“A STUDY OF NON-PERFORMING ASSETS”

ABSTRACT

In the Indian banking system, growing non-performing assets is a repeated problem. There
have been two such episodes over the previous two decades when the banking sector has
suffered seriously from balance sheet difficulties. In this study we make a comparative
examination of two instances of the banking crisis, one that started in the late 1990s and one
that has not yet been addressed following the 2020 global financial crisis. We describe the
pre-emergency macroeconomic and banking environment, the extent and the nature of the
crises and analyse policy responses. Finally, we draw political lessons from this conversation
and suggest actions that might be taken to better address a future crisis in the banking sector
that will have little impact on the real economy.

CHAPTER I
INTRODUCTION

Banking sector reforms in India has progressed promptly on aspects like interest rate
deregulation, reduction in statutory reserve requirements, prudential norms for interest rates,
asset classification, income recognition and provisioning. But it could not match the pace
with which it was expected to. The accomplishment of these norms at the execution stages
without restructuring the banking sector as such is creating havoc, this research paper deals
with the problem of having non-performing assets, the reasons for mounting of non-
performing assets and the practices present in other countries for dealing with non-
performing assets.

During pre-nationalization period and after independence, the banking sector remained in
private hands Large industries who had their control in the management of the banks were
utilizing major portion of financial resources of the banking system and as a result low
priority was accorded to priority sectors. Government of India nationalized the banks to make
them as an instrument of economic and social change and the mandate given to the banks was
to expand their networks in rural areas and to give loans to priority sectors such as small scale
industries, self-employed groups, agriculture and schemes involving women.

To a certain extent the banking sector has achieved this mandate. Lead Bank Scheme enabled
the banking system to expand its network in a planned way and make available banking
series to the large number of population and touch every strata of society by extending credit
to their productive Endeavour’s. This is evident from the fact that population per office of
commercial bank has come down from 66,000 in the year 1969 to 11,000 in 2016. Similarly,
share of advances of public sector banks to priority sector increased from 14.6% in 1969 to
44% of the net bank credit. The number of deposit accounts of the banking system increased
from over 3 crores in 1969 to over 30 crores. Borrowed accounts increased from 2.50 lakhs to
over 2.68 crores.

The accumulation of huge non-performing assets in banks has assumed great importance. The
depth of the problem of bad debts was first realized only in early 1990s. The magnitude of
NPAs in banks and financial institutions is over Rs.1, 50,000 crores. While gross NPA
reflects the quality of the loans made by banks, net NPA shows the actual burden of banks.
Now it is increasingly evident that the major defaulters are the big borrowers coming from
the non-priority sector. The banks and financial institutions have to take the initiative to
reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in
the debate not only because they dominate the banking industries, but also since they have
much larger NPAs compared with the private sector banks. This raises a concern in the
industry and academia because it is generally felt that NPAs reduce the profitability of banks,
weaken its financial health and erode its solvency. For the recovery of NPAs a broad
framework has evolved for the management of NPAs under which several options are
provided for debt recovery and restructuring. Banks and FIs have the freedom to design and
implement their own policies for recovery and write-off incorporating compromise and
negotiated settlements.

TYPES OF BANKS:

PUBLIC SECTOR BANKS:

Public sector banks are the ones in which the government has a major holding. Public Sector
Banks dominate 75% of deposits and 71% of advances in the banking industry. Public Sector
Banks control commercial banking India, these can be further classified into:

1) Nationalized banks
2) State Bank of India and its associates
3) Regional Rural Banks

PRIVATE SECTOR BANKS:

Private sector banks came into existence to supplement the performance of public sector
banks and serve the needs of the economy better. As the public sector banks were merely in
the hands of the government, banks had no incentive to make profits and improve their
financial capability. The main difference between public and private sector banks is only that
public sector banks follow the RBI interest rules strictly but private banks can make some
changes in them but only after the approval from the RBI. Private sector banks are the banks
which are controlled by the private lenders with the approval from the RBI. Their interest
rates are slightly costly as compared to public sector banks.

NPA (NON PERFORMING ASSET)

Action for enforcement of security interest can be initiated only if the secured asset is
classified as Non Performing Asset. Non Performing Asset means an asset or account of
borrower, which has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines relating to asset
classification issued by RBI. An amount due under any credit facility is treated as "past due"
when it has not been paid within 30 days from the due date. Due to the improvement in the
payment and settlement systems, recovery climate, up gradation of technology in the banking
system, etc., it was decided to dispense with 'past due' concept, with effect from March 31,
2013. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance
where interest and /or installment of principal remain overdue for a period of more than 180
days in respect of a Term Loan, the account remains 'out of order' for a period of more than
180 days, in respect of an overdraft/ cash Credit(OD/CC), the bill remains overdue for a
period of more than 180 days in the case of bills purchased and discounted, interest and/ or
installment of principal remains overdue for two harvest seasons but for a period not
exceeding two half years in the case of an advance granted for agricultural purpose, and any
amount to be received remains overdue for a period of more than 180 days in respect of other
accounts.

With a view to moving towards international best practices and to ensure greater
transparency, it has been decided to adopt the '90 days overdue' norm for identification of
NPAs, form the year ending March 31, 2016. Accordingly, with effect from March 31, 2016,
a non-performing asset (NPA) shell be a loan or an advance where; interest and /or
installment of principal remain overdue for a period of more than 90 days in respect of a
Term Loan, the account remains 'out of order' for a period of more than 90 days, in respect of
an overdraft/ cash Credit(OD/CC), the bill remains overdue for a period of more than 90 days
in the case of bills purchased and discounted, interest and/ or installment of principal remains
overdue for two harvest seasons but for a period not exceeding two half years in the case of
an advance granted for agricultural purpose, and any amount to be received remains overdue
for a period of more than 90 days in respect of other accounts.
Non-Performing Asset or NPA, It is called such as while it is an "Asset", it does not bring
substantial income to its Owner or is just dormant. Call it a white elephant if you wish.
Basically, it is having something that should work but does not. It is supposed to make Non-
Performing Assets work. The RBI has issued guidelines to banks for classification of assets
into four categories.

A. Standard (Assets):

These are loans which do not have any problem are less risk.

B .Substandard (Assets):

These are assets which come under the category of NPA for a period of less than 12 months.

C. Doubtful (Assets):

These are NPA exceeding 12 months.

D. Loss (Assets):

Where loss has been identified by the bank or internal or external auditors or the RBI
inspection but the amount has not been written off wholly.

BENEFICIARIES OF THE STUDY:

The outcomes analyzed from this study would be beneficial to various sections such as:

Banks: This study would primarily benefit the banks in identifying the sectors to be given
priority for lending money.

Future Researchers: The results of the study would also benefit the future researchers as this
study would enhance their knowledge about the topic. They would get an insight of the
present scenario of this industry as this is the emerging industry in the financial sector of the
economy.

NON PERFORMING ASSETS AS A MAJOR ISSUE AND CHALLENGE FOR

BANKING INDUSTRY:

Non-performing Assets are threatening the stability and demolishing bank‘s 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 Narashimam 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 bank industry have helped largely to clean NPA
which was around Rs 52,000 crores in the year 2016. The earning capacity and profitability
of the bank are highly affected due to this NPA.

GROSS NPA AND NET NPA

Gross NPA is an advance which is considered irrecoverable, for bank has made provisions,
and which is still held in banks' books of account. Net NPA is obtained by deducting items
like interest due but not recovered, part payment received and kept in suspense account from
Gross NPA. The Reserve Bank of India states that, compared to other Asian countries and the
US, the gross non-performing asset figures in India seem more alarming than the net NPA
figure. The problem of high gross NPAs is simply one of inheritance. Historically, Indian
public sector banks have been poor on credit recovery, mainly because of very little legal
provision governing foreclosure and bankruptcy, lengthy legal battles, sticky loans made to
government public sector undertakings, loan waivers and priority sector lending.

Net NPAs are comparatively better on a global basis because of the stringent provisioning
norms prescribed for banks in 1991 by Narashimam Committee. In India, even on security
taken against loans, provision has to be created. Further, Indian banks have to make a 100 per
cent provision on the amount not covered by the realizable value of securities in case of
''doubtful'' advance, while in some countries; it is 75 per cent or just 50 per cent. The
ASSOCHAM Study titled - Solvency Analysis of the Indian Banking Sectors, reveals that on
an average 24 per cent rise in net non performing assets have been registered by 25 public
sector and commercial banks during the second quarter of the 2021 as against 2020.
According to the RBI, "Reduction of NPAs in the Indian banking sector should be treated as
a national priority item to make the system stronger, resilient and geared to meet the
challenges of globalization. It is necessary that a public debate is started soon on the problem
of NPAs and their resolution."

RESEARCH PROBLEM:

Indian banking industry, which was in glory phase once upon a time, has been facing a lots of
challenges on non performing assets at present scenario. Many banks have kept their NPAs
under the control but some banks are not able to control their NPA levels. They are facing
lots of problems. There can be various reasons behind this NPA. Non-performing assets has
been hitting the profitability of the banks or it can be said that due to NPA, the profitability of
the banks are going down day by day. The subsidiary for this is the functioning of Debt
Recovery Tribunal (DRT) which is a judiciary for the bank for recovery amount from the
default customers. These can be considered as a research problem based on which the
information is collected, the object is measured and the data is analyzed and interpreted.

OBJECTIVES OF THE STUDY:

The objective of the project was to find how this Non-Performing Assets generate and what
its impact on the profitability of the bank and how it can be reduced. The study is addressed
to the following objectives:

• To study the trend of NPAs during last nine years.

• To determine the factors affecting NPA.
• To find out the effectiveness of recovery mechanism adopted by banks for NPA.
• To establish relationship between NPAs and profitability of private banks.
• To suggest measures to reduce NPAs in private sector.

NEED OF THE STUDY:

The non-performing assets that are not able to generate income for the bank are the great
threat for the banking institution. Rather than generating profit for the bank, NPA drains off
the income earned by the other performing asset by the way of paying interest to the real
owner of the resources. It affects the overall profitability of the bank adversely by affecting
the return on equity and return on asset. There are certain ways through which it affects the
financial institutions are as follows:

Thus, the need of the study of the NPA is must necessary due to these reasons. These reasons
are the crucial for any bank at present. One has to realize these matters and has to take
corrective action against NPA reasons, as for as possible one has to convert all the NPA
accounts into PA accounts. As far as the importance of the study is concern, without the
study, one can’t identify the whole gamut of the NPA. To know, how the account is
becoming NPA is must necessary. After identifying the reason behind the particular NPA
account, one can go for a step ahead. That means for the step of how to convert into PA and
how to prevent other account from becoming NPA. As for as possible, one has to eradicate
the reasons of NPAs. Thus, it is highly importance to study NPA in detail.

SCOPE OF THE STUDY:

Being a project scope will be based on the day-to-day teamwork operations. The data will be
collected from various aspects of loans and advances in various private banks of Hyderabad
and Secunderabad (Telangana).

• To understand the concept of NPA in Indian Private Banking industry.

• To understand the causes of NPA.
• To analyze the past trends of NPA of Private banks.

HYPOTHESES FORMULATION:

H1: There exists a relationship between NPAs and profitability of private banks.

H2: The recovery mechanisms adopted by private banks are effective.

COLLECTION OF DATA:
The relevant data was collected from both primary and secondary sources. Census method of
data collection was applied to collect primary information. Research population for the study
comprised of private banks operating in Hyderabad and Secunderabad (Telangana). The
response rate for the present study came to be 86.66 % since 13 banks responded out of 15
private banks in the concerned area. The 13 banks surveyed are 1) Axis Bank, 2) Citi Bank,
3) Federal Bank; 4) HDFC Bank, 5) ICICI Bank, 6) IndusInd Bank, 7) ING Vysya Bank, 8)
Karnataka Bank, 9) Karur Vysya Bank, 10) Kotak Mahindra Bank, 11) South Indian Bank,
12) Jammu and Kashmir Bank, 13) IDBI Bank.

The secondary sources comprised of various audited reports and publications of the Reserve
Bank of India. Detailed information were collected mainly from the various volumes of the
“Statistical Tables Relating to Banks in India” covering the period from 2000 - 2021 which
were published by the Statistical Department of Reserve Bank of India, Mumbai from the
website www.rbi.org.in.

DATA COLLECTION FORM:

A structured questionnaire assessing work system, recovery system, processing loan

applications and other impeding factors associated with loan portfolio was used to collect
primary information from the private banks. Items based on 5-point Likert scale and multiple
chioce questions were included in the questionnaire.

STATISTICAL TOOLS:

The analyses of primary data were conducted through descriptive statistics, factor analysis,
Pearson correlation and one-sample t-test. The secondary data was analyzed through column
charts, line charts, bar charts and percentages.

LIMITATIONS:
1. The secondary data was available for 9 years only.

2. The present study is confined to Hyderabad and Secunderabad areas only.

3. The conclusions of the study are based on the responses of the banks and secondary
information. Thus, some amount of subjectivity might remain.

CHAPTER II
REVIEW OF LITERATURE

According to a study by Brownbridge (1998), most of the bank failures were caused by non-
performing loans. Arrears affecting more than half the loan portfolios were typical of the
failed banks. Many of the bad debts were attributable to moral hazard: the adverse incentives
on bank owners to adopt imprudent lending strategies, in particular insider lending and
lending at high interest rates to borrowers in the most risky segments of the credit markets.

Bloem and Gorter (2013) suggested that a more or less predictable level of non-performing
loans, though it may vary slightly from year to year, is caused by an inevitable number of
‘wrong economic decisions by individuals and plain bad luck (inclement weather, unexpected
price changes for certain products, etc.). Under such circumstances, the holders of loans can
make an allowance for a normal share of non-performance in the form of bad loan provisions,
or they may spread the risk by taking out insurance. Enterprises may well be able to pass a
large portion of these costs to customers in the form of higher prices. For instance, the
interest margin applied by financial institutions will include a premium for the risk of
nonperformance on granted loans.
At this time, banks’ non-performing loans increase, profits decline and substantial losses to
capital may become apparent. Eventually, the economy reaches a trough and turns towards a
new expansionary phase, as a result the risk of future losses reaches a low point, even though
banks may still appear relatively unhealthy at this stage in the cycle.

According to Gorter and Bloem (2014) non-performing loans are mainly caused by an
inevitable number of wrong economic decisions by individuals and plain bad luck (inclement
weather, unexpected price changes for certain products, etc.). Under such circumstances, the
holders of loans can make an allowance for a normal share of nonperformance in the form of
bad loan provisions, or they may spread the risk by taking out insurance.

Petya Koeva (2015), his study on the Performance of Indian Banks. During Financial
Liberalization states that new empirical evidence on the impact of financial liberalization on
the performance of Indian commercial banks. The analysis focuses on examining the
behavior and determinants of bank intermediation costs and profitability during the
liberalization period. The empirical results suggest that ownership type has a significant
effect on some performance indicators and that the observed increase in competition during
financial liberalization has been associated with lower intermediation costs and profitability
of the Indian banks.

Das and Ghosh (2015) empirically examined non-performing loans of India’s public sector
banks in terms of various indicators such as asset size, credit growth and macroeconomic
condition, and operating efficiency indicators. Sergio (1996) in a study of non-performing
loans in Italy found evidence that, an increase in the riskiness of loan assets is rooted in a
bank’s lending policy adducing to relatively unselective and inadequate assessment of
sectoral prospects.

Vradi et.al (2018), his study on´ Measurement of efficiency of bank in India concluded that
in modern world performance of banking is more important to stable the economy .in order to
see the efficiency of Indian banks we have see the fore indicators i.e. profitability,
productivity, assets, quality and financial management for all banks includes public sector,
private sector banks in India for the period 2000 and 1999 to 2014-2015. For measuring
efficiency of banks we have adopted development envelopment analysis and found that
public sectors banks are more efficient then other banks in India

Brijesh K. Saho et.al (2019), this paper attempts to examine, the performance trends of the
Indian commercial banks for the period: 1997-98 - 2016-17. Our broad empirical findings are
indicative in many ways. First, the increasing average annual trends in technical efficiency
for all ownership groups indicate an affirmative gesture about the effect of the reform process
on the performance of the Indian banking sector. Second, the higher cost efficiency accrual of
private banks over nationalized banks indicate that nationalized banks, though old, do not
reflect their learning experience in their cost minimizing behavior due to X-inefficiency
factors arising from government ownership. This finding also highlights the possible stronger
disciplining role played by the capital market indicating a strong link between market for
corporate control and efficiency of private enterprise assumed by property right hypothesis.
And, finally, concerning the scale elasticity behavior, the technology and market-based
results differ significantly supporting the empirical distinction between returns to scale and
economies of scale, often used interchangeably in the literature.

Roma Mitra et.al (2020), A stable and efficient banking sector is an essential precondition to
increase the economic level of a country. This paper tries to model and evaluate the
efficiency of 50 Indian banks. The Inefficiency can be analyzed and quantified for every
evaluated unit. The aim of this paper is to estimate and compare efficiency of the banking
sector in India. The analysis is supposed to verify or reject the hypothesis whether the
banking sector fulfils its intermediation function sufficiently to compete with the global
players. The results are insightful to the financial policy planner as it identifies priority areas
for different banks, which can improve the performance. This paper evaluates the
performance of Banking Sectors in India.

B.Satish Kumar (2020), in his article on an evaluation of the financial performance of Indian
private sector banks wrote Private sector banks play an important role in development of
Indian economy. After liberalization the banking industry underwent major changes. The
economic reforms totally have changed the banking sector. RBI permitted new banks to be
started in the private sector as per the recommendation of Narashiman committee. The Indian
banking industry was dominated by public sector banks. But now the situations have changed
new generation banks with used of technology and professional management has gained a
reasonable position in the banking industry.

M. Karunakar et.al (2020), Study the important aspect of norms and guidelines for making
the whole sector vibrant and competitive. The problem of losses and lower profitability of
Non- Performing Assets (NPA) and liability mismatch in Banks and financial sector depend
on how various risks are managed in their business. Besides capital to risk Weightage assets
ratio of public sector banks, management of credit risk and measures to control the menace of
NPAs are also discussed. The lasting solution to the problem of NPAs can be achieved only
with proper credit assessment and risk management mechanism. It is better to avoid NPAs at
the market stage of credit consolidation by putting in place of rigorous and appropriate credit
appraisal mechanisms.

Nelson M. Waweru et.al (2021), Study that many financial institutions that collapsed in
Kenya since 1986 failed due to non performing loans, this study investigated the causes of
non- performing loans, the actions that bank managers have taken to mitigate that problem
and the level of success of such actions. Using a sample of 30 managers selected from the ten
largest banks the study found that national economic downturn was perceived as the most
important external factor. Customer failure to disclose vital information during the loan
application process was considered to be the main customer specific factor. The study further
found that Lack of an aggressive debt collection policy was perceived as the main bank
specific factor, contributing to the non performing debt problem in Kenya.

Kevin Greenidge et.al (2010), study the evaluation of non-performing loans is of great
importance given its association with bank failure and financial crises, and it should therefore
be of interest to developing countries. The purpose of this paper is to build a multivariate
model, incorporating macroeconomic and bank-specific variables, to forecast non-performing
loans in the banking sector of Barbados. On an aggregate level, our model outperforms a
simple random walk model on all forecast horizons, while for individual banks; these
forecasts tend to be more accurate for longer prediction periods only.

CHAPTER III
 INDUSTRY PROFILE & COMPANY PROFILE
INDUSTRY PROFILE

INDIAN BANKING SECTOR

The Reserve Bank of India (RBI) is India's central bank. Though public sector banks
currently dominate the banking industry, numerous private and foreign banks exist. India's
government-owned banks dominate the market. Their performance has been mixed, with a
few being consistently profitable. Several public sector banks are being restructured, and in
some the government either already has or will reduce its ownership.

PRIVATE AND FOREIGN BANKS

The RBI has granted operating approval to a few privately owned domestic banks; of these
many commenced banking business. Foreign banks operate more than 150 branches in India.
The entry of foreign banks is based on reciprocity, economic and political bilateral relations.
An inter-departmental committee approves applications for entry and expansion.

CAPITAL ADEQUACY NORM

Foreign banks were required to achieve an 8 percent capital adequacy norm by March
1993, while Indian banks with overseas branches had until March 1995 to meet that
target. All other banks had to do so by March 1996. The banking sector is to be used as
a model for opening up of India's insurance sector to private domestic and foreign
participants, while keeping the national insurance companies in operation.

BANKING
India has an extensive banking network, in both urban and rural areas. All large Indian banks
are nationalized, and all Indian financial institutions are in the public sector.
RBI BANKING

The Reserve Bank of India is the central banking institution. It is the sole authority for
issuing bank notes and the supervisory body for banking operations in India. It supervises and
administers exchange control and banking regulations, and administers the government's
monetary policy. It is also responsible for granting licenses for new bank branches. 25 foreign
banks operate in India with full banking Licenses. Several licenses for private banks have
been approved. Despite fairly broad banking coverage nationwide, the financial system
remains inaccessible to the poorest people in India.

INDIAN BANKING SYSTEM

The banking system has three tiers. These are the scheduled commercial banks; the
regional rural banks, which operate in rural areas, not covered by the scheduled banks;
and the cooperative and special purpose rural banks.

SCHEDULED AND NON SCHEDULED BANKS

There are approximately 80 scheduled commercial banks, Indian and foreign; almost 200
regional rural banks; more than 350 central cooperative banks, 20 land development banks;
and a number of primary agricultural credit societies. In terms of business, the public sector
banks, namely the State Bank of India and the nationalized banks, dominate the banking
sector.

NEW GENERATION BANKING

The liberalize policy of Government of India permitted entry to private sector in the banking,
the industry has witnessed the entry of nine new generation private banks. The major
differentiating parameter that distinguishes these banks from all the other banks in the Indian
banking is the level of service that is offered to the customer. Verify the focus has always
been centered on the customer – understanding his needs, preempting him and consequently
 delighting him with various configurations of benefits and a wide portfolio of products and
services. These banks have generally been established by promoters of repute or by ‘high
value’ domestic financial institutions. The popularity of these banks can be gauged by the
fact that in a short span of time, these banks have gained considerable customer confidence
and consequently have shown impressive growth rates. Today, the private banks corner
almost four per cent share of the total share of deposits. Most of the banks in this category
are concentrated in the high-growth urban areas in metros (that account for approximately
70% of the total banking business). With efficiency being the major focus, these banks have
leveraged on their strengths and competencies viz. Management, operational efficiency and
flexibility, superior product positioning and higher employee productivity skills.

The private banks with their focused business and service portfolio have a reputation of being
niche players in the industry. A strategy that has allowed these banks to concentrate on few
reliable high net worth companies and individuals rather than cater to the mass market.
These well-chalked out integrates strategy plans have allowed most of these banks to deliver
superlative levels of personalized services. With the Reserve Bank of India allowing these
banks to operate 70% of their businesses in urban areas, this statutory requirement has
translated into lower deposit mobilization costs and higher margins relative to public sector
banks.

BUSINESS OF BANKING

Banking, in a traditional sense is the business of accepting deposits of money from public for
the purpose of lending and investment. These deposits can have a distinct feature of being
withdrawal by cheques, which no other financial institution can offer.

In addition to this banks also offer various other financial services which include:
 Issuing Demand Drafts & Travelers Cheques
 Collection of Cheques, Bills of exchange
 Safe Deposit Lockers
 Issuing Letters of Credit & Letters of Guarantee
 Sale and Purchase of Foreign Exchange
 Custodial Services
 Investment services

The business of banking is highly regulated since banks deal with money offered to them by
the public and ensuring the safety of this public money is one of the prime responsibilities of
any bank. That is why banks are expected to be prudent in their lending and investment
activities. The major regulations and acts that govern the banking business are:
 Banking Regulations Act
 Reserve Bank of India Act
 Foreign Exchange Regulation (Amendment) Act, 1993
 Indian Contract Act
 Negotiable Instruments Act

Banks lend money either for productive purposes to individuals, firms, corporates etc. or for
buying house property, cars and other consumer durable and for investment purposes to
individuals and others. However, banks do not finance any speculative activity. Lending is
risk taking. The risk should be covered by having prudent norms for lending. The depositors
of banks are also assured of safety of their money by deploying some percentage of deposits
in statutory reserves like SLR & CRR.
OVERVIEW OF BANKING INDUSTRY: THE INDUSTRY BASICS

Banks play a key role in the entire financial system by mobilizing deposits from households
spread across the nation and making these funds available for investment, either by lending or
buying securities. Today the banking industry has become an integral part of any nation’s
economic progress and is critical for the financial wellbeing of individuals, businesses,
nations, and the entire globe. In this article, we will provide an overview of key industry
concepts, main sectors, and key aspects of the banking industry’s business model and trends.

A bank is a financial institution that provides banking and other financial services to their
customers. Banks are a subset of the financial services industry and play an important role in
the global economies. They are a key player in stimulating economic growth. Banking is an
important undertaking. The movement of capital handled by banks allows economies to grow
and prosper. Businesses and governments need money to operate, and banks act as
intermediaries between the suppliers of funds and users of funds.

Banking Basics: The Law of Banking

Law of Banking teaser Banking law is based on a contractual agreement between the bank
and customer. The customer is any entity for which the bank agrees to conduct an account or
business. Given below are the generally accepted rights and obligations:

• The bank account balance is the financial position between the bank and the customer:
when the account is in credit, the bank owes the balance to the customer; when the account is
overdrawn, the customer owes the balance to the bank.

• The bank agrees to pay the customer's cheques up to the amount standing to the credit of the
customer's account, plus any agreed overdraft limit.
• The bank may not pay from the customer's account without a mandate from the customer,
example cheques drawn by the customer.

• The bank agrees to promptly collect the cheques deposited to the customer's account as the
customer's agent, and to credit the proceeds to the customer's account.

• The bank has a right to combine the customer's accounts, since each account is just an
aspect of the same credit relationship.

• The bank has a lien on cheques deposited to the customer's account, to the extent that the
customer is indebted to the bank.

• The bank must not disclose details of transactions through the customer's account—unless
the customer consents, there is a public duty to disclose, the bank's interests require it, or the
law demands it.

• The bank must not close a customer's account without reasonable notice, since cheques are
outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the
customer and the bank. The statutes and regulations in force within a particular jurisdiction
may also modify the above terms and/or create new rights, obligations or limitations relevant
to the bank-customer relationship.
Types of Banks: Commercial & Investment Banking

Types of Banking teaser The banking industry can be divided into two categories
‘commercial-banking’ and ‘investment-banking’. Commercial banks play a key role in the
entire financial system by mobilizing deposits from households spread across the nation and
making these funds available for investment, either by lending or buying securities.
Investment Banks, on the other hand, raise capital (cash/money) for companies, which
companies need in order to grow and expand their businesses. Investment banks sell
securities to public investors in the form of stocks or bonds.

Distinctive types of banks are evolving to cater to various business demands, social needs,
and global complexities. These different banking institutions conduct their operations in a
different manner. However, on the basis of their functions, clientele served and products or
services offered, we can classify banks as follows:

 Retail Banks

 Commercial banks

 Investment Banks

 Cooperative banks

 Central banks

 Specialized banks

Business Model: Customer Profiles

Customer Profile Banking teaser Banks are large and complex organizations. Their clients
range from individuals and institutions, all the way up to the governments and central banks
of entire countries. This industry builds and maintains financial relationships with a variety of
customers ranging from individuals to governments to supply financial products and services.
Given below is the major classification of banking customers:

• Individual Consumers

• Small Businesses & Traders

• Farmers & Rural Consumers

• Corporates and Corporations

• Banks – Domestic & International

• Governments

• Institutional Investors

• Non-Profit Organizations

• International Clients

Business Model: Banking Products & Services

Products Services Banking teaser

The Banking sector offers several facilities to their customers including safeguarding their
money and valuables and providing them with numerous types of credit loans to meet their
many needs like home loans, consumer loans, personal loans, etc. Banks also provide
additional services like credit, and payment services, such as checking accounts, money
orders, and cashier's cheques. The banks also offer investment and insurance products. The
key operational activities are listed below:

Acceptance of Deposits

Lending of Funds

Clearing of Cheques

Remittance of Funds

Lockers & Safe Deposits

Bill Payment Services

Online Banking

Credit & Debit Cards

Overseas Banking Services

Wealth Management
Investment Banking

Social Objectives

Business Model: Functions of the Banking Industry

Functions Banking teaser The banking industry is growing rapidly. It's estimated that the
assets of the 1,000 largest banks are worth almost $100 trillion USD. With the growth in the
industry, banks manage a diverse portfolio of functions. Bank provides various services and
offers many products. The following discussion explains the key functions of the bank:

 Provide security to the savings of customers by safeguarding it

 Offering interest on the deposits kept with it

 Control the supply of money and credit

 Arrange funds to the parties who need them by borrowing from parties who have surplus

 Encourage public confidence in the working of the financial system

 Increase savings speedily and efficiently

 Avoid focus of financial powers in the hands of a few individuals and institutions
 Set equal norms and conditions to all types of customers

Business Model: Dynamic Regulatory Environment

Regulations Banking teaserBanks operating in most of the countries are exposed to various
stringent regulations. Most governments enforce rules and procedures to govern their
operations and service offerings, and the manner in which they grow and expand their
facilities to better serve the public. A banker works within the financial system to provide
loans, accept deposits, and provide other services to their customers. They must do so within
a climate of extensive regulation, designed primarily to protect the public interests. The main
reasons why banks are heavily regulated are as follows:

• To protect the safety of the public's savings.

• To control the supply of money and credit in order to achieve a nation's broad economic
goal.

• To ensure equal opportunity and fairness in the public's access to credit and other vital
financial services.

• To promote public confidence in the financial system, so that savings are made speedily and
efficiently.

• To avoid concentrations of financial power in the hands of a few individuals and

institutions.

• Provide the Government with credit, tax revenues, and other services.
• To help sectors of the economy that they have special credit needs for example Housing,
small business and agricultural loans, etc.

Current Industry Trends

Trends Banking teaserAs a variety of models for cooperation and integration among finance
industries have emerged, some of the traditional distinctions between banks, insurance
companies, and securities firms are fast diminishing. In spite of all these developments, banks
continue to maintain and perform their primary role—accepting deposits and lending funds
from these deposits. During recent times, technological advances have enabled banks to
extend their reach globally, and there is no longer a need for customers to visit bank branches
for every transaction, as most of the transactions can happen online.

The growth in cross-border activities has also increased the demand for banks that can
provide various services across borders to different nationalities. Despite these advances in
cross-border activities, the banking industry is nowhere near as globalized as some other
industries. There is no doubt that “Technology” is going to be a catalyst in that growth,
creating huge opportunities for professionals with a good understanding of the banking
industry domain.
History of Banking: Evolution of Banking as an Industry

Banking is one of the oldest industries and banking in the form that we know of began at
about 2000BC of the ancient world. It started with merchants making grain loans to farmers
and traders while carrying goods between cities. Since then, the banking industry has evolved
from a simplistic barter system and gift economies of earlier times to modern complex,
globalized, technology-driven, and internet-based e-banking model. In this article, we will
take you through the major events and developments in the history of the banking industry.

The History of Banking began at about 2000BC of the ancient world when merchants made
grain loans to farmers and traders started carrying goods between cities within the areas of
Assyria and Babylonia. The Code of Hammurabi, dating back to about 1772 BC, is one of the
oldest deciphered writings of significant length in the world that deals with matters of
contract and set the terms of a transaction. This code also included standardized procedures
for handling loans, interest, and guarantees.

Later on, in ancient Greece and during the Roman Empire, lenders based in temples made
loans and started accepting of deposits. Banking activities in Greece are more varied and
sophisticated than in any previous society. They took deposits, made loans, changed money
from one currency to another, and tested coins for weight and purity. They even engaged in
book transactions. Moneylenders can be found who will accept payment in one Greek city
and arrange for credit in another, avoiding the need for the customer to transport or transfer
large numbers of coins.

Banking, in the modern sense of the word, can be traced to medieval and early Renaissance
Italy, to the rich cities in the north such as Florence, Venice, and Genoa. The development of
banking spread through Europe and a number of important innovations took place in
Amsterdam during the Dutch Republic in the 16th century and in London in the 17th century.
Some of the earlier systems that facilitated trading/exchange of goods were barter system and
gift economies.
Barter System:

The Barter system is an age-old method

that was adopted by people to exchange their services and goods. This system was used for
centuries, before the invention of money. People used to exchange goods or services for other
goods or services in return. The advantage of bartering is that it does not involve money. You
can buy an item in exchange for some other thing you currently have but don't want. The
barter system was one of the earliest forms of trading. It facilitated the exchange of goods and
services, as money was not invented in those times. The barter system has been in use
throughout the world for centuries. The invention of money did not result at the end of
bartering services.

Gift Economy:

A gift economy (or gift culture) is a society

where valuable goods and services are regularly given without any explicit agreement for
immediate or future rewards. The gifts are exchanged as per the prevailing informal customs,
rather than an explicit exchange of goods or services for money or some other commodity.
Gift economies were prevalent before the advent of market economies but gradually
disappeared as societies became more complex. Contrary to popular conception, there is no
evidence that societies relied primarily on barter before using the money for trade, Instead,
non-monetary societies operated largely along with the principles of gift economics and debt.
When barter did in fact occur, it was usually between complete strangers.

Banking in 20th Century:

During the 20th century, developments in

telecommunications and computing resulting in major changes to the way banks operated and
allowed them to dramatically increase in size and geographic spread. The Late-2000s
financial crisis saw significant numbers of bank failures, including some of the world's
largest banks. The following paragraph provides a snapshot of some developments in the
banking industry over the last century:

The 1930s-1960s – The Great Depression:

During the Crash of 1929 preceding the Great Depression, banking and brokerage firms were
operating with margin requirements of mere ~10%. It meant that the brokerage firms would
lend $9 for every $1 an investor had deposited. When the market fell, brokers called in these
loans, which could not be paid back. Banks began to fail as debtors defaulted on debt and
depositors attempted to withdraw their deposits en masse, triggering multiple banking runs.
Government guarantees and Federal Reserve banking regulations to prevent such panics were
ineffective or not used. Bank failures led to the loss of billions of dollars in assets. After the
panic of 1929, and during the first 10 months of 1930, 744 US banks failed and in all, over
9,000 banks failed during the 1930s. The depression is said to be one of the factors leading to
World War II and the post-war recovery period saw governments taking on a more active and
larger role in banking, leading to increased regulation. In response to these many countries
significantly increased financial regulation and established regulatory agencies to oversee
banking operations and during the post-Second World War period two organizations were
created: The International Monetary Fund (IMF) and the World Bank.
COMPANY PROFILE

PROFILE OF ICICI BANK

ICICI monetary business enterprise is India's second-maximum supervisor hold cash with
novel assets of approximately Rupees.2, 513.89 billion (US$ 56.three billion) at March 31,
2006 and benefit after price of Rs.25.40 billion (US$569million) For the only three hundred
and sixty 5 days finished March 31, 2006(Rupees.20.05 billion (US$449mn) for the most
effective one year finished March 31, 2005).ICICI financial industrial employer commercial
company business enterprise has a way of spherical 614 branches and improvement Counters
and in more of , hundred ATMs. ICICI financial organization offers a relationship to company
and retail customers via an affiliation of improvement channels and via its particular posts
and branches at some diploma inside the zones of hypothesis banking, lifestyles and non-
extra protection, financing and asset the heads. ICICI financial enterprise installation its
massive cash related assembling in budgetary 2002 to oblige the pass visitor goals of
customers and impact on its family unit banking credit score rating score to offer subjects
economic agency business enterprise without a doubt at gift has relates within Russia and
Canada, branches in Singapore, Bahrain, Hong Kong, Sri Lanka and Dubai all round Finance
social referencing and pro directors .United Arab China, South Africa and Bangladesh.

Our united kingdom associate has installation a department in Belgium. ICICI monetary
industrial employer is the most essential financial industrial organization commercial
enterprise commercial enterprise in India to the diploma show capitalization.

ICICI financial business enterprise's genuinely properly surely properly well properly well
worth gives are recorded in India at the Bombay inventory exchange and the country wide
stock exchange of India limited and its American Depositary Receipts (ADRs) are recorded at
the large apple stock alternate (NYSE). ICICI economic business enterprise business
enterprise has picked a Code of company conduct and Ethics for its boss and professionals.
(Snap proper right here to appearance a replica of the code).

At June 5, 2006, ICICI financial enterprise, with unfastened go along with the flow strip
capitalization*of about Rupees.480.00 billion (US$ 10.8 billion) were given decrease lower
all yet again via 0.33 amongst all the affiliations recorded at the India stock exchanges.
ICICI monetary enterprise employer turn out to be from the maximum strong starting
diploma advanced in 1994 through the use of ICICI restricted, an India budgetary association,
and turn out to be its assured beautification. ICICI's shareholding in ICICI financial company
changed into dwindled it forty six% via an open obligation of offers in India in coins related
1998, a in reality nicely clearly properly honestly really worth duty in the form of ADRs
recorded at the NYSE in budgetary 2000, ICICI economic business employer's introduction
high quality approximately of financial company of Madura restricted in an all-stock
amalgamation in budgetary 2001, and discretionary market offers through ICICI to
institutional officers in sturdy cash associated 2001, and 2002.ICICI grow to be encased with
the beneficial resource of 1955 at the development of the sector economic corporation, the
government of India and head of India industrial corporation .

The critical cause become to make an improvement coins associated dating for giving
medium time period and allow free period have a go along with the flow at financing to India
affiliations. within the direction of the 1990s, ICICI modified its company from an
improvement cash related affiliation responsibility from a elegant thoughts-set stumble upon
record to an entire scale budgetary affiliations percent. presenting a shape of things and
affiliations, each in fact and via gildings and in addition such things as ICICI economic
business enterprise. In 1999, ICICI become the identical antique India industrial business
enterprise and the essential monetary group or foundation from non-Japan Asia to be
recorded on the NYSE.

After concept of corporation business corporation commercial agency corporation detaching

through alternatives concerning the growing massive scenario inside the India banking, and
ICICI financial company agency encased the view that the merger of ICICI with ICICI
economic commercial enterprise is probably key desire for the two substances, and will
make the proper right form for the ICICI get huge coins related approach. The merger also
can prop a vivifying strength for ICICI experts via the joined substance's to get right of get
proper of entry to unessential exertion shops, regularly huge open zones for getting fee based
totally surely in reality really compensation and the ability to take a gander on the bit form
and deliver exchange monetary affiliations. The merger can also furthermore probably
enhance an impacting energy for ICICI financial enterprise company experts through an
capital base and period of sports activities sports activities sports easy get admission to
ICICI's robust company courting grew over five a long term, vicinity into new corporation
enterprise corporation sports activities sports, higher little bit of the general company in
numerous business company commercial enterprise company organization enterprise packs,
particularly rate based totally truly sincerely in reality affiliations, and get proper of get entry
to a long way pool of ICICI economic industrial employer and its strip.

In October 2001, the forums of administrators of ICICI and ICICI economic saved up the
merger of ICICI and of actually had retail account posts, ICICI single coins associated
affiliations confined and ICICI Capital affiliations obliged, with ICICI financial The merger
have become saved up with the useful aid of budgetary heads of ICICI and ICICI economic
agency in January 2002, via way of the immoderate court docket of Gujarat at in March 2002,
and through the usage of the excessive courtroom docket of Judicature at Mumbai and the
Reserve financial enterprise of India in April 2002.

Board of Directors
Board Members

Mr. Girish Chandra

Chaturvedi
Non-Executive (part-time)
Chairman
..............................................

Mr. Hari L. Mundra

Independent Director
..............................................

Mr. Lalit Kumar Chandel

Government Nominee
Director
..............................................

Mr. S. Madhavan Mr. Sandeep Bakhshi,

Independent Director Managing Director & CEO
.............................................. ..............................................
Ms. Neelam Dhawan Mr. Anup Bagchi,
Independent Director Executive Director
.............................................. ..............................................

Mr. Radhakrishnan Nair Mr. Sandeep Batra,

Independent Director Executive Director
.............................................. ..............................................

Ms. Rama Bijapurkar Ms. Vishakha Mulye,

Independent Director Executive Director
.............................................. ..............................................

Mr. B. Sriram
Independent Director
..............................................

Mr. Uday Chitale

Independent Director

Board Committees
Board Governance, Remuneration &
Audit Committee
Nomination Committee

Ms. Neelam Dhawan, Chairperson

Mr. Uday Chitale, Chairman
Mr. Girish Chandra Chaturvedi
Mr. S. Madhavan
Ms. Rama Bijapurkar
Mr. Radhakrishnan Nair
Mr. B. Sriram

Corporate Social Responsibility

Customer Service Committee
Committee

Mr. Radhakrishnan Nair, Chairman Ms. Rama Bijapurkar, Chairperson

Ms. Rama Bijapurkar Mr. Hari L. Mundra
Mr. Uday Chitale Mr. Anup Bagchi
Mr. Anup Bagchi Mr. Sandeep Bakhshi
 Board Governance, Remuneration &
Audit Committee
Nomination Committee

Credit Committee Fraud Monitoring Committee

Mr. S. Madhavan, Chairman

Mr. Sandeep Bakhshi, Chairman
Ms. Neelam Dhawan
Mr. B. Sriram
Mr. Radhakrishnan Nair
Mr. Hari L. Mundra
Mr. Anup Bagchi
Ms. Vishakha Mulye
Mr. Sandeep Bakhshi

Information Technology Strategy

Risk Committee
Committee

Mr. B. Sriram, Chairman

Mr. Girish Chandra Chaturvedi, Chairman
Ms. Neelam Dhawan
Mr. S. Madhavan
Mr. Anup Bagchi
Mr. Sandeep Batra
Mr. Sandeep Batra

Review Committee for identification of wilful

Stakeholders Relationship Committee
defaulters/non co-operative borrowers

Mr. Hari L. Mundra, Chairman

Managing Director & CEO, Chairperson
Mr. Uday Chitale
Any Two Independent Directors
Mr. Anup Bagchi

CHAPTER IV
 DATA ANALYSIS AND INTERPRETATION

ANALYSES OF PRIMARY DATA:

MULTIPLE CHOICE QUESTIONS:

Table: 1 since how long the branch is functioning?

Percentage Cumulative
(%) Percent
Frequency Valid Percent
Valid 0-2 years 1 7.7 7.7 7.7
2-3 years 2 15.4 15.4 23.1
3-5 years 5 38.5 38.5 61.5
5- years above 5 38.5 38.5 100.0
Total 13 100.0 100.0

Interpretation:

39% of banks surveyed showed 3-5 years of functioning experience. Also, the same percentage (39%)
was found to have an experience above 5 years.

Table: 2 since how long the presence of NPA is observed in your

Percentage Cumulative
(%) Percent
Frequency Valid Percent
Valid 0-1yrs 3 23.1 23.1 23.1
1-2yrs 7 53.8 53.8 76.9
above -5yrs 3 23.1 23.1 100.0
Total 13 100.0 100.0

Interpretation:
54% of banks observed NPA in their branch from 1-2 years.
Table: 3 What is the appropriate value of NPA is your branch? (Rs in lakhs)
Percentage Cumulative
(%) Percent
Frequency Valid Percent
Valid 1-10 5 38.5 38.5 38.5
10-20 6 46.2 46.2 84.6
20-30 1 7.7 7.7 92.3
above - 40 1 7.7 7.7 100.0
Total 13 100.0 100.0

Interpretation:

46% of banks have 20 lakhs (approximate) of NPAs and 39% of banks have 1-10 lakhs (approximate)
NPA.

Table : 4 For which category the NPA is being observed

Percentage Cumulative
(%) Percent
Frequency Valid Percent
Valid Personal loan 6 46.2 46.2 46.2
Housing loan 6 46.2 46.2 92.3
Agri-term loan 1 7.7 7.7 100.0
Total 13 100.0 100.0

Interpretation:

46.2% banks observed NPAs are in the category of personal loans, also, same percentage (46.2%)
observed NPAs in housing loans category.

Table : 5 Measures for recovery of NPA adopted by the bank

Percentage Cumulative
(%) Percent
 Frequency Valid Percent
Valid Legal measures 6 46.2 46.2 46.2
Both legal and non-legal 7 53.8 53.8 100.0
Total 13 100.0 100.0

Interpretation:

53.8% banks adopted both legal and non-legal measures of recovery whereas 46.2% banks adopted
legal measures only.

Table: 6 To what extent NPA has been converting into good asset.
Percentage Cumulative
(%) Percent
Frequency Valid Percent
Valid 1% 1 7.7 7.7 7.7
2% 1 7.7 7.7 15.4
4% 1 7.7 7.7 23.1
5% 1 7.7 7.7 30.8
>5% 9 69.2 69.2 100.0
Total 13 100.0 100.0

Interpretation:

After survey 69.2% banks showed that they could convert more than 5% NPA into good assets.
Table: 7 Has the profitability improved after adopting reduction technique?
Percentage Cumulative
(%) Percent
Frequency Valid Percent
Valid Definitely improved 5 38.5 38.5 38.5
 improved 7 53.8 53.8 92.3
Can’t say 1 7.7 7.7 100.0
Total 13 100.0 100.0

Interpretation:

53.8% banks showed that their profitability improved and 38.5% banks confirmed that their
profitability definitely improved after adopting NPA reduction techniques.

FACTOR ANALYSIS:

Factorial profile of recovery mechanism adopted for NPA by banks

Table: 8
No. ofNo. ofCommunalities Iterations KMO Items Items V.E Factor
rounds factors (Above) (Above) Deleted Remained % Loading
(Above)
1 3 .60 4 .45 1 8 80.36 .55

2 3 .65 5 .34 - 7 80.81 .70

Descriptive Statistics of Factors affecting NPAs: Table: 9

Mean Standard Factor Communality Variance Cronbach’
Factors Deviation Loading Explained s Alpha
(%)
28.79 .721
F1 Recession and
 management failure
3.15 .987 .940 .891
Recession in economy
3.00 1.780 .837 .710
Management Failure
28.39 .709
F2 Execution Problems
2.92 1.115 .850 .762
Improper Credit
Appraisal
Difficulty in executing 3.46 .967 .827 .713
Repayment procedure
Cost of effective legal 2.46 1.391 .730 .694
measures
23.62 .753
F3 Default by customers
2.77 1.235 .914 .927

Willful Default
2.15 1.281 .854 .960
Absence of Security

Interpretation:

Factors affecting NPAs were subjected to data purification, which resulted into three factors, with
KMO value = 0.34, variance explained = 80.81%, communalities above .65 and Cronbach’s Alpha
above .70. The factors extracted were “Recession and management failure”, “Execution Problems”
and “Default by customers”.

Factorial profile of recovery mechanism adopted for reducing NPA

Table: 10
No. ofNo. ofCommunalities Iterations KMO Items Items V.E Factor
rounds factors (Above) (Above) Deleted Remained % Loading
(Above)
1 2 .15 3 .45 2 6 73.43 .50

2 2 .85 3 .50 - 4 89 .85

Descriptive Statistics of Recovery Mechanisms adopted to reduce NPAs:

Table: 11
Mean Standard Factor Communality Variance Cronbach’ s
Factors Deviation Loading Explained Alpha
(%)
F1 Banking Measures 48.25 .912

Self involvement 2.08 1.256 .960 .923

Recovery campus 2.00 1.414 .951 .910

F2 Legal Measures 41.71 .793

Lok adalats 2.31 1.494 .932 .892

SARFASI Act 1.85 1.214 .891 .874

Interpretation:

Factor analysis was run on the recovery mechanism adopted by private banks for reducing NPAs
which completed in two rounds after deleting two items, one with communality below 0.50 and other
with missing factor loading. Finally, two factors emerged “Banking Measures” and “Legal
Measures”, with KMO value of .50, variance explained = 89%, communalities above
.85 and Cronbach’s Alpha .80.
TESTING OF HYPOTHESES:

H1: There exists a relationship between NPAs and profitability of private banks.

Table: 12
Pearson Correlation
Net NPA Net Profit
Net NPA Pearson Correlation 1 .480
Sig. .191
Net Profit Pearson Correlation .480 1
Sig. .191

Interpretation:

Pearson correlation was applied to test this hypothesis. The value of coefficient of correlation r
obtained was .480. Since the significance value was above 0.05 (p =.191), it shows that NPA and
profitability of private banks surveyed is uncorrelated. Thus this hypothesis is rejected.

H2: The recovery mechanisms adopted by private banks are effective.

Table: 13

One- sample t-test (Test value = 2)

Factors t df Sig. level

F1 .108 12 .916

F2 .224 12 .827

Interpretation:

This hypothesis was tested through one sample t-test. Overall mean calculated was 2.06 and both the
factors were compared with the test value = 2. Both the factors were found to be insignificant, thus
hypothesis stands rejected. This implies that the recovery mechanism adopted by private banks to
reduce NPAs is not effective.
ANALYSIS & INTERPRETATION OF SECONDARY DATA:

ANALYSIS OF TREND AND ASSET QUALITY OF GROSS ADVANCES AND GROSS NON
PERFORMING ASSETS:

Table 1.1: GROSS ADVANCES AND GROSS NPAs OF PRIVATE SECTOR BANKS

Gross NPAs
Years Gross Percent to Gross Advances Percent to Total Assets
Advances(cr.)
Amount(cr.)
2012-13 71237 5963 8.4 3.4
2013-14 120958 11662 9.6 4.4
2014-15 146047 11782 8.1 4
2015-16 177419 10381 5.9 2.8
2016-17 197832 8782 4.4 2.1
2017-18 317690 7811 2.5 1.4
2018-19 420745 9256 2.2 1.2
2019-20 525845 12983 2.5 1.4
2020-21 585065 16983 2.9 1.7

Interpretation:
The following table helps in examining trends of gross advances, gross NPAs, ratio of gross NPAs to
gross advances and ratio of gross NPAs to total assets. We can also visualize the trend of private
sector banks by using gross advances, gross NPAs and ratios of gross NPA to gross advances and
total assets. We can clearly see from the above table that the gross advances are increasing
continuously and there is an increase of over 721 percent as compared to 2012-13 and 2020-21. This
clearly shows that apart from the presence of private sector banks also get a great opportunity to prove
them. The amount of gross NPAs shows a mix kind of trend over a period- as till 2014-15 and from
2017-18 to 2020-21 there is a continuous increase in gross NPA amount while there is a decrease in it
from a period ranging from 2015-16 to 2017-18. NPA ratios related to gross NPA also shows a mix
trend over a period. But if we see the last three years data, we can clearly see that there is an increase
in gross NPA to total assets and gross NPA to gross advances which means that the asset quality is
diminishing instead of improving.

Thus, if we compare both public and private sector banks we can say that public sector banks are
better than private sector banks as the efficiency and asset quality of public sector banks had shown a
continuous improvement if compare relatively to private sector banks.

ANALYSIS OF TREND AND ASSET QUALITY OF NET ADVANCES ON NET NON

PERFORMING ASSETS:

Table 1.2: NET ADVANCES AND NET NPAS OF PRIVATE SECTOR BANKS

Net NPAs
Years Net Advances(cr.) Percent to NetPercent to Total
Advances Assets
Amount(cr.)
2012-13 68059 3700 5.4 2.3
2013-14 116473 6676 5.7 2.5
2014-15 138951 3963 2.8 2.3
2015-16 170754 4128 2.4 1.3
2016-17 191397 4212 2.2 1
2017-18 312962 3171 1 0.6
2018-19 414752 4028 1 0.5
2019-20 518403 5607 1.1 0.6
2020-21 575336 7418 1.3 0.7
Interpretation:

After the analysis of gross advances and gross NPA, the study investigates the net advances; net
NPAs, ratio of net NPAs to net advances and net NPAs to total assets.

If we use the same criteria for private sector banks, we can see despite of continuous increase in net
advances in all years the net NPA ratio to net advances and total assets increases in last 2-3 years that
is in 2019-20 and 2020-21 while all other years’ shows a decreasing trend. That means only in last 2-3
years the efficiency and asset quality of private sector banks is questionable otherwise in all other
previous years the banks had shown a continuous improvement. As, if we see overall performance of
the private sector banks we can say that there is a wide improvement as the net NPA ratios changes
from 5.4 to 1.3 and from 2.3 to 0.7.
Thus, after comparing both the gross and net NPA ratio, if we compare Private sector banks are much
more efficient than other sector banks.

OBJECTIVE 1:

The trend of NPA in last nine years was analyzed through secondary data. The percentages of both
gross and net NPA to gross and net advances were found to increase during first two years but
continuously decrease after 2013 – 2014.

CLASSIFICATION OF LOAN ASSETS OF NPAS OF PRIVATE SECTOR BANKS

Table: 1.3
Classification of Loan Assets (Amount in Rs. Crore)
Sub-standard Assets
Years Standard Assets Doubtful Assets Loss Assets
Amoun
Amount %age Amount %age Amount %age t %age
2013 65071 91.5 2585 3.6 3069 4.3 424 0.6

2014 109216 90.3 4738 3.9 6539 5.4 390 0.3

2015 131620 90.8 3703 2.6 8512 5.9 1118 0.8

2016 167076 94.2 3127 1.8 6391 3.6 825 0.5

2017
216448 96.1 2213 1.0 5578 2.5 900 0.4
2018 309051 97.6 2424 0.8 4348 1.4 939 0.3
2019 382628 97.6 4378 1.1 3923 1 941 0.2
2020 459369 97.3 7280 1.5 4452 0.9 1244 0.3
2021 561546 97.1 10553 1.8 4975 0.9 1324 0.2

Interpretation:

If we analyze the loan assets of private sector banks, we can say that if we compare the first year and
last year for sub standard assets we can say that there is a decrease in it of health is improving but
overall analysis for sub-standard assets shows that after year 2018 there is a continuous increase in the
amount of sub-standard assets i.e. from 1percent to 1.8 percent. But, the doubtful assets have declined
from 5.9percent in 2015 to 0.9 percent in 2021. The loss assets also have shown a decreasing trend
from year 2015. Thus, we can say that except the sub- standard assets category the other two
categories of non-performing assets have improved over the period of study.

Net NPAs & Net Profit of Private Sector Banks: 2012-13 to 2020-21

Table: 1.4
Net NPA Net Profit
2012-13 3700 1142
2013-14 6676 1779
2014-15 3963 2958
2015-16 4128 3481
2016-17 4212 3533
2017-18 3171 4975
2018-19 4028 6465
2019-20 5380 9522
2020-21 7418 10868

12000
10000

8000

6000

4000

2000

Interpretation:

It is clearly observed from the line graph that there is continuous rise in net profit of private sector
banks over the years. The average of percentage increase in net profits of private sector banks comes
to approximately 34%.

On the contrary there is no continuous rise/fall in net NPA. But overall there is rise in net NPA from
2012-13 to 2020-21. The average of percentage rise in net NPA comes to almost 15%.

Classification of Loan Asset of Private Sector Banks in percentage:

Table: 1.5

Year Standard Sub- Doubtful Loss Asset

Asset (%) Standard Asset (%) (%)
Asset (%)
2016 94.2 1.8 3.6 0.5
2017 96.1 1.0 2.5 0.4
 2018 97.4 0.8 1.5 0.3
2019 97.6 1.1 1.0 0.2
2020 97.3 1.5 0.9 0.3
2021 96.8 2.0 1.0 0.3

Interpretation:

The above chart clearly states that the rise in the standard assets over the years compensates the fall in
the other three types of assets. But in the year 2021, the percentage of Sub-Standard asset is highest
among all the year. In 2021 percentage of standard asset has reduced by 0.5% which is compensated
by increase in Sub-Standard & doubtful assets. This increase is due to interest & principle amount
unpaid due to financial crisis in 2021. The percentage of doubtful asset has reduced to a great extent
amongst all. So the private sector banks have managed to reduce the doubtful asset.
CAPSTONE PROJECT – A study of Non Performing Assets on Indian Private Banks
Net NPA to Net Advance Ratio of Private Sector Banks:

Table: 1.6

Years Old Private Sector BanksNew Private Sector

Banks
2012-13 7.3 3.1
2013-14 7.1 4.9
2014-15 5.2 1.5
2015-16 3.8 1.7
2016-17 2.7 1.9
2017-18 1.7 0.8
2018-19 1 1
2019-20 0.7 1.1
2020-21 0.9 1.3
Interpretation:
From the above chart it is clearly observed that old private sector banks are constantly improving
in terms of net NPA to net advances ratio which is represented by declining trend from 2012-13
to 2020-21. While on the other hand for new private sector banks net NPA to net advances ratio
is fluctuating over the years.
Net NPAs of Old and New Private Sector Banks: 2012-13 to 2020-21

Table: 1.7
Year Old Private Sector New Private Sector
Banks Banks
2012-13 2,771 929
2013-14 3,013 3,663
2014-15 2,598 1,365
2015-16 2,142 1,986
2016-17 1,859 2,353
2017-18 1,375 1,796
2018-19 891 3,137
2019-20 740 4640
2020-21 1165 6253

Interpretation:

From the above chart it is clearly observed that net NPA of old private sector banks has a declining
trend over the years on the contrary new private sector banks has an upward trend.

Old private sector banks which is passing from lower growth rate in recent past, starts performing
better than their new counterparts. Old private sector banks are more efficient than that of new private
sector banks in managing NPA.

Composition of NPAs of Private Sector Banks - 2013 To 2021:

Table: 1.8
Year Priority Sector Non-Priority Public Sector
 Sector
2013 1835 4452 123
2014 2546 9090 31
2015 2445 9327 95
2016 2482 7796 75
2017 2188 6569 42
2018 2284 5541 4
2019 2884 6353 3
2020 3419 9558 0
2021 3640 13172 75
 CHAPTER V
SUGGESTIONS & CONCLUSION

SUGGESTIONS TO CONTROL NPAs:

The Bank should adopt the following general strategies to control NPAs. The suggestions are as
follows:

Projects with old technology should not be considered for finance

Large exposure on big corporate or single project should be avoided.
Operating staffs’ credit skills should be up graduation.
There is need to shift banks approach from collateral security to viability of the project
and intrinsic strength of promoters.
Timely sanction and or release of loans by the bank is to avoid time and cost overruns.
Bank should prevent diversion of funds by the promoters.
Operating staff should scrutinize the level of inventories/receivables at the time of assessment of
working capital.
The Credit section should carefully watch the warning signals viz. non-payment of quarterly interest,
dishonor of check etc.
Effective inspection system should be implemented.
Identifying reasons for turning of each account of a branch into NPA is the most important factor for
upgrading the asset quality, as that would help initiate suitable steps to upgrade the accounts.
The bank must focus on recovery from those borrows who have the capacity to repay but are not
repaying initiation of coercive action a few such borrows may help.
The recovery machinery of the bank has to be stream lined; targets should be fixed for field officers /
supervisors not only for recovery in general but also in terms of upgrading number of existing NPAs.
In the bank there should be a proper manpower planning.
Bank should try to establish the branches in competitive market, so it will increase their profit.
Bank has required increasing the cash and bank balances by reducing the unnecessary expenses for
future plan.

CONCLUSION:

Growing NPAs is one of the biggest problems that the private Indian banks are facing today. If proper
management of the NPAs is not undertaken it would hamper the efficiency of the banks. If the
concept of NPAs is taken very lightly it would be dangerous for the banking sector. The NPAs
destroy the current profit and interest income and affect the smooth functioning of the recycling of the
funds. Banks also redistribute losses to other borrowers by charging higher interest rates. Lower
deposit rates and higher lending rates repress savings and financial markets, which in turn hampers
the economic growth of the country. Thus, it is highly essential for the banks to focus their attention
on growth of NPAs and take appropriate measures to regulate their growth.