“NON PERFORMING ASSET A THREAT TO INDIAN BANKING INDUSTRY” A STUDY ON NON PERFORMING ASSETS IN PRIORITY SECTOR LENDING OF PUBLIC SECTOR BANKS.
Dec 11, 2015
“NON PERFORMING ASSET A THREAT TO INDIAN BANKING INDUSTRY”A STUDY ON NON PERFORMING
ASSETS IN PRIORITY SECTOR LENDING OF PUBLIC SECTOR BANKS.
TABLE OF CONTENTS
PARTICULARS PAGE NO.
1.1 INTRODUCTION1.1A HISTORY OF BANKING IN INDIA1.1B DEFINITION OF BANKING1.1C BANKING STRUCTURE IN INDIA1.1D PUBLIC SECTOR BANKS1.1E DEFINITION OF NPA1.1F FACTORS FOR RISE IN NPA1.1G GUIDELINES BY RBI1.1H DEFINITION PRIORITY SECTOR LENDING1.1I CATEGORIES UNDER PRIORITY SECTOR
1.1 I A AGICULTURE1.1 I B MICRO AND SMALL ENREPRISES1.1 I C WEAKER SECTIONS1.1 I D INVESTMENT IN SECURITISED ASSET1.1 I E OUTRIGHT PURCHASES1.1 I F INTER BANK PARTICIPATION CERTIFICATES BOUGHT BY BANKS1.1 I G BANK LOANS TO MFIS FOR ON-LENDING
1.1J NON-ACHIEVEMENT OF PRIORITY SECTOR TARGETS
1.1K COMMON GUIDELINES FOR PRIORITY SECTOR LOANS
1.2 RESEARCH DESIGN1.2A STATEMENT OF THE PROBLEM1.2B OBKECTIVES OF THE STUDY1.2C HYPOTHESIS OF THE STUDY1.2D SCOPE OF THE STUDY1.2E SAMPLING METHOD1.2F DATA COLLECTION METHODS1.2G GENERAL METHODOLOGY OF THE STUDY1.2H LIMITATIONS OF THE STUDY1.2I CHAPTERISATION OF THE STUDY
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LIST OF TABLES
PARTICULARS PAGE NO.
5.1A IMPACT OF PRIORITY SECTOR LENDING ON NPA OF PSBs
1 TABLE SHOWING THE DESCRIPTIVE STATISTICS OF THE VARIABLES
2 TABLE SHOWING THE CORRELATIONS BETWEEN THE VARIABLES
3 TABLE SHOWING THE MODEL SUMMARY4 TABLE SHOWING THE ANOVA VALUES5 TABLE SHOWING THE COEFFICIENT VALUES
5.1B IMPACT OF PRIORITY SECTOR NPAs ND NON PRIORITY SECTOR NPAs ON TOTAL NPAs OF PSBs
6 TABLE SHOWING CORRELATION OF PRIORITY SECTOR NPAS AND NON PRIORITY SECTOR NPAS
5.1C IMPACT OF RECOVERY OF NPAs ON TOTAL NPAs OF PSBs
6 TABLE SHOWING THE DESCRIPTIVE STATISTICS OF THE VARIABLES
7 TABLE SHOWING THE CORRELATIONS BETWEEN THE VARIABLES
8 TABLE SHOWING THE MODEL SUMMARY9 TABLE SHOWING THE ANOVA VALUES10 TABLE SHOWING THE COEFFICIENT VALUES.
5.1D IMPACT OF NET NPA ON PRIORITY SECTOR NPA
11 TABLE SHOWING THE T TEST VALUES
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1.1 INTRODUCTION
Presently, in India also almost all the sectors such as IT sector, automobile industry and
share market are not in a very good condition. But, quite interestingly, the banking sector
of India is booming day-by-day and that too even in the period of global crisis Banks acts
as the backbone of modern business. Development of a country mainly depends on banks.
Banks play an important role in the economic development of a country. The Indian
banking has come from a long way from being a sleepy business institution to a highly
proactive and dynamic entity. The Indian banking sector has emerged as one of the
strongest drivers of India’s economic growth. The Indian banking industry (US$ 1.22
trillion) has made outstanding advancement in last few years, even during the times when
the rest of the world was struggling with financial meltdown. India's economic
development and financial sector liberalization have led to a transformation of the Indian
banking sector over the past two decades.Today Indian Banking is at the crossroads of an
invisible revolution. The sector has undergone significant developments and investments
in the recent past. Most of banks provide various services such as Mobile banking, SMS
Banking, Net banking and ATMs to their clients Indian banks, the dominant financial
intermediaries in India, have made high quality progress over the last five years, as is
evident from several factors, including annual credit growth, profitabilityIn this growing
economic and financial sector reforms banks are faced with many challenges .what is
bothering the bank today is the management of non-performing asset.
Over the years the banks are facing this problem and therefore needs urgent remedial
actions.Non-performing assets are problematic for banks. pressure from the economy can
lead to a sharp increase in non-performing loans and often results in massive write-
downs.one of the important function of the bank is lending money to its customers by way
of loans and advances. For banks loans are the most profitable assets. Return comes in the
form of loan interest, fee income and investment. The most assumed risk is the credit risk
and it involves inability or unwillingness of customer to meet the commitments in relation
to the loan. Once a loan is overdue and cease to yield income it would be a non performing
asset. It is a serious concern for banks since they depend on interest payments for income.
Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the
banking industry in our country sending distressing signals on the sustainability and
insurability of the affected banks. The positive results of the chain of measures affected
under banking reforms by the Government of India and RBI in terms of the two
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Narasimhan Committee Reports in this contemporary period have been neutralized by the
ill effects of this surging threat. Despite various correctional steps administered to solve
and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus
confronted universally on banking and financial institutions. The severity of the problem is
however acutely suffered by Nationalised Banks, followed by the SBI group, and the all
India Financial Institutions. The Non-Performing Assets (NPAs) of the Indian banking
sector have been incessantly rising in the past six months. Historically, in 1997, NPAs
were 15.8% of loans for the banking sector, which nosedived to 2.4% in 2008. This figure
stands at 2.94% of loans in 2012. In absolute figures, NPAs have doubled from 2009 to
2012 and assets under reconstruction had trebled during the same period. India’s biggest
lender, State Bank of India, is experiencing an NPA level of 4.99% of total loans.
According to a recently published Credit Suisse Group AG report, 10 large industrial
houses account for 13% of total assets financed by the Banking system, which means that
bank lending is getting increasingly skewed. Further, of the total reconstructed assets,
8.24% belong to the large manufacturing sector, 3.99% are from the services sector while
1.45% are from the agricultural sector.
The namebank derives Italian word banco "desk/bench" used during the Renaissance by
Jewish Florentine bankers, who used to make their transactions above a desk covered by a
green tablecloth. However, there are traces of banking activity even in ancient times,
which indicates that the word 'bank' might not necessarily come from the word 'banco'. In
fact the word traces its origins back to the Ancient Roman Empire, where moneylenders
would set up their stalls in the middle of enclosed courtyards called macella ona long
bench called a bancu, from which the words banco and bank are derived. As a
moneychanger, the merchant at the bancu did not so much invest money as merely convert
the foreign currency into the only legal tender in Rome that of the Imperial Mint.
1.1 A HISTORY OF BANKING
The first banks were probably the religious temples of the ancient world, and were
probably established sometime during the third millennium B.C. Banks probably predated
the invention of money. Deposits initially consisted of grain and later other goods
including cattle, agricultural implements, and eventually precious metals such as gold, in
the form of easy-to-carry compressed plates. Temples and palaces were the safest places to
store gold as they were constantly attended and well built. As sacred places, temples
presented an extra deterrent to would-be thieves. There are extant records of loans from
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the 18th century BC in Babylon that were made by temple priests/monks to
merchants Pythius, who operated as a merchant banker throughout Asia Minor at the
beginning of the 5th century B.C., is the first individual banker of whom we have records.
1.1 B DEFINITION OF BANKING
The definition of a bank varies from country to country. Under English common law, a
banker is defined as a person who carries on the business of banking, which is specified
as:
conducting current accounts for his customers
paying cheques drawn on him, and
Collecting cheques for his customers.
In most English common law jurisdictions there is a Bills of Exchange Act that codifies
the law in relation to negotiable instruments, including cheques, and this Act contains a
statutory definition of the term banker: banker includes a body of persons, whether
incorporated or not, who carry on the business of banking'. Although this definition
seems circular, it is actually functional, because it ensures that the legal basis for bank
transactions such as cheques does not depend on how the bank is organized or regulated.
The business of banking is in many English common law countries not defined by
statute but by common law, the definition above. In other English common law
jurisdictions there are statutory definitions of the business of banking or banking
business. When looking at these definitions it is important to keep in minds that they are
defining the business of banking for the purposes of the legislation, and not necessarily
in general. In particular, most of the definitions are from legislation that has the purposes
of entry regulating and supervising banks rather than regulating the actual business of
banking. However, in many cases the statutory definition closely mirrors the common
law one. Examples of statutory definitions:
"banking business" means the business of receiving money on current or
deposit account, paying and collecting cheques drawn by or paid in by
customers, the making of advances to customers, and includes such other
Business as the Authority may prescribe for the purposes of this Act;
"banking business" means the business of either or both of the following:
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receiving from the general public money on current, deposit, savings.
other similar account repayable on demand or within less than [3 months] or with a
period of call or notice of less than that period;
paying or collecting cheques drawn by or paid in by customers
Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale), direct credit,
direct debit and internet banking, the cheque has lost its primacy in most banking systems
as a payment instrument.
1.1 C Banking Structure In India
The commercial banking structure in India consists of scheduled commercial banks and
unscheduled banks. Scheduled banks constitute those banks that are included in the
Second Schedule of Reserve Bank of India (RBI) Act, 1934.
As on June 30, 1999, there were 300 scheduled banks in India having a total network of
64,918 branches. The scheduled commercial banks in India comprise State Bank of India
and its associates (8), nationalised banks (19), foreign banks (45), private sector banks
(32), co-operative banks, and regional rural banks. Before the nationalization of Indian
banks, the State Bank of India (SBI) was the only nationalized bank, which was
nationalized on July 1, 1955, under the SBI Act of 1955. The nationalization of seven
State Bank subsidiaries took place in 1959.
After the nationalization of banks in India, the branches of the public sector banks rose to
approximately 800 percent in deposits and advances took a huge jump by 11,000 percent.
Nationalization Process
1955: Nationalization of State Bank of India
1959: Nationalization of SBI subsidiaries
1969: Nationalization of 14 major banks
1980: Nationalization of seven banks with deposits over Rs 200 crore
Banks In India
In India, banks are segregated in different groups. Each group has its own benefits and
limitations in operations. Each has its own dedicated target market. A few of them work in
the rural sector only while others in both rural as well as urban. Many banks are catering
in cities only. Some banks are of Indian origin and some are foreign players.
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Banks in India can be classified into:
Public Sector Banks
Private Sector Banks
Cooperative Banks
Regional Rural Banks
Foreign Banks
One aspect to be noted is the increasing number of foreign banks in India. The RBI has
shown certain interest to involve more foreign banks. This step has paved the way for a
few more foreign banks to start business in India.
Types Of Banks
There are various types of banks which operate in our country to meet the financial
requirements of different categories of people engaged in agriculture, business, profession
etc. on the basis of functions, the banking institution may be divided into following types:
1. Central Bank
A central bank functions as the apex controlling institution in the banking and financial
system of the country. It functions as the controller of credit, banker’s bank and also
enjoys the monopoly of issuing currency on behalf of the government. A central bank is
usually control and quite often owned, by the government of a country. The Reserve Bank
of India (RBI) is such a bank within an India.
2. Commercial Banks
It operates for profit. It accepts deposits from the general public and extends loans to the
households, the firms and the government. The essential characteristics of commercial
banking are as follows:
- Acceptance of deposits from public
- For the purpose of lending or investment
- Repayable on demand or lending or investment.
- Withdrawal by means of an instrument, whether a cheque or otherwise.
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Another distinguish feature of commercial bank is that a large part of their deposits are
demand deposits with drawable and transferable by cheque.
3. Development Banks
It is considered as a hybrid institution which combines in itself the functions of a finance
corporation and a development corporation. They also act as a catalytic agent in promoting
balanced and viable development by assuming promotional role of discovering project
ideas, undertaking feasibility studies and also provide technical, financial and managerial
assistance for the implementation of project. In India ‘Industrial Development Bank on
India’ (IDBI) is the unique example of development bank. It has been designated as the
principal institution of the country for co-ordinating the working of the institutions
engaged in financing, promoting or development of industry.
4. Co-operative Banks
The main business of co-operative banks is to provide finance to agriculture. They aim at
developing a system of credit. Agriculture finance is a special field. The co-operative
banks play a useful role in providing cheap exit facilities to the farmers. In India there are
three wings of co-operative credit system namely –
1. Short term 2. Medium-term, 3. Long term credit.
5. Specialised Banks
These banks are established and controlled under the special act of parliament. These
banks have got the special status. One of the major bank is ‘National Bank for
Agricultural and Rural development’ (NABARD) established in 1982, as an apex
institution in the field of agricultural and other economic activities in rural areas. In 1990 a
special bank named small industries development Bank of India (SIDBI) was established.
It was the subsidiary of Industrial development Bank of India. This bank was established
for providing loan facilities, discounting and rediscounting of bills, direct assistance and
leasing facility.
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6. Indigenous Bankers
That unorganised unit which provides productive, unproductive, long term, medium term
and short term loan at the higher interest rate are known as indigenous bankers. These
banks can be found everywhere in cities, towns and villages.
7. Rural Banking
A set of financial institution engaged in financing of rural sector is termed as ‘Rural
Banking’. The polices of financing of these banks have been designed in such a way so
that these institution can play catalyst role in the process of rural development.
8. Saving Banks
These banks perform the useful services of collecting small savings commercial banks
also run “saving bank” to mobilise the savings of men of small means. Different countries
have different types of savings bank viz. Mutual savings bank, Post office saving,
commercial saving banks etc.
9. Export - Import Bank
These banks have been established for the purpose of financing foreign trade. They
concentrate their working on medium and long-term financing. The Export-Import Bank
of India (EXIM Bank) was established on January 1, 1982 as a statutory corporation
wholly owned by the central government.
10. Foreign Exchange Banks
These banks finance mostly to the foreign trade of a country. Their main function is to
discount, accept and collect foreign bulls of exchange. They also buy and self foreign
currencies and help businessmen to convert their money into any foreign currency they
need. Over a dozen foreign exchange banks branches are working in India have their head
offices in foreign countries.
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1.1 D Public Sector Banks
Public Sector Banks (PSBs) are banks where a majority stake (i.e. more than 50%) is held
by a government. The shares of these banks are listed on stock exchanges. There are a
total of 21 PSBs in India.Public sector banks are also called as nationalised banks.The
Central Government entered the banking business with the nationalization of the Imperial
Bank Of India in 1955. A 60% stake was taken by the Reserve Bank of India and the new
bank was named as the State Bank of India. The seven other state banks became the
subsidiaries of the new bank when nationalised on 19 July 1960.The next major
nationalisation of banks took place in 1969 when the government of India, under prime
minister Indira Gandhi, nationalised an additional 14 major banks. The total deposits in
the banks nationalised in 1969 amounted to 50 crores. This move increased the presence
of nationalised banks in India, with 84% of the total branches coming under government
control.The next round of nationalisation took place in April 1980. The government
nationalised six banks. The total deposits of these banks amounted to around 200 crores.
This move led to a further increase in the number of branches in the market, increasing to
91% of the total branch network of the country. The objectives behind nationalisation
where:
To break the ownership and control of banks by a few business families,
To prevent the concentration of wealth and economic power,
To mobilize savings from masses from all parts of the country,
To cater to the needs of the priority sectors.....
1.1 E Definition of NPAs (NON -PERFORMING ASSETS)
An asset, including a leased asset, becomes non-performing when it ceases to generate
income for the bank. A ‘non performing asset’ was defined as a credit facility in respect
of which the interest and / or installment of principal had remained ‘past due’ for a
specified period of time. The specified period was reduced in a phased manner as under:
Year ending March 31 Specified period
1993 Four Quarters
1994 Three Quarters
1995 Onwards Two quarters
An amount due under any credit facility is treated as ‘past due’ when it has not been paid
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within 30 days from the due date. Due to the improvements in the payment and settlement
systems, recovery climate, up gradation of technology in the banking sector, etc, it was
decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001.
Accordingly, as from that date, a NPA shall be an advance where
Interest and/or installment of principal remain overdue for a period of more than
90 days in respect of a term loan,
The account remains ‘out of order’ for a period of more than 90 days, in respect of
an Overdraft/Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted,
Interest and/or installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance granted for
agricultural purposes,
NPA is a classification used by financial institutions that refer to loans that are in jeopardy
of default. Once the borrower has failed to make interest or principal payments for 90 days
the loan is considered to be a non-performing asset. Non-performing assets are
problematic for financial institutions especially banks since they depend on interest
payments for income. Troublesome pressure from the economy can lead to a sharp
increase in non-performing loans and often results in massive write-downs. With a view to
moving towards international best practices and to ensure greater transparency, it has been
decided to adopt the ‘90 days’ overdue’ norm for identification of NPAS, from march 31st
2004 . The Non-Performing Assets (NPAs) of the Indian banking sector have been
incessantly rising in the past six months. Historically, in 1997, NPAs were 15.8% of loans
for the banking sector, which nosedived to 2.4% in 2008. This figure stands at 2.94% of
loans in 2012. In absolute figures, NPAs have doubled from 2009 to 2013 and assets under
reconstruction had trebled during the same period. India’s biggest lender, State Bank of
India, is experiencing an NPA level of 4.99% of total loans. According to a recently
published Credit Suisse Group AG report, 10 large industrial houses account for 13% of
total assets financed by the Banking system, which means that bank lending is getting
increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the large
manufacturing sector, 3.99% are from the services sector while 1.45% are from the
agricultural sector.
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‘Out of Order’ Status
An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the date of
Balance Sheet or credits are not enough to cover the interest debited during the same
period, these accounts should be treated as ‘out of order’.
‘Overdue’
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the
due date fixed by the bank.
Classification of NPAs
Banks are required to classify NPAs further into the following three categories based on
the period for which the asset has remained non-performing and the reliability of the dues:
i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a
period less than or equal to 18 months. In such cases, the current net worth of the
borrower, or the current market value of the security charged is not enough to ensure
recovery of the dues to the banks in full. Such assets will have well defined
creditweakness that jeopardize the liquidation of the debt and are characterized by
thedistinct possibility that the bank will sustain a loss.
ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding
18 months. It has all the weaknesses inherent to a sub-standard asset with the added
characteristic that the collection or liquidation in full – on the basis of currently known
facts – is highly questionable and improbable.
iii. Loss Assets: A loss asset is one where a loss has been identified by the bank or,
internal or external auditors but the amount has not been written off wholly. Sub-standard
asset is the asset in which bank have to maintain 10% of its reserves. All those assets
which are considered as non-performing for period of more than 12 months are called as
Doubtful Assets. All those assets which cannot be recovered are called as Loss Assets.
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1.1 F FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems ofthe rising NPAs. But the
problem of NPAs is more in public sector banks when compared toprivate sector banks
and foreign banks. The NPAs in PSB are growing due to external as well as internal
factors.
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.
Wilful Defaults
There are borrowers who are able to payback loans but are intentionally withdrawing it.
These groups of people should be identified and proper measures should be taken in order
to get back the money extended to them as advances and loans.
Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every
nowand then India is hit by major natural calamities thus making the borrowers unable to
payback 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,
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which covers a minimum label. Thus the banks record the nonrecovered 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. eg.
The fallout of handloom sector is continuing as most of the weavers Co-operative societies
have become defunct largely due to withdrawal of state patronage. The rehabilitation plan
workedout by the Central govt to revive the handloom sector has not yet been
implemented. So the over dues due to the handloom sectors are becoming NPAs.
INTERNAL FACTORS
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.
i. Principles of safety By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business
b. Willingness to pay
Willingness to paydepends on: 1. Character 2. Honest 3. Reputation of borrower The
banker should, therefore take utmost care in ensuring that the enterprise or business for
which a loan is sought is. 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 cannot 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 computerised.
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,
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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. Analyse 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 analyse the purpose of the loan. To ensure safety
and liquidity, banks should grant loan for productive purpose only. Bank should analyse
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 wilful 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.
1.1 G GUIDELINES BY RBI
Guidelines of Government and RBI for Reduction of NPAs
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1. Compromise settlement schemes:
The RBI/Government of India have been constantly goading the banks to take steps for
arresting the incidence of fresh NPAs and have also been creating legal and regulatory
environment to facilitate the recovery of existing NPAs of banks. More significant of
them:
The broad framework for compromise or negotiated settlement of NPAs advised by RBIin
July 1995 continues to be in place. Banks are free to design and implement their own
policies for recovery and write-off incorporating compromise and negotiated settlements
with the approval of their Boards, particularly for old and unresolved cases falling under
the NPA category. The policy framework suggested by RBI provides for setting up of an
independent Settlement Advisory Committees headed by a retired Judge of the High Court
to scrutinise and recommend compromise proposals.
Specific guidelines were issued in May 1999 to public sector banks for one time
nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme
was operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore
through compromise settlement under this scheme].
Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5
croreand less as on 31 March 1997. [The above guidelines which were valid up to June 30,
2001helped the public sector banks to recover Rs. 2600 crore by September 2001].
An OTS Scheme covering advances of Rs. 25000 and below continues to be inoperation
and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister
providing for OTS for advances up to Rs. 50,000 in respect of NPAs ofsmall/marginal
farmers are being drawn up.
2. Lok Adaltas:
Lok Adalats help banks to settle disputes involving accounts in 'doubtful" and
"loss"category, with outstanding balance of Rs. 5 lakh for compromise settlement under
Adalats. Debt Recovery Tribunals have now been empowered to organize Lok Adalats to
decide on cases of NPAs of Rs. 10 lakhs and above. The public sectorbanks had recovered
Rs. 40.38 crore through the forum of Lok Adalat. The progress through this channel is
expected to pick up in the coming years particularly looking at the recent initiatives taken
by some of the public sector banks and DRTs in Mumbai.
3. Debt Recovery Tribunals:
The Recovery of Debts due to Banks and Financial Institutions (amendment) Act, passed
in March 2000 has helped in strengthening the functioning of DRTs. Provisions for
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placement of more than one Recovery Officer, power to attach defendant's property/assets
before judgement, penal provisions for disobedience of Tribunal's order or for breach of
any terms of the order and appointment of receiver with powers of realization,
management, protection and preservation of property are expected to provide necessary
teeth to the DRTs and speed up the recovery of NPAs in the times to come. Though there
are 22 DRTs set up at major centres in the country with Appellate Tribunals located infive
centres viz. Allahabad, Mumbai, Delhi,Calcutta and Chennai, they could decide only 9
814 cases . The amount recovered in respect of these cases amounted to only Rs. 1864.30
crore. Looking at the huge task on hand, with as many as 33049 cases involving Rs.
42988.84 crore pending before them I would like the banks to institute appropriate
documentation system and render all possible assistance to the DRTs for speeding up
decisions and recovery of some of the well collateralised NPAs involving large amounts. I
may add that familiarisation programmes have been offered in NIBM at periodical
intervals to the presiding officers of DRTs in understanding the complexities of
documentation and operational features and other legalities applicable of Indian banking
system. RBI on its part has suggested to the Government to consider enactment of
appropriate penal provisions against obstruction by borrowers in possession of attached
properties by DRT Receivers, and notify borrowers who default to honour the decree
passed against them.
4. Circulation of information on defaulters:
The RBI has put in place a system for periodical circulation of details of willful defaults of
borrowers of banks and financial institutions. This serves as a caution list while
considering requests for new or additional credit limits from defaulting borrowing units
and also from the directors/proprietors/partners of these entities. RBI also publishes a list
of borrowers (with outstanding aggregating Rs. 1 crore and above) against whom suits
have been filed by banks and FIs for recovery of their funds, as on 31st March every year.
It is our experience that these measures had not contributed to any perceptible recoveries
from the defaulting entities. However, they serve as negative basket of steps shutting off
fresh loans to these defaulters. I strongly believe that a real breakthrough can come only if
there is a change in the repayment psyche of the Indian borrowers
5. Recovery action against large NPAs:
After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBIhad
advised the public sector banks to examine all cases of willful default of Rs 1 crore and
above and file suits in such cases, and file criminal cases in regard to willful defaults.
17
Board of Directors are required to review NPA accounts of Rs. 1 crore and above with
special reference to fixing of staff accountability.On their part RBI and the Government
are contemplating several supporting measures including legalreforms, some of them I
would like to highlight.
6. Corporate Debt Restructuring (CDR):
Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a
timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and
above with the banks and financial institutions. The CDR process would also enable
viable corporate entities to restructure their dues outside the existing legal framework and
reduce the incidence of fresh NPAs. The CDR structure has been headquartered in IDBI,
Mumbai and a Standing Forum and Core Group for administering the mechanism had
already been put in place. The experiment however has not taken off at the desired pace
though more than six months have lapsed since introduction. As announced by the Hon'ble
Finance Minister in the Union Budget 2002-03, RBI has set up a high level Group under
the Chairmanship of Shri Vepa Kamesam, Deputy Governor, RBI to review the
implementation procedures of CDR mechanism and to make it more effective. The Group
will review the operation of the CDR Scheme, identify the operational difficulties, if any,
in the smooth implementation of the scheme and suggest measures to make the operation
of the scheme more efficient.
7. Credit Information Bureau:
Institutionalisation of information sharing arrangements through the newly formed Credit
Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the
recommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the
scheme of information dissemination on defaults to the financial system. The main
recommendations of the Group include dissemination of information relating to suitfiled
accounts regardless of the amount claimed in the suit or amount of credit granted by a
credit institution as also such irregular accounts where the borrower has given consent for
disclosure. This, I hope, would prevent those who take advantage of lack of system of
information sharing amongst lending institutions to borrow large amounts against same
assets and property, which had in no small measures contributed to the incremental NPAs
of banks.
8. Proposed guidelines on willful defaults/diversion of funds:
18
RBI is examining the recommendation of Kohli Group on willful defaulters. It is working
out a proper definition covering such classes of defaulters so that credit denials to this
group of borrowers can be made effective and criminal prosecution can be made
demonstrative against willful defaulters.
9. Corporate Governance:
A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by the
Reserve Bank to review the supervisory role of Boards of Banks and financial institutions
and to obtain feedback on the functioning of the Boards vis-à-vis
compliance,transparency, disclosure, audit committees etc. and make recommendations
for making the role of Board of Directors more effective with a view to minimising risks
and overexposure. The group is finalising its recommendations shortly and may come out
with guidelines for effective control and supervision by bank boards over credit
management and NPA prevention measures.
10. Securitization and Reconstruction of Financial Assets and Enforcement of
Security Interest Act, 2002:
The Act provides, inter alia for enforcement of security interest for realisation of dues
without the intervention of courts or tribunals. The Security Interest (Enforcement) Rules,
2002 has also been notified by Government to enable Secured Creditors to authorise their
officials to enforce the securities and recover the dues from the borrowers. As on June 30,
2004, 27 public sector banks had issued 61, 263 notices involving outstanding amount of
Rs. 19,744 crore, and had recovered an amount of Rs. 1,748 crore from 24,092 cases.
1.1 H DEFINITION PRIORITY SECTOR LENDING
Priority Sector Lending is an important role given by the Reserve Bank of India (RBI) to
the banks for providing a specified portion of the bank lending to few specific sectors like
agriculture or small scale industries. This is essentially meant for an all round
development of the economy as opposed to focusing only on the financial sector. Priority
sector lending is providing easy, adequate and timely credit to priority sectors that
otherwise would not receive easy finance. The scope of priority sectors is confined to
sectors that impact huge population segment, weaker sections in the society and sectors
that are labour-intensive. Consequently,the sectors covered within the ambit of priority
sectors include agriculture, education, export credit, housing, micro and small enterprises
(MSME) among others. Under the priority sector lending initiative, banks generally
19
disburse loans of small value to various sectors to aid the development of overall Indian
economy.The interest rate on loans extended under the scheme are in line with the
directives issued by the Central bank from time to time i.e. in the present scenario linked
to the Base rate of banks.
Since Nationalization of major commercial banks in 1969, banking sector has been
utilized as a powerful vehicle to carry on the Government’s development programmes.
The priority sector activities have been given adequate financial assistance through Banks.
Among the 20 point programmes announced by the Prime Minister, Mrs. Indira Gandhi,
poverty alleviation, creation of employment opportunities, promotion of self employment,
protection and promotion of village and cottage industries, encouraging entrepreneurs and
similar socio economic development programmes were given top priority. Thus various
employment generation activities, Agricultural development activities and activities
related to small Scale industries have been classified under priority sector. In other words,
some areas of fields in a country, depending on its economic condition or government
interest are called Priority Sectors, i.e. industry and agriculture. These may further be
subdivided. Banks are directed by the central bank of the country that loans must be given
on reduced rates of interest with discounts to promote these fields; such lending is called
Prime Sector Lending. Priority sector was first properly announced in 1972, after the
National Credit Council emphasized that there should be a larger involvement of the
commercial banks in the priority sector. In 1974, the banks were given a target of 33.33 %
as share of the priority sector in the total bank credit. This was later revised on the
recommendation of the Dr. K S Krishnaswamy committee and raised to 40%.
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Targets and sub targets for PSL
CategoriesDomestic commercial banks / Foreign banks Foreign
banks with
with 20 and above branches less than 20 branches
Total Priority
40 per cent of Adjusted Net Bank Credit (ANBC) 32 per cent of ANBC or
or credit equivalent amount of Off-Balance SheetCEOBE, whichever is
Sector Exposure (CEOBE), whichever is higher. higher.18 per cent of ANBC or CEOBE, whichever ishigher.
No specific target.
Of this, indirect lending in excess of 4.5% ofTotal Agriculture Forms partof total
ANBC or CEOBE, whichever is higher, will not be priority sector targetreckoned for computing achievement under 18per cent target.
Advances to micro and small enterprises sector No specific target.
Micro & Small will be reckoned in computing achievement Forms partof total
Enterprises (MSE) under the overall priority sector target of 40 per priority sector target.cent of ANBC or CEOBE, whichever is higher;Export credit is not a separate category. Export
No specific target.credit to eligible activities under agriculture and
Export Credit MSE will be reckoned for priority sector lending Forms partof total
under respective categories. priority sector target.
Advances to 10 per cent of ANBC or CEOBE, whichever isNo specific target inthe total priority sector
Weaker Sections higher. target.
1.1 I Description of the Categories under priority sector
1.1 I a. Agriculture
1.Direct Agriculture
Loans to individual farmers [including Self Help Groups (SHGs) or Joint Liability Groups
(JLGs), i.e. groups of individual farmers, provided banks maintain disaggregated data on
such loans], directly engaged in Agriculture and Allied Activities, viz., dairy, fishery, animal
husbandry, poultry, bee-keeping and sericulture (up to cocoon stage).
1. Short-term loans to farmers for raising crops, i.e. for crop loans. This will include
traditional/non-traditional plantations, horticulture and allied activities.
2. Medium & long-term loans to farmers for agriculture and allied activities (e.g. purchase of
agricultural implements and machinery, loans for irrigation and other developmental
activities undertaken in the farm, and development loans for allied activities).
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3. Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,
sorting, grading and transporting of their own farm produce.
4. Loans to farmers up to 50 lakh against pledge/hypothecation of agricultural produce
(including warehouse receipts) for a period not exceeding 12 months, irrespective of
whether the farmers were given crop loans for raising the produce or not.
5. Loans to small and marginal farmers for purchase of land for agricultural purposes.
6. Loans to distressed farmers indebted to non-institutional lenders.
7. Bank loans to Primary Agricultural Credit Societies (PACS), Farmers’ Service Societies
(FSS) and Large-sized Adivasi Multi Purpose Societies (LAMPS) ceded to or managed/
controlled by such banks for on lending to farmers for agricultural and allied activities.
8. Loans to farmers under Kisan Credit Card Scheme.
9. Export credit to farmers for exporting their own farm produce.
Loans to corporates including farmers' producer companies of individual farmers,
partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied
Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to
cocoon stage) up to an aggregate limit of 2 crore per borrower for the following activities:
1. Short-term loans to farmers for raising crops, i.e. for crop loans.
2. This will include traditional/non-traditional plantations, horticulture and allied activities.
3. Medium & long-term loans to farmers for agriculture and allied activities (e.g. purchase of
agricultural implements and machinery, loans for irrigation and other developmental
activities undertaken in the farm, and development loans for allied activities).
4. Loans to farmers for pre and post-harvest activities, viz., spraying, weeding, harvesting,
grading and sorting.
5. Export credit for exporting their own farm produce.
2.Indirect agriculture
Loans to corporates including farmers' producer companies of individual farmers,
partnership firms and co-operatives of farmers directly engaged in Agriculture and Allied
Activities, viz., dairy, fishery, animal husbandry, poultry, bee-keeping and sericulture (up to
cocoon stage)
1. If the aggregate loan limit per borrower is more than 2 crore the entire loan should be
22
treated as indirect finance to agriculture.
2. Loans up to 50 lakh against pledge/hypothecation of agricultural produce (including
warehouse receipts) for a period not exceeding 12 months, irrespective of whether the
farmers were given crop loans for raising the produce or not.
3.Other indirect agriculture loans
1. Loans up to 5 crore per borrower to dealers /sellers of fertilizers, pesticides, seeds, cattle
feed, poultry feed, agricultural implements and other inputs.
2. Loans for setting up of Agriclinics and Agribusiness Centres.
3. Loans up to 5 crore to cooperative societies of farmers for disposing of the produce of
member.
4. Loans to Custom Service Units managed by individuals, institutions or organizations who
maintain a fleet of tractors, bulldozers, well-boring equipment, threshers, combines, etc., and
undertake farm work for farmers on contract basis.
5. Loans for construction and running of storage facilities (warehouse, market yards, godowns
and silos), including cold storage units designed to store agriculture produce/products,
irrespective of their location.
6. Loans to MFIs for on-lending to farmers for agricultural and allied activities as per the
conditions specified in paragraph VIII of this circular.
7. Loans sanctioned to NGOs, which are SHG Promoting Institutions, for on-lending to
members of SHGs under SHG-Bank Linkage Programme for agricultural and allied
activities. The all inclusive interest charged by the NGO/SHG promoting entity should not
exceed the Base Rate of the lending bank plus eight percent per annum.
8. Loans sanctioned to RRBs for on-lending to agriculture and allied activities.
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1.1 I.b. Micro and Small Enterprises
The limits for investment in plant and machinery/equipment for manufacturing / service enterprise, as notified by Ministry of Micro Small and Medium Enterprises:
Manufacturing sector
Enterprises Investment in plant and machinery
Micro Enterprises Do not exceed twenty five lakh rupees
Small Enterprises More than twenty five lakh rupees but does
not exceed five crore rupees
Service Sector
Enterprises Investment in equipment
Micro Enterprises Does not exceed ten lakh rupees
Small Enterprises More than ten lakh rupees but does not exceed
two crore rupees
Bank loans to micro and small enterprises both manufacturing and service are eligible to be
classified under priority sector as per the following:
1.Direct Finance
a.Manufacturing Enterprises
The Micro and Small enterprises engaged in the manufacture or production of goods to any industry
specified in the first schedule to the Industries (Development and regulation) Act, 1951 and as
notified by the Government from time to time. The manufacturing enterprises are defined in terms
of investment in plant and machinery.
b.Loans for food and agro processing
Loans for food and agro processing will be classified under Micro and Small Enterprises, provided
the units satisfy investments criteria prescribed for Micro and Small Enterprises, as provided in
MSMED Act, 2006.
c. Service Enterprises
Bank loans up to 5 crore per unit to Micro and Small Enterprises engaged in providing or
rendering of services and defined in terms of investment in equipment under MSMED Act, 2006.
Export credit to MSE units (both manufacturing and services) for exporting of goods/services
produced/rendered by them.
d.Khadi and Village Industries Sector (KVI)
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All loans sanctioned to units in the KVI sector, irrespective of their size of operations, location and
amount of original investment in plant and machinery. Such loans will be eligible for classification
under the sub-target of 60 percent prescribed for micro enterprises within the micro and small
enterprises segment under priority sector.
2. Indirect Finance
1. Loans to persons involved in assisting the decentralized sector in the supply of inputs to and
marketing of outputs of artisans, village and cottage industries.
2. Loans to cooperatives of producers in the decentralized sector viz. artisans village and
cottage industries.
3. Loans sanctioned by banks to MFIs for on-lending to MSE sector as per the conditions
specified in the master circular.
e. Education
Loans to individuals for educational purposes including vocational courses upto 10 lakh for studies
in India and 20 lakh for studies abroad.
f. Housing
1. Loans to individuals up to 25 lakh in metropolitan centres with population above ten lakh
and 15 lakh in other centres for purchase/construction of a dwelling unit per family
excluding loans sanctioned to bank’s own employees.
2. Loans for repairs to the damaged dwelling units of families up to 2 lakh in rural and semi-
urban areas and up to 5 lakh in urban and metropolitan areas.
3. Bank loans to any governmental agency for construction of dwelling units or for slum
clearance and rehabilitation of slum dwellers subject to a ceiling of 10 lakh per dwelling
unit.
4. The loans sanctioned by banks for housing projects exclusively for the purpose of
construction of houses only to economically weaker sections and low income groups, the
total cost of which do not exceed 10 lakh per dwelling unit. For the purpose of identifying
the economically weaker sections and low income groups, the family income limit of
1,20,000 per annum, irrespective of the location, is prescribed.
5. Bank loans to Housing Finance Companies (HFCs), approved by NHB for their refinance,
for on-lending for the purpose of purchase/construction/reconstruction of individual
25
dwelling units or for slum clearance and rehabilitation of slum dwellers, subject to an
aggregate loan limit of 10 lakh per borrower, provided the all inclusive interest rate
charged to the ultimate borrower is not exceeding lowest lending rate of the lending bank for
housing loans plus two percent per annum.
6. The eligibility under priority sector loans to HFCs is restricted to five percent of the
individual bank’s total priority sector lending, on an ongoing basis. The maturity of bank
loans should be co-terminus with average maturity of loans extended by HFCs. Banks
should maintain necessary borrower-wise details of the underlying portfolio
g. Export Credit
1. Export Credit extended by foreign banks with less than 20 branches will be reckoned for
priority sector target achievement.
2. As regards the domestic banks and foreign banks with 20 and above branches, export credit
is not a separate category under priority sector.
h. Others
1. Loans, not exceeding 50,000 per borrower provided directly by banks to individuals and
their SHG/JLG, provided the borrower’s household annual income in rural areas does not
exceed 60,000/- and for non-rural areas it should not exceed 1,20,000/-.
2. Loans to distressed persons not exceeding 50,000 per borrower to prepay their debt to
non-institutional lenders.
3. Loans outstanding under loans for general purposes under General Credit Cards (GCC).
4. If the loans under GCC are sanctioned to Micro and Small Enterprises, such loans should be
classified under respective categories of Micro and Small Enterprises.
5. Overdrafts, up to 50,000 (per account), granted against basic banking / savings accounts
provided the borrowers household annual income in rural areas does not exceed .60,000/-
and for non-rural areas it should not exceed 1,20,000/-.
6. Loans sanctioned to State Sponsored Organisations for Scheduled Castes/ Scheduled Tribes
for the specific purpose of purchase and supply of inputs to and/or the marketing of the
outputs of the beneficiaries of these organisations.
7. Loans sanctioned by banks directly to individuals for setting up off-grid solar and other off-
grid renewable energy solutions for households.
1.1 I.c Weaker Sections
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1. Priority sector loans to the following borrowers will be considered under Weaker Sections
category:-
(a) Small and marginal farmers;
(b) Artisans, village and cottage industries where individual credit limits do not exceed
50,000;
2. Beneficiaries of Swarnjayanti Gram Swarozgar Yojana (SGSY), now National Rural
Livelihood Mission (NRLM);
3. Scheduled Castes and Scheduled Tribes;
4. Beneficiaries of Differential Rate of Interest (DRI) scheme;
5. Beneficiaries under Swarna Jayanti Shahari Rozgar Yojana (SJSRY);
6. Beneficiaries under the Scheme for Rehabilitation of Manual Scavengers (SRMS);
7. Loans to Self Help Groups;
8. Loans to distressed farmers indebted to non-institutional lenders;
9. Loans to distressed persons other than farmers not exceeding 50,000 per borrower to
prepay their debt to non-institutional lenders;
10. Loans to individual women beneficiaries upto 50,000 per borrower;
11. Loans sanctioned under (a) to (k) above to persons from minority communities as may be
notified by Government of India from time to time.
. 1.1 I .d. Investments by banks in securitised assets
1. Investments by banks in securitised assets, representing loans to various categories of
priority sector, except 'others' category, are eligible for classification under respective
categories of priority sector (direct or indirect) depending on the underlying assets
provided:
the securitised assets are originated by banks and financial institutions and are eligible to be
classified as priority sector advances prior to securitisation and fulfil the Reserve Bank of
India guidelines on securitisation.
the all inclusive interest charged to the ultimate borrower by the originating entity should
not exceed the Base Rate of the investing bank plus 8 percent per annum
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2. Investments made by banks in securitised assets originated by NBFCs, where the underlying
assets are loans against gold jewellery, are not eligible for priority sector status.
1.1 I .e. Transfer of Assets through Direct Assignment /Outright purchases
1.Assignments/Outright purchases of pool of assets by banks representing loans under
various categories of priority sector, except the 'others' category, will be eligible for
classification under respective categories of priority sector (direct or indirect) provided:
The assets are originated by banks and financial institutions and are eligible to be
classified as priority sector advances prior to the purchase and fulfil the Reserve Bank
of India guidelines on outright purchase/assignment.
The eligible loan assets so purchased should not be disposed of other than by way of
repayment.
The all inclusive interest charged to the ultimate borrower by the originating entity
should not exceed the Base Rate of the purchasing bank plus 8 percent per annum.
2.When the banks undertake outright purchase of loan assets from banks/ financial
institutions to be classified under priority sector, they must report the nominal amount
actually disbursed to end priority sector borrowers and not the premium embedded
amount paid to the sellers.
3.Purchase/ assignment/investment transactions undertaken by banks with NBFCs, where
the underlying assets are loans against gold jewellery, are not eligible for priority sector
status.
1.1 I .f. Inter Bank Participation Certificates bought by Banks
Inter Bank Participation Certificates (IBPCs) bought by banks, on a risk sharing basis, shall
be eligible for classification under respective categories of priority sector, provided the
underlying assets are eligible to be categorized under the respective categories of priority
sector and the banks fulfill the Reserve Bank guidelines on IBPCs.
1.1 I .g. Bank loans to MFIs for on-lending
1. Bank credit to MFIs extended on, or after, April 1, 2011 for on-lending to individuals
and also to members of SHGs / JLGs will be eligible for categorisation as priority
sector advance under respective categories viz., agriculture, micro and small
enterprise, and 'others', as indirect finance, provided not less than 85% of total assets
of MFI (other than cash, balances with banks and financial institutions, government
securities and money market instruments) are in the nature of “qualifying assets”. In
28
addition, aggregate amount of loan, extended for income generating activity, is not
less than 70% of the total loans given by MFIs. A “qualifying asset” shall mean a
loan disbursed by MFI, which satisfies the following criteria:
The loan is to be extended to a borrower whose household annual income in rural
areas does not exceed 60,000/- while for non-rural areas it should not exceed
1,20,000/-.
Loan does not exceed 35,000/- in the first cycle and 50,000/- in the subsequent
cycles.
Total indebtedness of the borrower does not exceed 50,000/-.
Tenure of loan is not less than 24 months when loan amount exceeds 15,000/- with
right to borrower of prepayment without penalty.
The loan is without collateral.
Loan is repayable by weekly, fortnightly or monthly installments at the choice of the
borrower.
2. Further, the banks have to ensure that MFIs comply with the following caps on margin and
interest rate as also other ‘pricing guidelines’, to be eligible to classify these loans as priority
sector loans.
Margin cap at 12% for all MFIs. The interest cost is to be calculated on average
fortnightly balances of outstanding borrowings and interest income is to be calculated
on average fortnightly balances of outstanding loan portfolio of qualifying assets.
Interest cap on individual loans at 26% per annum for all MFIs to be calculated on a
reducing balance basis.
Only three components are to be included in pricing of loans viz., (a) a processing fee
not exceeding 1% of the gross loan amount, (b) the interest charge and (c) the
insurance premium.
The processing fee is not to be included in the margin cap or the interest cap of 26%.
Only the actual cost of insurance i.e. actual cost of group insurance for life, health and
livestock for borrower and spouse can be recovered; administrative charges may be
recovered as per IRDA guidelines.
There should not be any penalty for delayed payment.
No Security Deposit/ Margin are to be taken.
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3.The banks should obtain from MFI, at the end of each quarter, a Chartered Accountant’s
Certificate stating, inter-alia, that (i) 85% of total assets of the MFI are in the nature of
“qualifying assets’’, (ii) the aggregate amount of loan, extended for income generation
activity, is not less than 70% of the total loans given by the MFIs.
1.1 J. Non-achievement of priority sector targets
All scheduled commercial banks having shortfall in lending to priority sector target/sub shall
be allocated amounts for contribution to the Rural Infrastructure Development Fund (RIDF)
established with NABARD and other Funds with NABARD/NHB/SIDBI/other Financial
Institutions, as decided by the Reserve Bank from time to time.
For the purpose of allocation of RIDF and other Funds, as decided by Reserve Bank from
time to time, the achievement levels of priority sector lending as on the March 31 st will be
taken into account. The deposits under the various Funds will be called upon by NABARD or
such other Financial Institutions as per the terms and conditions of the scheme.
The interest rates on banks’ contribution to RIDF or any other Funds, periods of deposits, etc.
shall be fixed by Reserve Bank of India from time to time and will be communicated to the
concerned banks every year by the Reserve Bank at the time of allocation of funds.
The misclassifications reported by the Reserve Bank’s Department of Banking Supervision
would be adjusted/ reduced from the achievement of that year, to which the amount of
declassification/ misclassification pertains, for allocation to various funds in subsequent
years.Non-achievement of priority sector targets and sub-targets will be taken into account
while granting regulatory clearances/approvals for various purposes. Priority Sector-Data
Reporting System facilitate the data on priority sector advances has to be furnished by banks
as per the extant guidelines on reporting.
1.1 K. Common guidelines for priority sector loans
Banks should comply with the following common guidelines for all categories of advances
under the priority sector.
1. Rate of interest
The rates of interest on various categories of priority sector loans will be as per DBOD
directives issued from time to time.
2. Service charges
No loan related and adhoc service charges/inspection charges should be levied on priority
sector loans up to 25,000.
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3. Receipt, Sanction/Rejection/Disbursement Register
A register/ electronic record should be maintained by the bank, wherein the date of receipt,
sanction/rejection/disbursement with reasons thereof, etc., should be recorded. The
register/electronic record should be made available to all inspecting agencies.
4. Issue of Acknowledgement of Loan Applications
Banks should provide acknowledgement for loan applications received under priority sector
loans. Bank Boards should prescribe a time limit within which the bank communicates its
decision in writing to the applicants.
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PART-B
1.2RESEARCH DESIGN
1.2A STATEMENT OF THE PROBLEM
Non-performing assets of banks are one of the biggest hurdles in the way of socio-economic
development of India. The level of NPAs of the banking system in India is still too high. It
affects the financial standing of the banks so that it is a heavy burden to the banks. A vigorous
effort has to be made by the banks to strengthen their internal control and risk management
systems and to setup early warning signals for timely detection and action.. The problem of NPA
is not limited to only Indian public sector banks, but it prevails in the entire banking industry.
Major portion of bad debts in Indian Banks arose out of lending to the priority sector at the
dictates of politicians and bureaucrats. If only banks had monitored their loans effectively, the
bad debt problem could have been contained if not eliminated. The top management of the
public banks was forced by politicians and bureaucrats to throw good money after bad in the
case of unscrupulous borrowers. Many big borrowers defaulted only due to the recession in the
economy. The absence of proper bankruptcy laws and the dilatory legal procedure in enforcing
security rights are the root cause of bad debts in banks. Added to these, there are many other
reasons why public sector banks have highest level of NPAs. The NPA problem of banking
institutions in India is exaggerated by deriving NPA figures based on percentage against risk
assets instead of total earning assets. To improve recovery and to minimize NPAs, banks are
expected to do a continuous recovery exercise through various methods adopting newer
strategies. The above are various issues faced by banks related to lending and recovery.Public
Sector Banks cannot stop lending. Lending will continue, recovery also must be continued. This
study aims at a thorough analysis of the functions of a bank in lending and recovery with special
reference to public sector Banks, in the present competitive, deregulated and technologically
improved banking environment.
1.2 B OBJECTIVE OF THE STUDY
1. To know and study about the non-performing assets in Indian Public sector Banks.
2. To study the trend of NPAs during last 11 years
3. To determine the factors affecting NPA.
4. To find out the significant impact of Priority Sector Lending on the Total NPA of public
sector Banks.
5. Comparison of NPA in Priority Sector and Non priority sector of Public Sector Banks .
32
6. To make appropriate suggestions to avoid future NPAs and to manage existing NPAs in
public sector Banks.
7. To find out the impact of recovery of NPAs on total NPAs of public sector banks
8. To find out impact of Net NPA and Gross NPA ratio on priority sector NPA ratio of priority
sector advances.
1.2C HYPOTHESIS OF THE STUDY
Q. Is there any significant impact of Priority Sector Lending on NPA of public sector Banks?
H0: There is no significant impact of Priority Sector Lending on Total NPA of Banks?
H1: There is significant impact of Priority Sector Lending on Total NPA of Banks?
Q.Is there any significant relation between priority sector NPAs and non-priority sector NPAs in
contributing towards total npas of psbs?
H0:There is no significant relation between priority sector NPAs and non-priority sector NPAS
towards total NPAS of PSBS.
H1: There is significant relation between priority sector NPAs and non-priority sector NPAS
towards total NPAS of PSBS.
Q.Is there any significant impact of recovery of NPAS on total NPAs of PSBs?
H0: There is no significant impact of Recovery of NPAs on total NPAs of Public sector banks
H1: There is a significant impact of Recovery of NPAs on total NPAs of Public sector banks
Q.Is there any impact of Gross NPA ratio and Net NPA ratio on priority sector NPA ratio of
public sector banks?
H0:There is no significant impact of Gross NPA Ratio and Net NPA ratio on priority sector NPA
ratio of PSBs.
H1: There is significant impact of Gross NPA Ratio and Net NPA ratio on priority sector NPA
ratio of PSBs.
1.2D SCOPE OF THE STUDY
1. To understand the concept of NPA in Indian Banking industry.
2. The study may help the government in creating & implementing new strategies to control
NPAs in priority sector.
3. The study will help to select appropriate techniques suited to manage the NPAs and develop a
time bound action plan to arrest the growth of NPAs in public sector banks.
4. The study could provide measures to avoid future NPAs and manage existing NPAs of public
sector banks.
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1.2E SAMPLING METHOD
For the purpose of analysing NPA the whole population of public sector banks is taken into
consideration.The data on Priority sector and Non priority sector of public sector banks is also
taken. Also the Advances and NPA in Priority Sector has been taken into consideration
1.2F DATA GENERATION
The data collected is mainly secondary in nature. The sources of data for this thesis include the
literature published by Indian Bank and the Reserve Bank of India. The data used to observe
Advances and NPA in priority sector is taken for the period of 11 years .The data is collected
from financial institutions and research institutions. The period of the study is from 2003 to
2013.The secondory data consist various audited reports and publications of reserve bank of
India.Detailed Informations were collected from the statistical tables published by the statistical
department of Reserve bank of India.
1.2G General Methodology Adopted For The Study
The methodology used in the research study is regression model wherein, the data is used to
find out how the dependent variable is the outcome of various independent variables. For this
purpose, the dependent variable is the Non-performing assets and independent variables are
priority sector lending ,Non priority sector lending and advances of the bank,Gross NPA,Net
NPA.Simple linear regression model is used when there is only one independent variable which
affect the dependent variable. To make the analysis meaningful advanced statistical tools like –
Ratios, Mean and percentages were applied. To test the hypothesizes Correlation Regressionand
t test were applied with the help of SPSS Software package.
1.2H LIMITATIONS OF THE STUDY
1. The study on management of non-performing assets is limited to the Indian public sector
Bank.
2. The conclusions of the study are based on the secondary information. Thus, some amount of
subjectivity might remain.
3. Reasons for NPAs and Management of NPAs are changing with the time. The study is done
in the present environment without foreseeing future developments.
4. The bank wise analyses of NPAs towards priority sector lending was not possible due to time
constraints.
5. Since the NPAs are critical banks are not willing to part all information relating with them.
6. The basis for identifying NPAs are taken from Reserve bank of India circulars.
34
1.2 I Chapterisation Of The Study
The first chapter gives an introduction about history of banking, Meaning and definition of
banks and its functions. It then focuses on the Non performing assets of public sector banks in
India with special attention to the priority sector lending.
The second chapter consists of the literature reviews by different authors on the Non
performing assetsof banks. They mainly explains about the the management of non performing
assets in the banking sector in India particularly public sector banks and the methodologies used
to determine the NPAS in banking sector.
The third chapter gives a brief summary of the banking sector in india and its current
scenario. A summary of all the public sector banks in the country is also explained.
The fourth chapter brings in the theoretical framework of the study where, the statistical tool
used for the research purpose is explained in detail and how the data was anlaysed with the
selected tool. The tool was used to analyse the significance of the information collected for 11
years.
The fifth chapter explains the relevant output of the information collected when analysed
using linear regression in SPSS. It tracks down the performance of public sector banks with
respect to the descriptive statistics, correlation, annova, r square, adjusted r square, f-value, p-
value significance level. The tool analyses the data and the relevant interpretation is provide with
each output.The ‘t’ test is also used in the study.
The sixth chapter summarises the whole research study in short. It consists of the finding
derived by using the statistical package on the data collected. The tool is used to find out the
dependence of one variable on another variable. The conclusion conveys the final result of the
study where the output of public sector bank is analysed .
35
2.REVIEW OF LITERATURE
Prashanta Athma (2000), in his study “Performance of Public Sector Banks – A case study
of State Bank of Hyderabad, made an attempt to evaluate the performance of Public Sector
Commercial Banks with special emphasis on State bank of Hyderabad. The period of the
study for the evaluation of performance is from 1980 to 1993-94. In this study, the author has
outlined the growth and progress of commercial banking in India and analaysed the trends in
deposits, various components of profits of SBH with other PSB’s, Associate banks of SBI and
SBI. Statistical techniques like ratios, percentages, compound annual rate of growth and
averages are computed for the purpose of meaningful comparison and analysis. The major
findings of this study are that since nationalisation, the progress of banking in India has been
very impressive. All three types of deposits have continuously grown during the study period,
though the rate of growth was highest in the fixed deposits. A comparison of SBH
performance in respect of resource mobilization with other banks showed the average growth
of deposits of SBH is higher than any other bank group. Profits of SBH showed an increasing
trend indicating a more than proportionate increase in the spread than in burden. Finally,
majority of the customers have given a very positive opinion about various statements
relating to counter service offered by SBH.
Jain (2002) in his thesis titled, “Non-performing Assets in Commercial and Development
Banks in India” focused that the future profitability of banks would depend on their alertness,
operational efficiency, customer orientation, creation of large volume of performing assets,
attainment of optimum levels of productivity. Since retail customers are fast becoming more
demanding in the current competitive environment, banks have to offer value-added services.
Harnessing technology to improve productivity, to ensure required standard of customer
service and internal efficiency, continual product innovation and strengthening of competitive
edge on an on-going basis to mass business will be the key factors that will impact banking
sector in the days to come. Ensuring optimum performance by each manager and staff will
also be vital. Another critical factor upon which would hinge the future of banking system
would be the ability and competence of banks to build up large volumes of quality assets in a
constantly increasing competitive environment, while adhering to prudential norms and
maintaining prescribed levels of capital adequacy on risk assets simultaneously. Continuous
quest for skill up gradation at all levels, development of vision, mission and commitment are
some of the aspects, which require urgent attention by the banking industry in future. He
concluded that banks, which are pro-active, respond quickly to the changing needs of the
36
customer, and give adequate attention to the changing scenario, alone can survive
successfully, perform well and prosper.
Rajiv Ranjan and Sarat Chandra Dhal,(2003) This paper explores an empirical approach
to the analysis of commercial banks' nonperforming loans (NPLs) in the Indian context. The
empirical analysis evaluates as to how banks’ non-performing loans are influenced by three
major sets of economic and financial factors, i.e., terms of credit, bank size induced risk
preferences and macroeconomic shocks. The empirical results from panel regression models
suggest that terms of credit variables have significant effect on the banks' non-performing
loans in the presence of bank size induced risk preferences and macroeconomic shocks.
Moreover, alternative measures of bank size could give rise to differential impact on bank's
non-performing loans. In regard to terms of credit variables, changes in the cost of credit in
terms of expectation of higher interest rate induce rise in NPAs. On the other hand, factors
like horizon of maturity of credit, better credit culture, favorable macroeconomic and business
conditions lead to lowering of NPAs. Business cycle may have differential implications
adducing to differential response of borrowers and lenders.
Nachiket Mor and Bhavna Sharma, (2002) highlighted some major micro-level issues that
were believed to be the root of why unsustainable performance levels are being observed
within banks. It was argued that unless the micro level issues would be dealt with, even after
the systemic issues being resolved, the problem of NPAs or other failures of the
intermediation process may resurface with greater intensity. According to the researchers, the
manner in which banks manage the three phases in the life cycle of an asset (creation,
monitoring and recovery) determines the quality of the intermediation process within a bank.
In the paper, the needs for internally consistent business models to guide the behaviour of a
bank in each of these three phases’ were discussed. It was argued that the set of
organizational competencies, the regulatory framework in which the banks operate, the
quality of disclosure and the incentive structure of the management and Boards produce an
inconsistent framework, which lead to an unsustainable performance level for a bank. The
role of statistics such as the Economic Value of Equity (EVE) and EVE at Risk (EVER) (if
mandatory disclosed on a monthly basis) in making these inconsistencies visible and
therefore aiding in their elimination, was also explored in the paper.
S. Ramasastri and N. K.Unnikrishnan (2005) studied that, NPAs are largely fallout of
banks' activities with regard to advances, both at the management and implementation levels
(including overall controls by the top management), the credit appraisal system, monitoring
of end-usage of funds. It also depends on the overall economic environment, the business
37
cycle and the legal environment for recovery of defaulted loans. Since the overall
environment is more or less same for all banks, non-performing loans of individual banks are
mainly a result of management controls and systems put in place by them and recovery
procedures. They concluded that higher than average credit expansion can further strengthen
banks if there is a good credit appraisal systems, strict recovery procedures and overall checks
and balances by the top management.
Jaynal Ud-din Ahmed (2010) conducted a study on “ Priority Sector Lending By
Commercial Banks in India” The priority sector lending is mainly intended to ensure that the
assistance from the banking system to those sectors of the economy which has not received
adequate support of institutional finance. The attainment of the socio economic priorities of
the government like growth of agriculture, promotion of small entrepreneurs and
development of backward area etc is the major responsibility of commercial banks. The
commercial banks played a significant role among the institutional sources of credit for
priority sector in India. The significance of bank credit in the priority sector can be observed
against the backdrop of increasing quantum of such credit to this sector. In order to study the
growth scenario of sector-wise NPAs, linear growth rate and compound growth rate has been
considered. A comparison of credit targets and actual achievements has been made to judge
the credit performance. Besides this simple tabulation, percentage analysis has also been
used. The socialization of bank credit has been the subject matter of PSL by the banks. The
banks operating in the study area, keeping in view of their aim and objectives for the
economic development under the lead bank schemes, have made an effort in providing
financial support to agriculture and SSI. The PSL is done in the districts through annual credit
plans.
Poongavanam.S (2010) conducted study on ‘Non-performing assets: Issues, Causes and
remedial Solution” and highlighted the main causes of NPA in India. While the primary
function of banks is to lend funds as loans to various sectors such as agriculture, industry,
personal loans, housing loans etc., in recent times the banks have become very cautious in
extending loans, this is due to mounting nonperforming assets (NPAs). Therefore, an NPA
account not only reduces profitability of banks by provisioning in the profit and loss account,
but their carrying cost is also increased which results in excess & avoidable management
attention. The article also mention about the reason of an asset turning NPA from economic
side, industry side, borrower side and from the banking side. The article also highlights the
reasons for an assets becoming NPA and remedial measures are to be taken. Due to various
steps taken by the Government of India, NPA levels were reduced to considerable level.
38
(Nearly 2.7% of the loans on the balance sheet of bank, from 8.8%).So it is an indication for
the bankers with bad loan in their portfolio to take appropriate actions immediately.
Ramachandran reddy(2011), focused their attention on the seriousness of NPA in the public
sector banks. They argued that with the introduction of the international norms of the income
recognition, asset calculation and the provision in the banking sector, managing non-
performing has emerged as one of the major challenges facing public sector banks. They felt
that total elimination of the NPAs is not possible in the banking business owing to
externalities but their incidence can be minimized. To reduce the seriousness of the problem,
they suggest that the banks should adopt proper policies of appraisal, supervision and follow
of advances, special recovery cells may be set up at all regional zonal levels. Recovery
officers should be appointed at making necessary provision s and contingencies. Seven banks
were operating in B category (those banks, which after operating profits would have not
sufficient funds to provide for the provisions thereby incurring net losses. And the remaining
was placed in the E category those banks which were to earn significant income to sufficient
operating profits. Apart from studying the profitability of the above mentioned banks, capital
adequacy and other balance sheet trends were also discussed. Moreover, same short term and
long term strategies for enhancing the profitability level were suggested.
Kamalpreet Kaur, Balraj Singh (2011) In their research, “Non-Performing Assets Of
Public And Private Sector Banks” explained the effect of NPA on the profitability and net-
worth of banks. The NPAs growth involves the necessity of provisions, which reduces the
overall profits and shareholders’ value. The problem of NPAs is not only affecting the banks
but also the whole economy. The Indian banking sector is facing a serious problem of NPAs.
The extent of NPAs is comparatively higher in public sectors banks. The level of NPAs is one
of the drivers of financial stability and growth of the banking sector. The Financial companies
and institutions are nowadays facing a major problem of managing the Non-Performing
Assets (NPAs) as these assets are proving to become a major setback for the growth of the
economy. Both types of banks showed a declining trend in gross and net NPAs over the
period of the study. In view of several options available to banks for dealing with NPAs,
banks have been able to recover a significant amount of NPAs. Both public and private sector
banks recovered a higher amount of NPAs during 2008-09 than that during the previous year.
They concluded that NPAs have always been a big worry for the banks in India. It is just not
a problem for the banks; they are bad for the economy too. The money locked up in NPAs is
not available for productive use and adverse effect on banks' profitability is there. The extent
39
of NPA is comparatively higher in public sectors banks. In this study it is found that to
improve the efficiency and profitability, the NPAs have to be scheduled. Various steps have
been taken by government to reduce the NPAs.
Suresh Patidar and Ashwini Kataria (2012) were conducted a study to analyse priority
sector lending by selected public and private sector banks in India. They assessed this based
on statistical tools like regression analysis, ratio analysis and t-test. The authors found the
significant impact of priority sector lending on total NPA of Public Sector banks, whereas in
case of Private Sector Banks, there was no significant impact of priority sector lending on
total NPA of Banks. Also the result showed the significant difference between NPA of SBI &
Associates, Old Private Banks and New Private Banks with the NPA of Nationalized Banks,
the benchmark category.
Veerakumar (2012) reviewed on “Non-Performing Assets in Priority Sector: A Threat to
Indian Scheduled Commercial Banks”. This research study aims to find out the categories of
priority sector advances which contribute to the growth of total priority sector NPAs during
the study period of 10 years between 2001-02 and 2010-11. The researcher found that, the
Gross NPAs of Scheduled Commercial Banks have been increasing year after year. The
NPAs in priority sector were more in public sector banks when compared to private and
foreign banks. NPAs in Priority sector have significant impact on total NPAs in Public sector
banks, whereas in Private sector banks, NPAs in priority sector have no significant impact on
total NPAs.
Najmi Shabbir (2013) analyses the breakup of Priority Sector Advances to Sub-sectors
within the overall Priority Sector advances (PSA). After nationalisation of the Banks, the
banks directed lending to certain sectors, such as, Agriculture, Small Scale Industries and
weaker section and others, which are collectively known as Priority Sector. This was
emphasized in his article ‘sector wise priority sector advances in India’. Under this Sectoral
and Sub-sectoral targets have been laid down from time to time, with the aim of upliftment of
these sectors and to bring about a balanced development of the country. The comparative
analysis of Agricultural Sector advances and Small Scale Industries advances by SCBs and
PSBs (Public Sector Banks) from 1969 to 2011 has been carried out. In this paper an analysis
of Agricultural Sector, Small Scale Industries and Micro and Small Enterprises within the
PSA has been presented and advances to these sectors have been analysed over a period of
time. It was found that over the selected period of time, indirect advances to agriculture had
increased while direct advances decreased from 80 percent of Agricultural credit in 1999 to
40
68 percent in 2007. Non Public Sector Scheduled Commercial banks have been giving a
lesser percentage in terms of direct credit to agriculture and more to indirect credit.
Sambha et al. (2013) highlighted in the research, the problems of NPAs are more serious in
Public Sector Banks than Private Sector Banks. Reduction of NPAs in banking sector should
be treated as a national priority to make the Indian banking system more strong and resilient.
The major chunk of NPAs came from priority-sector as well as non-priority sector. In priority
sector, the Gross NPAs showed declined trend in the year 2007 and increased trend in the
year 2008 & 2011 due to the implementation of the one-time settlement scheme for small and
marginal farmers. In Non-Priority Sector, the Gross NPAs showed an increasing trend during
study period.
B.Selvarajan & Dr. G. Vadivalagan (2013), carried out a study on “Management of Non-
Performing Assets in Priority Sector reference to Indian Bank and Public Sector Banks
(PSBs)” In India the magnitude of the problem of bad debts was not taken seriously.
Subsequently, following the recommendations of Narasimham committee and Verma
committee, some steps have been taken to solve the problem of old NPAs in the balance
sheets of the banks. It continues to be expressed from every corner that there has rarely been
any systematic evaluation of the best way of tackling the problem. There seems to be no
unanimity in the proper policies to be followed in resolving this problem. There is also no
consistency in the application of NPA norms, ever since these have been recognized. The
present study is an analytical study. For this study, primary data and secondary data are
collected. The primary data is collected from the borrowers with the help of questionnaire.
The secondary data is collected from the annual reports of Indian Bank and Reserve Bank of
India website. The Priority sector advances have been analysed in detail under three major
heads, viz., Agriculture, Small Scale Industries and Other Priority Sector. Further weaker
section advances, which forms part of Priority sector, have also been studied. The data related
to Priority sector advances for 10 years have been collected for Indian Bank and for the
Public Sector Banks as a whole. The data have been tabulated comfortably with required
percentage calculation and mean calculations. Timely action is essential to ensure future
growth of the Bank.
Dr.P.Raman (2013), conducted a study on “A Study on the Performance of Commercial
Banks towards Priority Sector Advances in Tamil Nadu”. This study analyses the
performance of the commercial bank in the area of priority sector lending for a period of 10
years (2000–2001 to 2009–2010). For analysing the performance of the commercial banks
41
tools like percentage analysis, growth rate and average are used. Availability of cheap and
adequate credit is a boon for the Economic Development (ED) of a country. By providing
credit to farmers, industries, traders, housing, Education loan and small businessmen the
economic progress can be achieved. The study is attempted to analyse about the various
bankers providing financial assistance to priority sector. The present research pays its
attention on both Public sector and Private sector banks in Tamil Nadu and the expected and
perceived quality on banking services and the satisfaction level of the particular service of the
bank. This study employs analytical type of methodology; the present study has used
secondary data. The secondary data at the national level was collected from the publishers of
Government of India, RBI, and Indian banks association such as economic survey, lead banks
annual report, report on trends and progress in banking, Report on currency and finance,
statistical tables relating to bank in India etc. It is evident that the Non-performing asset in
India has adversely affected the profitability and efficient functioning of the banks. To
improve the efficiency and profitability, the NPA has to be scheduled. Various steps have
been taken by government to reduce the NPA. It is highly impossible to have zero percentage
NPA. Expect to see a further improvement in the operating cost structure of public sector
banks as they improve their scale of operations.
42
3.1 INDUSTRY PROFILE
The Indian banking industry has evolved and transformed itself from a socialist licensed raj
business to a liberalized, modernized & technology oriented white elephant of India. Banking
industry is the backbone for any economy & is the key indicator to see & analyze the level of
development of a country.
The Indian banking Industry has been undergoing major changes, reflecting a number of
underlying developments. Advancement in communication and information technology has
facilitated growth in internet-banking, ATM Network, Electronic transfer of funds and quick
dissemination of information. Structural reforms in the banking sector have improved the
health of the banking sector. The reforms recently introduced include the enactment of the
Securitization Act to step up loan recoveries, establishment of asset reconstruction
companies, initiatives on improving recoveries from Non-performing Assets (NPAs) and
change in the basis of income recognition has raised transparency and efficiency in the
banking system. Spurt in treasury income and improvement in loan recoveries has helped
Indian Banks to record better profitability
On the other hand there are many challenges as well which the Indian banking industry has to
face in the road ahead like that of financial inclusion, deregulation of interest rates on saving
deposits, slow industrial growth, a large government deficit, increased stress on some sectors
(such as, State utilities, airlines, and microfinance) & the implementation of Basel III. The
Indian banks even braved the subprime crises that rocked the global financial sector in 2008.
The Indian banks ability to protect asset health through prudent lending helped them emerge
from this crisis unscathed.
Nevertheless seeing the credentials of the Indian Banks one can safely conclude that the
industry might have many stumbling blocks in the ‘Road Ahead’ but when ever encountered
with such blocks in the past it has used them as a stepping stone & has always ‘Transformed’
itself ( for the better) and ‘Evolved’ as a winner
43
Growth Rate:
The total assets of Indian banks, which are regulated by the Reserve Bank of India (RBI) and
the Ministry of Finance (MoF), were pegged at Rs 82,99,220 crore (US$ 1564.8 billion)
during FY12. Further, the revenues of Indian banks grew almost four-fold from US$ 11.8
billion to US$ 46.9 billion over the decade spanning 2001-10.
The banking sector of India has an annual growth rate of 23 percent, contributing nearly 6
percent of GDP & employing nearly 7.4 million people & has outperformed most banking
indices in the world with highest total returns to shareholders at 36.76%. The Indian banking
sector has a large market still unexplored with the Indian households being one of the highest
savers in the world accounting for 69% of India gross national saving of which only 47% is
accessed by the banks.
3.2 COMPANY PROFILE
1.BANK OF BARODA
Bank of Baroda (BoB) was founded by Maharaja Sayajirao Gaekwad in July 1908. It started with
a paid up capital of Rs10 lakh. Bank of Baroda is one of the leading commercial banks in India.
The Bank's solutions includes personal banking, which includes deposits, gen-next services, retail
loans, credit cards, debit cards, services and lockers; business banking. Bank of Baroda is a
pioneer in various customer centric initiatives in the Indian banking sector. Bank is amongst first
in the industry to complete an all-inclusive rebranding exercise wherein various novel customer
centric initiatives. The total income is Rs. 388272.793 Million (year ending Mar 2013) and net
profit - Rs. 44807.2 Million (year ending Mar 2013).
2.STATE BANK OF INDIA
The evolution of State Bank of India can be traced back to the first decade of the 19th century. It
began with the establishment of the Bank of Calcutta in Calcutta, on 2 June 1806. State Bank of
India is the largest state-owned banking and financial services company in India. The Bank
provides banking services to the customer. In addition to the banking services, the Bank through
their subsidiaries, provides a range of financial services, which include life insurance, merchant
banking, mutual funds, credit card, factoring, security trading, pension fund management and
primary dealership in the money market. It is a government-owned corporation with its
headquarters in Mumbai, Maharashtra. As of December 2013, it had assets of US$388 billion,
44
making it the largest banking and financial services company in India by assets. Mrs. Arundhati
Bhattacharya is the current CEO of State Bank Of India Ltd.
3.PUNJAB NATIONAL BANK
Punjab National Bank is a state-owned commercial bank located in New Delhi. The Bank is one of
the Big Four Banks of India. They offer banking products, and also operate credit card and debit
card business, bullion business, life and non-life insurance business, and gold coins and asset
management business. Mr. KR Kamath is the CEO of Punjab National Bank. PNB is the third
largest bank in India in terms of asset size. It was founded in 1895 as a private banking company
by Lala Lajpat Rai. The total income is Rs. 461092.519 Million (year ending Mar 2013) and net
profit - Rs. 47476.715 Million
4.UNION BANK
Union Bank of India was established on 11th November 1919 with its headquarters in the
city of Bombay now known as Mumbai.The Head Office building of the Bank in Mumbai
was inaugurated by Mahatma Gandhi, the Father of the nation in the year 1921 Resources
are mobilized through Current, Savings and Term Deposits and through refinance and
borrowings from abroad. The Bank has a large clientele base of over 49 million.On the
technology front the Bank has taken early initiatives and 100% of its branches are
computerized. The Bank has also introduced Core Banking Solution with connectivity
between branches. 100% of the business of the Bank is under Core Banking Solution
making it a leader among its peers in infusion of technology. Many innovative products
are developed using the technology platform to offer an array of choices to customers,
adding speed and convenience to transactions. Technology will also enable the Bank to
derive substantial cost reduction while creating the requisite capacity to handle the ever
increasing volume of business in a competitive environment that offers immense
opportunities. At the end of March 2013 the Bank achieved total business level of Rs.
4,75,673 crore (Rupees four lakh seventy five thousand six hundred seventy three
crore).Behind all these achievements is a dedicated team of staff, which is truly
cosmopolitan in its composition. Many generations of members of staff have contributed
in building up the strong edifice of the Bank. The present team of over 31,000 members of
staff distinguishes itself with its customer centricity, willingness to learn and adherence to
values enabling us to be recognized as a caring organization where people enjoy their
45
work and relationship with customers.
5.BANK OF INDIA
Bank of India was founded on 7th September, 1906 by a group of eminent businessmen
from Mumbai. The Bank was under private ownership and control till July 1969 when it
was nationalisedalong with 13 other banks.Beginning with one office in Mumbai, with a
paid-up capital of Rs.50 lakh and 50 employees, the Bank has made a rapid growth over
the years and blossomed into a mighty institution with a strong national presence and
sizable international operations. In business volume, the Bank occupies a premier position
among the nationalised banks. The Bank has 4545 branches in India spread over all states/
union territories including specialized branches. These branches are controlled through 50
Zonal Offices. There are 54 branches/ offices and 5 Subsidaries and 1 joint venture
abroad. Presently Bank has overseas presence in 20 foreign countries spread over 5
continents – with 53 offices including 4 Subsidiaries, 4 Representative Offices and 1 Joint
Venture, at key banking and financial centres viz., Tokyo, Singapore, Hong Kong,
London, Jersey, Paris and New York.Contribution of foreign branches in the global
business of the Bank as at 31.03.2013 is as under:
Deposits22.98%
Advances 30.36%
Business Mix 26.19%
6.ALLAHABAD BANK
Allahabad Bank is a nationalised bank with its head-quarters in Kolkata, India. It is the
oldest joint stock bank of India. It was founded in Allahabad in 1865.As of 31 March
2012, it had over 2,500 branches across India. The bank has a branch in Hong Kong and a
representative office in Shenzen. The government's ownership of Allahabad Bank shrank
in October 2002 after the bank engaged in an Initial Public Offering (IPO) of 100
million (US$1.6 million) of shares, each with a face value 10. The IPO reduced the
46
Government's shareholding to 71.16%. Then in April 2005 the bank conducted a second
public offering of 100 million of shares, each with a face value 10 and selling at a
premium of 72. This offering reduced the Government's ownership to 55.23%.In June
2006 the bank opened its first office outside India when it opened a representative office
in Shenzen, Mainland China. In February 2007, Allahabad Bank opened its first overseas
branch, in Hong Kong. In March 2013, the bank's business crossed the 10 million
million mark.
7.ANDHRA BANK
It is a medium-sized public sector bank (PSB), with a network of 2000+ branches, 15
extension counters, 38 satellite offices and 1563
automated teller machines (ATMs) as on 30 Nov 2013. During 2011–12, the bank entered
the states of Tripura and Himachal Pradesh. The bank now operates in 25 states and three
Union Territories.The Government of India owns 58% of its share capital and is going to
increase it to 62.14% by infusing 2 billion (US$32 million) in capital. The state
owned Life Insurance Corporation of India holds 10% of the shares. The bank has done a
total business of 2230 billion (US$36 billion) for the fiscal year ended 31 March 2013.
Andhra Bank is 100% CBS as on date. This will benefit the customers, who will have
access to banking andfinancial services anytime, anywhere through multiple delivery
channels. Andhra Bank is a pioneer in introducing Credit Cards in the country in 1981
8.BANK OF MAHARASHTRA
Bank of Maharashtra is a major bank of Maharashtra, India, registered on 16 September
1935 with an authorised capital of 1 million. It commenced business on 8 February
1936.Known as a common man's bank since its inception, the bank's initial financial
assistance to small units has given birth to many of today's industrial houses. After
nationalisation in 1969, the bank expanded rapidly. The Bank has the largest network of
branches by any Public sector bank in the state of Maharashtra.The Bank was founded by
a group of visionaries led by the late V. G. Kale and the late D. K. Sathe and registered as
a Banking Company on 16 September 1935 at Pune. Today, Bank of Maharashtra has
over 15 million customers across the length and breadth of the country served through
1825 branches in 29 states and 2 union territories.Bank of Maharashtra has informed that
Shri Narendra Singh who had assumed the office of Chairman & Managing Director from
1 February 2013, has demitted his office on 30 September 2013 on attaining
47
superannuation. Shri Sushil Muhnot is new Chairman & Managing Director.
9.CANARA BANK
Canara Bank is an Indian state-owned bank headquartered in Bangalore, Karnataka. It was
established in 1906, making it one of the oldest banks in the country. As of December
2013, the bank had a network of 3564 branches and 4000 ATMs spread across India. The
bank also has offices abroad in London, Hong Kong, Moscow, Shanghai, Doha,
and Dubai. Widely known for customer centricity, Canara Bank was founded in 1906 by
Shri Ammembal Subba Rao Pai, a great visionary and philanthropist, at Mangalore, then a
small port in Karnataka. The bank was nationalised in 1969. Today, Canara Bank
occupies a premier position in the comity of Indian banks with an unbroken record of
profits since its inception.
10.Central Bank Of India
Central Bank of India,a government-owned is one of the oldest and largest commercial
banks in India. It is based in Mumbai. The bank has 4100 branches and 270 extension
counters across 27 Indian states and three Union Territories. At present, Central Bank of
India has one overseas office, which is a joint venture with Bank of India, Bank of
Baroda, and the Zambian government. The Zambian government holds 40 per cent stake
and each of the banks has 20 per cent. Recently it has also opened a representative office
at Nairobi, Kenya. Central bank of India is one of 18 Public Sector banks in India to
get recapitalisation finance from the government over the next 24 months. Central Bank
of India has approached the reserve bank of India (RBI) for permission to open
representative offices in five more locations - Singapore, Dubai, Doha, London and Hong
Kong. As on 31 March 2013, the bank's reserves and surplus stood at 6,868.85 crore. Its
total business at the end of the last fiscal amounted to 2,09,757.33 crore.
11.CORPORATION BANK
Corporation Bank is a public sector banking company headquartered in Mangalore, India.
The bank has pan-India presence with 6,677 functional units comprising 1869 branches,
1425 ATMs & 3545 branchless banking units as of 31 March 2013.The total business of
the bank during the financial year 2012-13 has been 2,84,722 crores, as on 31 March
2013. The total deposits have grown to 1,66,005 crores. Total income of the bank reached
16,942.02 crores during this period. Operating profit of the bank reached 3,037 crores and
net profit reached 1,434.67 crores.
48
12.DENA BANK
Dena Bank is one of the earliest banks inIdia headquartered in Mumbai. Dena Bank was
founded on 26 May 1938, by the family of Devkaran Nanjee under the name Devkaran
Nanjee Banking Company Ltd. It is one of thenationalised banks of India.It became a
public limited in December 1939 and later the name was changed to Dena Bank Ltd. It
has a network of over 1400 branches.The logo of Dena Bank depicts Goddess Lakshmi,
the Goddess of Wealth, according to Hindu mythology. The 'D' in the logo reflects the
dynamism, dedication and the drive towards customer satisfaction
13.IDBI BANK
IDBI Bank Ltd. is today one of India's largest commercial Banks. Headquartered in
Mumbai, IDBI Bank today rides on the back of a robust business strategy, a highly
competent and dedicated workforce and a state-of-the-art information technology
platform, to structure and deliver personalised and innovative Banking services and
customised financial solutions to its clients across various delivery channels. As on March
31, 2013 IDBI Bank has a balance sheet of Rs. 3,22,769 crore and business size of Rs
4,23,423 crore. Mr. M. S. Raghavan is the chairman and managing director of IDBI bank.
As an Universal Bank, IDBI Bank, besides its core banking and project finance domain,
has an established presence in associated financial sector businesses like Capital Market,
Investment Banking and Mutual Fund Business.
14.INDIAN BANK
Indian bank is an indian state-owned financial services company headquartered
in chennai, india. it has 22,000 employees, 2100 branches and is one of the big public
sector banks of india . it has overseas branches in colombo, jaffna, sri lanka, singapore,
and 229 correspondent banks in 69 countries. since 1969 the government of india has
owned the bank, which celebrated its centenary in 2007.
15.INDIAN OVERSEAS BANK
Indian Overseas Bank (IOB) is a major bank based in Chennai (Madras), with more than
3078 domestic branches, 3 extension counters and six branches overseas as of 31.03.2012.
Indian Overseas Bank has an ISO CERTIFIED in-house Information Technology
department, which has developed the software that 3003 branches use to provide online
49
banking to customers; the bank has achieved 100% networking status as well as 100%
CBS status for its branches. IOB also has a network of about 2100 ATMs all over India
and IOB's InternationalVISA Debit Card is accepted at all ATMs belonging to the Cash
Tree and NFS networks. IOB offers internet Banking (E-See Banking) & Mobile Banking
and is one of the banks that the Govt. of India has approved for online payment of
taxes.The bank's business more than doubled in the last four years.The net profit for the
year ended March 31, 2012 stood at Rs 1,050.13 crore. Total income stood at Rs
19,578.13 crore as against Rs 13,326.56 crore registered during the same period last
financial year.For the full year, the total business grew by 24 per cent to Rs 3,21,707 crore
from Rs 2,59,020 crore.IOB has planned to achieve total business of Rs 3.85 trillion to Rs
4 trillion this fiscal.
16.ORIENTAL BANK OF COMMERCE
Oriental Bank of Commerce is an India-based bank established in Lahore (then a city
of British India, and currently in Pakistan), is one of the public sector banks in India. The
bank was nationalised on 15 April 1980. At that time total working of the bank was 483
crores having 19th position among the 20 nationalised banks. Within a decade the bank
turned into one of the most efficient and best performing banks of India. The bank has
progressed on several fronts crossing the Business Mix mark of 2 lac crores as on 31
March 2010 making it the seventh largest public sector Bank in India, achievement of
100% CBS, reorienting of lending strategy through Large & Mid Corporates and
establishment of new wings viz., Rural Development and Retail & Priority Sector. The
Bank has to its utmost credit lowest staff cost with highest productivity in the Indian
banking industry
17.PUNJAB & SIND BANK
Punjab & Sind Bank (P&SB) is a major Public Sector bank in Northern India and working
100% on CBS platform. The banks government shareholding is 79.86%. Of its 1249
branches and offices spread throughout India, almost 515 are in Punjab state. The bank's
corporate headquarters is in New Delhi. Its net profit is 339.22 crores and net NPA is
2.14% for the year ending 2012-13. The banks net profit for the quarter ending June 2013
is 121.71 crores. Total business of the bank is 1,32,000 crores. Business per employee is
14.35 crore & business per branch is 108.49 crores. Bank has registered a tremendous
50
growth rate in Housing, Auto & Retail loan scheme. Under DBT (Direct Benefit Scheme)
bank had opened 81,204 accounts in 43 districts. The bank has recently started two
variants of Rupay cards- Rupay debit card and Rupay Kissan credit card. After fully CBS
environment, bank has been continiously launching different-different products. Today,
Punjab & Sind Bank providing Internet banking, Mobile banking, tele banking, and sms
alert facility to his customers and giving highest rate of interest on fixed deposits for
senior citizens. Punjab & Sind Bank also providing a variety of savingslike Basic saving
account for students, pension saving account for pensioners, saving general accounts and
saving premier account. In current account, the bank providing two types account- current
account general and current account premier. Recently, the bank has opened a HUB in
Chandigarh city for housing loan proposals. Its tag line is "Where service is a way of life".
18.SYNDICATE BANK
Syndicate Bank was established in 1925 in Udupi, the abode of Lord Krishna in coastal
Karnataka with a capital of Rs.8000/- by three visionaries - Sri Upendra Ananth Pai, a
businessman, Sri Vaman Kudva, an engineer and Dr.T M A Pai, a physician - who shared
a strong commitment to social welfare. The Bank is well equipped to meet the challenges
of the 21st century in the areas of information technology, knowledge and
competition. The Bank provides a range of financial products and services to the retail
customers, including housing loans, retail trade loans, vehicle loans, consumer loans,
education loans, mortgage loans and investment loans. They also offer other services,
such as TeleBanking, short messaging service banking and data warehousing. Mr. Sudhir
Kumar Jain is the chairman and managing director of Syndicate bank. The total income is
Rs. 182950.451 Million (year ending Mar 2013) and net profit of Rs. 20044.218 Million
(year ending Mar 2013).
19.UCO BANK
Uco Bank, formerly United commercial bank, established in 1943 in Kolkata, is one of the
oldest and major commercial banks of India. Ghanshyam Das Birla, an eminent Indian
industrialist, during the Quit India movement of 1942, had conceived the idea of
organising a commercial bank with Indian capital and management, and the United
Commercial Bank Limited was incorporated to give shape to that idea. The Bank was
51
started with Kolkata as its Head Office with an issued capital of 2 crores and a paid-up
capital of 1 crore. The bank, along with 13 major commercial banks of India, was
nationalised on 19 July 1969 by the Government of India. Its name was changed to UCO
Bank, in 1985, by an act of Indian Parliament as a bank in Bangladesh existed with the
name “United Commercial Bank” which caused confusion in the international banking
arena. As of 6 January 2013 the bank had 2550 Service Units spread all over India, with
four overseas branches two each in Singapore and Hong Kong. The Bank has 44 Zonal
Offices spread all over India. UCO Bank's headquarter is located in Kolkata.
20.UNITED BANK OF INDIA
United Bank of India (UBI) is a state-owned financial services company headquartered
in Kolkata, West Bengal, India. Presently the bank has a three-tier organizational setup
consisting of its Head office in Kolkata, 35 Regional offices and 2001 branches spread all
over India. However, its major presence is in eastern India. The bank has three full
fledged overseas branches, one each at Kolkata, New Delhi and Mumbai. United Bank of
India now aims to expand its international activities. On 30 March 2009, the Indian
government approved the restructuring of United Bank of India. The government
proposed to invest 2.5 billion rupees in shares by 31 March and another 5.50 billion in the
next fiscal year in Tier-I capital instruments. The move is part of the Indian government's
program to improve the capital base of the state-owned banks.
21.VIJAYA BANK
Vijaya Bank, was established by Shri. Attavar Balakrishna Shetty at Bunts Hostel in
Mangalore on October 23, 1931. Since it was established on Vijayadashami Day, it was
named ‘Vijaya Bank. The objective was to promote banking habits, thrift and
entrepreneurship among the farming community of Dakshina Kannada district in
Karnataka State. The bank became a scheduled bankin 1958. Vijaya Bank steadily grew
into a large All Indian bank, with nine smaller banks merging with it during 1963-68. The
bank wasnationalised on April 15, 1980. The bank has built a network of 1502 branches,
864 centers, 48 Extension Counters and 1500 ATMs as on 12.02.2014, that span all 28
states and 4 union territories in the country.. All branches are functioning on the
CBS(Core Banking Solution) platform, covering 100% of the Bank's business.
52
4. CONCEPTUAL FRAMEWORK
A conceptual framework is an analytical tool with many variations and contexts. It is used to
make conceptual distinctions and organize ideas. The analytical tool used for the study is
Simple linear Regression,correlation(two tailed test) and T Test.
4.1 A Simple linear regression
simple linear regression is the least squares estimator of a linear regression model with a
single explanatory variable. In other words, simple linear regression fits a straight
line through the set of n points in such a way that makes the sum of squaredresiduals of the
model (that is, vertical distances between the points of the data set and the fitted line) as small
as possible.
The adjective simple refers to the fact that this regression is one of the simplest in statistics.
The slope of the fitted line is equal to thecorrelation between y and x corrected by the ratio of
53
standard deviations of these variables. The intercept of the fitted line is such that it passes
through the center of mass (x, y) of the data points.
The general formula for simple linear regression model is:
Y=a+Bx
Y’ = A predicted value of Y (which is your dependent variable)
a = the value of Y when X is equal to zero. This is also called the “Y Intercept”.
b = the change in Y for each 1 increment change in value of X
X = your first independent variable for which you are trying to predict value of Y’
Applying Simple linear Regression For The Research Study:
For the purposes of conducting the research,simple linear regression model has been used for
a period of 11 years. Simple linear regression is used to determine if a relationship exists
between the dependent variable and the independent variable.In this research study the
following equation are used:
1.NPA,t = α0 + α1 PSL,t + μ,t
Where,
NPA,t = NPA of public sector Bank at time t.
α0 = Intercept of Regression Equation.
α1 = Slope of the Regression Equation.
PSL,t = Priority Sector Lending of public sector bank at time t.
2.NPA,t = α0 + α1 RNPA,t + μ,t
Where,
NPA,t = NPA of public sector Bank at time t.
α0 = Intercept of Regression Equation.
α1 = Slope of the Regression Equation.
RNPA,t = Recovery Non performing asset, t.
54
4.1 B CORRELATION TWO TAILED TEST
When we are using a significance level of 0.05, a two-tailed test allots half of your alpha to
testing the statistical significance in one direction and half of your alpha to testing statistical
significance in the other direction. This means that .025 is in each tail of the distribution of
your test statistics. When using a two-tailed test, regardless of the direction of the relationship
we hypothesize, we are testing for the possibility of the relationship in both directions. For
example, we may wish to compare the mean of a sample to a given value x using a t-test. Our
null hypothesis is that the mean is equal to x. A two-tailed test will test both if the mean is
significantly greater than x and if the mean significantly less than x. The mean is considered
significantly different from x if the test statistic is in the top 2.5% or bottom 2.5% of its
probability distribution, resulting in a p-value less than 0.05.
Applying correlation two tailed For The Research Study:
It is done to find out if there is any correlation between priority sector advances and non
priority sector advances in contributing towards total NPAs.For this purpose the priority
sector advances and non priority sector advances for 11 years of PSBs are taken into
consideration. If p-value is less than 0.05, reject the null hypothesis and accept the alternative
hypothesis.
4.1 C Paired Sample T test
The Paired-Samples T Test procedure compares the means of two variables for a single
group. The procedure computes the differences between values of the two variables for
each case and tests whether the average differs from 0.
Example. In a study on high blood pressure, all patients are measured at the beginning of
the study, given a treatment, and measured again. Thus, each subject has two measures,
often called before and after measures. An alternative design for which this test is used is a
matched-pairs or case-control study, in which each record in the data file contains the
response for the patient and also for his or her matched control subject. In a blood pressure
study, patients and controls might be matched by age (a 75-year-old patient with a 75-
year-old control group member).
55
Statistics. For each variable: mean, sample size, standard deviation, and standard error of
the mean. For each pair of variables: correlation, average difference in means, t test, and
confidence interval for mean difference (you can specify the confidence level). Standard
deviation and standard error of the mean difference.
Applying Paired Simple T test For The Research Study:
In this research study paired simple T test is done to find out the impact of Gross NPA ratio
and Net NPA ratio on the priority sector NPA ratio.For this purpose the Gross NPA ratio and
Net NPA ratio of PSBs for a period of 11 years is taken into consideration.The priority sector
NPA ratio is also taken for the study.
5. DATA ANALYSIS AND INTERPRETATION
Graph 1: Graph showing the priority sector advances in the public sector banks.
56
Interpretation:
We can see that there is gradually increase in the amount of advances given to priority
sectors especially in reference to the agriculture sector. In 2003, the advances were to the tune
of Rs. 20000 crores and it saw a increase to Rs.80000 crores. A huge of the advances went to
the agriculture sector in order to meet the farmer’s requirements as well to cover the losses in
an event of uncertain calamities. The next sector that achieved such a target was the small
medium industries sector.
Graph 2: Graph representing the non-performing assets of the public sector banks
YEAR
20032004
20052006
20072008
20092010
20112012
20130
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
TOTAL NPAS OF PUBLIC SECTOR BANKS
TOTAL NPAS OF PUBLIC SECTOR BANKS
Interpretation
57
You can see that the NPA’s have tripled over the decade to the tune of Rs.150000 Cr of
the public sector banks. A high ratio of the NPA would certainly bring an negative impact to
the bank as a whole , if the NPA increases at the same pace in the near future it would prove
fatal for the banks and a question of the existence will come into being.
5.1 C .Based on the data gathered for Public sector banks for 11 years, the following output has been derived by using simple linear regression model in SPSS:
Regression:simple linear regression is done to find the impact of priority sector lending on NPA of PSBs.
Table 1:Table showing descriptive statistics of variables
LOG TOTAL
NPAS OF
PSBS
LOG TOTAL PRIORITY SECTOR ADVANCES
N
Valid 11 11
Missing 0 0
Mean 10.9690 13.2410
Std. Error of
Mean.13566 .19094
Median 10.8227 13.3220
Mode 10.56a 12.21a
58
Std. Deviation .44994 .63327
Variance .202 .401
Skewness 1.434 -.361
Std. Error of
Skewness.661 .661
Kurtosis 1.269 -1.163
Std. Error of
Kurtosis1.279 1.279
Range 1.40 1.86
Minimum 10.56 12.21
Maximum 11.96 14.06
Interpretation
The descriptive statistics table can be used to summarize the data gathered. It helps to get the
descriptive information of the data .From the table the following observation has been
observed:
The mean of the variables used in the analysis. The Independent variable priority
sector advances has the highest mean.
The standard error of mean describes the error term in each of the mean values.
The standard deviation of both the variables is less than one so the deviation from the
mean is less.
The variance measures how the set of numbers is spread out. It will be always
positive.
Skewness is used to show both positive and negative skew values rather than balanced
value. It is the risk when the data is skewed to the left or right of the mean.
Standard error of skewness denotes the error terms with respect to skewness values.
The minimum and maximum values represents the highest and lowest values of the
variables.
59
60
Correlations
Table 2:Table showing correlation values
LOG TOTAL NPAS
OF PSBS
LOG TOTAL
PRIORITY
SECTOR
ADVANCES
Pearson Correlation
LOG TOTAL NPAS OF PSBS 1.000 .620
LOG TOTAL PRIORITYSECTOR
ADVANCES.620 1.000
Sig. (1-tailed)
LOG TOTAL NPAS OFPSBS . .021
LOG TOTAL PRIORITYSECTOR
ADVANCES.021 .
N
LOG TOTAL NPAS OF PSBS 11 11
LOG TOTAL PRIORITYSECTOR
ADVANCES11 11
Interpretation:
1. Pearson Correlation -These numbers measure the strength and direction of the linear
relationship between the two variables. The correlation coefficient can range from -1
to +1, with -1 indicating a perfect negative correlation, +1 indicating a perfect positive
correlation, and 0 indicating no correlation at all. A variable correlated with itself will
always have a correlation coefficient of 1.
2. Sig. (1-tailed) -This is the p-value associated with the correlation
3. N - This is number of observations that were used in the correlation. Because we have
no missing data in this data set, all correlations were based on 11 observations.
61
Model Summary
Table 3:Table showing model summary
Model R R Square Adjusted R
Square
Std. Error of the
Estimate
Change Statistics
R Square
Change
F Change df1
1 .732a .535 .477 .37217 .535 5.616 1
a. Predictors: (Constant), LOGTOTALPRIORITYSECTORADVANCES
b. Dependent Variable: LOGTOTALNPASOFPSBS
R – It is a measure of the correlation between the observed value and the predicted value of the criterion variable. The R value is .732 which shows simple correlation.
R Square (R2) – It is the square of this measure of correlation and indicates the
proportion of the variance in the criterion variable which is accounted for by the model.
In essence, this is a measure of how good a prediction of the criterion variable we can
make by knowing the predictor variables.. A value between 0 and 1 is always better.
Higher value is always appreciated.It shows NPAs are effected by 53.5 % and 46.5% by
some other factors.
Durbin-Watson –The value should always betwwen 0 and 4.Here the value derived is
0.359 which shows positive auto correlation.
ANOVAa
62
Model Summary b
Model Change Statistics Durbin-Watson
df2 Sig. F Change
1 9a .042 .359
Model Sum of Squares df Mean Square F Sig.
1
Regression .778 1 .778 5.616 .042b
Residual 1.247 9 .139
Total 2.024 10
a. Dependent Variable: LOGTOTALNPASOFPSBS
b. Predictors: (Constant), LOGTOTALPRIORITYSECTORADVANCES
ANOVA-The ANOVA table indicates that the regression model predicts the outcome variable significantly well, p < 0.042, which is less than 0.05, and we can say that, there is a significant impact of Priority sector advances on total NPAs of Public sector banks by rejecting null hypothesis.
63
Coefficientsa
Table4:Table showing anova values
Model Unstandardized Coefficients Standardized
Coefficients
t Sig.
B Std. Error Beta
1
(Constant) 5.137 2.463 2.086 .067
LOG TOTAL
PRIORITYSECTOR
ADVANCES
.440 .186 .620 2.370 .042
Coefficientsa
Table 5:Table showing coefficient values
Model 95.0% Confidence Interval for B Collinearity Statistics
Lower Bound Upper Bound Tolerance VIF
1
(Constant) -.435 10.710
LOG TOTAL
PRIORITYSECTOR
ADVANCES
.020 .861 1.000 1.000
Dependent Variable: LOGTOTALNPASOFPSBS
Interpretation:
For coefficients with 95% confidence level, the beta value is a measure of how strongly each
predictor variable influences the criterion variable. The beta is measured in units of standard
deviation. The beta values change, depending on which predictors are included in the model.
Higher the value of beta, greater is the impact of independent variable on the dependent
variable. Here the independent variable has greater impact on dependent variable
64
5.1 D .Pearson Correlation
Pearson correlation is done to find relation between priority sector NPAs and non priority sector NPAs on total NPAs of PSBs
Table:6 Showing correlation of Priority sector NPAs and Non priority sector NPAs
LOG
PRIORITY
SECTOR
NPAS
LOG NONPRIORITY SECTOR NPAS
LOG PRIORITYSECTOR
NPAS
Pearson Correlation 1 .906**
Sig. (2-tailed) .000
N 11 11
LOG
NONPRIORITYSECTOR
NPAS
Pearson Correlation .906** 1
Sig. (2-tailed) .000
N 11 11
**. Correlation is significant at the 0.01 level (2-tailed).
Note: If p-value is less than 0.05, reject the null hypothesis and accept the alternative hypothesis
Interpretation
The table exhibits the correlation of priority sector NPAs and Non priority sector NPAs.
It is a two tailed test. It is done for a period of 11 years. For this the whole population of PSBs
is taken into consideration. Null hypothesis is rejected as the Pearson correlation is 0.906 and
p=.000(p<0.05) at confidence level of 0.01. Since p<0.05 ,there is a significant relation
between priority sector NPAs and Non priority sector NPAs in contributing to total NPAs of
PSBs.
65
5.1 E.Based on the data gathered for Public sector banks for 11 years, the following output has been derived by using simple linear regression model in SPSS:
Regression:simple linear regression is done to find the impact of Recovery of NPAs on Total NPAs of PSBs.
Descriptive Statistics
Table 6: Table showing descriptive statistics
LOG RECOVERY OF NPAS
IN PSBS
N
Valid 11
Missing 0
Mean 10.2121
Std. Error of Mean .11537
Median 10.0450
Mode 9.82a
Std. Deviation .38263
Variance .146
Skewness 1.113
Std. Error of Skewness .661
Kurtosis .121
Std. Error of Kurtosis 1.279
Range 1.15
Minimum 9.82
a. Multiple modes exist. The smallest value is shown
66
The descriptive statistics table can be used to summarize the data gathered. The data has been
done with frequencies tab to get the categorical values. It helps to get the descriptive
information of the data. From above table we can observe that:
The mean of the variables used in the analysis. The dependent variable total NPAs has
the highest mean.
The standard error of mean describes the error term in each of the mean values.
The standard deviation shows how much variation or dispersion from the mean value
exists.
The variance measures how a set of numbers is spread out. It is always positive.
Skewness is used to show both positive and negative skew values rather than balanced
value. It is the risk when the data is skewed to the left or right of the mean.
Standard error of skewness denotes the error terms with respect to skewness values.
67
Interpretation
The descriptive statistics command also gives a correlation matrix showing the
Pearson correlation between the variables.
1. Pearson Correlation -These numbers measure the strength and direction of the linear
relationship between the two variables. The correlation coefficient can range from -1
to +1, with -1 indicating a perfect negative correlation, +1 indicating a perfect positive
correlation, and 0 indicating no correlation at all. A variable correlated with itself will
always have a correlation coefficient of 1.
2. Sig. (1-tailed) -This is the p-value associated with the correlation.
3. N - This is number of observations that were used in the correlation. Because we have
no missing data in this data set, all correlations were based on 11 observations.
68
Correlations
Table 7:Table showing correlation values
LOG TOTAL NPAS OF
PSBS
LOG RECOVERY OF NPAS
IN PSBS
Pearson
Correlation
LOG TOTAL NPAS OF PSBS 1.000 .909
LOG RECOVERY OF NPAS IN
PSBS.909 1.000
Sig. (1-
tailed)
LOG TOTAL NPAS OF PSBS . .000
LOG RECOVERY OF NPAS IN
PSBS.000 .
N
LOG TOTAL NPAS OF PSBS 11 11
LOGRECOVERYOFNPASINPSBS 11 11
Model Summaryb
Table 8;Table showing model summary
Model R R Square Adjusted R
Square
Std. Error of
the Estimate
Change Statistics
R Square
Change
F Change df1
1 .909a .826 .806 .19801 .826 42.637 1
Model Summaryb
Model Change Statistics Durbin-Watson
df2 Sig. F Change
1 9a .000 .779
b. Predictors: (Constant), LOGRECOVERYOFNPASINPSBS
c. Dependent Variable: LOGTOTALNPASOFPSBS
R – It is a measure of the correlation between the observed value and the predicted value of
the criterion variable. The R value is 0.909 which represent simple correlation. It represents
high degree of correlation between Recovery of NPAs and Total NPAs.
R Square (R2) – It is the square of this measure of correlation and indicates the proportion of
the variance in the criterion variable which is accounted for by the model. In essence, this is a
measure of how good a prediction of the criterion variable we can make by knowing the
predictor variables. A value between 0 and 1 is always better. Higher value is always
appreciated. The R2 is .826 which suggests that there 82.6% effect of recovery of NPAs on
Total NPAs of PSBs.
69
Adjusted R Square – It is value gives the most useful measure of the success of our model.
Adjusted R Square value is calculated which takes into account the number of variables in
the model and the number of observations (participants) the model is based on. It tells about
what % of variability in the Dependent variable is accounted for the independent variable .In
this case the percentage of variability is about 80.6%.
Durbin-Watson - The value should always between 0 and 4.Here the value derived is 0.779
which shows positive auto correlation.
ANOVAa
Table 9:Table showing Anova values
Model Sum of Squares df Mean Square F Sig.
1
Regression 1.672 1 1.672 42.637 .000b
Residual .353 9 .039
Total 2.024 10
a. Dependent Variable: LOGTOTALNPASOFPSBS
Predictors: (Constant), LOGRECOVERYOFNPASINPSBS
The ANOVA table indicates that the regression model predicts the outcome variable
significantly well, p < 0.000, which is less than 0.05, and we can say that, there is a
significant impact of Recovery of NPAs on total NPAs of Public sector banks by rejecting
null hypothesis.Here the significance level is 0.000 which shows that there is significant
relation between Recovery of NPAs and Total NPAs
Coefficientsa
Tabe 10: Table showing coefficient values
Model Unstandardized
Coefficients
Standardized
Coefficients
t Sig.
B Std. Error Beta
1
(Constant) .057 1.672 .034 .973
LOGRECOVERYOFNPASINPSBS 1.069 .164 .909 6.530 .000
70
Coefficientsa
Model 95.0% Confidence Interval for B Collinearity Statistics
Lower Bound Upper Bound Tolerance VIF
1
(Constant) -3.726 3.840
LOGRECOVERYOFNPASINPSBS .698 1.439 1.000 1.000
a.Dependent Variable: LOGTOTALNPASOFPSBS
For coefficients with 95% confidence level, the beta value is a measure of how strongly
each predictor variable influences the criterion variable. The beta is measured in units of
standard deviation. The beta values change, depending on which predictors are included in
the model. Higher the value of beta, greater is the impact of independent variable on the
dependent variable. Here the independent variable has greater impact on dependent variable
71
5.1 F.T Test
To find the impact of Net NPA ratio on priority sector NPA ratio of PSBs.
Paired Samples Correlations
Table11:Table showing T Test values
N Correlation Sig.
Pair
1
LOGPRIORITYSECTORNPARATIO
& LOGNETNPARATIO11 .944 .000
Paired Samples Test
Paired Differences
Mean Std. Deviation Std. Error
Mean
95%
Confidence
Interval of the
Difference
Lower
Pair 1LOGPRIORITYSECTORNPARATIO
- LOGNETNPARATIO1.25411 .21717 .06548 1.10821
Paired Samples Test
Paired Differences t df Sig. (2-tailed)
95% Confidence
Interval of the
Difference
Upper
Pair 1
LOG PRIORITYSECTOR NPA
RATIO – LOG NET NPA
RATIO
1.40000 19.153 10 .000
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Interpretation
The observed mean difference is 1.254. Since the value of t is 19.153 at p< .000, the
mean difference (1.254) between Gross NPA ratio and Priority sector NPA ratio is
statistically significant. According to the Sig. of 0.000 (which is less than 0.05), the Null
hypothesis is rejected. Therefore, it can be inferred that there is a significant relationship
between Net NPA ratio and Priority sector NPA ratio of public sector banks during the study
period.
5.1 G.T Test
To find the impact of Gross NPA ratio on priority sector NPA ratio of PSBs.
Paired Samples Statistics
Table 12:Table Showing T Test values
Paired Samples Correlations
N Correlation Sig.
Pair 1LOGPRIORITYSECTORNPARATIO &
LOGGROSSNPARATIO11 .990 .000
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Paired Samples Test
Paired Differences
Mean Std. Deviation Std. Error Mean 95% Confidence
Interval of the
Difference
Lower
Pair 1
LOG PRIORITYSECTOR
NPA RATIO – LOG GROSS
NPA RATIO
.41910 .13065 .03939 .33133
Paired Samples Test
Paired Differences t df Sig. (2-tailed)
95% Confidence
Interval of the
Difference
Upper
Pair 1
LOG PRIORITYSECTOR NPA
RATIO – LOG GROSS NPA
RATIO
.50688 10.639 10 .000
Interpretation
The observed mean difference is .4191. Since the value of t is 10.639 at p < .000, the
mean difference (.4191) between Gross NPA ratio and Priority sector NPA ratio is
statistically significant. According to the Sig. of 0.000 (which is less than 0.05), the Null
hypothesis is rejected. Therefore, it can be inferred that there is a significant relationship
between Gross NPAratio and Priority sector NPA ratio of public sector banks during the
study period.
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6.1FINDINGS
The major findings of the present study are:
There is a declining trend in Gross NPAs and Net NPAs of Public sector banks till
2008-09 but it increased in the later years.
Total NPAs had inreased by 191.43% from 38,602 crores in the year 2007 to rs
1,12,500 crores in the year 2013.
The total priority sector credit of public sector banks have raised from Rs. 1,99,786
crore to Rs. 11,30,700 crore. The priority sector NPAs of public sector banks have
raised from Rs. 24,938.36 crore at the end of March, 2003 to Rs. 56,200 crore at the
end of March, 2013.
Public sector banks recovered a higher amount of NPAs during 2011-12 than that
during the previous year. Though the total amount recovered Rs. 47,800 crore in
Public sector banks in 2012-13 was higher than Rs 37,160 crore in 2010-11.
There is significant relation between Priority sector NPAs and Non-priority sector
NPAs in contributing to total NPAs of PSBs.
There is a significant relationship between Gross NPA ratio and Priority sector NPA
ratio of public sector banks during the study period.
There is a significant relationship between Net NPA ratio and Priority sector NPA ratio
of public sector banks during the study period.
There is a positive correlation between Priority sector advances and total NPAs.
There is a significant impact of Priority sector advances on total NPAs of Public sector
banks.
There is a significant impact of Recovery of NPAs on total NPAs of Public sector
banks.
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6.1 a.Suggestions for reducing NPAs
1. Effective and regular follow-up of the end use of the funds sanctioned is required to
ascertain any embezzlement or diversion of funds. This process can be undertaken every
quarter so that any account converting to NPA can be properly accounted for.
2. Combining traditional wisdom with modern statistical tools like Value-at-risk analysis and
Markov Chain Analysis should be employed to assess the borrowers. This is to be
supplemented by information sharing among the bankers about the credit history of the
borrower. In case of new borrowers, especially corporate borrowers, proper analysis of the
cash flow statement of last five years is to be done carefully.
3. A healthy Banker-Borrower relationship should be developed. Many instances have been
reported about forceful recovery by the banks, which is against corporate ethics. Debt
recovery will be much easier in a congenial environment.
4. Assisting the borrowers in developing his entrepreneurial skills will not only establish a
good relation between the borrowers but also help the bankers to keep a track of their funds.
5. Countries such as Korea, China, Japan, Taiwan have a well functioning Asset
Reconstruction/ Recovery mechanism wherein the bad assets are sold to an Asset
Reconstruction Company (ARC) at an agreed upon price. In India, there is an absence of
such mechanism and whatever exists, it is still in nascent stage. One problem that can be
accorded is the pricing of such loans. Therefore, there is a need to develop a common
prescription for pricing of distressed assets so that they can be easily and quickly disposed.
The ARCs should have clear ‘financial acquisition policy’ and guidelines relating to proper
diligence and valuation of NPA portfolio.
6. Some tax incentives like capital gain tax exemption, carry forward the losses to set off the
same with other income of the Qualified Institutional Borrowers (QIBs) should be granted so
as to ensure their active participation by way of investing sizeable amount in distressed
assets of banks and financial institutions.
7. So far the Public Sector Banks have done well as far as lending to the priority sector is
concerned. However, it is not enough to make lending to this sector mandatory; it must be
made profitable by sharply reducing the transaction costs. This entails faster embracing of
technology and minimizing documentation.
8. Commercial Banks should be allowed to come up with their own measures to address the
problem of NPAs. This may include waiving and reducing the principal and interest on such
loans, or extending the loans, or settling the loan accounts. They should be fully authorized
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and they should be able to apply all the preferential policies granted to the AMC.
9. Another way to manage the NPAs by the banks is Compromise Settlement Schemes or
One Time Settlement Schemes. However, under such schemes the banks keep the actual
amount recovered secret. Under these circumstances, it is necessary to bring more
transparency in such deals so that any flaw could be removed.
10.The borrowers of the priority sector loan and the bank officials involved in the scheme
should try to keep up the schedule of repayment. There is need for prompt and regular
repayment of loan to the concerned bank. Delay in repayment is likely to reduce the quantum
of loan for the prospective borrowers under the priority sector lending. Borrowers should be
properly motivated to stick to the schedule of repayment of loan by the bank officials.
11. There is need for the borrowers to improve their skills through training prior to obtaining
the sanctioning of the priority sector loan so that they can use loan productively and repay
them.
12. Productive use of priority sector loans needs the linking of the borrower’s products with
marketing. There is need for introducing business consciousness among artisans and other
small units who avail of priority sector loans.
13. It is desirable to adopt indirect financing of priority sector borrowers through unions like
weavers cooperatives and handloom development corporations, dairy cooperatives, etc.,
instead of direct financing so that credit administration, supervision and recovery are easier
14.Priority sector loans at low rates of interest should be given only to weaker sections and
not to the affluent under the label of priority sector. This will help banks to improve
monitoring and supervision of these advances on the weaker sections and their own
profitability.
15.The Public sector banks providing priority sector loans should properly supervise the use
of the loan by the beneficiary loanees, so that the loan amount is used for the purpose for
which it is obtained. A system of periodical visits by the bank officials of the projects
financed under the priority sector scheme must be enforced.
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6.2CONCLUSION
The NPAs have always been a big worry for the banks in India. It is just not a problem for the
banks; they are bad for the economy too. The money locked up in NPAs is not available for
productive use and adverse effect on banks' profitability is there. The extent of NPA is
comparatively higher in propriety sector lending. To improve the efficiency and profitability,
the NPAs have to be scheduled. The RBI and the Government of India have taken number
steps to reduce NPAs of the SCBs. This has led to decline in the level of NPAs of the Indian
banking sector. But a lot more needs to be done. The NPA level of our banks is still high as
compared to the international standards. It is highly impossible to have zero. percentage
NPAs. But at least Indian banks can try competing with foreign banks to maintain
international standard. One cannot ignore the fact that a part of the reduction in NPAs is due
to the writing off bad loans by the banks. Priority sector bank lending has been an instrument
of India’s financial policy which aims at restoring sectional balance within credit
disbursement and for channelling credit to the weaker sections within these sectors. The Bank
Company Acquisition Act 1969 leading to the nationalisation of the 14 commercial banks has
implicitly made it clear in its preamble. All the banking institutions involving in priority
sector lending have provided maximum amount of loan advances to Agriculture and Allied
activities compared to other priority sectors like SSIs, and Non-farm sectors. The viability of
priority lending by banks depends on the competence and integrity of the institutions
comprising it. It is found that the viability of the public sector banks has been eroded due to
two factors viz.
Directed investment in terms of minimum statutory liquidity ratio and
Directed lending to priority sectors.
The declining profitability of public sector banks has been related to the priority sector
lending as one of the causes viz.,
Increasing the quantum of interest subsidised loans causing heavy interest income
losses.
Causing highest establishment expenditure to supervise small amounts without
matching productivity.
Raising level of credit outstanding of sick limits requesting in the poor recovery of
small loans.
Expanding the volume of non-performing assets (NPA).
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The borrowers of the priority sector loan and the bank officials involved in the scheme should
try to keep up the schedule of repayment. There is need for prompt and regular repayment of
loan to the concerned bank. Delay in repayment is likely to reduce the quantum of loan for the
prospective borrowers under the priority sector lending. Borrowers should be properly
motivated to stick to the schedule of repayment of loan by the bank officials. The Indian
banks should take care to ensure that they give loans to creditworthy customers as prevention
is always better than cure.
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Reports:
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Websites:
www.rbi.org.in
www.moneycontrol.com
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