Npa Of Banks

I

CONTENTS Chapter

Particulars

Page No.

Declaration

I

Certificate

II

Acknowledgement

III

Abstracts

IV

I

Introduction

1-6

II

Theoretical Framework • Review of Literature • Indian Banking System and Structure • Non Performing Assets in India  NPA and Its Classification  Asset Classification • Factors contributing to Increase in NPAs of Banks • Impacts of NPAs • Non Performing Asset Recovery Mechanism

7-31 8 11 16 19 21 22 27 28

III

Data analysis and Interpretation • NPAs of India Over Last Five Years India’s position in global NPA Ratio • Relationship between NPA & Net Profit • Recovery of NPAs by Banks

IV

Conclusion • Conclusion • Suggestions

Reference

32-47 33 40 43 46

48-52 49 50

V

ABSTRACTS A banking systemis a group or network of institutions that provide financial services for us. These institutions are responsible for operating a payment system, providing loans, taking deposits, and helping with investments. Banking in India, in the modern sense, originated in the last decade 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 in 1786 but failed in 1791.

Money provided by the bank to entities for fulfilling their short term requirements is known as Advances. The loan is a kind of debt while Advances are credit facility granted to customers by banks. 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. According to the Reserve Bank of India (RBI), the gross non-performing assets in Indian banks, specifically inpublic sector banks, are valued at around Rs 400,000 crore (~US$61.5 billion), which represents 90% of the total NPA in India, withprivate sector banksaccounting for the remainder.

IV

Chapter I : Introduction •

INTRODUCTION

•

OBJECTIVES OF THE STUDY

•

RESEARCH METHODOLOGY

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INTRODUCTION The Indian banking sector has been facing serious problems of raising NonPerforming Assets (NPAs). The NPAs growth has a direct impact on profitability of banks. Non- performing assets are one of the major concerns for scheduled commercial banks in India. As for the recommendations of Narasimham committee and Verma committee, some steps have been taken to solve the problem of old NPAs in the balance sheets of the banks. It continues to be expressed from every corner that there has rarely been any systematic evaluation of the best way of tackling the problem. There seems to be no unanimity in the proper policies to be followed in resolving this problem. 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. NPAs affect the liquidity and profitability, in addition to posing threat on quality of asset and survival of banks. 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. It is necessary to trim down NPAs to improve the financial health in the banking system. An attempt is made in this paper to understand NPA, the status and trend of NPAs in Indian Scheduled commercial banks, The factors contributing to NPAs, reasons for high impact of NPAs on Scheduled commercial banks in India and recovery of NPAS through various channels. The banking system in India comprises commercial and cooperative banks, of which the former accounts for more than 90 per cent of banking system’s assets. Besides a few foreign and Indian private banks, the commercial banks comprise nationalized banks (majority equity holding is with the Government), the State Bank of India (SBI) (majority equity holding being with the Reserve Bank of India) and the associate banks of SBI (majority holding being with State Bank of India). These banks, along with regional rural banks, constitute the public sector (state owned) banking system in India. The banking industry has undergone a sea change after the first phase of economic liberalization in 1991 and hence credit management.

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Asset quality was not prime concern in Indian banking sector till 1991, but was mainly focused on performance objectives such as opening wide networks/branches, development of rural areas, priority sector lending, higher employment generation, etc. While the primary function of banks is to lend funds as loans to various sectors such as agriculture, industry, personal loans, housing loans etc., but in recent times the banks have become very cautious in extending loans. The reason being mounting nonperforming assets (NPAs) and nowadays these are one of the major concerns for banks in India. Bankers are the custodians and distributors of the liquid capital of the country. Therefore most important function of the banking system is to mobilize the savings of the people by accepting deposits from the public. The banker becomes the trustee of the surplus balances of the public. Deposit mobilization promotes the economic prosperity by controlling the money circulation and canalizing for development and productive purposes. In order to mobilize deposits, the commercial banks undertake deposit mobilization through various deposit schemes suited to the different sections of the people. The deposits along with other sources of funds namely capital, reserves and borrowings, form the sources of funds for the banks. The lending and investment activities of the bank are based on the sources of funds. The banks, in their books, have different kind of assets, such as cash in hand, balances with other banks, investment, loans and advances, fixed assets and other assets. The Non-Performing Asset (NPA) concept is restricted to loans, advances and investments. As long as an asset generates the income expected from it and does not disclose any unusual risk other than normal commercial risk, it is treated as performing asset, and when it fails to generate the expected income it becomes a “Non-Performing Asset”. In other words, a loan asset becomes a Non Performing Asset (NPA) when it ceases to generate income, i.e. interest, fees, commission or any other dues for the bank for more than 90 days. A NPA is an advance where payment of interest or

[3]

repayment of installment on principal or both remains unpaid for a period of two quarters or more and if they have become ‘past due’. An amount under any

[4]

of the credit facilities is to be treated as past due when it remain unpaid for 30 days beyond due date. Non-Performing Assets are also called as Non-Performing Loans. It is made by a bank or finance company on which repayments or interest payments are not being made on time. A loan is an asset for a bank as the interest payments and the repayment of the principal create a stream of cash flows. It is from the interest payments that a bank makes its profits. Banks usually treat assets as nonperforming if they are not serviced for some time. If payments are late for a short time, a loan is classified as past due and once a payment becomes really late (usually 90 days), the loan is classified as non-performing. A high level of nonperforming assets, compared to similar lenders, may be a sign of problems. Narasimham Committee that mandated identification and reduction of NPAs to be treated as a national priority because NPA direct toward credit risk that bank faces and its efficiency in allocating resources. Profitability and earnings of banks are affected due to NPA numbers.. NPAs stood at Rs 10,03,404 Crores of India as of 31stJune 2018. The main aim of any person is the utilisation of money in the best manner since India is the country where more than half of the population has problem pf running the family in the most efficient manner. However Indian people faced large number of problem till the development of full fledged banking sector. The Indian banking sector came into the developing nature mostly after the 1991 government policy.The banking sector has really helped the Indian people to utilize the single in the best manner as they want. The banks not only accept the deposits of the people but also provide them credit facility for their development.Indian banking sector play an important role in developing the business and service sectors.But recently the banks are facing the problem of credit risk. It is found that many general people and business people borrow from the banks but due to some genuine or other reasons are not able to

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repay back is known as non -performing assets. Many banks are facing the problem of NPA which hampers the business of banks. Due to NPAs the income of the bank is reduced amd the banks have to make the large number of provisions that would curtail the profit of the banks and due to that the f inancial performance of banks would show good results. The main aim behind making this report is to know how the rising in non performing assets affecting the Indian economy. My study is also focusing on existing system in India to solve the problem of NP As and comparative analysis to understand which bank is playing what role with concerned to NPAs.Thus, the study would help thr decision maker to understand the financial performance and growth of the concerned banks as compared to the NPAs.

OBJECTIVES OF THE STUDY i. To know the NPA position on quarterly basis from 2017-18 ii. To analyze the bank-wise NPAs and NPA ratio of 2018 and the increment in NPAs in two years upto June 2018 iii. To find out the NPA figures of different private and public sector banks over last five years. iv. To explore India's position of acquiring NPA across the globe.

v. To understand the recovery mechanism of different banks.

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RESEARCH METHODOLOGY This research study is descrpitive in nature. This paper aims to explore the NPA position,NPA ratio of different public and private sector banks. The study has been focused on the quarterly results of banks from 2016-2018 to get idea about the increments in NPA of banks in India. The bank wise NPA data has been studied for the year 2018 to know the current situation of banking sector. The impact of Gross NPA on net profits of different banks banks has been analysed for the year 20082018.The data for this study has been used from secondary sources such as RBI's circulars and reports, newspapers ,journals, articles etc. The statistical tools such as tables , bar diagrams and graphs, ratios and percentages and Correlation have been used for this study. The paper “Non-Performing Assets In Indian Banking Sector” consists of seven chapters. The first chapter provides an introduction of the study and explains about the objectives of the study and the research methodology used in this project. The second chapter includes the review of literature which explains different studies conducted relating to the non-performing assets and their findings. The third chapter provides a brief knowledge about the Indian banking system and the banking structure existing in the country. The fourth chapter gives information regarding the Non-performing assets in India, the classification of NPA accounts and various types of assets. The fifth chapter explains about the factors contributing to the rise in NPA of banks and the impact of rise in NPA on banks and business. It also provides information regarding the recovery mechanism of NPA existing in the country. The sixth chapter provides the data regarding the Gross NPAs and NPA ratio of different banks. The chapter explains about the trends taking place in the banking sector regarding the profits and the NPA for different years. [7]

The seventh chapter concludes the project and provides suggestions regarding the measures to be taken to reduce NPAs.

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ChapterII: Theoritical Framework • • • •

REVIEW OF LITERATURE INDIAN BANKING SYSTEM AND STRUCTURE NON PERFOTMING ASSETS IN INDIA FACTORS CONTRIBUTING TO INCREASE IN NPAs • IMPACTS OF NPAs • NON PERFORMING ASSET RECOVERY SYSTEM

REVIEW OF LITERATURE

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Many published articles are available in the area of non-performing assets and a large number of researchers have studied the issue of NPA in banking industry. A review of the relevant literature has been described. Kumar (2013) in his study on A Comparative study of NPA of Old Private Sector Banks and Foreign Banks has said that Non-performing Assets (NPAs) have become a nuisance and headache for the Indian banking sector for the past several years. One of the major issues challenging the performance of commercial banks in the late 90s adversely affecting was the accumulation of huge nonperforming assets (NPAs). Selvarajan & Vadivalagan (2013) in A Study on Management of Non-Performing Assets in Priority Sector reference to Indian Bank and Public Sector Banks (PSBs) find that the growth of Indian Bank’s lending to Priority sector is more than that of the Public Sector Banks as a whole. Indian Bank has slippages in controlling of NPAs in the early years of the decade. Singh (2013) in his paper entitled Recovery of NPAs in Indian commercial banks says that the origin of the problem of burgeoning NPA’s lies in the system of credit risk management by the banks. Banks are required to have adequate preventive measures in fixing pre- sanctioning appraisal responsibility and an effective postdisbursement supervision. Banks should continuously monitor loans to identify accounts that have potential to become non- performing. Gupta (2012) in her study A Comparative Study of Non-Performing Assets of SBI & Associates & Other Public Sector Banks had concluded that each bank should have its own independence credit rating agency which should evaluate the financial capacity of the borrower before credit facility and credit rating agencies should regularly evaluate the financial condition of the clients. Rai (2012) in her study on Study on performance of NPAs of Indian commercial banks find out that corporate borrowers even after defaulting continuously never

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had the fear of bank taking action to recover their dues. This is because there was no legal framework to safeguard the real interest of banks. Chatterjee C., Mukherjee J. and Das (2012) in their study on Management of nonperforming assets - a current scenario has concluded that banks should find out the original reasons/purposes of the loan required by the borrower. Proper identification of the guarantor should be checked by the bank including scrutiny of his/her wealth. Kaur K. and Singh B. (2011) in their study on Non-performing assets of public and private sector banks (a comparative study) studied that NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. Prasad G.V.B. and Veena (2011) in their study on NPAs Reduction Strategies for Commercial Banks in India stated that the NPAs do not generate interest income for banks but at the same time banks are required to provide provisions for NPAs from their current profits, thus NPAs have destructive impact on the return on assets in the following ways. Chaudhary K. and Sharma M. (2011) in their research stated that An efficient management information system should be developed. The bank staff involved in sanctioning the advances should be trained about the proper documentation and charge of securities and motivated to take measures in preventing advances turning into NPA. Karunakar (2008), in his study Are non - Performing Assets Gloomy or Greedy from Indian Perspective, has highlighted problem of losses and lower profitability of Non- Performing Assets (NPA) and liability mismatch in Banks and financial sector depend on how various risks are managed in their business. The lasting solution to the problem of NPAs can be achieved only with proper credit assessment and risk management mechanism.

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Bhatia (2007) in his research paper explores that NPAs are considered as an important parameter to judge the performance and financial health of banks. The level of NPAs is one of the drivers of financial stability and growth of the banking sector. Kaur (2006) in her thesis titled Credit management and problem of NPAs in Public Sector Banks, suggested that for effective handling of NPAs, there is an urgent need for creating proper awareness about the adverse impact of NPAs on profitability amongst bank staff, particularly the field functionaries. Bankers should have frequent interactions and meeting with the borrowers for creating better understanding and mutual trust. Balasubramaniam C.S. (2001) highlighted the level of NPAs is high with all banks currently and the banks would be expected to bring down their NPA. This can be achieved by good credit appraisal procedures, effective internal control systems along with their efforts to improve asset quality in their balance sheets. High Non-Performing assets is one of the many problem created by lending to priority sectors along with the problems like low profitability, high transaction cost etc, Uppal (2009) . Despite the significance of agriculture in contribution to economy, appropriate credit system has not developed in this connection and the existing system is plagued with increasing NPAs, Baijal (2015) . Goyal, Agrawal and Agrawal (2015) concluded that priority sector lending is a major contributor to NPAs in public and private sector banks.These studies indicate that there is a significant contribution of priority sector lending towards the NPAs in public sectors banks.

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In relation to the non-priority sector, there is also a significant relation between both priority and non-priority sector NPAs in contributing to the total NPAs in public sector banks, Nagarajan, Sathyanarayan & Ali (2014).

INDIAN BANKING SYSTEM A Bank is an institution which accepts deposits from the general public and extends loans to the households, the firms and the government. Banks are those institutions which operate in money. Thus, they are money traders, with the process of development functions of banks are also increasing and diversifying now, the banks are not nearly the traders of money, they also create credit. Their activities are increasing and diversifying. Hence it is very difficult to give a universally acceptable definition of bank. "Banking business" means the business of receiving money on current or deposit account, paying and collecting cheques drawn by or paid in by customers, the making of advances to customers, and includes such other business as the Authority may prescribe for the purposes of this Act.

Indian Banking Structure The structure of Indian banking system that developed during the preindependence period was without any purposive control and direction. There were no comprehensive banking laws except the Bank Charter Act 1876 which regulated the three presiding bank and the Indian Companies Act 1913 provided some safe guards against bank failures.

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Reserve Bank of India: The apex or central bank of India is the RBI aka Reserve Bank of India. RBI was established on 1st April, 1935 on the recommendation of Young Hilton Committee. RBI is regulated as per the RBI Act, 1934. RBI was later nationalized on 1st January, 1949. RBI acts as a banker to both State and Central Government. It also acts as a lender of last resort to other Banks in India. RBI is also responsible for making the monetary policy. Another important function of RBI is to issue currency and maintain its circulation in India. Power of regulating foreign reserves is also vested with RBI.

As seen in the above diagram, banks which are regulated by RBI can be broadly classified into three categories:i.Commercial Banks ii.Co-operative Banks iii.Development Banks Commercial Banks: Commercial Banks are financial intermediaries that accept deposits from customers for the purpose of lending. Commercial Banks are sometimes also known as Business Banks. Commercial Banks include:I. Public Sector Banks: Banks in which the government has the majority stakes are called Public Sector Banks. These Include



SBI and its 5 Associate Banks [15]

 

19 Nationalized Banks –Banks that were earlier private but were later  brought under the control of govt.  1 Other Public Sector Bank i.e. IDBI

II.Private Sector Banks: Banks in which individuals have the majority stakes are called Private Sector Banks. These include



Indian Banks: Example ICICI, HDFC, Axis Bank, etc. 

 Foreign Banks:

Foreign Banks mean multi-countries bank. In case of Indian foreign banks are such banks which open its branch office in India and their head office are outside of India. HSBC Bank, City Bank, Standard Chartered Bank , Bank of Tokyo, Bank of America are the examples of Foreign Banks working in India. These banks are mainly concerned with financing foreign trade.Following are the various functions of foreign banks :⦁ ⦁

Remitting money from one country to another country, Discounting of foreign bills,

⦁ ⦁

Buying and Selling Gold and Silver, and Helping Import and Export Trade

iii.Regional Rural Banks: Banks that are specially designed to cater to the credit needs of the rural and weaker sections of the society are called Regional Rural Banks. They aim to bring a large strata of unbanked population of India under the ambit of Banking Sector. Co-operative Banks: When a group of people belonging to same locality, or a professional community enters into the business of banking, they form Co-operative Banks. Usually these

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people share common interests and goals. The members of the co-operative banks are the owners, as well as, the customers of the Bank. These include 1. Primary Agricultural Societies: These operate at the village level. 2. Central Co-operative Societies: These operate at district level and manage various primary societies. 3. State Co-operative Societies: These operate at state level and manage various central co-operative societies.

Development Banks: These banks are special financial intermediaries that provide short and long term loans for the sole purpose of promoting development in the country. They provide finance to both public and private sector. These include 5 Agricultural Development Banks: These banks aims for the agriculturaldevelopment. So it provides finances to the rural people, agricultural labourers, farmers, etc. Example : National Bank for Agriculture and Rural Development (NABARD) 6 Industrial Development Banks: Industrial / Development banks collect cash byissuing shares & debenturesand providing long-term loans to industries. The main objective of these banks is to provide long-term loans for expansion and modernisation of industries. In India such banks are established on a large scale after independence. Example SIDBI, IFCI, IDBI, etc. 7 Export-Import Development Banks: Example Export Import Bank of India(EXIM) 8 Housing Development Banks: Example National Housing Bank (NHB)

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NON-PERFORMING ASSETS IN INDIA Assets mean valuable resources or properties owned by an organization. The organization utilized this assets in an efficient manner to their full capacity to attain the main goals of the organization i.e. income yield, improving productivity and profitability. Optimizing the performance of assets is the most important part of overall asset management. In order to assess the performance of any organization, the efficiency of its assets should be analysed. The focus has shifted from nearly an asset management to asset-liability management (ALM) in order to achieve the optimum efficiency of the organization. For the banking sector, efficient management of its assets is of principal importance because banks are the custodians of public funds and they lend other people‟s money. To protect the interest of the public as well as the banks itself, deliberate efforts are needed for efficient asset management. If the assets and liabilities of the banks are not managed in well manner, it can cause a serious problem for bank as well as for the society as a whole. In order to increase profitability of the banks, serious efforts are required for managing the assets and liabilities of the banks. If the assets are not managed in an appropriate manner, they turned to nonperforming state. Such assets are generally termed as 'NonPerforming Assets'. In the field of bank, non-performing assets include nonperforming cash and bank balances, non-performing loans and advances,interest on which is not realizable. If the amount of such non-performing assets increases, it can cause serious problem for the bank. In the current age most of the banks are facing the problem of nonperforming assets. It has become a serious concern for the bankers. The alarming situation of non-performing assets is an issue of concern not only to the bank management but also to the authorities regulating the working of the banks and to the policy makers at the national level

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The term ‘Non-Performing Assets’ (NPA) In human life, sickness, bankruptcy and death are not welcome, but they do occur. So is the case with industrial or agricultural units, which fall sick, go into liquidation and die much against the wishes of all concerned. Realities cannot be escaped; it is necessary to face them. In the context of NPA's, the situation is no different. In the current age the term 'non-performing assets' is the highly discussed issue in the banking and financial sector. All the management thinkers, policy makers and strategists are discussing this issue on a high scale. But actually the non-performing asset is not a new concept. It was in existence in olden days also without having a proper coinage of the term. A non-performing asset in the banking sector was termed as an asset not contributing to the income of the bank. In other words it is a 'zero-yielding asset'. The zero-yielding assets include surplus cash and banker's balance held over the norms, amount lying in suspense account, investments in shares or debentures of companies not yielding any dividend or interest, advances where interest is not realized and even the principal amount is difficult to recover. In Indian banking sector also the concept of NPA is not new. In olden days the assets were classified into eight categories as follows: a) Satisfactory b) Irregular c) Sick-viable under nursing d) Sick-non-viable/sticky e) Advances recalled f) Suit filed accounts

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g) Decreed debts h) Debts classified by the banks as bad/doubtful Out of these eight categories last four categories were deemed to be nonperforming loans. It is interesting to note that this classification was left to the discretion of each bank and there was no objective attempt to segregate badloans from good loans. In the year 1991, The Narasimham Committee on Financial Sector Reforms (CFSR) and in the year 1998, The Narasimham Committee on Banking Sector Reforms (CBSR) focused on this zero- yielding assets. The committee created various norms for the zero-yielding assets and the new term “Non-Performing Assets” was coined by the committee. The term “Non-Performing Assets” is now widely used in the banking sector. It has become a burning issue of the modern age of the banking industry. The term non-performing assets can be defined both in the wider and the narrow sense. While in the narrower sense, it includes only non-earning credit portfolio, in the wider sense it may include also the volume of unutilized cash balances and unutilized or underutilized physical assets like building and premises. In the wider sense it may also include non-performing human resources-a large volume of work force not effectively utilized. This is the generalized definition of the nonperforming assets but the present research is focused on the norms developed by RBI on the basis of recommendations given by The Narasimham Committee. In order to quantify NPA problem, The Narasimham Committee, 1991 made it mandatory on the part of the banks to publish annually the magnitude of NPAs. According to The Narasimham Committee, 1991 NPAs are those categories of

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assets (advances, bills discounted, overdraft, cash credits etc…….) for which any amount remains due for a period of 180 days

NPA and Its Classification A non-performing asset, in a narrow sense, may be defined as an asset which does not directly contribute to the corporate profits or yield any positive returns. This may be appropriate when applied to loans and advances. However, there are other assets such as cash balances held which are certainly require for business operations but do not yield any direct return. Although banks cannot completely do away with such nonperforming assets from their books, they have to manage to keep them at a minimum possible level to maximize profits. The term nonperforming asset has been defined by several experts, SARFAESI Act and RBI on the basis of recommendation of Narasimham Committee. ⦁SARFEASI Act, 2002 defined NPA as “an asset or account of borrower, which has beenclassified by a bank or financial institutions as sub-standard, doubtful or loss assets in accordance with the direction issued the Reserve Bank of India”.

⦁As per RBI guidelines advances are classified into performing and nonperforming advances (NPAs). NPAs are further classified into sub-standard, doubtful and loss assets based on the criteria stipulated by RBI.

An asset, including a leased asset, becomes nonperforming when it ceases to generate income for the Bank. An NPA is a loan or an advance where: I.Interest and/or installment of principal remains overdue for a period of more than 90 days in respect of a term loan. II.The account remains "out-of-order'' in respect of an Overdraft or Cash Credit (OD/CC). III.The bill remains overdue for a period of more than 90 days in case of bills purchased and discounted. IV.A loan granted for short duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for two crop seasons.

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V.A loan granted for long duration crops will be treated as an NPA if the installments of principal or interest thereon remain overdue for one crop season. The Bank classifies an account as an NPA only if the interest imposed during any quarter is not fully repaid within 90 days from the end of the relevant quarter. This is a key to

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the stability of the banking sector. There should be no hesitation in stating that Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment. In fact, recovery management is also linked to the banks‟ interest margins. The cost and recovery management supported by enabling legal framework hold the key to future health and competitiveness of the banks. No doubt, improving recovery management in India is an area requiring expeditious and effective actions in legal, institutional and judicial processes. In 2001 the norms of recognizing the NPA were somewhat liberal but in 2004 the RBI revised the norms and made them stricter. Below given is the comparative presentation of RBI guidelines for NPAs recognition. TABLE:- RBI Guidelines for NPAs Recognition

Loans & Advances

Guidelines

applicable Guidelines applicable from 31-

from 31-3-2001

Termloaninterestand/or installmentremain overdue for more than

Overdraft/credit account

180 days

Remains out of order

3-2004

90 days

Remains out of order

Bill purchased and discounted remains over due for more than 180 days Agriculturalloaninterest and/or Twoharvest seasons installments remains over due for notexceedingtwo

90 days

but Two harvest seasons but not and exceeding two and half years

half years Other accounts-any amount to bereceived remains over due for more

180 days

than

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90 days

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ASSET CLASSIFICATION For the evaluation of bank performance, it is important to identify the quality of assets of the bank. In the light of Narasimham Committee recommendations, the Reserve Bank of India has redefined the non-performing assets and advised all commercial banks in public sector, old and new private sector banks, development banks and the cooperative banks, to classify their advances into four broad categories i.e. Standard, Substandard, Doubtful and Loss assets.The standard assets are treated as performing assets and the remaining three categories are treated as non-performing assets. Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained non-performing and the realisability of the dues:

•

Sub-standard Assets

•

Loss Assets

Doubtful Assets

Sub-standard Assets With effect from 31 March 2005, a sub-standard asset would be one, which has remained NPA for a period less than or equal to 12 months. In such cases, the current net worth of the borrower/ guarantor 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 an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the sub-standard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable. Loss Assets

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A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Factors Contributing to Increase in NonPerforming Assets of Banks The banking sector has been facing the severe 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 increasing due to external as well as internal factors.

 External Factors a.Ineffective recovery tribunal The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances, due to their carelessness and ineffectiveness in their work the bank suffers the consequence of non-recover, thereby reducing their profitability and liquidity.

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

c. Natural calamities This is the measure factor, which is creating alarming increase 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 [26]

of provisions in order to pay damages those loans, hence end up the fiscal with a reduced profit. Basically ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to attain the production level thus they are not repaying the loans.

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

e. Lack of demand Entrepreneurs in India could not predict 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 smallest label. Therefore the banks record the non- recovered part as NPAs and have to make provision for it.

f. Change on Govt. policies With every new govt. banking sector gets new policies for its operation, so it has to cope with the changing principles and policies for the regulation of the rising of NPAs. For example, 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 renew the handloom sector has not yet been implemented, so the over dues due to the handloom sectors are becoming NPAs.

 Internal Factors a.Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks, that is, Principles of safety, Principle of liquidity, Principles of profitability. Principles of safety mean that the borrower is in a position to pay back

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the loan, including both principal and interest. The refund of loan depends upon the borrowers, Capacity to pay and Willingness to pay. Capacity to pay depends upon, Tangible assets, Success in business. Willingness to pay depends on, Character, Honest, 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 competent of carrying it out successfully, he should be a person of integrity and good character.

b. Inappropriate technology Due to improper 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, so NPA, therefore all the branches of the bank should be computerized.

c. Improper SWOT analysis The inappropriate strength, weakness, opportunity and threat analysis is another reason for increase in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower, so, banks should consider the borrowers own capital investment and bank should collect credit information of the borrowers from, a. Bankers b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies. Banker should examine the balance sheet which shows the true picture of business will be revealed on analysis of profit/loss a/c and balance sheet. When bankers give loan, he should examine the purpose of the loan. To make sure safety and liquidity, banks should grant loan for productive purpose only. Bank should examine the profitability, viability, long term acceptability of the project while financing.

d. Poor credit appraisal system

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Deprived credit appraisal is an additional factor for the increase in NPAs, due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use better credit appraisal to reduce the NPAs.

e. Managerial deficiencies The banker should always select the borrower very cautiously and should take tangible assets as security to safe guard its interests. When accepting securities, banks should consider, the Marketability, Acceptability, Safety, Transferability etc. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”, which 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 latest big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected.

f. 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. So the NPAs can be collected by regular visits. The growth and proliferation in the activities of the bank has led to everincreasing non-performing assets that have mounted to a huge amount during the last decade or so. The quantum of NPAs has been calculated and put at different figures mainly due to absence of correct statistics and the method on the basis adopted for calculating the percentage of NPAs in relation to either the total assets of the bank or the quantity of loan portfolio or on the basis of the number of the accounts or the size of the outstanding advances.

For a large number of years, the banks have been taking credit in its books, on basis of accrued interest income, even for the sum of periodic interest that was not really

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paid by the borrower. This was done by raising debit in suspense account and crediting amount equivalent to the periodic interest in the loan account of the borrower. After objections from the auditors and income tax authority the banks altered strategy and started giving extra loans to the defaulting borrowers for the purpose of making payments to the bank for adjustment of the over dues, in many cases the due dates of payments were postponed and even the entire period of the loan was extended further again and again. As if to attach fire to the fuel, ambitious programme for branch progress and extension of banking services led to new recruitments, transfers, relocation and unhealthy competition amongst offices of the same bank, but at the same time adequate facilities available for training of the staff were not expanded. In the anxiety to attain business targets the rules and procedures for prudent banking were conveniently forgotten. Even the senior management setup conveniently relaxed the rules for proper appraisal of the loan proposals, the provisions of standard bank sanction letter, errors in execution of the loan agreements, deeds of hypothecation and mortgages were more often overlooked for compliance in the hurry for disbursement and attainment of targets for purposes of building up record of achievements and reporting. The study of about 900 top NPA accounts in 27 public sector banks that has been tabulated from the available information revealed by RBI, that the following are the important factors for units becoming sick/weak and constantly accounts turning NPA in the order of prominence: * Diversification of funds mostly for expansion \diversification \ modernization, taking up of new projects, is the single most prominent reason. Besides being so, this factor also has significant proportion of cases, when compared to other factors. * Internal factor failure of business (product), inefficient management, inappropriate technology, product obsolescence.

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* External factor comprising industrial recession, price escalation, power shortage, accidents etc., * Other factors in order or prominence are Government Policies like changes in Import \ Excise duties etc., willful default, fraud \ misappropriation, disputes etc., (No. 8 above – Internal factor) and lastly, deficiencies on the part of banks delays in release of limits and delay in settlement of payments by government bodies.

IMPACT OF NPAs Following are the impact of NPAs:•

Lenders suffer lowering of profit margins.

•

Stress in banking sector causes less money available to fund other projects, therefore, negative impact on the larger national economy.

•

Higher interest rates by the banks to maintain the profit margin.

•

Redirecting funds from the good projects to the bad ones.

•

As investments got stuck, it may result in it may result in unemployment.

•

In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost.

•

Investors do not get rightful returns.

•

Balance sheet syndrome of Indian characteristics that is both the banks and the corporate sector have stressed balance sheet and causes halting of the investment-led development process.

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•

NPAs related cases add more pressure to already pending cases with the judiciary.

How are businesses getting affected? When an entrepreneur gets an order, he uses working capital from banks which finances the raw material inventory and work-in-progress. After production, delivery and collection of final payments, he pays interest on that working capital and draws it down with the bank until the next order. If the working capital cycle remains intact and accommodative, businesses are not hit by a squeeze on financing. But with severe constraints on such finance, all businesses are hit, irrespective of how good demand may be. Public sector banks (PSBs), comprising 21 “nationalised banks” and six of the State Bank of India group, account for almost 70 per cent of the assets and liabilities of the system.

Non-Performing Assets Recovery Mechanism Reduction in NPAs is the most important task for the banks. It is the burning issue for the RBI as well as the Government of India to control the NPAs. The government of India has taken certain steps for reducing NPAs of the Indian banking sector. For this, the government has established a recovery mechanism that involves the following steps. I.Sending reminders and visiting the borrower’s business premises/residence:

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The banks should take continuous follow – up for collecting the advances. The bank should adopt the policy of “the older the advances, the tighter the follow – up. The bank should send reminders to the borrowers on a periodical basis or the bank should visit the premises of the business or the residence of the borrowers. The bank should make it a point that the reminders are sent on time and without fail. Frequent visits should be taken in the case of hardcore borrowers. The visit should not be only the formality but it should bring some quality results. II.

Recovery camps:

In case of agricultural advances and advances given to seasonal businesses, recovery camps should be organize during the peak season of the business or during the harvest season in agriculture. In the recovery camp the banks can recover maximum advances by offering some discount or certain other relaxations. Such recovery camp should be properly planned to ensure maximum advantage. It is advisable to take the help of outsi ders such as local panchayatofficials, regional bank managers and similar other person. Such camps should be widely publicized to ensure maximum recovery of loans. III. Redesigning unpaid loan installments: The bank should make an effort to redesign the loan repayment schedule for those borrowers who are unable to repay the loans. The banks can reduce the amount of installment and can extend the time for repayment of the loan. This will convince the borrowers that they can repay the loan. The banks need to be sympathetic to the sincere borrowers. IV. One-time settlement/Compromise scheme: The bank can start compromise schemes or one-time settlement schemes for the recovery of loans. The RBI in consultation with the government of India has issued the guidelines for such one-time settlement/compromise scheme for the dues of commercial banks up to Rs. 10,00,000.

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V.

Rehabilitation of sick units:

The banks should identify sick units in SSI as well as in medium and large scale industry. The banks should introduce rehabilitation package for such sick units according to RBI guidelines. While introducing such rehabilitation package, the bank should keep in mind that the causes of sickness should be genuine and the project should be viable in terms of debt-service coverage ratio. VI. Filing of civil suits or legal actions for recovery: Where the compromise proposals given by the banks are not accepted by the borrowers, it is better for the banks to file the civil suits instead of waiting for the long time. The bank should start immediate actions against such borrowers because there are chances of their willful default.

VII. Asset Reconstruction Companies (ARC): The Committee on Banking Sector Reforms (CBSR) Report suggest remedies to recover the NPAs as well their subsequent transfer as asset through Asset Reconstruction Companies. The most effective way of removing NPAs from the books of the weak banks would be to move these out to a separate agency which will buy the loans and make it own efforts for their recovery. The ARC’s efforts are profit oriented and its aim is to recover from the acquired assets more than the price paid for it. These companies are to be registered with the RBI with a minimum capital base of Rs.2,00,00,000. VIII. Lok adalats: Lok adalats are voluntary agencies created by state governments to assist in matters of loan compromise. Lok adalats work out an acceptable compromise and

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issue a recovery certificate which shortens the period of obtaining a court decree. The government should make an effort to give wide publicity to the scheme, besides educating the bankers and borrowers about Lok adalats. Lok adalats have been set up for the recovery of dues in accounts falling in the doubtful and loss categories with outstanding balance up to Rs.5,00,000 by way of compromise settlements. Government has recently revised the monetary ceiling of cases to be referred to Lok adalats organized by civil courts from Rs.5,00,000 to Rs.20,00,000. RBI has issued guidelines to commercial banks advising them to make use of Lok adalats. IX. SARFAESI Act: SARFAESI is the preferred route for finding solution to NPA. There was no legal provision for facilitating securitization of financial asset of the bank and financial institutions or power to take possession of securities and sell them. This resulted in slow recovery of defaulting loan and mounting levels of NPA of bank and financial institutions and a need was felt for keeping pace with changing commercial practice and financial sector reforms. Keeping with this, an enabling legislative and regulatory framework was put in place with the enactment of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. The primary objective of the act is reduction of NPA levels of banks or financial institutions and unlocking value from distressed asset in the banking and financial system. X.

Debt Recovery Tribunal (DRT):

The government of India passed the recovery of Debts due to Banks and Financial Institutions (amendment) Act, 2000. This act has helped in strengthening the functioning of DRTs. Provisions for placement of more than one recovery officer, power to attach defendant’s property or asset before judgment, penal provision for disobedience of tribunal’s order or for breach of any terms has provided necessary strength to DRTs. XI. Corporate Debt Restructuring (CDR):

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Corporate Debt Restructuring mechanism has been introduced in the year 2001. The aim is to provide a timely and transparent system for restructuring of the corporate debt of Rs.20,00,00,000 and above with the banks and financial institutions. The CDR process enables the companies to restructure their dues and reduce the incidence of fresh NPAs. It reforms the loan servicing obligation of the borrower and gives some concession in the interest rate. XII. Revenue Recovery Act: On the basis of recommendations of Talwar Committee, a simplified procedure for recovery of commercial banks’ dues has been introduced. The recommendations of the committee have been accepted by most of the states but the results in terms of recovery are not encouraging. XIII. Settlement of claim with Deposit Insurance and Credit Guarantee Corporation of India (DICGC): Bank should submit their proposals for outstanding loans with DICGC for settlement of their claims and reduce their NPAs. DICGC will recover the outstanding loans on behalf of the banks.

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CHAPTER III: DATA ANALYSIS AND INTERPRETATION • NPA OF INDIAN BANKS OVER FIVE YEARS TILL JUNE 2018 • INDIA’S POSITION IN GLOBAL NPA RATIO • RELATIONSHIP BETWEEN NPA AND NET PROFIT • RECOVERY OF NPA

NPA OF INDIAN BANKS OVER LAST FIVE YEARS TILL JUNE 2018

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Indian banks' gross non-performing assets (NPAs), or bad loans, stood at Rs 10.25 lakh crore as on 31 March 2018. On quarter, the pile has grown by Rs 1.39 lakh crore or 16 percent from Rs 8.86 lakh crore as on 31 December 2017. This chunk now accounts for 11.8 percent of the total loans given by the banking industry. For financial year 2018, the total bad loans of these banks rose by a whopping Rs 3.13 lakh crore. Taking note of the alarming bad loans situation, the Narendra Modi-led government, last year, announced a Rs 2.11 lakh crore bank recapitalisation plan to pull out state-run banks from the mess. As much as 90 percent of the abovementioned sticky assets are on the books of government-owned banks. A break-up of the NPAs shows that 21 public sector banks (PSBs) saw their bad loans pile grow by Rs 1.19 lakh crore (or 15.4 percent) to Rs 8.97 lakh crore in the March 2018 quarter, compared to December 2017's figures, while that of 18 private banks surged by Rs 19,446 crore or 17.9 percent to Rs 1.28 lakh crore in the March 2018 quarter from Rs 1.09 lakh crore in the December 2017 quarter.After making provisions, the net bad loans of these banks stood at Rs 5.18 lakh crore in the March 2018 quarter as against Rs 4.69 lakh crore in the December 2017 quarter.

Industry leader, the State Bank of India (SBI), which tops the NPA chart, has logged an increase of Rs 24,286 crore in bad loans in the March quarter to Rs 2.23 lakh crore. The Nirav Modi scam-hit Punjab National Bank (PNB) has reported the maximum rise of Rs 29,100 crore in gross NPAs to Rs 86,620 crore in the March quarter. Barring the Bank of India (BoI) and Oriental Bank of Commerce (OBC), most other PSBs' also recorded a rise in bad loans during the quarter. While Bank of India's gross bad loans declined by Rs 1,920 crore in the March quarter, that of OBC was down by Rs 1,417 crore. Among private banks, the gross NPAs of ICICI Bank and Axis Bank have risen significantly. ICICI Bank's bad loans pile grew by Rs 8,024 crore or 17.4 percent in the March 2018 quarter to Rs 54,063 crore; Axis Bank's widened by Rs 9,248 crore or 37 [39]

percent to Rs 34,249 crore in the March 2018 quarter from Rs 25,001 crore during the December 2017 quarter. These seven charts throw more light on the bad loans crisis that has engulfed the nation's banking sector: ( https://infogram.com/bank-gross-npas-1h8j4x73gkxp6mv)

(fig 2)

The Modi government has time and again blamed the previous UPA-regime for the bad loan mess, saying NPAs are a legacy issue. It isn't clear whether the government has grasped the gravity of the situation. Indeed, the government has taken steps to address the bad loans mess like the NPA ordinance, giving the central bank more power to direct banks to take action against loan defaulters, and the passage of the Insolvency and Bankruptcy Code (IBC). [40]

While these steps are welcome, they are unlikely to help solve the bad loans problem in the immediate future. It will take years before banks can get rid of NPAs, accumulated over the years on account of multiple factors.Over last five years from December 2013 to June 2018 gross NPAs of Indian Banks increased from Rs. 2,52,275 to 10,03,404 . Which is a drastic change in gross NPAs in our banking structure,which is affecting our GDP. In 2013 the growth rate of Indian GDP is 6.6% and in 2018 it is 7.3%, which is not that satisfactory when compared to the global market. The lower rate of growth in GDP is clearly affected by incresing NPA % over these years.

(I) PUBLIC SECTOR BANKS GROSS NPAs(Quarterly till June 2018 )

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(https://infogram.com/psbs-gross-npas-1hxj48nmeprd4vg)(fig 3)

From this above data we can see that from December 2013 the Gross NPAs increased from Rs 2,28,244 to 8,74,071 in June 2018. This is also showing from Dec 2013 to Sep 2015 the rate of increment is slower than the rate of increment for the period Sep 2015 to June 2016. Because of demonitisation the NPA is increased in a slower rate and reached its lower in March 2017 among last 10 quarters. In recent data the NPA stands at Rs 8,74,071 in June 2018, decreasing from Rs 8,96,601 in March 2018.

(II) PRIVATE BANKS’ GROSS NPA (Quarterly data)

(https://infogram.com/private-banks-gross-npas-1hmr6gl8z8m94nl) [42]

(fig 4)

Like previous diagram in this histogram we can see NPAs of private banks stands at Rs 1,29,333 by increased from Rs 1,23,627 in March 2018 in a increasing order from December 2013 from Rs 24,031

(III)PUBLIC SECTOR BANKS’ WITH HIGHER GROSS NPA

(fig 5)

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From this above chart we can see that SBI stands at number one in the higher gross NPAs among other Public sector Banks with Rs. 2,12,840 followed By PNB Rs.82,889,BOI Rs.60,604,IDBI Rs.57,807 and at bottom UCO Bank with Rs.29,786.

(IV)PRIVATE BANKS WITH HIGHER GROSS NPS (in Rs. Crore)

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(fig 6)

As on 2018 ICICI Banks is standing at the Top with Rs.53,465 followed by Axis Bank Rs.32,662 HDFC RS.9,539 J &K Bank Rs. 6242 Kotak Mahindra Bank at Rs. 3,899 and ending with South Indian Bank at Rs. 2,552.

INDIA’S POSITION IN GLOBAL NPARATIO The non-performing asset (NPA) issue facing banks has dominated headlines for several months now and the fact that we are still unsure of whether or not all have been recognised does cause some discomfort. In this context it is compelling to see how the Indian banking system stands on a global yardstick. This is important because NPAs have resulted due to several judgment calls made in the past, which in hindsight were incorrect. Lending operations in the banking [45]

system are linked with expectations of how the economy will behave. If the economy is growing at a fast pace, it is assumed that the same will prevail in future. The problem hence, is that there always seem to be progressive expectations when the economy does well. This is where judgement gets blurred and errors get into the system as credit evaluation goes awry.

(fig 7)

This picture is showing the Position of India at Global level among other country.Where we stand at 6th position with 9.98% of NPAs in our banks. Business cycles When business cycles are buoyant and interest rates low, companies go in for big investments and banks are gung-ho as everything looks plausible. Growth in bank credit averaged 19 per cent per annum between FY08 and FY12 when the repo rate was first lowered from 7.75 per cent to 5 per cent before being increased to 8.5 per cent by FY12. During these phases, the interest cost also ceases to matter as it is assumed that it is a small component of the cost and can be absorbed with the topline growing [46]

rapidly. Corporate sales growth in those years averaged 15-20 per cent on a recurring basis. It is not surprising that bank credit during this period grew rapidly, by an average annual rate of 19 per cent. It was then the economy was impacted by various controversies in the natural resources sectors which, in particular, thwarted investments and led to an increase in stalled projects as bureaucrats were not willing to take decisions. Bank credit growth subsequently slowed and the average growth rate came down to 11 per cent between FY13 and FY17. This surrealism was hence shattered as the economy moved from a canter to a trot (GDP growth also slid by around 1 per cent per annum for these two periods with different base years), leaving banks holding the rotten eggs. This does provoke a debate on whether or not we have brought about high growth by inflating investment through erroneous lending. In several countries that saw rapid growth — starting with the East Asian Tiger economies in the 1980s and 1990s as well as China when it posted growth of over 10 per cent on a sustained basis on the back of an investment-driven model — there was reason to believe that financial decisions were fogged by a misleading futuristic windshield. At 10 per cent, India is in the more ‘unsatisfactory’ league of nations with high NPAs. The ones which are more problematic are Greece, Italy, Portugal, Ireland and Russia. Quite interestingly, the top four were part of the PIIGS group which epitomised the euro crisis of 2010. Spain has moved away with a ratio of 4.5 per cent, while the rest still struggle to rein them.One thing that stands out is that some of the Latin American nations like Brazil and Argentina are doing much better on this front while even Turkey, which has other challenges in terms of currency and growth, has a low ratio of less than 3 per cent. India’s NPAs were also around 3 per cent when there were various camouflages available under corporate debt restructuring. However, ever since the RBI brought about the concept of asset quality recognition in 2016, banks progressively revealed the same which has, in turn, stressed the system. The very developed nations with large economies like the US, [47]

the UK, Japan and Germany have sound banking systems with NPA ratios of less than 2 per cent, while China scores well at 1.7 per cent. The NPA issue does not just end with an adverse portfolio. As provisions have been made on an accelerated recognition of the same, the profitability of banks has been affected. The return on assets at 0.33 per cent for Indian banks is comparable to those of the very developed countries. However, this could lead to a misleading conclusion that Indian banking system is on par with them. Western banks operate on smaller interest rate spreads on much larger balance sheets which lowers their return on assets. Similarly, a larger volume of capital lowers the return on net worth. This means that if the interest rate spreads were lowered by Indian banks then profitability at the present levels would not be maintained. Therefore, in a way both deposit-holders as well as borrowers are confronting unfavourable interest rate schedules. The positive side The good part of the story is that hopefully all the NPAs have been placed on the table. And, the IBC (Insolvency and Bankruptcy Code) has seen the first big resolution and there would be more to follow. This is critical because the recovery rates in India have been very low at 15-20 per cent while the system needs to move towards 50-75 per cent over a period of time. Given the time-bound manner of resolution of the NPAs, there is hope that there would the proverbial light at the end of a tunnel which has a fixed length. The system may have to struggle for another year or so, but the 2019-20 fiscal could be brighter.

RELATIONSHIP BETWEEN NPA AND NET PROFIT Normally the profitability of the banking sector depends on recovery of loans on time which are disbursed to the different sectors. The performance of banking sector depends on how effectively you manage the non-performing assets. Except SBI and Punjab National Bank all the banks are facing problems with respect to NPAs. It does not indicate that the more NPAs the more profits for SBI but the largest bank of India is able [48]

to receive more profits only because of its wide variety of financial services and effective management of NPAs. But if NPAs continue in the same manner then even large banks will also stumble like Lehman Brothers in USA which resulted in International economic crisis. The net profits of SBI in 2007 was Rs 4541.31 crores and it increased upto Rs.9166.05 crores in 2010.It again reduced to Rs.7370.35 crores in 2011 and further increased upto Rs 14104.98 crores in 2013 and decreased to Rs 10891.17 crores in 2014. It gained Rs.13101.57 crores in 2015 and again the profits reduced to Rs 9950.65 crores in 2016. The net profits of Bank of India has risen from Rs.1125.95 crores in 2007 to Rs.3009.41 crores in 2009 and then it reduced to rs.1738.56 crores in 2010. Further it increased to Rs.2488.71 crores in 2011 and the profits increased upto Rs.2732.65 crores in 2014. Again it declined to Rs. 1748.32 crores and there was sharp decline in profits and was found to be negative i.e., Rs.-6334.98 crores in 2016. The United Bank of Indiahad profits of Rs.267.28 crores in 2007 which rose to Rs.318.95 crores in 2008 and declined to Rs.184.71 crores in 2009.Then the profits of the bank had a positive growth for three years 2010-2012.Further the profits declined to almost half to Rs.391.90 crores in the year 2013 and the profits were found to be negative in 2014 i.e., Rs. -1213.44 crores. The profits were positive in 2015 i.e., Rs.255.99 crores and negative in 2016 i.e., Rs. -281.96 crores. The profits of Indian Overseas Bank has been positive for the years 20072014.It found to be negative for the years 2015 and 2016. The Punjab National Bank had experienced positive growth from the year 2007-2012.Then the profits of the bank reduced from Rs.4747.67 crores in the year 2013 to Rs.3944.40 crores in 2016. The Central Bank of India has positive growth in net profits from 20072013 whereas it was found to be negative in 2014 i.e., R-1262.84 crores. The profits

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rose in 2015 to Rs. 606.45 crores and again it was negative in 2016 i.e., rs. 1117.67 crores.

Non-performing assets of seven banks The gross NPA have been continuously increasing for all he banks for he specified period. As the business operations of the bank increasing the amount of NPAs have also increased. The Gross NPA of SBI has risen from Rs.9998 crores in 2007 to Rs.98172.80 crores in 2016. It is observed that SBI has highest Gross NPA as compared to other banks.

(fig 8)

Bank of India had zero Gross NPA from 2007 to 2010. The bank had NPA ofRs.4811.55 crores in 2011 and it increased upto Rs. 49879.12 crores in 2016. United Bank of India, Bank of Baroda, Indian Overseas Bank, Punjab National Bank and Central Bank India also have faced growth in the Gross NPA in all thesubsequent years from 2007-2016. The Punjab National Bank also had higher NPAs followed by State Bank of India [50]

NPA of the banks went on increasing in all the years but a drastic raise was observed in the year 2016. The percentage raise of NPA of the banks in the year 2016 as compared to 2015 were SBI – 73.07, BOI- 124.75, UBI- 44.53, BOB-149.18, IOB101.37, PNB- 117 and CBI- 91.36

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RECOVERY OF NPA In an indication of deteriorating management of non-performing assets (NPAs), the rate of recovery of banks’ gross NPAs has been steadily declining for the past 12 years and hit the lowest level of 20.8 per cent in 2016-17, according to the latest data from the Reserve Bank of India (RBI). Recovery of written-off loans through various channels, such as debt recovery tribunals (DRTs), has also been falling year-on-year. While the loan recovery rate has been falling, the number of cases being referred to the National Company Law Tribunal (NCLT) benches for insolvency resolution has been correspondingly rising since the enactment of the Insolvency and Bankruptcy Code (IBC) last year. Recovery of banks’ NPAs remained poor, having declined to 20.8 per cent by end-March 2017 from 61.8 per cent in 2009.. After peaking in 2009 and remaining well above 40 per cent in the earlier years, the recovery rate has declined over the years. Banks were able to recover higher amount through secured loans, term loans and exposure to real estate. During the 2015-17 period, the average recovery ratio of Indian banks was 26.4 per cent, with recovery by private sector banks at 41 per cent being much higher than by public sector banks (PSBs) at 25.1 per cent. Banks continue to pursue various recovery measures for NPAs as well as written-off loans. A higher recovery rate indicates the ability of banks to prune their NPAs. During this twoyear period, banks and financial institutions recovered an average of around 10 per cent through the existing legal recovery channels, including DRTs, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, and Lok Adalats. The recovery percentage through these three channels fell to 9.8 per cent in 2016-17, down from 10.3 per cent in 2015-16. Out of Rs 2.86 lakh crore worth of bad loans being chased through DRTs, SARFAESI and Lok Adalats, banks were able to recover Rs 28,000 crore worth of loans in 2016-17. In the previous financial year, the banks and financial institutions could recover Rs 22,800 crore worth of bad loans out [52]

of total Rs 2.21 lakh crore being chased through these legal channels.“The proceedings of the annual review of state-run banks by finance minister Arun Jaitley on Tuesday highlighted the possible recovery of Rs 1.8 lakh crore in bad loans through resolution mechanisms as well as from the insolvency and bankruptcy code cases of some large borrowers with huge accumulated bad loans.” “We find NPAs are coming down… debtors are paying up because they may have to face IBC proceedings otherwise,” Jaitley said.” From The Telegraph (https://www.telegraphindia.com/business/npa-recovery-on-track/cid/1670109)

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Chapter IV: CONCLUSION • Conclusion • Suggestions

CONCLUSION

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The Non-Performing Assets have always created a big problem for the banks in India. It is just not only problem for the banks but for the economy too. The money locked up in NPAs has a direct impact on profitability of the bank as Indian banks are highly dependent on income from interest on funds lent. This study shows that extent of NPA is comparatively very high in public sectors banks. Although various steps have been taken by government to reduce the NPAs but still a lot needs to be done to curb this problem. The NPAs level of our banks is still high as compared to the foreign banks. It is not at all possible to have zero NPAs. The bank management should speed up the recovery process. The problem of recovery is not with small borrowers but with large borrowers and a strict policy should be followed for solving this problem. The government should also make more provisions for faster settlement of pending cases and also it should reduce the mandatory lending to priority sector as this is the major problem creating area. So the problem of NPA needs lots of serious efforts otherwise NPAs will keep killing the profitability of banks which is not good for the growing Indian economy at all.

Suggestions for Reducing Non-Performing Assets The non-performing asset is like termite which eats the whole financial system. If this termite is not controlled, it will be dangerous for the financial system. The government has taken several policy decisions and has prepared several strategies to control the high rate of NPAs in the banking sector. But these steps have not created desired effect on the rate of NPAs. Here are some suggestions for reducing nonperforming assets. If these suggestions are implemented effectively, they will be helpful for reducing NPAs with immediate effect. I.

Proper selection of borrower/activity:

When the borrower/activity is wrongly selected, it definitely results into NPAs. To reduce this danger, the banks should take enough care in selection of the borrower/activity. For this the bank should perform an in-depth investigation about the creditworthiness of the borrower. The bank must collect as much information

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as possible. After making thorough analysis of this information, the bank should take the decision whether to sanction the loan or not. II.

Regular post-sanction follow up:

Generally it happens that after sanctioning the loan, banks do not take any follow up of the borrower. Lack of regular follow up makes the borrower careless in the repayment of loans. And it results into default. To remove this danger, the bank must take regular follow up of the borrower after sanctioning the loan. Follow up taken at a regular interval will keep the borrower alert and the chances of default will be reduced. Reporting to the top level management of the bank about the repayment schedule of the borrower should be done regularly. III. Establishment of a recovery cell: The efforts made by the banks to recover the amount of loan are not enough. In this situation the amounts of NPAs are continuously rising. The bank should form a special recovery cell to recover the outstanding amount of loan. This recovery cell is responsible to recover the outstanding loans. For this, the recovery cell is empowered to take necessary steps to recover the outstanding loans. IV. Publishing the name of defaulters in local news papers: This can be an effective step for recovering the outstanding loans from the defaulters. The banks should publish the names of such defaulters in the local news papers with outstanding amounts. This will affect the dignity of such defaulter and there are chances that they may repay the amount of loan. This will be a helpful step for other banks also. By considering the names of defaulters, other banks would not sanction loans to such defaulter. V.

Set up a group of auctioneers:

Generally the assets that are kept as security are auctioned to recover the amount of default. But there are no bidders to purchase such moveable or immovable

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property due to the fear of the defaulters. Because of this the bank can not realize the full amount of default. In such case the bank should assign such case to a special group of auctioneer that will find out an appropriate bidder so that the full amount of default can be realized by selling the securitized property held with the bank. VI. Constant touch with persons trading with the borrower: To know about the creditworthiness of the borrower and to obtain market report in regard to his trade dealings and solvency, the bank should keep a touch with the persons trading with the borrower. By this the bank can take immediate steps as and when some negative information about the borrower is received from the market. VII. Setting up of credit investigation and information agency: The banks should establish an agency which is assigned the duty to investigate about the creditworthiness of the borrowers. The information obtained by such agency should be easily accessible by all the bankers. This will be helpful in the selection of borrowers. Before sanctioning the loan, such agency should be contacted to obtain the information about the creditworthiness of the borrowers. This will reduce the chances of wrong selection of borrower.

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VIII. Legislative changes: The government should pass some legislation in the direction of effective recovery of outstanding loans. By passing the legislation, recovery tribunals, recovery cell, lok-adalatas etc. should be given more authority and they should be made autonomous institutions. If they have more power to recover the outstanding loans, they can take immediate and effective steps for the recovery. This kind of institutions will be helpful for the banks to make the legal recovery of outstanding loans. IX. Interest discounts for prompt repayments: To reduce the NPAs, the bank should start some schemes under which the defaulters are given a special interest discount if they make the prompt repayment of the outstanding amount. This step may be helpful to recover the outstanding amount from those defaulters who have sense of market credit. X.

Asset Reconstruction Fund:

The NPAs of weak banks may be transferred to state owned asset reconstruction fund (ARF), managed by an independent private sector firms. The ARF will buy the NPAs from the weak banks at a price it decides. Its objective will be to make profits out of deals. It is just like business buying impaired loans, recovering them and in the process, making profits.

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REFERENCES • 1.https://www.indiastat.com/banksandfinancialinstitutions/3/performance /16063/nonperform ingassetsnpas/377761/stats.aspx • http://www.thehansindia.com/posts/index/Civil-Services/2017-1011/Understanding-the-NPAs-and-their-impact/332611 • http://www.indianmba.com/Faculty_Column/FC56/fc56.html • http://www.iosrjournals.org/iosrjbm/papers/Conf.15010/Volume%202/30. %2087-92.pdf • https://www.clearias.com/non-performing-assets-npa/ • https://financetapmi.wordpress.com/2017/03/10/rising-npas-inindianbanking-sector-causes-effects-implications-and-remedies/ • http://businessworld.in/article/How-NPA-Of-Banks-Increased-OverLastFive-Years/27-05-2017-119052/ • https://www.businesstoday.in/current/policy/npa-problem-indiarankingbad-loans-economies-with-huge-npabankrecapitalisation/story/266898.html • http://www.marketexpress.in/2017/10/severity-of-bad-loanproblem-npasin-indias-banking-sector.html • http://www.livemint.com/Opinion/8ISpQAo5B5Twan0fkPw46J/Theseverity -of-the-NPA-crisis.html

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• https://economictimes.indiatimes.com/markets/stocks/news/indiasbigbad-loan-problem-banks-with-highestnpas/idbibank/slideshow/58928037.cms • https://www.firstpost.com/business/banks-bad-loans-pile-crosses-rs10lakh-crore-up-rs-1-39-lakh-crore-in-march-quarter-the-npamessexplained-in-7-charts-4496431.html • https://www.telegraphindia.com/business/npa-recoveryontrack/cid/1670109 • https://www.news18.com/news/business/public-banks-recoveroneseventh-of-loan-write-offs-since-2014-fare-better-than-privateones1894201.html • https://www.thehindubusinessline.com/opinion/indias-npas-andtheglobal-scenario/article24145872.ece

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