Banking in India

Banking in India in the modern sense originated in the last decades of the 18th century.

Among the first banks were the Bank of Hindustan, which was established in 1770 and

liquidated in 1829-32; and the General Bank of India, established 1786 but failed in 1791

The largest bank, and the oldest still in existence, is the State Bank of India. It originated as

the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was

one of the three banks funded by a presidency government, the other two were the Bank of

Bombay and the Bank of Madras. The three banks were merged in 1921 to form the Imperial

Bank of India, which upon India's independence, became the State Bank of India in 1955. For

many years the presidency banks had acted as quasi-central banks, as did their successors,

until the Reserve Bank of India was established in 1935, under the Reserve Bank of India

Act, 1934.

In 1960, the State Banks of India was given control of eight state-associated banks under the

State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks.[5] In 1969 the Indian government nationalised 14 major private banks. In 1980, 6 more

private banks were nationalized.[7] These nationalized banks are the majority of lenders in

the Indian economy. They dominate the banking sector because of their large size and

widespread networks.

The Indian banking sector is broadly classified into scheduled banks and non-scheduled

banks. The scheduled banks are those which are included under the 2nd Schedule of the

Reserve Bank of India Act, 1934. The scheduled banks are further classified into:

nationalised banks; State Bank of India and its associates; Regional Rural Banks (RRBs);

foreign banks; and other Indian private sector banks.[6] The term commercial banks refers to

both scheduled and non-scheduled commercial banks which are regulated under the Banking

Regulation Act, 1949.

Generally banking in India was fairly mature in terms of supply, product range and reach-

even though reach in rural India and to the poor still remains a challenge. The government

has developed initiatives to address this through the State Bank of India expanding its branch

network and through the National Bank for Agriculture and Rural Development with things

like microfinance.

Nationalization in the 1960s

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

except the State Bank of India (SBI), continued to be owned and operated by private persons.

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

development of the Indian economy. At the same time, it had emerged as a large employer,

and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, the

then Prime Minister of India, expressed the intention of theGovernment of India in the annual

conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank

Nationalization”. The meeting received the paper with enthusiasm.

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

('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')

and nationalised the 14 largest commercial banks with effect from the midnight of 19 July

1969. These banks contained 85 percent of bank deposits in the country.Jayaprakash

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

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

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

the presidential approval on 9 August 1969.

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

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

With the second dose of nationalisation, the Government of India controlled around 91% of

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

of India with Punjab National Bank.[ It was the only merger between nationalised banks and

resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until

the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth

rate of the Indian economy.

 

The Indian banking can be broadly categorized into nationalized (government owned),

private banks and specialized banking institutions.The Reserve Bank of India acts a

centralized body monitoring any discrepancies and shortcoming in the system. Since the

nationalization of banks in 1969, the public sector banks or the nationalized banks have

acquired a place of prominence and has since then seen tremendous progress. The need to

become highly customer focused has forced the slow-moving public sector banks to adopt

a fast track approach. The unleashing of products and services through the net has

galvanized players at all levels of the banking and financial institutions market grid to

look anew at their existing portfolio offering. Conservative banking practices allowed

Indian banks to be insulated partially from the Asian currency crisis.Indian banks are now

quoting al higher valuation when compared to banks in other Asian countries (viz. Hong

Kong, Singapore, Philippines etc.) that have major problems linked to huge Non

Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble footed in

approach and armed with efficient branch networks focus primarily on the ‘high revenue’

niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the ‘new’

Indian market and is addressing the relevant issues to take on the multifarious challenges

of globalization. Banks that employ IT solutions are perceived to be ‘futuristic’ and

proactive players capable of meeting the multifarious requirements of the large customers

base. Private banks have been fast on the uptake and are reorienting their strategies using

the internet as a medium The Internet has emerged as the new and challenging frontier of

marketing with the conventional physical world tenets being just as applicable like in any

other marketing medium.

The Indian banking has come from a long way from being a sleepy business institution to

a highly proactive and dynamic entity.  This transformation has been largely brought

about by the large dose of liberalization and economic reforms that allowed banks to

explore new business opportunities rather than generating revenues from conventional

streams (i.e. borrowing and lending).  The banking in India is highly fragmented with 30

 

banking units contributing to almost 50% of deposits and 60% of advances.  Indian

nationalized banks (banks owned by the government) continue to be the major lenders in

the economy due to their sheer size and penetrative networks which assures them high

deposit mobilization.  The Indian banking can be broadly categorized into nationalized,

private banks and specialized banking institutions.

The Reserve Bank of India act as a centralized body monitoring any discrepancies and

shortcoming in the system.  It is the foremost monitoring body in the Indian financial

sector.  The nationalized banks (i.e. government-owned banks) continue to dominate the

Indian banking arena.  Industry estimates indicate that out of 274 commercial banks

operating in India, 223 banks are in the public sector and 51 are in the private sector.  The

private sector bank grid also includes 24 foreign banks that have started their operations

here.  Under the ambit of the nationalized banks come the specialized banking

institutions.  These co-operatives, rural banks focus on areas of agriculture, rural

development etc.,

Cash advances

A cash advance is a service provided by most credit card and charge card issuers. The

service allows cardholders to withdraw cash, either through an ATM or over the counter at a

bank or other financial agency, up to a certain limit. For a credit card, this will be the credit

limit (or some percentage of it).

Cash advances often incur a fee of 3 to 5 percent of the amount being borrowed. When made

on a credit card, the interest is often higher than other credit card transactions. The interest

compounds daily starting from the day cash is borrowed.

Some "purchases" made with a credit card of items that are viewed as cash are also

considered to be cash advances in accordance with the credit card network's guidelines,

thereby incurring the higher interest rate and the lack of the grace period. These often

include money orders, lottery tickets, gaming chips, and certain taxes and fees paid to certain

governments. However, should the merchant not disclose the actual nature of the

transactions, these will be processed as regular credit card transactions. Many merchants have

passed on the credit card processing fees to the credit card holders in spite of the credit card

network's guidelines, which state the credit card holders should not have any extra fee for

doing a transaction with a credit card.

Under card scheme rules, a credit card holder presenting an accepted form of identification

must be issued a cash advance over the counter at any bank which issues that type of credit

card, even if the cardholder cannot give his or her PIN.

Types of cash advance

There are a few different types of cash advances with varying features, but the common

denominators among all cash advances are the high interest rates and fees. The most popular

type of cash advance is borrowing on a line of credit through a credit card. Cash can be

withdrawn at an ATM or, depending on the credit card company, from a check provided by

the company that is deposited or cashed at a bank. Cash advances on a credit card often come

with much higher interest rates than credit purchases and include a fee for cashing out your

credit. Credit card companies either charge a flat rate cash advance fee or charge a percentage

of the amount. Additionally, if you use an ATM to access the cash, you are charged a small

ATM usage fee.

Credit card cash advances carry a separate balance from credit purchases, along with separate

interest rates, but the monthly payment is potentially applied to both balances. However, if

you are only making the minimum payment, credit card companies are allowed by federal

law to apply the minimum payment only to the balance with the smallest interest rate, which

could cause the cash advance balance to sit and accrue interest if only minimum payments are

made. Cash advance interest rates and fees vary by credit card company, so it is wise to learn

the different features of your specific card before borrowing through a cash advance.

Another common type of cash advance is the payday loan. As with a credit card cash

advance, payday loans also have high interest rates and fees. Payday lenders issue loans

anywhere from $50 to $1,000 but with interest rates exceeding 100%. The loans are short-

term and are required to be paid back on the borrower's payday, unless he or she wishes to

extend the loan, and in that case additional interest is charged. To get a payday loan, you

write a post-dated check made out to the payday lender for the amount you plan to borrow,

including the fees. The lender in turn immediately issues the borrowed amount but waits to

cash your check until your payday comes. People with bad credit or no credit are the most

likely to use this type of cash advance as it may be their only option for a loan since banks

require a minimum credit score.

Another type of cash advance is to go directly through an employer. Availability of the

service, as well as applicable fees and interest, vary by employer, though oftentimes no fees

or interest are charged. Before borrowing from any cash advance program, it is wise to do

your research to find the best option for your financial needs.

Forms of Advances Given by Banks

Commercial banks advances are made in different forms such as cash credit,

overdraft, loans, purchasing and Discounting Bills etc.

Commercial banks advances are made in different forms such as cash credit, overdraft,

loans, purchasing and Discounting Bills etc.. These forms of advances are explained

below.

Cash Credit : -Cash Credit is an arrangement by which the customer is allowed to borrow money up to a

certain limit known as the ‘cash credit limit’. Usually the borrower is required to provide

security in the form of pledge or hypothecation of tangible securities. Sometimes, this facility

is also provided against personal security.

1 his is a permanent arrangement and the customer need not draw the sanctioned amount at

once, but draw the amount as and when required. He can put back any surplus amount which

he may find with him. Thus cash credit is an active and running account to which deposits

and withdrawals may be affected frequently

Interest is charged only for the amount withdrawn and not for the whole amount approved. If

the customer does not use the cash limit to the foil extent, a commitment charge is made by

the bank. This charge is imposed on the un-utilized portion of cash credit only.

Cash credit provides an elastic form of borrowing since the limit fluctuates according to the

needs of the business. Cash credits are the most favorable mode of financing by large

commercial and industrial concerns.

Overdraft

Oxford Dictionary of Finance and Banking defines overdraft as "a loan made to a customer

with a cheque account at a bank or building society, in which the account is allowed to go

into debit, usually up to a specified limit”.

According to Cambridge Advanced Learner’s Dictionary, overdraft means “an amount of

money that a customer with a bank account is temporarily allowed to owe to the bank, or the

agreement which allows this”.

The Economist defines overdraft as "a credit facility that allows borrowers to draw upon it

(up to a specified limit) as and when they need to. Borrowers pay only for what they use”.

Overdraft is an arrangement between a banker and his customer by which the latter is allowed

to withdraw over and above his credit balance in the current account up to an agreed limit.

This is only a temporary accommodation usually granted against security.

The borrower is permitted to draw and repay any number of times, provided the total amount

overdrawn does not exceed the agreed limit. The interest is charged only for the amount

drawn and not for the whole amount sanctioned

A cash credit differs from an overdraft in one respect. A cash credit is used for long-term by

businesses in doing regular business whereas overdraft is made occasionally and for short

duration.

Banks sometimes grant unsecured overdraft for small amounts to customers having current

account with them. Such customers may be government employees with fixed income or

traders. Temporary overdrafts are permitted only where reliable source of funds are available

to a borrower for repayment.

Loans

As defined in Oxford Dictionary of Finance and Banking, loan is the “money lent on

condition by a bank that it is repaid, either in installments or all at once, on agreed dates and

usually that the borrower pays the lender an agreed rate of interest (unless it is ail interest-live

loan)”.

Oxford Dictionary of Finance and Banking defines bank loan as “a specified sum of money

lent by a bank to a customer, usually for a specified time, at a specified rate of interest”.

According to Cambridge Advanced Learner’s Dictionary, loan means “a sum of money

which is borrowed, often from a bank, and has to be paid back, usually together with an extra

amount of money that you have to pay as a charge for borrowing”.

I imotby W. Kocli defines loans as “formal agreement between a bank and borrower to

provide a fixed amount of credit for a specified period”.

hi ease of loan, the banker advances a lump sum for a certain period at an agreed rate of

interest- The entire amount is paid on an occasion either in cash or by credit in his current

account which he can draw at any time. The interest is charged for the full amount sanctioned

whether he withdraws the money from his account or not.

The loans may be repaid in installments or at the expiry of a certain period. The loan may be

made with or without security. A loan once repaid in full or in part cannot be withdrawn

again by the customer. In case a borrower wants further loan, he has to arrange for a fresh

loan.

Demand Loan Vs Term Loan

Loan may be a demand loan or a term loan. Demand loan is payable on demand. It is for a

short period and usually granted to meet working capital needs of the borrower. Term loans

may be medium-term or long-term. Medium-term loans are granted for a period ranging from

one year to five years for the purpose of vehicles, tools, and equipments.

Long-term loans are granted for capital expenditures such as purchase of land, construction of

factory building, purchase of new machinery and modernization of plant.

Secured Vs Unsecured Loan

According to section 5(e) of The Bank Companies Act, 1991, “Secured loan or advance

means such a loan or advance as made against the security assets, market value of which is

not at any means less than the amount of such loan or advance and unsecured loan or advance

is that loan or advance or part of it does not require sanctioning against the security”.

Participation Loan or Consortium Loan

Where one single loan is granted by more than one financing agency, it is termed as a

participation or consortium loan. Such participation becomes necessary where either the risk

involved is too large for one or more of the participating institutions to take individually or

there are administrative or other difficulties in servicing and follow up of the loan.

Purchasing and Discounting Bills

Bills of exchange, as defined in The Negotiable Instruments Act, 1 SSI, is “an instrument in

writing containing an unconditional order, signed by the maker, directing a certain person to

pay (on demand or at a fixed or determinable future time) a certain sum of money only to, or

to the order of, a certain person or to the bearer of the instrument”.

Banks grant advances to their customers by discounting bills of exchange. The net amount,

after deducting the amount of interest/discount from the amount of the installment, is credited

in the account of the customer. In this form of lending, the interest is received by the banker

in advance.

Banks sometimes purchase the bills instead of discounting them. Bills which are

accompanied by documents or title to goods such as bills of lading or railway receipt are

purchased by the bankers. In such cases, the banker grants loan in the form of overdraft or

cash credit against the security of the bills.

The term ‘bill purchased' seems to imply that the bank becomes the purchaser or owner of

such bills. But in almost all cases the bank holds the bill only as a security for the advance.

gold loan

Many nationalized banks, private banks and other financial companies offer

this loan at attractive rates. Many go for this loan for short period to meet the

requirement of their children’s education, marriage and other financial problems

in the family. And others think that instead of keeping the gold idle at home or

locker, loan against gold is the best option. Moreover with the rise in gold rates

the demand from companies and banks offering such loans has raised. For

instance, Muthoot Finance, one of the leading gold loan companies has seen 24

percent rises in gold loan against 17 percent raise in the market value of gold. 

Gold loan doesn’t demand any certificate to show your salary or income and even no

credit card history is required. Thus even unemployed and non working people can go

for gold loan.

Unlike any other unsecured loan, gold loan doesn’t require many papers, only few

documents such as ID proof and address proof is enough to avail for such loan.

One of the main advantages of gold loan is its low interest rates. Usually loan over

gold is provided at the interest of 12-16% per annum and this is quite low compared

to personal loans available at interest rates of 15-26% per annum.

In rural areas Agricultural loan against gold is also available for agriculturist at very

nominal rate of Interest of 7%-8%, proof of agricultural document needs to be

provided

Gold loan is the most simple and convenient forms of loan because here all you need

to do is pledge your gold with a bank or finance company and get upto 80% of the

market value of the gold as a loan.

Borrower will be given an option to pay only interest during the entire term and at the

end of the tenure you can pay complete borrowed amount in single shot.

In case of gold loan processing time is very less. Usually banks take just few hours to

complete the process where as in case of NBFC’s (Non Banking Financial

Companies) a few minutes is enough for the same. So for immediate financial help

this is the best option. –

 Home loan

Home Loan is a Secured loan offered against the security of a house/property which is funded by the bank’s

loan, the property could be a personal property or a commercial one. The Home Loan is a loan taken by a

borrower from the bank issued against the property/security intended to be bought on the part by the borrower

giving the banker a conditional ownership over the property i.e. if the borrower is failed to pay back the loan,

the banker can retrieve the lent money by selling the property.

Types of Home Loan

There are different types of home loans available in the market to cater borrower’s different needs.

Home Purchase Loan: This is the basic type of a home loan which has the purpose of purchasing a new

house.

Home Improvement Loan: This type of home loan is for the renovation or repair of the home which is

already bought.

Home Extension Loan: This type of loan serves the purpose when the borrower wants to extend or expand

an existing home, like adding an extra room etc.

Home Conversion Loan: It is that loan wherein the borrower has already taken a home loan to finance his

current home, but now wants to move to another home. The Conversion Home Loan helps the borrower to

transfer the existing loan to the new home which requires extra funds, so the new loan pays the previous loan

& fulfills the money required for new home.

Bridge Loan: This type of loan helps finance the new home of the borrower when he wants to sell the

existing home, this is normally a short term loan to the borrower & helps during the interim period when he

wants to sell the old home & want to buy a new one, It is given till the time a buyer is found for the old home.

Home Construction Loan: This type of loan taken when the borrower wants to construct a new home.

Land Purchase Loan: It is that loan which is taken to purchase a land for construction & investment

purposes.

mortgage loan

A mortgage loan, also referred to as a mortgage, is used by purchasers of real property to raise capital to buy real

estate; or by existing property owners to raise funds for any purpose while putting a lien on the property being

mortgaged. The loan is "secured" on the borrower's property. This means that a legal mechanism is put in place which

allows the lender to take possession and sell the secured property ("foreclosure" or "repossession") to pay off the loan

in the event that the borrower defaults on the loan or otherwise fails to abide by its terms. The word mortgage is

derived from a "Law French" term used by English lawyers in the Middle Ages meaning "death pledge", and refers to

the pledge ending (dying) when either the obligation is fulfilled or the property is taken through foreclosure.[1] Mortgage can also be described as "a borrower giving consideration in the form of a collateral for a benefit (loan).

Mortgage borrowers can be individuals mortgaging their home or they can be businesses mortgaging commercial

property (for example, their own business premises, residential property let to tenants or an investment portfolio). The

lender will typically be a financial institution, such as a bank, credit union or building society, depending on the

country concerned, and the loan arrangements can be made either directly or indirectly through intermediaries.

Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the

loan, and other characteristics can vary considerably. The lender's rights over the secured property take priority over

the borrower's other creditors which means that if the borrower becomes bankruptor insolvent, the other creditors will

only be repaid the debts owed to them from a sale of the secured property if the mortgage lender is repaid in full first.

In many jurisdictions, though not all (Bali, Indonesia being one exception[2]), it is normal for home purchases to be

funded by a mortgage loan. Few individuals have enough savings or liquid funds to enable them to purchase property

outright. In countries where the demand for home ownership is highest, strong domestic markets for mortgages have

developed.

Student loans / Education loans

Student loans in India (popularly known as Education loans) have become a popular method of funding

higher education in India with the cost of educational degrees going higher. The spread of self-financing institutions

(which has less to no funding from the government) for higher education in fields of engineering, medical and

management which has higher fees than their government aided counterparts have encouraged the trend in India. Most

large public sector and private sector banks offer educational loans.

Under section 80(e) of the Indian income tax act, a person can exempt the amount paid against the interest of the

education loan - either for self or for his/her spouse or children - for eight years from the year (s)he starts to repay the

loan or for the duration the loan is in effect, whichever is more. Education loan is becoming popular day by day

because of rising fee structure of higher education. It came into existence in 1995 started by SBI Bank and after that

many banks started offering student loans.

The Star Educational Loan Scheme aims at providing financial support from the bank to deserving/ meritorious

students for pursuing higher education in India and abroad. The main emphasis is that every meritorious student is

provided with an opportunity to pursue education with the financial support on affordable terms and conditions.

Non-performing asset

Introduction

A strong banking sector is important for flourishing economy. One of the most important and

major roles played by banking sector is that of lending business. It is generally encouraged

because it has the effect of funds being transferred from the system to productive purposes,

which also results into economic growth. As there are pros and cons of everything, the same

is with lending business that carries credit risk, which arises from the failure of borrower to

fulfill its contractual obligations either during the course of a transaction or on a future

obligation. The failure of the banking sector may have an adverse impact on other sectors.

Non- performing assets are one of the major concerns for banks in India. NPAs reflect the

performance of banks. A high level of NPAs suggests high probability of a large number of

credit defaults that affect the profitability and net-worth of banks and also erodes the value of

the asset. The NPA growth involves the necessity of provisions, which reduces the over all

profits and shareholders value. The issue of Non Performing Assets has been discussed at

length for financial system all over the world. The problem of NPAs is not only affecting the

banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but

a reflection of the state of health of the industry and trade.This project deals with

understanding the concept of NPAs, its magnitude and major causes for an account becoming

non-performing, projection of NPAs over next years in banks and concluding remarks.

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

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

provisions on such assets as per RBI guidelines The RBI has advised all State Co-operative

Banks as well as the Central Co-operative Banks in the country to adopt prudential norms

from the year ending 31-03-1997. These have been amended a number of times since 1997.

As per their guidelines the meaning of NPAs, the norms regarding assets classification and

provisioningIts now very known that the banks and financial institutions in India face the

problem of amplification of non-performing assets (NPAs) and the issue is becoming more

and more unmanageable. In order to bring the situation under control, various steps have been

taken. Among all other steps most important one was the introduction of Securitisation and

Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 by

Parliament, which was an important step towards elimination or reduction of NPAs.

An asset is classified as non-performing asset (NPAs) if dues in the

form of principal and interest are not paid by the borrower for a period of 180 days,

However with effect from March 2004, default status would be given to a borrower if dues

are not paid for 90 days. If any advance or credit facility granted by bank to a borrower

becomes non-performing, then the bank will have to treat all the advances/credit facilities

granted to that borrower as non-performing without having any regard to the fact that there

may still exist certain advances / credit facilities having performing status.

The NPA level of our banks is way high than international

standards. One cannot ignore the fact that a part of the reduction in NPA’s is due to the

writing off bad loans by banks. Indian banks should take care to ensure that they give loans to

credit worthy customers. In this context the dictum “prevention is always better than cure”

acts as the golden rule to reduce NPA’s.

Non Performing assets (nPA) - Concept

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 The Reserve Bank of India.

An asset, including a leased asset, becomes nonperforming when it ceases to generate income

for the bank. A NPA is 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. Earlier assets

were declared as NPA after completion of the period for the payment of total amount of loan

and 30 days grace. In present scenario assets are declared as NPA if none of the installment

is paid till 180 days i.e six monts in respect of term loan. With effect from march,30, 2004, a

non performing asset(NPA) shall be a loan or an advance where : Interest and/or installments

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/cd). The bill remains overdue for a period of more than 90 days in

the case of bills purchased and discounted, interest and or installments of principal remains

overdue for two harvest seasons but for a period not exceeding two half years in the case of

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.

RBI introduced, in 1992, the prudential norms for income recognition, asset

classification & provisioning – IRAC norms in short – in respect of the loan portfolio of the

Co operative Banks. The objective was to bring out the true picture of a bank’s loan portfolio.

The fallout of this momentous regulatory measure for the management of the CBs was to

divert its focus to profitability, which till then used to be a low priority area for it. Asset

quality assumed greater importance for the CBs when Maintenance of high quality credit

portfolio continues to be a major challenge for the CBs, especially with RBI gradually

moving towards convergence with more stringent global norms for impaired assets.The

quality of a bank’s loan portfolio can impact its profitability, capital and liquidity. Asset

quality problems are at the root of other financial problems for banks, leading to reduced net

interest income and higher provisioning costs. If loan losses exceed the Bad and Doubtful

Debt Reserve, capital strength is reduced. Reduced income means less cash, which can

potentially strain liquidity. Market knowledge that the bank is having asset quality problems

and associated financial conditions may cause outflow of deposits. Thus, the performance of

a bank is inextricably linked with its asset quality. Managing the loan portfolio to minimise

bad loans is, therefore, fundamentally important for a financial institution in today’s

extremely competitive and market driven business environment. This is all the more

important for the CBs, which are at a disadvantage of the commercial banks in terms of

professionalised management, skill levels, technology adoption and effective risk

management systems and procedures. Management of NPAs begins with the consciousness

of a good portfolio, which warrants a better understanding of risks in lending. The Board has

to decide a strategy keeping in view the regulatory norms, the business environment, its

market share, the risk profile, the available resources etc. The strategy should be reflected in

Board approved policies and procedures to monitor implementation. The essential

components of sound NPA management are

i) quick identification of NPAs,

ii) their containment at a minimum level,

iii) ensuring minimum impact of NPAs on the financials.

Definitions: 

An asset, including a leased asset, becomes non-performingwhen it ceases to generate income for

the bank.A ‘non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/

or instalment of principal has remained ‘past due’ for a specified period of time.

With a view to moving towards international best practices and to ensure greater

transparency, it has been decided to adopt the ‘

90 days’ overdue’ 

Norm for identification of NPAs, from the year ending March 31, 2004. Accordingly, with effect from

March 31, 2004, a non-performing asset (NPA) shall be a loan or anadvance where;

Interest and/ or instalment 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, inrespect 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 instalment of principal remains overdue for two harvestseasons but fo r a

pe r iod no t exceeding two ha l f years in the case o f an advance granted for

agricultural purposes, and

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

accounts.As a facilitating measure for smooth transition to 90 days norm, banks have beenadvised to move

over to charging of interest at monthly rests, by April 1, 2002.However, the date of classification

of an advance as NPA should not be changedon account of charging of interest at monthly

rests. Banks should, therefore,continue to classify an account as NPA only if the

interest charged during anyquarter is not serviced fully within 180 days from the end of the quarter

with effectfrom April 1, 2002 and 90 days from the end of the quarter with effect from March31, 2004.

'Out of Order' status:

An account should be treated as 'out of order' 

if the  ou t s tanding  ba lance   remains   con t inuous ly   in  excess  of   the  

sanc t ioned limit/drawing power. In cases where the outstanding balance in the

principaloperating account is less than the sanctioned limit/drawing power, but there areno

credits continuously for six months as on the date of Balance Sheet

or creditsa re  no t  enough   to  cover   the   in te res t  deb i ted  dur ing   the  same  

per iod ,   theseaccounts should be treated as 'out of order'

‘Overdue’

Any amount due to the bank under any credit facility is ‘overdue’ if itis not paid on the due date fixed by the

bank.

Types Of NPA:

A] Gross NPA B] Net NPAA] Gross NPA B] Net NPA

A] Gross NPA:A] Gross NPA: Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI

guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by

banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss

assets.

It can be calculated with the help of following ratio:

Gross NPAs Ratio Gross NPAs Gross Advances

B] Net NPA:B] Net NPA:Net NPAs are those type of NPAs in which the bank has deducted the provision regarding

NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets

contain a huge amount of NPAs and the process of recovery and write off of loans is very

time consuming, the provisions the banks have to make against the NPAs according to the

central bank guidelines, are quite significant. That is why the difference between gross and

net NPA is quite high.

It can be calculated by following_

Net NPAs Gross NPAs – Provisions

Gross Advances - Provisions

The RBI has issued the guidelines to banks for classification of assets in to following

categories.

Standard assets:- Standard Asset is one which does not disclose any problems and

which does not carry more than normal risk attached to the business/banks. These are loans

which do not have any problem are less risk. Such an asset is not a non-performing asset. In

other words, it carries not more than normal risk attached to the business.

Sub Standard Assets:- : It is classified as non-performing for a period not exceeding

12 months. The account holder comes in this category when they don’t pay three

installment continuously after 90 days and upto 1 year. For this category bank has made

10% provision of funds from their profit to meet the losses generated from NPA. With

effect from March 31, 2005 an asset would be classified as sub-standard  if it remained NPA 

for a period less than or equal to 12 months. In such cases, the current net worth of the

borrowers/ guarantors or the current market value of the security charged is not enough to

ensure recovery of the dues to the banks in full.  In other words, such assets will have well

defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by

the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

(ii) An asset where the terms of the loan agreement regarding interest and principal have been

re-negotiated or rescheduled after commencement of production, should be classified as sub-

standard and should remain in such category for at least 12 months of satisfactory

performance under the re-negotiated or rescheduled terms.  In other words, the classification

of an asset should not be upgraded merely as a result of rescheduling, unless there is

satisfactory compliance of this condition

Doubtful NPA : An asset that has remained an NPA for a period exceeding 12 months

is a doubtful asset. These are NPA exceeding 12 months.

Under doubtful NPA there are three sub categories:

D1 i.e upto 1 year: 20% provision is made by banks.

D2 i.e upto 2 year: 30% provision is made by bank

D3 i.e upto 3 year: 100% provision made by bank.

With effect from March 31, 2005, an asset is required to be classified as doubtful, if it has

remained NPA  for more than 12 months. The 12-month period of classification of a

substandard asset in doubtful category is effective from April 1, 2009. A loan classified as

doubtful has all the weaknesses inherent as that classified as sub-standard, with the added

characteristic that the weaknesses make collection or liquidation in full, on the basis of

currently known facts, conditions and values, highly questionable and improbable.

Loss Assets:- A loss asset is one where loss has been identified by the bank or internal

or external auditors or by the Co-operation Department or by the Reserve Bank of India

inspection but the amount has not been written off, wholly or partly. In other words, such an

asset is considered un-collectible and of such little value that its continuance as a bankable

asset is not warranted although there may be some salvage or recovery value. Here loss is

identified by the banks concerned, by internal auditors, by external auditors, or by the

Reserve Bank India upon inspection. These NPA which are identified unreliable by internal

inpector of bank or auditors or by RBI. Under this 100% provision is made.

Difficulties with the non-performing assets:

1. Owners do not receive a market return on their capital. In the worst case, if the bank fails,

owners lose their assets. In modern times, this may affect a broad pool of shareholders.

2. Depositors do not receive a market return on savings. In the worst case if the bank fails,

depositors lose their assets or uninsured balance. 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 hampers economic growth.

3. Non performing loans epitomize bad investment. They misallocate credit from good

projects, which do not receive funding, to failed projects. Bad investment ends up in

misallocation of capital and, by extension, labour and natural resources. The economy

performs below its production potential.

4. Non performing loans may spill over the banking system and contract the money stock,

which may lead to economic contraction. This spillover effect can channelize through

illiquidity or bank insolvency;

(a) when many borrowers fail to pay interest, banks may experience liquidity shortages.

These shortages can jam payments across the country,

(b) illiquidity constraints bank in paying depositors e.g. cashing their paychecks. Banking

panic follows. A run on banks by depositors as part of the national money stock

become inoperative. The money stock contracts and economic contraction follows

undercapitalized banks exceeds the banks capital base.

Lending by banks has been highly politicized. It is common

knowledge that loans are given to various industrial houses not on commercial considerations

and viability of project but on political considerations; some politician would ask the bank to

extend the loan to a particular corporate and the bank would oblige. In normal circumstances

banks, before extending any loan, would make a thorough study of the actual need of the

party concerned, the prospects of the business in which it is engaged, its track record, the

quality of management and so on. Since this is not looked into, many of the loans become

NPAs. The loans for the weaker sections of the society and the waiving of the loans to

farmers are another dimension of the politicization of bank lending.

Causes of NPA’s in banks

Non-performing Assets (NPAs) are the smoking gun threatening the very stability of Indian

banks. NPAs wreck a bank's profitability both through a loss of interest income and write-off

of the principal loan amount itself. In a bid to stem the lurking rot, RBI issued in 1993

guidelines based on recommendations of the Narasimham Committee that mandated

identification and reduction of NPAs. Their implementation immediately pushed many banks

into the red. So serious is the problem that an RBI report suggested that reducing NPAs be

treated as a 'national priority'

Dealing with NPAs involves two sets of policies

1. Relating to existing NPAs

2. To reduce fresh NPA generation.

As far as old NPAs are concerned, a bank can remove it on its own or sell the

assets to AMCs to clean up its balance sheet. For preventing fresh NPAs, the bank itself

should adopt proper policies.

A strong banking sector is important for a flourishing economy. The failure of the banking

sector may have an adverse impact on other sectors. The Indian banking system, which was

operating in a closed economy, now faces the challenges of an open economy. On one hand a

protected environment ensured that banks never needed to develop sophisticated treasury

operations and Asset Liability Management skills. On the other hand a combination of

directed lending and social banking relegated profitability and competitiveness to the

background. The net result was unsustainable NPAs and consequently a higher effective cost

of banking services. One of the main causes of NPAs into banking sector is the directed

loans system under which central co operative banks are required a prescribed percentage of

their credit (40%) to priority sectors. As of today nearly 7 percent of Gross NPAs are locked

up in 'hard-core' doubtful and loss assets, accumulated over the years.

The problem India Faces is not lack of strict prudential norms but

i. The legal impediments and time consuming nature of asset disposal proposal.

ii. Postponement of problem in order to show higher earnings.

iii. Manipulation of debtors using political influence.

Causes for an Account becoming NPA

There are several reasons for an account becoming NPA.

* Internal factors

* External factors

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.

2. Project not completed in time.

3. Poor recovery of receivables.

4. Excess capacities created on non-economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or other

debt instrument from capital markets.

6. Business failures.

7. Diversion of funds for expansion\modernization\setting up new projects\

helping or promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,

mis-appropriation etc.

9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and

follow-ups, delay in settlement of payments\ subsidiaries by government bodies etc

Defective Lending process

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

commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

i. Principles of safety :-

By safety it means that the borrower is in a position to repay the loan both

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

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon:

1. Tangible assets

2. Success in business

Willingness to pay depends on:

1. Character

2. Honest

3. Reputation of borrower

The banker should, there fore take utmost care in ensuring that the enterprise or business for

which a loan is sought is a sound one and the borrower is capable of carrying it out

successfully .he should be a person of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management information system, market driven

decisions on real time basis can not be taken. Proper MIS and financial accounting

system is not implemented in the banks, which leads to poor credit collection, thus

NPA. All the branches of the bank should be computerized.

Improper SWOT analysis

The improper strength, weakness, opportunity and threat analysis is another reason for

rise in NPAs. While providing unsecured advances the banks depend more on the

honesty, integrity, and financial soundness and credit worthiness of the borrower.

Banks should consider the borrowers own capital investment.

it should collect credit information of the borrowers from_

a. From bankers.

b. Enquiry from market/segment of trade, industry, business.

c. From external credit rating agencies.

Analyze the balance sheet.

True picture of business will be revealed on analysis of profit/loss a/c and

balance sheet.

Purpose of the loan

When bankers give loan, he should analyze the purpose of the loan. To ensure

safety and liquidity, banks should grant loan for productive purpose only.

Bank should analyze the profitability, viability, long term acceptability of the

project while financing.

Poor credit appraisal system

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

appraisal the bank gives advances to those who are not able to repay it back. They

should use good credit appraisal to decrease the NPAs.

Managerial deficiencies

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

assets as security to safe guard its interests. When accepting securities banks should

consider the_

1. Marketability

2. Acceptability

3. Safety

4. Transferability.

The banker should follow the principle of diversification of risk based on the

famous maxim “do not keep all the eggs in one basket”; it means that the banker

should not grant advances to a few big farms only or to concentrate them in few

industries or in a few cities. If a new big customer meets misfortune or certain traders

or industries affected adversely, the overall position of the bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom

industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and

the handloom sector Orissa hand loom WCS ltd (2439.60lakhs).

Absence of regular industrial visit

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

bank officials to the customer point decreases the collection of interest and principals

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

Re loaning process

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

have already affected the smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is

increasing day by day.

External factors:

1. Sluggish legal system –

Long legal tangles

Changes that had taken place in labour laws

Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.

4. Shortage of raw material, raw material\input price escalation, power shortage, industrial

recession, excess capacity, natural hazards like floods, accidents.

5. Failures, non payment\ over dues in other countries, recession in other countries,

externalization problems, adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes etc.

Some Other Reasons:

Failure to bring in Required capital

Too ambitious project

Mis management

Unwanted Expenses

Over trading

Imbalances of inventories

Lack of proper planning

Dependence on single customers

Lack of expertise

Improper working Capital Mgmt.

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals, which works for recovery

of loans and advances. Due to their negligence and ineffectiveness in their work the

bank suffers the consequence of non-recover, their by reducing their profitability and

liquidity.

Willful Defaults

There are borrowers who are able to payback loans but are intentionally withdrawing

it. These groups of people should be identified and proper measures should be taken in order

to get back the money extended to them as advances and loans.

Natural calamities

This is the measure factor, which is creating alarming rise in NPAs of the

PSBs. every now and then India is hit by major natural calamities thus making the

borrowers unable to pay back there loans. Thus the bank has to make large amount of

provisions in order to compensate those loans, hence end up the fiscal with a reduced

profit.

Mainly ours farmers depends on rain fall for cropping. Due to irregularities of

rain fall the farmers are not to achieve the production level thus they are not repaying

the loans.

Industrial sickness

Improper project handling , ineffective management , lack of adequate

resources , lack of advance technology , day to day changing govt. Policies give birth

to industrial sickness. Hence the banks that finance those industries ultimately end up

with a low recovery of their loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their product demand and starts production

which ultimately piles up their product thus making them unable to pay back the

money they borrow to operate these activities. The banks recover the amount by

selling of their assets, which covers a minimum label. Thus the banks record the non

recovered part as NPAs and has to make provision for it.

Change on Govt. policies

With every new govt. banking sector gets new policies for its operation. Thus

it has to cope with the changing principles and policies for the regulation of the rising

of NPAs.

The fallout of handloom sector is continuing as most of the weavers Co-

operative societies have become defunct largely due to withdrawal of state patronage.

The rehabilitation plan worked out by the Central government to revive the handloom

sector has not yet been implemented. So the over dues due to the handloom sectors

are becoming NPAs.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in the worst case, if the banks fails,

owners loose their assets. In modern times this may affect a broad pool of shareholders.

2. Depositors do not receive a market return on saving. In the worst case if the bank fails,

depositors loose their assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit

rates and higher lending rates repress saving and financial market, which hamper economic

growth.

4. Non performing loans epitomize bad investment. They misallocate credit from good projects,

which do not receive funding, to failed projects. Bad investment ends up in misallocation of

capital, and by extension, labour and natural resources.

Non performing asset may spill over the banking system and contract the money stock, which

may lead to economic contraction. This spill over effect can channelize through liquidity or

bank insolvency:

a) When many borrowers fail to pay interest, banks may experience liquidity shortage.

This can jam payment across the country,

b) Illiquidity constraints bank in paying depositors

.c) Undercapitalized banks exceeds the banks capital base.

The three letters Strike terror in banking sector and business circle today. NPA is short form

of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other

due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns

a non performing asset. The recovery of loan has always been problem for banks and

financial institution. To come out of these first we need to think is it possible to avoid NPA,

no can not be then left is to look after the factor responsible for it and managing those factors.

Interest and/or instalment 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 purposes, and

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

respect of other accounts.

As a facilitating measure for smooth transition to 90 days norm, banks have been advised to

move over to charging of interest at monthly rests, by April 1, 2002. However, the date of

classification of an advance as NPA should not be changed on account of charging of interest

at monthly rests. Banks should, therefore, continue to classify an account as NPA only if the

interest charged during any quarter is not serviced fully within 180 days from the end of the

quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect

from March 31, 2004.

'Out of Order' status'Out of Order' status ::

An account should be treated as 'out of order' if the outstanding balance remains

continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding

balance in the principal operating account is less than the sanctioned limit/drawing power, but

there are no credits continuously for six months as on the date of Balance Sheet or credits are

not enough to cover the interest debited during the same period, these accounts should be

treated as 'out of order'.

‘‘ Overdue’:Overdue’: Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid

on the due date fixed by the bank.

Suggestions to reduce n.p.a

At the pre-disbursement stage, appraisal techniques of bank need to be sharpened. All

technical, economic, commercial, organizational and financial aspects of the project need to

be assessed realistically. Bankers should satisfy themselves that the project is technically

feasible with reference to technical know how, scale of production etc. The project should be

commercially feasible in that all background linkages by way of availability of raw materials

at competitive rates and that all forward linkages by way of assured market are available. It

should be ensured assumptions on which the project report is based are realistic. Some

projects are born sick because of unrealistic planning, inadequate appraisal and faulty

implementation. As the initiative to sanction or reject the project proposal lies with the

banker, he can exercise his judgment judiciously. The banker should at the pre-sanction stage

not only appraise the project but also the promoter – his character and his capacity. It is said

that it is more prudent to sanction a 'B' class project with an 'A' class entrepreneur than vice-

versa. He has to ensure that the borrower complies with all the terms of sanction before

disbursement.

A major cause for NPA is fixation of unrealistic repayment schedule. Repayment schedule

may be fixed taking into account gestation or moratorium period, harvesting season, income

generation, surplus available etc. If the repayment schedule is defective both with reference

to quantum of instalment and period of recovery, assets have a tendency to become NPA. At

the post-disbursement stage, bankers should ensure that the advance does not become and

NPA by proper follow-up and supervision to ensure both assets creation and asset utilisation.

Bankers can do either off-site surveillance or on site inspection to detect whether the unit /

project is likely to become NPA. Instead of waiting for the mandatory period before

classifying an asset as NPA, the banker should look for early warning signals of NPA.

The following are the sources from which the banker can detect signals, which need quick

remedial action:

Scrutiny of accounts and ledger cards – During a scrutiny of these, banker can be

on alert if there is persistent regularity in the account, or if there is any default in

payment of interest and instalment or when there is a downward trend in credit

summations and frequent return of cheques or bills,

Scrutiny of statements – If the scrutiny of the statements submitted by the borrower

reveal a sharp decline in production and sales, rising level of inventories, diversion of

funds, the banker should realise that all is not well with the unit.

External sources – The banker may know the state of the unit through external

sources. Recession in the industry, unsatisfactory market reports, unfavourable

changes in government policy and complaints from suppliers of raw material, may

indicate that the unit is not working as per schedule.

Computerisation of loan monitoring – In computerised branches, it is possible to

computerise the loan monitoring system so that accounts, which show signs of

sickness or weakness can be monitored more closely than other accounts.Personal

visit and face-to-face discussion – By inspecting the unit the banker is able to see for

himself where the problem lies - either production bottlenecks or income leakage or

whether it is a case of willful default. During discussion with the borrower, the banker

may come to know details relating to breakdown in plant and machinery, labour

strike, change in management, death of a key person, reconstitution of the firm,

dispute among the partners etc. All these factors have a bearing on the functioning of

the unit and on its financial status.

‘Strategy for reducing provision – The extent of provision for doubtful asset is with

reference to secured and unsecured portion. Cent percent provision needs to be made for the

unsecured portion. If banks can ensure that the loan outstanding is fully secured by realisable

security, the quantum of provision to be made would be less. It takes one year for a sub

standard asset to slip into doubtful category. Therefore, as soon as an account is classified as

substandard, the banker must keep strict vigil over the security during the next one year

because in the event of the account being classified as doubtful, the lack of security would be

too costly for the bank.

Cash recovery – Banks, instead of organising a recovery drive based on overdues, must

short list those accounts, the recovery of which would provide impetus to the system in

reducing the pressure on profitability by reduced provisioning burden. Vigorous efforts need

to be made for recovery of critical amount (overdue interest and instalment) that can save an

account from NPA classification:

a) In case of a term loan, the banker gets 90 days after the date of default to take

appropriate action and to persuade the borrower to pay interest or instalment

whichever is due.

b) In case of a cash credit account, the banker gets 90 days for ensuring that the

irregularity in the account is rectified.

c) In case of direct agricultural loans, the account is classified NPA only after two crop

seasons (from sowing to harvesting) from the due date in case of short duration loans

and one crop season from the due date in case of long duration loans.

Up gradation of assets – Once accounts become NPA, then bankers should take steps to

up grade them by recovering the entire overdues. Close follow-up will generally ensure

success.

Compromise settlements – Wherever feasible, in case of chronic NPAs, banks can

consider entering into compromise settlements with the borrowers .

Reporting of NPAsReporting of NPAs

Banks are required to furnish a Report on NPAs as on 31 st March each year after

completion of audit. The NPAs would relate to the banks’ global portfolio, including

the advances at the foreign branches. The Report should be furnished as per the

prescribed format given in the Annexure I.

While reporting NPA figures to RBI, the amount held in interest suspense account,

should be shown as a deduction from gross NPAs as well as gross advances while

arriving at the net NPAs. Banks which do not maintain Interest Suspense account for

parking interest due on non-performing advance accounts, may furnish the amount of

interest receivable on NPAs as a foot note to the Report.

Whenever NPAs are reported to RBI, the amount of technical write off, if any, should

be reduced from the outstanding gross advances and gross NPAs to eliminate any

distortion in the quantum of NPAs being reported.

REPORTING FORMAT FOR NPA – GROSS AND NET NPA

Name of the Bank:

Position as on………

PARTICULARS

1) Gross Advanced *

2) Gross NPA *

3) Gross NPA as %age of Gross Advanced

4) Total deduction( a+b+c+d )

( a ) Balance in interest suspense a/c **

( b ) DICGC/ECGC claims received and held pending

adjustment

( c ) part payment received and kept in suspense a/c

( d ) Total provision held ***

5) Net advanced ( 1-4 )

6) Net NPA ( 2-4 )

7) Net NPA as a %age of Net Advance

Preventive Measurement For NPA

Early Recognition of the Problem:-Early Recognition of the Problem:-

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

late to retrieve the situation- both in terms of rehabilitation of the project and recovery of

bank’s dues. Identification of weakness in the very beginning that is : When the account starts

showing first signs of weakness regardless of the fact that it may not have become NPA, is

imperative. Assessment of the potential of revival may be done on the basis of a techno-

economic viability study. Restructuring should be attempted where, after an objective

assessment of the promoter’s intention, banks are convinced of a turnaround within a

scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to

facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through

legal means before the security position becomes worse.

Identifying Borrowers with Genuine Intent:-Identifying Borrowers with Genuine Intent:-

Identifying borrowers with

genuine intent from those who are non- serious with no commitment or stake in revival is a

challenge confronting bankers. Here the role of frontline officials at the branch level is

paramount as they are the ones who has intelligent inputs with regard to promoters’ sincerity,

and capability to achieve turnaround. Base don this objective assessment, banks should

decide as quickly as possible whether it would be worthwhile to commit additional finance.

In this regard banks may consider having “Special Investigation” of all financial transaction

or business transaction, books of account in order to ascertain real factors that contributed to

sickness of the borrower. Banks may have penal of technical experts with proven expertise

and track record of preparing techno-economic study of the project of the borrowers.

Borrowers having genuine problems due to temporary mismatch in fund flow or

sudden requirement of additional fund may be entertained at branch level, and for this

purpose a special limit to such type of cases should be decided. This will obviate the need to

route the additional funding through the controlling offices in deserving cases, and help avert

many accounts slipping into NPA category.

Timeliness and Adequacy of response:-Timeliness and Adequacy of response:-

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

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

techno-economic study and promoter’s commitment, has to be adequate in terms of extend of

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

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

Focus on Cash Flows:-Focus on Cash Flows:-

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

conventional fund flow analysis only, which could yield a potentially misleading picture.

Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction

with the Cash Flow rather than only on the basis of Funds Flow.

Management Effectiveness:- Management Effectiveness:-

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

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

adverse business conditions is a very important aspect that affects a borrowing unit’s

fortunes. A bank may commit additional finance to an aling unit only after basic viability of

the enterprise also in the context of quality of management is examined and confirmed.

Where the default is due to deeper malady, viability study or investigative audit should be

done – it will be useful to have consultant appointed as early as possible to examine this

aspect. A proper techno- economic viability study must thus become the basis on which any

future action can be considered.

Multiple Financing:-Multiple Financing:-

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

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

information on the borrower would go a long way toward overall success of

rehabilitation exercise, given the probability of success/failure.

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

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

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

that such cash flows are used for working capital purposes. Toward this end, there

should be regular flow of information among consortium members. A bank, which is

not part of the consortium, may not be allowed to offer credit facilities to such

defaulting clients. Current account facilities may also be denied at non-consortium

banks to such clients and violation may attract penal action. The Credit Information

Bureau of India Ltd.(CIBIL) may be very useful for meaningful information

exchange on defaulting borrowers once the setup becomes fully operational.

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

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

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

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

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

account.

D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to

provide a timely and transparent system for restructuring of the corporate debt of Rs.

20 crore and above with the banks and FIs on a voluntary basis and outside the legal

framework. Under this system, banks may greatly benefit in terms of restructuring of

large standard accounts (potential NPAs) and viable sub-standard accounts with

consortium/multiple banking arrangements.

 

RBI measures to control NPAs in recent times

Over the last few months, RBI has brought in various reforms in order to control the growing

NPAs both for the banks and the non-banking financial companies (NBFCs).

 

(i)Increase in FDI cap for ARCs:

The RBI, in order to promote the business of asset reconstruction in India, increased foreign

direct investment (FDI) cap on asset reconstruction companies to 74% from 49% under the

automatic route. It also allowed the foreign institutional investors (FIIs) to participate in the

equity of the ARCs, however, the maximum shareholding by FII cannot exceed 10% of the

paid up capital of the ARC.

 

(ii)Framework for Distressed Assets:

This is one such framework, through which the RBI has tried to bring in a number of changes

in order to stabilise the current stressed out situation in the economy. It has concentrated

more on early recognition of stressed assets as requires the banks and financial institutions to

route the assets through three classes of special mention accounts-SMA (SMA-0, SMA-1 and

SMA-2) before finally classifying it as a NPA. It also requires the all lenders with respect to

the borrower classified under SMA-2 to form a joint lenders forum (JLF) whereby they are to

formulate a corrective action plan in order to remove the stress over the asset. This

framework also requires the formation of a Central Registry of Information on Large Credits

(CRILC), which will be responsible to accumulate the data relating to the borrowers having

aggregate fund based and non-fund based exposures worth Rs500 crore or more from the

banks, non-banking financial companies- systemically important (NBFC-SIs) and NBFC-

Factors. There are various other things that RBI has brought forward including the

requirement of a proper credit risk management mechanism within the organisation.

 

(iii)Central Registry of Information on Large Credits (CRILC):

The main intent of setting up this registry was to keep a record of the large borrowers and

those which are under stress. The RBI requires all the banks, NBFC-SIs and NBFC-Factors to

report all the data relating to the borrowers having an aggregate fund based and non-fund

based exposure of Rs500 crore or more or of such borrowers who have been classified as

SMA-0 in the books.

 

(iv)Corporate debt restructuring norms for the NBFCs:

Earlier, the NBFCs were not allowed to be part of the corporate debt restructuring mechanism

under the corporate debt restructuring (CDR) cell, but with this notification,RBI has now

allowed the NBFCs to restructure their assets under the CDR cell and made their

restructuring regulations at par with that of the banks. This has created a lot of buzz in the

NBFC sector and it is believed that RBI has made this move in tune with the soaring

concerns over NPAs. Henceforth, the NBFCs will be able to restructure their stressed asset

either through one on one arrangement with the borrowers or along with other lenders

through the CDR cell. Through this notification, the RBI has brought an incentive for the

NBFCs, whereby they can retain their “standard” assets in the books even after restructuring,

only if it is able to implement the restructuring scheme within a period of 120 days from the

date of receipt of application for restructuring by the NBFCs. This incentive may encourage

the NBFCs to restructure the stressed assets and make an effort to make them good.

However, this special incentive is available with the NBFCs only till 31 March, 2015.

 

Apart from the above measures, the RBI earlier came out with several other such reforms,

however, still it could not get the control over the rising NPAs.

 

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002

(SARFAESI Act)

RBI guidelines & SARFAESI proceedings?

It is very clear that the Banks should follow RBI guidelines on Asset-Classification before

classifying any loan account as ‘Non-performing Asset (NPA)’. There were judgments

saying that it is mandatory for the Banks to follow RBI guidelines while classifying an

account as ‘Non-Performing Asset (NPA)’ and any deviation in this regard can vitiate the

proceedings initiated under SARFAESI Act, 2002. While RBI guidelines are detailed when it

comes to Asset Classification and related issues; the Bank officials or the Banks may have to

make a subjective assessment of certain issues. It is understood from the reading of RBI

guidelines on Asset-Classification that genuine borrowers facing temporary difficulties may

be treated separately and based on reasonable assurance of recovery. Guideline 4.2.4 of RBI

guideline deals with the issue of ‘accounts with temporary deficiencies’ and narration of

few of the temporary deficiencies in the said guideline appear to be ‘inclusive’ in nature

allowing the Bank to make certain subjective assessments on case-to-case basis. Obviously,

no creditor and especially secured creditor want to harass a genuine borrower having a good

track-record with the Bank for a considerable time. However, with constant emphasis on the

issue of reduction of NPAs, it seems that the Banks are very strict while getting the accounts

classified as ‘NPAs’. The most important thing about the issue of recovery by the Bank is

that they are allowed to proceed against the borrower for default in any of the facilities

availed by him when a borrower avails multiple credit facilities. Banks are asked to initiate

recovery proceedings ‘Borrower-Wise’ and not ‘Facility-Wise’ and it is very clear in the RBI

Provisions of the SARFAESI Act

The Act has made provisions for registration and regulation of securitisation companies or

reconstruction companies by the RBI, facilitate securitisation of financial assets of banks,

empower SCs/ARCs to raise funds by issuing security receipts to qualified institutional

buyers (QIBs), empowering banks and FIs to take possession of securities given for financial

assistance and sell or lease the same to take over management in the event of default.

The Act provides three alternative methods for recovery of NPAs, namely:

Securitisation: It means issue of security by raising of receipts or funds by SCs/ARCs.

A securitisation company or reconstruction company may raise funds from the QIBs

by forming schemes for acquiring financial assets. The SC/ARC shall keep and

maintain separate and distinct accounts in respect of each such scheme for every

financial asset acquired, out of investments made by a QIB and ensure that

realisations of such financial asset is held and applied towards redemption of

investments and payment of returns assured on such investments under the relevant

scheme.

Asset Reconstruction: The SCs/ARCs for the purpose of asset reconstruction should

provide for any one or more of the following measures:

• the proper management of the business of the borrower, by change in, or take over

of, the management of the business of the borrower

• the sale or lease of a part or whole of the business of the borrower

• rescheduling of payment of debts payable by the borrower

• enforcement of security interest in accordance with the provisions of this Act

• settlement of dues payable by the borrower

• taking possession of secured assets in accordance with the provisions of this Act. 

Exemption from registration of security receipt: The Act also provides,

notwithstanding anything contained in the Registration Act, 1908, for enforcement of

security without Court intervention: (a) any security receipt issued by the SC or ARC,

as the case may be, under section 7 of the Act, and not creating, declaring, assigning,

limiting or extinguishing any right, title or interest to or in immovable property except

in so far as it entitles the holder of the security receipt to an undivided interest

afforded by a registered instrument; or (b) any transfer of security receipts, shall not

require compulsory registration.

The Guidelines for SCs/ARCs registered with the RBI are:

act as an agent for any bank or FI for the purpose of recovering their dues from the

borrower on payment of such fees or charges

act as a manager between the parties, without raising a financial liability for itself;

act as receiver if appointed by any court or tribunal.

Apart from above functions any SC/ARC cannot commence or carryout other business

without the prior approval of RBI.

Issues under the SARFAESI

Right of Title

A securitisation receipt (SR) gives its holder a right of title or interest in the financial assets

included in securitisation. This definition holds good for securitisation structures where the

securities issued are referred to as ‘Pass through Securities’. The same definition is not

legally inadequate in case of ‘Pay through Securities’ with different tranches.

Thin Investor Base

The SARFAESI Act has been structured to enable security receipts (SR) to be issued and

held by Qualified Institutional Buyers (QIBs). It does not include NBFC or other bodies

unless specified by the Central Government as a financial institution (FI). For expanding the

market for SR, there is a need for increasing the investor base. In order to deepen the market

for SR there is a need to include more buyer categories.

Investor Appetite

Demand for securities is restricted to short tenor papers and highest ratings. Also, it has

remained restricted to senior tranches carrying highest ratings, while the junior tranches are

retained by the originators as unrated pieces. This can be attributed to the underdeveloped

nature of the Indian market and poor awareness as regards the process of securitisation.

Risk Management in Securitisation

The various risks involved in securitisation are given below:

Credit Risk: The risk of non-payment of principal and/or interest to investors can be at two

levels: SPV and the underlying assets. Since the SPV is normally structured to have no other

activity apart from the asset pool sold by the originator, the credit risk principally lies with

the underlying asset pool. A careful analysis of the underlying credit quality of the obligors

and the correlation between the obligors needs to be carried out to ascertain the probability

of default of the asset pool. A well diversified asset portfolio can significantly reduce the

simultaneous occurrence of default.

Sovereign Risk: In case of cross-border securitisation transactions where the assets and

investors belong to different countries, there is a risk to the investor in the form of non-

payment or imposition of additional taxes on the income repatriation. This risk can be

mitigated by having a foreign guarantor or by structuring the SPV in an offshore location or

have an neutral country of jurisdiction

Collateral deterioration Risk: Sometimes the collateral against which credit is sanctioned to

the obligor may undergo a severe deterioration. When this coincides with a default by the

obligor then there is a severe risk of non-payment to the investors. A recent example of this

is the sub-prime crisis in the US which is explained in detail in the following sections.

Legal Risk: Securitisation transactions hinge on a very important principle of “bankruptcy

remoteness” of the SPV from the sponsor. Structuring the asset transfer and the legal

structure of the SPV are key points that determine if the SPV can uphold its right over the

underlying assets, if the obligor declare bankruptcy or undergoes liquidation.

Prepayment Risk: Payments made in excess of the scheduled principal payments are called

prepayments. Prepayments occur due to a change in the macro-economic or competitive

industry situation. For example in case of residential mortgages, when interest rates go

down, individuals may prefer to refinance their fixed rate mortgage at lower interest rates.

Competitors offering better terms could also be a reason for prepayment. In a declining

interest rate regime prepayment poses an interest rate risk to the investors as they have to

reinvest the proceedings at a lower interest rate. This problem is more severe in case of

investors holding long term bonds. This can be mitigated by structuring the tranches such

that prepayments are used to pay off the principal and interest of short-term bonds.

Servicer Performance Risk: The servicer performs important tasks of collecting principal

and interest, keeping a tab on delinquency, maintains statistics of payment, disseminating the

same to investors and other administrative tasks. The failure of the servicer in carrying out

its function can seriously affect payments to the investors.

Swap Counterparty Risk: Some securitisation transactions are so structured wherein the

floating rate payments of obligors are converted into fixed payments using swaps. Failure on

the part of the swap counterparty can affect the stability of cash flows of the investors.

Financial Guarantor Risk: Sometime external credit protection in the form of insurance or

guarantee is provided by an external agency. Guarantor failure can adversely impact the

stability of cash flows to the investors .

Non Performing Asset - Current Scenario

For the 20 banks that have declared their September quarter earnings, bad loans

rose sharply in the past three months. Collective gross non-performing assets

(NPAs) for this set of banks rose by Rs.7,219 crore, or 14.3%. The run rate of

bad loan accumulation was sharper than in the June quarter, when gross bad

debts rose by Rs.3,340 crore, or 7%.

The main culprits, as has been the case in the past several quarters, were state-

owned banks. Punjab National Bank saw its bad loans rise by Rs.4,035 crore, or

40%, in the past three months. Bank of Baroda saw bad loans increase by one-

tenth in the September quarter and Indian Overseas Bank’s rose by one-fifth.

But these were the outliers. Even if the numbers of these three offenders are

excluded, bad loans for the remaining 17 banks rose by Rs.1,737 crore in the

September quarter, more than the Rs.728 crore slip seen in thee months ended

June.

As the Reserve Bank of India data shows, the gross NPAs of the Indian banking

system (as a percentage of gross advance) during the fiscal year that ended in

March 2012 (FY12) were the highest in the last six years. 

An even bigger concern is the rising threat of loans getting restructured as high

inflation and interest rates impact demand and reduce the pricing power of the

corporates. FY12 saw a massive spurt in restructured loans, both at an absolute

level and as a share total loan, as corporate cash flows have been affected

drastically.

Restructured loans refer to those that cannot be recovered or serviced as per

their schedule and the lenders are, therefore, required to dilute the terms under

which the loans were originally sanctioned, which may include lowering of

interest rates, extension of tenure or both. India’s Rs.75 trillion banking sector

has witnessed a surge in the amount of restructured loans in stress-ridden

sectors in the June quarter, a large chunk of which could turn bad if the growth

momentum does not pick up in Asia’s third largest economy.

The total amount of loans restructured by Indian banks under the corporate debt

restructuring (CDR) mechanism crossed a staggering Rs.1.68 trillion, on a

cumulative basis, on 30 June, registering an addition of about Rs.17,957 crore in

the three months since April. The actual figure of restructured assets in the

banking system, however, could be much higher as lenders often execute

bilateral loan recasts on a case-by-case basis.

This addition is significant as in the whole of the last fiscal year, banks

restructured Rs.40,000 crore of loans through the CDR route.

Historically, in 1997, NPAs were 15.8% of loans for the banking sector, which

nosedived to 2.4% in 2008. This figure stands at 2.94% of loans in 2012. In

absolute figures, NPAs have doubled from 2009 to 2012 and assets under

reconstruction had trebled during the same period. India’s biggest lender, State

Bank of India, is experiencing an NPA level of 4.99% of total loans. According

to a recently published Credit Suisse Group AG report, 10 large industrial

houses account for 13% of total assets financed by the Banking system, which

means that bank lending is getting increasingly skewed. Further, of the total

reconstructed assets, 8.24% belong to the large manufacturing sector, 3.99% are

from the services sector while 1.45% are from the agricultural sector.

Current market scenario-

One can easily make out the amount of stress prevailing over the financial

system after 40 listed companies together reported the growth of Rs2.4 lakh

crores worth NPAs  during the quarter ending on December 2013. While this

has been the overall scenario, some of the banks individually have made it to

the headlines by reporting huge amount of NPAs in the December quarter. In

terms of quantum, the State Bank of India (SBI) reported highest NPAs worth

Rs67,799 crore. However, it is Bank of Maharashtra and United Bank of India,

which made the headlines by reporting a growth of 209% and 188%,

respectively in NPAs. Even one of the recent releases by RBI  also highlights

the growing concerns over NPAs within the country. The table below would

show us the trend in the gross advances by the banks and the gross NPAs since

2001.

 

End of

March

Total Gross

AdvancesGross NPAs

Growth in

Gross

Advances (%)

Growth in

Gross NPAs

(%)

(Amt in Rs crore)

2001 522,365 62,896 - -

2002 645,865 71,113 23.6 13.1

2003 739,125 70,042 14.4 -1.5

2004 859,092 63,538 16.2 -9.3

2005 1,125,056 58,024 31.0 -8.7

2006 1,473,723 51,243 31.0 -11.7

2007 1,893,775 49,997 28.5 -2.4

2008 2,331,750 55,695 23.1 11.4

2009 2,788,424 68,216 19.6 22.5

2010 3,264,907 81,808 17.1 19.9

2011 3,992,145 94,121 22.3 15.1

2012 4,666,337 137,102 16.9 45.7

2013* 5,371,151 183,854 15.1 34.1

* As at the end of September, 2013

Source: RBI

This scenario was seemingly favourable till 2007, thereafter the gross NPAs started rising and

got worse as years passed, reaching 45% in 2012.

However, RBI from time to time has taken various initiatives to curtail ever increasing NPAs.

State Bank of India 

State Bank of India is an Indian multinational, Public Sector banking and financial

services company. It is a government-owned corporation with its headquarters

in Mumbai, Maharastra and also its corporate office in Mumbai, Maharashtra. As of

December 2013, it had assets of US$388 billion and 17,000 branches, including 190

foreign offices, making it the largest banking and financial services company in India

by assets.

State Bank of India is one of the Big Four banks of India, along with Bank of

Baroda, Punjab National Bank and ICICI Bank.

The bank traces its ancestry to British India, through the Imperial Bank of India, to

the founding, in 1806, of the Bank of Calcutta, making it the oldest commercial bank

in the Indian Subcontinent. Bank of Madras merged into the other two "presidency

banks" in British India, Bank of Calcutta and Bank of Bombay, to form the Imperial

Bank of India, which in turn became the State Bank of India. Government of

India owned the Imperial Bank of India in 1955, with Reserve Bank of India (India's

Central Bank) taking a 60% stake, and renamed it the State Bank of India. In 2008,

the government took over the stake held by the Reserve Bank of India.

State Bank of India is a regional banking behemoth and has 20% market share in

deposits and loans among Indian commercial banks.

The roots of the State Bank of India lie in the first decade of the 19th century, when

the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June

1806. The Bank of Bengal was one of three Presidency banks, the other two being

the Bank of Bombay (incorporated on 15 April 1840) and the Bank of

Madras(incorporated on 1 July 1843). All three Presidency banks were incorporated

as joint stock companies and were the result of royal charters. These three banks

received the exclusive right to issue paper currency till 1861 when, with the Paper

Currency Act, the right was taken over by the Government of India. The Presidency

banks amalgamated on 27 January 1921, and the re-organised banking entity took

as its name Imperial Bank of India. The Imperial Bank of India remained a joint stock

company but without Government participation.

Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve Bank

of India, which is India's central bank, acquired a controlling interest in the Imperial

Bank of India. On 1 July 1955, the imperial Bank of India became the State Bank of

India. In 2008, theGovernment of India acquired the Reserve Bank of India's stake in

SBI so as to remove any conflict of interest because the RBI is the country's banking

regulatory authority.

In 1959, the government passed the State Bank of India (Subsidiary Banks) Act. This

made SBI subsidiaries of eight that had belonged toprincely states prior to their

nationalization and operatonal take-over between September 1959 and October

1960, which made eight state banks associates of SBI. This acquisition was in tune

with the first Five Year Plan, which prioritised the development of rural India. The

government integrated these banks into the State Bank of India system to expand its

rural outreach. In 1963 SBI merged State Bank of Jaipur (est. 1943) and State Bank

of Bikaner (est.1944).

SBI has acquired local banks in rescues. The first was the Bank of Bihar (est. 1911),

which SBI acquired in 1969, together with its 28 branches. The next year SBI

acquired National Bank of Lahore (est. 1942), which had 24 branches. Five years

later, in 1975, SBI acquired Krishnaram Baldeo Bank, which had been established in

1916 in Gwalior State, under the patronage of Maharaja Madho Rao Scindia. The

bank had been the Dukan Pichadi, a small moneylender, owned by the Maharaja.

The new bank's first manager was Jall N. Broacha, a Parsi. In 1985, SBI acquired

the Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its

affiliate, the State Bank of Travancore, already had an extensive network in Kerala.

There has been a proposal to merge all the associate banks into SBI to create a

"mega bank" and streamline the group's operations.[11]

The first step towards unification occurred on 13 August 2008 when State Bank of

Saurashtra merged with SBI, reducing the number of associate state banks from

seven to six. Then on 19 June 2009 the SBI board approved the absorption of State

Bank of Indore. SBI holds 98.3% in State Bank of Indore. (Individuals who held the

shares prior to its takeover by the government hold the balance of 1.7%.)

The acquisition of State Bank of Indore added 470 branches to SBI's existing

network of branches. Also, following the acquisition, SBI's total assets will inch very

close to the  10 trillion mark (10 billion long scale). The total assets of SBI and ₹the State Bank of Indore stood at  9,981,190 million as of March 2009. The process ₹of merging of State Bank of Indore was completed by April 2010, and the SBI Indore

branches started functioning as SBI branches on 26 August 2010.

On October 7, 2013, Arundhati Bhattacharya became the first woman to be

appointed Chairperson of the bank

AXIS Bank

AXIS Bank was the first of the new private banks to have begun operations in 1994, after the

Government of India allowed new private banks to be established. The Bank was promoted

jointly by the Administrator of the specified undertaking of the, AXIS.

Life Insurance Corporation of India (LIC)

General Insurance Corporation Ltd.

Other four PSU companies, i.e.

National Insurance Company Ltd.,

The New India Assurance Company,

The Oriental Insurance Corporation and United Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 280.51 Crores with the public holding

(other than promoters) at 72.46 %.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at

Mumbai. Presently the Bank has a very wide network of more than 469 branch offices and

Extension Counters. The Bank has a network of over 2016 ATMs providing 24hrs a day

banking convenience to its customers. This is one of the largest ATM networks in the

country. The Bank has strengths in both retail and corporate banking and is committed to

adopting the best industry practices internationally in order to achieve excellence.

About Axis Bank

Axis Bank was the first of the new private banks to have begun operations in 1994, after the

Government of India allowed new private banks to be established. The Bank was promoted

jointly by the Administrator of the specified undertaking of the, Unit Trust of India.

Life Insurance Corporation of India (LIC)

General Insurance Corporation Ltd.

Other four PSU companies, i.e.

National Insurance Company Ltd.,

The New India Assurance Company,

The Oriental Insurance Corporation and United Insurance Company Ltd.

The Bank today is capitalized to the extent of Rs. 358.97 crores with the public holding (other

than promoters) at 57.59%.Presently; the Bank has a very wide network of more than 729

branch offices and Extension Counters. The Bank has a network of over 3171 ATMs

providing 24 hrs day banking. The Bank has strengths in both retail and corporate banking

and is committed to adopting the best industry practices internationally in order to achieve

excellence.

The latest offerings of the bank along with Dollar variant is the Euro and Pound Sterling

variants of the International Travel Currency Card. The Travel Currency Card is a signature

based pre-paid travel card which enables travelers’ global access to their money in local

currency of the visiting country in a safe and convenient way.

NPA analysis of Axis bank

Axis Bank has reported a better than expected net profit of Rs.5.81 bn in Q4FY09, a growth of 60.9%

on a YoY basis and 16.1% on a QoQ basis. For the FY09, the net profit stands at Rs.18.15 bn, a growth

of 69.5% on YoY. Axis Bank has restructured loans worth Rs.6.6 bn during the quarter, taking the

total restructured loans to Rs.16.25bn in FY09, representing 1.74% of the gross customer assets.

Facts and figure of the year 2007- 09:

2008-09 2007-08 Growth (%)

Net profit 581.45 361.40 61

Net interest income 1032.60 828.43 25

Other income 845.51 556.47 52

EPS(rs) 16.10 9.89 -

CAR (%) 13.69 13.73 -

Net NPA 0.35 0.36 -

Gross NPA has shown an upward movement:

The Gross NPA of the bank has increased by 24 bps during FY09 and 6 bps during the Q4FY09. In

absolute terms, the Gross NPA has increased by Rs.1.7bn during the quarter. The bank has written

back approx Rs.60mn, which limited the net increase in its gross NPA to Rs.1.10bn.

Operating Expenses remains under control:

Operational expenses of the bank remained under control during FY09. The employee cost of the

bank increased by 48.8% on a YoY basis. The bank had added

approx 5945 employees in FY09, which is reflected in the increased employee cost.

The cost to income ratio of the bank stands at 43.1% compared to 49.2% in FY08.

Comparison between AXIS, AND SBI

PARTICULARS AXIS 2008-09 SBI 2008-09

CAR(Capital

adequacy ratio)

13.69 % 14.25%

NET NPA 0.35% 1.76%

Inference

As compared to other banks the net NPA of Axis Bank is less. This shows the recovery and follow up

system of the bank. Further the quality of the appraisal and decision making is evident.