A Study on NPA Management in SBI (State Bank of India)
A Project Report Submitted for the Partial Fulfillment of the Requirement for the Award of the Degree of Master of Business Administration (MBA)
Supervised By DR. B.D. Mishra (Associate Professor)
Submitted By Meenakshi Dhirwani Roll No. -13605023
2015 Department of Management studies Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)
Certificate by the student
This is to certify that I, Meenakshi Dhirwani, a student of MBA Fourth Semester of the batch 2013-15 (Roll No. 13605023) have carried out a project entitled “NPA Management in SBI” under the supervision of Dr. B.D. Mishra (Associate Professor) in the Department of Management Studies, Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G). This is an original work carried out by me and the report has not been submitted to any other University for the award of any degree of diploma.
Date: 13/ 5 /2015 Place: Bilaspur
Meenakshi Dhirwani MBA IVth Semester Batch:- 2013-15 Roll No.:- 13605023
I
Certificate by the supervisor
This is to certify that Ms. Meenakshi Dhirwani, a student of MBA fourth semester of the 2013- 15 batch (Roll No. 13605023) has carried out a project “NPA Management in SBI” under my supervision and guidance. It is also certified that the student has compiled with all the guidelines designed for the project of report. To the best of my knowledge this report is an authentic record of the work carried out by the student and it is considered fit for being referred to evaluation.
Date: 13/ 5 /2015 Place: Bilaspur
Dr. B.D. Mishra (Associate professor) Department of Management Studies Guru Ghasidas Vishwavidyalaya, Bilaspur (C.G)
II
COPY OF SYNOPSIS AS APPROVED BY THE SUPERVISOR
TITLE:-A STUDY OF NPA MANAGEMENT IN SBI
OBJECTIVES:1. To understand what is non performing Assets and what are the underlying reasons for the emergence of the NPA's 2. To study the position of NPA in SBI group 3. To understand the impact of NPA on strategic banking whole 4. To know the reason for an Asset becoming NPA 5. To suggest measures to reduce NPA 6. To study the methods adopted by the RBI to look after NPA management 7. To study why banks and financial institutions are facing problems of swelling NPAs even after the passing of the act.
SIGNIFICANCE OF THE STUDY
The main aim of any person is the utilization of money in the best manner since the India is country where more than half of population has problem of running the family in the most efficient manner. However Indian people faced large number of problems till the development of full- fledged banking sector. The Indian banking sector came into the developing nature mostly after 1991 government policy. The banking sector has really helped the Indian people to utilize the single money in the best manner as they want. The banks not only accept the deposits of the people but also provide them credit facility for their development. Indian banking sector has the nation in developing the business and services sectors. But recently the banks are facing the problem of credit risk. It is found that many general people and business people borrow from the banks but due to some genuine of other reasons are not able to repay back is known as the non- performing assets. Many banks are facing the problem of NPA which hampers the business of banks. Due to NPAs the income of the banks is reduced and the banks have to make large number of the provision that would III
curtail the profit of the banks and due to that the financial performance of the bank would not show good results. The main aim behind making this report is to know how SBI is operating its business and how NPAs play its role to the operations of the SBI bank. My study is also focusing upon existing system in India to solve the problem of NPAs.
REASERCH METHODOLOGY The key element of our methodology are as follow:-
1.Sample size:- the total sample size was 25. The respondent was bank members, especially the bank manager, loan manager, the credit managers and the officers in charge of recovery department.
2. Selection of the sample:-convenience sampling is used.
3. Sources of Data collection:- the source of data is important consideration for any project. The data used it:
Secondary data:Secondary data refers to the data which has already been generated and is available for use. The data is taken from Reserve Bank of India website, SBI website and journals.
Primary data:The primary data is collected through questionnaire,
4. Period of the study:- the period of the study is done on the basis of availability of data. The data are collected i.e. from 2003-04 to 2007-08.
5. Research design:- the research conducted is to analyze the NPA management in SBI bank. The nature of research is exploratory as well as diagnostic. This study is based on the discussions conducted with officials of the bank. The various data provided by them, the RBI
IV
circulars, journal, magazines, data from internet will be studied and interpretation made thereof.
6. secondary information is obtained by the medium of internet, books and the journals of various Management schools and the government web portals.
CHAPTER PLAN
1. Introduction 2. Company profile 3. NPA management 4. Data analysis and interpretation 5. Findings, conclusion and suggestion.
V
ACKNOWLEDGEMENT
On the very outset of this report, I would like to extend my sincere & heartfelt obligation towards all the personages who have helped me in this endeavor. Without their active guidance, help, cooperation & encouragement, I would not have made headway in the project.
I am extremely thankful and pay my gratitude to my faculty guide Dr. B.D. Mishra for his valuable guidance and support on this project in its presently.
I am extremely indebted to Dr. L.P. Pateriya sir for conscientious guidance and encouragement to accomplish this assignment.
I extend my gratitude to Department of Management Studies, GGV, Bilaspur (C.G.) for giving me this opportunity.
I also acknowledge with a deep sense of reverence, my gratitude towards my parents and member of my family, who has always supported me morally as well as economically. At last but not the least gratitude goes to all my friends who directly or indirectly helped me to complete this project report
Any omission in this brief acknowledgement does not mean lack of gratitude.
Meenakshi Dhirwani MBA IVthSemester
VI
PREFACE
Master of business administration of finance is course which combines with theory and its application as its contents of study in the field of management as a part of this course every aspirant has to submit a major project report.
Granting of credit facilities for economic activities is the primary task of banking. Apart from raising resources through fresh deposits, borrowings, etc. recycling of fund received bank from borrowers constitutes a major part of funding credit dispensation activities. Nonrecovery of installment as also interest on the loan portfolio negates the effectiveness of this process of the credit cycle. Non- recovery also affects the profitability of banks besides being required to maintain more owned funds by way of capital and creation of reserves and provision to act as cushion for the loan losses. Avoidance of loan losses is one of the preoccupation of management of banks. While complete elimination of such losses is not possible, bank management aim to keep the losses at a low level. In fact, it is the level of nonperforming advances, which, to a great extent, widespread repercussions. To avoid shock waves affecting the system, the salvaging exercise is done by the Government or by the industry on the behest of Government/ central bank of the country putting pressure on the exchequer.
This project aims at providing overall view on the existence of NPAs, their treatment, the ways at resolving this issue and also a few reports on the recent developments in this field. If this report will be fruitful to any organization by any means, we will consider our work worthwhile.
Date: 13/5/2015 Place- Bilaspur
Meenakshi Dhirwani M.B.A IVth Semester
VII
LIST O TABLES AND CHARTS
TABLE NO.
CONTENTS
PAGE NO.
4.1
TOTAL ASSET
60
4.2
GROSS NPA RATIO
61
4.3
NET NPA RATIO
63
4.4
TABLE OF ADVANCES AND GROSS NPA
64
4.5
CAPITAL ADEQUACY RATIO
65
4.6
PROVISION RATIO
66
4.7
WHAT ISNPA?
68
4.8
PERCENTGE OF NPA
69
4.9
TREND OF NPA
70
4.10
CAUSES OF NPA
71
4.11
STEPS TO BE TAKEN
72
4.12
METHOD OF MEASUREMENT OF NPA
74
4.13
MEASURE FOR RECOVERY OF NPA
75
4.14
RESPONSIBLE FOR NON-RECOVERY OF OUT STNDING 76 CREDIT
4.15
APPOINMENT MADE FOR REALIZING MONEY
77
4.16
LAW ACTS AS A STUMBLING BLOCK
78
4.17
TIME TAKEN TO RECOVER MONEY
79
4. 18
GOVERNMENT POLICIES RESPONSIBLE FOR NPA
80
4.19
CATETGORY FOR WHICH NPA IS LARGELY OBSERVED
81
4.20
POLITICAL INTERFERANCE AFFECTS NPA
82
VIII
4.21
OUT OF COURT SETTLEMENT
4.22
DEVELOPING A TENDENCY OF DELIBERATE ATTEMPT 84 OF DEFAULT AMONG BORROWERS
4.22
ADEQUACY OF CREDIT MONITORING SYSTEM
85
4.23
NECESSITY OF IMPROVEMENT
86
4.24
APPOINTMENT OF EXTERNAL RECOVERY AGENT
87
4.25
DELAY IN LEGAL PROCEDURES CREATE DIFFICULTY IN 88 RECOVERY
4.26
CASH INCENTIVE SCHEME
89
4.27
SATISFACTION FROM PRESENT INCENTIVE SCHEME
90
4.28
PROGRESS OF NPA
91
4.29
SIMILAR RECOVERY STRATEGY
92
4.30
STRATEGIE, HELPFUL IN REDUCING NPA
93
IX
83
CONTENTS S. NO
PARTICULARS
PAGE NO.
1.
CERTIFICATE BY THE STUDENT
I
2.
CERTIFICATE BY THE SUPERVISOR
II
3.
COPY OF SYNOPSIS AS APPROVED BY THE SUPERVISOR
III-V
4.
PREFACE
VI
5.
ACKNOWLEDGEMENT
VII
6.
LIST OF TABLES AND CHARTS
VIII- IX
7.
EXECUTIVE SUMMARY
8.
CHAPTER-1 INTRODUCTION
1 2- 7
1.1 NPA IN INDIAN BANK- CURRENT SCENERIO 1.2 OBJECTIVES OF THE PROJECT 1.3 SIGNIFICANCE OF THE STUDY 1.4 RESEARCH PROBLEM 1.5 RESEARCH METHODOLOGY 1.6 LIMITATIONS OF THE STUDY 1.7 CHAPTER PLAN 9.
CHAPTER-2 BANKING INDUSTRY IN INDIA AND SBI 2.1 INTRODUCTION OF BANKING SYSTEM IN INDIA 2.2 HISTORY OF INDIAN BANKING 2.3 THE INDIAN BANKING SYSTEM 2.4 THE STRUCTURE OF INDIAN BANKING X
8- 30
2.5 BANKING DIVISIONS 2.6 SWOT ANALYSIS 2.7 IMPORTANCE OF BANKING SECTOR IN GROWING ECONOMY 2.8 EMERGING SCENERIO IN THE BANKING SECTOR 2.9 CONCERN 2.10 INTRODUCTION OF SBI 2.11 ABOUT LOGO 2.12 MISSION, VISSION AND VALUES 2.13 BOARD OF DIRECTORS 2.14 PRODUCTS AND SERVICES 10.
CHAPTER-3 NPA MANAGEMENT
31- 59
3.1 MEANING OF NPA 3.2 INCOME RECOGNITION- POLICY 3.3 ASSET CLASSIFICATION 3.4 SALE OF NPA TO OTHER BANK 3.5 TYPES OF NPA 3.6 REASONSOF AN ACCOUNT BECOMING NPA 3.7 IMPACT OF NPA ON BANKS 3.8 EARLY SYMPTOMS 3.9 PREVENTIVE MEASURES OF NPA 3.10 GUIDELINES BY RBI 11.
CHAPTER-4 DATA ANALYSIS AND INTERPRETATION 4.1 RATIO ANALYSIS
XI
60- 100
4.2 ANALYSIS BASED ON QUESTIONNAIRE 12.
CHAPTER-5 FINDINGS, CONCLUSION AND SUGGESTION
13.
ANNEXURE
106- 111
14.
BIBLIOGRAPHY
112
XII
101- 105
EXECUTIVE SUMMARY The most important problem that the Indian banks are facing is the problem of their NPAs. It is only since a couple of years that this particular aspect has been given so much importance. The banks has to overcome these difficulty properly in order to effectively counter the competition faced by the foreign banks. With the framing of law as per international standards and setting up of Debt recovery tribunal we can say that steps have been taken in this direction. SARFAESI ACT 2002 (Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act) gave the banks the much needed teeth to curb the menace of NPA’s. the non- performing assets (NPAs) of banks have at last begun shrinking. As reported from surveys, it is understood that there has been substantial improvement in non- performing assets and this has been because of several measures such as formation of asset reconstruction companies, debt restructuring norms, securitization, provisioning norms and prudential norms for income recognition. The problem is no doubt about recovery management where the objective is to find out about the reasons behind NPAs and to create networks for recovery. An explorative study was adopted to achieve the objectives of the study. The major limitation of the study was the lack of time. Even then, maximum care has been taken to arrive at appropriate conclusion. The method adopted for collection of data was personal interview with the bank officials and observation. It was also sourced from secondary data. After collecting data from the respective sources, analysis and interpretation of data has been made. Based on the findings, logical conclusion are drawn, and further, suitable suggestions and recommendation are brought out. The entire project report is presented in the form of a report using chapter scheme, developed logically and sequentially from ‘introduction’ to ‘bibliography’.
1
CHAPTER - 1
2
1.1
NPA IN INDIAN BANK- CURRENT SCENERIO
Non- performing assets (NPAs) are the smoking gun threatening the very stability of Indian banks. NPAs wreck a bank’s profitability both through a loss of interest income and writeoff of the principal loan amount itself. According to economic survey:- During 2012-13, the deteriorating asset quality of the banking sector emerged as a major concern, with gross NPAs ( non-performing assets ) of banks registering a sharp increase...Growth of NPA is a cause for concern," the Survey tabled in Parliament by Finance Minister ArunJaitley said. The bad loans of public sector banks were at 4.4 per cent in March 2014 compared with 2.09 per cent in 2008-09, it said, adding, the gross NPA increased by almost four times from March 2010 (Rs 59,972 crore) to March 2014 (Rs 2,04,249 crore). Increase in NPAs of banks is mainly accounted forby switchover to system-based identification of NPAs by PSBs (public sector banks), slowdown of economic growth, and aggressive lending bybanks in the past, especially during good times, it said.Overall NPAs or bad loans of the banks, includingprivate sector lenders, increased from 2.36 percent to 3.90 per cent in March 2014. Increase was sharp in case of infrastructure with NPAs rising from 3.23 per cent to 8.22 per cent, it said. Infrastructure, iron and steel, textiles, aviation and mining are five main sector that are stressed. "The next wave of infrastructure financing will require a capable bond market." Despite, asset quality deteriorating, the survey said the capital positions of Indian banks, including that of public sector, remained strong and above the stipulated minimum.Highlighting challenges and outlook, the Surveysaid financial markets continue to suffer from illiquidity and a major objective should be to develop bond-currency derivative (BCD) nexus to equity market quality levels.
3
1.2
OBJECTIVES OF THE STUDY 1. To understand what is non performing Assets and what are the underlying reasons for the emergence of the NPA's 2. To study the position of NPA in SBI group 3. To understand the impact of NPA on strategic banking whole 4. To know the reason for an Asset becoming NPA 5. To suggest measures to reduce NPA 6. To study the methods adopted by the RBI to look after NPA management 7. To study why banks and financial institutions are facing problems of swelling NPAs even after the passing of the act.
1.3
SIGNIFICANCE OF THE STUDY
The main aim of any person is the utilization of money in the best manner since the India is country where more than half of population has problem of running the family in the most efficient manner. However Indian people faced large number of problems till the development of full- fledged banking sector. The Indian banking sector came into the developing nature mostly after 1991 government policy. The banking sector has really helped the Indian people to utilize the single money in the best manner as they want. The banks not only accept the deposits of the people but also provide them credit facility for their development. Indian banking sector has the nation in developing the business and services sectors. But recently the banks are facing the problem of credit risk. It is found that many general people and business people borrow from the banks but due to some genuine of other reasons are not able to repay back is known as the non- performing assets. Many banks are facing the problem of NPA which hampers the business of banks. Due to NPAs the income of the banks is reduced and the banks have to make large number of the provision that would curtail the profit of the banks and due to that the financial performance of the bank would not show good results.
4
The main aim behind making this report is to know how SBI is operating its business and how NPAs play its role to the operations of the SBI bank. My study is also focusing upon existing system in India to solve the problem of NPAs.
1.4
REASEARCH PROBLEM
Indian banking industry, which was in glory phase once upon a time, has been facing a lots of challenges on non- performing assets at present scenario. Many banks have kept their NPAs under the control but some banks are not able to control their NPA levels. They are facing lots of problems there can be various reasons behind this NPA. Non- performing assets has been hitting the profitability of the banks or it can be said that due to NPA, the profitability of the banks are going down day by day. The subsidiary for this is the functioning of Debt Recovery Tribunal (DRT) which is a judiciary for the bank for recovery amount from the default customers. These can be considered as a research problem based on which the information is collected, the object is measured and the data is analyzed and interpreted.
1.5 RESEARCH PROBLEM The key element of our methodology are as follow:1. Sample size:- the total sample size was 25. The respondent was bank members, especially the
bank manager, loan manager, the credit managers and the
officers in charge of recovery department. 2. Selection of the sample:-convenience sampling is used. 3. Sources of Data collection:- the source of data is important consideration for any project. The data used it:
5
Secondary data:-
Secondary data refers to the data which has already been generated and is available for use. The data is taken from Reserve Bank of India website, SBI website and journals.
Primary data:-
The primary data is collected through questionnaire, 4. Period of the study:- the period of the study is done on the basis of availability of data. The data are collected i.e. from 2003-04 to 2007-08. 5. Research design:- the research conducted is to analyze the NPA management in SBI bank. The nature of research is exploratory as well as diagnostic. This study is based on the discussions conducted with officials of the bank. The various data provided by them, the RBI circulars, journal, magazines, data from internet will be studied and interpretation made thereof. 6. Secondary information is obtained by the medium of internet, books and the journals.
1.6 LIMITATIONS The project was a very good learning experience but on the other side it was full of challenging and difficulties. The most difficult part of the project was the interpretation with the members of the banks with the purpose to collect feedback. The major constraints faced can be listed as follow
It was not possible to collect the data from all the branches and members of the bank due to the shortage of time data.
Convincing respondent for filling up of the questionnaire was challenging.
The secondary data was available for 5 years only.
The conclusion of the study are based on the responces of the banks and secondary information. Thus, some amount of subjectivity might remain.
6
1.7 CHAPTER PLAN
1. Introduction 2. Company profile 3. NPA management 4. Data analysis and interpretation 5. Findings, conclusion and suggestion.
7
CHAPTER- 2
8
BANKING INDUSTRY IN INDIA 2.1 INTRODUCTION A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also non banking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry. A banking system also referred as a system provides by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, throughout the day. The banking system in India should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, India’s banking system has several outstanding achievements to its credit. The banks are the main participants of the financial system in India. The banking sector offers several facilities and opportunities to their customers. All the banks safeguard the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier’s cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role- accepting deposits and lending funds from these deposits.
2.2 History:Banking in India has its origin as carry as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to the interest. During the mogal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of East India Company, it was to turn of the agency houses top carry on the banking business. The general bank of India was the first joint stock bank to be established in the year
9
1786.The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906, while the other two failed in the meantime. In the first half of the 19th Century the East India Company established three banks; The Bank of Bengal in 1809, The Bank of Bombay in 1840 and The Bank of Madras in 1843.These three banks also known as presidency banks and were independent units and functioned well. These three banks were amalgamated in 1920 and The Imperial Bank of India was established on the 27th Jan 1921, with the passing of the SBI Act in 1955, the undertaking of The Imperial Bank of India was taken over by the newly constituted SBI. The Reserve Bank which is the Central Bank was created in 1935 by passing of RBI Act 1934, in the wake of swadeshi movement, a number of banks with Indian Management were established in the country namely Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, The Bank of Baroda Ltd, The Central Bank of India Ltd .On July 19 th 1969, 14 Major Banks of the country were nationalized and in 15th April 1980 six more commercial private sector banks were also taken over by the government. The Indian Banking industry, which is governed by the Banking Regulation Act of India 1949, can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled Banks comprise commercial banks and the co-operative banks. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from class banking to mass banking. This in turn resulted in the significant growth in the geographical coverage of banks. Every bank had to earmark a min percentage of their loan portfolio to sectors identified as “priority sectors” the manufacturing sector also grew during the 1970’s in protected environments and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980 since then the number of scheduled commercial banks increased four- fold and the number of bank branches increased to eight fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties. The PSB’s found it extremely difficult to complete with the new private sector banksand the foreign banks. The new private sector first made their appearance after the guidelines permitting them were issued in January 1993.
10
2.3 The Indian Banking System: Banking in our country is already witnessing the sea changes as the banking sector seeks new technology and its applications. The best port is that the benefits are beginning to reach the masses. Earlier this domain was the preserve of very few organizations. Foreign banks with heavy investments in technology started giving some “Out of the world” customer services. But, such services were available only to selected few- the very large account holders. Then came the liberalization and with it a multitude of private banks, a large segment of the urban population now requires minimal time and space for its banking needs. Automated teller machines or popularly known as ATM are the three alphabets that have changed the concept of banking like nothing before. Instead of tellers handling your own cash, today there are efficient machines that don’t talk but just dispense cash. Under the Reserve Bank of India Act 1934, banks are classified as scheduled banks and non-scheduled banks. The scheduled banks are those, which are entered in the Second Schedule of RBI Act, 1934. Such banks are those, which have paid- up capital and reserves of an aggregate value of not less then Rs.5 lacs and which satisfy RBI that their affairs are carried out in the interest of their depositors. All commercial banks Indian and Foreign, regional rural banks and state cooperative banks are Scheduled banks. Non Scheduled banks are those, which have not been included in the Second Schedule of the RBI Act, 1934. The organized banking system in India can be broadly classified into three categories: (i) Commercial Banks (ii) Regional Rural Banks and (iii) Co-operative banks. The Reserve Bank of India is the supreme monetary and banking authority in the country and has the responsibility to control the banking system in the country. It keeps the reserves of all commercial banks and hence is known as the “Reserve Bank”.
11
2.4 The Structure of Indian Banking: The Indian banking industry has Reserve Bank of India as its Regulatory Authority. This is a mix of the Public sector, Private sector, Co-operative banks and foreign banks. The private sector banks are again split into old banks and new banks.
RBI
scheduled
commercial
private
public
unscheduled
cooperative
RRB
foriegn
Rural
Urban
2.5 BANKING DIVISIONS
Retail banking – loans to individuals ( auto loan, housing loan, educational loan and other personal loan) or small business.
Wholesale banking – loans to mid and large corporate ( working capital loans, project finance, team loans, lease finance)
12
Treasury operations – investment in equity, derivatives, commodities, mutual funds, bonds, trading and forex operations.
Other banking businesses – merchant banking, leasing business, hire purchase, syndication services, etc.
2.6 SWOT ANALYSIS
STRENGHTS
WEAKNESSES
Valuable contribution to
Increasing NPA
GDP
Low penetration
Regulatory environment
Lack
Government support
of
product
differentiation
OPURTUNITIES
THREATS
Modern technology
Untapped rural market
Globalization
Unorganized money lending market
Customer dissatisfaction
Rise of monopolistic structures
13
2.7 IMPORTANCE OF BANKING SECTOR IN A GROWING ECONOMY In the recent times when the service industry is attaining greater importance compared to manufacturing industry, banking has evolved as a prime sector providing financial services to growing needs of the economy. Banking industry has undergone a paradigm shift from providing ordinary banking services in the past to providing such complicated and crucial services like, merchant banking, housing finance, bill discounting etc. This sector has become more active with the entry of new players like private and foreign banks. It has also evolved as a prime builder of the economy by understanding the needs of the same and encouraging the development by way of giving loans, providing infrastructure facilities and financing activities for the promotion of entrepreneurs and other business establishments. For a fast developing economy like ours, presence of a sound financial system to mobilize and allocate savings of the public towards productive activities is necessary. Commercial banks play a crucial role in this regard. The Banking sector in recent years has incorporated new products in their businesses, which are helpful for growth. The banks have started to provide fee-based services like, treasury operations, managing derivatives, options and futures, acting as bankers to the industry during the public offering, providing consultancy services, acting as an intermediary between two-business entities etc.At the same time, the banks are reaching out to other end of customer requirements like, insurance premium payment, tax payment etc. It has changed itself from transaction type of banking into relationship banking, where you find friendly and quick service suited to your needs. This is possible with understanding the customer needs their value to the bank, etc. This is possible with the help of well-organized staff, computer based network for speedy transactions, products like credit card, debit card, health card, ATM etc. These are the present trend of services. The customers at present ask for convenience of banking transactions, like 24 hours banking, where they want to utilize the services wheneverthere is a need. The relationship banking plays a major and important role
14
in growth, because the customers now have enough number of opportunities, and they choose according to their satisfaction of responses and recognition they get. So the banks have to play cautiously, else they may lose out the place in the market due to competition, where slightest of opportunities are captured fast. Another major role played by banks is in transnational business, transactions and networking. Many leading Indian banks have spread out their network to other countries, which help in currency transfer and earn exchange over it. These banks play a major role in commercial import and export business, between parties of two countries. This foreign presence also helps in bringing in the international standards of operations and ideas. The liberalization policy of 1991 has allowed many foreign banks to enter the Indian market and establish their business. This has helped large amount of foreign capital inflow & increase our Foreign exchange reserve. Another emerging change happening all over the banking industry is consolidation through mergers and acquisitions. This helps the banks in strengthening their empire and expanding their network of business in terms of volume and effectiveness.
2.8 EMERGING SCENARIO IN THE BANKING SECTOR The Indian banking system has passed through three distinct phases from the time of inception. The first was being the era of character banking, where you were recognized as a credible depositor or borrower of the system. This era come to an end in the sixties. The second phase was the social banking. Nowhere in the democratic developed world, was banking or the service industry nationalized. But this was practiced in India. Those were the days when bankers has no clue whatsoever as to how to determine the scale of finance to industry. The third era of banking which is in existence today is called the era of Prudential Banking. The main focus of this phase is on prudential norms accepted internationally
15
SBI GroupThe Bank of Bengal, which later became the State Bank of India. State Bank of India with its seven associate banks commands the largest banking resources in India.
NationalizationThe next significant milestone in Indian Banking happened in late 1960s when the then Indira Gandhi government nationalized on 19th July 1949, 14 major commercial Indian banks followed by nationalization of 6 more commercial Indian banks in 1980. The stated reason for the nationalization was more control of credit delivery. After this, until 1990s, the nationalized banks grew at a leisurely pace of around 4% also called as the Hindu growth of the Indian economy .After the amalgamation of New Bank of India with Punjab National Bank, currently there are 19 nationalized banks in India.
LiberalizationIn the early 1990’s the then Narasimharao government embarked a policy of liberalization and gave licences to a small number of private banks, which came to be known as New generation tech-savvy banks, which included banks like ICICI and HDFC. This move along with the rapid growth of the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the sectors of banks, namely Government banks, Private Banks and Foreign banks. However there had been a few hiccups for these new banks with many either being taken over like Global Trust Bank while others like Centurion Bank have found the going tough. The next stage for the Indian Banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in Banks may be given voting rights which could exceed the present cap of 10%, at pesent it has gone up to 49% with some restrictions.
16
The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. 2.9 CONCERN Indian economy is one of the fastest growing economies of the world. The economy with its vital geography and demography has specific requirements in order to traverse to the next orbit and attain its full potential. Banks enable to cope with finance requirement for few industries such as infrastructure, housing and real estate etc. India’s infrastructural financing needs are not only huge but also vital. Traditionally banks have been the major source of infrastructure financing and their exposure to infrastructure is already high at 17 per cent. There are several major concerns which as noted below: Intensifying competition Indian banking industry has undergone qualitative changes due to banking sector reforms. Indian banking sector, which is dominated by state- controlled, has facing formidable challenges. Due to this new emerging competition, Indian banks, especially PSBs are trying their best to improve their performance and preparing to compete in the emerging global market. New private sector banks and foreign banks have more customer- centric policies, high quality services, new attractive schemes and computerized branches. All these services attracted more and more customers to their banks. In this context, there is a need to examine the efficiency of public sector banks operating in India. Mainly, competition can intensify and banks which is efficient. The transaction cost of customers could come down and a bank which is efficient, nimble and customer focused would always be able to do better than others. As a result of globalization, many new banks have the Indian banking industry, further intensifying the competition.
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Increasing NPA The asset quality of banks is one of the most important indicator of their financial health. It also reflects the efficiency of banks’ credit risk management and the recovery environment. The Indian banks have shown very good performance as far as the financial operations are concerned. But non- performing assets (NPA) has caused some concerns. Despite write- offs gross NPAs have continued to rise significantly. The new accretion to NPAs has been much faster than the reduction in existing NPAs due to lower levels of up gradation and recoveries. To improve the banks’ ability their non –performing assets (NPAs) and restructured accounts in an effective manner and considering that almost all branches of banks have been fully computrized, the Reserve bank of India in its monetary policy statement 2012- 13 proposed the following measures: •
To mandate banks to put in place a robust mechanism for early detection of signs of
distress, and measures, including prompt restructuring in the case of all viable accounts wherever required, with view to presenting the economic value such accounts: and •
To mandate banks to have proper system generated- wise data on their NPA accounts,
write offs, compromise settlement, recovery and restructured accounts. Despite these concerns, it is projected that the Indian banking industry will grow through leaps and bounds looking at the huge growth potential of Indian economy. High population base of India, rising disposable income, etc. will drive the growth og Indian banking industry in the long- term.
COMPANY PROFILE 2.10 INTRODUCTIONSTATE BANK OF INDIA Not only many financial institution in the world today can claim the antiquity and majesty of the State Bank Of India founded nearly two centuries ago with primarily intent of imparting stability to the money market, the bank from its inception mobilized funds for supporting both the public credit of the companies governments in the three presidencies of British India and the private credit of the European and India merchants from about 1860s when the Indian
18
economy book a significant leap forward under the impulse of quickened world communications and ingenious method of industrial and agricultural production the Bank became intimately in valued in the financing of practically and mining activity of the SubContinent Although large European and Indian merchants and manufacturers were undoubtedly thee principal beneficiaries, the small man never ignored loans as low as Rs.100 were disbursed in agricultural districts against glad ornaments. Added to these the bank till the creation of the Reserve Bank in 1935 carried out numerous Central – Banking functions. Adaptation world and the needs of the hour has been one of the strengths of the Bank, In the post depression exe. For instance – when business opportunities become extremely restricted, rules laid down in the book of instructions were relined to ensure that good business did not go post. Yet seldom did the bank contravenes its value as depart from sound banking principles to retain as expand its business. An innovative array of office, unknown to the world then, was devised in the form of branches, sub branches, treasury pay office, pay office, sub pay office and out students to exploit the opportunities of an expanding economy. New business strategy was also evaded way back in 1937 to render the best banking service through prompt and courteous attention to customers.A highly efficient and experienced management functioning in a well defined organizational structure did not take long to place the bank an executed pedestal in the areas of business, profitability, internal discipline and above all credibility A impeccable financial status consistent maintenance of the lofty traditions if banking an observation of a high standard of integrity in its operations helped the bank gain a pre- eminent status. No wonders the administration for the bank was universal as key functionaries of India successive finance minister of independent India Resource Bank of governors and representatives of chamber of commercial showered economics on it.
Modern day management techniques were also very much evident in the good old days years before corporate governance had become a puzzled the banks bound functioned with a high degree of responsibility and concerns for the shareholders. An unbroken records of profits and a fairly high rate of profit and fairly high rate of dividend all through ensured
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satisfaction, prudential management and asset liability management not only protected the interests of the Bank but also ensured that the obligations to customers were not met. The traditions of the past continued to be upheld even to this day as the State Bank years itself to meet the emerging challenges of the millennium.
2.11 ABOUT LOGO
THE
PLACE
TO
SHARE THE NEWS ...…… SHARE
THE
VIEWS …… Togetherness is the theme of this corporate loge of SBI where the world of banking services meet the ever changing customers needs and establishes a link that is like a circle, it indicates complete services towards customers. The logo also denotes a bank that it has prepared to do anything to go to any lengths, for customers. The blue pointer represent the philosophy of the bank that is always looking for the growth and newer, more challenging, more promising direction. The key hole indicates safety and security.
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2.12 MISSION, VISION AND VALUES MISSION STATEMENT: To retain the Bank’s position as premiere Indian Financial Service Group, with world class standards and significant global committed to excellence in customer, shareholder and employee satisfaction and to play a leading role in expanding and diversifying financial service sectors while containing emphasis on its development banking rule.
VISION STATEMENT: Premier Indian Financial Service Group with prospective world-class Standards of efficiency and professionalism and institutional values. Retain its position in the country as pioneers in Development banking. Maximize the shareholders value through high-sustained earnings per Share. An institution with cultural mutual care and commitment, satisfying and Good work environment and continues learning opportunities.
VALUES: Excellence in customer service Profit orientation Belonging commitment to Bank Fairness in all dealings and relations Risk taking and innovative
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Team playing Learning and renewal Integrity Transparency and Discipline in policies and systems.
2.13 BOARD OF DIRECTORS List of directors on the central board of state bank of India (As on 1st December, 2014) S. No
Name
Designation
Under
section
of SBI Act 1955 1
Smt. Arundhati Bhattacharya
Chairman
19(a)
2
Shri. P. Pradeep Kumar
Managing director
19(b)
3
Shri. B. Sriram
Managing director
19(b)
4
Shri. V.G Kannan
Managing director
19(b)
5
Shri. SanjivMalhotra
Director
19(c)
6
Shri. Sunil Mehta
Director
19(c)
7
Shri. M. D. mallya
Director
19(c)
8
Shri. Deepak I. Amin
Director
19(c)
9
Shri. S. K Mukherjee
Officer
employee 19(cb)
director 10
Dr. Rajiv Kumar
Director
19(d)
11
Shri. HarichandraBahadursingh
Director
19(d)
12
Shri. TribhuwanNathchaturvedi
Director
19(d)
13
Dr. HasmukhAdhia
Director
19(e)
14
Dr. Urjit R. Patel
Director
19(f)
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2.14 PRODUCTS AND SERVICES PRODUCTS: State Bank Of India renders varieties of services to customers through the following products: Personal Loan Product:
SBI Term Deposits
SBI Recurring Deposits
SBI Housing Loan
SBI Car Loan
SBI Educational Loan
SBI Personal Loan
SBI Loan For Pensioners
Loan Against Mortgage Of Property
Loan Against Shares & Debentures
Rent Plus Scheme
Medi-Plus Scheme
Rates Of Interest
SBI Housing loan SBI Housing loan or Mortgage Loan schemes are designed to make it simple for you to make a choice at least as far as financing goes!
'SBI-Home Loans'
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features:
No cap on maximum loan amount for purchase/ construction of house/ flat
Option to club income of your spouse and children to compute eligible loan amount
Provision to club expected rent accruals from property proposed to compute eligible loan
amount
Provision to finance cost of furnishing and consumer durables as part of project cost
Repayment permitted upto 70 years of age
Free personal accident insurance cover
Optional Group Insurance from SBI Life at concessional premium (Upfront premium financed as part of project cost)
Interest applied on daily diminishing balance basis
'Plus' schemes which offer attractive packages with concessional interest rates to Govt. Employees, Teachers, Employees in Public Sector Oil Companies.
Special scheme to grant loans to finance Earnest Money Deposits to be paid to Urban Development Authority/ Housing Board, etc. in respect of allotment of sites/ house/ flat
No Administrative Charges or application fee
Prepayment penalty is recovered only if the loan is pre-closed before half of the original tenure (not recovered for bulk payments provided the loan is not closed)
Provision for downward refixation of EMI in respect of floating rate borrowers who avail Housing Loans of Rs.5 lacs and above, to avail the benefit of downward revision of interest rate by 1% or more
In-principle approval issued to give you flexibility while negotiating purchase of a property
·Option to avail loan at the place of employment or at the place of construction
Attractive packages in respect of loans granted under tie-up with Central/ State Governments/ PSUs/ reputed corporates and tie-up with reputed builders (Please contact your nearest branch for details)
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SERVICES:
DOMESTIC TREASURY
SBI VISHWA YATRA FOREIGN TRAVEL CARD
BROKING SERVICES
REVISED SERVICE CHARGES
ATM SERVICES
INTERNET BANKING
E-PAY
E-RAIL
RBIEFT
SAFE DEPOSIT LOCKER
GIFT CHEQUES
ATM SERVICES STATE BANK NETWORKED ATM SERVICES State Bank offers you the convenience of over 8000 ATMs in India, the largest network in the country and continuing to expand fast! This means that you can transact free of cost at the ATMs of State Bank Group (This includes the ATMs of State Bank of India as well as the Associate Banks – namely, State Bank of Bikaner & Jaipur, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, State Bank of Patiala, State Bank of Saurashtra, and State Bank of Travancore) and wholly owned subsidiary viz. SBI Commercial and International Bank Ltd., using the State Bank ATM-cum-Debit (Cash Plus) card.
KINDS OF CARDS ACCEPTED AT STATE BANK ATMs Besides State Bank ATM-Cum-Debit Card and State Bank International ATM-Cum-Debit Cards following cards are also accepted at State Bank ATMs: 1) State Bank Credit Card
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2) ATM Cards issued by Banks under bilateral sharing viz. Andhra Bank,Axis Bank, Bank of India, The Bank of Rajasthan Ltd., Canara Bank, Corporation Bank, Dena Bank, HDFC Bank, Indian Bank, Indus Ind Bank, Punjab National Bank, UCO Bank and Union Bank of India. 3) Cards issued by banks (other than banks under bilateral sharing) displaying Maestro, Master Card, Cirrus, VISA and VISA Electron logos 4) All Debit/ Credit Cards issued by any bank outside India displaying Maestro, Master Card, Cirrus, VISA and VISA Electron logos Note: If you are a cardholder of bank other than State Bank Group, kindly contact your Bank for the charges recoverable for usage of State Bank ATMs.
STATE
BANK
INTERNATIONAL
ATM-CUM-DEBIT
CARD
Eligibility: All Saving Bank and Current Account holders having accounts with networked branches and are:
18 years of age & above
Account type: Sole or Joint with “Either or Survivor” / “Anyone or Survivor”
NRE account holders are also eligible but NRO account holders are not.
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Benefits:
Convenience to the customers traveling overseas
Can be used as Domestic ATM-cum-Debit Card
Available at a nominal joining fee of Rs. 200/-
Daily limit of US $ 1000 or equivalent at the ATM and US $ 1000 or equivalent at Point of Sale (POS) terminal for debit transaction
Purchase Protection*up to Rs. 5000/- and Personal Accident cover*up to Rs. 2,00,000/-
Charges for usage abroad: Rs. 150+ Service Tax per cash withdrawal Rs. 15 + Service Tax per enquiry.
State Bank ATM-cum-Debit (State Bank Cash plus) Card: India’s largest bank is proud to offer you unparalleled convenience viz. State Bank ATMcum-Debit(Cash Plus) card. With this card, there is no need to carry cash in your wallet. You can now withdraw cash and make purchases anytime you wish to with your ATM-cum-Debit Card. Get an ATM-cum-Debit card with which you can transact for FREE at any of over 8000 ATMs of State Bank Group within our country.
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SBI GOLD INTERNATIONAL DEBIT CARD
E-PAY Bill Payment at Online SBI (e-Pay) will let you to pay your Telephone, Mobile, Electricity, Insurance and Credit Card bills electronically over our Online SBI website
E-RAIL Book your Railways Ticket Online. The facility has been launched wefIst September 2003 in association with IRCTC. The scheme facilitates Booking of Railways Ticket Online. The salient features of the scheme are as under:
All Internet banking customers can use the facility.
On giving payment option as SBI, the user will be redirected to onlinesbi.com. After logging on to the site you will be displayed payment amount, TID No. and Railway reference no.
. The ticket can be delivered or collected by the customer.
The user can collect the ticket personally at New Delhi reservation counter .
The Payment amount will include ticket fare including reservation charges, courier charges and Bank Service fee of Rs 10/. The Bank service fee has been waived unto 31st July 2006.
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SAFE DEPOSIT LOCKER For the safety of your valuables we offer our customers safe deposit vault or locker facilities at a large number of our branches. There is a nominal annual charge, which depends on the size of the locker and the centre in which the branch is located.
NRI HOME LOAN SALIENTFEATURES PURPOSE Loans to NRIs & PIOs can be extended for the following purposes.
To purchase/construct a new house / flat
To repair, renovate or extend an existing house/flat
To purchase an existing house/flat
To purchase a plot for construction of a dwelling unit.
To purchase furnishings and consumer durables, as a part of the project cost
AGRICULTURE / RURAL State Bank of India Caters to the needs of agriculturists and landless agricultural labourers through a network of 6600 rural and semi-urban branches. here are 972 specialized branches which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment. These branches include 427 Agricultural Development Branches (ADBs) and 547 branches with Development Banking Department (DBDs) which cater to agriculturists and 2 Agricultural Business Branches at Chennai and Hyderabad catering to the needs of hitech commercial agricultural projects.
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CHAPTER- 3
30
3.1 MEANING OF NPA Non- performing asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub- standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as ‘past due’ when it has not been paid within 30 days from the due date. Due to the improvements in the payment and settlement systems, recovery climate, up gradation of technology in the banking sector, etc, it was decided to dispense with the ‘past due’ concept, with effect from 31st March, 2001. Accordingly, as from that date, a NPA shall be an advance where, i. Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan ii. The account remains ‘our of order’ for a period of more than 180 days, in respect of an overdraft/cash credit iii. Interest and/or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agriculturepurposes iv. Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to move towards international best practices, it has been decided to adopt the ’90 days’ overdue norm for identification of NPAs, from 31st March, 2004. Accordingly with effect from march 31, 2004, a non-perfoming asset (NPA) shell be a loan or an advance where; I.
Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,
II.
The account remains ‘out of order’ for a period of more than 90 days in respect of an overdraft/ cash credit (OD/CC)
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III.
The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
IV.
Interest and / or installement of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and
V.
Any amount to be recived remains overdue for a period of more than 90 days in respect of other accounts.
3.2 INCOME RECOGNITION- POLICY
The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non-performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA.
However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.
If any advance, including bills purchased and discounted, become NPA as at the close of any year, the entire interest accured and credited to income account in the past periods, should be reversed or provided for if the same is not realized.
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3.3 ASSET CLASSIFICATION Assets are classified into following four categories:
Standard assets
Sub- standard assets
Doubtful assets
Loss assets
Standard Assets:- Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan does not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories. Provisioning norms:
From the year ending 31. 03. 2000, the banks should make a general provision of a minimum of 0.40 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards standard assets need not be netted from gross advances but shown seperately as ‘contingent provisions aginst standard assets’ under ‘other liabilities and provisions- others’ in schedule 5 of the balance sheet.
Banks are required to classify non- performing assets further into the following three categories based on the period for which the asset has remained non- performing and the reasonability of the dues: 1) Sub- standard assets 2) Doubtful assets 3) Loss assets
33
Sub-standard Assets:-- With effect from 31 March 2005, a sub standard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by sub standard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has well-defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Provisioning norms: a general provision of 10% on total outstanding should be made without making any allowance for DICGC/ECGC guarantee cover securities available. Doubtful Assets:--A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable.With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the sub-standard category for 12 months. Provisioning norms:
100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis.
In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 50 percent of the secured portion depending upon the period for which the asset has remained doubtful:
Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31, 2003 has to be made in phases as under: 1. As on31.03.2003, 50 percent of the additional provisioning requirement on the assets which became doubtful on account of new norm of 18 months for transition from sub-standard asset to doubtful category.
34
2. As on 31.03.2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31.03.2002.
Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year.
Loss Assets:--A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted- although there may be some salvage or recovery value. Also, these assets would have been identified as ‘loss assets’ by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly. Provisioning norms: The entire asset should be written off. If the assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for.
3.4 SALE OF NPA TO OTHER BANKS
A NPA is eligible for sale to other banks only if it has remained a NPA for at least two years in the books of the selling bank.
The NPA must be held by the purchasing bank at least for a period of 15 months before it is sold to other banbks but not to bank, which originally sold the NPA.
The NPA may be classified as standard in the books of the purchasing banbk for a period of 90 days from date of purchase and therefore it would depend on the record of recovery with refrence of cash flows estimated while purchasing.
The bank may purchase/ sell NPA only on without recourse basis.
If the sale is conducted below the net book value, the short fall should be debited to P&L account and if it is higher, the excess provision will be utilized to meet the loss on account of sale of other NPA.
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3.5 TYPES OF NPA A] Gross NPA B] Net NPA
Gross NPA:Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio:
Gross NPAs Ratio =
Gross NPAs Gross Advances
Net NPA:Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burdenof banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following_ Net NPAs =
Gross NPAs – Provisions Gross Advances - Provisions
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3.6 REASONS FOR AN ACCOUNT BECOMING NPA: FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors.
EXTERNAL FACTORS
1· Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of non-recover, their by reducing their profitability and liquidity.
2. Wilful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advances and loans.
3·Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers
37
depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans 4·Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity. 5·Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the nonrecovered part as NPAs and has to make provision for it. 6·Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. Eg. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central govt. to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs.
INTERNAL FACTORS 1· Defective Lending process There are three cardinal principles of bank lending that have been followed by the
38
commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of profitability i. Principles of safety By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers:
a. Capacity to pay b. Willingness to pay
Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.
2· Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized.
3· Improper SWOT analysis The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. • Banks should consider the borrowers own capital investment. • it should collect credit information of the borrowers
39
from a. From bankers b. Enquiry from market/segment of trade, industry, business.c. From external credit rating agencies. • Analyze the balance sheet True picture of business will be revealed on analysis of profit/loss a/c and balance sheet. • Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing.
4· Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs.
5· Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the 1. Marketability 2.Acceptability 3.Safety 4.Transferability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).
40
6· Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to wilful defaulters can be collected by regular visits.
7· Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.
3.7 IM PACT OF NPAS ON BANKS In portion of the interest income is absorbed in servicing NPA.NPA is not merely nonremunerative. It is also cost absorbing and profit eroding. In the context of severe competition in the banking industry, the weak banks are at disadvantage for leveraging the rate of interest in the deregulated market and securing remunerative business growth. The options for these banks are lost. "The spread is the bread for the banks". This is the margin between the cost of resources employed and the return therefore. In other words it is gap between the return on funds deployed (Interest earned on credit and investments) and cost of funds employed (Interest paid on deposits). When the interest rates were directed by RBI, as heretofore, there was not option forbanks. But today in the deregulated market the banks decide their lending rates and borrowing rates. In the competitive money and capital Markets, inability to offer competitive market rates adds to the disadvantage of marketing and building new NPA has affected the profitability, liquidity and competitive functioning of banks and finally the psychology of the bankers in respect of their disposition towards credit delivery and credit expansion.
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1. Impact on Profitability
"The efficiency of banks is not always reflected only by the size of its balance sheet but by the level of return on its assets. NPAS do not generate interest income for the banks, but at the same time banks are required to make provisions for such NPAS from their current profits. NPAS have a deleterious effect on the return on assets in several ways: · They erode current profits through provisioning requirements. · They result in reduced interest income. · They require higher provisioning requirements affecting profits and accretion to capital funds and capacity to increase good quality risk assets in future, and · They limit recycling of funds, set in asset-liability mismatches, etc. There is at times a tendency among some of the banks to understate the level of NPAs in order to reduce the provisioning and boost up bottom lines. It would only postpone the process. In the context of crippling effect on a bank's operations in all spheres, asset quality has been placed as one of the most important parameters in the measurement of a bank's performance under the CAMELS supervisory rating system of RBI. Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251 Crores towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores or 6.2% of net advances. To this extent the problem is contained but a what cost? This costly remedy is made at the sacrifice of building healthy reserves for future capitaladequacy. The enormous provisioning of NPA together with the holding cost of such non-productive assets over the years has acted as a severe drain on the profitability of the SBI Group. In turn SBI Group are seen as poor performers and unable to approach the market for raising
42
additional capital. Equity issues of nationalized banks that have already tapped the market are now quoted at a discount in the secondary market. Other bans hesitate to approach the market to rise new issues. This has alternatively forced SBI Group to borrow heavily from the debt market to build Tier II Capital to meet capital adequacy norms putting severe pressure on their profit margins; else they are to seek the bounty of the Central Government for repeated Recapitalization. Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost of funds at 6% plus 1% service charge) the net NPA of Rs. 32632 Crores absorbs a recurring holding ost of Rs. 2300 Crores annually. Considering the average provisions made for the last 8 years which works out to average of Rs. 3300 crores from annum, a size business. in the face of the deregulated banking industry, an ideal competitive working is reached,when the banks are able to earn adequate amount of non-interest income to cover their entire operating expenses i.e. a positive burden. In that event the spread factor i.e. the difference between the gross interest income and interest cost will constitute its operating profits.Theoretically even if the banks keeps 0% spread, it will still break even in terms of operating profit and not return an operating loss. The net profit is the amount of the operating profit minus the amount of provisions to be made including for taxation. On account of the burden of heavy NPA, many nationalized banks have little option and they are unable to lower lending rates competitively, as a wider spread is necessitated to cover cost of NPA in the face of lower income from off balance sheet business yielding non-interest income. The following working results of SBI Group an identified well managed nationalized banks for the last two years and for the first nine months of the current financial year, will be revealing to prove this statement. Non-interest income fully absorbs the operating expenses of this banks in the currentfinancial year for the first 9 months. In the last two financial years, though such income has substantially covered the operating expenses (between 80 to 90%) there is still a deficit left.
43
The strength of SBI Group is indentified by the following positive feature: 1. It's sizeable earnings under of non-interest income substantially/totally meets itsnoninterest expenses. 2. Its obligation for provisioning requirements is within bounds. (Net NPA/NetAdvances is 1.92%) It is worthwhile to compare the aggregate figures of the 19 Nationalised banks for the year ended March, 2001, as published by RBI in its Report on trends and progress of banking in India. Interest on Recapitalization Bonds is a income earned form the Government, who had issued the Recapitalization Bonds to the weak banks to sustain their capital adequacy under a bailout package. The statistics above show the other weaknesses of the nationalised banks in addition to the heavy burden they have to bear for servicing NPA by way of provisioning and holding cost as under:
Their operating expenses are higher due to surplus manpower employed. Wage costs total assets is much higher to PSBs compared to new private banks or foreign banks.
Their earnings from sources other than interest income are meagre. This is due to failure to develop off balance sheet business through innovative banking products.
2. Impact on Liquidity of the SBI Group Though SBI Group are able to meet norms of Capital Adequacy, as per RBI guidelines,the facts that their net NPA in the average is as much as 7% is a potential threat for them. RBI has indicated the ideal position as Zero percent Net NPA. Even granting 3% net NPA within limits of tolerance the SBI Group are holding an uncomfortable burden at 7.1% as at March 2001. They have not been able to build additional capital needed for business
44
expansion through internal generations or by tapping the equity market, but have resorted to II-Tier capital in the debt market orlooking to recapitalistion by Government of India. 3. Impact on Outlook of Bankers towards Credit Delivery The fear of NPA permeates the psychology of bank managers in the SBI Group inentertaining new projects for credit expansion. In the world of banking the concepts ofbusiness and risks are inseparable. Business is an exercise of balancing between risk and reward. Accept justifiable risks and implements de-risking steps. Without accepting risk, there can be no reward. The psychology of the banks today is to insulate themselves with zero percent risk and turn lukewarm to fresh credit. This has affected adversely credit growth compared to growth of deposits, resulting in a low C/D Ratio around 50 to 54% for the industry. The fear psychosis also leads to excessive security-consiousness in the approach towards lending to the small and medium sized credit customers. There is insistence on provision of collateral security, sometimes up to 200% value of the advance, and consequently due to a feeling of assumed protection on account of holding adequate security (albeit overconfidence). a tendencytowards laxity in the standards of credit appraisal comes to the fore. It is well know that the existence of collateral security at best may convert the credit extended to productive sectors into an investment against real estate, but will not prevent the account turning into NPA. Further blocked assets and real estate represent the most illiquid security and NPA in such advances has the tendency to persist for a long duration. SBI Group have reached a dead-end of the tunnel and their future prosperity depends on an urgent solution for handling this hovering threat. 4. Impact on Productivity: High level of NPAs effect the productivity of the banks by increasing the cost of fundsand by reducing the efficiency of banks employees. Cost of funds is increased becausedue to nonavailability of sufficient internal sources they have to rely on external sourcesto fulfill their future financial requirements. Productivity of employees is also reducedbecause it keeps staff busy with the task of recovery of overdue. Instead of devoting time for planning for development through more credit and mobilization of resources thebranch staff would
45
primarily be engaged in preparing a large value of returns and statements relating to substandard, doubtful and loss assets, preparing proposal for filing of suits, waivement of legal action, compromise, write off or in preparing DICGC claim papers etc. 5.Impact on other Variables: High level of NPAs also leads to squeezing of interest spread, when asset becomes anNPA for the first time it adversely affects the spread by not contributing to the interestincome and from the second year onwards it will have its impact on the bottom line of the balance sheet because of provisioning to be made for it and not have incremental effect on the spread. Now a days Govt. does not encourage liberal capital support to be given to banks. Banks are required to bring their own capital by issuing share to the public, whereas high level of NPAs leads to lower profits hence less or no profits available for equity shareholders hence lower EPS and fall in the value of share. During the year 2001-02 share of 12 public sector banks were traded on the NSE out of which share value of three PSBs have decreased. Low market value of shares has also forced the banks to borrow heavily debt market to build Tier II capital to meet capital adequacy norms, putting severe pressure on their profit margin 6. Qualitative aspects of the Micro Level Impact of NPAs: High incidence of loan defaults shakes the confidence of general public in the soundness of banking setup and indirectly effects the capacity of the banking system to mop up the deposits. It is a blot on the credibility of the banking system. It also leads to loss of trust of foreign suppliers. Reputed foreign suppliers do not accept letter of credit opened bi Indian banks or confine their transaction to top Indian banks only. Moreover, it puts negative effect on granting of autonomy to PSBs whereas it is must for banks in this competitive environment. Banks having positive net profits for the last three years, Net NPA level below 9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4 condition to be fulfilled to get autonomous status, which becomes difficult in the situation of huge level of NPAs. Inadequate recovery also inhibits the banks to draw refinance from higher levelagency. The eligibility of a bank to draw refinance from NABARD is linked to the %age of recovery to demand in respect of direct, medium and long term loans for agriculture and allied activities.
46
It implies that refinance facility would be progressively reduced depending on the position of NPAs and also on the No. of years in which a banks branch remains in a particular category of default. Due to fear of NPAs banks are being taken away from the basic function for which these were established it is becoming more & more risky and less remunerative. They are floating their subsidiaries to manage mutual funds, factoring, insurance business, Good money is spent to recover bad money. Deterioration in the quality of loan assets and inability to come with new products makes the Indian banks uncompetitive globally. Due to high cost, they cannot reduce lending rate to meet the economy's demand of low lending rate. It is also biggest threat for capital account convertibility.
7. Some areas of Macro-Economic Impact: It is not only the banks which are affected higher level of NPAs but it is the economy as a whole which pays for it. Banks are not putting enough resource in lending due to fear of default. Once the credit to various sectors of the economy slow down, the economy is badly hit. There is slowdown in growth in GDP, industrial output and fall in the profitmargins of the corporate and consequent depression in the market. Further high level of NPAs can result in adding to the inflationary potential in the economy and eroding the viability of the credit system as a whole. Not only this, burden of NPAs is to be borne by the society as a whole. When capital support is given to PSB on A/c of losses booked and/ or erosion of capital due to NPAs, it comes out of either Govt. budgetary resources or from the public as per Liberalization policy, whether this money is from tax revenues or from the hard earned saving of the investing public, in fact, the society is bearing the cost of these NPAs. Moreover, Govt. holds majority of shares in PSBs in some banks 100% capital is in its hand. Any dividend declared would have gone to the Govt. and which can be spent on the welfare and development program.
47
3.8 EARLY SYMPTOMS By which one can recognize a performing asset turning ti to non- performing asset four categories of early symptoms 1. Financial
Non- payment of the very first installment in case of term loan.
Bouncing of cheque due to insufficient balance in the accounts.
Irregularity in installment.
Irregularity of operations in the accounts.
Unpaid overdue bills.
Declining current ratio.
Payment which does not cover the interest and principal amount of that installment.
While monitoring the accounts it is found that principal amount is diverted to sister concern or parent company.
2. Operational and physical:
If information is received that the borrower has either initiated the process of winding up or are not doing the business.
Overdue receivables.
Stock statement not submitted on time.
External non- controllable factor like natural calamities in the city where borrower conduct his business.
Frequent changes in plan.
Nonpayment of wages.
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3. Attitudinal changes:
Use for personal comfort, stocks and shares by borrowers.
Avoidance of contact with bank.
Problem between partners.
4. Others:
Changes in government policies.
Death of borrowers.
Competition in the market.
3.9 PREVENTIVE MEASURES FOR NPA:
Early Recognition of the Problem:-
Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues. Identification of weakness in the very beginning that is : When the account starts showing first signs of weakness regardless of the fact that it may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a technoeconomic viability study. Restructuring should be attempted where, after an objective assessment of the promoter’s intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so asto recover whatever is possible through legal means before the security position becomes worse.
Identifying Borrowers with Genuine Intent: Identifying borrowers with genuine intent from those who are non- serious with no
commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters’ sincerity, and capability to achieve turnaround. Basedon this objective
49
assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing techno-economic study of the project of the borrowers. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.
Timeliness and Adequacy of response:-
Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoter’s commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option.
Focus on Cash Flows:
While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow.
Management Effectiveness:-
The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit’s fortunes. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be
50
done – it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered. Multiple Financing:I.
During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure.
II.
In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational.
III.
In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account.
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IV.
Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential
NPAs)
and
viable
sub-standard
accounts
with
consortium/multiple banking arrangements.
3.10 GUIDELINES BY RBI Guidelines of Government and RBI for Reduction of NPAs Compromise settlement schemes: The RBI/Government of India have been constantly goading the banks to take steps forarresting the incidence of fresh NPAs and have also been creating legal and regulatoryenvironment to facilitate the recovery of existing NPAs of banks. More significant of them,I would like to recapitulate at this stage. The broad framework for compromise or negotiated settlement of NPAs advised by RBIin July 1995 continues to be in place. Banks are free to design and implement their ownpolicies for recovery and write-off incorporating compromise and negotiated settlementswith the approval of their Boards, particularly for old and unresolved cases falling underthe NPA category. The policy framework suggested by RBI provides for setting up of anindependent Settlement Advisory Committees headed by a retired Judge of the High Court to scrutinise and recommend compromise proposals. Specific guidelines were issued in May 1999 to public sector banks for one time nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme was operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through compromise settlement under this scheme].
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Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 croreand less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001 helped the public sector banks to recover Rs. 2600 crore by September 2001]. An OTS Scheme covering advances of Rs. 25000 and below continues to be inoperation and guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister providing for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal farmers are being drawn up.
LokAdaltas: LokAdalats help banks to settle disputes involving accounts in 'doubtful" and "loss"category, with outstanding balance of Rs. 5 lakh for compromise settlement underLokAdalats. Debt Recovery Tribunals have now been empowered to organize LokAdalats to decide on cases of NPAs of Rs. 10 lakhs and above. The public sectorbanks had recovered Rs. 40.38 crore as on September 30, 2001, through the forum ofLokAdalat. The progress through this channel is expected to pick up in the comingyears particularly looking at the recent initiatives taken by some of the public sectorbanks and DRTs in Mumbai.
Debt Recovery Tribunals: The Recovery of Debts due to Banks and Financial Institutions (amendment) Act,passed in March 2000 has helped in strengthening the functioning of DRTs.Provisions for placement of more than one Recovery Officer, power to attachdefendant's property/assets before judgement, penal provisions for disobedience ofTribunal's order or for breach of any terms of the order and appointment of receiverwith powers of realization, management, protection and preservation of property areexpected to provide necessary teeth to the DRTs and speed up the recovery of NPAsin the times to come.Though there are 22 DRTs set up at major centres in the country with AppellateTribunals located in five centres viz. Allahabad, Mumbai, Delhi,CalcuttaandChennai, they could decide only 9814 cases for Rs. 6264.71 crore pertaining to publicsector banks since inception of DRT mechanism and till September 30,
53
2001. Theamount recovered in respect of these cases amounted to only Rs. 1864.30 crore.Looking at the huge task on hand, with as many as 33049 cases involving Rs.42988.84 crore pending before them as on September 30, 2001, I would like thebanks to institute appropriate documentation system and render all possible assistanceto the DRTs for speeding up decisions and recovery of some of the well collateralized NPAs involving large amounts. I may add that familiarisationprogrammes have beenoffered in NIBM at periodical intervals to the presiding officers of DRTs inunderstanding the complexities of documentation and operational features and otherlegalities applicable of Indian bankingsystem. RBI on its part has suggested to theGovernment to consider enactment of appropriate penal provisions againstobstruction by borrowers in possession of attached properties by DRT Receivers, andnotify borrowers who default to honour the decree passed against them. Circulation of information on defaulters:The RBI has put in place a system for periodical circulation of details of willfuldefaults of borrowers of banks and financial institutions. This serves as a caution listwhile considering requests for new or additional credit limits from defaulting borrowing units and also from the directors/proprietors/partners of these entities. RBIalso publishes a list of borrowers (with outstanding aggregating Rs. 1 croreandabove) against whom suits have been filed by banks and FIs for recovery oftheir funds, as on 31st March every year. It is our experience that these measures hadnot contributed to any perceptible recoveries from the defaulting entities. However,they serve as negative basket of steps shutting off fresh loans to these defaulters. Istrongly believe that a real breakthrough can come only if there is a change in therepayment psyche of the Indian borrowers Recovery action against large NPAs: After a review of pendency in regard to NPAs by the Hon'ble Finance Minister, RBIhad advised the public sector banks to examine all cases of willful default of Rs 1 crore and above and file suits in such cases, and file criminal cases in regard to willful defaults. Board of Directors are required to review NPA accounts of Rs. 1 crore and above with special reference to fixing of staff accountability.On their part RBI and the Government are contemplating several supporting measures including legal reforms, some of them I would like to highlight.
54
Corporate Debt Restructuring (CDR): Corporate Debt Restructuring mechanism has been institutionalised in 2001 to provide a timely and transparent system for restructuring of the corporate debts of Rs. 20 crore and above with the banks and financial institutions. The CDR process would also enable viable corporate entities to restructure their dues outside the existing legal framework and reduce the incidence of fresh NPAs. The CDR structure has beenheadquartered in IDBI, Mumbai and a Standing Forum and Core Group foradministering the mechanism had already been put in place. The experiment howeverhas not taken off at the desired pace though more than six months have lapsed sinceintroduction. As announced by the Hon'ble Finance Minister in the Union Budget2002-03, RBI has set up a high level Group under the Chairmanship of ShriVepaKamesam, Deputy Governor, RBI to review the implementation procedures of CDRmechanism and to make it more effective. The Group will review the operation of theCDR Scheme, identify the operational difficulties, if any, in the smoothimplementation of the scheme and suggest measures to make the operation of thescheme more efficient. Credit Information Bureau: Institutionalisation of information sharing arrangements through the newly formedCredit Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering therecommendations of the S.R.Iyer Group (Chairman of CIBIL) to operationalise thescheme of information dissemination on defaults to the financial system. The mainrecommendations of the Group include dissemination of information relating to suitfiledaccounts regardless of the amount claimed in the suit or amount of credit grantedby a credit institution as also such irregular accounts where the borrower has givenconsent for disclosure. This, I hope, would prevent those who take advantage of lackof system of information sharing amongst lending institutions to borrow largeamounts against same assets and property, which had in no small measurescontributed to the incremental NPAs of banks. Proposed guidelines on willful defaults/diversion of funds: RBI is examining the recommendation of Kohli Group on willful defaulters. It isworking out a proper definition covering such classes of defaulters so that creditdenials to this group of
55
borrowers can be made effective and criminal prosecution canbe made demonstrative against willful defaulters. Corporate Governance: A Consultative Group under the chairmanship of Dr. A. Ganguly was set up by theReserve Bank to review the supervisory role of Boards of Banks and financialinstitutions and to obtain feedback on the functioning of the Boards vis-à-viscompliance, transparency, disclosure, audit committees etc. and makerecommendations for making the role of Board of Directors more effective with aview to minimising risks and overexposure. The group is finalising itsrecommendations shortly and may come out with guidelines for effective control andsupervision by bank boards over credit management and NPA prevention measures. Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002: The Act provides, inter alia for enforcement of security interest for realisation of dueswithout the intervention of courts or tribunals. The Security Interest (Enforcement)Rules, 2002 has also been notified by Government to enable Secured Creditors toauthorise their officials to enforce the securities and recover the dues from theborrowers. As on June 30, 2004, 27 public sector banks had issued 61, 263 noticesinvolving outstanding amount of Rs. 19,744 crore, and had recovered an amount ofRs. 1,748 crore from 24,092 cases.
3.11 PROBLEMS LOAN RECOVERY 1. Inadequate security and Erosion in value of security: Generally, banks tend to find that there is a major gap in the valuation of the security,as carried out at the time of providing the loan and at the time of loan recovery. Thevalue of the security has generally deteriorated over the period and according toexperts, it may further deteriorate by almost 10-50% if quick action is not taken for itsimmediate sale.
56
2. Political interferences: Political interference in the day -to-day functioning of public sector banks created anumber of problems for them. The populist policies of the national level politicians,such as waiver in repayment only added to these problems. 3. Slow legal procedure: Before the establishment of DRTs in 1993, the banks had to approach the normalcourts to recover their dues. There were provisions under various acts whichhampered the smooth takeover and sale of secured assets. The legal process couldtake years to be completed, with the borrower having ample scope for delaying thetakeover of assets. A number of loopholes provided the borrower with opportunitiesto delay or ignore repayment of loans. During this period, it was said by someunscrupulous businessmen that - "there is no difference between equity and debt – younever have to repay either of them ". 4. Swamping of DRTs with cases: Once DRTs were established to quicken the pace of recovery procedures, the pace ofrecovery improved quite a bit. However, the DRTs were soon drowned in the everincreasing number of cases. The pending number of cases with the DRTs increasedmanifold during the period 1993-2002.
5. Misuse of BIFR/SICA: This was one of the favourite methods of willful defaulters to delay repayment. If thedefaulter's company is declared sick and taken for financial reconstruction underBIFR, it is not possible to undertake any recovery proceeding against the company.The procedure of financial reconstruction can take a number of years together,thereby delaying recovery to a great extent.
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6. Transfer of property Act, English mortgage: Under provisions of Section 69 of Transfer of Property Act, mortgagee can takepossession of mortgaged property and sell the same without the intervention of theCourt only in the case of English Mortgage. In addition, mortgagee can takepossession of mortgaged property where there is specific provision in mortgage deedand it is situated in the towns of Mumbai, Kolkata and Chennai only. In other cases,intervention of the court is required.However, this is very slow and time consuming process and by the time bank /FI isable to get possession; the asset either does not exist or has become valueless.
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CHAPTER- 4
59
4.1 DATA ANALYSIS AND INTERPRETATION STATE BANK OF INDIA The objective of this analysis is to know the position of SBI in terms of total Assets. From the time period from 2010 to 2014. A firm’s total assets include all current and fixed assets. TOTAL ASSET TABLE 1 YEARS
2010
2011
2012
2013
2014
TOTAL
10534.13
12237.36
13355.19
15662.61
17922.35
ASSET(RS. In billons)
CHART 1
TOTAL ASSETS 20000 15000
10000
Rs. In billions
5000 0 2010
2011
2012
2013
2014
INTERPRETATION Above graph show that total assets of SBI is increased in 2011 by 1703.23 billion, in 2014 increased by 2259.74 billion. So assets of the SBI bank increased from last five year.
60
RATIO ANALYSIS:The relationship between two related items of financial is known as ratio. A ratio is just one number expressed in terms on another. The ratio is customarily expressed in there different ways. It may be expressed as a proportion between the two figures. Second, it may be expressed in terms of percentage. Third, it may expressed in terms of rate. The use of ratio become increasingly popular during the last few years only. Originally, the bankers used the current ratio to judge the capacity of borrowings business enterprises to repay the loan and make regular interest payments. Today it has assumed to be important tools that anybody connected with the business turns to ratio for measuring the financial strength and earning capacity of business. Gross NPA Ratio: Gross NPA Ratio is the ratio of gross advances of the Bank. Gross is the sum of all loan assets that are classified as NPA as per RBI guidelines, the ratio is to be counted in terms of percentage and the formula for GNPA is as follows: Gross NPAs Ratio =
Gross NPAs
*100
Gross Advances TABLE 2 YEAR
GROSS NPA
GROSS
(IN CRORE)
ADVANCES
GROSS (IN RATIO
CR.) 2010
61605.35
3.05 2019847.54
2011
51189.39
1560652.134
3.28
2012
39676.46
893613.96
4.44
2013
25326.29
533185.052
4.75
2014
19534.89
394644.24
4.95
61
NPA
CHART 2
GROSS NPA RATIO 6
5
4
3
Rs. In crores
2
1
0 2010
2011
2012
2013
2014
INTEPRETATION The above table and graph makes it very clear that the average gross NPA of SBI is not very satisfactory. It has seem that the gross NPA which was 3.05% in 2010 increased every year and finally reached 4.95% in 2014. It seems that SBI need to take more care and follow ideal norms of granting advances, so that the recovery is satisfactory leading to lower gross NPA.
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NET NPA RATIO The net NPA percentage is the ratio of NPA to net advances in which is to be deducted from the gross advances. The provision is to be made for NPA account. The formula for that is. Net NPA Ratio =
Net NPAs
*100
Net Advances TABLE 3 YEAR
NET NPA
NET ADVANCES
NET NPA RATIO
2010
10870.17
631986.63
1.72
2011
12346.89
757477.91
1.63
2012
15818.85
869167.58
1.82
2013
21956.48
1045546.67
2.10
2014
31096.07
1209963.81
2.57
CHART 3
NET NPA RATIO 3 2.5 2 1.5 1 0.5 0
Series 1
2010
2011
2012
2013
63
2014
INTERPRETATION The above graph presents the NPA ratio of SBI bank. It can be noticed that the NPA ratio was decreased in 2011 by 0.9 crore. After that it is continuously increased. The bank had failed to make sufficient provisions against NPA.
TABLE 4 YEAR
ADVANCES
INCREASE/
GROSS NPA
INCREASE/
( Rs. In billion)
DECREASE
Rs. In crore)
DECREASE
PERCENTAGE
PERCENTAGE
2010
6319.14
---
19534.89
---
2011
7567.19
19.75
25326.29
26.65
2012
8675.79
14.65
39676.46
56.66
2013
10456.17
20.52
51189.39
29.017
2014
12098.29
15.70
61605.35
20.35
(source- annual report)
INTERPRETATION In this table we can see that increase in gross NPA is not because of increase in advances. There is another possibility of increasing in NPA may be this is because of poor credit system in bank. CAPITAL ADEQUACY RATIO The bank manages and maintains capital as a cushion against risk of problem losses and to protect its depositors and creditors. The future capital requirement of the bank is projected as a part of its annual business plan, in accordance with its business strategy. In calculating the capital requirements of the banks, broad parameters viz. balance sheet composition, portfolio mix, growth rate and relevant discounting are considered. In addition, views regarding market
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behavior of interest rate and liquidity positions are also taken into account. Further, the loan composition and rating matrix is factored in to reflect precision in projections. The New Capital Adequacy Framework (NCAF) of RBI stipulates the methodology for computation of CRAR which is a ratio of the total capital of the bank to its risk adjusted assets. The CRAR for the bank is calculated on a quarterly basis and credit, market and operational risks are considered to arrive at the ratio. The bank has adopted the standardized approach for credit risk, the Standardized Measurement Method (SMM) for market risk and the Basic Indicator Approach (BIA) for operational risk. The position of the CRAR of the bank is as follow.
TABLE 5 YEAR
CAPITAL
ADEQUACY
RATIO 2010
13.39
2011
11.98
2012
13.86
2013
12.92
2014
12.96
CHART 5
CAPITAL ADEQUACY RATIO 15 14
13
CAPITAL ADEQUACY RATIO
12 11 2010
2011
2012
2013
2014
(source- annual report)
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INTERPRETATION Each bank needs to create the capital reserve to compensate the non- performing assets. Here, SBI has shown better capital adequacy ratio with 13.86% in 2012as compared to 11.98% in 2011, 12.92% in 2013, 12.96% in 2014 and 13.39 in 2010. The capital adequacy ratio is important for them to maintain as per the regulation. Each bank needs to create the capital reserve to compensate the non- performing assets.
PROVISION RATIO Provision are to be made for to keep safety the NPA, and it directly effect on the gross profit of the banks. The provision ratio is nothing but total provision held for NPA to gross NPA of the banks. The formula for that is:
Provision Ratio =
Total Provision
*100
Gross NPAs (Additional Formula: Net NPA = Gross NPA- Provision Therefore, provision = Gross NPA – Net NPA) TABLE 6 YEAR
TOTAL
GROSS NPA
PROVISION
PROVISIONS
(IN CR.)
RATIO
(IN CR.) 2010
9155
61605.35
14.86
2011
17071
51189.39
33.35
2012
19866
39676.46
50.07
2013
16977
25326.29
108.61
2014
21218
19534.89
67.03
66
CHART 6
PROVISION RATIO 120 100 80 60
PROVISION RATIO
40 20 0 2010
2011
2012
2013
2014
(source- annual report)
INTERPRETATION This ratio indicates the degree of safety measures adopted by the banks. It has direct bearing on the profitability, dividend and safety of shareholders’ fund, if the provision ratio is less, it indicates that the banks has made under provision. The highest provisions ratio is showed by SBI is 108.61% in 2013 as compared to 14.86% in 2010, 33.35% in 2011, 50.07% in 2012 and 67.03% in 2014.
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ANALYSIS BASED ON QUESTIONNAIRE Q.1 according to you what is NPA?
TABLE 7 What is NPA?
RESPONDENT
A. When an assets ceases to 5
PERCENTAGE 20%
generate income from bank B. if the customers do not pay 18
72%
principal and interest for a certain period of time (90 days) ,it can be called as NPA C. if periodical income is not 2 generated
for
lender
8%
of
money ,it is called as NPA
CHART 7
WHAT IS NPA 80% 70% 60% 50% 40% 30% 20% 10% 0%
PERCENTAGE
a. When an asset b. If the customer c If periodical ceases to generate do not pay principal income is not income for the and interest for a generated from the bank. certain period of borrower of money time (90 days) it can it is called as NPA. be called as NPA
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INTERPRETATION According to above chart 72 percentage respondent said that,If the customers do not pay principal and interest for a certain period of time (90 days) ,it can be called as NPA . 20 percentage said that when an asset ceases to generate income from the bank and only 8 percentage said that if periodical income is not generated from the borrower of money it is called as NPA.
Q. 2 what is the percentage of NPA in your particular branch?
TABLE 8 Percentage of NPA
RESPONDENT
PERCENTAGE
A.1-4%
20
80%
B.4-7%
5
20%
C. 7-10%
0
0
D. 10% and above
0
0
CHART 8
percentage of NPA 100% 50% PERCENTAGE
0% 1-4%
4-7%
7-10% 10% and above
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INTERPRETATION 80 % respondent said that percentage of NPA in their bank is 1-4%, and other 20 % respondent said that percentage of NPA in their bank is 4-7 %. Q.3 what is trend of NPA in your bank ? TABLE 9 TREND OF NPA
RESPONDENT
PERCENTAGE
A. highly decreasing
1
4%
B. slowly decreasing
15
60%
C. constant
3
12%
D. slowly increasing
5
20%
E. highly increasing
1
4%
CHART 9
TREND OF NPA 70% 60% 50% 40% 30%
PERCENTAGE
20% 10% 0% highly decreasing
slowly decreasing
constant
slowly increasing
70
highly increasing
INTERPRETATION 60% of the respondent have said that the NPA in their branch is slowly decreasing, 20% have said that NPA is slowly increasing, 12% of respondent have said that NPA is constant, 4% have said that NPA is highly increasing and highly decreasing. Q.4 According to your opinion, What are the main causes of NPA? TABLE 10 CAUSES OF NPA
RESPONDENT
PERCENTAGE
A. Willful effect
6
24%
B. Lack of monitoring
0
0
C. Lack of persuasion
0
0
D. No risk assessment
0
0
E. Mismanagement
of 3
12%
fund borrowers F. Delay
in
legal 1
4%
proceeding G. All the above
15
60%
CHART 10
CAUSES OF NPA 70% 60% 50% 40% 30% 20% 10% 0%
PERCENTAGE
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INTERPRETATION 60% of respondent have said all the above mentioned points are causes of NPA, 24% respondent have said that
willful effect is the cause of NPA. 12% have said that
mismanagement of funds by borrowers and 4% have said that delay in legal proceedings is the cause of NPA. Q. 5 What are the steps to be taken by bank to control NPA? TABLE 11 STEPS TO BE TAKEN A. Caution
and
RESPONDENT care 2
PERCENTAGE 8%
during loan processing B. Strengthening
of 0
0%
C. Vigorous follow up at 0
0%
recovery cell
branch level D. Out
of
court 0
0%
settlement E. All the above
23
92%
72
CHART 11
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0%
Series1
INTERPRETATION 92% respondent have said that all the above mentioned steps can be taken to reduced NPA, and only 4% respondent have said to reduce NPA caution and care should be done during loan processing.
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Q. 6 What methods you have planned for measurement of NPA? TABLE 12 METHOD
OF RESPONDENT
PERCENTAGE
MEASUREMENT OF NPA A. Early stage
21
84%
B. Alert stage
4
16%
C. Advance stage
0
0%
CHART 12
methods for measurement of NPA 90% 80% 70% 60% 50% percentage
40% 30% 20% 10% 0% early stage
alert stage
advance stage
INTERPRETATION 84% respondent follow the early stage method while, 16% prefer alert stage method.
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Q. 7 what measures for recovery of NPA are adopted by your bank? TABLE 13 MEASURE
FOR RESPONDENT
PERCENTAGE
RECOVERY OF NPA Persuasion
4
16%
Out of court settlement
5
20%
Legal actions
4
16%
All the above
12
48%
CHART 13
MEASURES FOR RECOVERY OF NPA 60% 50% 40% 30% percentage 20% 10% 0% persuasionj
out of court settlement
legal actions
all the above
INTERPRETATION 20% and 16% respondent have voted out of court settlement and legal actions, while 16% feel NPA can be recovered by persuasion. 48% of the respondent feel that all the methods are equally important for the recovery of NPA.
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Q. 8 normally, who is held responsible for non- recovery of outstanding credit? TABLE 14 RESPONSIBLE
RESPONDENT
PERCENTAGE
Loan sanctioning officer
14
56%
Dealing clerk
0
0%
Branch manager
0
0%
None of the above
6
24%
Any other
5
20%
CHART 14
RESPONSIBLE FOR NON-RECOVERY OF OUTSTANDING CREDIT 60% 50% 40% 30%
percentage
20% 10% 0% loan sanctioning officer
dealing clerk
branch manager
none of the above
any other
INTERPRETATION 56% of respondent feels that loan sanctioning manager is responsible for non- recovery of outstanding credit, while 24% respondent have said none of these are responsible for nonrecovery of outstanding loan and 20% have said any other are responsible- like loan maintenance officer and loan dealing or recovery manger .
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Q. 9 How does your bank realize money from a NPA(In realizing the amount whom does your bank appoint)
TABLE 15 APPOINMENT MADE FOR RESPONDENT
PERCENTAGES
REALIZING MONEY Recovery agent
9
36%
Files suit
5
20%
Meeting with borrowers
9
36%
Appointment of arbitrator
2
8%
CHART 15
APPOINMENT MADE FOR REALIZING AMOUNT 40% 35% 30% 25% 20% 15% 10% 5% 0%
percentage
recovery agent
files suit
meeting with borrowers
appoinment of arbitrator
INTERPRETATION 36% of respondent have voted for recovery agent and meeting and persuading the borrower to pay the amount. While 20 % of respondent are in the favor of filing a suit and 8% have said for appointing of arbitrator.
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Q. 10 Do you think that the law acts as a stumbling block to recover NPA? TABLE 16 LAW
ACTS
AS
A RESPONDENT
PERCENTAGE
STUMBLING BLOCK Yes
16
64%
no
9
36%
CHART 16
LAW ACTS AS A STUMBLING BLOCK 70%
60% 50% 40%
percentage
30% 20% 10% 0% yes
no
INTERPRETATION 64% of respondent agree that law acts as a stumbling block for recovering NPA. On the other hand 36% of the respondent does not feel that law acts as a stumbling block for recovering NPA.
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Q. 11 How much time does it take to recover the money from customer? TABLE 17 TIME
TAKEN
TO RESPONDENT
PERCENTAGE
RECOVER MONEY Within the time limit
13
52%
Beyond the time limit
12
48%
CHART 17
TIME TAKEN TO RECOVER MONEY 53% 52% 51% 50% 49%
percentage
48% 47% 46% within the time limit
beyond the time limit
INTERPRETATION 52% of the respondent have said that the money recovered from the borrowers within the time limit by making continues calls, sending notices, and personnel visit. While 48% feel that the money is not received within the time limit.
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Q. 12 Do you think that government policies are responsible for NPA? TABLE 18 GOVERNMENT POLICIES RESPONDENT
PERCENTAGE
RESPONSIBLE FOR NPA yes
19
76%
no
6
24%
CHART 18
GOVERNMENT POLICIES RESPONSIBLE FOR NPA 80% 70% 60% 50% 40%
percentage
30% 20% 10% 0% yes
no
INTERPRETATION 76% of the respondent feels that the government policies are responsible for NPA. While 24% of respondent feels government policies are not responsible for NPA.
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Q. 13 Which category of loan NPA is largely observed? TABLE 19
CATETGORY WHICH
FOR RESPONDENT
NPA
PERCENTAGE
IS
LARGELY OBSERVED Agriculture and SME loan
17
68%
Non agriculture loan
3
12%
Cash credit
1
4%
Over draft
2
8%
Term loan
1
4%
Housing loan
1
4%
CHART 19
CATEGORY FOR WHICH NPA IS LARGELY OBSERVED 80% 70% 60% 50% 40% 30%
PERCENTAGE
20% 10%
0% Agriculture Non Cash credit Over draft and SME agriculture loan loan
Term loan
INTERPRETATON NPA is largely observed in agriculture and SME loan(68%), 12% is observed in nonagriculture loan, 4% in cash credit, 8% in over draft and 4% in term loan.
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Q. 14 Do you think political interference also affects NPA? TABLE 20 POLITICAL
RESPONDENT
PERCENTAGE
YES
19
76%
NO
6
24%
INTERFERANCE AFFECTS NPA
CHART 20 POLITICAL INTERFERANCE AFFECTS NPA 80% 70% 60% 50% 40%
percentage
30% 20% 10% 0%
yes
no
INTERPRETATION 76% respondent feel that political interference is an important factor affecting the NPA of the bank, while 24% disagree to the same.
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Q. 15 Are you in favor of out of court settlement? TABLE 21 OUT
OF
COURT RESPONDENT
PERCENTAGE
SETTLEMENT Yes
22
88%
no
3
12%
CHART 21
OUT OF COURT SETTLEMENT 100% 90% 80% 70% 60% 50%
percentage
40% 30% 20% 10% 0% yes
no
INTERPRETATION 88% of the respondent are in favor of out of court settlement. According to them small amount can be recovered by this method instead of going for the legal procedures as they are time taking. While 12% disagree with the same.
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Q. 16 Don’t you think that out of court settlement may develop a tendency among bank borrowers to make deliberate attempt of default and then ask for concession? TABLE 22 OPTIONS
RESPONDENT
PERCENTAGE
Yes
5
20%
no
20
80%
CHART 22
DEVELOPING A TENDENCY OF DIFFERENT ATTEMPT OF DEFAULT AMONG BORROWERS 90% 80% 70% 60%
50% percentages
40%
30% 20% 10% 0% yes
no
INTERPRETATION 80% of the respondent feel that out of court settlement may not develop a tendency amongborrowers to make deliberate attempt of default and then ask for concession. While 20% agree to the same.
84
Q. 17 Credit monitoring system in Indian banking industry. Is it adequate? Table 23 ADEQUACY OF CREDIT RESPONDENT
PERCENTAGE
MONITORING SYSTEM Yes
15
60%
no
10
40%
CHART 23
ADEQUACY OF CREDIT MONITORING SYSTEM 70% 60% 50% 40% percentages
30% 20% 10% 0% yes
no
INTERPRETATION 60% of the respondent agree to the fact that the present monitoring system in India is adequate while 40% disagree, accounting to them it can be further improved.
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Q. 18 Do you feel that improvement in this system is necessary? TABLE 24 NECESSITY
OF RESPONDENT
PERCENTAGES
IMPROVEMENT Yes
15
60%
no
10
40%
CHART 24
NECESSITY OF IMPROVEMENT 70% 60% 50% 40% percentages
30% 20% 10% 0% yes
no
INTERPRETATION 60% of that respondent said that it is necessary to bring improvement in this system of monitoring while 40% are satisfied with the present system.
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Q. 19 Do you favor appointment of external recovery agents to recover NPA? TABLE 25 APPOINTMENT
OF RESPOMDENT
PERCENTAGE
EXTERNAL RECOVERY AGENT Yes
20
80%
no
5
20%
CHART 25
APPOINTMENT OF EXTERNAL RECOVERY AGENT 90% 80% 70% 60% 50% percentage
40% 30% 20% 10%
0% yes
no
INTERPRETATION 80% of the respondent feel that there is need for the appointment of the external recovery agents. While 20% agree for the appointment of external agents.
87
Q. 20 Do you feel delay in legal procedure make the recovery procedure difficult? TABLE 26 DELAY
IN
LEGAL RESPONDENT
PERCENTAGE
PROCEDURES CREATE DIFFICULTY
IN
RECOVERY YES
15
60%
NO
10
40%
CHART 26
DELAY IN LEGAL PROCDURES CREATE DIFFICULTY IN RECOVERY 70% 60% 50% 40% percentage
30% 20% 10% 0%
Yes
No
INTERPRETATION: 40% feel that legal procedure take time, but does not create difficulty in recovery of NPA. While 60% agree to the fact that delays in legal procedure create difficulty.
88
21. Do you favour cash incentive schemes for bank staff for recovery of dues? TABLE 27 CASH
INCENTIVE RESPONDENT
PERCENTAGE
SCHEME YES
24
96%
NO
1
4%
CHART 27
CASH INCENTIVE SCHEME 120% 100%
80% 60%
percentage
40% 20% 0% yes
no
INTERPRETATION: 96% respondent agree to the fact that there should be a cash incentive scheme for the bank staff for recovery of dues, while 4% of respondent not agree.
89
Q. 22 Are you satisfied with the present cash incentive system? TABLE 28 SATISFACTION PRESENT
FROM RESPONDENT
PER CENTAGE
INCENTIVE
SCHEME Yes
20
80
No
5
20
CHART 28
SATISFACTION FROM PRESENT INCENTIVE SCHEME 90% 80% 70% 60% 50% percentage
40% 30% 20% 10%
0% yes
no
INTERPRETATION: 80% of the respondent are satisfied from the present incentive scheme. While 20% are not satisfied. Currently, SBI bank provides a cash incentive of
90
Q. How would you assess the progress of NPA management in your bank? TABLE 29 PROGRESS OF NPA
RESPONDENT
PERCENTAGE
Poor
O
0%
Slow
2
8%
Moderate
12
48%
Good
11
44%
CHART 29
PROGRESS OF NPA 60%
50% 40% 30%
percentage
20% 10% 0% poor
slow
moderate
good
INTERPRETATION: 48% of the respondent believe that the progress of NPA in SBI bank is moderate. 44% feel that it is good. 8% have voted for slow.
91
Q. 24 Do you have similar recovery strategy in all sectors and in all geographical regions? TABLE 30 SIMILAR
RECOVERY RESPONDENT
PERCENTAGE
STRATEGY Yes
10
40%
No
15
60%
CHART 30
SIMILAR RECOVERY STRATEGY IN ALL SECTOR ND GEOGRAPHICAL REGIONS 70% 60% 50% 40% percentage
30% 20% 10% 0% yes
no
INTERPRETATION: 60% of the respondent said that they do not have similar strategy for all sector and geographical regions, while 40% said that they have similar strategy for all sector and geographical regions.
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Q. 25 From the following strategies, choose which are helpful in reducing NPA.
TABLE 31 STRATEGIES, HELPFUL RESPONDENT
PERCENTAGE
IN REDUCING NPA Securitization of asset
1
4%
Legal recovery
3
12%
Lokadalats
2
8%
Compromise settlement
3
12%
Credit information bureau
4
16%
By
adopting proper credit 12
48%
evaluation process CHART 31 60% 50% 40% 30% 20% 10%
percentage
0% Securitization of asset
Legal recovery
Lok adalats Compromise Credit By adopting settlement information proper credit bureau evaluation process
INTERPRETATION:48% of respondent said by adopting proper credit evaluation system NPA can be reduced, 16% said NPA can be reduced by credit information bureau, 12% said by compromise settlement and legal recovery can be helpful in reducing NPA, 8% said lokadalat and 4% said by securitization of asset NPA can be reduced.
93
CHAPTER- 5
94
FINDINGS The asset quality of banks is one of the most important indicators of their financial health. It also reflects the efficiency of banks credit risk management and the recovery environment. The SBI bank has shown very good performanve as far as the financial operations are concerned. But non- performing assets (NPA) has caused some concerns. The NPA has been continuously increasing this was due to ineffective recovery of bank credit, credit recovery system, inadequate legal provision etc. Various steps have been taken by the government to recover and reduce NPAs. Some of them are:
Formation of the credit information bureau (India) limited (CIBIL)
Release of willful Defaulter’s list. RBI also releases a list of borrowers with aggregate outstanding of Rs. 1 crore and above against whom banks have filed suits for recovery of their funds.
Reporting of funds to RBI.
Norms of lender’s liability- framing of fair practices code with regard to lender’s liability to be followed by banks, which indirectly prevents accounts turning into NPAs on account of bank’s own failure.
Risk assessment and risk management.
RBI has advised banks to examine all cases of willful default of Rs. 1 crore and above and file suits in such cases. Board of directors are required to review NPA accounts of Rs. 1 crore and above with special references to fixing of staff accountability.
Reporting quick mortality cases
Special mention accounts for early identification of bad debts. Loans and advances overdue for less than one and two quarters would come under this category. However, these accounts do not need provisioning.
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Other findings
1. REASON OF NPA IN BANK
Default by customer Non-inspection of borrower Lack of expertise Imbalance of inventories Poor credit collection Lack of trained staff Lack of commitment to recovery Change in consumer preference
2 IMPACT OF NPA ON BANK Govt. Policies Impact of profitability Liquidity Impact on outlook of Banker towards credit delivery Impact of productivity
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CONCLUSION A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Over the years, much has been talked about NPA and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them. There is also a general perception that the prescriptions of 40% of net bank credit to priority sectors have led to higher NPAs, due to credit to these sectors becoming stickly managers of rural and semi-urban branches generally sanction these loans. In the changed context of new prudential norms and emphasis on quality lending and profitability, mangers should make it amply clear to potential borrowers that banks resources are scare and these are meant to finance viable ventures so that these are repaid on time and relevant to other needy borrowers for improving the economic lot of maximum number of households. Hence selection of right borrowers, viable economic activity, adequate finance and timely disbursement, correct and use of funds and timely recovery f loans is absolutely necessary pre conditions for preventing of minimizing the incidence of new NPAs. To conclude this study we can say about this report, that
The NPA is slowly decreasing in SBI
NPAs represent high level of risk and low level of credit appraisal.
There are so many preventive measures available those can be adopted to stop an Asset or A/C becoming NPA.
There are some certain guidelines made by RBI for NPAs which are adopted by banks.
BOP is better in all terms than OBC instead of capital adequacy.
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SUGGESTION
Credit administration: A banks have to strengthen their credit administrative
machinery and put in place effective credit risk management systems to reduce the fresh incidence of NPAs.
Better Inspection: We shall keep a close watch on the manner in which NPA
reduction is taking place.
Cash Recovery: We should also insist that cash recoveries should more than
offset the fresh write-offs in NPAs.
Perception: The mindset of the borrowers needs to change so that a culture of
proper utilization of credit facilities and timely repayment is developed.
Financial System: As you are aware, one of the main reason for corporate default
is on account of diversion of funds and corporate entities should come forward of avoid this practice in the interest of strong and sound financial system.
Coordinator: Extending credit involves lenders and borrowers and both should
realize their role and responsibilities. They should appreciate the difficulties of each other and should endeavor to work contributing to a healthy financial system.
98
QUESTIONAIRE I am pursuing MBA and I am conducting a study on non- performing assets in SBI bank. Please answer the questions below. Your response in this regard is very valuable for the success of my project. Also note that the information so revealed will be utilized without directly disclosing the identity of the concern bank/ officials. Further, the information provided will be used strictly for academic purposes only. Name of respondentDesignationBank name and branch-
1. According to you what is NPA? a. When an asset ceases to generate income for the bank. b. If the customer do not pay principal and interest for a certain period of time (90 days) it can be called as NPA c. If periodical income is not generated from the borrower of money it is called as NPA.
2. What is the percentage (%) of NPA in your particular branch?? a. 1-4 % b. 4-7% c. 7-10% d. 10% and above
3. What is trend of NPA in your bank? a. Highly decreasing b. Slowly decreasing c. Constant
99
d. Slowly increasing e. Highly increasing
4. According to your opinion, What are the main causes of NPA? a. Wilful effect b. Lack of monitoring c. Lack of persuasion d. No risk assessment e. Mismanagement of funds by borrowers f. Delay in legal proceedings g. All the above
5. What are the steps to be taken by bank to control NPA? a. Caution and care during loan processing b. Strengthening of recovery cell c. Vigorous follow up at branch level d. Out of court settlement e. All the above
6. What methods you have planned for measurement of NPA? a. Early stage b. Alert stage c. Advance stage
7. What measures for recovery of NPAare adopted by your bank? a. Persuasion b. Out of court settlement c. Legal actions d. All the above e. Any other- please specify-
100
8. Normally, who is held responsible for non-recovery of outstanding credit? a. Loan sanctioning officer b. Dealing clerk c. Branch manager d. All of the above e. None of the above f. Any other- please specify-
9. How does your bank realise money from a NPA(In realizing the amount whom does your bank appoint)? a. Recovery agent b. Files suit c. Meeting with borrower d. Appointment of arbitrator
10. Do you think that the law acts as a stumbling block to recover NPA? a. Yes b. No
11. How much time does it take to recover the money from customer? a. Within the time limit b. Beyond the time limit.
12 Do you think that government policies are responsible for NPA? a. Yes b. No
13For which category of loan NPA is largely observed? a. Agriculture loans
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b. Non agriculture loans c. Cash credit d. Over draft e. Term loan f. Housing loan
14Do you think political interference also affects NPA? a. Yes b. No
15Are you in favour of out of court settlement? a. Yes b. No
16Don’t you think that out of court settlement may develop a tendency among bank borrowers to make deliberate attempt of default and then ask for concession? a. Yes b. No
17Credit monitoring system in Indian banking industry. Is it adequate? a. Yes b. No
18Do you feel that improvement in this system is necessary? a. Yes b. No
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19. Do you favour appointment of external recovery agents to recover NPA? a. Yes b. No 20 Do you feel delay in the legal procedure make the recovery procedure difficult? a. Yes b. No
21 Do you favour cash incentive schemes for bank staff for recovery of dues? a. Yes b. No
22 Are you satisfied with the present cash incentives system? a. Yes b. No
23 How would you assess the progress of NPA management in your bank? a. Poor b. Slow c. Moderate d. Good
24 Do you have similar recovery strategy in all sectors and in all geographical regions? a. Yes b. No
25 From the following strategies, choose which are helpful in reducing NPA.
103
a. Securitization of asset b. Legal recovery c. Lokadalats d. Compromise settlement e. Credit information bureau f. By adopting proper credit evaluation process g. Any other (Please Specify)
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BIBLIOGRAPHY BOOKS
Management of Non- performing Assets in Banks by Sugan C Jain
Managing Non- performing Assets in Banks S.N.Bindani
MAGAZINES
Investors
Business India
E- NEWSPAPER
The Economic Times
The Business Standard
PUBLISHED MATERIAL
RBI Guidelines Circulars on Income Recognition and Asset Classification
Report on Trend and progress of Banking in India 2012- 13
WEBSITES
WWW.rbi.org.in
www.google.co.in
www.wiki.answers.com
www.wikipedia.com
www.moneycontrol.com
www.sbi.com
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