NPA Generating Factor In Indian Banking Education Essay

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After liberalization the Indian banking sector developed very appreciate. The RBI also nationalized good amount of commercial banks proving socio economic services to the people of the nation. The public Sector banks have shown very good performance as far as the financial operations are concerned.

If we look to the glance of the financial operation, We may find that deposit of public to the public sector Banks have increased from 859, 461, 95 crore to 1, 079, 393, 81 crore in 2003, the investments of the public sector Banks have increased from 349,107.81 crore to 545,509.00 crore , and however the advances have also been increased to 549,351.16crore from 414,989.36crore in 2003.

The total income of the public sector banks has also shown good performance since the last few years and currently it is 128,464.40crore.The public sector Banks have also shown comparately good result. The gross profits of the public sector Banks Currently29, 715,26crore which has been doubled to the last to last year, and the net profit Of the public sector Banks is 12,295,47crore.However, the only problem of the public sector Banks these days are the Increasing level of the non performing assets.

The non performing assets of the public Sector banks have been increasing regularly year by year. If we glance on the numbers of performing assets we may come to know that in the year 1997 the NPAs were 437,300crore and reached to 80.24crore in 2002. The only problem that hampers the possible financial performance of the public Sector Banks is the increasing results of the non performing assets.

The non performing assets impacts drastically to the working of the banks. The efficiency of a bank is not always reflected only by the size of its Balance sheet but buy the level of return on its assets.

NPAs do not generate interest income for its Bank, but at the same time banks are required to make provisions for such NPAs from their current profits.

NPAs have deleterious effect on the return on assets in several ways:

  • They erode current profits through provisioning requirements

  • They result in reduced interest income

  • They require higher providing requirements affecting profits and accretion to Capital funds recycling of funds, set in asset-liability mismatches, etc.

The RBI has also tried to develop many schemes and tools to reduce the non Performing assets the results are not up to the expectations. To improve NPAs each bank should be motivated to introduce their own precautionary steps. Before lending the banks must evaluate the feasible financial and operational prospective results of the borrowing companies by keeping in Considerations the overall impacts all the factors that influence the business


Pereiea.G “Investing in NPAs”. In his study observes that the major problem with the Indian banking system is that they depend largely upon lending and investments. The banks in the developed countries do not depend upon this income whereas 86 percent of income of Indian banks is accounted from interest and the rest of the income is fee based. The banker can earn sufficient net margin by investing in safer securities though not at high rate of interest. It facilitates for limiting of high level of NPAs gradually. The corporate debt restructuring is also one of the methods suggested for the reduction of NPAs. Its objective is to ensure a timely and transparent mechanism for restructure of corporate debts of viable corporate entities affected by the contributing factors outside the purview of DRT and other legal proceedings for the benefit of concerned.

Kumar .V (2008)“securitisation: issues and perspectives” in his study investigated that at the Global Level, SECURITISATION is becoming more popular among Fis. It is meant to avoid disparity between assets and liabilities of banks/Fis. In order to promote securitisation in India RBI has constituted a working group on assets securitisation. Though securitisation is in a nascent stage, it holds great promise in areas like infrastructure, power and housing.

Datey .V,(2006) “THE SARFAESI ACT” in his study observes that the securities and reconstruction of financial assets and enforcement of security interest act, 2002 made effective on 21.6.2002 is a step to reduce NPAs of Banks. The act also makes provision for asset reconstruction and securitisation.

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

Arpita.R in his study ,”Are Non Performing Assets Gloomy from Indian Perspective” investigated that growth in NPA threatens the repayment capacity of the banks and erodes the confidence reposed by them in the banks. In fact high level of NPAs has an adverse impact on the financial strength of the banks who in the present era of globalisation, are required to conform to stringent International Standards. “Non Performing Asset” means an asset or account of a borrower, which has been classified by bank or financial institution as substandard, doubtful or loan asset .The problem that India faces is not lack of prudential norms but the legal impediments and time consuming nature of asset disposal process , ‘postponement' of the problem in order to report high earnings and to some extent manipulation of by the debtor using political influence. Most of the banks in India are into this malpractices and fraudulent acts.


Action for enforcement of security interest can be initiated only if the secured asset is classified as Non Performing Asset. Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

  • An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Accordingly, as from that date, a Non performing asset (NPA) shell be an advance where Interest and /or installment of principal remain overdue for a period of more than 180 days in respect of a Term Loan,

  • The account remains 'out of order' for a period of more than 180 days, in respect of an overdraft/ cash Credit (OD/CC),

  • The bill remains overdue for a period of more than 180 days in the case of bills purchased and discounted,

  • Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose.

  • Any amount to be received remains overdue for a period of more than 180 days in respect of other accounts. With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shell be a loan or an advance where;

  • Interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan, 65

  • The account remains 'out of order' for a period of more than 90 days, in respect of an overdraft/ cash Credit (OD/CC),

  • The bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

  • Interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose

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


In India the bank loans are classified on the following basis.


Loans where the interest and/or principal are not overdue beyond 180 days at the end of the financial year.


Any loan repayment, which is overdue beyond 180 days or two quarters, is considered as NPA. According to the securitisation and reconstruction of financial assets and enforcement of security interest ordinance, 2002 “non-performing asset”(NPA) means “an asset or account of a borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classifications issued by the Reserve Bank” Internationally, income from non-performing assets is not recognized on accrual basis, but is taken into account as income only when it is actually received. It has been decided to adopt similar practice in our country also. Banks have been advised that they should not charge and take to income account the interest on all Non-performing assets. An asset becomes non-performing for a bank when it ceases to generate income.

The basis for treating a credit facility as non-performing is as follows:


A term loan is to be treated as NPA if interest remains past due for a period of 4 quarters for the year ended 31-3-1993,3 quarters for the year ended 31-3-1994 and 2 quarters for the year ended 31-3-1995 and onwards. Past due means an amount reaming out standing or unpaid for 30 days beyond due date. For e.g., interest due on 31-3-1993 becomes past due on 30 4-1993, if it is not received by that date.


A cash credit or overdraft account should be treated as NPA if the account remains out of order for a period of four quarters during the year ended 31-3-1993,threequarters during the year ended 31-3-1994 and two quarters during the year ended 31- 3-1995 and onwards. An account may be treated as out of order if any of the following three conditions is met The balance outstanding in the account remains continuously in excess of thesanctioned limit or drawing power.

An account should be treated as NPA if the bill remains overdue and unpaid for a period of four quarters during the year ended 31st March, 1994 and two quarters during the year ended 31st March, 1995 and onwards. It may be added that overdue interest should not be charged and taken to income account in respect of overdue bills unless it is realized.


Any other credit facility should be treated as NPA if any amount to be received in respect of that facility remains past due for a period of four quarters during the year ended 31st March 1993. There quarters during the year ended 31st March 1994 and two quarters during the year ended 31st March 1995 and onwards.



An asset, which does not disclose any problem and also does not carry more than normal risk attached to the business, it should not fail under the category o NPA.


An asset, which has been identified as NPA for a period not exceeding two years. In the case of term loan, if the installments of principal are overdue for more than one year but not exceeding two years, it is to be treated as sub-standard asset.


An asset, which remains NPA for Assets more than two years. Here too, rescheduling does not entitle a bank to upgrade the quality of an advance automatically. In the case of a term loan, if installments of principal are overdue for more than two years, it is to be treated as doubtful


An asset where loss has been identified by the bank or internal/external auditors or by RBI inspection but the amount has not been written-off, wholly or parity.


Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit, poor infrastructure facilities, sticky legal system, cutting of exposures to emerging markets by FIIs, etc. Further, international rating agencies like, Standard & Poor have lowered India's credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing forex reserves and a manageable inflation rate. Under such a situation, it goes without saying that banks are no exception and are bound to face the heat of a global downturn. One would be surprised to know that the banks and financial institutions in India hold non-performing assets worth Rs. 1,10,000 crores. Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive. The actual level of Non Performing Assets in India is around $40 billion much higher than government's estimation of $16 billion. This difference is largely due to the discrepancy in accounting the NPAs followed by India and rest of the world. The Accounting norms of the India are less stringent than those of the developed economies. the Indian banks also have the tendency to extend the past dues. Considering the GDP of India nearly $470 billion, the NPAs are 8% of total GDP, which was better than the many Asian countries. the NPA of china was 45%of the GDP, while Japan had NPAs of 25% of the GDP and Malaysia had 42%. The aggregate level of the NPAs in Asia has increased from $1.5 billion in 2000 to $2 billion in 2002.looking to such overall picture of the market, we can say that India is performing well and the steps taken are looking favorable.


1. Size of NPA Portfolios Reviewed

On an overall basis, in comparison to the Gross NPA portfolio of the financial sector in India for the year ended March 31, 2003, approximately Rs. 452 billion from the total gross NPAs of Indian banking sectors

  • Public Sector Banks cover 55% of gross NPAs
  • Private sector banks cover 11% of gross NPAs
  • Foreign sector banks cover 3.02%, and
  • Financial institutions cover 29%

2. Sectoral Segmentation

Banks in India are required to reserve a part of their lending for the priority sector. Broadly this comprises the sub-sectors such as Agriculture, Small Scale Industries, and other activities such as small business, retail trade, small transport operators, professional and self employed persons, housing, education loans, micro-credit etc. In addition, certain investments in bonds issued by State Financial Corporations (SFCs), State Industrial Development Corporations (SIDCs), etc. are also recognized as priority sector lending provided such bonds have been issued exclusively to finance priority sector activities. As seen from the Chart below, around 23% of the NPA portfolio is in the priority sector including agriculture, small scale and others. The balance 77% belongs to NPAs in the non-priority sector which includes NPAs pertaining to public sector undertakings, corporate and retail borrowers. Within the non-priority sector, a large proportion of NPAs (more than 96%) by gross value are in the corporate segment. The largest proportion among the corporate borrowers is private sector corporate borrowers. Since the sectoral segmentation norms are applicable to banks only the above graph is somewhat skewed (participant lenders included financial institutions). Given below is the sectoral segmentation in public sector banks only. Priority sector NPAs constitutes 46% of the NPA portfolio of participant public sector banks by value. In the non-priority sector corporate borrowers form the largest proportion of NPAs.

3. Industry Classification

Most of the participant lenders have provided us with detailed NPA profile for large NPAs. The remainder of our analysis for NPA profiling, therefore, focuses on the large NPA portfolio. The total large NPA (individual gross value above Rs 10 million) portfolio of the participating banks amounts to Rs 357 billion approximately. The top 5 industries with maximum Large NPAs (by gross value) for the participant lenders included in this study are Textiles, Iron & Steel, Chemicals, Engineering and (non ferrous) Metals. The Large NPAs of these 5 industries alone comprise approximately half of the total Large NPA portfolio (by gross value) of the participating lenders. At 15%, the Textiles industry is the single largest contributor to the gross Large NPAs of the participating lenders. It is followed by Iron & Steel with 14%, Chemicals with 9%, Engineering with 8% and Metals with 5%. The participant lenders provided loan grading segmentation of the Large NPAs in the top 5 industries viz. textiles, iron & steel, chemicals, engineering and metals. Only about 20% of the Large NPA portfolio by gross value is in sub-standard assets. This indicates that the rehabilitation potential of, about 80% of the Large NPA portfolio in each of the top 5 industries is somewhat limited.

4. State-wise Distribution

Data was collected from participant lenders on state wise distribution of their Large NPAs. The top 5 states with maximum Large NPAs (by gross value) for the lenders included in this study are Maharashtra (including Goa), Gujarat, Delhi (including Rajasthan), Andhra Pradesh and Tamil Nadu. The Large NPAs in these 5 states alone comprise approximately 65% of the total Large NPA portfolio (by gross value) of the lenders in the sample. Maharashtra (including Goa) with nearly 24% is the single largest contributor to the gross Large NPAs of the participant lenders. It is followed by Gujarat with 11%, Delhi (including Rajasthan) with slightly more than 10%, Andhra Pradesh with 10% and Tamil Nadu with just under 10%.

5. Region-wise Distribution

The NPA portfolios of lenders covered in the study have been segmented into the following regions:

  • Northern - J&K, Himachal Pradesh, Punjab, Haryana, Delhi, Rajasthan, Uttaranchal and UP

  • Eastern - North eastern states, West Bengal, Orissa, Bihar and Jharkhand

  • Southern - Tamil Nadu, Kerala, Pondicherry, Andhra Pradesh, Karnataka

  • Western - Maharashtra, Goa, Gujarat

  • Central - Madhya Pradesh, Chattisgarh Based on the above segmentation, the region-wise distribution of Large NPAs of the participant Lenders taken together is provided in the Chart below:

The Western region (with 35%) has the maximum Large NPAs (by gross value) of the participating lenders. This is followed by the Southern and Northern Regions with 24% each. Eastern and Central regions have a lower proportion of NPAs by gross value at 10% and 6% respectively. On an overall basis, the geographical distribution of NPAs is clearly linked to the level of industrialization in various parts of India. The Western region in general and Maharashtra and Gujarat, in particular, are amongst the more industrialized areas of India. As a result, these areas have also attracted the maximum amount of bank credit. The slowdown in industrial activity during the past few years has also been more pronounced in these areas, which has resulted in a higher proportion of NPAs.

6. Operating Status of Assets

In order to assess the rehabilitation potential of the Large NPAs, we had requested banks to provide break-down of their Large NPA portfolio between operating/non operating and implementation status. The table below provides a break-up of the NPA portfolio of all participating banks on the basis of operating status.

As can be seen, only a very small proportion of the Large NPA portfolio (by gross value) is under implementation. The remaining is more or less equally split between assets which are operating and those which are not.

7. Security Profile

The data on break-up of the number and gross value of the Large NPAs based on the type of security (Fixed assets/current assets) was also received from the participant lenders. It can be seen from the Chart below that 89% of the secured large NPAs are secured against Fixed Assets, which suggests that some value might be preserved even if assets are not operating

8. Possible Increase in Near Future

Several measures are being taken both by the Government, Reserve Bank of India and by the banks and institutions themselves to reduce the level of NPAs in the system. While the absolute value of NPAs has been increasing marginally, the NPA ratios (both gross and net) have been declining over the last few years. In fact in the year ended March 31, 2003, the levels of NPAs have also declined in absolute terms also as compared to the previous year.

The Indian system is moving towards international practices which utilize significant qualitative measures in addition to quantitative measures. Such a change may contribute to standard loans being graded as NPAs in the future. Also, according to some estimates, the application of the 90 days past due criteria from March 31, 2004 (as proposed by RBI) will increase gross NPAs by 3-5% of gross advances.


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


  • Diversion of funds for

    • Expansion/diversification/modernization

    • Taking up new projects

    • Helping/promoting associate concerns time/cost overrun during the project implementation stage

  • Business (product, marketing, etc.) failure

  • Inefficiency in management

  • Slackness in credit management and monitoring

  • Inappropriate technology/technical problems

  • Lack of co-ordination among lenders


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

As mentioned earlier, we held discussions with lenders and financial sector experts on the causes of NPAs in India and whilst the above-mentioned causes were reaffirmed, some others were also mentioned. A brief discussion is provided below.

Liberalization of economy/removal of restrictions/reduction of tariffs

A large number of NPA borrowers were unable to compete in a competitive market in which lower prices and greater choices were available to consumers. Further, borrowers operating in specific industries have suffered due to political, fiscal and social compulsions, compounding pressures from liberalization (e.g., sugar and fertilizer industries)

Lax monitoring of credits and failure to recognize Early Warning Signals

It has been stated that approval of loan proposals is generally thorough and each proposal passes through many levels before approval is granted. However, the monitoring of sometimes-complex credit files has not received the attention it needed, which meant that early warning signals were not recognised and standard assets slipped to NPA category without banks being able to take proactive measures to prevent this. Partly due to this reason, adverse trends in borrowers' performance were not noted and the position further deteriorated before action was taken.

Over optimistic promoters

Promoters were often optimistic in setting up large projects and in some cases were not fully above 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 arranged from the capital markets, which were booming at the time of the project appraisal. When the capital markets subsequently crashed, the requisite funds could never be raised, promoters often lost interest and lenders were left stranded with incomplete/unviable projects.

Directed lending

Loans to some segments were dictated by Government's policies rather than commercial imperatives.

Highly leveraged borrowers

Some borrowers were under capitalized and over burdened with debt to absorb the changing economic situation in the country. Operating within a protected market resulted in low appreciation of commercial/market risk.

Funding mismatch

There are said to be many cases where loans granted for short terms were used to fund long term transactions.

High Cost of Funds

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

Willful Defaulters

There are a number of borrowers who have strategically defaulted on their debt service obligations realizing that the legal recourse available to creditors is slow in achieving results If the borrower doesn't pay though he has the capacity to pay. He is termed as willful defaulter. The features of willful default are wrong use of funds and siphoning of funds.

Improper functioning of Debt Recovery Tribunals

Although the setting up of Debt Recovery Tribunals had raised much hope about speeding up of the recovery proceedings initiated by banks these hopes have largely remained unfulfilled. At quite a few places, the DRTs are still to be set up and, even where these have been set up, they are not yet fully equipped to handle very large number of cases already before them or those that can be placed before them. In some of the DRTs, the number of pending cases is quite large. While the government has been reviewing the operations of DRTs, as yet a Stage has not come when it can be said that these are helping recoveries of banks' dues substantially. In fact it has failed to achieve the declared objective of disposal of' cases within six months in speedy recovery of advances.

Project appraisal Deficiencies:

It includes deficiencies regarding technical feasibility" economic viability and project management deficiencies in regard to implementation, production, and labor " marketing" financial and administrative.

Ineffective Credit Monitoring:

Ineffective credit monitoring al1d follow-up mechanism of' the banks have also contributed to slippage of' standard loans into bad loans.

Diversion of Funds:

Diversion of' funds mostly for expansion/diversification/modernization and taking up new projects and for promoting associated concerns is a prominent reason for high level of NPAs.

External factors:

The RBI study noted that non-availability of raw materials, power shortage, transport bottlenecks, financial bottlenecks, change in Govt. policy, natural calamities, industrial sickness, increase in import cost, increase in overhead cost, market saturation, product obsolescence, fill in demand and others were responsible for weak performance in 48% of units assisted by the banks resulting into advances given to them turning bad.

Ineffective legal system:

It is one of the most important factors contributing to enormously high level of NPAs in Banks. Antiquated legal system, extremely slow judicial system and dismal record of enforcement machineries have contributed significantly to high level of NPAs.

Failure of suppliers:

The failure of suppliers to adhere to promised/committed delivery schedules due to various reasons is also one of the causes for an increase in the level of NPA.

International development:

Sudden international development adversely affects viability of production units e.g. OIL Crisis, fertilizer plants based on petro chemical feedstock became suddenly enviable.

Promoter-banker nexus:

In many instances, loans have been sanctioned because of vested interests. Promoter-banker nexus have been exploited to siphon off funds from the banking system.

Operational factors:

It is regarding the current and prospective risk to earnings arising from fraud, error and the inability to deliver products or services and maintain a competitive position.

Strategic Factors:

It includes adverse business decisions, improper implementation of of decisions or lack of responsiveness to industry changes.


SECURITIZATION ( a tool of management for npa)

Securitisation is the buzzword in today's world of finance. It's not a new subject to the developed economies. It is certainly a new concept for the emerging markets like India. The technique of securitisation definitely holds a great promise for a developing country like India. One of the major issues in the Development of banking sector in India is the reducing of non-performing assets in their balance sheets. One such financial innovation to reduce non-performing assets is "Securitisation". Securitisation is the financial instrument of the new Millennium. The process of securitisation creates the strata of risk-return and different maturity securities and is marketable into the capital markets as per the needs of the investors. It has become one of the most important financing vehicles in the developed countries like USA. Its use is rapidly expanding worldwide. Securitisation enables many companies to raise funds at a lower cost than through traditional financing.


At the organization level, all accounts where interest has not been collected should be reviewed at periodical intervals to appropriate authorities. Lest the time and energy is frittered away in following up and recovering small amounts, monitoring should be focused at critical branches having concentration of high value NP As. In order to recover the amount, one can adopt any way like persuasion, pressurization, frequent interaction as a appropriate level, showing syn1pathy, treating the borrower as a friend etc. recovery is not a one-man job. The-branch head should secure total involvement and commitment of the staff working with him to bring about the desired results. Irregular accounts need to be more actively followed up with a view to containing the damage before the irregularity blows out of proportion. If is the irregular portion in any account is fully recovered, such account will be eligible for immediate reclassification as a standard asset


Repayment of a term loan depends on income generating capacity)' of- the borrowing unit. It may be difficult to get repayn1ent of the term loan if the borrowing unit does not generate profit. A unit, which does not generate profit, may repay few installments by borrowing from other sources or diverting short-term funds for repayn1ent. But ultimately a loss-making unit may not be able to repay the term loan. Therefore, it is necessary to fix repayment programme for a term loan according to the income generating capacity of the unit. If repayment programme is not fixed or a unit is able to generate the expected profit, possibly ma)- be installments. Sometimes the borrowers e.g. agricultural borrowers may not be able to deposit the stipulated installments due to the natural calamities. In that case also the credit granted to the agricultural borrowers for sowing their crops should be converted into short term loans. Such rephasement should be done on the basis of estimated funds flow in consultation with the borrowers so that the rephrased repayment progran1me is meticulously adhered to and the asset is upgraded in due course.


After the classification of unit as Sick, Bank can make a decision to offer a rehabilitation package. In that case, Bank has to have a sympathetic and positive approach and provide the relief package in time. Such a package has to aim at helping the unit in easing its debt burden, its liquidity position, improving its activity level and its profitability so that the unit would be in a position to continue to serve its repayment obligations as agreed upon including those forming a part of the package. Rehabilitation is a long drawn process. One should not look for the results in the short run. The bank should however ensure to have the Right of Recompense incorporated in the agreement while giving the package to the borrowers, so that it can claim reimbursement of the sacrifices made, relief given, once the unit is successfully rehabilitated as a result of the package.


This is another strategy to reduce NPAs of a bank. It is the process U1lder which a sick unit is merged with a healthy unit, or sometimes, a healthy unit acquires a sick unit. A part of the consideration paid to the sick unit by the healthy unit is used to liquidate the NPA, wholly or partly. Very often, banks have to make sacrifices to clinch the deal.

Some of the other objectives of amalgamation are:

  • Horizontal growth to achieve size, to enlarge market share, to curb competition or to use unutilized capacity.

  • Vertical integration with a view of economizing cost and eliminating avoidable sales tax and/or excise duty.

  • Diversification of business.

So, in other words, we can say that amalgamation is done to achieve long term economic and financial benefits for both the amalgamating and amalgamated companies and their shareholders, tax benefits to the amalgamated company and their shareholders and for sound financial position of both companies concerned. In case of a merger the NP A will get immediately converted into a perfoffi1ing asset because it will acquire the status of the healthy unit. In fact, the sick unit will be wiped out from the books of the bank and the healthy unit will show increased outstanding under different account heads.


Recovery of advances through compromise settlement is accepted as an effective non-legal remedy in case where it is appropriated to adopt this option. Under this borrower agrees to pay certain amount of the bank after getting certain concessions. In this regard it is recognized that each of the compromise offers received from the borrower is unique as the circumstances that necessitate consideration of these, as a recovery option will vary from case to case. Every Bank has framed its own policy .on compromise/negotiated settlement of loans and advances


If all attempts of converting an NP A into a performing asset fail, the bank is left with no other option but to recall the advance and resort to legal action by filing of recovery suits in the civil court or Debt Recovery Tribunals. The cases for recovery of debt due to banks or financial institutions involving an amount of Rs. 10 lacs and above are to be filed in the Debt Recovery Tribunal of Jurisdiction. The branches and controlling authorities should make proper follow up of these cases tiled at various levels should be made by the branches and controlling authorities.


Some banks have opened asset recovery branches at critical center for undertaking recovery .Bad and doubtful assets of various existing branches have been transferred to the recovery Branch, which may have trained staff with necessary background for recovery .The Specialized Recovery Branches may give undivided attention to recovery of dues. Establishment of such specialized branches may help in reducing NPAs.


Lok Adalat is an arrangement wherein suit filed as well as non-suit filled accounts are referred by the banks for speedy settlement of t4e dispute through conciliation. On a mutual agreement, the settlements are arrived at the Iok Adalat and the concessions are extended as under.



Gross NPA Ratio is the ratio of gross NPA to gross advances of the Bank. Gross NPA is the sum of all loan assets that are classified as NPA as per the RBI guidelines. The ratio is to be counted in terms of percentage and the formula for GNPA is as follows:

The table above indicates the quality of credit portfolio of the banks. High gross NPA ratio indicates the low credit portfolio of bank and vice-a-versa. We can see from the above table that the Punjab and Sind Bank has the higher gross NPA ratio of 19.25 % followed by the Dena Bank with 17.86 %. The Allahabad Bank, Central Bank of India and united Bank of India also have higher gross NPA ratio with 13.65 %, 13.06% and 12.15%. Whereas the state Bank of Patiala, Andhra Bank and Canara Bank showed lower ratio with 4.8 %, 4.89 % and 5.96 % in the year 2003.


It is the ratio of Total Substandard Assets to Gross NPA of the bank.

The ratios calculated below are for the entire public sector banks:

Calculation of ratio

It indicates scope of up gradation/improvement in NPA. Higher substandard asset ratio means that in whole NPA the sub standard ratio has major proportion, which indicates that there is a high scope for advance up gradation or improvement because it will be very easy to recover the loan as minimum duration of default. Till 2000 this ratio of PSB was very high but dropped in recent years &than again it increased, which means there is a need of advance up gradation.


As per the above table, given the maximum advances in 2002 amount which 5,01,369 crore which increase from the 3,25,328. They are trying to reduce the NPA by various means. In 2002 total NPA of PSBs has 11.9% , which is reduce from the 15.9% in 1999 Percentage of standard assets increased from 84.1% to 88.9% during the 1990 to 2002. % of loss assets, decreased from 2.0% to 1.4% during the 1999 to 2002. In future, if it will reduce in this manner then it will reduce up to 0% NPA.


The net NPA percentage is the ratio of net NPA to net advances, in which the provision is to be deducted from the gross advance. The provision is to be made for NPA account. The formula for that is:

This Ratio indicates the degree of safety measures adopted by the Banks. It has direct bearing on the profitability, Dividend and safety of shareholders' fund. If the provision ratio is less, it indicates that the Banks has made under provision. The highest provision ratio is showed by corporation Bank with 66.40 % followed by Oriental Bank of commerce with 61.60 %. The lowest provision ratio is showed state Bank of Patiala with only 10.97 % in the year 2003.


The above chart represent the NPA position in different types of sectors like priority, Non priority and public sector. The highest % of NPAs are in the Non-priority sector under which the criteria of to given loans are not to be maintained strictly so far. The NPA % of Non-priority sector is highest with 53% whereas 45% NPAs in priority sector which included agriculture, small-scale industry, small business etc.


However the problem of NPAs has made its home since last three and half decade, since then it is found that the NPAs are increasing year by year. If we look to the numbers of the NPAs , we may find that in 1997 the NPAs were at Rs.47,300crore and in 2001 they were at Rs. 63,883, but after this period the NPAs increased in the Indian banking sector very drastically. It reached to Rs.80246crore in 2002 and in 2003 it touched to the Rs. 94,905crore

Recently RBI is taking its measures but but the result is not up to the expectations and no doubt that some of the measures have been wrathful to the banks, what I think is that those steps should be taken out that would help the banks to reduce the problem of increasing NPAs. The Banks should also be very specific while providing credit facility to the borrowers. The banks before giving credit facilities should perform basic calculations of the borrowers' capacity to pay the debt back. However, this only is not necessary, banks should regularly evaluate the financial position of the borrower companies.


Through RBI has introduced number of measures to reduce the problem of increasing NPAs of the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness of these measures. What I would like to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as under.

  • Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility.

  • The credit rating agency should regularly evaluate the financial condition of the clients.

  • Special accounts should be made of the clients where monthly loan concentration reports should be made.

  • It is also wise for the banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement.

  • The banks before providing the credit facilities to the borrower company should analyse the major heads of the income and expenditure based on the financial performance of the comparable companies in the industry to identify significant variances and seek explanation for the same from the company management.

  • Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with the use of their strength and weakness, and what will be their possible future growth in concerned to financial and operational performance.

  • Independent settlement procedure should be more strict and faster and the decision made by the settlement committee should be binding both borrowers and lenders.

  • There should be proper monitoring of the restructured accounts because there is every possibility of the loans slipping into NPAs category again.

  • Proper training is important to the staff of the banks at the appropriate level with on going process. That how they should deal the problem of NPAs, and what continues steps they should take to reduce the NPAs.

  • Willful Default of Bank loans should be made a Criminal Offence.

  • No loan is to be given to a Group whose one or the other undertaking has become a Defaulter.


The problem statement on which I focused my study is “NPAs generating factor in Indian banking system” challenge before the Public Sector Banks”. The Indian banking sector is the important service sector that helps the people of the India to achieve the socio economic objective. The Indian banking sector has helped the business and service sector to develop by providing them credit facilities and other finance related facilities. The Indian banking sector is developing with good appreciate as compared to the global benchmark banks. The Indian banking system is classified into scheduled and non scheduled banks. The Public Sector Banks play very important role in developing the nation in terms of providing good financial services. The Public Sector Banks have also shown good performance in the last few years. The only problem that the Public Sector Banks are facing today is the problem of non performing assets. The non performing assets means those assets which are classified as bad assets which are not possibly be returned back to the banks by the borrowers. If the proper management of the NPAs is not undertaken it would hamper the business of the banks. The NPAs would destroy the current profit, interest income due to large provisions of the NPAs, and would affect the smooth functioning of the recycling of the funds. If we analyze the past years data, we may come to know that the NPAs have increased very drastically after 2001. in 1997 the gross NPAs of the Indian banking sector was 47,300crore where as in 2001 the figure was 63,883 and which increased at faster rate in 2003 with 94,905crore. The Public Sector Banks involve its nearly 50% of share in the NPAs. Thus we can imagine how Public Sector Banks are functioning. The RBI has also been trying to take number of measures but the ratio of NPAs is not decreasing of the banks. The banks must find out the measures to reduce the evolving problem of the NPAs. If the concept of NPAs is taken very lightly it would be dangerous for the Indian banking sector. The reduction of the NPAs would help the banks to boost up their profits, smooth recycling of funds in the nation. This would help the nation to develop more banking branches and developing the economy by providing the better financial services to the nation.