SBES College of Arts and Commerce Chhatrapati Sambhajinagar

Affiliated to

Dr. Babasaheb Ambedkar Marathwada University Chh. Sambhajinagar

A Project Report entitled

"A Critical Analysis of Non Performing Assets of a Bank"

Submitted

In partial fulfillment for the award of the Degree

Master in Commerce (M.Com.)

Under the faculty of Commerce

by

JADHAV VAISHNAVI SUNIL

PRN : 2019015200500152
Roll No. : 11
Div.: C

Under the Guidance of

Mr.N.N. Upadhye

2024-25
 ACKNOWLEDGEMENT

It gives me great pleasure to thank PROF. R.N. RATHI Department of

Commerce & Management Science, for the constant support and guidance given to
me throughout the course of this project. He has been a constant source of inspiration
for us.

I also take the opportunity to acknowledge the contribution of The Principal

as well as the Head of the Department of Commerce & Management Science, for
their support and assistance during the development of the project.

I also take this the opportunity to acknowledge the contribution of the all-
faculty members of the department for their assistance and cooperation during the
development of this project. I also thank all the Non-Teaching Staff of the Department
who helped me in the course of the project. Last but not the least, I acknowledge my
friends for their encouragement in the completion of the project.

JADHAV VAISHNAVI SUNIL

 DECLARATION

I SHIVAM RAVINDRA BAKHALE here by declare that the project entitled “A

Critical Analysis of Non Performing Assets of a Bank” is a bonafide Student of
M.COM II Year (IV Sem) at S.B.E.S College of Arts and Commerce my enrollment
no. is 2019015200496123 Div. C Roll No. 47, work duly completed by me. It does not
contain any part of the projector thesis submitted by any other candidate to this or any
other institute or university for the award of any other degree, diploma or certificate
course.

All such materials that have been obtained from other sources have beenduly acknowledged.

JADHAV VAISHNAVI SUNIL

PRN: 2019015200500152
 CERTIFICATE

This is to certify that the project report entitled “A Critical Analysis of Non Performing

Assets of a Bank” submitted by JADHAV VAISHNAVI SUNIL

in partial fulfillment for the award of the Degree of Master in Commerce under the

faculty of Commerce of SBES College of Arts and Commerce, Chhatrapati

Sambhajinagar, affiliated to Dr. Babasaheb Ambedkar Marathwada University, Chh.

Sambhajinagar, is a bonafide work carried out under my guidance and supervision.

The contents presented in this project report have not been submitted to any other

university or Institute for the award of any degree.

Signature Signature

Head of the Department Project Guide

Signature
Principal
 INDEX

Sr. Pag
No. Chapter Topic e
No
Chapter Introduction 1
1
I Need and importance 4
Chapter
2 Research methodology 5
II
Chapter
3 Review Of Literature 6
III
Chapter IV
3 Organisation Profile 10

Chapter
Operational Definitions 17
V

NPA‟S Analytical Study 22

Importance Of Non Performing Assets 23

Causes For Non-Performing Assets 25

4 Impact Of Priority Sector Advances Of NPAs 26

Chapter
Conclusion Regarding Contributory Reasons 28
VI
Causes For An Accounts Becoming NPA 29

Magnitude Of Non-Performing Assets In AXIS Bank 33

Extent Of NPAS In Public Sector Banks : 2006-07 34

5 Chapter VII Impact of NPA‟S 35

Management Of NPA‟s 41

Strategies For Managing NPAs 43

Action Points In Regard To Existing Npa Accounts 44

Chapter Preventing Occurance Of New NPAs 46

6
VIII
Action Plan In Regard To Existing NPAs 46

Flow Chart For Action Plan 49

Committees And Recommendations 50

 Chapter
7 Findings And Observations 55
IX

Chapter
8 Suggestions And Recommendations 56
X
9 Findings and Discussion 58

Annexures Conclusion 60

References 62
 CHAPTER – I

INTRODUCTION

INTRODUCTION TO THE TOPIC:

The Indian banking sector underwent a major transformation in 1969 when a

large number of banks were nationalized. The policy thrust in those days was to spread

banking services far and wide into the country side. And this objective was largely

achieved.

Bank branches increased rapidly and deposit mobilization rose steadily. This has

undeniably aided the process of bringing in large amount of savings into the financial

markets for development purposes. Besides, targeted lending to priority sectors they led

to capital becoming available to new and small enterprises. The expansion of these

services not surprisingly, did not come without any ill effects. loans given the banks are

there assets and as the repayment of several of the loans were poor, quality of these

assets was steadily deteriorating. Credit allocation became

“loan melas”, loan proposal evaluations were slack and as a result repayments were very

poor.

The first and fore most casualty of banking sector reforms initiated in the early nineties

has been “ non-performing assets”(NPA), which were cutting into the banks bottom

lines in two ways-

1 Banks were not able to book interest accrued on such assets

2 They had to make provisions for these NPAs

Over the years, much has been talked about NPAs, which has also become
 One of the parameters to decide partial autonomy to be given to select banks.

How ever, the emphasis so far has been only on identification and quantification of NPAs

rather than on ways to reduce and upgrade them.

Though, the term NPA can notes a financial asset of a commercial bank which

has stopped earning an expected reasonable return, it is also a reflection of the

productivity of the unit, firm, concern, industry and nation

where that asset is idling.

Viewed with this broad perspective, the NPA is a result of an environment which

prevents it from performing up to expected levels.

How ever, the global slow down and the fall of banks world wide give

India‟s financial system some breathing space to catch up. The problem of NPAs is two

fold-

1 Tackling the existing NPAs

2 Preventing a build up for additional NPAs

The NPA level has to be brought down to at least 5% to 6%. For this, Indian banks

need to set up evaluation of various credit risks, to develop advance skills in risk

management and a need to set up speedy recovery mechanism.

The NPAs in bank balance sheet reflects the health the economy. If the economy

is doing well and if all its sectors are doing well, bank NPAs will also show an

improvement. Hence, it is a joint responsibility of policy- makers, judiciary,

entrepreneurs and bankers to collectively fight this problem.

The banking system in India remains handicapped in the absence of an adequate

legal framework to ensure expeditious recovery of loans as also enforcement of security.

 A Comprehensive banking legislation and enforcement machinery be put in place

not only to reduce the quantum of NPAs but also to ensure that such a framework serves

as a deterrent for future defaulters.

“Banks are yet another sector where the rot has already set in!”

It is high time to take stringent measures to curb NPAs and see to it that the

“NON-PERFORMING ASSETS” may not turn banks into

“NON-PERFORMING BANKS”, instead, steps should be taken to convert

“NON-PERFORMING ASSETS” into “NOW-PERFORMING ASSETS”.

“It is now or never”.

The study conducted to analyse the importance of NPAs in the banking sector.

The study lays emphasis to find out the causes for NPAs, impact of NPAs in AXIS BANK,

management of NPAs and projection of NPAs over the next three years.

The study aims to gain an insight into tha aspect of NPAs and impact of NPAs on the

profitability of the bank.

The procedure adopted for the study includes the primary statistical tools to

correlate results and analyzing the trend of NPAs in over the last 3 years and projecting

the extent of NPAs in the next 3 years in AXIS BANK.

In India, NPAs, which are considered to be at higher levels than those in other

countries, of late, attracted attention of public and the subject of high NPAs in banks

has also been frequently raised in various areas. These developments have promoted us

to undertake a study of NPAs in banks, to understand the problem, its genesis and

influence on banking sector.

NEED AND IMPORTANCE:

Ever since introduction and implementation of prudential norms, management of non

performing advances has become the most important issue before the banks.

RBI has therefore advised that banks should have a well-laid recovery

management policy approved by the board and the same should be put in place for

meticulous compliance so that the level of NPA can be brought down.

Management of Non-performing advances covers both recovery of NPA as also

regulars review monitoring of NPA accounts, write off etc in terms of prudential norms

issued by RBI.

Apart from up gradation and cash recovery, the bank has introduced several OTS

modules aiming at various types of borrowers to ensure recovery through compromise

settlement. Further, various modifications are also made for operational aspects of the

said OTS modules based on infield experiences/revised norms issued by RBI from time

to time and changed banking scenario to make the modules/schemes more effective and

fruitful.

Apart from recovery of NPAs, various other important issues like review of NPA

accounts, monitoring of suitified accounts. Decreed debts, waiver of legal action in

deserving cases, write off of bad debts, delegated authority, appropriation of recovery

in NPA accounts, estimation of sacrifice, disclose of information, guidelines in respect

of implementation of the securitization Act-2004 and sale of financial asset etc, are also

important in day to day functioning of the branches/offices.

 CHAPTER – II

RESEARCH METHODOLOGY

AIM OF THE PROJECT :

To assess the impact of role of the non-performing assets (NPA‟s) on the

profitability of the bank.

OBJECTIVES:

1 To study the nature and cause of NPAs

2 To assess the growth and magnitude of NPAs in AXIS BANK.

3 To study the measures taken by AXIS BANK to reduce NPAs.

METHODOLOGY:

1 Personal interviews and discussions are conducted with the officials of the bank.

2 Expert‟s opinions soughted on various aspects dealing with NPAs.

3 Analysis of annual report, profit and loss account and balance sheet of AXIS BANK.

SCOPE OF THE STUDY:

The study is laid on macro level and to find the impact of NPAs in AXIS BANK. It also

analyses the efficiency of recovery measures undertaken by AXIS BANK.

PERIOD OF STUDY:

Study is undertaken regarding the NPAs in AXIS BANK for period of 3 years.

LIMITATIONS:

1 Study is entirely based on data willingly provided by the bank officials.

2 Study is confidential in nature, so the views expressed by the officials may be a general

opinion.

3 The findings of the Study can not be applied to other branches of AXIS BANK.
 CHAPTER – III

REVIEW OF LITERATURE

In the banking literature, the problem of NPLs has been revisited in several theoretical

and empirical studies. A synoptic review of the literature brings to the fore insights into

the determinants of NPLacross countries. A considered view is that banks‟ lending

policy could have crucial influence on non-performing loans (Reddy, 2004). Reddy

(2004) critically examined various issues pertaining to termsof credit of Indian banks.

In this context, it was viewed that „the element of power has no bearing on the illegal

activity. A default is not entirely an irrational decision. Rather a defaulter takes into

account probabilistic assessment of various costs and benefits of his decision‟. Mohan

(2003)1 conceptualised „lazy banking‟ while critically reflecting on banks‟ investment

portfolio and lending policy. In a study of institutional finance structure and

implications for industrial growth, Mohan (2004) emphasised on key lending terms of

credit, such as maturity and interest-terms of loans to corporate sector. The Indian

viewpoint alluding to the concepts of „credit culture‟ owing to Reddy (2004) and „lazy

banking‟ owing to Mohan (2003a) has an international perspective since several studies

in the banking literature agree that banks‟ lending policy is a major driver of non-

performing loans (McGoven, 1993, Christine 1995, Sergio,1996, Bloem and Gorters,

2001).

In the seminal study on „credit policy, systems, and culture‟,Reddy (2004) raised

various critical issues pertaining to credit delivery mechanism of the Indian banking

sector. The study focusedon the terms of credit such as interest rate charged to various

productive activities and borrowers, the approach to risk management, and portfolio

management in general. There are three pillars on which India‟s credit

 system was based in the past; fixing of prices of credit or interest rate as well as quantum

of credit linked with purpose; insisting on collateral; and prescribing the end-use of

credit. Interest rate prescription and fixing quantum has, however, been significantly

reduced in the recent period. The study also highlighted the issues in security-based or

collateralised lending, which need careful examination in the context of growing

services sector. Given the fungibility of resources, multiple sources of flow of resources,

aswell as application of funds, the relevance and feasibility of end-use restrictions on

credit need a critical review. The link between formal and informal sectors shows that

significant divergence in lending terms between the two sectors still persists, despite

the fact that the interest rate in informal markets is far higher than that of the formal

sectors- the banking sector. The convergence between formal and informal sectors could

be achieved by pushing the supply of creditin the formal sector following a supply

leading approach to reducethe price or interest rate. Furthermore, in the context of NPAs

on account of priority sector lending, it was pointed out that the statistics may or may

not confirm this.

There may be only a marginal difference in the NPAs of banks‟ lending to priority sector

and the banks lending to private corporate sector. Against this background, the study

suggested that given the deficiencies in these areas, it is imperative that banks need to

be guided by fairness based on economic andfinancial decisions rather than system of

conventions, if reform has to serve the meaningful purpose. Experience shows that

policies of liberalisation, deregulation and enabling environment of comfortable

liquidity at a reasonable price do not automatically translate themselves into enhanced

credit flow.

Although public sector banks have recorded improvements in profitability, efficiency

(in terms of intermediation costs) and asset quality in the 1990s, they continue to have

higher interest rate spreads but at the same time earn lower rates of return, reflecting higher

7
 operating costs (Mohan, 2004). Consequently, asset quality is weaker so that loan loss

provisions continue to be higher. This suggests that, whereas, there is greater scope for

enhancing the asset quality of banks, in general, public sector banks, in particular, need to

reduce the operating costs further. The tenure of funds provided by banks either as loans or

investments depends critically on the overall asset-liability position. An inherent difficulty

in this regard is that since deposit liabilities of banks often tend to be of relatively shorter

maturity, long- term lending could induce the problem of asset-liability mismatches. The

maturity profile of commercial bank deposits shows that less than one fifth is of a tenor of

more than three years. On the asset side, nearly

40 per cent has already been invested in assets of over threeyear maturity. Banks also

have some capacity to invest in longer term assets, but this capacity will remain highly

limited until the fiscal deficitremains as high as it is and the Government demand for

investment in long dated bonds remains high. Some enhancement of their capacityto

invest in infrastructure, industry and agriculture in longer gestation projects can be

achieved by allowing a limited recourse to longer term bond issues.

In an another study, Mohan (2003) observed that lending rates of banks have not come

down as much as deposit rates and interest rates on Government bonds. While banks

have reduced their prime lending rates (PLRs) to some extent and are also extending

sub-PLR loans, effective lending rates continue to remain high. This development has

adverse systemic implications, especially in a country like India where interest cost as

a proportion of sales of corporates are much higher as compared to many emerging

economies.

The problem of NPAs is related to several internal and external factors confronting the

borrowers (Muniappan, 2002). The internal factors are diversion of funds for

expansion/diversification/modernisation, taking up new projects, helping/promoting

8
associate concerns, time/cost overruns during the project implementation stage,

business (product, marketing, etc.) failure, inefficient management, strained labour

relations, inappropriate technology/technical problems, product obsolescence, etc.,

while external factors are recession, non-payment in other countries, inputs/power

shortage, price escalation, accidents and natural calamities. In the Indian context,

Rajaraman and Vasishtha (2002) in an empirical study provided an evidence of

significant bivariate relationship between an operating inefficiency indicator and the

problem loans of public sector banks. In a similar manner, largely from lenders‟

perspective, Das and Ghosh (2003) empirically examined non-performing loans of

India‟s public sector banks in terms of various indicators such as asset size, credit

growth and macroeconomic condition, and operating efficiency indicators.

9
 CHAPTER – IV

ORGANISATION PROFILE

A BRIEF PROFILE OF AXIS BANK:

Company Profile

Axis Bank is the third largest private sector bank in India. Axis Bank offers the entire

spectrum of financial services to customer segments covering Large and Mid-

Corporates, MSME, Agriculture and Retail Businesses.

The Bank has a large footprint of 2402 domestic branches (including extension

counters) and 12,922 ATMs spread across the country as on 31st March 2014. The

overseas operations of the Bank are spread over its seven international offices with

branches at Singapore, Hong Kong, DIFC (Dubai International Financial Centre),

Colombo and Shanghai and representative offices at Dubai and Abu Dhabi. During the

year, the Bank has upgraded its representative office in Shanghai, China to a branch to

become the first Indian private sector bank to set up a branch in China. During the year,

the Bank‟s overseas subsidiary namely Axis Bank UK Ltd. commenced banking

operations.

Axis Bank is one of the first new generation private sector banks to have begun

operations in 1994. The Bank was promoted in 1993, jointly by Specified Undertaking

of Unit Trust of India (SUUTI) (then known as Unit Trust of India),Life

Insurance Corporation of India (LIC), General Insurance Corporation of India (GIC),

National Insurance Company Ltd., The New India Assurance Company Ltd., The

10
Oriental Insurance Company Ltd. and United India Insurance Company Ltd. The

shareholding of Unit Trust of India was subsequently transferred to SUUTI, an entity

established in 2003.

With a balance sheet size of Rs.3,83,245 crores as on 31st March 2014, Axis Bank has

achieved consistent growth and stable asset quality with a 5 year CAGR (2010- 14) of

21% in Total Assets, 19% in Total Deposits, 23% in Total Advances and 28% in Net

Profit.

Corporate Office

Axis House,

C-2 Wadia International Centre,

Pandurang Budhkar Marg, Worli, Mumbai – 4000 025

The Corporate Office of Axis Bank is located at Axis House Mumbai. Axis House has

received the „Platinum‟ rating awarded by the US Green Building Council for its

environment friendly facilities and reduction of carbon emission.

Subsidiaries

The Bank has set up eight wholly-owned subsidiaries:

Axis Capital Ltd.

Axis Private Equity Ltd.

Axis Trustee Services Ltd.

Axis Asset Management Company Ltd.

Axis Mutual Fund Trustee Ltd.

Axis Bank UK Ltd.

Axis Securities Ltd.

Axis Finance Ltd.

11
Promoters

Axis Bank Ltd. has been promoted by the largest Financial Institutions of the country,

UTI, LIC, GIC and its subsidiaries. The Bank was set up in 1993 with a capital of Rs.

115 crore, with UTI contributing Rs. 100 crore, LIC - Rs. 7.5 crore and GIC and its

four subsidiaries contributing Rs. 1.5 crore each.

Capital Structure

The Bank has authorized share capital of Rs. 850 crores comprising 850,000,000 equity

shares of Rs.10/- each. As on 31st March 2014, the Bank has issued, subscribed and

paid-up equity capital of Rs. 469.84 crores, constituting 469,844,553 equity shares of

Rs. 10/- each. The Bank‟s shares are listed on the National Stock Exchange and the

Bombay Stock Exchange. The GDRs issued by the Bank are listed on the London Stock

Exchange (LSE).

Distribution Network

The Bank has a network of 2402 domestic branches (including extension counters) and

12,922 ATMs spread across the country as on 31st March 2014. The overseas operations

of the Bank are spread over its seven international offices with branches at Singapore,

Hong Kong, DIFC (Dubai International Financial Centre), Colombo and

Shanghai and representative offices at Dubai and Abu Dhabi. During the year, the

Bank‟s overseas subsidiary namely Axis Bank UK Ltd. commenced banking

12
operations.

Vision 2015

To be the preferred financial solutions provider excelling in customer delivery through

insight, empowered employees and smart use of technology

Core Values

• Customer Centricity

• Ethics

• Transparency

• Teamwork

• Ownership

2012

1. Bank of the Year - Money Today FPCIL Awards 2012-13

2. Best Bank - CNBC-TV18 India‟s Best Bank and Financial Institution Awards

2012

3. Best Bank - Runner Up - Outlook Money Awards 2012

4. Consistent Performer - India‟s Best Banks – 2012 Survey by Business Today &

KPMG

5. Fastest Growing Large Bank - Dun & Bradstreet - Polaris Financial Technology

Banking Awards 2012

6. Fastest Growing Large Bank - Businessworld Best Banks Survey 2012

7. Best Domestic Bond House - The Asset Triple A Country Awards 2012 - Our

Bank has been honored with this award for the third year in a row.

8.India Bond House of the year - IFR ASIA - Country Awards 2012

9. Deal Maker of the Year in Rupee Bonds - Businessworld Magna Awards - India's

Best Deal Makers 2012

10. The Best Emerging Bullion Dealing Bank - 9th India International Gold

Convention-2011-12

11. Best Acquiring Institution in South Asia - Visa LEADER Award at Visa‟s 2012

APCEMEA Security Summit, Bali

12. Gold Shield for Excellence in Financial Reporting in the Private Banks category -

2011-12 - ICAI (Institute of Chartered Accountants of India)

2013

1. Axis Bank voted for Most Trusted Private Sector Bank in the country in the Most

Trusted Brands survey 2013 by Brand Equity.

2. Axis Bank ranked no. 1 bank in INDIA in both Primary & Secondary market of

corporate bonds -The Asset Benchmark Research

3. Best Debt House in India - Euromoney Awards for Excellence 2013

4. Axis Bank ranked No 1 company to work for in the BFSI sector - 'The Best

Companies to Work for' survey by Business Today

5. Consistent Performer - India‟s Best Banks – 2013 Survey by Business Today &

KPMG

6. Runner up for Best Bank category- Outlook Money Awards 2013

7. Fastest Growing Large Bank - Business World – PWC Survey of India‟s best banks

2013

8. Banking frontiers Finnoviti 2013 Awards for „FxConnect‟

14
 9. Ranked No 1 in the IT Biz Award - large enterprises category by Express IT

Awards

10. Innovation for 2013 for Ladies First card under „the Most Innovative Broad

Based Product Offering‟ category- IBA Innovations Award

11. Axis Bank featured in Asia's Fab50 companies for 2013 by Forbes Asia

12. Gold Shield for second year in a row for Excellence in Financial Reporting in the

Private Banks category - 2012-13 - ICAI (Institute of Chartered Accountants of

India)

13. Second Runners Up for Best Financial Inclusion Initiative amongst Private

Sector Banks- IBA Banking Technology Awards 2013

14. Second Runners Up for Best Technology Bank of the Year amongst Private

Sector Banks- IBA Banking Technology Awards 2013

15. Second Runners Up for Best Risk Management & Security Initiative amongst

Private Sector Banks- IBA Banking Technology Awards 2013

16. Second Runners Up for Best Internet Bank amongst Private Sector Banks- IBA

Banking Technology Awards 2013

2014

1. Axis Bank has been Ranked as the 'Most Trusted Private Sector Bank' second

year in a row - 'Most Trusted Brand Survey', conducted by Brand Equity,

Economic Times

2. Best Investment Manager for Real Estate in India- Euromoney Real Estate

Awards 2014

3. Best Domestic Bank in India- Asiamoney Best Banks 2014

15
4. Best Bank Award among Large Banks for IT For Business Innovation- IDRBT

Banking Technology Excellence Awards 2014

5. Axis Bank featured for the fourth time in Asia's Fab50 companies for 2014 by

Forbes Asia

6. Best Bank for Rural Reach in the Private Sector category- Dun & Bradstreet- Polaris

Financial Technology Banking Awards 2014

7. Best Retail Growth Performance in the Private Sector category- Dun &

Bradstreet-Polaris Financial Technology Banking Awards 2014

8. Fastest Growing Large Bank- BW Businessworld Magna Awards 2014

9. Axis Bank wins „Gold Award for Financial Inclusion‟ amongst the pvt. sector

banks at the Skoch Financial Inclusion & Deepening Award 2014.

10. Axis Bank wins the Best Financial Advisor (Private Bank) at the UTI MF &

CNBC TV 18 Financial Advisor Awards 2013 - 14.

11. Best Bank for Emerging Market Currencies Trading, Spot/Forward-Euromoney FX

Survey 2014

12. Best Bank for Emerging Market Options, Trading Strategies & Ideas-Euromoney

FX Survey 2014

13. Best Bank for Asian Currencies-Euromoney FX Survey 2014

16
 CHAPTER – V

OPERATIONAL DEFINITIONS

OPERATIONAL DEFINITIONS:

1. BANK RATE:

It is the rate at which the RBI lends to other commercial banks. It is the rate at which

the RBI re-discounts the bill of exchange. It acts as a signal to the economy on the

monetary policy. 2. BANK CREDIT:

The credit extended by banks to its customers.

3. NON-PERFORMING ASSETS:

NPA is a loan (whether term loan, cash credit, overdraft or bills discounted) which is in

default for more than three months. In case of such assets, the income should be shown

on receipt basis in bank‟s books and not on due basis.

4. GROSS NON-PERFORMING ASSETS:

Bank even after making provisions for the advances considered irrecoverable,

continued to hold such advances in their books is termed as GNPA.

5. NET NON-PERFORMING ASSETS:

Net non-performing assets are gross NPAs less provision made in the accounts, balance

in interest suspense account, claims received from DICGC, and amounts received in

compromise settlements.

6. CASH RESERVE RATIO (CRR):

17
Every commercial bank is required to keep a certain percentage of its demand and time

liabilities (deposits) with RBI (either as cash or book balance). RBI is empowered to

fix the CRR between 3% and 5%.

7. STATUTORY LIQUIDITY RATIO (SLR):

Commercial banks are also required to keep (in addition to CRR)liquid assets in the

shape of cash, gold or approved securities as a certain percentage of their net demand

and time liabilities(NDTL).

8. CAPITAL ADEQUACY RATIO (CAR):

Banks are required to maintain a minimum capital to risk assets ratio, which helps the

bank to survive even during sub stainable losses. (To ensure good performance, RBI

has specified minimum adequate capital for banks). 9. CAMELS:

As per the recommendation of working groups set up by RBI on „supervision of banks‟

a new approach has been adopted in the annual financial inspection of banks. It

evaluates banks –

CAPITAL ADEQUACY

ASSET QUALITY

MANAGEMENT

EARNINGS

LIQUIDITY

SYSTEM AND CONTROL.

18
10. VRS:

Voluntary retirement scheme, which is issued as a tool to remove the surplus staff in a

bank organization. (However, VRS for banks had been cleared by Ministry of Finance

in November 2002).

11. RE-CAPITALISATION:

It is a means through which the government infuses fresh additional capital in to the

weak banks to restructure their business. This is also a budgetary support for weak

banks.

12. RISK WEIGHTED ASSETS (RWA):

According to the risk involved in the assets of a bank, they are given some weightage.

RBI from time to time has been changing the weightage given to various classes of

assets.

13. RETURN ON ASSETS (RAO):

This is profit after tax as percentage of average total assets of average total assets of

current and previous year. Total assets are taken net of revaluation, advance tax, and

miscellaneous expenditure to the extent not written off.

14. RETURN ON INVESTMENTS (ROI):

This is ratio of interest and dividend income earned as percentage of average instruments

of current and previous year. Interest earned considered here excludes interest earned on

advances.

15. OPERATIONAL EXPENSES:

Expenses incurred by banks other than interest and tax.

 19
16. CAPITAL STRUCTURE:

TIER- 1, TIER- 2

Banks and FIs should have the capital structure as defined by RBI.

TIER- 1 Capital is the most permanent and readily available support against unexpected

losses.

It consists of –

1. paid up capital

2. statutory reserves

3. capital reserves

4. Other disclosed free reserves.

Less: 1. Equity investments in subsidiaries

2. Intangible assets 3.

Current and accumulated losses, If any.

Tier- 2 Capital is not permanent or, is not readily available.

It consists of-

1. Undisclosed reserves and cumulative preference shares

2. Revaluation reserves

3. general provision and loss reserves

4. Hybrid debt capital investments

5. Subordinate debt.

NOTE: Tier- 2 Capital should not be more than Tier- 1 Capital.

 20
17. DEBT RECOVERY TRIBUNAL (DRT):

It is a recovery mechanism which was set up Ministry of Finance in 1993 under a

separate act. The defaulter can apply to the DRT for the settlement of the debt suggesting

the terms on which he wants to settle. The tribunal will hear both the parties and pass

the final which will bind both the parties.

18. SETTLEMENT ADVISORY COMMITTEE (SAC):

This committee has also been set up by Ministry of Finance to suggest measures

for the quick recovery of loans and settle the accounts permanently.

19. ASSET RECONSTRUCTION COMPANY/FUND (ARC):

The principal objective of ARC is to take up the bad and doubtful assets of the

banks, which are in the recovery process, at a discounted price in the form of NPA,swap

bonds.( These banks would qualify for the SLR investments).

21
 CHAPTER – VI

NPA’S ANALYTICAL STUDY

NPAs – AN ANALYTICAL STUDY:

MEANING AND NATURE OF NPAs.

Granting of credit facilities for economic activities is the main reason of banking. A part

from raising resources through fresh deposits, borrowings and recycling of funds

received back from borrowers constitutes a major part of funding credit dispensation

activity. Non-recovery of installments as also interest on the loan portfolio negates the

effectiveness of this process of the credit cycle. Non recovery also affects the

profitability of banks besides being required to maintain more owned funds by way of

capital and creation of reserves and provisions to act as cushion for the loan losses.

Avoidance of loan losses is one of the pre occupations of the managements of banks.

While complete elimination of such losses is not possible, bank management aims to

keep the losses at a low level.

To begin with, it seems appropriate to define Non-performing advance, popularly called

“NPA”.

A Non performing advance is defined as

“ An advance where payment of interest or repayment of installment of principal ( in

case of term loans) or both remains unpaid for a period of two quarters or more. An

amount under any of the credit facilities is to be treated as „past due‟ when it is remains

unpaid for 30 days beyond due date.”

 22
As per recommendation of Narasimham committee, it has been decided that credit

facilities granted by banks will be classified in to „Performing‟ and „Non performing

asset‟.

“ NPA is a loan ( whether term loan, cash credit, overdraft, or bills discounted) which

is in default for more than three months. In case of such assets, the income should be

shown only on receipt and not shown in the banks book on a due basis.”

The ratio of Non-performing assets to advances reflects the quality of a bank‟s loan

portfolio.

A distinction is often made between „Gross NPA‟ and „NET NPA‟. NET NPA, which

is obtained by deducting from gross NPA items like interest due but not recovered, part

payment received and kept in suspense account, etc., is internationally accepted as the

more relevant indicator of financial health of the banks.

It is the level of non-performing assets which, to a grant extent, differentiates between a

good and bad bank. The subject of high NPA levels in banks has also been

frequently raised in various area.

IMPORTANCE OF NON PERFORMING ASSETS:

The one major cause for the current weakened state of banking sector is the level and

volume of NPAs. The problem has not been looked at in its proper perspective.

Descriptions such as decreased portfolio and figures running into thousands of crores

have all led to treating the problem as a major one-time aberration requiring emergency

treatment. The casual explanations – political interference, willful defaults, targeted

lending and even fraudulent behavior by banks – allowed them

23
selves to be pressurized into lowering their guard in the one area of business that is their

bread and butter of existence – risk assessment.

Lending to priority sectors or medium and small companies is likely to be the bank‟s

main activity in time to come. The bigger, established corporations would have the wide

world to choose from and to meet their requirements. The shift to medium-sized

borrowers and slightly riskier lending will form the prime activity of all banks. The

problem will then, be to ensure that such lending is justifiable on a commercial

criterion.

The high level of NPAs in Indian banking sector is the result of application of prudential

norms of accounting from 1992 onwards. The introduction of CAC is subject to the NPA

level being brought down to less than 5% from the present level of around 16%. The

government of India already initiated several steps to help banks in reducing their NPAs.

Several of these NPAs are still outstanding in the books of accounts because they are not

supported by adequate provisions.

Introduction of prudential norms on income, recognition, asset classification and

provisioning during 1992-93 and other steps initiated apart from bringing in

transparency in the loan portfolio of banking industry have significantly contributed

towards improvement of the pre-sanction appraisal and post sanction supervision which

is reflected in lowering of the levels of fresh accretion of NPAs of banks after 1992.

NATURE OF NPAs :

There is no gain saying the fact that Indian banking has been the government‟s step child

as far as economic policy is concerned. The two rounds of bank nationalization in 1969

24
and in 1980 created public sector banking behemoths which were slothful, indifferent

and anachronistic.

On the one hand a protected environment ensured that bank‟s 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.

The crucial factor that decides the performance of banks now-a-days is the recognizing

NPAs in their advances at the earliest.

NPAs are those loans given by a bank or financial institutions where the borrower

defaults or financial institution delays interest or principal payment. Banks are now

required to recognize such loans faster and then classify them as problem assets and take

measures to recover them.

Close to 17% of loan made by Indian banks are NPAs – very high compared to say 5%

in banking systems in advanced countries. The burden of NPAs is a millstone round the

necks of the banks. The NPAs are posing a major threat not only to the banking sector

but for the economy as a whole.

CAUSES FOR NON-PERFORMING ASSETS:

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

banking sector may have an adverse impact on all other sectors. The Indian banking

system, which was operating in a closed economy, now faces the challenges of an open

economy. Banks started getting concerned about non-performing assets consequent to

the introduction of prudential accounting norms.

25
NPAs reflect the performance of banks. A high level of NPAs suggests high probability

of a large number of credit defaults that affects cash flows. According to the RBI, the

gross NPAs of scheduled commercial banks rose from 24.4% in March 2006 to 24.9%

in March 2007.

Thus, increasing NPAs are a matter of concern for banks. In India, the banking sector is

still not strong on the solvency front. Having adhered to stipulated capital adequacy

norms does not suggest that a bank is strong enough. It is important to improve the

quality of assets and ensure timely recovery of loans.

IMPACT OF PRIORITY SECTOR ADVANCES OF NPAs:

There is a general perception that the prescription of 40% of net bank credit to priority

sector have led to higher level of NPAs, due to credit to these sectors becoming sticky.

The information obtained with regard to the NPAs in the priority sector advances, their

proportion to total NPAs of banks, the NPAs in non-priority sector advances, their

proportion to total NPAs of the AXIS BANK as on 31st march 2005,2006 and 2007

revealed that the proportion of NPAs in priority sector to total net NPAs were 7.08%,

2.37% and 1.28% respectively.

The proportion though lesser than NPAs in non-priority sector, reveals that the incidence

of NPAs in priority sector is much higher in view of the fact that the priority sector

advances constitute only 30% to 35% of the gross bank credit during the period.

However, gradual increase in the proportion on NPAs in non-priority sector have been

increasingly seen in borrowal accounts of industrial sector during the recent years. It is

observed that the share of priority sector NPAs of AXIS BANK,

26
 though reduced from 7.08% to 2.37%, was significantly higher than the proportion of

priority sector advances to total advances, which ranged between 30% and 35% during

three year period.

Management of non-performing assets, now a days is a critical performance area for

banks, especially in public sector banks. It is better for Indian banks to try for the

international standards in terms of efficiency, productivity, profitability, asset

recognition norms, and provisioning and capital adequacy to compete in the competitive

new economy. At present, any borrowal account not serving for either interest or

principal for at least 3 months will be called non-performing assets or NPAs.

Reserve bank of India (RBI) has been implementing stringent rules and regulations for

asset classification from the year 1991-92, in a phased manner. It includes adoption of

new method in measuring profitability, performance and evaluation of assets, to find

the financial conditions of banks.

There are several reasons for an account becoming NPA. These include :

1. Sluggish legal system

1 Long legal tangles

2 Changes that had taken place in labour laws

3 Lack of sincere effort

2. Funds borrowed for a particular purpose but not used for the said purpose

3. Project not completed in time.

4. Scarcity of raw materials, power and other resources.

5. Poor recovery of receivable.

6. Industrial recession.

7. Excess capacities created on non-economic costs.

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

instruments from capital markets. 9. Business failures.

10. Diversion of funds for expansion\modernization\setting up new

projects\helping or promoting sister concerns.

11. External factors like raw material shortage, raw material\ input price

escalation, power shortage, industrial recession, excess capacity, natural calamities like

floods, accidents.

12. Failure, non payment\overdue in other countries, externalization problems,

adverse exchange rate etc.

13. Government policies like excise, import duty changes, de-regulation, and

pollution control orders etc.

14. Wilful defaults, siphoning of funds, fraud, disputes, management disputes,

mis- appropriation etc.

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

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

CONCLUSION REGARDING CONTRIBUTORY REASONS:

The study of about 900 top NPA accounts in AXIS BANK has been tabulated from the

available information revealed that the following are the important causative

28
factors for units becoming sick\weak and constantly accounts turning NPA in the order

of prominence.
1 Diversification of funds mostly for expansion/diversification/ modernization. Taking up

of new projects, is the single most prominent reason. Besides being so, this factor also

has significant proportion of cases, when compared to other factors.

2 Internal factor such as failure of business (products), inefficient management,

inappropriate technology, product obsolescence.

3 External factors such as industrial recession, price escalation, power shortage, accidents

etc.

4 Time/cost over run during the project implementation stage leading to liquidity strain

and turning NPA in to next factor.

5 Other factors in order or prominence are government policies like changes in

import/excise duties etc, willful default, fraud, disputes etc, and lastly, deficiencies on

the part of banks delay in release of limits in settlement of payments by govt. bodies.

CAUSES FOR AN ACCOUNTS BECOMING NPA:

□CAUSES ATTRIBUTABLE TO BORROWER

1. Failure to bring in required capital

2. Too ambitious project

3. Longer gestation period

4. Unwanted expenses

5. Over trading

6. Imbalances of inventories

29
7. Lack of proper planning

8. Dependence on single customer

9. Lack of expertise
 10. Improper working capital management

11. Mismanagement

12. Diversion of funds

13. Poor quality management

14. Heavy out side borrowings

15. Poor credit collections

16. Lack of quality control

CAUSES ATTRIBUTABLE TO BANKS

1. Wrong selection of borrowers

2. Poor credit appraisal

3. Lack of supervision

4. Tough stand on issues

5. Too flexible on attitude

6. Systems overloaded

7. Non inspection of units

8. Lack of motivation

9. Delay in sanction

30
10. Lack of trained staff
11. Lack of delegation of work

12. Sudden credit squeeze by RBI

13. Lack of commitment to recovery

14. Lack of adequate technology

 15. Lukewarm effort by staff to work
16. Lack of technical personnel and zeal to work.

I. OTHER CAUSES

1. Lack of infrastructure

2. Fast changing technology

3. Unhelpful attitude of the govt.

4. Changes in consumer preferences

5. Increase in material cost

6. Govt. policies

7. Credit policies

8. Taxation laws

9. Civil disturbances
10. Political hostility

11. External pressure

12. Sluggish Legal System

31
13. Changes related to banking amendment act.

RBI should take stringent measures from time to time to govern and supervise

the operation of banks by introducing new set of norms of international standard. This

is important since success/failure of these banks are strongly linked to the performance

of the financial system. In addition, these measures help to weed out the in efficient

banks and lead to strengthening of the system. In India, the government has been
recapitalizing weaker banks in order to make them operative, however this alone will

not improve the performance of the banks.

32
MAGNITUDE OF NON-PERFORMING ASSETS IN AXIS BANK:
In India, the NPAs which are considered to be at higher levels than those in other

countries have of late, attracted the attention of public. The subject of high NPA levels

in banks has also been frequently raised in various forces.

The percentage of NPAs when compared to international standards is definitely high for

Indian banks. 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. It has also been possible to combat the

menace of NPAs by bringing down net NPAs from the level of 7.08% as on

31.03.2005 to 2.37% as on 31.03.2006. Thus, in a single year net NPAs declined by

4.71%. This compares favorably with the industry. Gross NPAs of the Bank declined to

Rs. 1,418.46 crore as on 31.03.2006 from Rs. 1,841.50 crore as on 31.03.2005 while

net NPAs reduced to Rs. 362.83 crore from Rs. 886.98 crore during the period.

Provision Coverage Ratio was brought up from 51.23% during 2005-06 to 73.75%

during 2006-07.

AXIS BANK has laid thrust on NPA recovery, specially taking advantage of

Securitization and Reconstruction of Financial Assets and Enforcement of Security Act,

2002, as also One Time Settlement Schemes formulated by RBI. In order to improve

asset quality, the Bank is pursuing improved credit appraisal techniques supported by

Credit Risk Rating, industry trend analysis etc. It has also strengthened credit-

monitoring system for improvement of asset quality and detection of early warning

signals etc.

33
EXTENT OF NPAs in PUBLIC SECTOR BANKS : 2006-07
 There has been improvement in the health of the banking sector in terms of bad loans

with the banking industry showing a reduction in gross and net NPAs as a percentage

of total advances during the year 2006. In absolute terms however, there has been a

growth in both gross as well as net NPAs. The gross and net NPAs stood at 65,850 crores

and 28,285 crores respectively.Public sector banks, which accounted for the maximum

share of NPAs, have shown an increase in the share of standard assets in total advances,

which rose to 86% in the year 2006-2007. the ratio of gross NPAs to gross advances

declined to 14%, net NPAs to net advances also showed a decline to 7.4%.The number

of banks having net NPAs between 10% - 20% in the year 2006-05 is 5%. The sector

wise analysis of NPAs of public sector banks showed that the share of NPAs of priority

sector increased to 44.5% in the year 2006. However, contrary to this phenomenon the

share of NPAs in respect to AXIS BANK declined to 4.71% and the share of NPAs of

non-priority sector to 58.5% in the same period which may be attributed to faulty

lending policies adopted by the bank.

Gross NPA/ Gross Advance

2003 2004 2005 2006

Public sector bank 12.37 11.09 9.36 7.79

Private sector 8.37 9.64 8.07 5.84

Foreign bank 6.84 5.38 5.25 4.62

34
 CHAPTER – VII

IMPACT OF NPA’s

IMPACT OF NPAs IN AXIS BANK:

This chapter focuses on examining the impact of NPAs in AXIS BANK. As the NPA

from year to year keep on increasing, It is a difficult task for the banks, especially public

sector banks to tackle the high level of NPAs.

But over the years the position of net NPAs of AXIS BANK has improved as can be

seen from the sharp decline of 7.08% to 2.37% to 1.28% in 2007. This is due to time

bound implementation of prudential accounting norms and liberal infusion of capital by

the government to meet the capital adequacy requirements besides strenuous recovery

efforts by banks. If other netting items like recoveries and pending adjustments, interest

charged to the borrower accounts but not taken to income accounts etc., for which data

are not available, are taken in to account of the net NPA position, perhaps may further

come down below to 1.5% mark.

RECOVERY OF NON-PERFORMING ASSETS:

The second phase of reforms lays thrust on improvement in the organizational efficiency

of banks. The most crucial factor being the improvement of profitability of banks in the

reduction of NPAs. This issue is closely connected with the overall stability of the

financial system and needs to be recognized as such for undertaking multi pronged

efforts. Apart from internal facts such preponderance of certain traditional industries in

the credit portfolio of certain banks, majority of which are

 35
suffering from serious inherent operational problems, natural calamities, policy and

technological changes which increase the incidence of sickness, labour problems and

non-availability of the raw materials and other such factors which are not with in the

control of banks.

While banks cannot be blamed for advances becoming non-performing due to external

factors, there is an urgent need that the banks address the problems arising out of

internal factors and this may call for organizations restructuring of banks, a change in

the approach of banks towards legal action which is generally the last step and not the

first step, no sooner the account becomes bad and a clear thrust on improving the skill

of officials for proper assessment of credit proposal, risk factor and repayment

possibilities.

The following are the figures of gross and net NPAs of AXIS BANK from the period

2005-2007.

GROSS AND NET NPAs OF AXIS BANK PERIOD (2004-2007)

End- Gross % To % To Net % To net %To total

advances
March NPAs Gross total NPAs assets
advances assets

2005 1,841.50 13.65 4.15 2,125 7.08 3.33

2006 1,418.46 8.66 3.02 450.33 2.37 3.10

2007 1,284.27 5.80 1.22 508.44 1.28 3.00

 36
Drastic measures should be taken for reducing the mounting level of NPAs in terms of

both „gross‟ and „net‟. Though there are problems in effecting recoveries and write off

and in compromise settlements for making recovery process more smooth and less time

consuming and also create other alternative channels/agencies for recovery of

debt/reduction of NPAs. Government and other authorities should devise policies

having a bearing on the industrial sector, agriculture and trade with a long term

perspective to avoid sickness in the industry and adverse impact on borrowers because

of sudden shift in the policy.

Arresting of non-performing assets is fast turning out to be a myth. Despite an

aggressive recovery drive, the AXIS BANK has failed to arrest the growth in NPAs. As

shown in the table the gross and net NPAs went on increasing, but most of the banks

have been able to pave the growth of NPAs because of the expansion in their asset

portfolio.

The fresh accretion of NPAs during the financial year 2006-05 has outpaced recovery

of bad loans. This has come to light for the first time, following the RBI‟s directive to

disclose the movement of NPAs.

EFFECTIVENESS OF LEGAL RECOVERY MEASURES IN BANKS:

In 31st march 2006 it was noticed that as many as 14,36,739 suit file cases were pending

for an amount of Rs. 21,824.92 crs. This procedure for recovery of bad debts due to

public sector banks has resulted in blocking of a significant portion of their funds in un

productive assets, the value of hich deteriorates with the passage of time.
The multiple litigation opportunities available to the borrowers for delaying the

verdicts/enforcement, courts being burdened, as they are, with heavy work load,

coupled with the tardy decision making process in the banks, rendered legal process

37
less useful. The recovery made though the legal measures/courts process indicated

above is self-revealing. Statements collected from public sector banks visited during

the study regarding the recovery process, revealed that significant portion of the suits

were pending for more than a decade. In some cases there were legal cases which were

pending for 15 to 20 years, but no progress were made in the suit.

It was observed during the perusal of filed cases in public sector banks that it took

many years, in many cases more than a decade, for the courts to settle the cases even

after passing of the orders/decree, due to the multiple litigation opportunities, eg.,

referring to appellate courts, higher courts, full benches etc, long time is taken for the

settlement of the cases. Difficulties are also faced and delay is occurring in the execution

of decree.

A part from the suit filing and legal measures the govt. and RBI has suggested other

vehicles to address the problem of NPAs recovery.

Among these are –

i. Debt recovery tribunals

ii. Debt settlement tribunals

iii. BIFR/SICA

iv. Lok adalats

v. Asset Reconstruction company

vi. Revenue recovery act

vii. Settlement advisory committee viii.One time settlement scheme

ix. And other means for the recovery of NPAs in AXIS BANK.

38
But at the end, data suggests that the working of all these „other vehicles‟ had fallen

short of the expectations by not creating a fast track system for recovery of bank dues.

In a bid to speed up recovery efforts of the banks, debt recovery tribunals (DRT) were

set up in 1993 by an act of parliament. This was welcomed by both banks and borrowers

alike. Finally, it was hoped there would be a non-confrontationist middle path where

both banks and borrowers could meet. Seven years on both sides agree that a lot still

needs to be done to make the DRTs an effective recovery tool for the Indian banking

sector.

At the end of June 2007, out of the total numbers of 11,700 cases filed and transferred

to debt recovery tribunal (DRT) involving Rs. 8,866.67 crs. Only 1045 cases have been

decided and meager amount of Rs. 178.08 crs was recovered.

WORKING GROUP:

Taking a serious note of this situation, the central board of RBI in 2007 reviewed the

effectiveness of DRTs. RBI therefore decided to set up a working group under the

chairman ship of N.V. Deshpande, former legal advisor to RBI, comprising officials

from the govt. banking divisions, some bankers and RBI officials to look into the

various issues and to suggest measures for their effective functioning.

The terms of reference of the working group were mainly –

1 To look into various issues and problems confronting the functions of DRTs and to

suggest measures to make them more effective.

2 The group was also to examine the existing statutory provisions and suggest

necessary amendments to the 1993 act with a view to improving the efficiency of

the legal machinery.

39
By august 2007 the working group submitted its final suggestions –

1 First it was noticed that once an application had been made to DRT, the branch

managers and staff of the banks did not take any interest in the proceedings

2 In many cases, bank officials themselves were unaware of even the execution of

loan documents and names of the borrowers.

3 The working group suggested that the banks and FIs should impress upon their

officers and staff to take a keen interest in the proceeding.

4 The group also said that the recovery officers should be given assistance of agencies

like police and professional debt recovery agencies and the act be amended to

provide licensing and regulating professional recovery agencies.

5 One of the most important recommendations was that not only should there be a

tribunal in every state, there should be more than one DRT in the same state if the

workload of the tribunals so justified. The presiding officers of DRTs should not

have more than 30 cases on the board on any given data and there should not be

more than 800 cases pending before it at any given point of time.

The center on march 9th ,2000 introduced the recovery of debts due to banks

(amendment ) bill 2000. the aim was to correct the legal anomalies pointed out by the

supreme court such as the stipulation that tribunals would continue to function not with

standing court stay or transfer of petitions. The amendments, first brought into force

through the ordinance from 17 th January,2000 addresses many of the other lacunae. It

empowers DRTs to attaché the property of the borrower on filing of the applications to

that effect.
 40

CHAPTER – VIII

MANAGEMENT OF NPA’s

MANAGEMENT OF NON PEFROMING ASSETS:

The new concepts of income recognition, asset classification and provisioning have

been introduced in phases with effect from 1992-93. The impact of implementation of

these prudential guidelines on the commercial banks has been so strong that out of 20

nationalized banks, one had to be merged and out of the remaining 19 banks excepting

6, all others were in red, showing net losses aggregating to a staggering level of 3573.13

crores. In march 1993 and still a higher level of Rs.4705.01 crores in march 1994.

Further, due to staggering net loss revealed by the Indian bank, the aggregate net loss

of the 19 nationalized banks even in march 1996 was rs. 1153.96 crores. However the

aggregate net profit of 19 nationalized banks, as on 31st march 1997 was Rs.1445.48

crores.

This drastic change of profitability scenario of banks in India since 2005-05 was mainly

due to recognition of income based on record of recovery rather than on accrual basis,

due to implementation of new prudential norms.

The message is now very loud and clear. If a bank wants to survive and grow, it has no

option but to actually recover the interest and principal in accordance with the terms of

sanction. If it fails to recover, the bank branch can not recognize the interest debited to
 the account as income. In case income is not received as per prudential norms, the loan

will become a NPA with all its necessary consequences.

41
The NPA effects adversely the health of the bank in several ways as follows:

I. Potential interests income is derecognized since it can not be booked as income, profit

of the bank depletes.

II. Depending up on the categorization of NPA, that is sub-standard, doubtful

(D1,D2,D3) or loss assets bank will have to make provision against such loan ranging

from 10% to 50% or even 100% in case of some of assets. Banks profitability is thus

doubly hurt. First income accruing on NPA is not recognized and secondly bank has to

make provision for it.

III. In case bank fails to upgrade the NPAs into the performing assets, it may be forced

to incur legal expenses by going to court or recovery tribunals.

IV. As a consequence profit and profitability of the bank is depleted and it may face

problem in maintaining the required capital adequacy norm of 8% or more.

V. Inadequate capital adequacy may downgrade banks rating and effect its growth and

survival.

Management of NPAs would have the following objectives: -

1. Improving the quality of NPAs to the performing status so that income of such assets

could be recognized.

2. Upgrading the status of the asset so as to reduce the provisioning requirement.

3. Cleansing the balance sheet of bank of loss assets and also of unsecured portion of

doubtuful assets, ultimately leading to improvement in the capital adequacy ratio of the

bank.

The above objectives can be achieved by adopting the following strategies as a

measure of reduction in the level out standing Non performing assets(NPAs).

42
Various steps for reducing NPAs

1 Studying the problem of NPAs – branch wise, amount wise and age wise.

2 Preparation of a loan recovery policy and strategies for reducing NPAs.

3 Creation of special recovery calls at head/regional level

4 Identifying critical branches for recovery

5 Fixing targets of recovery and draw the time bound action program

6 Selecting proper techniques for solving the problem of each NPA

7 Monitoring implementation of the time bound action plan

8 Taking corrective steps when ever found necessary while monitoring the action plan

make changes in the original plan if necessary.

STRATEGIES FOR MANAGING NPAs:

1 Very careful selection of new borrowers based on their credit worthiness and risk

analysis. Similarly, for high credit rated existing borrowers, need based credit

requirement should be promptly met.

2 Post-sanction follow-up must be done meticulously at all levels, ie., branches, regional

offices, zonal offices and head offices. All prescribed operational information system

such as annual reviews/renewal, quarterly information system. Quarterly review sheets,

 monthly stock statements, etc., must be received and meaningfully analyzed and

required follow-up action taken on time.

3 All big borrower accounts (Rs.50 lakhs and above) falling in the category of “standard

assets” must be reviewed on quarterly basis and prompt action taken if any adverse

feature is noted, with a view to ensure that they do not slip back to a lower category

3
i.e., sub standard.

4 Those borrower accounts which are at the lower-end of the list of “standard assets”

deserve special attention and the moment they show any sign of weakness to “slip-

back”, immediate pro-active steps, for lower end of list of sub-standard assets should

be taken to prevent this happening.

ACTION POINTS IN REGARD TO EXISTING NPA ACCOUNTS:

Main action points in regard to existing NPAs may be summed up as under:

I. The borrowal accounts lying at the top-end of the list of “sub standard assets” are

likely to be NPA of less than 1-year i.e., they must have slipped back to this category

only recently. All-out efforts should be made to upgrade these accounts and make them

performing (standard assets) by recovering the derecognized interest of all four quarters

of last year and at least three quarters of the current year or taking other relevant

measures which are necessary to make their performing assets.

II. Top priority should be given to upgrade progressively the quality of all NPAs to next

higher category of better-quality loan assets e.g., D3 may progressively upgraded to D2

and D1 then to “sub-standard” and ultimately to “standard” category over a period

through persuasion, nursing and rehabilitation based on major contribution from the

promoters. [Here D1 –upto 1year, D2 – 1year to 3 years, D3 –more than 3 years].

I. All the securities charged to the bank should be “re-valued” on realistic basis through

approved values and provisions should be made strictly on this basis.

II. In case upgradation on NPA appears difficult and value of security is adequate to

cover bank‟s loan and charge on the same is validly created in bank‟s favor, serious

44
 efforts at senior level should be made through a “high power” compromise committee

to enter into one-time settlement with the party in a manner that results into maximum

recovery and lease write-off in conformity with the available security level as far as

possible. This may involve some sacrifice in the form of “write-off” on the part of bank

also.

I. In case where steps (ii) and(iv) do not succeed, bank has no option but to resort to

legal action within the limitations period either by going to debt recovery tribunals (or)

judicial courts. In case of agricultural and other smaller loans banks may file recovery

certificates under state acts or approach lok adalats, if necessary for amicable

settlement.

I. Tackling NPA, is a massive and intricate job, where involvement of concerned staff

at all relevant levels is a must and should be done by forming “compromise committees”

at regional, zonal and head office levels. This is also in terms of RBI guidelines.

I. Specialized recovery branches should be set up at selected centers, keeping in view

concentration of banks NPAs and presence of DRT in that area for expeditious recovery

of bank dues.

I. Top priority should be accorded for effective follow-up of pending suits of execution

of the decrees.

II. Zones should be asked to submit a „monthly progress report‟ in a prescribed format

in regard to NPA account.

III. All the BIFR cases under rehabilitation program or under banks own nursing program

should be closely monitored so as to ensure that the rehabilitation is on right course.

PREVENTING OCCURANCE OF NEW NPAs:

46
 Managers of rural and semi-urban branches generally sanction these loans. In the

changed context of new prudential norms and emphasis on quality lending and

profitability, managers should make it amply clear to quality lending and profitability,

managers should make it amply clear to potential borrowers that banks resources are

scarce and these are meant to finance viable ventures so that these are repaid on time

and relent to other needy borrowers for improving the economic lot of maximum

number of households.

Hence, selection of right borrowers, viable economic activity, adequate finance,

and timely disbursement, correct endues of funds and timely recovery of loans is

absolutely necessary preconditions for preventing or minimizing the incidence of new

NPAs. Besides functioning as bankers, they have to work as a friend, philosopher and

guide of borrowers, develop mutual trust so as to maximize recovery in case of new

loans.

ACTION PLAN IN REGARD TO EXISTING NPAs:

These are as follows:

1 Frequent recovery camps should be organized on periodicities synchronizing with

harvesting seasons in case of agricultural loans and at monthly/bimonthly intervals in

other cases, so as to recover the bank dues from the sale proceeds on due dates.

2 Cash recovery of some minimum installments (25%) of smaller loans has now become

a pre-condition for lodging claims with the DI and CGC. Hence, branches must build

genuine pressure on borrowers to repay the installments whenever due, without

exception. For this purpose even clerical and subordinate staff member may also be

involved for effecting recovery through personnel contacts. To motivate the staff;

managers may issue appreciation letters to good performers.

47
3 Disposal of recovery certificates (RCs) cases, whenever pending in large numbers

should be taken up suitably by the regional/zonal managers with the district magistrate,

who is laso chairman of the district consultative committee (DCC).

4 Suitable colored printed post card in local languages may be supplied for issuing notices

of recovery camps and such camps may be attended by regional managers or other

senior officers of the regional office.

5 Bank may also try recovery peons (in bank uniforms) who may visit borrowers before

9 am or after 5pm for meeting the borrowers for recovery of bank dues.

6 “No default certificate” or “Best borrower certificate” should be given to such

borrowers in a borrowers meeting specially organized for the purpose, in the presence

of gram pradhan. This is likely to encourage others to repay bank dues in time and create

healthy recovery climate in the area.

7 Where recovery is not forthcoming despite due efforts, compromise proposals should

be mobilized by concerned region committee and sent to zonal officer for necessary

action.

8 Head office and zonal offices should also take advantage of lok adalats. Where

available, for striking instant compromise judgements in the presence of both parties.

But ,this will require necessary home work by the zonal heads in advance so that large

number of cases are mobilized and concurrence taken from competent authority, before

attending the pre-determined dates of lok adalats.

9 In all those cases where recovery chances are bleak and there is neither any operation

in the account nor any recovery has been effected during the last 2-3 years, but the cases

are eligible for lodgment in terms of latest D1 and CGC guidelines, branches should be

advised to prepare all such cases correctly and send to nodal center of the bank for

prompt lodgement of claims with D1 and CGC, Mumbai. Subsequently, there should
48
 be close effective follow-up by the bank with DI and CGC, Mumbai for prompt

settlement.

10 After settlement of those cases, the eligible portion can be written-off by the competent

authority as per banks rule so as to reduce the amount of “loss assets” from the books

of the bank.

11 In cases where adequate security is available, activity is continuing, but the repayment

is not coming, but bank may opt for legal action, after giving due notice to borrowers.

12 There should be close follow-up with banks lawyers having large number of un

disposed cases and their selection or future assignment of cases to them should be based

on merit and performances.

One of the main reasons of low profitability of AXIS BANK is the incidence of

very high non-performing assets. But the level of NPA varies significantly among

different banks. (Range being as wide as 4% in case of best bank to more than 40% in

case of worst bank).

Significantly, variation in the relative sizes of NPA is not related to the size of the

bank in terms of business or branch network. Variation exist between banks of

comparable size, whether small or large, suggesting that organizational culture and

quality of management have played a crucial role in determining the quality of loan

assets or banks over all performance.

Thus, there is need to improve the quality of leadership and management at

various levels in the mean time, improvement in recovery performance must be

49
accorded top priority in banks corporate plans. The maintenance of recovery discipline

requires that books vigorously pursue recovery even for advances that have been

provisioned against.

“ Loan is not a charity and it has to be repaid on the due date come what may.”

Should be the slogan of a good banker.

FLOW CHART FOR ACTION PLAN

Frequent recovery camps should be organized at monthly/bimonthly intervals

Cash recovery of some minimum installments

Disposal of recovery certificates should be taken up

Issuing notices of recovery camps

Recovery peons may visit borrowers

Default certificate/ best borrower certificate should be given

Compromise proposals should be mobilized

49
 ↓

Head office and zonal office take advantage of lok adalats

Lodgment of claims with DT and CGC

After settlement reduce the amount of loss assets from bank books

Opt for legal action

Close follow up with banks lawyers having large number of un disposed cases

COMMITTEES AND RECOMMENDATIONS

I. NARASIMHAM COMMITTEE REPORT [I/II].

The government of India has appointed a high level committee under the chairmanship

of Mr. M. Narasimham, the former chairman of SBI, to examin all aspects relating to the

structure, organization, functions and procedures of the Indian financial system. The

committee was appointed on August 14, 1991 which submitted its report on 30th November

1991. Major recommendations of the committee relating to NPAs :

1. SLR to be reduced from 38.5% to 25% over next five years and CRR to be brought down

to 3%. 2. Directed credit-loans to priority sector, different interest schemes, IRDP, IREP

etc.
 50
should be phased out the committee was of the view that easy availability of credit was

more important than subsidized credit to the rural poor.

3. Not more than 10% of the aggregate bank credit should be earmarked for the

redefined priority sector.

4. Capital adequacy requirement (CAR) should take into account market risks in

addition to credit risk.

5. Minimum capital to risk assets ratio be increased from 8% to 10% by 2004 in a phased

manner.

6. An asset be classified as doubtful if it is in the substandard category for 18 months in

the first instances and eventually for 12 months and loss if it has been identified but not

written off. These norms should be regarded as minimum and brought into force in a

phased manner.

7. For evaluating the quality of asset portfolio, advances covered by government

guarantees, which have turned sticky, be treated as NPAs.

8. Asset reconstruction fund (ARF) should be constituted to take over the NPAs of public

sector banks at a discount.

9. For banks with a high NPA portfolio, two alternative approaches could be adopted.

One approach can be that all loan assets in the doubtful and loss categories, should be

identified and their realizable value should be determined. These assets could be

transferred to asset Reconstruction Company which would issue NPA swap bonds.

10. Introduction of general provision of 1% on standard assets in a phased manner be

considered by RBI. 11. An incentive to make specific provision, they may be made tax

deductible.
51
12. Adoption of income recognition of asset classification and provisioning norms to be

compulsory. 13. Special tribunals should be set up for speedy recovery of the bank loan

dues.

14. There should be an independent loan review mechanism especially for large borrowal

accounts and systems to identify potential NPAs.

15. The minimum share of government holding/RBI holding in the equity of nationalized banks

should be brought down to 33%.

II. VERMA PANNEL REPORT

The committee which was headed by Mr. M.S. Verma, Former chairman of SBI,

identified the specific ailments prevailing in the banking sector and come out with a

panacea prescription.

The following are the recommendations of Verma panel :

The panel identified 3 weak PSBs and recommended a conditional bail out

package of 5000crs., out of which 3000crs., will be used for the recapitalization of weak

banks.

The most significant suggestion, however is the formation of a private sector asset

management company presided over by some of the most talented professionals of the

business. It will do away with the bureaucratic hurdles like delayed decision making in

disposing off the assets grabbed by asset reconstruction fund.

54
 The report also said about setting up of financial reconstruction authority of

statutory status will mark the beginning of a serious effort to bring back the banking

sector into a healthy state.

RBI MEASURES TO CURB NPAs:

In view of the time factor involved in recovering NPAs by legal means, the RBI

has come out with simplified non-discretionary guidelines for compromise settlement

of bad debts upto 5 crs for uniform implementation by them.

NON – DISCRETIONARY AND NON – DISCRIMINATORY NORMS:

The guidelines issued by RBI covers all outstanding, doubtful and loss assets of

Rs.5 crores or less as on March 31st , 1997 and which had turned into doubtful or loss

assets subsequently also would be covered, according to a statement issued by the IBA.

The RBI said these guidelines, which would be operative up to 31st March, 2003, would

cover NPAs relating to all sectors including small sector. Cases pending in courts/debt

recovery tribunals/BIFR are covered under the guidelines subject to the consent decree

being obtained, the apex bank averred and added cases of willful default or malfeasance

would not be covered. The amount of settlement arrived at should preferably be paid in

one lump sum. If not, at least 25% down payment and balance in settlements with in a

period of one year together with interest at the existing PLR from the date of settlement

upto the date of final payment.

RBI EASES NORMS ON NPA FOR AXIS BANK: “ONE TIME

SETTLEMENT”:
 To achieve maximum realization of public sector banks the RBI simplified the

guidelines for the recovery of NPAs.

The revised guidelines will cover NPAs relating to all sectors including the small sector,

but will not cover cases of willful default, fraud and malfeasance. The

53
banks should give notice to the defaulting borrowers to avail of the opportunity for

“one-time settlement” of outstanding dues.

Under the new guidelines, the minimum amount that should be recovered under

compromise settlement of NPAs classified as doubtful (or) loss, which would be 100%

of the outstanding balance in the account. This would be as on the date of transfer to the

protested bills account or the amount outstanding as on the date on which the account

was categorized as doubtful NPAs whichever happened earlier.

The guidelines have been circulated to all public sector banks. The RBI move

comes in the wake of complaints by such banks that the guidelines are inflexible of

retarded the progress in the recovery of NPAs.

56
 CHAPTER – IX

FINDINGS AND OBSERVATIONS

FINDINGS AND OBSERVATIONS:

1. The % of NPAs of private sector banks is less as compared to the public sector banks like

AXIS BANK.

2. The % of net NPAs to net advances of AXIS BANK is less than the % of gross NPAs to total

advances (More provisioning).

3. “Gross” &”Net” terms exist only in India.

4. AXIS BANK NPAs are increasing when compared to that of other nationalized banks.

5. Net NPAs of AXIS BANK are likely to reduce over next 3 years than the Gross

NPAs.

6. Overall NPAs in AXIS BANK as a % of advances are in decreasing trend, though the

NPAs in the absolute terms are increasing.

7. Due to compulsory lending to the priority sector, NPAs are more in AXIS BANK.

8. The recovery of non performing assets is slow due to the sluggish legal system prevailing in

India.

9. Recognition of an account becoming an NPA is not done in time.

10. No proper credit appraisal.

11. Due to high level of NPAs in AXIS BANK, operationg profits kept on decreasing.

12. Due to high provisioning, the ROA in AXIS BANK was in negative terms.

13. Even after providing Re-Capitalization facility by the government to the weak banks, not

much change has been observed in the performance of the banks.

55
CHAPTER – X

SUGGESTIONS AND RECOMMENDATIONS

SUGGESTIONS AND RECOMMENDATIONS:

Tackling the high level NPAs is certainly a major concern for the Indian banking industry.

Raising level of NPAs is becoming a concern for the banks.

The report on NPAs in AXIS BANK conveys its concern about management of NPAs in

the Indian banking system.

The suggestion and recommendations are listed below :

1. AXIS BANK must employ/adopt scientific approach for appraisal before the loan is

distributed and monitor it closely in real time.

2. It must provide need based micro-credit for needy entrepreneur with good proposals and

implement a system for selecting a good borrower.

58
3. It must build a credit information bureau to restrict the errant borrower, from switching banks.

4. Banks should always follow basic lending norms and take quick credit decisions.

5. It must break up recovery to branch level network.

6. It must set up separate NPA cell at each branch level.

7. Take every NPA case as a separate issue and analyse the need for future findings from an

economic point.

8. Opt for out of court settlements.

9. Remove the „Gross‟ and „Net‟ terms while distinguishing the NPAs.

10. Government should set up asset reconstruction company as proposed by the Narasimham

committee, to take over the bad loans of commercial banks and salvage what they can.
11. Banks should develop advanced skills in risk management and evaluation of various

credit risks.

12. The regulatory authority should strengthen the debt recovery tribunal by appointing

more judge and adequate number of recovery officers to dispose off the case.

13. Periodically a list of defaulters may be published to enable the banks to take necessary

action against the defaulters.

14. Amend the relevant laws like CPC, Limitations act, Stamp act, Evidence act etc, to

ensure that the bank default cases are dealt with an altogether different basis with limited

number of adjournments.

15. RBI could lower the bank‟s exposure to individual borrowers, to bring economic

prosperity equally around the country.

16. The government should see to that the strong bank should not be merged with the weak

bank, as it may effect the performance of the strong bank.

17. The banks should cut down the operational expenses to bring bank the back on the track

of profitability. VRS is one such measure to reduce the expenses.

18. Government should not provide any re-capitalization facility from here after, as infusion

of new capital may not restructure or lift the banks performance; hence the weak banks

should be closed down.

 ANNEXURES

FINDINGS AND DISCUSSIONS

 It can be observed from the Table 3, that there has been a steep rise in the NPAs of

Public Sector Banks since 2014. However, it wasn‟t until 2016, that banks started

running into losses as till 2015, even with the rise in NPAs banks still managed to be

profitable.

 There has been increase in the NPAs since 2014, which suggests that banks lacked

transparency and weren‟t showing the actual picture of the status of the loans that

had gone bad. This could beattributed to the fact that the loans were already defaulted

by the borrowers and were under the NPA category but they weren‟t acknowledged

by the banks till after 2014.

 From the Table 2. We can perceive that the Net Profits of the Public Sector Banks

have dwindled in the past 5 years due to heavy provisions for Non- Performing

Assets and other contingencies.

 As, it can be seen, that there is a moderately negative relationship between the Net

profit and GNPAs of all the 12 Public Sector Banks, meaning a rise in one variable

leads to a decline the other.

 There is a strong negative relationship between GNPAs and the Net Profits of the

banks, with the profits steadily decreasing and the GNPAs rising due to poor

appraisal of pre and post disbursement of loan, aggressive lending practices, wilful

61
 defaults, loan frauds and corruptions, poor follow-up by the banks and economic

slowdown.

 However, Net Profits of some public sector banks have turned around in 2019-20

after continuous losses in previous years despite COVID-19, owing to the relief

58
provided by RBI with respect to moratorium period, asset classification and

ploughing back of dividends which shored up their performance.

 It can also be observed that Indian Overseas Bank had managed to significantly

decrease their NPA burden from Rs. 33,398.12 cr to Rs. 19,912.70 cr due to capital

infusion of Rs. 4,360 cr by the government.

 CONCLUSION

This study attempted an empirical analysis of the non- performing loans of public sector

banks in India and investigated the response of NPLs to terms of credit, bank size and

macroeconomic condition. The empirical analysis suggested that terms of credit

variables have significant effect on the banks‟ non- performing loans in the presence of

bank size and macroeconomic shocks. Moreover, alternative measures of bank size

could give rise to differential impact on bank‟s non-performing loans. For instance, the

bank size measured in terms of assets, has negative impact on NPAs, while the

measureof bank size in terms of capital has positive and significant effect on gross NPAs

but negligible effect on net NPAs. Thus, appropriate measure of size assumes

importance. The empirical analysis suggests that asset measure of size could yield

meaningful results relating to borrowers‟ loan response.

63
The changes in the cost of credit in terms of expectation of higherinterest rate induce

increase in NPAs. On the other hand, factors like horizon of maturity of credit, better

credit culture, and favorable macroeconomic and business conditions lead to lowering

of NPAs.

The results confirm the viewpoint that banks exposure to priority sector lending could

not be more important than credit culture and terms of lending variables. The empirical

analysis suggests that positive deviation of an individual bank‟s credit- deposit ratio

(CDR), from that of industry‟s average could have favourable effect on reducing NPAs.

Banks could exploit competitive portfolio advantage within a range of about 8-13 per

cent difference between their own CDR and that of the industry.

60
The robustness of results was tested by excluding a major bankfrom the sample and re-

estimating parameters of the model. As a result, the sign condition of parameters does

not alter for any explanatory variable, thereby, reiterating the stability of the empirical

model.
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 REFERENCES

News papers

Bank magazines

Internet

Annual reports of Axis Bank