1. A Comparative Analysis of Non-Performing Assets of
Public Sector Banks, Private Sector Banks & Foreign
Banks in India”
A Dissertation Report
Submitted in Partial Fulfilment of the Degree of MBA
Programme of Amity University (U.P)
Submitted To: Submitted By:
Dr Rajesh Mr. Arjun Jaideep
Faculty Guide A31101916093
MBA Class Of 2018
Amity Global Business School,Kochi
MBA Batch 2016-2018

2. DECLARATION
Title of Project Report:
‘A Comparative Analysis of Non-Performing Assets of Public Sector
Banks, Private Sector Banks & Foreign Banks in India’
I declare
(a)That the work presented for assessmentin this Dissertation Report is my
own, that it has not previously been presented for another assessment and that
my debts (for words, data, arguments and ideas) have been appropriately
acknowledged
(b)That the work conforms to the guidelines for presentation and style set out in
the relevant documentation.
Date: Mr. Arjun Jaideep
A31101916093
MBA class of 2016

3. CERTIFICATE FROM FACULTY GUIDE
I Dr. Rajesh hereby certify that Mr. Arjun Jaideep student of
Master of Business Administration at Amity Global Business School,
Kochi, of Amity University Uttar Pradesh has completed the
Dissertation Report on ― ‘A Comparative Analysis of Non-
Performing Assets of Public Sector Banks, Private Sector Banks &
Foreign Banks in India.’
Dr. Rajesh
Faculty in charge
AGBS, Kochi

4. ACKNOWLEDGEMENT
First of all I would like to take this opportunity to thank my College
for having projects as a part of the MBA Curriculum.
I wish to express my heartfelt gratitude to the following individuals
who have played a crucial role in the research for this project.
Without their active cooperation the preparation of this project could
not have been completed within the specified time limit.
I must also thank my faculty guide Dr. Rajesh (Faculty, Amity
Global Business School) for her continuous support, mellow criticism
and able directional guidance during the project.
I sincerely thank Ms. Anu Antony (Faculty, Amity Global Business
School) for helping me to choose a relevant project topic for my
internship and her valuable suggestions and recommendations in my
study.
I would also like to thank all the respondents for giving their precious
time and relevant information and experience, I required, without
which the Project would have been incomplete.
Finally I would like to thank all lecturers, friends, and my family for
their kind support and to all who have directly or indirectly helped me
in preparing this project report. And at last I am thankful to all divine
light and my parents, who kept my motivation and zest for knowledge
always high through the tides of time.

5. ABSTRACT
Granting of credit facilities for economic activities is the primary task
of banking. Apart from raising resources through fresh deposits,
borrowings, etc. recycling of funds received back from borrowers
constitutes a major part of funding credit dispensation activities. Non-
recovery of installments as also interest on the loan portfolio negates
the effectiveness of this process of the credit cycle. Non-recovery also
affects the profitability of banks besides being required to maintain
more owned funds by way of capital and creation of reserves and
provisions to act as cushion for the loan losses. Avoidance of
loan losses is one of the pre-occupations of management of banks.
While complete elimination of such losses is not possible, bank
managements aim to keep the losses at a
low level. In fact, it is the level of non-performing advances, which,
to a great extent, differentiates between a good and a bad bank.
Mounting NPAs may also have more widespread repercussions. To
avoid shock waves affecting the system, the salvaging exercise is
done by the Government or by the industry on the behest of
Government central bank of the country putting pressure on the
exchequer.
In India, the NPAs, which are considered to be at higher levels than
those in other countries, have, of late, attracted the attention of public
as also of international financial institutions. This has gained further
prominence in the wake of transparency and disclosure measures
initiated by the RBI during recent years.
This project aims at providing an o overall view on the existence of
NPAs, their treatment, the ways at resolving this issue and also a few
reports on the recent developments in this field.

6. TABLE OF CONTENTS
Chapter 1: Introduction to NPAs…………………………………………
1.1 Meaning of NPA…………………………………………………………...
1.2 Asset Classification………………………………………………….……..
1.3 Types of NPA………………………………………………………………
1.4 Reasons for an Account becoming an NPA……………………...…………
1.5 Impact of NPA………………………………………………..……………
1.6 Early Symptoms……………………………………………………………
1.7 Preventive Measurement of NPA………………………………..…………
1.8 Procedureof NPA Identification & Resolutions in India…………...……..
Chapter 2:
Literature Review…………………………………………………......
Chapter 3:
ResearchMethodology……………………………………………......
Chapter 4:
Analysis and Interpretations…………………………………………
Chapter 5:
Findings, conclusionand suggestions………………………...………
References………………………………………………………………

7. CHAPTER 1: INTRODUCTION

8. Introduction to NPA
1.1 MEANING OF NPA:
Non-Performing Asset means an asset or account of borrower, which
has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by RBI.
An amount due under any credit facility is treated as "past due" when
it has not been paid within 30 days from the due date. Due to the
improvement in the payment and settlement systems, recovery
climate, up gradation of technology in the banking system, etc., it was
decided to dispense with 'past due' concept, with effect from March
31, 2001. Accordingly, as from that date, a Non performing asset
(NPA) shell be an advance where
i. Interest and /or installment of principal remain overdue for a period
of more than 180 days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 180
days, in respect of an overdraft/ cash Credit (OD/CC),
iii. The bill remains overdue for a period of more than 180 days in the
case of bills purchased and discounted,
iv. 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 purpose, and
v. Any amount to be received remains overdue for a period of more
than 180 days in respect of other accounts.
With a view to moving towards international best practices and to
ensure greater transparency, it has been decided to adopt the '90 days
overdue' norm for identification of NPAs, from the year ending March
31, 2004. Accordingly, with effect from March 31, 2004, a non-
performing asset (NPA) shell be a loan or an advance where;
i. Interest and /or installment of principal remain overdue for a period
of more than 90 days in respect of a Term Loan,
ii. The account remains 'out of order' for a period of more than 90
days, in respect of an overdraft/ cash Credit (OD/CC),
iii. The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted,
iv. Interest and/ or 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 purpose, and

9. v. Any amount to be received remains overdue for a period of more
than 90 days in respect of other accounts.
1.2 ASSET CLASSIFICATION:
Assets are classified into following four categories:
-standard Assets
Standard Assets:
Standard assets are the ones in which the bank is receiving interest as
well as the principal amount of the loan regularly from the customer.
Here it is also very important that in this case the arrears of interest
and the principal amount of loan do not exceed 90 days at the end of
financial year. If asset fails to be in category of standard asset that is
amount due more than 90 days then it is NPA and NPAs are further
need to classify in sub categories.
Provisioning Norms:
provision of a minimum of 0.40 percent on standard assets on global
loan portfolio basis.
arriving at net NPAs.
gross advances but shown separately as 'Contingent Provisions
against Standard Assets' under 'Other Liabilities and Provisions -
Others' in Schedule 5 of the balance sheet.
Banks are required to classify non-performing assets further into the
following three categories based on the period for which the asset has
remained non-performing and the reasonability of the dues:
1. Sub-standard Assets
2. Doubtful Assets
3. Loss Assets
Sub-standard Assets:
With effect from 31 March 2005, a substandard asset would be one,
which has remained NPA for a period less than or equal to 12 month.
The following features are exhibited by substandard assets: the
current net worth of the borrowers / guarantor or the current market

10. value of the security charged is not enough to ensure recovery of the
dues to the banks in full; and the asset has well-defined credit
weaknesses that jeopardize the liquidation of the debt and are
characterized by the distinct possibility that the banks will sustain
some loss, if deficiencies are not corrected.
Provisioning Norms:
made without making any allowance for DICGC/ECGC guarantee
cover and securities available.
Doubtful Assets:
A loan classified as doubtful has all the weaknesses inherent in assets
that were classified as sub-standard, with the added characteristic that
the weaknesses make collection or liquidation in full, on the basis of
currently known facts, conditions and values – highly questionable
and improbable.
With effect from March 31, 2005, an asset would be classified as
doubtful if it remained in the sub-standard category for 12 months.
Provisioning Norms:
extent to which the advance is not covered by
the realisable value of the security to which the bank has a valid
recourse and the realisable value is estimated on a realistic basis.
following basis, at the rates ranging from 20 percent to 50 percent of
the secured portion depending upon the period for which the asset has
remained doubtful:
Table 1.1: Provision Requirement for Doubtful Assets
Period for which the advance has been considered as doubtful
Provision requirement (%)
Up to one year
20
One to three years
30
More than three years:
(1) Outstanding stock of NPAs as on March 31, 2004.
(2) Advances classified as „doubtful‟ more than three years on or
after
April 1, 2004.

11. 60% with effect from March 31, 2005.
75% effect from March 31, 2006.
100% with effect from March 31, 2007.
definition of doubtful assets effective from March 31, 2003 has to be
made in phases as under:
i. As on31.03.2003, 50 percent of the additional provisioning
requirement on the assets which became doubtful on account of new
norm of 18 months for transition from sub-standard asset to doubtful
category.
ii. As on 31.03.2002, balance of the provisions not made during the
previous year, in addition to the provisions needed, as on 31.03.2002.
consequent upon the reduction in the transition period from
substandard to doubtful asset from 18 to 12 months over a four year
period commencing from the year ending March 31, 2005, with a
minimum of 20 % each year.
Loss Assets:
A loss asset is one which considered uncollectible and of such little
value that its continuance as a bankable asset is not warranted-
although there may be some salvage or recovery value. Also, these
assets would have been identified as “Loss assets” by the bank or
internal or external auditors or the RBI inspection but the amount
would not have been written-off wholly.
Provisioning Norms:
The entire asset should be written off. If the assets are permitted to
remain in the books for any reason, 100 percent of the outstanding
should be provided for.
1.3 TYPES OF NPA:
1. Gross NPA
2. Net NPA
Gross NPA:
Gross NPAs are the sum total of all loan assets that are classified as
NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA
reflects the quality of the loans made by banks. It consists of all the
nonstandard assets like as sub-standard, doubtful, and loss assets. It
can be calculated with the help of following ratio:

12. Gross NPAs Ratio = Gross NPAs
Gross Advances
Net NPA:
Net NPAs are those type of NPAs in which the bank has deducted the
provision regarding NPAs. Net NPA shows the actual burden of
banks. Since in India, bank balance sheets contain a huge amount of
NPAs and the process of recovery and write off of loans is very time
consuming, the provisions the banks have to make against the NPAs
according to the central bank guidelines, are quite significant. That is
why the difference between gross and net NPA is quite high. It can be
calculated by following:
Net NPAs = Gross NPAs – Provisions /
Gross Advances – Provisions
1.4 REASONS FOR AN ACCOUNT BECOMING NPA:
1. Internal factors
2. External factors
Internal factors:
1. Funds borrowed for a particular purpose but not use for the said
purpose.
2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of
equity or other debt instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansionmodernizationsetting up new
projects helping or promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management
disputes, misappropriation etc.
9. Deficiencies on the part of the banks viz. in credit appraisal,
monitoring and follow-ups, delaying settlement of payments
subsidiaries by government bodies etc.
External factors:
1. Sluggish legal system –
g legal tangles

13. 2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw materialinput price escalation,
power shortage, industrial recession, excess capacity, natural
calamities like floods, accidents
5. Failures, non-payment over dues in other countries, recession in
other countries, externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes
etc.,
The RBI has summarized the finer factors contributing to higher level
of NPAs in the Indian banking sector as:
modernization, undertaking new projects and for helping associate
concerns. This is also coupled with recessionary trends and failures to
tap funds in capital and debt markets.
to inefficient management system, strained labour relations,
inappropriate technology/ technical problems, product obsolescence
etc.
accidents, natural calamities etc. The externalization problems in
other countries also lead to growth of NPAs in Indian banking sector.
control orders etc.
-off funds, fraud/
misappropriation, promoters/ directors disputes etc.
payments/ subsidies by the Government of India.
1.5 IMPACT OF NPA:
Profitability:
NPA means booking of money in terms of bad asset, which occurred
due to wrong choice of client. Because of the money getting blocked
the prodigality of bank decreases not only by the amount of NPA but
NPA lead to opportunity cost also as that much of profit invested in
some return earning project/asset. So NPA doesn’t affect current

14. profit but also future stream of profit, which may lead to loss of some
long-term beneficial opportunity. Another impact of reduction in
profitability is low ROI (return on investment), which adversely affect
current earning of bank.
Liquidity:
Money is getting blocked, decreased profit lead to lack of enough
cash at hand which lead to borrowing money for shortest period of
time which lead to additional cost to the company. Difficulty in
operating the functions of bank is another cause of NPA due to lack of
money. Routine payments and dues.
Involvement of management:
Time and efforts of management is another indirect cost which bank
has to bear due to NPA. Time and efforts of management in handling
and managing NPA would have diverted to some fruitful activities,
which would have given good returns. Now day’s banks have special
employees to deal and handle NPAs, which is additional cost to the
bank.
Credit loss:
Bank is facing problem of NPA then it adversely affect the value of
bank in terms of market credit. It will lose its goodwill and brand
image and credit which have negative impact to the people who are
putting their money in the banks.
1.6 EARLY SYMPTOMS:
By which one can recognize a performing asset turning in to
nonperforming asset
Four categories of early symptoms:-
1. Financial:
-payment of the very first installment in case of term loan.
ccounts.
that installment.

15. diverted to sister concern or parent company.
2. Operational and Physical:
process of winding up or are not doing the business.
-controllable factor like natural calamities in the city
where borrower conduct his business.
-payment of wages.
3. Attitudinal Changes:
een partners.
4. Others:
1.7 PREVENTIVE MEASUREMENT FOR NPA:
Early Recognition of the Problem:
Invariably, by the time banks start their efforts to get involved in a
revival process, it’s too late to retrieve the situation- both in terms of
rehabilitation of the project and recovery of bank’s dues.
Identification of weakness in the very beginning that is: When the
account starts showing first signs of weakness regardless of the fact
that it may not have become NPA, is imperative. Assessment of the
potential of revival may be done on the basis of a techno-economic
viability study. Restructuring should be attempted where, after an
objective assessment of the promoter’s intention, banks are convinced
of a turnaround within a scheduled timeframe. In respect of totally
unviable units as decided by the bank, it is better to facilitate winding
up/ selling of the unit earlier, so as to recover whatever is possible
through legal means before the security position becomes worse.
Identifying Borrowers with Genuine Intent:

16. Identifying borrowers with genuine intent from those who are non-
serious with no commitment or stake in revival is a challenge
confronting bankers. Here the role of frontline officials at the branch
level is paramount as they are the ones who have intelligent inputs
with regard to promoters‟ sincerity, and capability to achieve
turnaround. Based on this objective assessment, banks should decide
as quickly as possible whether it would be worthwhile to commit
additional finance. In this regard banks may consider having “Special
Investigation” of all financial transaction or business transaction,
books of account in order to ascertain real factors that contributed to
sickness of the borrower. Banks may have penal of technical experts
with proven expertise and track record of preparing techno-economic
study of the project of the borrowers.
Borrowers having genuine problems due to temporary mismatch in
fund flow or sudden requirement of additional fund may be
entertained at branch level, and for this purpose a special limit to such
type of cases should be decided. This will obviate the need to route
the additional funding through the controlling offices in deserving
cases, and help avert many accounts slipping into NPA category.
Timeliness and Adequacy of response:
Longer the delay in response, grater the injury to the account and the
asset. Time is a crucial element in any restructuring or rehabilitation
activity. The response decided on the basis of techno-economic study
and promoter’s commitment, has to be adequate in terms of extend of
additional funding and relaxations etc. under the restructuring
exercise. The package of assistance may be flexible and bank may
look at the exit option.
Focus on Cash Flows:
While financing, at the time of restructuring the banks may not be
guided by the conventional fund flow analysis only, which could yield
a potentially misleading picture. Appraisal for fresh credit
requirements may be done by analyzing funds flow in conjunction
with the Cash Flow rather than only on the basis of Funds Flow.
Management Effectiveness:
The general perception among borrower is that it is lack of finance
that leads to sickness and NPAs. But this may not be the case all the
time. Management effectiveness in tackling adverse business

17. conditions is a very important aspect that affects a borrowing unit’s
fortunes. A bank may commit additional finance to an align unit only
after basic viability of the enterprise also in the context of quality of
management is examined and confirmed. Where the default is due to
deeper malady, viability study or investigative audit should be done –
it will be useful to have consultant appointed as early as possible to
examine this aspect. A proper techno- economic viability study must
thus become the basis on which any future action can be considered.
Multiple Financing:
Pragmatic and unified approach by all the lending banks/ FIs as
also sharing of all relevant information on the borrower would go a
long way toward overall success of rehabilitation exercise, given the
probability of success/failure.
should make sure that it captures the cash flows (there is a tendency
on part of the borrowers to switch bankers once they default, for fear
of getting their cash flows forfeited), and ensure that such cash flows
are used for working capital purposes. Toward this end, there should
be regular flow of information among consortium members. A bank,
which is not part of the consortium, may not be allowed to offer credit
facilities to such defaulting clients. Current account facilities may also
be denied at non-consortium banks to such clients and violation may
attract penal action. The Credit Information Bureau of India Ltd.
(CIBIL) may be very useful for meaningful information exchange on
defaulting borrowers once the setup becomes fully operational.
um of lenders, the priority of each lender will be different.
While one set of lenders may be willing to wait for a longer time to
recover its dues, another lender may have a much shorter timeframe
in mind. So it is possible that the letter categories of lenders may be
willing to exit, even a t a cost – by a discounted settlement of the
exposure. Therefore, any plan for restructuring/rehabilitation may
take this aspect into account.
Corporate Debt Restructuring mechanism has been
institutionalized in 2001 to provide a timely and transparent system
for restructuring of the corporate debt of Rs. 20 crore and above with
the banks and FIs on a voluntary basis and outside the legal

18. framework. Under this system, banks may greatly benefit in terms of
restructuring of large standard accounts (potential NPAs) and viable
sub-standard accounts with consortium/multiple banking
arrangements.
1.8 PROCEDURES FOR NPA IDENTIFICATION AND
RESOLUTION IN INDIA:
1. Internal Checks and Control:
Since high level of NPAs dampens the performance of the banks
identification of potential problem accounts and their close
monitoring assumes importance. Though most banks have Early
Warning Systems (EWS) for identification of potential NPAs, the
actual processes followed, however, differ from bank to bank. The
EWS enable a bank to identify the borrower accounts which show
signs of credit deterioration and initiate remedial action. Many banks
have evolved and adopted an elaborate EWS, which allows them to
identify potential distress signals and plan their options beforehand,
accordingly. The early warning signals, indicative of potential
problems in the accounts, viz. persistent irregularity in accounts,
delays in servicing of interest, frequent devolvement of L/Cs, units'
financial problems, market related problems, etc. are captured by the
system. In addition, some of these banks are reviewing their exposure
to borrower accounts every quarter based on published data which
also serves as an important additional warning system. These early
warning signals used by banks are generally independent of risk
rating systems and asset classification norms prescribed by RBI.
The major components/processes of a EWS followed by banks in
India as brought out by a study conducted by Reserve Bank of India at
the instance of the Board of Financial Supervision are as follows:
account/s Preparation of `know your client' profile
-list/special mention category accounts
Relationship Manager/Credit Officer
The Relationship Manager/Credit Officer is an official who is
expected to have complete knowledge of borrower, his business, his

19. future plans, etc. The Relationship Manager has to keep in constant
touch with the borrower and report all developments impacting the
borrowable account. As a part of this contact he is also expected to
conduct scrutiny and activity inspections. In the credit monitoring
process, the responsibility of monitoring a corporate account is vested
with Relationship Manager/Credit Officer.
Know your client' profile (KYC)
Most banks in India have a system of preparing `know your client'
(KYC) profile/credit report. As a part of `KYC' system, visits are
made on clients and their places of business/units. The frequency of
such visits depends on the nature and needs of relationship.
Credit Rating System
The credit rating system is essentially one point indicator of an
individual credit exposure and is used to identify measure and
monitor the credit risk of individual proposal. At the whole bank
level, credit rating system enables tracking the health of banks entire
credit portfolio. Most banks in India have put in place the system of
internal credit rating. While most of the banks have developed their
own models, a few banks have adopted credit rating models designed
by rating agencies. Credit rating models take into account various
types of risks viz. financial, industry and management, etc. associated
with a borrowable unit. The exercise is generally done at the time of
sanction of new borrowable account and at the time of review renewal
of existing credit facilities.
Watch-list/Special Mention Category
The grading of the bank's risk assets is an important internal control
tool. It serves the need of the Management to identify and monitor
potential risks of a loan asset. The purpose of identification of
potential NPAs is to ensure that appropriate preventive / corrective
steps could be initiated by the bank to protect against the loan asset
becoming non-performing. Most of the banks have a system to put
certain borrowable accounts under watch list or special mention
category if performing advances operating under adverse business or
economic conditions are exhibiting certain distress signals. These
accounts generally exhibit weaknesses which are correctable but
warrant banks' closer attention. The categorization of such accounts in
watch list or special mention category provides early warning signals

20. enabling Relationship Manager or Credit Officer to anticipate credit
deterioration and take necessary preventive steps to avoid their
slippage into non performing advances. Early Warning Signals It is
important in any early warning system, to be sensitive to signals of
credit deterioration. A host of early warning signals are used by
different banks for identification of potential NPAs. Most banks in
India have laid down a series of operational, financial, transactional
indicators that could serve to identify emerging problems in credit
exposures at an early stage. Further, it is revealed that the indicators
which may trigger early warning system depend not only on default in
payment of installment and interest but also other factors such as
deterioration in operating and financial performance of the borrower,
weakening industry characteristics, regulatory changes, general
economic conditions, etc. Early warning signals can be classified into
five broad categories viz.
a) Financial
b) Operational
c) Banking
d) Management and
e) External factors.
Financial related warning signals generally emanate from the
borrowers' balance sheet, income expenditure statement, statement of
cash flows, statement of receivables etc. Following common warning
signals are captured by some of the banks having relatively developed
EWS.
Financial warning signals
tion in liquidity/working capital position
g level of bad debt losses Operational warning signals

21. -payment of wages/power bills
inventory/large level of inventory
Management related warning signals
-operation from key personnel
ial statements
Banking related signals
Signals relating to external factors
policies
2. Management/Resolution of NPAs:
A reduction in the total gross and net NPAs in the Indian financial
system indicates a significant improvement in management of NPAs.
This is also on account of various resolution mechanisms introduced
in the recent past which include the SRFAESI Act, one time
settlement schemes, setting up of the CDR mechanism, strengthening
of DRTs. From the data available of Public Sector Banks as on March
31, 2003, there were 1,522 numbers of NPAs as on March 31, 2003
which had gross value greater than Rs. 50 million in all the public
sector banks in India. The total gross value of these NPAs amounted
to Rs. 215 billion. The total number of resolution approaches

22. (including cases where action is to be initiated) is greater than the
number of NPAs, indicating some double counting. As can be seen,
suit filed and BIFR are the two most common approaches to
resolution of NPAs in public sector banks. Rehabilitation has been
considered/ adopted in only about 13% of the cases. Settlement has
been considered only in 9% of the cases. It is likely to have been
adopted in even fewer cases. Data available on resolution strategies
adopted by public sector banks suggest that Compromise settlement
schemes with borrowers are found to be more effective than legal
measures. Many banks have come out with their own restructuring
schemes for settlement of NPA accounts. State Bank of India, HDFC
Limited, M/s. Dun and Bradstreet Information Services (India) Pvt.
Ltd. and M/s. Trans Union to serve as a mechanism for exchange of
information between banks and FIs for curbing the growth of NPAs
incorporated credit Information Bureau (India) Limited (CIBIL) in
January 2001. Pending the enactment of CIB Regulation Bill, the RBI
constituted a working group to examine the role of CIBs. As per the
recommendations of the working group, Banks and FIs are now
required to submit the list of suit-filed cases of Rs. 10 million and
above and suit filed cases of Willful defaulters of Rs. 2.5 million and
above to RBI as well as CIBIL. CIBIL will share this information
with commercial banks and FIs so as to help them minimize adverse
selection at appraisal stage. The CIBIL is in the process of getting
operationalized.
3. Willful Defaulters:
RBI has issued revised guidelines in respect of detection of Willful
default and diversion and siphoning of funds. As per these guidelines
a Willful default occurs when a borrower defaults in meeting its
obligations to the lender when it has capacity to honour the
obligations or when funds have been utilized for purposes other than
those for which finance was granted. The list of Willful defaulters is
required to be submitted to SEBI and RBI to prevent their access to
capital markets. Sharing of information of this nature helps banks in
their due diligence exercise and helps in avoiding financing
unscrupulous elements. RBI has advised lenders to initiate legal
measures including criminal actions, wherever required, and

23. undertake a proactive approach in change in management, where
appropriate.
4. Legal and Regulatory Regime:
Debt Recovery Tribunals
DRTs were set up under the Recovery of Debts due to Banks and
Financial Institutions Act, 1993. Under the Act, two types of
Tribunals were set up i.e. Debt Recovery Tribunal (DRT) and Debt
Recovery Appellate Tribunal (DRAT). The DRTs are vested with
competence to entertain cases referred to them, by the banks and FIs
for recovery of debts due to the same. The order passed by a DRT is
appealable to the Appellate Tribunal but no appeal shall be
entertained by the DRAT unless the applicant deposits 75% of the
amount due from him as determined by it. However, the Affiliate
Tribunal may, for reasons to be received in writing, waive or reduce
the amount of such deposit. Advances of Rs. 1 million and above can
be settled through DRT process. An important power conferred on the
Tribunal is that of making an interim order (whether by way of
injunction or stay) against the defendant to debar him from
transferring, alienating or otherwise dealing with or disposing of any
property and the assets belonging to him within prior permission of
the Tribunal. This order can be passed even while the claim is
pending. DRTs are criticized in respect of recovery made considering
the size of NPAs in the Country. In general, it is observed that the
defendants approach the High Country challenging the verdict of the
Appellate Tribunal which leads to further delays in recovery. Validity
of the Act is often challenged in the court which hinders the progress
of the DRTs. Lastly, many needs to be done for making the DRTs
stronger in terms of infrastructure.
Lokadalats
The institution of Lokadalat constituted under the Legal Services
Authorities Act, 1987 helps in resolving disputes between the parties
by conciliation, mediation, compromise or amicable settlement. It is
known for effecting mediation and counseling between the parties and
to reduce burden on the court, especially for small loans. Cases
involving suit claims up to Rs. l million can be brought before the
Lokadalat and every award of the Lokadalat shall be deemed to be a
decree of a Civil Court and no appeal can lie to any court against the

24. award made by the Lokadalat. Several people of particular localities
various social organizations are approaching Lokadalats which are
generally presided over by two or three senior persons including
retired senior civil servants, defence personnel and judicial officers.
They take up cases which are suitable for settlement of debt for
certain consideration. Parties are heard and they explain their legal
position. They are advised to reach to some settlement due to social
pressure of senior bureaucrats or judicial officers or social workers. If
the compromise is arrived at, the parties to the litigation sign a
statement in presence of Lokadalats which is expected to be filed in
court to obtain a consent decree. Normally, if such settlement contains
a clause that if the compromise is not adhered to by the parties, the
suits pending in the court will proceed in accordance with the law and
parties will have a right to get the decree from the court. In general, it
is observed that banks do not get the full advantage of the Lokadalats.
It is difficult to collect the concerned borrowers willing to go in for
compromise on the day when the Lokadalat meets. In any case, we
should continue our efforts to seek the help of the Lokadalat.
Enactment of SRFAESI Act
The "The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act" (SRFAESI) provides the formal
legal basis and regulatory framework for setting up Asset
Reconstruction Companies (ARCs) in India. In addition to asset
reconstruction and ARCs, the Act deals with the following largely
aspects,
rcement of Security Interest
reconstruction transactions as well as any creation of security interests
has to be filed.
The Reserve Bank of India (RBI), the designated regulatory authority
for ARCS has issued Directions, Guidance Notes, Application Form
and Guidelines to Banks in April 2003 for regulating functioning of
the proposed ARCS and these Directions/ Guidance Notes cover
various aspects relating to registration, operations and funding of
ARCS and resolution of NPAs by ARCS. The RBI has also issued
guidelines to banks and financial institutions on issues relating to

25. transfer of assets to ARCS, consideration for the same and valuation
of instruments issued by the ARCS. Additionally, the Central
Government has issued the security enforcement rules ("Enforcement
Rules"), which lays down the procedure to be followed by a secured
creditor while enforcing its security interest pursuant to the Act. The
Act permits the secured creditors (if 75% of the secured creditors
agree) to enforce their security interest in relation to the underlying
security without reference to the Court after giving a 60 day notice to
the defaulting borrower upon classification of the corresponding
financial assistance as a non-performing asset. The Act permits the
secured creditors to take any of the following measures:
including right to transfer by way of lease, assignment or sale;
ement of the secured assets including the right
to transfer by way of lease, assignment or sale;
could be the ARC if they do not accept any pecuniary liability); and
of the borrower in respect of any secured asset
which has been transferred. After taking over possession of the
secured assets, the secured creditors are required to obtain valuation
of the assets. These secured assets may be sold by using any of the
following routes to obtain maximum value.
otherwise interested in buying the assets;
Lenders have seized collateral in some cases and while it has not yet
been possible to recover value from most such seizures due to certain
legal hurdles, lenders are now clearly in a much better bargaining
position vis-a-vis defaulting borrowers than they were before the
enactment of SRFAESI Act. When the legal hurdles are removed, the
bargaining power of lenders is likely to improve further and one
would expect to see a large number of NPAs being resolved in quick
time, either through security enforcement or through settlements.
Under the SRFAESI Act ARCS can be set up under the Companies
Act, 1956. The Act designates any person holding not less than 10%

26. of the paid-up equity capital of the ARC as a sponsor and prohibits
any sponsor from holding a controlling interest in, being the holding
company of or being in control of the ARC. The SRFAESI and
SRFAESI Rules/ Guidelines require ARCS to have a minimum net-
owned fund of not less than Rs. 20,000,000. Further, the Directions
require that an ARC should maintain, on an ongoing basis, a
minimum capital adequacy ratio of 15% of its risk weighted assets.
ARCS have been granted a maximum realization time frame of five
years from the date of acquisition of the assets. The Act stipulates
several measures that can be undertaken by ARCs for asset
reconstruction. These include:
borrower;
uring or rescheduling of debt.
ARCS are also permitted to act as a manager of collateral assets taken
over by the
lenders under security enforcement rights available to them or as a
recovery agent
for any bank or financial institution and to receive a fee for the
discharge of these
functions. They can also be appointed to act as a receiver, if appointed
by any
Court or DRT.
Institution of CDR Mechanism
The RBI has instituted the Corporate Debt Restructuring (CDR)
mechanism for
resolution of NPAs of viable entities facing financial difficulties. The
CDR
mechanism instituted in India is broadly along the lines of similar
systems in the
UK, Thailand, Korea and Malaysia. The objective of the CDR
mechanism has
been to ensure timely and transparent restructuring of corporate debt
outside the

27. purview of the Board for Industrial and Financial Reconstruction
(BIFR), DRTs
or other legal proceedings. The framework is intended to preserve
viable corporate
affected by certain internal/external factors and minimize losses to
creditors/other
stakeholders through an orderly and coordinated restructuring
programme. RBI
has issued revised guidelines in February 2003 with respect to the
CDR
mechanism. Corporate borrowers with borrowings from the banking
system of
Rs. 20crores and above under multiple banking arrangement are
eligible under the
CDR mechanism. Accounts falling under standard, sub-standard or
doubtful
categories can be considered for restructuring. CDR is a nonstatutory
mechanism
based on debtor-creditor agreement and inter-creditor agreement.
Restructuring helps in aligning repayment obligations for bankers
with the cash flow projections as reassessed at the time of
restructuring. Therefore it is critical to prepare a restructuring plan on
the lines of the expected business plan along with projected cash
flows.
The CDR process is being stabilized. Certain revisions are envisaged
with respect to the eligibility criteria (amount of borrowings) and time
frame for restructuring. Foreign banks are not members of the CDR
forum, and it is expected that they would be signing the agreements
shortly. However they attend meetings. The first ARC to be
operational in India- Asset Reconstruction Company of India
(ARGIL) is a member of the CDR forum. Lenders in India prefer to
resort to CDR mechanism to avoid unnecessary delays in multiple
lender arrangements and to increase transparency in the process.
While in the RBI guidelines it has been recommended to involve
independent consultants, banks are so far resorting to their internal
teams for recommending restructuring programs.
Compromise Settlement Schemes

28. 1. One Time Settlement Schemes
NPAs in all sectors, which have become doubtful or loss as on 31st
March 2000. The scheme also covers NPAs classified as sub-standard
as on 31st March 2000, which have subsequently become doubtful or
loss. All cases on which the banks have initiated action under the
SRFAESI Act and also cases pending before Courts/DRTs/BIFR,
subject to consent decree being obtained from the Courts/DRTs/BIFR
are covered. However cases of Willful default, fraud and malfeasance
are not covered. As per the OTS scheme, for NPAs up to Rs.
10crores, the minimum amount that should be recovered should be
100% of the outstanding balance in the account.
2. Negotiated Settlement Schemes
The RBI/Government has been encouraging banks to design and
implement policies for negotiated settlements, particularly for old and
unresolved NPAs. The broad framework for such settlements was put
in place in July 1995. Specific guidelines were issued in May 1999to
public sector banks for one-time settlements of NPAs of small scale
sector. This scheme was valid until September 2000 and enabled
banks to recover Rs 6.7 billion from various accounts. Revised
guidelines were issued in July 2000 for recovery of NPAs of Rs. 50
million and less. These guidelines were effective until June 2001 and
helped banks recover Rs. 26 billion.
Increased Powers to NCLTs and the Proposed Repeal of BIFR
In India, companies whose net worth has been wiped out on account
of accumulated losses come under the purview of the Sick Industrial
Companies Act (SICA) and need to be referred to BIFR. Once a
company is referred to the BIFR (and even if an enquiry is pending as
to whether it should be admitted to BIFR), it is afforded protection
against recovery proceedings from its creditors. BIFR is widely
regarded as a stumbling block in recovering value for NPAs.
Promoters systematically take refuge in SICA - often there is a
scramble to file a reference in BIFR so as to obtain protection from
debt recovery proceedings. The recent amendments to the Companies
Act vest powers for revival and rehabilitation of companies with the
National Company Law Tribunal (NCLT), in place of BIFR, with
modifications to address weaknesses experienced under the SICA
provisions. The NCLT would prepare a scheme for reconstruction of

29. any sick company and there is no bar on the lending institution of
legal proceedings against such company whilst the scheme is being
prepared by the NCLT. Therefore, proceedings initiated by any
creditor seeking to recover monies from a sick company would not be
suspended by a reference to the NCLT and, therefore, the above
provision of the Act may not have much relevance any longer and
probably does not extend to the tribunal for this reason. However,
there is a possibility of conflict between the activities that may be
undertaken by the ARC, e.g. change in management, and the role of
the NCLT in restructuring sick companies. The Bill to repeal SICA is
currently pending in Parliament and the process of staffing of NCLTs
has been initiated.

30. CHAPTER 2: LITERATURE REVIEW

31. Rai (2012) in her study on Study on performance of NPAs of
Indian commercial banks said that till recent past, corporate
borrowers even after defaulting continuously never 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. However with the introduction of
SARFAECI ACT banks can issue notices to defaulters to
repay their loans. Also, the Supreme Court has recently given
the banks the freedom to sell mortgage assets of the
borrowers, if they do not respond to the legal proceedings
initiated by lender. This enables banks to get sticky loans
thereby improving their bottom lines.
Baiju S. and Thattil (2000) analyzed NPA's in commercial
banks from year 1993 to 1998 and found that foreign and new
private banks have lower NPA's as compared to public sector
banks and suggested way to recover NPA'.
Selvarajan & Vadivalagan (2013) in A Study on
Management of Non-Performing Assets in Priority Sector
reference to Indian Bank and Public Sector Banks (PSBs)
their research paper has studied 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.
Therefore, the management of banks must pay special
attention towards the NPA management and take appropriate
steps to arrest the creation of new NPAs, besides making
recoveries in the existing NPAs. Timely action is essential to
ensure future growth of the Bank.
Khanna (2012) in her research paper entitled Managing NPA
in commercial banks has said that 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

32. extending loans. The reason being mounting non-performing
assets (NPAs) and nowadays these are one of the major
concerns for banks in India. NPAs reflect the performance of
banks. A high level of NPAs suggests high probability of a
large number of credit defaults that affect the profitability and
net-worth of banks and also erodes the value of the asset.
Prasad 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.
The NPAs have destructive impact on the return on assets in
the following ways. The interest income of banks reduced it is
to be accounted only on receipt basis. The current profits of
the banks are eroded because the providing of doubtful debts
and writing it off as bad debts and it limits the recycling
funds.
Gurumoorthy (2012) analyzed that in the liberalized
economy, banking and financial sector get higher priority. The
banks in India are facing the problems of NPAs. The earning
capacity and profitability of banks are highly affected because
of the existence of NPAs. Moreover, the non-performance of
non-receipt of interest and principal blocked banks money in
the form of funds and is not available for further use of
banking business and thus the profit margin of the banks goes
down. In this connection banks must aware of the problems
and recovery of legislation of NPAs.
Mohnail and Deshmukh (2013) have suggested that past
reform era changed the whole structure of banking industry in
India. The emerging competition has resulted in new
challenges for the Indian banks. Hence, parameters for
evaluating the performance of banks have also changed. This
paper provides an empirical approach to the analysis of

33. profitability indicators with a focal point on NPAs of public
and private sector banks.
Balasubramaniam (2001) in Non-performing assets and
profitability of commercial banks in India: assessment and
emerging issues said that 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. However, maintaining profitability is a challenge to
commercial banks especially in a highly competitive era and
opening up of banking business to NBFC and foreign banks in
general.
Kaur (2006) in her thesis titled Credit management and
problem of NPAs in Public Sector Banks highlighted the
problem of non-performing assets in public sector banks.
Author 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.

34. CHAPTER 3: RESEARCH METHODOLOGY

35. Aim The main aim of this study is to understand the Non-Performing
Assets of banks. Also to understand the effect of NPAs in banking
profitability and economic development.
Project Objective:
-Performing Asset in Indian
perspective.
different types of banks (Public, Private & Foreign banks) using NPA
ratios & comparing NPA with profits.
Scope of the study:
& Foreign
banks in different sector.
Research Methodology:
Sample of the study
The Indian banking Industry has been studied with special reference
to all public sector, private sector (new) and foreign banks in India.
Data Source
The present study is based on secondary data. The relevant data have
been collected from the RBI publications like “Annual Report on
Trends and Progress of Banking in India”, 'Annual Report of RBI',
various publications of RBI like RBI bulletin, IBA bulletin, websites
and magazines.
Time Period
The study is based on time-series data for all banks in India for a
period of 10 years from the year March ended 2005 to March ended
2014.
Research Design: Descriptive Research
organizes,
tabulates, depicts, and describes the data.
during analysis.

36. Statistical Tools and Techniques
Ratio analysis has been used for analyzing the trend of NPAs of all
banks in India. Pie diagram has been used to make comparative
analysis of NPAs of all sectors banks. Four ratios used are; Gross
NPAs to Gross Advances (%), Gross NPAs to Total Assets (%),
Net NPAs to Net Advances (%), Net NPAs to Total Assets (%).
The terms used in the study have been computed as; Gross NPAs =
Sub-standard assets+ Doubtful Assets+ Loss Assets; Net NPAs =
Gross NPAs – Provision for NPAs; Gross Advances= All loans and
advances made by Banks; Net Advances = Gross Advances –
Provisions for NPAs.
Data collection methods: Secondary Data
Secondary data refers to the data which has already been generated
and is available for use. The data about NPAs & its composition,
classification of loan assets, profits (net & gross) & advances of
different banks is taken from Reserve Bank of India website and
indiastat.com.
Analysis and Discussion
The analysis and discussions of NPAs of all banks in India has been
studied for all public, new private and foreign sector banks in India
for 10 years period from financial year ended 2004-05 to 2013-14
with the help of ratios.

37. CHAPTER 4: ANALYSIS AND INTERPRETATION

38. Gross NPAs to Gross Advances
FY Public Sector
Banks
Private Sector
Banks (New)
Foreign Banks All SCBs
2013-14 4.4 1.8 3.9 3.8
2012-13 3.6 1.8 3.0 3.2
2011-12 3.3 2.2 2.7 3.1
2010-11 1.4 1.3 1.0 1.4
2009-10 1.6 1.3 1.3 1.4
2008-09 1.2 1.7 1.5 1.3
2007-08 1.3 1.4 0.8 1.3
2006-07 1.6 1.1 0.8 1.5
2005-06 2.1 1.0 1.0 1.8
2004-05 2.7 1.6 1.4 2.5
Interpretation:
it had reduced to 1.2% in FY09, which is the low level in the study
period.
the other hand Private sector banks maintained to be their ratio
in between 1-2%.
lowest levels and has 1.6% in FY10 & FY14 each as their highest
levels.
is 1.3%-2.5%.
HYPOTHESIS TESTING
TEST OF CO-RELATION
The test of co-relation is used to identify the co-relation between two
variables. The variable in our study is Net NPA and Net profit. This
test researcher has applied to identify the co-relation between two
variables i.e. Net NPA and Net profit of Public, Private and Foreign
Sector Banks.
Public Sector Banks:

39. H0: There is no significant correlation between NPA and Profit of
PSU Banks for last 10 years.
H1: There is correlation between NPA and Profit of PSU Banks for
last 10 years.
Private Sector Banks
Net NPA
( Billions )
Net Profit
( Billions )
FY X Y
2013-14 1306.24 370.19
2012-13 900.36 505.83
2011-12 593.91 495.14
2010-11 360.00 449.01
2009-10 293.75 392.57
2008-09 211.75 343.73
2007-08 178.92 265.92
2006-07 151.45 251.52
2005-06 145.66 165.39
2004-05 169.04 154.32
Total 4310.32 3343.60
Average 431.03 334.36
Correlation 0.58
H0 (Null Hypothesis) is rejected
Foreign Banks:
H0: There is no significant correlation between NPA and Profit of Foreign Banks for last 10
years.
H1: There is correlation between NPA and Profit of Foreign Banks for last 10 years.
Foreign Banks
Net NPA
( Billions )
Net Profit
( Billions )
FY X Y
2013-14 31.72 101.40
2012-13 26.8 115.86
2011-12 14.12 94.26
2010-11 12 77.19
2009-10 29.77 47.41

40. 2008-09 29.96 75.10
2007-08 12.47 66.12
2006-07 9.27 45.85
2005-06 8.08 30.69
2004-05 6.39 19.82
Total 180.58 673.71
Average 18.05 67.37
Correlation 0.59
H0 (Null Hypothesis) is rejected
Interpretation:
There is positive correlation between net profit & net NPA of
public sector banks, private sector & foreign banks.
Net profit consists of income earned by the banks. Income is divided
into two parts interest income & other income. Interest income
includes Interest/Discount on advances/bill, Income on investments,
Interest on balances with RBI and other inter-bank funds, others.
While non-interest income includes fee income components such as
commission, brokerage and exchange transactions, sale of
investments, corporate finance transactions, M&A deals; and any
other income other than the interest income generated by the bank.
But in interest income, income from Interest/Discount on
advances/bill is the major contributor towards NPA.
Public sector banks depend excessively on their interest income as
compared to their peers in the private sector and their fee-based
earnings coming from services remain quite low.
The higher proportion of non-interest income in private sector &
foreign banks is due to the value added services offered by these
banks. There are some services which are offered by private sector
banks but not by public sector banks. These include Forex Desk,
Derivatives Desk, Technology Finance, Syndication Services, Real
Time Gross Settlement, Channel Financing, Corporate Salary
Account, Bankers to Right/Public Issue. Foreign banks offers some
more services other than the above mentioned services like Global
Trade Solutions, Factoring Solutions, Derivatives Clearing, asset
management, private equity placement. So the private sector &

41. foreign banks earn higher non-interest income because of such value
added services.

42. CHAPTER 5: FINDINGS, CONCLUSION AND
SUGGESTIONS

43. Findings:
As the study on NPA makes me to understand and learn many things.
The findings of the study are:
banking sector.
compare to Private sector and foreign banks in India. Comparing
overall FY05 and FY14 is not good for all SCBs in India.
NPA to net advances ratio over the years states that public sector
banks makes more provisions in gross NPA & gross advances as
compared to private and foreign banks.
Private sector banks & Foreign, all showed a positive correlation with
value lie in between 0.5-1.0.
– PSU banks have high level of NPAs
in all SCBs in India. By taking NPA in profitability levels Private
sector banks and Foreign banks profitability is justifiably.
net advances, net NPA & net profit
clearly shows how NPAs will affect the profitability of banks.
Interest/Discount on advances/bill. Whereas it is just 55% & 43% for
private sector banks & foreign banks.
Conclusion
On behave of the NPA study we can conclude that:
facing today. If the proper management of the NPAs is not undertaken
it would hamper the business of the banks. If the concept of NPAs is
taken very lightly it would be dangerous for the Indian banking
sector. The NPAs would destroy the current profit, interest income
due to large provisions of the NPAs, and would affect the smooth
functioning of the recycling of the funds.
higher interest rates. Lower deposit rates and higher lending rates
repress savings and financial markets, which hampers economic
growth.

44. banks are more efficient than public sector & foreign
banks with regard to the management of non-performing assets. But
efficient management of NPA is not the sole factor that determines
the overall efficiency of banks.
Suggestions:
covery Tribunal should be established &
capacity of DRTs should be enhanced.
-standard &
doubtful assets.
-interest income, as
rise in NPA due to default in interest income may affect the profits
drastically.
'Thus, need is to have 'Now performing assets' than
'Nonperforming assets'.
REFERENCES
Websites
www.nseindia.com
www.bseindia.com
www.moneycontrol.com
www.sebi.gov.in
www.reuters.com
en.wikipedia.org/wiki/Non-Performing Assets
http://www.rbi.org.in/
http://www.indiastat.com/