A

PROJECT REPORT
ON

COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR BANKS

SUBMITTED IN PARTIAL FULFILLMENT OF REQUIRMENT OF

PG PROGRAME

Institute of business management and research

Ahmadabad

SUBMITTED BY:
JIGAR J. SONI ( 5 )

Session: 2007-2009

[Comparative analysis on NPA of Private & Public sector Banks] Page 1

 A
PROJECT REPORT
ON

COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR BANKS

SUBMITTED IN PARTIAL FULFILLMENT OF REQUIRMENT OF

PG PROGRAME

Institute of business management and research

Ahmadabad

SUBMITTED BY:
JIGAR J. SONI ( 5 )

Session: 2007-2009

[Comparative analysis on NPA of Private & Public sector Banks] Page 2

 ANNEXURE –A (COVER PAGE)

IBMR- INSTITUTE OF BUSINESS MANAGEMNT & RESEARCH

Code:-2911
Project title:
COMPARATIVE ANALYSIS ON
NON PERFORMING ASSETS
OF PRIVATE AND PUBLIC SECTOR BANKS

By:

Jigar J. Soni
Nirav N. Gusai

A project report submitted in partial fulfillment of the requirement for the

degree of MASTER OF BUSINESS ADMINISTRATION of SIKKIM MANIPAL
UNIVERSITY, INDIA.
Sikkim –Manipal university of Health, Medical and technological Sciences
Distance education wing
Syndicate house
Manipal-576 104

[Comparative analysis on NPA of Private & Public sector Banks] Page 3

ANNEXURE B (STUDENT DECLARATION)

We here by declare that the project report entitled COMPARATIVE ANALYSIS

ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTOR BANKS
submitted in partial fulfillment of the requirements for the degree of masters of
business Administration to Sikkim-Manipal University, India, are our original
work and not submitted for the award of any other degree, diploma, fellowship,
or any other similar title or prizes.

Reg.No: Name
520781709 JIGAR J. SONI

Date:

Place:

[Comparative analysis on NPA of Private & Public sector Banks] Page 4

 ANNEXURE –C (EXAMINER’S CERTIFICATE)

The project report by Jigar Soni & Nirav Gusai on COMPARATIVE

ANALYSIS ON NON PERFORMING ASSETS OF PRIVATE AND PUBLIC
SECTOR BANKS is approved and is acceptable in quality and form.

Internal examiner External examiner

Name:- Name:-
Qualification: - Qualification:-
Designation: - Designation:-

[Comparative analysis on NPA of Private & Public sector Banks] Page 5

 ANNUXERE – D (UNIVERSITY STUDY CENTRE CERTIFICATE)

This is to certify that the project report entitled COMPARATIVE ANALYSIS ON

NON PERFORMING ASSETS OF PRIVATE AND PUBLIC SECTORS BANKS
Submitted in partial fulfillment of the requirement for the degree of MASTER OF
BUSINESS ADMINISTRATION of SIKKIM MANIPAL UNIVERSITY of Health, Medical
and Technological science.

Jigar Soni and Nirav Gusai has worked under my supervision and that no
part of this report has been submitted for the award of any other degree,
Diploma , fellowship or other similar titles or prizes and that the work has been
published in any journal or Magazine.

Name Reg. no
Jigar Soni 520781709

Certified

(Guide’s Name and Qualification)

[Comparative analysis on NPA of Private & Public sector Banks] Page 6

ACKNOWLEDGEMENT
With a deep sense of gratitude I express we thanks to all those who have
been instrumental in the development of the project report.

I am also grateful to Institute of Business Management And Research,

Ahmedabad who gave me a valuable opportunity of involving me in real
live business project. I am thankful to all the professors whose positive
attitude, guidance and faith in my ability spurred me to perform well.

I am also indebted to all lecturers, friends and associates for their valuable
advice, stimulated suggestions and overwhelming support without which
the project would not have been a success.

[Comparative analysis on NPA of Private & Public sector Banks] Page 7

INTRODUCTION

The accumulation of huge non-performing assets in banks has

assumed great importance. The depth of the problem of bad debts was
first realized only in early 1990s. The magnitude of NPAs in banks and
financial institutions is over Rs.1,50,000 crores.

While gross NPA reflects the quality of the loans made by

banks, net NPA shows the actual burden of banks. Now it is increasingly
evident that the major defaulters are the big borrowers coming from the
non-priority sector. The banks and financial institutions have to take the
initiative to reduce NPAs in a time bound strategic approach.

Public sector banks figure prominently in the debate not only

because they dominate the banking industries, but also since they have
much larger NPAs compared with the private sector banks. This raises a
concern in the industry and academia because it is generally felt that
NPAs reduce the profitability of a banks, weaken its financial health and
erode its solvency.

For the recovery of NPAs a broad framework has evolved

for the management of NPAs under which several options are provided for
debt recovery and restructuring. Banks and FIs have the freedom to
design and implement their own policies for recovery and write-off
incorporating compromise and negotiated settlements.

[Comparative analysis on NPA of Private & Public sector Banks] Page 8

RESEARCH METHODOLOGY

Type of Research

The research methodology adopted for carrying out the study were

 In this project Descriptive research methodologies were use.

 At the first stage theoretical study is attempted.

 At the second stage Historical study is attempted.

 At the Third stage Comparative study of NPA is undertaken.

Scope of the Study

 Concept of Non Performing Asset
 Guidelines
 Impact of NPAs
 Reasons for NPAs
 Preventive Measures
 Tools to manage NPAs

Sampling plan
To prepare this Project we took five banks from public sector as well as
five banks from private sector.

OBJECTIVES OF THE STUDY

The basic idea behind undertaking the Grand Project on NPA was
to:
 To evaluate NPAs (Gross and Net) in different banks.

 To study the past trends of NPA

[Comparative analysis on NPA of Private & Public sector Banks] Page 9

  To calculate the weighted of NPA in risk management in Banking

 To analyze financial performance of banks at different level of NPA

 To evaluate profitability positions of banks

 To evaluate NPA level in different economic situation.

 To Know the Concept of Non Performing Asset

 To Know the Impact of NPAs

 To Know the Reasons for NPAs

 To learn Preventive Measures

Source of data collection

The data collected for the study was secondary data in Nature.

[Comparative analysis on NPA of Private & Public sector Banks] Page 10

 ((( CONTENTS )))
CHAPTER SUBJECT COVERED PAGE
NO. NO.
1 Introduction to NPAs
2 Research Methodology
 Scope of Research
 Type of Research
 Sources of Data Collection
 Objective of Study
 Data Collection
3 Introduction to Topic
 Definition
 History of Indian Banking
 Non Performing Assets
 Factor for rise in NPAs
 Problem due to NPAs
 Types of NPAs
 Income Recognition
 Reporting of NPAs
4 Provisioning Norms
 General
 Floating provisions
 Leased Assets
 Guideline under special circumstances
5 Impact, Reasons and Symptoms of NPAs
 Internal & External Factor
 Early Symptoms
6 Preventive Measurement
 Early Recognition of Problem
 Identifying Borrowers with genuine Intent

[Comparative analysis on NPA of Private & Public sector Banks] Page 11

  Timeliness
 Focus on Cash flow
 Management Effectiveness
 Multiple Financing
7 Tools for Recovery
 Willful default
 Inability to Pay
 Special Cases
 Role of ARCIL
8 Analysis
 Deposit-Investment-Advances
 Gross NPAs and Net NPAs
 Priority and Non-Priority Sector
9 Finding, Suggestions and Conclusions
10 Bibliography

[Comparative analysis on NPA of Private & Public sector Banks] Page 12

 Introduction to the topic

The three letters “NPA” Strike terror in banking sector and business circle
today. NPA is short form of “Non Performing Asset”. The dreaded NPA
rule says simply this: when interest or other due to a bank remains unpaid
for more than 90 days, the entire bank loan automatically turns a non
performing asset. The recovery of loan has always been problem for
banks and financial institution. To come out of these first we need to think
is it possible to avoid NPA, no can not be then left is to look after the factor
responsible for it and managing those factors.

Definitions:

An asset, including a leased asset, becomes non-performing when it

ceases to generate income for the bank.

A ‘non-performing asset’ (NPA) was defined as a credit facility in respect

of which the interest and/ or instalment of principal has remained ‘past
due’ for a specified period of time.

With a view to moving towards international best practices and to ensure

greater transparency, it has been decided to adopt the ‘90 days’
overdue’ norm for identification of NPAs, from the year ending March 31,
2004. Accordingly, with effect from March 31, 2004, a non-performing
asset (NPA) shall be a loan or an advance where;

 Interest and/ or instalment of principal remain overdue for a

period of more than 90 days in respect of a term loan,

[Comparative analysis on NPA of Private & Public sector Banks] Page 13

  The account remains ‘out of order’ for a period of more than 90
days, in respect of an Overdraft/Cash Credit (OD/CC),

 The bill remains overdue for a period of more than 90 days in

the case of bills purchased and discounted,

 Interest and/or instalment 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 purposes,
and

 Any amount to be received remains overdue for a period of

more than 90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm,

banks have been advised to move over to charging of interest at monthly
rests, by April 1, 2002. However, the date of classification of an advance
as NPA should not be changed on account of charging of interest at
monthly rests. Banks should, therefore, continue to classify an account as
NPA only if the interest charged during any quarter is not serviced fully
within 180 days from the end of the quarter with effect from April 1, 2002
and 90 days from the end of the quarter with effect from March 31, 2004.

[Comparative analysis on NPA of Private & Public sector Banks] Page 14

 HISTORY OF INDIAN BANKING

A bank is a financial institution that provides banking and other financial

services. By the term bank is generally understood an institution that
holds a Banking Licenses. Banking licenses are granted by financial
supervision authorities and provide rights to conduct the most fundamental
banking services such as accepting deposits and making loans. There are
also financial institutions that provide certain banking services without
meeting the legal definition of a bank, a so-called Non-bank. Banks are a
subset of the financial services industry.

The word bank is derived from the Italian banca, which is derived from
German and means bench. The terms bankrupt and "broke" are similarly
derived from banca rotta, which refers to an out of business bank, having
its bench physically broken. Moneylenders in Northern Italy originally did
business in open areas, or big open rooms, with each lender working from
his own bench or table.

Typically, a bank generates profits from transaction fees on financial

services or the interest spread on resources it holds in trust for clients
while paying them interest on the asset. Development of banking industry
in India followed below stated steps.

 Banking in India has its origin as early 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 rates of interest.

[Comparative analysis on NPA of Private & Public sector Banks] Page 15

  Banking in India has an early origin where the indigenous bankers
played a very important role in lending money and financing foreign
trade and commerce. During the days of the East India Company,
was the turn of the agency houses to carry on the banking
business. The General Bank of India was first Joint Stock Bank to
be established in the year 1786. The others which followed were
the Bank Hindustan and the Bengal Bank.

 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 were amalgamated in 1920
and a new bank, the Imperial Bank of India was established in
1921. With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken by the newly
constituted State Bank of India.

 The Reserve Bank of India which is the Central Bank was created
in 1935 by passing Reserve Bank of India Act, 1934 which was
followed up with the Banking Regulations in 1949. These acts
bestowed Reserve Bank of India (RBI) with wide ranging powers for
licensing, supervision and control of banks. Considering the
proliferation of weak banks, RBI compulsorily merged many of them
with stronger banks in 1969.

 The three decades after nationalization saw a phenomenal

expansion in the geographical coverage and financial spread of the
banking system in the country. As certain rigidities and weaknesses
were found to have developed in the system, during the late
eighties the Government of India felt that these had to be

[Comparative analysis on NPA of Private & Public sector Banks] Page 16

 addressed to enable the financial system to play its role in ushering
in a more efficient and competitive economy. Accordingly, a high-
level committee was set up on 14 August 1991 to examine all
aspects relating to the structure, organization, functions and
procedures of the financial system. Based on the recommendations
of the Committee (Chairman: Shri M. Narasimham), a
comprehensive reform of the banking system was introduced in
1992-93. The objective of the reform measures was to ensure that
the balance sheets of banks reflected their actual financial health.
One of the important measures related to income recognition, asset
classification and provisioning by banks, on the basis of objective
criteria was laid down by the Reserve Bank. The introduction of
capital adequacy norms in line with international standards has
been another important measure of the reforms process.

1. Comprises balance of expired loans, compensation and other

bonds such as National Rural Development Bonds and Capital
Investment Bonds. Annuity certificates are excluded.
2. These represent mainly non- negotiable non- interest bearing
securities issued to International Financial Institutions like
International Monetary Fund, International Bank for
Reconstruction and Development and Asian Development Bank.
3. At book value.
4. Comprises accruals under Small Savings Scheme, Provident
Funds, Special Deposits of Non- Government

 In the post-nationalization era, no new private sector banks were

allowed to be set up. However, in 1993, in recognition of the need
to introduce greater competition which could lead to higher
productivity and efficiency of the banking system, new private
sector banks were allowed to be set up in the Indian banking

[Comparative analysis on NPA of Private & Public sector Banks] Page 17

 system. These new banks had to satisfy among others, the
following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located
in a centre which does not have the headquarters of any
other bank; and
(v) The bank will be subject to prudential norms in respect of
banking operations, accounting and other policies as laid
down by the RBI. It will have to achieve capital adequacy
of eight per cent from the very beginning.

 A high level Committee, under the Chairmanship of Shri M.

Narasimham, was constituted by the Government of India in
December 1997 to review the record of implementation of financial
system reforms recommended by the CFS in 1991 and chart the
reforms necessary in the years ahead to make the banking system
stronger and better equipped to compete effectively in international
economic environment. The Committee has submitted its report to
the Government in April 1998. Some of the recommendations of the
Committee, on prudential accounting norms, particularly in the
areas of Capital Adequacy Ratio, Classification of Government
guaranteed advances, provisioning requirements on standard
advances and more disclosures in the Balance Sheets of banks
have been accepted and implemented. The other
recommendations are under consideration.

 The banking industry in India is in a midst of transformation, thanks

to the economic liberalization of the country, which has changed
[Comparative analysis on NPA of Private & Public sector Banks] Page 18
 business environment in the country. During the pre-liberalization
period, the industry was merely focusing on deposit mobilization
and branch expansion. But with liberalization, it found many of its
advances under the non-performing assets (NPA) list. More
importantly, the sector has become very competitive with the entry
of many foreign and private sector banks. The face of banking is
changing rapidly. There is no doubt that banking sector reforms
have improved the profitability, productivity and efficiency of banks,
but in the days ahead banks will have to prepare themselves to
face new challenges.

Indian Banking: Key Developments

1969  Government acquires ownership in major banks
 Almost all banking operations in manual mode
 Some banks had Unit record Machines of IBM for IBR &
Pay roll
1970- 1980  Unprecedented expansion in geographical coverage, staff,
business & transaction volumes and directed lending to
agriculture, SSI & SB sector
 Manual systems struggle to handle exponential rise in
transaction volumes --
 Outsourcing of data processing to service bureau begins
 Back office systems only in Multinational (MNC) banks'
offices

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1981- 1990  Regulator (read RBI) led IT introduction in Banks
 Product level automation on stand alone PCs at branches
(ALPMs)
 In-house EDP infrastructure with Unix boxes, batch
processing in Cobol for MIS.
 Mainframes in corporate office

1991-1995  Expansion slows down

 Banking sector reforms resulting in progressive de-
regulation of banking, introduction of prudential banking
norms entry of new private sector banks
 Total Branch Automation (TBA) in Govt. owned and old
private banks begins
 New private banks are set up with CBS/TBA form the start

1996-2000  New delivery channels like ATM, Phone banking and

Internet banking and convenience of any branch banking
and auto sweep products introduced by new private and
MNC banks
 Retail banking in focus, proliferation of credit cards
 Communication infrastructure improves and becomes
cheap. IDRBT sets up VSAT network for Banks
 Govt. owned banks feel the heat and attempt to respond
using intermediary technology, TBA implementation surges
ahead under fiat from Central Vigilance
 Commission (CVC), Y2K threat consumes last two years

[Comparative analysis on NPA of Private & Public sector Banks] Page 20

2000-2003  Alternate delivery channels find wide consumer acceptance
 IT Bill passed lending legal validity to electronic transactions
 Govt. owned banks and old private banks start
implementing CBSs, but initial attempts face problems
 Banks enter insurance business launch debit cards

(Source: M.Y.KHAN, “INDIAN FINANCIAL SYSYEM”,3rd edition

Publication by TATA McGraw hill)

[Comparative analysis on NPA of Private & Public sector Banks] Page 21

 NON PERFORMING ASSETS (NPA)

WHAT IS A NPA (NON PERFORMING ASSETS) ?

Action for enforcement of security interest can be initiated only if the

secured asset is classified as Nonperforming asset.

Non performing asset means an asset or account of borrower ,which has

been classified by bank or financial institution as sub –standard , doubtful
or loss asset, in accordance with the direction or guidelines relating to
assets classification issued by RBI .

An amount due under any credit facility is treated as “past due” when it
is not been paid within 30 days from the due date. Due to the
improvement in the payment and settlement system, recovery climate, up
gradation of technology in the banking system etc, it was decided to
dispense with “past due “concept, with effect from March 31, 2001.
Accordingly as from that date, a Non performing asset shell 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 ‘out of order ‘ for a period of more than 180
days ,in respect of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 180 days in case
of bill purchased or discounted.

iv. Interest and/or principal remains overdue for two harvest season
but for a period not exceeding two half years in case of an advance
granted for agricultural purpose ,and

v. Any amount to be received remains overdue for a period of more

than 180 days in respect of other accounts

With a view to moving towards international best practices and to

ensure greater transparency, it has been decided to adopt ’90 days
overdue ‘norms for identification of NPAs ,from the year ending March
31,2004,a non performing asset 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,

[Comparative analysis on NPA of Private & Public sector Banks] Page 22

 ii. The account remains ‘out of order ‘ for a period of more than
90 days ,in respect of an overdraft/cash credit (OD/CC)

iii. The bill remains overdue for a period of more than 90 days
in case of bill purchased or discounted.

iv. Interest and/or principal remains overdue for two harvest

season but for a period not exceeding two half years in case
of an advance granted for agricultural purpose ,and

v. Any amount to be received remains overdue for a period of

more than 90 days in respect of other accounts

Out of order

An account should be treated as out of order if the outstanding

balance remains continuously in excess of sanctioned limit /drawing
power. in case where the out standing balance in the principal operating
account is less than the sanctioned amount /drawing power, but there are
no credits continuously for six months as on the date of balance sheet or
credit are not enough to cover the interest debited during the same
period ,these account should be treated as ‘out of order’.

Overdue

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

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 :-
----------------------------------

[Comparative analysis on NPA of Private & Public sector Banks] Page 23

  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.

 Willful 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.

 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 depends on rain fall for cropping. Due

to irregularities of rain fall the farmers are not to achieve the
production level thus they are not repaying the loans.

 Industrial sickness

Improper project handling , ineffective management , lack of

adequate resources , lack of advance technology , day to day
changing govt. Policies give birth to industrial sickness. Hence the

[Comparative analysis on NPA of Private & Public sector Banks] Page 24

 banks that finance those industries ultimately end up with a low
recovery of their loans reducing their profit and liquidity.

 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 non
recovered part as NPAs and has to make provision for it.

 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.

The fallout of handloom sector is continuing as most of the

weavers Co-operative societies have become defunct largely due
to withdrawal of state patronage. The rehabilitation plan worked out
by the Central government to revive the handloom sector has not
yet been implemented. So the over dues due to the handloom
sectors are becoming NPAs.

 INTERNAL FACTORS :-

---------------------------------

 Defective Lending process

[Comparative analysis on NPA of Private & Public sector Banks] Page 25

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

[Comparative analysis on NPA of Private & Public sector Banks] Page 26

  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.

 Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis

is another reason for rise in NPAs. While providing unsecured
advances the banks depend more on the honesty, integrity, and
financial soundness and credit worthiness of the borrower.

• Banks should consider the borrowers own capital

investment.

• it should collect credit information of the borrowers from_

a. From bankers.

b. Enquiry from market/segment of trade, industry,

business.

c. From external credit rating agencies.

[Comparative analysis on NPA of Private & Public sector Banks] Page 27

 • 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.

 Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to
poor credit appraisal the bank gives advances to those who are not
able to repay it back. They should use good credit appraisal to
decrease the NPAs.

 Managerial deficiencies

The banker should always select the borrower very carefully and
should take tangible assets as security to safe guard its interests.
When accepting securities banks should consider the_

[Comparative analysis on NPA of Private & Public sector Banks] Page 28

 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).

 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 willful defaulters can be collected by regular visits.

 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.

[Comparative analysis on NPA of Private & Public sector Banks] Page 29

 Due to re loaning to the defaulters and CCBs and PACs, the NPAs
of OSCB is increasing day by day.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst
case, if the banks fails, owners loose their assets. In modern times
this may affect a broad pool of shareholders.

2. Depositors do not receive a market return on saving. In the worst

case if the bank fails, depositors loose their assets or uninsured
balance.

3. Banks redistribute losses to other borrowers by charging higher

interest rates, lower deposit rates and higher lending rates repress
saving and financial market, which hamper economic growth.

4. Non performing loans epitomize bad investment. They misallocate

credit from good projects, which do not receive funding, to failed
projects. Bad investment ends up in misallocation of capital, and by
extension, labour and natural resources.

Non performing asset may spill over the banking system and contract the
money stock, which may lead to economic contraction. This spill over
effect can channelize through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience
liquidity shortage. This can jam payment across the country,
b) Illiquidity constraints bank in paying depositors
.c) Undercapitalized banks exceeds the banks capital base.

The three letters Strike terror in banking sector and business circle today.
NPA is short form of “Non Performing Asset”. The dreaded NPA rule says

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simply this: when interest or other due to a bank remains unpaid for more
than 90 days, the entire bank loan automatically turns a non performing
asset. The recovery of loan has always been problem for banks and
financial institution. To come out of these first we need to think is it
possible to avoid NPA, no can not be then left is to look after the factor
responsible for it and managing those factors.

 Interest and/or instalment 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 purposes,
and

 Any amount to be received remains overdue for a period of

more than 90 days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks

have been advised to move over to charging of interest at monthly rests,
by April 1, 2002. However, the date of classification of an advance as NPA
should not be changed on account of charging of interest at monthly rests.
Banks should, therefore, continue to classify an account as NPA only if the
interest charged during any quarter is not serviced fully within 180 days
from the end of the quarter with effect from April 1, 2002 and 90 days from
the end of the quarter with effect from March 31, 2004.

'Out of Order' status:

An account should be treated as 'out of order' if the

outstanding balance remains continuously in excess of the sanctioned
limit/drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit/drawing

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power, but there are no credits continuously for six months as on the date
of Balance Sheet or credits are not enough to cover the interest debited
during the same period, these accounts should be treated as 'out of
order'.

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

Types of NPA

A] Gross NPA
B] Net NPA

A] Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as
NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA
reflects the quality of the 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:

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