A “Research Project” ON “PROBLEM OF NPA AND ITS IMPACT ON BANKS (WITH SPECIAL REFRENCE TO STATE BANK OF INDIA)” Submitted to Punjab Technical University, Jalandhar in partial fulfilment for the degree of Master of Business Administration (Session 2008-2010) Under the supervision of: - Submitted By:-
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A
“Research Project”
ON
“PROBLEM OF NPA AND ITS IMPACT ON BANKS (WITH SPECIAL REFRENCE TO
STATE BANK OF INDIA)”
Submitted to
Punjab Technical University, Jalandhar in partial fulfilment for the degree of Master of Business
Administration (Session 2008-2010)
Under the supervision of: - Submitted By:-
Dr. R.S GUPTA NAVJINDER GREWAL
HOD MGT DEPTT. MBA(II)YR
ROLL NO. (27)
DECLARATION
I hereby certify that the work embodied in the project “Problem of NPA and its impact on
banks (with special reference to state bank of India" was done by me under the
supervision of Dr. R.S GUPTA (H.O.D MGT DEPTT,BCET)
The project is done for the partial fulfillment of Degree of Master of Business Administration
program of Punjab Technical University, Jalandhar from, Bhutta College Of Engineering
And Technology, Ludhiana. I have not submitted this report to any institute or University.
NAVJINDER GREWAL
ACKNOWLEDGEMENT
My sincere thanks are due to all the contributors without whose efforts this project would not
have been completed. No task of this nature is a single person effort, so I am very thankful to
Dr. R.S GUPTA (H.O.D MGT DEPTT)
Under whose guidance I successfully completed my research project. Their unfailing interest
and support gave a new dimension to my work. They made it possible to collect abundance
of material, the relevant portion of which is quoted in this project.
I am also very grateful to all other Faculty of B.C.ET whose teaching methodology helped
me in completion of my project without any difficulty.
I also express my gratitude to the all respondent for their proper responses and cooperation
during my dissertation project.
I would like to extend my thanks to my all friends for their valuable suggestion and
cooperation at various stages during my project.
NAVJINDER GREWAL
CHAPTER PLAN
S.No. Chapters Page No.
1. Introduction
Non –performing asset
Classification of NPA
Some issue of NPA
2. Review of literature
3. Objective of study
4. Research Methodology
Research Design
Sources of Data
5. Reason of NPA
6. Impact of NPA on Banks
7. Guidelines of RBI
8. Analysis and interpretation of data
9. Findings
10. Limitation
11. Recommendation
12.
13.
Conclusion
Bibliography
INTRODUCTION TO THE PROJECT
Since the introduction of economic liberalization and financial sector reforms, Banks are
under growing pressure to bring down their NPAs so as to improve their performance and
viability. What is bothering the bankers today is the management of Non-performing Assets.
Over the period this problem has aggravated alarmingly and therefore needs urgent remedial
actions, so in this context a good number of circular instruction/guidelines have been issued
by bank/Reserve Bank of India.
Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of
Sh. M.Narsimham to examine and give recommendation for Income Recognition, Asset
Classification and Provisioning of loan assets of Banks and Financial Institutions. The
Committee examined the issues and recommended that a policy of Income Recognition
should be objective and based on record of recovery rather than on subjective considerations.
On the basis of the recommendations of the Narsimhan Committee, RBI had issued
guidelines to all Scheduled Commercial Banks on Income Recognition, Assets Classification
and Provisioning in April, 1992 which have been modified from time to time by the RBI on
the basis of experience gained and suggestions received from various quarters. The
Prudential Norms for Income Recognition, Asset Classification and Provisioning have come
into effect from the accounting year 31.03.1993.
Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India
Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were
also issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June,
1994 and to Regional Rural banks in March, 1996. They have adopted these guidelines for
the purpose of Income Recognition and Assets Classification from the accounting year 1995-
96. However, guidelines relating to provisioning for RRBs have been made effective from
the financial' year ended 31.03.1997. The definition of NPAs is also gradually becoming
tough for RRBs to cover all advances like Commercial Banks. Although most of-the
guidelines relating to RRBs are similar to that of Commercial Banks, they have been made
applicable in a phased manner for RRBs.
INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played
a crucial role in the socio- economic progress of the country. Banks extend credit to different
types of borrowers for many different purposes. For most customers, bank credit is the
primary source of available debt financing.
For banks good loans are the most profitable assets. Return comes in the form of loan
interest, fee income and investment and the most prominent assumed risk is credit risk.
Credit risk involves inability or unwillingness of customer or counterpart to meet
commitments in relation to lending once a loan is overdue and ceases to yield income it
would become a Non Performing Asset.
Proper management and speedy disposal of NPAs is one of the most critical tasks of banks
today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has
been a matter of grave concern not only for the banks but also the real economy in general, as
NPAs can choke further expansion of credit which would impede the economic growth of the
country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions
in the economy. NPAs are not therefore the concern of only lenders but also the public at
large.
Granting of credit for economic activities is the prime duty of banking. Apart from raising
resources through fresh deposits, borrowings and recycling of funds received back from
borrowers constitute a major part of funding credit dispensation activity. Lending is generally
encouraged because it has the effect of funds being transferred from the system to productive
purposes, which results into economic growth. However lending also carries a risk called
credit risk, which arises from the failure of borrower. Non-recovery of loans along with
interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the
bank’s profitability on a large scale. Though complete elimination of such losses is not
possible, but banks can always aim to keep the losses at a low level.
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 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.
STATE BANK OF INDIA
SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31, 2005. It
dominates the Indian banking sector with a market share of around 20% in terms of total
banking sector deposits. The increasing focus on upgrading the technology back-bone of the
bank will enable it to leverage its reach better, improve service levels, provide new delivery
platforms, and improve operating efficiency to counter the threat of competition effectively.
Once the core banking solution (CBS) is fully implemented, it will cover over 10,000
branches and ATMs of the State Bank group, and emerge as the strongest technology enabled
distribution network in India.
The increasing integration of SBI with its associate banks (associates) and subsidiaries will
further strengthen its dominant position in the banking sector and position it as the country’s
largest universal bank.
Resource-raising capabilities
SBI’s funding profile is strong, underpinned by its strong retail deposit base. The bank is
facing increasing competition in its metropolitan and urban franchise. SBI’s strong franchise
gives it access to a steady source of stable retail funds, which constitute around 59% of the
total resources as on March 31, 2005 (56% as at March 31, 2004).
Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in
the proportion of current account deposits, low-cost deposits have continued to constitute
over 40% of total deposits as at March 31, 2005. The bank’s cost of deposits (excluding
IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year from April
1 to March 31), compared with 5.48% in 2003-04. The bank’s liquidity position is very
strong due to healthy accretion to deposits, large limits in the call market, and significant
surplus SLR investments. SBI will maintain its strong funding profile and a low cost resource
position in view of its strong retail base and wide geographical reach.
Earnings profile to remain good
SBI will maintain a good earnings profile in the medium term despite high pressure on yields
due to the increasing competition in the banking sector. SBI’s earning profile is characterised
by consistency in the return on assets (PAT/Average Assets), at around 1% per annum for the
past three years, and diverse income streams. To maintain yields and pursue credit growth,
the bank is aggressively targeting retail finance and small and medium enterprises (SMEs).
The bank’s core fee income of 1% of average funds deployed bolsters its revenue profile.
However, with the opening of government business like tax collection to other banks and
increased competition, the growth in fee income is expected to slow down. The bank’s
operating expense at 2.44% of average funds deployed in 2004-05 is in line with other public
sector banks. The bank’s cost structure is rigid as fixed employee cost accounted for 74% of
the operating expenditure in 2004-05. Thus, despite good asset growth and technology
efficiency gains, the bank’s operating costs will remain high in the medium term. To be able
to reap the full benefits of technology implementation, the bank will have to reduce or
redeploy work force; since this is a sensitive issue, it is expected to happen gradually.
The bank’s fund based and fee income earnings are diversified across industries, regions,
asset classes, and customer segments.
Strong diversification in income streams will ensure that the bank’s earnings remain
relatively stable, despite the decline in profitability in some segments.
Comfortable capital position
SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a large capital
base of Rs 240.72 billion as at March 31, 2005. The bank has considerably improved its net
worth coverage for net NPAs to 4.4 times as at March 31, 2005 due to lower slippages
reflecting an improving asset quality, witnessed across the entire banking sector. The
capitalization levels of SBI are adequate to address the asset side risks and support the
business growth in the medium term.
Management strategies
In retail finance, the bank has leveraged its corporate relationships, pursued business growth
selectively, and has not competed based on interest rate. The bank has taken initiatives like
on-line tax returns filing and faster transfer of funds to protect its dominant position in the
government business. The bank also has a clear technology strategy that will enable it to
compete with the new generation private sector banks in customer service and operational
efficiency.
Asset quality to remain at average levels
The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at
March 31, 2005, compared with 4.9% for all scheduled commercial banks (SCBs) taken
together. The bank is facing challenges to improve the quality of assets originated, as can be
seen in the consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05.
To contain NPAs and ensure credit growth, the bank has decided to focus on financing the
retail (personal) segment as well as SMEs. The share of retail advances has increased to
24.73% (Rs 522.08 billion) of total advances as at September 30 2005. In the retail loan
segment, SBI is targeting primarily the housing loans segment, which constitutes Rs. 283.41
billion (54.3%) of total retail loans. The NPAs in retail finance are low currently; however
they are steadily increasing (especially in the housing finance portfolio) and have started
showing signs of stress. SBI’s retail portfolio has grown at over 37% CAGR in the last two
years and hence a significant portion of the portfolio is largely unseasoned. The housing
finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March 31, 2005.The bank
will face significant challenges in the medium term to develop effective credit appraisal and
collection systems in order to contain NPAs in retail finance. SBI’s asset quality is expected
to remain at average levels, as the bank’s large and diverse asset portfolio reflects of the asset
quality of the banking system.
Business description
SBI along with its associate banks offer a wide range of banking products and services across
its different client markets. The bank has entered the market of term lending to corporates
and infrastructure financing, traditionally the domain of the financial institutions. It has
increased its thrust in retail assets in the last two years, and has built a strong market position
in housing loans.
SBI, through its non-banking subsidiaries, offers a host of financial services, viz., merchant
banking, fund management, factoring, primary dealership, broking, investment banking and
credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI
Life Insurance Company Limited, which is a joint venture with Cardiff S.A., one of the
largest insurance companies in France. SBI currently holds 74% equity in the joint venture.
Industry prospects
To leverage benefits such as access to low cost resources and the facility to provide a larger
gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited
and HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that
of foreign banks promoting NBFCs to benefit from regulatory flexibility available to such
entities in areas like absence of statutory liquidity ratio and cash reserve ratio requirements,
priority sector requirements, and corporate exposure limits.
New private sector banks capture market share
With technological edge and a strong marketing thrust, private sector banks have been
stealing market share in retail deposits and the corporate fee business from public sector
banks. Together with some foreign banks, these private banks have also aggressively entered
the retail asset financing space, hitherto the domain of non-banking finance companies.
Given their focus on cross selling and optimizing their customer base, they now offer the
entire range of products and services on the asset and liability side to retail and wholesale
customers
Asset quality to improve
Banks have not yet fully resolved the stress in the asset quality of their legacy
corporate loan portfolios, however. Though slippages to NPAs and provisioning were high
for some banks in FY2004, as they moved to the 90-day norm for recognising and
provisioning for NPAs, the treasury gains enabled significant provisioning to be made with
the result that net NPAs for most public sector banks are now less than 3%.
Going forward, steady growth in gross domestic product should help improve the banks’
asset quality and increase corporate lending. The securitization and reconstruction of
financial assets and enforcement of security interest (Sarfaesi) Act should also help banks in
limiting slippages and improving NPA recoveries.
Better Capitalization levels
Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through
public issues in recent years, thereby improving their capitalization levels. The steady
accruals to net worth and falling non-performing asset levels have resulted in an
improvement in the capitalization position of banks in recent years.
Challenges ahead
Competition from new private sector and foreign banks remains a key challenge for public
sector banks. They need to reorient their staff and effectively utilize technology platforms to
retain customers and reduce costs. They also need to fortify their credit risk management
systems to mitigate the risks arising from small-ticket lending to the retail, small and medium
enterprises, and services segments.
Consolidation and emergence of universal banking groups
The cap on foreign ownership of banks has already been raised from 49% to 74%. The
competition in the sector could get further intensified if the 10% cap on voting rights is also
relaxed. New private sector banks are expanding their geographical coverage and making
inroads into government business. The new private and foreign banks will continue to gain
market share from public sector banks because of their efficient cost structures, technological
edge, focused marketing approach and operational freedom. However, the emergence of
newer players would be restricted if the private ownership of banks is capped at low levels.
Mergers among PSBs would create banks with even larger balance sheets and customer base.
However, the integration process in such mergers is expected to be complex and time long
drawn.
These would also be driven by GoI due to provisions of Banking Companies (Acquisition
and Transfer of Undertakings) Act 1969, and hence political scenario will impact the timing
and permutations possible. Strategic alliances between banks and other financial sector
players such as insurance companies and mutual funds are also likely as banks attempt to
enhance their product range, leverage on economies of scale and reduce costs.
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
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,
i. Interest and/or installment of principal remain overdue for a period of more than 180 days
in respect of a term loan
ii. The account remains ‘our of order’ for a period of more than 180 days, in respect of an
overdraft/cash credit
iii. 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 agriculture
purposes
iv. Any amount to be received remains overdue for a period of more than 180 days in respect
of other accounts.
With a view to move towards international best practices, it has been decided to adopt the ’90
days’ overdue norm for identification of NPAs, from 31st March, 2004.
‘Out of Order’ Status
An account should be treated as ‘out of order’ if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding
balance in the principal operating account is less than the sanctioned limit/drawing 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 credit
weakness that jeopardize the liquidation of the debt and are characterized by the
distinct 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.
Guidelines for Classification of NPAs
Broadly speaking, classification should be done taking into account the degree of well
defined credit weaknesses and the extent of dependence on collateral security for realization
of dues.
Banks should establish appropriate internal systems to eliminate the tendency to delay or
postpone the identification of NPAs, especially in respect of high value accounts.
Accounts with temporary deficiencies: These should be classified based on the past
recovery records.
Accounts regularize near about the balance sheet date: These accounts should be handled
with care and without scope for subjectivity. Where the account indicates inherent
weakness based on available data, it should be deemed as an NPA.
Asset classification should be borrower-wise and not facility-wise: If a single facility to a
borrower is classified as NPA, others should also be classified the same way, as it is
difficult to envisage only a solitary facility becoming a problem credit and not others.
Advances under consortium arrangements: Classification here should be based on the
recovery record of the individual member banks.
Accounts where there is erosion in the value of the security: If there is a significant (i.e.
the realizable value of the security is less than 50% of that assessed by the bank during
acceptance) the account may be classified as NPA.
NPA SOME ASPECTS AND ISSUES
1. The NPAs of banks in India are considered to be at higher levels than those in other
countries. This issue has attracted attention of public as also of international financial
institutions and has gained further prominence in the wake of transparency and
disclosure measures initiated by RBI during recent years.
2. The NPA Management Policy document of SBI lays down to contain net NPAs to
less than 5% of bank's total loan assets in confirmity with the international standard.
It is, therefore necessary that as per guidelines provided in NPA Management Policy
document, every effort be made at all levels to cut down the NPAs. All this requires
greater efforts and teamwork.
3. It is essential to keep a constant watch over the non-performing assets not just to keep
it performing but also that once they become non-performing, effective measures are
initiated to get full recovery and where this is not possible, the various means are to
be initiated to get rid off the NPAs from the branch books.
4. NPAs adversely affect the wealth condition of the branch advances as also the
profitability of the branch. Some of the reasons for this are as under:
(a) Interest cannot be applied on the loan accounts classified as NPAs.
(b) The Branch 'has to pay interest to central office on outstanding classified as
NPA.
(c) The Branch has to incur cost in supervision and follow up of such advances.
(d) Provision has to be made on NPAs at Bank level.
5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub
standard, Doubtful or loss assets.
6) Once the assets are classified as NPA, the Branch Manager has to take all the
necessary steps to get the dues recovered there-under to maintain the good health of
advances and the higher profitability at the-Branch. This requires management of NPAs
in such a Planned and scientific manner that the percentage of NPAs to the total advances
will be minimum.
RECOGNITION OF INCOME ON
NON-PERFORMING LOANS (NPLS)
Stricter regulations have been laid down by supervisory authorities in many countries with
regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest
payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful'
and 'loss'].
Any uncollected interest payments on NPLs are considered non-accrued interest. Previously
accrued, but uncollected interest is reversed out of income. Failure to do so would overstate
income. Uncollected interest is normally put in a memorandum account. NPLs are restored
on an accrual basis only after full settlement has been made on all delinquent principal and
interest. It would, therefore, be useful, if the accounts carry a footnote, explaining the
accounting policies followed with regard to recognition of income on NPLs.
NARSIMHAN COMMITTEE'S RECOMMENDATIONS
Committee on Financial System (CFS) Narsimhan committee which reported in 1991,
meanwhile major changes have taken place in the domestic, economic and institutional
science, indicating the movement towards global integration of financial services. Committee
has presented second generation reforms.
a) To strength the foundation of financial system.
b) Related to this, streamlining procedures, upgrading technology and human
resource development.
c) Structural changes in the system.
1. It is recommended that an asset be classified as doubtful if it is in the sub standard
category for 18 months in the first instance and eventually for 12 months as loss if it
has been so identified but not written off. These norms, which should be regarded as
the minimum, may be brought into force in a phased manner.
2. Corporations and FIs should avoid the practice of "ever greening" by making fresh
advances to their troubled constituents only with a view to settling interest dues and
avoiding classification of the loans in question as NPAs. The committee notes that the
regulatory and supervisory authorities are paying particular attention to such breaches
in the adherence to the spirit of the NPA definitions and are taking appropriate
corrective action.
3. The committee believes that objective should be to reduce the average level of net
NPAs for all bank's to below 5% by the year 2000 and 3% by 2002. These targets
cannot be achieved in the absence of measure to tackle the problem of backlong
NPAs on one time basis and the implementation of strict prudential norms and
management efficiency.
4. There is no denying the fact that any effort at financial restructuring in the form of
having off NPAs portfolio from the books of the corporation or measures to initiate
the impact of high level of NPAs must go hand with operational restructuring.
Cleaning up the balance sheets of banks would thus make sense only if simultaneous
steps are taken to prevent of limit the reemergence of new NPAs.
5. Direct credit has a proportionately higher share in NPA portfolio of corporations and
has been one of the factors in erosion in the quality of asset portfolio. There is a
continuing need of Financial Corporations to extend Credit to SSI sector, which is
important segment of national economy but on commercial considerations and on
basis of credit worthiness. Government feels reluctant to accept the recommendation
for reducing the scope of directed credit under priority sector because timy sector of
industry and small businesses have problems with regard to obtaining credit and some
remaining may be necessary for this sector. A poverty alleviation and employment
generation schemes. Given the special needs of these sectors, the current practice may
continue.
6. With regard to income recognition in India, income stops occurring when
interest/installment of principal is not paid within 180 days. However, we should
move towards international Practices in this regard and introduce the norm of 90 days
in a phased manner by the 2002.
7. As an incentive to Bank is to make specific provision, the consideration be given to
making such provisions tax deductible.
8. Banks should pay greater attention to asset liability management to avoid mismatch
and to cover, among others, liquidity and interest rate risks.
9. It should be encouraged to adopt statistical risk management techniques like value at
risk in respect of balance sheet term which are susceptible to market price fluctuation,
Forex rate volatility and interest rate changes. While the RBI and IDBI may initially,
prescribe certain normative models for market risk management, the ultimate
objective should be that of building up their models and RBI blacklisting them for
their validity on a periodical basis.
10. There is a need for a greater use of computerized system than at present.
Computerization has to be recognized as an indispensable tool for improvement in
customer service, the institution and operation of better control systems, greater
efficiency in information technology.
11. State Financial Corporations at present are over regulated and over administered.
Supervision should be based on evolving prudential norms and regulations which
should be adhered to rather than excessive control over administrative and other
aspects of organisation and functioning. Internal audit and internal inspection systems
should be strengthened.
12. The main issues with regard to operations of Bank’s are to ensure operational
flexibility and measure of competition and adequate internal autonomy in matters of
loan sanctioning and internal administration.
13. This calls for some re-examination and the present relevance of directed credit
programme ablest in respect of those who are able to stand on their own feet and to
whom the directed credit programmes with the element of interest concessionality
that has accompanied has become a source of economic rent. It is recommended that
directed credit sector be redefined to comprise the small and marginal farmers, the
tiny sector of industry, small business and transport operators, village and cottage
industry, rural artisans and other weaker sections. The credit target for this redefined
priority sector should hence forth be fixed at 10% of aggregate credit which would be
broadly in line with the credit flows to these sectors at present.
14. The committee believes that the balance sheets of banks and FIs should be made more
transparent and full disclosure made in Balance sheet. This is to be done in phased
manner.
REVIEW OF LITERATURE
Das (1990) has compared the various efficiency measures of public sector banks by
applying data envelopment analysis model and concluded that the level of NPAs
significant negative relationship with efficiency estimates.
Verma (1999) has concluded that high level of NPAs leads to operational failure of
the bank.
Berger and young (1997) has examined the relationship between problem loan and
bank efficiency by employing Granger-causality technique and found that high level
of problem loans cause banks of increase spending on monitoring, working out and /
or selling off these loans and possibly becomes more diligent in administering the
portion of their existing loan portfolio that is currently performing.
Gupta (1997) has also concluded that NPAs on protifability of banks and leads to
liquidity crunch and slow down in the growth in GDP etc.
Kaveri(1995) has also examined the impact of NPAs on profitability by taking profit
making and six loss making banks and concluded that loss making banks maintained
higher NPAs in the loan portfolio which led them to show losses.
Kwan and Eisenbeis (1994) also concluded that there is negative relationship
between efficiency and problem loans.
Toor (1994) analysed that poor recovery management leads to reduction in yield on
advanced that poor recovery management leads to reduction in yield on advances,
reduced productivity loss in the credibility and put detrimental impact on the policies
of the banks.
Murthy (1988) has examined that default bring down the return accruing and to them,
reduces effective rate of interest and reduces the funds’ recalculation and increase
their dependence on external sources thereby increasing the costs.
ACCORDING TO S, RAJ KUMAR (2002) the SARFAESI act and the could
primarily used as powerful bargaining tool while negotiating with defaulter. This
puts bank on stronger ground in salvaging sticky loan
OBJECTIVE OF STUDY
To study the position of non performing assets in SBI group
To know the impact on NPAon strategic banking variable.
To know the reason for an asset becoming NPA
RESEARCH METHODOLOGY
Meaning of Research
Research is defined as “a scientific & systematic search for pertinent information on a
specific topic”. Research is an art of scientific investigation. Research is a systemized effort
to gain new knowledge. It is a careful inquiry especially through search for new facts in any
branch of knowledge. The search for knowledge through objective and systematic method of
finding solution to a problem is a research.
PROBLEM STATEMENT
The research problems, in general refers to sum difficulty with a researcher experience in the
contest of either a particular a theoretical situation and want to obtain a salutation for same.
The present Dissertation has been undertaken to do the Problem of NPA in
State Bank of India.
RESEARCH DESIGN
TYPES OF RESEARCH DESIGN
DESIGN
EXPLORATORY
RESEARCH DESIGN
DESCRIPTIVE
EXPERIMENTAL RESEARCH DESIGN
The present study is descriptive in nature, as it seeks to discover ideas and insight
to bring out new relationship. Research design is flexible enough to provide opportunity for
considering different aspects of problem under study. It helps in bringing into focus some
inherent weakness in enterprise regarding which in depth study can be conducted by
management.
SAMPLING DESIGN:
A sample design is a definite plan for obtaining a sample from the sampling frame. It refers
to the technique or the procedure that is adopted in selecting the sampling units from which
inferences about the population is drawn. Sampling design is determined before the
collection of the data.
DATA COLLECTION
PRIMARY DATA: -
TYPES OF DATA
PRIMARY DATA
SECONDRY DATA
METHODS OF PRIMARY DATA
OBSERVATION METHOD
QUETIONAIRE METHOD
INTERVIEW METHIOD
SCHEDULE METHOD
SECONDARY DATA: -
The secondary data on the other hand, are those which have already been collected by
someone else and which have already been passed through the statistical processes. When the
researcher utilizes secondary data then he has to look into various sources from where he can
obtain them. For e.g. Books, magazine, newspaper, Internet, publications and reports. In the
present study use of secondary data collected from website.
.
REASONS FOR RISE IN NPAs
FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of
the rising NPAs. But the problem of NPAs is more in public sector banks when compared to
private sector banks and foreign banks. The NPAs in PSB are growing due to external as well
as internal factors.
EXTERNAL FACTORS
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 now
and then India is hit by major natural calamities thus making the borrowers unable to pay
back there loans. Thus the bank has to make large amount of provisions in order to
compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to
achieve the production level thus they are not repaying the loans
Industrial sickness
Improper project handling , ineffective management , lack of adequate resources , lack of
advance technology , day to day changing govt. Policies give birth to industrial sickness.
Hence the banks that finance those industries ultimately end up with a low recovery of their
loans reducing their profit and liquidity.
Lack of demand
Entrepreneurs in India could not foresee their product demand and starts production which
ultimately piles up their product thus making them unable to pay back the money they
borrow to operate these activities. The banks recover the amount by selling of their assets,
which covers a minimum label. Thus the banks record the 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 worked
out 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
b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay
depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore
take utmost care in ensuring that the enterprise or business for which a loan is sought is a
sound one and the borrower is capable of carrying it out successfully .he should be a person
of integrity and good character.
Inappropriate technology
Due to inappropriate technology and management information system, market driven
decisions on real time basis can not be taken. Proper MIS and financial accounting system is
not implemented in the banks, which leads to poor credit collection, thus NPA. All the
branches of the bank should be 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, 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.