General Management Project

On

“The Impact of NPA on the Net Profit of SBI and Axis

Bank.”
Submitted In partial fulfillment for the award of the degree of

Master of Management Studies (MMS)

University of Mumbai

Submitted By

MR. Vishal .B. Vora

Roll No-AMS182127

Under the Guidance of

PROF. BHARAT VIRA

Shree Ghatkopar Sarvajanik Jivdaya Khatu’s

Aruna Manharlal Shah

Institute of Management & Research

Ghatkopar (W), Mumbai-86

1
 2018-2020

CERTIFICATE

This is to certify that project titled “The Impact of NPA on the Net Profit of SBI and Axis Bank.”

is successfully completed by Mr. Vishal .B. Vora during the IV Semester, in partial fulfillment
of the Master’s Degree in Management Studies recognized by the University of Mumbai for the
academic year 2018-2020 through Aruna Manharlal Shah Institute of Management & Research.

This project work is original and not submitted earlier for the award of any degree/ diploma or
associate ship of any other University/ Institution.

Date: Signature of the Guide

Prof. Bharat Vira

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 DECLARATION

I hereby declare that this Project Report submitted by me to the Aruna Manharlal Shah Institute of
Management & Research. Is a bonafide work undertaken by me and it is not submitted to any other
University or Institution for the award of any degree/ diploma certificate or published any time
before.

Date: Signature of the student

Vishal .B. Vora

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 ACKNOWLEDGEMENT
I would like to place on record, my gratitude to those individuals whose patience and support has
led to the successful completion of this project.

I would like to thank my college, Aruna Manharlal Shah Institute of Management & Research and
the faculty, particularly Prof. Bharat Vira, for sparing his time to point out critical areas for analysis
and providing pointers that defined the very direction of this research. Also, my sincere thanks to
the non-teaching staff of the college, whose patience and helped to the timely completion of this
project report.

Last but never the least; I would like to express my sincere thanks and gratitude to my greatest
support and strength, and the most important stakeholders in every endeavor I undertake- my
family.

Thanks you all.

Vishal .B. Vora

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 Index

SR.NO TITLE PAGE NO.

1. INTRODUCTION 1-8
 Executive summary
 Objective of study
 Nature & scope of study

2. REVIEW OF LITERATURE 8-10

3. RESEARCH METHODOLOGY 9-10

4. NON PERFORMING ASSET 10-28
 Types of NPAs
 Effects of NPAs
 Impact of NPAs
 Recovering losses
 NPA in Banking System
 NPA Parameters
 NPA Ratio

5. Classification of bank 28-40

 Public sector bank
 Private sector bank
4. ABOUT BANKS 40-43
 SBI
 AXIS
5. UNDERLAYING REASON FOR NPA IN INDIA 43-45
6. A BRIEF ACCOUNT OF PROFITABILITY 45-46
7. DATA ANALYSS AND INTERPRETATION 46-49
8. PROBLEMS of NPA 49-50
9. SUGGESTION & RECOMMENDATION 50-51
10. CONCLUSION 51-52
11. BIBLIOGRAPHY 52-53

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 EXECUTIVE SUMMARY

In this report NPA means an asset or an account of borrower, which has been classified by bank
or financial institution as substandard, doubtful or loss asset in accordance to the direction or
guidelines on asset classification issued by the RBI. So NPAs can considered as a hindrance to the
profitability and liquidity of banks.

This study endeavors to determine the impact of NPA on Profitability Performance of the SBI and
Axis Bank in India. The objectives of the study are to measure the relationship between NPA and
profitability of the bank and to determine the impact of NPA on Net Profit of the bank. The study
applied Correlation analysis to measure the relationship and the impact of NPA on profitability.
The study found that there is a significant impact of NPA on SBI & Axis Bank during the study
period.

In this report discusses the problems of NPAs in the Indian banks in five years. & classification of
NPAs in SBI and Axis bank and there is no fixed formula on this basis of which a recovery strategy
for a NPA is undertaking. Then here RBI guidelines can be taken.

In the report resolution strategy for an NPA recommendations are is discussed .NPAs reflects the
performance of bank. A high levels of NPAs suggest high probability of a large number of credit
defaults that the profitability and net –worth of bank and also erodes the value of the asset. The
NPAs growth involves the necessity of provisions, which reduces the overall profits and
shareholders ‘value.

This report deals with understanding the concept of NPAs , its magnitude and major causes for an
account becoming non- performing , projection with special reference to SBI and Axis bank in
India.

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 Objective of the study
The different aspects of literature related to Non-Performing Assets have used for this study, but
there is a less time gap existing for the Comprehensive research on quality aspects of Non-
Performing Assets. Most of the research and studies are being done on causes, impact and
management aspects of NPAs.

1. To measure the relationship NPA of the SBI & Axis bank.

2. To determine the impact of NPA on Net Profit of the SBI & Axis bank.

3. The study may help the government in creating & implementing new strategies to control
NPA’s.
4. The study will help to select appropriate techniques suited to manage the NPAs.

5. To study the status of Non-Performing Assets of Public and Private sector bank.

6. To know the recovery of NPAs through various channels.

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 Nature & Scope of study

This Project report shows the role of profitability position and the NPA of leading SBI & Axis
bank in India. This is the process of comparing NPAs in SBI & Axis bank determining how much
NPA increase or decrease during a specific time period of time. The study covers a period of 5
years from 2014 to 2018 is taken for the study.

This study indicate the Indian Banking Sector is mainly dominated by the Bank. Globalization has
encouraged multinationals and foreign bank to set up their business unit in India.

This study will help to analyze the recent norms of NPA. This study helps to analyze how
NPA Causing Problems to Banking Sector and what might be the solution to overcome from this
problem and also its impact on Profitability of New Profit Banks.

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 REVIEW OF LITERATURE
NPA is a burning topic for the banking sector and many authors tried to study the reasons of NPA,
the problems created by NPA and the impact of NPA on the banking sector, and moreover came
to a solution or remedies of the growing problem of NPA. A number of papers have been written
and gone through, and this part of this paper is attempting to present a review of all those are
available in the same area of non-performing assets of the SBI bank, Axis bank and other banks.
This survey has conducted a study on the existing papers, articles, journals, and reports provided
by different authors, groups and committees from time to time.

 An article on ‘’ Nonperforming assets in India’’ is writer by anupam Jain, Vinita and Swati
Jain. This paper deals with the concept of nonperforming asset and nonperforming assets
in Indian commercials Banks. In this paper detail of Nonperforming assets of total banking
sector, distribution of commercial bank credit to priority sector and small scale industries
has been listed in the table format. Eight years data of total banking sector are considered.
This is done foe the total advances and also for advances to the SSI Sector. In particular
check for the significance of NPA as a determinant of efficiency.
 The study made by Prof. E. Gordon and Dr. K. Natarajan who publish a book on, “Banking
Theory, Law and Practice” in Himalaya Publishing House. In this book they studied
Magnitude of NPA, factors contributing to NPAs like internal factors, external factors and
other factors. Early Warning Signals like financial, operational, banking, managerial and
external signals were discussed. Management of NPAs by adopting some techniques are
discussed in this book.
 Biswanath Sukul (2018), in his study entitled “Non-Performing Assets (NPAs): A
Comparative Analysis of selected Private Sector Banks” examined and found that NPA is
increasing by leaps and bounds in ICICI bank and he also said that proper evaluation of
projects and adherence of proper credit appraisal techniques will lead to reduction in NPA.
 Pradip Kumar Samanta, Payel Roy (2018), in their study entitled “Analysis of Non-
Performing Assets in Public Sector Banks of India”, examined and found that there is a

9
high correlation between Gross NPA and Net Profit and to retain the investors trust
transparency in disclosure norms should adhere.

10
 RESEARCH METHODOLOGY

Sources of Data: The study has used data from secondary sources which are collected mainly from
the Annual reports of the SBI and Axis Banks in India and also from various journals and Web
sites like money control, investing.com and also from latest news related NPAs in economies
times.

Aim of the present research paper is to analyze the trends in NPAs. Several research studies on
NPA in Indian banking sector are available, the studies on a closer look validated NPA problem
using secondary data. The primary emphasis of this research is focused on analyzing
nonperforming assets of SBI and Axis banks in India during the period 2014 to 2018.The present
study is a descriptive study which tries to establish the relationship between the non-performing
assets and net profits. This is selective study. The data for the study has been sourced from Reserve
Bank of India (RBI) bulletins, comparison of NPAs in both SBI & Axis banks in India, report on
existing and progress of banking in India, issued by the RBI.

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 INTRODUCTION

Meaning of NPA: - A Non-performing asset (NPA) is defined as a credit facility in respect of

which the interest and/or installment of Bond finance principal has remained ‘past due’ for a
specified period of time. NPA is used by financial institutions that refer to loans that are in
jeopardy of default the so called NPL. Once the borrower has failed to make interest or principal
payments for 90 days the loan is considered to be a non-performing asset. Non-performing assets
are problematic for financial institutions since they depend on interest payments for income.
Troublesome pressure from the economy can lead to a sharp increase in NPLs and often results in
massive write-downs.

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 NPA, from the year
ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset
(NPA) is a loan or an advance where;

 Interest and/or installment of principal remain overdue for a period of more than 91 days in
respect of a term loan,
 The account remains ‘out of order’ for a period of more than 90 days, in respect of
an 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 installment of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of an advance granted for agricultural purposes,
and
 Any amount to be received remains overdue for a period of more than 90 days in respect of
other accounts.
 Non-submission of Stock Statements for 3 Continuous Quarters in case of Cash Credit Facility.

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 No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC) for more than
91days

Further classify non-performing assets further into the following three categories based on the
period for which the asset has remained non-performing and the reliability of the dues:

1. Sub-standard assets: a substandard asset is one which has been classified as NPA for a
period not exceeding 12 months.
2. Doubtful Assets: An asset would be classified as doubtful if it has remained in the
substandard category for a period of 12 months.
3. Loss assets: where loss has been identified by the bank, internal or external auditor or
central bank inspectors. But the amount has not been written off, wholly or partly.

Sub-standard asset is the asset in which bank have to maintain 15% of its reserves. All those assets
which are considered as non-performing for period of more than 12 months are called as Doubtful
Assets. All those assets which cannot be recovered are called as Loss Assets. Some advanced tools
like Experian India's "Hunter Fraud Score" have also been launched that work on data mining and
calculate some authentic score that can help banks detect fraud and lower their losses.

TYPES OF NONPERFORMING ASSETS

Although the most common nonperforming assets are term loans, there are six other ways loans
and advances are NPAs:

1. Gross NPA
Gross NPA is an advance which is considered written off, for bank has made provisions, and which
is still held in banks' books of account. Gross NPA (non-performing asset) refers to overall
quantity of loans that have gone bad debts. It consists of all the nonstandard assets like as sub-
standard, doubtful, and loss asset. “Gross NPAs Ratio = Gross NPAs / Gross Advances”

2. Net NPA

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Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs.
“Net NPAs = Gross NPAs – Provisions / Gross Advances – Provisions”

 Overdraft and cash credit (OD/CC) accounts left out-of-order for more than 90 days
 Agricultural advances whose interest or principal installment payments remain overdue for
two crop/harvest seasons for short duration crops or overdue one crop season for long
duration crops
 Bill overdue for more than 90 days for bills purchased and discounted
 Expected payment is overdue for more than 90 days in respect of other accounts
 Non-submission of stock statements for 3 consecutive quarters in case of cash-credit
facility
 No activity in the cash credit, overdraft, EPC, or PCFC account for more than 91 days

Banks are required to classify nonperforming assets in one of three categories according to how
long the asset has been non-performing: sub-standard assets, doubtful assets, and loss assets. A
sub-standard asset is an asset classified as an NPA for less than 12 months. A doubtful asset is an
asset that has been non-performing for more than 12 months. Loss assets are assets with losses
identified by the bank, auditor, or inspector and have not been fully written off.

THE EFFECTS OF NPAS

Carrying nonperforming assets, also referred to as nonperforming loans, on the balance sheet
places three distinct burdens on lenders. The nonpayment of interest or principal reduces cash flow
for the lender, which can disrupt budgets and decrease earnings. Loan loss provisions, which are
set aside to cover potential losses, reduce the capital available to provide subsequent loans. Once
the actual losses from defaulted loans are determined, they are written off against earnings.

Causes of NPA
1 Lending Practices of Banks: In 2008 the financial crisis has been happened because of bad
lending practices of banks. The banks should strictly follow rules and regulations while lending
loans. They should properly follow the credit policy of banks.

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2 Business Risk: The organization may sometimes face problems with its own operational
environment which may result in losses for the company.

3 Environmental Risk: Sometimes there may be environmental problems like cyclones, drought
which does not give the required output to the farmers and Agri based businesses.
Impact of NPA

1 Liquidity
The Banks are facing the problem of NPAs. They are not recovering which lending money to
borrower. Those times money will be blocked. Banks don’t have enough cash in hand for short
period of time.
2 Credit loss
Banks lose their goodwill and brand equity in market when there is problem with their NPA that
further affect the value of the banks in terms of market credit.
3. Profitability
NPA not only effect on current profits but also profit of entire financial year.

Assets Classification
1 Standard Assets
Standard Asset means which assets are not facing the problem and not more risk towards customer.
Such assets are assumed to be performing asset. A general provision of 0.25% has to be provided
on global loan portfolio basis.
2 Sub-standard Assets
An asset would be classified as sub-standard if it remained NPA for a period less than or equal to
12 months. Accordingly a general provision of 10% on outstanding has to be provided on
substandard assets
REASONS FOR OCCURRENCE OF NPA

NPAs result from what are termed “Bad Loans” or NPL. Default, in the financial parlance, is the
failure to meet financial obligations, say non-payment of a loan installment. These loans can
occur due to the following reasons:

• Usual banking operations /Bad lending practices

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• A banking crisis (as happened in USA, South Asia and Japan)

• Overhang component (due to environmental reasons, natural calamities, business cycle,

Disease Occurrence, etc...)

• Incremental component (due to internal bank management, like credit policy, terms of
credit, etc...)

PROBLEMS CAUSED BY NPA

NPAs do not just reflect badly in a bank’s account books, they adversely impact the national
economy. Following are some of the repercussions of NPAs:

• Depositors do not get rightful returns and many times may lose uninsured deposits. Banks
may begin charging higher interest rates on some products to compensate NPL losses

• Bank shareholders are adversely affected

• Bad loans imply redirecting of funds from good projects to bad ones. Hence, the
economy suffers due to loss of good projects and failure of bad investments.

• When bank do not get loan repayment or interest payments, liquidity problems may
ensue.

RECOVERING LOSSES
Lenders generally have four options to recoup some or all losses resulting from nonperforming
assets. When companies struggle to service debt, lenders take proactive steps to restructure loans
to maintain cash flow and avoid classifying loans as nonperforming. When defaulted loans
are collateralized by borrowers' assets, lenders can take possession of the collateral and sell it to
cover losses.

Lenders can also convert bad loans into equity, which may appreciate to the point of full recovery
of principal lost in the defaulted loan. When bonds are converted to new equity shares, the value
of the original shares is usually eliminated. As a last resort, banks can sell bad debts at steep
discounts to companies that specialize in loan collections. Lenders typically sell defaulted loans
that are unsecured or when methods of recovery are not cost-effective.

NPA woes may continue for banks in 2018-19 due to current economic situation: RBI

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 Reserve Bank of India said today that banks will witness further deterioration in their non-
performing assets (NPAs) or bad loans due to the "economic situation prevailing" in the current
fiscal.

HIGHLIGHTS

 The Gross NPA ratio of scheduled commercial banks may increase further in 2018-19

 In order to curb NPAs, RBI also put in place revised and harmonized guidelines

 NPAs in public sector banks increased by about Rs 6.2 lakh crore between March 2015-2018

According to the Reserve Bank of India (RBI), banks will continue to face deterioration in their
non-performing assets (NPAs) or bad loans due to the current economic conditions in the current
fiscal year. The gross non-performing assets (GNPAs) plus restructured standard advances in the
banking system remained elevated at 12.1 per cent of gross advances at end-March 2018, RBI's
annual report for 2017-18 stated.
"Going forward, the stress tests carried out by the Reserve Bank suggest that under the baseline
assumption of the current economic situation prevailing, the GNPA ratio of scheduled commercial
banks (SCBs) may increase further in 2018-19," it said.
The aggregate gross NPAs of SCBs increased primarily as a result of this transparent recognition
of stressed assets as NPAs, from Rs 3,23,464 crore, as on March 31, 2015, to Rs 10,35,528 crore,
as on March 31, 2018.
In order to curb NPAs, RBI also put in place revised and harmonized guidelines for resolution of
stressed assets during the year, replacing earlier schemes.
According to sources familiar with the report of the Standing Committee on Finance, RBI needs
to find out as to why the early signals of stressed accounts were not captured before the AQR.
The report was adopted by the Committee headed by senior Congress leader M Veerappa Moily
today and is likely to be placed in the Parliament in the Winter Session.
NPAs in public sector banks (PSBs) increased by about Rs 6.2 lakh crore between March 2015
and March 2018.

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This led to substantial provisioning of Rs 5.1 lakh crore, sources said quoting the report.

NPA IN INDIAN BANKING SYSTEM

NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst of
turbulent structural changes overtaking the international banking institutions, and when the
global financial markets were undergoing sweeping changes. In fact after it had emerged the
problem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the maze
of defective accounting standards that still continued with Indian Banks up to the Nineties and
opaque Balance sheets. In a dynamic world, it is true that new ideas and new concepts that
emerge through such changes caused by social evolution bring beneficial effects, but only after
levying a heavy initial toll. The process of quickly integrating new innovations in the existing
set-up leads to an immediate disorder and unsettled conditions. People are not accustomed to
the new models. These new formations take time to configure, and work smoothly. The old is
cast away and the new is found difficult to adjust.

Marginal and sub-marginal operators are swept away by these convulsions. Banks being
sensitive institutions entrenched deeply in traditional beliefs and conventions were unable to
adjust themselves to the changes. They suffered easy victims to this upheaval in the initial phase.
Consequently banks underwent this transition-syndrome and languished under distress and
banking crises surfaced in quick succession one following the other in many countries. But
when the banking industry in the global sphere came out of this metamorphosis to re-adjust to
the new order, they emerged revitalized and as more vibrant and robust units. Deregulation in
developed capitalist countries particularly in Europe, witnessed a remarkable innovative growth
in the banking industry, whether measured in terms of deposit growth, credit growth, growth
intermediation instruments as well as in network. During all these years the Indian Banking,
whose environment was insulated from the global context and was denominated by State
controls of directed credit delivery, regulated interest rates, and investment structure did not

18
participate in this vibrant banking revolution. Suffering the dearth of innovative spirit and
choking under undue regimentation, Indian banking was lacking objective and prudential
systems of business leading from early stagnation to eventual degeneration and reduced or
negative profitability. Continued political interference, the absence of competition and total
lack of scientific decision-making, led to consequences just the opposite of what was happening
in the western countries. Imperfect accounting standards and opaque balance sheets served as
tools for hiding the shortcomings and failing to reveal the progressive deterioration
and structural weakness of the country's banking institutions to public view. This enabled the
nationalized banks to continue to flourishing a deceptive manifestation and false glitter, though
stray symptoms of the brewing ailment were discernable here and there. The government hastily
introduced the first phase of reforms in the financial and banking sectors after the economic
crisis of 1991. This was an effort to quickly resurrect the health of the banking system and
bridge the gap between Indian and global banking development. Indian Banking, in particular
PSB‟s suddenly woke up to the realities of the situation and to face the burden of the surfeit of
their woes. Simultaneously major revolutionary transitions were taking place in other sectors
the economy on account the ongoing economic reforms intended towards freeing the Indian
economy from government controls and linking it to market driven forces for quick integration
with the global economy. Import restrictions were gradually freed. Tariffs were brought down
and quantitative controls were removed. The Indian market was opened for free competition to
the global players. The new economic policy in turn revolutionaries the environment of the
Indian industry and business and put them to similar problems of new mixture of opportunities
and challenges. As a result we witness today a scenario of banking, trade and industry in India,
all undergoing the convulsions of total reformation battling to kick off the decadence of the
past and to gain a new strength and vigor for effective links with the global economy. Many
are still languishing unable to get released from the old set-up, while few progressive corporate
are making a niche for themselves in the global context. During this decade the reforms have
covered almost every segment of the financial sector. In particular, it is the banking sector,
which experienced major reforms. There forms have taken the Indian banking sector far away
from the days of nationalization. Increase in the number of banks due to the entry of new private
and foreign banks; increase in the transparency of the banks' balance sheets through the
introduction of prudential norms and norms of disclosure; increase in the role of the market

19
forces due to the deregulated interest rates, together with rapid computerization and application
of the benefits of information technology to banking operations have all significantly affected
the operational environment of the Indian banking sector. In the background of these complex
changes when the problem of NPA was belatedly recognized for the first time at its peak
velocity during 1992-93, there was resultant chaos and confusion. As the problem in large
magnitude erupted suddenly banks were unable to analyze and make a realistic or complete
assessment of the surmounting situation. It was not realized that the root of the problem of NPA
was centered elsewhere in multiple layers, as much outside the banking system, more
particularly in the transient economy of the country, as within. Banking is not
compartmentalized and isolated sector delinked from the rest of the economy. As has happened
elsewhere in the world, a distressed national economy shifts a part of its negative results to the
banking industry.

NPAs definition by Reserve Bank of India (RBI)

An asset, including a leased asset, becomes non-performing when it ceases to generate income
for the bank.

 Technical definition by RBI on NPA on different cases NPA is a loan or an advance

where…
 Interest and/ or installment of principal remain overdue for a period of more than 90 days
in respect of a term loan.
 The account remains ‘out of order’ 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.
 The installment of principal or interest thereon remains overdue for two crop seasons for
short duration crops.
 The installment of principal or interest thereon remains overdue for one crop season for
long duration crops.
 The amount of liquidity facility remains outstanding for more than 90 days, in respect of a
securitization transaction undertaken in terms of guidelines on securitization dated
February 1, 2006.

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 In respect of derivative transactions, the overdue receivables representing positive mark-
to-market value of a derivative contract, if these remain unpaid for a period of 90 days from
the specified due date for payment.

Categories of Non-Performing Assets (NPAs)

Based upon the period to which a loan has remained as NPA, it is classified into 3 types:
How serious is India’s NPA issue?

 More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India.
This is a huge amount.
 The figure roughly translates to near 10% of all loans given.
 This means that about 10% of loans are never paid back, resulting in substantial loss of
money to the banks.
 When restructured and unrecognized assets are added the total stress would be 15-20% of
total loans.
 NPA crisis in India is set to worsen.
 Restructuring norms are being misused.
 This bad performance is not a good sign and can result in crashing of banks as happened
in the sub-prime crisis of 2008 in the United States of America.

Reasons for the rise in NPA in recent years

 GDP slowdown -Between early 2000's and 2008 Indian economy were in the boom phase.
During this period Banks especially Public sector banks lent extensively to corporate.
However, the profits of most of the corporate dwindled due to slowdown in the global
economy, the ban in mining projects, and delay in environmental related permits affecting
power, iron and steel sector, volatility in prices of raw material and the shortage in
availability of. This has affected their ability to pay back loans and is the most important
reason behind increase in NPA of public sector banks.
 One of the main reasons of rising NPA is the relaxed lending norms especially for corporate
honchos when their financial status and credit rating is not analyzed properly. Also, to face
competition banks are hugely selling unsecured loans which attributes to the level of NPAs.

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 5 sectors Textile, aviation, mining, Infrastructure contributes to most of the NPA, since
most of the loan given in these sector are by PSB, They account for most of the NPA.
 Public Sector banks provide around 80% of the credit to industries and it is this part of the
credit distribution that forms a great chunk of NPA. Last year, when kingfisher was marred
in financial crisis, SBI provided it huge amount of loan which it is not able to recover from
it.
 There is a myth that main reason for rise in NPA in Public sector banks was Priority sector
lending, However according to the findings of Standing Committee on Finance NPAs in
the corporate sector are far higher than those in the priority or agriculture sector. However,
even the PSL sector has contributed substantially to the NPAs. As per the latest estimates
by the SBI, education loans constitute 20% of its NPAs.
 The Lack of Bankruptcy code in India and sluggish legal system make it difficult for banks
to recover these loans from both corporate and non-corporate.
 Diversification of funds to unrelated business/fraud.
 Lapses due to diligence.
 Business losses due to changes in business/regulatory environment.
 Lack of morale, particularly after government schemes which had written off loans.
 Global, regional or national financial crisis which results in erosion of margins and profits
of companies, therefore, stressing their balance sheet which finally results into non-
servicing of interest and loan payments. (For example, the 2008 global financial crisis).
 The slowdown in a specific industrial segment, therefore, companies in that area bear the
heat and some may become NPAs.
 Unplanned expansion of corporate houses during boom period and loan taken at low rates
later being serviced at high rates, therefore, resulting into NPAs.
 Due to mal-administration by the corporates, for example, willful defaulters.
 Due to miss governance and policy paralysis which hampers the timeline and speed of
projects, therefore, loans become NPAs. For example Infrastructure Sector.
 Delay in land acquisition due to social, political, cultural and environmental reasons.
 A bad lending practice which is a non-transparent way of giving loans.
 Due to natural reasons such as floods, droughts, disease outbreak, earthquakes, tsunami etc

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 Steps taken by RBI and Government in last few years to curb NPA

 Government has launched ‘Mission Indradhanush’ to make the working of public sector
bank more transparent and professional in order to curb the menace of NPA in future.
 Government has also proposed to introduce Bankruptcy code.
 RBI introduced number of measures in last few years which include tightening the
Corporate Debt Restructuring (CDR) mechanism, setting up a Joint Lenders' Forum,
prodding banks to disclose the real picture of bad loans, asking them to increase
provisioning for stressed assets, introducing a 5:25 scheme where loans are to be amortized
over 25 years with refinancing option after every 5 years, and empowering them to take
majority control in defaulting companies under the Strategic Debt Restructuring (SDR)
scheme.
 NPAs story is not new in India and there have been several steps taken by the GOI on legal,
financial, policy level reforms. In the year 1991, Narasimham committee recommended
many reforms to tackle NPAs. Some of them were implemented.

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 NPA Parameters

Nature of Facility Parameters

Term Loan Interest and/or instalment of principal remain

overdue beyond 90 days

Overdraft/Cash Credit Remains “out of order” as indicated above

Bill Purchased/discounted Remains overdue beyond 90 days

Crop Loans (short duration crops) Instalment of principal or interest thereon

remains overdue for 2 crop seasons

Crop Loans (Long duration crops) Instalment of principal or interest thereon

remains overdue for 1 crop season

Securitization transactions Amount of liquidity facility remains

outstanding beyond 90 days

24
 Derivative transactions Overdue receivables representing positive
mark-to-market value of a derivative contract
which remains unpaid beyond 90 days from
specified due date for payment

Securitization transaction Liquidity facility remains outstanding for

more than 90 days

WORST OF THE NPA CRISIS IS OVER, IN RBI REPORT

NPA RATIO MAY FALL FROM 10.8% IN SEPTEMBER 2018 TO 10.3% IN
MARCH 2019

Mumbai: Indicating that the banking sector is on course to a recovery, the Reserve Bank of India
(RBI) on Monday said stress tests suggest further improvement in banks’ asset quality would be
made in the New Year.
In the baseline scenario, the (NPA) ratio may decline from 10.8% in September 2018 to 10.3% in
March 2019 and 10.2% in September 2019, RBI said in its biannual Financial Stability Report
(FSR). In his foreword to the report, new RBI governor Shaktikanta Das wrote that after a
prolonged period of stress, the load of impaired assets was receding, with banks reporting their
first half-yearly decline in the gross NPA ratio since September 2015.
The asset quality of banks showed an improvement, with the gross non-performing assets (GNPA)
ratio of scheduled commercial banks (SCBs) declining from 11.5% in March 2018 to 10.8% in
September 2018. But an industry analysis by RBI shows that stress is rising in the mining, food
processing and construction sectors.
Despite projections of a recovery, 18 SCBs, including all public sector banks under the prompt
corrective action (PCA) framework, may fail to maintain the required capital adequacy ratio under
a two SD (standard deviation) shock to the GNPA ratio, unless capital infusion takes place and
banks improve their performance, according to RBI’s analysis. One SD shock equals
approximately a two percentage point increase in the GNPA ratio.

25
The PCA banks are Allahabad Bank, United Bank of India, Corporation Bank, IDBI Bank, UCO
Bank, Bank of India, Central Bank of India, Indian Overseas Bank, Oriental Bank of Commerce,
Dena Bank and Bank of Maharashtra.

“Notwithstanding the significant costs wrought by the enhanced recognition of asset impairment
in Public Sector Banks (PSBs), it appears to have led to a greater discipline in credit assessment,
higher sensitivity to market risk and better appreciation of operational risks,” Das wrote.
The report pointed out that credit growth of banks improved in September 2018, driven largely by
private sector banks. However, the performance of public sector banks witnessed an overall
improvement, with credit growth increasing from 5.9% in March 2019 to 9.1% in September 2019
and deposit growth increasing from 3.2% to 5% during the same period.
RBI said there had been a further widening between PCA and non-PCA PSBs: while non-PCA
PSBs’ credit growth improved from 9.1% in March 2019 to 13.6% in September 2019 and deposit
growth rose from 6.1% to 7.9% during the same period, the PSBs under PCA registered a decline
in both credit and deposits.
Interestingly, the central bank also looked at fresh loans turning bad in the same fiscal to assess
stress in their incremental loan portfolios. For instance, 11 public sector banks under PCA saw
4.07% of their fresh exposure between April and September 2016 turning bad by the end of
September 2016. The numbers have shown a declining trend for PCA banks between 2016-17 and
2017-18, and stood at 2% of the freshly sanctioned portfolio.

“[This is] too high, especially given their constrained capital position and across-the-board
superior performance among private financial intermediaries,” the report said.

26
 RBI has also conducted a contagion analysis to assess whether the PCA framework has helped in
reducing the systemic footprint of PCA banks. For this, the central bank has argued, one needs to
do away with the implicit sovereign guarantees enjoyed by PCA banks.

NPA WOES MAY CONTINUE FOR BANKS IN 2018-19 DUE TO

CURRENT ECONOMIC SITUATION:
RBI SAID TODAY THAT BANKS WILL WITNESS FURTHER DETERIORATION IN
THEIR NON-PERFORMING ASSETS (NPAS) OR BAD LOANS DUE TO THE

"ECONOMIC SITUATION PREVAILING" IN THE CURRENT FISCAL.

HIGHLIGHTS
 The Gross NPA ratio of scheduled commercial banks may increase further in 2018-19

 In order to curb NPAs, RBI also put in place revised and harmonized guidelines

 NPAs in public sector banks increased by about Rs 6.2 lakh crore between March 2016-2019

 According to the Reserve Bank of India (RBI), banks will continue to face deterioration in
their non-performing assets (NPAs) or bad loans due to the current economic conditions in
the current fiscal year.
 The gross non-performing assets (GNPAs) plus restructured standard advances in the
banking system remained elevated at 12.1 per cent of gross advances at end-March 2019,
RBI's annual report for 2018-19 stated.
 "Going forward, the stress tests carried out by the Reserve Bank suggest that under the
baseline assumption of the current economic situation prevailing, the GNPA ratio of
scheduled commercial banks (SCBs) may increase further in 2018-19," it said.
 The aggregate gross NPAs of SCBs increased primarily as a result of this transparent
recognition of stressed assets as NPAs, from Rs 3,23,464 crore, as on March 31, 2016, to
Rs 10,35,528 crore, as on March 31, 2019.
 In order to curb NPAs, RBI also put in place revised and harmonized guidelines for
resolution of stressed assets during the year, replacing earlier schemes.

27
 A Parliamentary committee recently questioned RBI for failing to take preemptive action
in checking bad loans in the banking system prior to the Asset Quality Review undertaken
in December 2016.
 According to sources familiar with the report of the Standing Committee on Finance, RBI
needs to find out as to why the early signals of stressed accounts were not captured before
the AQR.
 The report was adopted by the Committee headed by senior Congress leader M Veerappa
Moily today and is likely to be placed in the Parliament in the Winter Session.
 The panel, which includes former Prime Minister Manmohan Singh as a member, wanted
to know the reasons of ever-greening of stressed accounts through restructuring schemes
of the RBI.
 The issue of rising NPAs is a legacy issue and role of RBI has not been up to the mark,
sources said.
 NPAs in public sector banks (PSBs) increased by about Rs 6.2 lakh crore between March
2016 and March 2019.
 This led to substantial provisioning of Rs 5.1 lakh crore, sources said quoting the report.

28
NET NPAS FOR 36 BANKS HAVE REDUCED BY RS 18,921 CRORE IN THE
THREE MONTHS FROM JULY TO SEPTEMBER. DURING THE SAME
PERIOD, GROSS NPAS HAVE REDUCED BY A MERE RS 5870 CRORE
The push for bad loan resolution has seen little success so far. However, it does hold promise to
improve the asset quality for the banking sector by the end of March 2019.Net non-performing
assets (NPAs) for 36 banks reduced by Rs 18,921 crore in the three months from July to September.
During the same period, gross NPAs reduced by a mere Rs 5,870 crore.

However, over the last one year, net NPAs have risen by Rs 13,453 crore while gross NPAs have
risen by Rs 1.41 lakh crore to Rs 8.72 lakh crore as at September 2018 end, as per data collated
by Money control. The numbers are based on the second quarter financial results of 36 banks
including public and private sector lenders.
“The emerging trends in the movement of NPAs when viewed along with the provisions made by
banks do indicate that the NPA cycle may have peaked and that the recognition issue has by and
large been addressed. This is evidenced from the declining NPA ratios for most banks,” said a
report by Care ratings.
Posting a profit after a consecutive loss in the last three quarters, State Bank of India (SBI),
country’s largest lender, reduced its gross NPAs by nearly Rs 7,000 crore while it’s net NPAs
declined by Rs 4,400 crore. Its gross NPAs stood at Rs 2.06 lakh crore (9.95 percent of total loans)
as on September end from Rs 2.13 crore as on June end (10.69 percent).
“NPA resolutions have started to happen since the recognition of bad loans and Insolvency and
Bankruptcy Code (IBC) law implementation has picked up. So hopefully, going forward, the asset
quality should start looking better from here on. Banks are also growing their balance sheet which
would also show improvement in the percentage ratios for the NPAs," said Karthik Srinivasan,
Senior Vice President of ICRA Ratings.

We believe FY20 will be “the year of happiness”, SBI Chairman Rajnish Kumar said
after the FY18 financial results. In the current market situation, Kumar considers SBI
in the best position to seize the opportunity.

29
 NPA NORMS

NPA norms Though the issue of NPA was given more importance after the Narasimham
Committee Report (1991) and highlighted its impact on the financial health of the commercial
banks and, subsequently, various asset classification norms were introduced, the concept of
classifying bank assets based on its quality began during 1985-86. A critical analysis to monitor
credit comprehensively and uniformly was introduced in 1985-86 by the RBI by way of the Health
Code System in banks. The RBI advised all commercial banks (excluding foreign banks, most of
which had similar coding system) on November 7, 1985, to introduce the Health Code System
indicating the quality (or health) of individual advances under the following eight categories, with
a health code assigned to each borrowal account (source: RBI): 1. Satisfactory - conduct is
satisfactory; all terms and conditions are complied with; all accounts are in order and safety of the
advance is not in doubt. 2. Irregular- the safety of the advance is not suspected, though there may
be occasional irregularities, which may be considered as a short term phenomenon. 3. Sick, viable
- advances to units that are sick but viable - under nursing and units for which nursing/revival
programme are taken up. 4. Sick: nonviable/sticky - the irregularities continue to persist and there
are no immediate prospects of regularization and the accounts could throw up some of the usual
signs of incipient sickness 5. Advances recalled - accounts where the repayment is highly doubtful
and nursing is not considered worthwhile and where decision has been taken to recall the advance.
6. Suit filed accounts - accounts where legal action or recovery proceedings have been initiated. 7.
Decreed debts - where decrees (verdict) have been obtained. 8. Bad and Doubtful debts - where
the recover ability of the bank's dues has become doubtful on account of short-fall in value of
security, difficulty in enforcing and realizing the securities or inability/unwillingness of the
borrowers to repay the bank's dues partly or wholly Under the above Health Code System, the
RBI classified problem loans of each bank into three categories: i) advances classified as bad and
doubtful by the bank (Health Code No.8) (ii) advances where suits were filed/decrees obtained
(Health Codes No.6 and 7) and (iii) those advances with major undesirable features (Health Codes
No.4 and 5). The Narasimham Committee (1991) felt that the classification of assets according to
the health codes was not in accordance with international standards. It believed that a policy of
income recognition should be objective and based on the record of recovery rather than on
subjective considerations. In addition, before the Indian banks complied with the capital adequacy

30
norms, their assets had to be revalued on a more realistic basis of their realizable value. Thus, the
Narasimham Committee (1991) believed a system of income recognition and provisioning is
fundamental to preserve the strength and stability of the banking system. The international practice
is that an asset is treated as non-performing when interest is due for at least two quarters. In respect
of such nonperforming assets, interest is not recognized on accrual basis but is booked as income
only when it is actually received. The NPA would be defined as advance, as on the balance sheet
date in the following circumstances: 1. In respect of overdraft and cash credits, accounts remain
out of order for a period of more than 180 days, 2. In respect of bills purchased and discounted,
the bill remains overdue4 and unpaid for a period of more than 180 days, 3. In respect of other
accounts, any account to be received remains past due for a period of more than 180 days. As
mentioned earlier, the grace period was reduced and from March 1995 onwards assets for which
interest has unpaid for 90 days were considered as NPAs. Provisions need to be made for the NPAs
and total NPA (gross) minus the provisions is defined as net NPA. Besides providing a detailed
definition of NPA, the Narasimham Committee (1991) also suggested that for the purpose of
provisioning, banks and financial institutions should classify their assets by compressing the health
codes into four broad groups; (i) Standard (ii) Sub-standard, (iii) Doubtful and (iv) Loss. Broadly,
substandard assets would exhibit problems and include assets classified as non-performing for a
period not exceeding two years. Doubtful assets are those that remain as such for more than two
years and include loans that are overdue for more than two years. Loss assets are accounts where
loss has been identified but amounts have not been written off. According to international norms,
commercial banks need to keep aside a portion of their income as a provision against bad loans.
The amount of the provision depends on the type of NPAs and the time duration. Now Indian
banks need to make provisions for all bad loans.

31
 NPA ratios

As per the Care report, “The NPA ratio peaked in Q4-FY19 at 10.16 percent which was when the
highest quantum of NPAs was recognized. There has tended to be some moderation subsequently
and in Q2 was down to 9.41 percent,” Care report said.

In the case of eight banks, the ratio for Q2 was lower than that of Q1. In a different set of eight
banks, the ratio still appears to be in an upward direction. “Here the next two quarters will again
be important to gauge whether or not whether the NPA ratio has peaked,” the report said.

It highlighted that HDFC Bank, Indusind Bank, Kodak and Ratnakar Bank have the lowest NPA
ratios which have been under control and could decline over the quarters.
Only two public sector banks (PSB) have gross NPA ratio of less than 10 percent; Vijaya
Bank with 5.86 percent and SBI which is on the border at 9.95 percent.
Half or six of 12 banks have witnessed lower ratios in the last two quarters. These include
SBI, Andhra Bank, Canara Bank, Indian Overseas Bank (IOB), Punjab National Bank and Vijaya
Bank. This is a positive for the PSB group, Care report said.
The improvement in banks, especially public sector ones, is largely attributed to the sudden
upsurge in the NPAs in the last 2-3 years to the recognition aspect after the asset quality review
(AQR) of banks undertaken under the leadership of former Reserve Bank of India (RBI) Governor
Raghu ram Rajan in December 2016.

“It was widely believed that the NPA level had peaked in March 2019. Subsequently, there was a
tendency for the ratios to show some moderation. This was also observed for provisions (where it
may be assumed that upwards of 80 percent are on account of NPA) that were made in the last two
quarters,” the report said.

However, two banks have ratios of above 20 percent in Q2-FY19 - IOB with 24.73 percent and
Dena Bank with 23.64 percent, while five banks have ratios in the band of 15-20 percent.

Hence, as per the Care report, there would still be some banks whose NPA ratios would have to
be monitored closely for another two quarters.

32
 RBI NOTE SHOWS WORST OF NPA AND CREDIT GROWTH
PROBLEM MAY BE OVER
THE SHARE OF GROSS NPAS IN TOTAL ADVANCES OF BANKS, BOTH IN THE PUBLIC
AND PRIVATE SECTOR, PEAKED IN MARCH 2018, AND HAS SINCE DECLINED — IN
BOTH THE JUNE AND SEPTEMBER QUARTER OF THE CURRENT FISCAL YEAR. THE
NPA CRISIS IS MORE WIDESPREAD IN THE PUBLIC SECTOR BANKS.
A Reserve Bank of India (RBI) note based on unaudited financial statements of Scheduled
Commercial Banks (SCBs) up to September 30, 2018, suggests that the worst of the non-
performing assets (NPA) crisis facing India’s banks might be over and that credit growth may also
be back. (REUTERS)

The share of gross NPAs in total advances of banks, both in the public and private sector, peaked
in March 2018, and has since declined — in both the June and September quarter of the current
fiscal year. The NPA crisis is more widespread in the public sector banks. The report also says that
annualized slippage ratio — percentage of fresh NPAs as percentage of standard NPAs — has also
shown a decline in the last two quarters.To be sure, the share of NPAs in total advances is still
much higher than what it was before the RBI forced banks to implement Asset Quality Review
(AQR) in December 2015. The AQR is believed to have put an end to the practice of making
additional provisions to what were already stressed loans.

The Indian economy has been suffering from a vicious cycle of low demand and supply for capital
due to the NPA crisis. Banks were unable to lend because their capital was caught in bad loans.
And firms were unwilling to borrow because of an already existing loan burden. The Economic
Survey had termed this as the “twin balance sheet” problem a couple of years ago.The latest
numbers on decline in share of NPAs, when read together with capital formation and credit growth
statistics, which are already available in the public realm, also point towards a cyclical revival of
the investment cycle in the Indian economy. Both these indicators show a revival in the recent
period, which suggests that there is a revival in investment demand in the economy.

While these developments are good news on the macro front from a growth perspective, they could
also mean a tightening of the inflation scenario. Given the fact that non-food inflation in the
economy has been consistently high, it could build the case for a hike in lending rates by RBI in
the near future.

33
 GROSS NPAS JUMP TO 11.2 % IN FY19: IN RBI REPORTS IN 2019

PRIVATE SECTOR PEERS BANKS’ NPA RATIO STOOD AT A MUCH LOWER LEVEL OF
4.7 PERCENT AS AGAINST 4.1 PERCENT IN FY17.

System-wide gross non-performing assets of banks rose to 11.2 percent or at Rs 10.39 trillion in
FY19 from 9.3 percent a year ago, and the share of public sector banks stood at Rs 8.95 trillion, or
at 14.6 percent, according to the Reserve Bank data released Friday.

In FY18, system-wide gross NPAs stood at 9.3 percent and that of state-run lenders stood at 11.7
per cent.

“During FY17, the GNPA ratio reached 14.6 percent for state-run banks due to restructured
advances slipping into NPAs and better NPA recognition,” RBI said in its report on ’Trends &
Progress of Banking in 2016-17’

In terms of the net NPA ratio, state-run banks saw significant deterioration at 8 percent in FY17
from 6.9 percent year-ago. Private sector peers banks’ GNPA ratio stood at a much lower level of
4.7 percent as against 4.1 percent in FY16.

“Resolute efforts on the part of private sector banks to clean up their balance sheets through higher
write-offs and better recoveries also contributed to their lower GNPA ratios,” the report said. Asset
quality of foreign banks improved marginally to 3.8 percent in FY18 from 4 percent in FY18.

In FY19, the share of doubtful advances in total gross NPAs increased sizeable to Rs 5.11 trillion
or 6.7 per cent of the system, driven up by state-run banks whose ratio stood at 9 percent.

In fiscal 2019, share of sub-standard and loss assets in GNPAs of private banks declined to 1.1
percent and 0.2 percent, respectively due to aggressive write-offs.

During the year under review, the fresh slippages rose for state-run lenders on account of
restructured advances slipping into NPAs and a decline in standard advances.

In the previous fiscal, the GNPA ratio of public sector banks arising from larger borrower accounts
(exposure of Rs 5 crore and above) increased to 23.1 per cent from 18.1 per cent in the FY18. But
this saw an improvement in FY19. “During the first half of FY19, NPAs in large borrower accounts

34
of state-run banks and private sector banks declined to 21.6 percent and 7 percent, respectively,”
the report said.

The gems & jewelry sector saw a significant increase in GNPAs during FY19 with unearthing of
frauds at PNB, which bore the brunt of the Rs 14,000 crore scam by Nirva Modi and his uncle
Mehul Choksi.

“Frauds have emerged as the most serious concern in the management of operational risks, with
90 percent of them located in the credit portfolio of banks,” the report said. A large value frauds
involving Rs 50 crore and above constituted about 80 percent of all the frauds during 2017-18.
Nearly 93 percent of the frauds worth Rs 10 lakh or more occurred in state-run lenders while
private banks accounted for just 6 percent.

“We will continue to monitor asset quality as well as resolution of stressed assets with a focus on
implementation of the new resolution framework,” the RBI said in the report. The monetary
authority also said it will look into implementation of Ind.-As, corporate governance in banks and
a revised framework for securitization. The central bank also intends to issue revised prudential
regulations including guidelines on exposure/investment norms, risk management framework and
select elements of Basel III capital framework, it said.

35
 Total NPA in Banking Sector till 2019
Indian banks' gross non-performing assets (NPAs), or bad loans, stood at Rs 10.25 lakh crore as
on 31 March 2019. On quarter, the pile has grown by Rs 1.39 lakh crore or 16 percent from Rs
8.86 lakh crore as on 31 December 2018. This chunk now accounts for 11.8 percent of the total
loans given by the banking industry. For financial year 2019, the total bad loans of these banks
rose by a whopping Rs 3.13 lakh crore.

Taking note of the alarming bad loans situation, the Narendra Modi-led government, last year,
announced an Rs 2.11 lakh crore bank recapitalization plan to pull out state-run banks from the
mess. As much as 90 percent of the above-mentioned sticky assets are on the books of government-
owned banks.

A break-up of the NPAs shows that 21 public sector banks (PSBs) saw their bad loans pile grow
by Rs 1.19 lakh crore (or 15.4 percent) to Rs 8.97 lakh crore in the March 2019 quarter, compared
to December 2018's figures, while that of 18 private banks surged by Rs 19,446 crore or 17.9
percent to Rs 1.28 lakh crore in the March 2018 quarter from Rs 1.09 lakh crore in the December
2017 quarter.

After making provisions, the net bad loans of these banks stood at Rs 5.18 lakh crore in the March
2019 quarter as against Rs 4.69 lakh crore in the December 2018 quarter. Industry leader, the State
Bank of India (SBI), which tops the NPA chart, has logged an increase of Rs 24,286 crore in bad
loans in the March quarter to Rs 2.23 lakh crore. The Nirav Modi scam-hit Punjab National Bank
(PNB) has reported the maximum rise of Rs 29,100 crore in gross NPAs to Rs 86,620 crore in the
March quarter. Barring the Bank of India (BoI) and Oriental Bank of Commerce (OBC), most
other PSBs' also recorded a rise in bad loans during the quarter. While Bank of India's gross bad
loans declined by Rs 1,920 crore in the March quarter, that of OBC was down by Rs 1,417 crore.

Among private banks, the gross NPAs of ICICI Bank and Axis Bank have risen significantly.
ICICI Bank's bad loans pile grew by Rs 8,024 crore or 17.4 percent in the March 2018 quarter to
Rs 54,063 crore; Axis Bank's widened by Rs 9,248 crore or 37 percent to Rs 34,249 crore in the
March 2018 quarter from Rs 25,001 crore during the December 2017 quarter.

36
These seven charts throw more light on the bad loans crisis that has engulfed the nation's banking
sector:

37
38
The Modi government has time and again blamed the previous UPA-regime for the bad loan mess,
saying NPAs are a legacy issue. It isn't clear whether the government has grasped the gravity of
the situation. Indeed, the government has taken steps to address the bad loans mess like the NPA
ordinance, giving the central bank more power to direct banks to take action against loan
defaulters, and the passage of the Insolvency and Bankruptcy Code (IBC).

39
 MEANING OF PUBLIC SECTOR BANK

A Public bank is a bank, a financial institution, in which a state, municipality, or public actors are
the owners. It is an enterprise under government control. Prominent among current public banking
models are the Bank of North Dakota, the German public bank system, and many nations’ postal
bank systems.

Public or 'state-owned' banks proliferated globally in the late 19th and early 20th centuries as vital
agents of industrialization in capitalist and socialist countries alike; as late as 2012, state banks
still owned and controlled up to 25 per cent of total global banking assets.

Proponents of public banking argue that policymakers can create public-sector banks to reduce the
costs of government services and infrastructure; protect and aid local banks; offer banking services
to people and entities underserved by private-sector banking; and promote particular kinds of
economic development reflecting polities’ shared notions of social good. The 2015 Addis Ababa
Financing for Development Action Agenda noted that public banks should have an important role
in achieving the new Sustainable Development Goals. Increasingly, major international financial
institutions are recognizing the positive and catalytic role public banks can serve in the coming
low carbon climate resilient transition. Further, international NGOs and critical scholars argue that
public banks can play a significant role in financing a just and equitable energy transition.

Public Sector Banks

The State Bank of India (SBI)

The SBI is an Indian multinational, public sector banking and financial services company. It is
a government-owned corporation headquartered in Mumbai, Maharashtra. The company is ranked
216th on the Fortune Global 500 list of the world's biggest corporations as of 2017. It is the largest
bank in India with a 23% market share in assets, besides a share of one-fourth of the total loan and
deposits market.

The bank descends from the Bank of Calcutta, founded in 1806, via the Imperial Bank of India,
making it the oldest commercial bank in the Indian subcontinent. The Bank of Madras merged into
the other two "presidency banks" in British India, the Bank of Calcutta and the Bank of Bombay,
to form the Imperial Bank of India, which in turn became the State Bank of India in

40
1955. The Government of India took control of the Imperial Bank of India in 1955, with Reserve
Bank of India (India's central bank) taking a 60% stake, renaming it the State Bank of India. In
2008, the government took over the stake held by the Reserve Bank of India

SBI FIVE YEARS NPAs

Year Net NPA in crore

2015 31096.07

2016 27590.58

2017 55807.02

2018 58277.38

2019 110854.70

INTERPRETATION: In this table shows that Net NPA of public sector banks E.g. SBI banks
has increase year by year like in 2015 there is 31096.07 crores and in year 2019 Net NPA will
increase 110854.70 it also effect on Net profit of banks & its performance.

41
 MEANING OF PRIVATE SECTOR BANKS

Private banking includes personalized financial and banking services generally offered to
wealthy high net worth individual (HNWI) clients. For wealth management purposes, HNWIs
have typically accrued more wealth than the average person, so they have the means to access a
larger variety of conventional and alternative investments. Private Banks aim to match such
individuals with the most appropriate options.

In addition to providing exclusive investment-related advice, private banking goes beyond

managing investments to address a client's entire financial situation. Services include protecting
and growing assets in the present, providing specialized financing solutions, planning
retirement and passing wealth on to future generations.

While an individual may be able to conduct some private banking with $50,000 or less in
investable assets, some exclusive private banks only accept clients with at least $500,000 worth of
investable assets. Such high levels of wealth allow these individuals to participate in alternative
investments, such as hedge funds and real estate. Furthermore, this level of wealth often prevents
liquidity problems. UBS, Merrill Lynch, Morgan Stanley and Credit Suisse are examples of private
banks.

Private sector banks

Axis Bank
Axis bank is the third largest of the private-sector banks in India offering a comprehensive suite
of financial products. The bank has its head office in Mumbai, Maharashtra. It has 3,703 branches,
13,814 ATM s, and nine international offices. The bank employs over 55,000 people and had a
market capitalization of 1.31 trillion (US$18 billion) (as on March 31, 2018). It sells financial
services to large and mid-size corporate s, SME, and retail businesses.

As of 30 Jun. 2017, 30.81% shares are owned by promoters and promoter group (United India
Insurance Company Limited, Oriental Insurance Company Limited, National Insurance Company
Limited, New India Assurance Company Ltd, GIC, LIC and UTI). The remaining 69.19% shares

42
are owned by mutual funds, FIIs, banks, insurance companies, corporate bodies, and individual
investors among others

AXIS FIVE YERAS OF NPAs

Year Net NPA in crore

2015 1,024.62

2016 1,316.71

2017 2,522.14

2018 8,626.60

2019 16,592.00

INTERPRETATION : In this table shows that Net NPA of Private sector banks E.g. Axis
banks has increase year by year like in 2015 there is 1024.62 crores and in year 2019 Net NPA
will increase 16592.00 it also effect on Net profit of banks & its performance.

43
 DATA ANALYSIS AND INTERPRETATION

To analyze the performance of SBI & Axis banks on Non-performing asset for last five years
In public sector (SBI bank) and private sector (axis bank) for this study were selected based on
purposive sampling method, for this top 1 public and 1 private sector banks in India were taken
for the study on the basis of market capitalization. The study period is from 2013-14 to 2017-18

Statistical tools used: Statistical tools used Mean has been calculated to know the average
performance and to know the stability in the performance of the banks to find the relationship
between NPA and Net profit.

Gross NPA to Gross advance ratio of SBI & AXIS Banks in India from 2012-13 to 2017 -18 (Ratio
in Percentage)

Year SBI BANK AXIS BANK

2014-15 4.93 1.34
2015-16 4.20 1.43
2016-17 6.3 1.75
2017-18 6.8 5.42
2018-19 6.90 6.77
MEAN 5.826 3.342

INTERPRETATION:
As above table shows that reveals the Gross NPA to Gross advance ratio of SBI & Axis Banks.
SBI has the highest mean ratio of 5.826, followed by Axis bank has the lowest mean ratio of 3.342.
This shows that there a consistency in Gross NPA to gross advance ratio.

44
 RELATIONSHIP BETWEEN NET NPA AND NET PROFITS OF SBI AND
AXIS BANKS

NET PROFIT AND NET NPA OF SELECT PUBLIC SECTOR BANKS FROM 2013-134TO
2017-18 (RS IN CRORES)

YEARS SBI SBI AXIS AXIS

NET NET NPA NET NET NPA
PROFIT PROFIT
2014-15 10891 31096 6216 1027
2015-16 13102 27590 7345 1318
2016-17 9951 55807 8224 2520
2017-18 10484 58277 3682 8627
2018-19 2815 110854 2757 16592
MEAN 9449 56725 5645 6017
Interpretation: AS above table shows that when NPA is at an increasing level, there will be a
downfall in the Net Profit of the banks. It is clear from the above table that the NPA of SBI
increases 56725 crores in 2018-19 .The NPA of Axis bank has the lowest 6017 in 2018-19.This
shows that the concentration of NPA with some largest Public Sector Bank increases at a high rate.
Table shows that when NPA is at an increasing level, there will be a downfall in the Net Profit of
the banks. It is clear from the above table that the NPA of SBI increases 56725 crores in 2018-19,
and the NPA of Axis banks has 6017.This shows that the concentration of NPA with largest SBI
Bank increases at a high rate. To analyze the performance of SBI & Axis banks on Non-
performing asset for last five years “NPA resolutions have started to happen since the recognition of
bad loans and Insolvency and Bankruptcy Code (IBC) law implementation has picked up. So hopefully,
going forward, the asset quality should start looking better from here on. Banks are also growing their
balance sheet which would also show improvement in the percentage ratios for the NPAs," said Karthik
Srinivasan, Senior Vice President of ICRA Ratings.

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In FY20 will be “the year of happiness”, SBI Chairman Rajnish Kumar said after the FY19
financial results. In the current market situation, Kumar considers SBI in the best position to seize
the opportunity.

Underlying reason for NPA in India

An internal study conducted by RBI shows that in the order of prominence, the following factor
contribute to NPAs. Internal Factor Diversion of funds for - Expansion/diversification
/modernization - Taking up new project - Helping /promoting associate concerns time/cost overrun
during the project implementation stage Business Failure Inefficiency in management Slackness
in credit management and monitoring Inappropriate Technology/technical problem Lack of
coordination among lenders External Factor Recession Input/power storage Price escalation
Exchange rate fluctuation Accidents and natural calamities, etc. Changes in government policies
in excise/ import duties, pollution control orders, etc.

NPA - Impact The problem of NPAs in the Indian banking system is one of the foremost and the
most formidable problems that had impact the entire banking system. Higher NPA ratio trembles
the confidence of investors, depositors, lenders etc. It also causes poor recycling of funds, which
in turn will have deleterious effect on the deployment of credit. The non-recovery of loans effects
not only further availability of credit but also financial soundness of the banks.
1. Profitability: NPAs put detrimental impact on the profitability as banks stop to earn income on
one hand and attract higher provisioning compared to standard assets on the other hand. On an
average, banks are providing around 25% to 30% additional provision on incremental NPAs which
has direct bearing on the profitability of the banks.
2. Asset (Credit) contraction: The increased NPAs put pressure on recycling of funds and reduces
the ability of banks for lending more and thus results in lesser interest income. It contracts the
money stock which may lead to economic slowdown.
3. Liability Management: In the light of high NPAs, Banks tend to lower the interest rates on
deposits on one hand and likely to levy higher interest rates on advances to sustain NIM. This may
become hurdle in smooth financial inter mediation process and hampers banks’ business as well
as economic growth.

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4. Capital Adequacy: As per Basel norms, banks are required to maintain adequate capital on risk-
weighted assets on an ongoing basis. Every increase in NPA level adds to risk weighted assets
which warrant the banks to shore up their capital base further. Capital has a price tag ranging from
12% to 18% since it is a scarce resource.
5. Shareholders’ confidence: Normally, shareholders are interested to enhance value of their
investments through higher dividends and market capitalization which is possible only when the
bank posts significant profits through improved business. The increased NPA level is likely to
have adverse impact on the bank business as well as profitability thereby the shareholders do not
receive a market return on their capital and sometimes it may erode their value of investments. As
per extant guidelines, banks whose Net NPA level is 5% & above are required to take prior
permission from RBI to declare dividend and also stipulate cap on dividend payout.
6. Public confidence: Credibility of banking system is also affected greatly due to higher level
NPAs because it shakes the confidence of general public in the soundness of the banking system.
The increased NPAs may pose liquidity issues which is likely to lead run on bank by depositors.
Thus, the increased incidence of NPAs not only affects the performance of the banks but also affect
the economy as a whole. In a nutshell, the high incidence of NPA has cascading impact on all
important financial ratios of the banks viz., Net Interest Margin, Return on Assets, Profitability,
Dividend Payout, Provision coverage ratio, Credit contraction etc., which may likely to erode the
value of all stakeholders including Shareholders, Depositors, Borrowers, Employees and public at
large.

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 A BRIEF ACCOUNT OF PROFITABILITY

The primary objective of each business enterprise is to earn profit. In facts profit earning is
considered essential not only for the survival of business but is also required for its expansion and
diversification. One of the most frequently used tools of financial ratio analysis is profitability
ratios which are used to determine the company’s bottom line and its return to its inventors.
Profitability ratios are typically based on net earnings, but variations will occasionally use cash
flow or operating earnings. Profitability is a measure of efficiency and control. Profitability is the
main base for liquidity as well as solvency. As per RBIs master circular dated 01 -07-2005 An
asset, including a leased asset, becomes non-performing when it ceases to generate income for the
bank. It is also known as non- productive assets (NPA’s), non-performing loans and constitutes
integral part of Bank’s operations. It means NPA 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. A critical look
through the existing statistics on the movement of NPAs of the leading Commercial Banks will help
to determent the extent to which they are standing with regard to NPAs.

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 PROBLEMS OF NPA

The banking sector regardless of laying prominence is not making sufficient return on investment
or the return on equity that shareholders necessitate. These days it’s all about the customer and
many banks are feeling stress because they are not delivering the level of service that consumers
are demanding, especially in regards to technology. In banking system day to day NPAs are
increasing so bank does not have sufficient capital adequacy ratio for managing the risk. The major
risk to India’s banks is the risk in bad loans. The hold back in the economy in the last few years
led to a risk in bad loans or non-performing assets.. This money cannot be used for any other
purpose including lending as a result; banks have lower capital available to use for its various
operation.

In the past few years, many banks have tried to interruption setting aside money as provisions (for
future bad loans). Technically, NPA are loan account of borrower, which have been classified by
a bank into three categories via, standard asset, substandard asset and loss asset in agreement with
the guidelines relating to assets classification issued by RBI. The increase of NPAs is an important
factor in banking sector influential its financial stability and growth as high NPAs have a
weakening impact on capital, liquidity and profitability of the banking institutions. In addition, a
high level of NPAs hampers the bank ability to recycle funds and puts a strain on the net worth of
banks. Since the onset of the global financial crisis, the Indian banking system has become a source
of concern due to rising NPAs.

Non-Performing assets have emerged as a serious threat to the banking industry in India as it
affects the performance, financial soundness, and profitability of the banks. Further, NPA is one
of the indicators to assess the soundness of banking sector. They, unfortunately, impact the banks
by reducing their profits in the form of provisions and it also reduces their lending capacity. The
banks’ inability to recover the loans results in written offs which leads to a downfall in their
profitability performance. Non-repayment of loans by the willful defaulters prevents the banks
from lending to new borrowers, which slows down the credit cycling and diminishes the estimate

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of credit multiplier. Increase in Non-Performing Assets has an adverse impact on the profitability
of the banks. So, it becomes the biggest hurdle in the way of social-economic development of
India. Hence, the present study focused on the impact of NPA on Profitability of the select Public
and Private Sector banks in India.

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 SUGGESTION AND RECOMMENDATION

 Advances provided by banks need to be done re-sanctioning evaluation and post

disbursement control so that NPA can decrease.
 Good management needed on the side of public sector bank e.g. SBI to decrease the level of
NPA. Proper selection of borrowers & follow ups required to get timely payment.
Non-performing assets are a drain to the bank.
 The banks in India are adopting various strategies to reduce the non-performing assets in
their banks and they are also adopting various methodologies by which further addition to
NPA portfolio is minimized In the real sense, in case there is a recovery in principal and
installments due in respect of the loans granted to the banks are received 100%, the question
of non-performing assets do not arise.
 However, there is no such ideal bank where the NPA is nil. Except banks which were
originated recently, all banks are prone to have some portion of their loans and advances as
non-performing advances the following are some strategies by which banks are trying to
curtail non-performing assets to a great extent.
 As the HDFC bank is using the new technology known as ‘Artificial Intelligence’ very
effectively by which the NPA of HDFC bank is very less around 0.2%. So it is suggested
that SBI and Axis bank should also use this technology in a very effective and efficient way
so that the NPA of these banks get reduced over the period of time.

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 CONCLUSION

This project report suggest NPAs affect the financial performance of Indian banks as well financial
growth of economy. Indian banking system is facing the NPAs problem. Every country’s economic
growth depends upon their financial system. The financial system mainly comprises banking
sector. Especially public sector banks E.g. SBI bank should focus on their NPA Management to
grow their profitability. The financial institutions should develop new strategies planning to
improve the recovery of loan. Non-performing assets (NPAs) is affecting the performance of
financial institutions both financially and psychologically. The non-performing assets have
become a major cause of concern. Absorbing the credit management skills has become all the more
important for improving the bottom-line of the banking sector. The current NPAs status continues
to disturb Indian banking Sector. The Indian banking sector faced a serious problem of NPAs. A
high level of NPAs suggests high probability of a large number of credit defaults that affect the
profitability and liquidity of banks. Most of the problem related to NPA is faced by public sector
banks. To improve the efficiency and profitability, the NPAs have to be scheduled. Strict measures
are needed to be taken up to combat these NPAs crises. It is highly impossible to have zero
percentage NPA

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 BIBLIOGRAPHY
A. Websites :-

1. WWW. MONEYCONTROL .COM

2. WWW. ECONOMIC TIMES.COM

3. WWW.INVESTING.COM

4. WWW.AXISBANK.COM

5. WWW.SBI.CO.IN

6. www.rbi.org.in

7. WWW.business today.in

8. WWW.WIKIPEDIA.COM

9. WWW.investopedia.com

B. Reference books :-

1. Financial Management- M.Y. Khan & P.K. Jain

2. Annual Report of SBI & Axis banks of Last 5Years.

3. Analysis of NPA in banking sectors.

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