Project on Non Performing Assets in Banks CONTENTS Chapter no.
Title Executive Summary
1
General Introduction
Page no. 2
Introduction to the Topic
4
Company Profile
6
Non performing assets
10
2
Research Methodology
32
3
Data Analysis & Interpretation
38
4
Findings, Suggestions & Conclusions
64
5
Annexure: a) Bibliography
68
b) Questionnaire
70
1
EXECUTIVE SUMMARY Studying books and merely passing exams is not worth, the education, knowledge and experience is incomplete without being exposed to what is happening in real. In order to make students competent enough to face real world, there is a requirement of course for undergoing training for six to eight weeks with some reputed organization. This exposure to real life situation gives an insight to the students the kind of pressure and problems they can expect to face during their career. For the requirement of undergoing training I sent my request for training to HDFC BANK and fortunately it was accepted. I was assigned the project “a study of investment behavior of people in respect to demographic features i.e. Age and Occupation. There are lot many investment avenues are available these days to invest money like Insurance, Bank Deposits, Equity Market etc. The report studies the various investment avenues preferred by people and the various factors like Age and Occupation that influence the investment behavior of people. Chapter gives the introduction to investment. It provides information about the various investment options available to the investor like mutual funds, bonds, shares, real estate, bank deposits etc. Next chapter describes the industry profile stating about investment management, investment banking & major players. Then comes the turn of company profile where the History, Mission & the Products offered by HDFC Bank are discussed. Some of the products offered are saving account, current account, fixed deposit, anywhere banking, online broking, insurance, lockers etc. Series of steps were undertaken in order to study the investment behavior of people. Descriptive research design & Non probability convenient sampling technique is used.
2
INTRODUCT ION
3
INTRODUCTION The accumulation of huge non-performing assets in banks has assumed great importance. The depth of the problem of bad debts was first realized only in early 1990s. The magnitude of NPAs in banks and financial institutions is over Rs.1,50,000 crores. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. Now it is increasingly evident that the major defaulters are the big borrowers coming from the non-priority sector. The banks and financial institutions have to take the initiative to reduce NPAs in a time bound strategic approach. Public sector banks figure prominently in the debate not only because they dominate the banking industries, but also since they have much larger NPAs compared with the private sector banks. This raises a concern in the industry and academia because it is generally felt that NPAs reduce the profitability of a banks, weaken its financial health and erode its solvency. For the recovery of NPAs a broad framework has evolved for the management of NPAs under which several options are provided for debt recovery and restructuring. Banks and FIs have the freedom to design and implement their own policies for recovery and write-off incorporating compromise and negotiated settlements.
4
COMPANY PROFILE
5
ABOUT HDFC The Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive an 'in principle' approval from the Reserve Bank of India (RBI) to set up a bank in the private sector, as part of the RBI's liberalization of the Indian Banking Industry in 1994. The bank was incorporated in August 1994 in the name of 'HDFC Bank Limited', with its registered office in Mumbai, India. HDFC Bank commenced operations as a Scheduled Commercial Bank in January 1995. HDFC is India's premier housing finance company and enjoys an impeccable track record in India as well as in international markets. Since its inception in 1977, the Corporation has maintained a consistent and healthy growth in its operations to remain the market leader in mortgages. Its outstanding loan portfolio covers well over a million dwelling units.
HDFC has developed significant expertise in
retail mortgage loans to different market segments and also has a large corporate client base for its housing related credit facilities. With its experience in the financial markets,
a strong market
reputation, large shareholder base and unique consumer franchise, HDFC was ideally positioned to promote a bank in the Indian environment. HDFC Bank began operations in 1995 with a simple mission : to be a “ World Class Indian Bank.” We realized that only a single minded 6
focus on product quality and service excellence would help us get there. Today, we are proud to say that we are well on our way towards that goal. As of March 31, 2008, the Bank’s distribution network was at 761 Branches and 1977 ATMs in 327 cities as against 684 branches and 1,605 ATMs in 320 cities as of March 31, 2007. Against the regulatory approvals for new branches in hand, the Bank expects to further expand the branch network by around 150 branches by June 30, 2008. During the year, the Bank stepped up retail customer acquisition with deposit accounts increasing from 6.2 million to 8.7 million and total cards issued (debit and credit cards) increasing from 7 million to 9.2 million.
PERSONAL BANKING Loan Product Auto Loan Loan Against Security Loan Against Property Personal loan Credit card 2-wheeler loan Commercial vehicles finance Home loans
Deposit Product
Saving a/c Current a/c Fixed deposit Demat a/c Safe Deposit Lockers
7
Investment & Insurance
Mutual Fund Bonds Knowledge Centre Insurance General and Health Insurance Equity and Derivatives Mudra Gold Bar
Retail business banking Tractor loan Working Capital Finance Construction Equipment Finance Health Care Finance Education Loan Gold Loan Cards Credit Card Debit Card Prepaid Card
-------------------------------Forex Services ------------------------------- Product & Services Trade Services Forex service Branch Locater RBI Guidelines
Payment Services
NetSafe Merchant Prepaid Refill Billpay Visa Billpay InstaPay DirectPay VisaMoney Transfer e–Monies Electronic Funds Transfer Online Payment of Direct Tax
WHOLESALE BANKING
8
Access To Bank NetBanking OneView InstaAlert MobileBanking ATM Phone Banking Email Statements Branch Network
Corporate
Small and Enterprises
Medium Financial and Trusts
Institutions
Funded Services Non Funded Services Value Added Services Internet Banking
BANKS Funded Services Sub Non Funded Clearing Membership Services – Specialized Services RTGS submembership Value added services Fund Transfer Internet Banking ATM Tie-ups Corporate Salary a/c Tax Collection Financial Institutions Mutual Funds Stock Brokers Insurance Companies Commodities Business Trusts
HDFC’s main goals are to :The primary objective of HDFC is to enhance residential housing stock and to promote home ownership. To acquire by purchase, lease, exchange, hire or otherwise lands & property or any interest in the same in India. To advance money to any person/ persons, company or corporation, society or association either at interest without, and or with or without any security and in particular to advance money to shareholders of the company or to oth4r persons to enable the person to erect, or purchase, or enlarge, or repair any house or building or any part or portions thereof or to purchase any freehold or leasehold or any lands or estate or property in India upon the terms and conditions as laid by the company.
9
NONPERFORMIN G ASSETS
NON PERFORMING ASSETS (NPA)
10
WHAT IS A NPA (NON PERFORMING ASSETS) ? Action for enforcement of security interest can be initiated only if the secured asset is classified as Nonperforming asset. Non performing 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 ,and
v.
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 ’90 days overdue ‘norms for identification of NPAs ,from the year ending March 31,2004,a non performing asset shell 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,
11
ii.
The account remains ‘out of order ‘ for a period of more than 90 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 out standing 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.
FACTORS FOR RISE IN NPAs
12
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 non-recover, their by reducing their 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 advances and loans. Natural calamities This is the measure factor, which is creating alarming rise in NPAs of the PSBs. every now and then India is hit by major natural calamities thus making the borrowers unable to pay back there loans. Thus the bank has to make large amount of provisions in order to compensate those loans, hence end up the fiscal with a reduced profit. Mainly ours farmers depends on rain fall for cropping. Due to irregularities of rain fall the farmers are not to achieve the production level thus they are not repaying the loans. Industrial sickness Improper project handling , ineffective management , lack of adequate resources , lack of advance technology , day to day changing govt. Policies give 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. 13
Lack of demand Entrepreneurs in India could not foresee their product demand and starts production which ultimately piles up their product thus making them unable to pay back the money they borrow to operate these activities. The banks recover the amount by selling of their assets, which covers a minimum label. Thus the banks record the non recovered part as NPAs and has to make provision for it. Change on Govt. policies With every new govt. banking sector gets new policies for its operation. Thus it has to cope with the changing principles and policies for the regulation of the rising of NPAs. The fallout of handloom sector is continuing as most of the weavers Co-operative societies have become defunct largely due to withdrawal of state patronage. The rehabilitation plan worked out by the Central government to revive the handloom sector has not yet been implemented. So the over dues due to the handloom sectors are becoming NPAs. INTERNAL FACTORS :-------------------------------- Defective Lending process There are three cardinal principles of bank lending that have been followed by the commercial banks since long. i. Principles of safety ii. Principle of liquidity iii. Principles of profitability
i.
Principles of safety :By safety it means that the borrower is in a position to repay the loan both principal and interest. The repayment of loan depends upon the borrowers:
14
a. Capacity to pay b. Willingness to pay Capacity to pay depends upon: 1. Tangible assets 2. Success in business Willingness to pay depends on: 1. Character 2. Honest 3. Reputation of borrower The banker should, there fore take utmost care in ensuring that the enterprise or business for which a loan is sought is a sound one and the borrower is capable of carrying it out successfully .he should be a person of integrity and good character.
Inappropriate technology Due to inappropriate technology and management information system, market driven decisions on real time basis can not be taken. Proper MIS and financial accounting system is not implemented in the banks, which leads to poor credit collection, thus NPA. All the branches of the bank should be computerized. Improper SWOT analysis The improper strength, weakness, opportunity and threat analysis is another reason for rise in NPAs. While providing unsecured advances the banks depend more on the honesty, integrity, and financial soundness and credit worthiness of the borrower. Banks should consider the borrowers own capital investment. it should collect credit information of the borrowers from_ a. From bankers. 15
b. Enquiry from market/segment of trade, industry, business. c. From external credit rating agencies.
Analyze the balance sheet. True picture of business will be revealed on analysis of profit/loss a/c and balance sheet.
Purpose of the loan When bankers give loan, he should analyze the purpose of the loan. To ensure safety and liquidity, banks should grant loan for productive purpose only. Bank should analyze the profitability, viability, long term acceptability of the project while financing.
Poor credit appraisal system Poor credit appraisal is another factor for the rise in NPAs. Due to poor credit appraisal the bank gives advances to those who are not able to repay it back. They should use good credit appraisal to decrease the NPAs. Managerial deficiencies The banker should always select the borrower very carefully and should take tangible assets as security to safe guard its interests. When accepting securities banks should consider the_ 1. Marketability 2. Acceptability 3. Safety 4. Transferability. The banker should follow the principle of diversification of risk based on the famous maxim “do not keep all the eggs in one basket”; it means that the banker should not grant advances to a few big farms only or to concentrate them in few industries or in a few cities. If a new big customer meets misfortune or certain traders or industries affected adversely, the overall position of the bank will not be affected. 16
Like OSCB suffered loss due to the OTM Cuttack, and Orissa hand loom industries. The biggest defaulters of OSCB are the OTM (117.77lakhs), and the handloom sector Orissa hand loom WCS ltd (2439.60lakhs). Absence of regular industrial visit The irregularities in spot visit also increases the NPAs. Absence of regularly visit of bank officials to the customer point decreases the collection of interest and principals on the loan. The NPAs due to willful defaulters can be collected by regular visits. Re loaning process Non remittance of recoveries to higher financing agencies and re loaning of the same have already affected the smooth operation of the credit cycle. Due to re loaning to the defaulters and CCBs and PACs, the NPAs of OSCB is increasing day by day.
PROBLEMS DUE TO NPA 1. Owners do not receive a market return on there capital .in the worst case, if the banks fails, owners loose 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 loose 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.
17
4. Non performing 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 resources. Non performing asset may spill over the banking system and contract the money stock, which may lead to economic contraction. This spill over effect can channelize through liquidity or bank insolvency: a) When many borrowers fail to pay interest, banks may experience
liquidity
shortage. This can jam payment across the country, b) Illiquidity constraints bank in paying depositors .c) Undercapitalized banks exceeds the banks capital base. The three letters Strike terror in banking sector and business circle today. NPA is short form of “Non Performing Asset”. The dreaded NPA rule says simply this: when interest or other due to a bank remains unpaid for more than 90 days, the entire bank loan automatically turns a 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 can not be then left is to look after the factor responsible for it and managing those factors. Interest and/or instalment 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 of other accounts. As a facilitating measure for smooth transition to 90 days norm, banks have been advised to move over to charging of interest at monthly rests, by April 1, 2002. However, the date of classification of an advance as NPA should not be changed on 18
account of charging of interest at monthly rests. 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 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 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'. ‘Overdue’: Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.
Impact of NPA 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 current profit but also future stream of profit, which may lead to loss of some long-term beneficial
19
opportunity. Another impact of reduction in profitability is low ROI (return on investment), which adversely affect current earning of bank. Liquidity:Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to borrowing money for shot\rtes 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. 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.
Credit loss:Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It will lose it’s goodwill and brand image and credit which have negative impact to the people who are putting their money in the banks . REASONS FOR NPA: Reasons can be divided in to two broad categories:A] Internal Factor B] External Factor
20
[ A ] Internal Factors:Internal Factors are those, which are internal to the bank and are controllable by banks. Poor lending decision: Non-Compliance to lending norms: Lack of post credit supervision: Failure to appreciate good payers: Excessive overdraft lending: Non – Transparent accounting policy:
[ B ] External Factors:External factors are those, which are external to banks they are not controllable by banks. Socio political pressure: Chang in industry environment: Endangers macroeconomic disturbances:
21
Natural calamities Industrial sickness Diversion of funds and willful defaults Time/ cost overrun in project implementation Labour problems of borrowed firm Business failure Inefficient management Obsolete technology Product obsolete
Types of NPA A] Gross NPA B] Net NPA A] 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
22
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:
Gross NPAs Ratio
Gross NPAs
Gross Advances B] 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_ Net NPAs Gross NPAs – Provisions Gross Advances - Provisions
PREVENTIVE MEASUREMENT FOR NPA
Early Recognition of the Problem:Invariably, by the time banks start their efforts to get involved in a revival process, it’s too late to retrieve the situation- both in terms of rehabilitation of the project and recovery of bank’s dues. Identification of weakness in the very beginning that is : When the account starts showing first signs of weakness regardless of the fact that it 23
may not have become NPA, is imperative. Assessment of the potential of revival may be done on the basis of a techno-economic viability study. Restructuring should be attempted where, after an objective assessment of the promoter’s intention, banks are convinced of a turnaround within a scheduled timeframe. In respect of totally unviable units as decided by the bank, it is better to facilitate winding up/ selling of the unit earlier, so as to recover whatever is possible through legal means before the security position becomes worse. Identifying Borrowers with Genuine Intent:Identifying borrowers with genuine intent from those who are non- serious with no commitment or stake in revival is a challenge confronting bankers. Here the role of frontline officials at the branch level is paramount as they are the ones who has intelligent inputs with regard to promoters’ sincerity, and capability to achieve turnaround. Base don this objective assessment, banks should decide as quickly as possible whether it would be worthwhile to commit additional finance. In this regard banks may consider having “Special Investigation” of all financial transaction or business transaction, books of account in order to ascertain real factors that contributed to sickness of the borrower. Banks may have penal of technical experts with proven expertise and track record of preparing technoeconomic study of the project of the borrowers. Borrowers having genuine problems due to temporary mismatch in fund flow or sudden requirement of additional fund may be entertained at branch level, and for this purpose a special limit to such type of cases should be decided. This will obviate the need to route the additional funding through the controlling offices in deserving cases, and help avert many accounts slipping into NPA category.
24
Timeliness and Adequacy of response:Longer the delay in response, grater the injury to the account and the asset. Time is a crucial element in any restructuring or rehabilitation activity. The response decided on the basis of techno-economic study and promoter’s commitment, has to be adequate in terms of extend of additional funding and relaxations etc. under the restructuring exercise. The package of assistance may be flexible and bank may look at the exit option. Focus on Cash Flows:While financing, at the time of restructuring the banks may not be guided by the conventional fund flow analysis only, which could yield a potentially misleading picture. Appraisal for fresh credit requirements may be done by analyzing funds flow in conjunction with the Cash Flow rather than only on the basis of Funds Flow. Management Effectiveness:The general perception among borrower is that it is lack of finance that leads to sickness and NPAs. But this may not be the case all the time. Management effectiveness in tackling adverse business conditions is a very important aspect that affects a borrowing unit’s fortunes. A bank may commit additional finance to an aling unit only after basic viability of the enterprise also in the context of quality of management is examined and confirmed. Where the default is due to deeper malady, viability study or investigative audit should be done – it will be useful to have consultant appointed as early as possible to examine this aspect. A proper techno- economic viability study must thus become the basis on which any future action can be considered. Multiple Financing:25
A. During the exercise for assessment of viability and restructuring, a Pragmatic and unified approach by all the lending banks/ FIs as also sharing of all relevant information on the borrower would go a long way toward overall success of rehabilitation exercise, given the probability of success/failure. B. In some default cases, where the unit is still working, the bank should make sure that it captures the cash flows (there is a tendency on part of the borrowers to switch bankers once they default, for fear of getting their cash flows forfeited), and ensure that such cash flows are used for working capital purposes. Toward this end, there should be regular flow of information among consortium members. A bank, which is not part of the consortium, may not be allowed to offer credit facilities to such defaulting clients. Current account facilities may also be denied at non-consortium banks to such clients and violation may attract penal action. The Credit Information Bureau of India Ltd.(CIBIL) may be very useful for meaningful information exchange on defaulting borrowers once the setup becomes fully operational. C. In a forum of lenders, the priority of each lender will be different. While one set of lenders may be willing to wait for a longer time to recover its dues, another lender may have a much shorter timeframe in mind. So it is possible that the letter categories of lenders may be willing to exit, even a t a cost – by a discounted settlement of the exposure. Therefore, any plan for restructuring/rehabilitation may take this aspect into account. D. Corporate Debt Restructuring mechanism has been institutionalized in 2001 to provide a timely and transparent system for restructuring of the corporate debt of Rs. 20 crore and above with the banks and FIs on a
26
voluntary basis and outside the legal framework. Under this system, banks may greatly benefit in terms of restructuring of large standard accounts (potential NPAs) and viable sub-standard accounts with consortium/multiple banking arrangements.
Tools for recovery of NPAs
Credit Default
Inability to Pay
Unviable
Willful default
Viable Rehabilitation
Lok Adalat 27 Debt Recovery Tribunals
Securitization Act
Compromise
Sole Banker
Consortium Finance
Asset Reconstruction
Corporate Debt Restructuring
Fresh Issue of Term Loan
Conversion into WCTL
Fresh WC Limit
Rephasement of Repayment Period
Once NPA occurred, one must come out of it or it should be managed in most efficient manner. Legal ways and means are there to over come and manage NPAs. We will look into each one of it. Willful Default :A] Lok Adalat and Debt Recovery Tribunal B] Securitization Act C] Asset Reconstruction
28
Lok Adalat: Lok Adalat institutions help banks to settle disputes involving account in “doubtful” and “loss” category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. The progress through this channel is expected to pick up in the coming years. Debt Recovery Tribunals(DRT): The recovery of debts due to banks and financial institution passed in March 2000 has helped in strengthening the function of DRTs. Provision for placement of more than one recovery officer, power to attach defendant’s property/assets before judgment, penal provision for disobedience of tribunal’s order or for breach of any terms of order and appointment of receiver with power of realization, management, protection and preservation of property are expected to provide necessary teeth to the DRTs and speed up the recovery of NPAs in the times to come. DRTs which have been set up by the Government to facilitate speedy recovery by banks/DFIs, have not been able make much impact on loan recovery due to variety of reasons like inadequate number, lack of infrastructure, under staffing and frequent adjournment of cases. It is essential that DRT mechanism is strengthened and vested with a proper enforcement mechanism to enforce their orders. Non observation of any order passed by the tribunal should amount to contempt of court, the DRT should have right to initiate contempt proceedings. The DRT should empowered to sell asset of the debtor companies and forward the proceed to the winding – up court for distribution among the lenders
29
Inability to Pay Consortium arrangements: Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books.
Corporate debt Restructuring (CDR): Background In spite of their best efforts and intentions, sometimes corporate find themselves in financial difficulty because of factors beyond their control and also due to certain internal reasons. For the revival of the corporate as well as for the safety of the money lent by the banks and FIs, timely support through restructuring in genuine cases is called for. However, delay in agreement amongst different lending institutions often comes in the way of such endeavours. Based on the experience in other countries like the U.K., Thailand, Korea, etc. of putting in place institutional mechanism for restructuring of corporate debt 30
and need for a similar mechanism in India, a Corporate Debt Restructuring System has been evolved, as under : Objective The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and transparent mechanism for restructuring of the corporate debts of viable entities facing problems, outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned. In particular, the framework will aim at preserving viable corporate that are affected by certain internal and external factors and minimize the losses to the creditors and other stakeholders through an orderly and coordinated restructuring programme.
RESEARCH METHODOLOGY 31
RESEARCH METHODOLOGY Research methodology is a way to systematically solve the research problem. Research methodology constitutes of research methods, selection criterion of research methods, used in context of research study and explanation of using of a particular method or technique so that research results are capable of being evaluated either by researcher himself or by others TITLE: “PROCEDURE TO REDUCE NON-PERFORMING ASSETS IN BANKS ”.
32
OBJECTIVES OF THE STUDY The basic idea behind undertaking the Grand Project on NPA was to:
To Know the Concept of Non Performing Asset To know Preventive Measures To evaluate NPAs (Gross and Net) in different banks. To analyze financial performance of banks at different level of NPA To Know the Impact of NPAs To Know the Reasons for NPAs
SIGNIFICANCE OF THE STUDY This is a limited study which takes into consideration the responses of 100 people. This data can be exported to take in the trends across the industry. The significance for the industry lies in studying these trends that emerge from the study. It is a rapidly changing and evolving sector. People are only beginning to wake up to it’s vast possibilities. A study like this can attempt to guide the future of the industry based on current trends. SCOPE OF THE STUDY
33
The scope of the study refers to the job that to know about the activities of the organization. The study means that the analysis of the products of the company on which he/she has to focus. Scope of the Study Concept of Non Performing Asset Guidelines Impact of NPAs Reasons for NPAs Preventive Measures Tools to manage NPAs During the summer training the volunteer need to find out the corporate strategies of the running company and The mile stone which the company has covered during its journey. In the summer training, it is necessary for the student that he /she involve with the experience guys to get the knowledge about the company. That is how the company has got the success, Or if it is going in the loss, why.
RESEARCH DESIGN
NON-PROBABILITY
EXPLORATORY &DISCRIPTIVE EXPERIMENTAL RESEARCH
The research is primarily both exploratory as well as descriptive in nature. The sources of information are both primary & secondary. Primary Data:
34
Primary data is basically the live data which I collected on field while doing cold calls with the Distributor and shopkeeper, customers, I shown them list of question for which I had required their responses. In some cases I got no response form their side and than on the basis of my previous experiences I filled those fields. Source: Main source for the primary data for the project was questionnaires which I got filled by the customers or some times filled myself on the basis of discussion with the customers. Secondary Data: 1
Internet ,
2
Books
3
Journals ,
4
Newspaper,
5 Annual report, 6
Database available in the library,
7
Catalogues and presentations.
Tools and Techniques: As no study could be successfully completed without proper tools and techniques, same with my project. For the better presentation and right explanation I used tools of statistics and computer very frequently. And I am very thankful to all those tools for helping me a lot. Basic tools which I used for project from statistics are- Bar Charts - Pie charts - Tables 35
bar charts and pie charts are really useful tools for every research to show the result in a well clear, ease and simple way. Because I used bar charts and pie charts in project for showing data in a systematic way, so it need not necessary for any observer to read all the theoretical detail, simple on seeing the charts any body could know that what is being said. Technological Tools Ms-Access Ms-Word Above application software of Microsoft helped me a lot in making project more interactive and productive. Microsoft-Excel had a great role in my project, it created for me a situation of “you sit and get”. I provided it simply all the detail of data and in return it given me all the relevant information..
SAMPLING METHODOLOGY Sampling Technique: Initially, a rough draft was prepared keeping in mind the objective of the research. A pilot study was done in order to know the accuracy of the Questionnaire. The final Questionnaire was arrived only after certain important changes were done. Thus my sampling came out to be judgment and convenient Sampling Unit: 36
The respondent who were asked to fill out questionnaires are the sampling units. These comprise of employees of MNC, Govt. Employees, Self Employed etc. Sample size: The sample size was restricted to only 100, which comprised of mainly peoples from different regions of BHOPAL due to time constraints. Sampling Area : The area of the research was Bhopal.
DATA ANALYSIS 37
&
ON
Gender: Classification of Customers Based On Sex Sex
No. of respondents
Percentage %
Male Female total
35 65 100
35 65 100
38
Interpretation: 35% of the respondents are male and 65% of the respondents are female. From the above table we can conclude that, the majority of the respondents were belongs to female group.
Occupation: Analysis of Occupation of the Respondents Occupation Business Employee House wife Others
No. of. respondents
Percentage
20 10 65 05
% 20 10 65 05 39
Total
100
100
Interpretation: 20% of the respondents are business, 10% of the respondents are employees, and 65% of the respondents are house wives, 05% of the respondents are others group.
Income: Analysis of Monthly Income of the Respondents Monthly income
No. of respondents
Percentage %
Below 5000 5001-10000 10001-15000 15001 & above Total
38 30 21 11 100
38 30 21 11 100
40
Interpretation: As per the data 38% of the respondents earn per month below 5000, 30% of the respondents earn 5001 to 10000, 21% of the respondents earn above 10001 to 15000. 11% of the respondents earn 15000 & above. From the above table we can conclude that majority of the respondents’ monthly income group of below 5000 and more than 5000 to 10000. 1. DO YOU KNOW THE NON PERFORMING ASSETS OF BANK Opinions Yes No Total
No. of Respondents 10 90 100
41
Percentage (%) 10 90 100
Interpretation: Only 10% of the respondents said that they know about NON PERFORMING ASSETS while 90% don’t know about NON PERFORMING ASSETS
2. IT IS POSSIBLE TO ELIMINATE TOTALLY THE NPAS IN THE BANKING BUSINESS Analysis of Recommendations Recommended Yes No Total
No. of Respondents 95 05 100
42
Percentage (%) 95 05 100
Interpretation: Out of 100 respondent , 95% of the respondents were recommended It is possible to eliminate totally the npas in the banking business while only 5% told It is not
3. EFFECTIVE INSPECTION SYSTEM SHOULD BE IMPLEMENTED
Option
Percentage of respondents
Yes
64
No
36
43
INTERPRETATION Out of 100 respondent 64 % respondent were satisfied with effective inspection system should be implemented while 36% told no.
4. DO YOU THINK OPERATING STAFF SHOULD SCRUTINIZE THE LEVEL OF INVENTORIES/RECEIVABLES REGULARLY Option
Percentage of respondents
Yes
78
No
22
44
INTERPRETATION Out of 100 respondent 78 % respondent are satisfied with the statement that operating staff should scrutinize the level of inventories/receivables regularly while only 22% were not satisfied.
5. DO YOU THINK LARGE EXPOSURE ON BIG CORPORATE OR SINGLE PROJECT SHOULD BE AVOIDED Option
Percentage of respondents
Yes
24
No
76
45
INTERPRETATION Out of 100 respondent only 24% think large exposure on big corporate or single project should be avoided While 76% don’t think about that.
6. UNEVEN SCALE OF REPAYMENT SCHEDULE WITH HIGHER REPAYMENT IN THE INITIAL YEARS NORMALLY IS PREFERRED
RESPONSE
NO. OF RESPONDENT S
SHARE (%)
Satisfied
45
45%
Not satisfied
55
55%
46
Not Responded Total
0
0.0%
100
100%
45.00%
55.00%
Satisfied
Not satisfied
INTERPRETATION 45% of the respondents are satisfied with uneven scale of repayment schedule with higher repayment in the initial years normally is preferred 55% of the respondents are not satisfied with that statement.
7. ARE YOU SATISFIED WITH STATEMENT THE BANKS SHOULD NOT ONLY TAKE STEPS FOR REDUCING PRESENT NPAS, BUT NECESSARY PRECAUTION SHOULD ALSO BE TAKEN TO AVOID FUTURE NPAS
RESPONSE
Satisfied
NO. OF RESPONDENT S
SHARE (%)
60
60%
47
Not satisfied
40
40%
Not Responded
0
0.0%
100
100%
Total 0% 40%
60%
Satisfied
Not satisfied
Not Responded
INTERPRETATION 60% of the respondents were think the banks should not only take steps for reducing present NPAs, but necessary precaution should also be taken to avoid future NPAs . 40% of the respondents are not satisfied with that statement.
48
8. DO YOU THINK THAT NECESSARY PRECAUTION SHOULD ALSO BE TAKEN TO AVOID FUTURE NPAS? RESPONSE
NO. OF RESPONDENT S
SHARE (%)
Yes
70
70%
No
30
30%
Total
100
100%
30%
70% Yes No
INTERPRETATION Out Of the sample size of 100 surveyed respondents 70% of the respondents think that necessary precaution should also be taken to avoid future NPA 30% don’t think that.
49
9.DO YOU THINK THERE IS SIGNIFICANT RELATIONSHIP BETWEEN GROSS NPA OF A BANK TO ITS OPERATING PROFIT?
RESPONSE
NO. OF RESPONDENTS
SHARE (%)
Yes
87
87%
no
13
13%
Total
100
100%
13.0%
87.0%
yes
no
INTERPRETATION Out of 100 respondent 87% think there is significant relationship between gross NPA of a bank to its operating profit only 13% don’t think there is significant relationship between gross npa of a bank to its operating profit.
50
10. DO YOU THINK THE BANK WILL ALWAYS FACE THE PROBLEM OF NPA BECAUSE OF POOR RECOVERY OF ADVANCES GRANTED BY THE BANK
RESPONSE
NO. OF RESPONDENT S
SHARE (%)
YES
45
45%
NO
55
55%
Not Responded
0
0.0%
100
100%
Total
45.00%
55.00%
YES
NO
INTERPRETATION Out of 100 respondent 55% respondent think the bank will always face the problem of npa because of poor recovery of advances granted by the bank while 45% don’t think.
51
ANALYSIS For the purpose of analysis and comparison between private sector and public sector banks, we take five-five banks in both sector to compare the non performing assets of banks. For understanding we further bifurcate the non performing assets in priority sector and non priority sector, gross NPA and net NPA in percentage as well as in rupees, deposit – investment – advances. Deposit – Investment – Advances is the first in the analysis because due to these we can understand the where the bank stands in the competitive market. As at end of march 2008, in private sector ICICI Bank is the highest deposit-investmentadvances figures in rupees crore, second is HDFC Bank and KOTAK Bank has least figures. In public sector banks Punjab National Bank has highest deposit-investmentadvances but when we look at graph first three means Bank of Baroda and Bank of India are almost the similar in numbers and Dena Bank is stands for last in public sector bank. When we compare the private sector banks with public sector banks among these banks, we can understand the more number of people prefer to choose public sector banks for deposit-investment. But when we compare the private sector bank ICICI Bank with the public sector banks ICICI Bank is more deposit-investment figures and first in the all banks.
52
DEPOSIT-INVESTMENT-ADVANCES ( RS.CRORE) of both sector banks and comparison among them, year 2007-08.
BANK AXIS HDFC ICICI KOTAK INDUSIND TOTAL
DEPOSIT 87626 100769 244431 16424 19037 468287
INVESTMENT 33705 49394 111454 9142 6630 210325
ADVANCES 59661 63427 225616 15552 12795 377051
BANK
DEPOSIT
INVESTMENT
ADVANCES
53
BOB BOI DENA PNB UBI TOTAL
152034 150012 33943 166457 103859 606305
43870 41803 10282 53992 33823 183770
106701 113476 23024 119502 74348 437051
ICICI BANK AND PUNJAB NATIONAL BANK :BANK
DEPOSIT
INVESTMENT 54
ADVANCES
ICICI BANK PNB
244431 166457
111454 53992
225616 119502
There are two concepts related to non-performing assets_ gross and net. Gross refers to all NPAs on a bank’s balance sheet irrespective of the provisions made. It consists of all the non standard assets, viz. sub standard, doubtful, and loss assets. A loan asset is classified as ‘ sub standard” if it remains NPA up to a period of 18 months; “ doubtful” if it remains NPA for more than 18 months; and loss, without any waiting period, where the dues are considered not collectible or marginally collectible. Net NPA is gross NPA less provisions. Since in India, bank balance sheets contains 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 NPA according to the central bank guidelines, are quite significant.
55
Here, we can see that there are huge difference between gross and net NPA. While gross NPA reflects the quality of the loans made by banks, net NPA shows the actual burden of banks. The requirements for provisions are : 100% for loss assets 100% of the unsecured portion plus 20-50% of the secured portion, depending on the period for which the account has remained in the doubtful category 10% general provision on the outstanding balance under the sub standard category.
Here, there are gross and net NPA data for 2006-07 and 2007-08 we taken for comparison among banks. These data are NPA AS PERCENTAGE OF TOTAL ASSETS. As we discuss earlier that gross NPA reflects the quality of the loans made by banks. Among all the ten banks Dena Banks has highest gross NPA as a percentage of total assets in the year 2006-07 and also net NPA. Punjab National Bank shows vast difference between gross and net NPA. There is almost same figures between BOI and BOB.
YEAR 2007-08 BANK
GROSS NPA
56
NET NPA
BOB BOI DENA PNB UBI
1.46 1.48 2.37 2.09 1.82
0.35 0.45 1.16 0.45 0.59
2007-08 BANK
GROSS NPA
NET NPA
BOB BOI DENA PNB
1.10 1.08 1.48 1.67
0.27 0.33 0.56 0.38
57
UBI
1.34
0.10
2006-07 BANK
GROSS NPA
NET NPA
AXIS HDFC ICICI KOTAK INDUSIND
0.57 0.72 1.20 1.39 1.64
0.36 0.22 0.58 1.09 1.31
2007-08
58
BANK
GROSS NPA
NET NPA
AXIS HDFC ICICI KOTAK INDUSIND
0.45 0.68 1.90 1.55 1.69
0.23 0.22 0.87 0.98 1.25
COMPARISON OF GROSS NPA WITH ALL BANKS FOR THE YEAR 2007-08. The growing NPAs affects the health of banks, profitability and efficiency. In the long run, it eats up the net worth of the banks. We can say that NPA is not a healthy sign for financial institutions. Here we take all the ten banks gross NPA together for better understanding. Average of these ten banks gross NPAs is 1.29 as percentage of total assets. So if we compare in private sector banks AXIS and HDFC Bank are below average of all banks and in public sector BOB and BOI. Average of these five private sector banks gross NPA is 1.25 and average of public sector banks is 1.33. Which is higher in compare of private sector banks. GROSS NPA :59
COMPARISON OF NET NPA WITH ALL BANKS FOR THE YEAR 200708. Average of these ten bank’s net NPA is 0.56. And in the public sector banks all these five banks are below this. But in private sector banks there are three banks are above average. The difference between private and public banks average is also vast. Private sector banks net NPA average is 0.71 and in public sector banks it is 0.41 as percentage of total assets. As we know that net NPA shows actual burden of banks. IndusInd bank has highest net NPA figure and HDFC Bank has lowest in comparison.
NET NPA of banks:-
PRIORITY –NON PRIORITY SECTOR When we further bifurcate NPA in priority sector and Non priority sector. Agriculture + small + others are priority sector. In private sector banks ICICI Bank has the highest NPA in both sector in compare to other private sector banks. Around 72% of NPA is with ICICI Bank with Rs.1359 crore in priority sector and
60
around 78% in non priority sector. We can see that in private sector banks , banks has more NPA in non priority sector than priority sector. BANK
AGRI (1)
AXIS 109.12 HDFC 36.12 ICICI 981.85 KOTAK 10.00 INDUSIND 30.44 TOTAL 1167.53
BANK
SMALL OTHERS PRIORITY (2) 14.76 110.56 23.35 33.84 3.18 185.69
(3)
SECTOR
PRIORITY
86.71 47.70 354.13 4.04 30.02 522.60
( 1+2+3 ) 210.59 194.41 1359.34 47.87 63.64 1875.85
275.06 709.23 6211.12 405.20 328.67 7929.28
PRIORITY SECTOR
NPA
(ADVANCED BOB BOI DENA PNB UBI
NON-
RS.CRORE ) 5469 3269 1160 3772 1924
61
350 325 106 443 197
When we talk about public sector banks they are more in priority sector and they given advanced to weaker sector or industries. Public sector banks give more loans to Agriculture , small scale and others units and as a result we see that there are more number of NPA in public sector banks than in private sector banks. BOB given more advanced to priority sector in 2007-08 than other four banks and Dena Bank is in least. But when there are comparison between private bank and public sector bank still ICICI Bank has more NPA in both priority and non priority sector with the comparison of public sector banks. Large NPA in ICICI Bank because the strategy of bank that risk-reward attitude and initiative in each sector. Above we also discuss that ICICI Bank has highest deposit-investment-advance than other banks. Now, when we compare the all public sector banks and public sector banks on priority and non-priority sector than the figures are really shocking. Because in compare of private sector banks, public sector banks numbers are very large.
SECTOR PRIORITY PUBLIC NON PRT TOTAL
PUBLIC SECTOR 2006-07 2007-08 22954 490 15158 38602
25287 299 14163 39749
NEW PRIVATE 2006-07 2007-08 1468 3 4800 6271 62
2080 0 8339 10419
Here, there are huge difference between private and public sector banks NPA. There is increase in new private sector banks NPA of Rs.4148 cr in 2007-08 which is almost 66% rise than previous year. In public sector banks the numbers are not increased like private sector banks.
FINDING SUGGESTION CONCLUSION 63
FINDING For the purpose of analysis and comparison between private sector and public sector banks, we take five-five banks in both sector to compare the non performing assets of banks. For understanding we further bifurcate the non performing assets in priority sector and non priority sector, gross NPA and net NPA in percentage as well as in rupees, deposit – investment – advances. 55% respondent think the bank will always face the problem of npa because of poor recovery of advances granted by the bank while 45% don’t think. 45% of the respondents are satisfied with uneven scale of repayment schedule with higher repayment in the initial years normally is preferred 55% of the respondents are not satisfied with that statement 60% of the respondents were think the banks should not only take steps for reducing present NPAs, but necessary precaution should also be taken to avoid future NPAs . 40% of the respondents are not satisfied with that statement. Deposit – Investment – Advances is the first in the analysis because due to these we can understand the where the bank stands in the competitive market. As at end of march 2008, in private sector ICICI Bank is the highest deposit-investment-
64
advances figures in rupees crore, second is HDFC Bank and KOTAK Bank has least figures. In public sector banks Punjab National Bank has highest deposit-investmentadvances but when we look at graph first three means Bank of Baroda and Bank of India are almost the similar in numbers and Dena Bank is stands for last in public sector bank. When we compare the private sector banks with public sector banks among these banks, we can understand the more number of people prefer to choose public sector banks for deposit-investment. comparison of net npa with all banks for the year 2007-08. Average of these ten bank’s net NPA is 0.56. And in the public sector banks all these five banks are below this. But in private sector banks there are three banks are above average SUGGESTION Effective inspection system should be implemented. Operating staff should scrutinize the level of inventories/receivables regularly. Large exposure on big corporate or single project should be avoided. Uneven scale of repayment schedule with higher repayment in the initial years normally is preferred. Large exposure on big corporate or single project should be avoided
65
CONCLUSION It is not possible to eliminate totally the NPAs in the banking business but can only be minimized. It is always wise it follow the proper policy appraisal, supervision and follow-up of advances to avoid NPAs. The banks should not only take steps for reducing present NPAs, but necessary precaution should also be taken to avoid future NPAs. The bank has achieved its target because the net profit is also increased and there is a decrease in NPAs. So it is in better position compared to last year
66
BIBLIOGRAPH 67
Y
BIBLIOGRAPHY Marketing Management Philip Kotler, The Millennium Edition, Prentice Hall Of India Private Limited, New Delhi. Marketing Research:
G.C Brek, Tata Mc Graw-Hill Publishing Company Limited, New Delhi
Periodical:
Business Word
Research Methodology: C.R.Kothari , 2nd edition. S.N Murty and U Bhojanna Website Address: www.hdfcbank.com
68
www.scribed.com www.googlesearch.com
QUESTIONNAI RE 69
QUESTIONNIRE I am student of first year MBA of the G.G.I.T.M. Bhopal, I am doing project on “Procedure to reduce non performing assets in banks” as a part of study. I request you to provide the required information for the completion of my study. Promise that the information is used exclusively for academic purpose only. 1. personal profile: A. Name: B. Address:
C: Sex: Male: G: Age: [
[
]
70
] Female [
]
1.DO YOU KNOW THE NON PERFORMING ASSETS OF BANK 1)
YES
2)
NO
2.IT IS POSSIBLE TO ELIMINATE TOTALLY THE NPAS IN THE BANKING BUSINESS 1)
YES
2)
NO
3.EFFECTIVE INSPECTION SYSTEM SHOULD BE IMPLEMENTED. 1)
YES
2)
NO
4.DO YOU THINK OPERATING STAFF SHOULD SCRUTINIZE THE LEVEL OF INVENTORIES/RECEIVABLES REGULARLY 1)
YES
2)
NO
5.DO YOU THINK LARGE EXPOSURE ON BIG CORPORATE OR SINGLE PROJECT SHOULD BE AVOIDED 1)
YES
2)
NO
6.UNEVEN SCALE OF REPAYMENT SCHEDULE WITH HIGHER REPAYMENT IN THE INITIAL YEARS NORMALLY IS PREFERRED 1)
YES
2)
NO
7.DO YOU THINKTHE BANKS SHOULD NOT ONLY TAKE STEPS FOR REDUCING PRESENT NPAS, BUT NECESSARY PRECAUTION SHOULD ALSO BE TAKEN TO AVOID FUTURE NPAS 1)
YES
2)
NO
8.NECESSARY PRECAUTION SHOULD ALSO BE TAKEN TO AVOID FUTURE NPAS. 1)
YES
2)
NO
9.DO YOU THINK THERE IS SIGNIFICANT RELATIONSHIP BETWEEN GROSS NPA OF A BANK TO ITS OPERATING PROFIT. 71
1)
YES
2)
NO
10.THE BANK WILL ALWAYS FACE THE PROBLEM OF NPA BECAUSE OF POOR RECOVERY OF ADVANCES GRANTED BY THE BANK 1)
YES
2)
NO
11.NON PERFORMING ASSETS ARE MORE IN 1) PRIORITY SECTOR 2) NON PRIORITY SECTOR
12.WHAT ARE THE METHODS ADOPTED BY THE BANK TO LOOK AFTER NPA MANAGEMENT ……………………………………………………………………………………… ……………………………………………………………………………………… ……........................................ 13.WHAT IS THE CRITERIA TO RECOVER THE ADVANCES FROM THE BANK ……………………………………………………………………………………… ……………………………………………………………………………………… ……………………………....
72
