NPAs have turned to be a major stumbling block affecting the profitability of Indian banks before 1992,banks did not disclose the bad debts sustained by them and provision made by them fearing that it may have an adverse. Owing to the low levels of profitability, banks owned funds had to be strengthened by repeated infusion of additional capital by the government. The introduction of prudential norms strengthen the banks financial position and enhance transparency is considered as a milestone measure in the financial sector reform. These prudential norms relate to income recognition, asset classification, provisioning for bad and doubtful debts and capital adequacy. the objectives of the study, and the study was conducted in Punjab & sind bank., on “An analysis of NPA in commercial banks with special reference to Punjab & sind bank”. To analyze the NPA level of Punjab & sind bank. To study the recovery procedures of Punjab & sind bank. To examine how far the bank has been successful in reducing the NPA level. INTRODUCTION OF BANKING SECTOR Banking in India originated in the last decades of the 18th century.
The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India’s independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980. Currently, India has 96 scheduled commercial banks (SCBs) – 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 49,000 ATM HISTORY OF PUNJAB AND SIND BANK It was in the year 1908, when a humble idea to uplift the poorest of poor of the land culminated in the birth of Punjab & Sind Bank with the far-sighted vision of luminaries like Bhai Vir Singh, Sir Sunder Singh Majitha and Sardar Tarlochan Singh. They enjoyed the highest respect with the people of Punjab. The bank was founded on the principle of social commitment to help the weaker section of the society in their economic endeavours to raise their standard of life. Decades have gone by, even today Punjab & Sind Bank stands committed to honor the social commitments of the founding fathers.
To put in place the effective Risk Management and Internal Control Systems. To adopt and operationalise high-level technology standards. To strive to achieve excellence in Customer Service. To achieve the highest standards of transparency and accountability in the conduct of banking business. To adopt professional approach in effectively managing financial as well as non-financial risks. To maximize profitability and profits of the Bank with due compliance of prudential guidelines. To maximize competitive risk adjusted return on capital, through planned reduction in the average cost of funds, increased yield on advances and investments besides reduction in cost of operations.
The Indian has been liberalized and globalize during the last decade or so. It has exposed the Indian financial sector to international competition in fairly significant manner. To cope with the growing competition in the present scenario the Indian banks have embarked on a massive exercise to revamp the system. Despite the overall progress made by the financial system over the years, the operational efficiency of the banking system has been unsatisfactory, characterized by low profitability, high and growing NPAs and relatively low capital base. NPAs have turned out to be a major stumbling factor affecting the profitability of Indian banks. Before 1992,bank did not disclose the bad debts sustained by them and the provision made by them fearing that it may have an adverse impact. The banks used to take income even on NPAs on accrual basis. This helped them to disclose false profits.
Owing to low levels of profitability, the banks owned funds had to be strengthened by repeated intention of additional capital by the government. The introduction of prudential norms to strengthen the banks financial position and enhance transparency is considered as a milestone measure in the financial sector reforms. These prudential norms, which relate to income recognition, asset classification, provisioning for bad and doubtful debt and capital adequacy serve three great purposes. 1. Income recognition norms reflect a true picture of the income and expenditure of the bank. 2. The asset classification and provisioning norms help in assessing the quality of the asset portfolio of the bank. 3. They also act as tool of financial discipline and compel banks to look at the quality of loans assets and the risk attached to the lending In India, NPAs are considered to at higher levels than most other countries, have of late attracted the attention of public as also of international institutions. This has gained further prominence in the wake of transparency and disclosures measures initiated by R.B.I. during the recent years .We have also to conform to international accounting standards, if Indian banks are to get their due place and recognition in the global market.
The general objective of the study was to analyze the NPA level in commercial banks. However the study was conducted with the following specific objectives. To analyze the NPA level of Punjab & sind bank Limited. To study the recovery procedures of Punjab & sind Bank Limited. To examine how far the bank has been successful in reducing the NPA level. To suggest measures for efficient management of NPAs. To bring out en explorative & descriptive report on “Analysis of NPA in commercial banks, with special reference to Punjab & sind Bank Ltd.,
A purposeful investigation of a problem research helps an organization in finding out causes and clues for making sound and effective decisions by applying scientific methodology to the art of management. Research can be of two types namely Exploratory research and Conclusive research. Exploratory research is investigation of relationships among variables without knowing why they are studied. It borders on an idle curiosity approach, differing from it only in that the investigator thinks there may be a payoff in the application somewhere in the forest of questions. In Conclusive research there are two types namely Descriptive research and Experimental research. Descriptive research allows both implicit & explicit hypotheses to be tested depending on the research problem. Experiments are artificial in the sense that the situations are usually created for testing purposes in experimental research. Based on all these facts and suggestion from the project guide ‘Descriptive & Exploratory Research Methodology’ is adapted for this project work.
Sampling refers to selecting a part of the population to represent the characteristics of the population. However, in this study, Finance Manager of the bank is the source of data and therefore, since he is the only one source of information, there is no question of any sampling.. Secondary data:- were collected from the published annual reports of the Punjab & Sind Bank and other sources. Such data collected were analyzed for some kind of a trend and its impact on the profit of the bank.
The data collected were analyzed with the help of statistical tools like frequency, percentage and trend analysis. Tables are used to represent the consolidated data. Graphical representation is also used for better comprehension & presentation.
The major limitation of the study was the paucity of time. Even then, maximum care has been taken to arrive at appropriate conclusion. Following are the limitations of the study: This study is restricted to Punjab & Sind Bank only. For the purpose of collecting vital information, Finance Manager of the bank is only contacted & interviewed. Since he is an individual, his biases may have creped into the data given. Though the subject matter pertains to commercial banks, only one scheduled bank. is considered for this study. Other commercial banks, as also the other scheduled banks are outside the purview of this study. Data pertains to NPA from 2000 -2001 to 2006 – 2007 only.
By : Arpita .A ,14 February 2010 The contaminated portfolio is definitely a bane for any bank. It puts severe dent on the liquidity and profitability of the bank where it is out of proportion. It is needless to mention, that a lasting solution to the problem of NPAs can be achieved only with proper credi A assessment and risk management mechanism. It is necessary that the banking system is to be equipped with prudential norms to minimize if not A completely to avoid the problem of NPAs. The onus for containing the factors A leading to NPAs rests with banks themselves. This will necessitates organizational restructuring, improvement in the managerial efficiency and skill up gradation for proper assessment of credit worthiness It is better to avoid NPAs at the nascent stage of credit consideration by putting in place of rigorous and mappropriate credit appraisal mechanisms 2) Non-Performing Assets in Indian Banks
The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively higher in public sectors banks. (Table II&III). To improve the efficiency and profitability, the NPA has to be scheduled. Various steps have been taken by government to reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard. 3)Majumdar Alok, NPAs : Recovery Blues, Treasury Management (Dec.2000) pp. 46-49. A strong banking sector is important for a flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Over the years, much has been talked about NPAs and the emphasis so far has been only on identification and quantification of NPAs rather than on ways to reduce and upgrade them. There is also a general perception that the prescription of 40% of net bank credit to priority sectors have led to higher NPAs, due to credit to these sectors becoming sticky. Managers of rural and semi-urban branches generally sanction these loans. In the changed context of new prudential norms and emphasis on quality lending and profitability, managers should make it amply clear to potential borrowers that banks resources are scarce and these are meant to finance viable ventures so that these are repaid on time and relevant to other needy borrowers for improving the economic lot of maximum number of households. Hence, selection of right borrowers, viable economic activity, adequate finance and timely disbursement, correct end use of funds and timely recovery of loans is absolutely necessary pre conditions for preventing or minimizing the incidence of new NPAs.
The government of India set up a nine member committee under the chairman ship of Mr. Narasimham, the former of governor of Reserve bank of India, to examine the structure and functioning of the existing financial systems of India and suggest financial reforms. The report of the committee was tabled in the parliament of December 17th 1991. The main recommendations of the committee are 1. A phased achievement of 8% capital adequacy ratio. 2. A phased reduction f statutory liquidity ratio; 3. Prudential guidelines governing the functioning of financial institutions; and 4. Proper classification of assets and full disclosure and transparency of banks and financial institutions. Most of the recommendations have been accepted by the government. While the most of the recommendations made by the committee in the 1 phase have been accepted for implementation, either in a single step or in a phased manner, some of them are yet to be considered for the same. These measures implemented so far have revolutionized the structure of the banking industry and its operations.
The Narasimham committee recommendations suggested that loans and advances in banks should classified in to performing and non performing on the basis of the health of the loans assets and the record of adherence to repayment of installments and interest on due dates. The committee also recommended that the banks be allowed to book to income by way of interest debited to an account only when it was found realizable with in a given time frame. The committee suggested that the banks should make provision for all NPAs on the basis of classification of such assets based on the age of irregularity, security cover available etc. The RBI accepted the recommendations of the committee with regard to introduction of norms for income recognition and asset classification and provisioning an advised the banks to implement the same in a phased manner beginning 1st April 1992. The asset of a bank are cash and balances with RBI, balances with banks and money at call and short notice, investment in government and other securities, advances (including loans and advances, bill purchased, discounts and other credit facilities), fixed and other assets.
A performing asset is an advance, which generate income to the bank by way of interest and their charges. An NPA is an advance of borrower account which does not generate income for the bank but they incur various inherent costs like a) Cost of deposit b) Cost of servicing c) provisioning at appropriate rates d) Capital adequacy requirements on these assets and e) Cost of recovery.
Identification of an account as NPA depends upon the nature of borrowal account whether it is a) Operative b) Non operative c) Bills d) Agricultural advances or any other miscellaneous accounts.
A critical analysis for a comprehensive review and uniform credit monitoring was introduced in 1985 to 86 by RBI by way of the Head Code system in banks which provide information regarding the health of the individual advances, quality of credit portfolio and the extend of advances causing concern in relation to total advances. It was consideredthat information would be off immense use to bank management for control purposes. RBI advised all commercial banks on 07/11/1985 to introduce the Health code classification assigning each approval account with a health code (in eight categories) indicating its quality. Despite all these true picture was still not displayed. In order the ensure greater transparency in the borrowal account and to reflect actual health quality of banks in the balance sheet, RBI introduced prudential regulation relating to Income Recognition, Asset classification and provisioning as recommended by the Narasimham Committee with certain modifications in a phased manner over a three year period beginning from 1992 – 1993. The Narasimham committee is of the view that for the purpose of provisioning banks and financial institutions should classify their assets by compressing the health V code into four broad groups, taking into account the degree of well defined credit weakness and the extend of dependence on security for realization of dues as below: Standard asset: Standard asset is one, which does not disclose any problems and does not carry more than normal risk attached to the business. Sub standard assets: Sub standard asset is one, which is a non-performing asset for a period not exceeding 18 months. Doubtful assets: Doubtful asset is one, which has remained as a non-performing assets for a period exceeding 18 months. A loan classified as doubtful has all the weakness inherent as that of substandard account with the added characteristics that the weaknesses make collection or liquidation of outstanding dues in such an account in full, on the basis of currently known facts, conditions and values, highly questionable and improbable. Loss assets: Loss assets is one, where loss has been identified by the banks or internal or external auditors or RBI inspecting official but the amount has not been written off, wholly or partly.
The RBI has advised banks to adopt 90 days norm instead of 180 days for classification of assets as in impaired one with effect from MARCH 2004 and to start making additional provisions for such asserts from March 2002 to absorb the impact due to reduction of NPA period. The accounts which may turn NPA with 90-day period have to be identified and 10% provision to be found out.
The classification of assets into above categories should be done taking into account the degree of well-defined credit weakness and the extend of dependence on collateral security for realization of dues. Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The bank may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point will be valid for the entire accounting year.
The classification of assets as NPA should be based on record of recovery. Banks should not classify an advance as NPA merely due to the existence of some deficiencies which are temporary in nature such as non availability of adequate drawing power base don the latest available stock statement, balance outstanding exceeding the limits temporarily, non submission of stock statements and non renewal of the limits on the due date etc.
a. It is difficult to envisage a situation when only one facility to a borrower becomes a problems credit and not others. Therefore, all the facilities granted by a bank to a borrower will have to be treated as NPA and not the particular facility or part there of which has become irregular. b. If the debits arising out of development of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrowers principal operating account for the purpose of application of prudential loans on income recognition, asset classification and provision. 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 banks 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 particularly 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.
a. A NPA need not go through various stages of classification in cases of serious credit impairment and such assets should be straight away classified as doubtful or loss asset as appropriate. Erosion in the value of security can be reckoned as significant when realizable value of the security is less than 50% of the value assessed by the bank or accepted by the RBI at the time of last inspection, as the case may be. Such NPAs may be straight away classified under doubtful category and provisioning should be made as applicable to doubtful assets. b. If the realizable value of the security has assessed by the bank/approved valuers / RBI is less than 10% of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straight away classified as loss asset. It may be either written off or fully provided for by the bank.
a. 100 percent of the extend to which the advance is not covered by realizable value of the security to which the banks has a valid recourse and the realizable value is estimated on a realistic basis. b. In regard to the secured portion, provision may be made on the following basis, at the rate ranging from 20% to 50% of the secured portion depending upon the period for which the asset has remained doubtful. c. Additional provisioning consequent upon the change in the definition of doubtful assets effective from March 31st 2001 has to be made in phases as under. Ø As on 31-03-2001, 50% of the additional provisioning requirement on the assets, which became doubtful on account of new norm of 18 months for transition from substandard asset to doubtful category. Ø As on 31-03-2002, balance of the provisions not made during the previous year, in addition to the provisions needed, as on 31-03-2002. d. Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from sub standard to doubtful assets from 18 to 12 months over a four year period commencing from the year ending March 31st 2005, with a minimum of 20% each year.
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