A Comparative Analysis of Non-Performing Assets (NPAs) of ...

www.cpmr.org.in Opinion: International Journal of Management 68

ISSN: 2277-4637 (Online) | ISSN: 2231-5470 (Print) Opinion Vol. 3, No. 1, June 2013

A Comparative Analysis of Non- Performing Assets(NPAs) of Selected Commercial Banks in India

Samir *Deepa Kamra**

ABSTRACTWith the introduction of international norms forincome recognition, asset classification andprovisioning in the banking sector, managing NPAshas emerged as one of the major challenges facingIndian banks. Banks today are judged not only onthe basis of number of branches and volume ofdeposits but also on the basis of quality of assets.Non-performing assets constitute a major portfolioof the Banks portfolio and hence are an inevitableburden on the banking industry. NPAs adverselyaffect the profitability, liquidity and solvency of thebanks. This paper analyses the position of NPAs inselected banks namely State Bank of India (SBI),Punjab National Bank (PNB) and Central Bank ofIndia (CBI).It also highlights the policies pursuedby the banks to tackle the NPAs and suggests amulti-pronged strategy for speedy recovery of NPAsin banking sector.Keywords: Non-Performing Assets, Priority sector,Sector-wise Classifications

I. INTRODUCTIONThe incidence of non-performing assets (NPAs) isaffecting the performance of the credit institutions both

financially and psychologically. Non-performing asset(NPA) is not only non-performing but also makes thebanker and the bank non-performing as it:

• Prevents or delays recycling of funds.• denies income from the asset by way of interest• Erodes profit by way of provisions.NPA is a disorder resulting in non-performance of

a portion of loan portfolio leading to no recovery orless recovery / income to the lender. NPAs representthe quantified “Credit Risk”. It also plays havoc on themental make-up of the banker where in the banker triesto go slow on lending, fearing future NPAs, it may leadto delay and denial of credit resulting in low off- take oflendable funds.

NPAs are an inevitable burden on the bankingindustry. Hence, the success of a bank depends uponthe methods of managing NPAs and keeping them withintolerance level.

II. AIM AND METHODOLOGYAim of the present research paper is to analyze the trendsin NPAs in terms of values, gross and net NPAs as apercentage of gross advances and net advances, grossand net NPAs as a percentage of Total Assetsrespectively. The paper details about the sector-wiseclassification of NPAs, reasons for their occurrence,

*Asst. Professor, Dept. of Commerce, Swami Shraddhanand College, University of Delhi, New Delhi.** Asst. Professor, Dept. of Business Studies, Deen Dayal Upadhyaya College, University of Delhi, New Delhi.



the effects of NPAs on banks, and frequency distributionof public sector banks by ratio of net NPAs to netadvances. The study spans the period starting from1996-1997 to 2009-2010.The data for the study hasbeen sourced from Reserve Bank of India(RBI)bulletins, statistical tables relating to banks in India,Report on trend and progress of banking in India, issuedby the RBI. The study also suggests multi-pronged anddiversified strategy for speedy recovery of NPAs incommercial banks in India.

III. CONCEPTUAL FRAMEWORKOF NPAS

The concept of NPAs originated when Reserve Bankof India introduced ‘prudential norms, on therecommendations of the Narashimam Committee in theyear 1992-93. As per the prudential norms laid downby RBI,” An asset is considered as “ non-performing” ifinterest on installments of principal due remain unpaidfor more than180 days(from March31,2004, it has beendecided to adopt the ,90 days, overdue norm foridentification of NPAs).

In simple words, as long as the expected income isrealized from the asset, it is treated as performing assetbut when it fails to generate income or deliver value ondue date it is treated as non-performing asset. Growthof non-performing assets on the balance sheet of bankserodes the solvency, profitability and financial health ofbanks.

With a view to moving towards international bestpractices and to ensure greater transparency, 90 daysoverdue norm for identification of NPAs instead of 180days has been adopted from the year ending March31st 2004. Accordingly, a non-performing asset wouldbe a loan or an advance where:

I. interest and /or installment of principal remainoverdue for a period of more than 90 days, inrespect of a term loan;

II. the account remain ¸out of order, in respect ofoverdraft/cash credit;

III. the bill remain overdue for a period of more than90 days in case of bill purchased and discounted;

IV. interest and or installment of principal remainsoverdue for two harvest seasons but for a periodnot exceeding two half years in the case of anadvance granted for agricultural purposes; and

V. Any amount to be received remains overdue for aperiod of more than 90 days in respect of otheraccounts.

(Any amount due to the bank under any credit facilityis “Overdue” if it is not paid on the due date fixed by thebank).

Banks have been advised by the RBI that theyshould identify the non-performing assets and ensurethat interest on such assets is not recognized as incomeand taken to the profit and loss account. Banks are torecognize their income on accrual basis in respect ofincome on performing assets and on cash basis in respectof income on non-performing assets. Any interestaccrued and credited to income account must becancelled by a reserve entry once the credit facilitycomes under the category of non-performing assets.

3.1 Assets Classification and ProvisionsBanks are required to classify the loan assets (advances)into four categories viz.

I. Standard assetsII. Sub-standard assets

III. Doubtful assets; andIV. Loss assets

Standard Advances/Assets: are those, which donot disclose any problem and do not carry more thannormal risk attached to the business. Such assets areconsidered to be performing asset. A general provisionof 0.25% has to be provided on global loan portfoliobasis.

Sub-Standard Advances: With effect from 31March 2005, a substandard asset would be one,

Which has remained NPA for a period less than orequal to 12 months. Such an asset will have well definedcredit weaknesses that jeopardize liquidation of the debtand are characterized by distinct possibility that bankwill sustain some loss. Accordingly a general provision

*



of 10% on outstanding has to be provided on sub-standard assets.

Doubtful assets- These are the assets which haveremained NPAs for a period exceeding 12 months andwhich are not considered as a loss advance. Banks haveto provide 100 percent of the unsecured portion of theoutstanding advance after netting realized amount inrespect of DICGC scheme (Deposit Insurance andCredit Guarantee Corporation) and realized/realizableamount of guarantee cover under ECGC (Export CreditGuarantee Corporation) schemes.

Period for which the Provision requirements (%)advance has remainedin Doubtful category

Up to one year 20

One to three years 30

More than three years

I. Outstanding stock of NPAs - 60 percent with effect from as on March31,2004 March31,2005

-75 percent with effect from March 31, 2006.

-100 percent with effect from March31,2007

II. Advances classified as 100 percent with effect from doubtful for more than March 31,2005 three years on or after April1,2004

Loss Assets – Loss assets are those where losshas been identified by the bank or internal /externalauditors or RBI inspectors but the amount has not beenwritten off, wholly or partially. Any NPAs would getclassified as loss assets if they were irrecoverable ormarginally collectible and cannot be classified asbankable asset. Companies have to provide 100% ofthese outstanding advances.

Note: provision towards standard assets should notbe deducted from advances but shown separately ascontingent provisions against standard assets under“Other liabilities and provisions” others in schedule Vof the balance sheet.

3.2 Reasons for NPAs in BanksAn account does not become an NPA overnight. It givessignals sufficiently in advance that steps can be taken to

prevent the slippage of the account into NPA category.An account becomes an NPA due to causes attributableto the borrower, the lender and for reasons beyond thecontrol of both. An internal study conducted by the RBIshows that in the order of prominence, the followingfactors contribute to NPAs.

Internal Factors• Diversion of funds for

-Expansion/diversification/modernization.-Taking up new projects.-Helping/promoting associate concerns.

• Time/cost overrun during the projectimplementation.

• Inefficient management.• Strained labour relations.• Inappropriate technology/technical problems.• Product obsolescence, etc.• Poor credit Appraisals, monitoring and follow up,

improper SWOT analysis on the part of banks.

External Factors• Recession.• Input or power shortage.• Price escalation.• Exchange rate fluctuation.• Accidents and natural calamities.• Changes in government policy such as excise,

import and export duties, pollution control orderetc.

• Willful defaulters have been there because theyknew that legal recourse available to the lendersis time consuming and slow.

• Sickness of the industry also leads to gradualerosion of the liquidity and units start failing tohonour its obligations for the loan payments.Heavy funds are locked up in these units.

• Political tool-Directed credit to SSI and Ruralsectors has been there

• Manipulation by the debtors using politicalinfluence has been a cause for high industrial baddebts.



In the current perspective, the Economic Survey,2012-13(paragraph 5.32) identifies the following as the“main” reasons for the growing NPAs:

a) Switchover to a system- based identification ofNPAs by PSBs

b) prevailing macro-economic situation in the country;c) Increased interest rates in the recent past;d) Lower economic growth; ande) Aggressive lending by banks in the past, especially

during good times.

3.3 NPAs: Effect on the Performance ofbanksThe large percentages of NPAs have a deleterious impacton a bank’s profit in a number of ways:

• they result in reduced interest income• They erode (eat into) current profits through

provisioning requirements.• it leads into erosion of capital base and reduction

in their competitiveness• Through creation of reserves and provisions that

come from profits, to act as cushions for loanlosses.

• Decline in profit has its bearing on variables likeCapital to Risk Weighted Assets Ratio (CRARand cost).

To quote the committee on banking sector reforms(Narasimham Committee II, 1998) “NPAs constitute areal economic cost to the nation is that they reflect theapplication of scarce capital & credit funds tounproductive uses. The money locked up in NPAs isnot available for productive uses to the extent that bankseek to make provisions for NPAs or write them off. Itis a charge on their profits, NPAs, in short, is not just aproblem for banks; they are bad for the economy”.

IV. ANALYSIS OF PERFORMANCE WITH REFERENCE TO NPAS

Non-performing assets are one of the importantparameters of analyzing financial performance of banks.

This part of the paper focuses on trend analysis of NPAsand evaluates the financial health of commercial banks.

4.1 Gross NPAs and Net NPAs (as apercentage of advances and Total Assets)

Gross NPAs is an advance which is consideredirrecoverable, for bank has made provisions, and whichis still held in banks books of account.Net NPAs areobtained from gross NPAs after deduction of thefollowing:

• Interest due but not received: i.e. balances ininterest suspense account.

• Claims received from credit guarantors and keptin suspense accounts pending final settlement.

• Part payment received and kept in suspensions;and

• Total provisions held.• Similarly gross advances consists of bills

purchased and discounted, cash credits, overdraftsand loans and term loans, whereas net advance iscalculated by netting out bills discounted, DICGCclaims etc., from gross advances. Gross NPA is abetter indicator than net NPAs since the formerdoes not incorporate the endogenous provisioningprocess; this is because banks make provisioningfor NPAs according to their capacities.Net NPAsdoes not present a true picture of NPAs so theywill have to be supplemented by gross NPAsfigures.

Table-1Gross and Net NPAs of SBI, PNB and

CBI as a percentage of advances and assetsduring 1996-97 to 2009-2010

GROSS NPAs/ GROSS ADVANCES RATIO andGROSS NPAs TO TOTAL ASSETS RATIO

GNPA/GADV GNPA/T.ASSETS

Year SBI PNB CBI SBI PNB CBI

1996-1997 16.02 16.31 25 7.01 6.92 9.55

1997-1998 14.14 14.5 20.47 6.38 6.15 7.91

1998-1999 15.56 14.12 17.41 6.32 6.11 6.9

1999-2000 14.25 13.19 16.63 5.88 5.78 6.87



2000-2001 12.93 11.71 16.06 5.11 5.45 6.88

2001-2002 11.95 11.38 14.7 4.39 5.68 6.42

2002-2003 9.34 11.58 13.06 3.59 5.78 5.68

2003-2004 7.75 9.35 12.55 3.11 4.56 4.88

2004-2005 5.96 5.96 9.5 2.71 3 3.8

2005-2006 3.9 4.1 6.8 1.95 2.2 3

2006-2007 2.9 3.5 4.8 1.76 2.1 2.76

2007-2008 3 2.7 3.2 1.78 1.66 1.89

2008-2009 2.98 1.77 2.67 1.63 1.1 1.6

2009-2010 3.28 1.71 2.32 1.85 1.08 1.34

Source: Compiled from Statistical Tables Relating to Banks in India,Various issues

• It is observed from the Table 1. The gross NPAsto gross advance ratio has shown a declining trendin selected commercial banks over the period ofstudy. Gross NPAs to Gross advance ratio of SBIdecreased from 16.02 percent in 1996-97 to 3.28percent in 2009-2010. In case of PNB, this ratioshows a significant decline from 16.31 percent to1.71 percent in 2009-2010.CBI has showncommendable progress in restricting this ratio witha decline from 25 percent in 1996-97 to 2.32percent in 2009-10. A significant improvement inrecovery of NPAs, along with a rise in gross loansand advances led to sharp decline in the grossNPAs to gross advances ratio. The settings of theAsset Reconstruction Company Limited (ARCIL),Debt Recovery Tribunal and the SARFASEI Acthave been effective in recovering of NPAs in thebanking sector.

• The gross NPAs as percentage of total assets havesignificantly reduced across all the banks from1996-97 to 2009-10.This decline can beattributed to the significant improvement in the assetquality with a rapid increase in quantum of creditto the commercial sector.

• High level of NPAs in PSBs can be attributed tothe following possible factors:

1. Various credits related welfare programs arecarried out through public sector banks as theyhave a widespread network in the rural areas.

2. The problem of high gross NPAs is also one ofinheritance. Historically, Indian public sector bankshave been poor on credit recovery due to a weaklegal provision governing foreclosure andbankruptcy, lengthy legal battles, sticky loansmade to PSUs, loan waivers and priority sectorlending.

3. PSBs also suffer due to lax system of grantingadvances, poor post-loan follow up and politicallymotivated policy framework.

• All banks have been making efforts to contain theNPAs level and reduce the drag on theirprofitability. Even as individual banks devisedvarious policies for containment of NPAs, themagnitude of the problem of slippage ofperforming assets to NPAs category has becomea cause of permanent concern in the banks.

4.2 Analysis of NPAs in SBI, PNB and CBIon basis of Net NPAs/Net Advances andTotal Assets

Table-2

NET NPAs/ NET ADVANCES RATIO andNET NPAs TO TOTAL ASSETS RATIO

NNPA/NADV NNPA/T.ASSETSYear SBI PNB CBI SBI PNB CBI1996-1997 7.3 10.38 14.4 2.89 4.11 4.81997-1998 6.07 9.57 12.21 2.5 3.84 4.281998-1999 7.18 8.96 9.79 2.65 3.66 3.551999-2000 6.41 8.52 9.84 2.4 3.54 3.762000-2001 6.03 6.74 9.72 2.35 2.95 3.872001-2002 5.63 5.32 7.98 1.96 2.48 3.232002-2003 4.5 3.86 6.74 1.58 1.77 2.742003-2004 3.48 0.98 5.57 1.33 0.44 2.012004-2005 2.65 0.2 2.98 1.16 0.1 1.22005-2006 1.9 0.3 2.59 0.99 0.1 1.32006-2007 1.56 0.76 1.7 0.93 0.4 0.92007-2008 1.78 0.64 1.45 1 0.4 0.92008-2009 1.79 0.17 1.24 1 0.1 0.72009-2010 1.72 0.53 0.69 1.03 0.33 0.4

Source: Compiled from Statistical Tables Relating to Banks in India,Various issues



It is observed from the table that Net NPAs to NetAdvance ratio has shown a declining trend in selectedcommercial banks over the period of study. Net NPAsto Net Advance ratio of SBI decreased from 7.3percent in 1996-97 to 1.72 percent in 2009-2010 .Incase of PNB, this ratio has improved from 10.38percent to 0.53 percent in 2009-2010.CBI exhibitscommendable progress with a decline from 14.40percent in 1996-97 to 0.69 percent in 2009-10.

The asset quality of banks in India has beenimproving over the past few years as reflected in thedeclining NPA to Advances ratio. It is noteworthy thatnotwithstanding the pressures of a slowdown in theeconomy and an uncertain macroeconomic scenario,the net NPA to net Advances ratio remained stable incase of SBI, while for the other two banks exhibited adecline in this ratio.

4.3 SECTOR –WISE NPAS OF SBI, PNBAND CBI

The total NPAs of banks are classified into threecategories viz. Priority Sector, Public Sector and Nonpriority Sector. The Sectoral distribution of NPAsshowed a growing proportion of priority sector NPAs

between 2009 and 2010. Priority sector NPAs, whichconstituted approximately half of the total NPAs ofdomestic banks up to 2008, exhibited a steep declinein 2009 attributable primarily to the Agricultural DebtWaiver and Debt Relief Scheme of 2008. Between2009 and 2010, the share of priority sector NPAsincreased for domestic banks, partly a reflection of theimpact of the financial crisis and the economic slowdownthat had set in thereafter.

4.3.1 STATE BANK OF INDIAThe proportion of NPAs in Priority Sector to the totalNPAs of the SBI has significantly increased from 44.44percent to 50.87 percent and the total amount of NPAsin Public sector decreased from Rs. 1090.40 crores in2000-01 to Rs.235 crores in 2009-10.

At the end of March 2010, the percentage ofPriority sector NPAs in Total NPAs was 50.87 per centfor State Bank of India The sharp rise in NPAs of non-priority sector was reflective of the slowdown in theeconomy and stressed financial conditions of corporates.The NPAs in the priority sector increased during 2007-08, mainly due to increase in NPAs of the agriculturesector.

Table 3 Sector-Wise Classification of NPAs of SBI

Year Priority % Public Sector % Non Priority % Total NPAs %Sector (i) NPAs (ii) Sector NPAs (ii) (i+ii+iii)

2000-01 6876.32 44.44 1090.4 7.05 7506.26 48.51 15472.98 100.002001-02 6942.42 44.83 506.4 3.27 8037.05 51.90 15485.87 100.002002-03 6171.23 46.55 381.2 2.88 6704.84 50.57 13257.27 100.002003-04 5764.83 48.70 109.06 0.92 5963.02 50.38 11836.91 100.002004-05 5604.68 48.12 90.32 0.78 5952.43 51.11 11647.43 100.002005-06 5906.49 57.51 33.2 0.32 4329.83 42.16 10269.52 100.002006-07 5810.19 58.86 149.32 1.51 3911.5 39.63 9871.01 100.002007-08 7561.28 60.12 91.16 0.72 4923.64 39.15 12576.08 100.002008-09 7010 46.41 163 1.08 7932 52.51 15105 100.002009-10 9073 50.87 235 1.32 8529 47.82 17837 100.00r * 0.82 0.51 0.94r** -0.54 0.39 0.52r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.



The calculated value of coefficient of correlation ,r,of the different sectors to the total amounts of sectorwise NPAs observed a positive correlation ,but theproportionate NPA recovery in the Priority Sector hasrecorded a negative correlation ,r = - 0.54 which showsincrease in NPAs in the priority Sector.

4.3.2 Punjab National BankThe proportion of NPAs in Priority Sector to the TotalNPAs of the PNB has significantly increased from 41.04percent to 76.88 percent whereas the Non-PrioritySector amounts decreased from Rs. 1993.52 crores in2000-01 to Rs.739 crores in 2009-10.The value ofPublic sector NPAs shows a fluctuating trend over theperiod of study and is minimum in the year 2008-09.

Table 4Sector-Wise Classification of NPAs of PNB


2000-01 1419.98 41.04 46.6 1.35 1993.52 57.61 3460.1 100.00

2001-02 1728.31 41.75 59.43 1.44 2352.12 56.82 4139.86 100.00

2002-03 2039.91 40.96 35.72 0.72 2904.43 58.32 4980.06 100.00

2003-04 1979.17 42.38 65.12 1.39 2625.84 56.23 4670.13 100.00

2004-05 1740.76 46.53 39.52 1.06 1961.06 52.42 3741.34 100.00

2005-06 1809.55 57.66 34.16 1.09 1294.57 41.25 3138.28 100.00

2006-07 2511.6 74.08 90.16 2.66 788.51 23.26 3390.27 100.00

2007-08 2761.59 83.20 52.84 1.59 504.87 15.21 3319.3 100.00

2008-09 2436 88.01 1 0.04 331 11.96 2768 100.00

2009-10 2471 76.88 4 0.12 739 22.99 3214 100.00

r* -0.33 0.37 0.90

r** -0.84 0.16 0.83

r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.

r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.

The calculated value of coefficient of correlation, r,of the different sectors to the total amounts of sectorwise NPAs observed a positive correlation in case ofpublic sector NPAs and non-priority sector NPAs butnegative correlation of -0.33 has been observed in caseof priority sector to the total NPAs amount, also theproportionate NPA recovery in the Priority Sector hasrecorded a high degree of negative correlation, r = -0.84 which shows increase in NPAs in the prioritySector.

4.3.3 Central Bank of IndiaThe proportion of NPAs in Priority Sector to the TotalNPAs of CBI has increased from 48.68 percent to67.45 percent whereas the Non-Priority Sector amountsdecreased from Rs. 26.96 crores in 2000-01 to Rs.8crores in 2009-10. The value of Public sector NPAsshows a fluctuating trend over the period of study andis minimum in the year 2008-09.

Non-Priority Sector amounts decreased fromRs. 1642.77 crores in 2000-01 to Rs.792 crores in2009-10.Public sector NPAs shows a fluctuatingtrend over the period of study and is minimum in theyear 2009-10.



Table 5Sector-Wise Classification of NPAs of CBI


2000-01 1583.6 48.68 26.96 0.83 1642.77 50.50 3253.33 100.002001-02 1708.99 50.63 25.01 0.74 1641.69 48.63 3375.69 100.002002-03 1721.04 53.06 123 3.79 1399.41 43.15 3243.45 100.002003-04 1724.59 55.78 21.14 0.68 1346.19 43.54 3091.92 100.002004-05 1585.44 60.48 12.71 0.48 1023.26 39.03 2621.41 100.002005-06 1597.68 59.52 6.47 0.24 1080.03 40.24 2684.18 100.002006-07 1598.86 62.16 10.15 0.39 962.97 37.44 2571.98 100.002007-08 1651.44 70.28 0.81 0.03 697.59 29.69 2349.84 100.002008-09 1587 68.38 59 2.54 675 29.08 2321 100.002009-10 1658 67.45 8 0.33 792 32.22 2458 100.00r* 0.53 0.39 0.98r** -0.97 0.31 0.94r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.

The calculated value of coefficient of correlation, r, of the different sectors to the total amounts of sector wiseNPAs observed a positive correlation in case of public sector NPAs, Priority sector and non-priority sectorNPAs, also the proportionate NPA recovery in the Priority Sector has recorded a high degree of negative correlation,r = - 0.97 which shows increase in NPAs in the priority Sector.

4.4 PRIORITY SECTOR NPAS IN SBI, PNB and CBIThe Priority Sector includes Agriculture, Small-scale Industries (SSIs) and Other Sectors, with a view to ensureflow of credit to these underdeveloped sectors, commercial banks in India were advised to grant at least 40percent of their total advances to the borrowers in the Priority Sectors. Following tables depict the priority sectorcomposition of NPAs in selected banks i.e. SBI, PNB and CBI.

Table 6Priority Sector NPAs of SBI

Year Agriculture (i) % SSI(ii) % Others(iii) % Total Priority % Sector (i+ii+iii)

2000-01 2351.18 34.19 2898.42 42.15 1626.72 23.66 6876.32 100.00

2001-02 2520.49 36.31 2794.22 40.25 1627.71 23.45 6942.42 100.00

2002-03 2369.39 38.39 2302.57 37.31 1499.27 24.29 6171.23 100.00

2003-04 2124.26 36.85 1741.07 30.20 1899.5 32.95 5764.83 100.00

2004-05 1912.68 34.13 1371.97 24.48 2320.03 41.39 5604.68 100.00

2005-06 1929.21 32.66 1238.89 20.98 2738.39 46.36 5906.49 100.00

2006-07 1977.18 34.03 1074.78 18.50 2758.23 47.47 5810.19 100.00

2007-08 2915.12 38.55 1260.11 16.67 3386.05 44.78 7561.28 100.00

2008-09 1789 25.52 1712 24.42 3509 50.06 7010 100.00



2009-10 2322 25.59 2168 23.90 4583 50.51 9073 100.00

r 0.48 0.34 0.68

R² 0.23 0.12 0.46

r = Coefficient of Correlation,R2 =Coefficient of Determination

Table 7

Priority Sector NPAs of PNB Year Agriculture (i) % SSI(ii) % Others(iii) % Total Priority %

Sector (i+ii+iii)

2000-01 384.81 27.10 568.88 40.06 466.29 32.84 1419.98 100.00

2001-02 443.9 25.68 687.09 39.76 597.32 34.56 1728.31 100.00

2002-03 512.23 25.11 929.91 45.59 597.77 29.30 2039.91 100.00

2003-04 474.05 23.95 928.17 46.90 576.95 29.15 1979.17 100.00

2004-05 354.46 20.36 908.3 52.16 478.6 27.48 1741.36 100.00

2005-06 432.17 23.88 796.94 44.04 580.5 32.08 1809.61 100.00

2006-07 647.39 25.78 991.32 39.47 872.89 34.75 2511.6 100.00

2007-08 1011.61 36.63 910.51 32.97 839.47 30.40 2761.59 100.00

2008-09 537 22.04 1000 41.05 899 36.90 2436 100.00

2009-10 977 39.55 1165 47.17 328 13.28 2470 100.00

r 0.84 0.76 0.56

R² 0.73 0.41 0.26


Table 8Priority Sector NPAs of CBI

Year Agriculture (i) % SSI(ii) % Others(iii) % Total Priority % Sector (i+ii+iii)

2000-01 346.78 21.90 737.71 46.58 499.11 31.52 1583.6 100.00

2001-02 396.34 23.19 789.37 46.19 523.28 30.62 1708.99 100.00

2002-03 441.1 25.63 746.75 43.39 533.19 30.98 1721.04 100.00

2003-04 459.78 26.66 683.39 39.63 581.42 33.71 1724.59 100.00

2004-05 356.34 22.48 627.55 39.58 601.55 37.94 1585.44 100.00

2005-06 413.39 25.87 607.46 38.02 576.83 36.10 1597.68 100.00

2006-07 450.67 28.19 519.47 32.49 628.72 39.32 1598.86 100.00

2007-08 535.83 32.45 636.3 38.53 479.31 29.02 1651.44 100.00

2008-09 417 26.26 659 41.50 512 32.24 1588 100.00

2009-10 421 25.39 922 55.61 315 19.00 1658 100.00

r 0.40 0.46 -0.16

R² 0.08 0.30 0.04




The decline in Priority Sector NPAs during 2008-09 was contributed by the agricultural sector, partlyreflecting the effect of the debt waiver scheme for farmersannounced by the Central Government in 2007.NPAsof SBI decreased from 34.19 Percent at the end ofMarch 2001 to 25.59 percent at the end of March 2010.The NPAs in case of SSIs declined from 42.15 percentin 2000-01 to 23.90 in 2009-10.The other sectorsamount of NPAs increased from Rs. 1626.72 croreswith 23.66 percent at the end of March 2001 to Rs.4583 crores with 50.51 percent at the end of March2010.The calculated value of coefficient of correlation,r, of Priority Sector shows that there is a positiveCorrelation as regards the recovery of mounting NPAsin Agriculture, SSI and other sectors to the total PrioritySector of PSBs, coefficient of correlation being0.48,0.34 and .68 over the period of study in case ofSBI.

4.5 Distribution of PSBs by Ratio of Net NPAsto Net AdvancesThe distribution of PSBs using the ratio of net NPAs tonet Advances is used to examine the performance ofbanks in improving the recovery of mounting NPAs;this ratio has been divided into 4 categories i.e. up to2%,2-5%, 5-10% and above 10%.The table revealsthat all the PSBs were under the category of below 2%of net NPAs at the end March 2009.This shows thatthere is an effective recovery of mounting NPAs in allthe PSBs and improvement in the financial health ofIndian banks in recent years.

Table 9Distribution of PSBs by Ratio of net

NPAs to net advances

Year No. of PSBs lie under the rate of NPA Total

Below 2% 2%-5% 5%-10% Above 10% PSBs

1999-00 0 22 5 0 27

2000-01 1 5 16 5 27

2001-02 0 11 13 3 27

2002-03 4 14 7 2 27

2003-04 11 13 3 0 27

2004-05 19 7 2 0 28

2005-06 23 5 0 0 28

2006-07 27 1 0 0 28

2007-08 28 0 0 0 28

2008-09 27 0 0 0 27

V. CONCLUSIONThe incidence of non-performing assets (NPAs) isaffecting the performance of credit institutions bothfinancially and psychologically. The non-performingassets have become a major cause of concern. Imbibingthe credit management skills has become all the moreimportant for improving the bottom-line of the bankingsector. It becomes essential to master the expertise formonitoring exposure levels, industry scenarios and timelyaction in respect of troubled industries. Skills of NPAmanagement, include working out negotiatedsettlements, compromises constituting active settlement,advisory committees, restructuring and rehabilitation,effective recourse to suitable legal remedies are to besupplemented with most suitable legal reforms by banksto recover dues well in time so that the financialsoundness of the banking sector will not be undermined.

On the international front, the various global risksassociated with the banking industry will expose thecredit assets to greater risks while serious efforts needto be taken for recovery measures, banks need to beequipped with necessary risk appraisal system to minimizecredit defaults.

The position of NPAs continues to haunt Indianbanking Sector. Several experiments have been tried tocurb NPAs (viz., BIFR/SICA, lok adalats, DRTs, OTS,SARFAESI etc) but nothing has hit the mark in tacklingNPAs. The validity of both DRT/ Securitization act waschallenged and still hangs in dilemma, which hasdampened the spirits of bankers.

A clear discrimination is warranted while formulatingany strategy in addressing the problem of genuine andwillful defaulters. There should be a real crackdown onwillful defaulters and their assets whether or not chargedto banks should be declared as national assets and bedisposed in a transparent manner, without major legalhurdles.



Nevertheless, the process of NPA management doesnot start after filing a suit but starts with the identificationof a right borrower. The problem of NPA is greater inthe public sector banks as compared to private andforeign banks in India. Similarly, the problem of NPAsis more in non-priority sector than priority and publicsector. Further, SSI sector has largest share in the totalNPA of priority sector. As a result of this, financial healthof banks has been affected adversely. Hence, banks inIndia must apply the basic principles of financialmanagement to solve the problems of mounting NPA.

From the above analysis, following suggestionsemerge which may contribute towards reduction in themounting non-performing assets in banks;

• Improving the recovery management-Soundfunctioning of banks depends on timely recoveryof credit, hence, banks should develop suitablerecovery programs for assessing and classifyingthe over dues, monitoring accounts ,keeping regularcontact with borrowers ,fixing recovery targets,arranging recovery camps, training the personneland linking marketing of produce and recovery.

• Improving the corporate governance practices-Government of India had initiated many economicreforms in the financial sectors but minimalattention has been devoted to the issues ofcorporate governance in banks .BOD are the keyplayers in the management of banks but they aregranted little autonomy. The nominees ofGovernment /RBI dominate the banks boards dueto their vast powers. Hence, there is an urgentneed to remove the dominance in order to takeappropriate decision to improve their financialhealth.

• Upgrading Technology- Computer based bankingsystem has helped the bank management to solvesome of the inherent problems. Computerizationcan further help the management in getting requiredinformation in order to take proper decisions whilegranting loans/advances.

• Inculcating ethics in borrowers- Ethics inborrowers is necessary to make the bankingsector more efficient. However, many borrowers

are defaulters not because of low income but dueto lack of ethics .Hence, banks should use NGO’sand other voluntary organizations to educate theborrowers regarding the importance of timelyrepayment of credit.

• Improving the credit Management- Managementof credit is essential for proper functioning ofbanks. Preparation of credit planning, appraisalof credit proposals, timely sanction anddisbursements, post sanction follow-up and needbased credit are the some areas of creditmanagement that needs improvement in order toreduce the NPAs.

• Effective legal system - Government of India/RBIhad initiated many legal measures to bring downNPA in banks. However, there are some flaws ineach legal measure which need improvement inorder to bring down NPA in banks.

• When the RBI grants new banking license, thereshould be a condition that for the first 10 yearsthere cannot be any loan write-offs. Later, write-off amounts must be borne by the shareholders,which is to be certified by external auditors. Aseparate statement should be made so that allstakeholders are aware to what extent their profitswere affected due to the write-off.

• Banks should reduce dependence on interestincome- Indian banks are largely dependent onthe lending and investment as in comparison todeveloped countries. Indian banks should look forsources (income) from fee based services andproducts.

• Credit Information Bureau- The institutionalizationof information sharing arrangement is now possiblethrough the newly formed Credit informationBureau of India Limited (CIBIL) it was set up inthe year 2001, by SBI, HDFC, and two foreigntechnology partners. This will prevent those whotake advantage of lack of system of informationsharing amongst leading institutions to borrow largeamount against same assets and property, whichhas in no measures contributed to the incrementalof NPAs of banks.



• Circulation of Information of Defaulters- RBI hasput in place a system for periodical circulation ofdetails of willful defaulters of banks and financialinstitutions. RBI also publishes a list of borrowers(with outstanding aggregate rupees one crore andabove) against whom banks and financialinstitutions in recovery of funds have filed suits ason 31 st March every year. This serves as a cautionlist while considering a request for new oradditional credit limits from defaulting borrowingunits and also from the directors, proprietors andpartners of these entities.

• Debt Recovery Tribunals (DRTs) - In the contextof recovery from NPAs, banks and FIs dependheavily on DRTs. These tribunals were set up forsuits of the value of recovery over Rs. 10 lakhs,while High Courts and District Courts would takeup cases of lesser values. The government hasamended the Debt Recovery Tribunal(procedures) rules, 2003 to facilitate betteradministration of the act including plural remediesfor banks like power to attach defendant’sproperty before judgement etc. They have the hugetask on their hands.(DRTs were set up under the recovery of debtsdue to banks and financial institution act, 1993).The following table depicts the NPAs recoveredthrough various channels by SCBs.

Table 10NPAs recovered by SCBs through Various

Channels(Amount in Rs. Crores)One-time Lok DRTs SARFAESI

Settlement/ Adalats Actcompromise

SchemeNo. of Cases 139562 186100 7544 2661#

referred2003-04 Amount 1510 1063 12305 7847

InvolvedAmount 617 149 2117 1156

RecoveredNo. of Cases 132781 185395 4744 39288#

referred2004-05 Amount 1332 801 14317 13244

Involved

Amount 880 113 2688 2391Recovered

No. of Cases 10262 268090 3534 41180#referred

2005-06 Amount 772 2144 6273 8517InvolvedAmount 608 265 4735 3363

RecoveredNo. of Cases __ 160368 4028 60178#

referredAmount __ 758 9156 8517

2006-07 InvolvedAmount __ 106 3463 3363



2007-08 InvolvedAmount __ 176 3020 4429



2008-09 InvolvedAmount __ 176 3020 4429

Recovered**No. of Cases __ 778833 6019 78366#

referred2009-10 Amount __ 7235 9797 14249

InvolvedAmount __ 112 3133 4269



2010-11 InvolvedAmount __ 200 3900 11600



2011-12 InvolvedAmount __ 200 4100 10100

Recovered**# Number of notices issued under section 13(2) of the SARFAESIAct.Source: Report on Trend and Progress of Banking in India, Variousissues, RBI.**Refers to amount recovered during the given year which could bewith reference to cases referred during the given year as well asduring the earlier years.



Using the new institutions and legal options, banksand financial institutions accelerated their recovery ofNPAs. In 2002, SARFAESI Act (Securitisation andReconstruction of Financial Assets and Enforcement ofSecurity Interest) was passed and it empowered thecreditors to foreclose non-performing loans and theunderlying collateral without going through a lengthyjudicial or tribunal process. This act was passed withthe aim of enabling banks and financial institutions torealize long-term assets, manage the problem of liquidity,reduce asset liability mismatches and improve recoveryby taking possession of securities, selling them andreducing NPAs. The ordinance also allows banks andfinancial institutions to utilize the services of ARCs/SCsfor speedy recovery of dues from defaulters and toreduce their NPAs. The ordinance contains provisionsthat would make it possible for ARCs/SCs to takepossession directly of the secured assets and/or themanagement of the defaulting borrower companieswithout resorting to the time-consuming process oflitigation and without allowing borrowers to take shelterunder the provisions of SICA/BIFR. All these effortsimproved the recovery of NPAs by commercial banks.The NPAs recovered by scheduled commercial banksthrough various channels is presented in the aboveTable. During 2011-12, total amount of NPAs recoveredthrough the Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security InterestAct (SARFAESI Act), Debt Recovery Tribunals (DRTs)and Lok Adalats registered a decline compared withthe previous year. Of the total amount recovered throughthese channels, recoveries under the SARFAESI Actconstituted almost 70 per cent. At present, there are 33DRTs and five Debt Recovery Appellate Tribunalsacross the country.SARFAESI Act and the debt recovery tribunals (DRTs)have proved to be most effective in terms of amountrecovered among the various channels of recovery fordealing with bad loans. .In terms of cases, the highestnumber (3405720) were referred to the lok adalats andthe lowest (57838) to the DRTs over the period 2003-2012. In terms of the amount involved, the DRTsrecovered the highest amount of around Rs. 30504

crores out of Rs 99997 crores and Lok Adalats theleast, Rs. 1497 crores out of Rs.25166 crores for theperiod 2003-12. In terms of the recovery, 58 percentof the amount involved was recovered through one –time settlement/Compromise schemes. DRTs recoveredaround 30.5 percent and lok Adalats recovered around5.63 percent, while 35.71 percent of the amount wasrecovered under the SARFAESI Act for the period2003-2012.

VI. REFERENCES1. Pricewaterhouse Coopers, “Management of non-

performing assets by Indian banks”, IBA Bulletin,Jan 2004.

2. Samir and Anubha (2005), “Management of non-performing assets (NPAs) in public sector,private-sector and foreign banks”, pp.71-76,vol.VII, No-1&2 in Musings, journal ofmanagement, Centre For ManagementDevelopment.

3. Shri A.S. Shiralashetu and Dr.Akash,S.B.(2006),” Management of non-performingassets in commercial banks-some issues”,Banking and finance

4. Dr. G.Sudarsana Reddy, (2004) Management ofnon-performing assets (NPAs) in Public sectorbanks”, Banking and finance.

5. Samir, Deepa Kamra and N.SRana.(2010)”Non-Performing Assets(NPAs)impede performance of Public Sector Banks”,pp.6-13,Vol. 7,No.3 in Masterstroke, TheJournal of Master School of Management, ISSN0972-9895

6. Report on Trend and Progress of banking in India,Various Issues.

7. Statistical Tables relating to Banks in India,Various Issues.

8. http://rbi.org.in.

9. http://iba.org.in

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