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CERTIFICATE BY THE HEAD OF THE DEPARTMENT

Mr. Sanjay Kumar Parida Head of the Department, P.G. Department of Finance & Management.

This is to certify that Miss.priyadarshini sahoo , a bonafide student of Master of Finance and Control has completed the project entitled
ASSETS CHALLENGE TO THE KOTAK MAHINDRA BANK. NON PERFORMING

This project has been submitted

as a partial fulfillment of the requirement for the Masters Degree of Finance and Control Examination, 2010. To the best of my knowledge no work with such caption and content has been submitted to any other University or institution for the award of any degree.

Date:Place: (MR. SANJAY K. PARIDA)

CERTIFICATE BY THE GUIDE


Faculty Member, name P.G. Department of Finance & Management.

This is to certify that Miss.priyadarshini sahoo, a bonafide student of Master of Finance and Control has completed the project entitled
ASSETS CHALLENGE TO THE KOTAK MAHINDRA BANK. NON PERFORMING

This project has been submitted

as a partial fulfillment of the requirement for the Masters degree of Finance and Control Examination, 2010.

Date:Place: ()

DECLARATION
Miss. priyadarshini sahoo here by declaration entitled NON PERFORMING ASSETS CHALLENGE TO THE KOTAK MAHINDRA BANK. is my original effort and it has not submitted to any other organization And university other than VIVEKANANDA INSTITUTION OF SOCIAL WORK & SOCIAL SCIENCE (VISWASS) AND INDIAN OVERSEAS BANK BHUBANESWAR for any purpose. This project has been Complied for partial fulfillment of the award of master of finance and control from VIVEKANANDA INSTITUTION OF SOCIAL WORK & SOCIAL SCIENCE ( VISWASS) AND.BHUBANEWAR 2009-11. I

Date: Place; Bhubaneswar

Name Roll no:137590092028

Acknowledgement

It is my proved privilege to express the feeling of my gratitude to several persons who helped me directly or indirectly to conduct this project work.

I acknowledge with sincere gratitude and deep sense of reverence to .. Indian Overseas Bank, Bhubaneswar , I would also like to thank all the staff of Indian overseas bank for their kind and generous co-operation.

I am greatly indebted and remain ever obliged to my concerned faculty MR RAKESH KUMAR PATRA who have helped me directly and indirectly to complete my project work on my respect. I am extremely thankful to the course co-ordination and faculties of the master of finance and control for their coordination and cooperation.

I am also extremely thankful to all those persons who have positively helped me and respond my questionnaires, around which the whole project cycle revolves. I also thank all my friends who have more or less contributed to the preparation of this project report. I will be always indebted to them.

Date: Place: Bhubaneswar. Name

CONTENTS
SL NO PARTICULARS PAGE NO

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

Introduction Objective of the study Need of the study Scope of the study Methodology of the study Limitation of the study Company Profile

SWOT Analysis banking industry PEST analysis in banking industry Data Analysis & Interpretation Findings

20 21 22 23

Suggestion Conclusion Bibliography Annexure

LIST OF TABLES AND FIGURES

CHAPTER-1 INTRODUCTION

INTRODUCTION
After liberalization the Indian banking sector developed very appreciate. The RBIalso nationalized good amount of commercial banks for proving socio economic servicesto the people of the nation.The Public Sector Banks have shown very good performance as far as the financial operations are concerned. If we look to the glance of the financial operations, we may find that deposits of public to the Public Sector Banks have increased from859,461.95crore to 1,079,393.81crore in 2003, the investments of the Public Sector Banks have increased from 349,107.81crore to 545,509.00crore, and however the advances have also been increased to 549,351.16crore from 414,989.36crore in 2003.The total income of the public sector banks have also shown good performance since the last few years and currently it is 128,464.40crore. The Public Sector Banks have also shown comparatively good result. The gross profits of the Public Sector Banks currently 29,715.26crore which

has been doubled to the last to last year, and the net profit of the Public Sector Banks is 12,295,47crore.However, the only problem of the Public Sector Banks these days are the increasing level of the non performing assets. The non performing assets of the Public Sector Banks have been increasing regularly year by year. If we glance on the numbers of non performing assets we may come to know that in the year 1997 the NPAs were47,300crore and reached to 80,246crore in 2002.The only problem that hampers the possible financial performance of the Public Sector Banks is the increasing results of the non performing assets. The non performing assets impacts drastically to the working of the banks.

The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time bank share required to make provisions for such NPAs from their current profits

NPAs have a deleterious effect on the return on assets in several ways They erode current profits through provisioning requirements They result in reduced interest income They require higher provisioning requirements affecting profits and accretion tocapital funds and capacity to increase good quality risk assets in future, and They limit recycling of funds, set in asset-liability mismatches, etc.The RBI has also tried to develop many schemes and tools to reduce the non performing assets by introducing internal checks and control scheme, relationship managers as stated by RBI who have complete knowledge of the borrowers, credit rating system, and early warning system and so on. The RBI has also tried to improve the securitization Act and SRFAESI Act and other acts related to the pattern of the borrowings. Though RBI has taken number of measures to reduce the level of the non performing assets the results is not up to the expectations. To improve NPAs each bank should be motivated to introduce their own precautionary steps. Before lending the banks must evaluate the feasible financial and operational prospective results of the borrowing companies. They must evaluate the business of borrowing companies by keeping in considerations the overall impacts of all the factors that influence the business

RESEARCH OPERATION
1. Significance of the study

The main aim of any person is the utilization money in the best manner since theIndia is country were more than half of the population has problem of running the familyin the most efficient manner. However Indian people faced large number of problem tillthe development of the full-fledged banking sector. The Indian banking sector came intothe developing nature mostly after the 1991 government policy. The banking sector hasreally helped the Indian people to utilise the single money in the best manner as theywant. People now have started investing their money in the banks and banks also providegood returns on the deposited amount. The people now have at the most understood that banks provide them good security to their deposits and so excess amounts are invested inthe banks. Thus, banks have helped the people to achieve their socio economicobjectives.The banks not only accept the deposits of the people but also provide them creditfacility for their development. Indian banking sector has the nation in developing the business and service sectors. But recently the banks are facing the problem of credit risk.It is found that many general people and business people borrow from the banks but dueto some genuine or other reasons are not able to repay back the amount drawn to the banks. The amount which is not given back to the banks is known as the non performingassets. Many banks are facing the problem of non performing assets which hampers the business of the banks. Due to NPAs the income of the banks is reduced and the bankshave to make the large number of the provisions that would curtail the profit of the banksand due to that the financial performance of the banks would not show good resultsThe main aim behind making this report is to know how Public Sector Banks areoperating their business and how NPAs play its role to the operations of the Public Sector Banks. The report NPAs are classified according to the sector, industry, and state wise.The present study also focuses on the existing system in India to solve the problem of NPAs and comparative analysis to understand which bank is playing what role withconcerned to NPAs.Thus, the study would help the decision makers to understand thefinancial performance and growth of Public Sector Banks as compared to the NPAs.

Objective of the study


Primary objective:
*The primary objective of the making report is: *To know why NPAs are the great challenge to the Public Sector Banks

Secondary objectives:
*The secondary objectives of preparing this report are: *To understand what is Non Performing Assets and what are the underlyingreasons for the emergence of the NPAs.

*To understand the impacts of NPAs on the operations of the Public Sector Banks. *To know what steps are being taken by the Indian banking sector to reduce the NPAs? *To evaluate the comparative ratios of the Public Sector Banks with concerned to the NPAs

Research methodology
The research methodology means the way in which we would complete our prospected task. Before undertaking any task it becomes very essential for any one to determine the problem of study. I have adopted the following procedure in completing my report study. 1. Formulating the problem 2. Research design 3. Determining the data sources 4. Analysing the data 5. Interpretation 6. Preparing research report (1) Formulating the problem I am interested in the banking sector and I want to make my future in the banking sector so decided to make my research study on the banking sector. I analysed first the factors that are important for the banking sector and I came to know that providing credit facility to the borrower is one of the important factors as far as the banking sector is concerned. On the basis of the analysed factor, I felt that the important issue right now as far as the credit facilities are provided by bank is non performing assets. I started knowing about the basics of the NPAs and decided to study on the NPAs. So, I chose the topic Non Performing Assts the great challenge before the Public Sector Banks. (2) Research Design The research design tells about the mode with which the entire project is prepared. My research design for this study is basically analytical. Because I have utilised the large number of data of the Public Sector Bank

(3) Determining the data source The data source can be primary or secondary. The primary data are those datawhich are used for the first time in the study. However such data take place much time and are also expensive. Where as the secondary data are those data which are already available in the market. These data are easy to search and are not expensive too. for my study I have utilised totally the secondary data.(4) Analysing the dataThe primary data would not be useful until and unless they are well edited and tabulated. When the person receives the primary data many un useful data would also be there. So, I analysed the data and edited them and turned them in the useful tabulations. So, that can become useful in my report study.(5) Interpretation of the data With use of analysed data I managed to prepare my project report. But the analyzing of data would not help the study to reach towards its objectives. The interpretation of the data is required so that the others can understand the crux of the study in more simple way without any problem so I have added the chapter of analysis that would explain others to understand my study in simpler way.(6) Project writing This is the last step in preparing the project report. The objective of the report writing was to report the findings of the study to the concerned authorities

4. Limitations of the study


* The limitations that I felt in my study are: * It was critical for me to gather the financial data of the every bank of the Public Sector Banks so the better evaluations of the performance of the banks are not possible. * Since my study is based on the secondary data, the practical operations as related to the NPAs are adopted by the banks are not learned. * Since the Indian banking sector is so wide so it was not possible for me to cover all the banks of the Indian banking sector

CHAPTER -2 INDIAN BANKING SECTOR

INDIAN BANKING SECTOR


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. During the Mogul period, 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, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalized and in 15thApril 1980 six more commercial private sector banks were also taken over by the government.

Indian Banking: A Paradigm shift-A regulatory point of view

The decade gone by witnessed a wide range of financial sector reforms, with many of them still in the process of implementation. Some of the recently

initiated measures by the RBI for risk management systems, anti money laundering safeguards and corporate governance in banks, and regulatory framework for non bank financial companies, urban cooperative banks, government debt market and forex clearing and payment systems are aimed at streamlining the functioning of these instrumentalities besides cleansing the aberrations in these areas. Further, one or two all India development financial institutions have already commenced the process of migration towards universal banking set up. The banking sector has to respond to these changes, consolidate andrealign their business strategies and reach out for technology support to survive emerging competition. Perhaps taking note of these changes in domestic as well as international arena All of we will agree that regulatory framework for banks was one area which has seen a sea-change after the financial sector reforms and economic liberalization andglobalisation measures were introduced in 1992-93. These reforms followed broadly the approaches suggested by the two Expert Committees both set up under the chairmanship of Shri M. Narasimham in 1991 and 1998, the recommendations of which are by now well known. The underlying theme of both the Committees was to enhance the competitive efficiency and operational flexibility of our banks which would enable the mto meet the global competition as well as respond in a better way to the regulatory and supervisory demand arising out of such liberalisation of the financial sector. Most of there commendations made by the two Expert Committees which continued to be subject matter of close monitoring by the Government of India as well as RBI have been implemented. Government of India and RBI have taken several steps to :(a) Strengthen the banking sector, (b) Provide more operational flexibility to banks, (c) Enhance the competitive efficiency of banks, (d) Strengthen the legal framework governing operations of banks.

Regulatory measures taken to strengthen the Indian Banking sectors


The important measures taken to strengthen the banking sector are briefly, the following: Introduction of capital adequacy standards on the lines of the Basel norms, prudential norms on asset classification, income recognition and provisioning, Introduction of valuation norms and capital for market risk for investments Enhancing transparency and disclosure requirements for published accounts , Aligning exposure norms single borrower and group-borrower ceiling with international best practices

Introduction of off-site monitoring system and strengthening of the supervisory framework for banks.

(A) Some of the important measures introduced to provide more operational flexibility to banks are: Besides deregulation of interest rate, the boards of banks have been given the authority to fix their prime lending rates. Banks also have the freedom to offer variable rates of interest on deposits, keeping in view their overall cost of funds. Statutory reserve requirements have significantly been brought down. The quantitative firm-specific and industry-specific credit controls were abolishedand banks were given the freedom to deploy credit, based on their commercial judgment, as per the policy approved by their Boards. The banks were given the freedom to recruit specialist staff as per their requirements, The degree of autonomy to the Board of Directors of banks was substantiallyenhanced. Banks were given autonomy in the areas of business strategy such as, opening of branches / administrative offices, introduction of new products and certain other operational areas.

(b) Some of the important measures taken to increase the competitive efficiency of banks are the following: Opening up the banking sector for the private sector participation Scaling down the shareholding of the Government of India in nationalised banksand of the Reserve Bank of India in State Bank of India. (c) Measures taken by the Government of India to provide a more conducive legal environment for recovery of dues of banks and financial institutions are: Setting up of Debt Recovery Tribunals providing a mechanism for expeditiousloan recoveries. Constitution of a High Power Committee under former Justice Shri Eradi tosuggest appropriate foreclosure laws.

An appropriate legal framework for securitisation of assets is engaging the attention of the Government, Due to this paradigm shift in the regulatory framework for banks had achieved the desired results. The banking sector has shown considerable degree of resilience. (a) The level of capital adequacy of the Indian banks has improved: the CRAR of public sector banks increased from an average of 9.46% as on March 31, 1995 to11.18% as on March 31, 2001. (b) The public sector banks have also made significant progress in enhancing their asset quality, enhancing their provisioning levels and improving their profits. The gross and net NPAs of public sector banks declined sharply from 23.2% and14.5% in 1992-93 to 12.40% and 6.7% respectively, in 2000-01. Similarly, in regard to profitability, while 8 banks in the public sector recorded operating and net losses in 1992-93, all the 27 banks in the public sector showed operating profits and only two banks posted net losses for the year ended March31, 2001. The operating profit of the public sector banks increased from Rs.5628 crore as onMarch 31, 1995 to Rs.13,793 crore as on March 31, 2001. The net profit of public sector banks increased from Rs.1116 crore to Rs.4317crore during the same period, despite tightening of prudential norms on provisioning against loan losses and investment valuation. The accounting treatment for impaired assets is now closer to the international best practices and the final accounts of banks are transparent and more amenable to meaningful interpretation of their performance.

WAY FORWARD
RBI president recently recommended Indian banks to go for larger provisioning when the profits are good without frittering them away by way of dividends, however tempting it may be. As a method of compulsion, RBI has recently advised banks to create an Investment Fluctuation Reserve up to 5 per cent of the investment portfolio to protect the banks from varying interest rate regime. He further added that one of the means for improving financial soundness of a bank is by enhancing the provisioning standards of the bank. The cumulative provisions against loan losses of public sector banks amounted to a mere 41.67% of their gross NPAs for the year ended March 31, 2001. The amount of provisions held by public sector banks is not only low by international standards but there has been wide variation in maintaining the provision among banks.

Some of the banks in the public sector had as low provisioning against loan losses as 30% of their gross NPAs and only 5 banks had provisions in excess of 50% of their gross NPAs. This is inadequate considering that some of the countries maintain provisioning against impaired assets at as high as 140%. Indian Banks should improve the provisioning levels to at least 50% of their gross NPAs. There should therefore be an attitudinal change in banks policy as regards appropriation of profits and full provisioning towards already impaired assets should become a priority corporate goal. He also suggested that banks should also develop a concept of building desirable capital over and above the minimum CRAR which is insisted upon in developed regulatory regimes like UK. This can be at, say around 12 percent as practiced even today by some of the Indian banks, so as to provide well needed cushion for growth in risk weighted assets as well as provide for unexpected erosion in asset values. As banks would have observed, the changes in the regulatory framework are now brought in by RBI only through an extensive consultative process with banks as well as public wherever warranted. While this serves the purpose of impact assessment on the proposed measures it also puts the banks on notice to initiate appropriate internalre adjustment to meet the emerging regulatory prescriptions. Though adequate transitionalroute has been provided for switchover to new regulatory measures such as scaling down the exposure to capital market, tightening the prudential requirements like switch over to 90 day NPA norm, reduction in exposure norms, etc., I observe from the various quarters 14from which RBI gets its inputs that the banks are yet to take serious steps towards implementation of these measures. The Boards of banks have been accorded considerable autonomy in regard to their corporate strategy as also several other operational matters. This does not; however, seem to have translated to any substantial improvement in customer service. It needs to be recognised that meeting the requirements of the customer whether big or small efficiently and in a cost effective manner, alone will enable the banks to withstand the global competition as also the competition from non-bank institutions. The profitability of the public sector banks is coming under strain. Despite there silience shown by our banks in the recent times, the income from recapitalisation bonds accounted for a significant portion of the net profits for some of the nationalised banks. The Return on Assets (RoA) of public sector banks has, on an average, declined from0.54 for the year ended March 31, 1999 to 0.43 for the year ended March 31, 2001. Therefore, the Boards attention needs to be focused on improving the profitability of the bank. The interest income of public sector banks as a percentage of total assets has shown a declining trend since 1996-97: it declined from 9.69 in 1996-97to 8.84 in 2000-01. Similarly, the spread (net interest income) as a percentage of total assets also declined from 3.16 in 1996-97 to 2.84 in 2000-01.A disheartening feature is that a large number of public sector banks have recorded far below the median RoA of 0.4% for 2000-01 in their

peer group. Incidentally the RoA recorded by new private banks and foreign banks ranged from 0.8% to 1% for the same period. An often quoted reason for the decline in profitability of public sector banks is the stock of NPAs which has become a drag on the banks profitability. As you are aware, the stock of NPAs does not add to the income of the bank while at the same time, additional cost is incurred for keeping them on the books. To help the public sector banks in clearing the old stock of chronic NPAs, RBI had announced one-time nondiscretionary and non discriminatory compromise settlement schemes in 2000 and 2001.Though many banks tried to settle the old NPAs through this transparent route, the response was not to the extent anticipated as the banks had been bogged down by the usual fear psychosis of being averse to settling dues where security was available. The moot point is if the underlying security was not realised over decades in many cases due to extensive delay in litigation process, should not the banks have taken advantage of the one time opportunity provided under RBI scheme to cleanse their books of chronic NPAs? This would have helped in realizing the carrying costs on such non-income earning NPAs and released the funds for recycling. If better steps are taken placed in this connection then the performance of the Public Sector Banks can show very good and healthy results in the shorter period. To make the better future of the Public Sector Banks, the Boards need to be alive to the declining profitability of the banks. One of the reasons for the low level of profitability of public sector banks is the high operating cost. The cost income ratio(which is also known as efficiency ratio of public sector banks) increased from 65.3 percent for the year ended March 31, 2000 to 68.7 per cent for the year ending March 31,2001. The staff expenses as a proportion to total income formed as high as 20.7% for public sector banks as against 3.3% for new banks and 8.2% for foreign banks for the year ended March 31, 2001. There is thus an imperative need for the banks to go for costcutting exercise and rationalise the expenses to achieve better efficiency levels inoperation to withstand declining interest rate regime. Boards of banks have much more freedom now than they had a decade ago, and obviously they have to play the role of change agents. They should have the expertise to identify, measure and monitor the risks facing the bank and be capable to direct and supervise the banks operations and in particular, its exposures to various sectors of the economy, and monitoring / review thereof, pricing strategies, mitigation of risks, etc. The Board of the banks should also ensure compliance with the regulatory framework, and ensure adoption of the best practices in regard to risk management and corporate governance standards. The emphasis in the second generation of reforms ought to be in the areas of risk management and enhancing of the corporate governance standards in banks.

CLASSIFICATION OF SCHEDULED BANKINGSTRUCTURE IN INDIA

Private Banks
There are 23 private banks. Some major ones are: Axis Bank (Formerly UTI Bank) Federal Bank Ltd. HDFC Bank ICICI Bank Karnataka Bank Dhanalakshmi Bank Karur Vysya Bank Kotak Mahindra Bank IndusInd Bank

ING Vysya Bank Lakshmi Vilas Bank South Indian Bank The Nainital Bank Ltd. Yes Bank City union Bank

DIFFERENTS BETWEEN PRIVATE SECTOR AND PUBLIC SECTOR BANK


Public Sector bank means any Government Sector Bank/Institute that goes public... means that issues it share to general public.. It also has a greater share of Government (more than 50%) so that the main motto of social welfare other than Maximising Profit remains. Where as Private Sector Banks are those Banks where the management is controlled by Private individuals and Government does not have any say in the management of these banks.Maximising profit is the basic motto.

INDUSTRY ANALYSIS

S.W.O.T. ANALYSIS OF INDIAN BANKING INDUSTRY

STRENGTH
Indian banks have compared favourably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 percent growth in the market index for the same period. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. Bank lending has been a significant driver of GDP growth and employment. The vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.

They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector

banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.

WEAKNESS
PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational performance ethic & strengthen human capital. Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital. Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.

OPPORTUNITY
The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance

and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks. With increased interest in India, competition from foreign banks will only intensify. Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity Foreign banks committed to making a play in India will need to adopt alternative approaches to win the race for the customer and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset. Reach in rural India for the private sector and foreign banks. With the growth in the Indian economy expected to be strong for quite some time especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.

The Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives. Liberalization of ECB norms: The government also liberalized the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets. In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.

THREATS
Threat of stability of the system: failure of some weak banks has often threatened the stability of the system. Rise in inflation figures which would lead to increase in interest rates. Increase in the number of foreign players would pose a threat to the PSB as well as the private players

PEST ANALYSIS OF INDIAN BANKING INDUSTRY:


PEST analysis of any industry investigates the important factors that affect the industry and influence the companies operating in the sector. PEST stands for Political, Economic, Social and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry

POLITICAL FACTORS
Government and RBI policies affect the banking sector. Sometimes looking into the political advantage of a particular party, the Government declares some measures to their benefits like waiver of short-term agricultural loans, to attract the farmers votes. By doing so the profits of the bank get affected. Various banks in the cooperative sector are open and run by the politicians. They exploit these banks for their benefits. Sometimes the government appoints various chairmen of the banks. Various policies are framed by the RBI looking at the present situation of the country for better control over the banks. FOCUS ON REGULATIONS OF GOVERNMENT
Banking is least affected as compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework, stricter prudential regulations with respect to capital and liquidity. This gives India an advantage in terms of credibility over other countries. Government affects the performance of banking sector most by legislature and framing policy government through its budget affects the banking activities securitization act has given more power to banking sector against defaulting borrowers.

MONETARY POLICY
Monetary Policy 2009-2010 Bank Rate: The Bank Rate has been retained unchanged at 6.0%. Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0% to 4.75% with immediate effect. Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3.5% to 3.25% with immediate effect. RBI has retained the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.

FDI LIMIT
The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net worth to meet CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment

BUDGET MEASURES Budget Provisions:Increase Farm Credit: The FM has further increase the farm credit target for 2009-10 at Rs 325000 crore compared to Rs 287000 crore targeted in 2008-09. Subvention of 1% to be paid as incentive to farmers: The Budget continued the Interest subvention scheme for short-term crop loans up to Rs 300000 per farmer at the interest rate of 7% per annum. Also additional subvention of 1% to be paid from this year, as incentive to those farmers who repay short-term crop loans on schedule. Also additional allocation of Rs 411 corer over Interim Budget 2009-10 was made for the same. Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by six more months for farmers owing more than 2 hectare of land. The Union Budget 2008-09 allowed these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of 30th June 2009. Currently this facility has been extended from 30th June, 2009 to 31st December, 2009.

Setting up of separate task force for those not covered under the debt waiver scheme: The government also announced that it will set up a task force to examine the issue of debt taken by a large number of farmers in some regions of Maharashtra from private money lenders who were not covered by the loan waiver scheme announced last year. OTHER PROVISIONS The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner. To allow scheduled commercial banks setting up off-site ATMs without prior approval subject to reporting. To provide banking facilities in under-banked/un-banked areas in the next three years. A subcommittee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same. The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least one Centre/Point of Sales (POS) for banking services in each of the un-banked blocks. BUDGET IMPACT The Union Budget 2008-09 has focused on farm credit. The agriculture sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. The one-time bank loan waiver of nearly Rs 71000 crore (Rs 710 billion) to cover an estimated 40 million farmers was one of the major highlights of the last Budget. This Union Budget has provided further six months extension of 25% rebate on loan for farmers owing more than 2 hectare of land. With Government bearing this burden, banks would not be affected much. It will only help banks to clear their most stubborn NPA accounts on banks book. Moreover the emphasize on hiking promoter shareholding in Public sector banks, expanding network with ATM's, opening of banking centre in un-banked blocks are some of the positive moves for the sector. N.R. INSTITUTE

On the flipside, the spike in government borrowings is set to adversely affect the treasury income of banks in general and public sector banks in particular, through rise in yields on government securities. OUTLOOK The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking sector as a whole. However it has increased the Government borrowing to Rs 451093 crore (Rs 4510.93 billion) compared to Rs 361782 crore (Rs 3617.82 billion) targeted in the Interim Budget 2009-10. This is likely to push the Bond yields high moving forward. Despite ample liquidity in the system, the 10 year benchmark yield has zoomed above 7% levels owing to rise in borrowing target. Hardening of yields is likely to affect treasury profits of banks in general and Public sector banks in particular.

ECONOMIC FACTORS
Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. In India, banking has existed in one form or the other from time to time. The present era in banking may be taken to have commenced with establishment of bank of Bengal in 1809 under the government charter and with government participation in share capital. Allahabad bank was started in the year 1865 and Punjab national bank in 1895, and thus, others followed. Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities. If in the Budget savings are encouraged, then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector, therefore, booming the economy. If the FDI limits are relaxed, then more FDI are brought in India through banking channels GROWING ECONOMY / GDP Indian economy has registered a growth of more that 9 per cent for last three year and is expected to maintain robust growth rate as compare to other developed and developing countries. Banking Industry is directly related to the growth of the economy. The contributions of various sectors in the Indian GDP for 2007-2008 are as follows: Agriculture: 17% Industry: 29% ServiceSector: 54% It is great news that today the service sector is contributing more than half of the Indian GDP. It takes India one step closer to the developed economies of the world. Earlier it was agriculture which mainly contributed to the Indian GDP. The Indian government is still looking up to improve the GDP of the country and so several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI investment have been framed to give a push to the economy and hence the GDP. N.R.

LOW INTEREST RATES Reserve Bank of India controls the Interest rate, which is based on several monetary policies. Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry. As on September 11, 2009 Bank Rate was 6.00 per cent, the same as on the corresponding date of last year. Call money rates (borrowing & lending) were in the range of 1.50/3.47 per cent as compared with 5.25/11.00 per cent on the corresponding date of last year. INFLATION RATES Inflation represents a rise in general level of prices of goods and services over a period of time. It leads to an erosion in the purchasing power of money. Resultantly, each unit of currency buys fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate from the high of 12.63 per cent to 3.92 per cent. To fight against the slowdown of the Economy, Government of India & Reserve Bank of India took many fiscal as well as monetary actions. Clubbed with fiscal & monetary actions, decreasing commodity prices, decreasing crude prices and lowering interest rate, we expect that Indian Economy could again register a robust growth rate in the year 2009-10. Inflation stands at 3.92 per cent on 7th February 2009 against a high of 12.63 per cent on 9th August 2008.

AGRICULTURE CREDIT Agriculture has been the mainstay of our economy with 60% of our population deriving their sustenance from it. In the recent past, the sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. Agriculture credit flow was Rs 2,87,000 crore in 2008-09. The target for agriculture credit flow for the year 2009-10 is being set at Rs.3,25,000 crore. To achieve this, I propose to continue the interest subvention scheme for short term crop loans to farmers for loans upto Rs.3 lakh per farmer at the interest rate of 7% per annum. For this year, the government shall pay an additional subvention of 1% as an incentive to those farmers who repay their short term crop loans on schedule. Thus, the interest rate for these farmers will come down to 6% per annum. For this, I am making an additional Budget provision of Rs 411 crore over Interim BE. DEBT RELIEF FOR FARMERS The one-time bank loan waiver of nearly Rs 71,000 corer to cover an estimated 40 million farmers was one of the major highlights of the last Budget. Under the Agricultural Debt Waiver and Debt Relief Scheme (2008), farmers having more than two hectares of land were given time upto 30th June, 2009 to pay 75% of their overdue. Due to the late arrival of monsoon, I propose to extend this period by six months up to 31st December, 2009.

SOCIO CULTUREAL FACTORS


Socio culture factors also affect the business. They show in which people behave in country. Sociocultural factors like taboos, customs, traditions, tastes, preferences, buying and consumption habit of people, their language, beliefs and values affect the business. Banking industry is also operates under this social environment and it is also affect by this factor. These factor are changing continuously peoples life style, their behavior, consumption pattern etc. is changing and also creating opportunities and threat for banking industry. There are some socio-culture factors that affect banking in India have been analyzed below. TRADITIONAL MAHAJAN PRATHA Before the birth of the banks, people of India were used to borrow money local moneylenders, shahukars, shroffs. They were used to charge higher interest and also mortgage land and house. Farmers were exploited by these shahukars. But farmers need money. So, they did not have any choice other than going to shahukar and borrowing money from them in spite of exploitation by these people. But after emergence of banks attitude of people was changed. Traditional mahajan pratha still exist in India specially in rural areas. This affects the banking sector. Rural people afraid to go to bank to borrow money instead they prefer to borrow from shahukar whith whom they have relationships from the time of their fore fathers. Banking infrastructure is also week in some interior areas of India. So, this is reason it still exist. SHIFT TOWARDS NUCLEAR FAMILY Attitude of people of India is changing. Now, younger generation wants to remain separate from their parents after they get married. Joint families are breaking up. There are many reasons behind that. But banking sector is positively affected by this trend. A family need home consumer durables likefreeze, washing machine, television, bike, car, etc.. so, they demand for these products and borrow from banks. Recently there is boost

in housing finance and vehicle loans. As they do not have money they go for installments. So, banks satisfy nuclear families wants. CHANGE IN LIFE STYLE Life style of India is changing rapidly. They are demanding high class products. They have become more advanced. People want everything car, mobile, etc.. what their fore father had dreamed for. Now teenagers also have mobile and vehicle. Even middle class people also want to have well furnished home, television, mobile, vehicle and this has opened opportunities for banking secter to tap this change. Everything is available so it has become easy to purchase anything if you do not have lump sum. POPULATION Increase in population is one of he important factor, which affect the private sector banks. Banks would open their branches after looking into the population demographics of the area. Percentage of deposit in any branches of banks depends upon the population demographic of that area. The population of India is about 102.90 is expected to reach about 119.70 cores in 2011. About 70% of population is below 35years of age. They are in the prime earning stage and this increase the earning of the banks. Total Deposits mobilized by the Private Sector Banks increased from Rs, 2,52,335 crore as on 31st March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Deposits showed a subdued growth during 2004-05.Income distributions also affects the operations and overall business of private sector banks. LITERACY RATE Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to transact with banks. So, this impacts negatively on banks. But there is positive side of this as well i.e. illiterate people trust more on banks to deposit their money, they do not have market information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe alternative.

TECHNOLOGICAL FACTORS
TECHNOLOGY IN BANKS Technology plays a very important role in banks internal control mechanisms as well as services offered by them. It has in fact given new dimensions to the banks as well as services that they cater to and the banks are enthusiastically adopting new technological innovations for devising new products and services. ATM The latest developments in terms of technology in computer and telecommunication have encouraged the bankers to change the concept of branch banking to anywhere banking. The use of ATM and Internet banking has allowed anytime, anywhere banking facilities. Automatic voice recorders now answer simple queries, currency accounting machines makes the job easier and self-service counters are now encouraged. Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa card are the two most popular cards used world over. The banks have now started issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking through telecommunication facilities and computer technology by using terminals installed at customers home and they can make the balance inquiry, get the statement of accounts, give instructions for fund transfers, etc. Through ECS we can receive the dividends and interest directly to our account avoiding the delay or chance of losing the post. IT SERVICES & MOBILE BANKING Today banks are also using SMS and Internet as major tool of promotions and giving great utility to its customers. For example SMS functions through simple text messages sent from your mobile. The messages are then recognized by the bank to provide you with the required information. All these technological changes have forced the bankers to adopt customer-based approach instead of productbased approach Technology

Advancement has changed the face of traditional banking systems. Technology advancement has offer 24X7 banking even giving faster and secured service. CORE BANKING SOLUTIONS It is the buzzword today and every bank is trying to adopt it is the centralize banking platform through which a bank can control its entire operation the adoption of core banking solution will help bank to roll out new product and services.

CHAPTER -3

COMPANY PROFILE

PROFILE OF KOTAK MAHINDRA BANK LTD.

A bank is a place where a man deals with money and credit. The bank saves ones money and makes it available to those who need it and helps in the remittance of money from Mane place to another. KOTAK MAHINDRA BANK LTD has put in place state of the art technology to give class benefits to all customers. This system has cross branch functionalities, which enable on-line transfer of funds across all KMBL bank locations.

Other co-operative, private and foreign bank could avail of network and other product and service, which have been engineered to suit the need of banking sector. Service offered by KMBL is customaries to the needs. That is well equipped to respond constantly changing and unique environment and can provide a comprehensive banking solution, whatever the line of business.

COMPANY OVERVIEW

Kotak Mahindra established in 1984, Kotak Mahindra is one of India's leading financial institutions, offering complete financial solutions. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporate. In February 2003, Kotak Mahindra Finance Ltd, the group's flagship company was given the license to carry on banking business by the Reserve Bank of India (RBI). Kotak Mahindra Finance Ltd. is the first company in the Indian banking history to convert to a bank. Recently, Kotak Mahindra Bank Ltd and HDFC Bank have signed a Memorandum of Understanding to share their ATM network. This agreement will give customers of the two banks access to over

1400 ATMs across the country. While HDFC Bank has 1335 ATMs across 228 locations in the country, Kotak Mahindra Bank has 75 ATMs at 41 locations, accessible 24 hours a day, 365 days a year. Kotak Mahindra Bank is offering access to HDFC Bank ATM network free of cost to most of its customers. The charges for HDFC Bank customer for using Kotak Mahindra's ATM sare Rs.18 for Cash withdrawals and Rs. 7 for Query-based transactions such as balance enquiry.

About Kotak Mahindras international business

One of the leading financial services conglomerates in India, Kotak has significant presence in various businesses including commercial banking, retail banking, stock broking, asset management, life insurance and investment banking. With an international presence since 1994, the international subsidiaries of Kotak Mahindra Bank Ltd. operating through offices in London, New York, Dubai, Mauritius, San Francisco and Singapore specialize in providing services to specialist overseas investors seeking to invest into India. Investors can access the asset management capabilities of the international subsidiaries through funds domiciled

outside India. They offer asset management services to institutions and high net worth individuals based outside India through a range of offshore Indian funds, as well as through specific advisory and discretionary investment management mandates for institutional investors. Kotak is a differentiated solution provider for India investments with a wide range of India investment solutions that span all major asset classes including listed equity, private equity, real estate and fixed income. They also lead manage and underwrite international issuances of securities. With its commendable track record, large presence on the ground and a large team of dedicated staff in India, Kotak is suitably positioned for managing assets in the Indian Capital markets.

BUSINESS DESCRIPTION

Type--

Private, BSE & NSE

Founded-- 1985 (as Kotak Mahindra Finance Ltd) Headquarters-- Kotak Mahindra Bank Ltd., Nariman Bhawan, Nariman Point Mumbai, India. Key people-- Mr. K.M. Gherda, Chairman Mr. Uday Kotak, Executive Vice Chairman & Managing Director. Dr. Shankar Acharya. Industry-Banking

Products-- Deposit accounts, Loans, Investment services, Business banking solutions, Treasury and fixed income products etc.

Mission--

The mission is to consistently provide the full-spectrum of intelligent

financial choices and be preferred provider of the highest quality service in the chosen business area.

CORPORATE IDENTITY

The KA symbol is the corporate Identity of the Kotak Mahindra Bank Ltd (KMBL). This KA symbol represents that the Bank has infinite number of ways to meet the unlimited wants and needs of mans

ABOUT KOTAK MAHINDRA BANK


Kotak Mahindra is one of India's leading banking and financial services organizations, offering a wide range of financial services that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the diverse financial needs of individuals and corporate sector. The group has a net worth of over Rs. 100.6 billion and has a distribution network of branches, franchisees, representative offices and satellite offices across cities and towns in India, and offices in New York, London, San Francisco, Dubai, Mauritius and Singapore servicing around 8 million customer accounts. History of Kotak Mahindra bank Milestones that have shaped the Kotak Mahindra Group, since 1986

Since the inception of the erstwhile Kotak Mahindra Finance Limited in 1985, it has been a steady and confident journey leading to growth and success. The milestones of the group growth story are listed below yearwise

1986
Kotak Mahindra Finance Ltd started the activity of Bill Discounting

1987
Kotak Mahindra Finance Ltd entered the Lease and Hire Purchase market

1990
The Auto Finance division was started

1991
The Investment Banking Division was started. Took over FICOM, one of India's largest financial retail marketing networks The Auto Finance division was started

1992
Entered the Funds Syndication sector

1995
Brokerage and Distribution businesses incorporated into a separate company - Securities. Investment banking division incorporated into a separate company - Kotak Mahindra Capital Company

1996
The Auto Finance Business is hived off into a separate company - Kotak Mahindra Prime Limited (formerly known as Kotak Mahindra Primus Limited). Kotak Mahindra takes a significant stake in Ford Credit Kotak Mahindra Limited, for financing Ford vehicles. The launch of Matrix Information Services Limited marks the Group's entry into information distribution.

1998
Entered the mutual fund market with the launch of Kotak Mahindra Asset Management Company.

2000
Kotak Mahindra tied up with Old Mutual plc. for the Life Insurance business. Kotak Securities launched its on-line broking site. Commencement of private equity activity through setting up of Kotak Mahindra Venture Capital Fund.

2001
Matrix sold to Friday Corporation. Launched Insurance Services. Kotak Securities Ltd. was incorporated

2003
Kotak Mahindra Finance Ltd. converted into a commercial bank - the first Indian company to do so.

2004
Launched India Growth Fund, a private equity fund.

2005
Kotak Group realigned joint venture in Ford Credit; their stake in Kotak Mahindra Prime was bought out (formerly known as Kotak Mahindra Primus Ltd) and Kotak groups stake in Ford credit Kotak Mahindra was sold. Launched a real estate fund.

2006
Bought the 25% stake held by Goldman Sachs in Kotak Mahindra Capital Company and Kotak Securities.

2008
Launched a Pension Fund under the New Pension System.

2009
Kotak Mahindra Bank Ltd. opened a representative office in Dubai Entered Ahmedabad Commodity Exchange as anchor investo

2010
Ahmedabad Derivatives and Commodities Exchange, a Kotak anchored enterprise, became operational as a national commodity exchange.

PRODUCT AND SERVICES


BANKING & SAVINGS: Banking Accounts Credit Cards Demat Deposits NRI Services Privy League Convenience Banking INVESTMENT & INSURANCE: Life Insurance Mutual Funds Share Trading Structured Product Gold Estate Planning CORPORATE & INSTITUTIONAL Corporate Finance

Investment Banking Institutional Equities Treasury LOANS & BORROWINGS: Car Finance Home Loans Loans Against Property Personal Loans Commercial Loans

CHAPTER -4 INTRODUCTION ON

NON PERFORMING ASSERTS

1. INTRODUCTION on NPA
The world is going faster in terms of services and physical products. However it has been researched that physical products are available because of the service industries. In the nation economy also, service industry plays vital role in the boosting up of the economy. The nations like U.S, U.K, and Japan have service industries more than 55%. Banking sector reforms in India has progressed promptly on aspects like interest rate deregulation, reduction in statutory reserve requirements, prudential norms for interest rates, asset classification, income recognition and provisioning. But it could not match the pace with which it was expected to do. The accomplishment of these norms at the execution stages without restructuring the banking sector as such is creating havoc. The efficiency of a bank is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAs do not generate interest income for the banks, but at the same time banks are required to make provisions for such NPAs from their current profits. The main aim of any person is the utilization money in the best manner since the India is country where more than half of the population has problem of running the family in the most efficient manner. However Indian people faced large number of problem till the development of the full-fledged banking sector. The Indian banking sector came into the developing nature mostly after the 1991 government policy. The banking sector has really helped the Indian people to utilize the single money in the best manner as they want. People now have started investing their money in the banks and banks also provide good returns on the deposited amount. The people now have at the most understood that banks provide them good security to their deposits and so excess amounts are invested in the

banks. Thus, banks have helped the people to achieve their socio economic objectives. The banks not only accept the deposits of the people but also provide them credit facility for their development. Indian banking sector has the nation in developing the business and service sectors. But recently the banks are facing the problem of credit risk. It is found that many general people and business people borrow from the banks but due to some genuine or other reasons are not able to repay back the amount drawn to the banks. The amount which is not given back to the banks is known as the non performing assets. Many banks are facing the problem of non- performing assets which hampers the business of the banks. Due to NPAs the income of the banks is reduced. The world is going faster in terms of services and physical products. However it has been researched that physical products are available because of the service industries. In the nation economy also service industry plays vital role in the boosting up of the economy. The nations like U.S, U.K, and Japan have service industries more than 55%. The banking sector is one of appreciated service industries. The banking sector plays larger role in channelizing money from one end to other end. It helps almost every person in utilizing the money at their best. The banking sector accepts the deposits of the people and provides fruitful return to people on the invested money. But for providing the better returns plus principal amounts to the clients; it becomes important for the banks to earn. The main source of income for banks is the interest that they earn on the loans that have been disbursed to general person, businessman, or any industry for its development. Thus, we may find the input-output system in the banking sector. Banks first, accepts the deposits from the people and secondly they lend this money to people who are in the need of it. By the way of channelizing money from one end to another end, Banks earn their profits. However, Indian banking sector has recently faced the serious problem of Non Performing Assets. This problem has been emerged largely in Indian banking sector since three decade. Due to this problem many Public Sector Banks have been adversely affected to their performance and operations. In simple words Non Performing Assets problem is one where banks are not able to recollect their landed money from the clients or clients have been in such a condition that they are not in the position to provide the borrowed money to the banks. The problem of NPAs is danger to the banks because it destroys the healthy financial conditions of them. The trust of the people would not be any more if the banks have higher NPAs. So. The problem of NPAs must be tackled out in such a way that would not destroy the operational, financial conditions and would not affect the image of the banks. Recently, RBI has taken number steps to reduce NPAs of the Indian banks. And it is also found that the many banks have shown positive figures in reducing NPAs as compared to the past years Rationale of the study

A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the major concerns for banks in India. NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and networth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade.

The main aim behind making this report is to know how Public Sector Banks are operating their business and how NPAs play its role to the operations of the Public Sector Banks. The report NPAs are classified according to the sector, industry, and state wise. The present study also focuses on the existing system in India to solve the problem of NPAs and comparative analysis to understand which bank is playing what role with concerned to NPAs. Thus, the study would help the decision makers to understand the financial performance and growth of Public Sector Banks as compared to the NPAs. Thats why the study of NPAs become necessary due to the above mentioned reasons : They erode current profits through provisioning requirements. They result in reduced interest income. They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and They limit recycling of funds, set in asset-liability mismatches, etc.

NPAs MEANING:
A 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 debt remains outstanding for 90 consecutive days or more beyond the scheduled payment date or maturity. The debt exceeds the borrowers approved limit for 90 consecutive days or more. Interest is due and uncollected for 90 days or more or .For overdrafts, the account has been inactive for 90 consecutive days and / or deposits are insufficient to cover the interest capitalized during the period.

Classification of NPA / Asset classification


Once an asset falls under the NPA category, banks are required by the Reserve Bank of India (RBI) to make provision for the uncollected interest on these assets. For the purpose they have to classify their assets based on the strength and on collateral securities into: 1.Substandard Assets Which has remained NPA for a period less than or equal to 12 months . This is not a non-performing asset. It does not carry more than normal risk attached to the business.

2.Doubtful Assets Which has remained in the sub-standard category for a period of 12 Months. 3. Loss Assets where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. It is an asset identified by the bank, auditors or by the RBI inspection as a loss asset. It is an asset for which no security is available or there is considerable erosion in the

realizable value of the security. Difficulties with the Non performing Assets 1.) Owners do not receive a market return on their capital. In the worst case, if the bank fails, owners lose their assets . In modern times, this may affect a broad pool of shareholders. 2.) Depositors do not receive a market return on savings. In the worst case if the bank fails, depositors lose their assets or uninsured balance. Banks also redistribute losses to other borrowers by charging higher interest rates .Lower deposit rates and higher lending rates repress savings and financial markets, which hampers economic growth. 3.) Non performing loans represent bad investments. NPA misallocate credit from good projects , which do not receive funding ,to failed projects. Bad investment end up in misallocation of capital and , by extension ,labor and natural resources . The economy performs below its production potential . 4.) Non performing loans may spill over the banking system and contract the money stock , which may lead to economic contraction . This spillover effect can channelize through illiquidity or bank insolvency; (a) When many borrowers fail to pay interest, banks may experience liquidity shortages .These Shortages can jam payments across the country. (b) Illiquidity constraints bank in paying depositors eg. Cashing their paychecks. Banking panic follows . A run on bank by depositors as part of the national money stock become inoperative . The money stock contracts and economic contraction follows (c) Under capitalized banks exceeds the banks capital base.

TYPES OF NPA:
11 GROSS NPA 22.. NET NPA
GROSS NPA

Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the nonstandard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:

Gross NPAs Ratio =

Gross NPAs -Provisions Gross Advances- Provisions

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

About the NPA


An asset is classified as Non-performing Asset (NPA) if due in the form of principal and interest are not paid by the borrower for a period of 90 days.If any advance or credit facilities granted by banks to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-

performing without having any regard to the fact that there may still exist certain advances / credit facilities having performing status. Though the term NPA connotes a financial asset of a commercial bank, which has stopped earning an expected reasonable return, it is also a reflection of the productivity of the unit, firm, concern, industry and nation where that asset is idling. Viewed with this perspective, the NPA is a result of an environment that prevents it from performing up to expected levels.

The definition of NPAs in Indian context is certainly more liberal with two quarters norm being applied for classification of such assets. The RBI is moving over to one-quarter norm from 2004 onwards.

Reasons for NPA


Various studies have been conducted to analysis the reasons for NPA. What ever may be complete elimination of NPA is impossible. The reasons may be widely classified in two: (1) Over hang component (2) Incremental component

Over hang component is due to the environment reasons, business cycle etc. Incremental component may be due to internal bank management, credit policy, terms of credit etc.

CHAPTER -4 FACTOR,S AFFECTING ON NPA

EXTERNAL FACTORS :-

Ineffective recovery tribunal


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

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 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


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 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.

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.

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

Provisioning Norms:

(i) Sub-standard assets


A general provision of 10percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available. At times bank give loans, which are unsecured. i.e. the loan is sanctioned without any security. Such account becomes NPA and is classified as substandard then provision on 20% would be made. Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a mini-mum of 20 % each year. EXAMPLE: An asset be-came NPA o r the first time on 31st March 2004. Balance outstanding in the account isRs.25 lacks. Account is classified as sub standard and there-ore provision o Rs.2.5 lacks is made as on 31st March 2004.As per the old norms; the as-set would have remained in the category o sub-standard as on31st March 2005. However due to reduction in period from 12months to 18 months, the asset got migrated to doubtful Category as on 31st March 2005and, therefore, bank will have to make provision o Rs.5 lacsi.e.20% o Rs.25 lacks. Thus, additional provision o Rs.2.5 lacks. This additional provision o Rs.2.5 lacks

can be spread over a period of four years with mini-mum provision o Rs.50, 000/ each year.

ii) Doubtful assets

a) 100 percent o the extent to which the advance is not covered by the realizable
value of the security to which the bank has a valid recourse and the realizable value is estimated on a realistic basis.

b) In regard to the secured portion, provision may be made on the following basis,
at the rates ranging from 20 percent to 100percent of the secured portion depending upon the period for which the asset has remained doubtful The Chartered Accountant 1335 March 2006. As per the provisioning norms applicable to year ended31st March 2004, or asset, which were doubtful for more than three years (doubtful 3), 50% provision was required to make secured portion. However, any asset, which gets migrated to doubtful 3 categories, 100% provision is required to be made on the entire balance i.e. secured portion also. However, assets which were already in the Doubtful 3 category, provision as indicated above will be required to be made.

(iii) Loss assets


Loss assets should be written off. If loss assets are per-mitted to remain in the books for any reason, 100 percent of the outstanding should be pro- vided for. Valuation of Security for provisioning purposes With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs.5 corer and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board of the bank would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favor of the bank should beget valued once in three years by values appointed as per the guidelines approved by the Board of Directors.

(iv)

Standard assets

A general provision of a minimum of 0.40 %on standard assets on global loan portfolio basis.

(v) Provisions under Special Circumstances

a. In respect of additional credit facilities granted to SSI units, which are identified
as sick and where rehabilitation packages/nursing programmers have been drawn

by the banks themselves or under consortium arrangements, no provision need be made for a period of one year.

b. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs, and life
policies would attract provisioning requirements as applicable to their asset classification status.

c. Advances against gold ornaments, government securities and all other kinds of
securities are not exempted from provisioning requirements.

d. Advances covered by ECGC/CGTSI In the case of advances classified as


doubtful and guaranteed by ECGC/CGTSI, provision is required to be made only for the balance in excess of the amount guaranteed by the Corporation. Further, while arriving at the provision required to be made for doubtful assets, realizable value of the securities should first be deducted from the outstanding balance in respect of the amount guaranteed by the Corporation and then provision should be made.

e. Provisioning norms for sale of financial assets to Securitization Company (SC) /


Reconstruction company (RC) i) If the sale of financial assets to SC/RC, is at a price below the net book value (NBV) (i.e. book value less pro- visions held), the short fall should be debited to the profit and loss account of that yea r. ii) If the sale is for a value higher than the NBV, the excess provision will not be reversed but will be utilized to meet the short fall/loss on ac-count of sale of other financial assets to SC/RC.

Natural Calamities
Our country is plagued by frequent occurrences o natural calamities like foods, cyclones, draughts etc. This causes lot of economic damage to our country and, therefore , needs massive rehabilitation efforts by all agencies including banks. RBI has issued Master Circular dated 1st July 2005 for relief measures by banks in areas affected by natural calamities. RBI has given detailed guidelines in this circular about restructuring of loans and fresh loans in respect of agricultural loans, crop loans, irrigation loans, poultry, fisheries, artisans, self-employed etc..

Table for provision for npa asserts

Period for which the advance has remained in doubtful category

Provision requirement (%

Up to one year One to three year More than three years

20 30

60 % with effect f from March 31, 2005 75 per cent i) Outstanding stock with effect from of NPAs as on March March 31, 2006 100 31, 2004.ii) advances per cent with effect classified as fromMarch31, doubtful more than 2007100 percent three years on or with effect from after April 1, 2004 March 31, 2005

Analysis of Gross and Net NPA by taking 3 years of by KOTAK MAHINDRA BANK

KOTAK GROS GROS NET NET MAHINDR S NPA S NPA NPA NPA% A BANK %

20072008

453

2.88% 276

1.780 %

20082009 20092010

689

4.07% 397

2.39%

767

3.62% 360

1.73%

FIGURURE-1
3 years gross npa and net npa chat on kotak Mahindra bank

INTERPRETATION
From the above graph it is observed that KOTAK MAHINDRA bank 2007 and 2008 gross npa 2.88% and net npa 1.780 % different between gross npa and net npa is very negligible towards the overall NPA of other consecutive 2 years .
In the year 2007 and 2008 gross npa amount in corer is 453 and net npa is 276 .

In this graph 2008-2009 npa report on kotak Mahindra bank,s is more satisfactory than previous year. In this year gross npa level 4.07% and

net npa is 2.39% different between gross npa and net npa is higher than the 2007-2008 . In 2008-2009 financial year gross npa amount in bank is 689 and net npa amount is 397 In the year 2009- 10 gross npa in KOTAK MAHINDRA bank is 3.62 and net npa is 1.73.
different between this 2 type of npa is high in this year ..

2009-2010 financial year total gross npa amount is 767 and net npa is 360. Gross npa and net npa levels are decreasing year by year .

Credit risk path of the New Private Banks by Comparing with selected 7 New private sector bank using Quadrant Analysis.

Credit risk path of the New Private Banks:

Npa to net advance % New private banks

Advance(crore Quadrant s) analysis 20 09 2010 2009 2010

2009 2010

Kotak Mahindra bank ltd.. 1.78 2.39 2417 2249 HL HL

HDFC bank

ltd.. ICICI bank ltd..

0.47

0.63

6342

9902

LL

LL

1.55 Indusind bank ltd.. AXIS bank ltd.. 0.42 YES bank ltd.. 0.09 Development credit bank 0.66 2.27

2.09

2256

2183

HL

HL

1.14

12795 15770

HL

LL

0.40

59661 81556

LH

LH

0.33 3.88

9430 4068

12403 3274

LL

LL

LL

HL

INTERPITATION
CREDIT RISK PATH OF THE NEW PSB,S A QUADANT ANALYSIS In the chart below an attempt is made to trace the relationship between NPA proportion and the size of credit portfolio (advances) of 7 old Private Banks. For this purpose proportion of gross NPA,s representing credit risk inherent is taken on the X- axis and gross credit levels are taken on the Y-axis. Since these two parameters are assets, which are stock concept variables, they have been plotted on the basis of 2 years 2008 and 2009 for a comparative analysis

QUADRANT TABLE- 2009

LEVEL CREDIT L NPA

LOW (BELOW LEVE AVG) (L)

HIGH(ABOVE AVG) (H)

LOW

LL(2)

LH(2)

HIGH

HL(3)

HH(0)

QUADRANT TABLE- 2010


LEVEL CREDIT LEVE L NPA LOW (BELOW AVG) (L)

HIGH(ABOVE AVG) (H)

LOW

LL (2)

LH(2)

HIGH

HL(2)

HH(0)

As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH, HL and

HH (the figures are arrived at by taking the averages). The average of NPAs for the year 2009 Is 1.03% and this figure is measured against each bank, any percentage above this figure falls in the H Category and below 1.03% falls in the L category. The same applies with the Advances .The average of advances for 2009 is 13,853 crores and 18,191 crores for 2010. The average of NPA for 2009 is 1.55%. L represents low average of the New Private Banks and H represents high or above average E.g while LL means low in credit size and low in NPA,S LH implies low in NPA and high in credit size . The following facts are visible from the quadrant table:

1. As In the tables, most of the new private banks fall in the HL quadrant. In 2009 there Depicted were 3 banks, which was 2 in 2010. As seen in the quadrants, the NPA was high compared to its credit size and the credit size is low in the New Sector Banks it might be because these bankshesitate to take risk and improper recovery measures. 2. there was 2 banks in the LL quadrant in 2009 which remain same in 2010 also. It means NPA Level and Credit size is low. 3. Bank of indusind ltd is high HL quadrant , there is high level of NPA and Low Advances in 2009. So only Bank of indusind ltd 4. The best performing bank in this sector was the ICICI Bank which was high in its credit size. 2nd is kotak Mahindra bank .. Compared to the rest of the banks and still maintained a low NPA level followed by HDFC Bank Ltd...

Appendix Table: Non-Performing Assets of Private Sector Banks - Sector-wise 2010-2011

Name of the Bank Sl no

Priority Sector NPAs

Of which, Small Scale Industries Of which, Agriculture Per cent to tota l Amo unt Per cent to tota l Amo unt Per cent to tota l

Of which, Others

Public Sector NPAs

NonPriority Sector NPAs Per ce nt to tot al Amo unt Per cent to tota l

Total NPAs

Amo unt

Amo unt

Per cent to tota l

Am oun t

Amou nt 15 = (3+ 11+13)

1 2 3 4 5 6 7

Axis Bank Ltd Development Credit Bank Ltd. HDFC Bank Ltd. ICICI Bank Ltd. IndusInd Bank Ltd. Kotak Mahindra Bank Ltd. Yes Bank Ltd.

528 68 400 1,946 84 152 -

40.8 21.2 22.1 21.0 33.0 -

248 14 110 1303 31 49 -

19.1 4.3 6.1 14.1 12.0 6.5 -

140 52 276 50 46 100 -

10.8 16.2 15.3 0.5 18.1 13.0 -

141 3 14 593 8 2 -

10.9 0.8 0.8 6.4 3.0 0.3 -

767 251 1,407 7,321 171 616 60

59.2 78.8 77.9 79.0 67.0 80.2 100. 0

1,295 319 1,807 9,267 255 767 60

PRIORITY SECTOR NPA AMOUNT IN CRORE ON 7 PRIVATE SECTOR BANK

INTERPRETATION

In this chat represents the 7 private bank priority sector npa amounts in the year 2010 -2011.ICICI bank higher than the other 6 bank its 1,946cr yes bank npa Amount is 0 cr.

AXIS bank npa amount is 528cr,, it is the 2nd heights amount in npa between these 7 banks . HDFC bank npa amount is higher than the KOTAK MAHINDRA bank . hdfc bank npa amount is 400 and KOTAK MAHINDRA 152cr . KOTAK MAHINDRA bank have higher amount of npa than the DEVELOPMENT
CREDIT Bank Ltd 68cr . And INDUSIND Bank Ltd 84cr .

AGRICULTURE SECTOR NPA AMOUNT IN CRORE ON 7 PRIVATE SECTOR BANK

INTERPRETATION

In this chat represents the 7 private bank sector npa amounts in the year 2010 -2011.ICICI bank higher than the other 6 bank its 1303cr yes bank npa Amount is 0 AXIS bank npa amount is 248cr,, it is the 2nd heights amount in npa between these 7 banks

HDFC bank npa amount is higher than the KOTAK MAHINDRA bank . hdfc bank npa amount is 110 and KOTAK MAHINDRA 59cr .
KOTAK MAHINDRA bank have higher amount of npa than the DEVELOPMENT
CREDIT Bank Ltd 14cr . And INDUSIND Bank Ltd 31cr

SMALL SECTOR NPA AMOUNT IN CRORE ON 7 PRIVATE SECTOR BANK

INTERPRETATION
In this chat represents the 7 private bank sector npa amounts in the year 2010 -2011. HDFC bank npa amount is higher than the other 6 banks in small scale industry . HDFC bank npa amount is 276cr, then AXIS bank 140cr. KOTAK MAHINDRA bank amount in NPA is 100cr its lower than the AXIS bank .. INDUSIND bank , ICICI bank and DEVLOPMENT CREDIT bank npa amount is close to each other . In Indusind bank its 46cr, icici bank 50cr and in development credit bank its 52cr. Kotak Mahindra bank npa amount is 3rd highest in between these 7 banks.

OTHER SECTOR NPA AMOUNT IN CRORE ON 7 PRIVATE SECTOR BANK

INTERPRETATION
This chat represents the comparison between the 7 private sector banks in 2010-2011 financial years on other sector NPA amount. ICICI bank npa amount is 593 which is highest in other banks in other sector business. 2nd highest bank is AXIS bank with 141cr, then HDFC bank with 14cr NPA amount,. INDUSIND BANK has 8cr npa amount then the KOTAK MAHINDRA bank 2cr, and DEVELOPMENT CREDIT BANK having 3cr amount.

YES BANK have no npa amount in other sector business.

NON-PRIORITY SECTOR NPA AMOUNT IN CRORE ON 7 PRIVATE SECTOR BANK

INTERPRETATION

This chat represents the comparison between the 7 private sector banks in 2010-2011 financial years on non-priority sector NPA amount. ICICI BANK take major role in non priority sector business with the amount of 7,321cr . HDFC BANK has 1,407cr its a 2nd heights amount is in non priority sector npa position. AXIS BANK followed by the HDFC BANK it has 767cr npa amount in the 2010-2011 year. KOTAK MAHINDRA BANK position is 4th in comparative analysis on npa amount. KOTAK MAHINDRA BANK has 616cr

Development credit bank followed by the kotak Mahindra bank . its having

OVER ALL FINDINGS

From the graph no 1 it is observed that KOTAK MAHINDRA bank 2007 and 2008. Different between gross npa and net npa is very negligible towards the overall NPA of other consecutive 2 years . In this graph 2008-2009 npa report on kotak Mahindra bank,s is more satisfactory than previous year. In this year different between gross npa and net npa is higher than the 2007-2008 .

In 2008-2009 financial year gross npa amount less than the previous year .

In the year 2009- 10 different between this 2 type of npa is high in this year .. Gross npa and net npa levels are decreasing year by year . KOTAK MAHINDRA BANK increasing there collection policy year by year . it is a good sign for bank reduce npa level . this bank growth is increasing day by day .

(Refe
r to graph 1)
As In the tables, most of the new private banks fall in the HL

quadrant. In 2009 there Depicted were 3 banks, which was 2 in 2010. As seen in the quadrants, the NPA was high compared to its credit size and the credit size is low in the New Sector Banks it might be because these bankshesitate to take risk and improper recovery measures The best performing bank in this sector was the ICICI Bank which was high in its credit size. 2nd is kotak Mahindra bank .. Compared to the rest of the banks and still maintained a low NPA level followed by HDFC Bank Ltd...

(Refer
to table )
According to the table of Non-Performing Assets of Private Sector Banks - Sector-wise 2010-2011 In priority sector ICICI bank higher than the other 6 bank its yes bank npa Amount is 0 cr. AXIS bank have 2nd heights amount in npa between these 7 banks . HDFC bank npa amount is higher than the KOTAK MAHINDRA bank . KOTAK MAHINDRA bank have higher amount of npa than the DEVELOPMENT
CREDIT Bank Ltd And INDUSIND Bank Ltd

In agriculture sector ICICI bank higher than the other 6 bank. AXIS bank 2nd heights and HDFC bank npa amount is higher than the KOTAK MAHINDRA bank
KOTAK MAHINDRA bank have higher amount of npa than the DEVELOPMENT
CREDIT Bank. And INDUSIND Bank .

HDFC bank npa amount is higher than the other 6 banks in small scale industry . amount is then AXIS bank . INDUSIND bank , ICICI bank and DEVLOPMENT CREDIT bank npa amount is close to each other . Kotak Mahindra bank npa amount is 3rd highest in between these 7 banks ICICI bank npa problem highest in other banks in other sector business. 2nd highest bank is AXIS bank then HDFC bank INDUSIND BANK 3rd then the KOTAK MAHINDRA bank 2cr, and DEVELOPMENT CREDIT BANK having 3cr amount. YES BANK have no npa amount in other sector business. In public sector npa level is 0 all 7 private sector bank because these banks are not spending fund in public sector business .. ICICI BANK take major role in non priority sector business. HDFC BANK its a 2nd heights amount is in non priority sector npa position. AXIS BANK followed by the HDFC BANK KOTAK MAHINDRA BANK position is 4th in comparative analysis on npa amount. KOTAK MAHINDRA BANK has 616cr Development credit bank followed by the kotak Mahindra bank .

(
Refer to table )

SUGGESTION

Through RBI has introduced number of measures to reduce the problem of increasing NPAs of the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act, etc. A lot of measures are desired in terms of

effectiveness of these measures. What I would like to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as under. (1) Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility. (2) The credit rating agency should regularly evaluate the financial condition of the clients. (3) Special accounts should be made of the clients where monthly loan concentration reports should be made. (4) It is also wise for the banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement.( 5) The banks before providing the credit facilities to the borrower company should analyse the major heads of the income and expenditure based ont he financial performance of the comparable companies in the industry to identify significant variances and seek explanation for the same from the company management. They should also analyse the current financial position of the major assets and liabilities. (6) Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with theuse of their strength and weakness, and what will be their possible futuregrowth in concerned to financial and operational performance. (7) Independent settlement procedure should be more strict and faster and thedecision made by the settlement committee should be binding both borrowers and lenders and any one of them failing to follow the decision of the settlement committee should be punished severely. (8) There should be proper monitoring of the restructured accounts because there is every possibility of the loans slipping into NPAs category again. (9) Proper training is important to the staff of the banks at the appropriate level with ongoing process. That how they should deal the problem of NPAs, and what continues steps they should take to reduce the NPAs. (10) Willful Default of Bank loans should be made a Criminal Offence.(11) No loan is to be given to a Group whose one or the other undertaking has become a Defaulter.

CONCLUSION

NPA is a double-edged weapon, which affects bank profitability due to interest income not being recognized on NPA accounts and creation of provision from hard earned profit amount. The bank must adopt structured NPAs management policy for elimination or reducing the NPAs in the Bank. KOTAK MAHINDRA BANK has adopted very good techniques to control the NPAs

RECOMMENDATIONS

Monitoring Officers should be assigned the responsibility of monitoring the A/c with special efforts to maintain and upgrade the asset quality. Identify critical branches for recovery. Fix target for recovery and draw time bound action plan. Proper appraisal of new proposals so that credit quality is given more importance. Proper selection of borrowers so that real entrepreneurs can be provided credit and willful defaulters can be avoided. Training of staff for improving credit appraisal abilities, improving techniques in recovery, negotiations, understanding legal formalities. Forming recovery teams at the branch or team of staff pooled from branches within the city.

Distribution of accounts for monitoring & NPA recovery within all staff members so that they feel that monitoring an NPA recovery is a job of all staff members. Weekly meeting of staff to take stock of recovery made in each account and deciding fresh strategies for achieving planned targets. Uses of Lokadalat facility so that legal expenses can be reduced and furtherappeals are stopped. Use of SARFAESI Act so that recovery can be done without intervention of courts and time is saved. Resorting to criminal actions in misuse cases and also under sec.138 by obtaining post-dated Cheques. Early disposals of legal suits pending in courts & effective execution of decrees. Rephasing & rescheduling in NPA account so that they can be upgraded within one year from first repayment installment date. Compromise in suitable cases with immediate decision. Incentive to staff doing good work in NPA recovery. NPA free branches Target be Set up

BIBLIOGRAPHY
M Y Khan and Public Sector Banks K Jain management Accounting

TataMcGraw-Hill Publishing Company Limited, new Delhi 1999. Banking Finance (February 2003) Banking Finance (April 2003) IBA Bulletin (January 2008), (February 2009), Monthly journal published by Indian Banks Associations. Banking Annual (Octomber 2009) published by Business Standard. www.rbi.org.com www.google.com . www. Scribd.com
Search:

Indian Banking Sector

Nonperforming assets and banking sectors Impact of NPAs on the working of the Public Sector Banks Steps taken by govt. to reduce the NPAs of the banks.

NPA MANAGEMENT PREVENTIVE MEASURES


Formation of the Credit Information Bureau (India) Limited (CIBIL)
Release of Willful Defaulters List. RBI also releases a list of borrowers

with aggregate outstanding of Rs.1 crore and above against whom banks have filed suits for recovery of their funds Reporting of Frauds to RBI Norms of Lenders Liability framing of Fair Practices Code with regard to lenders liability to be followed by banks, which indirectly prevents accounts turning into NPAs on account of banks own failure Risk assessment and Risk management
RBI has advised banks to examine all cases of willful default of Rs.1

crore and above and file suits in such cases. Board of Directors are required to review NPA accounts of Rs.1 crore and above with special reference to fixing of staff accountability. Reporting quick mortality cases Special mention accounts for early identification of bad debts. Loans and advances overdue for less than one and two quarters would come under this category. However, these accounts do not need provisioning

NPA MANAGEMENT RESOLUTION


Compromise Settlement Schemes Restructuring / Reschedulement Lok Adalat Corporate Debt Restructuring Cell

Debt Recovery Tribunal (DRT) Proceedings under the Code of Civil Procedure Board for Industrial & Financial Reconstruction (BIFR)/ AAIFR National Company Law Tribunal (NCLT) Sale of NPA to other banks Sale of NPA to ARC/ SC under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 (SRFAESI) Liquidation

COMPROMISE SETTLEMENT SCHEMES


Banks are free to design and implement their own policies for recovery and write off incorporation compromise and negotiated settlements with board approval Specific guidelines were issued in May 1999 for one time settlement of small enterprise sector.
Guidelines were modified in July 2000 for recovery of NPAs of Rs.5

crore and less as on 31st March 2007.

RESTRUCTURING AND REHABILITATION


Banks are free to design and implement their own policies for restructuring/ rehabilitation of the NPA accounts Reschedulement of payment of interest and principal after considering the Debt service coverage ratio, contribution of the promoter and availability of security

LOK ADALATS
Small NPAs up to Rs.20 Lacs

Speedy Recovery Veil of Authority Soft Defaulters Less expensive Easier way to resolve

CORPORATE DEBT RESTRUCTURING


The objective of CDR is to ensure a timely and transparent mechanism for restructuring of the debts of viable corporate entities affected by internal and external factors, outside the purview of BIFR, DRT or other legal proceedings The legal basis for the mechanism is provided by the Inter-Creditor Agreement (ICA). All participants in the CDR mechanism must enter the ICA with necessary enforcement and penal clauses. The scheme applies to accounts having multiple banking/ syndication/ consortium accounts with outstanding exposure of Rs.10 crores and above. The CDR system is applicable to standard and sub-standard accounts with potential cases of NPAs getting a priority. Packages given to borrowers are modified time & again

DRT ACT
The banks and FIs can enforce their securities by initiating recovery proceeding under the Recovery if Debts due to Banks and FI act, 1993 (DRT Act) by filing an application for recovery of dues before the Debt Recovery Tribunal constituted under the Act. On adjudication, a recovery certificate is issued and the sale is carried out by an auctioneer or a receiver.

DRT has powers to grant injunctions against the disposal, transfer or creation of third party interest by debtors in the properties charged to creditor and to pass attachment orders in respect of charged properties In case of non-realization of the decreed amount by way of sale of the charged properties, the personal properties if the guarantors can also be attached and sold.

PROCEEDING UNDER CODE OF CIVIL PROCEDURE


For claims below Rs.10 lacs, the banks and FIs can initiate proceedings under the Code of Civil Procedure of 1908, as amended, in a Civil court. The courts are empowered to pass injunction orders restraining the debtor through itself or through its directors, representatives, etc from disposing of, parting with or dealing in any manner with the subject property. Courts are also empowered to pass attachment and sales orders for subject property before judgment, in case necessary. The sale of subject property is normally carried out by way of open public auction subject to confirmation of the court. The foreclosure proceedings, where the DRT Act is not applicable, can be initiated under the Transfer of Property Act of 1882 by filing a mortgage suit where the procedure is same as laid down under the CPC.

BIFR AND AAIFR


BIFR has been given the power to consider revival and rehabilitation of companies under the Sick Industrial Companies (Special Provisions) Act of 1985 (SICA), which has been repealed by passing of the Sick Industrial Companies (Special Provisions) Repeal Bill of 2001.

The board of Directors shall make a reference to BIFR within sixty days from the date of finalization of the duly audited accounts for the financial year at the end of which the company becomes sick The company making reference to BIFR to prepare a scheme for its revival and rehabilitation and submit the same to BIFR the procedure is same as laid down under the CPC.
The shelter of BIFR misused by defaulting and dishonest borrowers It is

a time consuming process

NATIONAL COMPANY LAW TRIBUNAL


In December 2002, the Indian Parliament passed the Companies Act of 2002 (Second Amendment) to restructure the Companies Act, 1956 leading to a new regime of tackling corporate rescue and insolvency and setting up of NCLT. NCLT will abolish SICA, have the jurisdiction and power relating to winding up of companies presently vested in the High Court and jurisdiction and power exercised by Company Law Board The second amendments seeks to improve upon the standards to be adopted to measure the competence, performance and services of a bankruptcy court by providing specialized qualification for the appointment of members to the NCLT.
However, the quality and skills of judges, newly appointed or existing,

will need to be reinforced and no provision has been made for appropriate procedures to evaluate the performance of judges based on the standards.

SALE OF NPA TO OTHER BANKS


A NPA is eligible for sale to other banks only if it has remained a NPA for at least two years in the books of the selling bank

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

SARFESI Act 2002

SARFESI provides for enforcement of security interests in movable (tangible or intangible assets including accounts receivable) and immovable property without the intervention of the court The bank and FI may call upon the borrower by way of a written legal notice to discharge in full his liabilities within 60 days from the date of notice, failing which the bank would be entitled to exercise all or any of the rights set out under the Act. Another option available under the Act is to takeover the management of the secured assets Any person aggrieved by the measures taken by the bank can proffer an appeal to DRT within 45 days after depositing 75% of the amount claimed in the notice.

Chapter II of SARFESI provides for setting up of reconstruction and securitization companies for acquisition of financial assets from its owner, whether by raising funds by such company from qualified institutional buyers by issue of security receipts representing undivided interest in such assets or otherwise.

The ARC can take over the management of the business of the

borrower, sale or lease of a part or whole of the business of the borrower and rescheduling of payments, enforcement of security interest, settlement of dues payable by the borrower or take possession of secured assets Additionally, ARCs can act as agents for recovering dues, as manager and receiver. Drawback differentiation between first charge holders and the second charge holders