Npa final-report (1)

Capstone Project Report
On the topic
“A STUDY OF NON PERFORMING ASSETS IN INDIAN PRIVATE
BANKING SECTOR”

LOVELY PROFESIONAL UNIVERSITY
In Partial Fulfillment of the Requirements for the Award of Degree Of
MASTER OF BUSINESS ADMINISTRATION

Group Code: QDO5

Submitted by:Navjot Singh (11012664)
Rahul Kundliya (11001882)
Pankaj Bisht (11005154)
Sumit kumar (11001711)

1
CAPSTONE PROJECT – A study of Non Performing Assets on Indian Private Banks

ACKNOWLEDGEMENT

It is often said that journey of a thousand miles begins with the first, uncertain if we may add,
step. My journey was not too different. It involved the help, support and contribution of several
people.
It is difficult to ascertain the starting point for such thanks giving, and yet one usually starts with
the most significant contributor. In my case let us begin with the people who strictly confined
themselves to behind the scenes before I move on to the persons who directly affected the course
and scope of events.
I would like to extend our sincerest gratitude to Ms. Sakshi Sharma for her unrelenting support
and an uncanny habit of pointing out the flaws in the scheme of things at the most crucial
juncture, hence causing several opportunities for learning. I do not think it would be just to end
such thanks giving without thanking our respondents for co-operating with us.
Finally I also extend my heartiest thanks to all my friends and well wishers for being with me
and extending encouragement throughout the project.

2

CERTIFICATION/THESIS APPROVAL BY FACULTY ADVISOR
TO WHOMSOEVER IT MAY CONCERN

This is to certify that the project report titled “________________________________________”
carried out by Mr. ------------------------------------------------------------ (student name), S/o or D/O
------------------------------------------------------- (Father’s Name) has been accomplished under my
guidance & supervision as a duly registered MBA student of the Lovely Professional University,
Phagwara. This project is being submitted by him/her in the partial fulfillment of the
requirements for the award of the Master of Business Administration from Lovely Professional
University.
His dissertation represents his original work and is worthy of consideration for the award of the
degree of Master of Business Administration.

___________________________________
(Name & Signature of the Faculty Advisor)
Date:

3

DECLARATION
I, "________________________________ (student's name)”, hereby declare that the work
presented herein is genuine work done originally by me and has not been published or submitted
elsewhere for the requirement of a degree programme. Any literature, data or works done by
others and cited within this dissertation has been given due acknowledgement and listed in the
reference section.

_______________________
(Student's name & Signature)

_______________________
(Registration No.)

Date:__________________

4

DECLARATION
reference section.

_______________________
_______________________
(Registration No.)
Date:__________________

5

DECLARATION
I, "________________________________(student's name)”, hereby declare that the work
reference section.

_________________

_______________________
(Registration No.)
Date:__________________

6

DECLARATION

reference section.

_______________________

_______________________
(Registration No.)

Date:__________________

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TABLE OF CONTENTS

S.NO

PARTICULARS

PAGE.NO

1.
CHAPTER 1
INTRODUTION
1.1 Introduction To Non Performing Assets
1.2 Types of Banks

11-15

1.3 Non Performing Assets
1.4 Beneficiaries of the study

2.

Chapter 2
Review of Literature

3.

Chapter 3
Research Design & Methodology

4.

16-19

20-23

Chapter 4
Data Analysis and Interpretation

24-41

Reasons for an account becoming NPAs
Impact of NPAs on bank performance
Consequences of NPAs
Measures to Control NPAs

42-49

8

5.

Chapter 6
Suggestions & Conclusion

6.

50-52

Chapter 7
Bibliography

7.

53-54

Appendix

55-60

9

10

“A STUDY OF NON PERFORMING ASSETS IN INDIAN
PRIVATE BANKING SECTOR”

Introduction
Banking sector reforms in India has progressed promptly on aspects like interest rate
deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,
asset classification, income recognition and provisioning. But it could not match the pace with
which it was expected to. The accomplishment of these norms at the execution stages without
restructuring the banking sector as such is creating havoc, this research paper deals with the
problem of having non-performing assets, the reasons for mounting of non-performing assets and
the practices present in other countries for dealing with non-performing assets.
During pre-nationalization period and after independence, the banking sector remained in private
hands Large industries who had their control in the management of the banks were utilizing
major portion of financial resources of the banking system and as a result low priority was
accorded to priority sectors. Government of India nationalized the banks to make them as an
instrument of economic and social change and the mandate given to the banks was to expand
their networks in rural areas and to give loans to priority sectors such as small scale industries,
self-employed groups, agriculture and schemes involving women.
To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled the
banking system to expand its network in a planned way and make available banking series to the
large number of population and touch every strata of society by extending credit to their
productive Endeavour’s. This is evident from the fact that population per office of commercial
bank has come down from 66,000 in the year 1969 to 11,000 in 2004. Similarly, share of
advances of public sector banks to priority sector increased from 14.6% in 1969 to 44% of the
net bank credit. The number of deposit accounts of the banking system increased from over 3
crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to over 2.68
crores.
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 crores. 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 the major 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
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the private sector banks. This raises a concern in the industry and academia because it is
generally felt that NPAs reduce the profitability of banks, 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 settlements.

TYPES OF BANKS:
PUBLIC SECTOR BANKS:
Public sector banks are the ones in which the government has a major holding. Public Sector
Banks dominate 75% of deposits and 71% of advances in the banking industry. Public Sector
Banks control commercial banking India, these can be further classified into:
1) Nationalized banks
2) State Bank of India and its associates
3) Regional Rural Banks

PRIVATE SECTOR BANKS:
Private sector banks came into existence to supplement the performance of public sector banks
and serve the needs of the economy better. As the public sector banks were merely in the hands
of the government, banks had no incentive to make profits and improve their financial capability.
The main difference between public and private sector banks is only that public sector banks
follow the RBI interest rules strictly but private banks can make some changes in them but only
after the approval from the RBI. Private sector banks are the banks which are controlled by the
private lenders with the approval from the RBI. Their interest rates are slightly costly as
compared to public sector banks.

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NPA (NON PERFORMING ASSET)
Action for enforcement of security interest can be initiated only if the secured asset is classified
as Non Performing Asset. Non Performing Asset means an asset or account of borrower, which
has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines relating to asset classification issued by RBI. 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 improvement in the payment and settlement systems,
recovery climate, up gradation of technology in the banking system, etc., it was decided to
dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that
date, a Non performing asset (NPA) shell be an advance where interest and /or installment of
principal remain overdue for a period of more than 180 days in respect of a Term Loan, the
account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash
Credit(OD/CC), the bill remains overdue for a period of more than 180 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 purpose, and any amount to be received remains overdue for a period of more
than 180 days in respect of other accounts.
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, form the year
ending March 31, 2004. Accordingly, with effect from March 31, 2004, a non-performing asset
(NPA) shell be 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' 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 purpose, and any
amount to be received remains overdue for a period of more than 90 days in respect of other
accounts.
Non-Performing Asset or NPA, It is called such as while it is an "Asset", it does not bring
substantial income to its Owner or is just dormant. Call it a white elephant if you wish. Basically,
it is having something that should work but does not. It is supposed to make Non- Performing
Assets work. The RBI has issued guidelines to banks for classification of assets into four
categories.

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A. Standard (Assets):
These are loans which do not have any problem are less risk.
B .Substandard (Assets):
These are assets which come under the category of NPA for a period of less than 12 months.
C. Doubtful (Assets):
These are NPA exceeding 12 months.
D. 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.

BENEFICIARIES OF THE STUDY:
The outcomes analyzed from this study would be beneficial to various sections such as:
Banks: This study would primarily benefit the banks in identifying the sectors to be given
priority for lending money.
Future Researchers: The results of the study would also benefit the future researchers as this
study would enhance their knowledge about the topic. They would get an insight of the present
scenario of this industry as this is the emerging industry in the financial sector of the economy.
Students: This research would help students in understanding of NPA concept as a whole.

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NON PERFORMING ASSETS AS A MAJOR ISSUE AND CHALLENGE FOR
BANKING INDUSTRY:
Non-performing Assets are threatening the stability and demolishing bank‘s profitability through
a loss of interest income, write-off of the principal loan amount itself. RBI issued guidelines in
1993 based on recommendations of the Narashimam Committee that mandated identification and
reduction of NPAs be treated as a national priority’ because the level of NPA act as an indicator
showing the bankers credit risks and efficiency of allocation of resource. The financial reforms
in Indian bank industry have helped largely to clean NPA which was around Rs 52,000 crores in
the year 2004. The earning capacity and profitability of the bank are highly affected due to this
NPA.
GROSS NPA AND NET NPA
Gross NPA is an advance which is considered irrecoverable, for bank has made provisions, and
which is still held in banks' books of account. Net NPA is obtained by deducting items like
interest due but not recovered, part payment received and kept in suspense account from Gross
NPA. The Reserve Bank of India states that, compared to other Asian countries and the US, the
gross non-performing asset figures in India seem more alarming than the net NPA figure. The
problem of high gross NPAs is simply one of inheritance. Historically, Indian public sector
banks have been poor on credit recovery, mainly because of very little legal provision governing
foreclosure and bankruptcy, lengthy legal battles, sticky loans made to government public sector
undertakings, loan waivers and priority sector lending.
Net NPAs are comparatively better on a global basis because of the stringent provisioning norms
prescribed for banks in 1991 by Narashimam Committee. In India, even on security taken against
loans, provision has to be created. Further, Indian banks have to make a 100 per cent provision
on the amount not covered by the realizable value of securities in case of ''doubtful'' advance,
while in some countries; it is 75 per cent or just 50 per cent. The ASSOCHAM Study titled Solvency Analysis of the Indian Banking Sectors, reveals that on an average 24 per cent rise in
net non performing assets have been registered by 25 public sector and commercial banks during
the second quarter of the 2009 as against 2008. According to the RBI, "Reduction of NPAs in the
Indian banking sector should be treated as a national priority item to make the system stronger,
resilient and geared to meet the challenges of globalization. It is necessary that a public debate is
started soon on the problem of NPAs and their resolution."

15

16

Review of Literature:
According to a study by Brownbridge (1998), most of the bank failures were caused by nonperforming loans. Arrears affecting more than half the loan portfolios were typical of the failed
banks. Many of the bad debts were attributable to moral hazard: the adverse incentives on bank
owners to adopt imprudent lending strategies, in particular insider lending and lending at high
interest rates to borrowers in the most risky segments of the credit markets.
Bloem and Gorter (2001) suggested that a more or less predictable level of non-performing
loans, though it may vary slightly from year to year, is caused by an inevitable number of ‘wrong
economic decisions by individuals and plain bad luck (inclement weather, unexpected price
changes for certain products, etc.). Under such circumstances, the holders of loans can make an
allowance for a normal share of non-performance in the form of bad loan provisions, or they may
spread the risk by taking out insurance. Enterprises may well be able to pass a large portion of
these costs to customers in the form of higher prices. For instance, the interest margin applied by
financial institutions will include a premium for the risk of nonperformance on granted loans.
At this time, banks’ non-performing loans increase, profits decline and substantial losses to
capital may become apparent. Eventually, the economy reaches a trough and turns towards a new
expansionary phase, as a result the risk of future losses reaches a low point, even though banks
may still appear relatively unhealthy at this stage in the cycle.
According to Gorter and Bloem (2002) non-performing loans are mainly caused by an inevitable
number of wrong economic decisions by individuals and plain bad luck (inclement weather,
unexpected price changes for certain products, etc.). Under such circumstances, the holders of
loans can make an allowance for a normal share of nonperformance in the form of bad loan
provisions, or they may spread the risk by taking out insurance.
Petya Koeva (2003), his study on the Performance of Indian Banks. During Financial
Liberalization states that new empirical evidence on the impact of financial liberalization on the
performance of Indian commercial banks. The analysis focuses on examining the behavior and
determinants of bank intermediation costs and profitability during the liberalization period. The
empirical results suggest that ownership type has a significant effect on some performance
indicators and that the observed increase in competition during financial liberalization has been
associated with lower intermediation costs and profitability of the Indian banks.
Das and Ghosh (2003) empirically examined non-performing loans of India’s public sector
banks in terms of various indicators such as asset size, credit growth and macroeconomic
condition, and operating efficiency indicators. Sergio (1996) in a study of non-performing loans
in Italy found evidence that, an increase in the riskiness of loan assets is rooted in a bank’s
lending policy adducing to relatively unselective and inadequate assessment of sectoral
prospects.
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Vradi et.al (2006), his study on´ Measurement of efficiency of bank in India concluded that in
modern world performance of banking is more important to stable the economy .in order to see
the efficiency of Indian banks we have see the fore indicators i.e. profitability, productivity,
assets, quality and financial management for all banks includes public sector, private sector
banks in India for the period 2000 and 1999 to 2002-2003. For measuring efficiency of banks we
have adopted development envelopment analysis and found that public sectors banks are more
efficient then other banks in India
Brijesh K. Saho et.al (2007), this paper attempts to examine, the performance trends of the
Indian commercial banks for the period: 1997-98 - 2004-05. Our broad empirical findings are
indicative in many ways. First, the increasing average annual trends in technical efficiency for all
ownership groups indicate an affirmative gesture about the effect of the reform process on the
performance of the Indian banking sector. Second, the higher cost efficiency accrual of private
banks over nationalized banks indicate that nationalized banks, though old, do not reflect their
learning experience in their cost minimizing behavior due to X-inefficiency factors arising from
government ownership. This finding also highlights the possible stronger disciplining role played
by the capital market indicating a strong link between market for corporate control and efficiency
of private enterprise assumed by property right hypothesis. And, finally, concerning the scale
elasticity behavior, the technology and market-based results differ significantly supporting the
empirical distinction between returns to scale and economies of scale, often used interchangeably
in the literature.
Roma Mitra et.al (2008), A stable and efficient banking sector is an essential precondition to
increase the economic level of a country. This paper tries to model and evaluate the efficiency of
50 Indian banks. The Inefficiency can be analyzed and quantified for every evaluated unit. The
aim of this paper is to estimate and compare efficiency of the banking sector in India. The
analysis is supposed to verify or reject the hypothesis whether the banking sector fulfils its
intermediation function sufficiently to compete with the global players. The results are insightful
to the financial policy planner as it identifies priority areas for different banks, which can
improve the performance. This paper evaluates the performance of Banking Sectors in India.
B.Satish Kumar (2008), in his article on an evaluation of the financial performance of Indian
private sector banks wrote Private sector banks play an important role in development of Indian
economy. After liberalization the banking industry underwent major changes. The economic
reforms totally have changed the banking sector. RBI permitted new banks to be started in the
private sector as per the recommendation of Narashiman committee. The Indian banking industry
was dominated by public sector banks. But now the situations have changed new generation
banks with used of technology and professional management has gained a reasonable position in
the banking industry.
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M. Karunakar et.al (2008), Study the important aspect of norms and guidelines for making the
whole sector vibrant and competitive. The problem of losses and lower profitability of NonPerforming Assets (NPA) and liability mismatch in Banks and financial sector depend on how
various risks are managed in their business. Besides capital to risk Weightage assets ratio of
public sector banks, management of credit risk and measures to control the menace of NPAs are
also discussed. The lasting solution to the problem of NPAs can be achieved only with proper
credit assessment and risk management mechanism. It is better to avoid NPAs at the market
stage of credit consolidation by putting in place of rigorous and appropriate credit appraisal
mechanisms.
Nelson M. Waweru et.al (2009), Study that many financial institutions that collapsed in Kenya
since 1986 failed due to non performing loans, this study investigated the causes of nonperforming loans, the actions that bank managers have taken to mitigate that problem and the
level of success of such actions. Using a sample of 30 managers selected from the ten largest
banks the study found that national economic downturn was perceived as the most important
external factor. Customer failure to disclose vital information during the loan application process
was considered to be the main customer specific factor. The study further found that Lack of an
aggressive debt collection policy was perceived as the main bank specific factor, contributing to
the non performing debt problem in Kenya.
Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of great
importance given its association with bank failure and financial crises, and it should therefore be
of interest to developing countries. The purpose of this paper is to build a multivariate model,
incorporating macroeconomic and bank-specific variables, to forecast non-performing loans in
the banking sector of Barbados. On an aggregate level, our model outperforms a simple random
walk model on all forecast horizons, while for individual banks; these forecasts tend to be more
accurate for longer prediction periods only.

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RESEARCH PROBLEM:
Indian banking industry, which was in glory phase once upon a time, has been facing a lots of
challenges on non performing assets at present scenario. Many banks have kept their NPAs
under the control but some banks are not able to control their NPA levels. They are facing lots of
problems. There can be various reasons behind this NPA. Non-performing assets has been hitting
the profitability of the banks or it can be said that due to NPA, the profitability of the banks are
going down day by day. The subsidiary for this is the functioning of Debt Recovery Tribunal
(DRT) which is a judiciary for the bank for recovery amount from the default customers. These
can be considered as a research problem based on which the information is collected, the object
is measured and the data is analyzed and interpreted.

OBJECTIVES OF THE STUDY:
The objective of the project was to find how this Non-Performing Assets generate and what its
impact on the profitability of the bank and how it can be reduced. The study is addressed to the
following objectives:






To study the trend of NPAs during last nine years.
To determine the factors affecting NPA.
To find out the effectiveness of recovery mechanism adopted by banks for NPA.
To establish relationship between NPAs and profitability of private banks.
To suggest measures to reduce NPAs in private sector.

NEED OF THE STUDY:
The non-performing assets that are not able to generate income for the bank are the great threat
for the banking institution. Rather than generating profit for the bank, NPA drains off the income
earned by the other performing asset by the way of paying interest to the real owner of the
resources. It affects the overall profitability of the bank adversely by affecting the return on
equity and return on asset. There are certain ways through which it affects the financial
institutions are as follows:
Thus, the need of the study of the NPA is must necessary due to these reasons. These reasons are
the crucial for any bank at present. One has to realize these matters and has to take corrective
action against NPA reasons, as for as possible one has to convert all the NPA accounts into PA
accounts. As far as the importance of the study is concern, without the study, one can’t identify
the whole gamut of the NPA. To know, how the account is becoming NPA is must necessary.
After identifying the reason behind the particular NPA account, one can go for a step ahead. That
means for the step of how to convert into PA and how to prevent other account from becoming
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NPA. As for as possible, one has to eradicate the reasons of NPAs. Thus, it is highly importance
to study NPA in detail.

SCOPE OF THE STUDY:
Being a project scope will be based on the day-to-day teamwork operations. The data will be
collected from various aspects of loans and advances in various private banks of Jalandhar and
Phagwara (Punjab).


To understand the concept of NPA in Indian Private Banking industry.



To understand the causes of NPA.



To analyze the past trends of NPA of Private banks.

HYPOTHESES FORMULATION:
H1: There exists a relationship between NPAs and profitability of private banks.
H2: The recovery mechanisms adopted by private banks are effective.

COLLECTION OF DATA:
The relevant data was collected from both primary and secondary sources. Census method of
data collection was applied to collect primary information. Research population for the study
comprised of private banks operating in Jalandhar and Phagwara (Punjab). The response rate for
the present study came to be 86.66 % since 13 banks responded out of 15 private banks in the
concerned area. The 13 banks surveyed are 1) Axis Bank, 2) Citi Bank, 3) Federal Bank; 4) HDFC
Bank, 5) ICICI Bank, 6) IndusInd Bank, 7) ING Vysya Bank, 8) Karnataka Bank, 9) Karur Vysya
Bank, 10) Kotak Mahindra Bank, 11) South Indian Bank, 12) Jammu and Kashmir Bank, 13) IDBI
Bank.
The secondary sources comprised of various audited reports and publications of the Reserve
Bank of India. Detailed information were collected mainly from the various volumes of the
“Statistical Tables Relating to Banks in India” covering the period from 2000 - 2009 which were
published by the Statistical Department of Reserve Bank of India, Mumbai from the website
www.rbi.org.in.

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DATA COLLECTION FORM:
A structured questionnaire assessing work system, recovery system, processing loan applications
and other impeding factors associated with loan portfolio was used to collect primary
information from the private banks. Items based on 5-point Likert scale and multiple chioce
questions were included in the questionnaire.

STATISTICAL TOOLS:
The analyses of primary data were conducted through descriptive statistics, factor analysis,
Pearson correlation and one-sample t-test. The secondary data was analyzed through column
charts, line charts, bar charts and percentages.

LIMITATIONS:
1. The secondary data was available for 9 years only.
2. The present study is confined to Jalandhar and Phagwara areas only.
3. The conclusions of the study are based on the responses of the banks and secondary
information. Thus, some amount of subjectivity might remain.

23

24

ANALYSES OF PRIMARY DATA:
I) MULTIPLE CHOICE QUESTIONS:
Table: 1 Since how long the branch is functioning?
Percentage
Frequency
Valid

(%)

Cumulative
Valid Percent

Percent

0-2 years

1

7.7

7.7

7.7

2-3 years

2

15.4

15.4

23.1

3-5 years

5

38.5

38.5

61.5

5- years above

5

38.5

38.5

100.0

13

100.0

100.0

Total

Interpretation:
39% of banks surveyed showed 3-5 years of functioning experience. Also, the same percentage
(39%) was found to have an experience above 5 years.

Table : 2 Since how long the presence of NPA is observed in your
Percentage
Frequency
Valid

(%)

Cumulative
Valid Percent

Percent

0-1yrs

3

23.1

23.1

23.1

1-2yrs

7

53.8

53.8

76.9

above -5yrs

3

23.1

23.1

100.0

13

100.0

100.0

Total

Interpretation:
54% of banks observed NPA in their branch from 1-2 years.

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Table: 3 What is the appropriate value of NPA is your branch? (Rs in lakhs)
Percentage
Frequency
Valid

(%)

Cumulative
Valid Percent

Percent

1-10

5

38.5

38.5

38.5

10-20

6

46.2

46.2

84.6

20-30

1

7.7

7.7

92.3

above - 40

1

7.7

7.7

100.0

13

100.0

100.0

Total

Interpretation:
46% of banks have 20 lakhs (approximate) of NPAs and 39% of banks have 1-10 lakhs
(approximate) NPA.

Table : 4 For which category the NPA is being observed
Percentage
Frequency
Valid

(%)

Cumulative
Valid Percent

Percent

Personal loan

6

46.2

46.2

46.2

Housing loan

6

46.2

46.2

92.3

Agri-term loan

1

7.7

7.7

100.0

13

100.0

100.0

Total

Interpretation:
46.2% banks observed NPAs are in the category of personal loans, also, same percentage
(46.2%) observed NPAs in housing loans category.

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Table : 5 Measures for recovery of NPA adopted by the bank
Percentage
Frequency
Valid

(%)

Cumulative
Valid Percent

Percent

Legal measures

6

46.2

46.2

46.2

Both legal and non-legal

7

53.8

53.8

100.0

13

100.0

100.0

Total

Interpretation:
53.8% banks adopted both legal and non-legal measures of recovery whereas 46.2% banks
adopted legal measures only.

Table: 6 To what extent NPA has been converting into good asset.
Percentage
Frequency
Valid

(%)

Cumulative
Valid Percent

Percent

1%

1

7.7

7.7

7.7

2%

1

7.7

7.7

15.4

4%

1

7.7

7.7

23.1

5%

1

7.7

7.7

30.8

>5%

9

69.2

69.2

100.0

Total

13

100.0

100.0

Interpretation:
After survey 69.2% banks showed that they could convert more than 5% NPA into good assets.

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Table: 7 Has the profitability improved after adopting reduction technique?
Percentage
Frequency
Valid

(%)

Cumulative
Valid Percent

Percent

Definitely improved

5

38.5

38.5

38.5

improved

7

53.8

53.8

92.3

Can’t say

1

7.7

7.7

100.0

13

100.0

100.0

Total

Interpretation:
53.8% banks showed that their profitability improved and 38.5% banks confirmed that their
profitability definitely improved after adopting NPA reduction techniques.

II) FACTOR ANALYSIS:
Factorial profile of recovery mechanism adopted for NPA by banks
Table: 8

No. of No. of
rounds factors

Communalities Iterations KMO
Items
(Above)
(Above) Deleted

Items
V.E
Remained %

1

3

.60

4

.45

1

8

80.36

Factor
Loading
(Above)
.55

2

3

.65

5

.34

-

7

80.81

.70

28

Descriptive Statistics of Factors affecting NPAs:
Table: 9
Mean

Standard
Deviation

Factor
Loading

Communality

3.15

.987

.940

.891

3.00

1.780

.837

.710

Factors

Variance Cronbach’
Explained s Alpha
(%)
28.79
.721

F1 Recession and
management failure
Recession in economy
Management Failure
28.39

.709

23.62

.753

F2 Execution Problems
2.92
Improper Credit
Appraisal
Difficulty in executing
Repayment procedure
Cost of effective legal
measures

1.115

.850

.762

3.46

.967

.827

.713

2.46

1.391

.730

.694

F3 Default by customers
2.77

1.235

.914

.927

2.15

1.281

.854

.960

Willful Default
Absence of Security

Interpretation:
Factors affecting NPAs were subjected to data purification, which resulted into three factors,
with KMO value = 0.34, variance explained = 80.81%, communalities above .65 and Cronbach’s
Alpha above .70. The factors extracted were “Recession and management failure”, “Execution
Problems” and “Default by customers”.

29

Factorial profile of recovery mechanism adopted for reducing NPA
Table: 10

No. of No. of
rounds factors

(Above)
(Above)

Items
Deleted

Items
V.E
Remained %

1

2

.15

3

.45

2

6

73.43

Factor
Loading
(Above)
.50

2

2

.85

3

.50

-

4

89

.85

Descriptive Statistics of Recovery Mechanisms adopted to reduce NPAs:
Table: 11

Mean

Standard
Deviation

Factor
Loading

Communality

Self involvement

2.08

1.256

.960

.923

Recovery campus

2.00

1.414

.951

.910

Factors
F1 Banking Measures

Explained s Alpha
(%)
48.25
.912

41.71

F2 Legal Measures
Lok adalats

2.31

1.494

.932

.892

SARFASI Act

1.85

1.214

.891

.793

.874

Interpretation:
Factor analysis was run on the recovery mechanism adopted by private banks for reducing NPAs
which completed in two rounds after deleting two items, one with communality below 0.50 and
other with missing factor loading. Finally, two factors emerged “Banking Measures”
and “Legal Measures”, with KMO value of .50, variance explained = 89%, communalities above
.85 and Cronbach’s Alpha .80.

30

III) TESTING OF HYPOTHESES:
H1: There exists a relationship between NPAs and profitability of private banks.
Table: 12
Pearson Correlation
Net NPA
Net NPA

Pearson Correlation

Net Profit
1

.480

Sig.
Net Profit

.191

Pearson Correlation

.480

Sig.

1

.191

Interpretation:
Pearson correlation was applied to test this hypothesis. The value of coefficient of correlation r
obtained was .480. Since the significance value was above 0.05 (p =.191), it shows that NPA and
profitability of private banks surveyed is uncorrelated. Thus this hypothesis is rejected.

H2: The recovery mechanisms adopted by private banks are effective.
Table: 13

Factors

One- sample t-test (Test value = 2)
t
df

Sig. level

F1

.108

12

.916

F2

.224

12

.827

Interpretation:
This hypothesis was tested through one sample t-test. Overall mean calculated was 2.06 and both
the factors were compared with the test value = 2. Both the factors were found to be
insignificant, thus hypothesis stands rejected. This implies that the recovery mechanism adopted
by private banks to reduce NPAs is not effective.

31

ANALYSIS & INTERPRETATION OF SECONDARY DATA:
I. ANALYSIS OF TREND AND ASSET QUALITY OF GROSS ADVANCES AND GROSS
NON PERFORMING ASSETS:

Table 1.1: GROSS ADVANCES AND GROSS NPAs OF PRIVATE SECTOR BANKS

Years

Gross NPAs
Percent to Gross
Advances

Gross
Advances(cr.)

Percent to Total
Assets

Amount(cr.)
2000-01

71237

5963

8.4

3.4

2001-02

120958

11662

9.6

4.4

2002-03

146047

11782

8.1

4

2003-04

177419

10381

5.9

2.8

2004-05

197832

8782

4.4

2.1

2005-06

317690

7811

2.5

1.4

2006-07

420745

9256

2.2

1.2

2007-08

525845

12983

2.5

1.4

2008-09

585065

16983

2.9

1.7

Interpretation:
The following table helps in examining trends of gross advances, gross NPAs, ratio of gross
NPAs to gross advances and ratio of gross NPAs to total assets. We can also visualize the trend
of private sector banks by using gross advances, gross NPAs and ratios of gross NPA to gross
advances and total assets. We can clearly see from the above table that the gross advances are
increasing continuously and there is an increase of over 721 percent as compared to 2000-01 and
2008-09. This clearly shows that apart from the presence of private sector banks also get a great
opportunity to prove them. The amount of gross NPAs shows a mix kind of trend over a periodas till 2002-03 and from 2005-06 to 2008-09 there is a continuous increase in gross NPA amount
while there is a decrease in it from a period ranging from 2003-04 to 2005-06. NPA ratios related
to gross NPA also shows a mix trend over a period. But if we see the last three years data, we
can clearly see that there is an increase in gross NPA to total assets and gross NPA to gross
advances which means that the asset quality is diminishing instead of improving.
Thus, if we compare both public and private sector banks we can say that public sector banks are
better than private sector banks as the efficiency and asset quality of public sector banks had
shown a continuous improvement if compare relatively to private sector banks.
32

II. ANALYSIS OF TREND AND ASSET QUALITY OF NET ADVANCES ON NET NON
PERFORMING ASSETS:

Table 1.2: NET ADVANCES AND NET NPAS OF PRIVATE SECTOR BANKS

Years

2000-01

Net NPAs
Percent to Net
Advances

Net Advances(cr.)
Amount(cr.)
68059
3700

Percent to
Total
Assets

5.4

2.3

2001-02

116473

6676

5.7

2.5

2002-03

138951

3963

2.8

2.3

2003-04

170754

4128

2.4

1.3

2004-05

191397

4212

2.2

1

2005-06

312962

3171

1

0.6

2006-07

414752

4028

1

0.5

2007-08

518403

5607

1.1

0.6

2008-09

575336

7418

1.3

0.7

Interpretation:
After the analysis of gross advances and gross NPA, the study investigates the net advances; net
NPAs, ratio of net NPAs to net advances and net NPAs to total assets.
If we use the same criteria for private sector banks, we can see despite of continuous increase in
net advances in all years the net NPA ratio to net advances and total assets increases in last 2-3
years that is in 2007-08 and 2008-09 while all other years’ shows a decreasing trend. That means
only in last 2-3 years the efficiency and asset quality of private sector banks is questionable
otherwise in all other previous years the banks had shown a continuous improvement. As, if we
see overall performance of the private sector banks we can say that there is a wide improvement
as the net NPA ratios changes from 5.4 to 1.3 and from 2.3 to 0.7.
Thus, after comparing both the gross and net NPA ratio, if we compare Private sector banks are
much more efficient than other sector banks.

33

OBJECTIVE 1:
The trend of NPA in last nine years was analyzed through secondary data. The percentages of
both gross and net NPA to gross and net advances were found to increase during first two years
but continuously decrease after 2001 – 2002.

CLASSIFICATION OF LOAN ASSETS OF NPAS OF PRIVATE SECTOR BANKS
Table: 1.3

Years

Classification of Loan Assets (Amount in Rs. Crore)
Sub-standard
Standard Assets
Assets
Doubtful Assets
Loss Assets
Amoun
Amount
%age Amount %age Amount %age
t
%age

2001

65071

91.5

2585

3.6

3069

4.3

424

0.6

2002

109216

90.3

4738

3.9

6539

5.4

390

0.3

2003

131620

90.8

3703

2.6

8512

5.9

1118

0.8

2004

167076

94.2

3127

1.8

6391

3.6

825

0.5

2005

216448
309051
382628
459369
561546

96.1
97.6
97.6
97.3
97.1

2213
2424
4378
7280
10553

1.0
0.8
1.1
1.5
1.8

5578
4348
3923
4452
4975

2.5
1.4
1
0.9
0.9

900
939
941
1244
1324

0.4
0.3
0.2
0.3
0.2

2006
2007
2008
2009

Interpretation:
If we analyze the loan assets of private sector banks, we can say that if we compare the first year
and last year for sub standard assets we can say that there is a decrease in it of health is
improving but overall analysis for sub-standard assets shows that after year 2006 there is a
continuous increase in the amount of sub-standard assets i.e. from 1percent to 1.8 percent. But,
the doubtful assets have declined from 5.9percent in 2003 to 0.9 percent in 2009. The loss assets
also have shown a decreasing trend from year 2003. Thus, we can say that except the substandard assets category the other two categories of non-performing assets have improved over
the period of study.

34

Net NPAs & Net Profit of Private Sector Banks: 2000-01 to 2008-09
Table: 1.4

2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

Net NPA
3700
6676
3963
4128
4212
3171
4028
5380
7418

Net Profit
1142
1779
2958
3481
3533
4975
6465
9522
10868

12000
10000
8000
6000
Net NPA
4000

Net Profit

2000
0

Interpretation:

It is clearly observed from the line graph that there is continuous rise in net profit of private sector
banks over the years. The average of percentage increase in net profits of private sector banks comes
to approximately 34%.
On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from
2000-01 to 2008-09. The average of percentage rise in net NPA comes to almost 15%.

35

Classification of Loan Asset of Private Sector Banks in percentage:
Table: 1.5

Year

Standard
Asset (%)

2004
2005
2006
2007
2008
2009

94.2
96.1
97.4
97.6
97.3
96.8

0.5

0.4

0.3
1.5

2.5
0.8

3.6

SubStandard
Asset (%)
1.8
1.0
0.8
1.1
1.5
2.0

Doubtful
Asset (%)

Loss Asset
(%)

3.6
2.5
1.5
1.0
0.9
1.0

0.5
0.4
0.3
0.2
0.3
0.3

0.2
1

0.3
0.9

1.1

1.5

0.3
1
2

1

Loss Asset
Doubtful Asset

1.8
97.4

97.6

Sub-Standard Asset
97.3

96.1

96.8

Standard Asset

94.2

2004

2005

2006

2007

2008

2009

Interpretation:

The above chart clearly states that the rise in the standard assets over the years compensates the fall
in the other three types of assets. But in the year 2009, the percentage of Sub-Standard asset is
Subhighest among all the year. In 2009 percentage of standard asset has reduced by 0.5% which is
standard
compensated by increase in Sub Standard & doubtful assets. This increase is due to interest &
Sub-Standard
principle amount unpaid due to financial crisis in 2009. The percentage of doubtful asset has reduced
to a great extent amongst all. So the private sector banks have managed to reduce the doubtful asset.
mongst

36

Net NPA to Net Advance Ratio of Private Sector Banks:
Table: 1.6

Years
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

Old Private Sector
Banks
7.3
7.1
5.2
3.8
2.7
1.7
1
0.7
0.9

New Private Sector
Banks
3.1
4.9
1.5
1.7
1.9
0.8
1
1.1
1.3

8
7
6
5
4
3
2

Old Private Sector
Banks
New Private Sector
Banks

1
0

Interpretation:

From the above chart it is clearly observed that old private sector banks are constantly improving
in terms of net NPA to net advances ratio which is represented by declining trend from 2000-01
to 2008-09. While on the other hand for new private sector banks net NPA to net advances ratio
is fluctuating over the years.

37

Net NPAs of Old and New Private Sector Banks: 2000-01 to 2008-09
Table: 1.7

Year
2000-01
2001-02
2002-03
2003-04
2004-05
2005-06
2006-07
2007-08
2008-09

Old Private Sector
Banks
2,771
3,013
2,598
2,142
1,859
1,375
891
740
1165

New Private Sector
Banks
929
3,663
1,365
1,986
2,353
1,796
3,137
4640
6253

7,000
6,000
5,000
4,000
3,000

Old Private Sector Banks

2,000

New Private Sector Banks

1,000
0

Interpretation:

From the above chart it is clearly observed that net NPA of old private sector banks has a
declining trend over the years on the contrary new private sector banks has an upward trend.
Old private sector banks which is passing from lower growth rate in recent past, starts
performing better than their new counterparts. Old private sector banks are more efficient than
that of new private sector banks in managing NPA.

38

Composition of NPAs of Private Sector Banks - 2001 To 2009:
Table: 1.8

Year

Priority
Sector
1835
2546
2445
2482
2188
2284
2884
3419
3640

2001
2002
2003
2004
2005
2006
2007
2008
2009

Non-Priority
Sector
4452
9090
9327
7796
6569
5541
6353
9558
13172

Public Sector
123
31
95
75
42
4
3
0
75

14000
12000
10000
8000

Priority Sector
Non-Priority Sector

6000

Public Sector
4000
2000
0
1

2

3

4

5

6

7

8

9

Interpretation:
From the above graph it is observed that Priority sector category on an average constitutes
almost 34% of the total advances made by the private sector banks. While average NPA of
priority sector constitutes of 25% of total NPA. In later years from 2007 to 2009 there is increase
in NPA of priority sector. In these years more advances was given to agriculture & housing
sector.
39

In the year 2007-08, the real estate market was on boom, which encouraged people to take more
loans. But after the subprime crisis there was sudden fall in real estate market & people became
default to pay the loan.
In case of non-priority sector, the average advances made are 60.5% of total advance made by
private sector banks. But the average NPA of non-priority sector is almost 74% which is highest
amongst the entire category. We can see the declining trend in NPA of non-priority sector from
2003 to 2006, this as a result of securitization Act, 2002.

NPA ratios of Private Sector Banks: 2004-05 to 2008-09
Table: 1.9

Year

Gross
Net NPAs/Net
NPAs/Gross Advances
Advances

2004-05
2005-06
2006-07
2007-08
2008-09

4

3.8
2.5
2.2
2.5
2.9

1.9
1
1
1.2
1.5

3.8

3.5
3

2.9

2.5
2

2.5

2.5
2.2

Gross NPAs/Gross Advances

1.9

1.5

1.5

1

1

1

2005-06

2006-07

Net NPAs/Net Advances

1.2

0.5
0
2004-05

2007-08

2008-09

40

Interpretation:

The percentage change in of gross NPA to gross advances ratio is decreasing initially &
thereafter started rising from 2006-07. It has reduced by 34.2% from 2004-05 to 2005-06.
Similarly it has reduced by 12% from 2005-06 to 2006-07 & thereafter increased by 18.5% &
9% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-09. 
While in case of net NPA to net advances ratio, the percentage change is varying drastically. It
has reduced by 47% from 2004-05 to 2005-06. It is unchanged from 2005-06 to 2006-07. It has
increased by 20% & 25% respectively from 2006-07 to 2007-08 & 2007-08 to 2008-09.
The percentage change in gross NPA to gross advances ratio & net NPA to net advances ratio
over the years states that private sector banks makes more provisions in gross NPA & gross
advances.
The difference in gross NPA/ gross advances & net NPA/net advances is highest in 2005-06
[60%] & lowest in 2008-09 [48%]. In other years it near to 54%, in 2006 there is highest
increase in advances over previous year amongst all the year. This resulted increase in NPA
which in turn increased the provisions and unrecognized interest income.
Private sector banks have not succeeded to reduce NPA as against the advances made over the
years as both the ratios are increasing in later years.

41

REASONS FOR AN ACCOUNT BECOMING NPA:
1. Internal factors
2. External factors
Internal factors:


Funds borrowed for a particular purpose but not use for the said purpose.



Project not completed in time.



Poor recovery of receivables.



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 expansionmodernizationsetting up new projects helping or
promoting sister concerns.



Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc.



Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups,
delaying settlement of payments subsidiaries by government bodies etc.,

External factors:
1) Sluggish legal system:


Long legal tangles



Changes that had taken place in labor laws



Lack of sincere effort.

2) Scarcity of raw material, power and other resources.
3) Industrial recession.
4) Shortage of raw material, raw materialinput price escalation, power shortage, industrial
recession, excess capacity, natural calamities like floods, accidents.

42

5) Failures, nonpayment over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.

IMPACT OF NPAS ON BANK PERFORMANCE:
The efficiency of a bank is not reflected only by the size of its balance sheet but also the level of
return on its assets. The NPAs do not generate interest income for banks but at the same time
banks are required to provide provisions for NPAs from their current profits.
The NPAs have deleterious impact on the return on assets in the following ways.









The interest income of banks will fall and it is to be accounted only on receipt basis.
Banks profitability is affected adversely because of the providing of doubtful debts and
consequent to writing it off as bad debts.
Return on investments (ROI) is reduced.
The capital adequacy ratio is disturbed as NPAs are entering into its calculation.
The cost of capital will go up.
The assets and liability mismatch will widen.
The economic value addition (EVA) by banks gets upset because EVA is equal to the net
operating profit minus cost of capital and
It limits recycling of the funds.

It is due to above factors the public sector banks are faced with bulging NPAs which results in
lower income and higher provisioning for doubtful debts and it will make a dent in their profit
margin. In this context of crippling effect on banks operation the slew asset quality is placed as
one of the most important parameters in the measurement of banks performance under the
Camel’s supervisory rating system of RBI:
Profitability:
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of
client. Because of the money getting blocked the prodigality of bank decreases not only by the
amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some
return earning project/asset. So NPA doesn’t affect current profit but also future stream of profit,
which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in
profitability is low ROI (return on investment), which adversely affect current earning of bank.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest period of time which lead to additional cost to the company.
Difficulty in operating the functions of bank is another cause of NPA due to lack of money.
43

Involvement of Management:
Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to some
fruitful activities, which would have given good returns. Now days banks have special
employees to deal and handle NPAs, which is additional cost to the bank.
Credit Loss:
Bank is facing problem of NPA then it adversely affect the value of bank in terms of market
credit. It will lose its goodwill and brand image and credit which have negative impact to the
people who are putting their money in the banks.

Early Symptoms: By which one can recognize a performing asset turning in to non-performing
asset Four categories of early symptoms:1) Financial:


Non-payment of the very first installment in case of term loan.



Bouncing of cheque due to insufficient balance in the accounts.



Irregularity in installment.



Irregularity of operations in the accounts.



Unpaid overdue bills.



Declining Current Ratio.



Payment which does not cover the interest and principal amount of that installment.



While monitoring the accounts it is found that partial amount is diverted to sister concern
or parent company.

2) Operational and Physical:
If information is received that the borrower has either initiated the process of winding up or are
not doing the business.


Overdue receivables.



Stock statement not submitted on time.
44




External non-controllable factor like natural calamities in the city where borrower
conduct his business.



Frequent changes in plan.



Nonpayment of wages.

3) Attitudinal Changes:




Use for personal comfort, stocks and shares by borrower.
Avoidance of contact with bank.
Problem between partners.

4) Others:


Changes in Government policies.



Death of borrower.



Competition in the market

CREDIT DEFAULT SWAP:
It is a bilateral financial contract in which buyer pays a periodic fee expressed in fixed basis
points on the notional amount in return for a floating payment contingent on the default of a third
party reference credit. The floating payment is designated to mirror the loss incurred by creditors
of the reference credit in the event of its default. The credit event various from bank to bank and
from transaction to transaction, the credit events are pre defined in the agreement, which includes
(i) Bankruptcy, (ii) Insolvency (iii) Rating, and downgrading below agreed threshold (iv)Failure
to adjust for new payment obligation and (v) Debt Rescheduling. The credit event triggers the
obligation of the seller of default protection to the purchaser of the same. The investors who need
to protect themselves against default but do not want to sell them at risk security for accounting,
tax and regulatory reasons can buy a credit default swap.

CREDIT LIMITED NOTES (CLN):
These are known as credit swaps in which buyer makes periodic payments of a fixed percentage
of the reference asset to the seller over the life of the swap. Then the seller promises a payment
in the case of credit default for the reasons viz., bankruptcy, delinquency and credit rating down
grade. The payments may be either a pre - determined amount and also decrease in the market
value of the reference obligation that may cause the credit event. The seller calls the structure
away from the investor and delivers the defaulting notes against them on the happening of credit
45

event. The CLN are like bonds in character and are acceptable to certain banks. They are not
allowed to involve in credit default swap.

CONSEQUENCES OF NPAS:
The contaminated portfolio is definitely a bane for any bank. It puts severe dent on the liquidity
and profitability of the bank where it is out of proportion. The NPAs in the public sector banks
are well above the normal level. The consequences envisaged during the past several years are
many. It has become a difficult task for the banks to reduce the lending rate due to the presence
of large NPAs. Ultimately this is affecting the competitiveness of the Indian banks. When the
bank does not enjoy the market competitiveness naturally the credit expansion would be slumped
and when it happens, the profitability gets a setback. In this way the vicious circle will go on and
on.
Another important one is the reduction in the availability of funds for further expansion due to
the unproductiveness of the existing portfolio. Sometimes it is found that the presence of large
NPAs discourages banks to accept profitable but risky proposal loan from the customers. The
NPAs also affect the risk taking ability of the banks. On the whole it affects the credibility of the
bank and faces difficulty in raising fresh capital from the market for future requirements.

MEASURES TO CONTROL NPAs:
It is proved beyond doubt that NPAs in bank ought to be kept at the lowest level. Two pronged
approaches viz., (i) Preventive management and (ii) Curative management would be necessary
for controlling NPAs.

1. Preventive Management:
a) Credit Assessment and Risk Management Mechanism:
A lasting solution to the problem of NPAs can be achieved only with proper credit assessment
and risk management mechanism. The documentation of credit policy and credit audit
immediately after the sanction is necessary to upgrade the quality of credit appraisal in banks. In
a situation of liquidity overhang the enthusiasm of the banking system is to increase lending with
compromise on asset quality, raising concern about adverse selection and potential danger of
addition to the NPAs stock. It is necessary that the banking system is equipped with prudential
norms to minimize if not completely avoid the problem of credit risk.

46

b) Organizational Restructuring:
With regard to internal factors leading to NPAs the onus for containing the same rest with the
bank themselves. These will necessities organizational restructuring improvement in the
managerial efficiency, skill up gradation for proper assessment of credit worthiness and a change
in the attitude of the banks towards legal action, which is traditionally viewed as a measure of the
last resort.
c) Reduce Dependence on Interest:
The Indian banks are largely depending upon lending and investments. The banks in the
developed countries do not depend upon this income whereas 86 percent of income of Indian
banks is accounted from interest and the rest of the income is fee based. The banker can earn
sufficient net margin by investing in safer securities though not at high rate of interest. It
facilitates for limiting of high level of NPAs gradually. It is possible that average yield on loans
and advances net default provisions and services costs do not exceed the average yield on safety
securities because of the absence of risk and service cost.
d) Potential and Borderline NPA’s under Check:
The potential and borderline accounts require quick diagnosis and remedial measures so that they
do not step into NPAs categories. The auditors of the banking companies must monitor all
outstanding accounts in respect of accounts enjoying credit limits beyond cut – off points, so that
new sub-standard assets can be kept under check.

2. Curative Management:
The curative measures are designed to maximize recoveries so that banks funds locked up in
NPAs are released for recycling. The Central government and RBI have taken steps for arresting
incidence of fresh NPAs and creating legal and regulatory environment to facilitate the recovery
of existing NPAs of banks. They are: Debt Recovery Tribunals (DRT): In order to expedite
speedy disposal of high value claims of banks Debt Recovery Tribunals were setup. The Central
Government has amended the recovery of debts due to banks and financial institutions Act in
January 2000 for enhancing the effectiveness of DRTs. The provisions for placement of more
than one recovery officer, power to attach dependents property before judgment, penal provision
for disobedience of Tribunals 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 times to come.
a) Lok Adalats:
The Lok adalats institutions help banks to settle disputes involving accounts in doubtful and loss
categories. These are proved to be an effective institution for settlement of dues in respect of
smaller loans. The Lok adalats and Debt Recovery Tribunals have been empowered to organize
Lok adalats to decide for NPAs of Rs. 10 lakhs and above.

47

b) Asset Reconstruction Company (ARC):
The Narasimham Committee on financial system (1991) has recommended for setting up of
Asset Reconstruction Funds (ARF). The following concerns were expressed by the committee.
 It was felt that centralized all India fund will severely handicap in its recovery efforts by
lack of widespread geographical reach which individual bank posses and.
 Given the large fiscal deficits, there will be a problem of financing the ARF.
Subsequently, the Narasimham committee on banking sector reforms has recommended for
transfer of sticky assets of banks to the ARC. Thereafter the Varma committee on restructuring
weak public sector banks has also viewed the separation of NPAs and its transfer thereafter to the
ARF is an important element in a comprehensive restructuring strategy for weak banks. In
recognition of the same ARC Bill was passed to regulate Securitization and Reconstruction of
financial assets and enforcement of security interest.
The ICICI BANK has promoted the country’s first Asset Reconstruction Company. The
company is specialized in recovery and liquidation of assets. The NPAs can be assigned to ARC
by banks at a discounted price. The objective of ARC is floating of bonds and making necessary
steps for recovery of NPAs from the borrowers directly. This enables a onetime clearing of
balance sheet of banks by sticky loans.
c) Corporate Debt Restructuring (CDR):
The corporate debt restructuring is one of the methods suggested for the reduction of NPAs. Its
objective is to ensure a timely and transparent mechanism for restructure of corporate debts of
viable corporate entities affected by the contributing factors outside the purview of BIFR, DRT
and other legal proceedings for the benefit of concerned. The CDR has three tier structure viz., a.
CDR standing forum b. CDR empowered group and c. CDR cell.
The Mechanism of the CDR: It is a voluntary system based on debtors and creditors agreement.
It will not apply to accounts involving one financial institution or one bank instead it covers
multiple banking accounts, syndication, consortium accounts with outstanding exposure of Rs.
20 crores and above by banks and institutions.
The CDR system is applicable to standard and sub – standard accounts with potential cases of
NPAs getting a priority. In addition to the steps taken by the RBI and Government of India for
arresting the incidence of new NPAs and creating legal and regulatory environment to facilitate
for the recovery of existing NPAs of banks, the following measures were initiated for reduction
of NPAs. Circulation of Information of Defaulters: The RBI has put in place a system for
periodical circulation of details of willful defaulters of banks and financial institutions. The RBI
also publishes a list of borrowers (with outstanding aggregate rupees one crore and above)
against whom banks and financial institutions in recovery of funds have filed suits as on 31st
March every year. It will serve as a caution list while considering a request for new or additional
credit limits from defaulting borrowing units and also from the directors, proprietors and partners
of these entities.

48

d) Recovery Action against Large NPAs:
The RBI has directed the PSBs to examine all cases of willful default of Rs. One crore and above
and file criminal cases against willful defaulters. The board of directors are requested to review
NPAs accounts of one crore and above with special reference to fix staff accountability in
individually.

e) Credit Information Bureau:
The institutionalization of information sharing arrangement is now possible through the newly
formed Credit Information Bureau of India Limited (CIBIL) It was set up in January 2001, by
SBI, HDFC, and two foreign technology partners. This will prevent those who take advantage of
lack of system of information sharing amongst leading institutions to borrow large amount
against same assets and property, which has in no measures contributed to the incremental of
NPAs of banks.

49

50

SUGGESTIONS TO CONTROL NPAs:
The Bank should adopt the following general strategies to control NPAs. The suggestions are as
follows:


















Projects with old technology should not be considered for finance
Large exposure on big corporate or single project should be avoided.
Operating staffs’ credit skills should be up graduation.
There is need to shift banks approach from collateral security to viability of the project
and intrinsic strength of promoters.
Timely sanction and or release of loans by the bank is to avoid time and cost overruns.
Bank should prevent diversion of funds by the promoters.
Operating staff should scrutinize the level of inventories/receivables at the time of
assessment of working capital.
The Credit section should carefully watch the warning signals viz. non-payment of
quarterly interest, dishonor of check etc.
Effective inspection system should be implemented.
Identifying reasons for turning of each account of a branch into NPA is the most
important factor for upgrading the asset quality, as that would help initiate suitable steps
to upgrade the accounts.
The bank must focus on recovery from those borrows who have the capacity to repay but
are not repaying initiation of coercive action a few such borrows may help.
The recovery machinery of the bank has to be stream lined; targets should be fixed for
field officers / supervisors not only for recovery in general but also in terms of upgrading
number of existing NPAs.
In the bank there should be a proper manpower planning.
Bank should try to establish the branches in competitive market, so it will increase their
profit.
Bank has required increasing the cash and bank balances byreducing the unnecessary
expenses for future plan

51

CONCLUSION:
Growing NPAs is one of the biggest problems that the private Indian banks are facing today. If
proper management of the NPAs is not undertaken it would hamper the efficiency of the banks.
If the concept of NPAs is taken very lightly it would be dangerous for the banking sector. The
NPAs destroy the current profit and interest income and affect the smooth functioning of the
recycling of the funds. Banks also redistribute losses to other borrowers by charging higher
interest rates. Lower deposit rates and higher lending rates repress savings and financial markets,
which in turn hampers the economic growth of the country. Thus, it is highly essential for the
banks to focus their attention on growth of NPAs and take appropriate measures to regulate their
growth.

52

BIBLIOGRAPHY:
Nelson M. Waweru et.al (2009), Global Journal of Finance and Banking Issues Volume 3, No. 3
2009
Kevin Greenidge et.al (2010), Forecasting non-performing loans in Barbados, 80 / business,
finance economics in emerging economies vol. 5 no. 1 2010
Gorter, N. Bloem M., (2002), the macroeconomic statistical treatment of NPLs,
Publication of the Organization for Economic Corporation Development
Brownbridge, M., (1998) the Causes of Financial Distress in Local Banks in Africa and
Implications for Prudential Policy
M. Karunakar et.al (2008), Are non - Performing Assets Gloomy or Greedy from Indian
Perspective, Research Journal of Social Sciences, 3: 4-12, 2008
Bloem, A.M., Goerter, C.N (2001), ‘The Macroeconomic Statistical Treatment of NonPerforming loans’, Discussion Paper, Statistics Department of the IMF, Decembere1, 2001
Das, A., Ghosh, S (2003), ‘Determinants of Credit Risk’, Paper presented at the Conference
on Money, Risk and Investment held at Nottingham Trent University, November 2003.
Anurag, 2007, Causes for Non Performing Assets in Public Sector Banks, [Online] Available at:
http://www.123eng.com/forum/viewtopic.php?p=14590.
G.V.K. Kasthuri, 2009. Basel Norms for Indian Banks, [Online] Available at:
http://gvkk.blogspot.com
Management and resolution of NPAs legal and regulatory regime, [Online] Available at: http://
www.mbaknol.com

R P Balakrishnan, Opportunities opened by Basel II, [Online] Available at:
http://www.chillibreeze.com

53

BOOKS:
1) Marketing Research- An Applied Orientation by Naresh K. Malhotra; Edition-Fourth;
Publication-New Delhi

WEBSITES:
1) http://rbi.org.in/scripts/AnnualPublications.aspx?head=Trend and Progress of Banking in India
2) http://rbi.org.in/scripts/AnnualPublications.aspx?head=Statistical Tables Relating to Banks of
India
3) http://rbi.org.in/scripts/NotificationUser.aspx
4) http://en.wikipedia.org/wiki/Banking_in_India
5) http://www.ibef.org/industry/Banking.aspx
6) http://www.bankingindiaupdate.com/general.html

54

ANNEXURE
Descriptive Statistics of Factors affecting NPAs:
Mean

Standard
Deviation

Factor
Loading

Communality

3.15

.987

.940

.891

3.00

1.780

.837

.710

Factors

Explained s Alpha
(%)
28.79
.721

F1 Recession and
management failure
Recession in economy
Management Failure
28.39

.709

23.62

.753

F2 Execution Problems
2.92
Improper Credit
Appraisal
Difficulty in executing
Repayment procedure
Cost of effective legal
measures

1.115

.850

.762

3.46

.967

.827

.713

2.46

1.391

.730

.694

F3 Default by customers
2.77

1.235

.914

.927

2.15

1.281

.854

.960

Willful Default
Absence of Security

55

Descriptive Statistics of Recovery Mechanisms adopted to reduce NPAs:
Mean

Standard
Deviation

Factor
Loading

Communality

Self involvement

2.08

1.256

.960

.923

Recovery campus

2.00

1.414

.951

.910

Factors
F1 Banking Measures

Explained s Alpha
(%)
48.25
.912

41.71

F2 Legal Measures
Lok adalats

2.31

1.494

.932

.892

SARFASI Act

1.85

1.214

.891

.793

.874

Factorial profile of recovery mechanism for NPA by banks
No. of No. of
rounds factors

Items
(Above)
(Above) Deleted

Items
V.E
Remained %

1

3

.60

4

.45

1

8

80.36

Factor
Loading
(Above)
.55

2

3

.65

5

.34

-

7

80.81

.70

One-Sample Test
Test Value = 2
95% Confidence Interval of the
Difference
t
VAR00002

df
.222

Sig. (2-tailed)
12

.828

Mean Difference
.05769

Lower

Upper

-.5081

.6235

56

One-Sample Statistics
N
BART factor score 4 for

Mean

Std. Deviation

Std. Error Mean

13

BART factor score 1 for
analysis 3

2.0385

1.28228

.35564

13

analysis 2

2.0769

1.23905

.34365

KMO and Bartlett's Test
Kaiser-Meyer-Olkin Measure of Sampling Adequacy.
Bartlett's Test of Sphericity

.505

Approx. Chi-Square

20.921

df

6

Sig.

.002

Total Variance Explained
Rotation Sums of Squared
Initial Eigenvalues

Extraction Sums of Squared Loadings

Loadings
% of

Compon
ent

Cumulativ
Total

% of Variance

e%

% of
Total

Cumulative

Variance

%

Varian Cumula
Total

ce

tive %

1

2.044

51.097

51.097

2.044

51.097

51.097

1.930 48.251 48.251

2

1.555

38.873

89.970

1.555

38.873

89.970

1.669 41.719 89.970

3

.253

6.327

96.297

4

.148

3.703

100.000

Extraction Method: Principal Component Analysis.

57

A study of non-performing assets in Indian private banking
sector
We are pursuing MBA and we are conducting a study on non performing assets in private
banks.
Please answer the questions below. Your response in this regards is very valuable for the
success of our project. Also note that the information so revealed will be utilized without
directly disclosing the identity of the concern Bank/Officials.




Name
…………………………
Designation ………………………....
Branch
…………………………

Since how long the branch is functioning
2-3yrs
3-5yrs
0-2yrs

5yrs –above

Since how long the presence of NPA is observed in your branch
0-1yrs

1-2yrs

2-3yrs

5yrs

What is the approximate value of NPA in your branch? (Rs in lakhs)
1-10

10-20

20-30

above- 40

For which category the NPA is being observed
Personal loan

vehicle loan

Housing loan

Agri-term loan

58

The main reasons for NPA’s in the bank
(Rating factors 1-5 according to the importance of factor. 1- Most effective, 2- effective, 3moderate, 4- non effective, 5- least effective.)

Factors

1

2

3

4

5

Improper credit appraisal
Lack of effective follow up
Diversion of funds
willful default
difficulty in execution of
discredit
cost of effective legal measures
Absence of security
Management failure
demand recession

Measures for recovery of NPA adopted by the bank
Legal measures

non legal measures

Both legal and non-legal

other then specify

Which of the following recovery mechanism are adopted by the bank for NPA?
(Rating factors 1-5 according to the importance of factor. 1- Most effective, 2- effective, 3moderate, 4- non effective, 5- least effective.)

Factors

1

2

3

4

5

Lok adalats
Civil courts
Corporate and restructuring
Self involvement
debt recovery tribunal
one time settlement scheme
recovery campus
SARFAESI Act.

59

To what extent your bank has been succeeded in converting NPA into good assets?
1%

4%

2%

5%

3%

5%

Has the profitability improved after adopting reduction technique?
Definitely improved

improved

Can’t say

definitely not improved

Thanks for your co-operation.

60

Npa final-report (1)

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