a study of non performing assets of sbi final

8/3/2019 A Study of Non Performing Assets of SBI FINAL

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STEVENS BUSINESS SCHOOL

A REPORT ON STUDY OF NON PERFORMING

ASSETS OF S.B.I.

Under the supervision of: - Submitted By:-

Prof. T.R.ANAND NEERAJ TRIVEDI

ROLL NO. (31)

PGP-2010-12 (FINANCE)


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ACKNOWLEDGEMENT

I hereby wish to give my heartfelt gratitude and thanks to my faculty Guide Prof. T.R. ANAND

who gave me an opportunity to do this project. I would also like to thank Mr. Vijay Vora for his

guidance, support and valuable suggestion at every stage of the project.

NEERAJ TRIVEDI


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Table of content

Sr.

no.

TOPIC Page

no.

1 INTRODUCTION TO THE PROJECT 4

2 STATE BANK OF INDIA 6

3DEFINITION OF NPAs (NON -PERFORMING ASSETS)

12

4 NPA SOME ASPECTS AND ISSUES 15

5 OBJECTIVE OF STUDY 17

6 IMPACT OF NPAS ON BANKS 24

7 ANALYSIS 31

8 FINDINGS 37

9 RECOMMANDATIONS 38

10 CONCLUSION 40

11 BIBLIOGRAPHY 41


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INTRODUCTION TO THE PROJECT

Since the introduction of economic liberalization and financial sector reforms, Banks are under

growing pressure to bring down their NPAs so as to improve their performance and viability.

What is bothering the bankers today is the management of Non-performing Assets. Over the

period this problem has aggravated alarmingly and therefore needs urgent remedial actions, so in

this context a good number of circular instruction/guidelines have been issued by bank/Reserve

Bank of India.

Reserve Bank of India, in the year 1991, appointed a committee under the Chairmanship of Sh.

M.Narsimham to examine and give recommendation for Income Recognition, Asset

Classification and Provisioning of loan assets of Banks and Financial Institutions. The

Committee examined the issues and recommended that a policy of Income Recognition should

be objective and based on record of recovery rather than on subjective considerations. On the

basis of the recommendations of the Narsimhan Committee, RBI had issued guidelines to all

Scheduled Commercial Banks on Income Recognition, Assets Classification and Provisioning in

April, 1992 which have been modified from time to time by the RBI on the basis of experience

gained and suggestions received from various quarters. The Prudential Norms for Income

Recognition, Asset Classification and Provisioning have come into effect from the accounting

year 31.03.1993.

Similarly, guidelines were issued by the Reserve Bank of India in March, 1994 to All India

Financial Institutions viz. IDBI,ICICI, IFCI, AXIS Bank and IIBI. Separate guidelines were also

issued by the RBI on Prudential Norms to Non-Banking Financial Companies in June, 1994 and

to Regional Rural banks in March, 1996. They have adopted these guidelines for the purpose of

Income Recognition and Assets Classification from the accounting year 1995-96. However,

guidelines relating to provisioning for RRBs have been made effective from the financial' year


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ended 31.03.1997. The definition of NPAs is also gradually becoming tough for RRBs to cover

all advances like Commercial Banks. Although most of-the guidelines relating to RRBs are

similar to that of Commercial Banks, they have been made applicable in a phased manner for

RRBs.

INDIAN BANKS FUNCTIONALLY diverse and geographically widespread, have played a

crucial role in the socio- economic progress of the country. Banks extend credit to different types

of borrowers for many different purposes. For most customers, bank credit is the primary source

of available debt financing.

For banks good loans are the most profitable assets. Return comes in the form of loan

interest, fee income and investment and the most prominent assumed risk is credit risk. Credit

risk involves inability or unwillingness of customer or counterpart to meet commitments in

relation to lending once a loan is overdue and ceases to yield income it would become a Non

Performing Asset.

Proper management and speedy disposal of NPAs is one of the most critical tasks of banks

today. The problem of Non Performing Assets [NPAs] in banks and financial institutions has

been a matter of grave concern not only for the banks but also the real economy in general, as

NPAs can choke further expansion of credit which would impede the economic growth of the

country. Any bottleneck in the smooth flow of credit is bound to create adverse repercussions in

the economy. NPAs are not therefore the concern of only lenders but also the public at large.

Granting of credit for economic activities is the prime duty of banking. Apart from raising

resources through fresh deposits, borrowings and recycling of funds received back from

borrowers constitute a major part of funding credit dispensation activity. Lending is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, which results into economic growth. However lending also carries a risk called credit

risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a

major hurdle in the process of credit cycle. Thus, these loan losses affect the banks profitability

on a large scale. Though complete elimination of such losses is not possible, but banks can

always aim to keep the losses at a low level.


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Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the

banking industry in our country sending distressing signals on the sustainability and insurability

of the affected banks. The positive results of the chain of measures affected under banking

reforms by the Government of India and RBI in terms of the two Narasimhan Committee

Reports in this contemporary period have been neutralized by the ill effects of this surging threat.

Despite various correctional steps administered to solve and end this problem, concrete results

are eluding. It is a sweeping and all pervasive virus confronted universally on banking and

financial institutions. The severity of the problem is however acutely suffered by Nationalised

Banks, followed by the SBI group, and the all India Financial Institutions.

STATE BANK OF INDIA

SBI is the largest bank in India with deposits of Rs 933,932.81 crore as on March 31, 2011. It

dominates the Indian banking sector with a market share of around 37% in terms of total banking

sector deposits. The increasing focus on upgrading the technology back-bone of the bank will

enable it to leverage its reach better, improve service levels, provide new delivery platforms, and

improve operating efficiency to counter the threat of competition effectively. Once the core

banking solution (CBS) is fully implemented, it will cover over 10,000 branches and ATMs of

the State Bank group, and emerge as the strongest technology enabled distribution network in

India.

The increasing integration of SBI with its associate banks (associates) and subsidiaries will

further strengthen its dominant position in the banking sector and position it as the countrys

largest universal bank.

Resource-raising capabilities

SBIs funding profile is strong, underpinned by its strong retail deposit base. The bank is facing

increasing competition in its metropolitan and urban franchise. SBIs strong franchise gives it


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access to a steady source of stable retail funds, which constitute around 69% of the total

resources as on March 31, 2011 (56% as at March 31, 2010).

Savings deposits have shown a strong three-year growth of 19%. Thus, despite a reduction in the

proportion of current account deposits, low-cost deposits have continued to constitute over 57%

of total deposits as at March 31, 2011. The banks cost of deposits (excluding IMD) has

significantly reduced to 19.70% for the 2009-10 (refers to financial year from April 1 to March

31), compared with 14.48% in 2008-09. The banks liquidity position is very strong due to

healthy accretion to deposits, large limits in the call market, and significant surplus SLR

investments. SBI will maintain its strong funding profile and a low cost resource position in view

of its strong retail base and wide geographical reach.

Earnings profile to remain good

SBI will maintain a good earnings profile in the medium term despite high pressure on yields due

to the increasing competition in the banking sector. SBIs earning profile is chara cterised by

consistency in the return on assets (PAT/Average Assets), at around 4% per annum for the past

three years, and diverse income streams. To maintain yields and pursue credit growth, the bank is

aggressively targeting retail finance and small and medium enterprises (SMEs). The banks core

fee income of 3% of average funds deployed bolsters its revenue profile. However, with the

opening of government business like tax collection to other banks and increased competition, the

growth in fee income is expected to slow down. The banks operating expense at 6.44% of

average funds deployed in 2009-10 is in line with other public sector banks. The banks cost

structure is rigid as fixed employee cost accounted for 79% of the operating expenditure in 2009-

10. Thus, despite good asset growth and technology efficiency gains, the banks operating costs

will remain high in the medium term. To be able to reap the full benefits of technologyimplementation, the bank will have to reduce or redeploy work force; since this is a sensitive

issue, it is expected to happen gradually.

The banks fund based and fee income earnings are diversified across industries, regions, asset

classes, and customer segments.


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Strong diversification in income streams will ensure that the banks earnings remain relatively

stable, despite the decline in profitability in some segments.

Comfortable capital position

SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a large capital

base of Rs 940.72 billion as at March 31, 2010. The bank has considerably improved its net

worth coverage for net NPAs to 7.4 times as at March 31, 2010 due to lower slippages reflecting

an improving asset quality, witnessed across the entire banking sector. The capitalization levels

of SBI are adequate to address the asset side risks and support the business growth in the

medium term.

Management strategies

In retail finance, the bank has leveraged its corporate relationships, pursued business growth

selectively, and has not competed based on interest rate. The bank has taken initiatives like on-

line tax returns filing and faster transfer of funds to protect its dominant position in the

government business. The bank also has a clear technology strategy that will enable it to compete

with the new generation private sector banks in customer service and operational efficiency.

Asset quality to remain at average levels

The bank continues to have a high level of gross NPAs at 5.95% of gross advances as at March

31, 2005, compared with 4.9% for all scheduled commercial banks (SCBs) taken together. The

bank is facing challenges to improve the quality of assets originated, as can be seen in the

consistently higher levels of slippages (additions to NPAs) at 2.71% in 2004-05.

To contain NPAs and ensure credit growth, the bank has decided to focus on financing the retail

(personal) segment as well as SMEs. The share of retail advances has increased to 24.73% (Rs

522.08 billion) of total advances as at September 30 2009. In the retail loan segment, SBI is

targeting primarily the housing loans segment, which constitutes Rs. 283.41 billion (54.3%) of

total retail loans. The NPAs in retail finance are low currently; however they are steadily

increasing (especially in the housing finance portfolio) and have started showing signs of stress.

SBIs retail portfolio has grown at over 37% CAGR in the last two years and hence a significant


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portion of the portfolio is largely unseasoned. The housing finance portfolio has a 12-month,

lagged gross NPA of 4.34% as at March 31, 2009.The bank will face significant challenges in

the medium term to develop effective credit appraisal and collection systems in order to contain

NPAs in retail finance. SBIs asset quality is expected to remain at average levels, as the banks

large and diverse asset portfolio reflects of the asset quality of the banking system.

Business description

SBI along with its associate banks offer a wide range of banking products and services across its

different client markets. The bank has entered the market of term lending to corporates and

infrastructure financing, traditionally the domain of the financial institutions. It has increased its

thrust in retail assets in the last two years, and has built a strong market position in housing

loans.

SBI, through its non-banking subsidiaries, offers a host of financial services, viz., merchant

banking, fund management, factoring, primary dealership, broking, investment banking and

credit cards. SBI has commenced its life insurance business by setting up a subsidiary, SBI Life

Insurance Company Limited, which is a joint venture with Cardiff S.A., one of the largest

insurance companies in France. SBI currently holds 74% equity in the joint venture.

Industry prospects

To leverage benefits such as access to low cost resources and the facility to provide a larger

gamut of services, a number of finance companies such as Kotak Mahindra Finance Limited and

HDFC Limited have promoted banks. Simultaneously, yet another emerging trend is that of

foreign banks promoting NBFCs to benefit from regulatory flexibility available to such entities

in areas like absence of statutory liquidity ratio and cash reserve ratio requirements, priority

sector requirements, and corporate exposure limits.

New private sector banks capture market share

With technological edge and a strong marketing thrust, private sector banks have been stealing

market share in retail deposits and the corporate fee business from public sector banks. Together


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with some foreign banks, these private banks have also aggressively entered the retail asset

financing space, hitherto the domain of non-banking finance companies.

Given their focus on cross selling and optimizing their customer base, they now offer the entire

range of products and services on the asset and liability side to retail and wholesale customers

Asset quality to improve

Banks have not yet fully resolved the stress in the asset quality of their legacy

corporate loan portfolios, however. Though slippages to NPAs and provisioning were high for

some banks in FY2010, as they moved to the 90-day norm for recognising and provisioning for

NPAs, the treasury gains enabled significant provisioning to be made with the result that net

NPAs for most public sector banks are now less than 3%.

Going forward, steady growth in gross domestic product should help improve the banks asset

quality and increase corporate lending. The securitization and reconstruction of financial assets

and enforcement of security interest (Sarfaesi) Act should also help banks in limiting slippages

and improving NPA recoveries.

Better Capitalization levels

Banks have demonstrated a fair amount of flexibility in raising fresh equity capital through

public issues in recent years, thereby improving their capitalization levels. The steady accruals to

net worth and falling non-performing asset levels have resulted in an improvement in the

capitalization position of banks in recent years.


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Challenges ahead

Competition from new private sector and foreign banks remains a key challenge for public sector

banks. They need to reorient their staff and effectively utilize technology platforms to retain

customers and reduce costs. They also need to fortify their credit risk management systems to

mitigate the risks arising from small-ticket lending to the retail, small and medium enterprises,

and services segments.

Consolidation and emergence of universal banking groups

The cap on foreign ownership of banks has already been raised from 49% to 74%. The

competition in the sector could get further intensified if the 10% cap on voting rights is also

relaxed. New private sector banks are expanding their geographical coverage and making inroads

into government business. The new private and foreign banks will continue to gain market share

from public sector banks because of their efficient cost structures, technological edge, focused

marketing approach and operational freedom. However, the emergence of newer players would

be restricted if the private ownership of banks is capped at low levels. Mergers among PSBs

would create banks with even larger balance sheets and customer base. However, the integration

process in such mergers is expected to be complex and time long drawn.

These would also be driven by GoI due to provisions of Banking Companies (Acquisition and

Transfer of Undertakings) Act 1969, and hence political scenario will impact the timing and

permutations possible. Strategic alliances between banks and other financial sector players such

as insurance companies and mutual funds are also likely as banks attempt to enhance their

product range, leverage on economies of scale and reduce costs.


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Definition of NPAs (NON -PERFORMING ASSETS)

An asset, including a leased asset, becomes non-performing when it ceases to generate income

for the bank. A non performing asset was defined as a credit facility in respect of which the

interest and / or installment of principal had remained past due for a specified period of time.

The specified period was reduced in a phased manner as under:

Year ending March 31 Specified period

1993 Four Quarters

1994 Three Quarters

1995 Onwards Two quarters

An amount due under any credit facility is treated as past due when it has not been paid within

30 days from the due date. Due to the improvements in the payment and settlement systems,

recovery climate, up gradation of technology in the banking sector, etc, it was decided todispense with the past due concept, with effect from 31

st March, 2001. Accordingly, as from

that date, a NPA shall be an advance where,

i. Interest and/or installment of principal remain overdue for a period of more than 180 days in

respect of a term loan

ii. The account remains our of order for a period of more than 180 days, in respect of an

overdraft/cash credit

iii. Interest and/or installment of principal remains overdue for two harvest seasons but for a

period not exceeding two half years in the case of an advance granted for agriculture

purposes


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iv. Any amount to be received remains overdue for a period of more than 180 days in respect of

other accounts.

With a view to move towards international best practices, it has been decided to adopt the 90

days overdue norm for identification of NPAs, from 31

st

March, 2004.

Out of Order Status

An account should be treated as out of order if the outstanding balance remains continuously in

excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the

principal operating account is less than the sanctioned limit/drawing power, but there are no

credits continuously for six months as on the date of Balance Sheet or credits are not enough to

cover the interest debited during the same period, these accounts should be treated as out of

order.

Overdue

Any amount due to the bank under any credit facility is overdue if it is not paid on the due date

fixed by the bank.

Classification of NPAs

Banks are required to classify NPAs further into the following three categories based on the

period for which the asset has remained non-performing and the reliability of the dues:

i. Sub-standard Assets: A sub-standard asset is one which has remained NPA for a periodless than or equal to 18 months. In such cases, the current net worth of the borrower, or

the current market value of the security charged is not enough to ensure recovery of the

dues to the banks in full. Such assets will have well defined credit weakness that

jeopardize the liquidation of the debt and are characterized by the distinct possibility that

the bank will sustain a loss.


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ii. Doubtful Assets: A Doubtful Asset which has remained NPA for a period exceeding 18months. It has all the weaknesses inherent to a sub-standard asset with the added

characteristic that the collection or liquidation in full on the basis of currently known

factsis highly questionable and improbable.

iii. Loss Assets: A loss asset is one where a loss has been identified by the bank or, internalor external auditors but the amount has not been written off wholly.

Guidelines for Classification of NPAs

Broadly speaking, classification should be done taking into account the degree of well defined

credit weaknesses and the extent of dependence on collateral security for realization of dues.

Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value accounts.

Accounts with temporary deficiencies: These should be classified based on the past recovery

records.

Accounts regularize near about the balance sheet date: These accounts should be handled

with care and without scope for subjectivity. Where the account indicates inherent weakness

based on available data, it should be deemed as an NPA.

Asset classification should be borrower-wise and not facility-wise: If a single facility to a

borrower is classified as NPA, others should also be classified the same way, as it is difficult

to envisage only a solitary facility becoming a problem credit and not others.


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Advances under consortium arrangements: Classification here should be based on the

recovery record of the individual member banks.

Accounts where there is erosion in the value of the security: If there is a significant (i.e. the

realizable value of the security is less than 50% of that assessed by the bank during

acceptance) the account may be classified as NPA.

NPA SOME ASPECTS AND ISSUES

1. The NPAs of banks in India are considered to be at higher levels than those in other

countries. This issue has attracted attention of public as also of international financial

institutions and has gained further prominence in the wake of transparency and disclosure

measures initiated by RBI during recent years.

2. The NPA Management Policy document of SBI lays down to contain net NPAs to less

than 5% of bank's total loan assets in confirmity with the international standard. It is,

therefore necessary that as per guidelines provided in NPA Management Policy

document, every effort be made at all levels to cut down the NPAs. All this requires

greater efforts and teamwork.

3. It is essential to keep a constant watch over the non-performing assets not just to keep it

performing but also that once they become non-performing, effective measures are

initiated to get full recovery and where this is not possible, the various means are to be

initiated to get rid off the NPAs from the branch books.

4. NPAs adversely affect the wealth condition of the branch advances as also the

profitability of the branch. Some of the reasons for this are as under:

(a) Interest cannot be applied on the loan accounts classified as NPAs.(b) The Branch 'has to pay interest to central office on outstanding classified as NPA.

(c) The Branch has to incur cost in supervision and follow up of such advances.

(d) Provision has to be made on NPAs at Bank level.

5. Under Income Recognition, Assets Classification and provisioning, NPA may be Sub

standard, Doubtful or loss assets.


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6) Once the assets are classified as NPA, the Branch Manager has to take all the necessary

steps to get the dues recovered there-under to maintain the good health of advances and the

higher profitability at the-Branch. This requires management of NPAs in such a Planned and

scientific manner that the percentage of NPAs to the total advances will be minimum.

RECOGNITION OF INCOME ON

NON-PERFORMING LOANS (NPLS)

Stricter regulations have been laid down by supervisory authorities in many countries with

regard to income recognition on Non-Performing Loans (NPLs). The suspension of interest

payments is required on loans that are classified as 'non-performing' ['substandard', 'doubtful' and

'loss'].

Any uncollected interest payments on NPLs are considered non-accrued interest. Previously

accrued, but uncollected interest is reversed out of income. Failure to do so would overstate

income. Uncollected interest is normally put in a memorandum account. NPLs are restored on an

accrual basis only after full settlement has been made on all delinquent principal and interest. It

would, therefore, be useful, if the accounts carry a footnote, explaining the accounting policies

followed with regard to recognition of income on NPLs.


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OBJECTIVE OF STUDY

To study the position of non performing assets in SBI group

To know the reason for an asset becoming NPA

RESEARCH METHODOLOGY

Meaning of Research

Research is defined as a scientific & systematic search for pertinent information on a

specific topic. Research is an art of scientific investigation. Research is a systemized effort to

gain new knowledge. It is a careful inquiry especially through search for new facts in any branch

of knowledge. The search for knowledge through objective and systematic method of finding

solution to a problem is a research.


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The present Dissertation has been undertaken to do the Problem of NPA in

State Bank of India.

RESEARCH DESIGN

The present study is descriptive in nature, as it seeks to discover ideas and insight to

bring out new relationship. Research design is flexible enough to provide opportunity for

considering different aspects of problem under study. It helps in bringing into focus some

inherent weakness in enterprise regarding which in depth study can be conducted by

management.

SAMPLING DESIGN:

A sample design is a definite plan for obtaining a sample from the sampling frame. It refers to

the technique or the procedure that is adopted in selecting the sampling units from which

inferences about the population is drawn. Sampling design is determined before the collection of

the data.

TYPES OF

RESEARCH DESIGN

EXPLORATORY

RESEARCH

DESCRIPTIVE EXPERIMENTAL

RESEARCH

DESIGN


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DATA COLLECTION

SECONDARY DATA: -

The secondary data on the other hand, are those which have already been collected by someone

else and which have already been passed through the statistical processes. When the researcher

utilizes secondary data then he has to look into various sources from where he can obtain them.

For e.g. Books, magazine, newspaper, Internet, publications and reports.

In the present study use of secondary data collected from website.

.

REASONS FOR RISE IN NPAs

FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the

rising NPAs. But the problem of NPAs is more in public sector banks when compared to private

sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal

factors.

EXTERNAL FACTORS

Ineffective recovery tribunal

Types of data

SECONDARY DATA


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The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and

advances. Due to their negligence and ineffectiveness in their work the bank suffers the

consequence of non-recover, their by reducing their profitability and liquidity.

Wilful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing it. These

groups of people should be identified and proper measures should be taken in order to get back

the money extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now andthen India is hit by major natural calamities thus making the borrowers unable to pay back there

loans. Thus the bank has to make large amount of provisions in order to compensate those loans,

hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for

cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus

they are not repaying the loans

Industrial sickness

Improper project handling , ineffective management , lack of adequate resources , lack of

advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence

the banks that finance those industries ultimately end up with a low recovery of their loans

reducing their profit and liquidity.

Lack of demand


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Entrepreneurs in India could not foresee their product demand and starts production which

ultimately piles up their product thus making them unable to pay back the money they borrow to

operate these activities. The banks recover the amount by selling of their assets, which covers a

minimum label. Thus the banks record the nonrecovered part as NPAs and has to make provision

for it.

Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus it has to cope with

the changing principles and policies for the regulation of the rising of NPAs. eg. The fallout of

handloom sector is continuing as most of the weavers Co-operative societies have become

defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the

Central govt to revive the handloom sector has not yet been implemented. So the over dues due

to the handloom sectors are becoming NPAs.

INTERNAL FACTORS

Defective Lending process

There are three cardinal principles of bank lending that have been followed by the commercial

banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of profitability

i. Principles of safety By safety it means that the borrower is in a position to repay the loan both

principal and interest. The repayment of loan depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay


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Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay

depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore take

utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one

and the borrower is capable of carrying it out successfully .he should be a person of integrity and

good character.

Inappropriate technology

Due to inappropriate technology and management information system, market driven decisions

on real time basis can not be taken. Proper MIS and financial accounting system is not

implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of

the bank should be computerised.

Improper swot analysis

The improper strength, weakness, opportunity and threat analysis is another reason for rise in

NPAs. While providing unsecured advances the banks depend more on the honesty, integrity,

and financial soundness and credit worthiness of the borrower. Banks should consider the

borrowers own capital investment. it should collect credit information of the borrowers from a.

From bankers b. Enquiry from market/segment of trade, industry, business. c. From external

credit rating agencies. Analyse the balance sheet True picture of business will be revealed on

analysis of profit/loss a/c and balance sheet. Purpose of the loan When bankers give loan, he

should analyse the purpose of the loan. To ensure safety and liquidity, banks should grant loan

for productive purpose only. Bank should analyse the profitability, viability, long term

acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank

gives advances to those who are not able to repay it back. They should use good credit appraisal

to decrease the NPAs.

Managerial deficiencies


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The banker should always select the borrower very carefully and should take tangible assets as

security to safe guard its interests. When accepting securities banks should consider the 1.

Marketability 2. Acceptability 3. Safety 4. Transferability.

The banker should follow the principle of diversification of risk based on the famous maxim do

not keep all the eggs in onebasket; it means that the banker should not grant advances to a few

big farms only or to concentrate them in few industries or in a few cities. If a new big customer

meets misfortune or certain traders or industries affected adversely, the overall position of the

bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand

loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom

sector Orissa hand loom WCS ltd (2439.60lakhs).

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank

officials to the customer point decreases the collection of interest and principals on the loan. The

NPAs due to wilful defaulters can be collected by regular visits.

Re loaning process Non remittance of recoveries to higher financing agencies and re loaning

of the same have already affected the smooth operation of the credit cycle. Due to re loaning to

the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.


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IMPACT OF NPAS ON BANKS:-

In portion of the interest income is absorbed in servicing NPA.NPA is not merely non-

remunerative. It is also cost absorbing and profit eroding.

In the context of severe competition in the banking industry, the weak banks are at disadvantage

for leveraging the rate of interest in the deregulated market and securing remunerative business

growth. The options for these banks are lost. "The spread is the bread for the banks". This is the

margin between the cost of resources employed and the return therefrom." This is the margin

between the cost of resources employed and the return thereform. In other words it is gap

between the return on funds deployed (Interest earned on credit and investments) and cost of

funds employed (Interest paid on deposits).

When the interest rates were directed by RBI, as heretofore, there was not option for banks.

But today in the deregulated market the banks decide their lending rates and borrowing rates. In

the competitive money and capital Markets, inability to offer competitive market rates adds to

the disadvantage of marketing and building new NPA has affected the profitability, liquidity and

competitive functioning of banks and finally the psychology of the bankers in respect of their

disposition towards credit delivery and credit expansion.

1. Impact on Profitability"The efficiency of banks is not always reflected only by the size of its balance sheet but

by the level of return on its assets. NPAS do not generate interest income for the banks, but at

the same time banks are required to make provisions for such NPAS from their current

profits.

NPAS have a deleterious effect on the return on assets in several ways:

They erode current profits through provisioning requirements.

They result in reduced interest income.


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They require higher provisioning requirements affecting profits and accretion to

capital funds and capacity to increase good quality risk assets in future, and

They limit recycling of funds, set in asset-liability mismatches, etc.

There is at times a tendency among some of the banks to understate the level of NPAs in order to

reduce the provisioning and boost up bottom lines. It would only postpone the process.

In the context of crippling effect on a bank's operations in all spheres, asset quality has been

placed as one of the most important parameters in the measurement of a bank's performance

under the CAMELS supervisory rating system of RBI.

Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores

towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net

advances. To this extent the problem is contained but a what cost?

This costly remedy is made at the sacrifice of building healthy reserves for future capital

adequacy.

The enormous provisioning of NPA together with the holding cost of such non-productive assets

over the years has acted as a severe drain on the profitability of the SBI Group. In turn SBI

Group are seen as poor performers and unable to approach the market for raising additional

capital. Equity issues of nationalized banks that have already tapped the market are now quotedat a discount in the secondary market. Other bans hesitate to approach the market to rise new

issues. This has alternatively forced SBI Group to borrow heavily from the debt market to build

Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins;

else they are to seek the bounty of the Central Government for repeated Recapitalization.

Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds at

6% plus 1% service charge) the net NPA of Rs. 32632 Croces absorbs a recurring holding ost of

Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years whichworks out to average of Rs. 3300 crores from annum, a sizeab business.


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In the face of the deregulated banking industry, an ideal competitive working is reached, when

the banks are able to earn adequate amount of non-interest income to cover their entire operating

expenses i.e. a positive burden. In that event the spread factor i.e. the difference between the

gross interest income and interest cost will constitute its operating profits.

Theoretically even if the banks keeps 0% spread, it will still break even in terms of operating

profit and not return an operating loss. The net profit is the amount of the operating profit minus

the amount of provisions to be made including for taxation. On account of the burden of heavy

NPA, many nationalised banks have little option and they are unable to lower lending rates

competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income

from off balance sheet business yielding non-interest income.

The following working results of SBI Group an identified well manged nationalised banks for

the last two years and for the first nine months of the current financial year, will be revealing to

prove this statement.

Non-interest income fully absorbs the operating expenses of this banks in the current financial

year for the first 9 months. In the last two financial years, though such income has substantially

covered the operating expenses (between 80 to 90%) there is still a deficit left.

The strength of SBI Group is indentified by the following positive feature:

1. It's sizeable earnings under of non-interest income substantially/totally meets its non-

interest expenses.

2. Its obligation for provisioning requirements is within bounds. (Net NPA/Net

Advances is 1.92%)

It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended

March, 2001, as published by RBI in its Report on trends and progress of banking in India.

Interest on Recapitalization Bonds is a income earned form the Government, who had issued

the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout

package. The statistics above show the other weaknesses of the nationalised banks in addition to


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the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost

as under:

Their operating expenses are higher due to surplus manpower employed. Wage costs total

assets is much higher to PSBs compared to new private banks or foreign banks.

Their earnings from sources other than interest income are meagre. This is due to failure

to develop off balance sheet business through innovative banking products.

2. Impact on Liquidity of the SBI GroupThough SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines, the

facts that their net NPA in the average is as much as 7% is a potential threat for them. RBI

has indicated the ideal position as Zero percent Net NPA. Even

granting 3% net NPA within limits of tolerance the SBI Group are holding an uncomfortable

burden at 7.1% as at March 2001. They have not been able to build additional capital needed

for business expansion through internal generations or by tapping the equity market, but have

resorted to II-Tier capital in the debt market or looking to recapitalistion by Government of

India.

3. Impact on Outlook of Bankers towards Credit Delivery.The fear of NPA permeates the psychology of bank managers in the SBI Group in

entertaining new projects for credit expansion. In the world of banking the concepts of

business and risks are inseparable. Business is an exercise of balancing between risk and

reward. Accept justifiable risks and implements de-risking steps. Without accepting risk,

there can be no reward. The psychology of the banks today is to insulate themselves withzero percent risk and turn lukewarm to fresh credit. This has affected adversely credit growth

compared to growth of deposits, resulting in a low C/D Ratio around 50 to 54% for the

industry.


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The fear psychosis also leads to excessive security-consiousness in the approach towards

lending to the small and medium sized credit customers. There is insistence on provision of

collateral security, sometimes up to 200% value of the advance, and consequently due to a

feeling of assumed protection on account of holding adequate security (albeit over-

confidence). a tendency towards laxity in the standards of credit appraisal comes to the fore.

It is well know that the existence of collateral security at best may convert the credit

extended to productive sectors into an investment against real estate, but will not prevent the

account turning into NPA. Further blocked assets and real estate represent the most illiquid

security and NPA in such advances has the tendency to persist for a long duration.

SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an

urgent solution for handling this hovering threat.

4. Impact on Productivity:High level of NPAs effect the productivity of the banks by increasing the cost of funds and

by reducing the efficiency of banks employees. Cost of funds is increased because due to

non-availability of sufficient internal sources they have to rely on external sources to fulfill

their future financial requirements. Productivity of employees is also reduced because it

keeps staff busy with the task of recovery of overdue. Instead of devoting time for planning

for development through more credit and mobilization of resources the branch staff would

primarily be engaged in preparing a large value of returns and statements relating to sub-

standard, doubtful and loss assets, preparing proposal for filing of suits, waivement of legal

action, compromise, write off or in preparing DICGC claim papers etc.

5. Impact on other Variables:High level of NPAs also leads to squeezing of interest spread, when asset becomes an NPA

for the first time it adversely affects the spread by not contributing to the interest income and

from the second year onwards it will have its impact on the bottom line of the balance sheetbecause of provisioning to be made for it and not have incremental effect on the spread.

Now a days Govt. does not encourage liberal capital support to be given to banks. Banks are

required to bring their own capital by issuing share to the public, whereas high level of NPAs

leads to lower profits hence less or no profits available for equity shareholders hence lower


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EPS and fall in the value of share. During the year 2001-02 share of 12 public sector banks

were traded on the NSE out of which share value of three PSBs have decreased. Low market

value of shares has also forced the banks to borrow heavily debt market to build Tier II

capital to meet capital adequacy norms, putting severe pressure on their profit margins.

6. Qualitative aspects of the Micro Level Impact of NPAs:High incidence of loan defaults shakes the confidence of general public in the soundness of

banking setup and indirectly effects the capacity of the banking system to mop up the

deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust of

foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened bi Indian

banks or confine their transaction to top Indian banks only. Moreover, it puts negative effect

on granting of autonomy to PSBs whreas it is must for banks in this competitive

environment. Banks having positive net profits for the last three years, Net NPA level below

9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to be fulfilled to get

autonomous status, which becomes difficult in the situation of huge level of NPAs

.

Inadequate recovery also inhibits the banks to draw refinance from higher level agency.

The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery

to demand in respect of direct, medium and long term loans for agriculture and allied

activities. It implies that refinance facility would be progressively reduced depending on the

position of NPAs and also on the No. of years in which a banks branch remains in a

particular category of default. Due to fear of NPAa banks are being taken away from the

basic function for which these were established it is becoming more & more risky and less

remunerative. They are floating their subsidiaries to manage mutual funds, factoring,

insurance business, Good money is spent to recover bad money. Deterioration in the quality

of loan assets and inability to come with new products makes the Indian banks uncompetitiveglobally. Due to high cost, they cannot reduce lending rate to meet the economy's demand of

low lending rate. It is also biggest threat for capital account convertibility.


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7. Some areas of Macro-Economic Impact:It is not only the banks which are affected higher level of NPAs but it is the economy as a

whole which pays for it. Banks are not putting enough resource in lending due to fear of

default. Once the credit to various sectors of the economy slow down, the economy is badly

hit. There is slowdown in growth in GDP, industrial output and fall in the profit margins of

the corporate and consequent depression in the market. Further high level of NPAs can result

in adding to the inflationary potential in the economy and eroding the viability of the credit

system as a whole.

Not only this, burden of NPAs is to be borne by the society as a whole. When capital

support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs, it

comes out of either Govt. budgetary resources or from the public as per

Liberalization policy, whether this money is from tax revenues or from the hard earned

saving of the investing public, in fact, the society is bearing the cost of these

NPAs. Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is in

its hand. Any dividend declared would have gone to the Govt. and which can be spent on the

welfare and development program.


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ANALYSIS

STATE BANK OF INDIA

TOTAL ASSET

(RS. in CR)

YEAR MARCH 11 MARCH 10 MARCH 09

TOTAL ASSETS 1,223,736.20 1,053,413.74 964,432.08

Operating Profit recorded a YOY growth of 66.97% as on June 10 against a negative

growth of 7.28% recorded as on June 09.

Net Profit for Q1FY11 increased to Rs. 2914.20 crores from Rs. 2330.37crores in

Q1FY10, a growth of 25.05%.

964,432.081,053,413.74

1,223,736.20

0.00

200,000.00

400,000.00

600,000.00

800,000.00

1,000,000.00

1,200,000.00

1,400,000.00

9-Mar 10-Mar 11-Mar

TOTAL ASSETS(RS. in CR.)

TOTAL ASSETS(RS. in CR.)


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GROSS NPA


GROSS NPA 5,066.50 3,504.68 2,860.52

NET NPA


NET NPA 2,443.69 1,692.69 965.87

2,860.523,504.68

5,066.50

0.00

1,000.00

2,000.00

3,000.00

4,000.00

5,000.00

6,000.00

9-Mar 10-Mar 11-Mar

GROSS NPA (RS. in CR.)

GROSS NPA (RS. in CR.)


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NET ADVANCE


NET ADVANCE 680749 653220 680749

965.87

1,692.69

2443.69

0.00

500.00

1,000.00

1,500.00

2,000.00

2,500.00

3,000.00

9-Mar 10-Mar 11-Mar

NET NPA(RS. in CR.)

NET NPA(RS. in CR.)


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680749

653220

680749

635000

640000

645000

650000

655000

660000

665000

670000

675000

680000

685000

9-Mar 10-Mar 11-Mar

NET ADVANCE

NET ADVANCE


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GROSS ADVANCE


GROSS ADVANCE 693224 663828 5,49,793

Gross Advances up by Rs. 1,14,035 crores, a growth of 20.74% from Rs. 5,49,793 crores

in June 09 to Rs. 6,63,828 crores in June 10.

Market share in advances as on June 10 at 16.55% (16.43% as on June 09), an increase of

12 bps YOY.

Credit Deposit Ratio (Domestic) is up at 74.85% as at the end of June 10 from 64.84% at

the end of June 09, an increase of 1001 bps, against a growth of 348 bps recorded by

ASCB during the same period.

549793

663828693224

0

100000

200000

300000

400000

500000

600000

700000

800000

9-Mar 10-Mar 11-Mar

GROSS ADVANCE

GROSS ADVANCE


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INTERPRETATION

Rising interest rates, demand slowing in pace with economy are to blame; NPA may rais

further.The growth in non-performing assets (NPAs) as a percentage of banks loan portfolio was

almost at a five-year high in the April-June quarter and analysts said it could rise even further

because there is a strong chance that interest rates may harden in the absence of any sign of

inflation coming down.

When money becomes costlier, incomes of companies go down as demand from consumers

slows and, at the same time, their interest burden also goes up, leading to incidents of loandefaults.

In the april- june quarter, the banking industrys gross NPAs rose by 7.64% from Rs. 60,685

crore in the january-march quarter to Rs. 65,318 crore. This has been the highest growth of bad

loans in a quarter since july-senpember 2006.The growth in net NPAs, after provisioning, in the

April-June quarter was 9.62%, at Rs. 27,311 crore, up from Rs. 24,914 crore in the previous

quarter.

The financials of 35 of 40 listed banks have been taken into account. State Bank of India (SBI),

the nations largest lender, is yet to announce its June quarter earnings and comparable figures

for past 20 quarters are not available for four banks. In the January-March quarter, SB Is gross

NPAs grew to 3.28% from 3.17% in the previous quarter.

The economic environment could get worse. The Prime Ministers economic advisory council on

Monday cut its growth forecast for the economy to 8.2%, a significant reduction from its

February projection of 9%.
http://www.livemint.com/2011/08/03002328/Bad-loans-grow-fastest-in-five.htmlhttp://www.livemint.com/2011/08/03002328/Bad-loans-grow-fastest-in-five.htmlhttp://www.livemint.com/2011/08/03002328/Bad-loans-grow-fastest-in-five.htmlhttp://www.livemint.com/2011/08/03002328/Bad-loans-grow-fastest-in-five.htmlhttp://www.livemint.com/2011/08/03002328/Bad-loans-grow-fastest-in-five.html


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FINDINGS

1. REASON OF NPA IN SBI:-

Default by customer

Non-inspection of borrower

Lack of expertise

Imbalance of inventories

Poor credit collection

Lack of trained staff

Lack of commitment to recovery

Change in consumer preference

2 IMPACT OF NPA ON SBI

Govt. Policies

Impact of profitability

Liquidity

Impact on outlook of Banker to wards credit delivery


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RECOMMANDATIONS

Credit administration:

A banks have to strengthen their credit administrative machinery

and put in place effective credit risk management systems to reduce the fresh incidence of NPAs.

Better Inspection: We shall keep a close watch on the manner in which NPA

reduction is taking place.

Cash Recovery: We should also insist that cash recoveries should more than offset

the fresh write-offs in NPAs.

Perception: The mindset of the borrowers needs to change so that a culture of proper

utilization of credit facilities and timely repayment is developed.

Financial System: As you are aware, one of the main reason for corporate default is

on account of diversion of funds and corporate entities should come forward of avoid this

practice in the interest of strong and sound financial system.

Coordinator: Extending credit involves lenders and borrowers and both should realize

their role and responsibilities. They should appreciate the difficulties of each other and

should endeavor to work contributing to a healthy financial system.

\


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LIMITATION OF STUDY

Shortage of time :-

Time is very short for research ,so that is very difficult can get the knowledge about

everything .

Information not sufficiently available

The source of data collection is secondary so the information available is not sufficient.

No direct source of information available

The information is collected from indirect sources so in some information data is not

available.

Secondary data:-

Information is not reliable because of secondary data


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CONCLUSION

A strong banking sector is important for a flourishing economy. The failure of the banking

sector may have an adverse impact on other sectors.

Over the years, much has been talked about NPA and the emphasis so far has been only on

identification and quantification of NPAs rather than on ways to reduce and upgrade them.

There is also a general perception that the prescriptions of 40% of net bank credit to priority

sectors have led to higher NPAs, due to credit to these sectors becoming stickly managers of

rural and semi-urban branches generally sanction these loans. In the changed context of new

prudential norms and emphasis on quality lending and profitability, mangers should make it

amply clear to potential borrowers that banks resources are scare and these are meant to

finance viable ventures so that these are repaid on time and relevant to other needy borrowers

for improving the economic lot of maximum number of households. Hence selectionof right

borrowers, viable economic activity, adequate finance and timely disbursement, correct and

use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing

of minimizing the incidence of new NPAs.


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BIBLIOGRAPHY

1. WWW.SBI.COM

2. http://www.rbi.org.in/scripts/NotificationUser.aspx?Id=6376&Mode=0

3. http://www.moneycontrol.com/financials/statebankindia/balance-sheet/SBI

4. http://www.sbi.co.in/webfiles/uploads/files/PRESS_RELEASE_Q1_FY11.pdf

5. MINT NEWS PAPER Dated 03.08.11

6. INDIAN FINANCIAL SYSTEM (BHARTI V. PATHAK)

a study of non performing assets of sbi final

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