non perfoming assets @ uti bank project report mba finance

“Non Performing Assets and its impact on Profitability of New Private Sector Banks”

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Executive Summery

The future of Indian Banking represents a unique mixture of unlimited

opportunities amidst insurmountable challenges. On the one hand we see the scenario

represented by the rapid process of globalization presently taking shape bringing the

community of nations in the world together, transcending geographical boundaries, in the

sphere of trade and commerce, and even employment opportunities of individuals. All

these indicate newly emerging opportunities for Indian Banking. But on the darker side

we see the accumulated morass, brought out by three decades of controlled and

regimented management of the banks in the past. It has siphoned profitability of the many

banks, accumulated bloated NPA and threatens Capital Adequacy of the Banks and their

continued stability.

New Private Sector Banks in India can solve their problems only if they assert a

spirit of self-initiative and self-reliance through developing their in-house expertise. They

have to imbibe the banking philosophy inherent in de-regulation NPA is a problem

created by the Banks and they have to find the cause and the solution - how it was created

and how the Banks are to overcome it. An attempt is made in this study the present

situation and to arrive at a solution to solve this problem.

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Design of the study

Title of the project:

“Non Performing Assets and its impact on Profitability of New Private Sector

Banks”.

Scope of study: Scope of my study restricted only to 7 New Private Sector Banks

NPA data’s and Advances, and for Comparison of Credit risk path 7 old selected Private

Banks is taken.

Need For Study:

This study will help to know the recent norms of NPA.

This study helps to know how NPA Causing Problems to Banking Sector and

what might be the solution to overcome from this problem and also its impact on

Profitability of New Profit Banks.

STATEMENT OF THE PROBLEM

Profitability is considered as a benchmark for evaluating performance of any

business enterprise including the banking industry. However, increasing Non-

Performing Assets, have a direct impact on profitability of banks and financial

institutions. Legally speaking banks and financial institutions are not allowed to book

income on such account and at the same times they are forced to make provision on such

assets. So This project is undertaken to now impact of NPA on Profitability of New

Private Sector Banks.

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Objectives of Study

1. To study the RBI norms on Non Performing Assets, and the various reasons for

the existence of huge level of NPA in Indian banking.

2. To know the performance comparison of New Private Banks Non performing

asset for past 3 years.

3. To know the impact of non performing assets on profitability of New Private

Banks, and comparison of credit risk path of New Private Banks with 7 selected

Old Private Banks.

4. To study the various steps taken by the banks to bring down the NPA’s in

respective bank branches.

5. To recommend measures for Improving performance and reduction of Non

Performing Assets.

Methodology

Primary Data:

Views of the concerned officials were gathered by directly interacting with them, and

such data was found very useful while analyzing and drawing conclusions.

Secondary Data:

Recent RBI norms of NPA.

IBA Bulletin 0f 2005-06 is referred to collect data for Net NPA, and Advances.

Web site of UTI Bank and other Web sites.

Plan of analysis:

In this study quadrant analysis is used on the calculated figures.

Limitations:

The study is based mostly on secondary data.

Data has been drawn from journals, so information may not be complete.

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For the analysis only the advances and NPA percentages of banks and operating

profit, provisions and contingencies as a whole and net profit of New PSB’s are

taken into consideration.

INTRODUCTION

It's a known fact that the banks and financial institutions in India face the problem

of swelling non-performing assets (NPA’s) and the issue is becoming more and more

unmanageable. In order to bring the situation under control, some steps have been taken

recently. The Securitization and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 was passed by Parliament, which is an important step towards

elimination or reduction of NPA’s.

MEANING OF NPA’s:

An asset is classified as non-performing asset (NPA’s) if dues in the form of

principal and interest are not paid by the borrower for a period of 180 days. However

with effect from March 2004, default status would be given to a borrower if dues are not

paid for 90 days. If any advance or credit facilities granted by bank to a borrower become

non-performing, then the bank will have to treat all the advances/credit facilities granted

to that borrower as non-performing without having any regard to the fact that there may

still exist certain advances / credit facility.

NPA IN INDIAN BANKING SYSTEM:

NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the

midst of turbulent structural changes overtaking the international banking institutions,

and when the global financial markets were undergoing sweeping changes. In fact after it

had emerged the problem of NPA kept hidden and gradually swelling unnoticed and

unperceived, in the maze of defective accounting standards that still continued with

Indian Banks up to the Nineties and opaque Balance sheets.

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In a dynamic world, it is true that new ideas and new concepts that emerge

through such changes caused by social evolution bring beneficial effects, but only after

levying a heavy initial toll. The process of quickly integrating new innovations in the

existing set-up leads to an immediate disorder and unsettled conditions. People are not

accustomed to the new models. These new formations take time to configure, and work

smoothly. The old is cast away and the new is found difficult to adjust. Marginal and sub-

marginal operators are swept away by these convulsions. Banks being sensitive

institutions entrenched deeply in traditional beliefs and conventions were unable to adjust

themselves to the changes. They suffered easy victims to this upheaval in the initial

phase.

Consequently banks underwent this transition-syndrome and languished under

distress and banking crises surfaced in quick succession one following the other in many

countries. But when the banking industry in the global sphere came out of this

metamorphosis to re-adjust to the new order, they emerged revitalized and as more

vibrant and robust units. Deregulation in developed capitalist countries particularly in

Europe, witnessed a remarkable innovative growth in the banking industry, whether

measured in terms of deposit growth, credit growth, growth intermediation instruments as

well as in network.

During all these years the Indian Banking, whose environment was insulated from

the global context and was denominated by State controls of directed credit delivery,

regulated interest rates, and investment structure did not participate in this vibrant

banking revolution. Suffering the dearth of innovative spirit and choking under undue

regimentation, Indian banking was lacking objective and prudential systems of business

leading from early stagnation to eventual degeneration and reduced or negative

profitability. Continued political interference, the absence of competition and total lack of

scientific decision-making, led to consequences just the opposite of what was happening

in the western countries. Imperfect accounting standards and opaque balance sheets

served as tools for hiding the shortcomings and failing to reveal the progressive

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deterioration and structural weakness of the country's banking institutions to public view.

This enabled the nationalized banks to continue to flourish in a deceptive manifestation

and false glitter, though stray symptoms of the brewing ailment were discernable here

and there.

The government hastily introduced the first phase of reforms in the financial and

banking sectors after the economic crisis of 1991. This was an effort to quickly resurrect

the health of the banking system and bridge the gap between Indian and global banking

development. Indian Banking, in particular PSB’s suddenly woke up to the realities of the

situation and to face the burden of the surfeit of their woes. Simultaneously major

revolutionary transitions were taking place in other sectors of the economy on account

the ongoing economic reforms intended towards freeing the Indian economy from

government controls and linking it to market driven forces for a quick integration with

the global economy. Import restrictions were gradually freed. Tariffs were brought down

and quantitative controls were removed. The Indian market was opened for free

competition to the global players. The new economic policy in turn revolutionalised the

environment of the Indian industry and business and put them to similar problems of new

mixture Of opportunities and challenges. As a result we witness today a scenario of

banking, trade and industry in India, all undergoing the convulsions of total reformation

battling to kick off the decadence of the past and to gain a new strength and vigor for

effective links with the global economy. Many are still languishing unable to get released

from the old set-up, while a few progressive corporate are making a niche for themselves

in the global context.

During this decade the reforms have covered almost every segment of the

financial sector. In particular, it is the banking sector, which experienced major reforms.

The reforms have taken the Indian banking sector far away from the days of

nationalization. Increase in the number of banks due to the entry of new private and

foreign banks; increase in the transparency of the banks' balance sheets through the

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introduction of prudential norms and norms of disclosure; increase in the role of the

market forces due to the deregulated interest rates, together with rapid computerization

and application of the benefits of information technology to banking operations have all

significantly affected the operational environment of the Indian banking sector.

In the background of these complex changes when the problem of NPA was

belatedly recognized for the first time at its peak velocity during 1992-93, there was

resultant chaos and confusion. As the problem in large magnitude erupted suddenly banks

were unable to analyze and make a realistic or complete assessment of the surmounting

situation. It was not realized that the root of the problem of NPA was centered elsewhere

in multiple layers, as much outside the banking system, more particularly in the transient

economy of the country, as within. Banking is not a compartmentalized and isolated

sector delinked from the rest of the economy. As has happened elsewhere in the world, a

distressed national economy shifts a part of its negative results to the banking industry. In

short, banks are made ultimately to finance the losses incurred by constituent industries

and businesses. The unprepared ness and structural weakness of our banking system to

act to the emerging scenario and de-risk itself to the challenges thrown by the new order,

trying to switch over to globalization were only aggravating the crisis. Partial perceptions

and hasty judgments led to a policy of ad-hoc-ism, which characterized the approach of

the authorities during the last two-decades towards finding solutions to banking ailments

and dismantling recovery impediments. Continuous concern was expressed. Repeated

correctional efforts were executed, but positive results were evading. The problem was

defying a solution.

The threat of NPA was being surveyed and summarized by RBI and Government

of India from a remote perception looking at a bird's-eye-view on the banking industry as

a whole delinked from the rest of the economy. RBI looks at the banking industry's

average on a macro basis, consolidating and tabulating the data submitted by different

institutions. It has collected extensive statistics about NPA in different financial sectors

like commercial banks, financial institutions, urban cooperatives, NBFC etc. But still it is

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a distant view of one outside the system and not the felt view of a suffering participant.

Individual banks inherit different cultures and they finance diverse sectors of the

economy that do not possess identical attributes. There are distinct diversities as among

the 29 public sector banks themselves, between different geographical regions and

between different types of customers using bank credit. There are three weak nationalized

banks that have been identified. But there are also correspondingly two better performing

banks like Corporation and OBC. There are also banks that have successfully contained

NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra (Gross

NPA 6.13%). The scenario is not so simple to be generalized for the industry as a whole

to prescribe a readymade package of a common solution for all banks and for all times.

Similarly NPA concerns of individual Banks summarized as a whole and

expressed as an average for the entire bank cannot convey a dependable picture. It is

being statistically stated that bank X or Y has 12% gross NPA. But if we look down

further within that Bank there are a few pockets possessing bulk segments of NPA

ranging 50% to 70% gross , which should consequently convey that there should also be

several other segments with 3 to 5% or even NIL % NPA, averaging the bank's whole

performance to 12%. Much criticism is made about the obligation of Nationalized Banks

to extend priority sector advances. But banks have neither fared better in non-priority

sector. The comparative performance under priority and non-priority is only a difference

of degree and not that of kind.

The assessment of the mix-of contributing factors includes:

1. human factors (those pertaining to the bankers and the credit customers),

2. environmental imbalances in the economy on account of wholesale changes and

also

3. Inherited problems of Indian banking and industry.

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Variable skill, efficiency and level integrity prevailing in different branches and in

different banks accounts for the sweeping disparities between inter-bank and intra-bank

performance. We may add that while the core or base-level NPA in the industry is due to

common contributory causes, the inter-se variations are on account of the structural and

operational disparities. The heavy concentrated prevalence of NPA is definitely due to

human factors contributing to the same.

No bank appears to have conducted studies involving a cross-section of its operating

field staff, including the audit and inspection functionaries for a candid and

comprehensive introspection based on a survey of the variables of NPA burden under

different categories of sectoral credit, different regions and in individual Branches

categorized as with high, medium and low incidence of NPA. We do not hear the voice of

the operating personnel in these banks candidly expressed and explaining their failures.

Ex-bankers, i.e. the professional bankers who have retired from service, but possess a

depth of inside knowledge do not out-pour candidly their views. After three decades of

nationalized banking, we must have some hundreds of retired Bank executives in the

country, who can boldly and independently, but objectively voice their views. Everyone

is satisfied in blaming the others. Bank executives hold 'willful defaulters' responsible for

all the plague. Industry and business blames the government policies.

Important fact-revealing information for each NPA account is the gap period

between the date, when the advance was originally made and the date of its becoming

NPA. If the gap is long, it is the case of a sunset industry. Things were all right earlier,

but economic variance in trade cycles or market sentiments have created the NPA. Credit

customers who are in NPA today, but for years were earlier rated as good performers and

creditworthy clients ranging within the top 50 or 100. Significant part of the NPA is on

account of clout banking or willfully given bad loans. Infant mortality in credit is solely

on account of human factors and absence of human integrity.

Credit to different sectors given by the PSB’s in fact represents different products.

Advance to weaker sections below Rs.25000/- represents the actual social banking. NPA

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in this sector forms 8 TO 10% of the gross amount. Advance to agriculture, SSI and big

industries each calls for different strategies in terms of credit assessment, credit delivery,

project implementation, and post advance supervision. NPA in different sector is not

caused by the same resultant factors. Containing quantum of NPA is therefore to be

programmed by a sector-wise strategy involving a role of the actively engaged

participants who can tell where the boot pinches in each case. Business and industry has

equal responsibility to accept accountability for containment of NPA. Many of the

present defaulters were once trusted and valued customers of the banks. Why have they

become unreliable now, or have they?

The credit portfolio of a nationalized bank also includes a number of low-risk and

risk-free segments, which cannot create NPA. Small personal loans against banks' own

deposits and other tangible and easily marketable securities pledged to the bank and held

in its custody are of this category. Such small loans are universally given in almost all the

branches and hence the aggregate constitutes a significant figure. Then there is food

credit given to FCI for food procurement and similar credits given to major public

Utilities and Public Sector Undertakings of the Central Government. It is only the

residual fragments of Bank credit that are exposed to credit failures and reasons for NPA

can be ascertained by scrutinizing this segment.

Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all

pervasive national scourge swaying the entire Indian economy. NPA is a sore throat of

the Indian economy as a whole. The banks are only the ultimate victims, where life cycle

of the virus is terminated.

Now, how does the Government suffer? What about the recurring loss of revenue

by way of taxes, excise to the government on account of closure of several lakhs of

erstwhile vibrant industrial units and inefficient usage of costly industrial infrastructure

erected with considerable investment by the nation? As per statistics collected three years

back there are over two and half million small industrial units representing over 90

percent of the total number of industrial units. A majority of the industrial work force

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finds employment here and the sector's contribution to industrial output is substantial and

is estimated at over 35 percent while its share of exports is also valued to be around 40

percent. Out of the 2.5 million, about 10% of the small industries are reported to be sick

involving a bank credit outstanding around Rs.5000 to 6000 Crores, at that period. It may

be even more now. These closed units represent some thousands of displaced workers

Previously enjoying gainful employment. Each closed unit whether large, medium or

small occupies costly developed industrial land. Several items of machinery form security

for the NPA accounts should either be lying idle or junking out. In other words, large

value of land, machinery and money are locked up in industrial sickness. These are the

assets created that have turned unproductive and these represent the real physical NPA,

which indirectly are reflected in the financial statements of nationalized banks, as the

ultimate financiers of these assets. In the final analysis it represents instability in industry.

NPA represents the owes of the credit recipients, in turn transferred and parked with the

banks.

Recognizing NPA as a sore throat of the Indian economy, the field level

participants should first address themselves to find the solution. Why not representatives

of industries and commerce and that of the Indian Banks' Association come together and

candidly analyze and find an everlasting solution heralding the real spirit of deregulation

and decentralization of management in banking sector, and accepting self-discipline and

self-reliance? What are the deficiencies in credit delivery that leads to its misuse, abuse

or loss? How to check misuse and abuse at source? How to deal with erring Corporate? In

short, the functional staff of the Bank along with the representatives of business and

industry has to accept a candid introspection and arrive at a code of discipline in any final

solution. And preventive action to be successful should start from the credit-recipient

level and then extend to the bankers. RBI and Government of India can positively

facilitate the process by providing enabling measures. Do not try to set right industry and

banks, but help industry and banks to set right themselves. The new tool of deregulated

approach has to be accepted in solving NPA.

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REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPA’S IN THE

INDIAN BANKING SYSTEM (IBS):

The origin of the problem of burgeoning NPA’s lies in the quality of managing

credit risk by the banks concerned. What is needed is having adequate preventive

measures in place namely, fixing pre-sanctioning appraisal responsibility and having an

effective post-disbursement supervision. Banks concerned should continuously monitor

loans to identify accounts that have potential to become non-performing.

To start with, performance in terms of profitability is a benchmark for any

business enterprise including the banking industry. However, increasing NPA’s have a

direct impact on banks profitability as legally banks are not allowed to book income on

such accounts and at the same time banks are forced to make provision on such assets as

per the Reserve Bank of India (RBI) guidelines.

Also, with increasing deposits made by the public in the banking system, the

banking industry cannot afford defaults by borrowers since NPA’s affects the repayment

capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the

system through various rate cuts and banks fail to utilize this benefit to its advantage due

to the fear of burgeoning non-performing assets.

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Some of the other reasons were:

After the nationalization of banks sector wise allocation of credit disbursements

became compulsory.

Banks were compelled to give credit to even those sectors, which were not

considered to be very profitable, keeping in mind the federal policy.

People in the agricultural sector were hardly interested in returning the loans as

they were confident that the loans with the interest would be written off by the

successive governments.

The small scale industries also availed credit even though they were not sure of

performing to the extent of returning the loans.

Banks were also not in the position to press enough securities to cover the loans in

calls of timings.

Even if the assets were provided they proved to be substandard assets as the

values that could be realized were very low.

Free distribution done during “loan mails” (congress regime) also contributed to

the heavy increase in NPA’s.

The slackness in effort by the bank authorities to collect or recover loan advances

in time also contributes to the increase in NPA’s.

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Lack of accountability of the officers, who sanctioned the loans led to a caste

whole approach by the officers recovering the loans.

Loans sanctioned to under servicing candidates due to pressure from the

ministers and other politicians also led to the non recovery of debts.

Poor credit appraisal system, lack of vision while sanctioning credit limits.

Lack of proper monitoring.

Reckless advances to achieve the budgetary targets.

Lack of sincere corporate culture, inadequate legal provisions on foreclosure and

bankruptcy.

Change in economic policies/environment.

Lack of co-ordination between banks.

Some of the internal factors of the organization leading to NPA’s are:

Division of funds for expansion, diversification, modernization, undertaking

new projects and for helping associate concerns, this is coupled with

recessionary trends and failure to tap funds in the capital and debt markets.

Business failure( product, marketing etc.,),inefficient management, strained

labor relations, inappropriate technology, technical problems, product

obsolescence etc.,

Recession , shortage of input, power shortage, price escalation, accidents,

natural calamities, besides externalization problem in other countries leading

to non payment of overdue.

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Time/cost overrun during the project implementation stage.

Government policies like changes in the excise duties, pollution control

orders.

Willful default, siphoning off of funds, fraud, misappropriation,

promoters/directors disputes etc.,

Deficiencies on the part of the banks like delay in release of limits and delay

in release of payments/subsidies by the government.

Operational definitions:

NPA: An asset is classified as non-performing asset (NPA’s) if dues in the form of

principal and interest are not paid by the borrower for a period of 90 days.

Standard Assets: Such an asset is not a non-performing asset. In other words, it carries not more than normal risk attached to the business.

Sub-standard Assets: It is classified as non-performing asset for a period not exceeding 18 months

Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a

doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by external auditors or by Reserve Bank India (RBI) inspection

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Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain with itself

in the form of cash reserves or by way of current account with the Reserve Bank of India

(RBI), computed as a certain percentage of its demand and time liabilities. The objective

is to ensure the safety and liquidity of the deposits with the banks.

Statutory Liquidity Ratio (SLR): It is the one which every banking company shall

maintain in India in the form of cash, gold or unencumbered approved securities, an

amount which shall not, at the close of business on any day be less than such percentage

of the total of its demand and time liabilities in India as on the last Friday of the second

preceding fortnight, as the Reserve Bank of India (RBI) may specify from time to time.

RBI GUIDELINES ON INCOME RECOGNITION (INTEREST INCOME ON

NPA’s)

Income Recognition: Income from Non Performing Assets should not recognize on

accrual basis but should be booked as income only when it is actually received. Therefore

interest should not be charged and taken into income account till the account become

standard asset.

Interest charged to be stopped

Provision to be made

Over Due: Any amount due to the Bank under any credit facility is

“Over due” if it is not paid on the due date fixed by the Bank.

Out of Order: An account should be treated as “out of order”

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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 90 days as on the date of Bank’s Balance Sheet or Where are credits are not

enough to cover the interest debited during the same period.

A Non Performing Asset shall be an advance where:

Term Loan: Interest and/ or installment of principal remain “over due” for a period of

more than 90 days.

Cash Credit/ Over Draft: If the account remains out of order for a period more than

90 days.

Bills: Overdue for a period of more than 90 days.

Other accounts: Any amount to be received remains overdue for a period of more than

90 days.

Short duration crops: If the installment of principal or interest there on remains

overdue for two crop seasons.

Long duration crops: If installment of principal or interest there on remains overdue for

One Crop season.

An account would be classified as NPA only if the interest charged during any

quarter is not serviced fully within 90 days from the end of the quarter.

ASSET CLASSIFICATION

Standard Assets:

Is one which does not disclose any problem and which does not carry more than normal

risks attached to the business.

Substandard Assets:

Which has remained NPA for a period of less than or equal to 12 months.

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Doubtful Assets:

If it has remained NPA for a period exceeding 12 months.

Loss Assets:

A loss asset is one where loss has been identified by the bank.

RBI GUIDELINES ON PROVISIONING REQUIREMENT OF BANK

ADVANCES:

Loss Assets: 100% of the outstanding amount.

Doubtful Assets: 100% of unsecured portion.

Secured portion

Up to one year 20%

One to three years 30%

More than 3 years

1. Outstanding stock of NPA as on

31.3.2004

75% w.e.f.31st March, 06

100% w.e.f.31st March,07

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2. Advances classified as “doubtful more

than 3 years” on or after 31.3.2004

100% w.e.f.31st March,05

Substandard Assets: Secured portion 10% and unsecured portion 20% on total

outstanding.

Standard Assets: A general provision of 0.40% (For direct Agriculture & SME Sector

0.25%). Provisioning for standard assets will be done at corporate office centrally.

Calculation of Net NPA (Non Performing Asset)

Formula:

GROSS NPA

LESS: Balance in Interest Suspense Account

LESS: DICGC/ECGC Claims received but pending for adjustment

LESS: Part payment received and kept in suspense account

Illustration: (Based on annual reports of UTI bank 2005-06)

Particulars Amount

Gross NPA of UTI for the year 2006 37428

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LESS: Balance from interest suspense account 12704

LESS: DICGC/ECGC Claims received but pending for

adjustment

36

LESS: Part payment received and kept in Suspense A/c 2928

NET NON PERFORMING ASSETS 21760

NET NPA IN PERCENTAGE 0.97%

THE NARASIMHAN COMMITTEE'S FIRST REPORT

The salient features of these reforms include:

Phasing out of statutory pre-emption - The SLR requirement have been brought

down from 38.5% to 25% and CRR requirement from 7.50% to 5.75%. (Presently

4.5%)

Deregulation of interest rates - All lending rates except for lending to small

borrowers and a part of export finance have been de-regulated. Interest on all

deposits are determined by banks except on savings deposits.

Capital adequacy - CAR of 9 % prescribed with effect from March 31, 2000.

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Other prudential norms - Income recognition, asset classification and provisioning

norms has been made applicable. The provisioning norms are more prudent,

objective, transparent, and uniform and designed to avoid subjectivity.

Debt Recovery Tribunals - 22 DRTs and 5 DRATs have already been set up and 7

more DRTs will be set up during the current financial year. Comprehensive

amendment in the Act have been made to make the provisions for adjudication,

enforcement and recovery more effective.

Transparency in financial statements - Banks have been advised to disclose

certain key parameters such as CAR, percentage of NPA’s, provisions for NPA’s,

net value of investment, Return on Assets, profit per employee and interest

income as percentage to working funds.

Entry of new private sector banks - 9 new private sector banks have been set up

with a view to induce greater competition and for improving operational

efficiency of the banking system. Competition has been introduced in a controlled

manner and today we have nine new private sector banks and 36 foreign banks in

India competing with the public sector banks both in retail and corporate banking

Functional autonomy - The minimum prescribed Government equity was brought

to 51%. Nine nationalized banks raised Rs.2855 crores from the market during

1994-2001. Banks Boards have been given more powers in operational matters

such as rationalization of branches, credit delivery and recruitment of staff.

Hiving off of regulatory and supervisory control - Board for financial supervision

was set up under the RBI in 1994 bifurcating the regulatory and supervisory

functions.

NARASIMHAN COMMITTEE- SECOND REPORT

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The Narasimhan Committee on Banking Reforms, in its second report, has

combined drastic surgery with a strong dose of medicine to cure the ailing industry. On-

performing assets (NPA’s) have been the bane of the industry. The panel has identified

poor credit decisions by managements, cyclical changes in the economic environment,

directed credit and crude forms of behest-lending as the factors responsible for poor asset

quality. The panel points a finger at priority sector credit as having a high contamination

coefficient and suggests that quantitative targets have caused erosion of asset quality. It

laments the fact that infusion of recapitalization funds notwithstanding, NPA’s remain

uncomfortably high. Yet it recommends that advances covered by government guarantees

that have turned sticky should also be reckoned as net NPA’s.

The Narasimhan Committee's solution for NPA’s is the creation of an Asset

Reconstruction Fund (ARF), which will take over the bad debts of banks from their

balance sheets to enable them to start on a clean slate. Recapitalization through budgetary

infusion, the panel correctly points out, is not a sustainable option. But bankers are

skeptical about the workability of the ARF. A senior banker asked, "At what price will

the ARF take over my NPA’s? How will the discount be worked out?" He said that the

ARF cannot bail out banks under the present legal system. Although every bad debt is

secured, banks cannot encash the security because of legal hurdles. The Urban Land

Ceiling Act is a major deterrent to debt recovery. Bankers say that the legal system has to

be revamped to facilitate recovery so that the ARF can pick up "NPA’s at a viable price".

The committee has recommended that net NPA’s be brought down to less than 5

per cent by the year 2000 and 3 per cent by the year 2002. "Easier said than done," says a

top banker. "Already we do a lot of window-dressing. Outstanding accounts are shown as

priority lending to meet targets. We keep lending to defaulters to roll over the NPA’s.

Fixing unrealistic targets will be counterproductive."

The committee has recommended that banks should not lend to defaulters, but

bankers say that this is unrealistic. They claim that in the absence of fresh loans, the

defaulting companies will close down, and leading to loss of jobs. "Will that be

BABASAB PATIL -23-


acceptable?" asks a banker. Bankers also complain that they are forced by the Board for

Industrial and Financial Reconstruction (BIFR) to lend to sick companies, yet more often

than not there is no turnaround and the accounts turn bad.

Credit Risk and NPA’s:

Quite often credit risk management (CRM) is confused with managing non-

performing assets (NPA’s). However there is an appreciable difference between the two.

NPA’s are a result of past action whose effects are realized in the present i.e. they

represent credit risk that has already materialized and default has already taken place.

On the other hand managing credit risk is a much more forward-looking approach

and is mainly concerned with managing the quality of credit portfolio before default takes

place. In other words, an attempt is made to avoid possible default by properly managing

credit risk. Considering the current global recession and unreliable information in

financial statements, there is high credit risk in the banking and lending business. To

create a defense against such uncertainty, bankers are expected to develop an effective

internal credit risk models for the purpose of credit risk management.

Usage of financial statements in assessing the risk of default for lenders:

For banks and financial institutions, both the balance sheet and income statement

have a key role to play by providing valuable information on a borrower’s viability.

However, the approach of scrutinizing financial statements is a backward looking

approach. This is because; the focus of accounting is on past performance and current

positions.

BABASAB PATIL -24-


The key accounting ratios generally used for the purpose of ascertaining the

creditworthiness of a business entity are that of debt-equity ratio and interest coverage

ratio. Highly rated companies generally have low leverage. This is because; high leverage

is followed by high fixed interest charges, non-payment of which results into a default.

Capital Adequacy Ratio (CAR) of RBI and Basel committee on banking supervision

(BCBS):

Reserve Bank of India (RBI) has issued capital adequacy norms for the Indian

banks. The minimum CAR which the Indian Banks are required to meet at all times is set

at 9%. It should be taken into consideration that the bank's capital refers to the ability of

bank to withstand losses due to risk exposures.

To be more precise, capital charge is a sort of regulatory cost of keeping loans

(perceived as risky) on the balance sheet of banks. The quality of assets of the bank and

its capital are often closely related. Quality of assets is reflected in the quantum of

NPA’s. By this, it implies that if the asset quality was poor, then higher would be the

quantum of non-performing assets and vice-versa.

Market risk is the risk arising due to the fluctuations in value of a portfolio due to

the volatility of market prices.

Operational risk refers to losses arising due to complex system and processes. It is

important for a bank to have a good capital base to withstand unforeseen losses. It

indicates the capability of a bank to sustain losses arising out of risky assets.

The Basel Committee on Banking Supervision (BCBS) has also laid down certain

minimum risk based capital standards that apply to all internationally active commercial

banks. That is, bank's capital should at least be 8% of their risk-weighted assets. This

infact helps bank to provide protection to the depositors and the creditors.

BABASAB PATIL -25-


The main objective here is to build a sort of support system to take care of

unexpected financial losses thereby ensuring healthy financial markets and protecting

depositors.

IMPACT OF EXCESS LIQUIDITY:

One should also not forget that the banks are faced with the problem of increasing

liquidity in the system. Further, Reserve Bank of India (RBI) is increasing the liquidity in

the system through various rate cuts. Banks can get rid of its excess liquidity by

increasing its lending but, often shy away from such an option due to the high risk of

default. In order to promote certain prudential norms for healthy banking practices, most

of the developed economies require all banks to maintain minimum liquid and cash

reserves broadly classified into Cash Reserve Ratio (CRR) and the Statutory Liquidity

Ratio (SLR).

Cash Reserve Ratio (CRR) is the reserve which the banks have to maintain with

itself in the form of cash reserves or by way of current account with the Reserve Bank of

India (RBI), computed as a certain percentage of its demand and time liabilities. The

objective is to ensure the safety and liquidity of the deposits with the banks.

On the other hand, Statutory Liquidity Ratio (SLR) is the one which every

banking company shall maintain in India in the form of cash, gold or unencumbered

approved securities, an amount which shall not, at the close of business on any day be

less than such percentage of the total of its demand and time liabilities in India as on the

last Friday of the second preceding fortnight, as the Reserve Bank of India (RBI) may

specify from time to time.

A rate cut (for instance, decrease in CRR) results into lesser funds to be locked up

in RBI's vaults and further infuses greater funds into a system. However, almost all the

banks are facing the problem of bad loans, burgeoning non-performing assets, thinning

margins, etc. as a result of which, banks are little reluctant in granting loans to corporates.

BABASAB PATIL -26-


As such, though in its monetary policy RBI announces rate cut but, such news are

no longer warmly greeted by the bankers.

HIGH COST OF FUNDS DUE TO NPA’s:

Quite often genuine borrowers face the difficulties in raising funds from banks

due to mounting NPA’s. Either the bank is reluctant in providing the requisite funds to

the genuine borrowers or if the funds are provided, they come at a very high cost to

compensate the lender’s losses caused due to high level of NPA’s.

Therefore, quite often corporate prefer to raise funds through commercial papers

(CPs) where the interest rate on working capital charged by banks is higher.

With the enactment of the Securitization and Reconstruction of Financial Assets

and Enforcement of Security Interest Act, 2002, banks can issue notices to the defaulters

to pay up the dues and the borrowers will have to clear their dues within 60 days. Once

the borrower receives a notice from the concerned bank and the financial institution, the

secured assets mentioned in the notice cannot be sold or transferred without the consent

of the lenders.

The main purpose of this notice is to inform the borrower that either the sum due

to the bank or financial institution be paid by the borrower or else the former will take

action by way of taking over the possession of assets. Besides assets, banks can also

takeover the management of the company. Thus the bankers under the aforementioned

Act will have the much needed authority to either sell the assets of the defaulting

companies or change their management.

But the protection under the said Act only provides a partial solution. What banks

should ensure is that they should move with speed and charged with momentum in

disposing off the assets. This is because as uncertainty increases with the passage of time,

there is all possibility that the recoverable value of asset also reduces and it cannot fetch

good price. If faced with such a situation than the very purpose of getting protection

BABASAB PATIL -27-


under the Securitization Act, 2002 would be defeated and the hope of seeing a must have

growing banking sector can easily vanish.

Non Performing Assets of New Private Sector Banks-Sector wise (2006 data)

Centurion Bank of Panjab Ltd

Sector Amount( in Crore) Percentage to total

Agriculture 10.68 3.39

Small Scale Industries 11.23 3.57

Others 8.99 2.85

HDFC Bank Ltd




Others 174.26 29.88

ICICI Bank Ltd.


BABASAB PATIL -28-




Others 13.06 0.59

Indusind Bank Ltd




Others 24.80 9.23

Kotak Mahindra Bank Ltd



Small Scale Industries - -

Others 15.36 38.49

UTI Bank Ltd



BABASAB PATIL -29-



Others 0.30 0.08

RECOVERY MEASURES:s

Broadly speaking, recovery measures could be classified into two categories,

namely, legal measures and non-legal measures.

Legal Measures

1. Debt Recovery Tribunals(DRT)

In the context of recovery from NPAs DRT are assuming great importance since

efforts are on to set up & more DRT during this year and also to strengthen them.

Though the recovery through DRT is at present less than two per cent of the claim

amount, banks and Fls have to depend heavily on them. Efforts are on to amend the

recovery act to assign more powers to DRTs. More importantly, the borrowers tendency

to challenge the verdict of the Appellate Tribunals in the High court to seek natural-

justice needs to be checked, Otherwise, early recovery efforts through DRTs would be

futile. Secondly, training of presiding officers of Tribunals about the intricacies of

banking practices is very essential. Further, the numbers of recovery officers have to be

enhanced in every DRT for effective recovery. Finally, banks and Fls have to come

forward to provide liberal help to DRTs to equip them in terms of infrastructure,

manpower, etc.

BABASAB PATIL -30-


BABASAB PATIL -31-


2. National Company Law Tribunal :

As per the announcement made in the Budget-2001-02, Sick Industrial Company

Act will be repealed and Board for Industrial Finance and Reconstruction will be wound-

up. As an alternative arrangement, it is proposed to set up NCLT by amending the

Companies Act 1956. In August 2001, the NCLT is expected to consolidate the powers

of BIFR, High court and Company Law Board to avoid multiplicity of forums. In

matters of rehabilitation of sick units, all concerned parties are supposed to abide by the

orders of NCLT. There shall be 10 benches, which will deal with rehabilitation,

reconstruction and winding-up of companies. It is estimated to complete the entire

process during a period of 2-3 years as against 20-27 years presently taken. The Tribunal

will have, in addition, powers of contempt of court.

A rehabilitation and revival fund will be constituted to make interim payment of

dues to workers of a company declared sick or is under liquidation, protection of assets of

sick company and rehabilitate sick companies. While NCLT will be acting on the lines of

BIFR in the matters of rehabilitation viability of the projects will be assessed on cash test

and not in the present test of net-time limit for completing each formality relating to

rehabilitation and winding-up. Though the Bill is well drafted to ensure NCLT to

become time wise, and more effective than BIFR in respect of rehabilitation and winding-

up, doubts are raised about the implementation of the Bill taking into account the present

political economy. In any case, it is too early to comment.

BABASAB PATIL -32-


3. Corporate Debt Restructuring Body

A need was felt to special agency to facilitate debt restructuring because there has

been some hesitancy on the part of Bank and financial institution to implement RBI

guidelines on debt restructuring recently three-tire body, CDR has been set up to

coordinate corporate debt –restructuring program. It is yet to be operationalized CDR

consist of Forum Group and cell. While the forum evolves broad policy guidelines, the

group takes decisions on the proposals pecommended by the Cell. Initially, the borrower

approaches his Lead bank/FI with a request to restructure debt which in turn puts up the

proposal to the Cell. The CDR Covers only multiple banking accounts enjoying credit

facilities exceeding Rs.20crore. Cases of DRT, BIFR and willful defaults, doubtful and

loss accounts and suit-filed cased are outside the purview of the CDR. Thus standard and

sub-standard accounts are only eligible to seek CDR shelter. Decisions of the group are

based on the super majority principle. If 75 percent of the secured creditors agree to the

rehabilitation plan, it is binding on the other banks/Fis.

The CDR is a voluntary system based on debtor- creditor agreement and inter-

creditors agreement. No banker/borrower can take recourse to any legal action during the

stand-still period of 90-180 days. Lastly, CDR will observe the RBI Guideline on Debt

Restructuring issued in March 2006. While the arrangements under CDR seem to be

feasible from the debt restructuring perspective, its success depends upon the cooperation

extended by borrowers and bankers, on the one hand, and understanding among banks

and Fis, on the other. Doubts are raised about the implementation of these agreements

taking into the present working of the loan consortium arrangements.

BABASAB PATIL -33-


4. Asset Reconstruction Corporation.

It is proposed to set up ARCs in the private sector to take over NPAs in the public

sector banks. The RBI will be the regulator of these ATCs. The ARC will buy NPAs of

the banks and financial institutions at the pre-determined discounted value and issue NPA

redemption bonds, which carry a fixed return. ARCs are expected to be managed by

professionals to effect maximum recovery of NPA, which will help in redemption of

bonds after some time. The Finance Ministry has finalized the draft Bill to set up ARCs.

Though the proposed scheme seems to be attractive, its success will depend upon the

efficiency of DRTs and courts. Further, if ARC is going to depend on the staff deputed

by weak banks, its recovery chances are doubtful.

5. Company Mergers.

Under the Companies Act, 1956, mergers are permitted. In 1977, Sec 72-A was

inserted in the Income Tax Act to offer tax incentives to healthy companies which take

over the sick companies and prepare revival plans. Response to this scheme formalities

as per the instructions of the High Court and Income Tax Department. Tax incentives are

found to be inadequate to motivate healthy companies to come forward and take

advantage of the scheme. Recovery of bank dues on company-mergers is not assured

since hardly 7.8 per cent of sick companies are successfully revived. Encouraged by the

success achieved in company mergers in developed countries, a review of the scheme

under section 72-A of IT Act is called for.

BABASAB PATIL -34-


NON LEGAL MEASURES

1. Reminder System

The cheapest mode of recovery is by sending reminders to the borrowers before

the loan installment falls due. Generally, response to this arrangement particularly from

honest borrowers is encouraging. But efforts need to be strengthened in banks in

sending reminders on timely basis.

2. Visit to Borrower’s Business Premise/Residence

This is a more dependable measure of recovery. Visits need to be properly

planned. Involvement of staff at all levels in the bank branch is called for. Costs

involved in recovery need to be kept to the minimum. Frequent visits are called for in

case of hardcore borrowers. Over the years, it is observed that the number and quality of

visits are going down. Consequently, the recovery process is affected.

3. Recovery Camps

In respect of agricultural advances, recovery camps should be organized during

the harvest season. To ensure maximum advantage, recovery camps need to be properly

planned. It is also essential to take the help of outsiders, particularly, revenue officers in

the state government, local panchayat officials, regional approach to give a wide

publicity of the recovery camps to be organized in the local area, mobilize as many

farmers as possible and motivate the staff to get involved in the recovery drive.

BABASAB PATIL -35-


4. Rephrasing Unpaid Loan Installments

In respect of small advances, bankers need to be system pathetic in respect of

sincere and hardworking borrowers. If such borrowers fail to pay loan installments due

to natural calamities or for some other convincing reasons, unpaid loan installments may

be replased/rescheduled. Bankers efforts need to be strengthened in the regard.

5. Rehabilitation of Sick Units

Sick units both in SSI and non SSI sectors should be identified on timely basis

keeping in mind the official definitions. Causes of sickness should be genuine. If the

project is found viable in terms of Debt Service Coverage Ratio (DSCR), rehabilitation

package has to be prepared keeping in mind the broad parameters suggested by the RBI.

The package should be implemented at the earliest by the bank and the borrower. Close

monitoring of the progress of implementation is called for. There are several success

stories on rehabilitation of sick units. But in general, it is observed that the success rate

in revival of sickness is discouraging. Further, in the process of financial sector reforms,

banks and Fis are hesitant to rehabilitate due to the threat of failure in rehabilitation.

Recently, the RBI has permitted banks not to make provision for sick SSI units during the

first year of implementation. New guidelines on rehabilitation of sick SSI units will also

be issued soon by the RBI. For successful rehabilitation, it is essential to create a

sense of urgency on the part of both banks and borrowers. Efforts on the part of the

government in terms of concessions, relief’s etc. Should be made on timely basis.

Understanding between bank and SFCs should be strengthened. Above all, stern action

against willful defaulters is called for.

BABASAB PATIL -36-


6. Loan Compromise

This is the last resort of recovery. This should be voluntary. It calls for a

professional approach in preparing the compromise proposal for which each bank is

expected to introduce a scheme. Committee approach should be adopted to decide on the

loan compromise. Delays in taking decisions should be avoided. Recently, one Time

Settlement (OTS) scheme was introduced by the RBI. The overall response to the

scheme was limited. Hence, each bank is expected to come out with its own OTS

scheme. In addition, training of operating staff is essential to change their mindset. For

effective recovery, loan compromise should be taken up on priority basis.

7. Appointment of Professional Agencies for Recovery

Recently, IBA has worked out certain guidelines for banks on matters concerning

the appointment of outside professional agencies whose services can be utilized to

ascertain the whereabouts of the borrowers and enforcement of securities. There is some

hesitancy on the part of public sector banks in engaging them for recovery purposes due

to unpleasant experiences in certain cases. But during the post – VRS scenario, it is

suggested to seek such outsourcing. This should be done after examining the credentials

of the professionals. It is also essential to keep a constant vigil on their practice.

BABASAB PATIL -37-


BABASAB PATIL -38-


Unit Trust of India Bank

UTI Bank was the first of the new private banks to have begun operations in

1994, after the Government of India allowed new private banks to be established. The

Bank was promoted jointly by the Administrator of the specified undertaking of the, Unit

Trust of India.

Life Insurance Corporation of India (LIC)

General Insurance Corporation Ltd.

Other four PSU companies, i.e.

National Insurance Company Ltd.,

The New India Assurance Company,

The Oriental Insurance Corporation and United Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 280.51 Crores with the public

holding (other than promoters) at 72.46 %.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at

Mumbai. Presently the Bank has a very wide network of more than 469 branch offices

and Extension Counters. The Bank has a network of over 2016 ATMs providing 24hrs a

day banking convenience to its customers. This is one of the largest ATM networks in the

country.

The Bank has strengths in both retail and corporate banking and is committed to

adopting the best industry practices internationally in order to achieve excellence.

Mission of UTI Bank:

Customer Service and Product Innovation tuned to diverse needs of individual

and corporate clientele.

Continuous technology upgradation while maintaining human values.

Progressive globalization and achieving international standards.

Efficiency and effectiveness built on ethical practices.

BABASAB PATIL -39-


Core Values

Customer Satisfaction through

--Providing quality service effectively and efficiently

--Smile, it enhances your face value" is a service quality stressed on

--Periodic Customer Service Audits

Maximization of Stakeholder value

Success through Teamwork, Integrity and People

Promoters:

UTI Bank Ltd. has been promoted by the largest and the best Financial Institution of the

country, UTI. The Bank was set up with a capital of Rs. 115 crore, with

UTI contributing Rs. 100 crore,

LIC - Rs. 7.5 crore and

GIC and its four subsidiaries contributing Rs. 1.5 crore each.

Board of Directors :

The Bank has 12 members on the Board. Dr. P. J. Nayak is the Chairman and

Managing Director of the Bank.

The members of the Board are :

Dr. P. J. Nayak Chairman & Managing Director

Shri Surendra Singh Director

Shri N.C. Singhal Director

Shri A.T. Pannir Selvam Director

Shri J.R. Varma Director

Dr. R. H. Patil Director

Smt. Rama Bijapurkar Director

Shri R B L VaishDirector

Shri S. Chatterjee Executive Director (Whole Time Director)

Shri S B Mathur Director

Shri M V Subbiah Director

Shri Ramesh Ramanathan Director

BABASAB PATIL -40-


History of UTI Bank

1993- The Bank was incorporated on 3rd December and Certificate of business on14th

December. The Bank transacts banking business of all description. UTI Bank Ltd. was

promoted by Unit Trust of India, Life Insurance Corporation of India, General

Insurance Corporation of India and its four subsidiaries.

- The bank was the first private sector bank to get a license under the new guidelines

issued by the RBI

1994 – First branch of UTI Bank inaugurated at Ahmedabad by Dr. Manmohan Singh,

Hon'ble Finance Minister, Government of India.

1995 – Completes first profitable year in operation

1996 – Crosses Rs.1000 crore deposit mark

1997 – The Bank obtained license to act as Depository Participant with NSDL and

applied for registration with SEBI to act as `Trustee to Debenture Holders'.

- Rupees 100 crores was contributed by UTI, the rest from LIC Rs 7.5 crores,

GIC and its four subsidiaries Rs 1.5 crores each.

1998 – The Bank has 28 branches in urban and semi urban areas as on 31st July. All

the branches are fully computerised and networked through VSAT. ATM

services are available in 27 branches.

- The Bank came out with a public issue of 1,50,00,000 No. of equity shares of

Rs 10 each at a premium of Rs 11 per share aggregating to Rs 31.50 crores and

Offer for sale of 2,00,00,000 No. of equity shares for cash at a price of Rs 21

per share. Out of the public issue 2,20,000 shares were reserved for allotment

on preferencial basis to employees of UTI Bank. Balance of 3,47,80,000

shares were offered to the public.

- The company offers ATM cards, using which account-holders can withdraw

money from any of the bank's ATMs across the country which are inter-

connected by VSAT.

- UTI Bank has launched a new retail product with operational flexibility for its

customers.

BABASAB PATIL -41-


- UTI Bank will sign a co-brand agreement with the market, leader, Citibank NA

for entering into the highly promising credit card business.

- UTI Bank promoted by India's pioneer mutual fund Unit Trust of India along

with LIC, GIC and its four subsidiaries.

1999 - UTI Bank and Citibank have launched an international co-branded credit card.

- UTI Bank and Citibank have come together to launch an international co

branded credit card under the MasterCard umbrella.

- UTI Bank Ltd has inaugurated an off site ATM at Ashok Nagar here, taking the

total number of its off site ATMs to 13.m

2000 -The Bank has announced the launch of Tele-Depository Services for its

depository clients.

- UTI Bank has launch of `iConnect', its Internet banking Product.

-UTI Bank has signed a memorandum of understanding with equitymaster.com

for e-broking activities of the site.

- Infinity.com financial Securities Ltd., an e-broking outfit is typing up with UTI

Bank for a banking interface.

- Geojit Securities Ltd, the first company to start online trading services, has

signed a MoU with UTI Bank to enable investors to buy\sell demat stocks

through the company's website.

- Indiabulls has signed a memorandum of understanding with UTI Bank.

- UTI Bank has entered into an agreement with Stock Holding Corporation of

India for providing loans against shares to SCHCIL's customers and funding

investors in public and rights issues.

- UTI Bank has tied up with L&T Trade.com for providing customized online

trading solution for brokers.

2001 - UTI Bank launched a private placement of non-convertible debentures to rise up

to Rs 75 crore. - UTI Bank has opened two offsite ATMs and one extension

BABASAB PATIL -42-


counter with an ATM in Mangalore, taking its total number of ATMs across the

country to 355.

- UTI Bank has recorded a 62 per cent rise in net profit for the quarter ended

September 30, 2001, at Rs 30.95 crore. For the second quarter ended September

30, 2000, the net profit was Rs 19.08 crore. The total income of the bank during

the quarter was up 53 per cent at Rs 366.25 crore.

2002 - UTI Bank Ltd has informed BSE that Shri B R Barwale has resigned as a

Director of the Bank w.e.f. January 02, 2002. A C Shah, former chairman of

Bank of Baroda, also retired from the bank's board in the third quarter of last

year. His place continues to be vacant. M Damodaran took over as the director

of the board after taking in the reins of UTI. B S Pandit has also joined the

bank's board subsequent to the retirement of K G Vassal.

- UTI Bank Ltd has informed that Shri Paul Fletcher has been appointed as an

Additional Director Nominee of CDC Financial Service (Mauritius) Ltd of the

Bank.And Shri Donald Peck has been appointed as an Additional Director

(nominee of South Asia Regional Fund) of the Bank.

- UTI Bank Ltd has informed that on laying down the office of Chairman of LIC

on being appointed as Chairman of SEBI, Shri G N Bajpai, Nominee Director of

LIC has resigned as a Director of the Bank.

2002 - B Paranjpe & Abid Hussain cease to be the Directors of UTI Bank.

- UTI Bank Ltd has informed that in the meeting of the Board of Directors

following decisions were taken: Mr Yash Mahajan, Vice Chairman and

Managing Director of Punjab Tractors Ltd was appointed as an Additional

Director with immediate effect. Mr N C Singhal former Vice Chairman and

Managing Director of SCICI was appointed as an Additional Director with

immediate effect.

- UTI Bank Ltd has informed BSE that a meeting of the Board of Directors of the

Bank is scheduled to be held on October 24, 2002 to consider and take on record

BABASAB PATIL -43-


the unaudited half yearly/quarterly financial results of the Bank for the half

year/Quarter ended September 30, 2002.

-UTI Bank Ltd has informed that Shri J M Trivedi has been appointed as an

alternate director to Shri Donald Peck with effect from November 2, 2002.

2003 -UTI Bank Ltd has informed BSE that at the meeting of the Board of Directors of

the company held on January 16, 2003, Shri R N Bharadwaj, Managing Director

of LIC has been appointed as an Additional Director of the Bank with

immediate effect.

- UTI Bank, the private sector bank has opeaned a branch at Nellore. The bank's

Chairman and Managing Director, Dr P.J. Nayak, inaugurating the bank branch

at GT Road on May 26. Speaking on the occasion, Dr Nayak said, "This marks

another step towards the extensive customer banking focus that we are providing

across the country and reinforces our commitment to bring superior banking

services, marked by convenience and closeness to customers.

-UTI has been authorised to launch 16 ATMs on the Western Railway Stations of

Mumbai Division.

-UTI filed suit against financial institutions IFCI Ltd in the debt recovery tribunal

at Mumbai to recover Rs.85cr in dues.

-UTI bank made an entry to the Food Credit Programme, it has made an entry

into the 59 cluster which includes private sector, public sector, old private sector

and co-operative banks.

- Shri Ajeet Prasad, Nminee of UTI has resigned as the director of the bank.

- Banks Chairman and MD Dr.P.J.Nayak inaugurated a new branch at Nellore.

-UTI bank allots shares under Employee Stock Option Scheme to its employees.

-UTI Bank ties up with UK govt fund for contract farming

-Shri B S Pandit, nominee of the Administrator of the Specified Undertaking of the

Unit Trust of India (UTI-I) has resigned as a director from the Bank w.e.f

November 12, 2003.

BABASAB PATIL -44-


2004 -Comes out with Rs. 500 mn Unsecured Redeemable Non-Convertible Debenture

Issue, issue fully subscribed

-UTI Bank Ltd has informed that Shri Ajeet Prasad, Nominee of the

Administrator of the Specified Undertaking of the Unit Trust of India (UTI - I)

has been appointed as an Additional Director of the Bank w.e.f. January 20,

2004.

-UTI Bank opens new branch in Udupi

-UTI Bank ties up with Shriram Group Co’s

-Unveils premium payment facility through ATMs applicable to LIC & UTI Bank

customers

-Metaljunction (MJ)- the online trading and procurement joint venture of Tata

Steel and Steel Authority of India (SAIL)- has roped in UTI Bank to start off

own equipment for Tata Steel.

-DIEBOLD Systems Private Ltd, a wholly owned subsidiary of Diebold

Incorporated, has secured a major contract for the supply of ATMs and services

to UTI Bank

-HSBC completes acquisition of 14.6% stake in UTI Bank for $67.6 m

-UTI Bank installs ATM in Thiruvananthapuram

-Launches `Remittance Card' in association with Remit2India, a Web site offering

money-transfer services

2005: UTI Bank appointed by Government of Karnataka as the sole banker for the

Bangalore One (B1) project.

- UTI Bank launches a powerful version of Kisan Credit Card.

- UTI Bank gets listed on the London Stock Exchange, raises US$ 239.30 million

through Global Depositary Receipts (GDRs).

- UTI Bank and Bajaj Allianz join hands to distribute general insurance products.

- UTI Bank and Visa International launch Mobile Refill facility - Anytime,

Anywhere Pre-Paid Mobile Refill for all Visa Cardholders in India.

BABASAB PATIL -45-


- UTI Bank wins International Financing Review (IFR) Asia ‘India Bond House’

award for the year 2005.

- UTI Bank extends banking services to the rural milk producers in Anand and

Kheda districts in Gujarat.

2006: UTI Bank and UTI Mutual Fund to launch a new service for sale and redemption

of mutual fund schemes through the Bank’s ATMs across the country.

- UTI Bank opens its first international branch in Singapore.

- UTI Bank and LIC join hands to launch an Annuity Card for group

pensioners of LIC.

- UTI Bank ties up with Geojit Financial Services to offer Online Trading service

to its customers.

BABASAB PATIL -46-


SWOT Analysis

Strength

UTI Bank has been in the banking

industry since 1994. It has

successfully completed 12 years in

the Banking industry.

The bank has a sound network i.e

Anywhere Banking facility in 450

Branches and 1891ATM's at strategic

locations in India.

UTI Bank stands one among the top

ten banks in India and is ranked 1st

in growth in business

The bank is having well

experienced, trained, most dedicated

and committed staff.

In has a strong customer base.

Weakness

Tedious procedures have to be

followed before advancing loans

causing inconvenience to

customers.

Opportunities

Global aspirations of Indian

consumers and growing integration

with NRIs.

The bank can optimize the growth

opportunities arising out of retail

banking and small and medium

enterprises (SMEs).

Further expansion of ATMs networks

and possible arrangements of sharing

networks of other banks by issuing

mutual funds and insurance.

Threat Bank is facing competition from its

other Private Sector Banks and even

the foreign Banks

Changing economic policies of

Government will have serious

impact on interest rates and reserve

ratio maintained with RBI

BABASAB PATIL -47-


Products and Services of UTI Bank

Consumer banking

UTI Bank is providing in consumer banking the following products and services:-

Savings Account

Salary Power

Power Salute

Priority Banking

Women Account

Senior Privilege

AZAADI"- No Frills Savings Account

RFC (D) Account

Fixed Deposits

Recurring Deposits

Lockers

Debit Card

Travel Currency Card

Encash 24

Remittance Card

Visa Money Transfer

Power Transfer

Current Account

Normal Current Account

Business Advantage Account

Business Classic Account

Business Privilege Account

Channel One

BABASAB PATIL -48-


Demand drafts at correspondent bank locations available at very nominal charges.

Free Pay Order facility.

Free Demand Drafts

Intercity Cash Deposit

Intercity Cash Withdrawal

Home Branch Cash Withdrawal

Retail loans - UTI Bank is providing following loan facilities to the customers in retail

loan section.

Power Drive

Power Home

Asset Power

Personal Power

Loans against Securities

Consumer Power

Study Power

Corporate banking - In corporate banking UTI Bank is providing following services.

Cash Management Services

Lending/Financing

Trade Service

Current Account

Fixed Deposits

Lending/Financing

Working capital finance

Cash credit / working capital demand loan

BABASAB PATIL -49-


Loan against FCNR (B) deposit

Term lending

Project loan

Bill finance supply / purchase bills

Channel finance

Asset securitization

Line of credit

Bank guarantees

Trade Service

Trade Finance

Bills Discounting

L/C Backed bill discounting

Drawee Bill Discounting

Drawer Bill Discounting

Financial advisory service

It is bank’s endeavor to offer customer complete personal finance solutions.

Through bank’s financial Advisory Services bank understand customers investment

requirements and design tailor made financial solutions for them.

Beyond merely advising customers, Bank will also help the customers to invest in

a variety of instruments including.

Mutual Funds

Bank assurance

Equity

Tax consultancy

IPO Buzz

Fixed Income Products

Portfolio Tracker

BABASAB PATIL -50-


NRI SERVICES

In UTI Bank, realize that as an NRI, customer banking needs are special. And in

keeping with this philosophy, and offer valued NRI customers a plethora of services

customized to their needs, such as

The entire bouquet of NRI Deposit Products & Services.

International Debit Card with Accident Insurance cover

Free Internet Banking facility

Portfolio Investment scheme for capital market transactions.

Correspondent Banking/Remittance arrangements in all major currencies

Capital markets

Depository Services

eDepository Services

Debenture Trusteeship

Clearing bank for NSE/BSE/OTECI

Clearing Members for Derivatives Segment

Broker Financing

Issue Management

M&A Advisory

IPO Funding

Online Trading

Government Business

BABASAB PATIL -51-


UTI Bank is the First Private Sector Bank to be authorised by the Reserve Bank

of India (RBI) and Government of India for collecting Taxes on behalf of a State

Government. The Bank is handling Collection of Commercial Taxes in the twin cities of

Hyderabad and Secunderabad for Govt. of Andhra Pradesh since July 2001.

UTI Bank is now authorised by Reserve Bank of India and Govt. of India for

conducting all Central Government and State Government Business commencing with

October 1, 2003. The authorisation means the Bank can undertake the following

business on behalf of Central and State Governments:

Treasury

Foreign Exchange Desk

International Banking

Money Market Desk

Constituent SGL Facility

Retail G-sec

Deposit Rate

Newsletter

Foreign Exchange

BABASAB PATIL -52-


BABASAB PATIL -53-


Findings

And

Analysis

BABASAB PATIL -54-


Design of the study

Title of the project:

“Non Performing Assets and its impact on Profitability of New Private Sector

Banks”.

Scope of study: Scope of my study restricted only to 7 New Private Sector Banks

NPA data’s and Advances, and for Comparison of Credit risk path 7 old selected Private

Banks are taken.

Need For Study:

This study will help to know the recent norms of NPA.

This study helps to know how NPA Causing Problems to Banking Sector and

what might be the solution to overcome from this problem and also its impact on

Profitability of New Profit Banks.

STATEMENT OF THE PROBLEM

Profitability is considered as a benchmark for evaluating performance of any

business enterprise including the banking industry. However, increasing Non-

Performing Assets, have a direct impact on profitability of banks and financial

institutions. Legally speaking banks and financial institutions are not allowed to book

income on such account and at the same times they are forced to make provision on such

assets. So This project is undertaken to now impact of NPA on Profitability of New

Private Sector Banks.

BABASAB PATIL -55-


Objectives of Study

6. To study the RBI norms on Non Performing Assets, and the various reasons for

the existence of huge level of NPA in Indian banking.

7. To know the performance comparison of New Private Banks Non performing

asset for past 3 years.

8. To know the impact of non performing assets on profitability of New Private

Banks, and comparison of credit risk path of New Private Banks with 7 selected

Old Private Banks.

9. To study the various steps taken by the banks to bring down the NPA’s in

respective bank branches.

10. To recommend measures for Improving performance and reduction of Non

Performing Assets.

Methodology

Primary Data:

Views of the concerned officials were gathered by directly interacting with them, and

such data was found very useful while analyzing and drawing conclusions.

Secondary Data:

Recent RBI norms of NPA.

IBA Bulletin 0f 2005-06 is referred to collect data for Net NPA, and Advances.

Web site of UTI Bank and other Web sites.

Plan of analysis:

In this study quadrant analysis is used on the calculated figures.

Limitations:

The study is based mostly on secondary data.

Data has been drawn from journals, so information may not be complete.

BABASAB PATIL -56-


For the analysis only the advances and NPA percentages of banks and operating

profit, provisions and contingencies as a whole and net profit of New PSB’s are

taken into consideration.

Impact of Provisions and Contingencies on Net Profit of New Private Banks.

Performance comparison of New Private Sector Banks Operating Profit of 3 years

S No Banks Operating Profit ( in Crore)

2003-04 2004-05 2005-06

1 Bank of Panjab Ltd* 103 19 -

2 Centurion Bank Ltd* 12 31 148

3 HDFC Bank Ltd 1008 1344 19794 ICICI Bank Ltd 2481 2956 4691

5 Indusind Bank Ltd. 445 401 225

6 Kotak Mahindra Bank Ltd. 127 133 211

7 UTI Bank Ltd 698 566 994

8 Yes Bank - (4) 99

-1000

0

1000

2000

3000

4000

5000

2003-04

2004-05

2005-06

BABASAB PATIL -57-


Interpretation: As we seen in graph ICICI Bank Ltd. Operating Profit is increasing year

by year followed by HDFC Bank Ltd.

BABASAB PATIL -58-


Performance comparison of New Private Sector Banks Provisions and Contingencies of 3

years

S No Banks Provisions and Contingencies ( in Crore)2003-04 2004-05 2005-06

1 Bank of Panjab Ltd* 66 81 -

2 Centurion Bank Ltd* 117 6 603 HDFC Bank Ltd 498 678 11084 ICICI Bank Ltd 844 951 21515 Indusind Bank Ltd. 183 191 1886 Kotak Mahindra Bank Ltd. 48 49 927 UTI Bank Ltd 420 231 5098 Yes Bank - 0 44

0

500

1000

1500

2000

2500

Bank o

f Pan

jab L

td*

Centur

ion B

ank L

td*

HDFC Bank

Ltd

ICIC

I Ban

k Ltd

Indu

sind

Bank L

td.

Kotak

Mah

indra

Ban

k Ltd

.

UTI Bank

Ltd

Yes B

ank

2003-04

2004-05

2005-06

Interpretation:

ICICI Bank Ltd making large Provisions for losses compares to HDFC Bank Ltd and UTI

Bank Ltd may be because of their credit worthiness.

BABASAB PATIL -59-


Performance comparison of New Private Sector Banks Net Profit 3 years

S No Banks Net Profit (in Crore)2003-04 2004-05 2005-06

1 Bank of Panjab Ltd* 37 (61) -

2 Centurion Bank Ltd* (105) 25 883 HDFC Bank Ltd 510 666 8714 ICICI Bank Ltd 1637 2005 25405 Indusind Bank Ltd. 262 210 376 Kotak Mahindra Bank Ltd. 79 85 1187 UTI Bank Ltd 278 335 4858 Yes Bank - (4) 55

-500

0

500

1000

1500

2000

2500

3000

Bank o

f Pan

jab L

td*

Centur

ion B

ank L

td*

HDFC Bank

Ltd

ICIC

I Ban

k Ltd

Indu

sind

Bank L

td.

Kotak

Mah

indra

Ban

k Ltd

.

UTI Bank

Ltd

Yes B

ank

2003-04

2004-05

2005-06

Interpretation:

ICICI Bank Ltd and HDFC Bank LTD Net Profit is Increasing Even though lot of Money

has spent on Provision and Contingency. It may be because of their risk taking ability.

BABASAB PATIL -60-


Analysis of above data:

As we see the above graphs, ICICI Bank Ltd Operating Profit is increasing year

by year followed by HDFC Bank Ltd. UTI Bank Ltd Operating Profit is decreased in

2004-05 but its suddenly increased to 994crore in 2005-2006. But Bank of Panjab Ltd

Operating Profit for 2003-04 is 103 crore but suddenly it decreases to 19 crore 1n 2004-

05, then it amalgamated with Centurian Bank Whose Operating Profit is Comparatively

Low in 2003-04 and 2004-05 after amalgamation it increases to 148crore. Even Indusind

Bank Ltd Operating Profit is go on Decreasing and as Yes Bank is very new so initially it

had made loss of 4crore but made 99crore operating profit in 2005-06.

Provisions and Contingencies made by ICICI Bank Ltd and HDFC Bank Ltd is

Comparatively high it may be because of risk taking ability and have strong financial

background with more experience, And also these banks are able to provide adequate

finance to Different Sectors. As we seen UTI Bank Ltd Operating Profit in 2004-05

decreased and in 2005-06 increased so the Provisions made is low in 2004-05 but high in

2005-06 it may be because of large advances made by bank in 2005-06. But Bank of

Panjab Ltd Operating Profit gone down in 2004-05 to 19crore but it has incurred to make

81crore Provisions and Contingencies it may be because of wrong Strategy made by bank

to provide finance and to maintain operating Profit, same situation has faced by

Centurion Bank Ltd in the year 2005-06. So only Both

Bank of Panjab Ltd and Centurion Bank Ltd Amalgamated to make strong finance

Background. Indusind Bank Operating Profit coming down year by year. Kotak

Mahindra is performing better enough next to ICICI Bank, HDFC Bank, UTI Bank. As

Yes Bank is new so initially it incurred 4crore loss so no provisions were made but it

made Provisions in 2005-06.

ICICI Bank Ltd, HDFC Bank Ltd and UTI Bank Ltd had comparatively high Net

Profit it may be because of risk taking ability and strong financial background with more

experience. As heavy Provisions were incurred by Bank of Panjab Ltd and Centurion

Bank Ltd till 2004-05 had amalgamated to make Positive Net profit and named

themselves as Centurion Bank of Panjab Ltd. Indusind Bank have to adopt different

strategy to increase net profit as it incurring loss from past 3 years.

BABASAB PATIL -61-


Analysis of Gross and Net NPA by taking 3 years Advances paid by New Private

Sector Bank.

Bank of Panjab Ltd

Banks Gross

Advances

Gross

NPA

Gross

NPA(%)

Net

Advances

Net

NPA

Net

NPA(%)

2003-04 2709 168 6.20 2353 126 5.35

2004-05 2520 126 5.00 2417 112 4.64

2005-06 - - - - - -

Centurion Bank Ltd

Banks Gross

Advances

Gross

NPA

Gross

NPA(%)

Net

Advances

Net

NPA

Net

NPA(%)

2003-04 1705 221 12.96 1556 69 4.43

2004-05 2291 156 6.81 2194 55 2.49

2005-06 6848 315 4.6 6533 74 1.13

Intrepretation:

As Bank of Panjab Ltd and Centurion Bank has amalgamated in 2005 September, so we

can see a decrease in Gross NPA from 12.96% to 4.6% and Net NPA decreases to

1.13%. Of course it is a good sign to the company as it came below 5%, because if NPA

ratio of any Bank is more than 5% then it is said that the Banks need to adopt proper

strategy for recovery of debt.

BABASAB PATIL -62-


HDFC Bank Ltd

Banks Gross

Advances

Gross

NPA

Gross

NPA(%)

Net

Advances

Net

NPA

Net

NPA(%)

2003-04 18064 336 1.86 17745 28 0.16

2004-05 25976 439 1.69 25566 61 0.24

2005-06 36357 509 1.40 35061 155 0.44

Interpretation:

From the above table we can see that Gross NPA of HDFC Bank Ltd has decreasing from

1.86 to 1.40 from 2003-04 to 2005-06. This accomplishment is on account of credit

growth, which was higher than the growth of Gross NPA and not through appreciable

recovery of NPA. There is neither reduction nor even containment of the threat because

as we seen increase in Net NPA from Past 3 years.

ICICI Bank Ltd

Banks Gross

Advances

Gross

NPA

Gross

NPA(%)

Net

Advances

Net

NPA

Net

NPA(%)

2003-04 65106 3060 4.70 64948 1423 2.19

2004-05 91920 3925 4.27 91405 1505 1.65

2005-06 148200 2223 1.50 146163 1053 0.72

Interpretation:

From above table we can see that Gross NPA of ICICI Bank Ltd has decreasing from

4.70 to 1.50 from 2003-04 to 2005-06. This accomplishment is on account of credit


recovery of NPA. There is neither reduction nor even containment of the threat. ICICI

Bank Ltd is providing high advances compare to other banks in 2005-2006.

BABASAB PATIL -63-


Indusind Bank Ltd

Banks Gross

Advances

Gross

NPA

Gross

NPA(%)

Net

Advances

Net

NPA

Net

NPA(%)

2003-04 7848 259 3.3 7301 212 2.90

2004-05 9093 321 3.53 9000 244 2.71

2005-06 9376 269 2.90 9310 195 2.09

Interpretation:

Indusind Bank need to adopt strategy in reducing NPA as its advances were more in

2004-05 and also Gross NPA has increased it may be because of their credit worth. And

again it decreases Gross NPA in 2005-06 this ups and down can affect credit worthiness

of the bank.

Kotak Mahindra Bank Ltd.

Banks Gross

Advances

Gross

NPA

Gross

NPA(%)

Net

Advances

Net

NPA

Net

NPA(%)

2003-04 2105 20 0.95 2097 3 0.14

2004-05 4058 28 0.69 4017 15 0.37

2005-06 6353 38 0.60 6349 15 0.24

Interpretation:

Kotak Mahindra Bank Ltd Net NPA is Increasing from 2003-04 to 2004-05 and again it

decreases to 0.24 in 2005-06. it implied that NPA of Kotak Mahindra Bank are in ups and

down it may be because of any natural calamities or change in recovery measures etc.

but Gross NPA and Net NPA of Kotak Mahindra Bank is less than 1%. So its good sign

to Bank.

BABASAB PATIL -64-


UTI Bank Ltd

Banks Gross

Advances

Gross

NPA

Gross

NPA(%)

Net

Advances

Net

NPA

Net

NPA(%)

2003-04 9386 275 2.93 9363 112 1.20

2004-05 15628 311 1.99 15603 217 1.39

2005-06 22400 374 1.70 22314 218 0.98

Interpretation

UTI Bank Ltd Gross and Net NPA has decreases from 2.93 to 1.70 and 1.20 to 0.98

respectively from 2003-04 to 2005-06. This accomplishment is on account of credit


recovery of NPA. There is neither reduction nor even containment of the threat.

BABASAB PATIL -65-


Performance Comparison of Net NPA of New Private Sector Banks

New PSB’s 2003-04 2004-05 2005-06

Bank of Panjab Ltd*4.69 4.64 0

Centurion Bank Ltd*

4.43 2.49 1.13

HDFC Bank Ltd 0.16 0.24 0.44

ICICI Bank Ltd 2.21 1.65 0.72

Indusind Bank Ltd. 2.72 2.71 2.09

Kotak Mahindra Bank Ltd.

0.17 0.37 0.24

UTI Bank Ltd1.29 1.39 0.98

Yes Bank 0 0 0

BABASAB PATIL -66-


Interpretation:

From above chart we can see that Bank of Panjab Ltd’s NPA increasing till it’s

amalgamated with Centurion Bank Ltd, and came nearer to 5%, after amalgamation both

Bank of Panjab Ltd and Centurion Bank Ltd named themselves as Centurion Bank of

Panjab Ltd. And in 2005-06 its NPA comes down 1.13% comparatively from previous

year NPA.

We can say that HDFC Bank Ltd has strong financial background and credit

worthiness so it can provide more advances to people and also it is efficient enough to

recover those advances so its Net NPA has coming down and it is less than 1%. So

HDFC is performing well.

In 2003-04 ICICI Bank Ltd Net NPA is more but its declining slowly and came to

0.72 from 2.21 in 2005-06. it may be because of its credit worthiness and strong recovery

measures. ICICI Bank Ltd is real risk taker so we cannot compare it with other small

banks because it providing high advances compare to other banks.

Indusind Bank Ltd Net NPA almost same for 2003-04 to 2004-05 and declines to

2.09 in 2005-06.

As Kotak Mahindra Bank Ltd providing comparatively low advances to avoid

credit risk so its NPA is low compare to other Banks.

Even UTI Bank is performing well in recovering debts so its NPA came down

from previous year.

BABASAB PATIL -67-


IMPACT OF NPA’S ON BANKS' PROFITS AND LENDING PROWESS:

"The efficiency of a bank is not always reflected only by the size of its balance

sheet but by the level of return on its assets. NPA’s do not generate interest income for

the banks, but at the same time banks are required to make provisions for such NPA’s

from their current profits.

NPA’s 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

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 NPA’s in

order to reduce the provisioning and boost up bottom lines. It would only

postpone the 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.

BABASAB PATIL -68-


Credit risk path of the New Private Bank’s by Comparing with selected 7 Old PSB’s

using Quadrant Analysis.

Credit risk path of the New Private Bank’s:

New Private

Banks

NPA to Net

Advances

( %)

Advances(crores) Quadrant

analysis

2005 2006 2005 2006 2005 2006

Bank of Panjab Ltd*4.64 - 2417 - HL -

Centurion Bank Ltd* 2.49 1.13 2194 6533 HL HL

HDFC Bank Ltd 0.24 0.44 25566 37661 LH LH

ICICI Bank Ltd 1.65 0.72 91405 146163 LH LH

Indusind Bank Ltd. 2.71 2.09 9000 9310 HL HL

Kotak Mahindra Bank

Ltd.

0.37 0.24 4017 6349 LL LL

UTI Bank Ltd 1.39 0.98 15603 22314 LL LL

BABASAB PATIL -69-


Interpretation

Credit risk path of the New PSB’s: A Quadrant Analysis

In the chart below an attempt is made to trace the relationship between NPA

proportion and the size of credit portfolio (advances) of New Private Bank’s. For this

purpose proportion of gross NPA’s representing credit risk inherent is taken on the X-

axis and gross credit levels are taken on the Y-axis. Since these two parameters are

assets, which are stock concept variables, they have been plotted on the basis of 2 years

2005 and 2006 for a comparative analysis.

QUADRANT TABLE- 2005

LEVEL CREDIT LEVEL

NPA

LOW (BELOW AVG) (L)

HIGH (ABOVE AVG)

(H)

LOW

HIGH

LL (2)

HL (3)

LH (2)

HH (0)


LEVEL CREDIT LEVEL

NPA

LOW (BELOW AVG) (L)

HIGH (ABOVE AVG)

(H)

LOW

HIGH

LL (2)

HL (2)

LH (2)

HH (0)

BABASAB PATIL -70-


As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH,

HL and HH (the figures are arrived at by taking the averages). The average of NPA’s for

the year 2005 is 1.93% and this figure is measured against each bank, any percentage

above this figure falls in the H category and percentage below 1.93% falls in the L

category. The same applies with the advances. The average of advances for 2005 is

21,457 crores and 37,622 crores for 2006. The average of NPA for 2006 is 0.93%. ‘L’

represents low or below average of the New Private Bank’s and, ‘H’ represents high or

above average. E.g. while LL means low in credit size and low in NPA’s, LH implies low

in NPA and High in credit size. The following facts are visible from the quadrant table:

1).As depicted in the tables, most of the new private banks fall in the HL quadrant. In

2005 there were 3 banks, which was 2 in 2006. As seen in the quadrants, the NPA was

high compared to its credit size and the credit size is low in the New Sector Banks it

might be because these banks hesitate to take risk and improper recovery measures.

2).There was 2 banks in the LL quadrant in 2005 which remain same in 2006 also. It

means NPA Level and Credit size is low.

3). Bank of Panjab Ltd* is in HL quadrant, there is high level of NPA and Low Advances

in 2005 . So only Bank of Panjab Ltd. has merged with Centurion Bank in 2005

September and named as Centurion Bank of Panjab Ltd but still its in HL quadrant so still

this banks has to adopt proper strategy in providing advances and recovering debts.

5) The best performing bank in this sector was the ICICI Bank which was high in its

credit size compared to the rest of the banks and still maintained a low NPA level

followed by HDFC Bank Ltd..

BABASAB PATIL -71-


Credit risk path of the 7 selected Old PSB’s:

Old Private

Banks

NPA to Net

Advances

( %)

Advances(crores) Quadrant

analysis

2005 2006 2005 2006 2005 2006

City Union Bank Ltd 3.37 1.95 2013 2550 LL LL

Development Credit

Bank Ltd

6.34 4.50 2156 1867 HL HL

ING Vysya Bank Ltd 2.13 1.76 9081 10232 LH LH

Lord Krishna Bank Ltd 4.22 3.11 1387 1421 HL HL

Bank of Rajastan Ltd 2.50 0.99 2896 4065 LL LL

The United Western

Bank Ltd.5.83 5.66 3976 4006 HH HL

The Karnatak Bank Ltd 2.29 1.18 6287 7792 LH LH

BABASAB PATIL -72-


Interpretation

Credit risk path of the 7 Private Sector Banks: A Quadrant Analysis

In the chart below an attempt is made to trace the relationship between NPA

proportion and the size of credit portfolio (advances) of 7 old Private Bank’s. For this

purpose proportion of gross NPA’s representing credit risk inherent is taken on the X-

axis and gross credit levels are taken on the Y-axis. Since these two parameters are

assets, which are stock concept variables, they have been plotted on the basis of 2 years

2005 and 2006 for a comparative analysis.


LEVEL CREDIT LEVEL

NPA

LOW (BELOW AVG) (L)

HIGH (ABOVE AVG)

(H)

LOW

HIGH

LL (2)

HL (2)

LH (2)

HH (1)


LEVEL CREDIT LEVEL

NPA

LOW (BELOW AVG) (L)

HIGH (ABOVE AVG)

(H)

LOW

HIGH

LL (2)

HL (3)

LH (2)

HH (0)

BABASAB PATIL -73-


As depicted in the tables, the banks are divided into 4 quadrants namely LL, LH,

HL and HH (the figures are arrived at by taking the averages). The average of NPA’s for

the year 2005 is 3.81% and this figure is measured against each bank, any percentage

above this figure falls in the H category and percentage below 3.81% falls in the L

category. The same applies with the advances. The average of advances for 2005 is 3971

crores and 4562 crores for 2006. The average of NPA for 2006 is 2.74%. ‘L’ represents

low or below average of the PSB’s and, ‘H’ represents high or above average. E.g. while

LL means low in credit size and low in NPA’s, LH implies low in NPA and High in

credit size. The following facts are visible from the quadrant table:

1).As depicted in the table in 2005, out of 7 Private Sector Banks, 2 are fall under LL, i.e.

Low in NPA and Low in credit size, 2 fall under LH i.e. Low in NPA and High in credit

size. And remaining out of 3, 2 fall under HL i.e. High in NPA and Low in credit size.

2) As depicted in the table in 2006, out of 7 Private Sector Banks, 2 are fall under LL, i.e.

Low in NPA and Low in credit size, 2 falls under LH i.e. Low in NPA and High in credit

size. And 3 fall under HL i.e. High in NPA and Low in credit size.

3) There were 2 banks in the HL quadrant in 2005 which increased to 3 in 2006. It means

NPA Level is increasing year by year.

4). The United Western Bank Ltd moved from HH to HL , there is high level of NPA and

High Advances in 2005 which moved to High level of NPA and Low level of advances in

2006. Its not good sign to Bank because as in 2005 there is High NPA and Credit size so

Bank reduces its advances in 2006, but also its NPA increasing.

5) The best performing bank in this sector was the ING Vysya Bank which was high in

its credit size compared to the rest of the banks and still maintained a low NPA level.

BABASAB PATIL -74-


Comparison of New Private Bank’s credit path with Old selected Private Bank’s

credit path by using above Quadrant Analysis.

When compare to Old PB’s, New PB’s are performing well from past 2 years.

Old PB’s Net NPA on Advances are crossing 5% or nearer to 5 %, but almost all

New PB’s Net NPA on Advances are below 3%. It is good sign to New PSB’s as

it has strong credit path.

New PB’s are taking high risk by Providing more and more advances when

compare to Old PB’,

Majority of Old PB’s provide advances to Priority sectors whose recovery are

very difficult, because advances paid for agriculture are very difficult to recover,

but New PB’s are able to provide advances to both priority and non priority

sectors but it not expanded its services over villages. That’s why New PB’s

recovering its advances very quickly.

Adverse Effects of NPA on the Working of New Private Banks:

NPA has affected the profitability, liquidity and competitive functioning of New

Private Banks and finally the psychology of the bankers in respect of their disposition

towards credit delivery and credit expansion. Between 2004 and 2006 New Private Banks

incurred a total amount of Rs.4399 Crores towards provisioning NPA. This has brought

Net NPA to Rs.5780 Crores or 1.20% of net advances. To this extent the problem is

contained, but at 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 New Private Banks. In turn New Private Bank’s are seen

as poor performers and unable to approach the market for raising additional capital. This

has alternatively forced New Private Bank’s 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.

BABASAB PATIL -75-


Findings:

The brightest spot in the Indian banking industry in 2005-2006 was the massive

cleaning up of banks’ balance sheets by reducing non performing assets (NPA’s).

The net NPA’s of 7 New Private Bank’s are reduced by (-) 18% while compare to

previous year, i.e. from 2097 to 1709. Which was 6% higher Net NPA in 2004-05

when compare to 2003-04.

Net Profit of New Private Bank’s are increased by 28% from 2004-05 to 2005-06.

It may be because of provisions made in 2006 is comparatively low.

Most of the New Private Bank’s fall under LL quadrant i.e. Low in NPA and Low

in credit path in 2005-06.

All New Private Bank’s Net NPA on advances is less than 5% in 2005-06, its

good sign for companies to increase profit.

New Private Bank’s recorded a growth in advances of 50.3% in 2006 as compare

to 42.5% of the previous year. When compare to total advances of Old Private

Bank’s rose from 34.9% to 40.37%. we can say New PSB’s Credit capacity is

more while compare to Old PSB’s.

Most banks were able to take advantage of fat profits from treasury operations,

brought about by the lower interest rates, to make higher provisions for bad debts.

As a result, out of 7 new Private Bank’s, 2 New Private Bank’s- i.e. HDFC Bank

Ltd and Kotak Mahindra Bank Ltd’ Net NPA on advances has become less than

1%. Followed by ICICI Bank Ltd. And UTI Bank Ltd Net NPA on advances are

less than 2%.

ICICI is Best Performer in New Private Banks as it providing higher advances by

taking risk compare to other banks, and is able to its NPA less than 2%.

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Suggestions

1. Fixing up the budget for profits and recovery rather than for advances. Budget

oriented approach at times leads to release of credit facilities without ensuring

compliance of covenants of sanction. A suitable mechanism could be drawn at

each bank level to provide monetary benefits/ re-organization of the operating

staff particularly for recovery in NPA’s write-off cases.

2. Projects with old technology should not be considered for finance.

3. Up gradation of credit skills of the operating staff working in advance to avoid

over and under finance.

4. Timely sanction/ release of loan to avoid time and cost overruns. and also proper

checking of documents while sanctioning loan are recommended.

5. It is suggested for possible restructuring of banks through mergers and

acquisitions to keep themselves competitive in the high credit risk market in

India.

6. One of best solution to overcome NPA is OTS ( One Time Settlement), RBI has

advised all banks to provide a simplified mechanism for one time settlement of

loans where the principle amount is equal to or less than 25000/- and which have

become doubtful and loss assets.

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Conclusion

An attempt is made in this study to present a comprehensive picture of non-

performing advances of New Private banks in India, touching upon various quantitative

and qualitative trends in the post reform period, besides carrying out with some policy

and strategic implications. Undoubtedly India is one of the few countries where NPA

levels are very high as there is an increase in the percentage of gross advances eroding

their Profit by major basic points, after netting the provision.

New Private Banks NPA has come down i.e. less than 1%. While compare to old

Private Bank’s whose NPA is more than 5%. It may be because of the proportion of

credit risk among the priority sector advances is double that of non-priority advances

implying the irrationality of (administered) price controls, which still exists in some form.

External factors outweigh the internal factors contributing to this high accumulation of

NPA’s. If the banks have to survive in the competitive and increasingly globalize market

conditions they should be helped both by the RBI and the government in the form of

faster recovery climate, especially for the legal processes of enforcement of contracts.

The quadrant analysis of credit risk clearly identifies that 7 New Private banks are

comparatively performing well when compare to old selected PSB’s. It also offers scope

for mergers and acquisitions among the banks to be better prepared for high risk credit

marketing in India. And also quadrant analysis helps to identify profitability position of

New Private Banks by using advances provided and Non Performing Assets.

Unless New Private Banks adopt proper Strategy to prevent huge level of NPA’s,

it go on affecting Profitability of Banks.

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Abbreviation used:

IBA: Indian Banking Association

NPA: Non Performing Assets

PB’s: Private Banks

UTI Bank Ltd: Unit Trust of India Bank

ICICI Bank Ltd : Industrial Credit and Investment Corporation of India

HDFC Bank Ltd.: Housing Development Finance Corporation Bank Ltd

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Bibliography

Indian Banking Association (IBA) Bulletin 2005-06

Websites

- www.Indianbankingassociation.com

- www.utibank.com

- www.Google.com

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http://www.Google.com/

http://www.utibank.com/

http://www.Indianbankingassociation.com/

non perfoming assets @ uti bank project report mba finance

Economy & Finance