study of the npa

NPA Management of State Bank of India

EXEUTIVE SUMMARY
The future if Indian Banking represents a unique mixture of unlimited opportunities amidst insurmountable challenges. On the one hand we see the scenario represented by the rapid process of globalization presently taking shape bringing the community of nations in the world together, transcending geographical boundaries, in the sphere of trade and commerce, and even employment opportunities of individuals. All these indicates newly emerging opportunities for Indian banking to expand its horizon in International sphere and to become one of the leading financial forces in the International financial market. But on the darker side we see the accumulated morass, brought out by three decades of controlled and regimented management of the banks into past. It has siphoned profitability of many banks accumulated bloated NPA and threatens Capital Adequacy of the Banks and their continued stability. Banks in India can solve their problems only if they asset a spirit of self-initiative and self-reliance through developing their in –house expertise in monitoring the credit portfolio. The success of Banks in bringing down the level of NPA depends upon efficient management of its Credit Portfolio an attempt is made to study the causes for NPA in a bank and its implication and means and ways to reduce NPA.

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NPA Management of State Bank of India

1. INDUSTRY PROFILE
Banking in India has its origin as carry as the Vedic period. It is believed that the transition from money lending t banking must have occurred even before Manu, the great Hindu jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to the interest. During the Mughal period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of East India Company, it w sot turn of the agency houses top carry on the banking business. The general bank of India was the first joint stock bank to be established in the year 1786. The other, which followed, was the Bank of Hindustan and the Bengal Bank. The bank of Hindustan is reported to have continued till 1906, while the other two failed in the meantime. In the first half of the 19th Century the East India Company established three banks; The Bank of Bengal in 1809, The Bank of Bombay in 1840 and the bank of Madras in 1843. These three banks also known as presidency banks and were independent units and functioned well. These three banks were amalgamated in 1920 and the Imperial Bank of India was established on the 27th Jan 1921, with the passing of the SBI Act in 1955, the undertaking of the Imperial Bank of India was taken over by the newly constituted SBI. The Reserve Bank which is the Central Bank was created in 1935 by passing of RBI Act 1934, in the wake of swadeshi movement, a number of banks with India Management were established into country namely Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd. The Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19th 1969, 14 major Banks of the country were also taken over by the government. The Indian Banking Industry, Which is governed by the Banking Regulation Act 1949, can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the cooperative banks. BIET MBA PROGRAMME DAVANAGERE 2

NPA Management of State Bank of India The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from class banking to mass banking. This in turn resulted in the significant growth in the geographical coverage of banks. Every bank had to earmark a min percentage of their loan portfolio to sectors identified as “priority sectors” the manufacturing sector also grew during the 1970‟s I protected environment and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980 since then the number of scheduled commercial banks increased fourfold and the number of bank branches increased to eight fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties. The PSB‟s found it extremely difficult to complete with the new private sector banks and the foreign banks. The new private sector first made their appearance after the guidelines permitting them were issued in January 1993. The Indian Banking System: Banking in our country is already witnessing the sea changes as the banking sector seeks new technology and its applications. The best port is that the benefits are beginning to reach the masses. Earlier this domain was the preserve of very few organizations. Foreign banks with heavy investments in technology started giving some “out of the world” customer services. But, such services were available only to selected few-the very large account holders. Then came the liberalization and with it multitude of private banks, a large segment of the urban population now requires minimal time and space for its banking needs. Automated teller machines or popularly known as ATM are the three alphabets that have changed the concept of banking like nothing before. Instead a tellers handling our own cash, today there are efficient machines that do not talk but just dispense cash. Under the Reserve bank of India Act 1934, banks are classified as

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NPA Management of State Bank of India

Scheduled bank and non-scheduled banks. The scheduled banks are those, which are entered in the Second schedule of RBI Act, 1934. Such bank are those, which have paid up capital and reserve of an aggregate value of not less than Rs.5 lakh and which satisfy RBI that their affairs are carried out in the interest of their depositors. All commercial banks Indian and Foreign, regional rural banks and state co-operative banks are Scheduled banks. Non-Scheduled banks are those, which have not been included in the Second Schedule of the RBI Act, 1934. Current scenario:Currently the overall banking in India is considered as fairly mature in terms of supply, product range and reach – even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and Capital adequacy, India banks are considered to have clean strong and transparent balance sheets – as compared to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the Government. With the growth in the Indian economy expected to be strong for quite some time especially in its service sector, the demand for banking services especially retail banking, mortgages an investment services are expected to be strong. Merger and acquisitions, takeovers are much more in action in India. One of the classical economic functions of the banking industry that has remained virtually unchanged over the centuries is lending. On the one hand, competition has had considerable adverse impact on the margins which lenders have enjoyed, but on the other hand technology has to some extent reduced the cost of delivery of various products and services. Bank is a financial institution that borrows money from the public and lends money to the public for productive purposes. The Indian Banking Regulation Act BIET MBA PROGRAMME DAVANAGERE 4

NPA Management of State Bank of India

of 1949 defines the term Banking Company as “Any company which transacts banking business in India” and the term banking as “Accepting for the purpose of lending all Investment of money from the public, repayable on demand or otherwise and withdrawal by cheque, draft or otherwise”. State Bank of India is India's largest bank with a network of over 13000 branches and 5 associate banks located even in the remotest parts of India. Banks play important role in economic development of a country, like:        Banks mobilize the small savings of the people and make them available

for productive purposes. Promotes the habit of savings among the people thereby offering attractive

rates of interests on their deposits. Provides safety and security to the surplus money of the depositors and as

well provides a convenient and economical method of payment. Banks provide convenient means of transfer of fund form one place to

another. Helps the movement of capital from regions where it is not very useful to

regions where it can be more useful. Banks advances exposure in trade and commerce, industry and agriculture

by knowing their financial requirements and prospects. Banks as an intermediary between the depositors and the investors. Bank

also acts as mediator between exporter and importer who does foreign trades. Thus Indian banking has come from a long way from being a sleepy business institution to a highly pro-active and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generation revenues from conventional streams (i.e. borrowing and lending). The banking in

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NPA Management of State Bank of India

India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advance. The Structure of Indian Banking:

Reserve Bank of India [Central Bank]

Schedule Bank

Schedule Commercial Banks

Schedule Co-operative Banks

Schedule Urban Cooperative Banks

Scheduled State Cooperative Banks

Public Sector Bank

Private Sector Bank

Foreign Banks

Regional Rural Banks

Nationalized Banks

SBI & its Associates

Old Private Sector Banks

New Private Sector Bank

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NPA Management of State Bank of India Chart Showing Three Different Sectors of Banks 1. 2. Public Sector Banks Private Sector Banks Public Sector Banks

SBI and SUBAIDIARIES

Nationalized Banks

Regional Rural Banks

SBI and Subsidiaries: This group comprises of the State Bank of India and its seven subsidiaries viz., State Bank of Patiala, State Bank of Hyderabad, State Bank of Travancore, State Bank of Bikaner and Jaipur, State Bank of Mysore, State Bank of Saurashtra, State Bank of India. State Bank of India (SBI) is the largest bank in India. If one measures by the number of breach offices and employees, SBI is the largest bank in the world. Established in 1806 as bank of Bengal it is the oldest commercial bank in the Indian subcontinent. SBI provides various domestic, international and NRI products and services, through its vast network in India and overseas. With an asset base of $126 billion and its reach, it is a regional banking behemoth. The government nationalized the bank in 1955, with the Reserve bank of India taking a 60% ownership stake. In recent years the has focused on two effects priorities.  Reducing its staff through Golden handshake schemes known as the

Voluntary Retirement Scheme, which saw many of its best and brightest defect to the private sector.  Computerizing its operations.

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NPA Management of State Bank of India The State Bank of India trace its roots to the first decade of 19th century, when the bank of Calcutta, later renamed the Bank of Bengal, Was established on 2 June 1806. The government Amalgamated Bank of Bengal and two other presidency banks, namely, the bank of Bombay and the bank of Madras and named the reorganized banking entity the Imperial Bank of India. All these Presidency banks were incorporated as companies, and were the result of the royal charters. The Imperial Bank of India continued to remain a joint stock company. Until the establishment of a central bank in India the Imperial Bank and its early predecessors served as the nation‟s central bank printing currency. The State Bank of India Act 1955, enacted by the parliament of India, authorized the Reserve Bank of India, which is the central Banking Organization of India, to acquire a controlling interest in the Imperial Bank of India, which was renamed the State Bank of India on 30th April 1955. In recent years, the bank has sought to expand its overseas operations by buying foreign banks. Ti sis only Indian bank to feature in the top 100 world banks in the fortune Global 500 rating and various other rankings. NATIONALIZED BANKS: This group consists of private sector banks that were nationalized. The Government of India nationalized 14 private banks in 1969 and another 6 in the year 1980. In early 1993, the loss making new bank of India was merged with profit making Punjab National Bank. Hence, now only 27 nationalized banks exist in India.

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NPA Management of State Bank of India

REGIONAL RUTAL BANKS: The RBI established these dint the year 1975 of banking commission. It was established to operate exclusively in rural areas to provide credit and other facilities to small and marginal farmers, agricultural laborers, artisans and small entrepreneurs.

PRIVATE SECOTR BANKS: Private Sector Banks

Old private sector Banks

New private Sector Banks

Old Private Sector Banks: This group consist of the banks that were establishes by the privy sectors, committee organizations or by group of professionals for the cause of economic betterment in their operations. Initially, their operations were concentrated in a few regional areas. However, their braches slowly spread throughout the nation as they grow. New Private Sector Banks: These banks were started as profit orient companies after the RBI opened the banking secot to the private sector. These banks are mostly technology driven and better managed than other banks.

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NPA Management of State Bank of India

FORIGHN BANKS: These are the banks that were registered outside India and had originated in a foreign country. The major participants of the Indian financial system are the commercial banks, the financial institutions (FIs), encompassing term-lending institutions, investment institutions, specialized financial institutions and the state level development banks, Non-bank Financial Companies (NBFCs) and other market intermarries such as the stock brokers and money-lenders. The commercial banks and certain variants of NBFCs are among the oldest of the market participants. The FIs, on the other hand, are relatively new entities in the financial market place.

Important of banking sector in a growing economy: In the recent times when the service industry is attaining greater importance compared to manufacturing industry, banking has evolved as a prime sector providing financial service to growing needs of the economy. Banking industry has undergone a paradigm shift from providing ordinary banking services in the past to providing such complicated and crucial services like, merchant banking, housing finance, bill discounting etc. this sector has become more active with the entry of new players like private and foreign banks. It has also evolved as a prime builder of the economy by understanding the needs of the same and encouraging the development by way of giving loans, providing infrastructure facilities and financing activities for the promotion of entrepreneurs and other business establishments. The banking sector in recent years has incorporated new products in their business, which is helpful for growth. At the same time, the banks are reaching out to other end of customer requirements like, insurance premium payment, tax BIET MBA PROGRAMME DAVANAGERE 10

NPA Management of State Bank of India payment etc. It has changed itself from transaction type of banking into relationship banking, where you find friendly and quick service suited to your needs. This is possible with understanding the customer needs their value to the bank, etc. this is possible with the help of well-organized staff, computer based network for speedy transactions, products like credit card, debit card, health care, ATM etc. these are the present trend of services. The customers at present ask for convenience of banking transactions, like 24 hours banking, where they want to utilized the services whenever there is a need. The relationship banking plays a major an important role in growth, because the customers now have enough number of opportunities, and they choose according to their satisfaction of reposes and recognition they get. So the banks have to play cautiously, else they may lose out the place in the market due to competition, where slightest of opportunities are captured fast. Another major role played by banks is in transaction business, transactions and networking. Many leading Indian banks have spread out their network to other countries, which help in currency transfer and earn exchange over it.

These banks play a major role in commercial import and export business, between parties of two countries of two countries. This foreign presence also helps in bringing in the international standards of operations and ideas. The liberalization policy of 1991 has allowed many foreign banks to enter the Indian market and establish their business. This has helped large amount of foreign capital inflow and increase our foreign exchange reserve. Another emerging change happening all over the banks in strengthening their empire and expanding their network of business in terms of volume and effectiveness.

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NPA Management of State Bank of India

2. COMPANY PROFILE The roots of the State Bank of India lie in the decade of 19th century, when the Bank of Calcutta, later renamed the Bank of Bengal, was established on June 2, 1806. The bank of Bengal was one of three Presidency banks the other two being the bank of Bombay (incorporated on April 15th 1840) and the bank of madras (incorporated on July 1st 1843). All three Presidency banks were incorporated as joint stock companies and were the result of the royal charters. These three banks received the exclusive right to issue Paper Currency in 1861 with the Paper Currency act, a right they retained until the formation of the Reserve bank of India. The Presidency banks amalgamated on January 27th 1921, and the reorganized banking entity took as its name Imperial Bank of India. The Imperial bank of India remained a joint stock company. Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve Bank of India, which is India‟s Central bank, acquired a controlling interest in the Imperial Bank of India. On April 30th 1955, the Imperial Bank of India became the State Bank of India. The government of India recently acquired the Reserve Bank of India‟s stake in SBI so as to remove any conflict of interest because the RBI is the country‟s banking regulatory authority. In 1959, the government passed the State Bank of India (Subsidiary Banks) Act, enabling the State Bank of India to take over eight former state associated banks as its subsidiaries. On September 12, 2008, the state Bank of Suarashtra, one of the associate banks, merged with the State Bank of India. SBI has acquired local banks in rescues. For instance, in 1985, it acquired the Bank of Cochin in Kerala, which had 120 branches. SBI was acquiring as its affiliate, the State Bank of Travancore, already had an extensive network in Kerala.

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NPA Management of State Bank of India

Background of the company: STATE BANK OF INDIA Not only many financial institution in the world today can claim the antiquity and majesty of the State Bank of India founded nearly two centuries ago with primarily intent of imparting stability to the money market, the bank from its inception mobilized funds for supporting both the public credit of the companies government in the three presidencies of British India and the private credit of the European and India merchants from about 1860s when the Indian economy book a significant leap forward under the impulse of quickened world communications and ingenious method of industrial and agricultural production the Bank became intimately in valued in the financing of practically and mining activity of the Subundoubtedly the principal beneficiaries, the small man never ignored loans as low as the bank till the creation of the Reserve Bank in 1935 carried out numerous Central Banking functions. Adaption world and the needs of the hour has been one of the strengths of the Bank, in the post-depression exe. For instance – when business opportunities become extremely restricted, rules laid down in the book of instructions were relined to ensure that good business did no go post. Yet seldom did the bank contravene its innovative array of office, unknown to the world then, was devised in the form of braches, sub branches, treasury pay office, pay office, a sub pay office and out students to exploit the opportunities of an expanding economy. New business strategy was also evaded way back in 1937 to render the best banking service through prompt and courteous attention to customers. A highly efficient and experienced management functioning in a well-defined organizational structure did not take long to place the bank an executed pedestal in the areas of business, profitability, internal discipline and above all credibility if banking an observation of a high standard of integrity in its operation helped the BIET MBA PROGRAMME DAVANAGERE 13

NPA Management of State Bank of India

bank gain pre-eminent status. No wonders the administration for the bank was universal as key functionaries of India successive finance minister of independent India Resource Bank of governors and representative so of chamber of commercial showered economics on it. Modern day management techniques were also very much evident in the good old day‟s years before corporate governance had become a puzzled the banks bound functioned with a high degree of responsibility and concern for the shareholders. An unbroken record of profits and a fairly high rate of profit and fairly high rate of dividend all through ensured satisfaction; prudential management and asset liability obligations t customers were not met. The traditions of the past continued to the upheld even to this day as the State Bank year it to meet the emerging challenges of the millennium.

ABOUT LOGO

Togetherness is the theme of this corporate logo of SBI where the world of banking services meet the ever changing customers‟ needs and established a link that is like a circle, it indicates complete services towards customers. The logo also denotes a bank that it has prepared to do anything to go to any lengths, for customers. The blue pointer represent the philosophy of the bank that is always looking for the growth and newer, more challenging, more promising direction. The keyhole indicates safety and security. BIET MBA PROGRAMME DAVANAGERE 14

NPA Management of State Bank of India

NATURE OF THE BUSINESS CARRIED Banking activities are considered to be the lifeblood of the national economy. Without banking services, trading and business activities cannot be carried on smoothly. Banks are the distributors and protectors of liquid capital, which is of vital significance to a developing country. Efficient administration of the baking system helps in the economic growth of the nation. Banking is useful to trade and commerce. Banking activities are useful to trade and industry in the following ways.    Money deposited in a bank remains safe. Precious articles too can be kept

in the safe custody of banking lockers. Banks provide credit facilities to their customers. Customers with bank

account also enjoy better credit in the business world. Banks encourage the habit of saving and thrift among people. They

mobilize savings and invest them in productive activities. Thus, they help in increasing the rate of savings and investment in the country.    Banks provide a convenient and safe means of transferring money from

one place to another and facilitate business dealings/ transactions. Banks collect and realize bills, cheese, internet and dividend warrants etc. Foreign trade is facilitated considerably with the help of banks which

receive and make payments, provide credit and deal in foreign exchange. They protect importers form the risk of loss on account of exchange rate fluctuations. They issue letter of credit and provide information on the credit worthiness of importers. They also act as reference if their customers.   Banks meet the financial needs of small-scale business units which are

located in economically backward areas. Farmers and artisans in rural areas can also avail of bank credit for

financing their activities. BIET MBA PROGRAMME DAVANAGERE 15

NPA Management of State Bank of India  Commercial banks provide many other services to the general public which includes locker facility, issue of traveler‟s cheques and gift cheque, payment of insurance premium, etc. Services activities of Banks Service activities of banks may be categorized as follows:        Banks undertake/various agency services for their customer. Collection of cheques, drafts, and bills of exchanges on behalf of

customers. Collection of divided and interest warrants of customers. Purchasing and sale of securities on the instructions of customers. Executing standing orders for payment of rent, electricity bill, and

insurance premium. Acting as correspondent or representative of customers in dealing with

other banks. Acting as trustee or executor when so nominated.

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NPA Management of State Bank of India  Vision, Mission, and Quality Policy

Mission statement: To retain the Banks position as premiere Indian Financial Services Group, with world class standards and significant global committed to excellence in customer, shareholder and employee satisfaction and to play a leading role in expanding and diversifying financial service sector while containing emphasis on its development banking rule. Vision statement:    share.  An institution with cultural mutual care and commitment, satisfying and Premier Indian Financial Service Group with prospective world-class

standards of efficiency and professionalism and institution values. Retain its position in the country as pioneers in Development Banking. Maximize the shareholders‟ value through high-sustained earnings per

Good work environment and continues learning opportunities. Values:          Excellence in customer service Profit orientation Belonging commitment to bank Fairness in all dealings and relations Risk taking and innovative Team playing Learning and renewal Integrity Transparency and discipline in policies and system

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NPA Management of State Bank of India

Products and Services Profile: Products: State Bank of India renders varieties of services to customers through the following products:             SBI Term Deposits SBI Recurring Deposits SBI Housing Loan SBI Car Loan SBI Education Loan SBI Personal Loan SBI Loan for Pensioners Loan Against Mortgage of Property Loan Against Shares and debentures Rent plus scheme Medi-plus scheme Rates of Interest

Services:         Domestic Treasury Sbi vishwa yatra Foreign Travel card Broking Services Revised service charges ATM Services Remittance Internet banking E-Pay 18

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NPA Management of State Bank of India    E-Rail Safe Deposit Locker Gift Cheques

State bank networked ATM services: State bank offers you the convenience of over 26000 ATMs in India, the largest network in the country and continuing to expand fast! This means that you can transact free of cast at the ATMs of State Bank of India Group (This includes the ATMs of State Bank of India as well as the Associate Banks – namely, State Bank of Bikaner and Jaipur, State Bank of Patiala, State Bank of Saurashtra, State Bank of Hyderabad, State Bank of Indore, State Bank of Mysore, Stae Bank of

Travancore) and wholly owned subsidiary viz. SBI Commercial and International Bank Ltd., using the State Bank ATM-cum-Debit (Cash Plus) card. Kinds of cards accepted at State Bank ATM besides State Bank ATM-cum-Debit Card and State Bank International ATMCum-Debit Cards following cards are also accepted at State Bank ATMs:  State Bank Credit Card ATM Card issued by Banks under bilateral sharing viz. Andhra bank, Axis

bank, Dena Bank, HDFC Bank, Indian Bank, Punjab National Bank, UCO bank and Union Bank of India.   Cards issued by banks (other than under bilateral sharing) displaying

maestro, master card, cirrus, VISA and VISA Electron logos. All Debit/Credit cards issued by any bank outside India displaying

Maestro, Master Card, Cirrus, VISA and VISA Electron logos. Area of Operation-Global/National/Regional

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NPA Management of State Bank of India  globe.   banks.  SBI includes 99345 offices in India. SBI has about 26,000 ATMs and SBI group (including associate banks) State Bank of India has 172 foreign offices in 37 countries across the

has about 40,000 ATMs. SBI has 13000 branches, including branches that belong to its associate

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NPA Management of State Bank of India

Competitors Information
Market Name Last Price SBI Bank of Baroda PNB Canara Bank Bank of India Union Bank IDBI Bank Oriental Bank Indian Bank Syndicate Bank Allahabad Bank IOB Corporation Ban Andhra Bank Central Bank UCO Bank Dena Bank Bank of Mah State B Bikaner State Bank Mysore State Bnk Tr Vijaya Bank United Bank Punjab & Sind Cap. (Rs. cr.) Net Interest Income Net Profit Total Assets

2,296.40 154,098.84 106,521.45 11,707.29 1,335,519.24 771.50 860.70 448.45 341.05 236.35 100.20 302.95 191.35 130.00 149.40 75.70 406.20 102.95 76.90 67.20 103.25 56.40 454.75 625.00 553.25 55.35 67.75 66.60 31,815.68 29,193.11 19,866.34 19,594.00 13,012.23 12,809.77 8,838.91 8,223.65 7,825.35 7,470.39 6,033.28 6,017.01 5,760.88 5,660.73 4,466.87 3,614.35 3,325.30 3,183.25 2,924.99 2,766.25 2,742.81 2,445.77 1,559.83 29,673.72 36,428.03 30,850.62 28,480.67 21,144.28 23,369.93 15,814.88 12,231.32 15,268.35 15,523.28 17,897.08 13,017.78 11,338.73 19,149.50 14,632.37 6,794.13 7,213.96 6,291.36 5,078.44 6,828.76 7,988.12 7,961.09 6,474.50 5,006.96 4,884.20 3,282.72 2,677.52 1,787.13 2,031.61 1,141.56 1,746.97 1,313.39 1,866.79 1,050.13 1,506.04 1,344.67 533.04 1,108.67 803.14 430.83 652.03 369.15 510.46 580.99 632.53 451.28 447,321.46 458,194.01 374,160.20 384,535.47 262,211.44 290,837.23 178,130.17 141,419.20 182,468.06 182,934.57 219,648.17 163,560.42 124,964.23 229,799.74 180,498.41 87,387.93 88,017.38 72,528.15 60,403.58 85,949.33 95,764.00 102,010.39 72,905.27

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NPA Management of State Bank of India AWARDS OF STATE BANK OF INDIA

Recent Awards:


Best Online Banking Award, Best Customer Initiative Award & Best Risk

Management Award (Runner Up) by IBA Banking Technology Awards 2010


The Bank of the year 2009, India (won the second year in a row) by The Best Bank – Large and Most Socially Responsible Bank by the Business

Banker Magazine


Bank Awards 2009
     

Best Bank 2009 by Business India The Most Trusted Brand 2009 by The Economic Times Most Preferred Bank & Most preferred Home loan provider by CNBC Visionaries of Financial Inclusion By FINO Technology Bank of the Year by IBA Banking Technology Awards SKOCH Award 2010 for Virtual corporation Category for its e-payment

solution
 

The Brand Trust Report: 11th most trusted brand in India Business standard has Award “THE BEST BANK OF THE YEAR

AWARD” to Shri O.P Bhatt for this initiative to re-energies the bank.


CNN IBN Network 18 has selected Shri O.P Bhatt as Indian of the year

business 2007 for showing how a public sector behemoth can flex its muscle in the ferociously competitive banking sector. Asian Centre for corporation government and sustainability and Indian merchant chamber has awarded the “Transformational Leader Award 2007 to Shri O.P Bhatt for leadership, chairman, inspiration and intellectual stimulation for the entire SBI team.

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NPA Management of State Bank of India   The only Indian bank to find place in the fortune Global 500 list SBI has bagged the awards for “ Most Preferred Bank” and “Most

Preferred Brand for Home Loan” in CNBC Awaaz Consumer Awards in August 2007  lacs  3rd in the Economic Times Brand Equity ranking Top 50 most trusted SBI is No.1 provider of Agri. Finance and No.1 in Credit Linking of 9.35

Services Brand in the Services Sector 

Future growth and prospects:

If both Foreign Institutional Investments (FII) inflow and credit growth outperforms, SBI can perform as good as a bank fixed deposit that is deliver an annual return of around 10%. Has the potential to double in the long run – 3 to 5 years or more – for this to get delayed, and SBI delivering only an FD type return in good markets, and correcting significantly in adverse markets and slow credit growth condition. SBI recently concluded a successful bond issue that takes care of the fund requirements. The bank remains bullish on teaser loans in home financing, and seems to have the tacit approval of Finance Ministry, even against the wishes of banking regulator, Reserve Bank of Indian (RBI). Teaser how loans are expected to be a future money-spinner for SBI, if it doesn‟t regress to a sub-prime like scenario. Due to its unique positioning as the bank „closest‟ to Government of India, SBI has unique access to some incredibly large fund decisions like the recent Employee‟s Provident Fund Organization (EPFP) decision to park Rs.3.5 lakh crore solely with SBI, even if it is for three months. SBI is 330% larger than Punjab National Bank (BSE:532461,NSE:PNB), the nearest public sector competitor by income; and 275% larger than nearest private sector peer, ICICI Bank (BSE:532174,NSE:ICICIBSNK). Not only can‟t both of BIET MBA PROGRAMME DAVANAGERE 23

NPA Management of State Bank of India them play catch-up un the coming few years, but size-wise things are getting better for SBI due to the upcoming mergers with SBI Group banks like State bank of Mysore (BSE:532200, NSE:MYSOREBANK), State Bank of Bikaner and Jaipur (BSE:501061,NSE:SBBJ), and State Bank of Travancore

(BSE:532191,NSE:SBT). The dominance in income is also on a comparable asset base. SBI has shown the capability for leading other PSBs in innovative products, and lately even a brand of defiance to regulators when it comes to pushing things their way. State Bank Group has access to some of the lowest cost Current Account/Savings Account (CASA) funds in the country that protects margins. 3. EXPLANATION OF THE 7-S FRAMEWORK OF MCKINSEY

Description: The 7-S Frame of Mckinsey is management model that describes 7 factors to organize a company in a holistic and effective way. Together these factors BIET MBA PROGRAMME DAVANAGERE 24

NPA Management of State Bank of India determine the way in which a corporation operates. Managers should take into account all seven of these factors, to be sure of successful implementation of a strategy. Large or Small. They‟re all interdependent, so if you fail to pay proper attention to one of them; this may affect all others as well. On top of that, the relative importance of each factor may vary over time. The 7-S Framework was first mentioned in “The art of Japanese Management” by Richard Pascale an Anthony Athos in 1981. They had been investigating how Japanese industry had been so successful. At around the same time that Tm Peters and Robert Waterman were exploring what made a company excellent. The Seven S model was born at a meeting of these four authors in 1978. It appeared also in “In Search of Excellence” by peters and Waterman, and was taken up as abasing tool by the global management consultancy company Mckinsey. Since then it is known as their 7-S model. Shared Values: The interconnecting center of McKinsey's model is: Shared Values. What does the organization stands for and what it believes in. Central Beliefs and Attitudes.

Strategy: Plans for the allocation of firms scarce resources, over time, to reach identified goals. Environment, Competition, Customers. Structure: The way in which the organization's units relate to each other: centralized, functional divisions (top-down); decentralized; a matrix, a network, a holding, etc Systems: The procedures, processes and routines that characterize how the work should be done: financial systems; recruiting, promotion and performance appraisal systems; information systems.

Staff: Numbers and types of personnel within the organization. Style: Cultural style of the organization and how key managers behave in achieving the organization's goals. Compare: Management Styles.

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NPA Management of State Bank of India Skills: Distinctive capabilities of personnel or of the organization as a whole. Compare: Core Competences. Strengths of the 7-S Model. Benefits • • • • Diagnostic tool for understanding organizations that is ineffective. Guides organizational change. Combines rational and hard elements with emotional and soft elements. Managers must act on all S‟s in parallel and all S‟s are interrelated.

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ORGANIZATION STRUCTURE CHAIRMAN

DMD (I & MA) DMD&CCO

DMD (I&MA)

DMD&CDO CVO

CVO

Chief economic Advisor

MD&GE (CB)

MD&GE (NB)

MD&GE (IB)

MD&GE (A&S)

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4. SWOT ANALYSIS OF SBI Strength
 The biggest bank in the country.  Has separate act for itself. Thus, a special privilege.  Biggest branch network in the country.  First public sector to move to CBS.

Weakness  Huge amount of staff  Expected to experience high level of attrition due to retirement of its top Management.  Still carries the image of the old Government sector bank.

Opportunities  Pool in talent to replace the going top Management to serve the next generation  Make better use of its CRM  Expansion into rural areas

Threats  Consolidation among private banks  New bank licenses by RBI  Foreign banks that have sophisticated products

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NPA Management of State Bank of India

5. ANALYSIS OF FINANCIAL STATEMENT Financial Analysis Operating Profit: The Bank‟s Operating Profit is gradually increasing. Operating Profit in 2008 stood at Rs. 25257.87 (in Crs) at the end of financial year 2012 it was Rs. 49529.61 (in Crs). Table below shows the Operating Profit for past 5 years. Table 1: Operating Profit from 2008 to 2012=Sales-Variable-Fixed assets (Rs in Crore) YEARS Mar „08 Mar „09 Mar „10 Mar „11 Mar „12 OPERATING PROFITS 25257.87 33,673.05 44,405.16 46,280.41 49529.61 % GROWTH 28.36 33.32 31.87 4.22 7.02

Interpretation: Operating profit amount shows the growth for the last five years especially there is a rapid growth in the year 2008-09 due to increases in advances, reduction in staff expenses, reduction in cost of funds (borrowings). But there is a decrease in the profit since three years due to inflation and NPA‟s.

40 30 20 10 0 Mar ‘08 Mar ‘09

% GROWTH

% GROWTH

Mar ‘10

Mar ‘11

Mar ‘12

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NPA Management of State Bank of India 2. Net Profit The bank‟s Net Profit is substantially showing increasing trend form past 5 years. Net Profit in the year 2008 stood at Rs. 4541.31 (in Crs) at the end of financial year 2012 it was Rs. 7,370.35 (in Crs). Table below shows the Net Profit for past 5 years. Table 2: Net Profit from 2008 to 2012 [Rs.in Crores] YEARS Mar „08 Mar „09 Mar „10 Mar „11 Mar „12 Interpretation Though there is a continuous growth in the amounts of Net Profit the growth percentage is declining heavily to only -9.83% in the year 2012. This is because of high provisioning made on the NPA‟s over the year and due increase in advances and interest rates and due to the inflation caused since 3 years and growth in the 2012 year 41.65 NET PROFITS 4541.31 6,729.12 9,121.24 9,166.05 7,370.35 % GROWTH 3.05 48.2 35.55 0.5 -19.60

% GROWTH
60 40 20 % GROWTH 0 -20 -40 Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘11 Mar ‘12

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NPA Management of State Bank of India

3. Deposits: The bank deposit is constantly showing increasing trend from past 5 years. Deposits in 2007 stood at Rs. 1255562.48 (in Crs). Table below shows the deposits for past 5 years. Table 3: deposits from 2007 to 2011 YEARS Mar „ 07 Mar „08 Mar „09 Mar „10 Mar „11 DEPOSTITS 636,2272.88 776,416.52 1,011,988.33 1,116,464.56 1,255,562.48 % GROWTH 14.6 23.4 30.34 10.32 12.45

Interpretation: the percentage growth in the year 2009-10 was declined i.e., 29.74% India millennium Deposits also there has been increase in interest rate, which contribution to increase in deposits. Than growth rate is increase in the year 2011 to 2012 i.e., 10.32 to 12.45

% GROWTH
40 30 20 10 0 Mar ‘ 07 Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘11 % GROWTH

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NPA Management of State Bank of India

6. LEARNING EXPERIENCE: I have gained knowledge about all round view of the management operation. I come to know detailed review of the operations, performance and outlook of the Bank. As a researcher the bank employee how deal with customer in different situation. As a researcher got the practical orientation of the functions of the various departments in the company. As a researcher I have gained knowledge about all round view of the management operation. As a researcher I come to know that what difficulties the company faced and how they were tackled. It gave a detailed review of the operations, performance and outlook of the company.

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NPA Management of State Bank of India

1. General Introduction
Introduction: Study on Non-Performing assets

Non-Performing assets surfaced suddenly in the Indian banking scenario, around the eighties on the background of implementation of Narasimhan committee recommendations in the banking sector. This committee was appointed by RBI to safeguard the interest of the banks, In the midst of turbulent structure changes overtaking the international banking institutions and where the global financial markets were undergoing sweeping changes.

Now-a-days Management of Non-Performing Assets is a critical performing area for banks. One of the parameter for assessing efficiency of the bank is management of its N.P.A. the profitability of the bank and its strength is measured in terms of management of NPA. In order to compete globally it is necessary for Indian banks to adopt Internationally standard in terms of efficiency, productivity, profitability, assets recognitions norms, and provisioning and capital adequacy.

Literature Review
1. NPA Management in Indian Banks N. Fathima Thabassuma Dr. E. Mubarak Ali research scholar Reader in Commerce NPA means an asset or account of a barrower, which has been classified by a bank, or financial institution as substandard, doubtful or loss asset, in accordance with direction and guidelines relating to asset classifications issued by the Reserve bank of India. Means a charge in or upon any moveable property, existing or future, created by a favor of a secured creditor without a delivery of possession of a moveable property to such creditor, as a security for financial assistance and includes BIET MBA PROGRAMME DAVANAGERE 33

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floating charges and crystallization of such charge into fixed charge on moveable property.

1. Thesis On Non-perming Asset Of Bank NPAs have a direct impact on banks profitability as legally banks are not allowed to book income on such account and at the same time banks are forced to

make provision on such assets as per the Central Bank guidelines. Also, with increasing deposits made by public in the banking system, the banking industry cannot afford default by borrowers since NPAs affects the repayment capacity of through various rate cut and banks fails to utilize this benefit to its advantages due to the fear of burgeoning non-perming assets.

 Statement of the Problem: “A Study on Non-Performing Assets of State Bank of India” The concept of Non-performing Assets surfaced in the Indian banking scenario, in the early eighties, on the background of implementation of Narasimhan Committee recommendations in the banking sector, this committee was appointed by RBI to safeguard the interest of the banks, in the midst of turbulent structured changes overtaking the international banking institutions and where the global financial markets were undergoing sweeping changes.

Background of project topic: Credit risk is defined as the potential that a bank borrower or counterparty will fail to meet its obligations in accordance agreed terms, or in other words it is defined as the risk that a firms customer and the parties to which it has lent money BIET MBA PROGRAMME DAVANAGERE 34

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will fail to make promised payment is known as credit risk. The exposure to the credit risks large in case of financial institutions, such commercial banks when firms barrow money they in turn expose lenders to credit risk, the risk that the firm will default on its promised payments. As a consequence, barrowing exposes the firm owners to the risk that firm will be unable to pay its debt and thus be forced to bankruptcy.

 Objective of the Study
1. To study the pattern of NPA 2. Steps taken to reduce NPA 3. Examine the effects of NPA‟s. 4. To know the impact of NPA on profitability of the bank.

 Scope of the Study
“Non-Performing Assets” management is a key a subject, which plays an important role in deciding the overall performance of the Bank. Therefore, the subject of Non-performing Asset was chosen for the project work. Accordingly the project was undertaken at STATE BANK OF INDIA, BANGALORE URBAN HONNALI BRANCH.

Methodology of the study
Data Collection Method t fulfill the objectives of my study, I have taken both into considerations primary and secondary data. Primary data: primary data has been collected through personal interview by direct contact method. The Method, which was adopted to collect the information through unstructured „Personal Interview‟ method.

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NPA Management of State Bank of India Personal Interview and discussion was made with manager and other personnel in the organization for this purpose. Secondary method: the data is collected from the Magazines, Annual report, Internet, Textbooks. Internal files and Materials Websites Magazines Textbooks Annual Report

 Limitation of the study
     The time stipulated for the project was limited. Some confidential information was not revealed by the bank. Some employees were not co-operative. Study is restricted with one branch. Study process was restricted to bank‟s rules and regulations.

Analysis and Interpretation
After nationalization of commercial banks in July 1969 as per the directive of the government commercial banks have started opening more and more branches in rural and semi-urban centers this has led a tremendous growth in the business of banking sector. Thereafter the Indian banks have consolidated their growth year after year. The total volume of business has increase from mere Rs. 20,000crores to nearly Rs.60,000 crores and most of the banks were showing a growing in business and profitability. Banks were lending on the basis of securities and were not unduly amount in terms of securities. The interest is charged regularly on the advanced made by the bank without much bothering the recovery of the same. The RBI has introduced a system in the early eighties to categorize the advances BIET MBA PROGRAMME DAVANAGERE 36

NPA Management of State Bank of India in terms of realization. A health code was introduced to determine the quality of the assets. There was always a need to have regulated, uniform and prudent accounting policies for the banks with special reference to the credit risk involved

in lending activities so that the significant growth in the business volumes of banks was ably supported by a well set regulatory norms. In the earlier times, bank tended to lean much towards security-oriented approach in assessment of credit proposals as also subsequent classification of the asset in their books. The interest and other charges debited to a borrower‟s account was taken into income on the basis of accrual irrespective of the fact whether such interest and charges accrued earlier were actually recovered or not. Such income was taken to Profit and Loss Account and dividend was declared on the basis of profit so arrived at. Loans were treated as realizable without actually looking into the record recovery. All this resulted in overstating of profit and distorted depiction of the state of affairs of the banks in their books of accounts. Sensing this need, government of India at the behest of RBI appointed a committee under the chairmanship of Shri. M. Narashimham to study the financial system and to and to give guidelines for strengthening financial system in the wake of economy being opened up as per GATT agreement to face global competition to ensure that financial institutions operated on the basis of operational flexibility and functional autonomy thereby enhancing efficiency, productivity and profitability. The committee has made path-breaking recommendations to strengthen the financial institutions including banks. Wide-ranging suggestions and

recommendations of this committee were accepted and have resulted in evolvement of prudential norms on income recognitions, assets classification and provisioning. Keeping intact the original viewpoint, RBI has been making modifications to these norms taking into account changes in the business BIET MBA PROGRAMME DAVANAGERE 37

NPA Management of State Bank of India environment and need of the hour. These Prudential Norms harp upon three vital aspects Recognition of income-Recognition of income shall be objective and based on record of recovery rather than any subjective consideration like availability of security, net worth of borrower/guarantor etc.   Asset classification- Classification of assets shall be done on the basis of objective criteria with uniform and consistent application of norms duly ensured. Provisioning- Provisioning for bad and doubtful debts shall be made on the basis of classification of assets reckoning the period for which the assets has remained Non-Performing and the availability of security and the realizable Value hereof.

WHAT IS NPA?
With a view to moving towards International best practices and to ensure greater transparency the ‟90 days overdue‟ norms for identification of Non-performing Assets has been adopted by the R.B.I (w.e.f. 31.03.2004)  Interest and / or installment of principal remain overdue for a period off more than 90 days in respect of a term loan.  The Account remains „out of order‟ for a period of more than 90 days. In respect of an overdraft/ C.C.  The bills remains „overdue‟ for a period of more than 90 days in the case of bills purchased and discounted.  Any amount to be received remains „overdue‟ for a period of more than 90 days in respect of other accounts.  A loan granted for short duration crops is treated as NPA, if the installment of principal or interest thereon remains overdue for two crops season and a loan granted for long duration crops is treated as NPA, if installment of principal or interest thereon remains overdue for one crop season.

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NPA Management of State Bank of India  An account would be classified as NPA only if the interest charged during any quarter is not serviced fully within 90 days from the end of the quarter.

So in short NPA refers to those assets where in which the bank does not earn income from that account, asset or loan granted. If an irregular Account continuously remain as irregular category for a period of 90 days (earlier 180days) it seems NPA. According to sthe guidelines of the RBI once an account is listed as NPA, the interest has to be deducted out of the profit of the same accounting year.

Indian Economy and NPAs
Undoubtedly the world economy has slowed down, recession is at its peak, globally stock markets have tumbled and business itself is getting hard to do. The Indian economy has been much affected due to high fiscal deficit poor infrastructure facilities, sticky legal system cutting of exposure to emerging markets by FIIs, etc. Further, International rating agencies like, Standards and poor have lowered India‟s credit rating to sub-investment grade. Such negative aspects have often outweighed positives such as increasing fore ex reveres and a manageable inflation rate. Under such a situation, it goes without saying that banks are no expectation and are bound to face the heat of a global downturn. Bankers have realized that unless the level of NPAs is reduced drastically, they will find it difficult to survive.

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NPA Management of State Bank of India

Why such huge levels of NPAs exist in the Indian banking system (IBS)? The origin of the problem of growing NPAs lies in the quality of managing credit risk the Banks. What is needed is having adequate preventive measure in place namely, fixing pre-sanctioning appraisal responsibility and having an effective post-disbursement supervision. banks concerned should continuously monitor loans to identify accounts that have potential to become Non-Performing.

Why NPAs have become an issue for banks and financial intuitions in India? To start with, performing in terms of profitability is a benchmark for any business enterprise including the banking industry. However, increasing NPAs have a direct impact on bank profitability as legally banks are not allowed to book income on such accounts and at the same time banks are forced to make on such assets as per the Reserve bank of India (RBI) guidelines. Also, increasing deposits made by the public in the banking system, the banking industry cannot afford defaults by borrowers since NPAs affects the repayment capacity of banks. Further, RBI successfully creates excess liquidity in the system through various rate cuts and banks fails to utilize this benefit to its advantage due to the fear of burgeoning Non-Performing assets. „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 principle operating account is less than the sectioned limit drawing power, but there are no credits continuously for 90 days as on the

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NPA Management of State Bank of India 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‟. „Over Due‟: Any amount due to the bank under any credit faculty is overdue if it is not paid on the due date fixed by the bank.

RBI guidelines on income recognition (interest income on NPAs) Banks recognize income including interest on advances on accrual basis. That is, income is accounted for as and when it is earned. The prima-facie condition for accrual of income is that it should not be unreasonable to expect to its ultimate collection. Considering this fact, in accordance with the guidelines for income recognition issued by the RBI, banks not recognize interest income on such NPAs until it is actually realized. Reversal of Interest Income: If any advance becomes NPA as at the close of any year, interest accrued and credited to income. Account in the corresponding should be reversed or provided for if the same is not realized. Reporting of NPAs: Banks are required to furnish a report on NPA as on 31st march of each year after completion of audit. The NPA would relate to the banks global portfolio including the advances at the foreign branches.

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NPA Management of State Bank of India

Classification Assets: The NPAs are classified into 3 categories namely:  Sub-standard Assets  Doubtful Assets  Loss Assets These are being classified by the Banks based on the period for which the asset has remained Non-Performing and the reliability of the dues.

Sub-Standard Assets: An asset becomes NPAs is first classified as a sub-standard asset and which remains as NPA for a period less than or equal to 12 months (earlier 18 months). In such cases, the current net worth of the borrowed guarantor or the current market value of the security charged is not enough to such an assets will have well defined or weaknesses that Endanger the liquidation of the debt and are characteristics by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. Doubtful Assets: A substandard asset becomes a doubtful if it has remained as a substandard for a period exceeding 12 months (before 18 months). A loan classified as doubtful has all the weaknesses inherent in assets that ere classified as sub-standard, with the added characteristic that the weakness makes collection or liquidation in full, on the basis of currently known facts, conditions and values highly questionable and improbable.

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NPA Management of State Bank of India

Loss Assets: An Asset, which is considered as irrecoverable by the banks internally or externally through auditors or by the RBI. Inspection is treated as loss Account but the amount has not been written off wholly. In classification of assets interest above categories should be done taking interest Account the degree of well-defined or weakness and the extent of deepened on collateral security for realization of dues. Banks should establish appropriate internal system to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may even fix minimum cut off point to decide what would constitute a high value account depending their respective business levels. In terms of RBI guidelines, as and when an asset becomes a NPA, such advances would be first classified as a sub-standard one for a period that should not exceed 18 month and subsequently as doubtful assets. It should be noted that the above classification is only for the purpose of computing the amount of provision that should be made with respect to bank advances and certainly not for the purpose of presentation of advances in the bank‟s balance sheet.

Up gradation of loan account classified as NPA In case of any borrower pays the arrears of interest and principal classified as NPA‟s the account should no longer be treated as non-performing and may be classified as „standard‟ account.

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NPA Management of State Bank of India

Classification to be based on borrowers-wise and not facility wise The classification as NPA of the accounts should be based on the borrower wise and not based on the facility wise. That is if a borrower is having more than one facility (like two or more account‟s) in the same bank. The borrowers all the facilities should be treated as NPA‟s and not particular facility or part thereof which has become irregular. NORMS OF NPA: A) ASSETS CLASSIFICATION NORMS: 1. The Non-Performing financial asset purchase may be classified as standard in the books of the purchasing bank for a period of 90 days from the date of purchase. Therefore, the asset classification status of the financial asset purchased shall be determined by the record of recovery in the books of the purchasing bank with reference to cash flows estimated while purchasing the assets, which should be in compliance with requirements in Para (3). 2. The asset classification status of an existing exposure (other than purchased financial asset) to the same obligor in the books of the purchasing bank will continue to be governed by the record of recovery of that exposure and hence may be different. 3. Where the purchase/sale does not satisfy any of the prudential requirements prescribed in these guidelines the asset classification status of the financial asset in the books of the purchasing bank at the time of purchase shall be the same as in the books of the selling bank. Thereafter, the asset classification status will continue to be determined with reference to the date of NPA in the selling Bank.

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NPA Management of State Bank of India 4. Any restructure/reschedule/rephrase of the repayment schedule or the estimated cash flow of the Non-performing financial asset by the purchasing bank shall render the account as a non-performing asset. B) Provisioning Norms: Books of selling bank 1. When a bank sells its non-performing financial assets to other banks, the same will be removed from its books on transfer. 2. If the sale is at a price below the Net Book Value (NBV) (i.e., book value less provisions held), the shortfall should be debited to the profit and loss account of that year. 3. If the sale is for a value higher than the NBV, the excess provision shall not be reveres but will be utilized to meet the shortfall/loss on account of sale of other non-performing financial assets. Books of purchasing bank The asset shall attract provision requirement appropriate to its asset classification status in the books of the purchasing bank. C) Accounting of recoveries: Any recovery in respect of non-performing asset purchasing from other banks should first be adjusted its acquisition cost. Recoveries in the excess of the acquisition cost can be recognized as profit. D) Capital Adequacy: For the purpose of capital adequacy, banks should assign 100% risk weight to the non-performing financial assets purchased from other banks. In case the nonperforming financial assets purchased are an investment, then it would attract

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NPA Management of State Bank of India

capital charge for market risks also. For NBFCs the relevant instructions on capital adequacy would be applicable. E) Exposure Norms: The purchasing bank will reckon exposure on the obligor of the specific financial asset. Hence these banks should ensure compliance with the prudential credit exposure ceilings (both single and group) after reckoning the exposures to the obligors arising on account of the purchase. For NBFCs the relevant instruction on exposure norms would be applicable.

Main reasons for accounts becoming NPAs:               Units remain closed without intimation. Industrial recession. Borrower Absconding. Sale of Assets with the knowledge of the Bank. Diversion of Funds. Willful Default. Interest/installments not paid. Purpose of the loan is not clear. Non-performing of loans due to natural calamities such as drought, floods,

earthquakes etc., Lack of verification of his/her securities. Ineffective recovery tribunals. Inefficient credit appraisal systems. Lack of technology, methodology and data support for science credit

appraisal. Industrial sickness. Unusual projection of the business targets. 46

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NPA Management of State Bank of India   Overtrading, overstocking. Improper utilization of funds.

Often stated reasons for NPAs in India:         Corruption Willful default. Judicial system flaw. Nonexistent fear of penalties. Sudden changes in Government polices/ economic environments. Inefficient credit appraisal systems. Government policies like loan waiver/interest waiver. Lack of technology, methodology, and data support for scientific credit

appraisal.

2. Steps taken to Reduce NPAs: Soft Tools          Personal contacts. Frequent follow-ups by bank official. Issue of periodical notices. Adjustments of his/her outstanding deposits. Apply of Scientific tools for appraisal before the loan is disbursed and

monitor it closely in real time. Conduct Recovery Campaign. Break up recovery to branch level network. Take every NPA case as a separate issue and analyze the need for further

funding from an economic point of view. Implement a system for selecting a good borrower. 47

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NPA Management of State Bank of India  Write off NPA‟s.

Hard tools      Lok Adalat Debt Recovery Tribunals. SARFAESI Act, 2002 (Securitization and Reconstruction of Financial

Assets and Enforcement Security Interest). Assets Recovery Construction Industry Limited (ARCIL). Corporate Debt Restructuring (CDR).

LOK ADALAT     To settle disputes involving account in “doubtful” and “loss” category Outstanding balance of Rs.5lakh for compromise settlement. Proved to be quite effective for speedy justice and recovery of small loans. Progress through this channel is expected to pick up in the coming years.

DEBR RECOVERY TRIBUNALS (DRT):       To recover their bad Debt quickly and efficiently. 33 debt recovery Tribunal and 5 Debt Recovery Application Tribunal. It is the special court established by central government for the purpose of

bank or any financial institutions recovery. The judges of this court are retired judges of high court. In this court only the recovery cases of Rs.10 lakh and above can be filed. The Act provides three alternative methods for recovery of non-

performing assets, namely:-

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NPA Management of State Bank of India        Securitization. Asset Reconstruction. Enforcement of Security without the intervention of the Court. NPA loans with outstanding above Rs.1 lakh. NPA loan account where the amount is less than 20% of the principal and

interest ate not eligible to be dealt with under this Act. This Act empowers the Bank: To issue demand notice to the defaulting borrower and guarantor, calling

upon them to discharge their dues in full within 60 days from the date of the notice.    with. To give notice to any person who has acquired any of the secured assets

from the borrower to surrender the same to the Bank. To ask any debtor of the borrower to pay any sum due or becoming due to

the borrower. Any Security Interest created over Agricultural Land cannot be proceeded

ARCIL  A company which is set up with the objective of taking over distressed assets (NPA) from banks or financial institutions and to reconstruct or re-pack these assets to make those assets saleable.  To buy out troubled loans from banks and make special efforts at recovering value form the assets, if necessary by special legislation, with special powers for recovery.  Restructuring of weak banks to divest the bad loan portfolio.  India‟s first ARC with an initial equity of Rs.10crore with ICICI bank, IDBI and SBI.  Incorporated as public limited company on February 11, 2002 BIET MBA PROGRAMME DAVANAGERE 49

NPA Management of State Bank of India

Its objectives:  Unlocking capital for the banking system and the economy.  Creating a vibrant market for distressed debt assets/securities in India offering a trading platform for Lenders.  To evolve and create significant capacity in the system for quicker resolution of NPAs by deploying the assets optimally.

CORPORATE DEBR RESTRUCTURING (CDR)  For the revival of the corporate as well as for the safety of the money lent by the banks and FI.  Based on the experience in other countries like the U.K., Thailand, Korea, etc.  Objective was to ensure timely and transport mechanism for restructuring of the corporate debts.  CDR mechanism will be a voluntary system based on debtor creditor agreement and inter- creditor agreement.  CDR mechanism will cover only multiple banking accounts.  An outstanding exposure of Rs. 20 crore and above by banks and institutions. . 3. Effects of NPAs As the number of accounts become NPAs this will lead to additional provisions which has to be made and these provisions are made out of profits earned by the Bank. Ultimately it leads to:   NPA‟s  (SME‟s) 50 Huge decrease in the profitability Stagnation In specific industries with large share of loans contribution to

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NPA Management of State Bank of India    High cost of funds Slowdown of the economy as a whole High credit risk in lending business

Prerequisites to Contribution NPA‟s: 1. Governance:  Independent oversight board with clear mandate.  Defined and transparent procedures  Improved reporting standard

2. Greater focus on restructuring:  The quality and speed of asset resolution is key  Taking ownership of NPA‟s and proactive management  Working with debtors to improve cash flow of assets underlying NPA‟s

3. Greater power and intuitional capabilities:  For example, power to separate bad management from the debor and t liquidate debotors, which cannot be expeditiously restructured.  Training, knowledge transfer  Leadership

4. Incentives and disciplines for banks:  Enhanced accountability of banks and bank managers  Ensure banks put in place risk analysis and credit management systems  Ultimate burden not transferable to AMCs

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NPA Management of State Bank of India

5. Greater protection of creditor rights:  Credible liquidation procedures and efficient secured transaction processes  Triggers and inventive for insolvency  Strong and Credible regulators, free from political Pressure.

6. The Road to Recovery: The key facilities  Early detection  Speed  Voluntary references  Facilitation and quick arbitration.

Steps taken by the Bank to Reduce NPAs: 1) 2) Bank is planning to go for securitization of huge transaction accounts. Interest ensive follow up with Advocates/civil courts/DRTs for speedy

disposal of cases. 3) Official from various offices visit borrows/branches for discussions/

review of NPAs. 4) Liberal policy adopted for compromise in account with balances below

50,000 and those that are more than 10 year old. 5) 6) Risk management systems put in place. Apply of Scientific for appraisal before the loan is disbursed and monitor

is clsely in real time. 7) 8) State Bank of India has regularly conducted recovery campaigns. Break up recovery to branch level network.

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NPA Management of State Bank of India 9) Take every NPA case as separate issue and analyze the need for further

funding from an economic point of view. 10) State Bank of India has implemented a system for selecting a good

borrower. 11) State Bank of India has followed all credit exposures are classified as per

RBI guidelines, into performing and Non-Performing assets (NPA).

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NPA Management of State Bank of India

1. Movement of NPA to total Advances SBI as a whole (in crores) Calculation of Important Ratios (Gross NPA Ratio, Net NPA Ratio and Return on Asset Ratio) Table: 1 Ratio of Gross NPA to Total Advances Year 2007-08 2008 -09 2009 -10 2010 -11 2011 -12 Net Advances 275458.26 343810.84 405538.46 499719.13 587873.94 Gross NPA 10290.29 10495.10 13160.17 15675.27 19263.14 GNPA % 3.7356985 3.0525797 3.2451102 3.1368161 3.2767467

Interpretation GNPA was continuously decreasing up to 2008-09 but in the year 2009-10 it increases 3.25% which was low interest rates and increase in advances. By the end of the financial year 2011-12 it has again increased to 3.28% due to inflation and policy changes on lending rates.

GNPA %
4 3.5 3 2.5 2 1.5 1 0.5 0 2007-08 2008 -09 2009 -10 2010 -11 2011 -12

GNPA %

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NPA Management of State Bank of India

Table: 2 Ratio of Net NPA to Total Advances Year 2007-08 2008-09 2009-10 2010-11 2011-12 Net Advances 275458.26 343810.84 405538.46 499719.13 587873.94 Net NPA 5893.4 5997.9 7979.56 9649.57 11382.4 NNPA% 2.1394893 1.7445349 1.9676457 1.9309987 1.9361974

Interpretation NNPA% has followed a substantial decrease from 0.395% in the year 2006-07 to 1.93 in the year 2008-09 and a slight increase of 0.006% in the year 2009-10 which is due to high interest rates and the inflation caused. But the reduction in the NPA so far is due to the increased capital employed of Rs. 15,000crores in the year 2008-09

NNPA%
2.5 2 1.5 1 0.5 0 2007-08 2008-09 2009-10 2010-11 2011-12 NNPA%

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NPA Management of State Bank of India

1. Calculation of Important Ratios (Gross NPA Ratio, Net NPA Ratio and Return on Assets Ratio) Movement of NPA to total Advances (In Crors) Table: 2 Year 2007-08 2008-09 2009-10 2010-11 2011-12 Net Advances 2989.28 3878.34 4814.97 5577.61 6496.77 Gross NPA 80.37 85.84 109.48 110.24 94.21 GNPA% 2.6886073 2.2133181 2.2737421 1.9764738 1.4501052

Interpretation The GNPS Ratio in the year 2007-08 was 20.69% and has gradually reduced to 1.45% by the end of the financial year 2009-10. This shows that the Honnali module is striving hard to reduce NPA completely over the years. This has become possible due to high involvement of the employees in choosing the industries carefully and due to replacement of medium and long term loans, due to hiring of separate personnel for checking the authentication of information given by the client and the 3rd party.

GNPA%
3 2.5 2 1.5 1 0.5 0 2007-08 2008-09 2009-10 2010-11 2011-12 GNPA%

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NPA Management of State Bank of India

Table: 4 Ratio of Net NPA to Total Advances Year 2007-08 2008-09 2009-10 2010-11 2011-12 Interpretation: There is a reduction in the NNPA % from 1.83% in the year 2007-08 to 0.98% in the year 2011-12. This is a greater improvement in reduction of NPA in the honnali branch. This has been possible due to provisioning of willful defaults, adoption of liberal policy for compromise in account with balance below Rs. 5,00,000 and those that are 8 year old clients. Due to onetime settlement schemes with liability up to 10 crore in small and medium enterprise sector. Net Advances 2989.28 3878.34 4814.97 5577.61 6496.77 Net NPA 54.6 56.58 69.27 73.47 64.21 NNPA 1.8265268 1.4588716 1.4386382 1.3172309 0.9883373

NNPA
2 1.5 1 0.5 0 2007-08 2008-09 2009-10 2010-11 2011-12 NNPA

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NPA Management of State Bank of India Table: 5 2. Calculation of Return on Asset Ratio Year Mar „08 Mar „09 Mar „10 Mar „11 Mar „12 Net Income 4406.67 4541.31 6729.12 9121.23 9166.05 Total Assets 493869.54 566565.24 721526.32 964432.08 1053413.74 Return on Asset Ratio 0.008922741 0.008015511 0.009326229 0.009457618 0.008701282

Interpretation: The table clearly shows that though the net income is increasing steadily, there is a huge increase in assets. For a bank the loans lent to the borrower are the assets. If the assets go on increasing without a proportion increase in the net income then it results in loss. The ROI is decreasing. It clearly indicates that the banks are slow in converting its investments into profits. This is due to the huge competition and decrease in the Net Interest Margin and increase in cost of deposits.

Return on Asset Ratio
0.01 0.0095 0.009 0.0085 0.008 0.0075 0.007 Mar ‘08 Mar ‘09 Mar ‘10 Mar ‘11 Mar ‘12 Return on Asset Ratio

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NPA Management of State Bank of India

3. Capital Adequacy Ratio: Year Capital Adequacy Ratio Mar „08 11.88 Mar „09 12.34 Mar „10 13.47 Mar „11 14.25 Mar „12 13.39

Interpretation: There is a gradual increase in the CAR from 11.88% in the year 2008 to 14.25% in the year 2012. Any bank maintaining its CAR above 9.5% can sustain in the market.

Capital Adequacy Ratio
14.5 14 13.5 13 12.5 12 11.5 11 10.5 Mar '08 Mar '09 Mar' 10 Mar '11 Mar '12

Capital Adequacy Ratio

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NPA Management of State Bank of India

RBI guidelines on provisioning requirement of bank advances: Loss Assets: 100% of outstanding amount. Doubtful Assets: 100%of unsecured portion. Secured portion Up to one year 20% One to three years 30% More than three years (D-III) (i) outstanding stock of NPAs as 50% with effect from March 31, on March 31, 2008 2011 60% with effect from March 31, 2012 75% with effect from March 31, 2013 100 % (ii) advances classified as 'doubtful for more than three years' on or after April 1, 2010 100 %

Substandard Assets: Secured portion 10% and unsecured portion 20% on total out standing. Standard Assets: A general provision of 0.40% (For direct Agriculture and SME sector 0.25%. provisioning for standard will be dome ar corporate office at the center.

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NPA Management of State Bank of India

Illustration: The outstanding amount as on March 31st 2008 was Rs.10000 Realization value of security Rs.8000 Period for which the advance has remained “doubt” category as on March 31 st 2008: 2.5 years

Provision Requirement Asset AS ON
st

Provision on Secured portion % Amount 2400 8000

Provision on unsecured Portion % 100 100 Amount 2000 2000

Total

Classification

March 31 , 2008 March 31st , 2009

Doubtful 1 to 3 years Doubtful above 3 years

30 100

4400 10000

Reasons for reduction in Net NPA in:  Re-placement of Medium term and long term loan: Accounting to this

scheme Banks are trying to convert big installment into small one of different duration period. By doing so the Bank is helping the client to carry on his business activity and even earn profit by giving loan.   All these banks are converting customers (those whose accounts are in the

border line) short-term loans into term loan. Waiver of penal interest and other charges. (inspection charges and notices

charge LF charges legal charges etc.)

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NPA Management of State Bank of India   Adjustments of crop insurance claim settled towards his/jer NPA account. All these banks are conducting their Recovery activites through DEBT Lok Adalat, Court and other private recovery

RECOVERY TRIBUNAL, agencies. 

All these Banks have separate personnel for checking the authentication of

information given by the client; even the third person should give his authentication for such information. So that banks can select god borrower.        All these banks are strictly following all the Guidelines as mentioned by

the RBI. All these banks are providing additional provision to reduce NPAs. Some of these banks are conducting their Recovery activities through

personal contacts, issue of notices and frequent recovery visits. All these banks are developing their recovery departments by introducing

various schemes. Some banks have adopted Liberal policy for compromise in account with

balances below 50,000 and those that are more than 10 years old. By applying all these strategies most of the banks are earning huge

recovery amount. Some banks are providing huge advances to the priority sectors like

agriculture and SMEs. So that these banks can reduce its NPA temporarily.

SCHEM FOR ONE TIME SETTLEMENT OF NPAs “Scheme for one time settlement of NPA with liability yp to Rs.10 Crore in small and medium enterprises (SME) sector”. In tune with the Reserve Bank of India guidelines a Scheme on Time Settlement of NPAs under Small and Medium Enterprises (SME) sector with liability up Rs. 10 crore has been introduced. The salient features of the scheme are as under:

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NPA Management of State Bank of India  The Sheme will comver all NPAs in SME sector which have become doubtful as on 31/03/2004 with outstanding balance of Rs.10 crore and below on the date on wich the account was classified as doubtful.  The Schme will also cover NPAs classified as sub-standard as on

31/03/2004, which have subsequently become doubtful or loss where the outstanding balance was Rs.10 crore and below on the date on which the account was classified as doubtful.  The Scheme will cover the accounts in which action has been initiated

under DARFAESI Act, and also cases pending before Courts/DRTs/BIFR, subject to obtaining consent decree in such cases.

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NPA Management of State Bank of India  FINDINGS OVERALL SBI % Growth YEARS of deposits GNPA% NNPA% % of Profits 2007-08 2008-09 2009-10 2010-11 2011-12 14.6 23.4 38.1 8.36 12.45 3.7356985 3.0525797 3.2451102 3.1368161 3.2767467 1.8265268 1.4588716 1.4386382 1.3172309 0.9883373 2.37 3.05 48.2 35.55 0.5 Growth Net



Up to 2009-10 there was increase in deposit but in the year 2010-11 was

declined 8.36% India Millennium Deposit also there has been increase in interest rate, which contributed to increase in deposits i.e., increase12.45% in the year 2011-12. 

The GNPA ratio of Honnali module in the year 2007-08 was 3.73% and

has gradually decrease up to 2010-11 but in in the year 2011-12 it as again increased to 3.27% due to inflation and policy changes on lending rates. It shows that the Honnali Module is striving hard to reduce NPA completely over the years.  There is a reduction in the NNPA % from 1.83% in the year 2007-08 to

0.98% in the year 2009-10.thi is greater improvement in reduction of NPA in the Honnali Module. This has been possible due to provisioning of willful defaults, adoption of liberal policy for compromise in account with balance below Rs.50,000 and those are 10 years old clients.

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NPA Management of State Bank of India  There is a continuous growth in the amounts of Net Profit the growth percentage is declining heavily to 0.5 in the year 2012. This is because of high provisioning made on the NPA‟s over the year and due increase in advances and interest rates and inflation caused.  Due to high decrease in the % growth of deposits, decrease in the

advances and increase in Net Non-performing assets of the SBI as a whole has led to steep decrease in the net profits from 2.37% in the year 2007 to 0.5% in the year 2012 which is a huge loss to the Bank.

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NPA Management of State Bank of India

SUGGESTIONS:  Immediate action has to be taken for reduction of NPAs in those sectors

where NPAs in more like Agriculture Sector. 

The bank has to go for selling of Nonperforming Assets to Assets

Reconstruction Company of India Limited (ARCIL) to bring down the NPAs.



Bank should protect the interest of the investor but not at the cost of Banks

profitability. 

Bank is required to be caution about availability of security and ensure

honesty of the both borrower and guarantor so as to avoid the account becoming loss assets for which the bank is required to make 100% provision

.   There should be frequent follow-ups by the Bank officials.

The bank should issue periodical notices once in a month.



The Bank should take every NPA case as a separate issue and analyze the

need for further form an economic point of view. 

Banks should compulsorily go for settlement under compromise (OTS)

and under Lok Adalat for speedy recovery of NPA‟s.

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NPA Management of State Bank of India



CONCLUSION The Project undertaken has helped a lot in understanding the concept of

“Non-performing Asset Management” in Nationalized Bank with special reference to State Bank of India. Non-performing Asset Management is a key parameter, which is playing a pivotal role in deciding the profit ratio of the banks. The Project work has certainly enriched the knowledge about the effective management of “NPA” in banking sector. “Non-Performing Asset Management” is a vast subject and it is very difficult to cover all the aspects within a short period. However, every effort has been made to cover most of the important aspects, which have a direct bearing on improving the financial performance of Banking Industry. To sum up, it would not be out of way to mention here that the state Bank of India has given special impetus on “Non-performing asset Management”. In pursuance of the instructions and guidelines issued by the Reserve Bank of India, the State Bank of India has taken series of measures, to reduce the ratio of “NPA” marginally. The measures initiated by the bank have helped in reducing the ratio of “NPA” which in turn has contributed in improving its profit margin over the years. The concerted efforts put in by the management and Staff of State Bank if India has helped the Bank in achieving remarkable progress in almost all the important parameters. The bank is marching ahead in the direction of achieving the Number-1 position in the Banking Industry. Thus State Bank of India being the nationalized and one of the best Banks in India should concentrate much about Non-Performing Asset and strictly follow the guidelines given by the Reserve Bank of India. BIET MBA PROGRAMME DAVANAGERE 67

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