Badora Bank 2019.docx

Marathwada Shikshan Prasarak Mandal’s

Deogiri Institute of Engineering and Management Studies, Aurangabad A Project Report On

“A STUDY ON NON-PERFORMING ASSET OF BANK OF BARODA”

Submitted by MS. MANISHA RAMESHWAR GADHE

Roll no.:- F-721018 Specialization Finance MBA IV semester Batch 20172019

In partial fulfillment of the completion of MBA course of Dr. Babasaheb Ambedkar Marathwada University, Aurangabad

Acknowledgement I, MANISHA RAMESHWAR GADHE thank to Prof. Bharat Pawar (Project Guide). His expertise was valuable during each step of the project from narrowing the scope of the research to theoretical development and analysis. I also thank Prof. Rupesh Rebba (Head of Department) and Dr. Ulhas Shiurkar (Director), Deogiri Institute of Engineering and Management Studies, Aurangabad for encouraging and guiding me through the Project.

Mr. Manisha Rameshwar Gadhe Roll no.:- F-721018 MBA IV semester Batch 2017-2019

INDEX

SR.NO 1

CONTENTS

PAGE .NO

CHAPTER I:

1.1

INTRODUCTION

1

1.2

OBJECTIVES OF THE STUDY

2

1.3

SCOPE OF THE STUDY

2

1.4

LIMITATIONS OF THE STUDY

3

2 2.1 3 3.1 4 4.1 5

CHAPTER II: RESEARCH METHODOLOGY

4

CHAPTER III: COMPANY PROFILE /THEORITICAL BACKGROUND

5-15

CHAPTER IV: DATA ANALYSIS & INTERPRETATION

16-21

CHAPTER V:

5.1

FINDINGS & CONCLUSIONS

5.2

BIBILIOGRAPHY

22-23 24

CHAPTER 1 INTRODUCTION: “NPA” is strike terror

in banking sector and business circle today. NPA is short from of ‘Non

Performing Asset” the dreaded NPA rule says simply this ;when interest or other dues to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns to a non performing assets. The recovery of loan has always been problem for banks and financial intuition. An assets becomes NPA when:

 Interest and instalment of principal remains overdue for two harvest seasons. but for a period not exceeding two half year in the case of an advance granted for agricultural purposes, and

 Any amount to be recived remains overdue for a period of more than 90 days in respect of other accounts. For any nation, banking system plays a vital role in the development of its sound economy. Banking is an important segment of the tertiary sector and acts as a back bone of economic progress. Banks are supposed to be more directly and positively related to the performance of the economy. Banks act as a development agency and are the source of hope and aspirations of the masses. Commercial banks are the major players to develop the economy. A major threat to banking sector is prevalence of NonPerforming Assets (NPAs). NPAs reflect the performance of banks. A high level of NPAs suggests high profitability of 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 provision, which reduce the overall profit and shareholder “value in present scenario NPAs are at the core of financial problem of the banks. Concrete efforts have to be made to improve recovery performance. The main reasons of increasing NPAs are the target-oriented approach, which deteriorates the qualitative aspect of lending by banks willful defaults, ineffective supervision of loan accounts, lack of technical and managerial expertise on the part of borrowers.

The purpose of the study is to identify the causes of loans becoming NPAs and to identify the action plan to reduce the NPAs in Bank of Baroda.

1

2

OBJECTIVE OF THE STUDY



To understand the reasons for NPAs.



To assess the impact of NPA on bank profitability’s



To evaluate NPA (Gross NPA & Net NPA) of Bank of Baroda.



To suggest ways and needs to reduce NPA and its growth.

SCOPE OF THE STUDY

 Concept of NPAs can be made clear.  This project also be applicable to know the reasons of increase in NPAs.  To know the variables available to control NPAs.

3

LIMITATION OF THE STUDY

 The study was for Bank of Baroda only.  Time was the major constraint for the study. 

The study is limited to Five years data.



The solutions are not applicable to every bank.



4

CHAPTER 2 2.1 RESEARCH METHODOLOGY



Research : 

The study has been done in one of the lending public sector bank. This study based on secondary data, which have been obtained from published sources i.e. Annual report of period of last five year (i.e. from 2014-2018).

 

Research Design of our report is Descriptive and Analytical Research.

Statement problem: 

NPAs always affect the profit and also the prestige of the bank, so here the research problem is to identify the causes for the NPA and to identify the action plan to reduce the NPA.



Data Collection 

Secondary: The data for the current study was collected mainly from secondary source like drawn from the annual reports as found in the downloaded from the various websites. Other information related to the banks has been collected from various books, websites and magazines, Newspapers were all used to collect information.

5



Data Collection Instruments of data are:

1. www.rbi.org.in 2. Balance sheets of Bank of Baroda.

6

CHAPTER 3 3.1 COMPANY PROFILE/ THEORATICAL BACKGROUND

 WHAT IS A NPA (NON PERFORMING ASSETS)? Nonperforming asset means an asset or account of borrower, which has been classified by bank or financial institution as sub –standard , doubtful or loss asset, in accordance with the direction or guidelines relating to assets classification issued by RBI. An amount due under any credit facility is treated as “past due” when it is not been paid within 30 days from the due date. Due to the improvement in the payment and settlement system, recovery climate, up gradation 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 shell be an advance where i.

Interest and/or installment of principal remain overdue for a period of more than 180 days in respect of a term loan,

ii.

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

iii.

The bill remains overdue for a period of more than 180 days in case of bill purchased or discounted.

iv.

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

v.

Any amount to be received remains overdue for a period than 180 days in respect of other accounts.

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of more

With a view to move towards international best practices and to ensure greater transparency, it has been decided to adopt 90 days overdue norms for identification of NPAs, from the year ending March 31, 2004, a non performing asset shall be a loan or an advance where; i.

Interest and/or installment of principal remain overdue for a period of more than 90 days in respect of a term loan, The account remains ‘out of order ‘ for a period of more than 90

ii.

days ,in respect of an overdraft/cash credit (OD/CC) iii.

The bill remains overdue for a period of more than 90 days in case of bill purchased or discounted.

iv.

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

v.

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

 Out of order: An account should be treated as out of order if the outstanding balance remains continuously in excess of sanctioned limit /drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned amount /drawing power, but there are no credits continuously for six months as on the date of balance sheet or credit are not enough to cover the interest debited during the same period ,these account should be treated as ‘out of order’.  Overdue: Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on due date fixed by the bank.

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

CLASSIFICATION OF NPA:

Assets are classified into following four categories:

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

a. 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.

b. 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 well-defined 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. 9

c. 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 sub- standard category for 12 months. d. 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 writtenoff wholly.



PROFITABILITY: Profitability refers to profits which the company has made during the year which is calculated as difference between revenue and expense done by the company. A profitable company may not have enough liquidity because most of the funds of the company are invested into projects. Gross profits, net profit, operating profit, return on capital employed are some of the ratios which are used to calculate profitability of the firm while current ratio, liquid ratio. A company which is profitable can go bankrupt in the short term if it does not have liquidity.

10



LIQUIDITY: Liquidity refers to availability of cash with the company at any point of time. Liquidity may not be profitable because of lack of opportunities for putting idle cash. Liquid ratio and cash debt coverage ratio are some of the ratios which are used to calculate liquidity of the firm. A company which has liquidity but is not profitable cannot go bankrupt in the short term.



TYPES OF NPA:

1. Gross NPA : Gross NPAs are the sum total of all loan assets that are classified as NPAs as per RBI guidelines as on Balance Sheet date. Gross NPA reflects the quality of the loans made by banks. It consists of all the non standard assets like as sub-standard, doubtful, and loss assets. It can be calculated with the help of following ratio Formula; Gross NPAs Ratio = Gross NPAs Gross Advances 2. Net NPA : Net NPAs are those type of NPAs in which the bank has deducted the provision regarding NPAs. Net NPA shows the actual burden of banks. Since in India, bank balance sheets contain a huge amount of NPAs and the process of recovery and write off of loans is very time consuming, the provisions the banks have to make against the NPAs according to the central bank guidelines, are quite significant. That is why the difference between gross and net NPA is quite high. It can be calculated by following Formula;

Net NPAs =

Gross NPAs – Provisions Gross Advances - Provisions 11



REASONS FOR AN ACCOUNT BECOMING NPA: 1) Internal Factors: i.

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

ii.

Project not completed in time.

iii.

Poor recovery of receivables.

iv.

Excess capacities created on non-economic costs.

v.

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

vi.

Business failures.

vii.

Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns.

viii.

Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc.

ix.

Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delaying settlement of payments\ 12

subsidiaries by government bodies etc.,

2) External Factors: i.

Sluggish Legal System i.e. long legal tangles, changes that had taken place in labour laws & lack of sincere effort.

ii.

Scarcity of raw material, power and other resources.

iii.

Shortage of raw material, raw material / input price escalation, power shortage, industrial recession, excess capacity, natural calamities like floods, accidents.

iv.

Failures, nonpayment over dues in other countries, recession in other countries, externalization problems, adverse exchange rates etc.

v.



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

IMPACT OF NPA: 13

1. Profitability: NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client because of the money getting blocked the prodigality of bank decreases not only by the amount of NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning project/asset. So NPA doesn't affect only current profit but also future stream of profit, which may lead to loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI (Return on Investment), which adversely affect current earnings of bank.

2. Liquidity: Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shortest period of time which lead to additional cost to the company. Difficulty in operating the functions of bank is another cause of NPA due to lack of money, routine payments and dues. 3. Involvement of Management: Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time and efforts of management in handling and managing NPA would have diverted to some fruitful activities, which would have given good returns. Now day’s banks have special employees to deal and handle NPAs, which is additional cost to the bank. 4. Credit Loss: Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose its goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks. 

PROBLEMS DUE TO NPA 14

1. Owners do not receive a market return on their capital .in the worst case, if the banks fails, owners lose their assets. In modern times this may affect a broad pool of shareholders. 2. Depositors do not receive a market return on saving. In the worst case if the bank fails, depositors lose their assets or uninsured balance. 3. Banks redistribute losses to other borrowers by charging higher interest rates, lower deposit rates and higher lending rates repress saving and financial market, which hamper economic growth. 4. Nonperforming loans epitomize bad investment. They misallocate credit from good projects, which do not receive funding, to failed projects. Bad investment ends up in misallocation of capital, and by extension, labour and natural reources.

15

5. Nonperforming asset may spill over the banking system and contract the money stock, which may lead to economic contraction. This spillover effect can channelize through liquidity or bank insolvency: 6. When many borrowers fail to pay interest, banks may experience liquidity shortage. This can jam payment across the country, 7. An undercapitalized bank exceeds the bank’s capital base. The dreaded NPA rule says; when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns into non performing asset. The recovery of loan has always been problem for banks and financial institution. To come out of these first we need to think is it possible to avoid NPA, no cannot be then left is to look after the factor responsible for it and managing those factors. 

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 purposes, and



Any amount to be received remains overdue for a period of more than 90 days in respect to other accounts as a facilitating measure for smooth transition to 90 days norm; banks are advised to charge interest on monthly rests, since April 1, 2002. Banks should, therefore, continue to classify an account as NPA only if the interest charged during any quarter is not serviced fully within 180 days from the end of the quarter with effect from April 1, 2002 and 90 days from the end of the quarter with effect from March 31, 2004.



Out of Order &status: An account should be treated as & if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for six months as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as out of order.

16

SYMPTOMS OF NPA: There are four symptoms by which one can recognize a Performing Asset turning in to Non Performing Asset. 1. Financial: i.

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

ii.

Bouncing of cheques due to insufficient balance in the accounts.

iii.

Irregularity in installment.

iv.

Irregularity of operations in the accounts.

v.

Unpaid overdue bills

vi.

Declining Current Ratio.

vii.

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

viii.

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

2. Operational and Physical:

i.

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

ii.

Overdue receivables.

iii.

Stock statement not submitted on time.

iv.

External non-controllable factor like natural calamities in the city where borrower conduct his business.

v.

Nonpayment of wages.

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3. Attitudinal Changes: i.

Use for personal comfort, stocks and shares by borrower.

ii.

Avoidance of contact with bank.

iii.

Problem between partners.

4. Others:



i.

Changes in Government policies.

ii.

Death of borrower.

iii.

Competition in the market.

COMPUTATION OF NPA LEVELS: Banks should deduct the following items from the Gross Advances and Gross NPAs to arrive at the Net advances and Net NPAs respectively: i.

Balance in Interest Suspense Account

ii.

DICGC (Deposit Insurance and Credit Guarantee Corporation)/ECGC (Export Credit Guarantee Corporation) claims received and held, pending adjustment

iii.

Part payment received and kept in suspense account

iv.

Total provisions held (excluding amount of technical write off and provision on standard assets) For the purpose, the amount of gross advances should exclude the amount of

Technical Write off but would include all outstanding loans and advances; including the advances for which refinance has been availed but excluding the 18

amount of rediscounted bills. The level of gross and net NPAs will be arrived at in percentage terms by dividing the amount of gross and net NPAs by gross and net advances, computed as above, respectively.

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CHAPTER 4 4.1 DATA ANALYSIS AND INTERPRETATION

FORMAT FOR CALCULATING NPA: AMOUNT SR. NO.

PARTICULARS

RS.

1

Gross advance

xxxx

2

Gross NPA

xx.x

3

Gross NPA as a % of gross advances

x.xx%

4

Deductions I. II.

BAL. in interest suspense A/c DICGC/ECGC claims received and held

xx.xx

x.xx

pending adjustments III.

Part payment received and kept in suspense a/c

xx.xx

5

Net advances (1-(minus)4)

xxxx.xx

6

Net NPA

xx.xx

7

Net NPA as a % of net advances

x.xx

20

Balance Sheet of Bank of Baroda Bank of Baroda :

21

 GROSS NPA OF BANK OF BARODA (in Rs.Cr)

60,000.00

56,480.39

50,000.00 42,718.70

40,521.04

40,000.00

30,000.00

20,000.00

16,261.45 11,875.90

10,000.00

0.00 2018

2017

2016

2015

2014

INTERPRETATION: The graph above shows the Gross NPA of Bank of Baroda during past five years. The amount of Gross NPA has increase as the years have passed over. There has been drastic increase in Gross NPA in the year 2017 to 2018.

22

 GROSS NPA OF BANK OF BARODA (in %)

14 12.26 12 10.46 10

9.99

8

6 3.72

4

2.94 2

0 2018

2017

2016

2015

2014

INTERPRETATION: As per the table shows the Gross NPA of Bank of Baroda of last five years in percentage. There has been drastic increase in Gross NPA in the year 2018 to 2017. In 2018, Gross NPA was 0% only but now its increase and become 9% in 2017.

23

 NET NPA OF BANK OF BARODA (in Rs.Cr)

25000

23482.55

20000

18,080

19408.46

15000

10000

8069.49 6034.76

5000

0 2018

2017

2016

2015

2014

INTERPRETATION: As per the table shows Net NPA Bank of Baroda during past five years. The amount of Net NPA has increase as the years have passed over. There has been drastic increase in Net NPA in the year 2016 to 2018 (23482.55 to 19408.46).

24

 NET NPA OF BANK OF BARODA (in %)

6 5.49 5.06 5

4.72

4

3

1.89

2

1.52

1

0 2018

2017

2016

2015

2014

INTERPRETATION: As per the table of Net NPA Bank of Baroda during past five years in Percentage. The % of Net NPA has increase as the years have passed over. There has been drastic increase in Net NPA in the year 2018 to 2017. In 2016 to 2017, Net NPA was 5.06% but in 2018 it is 5.49% and in 2017 its increase to 4.72%.

25

CHAPTER 5  FINDINGS & CONCLUSIONS 1. Findings: •

There has been drastic increase in Gross NPA in 2018 to 2017. In 2017, Gross

NPA

was 42,718.70Cr. and it increase to 56,480.39Cr. in 2018. •

In percentage, Gross NPA increased by 12.26% to 10.46% in 2018 to 2017 resp.

•

Net NPA also increased by 19,408.46 Cr. to 23,482.55 in to 2018 respectively. 2016 In percentage, Net NPA increased by 5.49% to 5.06% in 2018 to 2016 resp.

•

The Gross NPAs shown increment in the very recent year i.e. 2018 due to ongoing slowdown in the industrial sector which would be recovered by improvement in asset quality.

•

The doubtful assets also shown rise which means that bank should take corrective action recovery through policy to reduce the level of doubtful assets.

•

The loss assets got declined this year which means that bank has taken appropriate measures thereby reducing the level of loss assets.

26

2.Conclusions: 

I conclude that NON-PERFORMING ASSETS are like black spots on diamond.



NPAs affect the profit of bank and also the financial health of the bank.



If not controlled NPAs properly managed then it affect the bank’s growth.



The issue of NON-PERFORMING ASSETS (NPAs)has been an area of concern for all economic and reduction in NPAs has become synonymous with functional efficiency of financial intermediaries.



NPAs are a balance sheet issue of individual banks and financial institution, it has macroeconomic implication.

27

BIBLIOGRAPHY

In the completion of the project some valuable information is collected from various web sites, reports, they are as follows: 

Reports : 1. Annual report of Bank of Baroda.



Web sites: 1. www.rbi.gob.in 2. www.icicibank.in 3. www.google.com

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