Project Synopsis

INVESTMENT MANAGEMENT

Group Members:
Rohitash Kumar(15PT1-19)
Kishore (15PT1-11)
Vrishab Prakash(15PT1-23)
Anand Bagchi

Project Name: Comparative Analysis of NPA of Public Sector

Banks

Abstract:
The reason being mounting non-performing assets (NPAs). An NPA is defined as a loan
asset, which has ceased to generate any income for a bank whether in the form of interest or
principal repayment. As per the prudential norms suggested by the Reserve Bank of India (RBI), a
bank cannot book interest on an NPA on accrual basis. In other words, such interests can be booked
only when it has been actually received.
Therefore, an NPA account not only reduces profitability of banks by provisioning in the profit and
loss account, but their carrying cost is also increased which results in excess & avoidable
management attention. Apart from this, a high level of NPA also puts strain on a banks net worth
because banks are under pressure to maintain a desired level of Capital Adequacy and in the
absence of comfortable profit level, banks eventually look towards their internal financial strength
to fulfil the norms thereby slowly eroding the net worth.
When a borrower, who is under a liability to pay to secured creditors, makes any default in
repayment of secured debt or any instalment thereof, the account of borrower is classified as
nonperforming assets (NPA) .NPAs cannot be used for any productive purposes because they reflect
the application of scarce capital and credit funds. Continued growth in NPA threatens the
repayment capacity of the banks and erodes the confidence reposed by them in the banks. In fact
high level of NPAs has an adverse impact on the financial strength of the banks who in the present
era of globalization, are required to conform to stringent International Standards. Non-Performing
Asset means an asset or account of a borrower, which has been classified by bank or financial
institution as substandard, doubtful or loan asset.

Objectives:
a)
b)
c)
d)

To Study the concept of Non-Performing Asset in Indian Perspective.

To Study NPA Standard of RBI
To Study reasons for and impact of NPAs
To evaluate efficiency in managing Non Performing Asset of different types of Banks (Public,
Private & Foreign Banks using NPA Ratios & comparing NPA with Profits).

Research Methodology:
a) Involves gathering data that describe events and then organizes, tabulates, depicts, and
describes the data
b) Uses description as a tool to organize data into patterns that emerge during analysis.
c) Often uses visual aids such as graphs and charts to aid the reader
d) Using of hypothesis testing.

Scope of the Study:

a) To understand the concept of NPA in Indian Banking Industry.
b) To understand the causes & effects of NPA
c) To analyse the past trends of NPA of Public, Private & Foreign banks in different
sector.

Introduction
The Indian banking system is financially stable and resilient to the shocks that may arise due to
higher non-performing assets (NPAs) and the global economic crisis, according to a stress test done
by the Reserve Bank of India (RBI). Significantly, the RBI has the tenth largest gold reserves in the
world after spending US$ 6.7 billion towards the purchase of 200 metric tons of gold from the
International Monetary Fund (IMF) in November 2009. The purchase has increased the country's
share of gold holdings in its foreign exchange reserves from approximately 4 per cent to about 6
per cent. Following the financial crisis, new deposits have gravitated towards public sector banks.
According to RBI's 'Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks:
September 2009', nationalized banks, as a group, accounted for 50.5 per cent of the aggregate
deposits, while State Bank of India (SBI) and its associates accounted for 23.8 per cent. The share
of other scheduled commercial banks, foreign banks and regional rural banks in aggregate deposits
were 17.8 per cent, 5.6 per cent and 3.0 per cent, respectively. With respect to gross bank credit
also, nationalized banks hold the highest share of 50.5 per cent in the total bank credit, with SBI
and its associates at 23.7 per cent and other scheduled commercial banks at 17.8 per cent. Foreign
banks and regional rural banks had a share of 5.5 per cent and 2.5 per cent respectively in the
total bank credit.
The report also found that scheduled commercial banks served 34,709 banked centres. Of these
centres, 28,095 were single office centres and 64 centres had 100 or more bank offices. The
confidence of non-resident Indians (NRIs) in the Indian economy is reviving again. NRI fund inflows
increased since April 2009 and touched US$ 45.5 billion on July 2009, as per the RBI's February
bulletin. Most of this has come through Foreign Currency Non-resident (FCNR) accounts and Nonresident External Rupee Accounts. India's foreign exchange reserves rose to US$ 284.26 billion as
on January 8, 2010, according to the RBI's February bulletin.
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 directions 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, recovery climate, up gradation of
technology in the banking system, etc., 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) shell be
an advance where
i. Interest and / or instalment of principal remain overdue for a period of more than 180 days in
respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/
cash Credit (OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the case of bills purchased and
discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period
not exceeding two half years in the case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 180 days in respect of
other accounts.With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs,
from the year ending March 31, 2004. Accordingly, with effect from March 31, 2004, a nonperforming asset (NPA) shell be a loan or an advance where;
i. Interest and /or installment of principal remain overdue for a period of more than 90 days in
respect of a Term Loan,

ii. The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/
cash Credit(OD/CC),
iii. The bill remains overdue for a period of more than 90 days in the case of bills purchased and
discounted,
iv. Interest and/ or installment of principal remains overdue for two harvest seasons but for a period
not exceeding two half years in the case of an advance granted for agricultural purpose, and
v. Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.

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 shortest period of time which lead to additional cost to the company. Difficulty
in operating the functions of bank is another cause of NPA due to lack of money. Routine payments
and dues.
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 diverted to some fruitful
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.

References:
http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend
and Progress of Banking in India
Tables in Annexure: Retrieved on 25th February, 2010 from
http://rbi.org.in/scripts/AnnualPublications.aspx?
head=Statistical Tables Relating to Banks of India

Introduction to Banking Industry: Retrieved on 25th January,

2010 from http://en.wikipedia.org/wiki/Banking_in_India