Proceedings of the International Conference on Business Management & Information Systems, 2012

A Study on Reduction of Non-Performing Assets in Commercial Banks (A Case Study of Alwar District, Rajasthan, India)
Mridul Dharwal, Ankur Agarwal and K.R. Gola
School of Business Studies, Sharda University, Greater Noida
E-mail: mridul.dharwal@sharda.ac.in; ankur.agrawal@sharda.ac.in; kr.gola@sharda.ac.in

ABSTRACT
The Indian Banking Industry has played a pivotal role in the socio- economic augmentation of the country. The financial sector reforms initiated in 1991 have commendably changed the visage of the Indian banking. The banking industry has transmogrified in a phased manner from a regulated environment to a deregulated market economy. Over the last few years Indian Banking, in its attempt to integrate itself with the global banking has been facing lots of hurdles in its way due to its inherent weaknesses, despite its high sounding claims and lofty achievements. In a developing country like ours, banking is seen as an important instrument of development, while with the strenuous NPAs, banks have become helpless burden on the economy. Looking to the changing scenario at the world level, the problem becomes more ironical because Indian banking, cannot afford to remain unresponsive to the global requirements. The banks are, however, aware of the grim situation and are trying their level best to reduce the NPAs ever since the regulatory authorities i.e., Reserve Bank of India and the Government of India are seriously chasing up the issue. Banks are exposed to credit risk, liquidity risk, interest risk, market risk, operational risk and management/ownership risk. It is the credit risk which stands out as the most dreaded one. Though often associated with lending, credit risk arises whenever a party enters into an obligation to make payment or deliver value to the bank. The nature and extent of credit risk, therefore, depend on the quality of loan assets and soundness of investments. Based on the income, expenditure, net interest income, NPAs and capital adequacy one can comment on the profitability and the long run sustenance of the bank. A Non performing asset is an asset or account of borrower, which has not been serviced by the borrower and the bank has stated the same as sub-standard, doubtful or loss assets, as per the norms and directions of the RBI. Non performing assets have emerged as an alarming threat to the Indian banking industry and their reduction has become synonymous with professional functioning and management of banks.

Introduction
Meaning of NPA
Non performing asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub standard, doubtful or loss asset, in accordance with the direction or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as past due when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, it was decided to dispense with past due concept, with effect from March 31, 2001. Accordingly, as from that date, a non performing asset (NPA) shall be an advance where: Interest and/or installments of principal remain overdue for a period of more than 180 days in respect of a term loan. The account remains out of order for a period of more than 180 days in respect of an overdraft/ cash credit.

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The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted. Interest and/or installments of principal remain overdue for two harvest but for a period not exceeding two half years in the case of an advance granted for agricultural purpose. Any amount to be received remains overdue for a period of more than 180 days in respect of other account. With a view to moving towards international best practices and to ensure greater transparency it has been decided to adopt the 90 days over due norm for identification to NPA, from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004 a Non-performing Asset (NPA) shall be a loan or an advance where: Interest and/or installment of principal remain overdue for a period of 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 over draft/ cash credit. The bill remains overdue for a period of more than 90 days in the case of bills purchase and discounted. Interest and/or installment of principal remain overdue for two harvest season but for a period not exceeding two half year in the case of an advance granted for agricultural purpose, and Any amount to be received remains overdue for a period of more than 90 days in respect of other accounts. Table 1. Reserve Bank of Indias Guideline for Non-Performing Assets Recognition
Loans and Advances Term loan interest and/or installment remain over due for more than Overdraft/credit A/c Bill Purchased and discounted remains over due for more than Agricultural loan interest and or installments remain over due for Other accounts any amount to be received remains over due for more than Guidelines Applicable from 31.3.2001 180 days Remains out of order 180 days Two harvest seasons but not exceeding two and half years 180 days Guidelines Applicable from 31.3.2004 90 days Remains out of order 90 days Two harvest seasons but not exceeding two and half years 90 days

Out of Order
An account should be treated as out of order, if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there was not credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as out of order[1].

Overdue
Any amount due to the hank under any credit facility is overdue if it is not paid on the due date fixed by the bank.

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Research Methodology
Research methodology is a way, through which we can find the solution or solve the research problem. In other words, research methodology is understood as the science of studying how research is done scientifically. The trends have been analyzed by using the statistical techniques as ratio, percentages, averages, coefficient of variation, coefficient of correlation. Regression technique has also used in relevant sections.

Objectives of the Study

To know the level of NPA in banking sector. To know the cause of NPA. Whether selection of borrowers is done in a proper way by bank? Whether Banker is aware of the diversion of funds by the customer? Whether Government Policies are helpful in recovering the NPA?

Review of Literature
A number of research studies have been conducted in India on various aspects of banking sector. Some worthwhile studies relating to the present topic are being reviewed here. The focal point of the study made by L.M. Bhole was to critically evaluate the trends and progress of commercial banks in India during the period 1971 to 1983[2]. The ratio analysis is used to evaluate the performance of commercial banks with respect to different indicators. However, overall performance of each bank is assessed with the help of Relative Growth Indices. The analysis revealed that commercial banks did very well with respect to branch expansions, deposit mobilisation, credit disbursement and priority sector advances. However, it was observed that banks are plagued with the problem of declining profitability. Indira Rajaraman (1999) explained inter-bank variations in net non-performing assets (NPA) for the year 1996-97[3]. The study was performed by a specification that included intercept dummies by ownership category, bank-specific prudential and efficiency indicators, and region of operation as measured by percentage branches in each of a set of state clusters. The analysis revealed that the foreign banks of Asian and West-Asian origin performed no better than domestic private sector banks in terms of NPAs. Arundeep (2005) discussed the desirable norms and techniques to study the performance of the banks. Prior to nationalisation, profit was the sole criterion for evaluating the performance of commercial banks. After nationalisation, profitability and social banking became the major objectives of commercial banks and thus any evaluation of banks performance has to be in relation to these goals [4]. Ashok K. Lahiri (2002) analysed that developed countries have NPA problems, but they hardly ever exceed 2-4 per cent of advances. In Malaysia, Singapore and South Korea, after the East Asian crisis, NPAs proportion of total advances was 9.5 per cent in November 2000, 9.7 per cent at end of 1999, and 7.1 per cent in September 2000. But the NPA problem of public sector banks in India is somewhat larger. In 2000-01, the NPAs of Indian public sector banks as a proportion of their total advances were 12.4 per cent. Paranjoy Guha Thakurta ( 2002) has further suggested that the government should simplify the rules and provisions of the Income Tax Act for treatment of bad debts, besides carry forward of losses and business income in the hands of the ARC.

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Debnath (1994) critically analysed the approach of commercial banks, in managing the nonperformance assets. It was observed that the credit management efforts of the banks so far have proved ineffective in checking the problem of growing non-performance assets. An altogether new managerial approach was suggested for managing credit asset.

Hypothesis
Within a framework of the above mentioned objectives major hypotheses set for the study are: Banking industry is not free to take decisions in case of defaulter borrower. General strategy and legal strategy are not sufficient to reduce the level of non performing assets. The main aim is to know the cause of non performing assets and remedial measured to reduce the level of NPA.

Data and their Sources

Data plays a very important role in conceptualization and understanding of any subject. The entire present study has been based on secondary data and primary data, and enquiry.

Primary Data
Primary data have been collected directly by interview method and review of concerned banks literature. The officials are asked about cause of non performing assets, impact of NPAs on the working of commercial Banks. Reviews of different banks literature are a good source of comparison of NPAs in commercial banks. Also this process has revealed what the present norms are and what are their policies.

Secondary Data
The secondary data have been collected from annual report of RBI, economic survey, economic review, Indian Banking association Bulletin, district industrial reports, periodicals and by different newspapers like Economic Times, Financial Express, Business standard etc.

Sampling Technique
A multistage stratified random sampling technique has been used to select the block and borrowers.

Selection of Block
Rajgarh block and Bhiwadi block is selected in Alwar district purposively as it represents the agro climatic condition and socio-economic condition of district Alwar (Rajasthan).

Selection of Borrowers
It list of all the farmers who had borrowed money from the selected banks, has been prepared along with their cultivated area. The farmers grouped under three size viz. small (0-2 ha), semi medium (2-4 ha), medium (4-8 ha) and large (8 ha. and above) group. A random sample of 60 borrowing cultivators has been drawn from the universe of different village among probability portion to size (PPS) method.

Analysis of Data
Analysis of data is a very important part to get the result of the research. For this purpose, firstly the

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data collected is tabulated. Secondly, advanced statistical tools like mean, deviation, coefficient of correlation etc. have been applied to analyze and interpretation of data.

Analytical Tools
The data have been collected from primary as well as secondary are analyzed and treated with certain statistical techniques for the interpretation of the facts, these have been discussed below.

Tabular Analysis
Tabular analysis has been used to compare the value of non performing assets in different banks and also used to compare with different years. We can also use tabular analysis to compare between gross NPAs and net NPAs in different banks.

Percentage
We can find out gross NPA & net NPA in percentage, with help of following formulas: 1. Gross NPAs as % of Gross advances = 2. Net NPAs as % of Gross advances 3. Gross NPAs as % of total assets 4. Net NPAs as % of total assets

Gross NPA' s X 100 Gross Advances Net NPA' s X 100 Gross Advances Gross NPA' s X 100 Totalassets Net NPA' s X 100 Totalassets

= = =

The severity of the incidence of NPA can be understood in relation to other variables like assets or advances. The ratio would help understand changes in the intensity over time and the variation of the intensity across banks and other financial institutions. Even, a cross-country comparison is also possible. There is some disagreement about what to be used as numerator and denominator for constructing a ratio to capture satisfactorily, the intensity of the NPA problem. The ratio used by the policy makers to judge the extent of the NPA problem of a bank is net NPA/net advances as it is internationally recognised.1

Cause of NPA
As the focal point of this paper is a critical study on reduction of non performing assets in banks a brief account of the system of banking in India has been analyzed in the paper. Different phases in the growth and expansion of banking have also been outlined. The problems have been identified and comparative statistics of NPA have been detailed. To proceed further, attention has been focused on causes of NPA in this chapter and investigative data are provided to ponder upon[5]. It would be interesting to identify and investigate the main cause, which have forced performing assets to became non performing assets. These causes can be categorized into three as follows. Banks Borrowers Government
1

Report on Trend and Progress of Banking in India 1996-97, p. 13.

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Banks Improper Selection of Borrower

Selection of borrower is a very important part in financing as the whole story starts with i t . Selection of borrower should be done very cautiously. It would be right to say that the most important factor, which needs to be studied, is a borrower, h i s character and competency, but very little has been said regarding the character and competency, of borrowers in the context of loaning.

Inordinate Delay in Financing

Sixty borrowers were interviewed in Rajgarh block and 60 were interviewed in Bhiwadi block. It is found that the delay by bank in Rajgarh block is 23%, while it is 13% in Bhiwadi block. Thus it is clear that owing to delay the borrower does not get loan at the time of need this would normally upset his plant of investment. Obviously, this will have a bearing the borrowers plan of returning the loan and as a consequence the assets may turn into NPA.

Poor Interaction with the Borrowers

It has been found that the interactions with the borrowers are very poor. While interacting, many information can be taken, like his thinking regarding loan, views regarding repayment, his earning, family back ground etc. After disbursement, when bankers do not meet the borrowers periodically, they tend to forget the bank and their repayment l i a b i l i t y to the bank also out of sight, out of mind, thus goes a saying.

Other Reasons
Briefly other reasons are: Unrealistic terms and conditions. Lengthy and time taking procedure of lending. Lack of supervision and follow up. Lack of management information system. No direct inquiry at the time of sanction.

Borrowers
Reasons for which borrowers can be held liable for NPAs are: Diversion of funds Willful defaulters Other reasons.

Diversion of Funds
Diversion of funds means the loan are not used for the purpose for which it is sanctioned, many areas have been identified where he can divert the loan. Chief among them are: Utilization of loan to repay the old debt. Utilization of loans towards other purposes such, as house purpose etc. Utilization of loans towards marriage of wards.

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Utilization of loan towards death r i t u a l s in rural areas. Utilization of loan for comfort of life.[6] To know the main reason, researcher interviewed 120 borrowers of Rajgarh block and Bhiwadi block. Question to the borrower, as given in questionnaire, was Whether you u t i l i s e the funds for the purpose for which it was sanctioned Study confined mainly to rural areas reveals that diversion of funds mainly take place towards marriage,death r i t u a l s and money lenders, which is illustrated in given Table 2. Table 2. Diversion of Funds in Rajgarh Block
S. No. 1 2 3 Extend of Diversion of Loan For the purpose for which it is sanctioned For repaying to money lenders Utilized in marriage & death rituals No. of Borrowers to Total Borrowers 39/60 11/60 10/60

From the above table. It is inferred that 18%, i.e. funds used in repaying the loan to money lenders and 17% loan utilized in marriage turn to be NPAs. Table 3. Diversion of Funds in Bhiwadi Block
S. No. 1 2 3 Extend of Diversion of Loan For the same purpose for which it is For repaying to money lenders Utilized in marriage & death rituals No. of Borrowers to Total 45/60 Oct-60 May-60

The above description has shown that tendency to divert loan for other purpose is prevalent among the borrowers and this it also a cause for the growth of NPAs. It is a concern that calls for the attentions of banks. This tendency can be checked if proper identification of the borrowers is emphasised. Where 25% funds are misappropriated and definitely this 25% is going to be NPAs.

Willful Defaulters
The R.B.I, has decided to conic out with a definition of willful defaulter which would enable banks to i n i t i a t e criminal prosecution against such borrowers. R.B.I, w i l l be issuing a consultative paper on willful defaulters prepared by the Kohli Group. According to M.R. Srinivasan Former chief General Manager, R.B.I. Any borrower, who has the ability to pay but does not pay could be termed as a willful defaulter These views were expressed in a two day Banking summit, organized by C.I.I. Table 4. Willful Defaulters in Rajgarh and Bhiwadi Block
S. No. 1 2 Block Rajgarh Bhiwadi Cause of Non-payment Misappropriation of funds Misappropriation of funds No. of Borrowers to Total Borrowers 21/60 15/60

It is seen that 35% and 25% willful defaulters are not a small number. Willful defaulters arc a major source of growing NPA. It should not be very difficult for banks to reduce the number of willful

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defaulters from among the future borrowers. Banks should device means and check points, to face these problems with a view to reclaim the NPAs as performing assets. Awareness about social image can play a significant role in this context.

Other Reasons
There are some other reasons which are also attributable to borrowers like: Lack of Resources: Some time a person takes the loan without planning and cannot manage the resources and ultimately do not repay it. Lack of infrastructure facilities. Lack of technical support. Lack of transportation.[7]

Government
Causes, which are attributable to Government. Political interference in sanctioning of loans. Political patronage to defaulters. Announcement of debt relief scheme. One time settlement scheme of RBI Over regulated environment. Debt relief scheme once given has a negative impact on recovery. The borrower, who is not paying regularly, who is defaulter, getting benefit in the rate of interest where as an efficient and honest customer, who is regular is payment is not getting any benefit. There is not such scheme in the Govt., under which an efficient customer is benefited. There are such scheme in Thailand, where borrowers, who pay regularly. They get incentive. Such scheme should be introduced in India also.

Concluding Observations
The ultimate impact of the actions put forward by both the RBI and Government of India, however, will be reflective of the degree of effective enforcement by the regulators themselves. Indian banks have to remain focused in their efforts to recover their spiraling bad loans, or nonperforming assets, to sustain the positive trend of improving asset quality. The lack of research and academic activity in the banking sector is also felt and attended to at institutional level. The areas felt to be looked into, inter alia, are: Should bankers take substantial exposure to the stock market? Should bankers be exposed to equity financing? Degree and extent to which Indian banking system should often quote the RBI norm which it regards as a universal application. Advances against shares are considered well secured and safe, and the risk factor has to be tackled by higher margin and effective follow up. But do they pass the test of purpose orientation, namely financing only for a productive purpose? What should be the guiding principles for RBI for the purpose of orientation and end use principle, when it comes to the question of extending equity finance to corporate? What should be norms for advances to share brokers and makers, for meeting working capital needs surprisingly, in the absence of account wise ceiling prescribed by RBI?

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It is prescribed that the RBI continues with its conservative approach towards bank exposure to capital markets. In view of the recent disastrous experience of banks, consequent to the over exposure to capital markets and real estate sectors in South East Asia and Japan, perhaps RBIs conservatism should be classified as prudential. Better risk management techniques, compliance with the core principle for effective banking supervision, skill building and training, and transparency in transactions could be the solutions. Removal of non-performing loans from the banks system even through government of quasi government funds at times, is essential. But official assistance should be so structured as to avoid moral hazard.

Suggestions
One novel idea which came to researchers mind is that to prevent the conversion of performing assets to non-performing assets branches should adopt village not only for financing but for total development. Under total development comes electricity, raw material, marketing, education, etc. Target should, be given to branches, for total development funds should be given to some outside agency (NGO); refinance can be taken from NABARD under area development scheme. Wide publicity should be given to such agency services. There is a need to change the attitude of borrowers and for attitudinal changes education and training are essential. To include the attributes for attitude it is desired from the bank official to take care of all these while giving the loan application. He should tell about the terms and conditions of the loan and consequences for not repaying the loan.

References
[1] Annual Report 2004-05, Ministry of Finance, Government of India, New Delhi, pp. 2-5. [2] L.M. Bhole, Financial Institutions and Market, 4th ed.,The Mc Graw Hill, New Delhi, 2007. [3] Indira Rajaraman, Sumon Bhaumik and Namita Bhatia, NPA Variations across Indian commercial Banks, Economic and Plotical Weekly, 1999, Vol. 34, pp. 161-163. [4] Arundeep singh and N.S.Toor, Banking problems and rationales, 3rd ed., Skylark Publications, 2006. [5] K.Jayachandra and M.S. Vasu, Management of Non-Performing Assets in Public Sector Banks, Southern Economist, October 2003, Vol. 42, No. 11, pp. 9-13. [6] B.M. Misra and Sarat Dhal, Pro-cyclical Management of Banks Non-Performing Loans by the Indian Public Sector Banks, 2009. [7] Draft Final Report of the Task Force on Revival of Cooperative Credit Institutions, December 2004, pp. 35-40.