii) Credit rating system
iv) Identification of watch-list/special mention category accounts
v) Monitoring of early warning signals
Relationship Manager/Credit Officer
The Relationship Manager/Credit Officer is an official who is expected to have complete
knowledge of borrower, his business, his future plans, etc. The Relationship Manager has
to keep in constant touch with the borrower and report all developments impacting the
borrowal account. As a part of this contact he is also expected to conduct scrutiny and
activity inspections. In the credit monitoring process, the responsibility of monitoring a
corporate account is vested with Relationship Manager/Credit Officer.
`Know your client' profile (KYC)
Most banks in India have a system of preparing `know your client' (KYC) profile/credit
report. As a part of `KYC' system, visits are made on clients and their places of
business/units. The frequency of such visits depends on the nature and needs of
relationship.
Credit Rating System
The credit rating system is essentially one point indicator of an individual credit exposure
and is used to identify measure and monitor the credit risk of individual proposal. At the
whole bank level, credit rating system enables tracking the health of banks entire credit
portfolio. Most banks in India have put in place the system of internal credit rating. While
most of the banks have developed their own models, a few banks have adopted credit
rating models designed by rating agencies. Credit rating models take into account various
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types of risks viz. financial, industry and management, etc. associated with a borrowal
unit. The exercise is generally done at the time of sanction of new borrowal account and
at the time of review / renewal of existing credit facilities.
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 borrowal accounts under
watch list or special mention category if performing advances operating under adverse
business or economic conditions are exhibiting certain distress signals. These accounts
generally exhibit weaknesses which are correctable but warrant banks' closer attention.
The categorisation 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.
Early Warning Signals
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
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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, general economic conditions, etc.
Early warning signals can be classified into five broad categories viz. (a) financial (b)
banking (c) management and (d) external factors. Financial related warning signals
generally emanate from the borrowers' balance sheet, income expenditure statement,
statement of cash flows, statement of receivables etc. Following common warning signals
are captured by some of the banks having relatively developed EWS.
Financial warning signals
Persistent irregularity in the account
Default in repayment obligation
Invocation of guarantees
Deterioration in liquidity/working capital position
Substantial increase in long term debts in relation to equity
Declining sales
Operating losses/net losses
Rising sales and falling profits
Disproportionate increase in overheads relative to sales
Rising level of bad debt losses Operational warning signals
Low activity level in plant
Disorderly diversification/frequent changes in plan
Nonpayment of wages/power bills
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Loss of critical customer/s
Frequent labor problems
Evidence of aged inventory/large level of inventory
Management related warning signals
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
Banking related signals
Declining bank balances/declining operations in the account
Opening of account with other bank
Return of outward bills/dishonored cheques
Sales transactions not routed through the account
Frequent requests for loan
Frequent delays in submitting stock statements, financial data, etc.
Signals relating to external factors
Economic recession
Emergence of new competition
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Emergence of new technology
Changes in government / regulatory policies
Natural calamities
2. Management/Resolution of NPAs
A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various
resolution mechanisms introduced in the recent past which include the SRFAESI Act, one
time settlement schemes, setting up of the CDR mechanism, strengthening of DRTs.
From the data available of Public Sector Banks as on March 31, 2010, NPAs which had
gross value near to 60000 crore.
The total number of resolution approaches (including cases where action is to be
initiated) is greater than the number of NPAs, indicating some double counting. As can
be seen, suit filed and Board for Industrial and Financial Reconstruction (BIFR) are the
two most common approaches to resolution of NPAs in public sector banks. Data
available on resolution strategies adopted by public sector banks suggest that
Compromise settlement schemes with borrowers are found to be more effective than legal
measures. Many banks have come out with their own restructuring schemes for
settlement of NPA accounts.
3. Credit Information Bureau
State Bank of India, HDFC Limited, M/s. Dun and Bradstreet Information Services
(India) Pvt. Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
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information between banks and FIs for curbing the growth of NPAs incorporated credit
Information Bureau (India) Limited (CIBIL) in January 2001. Pending the enactment of
CIB Regulation Bill, the RBI constituted a working group to examine the role of CIBs.
As per the recommendations of the working group, Banks and FIs are now required to
submit the list of suit-filed cases of Rs. 10 million and above and suit-filed cases of
willful defaulters of Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share
this information with commercial banks and FIs so as to help them minimize adverse
selection at appraisal stage.
4. 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 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.
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5. Legal and Regulatory Regime:-
A. Debt Recovery Tribunals
DRTs were set up under the Recovery of Debts due to Banks and Financial Institutions
Act, 1993. Under the Act, two types of Tribunals were set up i.e. Debt Recovery Tribunal
(DRT) and Debt Recovery Appellate Tribunal (DRAT). The DRTs are vested with
competence to entertain cases referred to them, by the banks and FIs for recovery of debts
due to the same. The order passed by a DRT is appealable to the Appellate Tribunal but
no appeal shall be entertained by the DRAT unless the applicant deposits 75% of the
amount due from him as determined by it. However, the Affiliate Tribunal may, for
reasons to be received in writing, waive or reduce the amount of such deposit. Advances
of Rs. 1 mn and above can be settled through DRT process. An important power
conferred on the Tribunal is that of making an interim order (whether by way of
injunction or stay) against the defendant to debar him from transferring, alienating or
otherwise dealing with or disposing of any property and the assets belonging to him
within prior permission of the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticised in respect of recovery made considering the size of NPAs in
the Country. In general, it is observed that the defendants approach the High Country
challenging the verdict of the Appellate Tribunal which leads to further delays in
recovery. Validity of the Act is often challenged in the court which hinders the progress
of the DRTs. Lastly, many needs to be done for making the DRTs stronger in terms of
infrastructure.
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B. Lokadalats
The institution of Lokadalat constituted under the Legal Services Authorities Act, 1987
helps in resolving disputes between the parties by conciliation, mediation, compromise or
amicable settlement. It is known for effecting mediation and counseling between the
parties and to reduce burden on the court, especially for small loans. Cases involving suit
claims upto Rs. l million can be brought before the Lokadalat and every award of the
Lokadalat shall be deemed to be a decree of a Civil Court and no appeal can lie to any
court against the award made by the Lokadalat.
Several people of particular localities/ various social organisations are approaching
Lokadalats which are generally presided over by two or three senior persons including
retired senior civil servants, defense personnel and judicial officers. They take up cases
which are suitable for settlement of debt for certain consideration. Parties are heard and
they explain their legal position. They are advised to reach to some settlement due to
social pressure of senior bureaucrats or judicial officers or social workers. If the
compromise is arrived at, the parties to the litigation sign a statement in presence of
Lokadalats which is expected to be filed in court to obtain a consent decree. Normally, if
such settlement contains a clause that if the compromise is not adhered to by the parties,
he suits pending in the court will proceed in accordance with the law and parties will
have a right to get the decree from the court. In general, it is observed that banks do not
get the full advantage of the Lokadalats. It is difficult to collect the concerned borrowers
willing to go in for compromise on the day when the Lokadalat meets. In any case, we
should continue our efforts to seek the help of the Lokadalat.
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C. Enactment of SRFAESI Act, 2002
The "The Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest Act" (SRFAESI) provides the formal legal basis and regulatory
framework for setting up Asset Reconstruction Companies (ARCs) in India. In addition
to asset reconstruction and ARCs, the Act deals with the following largely aspects, viz.
Securitisation and Securitisation Companies
Enforcement of Security Interest
Creation of a central registry in which all securitization and asset reconstruction
transactions as well as any creation of security interests has to be filed.
The Reserve Bank of India (RBI), the designated regulatory authority for ARCS has
issued Directions, Guidance Notes, Application Form and Guidelines to Banks in April
2003 for regulating functioning of the proposed ARCS and these Directions/ Guidance
Notes cover various aspects relating to registration, operations and funding of ARCS and
resolution of NPAs by ARCS. The RBI has also issued guidelines to banks and financial
institutions on issues relating to transfer of assets to ARCS, consideration for the same
and valuation of instruments issued by the ARCS. Additionally, the Central Government
has issued the security enforcement rules ("Enforcement Rules"), which lays down the
procedure to be followed by a secured creditor while enforcing its security interest
pursuant to the Act.
The Act permits the secured creditors (if 75% of the secured creditors agree) to enforce
their security interest in relation to the underlying security without reference to the Court
after giving a 60 day notice to the defaulting borrower upon classification of the
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corresponding financial assistance as a non-performing asset. The Act permits the
secured creditors to take any of the following measures:
Take over possession of the secured assets of the borrower including right to transfer by
way of lease, assignment or sale;
Take over the management of the secured assets including the right to transfer by way
of lease, assignment or sale;
Appoint any person as a manager of the secured asset (such person could be the ARC if
they do not accept any pecuniary liability); and
Recover receivables of the borrower in respect of any secured asset which has been
transferred.
After taking over possession of the secured assets, the secured creditors are required to
obtain valuation of the assets. These secured assets may be sold by using any of the
following routes to obtain maximum value.
By obtaining quotations from persons dealing in such assets or otherwise interested in
buying the assets;
By inviting tenders from the public;
By holding public auctions; or
By private treaty.
Lenders have seized collateral in some cases and while it has not yet been possible to
recover value from most such seizures due to certain legal hurdles, lenders are now
clearly in a much better bargaining position vis-a-vis defaulting borrowers than they were
before the enactment of SRFAESI Act. When the legal hurdles are removed, the
bargaining power of lenders is likely to improve further and one would expect to see a
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large number of NPAs being resolved in quick time, either through security enforcement
or through settlements.
Asset Reconstruction Companies
Under the SRFAESI Act ARCS can be set up under the Companies Act, 1956. The Act
designates any person holding not less than 10% of the paid-up equity capital of the ARC
as a sponsor and prohibits any sponsor from holding a controlling interest in, being the
holding company of or being in control of the ARC. The SRFAESI and SRFAESI Rules/
Guidelines require ARCS to have a minimum net-owned fund of not less than Rs.
20,000,000. Further, the Directions require that an ARC should maintain, on an ongoing
basis, a minimum capital adequacy ratio of 15% of its risk weighted assets. ARCS have
been granted a maximum realisation time frame of five years from the date of acquisition
of the assets. The Act stipulates several measures that can be undertaken by ARCs for
asset reconstruction. These include:
a) Enforcement of security interest;
b) Taking over or changing the management of the business of the borrower;
c) The sale or lease of the business of the borrower;
d) Settlement of the borrowers' dues; and
e) Restructuring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken over by the lenders
under security enforcement rights available to them or as a recovery agent for any bank or
financial institution and to receive a fee for the discharge of these functions. They can
also be appointed to act as a receiver, if appointed by any Court or DRT.
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REVIEW OF LITERATURE
In view of the seriousness of the problem number of research studies have been
conducted on different issues concerning NPAs. FICCI (1999), have discussed different
factors responsible for this problem and suggested measures to overcome it. Westgaard
(2000) has identified different financial variables as well as other firm characteristics
affecting the default probability which identified in advance can help controlling the fresh
accretion of NPAs. Mukherjee (2003), discussed the suitability model of asset
reconstruction companies to solve the problem of NPAs. Only few studies have
highlighted the impact of NPAs on the performance of banks. Das (1999) has compared
the various efficiency measures of public sector banks by applying data envelopment
analysis model and concluded that the level of NPAs has significant negative relationship
with efficiency estimates. Verma (1999) has concluded that high level of NPAs leads to
operational failure of the banks. Berger and Young (1997) has examined the relationship
between problem loan and bank efficiency and found that high level of problem loans
cause banks to increase spending on monitoring, working out and/or selling off these
loans and possibly become more diligent in administering the portion of their existing
loan portfolio that is currently performing. Gupta (1997) has also concluded that NPAs
effects the profitability of banks and leads to liquidity crunch and slow down in the
growth in GDP, etc. Kaveri (1995) has also examined the impact of NPAs on profitability
by taking profit making and six loss making banks and concluded that loss making banks
maintained higher NPAs in the loan portfolio which led them to show losses. Kwan and
Eisenbeis (1994) also concluded that there is negative relationship between efficiency and
problem loans. Toor (1994) analysed that poor recovery management leads to reduction
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in yield on advances, reduced productivity, loss in the credibility and put detrimental
impact on the policies of the banks. Murthy (1988) has examined that default bring down
the return accruing and to them, reduces effective rate of interest and reduces the funds'
recirculation and increases their dependence on external sources thereby increasing the
costs.
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METHODOLOGY
Research methodology is a methodology for collecting all sorts of information & data
pertaining to the subject in objectives. Secondary data is taken for the analysis as data is
related to the facts and numbers related to banking sector. The data is most relevant as the
values of data cannot be changed according to the need of the researcher and will remain
same throughout and taken through the most reliable sources. The research design for this
study is basically analytical because large number of data of the Public Sector Banks are
utilized. The research design that will be use is Descriptive Research. Involves gathering
data that describe events and then organizes, tabulates, depicts, and describes the data.
Often uses visual aids such as graphs and charts to aid the reader.
LIMITATIONS OF THE STUDY
The limitations that I felt in my study are:-
It was critical for me to gather the financial data of every bank of the Public
Sector Banks so the better evaluations of the performance of the banks are not
possible.
Since the Indian banking sector is so wide so it was not possible for me to cover
all the banks of the Indian banking sector.
Data for last three financial years were taken due to unavailability of the
complete data for all the considered banks.
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RATIO ANALYSIS
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Comparison with other Public Sector Banks
1.GROSS NPA RATIO:- Gross NPA Ratio is the ratio of gross NPA to gross advances
of the Bank. Gross NPA is the sum of all loan assets that are classified as NPA as per the
RBI guidelines. The ratio is to be counted in terms of percentage and the formula for
GNPA is as follows:
Gross NPA ratio = Gross NPA x 100
Gross advances
GRAPH 1
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Table 1
S.No. BANKS
Gross NPA as % Gross
Advance
I NATIONALISED BANKS 2008 2009 2010
1 Allahabad Bank 2.03 1.83 1.70
2 Andhra Bank 1.08 0.83 0.86
3 Bank of Baroda 1.85 1.28 1.37
4 Bank of India 1.70 1.72 2.89
5 Bank of Maharashtra 2.61 2.32 3.00
6 Canara Bank 1.18 1.56 1.52
7 Central Bank of India 3.21 2.71 2.33
8 Corporation Bank 1.49 1.15 1.03
9 Dena Bank 2.48 2.15 1.81
10 Indian Bank 1.22 0.89 0.82
11 Indian Overseas Bank 1.65 2.56 4.47
12 Oriental Bank of Commerce 2.34 1.53 1.74
13 Punjab & Sind Bank 0.74 0.65 0.63
14 Punjab National Bank 2.77 1.62 1.72
15 Syndicate Bank 2.76 1.95 2.21
16 UCO Bank 2.99 2.23 2.01
17 Union Bank of India 2.23 1.99 2.23
18 United Bank of India 2.73 2.88 3.24
19 Vijaya Bank 1.61 1.97 2.39
AVERAGE OF 19 NATIONALISED BANKS
[I] 2.08 1.77 2.00II State Bank of India (SBI) 3.08 2.89 3.09
III ASSOCIATES OF SBI
1 State Bank of Bikaner & Jaipur 1.69 1.64 1.73
2 State Bank of Hyderabad 0.87 1.11 1.22
3 State Bank of Indore 1.45 1.33 2.08
4 State Bank of Mysore 1.70 1.43 2.01
5 State Bank of Patiala 1.43 1.31 2.17
6 State Bank of Travancore 2.02 1.61 1.66
AVERAGE OF 6 ASSOCIATES [III] 1.49 1.38 1.76
AVERAGE OF STATE BANK GROUP.[II+III] 2.63 2.49 2.74IV Other Public Sector Bank
IDBI Ltd. 1.90 1.38 1.54
AVERAGE OF PUBLIC SECTOR
BANKS[I+II+III+IV]2.25 1.99 2.21
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The chart above indicates the quality of credit portfolio of the banks. High gross
NPA ratio indicates the low credit portfolio of bank and vice-a-versa.
We can see from the above chart that the Central Bank of India has performed
consistently well and brought down the Gross NPA from 3.21% in 2008 to 2.33%
by the end of financial year 2010.
As compared to the public sector banks as a whole we can observe that gross NPA
of CBI is higher by 0.12 %.
At present Indian Overseas Bank has the highest Gross NPA with 4.47% followed
by United Bank of India with 3.24%
Punjab & Sind Bank have the least Gross NPA with just 0.63% npa of the total
advances followed by Indian Bank and Andhra Bank with 0.82% and 0.86%
respectively.
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2.NET NPA RATIO:- The net NPA percentage is the ratio of net NPA to net advances,
in which the provision is to be deducted from the gross advance. Net NPAs are calculated
by reducing cumulative balance of provisions outstanding at a period end from gross
NPAs. Higher ratio reflects rising bad quality of loans. The formula for that is:
Net NPA Ratio = Gross NPA-Provision x 100
Gross Advances-Provisions
GRAPH 2
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Table 2
As on March 31
S.No. BANKS Net NPA as % Net Advance
I NATIONALISED BANKS 2008 2009 2010
1 Allahabad Bank 0.80 0.72 0.66
2 Andhra Bank 0.15 0.18 0.17
3 Bank of Baroda 0.47 0.31 0.34
4 Bank of India 0.52 0.44 1.31
5 Bank of Maharashtra 0.87 0.79 1.64
6 Canara Bank 0.84 1.09 1.06
7 Central Bank of India 1.45 1.24 0.69
8 Corporation Bank 0.32 0.29 0.31
9 Dena Bank 0.94 1.09 1.21
10 Indian Bank 0.24 0.18 0.2311 Indian Overseas Bank 0.60 1.33 2.52
12 Oriental Bank of Commerce 0.99 0.65 0.87
13 Punjab & Sind Bank 0.37 0.32 0.36
14 Punjab National Bank 0.64 0.17 0.53
15 Syndicate Bank 0.97 0.77 1.07
16 UCO Bank 1.98 1.18 1.17
17 Union Bank of India 0.17 0.34 0.81
18 United Bank of India 1.10 1.48 1.84
19 Vijaya Bank 0.57 0.82 1.40
AVERAGE OF 19 NATIONALISED BANKS[I] 0.73 0.70 0.95
II State Bank of India (SBI) 1.78 1.79 1.72
III ASSOCIATES OF SBI
1 State Bank of Bikaner & Jaipur 0.83 0.85 0.77
2 State Bank of Hyderabad 0.16 0.38 0.55
3 State Bank of Indore 0.73 0.89 1.13
4 State Bank of Mysore 0.43 0.50 1.02
5 State Bank of Patiala 0.60 0.60 1.04
6 State Bank of Travancore 0.94 0.58 0.91
AVERAGE OF 6 ASSOCIATES [III] 0.61 0.63 0.90
AVERAGE OF STATE BANK
GROUP[II+III]0.78 0.79 1.02
IV Other Public Sector Bank
IDBI Ltd. 1.30 0.92 1.02
AVERAGE OF PUBLIC SECTOR
BANKS[I+II+III+IV]0.76 0.73 0.97
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This ratio indicates the degree of risk in the portfolio of the banks. High NPA
ratio indicates the high quantity of risky assets in the Banks for which no
provision are made.
From the chart it becomes clear that Net NPA ratio of Central Bank of India has
improved consistently and has been brought down to 0.69% in 2010 from 1.45%
in 2008 which is a good indicator for the bank.
Looking at the other banks like Dena Bank, Bank of Maharashtra, Bank of India,
Indian Overseas Bank, Syndicate Bank, United Bank of India, Vijaya Bank it
seems that they have not performed well as Net NPA ratio of them has increased
since year 2008.
Indian Overseas Bank has the highest Net NPA ratio of 2.52 % followed by
United Bank of India with 1.84 %.
Andhra Bank has showed the lowest Net NPA ratio 0.17 % and Indian Bank,
Corporation Bank have also showed lower Net NPA ratio with 0.23 % and 0.31 %
in 2010.
3.PROVISION RATIO:- Provisions are to be made to keep safety against the NPA, &
it directly affect on the gross profit of the Banks. The provision Ratio is nothing but total
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provision held for NPA to gross NPA of the Banks. A high ratio suggests that additional
provisions to be made by the bank in the coming years would be relatively low .The
formula for that is,
Provision Ratio= Total Provision x 100
Gross NPAs
GRAPH 3
Table 3
As on
March31
S.No. BANKS PROVISION RATIO(in percentage)
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I NATIONALISED BANKS 2008 2009 2010
1 Allahabad Bank 26.60 29.03 67.92
2 Andhra Bank 26.61 46.19 62.50
3 Bank of Baroda 22.00 14.59 37.524 Bank of India 36.09 25.21 35.92
5 Bank of Maharashtra 11.22 23.43 20.74
6 Canara Bank 68.73 41.51 55.05
7 Central Bank of India 12.29 13.89 11.71
8 Corporation Bank 21.06 30.41 52.99
9 Dena Bank 46.07 32.04 15.10
10 Indian Bank 71.86 3.05 76.86
11 Indian Overseas Bank 12.53 18.98 25.45
12 Oriental Bank of Commerce 14.76 16.16 36.21
13 Punjab & Sind Bank 47.79 39.13 44.6614 Punjab National Bank 11.35 32.74 30.92
15 Syndicate Bank 19.50 28.02 26.45
16 UCO Bank 22.39 17.40 21.24
17 Union Bank of India 35.30 28.39 26.16
18 United Bank of India 32.19 19.50 19.89
19 Vijaya Bank 19.72 19.17 47.68
II State Bank of India (SBI) 15.58 15.75 23.66
III ASSOCIATES OF SBI
1 State Bank of Bikaner & Jaipur 17.39 14.89 23.202 State Bank of Hyderabad 9.61 27.77 21.26
3 State Bank of Indore 26.41 19.72 32.86
4 State Bank of Mysore 6.12 14.67 14.45
5 State Bank of Patiala 14.77 12.71 21.74
6 State Bank of Travancore 18.38 11.21 12.61
IV Other Public Sector Bank
1 IDBI Ltd 8.56 10.02 11.08
AVERAGE OF PUBLIC SECTOR
BANKS[I+II+III+IV] 24.99 22.42 32.43
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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. If
the provision ratio is less, it indicates that the Banks has made under provision.
Central Bank of India always had a lower provision for the NPAs which is not a
good indicator and at present it is just 11.71% of its Gross NPA which is among
the lowest provision ratio in public sector and need some attention of the
concerned authority.
At present, highest provision ratio is showed by Indian Bank with 76.86%
followed by Allahabad Bank with 67.92%.
The lowest provision ratio is showed by IDBI Ltd with only 11.08% in the year
2010.
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4. PROBLEM ASSET RATIO:- It is the ratio of gross NPA to total asset of the bank.
The formula for that is:
Problem Asset Ratio = Gross NPAsx100
Total Assets
GRAPH 4
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Table 4As on
March
31
S.No. BANKS Problem Asset Ratio (in percentage)I NATIONALISED BANKS 2008 2009 20101 Allahabad Bank 1.21 1.10 1.00
2 Andhra Bank 0.65 0.53 0.53
3 Bank of Baroda 1.10 0.81 0.86
4 Bank of India 1.07 1.09 1.77
5 Bank of Maharashtra 1.59 1.35 1.70
6 Canara Bank 0.70 0.98 0.97
7 Central Bank of India 1.89 1.56 1.34
8 Corporation Bank 0.87 0.64 0.58
9 Dena Bank 1.48 1.28 1.11
10 Indian Bank 0.69 0.54 0.50
11 Indian Overseas Bank 0.97 1.58 2.75
12 Oriental Bank of Commerce 1.41 0.93 1.06
13 Punjab & Sind Bank 0.43 0.38 0.36
14 Punjab National Bank 1.66 1.01 1.08
15 Syndicate Bank 1.65 1.22 1.44
16 UCO Bank 1.83 1.37 1.21
17 Union Bank of India 1.33 1.19 1.36
18 United Bank of India 1.40 1.64 1.78
19 Vijaya Bank 0.91 1.12 1.41
AVERAGE OF 19 NATIONALISED BANKS [I] 1.24 1.08 1.22
II State Bank of India (SBI) 1.77 1.62 1.85
III ASSOCIATES OF SBI
1 State Bank of Bikaner & Jaipur 1.06 1.05 1.12
2 State Bank of Hyderabad 0.50 0.63 0.73
3 State Bank of Indore 0.90 0.87 1.39
4 State Bank of Mysore 1.08 0.90 1.31
5 State Bank of Patiala 0.88 0.82 1.32
6 State Bank of Travancore 1.30 1.06 1.07
AVERAGE OF 6 ASSOCIATES [III] 0.91 0.86 1.11
AVERAGE OF STATE BANK GROUP [II+III] 1.54 1.44 1.66
IV Other Public Sector Bank
1 IDBI Ltd 1.19 0.83 0.91
AVERAGE OF PUBLIC SECTOR
BANKS[I+II+III+IV]1.34 1.19 1.34
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Problem asset ratio has direct bearing on return on assets as well as liquidity risk
management of the bank.
From the above chart we can observe that Central Bank of India has brought
down its problem asset ratio from 1.89 % to 1.34 % in year 2010 and is same as to
public sector as whole.
Indian Overseas Bank has the highest Problem Asset Ratio with 2.75 %.
Also Punjab & Sind Bank has the lowest Problem Asset Ratio with just 0.36 % in
year 2010.
The current average Problem Asset Ratio of the 19 nationalised bank is 1.22 %.
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5. CAPITAL ADEQUACY RATIO:- Capital Adequacy Ratio can be defined as ratio of
the capital of the Bank, to its assets, which are weighted/adjusted according to risk
attached to them i.e.
Capital Adequacy Ratio = Capital x 100
Risk Weighted Assets
The RBI has set the minimum capital adequacy ratio for all banks. A ratio below the
minimum indicates that the bank is not adequately capitalized to expand its operations.
The ratio ensures that the bank do not expand their business without having adequate
capital. For the purpose of capital Adequacy Achievement, the capital base i.e. Tire I +
Tire II should not be less than the prescribed % of total Risk Weighted Asset of the bank.
GRAPH 5
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Table 5As on
March
31
S.No. BANKS
Capital Adequacy(in percentage)
(Tier I +Tier II)
I NATIONALISED BANKS 2008 2009 2010
1 Allahabad Bank N.A. 13.11 13.62
2 Andhra Bank N.A. 13.22 13.93
3 Bank of Baroda 12.94 14.05 14.36
4 Bank of India 12.04 13.01 12.94
5 Bank of Maharashtra N.A. 12.05 12.78
6 Canara Bank 13.25 14.10 13.43
7 Central Bank of India 9.39 13.12 12.24
8 Corporation Bank N.A. 13.61 15.37
9 Dena Bank N.A. 12.07 12.77
10 Indian Bank N.A. 13.98 12.71
11 Indian Overseas Bank N.A. 13.2 14.78
12 Oriental Bank of Commerce N.A. 12.98 12.54
13 Punjab & Sind Bank N.A. 14.35 13.1
14 Punjab National Bank 13.46 14.03 14.16
15 Syndicate Bank 11.82 12.68 12.7
16 UCO Bank 11.02 11.93 13.21
17 Union Bank of India N.A. 13.27 12.51
18 United Bank of India N.A. 13.28 12.8
19 Vijaya Bank N.A. 13.15 12.5
II State Bank of India (SBI) 12.64 14.25 13.39
III ASSOCIATES OF SBI
1 State Bank of Bikaner & Jaipur 12.51 14.52 13.3
2 State Bank of Hyderabad 11.97 11.53 14.9
3 State Bank of Indore 11.29 13.46 13.53
4 State Bank of Mysore 11.73 12.99 12.42
5 State Bank of Patiala 13.56 12.60 13.26
6 State Bank of Travancore 13.53 14.03 13.74
IV Other Public Sector Bank
1 IDBI Ltd 10.83 11.57 11.31
AVERAGE OF PUBLIC SECTOR
BANKS[I+II+III+IV]12.13 13.19 13.27
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This ratio ensures that the bank do not expand their business without having
adequate capital. The minimum required Capital Adequacy Ratio is 9% at present
for the banks.
According to the above chart, we can observe that Central Bank of India has been
consistent by keeping its Capital Adequacy Ratio much above the minimum
required ratio which is 9% at present for the banks.
The ratio was 12.24% for Central Bank of India in 2010.
Among others public sector banks, Corporation Bank has the highest Capital
Adequacy Ratio with 15.37%.
The IDBI LTD stands lowest in the Capital Adequacy Rate at 11.31%.
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Comparisons Among Branches of
Central Banks of India
1.GROSS NPA RATIO:- Gross NPA Ratio is the ratio of gross NPA to gross advances
of the Bank. Gross NPA is the sum of all loan assets that are classified as NPA as per the
RBI guidelines. The ratio is to be counted in terms of percentage and the formula for
GNPA is as follows:
Gross NPA ratio = Gross NPA x 100
Gross advances
AS ON
31ST
MARCH
NPA as %
Gross
Advance
S.No. BRANCHES 2010
1 Angel Public School 1.99
2 Chandni Chowk 0.60
3 Darya Ganj 1.25
4 Lawrence Road 11.605 Chuna Mandi 0.28
6 Mori Gate 2.40
7 Najafgarh Road 0.91
8 New Seelampur 3.34
9 Press Area 1.08
10 Ram Tirath Nager 1.98
11 Rohini Sector -18 2.93
12 Sadar Bazar 3.00
AVERAGE OF ALL BRANCHES 2.61
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Comparing the NPA ratio of the above branches, we can observe that:
Lawrence Road branch has the highest ratio of 11.6% as compared to the rest
branches.
Chuna Mandi have lowest NPA ratio having just 0.28 % followed by Chandni
Chowk with 0.60 % NPA ratio.
The average NPA ratio of all the branches is 2.61 %.
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2.PROVISION RATIO:- Provisions are to be made to keep safety against the NPA, &
it directly affect 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 x 100
Gross NPAs
AS ON
31ST
MARCH
Provision
as % NPA
S.No. BRANCHES 2010
1 Angel Public School 9.00
2 Chandni Chowk 21.77
3 Darya Ganj 43.18
4 Lawrence Road 18.455 Mitrao 87.50
6 Mori Gate 6.60
7 Najafgarh Road 9.47
8 New Seelampur 5.04
9 Press Area 15.82
10 Ram Tirath Nager 14.10
11 Rohini Sector -18 18.37
12 Sadar Bazar 3.50
AVERAGE OF ALL BRANCHES 21.06
Comparing on the basis of Provision ratio, it can be observed that:
Mitrao branch has the highest provision ratio of 87.50 % followed by Darya Ganj
branch with 43.18%.
Also there are some branches which have very low provision ratio, but some other
doesnt even have minimum required provision ratio such as Mori Gate, New
Seelampur, Sadar Bazar branches.
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3. SUB-STANDARD ASSETS RATIO:- It indicates scope of up
gradation/improvement in NPA. Higher substandard asset ratio means that in whole NPA
the sub standard ratio has major proportion, which indicates that there is a high scope for
advance up gradation or improvement because it will be very easy to recover the loan as
minimum duration of default.It is the ratio of Total Substandard Assets to Gross NPA of
the bank. The formula for that is,
Substandard Assets Ratio= Total Substandard Assets x 100
Gross NPAs
AS ON
31ST
MARCH
Substandard
Asset as %
of total NPA
S.No. BRANCHES 2010
1 Angel Public School 100.00
2 Chandni Chowk 77.72
3 Darya Ganj 10.22
4 Lawrence Road 18.18
5 Mitrao 0
6 Mori Gate 100.007 Najafgarh Road 100.00
8 New Seelampur 100.00
9 Press Area 79.43
10 Ram Tirath Nager 37.65
11 Rohini Sector -18 16.01
12 Sadar Bazar 100.00
AVERAGE OF ALL BRANCHES61.60
Among the above studied branches, we can observe that:
Many branches have hundred percent Sub standard Asset Ratio, which seems to
be a good indicator and have more chances of recovery.
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4. DOUBTFUL ASSET RATIO:- It indicates the scope of compromise for NPA
reduction. It is the ratio of Total Doubtful Assets to Gross NPAs of the bank.
Doubtful Asset Ratio= Total Doubtful Assets x 100
Gross NPAs
AS ON
31ST
MARCH
Doubtful
Asset as
% of total
NPA
S.No. BRANCHES 2010
1 Angel Public School 0
2 Chandni Chowk 03 Darya Ganj 0
4 Lawrence Road 81.50
5 Mitrao 15.62
6 Mori Gate 0
7 Najafgarh Road 0
8 New Seelampur 0
9 Press Area 7.71
10 Ram Tirath Nager 0
11 Rohini Sector -18 83.99
12 Sadar Bazar 0
Considering the Doubtful Asset Ratio of the above branches, we can observe that:
Not much NPAs of branches lies in this category with only three branches having
major part of there NPAs in this category.
Majority of banks have no doubtful assets which is a good sign for the branches.
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5.LOSS ASSET RATIO:- It indicates the proportion of bad loans in the bank. It is the
ratio of total loss assets to Gross NPA of the bank.
Loss Asset Ratio= Total Loss Assets x 100
Gross NPA
AS ON
31ST
MARCH
Loss Asset
as % of
total NPA
S.No. BRANCHES 2010
1 Angel Public School 0
2 Chandni Chowk 22.28
3 Darya Ganj 89.784 Lawrence Road 0.32
5 Mitrao 84.38
6 Mori Gate 0
7 Najafgarh Road 0
8 New Seelampur 0
9 Press Area 12.86
10 Ram Tirath Nager 62.35
11 Rohini Sector -18 0
12 Sadar Bazar 0
In this table we can observe that:
Three branches among the twelve studied branches have major part of there NPAs
lying under this category and seems to be bad loans for the branches.
Chandni Chowk and Press Area branch has relatively lower loss asset ratio as
compared to the above mentioned three branches.
The remaining branches does not have any loss assets which seems to be good for
the respective branches.
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CONCLUSION
The problem statement on which I focused my study is To study Non Performing Assets
of the Central Bank of India and other public sector banks. The Indian banking sector is
the important service sector that helps the people of the India to achieve the socio
economic objective. The Indian banking sector has helped the business and service sector
to develop by providing them credit facilities and other finance related facilities. The
Indian banking sector is developing with good appreciate as compared to the global
benchmark banks. The Public Sector Banks play very important role in developing the
nation in terms of providing good financial services. The Public Sector Banks have also
shown good performance in the last few years. The only problem that the Public Sector
Banks are facing today is the problem of non performing assets. The non performing
assets means those assets which are classified as bad assets which are not possibly be
returned back to the banks by the borrowers. If the proper management of the NPAs is
not undertaken it would hamper the business of the banks. The NPAs would destroy the
current profit, interest income due to large provisions of the NPAs, and would affect the
smooth functioning of the recycling of the funds.
In the analyse done on the past three years data, we came to know that the NPAs is
increasing and in year 2010 it is at 59927 crore as compared from year 2008, in which it
was 40277. Central Bank of India has performed well and has improved on a lot on a
number of aspects, such as, Gross NPA ratio brought down to 2.33% from3.21% in 2008
and maintained Capital Adequacy Ratio at 12.24% which is much above the minimum
requirement of CAR set by RBI. However, the bank need to consider some other aspects
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like low provision ratio and should take some useful steps to improve it. Taking an
overview the bank has reached many achievements like total number of branches
increased to 3728 and increase in net profit by 194 crore in year 2010 as compared to
previous year.
The RBI has also been trying to take number of measures but the NPAs are not
decreasing at an expected rate. The banks must find out the measures to reduce the
evolving problem of the NPAs. If the concept of NPAs is taken very lightly it would be
dangerous for the Indian banking sector. The reduction of the NPAs would help the banks
to boost up their profits, smooth recycling of funds in the nation. This would help the
nation to develop more banking branches and developing the economy by providing the
better financial services to the nation.
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RECOMMENDATION
Though RBI has introduced number of measures to reduce the problem of increasing
NPAs of the banks such as CDR mechanism, one time settlement schemes, enactment of
SRFAESI act, 2002 etc. A lot of measures are desired in terms of effectiveness of these
measures. What I would like to suggest for reducing the NPAs of Central Bank of India
are as under:-
(1) The bank should have its own independent credit rating agency which should evaluate
the financial capacity of the borrower before than credit facility.
(2) The credit rating agency should regularly evaluate the financial condition of the
clients.
(3) The bank needs to raise its provision for the NPAs as it is on a lower side and doesnt
leave a good impression on the minds of the stake holder of the bank.
(4) It is also wise for the bank to carryout special investigative audit of all financial and
business transactions and books of accounts of the borrower company when there is
possibility of the diversion of the funds and mismanagement.
(5) The bank before providing the credit facilities to the borrower company should
analyse the major heads of the income and expenditure based on the financial
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performance of the comparable companies in the industry to identify significant variances
and seek explanation for the same from the company management. They should also
analyse the current financial position of the major assets and liabilities.
(6) The bank should evaluate the SWOT analysis of the borrowing companies i.e. how
they would face the environmental threats and opportunities with the use of their strength
and weakness, and what will be their possible future growth in concerned to financial and
operational performance.
(7) Independent settlement procedure should be more strict and faster and the decision
made by the settlement committee should be binding both borrowers and lenders and any
one of them failing to follow the decision of the settlement committee should be punished
severely.
(8) There should be proper monitoring of the restructured accounts because there is every
possibility of the loans slipping into NPAs category again.
(9) Proper training is important to the staff of the bank at the appropriate level with on
going process, that how they should deal the problem of NPAs, and what continues steps
they should take to reduce the NPAs.
(10) Willful Default of Bank loans should be treated a Criminal Offence.
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(11) No loan is to be given to a Group whose one or the other undertaking has become a
Defaulter.
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BIBLIOGRAPHY
M Y Khan and K Jain management Accounting Tata McGraw-Hill Publishing
Company Limited.
www.iba.org.in
www.centralbankofindia.co.in
www.rbi.org.in
search.proquest.com
Articles for literature review:
Das, Abhiman, (1999), "Efficiency of Public sector Banks: An application of Data EnvelopmentModel", Prajnan, Vol. 28, No. 2, September 1999
FICCI, (1999), "NPA-The unwanted burden of Nationalised banks", FICCI, New Delhi
Gupta, Debashish, (1997), "NPA Management : Innovation is the Key", Chartered FinancialAnalyst, Vol. 3, No. 3, November 1997
Kaveri, V. S., (1995) "Relationship Between Recovery and Profitability of Bank-A Study", SBIMonthly Review, Vol. 33
Kwan, and Eisenbeis, (1994), "An Analysis of Inefficiencies in Banking
Mukherjee, Paramita, (2003), "Dealing with NPAs : Lsessons from International Experiences",
Money and Finance, Vol. 12, No. 12, March 2003
Murthy, J. Vishwanatha and A. Bayya Reddy, (1988), "Defaults of Financial Institutions atWhat Cost", The Chartered Accountant, Vol. 37, No. 6, December 1988
Rao, G. L. and R. K. Samanta, (1981), "Who Shall Repay Agricultural Loan", Bikshan, Vol. 28,No. 2
Toor, N. S., (1994), "Non Performing Advances in Banks", Skylark Publication, New Delhi
Westgaard, Sjur, and Nico van der Wijst, (2001), "Defaultprobabilities in a corporate bankportfolio : A logistic model approach", Elsevier.
Search:
o Non performing assets and banking sectors
o Impact of NPAs on the working of the Public Sector Banks
o Steps taken by govt. to reduce the NPAs of the banks
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