1. INTRODUCTION:

The main aim of any individual is the utilization of money in the best manner since India is a

country where more than half of the population has a problem of running the family in an

efficient manner. However Indian people faced large number of problems until the development

of the full-fledged banking sector. The Indian banking sector started developing after the 1991

government policy. The banking sector has helped the Indian people to utilize the single money

in the best manner possible. People now have started investing their money in the bank. Banks

also provide good returns on the money deposited with them. The people now have understood

that banks provide them a good security of their deposits, so excess amounts are invested in the

banks. Thus, banks have helped the people to achieve their socio economic objectives. The banks

not only accept the deposits of the people but also provide them credit facility for their

development. Indian banking sector has helped the nation in developing its business and service

sectors. But recently banks are facing the problem of credit risk. It is found that many common

people and business people borrow from banks but due to some genuine or other reasons are not

able to pay back the amount drawn from the banks. The amount which is not given back to the

banks is known as non performing assets. Many banks are facing the problem of nonperforming

assets which hamper the business of the banks. Due to NPAs the income of the banks is reduced

and the banks have to make the large number of provisions that would curtail their profit. And

due to this the financial performance of the banks would not show good results. The main aim

behind making this report is to know how Public Sector Banks are operating their business and

how NPAs play their role in the operations of the Public Sector Banks. The present study also

focuses on the existing system in India to solve the problem of NPAs and comparative analysis

to understand which bank is playing what role with concern to NPAs. Thus, the study would help

the decision makers to understand the financial performance and growth of Public Sector Banks

with regard to NPAs.

The world is going faster in terms of services and physical products. However it has been found

that physical products are available because of the service industries. Service industry plays a

vital role in boosting the economy. Nations like U.S, U.K, and Japan the service industry is

contributing more than 55%. The banking sector is one of appreciated service industries. The

banking sector plays a large role in channelizing money from one end to other. It helps almost

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every person in utilizing his money to the best. The banking sector accepts the deposits of the

people and provides fruitful return to people on the invested money. But for providing better

returns plus principal amount to the clients; it becomes important for the banks to earn good

income. The main source of income for banks is the interest that they earn on the loans that have

been disbursed to the common man, businessman, or any industry for its development. Banks

first, accept the deposits from the people and then lend this money to people who are in the need

of it. Through channelizing money from one end to the other, banks earn their profits. However

as discussed earlier, the

Indian banking sector has recently faced a serious problem of Non Performing Assets. This

problem has emerged largely in the Indian banking sector since the last three decades. Due to

this problem many Public Sector Banks performances and operations have been adversely

affected. The problem of NPAs is dangerous for the banks because it destroys their healthy

financial conditions. The people would lose their trust in the banks, if they continue to have high

Non Performing Assets. So, the problem of NPAs must be tackled in such a manner that does not

destroy the operational, financial conditions and also not affect the image of the banks. Recently,

RBI has taken a number steps to reduce NPAs of the Indian banks. And it has also found out that

many banks have shown positive figures in reducing NPAs as compared to the past years.

1.1 STATEMENT OF PROBLEM:

The Banks in India face the problem of swelling nonperforming assets (NPAs) and the issue is

becoming more and more unmanageable.  The NPAs have direct impact on banks profitability,

liquidity and equity.  The NPAs of Indian Banks are relatively huge by international standard. 

Therefore the biggest ever challenge that the banking industry now faces is management of

NPAs.  It is true that banks have to restrict their lending operations to secured advances only

with adequate collateral securities.

In this connection banks must aware of the problems and recovery legislations of NPAs. Non-

performing assets means an advance where payment of interest or repayment of installments of

principal or both remains for a period of more than 180 days. 

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The magnitude of NPAs have a direct impact on banks profitability as legally they are not

allowed to book income on such accounts and at the same time banks are forced to make

provision on such assets as per the RBI guidelines.  The Indian Banking sector is facing a serious

situation in view of the mounting NPAs which are the tune of Rs. 56,000crores in March 2002.

NPAs an important parameter in the analysis of financial performance of banks. The reduction of

NPAs is necessary to improve profitability of the banks and comply with capital adequacy

norms. 

Therefore, to solve the problems of existing NPAs, quality of appraisal supervision and follow

up should be improved.  The NPAs can be avoided at the initial stage of credit consideration by

putting rigorous and appropriate credit appraisal mechanism.  This is in order to recover the NPA

debt, the judicial systems should revamped and is essential to enforce the SARFAESI Act with

more stringent provisions to realize the securities and personal assets of the defaulters.

1.2 REVIEW OF LITERATURE:

Non-performing assets, also called non-performing loans, are loans, 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 than a bank makes its profits. Banks usually treat

assets as non-performing if they are not serviced for some time. If payments are late for a short

time a loan is classified as past due. Once a payment becomes really late usually 90 days the loan

classified as non-performing. . Accordingly, with effect from March 31, 2005, a non-performing

asset (NPA) shell be a loan or an advance where;

i) Interest and 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 (ODICC),

iii) The bill remains overdue for a period of more than 90 days in the case of bills purchased

and discounted,

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iv) 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 90 days.

1.3 OBJECTIVES OF STUDY:

To understand what is NPA.

To understand what are the underlying reasons for the emergence of the NPAs.

To understand the dimensions of nonperforming assets of bank.

To study the position of Non-performing Assets in State Bank of Patiala.

To study the procedure and tools used for management of NPSs.

To evaluate the ratio of the Bank with concerned to the NPSs.

1.4 RESEARCH METHODOLOGY:

Meaning of Research

Research is defined as “a scientific & systematic search for pertinent information on a specific

topic”. Research is an art of scientific investigation. Research is a systemized effort to gain new

knowledge. It is a careful inquiry especially through search for new facts in any branch of

knowledge. The search for knowledge through objective and systematic method of finding

solution to a problem is a research.

Design is basically a blue print of the research which includes the method of research, the

instruments to be used for method of sampling etc. It is a statement of; elements of a study those

that provides the details of the project. The design that is in the study is a Descriptive Design, a

descriptive

the phenomenon without establishing association factors, descriptive design was used

because it studies variables of people or respondents who are under the study involved

the survey of consumers views

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Intended to produce accurate descriptions of relevant to the decision being faced without that

some relationship exists between variables. It is the simplest of all the designs.

Sources of data:

The sources of data means from where we have to get data. There are mainly two sources of

data. These are:

Primary data: The Primary data are those which are collected a fresh and for the first time and

thus happens to be original in character.

Secondary data: The secondary data are those data which have already been collected by

someone else and which have already been passed through statistics process. We get published

data as maintained by finance departments of a concern or other publications like Annual report,

Magazines etc.

In my research only secondary type of data is collected.

Data sources:

Secondary sources of data:

Annual reports of the company

Internet

Finance books

This also included going through researches prepared by other students.

1.5 LIMITATION OF STUDY:

It was difficult to gather the financial data of Bank so the better evaluation of the performance of

the bank is not possible.

Managerial staff was quite busy to their work, so due to their schedule of work, I was not in a

position to discuss some important aspect in detail.

Analysis is only a means and not ends in itself. The analyst has to make interpretation and draw

his own conclusion. Different people may interpret the same analysis in different ways.

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2. INDUSTRY PROFILE

2.1 WHAT IS BANKING?

Banking in a traditional sense is the business of accepting deposits of money from public for the

purpose of lending and investment. These deposits can have a distinct feature of being

withdrawn able by cheques, which no other financial institution can offer. In addition, banks also

offer financial services, which include:

Issuing demand draft & traveler’s cheque.

Credit cards

Collection of cheques, bill of exchange.

Safe deposit lookers

Custodian services.

Investment and Insurance Services.

The business of banking is highly regulated since banks deal with money offered to them by the

public and ensuring the safety of this public money is one of the prime responsibilities of any

bank. That is why banks are expected to be prudent in their leading and investment activities.

Every bank has a compliance department, which is responsible to ensure that all the services

offered by the bank, and the processes followed are in compliance with the local regulations and

the Bank’s corporate policy.

The major regulations and act govern the banking business are:-

Banking Regulation Act, 1949

Foreign Exchange Management Act,1999

Indian Contract Act

Negotiable Instruments Act, 1881

Bank lend money either for productive purposes to individual, firms, Corporate etc. of for buying

house property, cars and other consumer durables and for investment purposes to individuals and

the others. However, banks do mot finance any speculative activity. Lending is risk taking.

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Banking in India originated in the last decades of the 18th century. The first banks were The

General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790;

both are now defunct. The oldest bank in existence in India is the State Bank of India, which

originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of

Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay

and the Bank of Madras, all three of which were established under charters from the British East

India Company. For many years the Presidency banks acted as quasi-central banks, as did their

successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon

India's independence, became the State Bank of India

2.2 HISTORY OF BANKING IN INDIA

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a

consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and

still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company

that issues stock and requires shareholders to be held liable for the company's debt) It was not the

first though. That honor belongs to the Bank of Upper India, which was established in 1863, and

which survived until 1913, when it failed, with some of its assets and liabilities being transferred

to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate

States, promoters opened banks to finance trading in Indian cotton. With large exposure to

speculative ventures, most of the banks opened in India during that period failed. The depositors

lost money and lost interest in keeping deposits with banks. Subsequently, banking in India

remained the exclusive domain of Europeans for next several decades until the beginning of the

20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire

d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;

branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in

Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the

British Empire, and so became a banking center.

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The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in

Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in

1895, which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period

of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial

and other infrastructure had improved. Indians had established small banks, most of which

served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and

a number of Indian joint stock banks. All these banks operated in different segments of the

economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign

trade. Indian joint stock banks were generally undercapitalized and lacked the experience and

maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon

to observe, "In respect of banking it seems we are behind the times. We are like some old

fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome

compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi

movement. The Swadeshi movement inspired local businessmen and political figures to found

banks of and for the Indian community. A number of banks established then have survived to the

present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank

and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina

Kannada and Udupi district which were unified earlier and known by the name South Canara

( South Kanara ) district. Four nationalized banks started in this district and also a leading private

sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian

Banking".

During the First World War (1914-1918) through the end of the Second World War (1939-1945),

and two years thereafter until the independence of India were challenging for Indian banking

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Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,

paralyzing banking activities for months. India's independence marked the end of a regime of the

Laissez-faire for the Indian banking. The Government of India initiated measures to play an

active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the

government in 1948 envisaged a mixed economy. This resulted into greater involvement of the

state in different segments of the economy including banking and finance. The major steps to

regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on

January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public

Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of

India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing

bank could be opened without a license from the RBI, and no two banks could have

common director.

Nationalization

Despite the provisions, control and regulations of Reserve Bank of India, banks in India except

the State Bank of India or SBI, continued to be owned and operated by private persons. By the

1960s, the Indian banking industry had become an important tool to facilitate the development of

the Indian economy. At the same time, it had emerged as a large employer, and a debate had

ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of

India, expressed the intention of the Government of India in the annual conference of the All

India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The

meeting received the paper with enthusiasm.

Thereafter, her move was swift and sudden. The Government of India issued an ordinance and

nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969.

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Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political

sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking

Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential

approval on 9 August 1969.

A second dose of nationalization of 6 more commercial banks followed in 1980. The stated

reason for the nationalization was to give the government more control of credit delivery. With

the second dose of nationalization, the Government of India controlled around 91% of the

banking business of India. Later on, in the year 1993, the government merged New Bank of India

with Punjab National Bank. It was the only merger between nationalized banks and resulted in

the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the

nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian

economy

Liberalization

In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization,

licensing a small number of private banks. These came to be known as New Generation tech-

savvy banks, and included Global Trust Bank (the first of such new generation banks to be set

up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI

Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of

India, revitalized the banking sector in India, which has seen rapid growth with strong

contribution from all the three sectors of banks, namely, government banks, private banks and

foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation in the norms

for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights

which could exceed the present cap of 10%,at present it has gone up to 74% with some

restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used

to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave

ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this

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led to the retail boom in India. People not just demanded more from their banks but also received

more.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range

and reach-even though reach in rural India still remains a challenge for the private sector and

foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to

have clean, strong and transparent balance sheets relative to other banks in comparable

economies in its region. The Reserve Bank of India is an autonomous body, with minimal

pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage

volatility but without any fixed exchange rate-and this has mostly been true.

With the growth in the Indian economy expected to be strong for quite some time-especially in

its services sector-the demand for banking services, especially retail banking, mortgages and

investment services are expected to be strong. One may also expect M&As, takeovers, and asset

sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in

Kodak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been

allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005

that any stake exceeding 5% in the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive in

their loan recovery efforts in connection with housing, vehicle and personal loans. There are

press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

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Phases of banking in India

Without a sound and effective banking system in India it cannot have a healthy economy. The

Banking system of India should not only be hassle free but it should be able to meet new

challenges posed by the technology and any other external and internal factors.

For the past decades Indian banking system has several outstanding achievements to its credits.

The most striking is its extensive reach. It is no longer confined to only metropolitans or

cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of

the country. This is one of the main reasons of India’s growth process.

The government regular policy for Indian banks since 1969 has paid rich dividends. With the

nationalization of 14 major private banks of India.

Not long ago, a account holder had to wait for a hour at the bank counters for getting a draft or

for withdrawing of his own money. Today he has a choice. Gone are the day when most efficient

bank transfer money from one branch to other in two days. Now it is simple as instant messaging

or dials a pizza. Money has become the order of the day.

The first bank in India, through conservative was established in 1786. From 1786 till today, the

journey of Indian banking system can be segregated into three distant phases. They are as

mentioned below:

Early Phase from 1786 to 1969 of Indian banks.

Nationalization of Indian banks and upto 1991 prior to Indian banking sector reforms.

New phase of Indian banking system with the advent of Indian financial and Indian

banking sector reforms after 1991.

To make this write up more explanatory, I prefix the scenario as phase I, phase II and phase III.

Phase I

The general bank of India was set up in the year 1786. Next came bank of Hindustan and Bengal

banks. The East Indian Company established bank of Bengal (1890), Bank of Bombay (1840)

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and Bank of Madras (1843) as independent unit and called it as presidency banks. These three

banks were amalgamated in 1920 and Imperial bank of India was established which started as

private shareholder banks, mostly European shareholders.

In 1865 Allahabad bank was established and first time exclusively by Indians, Punjab National

Bank Ltd was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of

India, Central bank of India, Bank of Baroda, Canara Bank, Indian bank, Bank of Mysore were

set up. Reserve Bank of India came in 1935.

During the first phase growth was very slow and bank also experienced periodic failure between

1913 to 1948. There were approximately 1100 banks mostly small. To streamline the functioning

and activities of commercial banks, the government of India came up with The Banking

Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending

Act of 1965 (Act No . 23 of 1965). Reserve Bank of India was vested with extensive powers for

the supervision of banking in India as the Central Banking Authority.

During those days’ people has lesser confidence in banks. As an aftermath deposit mobilization

was slow. Abreast of it the savings bank facility provided by the postal department was

comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955,

it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially

in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI

and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19July,

1969, major process of nationalization was carried out. It was the efforts of the then Prime

Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were

nationalized.

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Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with

seven more banks. This step brought 80% of the banking segment in India under Government

ownership.

The following are the steps taken by the Government of India to regulate banking institution in

the country:

1949: Enactment of Banking Regulation Act.

1955: Nationalization of State Bank of India.

1959: Nationalization of SBI subsidiaries.

1961: Insurance cover extended to deposits.

1969: Nationalization of 14 major banks.

1971: Creation of credit guarantee corporation.

1975: Creation of regional rural banks.

1980: Nationalization of seven banks with deposits over 200 crore.

After the nationalization of banks the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11000%.

Banking is the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products a reforms measure. In 1991, under the

chairmanship of M Narasimha, and facilities in the banking sector in its committee was set up by

his name which worked for the liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to customers. Phone banking and net banking is introduced. The entire

system became more convenient and swift. Time is given more importance than money.

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2.3 TYPES OF BANKS IN INDIA

With an increase in the range of financial activities in the Indian banking sector, there are

different of banks that cater to specific requirements of the customers. Today, we have banks

catering to customers through personalized services and banks that offer specific services.

Typically, banks can be classified on the basis of their activities. Examples of these activities

include investment, retail or business.

Main Types of Banks in India

http://www.lawisgreek.com/wp-content/uploads/2010/05/RBI-Lawisgreek.jpgThe extent of

ownership determines the type of banks that you see in India. Decades ago, nationalized banks

dominated the banking sector in India. In 1969, the major nationalization of

banks was spearheaded by none other than Prime Minister Indira Gandhi. The purpose was to

spread awareness to rural areas and make cheap finance options available to the poor and needy

farmers. That year, 14 major commercial banks were nationalized.

Today, the banking scenario has changed considerably. The following are the main types of

banks in India:

Privately Owned: These banks operate on a purely profit basis. Also called central banks and

new generation banks, these are controlled by the state governments of their respective countries.

While they are known to offer quick, easy and convenient options for customers, they are not

considered as reliable and committed to growing the wealth of their customers as nationalized

banks.

Publicly Owned: These banks are operated and controlled by the government. These banks

actively maintain a huge number of operations that constitute the country’s liquidity in the

banking sector. They are considered safe, reliable and committed to the customers and the

process established by the Reserve Bank of India.

These banks handle a number of tasks pertaining to the banking sector. Publicly owned banks

also determine the interest rates that other banks in the country offer.

Other Categories of Banks

The following categories include larger banks that have broader and multiple divisions:

15

Retail banks: These banks deal with consumers and small business owners directly. The major

products offered by them include savings and current accounts, credit cards, and loans, such as

mortgages. These also cater to high net worth clients offering them wealth management services.

These can be further divided into

Offshore banks: Most of these are private banks that operate in spheres of reduced taxes.

Community banks: These banks operate on a local basis and serve people and markets

that have usually been devoid of banking services.

Postal savings banks: These banks operate in collaboration with the nation’s national

postal systems.

Building societies: Typically owned by their clients, these banks offer a broad range of

retail banking services.

Ethical banks: These banks only acknowledge investments that are socially and

environmentally useful.

Business banks: These banks serve medium scale businesses and organizations.

Corporate banks: These banks typically deal with major business entities.

Investment banks: These banks help clients in mergers and acquisitions and other

services related to financial markets. Some investment banks conduct underwriting

services only. Some investment banks are merchant banks that perform traditional

banking activities related to trade-finance.

All types of banks function well based on the extent of trust they are able to communicate with

their customers. Their customers, in turn, recommend them to others and avail more services

offered by these banks, expecting complete safety of their dealings.

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2.4 FUTURE OF BANKING IN INDIA

A healthy banking system is essential for any economy striving to achieve good growth and yet

remain stable in an increasingly global business environment. The Indian banking system has

witnessed a series of reforms in the past, like deregulation of interest rates, dilution of

government stake in PSBs, and increased participation of private sector banks. It has also

undergone rapid changes, reflecting a number of underlying developments. This trend has

created new competitive threats as well as new opportunities. This paper aims to foresee major

future banking trends, based on these past and current movements in the market.

Given the competitive market, banking will (and to a great extent already has) become a process

of choice and convenience. The future of banking would be in terms of integration. This is

already becoming a reality with new-age banks such as YES Bank, and others too adopting a

single-PIN. Geography will no longer be an inhibitor. Technology will prove to be the

differentiator in the short-term but the dynamic environment will soon lead to its saturation and

what will ultimately be the key to success will be a better relationship management.

‘The future belongs to bigger banks alone, as well as to those which have minimized their risks

considerably.’

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3. STATE BANK OF PATIALA: ALL ABOUT

State Bank of Patiala (SBP) is a nationalized Indian bank which is a subsidiary of

the State Bank of India. Founded in 1917 by the then Maharaja His Highness Bhupinder Singh,

erstwhile Patiala, the bank was initially named Patiala State Bank. It was named as State Bank of

Patiala after it became a subsidiary of SBI. The bank was set up with the sole aim of nurturing

the growth of agriculture, trade and industry. In 1948, the bank was brought under the control of

the Reserve Bank of India or RBI. Since its inception, the State Bank of Patiala has been

constantly working towards increasing its size and the volume of business. 

Today State Bank of Patiala is a bank that has all the modern

amenities for its clients including computerized branches. There are more than 700 branches of

the bank spread all over the country catering to a diverse group of customer. Though the bank

has branches across the country, a majority of the branches can be found in the states of Punjab,

Delhi, Jammu & Kashmir, Gujarat, Madhya Pradesh, Haryana, Rajasthan and Himachal Pradesh.

3.1 STATE BANK OF PATIALA SERVICES:

State Bank of Patiala offers various types of services to its clients. SBP shares its

ATM network with other State Bank group members, so this means that the bank’s customers

have access to the more than 7000 State Bank Group ATMs across the country. Some of the

services offered by the bank consist of:

NRI Services

Govt. Business

Personal Banking

Internet Banking

SME & Corporate Banking

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Agriculture & Rural Banking

Personal Banking

Under the Personal Banking services offered by State Bank of Punjab, various

types of loans are given to customers, so that they can take care of all their monetary needs

without any hassles. SBP Loan to Pensioners is an attractive scheme for retired people. This

scheme is available to all Central, State Government, Defense and SBP pensioners whose

pension accounts are maintained by the bank. All the loans of State Bank of Patiala come with

easy repayment options and can be paid off very easily. 

Some of the other services offered by the bank under personal banking consist of

SBP Loan against Mortgage of Immovable Property, SBP Loan for Earnest Money, SBP

Education Loan, SBP Loan against LIC / SBI-Life Products, SBP Loan for Rural Housings, SBP

Loan against RBI Relief Bonds, SBP Loan against Gold Ornaments, SBP Loan against Term

Deposits, SBP Home Loan Scheme, SBP Two Wheeler Loan, SBP Realty, SBP Loan to

Pensioners, SBP Career Loan, SBP Car Loan and SBP Personal Loan.

3.2 VISION AND MISSION:

Vision

To be a progressive Bank with customer centric philosophy blending modernity with tradition.

Mission

To continue our tradition of customers-focused approach for high growth and profitability , and

be the most preferred bank in our core area of operation meeting the expectations of all

stakeholders as a responsible corporate citizens.

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3.3 BOARD OF DIRECTORS

NAME DESIGNATION

Shri O.P.Bhatt Chairman

Shri Ashok Kumar Managing Director

Shri N.H.Siddiqui Nominated by Reserve Bank of India

Shri S.A. Thimmiah General Manager

Shri B.S. Gopalakrishna Deputy General Manager

Shri Sushil Gautam Workmen Director

Shri Rakesh Chander Jasra Non-Workmen Director

Shri Ashwani Kumar Gupta Nominated by State Bank of India

Shri Swarn Singh Boparai Nominated by State Bank of India

Dr. Abhijit Mukherjee Director

Shri R.K.Sood Under Secretary

20

3.4 TOP MANAGEMENT

NAME DESIGNATION

Sh. Ashok Nayar Managing Directors

Sh. T. Lokeshaiah Chief General Manager

Sh. Salil Misra General Manager (Treasury)

Sh. Jasbir Singh General Manager (Vigilance)

Sh. S. Sridhar General Manager (Tech. & Insp.)

Sh. C.R.Roy Surendra General Manager (Comm. Banking)

Sh. R.D.Modi General Manager (Planning & Dev.)

Sh. Pukhraj Kanther General Manager (Operations)

21

3.5 SWOT ANALYSIS

Let’s analyze SWOT in order to know as to where the company stands

STRENGTH

Wide network

Large number of customers

Fast adaptability to technology

Brand image

WEAKNESS

Casual behaviour

Corruption and red tapism

Slow decision making due to large hierarchy

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OPPORTUNITIES

Home to home banking services

Diversification towards other fields

Globalization

THREATS

Stiff competition from other private players.

23

4. MEANING OF NON PERFORMING ASSETS (NPA)

Non-performing assets, also called non-performing loans, are loans, made by a bank or finance

company, on which repayments or interest payments are not being made on time. An asset,

including a leased asset, becomes non-performing when it ceases to generate income for the

bank. 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.

Earlier an amount due under any credit facility was treated as "past due" when it has not been

paid within 30 days from the due date. However, with 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. Therefore,

w.e.f. 1st April, 2001, a Non performing asset (NPA) was an advance where:-

(a) Interest and /or installment of principal remain overdue for a period of more than 180 days in

respect of a Term Loan,

(b) The account remains 'out of order' for a period of more than 180 days, in respect of an

overdraft/ cash Credit (OD/CC),

(c) The bill remains overdue for a period of more than 180 days in the case of bills purchased

and discounted,

(d) 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

(e) Any amount to be received remains overdue for a period of more than 180 days in respect of

other accounts.

However, the above definition was been further modified w.e.f. 31st March, 2003.

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Till December, 2003, banks recognized a loan as an NPA if either the principal or the interest

was overdue for two quarters or 180 days. 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. Thus, from March, 2004,

Banks have shifted to the 90-day income recognition norms for calculating NPAs.

Accordingly, with effect from March 31, 2004, a non-performing asset (NPA) shall 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

(v) Any amount to be received remains overdue for a period of more than 90 days in respect of

other accounts

Out of Order

An account is treated as 'out of order'

(a) When the outstanding balance is more than drawing power or sanctioned limit; or

(b) When there are no credits continuously for six months or credits are not enough to cover the

interest debited during the same period; or

25

(c) when the stock statement is delayed for 3 months or renewal of limits does not take place or

is delayed for 3 months (in case of exceptional cases it can be upto 6 months) even though

outstanding balance is within the sanctioned limit / drawing power.

Overdue

An amount is considered as overdue under any credit facility if it is not paid on the due date

fixed by the bank

However, some banks made additional provisions to adhere to the 90-day NPA recognition norm

even earlier. Some of such examples are:-

(a) Oriental Bank of Commerce (OBC) has declared itself a zero-NPA bank after shifting to the

90-day norm.

(b) Bank of Baroda adopted the 90-day norm from December 2003. The bank's net NPA on

December 31, 2003, slipped to 3.46 per cent, against 4.01 per cent in the corresponding period of

the last financial year.

(c) Corporation Bank adopted the 90-day NPA classification norm in December 2003. After the

adoption of the norm, the net NPA level of the bank as on December 31, 2003, decreased to 1.7

per cent from 2.4 per cent in the corresponding period of the last financial year.

(d) In the private sector, HDFC Bank adopted the 90-day norm in August 2003 and the overall

impact was marginal. The net NPA ratio of around 0.5 per cent of its advances is based on the

90-day norm.

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4.1 CLASSIFICATION OF ASSETS

CHART OF ASETS CLASSIFICATION

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ASSETS

PERFORMING ASSETS OR STANDARD ASSETS

NON-PERFORMING ASSETS

SUB-STANDARD ASSETS

DOUBTFUL ASSETS

LOSS ASSETS

PERFORMING ASSETS OR STANDARD ASSETS:-

These assets do not disclose any problem and also do not carry more than normal risk attached to

the business. Such assets are considered as performing assets.

Provisions Norms:- A general provision of a minimum of 0.25% of total standard assets should

be made as a matter of abundant cautions, even though there could be no risk of nonperforming

of default. It has been clarified by RBI that the provision should be made on global loan basis

and not on domestic advances alone.

CLASSIFICATION OF 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 reasonability of the

dues:

Sub-standard Assets

Doubtful Assets

Loss Assets.

Sub Standard Assets:-

A Sub-Standard Asset would be one which has been classified 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 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.

Provision Norms:- A general provision of 10%of the total outstanding.

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Doubtful Assets:-

An asset would be classified as Doubtful Asset if it has remained in the Substandard 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.

Provision Norms:-

a) 100% of the extent to which the advances is not covered by the realizable value of the

security in the possession of the bank. The reasonable value is estimated on realistic

basis.

b) Over and above item a) above, depending on the period for which the assets remained

doubtful 20% to 50% of the secured portion of the doubtful assets (i.e. estimated

realizable value of the outstanding) on the following basis:

Period for which the advances has been

considered as doubtful

% of provision

i) Upto 1 year 100% of unsecured + 20% of secured portion

ii) 1 to 3 years 100% of unsecured + 30% of secured portion

iii) More than 3 years 100% of unsecured portion + 50% of

secured portion

Loss Assets:-

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.

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Provision Norms: The entire assets should be written off. If the assets are to remain in the

books for any reason, then 100% of the outstanding should be provided.

4.2 GUIDELINE FOR THE CLASSIFICATION OF NPAs.

Broadly speaking classification should be done by taking into account the degree of well defined

credit weaknesses and the extent of dependence on collateral security for realization of dues.

Banks should establish appropriate internal systems to eliminate the tendency to delay or

postpone the identification of NPAs, especially in respect of high value amount.

Accounts will temporary deficiencies: These should be classified based on the past

recovery records.

Accounts regularize near about the balance sheet date: This accounts should be

handle with care and without scope of subjectivity. When he account indicates inherent

weakness based upon available data, it should be deemed as an NPA.

Assets classification should be borrower wise and not facility wise: if a single facility

to a borrower is classified as a NPA, other should also be classified the same way, as it is

difficult to envisage only a solitary facility becoming a problem credit and not others.

Advances under consortium arrangements: Classifications here should be based on

the recovery records of the individual member banks.

Accounts where there is a erosion in the value of a security: if there is a significant

(i.e. the realizable value of the security is less than 50% of that assessed by the banks

during acceptance) the amount may be classified as a NPA.

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4.3 TYPES OF NPA:

Gross NPA.

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:

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

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5. REASONS FOR NPA IN INDIA

The banking sector has been facing serious problem of rising NPAs. But the problem of NPAs is

more in public sector bank when compare to private banks and foreign banks. The NPAs is

growing in public sector bank due to external as well as internal factors.

External Factors:

Ineffective recovery tribunal

The government has set number of recovery tribunals, which works for the recovery of loans and

advances. Due to their negligence and ineffectiveness in their work bank suffers the consequence

of non- recover, their by reducing their profitability and liquidity.

Willful defaults

There are borrowers who are able to pay back loans but are intentionally withdrawing it.

These groups of people should be identified and proper measures should be taken in order to get

back the money extended to them as advances and loans.

Natural Calamities

These are the measure factor, which is creating alarming rise in NPAs. India is hit by major

natural calamities thus making the borrowers unable to pay back their loans. Thus the bank has

to make large amount of provisions in order to compensate those loans, hence end up the fiscal

with reduced profits. Mainly our farmers depend upon rainfall for cropping. Due to irregularities

of rainfall the farmers are not to achieve the production level thus they are not repaying the

loans.

Industrial Sickness

Improper project handling, ineffective management , lack of adequate resources, lack of advance

technology, day to day changing government policies give birth to industrial sickness. Hence the

banks that finance those industries ultimately end up with low recovery of their loans reducing

their profit and liquidity.

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Lack of demand

Entrepreneurs in India could not foresees the product demand and start production which

ultimately piles up their products thus making them unable to pay back the money they borrow to

operate their activities. The banks recover the amount by selling of their assets , which cover the

minimum label. Thus the banks record the no recovered part as NPAs and have to make

provision for it.

Change on government policies

With every new government banking sector gets new policies for their operations. Thus it has to

cope with the changing principles and policies for the regulations of the rising of the NPAs eg.

The fallout of the handloom sector as the most of the weavers co-operative societies has

becomes defunct due to withdrawal of the state patronage. The rehabilitation plan worked out by

centre government to revive the handloom sector has not yet been implemented. So the overdues

due to the handloom sectors are becoming NPAs.

Internal Factors:

Defective leading process

There are three cardinal principles of bank lending that have been followed by the commercial

banks since long. i) Principle of safety ii) Principle of liquidity iii)Principle of profitability.

i) Principles of safety By safety it means that the borrower is in a position to repay the loan

both principal and interest. The repayment of loans depends upon the borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay

depends on: 1. Character 2. Honest 3. Reputation of borrower the banker should, therefore take

utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one

and the borrower is capable of carrying it out successfully. He should be a person of integrity and

good character.

Inappropriate technology:

33

Due to inappropriate technology and management information system, market driven decision on

real time bases cannot be taken. Proper MIS and accounting system is not implemented in the

banks, which lead to poor credit collection, thus NPA. All the branches of bank should be

computerized.

Improper swot analysis:

The improper strength, weaknesses, opportunity and threat is also another reason for rise in an

NPAs. While providing unsecured advances bank depend more upon honesty, integrity, financial

soundness and credit worthiness of borrower. Bank should considered the borrower own capital

investment. It should collect the credit information of the borrower from a) banker b) Enquiry

from market segment of trade, industry , business c) From external credit rating agency d)

Analysis the balance sheet. True picture of the business will be reveled on analysis the profit loss

account and balance sheet. e) Purpose of loan. When the banker give loan he should analyses the

purpose of the loan to ensure safety and liquidity. Bank should grant loan for productive purpose

only. Bank should analyze the profitability, viability and long term acceptability of the project

while financing.

Poor credit appraisal system:

Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank

gives advances to those who are not able to repay it back. They should use good credit appraisal

to decrease the NPAs

Managerial deficiencies:

The banker should always select the borrower very carefully and should take tangible assets as

security to safe guard its interests. When accepting securities banks should consider the

1.Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the

principle of diversification of risk based on the famous maxim

“do not keep all the eggs in one basket”; it means that the banker should not grant advances

to a few big farms only or to concentrate them in few industries or in a few cities. If a new

big customer meets misfortune or certain traders or industries affected adversely, the overall

position of the bank will not be affected. Like OSCB suffered loss due to the OTM Cuttack,

34

and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM

(117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60 Lakhs)

Absence of regular industrial visit:

The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank

officials to the customer point decreases the collection of interest and principals on the loan.

The NPAs due to willful defaulters can be collected by regular visits.

Re loaning Process:

Non remittance of recoveries to higher financing agencies and re loaning of the same have

already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters

and CCBs and PCVs the NPA of OSCB is increasing day by day.

6. EFFECTS OF NPA ON BANKS

Effects on profitability:

The profitability of the banks is severely affected by NPA’s as

NPA do not generate any income.

Provisioning is required @ 10% to 100% depending upon the quality of assets.

Banks are required to meet the cost of funding these unproductive assets.

Banks also incur expenses for maintenance of NPA’s

Effects on Return on Assets (ROA) :

As NPA’s reduce earning capacity of assets, Return on Assets (ROA) gets affected. ROA is

inversely related to NPA’s.

Effect on Net worth:

Capital and reserves constitute total net worth of the banks. For example in the year of 1999-

2000 the aggregate total net worth of the public sector banks is Rs. 46052 crore and their net

35

NPA’s is about Rs. 26188 crore, but the actual net worth is Rs. 19864 crore. So NPA’s have

direct impact on net worth of the banks.

Effect on Capital Adequacy Ratio:

As NPA’s do not earn any income and reduce the profits by way of provisioning. They adversely

affect Capital Adequacy Ratio (CAR).

Effects on Autonomy:

In the emerging competitive banking scenario the autonomy package, provided by RBI/

Government to the public sector banks on the basis of certain criteria, provides advantages to the

banks. Maximum net NPA’s limit of 9% is one of the criteria for getting autonomy. It is one of

the factors, which has eluded many banks to get autonomy.

Effects on Rating:

As per the recommendations of Padmanabhan Committee the banks are to be rated on a joint

scale of A to E widely on the lines of International CAMELS rating model. NPA has directly or

indirectly have effect on the three factors such as C (Capital Adequacy) A (Asset Quality) and E

(Earnings) of the above rating model. Regulatory and credit rating agencies abroad are also not

comfortable with the high level of NPA’s as on Indian Banks.

Effects on productivity:

The productivity of the banks having higher NPAs would be low as the branch staff that could

have been utilized for the business mobilization would primarily be engaged in management of

NPAs it is one of the factors for low productivity.

Effects on business mobilization:

The presence of high NPAs would reduce the average yield on funds deployed. In order to earn

profits the bankers would be in search of low cost deposits and they have to face a lot of

difficulties in mobilizing, maintaining and serving such deposits in today’s competitive

environment. In case, the banks are not able to mobilize low cost deposits then to remain in

36

profit they will have to find the avenues of investment, advances where the earning is high and

funds are safe. But here again there is a lot of competition among the banks for such avenues.

The banks with high NPAs are thus in vicious circle.

Effect on Recycling of funds:

Recycling of funds is severely affected due to high NPAs in the banks. The banks are being

deprived of utilizing the funds blocked in NPAs in highly productive avenues.

Effects on capital restructuring:

In order to improve the prescribed capital adequacy ratio (CAR) and improve the working results

today or tomorrow all most all banks would be forced to approach the capital market for proper

restructuring of their capital base. Besides earning per share (EPS) the investing public observed

the quantum of NPAs the bank carries.

Effects on the image of the bank:

The high NPA’s in the balance sheet of a bank show a poor picture of the bank as it indicate

inefficiency and ineffectiveness in the credit management of the bank.

Effect on interest Rate:

Due to the high NPAs banks are charging high rate of interest on the good borrowers to

compensate the interest loss in the NPAs account. High NPAs in the banks have devastating

effects not only on the banks but also economy as whole. To explain its ill effect it is better to

quote extract from Narasimha committee Report 1998 which reads as NPAs constitute a real

economic cause to the nation in that they reflect the application of scare capital and credit funds

to unproductive uses. The money locked up in the NPAs is not available for productive use and

to the extent that banks seek. To make provisions for NPAs or to write off it is a charge on their

profit. To be able to do so banks have to charge their productive and diligent customers at higher

rate of interest. It is thus become a tax on efficiency. It is the customer who uses credit efficiently

those subsidies the inefficiency represented by NPAs.

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7. EARLIER SYMPTOMS:

By which one can recognize a performing asset turning in to non-performing asset Four

categories of early symptoms:-

1) Financial:

Non-payment of the very first installment in case of term loan.

Bouncing of cheque due to insufficient balance in the accounts.

Irregularity in installment.

Irregularity of operations in the accounts.

Unpaid overdue bills.

Declining Current Ratio.

Payment which does not cover the interest and principal amount of that installment.

While monitoring the accounts it is found that partial amount is diverted to sister concern

or parent company.

2) Operational and Physical:

If information is received that the borrower has either initiated the process of winding up

or are not doing the business.

Overdue receivables.

Stock statement not submitted on time.

External non-controllable factor like natural calamities in the city where borrower

conduct his business.

Frequent changes in plan.

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Nonpayment of wages.

3) Attitudinal Changes:

Use for personal comfort, stocks and shares by borrower.

Avoidance of contact with bank.

Problem between partners.

4) Others:

Changes in Government policies.

Death of borrower.

Competition in the market.

8. PREVENTIVE MEASURES FOR NPA:

Early Recognition of the Problem:

Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late to

retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues.

Identification of weakness in the very beginning that is:

When the account starts showing first signs of weakness regardless of the fact that it may not

have become NPA, is imperative. Assessment of the potential of revival may be done on the

basis of a 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.

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Identifying Borrowers With Genuine Intent :

Identifying borrowers with genuine intent from those who are non- serious with no commitment

or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the

branch level is paramount as they are the ones who have intelligent inputs with regard to

promoter’s 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 of Adequacy of Response:

Longer the delay in response greater the injury to the account and the asset. Time is a crucial

element in any restructuring or rehabilitation activity. The response decided on the basis of

techno-economic study and promoters commitment, has to be adequate in terms of extend of

additional funding and relaxations etc. under the restructuring exercise. The package of

assistance may be flexible and bank may look at the exit option.

Focus On Cash Flows:

While financing, at the time of restructuring the banks may not be guided by the conventional

fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh

credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow

rather than only on the basis of Funds Flow.

Management Effectiveness:

40

The general perception among borrower is that it is lack of finance that leads to sickness and

NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse

business conditions is a very important aspect that affects borrowing unit’s fortunes. A bank may

commit additional finance to an ailing 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:

During the exercise for assessment of viability and restructuring, a Pragmatic and unified

approach by all the lending banks/ FIs as also sharing of all relevant information on the

borrower would go a long way toward overall success of rehabilitation exercise, given the

probability of success/failure.

In some default cases, where the unit is still working, the bank should make sure that it

captures the cash flows (there is a tendency on part of the borrowers to switch bankers

once they default, for fear of getting their cash flows forfeited), and ensure that such cash

flows are used for working capital purposes. Toward this end, there should be regular

flow of information among consortium members. A bank, which is not part of the

consortium, may not be allowed to offer credit facilities to such defaulting clients.

Current account facilities may also be denied at non-consortium banks to such clients and

violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL)

may be very useful for meaningful information exchange on defaulting borrowers once

the setup becomes fully operational.

In a forum of lenders, the priority of each lender will be different. While one set of

lenders may be willing to wait for a longer time to recover its dues, another lender may

have a much shorter timeframe in mind. So it is possible that the letter categories of

lenders may be willing to exit, even a t a cost – by a discounted settlement of the

exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into

account.

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Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a

timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and

above with the banks and FIs on a voluntary basis and outside the legal framework.

Under this system, banks may greatly benefit in terms of restructuring of large standard

accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple

banking arrangements.

9. TOOLS FOR RECOVERING NPA

For recovery of NPA there are different tools available. The important purpose of these tools

are to recover the loan amount from borrowers. These tools can be used according to the loan

amount. Following are the different recovery tools:

1. Compromise settlement schemes:

The RBI/Government of India have been constantly guarding the banks to take steps for arresting

the incidence of fresh NPAs and have also been creating legal and regulatory environment to

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

recapitulate at this stage.

* The broad framework for compromise or negotiated settlement of NPAs advised by RBI in July

1995 continues to be in place. Banks are free to design and implement their own policies for

recovery and write-off incorporating compromise and negotiated settlements with the approval

of their Boards, particularly for old and unresolved cases falling under the NPA category. The

policy framework suggested by RBI provides for setting up of an independent Settlement

Advisory Committees headed by a retired Judge of the High Court to scrutinize and recommend

compromise proposals.

* Specific guidelines were issued in May 1999 to public sector banks for one time

nondiscretionary and non discriminatory settlement of NPAs of small sector. The scheme was

operative up to September 3, 2000. [Public sector banks recovered Rs. 668 crore through

compromise settlement under this scheme].

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* Guidelines were modified in July 2000 for recovery of the stock of NPAs of Rs. 5 crore and

less as on 31 March 1997. [The above guidelines which were valid up to June 30, 2001helped the

public sector banks to recover Rs. 2600 crore by September 2001].

* An OTS Scheme covering advances of Rs. 25000 and below continues to be in operation and

guidelines in pursuance to the budget announcement of the Hon'ble Finance Minister providing

for OTS for advances up to Rs. 50,000 in respect of NPAs of small/marginal farmers are being

drawn up.

2. Lok Adalats:

The institution of Lok adalat 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 Lok adalat and every award of the Lok adalat shall be deemed to be a

decree of a Civil Court and no appeal can lie to any court against the award made by the Lok

adalat. 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, defense 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 Lok adalat meets. In any case,

we should continue our efforts to seek the help of the Lok adalat.

43

3. 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.

4. Circulation of information on defaulters:

The RBI has put in place a system for periodical circulation of details of willful defaults of

borrowers of banks and financial institutions. This serves as a caution list while considering

requests for new or additional credit limits from defaulting borrowing units and also from the

directors/proprietors/partners of these entities. RBI also publishes a list of borrowers (with

outstanding aggregating Rs. 1 crore and above) against whom suits have been filed by banks and

FIs for recovery of their funds, as on 31st March every year. These measures had not

contributed to any perceptible recoveries from the defaulting entities. However, they serve as

negative basket of steps shutting off fresh loans to these defaulters. I strongly believe that a real

44

breakthrough can come only if there is a change in the repayment psyche of the Indian

borrowers.

5. Corporate Debt Restructuring (CDR):

Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely

and transparent system for restructuring of the corporate debts of Rs.20 crore and above with the

banks and financial institutions. The CDR process would also enable viable corporate entities to

restructure their dues outside the existing legal framework and reduce the incidence of fresh

NPAs. The CDR structure has been headquartered in IDBI, Mumbai and a Standing Forum and

Core Group for administering the mechanism had already been put in place. The experiment

however has not taken off at the desired pace though more than six months have lapsed since

introduction. As announced by the Hon'ble Finance Minister in the Union Budget2002-03, RBI

has set up a high level Group under the Chairmanship of Shri VepaKamesam, Deputy Governor,

RBI to review the implementation procedures of CDR mechanism and to make it more effective.

The Group will review the operation of the CDR Scheme, identify the operational difficulties, if

any, in the smooth implementation of the scheme and suggest measures to make the operation of

the scheme more efficient.

6. Credit Information Bureau:

Institutionalization of information sharing arrangements through the newly formed Credit

Information Bureau of India Ltd. (CIBIL) is under way. RBI is considering the recommendations

of the S.R.Iyer Group (Chairman of CIBIL) to operationalise the scheme of information

dissemination on defaults to the financial system. The main recommendations of the Group

include dissemination of information relating to suit-filed accounts regardless of the amount

claimed in the suit or amount of credit granted by a credit institution as also such irregular

accounts where the borrower has given consent for disclosure. This, I hope, would prevent those

who take advantage of lack of system of information sharing amongst lending institutions to

borrow large amounts against same assets and property, which had in no small measures

contributed to the incremental NPAs of banks.

7. Proposed guidelines on willful defaults/diversion of funds:

45

RBI is examining the recommendation of Kohli Group on willful defaulters. It is working out a

proper definition covering such classes of defaulters so that credit denials to this group of

borrowers can be made effective and criminal prosecution can be made demonstrative against

willful defaulters.

8. Corporate Governance:

A Consultative Group under the chairmanship of Dr. A. Gangly was set up by the Reserve Bank

to review the supervisory role of Boards of Banks and financial institutions and to obtain

feedback on the functioning of the Boards vis-a-incompliance, transparency, disclosure, audit

committees etc. and make recommendations for making the role of Board of Directors more

effective with a view to minimizing risks and overexposure. The group is finalizing its

recommendations shortly and may come out with guidelines for effective control and supervision

by bank boards over credit management and NPA prevention measures.

9. Sale of assets to reconstruction companies:

With a view to develop a healthy secondary market for NPAs and to further increase the options

available to banks, RBI has issued guidelines for purchase/sale of NPAs (including Non-

performing investments) on cash basis, to SCs/ARCs/Banks/Fls/NBFCs.

A financial asset, including assets under multiple/consortium banking arrangements,

would be eligible for sale, if it has remained an NPA/Nonperforming investment in the

books of the bank for at least 2 years. .

The option of restructuring by the bank has been ruled out.

There is no prohibition against assignment of the loan, in the loan documents.

The loan should be fully disbursed without any outstanding commitment on part of the

Bank.

In case of working capital, the loan should be due and payable.

In case of contingent liability, the same may also be sold on crystallization.

Homogenous pool within Retail Non Performing Financial Assets on a portfolio basis

provided each of Non Performing Financial Assets of the pool has remained as Non

Performing for at least 2 years in the books of the bank.

46

NPAs not eligible for sale:

1) NPAs where rehabilitation is approved and repayment is flowing as per approved plan (if

however for any reason the OTS terms are not complying with the borrower/guarantor, then it

may be offered for sale).

2) NPAs where OTS is under process/is being negotiated and where 25% of the offer amount has

been deposited by the borrower/guarantor (if however, OTS proposal fails for any reason, then it

may be offered for sale).

3) Accounts where restructuring proposals are under consideration of CDR Cell (if the CDR

proposal fails and is rejected by CDR Cell then the financial asset may be offered like any other

eligible account).

The accounts which are classified as NPA and have the balance of Rs1lac or above are sold to

Assets Reconstruction Companies (ARC).

Whenever Central office decides to sell the selected NPA accounts to ARC and others, Regional

Offices to ensure that they submit the required details at the earliest and carry out the nodal

centre jobs required for due diligence

Valuation:

Valuation of the underlying securities of the accounts/assets being sold to

ARCs/Banks/Fls/NBFCs should be got done from a suitable agency identified from the panel of

approved valuers. Such valuation should not be more than 6 months old.

Reserve Price:

The reserve price will be fixed after proper evaluation· of the alternative realization routes viz.

DRT, seizure under SARFAESI Act and Compromise/GTS etc. Any price offer below the

reserve price will not be accepted. However, if for valid reasons, the reserve price is required to

be revised, the same will remain open with approval of the competent authority.

Acceptability of the price offered by SCs/ARCs/Banks/Fis/NBFCs:

47

The Participating SCs/ARCs/Banks/Fls/NBFCs are expected to make offer/offers to the Bank on

selected assets, thereafter the Bank will make its own assessment of the value offered. The price

offered will be evaluated on the basis of the following:

i) The status of the operations of the borrowing unit- whether a closed unit or a going concern.

ii) Valuation and reliability under conditions of distress sale of assets charged to the Bank

including collateral.

iii) Worth of the guarantors .

iv) Feasibility of recovery through various alternate means (Le. compromise offers by

borrowers, legal action, BIFR mandated winding up proceedings, enforcement of security rights

under the provisions of SARFAESI Act 2002 or any other offer in hand etc.).

All the price offers will be recorded and evaluated against the reserve price arrived at

beforehand. Negotiations with the purchaser/ highest bidder in the price offered for sale of the

assets would be done by the negotiating team already in place in case of negotiation of price

offer with SCs/ARCs/Banks/Fls/NBFCs. The Negotiating Committee will recommend for sale of

financial assets to the competent authority.

Terms and Transfer/Sale:

The branches will ensure that the evaluation is based on latest valuation so that in the

case of immovable assets such valuation is preferably less than 6 months old at the time

of entering into sale with the SCs/ARCs/Banks/Fls/NBFCs.

The sale will be transacted on cash basis only and without recourse and such sale should

discharge the bank completely.

The financial asset would be sold in such a way that the asset is taken off the books of the

Bank and after the sale there will not be any known liability devolving on the Bank.

It will have to ensure that subsequent to sale of financial asset, bank does not assume any

operational, legal, or any other type of risks relating to the financial assets sold.

No sale would be made at a contingent price whereby in the event of shortfall in the

realization, the bank would have to bear a portion of the shortfall.

48

The assignment of the financial assets should be after full receipt of the consideration

amount.

When negotiation is over and the final offer price has been decided by the Negotiating

Committee, the proposals to accept the offer should be put up to the competent authority or

above as per delegation of financial powers for compromise settlements

10. 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,

Securitization and Securitization Companies

Enforcement of Security Interest

Creation of a central registry in which all securitization and asset reconstruction

transactions as well as any creation of security interests has to be filed.

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 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:

49

Take over possession of the secured assets of the borrower including right to transfer by

way of lease, assignment or sale;

Take over the management of the secured assets including the right to transfer by way of

lease, assignment or sale;

Appoint any person as a manager of the secured asset (such person could be the ARC if

they do not accept any pecuniary liability); and

Recover receivables 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.

By obtaining quotations from persons dealing in such assets or otherwise interested in

buying the assets;

By inviting tenders from the public;

By holding public auctions; or

By private treaty.

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% 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

50

acquisition of the assets. The Act stipulates several measures that can be undertaken by ARCs for

asset reconstruction. These include:

Enforcement of security interest;

Taking over or changing the management of the business of the borrower;

The sale or lease of the business of the borrower;

Settlement of the borrowers’ dues; and

Restructuring 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.

51

10. ANALYSIS AND INTERPRETATION OF DATA:

Year wise NPA at State Bank of Patiala.

Year 2008 – 2009

Details Amount (Rs. In Crores) % of Total

Standard Assets 43401.1 98.69

Substandard Assets 264.62 0.60

Doubtful Assets 272.58 0.62

Loss Assets 36.70 0.08

Total 43975 100

Standard Assets Sub- Standard Assets

Doubtful Assets Loss Assets0

10

20

30

40

50

60

70

80

90

100

98.69

0.6 0.62 0.08

Series 3

Assets

in %

52

Year 2009-2010

Details Amount (Rs. in Crores) % of Total

Standard Assets 46056.39 97.86

Sub-Standard Assets 603.06 1.28

Doubtul Assets 331.76 0.70

Loss Assets 71.79 0.15

Total 47063 100

Standard Assets Sub-Standard Assets

Doubtful Assets Loss Assets0

10

20

30

40

50

60

70

80

90

100

97.83

1.28 0.7 0.15

Series 3Assets

in %

53

Year 2010-2011

Details Amount ( Rs. in Crores) % of Total

Standard Assets 50971.32 97.36

Sub-Standard Assets 602.02 1.14

Doubtful Assets 546.2 1.043

Loss Assets 233.46 0.44

Total 52353 100

Standard Assets Sub-Standard Assets

Doubtful Assets Loss Assets0

10

20

30

40

50

60

70

80

90

100

97.36

1.14 1.043 0.44

% of Total

Assets

in %

GROSS NPA

54

Years 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Gross NPA

(Rs. In

Crores)

524.41 520.94 573.90 1006.61 1381.68

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

200

400

600

800

1000

1200

1400

1600

524.41 520.94 573.9

1006.61

1381.68

Series 3Years

Rs. i

n Cr

ores

Interpretation:

The above graph shows that gross NPA of State Bank of Patiala decreased by Rs. 3.47 Crores in

year 2007-2008. Then it again increased to Rs. 573.9 Crores. In 2009-2010 gross NPA increased

by Rs. 432.71 Crores and reached at Rs. 1006.61 Crores. In 2010-2011 Gross NPA again

increased to 1381.68 Crores.

NET NPA

55

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Net NPA (Rs.

in Crores)

238.41 216.99 263.63 482.72 620.77

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

100

200

300

400

500

600

700

238.41 216.99263.63

482.72

620.77

Column1Years

Rs.

in C

rore

s

Interpretation:

The above graph shows that Net NPA of State Bank of Patiala decreased by Rs. 21.42 Crores in

year 2007-2008. It again increased in 2008-2009 to 2010-2011. In year 2010-2011 Net NPA of

bank is Rs. 620.77 Crores.

MOVEMENT OF GROSS NPA

56

(Rs. in Crores)

Year 2007-2008 2008-2009 2009-2010 2010-2011

Opening

Balance

524.41 520.94 573.71 1006.61

Addition

during year

449.28 393.96 1001.71 1250.93

Reduction

during year

452.75 341.00 569.00 875.86

Closing balance 520.94 573.91 1006.61 1381.68

MOVEMENT OF NET NPA

(Rs. in Crores)

Year 2007-2008 2008-2009 2009-2010 2010-2011

Opening

balance

23.41 216.99 263.63 482.72

Addition during

year

372.49 301.09 705.81 841.57

Reduction

during year

393.91 254.45 486.72 703.52

Closing balance 216.99 263.63 482.72 620.77

SECTOR WISE NPA

57

Year 2009-2010

Sector % of NPA to total advantages in that sector

Agriculture and Allied activities 1.86

Industry ( micro& small , medium & large) 1.88

Services 2.32

Personal loans 2.91

Agriculture and Alied activities

Industry ( micro & small , medium &

large)

Services Personal Loans0

0.5

1

1.5

2

2.5

3

3.5

1.86 1.882.32

2.91

Series 3Sector

in %

Year 2010-2011

58

Sector % of NPA to total advantages in that sector

Agriculture and Allied activities 3.55

Industry ( micro & small , medium & large 2.28

Services 3.30

Personal loans 3.13

Agriculture and Allied activities

Industry ( micro & small, medium &

large)

Services Personal loans0

0.5

1

1.5

2

2.5

3

3.5

4

3.35

2.28

3.3 3.13

Series 3Sectors

in %

GROSS NPA RATIO

59

Gross NPA ratio:-Gross NPA ratio of gross NPA to gross advances of the bank. Gross NPA is

the sum of all loan assets that are classified as NPA as per RBI guidelines .The ratio is to be

counted in terms of percentage and formula for Gross NPA is as follows:-

Gross NPA = Gross NPA * 100

Gross advances

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Gross NPA

ratio (%)

2.14 1.42 1.31 2.14 2.64

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.5

1

1.5

2

2.5

3

2.14

1.42 1.31

2.14

2.64

Series 3Year

in %

Interpretation:

Gross NPA Ratio shows the bank’s credit appraisal policy. High Gross NPA ratio means bank

have liberal appraisal policy and vice-versa. In State Bank of Patiala this ratio is 2.14% in year

2006-2007and it has been decreased from year 2006-2007 to 2008-2009 from 2.14% to 1.31%.

But it again increased in year 2009-2010 & 2010-2011 and reached at 2.64 %.

NET NPA RATIO

60

The net NPA percentage is the ratio of net NPA to net advances in which the provision is to be

deducted from the gross advances. The provision is to be made for NPA account. The formula

for that is

Net NPAs = Gross NPAs - Provisions *100

Gross Advances - Provisions

Year 2006-2007 2007-2008 2008-2009 2009-2010 2010-2011

Net NPA

ratio (%)

0.83 0.60 0.60 1.04 1.21

2006-2007 2007-2008 2008-2009 2009-2010 2010-20110

0.2

0.4

0.6

0.8

1

1.2

1.4

0.830.6 0.6

1.041.21

Series 3Year

in %

Interpretation:

The Net NPA Ratio shows the degree of risk in portfolio of bank. High Net NPA ratio means

banks don’t have enough funds to do provision against the Gross NPA. In State Bank of Patiala

this Ratio is 0.83% in year 2006-2007 and it decreased from year 2006-2007 to 2008-2009 from

0.83% to 0.60% and again increased from year 2009-2010 to 2010-2011 from 1.04% to 1.21%.

PROVISION RATIO

61

Provision ratio is to be made for to keep safety against the NPA &directly affected on the gross

profit of the bank to gross of the banks. The formula is that:-

Provision ratio = Total Provision * 100

Gross NPAs

Year 2008-2009 2009-2010 2010-2011

Provision Ratio (%) 58.34 63.78 70.22

2008-2009 2009-2010 2010-20110

10

20

30

40

50

60

70

80

58.3463.78

70.22

Series 3Year

in %

Interpretation:

Provision ratio indicates the degree of safety measures adopted by the banks. It has direct bearing

on the profitability, dividend and safety of the shareholders. If provision ratio is less its indicates

that bank has made under provision. In year 2008-2009 provision ratio of State Bank of Patiala

was 58.34%. then it started increasing and has reached at 70.22% in 2010-2011.

CAPITAL ADEQUACY RATIO

62

The ratio of a Bank Capital to its Risk weighted Assets

Capital Adequacy Ratio = Capital * 100

Risk weighted Assets

Year 2007-2008 2008-2009 2009-2010 2010-2011

Capital

Adequacy Ratio

(%) Base I-I

12.50 11.43 12.45 12.25

Capital

Adequacy Ratio

(%) Base I-II

13.56 12.60 13.26 13.41

2007-2008

2008-2009

2009-2010

2010-2011

10

10.5

11

11.5

12

12.5

13

13.5

14

12.5

11.43

12.4512.25

13.56

12.6

13.26 13.41

Capital adequacy ratio(%) Base I-I

Capital adequacy ratio(%) Base I-IIYears

in %

Interpretation:

The capital adequacy ratio is important for them to maintain as per the banking regulations. Each

bank needs to create capital reserves to compensate the Non- Performing Assets. Each assets has

been given a risk weighted age as per RBI guidelines. Risk weighted assets= Assets * Risk

weighted age. So more the risk weighted assets more the bank has to maintain capital. The

capital adequacy ratio of state bank of Patiala is well above the minimum requirement of 9%

prescribed by RBI, and stood at 13.41% under Base I-II on March 2011 as against 13.26% as on

March 2010. It is 12.25% under Base I-I as on March 2011 as against 12.45% as on March

2010.

SUB-STANDARD ASSETS RATIO

63

It is the ratio of total substandard Assets to gross NPA of the Bank.

Sub – standard assets ratio = Total Sub- standard assets * 100

Gross NPA

(Rs. in Crores)

Year Sub-Standard Assets Gross NPA Sub –Standard

Assets Ratio (%)

2008-2009 264.62 573.90 46.10

2009-2010 603.06 1006.61 59.91

2010-2011 602.02 1381.68 43.57

2008-2009 2009-2010 2010-20110

10

20

30

40

50

60

70

46.1

59.9

43.57

Series 3years

in %

Interpretation:

This ratio shows the percentage of Sub-Standard Assets in Gross NPA of Bank. High Sub-

Standard Ratio means high proportion of Sub –Standard Assets in Gross NPA. High ratio shows

that the chances of recovery of assets are high. In State Bank of Patiala this ratio was 46.1% in

year 2008-2009. It increased to 59.9% in year 2009-2010 which is good for bank. In 2010-2011

it again decreased to 43.57% which is not good for bank.

DOUBTFUL ASSETS RATIO

64

It is the ratio of total doubtful Assets to gross NPAs of the bank

Doubtful Assets ratio = Total Doubtful Assets * 100

Gross NPA

Year Total Doubtful

Assets

Gross NPA Doubtful Assets

Ratio (%)

2008-2009 272.58 573.90 47.49

2009-2010 331.76 1006.61 32.95

2010-2011 546.2 1381.68 39.53

2008-2010 2009-2010 2010-20110

5

10

15

20

25

30

35

40

45

50

47.49

32.9539.53

Series 3Years

in %

Interpretation:

High Doubtful Ratio means more proportion of Doubtful Assets in Gross NPA. More Doubtful

Assets means bank should take action through recovery policy to reduce the level of Doubtful

Assets ratio. In State Bank of Patiala this ratio was 47.49% in year 2008-2009 and decreased to

32.95% in year 2009-2010 which is good for bank. In 2010-2011 it increased to 39.53% which is

good for bank.

LOSS ASSETS RATIO

65

It is the ratio of total loss asset to Gross NPA of the bank.

Loss Assets Ratio = Total Loss Assets * 100

Gross NPA

Year Total Loss Assets Gross NPA Loss Assets Ratio

(%)

2008-2009 36.70 573.90 6.39

2009-2010 71.79 1006.61 7.13

2010-2011 233.46 1381.68 16.89

2008-2009 2009-2010 2010-20110

2

4

6

8

10

12

14

16

18

6.39 7.13

16.89

Column1Years

in %

Interpretation:

High Loss Assets Ratio means more proportion of Loss assets in the Gross NPA. This should be

less in banks. The high ratio indicates that bank has more fraudulent accounts and it is bad for

bank. The bank must take necessary action to reduce the level of Loss Assets. In State Bank of

Patiala this ratio was 6.39% in year 2008-2009 but in 2009-2010 & 2010-2011 it increased from

7.13% to 16.89% which is not good for bank.

11. FINDINGS FROM RATIOS:

66

The Gross NPA ratio of bank is 2.14% in year 2006-2007and it has been decreased from

year 2006-2007 to 2008-2009 from 2.14% to 1.31%.But it again increased in year 2009-

2010 & 2010-2011 and reached at 2.64 % which is not good for bank.

The Net NPA ratio of bank was0.83% in year 2006-2007 and it decreased from year

2006-2007 to 2008-2009 from 0.83% to 0.60% and again increased from year 2009-2010

to 2010-2011 from 1.04% to 1.21%.

The provision ratio of State Bank of Patiala is 58.34%. Then it started increasing and has

reached at 70.22% in 2010-2011.

The capital adequacy ratio of state bank of Patiala is well above the minimum

requirement of 9% prescribed by RBI, and stood at 13.41% under Base I-II on March

2011 as against 13.26% as on March 2010. It is 12.25% under Base I-I as on March

2011 as against 12.45% as on March 2010.

It will be considered good if sub-standard ratio is high. The Sub-Standard ratio of bank

was 46.1% in year 2008-2009. It increased to 59.9% in year 2009-2010 which is good

for bank. In 2010-2011 it again decreased to 43.57% which is not good for bank.

Doubtful Assets should be low for the good health of bank. . In State Bank of Patiala this

ratio is 47.49% in year 2008-2009 and decreased to 32.95% in year 2009-2010 which is

good for bank. In 2010-2011 it increased to 39.53% which is good for bank.

In State Bank of Patiala this ratio is 6.39% in year 2008-2009 but in 2009-2010 & 2010-

2011 it increased from 7.13% to 16.89% which is not good for bank.

12. SUGGESTIONS:

67

Through RBI has introduced number of measures to reduce the problem of increasing NPAs of

the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act,

etc. A lot of measures are desired in terms of effectiveness of these measures. Suggestions for

reducing the evolutions of the NPAs of Public Sector Banks are as under.

Each bank should have its own independent credit rating agency which should evaluate

the financial capacity of the borrower before than credit facility.

The credit rating agency should regularly evaluate the financial condition of the clients.

Special accounts should be made of the clients where monthly loan concentration reports

should be made.

It is also wise for the banks to carryout special investigative audit of all financial and

business transactions and books of accounts of the borrower company when there is

possibility of the diversion of the funds and mismanagement.

The banks before providing the credit facilities to the borrower company should analyses

the major heads of the income and expenditure based on the financial performance of the

comparable companies in the industry to identify significant variances and seek

explanation for the same from the company management. They should also analyse the

current financial position of the major assets and liabilities.

Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they

would face the environmental threats and opportunities with the use of their strength and

weakness, and what will be their possible future growth in concerned to financial and

operational performance.

Independent settlement procedure should be more strict and faster and the decision

made by the settlement committee should be binding both borrowers and lenders

and any one of them failing to follow the decision of the settlement committee should be

punished severely.

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There should be proper monitoring of the restructured accounts because there is every

possibility of the loans slipping into NPAs category again.

Proper training is important to the staff of the banks at the appropriate level with ongoing

process. That how they should deal the problem of NPAs, and what continues steps they

should take to reduce the NPAs.

Willful Default of Bank loans should be made a Criminal Offence.

No loan is to be given to a Group whose one or the other undertaking has become a

Defaulter.

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13. CONCLUSION:

The Indian banking sector is the important service sector that helps the people of the India to

achieve the socio economic objectives. The Indian banking sector has helped the business and

service sector to develop by providing them credit facilities and other finance related facilities.

The Public Sector Banks have also shown good performance in the last few years. The only

problem that the Public Sector Banks are facing today is nonperforming assets. The non

performing assets means those assets which are classified as bad assets which are not possibly be

returned back to the banks by the borrowers. If the proper management of the NPAs is not

undertaken it would hamper the business of the banks. The NPAs would destroy the current

profit, interest income due to large provisions of the NPAs, and would affects the smooth

functioning of the recycling of the funds. The Public Sector banks involve its nearly 50% of

share in the NPAs. Thus we can imagine how Public Sector Banks are functioning.

Due to NPAs the income of the banks is reduced and the banks have to make the large number of

provisions that would curtail their profit. And due to this the financial performance of the banks

would not show good results. So, the problem of NPAs must be tackled in such a manner that

does not destroy the operational, financial conditions and also not affect the image of the banks.

Recently, RBI has taken a number steps to reduce NPAs of the Indian banks. And it has also

found out that many banks have shown positive figures in reducing NPAs as compared to the

past years.

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14. BIBLIOGRAPHY:

Annual Reports of State Bank of Patiala:

2006-2007

2007-2008

2008-2009

2009-2010

2010-2011

Internet sites:

www.sbp.co.in

www.rbi.org.in

http://en.wikipedia.org/wiki/Non-performing_asset

http://www.allbankingsolutions.com/non-performing-assets.htm

http://www.pravinthorat.com/effect-of-npa%E2%80%99s

http://www.indianmba.com/Faculty_Column/FC212/fc212.html

Books:

Khan.M.Y, Financial Services Tata McGraw Hill, New Delhi, Third edition.

Khan. M.Y, Indian Financial System Tata McGraw Hill, New Delhi, Fifth Edition

Bhole LM, Mahakul Jatinder Financial Institution and Markets (Structure, growth &

innovation) Tata McGraw Hill, New Delhi, Fifth Edition.

Babu G Ramesh Financial Services in India Ashok Kumar Mittal, New Delhi

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