A Study on

NPA Management in SBI (State Bank of India)

A Project Report Submitted for the

Partial Fulfillment of the Requirement for the Award of the Degree
of
Master of Business Administration (MBA)

Supervised By Submitted By
DR. B.D. Mishra Meenakshi Dhirwani
(Associate Professor) Roll No. -13605023

2015

Department of Management studies

Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)

 Certificate by the student

This is to certify that I, Meenakshi Dhirwani, a student of MBA Fourth Semester of the
batch 2013-15 (Roll No. 13605023) have carried out a project entitled “NPA Management
in SBI” under the supervision of Dr. B.D. Mishra (Associate Professor) in the Department
of Management Studies, Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G). This is an original
work carried out by me and the report has not been submitted to any other University for the
award of any degree of diploma.

Date: 13/ 5 /2015 Meenakshi Dhirwani

Place: Bilaspur MBA IVth Semester
Batch:- 2013-15
Roll No.:- 13605023

I
 Certificate by the supervisor

This is to certify that Ms. Meenakshi Dhirwani, a student of MBA fourth semester of the
2013- 15 batch (Roll No. 13605023) has carried out a project “NPA Management in SBI”
under my supervision and guidance. It is also certified that the student has compiled with all
the guidelines designed for the project of report. To the best of my knowledge this report is
an authentic record of the work carried out by the student and it is considered fit for being
referred to evaluation.

Date: 13/ 5 /2015 Dr. B.D. Mishra

Place: Bilaspur (Associate professor)
Department of Management Studies
Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)

II
 COPY OF SYNOPSIS AS APPROVED BY THE
SUPERVISOR

TITLE:-A STUDY OF NPA MANAGEMENT IN SBI

OBJECTIVES:-
1. To understand what is non performing Assets and what are the underlying reasons for the
emergence of the NPA's

2. To study the position of NPA in SBI group

3. To understand the impact of NPA on strategic banking whole

4. To know the reason for an Asset becoming NPA

5. To suggest measures to reduce NPA

6. To study the methods adopted by the RBI to look after NPA management

7. To study why banks and financial institutions are facing problems of swelling NPAs even
after the passing of the act.

SIGNIFICANCE OF THE STUDY

The main aim of any person is the utilization of money in the best manner since the India is
country where more than half of population has problem of running the family in the most
efficient manner. However Indian people faced large number of problems till the
development of full- fledged banking sector. The Indian banking sector came into the
developing nature mostly after 1991 government policy. The banking sector has really helped
the Indian people to utilize the single money in the best manner as they want. The banks not
only accept the deposits of the people but also provide them credit facility for their
development. Indian banking sector has the nation in developing the business and services
sectors. But recently the banks are facing the problem of credit risk. It is found that many
general people and business people borrow from the banks but due to some genuine of other
reasons are not able to repay back is known as the non- performing assets. Many banks are
facing the problem of NPA which hampers the business of banks. Due to NPAs the income of
the banks is reduced and the banks have to make large number of the provision that would

III
curtail the profit of the banks and due to that the financial performance of the bank would not
show good results.

The main aim behind making this report is to know how SBI is operating its business and
how NPAs play its role to the operations of the SBI bank. My study is also focusing upon
existing system in India to solve the problem of NPAs.

REASERCH METHODOLOGY
The key element of our methodology are as follow:-

1.Sample size:- the total sample size was 25. The respondent was bank members, especially
the bank manager, loan manager, the credit managers and the officers in charge of recovery
department.

2. Selection of the sample:-convenience sampling is used.

3. Sources of Data collection:- the source of data is important consideration for any project.
The data used it:

 Secondary data:-
Secondary data refers to the data which has already been generated and is available for use.
The data is taken from Reserve Bank of India website, SBI website and journals.

 Primary data:-
The primary data is collected through questionnaire,

4. Period of the study:- the period of the study is done on the basis of availability of data.
The data are collected i.e. from 2003-04 to 2007-08.

5. Research design:- the research conducted is to analyze the NPA management in SBI
bank. The nature of research is exploratory as well as diagnostic. This study is based on the
discussions conducted with officials of the bank. The various data provided by them, the RBI

IV
circulars, journal, magazines, data from internet will be studied and interpretation made
thereof.

6. secondary information is obtained by the medium of internet, books and the journals of
various Management schools and the government web portals.

CHAPTER PLAN

1. Introduction

2. Company profile

3. NPA management

4. Data analysis and interpretation

5. Findings, conclusion and suggestion.

V
 ACKNOWLEDGEMENT

On the very outset of this report, I would like to extend my sincere & heartfelt obligation
towards all the personages who have helped me in this endeavor. Without their active
guidance, help, cooperation & encouragement, I would not have made headway in the
project.

I am extremely thankful and pay my gratitude to my faculty guide Dr. B.D. Mishra for his
valuable guidance and support on this project in its presently.

I am extremely indebted to Dr. L.P. Pateriya sir for conscientious guidance and
encouragement to accomplish this assignment.

I extend my gratitude to Department of Management Studies, GGV, Bilaspur (C.G.) for

giving me this opportunity.

I also acknowledge with a deep sense of reverence, my gratitude towards my parents and
member of my family, who has always supported me morally as well as economically. At last
but not the least gratitude goes to all my friends who directly or indirectly helped me to
complete this project report

Any omission in this brief acknowledgement does not mean lack of gratitude.

Meenakshi Dhirwani
MBA IVthSemester

VI
 PREFACE

Master of business administration of finance is course which combines with theory and its
application as its contents of study in the field of management as a part of this course every
aspirant has to submit a major project report.

Granting of credit facilities for economic activities is the primary task of banking. Apart from
raising resources through fresh deposits, borrowings, etc. recycling of fund received bank
from borrowers constitutes a major part of funding credit dispensation activities. Non-
recovery of installment as also interest on the loan portfolio negates the effectiveness of this
process of the credit cycle. Non- recovery also affects the profitability of banks besides being
required to maintain more owned funds by way of capital and creation of reserves and
provision to act as cushion for the loan losses. Avoidance of loan losses is one of the pre-
occupation of management of banks. While complete elimination of such losses is not
possible, bank management aim to keep the losses at a low level. In fact, it is the level of non-
performing advances, which, to a great extent, widespread repercussions. To avoid shock
waves affecting the system, the salvaging exercise is done by the Government or by the
industry on the behest of Government/ central bank of the country putting pressure on the
exchequer.

This project aims at providing overall view on the existence of NPAs, their treatment, the
ways at resolving this issue and also a few reports on the recent developments in this field. If
this report will be fruitful to any organization by any means, we will consider our work
worthwhile.

Date: 13/5/2015 Meenakshi Dhirwani

Place- Bilaspur M.B.A IVth Semester

VII
 LIST O TABLES AND CHARTS

TABLE CONTENTS PAGE

NO. NO.

4.1 TOTAL ASSET 60

4.2 GROSS NPA RATIO 61

4.3 NET NPA RATIO 63

4.4 TABLE OF ADVANCES AND GROSS NPA 64

4.5 CAPITAL ADEQUACY RATIO 65

4.6 PROVISION RATIO 66

4.7 WHAT ISNPA? 68

4.8 PERCENTGE OF NPA 69

4.9 TREND OF NPA 70

4.10 CAUSES OF NPA 71

4.11 STEPS TO BE TAKEN 72

4.12 METHOD OF MEASUREMENT OF NPA 74

4.13 MEASURE FOR RECOVERY OF NPA 75

4.14 RESPONSIBLE FOR NON-RECOVERY OF OUT STNDING 76

CREDIT

4.15 APPOINMENT MADE FOR REALIZING MONEY 77

4.16 LAW ACTS AS A STUMBLING BLOCK 78

4.17 TIME TAKEN TO RECOVER MONEY 79

4. 18 GOVERNMENT POLICIES RESPONSIBLE FOR NPA 80

4.19 CATETGORY FOR WHICH NPA IS LARGELY OBSERVED 81

4.20 POLITICAL INTERFERANCE AFFECTS NPA 82

VIII
4.21 OUT OF COURT SETTLEMENT 83

4.22 DEVELOPING A TENDENCY OF DELIBERATE ATTEMPT 84

OF
DEFAULT AMONG BORROWERS

4.22 ADEQUACY OF CREDIT MONITORING SYSTEM 85

4.23 NECESSITY OF IMPROVEMENT 86

4.24 APPOINTMENT OF EXTERNAL RECOVERY AGENT 87

4.25 DELAY IN LEGAL PROCEDURES CREATE DIFFICULTY IN 88

RECOVERY

4.26 CASH INCENTIVE SCHEME 89

4.27 SATISFACTION FROM PRESENT INCENTIVE SCHEME 90

4.28 PROGRESS OF NPA 91

4.29 SIMILAR RECOVERY STRATEGY 92

4.30 STRATEGIE, HELPFUL IN REDUCING NPA 93

IX
 CONTENTS

S. NO PARTICULARS PAGE NO.

1. CERTIFICATE BY THE STUDENT I

2. CERTIFICATE BY THE SUPERVISOR II

3. COPY OF SYNOPSIS AS APPROVED BY THE SUPERVISOR III-V

4. PREFACE VI

5. ACKNOWLEDGEMENT VII

6. LIST OF TABLES AND CHARTS VIII- IX

7. EXECUTIVE SUMMARY 1

8. CHAPTER-1 INTRODUCTION 2- 7

1.1 NPA IN INDIAN BANK- CURRENT SCENERIO

1.2 OBJECTIVES OF THE PROJECT

1.3 SIGNIFICANCE OF THE STUDY

1.4 RESEARCH PROBLEM

1.5 RESEARCH METHODOLOGY

1.6 LIMITATIONS OF THE STUDY

1.7 CHAPTER PLAN

9. CHAPTER-2 BANKING INDUSTRY IN INDIA AND SBI 8- 30

2.1 INTRODUCTION OF BANKING SYSTEM IN INDIA

2.2 HISTORY OF INDIAN BANKING

2.3 THE INDIAN BANKING SYSTEM

2.4 THE STRUCTURE OF INDIAN BANKING

X
 2.5 BANKING DIVISIONS

2.6 SWOT ANALYSIS

2.7 IMPORTANCE OF BANKING SECTOR IN GROWING ECONOMY

2.8 EMERGING SCENERIO IN THE BANKING SECTOR

2.9 CONCERN

2.10 INTRODUCTION OF SBI

2.11 ABOUT LOGO

2.12 MISSION, VISSION AND VALUES

2.13 BOARD OF DIRECTORS

2.14 PRODUCTS AND SERVICES

10. CHAPTER-3 NPA MANAGEMENT 31- 59

3.1 MEANING OF NPA

3.2 INCOME RECOGNITION- POLICY

3.3 ASSET CLASSIFICATION

3.4 SALE OF NPA TO OTHER BANK

3.5 TYPES OF NPA

3.6 REASONSOF AN ACCOUNT BECOMING NPA

3.7 IMPACT OF NPA ON BANKS

3.8 EARLY SYMPTOMS

3.9 PREVENTIVE MEASURES OF NPA

3.10 GUIDELINES BY RBI

11. CHAPTER-4 DATA ANALYSIS AND INTERPRETATION 60- 100

4.1 RATIO ANALYSIS

XI
 4.2 ANALYSIS BASED ON QUESTIONNAIRE

12. CHAPTER-5 FINDINGS, CONCLUSION AND SUGGESTION 101- 105

13. ANNEXURE 106- 111

14. BIBLIOGRAPHY 112

XII
EXECUTIVE SUMMARY

The most important problem that the Indian banks are facing is the problem of their NPAs. It
is only since a couple of years that this particular aspect has been given so much importance.
The banks has to overcome these difficulty properly in order to effectively counter the
competition faced by the foreign banks. With the framing of law as per international
standards and setting up of Debt recovery tribunal we can say that steps have been taken in
this direction.

SARFAESI ACT 2002 (Securitization and Reconstruction of Financial Assets and

Enforcement of Security Interest Act) gave the banks the much needed teeth to curb the
menace of NPA’s. the non- performing assets (NPAs) of banks have at last begun shrinking.
As reported from surveys, it is understood that there has been substantial improvement in
non- performing assets and this has been because of several measures such as formation of
asset reconstruction companies, debt restructuring norms, securitization, provisioning norms
and prudential norms for income recognition. The problem is no doubt about recovery
management where the objective is to find out about the reasons behind NPAs and to create
networks for recovery.

An explorative study was adopted to achieve the objectives of the study. The major limitation
of the study was the lack of time. Even then, maximum care has been taken to arrive at
appropriate conclusion. The method adopted for collection of data was personal interview
with the bank officials and observation. It was also sourced from secondary data. After
collecting data from the respective sources, analysis and interpretation of data has been made.

Based on the findings, logical conclusion are drawn, and further, suitable suggestions and
recommendation are brought out. The entire project report is presented in the form of a report
using chapter scheme, developed logically and sequentially from ‘introduction’ to
‘bibliography’.

1
CHAPTER - 1

2
1.1 NPA IN INDIAN BANK- CURRENT SCENERIO

Non- performing assets (NPAs) are the smoking gun threatening the very stability of Indian
banks. NPAs wreck a bank’s profitability both through a loss of interest income and write-
off of the principal loan amount itself.

According to economic survey:- During 2012-13, the deteriorating asset quality of the
banking sector emerged as a major concern, with gross NPAs ( non-performing assets ) of
banks registering a sharp increase...Growth of NPA is a cause for concern," the Survey tabled
in Parliament by Finance Minister ArunJaitley said. The bad loans of public sector banks
were at 4.4 per cent in March 2014 compared with 2.09 per cent in 2008-09, it said, adding,
the gross NPA increased by almost four times from March 2010 (Rs 59,972 crore) to March
2014 (Rs 2,04,249 crore).

Increase in NPAs of banks is mainly accounted forby switchover to system-based

identification of NPAs by PSBs (public sector banks), slowdown of economic growth, and
aggressive lending bybanks in the past, especially during good times, it said.Overall NPAs or
bad loans of the banks, includingprivate sector lenders, increased from 2.36 percent to 3.90
per cent in March 2014. Increase was sharp in case of infrastructure with NPAs rising from
3.23 per cent to 8.22 per cent, it said. Infrastructure, iron and steel, textiles, aviation and
mining are five main sector that are stressed.

"The next wave of infrastructure financing will require a capable bond market." Despite, asset
quality deteriorating, the survey said the capital positions of Indian banks, including that of
public sector, remained strong and above the stipulated minimum.Highlighting challenges
and outlook, the Surveysaid financial markets continue to suffer from illiquidity and a major
objective should be to develop bond-currency derivative (BCD) nexus to equity market
quality levels.

3
1.2 OBJECTIVES OF THE STUDY

1. To understand what is non performing Assets and what are the underlying reasons for
the emergence of the NPA's
2. To study the position of NPA in SBI group
3. To understand the impact of NPA on strategic banking whole
4. To know the reason for an Asset becoming NPA
5. To suggest measures to reduce NPA
6. To study the methods adopted by the RBI to look after NPA management
7. To study why banks and financial institutions are facing problems of swelling NPAs
even after the passing of the act.

1.3 SIGNIFICANCE OF THE STUDY

The main aim of any person is the utilization of money in the best manner since the India is
country where more than half of population has problem of running the family in the most
efficient manner. However Indian people faced large number of problems till the
development of full- fledged banking sector. The Indian banking sector came into the
developing nature mostly after 1991 government policy. The banking sector has really helped
the Indian people to utilize the single money in the best manner as they want. The banks not
only accept the deposits of the people but also provide them credit facility for their
development. Indian banking sector has the nation in developing the business and services
sectors. But recently the banks are facing the problem of credit risk. It is found that many
general people and business people borrow from the banks but due to some genuine of other
reasons are not able to repay back is known as the non- performing assets. Many banks are
facing the problem of NPA which hampers the business of banks. Due to NPAs the income of
the banks is reduced and the banks have to make large number of the provision that would
curtail the profit of the banks and due to that the financial performance of the bank would not
show good results.

4
The main aim behind making this report is to know how SBI is operating its business and
how NPAs play its role to the operations of the SBI bank. My study is also focusing upon
existing system in India to solve the problem of NPAs.

1.4 REASEARCH PROBLEM

Indian banking industry, which was in glory phase once upon a time, has been facing a lots of
challenges on non- performing assets at present scenario. Many banks have kept their NPAs
under the control but some banks are not able to control their NPA levels. They are facing
lots of problems there can be various reasons behind this NPA. Non- performing assets has
been hitting the profitability of the banks or it can be said that due to NPA, the profitability of
the banks are going down day by day. The subsidiary for this is the functioning of Debt
Recovery Tribunal (DRT) which is a judiciary for the bank for recovery amount from the
default customers. These can be considered as a research problem based on which the
information is collected, the object is measured and the data is analyzed and interpreted.

1.5 RESEARCH PROBLEM

The key element of our methodology are as follow:-

1. Sample size:- the total sample size was 25. The respondent was bank members, especially
the bank manager, loan manager, the credit managers and the
officers in charge of recovery department.

2. Selection of the sample:-convenience sampling is used.

3. Sources of Data collection:- the source of data is important consideration for any project.
The data used it:

5
  Secondary data:-

Secondary data refers to the data which has already been generated and is available for use.
The data is taken from Reserve Bank of India website, SBI website and journals.

 Primary data:-

The primary data is collected through questionnaire,

4. Period of the study:- the period of the study is done on the basis of availability of data.
The data are collected i.e. from 2003-04 to 2007-08.

5. Research design:- the research conducted is to analyze the NPA management in SBI
bank. The nature of research is exploratory as well as diagnostic. This study is based on the
discussions conducted with officials of the bank. The various data provided by them, the RBI
circulars, journal, magazines, data from internet will be studied and interpretation made
thereof.

6. Secondary information is obtained by the medium of internet, books and the journals.

1.6 LIMITATIONS

The project was a very good learning experience but on the other side it was full of
challenging and difficulties. The most difficult part of the project was the interpretation with
the members of the banks with the purpose to collect feedback. The major constraints faced
can be listed as follow-

 It was not possible to collect the data from all the branches and members of the bank
due to the shortage of time data.
 Convincing respondent for filling up of the questionnaire was challenging.
 The secondary data was available for 5 years only.
 The conclusion of the study are based on the responces of the banks and secondary
information. Thus, some amount of subjectivity might remain.

6
  1.7 CHAPTER PLAN

1. Introduction

2. Company profile

3. NPA management

4. Data analysis and interpretation

5. Findings, conclusion and suggestion.

7
CHAPTER- 2

8
BANKING INDUSTRY IN INDIA

2.1 INTRODUCTION

A bank is a financial institution that provides banking and other financial services to their
customers. A bank is generally understood as an institution which provides fundamental
banking services such as accepting deposits and providing loans. There are also non banking
institutions that provide certain banking services without meeting the legal definition of a
bank. Banks are a subset of the financial services industry.

A banking system also referred as a system provides by the bank which offers cash
management services for customers, reporting the transactions of their accounts and
portfolios, throughout the day. The banking system in India should not only be hassle free but
it should be able to meet the new challenges posed by the technology and any other external
and internal factors. For the past three decades, India’s banking system has several
outstanding achievements to its credit. The banks are the main participants of the financial
system in India. The banking sector offers several facilities and opportunities to their
customers. All the banks safeguard the money and valuables and provide loans, credit, and
payment services, such as checking accounts, money orders, and cashier’s cheques. The
banks also offer investment and insurance products. As a variety of models for cooperation
and integration among finance industries have emerged, some of the traditional distinctions
between banks, insurance companies and securities firms have diminished. In spite of these
changes, banks continue to maintain and perform their primary role- accepting deposits and
lending funds from these deposits.

2.2 History:Banking in India has its origin as carry as the Vedic period. It is believed that
the transition from money lending to 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 mogal 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 was to 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

9
1786.The others which followed were 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 19th 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 27th 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 Indian Management were
established in the 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 nationalized and in 15th April 1980 six more
commercial private sector banks were also taken over by the government. The Indian
Banking industry, which is governed by the Banking Regulation Act of India 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.

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 in protected environments 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 four- fold 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
banksand the foreign banks. The new private sector first made their appearance after the
guidelines permitting them were issued in January 1993.

10
2.3 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 a 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 of tellers handling your own
cash, today there are efficient machines that don’t talk but just dispense cash. Under the

Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled
banks. The scheduled banks are those, which are entered in the Second Schedule of RBI Act,
1934. Such banks are those, which have paid- up capital and reserves of an aggregate value of
not less then Rs.5 lacs 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.

The organized banking system in India can be broadly classified into three categories: (i)
Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative banks. The Reserve
Bank of India is the supreme monetary and banking authority in the country and has the
responsibility to control the banking system in the country. It keeps the reserves of all
commercial banks and hence is known as the “Reserve Bank”.

11
 2.4 The Structure of Indian Banking:

The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of
the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are
again split into old banks and new banks.

RBI

scheduled unscheduled

commercial cooperative

Rural Urban
public private foriegn RRB

2.5 BANKING DIVISIONS

 Retail banking – loans to individuals ( auto loan, housing loan, educational loan and
other personal loan) or small business.
 Wholesale banking – loans to mid and large corporate ( working capital loans, project
finance, team loans, lease finance)

12
  Treasury operations – investment in equity, derivatives, commodities, mutual funds,
bonds, trading and forex operations.
 Other banking businesses – merchant banking, leasing business, hire purchase,
syndication services, etc.

2.6 SWOT ANALYSIS

STRENGHTS WEAKNESSES
 Valuable contribution to  Increasing NPA
GDP  Low penetration
 Regulatory environment  Lack of product
 Government support differentiation
OPURTUNITIES THREATS
 Modern technology  Unorganized money
 Untapped rural market lending market
 Globalization  Customer
dissatisfaction
 Rise of monopolistic
structures

13
2.7 IMPORTANCE 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 services 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.

For a fast developing economy like ours, presence of a sound financial system to mobilize
and allocate savings of the public towards productive activities is necessary. Commercial
banks play a crucial role in this regard.

The Banking sector in recent years has incorporated new products in their businesses, which
are helpful for growth. The banks have started to provide fee-based services like, treasury
operations, managing derivatives, options and futures, acting as bankers to the industry
during the public offering, providing consultancy services, acting as an intermediary between
two-business entities etc.At the same time, the banks are reaching

out to other end of customer requirements like, insurance premium payment, tax 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 card, 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 utilize the
services wheneverthere is a need. The relationship banking plays a major and important role

14
in growth, because the customers now have enough number of opportunities, and they choose
according to their satisfaction of responses 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 transnational 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. 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 & increase our Foreign exchange reserve.

Another emerging change happening all over the banking industry is consolidation through
mergers and acquisitions. This helps the banks in strengthening their empire and expanding
their network of business in terms of volume and effectiveness.

2.8 EMERGING SCENARIO IN THE BANKING SECTOR

The Indian banking system has passed through three distinct phases from the time of
inception. The first was being the era of character banking, where you were recognized as a
credible depositor or borrower of the system. This era come to an end in the sixties. The
second phase was the social banking. Nowhere in the democratic developed world, was
banking or the service industry nationalized. But this was practiced in India. Those were the
days when bankers has no clue whatsoever as to how to determine the scale of finance to
industry. The third era of banking which is in existence today is called the era of Prudential
Banking. The main focus of this phase is on prudential norms accepted internationally

15
SBI Group-
The Bank of Bengal, which later became the State Bank of India. State Bank of India with its
seven associate banks commands the largest banking resources in India.

Nationalization-

The next significant milestone in Indian Banking happened in late 1960s when the then Indira
Gandhi government nationalized on 19th July 1949, 14 major commercial Indian banks
followed by nationalization of 6 more commercial Indian banks in 1980.

The stated reason for the nationalization was more control of credit delivery. After this, until
1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu
growth of the Indian economy .After the amalgamation of New Bank of India with Punjab
National Bank, currently there are 19 nationalized banks in India.

Liberalization-

In the early 1990’s the then Narasimharao government embarked a policy of liberalization
and gave licences to a small number of private banks, which came to be known as New
generation tech-savvy banks, which included banks like ICICI and HDFC. This move along
with the rapid growth of the economy of India, kick started the banking sector in India, which
has seen rapid growth with strong contribution from all the sectors of banks, namely
Government banks, Private Banks and Foreign banks. However there had been a few hiccups
for these new banks with many either being taken over like Global Trust Bank while others
like Centurion Bank have found the going tough.

The next stage for the Indian Banking has been set up with the proposed relaxation in the
norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given
voting rights which could exceed the present cap of 10%, at pesent it has gone up to 49%
with some restrictions.

16
The new policy shook the Banking sector in India completely. Bankers, till this time, were
used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new
wave ushered in a modern outlook and tech-savvy methods of working for traditional
banks.All this led to the retail boom in India. People not just demanded more from their
banks but also received more.

2.9 CONCERN

Indian economy is one of the fastest growing economies of the world. The economy with its
vital geography and demography has specific requirements in order to traverse to the next
orbit and attain its full potential. Banks enable to cope with finance requirement for few
industries such as infrastructure, housing and real estate etc. India’s infrastructural financing
needs are not only huge but also vital. Traditionally banks have been the major source of
infrastructure financing and their exposure to infrastructure is already high at 17 per cent.
There are several major concerns which as noted below:

Intensifying competition

Indian banking industry has undergone qualitative changes due to banking sector reforms.
Indian banking sector, which is dominated by state- controlled, has facing formidable
challenges. Due to this new emerging competition, Indian banks, especially PSBs are trying
their best to improve their performance and preparing to compete in the emerging global
market. New private sector banks and foreign banks have more customer- centric policies,
high quality services, new attractive schemes and computerized branches. All these services
attracted more and more customers to their banks. In this context, there is a need to examine
the efficiency of public sector banks operating in India. Mainly, competition can intensify
and banks which is efficient. The transaction cost of customers could come down and a bank
which is efficient, nimble and customer focused would always be able to do better than
others. As a result of globalization, many new banks have the Indian banking industry,
further intensifying the competition.

17
Increasing NPA

The asset quality of banks is one of the most important indicator of their financial health. It
also reflects the efficiency of banks’ credit risk management and the recovery environment.
The Indian banks have shown very good performance as far as the financial operations are
concerned. But non- performing assets (NPA) has caused some concerns. Despite write- offs
gross NPAs have continued to rise significantly. The new accretion to NPAs has been much
faster than the reduction in existing NPAs due to lower levels of up gradation and recoveries.
To improve the banks’ ability their non –performing assets (NPAs) and restructured accounts
in an effective manner and considering that almost all branches of banks have been fully
computrized, the Reserve bank of India in its monetary policy statement 2012- 13 proposed
the following measures:

• To mandate banks to put in place a robust mechanism for early detection of signs of
distress, and measures, including prompt restructuring in the case of all viable accounts
wherever required, with view to presenting the economic value such accounts: and

• To mandate banks to have proper system generated- wise data on their NPA accounts,
write offs, compromise settlement, recovery and restructured accounts.

Despite these concerns, it is projected that the Indian banking industry will grow through
leaps and bounds looking at the huge growth potential of Indian economy. High population
base of India, rising disposable income, etc. will drive the growth og Indian banking industry
in the long- term.

COMPANY PROFILE

2.10 INTRODUCTIONSTATE 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 governments in the three presidencies of British India
and the private credit of the European and India merchants from about 1860s when the Indian

18
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-
Continent Although large European and Indian merchants and manufacturers were
undoubtedly thee principal beneficiaries, the small man never ignored loans as low as Rs.100
were disbursed in agricultural districts against glad ornaments. Added to these the bank till
the creation of the Reserve Bank in 1935 carried out numerous Central – Banking functions.

Adaptation 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 not
go post. Yet seldom did the bank contravenes its value as depart from sound banking
principles to retain as expand its business. An innovative array of office, unknown to the
world then, was devised in the form of branches, sub branches, treasury pay office, pay
office, 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.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 A impeccable

financial status consistent maintenance of the lofty traditions if banking an observation of a

high standard of integrity in its operations helped the bank gain a 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
representatives of chamber of commercial showered economics on it.

Modern day management techniques were also very much evident in the good old days years
before corporate governance had become a puzzled the banks bound functioned with a high
degree of responsibility and concerns for the shareholders. An unbroken records of profits
and a fairly high rate of profit and fairly high rate of dividend all through ensured

19
satisfaction, prudential management and asset liability management not only protected the
interests of the Bank but also ensured that the obligations to customers were not met. The
traditions of the past continued to be upheld even to this day as the State Bank years itself to
meet the emerging challenges of the millennium.

2.11 ABOUT LOGO

THE PLACE TO
SHARE THE NEWS
...……

SHARE THE
VIEWS ……

Togetherness is the theme of this corporate loge of SBI where the world of banking services
meet the ever changing customers needs and establishes a link 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 key hole indicates safety and
security.

20
2.12 MISSION, VISION AND VALUES
MISSION STATEMENT:

To retain the Bank’s position as premiere Indian Financial Service 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 sectors 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 institutional 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

 Risk taking and innovative

21
 Team playing

 Learning and renewal

 Integrity

 Transparency and Discipline in policies and systems.

2.13 BOARD OF DIRECTORS

List of directors on the central board of state bank of India (As on 1st December, 2014)

S. No Name Designation Under section

of
SBI Act 1955
1 Smt. Arundhati Bhattacharya Chairman 19(a)
2 Shri. P. Pradeep Kumar Managing director 19(b)
3 Shri. B. Sriram Managing director 19(b)
4 Shri. V.G Kannan Managing director 19(b)
5 Shri. SanjivMalhotra Director 19(c)
6 Shri. Sunil Mehta Director 19(c)
7 Shri. M. D. mallya Director 19(c)
8 Shri. Deepak I. Amin Director 19(c)
9 Shri. S. K Mukherjee Officer employee 19(cb)
director
10 Dr. Rajiv Kumar Director 19(d)
11 Shri. HarichandraBahadursingh Director 19(d)
12 Shri. TribhuwanNathchaturvedi Director 19(d)
13 Dr. HasmukhAdhia Director 19(e)
14 Dr. Urjit R. Patel Director 19(f)

22
2.14 PRODUCTS AND SERVICES

PRODUCTS:

State Bank Of India renders varieties of services to customers through the following
products:

Personal Loan Product:

 SBI Term Deposits

 SBI Recurring Deposits
 SBI Housing Loan
 SBI Car Loan
 SBI Educational Loan
 SBI Personal Loan
 SBI Loan For Pensioners
 Loan Against Mortgage Of Property
 Loan Against Shares & Debentures
 Rent Plus Scheme
 Medi-Plus Scheme
 Rates Of Interest

SBI Housing loan

SBI Housing loan or Mortgage Loan schemes are designed to make it simple for you to make
a choice at least as far as financing goes!

'SBI-Home Loans'

23
features:

 No cap on maximum loan amount for purchase/ construction of house/ flat

 Option to club income of your spouse and children to compute eligible loan amount
 Provision to club expected rent accruals from property proposed to compute eligible
loan amount
Provision to finance cost of furnishing and consumer durables as part of project cost
 Repayment permitted upto 70 years of age
 Free personal accident insurance cover
 Optional Group Insurance from SBI Life at concessional premium (Upfront premium
financed as part of project cost)
 Interest applied on daily diminishing balance basis
 'Plus' schemes which offer attractive packages with concessional interest rates to
Govt. Employees, Teachers, Employees in Public Sector Oil Companies.
 Special scheme to grant loans to finance Earnest Money Deposits to be paid to Urban
Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/
flat
 No Administrative Charges or application fee
 Prepayment penalty is recovered only if the loan is pre-closed before half of the
original tenure (not recovered for bulk payments provided the loan is not closed)
 Provision for downward refixation of EMI in respect of floating rate borrowers who
avail Housing Loans of Rs.5 lacs and above, to avail the benefit of downward revision
of interest rate by 1% or more
 In-principle approval issued to give you flexibility while negotiating purchase of a
property
 ·Option to avail loan at the place of employment or at the place of construction
 Attractive packages in respect of loans granted under tie-up with Central/ State
Governments/ PSUs/ reputed corporates and tie-up with reputed builders (Please
contact your nearest branch for details)

24
SERVICES:

 DOMESTIC TREASURY
 SBI VISHWA YATRA FOREIGN TRAVEL CARD
 BROKING SERVICES
 REVISED SERVICE CHARGES
 ATM SERVICES
 INTERNET BANKING
 E-PAY
 E-RAIL
 RBIEFT
 SAFE DEPOSIT LOCKER
 GIFT CHEQUES

ATM SERVICES
STATE BANK NETWORKED ATM SERVICES

State Bank offers you the convenience of over 8000 ATMs in India, the largest network in
the country and continuing to expand fast! This means that you can transact free of cost at the
ATMs of State Bank Group (This includes the ATMs of State Bank of India as well as the
Associate Banks – namely, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State
Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra, and
State 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 ATMs

Besides State Bank ATM-Cum-Debit Card and State Bank International ATM-Cum-Debit
Cards following cards are also accepted at State Bank ATMs: -

1) State Bank Credit Card

25
2) ATM Cards issued by Banks under bilateral sharing viz. Andhra Bank,Axis Bank, Bank
of India, The Bank of Rajasthan Ltd., Canara Bank, Corporation Bank, Dena Bank, HDFC
Bank, Indian Bank, Indus Ind Bank, Punjab National Bank, UCO Bank and Union Bank of
India.

3) Cards issued by banks (other than banks under bilateral sharing) displaying Maestro,
Master Card, Cirrus, VISA and VISA Electron logos

4) All Debit/ Credit Cards issued by any bank outside India displaying Maestro, Master Card,
Cirrus, VISA and VISA Electron logos

Note: If you are a cardholder of bank other than State Bank Group, kindly contact your Bank
for the charges recoverable for usage of State Bank ATMs.

STATE BANK INTERNATIONAL ATM-CUM-DEBIT CARD

Eligibility:

All Saving Bank and Current Account holders having accounts with networked branches and
are:

 18 years of age & above

 Account type: Sole or Joint with “Either or Survivor” / “Anyone or Survivor”
 NRE account holders are also eligible but NRO account holders are not.

26
Benefits:

 Convenience to the customers traveling overseas

 Can be used as Domestic ATM-cum-Debit Card
 Available at a nominal joining fee of Rs. 200/-
 Daily limit of US $ 1000 or equivalent at the ATM and US $ 1000 or equivalent at
Point of Sale (POS) terminal for debit transaction
 Purchase Protection*up to Rs. 5000/- and Personal Accident cover*up to Rs.
2,00,000/-
 Charges for usage abroad: Rs. 150+ Service Tax per cash withdrawal Rs. 15 + Service
Tax per enquiry.

State Bank ATM-cum-Debit (State Bank Cash plus) Card:

India’s largest bank is proud to offer you unparalleled convenience viz. State Bank ATM-
cum-Debit(Cash Plus) card. With this card, there is no need to carry cash in your wallet. You
can now withdraw cash and make purchases anytime you wish to with your ATM-cum-Debit
Card.

Get an ATM-cum-Debit card with which you can transact for FREE at any of over 8000
ATMs of State Bank Group within our country.

27
SBI GOLD INTERNATIONAL DEBIT CARD

E-PAY

Bill Payment at Online SBI (e-Pay) will let you to pay your Telephone, Mobile, Electricity,
Insurance and Credit Card bills electronically over our Online SBI website

E-RAIL

Book your Railways Ticket Online.

The facility has been launched wefIst September 2003 in association with IRCTC. The
scheme facilitates Booking of Railways Ticket Online.

The salient features of the scheme are as under:

 All Internet banking customers can use the facility.

 On giving payment option as SBI, the user will be redirected to onlinesbi.com. After
logging on to the site you will be displayed payment amount, TID No. and Railway
reference no.
 . The ticket can be delivered or collected by the customer.
 The user can collect the ticket personally at New Delhi reservation counter .
 The Payment amount will include ticket fare including reservation charges,
courier charges and Bank Service fee of Rs 10/. The Bank service fee has
been waived unto 31st July 2006.

28
SAFE DEPOSIT LOCKER

For the safety of your valuables we offer our customers safe deposit vault or locker facilities
at a large number of our branches. There is a nominal annual charge, which depends on the
size of the locker and the centre in which the branch is located.

NRI HOME LOAN

SALIENTFEATURES

PURPOSE
Loans to NRIs & PIOs can be extended for the following purposes.

 To purchase/construct a new house / flat

 To repair, renovate or extend an existing house/flat
 To purchase an existing house/flat
 To purchase a plot for construction of a dwelling unit.
 To purchase furnishings and consumer durables, as a part of the project cost

AGRICULTURE / RURAL

State Bank of India Caters to the needs of agriculturists and landless agricultural labourers
through a network of 6600 rural and semi-urban branches. here are 972 specialized branches
which have been set up in different parts of the country exclusively for the development of
agriculture through credit deployment. These branches include 427 Agricultural Development
Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which
cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad
catering to the needs of hitech commercial agricultural projects.

29
CHAPTER- 3

30
3.1 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
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 improvements in the payment and settlement
systems, recovery climate, up gradation of technology in the banking sector, etc, it was
decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.

Accordingly, as from that date, a NPA shall be an advance where,

i. Interest and/or installment of principal remain overdue for a period of more than 180 days
in respect of a term loan

ii. The account remains ‘our of order’ for a period of more than 180 days, in respect of an
overdraft/cash credit

iii. 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 agriculturepurposes

iv. Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.

With a view to move towards international best practices, it has been decided to adopt the ’90
days’ overdue norm for identification of NPAs, from 31st March, 2004. Accordingly with
effect from march 31, 2004, a non-perfoming 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)

31
 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 installement 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 recived remains overdue for a period of more than 90 days in
respect of other accounts.

3.2 INCOME RECOGNITION- POLICY

 The policy of income recognition has to be objective and based on the record of
recovery. Internationally income from non-performing assets (NPA) is not recognised
on accrual basis but is booked as income only when it is actually received. Therefore,
the banks should not charge and take to income account interest on any NPA.
 However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life
policies may be taken to income account on the due date, provided adequate margin is
available in the accounts.

 If Government guaranteed advances become NPA, the interest on such advances

should not be taken to income account unless the interest has been realised.
 If any advance, including bills purchased and discounted, become NPA as at the close
of any year, the entire interest accured and credited to income account in the past
periods, should be reversed or provided for if the same is not realized.

32
3.3 ASSET CLASSIFICATION

Assets are classified into following four categories:

 Standard assets
 Sub- standard assets
 Doubtful assets
 Loss assets

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 does 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.

Provisioning norms:

 From the year ending 31. 03. 2000, the banks should make a general provision of a
minimum of 0.40 percent on standard assets on global loan portfolio basis.
 The provisions on standard assets should not be reckoned for arriving at net NPAs.
 The provisions towards standard assets need not be netted from gross advances but
shown seperately as ‘contingent provisions aginst standard assets’ under ‘other
liabilities and provisions- others’ in schedule 5 of the balance sheet.

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
reasonability of the dues:

1) Sub- standard assets

2) Doubtful assets
3) Loss assets

33
Sub-standard Assets:-- With effect from 31 March 2005, a sub standard asset would be
one, which has remained NPA for a period less than or equal to 12 month. The following
features are exhibited by sub standard assets: the current net worth of the borrowers /
guarantor or the current market value of the security charged is not enough to ensure recovery
of the dues to the banks in full; and the asset has well-defined credit weaknesses that
jeopardise the liquidation of the debt and are characterised by the distinct possibility that the
banks will sustain some loss, if deficiencies are not corrected.

Provisioning norms: a general provision of 10% on total outstanding should be made

without making any allowance for DICGC/ECGC guarantee cover securities available.

Doubtful Assets:--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.

Provisioning norms:

 100 percent of the extent to which the advance is not covered by the realisable value
of the security to which the bank has a valid recourse and the realisable value is
estimated on a realistic basis.
 In regard to the secured portion, provision may be made on the following basis, at the
rates ranging from 20 percent to 50 percent of the secured portion depending upon the
period for which the asset has remained doubtful:
 Additional provisioning consequent upon the change in the definition of doubtful
assets effective from March 31, 2003 has to be made in phases as under:

1. As on31.03.2003, 50 percent of the additional provisioning requirement on the

assets which became doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.

34
 2. As on 31.03.2002, balance of the provisions not made during the previous year, in
addition to the provisions needed, as on 31.03.2002.

 Banks are permitted to phase the additional provisioning consequent upon the
reduction in the transition period from substandard to doubtful asset from 18 to 12
months over a four year period commencing from the year ending March 31, 2005,
with a minimum of 20 % each year.

Loss Assets:--A loss asset is one which 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. Also, these assets would have been identified as ‘loss assets’ by the bank or
internal or external auditors or the RBI inspection but the amount would not have been
written-off wholly.

Provisioning norms: The entire asset should be written off. If the assets are permitted to
remain in the books for any reason, 100 percent of the outstanding should be provided for.

3.4 SALE OF NPA TO OTHER BANKS

 A NPA is eligible for sale to other banks only if it has remained a NPA for at least
two years in the books of the selling bank.
 The NPA must be held by the purchasing bank at least for a period of 15 months
before it is sold to other banbks but not to bank, which originally sold the NPA.
 The NPA may be classified as standard in the books of the purchasing banbk for a
period of 90 days from date of purchase and therefore it would depend on the record
of recovery with refrence of cash flows estimated while purchasing.
 The bank may purchase/ sell NPA only on without recourse basis.
 If the sale is conducted below the net book value, the short fall should be debited to
P&L account and if it is higher, the excess provision will be utilized to meet the loss
on account of sale of other NPA.

35
3.5 TYPES OF NPA

A] Gross NPA

B] Net NPA

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 loans
made 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

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

36
3.6 REASONS FOR AN ACCOUNT BECOMING NPA:

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

1· 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.

2. Wilful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing it.

These groups of people should be identified and proper measures should be taken in order to
get back the money extended to them as advances and loans.

3·Natural calamities

This is the measure 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

37
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

4·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.

5·Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they borrow
to operate these activities. The banks recover the amount by selling of their assets, which
covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to
make provision for it.

6·Change on 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. Eg. 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 govt. to revive the handloom sector has not yet been implemented. So the
over dues due to the handloom sectors are becoming NPAs.

INTERNAL FACTORS

1· Defective Lending process

There are three cardinal principles of bank lending that have been followed by the

38
commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of
profitability

i. Principles of safety By safety it means that the borrower is in a position to repay the loan

both principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay
b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore
take utmost care in ensuring that the enterprise or business for which a loan is sought is a
sound one and the borrower is capable of carrying it out successfully .he should be a person
of integrity and good character.

2· Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis can not 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.

3· 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

39
from a. From bankers b. Enquiry from market/segment of trade, industry, business.c. From
external credit rating agencies. • Analyze the balance sheet True picture of business will be
revealed on analysis of profit/loss a/c and balance sheet. • Purpose of the loan When bankers
give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks
should grant loan for productive purpose only. Bank should analyze the profitability,
viability, long term acceptability of the project while financing.

4· 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.

5· 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).

40
6· Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank
officials to the customer point decreases the collection of interest and principals on the loan.
The NPAs due to wilful defaulters can be collected by regular visits.

7· Re loaning process

Non remittance of recoveries to higher financing agencies and re loaning of the same have
already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters
and CCBs and PACs, the NPAs of OSCB is increasing day by day.

3.7 IM PACT OF NPAS ON BANKS

In portion of the interest income is absorbed in servicing NPA.NPA is not merely non-
remunerative. It is also cost absorbing and profit eroding.

In the context of severe competition in the banking industry, the weak banks are at
disadvantage for leveraging the rate of interest in the deregulated market and securing
remunerative business growth. The options for these banks are lost. "The spread is the bread
for the banks". This is the margin between the cost of resources employed and the return
therefore. In other words it is gap between the return on funds deployed (Interest earned on
credit and investments) and cost of funds employed (Interest paid on deposits).

When the interest rates were directed by RBI, as heretofore, there was not option
forbanks. But today in the deregulated market the banks decide their lending rates and

borrowing rates. In the competitive money and capital Markets, inability to offer competitive
market rates adds to the disadvantage of marketing and building new NPA has affected the
profitability, liquidity and competitive functioning of banks and finally the psychology of the
bankers in respect of their disposition towards credit delivery and credit expansion.

41
 1. Impact on Profitability

"The efficiency of banks is not always reflected only by the size of its balance sheet but by
the level of return on its assets. NPAS do not generate interest income for the banks, but at
the same time banks are required to make provisions for such NPAS from their current
profits. NPAS have a deleterious effect on the return on assets in several ways:

· They erode current profits through provisioning requirements.

· They result in reduced interest income.

· They require higher provisioning requirements affecting profits and accretion to

capital funds and capacity to increase good quality risk assets in future, and

· They limit recycling of funds, set in asset-liability mismatches, etc.

There is at times a tendency among some of the banks to understate the level of NPAs in
order to reduce the provisioning and boost up bottom lines. It would only postpone the
process.

In the context of crippling effect on a bank's operations in all spheres, asset quality has been
placed as one of the most important parameters in the measurement of a bank's performance
under the CAMELS supervisory rating system of RBI.

Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores
towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net
advances. To this extent the problem is contained but a what cost?

This costly remedy is made at the sacrifice of building healthy reserves for future
capitaladequacy.

The enormous provisioning of NPA together with the holding cost of such non-productive
assets over the years has acted as a severe drain on the profitability of the SBI Group. In turn
SBI Group are seen as poor performers and unable to approach the market for raising

42
additional capital. Equity issues of nationalized banks that have already tapped the market are
now quoted at a discount in the secondary market. Other bans hesitate to approach the market
to rise new issues. This has alternatively forced SBI Group to borrow heavily from the debt
market to build Tier II Capital to meet capital adequacy norms putting severe pressure on
their profit margins; else they are to seek the bounty of the Central Government for repeated
Recapitalization.

Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds
at 6% plus 1% service charge) the net NPA of Rs. 32632 Crores absorbs a recurring holding
ost of Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years
which works out to average of Rs. 3300 crores from annum, a size business.

in the face of the deregulated banking industry, an ideal competitive working is reached,when
the banks are able to earn adequate amount of non-interest income to cover their entire
operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference
between the gross interest income and interest cost will constitute its operating
profits.Theoretically even if the banks keeps 0% spread, it will still break even in terms of
operating profit and not return an operating loss. The net profit is the amount of the operating
profit minus the amount of provisions to be made including for taxation. On account of the
burden of heavy NPA, many nationalized banks have little option and they are unable to
lower lending rates competitively, as a wider spread is necessitated to cover cost of NPA in
the face of lower income from off balance sheet business yielding non-interest income.

The following working results of SBI Group an identified well managed nationalized banks
for the last two years and for the first nine months of the current financial year, will be
revealing to prove this statement.

Non-interest income fully absorbs the operating expenses of this banks in the currentfinancial
year for the first 9 months. In the last two financial years, though such income has
substantially covered the operating expenses (between 80 to 90%) there is still a deficit left.

43
The strength of SBI Group is indentified by the following positive feature:

1. It's sizeable earnings under of non-interest income substantially/totally meets itsnon-

interest expenses.

2. Its obligation for provisioning requirements is within bounds. (Net NPA/NetAdvances is

1.92%)

It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year
ended March, 2001, as published by RBI in its Report on trends and progress of banking in
India.

Interest on Recapitalization Bonds is a income earned form the Government, who had issued
the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout
package. The statistics above show the other weaknesses of the nationalised banks in addition
to the heavy burden they have to bear for servicing NPA by way of provisioning and holding
cost as under:

 Their operating expenses are higher due to surplus manpower employed. Wage
costs total assets is much higher to PSBs compared to new private banks or foreign
banks.
 Their earnings from sources other than interest income are meagre. This is due to
failure to develop off balance sheet business through innovative banking products.

2. Impact on Liquidity of the SBI Group

Though SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines,the
facts that their net NPA in the average is as much as 7% is a potential threat for them.

RBI has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA
within limits of tolerance the SBI Group are holding an uncomfortable burden at 7.1% as at
March 2001. They have not been able to build additional capital needed for business

44
expansion through internal generations or by tapping the equity market, but have resorted to
II-Tier capital in the debt market orlooking to recapitalistion by Government of India.

3. Impact on Outlook of Bankers towards Credit Delivery

The fear of NPA permeates the psychology of bank managers in the SBI Group inentertaining
new projects for credit expansion. In the world of banking the concepts ofbusiness and risks
are inseparable. Business is an exercise of balancing between risk and reward. Accept
justifiable risks and implements de-risking steps. Without accepting risk, there can be no
reward. The psychology of the banks today is to insulate themselves with zero percent risk
and turn lukewarm to fresh credit. This has affected adversely credit growth compared to
growth of deposits, resulting in a low C/D Ratio around 50 to 54% for the industry.

The fear psychosis also leads to excessive security-consiousness in the approach towards
lending to the small and medium sized credit customers. There is insistence on provision of
collateral security, sometimes up to 200% value of the advance, and consequently due to a
feeling of assumed protection on account of holding adequate security (albeit
overconfidence). a tendencytowards laxity in the standards of credit appraisal comes to the
fore. It is well know that the existence of collateral security at best may convert the credit
extended to productive sectors into an investment against real estate, but will not prevent the
account turning into NPA. Further blocked assets and real estate represent the most illiquid
security and NPA in such advances has the tendency to persist for a long duration.

SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an
urgent solution for handling this hovering threat.

4. Impact on Productivity:
High level of NPAs effect the productivity of the banks by increasing the cost of fundsand by
reducing the efficiency of banks employees. Cost of funds is increased becausedue to non-
availability of sufficient internal sources they have to rely on external sourcesto fulfill their
future financial requirements. Productivity of employees is also reducedbecause it keeps staff
busy with the task of recovery of overdue. Instead of devoting time for planning for
development through more credit and mobilization of resources thebranch staff would

45
primarily be engaged in preparing a large value of returns and statements relating to sub-
standard, doubtful and loss assets, preparing proposal for filing of suits, waivement of legal
action, compromise, write off or in preparing DICGC claim papers etc.

5.Impact on other Variables:

High level of NPAs also leads to squeezing of interest spread, when asset becomes anNPA
for the first time it adversely affects the spread by not contributing to the interestincome and
from the second year onwards it will have its impact on the bottom line of the balance sheet
because of provisioning to be made for it and not have incremental effect on the spread.

Now a days Govt. does not encourage liberal capital support to be given to banks. Banks are
required to bring their own capital by issuing share to the public, whereas high level of NPAs
leads to lower profits hence less or no profits available for equity shareholders hence lower
EPS and fall in the value of share. During the year 2001-02 share of 12 public sector banks
were traded on the NSE out of which share value of three PSBs have decreased. Low market
value of shares has also forced the banks to borrow heavily debt market to build Tier II
capital to meet capital adequacy norms, putting severe pressure on their profit margin

6. Qualitative aspects of the Micro Level Impact of NPAs:

High incidence of loan defaults shakes the confidence of general public in the soundness of
banking setup and indirectly effects the capacity of the banking system to mop up the
deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust of
foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened bi Indian
banks or confine their transaction to top Indian banks only. Moreover, it puts negative effect
on granting of autonomy to PSBs whereas it is must for banks in this competitive
environment. Banks having positive net profits for the last three years, Net NPA level below
9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to be fulfilled to get
autonomous status, which becomes difficult in the situation of huge level of NPAs.

Inadequate recovery also inhibits the banks to draw refinance from higher levelagency. The
eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to
demand in respect of direct, medium and long term loans for agriculture and allied activities.

46
It implies that refinance facility would be progressively reduced depending on the position of
NPAs and also on the No. of years in which a banks branch remains in a particular category
of default. Due to fear of NPAs banks are being taken away from the basic function for which
these were established it is becoming more & more risky and less remunerative. They are
floating their subsidiaries to manage mutual funds, factoring, insurance business, Good
money is spent to recover bad money. Deterioration in the quality of loan assets and inability
to come with new products makes the Indian banks uncompetitive globally. Due to high cost,
they cannot reduce lending rate to meet the economy's demand of low lending rate. It is also
biggest threat for capital account convertibility.

7. Some areas of Macro-Economic Impact:

It is not only the banks which are affected higher level of NPAs but it is the economy as a
whole which pays for it. Banks are not putting enough resource in lending due to fear of
default. Once the credit to various sectors of the economy slow down, the economy is badly
hit. There is slowdown in growth in GDP, industrial output and fall in the profitmargins of
the corporate and consequent depression in the market. Further high level of NPAs can result
in adding to the inflationary potential in the economy and eroding the viability of the credit
system as a whole.

Not only this, burden of NPAs is to be borne by the society as a whole. When
capital support is given to PSB on A/c of losses booked and/ or erosion of capital due to
NPAs, it comes out of either Govt. budgetary resources or from the public as per
Liberalization policy, whether this money is from tax revenues or from the hard earned
saving of the investing public, in fact, the society is bearing the cost of these NPAs.
Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is in its hand.
Any dividend declared would have gone to the Govt. and which can be spent on the welfare
and development program.

47
3.8 EARLY SYMPTOMS

By which one can recognize a performing asset turning ti to non- performing asset four
categories of early symptoms

1. Financial
 Non- payment of the very first installment in case of term loan.
 Bouncing of cheque due to insufficient balance in the accounts.
 Irregularity in installment.
 Irregularity of operations in the accounts.
 Unpaid overdue bills.
 Declining current ratio.
 Payment which does not cover the interest and principal amount of that
installment.
 While monitoring the accounts it is found that principal amount is diverted to
sister concern or parent company.

2. Operational and physical:

 If information is received that the borrower has either initiated the process of
winding up or are not doing the business.
 Overdue receivables.
 Stock statement not submitted on time.
 External non- controllable factor like natural calamities in the city where
borrower conduct his business.
 Frequent changes in plan.
 Nonpayment of wages.

48
 3. Attitudinal changes:
 Use for personal comfort, stocks and shares by borrowers.
 Avoidance of contact with bank.
 Problem between partners.

4. Others:
 Changes in government policies.
 Death of borrowers.
 Competition in the market.

3.9 PREVENTIVE MEASURES FOR NPA:

 Early Recognition of the Problem:-

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too
late to retrieve the situation- both in terms of rehabilitation of the project and recovery of
bank’s 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 promoter’s intention, banks are convinced of a turnaround within a
scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to
facilitate winding up/ selling of the unit earlier, so asto 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 has intelligent inputs with
regard to promoters’ sincerity, and capability to achieve turnaround. Basedon this objective

49
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 many
accounts slipping into NPA category.

 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 promoter’s commitment, has to be adequate in terms of extend of
additional funding and relaxations etc. under the restructuring exercise. The package of
assistance may be flexible and bank may look at the exit option.

 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 unit’s
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

50
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.

 Multiple Financing:-
I. During the exercise for assessment of viability and restructuring, a
Pragmatic and unified approach by all the lending banks/ FIs as also
sharing of all relevant information on the borrower would go a long way
toward overall success of rehabilitation exercise, given the probability of
success/failure.

II. In some default cases, where the unit is still working, the bank should
make sure that it captures the cash flows (there is a tendency on part of
the borrowers to switch bankers once they default, for fear of getting their
cash flows forfeited), and ensure that such cash flows are used for working
capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the
consortium, may not be allowed to offer credit facilities to such defaulting
clients. Current account facilities may also be denied at non-consortium
banks to such clients and violation may attract penal action. The Credit
Information Bureau of India Ltd.(CIBIL) may be very useful for
meaningful information exchange on defaulting borrowers once the setup
becomes fully operational.

III. In a forum of lenders, the priority of each lender will be different. While
one set of lenders may be willing to wait for a longer time to recover its
dues, another lender may have a much shorter timeframe in mind. So it is
possible that the letter categories of lenders may be willing to exit, even a t
a cost – by a discounted settlement of the exposure. Therefore, any plan
for restructuring/rehabilitation may take this aspect into account.

51
 IV. Corporate Debt Restructuring mechanism has been institutionalized in
2001 to provide a timely and transparent system for restructuring of the
corporate debt of Rs. 20 crore and above with the banks and FIs on a
voluntary basis and outside the legal framework. Under this system, banks
may greatly benefit in terms of restructuring of large standard accounts
(potential NPAs) and viable sub-standard accounts with
consortium/multiple banking arrangements.

3.10 GUIDELINES BY RBI

Guidelines of Government and RBI for Reduction of NPAs

Compromise settlement schemes:

The RBI/Government of India have been constantly goading the banks to take steps
forarresting the incidence of fresh NPAs and have also been creating legal and
regulatoryenvironment 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 RBIin
July 1995 continues to be in place. Banks are free to design and implement their ownpolicies
for recovery and write-off incorporating compromise and negotiated settlementswith the
approval of their Boards, particularly for old and unresolved cases falling underthe NPA
category. The policy framework suggested by RBI provides for setting up of anindependent
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
nondiscretionary 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].

52
Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 croreand
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]. An OTS
Scheme covering advances of Rs. 25000 and below continues to be inoperation and
guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister
providing for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal
farmers are being drawn up.

LokAdaltas:

LokAdalats help banks to settle disputes involving accounts in 'doubtful" and "loss"category,
with outstanding balance of Rs. 5 lakh for compromise settlement underLokAdalats. Debt
Recovery Tribunals have now been empowered to organize LokAdalats to decide on cases of
NPAs of Rs. 10 lakhs and above. The public sectorbanks had recovered Rs. 40.38 crore as on
September 30, 2001, through the forum ofLokAdalat. The progress through this channel is
expected to pick up in the comingyears particularly looking at the recent initiatives taken by
some of the public sectorbanks and DRTs in Mumbai.

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 attachdefendant's property/assets before
judgement, penal provisions for disobedience ofTribunal's order or for breach of any terms of
the order and appointment of receiverwith powers of realization, management, protection and
preservation of property areexpected to provide necessary teeth to the DRTs and speed up the
recovery of NPAsin the times to come.Though there are 22 DRTs set up at major centres in
the country with AppellateTribunals located in five centres viz. Allahabad, Mumbai,
Delhi,CalcuttaandChennai, they could decide only 9814 cases for Rs. 6264.71 crore
pertaining to publicsector banks since inception of DRT mechanism and till September 30,

53
2001. Theamount 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 thebanks to institute
appropriate documentation system and render all possible assistanceto the DRTs for speeding
up decisions and recovery of some of the well collateralized NPAs involving large amounts. I
may add that familiarisationprogrammes have beenoffered in NIBM at periodical intervals to
the presiding officers of DRTs inunderstanding the complexities of documentation and
operational features and otherlegalities applicable of Indian bankingsystem. RBI on its part
has suggested to theGovernment to consider enactment of appropriate penal provisions
againstobstruction by borrowers in possession of attached properties by DRT Receivers,
andnotify borrowers who default to honour the decree passed against them.

Circulation of information on defaulters:The RBI has put in place a system for periodical
circulation of details of willfuldefaults of borrowers of banks and financial institutions. This
serves as a caution listwhile considering requests for new or additional credit limits from
defaulting borrowing units and also from the directors/proprietors/partners of these entities.
RBIalso publishes a list of borrowers (with outstanding aggregating Rs. 1 croreandabove)
against whom suits have been filed by banks and FIs for recovery oftheir funds, as on 31st
March every year. It is our experience that these measures hadnot contributed to any
perceptible recoveries from the defaulting entities. However,they serve as negative basket of
steps shutting off fresh loans to these defaulters. Istrongly believe that a real breakthrough
can come only if there is a change in therepayment psyche of the Indian borrowers

Recovery action against large NPAs:

After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBIhad
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.

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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 beenheadquartered in IDBI, Mumbai and a
Standing Forum and Core Group foradministering the mechanism had already been put in
place. The experiment howeverhas not taken off at the desired pace though more than six
months have lapsed sinceintroduction. As announced by the Hon'ble Finance Minister in the
Union Budget2002-03, RBI has set up a high level Group under the Chairmanship of
ShriVepaKamesam, Deputy Governor, RBI to review the implementation procedures of
CDRmechanism and to make it more effective. The Group will review the operation of
theCDR Scheme, identify the operational difficulties, if any, in the smoothimplementation of
the scheme and suggest measures to make the operation of thescheme more efficient.

Credit Information Bureau:

Institutionalisation of information sharing arrangements through the newly formedCredit

Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering
therecommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise thescheme
of information dissemination on defaults to the financial system. The mainrecommendations
of the Group include dissemination of information relating to suitfiledaccounts regardless of
the amount claimed in the suit or amount of credit grantedby a credit institution as also such
irregular accounts where the borrower has givenconsent for disclosure. This, I hope, would
prevent those who take advantage of lackof system of information sharing amongst lending
institutions to borrow largeamounts against same assets and property, which had in no small
measurescontributed to the incremental NPAs of banks.

Proposed guidelines on willful defaults/diversion of funds:

RBI is examining the recommendation of Kohli Group on willful defaulters. It isworking out
a proper definition covering such classes of defaulters so that creditdenials to this group of

55
borrowers can be made effective and criminal prosecution canbe made demonstrative against
willful defaulters.

Corporate Governance:

A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by theReserve
Bank to review the supervisory role of Boards of Banks and financialinstitutions and to
obtain feedback on the functioning of the Boards vis-à-viscompliance, transparency,
disclosure, audit committees etc. and makerecommendations for making the role of Board of
Directors more effective with aview to minimising risks and overexposure. The group is
finalising itsrecommendations shortly and may come out with guidelines for effective control
andsupervision by bank boards over credit management and NPA prevention measures.

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 dueswithout
the intervention of courts or tribunals. The Security Interest (Enforcement)Rules, 2002 has
also been notified by Government to enable Secured Creditors toauthorise their officials to
enforce the securities and recover the dues from theborrowers. As on June 30, 2004, 27
public sector banks had issued 61, 263 noticesinvolving outstanding amount of Rs. 19,744
crore, and had recovered an amount ofRs. 1,748 crore from 24,092 cases.

3.11 PROBLEMS LOAN RECOVERY

1. Inadequate security and Erosion in value of security:

Generally, banks tend to find that there is a major gap in the valuation of the security,as
carried out at the time of providing the loan and at the time of loan recovery. Thevalue of the
security has generally deteriorated over the period and according toexperts, it may further
deteriorate by almost 10-50% if quick action is not taken for itsimmediate sale.

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2. Political interferences:

Political interference in the day -to-day functioning of public sector banks created anumber of
problems for them. The populist policies of the national level politicians,such as waiver in
repayment only added to these problems.

3. Slow legal procedure:

Before the establishment of DRTs in 1993, the banks had to approach the normalcourts to
recover their dues. There were provisions under various acts whichhampered the smooth
takeover and sale of secured assets. The legal process couldtake years to be completed, with
the borrower having ample scope for delaying thetakeover of assets. A number of loopholes
provided the borrower with opportunitiesto delay or ignore repayment of loans. During this
period, it was said by someunscrupulous businessmen that - "there is no difference between
equity and debt – younever have to repay either of them ".

4. Swamping of DRTs with cases:

Once DRTs were established to quicken the pace of recovery procedures, the pace ofrecovery
improved quite a bit. However, the DRTs were soon drowned in the everincreasing number
of cases. The pending number of cases with the DRTs increasedmanifold during the period
1993-2002.

5. Misuse of BIFR/SICA:

This was one of the favourite methods of willful defaulters to delay repayment. If
thedefaulter's company is declared sick and taken for financial reconstruction underBIFR, it
is not possible to undertake any recovery proceeding against the company.The procedure of
financial reconstruction can take a number of years together,thereby delaying recovery to a
great extent.

57
6. Transfer of property Act, English mortgage:

Under provisions of Section 69 of Transfer of Property Act, mortgagee can takepossession of

mortgaged property and sell the same without the intervention of theCourt only in the case of
English Mortgage. In addition, mortgagee can takepossession of mortgaged property where
there is specific provision in mortgage deedand it is situated in the towns of Mumbai, Kolkata
and Chennai only. In other cases,intervention of the court is required.However, this is very
slow and time consuming process and by the time bank /FI isable to get possession; the asset
either does not exist or has become valueless.

58
CHAPTER- 4

59
4.1 DATA ANALYSIS AND INTERPRETATION

STATE BANK OF INDIA

The objective of this analysis is to know the position of SBI in terms of total Assets. From the
time period from 2010 to 2014. A firm’s total assets include all current and fixed assets.
TOTAL ASSET

TABLE 1

YEARS 2010 2011 2012 2013 2014

TOTAL 10534.13 12237.36 13355.19 15662.61 17922.35

ASSET(RS.
In billons)

CHART 1

TOTAL ASSETS
20000

15000

10000
Rs. In billions
5000

0
2010 2011 2012 2013 2014

INTERPRETATION
Above graph show that total assets of SBI is increased in 2011 by 1703.23 billion, in 2014
increased by 2259.74 billion. So assets of the SBI bank increased from last five year.

60
RATIO ANALYSIS:The relationship between two related items of financial is known as
ratio. A ratio is just one number expressed in terms on another. The ratio is customarily
expressed in there 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 expressed in terms
of rate.
The use of ratio become increasingly popular during the last few years only. Originally, the
bankers used the current ratio to judge the capacity of borrowings business enterprises to
repay the loan and make regular interest payments. Today it has assumed to be important
tools that anybody connected with the business turns to ratio for measuring the financial
strength and earning capacity of business.

Gross NPA Ratio:

Gross NPA Ratio is the ratio of gross advances of the Bank. Gross 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 NPAs Ratio = Gross NPAs *100

Gross Advances

TABLE 2

YEAR GROSS NPA GROSS GROSS NPA

(IN CRORE) ADVANCES (IN RATIO
CR.)
2010 61605.35 3.05
2019847.54
2011 51189.39 1560652.134 3.28
2012 39676.46 893613.96 4.44
2013 25326.29 533185.052 4.75
2014 19534.89 394644.24 4.95

61
CHART 2

GROSS NPA RATIO

6

3
Rs. In crores

0
2010 2011 2012 2013 2014

INTEPRETATION

The above table and graph makes it very clear that the average gross NPA of SBI is not very
satisfactory. It has seem that the gross NPA which was 3.05% in 2010 increased every year
and finally reached 4.95% in 2014. It seems that SBI need to take more care and follow ideal
norms of granting advances, so that the recovery is satisfactory leading to lower gross NPA.

62
NET NPA RATIO

The net NPA percentage is the ratio of NPA to net advances in which is to be deducted from
the gross advances. The provision is to be made for NPA account. The formula for that is.

Net NPA Ratio = Net NPAs *100

Net Advances

TABLE 3

YEAR NET NPA NET ADVANCES NET NPA RATIO

2010 10870.17 631986.63 1.72

2011 12346.89 757477.91 1.63
2012 15818.85 869167.58 1.82
2013 21956.48 1045546.67 2.10
2014 31096.07 1209963.81 2.57
CHART 3

NET NPA RATIO

3
2.5
2
1.5
Series 1
1
0.5
0
2010 2011 2012 2013 2014

63
INTERPRETATION

The above graph presents the NPA ratio of SBI bank. It can be noticed that the NPA ratio
was decreased in 2011 by 0.9 crore. After that it is continuously increased. The bank had
failed to make sufficient provisions against NPA.

TABLE 4

YEAR ADVANCES INCREASE/ GROSS NPA INCREASE/

( Rs. In billion) DECREASE Rs. In crore) DECREASE
PERCENTAGE PERCENTAGE
2010 6319.14 --- 19534.89 ---
2011 7567.19 19.75 25326.29 26.65
2012 8675.79 14.65 39676.46 56.66
2013 10456.17 20.52 51189.39 29.017
2014 12098.29 15.70 61605.35 20.35
(source- annual report)

INTERPRETATION

In this table we can see that increase in gross NPA is not because of increase in advances.
There is another possibility of increasing in NPA may be this is because of poor credit system
in bank.

CAPITAL ADEQUACY RATIO

The bank manages and maintains capital as a cushion against risk of problem losses and to
protect its depositors and creditors. The future capital requirement of the bank is projected as
a part of its annual business plan, in accordance with its business strategy. In calculating the
capital requirements of the banks, broad parameters viz. balance sheet composition, portfolio
mix, growth rate and relevant discounting are considered. In addition, views regarding market

64
behavior of interest rate and liquidity positions are also taken into account. Further, the loan
composition and rating matrix is factored in to reflect precision in projections. The New
Capital Adequacy Framework (NCAF) of RBI stipulates the methodology for computation of
CRAR which is a ratio of the total capital of the bank to its risk adjusted assets. The CRAR
for the bank is calculated on a quarterly basis and credit, market and operational risks are
considered to arrive at the ratio. The bank has adopted the standardized approach for credit
risk, the Standardized Measurement Method (SMM) for market risk and the Basic Indicator
Approach (BIA) for operational risk. The position of the CRAR of the bank is as follow.

TABLE 5

YEAR CAPITAL ADEQUACY

RATIO
2010 13.39
2011 11.98
2012 13.86
2013 12.92
2014 12.96

CHART 5

CAPITAL ADEQUACY RATIO

15

14

13
CAPITAL ADEQUACY RATIO
12

11
2010 2011 2012 2013 2014

(source- annual report)

65
INTERPRETATION

Each bank needs to create the capital reserve to compensate the non- performing assets. Here,
SBI has shown better capital adequacy ratio with 13.86% in 2012as compared to 11.98% in
2011, 12.92% in 2013, 12.96% in 2014 and 13.39 in 2010. The capital adequacy ratio is
important for them to maintain as per the regulation. Each bank needs to create the capital
reserve to compensate the non- performing assets.

PROVISION RATIO

Provision are to be made for to keep safety the NPA, and it directly effect on the gross profit
of the banks. The provision ratio is nothing but total provision held for NPA to gross NPA of
the banks. The formula for that is:

Provision Ratio = Total Provision *100

Gross NPAs

(Additional Formula: Net NPA = Gross NPA- Provision

Therefore, provision = Gross NPA – Net NPA)

TABLE 6

YEAR TOTAL GROSS NPA PROVISION

PROVISIONS (IN CR.) RATIO
(IN CR.)
2010 9155 61605.35 14.86
2011 17071 51189.39 33.35
2012 19866 39676.46 50.07
2013 16977 25326.29 108.61
2014 21218 19534.89 67.03

66
CHART 6

PROVISION RATIO
120

100

80

60
PROVISION RATIO

40

20

0
2010 2011 2012 2013 2014

(source- annual report)

INTERPRETATION

This ratio indicates the degree of safety measures adopted by the banks. It has direct bearing
on the profitability, dividend and safety of shareholders’ fund, if the provision ratio is less, it
indicates that the banks has made under provision. The highest provisions ratio is showed by
SBI is 108.61% in 2013 as compared to 14.86% in 2010, 33.35% in 2011, 50.07% in 2012
and 67.03% in 2014.

67
ANALYSIS BASED ON QUESTIONNAIRE

Q.1 according to you what is NPA?

TABLE 7

What is NPA? RESPONDENT PERCENTAGE

A. When an assets ceases to 5 20%
generate income from bank
B. if the customers do not pay 18 72%
principal and interest for a
certain period of time (90
days) ,it can be called as
NPA
C. if periodical income is not 2 8%
generated for lender of
money ,it is called as NPA

CHART 7

WHAT IS NPA
80%
70%
60%
50%
40%
PERCENTAGE
30%
20%
10%
0%
a. When an asset b. If the customer c If periodical
ceases to generate do not pay principal income is not
income for the and interest for a generated from the
bank. certain period of borrower of money
time (90 days) it can it is called as NPA.
be called as NPA

68
INTERPRETATION

According to above chart 72 percentage respondent said that,If the customers do not pay
principal and interest for a certain period of time (90 days) ,it can be called as NPA . 20
percentage said that when an asset ceases to generate income from the bank and only 8
percentage said that if periodical income is not generated from the borrower of money it is
called as NPA.

Q. 2 what is the percentage of NPA in your particular branch?

TABLE 8

Percentage of NPA RESPONDENT PERCENTAGE

A.1-4% 20 80%
B.4-7% 5 20%
C. 7-10% 0 0
D. 10% and above 0 0

CHART 8

percentage of NPA
100%
50%
0% PERCENTAGE
1-4% 4-7% 7-10% 10% and
above

69
INTERPRETATION

80 % respondent said that percentage of NPA in their bank is 1-4%, and other 20 %
respondent said that percentage of NPA in their bank is 4-7 %.

Q.3 what is trend of NPA in your bank ?

TABLE 9

TREND OF NPA RESPONDENT PERCENTAGE

A. highly decreasing
B. slowly decreasing
C. constant
D. slowly increasing
E. highly increasing
1 4%
15 60%
3 12%
5 20%
1 4%

CHART 9

TREND OF NPA
70%

60%

50%

40%

30% PERCENTAGE

20%

10%

0%
highly slowly constant slowly highly
decreasing decreasing increasing increasing

70
INTERPRETATION

60% of the respondent have said that the NPA in their branch is slowly decreasing, 20% have
said that NPA is slowly increasing, 12% of respondent have said that NPA is constant, 4%
have said that NPA is highly increasing and highly decreasing.

Q.4 According to your opinion, What are the main causes of NPA?

TABLE 10

CAUSES OF NPA RESPONDENT PERCENTAGE

A. Willful effect 6 24%
B. Lack of monitoring 0 0
C. Lack of persuasion 0 0
D. No risk assessment 0 0
E. Mismanagement of 3 12%
fund borrowers
F. Delay in legal 1 4%
proceeding
G. All the above 15 60%
CHART 10

CAUSES OF NPA
70%
60%
50%
40%
30%
20%
10% PERCENTAGE
0%

71
INTERPRETATION

60% of respondent have said all the above mentioned points are causes of NPA, 24%
respondent have said that willful effect is the cause of NPA. 12% have said that
mismanagement of funds by borrowers and 4% have said that delay in legal proceedings is
the cause of NPA.

Q. 5 What are the steps to be taken by bank to control NPA?

TABLE 11

STEPS TO BE TAKEN RESPONDENT PERCENTAGE

A. Caution and care 2 8%
during loan processing
B. Strengthening of 0 0%
recovery cell
C. Vigorous follow up at 0 0%
branch level
D. Out of court 0 0%
settlement
E. All the above 23 92%

72
CHART 11

100%
90%
80%
70%
60%
50%
40%
30%
20%
10% Series1
0%

INTERPRETATION

92% respondent have said that all the above mentioned steps can be taken to reduced NPA,
and only 4% respondent have said to reduce NPA caution and care should be done during
loan processing.

73
Q. 6 What methods you have planned for measurement of NPA?

TABLE 12

METHOD OF RESPONDENT PERCENTAGE

MEASUREMENT OF NPA
A. Early stage 21 84%
B. Alert stage 4 16%
C. Advance stage 0 0%

CHART 12

methods for measurement of NPA

90%

80%

70%

60%

50%

40% percentage

30%

20%

10%

0%
early stage alert stage advance stage

INTERPRETATION

84% respondent follow the early stage method while, 16% prefer alert stage method.

74
Q. 7 what measures for recovery of NPA are adopted by your bank?

TABLE 13

MEASURE FOR RESPONDENT PERCENTAGE

RECOVERY OF NPA
Persuasion 4 16%
Out of court settlement 5 20%
Legal actions 4 16%
All the above 12 48%

CHART 13

MEASURES FOR RECOVERY OF NPA

60%

50%

40%

30%
percentage
20%

10%

0%
persuasionj out of court legal actions all the above
settlement

INTERPRETATION

20% and 16% respondent have voted out of court settlement and legal actions, while 16%
feel NPA can be recovered by persuasion. 48% of the respondent feel that all the methods are
equally important for the recovery of NPA.

75
Q. 8 normally, who is held responsible for non- recovery of outstanding credit?

TABLE 14

RESPONSIBLE RESPONDENT PERCENTAGE

Loan sanctioning officer 14 56%
Dealing clerk 0 0%
Branch manager 0 0%
None of the above 6 24%
Any other 5 20%

CHART 14

RESPONSIBLE FOR NON-RECOVERY OF OUTSTANDING

CREDIT
60%

50%

40%

30%
percentage
20%

10%

0%
loan dealing clerk branch none of the any other
sanctioning manager above
officer

INTERPRETATION

56% of respondent feels that loan sanctioning manager is responsible for non- recovery of
outstanding credit, while 24% respondent have said none of these are responsible for non-
recovery of outstanding loan and 20% have said any other are responsible- like loan
maintenance officer and loan dealing or recovery manger .

76
Q. 9 How does your bank realize money from a NPA(In realizing the amount whom does
your bank appoint)

TABLE 15

APPOINMENT MADE FOR RESPONDENT PERCENTAGES

REALIZING MONEY
Recovery agent 9 36%
Files suit 5 20%
Meeting with borrowers 9 36%
Appointment of arbitrator 2 8%

CHART 15

APPOINMENT MADE FOR REALIZING AMOUNT

40%
35%
30%
25%
20%
15% percentage
10%
5%
0%
recovery agent files suit meeting with appoinment of
borrowers arbitrator

INTERPRETATION

36% of respondent have voted for recovery agent and meeting and persuading the borrower
to pay the amount. While 20 % of respondent are in the favor of filing a suit and 8% have
said for appointing of arbitrator.

77
Q. 10 Do you think that the law acts as a stumbling block to recover NPA?

TABLE 16

LAW ACTS AS A RESPONDENT PERCENTAGE

STUMBLING BLOCK
Yes 16 64%
no 9 36%

CHART 16

LAW ACTS AS A STUMBLING BLOCK

70%

60%

50%

40%

percentage
30%

20%

10%

0%
yes no

INTERPRETATION

64% of respondent agree that law acts as a stumbling block for recovering NPA. On the other
hand 36% of the respondent does not feel that law acts as a stumbling block for recovering
NPA.

78
Q. 11 How much time does it take to recover the money from customer?

TABLE 17

TIME TAKEN TO RESPONDENT PERCENTAGE

RECOVER MONEY
Within the time limit 13 52%
Beyond the time limit 12 48%

CHART 17

TIME TAKEN TO RECOVER MONEY

53%

52%

51%

50%

49% percentage

48%

47%

46%
within the time beyond the time
limit limit

INTERPRETATION

52% of the respondent have said that the money recovered from the borrowers within the
time limit by making continues calls, sending notices, and personnel visit. While 48% feel
that the money is not received within the time limit.

79
Q. 12 Do you think that government policies are responsible for NPA?

TABLE 18

GOVERNMENT POLICIES RESPONDENT PERCENTAGE

RESPONSIBLE FOR NPA
yes 19 76%
no 6 24%

CHART 18

GOVERNMENT POLICIES RESPONSIBLE FOR NPA

80%

70%

60%

50%

40%
percentage
30%

20%

10%

0%
yes no

INTERPRETATION

76% of the respondent feels that the government policies are responsible for NPA. While
24% of respondent feels government policies are not responsible for NPA.

80
Q. 13 Which category of loan NPA is largely observed?

TABLE 19

CATETGORY FOR RESPONDENT PERCENTAGE

WHICH NPA IS
LARGELY OBSERVED
Agriculture and SME loan 17 68%
Non agriculture loan 3 12%
Cash credit 1 4%
Over draft 2 8%
Term loan 1 4%
Housing loan 1 4%
CHART 19

CATEGORY FOR WHICH NPA IS LARGELY OBSERVED

80%
70%
60%
50%
40%
30% PERCENTAGE
20%
10%
0%
Agriculture Non Cash credit Over draft Term loan
and SME agriculture
loan loan

INTERPRETATON

NPA is largely observed in agriculture and SME loan(68%), 12% is observed in non-
agriculture loan, 4% in cash credit, 8% in over draft and 4% in term loan.

81
Q. 14 Do you think political interference also affects NPA?

TABLE 20

POLITICAL RESPONDENT PERCENTAGE

INTERFERANCE
AFFECTS NPA
YES 19 76%
NO 6 24%

CHART 20

POLITICAL INTERFERANCE AFFECTS NPA

80%

70%

60%

50%

40%
percentage
30%

20%

10%

0%
yes no

INTERPRETATION

76% respondent feel that political interference is an important factor affecting the NPA of the
bank, while 24% disagree to the same.

82
Q. 15 Are you in favor of out of court settlement?

TABLE 21

OUT OF COURT RESPONDENT PERCENTAGE

SETTLEMENT
Yes 22 88%
no 3 12%

CHART 21

OUT OF COURT SETTLEMENT

100%
90%
80%
70%
60%
50%
percentage
40%
30%
20%
10%
0%
yes no

INTERPRETATION

88% of the respondent are in favor of out of court settlement. According to them small
amount can be recovered by this method instead of going for the legal procedures as they are
time taking. While 12% disagree with the same.

83
Q. 16 Don’t you think that out of court settlement may develop a tendency among bank
borrowers to make deliberate attempt of default and then ask for concession?

TABLE 22

OPTIONS RESPONDENT PERCENTAGE

Yes 5 20%
no 20 80%

CHART 22

DEVELOPING A TENDENCY OF DIFFERENT ATTEMPT OF

DEFAULT AMONG BORROWERS
90%
80%
70%
60%
50%
40% percentages

30%
20%
10%
0%
yes no

INTERPRETATION

80% of the respondent feel that out of court settlement may not develop a tendency
amongborrowers to make deliberate attempt of default and then ask for concession. While
20% agree to the same.

84
Q. 17 Credit monitoring system in Indian banking industry. Is it adequate?

Table 23

ADEQUACY OF CREDIT RESPONDENT PERCENTAGE

MONITORING SYSTEM
Yes 15 60%
no 10 40%

CHART 23

ADEQUACY OF CREDIT MONITORING SYSTEM

70%

60%

50%

40%

percentages
30%

20%

10%

0%
yes no

INTERPRETATION

60% of the respondent agree to the fact that the present monitoring system in India is
adequate while 40% disagree, accounting to them it can be further improved.

85
Q. 18 Do you feel that improvement in this system is necessary?

TABLE 24

NECESSITY OF RESPONDENT PERCENTAGES

IMPROVEMENT
Yes 15 60%
no 10 40%

CHART 24

NECESSITY OF IMPROVEMENT
70%

60%

50%

40%

percentages
30%

20%

10%

0%
yes no

INTERPRETATION

60% of that respondent said that it is necessary to bring improvement in this system of
monitoring while 40% are satisfied with the present system.

86
Q. 19 Do you favor appointment of external recovery agents to recover NPA?

TABLE 25

APPOINTMENT OF RESPOMDENT PERCENTAGE

EXTERNAL RECOVERY
AGENT
Yes 20 80%
no 5 20%

CHART 25

APPOINTMENT OF EXTERNAL RECOVERY AGENT

90%

80%

70%

60%

50%

40% percentage

30%

20%

10%

0%
yes no

INTERPRETATION

80% of the respondent feel that there is need for the appointment of the external recovery
agents. While 20% agree for the appointment of external agents.

87
Q. 20 Do you feel delay in legal procedure make the recovery procedure difficult?

TABLE 26

DELAY IN LEGAL RESPONDENT PERCENTAGE

PROCEDURES CREATE
DIFFICULTY IN
RECOVERY
YES 15 60%
NO 10 40%
CHART 26

DELAY IN LEGAL PROCDURES CREATE DIFFICULTY IN

RECOVERY
70%

60%

50%

40%
percentage
30%

20%

10%

0%
Yes No

INTERPRETATION:

40% feel that legal procedure take time, but does not create difficulty in recovery of NPA.
While 60% agree to the fact that delays in legal procedure create difficulty.

88
21. Do you favour cash incentive schemes for bank staff for recovery of dues?

TABLE 27

CASH INCENTIVE RESPONDENT PERCENTAGE

SCHEME
YES 24 96%
NO 1 4%

CHART 27

CASH INCENTIVE SCHEME

120%

100%

80%

60%
percentage

40%

20%

0%
yes no

INTERPRETATION:

96% respondent agree to the fact that there should be a cash incentive scheme for the bank
staff for recovery of dues, while 4% of respondent not agree.

89
Q. 22 Are you satisfied with the present cash incentive system?

TABLE 28

SATISFACTION FROM RESPONDENT PER CENTAGE

PRESENT INCENTIVE
SCHEME
Yes 20 80
No 5 20

CHART 28

SATISFACTION FROM PRESENT INCENTIVE SCHEME

90%

80%

70%

60%

50%

40% percentage

30%

20%

10%

0%
yes no

INTERPRETATION:

80% of the respondent are satisfied from the present incentive scheme. While 20% are not
satisfied. Currently, SBI bank provides a cash incentive of

90
Q. How would you assess the progress of NPA management in your bank?

TABLE 29

PROGRESS OF NPA RESPONDENT PERCENTAGE

Poor O 0%
Slow 2 8%
Moderate 12 48%
Good 11 44%

CHART 29

PROGRESS OF NPA
60%

50%

40%

30%
percentage

20%

10%

0%
poor slow moderate good

INTERPRETATION:

48% of the respondent believe that the progress of NPA in SBI bank is moderate. 44% feel
that it is good. 8% have voted for slow.

91
Q. 24 Do you have similar recovery strategy in all sectors and in all geographical regions?

TABLE 30

SIMILAR RECOVERY RESPONDENT PERCENTAGE

STRATEGY
Yes 10 40%
No 15 60%

CHART 30

SIMILAR RECOVERY STRATEGY IN ALL SECTOR ND

GEOGRAPHICAL REGIONS
70%

60%

50%

40%
percentage
30%

20%

10%

0%
yes no

INTERPRETATION:

60% of the respondent said that they do not have similar strategy for all sector and
geographical regions, while 40% said that they have similar strategy for all sector and
geographical regions.

92
Q. 25 From the following strategies, choose which are helpful in reducing NPA.

TABLE 31

STRATEGIES, HELPFUL RESPONDENT PERCENTAGE

IN REDUCING NPA
Securitization of asset 1 4%
Legal recovery 3 12%
Lokadalats 2 8%
Compromise settlement 3 12%
Credit information bureau 4 16%
By adopting proper credit 12 48%
evaluation process
CHART 31

60%
50%
40%
30%
20%
10% percentage
0%
Securitization Legal Lok adalats Compromise Credit By adopting
of asset recovery settlement information proper credit
bureau evaluation
process

INTERPRETATION:48% of respondent said by adopting proper credit evaluation system

NPA can be reduced, 16% said NPA can be reduced by credit information bureau, 12% said
by compromise settlement and legal recovery can be helpful in reducing NPA, 8% said
lokadalat and 4% said by securitization of asset NPA can be reduced.

93
CHAPTER- 5

94
FINDINGS

The asset quality of banks is one of the most important indicators of their financial health. It
also reflects the efficiency of banks credit risk management and the recovery environment.
The SBI bank has shown very good performanve as far as the financial operations are
concerned. But non- performing assets (NPA) has caused some concerns. The NPA has been
continuously increasing this was due to ineffective recovery of bank credit, credit recovery
system, inadequate legal provision etc.

Various steps have been taken by the government to recover and reduce NPAs. Some of them
are:

 Formation of the credit information bureau (India) limited (CIBIL)

 Release of willful Defaulter’s list. RBI also releases a list of borrowers with
aggregate outstanding of Rs. 1 crore and above against whom banks have filed suits
for recovery of their funds.
 Reporting of funds to RBI.
 Norms of lender’s liability- framing of fair practices code with regard to lender’s
liability to be followed by banks, which indirectly prevents accounts turning into
NPAs on account of bank’s own failure.
 Risk assessment and risk management.
 RBI has advised banks to examine all cases of willful default of Rs. 1 crore and above
and file suits in such cases. Board of directors are required to review NPA accounts of
Rs. 1 crore and above with special references to fixing of staff accountability.
 Reporting quick mortality cases
 Special mention accounts for early identification of bad debts. Loans and advances
overdue for less than one and two quarters would come under this category. However,
these accounts do not need provisioning.

95
  Other findings

 1. REASON OF NPA IN BANK

Default by customer
Non-inspection of borrower
Lack of expertise
Imbalance of inventories
Poor credit collection
Lack of trained staff
Lack of commitment to recovery
Change in consumer preference

2 IMPACT OF NPA ON BANK

Govt. Policies
Impact of profitability
Liquidity
Impact on outlook of Banker towards credit delivery
Impact of productivity

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CONCLUSION

A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors.
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.
There is also a general perception that the prescriptions of 40% of net bank credit to
priority sectors have led to higher NPAs, due to credit to these sectors becoming stickly
managers of rural and semi-urban branches generally sanction these loans. 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. Hence selection of right borrowers, viable economic activity, adequate
finance and timely disbursement, correct and use of funds and timely recovery f loans is
absolutely necessary pre conditions for preventing of minimizing the incidence of new
NPAs.

To conclude this study we can say about this report, that

 The NPA is slowly decreasing in SBI

 NPAs represent high level of risk and low level of credit appraisal.
 There are so many preventive measures available those can be adopted to stop an
Asset or A/C becoming NPA.
 There are some certain guidelines made by RBI for NPAs which are adopted by
banks.
 BOP is better in all terms than OBC instead of capital adequacy.

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SUGGESTION

 Credit administration: A 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: We shall keep a close watch on the manner in which NPA
reduction is taking place.

 Cash Recovery: We should also insist that cash recoveries should more than
offset the fresh write-offs in NPAs.

 Perception: The mindset of the borrowers needs to change so that a culture of

proper utilization of credit facilities and timely repayment is developed.

 Financial System: As you are aware, one of the main reason for corporate default
is on account of diversion of funds and corporate entities should come forward of
avoid this practice in the interest of strong and sound financial system.

 Coordinator: 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.

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QUESTIONAIRE

I am pursuing MBA and I am conducting a study on non- performing assets in SBI bank.
Please answer the questions below. Your response in this regard is very valuable for the
success of my project. Also note that the information so revealed will be utilized without
directly disclosing the identity of the concern bank/ officials. Further, the information
provided will be used strictly for academic purposes only.

Name of respondent-

Designation-

Bank name and branch-

1. According to you what is NPA?

a. When an asset ceases to generate income for the bank.
b. If the customer do not pay principal and interest for a certain period of time (90
days) it can be called as NPA
c. If periodical income is not generated from the borrower of money it is called as
NPA.

2. What is the percentage (%) of NPA in your particular branch??

a. 1-4 %
b. 4-7%
c. 7-10%
d. 10% and above

3. What is trend of NPA in your bank?

a. Highly decreasing
b. Slowly decreasing
c. Constant

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 d. Slowly increasing
e. Highly increasing

4. According to your opinion, What are the main causes of NPA?

a. Wilful effect
b. Lack of monitoring
c. Lack of persuasion
d. No risk assessment
e. Mismanagement of funds by borrowers
f. Delay in legal proceedings
g. All the above

5. What are the steps to be taken by bank to control NPA?

a. Caution and care during loan processing
b. Strengthening of recovery cell
c. Vigorous follow up at branch level
d. Out of court settlement
e. All the above

6. What methods you have planned for measurement of NPA?

a. Early stage
b. Alert stage
c. Advance stage

7. What measures for recovery of NPAare adopted by your bank?

a. Persuasion
b. Out of court settlement
c. Legal actions
d. All the above
e. Any other- please specify-

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8. Normally, who is held responsible for non-recovery of outstanding credit?
a. Loan sanctioning officer
b. Dealing clerk
c. Branch manager
d. All of the above
e. None of the above
f. Any other- please specify-

9. How does your bank realise money from a NPA(In realizing the amount whom does
your bank appoint)?
a. Recovery agent
b. Files suit
c. Meeting with borrower
d. Appointment of arbitrator

10. Do you think that the law acts as a stumbling block to recover NPA?
a. Yes
b. No

11. How much time does it take to recover the money from customer?
a. Within the time limit
b. Beyond the time limit.

12 Do you think that government policies are responsible for NPA?

a. Yes
b. No

13For which category of loan NPA is largely observed?

a. Agriculture loans

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 b. Non agriculture loans
c. Cash credit
d. Over draft
e. Term loan
f. Housing loan

14Do you think political interference also affects NPA?

a. Yes
b. No

15Are you in favour of out of court settlement?

a. Yes
b. No

16Don’t you think that out of court settlement may develop a tendency among bank
borrowers to make deliberate attempt of default and then ask for concession?

a. Yes
b. No

17Credit monitoring system in Indian banking industry. Is it adequate?

a. Yes
b. No

18Do you feel that improvement in this system is necessary?

a. Yes
b. No

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19. Do you favour appointment of external recovery agents to recover NPA?

a. Yes
b. No

20 Do you feel delay in the legal procedure make the recovery procedure difficult?

a. Yes
b. No

21 Do you favour cash incentive schemes for bank staff for recovery of dues?

a. Yes
b. No

22 Are you satisfied with the present cash incentives system?

a. Yes
b. No

23 How would you assess the progress of NPA management in your bank?
a. Poor
b. Slow
c. Moderate
d. Good

24 Do you have similar recovery strategy in all sectors and in all geographical regions?
a. Yes
b. No

25 From the following strategies, choose which are helpful in reducing NPA.

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a. Securitization of asset
b. Legal recovery
c. Lokadalats
d. Compromise settlement
e. Credit information bureau
f. By adopting proper credit evaluation process
g. Any other (Please Specify)

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BIBLIOGRAPHY

BOOKS

 Management of Non- performing Assets in Banks by Sugan C Jain

 Managing Non- performing Assets in Banks S.N.Bindani

MAGAZINES

 Investors
 Business India

E- NEWSPAPER

 The Economic Times

 The Business Standard

PUBLISHED MATERIAL

 RBI Guidelines Circulars on Income Recognition and Asset Classification

 Report on Trend and progress of Banking in India 2012- 13

WEBSITES

 WWW.rbi.org.in
 www.google.co.in
 www.wiki.answers.com
 www.wikipedia.com
 www.moneycontrol.com
 www.sbi.com

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