Page | 1 A PROJECT REPORT ON COMPERATIVE ANALAYSIS ON NON PERF ORMING ASSETS OF INDI AN BANKING INDUSTRY.”Submitted to Mumbai university, Mumbai For the partial fulfillment for the award of MMS degree Faculty Supervisor Submittedby: Prof.FarukhMistri Swapnil JainRoll No.-1033Faculty of management, MMS-IVthSem MIMR. MUMBAI INSTITUTE OF MANAGEMENT & RESERCH
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Former Director Of Industries, Govt Of Maharashtra
Ref No.: MIMR/0/10-11 Date: 26/07/2011
TO WHOMSOEVER IT MAY CONCERN
This is to certify that Mr.SwapnilJain ,abonafide student of Mumbai Institute Of
Management and Research, Mumbai has completed the project with title
“COMPERATIVE ANALAYSIS ON NON PERFORMING ASSETS OF INDIAN BANKING
INDUSTRY”. The project was undertaken in the partial fulfillment of master degree in
management studies under “University of Mumbai” during the academic year 2011-
2012
He has carried out his project under my guidance and supervision. His work was to
be satisfactory in all respects. He has duly acknowledged the sources of informationand data used for the purpose of completion of project report. We wish him all the
best for his future endeavors. .
Prof. FARUKH MISTRIProf. VISHWANATHAN
(Project Guide) (Director)
“J. K. KNOWLEDGE CENTRE”, Near Mbpt Hospital, Wadala (E), Mumbai - 400037
The accumulation of huge non-performing assets in banks has assumed great
importance. The depth of the problem of bad debts was first realized only in early
1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,
50,000 crore.
While gross NPA reflects the quality of the loans made by banks,
net NPA shows the actual burden of banks. Now it is increasingly evident that themajor defaulters are the big borrowers coming from the non-priority sector. The
banks and financial institutions have to take the initiative to reduce NPAs in a time
bound strategic approach.
Public sector banks figure prominently in the debate not only
because they dominate the banking industries, but also since they have much larger
NPAs compared with the private sector banks. This raises a concern in the industry
and academia because it is generally felt that NPAs reduce the profitability of a
bank, weaken its financial health and erode its solvency.
For the recovery of NPAs a broad framework has evolved for the
management of NPAs under which several options are provided for debt recovery
and restructuring. Banks and FIs have the freedom to design and implement their
own policies for recovery and write-off incorporating compromise and negotiated
The research methodology means the way in which we would complete our prospected task. Before undertaking any task it becomes very essential for any one
to determine the problem of study. I have adopted the following procedure incompleting my report study.
1. Formulating the problem
2. Research design
3. Determining the data sources
4. Analysing the data
5. Interpretation6. Preparing research report
(1) Formulating the problem
I am interested in the banking sector and I want to make my future in the banking
sector so decided to make my research study on the banking sector. I analyzed first
the factors that are important for the banking sector and I came to know that providing credit facility to the borrower is one of the important factors as far as the
banking sector is concerned. On the basis of the analyzed factor, I felt that theimportant issue right now as far as the credit facilities are provided by bank is non
performing assets. I started knowing about the basics of the NPAs and decided to
study on the NPAs. So, I chose the topic “Non Performing Assets the great
challenge before the Public Sector and Private Banks”.
(2) Research Design
The research design tells about the mode with which the entire project is prepared.
My research design for this study is basically analytical. Because I have utilized thelarge number of data of the Public Sector Banks.
The data source can be primary or secondary. The primary data are those data whichare used for the first time in the study. However such data take place much time and
are also expensive. Whereas the secondary data are those data which are alreadyavailable in the market. These data are easy to search and are not expensive too.for
my study I have utilised totally the secondary data.
(4) Analysing the data
The primary data would not be useful until and unless they are well edited andtabulated. When the person receives the primary data many unuseful data would also
be there. So, I analysed the data and edited them and turned them in the usefultabulations. So, that can become useful in my report study.
(5) Interpretation of the data
With use of analyzed data I managed to prepare my project report. But the analyzing
of data would not help the study to reach towards its objectives. The interpretation of
the data is required so that the others can understand the crux of the study in more
simple way without any problem so I have added the chapter of analysis that would
explain others to understand my study in simpler way.
(6) Project writing
This is the last step in preparing the project report. The objective of the report
writing was to report the findings of the study to the concerned authorities.
NPA. The three letters Strike terror in banking sector and business circletoday. NPA is short form of “Non Performing Asset”. The dreaded NPA rulesays simply this: when interest or other due to a bank remains unpaid formore than 90 days, the entire bank loan automatically turns a nonperforming asset. The recovery of loan has always been problem for banksand financial institution. To come out of these first we need to think is itpossible to avoid NPA, no cannot be then left is to look after the factorresponsible for it and managing those factors.
Defini t ions :
An asset, including a leased asset, becomes nonperforming when it ceasesto generate income for the bank. A „non-performing asset‟ (NPA) wasdefined as a credit facility in respect of which the interest and/ or installmentof principal has remained „past due‟ for a specified period of time.
With a view to moving towards international best practices and to ensuregreater transparency, it has been decided to adopt the „90 days’overdue’ norm for identification of NPAs, from the year ending March 31,2004. Accordingly, with effect from March 31, 2004, a non-performing asset(NPA) shall be a loan or an advance where;
Interest and/ or installment of principal remain overdue for a period ofmore 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 caseof bills purchased and discounted,
Interest and/or installment of principal remains overdue for two harvestseasons but for a period not exceeding two half years in the case of anadvance granted for agricultural purposes.
As a facilitating measure for smooth transition to 90 days norm, banks have
been advised to move over to charging of interest at monthly rests, by April
1, 2002. However, the date of classification of an advance as NPA should
not be changed on account of charging of interest at monthly rests. Banks
should, therefore, continue to classify an account as NPA only if the interest
charged during any quarter is not serviced fully within 180 days from the end
of the quarter with effect from April 1, 2002 and 90 days from the end of the
quarter with effect from March 31, 2004.
NPAs: AN ISSUE FOR BANKS AND FIs IN INDIA
To start with, performance in terms of profitability is a benchmark for any
business enterprise including the banking industry. However, increasing
NPAs have a direct impact on banks profitability as legally banks are not
allowed to book income on such accounts and at the sometime are forced to
make provision on such assets as per the Reserve Bank of India (RBI)guidelines. Also, with increasing deposits made by the public in the banking
system, the banking industry cannot afford defaults by borrower s since
NPAs affects the repayment capacity of banks. Further, Reserve Bank of
India (RBI) successfully creates excess liquidity in the system through
various rate cuts and banks fail to utilize this benefit to its advantage due to
the tear of burgeoning non-performing assets.
INDIAN ECONOMY AND NPAs
Undoubtedly the world economy has slowed down, recession is at its peak,
globally stock markets have tumbled and business itself is getting hard to do.
The Indian economy has been much affected due to high fiscal deficit, poor
infrastructure facilities, sticky legal system, cutting of exposures to emerging
markets by FIs, etc. Further, international rating agencies like, Standard &
Poor have lowered India‟s credit rating to sub-investment grade. Such
negative aspects have often outweighed positives such as increasing forex
reserves and a manageable inflation rate.
Under such a situation, it goes without saying that banks are no exception
and are bound to face the heat of a global downturn. One would be surprised
to know that the banks and financial institution in India hold nonperforming
assets worth Rs. 110000 crores Bankers have realized that unless the level
of NPAs is reduced drastically, they will find it difficult to survive.
GLOBAL DEVELOPMENTS AND NPAs
The core banking business is of mobilizing the deposits and utilizing it for
lending to industry. Lending business 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 credit risk, which arises from the failure ofborrower to fulfill its contractual obligations either during the course of a
transaction or on a future obligation.
A question that arises is how much risk can a bank afford to take? Recent
happenings in the business world -Enron, WorldCom, Xerox, Global
Crossing do not give much confidence to banks.In case after case, these
giant corporate becan1e bankrupt and failed to provide investors with clearer
and more complete information thereby introducing a degree of risk thatmany investors could neither anticipate nor welcome. The history of financial
institutions also reveals the fact that the biggest banking failures were due to
credit risk. Due to this, banks are restricting their lending operations to
secured avenues only with adequate collateral on which to fall back upon in
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 toprivate sector banks and foreign banks. The NPAs in PSB are growing dueto external as well as internal factors.
EXTERNAL FACTORS:-
Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works forrecovery of loans and advances. Due to their negligence and ineffectiveness
in their work the bank suffers the consequence of non-recover, therebyreducing their profitability and liquidity.
Willful Defaul
There are borrowers who are able to pay back 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.
When bankers give loan, he should analyze the purpose of the loan. To
ensure safety and liquidity, banks should grant loan for productive purposeonly. Bank should analyze the profitability, viability, long term acceptability of
the project while financing.
Poor credit appraisal system
Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it
back. They should use good credit appraisal to decrease the NPAs.
Managerial deficiencies
The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting
securities banks should consider the_
1. Marketability2. Acceptability
3. Safety4. Transferability.
The banker should follow the principle of diversification of risk based on the
famous maxim “do notkeep 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).
The irregularities in spot visit also increases the NPAs. Absence of regularly
visit of bank officials to the customer point decreases the collection ofinterest and principals on the loan. The NPAs due to willful defaulters can be
collected by regular visits.
Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of
the same have already affected the smooth operation of the credit cycle.
Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB
is increasing day by day.
PROBLEMS DUE TO NPA
Owners do not receive a market return on their capital .in the worst
case, if the banks fails, owners lose their assets In modern times this
may affect a broad pool of shareholders.
Depositors do not receive a market return on saving. In the worst caseif the bank fails, depositors lose their assets or uninsured balance.
Banks redistribute losses to other borrowers by charging higher
interest rates, lower deposit rates and higher lending rates repress
saving and financial market, which hamper economic growth.
Nonperforming loans epitomize bad investment. They misallocate
credit from good projects, which do not receive funding, to failed
projects. Bad investment ends up in misallocation of capital, and by
extension, labor andnatural resources. Nonperforming asset may spill
over the banking system andcontract the money stock, which may lead
to economiccontraction. This spillover effect can channelize through
Changes in Government policies. Death of borrower.
Competition in the market.
Preventive Measurement for NPA
Early Recogni t ion o f the Problem:-
Invariably, by the time banks start their efforts to get involved in a revival
process, it‟s too late to retrieve the situation- both in terms of rehabilitation of
the project and recovery of bank‟s dues. Identification of weakness in the
very beginning that is: When the account starts showing first signs of
weakness regardless of the fact that it may not have become NPA, is
imperative. Assessment of the potential of revival may be done on the basis
of a techno-economic viability study. Restructuring should be attempted
where, after an objective assessment of the promoter‟s intention, banks areconvinced of a turnaround within a scheduled timeframe. In respect of totally
unviable units as decided by the bank, it is better to facilitate winding up/
selling of the unit earlier, so as to recover whatever is possible through legal
means before the security position becomes worse.
Ident i fy ing B orrowers with Genu ine Intent : -
Identifying borrowers with genuine intent from those who are non- serious
with no commitment or stake in revival is a challenge confronting bankers.
Here the role of frontline officials at the branch level is paramount as they
are the ones who has intelligent inputs with regard to promoters‟ sincerity,
and capability to achieve turnaround. Based on this objective assessment,
banks should decide as quickly as possible whether it would be worthwhile
The general perception among borrower is that it is lack of finance that leads
to sickness and NPAs. But this may not be the case all the time.
Management effectiveness in tackling adverse business conditions is a very
important aspect that affects a borrowing unit‟s fortunes. A bank may commit
additional finance to an align unit only after basic viability of the enterprisealso in the context of quality of management is examined and confirmed.
Where the default is due to deeper malady, viability study or investigative
audit should be done –
it will be useful to have consultant appointed as early as possible to examine
this aspect. A proper techno economic viability study must thus become the
basis on which any future action can be considered.
Mult iple Financing :-
A.During the exercise for assessment of viability and restructuring, aPragmatic and unified approach by all the lending banks/ FIs as alsosharing of all relevant information on the borrower would go a long waytoward overall success of rehabilitation exercise, given the probability ofsuccess/failure.
B. In some default cases, where the unit is still working, the bank should
make sure that it captures the cash flows (there is a tendency on part of
the borrowers to switch bankers once they default, for fear of getting their
cash flows forfeited), and ensure that such cash flows are used for working
capital purposes. Toward this end, there should be regular flow of
information among consortium members. A bank, which is not part of the
consortium, may not be allowed to offer credit facilities to such defaulting
clients. Current account facilities may also be denied at no consortium banks
to such clients and violation may attract penal action. The Credit
Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful
information exchange on defaulting borrowers once the setup becomes fully
operational.
C. In a forum of lenders, the priority of each lender will be different. While
one set of lenders may be willing to wait for a longer time to recover its dues,
another lender may have a much shorter timeframe in mind. So it is possible
Once NPA occurred, one must come out of it or it should be managed inmost efficient manner. Legal ways and means are there to overcome andmanage NPAs. We will look into each one of it.
In case there is a sacrifice involved in the amount of interest in present value
terms, as at (b) above, the amount of sacrifice should either be written off
or provisionmade to the extent of the sacrifice involved.sacrifice is by way
of write off of the past interest dues, the asset should continue to be treated
as sub-standard.
6.6 Up gradation of restructured accounts:
The sub-standard accounts which have been subjected to restructuring etc.,
whether in respect of principal installment or interest amount, by whatever
modality, would be eligible to be upgraded to the standard category only
after the specified period i.e., a period of one year after the date when first
payment of interest or of principal, whichever is earlier, falls due, subject tosatisfactory performance during the period. The amount of provision made
earlier, net of the amount provided for the sacrifice in the interest amount in
present value terms as aforesaid, could also be reversed after the one year
period. During this one-year period, the substandard asset will not
deteriorate in its classification if satisfactory performance of the account is
demonstrated during the period. In case, however, the satisfactory
performance during the one-year period is not evidenced, the asset
classification of the restructured account would be governed as per the
applicable prudential norms with reference to the pre restructuring
payment schedule.
6.7 General:
These instructions would be applicable to all type of credit facilities including
working capital limits, extended to industrial units, provided they are fullycovered by tangible securities.
As trading involves only buying and selling of
commodities and the problems associated with manufacturing units such as
bottleneck in commercial production, time and cost escalation etc. are not
applicable to them, these guidelines should not be applied to restructuring/
rescheduling of credit facilities extended to traders.
While assessing the extent of security cover available to the credit facilities,
which are being restructured/ rescheduled, collateral security would also be
reckoned, provided such collateral is a tangible security properly charged tothe bank and is not in the intangible form like guarantee etc. of the promoter/
others.
6.8 Income recognition
There will be no change in the existing instructions on income recognition.
Consequently, banks should not recognise income on accrual basis in
respect of the projects even though the asset is classified as a standard
asset if the asset is a "non performing asset" in terms of the extant
instructions. In other words, while the accounts of the project may be
classified as a standard asset, banks shall recognize income in such
accounts only on realisation on cash basis if the asset has otherwise
become „non performing‟ as per the extant delinquency norm of 180 days.
The delinquency norm would become 90 days with effect from 31 March
2004.
Consequently, banks, which have wrongly recognised income in the past,should reverse the interest if it was recognised as income during the current
year or make a provision for an equivalent amount if it was recognised as
income in the previous year(s). As regards the regulatory
treatment of income recognised as „funded interest‟ and „conversion into
equity, debentures or any other instrument‟ banks should adopt the
following:
6.9 Funded Interest:
Income recognition in respect of the NPAs, regardless of whether these areor are not subjected to restructuring/ rescheduling/ renegotiation of terms ofthe loan agreement, should be done strictly on cash basis, only onrealisation and not if the amount of interest overdue has been funded. If,however, the amount of funded interest is recognised as income, a provision
for an equal amount shouldalso be made simultaneously. In other words,any funding of interest in respect of NPAs, if recognised as income, shouldbe fully provided for.
6.9.1. Conversion into equity, debentures or any other instrument:
The amount outstanding converted into otherinstruments would normally
comprise principal and the interestcomponents. If the amount of interest
dues is converted intoequity or any other instrument, and income is
recognised inconsequence, full provision should be made for the amount
ofincome so recognised to offset the effect of such income recognition. Such
provision would be in addition to the amount of provision that may be
necessary for the depreciation in the value of the equity or other instruments,
as per the investment valuation norms. However, if the conversion of interest
is into equity, which is quoted, interest income can be recognised at market
value of equity, as on the date of conversion, not exceeding the amount of
interest converted to equity. Such equity must thereafter be classified in the
"available for sale" category and valued at lower of cost or market value. In
case of conversion of principal and /or interest in respect of NPAs into
debentures, such debentures should be treated as NPA, abinitio, in the
same asset classification as was applicable to loan just before conversion
and provision made as per norms. This norm would also apply to zero
coupon bonds or other Instruments which seek to defer the liability of the
issuer. On such debentures, income should be recognised only on
realisation basis. The income in respect of unrealised interest, which is
converted into debentures or any other fixed maturity instrument, should be
recognised only on redemption of such instrument. Subject to the above, theequity shares or other instruments arising from conversion of the principal
amount of loan would also be subject to the usual prudential valuation norms
7.1.2. Accounts regularized near about the balance sheet date:
The asset classification of borrower accounts where a solitary or a few
credits are recorded before the balance sheet date should be handled with
care and without scope for subjectivity. Where the account indicates inherent
weakness on the basis of the data available, the account should be deemed
as a NPA. In other genuine cases, the banks must furnish satisfactory
evidence to the Statutory Auditors/Inspecting Officers about the manner of
regularization of the account to eliminate doubts on their performing status.
7.1.3Asset Classification to be borrower-wise and not facility-wise
It is difficult to envisage a situation when only one facility to a borrower
becomes a problem credit and not others. Therefore, all the facilities granted
by a bank to a borrower will have to be treated as NPA and not the particular
facility or part thereof which has become irregular. If the debits arising out of
devolvement of letters of credit or invoked guarantees are parked in a
separate account, the balance outstanding in that account also should be
treated as a part of the borrower‟s principal operating account for the
purpose of application of prudential norms on income recognition, asset
classification and provisioning.
7.1.4. Accounts where there is erosion in the value of security
A NPA need not go through the various stages of classification in cases of
serious credit impairment and such assets should be straightaway classifiedas doubtful or loss asset as appropriate. Erosion in the value of security can
be reckoned as significant when the realizable value of the security is less
than 50 per cent of the value assessed by the bank or accepted by RBI at
the time of last inspection, as the case may be. Such NPAs may be
straightaway classified under doubtful category and provisioning should be
The credit facilities backed by guarantee of the Central Government thoughoverdue may be treated as NPA only when the Government repudiates its
guarantee when invoked. This exemption from classification of Government
guaranteed advances as NPA is not for the purpose of recognition of
income. With effect from 1st April 2000, advances sanctioned against State
Government guarantees should be classified as NPA in the normal course, if
the guarantee is invoked and remains in default for more than two quarters.
With effect from March 31, 2001 the period of default is revised as more than
180 days.
7.2.1. Take -out Finance:
Takeout finance is the product emerging in the context of the funding of long-
term infrastructure projects. Under this arrangement, the institution/the bank
financing infrastructure projects will have an arrangement with any financial
institution for transferring to the latter the outstanding in respect of
suchfinancing in their books on a predetermined basis. In view of the time-
lag involved in taking-over, the possibility of a default in the meantime cannotbe ruled out. The norms of asset classification will have to be followed by the
concerned bank/financial institution in whose books the account stands as
balance sheet item as on the relevant date. If the lending institution observes
that the asset has turned NPA on the basis of the record of recovery, it
should be classified accordingly. The lending institution should not recognize
income on accrual basis and account for the same only when it is paid by the
borrower/ taking over institution (if the arrangement so provides). The
lending institution should also make provisions against any asset turning intoNPA pending its takeover by taking over institution. As and when
the asset is taken over by the taking over institution, the corresponding
provisions could be reversed. However, the taking over institution, on taking
over such assets, should make provisions treating the account as NPA from
Here, there are gross and net NPA data for 2007-08 to 2010- 11 we takenfor comparison among banks. These data are NPA AS PERCENTAGE OFTOTAL ASSETS. As we discuss earlier that gross NPA reflects the quality of
the loans made by banks. Among all the ten banks Dena Banks has highestgross NPA as a percentage of total assets in the year 2007-08 and also netNPA. Punjab National Bank shows huge difference between gross and netNPA. There is an almost same figure between BOI and BOB.
Gross NPA and Net NPA Of different Public Sector banks in the year2007-08
Gross NPA and Net NPA Of different Public Sector banks in the year200 8 -09
Gross NPA and Net NPA Of different Private Sector banks in the year2009-10
Gross NPA and Net NPA Of different Private Sector banks in the year2010 -11
Comparison of GROSS NPA with Public and Privatesectors banks forthe year 2009 -10
Comparison of GROSS NPA with all banks for the year 2007-08. The
growing NPAs affect the health of banks, profitability and efficiency. In the
long run, it eats up the net worth of the banks. We can say that NPA is not ahealthy sign for financial institutions. Here we take all the ten banks gross
NPA together for better understanding. Average of these ten banks gross
NPAs is 1.29 as percentage of total assets. So if we compare in private
sector banks AXIS and HDFC Bank are below average of all banks and in
public sector BOB and BOI. Average of these five private sector banks gross
When we talk about public sector banks they are more in priority sector and
they give advanced to weaker sector or industries. Public sector banks give
more loans to Agriculture, small scale and others units and as a result we
see that there are more number of NPA in public sector banks than private
sector banks. BOB given more advanced to priority sector in 2010-11 than
other four banks .
But when there are comparison between private bank and public sector bankstill ICICI Bank has more NPA in both priority and non-priority sector with thecomparison of public sector banks. Large NPA in ICICI Bank because thestrategy of bank that risk-reward attitude and initiative in each sector.
Above,we also discuss that ICICI Bank has highest deposit investment-advance than other banks.
Now, when we compare the all public sector and private sector banks on
priority and non-priority sector the figures are really shocking. Because in
compare of private sector banks, public sector banks numbers are very
http://www.bankcapitalgroup.net/services-non-performingassets.php http://rituparnodas.blogspot.com/2009/01/npa-management.htm l http://www.finanssivalvonta.fi/en/Statistics/Credit_market/Nonperforming_as