npa mcom koma

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CHAPTER 1

INTRODUCTION

INTRODUCTION

Since the introduction of economic liberalization and financial sector reforms, Banks are under

growing pressure to bring down their NPAs so as to improve their performance and viability.

hat is bothering the bankers today is the management of Non!performing Assets. "ver the

period this problem has aggravated alarmingly and therefore needs urgent remedial actions, so in

this conte#t a good number of circular instruction$guidelines have been issued by bank$%eserve

Bank of &ndia.

%eserve Bank of &ndia, in the year '((', appointed a committee under the )hairmanship of Sh.

*.Narsimham to e#amine and give recommendation for &ncome %ecognition, Asset

)lassification and Provisioning of loan assets of Banks and +inancial &nstitutions. he

)ommittee e#amined the issues and recommended that a policy of &ncome %ecognition should

be ob-ective and based on record of recovery rather than on sub-ective considerations. "n the

basis of the recommendations of the Narsimhan )ommittee, %B& had issued guidelines to all

Scheduled )ommercial Banks on &ncome %ecognition, Assets )lassification and Provisioning in

April, '(( which have been modified from time to time by the %B& on the basis of e#perience

gained and suggestions received from various /uarters. he Prudential Norms for &ncome

%ecognition, Asset )lassification and Provisioning have come into effect from the accounting

year 0'.10.'((0.

Similarly, guidelines were issued by the %eserve Bank of &ndia in *arch, '((2 to All &ndia

+inancial &nstitutions viz. &3B&,&)&)&, &+)&, A4&S Bank and &&B&. Separate guidelines were alsoissued by the %B& on Prudential Norms to Non!Banking +inancial )ompanies in 5une, '((2 and

to %egional %ural banks in *arch, '((6. hey have adopted these guidelines for the purpose of

&ncome %ecognition and Assets )lassification from the accounting year '((7!(6. 8owever,

guidelines relating to provisioning for %%Bs have been made effective from the financial9 year

ended 0'.10.'((:. he definition of NPAs is also gradually becoming tough for %%Bs to cover

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all advances like )ommercial Banks. Although most of!the guidelines relating to %%Bs are

similar to that of )ommercial Banks, they have been made applicable in a phased manner for

%%Bs.

INDIAN BANKS FUNCTIONALLYdiverse and geographically widespread, have played a

crucial role in the socio! economic progress of the country. Banks e#tend credit to different types

of borrowers for many different purposes. +or most customers, bank credit is the primary source

of available debt financing.

+or banks good loans are the most profitable assets. %eturn comes in the form of loan interest,

fee income and investment and the most prominent assumed risk is credit risk. )redit risk

involves inability or unwillingness of customer or counterpart to meet commitments in relation

to lending once a loan is overdue and ceases to yield income it would become a Non Performing

Asset.

Proper management and speedy disposal of NPAs is one of the most critical tasks of banks

today. he problem of Non Performing Assets ;NPAs< in banks and financial institutions has

been a matter of grave concern not only for the banks but also the real economy in general, as

NPAs can choke further e#pansion of credit which would impede the economic growth of the

country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in

the economy. NPAs are not therefore the concern of only lenders but also the public at large.

=ranting of credit for economic activities is the prime duty of banking. Apart from raising

resources through fresh deposits, borrowings and recycling of funds received back from

borrowers constitute a ma-or part of funding credit dispensation activity. >ending is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, which results into economic growth. 8owever lending also carries a risk called credit

risk, which arises from the failure of borrower. Non!recovery of loans along with interest forms a

ma-or hurdle in the process of credit cycle. hus, these loan losses affect the bank?s profitability

on a large scale. hough complete elimination of such losses is not possible, but banks can

always aim to keep the losses at a low level.

Non!performing Asset @NPA has emerged since over a decade as an alarming threat to the

banking industry in our country sending distressing signals on the sustainability and insurability

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of the affected banks. he positive results of the chain of measures affected under banking

reforms by the =overnment of &ndia and %B& in terms of the two Narasimhan )ommittee

%eports in this contemporary period have been neutralized by the ill effects of this surging threat.

3espite various correctional steps administered to solve and end this problem, concrete results

are eluding. &t is a sweeping and all pervasive virus confronted universally on banking and

financial institutions. he severity of the problem is however acutely suffered by Nationalised

Banks, followed by the SB& group, and the all &ndia +inancial &nstitutions.

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MEANING OF NPA

A Non-performin !""e#@NPA is defined as a credit facility in respect of which the interest

and$or installment of Bond finance principal has remained past due? for a specified period of

time. NPA is used by financial institutionsthat refer to loans that are in -eopardy of default. "nce

the borrower has failed to make interest or principle payments for (1 days the loan is considered

to be a non!performing asset. Non!performing assets are problematic for financial institutions

since they depend on interest payments for income. roublesome pressure from the economy can

lead to a sharp increase in non!performing loansand often results in massive write!downs.

ith a view to moving towards international best practices and to ensure greater transparency, it

has been decided to adopt the (1 days? overdue? norm for identification of NPA, from the year

ending *arch 0', 112. Accordingly, with effect from *arch 0', 112, a non!performing asset

@NPAis a loan or an advance whereC

&nterest and$or installment of principal remain overdue for a period of more than (' days

in respect of a term loan,

he account remains out of order? for a period of more than (1 days, in respect of

an"verdraft$)ash )redit @"3$)),

he bill remains overdue for a period of more than (1 days in the case of bills purchased

and discounted,

&nterest and$or installment of principal remains overdue for twoharvest seasonsbut for a

period not e#ceeding two half years in the case of an advance granted for agricultural

purposes, and

Any amount to be received remains overdue for a period of more than (1 days in respect

of other accounts.

Non submission of Stock Statements for 0 )ontinuous Duarters in case of )ash )redit

+acility.

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https://en.wikipedia.org/wiki/Financial_institutionshttps://en.wikipedia.org/wiki/Default_(finance)https://en.wikipedia.org/wiki/Non-performing_loanhttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/wiki/Default_(finance)https://en.wikipedia.org/wiki/Non-performing_loanhttps://en.wikipedia.org/wiki/Overdrafthttps://en.wikipedia.org/w/index.php?title=Harvest_seasons&action=edit&redlink=1https://en.wikipedia.org/wiki/Financial_institutions


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No active transactions in the account @)ash )redit$"ver 3raft$EP)$P)+) for more than

('days

sify non!performing assets further into the following three categories based on the period for

which the asset has remained non!performing and the realisability of the duesF

'. Sub!standard assetsF a sub standard asset is one which has been classified as NPA for a

period not e#ceeding ' months.

. 3oubtful AssetsF a doubtful asset is one which has remained NPA for a period e#ceeding

' months.

0. >oss assetsF where loss has been identified by the bank, internal or e#ternal auditor or

central bank inspectors. But the amount has not been written off, wholly or partly.

Sub!standard asset is the asset in which bank have to maintain '7G of its reserves. All those

assets which are considered as non!performing for period of more than ' months are called as

3oubtful Assets. All those assets which cannot be recovered are called as >oss Assets.

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ABOUT THE REPORT

Title of the study: - The present study is titled as A

PROJECT REPORT ON NPA MANAGEMENT INBANK(SBI!"

O#$e%ti&e of the study:-The following are the objective of

the study

o study the position of non performing assets in SB&.

o know the impact on NPA on strategic banking variable.

o know the reason for an asset becoming NPA.

Pe'iod of the study:-The period of the present study is

FEB 21!"

i)it*tio+s of the Study:-The present study has got all

the li#itations of e$planatory study #ethod"

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,*t* *+d Methodoloy:-For the purpose of the present

study % had referred internet& boo's& newspaper to collect

infor#ation"

CHAPTER $

PROFILE

STATE BANK OF INDIA

SB& is the largest bank in &ndia with deposits of %s 0, 6:,111 crore as on *arch 0', 117. &t

dominates the &ndian banking sector with a market share of around 1G in terms of total banking

sector deposits. he increasing focus on upgrading the technology back!bone of the bank will

enable it to leverage its reach better, improve service levels, provide new delivery platforms, and

improve operating efficiency to counter the threat of competition effectively. "nce the core

banking solution @)BS is fully implemented, it will cover over '1,111 branches and A*s of

the State Bank group, and emerge as the strongest technology enabled distribution network in

&ndia.

he increasing integration of SB& with its associate banks @associates and subsidiaries will

further strengthen its dominant position in the banking sector and position it as the country?s

largest universal bank.

Re"o%r&e-r!i"in &!p!'i(i#ie"

SB&?s funding profile is strong, underpinned by its strong retail deposit base. he bank is facing

increasing competition in its metropolitan and urban franchise. SB&?s strong franchise gives it

access to a steady source of stable retail funds, which constitute around 7(G of the total

resources as on *arch 0', 117 @76G as at *arch 0', 112.

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Savings deposits have shown a strong three!year growth of '(G. hus, despite a reduction in the

proportion of current account deposits, low!cost deposits have continued to constitute over 21G

of total deposits as at *arch 0', 117. he bank?s cost of deposits @e#cluding &*3 has

significantly reduced to 2.:1G for the 112!17 @refers to financial year from April ' to *arch

0', compared with 7.2HG in 110!12. he bank?s li/uidity position is very strong due to healthy

accretion to deposits, large limits in the call market, and significant surplus S>% investments.

SB& will maintain its strong funding profile and a low cost resource position in view of its strong

retail base and wide geographical reach.

E!rnin" profi(e #o rem!in oo)

SB& will maintain a good earnings profile in the medium term despite high pressure on yields due

to the increasing competition in the banking sector. SB&?s earning profile is characterised by

consistency in the return on assets @PA$Average Assets, at around 'G per annum for the past

three years, and diverse income streams. o maintain yields and pursue credit growth, the bank is

aggressively targeting retail finance and small and medium enterprises @S*Es. he bank?s core

fee income of 'G of average funds deployed bolsters its revenue profile. 8owever, with the

opening of government business like ta# collection to other banks and increased competition, the

growth in fee income is e#pected to slow down. he bank?s operating e#pense at .22G of

average funds deployed in 112!17 is in line with other public sector banks. he bank?s cost

structure is rigid as fi#ed employee cost accounted for :2G of the operating e#penditure in 112!

17. hus, despite good asset growth and technology efficiency gains, the bank?s operating costs

will remain high in the medium term. o be able to reap the full benefits of technology

implementation, the bank will have to reduce or redeploy work forceC since this is a sensitive

issue, it is e#pected to happen gradually.

he bank?s fund based and fee income earnings are diversified across industries, regions, asset

classes, and customer segments.

Strong diversification in income streams will ensure that the bank?s earnings remain relatively

stable, despite the decline in profitability in some segments.

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Comfor#!'(e &!pi#!( po"i#ion

SB& is ade/uately capitalized with a tier & capital ade/uacy ratio of H.12G and a large capital

base of %s 21.: billion as at *arch 0', 117. he bank has considerably improved its net

worth coverage for net NPAs to 2.2 times as at *arch 0', 117 due to lower slippages reflectingan improving asset /uality, witnessed across the entire banking sector. he capitalization levels

of SB& are ade/uate to address the asset side risks and support the business growth in the

medium term.

M!n!emen# "#r!#eie"

&n retail finance, the bank has leveraged its corporate relationships, pursued business growth

selectively, and has not competed based on interest rate. he bank has taken initiatives like on!

line ta# returns filing and faster transfer of funds to protect its dominant position in the

government business. he bank also has a clear technology strategy that will enable it to compete

with the new generation private sector banks in customer service and operational efficiency.

A""e# *%!(i#+ #o rem!in !# !,er!e (e,e("

he bank continues to have a high level of gross NPAs at 7.(7G of gross advances as at *arch

0', 117, compared with 2.(G for all scheduled commercial banks @S)Bs taken together. he

bank is facing challenges to improve the /uality of assets originated, as can be seen in the

consistently higher levels of slippages @additions to NPAs at .:'G in 112!17.

o contain NPAs and ensure credit growth, the bank has decided to focus on financing the retail

@personal segment as well as S*Es. he share of retail advances has increased to 2.:0G @%s

7.1H billion of total advances as at September 01 117. &n the retail loan segment, SB& is

targeting primarily the housing loans segment, which constitutes %s. H0.2' billion @72.0G of

total retail loans. he NPAs in retail finance are low currentlyC however they are steadily

increasing @especially in the housing finance portfolio and have started showing signs of stress.

SB&?s retail portfolio has grown at over 0:G )A=% in the last two years and hence a significant

portion of the portfolio is largely unseasoned. he housing finance portfolio has a '!month,

lagged gross NPA of 2.02G as at *arch 0', 117.he bank will face significant challenges in the

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medium term to develop effective credit appraisal and collection systems in order to contain

NPAs in retail finance. SB&?s asset /uality is e#pected to remain at average levels, as the bank?s

large and diverse asset portfolio reflects of the asset /uality of the banking system.

B%"ine"" )e"&rip#ion

SB& along with its associate banks offer a wide range of banking products and services across its

different client markets. he bank has entered the market of term lending to corporates and

infrastructure financing, traditionally the domain of the financial institutions. &t has increased its

thrust in retail assets in the last two years, and has built a strong market position in housing

loans.

SB&, through its non!banking subsidiaries, offers a host of financial services, viz., merchant

banking, fund management, factoring, primary dealership, broking, investment banking and

credit cards. SB& has commenced its life insurance business by setting up a subsidiary, SB& >ife

&nsurance )ompany >imited, which is a -oint venture with )ardiff S.A., one of the largest

insurance companies in +rance. SB& currently holds :2G e/uity in the -oint venture.

In)%"#r+ pro"pe"

o leverage benefits such as access to low cost resources and the facility to provide a larger

gamut of services, a number of finance companies such as Iotak *ahindra +inance >imited and

83+) >imited have promoted banks. Simultaneously, yet another emerging trend is that of

foreign banks promoting NB+)s to benefit from regulatory fle#ibility available to such entities

in areas like absence of statutory li/uidity ratio and cash reserve ratio re/uirements, priority

sector re/uirements, and corporate e#posure limits.

Ne pri,!#e "eor '!n." &!p#%re m!r.e# "/!re

ith technological edge and a strong marketing thrust, private sector banks have been stealing

market share in retail deposits and the corporate fee business from public sector banks. ogether

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with some foreign banks, these private banks have also aggressively entered the retail asset

financing space, hitherto the domain of non!banking finance companies.

=iven their focus on cross selling and optimizing their customer base, they now offer the entire

range of products and services on the asset and liability side to retail and wholesale customers

A""e# *%!(i#+ #o impro,e

Banks have not yet fully resolved the stress in the asset /uality of their legacy corporate loan

portfolios, however. hough slippages to NPAs and provisioning were high for some banks in

+J112, as they moved to the (1!day norm for recognising and provisioning for NPAs, the

treasury gains enabled significant provisioning to be made with the result that net NPAs for most

public sector banks are now less than 0G.

=oing forward, steady growth in gross domestic product should help improve the banks? asset

/uality and increase corporate lending. he securitization and reconstruction of financial assets

and enforcement of security interest @Sarfaesi Act should also help banks in limiting slippages

and improving NPA recoveries.

Be##er C!pi#!(i0!#ion (e,e("

Banks have demonstrated a fair amount of fle#ibility in raising fresh e/uity capital through

public issues in recent years, thereby improving their capitalization levels. he steady accruals to

net worth and falling non!performing asset levels have resulted in an improvement in the

capitalization position of banks in recent years.

C/!((ene" !/e!)

)ompetition from new private sector and foreign banks remains a key challenge for public sector

banks. hey need to reorient their staff and effectively utilize technology platforms to retain

customers and reduce costs. hey also need to fortify their credit risk management systems to

mitigate the risks arising from small!ticket lending to the retail, small and medium enterprises,

and services segments.

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Con"o(i)!#ion !n) emeren&e of %ni,er"!( '!n.in ro%p"

he cap on foreign ownership of banks has already been raised from 2(G to :2G. he

competition in the sector could get further intensified if the '1G cap on voting rights is also

rela#ed. New private sector banks are e#panding their geographical coverage and making inroads

into government business. he new private and foreign banks will continue to gain market share

from public sector banks because of their efficient cost structures, technological edge, focused

marketing approach and operational freedom. 8owever, the emergence of newer players would

be restricted if the private ownership of banks is capped at low levels. *ergers among PSBs

would create banks with even larger balance sheets and customer base. 8owever, the integration

process in such mergers is e#pected to be comple# and time long drawn.

hese would also be driven by =o& due to provisions of Banking )ompanies @Ac/uisition and

ransfer of Kndertakings Act '(6(, and hence political scenario will impact the timing and

permutations possible. Strategic alliances between banks and other financial sector players such

as insurance companies and mutual funds are also likely as banks attempt to enhance their

product range, leverage on economies of scale and reduce costs.

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CHAPTER

THEORETICAL 2IE3

CLASSIFICATION OF NPA

Banks are re/uired to classify NPAs further into the following three categories based on the

period for which the asset has remained non!performing and the reliability of the duesF

i4 S%'-"#!n)!r) A""e#"5A sub!standard asset is one which has remained NPA for a period

less than or e/ual to 'H months. &n such cases, the current net worth of the borrower, or

the current market value of the security charged is not enough to ensure recovery of the

dues to the banks in full. Such assets will have well defined credit weakness that

-eopardize the li/uidation of the debt and are characterized by the distinct possibility that

the bank will sustain a loss.

ii4 Do%'#f%( A""e#"5 A 3oubtful Asset which has remained NPA for a period e#ceeding 'H

months. &t has all the weaknesses inherent to a sub!standard asset with the added

characteristic that the collection or li/uidation in full L on the basis of currently known

facts L is highly /uestionable and improbable.

iii4 Lo"" A""e#"5 A loss asset is one where a loss has been identified by the bank or, internal

or e#ternal auditors but the amount has not been written off wholly.

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GUIDELINES FOR CLASSIFICATION OF NPAS

Broadly speaking, classification should be done taking into account the degree of well defined

credit weaknesses and the e#tent of dependence on collateral security for realization of dues.

Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value accounts.

Accounts with temporary deficienciesF hese should be classified based on the past recovery

records.

Accounts regularize near about the balance sheet dateF hese accounts should be handled

with care and without scope for sub-ectivity. here the account indicates inherent weaknessbased on available data, it should be deemed as an NPA.

Asset classification should be borrower!wise and not facility!wiseF &f a single facility to a

borrower is classified as NPA, others should also be classified the same way, as it is difficult

to envisage only a solitary facility becoming a problem credit and not others.

Advances under consortium arrangementsF )lassification here should be based on the

recovery record of the individual member banks.

Accounts where there is erosion in the value of the securityF &f there is a significant @i.e. the

realizable value of the security is less than 71G of that assessed by the bank during

acceptance the account may be classified as NPA.

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NPA SOME ASPECTS AND ISSUES

'. he NPAs of banks in &ndia are considered to be at higher levels than those in other

countries. his issue has attracted attention of public as also of international financial

institutions and has gained further prominence in the wake of transparency and disclosure

measures initiated by %B& during recent years.

. he NPA *anagement Policy document of SB& lays down to contain net NPAs to less

than 7G of bank9s total loan assets in confirmity with the international standard. &t is,

therefore necessary that as per guidelines provided in NPA *anagement Policy

document, every effort be made at all levels to cut down the NPAs. All this re/uires

greater efforts and teamwork.

0. &t is essential to keep a constant watch over the non!performing assets not -ust to keep it

performing but also that once they become non!performing, effective measures are

initiated to get full recovery and where this is not possible, the various means are to be

initiated to get rid off the NPAs from the branch books.

2. NPAs adversely affect the wealth condition of the branch advances as also the

profitability of the branch. Some of the reasons for this are as underF

@a &nterest cannot be applied on the loan accounts classified as NPAs.

@b he Branch 9has to pay interest to central office on outstanding classified as NPA.

@c he Branch has to incur cost in supervision and follow up of such advances.

@d Provision has to be made on NPAs at Bank level.

7. Knder &ncome %ecognition, Assets )lassification and provisioning, NPA may be Sub

standard, 3oubtful or loss assets.

6. "nce the assets are classified as NPA, the Branch *anager has to take all the necessary

steps to get the dues recovered there!under to maintain the good health of advances and

the higher profitability at the!Branch. his re/uires management of NPAs in such a

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Planned and scientific manner that the percentage of NPAs to the total advances will be

minimum.

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RECOGNITION OF INCOME ON NON-PERFORMING LOANS 6NPLS7

Stricter regulations have been laid down by supervisory authorities in many countries with

regard to income recognition on Non!Performing >oans @NP>s. he suspension of interest

payments is re/uired on loans that are classified as 9non!performing9 ;9substandard9, 9doubtful9 and

9loss9s are considered non!accrued interest. Previously

accrued, but uncollected interest is reversed out of income. +ailure to do so would overstate

income. Kncollected interest is normally put in a memorandum account. NP>s are restored on an

accrual basis only after full settlement has been made on all delin/uent principal and interest. &t

would, therefore, be useful, if the accounts carry a footnote, e#plaining the accounting policies

followed with regard to recognition of income on NP>s.

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REASONS FOR RISE IN NPA"

+A)"%S +"% %&SE &N NPAs he banking sector has been facing the serious problems of the

rising NPAs. But the problem of NPAs is more in public sector banks when compared to private

sector banks and foreign banks. he NPAs in PSB are growing due to e#ternal as well as internal

factors.

E8TERNAL FACTORS

Ineffei,e re&o,er+ #ri'%n!(

he =ovt. has set of numbers of recovery tribunals, which works for recovery of loans and

advances. 3ue to their negligence and ineffectiveness in their work the bank suffers the

conse/uence of non!recover, their by reducing their profitability and li/uidity.

3i(f%( Def!%(#"

here are borrowers who are able to payback loans but are intentionally withdrawing it. hese

groups of people should be identified and proper measures should be taken in order to get back

the money e#tended to them as advances and loans.

N!#%r!( &!(!mi#ie"

his is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and

then &ndia is hit by ma-or natural calamities thus making the borrowers unable to pay back there

loans. hus the bank has to make large amount of provisions in order to compensate those loans,

hence end up the fiscal with a reduced profit. *ainly ours farmers depends on rain fall for

cropping. 3ue to irregularities of rain fall the farmers are not to achieve the production level thus

they are not repaying the loans

In)%"#ri!( "i&.ne""

&mproper pro-ect handling , ineffective management , lack of ade/uate resources , lack of

advance technology , day to day changing govt. Policies give birth to industrial sickness. 8ence

the banks that finance those industries ultimately end up with a low recovery of their loans

reducing their profit and li/uidity.

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L!&. of )em!n)

Entrepreneurs in &ndia could not foresee their product demand and starts production which

ultimately piles up their product thus making them unable to pay back the money they borrow to

operate these activities. he banks recover the amount by selling of their assets, which covers a

minimum label. hus the banks record the nonrecovered part as NPAs and has to make provision

for it.

C/!ne on Go,#4 po(i&ie"

ith every new govt. banking sector gets new policies for its operation. hus it has to cope with

the changing principles and policies for the regulation of the rising of NPAs. eg. he fallout of

handloom sector is continuing as most of the weavers )o!operative societies have becomedefunct largely due to withdrawal of state patronage. he rehabilitation plan worked out by the

)entral govt to revive the handloom sector has not yet been implemented. So the over dues due

to the handloom sectors are becoming NPAs.

INTERNAL FACTORS

Defei,e Len)in pro&e""

here are three cardinal principles of bank lending that have been followed by the commercial

banks since long. i. Principles of safety ii. Principle of li/uidity iii. Principles of profitability

i. Principles of safety By safety it means that the borrower is in a position to repay the loan both

principal and interest. he repayment of loan depends upon the borrowersF

!4 C!p!&i#+ #o p!+

b. 3i((inne"" #o p!+

)apacity to pay depends uponF '. angible assets . Success in business illingness to pay

depends onF '. )haracter . 8onest 0. %eputation of borrower he banker should, there fore take

utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one

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and the borrower is capable of carrying it out successfully .he should be a person of integrity and

good character.

In!ppropri!#e #e&/no(o+

3ue to inappropriate technology and management information system, market driven decisions

on real time basis can not be taken. Proper *&S and financial accounting system is not

implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of

the bank should be computerised.

Improper "o# !n!(+"i"

he improper strength, weakness, opportunity and threat analysis is another reason for rise in

NPAs. hile providing unsecured advances the banks depend more on the honesty, integrity, and

financial soundness and credit worthiness of the borrower. M Banks should consider the

borrowers own capital investment. M it should collect credit information of the borrowers from a.

+rom bankers b. En/uiry from market$segment of trade, industry, business. c. +rom e#ternal

credit rating agencies. M Analyse the balance sheet rue picture of business will be revealed on

analysis of profit$loss a$c and balance sheet. M Purpose of the loan hen bankers give loan, he

should analyse the purpose of the loan. o ensure safety and li/uidity, banks should grant loan

for productive purpose only. Bank should analyse the profitability, viability, long term

acceptability of the pro-ect while financing.

Poor &re)i# !ppr!i"!( "+"#em

Poor credit appraisal is another factor for the rise in NPAs. 3ue to poor credit appraisal the bank

gives advances to those who are not able to repay it back. hey should use good credit appraisal

to decrease the NPAs.

M!n!eri!( )efi&ien&ie"

he banker should always select the borrower very carefully and should take tangible assets as

security to safe guard its interests. hen accepting securities banks should consider the '.

*arketability . Acceptability 0. Safety 2. ransferability.

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he banker should follow the principle of diversification of risk based on the famous ma#im do

not keep all the eggs in one basketOC it means that the banker should not grant advances to a few

big farms only or to concentrate them in few industries or in a few cities. &f a new big customer

meets misfortune or certain traders or industries affected adversely, the overall position of the

bank will not be affected. >ike "S)B suffered loss due to the "* )uttack, and "rissa hand

loom industries. he biggest defaulters of "S)B are the "* @'':.::lakhs, and the handloom

sector "rissa hand loom )S ltd @20(.61lakhs.

A'"en&e of re%(!r in)%"#ri!( ,i"i#

he irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank

officials to the customer point decreases the collection of interest and principals on the loan. he

NPAs due to wilful defaulters can be collected by regular visits.

Re (o!nin pro&e""

Non remittance of recoveries to higher financing agencies and re loaning of the same have

already affected the smooth operation of the credit cycle. 3ue to re loaning to the defaulters and

))Bs and PA)s, the NPAs of "S)B is increasing day by day.

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IMPACT OF NPAS ON BANKS5-

&n portion of the interest income is absorbed in servicing NPA.NPA is not merely non!

remunerative. &t is also cost absorbing and profit eroding.

&n the conte#t of severe competition in the banking industry, the weak banks are at disadvantage

for leveraging the rate of interest in the deregulated market and securing remunerative business

growth. he options for these banks are lost. he spread is the bread for the banks. his is the

margin between the cost of resources employed and the return therefrom. his is the margin

between the cost of resources employed and the return thereform. &n other words it is gap

between the return on funds deployed @&nterest earned on credit and investments and cost of

funds employed @&nterest paid on deposits.

hen the interest rates were directed by %B&, as heretofore, there was not option for banks. But

today in the deregulated market the banks decide their lending rates and borrowing rates. &n the

competitive money and capital *arkets, inability to offer competitive market rates adds to the

disadvantage of marketing and building new NPA has affected the profitability, li/uidity and

competitive functioning of banks and finally the psychology of the bankers in respect of their

disposition towards credit delivery and credit e#pansion.

14 Imp! on Profi#!'i(i#+

9T/e effi&ien&+ of '!n." i" no# !(!+" ref(ee) on(+ '+ #/e "i0e of i#"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 re/uired to make provisions for such NPAS from their current profits.

NPAS have a deleterious effect on the return on assets in several waysF

hey erode current profits through provisioning re/uirements.

hey result in reduced interest income.

hey re/uire higher provisioning re/uirements affecting profits and accretion to

capital funds and capacity to increase good /uality risk assets in future, and

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hey limit recycling of funds, set in asset!liability mismatches, etc.

here is at times a tendency among some of the banks to understate the level of NPAs in order to

reduce the provisioning and boost up bottom lines. &t would only postpone the process.

&n the conte#t of crippling effect on a bank9s operations in all spheres, asset /uality has been

placed as one of the most important parameters in the measurement of a bank9s performance

under the )A*E>S supervisory rating system of %B&.

Between 1'.12.(0 to 0'.10.11', SB& =roup incurred a total amount of %s. 0'7' )rores

towards provisioning NPA. his has brought Net NPA to %s. 060 )rores or 6.G of net

advances. o this e#tent the problem is contained but a what costQ

his costly remedy is made at the sacrifice of building healthy reserves for future capital

ade/uacy.

he enormous provisioning of NPA together with the holding cost of such non!productive assets

over the years has acted as a severe drain on the profitability of the SB& =roup. &n turn SB&

=roup are seen as poor performers and unable to approach the market for raising additional

capital. E/uity issues of nationalized banks that have already tapped the market are now /uoted

at a discount in the secondary market. "ther bans hesitate to approach the market to rise new

issues. his has alternatively forced SB& =roup to borrow heavily from the debt market to build

ier && )apital to meet capital ade/uacy norms putting severe pressure on their profit marginsC

else they are to seek the bounty of the )entral =overnment for repeated %ecapitalization.

)onsidering the minimum cost of holding NPAs at :G p.a. @reckoning average cost of funds at

6G plus 'G service charge the net NPA of %s. 060 )roces absorbs a recurring holding ost of

%s. 011 )rores annually. )onsidering the average provisions made for the last H years which

works out to average of %s. 0011 crores from annum, a sizeab business.

&n the face of the deregulated banking industry, an ideal competitive working is reached, when

the banks are able to earn ade/uate amount of non!interest income to cover their entire operating

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e#penses i.e. a positive burden. &n that event the spread factor i.e. the difference between the

gross interest income and interest cost will constitute its operating profits.

heoretically even if the banks keeps 1G spread, it will still break even in terms of operating

profit and not return an operating loss. he net profit is the amount of the operating profit minus

the amount of provisions to be made including for ta#ation. "n account of the burden of heavy

NPA, many nationalised banks have little option and they are unable to lower lending rates

competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income

from off balance sheet business yielding non!interest income.

he following working results of SB& =roup an identified well manged nationalised banks for

the last two years and for the first nine months of the current financial year, will be revealing to

prove this statement.

Non!interest income fully absorbs the operating e#penses of this banks in the current financial

year for the first ( months. &n the last two financial years, though such income has substantially

covered the operating e#penses @between H1 to (1G there is still a deficit left.

he strength of SB& =roup is indentified by the following positive featureF

'. &t9s sizeable earnings under of non!interest income substantially$totally meets its non!

interest e#penses.

. &ts obligation for provisioning re/uirements is within bounds. @Net NPA$Net

Advances is '.(G

&t is worthwhile to compare the aggregate figures of the '( Nationalised banks for the year ended

*arch, 11', as published by %B& in its %eport on trends and progress of banking in &ndia.

&nterest on %ecapitalization Bonds is a income earned form the =overnment, who had issued the

%ecapitalization Bonds to the weak banks to sustain their capital ade/uacy under a bailout

package. he statistics above show the other weaknesses of the nationalised banks in addition to

the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as

underF

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heir operating e#penses are higher due to surplus manpower employed. age costs total

assets is much higher to PSBs compared to new private banks or foreign banks.

heir earnings from sources other than interest income are meagre. his is due to failure

to develop off balance sheet business through innovative banking products.

$4 Imp! on Li*%i)i#+ of #/e SBI Gro%p

hough SB& =roup are able to meet norms of )apital Ade/uacy, as per %B& guidelines, the facts

that their net NPA in the average is as much as :G is a potential threat for them. %B& has

indicated the ideal position as Rero percent Net NPA. Even

granting 0G net NPA within limits of tolerance the SB& =roup are holding an uncomfortable

burden at :.'G as at *arch 11'. hey have not been able to build additional capital needed for

business e#pansion through internal generations or by tapping the e/uity market, but have

resorted to &&!ier capital in the debt market or looking to recapitalistion by =overnment of

&ndia.

4 Imp! on O%#(oo. of B!n.er" #o!r)" Cre)i# De(i,er+4

he fear of NPA permeates the psychology of bank managers in the SB& =roup in entertaining

new pro-ects for credit e#pansion. &n the world of banking the concepts of business and risks are

inseparable. Business is an e#ercise of balancing between risk and reward. Accept -ustifiable

risks and implements de!risking steps. ithout accepting risk, there can be no reward. he

psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm

to fresh credit. his has affected adversely credit growth compared to growth of deposits,

resulting in a low )$3 %atio around 71 to 72G for the industry.

he fear psychosis also leads to e#cessive security!consiousness in the approach towards lending

to the small and medium sized credit customers. here is insistence on provision of collateral

security, sometimes up to 11G value of the advance, and conse/uently due to a feeling of

assumed protection on account of holding ade/uate security @albeit over!confidence. a tendency

towards la#ity in the standards of credit appraisal comes to the fore. &t is well know that the

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e#istence of collateral security at best may convert the credit e#tended to productive sectors into

an investment against real estate, but will not prevent the account turning into NPA. +urther

blocked assets and real estate represent the most illi/uid security and NPA in such advances has

the tendency to persist for a long duration.

SB& =roup have reached a dead!end of the tunnel and their future prosperity depends on an

urgent solution for handling this hovering threat.

:4 Imp! on Pro)%i,i#+5

8igh level of NPAs effect the productivity of the banks by increasing the cost of funds and by

reducing the efficiency of banks employees. )ost of funds is increased because due to non!

availability of sufficient internal sources they have to rely on e#ternal sources to fulfill their

future financial re/uirements. Productivity of employees is also reduced because it keeps staff

busy with the task of recovery of overdue. &nstead of devoting time for planning for development

through more credit and mobilization of resources the branch staff would primarily be engaged

in preparing a large value of returns and statements relating to sub!standard, doubtful and loss

assets, preparing proposal for filing of suits, waivement of legal action, compromise, write off or

in preparing 3&)=) claim papers etc.

;4 Imp! on o#/er 2!ri!'(e"5

8igh level of NPAs also leads to s/ueezing of interest spread, when asset becomes an NPA for

the first time it adversely affects the spread by not contributing to the interest income and from

the second year onwards it will have its impact on the bottom line of the balance sheet because of

provisioning to be made for it and not have incremental effect on the spread.

Now a days =ovt. does not encourage liberal capital support to be given to banks. Banks are

re/uired to bring their own capital by issuing share to the public, whereas high level of NPAs

leads to lower profits hence less or no profits available for e/uity shareholders hence lower EPS

and fall in the value of share. 3uring the year 11'!1 share of ' public sector banks were

traded on the NSE out of which share value of three PSBs have decreased. >ow market value of

shares has also forced the banks to borrow heavily debt market to build ier && capital to meet

capital ade/uacy norms, putting severe pressure on their profit margins.

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conse/uent depression in the market. +urther high level of NPAs can result in adding to the

inflationary potential in the economy and eroding the viability of the credit system as a whole.

Not only this, burden of NPAs is to be borne by the society as a whole. hen capital support is

given to PSB on A$c of losses booked and$ or erosion of capital due to NPAs, it comes out of

either =ovt. budgetary resources or from the public as per

>iberalization policy, whether this money is from ta# revenues or from the hard earned saving of

the investing public, in fact, the society is bearing the cost of these

NPAs. *oreover, =ovt. holds ma-ority of shares in PSBs in some banks '11G capital is in its

hand. Any dividend declared would have gone to the =ovt. and which can be spent on the

welfare and development program.

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RECOMMENDATION

Cre)i# !)mini"#r!#ionF A banks have to strengthen their credit administrative

machinery and put in place effective credit risk management systems to reduce the fresh

incidence of NPAs.

Be##er In"peion5 e shall keep a close watch on the manner in which NPA

reduction is taking place.

C!"/ Re&o,er+5 e should also insist that cash recoveries should more than offset

the fresh write!offs in NPAs.

Per&ep#ion5 he mindset of the borrowers needs to change so that a culture of proper

utilization of credit facilities and timely repayment is developed.

Fin!n&i!( S+"#em5 As you are aware, one of the main reason for corporate default is

on account of diversion of funds and corporate entities should come forward of avoid this

practice in the interest of strong and sound financial system.

Coor)in!#or5 E#tending credit involves lenders and borrowers and both should realize

their role and responsibilities. hey should appreciate the difficulties of each other and

should endeavor to work contributing to a healthy financial system.

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CHAPTER :

CONCLUSION

CONCLUSION

A strong banking sector is important for a flourishing economy. he failure of the banking

sector may have an adverse impact on other sectors.

"ver the years, much has been talked about NPA and the emphasis so far has been only on

identification and /uantification of NPAs rather than on ways to reduce and upgrade them.

here is also a general perception that the prescriptions of 21G of net bank credit to priority

sectors have led to higher NPAs, due to credit to these sectors becoming stickly managers of

rural and semi!urban branches generally sanction these loans. &n the changed conte#t of new

prudential norms and emphasis on /uality lending and profitability, mangers should make it

amply clear to potential borrowers that banks resources are scare and these are meant to

finance viable ventures so that these are repaid on time and relevant to other needy borrowers

for improving the economic lot of ma#imum number of households. 8ence selection of right

borrowers, viable economic activity, ade/uate finance and timely disbursement, correct and

use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing

of minimizing the incidence of new NPAs.

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BIBILOGRAPHY

BOOKS 5 &N3&AN +&NAN)&A> SJSE*

AK8"% F I8AN.

PKB>&S8E% F AA *)=%A 8&>>.

4"'i4&om

4i.ipe)i!4&om

4"&ri')4&om
http://www.sbi.com/http://www.wikipedia.com/http://www.scribd.com/http://www.sbi.com/http://www.wikipedia.com/http://www.scribd.com/

npa mcom koma

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