INTRODUCTION

NON PERFORMING ASSETS (NPA)

NPA:ThethreelettersStriketerrorinbankingsectorandbusinesscircletoday.NPA is short
form

ofNon-PerformingAsset.ThedreadedNPArule

says

simplythis:wheninterestorotherduetoabankremainsunpaidformorethan90days,theentireba
nkloanautomaticallyturnsanonperformingasset.Therecoveryofloanhasalwaysbeenproblem
forbanksandfinancialinstitution.Tocomeoutofthesefirstweneedtothinkisitpossibletoavoid
NPA,nocannotbethenleftisto lookafterthefactorresponsibleforitandmanagingthosefactors.

Definition:
Anasset,includingaleasedasset,becomesnon-performingwhen itceases togenerateincome
forthebank.A

non-performingasset(NPA)wasdefinedasacreditfacility

inrespect

ofwhichtheinterestand/orinstalmentofprincipalhasremainedpastdueforaspecifiedperiodo
f

time.Withaviewtomovingtowardsinternationalbestpracticesand

toensuregreatertransparency,ithasbeendecidedtoadoptthe90daysoverduenormforidentif
icationofNPAs,fromtheyearendingMarch31,2004.Accordingly,witheffectfromMarch31,2
004,anon-performingasset(NPA)shallbealoanoran advance where;
Interestand/orinstalmentofprincipalremainoverdueforaperiodofmorethan90day
sinrespectofatermloan,
Theaccountremainsoutoforderforaperiodofmorethan90days,inrespectofanOverd
raft/Cash Credit(OD/CC),
Thebillremainsoverdueforaperiodofmorethan90daysinthecaseofbillspurcha
sedanddiscounted

PROBLEMS DUE TO NPA:

2

1. Owners do not receive a market return on their capital .in the worst case, if the
banks fails, owners lose their assets. In modern times this may affect a broad pool
of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if the bank
fails, depositors lose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest rates, and
higher lending rates repress saving and financial market which hamper economic
growth
4. Nonperforming loans epitomize bad investment. They misallocate credit from
projects, which do not receive funding to failed projects. Bad investment ends up
in misallocation of capital and by extension, labor and natural resources

Types of NPA
There are two types of NPA:
A] Gross NPA
B] Net NPA
A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI
guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loansmade
by banks. It consists of all the non standard assets like as sub-standard, doubtful, and
loss assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio =Gross NPAs
Gross Advances

B]

Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision regarding
NPAs. Net NPA shows the actual burdenof banks. Since in India, bank balance sheets
contain a huge amount of NPAs and the process of recovery and write off of loans is very
time consuming, the provisions the banks have to make against the NPAs according to the
central bank guidelines, are quite significant. That is why the difference between gross
and net NPA is quite high.
It can be calculated by following:
Net NPAs =Gross NPAs Provisions
Gross Advances - Provisions

Asset Classification (as per RBI)

Categories of NPAs:
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as well as the
principal amount of the loan regularly from the customer. Here it is also very important
that in this case the arrears of interest and the principal amount of loan do not exceed 90
days at the end of financial year. If asset fails to be in category of standard asset that is
amount due more than 90 days then it is NPA and NPAs are further need to classify in sub
categories.
Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
reliability of the dues:
a) Sub-standard Assets
b) Doubtful Assets
c) Loss Assets

Sub-standard Assets:
A sub-standard asset was one, which was classified as NPA for a period not exceeding
two years. With effect from 31 March 2001, a sub-standard asset is one, which has
remained NPA for a period less than or equal to 18 months.In such cases, the current
net worth of the borrower/guarantor or the current market value of the security charged is
not enough to ensure recovery of the dues to the banks in full. In other words, such an
asset will have well defined credit weaknesses that jeopardize the liquidation of the debt
and are characterized by the distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.
Doubtful Assets:
A doubtful asset was one, which remained NPA for a period exceeding two years. With
effect from 31 March 2001, an asset is to be classified as doubtful, if it has remained
NPA for a period exceeding 18 months. A loan classified as doubtful has all the
weaknesses inherent in assets that were classified as sub-standard, with the added
characteristic that the weaknesses make collection or liquidation in full, on the basis of
currently known facts, conditions and values highly questionable and improbable.
With effect from March 31, 2005, an asset would be classified as doubtful if it remained
in the sub-standard category for 12 months

Loss Assets:
A loss asset is one where the bank or internal or external auditors have identified loss or
the RBI inspection but the amount has not been written off wholly. In other words, such
an asset is considered uncollectible and of such little value that its continuance as a
bankable asset is not warranted although there may be some salvage or recovery value.

Impact of NPA
Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong choice
of client. Because of the money getting blocked the prodigality of bank decreases not
only by the amount of NPA but NPA lead to opportunity cost also as that much of profit
invested in some return earning project/asset. So NPA doesnt affect current profit but
also future stream of profit, which may lead to loss of some long-term beneficial
opportunity. Another impact of reduction in profitability is low ROI (return on
investment), which adversely affect current earning of bank.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which
lead to borrowing money for shorter period of time which lead to additional cost to the
company.
Involvement of management:
Time and efforts of management is another indirect cost which bank has to bear due to
NPA. Time and efforts of management in handling and managing NPA would have
handle activities, which would have given good returns. Now days banks have special
employees to deal and handle NPAs, which is additional cost to the bank.

Credit loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of
market credit. It will lose its goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks .

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems of the rising NPAs. But the
problem of NPAs is more in public sector banks when compared to private sector banks
and foreign banks. The NPAs in PSB are growing due to external as well as internal
factors.

EXTERNAL FACTORS:Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery of loans
and advances. Due to their negligence and ineffectiveness in their work the bank suffers
the consequence of non-recover, their by reducing their profitability and liquidity.

Natural calamities
This is the major factor, which is creating alarming rise in NPAs of the PSBs. every now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit.
Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall
the farmers are not to achieve the production level thus they are not repaying the loans.

Industrial sickness
Improper project handling , ineffective management , lack of adequate resources , lack of
advance technology , day to day changing govt. Policies give birth to industrial sickness.
Hence the banks that finance those industries ultimately end up with a low recovery of
their loans reducing their profit and liquidity.

Change In Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to
cope with the changing principles and policies for the regulation of the rising of NPAs.
The fallout of handloom sector is continuing as most of the weavers Co-operative
societies have become defunct largely due to withdrawal of state patronage. The
rehabilitation plan worked out by the Central government to revive the handloom sector
has not yet been implemented. So the over dues due to the handloom sectors are
becoming NPAs.

INTERNAL FACTORS:Inappropriate technology:

Due to inappropriate technology and management information system, market driven
decisions on real time basis cannot be taken. Proper MIS and financial accounting system
is not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be computerized.

Improper SWOT analysis:

The improper strength, weakness, opportunity and threat analysis is another reason for
rise in NPAs. While providing unsecured advances the banks depend more on the
honesty, integrity, and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from

a. From bankers.
b. Enquiry from market/segment of trade, industry, business.
c. From external credit rating agencies.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal
the bank gives advances to those who are not able to repay it back. They should use good
credit appraisal to decrease the NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting securities
banks should consider the_
1. Marketability
2. Acceptability
3. Safety
4. Transferability.
The banker should follow the principle of diversification of risk based on
the famous maxim do not keep all the eggs in one basket; it means that the
banker should not grant advances to a few big farms only or to concentrate them
in few industries or in a few cities. If a new big customer meets misfortune or
certain traders or industries affected adversely, the overall position of the bank
will not be affected.
Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the
handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

MEASURES INITIATED BY RBI AND GOVERNMENT OF

INDIA FOR REDUCTION OF NPAs
1. Compromise settlement schemes:
The RBI/Government of India have been constantly goading the banks to take steps for
arresting the incidence of fresh NPAs and have also been creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. More significant of
them, I would like to recapitulate at this stage.

The broad framework for compromise or negotiated settlement of NPAs advised

by RBI in July 1995 continues to be in place. Banks are free to design and
implement their own policies for recovery and write-off incorporating
compromise and negotiated settlements with the approval of their Boards,
particularly for old and unresolved cases falling under the NPA category. The
policy framework suggested by RBI provides for setting up of an independent
Settlement Advisory Committees headed by a retired Judge of the High Court to
scrutinise and recommend compromise proposals.

Specific guidelines were issued in May 1999 to public sector banks for one time
non discretionary and non discriminatory settlement of NPAs of small sector. The
scheme was operative up to September 3, 2000. [Public sector banks recovered
Rs. 668 crore through compromise settlement under this scheme].

Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5
crore and less as on 31 March 1997. [The above guidelines which were valid up to
June 30, 2001 helped the public sector banks to recover Rs. 2600 crore by
September 2001].

2.LokAdaltas:
LokAdalats help banks to settle disputes involving accounts in 'doubtful" and "loss"
category, with outstanding balance of Rs. 5 lakh for compromise settlement under
LokAdalats. Debt Recovery Tribunals have now been empowered to organize LokAdalats
to decide on cases of NPAs of Rs. 10 lakhs and above. The public sector banks had
recovered Rs. 40.38 crore as on September 30, 2001, through the forum of LokAdalat.
The progress through this channel is expected to pick up in the coming years particularly
looking at the recent initiatives taken by some of the public sector banks and DRTs in
Mumbai.
3.Debt Recovery Tribunals:
The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed
in March 2000 has helped in strengthening the functioning of DRTs. Provisions for
placement of more than one Recovery Officer, power to attach defendant's property/assets
before judgement, penal provisions for disobedience of Tribunal's order or for breach of
any terms of the order and appointment of receiver with powers of realization,
management, protection and preservation of property are expected to provide necessary
teeth to the DRTs and speed up the recovery of NPAs in the times to come.
Though there are 22 DRTs set up at major centres in the country with Appellate Tribunals
located in five centres viz. Allahabad, Mumbai, Delhi,Calcutta and Chennai, they could
decide only 9814 cases for Rs. 6264.71 crore pertaining to public sector banks since
inception of DRT mechanism and till September 30, 2001. The amount recovered in
respect of these cases amounted to only Rs. 1864.30 crore.
Looking at the huge task on hand, with as many as 33049 cases involving Rs. 42988.84
crore pending before them as on September 30, 2001, I would like the banks to institute
appropriate documentation system and render all possible assistance to the DRTs for
speeding up decisions and recovery of some of the well collateralised NPAs involving
large amounts. I may add that familiarisationprogrammes have been offered in NIBM at
periodical intervals to the presiding officers of DRTs in understanding the complexities of

documentation and operational features and other legalities applicable of Indian banking
system. RBI on its part has suggested to the Government to consider enactment of
appropriate penal provisions against obstruction by borrowers in possession of attached
properties by DRT Receivers, and notify borrowers who default to honourthe decree
passed against them.
4.Circulation of information on defaulters:
The RBI has put in place a system for periodical circulation of details of willful defaults
of borrowers of banks and financial institutions. This serves as a caution list while
considering requests for new or additional credit limits from defaulting borrowing units
and also from the directors/proprietors/partners of these entities. RBI also publishes a list
of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits
have been filed by banks and FIs for recovery of their funds, as on 31st March every year.
It is our experience that these measures had not contributed to any perceptible recoveries
from the defaulting entities. However, they serve as negative basket of steps shutting off
fresh loans to these defaulters. I strongly believe that a real breakthrough can come only
if there is a change in the repayment psyche of the Indian borrowers
5.Recovery action against large NPAs:
After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBI had
advised the public sector banks to examine all cases of willful default of Rs 1 crore and
above and file suits in such cases, and file criminal cases in regard to willful defaults.
Board of Directors are required to review NPA accounts of Rs. 1 crore and above with
special reference to fixing of staff accountability.On their part RBI and the Government
are contemplating several supporting measures including legal reforms, some of them I
would like to highlight.

6.Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a
timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and
above with the banks and financial institutions. The CDR process would also enable
viable corporate entities to restructure their dues outside the existing legal framework and
reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI,
Mumbai and a Standing Forum and Core Group for administering the mechanism had
already been put in place. The experiment however has not taken off at the desired pace
though more than six months have lapsed since introduction. As announced by the
Hon'ble Finance Minister in the Union Budget 2002-03, RBI has set up a high level
Group under the Chairmanship of ShriVepaKamesam, Deputy Governor, RBI to review
the implementation procedures of CDR mechanism and to make it more effective. The
Group will review the operation of the CDR Scheme, identify the operational difficulties,
if any, in the smooth implementation of the scheme and suggest measures to make the
operation of the scheme more efficient.
7.Credit Information Bureau:
Institutionalisation of information sharing arrangements through the newly formed Credit
Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the
recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the
scheme of information dissemination on defaults to the financial system. The main
recommendations of the Group include dissemination of information relating to suit-filed
accounts regardless of the amount claimed in the suit or amount of credit granted by a
credit institution as also such irregular accounts where the borrower has given consent for
disclosure. This, I hope, would prevent those who take advantage of lack of system of
information sharing amongst lending institutions to borrow large
amounts against same assets and property, which had in no small measures contributed to
the incremental NPAs of banks.

8.Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working
out a proper definition covering such classes of defaulters so that credit denials to this
group of borrowers can be made effective and criminal prosecution can be made
demonstrative against willful defaulters.
9.Corporate Governance:
A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the
Reserve Bank to review the supervisory role of Boards of Banks and financial institutions
and to obtain feedback on the functioning of the Boards vis-a-vis compliance,
transparency, disclosure, audit committees etc. and make recommendations for making
the role of Board of Directors more effective with a view to minimising risks and
overexposure. The group is finalising its recommendations shortly and may come out
with guidelines for effective control and supervision by bank boards over credit
management and NPA prevention measures.
10. Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002:
The Act provides, inter alia for enforcement of security interest for realisation of dues
without the intervention of courts or tribunals. The Security Interest (Enforcement) Rules,
2002 has also been notified by Government to enable Secured Creditors to authorise their
officials to enforce the securities and recover the dues from the borrowers. As on June 30,
2004, 27 public sector banks had issued 61, 263 notices involving outstanding amount of
Rs. 19,744 crore, and had recovered an amount of Rs. 1,748 crore from 24,092 cases.

Preventive Measurement for NPA

Early Recognition of the Problem:
Invariably, by the time banks start their efforts to get involved in a revival process, its
too late to retrieve the situation-both in terms of rehabilitation of the project and recovery
of banks dues. Identification of weakness in the very beginning that is : When the
account starts showing first signs of weakness regardless of the fact that it may not have
become NPA, is imperative. Assessment of the potential of revival may be done on the
basis of a techno-economic viability study. Restructuring should be attempted where,
after an objective assessment of the promoters intention, banks are convinced of a
turnaround within a scheduled timeframe. In respect of totally unviable units as decided
Selling of the unit earlier, so as to recover whatever is possible through legal means
before the security position becomes worse.

Identifying Borrowers with Genuine Intent:

Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of
frontline officials at the branch level is paramount as they are the ones who have
intelligent inputs with regard to promoters sincerity, and capability to achieve
turnaround. Based on this objective assessment, banks should decide as quickly as
possible whether it would be worthwhile to commit additional finance.
In this regard banks may consider having Special Investigation of all financial
transaction or business transaction, books of account in order to ascertain real factors that
contributed to sickness of the borrower. Banks may have penal of technical experts with
proven expertise and track record of preparing techno-economic study of the project of
the borrowers.
Borrowers having genuine problems due to temporary mismatch in fund flow or sudden
requirement of additional fund may be entertained at branch level, and for this purpose a
special limit to such type of cases should be decided. This will obviate the need to route
the additional funding through the controlling offices in deserving cases, and help avert

Timeliness and Adequacy of response:

Longer the delay in response, grater the injury to the account and the asset. Time is a
crucial element in any restructuring or rehabilitation activity. The response decided on the
basis of techno-economic study and promoters commitment, has to be adequate in terms
of extend of additional funding and relaxations etc. under the restructuring exercise.
Focus on Cash Flows:
While financing, at the time of restructuring the banks may not be guided by the
conventional fund flow analysis only, which could yield a potentially misleading picture.
Appraisal for fresh credit requirements may be done by analyzing funds flow in
conjunction with the Cash Flow rather than only on the basis of Funds Flow.
Management Effectiveness:
The general perception among borrower is that it is lack of finance that leads to sickness
and NPAs. But this may not be the case all the time. Management effectiveness in
tackling adverse business conditions is a very important aspect that affects a borrowing
units fortunes. A bank may commit additional finance to an aling unit only after basic
viability of the enterprise also in the context of quality of management is examined and
confirmed. Where the default is due to deeper malady, viability study or investigative
audit should be done it will be useful to have consultant appointed as early as possible
to examine this aspect. A proper techno-economic viability study must thus become the
basis on which any future action can be considered

LITERATURE
REVIEW

ParulKhanna (2012) has conducted a study to ascertain the contributing factors for the high
level of NPAs in the banks covering 800 top NPA accounts in 33 banks (RBI Bulletin, July
1999). The study has found that the proportion of problem loans in case of Indian banking sector
always been very high. The problem loans of these banks, in fact, formed 17.91 percent of their
gross advances as on March 31, 1989. This proportion did not include the amounts locked up in
sick industrial units. Hence, the proportion of problem loans indeed was higher. However, the
NPAs of Indian Banks declined to 17.44 percent as on March 31, 1997 after introduction of
prudential norms. In case of many of the banks, the decline in ratio of NPAs was mainly due to
proportionately much higher rise in advances and a lower level of NPAs accretion after 1992.
The study also revealed that the major factors contributing to loans becoming NPAs include
diversion of funds for expansion, diversification, modernization, undertaking new projects and
for helping associate concerns. This is coupled with recessionary trend and failure to tap funds in
the capital and debt markets, business failure (product, marketing, etc.), inefficient management,
strained labourrelations, inappropriate technology/technical problems, product obsolescence,
recession input/power shortage, price escalation, accidents, natural calamities, Government
policies like changes in excise duties, pollution control orders, etc. The RBI report concluded
that reduction of NPAs in banking sector should be treated as a national priority issue to make
the Indian banking system stronger, resilient and geared to meet the challenges of globalization
Bloem and Gorter (2002)suggested that a more or less predictable level of non-performing
loans, though it may vary slightly from year to year, is caused by an inevitable number of
wrongeconomic decisionsby individuals and plain bad luck (inclement weather, unexpected price
changes for certain products, etc.). Under such circumstances, the holders of loans can make an
allowance for a normal share of non-performance in the form of bad loan provisions, or they
mayspread the risk by taking out insurance. Enterprises may well be able to pass a large portion
of these costs to customers in the form of higher prices. For instance, the interest margin applied
by financial institutions will include a premium for the risk of nonperformance on granted
loans.At this time, banks non-performing loans increase, profits decline and substantial losses to
capital may become apparent. Eventually, the economy reaches a trough and turns towards a new
expansionary phase, as a result the risk of future losses reaches a low point, even though banks
may still appear relatively unhealthy at this stage in the cycle.
Brijesh K. Saho(2007),this paper attempts to examine, the performance trends
of the Indian commercial banks for the period: 1997-98 - 2004-05. Our broad
empirical findings are indicative in many ways. First, the increasing average
annual trends in technical efficiency for all ownership groups indicate an
affirmative gesture about the effect of the reform process on the
performance of the Indian banking sector. Second, the higher cost efficiency
accrual of private banks over nationalized banks indicate that nationalized
banks, though old, do not reflect their learning experience in their cost

minimizing behavior due to X-inefficiency factors arising from government

ownership. This finding also highlights the possible stronger disciplining role
played by the capital market indicating a strong link between market for
corporate control and efficiency of private enterprise assumed by property
right hypothesis. And, finally, concerning the scale elasticity behavior, the
technology and market-based results differ significantly supporting the
empirical distinction between returns to scale and economies of scale, often
used interchangeably in the literature.
M. Karunakar(2008),Study the important aspect of norms and guidelines for making the whole
sector vibrant and competitive. The problem of losses and lower profitability of Non- Performing
Assets (NPA) and liability mismatch in Banks and financial sector depend on how various risks
are managed in their business. Besides capital to risk Weightage assets ratio of public sector
banks, management of credit risk and measures to control the menace of NPAs are also
discussed. The lasting solution to the problem of NPAs can be achieved only with proper credit
assessment and risk management mechanism. It is better to avoid NPAs at the market stage of
credit consolidation by putting in place of rigorous and appropriate credit appraisal mechanisms.
Nelson M. Waweru(2009),Study that many financial institutions that collapsed in
Kenyasince 1986 failed due to non performing loans, this study investigated
the causes of nonperformingloans, the actions that bank managers have
taken to mitigate that problem and thelevel of success of such actions. Using
a sample of 30 managers selected from the ten largestbanks the study found
that national economic downturn was perceived as the most important
external factor. Customer failure to disclose vital information during the loan
application processwas considered to be the main customer specific factor.
The study further found that Lack of anaggressive debt collection policy was
perceived as the main bank specific factor, contributing to the non
performing debt problem in Kenya.
Kevin Greenidge(2010),study the evaluation of non-performing loans is of great importance
given its association with bank failure and financial crises, and it should therefore be of interest
to developing countries. The purpose of this paper is to build a multivariate model, incorporating
macroeconomic and bank-specific variables, to forecast non-performing loans in the banking
sector of Barbados. On an aggregate level, our model outperforms a simple random walk model
on all forecast horizons, while for individual banks; these forecasts tend to be more accurate for
longer prediction periods only.
Prashanth K. Reddy (2002) in his research examined the similarities and dissimilarities,
remedial measures. Financial sector reform in India has progressed rapidly on aspects like
interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms
and risk-based supervision. The study reveals that the sheltering of weak institutions while

liberalizing operational rules of the game is making implementation of operational changes

difficult and ineffective. Changes required to tackle the NPA problem would have to span the
entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with
the experiences of other Asian countries in handling of NPAs. It further looks into the effect of
the reforms on the level of NPAs and suggests mechanisms to handle the problem by drawing on
experiences from other countries.
Bagchi, (2006)a former president of bank made an attempt to analyze the performance of
Cooperative Credit Institutions especially Primary Agriculture Credit Societies, and observed
that PACS could not match up to the increasing requirements of growth dimensions in the
Agri /Rural developments in the Post-Independence Period, although till the late 50s, they were
the only available source of institutional rural finance. According to the RBI Report on Trend and
Progress of Banking in India 2004-05, released on 24-11-05, the Cooperative Credit Institutions
had extended an amount of Rs.39, 638 crores to Agri-Allied sectors i.e., about half of credit
advanced by Commercial Banks (72,886 crores) and double the amount advanced by RRBs
(11,718 crores).
Siraj K.K. and P. SudarsananPillai(2012) described that Non-Performing Assets engender
negative impact on banking stability and growth. Issue of NPA and its impact on erosion of profit
and quality of asset was not seriously considered in Indian banking prior to 1991. There are
many reasons cited for the alarming level of NPA in Indian banking sector. Asset quality was not
prime concern in Indian banking sector till 1991, but was mainly focused on performance
objectives such as opening wide networks/branches, development of rural areas, priority sector
lending, higher employment generation, etc. The accounting treatment also failed to project the
problem of NPA, as interest on loan accounts were accounted on accrual basis.
Bhavani Prasad, G. and Veena, V.D.( 2011)mentioned a Committee on Banking Sector
Reforms known as Narasimham Committee was set up by RBI to study the problems faced by
Indian banking sector and to suggest measures revitalize the sector. The committee identified
NPA as a major threat and recommended prudential measures for income recognition, asset
classification and provisioning requirements. These measures embarked on transformation of the
Indian banking sector into a viable, competitive and vibrant sector. The committee recommended
measures to improve operational flexibility and functional autonomy so as to enhance
efficiency, productivity and profitability. The main cause of mounting NPAs in public sector
banks is malfunctioning of the banks. Narasimham Committee identified the NPAs as one of the

possible effects of malfunctioning of public sector bank. It has been examined that the reason
behind the falling revenues from traditional sources is 78% of the total NPAs accounted in public
sector banks.

OBJECTIVES AND
SCOPE

OBJECTIVES OF THE STUDY:

The objective of the project was to find how this Non-Performing Assets generate and
what its impact on the profitability of the bank and how it can be reduced. The study is
addressed to the following objectives:

To study the trend of NPAs of both public and private sector banks
To determine the factors affecting NPA.
To establish relationship between NPAs and profitability of banks.
To suggest measures to reduce NPA.

SCOPE OF THE STUDY:

The major scopes of the NPA are as follows:
Understanding the Concept of Non Performing Asset in Indian banking system
The most important concept is to know what NPA has done to the Indian Banks how
much the NPA factor has contributed to the downfall to the Indian banks in the last few
years
Reasons or factors for rise in NPAs
In this point we came to know what all the factors are their because of which NPA has
increased so much in the Indian banks what all the major things are their because of
which NPA has increased so much
Preventive Measures taken to control NPAs in banks
In this we came to know how a bank can early detect the problem of NPA and can
remove it before NPA result in huge loss to the banks
Impact of NPAs on banking sector

In this we came to know that what NPA has caused the damage to the entire banking
system what all negative things has been resulted because of NPA into the banking sector

RESEARCH
METHODOLGY

Research is a structured enquiry that utilizes acceptable scientific methodology to solve problems
and create new knowledge that is generallyapplicable. The system of collecting data for research
is known as research methodology.

Methodology of the Study:

An descriptive survey, by way of extensive literature review of books, journals and other
published data related to the focus of the study, as also concerned websites, was carried out to
gather background information about the general nature of the research problem.

Type of data:
The collection of research can be both primary and secondary. Using the type of
Approach depends on the nature of research being carried out keeping in mind
the time frame in which the data is to be collected and the results are to be
displayed.
Few banks that are surveyed are 1) HDFC Bank, 2) ICICI Bank, 3) Punjab national Bank.4) SBI
Bank.
Criteria for selecting public and private banks
1. State bank of India
Reflecting the rising bad loans that have impacted profitability of banks, SBI is the latest
amongst its public sector peers, including Punjab National Bank to post weak financial
results. SBI chairperson Arundhati Bhattacharya said that bulk of the stress on assets
came from mid-corporate and the small-and-medium enterprise (SME) segment and
hoped for a recovery with higher GDP growth. SBI also plans to conduct weekly reviews
and install new technology to quickly identify loan accounts showing signs of stress to
prevent further weakening of its asset quality.
2. Punjab national bank
Asset quality of PNB is also not good, as gross NPA have been continuously increasing
for many years but the performance of PNB in terms of Capital Adequacy Ratio is better
than SBI as the bank has more capital base being used as a cushion hedge the credit risk
than that of SBI .

3. ICICI bank
ICICI Bank has the highest NPAs among private sector banks. ICICI Bank has slightly
improved its net bad debts to 0.90 per cent from 0.91 per cent in the earlier quarter of
2013. Indian banks face challenges like increase in interest rates on saving deposits, a
tighter monetary policy, restructured loan accounts and increasing infrastructure loans.
4. Housing Development Finance Corporation(HDFC)
HDFC Bank Ltd. is a commercial bank of India, incorporated in August 1994, after the
Reserve Bank of India allowed establishing private sector banks. The Bank was promoted
by the Housing Development Finance Corporation, a premier housing finance company
(set up in 1977) of India.HDFC bank also has high NPA ratio because of of high deposits
and advances, it also have high gross NPA advances but lesser than ICICI bank.HDFC as
good capital adequacy ratio and deposits which improves the asset quality.
Public sector banks SBI, Punjab National Bank, Bank of Baroda were taken in this survey
because Punjab National Bank and Bank of Baroda are on the top position in terms of total
deposit-investment among all the public sector banks.SBI is taken because most of the people
have taken loan from this bank and has not paid because of which there is a huge NPA in these
banks.Kingfisher and Reliance metro are the example who has taken more than 500 crores of
loans from SBI and till now they have not paid to them which result into NPA.
Private sector bank ICICI bank is taken because more number of people prefers to choose ICICI
bank for deposit-investment. As deposit-investment of ICICI bank is the highest among all the
private sector banks.
HDFC Bank is taken because it is on the second rank in terms of total deposit-investment
among all the private banks.
The Data that has been collected is of Secondary Data

Type of data collected: secondary data.

Sampling unit: - Public and Private sector banks.
Data collection: journals, articles, internet, books, newspapers etc

SECONDARY DATA:
Inthis study, the secondary source of data is obtained from:
Various references were undertaken like Journals, financial newspapers, research articles,
magazines,Economic Surveys, internet and newspapers and in some published sources and
also from internet.It also includes various audited reports and publications of the Reserve Bank
of India. Detailed information were collected mainly from the various volumes of the Statistical
Tables Relating to Banks in India covering the period from 2000 - 2009 which were published
by the Statistical Department of Reserve Bank of India, Mumbai from the website
www.rbi.org.in.Publications of Reserve Bank Of India.

DATA ANALYSIS
AND
INTERPRETATION

Tools used for measuring NPAs:

 Comparative analysis
Ratio analysis
The study is analytical in nature, and the present study uses the latest available published
secondary data for the years 2004-2010 compiled from Report on Trends and Progress of
Banking in India, 2004-10 .The scope of the study is limited to seven years data. The data has
been analyzed using percentage method. The study is related to Public sector banks and private
sector banks NPAs.

Comparative analysis
Comparison between public sector banks and private sector banks NPAs
(Amount in Rs. Crores)

Public sector banks

Private sector banks

Public

Years

Advances

NPA

sector

Private
Advances

NPA

sector

banks

banks

%NPA

%NPA

2004

35,492.66

6,706.49 1

18.9

1279.86

155.52

12.15

2005

51,444.83

5,752.04

11.18

1581.37

207.98

13.15

2006

59,471.02

5,023.22

8.45

2,932.34

276.19

9.43

2007

78,844.69

5,181.15

6.57

3,862.18

149.31

3.87

2008

99,993.88

5,388.00

5.39

5,031.57

117.04

2.33

2009

1,22,894

5,074

4.1

15,052

91

0.6

3.0

25800

130

0.5

2010
165826.2
5,053
%NPA=NPA/ ADVANCES *100

20
18
16
14
12
Public sector banks

10

Private sector banks

8
6
4
2
0
Years 2004 2005 2006 2007 2008 2009 2010

INTERPRETATION:
The above study examines that achievements of the private sector banks in case of advances are
as low as compared to that of public sector banks Advances of the public sector banks in absolute
term have increased from Rs 35492.66 crores in 2003-04 to Rs 165826.2 crore in 2009-10. And
that of private sector banks increased from Rs1279.86 crores in 2003-04 to Rs25800 crores in
2009-10. The NPAs of the public sector banks in absolute terms have decreased from Rs 6706.49
crores in 2003- 04, to Rs 5053 crores and in the case of the private sector banks it has decreased
from Rs 155.52 crores in 2003-2004 to Rs130 crores in 2009-2010. The NPAs in absolute terms
have decreased by 24.66%percent in public sector banks and 16.41% in private sector banks in
the year 2009-10 over 2002-03. .The NPA ratio for public sector banks was higher at 3.0 per cent
than 0.5 per cent for private sector banks at end-March 2010.

Source: Report on Trend and Progress of Banking in India 2004 2010

PRIORITY NON PRIORITY SECTOR

When we further bifurcate NPA in priority sector and Non priority sector. Agriculture + small
scale industries+ others are priority sector. In private sector banks ICICI Bank has the highest
NPA in both sector in compare to other private sector banks. Around 72% of NPA is with ICICI
Bank with Rs.1359 crore in priority sector and around 78% in non-priority sector. We can see
that in private sector banks , banks has more NPA in non-priority sector than priority sector.
PRIVATE SECTOR BANKS
BANK

AGRI
(1)

SMALL
SCALE
INDUSRIE

(RS.CRORE)

OTHERS

PRIORITY

(3)

SECTOR

NONPRIORITY

( 1+2+3 )

(2)
AXIS

109.12

14.76

86.71

210.59

275.06

HDFC

36.12

110.56

47.70

194.41

709.23

ICICI

981.85

23.35

354.13

1359.34

6211.12

KOTAK

10.00

33.84

4.04

47.87

405.20

INDUSIND

30.44

3.18

30.02

63.64

328.67

TOTAL

1167.53

185.69

522.60

1875.85

7929.28

7000
6000
5000
4000
PRIORITY

3000

NON-PRIORITY

2000
1000
0
AXIS

HDFC

ICICI

KOTAK

INDUSIND

PUBLIC SECTOR BANKS

Bank

PRIORITY SECTOR

NPA

(ADVANCED RS.CRORE )
BOB

5469

350

BOI

3269

325

DENA

1160

106

PNB

3772

443

UBI

1924

197

6000
5000
4000
3000

PRIORITY

NPA

2000
1000
0
BOB

BOI

DENA

PNB

UBI

INTERPRE
TATION:
When we talk about public sector banks they are more in priority sector and they given advanced
to weaker sector or industries. Public sector banks give more loans to Agriculture , small scale
and others units and as a result we see that there are more number of NPA in public sector banks
than in private sector banks. BOB given more advanced to priority sector in 2007-08 than other
four banks and Dena Bank is in least.But when there are comparison between private bank and
public sector bank still ICICI Bank has more NPA in both priority and non-priority sector with
the comparison of public sector banks. Large NPA in ICICI Bank because the strategy of bank
that risk-reward attitude and initiative in each sector. Above we also discuss that ICICI Bank has
highest deposit-investment-advance than other banks.
Source
Source:
DepartmentofBankingSupervision,RBI

Ratio Analysis
The relationship between two related items of financial statement is known as ratio. Aratio is just
one number expressed in terms of another. The ratio is customarily expressed in three different
ways. It may be expressed as a proportion between the two figures. Second it may be expressed
in terms of percentage. Third, it may be expressed in terms of rates. The use of ratio has become
increasingly popular during the last few years only. Today it has assumed to be important tool
that anybody connected with the business turns to ratio for measuring the financial strength and
earning capacity of the business.
To analyze the NPA situation in bank and to know about the banks credit appraisal system and
level of risk in bank I have done the ratio analysis. Ratio analysis is the tool which will help us to
do financial analysis of bank.
Following ratios used to analyse NPA situation are:
1. Gross NPA Ratio:
Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank.
Gross NPA is the sum of all loan assets that are classified as NPA as per RBI guidelines. The
ratio is to be counted in terms of percentage and the formula for GNPA
is as follows:
Gross NPA Ratio =

Gross NPA

* 100

Gross Advances

Gross NPA ratio of

banks

YEARS
2010

HDFC
ICICI
BOB
PNB

1.86
4.70
0.95
2.93

2011

2012

1.69

1.40

4.27
0.69
1.99

2013
1.45

4.17

4.10

0.60

0.75

1.70

1.80

5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

HDFC

2010

ICICI

BOB

PNB

2011

2012

2013

INTERPRETATION
Gross NPA ratio shows the banks credit appraisal policy. High Gross NPA ratio means bank
have liberal or bad appraisal policy and vice-versa. In ICICI bank this ratio was 4.70% in Dec2010 and it has been decreased from year 2010 to 2013 from 4.70% to 4.10%. However it is
revels from the chart that banks Gross NPA ratio is continuously decreasing which is positive
trend for bank and we can say that bank have good appraisal system.
After ICICI Bank BOB Bank has good appraisal policy as compare to HDFC and PNB bank as it
Continuously decreasing at a good rate

2. NET NPA RATIO

Net NPA Ratio is the ratio of net NPA to Net Advances. Net NPA ratio shows the degree of risk
in banks portfolio. This ratio is to be calculated in terms of percentage and the formula for NET
NPA is as follows
Net NPA Ratio =

Net NPA

*100

Net Advances
Net NPA = Gross NPA Provision for NPA
Net Advances = Gross NPA Provision for NPA

Net

NPA

RATIO

OF

YEARS

BANKS

2010

2011

2012

HDFC

ICICI

BOB

PNB

2013
0.54

0.16

0.24

0.44

2.19

1.65

0.72

0.65

0.24

0.30

0.14

1.20

0.37

1.39

0.98

0.88

2.5
2
1.5
1

HDFC

ICICI

BOB

PNB

2011

2012

2013

0.5
0
2010
INTERPRETATION
Net NPA ratio shows the degree of risk in portfolio of bank. High net NPA ratio means banks
dont have enough fund to do provision against the Gross NPA.
In ICICI Bank Net NPA ratio was 2.19% in year March-2010 which shows that in that year bank
had not enough fund for provisions. But after that from March-2010 to March-2013 Net NPA
ratio is 0.65% which shows that bank has now more provision capacity. So, here the degree of
risk is less.
But HDFC Bank NPA was increased on continuous basis which shows that Bank do not have
enough fund capacity to do provision against Gross NPA
In Public sector bank PNB Net NPA decreased from 1.20% in 2010 to 0.88% in 2013 as compare
to BOB Bank which shows that PNB bank has the better fund for provision than BOB Bank.

3. PROVISION RATIO

Provision Ratio is the Ratio made against the Gross NPA of bank. Provisions are to be made
against the Gross NPA of bank. As bank make provision for NPA it directly affects the profit of
bank. The formula for calculating the ratio is as follows.
Provision Ratio =

Total Provision

*100

Gross NPA

Provision

ratio

of

banks

YEARS

2010

2011

2012

HDFC

2013
65.95

100.20
ICICI

105.5

81.23

68.98

111.45

96.18

101.90

78.98

72.76

76.56

68.90

56.78

55.78

6
BOB

PNB

102.88

103.33

120
100
80
60

HDFC

ICICI

BOB

PNB

40
20
0
2010

2011

2012

INTERPRETATION
Provision ratio shows the degree of provision that is made against the Gross NPA of bank. As
bank made the provision it directly affect the profit of bank and also the dividend payout ratio of
bank too. If Provision ratio is less then it means that bank has make under provision and if
provision is more then it means that it is over provision.
In ICICI Bank they have made 105.56% provision in March-2010 which shows that it was v
good provision as compare to other 3 banks in the year 2010 and that in March-2013 also it is
highest with 101.90% % which indicate that provision ratio of ICICI bank is on top it means that
it is over provision.

4. PROBLEM ASSETS RATIO

Problem Assets Ratio is the Ratio also known as the Gross NPA to Total Assets ratio
made against the Gross NPA of bank. This ratio shows the percentage of risk on the
total assets of the bankThe formula for calculating the ratio is as follows
.Problem Assets Ratio =

Gross NPA

*100
Total Assets

Problem Asset ratio

YEARS

of banks

2010

2011

2012

HDFC

2013
0.97

1.60

0.98

0.88

ICICI

0.68

0.61

0.65

0.74

BOB

1.15

1.67

2.45

2.37

1.75

2.57

2.44

PNB

1.20

3
2.5
2
1.5

HDFC

ICICI

BOB

PNB

2010

2011

2012

2013

1
0.5
0

INTERPRETATION
This ratio shows the percentage of risk on the assets of bank. It shows the level of risk on banks
assets. High ratio shows the high risk on liquidity.
In HDFC Bank this ratio was 1.60% in March-2010 and after that it has been decreased from
1.60% to 0.97% in March-2013..
This ratio is continuously decreasing in HDFC bank except in March-2013. But overall this ratio
is good for bank which indicates the level of risk is low in bank
In PNB Bank only this ratio increased in every year otherwise in other banks this ratio was
decreased with every year and it shows that risk is high in PNB bank as compare to other banks

FINDINGS

ICICI Bank in Public sector and Bank of Baroda in Private sector has good appraisal policy as
compare to other banks
In HDFC Bank risk on bank assets was low but in Punjab National Bank risk on bank assets was
very high as compare to other banks.
Some of the Reasons of NPA in bank was because their were lack of trained staff, Inspection of
NPA was not done on a regular basis, Default of loans was done on a large number by the
customer.
Many measures were taken by the RBI and by Government of India in order to reduce the NPAs
like LokAdalats were started by them in order to solve the small amount problem of the
customers of upto 5 lacs, 22 Debt Recovery Tribunals were started by Government in order to
recover the big loan amount.
Selection of right borrowers, viable economic activity, adequate finance and timely
disbursement, correct and use of funds and timely recovery of loans is absolutely necessary pre
conditions for preventing of minimizing the incidence of new NPAs
Advances of the Public sector banks in absolute term were increased from Rs 35492.66 crores in
2003-04 to Rs 165826.2crore in 2009-10. And that of Private sector banks increased from
Rs1279.86 crores in 2003-04 to Rs25800 crores in 2009-10.
The major contributor towards the Priority sector in Private sector bank was ICICI Bank which
contributed almost Rs 1359 crore and Bnak of Baroda was major contributor in public sector
bank of Rs 5469 crore

GrossNPAstoGross AdvancesRatio was highest in SBI Bank and the percentage was 4.75%
which was more than any other bank
In Private Sector Banks GrossNPAstoGross AdvancesRatio was highest in ICICI Bank the
percentage was 3.22% which was highest among the Private Sector Banks.
Some of the major points with the help of which Problem of NPA can be solved is to educate
both the employee and the customer well and a proper checking of documents should be done of
the customer who is taking loan from the bank as it will help the bank in providing loans to the
good customer rather to the defaulter.
Banks have to strengthen their credit administrative machinery and put in place effective credit
risk management systems to reduce the fresh incidence of NPAs.

CONCLUSION

NPAis one of the biggest problems that the Indian Banks are facing today. If the proper
management of the NPAs is not undertaken it would hamper the business of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector.

The banker do not get both the formal and informal report about the goodwill of the customer as
if in case the customer is defaulter than by these reports it will help the bank of not giving the
loans to that customer again. Banks has taken various steps in order to solve the problem of
NPAs as around 22 Debt Recovery Tribunals have been set up all over the country besides this
LokAdalats for recovery of small loans of upto 5 lacs have been setup.
The Reserve Bank of India has set up a Central Repository of Information on Large Credits
(CRILC) to collect, store, and disseminate credit data to lenders. Public sector banks should not
only concentrate on priority sectors like agriculture or small scale industry but they should also
contribute towards the non priority sector like giving credit cards giving personal loans to the
people living in urban areas.A strong banking sector is necessary which can give time on
recovery of loans from the customers so that loan money can be collected from them timely.
Employees of the bank should understand their responsibility for non performing assets and
should talk to the customers who have not given loan money bank to the bank.
Over the years, much has been talked about NPA and the emphasis so far has been only on
identification and quantification of NPAs rather than on ways to reduce and upgrade them.
In the changed context of new prudential norms and emphasis on quality lending and
profitability, mangers should make it amply clear to potential borrowers that banks resources are
scare and these are meant to finance viable ventures so that these are repaid on time and relevant
to other needy borrowers for improving the economic lot of maximum number of households.
Selection of right borrowers, viable economic activity, adequate finance and timely
disbursement, correct and use of funds and timely recovery of loans is absolutely necessary pre
conditions for preventing of minimizing the incidence of new NPAs.
ICICI Bank is on top Position in terms of the credit appraisal as ICICI bank has the best appraisal
system among the other banks. In terms of risk PNB Bank is on top position in terms of high risk
on liquidity as compare to other banks. A proper preventive measures should be follow in order
to reduce NPA so that whenever NPA increases there should be a proper steps with the help of
which NPA can be reduced.

Apart from the said conclusions, the level of reduction of Non Performing Assets and to
increase the special efforts should be made in respect of large advances and more attention
needs to be paid for strategies planning by employees with self set goals educating
borrowers.

BENEFICIARIES OF THE STUDY:

The outcomes analyzed from this study would be beneficial to various
sections such as:
Banks:This study would primarily benefit the banks in identifying the sectors
to be given
priority for lending money.
Future Researchers: The results of the study would also benefit the future
researchers as this
study would enhance their knowledge about the topic. They would get an
insight of the present
scenario of this industry as this is the emerging industry in the financial
sector of the economy.
Students: This research would help students in understanding of NPA concept
as a whole.

SUGGESTIONS

 Bank should properly check the documents before giving loans to the customers so that in
future customers pay their loan amount on time which will help in reducing the NPA.
There is a need to change the attitude of borrowers who are taking loans for them education
and training are essential. It is important 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 so that people can know what will happen if they do
not pay the loan
Public sector banks like Dena bank and Bank of India should improve their Deposit,
Investment and Advances so that more customer can deposit and invest the money which will
help these bank in reducing the NPA.
The bank must focus on recovery from those borrowers who have the capacity to repay the
loan amount but are not paying as this step will help in reducing of unnecessary of NPAs in
the banks
Bank should increase the cash and bank balances by reducing the unnecessary expenses for
future plans as it will help in fighting with NPAs.
Manager who is in charge of Non-Performing assets should be strict towards the defaulter of
loans and should take necessary steps against them so that in future customers do not do
default of their loans
Frequent discussion with staff in the branch and taking their suggestions for recovery of
NPAs will help in making them feel responsible. Establish special task force for the recovery
of the dues which will fall under the category of Non-Performing Assets as it will help the
banks in recovering the loans fast from the customers
Extending credit involves lenders and borrowers and both should realize their role and
responsibilities. They should appreciate the difficulties of each other and should endeavor to
work contributing to a healthy financial system.
Banks have to strengthen their credit administrative machinery and put in place effective
credit risk management systems to reduce the fresh incidence of NPAs.
Better Inspection of NPA should be done on a regular bass so that banks can know how much
NPA of bank is their every month.

BIBLIOGRAPHY

Books

 Management Of Non-Performing Assets In Banks by Sugan C Jain

Managing Non-performing Assets in Banks S. N. Bidani
Magazines
Investor
Business India
Newspapers
The Economic Times
The Business Standard

Journals and Magazine

Annual Report ICICI Bank 2010-11, 2011-12
Annual Report ICICI Bank 2012-13
RBI Bulletin, July 2010 pp-34-36
RBI Bulletin, January 2011 pp-17-19
AlokMajumdar, NPAs: Recovery Blues, Treasury Management (Dec. 2000)
Other Sources Internet Websites
http://www.rbi.org.in/
http://www.indiastat.com/
www.indianresearchjournals.com