IMPACT OF NON-PERFORMING ASSETS ON BANKS:

A STUDY ON ICICI BANK AND BANK OF BARODA

BACKGROUND OF THE STUDY

The banking sector plays an important role in the economic growth of a country. Through its
intermediary activities, the banking sector fosters the production, distribution, exchange and
consumption processes in the economic system. It stimulates the flow of funds in the economy
and fuels economic growth. The efficiency of banking system, thus determines the pace
ofdevelopment of the economy. Similar to any other business enterprise, the efficiency of a bank
is evaluated based on profitability and quality of assets it possess. But unlike othercommercial
ventures, Indian banking has social commitments integrated into its operations. The banking
system in India hashad to serve the goals of economic policies enunciated in successive five year
development plan, particularly concerning equitable income distribution,balanced regional
economic growth and the reduction and elimination of privatesector monopolies in trade and
industry. In the post-independence period, the banking sector has played a catalyst and
commendable role in supporting thegovernment to achieve its social and economic objectives
through depositmobilization, mass branch networking, priority sector lending,
employmentgeneration etc. Achieving such societal objectives resulted in imposingextensive
regulations by the government which in turn hampered theproductivity of Indian banking during
the pre-liberalization era.An evaluation of the Indian banking industry during the pre-
liberalization era revealed the presence of several shortcomings which crept into thefinancial
system over the years notably reduced productivity, deterioratedasset quality and efficiency and
increased cost structure due to technologicalbackwardness. Among these deficiencies, policy
makers identified the erosionof asset quality as the most significant obstacle for the development
of a soundand efficient banking sector. In fact, the various practices that were followedduring
pre-liberalization period that includes asset classification using healthcode system, accrual basis
used to book interest in bank accounts etc.,concealed the gravity of asset quality issues of the
banking sector.
The assetquality is a prime concern and impacts various performance indicators, i.e.,profitability,
intermediation costs, liquidity, credibility, income generatingcapacity and overall functioning of
banks. The reduction in asset qualityresults in accumulation of Non-Performing Assets
(NPAs).The intermediation process is the principal function of a commercial bank. Since it
involves counterparty risk; risk is inherent in banking. A banker should expect that all loan
portfolios will not fetch returns/earnings in the normal course.
The loans/advances is an important source of income for thebanks. The strength and soundness
of the banking system primarily depend on the quality and performance of the loan portfolio, i.e.
the fulfillment ofobligations by borrowers promptly.Non-performing assets indicate an advance
for which interest or repaymentof principal or both remains overdue for a period of 90 days or
more. Anadvance/loan is treated as non-performing when it fails to satisfy its
repaymentobligations. Thus, non-performing assets are loans in jeopardy of default. Thelevel of
NPAs isan indicator of the efficiency of bankers credit risk managementand efficiency of
resource allocation to productive sectors. The Basel Committee on Banking Supervision defines
credit risk as potential default of a borrower tomeet the obligation in accordance with the agreed
terms (BIS, 2005). Highernon-performing assets resulted in many bank failures (Nayak et al,
2010). NPAsrepresent a real economic cost in modern days as they reflect the application
ofscarce capital and credit funds to unproductive use. It also affects the lendingcapacity since
funds are blocked and repayment is disturbed and has also resultedin additional cost for
intermediation and realizing the NPAs.

The banking sector reforms in India during the post-liberalization periodmostly focused on
improving the efficiency of the banking sector byincorporating prudential norms for income
recognition, asset classification andprovisioning and through integrating international standards.
The alarminglevel of NPAs is recognized as one of the major explanations for
implementingstructural changes and reform measures in the banking sector during thisperiod.
Keeping in view the inefficiencies in the banking sector and thepresence of non-performing
assets, the Committee on Financial System(Narasimham Committee I) was set up. Few
observations of NarasimhamCommittee I on the banking sector and its inefficiencies include:
 Gross profits before provisions were no more than 1.10% ofworking funds indicating low
profitability of banks.
Net profit of public sector banks (PSBs) as a percentage of totalassets show as low as
0.17%.
Average operating costs of banks as a percentage of assets wasabout 2.3% in India, while
it was as low as 1.10% in China, 1.60%in Malaysia, 1.90% in Thailand, 1.00% Japan and
2.10% inEuropean countries.
The Cash Reserve Ratio (CRR) stood at its legal upper limit of15% and SLR at 38.50%.
The Credit to Deposit Ratio (CDR) shows 62.54% and Investment-Deposit Ratio of 38%.
Huge amount of NPA without any clear cut regulation.
40% of bank credit channelize to priority sector at concessional rate.
Restriction on entry and expansion of domestic, private and foreignbanks.
Non-interest income as percentage of total income shows 9.25%
High intermediation cost as 2.61%
The Capital adequacy ratio was 1.5% in India as compared to 4% inKorea and Pakistan,
and 4% to 6% in Taiwan, Thailand and Singapore.

Banking reforms were initiated to upgrade the operating standards,health and financial soundness
of banks to internationally accepted levels in an increasingly globalized market (Pathak, 2009).
The reforms have been undertakengradually with mutual consent and wider debate amongst the
participants andin a sequential pattern that is reinforcing to the overall economy (Badola
andVerma, 2006). These reform measures substantiate the views that highlight thekey role in
economic development that could be played by a banking systemfree from the types of controls
on interest rates and quantities that wereprevalent at the time (Barajas et al, 2012).
SCOPE OF THE STUDY

The study focuses on public sector banks (PSBs) even though for comparative purpose,
all bank groups are considered. The variables selected that include NPA indicators, bank
performance indicators and macroeconomic indicators are based on previous studies on
NPA conducted in India and international context.

The bank groups in India include (a) Public sector banks, (b) Private sector banks and, (c)
Foreign banks. Public sector banks are further classified into (a) SBI & Associates, and
(b) Nationalized banks.

To evaluate the trend in the movement of NPA variables, the study period is divided into
pre financial crisis period and post financial crisis period. The period from 2000-01 to
2006-07 is considered as pre financial crisis period, while the period from 2007-08 to
2011-12 is considered as post-financial crisis period. Such a classification is undertaken
based on expert feedback on the financial crisis that erupted globally during 2007.
12
In order to substantiate secondary data analysis and to analyze the various facets of non-
performing assets, primary data were collected from officers working with State Bank of
Travancore. The bank is selected since it is a major associate of the State Bank of India.
The public sector banks, which comprise of the State Bank of India and nationalized
banks, hold more than 75% of total advances and loans of all scheduled commercial
banks in India.
OBJECTIVE OF STUDY

To analysis the impact of non-performing assets on profitability of public and private

sector banks at aggregate & sectoral level.
To evaluate the impact of NPA on profitability with other variables.
To examine the impact of NPA on efficiency & productivity.
To understand how NPA is managed in ICICI & Bank of Baroda.
To understand the various factors causing mounting NPAs to bank.
To understand the impact of NPAs in Indian economy.
To analyze the major causes of NPA & their significance on the generation of NPA.
To study the impact of NPA on stakeholders value.
To suggest measures for the efficient & effective management of NPA.
INTRODUCTION

Its a known fact that the banks and financial institutions in India face the problem of swelling
non-performing assets (NPAs) and the issue is becoming more and more unmanageable. In
order to bring the situation under control, some steps have been taken recently. The
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 was passed by Parliament, which is an important step towards elimination or reduction of
NPAs.

MEANING 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 facilities granted by bank to a borrower become 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 facility.

NPA IN INDIAN BANKING SYSTEM:

NPA surfaced suddenly in the Indian banking scenario, around the Eighties, in the midst of
turbulent structural changes overtaking the international banking institutions, and when the
global financial markets were undergoing sweeping changes. In fact after it had emerged the
problem of NPA kept hidden and gradually swelling unnoticed and unperceived, in the maze of
defective accounting standards that still continued with Indian Banks up to the Nineties and
opaque Balance sheets.

In a dynamic world, it is true that new ideas and new concepts that emerge through such changes
caused by social evolution bring beneficial effects, but only after levying a heavy initial toll. The
process of quickly integrating new innovation in the existing set-up leads to an immediate
disorder and unsettled conditions. People are not accustomed to the new models. These new
formations take time to configure, and work smoothly. The old is cast away and the new is found
difficult to adjust.

Marginal and sub-marginal operators are swept away by these convulsions. Banks being
sensitive entrenched deeply in traditional beliefs and conventions were unable to adjust
themselves to the changes. They suffered easy victims to this upheaval in the initial phase.

Consequently banks underwent thus transition-syndrome and languished under distress and
banking crises surfaced in quick succession one following the other in many countries. But when
the banking industry in the global sphere came out of this metamorphosis to re-adjust to the new

order, they emerged revitalized and as more vibrant and robust units. Deregulation in developed
capitalist countries particularly in Europe, witnessed a remarkable innovative growth, credit
growth, growth intermediation instruments as well as in network.

During all these years the Indian Banking, whose environment was insulated from the global
context and was denominated by State controls of directed credit delivery, regulated interest
rates, and investment structure did not participate in this vibrant banking revolution. Suffering
the dearth of innovation spirit and choking under undue regimentation, Indian banking was
lacking objective and prudential systems of business leading from early stagnation to eventual
degeneration and reduced or negative profitability. Continued political interference, the absence
of competition and total lack of scientific decision-making, led to consequences just the opposite
of what was happening in the western countries. Imperfect accounting standards and opaque
balance sheets served as tools for hiding the shortcomings and failing to reveal the progressive
deterioration and structural weakness of the countrys banking institutions to public view. This
enabled the nationalized banks to continue to flourish in a deceptive manifestation and false
glitter, though stay symptoms of the brewing ailment were discemable here and there.

The government hastily introduced the first phase of reforms in the financial and banking sectors
after the economic crisis of 1991. This was an effort to quickly resurrect the health of the
banking system and bridge the gap between India and global banking development. Indian
Banking, in particular PSBs suddenly woke up to the realities of the situation and to face the
burden of the surfeit of their woes. Simultaneously major revolutionary transitions were taking
place in other sectors of the economy on account the ongoing economic reforms intended
towards freeing the Indian economy from government controls and linking it to market driven
forces for a quick integration with the global economy. Import restrictions were gradually freed.
Tariffs were brought down and quantitative controls were removed. The Indian market was
opened for free competition to the global players. The new economic policy in turn
revolutionalised the environment of the Indian industry and business and put them to similar
problems of new mixture of opportunities and challenges. As a result we witness today a
scenario of banking, trade and industry in India, all undergoing the convulsions of total
reformation battling to kick off the decadence of the past and to gain a new strength and vigor for
effective links with the global economy. Many are still languishing unable to get released from
the old set-up, while a few progressive corporate are making a niche for themselves in the global
context.

During this decade the reforms have covered almost every segment of the financial sector. In
particular, it is the banking sector, which experienced major reforms. The reforms have taken the
Indian banking sector far away from the days of nationalization. Increase in the number of banks
due to the entry of new private and foreign banks; increase in the transparency of the banks
balance sheets through the introduction of prudential norms and norms of disclosure; increase in
the role of the market forces due to the deregulated interest rates, together with rapid
computerization and application of the benefits of information technology to banking operations
have all significantly affected the operational environment of the Indian banking sector.
In the background of these complex changes when the problem of NPA was belatedly recognized
for the first time at its peak velocity during 1992-93, there was resultant chaos and confusion. As
the problem in large magnitude erupted suddenly banks were unable to analyze and make a
realistic or complete assessment of the surmounting situation. It was not realized that the root of
the problem of NPA was centered elsewhere in multiple layers, as much outside the banking
system, more particularly in the transient economy of the country, as within. Banking is not a
compartmentalized and isolated sector delinked from the rest of the economy. As happened
elsewhere in the world, a distressed national economy shifts a part of its negative results to the
banking industry. In short, banks are made ultimately to finance the losses incurred by
constituent industries and businesses. The unprepared mess and structural weakness of our
banking system to act to the emerging scenario and de-risk itself to the challenges thrown by the
new order, trying to switch over globalization were only aggravating the crisis. Partial
perceptions and hasty judgments led to a policy of ad-hoc-ism, which characterized the approach
of the authorities during the last two-decades towards finding solutions to banking ailments and
dismantling recovery impediments. Continuous concern was expressed. Repeated correctional
efforts were executed, but positive results were evading. The problem was defying a solution.

The threat of NPA was being surveyed and summarized by RBI and Government of India from a
remote perception looking at a birds-eye-view on the banking industry as a whole delinked from
the rest of the economy. RBI looks at the banking industrys average on a macro basis,
consolidating and tabulating the data submitted by different institutions. It has collected
extensive statistics about NPA in different financial sectors like commercial banks, financial
institutions, urban cooperatives, NBFC etc. But still is a distant view of one outside the system
and not the felt view of a suffering participant. Individual banks inherit different cultures and
they finance diverse sectors of the economy that do not possess identical attributes. There are
distinct diversities as among the 29 public sector banks themselves, between different
geographical regions and between different types of customers using bank credit. There are three
weak nationalized banks that have been identified. But there are also correspondingly two better
performing banks like Corporation and OBC. There are also banks that have successfully
contained NPA and brought it to single digit like Syndicate (Gross NPA 7.87%) and Andhra
(Gross NPA 6.13%). The scenario is not so simple to be generalized for the industry as a whole
to prescribe a readymade package of a common solution for all banks and for all times.
Similarly NPA concerns of individual Banks summarized as a whole and expressed as an
average for the entire bank cannot convey a dependable picture. It is being statistically stated that
bank X or Y has 12% gross NPA. But if we look down further within that Bank there are a few
pockets possessing bulk segments of NPA ranging 50% to 70% gross, which should
consequently convey that there should also be several other segments with 3 to 5% or even NIL
% NPA, averaging the banks whole performance to 12%. Much criticism is made about the
obligation of Nationalized Banks to extend priority sector advances. But banks have neither fared
better in non-priority sector. The comparative performance under priority and non-priority is
only a difference of degree and not that of kind.

The assessment of the mix-of contributing factors includes:

1. Human factors (those pertaining to the bankers and the credit customers),
2. Environmental imbalances in the economy on account of wholesale changes and also
3. Inherited problems of Indian banking and industry.

Variable skill, efficiency and level integrity prevailing in different branches and in different
banks accounts for the sweeping disparities between inter-bank and intra-bank performance.
We may add that while the core or base-level NPA in the industry is due to common
contributory causes, the inter-se variations are on account of the structural and operational
disparities. The heavy concentrated prevalence of NPA is definitely due to human factors
contributing to the same.

No bank appears to have conducted studies involving a cross-section of its operating field
staff, including the audit and inspection functionaries for a candid and comprehensive
introspection based on a survey of the variables of NPA burden under different categories of
sectoral credit, different regions and in individual Branches categorized as with high, medium
and low incidence of NPA. We do not hear the voice of the operating personnel in these
banks candidly expressed and explaining their failures. Ex-bankers, i.e. the professional
bankers who have retired from service, but possess a depth of inside knowledge do not out-
pour candidly their views. After three decades of nationalized banking, we must have some
hundreds of retired Bank executives in the country, who can boldly and independently, but
objectively voice their views. Everyone is satisfied in blaming the others. Bank executives
hold willful defaulters responsible for all the plague. Industry and business blames the
government policies.

Important fact-revealing information for each NPA account is the gap period between the
date, when the advance was originally made and the date of its becoming NPA. If the gap is
long, it is the case of a sunset industry. Things were all right earlier, but economic variance in
trade cycles or market sentiments have created the NPA. Credit customers who are in NPA
today, but for years were earlier rated as good performers and creditworthy clients ranging
within the top 50 or 100. Significant part of the NPA is on account of clout banking or
willfully given bad loans. Infant mortality in credit is solely on account of human factors and
absence of human integrity.

Credit to different sectors given by the PSBs in fact represents different products. Advance
to weaker sections below Rs.25000/- represents the actual social banking. NPA in this sector
forms 8 to 10% of the gross amount. Advance to agriculture, SSI and big industries each calls
for different strategies in terms of credit assessment, credit delivery, project implementation,
and post advance supervision. NPA in different sector is not caused by the same resultant
factors. Containing quantum of NPA is therefore to be programmed by a sector-wise strategy
involving a role of the actively engaged participants who can tell where the boot pinches in
each case. Business and industry has equal responsibility to accept accountability for
containment of NPA. Many of the present defaulters were once trusted and valued customers
of the banks. Why have they become unreliable now, or have they?

The credit portfolio of a nationalized bank also included a number of low-risk and risk-free
segments, which cannot create NPA. Small personal loans against banks own deposits and
other tangible and easily marketable securities pledged to the bank and held in its custody are
of this category. Such small loans are universally given in almost all the branches and hence
the aggregate constitutes a significant figure. Then there is food credit given to FCI for food
procurement and similar credits given to major public Utilities and Public Sector
Undertakings of the Central Government. It is only the residual fragments of Bank credit that
are exposed to credit failures and reasons for NPA can be ascertained by scrutinizing this
segment.
Secondly NPA is not a dilemma facing exclusively the Bankers. It is in fact an all pervasive
national scourge swaying the entire Indian economy. NPA is a sore throat of the Indian
economy as a whole. The banks are only the ultimate victims, where life cycle of the virus is
terminated.

Now, how does the Government suffer? What about the recurring loss of revenue by way of
taxes, excise to the government on account of closure of several lakhs of erstwhile vibrant
industrial units and inefficient usage of costly industrial infrastructure erected with
considerable investment by the nation? As per statistics collected three years back there are
over two and half million small industrial units representing over 90 percent of the total
number of industrial units. A majority of the industrial work force finds employment here and
the sectors contribution to industrial output is substantial and is estimated at over 35 percent
while its share of exports is also valued to be around 40 percent. Out of the 2.5 million, about
10% of the small industries are reported to be sick involving a bank credit outstanding around
Rs.5000 to 6000 crores, at that period. It may be even more now. These closed units represent
some thousands of displaced workers Previously enjoying gainful employment. Each closed
unit whether large, medium or small occupies costly developed industrial land. Several items
of machinery form security for the NPA accounts should either be lying idle or junking out.
In other words, large value of land, machinery and money are locked up in industrial
sickness. These are the assets created that have turned unproductive and these represent the
real physical NPA, which indirectly are reflected in the financial statements of nationalized
banks, as the ultimate financiers of these assets. In the final analysis it represents instability in
industry. NPA represents the owes of the credit recipients, in turn transferred and parked with
the banks.

Recognizing NPA as a sore throat of the Indian economy, the field level participants should
first address themselves to find the solution. Why not representatives of industries and
commerce and that of the Indian Banks Association come together and candidly analyze and
find an everlasting solution heralding the real spirit of deregulation and decentralization of
management in banking sector, and accepting self-discipline and self-reliance? What are the
deficiencies in credit delivery that leads to its misuse, abuse or loss? How to check misuse
and abuse at source? How to deal with erring Corporate? In short, the functional staff of the
 Bank along with the representatives of business and industry has to accept a candid
introspection and arrive at a code of discipline in any final solution. And preventive action to
be successful should start from the credit-recipient level and then extend to the bankers. RBI
and Government of India can positively facilities the process by providing enabling
measures. Do not try to set right industry and banks, but help industry and banks to set right
themselves. The new tool of deregulated approach has to be accepted in solving NPA.

Why assets become NPA?

A several factors is responsible forever increasing size of NPAs in PSBs. The Indianbanking
industry has one of the highest percents of NPAs compared to internationallevels. A few
prominent reasons for assets becoming NPAs are as under:

Lack of proper monitoring and follow-up measures.

Lack of sincere corporate culture. Inadequate legal provisions on foreclosure
andbankruptcy.
Change in economic policies/environment.
Non transparent accounting policy and poor auditing practices.
Lack of coordination between banks/FIs.
Directed landing to certain sectors.
 Failure on part of the promoters to bring in their portion of equity from their ownsources
or public issue due to market turning unfavorable.

Underlying reason for NPA in India

An internal study conducted by RBI shows that in the order of prominence, the followingfactor
contribute to NPAs.

Internal Factor

Diversion of funds for- Expansion/diversification /modernization

Taking up new project
Helping /promoting associate concerns time/cost overrun during the
projectimplementation stage
Business Failure
Inefficiency in management
Slackness in credit management and monitoring
Inappropriate Technology/technical problem
Lack of coordination among lenders
External Factor

Recession
Input/power storage
Price escalation
Exchange rate fluctuation
Accidents and natural calamities ,etc.
Changes in government policies in excise/ import duties, pollution control orders, etc.

Some other factors also affected to NPA which are mention below in detail:
Liberalization of economy/removal of restriction/reduction of tariffs
A large number of NPA borrowers were unable to compete in a competitive market
inwhich lower prices and greater choices were available to consumers. Further,
borrowersoperating in specific industries have suffered due to political, fiscal and social
compulsions,compounding pressures from liberalization.

Lax monitoring of credit and failure to recognize Early Warnings Signals

It has been stated that approval of loan proposal is generally thorough and each
proposalpasses through many levels before approval is granted. However, the monitoring
ofsometimes complex credit files has not received the attention it needed which meant
thatearly warning signals were not recognized and standard assets slipped to NPA
categorywithout banks being able to take proactive measures to prevent this. partly due to
thisreason, adverse trends in borrowers performance were not noted and the position
furtherdeteriorated before action was taken.

Over optimistic promoters

Promoters were often optimistic in setting up large projects and in some cases were not
fullyabove board in their intentions. screening procedures did not always highlight these
issues. Often projects were set up with the expectation that part of the funding would be
arrangedfrom the capital markets which were booming at the time of the project
appraisal. When thecapital markets subsequently crashed, the requisite funds could never
be raised, promoteroften lost interest and lenders were left stranded with
incomplete/unviable projects.

Directed lending
Loans to some segment were dictated by Governments policies than
commercialimperatives.

Highly Leveraged borrowers

Some borrowers were under-capitalized and over burdened with debt to absorb the
changingeconomic situation in the country. Operating within a protected market resulted
 economicsituation in the country. Operating within a protected market resulted in low
appreciation ofcommercial/market risk.

Funding mismatch
There are said to be many cases where loans granted for short terms were used to fund
longterm transactions.

High Cost of Funds

Interest rates as high as 20% were not uncommon. Coupled with high leveraging and
fallingDenmark, borrowers could not continue to service high cost debt.

REASONS FOR THE EXISTENCE OF HUGE LEVEL OF NPAS

IN THE INDIAN BANKING SYSTM (IBS):

The origin of the problem of burgeoning NPAs lies in the quality of managing credit risk by the
banks concerned. What is needed is having adequate preventive measures in place namely, fixing
pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision.
Banks concerned should continuously monitor loans to identify accounts that have potential to
become non-performing.

To start with, performance in terms of profitability is a benchmark for any business enterprise
including the banking industry. However, increasing NPAs have a direct impact on banks
profitability as legally banks are not allowed to book income on such accounts and at the same
time banks are forced to make provision on such assets as per the Reserve Bank of India(RBI)
guidelines.

Also, with increasing deposits made by the public in the banking system, the banking industry
cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks.

Further, Reserve Bank of India (RBI) successfully creates excess liquidity in the system through
various rate cuts and banks fail to utilize this benefit to its advantage due to the fear of
burgeoning non-performing assets.

Some of the other reasons NPAs were:

After the nationalization of banks sector wise allocation of credit disbursements

became compulsory.
Banks were compelled to give credit to even those sectors, which were not considered
to be very profitable, keeping in mind the federal policy.
People in the agricultural sector were hardly interested in returning the loans as they
were confident that the loans with the interest would be written off by the successive
governments.
The small scale industries also available credit even though they were not sure of
performing to the extent of returning the loans.
Banks were also not in the position to press enough securities to cover the loans in
calls of timings.
Even if the assets were provided they proved to be substandard assets as the values
that could be realized were very low.
Free distribution done during loan mails(congress regime) also contributed to the
heavy increase in NPAs.
The slackness in effort by the bank authorities to collect or recover loan advances in
time also contributes to the increase in NPAs.
Lack of accountability of the officers, who sanctioned the loans led to a caste whole
approach by the officers recovering the loans.
Loans sanctioned to under servicing candidates due to pressure from the ministers and
other politicians also led to the non-recovery of debts.
 Poor credit appraisal system, lack of vision while sanctioning credit limits.
Lack of proper monitoring.
Reckless advances to achieve the budgetary targets.
Lack of sincere corporate culture, inadequate legal provisions on foreclosure and
bankruptcy.
Change in economic policies/ environment.
Lack of co-ordination between banks.

Some of the internal factors of the organization leading to NPAs are:

Division of funds for expansion, diversification, modernization, undertaking new projects

and for helping associate concerns, this is coupled with recessionary trends and failure to
tap funds in the capital and debt markets.
Business failure(product, marketing etc.), inefficient management, strained labor
relations, inappropriate technology, technical problems, product obsolescence etc.,
Recession, shortage of input, power shortage, price escalation, accidents, natural
calamities, besides externalization problem in other countries leading to nonpayment of
overdue.
Time/cost overrun during the project implementation stage.
Government policies like changes in the excise duties, pollution control orders.
Willful default, siphoning off of funds, fraud, misappropriation, promoters/directors
disputes etc.,
Deficiencies on the part of the banks like delay in release of limits and delay in release of
payments/subsidies by the government.

Operational definitions:

NPA: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 90 days.
Standard Assets: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 asset for a period not

exceeding 18 months

Doubtful Assets: Asset that has remained NPA for a period exceeding 18 months is a
doubtful asset.

Loss Assets: Here loss is identified by the banks concerned or by internal auditors or by
external auditors or by Reserve Bank India (RBI) inspection.

RBI GUIDELINES ON INCOME RECOGNITION (INTEREST

INCOME ON NPAs)

Income Recognition: Income from Non Performing Assets should not recognize on
accrual basis but should be booked as income only when it is actually received. Therefore
interest should not be changed and taken into income account till the account become
standard asset.
Interest charged to be stopped
Provision to be made
Over Due:Any amount due to the Bank under any credit facility is Over due if it is not paid
on the due date fixed by the Bank.

Out of Order: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 90 days as on
the date of Banks Balance Sheet or Where are credits are not enough to cover the
interest debited during the same period.

A Non Performing Asset shall be an advance where:

Term loan:Interest and/ or installment of principal remain over-due for a period of

more than 90 days.

Cash Credit/ Over Draft: If the account remains out of order for a period more
than 90 days.

Bills:Overdue for a period of more than 90 days.

Other accounts:Any amount to be received remains overdue for a period of more than
90 days.

Short duration crops:If the installment of principal or interest there on remains

overdue for two crop seasons.

Long duration crops:If installment of principal or interest there on remains overdue

for One Crop season.
 An account would be classified as NPA only if the interest charged during any quarter is
not serviced fully within 90 days from the end of the quarter.

ASSET CLASSIFICATION

Standard Assets:
Is one which does not disclose any problem and which does not carry more than normal
risks attached to the business.

Substandard Assets:
Which has remained NPA for a period of less than or equal to 12 months.

Doubtful Assets:
If it has remained NPA for a period exceeding 12 months.

Loss Assets:
A loss asset is one where loss has been identified by the bank.

RBI GUIDELINES ON PROVISIONING REQUIREMENT OF BANK

ADVANCES:

Loss Assets: 100% of the outstanding amount.

Doubtful Assets: 100% of unsecured portion.

Secured portion
 Up to one year 20%
One to three years 30%
More than 3 years
1. Outstanding stock of NPA as 75% w.e.f.31st March,06
on 31.3.2004 100% w.e.f.31st March,07

2. Advances classified as 100% w.e.f.31st March,05

doubtful more than 3 years
on or after 31.3.2004

Substandard Assets:Secured portion 10% and unsecured portion 20% on total

outstanding.

Standard Assets:A general provision of 0.40% (For direct Agriculture & SME Sector
0.25%). Provisioning for standard assets will be done at corporate office centrally.

Credit growth and NPA life cycle

NPAs are largely a fallout of banks activities with regard to advance, both at the managementand
implementation levels .The credit appraisal system, monitoring of end -usage of fundsand
recovery procedures.

High Credit growth

Banks with proper credit appraisal recovery Banks with proper appraisal and loose
process and management control management control

Low levels of NPA s High levels of NPAs

Inability to grow

Inherent strength to grow further May stagnate unless restructured

It also depends on the overall economic environment, the business cycle and the
legalenvironment for recovery of defaulted loan since the overall environment is more or
less same for all banks, Non-performing loans of individual banks are mainly a result
ofmanagement controls and systems put in place by them.

A bank with an efficient credit appraisal and loan recovery system will grow stronger
overthe years. Such banks have good management controls and also inherent strengths in
terms of a highly motivated staff, good checks and balance, which are further enhance by
aregulatory and supervisory system.

As the growth in advances is largely determine by the economic and business

environment, such banks will be able to push their credit portfolio aggressively,

Especially wheneconomy is booming. Also, as such banks have a diversified credit

portfolio, it would act asa cushion during economic downturns. This will results in lower
NPAs, allowing them togrow stronger and even adopt a more aggressive growth strategy
and thereby, withstandmarginally higher incidences of default.
 However, a bank without inherent strength will not be able to push their credit
portfoliothe way the want to. They are characterized by poor management control,
inadequate creditappraisal and even low levels of motivation among the staff. When such
banks push theiradvances portfolio, chances of their assets quality deteriorating are
higher. Since assetsquality will be visible only after credit disbursal, which it self
depends on the regulatorydefinition of NPAs, any deteriorating will be reflected after a
time lag. Thus, bank withoutinherent strength will have higher NPA levels, especially
when the economy has seenabove average credit growth.

GROWTH & DEVELOPMENT (PERCENTAGE SHARE)

BANK PERCENTAGE
State Bank of India 18%
 Punjab National Bank 6%
Bank of Baroda 5%
ICICI Bank 5%
Bank of India 5%
Canara Bank 5%
HDFC Bank 4%
IDBI Bank 4%
Axis Bank 3%
Central Bank of India 3%
Others 42%

State Bank of India

Punjab National Bank
18%
Bank of Baroda
ICICI Bank
42% 6%
Bank of India
5% Canara Bank
5% HDFC Bank
5% IDBI Bank
5% Axis Bank
4% 4%
3% Central Bank of India
3%

Market share of leading bank

COMPANY PROFILE OF ICICI BANK

ICICI Bank Limited is a banking company. The Bank is engaged in providing a range of banking
and financial services, including commercial banking, retail banking, project and corporate
finance, working capital finance, insurance, venture capital and private equity, investment
banking, broking and treasury products and services. The Banks business segments are Retail
banking, Wholesale banking, Treasury, Other banking, Life Insurance, General Insurance and
Others. It has a network of approximately 18,210 branches and automated teller
machines(ATMs). The bank has approximately 110 Touch Banking branches across over 30
cities. Its international banking is focused on providing solutions for the international banking
requirements of its Indian corporate clients and leveraging economic corridors between India and
the rest of the world. The Bank caters to the financial needs of women entrepreneurs through its
Self-Help Group (SHG) program as a part of its microfinance initiatives.

ICICI Bank started as a wholly owned subsidiary of ICICI Limited, as Indian financial
institution, in 1994. Four years later, when the company offered ICICI Banks shares to the
public, ICICIs shareholding was reduced to 46%. In the year 2000, ICICI Bank offered made an
equity offering in the form of ADRs on the New York Stock Exchange (NYSE), thereby
becoming the first Indian company and the first bank or financial institution from non-Japan Asia
to be listed on the NYSE. In the next year, it acquired the Bank of Madura Limited in an all-
stock amalgamation. Later in the year and the next fiscal year, the bank made secondary market
sales to institutional investors.

With a change in the corporate structure and the budding competition in the Indian Banking
industry, the management of both ICICI Bank was of the opinion that a merger between the two
entities would prove to be an essential step. It was in 2001 that the Boards of Directors of ICICI
and ICICI Bank sanctioned the amalgamation of ICICI and two of its wholly-owned retail
finance subsidiaries, ICICI Personal Financial Services Limited and ICICI Capital Services
Limited, with ICICI Bank. In the following year, the merger was approved by its shareholders,
the High Court of Gujarat at Ahmadabad as well as the High Court of Judicature at Mumbai and
the Reserve Bank of India.

Present Scenario

ICICI Bank has its equity shares listed in India on Bombay Stock Exchange and the National
Stock Exchange of India Limited. Overseas, its American Depositary Receipts (ADRs) are listed
on the New York Stock Exchange (NYSE). As of December 31, 2016, ICICI is Indias second-
largest bank, boasting an asset value of Rs.3,744.10 billion and profit after tax Rs.30.14 billion,
for the nine months, that ended on December 31, 2016.

Branches & ATMs

ICICI Bank has a wide network both in Indian and abroad. In India alone, the bank has 1,420
branches and about 4,644 ATMs. Talking about foreign countries, ICICI Bank has made its
presence felt in 18 countries- United States, Singapore, Bahrain, Hong Kong, Sri Lanka, Qatar
and Dubai International Finance Centre and representative offices in United Arab Emirates,
China, South Africa, Bangladesh, Thailand, Malaysia and Indonesia. The Bank proudly holds its
subsidiaries in the United Kingdom, Russia and Canada out of which, the UK subsidiary has
established branches in Belgium and Germany.

Products & Services

Personal Banking

Deposits
Loans
Cards
Investments
Insurance
Demat Services
Wealth Management

NRI Banking

Money Transfer
Bank Accounts
Investments
Property Solutions
 Insurance
Loans

Business Banking

Corporate Net Banking

Cash Management
Trade Services

FXOnline
SME Services
Online Taxes
Custodial Services

COMPANY PROFILE OF BANK OF BARODA

Bank of Baroda is engaged in providing various services, such as personal banking, corporate
banking, international banking, small and medium enterprise(SME) banking, rural banking, non-
resident Indian (NRI) services and treasury services. The Banks segments include Treasury,
Corporate/ Wholesale Banking, Retail Banking and Other Banking Operations. The Bank offers
personal banking services, such as deposits, loans, mobile banking and wealth management
services; business banking services, such as Baroda Money Express, debit cards and collection
services; corporate banking services, such as appraisal and merchant banking, and cash
management and remittances; international banking services, such as export, import and trade
finance, and correspondent banking; rural banking services, such as deposits, priority sector
advances, financial inclusion and lockers, and treasury services, such as domestic and forex
operations. The Bank operates a network of approximately 5,330 branches.

Bank of Baroda is one of the most prominent banks in India, having its total assets as
Rs.1,43,146 Crores as on 31st of March 2016. The bank was founded by Maharaja Sayajirao
Gaekwad III (also known as Shrimant Gopalrao Gaekwad), the then Maharaja of Baroda on 20th
of July 1908 with a paid capital of Rs.1o Lacs. From its introduction in a small building of
Baroda, the bank has come a long way to achieve its current position as one of the most
important banks in India. On 19th of July 1969, Bank of Baroda was nationalized by the
Government of India along with 13 other commercial banks.

Financial Details

As of March 2016, the bank had total deposits worth Rs.1,24,915 Crores while it had a total
number of 2956 branches located worldwide as on April 2009, out of which 626 were located in
Metro cities, 524 in Urban areas, 642 in Semi-Urban locations, 1092 in Rural areas and 72 were
located outside India. The bank has 10 Zonal Offices and 43 Regional Offices which help it
control its operations nationally.

International Presence

Along with a huge network of its branches spread across India, Bank of Baroda has its overseas
branches located in 14 other countries, which include Bahamas, Bahrain, Belgium, China, Fiji
Islands, Hong Kong, Mauritius, Republic of South Africa, Seychelles, Singapore, Sultanate of
Oman, United Arab Emirates, United Kingdom and United States of America. Apart from it, the
bank has established its subsidiaries in 7 countries viz. Botswana, Ghana, Guyana, Kenya,
Tanzania, Trinidad & Tobago and Uganda, and its representative offices in 3 countries which are
Australia, Malaysia and Thailand.

Other Details

Bank of Baroda had a total workforce of 38063 employees offering their services to the
institution as of September 2016. Out of these, 13525 were Officers, 16497 were Clerks while
8041 were Sub-Staff members.

The bank offers a wide array of customized and specialized services to meet the diverse needs of
its customers, and these services have been categorized into Personal Banking, Business
Banking, Corporate Banking, International Banking, Treasury Banking and Rural Banking