Banking In India

The Indian Banking can be broadly categorized into nationalized (government

owned), private banks and specialized banking institutions. The Reserve Bank of
India acts a centralized body monitoring any discrepancies and shortcoming in the
system. Since the nationalization of banks in 1969 , the public sector banks or the
nationalized banks have acquired a place of prominence and has since then seen
tremendous progress. The need to become highly customer focused has forced the
slow-moving public sector banks to adopt a fast track approach. The unleashing of
products and services through the net has galvanized players at all levels of the
banking and financial institutions market grid to look anew at their existing portfolio
offering. Conservative banking practices allowed Indian banks to be insulated
partially from the Asian currency crisis. Indian banks are now quoting al higher
valuation when compared to banks in other Asian countries (viz. Hong Kong,

Singapore, Philippines etc.) that have major problems linked to huge Non Performing
Assets (NPAs) and payment defaults. Co-operative banks are nimble footed in
approach and armed with efficient branch networks focus primarily on the high
revenue niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the new
Indian market and is addressing the relevant issues to take on the multifarious
challenges of globalization. Banks that employ IT solutions are perceived to be
futuristic and proactive players capable of meeting the multifarious requirements of
the large customers base. Private banks have been fast on the uptake and are
reorienting their strategies using the internet as a medium The Internet has emerged
as the new and challenging frontier of marketing with the conventional physical
world tenets being just as applicable like in any other marketing medium.

The Indian banking has come from a long way from being a sleepy business
institution to a highly proactive and dynamic entity. This transformation has been
largely brought about by the large dose of liberalization and economic reforms that
allowed banks to explore new business opportunities rather than generating revenues
from conventional streams (i.e. borrowing and lending).

The banking in India is

highly fragmented with 30 banking units contributing to almost 50% of deposits and
60% of advances.

Indian nationalized banks (banks owned by the government)

continue to be the major lenders in the economy due to their sheer size and
penetrative networks which assures them high deposit mobilization.

The Indian

banking can be broadly categorized into nationalized, private banks and specialized
banking institutions .Indian banking is the lifeline of the nation and its people.

Banking has helped in developing the vital sectors of the economy and usher in a
new dawn of
progress on the Indian horizon. The sector has translated the hopes and aspirations
of millions of people into reality. But to do so, it has had to control miles and
miles of difficult terrain, suffer the indignities of foreign rule and the pangs of
partition. Today ,Indian banks can confidently compete with modern banks of the
world.

Before the 20th century, usury, or lending money at a high rate of interest, was
widely prevalent in rural India. Entry of Joint stock banks and development of
Cooperative movement have taken over a good deal of business from the hands of
the Indian money lender, who although still exist, have lost his menacing teeth. In
the Indian Banking System, Cooperative banks exist side by side with commercial
banks and play a supplementary role in providing need-based finance, especially for
agricultural and agriculture-based operations including farming, cattle, milk, hatchery,
personal finance etc. along with some small industries and self-employment driven
activities. Generally, co-operative banks are governed by the respective co-operative
acts
of state governments. But, since banks began to be regulated by the RBI after
1stMarch 1966, these banks are also regulated by the RBI after amendment to the
Banking Regulation Act 1949. The Reserve Bank is responsible for licensing of
banks and branches, and it also regulates credit limits to state co-operative banks on
behalf of primary co-operative banks for financing SSI units.4Banking in India
originated in the first decade of 18th century with The General Bank of India
coming into existence in 1786. This was followed by Bank of Hindustan. Both these
banks are now defunct. After this, the Indian government established three presidency
banks in India. The first of three was the Bank of Bengal, which obtains charter in
1809, the other two presidency bank, viz., the Bank of Bombay and the Bank of
Madras, were established in 1840 and 1843,respectively. The three presidency banks
were subsequently amalgamated into the Imperial Bank of India (IBI) under the
Imperial Bank of India Act, 1920 which is now known as the State Bank of
India.A couple of decades later, foreign banks like Credit Lyonnais started their
Calcutta operations in the 1850s. At that point of time, Calcutta was the most active

trading port, mainly due to the trade of the British Empire, and due to which
banking activity took roots there and prospered. The first fully Indian owned bank
was the Allahabad Bank, which was established in 1865.By the 1900s, the market
expanded with the establishment of banks such as Punjab National Bank, in 1895 in
Lahore and Bank of India, in 1906, in Mumbai both of which were founded
under private ownership. The Reserve Bank of India formally took on the
responsibility of regulating the Indian banking sector from 1935. After India
independence in 1947, the Reserve Bank was nationalized and given broader powers.
As the banking institutions expand and become increasingly complex under the
impact of deregulation, innovation and technological up gradation, it is crucial to
maintain balance between efficiency and stability. During the last 30 years since
nationalization tremendous changes have taken place in the financial markets as well
as in the banking industry due to financial sector reforms. The banks have shed
their traditional functions and have been innovating, improving and coming out with
new types of services to cater emerging needs of their 5customers. Banks have been
given greater freedom to frame their own policies. Rapid advancement of technology
has contributed to significant reduction in transaction costs, facilitated greater
diversification of portfolio and improvements in credit delivery of banks. Prudential
norms, in line with international standards, have been put in place for promoting and
enhancing the efficiency of banks. The process of institution building has been
strengthened with several measures in the areas of debt recovery, asset reconstruction
and securitization, consolidation, convergence, mass banking etc.

Despite this commendable progress, serious problem have emerged reflecting in a

decline in productivity and efficiency, and erosion of the profitability of the banking
sector. There has been deterioration in the quality of loan portfolio which, in turn,
has come in the way of banks income generation and enchancement of their capital
funds. Inadequacy of capital has been accompanied by inadequacy of loan loss
provisions resulting into the adverse impact on the depositors and investors
confidence. The Government, therefore, set up Narasimham Committee to look into
the problems and recommend measures to improve the health of the financial
system. The acceptance of the Narasimham Committee recommendations by the

Government has resulted in transformation of hitherto highly regimented and over

bureaucratized banking system into market driven and extremely competitive one.
The massive and speedy expansion and diversification of banking has not been be
facing increasing competition from non-banks not only in the domestic market but in
the international markets also. The operational structure of banking in India is
expected to undergo a profound change during the next decade. With the emergence
of new private banks, the private bank sector has 6become enriched and diversified
with focus spread to the wholesale as well as
retail banking. The existing banks have wide branch network and geographicpread,
whereas the new private banks have the clout of massive capital, lean personnel
component, the expertise in developing sophisticated financial products and use of
state-of-the-art technology.
Gradual deregulation that is being ushered in while stimulating the competition would
also facilitate forging mutually beneficial relationships, which would ultimately
enhance the quality and content of banking. In the final phase, the banking system in
India will give a good account of itself only with the combined efforts of cooperative
banks, regional rural banks and development banking institutions which are expected
to provide an adequate number of effective retail outlets to meet the emerging socioeconomic challenges during he next two decades. The electronic age has also affected
the banking system, leading to very fast electronic fund transfer. However, the
development of electronic banking has also led to new areas of risk such as data
security and integrity requiring new techniques of risk management.
Cooperative (mutual) banks are an important part of many financial systems. In a
number of countries, they are among the largest financial institutions when considered
as a group. Moreover, the share of cooperative banks has been increasing in recent
years; in the sample of banks in advanced economies and emerging markets analyzed
in this paper, the market share of cooperative banks in terms of total banking sector
assets increased from about 9 percent in mid1990s to about 14 percent in 2004.

The Reserve Bank of India act as a centralized body monitoring any discrepancies
and shortcoming in the system.

It is the foremost monitoring body in the Indian

financial sector. The nationalized banks (i.e. government-owned banks) continue to

dominate the Indian banking arena.

Industry estimates indicate that out of 274

commercial banks operating in India, 223 banks are in the public sector and 51 are
in the private sector. The private sector bank grid also includes 24 foreign banks that
have started their operations here. Under the ambit of the nationalized banks come
the specialized banking institutions. These co-operatives, rural banks focus on areas of
agriculture, rural development etc.

Functions Of Bank :-

The function of bank are as follows -

Primary functions :
Commercial banks perform various functions:

Commercial banks accept various types of deposits from public especially from
its clients, including saving account deposits, recurring account deposits, and fixed
deposits. These deposits are payable after a certain time period

Commercial banks provide loans and advances of various forms, including an

overdraft facility, cash credit, bill discounting, money at call etc. They also give
demand and demand and term loans to all types of clients against proper security.

Credit creation is the most significant function of commercial banks. While

sanctioning a loan to a customer, they do not provide cash to the borrower.
Instead, they open a deposit account from which the borrower can withdraw. In
other words, while sanctioning a loan, they automatically create deposits, known
as a credit creation from commercial banks.

Secondary functions :
Along with primary functions, commercial banks perform several secondary functions.
The secondary functions of commercial banks can be divided into agency functions
and utility functions.

Agency functions include :

To collect and clear cheques, dividends and interest warrant.

To make payments of rent, insurance premium, etc.

To deal in foreign exchange transactions.

To purchase and sell securities.

To act as trustee, attorney, correspondent and executor.

To accept tax proceeds and tax returns.

Utility functions include :

To provide safety locker facility to customers.

To provide money transfer facility.

To issue traveller'scheque.

To act as referees.

To accept various bills for payment: phone bills, gas bills, water bills, etc.

To provide merchant banking facility.

To provide various cards: credit cards, debit cards, smart cards, etc.

Forms of Advances Given by Banks

Cash Advances :
A cash advance is a service provided by most credit card and charge card issuers.
The service allows cardholders to withdraw cash, either through an ATM or over the
counter at a bank or other financial agency, up to a certain limit. For a credit card,
this will be the credit limit (or some percentage of it).
Cash advances often incur a fee of 3 to 5 percent of the amount being borrowed.
When made on a credit card, the interest is often higher than other credit card
transactions. The interest compounds daily starting from the day cash is borrowed.
Some "purchases" made with a credit card of items that are viewed as cash are also
considered to be cash advances in accordance with the credit card network's
guidelines, thereby incurring the higher interest rate and the lack of the grace period.
These often include money orders, lottery tickets, gaming chips, and certain taxes and
fees paid to certain governments. However, should the merchant not disclose the
actual nature of the transactions, these will be processed as regular credit card
transactions. Many merchants have passed on the credit card processing fees to the
credit card holders in spite of the credit card network's guidelines, which state the
credit card holders should not have any extra fee for doing a transaction with a
credit card.
Under card scheme rules, a credit card holder presenting an accepted form of
identification must be issued a cash advance over the counter at any bank which
issues that type of credit card, even if the cardholder cannot give his or her PIN.

Types of cash advance :

There are a few different types of cash advances with varying features, but the
common denominators among all cash advances are the high interest rates and fees.
The most popular type of cash advance is borrowing on a line of credit through a
credit card. Cash can be withdrawn at an ATM or, depending on the credit card
company, from a check provided by the company that is deposited or cashed at a
bank. Cash advances on a credit card often come with much higher interest rates
than credit purchases and include a fee for cashing out your credit. Credit card
companies either charge a flat rate cash advance fee or charge a percentage of the
amount. Additionally, if you use an ATM to access the cash, you are charged a small
ATM usage fee.
Credit card cash advances carry a separate balance from credit purchases, along with
separate interest rates, but the monthly payment is potentially applied to both
balances. However, if you are only making the minimum payment, credit card
companies are allowed by federal law to apply the minimum payment only to the
balance with the smallest interest rate, which could cause the cash advance balance to
sit and accrue interest if only minimum payments are made. Cash advance interest
rates and fees vary by credit card company, so it is wise to learn the different
features of your specific card before borrowing through a cash advance.
Another common type of cash advance is the payday loan. As with a credit card
cash advance, payday loans also have high interest rates and fees. Payday lenders
issue loans anywhere from $50 to $1,000 but with interest rates exceeding 100%. The
loans are short-term and are required to be paid back on the borrower's payday,
unless he or she wishes to extend the loan, and in that case additional interest is
charged. To get a payday loan, you write a post-dated check made out to the payday
lender for the amount you plan to borrow, including the fees. The lender in turn
immediately issues the borrowed amount but waits to cash your check until your
payday comes. People with bad credit or no credit are the most likely to use this
type of cash advance as it may be their only option for a loan since banks require a
minimum credit score.

Another type of cash advance is to go directly through an employer. Availability of

the service, as well as applicable fees and interest, vary by employer, though
oftentimes no fees or interest are charged. Before borrowing from any cash advance
program, it is wise to do your research to find the best option for your financial
needs.
Commercial banks advances are made in different forms such as cash credit,
overdraft, loans, purchasing and Discounting Bills etc.
Commercial banks advances are made in different forms such as cash credit,
overdraft, loans, purchasing and Discounting Bills etc.. These forms of advances are
explained below.

Cash Credit :
Cash Credit is an arrangement by which the customer is allowed to borrow money
up to a certain limit known as the cash credit limit. Usually the borrower is
required to provide security in the form of pledge or hypothecation of tangible
securities. Sometimes, this facility is also provided against personal security.
1 his is a permanent arrangement and the customer need not draw the sanctioned
amount at once, but draw the amount as and when required. He can put back any
surplus amount which he may find with him. Thus cash credit is an active and
running account to which deposits and withdrawals may be affected frequently
Interest is charged only for the amount withdrawn and not for the whole amount
approved. If the customer does not use the cash limit to the foil extent, a
commitment charge is made by the bank. This charge is imposed on the un-utilized
portion of cash credit only.
Cash credit provides an elastic form of borrowing since the limit fluctuates according
to the needs of the business. Cash credits are the most favorable mode of financing
by large commercial and industrial concerns.

Overdraft :

Oxford Dictionary of Finance and Banking defines overdraft as "a loan made to a
customer with a cheque account at a bank or building society, in which the account
is allowed to go into debit, usually up to a specified limit.
According to Cambridge Advanced Learners Dictionary, overdraft means an amount
of money that a customer with a bank account is temporarily allowed to owe to the
bank, or the agreement which allows this.
The Economist defines overdraft as "a credit facility that allows borrowers to draw
upon it (up to a specified limit) as and when they need to. Borrowers pay only for
what they use.
Overdraft is an arrangement between a banker and his customer by which the latter
is allowed to withdraw over and above his credit balance in the current account up
to an agreed limit. This is only a temporary accommodation usually granted against
security.
The borrower is permitted to draw and repay any number of times, provided the total
amount overdrawn does not exceed the agreed limit. The interest is charged only for
the amount drawn and not for the whole amount sanctioned
A cash credit differs from an overdraft in one respect. A cash credit is used for
long-term by businesses in doing regular business whereas overdraft is made
occasionally and for short duration.
Banks sometimes grant unsecured overdraft for small amounts to customers having
current account with them. Such customers may be government employees with fixed
income or traders. Temporary overdrafts are permitted only where reliable source of
funds are available to a borrower for repayment.

Loans :
As defined in Oxford Dictionary of Finance and Banking, loan is the money lent
on condition by a bank that it is repaid, either in installments or all at once, on
agreed dates and usually that the borrower pays the lender an agreed rate of interest
(unless it is ail interest-live loan).

Oxford Dictionary of Finance and Banking defines bank loan as a specified sum of
money lent by a bank to a customer, usually for a specified time, at a specified rate
of interest.
According to Cambridge Advanced Learners Dictionary, loan means a sum of money
which is borrowed, often from a bank, and has to be paid back, usually together
with an extra amount of money that you have to pay as a charge for borrowing.
I imotby W. Kocli defines loans as formal agreement between a bank and borrower
to provide a fixed amount of credit for a specified period.
hi ease of loan, the banker advances a lump sum for a certain period at an agreed
rate of interest- The entire amount is paid on an occasion either in cash or by credit
in his current account which he can draw at any time. The interest is charged for the
full amount sanctioned whether he withdraws the money from his account or not.
The loans may be repaid in installments or at the expiry of a certain period. The
loan may be made with or without security. A loan once repaid in full or in part
cannot be withdrawn again by the customer. In case a borrower wants further loan,
he has to arrange for a fresh loan.

Demand Loan Vs Term Loan :

Loan may be a demand loan or a term loan. Demand loan is payable on demand. It
is for a short period and usually granted to meet working capital needs of the
borrower. Term loans may be medium-term or long-term. Medium-term loans are
granted for a period ranging from one year to five years for the purpose of vehicles,
tools, and equipments.
Long-term loans are granted for capital expenditures such as purchase of land,
construction of factory building, purchase of new machinery and modernization of
plant.

Secured Vs Unsecured Loan

According to section 5(e) of The Bank Companies Act, 1991, Secured loan or
advance means such a loan or advance as made against the security assets, market
value of which is not at any means less than the amount of such loan or advance
and unsecured loan or advance is that loan or advance or part of it does not require
sanctioning against the security.

Participation Loan or Consortium Loan :

Where one single loan is granted by more than one financing agency, it is termed as
a participation or consortium loan. Such participation becomes necessary where either
the risk involved is too large for one or more of the participating institutions to take
individually or there are administrative or other difficulties in servicing and follow up
of the loan.

Purchasing and Discounting Bills :

Bills of exchange, as defined in The Negotiable Instruments Act, 1 SSI, is an
instrument in writing containing an unconditional order, signed by the maker, directing
a certain person to pay (on demand or at a fixed or determinable future time) a
certain sum of money only to, or to the order of, a certain person or to the bearer
of the instrument.
Banks grant advances to their customers by discounting bills of exchange. The net
amount, after deducting the amount of interest/discount from the amount of the
installment, is credited in the account of the customer. In this form of lending, the
interest is received by the banker in advance.
Banks sometimes purchase the bills instead of discounting them. Bills which are
accompanied by documents or title to goods such as bills of lading or railway receipt
are purchased by the bankers. In such cases, the banker grants loan in the form of
overdraft or cash credit against the security of the bills.
The term bill purchased' seems to imply that the bank becomes the purchaser or

owner of such bills. But in almost all cases the bank holds the bill only as a
security for the advance.

Gold loan :
Many nationalized banks, private banks and other financial companies offer this
loan at attractive rates. Many go for this loan for short period to meet the
requirement of their childrens education, marriage and other financial problems in the
family. And others think that instead of keeping the gold idle at home or locker, loan
against gold is the best option. Moreover with the rise in gold rates the demand from
companies and banks offering such loans has raised. For instance, Muthoot Finance,
one of the leading gold loan companies has seen 24 percent rises in gold loan
against 17 percent raise in the market value of gold.

Gold loan doesnt demand any certificate to show your salary or income and
even no credit card history is required. Thus even unemployed and non

working people can go for gold loan.

Unlike any other unsecured loan, gold loan doesnt require many papers, only
few documents such as ID proof and address proof is enough to avail for

such loan.
One of the main advantages of gold loan is its low interest rates. Usually loan
over gold is provided at the interest of 12-16% per annum and this is quite
low compared to personal loans available at interest rates of 15-26% per
annum.

In rural areas Agricultural loan against gold is also available for agriculturist at
very nominal rate of Interest of 7%-8%, proof of agricultural document needs

to be provided
Gold loan is the most simple and convenient forms of loan because here all
you need to do is pledge your gold with a bank or finance company and get

upto 80% of the market value of the gold as a loan.

Borrower will be given an option to pay only interest during the entire term
and at the end of the tenure you can pay complete borrowed amount in single

shot.
In case of gold loan processing time is very less. Usually banks take just few
hours to complete the process where as in case of NBFCs (Non Banking
Financial Companies) a few minutes is enough for the same. So for immediate
financial help this is the best option.

Home loan :
Home Loan is a Secured loan offered against the security of a house/property which
is funded by the banks loan, the property could be a personal property or a
commercial one. The Home Loan is a loan taken by a borrower from the bank
issued against the property/security intended to be bought on the part by the borrower
giving the banker a conditional ownership over the property i.e. if the borrower is
failed to pay back the loan, the banker can retrieve the lent money by selling the
property.

Types of Home Loan

There are different types of home loans available in the market to cater borrowers
different needs.

Home Purchase Loan: This is the basic type of a home loan which has the
purpose of purchasing a new house.

Home Improvement Loan: This type of home loan is for the renovation or
repair of the home which is already bought.

Home Extension Loan: This type of loan serves the purpose when the
borrower wants to extend or expand an existing home, like adding an extra room
etc.

Home Conversion Loan: It is that loan wherein the borrower has already
taken a home loan to finance his current home, but now wants to move to another
home. The Conversion Home Loan helps the borrower to transfer the existing loan
to the new home which requires extra funds, so the new loan pays the previous
loan & fulfills the money required for new home.

Bridge Loan: This type of loan helps finance the new home of the borrower
when he wants to sell the existing home, this is normally a short term loan to the
borrower & helps during the interim period when he wants to sell the old home &
want to buy a new one, It is given till the time a buyer is found for the old
home.

Home Construction Loan: This type of loan taken when the borrower wants
to construct a new home.

Land Purchase Loan: It is that loan which is taken to purchase a land for
construction & investment purposes.

Mortgage loan :

A Mortgage loan, also referred to as a mortgage, is used by purchasers of real

property to raise capital to buy real estate; or by existing property owners to raise
funds for any purpose while putting a lien on the property being mortgaged. The
loan is "secured" on the borrower's property. This means that a legal mechanism is
put in place which allows the lender to take possession and sell the secured property
("foreclosure" or "repossession") to pay off the loan in the event that the borrower
defaults on the loan or otherwise fails to abide by its terms. The word mortgage is
derived from a "Law French" term used by English lawyers in the Middle Ages
meaning "death pledge", and refers to the pledge ending (dying) when either the
obligation is fulfilled or the property is taken through foreclosure.[1] Mortgage can
also be described as "a borrower giving consideration in the form of a collateral for
a benefit (loan).
Mortgage borrowers can be individuals mortgaging their home or they can be
businesses mortgaging commercial property (for example, their own business premises,
residential property let to tenants or an investment portfolio). The lender will typically
be a financial institution, such as a bank, credit union or building society, depending
on the country concerned, and the loan arrangements can be made either directly or
indirectly through intermediaries. Features of mortgage loans such as the size of the
loan, maturity of the loan, interest rate, method of paying off the loan, and other
characteristics can vary considerably. The lender's rights over the secured property
take priority over the borrower's other creditors which means that if the borrower
becomes bankruptor insolvent, the other creditors will only be repaid the debts owed
to them from a sale of the secured property if the mortgage lender is repaid in full
first.
In many jurisdictions, though not all (Bali, Indonesia being one exception[2]), it is
normal for home purchases to be funded by a mortgage loan. Few individuals have
enough savings or liquid funds to enable them to purchase property outright. In
countries where the demand for home ownership is highest, strong domestic markets
for mortgages have developed.

Student loans / Education loans :

Student loans in India (popularly known as Education loans) have become a
popular method of funding higher education in India with the cost of educational
degrees going higher. The spread of self-financing institutions (which has less to no
funding from the government) for higher education in fields of engineering, medical
and management which has higher fees than their government aided counterparts have
encouraged the trend in India. Most large public sector and private sector banks offer
educational loans.

Under section 80(e) of the Indian income tax act, a person can exempt the amount
paid against the interest of the education loan - either for self or for his/her spouse
or children - for eight years from the year (s)he starts to repay the loan or for the
duration the loan is in effect, whichever is more. Education loan is becoming popular
day by day because of rising fee structure of higher education. It came into existence
in 1995 started by SBI Bank and after that many banks started offering student loans.
The Star Educational Loan Scheme aims at providing financial support from the bank
to deserving/ meritorious students for pursuing higher education in India and abroad.
The main emphasis is that every meritorious student is provided with an opportunity
to pursue education with the financial support on affordable terms and conditions.

Non-Performing Asset

Introduction

A strong banking sector is important for flourishing economy. One of the most
important and major roles played by banking sector is that of lending business. It is
generally encouraged because it has the effect of funds being transferred from the
system to productive purposes, which also results into economic growth. As there are
pros and cons of everything, the same is with lending business that carries credit
risk, which arises from the failure of borrower to fulfill its contractual obligations
either during the course of a transaction or on a future obligation. The failure of the
banking sector may have an adverse impact on other sectors.
Non- performing assets are one of the major concerns for banks in India.

NPAs

reflect the performance of banks. A high level of NPAs suggests high probability of a
large number of credit defaults that affect the profitability and net-worth of banks and
also erodes the value of the asset. The NPA growth involves the necessity of
provisions, which reduces the over all profits and shareholders value. The issue of
Non Performing Assets has been discussed at length for financial system all over the
world. The problem of NPAs is not only affecting the banks but also the whole
economy. In fact high level of NPAs in Indian banks is nothing but a reflection of
the state of health of the industry and trade. This project deals with understanding the
concept of NPAs, its magnitude and major causes for an account becoming nonperforming, projection of NPAs over next years in banks and concluding remarks.

The magnitude of NPAs have a direct impact on Banks profitability legally they are
not allowed to book income on such accounts and at the same time banks are forced
to make provisions on such assets as per RBI guidelines The RBI has advised all
State Co-operative Banks as well as the Central Co-operative Banks in the country to
adopt prudential norms from the year ending 31-03-1997. These have been amended
a number of times since 1997. As per their guidelines the meaning of NPAs, the
norms regarding assets classification and provision in gIts now very known that the
banks and financial institutions in India face the problem of amplification of nonperforming assets (NPAs) and the issue is becoming more and more unmanageable. In
order to bring the situation under control, various steps have been taken. Among all
other

steps

most

important

one

was

the

introduction

of

Securitisation

and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by

Parliament, which was an important step towards elimination or reduction of NPAs.
An asset is classified as non-performing asset (NPAs) if dues in the form of
principal and interest are not paid by the borrower for a period of 180 days,
However with effect from March 2004, default status would be given to a borrower
if dues are not paid for 90 days. If any advance or credit facility granted by bank to
a borrower becomes non-performing, then the bank will have to treat all the
advances/credit facilities granted to that borrower as non-performing without having
any regard to the fact that there may still exist certain advances / credit facilities
having performing status.
The NPA level of our banks is way high than international standards. One cannot
ignore the fact that a part of the reduction in NPAs is due to the writing off bad
loans by banks. Indian banks should take care to ensure that they give loans to credit
worthy customers. In this context the dictum prevention is always better than cure
acts as the golden rule to reduce NPAs.

Non Performing assets (NPA) - Concept

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
The

Reserve

Bank

of

India.

An

asset,

including

leased

asset,

becomes

nonperforming when it ceases to generate income for the bank. A NPA is a loan or
an advance where Interest and/ or instalment of principal remain overdue for a period
of more than 90 days in respect of a term loan. Earlier assets were declared as NPA
after completion of the period for the payment of total amount of loan and 30 days
grace. In present scenario assets are declared as NPA if none of the instalment is
paid till 180 days i.e. six month in respect of term loan. With effect from march,30,
2004, a non performing asset(NPA) shall be a loan or an advance where : Interest
and/or instalments of principal remain overdue for a period of more than 90 days in
respect of a term loan, The account remains out of order for a period of more than
90 days, in respect of an overdraft/cash credit (od/cd). The bill remains overdue for a
period of more than 90 days in the case of bills purchased and discounted, interest
and or instalments of principal remains overdue for two harvest seasons but for a
period not exceeding two half years in the case of advance granted for agricultural
purpose, and any amount to be received remains overdue for a period of more than
90 days in respect of other accounts.
RBI introduced, in 1992, the prudential norms for income
recognition, asset classification & provisioning IRAC norms in short in respect of
the loan portfolio of the Co operative Banks. The objective was to bring out the true

picture of a banks loan portfolio. The fallout of this momentous regulatory measure
for the management of the CBs was to divert its focus to profitability, which till then
used to be a low priority area for it. Asset quality assumed greater importance for
the CBs when Maintenance of high quality credit portfolio continues to be a major
challenge for the CBs, especially with RBI gradually moving towards convergence
with more stringent global norms for impaired assets .The quality of a banks loan
portfolio can impact its profitability, capital and liquidity. Asset quality problems are
at the root of other financial problems for banks, leading to reduced net interest
income and higher provisioning costs. If loan losses exceed the Bad and Doubtful
Debt Reserve, capital strength is reduced. Reduced income means less cash, which
can potentially strain liquidity. Market knowledge that the bank is having asset quality
problems and associated financial conditions may cause outflow of deposits. Thus, the
performance of a bank is inextricably linked with its asset quality. Managing the loan
portfolio to minimise bad loans is, therefore, fundamentally important for a financial
institution in todays extremely competitive and market driven business environment.
This is all the more important for the CBs, which are at a disadvantage of the
commercial banks in terms of professionalised management, skill levels, technology
adoption and effective risk management systems and procedures. Management of
NPAs begins with the consciousness of a good portfolio, which warrants a better
understanding of risks in lending. The Board has to decide a strategy keeping in
view the regulatory norms, the business environment, its market share, the risk
profile, the available resources etc. The strategy should be reflected in Board
approved policies and procedures to monitor implementation. The essential components
of sound NPA management are
i)
ii)
iii)

quick identification of NPAs,

their containment at a minimum level,
ensuring minimum impact of NPAs on the financials.

Definitions:

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

income for the bank.A non-performing asset (NPA) was defined as a credit facility in respect of
which the interest and/ or instalment of principal has remained past due for a specified period of
time.
With a view to moving towards international best practices and to
ensuregreater transparency, it has been decided to adopt the
90 days overdue
Norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with
effect from March 31, 2004, a non-performing asset (NPA) shall be a loan or an
advance where;
Interest and/ or instalment of principal remain overdue for a period of more than 90
days in respect of a term loan,

The account remains out of order for a period of more than 90 days, in respect of an
Overdraft / Cash Credit (OD/CC),
The bill remains overdue for a period of more than 90 days in the case of bills
purchased and discounted

Interest and/or instalment of principal remains overdue for two harvest s e a s o n s b u t

f o r a p e r i o d n o t e x c e e d i n g t w o h a l f ye a r s i n t h e c a s e o f a n advance
granted for agricultural purposes, and
Any amount to be received remains overdue for a period of more than 90days in
respect of other accounts . As a facilitating measure for smooth transition to 90 days norm, banks
have been advised to move over to charging of interest at monthly rests, by April 1,
2002. However, the date of classification of an advance as NPA should not be change don
account of charging of interest at monthly rests. Banks should, therefore
,continue to classify an account as NPA only if the interest charged during

any quarter is not serviced fully within 180 days from the end of the quarter with effect from
April 1, 2002 and 90 days from the end of the quarter with effect from March31, 2004.
'Out of Order' status:
An account should be treated as 'out of order'
if t h e o u t s t a n d i n g b a l a n c e r e m a i n s c o n t i n u o u s l y i n e x c e s s o f t h e
s a n c t i o n e d limit/drawing power. In cases where the outstanding balance in
the principal operating account is less than the sanctioned limit/drawing power, but
there are no credits continuously for six months as on the date of Balance Sheet or
credits a r e n o t e n o u g h t o c o v e r t h e i n t e r e s t d e b i t e d d u r i n g t h e s a m e
p e r i o d , t h e s e accounts should be treated as 'out of order'
Overdue
Any amount due to the bank under any credit facility is overdue if itis not paid on the due date
fixed by the bank.

Types Of NPA :
A] Gross NPA

B] Net NPA

A] 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

B]

Net NPA:

Net NPAs are those type of NPAs in which the bank has deducted the provision
regarding NPAs. Net NPA shows the actual burden of 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_

Gross NPAs Provisions

Net NPAs

Gross Advances - Provisions

The RBI has issued the guidelines to banks for classification of assets in to
following categories.

Standard assets : Standard Asset is one which does not disclose any problems
and which does not carry more than normal risk attached to the business/banks.
These are loans which do not have any problem are less risk. Such an asset is not a
non-performing asset. In other words, it carries not more than normal risk attached to
the business.

Sub Standard Assets : It is classified as non-performing for a period not

exceeding 12 months. The account holder comes in this category when they
dont pay three installment continuously after 90 days and upto 1 year. For this
category bank has made 10% provision of funds from their profit to meet the
losses generated from NPA. With effect from March 31, 2005 an asset would be
classified as sub-standard if it remained NPA for a period less than or equal to 12
months. In such cases, the current net worth of the borrowers/ guarantors or the

current market value of the security charged is not enough to ensure recovery of the
dues to the banks in full. In other words, such assets will have well defined credit
weaknesses that jeopardize the liquidation of the debt and are characterized by the
distinct possibility that the banks will sustain some loss, if deficiencies are not
corrected.
(ii) An asset where the terms of the loan agreement regarding interest and principal
have been re-negotiated or rescheduled after commencement of production, should be
classified as sub-standard and should remain in such category for at least 12 months
of satisfactory performance under the re-negotiated or rescheduled terms. In other
words, the classification of an asset should not be upgraded merely as a result of
rescheduling, unless there is satisfactory compliance of this condition

Doubtful NPA : An asset that has remained an NPA for a period exceeding 12
months is a doubtful asset. These are NPA exceeding 12 months.
Under doubtful NPA there are three sub categories:

D1 i.e upto 1 year: 20% provision is made by banks.

D2 i.e upto 2 year: 30% provision is made by bank
D3 i.e upto 3 year: 100% provision made by bank.

With effect from March 31, 2005, an asset is required to be classified as doubtful, if
it has remained NPA for more than 12 months. The 12-month period of classification
of a substandard asset in doubtful category is effective from April 1, 2009. A loan
classified as doubtful has all the weaknesses inherent as that classified as substandard, 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.

Loss Assets : A loss asset is one where loss has been identified by the bank or
internal or external auditors or by the Co-operation Department or by the Reserve
Bank of India inspection but the amount has not been written off, wholly or partly.
In other words, such an asset is considered un-collectible and of such little value that
its continuance as a bankable asset is not warranted although there may be some
salvage or recovery value. Here loss is identified by the banks concerned, by internal

auditors, by external auditors, or by the Reserve Bank India upon inspection. These
NPA which are identified unreliable by internal inpector of bank or auditors or by
RBI. Under this 100% provision is made.

Difficulties with the non-performing assets:

1. Owners do not receive a market return on their capital. In the worst case, if the
bank fails, owners lose their assets. In modern times, this may affect a broad pool of
shareholders.
2. Depositors do not receive a market return on savings. In the worst case if the
bank fails, depositors lose their assets or uninsured balance. Banks also redistribute
losses to other borrowers by charging higher interest rates. Lower deposit rates and
higher lending rates repress savings and financial markets, which hampers economic
growth.
3. Non performing loans epitomize bad investment. They misallocate credit from good
projects, which do not receive funding, to failed projects. Bad investment ends up in
misallocation of capital and, by extension, labour and natural resources. The economy
performs below its production potential.
4. Non performing loans may spill over the banking system and contract the money
stock, which may lead to economic contraction. This spillover effect can channelize
through illiquidity or bank insolvency;
(a) when many borrowers fail to pay interest, banks may experience liquidity
shortages. These shortages can jam payments across the country,
(b) illiquidity constraints bank in paying depositors e.g. cashing their paychecks.
Banking panic follows. A run on banks by depositors as part of the national
money stock become inoperative. The money stock contracts and economic
contraction follows undercapitalized banks exceeds the banks capital base.

Lending by banks has been highly politicized. It is common knowledge that

loans are given to various industrial houses not on commercial considerations and
viability of project but on political considerations; some politician would ask the bank
to extend the loan to a particular corporate and the bank would oblige. In normal
circumstances banks, before extending any loan, would make a thorough study of the
actual need of the party concerned, the prospects of the business in which it is
engaged, its track record, the quality of management and so on. Since this is not
looked into, many of the loans become NPAs. The loans for the weaker sections of
the society and the waiving of the loans to farmers are another dimension of the
politicization of bank lending.

Causes of NPAs in banks

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 write-off of the principal loan amount itself. In a bid to stem the lurking
rot, RBI issued in 1993 guidelines based on recommendations of the Narasimham
Committee that mandated identification and reduction of NPAs. Their implementation
immediately pushed many banks into the red. So serious is the problem that an RBI
report suggested that reducing NPAs be treated as a 'national priority'
Dealing with NPAs involves two sets of policies
1. Relating to existing NPAs
2. To reduce fresh NPA generation.
As far as old NPAs are concerned, a bank can remove it on its own or sell the
assets to AMCs to clean up its balance sheet. For preventing fresh NPAs, the bank
itself should adopt proper policies.

A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. The Indian banking
system, which was operating in a closed economy, now faces the challenges of an
open economy. On one hand a protected environment ensured that banks never
needed to develop sophisticated treasury operations and Asset Liability Management
skills. On the other hand a combination of directed lending and social banking
relegated profitability and competitiveness to the background. The net result was
unsustainable NPAs and consequently a higher effective cost of banking services. One
of the main causes of NPAs into banking sector is the directed loans system under
which central co operative banks are required a prescribed percentage of their credit
(40%) to priority sectors. As of today nearly 7 percent of Gross NPAs are locked up
in 'hard-core' doubtful and loss assets, accumulated over the years.
The problem India Faces is not lack of strict prudential norms but
i. The legal impediments and time consuming nature of asset disposal proposal.
ii. Postponement of problem in order to show higher earnings.
iii. Manipulation of debtors using political influence.
Causes for an Account becoming NPA

There are several reasons for an account becoming NPA.

Internal factors
External factors

Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.
2. Project not completed in time.
3. Poor recovery of receivables.

4. Excess capacities created on non-economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or other
debt instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansion\modernization\setting up new projects\
helping or promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,
mis-appropriation etc.
9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and
follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc
Defective Lending process
There are three cardinal principles of bank lending that have been followed by
the commercial banks since long.
i.
Principles of safety
ii.
Principle of liquidity
iii.
Principles of profitability

i.

Principles of safety :
By safety it means that the borrower is in a position to repay the loan
both principal and interest. The repayment of loan depends upon the
borrowers:
a. Capacity to pay
b. Willingness to pay

Capacity to pay depends upon:

1. Tangible assets
2. Success in business

Willingness to pay depends on :

1. Character
2. Honest
3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise
or business for which a loan is sought is a sound one and the borrower is
capable of carrying it out successfully .he should be a person of integrity and
good character.

Inappropriate technology :
Due to inappropriate technology and management information system, market
driven decisions on real time basis can not be taken. Proper MIS and financial
accounting system is not implemented in the banks, which leads to poor credit
collection, thus NPA. All the branches of the bank should be computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another
reason for rise in NPAs. While providing unsecured advances the banks depend
more on the honesty, integrity, and financial soundness and credit worthiness of
the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_

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

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.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit
appraisal the bank gives advances to those who are not able to repay it back.
They should use good credit appraisal to decrease the NPAs.

Managerial deficiencies
The banker should always select the borrower very carefully and should take
tangible assets as security to safe guard its interests. When accepting securities
banks should consider the_
1.
2.
3.
4.

Marketability
Acceptability
Safety
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
(117.77lakhs),

and

the

handloom

sector

Orissa

the OTM
hand

loom

WCS

ltd

(2439.60lakhs).

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs. Absence of regularly
visit of bank officials to the customer point decreases the collection of interest

and principals on the loan.

The NPAs due to willful defaulters can be

collected by regular visits.

Re loaning process
Non remittance of recoveries to higher financing agencies and re loaning of
the same have already affected the smooth operation of the credit cycle.
Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB
is increasing day by day.

External factors:
1. Sluggish legal system
Long legal tangles
Changes that had taken place in labour laws
Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural hazards like floods, accidents.
5. Failures, non payment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes etc.
Some Other Reasons:

Failure to bring in Required capital

Too ambitious project
Mis management
Unwanted Expenses
Over trading
Imbalances of inventories
Lack of proper planning
Dependence on single customers
Lack of expertise
Improper working Capital Mgmt.

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.

Willful Defaults
There are borrowers who are able to payback loans but are intentionally
withdrawing it. These groups of people should be identified and proper
measures should be taken in order to get back the money extended to them as
advances and loans.

Natural calamities
This is the measure factor, which is creating alarming rise in NPAs of
the PSBs. every now and then India is hit by major natural calamities thus
making the borrowers unable to pay back there loans. Thus the bank has to
make large amount of provisions in order to compensate those loans, hence
end up the fiscal with a reduced profit.
Mainly ours farmers depends on rain fall for cropping. Due to
irregularities of rain fall the farmers are not to achieve the production level
thus they are not repaying the loans.

Industrial sickness
Improper project handling , ineffective management , lack of adequate
resources , lack of advance technology , day to day changing govt. Policies
give birth to industrial sickness. Hence the banks that finance those industries
ultimately end up with a low recovery of their loans reducing their profit and
liquidity.

Lack of demand
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 non recovered part as NPAs and has to make provision for
it.

Change on Govt. policies

With every new govt. banking sector gets new policies for its operation.
Thus it has to cope with the changing principles and policies for the
regulation of the rising of NPAs.
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 government to
revive the handloom sector has not yet been implemented. So the over dues
due to the handloom sectors are becoming NPAs.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, if
the banks fails, owners loose their assets. In modern times this may affect a
broad pool of shareholders.
2. Depositors do not receive a market return on saving. In the worst case if the
bank fails, depositors loose their assets or uninsured balance.
3. Banks redistribute losses to other borrowers by charging higher interest rates,
lower deposit rates and higher lending rates repress saving and financial
market, which hamper economic growth.
4. Non performing loans epitomize bad investment. They misallocate credit from
good projects, which do not receive funding, to failed projects. Bad investment
ends up in misallocation of capital, and by extension, labour and natural
resources.

Non performing asset may spill over the banking system and contract the money
stock, which may lead to economic contraction. This spill over effect can channelize
through liquidity or bank insolvency:
a) When many borrowers fail to pay interest, banks may experience
shortage.

liquidity

This can jam payment across the country,

b) Illiquidity constraints bank in paying depositors

.c) Undercapitalized banks exceeds the banks capital base.
The three letters Strike terror in banking sector and business circle today. NPA is
short form of Non Performing Asset. The dreaded NPA rule says simply this: when
interest or other due to a bank remains unpaid for more than 90 days, the entire
bank loan automatically turns a non performing asset. The recovery of loan has
always been problem for banks and financial institution. To come out of these first
we need to think is it possible to avoid NPA, no can not be then left is to look
after the factor responsible for it and managing those factors.

Interest and/or instalment 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 purposes, and

Any amount to be received remains overdue for a period of more than 90

days in respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been
advised to move over to charging of interest at monthly rests, by April 1, 2002.
However, the date of classification of an advance as NPA should not be changed on
account of charging of interest at monthly rests. Banks should, therefore, continue to
classify an account as NPA only if the interest charged during any quarter is not

serviced fully within 180 days from the end of the quarter with effect from April 1,
2002 and 90 days from the end of the quarter with effect from March 31, 2004.

'Out of Order' status:

An account should be treated as 'out of order' if the outstanding

balance remains continuously in excess of the sanctioned limit/drawing power. In
cases where the outstanding balance in the principal operating account is less than the
sanctioned limit/drawing power, but there are no credits continuously for six months
as on the date of Balance Sheet or credits are not enough to cover the interest
debited during the same period, these accounts should be treated as 'out of order'.
Overdue:
Any amount due to the bank under any credit facility is overdue if
it is not paid on the due date fixed by the bank.

Suggestions To Reduce NPA

At the pre-disbursement stage, appraisal techniques of bank need to be sharpened. All

technical, economic, commercial, organizational and financial aspects of the project
need to be assessed realistically. Bankers should satisfy themselves that the project is
technically feasible with reference to technical know how, scale of production etc.

The project should be commercially feasible in that all background linkages by way
of availability of raw materials at competitive rates and that all forward linkages by
way of assured market are available. It should be ensured assumptions on which the
project report is based are realistic. Some projects are born sick because of unrealistic
planning, inadequate appraisal and faulty implementation. As the initiative to sanction
or reject the project proposal lies with the banker, he can exercise his judgment
judiciously. The banker should at the pre-sanction stage not only appraise the project
but also the promoter his character and his capacity. It is said that it is more
prudent to sanction a 'B' class project with an 'A' class entrepreneur than vice-versa.
He has to ensure that the borrower complies with all the terms of sanction before
disbursement.
A major cause for NPA is fixation of unrealistic repayment schedule. Repayment
schedule may be fixed taking into account gestation or moratorium period, harvesting
season, income generation, surplus available etc. If the repayment schedule is
defective both with reference to quantum of instalment and period of recovery, assets
have a tendency to become NPA. At the post-disbursement stage, bankers should
ensure that the advance does not become and NPA by proper follow-up and
supervision to ensure both assets creation and asset utilisation. Bankers can do either
off-site surveillance or on site inspection to detect whether the unit / project is likely
to become NPA. Instead of waiting for the mandatory period before classifying an
asset as NPA, the banker should look for early warning signals of NPA.
The following are the sources from which the banker can detect signals, which need
quick remedial action:

Scrutiny of accounts and ledger cards During a scrutiny of these,

banker can be on alert if there is persistent regularity in the account, or if
there is any default in payment of interest and instalment or when there is a
downward trend in credit summations and frequent return of cheques or bills,

Scrutiny of statements If the scrutiny of the statements submitted by the

borrower reveal a sharp decline in production and sales, rising level of
inventories, diversion of funds, the banker should realise that all is not well
with the unit.

External sources The banker may know the state of the unit through
external sources. Recession in the industry, unsatisfactory market reports,
unfavourable changes in government policy and complaints from suppliers of
raw material, may indicate that the unit is not working as per schedule.

Computerisation of loan monitoring In computerised branches, it is

possible to computerise the loan monitoring system so that accounts, which
show signs of sickness or weakness can be monitored more closely than other
accounts.Personal visit and face-to-face discussion By inspecting the unit the
banker is able to see for himself where the problem lies - either production
bottlenecks or income leakage or whether it is a case of willful default.
During discussion with the borrower, the banker may come to know details
relating to breakdown in plant and machinery, labour strike, change in
management, death of a key person, reconstitution of the firm, dispute among
the partners etc. All these factors have a bearing on the functioning of the
unit and on its financial status.
Strategy for reducing provision The extent of provision for doubtful asset is

with

reference to secured and unsecured portion. Cent percent provision needs to be

made for the unsecured portion. If banks can ensure that the loan outstanding is fully
secured by realisable security, the quantum of provision to be made would be less. It
takes one year for a sub standard asset to slip into doubtful category. Therefore, as
soon as an account is classified as substandard, the banker must keep strict vigil over
the security during the next one year because in the event of the account being
classified as doubtful, the lack of security would be too costly for the bank.
Cash recovery Banks, instead of organising a recovery drive based on overdues,
must short list those accounts, the recovery of which would provide impetus to the
system in reducing the pressure on profitability by reduced provisioning burden.
Vigorous efforts need to be made for recovery of critical amount (overdue interest
and instalment) that can save an account from NPA classification:

a) In case of a term loan, the banker gets 90 days after the date of default to
take appropriate action and to persuade the borrower to pay interest or
instalment whichever is due.
b) In case of a cash credit account, the banker gets 90 days for ensuring that the
irregularity in the account is rectified.
c) In case of direct agricultural loans, the account is classified NPA only after
two crop seasons (from sowing to harvesting) from the due date in case of
short duration loans and one crop season from the due date in case of long
duration loans.
Up gradation of assets Once accounts become NPA, then bankers should take
steps to up grade them by recovering the entire overdues. Close follow-up will
generally ensure success.
Compromise settlements Wherever feasible, in case of chronic NPAs, banks can
consider entering into compromise settlements with the borrowers .

Reporting of NPAs

Banks are required to furnish a Report on NPAs as on 31 st March each year

after completion of audit. The NPAs would relate to the banks global
portfolio, including the advances at the foreign branches. The Report should be
furnished as per the prescribed format given in the Annexure I.

While reporting NPA figures to RBI, the amount held in interest suspense
account, should be shown as a deduction from gross NPAs as well as gross
advances while arriving at the net NPAs. Banks which do not maintain Interest

Suspense account for parking interest due on non-performing advance accounts,

may furnish the amount of interest receivable on NPAs as a foot note to the
Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if any,
should be reduced from the outstanding gross advances and gross NPAs to
eliminate any distortion in the quantum of NPAs being reported.

Preventive Measurement For NPA

Early Recognition of the Problem :

Invariably, by the time banks start their efforts to get involved in a revival process,
its too late to retrieve the situation- both in terms of rehabilitation of the project and
recovery of banks dues. Identification of weakness in the very beginning that is :
When the account starts showing first signs of weakness regardless of the fact that it
may not have become NPA, is imperative. Assessment of the potential of revival may
be done on the basis of a techno-economic viability study. Restructuring should be
attempted where, after an objective assessment of the promoters 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 as to 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. Base don this objective 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 promoters 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 units 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 done it will be useful to have
consultant appointed as early as possible to examine this aspect. A proper technoeconomic viability study must thus become the basis on which any future action can
be considered.

Multiple Financing :

A. 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.

B. In some default cases, where the unit is still working, the bank should make
sure that it captures the cash flows (there is a tendency on part of the
borrowers to switch bankers once they default, for fear of getting their cash
flows forfeited), and ensure that such cash flows are used for working capital
purposes. Toward this end, there should be regular flow of information among
consortium members. A bank, which is not part of the consortium, may not be

allowed to offer credit facilities to such defaulting clients. Current account

facilities may also be denied at 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.

C. In a forum of lenders, the priority of each lender will be different. While one
set of lenders may be willing to wait for a longer time to recover its dues,
another lender may have a much shorter timeframe in mind. So it is possible
that the letter categories of lenders may be willing to exit, even a t a cost
by

discounted

settlement

of

the

exposure.

Therefore,

any

plan

for

restructuring/rehabilitation may take this aspect into account.

RBI measures to control NPAs in recent times

Over the last few months, RBI has brought in various reforms in order to control the
growing NPAs both for the banks and the non-banking financial companies (NBFCs).

Increase in FDI cap for ARCS :

The RBI, in order to promote the business of asset reconstruction in India, increased
foreign direct investment (FDI) cap on asset reconstruction companies to 74% from
49% under the automatic route. It also allowed the foreign institutional investors
(FIIs) to participate in the equity of the ARCs, however, the maximum shareholding
by FII cannot exceed 10% of the paid up capital of the ARC.

 Framework for Distressed Assets :

This is one such framework, through which the RBI has tried to bring in a number
of changes in order to stabilise the current stressed out situation in the economy. It
has concentrated more on early recognition of stressed assets as requires the banks
and financial institutions to route the assets through three classes of special mention
accounts-SMA (SMA-0, SMA-1 and SMA-2) before finally classifying it as a NPA. It
also requires the all lenders with respect to the borrower classified under SMA-2 to
form a joint lenders forum (JLF) whereby they are to formulate a corrective action
plan in order to remove the stress over the asset. This framework also requires the
formation of a Central Registry of Information on Large Credits (CRILC), which will
be responsible to accumulate the data relating to the borrowers having aggregate fund
based and non-fund based exposures worth Rs500 crore or more from the banks, nonbanking financial companies- systemically important (NBFC-SIs) and NBFC-Factors.
There are various other things that RBI has brought forward including the requirement
of a proper credit risk management mechanism within the organisation.

Central Registry of Information on Large Credits (CRILC):

The main intent of setting up this registry was to keep a record of the large
borrowers and those which are under stress. The RBI requires all the banks,
NBFC-SIs and NBFC-Factors to report all the data relating to the borrowers
having an aggregate fund based and non-fund based exposure of Rs500 crore
or more or of such borrowers who have been classified as SMA-0 in the
books.

 Corporate debt restructuring norms for the NBFCs:

Earlier, the NBFCs were not allowed to be part of the corporate debt restructuring
mechanism under the corporate debt restructuring (CDR) cell, but with this
notification,RBI has now allowed the NBFCs to restructure their assets under the
CDR cell and made their restructuring regulations at par with that of the banks. This
has created a lot of buzz in the NBFC sector and it is believed that RBI has made
this move in tune with the soaring concerns over NPAs. Henceforth, the NBFCs will
be able to restructure their stressed asset either through one on one arrangement with
the borrowers or along with other lenders through the CDR cell. Through this
notification, the RBI has brought an incentive for the NBFCs, whereby they can
retain their standard assets in the books even after restructuring, only if it is able
to implement the restructuring scheme within a period of 120 days from the date of
receipt of application for restructuring by the NBFCs. This incentive may encourage
the NBFCs to restructure the stressed assets and make an effort to make them good.
However, this special incentive is available with the NBFCs only till 31 March, 2015.

Apart from the above measures, the RBI earlier came out with several other such
reforms, however, still it could not get the control over the rising NPAs.

Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest Act, 2002
(SARFAESI Act)

RBI guidelines & SARFAESI proceedings?

It is very clear that the Banks should follow RBI guidelines on Asset-Classification
before classifying any loan account as Non-performing Asset (NPA). There were
judgments saying that it is mandatory for the Banks to follow RBI guidelines while
classifying an account as Non-Performing Asset (NPA) and any deviation in this
regard can vitiate the proceedings initiated under SARFAESI Act, 2002. While RBI
guidelines are detailed when it comes to Asset Classification and related issues; the
Bank officials or the Banks may have to make a subjective assessment of certain
issues. It is understood from the reading of RBI guidelines on Asset-Classification
that genuine borrowers facing temporary difficulties may be treated separately and
based on reasonable assurance of recovery. Guideline 4.2.4 of RBI guideline deals
with the issue of accounts with temporary deficiencies and narration of few of the
temporary deficiencies in the said guideline appear to be inclusive in nature allowing
the Bank to make certain subjective assessments on case-to-case basis. Obviously, no
creditor and especially secured creditor want to harass a genuine borrower having a
good track-record with the Bank for a considerable time. However, with constant
emphasis on the issue of reduction of NPAs, it seems that the Banks are very strict
while getting the accounts classified as NPAs. The most important thing about the
issue of recovery by the Bank is that they are allowed to proceed against the
borrower for default in any of the facilities availed by him when a borrower avails
multiple credit facilities. Banks are asked to initiate recovery proceedings BorrowerWise and not Facility-Wise and it is very clear in the RBI

Provisions of the SARFAESI Act

The Act has made provisions for registration and regulation of securitisation
companies or reconstruction companies by the RBI, facilitate securitisation of
financial assets of banks, empower SCs/ARCs to raise funds by issuing security
receipts to qualified institutional buyers (QIBs), empowering banks and FIs to take
possession of securities given for financial assistance and sell or lease the same to
take over management in the event of default.
The Act provides three alternative methods for recovery of NPAs, namely:

Securitisation: It means issue of security by raising of receipts or funds by

SCs/ARCs. A securitisation company or reconstruction company may raise
funds from the QIBs by forming schemes for acquiring financial assets. The
SC/ARC shall keep and maintain separate and distinct accounts in respect of
each such scheme for every financial asset acquired, out of investments made
by a QIB and ensure that realisations of such financial asset is held and
applied towards redemption of investments and payment of returns assured on
such investments under the relevant scheme.

Asset Reconstruction: The SCs/ARCs for the purpose of asset reconstruction

should provide for any one or more of the following measures:
the proper management of the business of the borrower, by change in, or
take over of, the management of the business of the borrower
the sale or lease of a part or whole of the business of the borrower
rescheduling of payment of debts payable by the borrower
enforcement of security interest in accordance with the provisions of this Act
settlement of dues payable by the borrower
taking possession of secured assets in accordance with the provisions of this
Act.

Exemption from registration of security receipt: The Act also provides,

notwithstanding anything contained in the Registration Act, 1908, for
enforcement of security without Court intervention: (a) any security receipt
issued by the SC or ARC, as the case may be, under section 7 of the Act,
and not creating, declaring, assigning, limiting or extinguishing any right, title
or interest to or in immovable property except in so far as it entitles the
holder of the security receipt to an undivided interest afforded by a registered
instrument; or (b) any transfer of security receipts, shall not require
compulsory registration.

The Guidelines for SCs/ARCs registered with the RBI are:

act as an agent for any bank or FI for the purpose of recovering their dues
from the borrower on payment of such fees or charges

act as a manager between the parties, without raising a financial liability for
itself;

act as receiver if appointed by any court or tribunal.

Apart from above functions any SC/ARC cannot commence or carryout other
business without the prior approval of RBI.

Issues under the SARFAESI

Right of Title
A securitisation receipt (SR) gives its holder a right of title or interest in the
financial assets included in securitisation. This definition holds good for securitisation
structures where the securities issued are referred to as Pass through Securities. The
same definition is not legally inadequate in case of Pay through Securities with
different tranches.

Thin Investor Base

The SARFAESI Act has been structured to enable security receipts (SR) to be issued
and held by Qualified Institutional Buyers (QIBs). It does not include NBFC or
other bodies unless specified by the Central Government as a financial institution
(FI). For expanding the market for SR, there is a need for increasing the investor
base. In order to deepen the market for SR there is a need to include more buyer
categories.

Investor Appetite
Demand for securities is restricted to short tenor papers and highest ratings. Also, it
has remained restricted to senior tranches carrying highest ratings, while the junior
tranches are retained by the originators as unrated pieces. This can be attributed to
the underdeveloped nature of the Indian market and poor awareness as regards the
process of securitisation.

Risk Management in Securitisation

The various risks involved in securitisation are given below:

Credit Risk : The risk of non-payment of principal and/or interest to investors can
be at two levels: SPV and the underlying assets. Since the SPV is normally
structured to have no other activity apart from the asset pool sold by the originator,
the credit risk principally lies with the underlying asset pool. A careful analysis of
the underlying credit quality of the obligors and the correlation between the obligors
needs to be carried out to ascertain the probability of default of the asset pool. A
well diversified asset portfolio can significantly reduce the simultaneous occurrence of
default.

Sovereign Risk : In case of cross-border securitisation transactions where the

assets and investors belong to different countries, there is a risk to the investor in
the form of non-payment or imposition of additional taxes on the income repatriation.
This risk can be mitigated by having a foreign guarantor or by structuring the SPV
in an offshore location or have an neutral country of jurisdiction
Collateral deterioration Risk: Sometimes the collateral against which credit is
sanctioned to the obligor may undergo a severe deterioration. When this coincides
with a default by the obligor then there is a severe risk of non-payment to the
investors. A recent example of this is the sub-prime crisis in the US which is
explained in detail in the following sections.
Legal Risk : Securitisation transactions hinge on a very important principle of
bankruptcy remoteness of the SPV from the sponsor. Structuring the asset transfer
and the legal structure of the SPV are key points that determine if the SPV can
uphold its right over the underlying assets, if the obligor declare bankruptcy or
undergoes liquidation.

Prepayment Risk : Payments made in excess of the scheduled principal payments

are called prepayments. Prepayments occur due to a change in the macro-economic
or competitive industry situation. For example in case of residential mortgages, when
interest rates go down, individuals may prefer to refinance their fixed rate mortgage
at lower interest rates. Competitors offering better terms could also be a reason for
prepayment. In a declining interest rate regime prepayment poses an interest rate risk
to the investors as they have to reinvest the proceedings at a lower interest rate.
This problem is more severe in case of investors holding long term bonds. This can
be mitigated by structuring the tranches such that prepayments are used to pay off
the principal and interest of short-term bonds.

Servicer Performance Risk : The servicer performs important tasks of collecting

principal and interest, keeping a tab on delinquency, maintains statistics of payment,
disseminating the same to investors and other administrative tasks. The failure of the
servicer in carrying out its function can seriously affect payments to the investors.
Swap Counterparty Risk: Some securitisation transactions are so structured wherein
the floating rate payments of obligors are converted into fixed payments using swaps.
Failure on the part of the swap counterparty can affect the stability of cash flows of
the investors.
Financial Guarantor Risk: Sometime external credit protection in the form of
insurance or guarantee is provided by an external agency. Guarantor failure can
adversely impact the stability of cash flows to the investors .

Non Performing Asset - Current Scenario

For the 20 banks that have declared their September quarter earnings, bad loans rose
sharply in the past three months. Collective gross non-performing assets (NPAs) for
this set of banks rose by Rs.7,219 crore, or 14.3%. The run rate of bad loan
accumulation was sharper than in the June quarter, when gross bad debts rose by
Rs.3,340 crore, or 7%.
The main culprits, as has been the case in the past several quarters, were state-owned
banks. Punjab National Bank saw its bad loans rise by Rs.4,035 crore, or 40%, in
the past three months. Bank of Baroda saw bad loans increase by one-tenth in the
September quarter and Indian Overseas Banks rose by one-fifth.
But these were the outliers. Even if the numbers of these three offenders are
excluded, bad loans for the remaining 17 banks rose by Rs.1,737 crore in the
September quarter, more than the Rs.728 crore slip seen in thee months ended June.
As the Reserve Bank of India data shows, the gross NPAs of the Indian banking
system (as a percentage of gross advance) during the fiscal year that ended in March
2012 (FY12) were the highest in the last six years.
An even bigger concern is the rising threat of loans getting restructured as high
inflation and interest rates impact demand and reduce the pricing power of the
corporates. FY12 saw a massive spurt in restructured loans, both at an absolute level
and as a share total loan, as corporate cash flows have been affected drastically.
Restructured loans refer to those that cannot be recovered or serviced as per their
schedule and the lenders are, therefore, required to dilute the terms under which the
loans were originally sanctioned, which may include lowering of interest rates,
extension of tenure or both. Indias Rs.75 trillion banking sector has witnessed a
surge in the amount of restructured loans in stress-ridden sectors in the June quarter,

a large chunk of which could turn bad if the growth momentum does not pick up in
Asias third largest economy.
The total amount of loans restructured by Indian banks under the corporate debt
restructuring (CDR) mechanism crossed a staggering Rs.1.68 trillion, on a cumulative
basis, on 30 June, registering an addition of about Rs.17,957 crore in the three
months since April. The actual figure of restructured assets in the banking system,
however, could be much higher as lenders often execute bilateral loan recasts on a
case-by-case basis.
This addition is significant as in the whole of the last fiscal year, banks restructured
Rs.40,000 crore of loans through the CDR route.
Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which
nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In absolute
figures, NPAs have doubled from 2009 to 2012 and assets under reconstruction had
trebled during the same period. Indias biggest lender, State Bank of India, is
experiencing an NPA level of 4.99% of total loans. According to a recently published
Credit Suisse Group AG report, 10 large industrial houses account for 13% of total
assets financed by the Banking system, which means that bank lending is getting
increasingly skewed. Further, of the total reconstructed assets, 8.24% belong to the
large manufacturing sector, 3.99% are from the services sector while 1.45% are from
the agricultural sector.

Current market scenario

One can easily make out the amount of stress prevailing over the financial system
after 40 listed companies together reported the growth of Rs2.4 lakh crores worth
NPAs during the quarter ending on December 2013. While this has been the overall

scenario, some of the banks individually have made it to the headlines by reporting
huge amount of NPAs in the December quarter. In terms of quantum, the State Bank
of India (SBI) reported highest NPAs worth Rs67,799 crore. However, it is Bank of
Maharashtra and United Bank of India, which made the headlines by reporting a
growth of 209% and 188%, respectively in NPAs. Even one of the recent releases by
RBI

also highlights the growing concerns over NPAs within the country. The table

below would show us the trend in the gross advances by the banks and the gross
NPAs since 2001.

End of

Total Gross

March

Advances

Growth in

Growth in

Gross

Gross NPAs

Advances (%)

(%)

Gross NPAs

(Amt in Rs crore)

2001

522,365

62,896

2002

645,865

71,113

23.6

13.1

2003

739,125

70,042

14.4

-1.5

2004

859,092

63,538

16.2

-9.3

2005

1,125,056

58,024

31.0

-8.7

2006

1,473,723

51,243

31.0

-11.7

2007

1,893,775

49,997

28.5

-2.4

2008

2,331,750

55,695

23.1

11.4

2009

2,788,424

68,216

19.6

22.5

2010

3,264,907

81,808

17.1

19.9

2011

3,992,145

94,121

22.3

15.1

2012

4,666,337

137,102

16.9

45.7

2013*

5,371,151

183,854

15.1

34.1

* As at the end of September, 2013

This scenario was seemingly favourable till 2007, thereafter the gross NPAs started
rising and got worse as years passed, reaching 45% in 2012.
However, RBI from time to time has taken various initiatives to curtail ever
increasing NPAs.

Organisation Profile Of
State Bank Of India

State Bank of India is an Indian multinational, Public Sector banking and financial
services company. It is a government-owned corporation with its headquarters in
Mumbai, Maharashtra and also its corporate office in Mumbai, Maharashtra. As of
December 2013, it had assets of US$388 billion and 17,000 branches, including 190
foreign offices, making it the largest banking and financial services company in India
by assets.
State Bank of India is one of the Big Four banks of India, along with Bank of
Baroda, Punjab National Bank and ICICI Bank.
The bank traces its ancestry to British India, through the Imperial Bank of India, to
the founding, in 1806, of the Bank of Calcutta, making it the oldest commercial bank
in the Indian Subcontinent. Bank of Madras merged into the other two "presidency
banks" in British India, Bank of Calcutta and Bank of Bombay, to form the Imperial
Bank of India, which in turn became the State Bank of India. Government of India
owned the Imperial Bank of India in 1955, with Reserve Bank of India (India's
Central Bank) taking a 60% stake, and renamed it the State Bank of India. In 2008,
the government took over the stake held by the Reserve Bank of India.
State Bank of India is a regional banking behemoth and has 20% market share in
deposits and loans among Indian commercial banks.
The roots of the State Bank of India lie in the first decade of the 19th century,
when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2

June 1806. The Bank of Bengal was one of three Presidency banks, the other two
being the Bank of Bombay (incorporated on 15 April 1840) and the Bank of
Madras(incorporated on 1 July 1843). All three Presidency banks were incorporated as
joint stock companies and were the result of royal charters. These three banks
received the exclusive right to issue paper currency till 1861 when, with the Paper
Currency Act, the right was taken over by the Government of India. The Presidency
banks amalgamated on 27 January 1921, and the re-organised banking entity took as
its name Imperial Bank of India. The Imperial Bank of India remained a joint stock
company but without Government participation.
Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve Bank
of India, which is India's central bank, acquired a controlling interest in the Imperial
Bank of India. On 1 July 1955, the imperial Bank of India became the State Bank
of India. In 2008, the Government of India acquired the Reserve Bank of India's stake
in SBI so as to remove any conflict of interest because the RBI is the country's
banking regulatory authority.
In 1959, the government passed the State Bank of India (Subsidiary Banks) Act. This
made SBI subsidiaries of eight that had belonged to princely states prior to their
nationalization and operational take-over between September 1959 and October 1960,
which made eight state banks associates of SBI. This acquisition was in tune with
the first Five Year Plan, which prioritised the development of rural India. The
government integrated these banks into the State Bank of India system to expand its
rural outreach. In 1963 SBI merged State Bank of Jaipur (est. 1943) and State Bank
of Bikaner (est.1944).
SBI has acquired local banks in rescues. The first was the Bank of Bihar (est. 1911),
which SBI acquired in 1969, together with its 28 branches. The next year SBI
acquired National Bank of Lahore (est. 1942), which had 24 branches. Five years
later, in 1975, SBI acquired Krishna ram Baldeo Bank, which had been established in
1916 in Gwalior State, under the patronage of Maharaja Madho Rao Scindia. The
bank had been the Dukan Pichadi, a small moneylender, owned by the Maharaja. The
new bank's first manager was Jall N. Broacha, a Parsi. In 1985, SBI acquired the
Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its
affiliate, the State Bank of Travancore, already had an extensive network in Kerala.

There has been a proposal to merge all the associate banks into SBI to create a
"mega bank" and streamline the group's operations.[11]
The first step towards unification occurred on 13 August 2008 when State Bank of
Saurashtra merged with SBI, reducing the number of associate state banks from seven
to six. Then on 19 June 2009 the SBI board approved the absorption of State Bank
of Indore. SBI holds 98.3% in State Bank of Indore. (Individuals who held the shares
prior to its takeover by the government hold the balance of 1.7%.)
The acquisition of State Bank of Indore added 470 branches to SBI's existing
network of branches. Also, following the acquisition, SBI's total assets will inch very
close to the 10 trillion mark (10 billion long scale). The total assets of SBI and
the State Bank of Indore stood at 9,981,190 million as of March 2009. The process
of merging of State Bank of Indore was completed by April 2010, and the SBI
Indore branches started functioning as SBI branches on 26 August 2010.
On October , 2013, Arundhati Bhattacharya became the first woman to be appointed
Chairperson of the bank

SBI sets up for NPA recovery

State Bank of India is using every possible way to step up

recoveries from non-performing assets. The countrys largest lender
has opened two call centres at Gurgaon and Chennai to deal with
NPAs and Special Mention Accounts those in a zone in between
standard assets and NPAs. It has also set up account tracking
centres at 14 local head offices. As a step to improve tracking and
recovery, the bank has begun assigning SMAs and NPAs to

individual staff members. This step will ensure a sense of

ownership in dealing with stress asset cases, a senior official said.
Domestic brokerage Motilal Oswal Securities, in its review of bank performance in
the third quarter, said NPAs had been increasing. Gross NPAs rose marginally to Rs
23,438 crore by end-December 2010 from Rs 23,205 crore at end- September. In 12
months, gross NPAs have grown by Rs 4,577 crore.
The banking sectors bad loans swelled after September 2008, due to the adverse
effect of the global financial crisis on companies, small and medium enterprises and
households.
This brought heightened awareness in detecting stress cases early and taking corrective
steps in time. SBI has formulated a new code to identify accounts from the seventh
day of default.
Keeping an eye on improving banks ability to withstand adverse events, Reserve
Bank of India asked all lenders to make 70 per cent provision on overall NPAs. It
first gave time till September 2010 to do so. SBI sought, and got, an extra year to
do so. It has since sought time till March 2012 to meet the 70 per cent mark.
Its provision coverage ratio, including technical write-offs, improved to 64 per cent at
the end of December 2010 from 62.7 per cent in the earlier quarter. The incremental
provisioning required for 70 per cent is pegged at Rs 2,000 crore, to be amortised
over three quarters. NPA provisions were Rs 1,630 crore, which included additional
provisions made to improve coverage ratio.
The total of restructured loans were Rs 32,750 crore. Of the restructured portfolio,
assets worth Rs 4,420 crore have slipped into NPAs.

SBI steps up recovery of bad loans

State Bank of India (SBI) is taking steps to clamp on bad loans that include webbased tracking of assets and regular calls to stressed accounts in the retail as well
as real estate segments, Arundhati Bhattacharya, chairman of the country's largest
lender, has said.
In addition, the bank has initiated dynamic credit rating review of borrowal
accounts to capture deterioration in credit quality promptly and initiate corrective
action and facilitate correct pricing of risk, she said in a message to shareholders
ahead of the bank's July 2 annual general meeting.
During the year (2014-15), the bank has embarked on a number of initiatives to
clamp down on NPAs (non-performing assets). Some of them are web-based assets
tracking & monitoring and regular calls to stressed accounts in the retail segment and
real estate sector to prevent slippages..., she said.
The bank's exposure in the retail segment, which includes housing, auto, education
and personal loans, increased to Rs 2.72 lakh crore, from Rs 2.37 lakh crore at the
end of March 2014.
Of this, gross NPAs in retail was Rs 2,528 crore at the end of March 2015. It has
come down from Rs 3,034 crore at the end of 2013-14.
Besides, she said, the bank has also set up asset tracking centres at all circles, and
formed various committees to review stressed assets periodically and suggest
resolutions and turn around strategies.
The banks gross NPA in absolute terms declined to Rs 56,725 crore while the net
NPA came down to Rs 27,591 crore at the end of March 2015.
During 2014-15, the banks asset quality improved NPAs or bad loans were trimmed
to 2.12 per cent of net advances as against 2.57 per cent at the end of the previous
financial year.

At the same time, gross NPAs also came down to 4.25 per cent of gross advances,
from 4.95 per cent at the end of March 2014.
With regard to capital requirement, Bhattacharya said: As the pace of economic
activity gathers further momentum in the coming years, the bank will be required to
improve and strengthen its capital planning processes to support future business
growth.
Furthermore, she added, in view of the implementation of Basel-III capital regulations,
the transitional period for full implementation of Basel-III capital regulations in India
has already been extended up to March 31, 2019, by the Reserve Bank of India.

SBI to sell around Rs 5000-cr non-performing assets to ARCs

For the first time in its over two centuries of history, State Bank of India (SBI)is
going all out to stem the rot by offloading around Rs 5,000 crore of its Rs 67,799
crore dud assets to ARCs before the end of the month.
The state-run bank had reported 5.73 per cent of its assets as bad loans in the
December quarter.
"There are 14 ARCs functioning today, and we have invited many of them to pick
up our stressed loans of around Rs 5,000 crore. We will definitely be offloading at
least a large portion of this to the highest bidders. The process should be concluded
before the end of the month," a senior SBI official said in Mumbai on Monday.
The move comes ahead of the tighter provisioning norms kicking in from next April,
which the Reserve Bank of India had announced in May 2013 when it had more
than doubled the provisioning for restructured loans to 5 from 2 per cent.

Earlier this month, chairperson Arundhati Bhattacharya had said in Kolkata that
"the bank was considering a proposal to sell NPAs in the current quarter. This would
be for the first time we would be selling NPAs to asset reconstruction companies or
ARCs." But she did not specify how much the bank was planning to offload.
Normally ARCs pay 5-10 per cent of the total bad loans being bought pay in cash
and the rest could be security receipts (SRs), the SBI official cited earlier said,
adding the bank is confident of selling a good portion of the dud loans earmarked
for offloading.
In the quarter to December alone, the lender had added as much as Rs 11,400 crore
in fresh bad loans or 5.73 per cent, taking its overall NPA mount to a whopping Rs
67,799 crore. This pulled down its net profit by a whopping 34 per cent to Rs Rs
2,234 crore, as the bank was forced to make Rs 3,428.6 crore towards loan
provisions up from Rs 2,766 crore a year ago.
The bank added Rs 11,400 crore in fresh slippages, including Rs 9,500 crore from
SMEs and mid-corporates and added Rs 6,165 crore into the restructured loan book
during the quarter, while a cleaning up of balancesheet resulted in a write-off of
around Rs 5,000 crore in Q3.
The bank is also expecting at least Rs 9,500 crore of loans being restructured in the
fourth qaurter.
As of the December quarter, as much as Rs 67,799 crore of its Rs 11,83,723 crore
assets or advances as classified as NPAs, or 5.73 per cent up from Rs 64,206 crore
or 5.64 per cent in the previous quarter. While its net NPAs stood at Rs 37,167
crore or 3.24 per cent in Q3 and Rs 32,151 crore or 2.91 per cent in the previous
quarter when its total net NPA was at Rs 11,39,326 crore.
Media reports said banks, mostly state-run ones, are scurrying to sell close to Rs
43,000 crore to ARCs by the end of the month as the total bad assets in the system
rose to 4.1 per cent of the total advances. This is almost four times the amount that
were put up for auctions in the past quarter.

The urgency of bans come as the central bank under the new Governor Raghuram
Rajan has been encouraging lenders to clean up their books.
In his inaugural address on September 4 last, Rajan had famously said that promoters
of failed companies have no divine right to remain in control of such companies.
The rush to offloan bad loans is also to guard them against higher loan loss
provisions that kick in from next March, by when all restructured loans would be
classified as non-performing accounts attracting higher provisions.
On May 30 last year, the RBI had tightened the norms for loan restructuring norms
by raising provisions to 5 per cent in line with the global practices, in a gradual
manner.

Organisation Profile Of

Axis Bank

Axis Bank established in 1993 was the first of the new private banks to have begun
operations in 1994 after the Government of India allowed new private banks to be
established Axis Bank Ltd. has been promoted by the largest and the best Financial
Institution of the country, UTI. The Bank was set up with a capital of Rs. 115 crore,
with UTI contributing Rs. 100 crore, LIC Rs. 7.5 crore and GIC and its four
subsidiaries contributing Rs. 1.5 crore each .Axis Bank is one of the first new
generation private sector banks to have begun operations in 1994. The Bank was
promoted in 1993, jointly by Specified Undertaking of Unit Trust of India (SUUTI)
(then known as Unit Trust of India),Life Insurance Corporation of India (LIC),
General Insurance Corporation of India (GIC), National Insurance Company Ltd., The
New India Assurance Company Ltd., The Oriental Insurance Company Ltd. and
United India Insurance Company Ltd. The shareholding of Unit Trust of India was
subsequently transferred to SUUTI, an entity established in 2003.
Erstwhile Unit Trust of India was set up as a body corporate under the UTI Act,
1963, with a view to encourage savings and investment. In December 2002, the UTI
Act, 1963 was repealed with the passage of Unit Trust of India (Transfer of
Undertaking and Repeal) Act, 2002 by the Parliament, paving the way for the
bifurcation of UTI into 2 entities, UTII and UTIII with effect from 1st February
2003. In accordance with the Act, the Undertaking specified as UTI I has been
transferred and vested in the Administrator of the Specified Undertaking of the Unit
Trust of India (SUUTI), who manages assured return schemes along with 6.75% US
64 Bonds, 6.60% ARS Bonds with a Unit Capital of over Rs. 14167.59 crores.
The Bank has strengths in both retail and corporate banking and is committed to
adopting the best industry practices internationally in order to achieve excellence.
Axis Bank entered a deal in November 2010 to buy the investment banking and
equities units of Enam Securities for $456 million. Axis Securities, the equities arm
of Axis Bank, will merge with the investment banking business of Enam Securities
.As per the deal, Enam will demerge its investment banking, institutional equities,
retail equities and distribution of financial products, and nonbanking finance
businesses and merge them with Axis Securities.
Services offered by the bank:

Personal Banking

Corporate Banking

NRI Banking

Priority Banking

VBV Online purchases using Credit Card

VBV / MSC Online purchases using Debit Card

The Bank today is capitalized to the extent of Rs. 280.51 Crores with the
public holding (other than promoters) at 72.46%.
The Bank's Registered Office is at Ahmadabad and its Central Office is
located at Mumbai. Presently the Bank has a very wide network of more than
469 branch offices and Extension Counters. The Bank has a network of over
2016 ATMs providing 24hrs a day banking convenience to its customers. This
is one of the largest ATM networks in the country. The Bank has strengths
in both retail and corporate banking and is committed to adopting the best
industry practices internationally in order to achieve excellence.
Axis Bank was the first of the new private banks to have begun operations
in 1994, after the Government of India allowed new private banks to be
established.

The

Bank

was

promoted

jointly

by

the

Administrator

of

the

specified undertaking of the, Unit Trust of India.

Life Insurance Corporation of India (LIC)
General Insurance Corporation Ltd.
Other four PSU companies, i.e.
National Insurance Company Ltd.,
The New India Assurance Company,
The Oriental Insurance Corporation and United Insurance Company
Ltd.
The Bank today is capitalized to the extent of Rs. 358.97 crores with the
public holding (other than promoters) at 57.59%.Presently; the Bank has a very

wide network of more than 729 branch offices and Extension Counters. The
Bank has a network of over 3171 ATMs providing 24 hrs day banking. The
Bank has strengths in both retail and corporate banking and is committed to
adopting

the

best

industry

practices

internationally

in

order

to

achieve

excellence.
The latest offerings of the bank along with Dollar variant is the Euro and
Pound Sterling variants of the International Travel Currency Card. The Travel
Currency Card is a signature based pre-paid travel card which enables travelers
global access to their money in local currency of the visiting country in a
safe and convenient way.

Mission of AXIS Bank :

Customer

Service

and

Product

Innovation

tuned

to

diverse

needs

of

individual and corporate clientele.

Continuous technology up gradation while maintaining human values.

Progressive globalization and achieving international standards.

Efficiency and effectiveness built on ethical practices.

Axis Bank offers fast track loans for SMEs under the following
schemes:

M power-Term Loan (M power-TL)

Axis Bank's M power-TL provides a hassle free way of meeting your business
needs

of

security
EMI

of

based

expansion

and

immovable
loan

and

other

long

term

residential

or

can

availed

be

funding

commercial
by

requirements

against

property. Mpower-TL is

Partnership

firms,

Companies and Trusts. Mpower-TL has the following features:

Private

the
an
Ltd.

Loans upto Rs 5 crores*

Flexible repayment options of upto 10 years

Attractive market related interest rates

Fast processing and quick disbursement

Business Loan for Property

Looking to acquire an office space for your business? Axis Bank's BLFP offers
you a convenient way. It is an EMI based term loan and can be availed by
Partnership firms, Private Ltd. Companies and Trusts. BLFP has the following
features:

Loans upto Rs 5 crores*

Flexible repayment options of upto 10 years

Attractive market related interest rates

Fast processing and quick disbursement

Power Rent
Having

corporate

rental
or

income

Public

Sector

from

commercial

Units

or

Banks

property
or

leased

Insurance

out

to

reputed

Companies?

Axis

Bank's Power Rent is just the right product for you. The product offering
involves discounting the future receivables and providing an upfront loan to the
landlord, thus extending immediate liquidity in the hands of the landlord. It is
an EMI based term loan, which can be availed by Proprietors, Partnerships,
Private Ltd. Companies and Trusts. Power Rent has the following features:

Loans upto Rs 20 crores*

Flexible repayment options of upto 10 years

Attractive market related interest rates

Fast processing and quick disbursement

Power Trade
At Axis Bank we understand the unique needs of the trader segment and we
have tailor designed a specific product 'Power Trade' to meet your business
needs. Axis Bank's Power Trade is a hassle free and flexible credit facility for
meeting your working capital requirements like Cash Credit, Bills discounting,
Export Credit, Bank Guarantee, Letter of Credit or a term loan.

Loan upto Rs 2.5 crore*

Stock statements to be submitted quarterly*

Tenure - 1 year for Working capital and 3 years for Term Loans

M power-OD
Axis Bank's M power-OD helps you meet your short-term funding needs and
allows you to leverage every business opportunity that comes your way against
the security of residential or commercial property.

Loans upto Rs 2 crores*

Tenure - 1 year

Immovable Property as collateral

Attractive market related interest rates

Fast processing and quick disbursement

Enterprise Power
Axis Bank's Enterprise Power is a unique product designed keeping in mind
the business requirements of Micro and Small Enterprises (MSE).

Loans upto Rs. 1.00 crore*

Tenure-1 year for working capital and 3 years for term loan

Attractive market related interest rates

Fast processing and quick disbursement

Equipment Power
This product is a term loan facility with a tenor upto 48 months for purchase
of construction, medical and office equipments. There is a standard list of
equipments, which the Bank would finance under the scheme and the maximum
exposure permitted under the product is Rs. 100.00 lacs.
Zero Collateral Loans to SSI Units (ZCL)
Collateral free product to facilitates the MSE and software/IT related services to
avail both working capital and term finance from the Bank. The facility is
secured by guarantee cover of Credit Guarantee Fund Trust for Micro and
Small Enterprises (CGMSE). Maximum loan amount under the product is Rs.
50 lacs.

Treatment of Accounts as NPA

The treatment of an asset as NPA should be based on the record of recovery. Banks
should not treat an advance as NPA merely due to existence of some deficiencies
which are of temporary in nature such as non-availability of adequate drawing power,
balance outstanding exceeding the limit, non-submission of stock statements and the
non-renewal of the limits on the due date, etc. Where there is a threat of loss, or the
recoverability of the advances is in doubt, the asset should be treated as NPA.

Where the accounts of the borrowers have been regularized by repayment of overdue
amounts through genuine sources (not by sanction of additional facilities or transfer of
funds between accounts), the accounts need not be treated as NPA.

Treatment of NPA Borrower-wise and not Facility-wise :

In respect of a borrower having more than one facility with a bank, all the facilities
granted by the bank will have to be treated as NPA and not the particular facility or

part thereof which has become irregular.

However, in respect of consortium advances or financing under multiple banking
Arrangements, each bank may classify the borrowal accounts according to its own
Record of recovery and other aspects having a bearing on the recoverability of the
Advances.

Recognition of Income on Investment Treated as NPA:

The investments are also subject to the prudential norms on income recognition.
Banks should not book income on accrual basis in respect of any security irrespective
of the category in which it is included, where the interest/principal is in arrears for
more than 90 days

Analysis and Interpretation

Analysis & Interpretation Between SBI And AXIS

NPA RATIO OF SBI :

NPA Ratios : sbi

Mar 15

Gross NPA

Net NP

Mar14

Mar13

Mar12

56,725.34

61,605.35

51,189.39

39,676.46

27,590.58

31,096.07

21,956.48

15,818.85

70,000.00
60,000.00
50,000.00
40,000.00
30,000.00
20,000.00
10,000.00
0.00
Mar'15

Mar'14

Mar'13

Mar'12

Interpretation :
Above graph shows that the gross NPA of SBI is increased from
Mar 12 to Mar14 and decreased in Mar15 . The Net NPA is increased
from Mar12 to Mar14 and decreased in 2015.

Percentage Of NPA Ratio :

NPA Ratio SBI

Mar15

Mar14

% of Gross NPA

4.25

% of Net NPA

2.12
0.76

Return on Assets %

Mar13 Mar12

4.95

4.75

4.44

2.57

2.10

1.82

0.65

0.91

0.88

5
4.5
4
3.5
3
2.5

% of Gross NPA

% of Net NPA

1.5

Return on Assets %

1
0.5
0
Mar'15

Mar'14

Mar'13

Mar'12

Interpretation :
Above graph show that the Gross NPA SBI is increased from Mar12 to 14
and decreased in Mar15 The Net NPA is increased from Mar12 to Mar14 and
decreased in Mar15 the return on assets % increased from Mar12 to Mar13 and
decreased in Mar14 and again increased in Mar15 .

NPA RATIO OF AXIS BANK :

NPA Ratio : Axis Bnak

Mar15

Gross NPA

4,110.19

Net NPA

1,316.71

Mar13

Mar12

3,146.41

2,393.42

1,806.30

1,024.62

704.13

472.64

Mar14

4,500.00
4,000.00
3,500.00
3,000.00
2,500.00
2,000.00

Gross NPA

1,500.00

Net NPA

1,000.00
500.00
0.00
Mar'15

Mar'14

Mar'13

Mar'12

Interpretation :
Above graph show that the Gross NPA is increased from Mar 12 to Mar15 and
Net NPA is also increased from Mar12 to Mar15

Percentage Of NPA Ratio :

NPA Ratio Axis bank

% of Gross NPA
% of Net NPA
Return on Assets %

Mar15

Mar14

Mar13

Mar12

1.34

1.22

1.06

0.94

0.44

0.40

0.32

0.25

1.83

1.78

1.70

1.68

2
1.8
1.6
1.4
1.2
1

% of Gross NPA

0.8

% of Net NPA

0.6

Return on Assets %

0.4
0.2
0
Mar'15

Mar'14

Mar'13

Mar'12

Interpretation :
Above graph show that the Gross NPA increased from Mar12 to Mar15
Net NPA increased from Mar12 to Mar15 and return on asset % is also increased
From Mar12 to Mar15.

Finding