INTRODUCTION

Banking in India in the modern sense originated in the last decades of the 18th
century. Among the first banks were the Bank of Hindustan, which was established
in 1770 and liquidated in 1829-32; and the General Bank of India, established 1786
but failed in 1791.
The largest bank, and the oldest still in existence, is the State Bank of India. It
originated as the Bank of Calcutta in June 1806. In 1809, it was renamed as the
Bank of Bengal. This was one of the three banks funded by a presidency
government, the other two were the Bank of Bombay and the Bank of Madras. The
three banks were merged in 1921 to form the Imperial Bank of India, which upon
India's independence, became the State Bank of India in 1955. For many years the
presidency banks had acted as quasi-central banks, as did their successors, until the
Reserve Bank of India was established in 1935, under the Reserve Bank of India
Act, 1934.
In 1960, the State Banks of India was given control of eight state-associated banks
under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called
its associate banks. In 1969 the Indian government nationalized 14 major private
banks. In 1980, 6 more private banks were nationalized. These nationalized banks
are the majority of lenders in the Indian economy. They dominate the banking
sector because of their large size and widespread networks.
The Indian banking sector is broadly classified into scheduled banks and nonscheduled banks. The scheduled banks are those which are included under the 2nd
Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further
classified into: nationalized banks; State Bank of India and its associates; Regional
Rural Banks (RRBs); foreign banks; and other Indian private sector banks. The
term commercial banks refers to both scheduled and non-scheduled commercial
banks which are regulated under the Banking Regulation Act, 1949.
Generally banking in India is fairly mature in terms of supply, product range and
reach-even though reach in rural India and to the poor still remains a challenge.
The government has developed initiatives to address this through the State Bank of
1

India expanding its branch network and through the National Bank for Agriculture
and Rural Development with facilities like microfinance.

DEFINITION OF A COMMERCIAL BANK

Privately owned financial institution which (1) accepts demand and time deposits,
(2) makes loans to individuals and organizations, and (3) provides services such
as documentary

collections,

international banking, trade financing.

Since

large proportion of a commercial bank's deposits is payable on demand, it prefers

to make short-term loans instead of the long-term ones
A Commercial bank is a type of Bank / Financial Institution that provides services
such as accepting deposits, making business loans, and offering basic investment
products.

"Commercial bank" can also refer to a bank, or a division of a large bank, which
more specifically deals with deposit and loan services provided to corporations or
large/middle-sized business - as opposed to individual members of the public/small
business -Retail banking, or Merchant banks.

Origin of the term

The name bank derives from the Italian word banco "desk/bench", used during the
Renaissance era by Florentine bankers, who used to carry out their transactions on
a desk covered by a green tablecloth.[1] However, traces of banking activity can be
found even in ancient times.
Some have suggested that the word "bank" traces its origins back to the Ancient
Roman Empire, where moneylenders would set up their stalls in the middle of
enclosed courtyards called macella, on long benches (each called a bancu), from
which the words banco and bank are derived. As a moneychanger, the merchant at
3

the bancu, did not so much invest money as merely convert the foreign currency
into Imperial Mint, the only legal tender in Rome.[2]
In the United States the term "commercial bank" was often used to distinguish it
from an investment bank due to differences in bank regulation. After the Great
Depression, through the GlassSteagall Act, the U.S. Congress required that
commercial banks only engage in banking activities, whereas investment banks
were limited to capital market activities. This separation was mostly repealed in
1999 by the GrammLeachBliley Act but was restored by the Volcker Rule,
implemented in January 2014 as part of the Dodd-Frank Act of 2010.

HISTORY OF A COMMERCIAL BANK

The history of banking refers to the development of banks and banking throughout
history, with banking defined by contemporary sources as an organisation which
provides facilities for acceptance of deposits, and provision of loans.
The history begins with the first prototype banks of merchants of the ancient
world, which made grain loans to farmers and traders who carried goods between
cities. This began around 2000 BC in Assyria and Babylonia. Later, in ancient
Greece and during the Roman Empire, lenders based in temples made loans and
added two important innovations: they accepted deposits and changed money.
Archaeology from this period in ancient China and India also shows evidence of
money lending activity.
Many histories position the crucial historical development of a banking system to
medieval and Renaissance Italy and particularly the affluent cities of Florence,
Venice and Genoa. The Bardi and Peruzzi families dominated banking in 14th
century Florence, establishing branches in many other parts of Europe.[2] Perhaps
the most famous Italian bank was the Medici bank, established by Giovanni Medici
in 1397. The oldest bank still in existence is Monte dei Paschi di Siena,
headquartered in Siena, Italy, which has been operating continuously since 1472.
The development of banking spread from northern Italy throughout the Holy
Roman Empire, and in the 15th and 16th century to northern Europe. This was
followed by a number of important innovations that took place in Amsterdam
4

during the Dutch Republic in the 17th century, and in London in the 18th century.
During the 20th century, developments in telecommunications and computing
caused major changes to banks' operations and let banks dramatically increase in
size and geographic spread.

FUNCTION OF A COMMERCIAL BANK

Commercial Banks: Primary and Secondary Functions of Commercial Banks!
(1) Primary Function:
1. Accepting Deposits:
It is the most important function of commercial banks.
They accept deposits in several forms according to requirements of different
sections of the society.
The main kinds of deposits are:
(i) Current Account Deposits or Demand Deposits:
These deposits refer to those deposits which are repayable by the banks on
demand:
1. Such deposits are generally maintained by businessmen with the intention of
making transactions with such deposits.
2. They can be drawn upon by a cheque without any restriction.
3. Banks do not pay any interest on these accounts. Rather, banks impose service
charges for running these accounts.
(ii) Fixed Deposits or Time Deposits:
Fixed deposits refer to those deposits, in which the amount is deposited with the
bank for a fixed period of time.
6

1. Such deposits do not enjoy cheque-able facility.

2. These deposits carry a high rate of interest.
Basis

Demand Deposits Fixed Deposits

Cheque facility They are chequeThey are non-cheque

able deposits.
able deposits.
Interest
payments
Number
transactions

They do not carryThey carry interest

any interest.
which varies directly
with the period of time.
ofThe depositor canDepositor
generally
make any numbermakes
only
two
of transactions fortransactions: (i) Deposit
deposit or withof Money in the
drawl of money. beginning;
(ii)
Withdrawal
money on maturity.

of

(iii) Saving Deposits:

These deposits combine features of both current account deposits and fixed
deposits:
1. The depositors are given cheque facility to withdraw money from their account.
But, some restrictions are imposed on number and amount of withdrawals, in order
to discourage frequent use of saving deposits.
2.They carry a rate of interest which is less than interest rate on fixed deposits. It
must be noted that Current Account deposits and saving deposits are chequable
deposits, whereas, fixed deposit is a non-chequable deposit.

2. Advancing of Loans:
The deposits received by banks are not allowed to remain idle. So, after keeping
certain cash reserves, the balance is given to needy borrowers and interest is
charged from them, which is the main source of income for these banks.
Different types of loans and advances made by Commercial banks are:
(i) Cash Credit:
Cash credit refers to a loan given to the borrower against his current assets like
shares, stocks, bonds, etc. A credit limit is sanctioned and the amount is credited in
his account. The borrower may withdraw any amount within his credit limit and
interest is charged on the amount actually withdrawn.
(ii) Demand Loans:
Demand loans refer to those loans which can be recalled on demand by the bank at
any time. The entire sum of demand loan is credited to the account and interest is
payable on the entire sum.
(iii) Short-term Loans:
They are given as personal loans against some collateral security. The money is
credited to the account of borrower and the borrower can withdraw money from his
account and interest is payable on the entire sum of loan granted.
(2) Secondary Functions:
1. Overdraft Facility:
It refers to a facility in which a customer is allowed to overdraw his current
account up to an agreed limit. This facility is generally given to respectable and
reliable customers for a short period. Customers have to pay interest to the bank on
the amount overdrawn by them.

2. Discounting Bills of Exchange:

It refers to a facility in which holder of a bill of exchange can get the bill
discounted with bank before the maturity. After deducting the commission, bank
pays the balance to the holder. On maturity, bank gets its payment from the party
which had accepted the bill.
3. Agency Functions:
Commercial banks also perform certain agency functions for their customers. For
these services, banks charge some commission from their clients.
Some of the agency functions are:
(i) Transfer of Funds:
Banks provide the facility of economical and easy remittance of funds from placeto-place with the help of instruments like demand drafts, mail transfers, etc.
(ii) Collection and Payment of Various Items:
Commercial banks collect cheques, bills, interest, dividends, subscriptions, rents
and other periodical receipts on behalf of their customers and also make payments
of taxes, insurance premium, etc. on standing instructions of their clients.
(iii) Purchase and Sale of Foreign Exchange:
Some commercial banks are authorized by the central bank to deal in foreign
exchange. They buy and sell foreign exchange on behalf of their customers and
help in promoting international trade.
(iv) Purchase and Sale of Securities:
Commercial banks buy and sell stocks and shares of private companies as well as
government securities on behalf of their customers.

(v) Income Tax Consultancy:

They also give advice to their customers on matters relating to income tax and
even prepare their income tax returns.
(vi) Trustee and Executor:
Commercial banks preserve the wills of their customers as trustees and execute
them after their death as executors.
(vii) Letters of Reference:
They give information about the economic position of their customers to traders
and provide the similar information about other traders to their customers.
4. General Utility Functions:
Commercial banks render some general utility services like:
(i) Locker Facility:
Commercial banks provide facility of safety vaults or lockers to keep valuable
articles of customers in safe custody.
(ii) Travellers Cheques:
Commercial banks issue travelers cheques to their customers to avoid risk of
taking cash during their journey.
(iii) Letter of Credit:
They also issue letters of credit to their customers to certify their creditworthiness.
(iv) Underwriting Securities:

10

Commercial banks also undertake the task of underwriting securities. As public has
full faith in the creditworthiness of banks, public do not hesitate in buying the
securities underwritten by banks.
(v) Collection of Statistics:
Banks collect and publish statistics relating to trade, commerce and industry.
Hence, they advice customers on financial matters. Commercial banks receive
deposits from the public and use these deposits to give loans. However, loans
offered are many times more than the deposits received by banks. This function of
banks is known as Money Creation.

11

INTRODUCTION ON MANAGEMENT OF NON

PERFORMING ASSETS
The business of banking essentially involves intermediation-acceptance of deposits
and channeling these deposits in to lending activities. Since the deposits received
from the depositors have to be repaid to them by the bank, they are known as
banks Liabilities and as the loan given to the borrowers are to be received back
from them, they are termed as banks Assets so assets are banks loans and
advances1 .

In the traditional banking business of lending financed by deposits from customers,

Commercial Banks are faced with the risk of default by the borrower in the
payment of either principal or interest. This risk in banking parlance is termed as
Credit Risk and accounts where payment of interest and /or repayment of
principal is not forthcoming are treated as Non-Performing Assets2 , as per the
Reserve Bank of India, an asset, including a leased asset, becomes non-Performing
when it ceases to generate income for the bank.
Existence of Non-Performing Asset is an integral part of banking and every bank
has some Non-Performing Assets in its advance portfolio. However, the high level
of NPA is a cause of worry to any financial institution.

DEFINITION OF A NON-PERFORMING ASSETS

A Non-performing asset (NPA) is defined as a credit facility in respect of which
the interest and/or installment of principal has remained past due for a specified
period of time. In simple terms, an asset is tagged as non performing when it
ceases to generate income for the lender
A Non-performing asset (NPA) is defined as a credit facility in respect of which
the interest and/or installment of Bond finance principal has remained past due
for a specified period of time. NPA is used by financial institutions that refer to
12

loans that are in jeopardy of default. Once the borrower has failed to make interest
or principle payments for 90 days the loan is considered to be a non-performing
asset. Non-performing assets are problematic for financial institutions since they
depend on interest payments for income. Troublesome pressure from the economy
can lead to a sharp increase in non-performing loans and often results in massive
write-downs.
With a view to moving towards international best practices and to ensure greater
transparency, it had been decided to adopt the 90 days overdue norm for
identification of NPA, from the year ending March 31, 2004. Accordingly, with
effect from March 31, 2004, a non-performing asset (NPA)is a loan or an advance
where;

Interest and/or installment of principal remain overdue for a period of more

than 91 days in respect of a term loan,

The account remains out of order for a period of more than 90 days, in
respect of an Overdraft/Cash Credit (OD/CC),

The bill remains overdue for a period of more than 90 days in the case of
bills purchased and discounted,

Interest and/or installment of principal remains overdue for two harvest

seasons but for a period not exceeding two half years in the case of an advance
granted for agricultural purposes, and

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

days in respect of other accounts.

Non submission of Stock Statements for 3 Continuous Quarters in case of

Cash Credit Facility.

No active transactions in the account (Cash Credit/Over Draft/EPC/PCFC)

for more than 91days.

13

NPA IN INDIAN BANKING SYSTEM

NPA surfaced suddenly in the Indian banking scenario, around the Eighties,
in the midst of turbulent structural changes overtaking the international
banking
institutions ,and when the global financial markets were
undergoing sweeping changes. In fact after it had emerged the problem of
NPA kept hidden and gradually swelling unnoticed and unperceived, in the
maze of defective accounting standards that still continued with Indian
Banks up to the Nineties and opaque Balance sheets.
In a dynamic world, it is true that new ideas and new concepts that emerge
through such changes caused by social evolution bring beneficial effects, but
only after levying a heavy initial toll. existing set-up leads to an immediate
disorder and unsettled conditions. People are not accustomed to the new
models. These new formations take time to configure, and work smoothly.
The old is cast away and the new is found difficult to adjust. Marginal and
sub-marginal operators are swept away by these convulsions. Banks being
sensitive institutions entrenched deeply in traditional beliefs and conventions
were unable to adjust themselves to the changes. They suffered easy victims
to this upheaval in the initial phase.
Consequently banks underwent this transition-syndrome and languished
under distress and banking crises surfaced in quick succession one following
the other in many countries. But when the banking industry in the global
sphere came out of this metamorphosis to re-adjust to the new order, they
emerged revitalized and as more vibrant and robust units. Deregulation in
developed capitalist countries particularly in Europe, witnessed a remarkable
innovative growth in the banking industry, whether measured in terms of

14

deposit growth, credit growth, growth intermediation instruments as well as

in network.
During all these years the Indian Banking, whose environment was
insulated from the global context and was denominated by State controls of
directed credit delivery, regulated interest rates, and investment structure did
not participate in this vibrant banking revolution. Suffering the dearth of
innovative spirit and choking under undue regimentation, Indian banking
was lacking objective and prudential systems of business leading from early
stagnation to eventual degeneration and reduced or negative profitability.
Continued political interference, the absence of competition and total lack of
scientific decision-making, led to consequences just the opposite of what
was happening in the western countries.
Imperfect accounting standards and opaque balance sheets served as tools
for hiding the shortcomings and failing to reveal the progressive
deterioration and structural weakness of the country banking institutions to
public view .This enabled the nationalized banks to continue to flourish in a
deceptive manifestation and false glitter, though stray symptoms of the
brewing ailment were discern able here and there.

REASONS FOR THE EXISTENCE OF HUGE LEVEL OF

NPAS IN THE INDIAN BANKING SYSTEM (IBS):
The origin of the problem of burgeoning NPAs lies in the quality of managing
credit risk by the banks concerned. What is needed is having adequate preventive
measures in place namely, fixing pre-sanctioning appraisal responsibility and
having an effective post-disbursement supervision. Banks concerned should
continuously monitor loans to identify accounts that have potential to become nonperforming. To start with, performance in terms of profitability is a benchmark for
any business enterprise including the banking industry. However, increasing NPAs
have a direct impact on banks profitability as legally banks are not allowed to book
income on such accounts and at the same time banks are forced to make provision
on such assets as per the Reserve Bank of India (RBI) guidelines. Also, with
15

increasing deposits made by the public in the banking system, the banking industry
cannot afford defaults by borrowers since NPAs affects the repayment capacity of
banks. Further, Reserve Bank of India (RBI) successfully creates excess liquidity
in the system through various rate cuts and banks fail to utilize this benefit to its
advantage due to the fear of burgeoning non-performing assets.
Some of the other reasons were:
1. After the nationalization of banks sector wise allocation of credit disbursements
became compulsory.
2. Banks were compelled to give credit to even those sectors, which were not
considered to be very profitable, keeping in mind the federal policy.
3. People in the agricultural sector were hardly interested in returning the loans as
they were confident that the loans with the interest would be written off by the
successive governments.
4. The small scale industries also availed credit even though they were not sure of
performing to the extent of returning the loans.
5. Banks were also not in the position to press enough securities to cover the loans
in calls of timings.
6. Even if the assets were provided they proved to be substandard assets as the
values that could be realized were very low.
7. Free distribution done during loan mails (congress regime) also contributed to
the heavy increase in NPAs.
8. The slackness in effort by the bank authorities to collect or recover loan
advances in time also contributes to the increase in NPAs
9. Lack of accountability of the officers, who sanctioned the loans led to a caste
whole approach by the officers recovering the loans.
10. Loans sanctioned to under servicing candidates due to pressure from the
ministers and other politicians also led to the non recovery of debts.
11. Poor credit appraisal system, lack of vision while sanctioning credit limits.
16

12. Lack of proper monitoring.

13. Reckless advances to achieve the budgetary targets.
14. Lack of sincere corporate culture, inadequate legal provisions on foreclosure
and bankruptcy.
15. Change in economic policies/environment.
16. Lack of co-ordination between banks.
Some of the internal factors of the organization leading to NPAs are:
Division of funds for expansion, diversification, modernization, undertaking new
projects and for helping associate concerns, this is coupled with recessionary
trends and failure to tap funds in the capital and debt markets.
Business failure( product, marketing etc.,),inefficient management, strained labor
relations, inappropriate technology, technical problems, product obsolescence etc.,
Recession , shortage of input, power shortage, price escalation, accidents, natural
calamities, besides externalization problem in other countries leading to non
payment of overdue.
Time/cost overrun during the project implementation stage.
Government policies like changes in the excise duties, pollution control orders.
Willful default, siphoning off of funds, fraud, misappropriation,
promoters/directors disputes etc.,
Deficiencies on the part of the banks like delay in release of limits and delay in
release of payments/subsidies by the government.
OPERATIONAL DEFINITION
NPA : An asset is classified as a non performing assets (NPA) if dues in the form
of principal and interest are not paid by the borrower for a period of 90 days .
Standard Assets: Such an asset is not a non-performing asset. In other words, it
carries not more than normal risk attached to the business.

17

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

exceeding18 months .
Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months
is a doubtful asset.
Loss Assets: Here loss is identified by the banks concerned or by internal auditors
or by external auditors or by Reserve Bank India (RBI) inspection
Cash Reserve Ratio (CRR): It is the reserve which the banks have to maintain
with itself in the form of cash reserves or by way of current account with the
Reserve Bank of India(RBI), computed as a certain percentage of its demand and
time liabilities. The objectives to ensure the safety and liquidity of the deposits
with the banks.
Statutory Liquidity Ratio (SLR): It is the one which every banking company
shall maintain in India in the form of cash, gold or unencumbered approved
securities, an amount which shall not, at the close of business on any day be less
than such percentage of the total of its demand and time liabilities in India as on
the last Friday of the second preceding fortnight, as the Reserve Bank of India
(RBI) may specify from time to time.

18

STATE BANK OF INDIA

INTRODUCTION
SBI is the largest bank in India with deposits of Rs 3, 67,000 crore as on March 31,
2005. It dominates the Indian banking sector with a market share of around 20% in
terms of total banking sector deposits. The increasing focus on upgrading the
technology back-bone of the bank will enable it to leverage its reach better,
improve service levels, provide new delivery platforms, and improve operating
efficiency to counter the threat of competition effectively. Once the core banking
solution (CBS) is fully implemented, it will cover over 10,000branches and ATMs
of the State Bank group, and emerge as the strongest technology enabled
distribution network in India. The increasing integration of SBI with its associate
banks (associates) and subsidiaries will further strengthen its dominant position in
the banking sector and position it as the country s largest universal bank.
Resource-raising capabilities SBIs funding profile is strong, underpinned by its
strong retail deposit base. The bank is facing increasing competition in its
metropolitan and urban franchise. SBIs strong franchise gives it access to a steady
source of stable retail funds, which constitute around 59% of the total resources as
on March 31, 2005 (56% as at March 31, 2004).Savings deposits have shown a
strong three-year growth of 19%. Thus, despite a reduction in the proportion of
current account deposits, low-cost deposits have continued to constitute over 40%
of total deposits as at March 31, 2005. The banks cost of deposits (excluding
IMD) has significantly reduced to 4.70% for the 2004-05 (refers to financial year
from April1 to March 31), compared with 5.48% in 2003-04. The banks liquidity
position is very strong due to healthy accretion to deposits, large limits in the call
market, and significant surplus SLR investments. SBI will maintain its strong
funding profile and a low cost resource position in view of its strong retail base and
wide geographical reach.

19

Company profile of SBI

The evolution of State Bank of India can be traced back to the first decade of the
19th century. It began with the establishment of the Bank of Calcutta in Calcutta,
on 2 June 1806. The bank was redesigned as the Bank of Bengal, three years later,
on 2 January 1809. It was the first ever joint-stock bank of the British India,
established under the sponsorship of the Government of Bengal. Subsequently, the
Bank of Bombay (established on 15 April 1840) and the Bank of
Madras(established on 1 July 1843) followed the Bank of Bengal. These three
banks dominated the modern banking scenario in India, until when they were
amalgamated to form the Imperial Bank of India, on 27 January 1921.
An important turning point in the history of State Bank of India is the launch of the
first Five Year Plan of independent India, in 1951. The Plan aimed at serving the
Indian economy in general and the rural sector of the country, in particular. Until
the Plan, the commercial banks of the country, including the Imperial Bank of
India, confined their services to the urban sector. Moreover, they were not
equipped to respond to the growing needs of the economic revival taking shape in
the rural areas of the country. Therefore, in order to serve the economy as a whole
and rural sector in particular, the All India Rural Credit Survey Committee
recommended the formation of a state-partnered and state-sponsored bank.
The All India Rural Credit Survey Committee proposed the take over of the
Imperial Bank of India, and integrating with it, the former state-owned or stateassociate banks. Subsequently, an Act was passed in the Parliament of India in May
1955. As a result, the State Bank of India (SBI)was established on 1 July 1955.
This resulted in making the State Bank of India more powerful, because as much as
a quarter of the resources of the Indian banking system were controlled directly by
the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed
in1959. The Act enabled the State Bank of India to make the eight former Stateassociated banks as its subsidiaries.
The State Bank of India emerged as a pacesetter, with its operations carried out by
the 480offices comprising branches, sub offices and three Local Head Offices,
20

inherited from the Imperial Bank. Instead of serving as mere repositories of the
community savings and lending to creditworthy parties, the State Bank of India
catered to the needs of the customers, by banking purposefully. The bank served
the heterogeneous financial needs of the planned economic development.
Branches
The corporate center of SBI is located in Mumbai. In order to cater to different
functions, t here are several other establishments in and outside Mumbai, apart
from the corporate center. The bank boasts of having as many as 14 local head
offices and 57 Zonal Offices, located at major cities throughout India. It is
recorded that SBI has about 10000 branches, well networked to cater to its
customers throughout India.
ATM Services
SBI provides easy access to money to its customers through more than 8500 ATMs
in India. The Bank also facilitates the free transaction of money at the ATMs of
State Bank Group, which includes the ATMs of State Bank of India as well as the
Associate Banks State Bank of Bikaner & Jaipur , State Bank of Hyderabad,
State Bank of Indore, etc. You may also transact money through SBI Commercial
and International Bank Ltd by using the State Bank ATM-cum-Debit (Cash Plus)
card. State Bank Group includes a network of eight banking subsidiaries and
several non-banking subsidiaries. Through the establishments, it offers various
services including merchant banking services, fund management, factoring
services, primary dealership in government securities ,credit cards and insurance
The eight banking subsidiaries are:
State Bank of Bikaner and Jaipur (SBBJ)
State Bank of Hyderabad (SBH)
State Bank of India (SBI)
State Bank of Indore (SBIR)
State Bank of Mysore (SBM)
State Bank of Patiala (SBP)
21

 State Bank of Saurashtra (SBS)

State Bank of Travancore (SBT)
Products And Services
Personal Banking
* SBI Term Deposits SBI Loan For Pensioners
* SBI Recurring Deposits Loan Against Mortgage Of Property
* SBI Housing Loan Against Shares & Debentures
* SBI Car Loan Rent Plus Scheme
* SBI Educational Loan Medi-Plus Scheme Other Services
* Agriculture/Rural Banking
* NRI Services
*ATM Services
* Demat Services
*Corporate Banking
*Internet Banking 16
* Mobile Banking
* International Banking
*Safe Deposit Locker

Earnings profile to remain good

SBI will maintain a good earnings profile in the medium term despite high
pressure on yields due to the increasing competition in the banking sector. SBIs
earning profile is characterized by consistency in the return on assets (PAT/Average
22

Assets), at around 1% per annum for the past three years, and diverse income
streams. To maintain yields and pursue credit growth, the bank is aggressively
targeting retail finance and small and medium enterprises (SMEs).The banks core
fee income of 1% of average funds deployed bolsters its revenue profile. However,
with the opening of government business like tax collection to other banks and
increased competition, the growth in fee income is expected to slow down. The
banks operating expense at 2.44% of average funds deployed in 2004-05 is in line
with other public sector banks. The banks cost structure is rigid as fixed employee
cost accounted for 74% of the operating expenditure in 2004-05. Thus, despite
good asset growth and technology efficiency gains, the banks operating costs will
remain high in the medium term. To be able to reap the full benefits of technology
implementation, the bank will have to reduce or redeploy work force; since this is a
sensitive issue, it is expected to happen gradually.
Comfortable capital position
SBI is adequately capitalized with a tier I capital adequacy ratio of 8.04% and a
large capital base of Rs 240.72 billion as at March 31, 2005. The bank has
considerably improved its net worth coverage for net NPAs to 4.4 times as at
March 31, 2005 due to lower slip pages reflecting an improving asset quality,
witnessed across the entire banking sector. The capitalization levels of SBI are
adequate to address the asset side risks and support the business growth in the
medium term.
Management strategies
In retail finance, the bank has leveraged its corporate relationships, pursued
business growth selectively, and has not competed based on interest rate. The bank
has taken initiatives like on-line tax returns filing and faster transfer of funds to
protect its dominant position in the government business. The bank also has a clear
technology strategy that will enable it to compete with the new generation private
sector banks in customer service and operational efficiency.
Asset quality to remain at average levels
The bank continues to have a high level of gross NPAs at 5.95% of gross advances
as at March 31, 2005, compared with 4.9% for all scheduled commercial banks
23

(SCBs) taken together. The bank is facing challenges to improve the quality of
assets originated, as can be seen in the consistently higher levels of slippages
(additions to NPAs) at 2.71% in 2004-05.
To contain NPAs and ensure credit growth, the bank has decided to focus on
financing the retail (personal) segment as well as SMEs. The share of retail
advances has increased to24.73% (Rs 522.08 billion) of total advances as at
September 30 2005. In the retail loan segment, SBI is targeting primarily the
housing loans segment, which constitutes Rs. 283.41billion (54.3%) of total retail
loans. The NPAs in retail finance are low currently; however they are steadily
increasing (especially in the housing finance portfolio) and have started showing
signs of stress. SBIs retail portfolio has grown at over 37% CAGR in the last two
years and hence a significant portion of the portfolio is largely unseasoned. The
housing finance portfolio has a 12-month, lagged gross NPA of 4.34% as at March
31, 2005.The bank will face significant challenges in the medium term to develop
effective credit appraisal and collection systems in order to contain NPAs in retail
finance. SBIs asset quality is expected to remain at average levels, as the banks
large and diverse asset portfolio reflects of the asset quality of the banking system.
Business description
SBI along with its associate banks offer a wide range of banking products and
services across its different client markets. The bank has entered the market of term
lending to corporate and infrastructure financing, traditionally the domain of the
financial institutions. It has increased its thrust in retail assets in the last two years,
and has built a strong market position in housing loans.
SBI, through its non-banking subsidiaries, offers a host of financial services, viz.,
merchant banking, fund management, factoring, primary dealership, broking,
investment banking and0020credit cards. SBI has commenced its life insurance
business by setting up a subsidiary, SBI Life Insurance Company Limited, which is
a joint venture with Cardiff S.A., one of the largest insurance companies in France.
SBI currently holds 74% equity in the joint venture.
Industry prospects
24

To leverage benefits such as access to low cost resources and the facility to provide
a larger gamut of services, a number of finance companies such as Kotak Mahindra
Finance Limited and HDFC Limited have promoted banks. Simultaneously, yet
another emerging trend is that of foreign banks promoting NBFCs to benefit from
regulatory flexibility available to such entities in areas like absence of statutory
liquidity ratio and cash reserve ratio requirements, priority sector requirements,
and corporate exposure limits.
New private sector banks capture market share
With technological edge and a strong marketing thrust, private sector banks have
been stealing market share in retail deposits and the corporate fee business from
public sector banks. Together with some foreign banks, these private banks have
also aggressively entered the retail asset financing space, hitherto the domain of
non-banking finance companies.
Given their focus on cross selling and optimizing their customer base, they now
offer the entire range of products and services on the asset and liability side to
retail and whole sale customers
Asset quality to improve
Banks have not yet fully resolved the stress in the asset quality of their legacy
corporate loan portfolios, however. Though slippages to NPAs and provisioning
were high for some banks in FY2004, as they moved to the 90-day norm for
recognizing and provisioning for NPAs, the treasury gains enabled significant
provisioning to be made with the result that net NPAs for most public sector banks
are now less than 3%.
Going forward, steady growth in gross domestic product should help improve the
banks asset quality and increase corporate lending. The securitization and
reconstruction of financial assets and enforcement of security interest (Sarfaesi)
Act should also help banks in limiting slippages and improving NPA recoveries.
25

Better Capitalization levels

Banks have demonstrated a fair amount of flexibility in raising fresh equity capital
through public issues in recent years, thereby improving their capitalization levels.
The steady accruals to net worth and falling non-performing asset levels have
resulted in an improvement in the capitalization position of banks in recent years.
Challenges ahead
Competition from new private sector and foreign banks remains a key challenge
for public sector banks. They need to reorient their staff and effectively utilize
technology platforms to retain customers and reduce costs. They also need to
fortify their credit risk management systems to mitigate the risks arising from
small-ticket lending to the retail, small and medium enterprises, and services
segments.

Consolidation and emergence of universal banking groups

The cap on foreign ownership of banks has already been raised from 49% to 74%.
The competition in the sector could get further intensified if the 10% cap on voting
rights is also relaxed. New private sector banks are expanding their geographical
coverage and making inroads into government business. The new private and
foreign banks will continue to gain market share from public sector banks because
of their efficient cost structures, technological edge, focused marketing approach
and operational freedom. However, the emergence of newer players would be
restricted if the private ownership of banks is capped at low levels. Mergers among
PSBs would create banks with even larger balance sheets and customer base.
However, the integration process in such mergers is expected to be complex and
time long drawn.
These would also be driven by Go I due to provisions of Banking Companies
(Acquisition and Transfer of Undertakings) Act 1969, and hence political scenario
will impact the timing and permutations possible. Strategic alliances between
26

banks and other financial sector players such as insurance companies and mutual
funds are also likely as banks attempt to enhance their product range, leverage on
economies of scale and reduce costs.

27

NPA SOME ASPECTS AND ISSUES

1. The NPAs of banks in India are considered to be at higher levels than those in
other countries. This issue has attracted attention of public as also of international
financial institutions and has gained further prominence in the wake of
transparency and disclosure measures initiated by RBI during recent years.
2. The NPA Management Policy document of SBI lays down to contain net NPAs
to less than 5% of banks total loan assets in conformity with the international
standard. It is, therefore necessary that as per guidelines provided in NPA
Management Policy document, every effort be made at all levels to cut down the
NPAs. All this requires greater efforts and teamwork.
3. It is essential to keep a constant watch over the non-performing assets not just to
keep it performing but also that once they become non-performing, effective
measures are initiated to get full recovery and where this is not possible, the
various means are to be initiated to get rid off the NPAs from the branch books.
4. NPAs adversely affect the wealth condition of the branch advances as also the
profitability of the branch. Some of the reasons for this are as under:
(a) Interest cannot be applied on the loan accounts classified as NPAs.
(b) The Branch has to pay interest to central office on outstanding classified as
NPA.
(c) The Branch has to incur cost in supervision and follow up of such advances.
(d) Provision has to be made on NPAs at Bank level.
5. Under Income Recognition, Assets Classification and provisioning, NPA may be
Sub standard, Doubtful or loss assets.
6) Once the assets are classified as NPA, the Branch Manager has to take all the
necessary steps to get the dues recovered there-under to maintain the good health
of advances and the higher profitability at the-Branch. This requires management
28

of NPAs in such a Planned and scientific manner that the percentage of NPAs to
the total advances will be minimum.

REASONS FOR RISE IN NPAs

FACTORS FOR RISE IN NPAs
The banking sector has been facing the serious problems of the rising NPAs. But
the problem of NPAs is more in public sector banks when compared to private
sector banks and foreign banks. The NPAs in PSB are growing due to external as
well as internal factors.
EXTERNAL FACTORS
Ineffective recovery tribunal
The Govt. has set of numbers of recovery tribunals, which works for recovery of
loans and advances. Due to their negligence and ineffectiveness in their work the
bank suffers the consequence of non-recover, their by reducing their profitability
and liquidity.
Wilful Defaults:
There are borrowers who are able to pay back 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
29

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. eg. The fallout of handloom sector is continuing
as most of the weavers Co-operative societies have become defunct largely due to
withdrawal of state patronage. The rehabilitation plan worked out by the Central
govt to revive the handloom sector has not yet been implemented. So theover dues
due to the handloom sectors are becoming.
NPAs. INTERNAL FACTORS
Defective Lending process
There are three cardinal principles of bank lending that have been followed by the
commercial banks since long.
1. Principles of safety
2. Principle of liquidity
3. Principles of profitability
30

1.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, therefore 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 cannot 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
31

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.Marketability 2. Acceptability 3. Safety 4.
Transferability.
The banker should follow the principle of diversification of risk based on the
famous maxim do not keep all the eggs in one basket; it means that the banker
should not grant advances to a few big farms only or to concentrate them in few
industries or in a few cities. If a new big customer meets misfortune or certain
traders or industries affected adversely, the overall position of the bank will not be
affected. Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom
industries. The biggest defaulters of OSCB are the OTM(117.77lakhs), and the
handloom sector Orissa hand loom WCS ltd (2439.60lakhs).
Absence of regular industrial visit
The irregularities in spot visit also increases the NPAs. Absence of regularly visit
of bank officials to the customer point decreases the collection of interest and
principals on the loan. The NPAs due to wilful defaulters can be collected by
regular visits.

32

 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.

33

IMPACT OF NPAS ON BANKS:

In portion of the interest income is absorbed in servicing NPA.NPA is not merely
non-remunerative. It is also cost absorbing and profit eroding.
In the context of severe competition in the banking industry, the weak banks are at
disadvantage for leveraging the rate of interest in the deregulated market and
securing remunerative business growth. The options for these banks are lost. "The
spread is the bread for the banks". This is the margin between the cost of resources
employed and the return there from." This is the margin between the cost of
resources employed and the return here form. In other words it is gap between the
return on funds deployed (Interest earned on credit and investments) and cost of
funds employed (Interest paid on deposits).
When the interest rates were directed by RBI, as heretofore, there was not option
for banks. But today in the deregulated market the banks decide their lending rates
and borrowing rates. In the competitive money and capital Markets, inability to
offer competitive market rates adds to the disadvantage of marketing and building
new NPA has affected the profitability, liquidity and competitive functioning of
banks and finally the psychology of the bankers in respect of their disposition
towards credit delivery and credit expansion.
1. Impact on Profitability
"The efficiency of banks is not always reflected only by the size of its balance
sheet but by the level of return on its assets. NPAS do not generate interest
income for the banks, but at the same time banks are required to make
provisions for such NPAS from their current profits.
NPAS have a deleterious effect on the return on assets in several ways:
They erode current profits through provisioning requirements.
They result in reduced interest income.
They require higher provisioning requirements affecting profits and accretion
to capital funds and capacity to increase good quality risk assets in future, and
34

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

There is at times a tendency among some of the banks to understate the level of
NPAs in order to reduce the provisioning and boost up bottom lines. It would only
postpone the process.
In the context of crippling effect on a banks operations in all spheres, asset quality
has been placed as one of the most important parameters in the measurement of a
banks performance under the CAMELS supervisory rating system of RBI.
Between 01.04.93 to 31.03.2001, SBI Group incurred a total amount of Rs. 31251
Crores towards provisioning NPA. This has brought Net NPA to Rs. 32632 Crores
or 6.2% of net advances. To this extent the problem is contained but a what cost?
This costly remedy is made at the sacrifice of building healthy reserves for future
capital adequacy.
The enormous provisioning of NPA together with the holding cost of such nonproductive assets over the years has acted as a severe drain on the profitability of
the SBI Group. In turn SBI Group are seen as poor performers and unable to
approach the market for raising additional capital. Equity issues of nationalized
banks that have already tapped the market are now quoted at a discount in the
secondary market. Other bans hesitate to approach the market to rise new issues.
This has alternatively forced SBI Group to borrow heavily from the debt market to
build Tier II Capital to meet capital adequacy norms putting severe pressure on
their profit margins; else they are to seek the bounty of the Central Government for
repeated Recapitalization.
Considering the minimum cost of holding NPAs at 7% p.a. (reckoning average cost
of fund sat 6% plus 1% service charge) the net NPA of Rs. 32632 Cores absorbs a
recurring holding ost of Rs. 2300 Crores annually. Considering the average
provisions made for the last 8 years which works out to average of Rs. 3300 crores
from annum, a sizeable business.
In the face of the deregulated banking industry, an ideal competitive working is
reached, when the banks are able to earn adequate amount of non-interest income
35

to cover their entire operating expenses i.e. a positive burden. In that event the
spread factor i.e. the difference between the gross interest income and interest cost
will constitute its operating profits.
Theoretically even if the banks keeps 0% spread, it will still break even in terms of
operating profit and not return an operating loss. The net profit is the amount of the
operating profit minus the amount of provisions to be made including for taxation.
On account of the burden of heavy NPA, many nationalised banks have little
option and they are unable to lower lending rates competitively, as a wider spread
is necessitated to cover cost of NPA in the face of lower income from off balance
sheet business yielding non-interest income.
The following working results of SBI Group an identified well managed
nationalized banks for the last two years and for the first nine months of the current
financial year, will be revealing to prove this statement.
Non-interest income fully absorbs the operating expenses of this banks in the
current financial year for the first 9 months. In the last two financial years, though
such income has substantially covered the operating expenses (between 80 to 90%)
there is still a deficit left.
The strength of SBI Group is indentified by the following positive feature:
1. Its sizeable earnings under of non-interest income substantially/totally meets its
non-interest expenses.
2. Its obligation for provisioning requirements is within bounds. (Net NPA/Net
Advances is 1.92%)
It is worthwhile to compare the aggregate figures of the 19 Nationalized banks
for the year ended March, 2001, as published by RBI in its Report on trends
and progress of banking in India.
Interest on Recapitalization Bonds is a income earned form the Government,
who had issued the Recapitalization Bonds to the weak banks to sustain their
36

capital adequacy under a bailout package. The statistics above show the other
weaknesses of the nationalized banks in addition to the heavy burden they have
to bear for servicing NPA by way of provisioning and holding cost as under:
Their operating expenses are higher due to surplus manpower employed.
Wage costs total assets is much higher to PSBs compared to new private banks
or foreign banks.
Their earnings from sources other than interest income are meager. This is
due to failure to develop off balance sheet business through innovative banking
products.

2.Impact on Liquidity of the SBI Group

Though SBI Group are able to meet norms of Capital Adequacy, as per RBI
guidelines, the facts that their net NPA in the average is as much as 7% is a
potential threat for them. RBI has indicated the ideal position as Zero percent
Net NPA.
Even granting 3% net NPA within limits of tolerance the SBI Group are
holding an uncomfortable burden at 7.1% as at March 2001. They have not
been able to build additional capital needed for business expansion through
internal generations or by tapping the equity market, but have resorted to IITier capital in the debt market or looking to recapitalization by Government of
India.
3. Impact on Outlook of Bankers towards Credit Delivery.
The fear of NPA permeates the psychology of bank managers in the SBI Group
in entertaining new projects for credit expansion. In the world of banking the
concepts of business and risks are inseparable. Business is an exercise of
balancing between risk and reward. Accept justifiable risks and implements derisking steps. Without accepting risk, there can be no reward. The psychology
of the banks today is to insulate themselves with zero percent risk and turn
37

lukewarm to fresh credit. This has affected adversely credit growth compared
to growth of deposits, resulting in a low C/D Ratio around 50 to 54% for the
industry.
The fear psychosis also leads to excessive security-consciousness in the
approach towards lending to the small and medium sized credit customers.
There is insistence on provision of collateral security, sometimes up to 200%
value of the advance, and consequently due to a feeling of assumed protection
on account of holding adequate security (albeit over-confidence). a tendency
towards laxity in the standards of credit appraisal comes to the fore. It is well
know that the existence of collateral security at best may convert the credit
extended to productive sectors into an investment against real estate, but will
not prevent the account turning into NPA. Further blocked assets and real estate
represent the most illiquid security and NPA in such advances has the tendency
to persist for a longduration.SBI Group have reached a dead-end of the tunnel
and their future prosperity depends on an urgent solution for handling this
hovering threat.
4. Impact on Productivity:
High level of NPAs effect the productivity of the banks by increasing the cost
of funds and by reducing the efficiency of banks employees. Cost of funds is
increased because due to non-availability of sufficient internal sources they
have to rely on external sources to fulfill their future financial requirements.
Productivity of employees is also reduced because it keeps staff busy with the
task of recovery of overdue. Instead of devoting time for planning for
development through more credit and mobilization of resources the branch staff
would primarily be engaged in preparing a large value of returns and
statements relating to sub-standard, doubtful and loss assets, preparing proposal
for filing of suits, waivement of legal action, compromise, write off or in
preparing DICGC claim papers etc.
5. Impact on other Variables:
High level of NPAs also leads to squeezing of interest spread, when asset
becomes an NPA for the first time it adversely affects the spread by not
38

contributing to the interest income and from the second year onwards it will
have its impact on the bottom line of the balance sheet because of provisioning
to be made for it and not have incremental effect on the spread.
Now a days Govt. does not encourage liberal capital support to be given to
banks. Banks are required to bring their own capital by issuing share to the
public, whereas high level of NPAs leads to lower profits hence less or no
profits available for equity shareholders hence lower EPS and fall in the value
of share. During the year 2001-02 share of 12 public sector banks were traded
on the NSE out of which share value of three PSBs have decreased. Low
market value of shares has also forced the banks to borrow heavily debt market
to build Tier II capital to meet capital adequacy norms, putting severe pressure
on their profit margins.
6. Qualitative aspects of the Micro Level Impact of NPAs:
High incidence of loan defaults shakes the confidence of general public in the
soundness of banking setup and indirectly effects the capacity of the banking
system to mop up the deposits. It is a blot on the credibility of the banking
system. It also leads to loss of trust of foreign suppliers. Reputed foreign
suppliers do not accept letter of credit opened bi Indian banks or confine their
transaction to top Indian banks only. Moreover, it puts negative effect on
granting of autonomy to PSBs whereas it is must for banks in this competitive
environment. Banks having positive net profits for the last three years, Net
NPA level below 9%, owned funds of Rs. 100 Crore, CAR of > 8% are the 4
condition to be fulfilled to get autonomous status, which becomes difficult in
the situation of huge level of NPAs.
Inadequate recovery also inhibits the banks to draw refinance from higher level
agency. The eligibility of a bank to draw refinance from NABARD is linked to
the % age of recovery to demand in respect of direct, medium and long term
loans for agriculture and allied activities. It implies that refinance facility
would be progressively reduced depending on the position of NPAs and also on
the No. of years in which a banks branch remains in a particular category of
default.
39

GUIDELINES BY RBI
Guidelines of Government and RBI for Reduction of NPAs
1. Compromise settlement schemes:
The RBI/Government of India have been constantly goading the banks to
take steps for arresting the incidence of fresh NPAs and have also been
creating legal and regulatory environment to facilitate the recovery of
40

existing NPAs of banks. More significant of them, I would like to

recapitulate at this stage.
* The broad framework for compromise or negotiated settlement of NPAs
advised by RBI in July 1995 continues to be in place. Banks are free to
design and implement their own policies for recovery and write-off
incorporating compromise and negotiated settlements with the approval of
their Boards, particularly for old and unresolved cases falling under the
NPA category. The policy framework suggested by RBI provides for setting
up of an independent Settlement Advisory Committees headed by a retired
Judge of the High Court to scrutinize and recommend compromise
proposals.
* Specific guidelines were issued in May 1999 to public sector banks for
one time nondiscretionary and non discriminatory settlement of NPAs of
small sector. The scheme was operative up to September 3, 2000. [Public
sector banks recovered Rs. 668 crore through compromise settlement under
this scheme].
* Guidelines were modified in July 2000 for recovery of the stock of NPAs
of
Rs. 5 crore and less as on 31 March 1997. [The above guidelines which were valid
up to June 30, 2001helped the public sector banks to recover Rs. 2600 crore by
September 2001].
* An OTS Scheme covering advances of Rs. 25000 and below continues to be in
operation and guidelines in pursuance to the budget announcement of the Honble
Finance Minister providing for OTS for advances up to Rs. 50,000 in respect of
NPAs of small/marginal farmers are being drawn up.
2. Lok Adaltas:
Lok Adalats help banks to settle disputes involving accounts in doubtful"
and "loss" category, with outstanding balance of Rs. 5 lakh for compromise
settlement under Lok Adalats. Debt Recovery Tribunals have now been
empowered to organize Lok Adalats to decide on cases of NPAs of Rs. 10
lakhs and above. The public sector banks had recovered Rs. 40.38 crore as
41

on September 30, 2001, through the forum of Lok Adalat. The progress
through this channel is expected to pick up in the coming years particularly
looking at the recent initiatives taken by some of the public sector banks and
DRTs in Mumbai.
3. Debt Recovery Tribunals:
The Recovery of Debts due to Banks and Financial Institutions
(amendment) Act, passed in March 2000 has helped in strengthening the
functioning of DRTs. Provisions for placement of more than one Recovery
Officer, power to attach defendants property/assets before judgment, penal
provisions for disobedience of Tribunals order or for breach of any terms of
the order and appointment of receiver with powers of realization,
management, protection and preservation of property are expected to
provide necessary teeth to the DRTs and speed up the recovery of NPAs in
the times to come.
Though there are 22 DRTs set up at major centers in the country with
Appellate Tribunals located in five centers viz. Allahabad, Mumbai, Delhi,
Calcutta and Chennai, they could decide only 9814 cases for Rs. 6264.71
crore pertaining to public sector banks since inception of DRT mechanism
and till September 30, 2001. The amount recovered in respect of these cases
amounted to only Rs. 1864.30 crore.
Looking at the huge task on hand, with as many as 33049 cases involving
Rs. 42988.84 crore pending before them as on September 30, 2001, I would
like the banks to institute appropriate documentation system and render all
possible assistance to the DRTs for speeding up decisions and recovery of
some of the well collateralized NPAs involving large amounts. I may add
that familiarization programmers have been offered in NIBM at periodical
intervals to the presiding officers of DRTs in understanding the complexities
of documentation and operational features and other legalities applicable of
Indian banking system. RBI on its part has suggested to the Government to
consider enactment of appropriate penal provisions against obstruction by
borrowers in possession of attached properties by DRT Receivers, and
notify borrowers who default to honor the decree passed against them.
42

4. Circulation of information on defaulters:

The RBI has put in place a system for periodical circulation of details of
willful defaults of borrowers of banks and financial institutions. This serves
as a caution list while considering requests for new or additional credit
limits from defaulting borrowing units and also from the
directors/proprietors/partners of these entities. RBI also publishes a list of
borrowers (with outstanding aggregating Rs. 1 crore and above) against
whom suits have been filed by banks and FIs for recovery of their funds, as
on 31st March every year. It is our experience that these measures had not
contributed to any perceptible recoveries from the defaulting entities.
However, they serve as negative basket of steps shutting off fresh loans to
these defaulters. I strongly believe that a real breakthrough can come only if
there is a change in the repayment psyche of the Indian borrowers
5. Recovery action against large NPAs:
After a review of pendency in regard to NPAs by the Honble Finance
Minister, RBI had advised the public sector banks to examine all cases of
willful default of Rs 1 crore and above and file suits in such cases, and file
criminal cases in regard to willful defaults. Board of Directors are required
to review NPA accounts of Rs. 1 crore and above with special reference to
fixing of staff accountability. On their part RBI and the Government are
contemplating several supporting measures including legal reforms, some
of them I would like to highlight.
6. Corporate Debt Restructuring (CDR):
Corporate Debt Restructuring mechanism has been institutionalized in 2001
to provide a timely and transparent system for restructuring of the corporate
debts of Rs. 20 crore and above with the banks and financial institutions.
The CDR process would also enable viable corporate entities to restructure
their dues outside the existing legal framework and reduce the incidence of
fresh NPAs. The CDR structure has been headquartered in IDBI, Mumbai
and a Standing Forum and Core Group for administering the mechanism
had already been put in place. The experiment however has not taken off at
43

the desired pace though more than six months have lapsed since
introduction. As announced by the Honble Finance Minister in the Union
Budget 2002-03, RBI has set up a high level Group under the Chairmanship
of Shri Vepa Kamesam, Deputy Governor, RBI to review the
implementation procedures of CDR mechanism and to make it more
effective. The Group will review the operation of the CDR Scheme, identify
the operational difficulties, if any, in the smooth implementation of the
scheme and suggest measures to make the operation of the scheme more
efficient.
7. Credit Information Bureau:
Institutionalization of information sharing arrangements through the newly
formed Credit Information Bureau of India Ltd. (CIBIL) is under way. RBI
is considering the recommendations of the S. R .Iyer Group (Chairman of
CIBIL) to operationalise the scheme of information dissemination on
defaults to the financial system. The main recommendations of the Group
include dissemination of information relating to suit- filed accounts
regardless of the amount claimed in the suit or amount of credit granted by
a credit institution as also such irregular accounts where the borrower has
given consent for disclosure. This, I hope, would prevent those who take
advantage of lack of system of information sharing amongst lending
institutions to borrow large amounts against same assets and property,
which had in no small measures contributed to the incremental NPAs of
banks.
8. Proposed guidelines on willful defaults/diversion of funds:
RBI is examining the recommendation of Kohli Group on willful defaulters.
It is working out a proper definition covering such classes of defaulters so
that credit denials to this group of borrowers can be made effective and
criminal prosecution can be made demonstrative against willful defaulters.
9. Corporate Governance:

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A Consultative Group under the chairmanship of Dr. A. Ganguly was set

up by the Reserve Bank to review the supervisory role of Boards of Banks
and financial institutions and to obtain feedback on the functioning of the
Boards via-a-visa compliance, transparency, disclosure, audit committees
etc. and make recommendations for making the role of Board of Directors
more effective with a view to minimizing risks and overexposure. The
group is finalizing its recommendations shortly and may come out with
guidelines for effective control and supervision by bank boards over credit
management and NPA prevention measures.
10.Securitization and Reconstruction of Financial Assets and Enforcement
of Security Interest Act, 2002:
The Act provides, inter alia for enforcement of security interest for
realization of dues without the intervention of courts or tribunals. The
Security Interest (Enforcement) Rules, 2002 has also been notified by
Government to enable Secured Creditors to authorise their officials to
enforce the securities and recover the dues from the borrowers.

CONCLUSION
A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. Over the years, much
has been talked about NPA and the emphasis so far has been only on identification
and quantification of NPAs rather than on ways to reduce and upgrade them. There
is also a general perception that the prescriptions of 40% of net bank credit to
priority sectors have led to higher NPAs, due to credit to these sectors becoming
stickly managers of rural and semi-urban branches generally sanction these loans.
In the changed context of new prudential norms and emphasis on quality lending
and profitability, mangers should make it amply clear to potential borrowers that
banks resources are scare and these are meant to finance viable ventures so that
these are repaid on time and relevant to other needy borrowers for improving the
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economic lot of maximum number of households. Hence selection of right

borrowers, viable economic activity, adequate finance and timely disbursement,
correct and use of funds and timely recovery f loans is absolutely necessary pre
conditions for preventing of minimizing the incidence of new NPAs.

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