study of the npa
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NPA Management of State Bank of India
EXEUTIVE SUMMARY
The future if Indian Banking represents a unique mixture of unlimited
opportunities amidst insurmountable challenges. On the one hand we see the
scenario represented by the rapid process of globalization presently taking shape
bringing the community of nations in the world together, transcending
geographical boundaries, in the sphere of trade and commerce, and even
employment opportunities of individuals. All these indicates newly emerging
opportunities for Indian banking to expand its horizon in International sphere and
to become one of the leading financial forces in the International financial market.
But on the darker side we see the accumulated morass, brought out by three
decades of controlled and regimented management of the banks into past. It has
siphoned profitability of many banks accumulated bloated NPA and threatens
Capital Adequacy of the Banks and their continued stability.
Banks in India can solve their problems only if they asset a spirit of self-initiative
and self-reliance through developing their in –house expertise in monitoring the
credit portfolio. The success of Banks in bringing down the level of NPA depends
upon efficient management of its Credit Portfolio an attempt is made to study the
causes for NPA in a bank and its implication and means and ways to reduce NPA.
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NPA Management of State Bank of India
1. INDUSTRY PROFILE
Banking in India has its origin as carry as the Vedic period. It is believed that the
transition from money lending t banking must have occurred even before Manu,
the great Hindu jurist, who has devoted a section of his work to deposits and
advances and laid down rules relating to the interest. During the Mughal period,
the indigenous bankers played a very important role in lending money and
financing foreign trade and commerce. During the days of East India Company, it
w sot turn of the agency houses top carry on the banking business. The general
bank of India was the first joint stock bank to be established in the year 1786. The
other, which followed, was the Bank of Hindustan and the Bengal Bank. The bank
of Hindustan is reported to have continued till 1906, while the other two failed in
the meantime. In the first half of the 19 th Century the East India Company
established three banks; The Bank of Bengal in 1809, The Bank of Bombay in
1840 and the bank of Madras in 1843.
These three banks also known as presidency banks and were independent units
and functioned well. These three banks were amalgamated in 1920 and the
Imperial Bank of India was established on the 27 th Jan 1921, with the passing of
the SBI Act in 1955, the undertaking of the Imperial Bank of India was taken over
by the newly constituted SBI. The Reserve Bank which is the Central Bank was
created in 1935 by passing of RBI Act 1934, in the wake of swadeshi movement,
a number of banks with India Management were established into country namely
Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd.
The Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19 th 1969, 14
major Banks of the country were also taken over by the government. The Indian
Banking Industry, Which is governed by the Banking Regulation Act 1949, can
be broadly classified into two major categories, non-scheduled banks and
scheduled banks. Scheduled banks comprise commercial banks and the co-
operative banks.
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NPA Management of State Bank of India The first phase of financial reforms resulted in the nationalization of 14 major
banks in 1969 and resulted in a shift from class banking to mass banking. This in
turn resulted in the significant growth in the geographical coverage of banks.
Every bank had to earmark a min percentage of their loan portfolio to sectors
identified as “priority sectors” the manufacturing sector also grew during the
1970’s I protected environment and the banking sector was a critical source.
The next wave of reforms saw the nationalization of 6 more commercial banks in
1980 since then the number of scheduled commercial banks increased fourfold
and the number of bank branches increased to eight fold.
After the second phase of financial sector reforms and liberalization of the sector
in the early nineties. The PSB’s found it extremely difficult to complete with the
new private sector banks and the foreign banks. The new private sector first made
their appearance after the guidelines permitting them were issued in January 1993.
The Indian Banking System:
Banking in our country is already witnessing the sea changes as the banking
sector seeks new technology and its applications. The best port is that the benefits
are beginning to reach the masses. Earlier this domain was the preserve of very
few organizations. Foreign banks with heavy investments in technology started
giving some “out of the world” customer services. But, such services were
available only to selected few-the very large account holders. Then came the
liberalization and with it multitude of private banks, a large segment of the urban
population now requires minimal time and space for its banking needs.
Automated teller machines or popularly known as ATM are the three alphabets
that have changed the concept of banking like nothing before. Instead a tellers
handling our own cash, today there are efficient machines that do not talk but just
dispense cash. Under the Reserve bank of India Act 1934, banks are classified as
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NPA Management of State Bank of India
Scheduled bank and non-scheduled banks. The scheduled banks are those, which
are entered in the Second schedule of RBI Act, 1934. Such bank are those, which
have paid up capital and reserve of an aggregate value of not less than Rs.5 lakh
and which satisfy RBI that their affairs are carried out in the interest of their
depositors. All commercial banks Indian and Foreign, regional rural banks and
state co-operative banks are Scheduled banks. Non-Scheduled banks are those,
which have not been included in the Second Schedule of the RBI Act, 1934.
Current scenario:-
Currently the overall banking in India is considered as fairly mature in terms of
supply, product range and reach – even though reach in rural India still remains a
challenge for the private sector and foreign banks. Even in terms of quality of
assets and Capital adequacy, India banks are considered to have clean strong and
transparent balance sheets – as compared to other banks in comparable economies
in its region. The Reserve Bank of India is an autonomous body, with minimal
pressure from the Government.
With the growth in the Indian economy expected to be strong for quite some time
especially in its service sector, the demand for banking services especially retail
banking, mortgages an investment services are expected to be strong. Merger and
acquisitions, takeovers are much more in action in India.
One of the classical economic functions of the banking industry that has remained
virtually unchanged over the centuries is lending. On the one hand, competition
has had considerable adverse impact on the margins which lenders have enjoyed,
but on the other hand technology has to some extent reduced the cost of delivery
of various products and services.
Bank is a financial institution that borrows money from the public and lends
money to the public for productive purposes. The Indian Banking Regulation Act
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NPA Management of State Bank of India
of 1949 defines the term Banking Company as “Any company which transacts
banking business in India” and the term banking as “Accepting for the purpose of
lending all Investment of money from the public, repayable on demand or
otherwise and withdrawal by cheque, draft or otherwise”.
State Bank of India is India's largest bank with a network of over 13000 branches
and 5 associate banks located even in the remotest parts of India.
Banks play important role in economic development of a country, like:
Banks mobilize the small savings of the people and make them available
for productive purposes.
Promotes the habit of savings among the people thereby offering attractive
rates of interests on their deposits.
Provides safety and security to the surplus money of the depositors and as
well provides a convenient and economical method of payment.
Banks provide convenient means of transfer of fund form one place to
another.
Helps the movement of capital from regions where it is not very useful to
regions where it can be more useful.
Banks advances exposure in trade and commerce, industry and agriculture
by knowing their financial requirements and prospects.
Banks as an intermediary between the depositors and the investors. Bank
also acts as mediator between exporter and importer who does foreign trades.
Thus Indian banking has come from a long way from being a sleepy business
institution to a highly pro-active and dynamic entity. This transformation has been
largely brought about by the large dose of liberalization and economic reforms
that allowed banks to explore new business opportunities rather than generation
revenues from conventional streams (i.e. borrowing and lending). The banking in
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NPA Management of State Bank of India
India is highly fragmented with 30 banking units contributing to almost 50% of
deposits and 60% of advance.
The Structure of Indian Banking:
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Reserve Bank of India [Central Bank]
Schedule Bank
Schedule Urban Co-operative Banks
Schedule Commercial Banks
Schedule Co-operative Banks
Scheduled State Co-operative Banks
Public Sector Bank Private Sector Bank Foreign Banks Regional Rural Banks
Nationalized Banks SBI & its AssociatesNew Private Sector
BankOld Private Sector
Banks
NPA Management of State Bank of India Chart Showing Three Different Sectors of Banks
1. Public Sector Banks
2. Private Sector Banks
Public Sector Banks
SBI and Nationalized Regional Rural
SUBAIDIARIES Banks Banks
SBI and Subsidiaries:
This group comprises of the State Bank of India and its seven subsidiaries viz.,
State Bank of Patiala, State Bank of Hyderabad, State Bank of Travancore, State
Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Saurashtra,
State Bank of India. State Bank of India (SBI) is the largest bank in India. If one
measures by the number of breach offices and employees, SBI is the largest bank
in the world. Established in 1806 as bank of Bengal it is the oldest commercial
bank in the Indian subcontinent. SBI provides various domestic, international and
NRI products and services, through its vast network in India and overseas. With
an asset base of $126 billion and its reach, it is a regional banking behemoth. The
government nationalized the bank in 1955, with the Reserve bank of India taking
a 60% ownership stake. In recent years the has focused on two effects priorities.
Reducing its staff through Golden handshake schemes known as the
Voluntary Retirement Scheme, which saw many of its best and brightest defect to
the private sector.
Computerizing its operations.
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NPA Management of State Bank of India The State Bank of India trace its roots to the first decade of 19 th century, when the
bank of Calcutta, later renamed the Bank of Bengal, Was established on 2 June
1806. The government
Amalgamated Bank of Bengal and two other presidency banks, namely, the bank
of Bombay and the bank of Madras and named the reorganized banking entity the
Imperial Bank of India.
All these Presidency banks were incorporated as companies, and were the result
of the royal charters. The Imperial Bank of India continued to remain a joint stock
company. Until the establishment of a central bank in India the Imperial Bank and
its early predecessors served as the nation’s central bank printing currency.
The State Bank of India Act 1955, enacted by the parliament of India, authorized
the Reserve Bank of India, which is the central Banking Organization of India, to
acquire a controlling interest in the Imperial Bank of India, which was renamed
the State Bank of India on 30th April 1955.
In recent years, the bank has sought to expand its overseas operations by buying
foreign banks. Ti sis only Indian bank to feature in the top 100 world banks in the
fortune Global 500 rating and various other rankings.
NATIONALIZED BANKS:
This group consists of private sector banks that were nationalized. The
Government of India nationalized 14 private banks in 1969 and another 6 in the
year 1980. In early 1993, the loss making new bank of India was merged with
profit making Punjab National Bank. Hence, now only 27 nationalized banks exist
in India.
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NPA Management of State Bank of India
REGIONAL RUTAL BANKS:
The RBI established these dint the year 1975 of banking commission. It was
established to operate exclusively in rural areas to provide credit and other
facilities to small and marginal farmers, agricultural laborers, artisans and small
entrepreneurs.
PRIVATE SECOTR BANKS:
Private Sector Banks
Old private sector Banks New private Sector Banks
Old Private Sector Banks:
This group consist of the banks that were establishes by the privy sectors,
committee organizations or by group of professionals for the cause of economic
betterment in their operations. Initially, their operations were concentrated in a
few regional areas. However, their braches slowly spread throughout the nation as
they grow.
New Private Sector Banks:
These banks were started as profit orient companies after the RBI opened the
banking secot to the private sector. These banks are mostly technology driven and
better managed than other banks.
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NPA Management of State Bank of India
FORIGHN BANKS:
These are the banks that were registered outside India and had originated in a
foreign country. The major participants of the Indian financial system are the
commercial banks, the financial institutions (FIs), encompassing term-lending
institutions, investment institutions, specialized financial institutions and the state
level development banks, Non-bank Financial Companies (NBFCs) and other
market intermarries such as the stock brokers and money-lenders. The
commercial banks and certain variants of NBFCs are among the oldest of the
market participants. The FIs, on the other hand, are relatively new entities in the
financial market place.
Important of banking sector in a growing economy:
In the recent times when the service industry is attaining greater importance
compared to manufacturing industry, banking has evolved as a prime sector
providing financial service to growing needs of the economy.
Banking industry has undergone a paradigm shift from providing ordinary
banking services in the past to providing such complicated and crucial services
like, merchant banking, housing finance, bill discounting etc. this sector has
become more active with the entry of new players like private and foreign banks.
It has also evolved as a prime builder of the economy by understanding the needs
of the same and encouraging the development by way of giving loans, providing
infrastructure facilities and financing activities for the promotion of entrepreneurs
and other business establishments.
The banking sector in recent years has incorporated new products in their
business, which is helpful for growth. At the same time, the banks are reaching
out to other end of customer requirements like, insurance premium payment, tax
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NPA Management of State Bank of India payment etc. It has changed itself from transaction type of banking into
relationship banking, where you find friendly and quick service suited to your
needs. This is possible with understanding the customer needs their value to the
bank, etc. this is possible with the help of well-organized staff, computer based
network for speedy transactions, products like credit card, debit card, health care,
ATM etc. these are the present trend of services. The customers at present ask for
convenience of banking transactions, like 24 hours banking, where they want to
utilized the services whenever there is a need. The relationship banking plays a
major an important role in growth, because the customers now have enough
number of opportunities, and they choose according to their satisfaction of
reposes and recognition they get. So the banks have to play cautiously, else they
may lose out the place in the market due to competition, where slightest of
opportunities are captured fast. Another major role played by banks is in
transaction business, transactions and networking. Many leading Indian banks
have spread out their network to other countries, which help in currency transfer
and earn exchange over it.
These banks play a major role in commercial import and export business, between
parties of two countries of two countries. This foreign presence also helps in
bringing in the international standards of operations and ideas. The liberalization
policy of 1991 has allowed many foreign banks to enter the Indian market and
establish their business. This has helped large amount of foreign capital inflow
and increase our foreign exchange reserve. Another emerging change happening
all over the banks in strengthening their empire and expanding their network of
business in terms of volume and effectiveness.
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NPA Management of State Bank of India
2. COMPANY PROFILE
The roots of the State Bank of India lie in the decade of 19 th century, when the
Bank of Calcutta, later renamed the Bank of Bengal, was established on June 2,
1806. The bank of Bengal was one of three Presidency banks the other two being
the bank of Bombay (incorporated on April 15th 1840) and the bank of madras
(incorporated on July 1st 1843). All three Presidency banks were incorporated as
joint stock companies and were the result of the royal charters. These three banks
received the exclusive right to issue Paper Currency in 1861 with the Paper
Currency act, a right they retained until the formation of the Reserve bank of
India. The Presidency banks amalgamated on January 27th 1921, and the re-
organized banking entity took as its name Imperial Bank of India. The Imperial
bank of India remained a joint stock company.
Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve
Bank of India, which is India’s Central bank, acquired a controlling interest in the
Imperial Bank of India. On April 30th 1955, the Imperial Bank of India became
the State Bank of India. The government of India recently acquired the Reserve
Bank of India’s stake in SBI so as to remove any conflict of interest because the
RBI is the country’s banking regulatory authority. In 1959, the government
passed the State Bank of India (Subsidiary Banks) Act, enabling the State Bank of
India to take over eight former state associated banks as its subsidiaries. On
September 12, 2008, the state Bank of Suarashtra, one of the associate banks,
merged with the State Bank of India. SBI has acquired local banks in rescues. For
instance, in 1985, it acquired the Bank of Cochin in Kerala, which had 120
branches. SBI was acquiring as its affiliate, the State Bank of Travancore, already
had an extensive network in Kerala.
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NPA Management of State Bank of India
Background of the company:
STATE BANK OF INDIA
Not only many financial institution in the world today can claim the antiquity and
majesty of the State Bank of India founded nearly two centuries ago with
primarily intent of imparting stability to the money market, the bank from its
inception mobilized funds for supporting both the public credit of the companies
government in the three presidencies of British India and the private credit of the
European and India merchants from about 1860s when the Indian economy book
a significant leap forward under the impulse of quickened world communications
and ingenious method of industrial and agricultural production the Bank became
intimately in valued in the financing of practically and mining activity of the Sub-
undoubtedly the principal beneficiaries, the small man never ignored loans as low
as the bank till the creation of the Reserve Bank in 1935 carried out numerous
Central Banking functions.
Adaption world and the needs of the hour has been one of the strengths of the
Bank, in the post-depression exe. For instance – when business opportunities
become extremely restricted, rules laid down in the book of instructions were
relined to ensure that good business did no go post. Yet seldom did the bank
contravene its innovative array of office, unknown to the world then, was devised
in the form of braches, sub branches, treasury pay office, pay office, a sub pay
office and out students to exploit the opportunities of an expanding economy.
New business strategy was also evaded way back in 1937 to render the best
banking service through prompt and courteous attention to customers.
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NPA Management of State Bank of India A highly efficient and experienced management functioning in a well-defined
organizational structure did not take long to place the bank an executed pedestal
in the areas of business, profitability, internal discipline and above all credibility
if banking an observation of a high standard of integrity in its operation helped the
bank gain pre-eminent status. No wonders the administration for the bank was
universal as key functionaries of India successive finance minister of independent
India Resource Bank of governors and representative so of chamber of
commercial showered economics on it.
Modern day management techniques were also very much evident in the good old
day’s years before corporate governance had become a puzzled the banks bound
functioned with a high degree of responsibility and concern for the shareholders.
An unbroken record of profits and a fairly high rate of profit and fairly high rate
of dividend all through ensured satisfaction; prudential management and asset
liability obligations t customers were not met. The traditions of the past continued
to the upheld even to this day as the State Bank year it to meet the emerging
challenges of the millennium.
ABOUT LOGO
Togetherness is the theme of this corporate logo of SBI where the world of
banking services meet the ever changing customers’ needs and established a link
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NPA Management of State Bank of India that is like a circle, it indicates complete services towards customers. The logo
also denotes a bank that it has prepared to do anything to go to any lengths, for
customers. The blue pointer represent the philosophy of the bank that is always
looking for the growth and newer, more challenging, more promising direction.
The keyhole indicates safety and security.
NATURE OF THE BUSINESS CARRIED
Banking activities are considered to be the lifeblood of the national economy.
Without banking services, trading and business activities cannot be carried on
smoothly. Banks are the distributors and protectors of liquid capital, which is of
vital significance to a developing country. Efficient administration of the baking
system helps in the economic growth of the nation. Banking is useful to trade and
commerce.
Banking activities are useful to trade and industry in the following ways.
Money deposited in a bank remains safe. Precious articles too can be kept
in the safe custody of banking lockers.
Banks provide credit facilities to their customers. Customers with bank
account also enjoy better credit in the business world.
Banks encourage the habit of saving and thrift among people. They
mobilize savings and invest them in productive activities. Thus, they help in
increasing the rate of savings and investment in the country.
Banks provide a convenient and safe means of transferring money from
one place to another and facilitate business dealings/ transactions.
Banks collect and realize bills, cheese, internet and dividend warrants etc.
Foreign trade is facilitated considerably with the help of banks which
receive and make payments, provide credit and deal in foreign exchange. They
protect importers form the risk of loss on account of exchange rate fluctuations.
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NPA Management of State Bank of India They issue letter of credit and provide information on the credit worthiness of
importers. They also act as reference if their customers.
Banks meet the financial needs of small-scale business units which are
located in economically backward areas.
Farmers and artisans in rural areas can also avail of bank credit for
financing their activities.
Commercial banks provide many other services to the general public
which includes locker facility, issue of traveler’s cheques and gift cheque,
payment of insurance premium, etc.
Services activities of Banks
Service activities of banks may be categorized as follows:
Banks undertake/various agency services for their customer.
Collection of cheques, drafts, and bills of exchanges on behalf of
customers.
Collection of divided and interest warrants of customers.
Purchasing and sale of securities on the instructions of customers.
Executing standing orders for payment of rent, electricity bill, and
insurance premium.
Acting as correspondent or representative of customers in dealing with
other banks.
Acting as trustee or executor when so nominated.
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NPA Management of State Bank of India
Vision, Mission, and Quality Policy
Mission statement:
To retain the Banks position as premiere Indian Financial Services Group, with
world class standards and significant global committed to excellence in customer,
shareholder and employee satisfaction and to play a leading role in expanding and
diversifying financial service sector while containing emphasis on its
development banking rule.
Vision statement:
Premier Indian Financial Service Group with prospective world-class
standards of efficiency and professionalism and institution values.
Retain its position in the country as pioneers in Development Banking.
Maximize the shareholders’ value through high-sustained earnings per
share.
An institution with cultural mutual care and commitment, satisfying and
Good work environment and continues learning opportunities.
Values:
Excellence in customer service
Profit orientation
Belonging commitment to bank
Fairness in all dealings and relations
BIET MBA PROGRAMME DAVANAGERE 17
NPA Management of State Bank of India Risk taking and innovative
Team playing
Learning and renewal
Integrity
Transparency and discipline in policies and system
Products and Services Profile:
Products:
State Bank of India renders varieties of services to customers through the
following products:
SBI Term Deposits
SBI Recurring Deposits
SBI Housing Loan
SBI Car Loan
SBI Education Loan
SBI Personal Loan
SBI Loan for Pensioners
Loan Against Mortgage of Property
Loan Against Shares and debentures
Rent plus scheme
Medi-plus scheme
Rates of Interest
Services:
Domestic Treasury
Sbi vishwa yatra Foreign Travel card
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NPA Management of State Bank of India Broking Services
Revised service charges
ATM Services
Remittance
Internet banking
E-Pay
E-Rail
Safe Deposit Locker
Gift Cheques
State bank networked ATM services:
State bank offers you the convenience of over 26000 ATMs in India, the largest
network in the country and continuing to expand fast! This means that you can
transact free of cast at the ATMs of State Bank of India Group (This includes the
ATMs of State Bank of India as well as the Associate Banks – namely, State Bank
of Bikaner and Jaipur, State Bank of Patiala, State Bank of Saurashtra, State Bank
of Hyderabad, State Bank of Indore, State Bank of Mysore, Stae Bank of
Travancore) and wholly owned subsidiary viz. SBI Commercial and International
Bank Ltd., using the State Bank ATM-cum-Debit (Cash Plus) card.
Kinds of cards accepted at State Bank ATM
besides State Bank ATM-cum-Debit Card and State Bank International ATM-
Cum-Debit Cards following cards are also accepted at State Bank ATMs:-
State Bank Credit Card
ATM Card issued by Banks under bilateral sharing viz. Andhra bank, Axis
bank, Dena Bank, HDFC Bank, Indian Bank, Punjab National Bank, UCO bank
and Union Bank of India.
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NPA Management of State Bank of India Cards issued by banks (other than under bilateral sharing) displaying
maestro, master card, cirrus, VISA and VISA Electron logos.
All Debit/Credit cards issued by any bank outside India displaying
Maestro, Master Card, Cirrus, VISA and VISA Electron logos.
Area of Operation-Global/National/Regional
State Bank of India has 172 foreign offices in 37 countries across the
globe.
SBI has about 26,000 ATMs and SBI group (including associate banks)
has about 40,000 ATMs.
SBI has 13000 branches, including branches that belong to its associate
banks.
SBI includes 99345 offices in India.
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NPA Management of State Bank of India
Competitors Information
Name Last
Price
Market
Cap.
(Rs. cr.)
Net
Interest
Income
Net
Profit
Total Assets
SBI 2,296.4
0
154,098.84 106,521.4
5
11,707.29 1,335,519.24
Bank of Baroda 771.50 31,815.68 29,673.72 5,006.96 447,321.46
PNB 860.70 29,193.11 36,428.03 4,884.20 458,194.01
Canara Bank 448.45 19,866.34 30,850.62 3,282.72 374,160.20
Bank of India 341.05 19,594.00 28,480.67 2,677.52 384,535.47
Union Bank 236.35 13,012.23 21,144.28 1,787.13 262,211.44
IDBI Bank 100.20 12,809.77 23,369.93 2,031.61 290,837.23
Oriental Bank 302.95 8,838.91 15,814.88 1,141.56 178,130.17
Indian Bank 191.35 8,223.65 12,231.32 1,746.97 141,419.20
Syndicate Bank 130.00 7,825.35 15,268.35 1,313.39 182,468.06
Allahabad Bank 149.40 7,470.39 15,523.28 1,866.79 182,934.57
IOB 75.70 6,033.28 17,897.08 1,050.13 219,648.17
Corporation Ban 406.20 6,017.01 13,017.78 1,506.04 163,560.42
Andhra Bank 102.95 5,760.88 11,338.73 1,344.67 124,964.23
Central Bank 76.90 5,660.73 19,149.50 533.04 229,799.74
UCO Bank 67.20 4,466.87 14,632.37 1,108.67 180,498.41
Dena Bank 103.25 3,614.35 6,794.13 803.14 87,387.93
Bank of Mah 56.40 3,325.30 7,213.96 430.83 88,017.38
State B Bikaner 454.75 3,183.25 6,291.36 652.03 72,528.15
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NPA Management of State Bank of India State Bank Mysore 625.00 2,924.99 5,078.44 369.15 60,403.58
State Bnk Tr 553.25 2,766.25 6,828.76 510.46 85,949.33
Vijaya Bank 55.35 2,742.81 7,988.12 580.99 95,764.00
United Bank 67.75 2,445.77 7,961.09 632.53 102,010.39
Punjab & Sind 66.60 1,559.83 6,474.50 451.28 72,905.27
AWARDS OF STATE BANK OF INDIA
Recent Awards:
Best Online Banking Award, Best Customer Initiative Award & Best Risk
Management Award (Runner Up) by IBA Banking Technology Awards 2010
The Bank of the year 2009, India (won the second year in a row) by The
Banker Magazine
Best Bank – Large and Most Socially Responsible Bank by the Business
Bank Awards 2009
Best Bank 2009 by Business India
The Most Trusted Brand 2009 by The Economic Times
Most Preferred Bank & Most preferred Home loan provider by CNBC
Visionaries of Financial Inclusion By FINO
Technology Bank of the Year by IBA Banking Technology Awards
SKOCH Award 2010 for Virtual corporation Category for its e-payment
solution
The Brand Trust Report: 11th most trusted brand in India
Business standard has Award “THE BEST BANK OF THE YEAR
AWARD” to Shri O.P Bhatt for this initiative to re-energies the bank.
CNN IBN Network 18 has selected Shri O.P Bhatt as Indian of the year
business 2007 for showing how a public sector behemoth can flex its muscle in
the ferociously competitive banking sector.
BIET MBA PROGRAMME DAVANAGERE 22
NPA Management of State Bank of India Asian Centre for corporation government and sustainability and Indian merchant
chamber has awarded the “Transformational Leader Award 2007 to Shri O.P
Bhatt for leadership, chairman, inspiration and intellectual stimulation for the
entire SBI team.
The only Indian bank to find place in the fortune Global 500 list
SBI has bagged the awards for “ Most Preferred Bank” and “Most
Preferred Brand for Home Loan” in CNBC Awaaz Consumer Awards in August
2007
SBI is No.1 provider of Agri. Finance and No.1 in Credit Linking of 9.35
lacs
3rd in the Economic Times Brand Equity ranking Top 50 most trusted
Services Brand in the Services Sector
Future growth and prospects:
If both Foreign Institutional Investments (FII) inflow and credit growth
outperforms, SBI can perform as good as a bank fixed deposit that is deliver an
annual return of around 10%. Has the potential to double in the long run – 3 to 5
years or more – for this to get delayed, and SBI delivering only an FD type return
in good markets, and correcting significantly in adverse markets and slow credit
growth condition.
SBI recently concluded a successful bond issue that takes care of the fund
requirements. The bank remains bullish on teaser loans in home financing, and
seems to have the tacit approval of Finance Ministry, even against the wishes of
banking regulator, Reserve Bank of Indian (RBI). Teaser how loans are expected
to be a future money-spinner for SBI, if it doesn’t regress to a sub-prime like
scenario. Due to its unique positioning as the bank ‘closest’ to Government of
India, SBI has unique access to some incredibly large fund decisions like the
BIET MBA PROGRAMME DAVANAGERE 23
NPA Management of State Bank of India recent Employee’s Provident Fund Organization (EPFP) decision to park Rs.3.5
lakh crore solely with SBI, even if it is for three months.
SBI is 330% larger than Punjab National Bank (BSE:532461,NSE:PNB), the
nearest public sector competitor by income; and 275% larger than nearest private
sector peer, ICICI Bank (BSE:532174,NSE:ICICIBSNK). Not only can’t both of
them play catch-up un the coming few years, but size-wise things are getting
better for SBI due to the upcoming mergers with SBI Group banks like State bank
of Mysore (BSE:532200, NSE:MYSOREBANK), State Bank of Bikaner and
Jaipur (BSE:501061,NSE:SBBJ), and State Bank of Travancore
(BSE:532191,NSE:SBT). The dominance in income is also on a comparable asset
base. SBI has shown the capability for leading other PSBs in innovative products,
and lately even a brand of defiance to regulators when it comes to pushing things
their way. State Bank Group has access to some of the lowest cost Current
Account/Savings Account (CASA) funds in the country that protects margins.
3. EXPLANATION OF THE 7-S FRAMEWORK OF MCKINSEY
BIET MBA PROGRAMME DAVANAGERE 24
NPA Management of State Bank of India
Description:
The 7-S Frame of Mckinsey is management model that describes 7 factors to
organize a company in a holistic and effective way. Together these factors
determine the way in which a corporation operates. Managers should take into
account all seven of these factors, to be sure of successful implementation of a
strategy. Large or Small. They’re all interdependent, so if you fail to pay proper
attention to one of them; this may affect all others as well. On top of that, the
relative importance of each factor may vary over time.
The 7-S Framework was first mentioned in “The art of Japanese Management” by
Richard Pascale an Anthony Athos in 1981. They had been investigating how
Japanese industry had been so successful. At around the same time that Tm Peters
and Robert Waterman were exploring what made a company excellent. The Seven
S model was born at a meeting of these four authors in 1978. It appeared also in
BIET MBA PROGRAMME DAVANAGERE 25
NPA Management of State Bank of India “In Search of Excellence” by peters and Waterman, and was taken up as abasing
tool by the global management consultancy company Mckinsey. Since then it is
known as their 7-S model.
Shared Values: The interconnecting center of McKinsey's model is: Shared
Values. What does the organization stands for and what it believes in. Central
Beliefs and Attitudes.
Strategy: Plans for the allocation of firms scarce resources, over time, to reach
identified goals. Environment, Competition, Customers.
Structure: The way in which the organization's units relate to each other:
centralized, functional divisions (top-down); decentralized; a matrix, a network, a
holding, etc
Systems: The procedures, processes and routines that characterize how the work
should be done: financial systems; recruiting, promotion and performance
appraisal systems; information systems.
Staff: Numbers and types of personnel within the organization.
Style: Cultural style of the organization and how key managers behave in
achieving the organization's goals. Compare: Management Styles.
Skills: Distinctive capabilities of personnel or of the organization as a whole.
Compare: Core Competences.
Strengths of the 7-S Model. Benefits
• Diagnostic tool for understanding organizations that is ineffective.
• Guides organizational change.
• Combines rational and hard elements with emotional and soft elements.
• Managers must act on all S’s in parallel and all S’s are interrelated.
BIET MBA PROGRAMME DAVANAGERE 26
NPA Management of State Bank of India
ORGANIZATION STRUCTURE
BIET MBA PROGRAMME DAVANAGERE 27
CHAIRMAN
DMD (I & MA)
DMD&CCO
DMD (I&MA)
NPA Management of State Bank of India
4. SWOT ANALYSIS OF SBI
Strength
The biggest bank in the country.
Has separate act for itself. Thus, a special privilege.
Biggest branch network in the country.
First public sector to move to CBS.
Weakness
BIET MBA PROGRAMME DAVANAGERE 28
DMD&CDO
CVO
CVO
Chief economic Advisor
MD&GE (CB) MD&GE (NB) MD&GE (IB) MD&GE (A&S)
NPA Management of State Bank of India Huge amount of staff
Expected to experience high level of attrition due to retirement of its top
Management.
Still carries the image of the old Government sector bank.
Opportunities
Pool in talent to replace the going top Management to serve the next generation
Make better use of its CRM
Expansion into rural areas
Threats
Consolidation among private banks
New bank licenses by RBI
Foreign banks that have sophisticated products
5. ANALYSIS OF FINANCIAL STATEMENT
Financial Analysis
Operating Profit:
The Bank’s Operating Profit is gradually increasing. Operating Profit in 2008
stood at Rs. 25257.87 (in Crs) at the end of financial year 2012 it was Rs.
49529.61 (in Crs). Table below shows the Operating Profit for past 5 years.
Table 1: Operating Profit from 2008 to 2012=Sales-Variable-Fixed assets
(Rs in Crore)
BIET MBA PROGRAMME DAVANAGERE 29
NPA Management of State Bank of India YEARS OPERATING PROFITS % GROWTH
Mar ‘08 25257.87 28.36
Mar ‘09 33,673.05 33.32
Mar ‘10 44,405.16 31.87
Mar ‘11 46,280.41 4.22
Mar ‘12 49529.61 7.02
Interpretation: Operating profit amount shows the growth for the last five years
especially there is a rapid growth in the year 2008-09 due to increases in
advances, reduction in staff expenses, reduction in cost of funds (borrowings). But
there is a decrease in the profit since three years due to inflation and NPA’s.
Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘11 Mar ‘1205
101520253035
% GROWTH
% GROWTH
2. Net Profit
The bank’s Net Profit is substantially showing increasing trend form past 5 years.
Net Profit in the year 2008 stood at Rs. 4541.31 (in Crs) at the end of financial
year 2012 it was Rs. 7,370.35 (in Crs). Table below shows the Net Profit for past
5 years.
Table 2: Net Profit from 2008 to 2012
[Rs.in Crores]
YEARS NET PROFITS % GROWTH
Mar ‘08 4541.31 3.05
BIET MBA PROGRAMME DAVANAGERE 30
NPA Management of State Bank of India Mar ‘09 6,729.12 48.2
Mar ‘10 9,121.24 35.55
Mar ‘11 9,166.05 0.5
Mar ‘12 7,370.35 -19.60
Interpretation
Though there is a continuous growth in the amounts of Net Profit the growth
percentage is declining heavily to only -9.83% in the year 2012. This is because
of high provisioning made on the NPA’s over the year and due increase in
advances and interest rates and due to the inflation caused since 3 years and
growth in the 2012 year 41.65
Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘11 Mar ‘12
-30-20-10
0102030405060
% GROWTH
% GROWTH
3. Deposits:
The bank deposit is constantly showing increasing trend from past 5 years.
Deposits in 2007 stood at Rs. 1255562.48 (in Crs). Table below shows the
deposits for past 5 years.
Table 3: deposits from 2007 to 2011
YEARS DEPOSTITS % GROWTH
Mar ‘ 07 636,2272.88 14.6
BIET MBA PROGRAMME DAVANAGERE 31
NPA Management of State Bank of India Mar ‘08 776,416.52 23.4
Mar ‘09 1,011,988.33 30.34
Mar ‘10 1,116,464.56 10.32
Mar ‘11 1,255,562.48 12.45
Interpretation: the percentage growth in the year 2009-10 was declined i.e.,
29.74% India millennium Deposits also there has been increase in interest rate,
which contribution to increase in deposits. Than growth rate is increase in the year
2011 to 2012 i.e., 10.32 to 12.45
Mar ‘ 07 Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘1105
101520253035
% GROWTH
% GROWTH
6. LEARNING EXPERIENCE:
I have gained knowledge about all round view of the management operation. I
come to know detailed review of the operations, performance and outlook of the
Bank. As a researcher the bank employee how deal with customer in different
situation. As a researcher got the practical orientation of the functions of the
various departments in the company. As a researcher I have gained knowledge
about all round view of the management operation. As a researcher I come to
BIET MBA PROGRAMME DAVANAGERE 32
NPA Management of State Bank of India know that what difficulties the company faced and how they were tackled. It gave
a detailed review of the operations, performance and outlook of the company.
1. General IntroductionIntroduction:
Study on Non-Performing assets
Non-Performing assets surfaced suddenly in the Indian banking scenario, around
the eighties on the background of implementation of Narasimhan committee
recommendations in the banking sector. This committee was appointed by RBI to
safeguard the interest of the banks, In the midst of turbulent structure changes
BIET MBA PROGRAMME DAVANAGERE 33
NPA Management of State Bank of India overtaking the international banking institutions and where the global financial
markets were undergoing sweeping changes.
Now-a-days Management of Non-Performing Assets is a critical performing area
for banks. One of the parameter for assessing efficiency of the bank is
management of its N.P.A. the profitability of the bank and its strength is measured
in terms of management of NPA. In order to compete globally it is necessary for
Indian banks to adopt Internationally standard in terms of efficiency, productivity,
profitability, assets recognitions norms, and provisioning and capital adequacy.
Literature Review1. NPA Management in Indian Banks
N. Fathima Thabassuma Dr. E. Mubarak Ali research scholar Reader in
Commerce NPA means an asset or account of a barrower, which has been
classified by a bank, or financial institution as substandard, doubtful or loss asset,
in accordance with direction and guidelines relating to asset classifications issued
by the Reserve bank of India.
Means a charge in or upon any moveable property, existing or future, created by a
favor of a secured creditor without a delivery of possession of a moveable
property to such creditor, as a security for financial assistance and includes
floating charges and crystallization of such charge into fixed charge on moveable
property.
1. Thesis On Non-perming Asset Of Bank
NPAs have a direct impact on banks profitability as legally banks are not allowed
to book income on such account and at the same time banks are forced to
BIET MBA PROGRAMME DAVANAGERE 34
NPA Management of State Bank of India make provision on such assets as per the Central Bank guidelines. Also, with
increasing deposits made by public in the banking system, the banking industry
cannot afford default by borrowers since NPAs affects the repayment capacity of
through various rate cut and banks fails to utilize this benefit to its advantages due
to the fear of burgeoning non-perming assets.
Statement of the Problem:
“A Study on Non-Performing Assets of State Bank of India”
The concept of Non-performing Assets surfaced in the Indian banking scenario, in
the early eighties, on the background of implementation of Narasimhan
Committee recommendations in the banking sector, this committee was appointed
by RBI to safeguard the interest of the banks, in the midst of turbulent structured
changes overtaking the international banking institutions and where the global
financial markets were undergoing sweeping changes.
Background of project topic:
Credit risk is defined as the potential that a bank borrower or counterparty will
fail to meet its obligations in accordance agreed terms, or in other words it is
defined as the risk that a firms customer and the parties to which it has lent money
will fail to make promised payment is known as credit risk. The exposure to the
credit risks large in case of financial institutions, such commercial banks when
firms barrow money they in turn expose lenders to credit risk, the risk that the
firm will default on its promised payments. As a consequence, barrowing exposes
the firm owners to the risk that firm will be unable to pay its debt and thus be
forced to bankruptcy.
BIET MBA PROGRAMME DAVANAGERE 35
NPA Management of State Bank of India
Objective of the Study1. To study the pattern of NPA
2. Steps taken to reduce NPA
3. Examine the effects of NPA’s.
4. To know the impact of NPA on profitability of the bank.
Scope of the Study“Non-Performing Assets” management is a key a subject, which plays an
important role in deciding the overall performance of the Bank. Therefore, the
subject of Non-performing Asset was chosen for the project work. Accordingly
the project was undertaken at STATE BANK OF INDIA, BANGALORE
URBAN HONNALI BRANCH.
Methodology of the study
Data Collection Method t fulfill the objectives of my study, I have taken both into
considerations primary and secondary data.
Primary data: primary data has been collected through personal interview by
direct contact method. The Method, which was adopted to collect the information
through unstructured ‘Personal Interview’ method.
Personal Interview and discussion was made with manager and other personnel in
the organization for this purpose.
Secondary method: the data is collected from the Magazines, Annual report,
Internet, Textbooks.
Internal files and Materials
Websites
Magazines
BIET MBA PROGRAMME DAVANAGERE 36
NPA Management of State Bank of India Textbooks Annual Report
Limitation of the study The time stipulated for the project was limited.
Some confidential information was not revealed by the bank.
Some employees were not co-operative.
Study is restricted with one branch.
Study process was restricted to bank’s rules and regulations.
Analysis and Interpretation
After nationalization of commercial banks in July 1969 as per the directive of the
government commercial banks have started opening more and more branches in
rural and semi-urban centers this has led a tremendous growth in the business of
banking sector. Thereafter the Indian banks have consolidated their growth year
after year. The total volume of business has increase from mere Rs. 20,000crores
to nearly Rs.60,000 crores and most of the banks were showing a growing in
business and profitability. Banks were lending on the basis of securities and were
not unduly amount in terms of securities. The interest is charged regularly on the
advanced made by the bank without much bothering the recovery of the same.
The RBI has introduced a system in the early eighties to categorize the advances
in terms of realization. A health code was introduced to determine the quality of
the assets. There was always a need to have regulated, uniform and prudent
accounting policies for the banks with special reference to the credit risk involved
in lending activities so that the significant growth in the business volumes of
banks was ably supported by a well set regulatory norms.
BIET MBA PROGRAMME DAVANAGERE 37
NPA Management of State Bank of India In the earlier times, bank tended to lean much towards security-oriented approach
in assessment of credit proposals as also subsequent classification of the asset in
their books. The interest and other charges debited to a borrower’s account was
taken into income on the basis of accrual irrespective of the fact whether such
interest and charges accrued earlier were actually recovered or not. Such income
was taken to Profit and Loss Account and dividend was declared on the basis of
profit so arrived at. Loans were treated as realizable without actually looking into
the record recovery. All this resulted in overstating of profit and distorted
depiction of the state of affairs of the banks in their books of accounts.
Sensing this need, government of India at the behest of RBI appointed a
committee under the chairmanship of Shri. M. Narashimham to study the
financial system and to and to give guidelines for strengthening financial system
in the wake of economy being opened up as per GATT agreement to face global
competition to ensure that financial institutions operated on the basis of
operational flexibility and functional autonomy thereby enhancing efficiency,
productivity and profitability.
The committee has made path-breaking recommendations to strengthen the
financial institutions including banks. Wide-ranging suggestions and
recommendations of this committee were accepted and have resulted in
evolvement of prudential norms on income recognitions, assets classification and
provisioning. Keeping intact the original viewpoint, RBI has been making
modifications to these norms taking into account changes in the business
environment and need of the hour. These Prudential Norms harp upon three vital
aspects-
Recognition of income-Recognition of income shall be objective and based on
record of recovery rather than any subjective consideration like availability of
security, net worth of borrower/guarantor etc.
BIET MBA PROGRAMME DAVANAGERE 38
NPA Management of State Bank of India Asset classification- Classification of assets shall be done on the basis of
objective criteria with uniform and consistent application of norms duly ensured.
Provisioning- Provisioning for bad and doubtful debts shall be made on the basis
of classification of assets reckoning the period for which the assets has remained
Non-Performing and the availability of security and the realizable Value hereof.
WHAT IS NPA?
With a view to moving towards International best practices and to ensure greater
transparency the ’90 days overdue’ norms for identification of Non-performing
Assets has been adopted by the R.B.I (w.e.f. 31.03.2004)
Interest and / or installment of principal remain overdue for a period off more than
90 days in respect of a term loan.
The Account remains ‘out of order’ for a period of more than 90 days. In respect
of an overdraft/ C.C.
The bills remains ‘overdue’ for a period of more than 90 days in the case of bills
purchased and discounted.
Any amount to be received remains ‘overdue’ for a period of more than 90 days
in respect of other accounts.
A loan granted for short duration crops is treated as NPA, if the installment of
principal or interest thereon remains overdue for two crops season and a loan
granted for long duration crops is treated as NPA, if installment of principal or
interest thereon remains overdue for one crop season.
An account would be classified as NPA only if the interest charged during any
quarter is not serviced fully within 90 days from the end of the quarter.
So in short NPA refers to those assets where in which the bank does not earn
income from that account, asset or loan granted. If an irregular Account
continuously remain as irregular category for a period of 90 days (earlier
BIET MBA PROGRAMME DAVANAGERE 39
NPA Management of State Bank of India 180days) it seems NPA. According to sthe guidelines of the RBI once an account
is listed as NPA, the interest has to be deducted out of the profit of the same
accounting year.
Indian Economy and NPAs
Undoubtedly the world economy has slowed down, recession is at its peak,
globally stock markets have tumbled and business itself is getting hard to do. The
Indian economy has been much affected due to high fiscal deficit poor
infrastructure facilities, sticky legal system cutting of exposure to emerging
markets by FIIs, etc.
Further, International rating agencies like, Standards and poor have lowered
India’s credit rating to sub-investment grade. Such negative aspects have often
outweighed positives such as increasing fore ex reveres and a manageable
inflation rate.
Under such a situation, it goes without saying that banks are no expectation and
are bound to face the heat of a global downturn. Bankers have realized that unless
the level of NPAs is reduced drastically, they will find it difficult to survive.
Why such huge levels of NPAs exist in the Indian banking system (IBS)?
The origin of the problem of growing NPAs lies in the quality of managing
credit risk the Banks. What is needed is having adequate preventive measure in
BIET MBA PROGRAMME DAVANAGERE 40
NPA Management of State Bank of India place namely, fixing pre-sanctioning appraisal responsibility and having an
effective post-disbursement supervision. banks concerned should continuously
monitor loans to identify accounts that have potential to become Non-Performing.
Why NPAs have become an issue for banks and financial intuitions in India?
To start with, performing in terms of profitability is a benchmark for any business
enterprise including the banking industry. However, increasing NPAs have a
direct impact on bank profitability as legally banks are not allowed to book
income on such accounts and at the same time banks are forced to make on such
assets as per the Reserve bank of India (RBI) guidelines.
Also, increasing deposits made by the public in the banking system, the banking
industry cannot afford defaults by borrowers since NPAs affects the repayment
capacity of banks.
Further, RBI successfully creates excess liquidity in the system through various
rate cuts and banks fails to utilize this benefit to its advantage due to the fear of
burgeoning Non-Performing assets.
‘Out of Order’ Status:
An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principle operating account is less than the sectioned
limit drawing power, but there are no credits continuously for 90 days as on the
date of Balance Sheet or credits are not enough to cover the interest debited
during the same period, these accounts should be treated as ‘out of order’.
‘Over Due’:
Any amount due to the bank under any credit faculty is overdue if it is not paid on
the due date fixed by the bank.
BIET MBA PROGRAMME DAVANAGERE 41
NPA Management of State Bank of India
RBI guidelines on income recognition (interest income on NPAs)
Banks recognize income including interest on advances on accrual basis. That is,
income is accounted for as and when it is earned. The prima-facie condition for
accrual of income is that it should not be unreasonable to expect to its ultimate
collection.
Considering this fact, in accordance with the guidelines for income recognition
issued by the RBI, banks not recognize interest income on such NPAs until it is
actually realized.
Reversal of Interest Income:
If any advance becomes NPA as at the close of any year, interest accrued and
credited to income. Account in the corresponding should be reversed or provided
for if the same is not realized.
Reporting of NPAs:
Banks are required to furnish a report on NPA as on 31st march of each year after
completion of audit. The NPA would relate to the banks global portfolio including
the advances at the foreign branches.
Classification Assets:
The NPAs are classified into 3 categories namely:
Sub-standard Assets
Doubtful Assets
BIET MBA PROGRAMME DAVANAGERE 42
NPA Management of State Bank of India Loss Assets
These are being classified by the Banks based on the period for which the asset
has remained Non-Performing and the reliability of the dues.
Sub-Standard Assets:
An asset becomes NPAs is first classified as a sub-standard asset and which
remains as NPA for a period less than or equal to 12 months (earlier 18 months).
In such cases, the current net worth of the borrowed guarantor or the current
market value of the security charged is not enough to such an assets will have
well defined or weaknesses that
Endanger the liquidation of the debt and are characteristics by the distinct
possibility that the banks will sustain some loss, if deficiencies are not corrected.
Doubtful Assets:
A substandard asset becomes a doubtful if it has remained as a substandard for a
period exceeding 12 months (before 18 months).
A loan classified as doubtful has all the weaknesses inherent in assets that ere
classified as sub-standard, with the added characteristic that the weakness makes
collection or liquidation in full, on the basis of currently known facts, conditions
and values highly questionable and improbable.
Loss Assets:
An Asset, which is considered as irrecoverable by the banks internally or
externally through auditors or by the RBI. Inspection is treated as loss Account
but the amount has not been written off wholly.
BIET MBA PROGRAMME DAVANAGERE 43
NPA Management of State Bank of India In classification of assets interest above categories should be done taking interest
Account the degree of well-defined or weakness and the extent of deepened on
collateral security for realization of dues.
Banks should establish appropriate internal system to eliminate the tendency to
delay or postpone the identification of NPAs, especially in respect of high value
accounts. The banks may even fix minimum cut off point to decide what would
constitute a high value account depending their respective business levels.
In terms of RBI guidelines, as and when an asset becomes a NPA, such advances
would be first classified as a sub-standard one for a period that should not exceed
18 month and subsequently as doubtful assets. It should be noted that the above
classification is only for the purpose of computing the amount of provision that
should be made with respect to bank advances and certainly not for the purpose of
presentation of advances in the bank’s balance sheet.
Up gradation of loan account classified as NPA
In case of any borrower pays the arrears of interest and principal classified as
NPA’s the account should no longer be treated as non-performing and may be
classified as ‘standard’ account.
Classification to be based on borrowers-wise and not facility wise
The classification as NPA of the accounts should be based on the borrower wise
and not based on the facility wise. That is if a borrower is having more than one
facility (like two or more account’s) in the same bank. The borrowers all the
BIET MBA PROGRAMME DAVANAGERE 44
NPA Management of State Bank of India facilities should be treated as NPA’s and not particular facility or part thereof
which has become irregular.
NORMS OF NPA:
A) ASSETS CLASSIFICATION NORMS:
1. The Non-Performing financial asset purchase may be classified as standard in
the books of the purchasing bank for a period of 90 days from the date of
purchase. Therefore, the asset classification status of the financial asset purchased
shall be determined by the record of recovery in the books of the purchasing bank
with reference to cash flows estimated while purchasing the assets, which should
be in compliance with requirements in Para (3).
2. The asset classification status of an existing exposure (other than purchased
financial asset) to the same obligor in the books of the purchasing bank will
continue to be governed by the record of recovery of that exposure and hence may
be different.
3. Where the purchase/sale does not satisfy any of the prudential requirements
prescribed in these guidelines the asset classification status of the financial asset
in the books of the purchasing bank at the time of purchase shall be the same as in
the books of the selling bank. Thereafter, the asset classification status will
continue to be determined with reference to the date of NPA in the selling Bank.
4. Any restructure/reschedule/rephrase of the repayment schedule or the estimated
cash flow of the Non-performing financial asset by the purchasing bank shall
render the account as a non-performing asset.
B) Provisioning Norms:
Books of selling bank
BIET MBA PROGRAMME DAVANAGERE 45
NPA Management of State Bank of India 1. When a bank sells its non-performing financial assets to other banks, the same
will be removed from its books on transfer.
2. If the sale is at a price below the Net Book Value (NBV) (i.e., book value less
provisions held), the shortfall should be debited to the profit and loss account of
that year.
3. If the sale is for a value higher than the NBV, the excess provision shall not be
reveres but will be utilized to meet the shortfall/loss on account of sale of other
non-performing financial assets.
Books of purchasing bank
The asset shall attract provision requirement appropriate to its asset classification
status in the books of the purchasing bank.
C) Accounting of recoveries:
Any recovery in respect of non-performing asset purchasing from other banks
should first be adjusted its acquisition cost. Recoveries in the excess of the
acquisition cost can be recognized as profit.
D) Capital Adequacy:
For the purpose of capital adequacy, banks should assign 100% risk weight to the
non-performing financial assets purchased from other banks. In case the non-
performing financial assets purchased are an investment, then it would attract
capital charge for market risks also. For NBFCs the relevant instructions on
capital adequacy would be applicable.
E) Exposure Norms:
BIET MBA PROGRAMME DAVANAGERE 46
NPA Management of State Bank of India The purchasing bank will reckon exposure on the obligor of the specific financial
asset. Hence these banks should ensure compliance with the prudential credit
exposure ceilings (both single and group) after reckoning the exposures to the
obligors arising on account of the purchase. For NBFCs the relevant instruction
on exposure norms would be applicable.
Main reasons for accounts becoming NPAs:
Units remain closed without intimation.
Industrial recession.
Borrower Absconding.
Sale of Assets with the knowledge of the Bank.
Diversion of Funds.
Willful Default.
Interest/installments not paid.
Purpose of the loan is not clear.
Non-performing of loans due to natural calamities such as drought, floods,
earthquakes etc.,
Lack of verification of his/her securities.
Ineffective recovery tribunals.
Inefficient credit appraisal systems.
Lack of technology, methodology and data support for science credit
appraisal.
Industrial sickness. Unusual projection of the business targets.
Overtrading, overstocking.
Improper utilization of funds.
Often stated reasons for NPAs in India:
BIET MBA PROGRAMME DAVANAGERE 47
NPA Management of State Bank of India Corruption
Willful default.
Judicial system flaw.
Nonexistent fear of penalties.
Sudden changes in Government polices/ economic environments.
Inefficient credit appraisal systems.
Government policies like loan waiver/interest waiver.
Lack of technology, methodology, and data support for scientific credit
appraisal.
2. Steps taken to Reduce NPAs:
Soft Tools
Personal contacts.
Frequent follow-ups by bank official.
Issue of periodical notices.
Adjustments of his/her outstanding deposits.
Apply of Scientific tools for appraisal before the loan is disbursed and
monitor it closely in real time.
Conduct Recovery Campaign.
Break up recovery to branch level network.
Take every NPA case as a separate issue and analyze the need for further
funding from an economic point of view.
Implement a system for selecting a good borrower.
Write off NPA’s.
Hard tools
Lok Adalat
BIET MBA PROGRAMME DAVANAGERE 48
NPA Management of State Bank of India Debt Recovery Tribunals.
SARFAESI Act, 2002 (Securitization and Reconstruction of Financial
Assets and Enforcement Security Interest).
Assets Recovery Construction Industry Limited (ARCIL).
Corporate Debt Restructuring (CDR).
LOK ADALAT
To settle disputes involving account in “doubtful” and “loss” category
Outstanding balance of Rs.5lakh for compromise settlement.
Proved to be quite effective for speedy justice and recovery of small loans.
Progress through this channel is expected to pick up in the coming years.
DEBR RECOVERY TRIBUNALS (DRT):
To recover their bad Debt quickly and efficiently.
33 debt recovery Tribunal and 5 Debt Recovery Application Tribunal.
It is the special court established by central government for the purpose of
bank or any financial institutions recovery.
The judges of this court are retired judges of high court.
In this court only the recovery cases of Rs.10 lakh and above can be filed.
The Act provides three alternative methods for recovery of non-
performing assets, namely:-
Securitization.
Asset Reconstruction.
Enforcement of Security without the intervention of the Court.
NPA loans with outstanding above Rs.1 lakh.
BIET MBA PROGRAMME DAVANAGERE 49
NPA Management of State Bank of India NPA loan account where the amount is less than 20% of the principal and
interest ate not eligible to be dealt with under this Act.
This Act empowers the Bank:
To issue demand notice to the defaulting borrower and guarantor, calling upon
them to discharge their dues in full within 60 days from the date of the notice.
To give notice to any person who has acquired any of the secured assets from the
borrower to surrender the same to the Bank.
To ask any debtor of the borrower to pay any sum due or becoming due to the
borrower.
Any Security Interest created over Agricultural Land cannot be proceeded with.
ARCIL
A company which is set up with the objective of taking over distressed assets
(NPA) from banks or financial institutions and to reconstruct or re-pack these
assets to make those assets saleable.
To buy out troubled loans from banks and make special efforts at recovering
value form the assets, if necessary by special legislation, with special powers for
recovery.
Restructuring of weak banks to divest the bad loan portfolio.
India’s first ARC with an initial equity of Rs.10crore with ICICI bank, IDBI and
SBI.
Incorporated as public limited company on February 11, 2002
Its objectives:
Unlocking capital for the banking system and the economy.
Creating a vibrant market for distressed debt assets/securities in India offering a
trading platform for Lenders.
BIET MBA PROGRAMME DAVANAGERE 50
NPA Management of State Bank of India To evolve and create significant capacity in the system for quicker resolution of
NPAs by deploying the assets optimally.
CORPORATE DEBR RESTRUCTURING (CDR)
For the revival of the corporate as well as for the safety of the money lent by the
banks and FI.
Based on the experience in other countries like the U.K., Thailand, Korea, etc.
Objective was to ensure timely and transport mechanism for restructuring of the
corporate debts.
CDR mechanism will be a voluntary system based on debtor creditor agreement
and inter- creditor agreement.
CDR mechanism will cover only multiple banking accounts.
An outstanding exposure of Rs. 20 crore and above by banks and institutions.
.
3. Effects of NPAs
As the number of accounts become NPAs this will lead to additional provisions
which has to be made and these provisions are made out of profits earned by the
Bank. Ultimately it leads to:
Huge decrease in the profitability
Stagnation In specific industries with large share of loans contribution to
NPA’s
(SME’s)
High cost of funds
Slowdown of the economy as a whole
High credit risk in lending business
Prerequisites to Contribution NPA’s:
BIET MBA PROGRAMME DAVANAGERE 51
NPA Management of State Bank of India 1. Governance:
Independent oversight board with clear mandate.
Defined and transparent procedures
Improved reporting standard
2. Greater focus on restructuring:
The quality and speed of asset resolution is key
Taking ownership of NPA’s and proactive management
Working with debtors to improve cash flow of assets underlying NPA’s
3. Greater power and intuitional capabilities:
For example, power to separate bad management from the debor and t liquidate
debotors, which cannot be expeditiously restructured.
Training, knowledge transfer
Leadership
4. Incentives and disciplines for banks:
Enhanced accountability of banks and bank managers
Ensure banks put in place risk analysis and credit management systems
Ultimate burden not transferable to AMCs
5. Greater protection of creditor rights:
Credible liquidation procedures and efficient secured transaction processes
Triggers and inventive for insolvency
BIET MBA PROGRAMME DAVANAGERE 52
NPA Management of State Bank of India Strong and Credible regulators, free from political Pressure.
6. The Road to Recovery:
The key facilities
Early detection
Speed
Voluntary references
Facilitation and quick arbitration.
Steps taken by the Bank to Reduce NPAs:
1) Bank is planning to go for securitization of huge transaction accounts.
2) Interest ensive follow up with Advocates/civil courts/DRTs for speedy
disposal of cases.
3) Official from various offices visit borrows/branches for discussions/
review of NPAs.
4) Liberal policy adopted for compromise in account with balances below
50,000 and those that are more than 10 year old.
5) Risk management systems put in place.
6) Apply of Scientific for appraisal before the loan is disbursed and monitor
is clsely in real time.
7) State Bank of India has regularly conducted recovery campaigns.
8) Break up recovery to branch level network.
9) Take every NPA case as separate issue and analyze the need for further
funding from an economic point of view.
BIET MBA PROGRAMME DAVANAGERE 53
NPA Management of State Bank of India 10) State Bank of India has implemented a system for selecting a good
borrower.
11) State Bank of India has followed all credit exposures are classified as per
RBI guidelines, into performing and Non-Performing assets (NPA).
1. Movement of NPA to total Advances SBI as a whole (in crores)
BIET MBA PROGRAMME DAVANAGERE 54
NPA Management of State Bank of India Calculation of Important Ratios (Gross NPA Ratio, Net NPA Ratio and Return on Asset Ratio)
Table: 1
Ratio of Gross NPA to Total Advances
Year Net Advances Gross NPA GNPA %
2007-08 275458.26 10290.29 3.73569852008 -09 343810.84 10495.10 3.05257972009 -10 405538.46 13160.17 3.24511022010 -11 499719.13 15675.27 3.13681612011 -12 587873.94 19263.14 3.2767467
Interpretation
GNPA was continuously decreasing up to 2008-09 but in the year 2009-10 it
increases 3.25% which was low interest rates and increase in advances. By the
end of the financial year 2011-12 it has again increased to 3.28% due to inflation
and policy changes on lending rates.
2007-08 2008 -09 2009 -10 2010 -11 2011 -120
0.51
1.52
2.53
3.54
GNPA %
GNPA %
BIET MBA PROGRAMME DAVANAGERE 55
NPA Management of State Bank of India Table: 2
Ratio of Net NPA to Total Advances
Year Net Advances Net NPA NNPA%2007-08 275458.26 5893.4 2.13948932008-09 343810.84 5997.9 1.74453492009-10 405538.46 7979.56 1.96764572010-11 499719.13 9649.57 1.93099872011-12 587873.94 11382.4 1.9361974
Interpretation
NNPA% has followed a substantial decrease from 0.395% in the year 2006-07 to
1.93 in the year 2008-09 and a slight increase of 0.006% in the year 2009-10
which is due to high interest rates and the inflation caused. But the reduction in
the NPA so far is due to the increased capital employed of Rs. 15,000crores in the
year 2008-09
2007-08 2008-09 2009-10 2010-11 2011-120
0.5
1
1.5
2
2.5
NNPA%
NNPA%
BIET MBA PROGRAMME DAVANAGERE 56
NPA Management of State Bank of India 1. Calculation of Important Ratios (Gross NPA Ratio, Net NPA Ratio and Return on Assets Ratio)
Movement of NPA to total Advances (In Crors)
Table: 2
Year Net Advances
Gross NPA GNPA%
2007-08 2989.28 80.37 2.68860732008-09 3878.34 85.84 2.21331812009-10 4814.97 109.48 2.27374212010-11 5577.61 110.24 1.97647382011-12 6496.77 94.21 1.4501052
Interpretation
The GNPS Ratio in the year 2007-08 was 20.69% and has gradually reduced to
1.45% by the end of the financial year 2009-10. This shows that the Honnali
module is striving hard to reduce NPA completely over the years. This has
become possible due to high involvement of the employees in choosing the
industries carefully and due to replacement of medium and long term loans, due to
hiring of separate personnel for checking the authentication of information given
by the client and the 3rd party.
2007-08 2008-09 2009-10 2010-11 2011-120
0.5
1
1.5
2
2.5
3
GNPA%
GNPA%
BIET MBA PROGRAMME DAVANAGERE 57
NPA Management of State Bank of India Table: 4
Ratio of Net NPA to Total Advances
Year Net Advances Net NPA NNPA2007-08 2989.28 54.6 1.82652682008-09 3878.34 56.58 1.45887162009-10 4814.97 69.27 1.43863822010-11 5577.61 73.47 1.31723092011-12 6496.77 64.21 0.9883373
Interpretation:
There is a reduction in the NNPA % from 1.83% in the year 2007-08 to 0.98% in
the year 2011-12. This is a greater improvement in reduction of NPA in the
honnali branch. This has been possible due to provisioning of willful defaults,
adoption of liberal policy for compromise in account with balance below Rs.
5,00,000 and those that are 8 year old clients.
Due to onetime settlement schemes with liability up to 10 crore in small and
medium enterprise sector.
2007-08 2008-09 2009-10 2010-11 2011-120
0.20.40.60.8
11.21.41.61.8
2
NNPA
NNPA
BIET MBA PROGRAMME DAVANAGERE 58
NPA Management of State Bank of India Table: 5
2. Calculation of Return on Asset Ratio
Year Net Income Total Assets Return on Asset Ratio
Mar ‘08 4406.67 493869.54 0.008922741
Mar ‘09 4541.31 566565.24 0.008015511
Mar ‘10 6729.12 721526.32 0.009326229
Mar ‘11 9121.23 964432.08 0.009457618
Mar ‘12 9166.05 1053413.74 0.008701282
Interpretation:
The table clearly shows that though the net income is increasing steadily, there is
a huge increase in assets. For a bank the loans lent to the borrower are the assets.
If the assets go on increasing without a proportion increase in the net income then
it results in loss. The ROI is decreasing. It clearly indicates that the banks are
slow in converting its investments into profits. This is due to the huge competition
and decrease in the Net Interest Margin and increase in cost of deposits.
Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘11 Mar ‘120.007
0.0075
0.008
0.0085
0.009
0.0095
0.01
Return on Asset Ratio
Return on Asset Ratio
BIET MBA PROGRAMME DAVANAGERE 59
NPA Management of State Bank of India
3. Capital Adequacy Ratio:
Year Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘11 Mar ‘12
Capital Adequacy Ratio 11.88 12.34 13.47 14.25 13.39
Interpretation:
There is a gradual increase in the CAR from 11.88% in the year 2008 to 14.25%
in the year 2012. Any bank maintaining its CAR above 9.5% can sustain in the
market.
Mar '08 Mar '09 Mar' 10 Mar '11 Mar '1210.5
1111.5
1212.5
1313.5
1414.5
Capital Adequacy Ratio
Capital Adequacy Ratio
BIET MBA PROGRAMME DAVANAGERE 60
NPA Management of State Bank of India
RBI guidelines on provisioning requirement of bank advances:
Loss Assets: 100% of outstanding amount.
Doubtful Assets: 100%of unsecured portion.
Secured portion
Up to one year 20%One to three years 30%More than three years (D-III)(i) outstanding stock of NPAs as
on March 31, 2008 50% with effect from March 31, 2011 60% with effect from March 31, 2012 75% with effect from March 31, 2013 100 %
(ii) advances classified as 'doubtful for more than three years' on or after April 1, 2010 100 %
Substandard Assets: Secured portion 10% and unsecured portion 20% on total
out standing.
Standard Assets: A general provision of 0.40% (For direct Agriculture and SME
sector 0.25%. provisioning for standard will be dome ar corporate office at the
center.
BIET MBA PROGRAMME DAVANAGERE 61
NPA Management of State Bank of India
Illustration:
The outstanding amount as on March 31st 2008 was Rs.10000
Realization value of security Rs.8000
Period for which the advance has remained “doubt” category as on March 31 st
2008: 2.5 years
Provision Requirement
AS ON
Asset
Classification
Provision on
Secured portion
Provision on
unsecured Portion
Total
March 31st ,
2008
Doubtful 1 to 3
years
% Amount % Amount
30 2400 100 2000 4400
March 31st ,
2009
Doubtful above
3 years
100 8000 100 2000 10000
Reasons for reduction in Net NPA in:
Re-placement of Medium term and long term loan: Accounting to this
scheme Banks are trying to convert big installment into small one of different
duration period. By doing so the Bank is helping the client to carry on his
business activity and even earn profit by giving loan.
All these banks are converting customers (those whose accounts are in the
border line) short-term loans into term loan.
Waiver of penal interest and other charges. (inspection charges and notices
charge LF charges legal charges etc.)
BIET MBA PROGRAMME DAVANAGERE 62
NPA Management of State Bank of India Adjustments of crop insurance claim settled towards his/jer NPA account.
All these banks are conducting their Recovery activites through DEBT
RECOVERY TRIBUNAL, Lok Adalat, Court and other private recovery
agencies.
All these Banks have separate personnel for checking the authentication of
information given by the client; even the third person should give his
authentication for such information. So that banks can select god borrower.
All these banks are strictly following all the Guidelines as mentioned by
the RBI.
All these banks are providing additional provision to reduce NPAs.
Some of these banks are conducting their Recovery activities through
personal contacts, issue of notices and frequent recovery visits.
All these banks are developing their recovery departments by introducing
various schemes.
Some banks have adopted Liberal policy for compromise in account with
balances below 50,000 and those that are more than 10 years old.
By applying all these strategies most of the banks are earning huge
recovery amount.
Some banks are providing huge advances to the priority sectors like
agriculture and SMEs. So that these banks can reduce its NPA temporarily.
SCHEM FOR ONE TIME SETTLEMENT OF NPAs “Scheme for one time
settlement of NPA with liability yp to Rs.10 Crore in small and medium
enterprises (SME) sector”. In tune with the Reserve Bank of India guidelines a
Scheme on Time Settlement of NPAs under Small and Medium Enterprises
(SME) sector with liability up Rs. 10 crore has been introduced. The salient
features of the scheme are as under:
BIET MBA PROGRAMME DAVANAGERE 63
NPA Management of State Bank of India The Sheme will comver all NPAs in SME sector which have become
doubtful as on 31/03/2004 with outstanding balance of Rs.10 crore and below on
the date on wich the account was classified as doubtful.
The Schme will also cover NPAs classified as sub-standard as on
31/03/2004, which have subsequently become doubtful or loss where the
outstanding balance was Rs.10 crore and below on the date on which the account
was classified as doubtful.
The Scheme will cover the accounts in which action has been initiated
under DARFAESI Act, and also cases pending before Courts/DRTs/BIFR, subject
to obtaining consent decree in such cases.
BIET MBA PROGRAMME DAVANAGERE 64
NPA Management of State Bank of India
FINDINGS
OVERALL SBI
YEARS
% Growth
of deposits GNPA% NNPA%
% Growth
of Net
Profits
2007-08 14.6 3.7356985 1.8265268 2.37
2008-09 23.4 3.0525797 1.4588716 3.05
2009-10 38.1 3.2451102 1.4386382 48.2
2010-11 8.36 3.1368161 1.3172309 35.55
2011-12 12.45 3.2767467 0.9883373 0.5
Up to 2009-10 there was increase in deposit but in the year 2010-11 was
declined 8.36% India Millennium Deposit also there has been increase in interest
rate, which contributed to increase in deposits i.e., increase12.45% in the year
2011-12.
The GNPA ratio of Honnali module in the year 2007-08 was 3.73% and
has gradually decrease up to 2010-11 but in in the year 2011-12 it as again
increased to 3.27% due to inflation and policy changes on lending rates. It shows
that the Honnali Module is striving hard to reduce NPA completely over the
years.
There is a reduction in the NNPA % from 1.83% in the year 2007-08 to
0.98% in the year 2009-10.thi is greater improvement in reduction of NPA in the
Honnali Module. This has been possible due to provisioning of willful defaults,
adoption of liberal policy for compromise in account with balance below
Rs.50,000 and those are 10 years old clients.
BIET MBA PROGRAMME DAVANAGERE 65
NPA Management of State Bank of India There is a continuous growth in the amounts of Net Profit the growth
percentage is declining heavily to 0.5 in the year 2012. This is because of high
provisioning made on the NPA’s over the year and due increase in advances and
interest rates and inflation caused.
Due to high decrease in the % growth of deposits, decrease in the
advances and increase in Net Non-performing assets of the SBI as a whole has led
to steep decrease in the net profits from 2.37% in the year 2007 to 0.5% in the
year 2012 which is a huge loss to the Bank.
BIET MBA PROGRAMME DAVANAGERE 66
NPA Management of State Bank of India
SUGGESTIONS:
Immediate action has to be taken for reduction of NPAs in those sectors
where NPAs in more like Agriculture Sector.
The bank has to go for selling of Nonperforming Assets to Assets
Reconstruction Company of India Limited (ARCIL) to bring down the NPAs.
Bank should protect the interest of the investor but not at the cost of Banks
profitability.
Bank is required to be caution about availability of security and ensure
honesty of the both borrower and guarantor so as to avoid the account becoming
loss assets for which the bank is required to make 100% provision
.
There should be frequent follow-ups by the Bank officials.
The bank should issue periodical notices once in a month.
The Bank should take every NPA case as a separate issue and analyze the
need for further form an economic point of view.
Banks should compulsorily go for settlement under compromise (OTS)
and under Lok Adalat for speedy recovery of NPA’s.
BIET MBA PROGRAMME DAVANAGERE 67
NPA Management of State Bank of India
CONCLUSION
The Project undertaken has helped a lot in understanding the concept of
“Non-performing Asset Management” in Nationalized Bank with special
reference to State Bank of India. Non-performing Asset Management is a key
parameter, which is playing a pivotal role in deciding the profit ratio of the banks.
The Project work has certainly enriched the knowledge about the effective
management of “NPA” in banking sector.
“Non-Performing Asset Management” is a vast subject and it is very
difficult to cover all the aspects within a short period. However, every effort has
been made to cover most of the important aspects, which have a direct bearing on
improving the financial performance of Banking Industry.
To sum up, it would not be out of way to mention here that the state
Bank of India has given special impetus on “Non-performing asset Management”.
In pursuance of the instructions and guidelines issued by the Reserve Bank of
India, the State Bank of India has taken series of measures, to reduce the ratio of
“NPA” marginally. The measures initiated by the bank have helped in reducing
the ratio of “NPA” which in turn has contributed in improving its profit margin
over the years.
The concerted efforts put in by the management and Staff of State Bank
if India has helped the Bank in achieving remarkable progress in almost all the
important parameters. The bank is marching ahead in the direction of achieving
the Number-1 position in the Banking Industry.
Thus State Bank of India being the nationalized and one of the best
Banks in India should concentrate much about Non-Performing Asset and strictly
follow the guidelines given by the Reserve Bank of India.
BIET MBA PROGRAMME DAVANAGERE 68
NPA Management of State Bank of India
BIET MBA PROGRAMME DAVANAGERE 69