Management of Non-Performing Assets (NPAs): A Comparative Study of

Public and Private Sector Banks in India

A dissertation submitted in partial fulfillment of the requirements for the award of the degree
Master of Commerce under Assam University, Silchar, India

(SESSION 2012-2014), M.COM 4th SEMESTER, ASSAM UNIVERSITY

Under the Supervision of:

Submitted By:

Dr. Joyeeta Deb

Biswajit Roy

Assistant Professor

Email ID: jitroy09@gmail.com;

biswajitlaxmiroy2014@hotmail.com (please
send your valuable feedback)

Department of Commerce
Assam University, Silchar

Department of Commerce
Mahatma Gandhi School of Economics & Commerce
Dargakona, Silchar-788011
Assam

CONTENTS
Title

Serial
No.
1

Declaration

Certificate

ii

Acknowledgement

iii

Preface

iv

List of Charts

List of Tables

List of Figures

Chapter: - 1 Conceptual Framework

1-26

Introduction

1-2

Meaning of Non-Performing Assets

2-3

Income Recognition of NPAs

Page No.

NPA Classifications

3-4

Types of NPA

4-5

Asset Classification

5-7

RBIs Guidelines for Provisioning Norms of NPAs

Non-Performing Assets as a Major Issue And Challenge For Banking

Industry
Impact of NPA on the Operations of Banks
High Cost of Funds Due to NPAs

8
8-9
9

Reasons of Non-Performing Assets

10-15

Measures to Control NPAs

15-18

Tools available to Banks to Manage their NPAs

18-25

Management/Resolution of NPAs

25-26

Chapter: - 2 Literature Review and Methodology

27-33

2.1 Review of Literature

27-32

2.2 Methodology

32-33

10

Chapter: - 3 Analysis of Non-Performing Assets

34-54

11

Chapter: - 4 Findings and Conclusion

55-58

Findings

55-56

Conclusion

57-58

12

Chapter: - 5 Bibliography

59-61

13

Appendix

a-d

DECLARATION

I do hereby declare that the dissertation work entitled Management of Non-Performing

Assets (NPAs): A Comparative Study of Public and Private Sector Banks in India
submitted to Assam University, Silchar is a record of an independent research work done
by me and is conducted in the partial fulfillment of the requirement of 4th semester,
M.Com. degree as per course curriculum offered by the Department of Commerce,
Assam University, Silchar.
This dissertation report or any part of it has not been previously submitted to this
University or any other institution for the award of any degree or diploma.

Biswajit Roy
Date:

M.Com. 4th Semester,

Place: Silchar

Department of Commerce

DEPARTMENT OF COMMERCE
ASSAM UNIVERSITY, SILCHAR
PIN: 788011, ASSAM, INDIA

Dr. Joyeeta Deb,

Assistant Professor,
Department of Commerce

CERTIFICATE

This is to certify that the Dissertation entitled Management of Non-Performing Assets

(NPAs): A Comparative Study of Public and Private Sector Banks in India is the research
work carried out by BISWAJIT ROY bearing Roll: 041412, No. 23200246 of M.Com and
Registration No. 10202790 of 2008-2009 of Assam University, Silchar, India under my
supervision towards the partial fulfillment of the requirements for the award of the Degree
of Master of Commerce in 2014 and that the dissertation has not found a basis for the
award previously of any degree, diploma, fellowship or any other similar title.

Signature
(Joyeeta Deb)

ii

ACKNOWLEDGEMENT

At the very outset, I would like to take the golden opportunity of thanking those
persons without whose guidance, motivations, inspirations and suggestions, it was
hardly possible for me to accomplish the project successfully.
First and foremost, I would like to express my humble gratitude to my guide Dr. Joyeeta
Deb for her guidance, constant supervision and support in completing the project.
I would like to express my special thanks and gratitude to Prof. Nikhil Bhusan Dey,
Dean, Mahatma Gandhi School of
Goswami, Head of

Economics and Commerce and Dr. Pranay Jyoti

the Department, Department of Commerce, Assam University

for

providing me necessary help and advice as and when required.

I would like to extent my sincere thanks and gratitude to all the faculty members of the
Department of Commerce, Assam University, who co-operated directly or indirectly to fulfill
the requirements of the project.

iii

PREFACE

Non-Performing Assets are the most vexed problem for the Indian banking industry. The
Government and Reserve Bank of India has promulgated a stringent regulatory framework in
order to contain NPAs of the banks.
In the liberalized economy, Banking and Financial sector get high priority. The banks in
India are facing the problem of Non-Performing Assets (NPAs). The earning capacity and
profitability of the banks are highly affected because of the existence of NPAs. Moreover, the
non-performance or non-receipt of interest and principal blocked banks money in the form of
funds and is not available for further use of banking business and thus the profit margin of the
banks goes down. In this connection, bank must be aware of the problems and recovery
legislations of NPAs. Compared to Private Sector Banks, Public Sector Banks are highly
affected by this three letter virus NPA, because whose objectives have been more social than
economic.
This present study analyzes the classification of loan assets in Scheduled, Public and
Private Sector Banks, composition of NPAs in different sectors and NPAs position in
different sectors.
It is also aimed to analyse the differences in the amount of NPAs and the trend of NPAs
in the Scheduled, Public, Old Private and New Private Sector Banks, it has tried to find
reasons for the differences. Resolutions and suggestions for controlling the mounting level of
NPAs in India are also provided therewith.

iv

List of Charts
1. Chart 1: NPA Classification
2. Chart 2: Provisioning Norms of NPAs

List of Tables
1. Table 1: Bank Group-Wise Classification of Loan Assets of Commercial Banks
2. Table 2: Percentage Growth Rate of Total Gross NPAs of All Public and Private
Sector Banks
3. Table 3: Non-Performing Assets of all Banks-Sector Wise
4. Table 4: Gross and Net NPAs of Commercial Banks (Bank Group-Wise)

List of Figures
1. Figure 1: Gross NPAs as Percentage Share of Total Gross Advances
2. Figure 2: Average Gross NPAs as Percentage of Total Gross Advances
3. Figure 3: Percentage Growth Rate of Average Gross NPAs
4. Figure 4: Priority Sector NPAs as Percentage Share on Total NPAs
5. Figure 5: Non- Priority Sector NPAs as Percentage Share on Total NPAs
6. Figure 6: Public Sector NPAs as Percentage Share of Total NPAs
7. Figure 7: Gross NPAs as Percentage of Gross Advances
8. Figure 8: Gross NPAs as Percentage of Total Assets
9. Figure 9: Net NPAs as Percentage of Net Advances
10. Figure 10: Net NPAs as Percentage of Total Assets

Chapter 1:Conceptual Framework

INTRODUCTION
Banking system plays a very significant position in the economic life of a country. The
strength of the economy is closely related to the soundness of its banking system and a wellbuilt banking sector is significant for a prosperous economy. Indian banking industry has
undergone several changes during the liberalization process. However, one troublesome crisis
affecting the banking sector is that of Non- performing assets. Non-performing assets does
not generate any new income to banks and also affect the profitability and effectiveness of
banks. At present, for all the public sector banks and for the Reserve Bank of India, these
NPAs became trouble assets. It is believed that the Indian banking sector had not been in its
best state of health for quite some time. One of the major reasons cited for this state of health
has been the persistence of Non-performing Assets (NPAs) in the books of banks. In the
pre-liberalization period the dominant segment in the banking industry was the public sector
banks. During this period, non-performing assets were treated as an exclusive problem of the
public sector banks. With liberalization, banking industry particularly commercial banking
has been facing a new environment. This is both in terms of the new policy framework
proposed by the Narasimham Committee in 1991 and the market conditions in banking
industry that have become more competitive.

The quality of assets held by banks and financial institutions is a critical indicator of the
health of the financial system. A high quality of assets reflects the level of banks credit risk
and efficiency in allocation of resources to productive sectors. The quality assets have been
deteriorating in case of both banks and financial institutions which has become an area of
great concern. While credit growth is one of the drivers of economic growth, NPAs are value
destroyers of the economy. The total distressed asset stock in India as on March 2005
excluding state financial corporations, mutual funds and the insurance sector is around Rs.
2,55,000 crore and this works out to 9.8 percent of the GDP at constant prices. With a high
credit growth of around 30 percent, there may be an increase of fresh flow of non-performing
assets as these assets are a natural product of credit. The large amount of NPAs
predominantly originates from the industrial sector. But retail loans accounted for bulk of the
addition to NPAs in 2005-06.

The Narasimham Committee Report notes, No other single indicator reflects the quality of
assets and their impact on banks viability than the NPA figure in relation to advances.

MEANING OF NON-PERFORMING ASSETS

A non-performing asset is an asset, including a leased asset, which ceases to generate income
for a bank whether in the form of interest or principal repayment. It can also be defined as an
advance, where payment of interest or repayment of instalment of principal (in case of term
loans) or both remains unpaid for a certain period. In India, the definition of NPAs has
changed over time.

According to the Narasimham Committee Report (1991), those assets (advances, bills
discounted, overdrafts, cash credit etc.) for which the interest remains due for a period of two
quarters (180 days) should be considered as NPAs. Subsequently, this period was reduced,
and from March 1995 onwards, the assets for which the interest has remained unpaid for 90
days were considered as NPAs.

The Securitization Reconstruction of Financial Assets and Enforcement of Security Interest

(SRFAESI) Act, 2002 defines NPA as an asset or account of a borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss asset in
accordance with the direction or guidelines relating to asset classification issued by the RBI

Non-performing assets (NPAs) are loans given by a bank or a financial institution wherein
the borrower defaults or delays interest or principal payments. According to the RBI norms,
any interest or loan repayment delayed beyond 90 days has to be identified as a nonperforming asset. Non-performing assets are categorized into sub-standard, doubtful and loss
assets for which provisions have to be made in the lenders books. Under the prudential
norms laid down by RBI, income should not be recognised on NPAs on an accrual basis but
should be recorded in the books of accounts only when it is actually received in respect of
such accounts.

Any NPA would migrate from sub-standard to doubtful category after 12 months. It would
get classified as a loss asset if it is irrecoverable or marginally collectible. The banks should
2

make full provision for loss assets, 100 percent of the unsecured portion of the doubtful assets
and 20 percent to 100 percent of the secured portion depending upon the period for which the
asset has remained doubtful. If the asset has remained doubtful for one year, the provisioning
requirement is 20 percent; if doubtful up to three years, the provisioning requirement is 30
percent and for more than three years, it is 100 per cent with effect from 31 March 2005.

INCOME RECOGNITION OF NPAs

Income should not be recognised on non-performing assets on accrual basis but should be
booked only when it is actually realised in respect of such accounts.

NPA CLASSIFICATIONS
With a view to moving towards international best practices and to ensure greater
transparency, 90 days overdue norms for identification of NPAs have been made applicable
from the year ended March 31, 2004. As such, with effect from March 31, 2004, a nonperforming asset shall be a loan or an advance where:
(i)

interest and/or instalment of principal remains overdue for a period of more than
90 days in respect of a term loan;

(ii)

the account remains out of order 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)

the instalment of principal or interest thereon remains overdue for two crop
seasons for short duration crops in respect of advances granted for agricultural
purpose;

(v)

the instalment of principal or interest thereon remains overdue for one crop season
for long duration crops in respect of advances granted for agricultural
purpose;

(vi)

the amount of liquidity facility remains outstanding for more than 90 days, in
respect of a securitization transaction undertaken in terms of guidelines on
securitization dated February 1, 2006;

(vii)

in respect of derivative transactions, the overdue receivables representing

positive mark to market value of a derivative contract, if these remain unpaid for a
period of 90 days from the specified due date for payment.

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

continuously in excess of the sanctioned limit/drawing power, but there are no credits
continuously for 90 days or credits are not enough to cover the interest debited during the
same period, these accounts should be treated as out of order.

TYPES OF NPA
Gross NPA:
Gross NPAs are the advances which is considered irrecoverable, for bank has made
provisions, and which is still held in banks' books of account. Gross NPAs are the sum total
of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date.
Gross NPA reflects the quality of the loans made by banks. It consists of all the non-standard
assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of
following formulas:
Gross NPAs= Sub-standard Assets + Doubtful Assets + Loss Assets

Gross NPAs Ratio = Gross NPA / Gross Advances

Net NPA:
Net NPA is obtained by deducting items like interest due but not recovered, part payment
received and kept in suspense account from Gross NPA. In other words, 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 ways:
Net NPAs = Gross NPAs Provisions / Gross Advances Provisions

Net NPA = Gross NPA (Balance in Interest Suspense account + DICGC/ECGC claims
received and held pending adjustment + Part payment received and kept in suspense account
+ Total provisions held)

ASSET CLASSIFICATION
Assets are classified into following four categories:

Standard Assets;

Sub-standard Assets;

Doubtful Assets;

Loss Assets

Chart 1:

NPA CLASSIFICATION
ASSETS

Performing/Standard
Non-Performing Assets

Assets

Sub-Standard Assets
Doubtful Assets

Loss Assets

Standard Assets: Standard assets are the ones in which the bank is receiving interest as well
as the principal amount of the loan regularly from the customer. Here it is also very important
that in this case the arrears of interest and the principal amount of loan do not exceed 90 days
at the end of financial year. If asset fails to be in category of standard asset that is amount due
more than 90 days then it is NPA and NPAs are further need to classify in sub categories.
5

Provisioning Norms:
From the year ending 31.03.2000, the banks should make a general provision of a minimum
of 0.40 percent on standard assets on global loan portfolio basis.
The provisions on standard assets should not be reckoned for arriving at net NPAs.
The provisions towards Standard Assets need not be netted from gross advances but shown
separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and
Provisions - Others' in Schedule 5 of the balance sheet.

Banks are required to classify non-performing assets further into the following three
categories based on the period for which the asset has remained non-performing and the
reasonability of the dues, they are mentioned as follows:
1. Sub-standard Assets;
2. Doubtful Assets;
3. Loss Assets

Sub- Standard Assets: With effect from 31 March 2005, a sub-standard asset would be one,
which has remained NPA for a period less than or equal to 12 months. The following features
are exhibited by sub-standard assets: the current net worth of the borrowers / guarantor or the
current market value of the security charged is not enough to ensure recovery of the dues to
the banks in full; and the asset has well-defined credit weaknesses that jeopardize the
liquidation of the debt and are characterized by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.

Provisioning Norms:
For urban co-operative banks, a general provision of 10 percent on total outstanding should
be made without making any allowance for DICGC / ECGC guarantee cover and securities
available.
For commercial banks, a general provision of 15 percent on total outstanding should be
made without making any allowance for ECGC guarantee cover and securities available. The
unsecured exposures which are identified as substandard would attract additional
provision of 10 percent, i.e., a total of 25 percent on the outstanding balance. However, in
view of certain safeguards such as escrow accounts available in respect of infrastructure
lending, infrastructure loan accounts which are classified as sub-standard will attract a
provisioning of 20 percent instead of the aforesaid prescription of 25 percent.
6

Doubtful Assets: A loan classified as doubtful has all the weaknesses inherent in assets that
were classified as sub-standard, with the added characteristic that the weaknesses make
collection or liquidation in full, on the basis of currently known facts, conditions and values
highly questionable and improbable. With effect from March 31, 2005, an asset would be
classified as doubtful if it remained in the sub-standard category for 12 months.

Loss Assets: A loss asset is one which 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. Also, these assets would have been identified as loss assets by the bank or
internal or external auditors or the RBI inspection but the amount would not have been
written-off wholly.

Provisioning Norms for Loss Assets:

The entire asset should be written off. If the assets are permitted to remain in the books for
any reason, 100 percent of the outstanding should be provided for.

RBIs Guidelines for Provisioning Norms of NPAs

In order to ensure that banks are not affected due to defaults, RBI has directed the banks to
make provisions or set aside money when an account turns bad.

Chart 2:
Asset Classification

Provisioning Requirements

Standard Asset

0.40% of the loan amount normally (some

exceptions are there)

Sub-Standard Asset

Secured: 15% on outstanding amount.

Unsecured: 25% on outstanding amount. In
some cases it is 20%.

Doubtful Asset:
3a. Up to 1 year

Secured: 25% of the outstanding amount.

3b. 1 to 3 years

Unsecured: 100% of the outstanding

amount.
Secured: 40% of the outstanding amount.
Unsecured:
amount.
7

100%

of

the

outstanding

3c. More than 3 years

Secured: 100% of the outstanding amount.

Loss Asset

Unsecured: 100% of the outstanding

amount.
100% for the outstanding amount.

NON-PERFORMING ASSETS AS A MAJOR ISSUE AND CHALLENGE FOR

BANKING INDUSTRY:
Non-performing Assets are threatening the stability and demolishing banks profitability
through a loss of interest income, write-off of the principal loan amount itself. RBI issued
guidelines in 1993 based on recommendations of the Narasimham Committee that mandated
identification and reduction of NPAs be treated as a national priority because the level of
NPA act as an indicator showing the bankers credit risks and efficiency of allocation of
resource. The financial reforms in Indian banking industry have helped largely to clean NPA
which was around Rs. 52,000 crores in the year 2004. The earning capacity and profitability
of the bank are highly affected due to this NPA.

IMPACT OF NPA ON THE OPERATIONS OF BANKS

Profitability
NPA means booking of money in terms of bad asset, which occurred due to wrong choice of
client. Because of the money getting blocked, the prodigality of bank decreases not only by
the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in
some return earning project/asset. So, NPA does not affect current profit but also future
stream of profit, which may lead to loss of some long-term beneficial opportunity. Another
impact of reduction in profitability is low ROI (return on investment), which adversely affect
current earning of bank.

Liquidity
Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to
borrowing money for shortest period of time leading to additional cost to the company.
Difficulty in operating the functions of bank is another cause of NPA due to lack of money.
8

Involvement of Management
Time and efforts of management is another indirect cost which bank has to bear due to NPA.
Time and efforts of management in handling and managing NPA would have diverted to
some fruitful activities, which would have given good returns. Now a day, banks have special
employees to deal and handle NPAs, which is additional cost to the bank.

Credit Loss
If a bank is facing problem of NPA, then it adversely affects the value of bank in terms of
market for credit. It will lose its goodwill and brand image and credit which have negative
impact to the people who are putting their money in the banks.

HIGH COST OF FUNDS DUE TO NPAs

Quite often genuine borrowers face the difficulties in raising funds from banks due to
mounting NPAs. Either the bank is reluctant in providing the requisite funds to the genuine
borrowers or if the funds are provided, they come at a very high cost to compensate the
lenders losses caused due to high level of NPAs. Therefore, quite often the corporate prefer
to raise funds through commercial papers (CPs), where the interest rate on working capital
charged by banks is higher. The enactment of the Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002, banks can issue notices to
the defaulters to pay up the dues and the borrowers will have to clear their dues within 60
days. Once the borrower receives a notice from the concerned bank and the financial
institution, the secured assets mentioned in the notice cannot be sold or transferred without
the consent of the lenders. The main purpose of this notice is to inform the borrower that
either the sum due to the bank or financial institution is paid by the borrower or else the
former will take action by way of taking over the possession of assets. Besides assets, banks
can also take over the management of the company. Thus, the bankers under the
aforementioned Act will have the much needed authority to either sell the assets of the
defaulting companies or change their management. But the protection under the said Act only
provides a partial solution. What banks should ensure is that they should move with speed
and charged with momentum in disposing off the assets. This is because as uncertainty
increases with the passage of time, there is all possibility that the recoverable value of asset
also reduces and it cannot fetch good price. If faced with such a situation than the vary
9

purpose of getting protection under the Securitisation Act, 2002 would be defeated and the
hope of seeing a must have growing banking sector can easily vanish.

REASONS OF NON-PERFORMING ASSETS

Following are the reasons for emergence of NPAs:

Political Causes: Political interference in the lending process of banking is leading to the
neglect of proper credit appraisal, need-based credit, follow up and supervision, has been
projected as one of the major reasons for increasing non-performing advances. Political
connections are widely perceived but, as is the case with wilful defaulters, difficult to prove.
Almost certainly the public sector character of banks and their vulnerability to outside
influence has been a dampener even in loan recovery. Directed lending, loan melas (fare),
credit to various segments under political influence have caused neglect of appraisal, scrutiny
and basic principles of lending, resulting lethargy in repayments or non-payments and
difficulty in recoveries of loans since there is always an air of expectancy that small loans and
agricultural loans in particular may be waived or totally written off en-masse under political
patronage.

Economic causes: These causes can be external or internal.

External factor: Several studies have gone into the causes of Non-Performing Advances and
come to the conclusion that macro-economic environment like recessions, infrastructure
bottlenecks, changes in government policies, etc. result in some lending of banks becoming
unproductive and borrowers turning defaulters, changes in economic policy, i.e. fiscal and
monetary, effected in response to economic and political needs from time to time in the
context of domestic and international scenario, have a bearing on the performance of banks
and business, as also on loans going bad. Changes in Industrial and Agricultural policies,
Export Import policy, Credit policy, Exchange Rate policy, Labour policy are also stated to
have partially contributed to the failure of some borrowers in the repayment of loans, as the
borrowed funds could not be used fruitfully due to some of the unfavourable impact and
effects of policy measures. Both banks and borrowers have been caught unaware by the fast
changing policies and find themselves trapped with funds locked up in units producing
nothing.

10

Internal factor: While banks and borrowers have not much of control over external factors,
lack of co-ordination between banks and other agencies involved particularly to have a tie up
for funding requirements etc. adds to the woes of the borrowers making them difficult to
perform. Factors like diversion of funds for business expansion/ diversification of associate
concerns, business/ market failure, time/ cost over run in the implementation of projects,
inefficient management on the part of borrowers, etc. have resulted in poor utilisation of
credit and consequent repayment problems. Wilful default by some of the borrowers taking
advantage of weak legal system is cited as another major cause of NPAs. On banks side,
delay in the sanctioning of loans, grant of inadequate credit deficiency in the credit appraisal
standards, lack of supervision and follow-up, general level of inefficiency in containing the
cost of funds due to very high overheads, poor productivity, high intermediation costs, low
level of technological and high rate of interest charged to borrowers to cover up the loss on
account of Non-Performing Advances have been emphasised as important causes for
mounting NPAs.

Social Reasons: On the social side, lack of education and enlightenment among the
borrowers buttressed with poor legal infrastructure generally stated to be supportive of the
borrowers rather than lenders and corruption have been observed to be major stumbling
blocks in the recovery of loans. Lack of integrity on the part of both bankers and borrowers
has also influenced formation of NPAs. Erosion in social, values, ethics and accountability
have been highlighted as some of the reasons for formation of huge NPAs. Awareness that
banks lend public money which is required to be returned, is unfortunately found missing,
aggravating the problem of recovery of loans.

Indiscipline in Utilising Funds: The other causes aggravating the problem of NPAs can be
found in the inability of borrowers to tie up the required funds as promoters contribution,
and in general financial indiscipline in the utilisation of funds for the purpose for which loans
are availed, inordinate delay in realisation of their own dues from debtors, poor capital
market support, lack of competitive spirit in the conduct of business and ability to cope with
the competition observed in product market, capital market, money market and foreign
exchange market witnessed in the area of efficiency, quality, cost, etc. resulting in the
inability to compete in the open market which in turn has resulted in the units turning
sick/getting closed without having funds to clear the banks dues. Lack of accountability on

11

the part of borrowers, lenders, auditors, accountants, lawyers, values and all connected
professionals have also been accelerating NPA formation.
Debtor Friendly Governments Actions: Non-Performing Advances were the result of
lending directed by government, on contact considerations, and a debtor-friendly definition of
Non-Performing Advances. When NPAs were redefined, many good loans suddenly
become bad or Non-Performing. There was no bringing of defaulters to book, because they
had ways to hold up action. The fetish for secrecy resulted in information regarding
defaulters not being shared between lenders, and to their names not being published.
Borrowers influenced this penchant for secrecy. The inexplicable delays in setting up of
adequate Debt Recovery Tribunals also points to the malign influence of corporate
borrowers. Chambers of Commerce is vocal about the need for lower interest rates or for
Indian lenders to be more sympathetic towards borrowers which have never taken action
against many of their defaulting members, some of them are even honoured with important
positions.

Lack of Technological Advancement: Lack of technological advancement which can help

in increasing the cost of funds, slower movement of funds, leading to inefficient and
ineffective payment and settlement system, is also stated to be one of the reasons for growing
NPAs.

Wilful Defaulters: The major culprits behind high NPAs are intentional defaults,
mismanagement and lack of planning. Public money obtained from banks has been
systematically siphoned away from our industries. The problem of NPAs has degenerated to
such an extent where in an effort to assign the blame, even Trade Unions have ventured in
recent times to publish lists of defaulters because of whom, they consider that some of the
banks are in dire financial straits. These lists are over and above the official lists published by
RBI of bank-wise defaulters of Rs. one crore and above in the banking system.

Better Creditworthy Companies moved away from banks: With the introduction of
varieties of debt instrument like Commercial paper, Corporate bonds, Debentures, etc. in the
credit market and linking of interest rates to the market forces and credit worthiness of the
borrowers, many of the better rated corporate concerns have moved away from banks,

12

leaving the latter with only second and third grade borrowers. This adds to the problem of
NPAs of banks.

Poor Appraisal Quality: The history of NPAs is complex. Poor appraisal quality and lack of
appreciation and understanding of broader economic, financial and market forces impacting
project and corporate viability are major reasons. External pressures in credit decisions have
played their part. Lack of integrity on the part of some appraising officials and bank
managements is another proximate cause. One more significant factor is the log-jam in
accessing collaterals and recovery of its market value because of legal hurdles.
Long Drawn-out Legal Procedures: The RBI Bulletin argues that Indias high level of
NPAs is a historical legacy. This is a rather dubious claim. It is far better to focus on the
systematic failures such as lacunae in the credit recovery system, arising from adequate legal
provisions on foreclosure and bankruptcy, long drawn-out legal procedures, and difficulties
in the execution of the decree awarded by the court. These continue to be a feature of the
present financial situation. Banks may themselves play an important role in raising NPAs
levels through sheer delay in offering adequate credit limits to working capital and thus lead
to poor operating results.

Priority Sector Lending Regulations: Other causative factors responsible for NPAs relate
to cyclical weaknesses, structural weaknesses and miscellaneous reasons. The weak capital
position of Indian Banking System is largely a reflection of growing assets-quality problems
stemming from weak underwriting and credit management systems and vulnerabilities of the
Indian Banking Sector to the impact of globalisation on the countrys key industrial sectors.
The asset-quality position has also suffered from regulations with respect to lending to
priority sectors.

Weak Credit Risk Management: Banks are derivative institutions. The health of the real
sector is reflected in the banking systems health. If the credit discipline is weak and state
intervention in the financial sector is pronounced, there is every possibility that the banking
system will be weak and often unsound. Experiences from and around the world indicates
that poor credit quality coupled with weak credit risk management practices continues to be a
dominant factor in bank failures and banking crises. Severe credit losses in a banking system

13

reflect simultaneous problems in several areas such as credit concentrations; credit processes
issues, and market and liquidity sensitive credit exposures.
Misusage of Funds: The borrowers misuse the amount given as loan by the banks. They do
not utilize the money for the purpose for which they have applied, rather they use it for some
other purposes. For instance, a farmer has taken loan for installing a tube well but has utilized
the money in the construction of house. Then under such circumstances, it becomes difficult
for that farmer to pay back the money and from the point of view of loan it becomes nonperforming.

No Proper Follow-up Action: The bank authorities fail to adopt proper follow-up action for
the advances which they have given. The bank authorities, while distributing loans do the
paper work formalities, they get the certificate from the borrower which gives the assurance
that the amount will be rightly used in the project, for which they have taken the loan. But the
authorities never bother to verify the validity of the certificate. Thus, due to no proper followup action, it becomes rather very difficult to recover the amount and thus the amount
becomes NPAs.

Natural Causes and Calamities: Sometimes natural causes and calamities are also
responsible for the emergence of NPAs. For example, a farmer borrowed the money for the
purchase of seeds or fertilizers, but due to drought there has been no crop throughout the
year, as it happened in Rajasthan in the year 2002, or there have been excessive rains thus
destroying the whole crop. Similarly, a factory owner taken a loan for the improvement of the
factory, but due to short-circuit, the whole is engulfed in flames, or because of flood, the
factory has been demolished or due to earthquake whole of the region has been destroyed.
Such natural calamities are also one of the reasons for emergence of NPA.

Pressure of Seniors on the Operating Managers: Sometimes excessive pressure of the

seniors on their operating staff/managers, forces them to advance credit. These managers
know it fully that it will be very difficult to recover the amount of debt. But force
circumstances compel them to obey the order and grant loans. This also leads to the
emergence of NPAs. In this type of cases, seniors may have good personal relations with the
borrowers or they want to advance those loans to their family members/relatives.

14

Under/Over Financing: Sometimes it has been noticed that the firms/individuals who
require higher amount of debt are given less amount and who are needed less amount are
given higher amount. In both the cases, the amount of debt is trapped. The person/firm,
getting inadequate amount, is not in a position to run his business smoothly and is also
incapable of paying back the same. On the other hand, the person, who gets excess loan, uses
the same in an uneconomic way and in unproductive activities. In both the cases, there is
delay in paying back the amount. Thus, it leads to emergence of NPAs.

Competition in Marketing of the Product: A businessman/producer borrows money for the

production of a product, but sometimes any other producer starts producing the similar
product. If it happens to be superior to the former, then this product fails in the market due to
competition. It becomes difficult for the former businessperson or the producer to return the
money back. Sometimes due to lack of transport facility, the product does not reach the
market in time for sale and thus, there is a delay in paying back the debt. Both these causes
are also responsible for emergence of NPAs.

Non-Availability of Proper Security against Funds: Some loans are given without
adequate mortgage/security. The non-availability of proper security against these funds
makes them insecure to recover.

Large Branch Expansion: In recent years, there has been a vast expansion of branches of
the banks, especially of public sector banks. The main motive behind this branch expansion
was to provide adequate banking facilities in rural, backward and remote-far off areas and
small towns. For the expansion of these branches, land was purchased, building was
constructed, banking infrastructure was purchased, employees were sent there, and new
employees were recruited as per the requirement. A lot of expenditure was incurred in all this
process. But many of these branch expansions proved to be uneconomic, and the recurring
expenditure without any yield is still going on. Some branches opened by the banks in rural
areas failed to generate return, hence turned out to be NPAs.

MEASURES TO CONTROL NPAs

In present scenario, NPAs are at the core of financial problem of the banks. Concrete efforts
have to be made to improve recovery performance. Measures required to be undertaken are
15

mainly two fold. Banks should make efforts first to avoid fresh addition on NPAs by their
effective presentation appraisal and secondly to recover the amount from accounts which
have already turned bad.

Preventive Measures: Most of the bankers feel that genuine viability problem of the
borrowing units, weakness in credit appraisal system, absence of effective monitoring and
supervision of loan account, absence of credit information sharing among the banks etc. are
some of the significant causative factors of high level of NPAs internal to the banks.

So for preventing the fresh inflow of funds into the non-performing category, banks should
reformulate their credit appraisal techniques.

Proper evaluation of the loan application may help in detecting the unviable projects at the
first instance.

Full information about unit, industry, its financial stake, management etc. should be
collected.

Industrial cell should be established at the bank level, which would have complete
information about the industry and its prospects in future.

Proper credit monitoring should be equally emphasized. There should be proper flow of
information from the units regarding their financial area, annual accounts, stock reports etc.,
which would enable the banker to know the need based credit requirement of borrower and
warning signals for taking quick remedial action.

Banks should inspect the progress of the project or the business. Separate monitoring
department should be established in large branches for periodical review of accounts,
comparative risk analysis and compliance of terms and conditions of sanction. Equal
emphasis should be given for monitoring of standard assets also.

Banks should be equipped with latest credit risk management techniques to protect the bank
funds and minimize insolvency risks. Banks should develop credit derivatives markets to
avoid these risks. There should be regular outflow of senior bank officers from all public
16

sector banks for specialized training in training institute to equip them with latest procedures
and practices.

Curative Measures:
Besides making efforts to stop the fresh additions of NPAs, banks have to take steps to
recover the amount from assets, which have already slipped into NPAs category. Significant
causative factors highlighted were slow recovery of legal cases, wilful default induced by
officially announced loan waiver schemes etc. the Indian legal system is sympathetic towards
the borrowers and works against the banks interest.

Despite most of their loans being backed by security, banks are unable to enforce their claims
on the collateral, when the loans turn non-performing and therefore loan recoveries have
been insignificant.

The Narasimham Committee on financial system (1991) has recommended the establishment
of Debt Recovery Tribunals (DRT) for the speedy recovery of the assets from NPAs category.
On the basis of recommendations 22 DRTs were established by passing the bill on Recovery
of Debt due to Banks and Financial Institutions Act 1993. But the performance of DTRs for
the past years has not been found satisfactory or up to the mark.

The Act has some limitations, which must be removed to make its effective implementation.

At present, one presiding officer is handling at least 80-90 cases per day. It is suggested that
DRT Act may be amended to enable the central government to appoint additional presiding
officers for speedy disposal of recovery cases.

One of the major factors accounting for delay in disposing of application by DRT is the delay
caused due to refusal by defendants to accept the summons, and at times due to change in
address too.

DRT may be empowered to order service of summons by hand, registered post and by
publications simultaneously. Attachment of immovable property of borrower is not admitted
due to service of summons.

17

Enforcement of security and obtaining court decree take unduly long time, it encourages
wilful default and ultimately the banks may be compelled to write off loans. Wilful default
should be declared a criminal offence.

Government should not go for mass waiver of interest/instalments as it sends unhealthy

signals to the borrower. During 1990-91, there was a massive waiver of rural debt amounting
to over Rs. 15000 crore and Rs. 65000 crore in 2008. These types of activities put a premium
on wilful default and dishonesty. It lowers the repayment ethics.

In case of government sponsored schemes, government should assist in recovery. It may be

noted that suggestions enumerated will go a long way in reducing the NPAs. This will not
only considerably improve the profitability of the banks and the quality of assets, but also
make the Indian Banking system stringent, resilient and geared to meet the challenges of
globalisation (Mohan Kumar & Govind Singh, 2012).

TOOLS AVAILABLE TO BANKS TO MANAGE THEIR NPAs

The provisions of Indian laws do not facilitate speedy and effective enforcement of securities.
The Sick Industries Companies (Special Provisions) Act, 1985 was enacted to provide a
framework for the rehabilitation and revival of sick industrial companies through the board
for industrial and financial reconstruction so as to enable inter alia release of public funds that
are locked up in such companies. This act was not only unable to provide a speedy and
efficient mechanism for rehabilitation and revival of the sick companies, but also provided
companies with a safe haven for defaulting.

Now, banks and financial institutions saddled with bad loans have multiple options like direct
settlement across the table, legal recourse in the form of approaching the high court or debt
recovery tribunals, enforcement of the new securitization law (where securities pledged with
them could be attached and subsequently sold), and lastly selling it to Asset Reconstruction
Companies (ARCs).

18

Debt Recovery Tribunals (DRTs):

They were setup under the Recovery of Debts due to Banks and Financial Institutions Act,
1993. This act provides for the establishment of tribunals for expeditious adjudication and
recovery of debts due to banks and FIs and for matters connected therewith and incidental
thereto. Under the act, two types of tribunals are set up: (i) Debt Recovery Tribunals (DRTs)
and (ii) Debt Recovery Appellate Tribunals (DRATs). The order passed by a DRT is
appealable to a DRAT but no appeal shall be entertained by the DRAT unless the applicant
deposits 75 percent of the amount due from him. However, the DRAT may waive or reduce
the amount of such deposit. DRTs have been empowered to decide on cases of advances of
Rs. 10 lakh and above.

The central government sets up the tribunals and provides them with a presiding officer,
recovery officers and other employees. Every bank and financial institutions can initiate the
procedure of recovery by making an application under Section 19 of the Recovery of Debts
due to Banks and financial Institutions Act, 1993, to the tribunal, within the local limits of
whose jurisdictions the defaulter company is located. If there is other banks whose loan to the
same company has become bad, the latter can join the recovery suit. After receiving a valid
application, the DRT takes up the cases and listens to arguments from the contesting parties.
The parties to suit or proceedings can be represented by an agent, including a lawyer, in
which case the application must be accompanied by a duly executed Vakalatnama.

DRTs have become more active as they have been vested with new powers such as power
to attach defendants property/assets before judgement, penal provisions for disobedient of
the tribunals order or breach of any terms of the order and appointment of receiver with
powers of realisation, management, protection and preservation of property. At present, there
are 25 DRTs and 9 DRATs but they have hardly made a dent on the recovery process.
Defendants challenge the validity of the act in the high court which hinders the functioning of
the DRTs.

One Time Settlement/Compromise Scheme

Banks have been advised to devise one-time compromise settlement schemes for resolution
of NPAs. The RBI issued guidelines for this scheme in March 2000. This scheme covers
NPAs classified as doubtful and NPAs classified as sub-standard, which have subsequently
become doubtful or less. This scheme covers actions under the SARFAESI Act and also
19

cases pending before courts/DRTs/BIFR, subject to consent decree being obtained from them
but does not cover cases of wilful default, fraud and malfeasance. As per this scheme, for
NPAs up to Rs. 10 crore, the minimum amount that should be recovered should be 100 per
cent of the outstanding balance in the account. For NPAs above Rs. 10 crore, the CMDs of
the respective banks should personally supervise the settlement of NPAs on a case-to-case
basis. The RBI has allowed the board of directors to evolve policy guidelines regarding onetime settlement of NPAs as a part of their loan recovery policy. The amount recovered under
compromise settlement up to March 2004 was Rs. 1,095 crore. The number of cases referred
for one-time settlement/compromise was10,262 and the amount recovered was Rs. 608 crore
during 2005-06.

The Reserve Bank issued a new set of guidelines for all public sector banks to go in for
one-time settlements of chronic NPAs of Rs. 10 crore and less in the small and medium
enterprises (SME) on March 2004. The revised guidelines cover all NPAs in the SME sector
which have become doubtful or loss or sub-standard as on March 31,2004 with outstanding
balance of Rs. 10 crore and below on the date on which the account was classified as
doubtful.

According to the settlement formula, the minimum amount to be covered for one time
settlement of doubtful NPAs is 100 percent of the outstanding balance in the account as on
that date. In the case of NPAs classified as sub-standard, as on 31 March,2004 which became
doubtful or loss subsequently, it is 100 percent of the outstanding balance plus interest at the
existing Prime Lending Rate (PLR) till the date of final payment. The amount arrived for
settlement is to be paid in lump sum. If not, borrowers should pay at least 25 percent upfront
and the balance within one year with interest at the PLR. These guidelines cover areas on
which the banks have initiated action under the SARFAESI Act and also cases pending
before courts/DRT/Board for Industrial and Financial Reconstruction (BIFR) subject to
consent decree being obtained from those defaults. Cases of Wilful default, fraud and
malfeasance will not cover.

SARFAESI Act 2002:

Securitisation And Reconstruction of Financial Assets and Enforcement of Security Interest
Act 2002 are popularly known as Securitisation Act. This act enables the banks to issue
notices to defaulters who have to pay the debts within 60 days. Once the notice is issued the
20

borrower cannot sell or dispose the assets without the consent of the lender. The
Securitisation Act further empowers the banks to take over the possession of the assets and
management of the company. The lenders can recover the dues by selling the assets or
changing the management of the firm. The Act also enables the establishment of Asset
Reconstruction Companies for acquiring NPAs. According to the provisions of the Act, Asset
Reconstruction Company of India Ltd. with eight shareholders and an initial capital of Rs. 10
crores has been set up. The eight shareholders are HDFC, HDFC Bank, IDBI, IDBI Bank,
SBI, ICICI, Federal Bank and South Indian Bank.

Lok Adalats:
They are constituted under the Legal Services Authority Act, 1987. They have been setup to
help banks to settle disputes involving accounts in doubtful and loss category. Lok
Adalats have been found suitable for the recovery of small loans. According to RBI
guidelines issued in 2001, they cover NPA up to Rs. 5 lakhs, both suit filed and non-suit filed
are covered. Lok Adalats avoid the legal process.

Lok Adalats help in resolving disputes between the parties by conciliation, mediation,
compromise or amicable settlement and thereby reduce burden on courts. They were
conferred adjudicatory status and every award of the Lok Adalat shall be deemed to be a
decree of a civil court and no appeal can be made to any court against the award made by the
Lok Adalat. They are generally presided over by two or three senior persons including retired
senior civil servants, defence personnel and judicial officers.

The government in 2004 revised the monetary ceiling of cases to be referred to Lok
Adalats organized by civil courts from Rs. 5 lakh to Rs. 20 lakh. Debt recovery tribunals
(DRTs) have now been empowered to organise Lok Adalats to decide on cases of NPAs of
Rs. 10 lakh and above. Banks were advised to participate in the Lok Adalats convened by
various DRTs/Debt Recovery Appellate Tribunals (DRATs) for resolving cases involving Rs.
10 lakh and above to reduce the stock of NPAs. The Public Sector Banks had recovered Rs.
40 crores by September 2001. Despite being a popular method, banks find difficulty in
bringing the parties together when the Lok Adalat meets.

21

Corporate Debt Restructuring (CDR):

The scheme of CDR was institutionalised in 2001-02 to provide a timely and transparent
system for restructuring of corporate debts of Rs.20 crore and above with the banks and
financial institutions. The corporate debt should be outside the purview of the Board for
Industrial and Financial Reconstruction (BIFR), DRTs or other legal proceedings. The
objective of the scheme is to enable corporate affected by certain internal/external factors to
restructure their debt through an orderly and co-ordinated debtor-creditor agreement and
inter-creditor agreement which results in preserving their viability and minimising losses to
creditor/other stakeholders.

The RBI revised the guidelines with respect to the CDR mechanism in February 2003. The
revised guidelines allow account categorised as standard, sub-standard or doubtful for
restructuring and independent consultants to help in preparing the restructuring plan. The
main features of the revised guidelines are the introduction of two types of restructuring
under the CDR System. Accounts which are classified as standard and sub-standard would
be restructured under the first category (Category I) whereas accounts classified as doubtful
would be restructured under the second category (Category II). CDR will have a three-tier
structure consisting of the CDR Standing Forum and the core Group (the policy-making
body), CDR Empowered Group (the functional group deciding on the restructuring of cases
referred to CDR mechanism) and the CDR Cell (the secretariat to the CDR system). Other
notable changes in the scheme relate to broadening of eligibility criteria to include suit-filed
cases provided the proposal to restructuring is supported by 75 percent of the lenders by
value; eligibility of large erstwhile BIFR cases to be decided by CDR Core Group,
composition and enhancement of the scope of the core group, additional functions to the
CDR Empowered Group, flexibility in sanction of additional assistance as part of
restructuring package, availability of exit option out of the package, restructuring of doubtful
assets cases under Category II scheme, discretion to join the CDR System on a case-by-case
basis to institutions like UTI, LIC, GIC, and foreign lenders who have financed from outside
the country.

CDR is a popular mechanism among lenders as it avoids delays in multiple lender

arrangements and increases transparency in the process. Financial restructuring includes
extension of loan maturity, reduction of interest rates, write-off principal or debt to equity
/convertible bond swap. Business restructuring comprises of sale of assets or business units,
22

spin-off business division or mergers and amalgamations. Operational restructuring includes

changes in company management, assets sales, special audits and divestiture and/or
liquidation of non-viable and non-core assets.

Wilful Defaulters:
A large number of defaulters strategically defaulted on their repayment obligations on
realising that the legal machinery was ineffective in taking any steps against them. As per the
RBI guidelines on detection of wilful defaults, a wilful default occurs when a borrower
defaults in meeting its obligations to the lender when it has a capacity to honour the
obligations or when funds have been utilised for purposes other than those for which finance
was granted.

The RBI publishes a list of borrowers with outstanding aggregating Rs. one crore and
above and against whom suits have been filed by banks and financial institutions for recovery
of their funds as on 31 March every year. The banks have to submit a list of wilful defaulters
to the SEBI also so as to prevent their access to capital markets. The RBI has also advised
public sector banks to examine all cases of wilful default of Rs. one crore and above and file
criminal suits in such cases. A wilful defaulter does not get any new loan from FIs. Also,
promoters are not allowed to raise resources for floating new ventures for five years from the
date of the Reserve Bank publishing their names in the list of wilful defaulters.

Banks and financial institutions are required to form a committee of higher functionaries
headed by the executive director for classification of borrowed accounts as wilful defaulters,
and create a redressal mechanism in the form of a committee headed by the chairman and the
managing director to be carried out through two distinct processes, namely, (i) identification
of default as wilful based on the prescribed norms through a committee approach, and (ii)
suitably advising the borrower about the proposal to classify him as wilful defaulter, along
with the reasons thereof. The concerned borrower would be provided reasonable time for
making representation against such decision to the committee members. A final declaration
as wilful defaulter would be made only after a view is taken by the committee on a specific
representation.

23

Asset Reconstruction Companies:

The SARFAESI Act, 2002 paved the way for setting up Assets Reconstruction Companies
(ARCs) under Section 30 of the act. ARC is setup to help the banks and financial institutions
to clean up their balance sheets. Asset Reconstruction Company is also known as
Securitisation Company (SC) or Reconstruction Company (RC).

ARC is an important constituent of the financial system because of the following reasons:

Isolates non-performing loans from the balance sheets of banking and financial institutions
and thereby enable them to focus on their core activities.

Facilitates development of market for distressed assets.

An ARC is registered under the Companies Act and regulated by the RBI as a non-banking
financial company [u/s. 451 (f) (iii) of RBI Act, 1934].

The functions of an ARC are specified in RBI Notification dated 23 April 2003, which may
be as follows:

Acquisition of financial assets (as defined u/s.2 (L) of the SARFAESI Act.

Change or takeover of management/sale or lease of business of the borrower (as per the
guidelines to be issued by the RBI in this behalf).

Rescheduling of debts.

Enforcement of security interest as per Section 13 (4) of the SARFAESI Act, 2002.

Settlement of dues payable by the borrower.

Benefits of sale of NPAs to ARCs:

Enables banks/FIs to remove NPAs from the loan books;

Enable banks/FIs to focus on their core activities;

Faster implementation of resolution strategy by ARCs;

Reduces expenditure of banks/FIs on NPA maintenance.

Methods available to ARCs for asset reconstruction and recoveries:

Restructuring of assets;

Settlement of debts;

Sale of assets through enforcement of security rights under SARFAESI Act;

24

Sale/lease of management and business of the borrower.

Settlement of Cases with Deposit Insurance and Credit Guarantee Corporation

(DICGC):
If DICGC cover is available, the bank may try to complete all necessary formalities for
DICGC claim and make proper follow-up with the corporation in order to get the claim
settled at earliest so that NPAs are reduced to some extent. The terms of guarantee cover of
DICGC are as under: (a) an account should be written of first and only afterwards claim
should be lodged with DICGC, the time limit for preferring the claim is one year after the
date of write-off; (b) Claim will be entertained by DICGC only if recovery in the account is
not less than 25% of the total debts in the account at the date of write-off; (c) Guarantee cover
is available only on the principle amount sanctioned by the bank, not on interest applied,
charges incurred like inspection charges, insurance etc.; (d) For term loans, cover is based on
the principle amount outstanding as at the date of write-off; (e) For cash credit and overdrafts,
the guarantee cover is based on the amount outstanding within the regular limit.

MANAGEMENT/RESOLUTION OF NPAs

A reduction in the total gross and net NPAs in the Indian financial system indicates a
significant improvement in management of NPAs. This is also on account of various
resolution mechanisms introduced in the recent past which include the SARFAESI
(Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest)
Act, one time settlement schemes, setting up of the Corporate Debt Restructuring (CDR)
mechanism, strengthening of Debt Recovery Tribunals (DRTs). From the data available of
Public Sector Banks as on March 31, 2003, there were 1,522 numbers of NPAs as on March
31, 2003 which had gross value greater than Rs. 50 million in all the public sector banks in
India. The total gross value of these NPAs amounted to Rs. 215 billion. The total number of
resolution approaches (including cases where action is to be initiated) is greater than the
number of NPAs, indicating some double counting. As can be seen, suit filed and Bureau of
Industrial Finance & Reconstruction (BIFR) is the two most common approaches to
resolution of NPAs in public sector banks. Rehabilitation has been considered/adopted in
only about 13% of the cases. Settlement has been considered only in 9% of the cases. It is
likely to have been adopted in even fewer cases. Data available on resolution strategies
adopted by public sector banks suggest that Compromise settlement schemes with borrowers
25

are found to be more effective than legal measures. Many banks have come out with their
own restructuring schemes for settlement of NPA accounts. State Bank of India, HDFC Bank
Limited, M/s. Dun and Bradstreet Information Services (India) Private Ltd. and M/s. Trans
Union to serve as a mechanism for exchange of information between banks and FIs for
curbing the growth of NPAs incorporated Credit Information Bureau (India) Limited (CIBIL)
in January 2001. Pending the enactment of CIB Regulation Bill, the RBI constituted a
working group to examine the role of CIBs. As per the recommendations of the working
group, Banks and FIs are now required to submit the list of suit-filed cases of Rs. 10 million
and above and suit filed cases of wilful defaulters of Rs. 2.5 million and above to RBI as well
as CIBIL. CIBIL will share this information with commercial banks and FIs so as to help
them minimize adverse selection at appraisal stage. CDR is a non-statutory mechanism based
on debtor-creditor agreement and inter-creditor agreement. Restructuring helps in aligning
repayment obligations for bankers with the cash flow projections as reassessed at the time of
restructuring. Therefore, it is critical to prepare a restructuring plan on the lines of the
expected business plan along with projected cash flows. The CDR process is being stabilized.
Certain revisions are envisaged with respect to the eligibility criteria (amount of borrowings)
and time frame for restructuring. Foreign banks are not members of the CDR forum, and it is
expected that they would be signing the agreements shortly. However, they attend meetings.
The first ARC to be operational in India- Asset Reconstruction Company of India (ARCIL) is
a member of the CDR forum. Lenders in India prefer to resort to CDR mechanism to avoid
unnecessary delays in multiple lender arrangements and to increase transparency in the
process. While in the RBI guidelines it has been recommended to involve independent
consultants, banks are so far resorting to their internal teams for recommending restructuring
programs.

26

Chapter: - 2
Literature Review and
Methodology

2.1 REVIEW OF LITERATURE

This section provides an overview of some of the existing literature with regard to the NPA.
In purview of preventing assets from slipping down to NPAs for effective running of banks,
maintaining the financial liquidity and health of banks, enhance the performance and to
overcome/manage the problem of existing NPAs of banks many empirical research studies
have been made in this area from time to time. A synoptic study will help us to understand
the concept, types, reasons, trend, position of NPAs in Indian banking sector, and thereby can
find out resolutions to NPAs management. This literature review will help us to better
understand both research topics and the existing gap:
Dey, Bhusan, N. and Biswas, M. (2010) conducted research study on Management of NPAsA non-legal approach (with special reference to State Bank of India) to examine the existing
NPAs management system of SBI operating in the districts of Barak Valley of Assam, it has
also made attempt to construct an index of effective management of NPAs. It relied on
primary data for examining the existing NPA management. Thirty-five officials of SBI
working in various branches have been interviewed through a well devised questionnaire. No
statistical analysis has been done because of it was based on interviews with a few bank
employees having knowledge about the NPA management and being based on crude scoring
system. It found out that NPA management policy of SBI seeks to lay down on some basic
tenets like stop slippage of performing assets to non-performing assets through early
identification on the basis of early warning signals and initiation of corrective action. Once
the assets are classified as NPAs, the branch/bank should redouble its efforts to reduce the
quantum of NPAs. By pre-sanction appraisal technique, bank appraises the feasibility of the
project. The technical feasibility of the project is also given prior importance in the NPA
management policy of SBI but a few bank officials of selected branches sanctions loans on
the basis of borrowers reputation. On the other hand, bankers argue that due to shortage of
staff etc., it is not possible to monitor each account. Because of that, they follow-up only the
high value advances. Relative seriousness for preventing NPA slippage is indicated by some
selected branches as compared to all branches in this region. Monitoring of small advances,
individual case analysis of problem loan needs serious attention. Lecture method is applied of
imparting training for handling bad loans. One of the prime reasons for NPAs of SBI is

27

overstressed focus on tackling NPAs i.e. managing loans after slipped into non-performing
category.
Balasubramaniam, C.S. (2011) has conducted a study on Non-Performing Assets and
Profitability of Commercial Banks in India during 2001-2010 to analyse the trend of NPAs
of Public Sector Banks, Private Sector banks and Foreign Banks and also raising concerns
about financial performance and operations of the borrowers. It also focuses on the issues and
challenges on the performance of banking sector and financial stability of the economy. It
uses simple statistical tool. It has observed that Indian banks have overall demonstrated a
trend of continued good performance and profitability despite rising interest rates, increase in
operating costs and the spillover effects of recent global financial crisis. The level of NPAs is
high with all banks. This can be brought down by good credit appraisal procedures, effective
internal control systems along with their efforts to improve asset quality in their balance
sheets.
Narula, S. and Singla, M. (2014) conducted a study named Empirical Study on NonPerforming Assets of Banks for the period of 6 years i.e. 2006-07 to 2011-12 to compare the
total advances, net profit, gross NPA and net NPA of Punjab National Bank so as to study the
impact of NPA on banks; to access the performance of Punjab National Bank; to study the
relationship between net Profit and net NPA of the bank. The data relating to annual reports
of the PNB is collected, then analysed by using tables and co-efficient of correlation. It
founded that there is a positive relation between net profit and NPA i.e. with the increase in
profit, NPA also increases and this is because of mismanagement, gross NPAs and net NPAs
are increasing every year, there is adverse effect on the liquidity of bank, bank is unable to
give new loans to customers due to lack of funds which arises due to NPA. Banks
performance is shaking due to varieties of customers.
Rajeev, M. and Mahesh, H. P (2010) conducted a study On Banking Sector Reforms and
NPA: A Study of Indian Commercial Banks for the period of 2002-2009 to provide an
overview of the NPA problem in India concentrating on the various dimensions involved. For
analysis, Percentage Method is used. It compares India with few other countries across the
globe. They observed that NPA is the root cause of the global financial crisis. The problem of
NPA has received considerable attention after the Liberalization of the financial sector in
India. To reduce NPAs, various measures are taken by government of India like Asset
28

Reconstruction Company was established for rescheduling and restructuring of banks,

recovery through Lok Adalats, Civil Courts, Debt Recovery Tribunals and One Time
Settlement/Compromise Settlement had been established. Accounting norms had been
modified substantially and mechanisms are devised for reduction of bad loans. Banks
however, says that decline in their performance is mainly due to the awareness of the problem
of bad loans at the bank level. It remains true that NPA in the priority sector is still higher
than that of the non-priority sector.
Das, S. (2007) conducted a study on Management of Non-Performing Assets in Indian
Public Sector Banks: With reference to Jharkhand for the period of 2002-2008 to find the
reasons and solution to the problem of growing level of NPAs. The study takes sample of six
districts of Jharkhand i.e. Ranchi, East Singbhum, Bokaro, Dhanbad, Hazaribagh, Gumla.
Simple statistical tool are used. It reveals that bankers feel that lack of entrepreneurship and
wilful defaults are important reasons for the generation of NPAs and the borrowers hold
market failure as the reason for the inability to repay their loans in time. The solutions for
solving the problem are: Effective and regular follow-up of the end use of the funds, healthy
banker-borrower relationship should be developed and government of India has to set ARCs
to manage NPAs to face the challenges.
Khanna, P. (2012) conducted a study on Managing Non-Performing Assets in Commercial
Banks for 5 years i.e. 2005-2010 to investigate the growth of NPA in the commercial banks.
The study was based on secondary data, criteria for selecting banks was the highest business
per employee. It finds that high level of NPAs suggests high probability of a large number of
credit defaults that affect the profitability and net worth of banks and also erodes the value of
the assets. NPA growth involves the necessity of provisions which reduces the overall profit
and share holders value. The growth of gross NPAs out of total advances is declining in SBI,
State Bank of Patiala and State Bank of Indore. Again, growth of non-performing assets in
Oriental Bank of Commerce, Corporation Bank and Bank of Baroda shows a declining trend.
Also founds that major chunk of NPAs of nationalised banks accrue in the priority sector and
major chunk of NPAs in private sector accrue in the non-priority sector.
Ghosh, D. and Ghosh, S. (2011) conducted a study on Management of Non-Performing
Assets in Public Sector Banks for the period of 6 years from 2005-2010. The purpose of the
study is to analyze the movement of the non-performing assets in public sector banks of
29

India, by analyzing the financial performance of the banks and management of the nonperforming assets under the purview of new policy actions and regulatory compliance of the
Reserve Bank of India. It uses simple statistical tool for analysis. From the study, it is
observed that the Indian public sector banks have been able to manage high level of capital
adequacy ratio to provide cushion for any unexpected losses. The quality of advances in
Indian public sector banks has deteriorated over the years due to aggressive lending policies
undertaken by the banks. Quality of lending and recovery in non-priority sector has been
improving over the years. Public sector banks in India over the years have been able to
control non-performing assets because of stringent regulatory norms of RBI. Though the
banks have been able to strengthen its capital adequacy requirements, enhancement in
monitoring and recovery procedures is required to improve the overall management of nonperforming assets. Use of Core Banking Solution (CBS) by public sector banks in India to
monitor regularly the movement of non-performing assets is definitely a step in the right
direction.
Malhotra, M. and Laveena (2014) conducted a study named Empirical Analysis of NPAs
Related to Private Banks in India for 8 years i.e. 2004-2012 to investigate the movement of
non-performing assets; to relate the effects of non-performing assets on the profitability
position of private sector banks; effect of priority sector lending on the total NPAs of Public
sector banks. It used secondary data as a basis. Data collected has been analysed and
interpreted by various statistical tools like ratios, averages, percentages, co-efficient of
variation, correlation and regression test. It finds that the trends of gross advances as
compared to non-performing assets are in continuing increase form which indicates the
performance of these private banks goes in better way. The private banks have great
opportunity to manifest themselves. The rise of standard assets over the years is
compensating the fall of other assets. Also founds that there is a high degree of correlation
between profitability and non-performing assets of private sector banks which badly affect
the growth of the economy.
Sikdar, P. and Makkad, M. (2013) conducted study on Role of NPAs in the Risk Framework
of Commercial Banks to provide an insight into the concept of NPA as a standard criterion
for assessing commercial bank credit risk globally, the means of interpreting credit risk from
existing level of bank NPAs, step taken and procedures implemented by major Indian
commercial banks towards recovery of NPAs. The study is based on extensive study of
30

annual publications on performance of commercial banks including both public and private
sector provided by the Indian Banks Association (IBA). It has founded that SBI has taken
certain measures to prevent NPA slippage such as tighten the appraisal norms/loan eligibility
criteria, risk scoring models have been developed; account tracking models have been
operationalized in all circles; towards giving focussed attention to high value NPAs in SMEs
and corporate sectors, Stressed Assets Management Group (SAMG) was created. In spite of
the challenging phase of Indian Economy, Punjab and Sind Bank group continued its efforts
in maintaining the asset quality by accelerating recovery of NPAs. Identification,
measurement, monitoring and management of risks remain a key focus area for HDFC Bank.
Significant improvements in terms of asset quality and performance have been observed over
the years with respect to Indian commercial banks. From 2009 to 2012, commercial banks
have seen a high level of NPAs in share with total advances which may be due to recession.
Gurumoorthy, T.R. and Sudha, B. (2012) has conducted a study on Non-Performing Assets
(A study with reference to Public Sector Banks) for 2005-2011. The objective was to
analyse the classification of loan assets in Public sector banks and to analyse the composition
of NPAs in different sectors. For this study, secondary data have been collected and shown in
tables like classification of loan assets, composition of NPAs, non-performing assets as a
percentage to total assets and as percentage to advances and then analysed. It founded that the
amount of standard assets showed an increasing trend; the ratio of sub-standard, doubtful and
loss assets to total advances showed a decreasing trend which shows a clear indication of the
effectiveness of follow-up actions of PSBs in monitoring NPAs. Then, the share of NPAs in
priority sector to total NPAs has increased marginally however the share in non-priority
sector has declined. There is significant improvement in NPAs recovery. At the end of the
study period gross NPAs to total assets ratio shows increasing trend, and in case of gross
NPAs to gross advances ratio, in the initial years it shows decreasing trend then at the end of
period of study it showed increasing trend.
Patidar, S. and Kataria, A. (2012) conducted a study on An Analysis of NPA in Priority
Sector Lending: A Comparative Study between Public Sector Banks and Private Sector
Banks of India for the period of five years from 2005-2010. The objective of the study is to
analyse whether there is significant difference between NPA of SBI & Associates, Old
Private Banks and New Private Banks with the NPA of Nationalized Banks and to find out
the significant impact of Priority Sector Lending on the Total NPA of Banks using tools like
31

regression analysis and ratio analysis. From the study, it has showed that priority sector
lending has significant impact on total NPA of public sector banks wherein private sector
banks, priority sector lending has no significant impact on total NPA of Banks. It had also
shown that there is significant difference between NPA of Nationalized Banks with that of
SBI & Associates, New Private Banks and Old Private Banks. The reasons for growing
advances in Priority Sector are the regulations given by RBI, where banks need to
compulsorily invest in these sectors. NPA is an important factor, which affects the
performance of the banks. So, it is very important to check it from time to time and try to
minimize it in order to get increasing returns.

2.2 METHODOLOGY

Sample:
The present study includes all the Indian public and private sector banks.

Year of study:
For the present study, 10 years data from 2002 to 2011 is collected.

Methodology of Analysis:
The present study makes use of tables, graphs, charts and figures. It also makes use of
statistical measures e.g. Compound Annual Growth Rate (CAGR), Mean etc. to make the
analysis more clear and simple.

Sources of Data: Secondary sources of data have been used for the study. These sources
include banks annual reports, data given in the authentic websites, RBIs annual reports,
articles, data given in the journals etc.

Scope of the study:

This study may be helpful to the banks in making their policy regarding the management of
NPAs and thereby can reduce their cost structure, improve financial health of the business. It
can also help banks to appraise their creditworthiness, the quantum of advances they are able
to provide at the present time as well as in the future. It can also help out banks to know their
liquidity position at various time periods and thereby they will be able to forecast the need for
32

tightening the credit appraisal procedures when advancing loans, by this way standard assets
will be more and more amount of standard assets indicates increased profit as well as
increased wealth will be generated by the banks by repeating the cycle of advancing loans
from the amount earned through the interest on earlier advances.

Objective of the study:

To make a comparative analysis of the amount of Gross NPAs and Net NPAs of Public and
Private Sector Banks over the ten years of study.

To know about the trend of percentage growth rates of Gross NPAs in both Public and
Private Sector Banks over the years.

To make a comparative analysis of Standard Assets with that of Sub-standard, Doubtful and
Loss Assets in Scheduled, Public and Private Sector Banks over the years.

To know the amount of NPAs in the priority sector as well as in the non-priority sector out of
the total NPAs in different banks.

Limitations of the study:

The financial data obtained for the study is confined to ten years only which cannot be
considered as an in-depth study of the financial performance.

Some confidential data may be there within the bank apart from the data provided by them in
their annual reports which had not been disclosed to us i.e. the real picture of performance
may be different.

The secondary data collected may have its own inherent limitations.

33

Chapter: - 3
Analysis of Non-Performing
Assets

This chapter deals with management and analysis of NPAs at various banking sectors in
India. Analysis takes place between Scheduled Commercial Banks, Public Sector Banks and
Private Sector Banks in India for ten years which is from 2002 to 2011 to know the level and
trend of NPAs. The analysis is illustrated by tables, graphs, charts etc.

Table 1:
Bank Group-Wise Classification of Loan Assets of Commercial Banks (As on 31st March)
Amounts in Rs.crores
YEAR

STANDARD ASSETS

AMOUNT

%
SHARE

SUB-STANDARD
ASSETS
AMOUNT

% SHARE

DOUBTFUL
ASSETS
AMOUNT

%
SHARE

LOSS ASSETS

AMOUNT

GROSS NPAs

%
SHARE

AMOUNT

% SHARE

TOTAL
GROSS
ADVANCES

AMOUNT

All Scheduled Commercial Banks

2002

609,972

89.6

21,382

3.1

41,201

6.1

8,370

1.2

70,953

10.4

680,925

2003

709,260

91.2

20,078

2.6

39,731

5.1

8,971

1.2

68,780

8.8

778,040

2004

837,130

92.8

21,026

2.3

36,247

7,625

0.8

64,898

9.2

902,027

2005

1,066,903

94.84

14,073

1.25

36,955

3.29

6,996

0.62

58,023

5.16

1,124,926

2006

1,422,285

96.52

14,737

29,940

2.03

6,565

0.45

51,242

3.48

1,473,527

2007

1,843,397

97.4

19,680

24,531

1.3

5,905

0.3

50,116

2.6

1,893,513

2008

2,276,054

97.61

26,089

1.12

24,304

1.04

5,302

0.23

55,695

2.39

2,331,750

2009

2,720,208

97.55

35,922

1.29

26,730

0.96

5,564

0.2

68,216

2.45

2,788,424

2010

3,183,181

97.49

41,293

1.26

32,664

7,851

0.24

81,808

2.51

3,264,989

2011

3,898,107

97.64

39,877

44,804

1.12

9,440

0.24

94,121

2.36

3,992,228

Total

18,566,497

953

254,157

16

337,107

26

72,589

663,852

49

19,230,349

Mean

1856649.7

95.265

25415.7

1.592

33710.7

2.594

7258.9

0.548

66385.2

4.935

1923034.9

CAGR

24.1014

105.2

9.8331

42.9187

-2.1557

6.209

2.3679

10.3352

22.911

2002

452,862

88.9

15,788

3.1

33,658

6.6

7,061

1.4

56,507

11.1

509,369

2003

523,724

90.6

14,909

2.6

32,340

5.6

6,840

1.2

54,089

9.4

577,813

2004

610,435

92.2

16,909

2.6

28,756

4.3

5,876

0.9

51,541

7.8

661,975

2005

770,431

94.27

11,084

1.35

30,218

3.69

5,514

0.67

46,817

5.73

817,248

2006

1,029,493

96.14

11,394

1.06

24,804

2.32

5,180

0.48

41,378

3.86

1,070,872

2007

1,335,352

97.2

13,945

19,970

1.5

4,510

0.3

38,425

2.8

1,373,777

2008

1,656,451

97.67

16,846

0.99

19,083

1.13

3,672

0.22

39,600

2.33

1,696,051

2009

2,054,601

97.9

19,521

0.93

20,708

0.99

3,803

0.18

44,032

2.1

2,098,633

2010

2,455,147

97.72

27,685

1.1

24,679

0.98

4,928

0.2

57,293

2.28

2,512,439

2011

2,988,872

97.68

33,612

1.1

31,955

1.04

5,514

0.18

71,080

2.32

3,059,953

Total

13,877,368

950.28

181,693

15.83

266,171

28.15

52,898

5.73

500,762

49.72

14,378,130

Mean

1387736.8

95.028

18169.3

1.583

26617.1

2.815

5289.8

0.573

50076.2

4.972

1437813

CAGR

24.7008

105.76

8.4005

35.9678

-3.3352

14.28

-4.7641

-20.4

0.6715

2.8751

23.3556

-1.4226
9.409
Public Sector Banks

34

Private Sector Banks

2002

109,272

90.35

4,738

3.92

6,539

5.41

390

0.32

11,667

9.65

120,938

2003

134,248

91.92

4,174

2.86

6,447

4.41

1,180

0.81

11,798

8.08

146,046

2004

167,076

94.17

3,127

1.76

6,392

3.6

825

0.46

10,344

5.83

177,420

2005

221,781

96.16

2,270

0.98

5,671

2.49

910

0.39

8,851

3.84

230,632

2006

296,020

97.44

2,396

0.79

4,438

1.46

940

0.31

7,774

2.56

303,793

2007

382,630

97.6

4,368

1.1

3,930

941

0.2

9,239

2.4

391,869

2008

459,722

97.25

7,281

1.54

4,453

0.94

1,244

0.26

12,978

2.75

472,700

2009

503,187

96.75

10,527

2.02

5,018

0.96

1,345

0.26

16,890

3.25

520,077

2010

567,723

97.03

8,678

1.48

6,543

1.12

2,166

0.37

17,387

2.97

585,110

2011

714,978

97.55

4,400

0.6

10,736

1.46

2,839

0.39

17,975

2.45

732,953

Total

3,556,637

956.22

51,959

17.05

60,167

22.85

12,780

3.77

124,903

43.78

3,681,538

Mean

355663.7

95.622

5195.9

1.705

6016.7

2.285

1278

0.377

12490.3

4.378

368153.8

CAGR

23.5963

104.08

9.2674

40.8767

1.5321

6.7578

16.7127

73.717

6.491

28.6305

22.6716

Source: Own calculation based on RBIs Reports on Trend and Progress of Banking in India, various issues.

Interpretation: In Table 1, Scheduled Commercial Banks group, the standard assets as a

percentage share of total gross advances is showing an increasing trend from 89.6% in the
year 2002 to 97.6% in 2008 which indicates a good financial health of the Scheduled
Commercial banks in terms of less number of NPAs occurred during these years, moreover
amount in standard assets increased over the period. Then from the year 2008 to 2010,
standard assets deteriorated in its number which is a bad indication but again increased during
the year 2011. Thus, we can say that on an average the advances available in the custody of
standard assets of Scheduled Banks was excellent showing a Compound Annual Growth Rate
of 24.1014% of Total Gross Advances which is a good indicator of fair performance because
Total Gross Advances had not increased at such a faster rate how standard assets had raised.

The sub-standard assets as a percentage share of total gross advances is in decreasing trend
from 2002 up to 2007 which is 3.1% to 1% which is a good indication of banks better
collection of returns from advances, then again it started increasing in the year 2008 and 2009
which is 1.12% and 1.29% but again it decreased for two years which is 1.26% in 2010 1% in
2011. On an overall basis we can say that sub-standard assets of Scheduled Commercial
Banks showed a good trend. Similarly, doubtful and loss assets as a ratio to total gross
advances also showed a decreasing trend with a slight increase in 2011 in doubtful assets
category and thereby gross NPAs share in total gross advances also showed decreasing trend
from 10.4% in 2002 to 2.36% in 2011, though in 2007 and 2010 it showed slightly high value
but on overall basis the Mean of gross NPAs as percentage of total gross advances was
35

4.935% which indicates a better follow-up is done by Scheduled Commercial Banks over the
preceding years.

In Public Sector Banks group also, standard assets increased and sub-standard, doubtful, loss
assets similarly showed a decreasing trend which indicates an improvement in assets quality
over the time and thereby gross NPAs also decreased though in 2010 and 2011 standard
assets slightly decreased, doubtful slightly increased in 2011, loss assets slightly increased in
2010.

In Private Sector Banks group, standard assets showed an increasing trend and sub-standard
assets, doubtful assets respective ratios showed a decreasing trend though standard assets
decreased in 2008 and 2010, sub-standard assets increased in 2007, 2008, 2009, doubtful
assets increased in 2009, 2010, 2011 but loss assets in it showed a different picture, in 2003,
it suddenly showed a very high rate of 0.81% from only 0.32% then again slowly and steadily
it declined and stopped at a point of 0.39% in 2011 which is obviously greater than in 2002,
but it was not bad enough showing Mean of 0.377% though at the end of study years (2008,
2009, 2010, 2011), it showed decreasing movement and with this we can say that a better
follow-up actions, better credit appraisal system of projects like techniques were applied by
Private Sector Banks in the later years though some lacunas are there in NPAs management
in some years for slight increase, or it may be due to recession or market crash.

Again, Mean percentage share of standard assets out of total gross Advances of Private
Sector Banks is the highest showing 95.622% as compared to Scheduled Commercial Banks
showing 95.265% and Public Sector Banks has the lowest showing 95.028%. That means
Private Sector Banks are doing well in recovery of advances over the ten years compared to
Scheduled and Public Sector Banks because the Private Sector Banks uses better NPA
management techniques like credit appraisal of customer, technical feasibility of the projects,
follow-up etc.

But in the sub-standard assets category, the Mean percentage share of advances showed an
opposite picture. There Public Sector Banks are showing better position compared to
Scheduled Commercial Banks and Private Sector Banks, showing 1.582% in Public Sector
Banks and 1.592% by Scheduled Commercial Banks and a highest of 1.705% by Private
Sector Banks.
36

Where, in doubtful assets category, the Mean is lowest in Private Sector Banks, showing
2.285% as compared to Scheduled Commercial Banks showing 2.594% and Public Sector
Banks showing highest of 2.815% which is very unsound for Public Sector Banks
performance.

Again, the Mean in loss assets category, Private Banks has the lowest in percentage share of
total gross advances which is incredibly good indication of recovery of money by Private
Sector Banks showing 0.377% as compared to Scheduled Commercial Banks in the second
position showing 0.548% and Public Sector Banks in the last position showing 0.573%.

Therefore, gross NPAs showed the lowest Mean of 4.378% share of total gross advances in
Private Sector Banks, whereas Scheduled Commercial Banks in the second position of
keeping 4.935% Gross NPAs in their Balance Sheet and Public Sector Banks in the last
position of keeping 4.972% gross NPAs as percentage share of total gross advances which is
an indication of inefficient performance by both Scheduled Commercial Banks and Public
Sector Banks. They should learn from Private Sector Banks which are employing efficient
credit appraisal method(s), feasibility test method(s) before granting loans, effective followups etc.

In standard assets column, CAGR as a percentage share of total gross advances of Public
Sector Banks is 105.7596% showing highest rate as compared to Scheduled Commercial
Banks in the second position showing the lowest rate of 104.0787%.

In sub-standard assets column, CAGR as a percentage share of total gross advances of Public
Sector Banks has the lowest rate of 35.9678%, Private Sector Banks in the second position
with a rate of 42.9187% which is a bad indication of performance by both Private and
Scheduled Commercial Banks.

In doubtful assets column, CAGR as a percentage share of total gross advances of Public
Sector Banks again showed the lowest rate of -14.2801% and Scheduled Commercial Banks
in the second position of showing -9.4090% which is a very well performance because they
minimised their rate to even negative rate. But Private Sector Banks showed a very poor
performance in this category showing a po9sitive rate of 6.7578%.

37

In loss assets column, CAGR as a percentage of total gross advances of Public Sector Banks
showed an excellent performance at a rate of -20.3981%, Scheduled Commercial Banks in
the second position showing an efficient performance of -6.2092%, but Private Sector Banks
showed a worse performance in this category showing a very growth rate of 73.7165%.

Lastly, on an overall basis, in gross NPAs column, CAGR as a percentage share of total gross
advances of Public Sector Banks showed the lowest rate of 2.8751% while the Scheduled
Commercial Banks and Private Sector Banks showed a rate of 10.3352% and 28.6305%
respectively.

Thus, we can say that on an overall basis Public Sector Banks showed best performance in
minimising Gross NPAs, the Scheduled Commercial Banks remains in the second position
and the Private Sector Banks showed the worst performance in minimising gross NPAs but if
net NPAs are taken into consideration in this comparison, there may be different picture
because gross NPAs include provision for NPAs.
Table 2:
Percentage Growth Rate of Total Gross NPAs of All Public and Private Sector Banks-2002 to 2011
(Amount in Rs.crores)
All Public Sector Banks

All Private Sector Banks

Gross
NPAs as
Percentage
Share
of
Total
Gross
Advances
9.65

Average
Gross
NPAs
466.68

Average
Gross NPAs
as
Percentage
of
Total
Gross
Advances
0.3859

-4.3163

8.08

421.3571

0.2885

-9.7118

0.2781

-4.7496

5.83

369.4286

0.2082

-12.3241

1,672.036

0.2046

-9.1248

3.84

340.4231

0.1476

-7.8514

3.48

1,477.786

0.1380

-11.6176

2.56

299.00

0.0984

-12.1681

2007

2.6

1,372.321

0.0999

-7.1367

2.40

401.6957

0.1025

34.3464

2008

2.39

1,414.286

0.0834

3.058

2.75

589.9091

0.1248

46.8547

2009

2.45

1,572.571

0.0749

11.1919

3.25

804.2857

0.1546

36.3406

2010

2.51

2,046.179

0.0814

30.1168

2.97

827.9524

0.1415

2.9426

2011

2.36

2,538.5714

0.0830

24.064

2.45

855.9524

0.1168

3.3818

CAGR

-18.3892%

0.6715%

-18.3892

-13.1901%

10.1974%

-10.1687%

Year
2002

Gross
NPAs as
Percentage
Share of
Total
Gross
Advances
10.4

Average
Gross
NPAs
2,018.107

Average
Gross NPAs
as
Percentage
of
Total
Gross
Advances
0.3962

2003

8.8

1,931.75

0.3343

2004

9.2

1,840.75

2005

5.16

2006

Percentage
Growth
Rate
of
Average
Gross NPAs

38

Percentage
Growth Rate
of Average
Gross NPAs

Source: Own calculation based on RBIs Reports on Trend and Progress of Banking in India, various issues.

Interpretation: In Table 2 average gross NPAs is calculated by dividing total gross NPAs
with the number of banks at the respective sectors available in the respective years. As we
can see in this table, gross NPAs as a percentage share total gross advances is 10.4% in case
of Public Sector Banks which is higher than in Private Sector Banks depicting 9.65% in the
year 2002. In the year 2003, Public Sector Banks has 8.8% gross NPAs as percentage share
of total gross advances whereas in Private Sector Banks it is 8.08%. In 2004, Public Sector
has 8% and in Private Sector it is 5.83% which shows that there is much difference between
their NPAs share. Again, in 2005 and 2006 there is a good difference between their share of
gross NPAs in total gross advances where private sectors have lower gross NPAs. It means
that Private Sector is managing their NPAs well better than Public Sector. In 2007, though
Public Sector have greater gross NPAs but it is not so big difference compared to Private
Sector as recorded in the previous years. At the end of the study period, Public Sector have
shown better performance in managing Gross NPAs in relation to previous years as a
comparison with Private Sector Banks as in 2008, 2009, 2010, and in 2011 Public Sector
sited 2.39%, 2.45%, 2.51%, 2.36% in respective years, whereas Private Sector showed
2.75%, 3.25%, 2.97%, 2.45% at respective years.

From 2002 to 2006, average gross NPAs as percentage of total gross advances in Private
Sector it showed lesser than Public Sector and also it showed decreasing trend for both the
sectors where in 2002, 2003, 2004, 2005 and 2006, Private Sector showed 0.3859%,
0.2885%, 0.1476%, 0.0984% respectively whereas in Public Sector Banks it showed
0.3962%, 0.3343%, 0.2046% and 0.1380% respectively. But from 2007 to 2011, Public
Sector showed lesser gross NPAs than in Private Sector Banks means in the later years of
study period Public Sector Banks used better follow-ups of their loans. In 2007, 2008, 2009,
2010 and 2011, Public Sector showed 0.0999%, 0.0834%, 0.0749%, 0.0814%, 0.0830%,
respectively whereas in Private Sector, it showed 0.1025%, 0.1248%, 0.1546%, 0.1415% and
0.1168% respectively. Though from year 2007 to 2009 Public Sector showed decreasing
trend of average gross NPAs but in 2010 and 2011 it showed increasing trend. In case of
Private Sector average gross NPAs share only increased in 2009 and in other years it showed
decreasing trend.

39

In the percentage growth rate of average gross NPAs sector, in 2003 and 2004 growth is
lower in case of Private Sector Banks which shows -9.7118% and -12.3241% respectively as
compared to -4.3163% and -4.7496% in case of Public Sector Banks which is a good
indication for Private Sector Banks as they are able to minimise the growth of gross NPAs.
Again in 2005, growth is lower in case of Public Sector. Again in 2006 it is lower in case of
Private Sector. But from 2007 onwards growth rate exhibited huge difference in both sector.
From 2007 to 2009, growth rates were lower in case of Public Sector Banks depicting the 7.1367%, 3.058%, and 11.1919% respective whereas in case of Private Sector Banks they are
34.3464%, 46.8547% and 36.3406% respectively. But in 2010and 2011, it shows opposite
picture. In Private Sector, it shows 2.9426% and 3.3818% respectively which is very low as
compared to Public Sector showing 30.1168% and 24.064% respectively. Thus, in the last
two years of study period, Private Sector has managed dramatically their growth of gross
NPAs.

Lastly, the Compound Annual Growth Rate (CAGR) of average gross NPAs showed lower in
case of Public Sector Banks showing 0.6715% whereas Private Sector showed a very high
rate of 10.1974%.
Figure 1:
Gross NPAs as Percentage Share of Total Gross Advances
12
10
8
Public Sector

Private Sector
4
2
0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Interpretation: As we can see in figure 1, in 2002 and 2003, Public Sector have slight high
gross NPAs than in Private Sector while in 2004, there is a huge difference between the two
40

sectors, Public Sector have very high gross NPAs than in Private Sector. In 2005 and 2006, a
good difference is viewed between the two sectors where Public Sector showed higher gross
NPAs. Again in 2007 and 2008, there exists slight differences, where in 2007 Public Sector
sited greater gross NPAs, while in 2008, Private Sector have greater gross NPAs while in
2008, Private Sector have greater gross NPAs. In 2009, 2010 and 2011 Private Sector
depicted higher gross NPAs than in Public Sector. In 2009, the difference between the two
sectors, is evidencing a good difference, while in 2010, the difference is not so big. And
lastly, in 2011, a little difference in gross NPAs is evident in figure 1.

Figure 2:
Average Gross NPAs as Percentage of Total Gross Advances
0.45
0.4
0.35
0.3
0.25

Public Sector

0.2

Private Sector

0.15
0.1
0.05
0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Interpretation: As we can see in figure 2, average gross NPAs as percentage of total gross
advances are decreasing over the years for both the sectors. In the later years of study i.e. in
2008 and 2009, only private sectors showed increasing trend but again it decreased in 2010
and 2011. While in public sector, average gross NPAs slightly increased in 2010 and 2011. In
2002, a huge difference was there between public and private sectors gross NPAs as
percentage of total gross advances. From 2003 to 2006, a good level of difference is sighted
between the two sectors. In 2007, it was almost equal but a very little variation was there
between the two sectors. In 2008, 2009, and 2010 a big difference was seen between the
gross NPAs of the two sectors while in 2011, a good level of difference is sighted between
the two sectors. From 2002 to 2006, Public sector had got higher number of gross NPAs than

41

in Private sector but from 2007 to 2011, Private Sector Banks evidenced a higher level of
gross NPAs.
Figure 3:
Percentage Growth Rate of Average Gross NPAs
50
40
30
20

Public Sector
Private Sector

10
0
2003

2004

2005

2006

2007

2008

2009

2010

2011

-10
-20

Interpretation: As we can see in figure 3, a graph is drawn which shows the trend of
percentage growth rate of average gross NPAs over the years of study period. Here, lower
level of percentage growth rates of average gross NPAs indicates a better performance of
banks in managing and minimising their NPAs growth. Now, we can clearly see that from
2003 to 2005, both the sectors growth rate tend to diminish, for public sector it continued to
decrease till 2006. In 2003, where private sector have positive growth rate, the public sector
had negative growth rate, again in 2003, public sector had lower growth rates than in private
sector. In 2004 and 2005, private sector had less growth rates than in public sector, in 2006,
the growth rates were same for the both sectors. From 2007 to 2011, a huge difference in the
growth rates is seen between the two sectors where from 2007 to 2009, public sectors had
seen a lower level of growth rate than in private sector, in 2010 and 2011, private sectors had
seen a lower level of growth rates compared to public sector. From 2004 to 2006, a negative
trend of growth rates is depicted in this figure among the both sectors, public sector continued
to be negative till 2007. But in 2007 and 2008, both the sectors sited an increasing trend in
growth rates, for public sector growth rates continued to increment till 2010. While in 2009
and 2010, private sectors growth rates showed a downward slope. But in 2011, where public
sectors growth rates had declined, private sector had seen a slight increment.
42

Table 3:
Non-Performing Assets of all Banks-Sector Wise
(Amount in Rs. crores)
Priority
Bank Sector/Year

Sector

NPAs

Non-Priority

Sector

NPAs

Of

which,

Public

Sector NPAs

Percent

Percent

Total
NPAs

Percent

Amount

Amount

to total

Amount

to total

Amount

to total

(2+4+6=8)

2002

25,139.34

44.49

30,251.15

53.54

1,115.85

1.97

56,506.34

2003

24,938.36

47.23

26,781.41

50.72

1,087.15

2.06

52,806.92

2004

23,840.33

47.54

25,697.75

51.24

610.23

1.22

50,148.31

2005

23,397.38

49.05

23,848.61

50

450.49

0.94

47,696.48

2006

22,373.74

54.07

18,663.99

45.11

340.5

0.82

41,378.23

2007

22,953.62

59.46

15,157.99

39.27

490.18

1.27

38,601.80

2008

25,286.67

63.62

14,163.14

35.63

298.69

0.75

39,748.51

2009

24,318

55.2

19,251

43.7

474

1.1

44,042

2010

30,848

53.8

25,929

45.3

524

0.9

57,301

2011

41245

58.1

29803

41.9

278

0.4

71047

2002

2,546.35

21.82

9,089.77

77.91

31.18

0.27

11,667.30

2003

2,445.40

20.61

9,326.52

78.6

94.51

0.8

11,866.43

2004

2,481.93

23.97

7,795.81

75.3

74.58

0.72

10,352.32

2005

2,188.46

24.87

6,569.03

74.65

42.34

0.48

8,799.83

2006

2,284.03

29.17

5,541.37

70.78

4.02

0.05

7,829.42

2007

2884.18

31.22

6352.51

68.75

2.79

0.03

9239.48

2008

3,418.53

26.34

9,557.52

73.66

0.01

12,976.06

2009

3640

21.6

13172

78

75

0.4

16887

2010

4,792

27.6

12,592

72.4

17,384

2011

4823

26.8

13147

73.2

153

0.8

17971

1
Public Sector Banks

Private Sector Banks

Source: (RBI) Reports on Trend and Progress of Banking in India, various issues.

Interpretation: In the table 3, NPAs of all Banks are given in sector wise where sectors are
divided into priority sector, non-priority sector and public sector, addition to all the sectors
gives us the total NPAs. Here, we can see that on an average, Public Sector Banks have high
percentage share of their NPAs in priority sector while Private Sector Banks have less
percentage share of their NPAs in priority sector. These may be due to various reasons, one
of the reasons may be Public Sector Banks have been given guidelines by RBI to advance a
43

certain percentage of their loans to priority sectors. Thus, where percentage of advances is
larger NPAs will also be larger while Private Sectors Banks are not given such guidelines.
Moreover, usually we see that in priority sector advances are more risky. Again, we can
clearly see that Private Sector Banks have larger percentage of NPAs in the non-priority
sector, which is more than Public Sector Banks as the private sectors have no pressure from
the government or RBI to advance loans to the priority sector. Therefore, Private Sector
Banks advances their maximum percentage of loans to non-priority sector where they can
earn more and where advances will be large, probability of NPAs in that sector will be large.
Again, in the public sector NPAs section, we can see that larger percentage of NPAs comes
from Public Sector Banks than in Private Sector Banks, as the former banks has to abide by
the guidelines given by the RBI for lending money to public sector organizations and we
know that where lending is more NPAs is also more.

In priority sector NPAs section, an increasing trend of NPAs is observed from 44.49% in the
year 2002 to 63.62% in 2008 then again for two years i.e. in 2009 and 2010 it showed
decreasing trend depicting 55.2% and 53.8% respectively. In the last year of study i.e. in
2011, it suddenly increased to 58.1% showing an upward trend of NPAs.

In reality, a big gap is observed between the NPAs of Public Sector Banks and Private Sector
Banks in the priority sector lending. In Private Sector Banks, NPAs in priority section
increased over the years from 21.87% in 2002 to 26.8% in 2011. The trend of NPAs in
priority section of Private Sector Banks showed a decreasing trend in the initial two years i.e.
21.82% in 2002 to 20.61% in 2003, and then it showed an increasing trend from 23.97% in
2004 to 31.22% in 2007. Nevertheless, it decreased for two years from 26.34% in 2008 and
21.6% in 2009, again, it increased to a quite high extent in 2010 showing 27.6% and lastly it
slightly decreased to 26.8% in 2011.

In the non-priority sector NPAs, Public Sector Banks depicted a decreasing trend over the
years from 53.54% in 2002 to 41.9% in 2011. Firstly, in 2003, NPAs decreased to some
extent from 53.54% in 2002 to 50.72% in 2003. Nonetheless, it increased to 51.24% in 2004,
and then it again showed decreasing trend for four years from 50% in year 2005 to 35.63% in
2008. However, NPAs again increased for two years i.e. 43.7% in 2009 to 45.3% in 2010 and
in the last year of study, it decreased to 41.9%.

44

For non-priority sector NPAs of Private Sector Banks, it showed a decreasing trend over the
years from 77.91% in 2002 to 73.2% in 2011. In the year 2003, NPAs slightly increased from
77.91% in 2002 to 78.6% in 2003. Nevertheless, it decreased for four years from 75.3% in
2004 to 68.75% in 2007. Again, it increased for two years, which is 73.66% in 2008 and 78%
in 2009. However, in the last years of study, it diminished from 72.4% in 2010 to 73.2% in
2011.A wide variation of NPAs between the two banking sectors can be noticed in this
section.

Coming to the public sector NPAs share on total NPAs section, for Public Sector Banks have
shown a decreasing trend over the years of study period from 1.97% in 2002 to 0.4% in 2011.
In 2003, it slightly increased to 2.06% but from 2004 to 2006, it had showed a decreasing
trend from 1.22% in 2004 to 0.82% in 2006. Again, for one year it increased i.e. in 2007, it
increased to 1.27%. In 2009, percentage share of NPAs increased to some extent. Then, in the
later years of study, it only decreased from 0.9% in 2010 to 0.4% in 2011.

In real sense, comparability of public sector NPAs as percentage share of total NPAs between
Public and Private Sector Banks has a huge gap. We can say that on an overall basis, Private
Sector Banks had incurred half of the NPAs occurring in Public Sector Banks over the years
of study period, means Private Sector Banks are in better position than in Public Sector
Banks.

Over the years of study, Private Sector Banks had to bear increasing trend of NPAs from
0.27% in 2002 to 0.8% in 2011. In 2003, NPAs increased largely from 0.27% in 2002 to
0.8% in 2003. Nevertheless, from 2004 to 2008, it showed a tremendous decrease at the rate
of 0.72% in 2004 to 0.03% in 2007. In 2008, NPAs were nil almost, but in 2009, it slightly
increased then again in 2010, it was nil. Moreover, in the end year, it suddenly raised largely
showing 0.8% of NPAs as percentage share on total NPAs. However, as compared to Public
Sector Banks, the Private Sector Banks had very less number of NPAs in this section, which
is a good indication for the Private Sector Banks and for the economy as well. This showed a
better performance of Private Sector Banks in managing and minimizing their NPAs, which
will give beneficial and positive ratings in creditworthiness of their banks.

45

Figure 4:
Priority Sector NPAs as Percentage Share on Total NPAs
70
60
50
40
Public Sector
30

Private Sector

20
10
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Interpretation: As we can see in figure 4, Priority Sector NPAs as Percentage Share on

Total NPAs is compared between the Public Sector and Private Sector Banks. Here, we can
see that Public Sector Banks NPAs is increasing over the years from 2002 to 2008 then it
decreased to some extent for two years, again in the last year of study it increased to an extent
that is greater than in 2009. In Private Sector Banks, NPAs marginally increased over the
years from 2002 to 2007 then it showed a decreased trend for two years i.e. in 2008 and 2009.
Again, it increased for one year to some extent i.e. in 2010 and in the last year of study, it
slightly decreased. In addition, for the comparability between the two banking sectors, we can
say that a huge difference in the level of NPAs is observed between the two sectors where
Public Sector Banks have a very high level of priority sector NPAs as percentage share on
total NPAs as compared to Private Sector Banks over the years.

46

Figure 5:
Non- Priority Sector NPAs as Percentage Share on Total NPAs
90
80
70
60
50

Public Sector

40

Private Sector

30
20
10
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Interpretation: In figure 5, we can see that a graph is drawn for showing the Non- Priority
Sector NPAs as Percentage on Total NPAs. A big difference is seen for non-priority sector
NPAs between the Public and Private Sector Banks. We can see that over the years, NPAs of
Public Sector has reduced from 2002 to 2011 while NPAs of Private Sector has remained on
an average same starting from 2002 to 2011. In Public Sector Banks, NPAs has reduced in
the second year from 53.54% in 2002 to 50.72% in 2003. Then again, it slightly increased for
one year i.e. in 2004 after that it continuously decreased for four years i.e. in 2005, 2006,
2007 and 2008 and stopped at a point of 35.63% in the year 2008. Nevertheless, it again
increased for two years to some extent i.e. in 2009 and 2010 but in the last year, it recorded a
decreased in the level of NPAs showing a level of 41.9%.
Again, for Private Sector Banks, NPAs slightly increased in 2003 than in 2002. However,
in the next four years i.e. from 2004 to 2007, it showed a continuously decreasing trend.
Nonetheless, it again increased for two years to some height up to the year 2009 then again in
2010, it decremented to a position lower than that in 2008. Moreover, in the last year of
study, it increased slightly.

47

Figure 6:
Public Sector NPAs as Percentage Share of Total NPAs
2.5

1.5
Public Sector
Private Sector

0.5

0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Interpretation: As we can see in figure 5, a graph is drawn for depicting the percentage
share of public sector NPAs out of total NPAs. In this graph, Public Sector Banks has a very
high level of NPAs than that in Private Sector Banks over the years. Public Sector Banks had
showed a decreasing trend of public sector NPAs while Private Sector Banks had showed an
increasing trend of public sector NPAs over the years.
Public Sector Banks NPAs in the initial years were very high. In 2003, it increased from a
point of 1.97% to 2.06%. After that over the three years, it showed a declining trend up to the
year 2006. Compared to 2006, in 2007, public sector NPAs increased to a great height from
only point 0.82% in 2006 to 1.27% in 2007. Nonetheless, in 2008, it again decreased to a
point of 0.75%, which is even less than the point in 2006. Again, public sector NPAs
increased to 1.1% in 2009. After that, it only decreased and stopped at a point of 0.4% in
2011.

For Private Sector Banks, public sector NPAs increased from a point of only 0.27% to a
height of 0.8%. Then, public sector NPAs continuously decreased consecutive years stopping
at a point of zero in 2008. Nevertheless, in 2009, public sector NPAs grew to a point of 0.4%
and again, it diminished to its earlier point in 2008. However, in 2011, it had shown a growth
of double the NPAs in 2009. Therefore, over the years, public sector NPAs has shown a
fluctuating trend.
48

Table 4:

Gross and Net NPAs of Commercial Banks (Bank Group-Wise)

Gross NPAs

Year (end-

As

Percentage

March)

Gross Advances

of

Net NPAs

As Percentage of Total

As Percentage of Net

As Percentage of Total

Assets

Advances

Assets

Scheduled Commercial Banks

2002-03

8.8

4.1

1.8

2003-04

7.2

3.3

2.8

1.2

2004-05

5.2

2.5

0.9

2005-06

3.3

1.8

1.2

0.7

2006-07

2.5

1.5

0.6

2007-08

2.3

1.3

0.6

2008-09

2.3

1.3

1.1

0.6

2009-10

2.4

1.4

1.1

0.6

2010-11

2.5

1.4

1.1

0.6

2011-12

3.1

1.7

1.4

0.8

Average
CAGR

3.96

2.03

1.67

0.84

-12.39088573

-10.30458646

-11.00577307

-8.490588618

Public Sector Banks

2002-03

9.4

4.2

4.5

1.9

2003-04

7.8

3.5

3.1

1.3

2004-05

5.5

2.7

2.1

2005-06

3.6

2.1

1.3

0.7

2006-07

2.7

1.6

1.1

0.6

2007-08

2.2

1.3

0.6

2008-09

1.2

0.9

0.6

2009-10

2.2

1.3

1.1

0.7

2010-11

2.4

1.4

1.2

0.7

2011-12

3.3

1.9

1.7

Average
CAGR

4.11

2.12

1.8

0.91

-13.65295683

-10.92766781

-11.32742695

-7.214847415

Old Private Sector Banks

2002-03

8.9

4.3

5.2

2.5

2003-04

7.6

3.6

3.8

1.8

2004-05

3.1

2.7

1.4

2005-06

4.4

2.5

1.7

0.9

2006-07

3.1

1.8

0.6

2007-08

2.3

1.3

0.7

0.4

2008-09

2.4

1.3

0.9

0.5

49

2009-10

2.3

1.3

0.8

0.5

2010-11

1.9

1.2

0.5

0.3

2011-12

1.8

1.1

0.6

0.4

Average
CAGR

4.07

2.15

1.79

0.93

-17.12828102

-14.88493897

-22.46325754

-19.77363705

New Private Sector Banks

2002-03

7.6

3.8

1.5

0.7

2003-04

2.4

1.7

0.8

2004-05

3.6

1.6

1.9

0.8

2005-06

1.7

0.8

0.4

2006-07

1.9

1.1

0.5

2007-08

2.5

1.4

1.2

0.7

2008-09

3.1

1.7

1.4

0.8

2009-10

2.9

1.6

1.1

0.6

2010-11

2.7

1.3

0.6

0.3

2011-12

2.2

1.1

0.5

0.2

Average
CAGR

3.32

1.7

1.17

0.58

-8.398865937

-7.92075501

-10.36186271

-9.879200633

Source: Own calculation based on secondary data collected from equitymaster.com and RBIs
Publications.

Interpretation: Table 4 represents the gross NPAs and net NPAs of commercial banks in
India, bank group wise. Here, we have drawn this table to do a comparative analysis of gross
and net NPAs between scheduled, public, old private and new private sector banks in India.
The average of gross NPAs as percentage share of gross advances and as percentage share of
total assets are lowest in New Private Sector Banks with 3.32% and 1.7% respective rates.
Moreover, the average of net NPAs as percentage share of net advances and as percentage
share of total assets are lowest in New Private Sector Banks with 1.17% and 0.58%
respective rates. Thus, we can say that New Private Sector Banks have given a continuous
best performance in its banks NPAs. The Compound Annual Growth Rates (CAGR) for
gross NPAs as percentage share of gross advances and as percentage share of total assets are
lowest in Old private Sector Banks. Moreover, the CAGR for net NPAs as percentage share
of net advances and as percentage share of total assets are again lowest in Old private Sector
Banks. Therefore, Old Private Sector Banks have given best performance in growth rates
showing the lowest growth rates in the banking sector.

50

Figure 7:
Gross NPAs as Percentage of Gross Advances
10
Scheduled Commercial
Banks

9
8
7

Public Sector Banks

6
5

Old Private Sector

Banks

4
3

New Private Sector

Banks

2
1
0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Interpretation: As we can see in figure 6, gross NPAs as percentage share of gross advances
is showing a decreasing trend for all the sectors over the years. Where New Private Sector
Banks have started their NPAs at the lowest rate of 7.6% indicating a good performance,
Scheduled Commercial Banks started it with the second lowest rate of 8.8%, compared to
these, Old Private Sector Banks are in the third position showing 8.9% while Public Sector
Banks remains in the last position showing 9.4%. Over the next three years i.e. from 2003-04
to 2005-06, all the sectors have showed a decreasing trend. But New Private Sector Banks
have recorded an incredible improved performance by showing a continuous decreasing and
low level of gross NPAs as percentage share of gross advances showing 5%, 3.6% and 1.7%,
where Scheduled Commercial Banks are in the second lowest position showing 7.2%, 5.2%
and 3.3%. Compared to these sectors, Public Sector Banks are in the third lowest position
showing 7.8%, 5.5% and 3.6% and in the last position Old Private Sector Banks are there.
During the next three years i.e. in 2006-07, 2007-08 and 2008-09, the Public Sector Banks
have given best performance showing 2.7%, 2.2% and 2% gross NPAs as percentage to gross
advances compared to other sectors. However, Scheduled Commercial Banks are in the
second lowest position, Old Private Sector Banks in the third lowest position, but New
Private Sector Banks have shown a worst performance of 1.9%, 2.5% and 3.1%, that
indicates an increasing trend of its NPAs level. Again, over the next three year, Old Private
Sector have shown best performance among all the sectors, also it showed a decreasing trend
in its NPAs level showing a rate of 2.3%, 1.9% and 1.8%. Nevertheless, Public Sector Banks
are in the second lowest position showing 2.2%, 2.4% and 3.3%, though it showed an
51

increasing trend of its NPAs level but compared to Scheduled and New Private Sector
Banks, it has done a better performance in managing NPAs.

Figure 8:
Gross NPAs as Percentage of Total Assets
5
Scheduled
Commercial
Banks

4.5
4
3.5

Public Sector
Banks

3
2.5
2

Old Private Sector

Banks

1.5
1

New Private
Sector Banks

0.5
0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Interpretation: Coming to figure 7, gross NPAs as percentage of total assets, we can see that
in the starting year, i.e. in 2002-03, new private sector are in the lowest position in the level
of NPAs, second lowest is the scheduled banks, third is the public sector while old private
sector remains in the last position. Over the next three years, i.e. during 2003-04, 2004-05
and 2005-06, all the sectors had shown a decreasing trend of NPAs, new private sector have
shown the lowest NPAs showing 2.4%, 1.6% and 1% while scheduled banks in the second
lowest position showing 3.3%, 2.5% and 1.8% respectively. Moreover, public banks and old
private remain in the third and fourth lowest position respectively. Again, over the next three
years, i.e. during 2006-07, 2007-08 and 2008-09, scheduled and public sector has shown the
lowest NPAs exhibiting 1.5%, 1.3%, 1.3% and 1.6%, 1.3%, 1.2% respectively, while new
private remains in the second lowest position and old private have shown worst performance.
Lastly, over the next three years, i.e. during 2009-10, 2010-11 and 2011-12, old private have
shown the lowest NPAs exhibiting 1.3%, 1.2% and 1% respectively, while new private and
scheduled banks were in the second and third lowest position, but public sector has showed
the worst performance.

52

Figure 9:
Net NPAs as Percentage of Net Advances
6
5

Scheduled
Commercial Banks

Public Sector Banks

3
Old Private Sector
Banks

2
1

New Private Sector

Banks

0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Interpretation: In figure 8, we can clearly see that net NPAs as percentage of net advances
of old private sector banks have shown an improved performance over the years compared to
other sectors starting with 5.2% NPAs and ending with only 0.6%. On the other hand, new
private had showed best performance over the years, starting with 1.5% and ending with
0.5%. But, among the all sectors, new private have shown a great start in managing NPAs
compared to others showing 1.5% in 2002-03, while scheduled banks remains in the second
lowest position showing 4% rate, public banks in the third lowest position but old private had
shown the poorest performance showing 5.2% rate. Over the next three years, i.e. during
2003-04, 2004-05 and 2005-06, new private had shown the lowest rates showing 1.7%, 1.9%
and 0.8% respectively while scheduled and public banks had remained in the second and
third lowest position respectively but old private had showed worst performance. Again, over
the next three years, i.e. during 2006-07, 2007-08 and 2008-09, old private showed the lowest
rate exhibiting 1%, 0.7% and 0.9% respectively while public and scheduled banks remained
in the second and third lowest position respectively but new private remained in the worst
position. Lastly, over the end years, old private has shown lowest level of NPAs, while new
private and scheduled banks remained in the second and third lowest position, but public
banks had shown worst performance.

53

Figure 10:
Net NPAs as Percentage of Total Assets
3
Scheduled
Commercial Banks

2.5
2

Public Sector Banks

1.5
Old Private Sector
Banks

New Private Sector

Banks

0.5
0
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Interpretation: Coming to the figure 9, we can see that the net NPAs as percentage share of
total assets of new private sector banks has again shown best performance starting with 0.7%
and ending with 0.2%. On the other hand, old private had shown an improved performance
started with 2.5% and ended with 0.4%. Among all sectors, new private has given best start
with a percentage of 0.7%. Again, over the next three years, i.e. during 2003-04, 2004-05 and
2005-06, new private had shown lowest rates, which are 0.8%, 0.8% and 0.4% respectively
while scheduled and public sector banks showed the second and third lowest rates, but old
private had showed worst performance. Again, over the next three years, i.e. during 2006-07,
2007-08 and 2008-09, old private had shown lowest rates, while public and scheduled banks
remained in the second lowest position, moreover new private remained in the third lowest
position though the rates were not so high. Lastly, at the end years, new private as well as old
private had the lowest level of net NPAs as percentage share to total assets, however,
scheduled and public sector banks remained in the second and third lowest rates.

54

Chapter: - 4
Findings and Conclusion

FINDINGS

Standard assets, doubtful assets, loss assets and gross NPAs position of Private Sector Banks
were better compared to Scheduled and Public Sector Banks over the years of study.

Sub-standard assets position of Public Sector Banks was best among the all sectors over the
years of study.

CAGR of standard assets and gross NPAs of Public Sector Banks were better compared to
Scheduled and Public Sector Banks because the former sectors growth rates in every year
increased but in a declining rate.

CAGR of gross NPAs as percentage share of total gross advances was better in Public Sector
Banks compared to Private Sector Banks over the years of study because the former sectors
growth rates in every year increased but in a declining rate.

Percentage growth rate of average gross NPAs over the years of the Public Sector Banks had
shown better trend compared to Private Sector Banks.

Priority sector and public sector NPAs position was better in Private Sector Banks compared
to Public Sector Banks because they have secured loan policy and they advance less loans to
priority and public sector unlike Public Sector Banks.

Public Sector Banks had better position of its banks NPAs level in non-priority sector
compared to Private Sector Banks.

New Private Sector Banks had shown better performance in managing gross and net NPAs as
percentage share of gross and net respectively and as percentage share of total assets over the
years as compared to Scheduled, Public and Old Private Sector Banks.

The CAGR of gross and net NPAs as percentage share of gross and net advances respectively
and as percentage share of total assets were best in Old Private Sector Banks on an overall
basis.
55

Private Sector Banks are able to manage their NPAs well because the Private Sector Banks
uses efficient NPAs management policies and effective credit appraisal systems of
customers credit worthiness before granting loans to them. Public Sector Banks though also
have NPAs management policies and credit appraisal systems but they are not able to use
them effectively as in Private Banks.

Moreover, Public Sector Banks management take measures to control NPAs after the assets
had already slipped into non-performing category unlike Private Sector Banks that take
preventive measures before assets slippage to non-performing category.

Many Public Sector Banks employees also do not have enough knowledge regarding nonperforming assets that may be because of ineffective training programs. Most of the Public
Sector Banks are using old procedures and techniques of training programs e.g. lecture
method of training being an old age method is still used in Public Sector Banks.

56

CONCLUSION
From the above discussion, it can be concluded that the problem of NPAs has been a major
issue for the banking industry in India. Growing NPAs affects the liquidity position of banks
and raises the cost of funds and these in turn demolishes the banks profitability and threatens
the financial stability. Moreover, as the soundness of the banking industry is the major
indicator of the strength of any economy, so it is a very important issue to manage NPAs. The
reasons for growing NPAs are willful defaulters, misusage of funds, no proper follow-up
actions been taken, political pressure, weak credit appraisal mechanisms, non-availability of
proper security against funds, under/over financing etc. All bank sectors are making efforts
from time to time to reduce the level of NPAs so that the financial condition of the banks is
improved. The present study is carried out to make a comparative and trend analysis of the
classification loan assets among the Scheduled, Public and Private Sector Banks. From the
data, we are able to find that the level of standard, doubtful and loss assets of Private Banks
were better in Private Sector Banks as compared to Scheduled and Public Sector Banks
because the Private Banks had managed their assets quality well due to preventive measures
and effective credit appraisal systems. Nevertheless, the Public Sector Banks had only been
able to manage its sub-standard assets well. Public Sector Banks also have NPAs
management policy but they are not used effectively, moreover, these banks take actions to
control NPAs slippage of assets when the assets quality has already been demolished.
Moreover, priority sector and public sector NPAs position were worst in Public Sector
Banks because governments welfare and development programs are mostly routed through
these banks. Thus, we can say that they are more social in nature rather than economical,
thats why elimination of NPAs in Public Sector Banks are not completely possible but the
banks can always aim to keep the NPAs at the low level. Further, New Private Sector Banks
had shown better performance in managing gross and net NPAs as compared to Scheduled,
Public and Old Private Sector Banks. Therefore, the banks need to bring down their level of
NPAs, which can be achieved through checking the genuine viability of the borrowing units
before lending, effective monitoring and supervision of loans accounts, reforming effective
credit appraisal techniques, formulating project appraisal techniques, sharing credit
information among the banks, establishing debtor-creditor relationship, inspection of the
progress of the projects etc. Moreover, various tools are also available to the banks such as
approaching to Debt Recovery Tribunals for expeditious adjudication and recovery of debts,

57

using of compromise schemes, availing of Corporate Debt Restructuring schemes for

restructuring debts through an orderly and co-ordinated debtor-creditor agreement and intercreditor agreement etc. Furthermore, approaching to ARCs for change/takeover of
management or sale/lease of business of the borrowers and settlement of dues payable by the
borrower and many other options are also available to the banks.

58

Chapter: - 5
Bibliography

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from

Appendix: Literature Review

Author
Dey, N.B.,
Biswas, M.

Title
& Management
of
NPAs-A non-legal
approach
(with
special reference
to State Bank of
India)

Balasubramaniam,
C.S.

Narula, S.,
Singla, M.

Rajeev, M.,
Mahesh, H.P.

Non-Performing
Assets
and
Profitability
of
Commercial
Banks in India

Objective
To examine the
existing NPAs
Management
System of SBI
operating
in
Barak Valley of
Assam

Methodology
It relied on primary
data
such
as
interviews through
questionnaire.

Findings
Though
SBIs
Management
Policy
has suggested sanction
of loan should be on
the basis of feasibility
of the project but a few
bank
officials
sanctions loans on the
basis of borrowers
reputation.
They
follow-up only the
high value advances.

To analyse the It used simple

trend of NPAs of statistical tool.
Public
Sector
Banks, Private
Sector Banks and
Foreign Banks
and also raising
concerns about
financial
performance and
operations of the
borrowers.

Indian Banks have

demonstrated a trend
of continued good
performance
and
profitability. The level
of NPAs is high with
all banks. This can be
brought down by good
credit
appraisal
procedures, effective
internal
control
systems, and improved
asset quality in balance
sheets.
With the increase in
profit, NPA is also in
increasing trend and
because
of
mismanagement gross
NPAs and net NPAs
are increasing every
year. There is adverse
effect on the liquidity
of bank.

& Empirical study on To compare the

Non-Performing
total advances,
net profit, gross
Assets of Banks
NPA and net
NPA of Punjab
National Bank so
as to study the
impact of NPAs
on banks and to
access
the
performance of
PNB.
Banking
Sector
Reforms & NPA:
&
A study of Indian
Commercial
Banks

The data relating to

annual reports of
the
PNB
is
collected and then
analysed by using
tables and coefficient
of
correlation.

To provide an
overview of the Percentage
NPA problem in statistical
India
technique
concentrating on
the
various

NPA is the root cause

and of the global financial
crisis. Banks shows
decline
in
their
performance due to the
lack of awareness of

dimensions
involved.

Das, S.

Khanna, P.

Ghosh, D.,
Ghosh, S.

Management
of
Non-Performing
Assets in Indian
Public
Sector
Banks
with
reference
to
Jharkhand

the problem of bad

loans at the bank level.
NPA in the priority
sector is still higher
than that of the nonpriority sector.

Reasons
and
solutions to the
Simple
problem
of
tool
growing level of
NPAs.

Managing NPAs To
investigate
in
Commercial the growth of
NPAs in the
Banks
commercial
banks.

Based
on High level of NPAs
secondary
data, suggests
high
criteria
for probability of a large
selecting
banks number
of
credit
was the highest defaults that affect the
business
per profitability and net
worth of banks and
employee.
also erodes the value
of the assets.

The movement
of the NPA in
PSB of India and
management of
Management
of the NPA under
& Non-Performing
the purview of Simple
Assets in Public new
policy tool
actions
and
Sector Banks
regulatory
compliance
of
the
Reserve
Bank of India.

Lack
of
entrepreneurship,
wilful defaults and
market failure are
important reasons for
the
generation
of
NPAs. The solutions
statistical are: effective and
regular
follow-up
action, healthy bankerborrower relationship
should develop and
that the government
should setup ARCs to
manage NPAs to face
the challenges.

Indian PSBs have been

able to manage high
level
of
capital
adequacy ratio. The
quality of advances in
Indian
PSBs
has
deteriorated over the
statistical years due to aggressive
lending
policies
undertaken by the
banks. Quality of
lending and recovery
in non-priority sector
has been improving
over the years. PSBs in
India have been able to

control
nonperforming
assets
because of stringent
regulatory norms of
RBI. Though the banks
have been able to
strengthen its capital
adequacy
requirements,
enhancement
in
monitoring
and
recovery procedures is
required to improve
the
overall
management
of
nonperforming assets.
Malhotra, M., & Empirical
Analysis of NPAs
Laveena
related to Private
Banks in India

To
investigate
the movement of
NPAs. To relate
the effects of
NPAs on the
profitability
position
of
private
sector
banks. Effect of
priority
sector
lending on the
total NPAs of
Public
Sector
Banks.

It used secondary
data as a basis.
Analysed
and
interpreted
by
various statistical
tools like ratios,
averages,
percentages,
coefficient
of
variation,
correlation
and
regression test.

The trend of gross

advances as compared
to
non-performing
assets is in continuing
increase form. The rise
of standard assets over
the
years
is
compensating the fall
of other assets. A high
degree of correlation
between profitability
and NPAs of private
sector is there which
affect badly the growth
of the economy.

Sikdar,
P.,
Makkad, M.

To provide an
insight into the
concept of NPAs
as a standard
criterion
for
assessing
commercial bank
credit risk. Steps
taken
towards
recovery
of
NPAs by Indian
commercial
banks.

Based on extensive
study of annual
publications
on
performance
of
commercial banks.

SBI has taken certain

measures to prevent
NPA slippage such as
tighten the appraisal
norms etc. Inspite of
the challenging phase
of Indian Economy,
Punjab and Sind Bank
continued its efforts in
maintaining the assets
quality by accelerating
the recovery of NPAs.
Identification,
measurement,
monitoring
and
management of risks

& Role of NPAs in

the
Risk
Framework
of
Commercial
Banks

remain a key focus

area for HDFC bank.
Gurumoorty, T.R. Non-Performing
Assets A study
& Sudha, B.
with reference to
Public
Sector
Banks

Patidar, S.,
Kataria, A.

An Analysis of
NPA in Priority
Sector Lending: A
Comparative
&
Study
between
Public
Sector
Banks and Private
Sector Banks of
India

To analyse the
classification of
loan assets in
PSBs and to
analyse
the
composition of
NPAs
in
different sectors.

Based
on
secondary data and
data are shown in
tables
like
Classification
of
loan
assets,
Composition
of
NPAs,
Nonperforming assets
as a percentage to
total assets and as
percentage
to
advances.

The
amount
of
standard assets showed
increasing trend while
ratio of sub-standard,
doubtful and loss
assets to total advances
showed
decreasing
trend which shows an
indication of effective
follow-up actions in
monitoring NPAs. The
share of NPAs in
priority sector has
increased marginally
while share in nonpriority sector has
declined. Significant
improvement in NPA
recovery is there.

Priority sector lending

has significant impact
To
analyze
on total NPA of public
whether there is
sector banks; where in
significant
private sector banks,
difference
priority sector lending
between NPA of
has no significant
SBI
&
impact on total NPA of
Associates, Old
Banks.
There
is
Private
Banks
significant difference
and New Private
Regression
between
NPA
of
Banks with the
analysis and ratio Nationalized
Banks,
NPA
of
with that of SBI &
analysis
Nationalized
Associates,
New
Banks and to
Private Banks and Old
find out the
Private Banks. The
significant
reasons for growing
impact
of
advances in Priority
Priority Sector
Sector
are
the
Lending on the
regulations given by
Total NPA of
RBI where banks need
Banks.
to compulsorily invest
in these sectors.