1554215015697_rajani Gandha (1)21 Project Final Npa.docx

A Study on IMPACT OF NPA IN INDIA A Project Submitted to

University of Mumbai for partial completion of the degree of Bachelor in Commerce (Banking and Insurance) Under the Faculty of Commerce

By Rajani gupta Under the Guidance of Ms janshi rengaswamy

Guru Nanak College of Arts, Science and Commerce,

G.T.B. Nagar, Mumbai-400037.

2018-2019

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Acknowledgement

I would like to acknowledge the following as being idealistic channels and fresh dimension in the completion of this project. I take this opportunity thank the University of Mumbai for giving me chance to do this project. I would like to thanks my I\CPrincipal Dr. Pushpinder G.Bhatia for providing the necessary facilities required for completion of this project. I take this opportunity to thank our Coordinator Ms. Janshi Rengaswamy for her moral support and guidance. I would like to express my sincere gratitude towards my project guidance Ms. Janshi rengaswamy whose guidance and care made the project successful. I would like to thank my College Library, for having provided various references books and magazines related to my project. Lastly I would like to thank each and every person who directly or indirectly helped me in the completion of the project especially my Parents and Peers who supported me throughout my project.

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Declaration I the undersigned Mr. /Ms Rajani gupta here by, declare that the work embodied in this project work titled “A Study on impact of NPA in india forms my own contribution to the research work carried out under the guidance of Ms. Janshi rengaswamy is a result of my own research work and has not been previously submitted to any other university for any other Degree/Diploma to this or any other university. Wherever references have been made to previous works of others, it has been clearly indicated as such and included in the bibliography.

Name and Signature of the learner

Certified by

Name and signature of the Guiding Teacher

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Guru Nanak College of Arts, Science and Commerce, G.T.B Nagar, Mumbai-400037 Certificate This is to certify that Ms. Rajani gupta has worked and duly completed her Project work for the degree of Bachelor of Commerce (Banking and Insurance) under the faculty of Commerce in the subject of Information technology in Banking and Insurance-1 and his Project is entitled, “A Study on impact of NPA in india under my supervision. I further certify that the entire work has been done by the learner under my guidance and that no part of it has been submitted previously for any Degree or Diploma of any University. It is his own work and facts reported by his personal findings and investigations.

Name and Signature of Guiding Teacher

Date of submission:

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Abstract Non-performing Asset is a vital factor in the examination of financial performance of a bank. Non Performing Asset is the key term for the banking corporations. Non Performing Assets show the competence of the performance of the banks. Non Performing Assets means which amount is not received by the bank in return of loans disbursed. Non Performing Assets affect not only the finance institution but the total financial system. Thus a selective study has been done on public sector banks in India to evaluate the effect of Non Performing Assets on the profitability of banks. Banks today are not judged only on the basis of number of branches and volume of deposits but also on the basis of standard of assets. NPAs negatively affect on the profitability, liquidity and solvency of the banks. This paper analyses the circumstances of NPAs in selected banks namely State Bank of India (SBI), Bank of India, United Bank of India, Bank of Baroda, Indian Overseas Bank, Punjab National Bank and Central Bank India. It also highlights the policies followed by the banks to tackle the NPAs and suggests a multi-pronged strategy for speedy recovery of NPAs in banking sector. Seven Public Sector Banks has been selected for the study the relation between Gross NPA and Net Profit of seven banks. In this paper is applying the panel regression. The result shows that except for SBI and PNB all the other banks exhibit a negative correlation between their gross Non Performing Assets and net profits. But SBI and PNB is increased the net profit every year not affected by Gross Non Performing Assets. Both banks are paying attention towards their NPA to recover their pending loans. The study is based upon secondary data recovered from Report of Progress of banking in India, Websites, Journals and Articles. The scope of the study is limited to analysis of nonperforming assets of public sector banks covering the period of 20072016.

Keywords : Non-Performing Asset; Net Profit; Doubtful Debts; Correlation; Deposit

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INDEX Sr. no 1

2

Content Chapter 1 1.1 Introduction

8-14

1.2 Factors

15-17

1.3 Historical background

18-20

1.4 Concept Of NPAs

21-24

Chapter 2: Research methodology 2.1 Objectives

3

4

25

2.2 Scope

26-27

2.3 Limitations

28-30

2.4 Significance

31-32

2.5 Causes

33-39

2.6 Tools & Techniques

40-45

Chapter 3: Literature review 3.1 Ashly Lynn Joseph, Dr. M. Prakash(2014)

46

3.2 J. Rama Devi and Dr. B. Ramachandra

47

Reddy (2014)

48

3.3 Dr. Jasbir Singh (2013)

49

3.4 K.T Srinivas (2013)

50

3.5 Samir and Deepak karma (2013)

51

3.6 My understanding

52

Chapter 4: Data analysis 4.1 Findings

5

Page no

53-62

Chapter 5: Conclusions

63

Recommendations/ Suggestion

64

Bibiliography/References

65

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1.1INTRODUCTION Any asset which stops giving returns to its investors for a specified period of time is known as Non-Performing Asset (NPA). Indian Banking industry is seriously affected by Non-Performing Assets. More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge amount. The figure roughly translates to near 10% of all loans given. This means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks. When restructured and unrecognised assets are added the total stress would be 15-20% of total loans. NPA crisis in India is set to worsen. Restructuring norms are being misused. This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime crisis of 2008 in the United States of America. Also, the NPA problem in India is worst when comparing other emerging BRICS Economies. In India banking sector has played pivotal role in our nation building. After Liberalisation of the economy the banking sector has faced severer challenges, but due to its solid foundation and management it has withered all the subsequent challenges including 2008 sub-prime crisis. But the recent problem has been grave. In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost.NPAs related cases add more pressure to already pending cases with the judiciary one. In this paper it has been discussed in details with best possible solutions. A loan or lease that is not meeting its stated principal and interest payments. A loan is an asset for a bank as the interest payments and the repayment of the principal amount create a stream of cash flows. Banks usually treat assets as non-performing if they are not serviced for some time. If payment has not been made as of its due date then the loan gets classified as past due. Once a payment becomes really late the loan gets classified as non-performing. A non performing asset (NPA) is a loan or advance for which the principal or interest payment remained overdue for a period of 90 days. 8

Of this year’s 22 NPAs and DPAs, 11 are NPAs and 11 are DPAs. DOJ’s Fraud Section, which entered into six of the agreements, including several of the highest-penalty agreements, entered into one publicly available NPA in 2017. This is particularly notable in light of the Fraud Section’s recent emphasis on declinations in the Foreign Corrupt Practices Act (“FCPA”) context for companies meeting certain disclosure, cooperation, and remediation criteria set forth in the Fraud Section’s FCPA Enforcement Plan and Guidance Pilot Program of April 5, 2016 (the “Pilot Program”).[3] As discussed further below, DOJ has recently highlighted the successes of the Pilot Program—which was enhanced and made permanent this year[4]—in securing declinations for companies in 2017;[5] it is possible that certain companies that previously would have received NPAs are benefitting from the FCPA Enforcement Plan and Guidance and instead receiving declinations, or declinations-plusdisgorgement letters (discussed at length in our 2016 Year-End and 2017 Mid-Year Updates). In 2016, by way of comparison, when implementation of the FCPA Enforcement Plan and Guidance was in its infancy, the Fraud Section entered into nine NPAs and DPAs, of which three were NPAs.[6] We note that the tremendous overall spike in 2015 is attributable to the DOJ Tax Division’s Program for NPAs or “Non-Target Letters” for Swiss Banks, discussed in our 2015 Mid-Year and Year-End Updates, which invited banks to selfdisclose tax-related conduct (and pay associated penalties) in exchange for NPAs.

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NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade.

The Narasimhan Committee has recommended prudential norms on income recognition, asset classification and provisioning. In a change from the past, Income recognition is now not on an accrual basis but when it is actually received. Past problems faced by banks were to a great extent attributable to this. Classification of what an NPA is has changed with tightening of prudential norms. Currently an asset is ´non-performing if interest or installments of principal due remain unpaid for more than 180 days.

Definition:Non Performing Asset

It means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India.

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Asset Classification:Assets are classified into following four categories:

1) Standard Assets 2) Sub-standard Assets 3) Doubtful Assets 4) Loss Assets

1) Standard Assets: Standard assets are the ones in which the bank is receiving interest as well as the principal amount of the loan regularly from the customer. Here it is also very important that in this case the arrears of interest and the principal amount of loan do not exceed 90 days at the end of financial year. If asset fails to be in category of standard asset that is amount due more than 90 days then it is NPA and NPAs are further need to classify in sub categories using norms.

Banks are required to classify non-per forming assets further into the following three categories based on the period for which the asset has remained non- performing and the reasonability of the dues:

* Sub-Standard Assets * Doubtful Assets * Loss Assets

a) Sub-Standard Assets: With effect from 31 March 2005, a substandard asset would be one, which has remained NPA for a period less than or equal to 12 month. The following features are exhibited by substandard assets: the current net worth of the borrowers / guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full; and the asset has welldefined credit weaknesses that jeopardize the liquidation of the debt and are characterized by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected.

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b) Doubtful Assets: A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub-standard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently known facts, conditions and values – highly questionable and improbable. With effect from March 31, 2005, an asset would be classified as doubtful if it remained in the substandard category for 12 months.

c) Loss Assets: A loss asset is one which considered uncollectible and of such little value that its continuance as a bankable asset is not warranted, although there may be some salvage or recovery value. Also, these assets would have been identified as „loss assets by the bank or internal or external auditors or the RBI inspection but the amount would not have been written-off wholly.

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Assets which generate income are called performing assets and but those do not generate income are called non-performing assets. A debt obligation where the borrower has not paid any previously agreed upon interest and principal repayments to the designated lender for an extended period of time. The nonperforming asset is therefore not yielding any income to the lender in the form of principal and interest payments .For example, a mortgage in default would be considered non-performing. After a prolonged period of non-payment, the lender will force the borrower to liquidate any assets that were pledged as part of the debt agreement. If no assets were pledged, the lenders might write-off the asset as a bad debt and then sell it at a discount to a collections agency An asset becomes non-performing when it ceases to generate income for the bank. Indian Banking industry is seriously affected by Non-Performing Assets. More than Rs. 7 lakh crore worth loans are classified as Non-Performing Loans in India. This is a huge amount. The figure roughly translates to near 10% of all loans given. This means that about 10% of loans are never paid back, resulting in substantial loss of money to the banks. When restructured and unrecognised assets are added the total stress would be 15-20% of total loans. NPA crisis in India is set to worsen. Restructuring norms are being misused. This bad performance is not a good sign and can result in crashing of banks as happened in the sub-prime crisis of 2008 in the United States of America. Also, the NPA problem in India is worst when comparing other emerging BRICS Economies. In India banking sector has played pivotal role in our nation building. After Liberalisation of the economy the banking sector has faced severer challenges, but due to its solid foundation and management it has withered all the subsequent challenges including 2008 sub-prime crisis. But the recent problem has been grave. In the case of public sector banks, the bad health of banks means a bad return for a shareholder which means that government of India gets less money as a dividend. Therefore it may impact easy deployment of money for social and infrastructure development and results in social and political cost. NPAs related cases add more pressure to already pending cases with the judiciary one. In this paper it has been discussed in details with best possible solutions.

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1.2FACTORS FOR RISE IN NPAs The banking sector has been facing the serious problems of the rising NPAs. But the problem of NPAs is more in public sector banks when compared to private sector banks and foreign banks. The NPAs in PSB are growing due to external as well as internal factors.

EXTERNAL FACTORS Ineffective recovery tribunal: The Govt. has set of numbers of recovery tribunals, which works for recovery of loans and advances. Due to their negligence and ineffectiveness in their work the bank suffers the consequence of nonrecover, their by reducing thei r profitability and liquidity.

Willful Defaults There are borrowers who are able to payback loans but are intentionally withdrawing it. These groups of people should be identified and proper measures should be taken in order to get back the money extended to them as advance s and loans

Natural calamities This is the measure factor, which is creating alarming rise in PAs of the PSBs. every now and then India is hit by major natural calamities thusmaking the borrowers unable to pay back there loans. Thus the bank has tomake large amount of provisions in order to compensate those loans, henceend up the fiscal with a reduced profit.Mainly ours farmers depends on rain fall for cropping. Due toirregularities of rain fall the farmers are not to achieve the production levelthus they are not repaying the loans

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Industrial sickness Improper project handling , ineffective management , lack of adequateresources , lack of advance technology , day to day changing govt. Policiesgive birth to industrial sickness. Hence the banks that finance those industries ultimately end up with a low recovery of their loans reducing their profit and liquidity.

Lack of demand: Entrepreneurs in India could not foresee their product demand and startsproduction which ultimately piles up their product thus making them unable topay back the money they borrow to operate these activities.

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INTERNAL FACTORS :

Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks. Principles of safety Principle of liquidity Principles of profitability Principles of safety: By safety it means that the borrower is in a position to repay the loan bothprincipal and interest. The repayment of loan depends upon the borrowers.

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1.3 HISTORICAL BACKGROUND Over-optimism: A larger number of bad loans were originated in the period 2006-2008 when economic growth was strong, and previous infrastructure projects such as power plants had been completed on time and within budget. It is at such times that banks make mistakes. They extrapolate past growth and performance to the future. So they are willing to accept higher leverage in projects, and less promoter equity. Indeed, sometimes banks signed up to lend based on project reports by the promoter’s investment bank, without doing their own due diligence. One promoter told me about how he was pursued then by banks waving checkbooks, asking him to name the amount he wanted. This is the historic phenomenon of irrational exuberance, common across countries at such a phase in the cycle.

Slow Growth Unfortunately, growth does not always take place as expected. The years of strong global growth before the global financial crisis were followed by a slowdown, which extended even to India, showing how much more integrated we had become with the world. Strong demand projections for various projects were shown to be increasingly unrealistic as domestic demand slowed down.

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Fraud The size of frauds in the public sector banking system have been increasing, though still small relative to the overall volume of NPAs. Frauds are different from normal NPAs in that the loss is because of a patently illegal action, by either the borrower or the banker. Unfortunately, the system has been singularly ineffective in bringing even a single high profile fraudster to book. As a result, fraud is not discouraged. The investigative agencies blame the banks for labeling frauds much after the fraud has actually taken place, the bankers are slow because they know that once they call a transaction a fraud, they will be subject to harassment by the investigative agencies, without substantial progress in catching the crooks. The RBI set up a fraud monitoring cell when I was Governor to coordinate the early reporting of fraud cases to the investigative agencies. I also sent a list of high profile cases to the PMO urging that we coordinate action to bring at least one or two to book. I am not aware of progress on this front. This is a matter that should be addressed with urgency.

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An overview of Non-Performing Assets in India Banks give loans and advances to borrowers which may be categorised as: (i) standard asset (any loan which has not defaulted in repayment) or (ii) non-performing asset (NPA), based on their performance. NPAs are loans and advances given by banks, on which the borrower has ceased to pay interest and principal repayments.

In recent years, the gross NPAs of banks have increased from 2.3% of total loans in 2008 to 4.3% in 2015 (see Figure 1 alongside*). The increase in NPAs may be due to various reasons, including slow growth in domestic market and drop in prices of commodities in the global markets. In addition, exports of products such as steel, textiles, leather and gems have slowed down. [i]

The increase in NPAs affects the credit market in the country. This is due to the

impact that non-repayment of loans has on the cash flow of banks and the availability of funds with them. [ii] Additionally, a rising trend in NPAs may also make banks unwilling to lend. This could be because there are lesser chances of debt recovery due to prevailing market conditions. [iii] For example, banks may be unwilling to lend to the steel sector if companies in this sector are making losses and defaulting on current loans. There are various legislative mechanisms available with banks for debt recovery. These include: (i) Recovery of Debt Due to Banks and Financial Institutions Act, 1993 (DRT Act) and (ii) Securitisation and Reconstruction of Financial Assets and Security Interest Act, 2002 (SARFAESI Act).

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1.4 Non-Performing Assets (NPA) - Concept

The three letters “NPA” strike terror in banking sector and business circle today.NPA is a short form of “Non-Performing Assets”. In banking, NPA are loans given to doubtful customers who may or may not repay the loan on time. There are two types of assets viz. performing and non-performing. Performing loans are standard loans on which both the principle and interest are secured and their return is guaranteed. Non Performing assets means the debt which is given by the Bank is unable torecover it is called NPA .Non- Performing Asset [NPA] is a result of asset Liability mismatch, A NPA account in the books of accounts is an asset as it indicates the amount receivable from the Defaulters. It means if any bank gives loan to the customer if the interest for that loan is not paid by the customer till 90 days then that account is called as NPA account. A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income.

A’ non-performing asset’ (NPA) was defined as a credit facility in respect of which the interest and/or installment of principal has remained ‘past due’ for a specified period of time. The specified period was reduced in a phased manner as under: w.e.f. 31.03.1993 : four quarters w.e.f. 31.03.1994 : three quarters w.e.f. 31.03.1995 : two quarters w.e.f. 31.03.2001 : 180 days w.e.f. 31.03.2004 : 90 days 21

90 days’ delinquency norms are not applicable to Agriculture segment

With the effect from March 31, 2004, NPA shall be a loan or an advance where: 1. Term loan: Interest and /or installment of principal remain over due for a period of more than 90 days. 2. Cash credit/overdraft: The account remains ‘out of order’ for a period of more than 90 days. 3. Bills: The bill remains overdue for a period of more than 90days from due date of payment. 4. Other Loans: Any amount to be received remains overdue for a period of more than 90 days. 5. Agricultural Accounts: In the case of agriculture advances, where repayment is based on income from crop. An account will be classified as NPA as under: a) If loan has been granted for short duration crop: interest and/or installment of Principal remains overdue for two crop seasons beyond the due date. b) If loan has been granted for long duration crop: Interest and/or installment of principal remains overdue for one crop seasons beyond due date.

RBI introduced, in 1992, the prudential norms for income recognition, asset classification &provisioning – IRAC norms in short – in respect of the loan portfolio of the Co operative Banks.

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NPA NORMS Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. The Narsimham Committee has recommended the following provisioning norms a.100 per cent of loss assets or 100 per cent of out- standings for loss assets; b.100 per cent of security shortfall for doubtful assets and 20 percent to 50 per centof the secured portion; and 341 c.10 per cent of the total out standings for substandard assets. A provision of 1% onstandard assets is required as suggested by Narsimham Committee II, 1998. Banks need to have better credit appraisal systems so as to prevent NPA from occurring. The most important relaxation is that the banks have been allowed to make provisions for only30 per cent of the "provisioning requirements" as calculated using the Narsimham Committee recommendations on provisioning. The encouraging profits recently declared by several banks have to be seen in the light of provisions made by them. To the extent that provisions have not been made, the profits would be fictitious asset.

Disclosure Norms: Banks should disclose in balance sheets maturity pattern of advances, deposits, investments and borrowings. Apart from this, banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. These disclosures were to be made for the year ending March 2000. In fact, the banks must be forced to make public the nature of NPA being written off .

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CHAPTER 2 : RESEARCH METHODOLOGY

2.1 OBJECTIVES 

To analyse the NPA and its impact on India.



To know the banking industry in India.



To know the concept of NPA.



To know the reasons for NPA.



To know the impact of NPA.



To know NPA standards of RBI.



To evaluate NPA ( Gross NPA & Net NPA ) in india.



To evaluate the comparative ratios of the selected banks with concerned to the NPA.

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To understand the impact of NPA on the profitability of selected banks.

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To give suggestions to overcome the problem of NPA.

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To know the recovery of NPAS through various channels.



To make appropriate suggestions to avoid future NPAs and to manage existing NPAs in

india.

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2.2 SCOPE The study could suggest measures for the banks to avoid future NPAs & to reduce existing NPAs The study may help the government in creating & implementing new strategies to control NPAs. The study will help to select appropriate techniques suited to manage the NPAs and to develop a time bound action plan to check the growth of NPAs. The Reserve Bank of India (RBI) has now allowed banks to sell their bad assets to other banks and non-banking finance companies (NBFC) and not just asset reconstruction companies (ARCs) as was the practice so far. This will help banks like ICICI Bank and State Bank of India (SBI) acquire bad loans of other banks through the special stressed assets funds they have set up. This will help a weaker bank to shed the bad loan while stronger and bigger banks can recover them faster through their specialised funds. The central bank has also asked banks to bring down their investment in the security receipts (SRs) issued by the asset reconstruction companies to 10% by April 2018, from the present threshold of 50% if the underlying asset was sold by the same bank. So far, many banks were selling off bad loans to the ARCs and then investing into the security receipts issued by the ARCS on the same loans. If in case the banks exceed this limit, they have to set aside more capital in lieu of these investments. That means provisioning requirements will go up. To improve transparency to attract more buyers, RBI said banks must have a transparent policy to sell the assets and it should be through a process of e-auctions. According to RBI, the discount rate used by banks should be spelt out in the valuation exercise. This may be either cost of equity or the average cost of funds or opportunity cost or some other relevant rate, subject to a floor of the contracted interest rate and penalty.

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For the purpose of study, three branches of a nationalized bank have been selected; one each from urban, semi-urban and rural areas in Kolhapur district. The bank has very well spread out net work with 39 branches in the district. These branches are taking up all type of banking business irrespective of their locations in the district. However, the level of activity, type of clientele and the nature of problems as well as working conditions are different depending upon their geographical locations. It is with this in view, three 4 branches selected for study are, one each, from rural semiurban and urban category to make it more comprehensive. The actual selection of the Branches, however, was done by the controlling office of the bank keeping in view the objectives of the study, representative sample for such study, availability of information at the branch, necessary cooperation, assistance and guidance from the staff at the branch. Due care was taken to select branches having normal banking business and are not exceptionally good or bad in any respect. For the purpose of study, all the non-performing accounts at the selected branches have been scrutinized to reassess the, asset classification, provisioning made, etc. by the branch. The other details required to calculate the carrying cost were either collected or worked out from the data/figures available at the branch For the study of Management of NPAs by the selected branches, the information was collected from all the officials involved in management of NPAs at these branches through a specially designed questionnaire. Apart from this, officers from controlling office (including the Head of the Zone) who are responsible for monitoring and follow up were also interviewed to assess their views and note their comments. In addition to this, 7 borrowers per branch were selected randomly from the list of defaulters to assess their awareness and views on various aspects associated with the topic and related to them.

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2.3 LIMITATIONS

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Non-performing assets typically refer to loans that have problems getting paid on time or getting paid at all. It is a classification commonly used by financial institutions to designate loans that are unpaid for at least 90 days, have more than 90 days' worth of interest delayed or refinanced or have no expectation of payments continuing. Knowing the disadvantages of nonperforming assets can help you avoid ending up as a lender or borrower of this type of loan.

Reduced Income Interest Income is the first account that gets hit whenever an asset is declared nonperforming. Lending companies such as banks are primarily in the business of earning income from interest paid by borrowers. A loan that has fallen into the nonperforming asset category has not yielded interest for at least 90 days. Any decrease in interest payments will translate into a decrease in net income. A company's income level falls as the amount of nonperforming assets climbs.

Unrecoverable Principal The principal, or money used by banks to finance loans, comes largely from the bank's depositors. Banks borrow the money deposited by account holders and loan it to their customers. It is imperative for the bank to recover the money, because it's not the bank's money in the first place. When a borrower defaults on loan payments, the bank is unable to recover the principal. Unrecoverable principal must be replaced by the bank to keep its depositors' funds intact.

Reduced Cash Flow Companies react to high levels of nonperforming assets by tightening credit policies. Unrecoverable income and a decrease in interest collections translate into less cash flow. With an increase in nonperforming assets and with less cash floating around, lending companies tend to resort to tighter credit policies. This outcome can slow down economic growth, because some businesses won't be able to obtain a loan. 29

Negative Indicator Nonperforming assets can be used as indicators of a lender's ability to manage its loan portfolio efficiently. The efficiency of lending companies in recovering their principal and earning interest can be measured by comparing their nonperforming assets ratio against those of peer companies. Dividing the amount of nonperforming assets by the total gross loans will yield this ratio. A lending company's efficiency rating deteriorates as the ratio increases.

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2.4 SIGNIFICANCE OF THE STUDY The main aim of any person is the utilization of money in the best manner since the India is country where more than half of population has problem of running the family in the most efficient manner. However Indian people faced large number of problem till the development of full-fledged banking sector. The Indian banking sector came into the developing nature mostly after the1991 government policy. The banking sector has really helped the Indian people to utilize the single money in the best manner as they want. The banks not only accept the deposits of the people but also provide them credit facility for their development. Indian banking sector has the nation in developing the business and service sectors. But recently the banks are facing the problem of credit risk. It is found that many general people and business people borrow from the banks but due to some genuine or other reasons are not able to repay back is known as the non performing assets. Many banks are facing the problem of NPA which hampers the business of banks. Due to NPAs the income of the banks is reduced and the banks have to make the large number of the provisions that would curtail the profit of the banks and due to that the financial performance of the banks would not show good results. The main aim behind making this report is to know how indian banking is operating its business and how NPAs play its role to the operations of the indian bank. My study is also focusing upon existing system in India to solve the problem of NPAs and comparative analysis to understand which bank is playing what role with concerned to NPAs. Thus, the study would help the decision maker to understand the financial performance and growth of the concerned banks as compared to the NPAs.

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The design of any research project requires considerable attention to the research methods and the proposed data analysis. Within this section, we have attempted to provide some information about how to produce a research design for a study. We offer a basic overview of the research methods portion of a research proposal and then some data analysis templates for different types of designs. Our goal is not to answer every question, but provide a head start.

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2.5 Causes for an Account becoming NPA A multiplicity of factors is responsible for assets turning out eventually into NPAs. While focusing on the incidence of NPAs, general causes are identified as ineffective management policies both at macro level and micro level. In today's' world any change occurs in global market has had its impact with greater degree than before. As the recent vibrations of global financial meltdown that started in the western world have reached here in India and have had their impact. Different sectors of the economy are bound to face the heat of a global down turn. Indian banking sector is no exception to this. In the present scenario we expect that the level of stressed assets of the banks will rise in near future. While focusing on the micro level policies, it seems the presanction appraisal and post -sanction monitoring of projects are not realistic and purpose oriented. The monitoring of complex credit file has not received the attention it deserves. The Early Warning Signals are not recognized properly and Standard Assets slip into NPA category. With the intention of identifying the determinants of NPAs problem in depth and analyzing the relative strength of the factors influencing the occurrences of NPA, this chapter throws light on the socio economic aspects of the defaulters, and the determinants of NPAs in the region.

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Causes Attributable to Borrower



Failure to bring in Required capital



Too ambitious project



Longer gestation period



Unwanted Expenses



Over trading



Imbalances of inventories



Lack of proper planning



Dependence on single customers



Lack of expertise



Improper working Capital Mgmt.



Mismanagement



Diversion of Funds



Poor Quality Management



Heavy borrowings



Poor Credit Collection



Lack of Quality Control

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Causes Attributable to Banks



Wrong selection of borrower



Poor Credit appraisal



Unhelpful in supervision



Tough stand on issues



Too inflexible attitude



Systems overloaded



Non inspection of Units



Lack of motivation



Delay in sanction



Lack of trained staff



Lack of delegation of work



Sudden credit squeeze by banks



Lack of commitment to recovery



Lack of technical, personnel & zeal to work.

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Other Causes



Lack of Infrastructure



Fast changing technology



Un helpful attitude of Government



Changes in consumer preferences



Increase in material cost



Government policies



Credit policies



Taxation laws



Civil commotion



Political hostility



Sluggish legal system



Changes related to Banking amendment Act

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Early symptoms by which one can recognize a performing asset turning in to Nonperforming asset

Four categories of early symptoms: Financial: 

Non-payment of the very first installment in case of term loan.



Bouncing of cheque due to insufficient balance in the accounts.



Irregularity in installment



Irregularity of operations in the accounts.



Unpaid overdue bills.



Declining Current Ratio



Payment which does not cover the interest and principal amount of that installment



While monitoring the accounts it is found that partial amount is diverted to sister concern or parent company.

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Operational and Physical: 

If information is received that the borrower has either initiated the process of winding up or are not doing the business.



Overdue receivables.



Stock statement not submitted on time.



External non-controllable factor like natural calamities in the city where borrower

conduct his business.



Frequent changes in plan



Nonpayment of wages

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Attitudinal Changes: 

Use for personal comfort, stocks and shares by borrower



Avoidance of contact with bank



Problem between partners

Others:



Changes in Government policies



Death of borrower



Competition in the market

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2.6 Tools and techniques For recovery of NPA there are different tools are available. The important purpose of these tools are to recover the loan amount from borrower. These tools can beuse according to Loan amount.Following are the different recovery tools. 

LOK ADALATS



DEBT RECOVERY TRIBUNALS (DRT)



SARFAESI ACT, 2002



ASSET RECOVERY CONSTRUCTION INDUSTRY LIMITED(ARCIL)



CORPORATE DEBT RESTRUCTURING (CDR)



ASSET MANAGEMENT COMPANY(AMC)

Lok Adalats : Lok Adalats is a mechanism to settle matters relating to recovery of dues, out of court. These are convened by Debt Recovery Tribunals / Debt Recovery AppellateTribunals. Lok Adalats have no judicial powers. It is a mutual forum for the bank and the borrower to meet and arrive at a mutual settlement. Once the settlement is signed by boththe parties, the same is placed before the court. The court would then pass a suitabledecrees / orders as per the terms of settlement. Such decrees can not be challenged in thenext higher courts. At present, accounts in µdoubtful¶ and µloss¶ category with outstandingabove Rs. 5.00 lacs can be referred to this forum. Lok Adalats Proved to be quiteeffective for speedy justice and recovery of small loans.

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DEBT RECOVERY TRIBUNALS (DRT) Keeping in line with the international trends on helping financial institutions recover their bad debts quickly and efficiently, the Government of India has constituted thirty three Debts Recovery Tribunals and five Debts Recovery Appellate Tribunals across the country.

The Debts Recovery Tribunal (DRT) enforces provisions of the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 and also Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002.

Under the Recovery of Debts Due to Banks and Financial Institutions (RDDBFI) Act, 1993 banks approach the Debts Recovery Tribunal (DRT) whereas, under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interests (SARFAESI) Act, 2002 borrowers, guarantors, and other any other person aggrieved by any action of the bank can approach the Debts Recovery Tribunal (DRT).

Debts Recovery Tribunal are located across the country. Some cities have more than one Debts Recovery Tribunals. New Delhi, Chennai, Kolkata and Mumbai have three Debts Recovery Tribunals. Ahmedabad and Chandigarh have two Debts Recovery Tribunal (DRT) each. One Debts Recovery Tribunal has been constituted at Allahabad, Aurangabad, Bangalore, Coimbatore, Cuttack, Earnakulam, Guwahati, Hyderabad, Jabalpur, Jaipur, Lucknow, Madurai,Nagpur, Patna, Pune, Vishakapatnam and Ranchi.

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SARFAESI ACT, 2002 The full form of SARFAESI Act as we know is Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Banks utilize this act as an effective tool for bad loans (NPA) recovery. It is possible where nonperforming assets are backed by securities charged to the Bank by way of hypothecation or mortgage or assignment.

SARFAESI is effective only for secured loans where bank can enforce the underlying security eg hypothecation, pledge and mortgages. In such cases, court intervention is not necessary, unless the security is invalid or fraudulent. However, if the asset in question is an unsecured asset, the bank would have to move the court to file civil case against the defaulters.

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ASSET RECOVERY CONSTRUCTION INDUSTRY LIMITED(ARCIL) The word asset reconstruction company is a typical used in India. Globally the equivalent phrase used is " asset management companies". The word "asset reconstruction" in India were used in Narsimham I report where it was envisaged for the setting up of a central Asset Reconstruction Fund with money contributed by the Central Government, which was to be used by banks to shore up their balance sheets to clean up their non-performing loans. However, this never saw the light of the day and later on Narsimham II floated the idea asset reconstruction companies..

Why ARC : In last 15 years or so the a number of economies around the world have witnessed the problem of non performing assets.

A high level of NPAs in the

banking system can severely affect the economy in many ways. The high level of NPAs leads to diversion of banking resources towards resolution of this problems. This causes an opportunity loss for more productive use of resources. The banks tend to become risk averse in making new loans, particularly to small and medium sized companies. Thus, large scale NPAs when left unattended, cause continued economic and financial degradation of the country. The realization of these problems has lead to greater attention to resolve the NPAs. ARCs have been used world-wide, particularly in Asia, to resolve bad-loan problems. However, these had a varying degree of success in different countries. ARCs focus on NPAs and allows the banking system to act as "clean bank".

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ARC in India : In India the problem of recovery from NPAs was recognized in 1997 by Government of India. The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform. It was expected that with a combination of policy and institutional development, new NPAs in future could be lower. However, the huge backlog of existing NPAs continued to hound the banking sector. It impinged severely on banks performance and their profitability. The Report envisaged creation of an "Asset Recovery Fund" to take the NPAs off the lender's books at a discount.

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Accordingly, Asset Reconstruction Company (Securitization Company / Reconstruction Company) is a company registered under Section 3 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002. It is regulated by Reserve Bank of India as an Non Banking Financial Company ( u/s 45I ( f ) (iii) of RBI Act, 1934). RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934. ARC functions like an AMC within the guidelines issued by RBI. ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by:(a) isolating Non Performing Loans (NPLs) from the Financial System (FS), (b) freeing the financial system to focus on their core activities and (c) Facilitating development of market for distressed assets.

CORPORATE DEBT RESTRUCTURING (CDR) Corporate debt restructuring is the reorganization of a company's outstanding obligations, often achieved by reducing the burden of the debts on the company by decreasing the rates paid and increasing the time the company has to pay the obligation back.

ASSET MANAGEMENT COMPANY(AMC) An asset management company (AMC) is a company that invests its clients' pooled funds into securities that match declared financial objectives. Asset management companies provide investors with more diversification and investing options than they would have by themselves.

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3. LITERATURE REVIEW

3.1 Ashly Lynn Joseph, Dr. M. Prakash(2014) : A study on analyzing the trends of NPA level in private sector Banks and public sector Banks To find out the trends in NPAs, to find out the factors that contribute to NPAs and to suggest the various measures for NPAs management. 2008 to 2013. Public and private sector Banks The result of the study reveals that there are many internal and external factors found which affect the NPAs of the bank like time and cost overrun, inefficiency in the management, exchange rate fluctuations, Government policies etc. Data of Loan Assets of the 148 public sector Banks showed increasing trend during the study period. In private sector NPAs level is less in sub standard Assets and doubtful Assets with comparative to public Sector Banks. In case of public sector Banks share was high in priority sector advances. The ratio of Gross NPA to gross advances in case of public sector is more compared to private sector. At last concluded that NPAs was more in public sector Banks with 149 comparative to private Sector Banks. Public sector Banks had taken corrective actions to tackle the problem of NPAs.

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3.2 J. Rama Devi and Dr. B. Ramachandra Reddy (2014) : Measures to Curb NPAs in Public Sector Banks To analyze the classification of loan assets in Public Sector Banks and to examine the causes and remedial measures to arrest. Public Sector Banks In their study highlighted that the amount of standard assets showed an increasing trend during the stated period. In 146 the initial year 2004 the ratio of standard assets to total advances stood at 92.2 percent. It increased to 96.4 percent in 2013. Total advances of Public Sector Banks is increased from Rs. 6,61,976 crore in 2004 to Rs . 39,428 crore in 2012. The Net NPAs to per cent of Net Asset ratios it was 1.3 per cent in 2004 and increased to 2.0 per cent in 2013. They concluded that a large number of compromise proposals are being approved by banks with a 147 view to reducing the NPAs and recycling the funds instead of resorting to expensive recovery proceedings spread over a long period.

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3.3 Dr. Jasbir Singh (2013) : Recovery of NPAs in Indian commercial banks To analysis the recovery performance of Indian banks through various recovery channels. The NPAs affect the profitability, capital adequacy ratio, employment generation, living standard of people and income level of the banks. It is necessary that the banking system is to be equipped with prudential norms to minimize if not completely to avoid the problem of NPAs. . At last we can say that performance of various recovery channels of NPAs in Indian banking system is not 145 found satisfactory. So that, there is requirement of improved the recovery of the NPAs and try to reduce the NPAs for the good health & future of Indian banks. A component is as important as the right dose of medicine for a patient. Indian banking system required a right dose for NPAs reduction unless our banking system will be died.

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3.4 K.T Srinivas (2013) : A Study on Composition of NPAs of Public Sector Banks in India To understand the concept of NPAs and sector wise NPAs of public sector banks Public Sector Banks The result of the study found that Priority sector share is more in amount of NPAs of Nationalized banks in India as compared to Nonpriority sector share and public sector share .The priority sector share not only in the Nationalized banks but also in the SBI Groups banks share was high. And also from the present study it is found 143 that during 2004 Non -priority sector contribution is more for NPAs as compared to priority and public sector. From 2005 to till 2011 priority sector share was high in the NPAs as compared to Non -priority and public sector. But in the year 2011 priority and non - priority sector share was almost equal in the creation of NPAs for public sector banks as compared to public sector. During 2013 Non -priority share was high in creation of NPAs in public sector banks as 144 compared to priority and public sector in composition of NPAs of Public sector banks.

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3.5 Samir and Deepak karma (2013) A Comparative Analysis of NonPerforming Assets of Selected Commercial Banks in India To analyses the position of NPAs in selected banks and the policies used by the banks to face the problem of NPAs State Bank of India (SBI), Punjab National Bank (PNB) and Central Bank of India (CBI) In their study highlighted that Gross NPAs to Gross advance ratio of SBI decreased from 16.02 percent in 1996-97 to 3.28 percent in 2009- 2010. The settings of the Asset Reconstruction Company Limited (ARCIL), Debt Recovery Tribunal and the SARFASEI Act have been effective in recovering of NPAs in the banking sector. The gross NPAs as percentage of 141 total assets have significantly reduced across all the banks from 1996 -97 to 2009 -10.This decline can be attributed to the significant improvement in the asset quality with a rapid increase in quantum of credit to the commercial sector. At last highlighted that In terms of the recovery, 58 percent of the amount involved was recovered through one – time settlement/Com promise schemes. DRTs recovered around 30.5 percent and 142 Lok Adalats recovered around 5.63 percent, while 35.71 percent of the amount was recovered under the SARFAESI Act for the period 2003- 2012.

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3.6 MY UNDERSTANDING My basic need of taking or selecting this topic was to understand the concept of NPA. The growing problems of Non Performing Assets in the banking sector, its adverse effects on the functioning of the banks and the various mechanisms available for recovery of the NPAs with special reference to the recently enacted Securitization Act. The primary emphasis of these studies was to evaluate the movement of NPA and to check effectiveness of various regulatory measures in managing NPA of banks. The majority of these studies recommended further studies on NPA and the establishment of more proactive and curative measures to manage it.

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Chapter No :- 4 Data analysis and interpretation 4.1 :- Findings 52

In these we can see that the Bankers are agreed with 66.7% . that it has changed to 90 days from 180 days. & 33.3 % has not agreed with it.

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As we can see that the factors are more affected in External by 61.5% & Less in internal by 38.5%.

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We can see that the bankers says that 30.8% they have recovery stage in all sectrs and in all geographical region & 15.4 % they don’t have similar recovery stage in all sectors & in all geographical region . And 53.8% they may have similar recovery stage in all sector & in all geographical region.

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In these Diagram it is said that the strategy i.e Securitization of Assets(Debt) is more helpful to reduce NPA & the strategy i.e Legal Recovery is less helpul to reduce NPA .

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In above diagram we can see that the bakers are saying that Lending at low rate of interest to farmers so repayment will get easy is a way to reduce NPA and it is at 23.1%. And Proper appraisal before lending is also a way to reduce NPA at 30.8% . And at last To reduce Unsecured Loans political recommendation should not be Encouraged is also a way to reduce NPA at 46.2%. 57

We can see that the reasons for assets becoming Non-performing i.e Managerial defenciencies during work is 0%,Lack of knowledge of the area of handling is at 25%,Lack of timing Actions is at 25%,Lack of adequate efforts for Recovery is at 8.3%,Lack of proper verification of the genuine purpose of loans and advances is at 41.75%. So, the more % of reasons for assets becoming Non-performing is 41.7%.

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We can see that the % of NPA in every branch is different and i.e 1-4% is 7.7%, 4-7% is 61.5%, 7-10% is 15.45% 10&above is 15.4%.

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In the above Diagram it is said that the NPA is classified as Standard asset as 16.7%. Sub standard asset as 41.7%. Doubtful asset as 33.3%. Loss asset as 8.3%.

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In the above Diagram it is said that the trend of NPA in banks are highly decreasing at 0%. Slowly decreasing at 15.4%. Constant at 38.5%. Highly increasing at 15%. Slowly increasing at 38.5%.

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In above Diagram the advances treated as Non performing are agricultural loans are at 15.4% Non agricultural loans is at 0%. Cash credit is at 23.1%. Term loans is at 23.1%. Housing loans is at 0%.

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CHAPTER : 5 CONCLUSION The main objective of the project entitled “a study on non-performing assets in india”, is to investigate the impact of non-performing assets on the profitability of indian bank, Indian economy. In recent times banks are very cautious in extending loan, because of mounting npa. This research study highlights the reasons for an assets becoming npa and remedial measures to be taken to trim down the npa. from the analysis, it is evident that NPA still remains a major concern for banks in india. Even though the NPA during the last five years has not increased drastically and continually, it still remains a big challenging when it comes to recovery of bad loans. It poses a big threat to the macro-economic stability of the Indian economy. An analysis of the present situation brings us to the point that the problem is multifaceted and has roots in economic slowdown; deteriorating business climate in India; shortages in the legal system; and the operational shortcoming of the banks. Therefore, it has to be dealt at multiple levels. The government can’t be expected to rescue the state-run banks with tax-payer’s money every time they fall into a crisis. But, the kind of attention with which this problem has been received by policymakers and bankers alike is a big ray of hope. Right steps, timely and concerted actions and a revival of the Indian economy will put a lid on NPAs.

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RECOMMENDATION/SUGGESTION 1. Adequate Manpower. 2. Awareness and training camps for borrowers. 3. Helping Borrowers in Difficulties.

4. Write Off of Loans. 5. Government Programmers- Improvement in Implementation. 6. Incentive for Prompt Repayment Appreciation for Loyalty.

7. Coordination with Farmer’s Clubs/NGOs/Social Organizations. 8. Improvement in Recovery Act. 9. Recovery Camps. 10. Special Attention to SSI Units.

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BIBLIOGRAPHY/REFERENCES

https://www.researchgate.net/publication https://www.scmspune.ac.in/chapter/2016/Chapter%209. http://www.igidr.ac.in/pdf/publication/WP-2017-019 https://www.mbarendezvous.com/ impact-of-npas-of-indian-economy-industry-and-banks/ http://shodhganga.inflibnet.ac.in/handle/10603/200588? http://shodhganga.inflibnet.ac.in/bitstream/10603/48938/11/11 https://www.investopedia.com/terms/n/non-performing-assets.asp

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