Capstone Project Report On the topicA STUDY OF NON PERFORMING ASSETS IN INDIAN PRIVATE BANKING SECTORLOVELY PROFESIONAL UNIVERSITYIn Partial Fulfillment of the Requirements for the Award of Degree OfMASTER OF BUSINESS ADMINISTRATIONGroup Code: -QDO5Submitted by:- Navjot Singh (11012664) Rahul Kundliya (11001882) Pankaj Bisht (11005154)Sumit kumar (11001711)1CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksACKNOWLEDGEMENTIt is often said that journey of a thousand miles begins with the first, uncertain if we may add,step. My journey was not too different. It involved the help, support and contribution of severalpeople.It is difficult to ascertain the starting point for such thanks giving, and yet one usually starts withthe most significant contributor. In my case let us begin with the people who strictly confinedthemselves to behind the scenes before I move on to the persons who directly affected the courseand scope of events.I would like to extend our sincerest gratitude to Ms. Sakshi Sharma for her unrelenting supportand an uncanny habit of pointing out the flaws in the scheme of things at the most crucialjuncture, hence causing several opportunities for learning. I do not think it would be just to endsuch thanks giving without thanking our respondents for co-operating with us.Finally I also extend my heartiest thanks to all my friends and well wishers for being with meand extending encouragement throughout the project.2CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksCERTIFICATION/THESIS APPROVAL BY FACULTY ADVISORTO WHOMSOEVER IT MAY CONCERNThis is to certify that the project report titled ________________________________________carried out by Mr. ------------------------------------------------------------ (student name), S/o or D/O------------------------------------------------------- (Fathers Name) has been accomplished under myguidance & supervision as a duly registered MBA student of the Lovely Professional University,Phagwara. This project is being submitted by him/her in the partial fulfillment of therequirements for the award of the Master of Business Administration from Lovely ProfessionalUniversity.His dissertation represents his original work and is worthy of consideration for the award of thedegree of Master of Business Administration.___________________________________(Name & Signature of the Faculty Advisor)Date:3CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksDECLARATIONI, "________________________________ (student's name), hereby declare that the workpresented herein is genuine work done originally by me and has not been published or submittedelsewhere for the requirement of a degree programme. Any literature, data or works done byothers and cited within this dissertation has been given due acknowledgement and listed in thereference section._______________________(Student's name & Signature)_______________________(Registration No.)Date:__________________4CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksDECLARATIONI, "________________________________ (student's name), hereby declare that the workpresented herein is genuine work done originally by me and has not been published or submittedelsewhere for the requirement of a degree programme. Any literature, data or works done byothers and cited within this dissertation has been given due acknowledgement and listed in thereference section._______________________(Student's name & Signature)_______________________(Registration No.)Date:__________________5CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksDECLARATIONI, "________________________________(student's name), hereby declare that the workpresented herein is genuine work done originally by me and has not been published or submittedelsewhere for the requirement of a degree programme. Any literature, data or works done byothers and cited within this dissertation has been given due acknowledgement and listed in thereference section._________________(Student's name & Signature)_______________________(Registration No.)Date:__________________6CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksDECLARATIONI, "________________________________ (student's name), hereby declare that the workpresented herein is genuine work done originally by me and has not been published or submittedelsewhere for the requirement of a degree programme. Any literature, data or works done byothers and cited within this dissertation has been given due acknowledgement and listed in thereference section._______________________(Student's name & Signature)_______________________(Registration No.)Date:__________________7CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksTABLE OF CONTENTSS.NO1.CHAPTER 1PARTICULARSPAGE.NOINTRODUTION1.1 Introduction To Non Performing Assets1.2 Types of Banks1.3 Non Performing Assets1.4 Beneficiaries of the study11-152.Chapter 2Review of Literature16-193.Chapter 3Research Design & Methodology20-234.Chapter 4Data Analysis and Interpretation24-41Reasons for an account becoming NPAsImpact of NPAs on bank performanceConsequences of NPAsMeasures to Control NPAs42-498CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks5.Chapter 6Suggestions & Conclusion50-526.Chapter 7Bibliography53-5455-607.Appendix9CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks10CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksA STUDY OF NON PERFORMING ASSETS IN INDIANPRIVATE BANKING SECTORIntroductionBanking sector reforms in India has progressed promptly on aspects like interest ratederegulation, reduction in statutory reserve requirements, prudential norms for interest rates,asset classification, income recognition and provisioning. But it could not match the pace withwhich it was expected to. The accomplishment of these norms at the execution stages withoutrestructuring the banking sector as such is creating havoc, this research paper deals with theproblem of having non-performing assets, the reasons for mounting of non-performing assets andthe practices present in other countries for dealing with non-performing assets.During pre-nationalization period and after independence, the banking sector remained in privatehands Large industries who had their control in the management of the banks were utilizingmajor portion of financial resources of the banking system and as a result low priority wasaccorded to priority sectors. Government of India nationalized the banks to make them as aninstrument of economic and social change and the mandate given to the banks was to expandtheir networks in rural areas and to give loans to priority sectors such as small scale industries,self-employed groups, agriculture and schemes involving women.To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled thebanking system to expand its network in a planned way and make available banking series to thelarge number of population and touch every strata of society by extending credit to theirproductive Endeavours. This is evident from the fact that population per office of commercialbank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share ofadvances of public sector banks to priority sector increased from 14.6% in 1969 to 44% of thenet bank credit. The number of deposit accounts of the banking system increased from over 3crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68crores.The accumulation of huge non-performing assets in banks has assumed great importance. Thedepth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAsin banks and financial institutions is over Rs.1, 50,000 crores. While gross NPA reflects thequality of the loans made by banks, net NPA shows the actual burden of banks. Now it isincreasingly evident that the major defaulters are the big borrowers coming from the non-prioritysector. The banks and financial institutions have to take the initiative to reduce NPAs in a timebound strategic approach. Public sector banks figure prominently in the debate not only becausethey dominate the banking industries, but also since they have much larger NPAs compared with11CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banksthe private sector banks. This raises a concern in the industry and academia because it isgenerally felt that NPAs reduce the profitability of banks, weaken its financial health and erodeits solvency. For the recovery of NPAs a broad framework has evolved for the management ofNPAs under which several options are provided for debt recovery and restructuring. Banks andFIs have the freedom to design and implement their own policies for recovery and write-offincorporating compromise and negotiated settlements.TYPES OF BANKS:PUBLIC SECTOR BANKS:Public sector banks are the ones in which the government has a major holding. Public SectorBanks dominate 75% of deposits and 71% of advances in the banking industry. Public SectorBanks control commercial banking India, these can be further classified into:1) Nationalized banks2) State Bank of India and its associates3) Regional Rural BanksPRIVATE SECTOR BANKS:Private sector banks came into existence to supplement the performance of public sector banksand serve the needs of the economy better. As the public sector banks were merely in the handsof the government, banks had no incentive to make profits and improve their financial capability.The main difference between public and private sector banks is only that public sector banksfollow the RBI interest rules strictly but private banks can make some changes in them but onlyafter the approval from the RBI. Private sector banks are the banks which are controlled by theprivate lenders with the approval from the RBI. Their interest rates are slightly costly ascompared to public sector banks.12CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksNPA (NON PERFORMING ASSET)Action for enforcement of security interest can be initiated only if the secured asset is classifiedas Non Performing Asset. Non Performing Asset means an asset or account of borrower, whichhas been classified by a bank or financial institution as sub-standard, doubtful or loss asset, inaccordance with the directions or guidelines relating to asset classification issued by RBI. Anamount due under any credit facility is treated as "past due" when it has not been paid within 30days from the due date. Due to the improvement in the payment and settlement systems,recovery climate, up gradation of technology in the banking system, etc., it was decided todispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from thatdate, a Non performing asset (NPA) shell be an advance where interest and /or installment ofprincipal remain overdue for a period of more than 180 days in respect of a Term Loan, theaccount remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cashCredit(OD/CC), the bill remains overdue for a period of more than 180 days in the case of billspurchased and discounted, interest and/ or installment of principal remains overdue for twoharvest seasons but for a period not exceeding two half years in the case of an advance grantedfor agricultural purpose, and any amount to be received remains overdue for a period of morethan 180 days in respect of other accounts.With a view to moving towards international best practices and to ensure greater transparency, ithas been decided to adopt the '90 days overdue' norm for identification of NPAs, form the yearending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset(NPA) shell be a loan or an advance where; interest and /or installment of principal remainoverdue for a period of more than 90 days in respect of a Term Loan, the account remains 'out oforder' for a period of more than 90 days, in respect of an overdraft/ cash Credit(OD/CC), the billremains overdue for a period of more than 90 days in the case of bills purchased and discounted,interest and/ or installment of principal remains overdue for two harvest seasons but for a periodnot exceeding two half years in the case of an advance granted for agricultural purpose, and anyamount to be received remains overdue for a period of more than 90 days in respect of otheraccounts.Non-Performing Asset or NPA, It is called such as while it is an "Asset", it does not bringsubstantial income to its Owner or is just dormant. Call it a white elephant if you wish. Basically,it is having something that should work but does not. It is supposed to make Non- PerformingAssets work. The RBI has issued guidelines to banks for classification of assets into fourcategories.13CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksA. Standard (Assets):These are loans which do not have any problem are less risk.B .Substandard (Assets):These are assets which come under the category of NPA for a period of less than 12 months.C. Doubtful (Assets):These are NPA exceeding 12 months.D. Loss (Assets):Where loss has been identified by the bank or internal or external auditors or the RBI inspectionbut the amount has not been written off wholly.BENEFICIARIES OF THE STUDY:The outcomes analyzed from this study would be beneficial to various sections such as:Banks: This study would primarily benefit the banks in identifying the sectors to be givenpriority for lending money.Future Researchers: The results of the study would also benefit the future researchers as thisstudy would enhance their knowledge about the topic. They would get an insight of the presentscenario of this industry as this is the emerging industry in the financial sector of the economy.Students: This research would help students in understanding of NPA concept as a whole.14CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksNON PERFORMING ASSETS AS A MAJOR ISSUE AND CHALLENGE FORBANKING INDUSTRY:Non-performing Assets are threatening the stability and demolishing banks profitability througha loss of interest income, write-off of the principal loan amount itself. RBI issued guidelines in1993 based on recommendations of the Narashimam Committee that mandated identification andreduction of NPAs be treated as a national priority because the level of NPA act as an indicatorshowing the bankers credit risks and efficiency of allocation of resource. The financial reformsin Indian bank industry have helped largely to clean NPA which was around Rs 52,000 crores inthe year 2004. The earning capacity and profitability of the bank are highly affected due to thisNPA.GROSS NPA AND NET NPAGross NPA is an advance which is considered irrecoverable, for bank has made provisions, andwhich is still held in banks' books of account. Net NPA is obtained by deducting items likeinterest due but not recovered, part payment received and kept in suspense account from GrossNPA. The Reserve Bank of India states that, compared to other Asian countries and the US, thegross non-performing asset figures in India seem more alarming than the net NPA figure. Theproblem of high gross NPAs is simply one of inheritance. Historically, Indian public sectorbanks have been poor on credit recovery, mainly because of very little legal provision governingforeclosure and bankruptcy, lengthy legal battles, sticky loans made to government public sectorundertakings, loan waivers and priority sector lending.Net NPAs are comparatively better on a global basis because of the stringent provisioning normsprescribed for banks in 1991 by Narashimam Committee. In India, even on security taken againstloans, provision has to be created. Further, Indian banks have to make a 100 per cent provisionon the amount not covered by the realizable value of securities in case of ''doubtful'' advance,while in some countries; it is 75 per cent or just 50 per cent. The ASSOCHAM Study titled -Solvency Analysis of the Indian Banking Sectors, reveals that on an average 24 per cent rise innet non performing assets have been registered by 25 public sector and commercial banks duringthe second quarter of the 2009 as against 2008. According to the RBI, "Reduction of NPAs in theIndian banking sector should be treated as a national priority item to make the system stronger,resilient and geared to meet the challenges of globalization. It is necessary that a public debate isstarted soon on the problem of NPAs and their resolution."15CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks16CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksReview of Literature:According to a study by Brownbridge (1998), most of the bank failures were caused by non-performing loans. Arrears affecting more than half the loan portfolios were typical of the failedbanks. Many of the bad debts were attributable to moral hazard: the adverse incentives on bankowners to adopt imprudent lending strategies, in particular insider lending and lending at highinterest rates to borrowers in the most risky segments of the credit markets.Bloem and Gorter (2001) suggested that a more or less predictable level of non-performingloans, though it may vary slightly from year to year, is caused by an inevitable number of wrongeconomic decisions by individuals and plain bad luck (inclement weather, unexpected pricechanges for certain products, etc.). Under such circumstances, the holders of loans can make anallowance for a normal share of non-performance in the form of bad loan provisions, or they mayspread the risk by taking out insurance. Enterprises may well be able to pass a large portion ofthese costs to customers in the form of higher prices. For instance, the interest margin applied byfinancial institutions will include a premium for the risk of nonperformance on granted loans.At this time, banks non-performing loans increase, profits decline and substantial losses tocapital may become apparent. Eventually, the economy reaches a trough and turns towards a newexpansionary phase, as a result the risk of future losses reaches a low point, even though banksmay still appear relatively unhealthy at this stage in the cycle.According to Gorter and Bloem (2002) non-performing loans are mainly caused by an inevitablenumber of wrong economic decisions by individuals and plain bad luck (inclement weather,unexpected price changes for certain products, etc.). Under such circumstances, the holders ofloans can make an allowance for a normal share of nonperformance in the form of bad loanprovisions, or they may spread the risk by taking out insurance.Petya Koeva (2003), his study on the Performance of Indian Banks. During FinancialLiberalization states that new empirical evidence on the impact of financial liberalization on theperformance of Indian commercial banks. The analysis focuses on examining the behavior anddeterminants of bank intermediation costs and profitability during the liberalization period. Theempirical results suggest that ownership type has a significant effect on some performanceindicators and that the observed increase in competition during financial liberalization has beenassociated with lower intermediation costs and profitability of the Indian banks.Das and Ghosh (2003) empirically examined non-performing loans of Indias public sectorbanks in terms of various indicators such as asset size, credit growth and macroeconomiccondition, and operating efficiency indicators. Sergio (1996) in a study of non-performing loansin Italy found evidence that, an increase in the riskiness of loan assets is rooted in a bankslending policy adducing to relatively unselective and inadequate assessment of sectoralprospects.17CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksVradi et.al (2006), his study on Measurement of efficiency of bank in India concluded that inmodern world performance of banking is more important to stable the economy .in order to seethe efficiency of Indian banks we have see the fore indicators i.e. profitability, productivity,assets, quality and financial management for all banks includes public sector, private sectorbanks in India for the period 2000 and 1999 to 2002-2003. For measuring efficiency of banks wehave adopted development envelopment analysis and found that public sectors banks are moreefficient then other banks in IndiaBrijesh K. Saho et.al (2007), this paper attempts to examine, the performance trends of theIndian commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings areindicative in many ways. First, the increasing average annual trends in technical efficiency for allownership groups indicate an affirmative gesture about the effect of the reform process on theperformance of the Indian banking sector. Second, the higher cost efficiency accrual of privatebanks over nationalized banks indicate that nationalized banks, though old, do not reflect theirlearning experience in their cost minimizing behavior due to X-inefficiency factors arising fromgovernment ownership. This finding also highlights the possible stronger disciplining role playedby the capital market indicating a strong link between market for corporate control and efficiencyof private enterprise assumed by property right hypothesis. And, finally, concerning the scaleelasticity behavior, the technology and market-based results differ significantly supporting theempirical distinction between returns to scale and economies of scale, often used interchangeablyin the literature.Roma Mitra et.al (2008), A stable and efficient banking sector is an essential precondition toincrease the economic level of a country. This paper tries to model and evaluate the efficiency of50 Indian banks. The Inefficiency can be analyzed and quantified for every evaluated unit. Theaim of this paper is to estimate and compare efficiency of the banking sector in India. Theanalysis is supposed to verify or reject the hypothesis whether the banking sector fulfils itsintermediation function sufficiently to compete with the global players. The results are insightfulto the financial policy planner as it identifies priority areas for different banks, which canimprove the performance. This paper evaluates the performance of Banking Sectors in India.B.Satish Kumar (2008), in his article on an evaluation of the financial performance of Indianprivate sector banks wrote Private sector banks play an important role in development of Indianeconomy. After liberalization the banking industry underwent major changes. The economicreforms totally have changed the banking sector. RBI permitted new banks to be started in theprivate sector as per the recommendation of Narashiman committee. The Indian banking industrywas dominated by public sector banks. But now the situations have changed new generationbanks with used of technology and professional management has gained a reasonable position inthe banking industry.18CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksM. Karunakar et.al (2008), Study the important aspect of norms and guidelines for making thewhole sector vibrant and competitive. The problem of losses and lower profitability of Non-Performing Assets (NPA) and liability mismatch in Banks and financial sector depend on howvarious risks are managed in their business. Besides capital to risk Weightage assets ratio ofpublic sector banks, management of credit risk and measures to control the menace of NPAs arealso discussed. The lasting solution to the problem of NPAs can be achieved only with propercredit assessment and risk management mechanism. It is better to avoid NPAs at the marketstage of credit consolidation by putting in place of rigorous and appropriate credit appraisalmechanisms.Nelson M. Waweru et.al (2009), Study that many financial institutions that collapsed in Kenyasince 1986 failed due to non performing loans, this study investigated the causes of non-performing loans, the actions that bank managers have taken to mitigate that problem and thelevel of success of such actions. Using a sample of 30 managers selected from the ten largestbanks the study found that national economic downturn was perceived as the most importantexternal factor. Customer failure to disclose vital information during the loan application processwas considered to be the main customer specific factor. The study further found that Lack of anaggressive debt collection policy was perceived as the main bank specific factor, contributing tothe non performing debt problem in Kenya.Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of greatimportance given its association with bank failure and financial crises, and it should therefore beof interest to developing countries. The purpose of this paper is to build a multivariate model,incorporating macroeconomic and bank-specific variables, to forecast non-performing loans inthe banking sector of Barbados. On an aggregate level, our model outperforms a simple randomwalk model on all forecast horizons, while for individual banks; these forecasts tend to be moreaccurate for longer prediction periods only.19CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks20CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksRESEARCH PROBLEM:Indian banking industry, which was in glory phase once upon a time, has been facing a lots ofchallenges on non performing assets at present scenario. Many banks have kept their NPAsunder the control but some banks are not able to control their NPA levels. They are facing lots ofproblems. There can be various reasons behind this NPA. Non-performing assets has been hittingthe profitability of the banks or it can be said that due to NPA, the profitability of the banks aregoing down day by day. The subsidiary for this is the functioning of Debt Recovery Tribunal(DRT) which is a judiciary for the bank for recovery amount from the default customers. Thesecan be considered as a research problem based on which the information is collected, the objectis measured and the data is analyzed and interpreted.OBJECTIVES OF THE STUDY:The objective of the project was to find how this Non-Performing Assets generate and what itsimpact on the profitability of the bank and how it can be reduced. The study is addressed to thefollowing objectives:To study the trend of NPAs during last nine years.To determine the factors affecting NPA.To find out the effectiveness of recovery mechanism adopted by banks for NPA.To establish relationship between NPAs and profitability of private banks.To suggest measures to reduce NPAs in private sector.NEED OF THE STUDY:The non-performing assets that are not able to generate income for the bank are the great threatfor the banking institution. Rather than generating profit for the bank, NPA drains off the incomeearned by the other performing asset by the way of paying interest to the real owner of theresources. It affects the overall profitability of the bank adversely by affecting the return onequity and return on asset. There are certain ways through which it affects the financialinstitutions are as follows:Thus, the need of the study of the NPA is must necessary due to these reasons. These reasons arethe crucial for any bank at present. One has to realize these matters and has to take correctiveaction against NPA reasons, as for as possible one has to convert all the NPA accounts into PAaccounts. As far as the importance of the study is concern, without the study, one cant identifythe whole gamut of the NPA. To know, how the account is becoming NPA is must necessary.After identifying the reason behind the particular NPA account, one can go for a step ahead. Thatmeans for the step of how to convert into PA and how to prevent other account from becoming21CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksNPA. As for as possible, one has to eradicate the reasons of NPAs. Thus, it is highly importanceto study NPA in detail.SCOPE OF THE STUDY:Being a project scope will be based on the day-to-day teamwork operations. The data will becollected from various aspects of loans and advances in various private banks of Jalandhar andPhagwara (Punjab).To understand the concept of NPA in Indian Private Banking industry.To understand the causes of NPA.To analyze the past trends of NPA of Private banks.HYPOTHESES FORMULATION:H1: There exists a relationship between NPAs and profitability of private banks.H2: The recovery mechanisms adopted by private banks are effective.COLLECTION OF DATA:The relevant data was collected from both primary and secondary sources. Census method ofdata collection was applied to collect primary information. Research population for the studycomprised of private banks operating in Jalandhar and Phagwara (Punjab). The response rate forthe present study came to be 86.66 % since 13 banks responded out of 15 private banks in theconcerned area. The 13 banks surveyed are 1) Axis Bank, 2) Citi Bank, 3) Federal Bank; 4) HDFCBank, 5) ICICI Bank, 6) IndusInd Bank, 7) ING Vysya Bank, 8) Karnataka Bank, 9) Karur VysyaBank, 10) Kotak Mahindra Bank, 11) South Indian Bank, 12) Jammu and Kashmir Bank, 13) IDBIBank.The secondary sources comprised of various audited reports and publications of the ReserveBank of India. Detailed information were collected mainly from the various volumes of theStatistical Tables Relating to Banks in India covering the period from 2000 - 2009 which werepublished by the Statistical Department of Reserve Bank of India, Mumbai from the websitewww.rbi.org.in.22CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksDATA COLLECTION FORM:A structured questionnaire assessing work system, recovery system, processing loan applicationsand other impeding factors associated with loan portfolio was used to collect primaryinformation from the private banks. Items based on 5-point Likert scale and multiple chiocequestions were included in the questionnaire.STATISTICAL TOOLS:The analyses of primary data were conducted through descriptive statistics, factor analysis,Pearson correlation and one-sample t-test. The secondary data was analyzed through columncharts, line charts, bar charts and percentages.LIMITATIONS:1. The secondary data was available for 9 years only.2. The present study is confined to Jalandhar and Phagwara areas only.3. The conclusions of the study are based on the responses of the banks and secondary information. Thus, some amount of subjectivity might remain.23CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks24CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksANALYSES OF PRIMARY DATA:I) MULTIPLE CHOICE QUESTIONS:Table: 1 Since how long the branch is functioning?PercentageFrequencyValid0-2 years2-3 years3-5 years5- years aboveTotal125513(%)7.715.438.538.5100.0Valid Percent7.715.438.538.5100.0CumulativePercent7.723.161.5100.0Interpretation:39% of banks surveyed showed 3-5 years of functioning experience. Also, the same percentage(39%) was found to have an experience above 5 years.Table : 2 Since how long the presence of NPA is observed in yourPercentageFrequencyValid0-1yrs1-2yrsabove -5yrsTotal37313(%)23.153.823.1100.0Valid Percent23.153.823.1100.0CumulativePercent23.176.9100.0Interpretation:54% of banks observed NPA in their branch from 1-2 years.25CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksTable: 3 What is the appropriate value of NPA is your branch? (Rs in lakhs)PercentageFrequencyValid1-1010-2020-30above - 40Total561113(%)38.546.27.77.7100.0Valid Percent38.546.27.77.7100.0CumulativePercent38.584.692.3100.0Interpretation:46% of banks have 20 lakhs (approximate) of NPAs and 39% of banks have 1-10 lakhs(approximate) NPA.Table : 4 For which category the NPA is being observedPercentageFrequencyValidPersonal loanHousing loanAgri-term loanTotal66113(%)46.246.27.7100.0Valid Percent46.246.27.7100.0CumulativePercent46.292.3100.0Interpretation:46.2% banks observed NPAs are in the category of personal loans, also, same percentage(46.2%) observed NPAs in housing loans category.26CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksTable : 5 Measures for recovery of NPA adopted by the bankPercentageFrequencyValidLegal measuresBoth legal and non-legalTotal6713(%)46.253.8100.0Valid Percent46.253.8100.0CumulativePercent46.2100.0Interpretation:53.8% banks adopted both legal and non-legal measures of recovery whereas 46.2% banksadopted legal measures only.Table: 6 To what extent NPA has been converting into good asset.PercentageFrequencyValid1%2%4%5%>5%Total1111913(%)7.77.77.77.769.2100.0Valid Percent7.77.77.77.769.2100.0CumulativePercent7.715.423.130.8100.0Interpretation:After survey 69.2% banks showed that they could convert more than 5% NPA into good assets.27CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksTable: 7 Has the profitability improved after adopting reduction technique?PercentageFrequencyValidDefinitely improvedimprovedCant sayTotal57113(%)38.553.87.7100.0Valid Percent38.553.87.7100.0CumulativePercent38.592.3100.0Interpretation:53.8% banks showed that their profitability improved and 38.5% banks confirmed that theirprofitability definitely improved after adopting NPA reduction techniques.II) FACTOR ANALYSIS:Factorial profile of recovery mechanism adopted for NPA by banksTable: 8No. of No. ofrounds factors1233Communalities Iterations KMOItems(Above)(Above) Deleted.60.6545.45.341-ItemsV.ERemained %8780.3680.81FactorLoading(Above).55.7028CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksDescriptive Statistics of Factors affecting NPAs:Table: 9MeanFactorsStandardDeviationFactorLoadingCommunalityVariance CronbachExplained s Alpha(%)28.79.721F1 Recession andmanagement failure3.15Recession in economy3.00Management Failure28.39F2 Execution Problems2.92Improper CreditAppraisalDifficulty in executingRepayment procedureCost of effective legalmeasures1.115.850.762.7091.780.837.710.987.940.8913.462.46.9671.391.827.730.713.69423.62F3 Default by customers2.77Willful Default2.15Absence of Security1.281.854.9601.235.914.927.753Interpretation:Factors affecting NPAs were subjected to data purification, which resulted into three factors,with KMO value = 0.34, variance explained = 80.81%, communalities above .65 and CronbachsAlpha above .70. The factors extracted were Recession and management failure, ExecutionProblems and Default by customers.29CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksFactorial profile of recovery mechanism adopted for reducing NPATable: 10No. of No. ofrounds factors1222Communalities Iterations KMO(Above)(Above).15.8533.45.50ItemsDeleted2-ItemsV.ERemained %6473.4389FactorLoading(Above).50.85Descriptive Statistics of Recovery Mechanisms adopted to reduce NPAs:Table: 11MeanFactorsF1 Banking MeasuresSelf involvementRecovery campusF2 Legal MeasuresLok adalatsSARFASI Act2.311.852.082.00StandardDeviationFactorLoadingCommunalityVariance CronbachExplained s Alpha(%)48.25.9121.2561.414.960.951.923.91041.71.7931.4941.214.932.891.892.874Interpretation:Factor analysis was run on the recovery mechanism adopted by private banks for reducing NPAswhich completed in two rounds after deleting two items, one with communality below 0.50 andother with missing factor loading. Finally, two factors emerged Banking Measuresand Legal Measures, with KMO value of .50, variance explained = 89%, communalities above.85 and Cronbachs Alpha .80.30CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksIII) TESTING OF HYPOTHESES:H1: There exists a relationship between NPAs and profitability of private banks.Table: 12Pearson CorrelationNet NPANet NPAPearson CorrelationSig.Net ProfitPearson CorrelationSig..480.1911Net Profit.480.1911Interpretation:Pearson correlation was applied to test this hypothesis. The value of coefficient of correlation robtained was .480. Since the significance value was above 0.05 (p =.191), it shows that NPA andprofitability of private banks surveyed is uncorrelated. Thus this hypothesis is rejected.H2: The recovery mechanisms adopted by private banks are effective.Table: 13FactorsF1F2One- sample t-test (Test value = 2) tdf.108.2241212Sig. level.916.827Interpretation:This hypothesis was tested through one sample t-test. Overall mean calculated was 2.06 and boththe factors were compared with the test value = 2. Both the factors were found to beinsignificant, thus hypothesis stands rejected. This implies that the recovery mechanism adoptedby private banks to reduce NPAs is not effective.31CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksANALYSIS & INTERPRETATION OF SECONDARY DATA:I. ANALYSIS OF TREND AND ASSET QUALITY OF GROSS ADVANCES AND GROSS NON PERFORMING ASSETS:Table 1.1: GROSS ADVANCES AND GROSS NPAs OF PRIVATE SECTOR BANKS Gross NPAsPercent to Gross AdvancesAmount(cr.)2000-012001-022002-032003-042004-052005-062006-072007-082008-09Interpretation:The following table helps in examining trends of gross advances, gross NPAs, ratio of grossNPAs to gross advances and ratio of gross NPAs to total assets. We can also visualize the trendof private sector banks by using gross advances, gross NPAs and ratios of gross NPA to grossadvances and total assets. We can clearly see from the above table that the gross advances areincreasing continuously and there is an increase of over 721 percent as compared to 2000-01 and2008-09. This clearly shows that apart from the presence of private sector banks also get a greatopportunity to prove them. The amount of gross NPAs shows a mix kind of trend over a period-as till 2002-03 and from 2005-06 to 2008-09 there is a continuous increase in gross NPA amountwhile there is a decrease in it from a period ranging from 2003-04 to 2005-06. NPA ratios relatedto gross NPA also shows a mix trend over a period. But if we see the last three years data, wecan clearly see that there is an increase in gross NPA to total assets and gross NPA to grossadvances which means that the asset quality is diminishing instead of improving.Thus, if we compare both public and private sector banks we can say that public sector banks arebetter than private sector banks as the efficiency and asset quality of public sector banks hadshown a continuous improvement if compare relatively to private sector banks.32CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks71237120958146047177419197832317690420745525845585065596311662117821038187827811925612983169838.49.68.15.94.42.52.22.52.93.44.442.82.11.41.21.41.7Years GrossAdvances(cr.)Percent to Total AssetsII. ANALYSIS OF TREND AND ASSET QUALITY OF NET ADVANCES ON NET NON PERFORMING ASSETS:Table 1.2: NET ADVANCES AND NET NPAS OF PRIVATE SECTOR BANKSNet NPAsPercent to NetAdvances5.45.72.82.42.2111.11.3YearsNet Advances(cr.) Amount(cr.)68059370011647313895117075419139731296241475251840357533666763963412842123171402856077418Percent toTotalAssets2.32.52.31.310.60.50.60.72000-012001-022002-032003-042004-052005-062006-072007-082008-09Interpretation:After the analysis of gross advances and gross NPA, the study investigates the net advances; netNPAs, ratio of net NPAs to net advances and net NPAs to total assets.If we use the same criteria for private sector banks, we can see despite of continuous increase innet advances in all years the net NPA ratio to net advances and total assets increases in last 2-3years that is in 2007-08 and 2008-09 while all other years shows a decreasing trend. That meansonly in last 2-3 years the efficiency and asset quality of private sector banks is questionableotherwise in all other previous years the banks had shown a continuous improvement. As, if wesee overall performance of the private sector banks we can say that there is a wide improvementas the net NPA ratios changes from 5.4 to 1.3 and from 2.3 to 0.7.Thus, after comparing both the gross and net NPA ratio, if we compare Private sector banks aremuch more efficient than other sector banks.33CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksOBJECTIVE 1:The trend of NPA in last nine years was analyzed through secondary data. The percentages ofboth gross and net NPA to gross and net advances were found to increase during first two yearsbut continuously decrease after 2001 2002.CLASSIFICATION OF LOAN ASSETS OF NPAS OF PRIVATE SECTOR BANKSTable: 1.3Years Classification of Loan Assets (Amount in Rs. Crore) Sub-standardStandard AssetsAssetsDoubtful AssetsLoss Assets AmounAmount%age Amount %age Amount %aget%age6507110921613162016707621644830905138262845936956154691.590.390.894.296.197.697.697.397.12585473837033127 2213 2424 4378 7280105533.63.92.61.81.00.81.11.51.83069653985126391557843483923445249754.35.45.93.62.51.4 10.90.94243901118825 900 939 941124413240.60.30.80.50.40.30.20.30.2200120022003200420052006200720082009Interpretation:If we analyze the loan assets of private sector banks, we can say that if we compare the first yearand last year for sub standard assets we can say that there is a decrease in it of health isimproving but overall analysis for sub-standard assets shows that after year 2006 there is acontinuous increase in the amount of sub-standard assets i.e. from 1percent to 1.8 percent. But,the doubtful assets have declined from 5.9percent in 2003 to 0.9 percent in 2009. The loss assetsalso have shown a decreasing trend from year 2003. Thus, we can say that except the sub-standard assets category the other two categories of non-performing assets have improved overthe period of study.34CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksNet NPAs & Net Profit of Private Sector Banks: 2000-01 to 2008-09Table: 1.42000-012001-022002-032003-042004-052005-062006-072007-082008-09Net NPA370066763963412842123171402853807418Net Profit1142177929583481353349756465952210868120001000080006000Net NPA400020000Net ProfitInterpretation:It is clearly observed from the line graph that there is continuous rise in net profit of private sectorbanks over the years. The average of percentage increase in net profits of private sector banks comesto approximately 34%.On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from2000-01 to 2008-09. The average of percentage rise in net NPA comes to almost 15%.35CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksClassification of Loan Asset of Private Sector Banks in percentage:Table: 1.5YearStandardAsset (%)94.296.197.497.697.396.8200420052006200720082009 Sub-StandardAsset (%) 1.8 1.0 0.8 1.1 1.5 2.0DoubtfulAsset (%)3.62.51.51.00.91.0Loss Asset (%)0.50.40.30.20.30.30.50.42.50.31.50.2 11.10.30.91.50.3 12Loss AssetDoubtful Asset3.610.81.897.496.194.297.697.396.8Sub-Standard AssetStandard Asset200420052006200720082009Interpretation:The above chart clearly states that the rise in the standard assets over the years compensates the fallin the other three types of assets. But in the year 2009, the percentage of Sub--Standard asset ishighest among all the year. In 2009 percentage of standard asset has reduced by 0.5% which iscompensated by increase in SubSub-Standard & doubtful assets. This increase is due to interest &principle amount unpaid due to financial crisis in 2009. The percentage of doubtful asset has reducedto a great extent amongst all. So the private sector banks have managed to reduce the doubtful asset.mongst36CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksNet NPA to Net Advance Ratio of Private Sector Banks:Table: 1.6Years2000-012001-022002-032003-042004-052005-062006-072007-082008-09Old Private Sector Banks 7.3 7.1 5.2 3.8 2.7 1.7 1 0.7 0.9New Private Sector Banks 3.1 4.9 1.5 1.7 1.9 0.8 1 1.1 1.3876543210Old Private SectorBanksNew Private SectorBanksInterpretation:From the above chart it is clearly observed that old private sector banks are constantly improvingin terms of net NPA to net advances ratio which is represented by declining trend from 2000-01to 2008-09. While on the other hand for new private sector banks net NPA to net advances ratiois fluctuating over the years.37CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksNet NPAs of Old and New Private Sector Banks: 2000-01 to 2008-09Table: 1.7Year2000-012001-022002-032003-042004-052005-062006-072007-082008-09Old Private SectorBanks2,7713,0132,5982,1421,8591,3758917401165New Private SectorBanks9293,6631,3651,9862,3531,7963,137464062537,0006,0005,0004,0003,0002,0001,0000Old Private Sector BanksNew Private Sector BanksInterpretation:From the above chart it is clearly observed that net NPA of old private sector banks has adeclining trend over the years on the contrary new private sector banks has an upward trend.Old private sector banks which is passing from lower growth rate in recent past, startsperforming better than their new counterparts. Old private sector banks are more efficient thanthat of new private sector banks in managing NPA.38CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksComposition of NPAs of Private Sector Banks - 2001 To 2009:Table: 1.8Year200120022003200420052006200720082009PrioritySector183525462445248221882284288434193640Non-PrioritySector4452909093277796656955416353955813172Public Sector123319575424307514000120001000080006000400020000123456789Priority SectorNon-Priority SectorPublic SectorInterpretation:From the above graph it is observed that Priority sector category on an average constitutesalmost 34% of the total advances made by the private sector banks. While average NPA ofpriority sector constitutes of 25% of total NPA. In later years from 2007 to 2009 there is increasein NPA of priority sector. In these years more advances was given to agriculture & housingsector.39CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksIn the year 2007-08, the real estate market was on boom, which encouraged people to take moreloans. But after the subprime crisis there was sudden fall in real estate market & people becamedefault to pay the loan.In case of non-priority sector, the average advances made are 60.5% of total advance made byprivate sector banks. But the average NPA of non-priority sector is almost 74% which is highestamongst the entire category. We can see the declining trend in NPA of non-priority sector from2003 to 2006, this as a result of securitization Act, 2002.NPA ratios of Private Sector Banks: 2004-05 to 2008-09Table: 1.9YearGrossNet NPAs/NetNPAs/Gross AdvancesAdvances2004-052005-062006-072007-082008-093.82.52.22.52.91.9 1 11.21.543.83.532.521.51.210.502004-052005-062006-072007-082008-09111.91.52.52.2Gross NPAs/ Gross AdvancesNet NPAs/ Net Advances2.52.940CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksInterpretation:The percentage change in of gross NPA to gross advances ratio is decreasing initially &thereafter started rising from 2006-07. It has reduced by 34.2% from 2004-05 to 2005-06.Similarly it has reduced by 12% from 2005-06 to 2006-07 & thereafter increased by 18.5% &9% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-09. While in case of net NPA to net advances ratio, the percentage change is varying drastically. Ithas reduced by 47% from 2004-05 to 2005-06. It is unchanged from 2005-06 to 2006-07. It hasincreased by 20% & 25% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-09.The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratioover the years states that private sector banks makes more provisions in gross NPA & grossadvances.The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2005-06[60%] & lowest in 2008-09 [48%]. In other years it near to 54%, in 2006 there is highestincrease in advances over previous year amongst all the year. This resulted increase in NPAwhich in turn increased the provisions and unrecognized interest income.Private sector banks have not succeeded to reduce NPA as against the advances made over theyears as both the ratios are increasing in later years.41CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksREASONS FOR AN ACCOUNT BECOMING NPA:1. Internal factors2. External factorsInternal factors:Funds borrowed for a particular purpose but not use for the said purpose.Project not completed in time.Poor recovery of receivables.Excess capacities created on non-economic costs.In-ability of the corporate to raise capital through the issue of equity or other debtinstrument from capital markets.Business failures.Diversion of funds for expansion\modernization\setting up new projects\ helping orpromoting sister concerns.Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-appropriation etc.Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,delaying settlement of payments\ subsidiaries by government bodies etc.,External factors:1) Sluggish legal system:Long legal tanglesChanges that had taken place in labor lawsLack 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, industrialrecession, excess capacity, natural calamities like floods, accidents.42CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks5) Failures, nonpayment\ over dues in other countries, recession in other countries,externalization problems, adverse exchange rates etc.IMPACT OF NPAS ON BANK PERFORMANCE:The efficiency of a bank is not reflected only by the size of its balance sheet but also the level ofreturn on its assets. The NPAs do not generate interest income for banks but at the same timebanks are required to provide provisions for NPAs from their current profits.The NPAs have deleterious impact on the return on assets in the following ways.The interest income of banks will fall and it is to be accounted only on receipt basis.Banks profitability is affected adversely because of the providing of doubtful debts andconsequent to writing it off as bad debts.Return on investments (ROI) is reduced.The capital adequacy ratio is disturbed as NPAs are entering into its calculation.The cost of capital will go up. The assets and liability mismatch will widen.The economic value addition (EVA) by banks gets upset because EVA is equal to the netoperating profit minus cost of capital and It limits recycling of the funds.It is due to above factors the public sector banks are faced with bulging NPAs which results inlower income and higher provisioning for doubtful debts and it will make a dent in their profitmargin. In this context of crippling effect on banks operation the slew asset quality is placed asone of the most important parameters in the measurement of banks performance under theCamels supervisory rating system of RBI:Profitability:NPA means booking of money in terms of bad asset, which occurred due to wrong choice ofclient. Because of the money getting blocked the prodigality of bank decreases not only by theamount of NPA but NPA lead to opportunity cost also as that much of profit invested in somereturn earning project/asset. So NPA doesnt affect current profit but also future stream of profit,which may lead to loss of some long-term beneficial opportunity. Another impact of reduction inprofitability 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 toborrowing 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.43CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksInvolvement of Management:Time and efforts of management is another indirect cost which bank has to bear due to NPA.Time and efforts of management in handling and managing NPA would have diverted to somefruitful activities, which would have given good returns. Now days banks have specialemployees 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 marketcredit. It will lose its goodwill and brand image and credit which have negative impact to thepeople who are putting their money in the banks.Early Symptoms: By which one can recognize a performing asset turning in to non-performingasset Four categories of early symptoms:-1) Financial:Non-payment of the very first installment in case of term loan.Bouncing of cheque due to insufficient balance in the accounts.Irregularity in installment.Irregularity of operations in the accounts.Unpaid overdue bills.Declining Current Ratio.Payment which does not cover the interest and principal amount of that installment.While monitoring the accounts it is found that partial amount is diverted to sister concernor parent company.2) Operational and Physical: If information is received that the borrower has either initiated the process of winding up or arenot doing the business.Overdue receivables.Stock statement not submitted on time.44CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksExternal non-controllable factor like natural calamities in the city where borrowerconduct his business.Frequent changes in plan.Nonpayment of wages.3) Attitudinal Changes:Use for personal comfort, stocks and shares by borrower.Avoidance of contact with bank.Problem between partners.4) Others:Changes in Government policies.Death of borrower.Competition in the marketCREDIT DEFAULT SWAP:It is a bilateral financial contract in which buyer pays a periodic fee expressed in fixed basispoints on the notional amount in return for a floating payment contingent on the default of a thirdparty reference credit. The floating payment is designated to mirror the loss incurred by creditorsof the reference credit in the event of its default. The credit event various from bank to bank andfrom transaction to transaction, the credit events are pre defined in the agreement, which includes(i) Bankruptcy, (ii) Insolvency (iii) Rating, and downgrading below agreed threshold (iv)Failureto adjust for new payment obligation and (v) Debt Rescheduling. The credit event triggers theobligation of the seller of default protection to the purchaser of the same. The investors who needto protect themselves against default but do not want to sell them at risk security for accounting,tax and regulatory reasons can buy a credit default swap.CREDIT LIMITED NOTES (CLN):These are known as credit swaps in which buyer makes periodic payments of a fixed percentageof the reference asset to the seller over the life of the swap. Then the seller promises a paymentin the case of credit default for the reasons viz., bankruptcy, delinquency and credit rating downgrade. The payments may be either a pre - determined amount and also decrease in the marketvalue of the reference obligation that may cause the credit event. The seller calls the structureaway from the investor and delivers the defaulting notes against them on the happening of credit45CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banksevent. The CLN are like bonds in character and are acceptable to certain banks. They are notallowed to involve in credit default swap.CONSEQUENCES OF NPAS:The contaminated portfolio is definitely a bane for any bank. It puts severe dent on the liquidityand profitability of the bank where it is out of proportion. The NPAs in the public sector banksare well above the normal level. The consequences envisaged during the past several years aremany. It has become a difficult task for the banks to reduce the lending rate due to the presenceof large NPAs. Ultimately this is affecting the competitiveness of the Indian banks. When thebank does not enjoy the market competitiveness naturally the credit expansion would be slumpedand when it happens, the profitability gets a setback. In this way the vicious circle will go on andon.Another important one is the reduction in the availability of funds for further expansion due tothe unproductiveness of the existing portfolio. Sometimes it is found that the presence of largeNPAs discourages banks to accept profitable but risky proposal loan from the customers. TheNPAs also affect the risk taking ability of the banks. On the whole it affects the credibility of thebank and faces difficulty in raising fresh capital from the market for future requirements.MEASURES TO CONTROL NPAs:It is proved beyond doubt that NPAs in bank ought to be kept at the lowest level. Two prongedapproaches viz., (i) Preventive management and (ii) Curative management would be necessaryfor controlling NPAs.1. Preventive Management:a) Credit Assessment and Risk Management Mechanism:A lasting solution to the problem of NPAs can be achieved only with proper credit assessmentand risk management mechanism. The documentation of credit policy and credit auditimmediately after the sanction is necessary to upgrade the quality of credit appraisal in banks. Ina situation of liquidity overhang the enthusiasm of the banking system is to increase lending withcompromise on asset quality, raising concern about adverse selection and potential danger ofaddition to the NPAs stock. It is necessary that the banking system is equipped with prudentialnorms to minimize if not completely avoid the problem of credit risk.46CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banksb) Organizational Restructuring:With regard to internal factors leading to NPAs the onus for containing the same rest with thebank themselves. These will necessities organizational restructuring improvement in themanagerial efficiency, skill up gradation for proper assessment of credit worthiness and a changein the attitude of the banks towards legal action, which is traditionally viewed as a measure of thelast resort.c) Reduce Dependence on Interest:The Indian banks are largely depending upon lending and investments. The banks in thedeveloped countries do not depend upon this income whereas 86 percent of income of Indianbanks is accounted from interest and the rest of the income is fee based. The banker can earnsufficient net margin by investing in safer securities though not at high rate of interest. Itfacilitates for limiting of high level of NPAs gradually. It is possible that average yield on loansand advances net default provisions and services costs do not exceed the average yield on safetysecurities because of the absence of risk and service cost.d) Potential and Borderline NPAs under Check:The potential and borderline accounts require quick diagnosis and remedial measures so that theydo not step into NPAs categories. The auditors of the banking companies must monitor alloutstanding accounts in respect of accounts enjoying credit limits beyond cut off points, so thatnew sub-standard assets can be kept under check.2. Curative Management:The curative measures are designed to maximize recoveries so that banks funds locked up inNPAs are released for recycling. The Central government and RBI have taken steps for arrestingincidence of fresh NPAs and creating legal and regulatory environment to facilitate the recoveryof existing NPAs of banks. They are: Debt Recovery Tribunals (DRT): In order to expeditespeedy disposal of high value claims of banks Debt Recovery Tribunals were setup. The CentralGovernment has amended the recovery of debts due to banks and financial institutions Act inJanuary 2000 for enhancing the effectiveness of DRTs. The provisions for placement of morethan one recovery officer, power to attach dependents property before judgment, penal provisionfor disobedience of Tribunals order and appointment of receiver with powers of realization,management, protection and preservation of property are expected to provide necessary teeth tothe DRTs and speed up the recovery of NPAs in times to come.a) Lok Adalats:The Lok adalats institutions help banks to settle disputes involving accounts in doubtful and losscategories. These are proved to be an effective institution for settlement of dues in respect ofsmaller loans. The Lok adalats and Debt Recovery Tribunals have been empowered to organizeLok adalats to decide for NPAs of Rs. 10 lakhs and above.47CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banksb) Asset Reconstruction Company (ARC):The Narasimham Committee on financial system (1991) has recommended for setting up ofAsset Reconstruction Funds (ARF). The following concerns were expressed by the committee. It was felt that centralized all India fund will severely handicap in its recovery efforts by lack of widespread geographical reach which individual bank posses and. Given the large fiscal deficits, there will be a problem of financing the ARF.Subsequently, the Narasimham committee on banking sector reforms has recommended fortransfer of sticky assets of banks to the ARC. Thereafter the Varma committee on restructuringweak public sector banks has also viewed the separation of NPAs and its transfer thereafter to theARF is an important element in a comprehensive restructuring strategy for weak banks. Inrecognition of the same ARC Bill was passed to regulate Securitization and Reconstruction offinancial assets and enforcement of security interest.The ICICI BANK has promoted the countrys first Asset Reconstruction Company. Thecompany is specialized in recovery and liquidation of assets. The NPAs can be assigned to ARCby banks at a discounted price. The objective of ARC is floating of bonds and making necessarysteps for recovery of NPAs from the borrowers directly. This enables a onetime clearing ofbalance sheet of banks by sticky loans.c) Corporate Debt Restructuring (CDR):The corporate debt restructuring is one of the methods suggested for the reduction of NPAs. Itsobjective is to ensure a timely and transparent mechanism for restructure of corporate debts ofviable corporate entities affected by the contributing factors outside the purview of BIFR, DRTand other legal proceedings for the benefit of concerned. The CDR has three tier structure viz., a.CDR standing forum b. CDR empowered group and c. CDR cell.The Mechanism of the CDR: It is a voluntary system based on debtors and creditors agreement.It will not apply to accounts involving one financial institution or one bank instead it coversmultiple banking accounts, syndication, consortium accounts with outstanding exposure of Rs.20 crores and above by banks and institutions.The CDR system is applicable to standard and sub standard accounts with potential cases ofNPAs getting a priority. In addition to the steps taken by the RBI and Government of India forarresting the incidence of new NPAs and creating legal and regulatory environment to facilitatefor the recovery of existing NPAs of banks, the following measures were initiated for reductionof NPAs. Circulation of Information of Defaulters: The RBI has put in place a system forperiodical circulation of details of willful defaulters of banks and financial institutions. The RBIalso publishes a list of borrowers (with outstanding aggregate rupees one crore and above)against whom banks and financial institutions in recovery of funds have filed suits as on 31stMarch every year. It will serve as a caution list while considering a request for new or additionalcredit limits from defaulting borrowing units and also from the directors, proprietors and partnersof these entities.48CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banksd) Recovery Action against Large NPAs:The RBI has directed the PSBs to examine all cases of willful default of Rs. One crore and aboveand file criminal cases against willful defaulters. The board of directors are requested to reviewNPAs accounts of one crore and above with special reference to fix staff accountability inindividually.e) Credit Information Bureau:The institutionalization of information sharing arrangement is now possible through the newlyformed Credit Information Bureau of India Limited (CIBIL) It was set up in January 2001, bySBI, HDFC, and two foreign technology partners. This will prevent those who take advantage oflack of system of information sharing amongst leading institutions to borrow large amountagainst same assets and property, which has in no measures contributed to the incremental ofNPAs of banks.49CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks50CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksSUGGESTIONS TO CONTROL NPAs:The Bank should adopt the following general strategies to control NPAs. The suggestions are asfollows:Projects with old technology should not be considered for financeLarge exposure on big corporate or single project should be avoided.Operating staffs credit skills should be up graduation. There is need to shift banks approach from collateral security to viability of the projectand intrinsic strength of promoters. Timely sanction and or release of loans by the bank is to avoid time and cost overruns.Bank should prevent diversion of funds by the promoters.Operating staff should scrutinize the level of inventories/receivables at the time ofassessment of working capital.The Credit section should carefully watch the warning signals viz. non-payment ofquarterly interest, dishonor of check etc.Effective inspection system should be implemented.Identifying reasons for turning of each account of a branch into NPA is the mostimportant factor for upgrading the asset quality, as that would help initiate suitable stepsto upgrade the accounts.The bank must focus on recovery from those borrows who have the capacity to repay butare not repaying initiation of coercive action a few such borrows may help.The recovery machinery of the bank has to be stream lined; targets should be fixed forfield officers / supervisors not only for recovery in general but also in terms of upgradingnumber of existing NPAs.In the bank there should be a proper manpower planning.Bank should try to establish the branches in competitive market, so it will increase theirprofit.Bank has required increasing the cash and bank balances byreducing the unnecessaryexpenses for future plan51CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksCONCLUSION:Growing NPAs is one of the biggest problems that the private Indian banks are facing today. Ifproper management of the NPAs is not undertaken it would hamper the efficiency of the banks.If the concept of NPAs is taken very lightly it would be dangerous for the banking sector. TheNPAs destroy the current profit and interest income and affect the smooth functioning of therecycling of the funds. Banks also redistribute losses to other borrowers by charging higherinterest rates. Lower deposit rates and higher lending rates repress savings and financial markets,which in turn hampers the economic growth of the country. Thus, it is highly essential for thebanks to focus their attention on growth of NPAs and take appropriate measures to regulate theirgrowth.52CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksBIBLIOGRAPHY:Nelson M. 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Karunakar et.al (2008), Are non - Performing Assets Gloomy or Greedy from IndianPerspective, Research Journal of Social Sciences, 3: 4-12, 2008Bloem, A.M., & Goerter, C.N (2001), The Macroeconomic Statistical Treatment of Non-Performing loans, Discussion Paper, Statistics Department of the IMF, Decembere1, 2001Das, A., & Ghosh, S (2003), Determinants of Credit Risk, Paper presented at the Conferenceon Money, Risk and Investment held at Nottingham Trent University, November 2003.Anurag, 2007, Causes for Non Performing Assets in Public Sector Banks, [Online] Available at:http://www.123eng.com/forum/viewtopic.php?p=14590.G.V.K. Kasthuri, 2009. Basel Norms for Indian Banks, [Online] Available at:http://gvkk.blogspot.comManagement and resolution of NPAs legal and regulatory regime, [Online] Available at: http://www.mbaknol.comR P Balakrishnan, Opportunities opened by Basel II, [Online] Available at:http://www.chillibreeze.com53CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksBOOKS:1) Marketing Research- An Applied Orientation by Naresh K. Malhotra; Edition-Fourth; Publication-New DelhiWEBSITES:1) http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India2) http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to Banks ofIndia3) http://rbi.org.in/scripts/NotificationUser.aspx4) http://en.wikipedia.org/wiki/Banking_in_India5) http://www.ibef.org/industry/Banking.aspx6) http://www.bankingindiaupdate.com/general.html54CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksANNEXUREDescriptive Statistics of Factors affecting NPAs:MeanFactorsStandardDeviationFactorLoadingCommunalityVariance CronbachExplained s Alpha(%)28.79.721F1 Recession andmanagement failure3.15Recession in economy3.00Management Failure28.39F2 Execution Problems2.92Improper CreditAppraisalDifficulty in executingRepayment procedureCost of effective legalmeasures1.115.850.762.7091.780.837.710.987.940.8913.462.46.9671.391.827.730.713.69423.62F3 Default by customers2.77Willful Default2.15Absence of Security1.281.854.9601.235.914.927.75355CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksDescriptive Statistics of Recovery Mechanisms adopted to reduce NPAs:MeanFactorsF1 Banking MeasuresSelf involvementRecovery campusF2 Legal MeasuresLok adalatsSARFASI Act2.311.851.4941.214.932.891.892.8742.082.001.2561.414.960.951.923.91041.71.793StandardDeviationFactorLoadingCommunalityVariance CronbachExplained s Alpha(%)48.25.912Factorial profile of recovery mechanism for NPA by banksNo. of No. ofrounds factors1233Communalities Iterations KMOItems(Above)(Above) Deleted.60.6545.45.341-ItemsV.ERemained %8780.3680.81FactorLoading(Above).55.70One-Sample TestTest Value = 295% Confidence Interval of theDifferencetVAR00002.222df12Sig. (2-tailed).828Mean Difference.05769Lower-.5081Upper.623556CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksOne-Sample StatisticsNBART factor score 4 foranalysis 2BART factor score 1 foranalysis 313Mean2.0385Std. Deviation1.28228Std. Error Mean.35564132.07691.23905.34365KMO and Bartlett's TestKaiser-Meyer-Olkin Measure of Sampling Adequacy.Bartlett's Test of SphericityApprox. Chi-SquaredfSig..50520.9216.002Total Variance ExplainedRotation Sums of SquaredInitial EigenvaluesExtraction Sums of Squared LoadingsLoadings% ofComponent1234Total2.0441.555.253.148% of Variance51.09738.8736.3273.703Cumulative%51.09789.97096.297100.000Total2.0441.555% ofVariance51.09738.873Cumulative%51.09789.970TotalVarian Cumulacetive %1.930 48.251 48.2511.669 41.719 89.970Extraction Method: Principal Component Analysis.57CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksA study of non-performing assets in Indian private banking sectorWe are pursuing MBA and we are conducting a study on non performing assets in privatebanks.Please answer the questions below. Your response in this regards is very valuable for thesuccess of our project. Also note that the information so revealed will be utilized withoutdirectly disclosing the identity of the concern Bank/Officials.NameDesignation ....BranchSince how long the branch is functioning0-2yrs2-3yrs3-5yrs5yrs aboveSince how long the presence of NPA is observed in your branch0-1yrs1-2yrs2-3yrs5yrsWhat is the approximate value of NPA in your branch? (Rs in lakhs)1-1010-2020-30above- 40For which category the NPA is being observedPersonal loanHousing loanvehicle loanAgri-term loan58CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksThe main reasons for NPAs in the bank(Rating factors 1-5 according to the importance of factor. 1- Most effective, 2- effective, 3-moderate, 4- non effective, 5- least effective.)FactorsImproper credit appraisalLack of effective follow upDiversion of fundswillful defaultdifficulty in execution ofdiscreditcost of effective legal measuresAbsence of securityManagement failuredemand recession12345Measures for recovery of NPA adopted by the bankLegal measuresBoth legal and non-legalnon legal measuresother then specifyWhich of the following recovery mechanism are adopted by the bank for NPA?(Rating factors 1-5 according to the importance of factor. 1- Most effective, 2- effective, 3-moderate, 4- non effective, 5- least effective.)FactorsLok adalatsCivil courtsCorporate and restructuringSelf involvementdebt recovery tribunalone time settlement schemerecovery campusSARFAESI Act.1234559CAPSTONE PROJECT A study of Non Performing Assets on Indian Private BanksTo what extent your bank has been succeeded in converting NPA into good assets?1%2%3%4%5%>5%Has the profitability improved after adopting reduction technique?Definitely improvedCant sayimproveddefinitely not improvedThanks for your co-operation.60CAPSTONE PROJECT A study of Non Performing Assets on Indian Private Banks