Arayabhatta Institute of Management & TechnologySeminar
Submission for internal assessment requirement of Seminar on
Project Presentation for Master of Business Administration Punjab
Technical University Jalandhar
Topic: Non-Performing AssetsSubmitted to: Mr. Pardeep Kumar
(Class In-charge & Lect. Of FM) Submitted by: Name: Parneet
Kaur Roll No.:95202239175
Introduction of SBOPAn Associate Bank of the State Bank of
India, State Bank of Patiala (SBP) was established in 1917 by Late
Bhupinder Singh, the Maharaja of Patiala state. SBP started its
operations from one branch called 'Chowk Fort', in Patiala. During
the time of the establishment, the state owned Bank was known as
Patiala State Bank. Patiala State Bank was renamed State Bank of
Patiala on 1 April 1960, when it became a wholly owned undertaking
of the Government of Punjab. There are as many as 750 branches of
SBP, spread across the major cities of India.2
I tr
cti
f
C
Established on 19th Feb' 1943 in Lahore, Oriental Bank of
Commerce (OBC) is one of the public sector banks in India. Its
modest beginning is creditable to its founder Late Rai Bahadur Lala
Sohan Lal, the first Chairman of the OBC. Within four years of
coming into existence, the country partitioned, the Bank shifted
its Registered Office from Lahore to Amritsar. The Oriental Bank of
Commerce was nationalized on 15th April 1980. The bank has 1,508
branches.
3
Classification of Assets
Performing Assets
Non-Performing Assets
4
DEFINITION OF NPASA NPA is a loan or an advance where; Interest
and/ or installment of principal remain overdue
for a period of more than 90 days in respect of a term loan, The
account remains out of order in respect of an overdraft/ cash
credit The bill remains overdue for a period of more than 90 days
in the case of bills purchased and discounted The installment or
interest remains overdue for two crop seasons in case of short
duration crops and for one crop season in case of long duration
crops
5
CATEGORIES OF NPASubstandard Assets Which has remained NPA for
a
period less than or equal to 12 months. Doubtful Assets Which
has remained in the sub-standard category for a period of 12 months
(mainly up to 3 years). Loss Assets where loss has been identified
by the bank or internal or external auditors or the RBI inspection
but the amount has not been written off wholly.
6
PROVISIONING NORMSStandard Assets general provision of a minimum
of
0.25% Substandard Assets 10% on total outstanding balance, 10 %
on unsecured exposures identified as sub-standard. Doubtful Assets
100% to the extent advance not covered by realizable value of
security. In case of secured portion, provision may be made in the
range of 20% to 100% depending on the period of asset remaining
sub-standard Loss Assets 100% of the outstanding
7
Impact f N As p
a ks
They erode current profits through provisioning requirements.
They result in reduced interest income. They require higher
provisioning requirements affecting profits and accretion to
capital. They limit recycling of funds, set in assets-liability
mismatches, etc. Adverse impact on Capital Adequacy Ratio. ROE and
ROA goes down because NPAs do not earn. Banks rating gets affected.
Banks cost of raising funds goes up. RBIs approval required for
declaration of dividend if Net NPA ratio is above 3%. Bad effect on
Goodwill & equity value.8
Underlying Reas ns f r N As in IndiaInternal FactorsInefficiency
in management Slackness in credit management and monitoring Lack of
co-ordination among lenders. Problem of bad credit appraisal.
Inappropriate Technology/technical problems Funds borrowed for a
particular purpose but not use for
the said purpose. Project not completed in time. Poor recovery
of receivables.9
Underlying Reas ns f r N As in IndiaContd. Excess capacities
created on non-economic costs. In-ability of the corporate to raise
capital through the issue of equity or other debt instrument from
capital markets. Business failures. Diversion of funds for
expansion\modernization\setting up new projects\ helping or
promoting sister concerns. Willful defaults, siphoning of funds,
fraud, disputes, management disputes, Mis-appropriation etc.,
Deficiencies on the part of the banks viz. in credit appraisal,
monitoring and follow-ups, delay in settlement of payments\
subsidiaries by government bodies etc.,
10
Underlying Reas ns f r N As in IndiaExternal Factors Recession.
Input / power shortage Price escalation. Exchange rate fluctuation
Accidents and natural calamities, Liberalization of Economy/
removal of
restrictions/reduction of tariffs. Sluggish legal system. Long
legal tangles. Changes that had taken place in labour laws11
Underlying Reas ns f r N As in IndiaContd. Lack of sincere
effort & Industrial recession. Scarcity of raw material, labour
and other resources. Shortage of raw material, raw material\input
price escalation, power shortage, industrial recession, excess
capacity, natural calamities like floods, accidents. Failures,
nonpayment\ over dues in other countries, recession in other
countries, externalization problems, adverse exchange rates etc.
Government policies like excise duty changes, Import duty changes
etc.,12
Preventive Meas rements f r NPAEarly Recognition of the Problem
Identifying Borrowers with Genuine Intent Timeliness and Adequacy
of response Focus on Cash Flows Management Effectiveness Multiple
Financing
13
Early Sympt msFour categories of early symptoms:Financial.
Operational and Physical. Attitudinal Changes. Others ( death of
person , competition in the market etc.)
14
Sale of NPAs to other Banks A NPA is eligible for sale to other
banks only if it has remained a NPA for at least two years in the
books of the selling bank The NPA must be held by the purchasing
bank at least for a period of 15 months before it is sold to other
banks but not to bank, which originally sold the NPA. The NPA may
be classified as standard in the books of the purchasing bank for a
period of 90 days from date of purchase and thereafter it would
depend on the record of recovery with reference to cash flows
estimated while purchasing. The bank may purchase/ sell NPA only on
without recourse basis. If the sale is conducted below the net book
value, the short fall should be debited to P&L account and if
it is higher, the excess provision will be utilized to meet the
loss on account of sale of other NPA.15
Meas res Initiated by R I & G vt. Compromise Settlement
Schemes Restructuring / Reschedulement Lok Adalat Corporate Debt
Restructuring Cell Debt Recovery Tribunal (DRT) Proceedings under
the Code of Civil Procedure Board for Industrial & Financial
Reconstruction (BIFR)/ AAIFR National Company Law Tribunal (NCLT)
Sale of NPA to other banks Sale of NPA to ARC/ SC under
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act 2002 (SRFAESI)
Liquidation16
INTERNATIONAL PRACTICESCredit Risk Mitigation Early Warning
Systems Asset Management Companies out of court restructuring
17
RESEARCH OPERATIONSSignificance of the studyThe main aim behind
making this report is to know how SBP is operating its business and
how NPAs play its role to the operations of the SBP bank. My study
is also focusing upon existing system in India to solve the problem
of NPAs and comparative analysis to understand which bank is
playing what role with concerned to NPAs. Thus, the study would
help the decision maker to understand the financial performance and
growth of the concerned banks as compared to the NPAs.
Objective of the study To know which is better in terms of NPAs
from both the banks
SBP and OBC banks. To understand what is Non Performing Assets
and what are the underlying reasons for the emergence of the NPAs.
To understand the impacts of NPAs on the operations of the
Banks.18
Objectives f the st dyTo know what steps are being taken by the
Indian banking
sector to reduce the NPAs? To evaluate the comparative ratios of
the SBP & OBC banks. To know why NPAs are the great challenge
to Banks. To understand the meaning & nature of NPAs. To study
the general reasons for assets become NPAs. What are the methods
adopted by the bank to look after NPA management19
Need For StudyFollowing Type of need arises for this study:To
study what kind of role NPAs are playing upon the
operations of the Bank. To know the variables available to
control NPAs. The need also has been felt to study the financial
performance of SBP bank.
20
Scope of the StudyBanks can improve their financial position or
can increase
their income from credits with the help of this project. This
project can be used for comparing the performance of the bank with
others. This can also be applicable to know the reasons of increase
in NPAs. This project also gives light upon Impact of NPAs. Concept
of NPAs can be made clear. To present a picture of movement of NPA
in The SBOP Bank.21
Limitati ns f the st dyThe data collected by me was not
sufficient for report
studying. I havent got enough time to study my report so that
becomes the cause of limitation in the study. Since my study is
based upon Secondary data, the practical operations as related to
NPAs are adopted by the banks are not learned. The solutions are
not applicable to every bank.
22
Research Methodology Research ProblemAs my training is at bank I
have got the project upon Non Performing Assets the great challenge
before the banks. This is my problem to be studied.
Research DesignThe research design tells about the mode with
which the entire project is prepared. My research design for this
study is basically analytical. Because I have utilized the large
number of data of the banking sector. In this project theoretical
study is also attempted.
Determining the data source The data source can be primary or
secondary. The primary data are those data which are used for the
first time in the study. However such data take place much time and
are also expensive.Contd.23
Contd.Whereas the secondary data are those data which are
already available in the market these data are easy to search and
are not expensive too. For my study I have utilized almost totally
the secondary data .But somehow I have also used primary data in
shape of interviews.
Tools used for analysis of dataThe data collected were analyzed
with the help of statistical tools like Ratio analysis, and trend
analysis. Tables are used to represent the consolidated data.
Graphical representation is also used for better comprehension
& presentation
Analyzing the DataThe Primary or secondary data both would never
be useful until they are edited and studied or analyzed. When the
person receives the data many unuseful data would also be there.
So, I analyzed the data and edited it and turned it in the useful
manner So, that it can become useful in my report study.
24
Contd. Interpretation of the dataWith the use of analyzed data I
managed to prepare my project report. But analyzing of the data
would not help my study to reach towards its objectives. The
interpretation of the data is required so that the others can
understand the Crux of the study in more simple way without any
problem so I have added the chapter of analysis that would explain
others to understand mystudy in simpler way.
Project WritingThis is the last step in preparing the project
report. The objective of the report writing was to report the
findings of the study to the concerned authorities. And to attach
all the requirements with your report.
25
Analysis Gross NPA Ratio:
Gross NPA Gross NPA Ratio = Gross AdvancesBanks As on March 31,
2009 Gross Gross Gross NPA NPAs Advances Ratio (%) (1) (2) (3)
57390 105812 4396081 6906472 1.31 1.53
*100
State Bank of Patiala Oriental Bank of Commerce
26
Gross NPA Ratio (Graphic presentation)Gross NPA Ratio (%)1.55
1.5 1.45 1.4 1.3 1.3 1.2 1.2
State Bank of Patiala
1.53Oriental Bank of Commerce
1.31tate an of Patiala riental an of o erce
27
InterpretationFindingsThe table above indicates the quality of
credit portfolio of
the banks. High gross NPA ratio indicates the low credit
portfolio of bank and vice-a-versa. We can see from the above Chart
that the Oriental Bank of Commerce has the higher gross NPA ratio
of 1.53 % as compared to the State Bank of Patiala with 1.31%.
28
Net NPA Rati Net NPA Ratio :Gross NPA-Provision Net NPA Ratio =
* 100 Gross Advances- ProvisionsAs on March 31, 2009 Net Net Net
NPA NPAs Advances Ratio (%) (1) (2) (3) 26363 Oriental Bank of
Commerce 44243 435872070 63204285 0.6 0.7
Banks
State Bank of Patiala
29
Net NP0.72 0.7 0.68 0.66 0.64 0.62 0.6 0.58 0.56 0.54
ati ( ra
ic rese tati
)
Net NPA Ratio (%)
State Ba k f Patiala
0.7 0.6
Orie tal Ba k f C mmerce
State Ba k f Patiala
Orie tal Ba k f C mmerce
30
InterpretationFindingsHigh NPA ratio indicates the high quantity
of risky assets
in the Banks for which no provision are made. The OBC bank has
the highest NPA ratio of 0.7 % as compared to the State Bank of
Patiala with 0.6% However there is not too much difference.
31
Provisioning Ratio Provision Ratio:
Total Provision Provision Ratio = Gross NPAsName of the Bank
Provision Ratio (%)
* 100
State Bank of Patiala Oriental Bank of Commerce
58.34
57.9032
Provisioning Ratio(Graphic presentation)Provision Ratio (%)58.4
58.3 58.2 58.1 58 57.9 57.8 57.7 57.6 State Bank of Patiala
Oriental Bank of Commerce
58.34
57.9
State Bank of Patiala Oriental Bank of Commerce
33
InterpretationFindings This Ratio indicates the degree of safety
measures adopted by the Banks. It has direct bearing on the
profitability, Dividend and safety of shareholders fund. If the
provision ratio is less, it indicates that the Banks has made under
provision. The highest provision ratio is showed by State Bank of
Patiala with58.34% as compared to OBC with 57.90%.34
Problem Asset Ratio Problem Asset Ratio:
Gross NPAs Problem Asset Ratio = Total AssetsAs on March 31,
2009 Banks Gross NPAs (1) State Bank of Patiala 57390 Oriental Bank
of Commerce 105812 112539 0.9435
* 100
Total Assets (2) 69665
Problem Asset Ratio (3) 0.82
Problem Asset Ratio(Graphic presentation)Problem Asset Ratio100%
90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
0.82
0.94
State Bank of Patiala Oriental Bank of Commerce
State Bank of Patiala
Oriental Bank of Commerce36
InterpretationFindingsWe determine the percentage of assets out
of total assets /
advances that are likely to become the Non- performing Assets as
problematic assets. From the above table it becomes clear that
Oriental Bank of Commerce have high problem Asset Ratio with 0.94%
as compare to SBOP. That Ratio implies that the both above banks
have the highest probability of creating NPAs in the near future.
However OBC have more chances of increasing future NPAs.37
Capital Adequacy Ratio Capital Adequacy Ratio:
Capital Capital Adequacy Ratio = Risk Weighted Assets * 100
Name of the Bank
Capital Adequacy Ratio (%) 0.60
State Bank of Patiala Oriental Bank of Commerce
0.9938
Capital Adequacy Ratio (Graphic presentation)Capital Adequacy
Ratio (%)1 0.9 0.8 0.7 0.6 0.5 0.4 0.3 0. 0.1 0
State Bank of Patiala Oriental Bank of Commerce
State Bank of Patiala
Oriental Bank of Commerce39
InterpretationFindings The capital adequacy ratio is important
for them to maintain as per the banking regulations. Each bank
needs to create the capital Reserve to compensate the Non
Performing Assets. Each Asset has been given a risk weight age as
per RBI guidelines Risk weighted Asset = Asset * Risk Weight age
So, More the Risk weighted Assets are, Bank has to maintain more
capital. As far as this ratio is concerned OBC is better than
SBOP.40
SolutionsDont Eliminate Manage Effectiveness of ARCs Well
Developed Capital Markets Contextual Decision Making
Securitization
41
FindingsOBC Bank shows high NPAs Ratio as compare to SBOP
Bank. High NPAs Ratio shows low credit portfolio of OBC Bank. In
analysis SBOP low risk profile as compare to OBC in terms of NPAs.
Study also indicates that major NPA increases because of govt.
recommended priority sectors. SBOP has better provisioning as
compare to OBC however OBC have better capital adequacy ratio than
SBOP.42
Recommendations Both the Banks should give stress upon credit
appraisal. The credit should be backed up by securitization. Banks
should create effectiveness in Management. Credit officer should
focus upon cash flow. Timely check out should be adopted. Both
Banks should make good provisioning policy. Banks should try their
best to recover NPAs. The problem should be identified very early
so that companies can try their best to
stop an asset or A/C becoming NPA. Banks should evaluate the
SWOT analysis of the borrowing companies i.e. how they would face
the environmental threats and opportunities with the use of their
strength and weakness, and what will be their possible future
growth in concerned to financial and operational performance. Each
bank should have its own independent credit rating agency which
should evaluate the financial capacity of the borrower before than
credit facility. The credit rating agency should regularly evaluate
the financial condition of the clients.43
ConclusionBoth the bank shows very much high NPA ratios. NPAs
represent high level of risk & low level of credit
appraisal. There are so many preventive measures available those
can be adopted to stop an Asset or A/C becoming NPA. There are some
certain guidelines made by RBI for NPAs which are adopted by banks.
SBOP is better in all terms than OBC instead of capital
Adequacy.
44
45
46